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Offset Policy Guidelines DSMC Event July2012
Offset Policy Guidelines DSMC Event July2012
Offset Policy Guidelines DSMC Event July2012
Offset Policy Guidelines DSMC Event July2012
Offset Policy Guidelines DSMC Event July2012
Offset Policy Guidelines DSMC Event July2012
Offset Policy Guidelines DSMC Event July2012
Offset Policy Guidelines DSMC Event July2012
Offset Policy Guidelines DSMC Event July2012
Offset Policy Guidelines DSMC Event July2012
Offset Policy Guidelines DSMC Event July2012
Offset Policy Guidelines DSMC Event July2012
Offset Policy Guidelines DSMC Event July2012
Offset Policy Guidelines DSMC Event July2012
Offset Policy Guidelines DSMC Event July2012
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Offset Policy Guidelines DSMC Event July2012

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Offset Policy Guidelines DSMC Event July2012 UAE

Offset Policy Guidelines DSMC Event July2012 UAE

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  • 1. Defence Contractor Offset Guidelines 2010 to 2011 Edition
  • 2. TABLE OF CONTENTSSection 1: INSTRUCTIONS FOR USING THESE GUIDELINES .............................................41.1 Purpose of these Guidelines ....................................................................................................... 4Section 2: INTRODUCTION TO OFFSET ....................................................................................42.1 What is Offset? ........................................................................................................................... 42.2 Offsets around the World ........................................................................................................... 42.3 UAE Offset History .................................................................................................................... 52.4 Defence Contractors ................................................................................................................... 52.5 Focus of Offset Program ............................................................................................................ 6A. Components ................................................................................................................................ 6B. Systems ....................................................................................................................................... 6Section 3: POLICY............................................................................................................................63.1 Requirements of the Offset Program .......................................................................................... 6A. Flexible and Attractive to Defence Contractors ......................................................................... 6B. Drives Successful Achievements of Offset Program Targeted Sectors ...................................... 6C. Maximise Fulfillment of Offset Obligations .............................................................................. 73.2 Hybrid Model – Input & Output ................................................................................................. 7A. Input Contribution (Max 30% of the Base Program Obligation) ............................................... 7B. Output Contribution (Min 70% of the Base Program Obligation) ............................................. 73.3 Key Elements of the Offset Policy ............................................................................................. 83.4 Rationale for Implementing Offset Policy.................................................................................. 9A. Offset Activities Considered for Offset Credits ......................................................................... 9B. Offset Percentage Required ........................................................................................................ 93.5 POLICY...................................................................................................................................... 9A. Base Program.............................................................................................................................. 9B. Milestones................................................................................................................................... 9C. Bank Guarantee ........................................................................................................................ 10D. Default Account........................................................................................................................ 10E. Default Account Supplemental Amount................................................................................... 10F. Grace Period ............................................................................................................................. 10G. Liquidated Damages ................................................................................................................. 11H. Calculation Methods ................................................................................................................. 11I. Multiplier .................................................................................................................................. 133.6 Offset Business Plan ................................................................................................................. 14 Page 2 of 15
