Tendering in Oman: Practical Issues

Foreign companies wishing to tender in Oman need to understand a wide range of matters such as legal procedures, applicable government policies, the procurement guidelines, approvals required, and the implications of policy and law changes.

In this article, we highlight some issues which may impact on tendering in Oman.

• The Tender Board: Article 3 of the Tender Law provides that contracts for the supply or execution of works or transport or offers of services, consultancy studies, technical works, and purchase and lease of real estate shall be through public tenders. Certain types of contracts such as security and defence units do not go through the Tender Board; rather, these are carried out through other ministries.


• Registration: Before a foreign company may submit a bid to the Tender Board, it must register with the Tender Board. The criteria for registration depends on whether the project is for construction, supply, consultancy, or training.


• Local Representation: It is not necessary for the foreign company to have a local presence in Oman at the time of bid submission. Article 23 of the Tender Law provides that foreign companies, however, must form a local entity within 30 working days of winning the bid. Some quasigovernmental entities require foreign companies to submit their tenders through a local Omani agent, but there is no such requirement with the Tender Board.


• Standard Government Contract: Companies should be aware that the contract entered into with the government is the Omani Standard Forms and Conditions, which is based on the FIDIC standard form.


• Applicable Laws: In addition to the Tender Law, companies also should be aware of other relevant laws such as the Law of Engineering Consultancy Offices and the Foreign Capital Investment Law.


• International Treaties: The U.S.-Oman FTA and the GCC-Singapore FTA each include a dedicated chapter on government procurement.


• Oil and Gas Projects: There are additional requirements for companies wishing to bid on oil and gas projects. For example, some tenders require Oman Society for Petroleum Services (OPAL) certification.

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Use of Post-Dated Cheques in Commercial Transactions

Post-dated cheques are often used in Oman in business transactions to make payments in series, such as in construction contracts or rental agreements or car purchases or to discharge any large indebtedness. The use of this common instrument in Oman can sometimes result in problems for both the recipient of the cheques and the entity bound to make the payment by cheque (the “drawee”).

For example, the recipient of the cheque may seek to obtain payment under the cheque and find that there is a hold on the cheque or lack of funds in the account. In such an instance the bearer of the cheque has the option of lodging a criminal complaint with the Royal Oman Police (ROP). The ROP will conduct an investigation, and if appropriate refer the matter to the public prosecutor. Thereafter, the matter would be handled by the criminal courts of Oman.

There are two major circumstances in which the failure of a cheque will not suffice to form the basis of a criminal case in Oman. First, the failure of the cheque must be the result of bad faith in order for a criminal case to result. If the failure of the cheque is the result of a good faith claim regarding the payment, for example, if the drawee puts a hold on the cheque because the product or service provided is deficient or not delivered, this failure will either mean the file is closed before it reaches the courts, or else it could lead to the collapse of the criminal case.

Second, if the cheque was issued as a method for guaranteeing payment, and not as the actual basis for making the payment, then the failure of the cheque cannot form the basis of a criminal case. Post-dated cheques issued for guaranteeing payment often have the words “guarantee” written on them. If such cheques bounce, the drawer will have difficulties as Omani law says that these cheques were not intended as the primary mode of payment.

Those receiving payments by post-dated cheque should make sure the cheque does not include the words “guarantee” if the cheque is the intended method of payment and any underlying settlement agreement should make it clear that the post-dated cheques in question are the primary, intended mode of payment. In addition, if a cheque fails, the bearer of the cheque should be sure to lodge the complaint with the ROP within three months.

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Engineering Consultancy Partners

The Engineering Consultancy Law, Royal Decree 120 of 1994, requires foreign companies to engage a local Omani engineer partner in order to execute engineering work in Oman. The Engineering Consultancy Law specifies the requirements that apply to the Omani engineer partner, including the required education, experience, and reputation.

One issue facing foreign engineering companies in evaluating Omani engineer partner candidates is whether the Omani engineer must be educated and experienced in any particular engineering discipline. For example, if the company plans to engage in civil engineering work in Oman, must the Omani engineer partner be educated and experienced in civil engineering as well, or is another engineering discipline acceptable?

The Engineering Consultancy Law does not specify the answer to this question, but the Ministry of Commerce and Industry (MOCI), which is responsible for reviewing and approving engineering licenses, has clarified the matter in informal statements. Specifically, MOCI requires the Omani engineer partner to be educated and experienced in an engineering discipline that is related to the type of engineering work to be completed in Oman. For example, an architectural engineer in Oman cannot fulfill the local partner requirement for an engineering consultancy that plans to engage in petroleum engineering work because architecture and petroleum are not sufficiently related.

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GCC Interconnection Grid

The vision of an interconnected power system for the states of the Gulf Cooperation Council (GCC) is nearly as old as the 27-year old organization itself. The introduction of the concept in 1982 has, in recent years, proven extraordinarily prescient. Today, the GCC Interconnection project is nearing completion just as electricity demand projections appear set to take off.

