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Purchase of imported supersonic fighters will have to benefit Brazilian companies

Contract for modernizing the F-5s provides for offsettingEMBRAERIn April, the Ministry of Defense promises to announce the result of the tender for the purchase of from 12 to 24 supersonic fighters for the Brazilian Air Force (FAB), a deal worth US$ 700 million. The costs of the program known as F-X may reach US$ 1 billion, including the maintenance costs, ground infrastructure and weaponry. Five consortiums are in the contest. The winner will have to transfer technology to the Brazilian industry, through offset agreements. The future contract, whose terms are kept a secret by the Ministry of Defense, may provide for partnerships with Brazilian companies for supplying components of the fighters, funds for risk investments, training of human resources, among other items. The Minister of Defense, José Viegas, has now announced that Brazilian companies will enter into a partnership with the winning consortium. “One of the criteria for choosing the supplier of the fighters is the quid-pro-quo”, says Julio Cesar Imenes, head of the Department for Development, Analysis and Technical Accompanying of the Area of Innovation for Industrial Competitiveness, of the Financier of Studies and Projects (Finep). “There is an interest for Brazilian companies to qualify themselves for nationalizing technology.”

The participation of companies in offset agreements requires them to be ready for making effective use of the technology to be shared.  “The expansion of plant, the acquisition of equipment, and the development of the research and development activity in order to adapt and perfect the technologies are examples of obligations that may be required of the Brazilian companies that benefit from the agreement”, explains Imenes. Finep has reimbursable funds available for financing the companies’ R&D activities. It will also be possible to get non-reimbursable funds, intended for universities and research institutes that may take part in cooperative projects with companies that are beneficiaries of offset clauses, by scientific interchanges, for example. “But, for this to happen, the committees that manage the various sectorial funds, the Telecommunications Fund, and the Green-Yellow Fund, will have to be swayed”, he observes.  The National Bank for Economic and Social Development (BNDES) may also support companies that participate in offset agreements.  This same modality of contract should be used in any governmental purchase made by a tender abroad.

Historically, offsetting is common practice in the aerospace industry.  It has made it possible to get new technologies, investments in the aerospace industry, and other benefits in qualification and logistics. When Varig bought MD-11 aircraft from McDonnell Douglas, Embraer was benefited with contracts for making 300 sets of flaps, training, and technology transfer, besides financing the EMB-120 Brasilia aircraft in the American market. The Brazilian Army also signed an offset agreement when it bought helicopters from Aerospatiale, which resulted in the acquisition of 50 Tucano aircraft by the French Air Force, besides other transactions to the benefit of the Army itself. At the moment, the projects for modernizing the F-5BR aircraft, CL-X transport aircraft, the acquisition of systems and sensors, and the modernization of the A-1M aircraft, amongst other projects under way, are also being carried out by means of contracts that call for technological offsets.

It is estimated that roughly 40% of the world trade in goods and services is related to contracts with offset clauses. In Brazil, offsetting has been mandatory, ever since 1992, in purchases by the aerospace industry in amounts that exceed US$ 1 million. In 2002, the Ministry of Defense laid down the Policy and Guidelines for Commercial, Industrial, and Technological Offsetting, by means of Normative Regulation No. 764/MD, of December 27. In the other sectors, though, this practice is still little known.

The Ministry of Foreign Relations has tried to stimulate the debate around the practice of offsetting, through seminars and working groups. Last February, the Center for Strategic Management of Knowledge in Science and Technology (CGECon) published the book. A panorama da prática de offset no Brasil (A panorama of the practice of offsetting in Brazil), which brings together articles by 22 specialists in this kind of deal. “Since the middle of last year, we have also been debating this policy with Brazilian embassies abroad, for an exchange of information”, says Ronan Coura Ivo, from the center’s team. The CGECon was created by the Itamaraty at the beginning of last year, with the objective of restructuring information systems in Science and Technology abroad. It works like a router of knowledge, through the operation of virtual communities made up of specialists.  One of these communities, in which representatives of the Ministry of Defense are taking part, is debating and analyzing models of offsetting.  These specialists have the task of qualifying diplomats in the formulation of offset agreements.

Multiplying factors
Commercial, industrial, and technological offset agreements were created soon after the Second World War, to support the reconstruction of Europe and Japan, and “to guarantee the hegemony and military and economic supremacy of the United States as a leading nation of the new political and strategic context created with the division of the world into East and West axes”, say Lieutenant Colonel Ancelmo Modesti and Air Commodore Aprígio Eduardo de Moura Azevedo, co-authors of one of the chapters of the book published by the Itamaraty. In Brazil, the first offset operation took place at the beginning of the 1950s, when the FAB acquired from England Gloster Meteor TF-7 and F-8 aircraft, which were swapped for the equivalent value in cotton.  Nowadays, most countries use multiplying factors to attribute a value to transactions that involve technology transfer, scientific and technological cooperation, and investments to the benefit of the country.  An example: in an offset agreement involving a national research center and a foreign company, the value of the multiplying factors will take into consideration the updating of the technology involved, scarcity, and complexity of the project, among other attributes. The foreign company would estimate the project at US$ 1 million, and would ask for a multiplying factor of 5, which would result in an offset credit of US$ 5 million.

Most deals with technological offsetting have been restricted to the area of Defense.  The intention, now, is to extend this kind of offsetting to civilian areas as well.