Industrial Cooperation in the Defence Sector – Opportunities for Norwegian Industry

The Norwegian Armed Forces' procurements from foreign suppliers represent significant opportunities for Norwegian suppliers: For procurements exceeding NOK 100 million, the foreign supplier is generally required to enter into an industrial cooperation agreement. This entails an offset obligation, whereby the foreign supplier is obligated to reinvest in Norwegian industry.

The legal framework for industrial cooperation is the Regulations on Industrial Cooperation Related to Defence Acquisitions from Abroad (BIF), issued by the Ministry of Defence as Annex 6 to the Guidelines for Acquisitions in the Defence Sector (RAF) (Norwegian), previously published in this article.  For Norwegian companies seeking to position themselves to capitalise on the opportunities arising from defence procurements from foreign actors, thorough knowledge of this regulatory framework is essential.

What are industrial cooperation agreements?

Industrial cooperation agreements serve multiple purposes. First, they provide Norwegian defence industry with access to, and market entry into, the supply chains of international suppliers. Second, the offset requirement may be regarded as a strategic defence-industrial instrument that ensures Norwegian national security interests are safeguarded through the sharing of technology from, and establishment of long-term cooperation with, foreign suppliers.

Industrial cooperation agreements impose on foreign suppliers to the Norwegian defence sector an obligation to undertake industrial cooperation with Norwegian industry. The purpose is defined in BIF Section 1.2:

"Industrial Co-operation related to Defence Acquisition from abroad shall contribute to maintain, further develop and innovate a competitive national defence industrial capability and competence within technology and product areas that are integral for the further development of the Armed Forces whenever this can contribute to meet the requirements of the Armed Forces."

With few exceptions, an industrial cooperation agreement is required for all procurements exceeding NOK 100 million from foreign suppliers of materiel, goods and services, where the procurement is based on Article 123 of the EEA Agreement. Article 123 of the EEA Agreement permits EEA states to derogate from the general EEA rules, including the public procurement regulations, where this is necessary to safeguard the state's essential security interests. The provisions on industrial cooperation agreements also apply where the supplier is registered in Norway but substantial parts of the delivery are produced abroad.

The offset scheme – pound for pound, with certain modifications

The offset scheme is the central mechanism in the industrial cooperation agreement and imposes on the foreign supplier a direct obligation to invest in Norwegian industry. The supplier commits to offsets with a total value of up to 100% of the calculation basis, cf. BIF Section 3.1.1. The calculation basis constitutes the value of the procurement, excluding VAT, customs duties and other charges imposed by Norwegian authorities, as well as documented administrative fees for procurements through international cooperation agreements, other nations' supply channels or similar, cf. BIF Section 2.1.4. In other words, the starting point is investments pound for pound back into Norwegian companies, corresponding to the value of the main procurement carried out directly by the Armed Forces. A minimum of 50% of the obligation shall be fulfilled within Category I (strategic projects), and a maximum of 25% may be fulfilled in Category III (security-related projects). In addition to the aforementioned composition requirement, the obligation may be fulfilled within Category II (defence-related projects).

Only the portion of value creation that takes place in Norway may be credited towards the supplier's fulfilment of the offset obligation, cf. BIF Section 3.4.2. For production-based projects, a specific 80/20 threshold applies: If the share of Norwegian value creation exceeds 80%, 100% is credited; if the share amounts to less than 20%, nothing is credited. This threshold has direct practical significance for how Norwegian companies should structure their projects.

The pound-for-pound principle is nevertheless subject to significant modifications. The value of an industrial cooperation project will be adjusted through the application of multiplication factors, cf. BIF Section 3.4.3. The factors vary by project type.

Small and medium-sized enterprises within the meaning of the EEA Agreement, based on Commission Recommendation 2003/361/EC, are afforded a particular competitive advantage through additional factors of 1.5 and 1.3, respectively, cf. BIF Section 3.4.3.

Foreign suppliers thus have an incentive to seek cooperation that yields the highest possible factor. In practice, this tends to be a central topic of negotiation between the foreign supplier and the Norwegian Defence Materiel Agency ("NDMA").

The process for a Norwegian company wishing to participate in industrial cooperation

For a Norwegian company wishing to participate in industrial cooperation, the process can be divided into four key steps.

Step 1 – Contact with foreign supplier

The first step is to establish contact with the foreign supplier regarding potential cooperation projects. There is no prescribed formula for achieving this, but it is important for Norwegian suppliers to ensure visibility, for example by participating in events where foreign suppliers are present. As part of its tender process and negotiations with the Norwegian Armed Forces, the foreign supplier will actively seek to identify suitable Norwegian partners and cooperation projects. An overview of the defence sector's planned procurements can be found in Future Acquisitions for the Defence Sector (FAF). It is also entirely possible to approach foreign suppliers directly where they have entered into a contract with the Norwegian Armed Forces and are subject to an offset obligation. Project overviews of ongoing agreements are published, and contact information for the foreign suppliers can be found on NDMA's website.

Step 2 – Contract conclusion

Once contact has been established, a contract is entered into between the Norwegian company and the foreign supplier. Pursuant to BIF Section 3.1.1, efforts should be made to ensure that a certain share of the obligation is contractually committed with Norwegian industry before the procurement authority enters into a binding contract with the supplier. An Annex C describing the relevant project types is prepared as part of the industrial cooperation agreement. The annex may be supplemented at a later stage.

Step 3 – Pre-approval from the Norwegian Defence Materiel Agency

All industrial cooperation projects shall be pre-approved by NDMA, cf. BIF Section 3.3.1. Approval shall generally be based on the existence of an industrial cooperation agreement, cf. BIF Section 3.3.5. Upon approval, the category, project type, estimated value, and factor are determined. NDMA may request Norwegian partners to prepare a report describing the utility value of the individual project.

Step 4 – Ongoing reporting

The foreign supplier shall report to NDMA by 31 March each year, requesting credit for activities carried out in the preceding calendar year. The reporting forms the basis for the granting of offset credits, which in principle occurs in arrears. The Norwegian partner is obligated to provide NDMA with access to all necessary documentation and other information required to assess the industrial cooperation projects.

Practical advice for Norwegian suppliers

For Norwegian companies wishing to seize the opportunities offered by industrial cooperation, the following key points are essential:

• Familiarise yourselves thoroughly with the regulations on industrial cooperation, available at www.fma.no
• Stay informed about upcoming major procurement projects in the defence sector.
• Ensure that the services you offer are relevant to the defence sector.
• Be specific and realistic about what your company can deliver.
• Develop an understanding of the expertise and capacity of relevant foreign suppliers.
• Actively market your company to foreign suppliers, for example by participating in relevant trade fairs and other events.

This article is provided as general information and do not constitute legal advice.