  • 3. A. Evaluate Concept Paper ............................................................................................................ 14B. Criteria for Concept Paper Evaluation...................................................................................... 143.7 Evaluation Business Plan ......................................................................................................... 143.8 Monitor Project Setup............................................................................................................... 143.9 Monitor Obligation Fulfillment ................................................................................................ 143.10 Closing Program ....................................................................................................................... 15Section 4: OFFSET DISCLAIMER ...............................................................................................15 Page 3 of 15
  • 4. SECTION 1: INSTRUCTIONS FOR USING THESE GUIDELINES1.1 PURPOSE OF THESE GUIDELINES The purpose of these guidelines is to outline the new Offset policy and to detail the methods for compliance. It is also designed to act as a reference for the Defence Contractor (DC or the Contractor) and to ensure consistency of performance. These Guidelines should be read in conjunction with the Offset Agreement between Offset and the DC. Unless the context indicates otherwise, terms not otherwise defined in these Guidelines follow the definitions given to them in the Offset Agreement.SECTION 2: INTRODUCTION TO OFFSET2.1 WHAT IS OFFSET? An offset program is a mechanism to compensate the local industry for foreign purchases and to offset the negative effects of that purchase on the trade balance of a country. More precisely, an offset program is the practice of requiring foreign contractors that receive government contracts to contribute to the local economy. Traditionally, offset programs were designed to build local capacities through the transfer of technologies and the opening of markets related to the specific purchase/s.2.2 OFFSETS AROUND THE WORLD An offset program has four broad classifications: A. Direct – Relating directly to the contract or to the core business of the contractor. (E.g. A contract to purchase a jet would require that the jet’s landing gear be manufactured in the UAE.) B. Indirect - Not relating to the contract or to the core business of the contractor. (E.g. A DC building a hospital.) C. Input credits - Offset Credits earned when the DC provides inputs to a Project. (E.g. Offset Credits are given when an Investment is made or when training technology has been delivered.) D. Output credits – Offset Credits earned after the Project has produced its desired results. (E.g. After a company or Project is set-up, Offset Credits are earned when that company or Project produces exports or profits.) Page 4 of 15
  • 5. The basic premise behind an offset program is that security is based on a strong economy and the economy can be strengthened through successful offset projects.2.3 UAE OFFSET HISTORY The UAE Offset Program Bureau was first established in 1992 (previously, the UAE Offset Group). Among other things, its mandate was to oversee the establishment of joint ventures between international contractors and members of the local private sector. In 2010, these investments in commercial, industrial, financial, and educational projects in the UAE have created over 40 commercially viable, profitable, and sustainable joint ventures, attracting foreign investment in excess of AED 8 billion, including 4 public joint stock companies listed on the UAE stock market. More than 300,000 UAE nationals are shareholders in these public joint stock companies. In this way, the UAE Offset Program has consistently achieved its key objective of adding value to the country’s economy while ensuring that all projects developed under the UAE Offset Program have been in line with the UAE’s overall strategic master plan and have been consistent with national priorities. The UAE Offset Program has created thousands of job opportunities for UAE nationals in knowledge-intensive and value-added projects, speeding up the transfer of technology and providing expertise through various joint ventures with foreign investors.2.4 DEFENCE CONTRACTORS DCs are all subject to the Offset Program (as defined in the Offset Agreement). The Offset Program is applicable to all purchases of goods and services by the UAE Armed Forces (or any other UAE federal or local government entity (Government) as defined in the Offset Agreement), as reflected in the Supply Contract/s entered into between the Government and the DC. In addition, the Offset Program is applicable to DCs that supply goods and services indirectly to the Government, through local agents, local representatives and local defence companies or otherwise. DCs are required to sign the Offset Agreement, a general agreement that sets out the relationship between the Offset Program and the DC and acknowledges the DC’s Offset Obligations going forward. Moreover, the DC is required to sign a Supplemental Agreement if its Supply Contract/s reach/es the threshold of US$10 million (accumulated) over a period of 5 years, such period commencing on the signature date of the first contract/purchase order from the Government. The obligations of the DC are generally to be fulfilled by the creation of a successful joint venture with a local investor that will generate Offset Credits to fulfill the obligations. Page 5 of 15