The countries of the GCC have experienced increases in demand driven by population growth, urbanization and industrialization. According to some sources, demand for electricity in Oman has been growing at 6-7% per year. Demand growth is forecasted at 15% annually until 2020

The GCC Interconnection Grid is a crucial element of the GCC’s plans to meet the growth in demand. The linking up of electricity systems between Gulf states will reduce long term investment costs for generation by reducing required levels of reserves, adding efficiencies and creating opportunities in energy trading.

Phase I of the interconnection was completed in July 2009, linking Bahrain, Saudi Arabia, Qatar and Kuwait in what is referred to as the GCC North Grid. Phase II of the plan, also complete, involves the internal connection of the electricity grids in the UAE and Oman, known as the GCC South Grid. Phase III will bring the project to completion with the linking of the North and South grids. The final of the three phases of the USD 1.407 billion interconnection project is scheduled for completion in 2011.

According to GCC Interconnection Authority (GCCIA), the body responsible for constructing, operating and maintaining the interconnection, each GCCIA member state will be capable of importing up to the value of its interconnection size. In Oman’s case, potential imports amount to 400MW. As a result, operational reserves in the region are expected to fall.

Additionally, lower operating and management costs to consumers will be achieved by using energy from the most economic generation unit available for dispatch in the interconnected system.

Further, available spinning reserves will be shared to cover emergency conditions and provide emergency support to any system experiencing a blackout.

The benefits of interconnection, however, could stretch far beyond cost savings. If all goes according to plan, the Interconnection Grid will enable the export of power to the Mediterranean basin and to Europe.

Legal Framework for Interconnection
Just as crucial as the technology behind the GCC Interconnection Grid are the legal arrangements making interconnection possible. In the words of GCCIA spokesman Hassan Al-Asaad, “legal agreements are the basis for the entire project – without them there we have no interconnection.”

The members of the GCC Water & Ministerial Committee have undertaken to sign the General Agreement of Power Interconnection Grid with the GCCIA. The General Agreement lays out the fundamental agreement between member states with regard to use of the interconnection. The General Agreement includes provisions relating to connection fees, rights of interconnection, performance, defaults, termination, and governing law, as well as the regulatory principles committed to by the parties.

Regulation of use of the interconnection will initially be carried out by the GCCIA Board. At a later stage, authority will be transferred to a Regulatory & Advisory Committee that will ensure compliance with regulatory principles and performance standards. Finally, when member states take the step of forming a regional energy regulator, permanent authority will vest in that body.

In addition to the General Agreement, state utilities must enter into a Power Exchange and Trading Agreement (PETA) which sets out the terms on which the parties may connect and have access to the grid and the terms by which parties may schedule transfers of power. The PETA is made up of three separate components:

1. the Trading Agreement, which sets out the terms on which the parties may use the interconnection for scheduling transfers of power;
   
   
2. the Interconnection and Use of System Agreement, which sets out the terms on which the parties will connect and have access to the interconnection; and
   
   
3. the Transmission Code which sets out the technical rules that govern connection and access to the grid.

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Legal Issues in Retention of Employee Passports

The practice of employers retaining their employees’ passports has been justified on the grounds of “safekeeping” and as a foolproof method of ensuring that an employee does not leave the country without the prior knowledge of the employer. Some employers are also known to deny free access to their employees to use their passports or to travel freely. A passport is a formal government document that certifies one’s identity and citizenship and permits a citizen to travel abroad. As a matter of fact, most governments prefer that their citizens exercise caution in agreeing to handover their passports to employers or to any other persons. In most countries, retaining the passport of a person without appropriate judicial authorisation is not permissible. The courts in many GCC countries have consistently held in cases filed by aggrieved employees that passports should not be retained by employers. Further, retention of passports may also be an infringement of the Forced Labour Convention of the International Labour Organisation (ILO) which requires member-states ratifying the Convention to undertake to suppress the use of forced or compulsory labour in all its forms within the shortest possible period. Forced or compulsory labour is defined as all work or service which is extracted from a person under the menace of any penalty and for which the person has not offered voluntarily. In the UAE, government circulars have been issued periodically proscribing the practice of retaining employees’ passports. A similar circular was issued in November 2006 in Oman by the Ministry of Manpower upholding the right to retain one’s passport but without prescribing a penalty [or private right of suit] for its infringement. Consequently, enforcement is no easy task. The ostensible justification that employers hold forth is that their employees may be controlling substantial parts of their assets and withholding their passports gives them the leverage to counter any attempt to misuse the authority vested in the employees. But this is a restraint on the right to free movement and could give undue advantage to the employer in a dispute. Further, the Supreme Court has ruled that foreign workers are no longer required to obtain the permission of their employers to seek new employment in Oman. The impact of this ruling could remain largely illusory if the employer retains the passport of the employee seeking new employment. Retention of the employees’ passports may be an efficacious means to exercise control over the employees but it is clearly not a legal option available to employers. This underscores the need for employers and governments to devise a legally enforceable mechanism to remove the uneven bargaining power between parties.

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Signing of Documents by the Government

All contracts and obligations in the name of the Government of the Sultanate of Oman or on its behalf must be signed in accordance with Royal Decree 48/76 (as amended by Royal Decrees 80/94 and 23/97) or approved by a special decision of H.M. The Sultan.

