Offset Deals in the GCC - Marmore sector report - Executive Summary

Marmore Sector Report 2015

Offsets in the GCC

Emphasis on Civilian Projects for Rapid Growth

Research Highlights:

The report is a primer on the Offset industry in the GCC region. The report analyses market dynamics and current trends in Offsets in the GCC region. The report also discusses the implementation of Offsets in the GCC region along with providing policy recommendations and best practices to be followed.

A subsidiary

MARMORE SECTOR RESEARCH

Offsets in the GCC - February 2015

2 A subsidiary

Disclaimer

This report has been prepared and issued by Marmore MENA Intelligence Ltd (Marmore), a fully owned research subsidiary of Kuwait Financial Centre “Markaz” K.P.S.C. Marmore is a private limited company registered with the Registrar of Companies in India.

This Report is owned by Marmore and is privileged and proprietary and is subject to copyrights. Sale of any copies of this Report is strictly prohibited. This Report cannot be quoted without the prior written consent of Marmore. Any user after obtaining Marmore's permission to use this Report must clearly mention the source as “Marmore." The Report is intended to be circulated for general information only and should not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction.

The information and statistical data herein have been obtained from sources we believe to be reliable, but no representation or warranty, expressed or implied, is made that such information and data is accurate or complete, and therefore should not be relied upon as such. Opinions, interpretations, estimates, and projections in this report constitute the current judgment of the author as of the date of this Report. They do not necessarily reflect the opinion of Markaz or Marmore or other identified parties and are subject to change without prior notice. Neither Marmore nor Markaz have an obligation to update, modify, or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast, or estimate set forth herein, changes or subsequently becomes inaccurate, or if research on the subject company is withdrawn.

This Report may not consider the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors are urged to seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and to understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security’s price or value may rise or fall. Investors should be able and willing to accept a total or partial loss of their investment. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily indicative of future performance.

Markaz may seek to do business, including investment banking deals, with companies covered in its research reports. Markaz may have interests in the areas covered in this research report. Markaz, Markaz managed entities, its clients, or its employees may have from time to time long or short positions in any security, derivative or other types of assets referred to in this research report. As a result, investors should be aware that Markaz may have a conflict of interest that could affect the objectivity of this report.

This report may provide the addresses of or contain hyperlinks to websites. Except to the extent to which the report refers to website material of Markaz and Marmore, Markaz has not reviewed the linked site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to Markaz’s or Marmore’s own website material) is provided solely for your convenience and information, and the content of the linked site does not in any way form part of this document. Accessing such website or following such link through this report or Markaz’s or Marmore’s website shall be at your own risk.

For further information, please contact ‘Markaz’ at P.O. Box 23444, Safat 13095, Kuwait; Email: [email protected]; Tel: 00965 22248280; Fax: 00965 22495741.

Research

Support

M.R. Raghu CFA, FRM | Head of Research

[email protected]

N.C. Karthik Ramesh | Manager - Research

[email protected]

Mohammed Bashar Khan | Manager - Real Estate

[email protected]

Sudhakaran Jampala |Policy Analyst [email protected]

Jenevivu Lasrado| Executive Secretary, Research

[email protected]

Nataraj Balakrishnan| Manager – Admin & Support [email protected]

Nael Aboul Huda | Manager, Media & Communications [email protected]

mailto:[email protected]

mailto:[email protected]



3 A subsidiary

Table of Contents

1. Executive Summary .................................................................................................. 5

2. What are Offsets? ..................................................................................................... 8

3. The Offset Market Dynamics ................................................................................ 11

4. Offset Policies – A Flavour .................................................................................... 15

5. Offset Trends in the GCC ....................................................................................... 18

6. Implementing Offsets in the GCC ........................................................................ 22

7. Strategic and Proactive Use of Offsets in the GCC: Case Study of the UAE 27

8. Some International Case Studies ........................................................................ 31

9. Criticism of Offsets ................................................................................................. 34

10. Policy Recommendations & Best Practices ....................................................... 36

11. Appendix ................................................................................................................... 40



4 A subsidiary

Tables and Charts

Tables Charts

2.1 Evolution of Defense Offset Programs Value Chain 2.1 Classes of Offset Programmes

3.1 Offset Penalties Summary, Select GCC countries 3.1 Offset Obligations of Top 12 Global Defense

Contractors, 2013, $bn (Global)