  • 6. 2.5 FOCUS OF OFFSET PROGRAM While the goal of the Offset Program is to diversify the UAE’s economy through the transfer of technology and market access, the Offset Program places additional emphasis on creating job opportunities for UAE Nationals. Offset has identified key areas of development with potential for future growth: A. COMPONENTS 1. Advanced material parts 2. Technical services 3. Precision manufacturing 4. Advanced electronics B. SYSTEMS 1. Strategic Technological systems 2. Infrastructure systems 3. Transportation Equipment systems 4. Oils & Gas systemsSECTION 3: POLICY3.1 REQUIREMENTS OF THE OFFSET PROGRAM The new Offset Program reflects a more flexible program that considers both input and output generated through the Base Program. A. FLEXIBLE AND ATTRACTIVE TO DEFENCE CONTRACTORS 1. Receive Offset Credits proportional to DC contribution. 2. Flexibility in types of projects, timeline, input contributions, etc. to fulfill obligations. 3. Milestones are spread fairly over a 7 year period and reflects the actual profit performance of companies. B. DRIVES SUCCESSFUL ACHIEVEMENTS OF OFFSET PROGRAM TARGETED SECTORS 1. Emphasis on DCs earning the majority of their Offset Credits through the creation of joint ventures. Page 6 of 15
  • 7. 2. The intention behind achieving Offset Credits is that it will contribute towards creating economical benefits for the UAE. 3. The Offset Program aims to attract DCs’ contributions and efforts to the targeted sectors. C. MAXIMISE FULFILLMENT OF OFFSET OBLIGATIONS 1. Penalties (i.e., Liquidated Damages) will apply to late or partly unfulfilled Milestone Obligations. However, payment of such penalties will not satisfy all of the DC’s Offset Obligations. (Payment of Liquidated Damages in respect of a specific Milestone Obligation will only discharge the Contractor from its obligation to achieve that Milestone Obligation. All other Offset Obligations shall remain.) 2. Non-fulfillment of Milestone Obligations by DCs will be tracked early through regular monitoring. 3. Different multipliers for different activities will encourage DCs to maximize their participation in the various aspects of the Offset Program (e.g., local joint ventures which employ several UAE nationals).3.2 HYBRID MODEL – INPUT & OUTPUT A. INPUT CONTRIBUTION (MAX 30% OF THE BASE PROGRAM OBLIGATION) 1. Industry Enablers 2. Knowledge Empowerment 3. Equity contribution B. OUTPUT CONTRIBUTION (MIN 70% OF THE BASE PROGRAM OBLIGATION) 1. Net Profit / export sales percentage 2. Salaries for UAE Nationals Page 7 of 15
  • 8. 3.3 KEY ELEMENTS OF THE OFFSET POLICY Levers Offset Policy1 Threshold  Cumulative over a 5 year period: e.g., GHQ/SOC contract/s ($). - <10 M: No obligations, - >=10M: output obligations.  Option of non-joint venture activities at Offset’s discretion.  Max 30% input credits, Min 70% output credits.2 Minimum Offset % required  60% of purchase contract/s value.3 Term (duration)  Base Offset Program = 7 years.  Grace period: Period to be determined by Offset at its discretion.4 Milestones  Yr1: 5%, Yr2: 10%, Yr3: 10%, Yr4: 15%, Yr5: 15%, Yr6: 20%, Yr7: 25%5 Offset activities considered for Offset  Input activities: Industry Enablers, Knowledge Empowerment, and Equity Contribution. Credits  Output activities: Net Profits (Export Sales and UAE Nationals’ Salaries).6 Crediting method and formula  Additional formula for purchases of UAE products within targeted sectors.  Input valuation methodology to be finalized.7 Multipliers  Varying between 1 - 2 for input.  Varying between 2 – 5 for output.8 Liquidated Damages  8.5% of the Shortfall Amount. Payment of damages will only discharge a DC’s obligation to achieve the relevant Milestone Obligation.
  • 9. 3.4 RATIONALE FOR IMPLEMENTING OFFSET POLICY The Offset policy has been implemented to support the values of the Offset Program Bureau and the UAE and to establish a non-bureaucratic environment that promotes transparency while facilitating the establishment of new businesses in a smooth and efficient manner. This in turn will result in increased contributions from DCs and allow for maximizing economical benefits through approved projects. A. OFFSET ACTIVITIES CONSIDERED FOR OFFSET CREDITS Key activities that could be considered for Offset Credits are: 1. Local value added projects 2. Technology transfer 3. Know-how transfer 4. Training, apprenticeships, etc 5. Export Sales 6. Causality (causing business to happen) 7. Generated Net Profit 8. Equity Contribution 9. Expansions of existing businesses B. OFFSET PERCENTAGE REQUIRED Foreign DCs supplying a product or service to the Government will incur obligations of 60% of the Contract Value signed with the UAE Armed Forces. DCs are required to create a project that will generate Offset Credits equivalent to those obligations.3.5 POLICY A. BASE PROGRAM The Base Program is the initial Offset Program of 7 years, which will commence from the Effective Date (i.e., the date of signature of a Supply Contract) and will have 7 Milestone Obligations, excluding any grace period granted by Offset. B. MILESTONES Milestones Obligation means in relation to the Offset Obligation, the relevant proportion of the Offset Obligations which the DC is required to achieve by each Milestone (i.e., Page 9 of 15