Any contracts or obligations with the Government for RO 250,000 or more must be signed by two signatories, namely:

• (i) the competent Minister, (ii) head of the Government Unit, (iii) the Chairman of the Organisation/ General Organisation/ public corporation, or (iv) by the person specifically authorised by any of them in writing; and
  
  
• (i) the Minister supervising the Ministry of Finance or by the person he authorises in writing where the contracts or obligations are for RO 500,000 or more; or (ii) the Undersecretary of the Ministry of Finance for Financial Affairs or by the person he authorises in writing where the contracts or obligations are for RO 250,000 or more but less than RO 500,000.

If the contracts or obligations amount to less than RO 250,000, then the Royal Decree sets out the relevant signing requirements for contracts or obligations for (i) RO 100,000 or more but less than RO 250,000, (ii) RO 50,000 or more but less than RO 100,000, and (iii) less than RO 50,000.

There are also separate signing requirements for contracts and obligations in the name of H.M. Sultan or in the name of the Government and which provide that the Government or any of The Ministries/ the Government Units/ Organisations/ General Organisation undertake any investments or provide a third party with a loan or a grant to obtain a loan from such third party or issue bonds or any debenture loan or undertake any security or other financial dealings.

In the event that these signing requirements and the other conditions set out in the Royal Decree (as amended) are not met, then such contracts or obligations with the Government shall not be recognised and shall have no legal effect in Oman.

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What Fund Offering Terms Should Omani Institutional Investors Negotiate? (Private Equity)

Private equity funds are broadly accepted as an established asset class among institutional, sovereign and other sophisticated investors. As a general matter, the performance of private equity funds does not closely correlate with that of the public equity markets, thereby providing an excellent risk diversification tool for investors seeking to make a passive, long-term commitment of their capital. In this article, we briefly examine certain key terms that Omani institutional investors (e.g., sovereign wealth funds, pension and other government funds, private financial institutions, and banks) should consider negotiating for in relation to their capital commitment to private equity funds.

• MFN Clause: The most-favoured-nation clause guarantees the institutional investor treatment no less favourable than that accorded, in the past or future, to any other investor in the fund. Any preferential treatment must be disclosed to the institutional investor, with the option to elect to receive such treatment itself.
• Fees: Generally, management fees should be determined in relation to a fund’s aggregate capital commitments during the investment period and in relation to its declining invested balance thereafter. The carried interest, moreover, should only be paid if a hurdle rate is achieved (generally either 8% or 12% return, depending on the fund’s investment strategy), calculated on a “funds-as-a-whole” basis and subject to a guaranteed clawback. Further, no placement, organizational or other fees should be chargeable unless otherwise agreed with the institutional investor and disclosed on an item-by-item basis. The calculation of all fees and carried interest distributions should be confirmed by an independent audit to provide transparency to the institutional investor, and all fees should be commercially reasonable and in line with market rates.
• Excusal Rights: Under the Executive Regulations and Instructions issued by the Ministry of Finance of Oman, certain institutional investors (such as sovereign wealth funds) may be statutorily forbidden from investing and/or maintaining more than a set percentage of their aggregate assets in investments outside of Oman. In such case, the institutional investor should require the fund to provide it with prior notice of any prospective investment to allow time to consider the permissibility of the investment and to elect not to participate.
• In-kind Distributions: An institutional investor should ensure that all distributions of fund assets are made in cash, unless it specifically agrees to in-kind distributions, in which case it should request the right to establish a liquidating trust to receive the in-kind distribution.
• Transferability: An institutional investor should request a carve-out to the fund’s transfer restrictions to permit affiliated-party transfers (for example, where the institutional investor is undergoing a reorganization) without requiring the fund’s consent.
• Allocations of Carried Interest/Change of Control Disclosure: The fund manager should disclose the allocation of carried interest amongst its personnel and any changes to such allocations. Further, any changes of control of the fund manager should be disclosed to the institutional investor and trigger a suspension on commitment drawdowns.
• Privileges and Immunities: Certain institutional investors may, under Omani law, benefit from immunity from certain domestic and international laws which would otherwise be applicable to them. No provision of any fund document should prejudice such immunity unless deliberately waived by the institutional investor.
• Alternative Investment Vehicle: Where the fund elects to establish an alternative investment vehicle to pursue a particular investment opportunity, the institutional investor should have the right to “opt out” of the vehicle upon sufficient prior notice.
• Forum Selection: Omani courts should have exclusive jurisdiction in respect of any legal action brought against an institutional investor relating to its investment in the fund.

Investing in private equity entails a long-term capital commitment by the investor (up to 12 years), coupled with little or no influence on the decision- making process of a fund. It is, therefore, crucial for Omani institutional investors to negotiate the inclusion of terms, such as the above, in a side letter agreement with the fund manager before investing to ensure high levels of transparency and oversight of the fund manager’s decision-making process, and the alignment of the fund’s investment strategy with the investor’s portfolio diversification and regulatory requirements.

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