The Oman Authority of Partnership for Development (the “Authority”) was established by RD 9/2014 and is affiliated with the Ministry of Commerce and Industry (“MOCI”). It was set up to ensure that offset obligations are applied to all large civilian and military procurement contracts with foreign companies and Omani companies where foreign content is involved. These offset obligations are applied through the Partnership for Development (“PFD”) program established by the Authority. Various other offset programs linked to large military procurement contracts have been applied successfully by other GCC member States for decades, including notably in the UAE and Saudi Arabia. They have also been used successfully by other countries including but not limited to Turkey, The Netherlands, Spain, Morocco and Indonesia.'
What is an Offset Obligation?
Offsets span a range of compensation arrangements required by a foreign government as a condition for the purchase of defence or civilian goods or services from a foreign supplier. The arrangements are usually wide ranging such as investments in local industries, local production requirements and various joint ventures. When countries spend a large part of their government budget buying defence equipment from foreign suppliers or awarding mega infrastructure projects, they demand that the suppliers enter into offset agreements in order to gain economic benefits from their expenditures.
The PFD Program
The PFD program aims to generate long-term self-sufficient projects that would diversify the sources of national income, support strategic sectors of the economy, enhance Oman’s defence and security capabilities, train Omani nationals, create job opportunities and strengthen the private sector. Put another way, offset agreements are meant to create local joint ventures that will create high-paying jobs for locals, while generating profit and export revenue. Every PFD project must be sustainable beyond the obligation period of the offset agreement and be fulfilled by the contractor.
The PFD obligations apply to:
- Infrastructure contracts in excess of OMR 5,000,000;
- Military or security equipment contracts in excess of OMR 5,000,000;
- Situations in which a contractor is awarded several contracts the cumulative value of which exceeds OMR 5,000,000 in a period of two years; and
- Contracts with multiple contractors where the value exceeds OMR 5,000,000; in such cases the PFD or offset obligation will be distributed on a pro-rata basis.
The level of offset obligation set by the Authority is 50% of the value of the contract and it can be either direct or indirect. Direct offsets are related to the original contract whereas indirect offsets generally have nothing to do with what the country is purchasing. Most of the major GCC offset programs have focused on indirect offsets, mainly through off-the-shelf purchases, capital investments, and joint ventures in sectors such as electronics, pharmaceuticals, healthcare, shipbuilding, education and aquaculture.
Whilst the value of the offset obligation is 50% in practice, however, factors such as In Country Value (“ICV”) and local content will be taken into account when determining the actual amount of the obligation and its fulfillment by the contractor. ICV is normally defined to refer to the total spend retained in country that benefits business development. PFD projects will be measured and evaluated by using a system of PFD credits which will be awarded when a milestone in the offset agreement has been achieved. Failure to achieve the required PFD credits for an approved offset project within the time frame agreed with the Authority could result in penalties being applied to the contractor up to 5% of the total value of the defence or infrastructure contract.
In other GCC countries where offset agreements have been signed, company executives are concerned that they have exposed themselves to substantial penalties under agreements that prove difficult to fulfill and in the time frame agreed. The Financial Times has identified Raytheon, Lockheed Martin and Boeing, of the US, and Thales, EADS, Finmeccanica and Rolls-Royce, of Europe, as having significant exposure in the UAE having signed deals there in the last three years.
Such problems could arise in Oman now that it is mandating offset agreements be executed for large civilian infrastructure projects and military supply contracts. Contractors with offset obligations will worry that too many companies are chasing joint ventures in an economy not big enough to cater for them all in the time frame set by the Authority.
The PFD is a smart new initiative designed to force foreign contractors, benefitting from major projects in Oman, to give something back to the country. It is therefore vital for the Authority to raise awareness of the PFD program and to clarify the requirements and procedures for the parties to eliminate uncertainties that may adversely affect the implementation of the projects it has approved and to not discourage potential investors.