New rules expected for offsets

Defence companies welcome revisions to defence contract rules from Abu Dhabi.

The Abu Dhabi Government is expected to announce new rules this summer that could harness the resources of defence suppliers to achieve the goals of the capital's 2030 plan. The UAE's Offsets Programme Bureau (OPB) is overhauling its 18-year-old regulations governing offsets, which require defence companies to help contribute to the economy in exchange for arms contracts.

The changes could have a profound influence on the way defence companies do business in the Emirates and affect the flow of billions of dollars of investment into diversifying the UAE economy. "All of the defence companies are waiting in advance of this; we find it tremendously important," said Kevin Massengill, the vice president and regional executive of Raytheon. As one of the largest arms importers in the world, the UAE has a huge offsets system. Defence companies will be obliged to generate economic output worth US$21 billion (Dh77.13bn) in the Emirates over the next five years, in exchange for an estimated $35bn in arms contracts, according to Blenheim Capital Partners, the UK-based financial services company.

Hamad al Neyadi, the executive director of strategy and portfolio management at Tawazun, a commercial investment arm of the OPB, said the offset rules needed to be adjusted to fit the times. "They were established in 1992, so it is about time to enhance them and fit the regulations to our needs," Mr al Neyadi said. Other GCC nations are also trying to streamline their defence procurement systems. In Kuwait, officials said they had updated their offset guidelines to reduce red tape. This included cutting 13 procedures to four, shortening application times from 35 days to six, and making its National Offsets Company a one-stop shop instead of requiring companies to work with 18 government departments.

The UAE's existing regulations require companies to create new businesses that generate profits equal to 60 per cent of the original arms contract. The focus on profits led to the creation of many asset management companies, such as Waha Leasing and Emirates Ship Investment Company - both capital-intensive businesses that were able to start generating profits quickly. But some parties have warned that focusing on profits alone would be a difficult goal to achieve amid the economic downturn.

"There is not enough flexibility in the old rules, so I consider the decision to create new policies an excellent move," said Major Gen Khalid al Buainnain, the former Commander of the UAE Air Force and Air Defence and current chairman of Baynuna Group, a holding company involved in the defence industry. Abu Dhabi's 2030 plan gives priority to educating UAE nationals and transferring sophisticated technology to local industry.

As a consequence, Mr Massengill said Abu Dhabi's leadership was focused increasingly on using its relationships with aerospace and defence companies to realise these goals. "High-tech job creation will almost certainly be part of it," he said. The plans could include providing offset credits for companies that form partnerships with academic institutions to create technical programmes related to the emirate's new industrial focus.

Defence companies are optimistic about the rule changes. "The most important thing for us to understand is what the Emiratis would like to have," said Andreas von der Heide, the senior vice president and general manager of industrial co-operation at Saab. That company has an offset obligation worth ?100 million (Dh483.4m) in the UAE relating to the sale of two Saab 340 early-warning aircraft. "As far as I know, the new regulations make a lot of sense"