Under Kuwait's counter-trade offset programme, a foreign contractor who signs contracts to supply government institutions with goods or services that are cumulatively worth equivalent to or exceeding KD10 million in any fiscal year (April to March) incurs an offset obligation that requires him to set up a business beneficial to Kuwait.
The Offset Obligation
The offset obligation is expressed in the same currency as the supply contracts and is nominally 30% of their value. The contractor earns 'credits' for expenditures relating to his offset business venture (OBV) and when these credits amount to 30% of his supply contracts he has fulfilled his obligation. Actual expenditures will be much less than 30% because most expenditures earn credits at a rate greater than 1:1 and, in practice, offset expenditures amount to about 3% of a contractor's supply contracts. But before a contractor may embark on his OBV, the business must be officially approved. The programme is administered by the Counter-Trade Offset Program Executive Office (PEO) in the Ministry of Finance. The stated objectives of Kuwait's offset programme are:
- to promote long-term mutually beneficial collaborative business ventures between foreign enterprises and Kuwaiti companies with an emphasis on the private sector;
- to achieve sustainable economic benefits (such as export sales and import substitution);
- to enhance the high-tech capabilities of the private sector by creating and expanding education and training opportunities for Kuwaiti nationals locally and abroad;
- to facilitate the transfer of state-of-the-art technology into the private sector; and
- to support Kuwait's foreign aid programmes.
These objectives provide the criteria by which proposed OBVs are evaluated.
A contractor's obligation begins when he signs the supply contract that creates it. The total time allowed to fulfil the obligation is 10 years, i.e. 24 months for approval of the OBV and eight years thereafter to generate the credits needed to extinguish the obligation, with 50% being settled within four years. A contractor's OBV must include Kuwaiti businesses or entrepreneurs as equity partners, and it must exist and operate under Kuwait's Commercial Companies Law.
A contractor who refuses to participate in the programme or ceases to participate before he accumulates credits equal to 10% of his obligation, incurs a penalty of 6% of the value of his supply contract(s). If he fails to continue after completing 10% or more of his obligation, the penalty is reduced by the percentage of the obligation which has been completed.
The Offset Process
Once a foreign contractor has signed the supply contracts that trigger his obligation, he must acknowledge this obligation by signing a memorandum of agreement with the Ministry of Finance. He must then submit business ideas to the PEO in order to obtain approval for an OBV. For each idea he must submit in turn a concept paper, a proposal and a business plan, and each of these documents must be approved before the next one is submitted.
The concept paper is essentially a brief summary of the proposed business. A proposal is similar to a traditional feasibility study and is the key document upon which approval of the OBV rests. The business plan must be fully detailed and must cover the whole eight years in which the obligation must be fulfilled.
The proposed OBV must pass normal evaluation criteria for commercial, technical and financial viability. The business is also evaluated on its ability to further capital accumulation and promote economic development in Kuwait, on the contribution it can make to developing a highly skilled experienced globally-competitive work force and on whether it will transfer inwards technology appropriate to the development of new industries in Kuwait.
Calculation of Credits
Once his business plan has been approved the foreign contractor establishes and operates the OBV with his Kuwaiti associates. He is awarded offset credits annually on the basis of the expenditures relating to the OBV as shown by its audited financial statements.
All the OBV's expenditures, except for costs incurred in administering the programme, are eligible for credits. But instead of being just aggregated to calculate the credits, these expenditures are classified and weighed according to the preferences given to them under the government's economic policy objectives. First the expenditures are classified, according to the internal functions of the OBV, into micro-categories (see box). The actual expenses in each micro-category are then multiplied by the appropriate micro-multiplier. The result is then multiplied by the approved macro-multiplier. The final result is the amount of credits earned in that particular micro-category. The credits earned in each micro-category are then summed to arrive at the total number of credits generated by the OBV for that year.
To decide what the OBV's macro-multiplier should be, the OBV is classified according to its activities into one of the economic activity areas (EAA) shown in the box. Each EAA has a macro-multiplier which ranks it by the preferences accorded to that economic activity in the government's policy objectives.
Once an OBV is established, the PEO must be provided with six monthly progress reports, i.e. performance updates. The OBV is required to maintain accounting records according to International Accounting Standards and to file annual audited financial statements with the PEO. All supporting records must be kept for four years and PEO has the right to audit these records annually.
After a contractor's current obligation has been fulfilled, additional credits generated by his OBV may be carried forward and set against offset obligations arising from any future supply contracts he signs. These future credits may not be transferred to other contractors.
Third Party Fulfilment
Subject to PEO approval, a foreign contractor may designate a third party to fulfil his offset obligation, though the contractor remains responsible for the outcome. Contractors unable to find suitable OBVs may be allowed to fulfil their obligations by investing in approved investment funds which provide finance for ventures acceptable under the offset programme. Several local funds have been approved for this purpose by the Ministry of Finance.