Turkey: Where is Turkey in the "Offset"? Current Legal Environment and the Recent Legislation Change

Last Updated: 27 April 2015
Article by Serap Zuvin and Beril Hepagir

The Turkish Republic currently has two types of offset implementations: military and civil. The military offset implementations in Turkey are regulated under the Law on the Establishment of the Undersecretariat for Defence Industries1 and the Industrial Participation/Offset Directive2 as issued by the Ministry of National Defence of Turkey. The minimum commitment ratio in military offsets must be equal to 50% of the value of the procurement agreement for industry participation/offset arrangements.

The number of civil offset legislations under Turkish law is more than the ones regulating military offset implementations. Such legislations can be outlined as: (i) the Offset Communiqué3; (ii) the Omnibus Bill4, which has amended certain articles of the Public Procurement Law5 ; and finally (iii) the Regulation on the Industrial Cooperation Program6 (the "Offset Regulation")7.

Although the military offset and civil offset implementations are regulated within the scope of different legislations under Turkish law, both offset types are subject to the procurements which are held/to be held by public entities only.

WHY DID TURKEY NEED A NEW OFFSET REGULATION?

The Omnibus Bill amended selected articles of the Public Procurement and introduced a new subparagraph stating that "...the purchase of goods and services involving industrial participation/offset implementations which purport to provide innovation8 (yenilik), localization9 (yerlilesme) and technology transfer10 (teknoloji transferi) will be exempted from the scope of the Public Procurement Law."

Therefore, with the Omnibus Bill, the foregoing goods and services are excluded from the scope of the Public Procurement Law.

It was expected that the rules and procedures on the implementation of the newly-introduced subparagraph would be set out in a regulation to be issued by the Ministry of Science, Industry and Technology of Turkey (the "Ministry") at a later stage. So, the Offset Regulation is in force now.

WHAT DOES THE OFFSET REGULATION SAY?

The civil Offset Regulation is applicable on the public purchases with a minimum amount of USD 10,000,00011 and refers to the term "Industrial Cooperation Program" ("ICP") (Sanayi Isbirligi Programi) instead of the term "offset". The regulation further mandates ICP implementations basically as a public procurement policy tool for the purposes of (i) providing localization, innovation and technology transfer in the relevant Turkish industry; (ii) improving production and technology capability in Turkey; (iii) increasing the quality of products and services; and (iv) ensuring international mutual cooperation and investment opportunities through public procurements. So, the Offset Regulation aims to contribute to the development of the relevant Turkish industries, e.g. healthcare, aviation etc.

It is important to note that the term "local manufacturer or service provider" under the Offset Regulation means real person manufacturers/service providers, who are Turkish citizens; or legal entity manufacturers/service providers more than 50% of the capital of which are owned by Turkish real or legal persons.

WHAT DOES THE OFFSET REGULATION HAVE TO OFFER?

The Offset Regulation does not provide for any mandatory ratios on the local content that successful bidders will need to undertake for the subject product/service. The public entity conducting the procurement has the discretion to determine on those ratios. The Offset Regulation requires that the minimum ICP commitment rates, as determined for that particular procurement by the public entity conducting the procurement, are included in the relevant procurement documents. The public entity, similarly, must also consider the technology level of the requested product or the service under its respective sector.

MAIN PRINCIPLES UNDER THE OFFSET REGULATION

The Offset Regulation has adapted the main principles provided under the Public Procurement Law for the public procurements. Those principles are: transparency, competition, equal treatment, reliability, confidentiality and productive use of resources.

The Offset Regulation also states that the evaluations to be made for the procurement Projects12 will be based on the criteria of efficiency (verimlilik) and affordability (iktisadilik). This means that the bids to be made under the Offset Regulation will be evaluated not only based on the offered price, but the maintenance costs, quality, technical superiority, lifecycle cost and the ICP commitment etc. as offered by each bidder contractor will be considered as well.

THE MANDATORY ICP REQUIREMENTS

The bidders must undertake satisfying the minimum ICP commitment rates as stated in their respective Main Supply Agreement. The mandatory ICP categories are as follows:

  1. Category A – Local Production Contribution: Contractors must manufacture a high-tech product as a whole or in part in Turkey by using any existing facility in Turkey.
  2. Category B – Investment: Contractors must manufacture a high-tech product as a whole or in part in Turkey and build a new production facility in Turkey for such production.
  3. Category C – Technological Cooperation: This option requires the contractors to bring in technological sufficiency to the Turkish industry by ICP commitments; and
  4. Category D – Exportation: The contractors must provide exportation from Turkey by ICP commitments.

The commitments as categorised under the Categories C or D can only be fulfilled together with the undertakings included in Category A and/or Category B. Finally, to satisfy the ICP commitments stated in Category D above, a web portal is in the pipeline to be established. Such web portal will provide for the data regarding the local manufacturers in Turkey, so that the bidding private entities can reach to the candidates with which they can cooperate in order to fulfil their respective ICP commitments.

PAYMENT REQUIREMENTS UNDER THE OFFSET REGULATION

According to the Offset Regulation, the cost calculations to be made for the product or service purchases will be based on the foreign exchange buying rate applicable on the relevant calculation date as determined by the Central Bank of Turkey.