4.1 Offset Policy Summary, as of March 2010 3.2 The Top Five Exporters’ share of international

arms exports (%), 2009–13

7.1 Key Elements of UAE Offset Policy (as of 2011) 4.1 Prevailing Obligations on Defense Imports, 2011-

2016, % of Total Defense Contracts Value

7.2 Areas Receiving the Highest Multiplier Effect (as of

2011) 5.1

Comparing GCC Military Spend in conjunction with

GDP, 2011; $bn

7.3 Calculation for Application of Additional Multipliers

(as of 2011) 11.1

Forecast offset returns to be accrued from US-

headquartered prime contractors -2012 to 2022

11.1 US contractors, 2012 revenue share by geography 11.2 Economic gains through accrued offset -average

2010 to 2013



5 A subsidiary

1. Executive Summary

“Well structured and managed offset programmes can provide significant

benefit to procuring countries,…”Grant Rogan, Founder and CEO, Blenheim

Capital

“Despite the much discussed downturn in defense spending, offsets

continue to be a robust—though less appreciated—element of the global

defense market.” Avascent1 (2013)

Offsets, in defense and civil trade, are essentially compensations that a

procuring government or buyer seeks from the seller for the purchase of

goods and/or services2. A practice that originated in the 1950s, offsets have

grown in stature over the years and is now evident in about 120 countries

around the world, from a mere 20 from approximately 25 years ago. In the

GCC, the practice of offsets in the defense arena was pioneered by the

Kingdom of Saudi Arabia (KSA). Started in the year 1984 under the $5.6

billion Peace Shield contract, the KSA signed the first offset programme

with the US companies, Boeing and General Electric3. The offset

programme led to the creation of notable successful companies, Alsalam

Aircraft Company (AAC) and Middle East Propulsion Company (MEPC),

among others4.

There are broadly two classes of offset programmes, i.e., Direct Offsets

(DOs) and Indirect Offsets (IOs). DOs are usually in the form of

coproduction, subcontracting, etc.; while IOs involve measures such as

investments or skills training programmes that are sponsored by the

obligor. Countries have to adopt a coherent strategy in terms of IOs and

DOs, so as not to fritter away opportunities for meaningful obligors’

involvement.

In the GCC, the two largest defense spenders are the KSA and the UAE,

which have over the years refined their offset programmes.

1 Global Offsets Grow Unabated Amid Evolving Requirements and Goals: Avascent 2 Journal of Defence Studies, IDSA 3 Oxford Business Group 4 Ibid.

A practice that

originated in the 1950s,

offsets have grown in

stature over the years

There are broadly two

classes of offset

programmes, i.e., Direct

Offsets (DOs) and

Indirect Offsets (IOs)



6 A subsidiary

For e.g., the UAE furnishes ‘credits’ to defense contractors that is linked to

the profitability that the offset programme is able to generate. Between

2013 and 2025, the GCC is expected to spend about $1 trillion for defense

purposes. Off this, 30% is expected to be dedicated to the sphere of capital

expenditures. Projecting that a 35% offset requirement is strictly enforced,

it means that $105 billion could either be sourced domestically or

reinvested into the buying state economies, acting as a multiplier in jobs

creation and economic diversification. However, it should be borne in mind

that though offsets in the GCC have resulted in defense and non-defense

enterprises, they display varying degrees of experiential success.

With respect to Kuwait, the country’s offsets origin was in the form of a

counter-trade offset programme set up in 1992. In 2006, Kuwait set up the

National Offset Company (NOC) to review, manage and enforce all offset

proposals. However, in September 2014, Kuwait announced the suspension

of its offset programme5. The suspension of the offset programme, was

made with the announcement that the programme would be revised and

implemented in a relatively moderate way so as to encourage international

firms to participate.

For many countries in the GCC, the objective of offsets is to develop

indigenous manufacturing capabilities, provide skills development

opportunities for nationals and to create jobs. However, some offset

obligors complain that at times, there can be a dearth of reliable investment

options in terms of both R&D programmes and private sector companies

that display reasonable potential for creating products that can find an

export market. In order to drive benefits out of offsets, there is the need

to have a strategic framework of industries into which obligors’ investments

are most welcome. For instance, Kuwait can target computer aided design

and development as an important area of technological intervention with

respect to defense obligors. Also, several states face the twin problems of

limited skills base in the society in terms of the available pool of nationals,

and a constrained domestic market in terms of scale. Importing foreign

5 Thomson Reuters

Offsets in the GCC

have resulted in

defense and non-

defense enterprises

With respect to Kuwait,

the country’s offsets

origin was in the form

of a counter-trade

offset programme set

up in 1992



7 A subsidiary

labour for advanced jobs spawned from offset programmes will not likely

be popular.

