Current Affairs 14/99: Guidelines for Establishing and Implementing Offset Arrangements in Connection with Defence Procurement from Foreign Suppliers

No.14/99 E

Guidelines for Establishing and Implementing Offset Arrangements in Connection with Defence Procurement from Foreign Suppliers

June 1999

Offset is defined as transactions which counterbalance the
Defence Force's procurement from sources abroad.

1. Overriding objective

Offset agreements are intended to contribute towards maintaining and strengthening the expertise, capacity and marketing potential of our defence industries. Support will preferably be given to those areas, which are of direct importance to the Norwegian Defence Forces. Offset agreements must also play a part in bringing new technology, skills and marketing opportunities to other sectors of Norwegian trade and industry.

Priority must be given to the development of Norwegian industry in areas where industry has the expertise or particular opportunities to be successful. Offset agreements are intended to provide for the best possible long-term support to the potentials of Norwegian industry.

2.Strategy

Offset will be conducted in accordance with the following priorities:

2.1. Procurement of Norwegian defence products, particularly of weapons systems, sub-systems, individual weapons, and their components

2.2. Procurement of high-technology dual use based products and services, including Research and Development co-operation.

Norwegian defence products mean defence related products for which manufacture takes place within a company in Norway.

Offset, which is intended to be conducted through the purchase of Norwegian defence products, calls for extensive contacts between the Defence Force authorities, the defence industries and the supplier nation. It is incumbent on the supplier to forge contacts with Norwegian industry as well as with his own defence authorities so as to identify areas where Norwegian expertise coincides with the needs of defence authorities for military materiel. Procurement of Norwegian defence products will involve the defence industry and the defence authorities of both countries.

Responsibility for seeing offset arrangements through will lie with the foreign supplier.

Offset transactions must fall primarily within those areas in which Norwegian participation in international defence materiel and technological co-operation is being concentrated. Norway gives priority to defence technology in these areas:

• Hardware and software for communications and command control, and information systems,
• Radio, satellite and line communications,
• Electro-optic (optronic) systems,
• Fire control systems,
• Missile technology,
• Ammunition and military explosives,
• Underwater technology and sonar systems,
• High-speed naval craft, and
• Space technology.

Further, defence related transactions within the following technology areas;

• Material technology,
• Maritime technology,
• Information- and Communication technology, and
• Medical technology

may be accepted as offset.

Transactions defined as direct offset, para 4.1 below, may be considered as offset independent of the above mentioned technology areas.

3. Organisation

A Strategic Advisory Group for Industrial Co-operation and Offset has been established.

The Group consists of representatives from; The Ministry of Defence (Chairman), Ministry of Industry and Trade (MOI), Norwegian Defence Research Establishment (FFI), HQ Defence Command Norway (FO), the State Industrial and Regional Development Fund (SND), the Confederation of Norwegian Business and Industry/the Norwegian Defence Industry Group (NHO/NFL) and 3 industrial representatives.. The Ministry of Defence provides the secretariat. The group may also call in outside expertise in certain cases.

The Group can establish offset groups for individual projects when needed.

The Group reports to the Ministry of Defence.

4. Offset regulations

The Ministry of Defence has the overall responsibility for establishing and implementing offset agreements.

4.1 Direct and indirect offset

Direct offset means supplies of Norwegian manufactured components that feature as part of the materiel procured by the Defence Forces.

Indirect offset means supplies of Norwegian manufactured products that do not form part of materiel acquired by the Defence Forces, but where their value is set off in the context of offset transactions.

Indirect offset of defence materiel is preferred; however, co-operation within the areas where Norwegian defence technology is given priority shall take precedence.

4.2. Offset requirement criteria

Acquisitions from foreign suppliers larger than NOK 50 million (inclusive of options) shall, as a general rule, require offset. The Ministry of Defence may grant exemption from the requirement to offset in special cases. The offset obligation must, as a minimum, correspond to the procurement price of the actual product. In calculating offset transactions, the Norwegian manufactured content shall be taken as a basis.

The Ministry of Defence may also require offset for acquisitions of a contracted value less than NOK 50 million. If an offset agreement has already been established with the supplier in question, offset shall be required for all supplementary contracts irrespective of their value.

4.3. Transactions qualifying as offset

A transaction may qualify as offset if the overseas supplier conducts, or is involved in, the setting up of offset transactions that are advantageous to Norwegian industry. Such transactions must come within those areas of defence technology to which Norway allocates priority or be in other areas of high technology dual use based products. The level of technology shall be equivalent to, or higher than, the level of technology employed in the product supplied to the Defence Forces. The following transactions may be sanctioned:

• procurement of weapon systems,
• procurement of sub-systems,
• procurement of individual weapons,
• procurement of components for weapons systems, sub systems, and individual weapons,
• promotion of industrial co-operation through the acquisition of Norwegian products,
• establishment of research and development co-operation in Norway,
• transfer of technology and know-how to Norway,
• investments which result in new commercial activity in Norway, and
• Openings of new export markets or the improvements of existing export opportunities.

The further development of established business relationships is not normally assessed for offset value.

Low technology finished goods outside the priority areas; raw materials, semi-manufactured goods and services are not normally regarded as offset. Exceptions may be made for high technology, partly finished products as well as for engineering projects and research and development services related thereto.

