Turkey: Offset And Industrial Participation (O/IP) Regime In Turkey

Last Updated: 15 September 2014
Article by Safak Herdem

In 2012 the Undersecretariat for Defence Industries ("SSM") of Turkey has announced its vision as making Turkey superior in defence and security technologies taking the management of industrialization, technology and procurement programs that assures the continuous improvement of Turkey's defence and security capabilities as a mission.

SSM manifested its strategic priorities in its Strategic Plan of 2012-2016 as sustainability of defence industry, achieving maturity in program management, developing technological competence and employee who create value and receive recognition.

In consideration and as the result of all aforementioned plans, vision and the missions, Turkey has started to initiate a new approach in its offset and industrial participation regime in 2011.

Former undersecretary of defence industries, Murad Bayar has made major contribution to improve the offset regime and competence and increase in capabilities has ensued as a result of new set of rules. The new approach has abandoned the limited thresholds, amended the definitions and extended the categories of offset and industrial participation activities as applicable since April 2011.

Accordingly any offset and industrial participation activities under procurement and industrialization activities executed by SSM based on the authorization from Defence Industry Executive Committee and assigned to the SSM is subject to new regulation since 2011.

New regime is also applied to all activities contracted with the natural and real persons whom are liable to SSM for the duration between the advance payment and 2 (two) years (O/IP Duration) and effective to the past activities unless contradicts with the terms and conditions of those.

The new offset regime classifies the O/IP commitments in three categories. The category A consists of the activities to be conducted by Turkish industry within the scope of the contract that Industrialization Plan attached thereto and setting out the terms and conditions of contractor's obligations and with a proven fulfillment by supporting documents within the related program period. The program period for the O/IP contracts which the O/IP liability period is up to 2 (two) years, the duration from the date that advance payment within the framework of procurement contract is made on the contractor until the date that O/IP liability period is expired. The program period for the O/IP contracts which the O/IP liability term is longer than 2 (two) years, every 12 (twelve) months period from the date that advance payment within the framework of procurement contract is made on the contractor. The category A O/IP commitments do not require a pre-approval from SSM and only executed thru O/IP contracts.

The category B consists of product and/or service export within the fields of defence, homeland security and aerospace industries. The category C is also sub-classified based on the contractor's origin. Accordingly; the domestic contractor's contributions including equipment, hardware, software, service or financial support to the training and R&D studies conducted by industrial enterprises, training and research institutions in Turkey in the fields of defence, homeland security and aerospace industries and foreign contractor's technological cooperation and investment activities in field of defence, homeland security and aerospace industry excluding those in category A are recognized in category C. The technological cooperation is defined as either the development of a genuine product and technology or design, development, production, test, etc. capabilities. Therefore the term "investment" excludes the takeover of an existing company, direct foreign investments within the scope of establishment of brand new companies or partnership with existing companies to be deemed as in category C.

The category B and C O/IP commitments require pre-approval from SSM before reaching an O/IP contract. The financing the commitments are also designed based on the conditions and references of the pre-approval and the multipliers granted by SSM. The maximum number of multipliers is allowed to be eight for an offset and industrial participation activity. However except the technoparks, the export and technological collaboration / investment activities conducted by the companies settled in Free Trade Zones can be provided loan with a lower multiplier up to (-2) than the ones defined for category A.

The multiplier for the design and engineering activities executed by small medium sized business enterprises in category A is (2) and in all other activities in category A the multiplier is (1).

In category B, the multiplier for i) land and naval platforms is (4), ii) air platforms, rocket/missiles and satellite systems is (5).

For the systems/subsystem and components the multiplier in category B for i) mechanical / hydraulic / pneumatic systems, electrical/electronic systems, software, weapon and ammunition, power/impulse/motor/transmission systems, command control/information systems, electronic warfare systems, simulators is (3) and ii) structural components is (2).

For technological collaboration of category C, depending on fields of network based warfare, command control/information management systems, software, electronic warfare, missile guidance and control, sensor systems, system integration, satellite and space technologies the multiplier varies as (4) of (5). For generation or creation of special requested technology/ability the multiplier varies between (6) and (8).

