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Expansion and Revision of ADNOC‘s In-Country Value Programme

09 April 2020

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By: Dr. Constantin Frank-Fahle, LL.M.

The Abu Dhabi National Oil Company (ADNOC) had launched its localisation programme (In-Country Value – ICV) in late 2017, which came into effect in 2018 (ICV 1.0). The first round of revision came into force in November 2018 (ICV 2.0). The third version of the ICV formula (ICV 3.0) will take effect in May 2020. At the end of 2019, Abu Dhabi Ports and Aldar Properties had announced that they would follow the ICV programme. The Abu Dhabi Department of Economic Development (ADDED), who had previously soft-launched its localisation scheme (Abu Dhabi Value), followed this development in early 2020. This article discusses the recent changes to the ICV formula and the adoption of ICV through three further players in the emirate of Abu Dhabi.

 

1. What has happened so far?

ADNOC’s “In Country Value” (ICV) programme was announced in November 2017 and implemented on 1 January 2018. Since 1 April 2018, all suppliers of goods or services to ADNOC and its subsidiaries (ADNOC) are required to calculate and declare their ICV score for the previous financial year, to demonstrate how they are delivering ICV. ICV scores need to be certified by an ADNOC approved certifying body on an annual basis and submitted by the supplier to ADNOC with each proposal they make.

In April 2019, the Abu Dhabi Department of Economic Development (ADDED) introduced its localisation programme (also referred to as Abu Dhabi Value (ADV) or Abu Dhabi Local Content (ADLC). ADV was soft-launched one year after ADNOC’s ICV programme and relied to a great extent on ICV 1.0 formula and the same procurement decision making process as ICV.

Abu Dhabi Ports and Aldar Properties subsequently entered into framework agreements on 12 November 2019 with ADNOC, ultimately adapting the ICV programme for their procurement process. To harmonise the localisation programme landscape in the emirate of Abu Dhabi, on 25 February 2020, ADNOC and ADDED entered into a Memorandum of Understanding for implementation of the ICV programme with ADDED. ADDED, therefore, has disregarded its localisation programme (ADV).

 

2. Why was the ICV programme extended to the Abu Dhabi Ports, Aldar Properties and the Abu Dhabi Department of Economic Development?

Following the soft-launch of ADDED’s ADV programme, suppliers that were bidding on ADNOC and ADDED tenders would have to get two separate certifications, one for ADNOC’s ICV programme and one for ADDED’s ADV programme. While the ICV and ADV formula and certification process was similar, one crucial difference was that ADV solely relied on Abu Dhabi data. Therefore, the administration of the two certifications translated into time and cost efforts for bidders.

In order to enhance the ease of doing business in the emirate of Abu Dhabi, the stakeholders agreed to rely on ADNOC’s ICV programme. Unifying the localisation programmes in the emirate of Abu Dhabi and issuing a single ICV certificate that can be used for four parties (ADNOC, Abu Dhabi Ports, Aldar Properties and ADDED) will certainly smoothen the process, as a single certificate will reduce the burden of costs and time.

 

3. What are the key changes under ADNOC’s ICV 3.0 compared to the ICV 2.0?

Key changes under ICV 3.0 include:

  • ICV certificates should be based on financial reports that are issued by licensed auditors (Ministry of Economy approved) and based on the International Financial Reporting Standards (IFRS).
  • Payments to free zone authorities and governmental bodies will be considered full under ICV 3.0.
  • Service providers who are based in UAE mainland will be automatically granted 10% ICV score.
  • Headcount of employees will be counted on an average basis in a year and not on a year-end basis.
  • The ICV certificate is generally valid for 14 months (counted from the issuance of the audited financial statements or the issuance of new financial statements – whichever is earlier).
  • Suppliers should register with the official job platform for Emirati job seekers (www.aejobs.ae) within 14 months from ICV certification.

 

It is interesting to note that under the 3rd revision, the principle that each corporate vehicle needs its own ICV certificate has been loosened with regard to branch offices. As far as they carry out identical activities and have the same ownership structure, such branches would be eligible for a combined ICV certificate. While these conditions will probably not be met by the vast majority of suppliers, this could be effectively the first step towards a consolidated ICV certificate in a future revision.

Under ICV 3.0, all internal costs are excluded from the calculations except for depreciation cost. Bidders that have used inter-company charging models to optimise their ICV scores will need to revise such transactions.

ICV certificates issued under the ICV 2.0 formula can be re-certified free of costs as long as they refer to the same audited financial statements.

 

4. What are the benefits of unified certification?

The certification process will be unified, while the implementation will be carried out by the various players. Therefore, bidders should familiarise themselves how the localisation score will be adapted within the procurement decision-making process of the awarding body. Besides, bidders should understand to which degree they will need to commit to improving their localisation score and what could be the potential risks of non-compliance.

 

5. Conclusion

Suppliers engaging with ADNOC, ADDED, Aldar or Abu Dhabi Ports should familiarise themselves with the dynamics of ICV. The expansion of ICV into the logistics (Abu Dhabi Ports), construction & real estate (Aldar) and general procurement (ADDED) will most certainly be a test for other emirates. By agreeing on a unified certificate, ADNOC has strengthened its leading role in the field of localisation. It is expected that ADNOC will, therefore, influence how localisation will move into other emirates and sectors. In light of the Covid-19 crisis, ADNOC has already announced that the creation of in-country value will play a significant role in stimulating the UAE’s economy. Besides, it is expected that the attempts to localise critical parts of the supply chain will be intensified in light of the Covid-19 crisis. ICV and local content programmes will, therefore, gain further importance in the UAE.

 

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Dr. Constantin Frank-Fahle, LL.M.
Managing Partner | Attorney at Law
+971 (0)2 694 8562 | frank-fahle@germela.law | www.germela.law
GERMELA LAW LLP | Al Sila Tower, 24th Floor | Abu Dhabi Global Market Square | Abu Dhabi | UAE

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