““PROMOTING THE BALANCE OF PRODUCTIVE PROMOTING THE BALANCE OF PRODUCTIVE FORCES BETWEEN COMPETITIVE FORCES BETWEEN COMPETITIVE

COMPANIESCOMPANIES””AHRSAHRS

MINISTRY OF DEFENSE BRAZILIAN AIR FORCE COMMAND – COMAER

DEPARTMENT OF AEROSPACE SCIENCE AND TECHNOLOGY- DCTAINSTITUTE FOR INDUSTRIAL FOSTERING AND COORDINATION – IFI

ECCOECCO – Sympsium to Offset and Industrial Cooperation – Jun 2012

Brazil - BAF Current Offset Policy and Expectations to the Future

Paris Nord Villepinte

To understand the interests of Brazilian To understand the interests of Brazilian Offset Defense Policy, Identify the needs Offset Defense Policy, Identify the needs for Offset activities related to Programs for Offset activities related to Programs

conducted by the Brazilian Air Force, and conducted by the Brazilian Air Force, and the expectations to the future.the expectations to the future.

OBJECTIVE OBJECTIVE

Legal Basis Offset Structure in Brazil Brazilian Military Offset Focus Offset Features of MoD and BAF Offset's Structure and Responsibility in BAF BAF Offset Features & Portfolio Role of Suppliers and Characteristics of Offset Program Industrial Cooperation - HX-Br case Expectations Conclusion

AGENDAAGENDA

SPECIFIC LEGAL BASISSPECIFIC LEGAL BASIS

MINISTRY OF DEFENSE (MoD)MINISTRY OF DEFENSE (MoD) Decree nr. 764/MOD (Decree nr. 764/MOD (“Policy and Directives for Offsets under “Policy and Directives for Offsets under

Ministry of Defense)Ministry of Defense), December 27, December 27thth, 2002., 2002.

BRAZILIAN AIR FORCE (BAF)BRAZILIAN AIR FORCE (BAF) DCA 360-1 (DCA 360-1 (“Policy and Strategy for Offset Agreements”, under “Policy and Strategy for Offset Agreements”, under

BAF)BAF), December 13, December 13thth, 2005., 2005. ICA 360-1 (ICA 360-1 (“Principles for Offset Agreements Negotiations”, under “Principles for Offset Agreements Negotiations”, under

BAF)BAF), December 13, December 13thth, 2005., 2005.

(Available at website : (Available at website : http://www.ifi.cta.br/desenvolvimento-industrial.phphttp://www.ifi.cta.br/desenvolvimento-industrial.php - only in - only in Portuguese versions)Portuguese versions)

Overview of Offset Structure in Brazil Current Activities

Ministry of Defense

Air Force Army Navy

Military Offsets

GeneralOffsets

Offset in Brazil

- No civilian Offset negotiations during the recent years

-2010 - Modifications of the Federal Procurement Law 8.666 (Public bids and Administrative Contracts) to introduce Offsets throught the Law 12.349/10

-Published the General Offset Policy in 2002

-There is not structure today to negotiate Offsets, but orientation to each Armed to do.

- Each Armed Force has its Rules for Offsets Agreements, according the Offset General Policy from MoD, and can conducts its own acquisitions processes, under supervision of MoD

A consolidated Policy under BAF to negotiate offsets since 1991.

Brazilian Military Offset FocusNATIONAL STRATEGY OF DEFENSE (NSD) - OFFSET

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

A Defense equipment purchase drive a typical offset A Defense equipment purchase drive a typical offset accord, but a Cooperation Agreement between Brazil accord, but a Cooperation Agreement between Brazil and other Country can result in a Industrial Cooperation, and other Country can result in a Industrial Cooperation, in special cases, like a offset engage.in special cases, like a offset engage.

Offset Features - MoD

Offset area - DefenseThreshold - FOB 5 million US$, 12 monthsNormal obligation - 100% commercial contractTimeframe - Commercial Contract durationSource of obligation - Direct commercial sales or subcontracting

(indirect supply)Multipliers - Accord kind of obligation, case-by-case basis Penalties Brazilian - administrative legislationFocus - Defense and aerospace industry sectorsDirect offsets - PreferentialIndirect offsets - AcceptableEligible activities- Transfer of technology, investments,

coproduction,licensed production, marketing support, training, other forms of countertrade.

OFFSET IN THE BRAZILIAN AIR FORCE

(BAF)

DECEA DCTA COMGAP

CONTRACTING ORGANIZATIONS

FROM BAF

Air Force Commander

EMAER (General Staff)

- Policy & Process Assessment

- Offset Committee

SEFA

Accounting general inspector

organization

SDDPCOPAC IFI

General Offset Coordination for BAF

Negotiation and Management of the Agreements under DCTA

responsibilities

Offset Technical Support for Contracting Organizations

Follow-up of the Agreements

GENERAL STRUCTURE OF BAF FOR OFFSETSGENERAL STRUCTURE OF BAF FOR OFFSETS

COMMERCIAL, INDUSTRIAL AND COMMERCIAL, INDUSTRIAL AND TECHNOLOGICAL COMPENSATION (OFFSET) TECHNOLOGICAL COMPENSATION (OFFSET)

OBJECTIVE SYNTHESISOBJECTIVE SYNTHESIS

To promote the growth of technology andTo promote the growth of technology and quality levels of the Brazilian Aerospacequality levels of the Brazilian Aerospace

Industry, modernizing methods andIndustry, modernizing methods and processes of production and implementingprocesses of production and implementing

new technologies.”new technologies.”

DCA 360-1 (“Policy and Strategy for Offset Agreements”, under BAF), December 13th, 2005.

