The report provides an overview of offsets in the GCC region. It discusses the different types of offset programs, including direct offsets like co-production and subcontracting, and indirect offsets such as skills training programs. It analyzes trends in offsets in the GCC, how countries like the UAE and Saudi Arabia have developed their offset policies, and some case studies of offset programs internationally. The report also covers criticism of offsets and provides policy recommendations, with the overall aim of outlining best practices for utilizing offsets to support domestic industries and job growth in GCC countries.

1. 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

2. MARMORE SECTOR RESEARCH
Offsets in the GCC - February 2015
2
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3. MARMORE SECTOR RESEARCH
Offsets in the GCC - February 2015
3
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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 UAE27
8. Some International Case Studies ........................................................................31
9. Criticism of Offsets .................................................................................................34
10. Policy Recommendations & Best Practices .......................................................36
11. Appendix ...................................................................................................................40

4. MARMORE SECTOR RESEARCH
Offsets in the GCC - February 2015
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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. MARMORE SECTOR RESEARCH
Offsets in the GCC - February 2015
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. MARMORE SECTOR RESEARCH
Offsets in the GCC - February 2015
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. MARMORE SECTOR RESEARCH
Offsets in the GCC - February 2015
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
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self-interests that are
crisscrossing
Clear policies are
required to guide the
steps of all
stakeholders

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