National Offset Company::faq




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Frequently Asked Questions:

1. What is offset?
2. Why were the responsibilities of managing the Offset Program transferred from the Offset Program Department at the Ministry of Finance of Kuwait to the National Offset Company (NOC)?
3. What type of contracts is subject to offset and which ones are not?
4. What are the thresholds on contracts that require offset?
5. What constitutes defense contracts and civil contracts?
6. What is the current offset obligation rate that is imposed on foreign contracts? And how is it calculated?
7. If a contractor signs a multiple of contracts during any Kuwait financial year will the offset obligation be counted based on the cumulative value of these contracts?
8. What is the value of required bank guarantee and what are the penalties on foreign obligors for not fulfilling the offset obligation?
9. What is the nature of direct, indirect, and Off-shore offset projects, and of offset funds? Which type of offset projects is given highest priority?
10. Does NOC force offset obligors to pursue specific offset projects?
11. What are the Offset Multipliers?
12. How can an obligor acquire pre-emptive or future Offset Credits and how can he sell or transfer these credits?
13. How are the proposals for offset business ventures (OBVs) assessed and approved?
14. Is there sector priority for OBVs and are there any limitations on the minimum investment value of an OBV?
15. Who proposes, approves and takes decisions concerning the implementation of OBVs?
16. What are the responsibilities and authority that NOC has over OBVs?
17. What happens after the foreign contractor satisfies its offset obligation?
18. How can the Kuwaiti Private Sector and the foreign contractors benefit from the Offset Program?
19. Why do some contractors view offset as an obstacle?

1. What is offset?
The Offset Program of Kuwait is an obligation that foreign government or private (commercial) entities incur upon winning civil or defense contracts from Kuwait government entities; an obligation that could be satisfied through the implementation of investment projects in Kuwait or offshore, and that could add value to the national economy of Kuwait.

2. Why were the responsibilities of managing the Offset Program transferred from the Offset Program Department at the Ministry of Finance of Kuwait to the National Offset Company (NOC)?
Based on the recommendations of the World Bank, which was commissioned by Kuwait Ministry of Finance in the year 2000 to assess the Offset Program of Kuwait, the National Offset Company (NOC) was established, as a state-owned closed shareholding company and its Contract of Incorporation was signed on March 28, 2006. It commenced its operations on the 2nd of September 2006 after concluding a Management Agreement with the Ministry of Finance under which NOC assumed its responsibilities of managing Kuwait’s Offset Program. The objective was to delegate the tasks of managing the Offset Program of Kuwait to a company, that operates in accordance with the efficient and effective work directive of the private sector, ensuring high level and professional management of the Offset Program, in order to achieve excellence in its management approach. NOC relies on state of the art systems and procedures to facilitate and support its interaction with the foreign contractors and local entities. It provides all the appropriate support to foreign contractors to assist them in successfully fulfilling their offset obligations. NOC may also assist local Kuwaiti entrepreneurs in benefiting from the Offset Program, by receiving offset investment proposals from Kuwaiti entrepreneurs, evaluating and assessing these proposals and liaising between the foreign contracts and Kuwaiti entrepreneurs, for the joint implementation of such projects. NOC governance is a further attribute in the system that organizes the relations among the executive management of NOC, Board of Directors, shareholders and other stakeholders, with the objective of improving its management and economic efficiency, through the utilization of audit and control tools and procedures, applicable to private sector companies.

3. What type of contracts is subject to offset and which ones are not?
Both civil and defense contracts whose values are equal or greater than KD10 million and KD 3 million respectively, and that are signed between a Kuwait government entity and a foreign government or private (commercial) contractor are subject to offset. A foreign contractor (FC), for the purpose of Kuwait Offset Program, is by definition any government or private (commercial) entity satisfying either of the following conditions:

Any foreign legal entity or entities not registered or incorporated in Kuwait, under direct contractual commitment to supply goods and/or services (“Supply Contract”) to the Government of Kuwait,
Any foreign legal entity or entities party to a Supply Contract represented by a local legal entity acting as its agent or legal representative, and under which the foreign legal entity or entities will remain completely and entirely responsible for the implementation of the Supply Contract;
Any joint venture formed between a foreign legal entity or entities and a Kuwaiti legal entity or entities for the purpose of jointly signing and executing a Supply Contract with the Kuwaiti Government;
Any legal entity not satisfying one of the above conditions and classified as a foreign contractor by NOC.

