Summary:

1. Offset’s Main Functions, Legal Background

2. Offset Policy Development

3. Main Programmes

4. Success Stories and Problems

5. Future of Offsets

1. OFFSET’S MAIN FUNCTIONS IN

HUNGARY:

1.2. Cost Saving in Defence A tool for efficient Expenditures defence spending

1.1. Defence Expenditures’ A tool for supporting Compensation economic development

1.3. National Defence & A tool for supporting the Security Industry transition of defence industry

Development & development of security Industry

1.1. Defence Expenditures’ Compensation – A tool for supporting economic development

Overall Offset Obligation for 1,1 Billion Euros

Offset to SupportEconomic Policy

Goals

Support knowledge-based economic development

Provide inclusion of subcontractor SMEs in main supply chains and systems

Help job creation and maintenance of employment, human resources development

Enhance regional development

Access to new markets

Develop national defence and dual-use industries

Variety of toolsFDI, technology transfer, know-how, grants, R+D,

marketing assistance, export of new products, training, subcontracting, offset abatement.

Priority sectors and Project Based Fulfilment

•IT•Telecommunications•Nanotechnology•Biotechnology •Electronics•Environmental protection technologies•Renewable energies•Defence Industry•Aerospace/Aircraft Manufacturing

•Realisation of complete projects as new fulfilment possibility

•Projects databases elaborated together with professional associations

•Fulfilment rewarded with multipliers 3-5 to be negotiated case by case

Technology intensive branches and activities

to increase economic competitiveness

Project Based Fulfilment

in Priority Sectors:

1.2. Cost Saving in Defence Expenditures –A tool for efficient defence spending

Creation of Modernized Professional Armed Forces versus Decreasing Defence Spending

Offset to achieveCost Saving/

Cost Avoidance

Variety of tools

• Maintenance and logistic support facilities for the life cycle of the system acquired • Developing/upgrading capacities for the system acquired

• Savings by receiving services free of charge as (direct) offset fulfilment• Obtaining of new technical servicing and upgrading capabilities

1.3. National Defence Industry Development A tool to support defence& security industry

A small national defence industry in transition versus import dependence on defence platforms

Offset to Support Development of

Defence&Security/Dual Use

High-Tech Industry

Variety of tools• Any defence/security/dual use high-tech

industry development/investment accounts

for direct offset fulfilment

• Direct Subcontracting• Acquisition of new technologies• Know-how transfer• New products/services• Marketing support • Participation in International Defence Development/NATO Programmes

LEGAL BACKGROUND

Government Decree No 228/2004.(VII.30.) on the specific rules of acquisition of goods and services for military, public order and surveillance use, related to basic defence and security interests

MAIN OFFSET PRINCIPLES:• 100% obligation, • 1 Bn HUF (4 M Euros) threshold• 30 % obligatory investment ratio• rest of the rules determined by MOET

Offset Regulation

MOET Order No. 21/2006.(IX.24.) on the tasks, competence, procedure and operation of the Offset Committee:

The Ministry of Economy and Transport as responsible governmental body for offset leads the Offset Committee

General Rules for Offset Detailed offset regulation guidelines approved by the Minister of Economy:

• offset policy priorities, • possible ways and fields of fulfilment.

The General Rules for Offset are considered:• as a base for any future RFQ, and consequently • as a base for the Offset Agreement itself

General Rules for Offset Modified

• Last modifications in November 2006:

– Aerospace Sector selected among priorities;

– Direct Offset fulfilment is to include 30 % investment obligation;

– Only Hungarian added value to be counted as export fulfilment;

– Indicative Lists modified.

2.2. OFFSET POLICY DEVELOPMENT

Early 90’s:

Introduction of Offset

Practice

1999-2001: Setting Policy

Priorities & Legal Framework:

From 2004:

NEW OFFSET

POLICY

1995 2000 2005

Indirect Commercial

Offset

Indirect Commercial

Offset & Direct Offset,

whenever possible

Obligatory Direct Offset &

Indirect Commercial Offset,

but Defence&Security in a wider approach

3. MAIN OFFSET AGREEMENTSCompany name Contract year Offset Obligation

Matra Defense 1999, closed 2001 100%, 109 M USD

Gripen International 2001, modif. 2003 110%, 191 Mrd HUF

Kongsberg Defence Comm. 2003 180%, 44 Mrd HUF

Rába Járműipari Kft 2003 170%, so far 19 Mrd HUF

Ikarus-Trade Kft 2003 100%

Raytheon 2005, closed 2006 100%, 20,3 M USD

HM Currus 2005 100%

VIV Rt 2005 100%

Carl Zeiss Optronics 2005 100%, 10,9 M EUR

Rohde & Schwarz GmbH 2005 112%, 9,5 M EUR

Diehl-Raytheon Missile 2006 100%, 10,2 M EUR

Raytheon 2006 100%, 20,5 M USD

Gripen International 2006 +1,85 Mrd HUF

Rheinmetall 2006 100%, 6,1 M EUR

MBDA France 2006 100%, 7,7 M EUR

NATO Project with Offset

Hungary joined NATO

Airborne Early Warning and Control

Organization (NAPMO) as from

22nd December 2005.

• Hungary contributes to the Mid Term Modernization Programme of the AWACS fleet and also the Depot Level Maintenance.

• National MTM contributions compensated 100% by the Programme’s Main Contractor – the Boeing Company through offset.

• Hungarian DLM contributions compensated through offset.

4. SUCCESS STORIES AND PROBLEMS

Agreements Pre-offsets

1995-2001

Offset Agreements

2001-2007

Procurement related imports 0

232 Mrd HUF(1.16 Bn USD)

Offset obligation 0

279 Mrd HUF(1,4 Bn USD)

FulfilmentAs per Dec. 2006

271 Mrd HUF

(1,3 Bn USD)

248 Mrd HUF(1,24 Bn USD)

Results: Long-term embedded investments

mainly with export capacities

Success Stories and Problems

Offset obligation: 780 M Euros,

110 % of the Leasing Value

Investments: 230 M Euros

32 % of the offset obligation

Fulfilment period: Within 14 years Within 7 years

Milestones: 50 % of the obligations to be fulfilled within 8 years

-

Penalty: 5 % -

GRIPEN OFFSET AGREEMENT•Signed 20th December, 2001,•Modified 3rd February, 2003

5. FUTURE OF OFFSETS

Rome Treaty § 296• EC Green Book – Intention to revise and modify the existing rules for defence procurement, effects on offset.

EDA/EDEM Code of ConductAbolishment of Offset Harmonisation Study

Hungary opted out from CoC:• Low level of competitiveness of the national defence industry• Offset is an economic necessity

LESSONS LEARNED:

• Offset depends on a calculable Procurement policy, long and middle term planning of acquisitions, budget stability.

• Offset is an additional source for economic development, any Government priority could be included in offset.

• Each offset programme is different, offset to be handled with a great level of flexibility.

• Offset must rely on real business opportunities.

• Direct offset possibilities should be assessed pursuant to the procurement and the real involvement possibilities of the local defense industry.

Thank you for your kind attention!

Q&A:

Ministry of Economy and TransportState Secretariat for International Economic RelationsOffset& Investment Unit

Phone: +361 374 2841, Fax: +361 269 3478E-mail: szabo.sandor@gkm.gov.hu