Ministry of Defense BAF Command

Offset Strategy
of the
Brazilian Air Force
A comprehensive approach

Major Dió
Diógenes Lima Neto
M.Sc., MBA

Air Force Secretariat for Economy and Finances (SEFA) GICC – 2010 – Budapest, Hungary
 Ministry of Defense BAF Command

Objective
• To have a better understanding of the
BAF offset strategy, with special
attention to the relationships between
commercial contracts, offset
agreements and buyer’s credit
operations.

Air Force Secretariat for Economy and Finances (SEFA) GICC – 2010 – Budapest, Hungary
 Ministry of Defense BAF Command

Agenda
• Brazilian Military Offset Focuses & Tendencies
• Offset Strategy of MoD and BAF
• BAF’s Offset Features & Portfolio
• SEFA in context
• Negotiating Commercial, Financial and Offset's
Agreements – a comprehensive approach
• Offset Agreements: Controls and Auditing

Air Force Secretariat for Economy and Finances (SEFA) GICC – 2010 – Budapest, Hungary
 Ministry of Defense BAF Command

Brazilian Military Offset Focus

• NSD will be the driver for new high-profile
programs, under MoD-issued guidelines for
Industrial Participation.

• Other government domains than defense

will be increasingly concerned on possible
benefits of industrial participation and
offsets, such as MDIC, MRE, MTran, MME
and BNDES, specially for large national
projects such as high-speed rail
transportation and hydrocarbons offshore
prospection.

Air Force Secretariat for Economy and Finances (SEFA) GICC – 2010 – Budapest, Hungary
 Ministry of Defense BAF Command

Brazilian Offset Tendencies

• Brazil is moving from decentralized offset management
toward industrial participation using high profile
programs as drivers of the change.
• This implies a different approach to manage offset/IP on
Government procurements:
– Projects must be discussed at the early stages of program
lifecycles, given that effective industrial participation is in fact direct
and so set in the beginning for joint development and production to
succeed (the CMA issue).
– Industrial cooperation demands more institutional support
from the offset authority to the local industry, including
investments and continuous workload.
– Sound business plans are paramount.

Air Force Secretariat for Economy and Finances (SEFA) GICC – 2010 – Budapest, Hungary
 Commercial, Offset and Financing relationships

MoD MoTrade
Army BNDES
Navy
Air Force
funding
MoC&T
funding Private
FINEP
Sector
Commercial
Financing contract
Contract Companies
Universities
Civilian Organ.

Suppliers
Offset
Agreement
Lenders funding
 Ministry of Defense BAF Command

Offset Strategy of MoD

• MoD - Strategic level
– Order nr. 764/MD/2002, “Policy and Directives for Offsets”.

• BAF
– Strategic level
• DCA 360-1/2005, “Policy and Strategy for Offset Agreements”.

• Order nr. 1.396/GC4/2005 – Institutes the Air Force Offset

Committee, under the AF General Staff.

– Execution level
• ICA 360-1/2005, “Principles for Offset Agreements
Negotiations”.

Air Force Secretariat for Economy and Finances (SEFA) GICC – 2010 – Budapest, Hungary
 Ministry of Defense BAF Command

Offset Strategy of MoD

MoD Order 764/MD - Essentials
Offset area Defense
Threshold FOB 5 million US$, 12 months
Minimum obligation 100% commercial contract
Timeframe Commercial Contract duration
Source of obligation Direct commercial sales or subcontracting (indirect supply)
Multipliers Empirical, case-by-case basis
Penalties Brazilian administrative legislation
Focus Defense and aerospace industry sectors
Direct offsets Preferential
Indirect offsets Acceptable
Eligible activities Transfer of technology, investments, co-production, licensed
production, marketing support, training, other forms of
countertrade.

Air Force Secretariat for Economy and Finances (SEFA) GICC – 2010 – Budapest, Hungary
 Ministry of Defense BAF Command

BAF Offset Features

Liquidated damages Yes
Bank guaranties Usually 5% of the obligation
Multipliers 1 to 4
Waiver Sole-source suppliers, government-to-government
international agreements (except under competitive
environments)
Banking 50% of new commercial contracts, 5 years, transferable
under the same holding
Pre-offsets No, but may be considered in a case-by-case basis
Swaps No, but may be considered in a case-by-case basis
Industrial Acceptable, but only if joint projects are defined upfront and
Participation milestones are established
Penalties Credit-increase based settlements may be accepted
MoU Mandatory, even if the beneficiary is an AF organization

Air Force Secretariat for Economy and Finances (SEFA) GICC – 2010 – Budapest, Hungary
 Ministry of Defense BAF Command

BAF’s & Offsets*

• 5 offset and IP agreements, valued ~US$ 4 billion.
(~US$ 500 million credited)
• EADS CASA – P-3 &CL-X
• Airbus – VC-X
• Elbit Systems – F-5BR & AL-X
• Eurocopter – H-XBR

• 18 agreements under negotiation, valued ~US$ 9 billion.

• A-1M – Elbit Systems (T&C agreed)
• CL-X2 – Airbus Military
• H-XBR CLS – Eurocopter & Turbomeca
• F-X2, KC-X – selection in progress
SDDP: Underdepartment of Development and Programs *SDDP examples

Air Force Secretariat for Economy and Finances (SEFA) GICC – 2010 – Budapest, Hungary
 Ministry of Defense BAF Command

Latest Success Case: HX-BR Project

• Industrial cooperation agreement for local production and nationalization of
50 EC-725 helicopters, focused on transfer of technology and local industry
development.

