Offset programmes to harness foreign expertise

The Kuwaiti government’s increased efforts to bolster foreign direct investment (FDI) could have a significant impact on its offset activities in 2014, as the state’s National Offset Company (NOC) moves to roll out new partnerships between offset obligors and private investors. Although progress has been moderate since the programme’s inception in the 1990s, renewed interest in Kuwait’s hospitality and health sectors has presented opportunities for the government to maximise the potential of foreign investment, while developing its own human capital and expertise.

Foreign Expertise

Used as a mechanism to encourage FDI in the local economy, offset programmes are frequently implemented in developing economies as governments endeavour to leverage the investment and expertise of foreign multinationals for the benefit of their local population. The programme’s history in Kuwait dates back to 1992, when an offset unit was established within the Ministry of Finance. In 2004 the programme was temporarily suspended, but then revived in 2006 with the creation of the NOC under the new Offset Programme Guidelines No. 9-2007.

Kuwait’s offset programme seeks to achieve equitable distribution of foreign investment benefits, stipulating that any foreign firm entering into a contract worth more than KD10m ($35.16m) to provide the government with goods and services, must establish a business that is beneficial to Kuwait, through an offset obligor. The offset obligation is pegged at 30% of the contract value, with the contractor earning credits for venture-related expenditures. “The primary objectives of Kuwait’s offset programme include the creation of high-skill job opportunities for Kuwaitis, as well as the enhancement of educational and training services for nationals. Educational and technical training offset projects are currently among the highest-priority projects,” Reem Al Khader, acting general manager of the NOC, told OBG.

According to the Embassy of Kuwait in Japan, actual expenditures amount to much less than 30%, as firms earn credits at a rate greater than 1:1, and in practice, such costs amount to 3% of the value of a contractor’s supply contracts. Contracts for non-industry-related construction works, public-private partnership schemes and foreign suppliers of goods on a free-on-board basis are also exempt from offset obligations.

Partners

According to Al Khader, the NOC has adopted a more proactive policy in recent years, realigning its regulations to create a number of sustainable partnerships between offset obligors and private investors. The NOC had listed several projects at the pre-approval stage in 2012, including provision of a carbon dioxide capture and recovery system for a petrochemicals plant, a consultancy body to address environmental damage to marine areas and construction of a manufacturing facility for pre-cast construction materials.

In September 2013 the NOC announced that the Touristic Enterprises Company (TEC) is seeking private partners to establish a joint venture that will develop and expand Entertainment City into a major recreational destination. TEC hopes to establish a joint venture with Kuwaiti and foreign firms, including foreign offset obligors, in the development of Entertainment City, with private firms slated to develop, manage and maintain the city, including water and sewage networks, air conditioning systems and secondary power stations. The NOC also announced in March 2014 that it hopes to establish a partnership between interested foreign offset obligors and the Dasman Diabetes Institute (DDI), the Harvard Medical School-affiliated Joslin Diabetes Centre and the University of Dundee. The project will specialise in training health care professionals.

“In 2014 we intend to expand our efforts towards achieving offset partnership projects. In fact, there are currently a number of sectors that could provide lucrative investment opportunities for foreign offset obligors, which firms can implement in partnership with Kuwaiti private sector investors. These opportunities include projects in the electric power, water resources, infrastructure, education, health, urban development, public services and others,” Al Khader told OBG.