Examples of a Foreign Contractor:

A Foreign company or Government party to a Supply Contract of goods and/or services with the Kuwait Ministry of Defense.
A Foreign company signing a supply and service contract, as a second party, with the Ministry of Electricity and Water.
A foreign entity party to a Supply Contract that is represented by a local entity acting as an agent or legal representative of the foreign company.
A joint venture between a local entity or entities with one or more foreign contractors or governments as the main contractual party to a Supply Contract with a Kuwaiti Government entity or with a single authorized local or international representation.
A foreign supplier of goods and services under a Supply Contract where all, if not most of, the in situ scope of work or services (to be provided under the Contract) is carried out by the Foreign Contractor, such as construction of sewage plants, waste treatment, recycling plants or major/centralized utility services…etc.
A supplier of defense equipment and services whereby the contract is granted to the supplier as a result of a direct government-to-government agreement for the supply of defense equipment and services.

Examples of entities that are not considered Foreign Contractors:

Foreign entity (foreign company or foreign government entity) signing a contract for non-industry related civil construction works. Examples of these Projects are construction of roads, infrastructure, government buildings or schools…etc.
Foreign entity acting as supplier of goods only (i.e. on a F.O.B. basis), directly or through a local agent/distributor or where all, if not most of, the in situ scope of work or services is carried out and executed by a local entity.
All "Public-Private-Partnerships" (PPP) contracts signed with any Kuwaiti governmental entity.

4. What are the thresholds on contracts that require offset?
The threshold for defense and security contracts that are subject to offset is KD3 million and above, while the threshold for civil contracts (Non-defense) is KD10 million and above.

5. What constitutes defense contracts and civil contracts?
Defense contracts are those that are signed with the following Kuwaiti government entities:

Ministry of Defense
National Guards
Ministry of Interior

Civil contracts are those that are signed with all other Kuwait government entities, excluding the above three entities mentioned under defense contracts.

6. What is the current offset obligation rate that is imposed on foreign contracts? And how is it calculated?
The current offset obligation is equivalent to 35% of the net monetary value of the supply contract after deducting the monetary value of any of the following, if existent:

Subcontracts signed with operating Kuwaiti companies, with predefined rules and responsibilities within the supply contract.
The value of locally procured goods and/or services, as predefined in the supply contract.
The monetary value of the Kuwaiti share in a joint venture that is subject to offset, but up to maximum of 30% of the joint venture and subject to the approval of NOC; if such deduction is approved no additional deductions are allowed from the supply contract corresponding to any subcontracts with Kuwaiti companies or any purchase of locally goods and services.

The Monetary Equivalence of Offset Obligation Value is the output of the mathematical multiplication of the value of investment in the offset project, by the multiplier value, which is specified for the project. It is equivalent to the value of total offset credits generated from the investment in the project.

7. If a contractor signs a multiple of contracts during any Kuwait financial year will the offset obligation be counted based on the cumulative value of these contracts?
According to the Offset Program Guidelines, No. (9) 2007 the offset obligation is imposed on the basis of singular contracts, and therefore contractors signing multiple contracts during any financial year shall not face offset obligation of the cumulative value of these contracts.

Alternatively, the offset obligation imposed on tenders and contracts that are signed by any one contractor and that are subject to the Offset Program Guidelines No. GL 7/2002 is calculated based on their cumulative value within any financial year.

8. What is the value of required bank guarantee and what are the penalties on foreign obligors for not fulfilling the offset obligation?
The value of the required bank guarantee is initially calculated to be equivalent to 6% of the total monetary value of the supply contract, however when the necessary certified documents are presented to NOC regarding any of the following, and after NOC confirms the presented information from the Government of Kuwait entity with which the contract is signed, they can be deducted from the total supply contract and the value of the bank guarantee can be adjusted accordingly. The following can be deducted from the contract if existent:

Subcontracts signed with Kuwaiti companies.
Purchases of goods and services of national origin that are made within the context of the supply contract.
The monetary value of the Kuwaiti share in a joint venture that is subject to offset, but up to maximum of 30% of the joint venture and subject to the approval of NOC; if such deduction is approved no additional deductions are allowed from the supply contract corresponding to any subcontracts with Kuwaiti companies or any purchase of locally goods and services.