Experts opine that offsets are vulnerable to risks of malpractice, simply due

to the fact that they belong to an industry that is situated in a sector that

has historically remained firmly enclosed away from the public eye and

scrutiny. The risk of malpractice when allied with the perception or fact

that the promised benefits of offsets are usually elusive, ensures that a

strong concoction for criticism of the offsets system is always present. It is

estimated that the cumulative value of the offsets industry is approximately

$500 billion (2005 – 2016), globally6. Even as defense spending decline in

the traditional US and European markets for leading defense contractors;

the buying power of customers such as the KSA and India is altering the

landscape of the defense procurement industry.

The increasingly clear dynamic is that in a world that is awash with

economic and financial inequalities, arms recipients want to use the

massive bills to create local industries and jobs; while defense contractors

want to continuously keep boosting quarterly profits and to keep tight hold

over their intellectual properties. Meanwhile, the governments of arms

exporters want to strengthen the industrial ecosystems and advanced jobs

underpinning the export of high technology arms. Thus, there are forces

of self-interests that are crisscrossing from diametrical positions. Thus, all

stakeholders connected to the defense sector and the offsets industry

should realize that there are multiple topical changes taking place

simultaneously. Clear policies are required to guide the steps of all

stakeholders.

6 Avascent

Cost of the full report: $500

For payment details please write to: [email protected]

Or

Kindly use our online payment gateway at www.e-marmore.com

There are forces of

self-interests that are

crisscrossing

Clear policies are

required to guide the

steps of all

stakeholders

Research Library (Complimentary Research)

Capital Markets

Researches

Daily Morning Brief

Kuwait Daily

Fixed Income Update (Daily)

Monthly MENA Markets Review

International Market Update (Monthly)

GCC Equity Risk Premium (Quarterly)

GCC Corporate Earnings (Half Yearly)

GCC Markets Outlook (Half Yearly)

Global Markets Outlook (Annual)

Saudi Arabian Markets Set to Open (2014)

MENA Asset Management Policy Perspectives

(2013)

Including GCC in the MSCI EM Index (2012)

Alpha Abound: A Study to explore Alpha

generation in GCC (2012)

Kuwait Investment Sector (2012)

GCC Defensive Bellwether Stocks (2012)

GCC SWFs: The Golden Portfolio (2010)

Persistence in performance: The GCC Experience

(2010)

This Too Shall Pass: What can we expect in 2009

for GCC Markets? (2009)

Mr. GCC Market-Manic Depressive (2008)

To Yield or Not To Yield: Examining the Potential

of Yield Stocks in GCC (2008)

Derivatives Market in GCC (2007)

Regulatory

Researches

GCC Regulatory Digest (Quarterly)

Kuwait's BOT law (2014)

Land Reforms in Kuwait (2014)

Kuwait’s PPP Law (2013)

Bankruptcy Law in the GCC (2013)

Got a CMA (Kuwait): What Next? (2012)

The New Regulations for Kuwait Investment

Sector (2010)

Wanted: A Kuwait Capital Market Authority

(2010)

To Leap or To Lag: Choices before GCC

Regulators (2007)

Policy

Researches

Oil & Gas Markets and the Emergence of New

Resources (2014)

GCC Countries & Asia: Bolstering Energy Ties

(2014)

GCC Energy Strategies: The Way Forward (2014)

Blueprint for Public Sector Good Governance in

Kuwait (2013)

Kuwait - Private Labor Market (2013)

Kuwait - Alternatives for Power Generation

(2013)

Kuwait - Sustainable Power Strategy (2012)

Tools to Strengthen & Support Kuwait's Private

Sector (2012)

Daily

Morning Brief Fixed Income Update

Kuwait Daily

Monthly

MENA Markets Review

International Market Update

Quarterly

Equity Risk Premium

GCC Regulatory Digest

Half yearly

GCC Markets Outlook

GCC Corporate Earnings

Annual

Global Markets Outlook

Periodic

Reports

Basel III Norms (2015)

Kuwait Real Estate (2015)

Swiss Franc (2015)

Cheaper Oil (2015)

Rising Fuel Prices in Kuwait (2015)

Cloud Computing (2014)

GCC Free Trade Zones (2014)

Disruptive Technology: Bitcoins (2014)

The Internet of Things ! Big Data (2014)

Kuwait Credit Growth (2014)

Kuwait SME’s (2014)

Multiple directorships in KSA (2013)

GCC Demographic Shift (2012)

How is GCC preparing for a “AA+” World?

