History and changes in the UAE Offset program Presentation for: - - PowerPoint PPT Presentation

• History and changes in the

UAE Offset program

Presentation for: ECCO Prepared by: Blenheim Capital Services

PROPRIETARY & CONFIDENTIAL

6-7 September 2011

The UAE Offset Program

• The UAE Offset Program was put in place in mid 1990 to derive economic and

commercial value from the country's extensive defense procurement program, which became a necessity after the Gulf War of 1990 - 1991.

• The offset programme at that time was managed by the United Arab Emirates Offsets

Group (‘UOG’). In 1992 a major series of revisions were made to the guidelines with further changes made again in 1994 to amend the 1992 changes.

• To date, the Offset Program has resulted in the creation of several multi-million dollar

joint ventures in various economic and industrial sectors including shipping, district cooling, aircraft leasing, fish farming, healthcare, agriculture, banking and education.

• Offset Projects are required to add economic and commercial value to the UAE's

economy equivalent to 60% of a contract's value. The level of obligation discharged does not directly correspond to investments made in an Offset venture but to the value created by an Offset venture in terms of profits over time.

• Defense Contractors typically are to fulfill their Offset obligations stemming from a

purchase contract over a period of seven years. Several milestones are set and monitored by the OPB after the award of a supply contract to help achieve this objective.

Government Structure For Offset Activities

• The Offset Program Bureau (“OPB”) is responsible for all aspects of managing the UAE Offset

program including: – Assessing the contractor's Offset proposals – Making recommendations based on the merits of contractors' proposals – Approving Offset ventures for defense contractors – Monitoring Offset compliance and crediting – Awarding Offset credits – Applying damages – The OPB may also, from time to time, assist contractors in assessing proposals, formulating business plans and implementing Offset projects.

• In conjunction with the new rule OPB have formed an Offset Committee. The six Committee

membership draws from OPB, GHQ and SOC. OPB members are CEO, Director – Offset Unit, and Offset Program Manager, whereas GHQ and SOC members are Chief of Logistics Staff, Director of Purchasing Department, and Director of Contracts & Finance.

• The committee coordinates offset activity with procurement demand and acts as a liaison

between OPB and the UAE Armed Forces General Headquarters (GHQ) to study common issues and develop appropriate recommendations toward enhancing the working mechanism between both parties.

UAE Offset Program has Changed

• The UAE Offset program is undergoing considerable change that will have a direct impact on the

approach of all Defence Contractors (DCs) to satisfying their current and expected contractual

• bligations in the UAE
• New guidelines were announced in Paris June 13th 2010, and present new challenges to DCs

with current and future obligations in the UAE

• Previous significant rule changes (1992) took approximately two years to “settle in”.
• The program has moved from a model based purely on the profit generated by ventures backed

by Offset obligors to one where technology and the production of goods will be central to the program, thus providing more flexibility for the DC (more in accordance with the 1990 guideline principles)

• However the door remains open to “strategic programs” and profit is still the main driver of

credit generation with a requirement of > 70% of credits to be generated from output activity

• Companies with substantial long term interest in the UAE will need to have a focused, coherent

strategy going forward to respond to the new guidelines

• Companies will also need to develop projects that meet the new requirements

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Context – Old Program

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Old program was challenging, but favoured asset finance projects, such as infrastructure, aircraft leasing, etc.