The Bank guarantee must be submitted by the Offset Obligor within a period of 30 days from the date of signing the Supply Contract, or upon the commencement of actual implementation of the contract; and it must be valid for 1 year and renewable until the fulfillment of the Offset obligation; If the GOK, for any reason, cancels the Supply Contract, the bank guarantee shall, accordingly, be cancelled;
The penalty that NOC imposes on foreign obligors for not fulfilling their offset obligation according to the terms of MOA and/or its addenda, if any, is by cashing the bank guarantee. In this event NOC shall contact the respective Kuwaiti Government entities, report the lack of or failure in performance of the Offset Obligor and recommend the exclusion of the Foreign Contractor from future Supply Contracts.

9. What is the nature of direct, indirect, and Off-shore offset projects, and of offset funds? Which type of offset projects is given highest priority?
Direct Offset Projects are those in which the FC assists the GOK entity with which the contract is signed through a mechanism such as supply arrangements, technology licenses or co-production of the underlying product within Kuwait. The overall effect of a direct Offset Project is to reduce the cost of purchase, operation and/or maintenance through participation of the seller in supplying the product. Direct offset projects could include:

Grant labeled projects;
Privatization projects;
Defense related projects, including training, maintenance and test labs;
Projects of dual defense/civil uses.

Indirect Offset Projects are those in which the FC agrees to assist GOK in its efforts towards the development of Kuwait’s private sector with foreign vendor participation in projects to produce products either for export or import substitution or investment plans unrelated to the principal import (Supply) contract.
NOC may approve offshore Offset Project proposals if they can meet the objectives of the Offset Program as specified in the Offset Program Guidelines, Section 6.4. In such cases, NOC may elect to subject Offshore Offset Projects to all rules and regulations governing the fulfillment of Offset Obligations.

Another option that foreign contractors may have to fulfill their offset obligation is through participate in existing NOC approved and established funds or develop and create new offset funds under Kuwaiti law to finance the implementation of general and/or Offset Projects, with the clear understanding that:

Offset Funds must be local legal entities managed by specialized Kuwaiti or foreign financial Institutions and must be approved by NOC;
Offset funds should target the achievement of one or more of the Offset Program Objectives in the same way as other Offset Projects do.

The structure of direct or indirect Offset Projects may take any of the following forms:

Establish an Offset Business Venture (“OBV”) with Kuwaiti businesses, entrepreneurs and/or Kuwaiti private citizens as equity partners;
Establish an OBV in which the Offset Obligor’s equity share is more than 49% in accordance with the Foreign Investment Law No. 8/2001, (as amended) regulating direct foreign capital investment in the State of Kuwait;
Expand and develop existing business ventures;
Make in kind contribution(s) or grant(s) to existing Offset Projects approved by NOC as Offset Obligation recipients.

Some examples of Offset Projects for each type:

Examples of Direct Offset Projects:

Establishment of laboratories, services or maintenance facilities within the operational domain of the Kuwaiti Government entity party to the Supply contract.
Short and long-term training programs of national manpower on high technology equipment or software.
Development of specialized software or systems for special application
Establishment of a business entity with or without participation of the Kuwait Government as owner or co-owner, to provide services or goods to the buyer and/or other sectors.

Examples of Indirect Offset Projects:

Grants or donations to approved and licensed organizations in Kuwait providing educational, health care or public services.
Establishment of business entities in Kuwait to provide goods or services.
Establishment of specialized training centers to train Kuwaitis.
Establishment of energy related industries.
Invest in business ventures to promote the use of alternate energy.
Invest in business ventures to manage and optimize the use of fuel energy or water resources.
Procurement of national goods and services.
Establishment of P.P.P. Projects with local participation.

Which type of offset projects is given highest priority?

The Offset Project Multiplier system, adopted in the Offset Program Guidelines reflect the priorities that are given to various offset projects or funds. According to the currently adopted Offset Guidelines No. (9) 2007 Direct offset projects are given the highest priority, thus they receive the highest maximum offset multiplier of 5.5, but only if such projects achieve all three economic objectives of the offset program, namely technology transfer, job creation for Kuwaitis, and education and training of Kuwaitis. Special attention is given to following criteria:

Does the Offset Project realize certain technology or technologies? What type? How technical? Can they be integrated, applied and operated? What is the benefit to Kuwaits economy or its sectors from this technology? How much does it cost to transfer and own this technology if possible? (Annex V of the Guidelines details these conditions).
Does the Offset Project promote the employment of national labor? How much? What types of skills? For how long?
Does the Offset Project provide specialized training to local manpower? What kind of training? For how long? How many trainees? Who are the instructors? What kind of skills to be realized after training? Where will they be used?

