Offset Fundamentals Frank Kenlon Professor of Intl Acq - PowerPoint PPT Presentation

Offset Fundamentals Frank Kenlon Professor of Int’l Acq (Intermittent) DAU/DSMC Int’l Acquisition Center Frank.Kenlon@dau.edu February 18, 2020

Overview • Offset Fundamentals – Definitions and Background – USG Policy – Types, Valuation, and Reporting – Offset Relationships • Offsets on FMS Programs – Cost Recovery and LOA Terms & Conditions – Offset Costs & Disclosure • Industry Perspectives • Summary 2

Offset Definition • Compensation practices required as a condition of purchase by foreign countries for FMS, DCS, and Hybrid defense sales • Required by the foreign country and agreed to through arrangements established with U.S. contractor • Obligates the U.S. contractor to perform action(s) that will “offset” the outflow of money from the foreign country purchasing the U.S.-origin defense articles/services • Also known as industrial cooperation, industrial participation, countertrade, industrial benefits, etc 3

Background • Use of offsets is commonplace in global defense trade in purchases from U.S. and other foreign defense contractors • Virtually all U.S. defense trading partners impose some type of offset requirement – Required by about 80 countries – often required by their laws or regulations • Countries require offsets to ease the burden of large defense purchases on their economy, increase or preserve domestic employment, obtain desired technology and/or promote industrial sectors Offsets can be a deciding factor in foreign gov source selection decisions 4

1990 Presidential Policy • No agency of the USG shall encourage, enter directly into, or commit U.S. firms to any offset arrangement in connection with the sale of defense goods or services to foreign governments. • The decision whether to engage in offsets, and the responsibility for negotiating and implementing offset arrangements, reside with the companies involved. • Codified into law in 1992 amendments to the Defense Production Act Public Law 102-558) • Basic USG policy on offsets in defense trade is that they are considered to be “economically inefficient and trade distorting” 5

Types of Offsets & Transactions Direct Offsets Indirect Offsets Offset transactions that are directly related Offset transactions that are unrelated to to the article or service being exported the article or service being exported Types of Transactions Direct Offset Direct or Indirect Offset Indirect Offset • Co-development • Technology Transfer (training, • Purchase of items or • Co-production intellectual property, etc.) services • Defense services • Foreign Direct Investment, • Export Assistance Credit Assistance, Financing • Offset Barter/Swapping See Commerce Dept Bureau of Industry & Security (BIS) website for details 6

Offset Valuation Actual Value Multiplier Credit Value The value credited for the Actual value of offset A factor applied to the offset transaction by transactions without taking actual value of certain application of a multiplier, into account multipliers or offset transactions to any intangible factors, or intangible factors calculate the credit value other method. The credit earned. Foreign value may be greater than, purchasers use multipliers equal to, or less than the to provide firms with actual value of the offset incentives to offer offsets transaction that benefit targeted areas of economic growth. May be positive or negative. Offset obligation often characterized as a percentage of the main contract value 7

Offset Example Credit Actual 300 Tanks Multiplier 400 Million Value Value + Offsets 70 mil 3 210 mil Co-production 400 mil S eller P urchaser Foreign Direct 14.5 mil 4 58 mil Investment 300 tanks 20 mil 7 140 mil T echnology Transfer Export 3 mil/ 3 72 mil y X Direct Assistance/Marketing 8 yrs Offsets Indirect 480 mil 128.5 mil This would be reported as a 120% offset 8

Offset Reporting Requirements • Defense Production Act requires the President to submit a report to Congress on the impact of offsets on the defense preparedness, industrial competitiveness, employment, and trade of the U.S. • Commerce Department’s Bureau of Industry and Security (BIS) develops the report through the Offset Reporting Regulation, 15 CFR Part 105 • Industry reporting requirements – Any U.S. firm that enters into a contract to provide defense articles or defense services to a foreign country or foreign firm pursuant to an offset agreement exceeding $5 million in value must report that agreement – U.S. firms must also report each offset transaction completed in performance of existing offset commitments for which offset credit of $250,000 or more has been claimed from a foreign representative See BIS’s Guidance for Reporting on Offset Agreements and Transactions 9

Offset Relationships Direct Commercial Sales Foreign Military Sales Foreign (DCS) (FMS) Government USG FMS Case Export Authorization Commercial Offset DoD Contract Agreement FAR Contract USG is not a party to these agreements Includes reimbursement of offset costs U.S. Note: Hybrid Sales may include both types of Contractor offset arrangements Foreign Government requests, USG allows, and Industry manages 10

Offsets on FMS or Hybrid Programs • Have you dealt with offsets? • What were the challenges? 11

FMS Offset Relationships United States Government Contractor can All Offset costs are included in recover all Offset costs in the contract the LOA Offset FMS Defense Relationship Purchaser Contractor 12

FMS Offset Costs • Industry provided offset costs should be included in P&A data and in estimated prices quoted in the LOAs − Incorporate in major end item price in line 1 of the LOA – not spread in other line items • Contractor must disclose the estimated offset costs to the DoD contracting officer and the FMS customer • Requests to include offset costs after LOA acceptance require an LOA modification or amendment See SAMM C6.3.9 for additional information 13

Cost Recovery (DFARS 225.7303-2) • A U.S. defense contractor may recover all costs incurred for offset agreements with a foreign government or international organization if the LOA is financed wholly with foreign government or international organization customer cash or repayable foreign military finance credits. • The U.S. Government assumes no obligation to satisfy or administer the offset agreement or to bear any of the associated costs. • Indirect offset costs are deemed reasonable for purposes of FAR parts 15 and 31 with no further analysis necessary on the part of the contracting officer, provided that the U.S. defense contractor submits to the contracting officer a signed offset agreement or other documentation showing that the FMS customer has made the provision of an indirect offset a condition of the FMS acquisition. FMS customers are placed on notice through the LOA that indirect offset costs are deemed reasonable without any further analysis by the contracting officer. 14

Cost Sufficiency Reviews DFARS Direct and Indirect Offset Definitions (2018) Direct Offset Costs Indirect Offset Costs • Normal Contracting Officer • Deemed reasonable w/o cost sufficiency review further Contracting Officer analysis 15

LOA Standard Terms and Conditions 2.8. Any offset arrangement is strictly between the Purchaser and the U.S. defense contractor. The U.S. Government is not a party to any offset agreement that may be required by the Purchaser in relation to the sales made in this LOA. The USG assumes no obligation to administer or satisfy any offset requirements or bear any of the associated costs. Although offsets, as defined in the Defense Federal Acquisition Regulation Supplement, are not within the scope of the DoD contracts entered into to fulfill the requirements of this LOA, offset costs may be recovered through such contracts. Indirect offset costs may be deemed reasonable without further analysis in accordance with the Defense Federal Acquisition Regulation Supplement. If the Purchaser wishes to obtain information regarding offset costs, the Purchaser should request information directly from the U.S. defense contractor. 16

Disclosure of Offset Information • Inappropriate for USG personnel to discuss with the purchaser the nature or details of an offset arrangement • The fact that offset costs have been included in the P&A or LOA price estimate may be confirmed, should the purchaser inquire • Purchaser should be directed to the U.S. contractor for answers to all questions associated with offset agreements, including questions regarding their costs • Involvement in any discussion of offset costs (beyond confirmation of the inclusion of these costs in price estimates) must be avoided See SAMM C6.3.9.3 for additional information 17