Foreign contractors new to the Gulf region and bidding for contracts awarded by the Kuwait Government for the first time are often unaware of the Kuwait Offset Programme (KOP), and fail to factor the KOP's commercial impact into their project budgets.
Yet the program originates from 1992, when Kuwait followed Saudi Arabia and the United Arab Emirates in introducing the measure, first on defence contracts and subsequently on civil ones.
The driving principle behind the KOP is that successful bidders on government contracts should give something back in return for their commercial success to the state or the people of Kuwait.
The offset obligation applies to civil contracts with a value exceeding KWD10 million ($35.3 million) and is given a monetary value, normally 30% of the contract value in gross terms (and not the net profit) to be derived by the foreign contractor, against which credits are required to be earned. In practice, the total value of credits to be achieved actually works out to have a monetary value much less than the stated percentage of contract value.
Those credits are earned from the expenditure incurred in the setting up of a business or enterprise for the furtherance of business ventures between foreign and Kuwaiti businesses. This arrangement is set down in a memorandum of understanding with the Kuwait Ministry of Finance (MOF), which carries approval of the foreign contractor's concept or proposal for the earning of the required credits.
All expenditure (other than administrative or managerial) incurred by the foreign contractor in the performance of the awarded contract generally qualifies for credits. The responsible agency, MOF's Offset Program Executive, must receive regular six-monthly audited progress reports as to the accumulation of credits.
Finally it is worth noting that, once sufficient credits have been earned on one contract, any surplus credits may generally be carried forward to other affected future contracts undertaken by the foreign contractor.
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