When I was first asked to talk at this conference, I put together a speech, and after working and talking with you people over the last two days, I’ve decided to change my speech completely to a number of questions that I’ve faced, which have come to me:
What in the World Is Offsets?
You’re going to have a short course on Offsets, and also because of the time, a speed reading course, so here we go….
Offsets has many names - regional benefits, licensing, co-production, localisation, barter, counter-trade all mean the same thing. Offsets means that, when a foreign company is awarded a large contract by a government, it is contractually obliged to contribute economic activity to the local economy. This contribution will partially offset, hence the word "Offsets," the negative effect of this large expenditure going abroad and, when I mean partially, I mean there’s no reason why a company would come here if all the money had to go abroad.
What does Offsets have to do with technology or technical training?
Offsets often involves technology transfer, technical training, increased business opportunities, joint ventures and, in some cases, the creation of entire industries.
How Big Is This Thing Called Offsets?
Offsets magnitude. Over 80 nations have some form of Offsets programme. Almost every large nation in the world has an Offsets programme. Since they’ve been keeping track, for about ten years, USD 75 billion in offsets have been performed. Currently over USD 100 billion is owed; every major defence contractor is involved. Offsets are cited as a mechanism that levels the technology between the have and the have not nations.
How Did the UAE Get Involved in Offsets?
The UAE has a unique situation. After the Gulf war, it was determined that the UAE would need to procure a large amount of equipment to modernise its armed forces and it also had some other interests. The country needed to continue the policy of wealth distribution and economic diversification. But the UAE had a couple of problems. One, it had virtually no defence industry, no experience in Offsets and few bureaucrats and a small, but expanding work force.
Meanwhile Offsets was changing. Many Offsets companies had become liabilities for their nations. Those companies that had one-off investments, had got their Offsets credit up front and now these companies were starting to fail. In many cases Offsets was unsustainable. Those companies that were created, as technology was created, was appropriate technology and not the state-of the-art technology. Offsets was evolving from direct to indirect. In other words Offsets used to be concerned with the procurement of the specific technology. Now Offsets has to do with any activity because we’re dealing with large global companies like UTC.
Offsets was becoming more prevalent but, like smoke and mirrors, there was a lot of credit given but there was no substance behind it, and that became the rule. A lot of litigation started occurring and bureaucrat legions were formed. Canada alone had over 200 people monitoring Offsets in their country and fulfilment became problematic because the defence industry was shrinking. GATT and WTO banned Offsets and the US Government passed a law against it but, like any demand-driven thing, there were exceptions, and exceptions according to security and technology has a lot to do with security, and so essentially those laws have no effect on Offsets. The defence contractor world was changing. Their market was shrinking, technology change was accelerating, dual use was being exploited and corporations were evolving from international to global to multi-local. They know they have to have a presence in order to do business in a country.
How Did the UAE Take Advantage of These Opportunities?
The UAE Offsets Programme. All contractors must form a joint venture in the UAE with local partners, and this is very much unlike the problem in other countries where often they just have to transfer certain technologies. In the UAE , they have to form a joint-venture with local partners. Contractors can pick any type of venture, of course, within reason, that would be profitable. That means the contractor, not the bureaucrats, decides which section should go in, the contractor decides what section he wants to go into. There is only one measure of performance and that’s profits, and credits can only be obtained from creating profitable companies. So Offsets isn’t given up-front. It’s only given when a company is created and becomes profitable.
How Does This Fulfil the UAE Objectives?
The UAE output, we call it output base or profit base Offsets, spreads wealth and diversifies the economy. It creates only logical and sustainable activities because the contractors pick the activities. Incentives exist for contractors to perform through the profit motive not because they are doing something good for the nation, but because they are doing something in their own interest. It’s easily audited, anyone can tally the profits of a company, it’s non-contentious; we don’t need legions; we have one person that’s in charge of contracts and one person that’s going to monitor it and it transfers the risks of performance to the contractors. No longer does the Government have to take some risks and use up Offsets credits, and this is probably the most difficult portion of it.
What Was the Reaction to This New Paradigm in Offsets?
Well, first of all, Offsets performance; first they didn’t like it at all. They kept saying: "this will go away," and they got their ambassadors to parade in and try to change the programme. Then they went through acceptance and then world class performance. Over twenty-two ventures launched through Offsets and a new dynamic in the economy. Over four hundred feasibility studies with hundreds of companies looking at the UAE as the place to go, although some of these companies didn’t end up doing Offsets. These ventures went on anyway.
Offsets joint ventures, just some of the ventures that we have; Abu Dhabi Ship building, a collaboration with Newport New Ship Yards, the largest ship yard in the world. The National Science and Technology Institute, a collaboration with Bechtel, the largest contract research company in the world. Gulf Energy Systems in alliance with Duke and a number of other large medical universities, Gulf Diagnostic Centre, Combined Cargo UAE, and we’re also focusing on privatisation where we think the biggest opportunity is.
Have there been any problems?
Absolutely. Inhibitors to venture creation. First of all there’s a lot of red tape and bureaucratic procedures, which we’re working on through the Government to try to change and streamline. Second, the laws here are not fully developed, so there’s a lot of risk involved–we’re working to develop those laws. Third, there’s a need for a trained work force, as I said 10% of them. So what we’re talking about is market-driven training. Companies needing training have naturally sought out HCT and CERT for assistance. When I worked for UCT and had to do an Offsets programme in the UAE, one of the first people I talked to in this country was Tayeb Kamali, to talk about how we could work together.
Fourth, people. Seeing opportunities, people say, well there’s a real opportunity for this training. We say fine, turn it into a business and make it sustainable. Let’s not do a one off where you train say 12 to 20 people and then go away. Let’s make sure that you train more and this company is sustainable.
Is Offsets Credit Given for Training?
The word is "no." Offsets is only given for profitable joint ventures. The thinking is that, if a company is going to be profitable, it must train its people on a continual basis. So we’re saying that, if you train people, why should you deserve Offsets credit. You have to do it in order to get a sustainable profitable company. Second, if you see a demand in the market, please do go ahead and create a profitable business that would be continual, let the non-profitable training be a part of the Government. They do that part best.
The Future of UAE Offsets
Promotion of value added activities, that’s what we’re concentrating on. We’re not for trading companies. We’re looking to put value added in this economy. Second, a closer link to HCT and CERT and, in general, human resource development. Stronger communication with contractors in the community. One of the things we’ve done is that we’ve brought on nine new nationals in the Offsets programme, and I’ve been brought on to help train them in this, and we’re really trying to connect with the community and make sure we’re on target. Nurturing of businesses that have been launched. There’s a real feeling that now that we’ve launched these businesses, they need help because this is a difficult environment, and we’re out there helping them. Last of all I think we’re going to see an increased pace of new alliances.
Thank you very much.