The multiplier of investment section of category C for i) direct foreign investments within the scope of establishing brand new companies in the fields of defence, homeland security and aerospace industries is (4) i) the equipment, hardware and software provided to the universities, training and research institutions in Turkey in the fields of defence, homeland security and aerospace industries is (3).

For the R&D support for the equipment, hardware, software, service or financial support provided to the training and R&D studies conducted by industrial enterprises, training and research institutions in Turkey in the fields of defence, homeland security and aerospace industries of category C, the multiplier is (5).

The law requires all procurement and industrialization activities by means of O/IP to be conducted within scope of the new regime and to sign a contract with the contractor referring to the procurement agreement for the duration between the advance payment and 2 (two) years (O/IP Liability). The new regime also allows SSM to sign separate contracts with foreign subcontractors involved in relevant procurement and industrialization activities. Any financial burden on SSM while performing the O/IP liability is not allowed in the new regime as same applied in the past. The foreign contractors shall also act as cosignatory of the O/IP contracts together with the SSM in intergovernmental purchases of foreign military sales (FMS) if reached to a contract with a foreign country's administration. In such conditions O/IP contracts requires to be signed by the foreign country and SSM before signature of the procurement agreement or before the first payment made by SSM within the scope of the project.

The O/IP liability percentage is not acceptable if lower than 70% of the value of the procurement contract that is determined by SSM taking the attributes of the procurement and industrialization activities into account. The work share ratio of supplier company to small-medium business sized enterprises is not allowed to be lower than 30% of the Category-A O/IP commitments. In addition to this limitation minimum 15% of Category-A O/IP liability shall be accomplished by ten small-medium sized business enterprises. The evaluation and calculation of the O/IP proposal are subject to below formulas:

Evaluation Score = 0.50 × (T) + 0.40 × (I) + 0.10× (E)

where

T: Technical Score,

I : O/IP Score,

E: Administrative/Economical Score.

O/IP Score (I) = 0.65 × (PA) + 0.20 × (PB) + 0.15 × (PC)

where

PA: Category-A O/IP Score

PB: Category-B O/IP Score

PC: Category-C O/IP Score

The calculation of category B O/IP is made according to the formula of:

PB = RB / (1+ DB / TB)

where

RB: Ratio of Category-B O/IP liability over contract value

DB: Weighted average fulfillment duration of Category-B O/IP liability (Sum of multiplication of every Program Period's number and Category-B

O/IP liability amount within related Program Period over total Category-B O/IP liability)

TB: Duration that the Category-B O/IP liability is fulfilled

And the calculation of Category-C O/IP is subject to the below formula:

PC = RC / (1+ DC / TC)

where

RB: Ratio of Category-C O/IP liability over contract value

DB: Weighted average fulfillment duration of Category-C O/IP liability (Sum of multiplication of every Program Period's number and Category-C O/IP liability amount within related Program Period over total Category-C O/IP liability)

TB: Duration that the Category-C O/IP liability is fulfilled

The letter of guarantee requested by SSM from the contractor should correspond to 6% of O/IP liability with minimum one year longer term of the O/IP liability period. The new regime also requires to apply escalation to O/IP liabilities as defined in procurement contracts only in cases where procurement contract is subject to escalation.

In cases where O/IP commitments fail the contractor is obliged to pay 6% of the value of its commitments within 30 days upon the written request of SSM. This penalty is also subject to off-set that SSM may deduct from payments to be made to the contractor if not paid within 30 days term.

As clearly observed the Turkish defence industry has been undergoing a comprehensive transformation with new approaches and coordinated policies to industrial participation and offset regimes. Its recent success not only reflects the success of ongoing policies but also the contribution of skills in technology production gained by past offset experiences. However the gap in technology assessment and review capabilities still remains as a shortcoming in evaluation of offset activities. Turkey as the country having 194 universities and 21 technoparks is expected to focus more on technology production and transfer capabilities as South Korea and Japan did in the past during KTX-2 and FS-X offset projects that resulted with gaining the capability technology production in their countries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Safak Herdem
 
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