Guidelines
Approved by the Commission on Compensation
Matters when Purchasing Arms, Ammunition,
Explosives or Other Military Purpose Goods
April 26 2004
for Establishing and Implementing Compensation (Industrial Cooperation) Agreements in Connection with Lithuanian Defence Procurements
Foreign suppliers selling arms or other military purpose goods to the Lithuanian Armed Forces will be required to enter into the Compensation Agreement with the Ministry of Economy.
Arms or other military purpose goods purchase contract shall only come into effect upon the signature of the Compensation Agreement.
The Lithuanian Development Agency will assist foreign suppliers in identifying and assessing opportunities for compensation and in arranging meetings with Lithuanian enterprises.
The Compensation Agreement value must equal at least 100 % of the arms or other military purpose goods purchase contract value.
The Compensation Agreement is required to enter into when the value of the procurement contract on arms or other military purpose goods exceeds 5 million Litas.
For major procurements (over 100 million Litas) the potential foreign supplier must present a preliminary compensation plan covering at least 30 % of the value of the contract with the Lithuanian Armed Forces.
Objectives
The objective of the Compensation program is to strengthen the potential of Lithuanian defence industry enterprises, establishing long-term economic cooperation relationships between foreign and Lithuanian companies, attracting the expertise and advanced technologies.
Compensation (industrial cooperation) can take various forms. For example: direct procurement of Lithuanian defence products, subsystems and components; strategic alliances; establishment of joint ventures and subcontractors arrangements from local manufacturers.
Through the Compensation Agreement a foreign supplier undertakes to purchase products and/or services from Lithuanian companies in an amount corresponding to the value of the contract on the Lithuanian procurement of defence equipment abroad (assessing multipliers to be applied).
The priority is given to the projects related to Lithuanian defence industry companies and defence related companies especially operating in hi-tech or innovative spheres. The following compensation fields shall be given priority: manufacturing of arms, ammunition, and other military purpose goods as well as manufacturing of double-purpose goods in Lithuania; development of the state-of-the-art technologies (lasers, biotechnology, information technology, radio electronics, manufacturing of medical equipment) and cooperation in research and development projects.
Potential foreign suppliers are recommended to begin discussions concerning possible compensation with the Ministry of Economy at an early stage.
Responsible Institutions
The Ministry of Economy is responsible for the establishment, implementation and follow-up of the Compensation Agreements.
The Ministry of Economy established an advisory institution - Commission on Compensation Matters when Purchasing Arms, Ammunition, Explosives or Other Military Purpose Goods. The Commission assesses the application of compensation requirements when purchasing arms or other military purpose goods from foreign suppliers and presents proposals to the Ministry of Economy concerning compensation proposals presented by foreign suppliers.
Members of the Commission are representatives from the Ministry of Economy, the Ministry of Defence, the Lithuanian Development Agency, the Lithuanian Confederation of Industrialists, the Association of Lithuanian Chambers of Commerce, Industry and Crafts.
Responsibility for completing the obligations and terms of the Compensation Agreement lies with the foreign supplier.
Criteria for the Compensation Agreements
The Compensation Agreement is required to enter into when the value of the procurement contract on arms and other military purpose goods exceeds 5 million Litas. The Compensation Agreement value must equal at least 100 % of the contract value.
For procurements of over 100 million Litas, the potential supplier must present preliminary compensation plan, including signed conditional contracts with Lithuanian enterprises covering at least 30% of all obligations for the required compensation. This plan must be presented to the Ministry of Economy no later than within one month before signing procurement contract with the Ministry of Defence or the Arms Fund of the Republic of Lithuania under the Government of the Republic of Lithuania.
Priorities are given to compensation in the area of Lithuanian defence industry.
Compensation, in the area of manufacturing non-military goods, will only be allowed when a Lithuanian company manufacturing these products has direct relations with defence industry sector.
Compensation operations directed to the manufacturing areas not related to the defence industry will only be allowed when results of new businesses start-up or essential expansion of the existing businesses, their modernisation or renovation is commenced based on the Compensation Agreement.
Compensation will not be allowed in the following areas: textiles and clothing (except for military purposes), transportations, manufacturing of agricultural and food products, construction industry and manufacturing of furniture.
The Value of Compensation Operations
The value of compensation operations will be evaluated based on the value of the Lithuanian content of the product, i.e. value added of product than the manufacturing processes carried out in Lithuania. In case of ordering (exporting) goods of Lithuanian origin the value of the compensation operation corresponds to the value of these goods.
The Ministry of Economy will consider transfer of property (technology, know-how) for credit purposes. Such cases will be negotiated and evaluated on a case by case basis. The relevance for compensation of such transfer will depend on the extent to which Lithuanian enterprises are able to exploit the technology derived from the transfer.
Technology transfer shall only be credited in case of free transfer to the ownership of the Lithuanian economic entity. Technology transfer will be approved according with its market value or as proportion of demonstrated investment in the technology.
Other compensation operations - investment, organisation of general manufacturing, participation in research and development projects, in every separate case shall be assessed separately taking account of the contribution of the compensation operation to the development of the economic activity carried out by the Lithuanian economic entities.
In every separate case, the Ministry of Economy specifies the values of multipliers. A common multiplier applied to one compensation operation shall not be bigger than 5.
Time Period and Terms for Fulfilment of Compensation Agreement Obligations The Compensation Agreement fulfilment period should be consistent with obligations considering the delivery of arms or military equipment contract fulfilment period.
The term for fulfilling compensation obligations shall not exceed 10 years following the day of signing the purchase of arms or other military purpose goods contract. Within the first 5 years at least 50 percent of the compensation obligations must be fulfilled.
The fulfilment plan will be included as a part of the Compensation Agreement.
The foreign supplier will be required to submit an annual report on the fulfilment of compensation obligations (over the period 1 January to 31 December). The report must be submitted to the Ministry of Economy before 1 March the following year. The report must contain information about compensation operations completed within the reporting year. This report will reflect progress towards satisfactions of the terms of the Agreement.
The value of compensation operations must be expressed in LTL. In cases where the values of operations are presented in other currencies, they will be converted to LTL on the basis of the official Exchange rates of the Bank of Lithuania. The date of conversion will be the same date as the date when arms or other military purpose goods purchase contract entering into force.
Banking of credits
When the foreign supplier has fulfilled the terms of the Compensation Agreement, the Ministry of Economy may consider a banked credits agreement for future obligations in order to encourage cooperation with Lithuanian defence industry.
The foreign companies that have not yet concluded any Compensation Agreements but are actively addressing Lithuanian defence sales can also negotiate specific terms for banked credits.
Banked credits will be valid for 2 years period from the date of contract signing.
Banked credits may not be transferred to a third party. In case of enterprises merger or split-up, the Ministry of Economy reserves the right to determine transfer of any banked credits.
Banked credits cannot exceed 30% of all new the Compensation Agreement obligations required. Multipliers applied to the banked credits shall be reduced by 50 percents.
Penalties Clauses
In case the foreign supplier fails to fulfil compensation obligations provided for in the Compensation Agreement or unduly fulfils them, the supplier may be excluded from participating in new programs for the Lithuanian Armed Forces until these obligations are fulfilled.
In case of failing to fulfil obligations established in the fulfilment plan or its separate stages, the Ministry of Economy can withdraw multipliers or reduce their value applied to the non-fulfilled part of obligations.
The information about the exclusion of the foreign supplier can be distributed and made available on the Ministry of Economy website.
