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Warning to Contractors Dealing with GCC Governments

Analysis Offset obligations ("Offsets") are required by most of the GCC governments from their foreign service and product providers ("Contractors"). In short, as a matter of public policy, GCC governments will never contract with foreign corporate entities without any specific offset agreement which will provide an economic benefit from their expenditure.

This article, explores the legal framework of offsets in place within the United Arab Emirates and the Sultanate of Oman.

1. The notion of Offsets in the UAE and Oman 1.1 The Principle:

Offsets aim to create long-term projects that diversify and support strategic economic sectors so as to optimize a state's national capabilities. These obligations are regulated and monitored by the Tawazun Economic Council in the UAE ("Tawazun UAE") and the Oman Authority of Partnership for Development ("Oman OAPFD") in the Sultanate of Oman.

Tawazun UAE and Oman OAPFD (as per their respective by-laws), are vested with managing the negotiations pertaining to the implementation of the offset program with the contractors independently including, negotiations relating to the terms of technical and commercial specifications, which fall under the jurisdiction of the concerned government bodies that issued the request for proposals.

The national and political reasons for requiring offset obligations are the following:
  • Employment creation;
  • Human resource development;
  • Technology transfer
  • Sustainable economic growth
  • Exports of value-added goods and services
  • Research & development collaboration
  • Encouraging existing competitive companies and supporting establishment of new competing companies on national and international levels.
  • Supporting the capability of military and security entities to produce, enhancing their knowledge and transferring new technology to them.
It is important to bear in mind that whilst both Tawazun UAE and Oman OAPFD have narrowed down the key sectors to specific capabilities, the definition is wide enough to safely consider that basically all government procurements are encompassed in the offsets, such obligation being construed as an obligation on the foreign supplier rather than just an option to levy on its own accord.

1.2 Methodology to achieve Offsets objectives 1.2.1 To get a contract with GCC government, contractors have to get credits In order to get credit, contractors have to invest in specific sectors defined by GCC governments.

In the UAE, Tawazun UAE has identified key sectors and capabilities of development which contractor's should focus on for generating credits. These sectors are (i) Aerospace (ii) Defense (iii) Autonomous systems (iv) Cyber Security with pertaining capabilities ranging from design and software engineering to assembly and manufacturing.

In Oman, Oman OAPFD identified infrastructure projects and contracts for the supply of weapons, military, and security equipment as key sectors falling under the offsets' obligation.

1.2.2 Triggering Point

In the UAE, the contractor undertakes to generate credits by investing itself or through a UAE company sixty per cent (60%) of the value of the supply contract during the base program period. The base program shall be seven (7) years duration and will have seven (7) annual milestone obligations.

In Oman, offsets obligations shall apply to supply contracts entered into with the government in excess of OMR 5,000,000. Whereby the contractor to generate credits either itself or through an Omani company invests an amount equal to fifty per cent (50%) of the value of the supply contract during the base program period which shall be eight (8) years.

In regards to both jurisdictions, the contractor should be communicating with the offsets' regulators to be fully informed on its expected obligations in the early stages of its bid to be awarded government contract. This is to ensure that the contractor is aware of the level of upcoming offset investments and milestones it will need to comply with prior to servicing the underlying government contract.

2. Main points to be considered by the contractors 2.1. Period of Performance and Milestones: As a matter of principle, both Tawazun UAE and Oman OAPFD consider the milestones' schedule as nonflexible and a shortfall will lead to applicable liquidated damages. That being said, both regulators may elect to grant a discretionary grace period to the contractor, based on justifiable reasons communicated by the contractors. (default account).

2.2. Guarantees: In the UAE, the amount of the bank guarantee shall be equal to eight and a half percent (8.5%) of the offset obligation and shall be valid for the whole base program period. The guarantee is to be put in place within thirty (30) days of execution of the offset agreement with Tawazun UAE. In Oman, a corporate guarantee will be required to be established for a value equivalent to the potential penalty that could be applied to any unfulfilled offset obligations. The guarantee is to be put in place within sixty (60) days of signing the supplemental agreement with the Oman OAPFD.

2.3. Liquidated Damages: In Oman, in the event of an offset milestone shortfall, the contractor shall be required to submit a bank guarantee which will replace the related corporate guarantee, with penalties applied to ten percent (10%) of the outstanding offset obligations on the basis of the unfulfilled offset obligations shortfall. In the UAE, a penalty may be payable by the contractor equivalent to 8.5% of the shortfall amount set out in the milestone Offset obligations defined by Tawazun.

In conclusion, and in light of the complex methodology applied to the generation of offset credits, milestone schedule and multipliers, contractors dealing with GCC governments are strongly invited to rethink their assumption of non-enforceability of offsets, which are deemed both vital to the growth of GCC states and a mandatory requirement of said contractors.

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Published: May 2017
Publication: Lexis Middle East
Title: Warning to Contractors Dealing with GCC Governments
Practice: CommercialCorporate and M&A
Authors: Bertrand Dumon and Edouard Salwan
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