(2011)

Kuwait Development Plan (2011)

Political Risk moving to the forefront in

MENA: Impact Analysis (2011)

Diworsification - The GCC Oil Stranglehold

(2009)

The Vicious “Square”: Monetary Policy

Options for Kuwait (2008)

Economic

Researches

A subsidiary www.e-marmore.com

Research Library (Paid Research)

A subsidiary

Infrastructure

Researches*

Power

GCC MENA (Ex- GCC)

Egypt KSA

Kuwait UAE

Qatar

Ports

GCC KSA

Kuwait UAE

Qatar Oman

Aviation

GCCGCC Full Service

Carriers

GCC Low Cost Carriers Kuwait

KSA UAE

Water

GCC Qatar

KSA Kuwait

ICT

GCC KSA

UAE Kuwait

Qatar

Roads and Railways

GCC KSA

Qatar

Real Estate

GCC Office RE GCC Affordable Housing

GCC Residential RE

Sector

Researches*

Healthcare

GCC, KSA

Education

GCC, KSA

Family Business

GCC

Wealth Management

GCC

Banking

GCC, Kuwait, KSA, UAE

Hospitality

GCC

Retail

GCC, Luxury - GCC, Online – GCC

Asset Management

MENA, KSA, UAE, Egypt

Islamic Finance

GCC

Investment Banking

GCC

Insurance

GCC, KSA

Media

GCC - Print, TV, Digital

Social Media

GCC

Petrochemicals

GCC, Kuwait, KSA

Contracting

GCC

Metals & Mining

GCC

Research - Knowledge Gap

GCC

FIFA World Cup 2022

Qatar

Women Investors

GCC

Corporate

Profiles*

Abu Dhabi National Hotels Co (UAE)

Air Arabia (UAE)

EMAAR Properties (UAE)

Kuwait Food Co (Kuwait)

Qatar Insurance Co (Qatar)

Qatar National Bank (Qatar)

SABIC (KSA)

Saudi Electricity Co (KSA)

Saudi Telecom (KSA)

Savola Group (KSA)

The National Shipping Co. of Saudi Arabia -

BAHRI (KSA)

*Paid reports ranging from

US$250-$500

Access Our

Reports

Bloomberg - “MRKZ” <Go>

Thomson Research,

Reuters Knowledge

Nooz

Zawya Investor

ISI Emerging markets

Capital IQ

FactSet Research Connect

TheMarkets.com

www.e-marmore.com

Subscription Options

A subsidiary

Selective Access

www.e-marmore.com

Download up to 5 paid reports in a year

• Select and download 5 reports from our database of paid research reports. Subscription is

valid for a year.

• New reports are constantly being added to our database, providing an option to download

latest reports within the subscription period.

Wide Access

Download up to 10 paid reports in a year

• Select and download 10 reports from our database of paid research reports. Subscription is

valid for a year.



USD 2,000 / Yr.

USD 1,000 / Yr.

Unrestricted Access

Access and download all our paid reports for a year

• Select and download any report from our database of paid research reports. Subscription is

valid for a year.



Best

Value USD 3,000 / Yr.

Note:

• The above pricing is to obtain a single user license to use the PDF report file for one user only. If you

wish to subscribe for more than one user, please send us an enquiry at [email protected]

• Select reports priced US$1,000 and more are excluded from the Subscription Packages.

• For reports that are available for download on “On Request”, the subscriber will be required to send the

request.

Marmore MENA IntelligenceA ‘Markaz’ Subsidiary

About MarmoreMarmore MENA Intelligence Ltd. (Marmore) caters to the growing research and information needs of

organizations in the Middle East and North Africa (MENA) region. We offer full-fledged research services

covering economies, capital markets, sectors and companies - focused on the MENA region.

We also provide research services to assist our clients in investment decision-making, scanning markets to

identify investment opportunities, conducting ad-hoc researches to understand niche market segments, and

other need-based, bespoke researches.

To know more about us, please visit our website at www.e-marmore.com or write to us on

[email protected] or call us at +965-2224 8280.

A subsidiary www.e-marmore.com

Research On DemandWe conduct customized researches based on specific requirements of our clients

Understand client’s

requirements

Develop

scope of

work

Identify

required

deliverables

Plan research

activities

Develop estimated

effort for research

work

Gather

research

data

Analyze

data

Prepare report

and presentation

Research

Process

Client’s

requirements

Client’s

briefing

to Marmore

Marmore

conducts the

research

Report

presentation

to client

Meeting specific

requirements

Overcoming

research

challenges

Cost

effectiveness

Focus on quality

Access to large

database

End-to-end

solutions

Government

bodies

Policy makers

Asset

Management

companies

Investment

Banks

Stock brokers

Consultants &

Audit firms

Corporate and

SMEs

Challenges

Cost

Times

Scope

Data

Resources

Management

Outcomes

Information on

client’s

specific

requirements

Greater

confidence

Customized

solutions

Comprehensive

research

scope

Research Methodology

Research Rationale

Key Beneficiaries

Research on Demand

Offset Deals in the GCC - Marmore sector report - Executive Summary

Documents

Transcript of Offset Deals in the GCC - Marmore sector report - Executive Summary