  • 10. each anniversary as of the Effective Date of the Offset Agreement, when the amount of Offset Credits to be awarded to the DC will be reviewed). DCs progress in executing projects will be assessed according to the Milestones schedule below: 5% 10% 10% 15% 15% 20% 25% Yr1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 The advantages of the annual review of Milestones are: 1. Ensure better monitoring of the DC’s obligations. 2. Follow-up on progress of projects. 3. Business driven Milestones which reflect business growth.C. BANK GUARANTEE A bank guarantee from an Approved Bank equal to 8.5% of the obligation must be delivered for each Base Program.D. DEFAULT ACCOUNT Default Account means an account that holds 50% of the unfulfilled obligation (i.e., the Shortfall Amount) within a specific Base Program.E. DEFAULT ACCOUNT SUPPLEMENTAL AMOUNT The Default Account Supplemental Amount is equal to the amount listed in the Default Account divided by 60%. The Default Account Supplemental Amount will be added to the Contract Value (if any) of the new Supplemental Agreement entered into by the DC. (Even where a new Supply Contract is not entered into, the Contractor will be required to execute a new Supplemental Agreement, the Contract Value of which will be the Default Account Supplemental Amount.)F. GRACE PERIOD The grace period is a head-start granted to a DC to set up a Project (i.e., a Project which has been approved by Offset pursuant to the Offset Agreement) which has complex infrastructure, training or facility requirements which need additional time for construction or assembly. Any such grace period is determined by OPB at its sole discretion and would be granted before the commencement of the Base Program. In Page 10 of 15
  • 11. order to consider a grace period, the DC must submit a Business Plan which justifies an extended term.G. LIQUIDATED DAMAGES Liquidated Damages are a penalty equivalent to 8.5% of the Shortfall Amount set out in the Milestone Statement that will be charged to any DC who fails to generate Offset Credits when the relevant Milestone Obligation is due. The Liquidated Damages amount will be returned to the Contractor at the end of the specific Base Program period if at the end of the Base Program, the Contractor has “corrected” its failure to generate Offset Credits through having generated the total amount of Offset Credits required from the Contractor for the specific Base Program. Re-payment of this amount is conditional on the Contractor submitting its request to Offset for re-payment within a period of 6 months from the end of the specific Base Program period, provided it has submitted to Offset all information required by Offset (in its sole discretion) to determine whether the Contractor has generated the total amount of Offset Credits.H. CALCULATION METHODS 1. Offset Credit calculation method consists of an input multiplier and output multiplier. The input credit multiplier is determined thru contributions made towards the project by providing industry enablers, knowledge empowerment and equity contribution. The output multiplier results from the Net Profit generated and UAE nationals’ salaries. 2. Total output credit = Output year 1 + Output year 2 + Output Year 3 + Output year 4 + Output 5 + Output year 6 + Output year 7. 3. Output credits formula per annum: (Net Profit Credits + UAE nationals’ salaries credits). 4. Net Profit Credits will be calculated as follows: o Net Profit Credits = Net Profit X (Output Multiplier + Additional Multiplier). o Output Multiplier = 2 o Additional Multiplier Calculation:  Percentage of Export Sales = Sales from Exports/ Total Sales.  Percentage of Export Sales will determine an Additional Multiplier on the Net Profit as per Table 1.1. 5. UAE National Salaries Credits will be calculated as follows: Page 11 of 15
  • 12. o Therefore, UAE National Salaries Credits = Total National Salaries X (Output Multiplier + Additional Multiplier). o Output Multiplier = 2 o Additional Multiplier Calculation:  Percentage of UAE Nationals= Total UAE National Salaries/ Total Salaries.  Percentage of UAE Nationals will determine an additional multiplier on the UAE National Salaries as per Table 1.1.Table: 1.1Main Activities Multiplier Bonus Activities MultiplierExport % of Sale Additional Multiplier % of UAE Nationals Additional Employees Multiplier5% - 20% 1.5 10% - 30% 1.021% - 50% 2.0 31% - 70% 1.551% & Above 3.0 71% & Above 2.0 6. Total Input credit formula: [value of total input contribution X input multiplier] o The Total Input Credits awarded will not exceed 30% of the Base Program Obligation. o Value of total Input contribution = Equity Contribution + Industrial Enablers + Knowledge Empowerment. o Input multiplier formula = [ (Total input elements)/25] +1  Total Input Elements = End market focus + products/services + function + infrastructure + education & knowledge + other. 7. Total Input Credit + Total Output Credit = Offset total credit awarded for a specific Base Program. (Subject to Ownership structure). 8. 49% ownership is the optimum percentage where the DCs will obtain 100% of the Offset Credits generated. Ownership structure above or below the 49% will result into a reduction on the Offset Credits generated. Page 12 of 15
