US embassy cable - 05BRASILIA2775

UNCLAS SECTION 01 OF 02 BRASILIA 002775 
 
SIPDIS 
 
NSC FOR CRONIN 
STATE PASS USTR 
TREASURY FOR OASIA - DAS LEE AND FPARODI 
STATE PASS TO FED BOARD OF GOVERNORS FOR ROBITAILLE 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/DDEVITO/DANDERSON/EOL SON 
AID/W FOR LAC/SA 
 
E.O. 12958: N/A 
TAGS: ECON, BEXP, MASS, KIPR, Economic Policy & General Analysis 
SUBJECT: BRAZILIAN GOVERNMENT BEGINS TO LOOK AT OFFSETS FOR 
ITS LARGE-SCALE PURCHASES 
 
1. Summary. On October 4-5 in Brasilia, the Foreign Ministry 
hosted an International Seminar on Commercial, Industrial 
and Technological Offsets (i.e., conditioning a government 
purchase on some quid pro quo on the part of the vendor). 
The seminar sought to identify the legal principles 
underpinning offset practices and to discuss ways to develop 
awareness within the government and private sector on how to 
take advantage of offset opportunities.  The target audience 
for the seminar was officials within the Ministries of 
Defense, Foreign Relations, Development and Trade, Science 
and Technology, Planning, and Finance, as well as research 
center executives and import and export companies.  In 
addition, country representatives from Spain, South Africa, 
Portugal, the United States (private sector), the 
Netherlands, and the United Kingdom also participated. 
 
2. The seminar opened by citing the importance of offsets 
nowadays for governments and noting that most offsets take 
place in the defense sector.  Conference participants 
concluded that Brazil lagged far behind other countries in 
seeking offsets and that there was a lack of understanding 
within the government of what offsets were and how they 
could be used by government ministries.  Currently, the 
Brazilian Government has no offset policy, no database of 
companies which provide offsets, no centralized office to 
coordinate government procurement, and no offset legislation 
in place.  End Summary. 
 
Foreign Offset Practices 
------------------------ 
 
3. Spain. Conference participant Henrique Goncalo Navarro 
Gil (Deputy Counselor for Industrial Management Cooperation 
within Spain's Defense Ministry) stated that in Spain 
offsets are under the umbrella of the defense ministry, as 
it is the case in most countries.  According to Navarro, 
offsets are a great tool for developing negotiating skills 
and multinational corporations are much more open now than 
ever before to including offsets when they deal with 
governments.  "We should see more offset dealings, as this 
is a trend that will continue for the foreseeable future" 
said Navarro. 
 
4. South Africa. Sipho Zikode (Chief Director of the 
Industrial Participation Secretariat within South Africa's 
Commerce and Trade Ministry) pointed out that offsets are a 
good mechanism for obtaining technology from foreign 
corporations.  Zikode noted the importance of maintaining a 
consistent policy on offsets for as long as 25-30 years in 
order to show multinational corporations the emphasis the 
government placed in this area.  According to Zikode, there 
are two large ongoing offset programs in South Africa: the 
national industrial program and the defense industrial 
program.  These programs apply all government foreign 
purchases and are used as a tool to develop strategic 
partnership agreements with foreign corporations.  Most 
importantly, they are used to leverage economic benefits and 
help develop of South African industry by more effectively 
utilizing the instrument of the government procurement. 
Target sectors are: clothing, textiles, automotives, 
aviation and aerospace, agro-processing, metal and minerals, 
chemicals, biotechnology, defense, information and 
communications. 
 
5. Portugal. Rui Augusto (President of the Portuguese 
Ministry of Economy's Office Committee) stated that his 
country's offsets focus on the defense sector, where the 
government has been able to develop and implement a series 
of deals during the past decade.  Its practices and 
objectives, he said, were similar to South Africa. 
 
6. European Union. A question was raised from the audience 
regarding the EU position on offsets.  A private sector 
representative from the Netherlands answered, noting that 
this was a very sensitive issue as it dealt with defense, 
technology transfer, and intellectual property rights.  For 
now, the EU has no policy authorizing offsets, although 
things might change in the future as the EU Commission is 
increasingly examining the practices of its members in the 
field of defense. 
 
7. United States. An audience member immediately posed a 
follow-up question inquiring about U.S offset policy:  was 
it determined by the government or market driven?  The 
Managing Director of a U.S.-based offset company (Industrial 
Participation Projects LLC) responded that at this time 
there was no overarching U.S. policy and that he didn't see 
one coming about for a few years. 
 
Commercial Promotion and Market Access in Brazil 
--------------------------------------------- --- 
 
8. Maria Elisa Rabello Maia, Deputy Chief of the Market 
Access Division in the Brazilian Ministry of Foreign Affairs 
spoke about the current state of offsets in Brazil.  She 
noted that while Brazil is not willing to participate in 
market access discussions for government procurement in WTO, 
the country is an active member of the transparency debate 
group.  Her rationale was that Brazilian companies are 
unprepared to compete with foreigners.  According to Maia, 
Brazilian companies are hesitant to take the steps necessary 
to gain access to foreign markets.  Asked about the time 
line in which she sees Brazil institutionalizing offset 
practices, she replied:  "it won't happen in the short to 
medium term".  Brazilians are mainly using offsets in the 
defense sector through a 30-year old Air Force program. 
However, Embraer, the Brazilian airline manufacturer, is now 
(successfully) taking the lead in using offsets in the 
private sector. 
 
9. Maia said that draft offset legislation has been 
discussed at the ministerial level, and by the beginning of 
2006 the Ministry of Foreign Affairs will seek the 
President's approval to submit the bill to Congress (though 
no vote on any law is expected until 2007 at the earliest). 
 
10. The Industrial Participation Projects representative 
stated that Colombia and other Latin America countries are 
developing good offset programs and Brazil should do the 
same. He emphasized the importance of offsets for promoting 
trade and gaining market access; eighty-four countries 
participate in offset programs worldwide.  (Purportedly, the 
first case of offset compensation took place in 1851 when 
Samuel Colt sought to sell revolvers to the British. The 
British would only buy the guns if the manufacturing plant 
was located in England.)  He concluded by noting that  even 
if the WTO limits offsets, companies will still use them 
because they can be an effective development and marketing 
tool. 
 
DANILOVICH