BAF Offset Features

Liquidated damages - YesBank guaranties - Usually 5% of the obligationMultipliers - 1 to 5Waiver - Sole-source suppliers, government-to-government international

agreements (except under competitive environments)Credit Banking - 50% of new commercial contracts, 5 years, transferable

under the same holdingPre-offsets - No, but may be considered in a case-by-case basisSwaps - No, but may be considered in a case-by-case basisIndustrial Cooperation – Usually when established a Cooperation Accord

with another country, and if joint projects are defined upfront and milestones are established

Penalties - Credit-increase based settlements may be acceptedMoU - Mandatory, even if the beneficiary is an Governmental organization

(including Air Force Organizations)

BAF - Examples on Offsets

6 Offset and IC agreements,

●Valued ~US$ 5 billion.

19 agreements under contract. CL-X –Airbus Military

• P-3 – Airbus Military

•F-5Br – Elbit

•A-1 – Elbit

•VC-X – Airbus SAS

H-X Br – Eurocopter & Turbomeca KC-390 –selection in progress (13 confirmed agreements)

The Role of Foreign SuppliersThe Role of Foreign Suppliers To have a extensive discussion with the Brazilian Companies about the To have a extensive discussion with the Brazilian Companies about the

conditions for the Partnership (The share of Responsibilities and Costs)conditions for the Partnership (The share of Responsibilities and Costs)

To select national companies that will take part in the Projects, considering To select national companies that will take part in the Projects, considering aspects such as capabilities, quality and costs (Business Sense)aspects such as capabilities, quality and costs (Business Sense)

To consolidate Projects in an Offset Proposal and submit it to the Selection To consolidate Projects in an Offset Proposal and submit it to the Selection Committee according the scheduleCommittee according the schedule

To submit Offset Projects with the detail level specified in the RFP and ICA To submit Offset Projects with the detail level specified in the RFP and ICA 360-1, as well with their respective MOU / MOA360-1, as well with their respective MOU / MOA

To assure the Project execution along the National CompaniesTo assure the Project execution along the National Companies

Characteristics to be evaluated in a Characteristics to be evaluated in a Proposed Offset ProjectProposed Offset Project

Fulfillment of Armed Forces Interest Areas described in the RFP (Request For Fulfillment of Armed Forces Interest Areas described in the RFP (Request For Proposal)Proposal)

Compatibility with the Offset Policies Objectives (Decree nr.764/MD & DCA-Compatibility with the Offset Policies Objectives (Decree nr.764/MD & DCA-360-1)360-1)

Added Value (subjective and objective) by the Proposed Project and level of Added Value (subjective and objective) by the Proposed Project and level of significance for the Beneficiary - Benefitssignificance for the Beneficiary - Benefits

Technological Singularity (New Technologies for the Brazilian Industry)Technological Singularity (New Technologies for the Brazilian Industry)

Project SustainabilityProject Sustainability

Technological and Economic ImpactsTechnological and Economic Impacts

Possible Spin-OffsPossible Spin-Offs

Project Consistency and FeasibilityProject Consistency and Feasibility

Brazilian Army Acquisitions of military material, helicopters,

supply and technical assistance.

In the Army, since 1988 until 2008,

was to do contract more than US$ 400 millions

We have now a chance to accomplisch some technology and

materials relating a very important purchase of HX-725

and antiaircraft defense, to fortify the Army

Source: Seminary of Defense – Brasília 2008 and MoD 2012

HX-BrEC-725

This is the first great contract of MoD to equip all the three Armed Forces. More than US$ 2,5 billion for 50 Helicopters from Eurocopter

We are receiving the equipaments and all conditions to assemble this helicopter and provide the tools to maintainence to all the Armed Forces in Brazil, in Itajubá - Minas

Gerais, where is the plant of Helibrás, participate of society with Eurocopter.

Itajubá

EXPECTATIONS

EquipementEquipementFX-2 – Hope to conclud this year the purchase to BAF with possibilities to Navy also.

Wish EffectWish EffectTechnologies ImprovementIndustrial Process CapacityCommercial TransactionsWork LoadSufficiency related external market

OFFSET IDEAOFFSET IDEA

The Offset practice should not be viewed as a The Offset practice should not be viewed as a process of donation, but rather as a two-way process of donation, but rather as a two-way road, through which valuable and important road, through which valuable and important

offers are incorporated, meaning, in principle, offers are incorporated, meaning, in principle, an ideal "win – win" to growing partnership.an ideal "win – win" to growing partnership.

Legal Basis Offset Structure in Brazil Brazilian Military Offset Focus Offset Features of MoD and BAF Offset's Structure and Responsibility in BAF BAF Offset Features & Portfolio Role of Suppliers and Characteristics of Offset Program Industrial Cooperation - HX-Br case Expectations Conclusion

AGENDAAGENDA

To understand the interests of Brazilian To understand the interests of Brazilian Offset Defense Policy, Identify the needs Offset Defense Policy, Identify the needs for Offset activities related to Programs for Offset activities related to Programs

conducted by the Brazilian Air Force, and conducted by the Brazilian Air Force, and the expectations to the future.the expectations to the future.

OBJECTIVE OBJECTIVE

““Dream and reality are two points Dream and reality are two points

that are connected by workthat are connected by work””

Affonso Henriques R. de Sousa – Col R1Affonso Henriques R. de Sousa – Col R1IFIIFI(Subdivision of Offset - CDI-ST)(Subdivision of Offset - CDI-ST)Phone +55 012-3947-7359Phone +55 012-3947-7359E-mail: affonsoahrs@ifi.cta.brE-mail: affonsoahrs@ifi.cta.br

Special thanks to LtCol Quesado, and Lt Col Diógenes, from BAF, for their precious support in the elaboration of this presentation.