  • 13. I. MULTIPLIER Strategic tech. sys (Military & Defense) 5 Oil and Gas 2 End Market Transportation equipment 3 Infrastructure 3 Other 2 System (Focus area) 5 System (Other) 3 Component – Precision manufacturing 5 Product/Service Component – Advanced materials 5 Component – Advanced electronics 5 Component – Technical services 3 Component – Other 3 R&D (Design) 2 Manufacturing / production 5 Assembly 3 Testing 2 Function Sales / exports (new business / markets) 5 Logistics 3 After sales service (Repair / maintenance) 2 Other 2 Develops public infrastructure 2 Develops private infrastructure 4 Infra-structure Transfer proprietary knowledge / IP A. System 5 B. Component 4 UAE national High School graduates 5 Skill UAE undergraduate/postgraduate students 5 Development, Education & UAE national Fresh graduate 5 Knowledge UAE retired military personnel 5 Apprenticeships 5 Other Social Benefits Benefits SMEs 5 (within UAE) UAE Entrepreneur businessmen 2 Input multiplier = 1 + (input score /25) Page 13 of 15
  • 14. 3.6 OFFSET BUSINESS PLAN A. EVALUATE CONCEPT PAPER The DC submits the Concept Paper (CP) regarding a proposed project to the Offset Unit in a standard template form. An in-principal approval along with a Business Plan template are to be forwarded to the DC upon request if the CP is approved by the Offset Unit Director. The DC will be informed formally if the CP is rejected. B. CRITERIA FOR CONCEPT PAPER EVALUATION 1. Profitability. 2. To obtain latest technology. 3. Variety of customers locally and internationally. 4. Unique aspects of concept. 5. Competitive advantage. 6. Fall within Offset focused area. 7. Sustainability. 8. Non-labor intensive.3.7 EVALUATION BUSINESS PLAN The DC submits the Business Plan (BP) to the Offset Unit in a standard template form. A final approval for a Project will be forwarded to DC if the BP is approved by Offset Unit Director. The DC will be informed formally if the BP is rejected.3.8 MONITOR PROJECT SETUP The implementation of the Project is monitored thoroughly. The Offset Unit compares the Project progress report to the scheduled implementation plan. In case of variance/delays, an Offset Relationship Manager will seek clarifications from the DC. If necessary, a site visit will be conducted by a Relationship Manager with the support from subject matter experts. OPB will then decide whether to grant any grace period.3.9 MONITOR OBLIGATION FULFILLMENT DCs are required to submit audited financial statements to Offset to evaluate the performance of the joint venture. This will enable the Relationship Manager to monitor the Milestones Obligations annually. It will also enable the Relationship Manager to award Offset Credits, claim or release bank guarantees, subject to an Offset Unit Director’s approval. Offset Credit Page 14 of 15
  • 15. award letters will then be issued to DCs and bank guarantees will then be released / called depending on Offset’s decision.3.10 CLOSING PROGRAM The DC completes the Base Program within the specified timeframe. The Relationship Manager, with the assistance of other members of the Offset Unit, will carry out final checks/reviews on all the Offset Credits and obligations to ensure the Base Program obligations are fulfilled, and make recommendations accordingly. The Offset Director then approves the program fulfillment by providing the DC with the final statement and a detailed fulfillment letter.SECTION 4: OFFSET DISCLAIMER The information contained in these Guidelines is provided on the terms and conditions set out in this document and all other terms and conditions subject to which such information is provided. By reading these Guidelines, you agree (a) not to reproduce or disclose to others the document or any portion of it except as agreed by Offset in writing or in accordance with the terms and conditions of any confidentiality agreement agreed between you and Offset (other than to your legal or financial advisers); and (b) not to use the information contained for any purpose other than to assist you in satisfying your Offset Obligations or complying with UAE law. These Guidelines do not purport to contain all the information that a DC may require and aim to act only as a brief outline of the Offset Program. These Guidelines may not be complete in all respects and it is not possible for Offset to cater for each DC’s individual situation or particular needs in preparing these Guidelines. Each DC should conduct its own investigations and analysis and should check the accuracy, reliability and completeness of the information in these Guidelines and, wherever necessary, may obtain independent advice (subject to confidentiality obligations) from appropriate sources on its Offset Obligations. Offset, member companies (subsidiaries, parent or affiliates) and their employees, directors and partners make no representation or warranty and shall incur no liability under any law, statute, rules or regulations as to the accuracy, reliability or completeness of these Guidelines. Offset may, in its absolute discretion but without being under any obligation to do so, update, amend or supplement the information in these Guidelines. Page 15 of 15

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