Industrial benefit in the field of defence procurements (industrial offset)

Considering the high technical level of the equipment and the important financial volume of the defense procurements, the equipment of the Belgian Armed Forces can contribute to maintain the technological and industrial basis, which constitutes an important factor in the protection of the national security.

The legal basis for the intervention of the Federal Public Service (FPS) Economy, SME's, Self-Employed and Energy in this matter can be found in the (E4_Royal Decree of February 6, 1997) concerning the public procurement of supply and services which are subject to article 296, §1, b, of the Treaty establishing the European CommunityExternal link, modified by the Royal Decree of December 6, 2001.

The points of action of the FPS Economy in order to associate to the extent possible the national industry to major military projects are outlined below.

The Directorate General Economic Potential, Directorate Direction Aeronautics - Defence is within the FPS Economy responsible for this matter.

1. Introduction

Important procurements of the Ministry of Defense (MOD) are in general executed through one of the following contractual procedures:

  • in the case of an invitation to tender, the offer submitted by the tenderer CANNOT be negotiated. The contracting authority can only ask for further explanations after the submission of the offers;
  • in the case of a negotiated procedure, the conditions of the contract can be negotiated.

Planned procurements of military equipment have to be presented to the Council of Ministers for prior approval provided their estimated procurement values reach or exceed certain levels.

  • For the invitation to tender, this threshold is fixed at 11 MEUR;
  • For the negotiated procedure the threshold is
    • 1.1 MEUR (without publication)
    • 2.7 MEUR (with publication).

The Council of Ministers decides whether or not industrial benefit will be requested for such procurement and for which weight the economic part will count in the evaluation of the different offers being in competition for the award of the contract. This weight in the evaluation of the offers is fixed at maximum 15% of the totality of the award criteria of the procurement.
At the same occasion, the Council of Ministers also decides upon the importance of the contractual penalty in case of non-fulfillment of the economic commitment of the contractor; this penalty will in any case be at least 10% of the non-fulfilled industrial benefit.

It concerns the system of industrial benefit also known under different acronyms: “economic return”, ”juste retour”, ”offset”, ”industrial benefit”, ”industrial participation” and “buy back”.

2. Procedure

If the military procurement includes an economic part, the tenderer is invited to introduce besides his offer for the equipment and services an economic offer at the same time. If the tenderer would decide NOT to introduce such an economic offer, his offer for the equipment and services will NOT be considered as irregular, but will receive a score equal to zero for the economic part.

The economic offers are only taken into consideration in the global evaluation as far as the military evaluation results in "offers representing an equivalent interest". This means that the first ranked offers in the motivated and pondered classification, established by the MOD on the basis of the military evaluation criteria, fall within a range of 10%.

All the introduced economic offers are binding for the tenderer, whether or not the economic aspect has played a role in the attribution of the contract.

The FPS Economy does not impose any obligations on the tenderer concerning the quantity of industrial benefit. It is up to the tenderer to consider which credible economic commitment he can take in order to introduce the best global offer taking into account the totality of the award criteria for the procurement. For evaluation purposes, an economic offer higher than 100%, will be limited to 100%. Nevertheless the purposed percentage in the economic offer remains binding during the execution of the contract.

The evaluation of the economic offers is the exclusive competence of the FPS Economy.

3. General principles governing the economic aspect of defense contracts

The tenderer is asked to commit himself for a global obligation of industrial benefit (IB) expressed in terms of a minimum percentage of Belgian added value in proportion to the total value of the contract.

That percentage has to be split according to the following categories:

  • Direct participation
  • Semi-direct offset
  • Indirect offset

These different categories of industrial benefit are described below in §5.

Offset orders placed with Belgian industry have to be of a high technological level and must create a new or additional business flow for the benefiting Belgian companies.

Investments cannot be accepted as industrial benefit.

Transfers of technology (TOT) as such are not acceptable as IB, but the Belgian added value of the business turnover, generated by these transfers, is in principle acceptable. If the TOT is estimated as being of high importance for the Belgian company, then a multiplier (normally factor 2) can be applied on the turnover. Also internships abroad by young engineers can be acceptable as IB and are awarded with a multiplier going from 2 to 5.

The tenderer shall commit himself to achieve his economic commitment within a well determined and reasonable time period and he will be bound to pay a penalty for the non-executed economic commitments within that period.

Industrial benefit will be considered as being fulfilled within this period provided that the orders have been invoiced by the Belgian companies.

The tenderer can be asked to distribute his global commitment of the industrial benefit among the three Regions of the country (in principal for procurements with an estimated value of more than 11 MEUR).