4.4. Determining the value of offset transactions

Offset transactions can be approved to the value of the Norwegian content value of the product. If the Norwegian content is over 80%, then 100% will be allowed as offset. Subject to evaluation some transactions' offset values may be adjusted by use of factors. An adjustment will be based on an evaluation taking into account the transaction's benefit to Norwegian industry.

Offset transactions will be evaluated on the following criteria:

• For research and development projects placed in Norway, provided that any production takes place in Norway, a factor of between 1 and 5 is applied. A factor of 1 is applied to production,
• For Research and Development co-operation where technology is transferred at no charge to a Norwegian company, a factor between 1 and 5 is applied,
• For the acquisition of products within the priority areas and other fields of high technology, a factor of 1 is applied,
• The acquisition of high technology products which are defined as partly finished items may, under special circumstances, be approved and a factor between 0.2 and 1 applied,
• For investments in Norway which result in new commercial activity, a factor between 1 and 5 is applied,
• A factor between 0. 1 to 2 of the sold product's value is applied to marketing assistance.

Marketing assistance must be approved in advance following application from the Norwegian partner and will only be granted as offset if it leads to sales of the product in question. Settlement in respect of sales must be made within the period of the contract, and within two years at the latest.

Where Norwegian industry is participating in the joint production of a weapon system, the value of the contracted share of the production may be treated as offset.

The criteria for determining factors relating to offset transactions are listed in APPENDIX.

4.5. Costs related to offset activities

Any costs involved in the implementation of offset shall be borne in full by the supplier. In those situations where the supplier uses services bought from a third party, any costs must be covered by the supplier and/or the third party. The costs will not be credited as offset.

4.6. Foreign exchange

The value of offset will be expressed in NOK. In circumstances where claims are presented in other currencies, they will be converted to NOK on the basis of the official exchange rates of the Bank of Norway. The date of conversion will be the same date as the date when offset is sanctioned. Where necessary, any clauses relating to foreign exchange will be negotiated.

4.7. Timescale for completion of offset

Offset obligations must be fulfilled by the delivery of the procurement contract, at the latest. Exemptions will be made for long-term contractual co-operation.

4.8. Penalty use

If the supplier defaults on his obligations in accordance with the offset agreement, the Norwegian authorities will withhold payment corresponding to 10% of the contract figure. This sum withheld does not release the supplier from his offset obligations and the amount will not be credited as offset. If the offset obligations are not met within two years after the expiry of the agreement, the withheld sum will be forfeited.

4.9. Conditional offset

Conditional offset means implementing offset activities before any procurement contract is signed. Such an agreement must be entered into between the potential supplier and the Ministry of Defence. Conditional offset is subject to the same requirements as other forms of offset.

A conditional offset agreement will not influence the Ministry of Defence's decisions regarding materiel procurement. Nor will any conditional offset agreement confer any right to present financial claims on the Norwegian authorities or Norwegian industrial partners.

4. 10. Transfer of conditional offset

In cases where a potential supplier fails to win the contract, the value which has been approved and entered in the company's conditional offset account may be transferred to other suppliers or potential suppliers of defence materiel to Norway. It is a condition that the supplier shall be situated in the same country as the contract partner, and that the transfer is sanctioned by the Ministry of Defence.

Conditional offset amounts approved are valid for 2 years from the date of contract award.

4.11. Offset reporting

The supplier shall send in his claim for offset or conditional offset credit on an annual basis. The report must cover the period 1 January to 31 December and must be lodged before 31 March the following year. If the report is not received, the purchases/ transactions conducted during the period shall not be credited as offset. Replies to the report will be sent out before 30 September.

The supplier is required to submit an annual status report on the progress of offset activities. The status report must be submitted by 3l October and comes in addition to the annual claim for offset credits.

All offset reporting shall be sent to

HQ Defence Command Norway
Oslo mil./ Huseby
0016 Oslo 1
Norway.

APPENDIX

Determining factors relating to offset transactions

When setting the factors for offset transactions, the following criteria will be considered.

A) The following aspects will be assessed in all types of transaction:

1. Does the product fall within a priority area?2. Is the product technology more advanced than in the product supplied to the Defence Forces?3. Has the product been developed in Norway?4. Has the product been developed within the last two years?5. Has it been confirmed that no competitive industry exists in Norway? 6. Is the production technology employed very advanced?7. Has the production technology been developed in Norway?8. Is this a new market?9. Is this a protected market?10. Does the transaction have major significance for Norway or for the future of the Norwegian Company?

B) In addition, the following will be considered in relation to investments:

1. Will the investment be used for production development or as production funding, including testing equipment?2. Will the investment mean the expected turnover (sales) will be more than 10 times the sum invested?3. Will the anticipated turnover be found through exports?

C) In addition the following will be considered in respect of research and development and the transfer of technology:

1. Does the foreign company contribute the largest share of technological expertise?2. Is the technology new in Norway?3. Will the new technology mean that the expected turnover (sales) will be more than 10 times the value of the technology developed/transferred?4. Will the anticipated turnover be found through exports?

D) In addition, the following will be considered in respect of marketing assistance:

1. Is the product purchased by the defence authorities?2. Does the foreign company exert any influence on the purchaser's choice of supplier?

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This page was last updated December 10, 1999 by the editors