• First joint acquisition program in Brazilian military history.

• 22 ICP projects, managed by SDDP with AF, Navy, Army and MDIC
participation.

• Keywords in this project:

Industrial co-operation & sustainable benefits

Long term relationship

Pro-active approach

Global strategy
MDIC: Ministry of Development,
Development, Industry and Trade Recent Success Story: HX-BR Project

Air Force Secretariat for Economy and Finances (SEFA) GICC – 2010 – Budapest, Hungary
 Ministry of Defense BAF Command

BAF’s Acquisition & Offset Process

EMAER Mil.Org. DCTA IFI SEFA
(BAF’s Gen.Staff) (Buyers) (C&T Dep.) (Inst. for
Ind. Sup.)

Policy & Strategy

Co-ordination

Acquisition Process &

Execution
Technical support

Budgetary & Financial

support
Accounting

Internal Control & Auditing

Air Force Secretariat for Economy and Finances (SEFA) GICC – 2010 – Budapest, Hungary
 Ministry of Defense BAF Command

SEFA in context
Financial Institutions Air Force Secretariat for Economy and Finances

Banks General
General Attourney
Attourney
Banks

National
National Treasury
Treasury
ECAs
ECAs

Central
Central Bank
Bank
Foreign
Foreign Gov’
Gov’t Entities
Gov’t Entities

Gov’
Gov’t Auditing and Control

TCU
TCU
Int’
Int ’l Affairs
Int’l Affairs
Secretariat
Secretariat
MPU
MPU

Federal
Federal Budgetary
Budgetary
CGU
CGU Secretariat
Secretariat
BAF Mil Org

TCU: the Brazilian Government Accounting Office

MPU: a public prosecution service
Air Force Secretariat for Economy and Finances (SEFA) GICC – 2010 – Budapest, Hungary
CGU: federal comptroller general
 Ministry of Defense BAF Command

Negotiating Commercial, Financial and Offset's Agreements – a comprehensive approach

FIRST PHASE - PRELIMINARY ASSESSMENT

RFI / RFP PROPOSALS EVALUATION SHORT

SHORT LIST
LIST

SECOND PHASE – FINAL SELECTION

FACE TO FACE
REVISED COMMERCIAL, LOGISTICS ,
ON-
ON-SITE SURVEY ANALYSIS TECHNICAL OFFSET
PROPOSALS
FLIGHTS

SELECTED
SELECTED
COMPLEMENTARY BIDDER
BAFO BIDDER
INFORMATION
BAF Commander

THIRD PHASE - CONTRACTING

FINAL COMMERCIAL NEGOTIATION

COMMERCIAL OFFSET
CONTRACT AGREEMENT

AWARD
AWARD AND
AND SIGNATURE
SIGNATURE

FINANCING
Air Force Secretariat for Economy and Finances (SEFA) PROCUREMENT GICC – 2010 – Budapest, Hungary
Courtesy of Maj Int Eduardo Quesado Filgueiras – SDDP/COPAC
 Ministry of Defense BAF Command

BAF Offset Agreements: Controls and Auditing

• Few years ago, the controlling was made exclusively by EMAER.

• Recently, this control was split between EMAER and SEFA.

– EMAER: strategic aspects of offset;
– SEFA: accomplishment of the offset credits and its balance.

• Our Government Accounting Office (TCU) has demonstrated deep

concerns with a possible non-utilization of some of those offset
credits.

• Additionally to the external control exercised by TCU, SEFA is in

charge of all activities related to Auditing inside the BAF realm.

Air Force Secretariat for Economy and Finances (SEFA) GICC – 2010 – Budapest, Hungary
 Ministry of Defense BAF Command

Agenda
• Brazilian Military Offset Focuses & Tendencies
• Offset Strategy of MoD and BAF
• BAF’s Offset Features & Portfolio
• SEFA in context
• Negotiating Commercial, Financial and Offset's
Agreements – a comprehensive approach
• Offset Agreements: Controls and Auditing

Air Force Secretariat for Economy and Finances (SEFA) GICC – 2010 – Budapest, Hungary
 Ministry of Defense BAF Command

Objective
• To have a better understanding of the
BAF offset strategy, with special
attention to the relationships between
commercial contracts, offset
agreements and buyer’s credit
operations.

Air Force Secretariat for Economy and Finances (SEFA) GICC – 2010 – Budapest, Hungary
 Ministry of Defense BAF Command

Offset Strategy of the Brazilian Air Force

A comprehensive approach

Major Diógenes Lima Neto

Divisão de Contratos e Convênios

Secretaria de Economia e Finanças da Aeronáutica – SEFA

Esplanada dos Ministérios, bloco “M”, 2º andar
Brasília – Distrito Federal
Brasil
CEP 70.045-900

TEL: +55 (61) 3962-1463

E-mail: diogenesln@sefa.aer.mil.br

Special thanks to Maj Eduardo Quesado Filgueiras, from the SDDP/COPAC, for his precious support in the elaboration of this presentation.

Air Force Secretariat for Economy and Finances (SEFA) GICC – 2010 – Budapest, Hungary