The second priority is given to indirect offset projects, whereby if they achieve all three economic objectives of the offset program, referred to above, they receive a maximum multiplier of 5.
On the other hand, Offset Funds receive an initial multiplier of 3.5, but only if they achieve at least two of the primary objectives of the Offset Program, as specified above. However, this multiplier value could be increased to 5.5 after NOC reviews and assesses the annual achievements of the Fund and confirms that it achieves all three primary economic objectives of the Offset Program.

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10. Does NOC force offset obligors to pursue specific offset projects?
NOC does not force any offset obligor to pursue any specific offset project or projects. The choice of projects or funds is totally left to the discretion of the offset obligor. The Offset Program Guidelines only specify the type of projects that constitute the Programs priorities, and this is reflected in the values of offset multipliers that are specified to various offset projects or funds, but these guidelines do not in any way or form force the offset obligor to pursue any offset projects, which may not be acceptable by the obligors.

11. What are the Offset Multipliers?
Offset Multipliers are a financial incentive system that is adopted to direct offset obligated foreign companies to invest in projects that are considered to achieve the objectives of the Offset Program. This system enables a reduction in the value of the initial offset obligation by a ratio equivalent to the Total Multiplier Value that is specified for the offset project. The Total Multiplier Value is the sum of sub-multipliers that are specified for the offset project (as shown in the referenced Table 1) concomitant with the extent of its achievement of the three primary economic objectives of the Offset Program (Transfer of Technology, job creation for Kuwaitis, provision of educational and training opportunities for Kuwaitis).

12. How can an obligor acquire pre-emptive or future Offset Credits and how can he sell or transfer these credits?
Foreign Contractors with no offset obligations, but anticipate to have an obligation can initiate an Offset Project in advance and collect Offset Credits (on pre-emptive basis); however, the pre-emptive offset project/projects must be approved by NOC. The foreign contractors can use and apply the realized Offset Credits against future Offset Obligations, but only for a maximum period of 3 years from the date of earning such Credits. During that period pre-emptive Offset Credits can also be transferred, assigned or sold to a third party, to be utilized to cover its respective offset obligations; but subject to the pre-approval of NOC.

On the other hand, if offset obligors invest in NOC approved offset project(s) of fund(s) in an amount that would generate offset credits that exceed their current offset obligation they will be entitled to future offset credits, whose value is equivalent to the difference between Monetary Equivalent Offset Obligation Value (Obligor’s monetary investment in project or fund × Multiplier value specified for offset project or fund) and the value of their current offset obligation. Future offset credits can be utilized by obligors to partially or totally cover future offset obligations; however, the value of future Credits that are generated from a specific offset investment project should not exceed the total offset obligation, which the offset investment project was initially intended to fulfill (i.e. The value of future credits should not exceed the equivalent of 100% the value of the current offset obligation of the foreign contractor). Earned future offset credits can be transferred, assigned to third parties or sold to other foreign contractors or offset obligors, however, such transaction should be pre-approved by NOC and should be executed within a maximum of 3 years from the date of earning such Credits.

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13. How are the proposals for offset business ventures (OBVs) assessed and approved?
The Offset Project starts in the form of a concept paper, which could be submitted by the foreign contractor (FC) or by Kuwaiti investors to NOC. NOC reviews and analyses the submitted concept paper and approves or rejects it. If the concept paper receives initial approval by NOC, the FC will then give its commitment to fulfill its offset obligation by implementing the approved project; this commitment is spelled out in the MOA which the FC signs with NOC. The MOA specifies that the FC shall implement the approved project to fulfill its offset obligation. The MOA can be signed at any time before the date of signing the Supply Contract and no later than that date.
Within a period of 4 months from the date of signing the supply contract the FC (offset obligor) is required to submit the full business plan of the proposed project. This deadline for preparing the business plan could be extended if NOC approves of such extension. Once the business plan is received by NOC it will evaluate and assess it within a period of 2 months, during which it may request additional information from the sponsors of the project. If the business plan is approved the obligor is then notified in writing and would have a grace period of not more than 6 months to finalize all licensing procedures, such that the project will be ready for implementation. If on the other hand the project is not approved the FC will be required to re-submit a new business plan.