4. Classification and importance of the various kinds of industrial benefit

A. International programs

If the requirements of the MOD can be fitted in the framework of an international cooperation, it is important to permit the national industry to participate in the development and in the production of the material.
The legal basis for the promotion of the international cooperation in those fields covered by the article 296, §1, b, of the Treaty establishing the Euro-pean CommunityExternal link, which are essentially but not exclusively related to military procurements, lies in the Royal Decree of April 29, 2001.

Every proposal for international cooperation has to be approved by the Council of Ministers on the basis of not only the operational, technical and financial but also the industrial advantages for Belgium. In the same way as for national programs, it is the Minister of Economy who has to judge about the industrial advantages of the proposed international collaboration.

A.1 Industrial cooperation from the R&D stage

In this case the industry of every participating country has the opportunity to take part in the technologically most interesting stage of the R&D. At the time of the realization of the prototype each partner is responsible for a full set of the developed equipment, which normally eases the distribution of the production at the procurement stage.

A.2 Integrated production or coproduction

This is a common production allowing the participating countries to share the total volume of production according to the value of their respective needs (juste retour).

The ideal basic principle is a sole source of production for each assembly for all purchasing countries during the whole term of the program. As such, the industry in each country has the opportunity to produce assemblies in sufficiently large and thus economically profitable ranges, in the interest of the industrial partners and the purchasers. However, in many cases and for different reasons there is derogation from this principle and different production chains are put in place.

B. National procurement programs

In the case of national procurement programs of the MOD, where the Royal Decree of December 6, 2001 is applicable, industrial benefit expected from the tenderer is in principle classified according to the following economic interest:

B.1 Direct participation

Participation by Belgian industry in the supply and services which are covered by the contract signed with the Ministry of Defense and which are destined for the Belgian needs only.

Direct participation gives the opportunity to our national industry to participate technically in carrying out the order, achieving partially the mounting and the final assembly of the equipment, thus ensuring a sufficient knowledge of the equipment in order to be able to carry out the maintenance of the equipment.

B.2 Offset (generally)

Orders for equipments and/or services placed by the Contractor or foreign companies acting on its behalf at a Belgian company and meeting each of the following four conditions:

  • Causality aspect (compensatory character): It concerns an order for which it could be supposed that, without the economic obligations of this contract, would be normally placed within a foreign company;
  • Technology aspect: the order will concern equipment and/or services of an advanced technological level and realised in Belgium making use of high qualified labour;
  • Newness aspect: the order must create unambiguously a new or ad-additional business flow;
  • Export aspect: the final destination of the order is not situated in Belgium.
a. Semi-direct offset

Offset relative to equipment and/or services identical to those covered by the contract signed with the Ministry of Defense or very similar and intended for the same application.

The technological level of semi-direct offset orders is at least equivalent or superior to that of the direct participation, but their realization depends on sales to other markets.

b. Indirect offset

Offset relative to equipment and/or services other than those covered by the contract signed with the Ministry of Defense.

In order to demonstrate that this category of industrial benefit proposals cannot be referred to as existing business relations or as orders Belgian industry would receive in any case, it is imperative that the tenderer introduces convincing elements allowing the FPS Economy to verify that the conditions mentioned in the definition of offset (causality, techno-logical level, newness and export) are met.

5. Criteria for comparison of the economic offers

The economic offer will be assessed by the FPS Economy according to the following criteria:
- volume of industrial benefit in the following order of importance:

  • direct participation
  • semi-direct offset
  • indirect offset

(New business flow is given preference over additional business flow) To those main criteria the following subcriteria are applicable in descending importance:

  • technological level of the industrial benefit proposals;
  • Research & Development in the Belgian industry of the system or sub-system of the present contract (direct participation);
  • introduced guaranties relative to the realisation of the industrial benefit (a.o. agreements concluded with Belgian industry for the realisation of the industrial benefit);
  • causality of the offset proposals;
  • degree of reality of the economic offer (credibility of the economic offer and of the tenderer, financial situation of the tenderer, precision of the content of the economic offer, …).

6. Contractual aspect

Suppliers' industrial benefit commitments are specified in a clause normally contained in the procurement contract with the Ministry of Defense.

The contract will contain coercive measures for the supplier aimed at ensuring the fulfillment of his industrial benefit commitments. A bank guarantee, due at first request, will cover the penalties in case of non-execution of the economic obligations.

The approval of industrial benefit is the competence of the FPS Economy, SME's, Self-Employed and Energy and the industrial benefit will be considered as being fulfilled after verification by the auditing agency of the Department in accordance with the criteria of the economic clause of the procurement contract.

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Directorate Aeronautics - Defence

FPS Economy, S.M.E.s, Self-employed and Energy
Directorate-General Economic Potential
Directorate Aeronautics - Defence 

City Atrium C
Rue du Progrès, 50/Vooruitgangstraat, 50
B-1210 BRUSSELS
Phone: +32 2 277 70 14
Fax:  +32 2 277 53 07
E-mail: contact.defense@economie.fgov.be