• Aim to diversify UAE economy away from oil. Wealth creation is the focus.
• Any industrial sector acceptable except oil and defence
• 60% of contract value = obligation
• 8.5% of obligation = liquidated damages to be committed to prior to contract award
• Defence Contractor to form a joint venture with a local company
• Defence Contractor to invest funding into the joint venture
• Contractor has milestones and the risk of penalty draw down at years 3,5 and 7
• Credits awarded based on the profitability of the venture over 7 years, with multipliers

decreasing for the later years

Exampes of Old Rules Programs

• 1. Project Blue
• Project Blue financed 25 Airbus aircraft under financial leases operated by 10 airlines, supporting a

strategically important industry sector by providing critical mass to ensure that the UAE has a sustainable aircraft leasing business. Participants included 6 US and European defence companies 2. Project Alpha

• Project Alpha supported a huge real estate development that connects Abu Dhabi Island with the
• airport. The offset investment supported (then) relatively unknown property developer Aldar PJSC

through the delivery of a competitive financing package to support the building of infrastructure across the development. Participants included 15 US and European defence companies 3. Project Summit

• In 1997 Summit, Blenheim’s parent, was retained by seven (7) UK, French and Italian defence

manufacturers to discharge their Offset obligation to the Government of Abu Dhabi for the sale of the Mirage 2000-9 and supplemental equipment resulting from the sale. Summit in partnership with the United Arab Emirates Offsets Group (UOG) successfully discharged the obligation in full in late 2000. Project Summit was the merger and acquisition of both downstream and upstream oil and gas assets with a particular focus in Europe. The project details remain confidential.

New Program Context - Economic Vision 2030

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The new rules support Vision 2030, establishing a “common framework aligning all policies and plans and fully engaging the private sector in their implementation”

Pillars of the Vision (9) Priorities of the Vision (2) Engines to the Vision (12)

A large empowered private sector The creation of a sustainable knowledge based economy An optional transparent regulatory environment A continuation of strong and diverse international relationships Emirate resource optimization Premium education, healthcare and infrastructure assets Complete international and domestic security Maintaining Abu Dhabi’s values, culture and heritage A significant and ongoing contribution to the federation of the UAE Abu Dhabi will build a sustainable economy Abu Dhabi will ensure that social and regional development is balanced to bring the benefits of economic growth and wellbeing to the entire population of the Emirate Energy – Oil & Gas Petrochemicals Metals Aviation, Aerospace & Defence Pharma, Biotechnology & Life Sciences Tourism Healthcare equipment & Services Transportation, Trade & Logistics Education Media Financial Services Telecommunications Services

• OPB’s contribution to the Economic Vision 2030
• Focused on the establishment of high technology businesses to Abu Dhabi
• DCs (in general) will need to be much more proactive in engaging the OPB than they were

previously

• Penalty requirement still exists and is no longer fully liquidating
• Milestones now annual, but a case by case grace period can be granted to allow the project to

gather pace

• Credit award methodology has changed to reflect multiple inputs for technology transfer,

production expertise, training and other qualitative measures. 30% of credits can be generated through inputs, and the maximum multiplier is 2x the input.

• Profit remains a significant part of OPB’s metrics with up to 70% of credits being awarded

against a profit metric. Exports also key to obtaining the maximum multiplier of 5x the profit

• Offset projects now form part of the RFP evaluation making it a BD issue as well as a contractual
• bligation

New Program

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Similarities and differences - summary

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1. Profit focus 2. 60% of contract obligation 3. 8.5% of obligation as a penalty 4. Need for a concept paper and business plan 5. Annual review 6. Requirement for a JV

Similarities Differences

1. Input credits 2. Multiplier regime 3. Export focus 4. Narrower industry focus (technology) 5. Damages no longer liquidating (50% of

• bligation unfilled added to next

contract) 6. Offset plan required at RFP stage 7. Grace period 8. Annual milestones

Exampes of new rules programs (?)

• 1. Product manufacture
• Manufacture in Abu Dhabi of a specific product for supply regionally or globally e.g.

– Weapon system – Aero-structure – Machined parts

• Potential to be done in parallel with a major supply contract
• Degree of certainty of sales will be key for a successful project

2. Industrial infrastructure

• Setting up /or addition of a manufacturing capability to support the growing indigenous

manufacturing capability – Specific focus areas – Highest technology sought

• Technology provider flexibility and local partner selection will be key to a successful project

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