14. Is there sector priority for OBVs and are there any limitations on the minimum investment value of an OBV?
Under the new Offset Program Guidelines No (9) 2007, the highest priority is given to direct offset projects and since government contracts by the Kuwait Ministry of Defense and Ministry of Electricity and Water constitute the highest proportion of the total value government contracts that are subject to offset, projects in these sectors are considered to be of highest priority.
On the other hand, according to the new Offset Guidelines indirect offset projects are given second priority; however, within this category of projects the Offset Program guidelines did not give any special priority to any specific sector or project type. Needless to say, the NOC’s currently adopted business plan (2008-2010) has specified that manufacturing, education, healthcare transportation and environment projects will be given priority over other projects.

15. Who proposes, approves and takes decisions concerning the implementation of OBVs?
Offset business ventures (OBVs) are proposed by either the offset obligors or by Private Kuwaiti or foreign investors. The proposed OBVs are evaluated and assessed by NOC and if approved by NOC they could be implemented by offset obligors to fulfill their offset obligations.

16. What are the responsibilities and authority that NOC has over OBVs?
The National Offset Company plays the role of overlooking the implementation of the Offset Business Ventures that offset obligors decide to implement, in fulfillment of their offset obligation. For that purpose it requests offset obligors to present regular progress reports about their projects, and to highlight the extent to which these projects achieve the primary objectives of the offset program, namely technology transfer, job creation for Kuwaitis and training opportunities for Kuwaitis.
According the currently adopted Offset Program Guidelines No. (9) 2007 the NOC will not issue an offset fulfillment certificate to the offset obligor and release it from its offset obligation before the offset obligor presents a detailed report about the OBV covering its first financial year.

17. What happens after the foreign contractor satisfies its offset obligation?
Offset obligors that fulfill their offset obligation by participating in an offset project of its choice shall be issued an offset fulfillment certificate by NOC, which constitutes an acknowledgement that the Offset Obligor has fulfilled its Offset Obligation. However, for such a certificate to be issued, NOC will request the following information from the Offset Obligor:

Financial statements, relating to the Offset Project covering, its first financial year and certified by one of the auditing firms approved by NOC;
If the investment involves the transfer of technology and/or know-how to Kuwait, a specialized international institution, mutually selected by the Offset Obligor and NOC, must have assessed and determined the monetary value of the transferred technology;
A Bank statement(s), if applicable, confirming the Offset Obligor’s transfer of, or subscription to its share of, the investment to the Offset Project;
If the Offset Venture is a Shareholding Company, the Official Articles of Association and Registration Certificate of the Incorporation should be provided.
Submit equity share certificates, certified by the Ministry of Commerce or the concerned government entities, specifying the value of equity share of the Offset Obligor in the Offset Project Venture.
Before issuing the Offset Fulfillment Certificate, NOC may request to visit the site of the Offset Project and assess the actually achieved progress.

On the other hand, when an offset obligated company participates in one of NOC approved funds, and after NOC confirms that such participation was undertaken in line with the rules and regulations of the fund, it shall notify the company in writing that it has completed its offset obligation, to the extent of its participation in the fund. Such written certificates shall be issued to the company within a period of two weeks from the date of licensing / closing the Fund.

18. How can the Kuwaiti Private Sector and the foreign contractors benefit from the Offset Program?
The benefits of Kuwait Offset Program to the Kuwaiti Private Sector include the following:

Diversifying and expanding the economic base both inside and outside Kuwait;
Strengthening productive capacity and export potential for goods and services;
Enhancing R&D capabilities of the Private Sector;
Enhancing the local technical, administrative & managerial skills;
Encouraging the development of local SMEs;
Increasing private sector competitiveness.

The benefits from the Offset Program to Foreign contractors include:

Establishing and developing new business relations, particularly in Kuwait;
Benefiting from various financial opportunity prospects in Kuwait;
Developing a better position and an understanding of the Kuwait business market.
Strengthening and integrating international production chains in a new and promising market.

19. Why do some contractors view offset as an obstacle?
Some offset obligors view offset as an obstacle when they are not fully aware that offset could be utilized by them to invest in projects that could bring financial benefits to them, or that offset could be an important vehicle by which they could establish and develop long term business relations with Kuwaiti entrepreneurs and a venue for expanding their business opportunities in Kuwait and other GCC countries. In fact a number of multinational companies that are well aware that offset could be utilized as an effective marketing tool have opted to invest in certain projects that they consider to represent a showcase of their economic cooperation with the Kuwaiti business community, which could be extremely beneficial to these companies in boosting their business relations with Kuwaiti government and private sectors.