Defence experts have reacted to the news that Lithuania plans to assemble German Leopard tanks domestically, in cooperation with local businesses. According to Paulius Murauskas, a lawyer at law firm Sorainen, this could be a serious boost to the country’s defence industry, attracting millions in foreign investment. These opportunities are provided for in the Defence and Security Industry Act, which came into force last year and defines the requirements for industrial cooperation (offset) in arms purchases.
According to Paulius Murauskas, various commitments made by suppliers regarding industrial cooperation are common practice in defence procurement worldwide. They allow the purchasing country to create greater long-term value for its businesses and scientific institutions, while at the same time increasing the attractiveness of the manufacturer or supplier’s offer due to the planned investments. For the supplying party, such agreements can help with securing large government contracts.
“Industrial cooperation provisions allow the state to not only acquire the necessary weapons or defence equipment, but also to create more opportunities for local companies by involving them in the value chains of the equipment being purchased, enabling them to work with world-class companies and the weapons they produce. Such provisions can also help attract long-term foreign investment to develop the local defence sector. For example, the purchase of a certain number of weapons, together with the supplier’s investment in a local production or technical service centre, is much more beneficial to the state than a simple purchase-sale transaction without additional commitments from the seller. Therefore, the industrial cooperation requirements set out in the law could indeed contribute to the development of Lithuania’s defence sector,” says Paulius Murauskas.
Among the conditions is minimum value of EUR 5 million
However, the Ministry of National Defence, the Lithuanian Armed Forces, and other defence sector contracting authorities may only apply the industrial cooperation requirement when the purchase meets certain conditions set out in law. According to Paulius Murauskas, there are three key conditions. First of all, the value of the planned contract must exceed EUR 5 million, excluding VAT. In addition, the planned procurement of weapons and military equipment must be included in the list of priority military capabilities drawn up by the government. It is also important to stress that the industrial cooperation requirement can only be applied when planning to purchase weapons and equipment that are not manufactured in Lithuania at the time of purchase.
“The government sets the priorities for the most important weapons and technologies for the development of the Lithuanian Armed Forces. This means that the list can be supplemented or updated without the need for lengthy parliamentary decision-making processes, which are often required. This gives the executive branch the opportunity to discuss the terms of industrial cooperation with suppliers’ representatives at the initial stages of negotiations,” notes Paulius Murauskas.
Investment extent is the result of head-to-head negotiations
The aforementioned law provides for possible forms of industrial cooperation, via which an agreed amount of investment is distributed. Such cooperation may include direct investment by the supplier in the Lithuanian defence and security industry, or technology transfer, or joint research with Lithuanian scientific institutions or companies. It is also possible for the supplier to undertake to purchase goods and services from Lithuanian companies or scientific institutions, to provide consultations in the field of military equipment production, technology or innovation, or to grant access to production, research or testing infrastructure.
“In each case, several different forms of industrial cooperation may be combined. The wording of the law shows that the intention is to enable suppliers and manufacturers to choose the industrial cooperation measures that best suit them. Due to the specific nature and sensitivity of the defence sector, these commercial issues should be discussed at an early stage of negotiations. In other words, this will be a matter for mutual agreement,” says Paulius Murauskas.
Supplier contribution – up to 30% of contract value
The value of industrial cooperation is also subject to negotiation; it will be determined separately for each procurement. However, the Defence and Security Industry Law stipulates that the contracting authority may impose a condition on the supplier: that its contribution does not exceed 30% of the contract value.
“For example, if Lithuania wants to purchase weapons or equipment worth EUR 100 million, the contract will include requirements for additional investments by the supplier or the value of service and production contracts awarded to Lithuanian contractors, which may not exceed EUR 30 million. In each specific case, the Ministry of National Defence and the Government will decide on the conditions and scope of industrial cooperation, taking into account the results of negotiations with manufacturers or investors. This will largely depend on the volume and value of orders guaranteed by Lithuania,” says a lawyer from law firm Sorainen.
Important to take advantage of opportunities
According to Murauskas, negotiations on the terms of industrial cooperation with foreign suppliers or manufacturers will not be easy, especially when the initial contracts are being signed. Therefore, in order to be as well prepared as possible and to consolidate the knowledge of different institutions, the government has been tasked with preparing standard terms and conditions for industrial cooperation agreements.
“A new supervisory and coordinating body, the Defence and Security Industry Council, should also help to achieve favourable results for the Lithuanian defence industry and make proper use of the industrial cooperation. Although it is only an advisory body, it may play an important role in coordinating the activities of institutions that shape defence and security industry policy, and in mediating consultations with the business community regarding our country’s defence sector. Admittedly, this council will still have to prove its effectiveness in practice, but the conditions for this are already in place,” says Paulius Murauskas.
Time will tell how the opportunities provided by the industrial cooperation requirements will be exploited in practice. However, according to Paulius Murauskas, if state institutions act purposefully, they will be able to negotiate effectively with potential suppliers and properly assess the needs of the country’s defence sector, and this could become a truly important instrument for increasing the country’s security and defence preparedness. The first success stories in Lithuania will undoubtedly be heard in the international defence industry market and used for reference in similar future endeavours.