The Offsets Management Company
Article from Countertrade & Offset
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Egypt is becoming increasingly receptive to proposals from foreign suppliers of defence equipment who are willing to be paid under the country’s barter policy, according to a British service provider who has become active in that market. The voluntary acceptance of barter payment terms is certain to give that supplier a competitive edge, he says.
The policy allows for the payment of 50 percent of the contract price in US dollars, but the other 50 percent must be settled with Egyptian pounds paid into an escrow account. Those funds are used to export Egyptian goods and commodities, with the deals processed through Egyptian trading groups in return for a negotiated commission.
In addition to the barter policy, the Armaments Authority is keen to encourage the co-production of defence equipment in Egypt, and has stated that this is an important aspect of its forward industrial strategy. “To my knowledge there are no stipulated thresholds for coproduction in Egypt, however foreign defence companies that are prepared to offer the Armaments Authority a combination of barter with co-production would be providing a compelling and attractive commercial proposal,” Roger Bulgin said. Bulgin, a Director of the UK service provider Offsets 2000, is the offset advisor to the UK’s Defence Manufacturers Association (DMA).
Suppliers that decline the barter option may see the procurement postponed. Non-essential acquisitions will be deferred to the following year’s budget, when the competitive process will start from scratch. Bulgin, who visited Cairo to unravel the complexities behind the policy on behalf of a British SME, notes that there is apparently no specific threshold to which the policy applies. Indeed, the barter process can be used for contracts for only $1m but each contract is considered on its own merits.
Bulgin’s first impressions however were not entirely favourable. The system was unclear and undocumented, he said, and while the Ministry of Foreign Trade and Industry (MFTI) can introduce suppliers to several ‘specialist’ barter companies who can do the trading on the supplier’s behalf, they typically charge a disagio of between 10 and 20 percent, a margin that makes most deals unworkable.
“My client simply couldn’t afford to pay that,” Bulgin complained. “It is difficult to see how to do a barter trade along those lines and that would keep the MFTI happy. My view is that we can drive those commission rates down to well under 10 percent by using [independent] commercially driven exporters. If we can do a successful barter deal on this particular defence contract then there is no reason why we can’t apply the same process to bigger contracts with other contractors.” In fact, Bulgin claims to have done exactly that. He identified a local bank which has the appropriate experience and which put in place the various account structures and financial instruments to mitigate risk and cost to the defence contractor. “Through a process of negotiation, and by identifying alternative commercial exporting organisations, I have managed to significantly reduce this commission to a more acceptable level,” he said.
The rules for this sort of trade are laid down by the MFTI. The role of the Armaments Authority of the MoD is to close the contract and make the payments while the MFTI sets the policy requirements for barters. The banks will oversee the whole transaction to ensure that defence contractors receive their payments at the due time. “I believe this system to be no more onerous than more traditional offset requirements in other countries where the cost and the outcome is often unknown, and could be considered (by the industry)... as an alternative and more innovative means of winning contracts in Egypt,” Bulgin said.
The attraction for the Armaments Authority is that it has a separate budget for barter-type projects in Egyptian pounds, which it can use when it has depleted its national (hard currency) budget. In most years however, this barter budget is significantly under-utilised, which Bulgin believes is possibly due to a lack of understanding of the barter system by foreign contractors.
The key point, he says, is that in some circumstances barter is a more convenient means for the Armaments Authority of financing contracts than using the national budget.
There are now no restrictions and exporters can use any Egyptian goods or commodities.
NB: A two-day conference on Egyptian and regional countertrade and offset policies is likely to be held in Cairo in January 2006 under the patronage of the Egyptian Businessmen’s Association.
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