Under Article 17 of the Offset Regulation, the bidders must provide all of the following securities to participate in procurements: (i) a provisional security to be calculated over the subject bid price and which can be at a rate of at least 3% of the same; (ii) a fixed security, which can be at a rate of at least 6% of the value of the subject Main Supply Agreement; and (iii) an additional fixed security to be calculated over the price providing for the ICP commitment rate, which can be at a rate of its at least 4%. s

Regarding the ICP commitment rates, Article 4/4 of the Offset Regulation states that in the event that the value of a Main Supply Agreement is increased or decreased13 for a reason as determined under the agreement, then the value of the contractor's ICP commitment will also be increased or decreased on a pro rata basis. The contractors are not allowed under the Offset Regulation to impose any additional financial burden to the relevant public entity conducting the procurement, when fulfilling their ICP commitments.

Furthermore, the funds/allocations (ödenek) to be provided for the first year of a Project cannot be less than 10% of the total project cost and the budget as allocated for the coming years of the Project as determined at the outset cannot be reduced in time.

Finally, the purchases of products and the purchases of services must at all times be subject to separate procurements under the Offset Regulation; unless there is a reasonable and natural bond between them.

WHAT HAPPENS IF THE ICP COMMITMENTS ARE NOT FULFILLED?

If a contractor fails to fulfil its ICP commitments (i) within the relevant program year and term and/or (ii) in accordance with the amount and the conditions as stated in its ICP Agreement, the general directorate of the public entity conducting the procurement will provide a cure period of at least 60 days to the contractor.

If the contractor fails to cure its default within the cure period, then the contractor will be subject to penalties provided under its ICP Agreement. Despite the enforcement of those penalty clauses, the ICP commitments of the respective contractor will remain as they are. If the contractor does not pay the penalty within 15 days following the date of the written claim of the relevant public entity, then the amount will either be (i) deducted from the payments to be made to such contractor; and/or (ii) covered from the security amount as deposited by the contractor under the ICP Agreement. It must also be noted that in case of termination of the ICP Agreement due to a default of the contractor, then the security amount deposited by the same will be recorded as revenue in favour of the state.

DO OFFSET IMPLEMENTATIONS DISTORT THE MARKET?

The Offset Regulation will affect the transactions only (i) which will take place between Turkish public entities and any private entity; be it a local or a foreign one; and (ii) which do not fall within the scope of the military public procurements.

According to a news article as appeared in the Turkish media, the Offset Regulation is considered as a major step forward to support the local industry of Turkey. For example, within the scope of the National High-Speed Train Project, the Minister of the Transportation, Maritime Affairs and Communications of Turkey announced that it will be mandatory for bidders of such project to have a minimum locality requirement of 53% for the purchase of 80 Sets of High-Speed Trains.

As a matter of fact, offset arrangements are made to contribute to national economy and to support domestic goods, which are the affirmative and efficient aspects of offset arrangements; yet foreign companies claim that such arrangements are against the equal treatment principle. Furthermore, offset arrangements are also claimed to be bringing competition mostly among the local industry players and excluding foreign companies which are indeed as much as or more of high quality than the local market players, as the case may be. Therefore, offset arrangements of countries are sometimes interpreted to conflict with the freedom of contract and fair competition by various foreign companies which are willing to attend public procurements in other countries. This is also the reason why the offset arrangements have been claimed to be "market distorting" and inefficient by the same.

Although it has been more than 2 months since the Offset Regulation was entered into force, there have not been so many news articles etc. published to such effect in the Turkish media. So, at this point, we all look forward to seeing the actual outcome of the implementation of the Offset Regulation.

Footnotes

1 Law on Establishment of Undersecretariat for Defence Industries dated November 7, 1985 and numbered 3238 and published in the Official Gazette dated November 13, 1985 and numbered 18927.

2 Industrial Participation/Offset Directive (Sanayi Katılımı/Offset Uygulamaları Yönergesi) dated February 14, 2007 and issued by the Ministry of National Defense.

3 Communiqué on Offset Implementations (Offset Uygulamalarına Ilişkin Tebliğ) as issued by Undersecretariat of Foreign Trade and published in the Official Gazette dated July 27, 2007 and numbered 26595.

4 Law on Amending the Decree Law on the Organization and Duties of the Ministry of Family and Social Policies and Certain Others Laws and Decree Laws(Aile ve Sosyal Politikalar Bakanlığının Teşkilat ve Görevleri Hakkında Kanun Hükmünde Kararname ile Bazı Kanun ve Kanun Hükmünde Kararnamelerde Değişiklik Yapılmasına Dair Kanun)dated February 6, 2014 and numbered 6518, published in the Official Gazette dated February 19, 2014 and numbered 28918.

5 Public Procurement Law (Kamu İhaleleri Kanunu) dated January 4, 2002 and numbered 4734; published in the Official Gazette dated January 22, 2002 and numbered 24648.

6 "Industrial Cooperation Program" is the Turkish correspondence of the term "offset".

7 Regulation on the Procedures and Principles of the Industrial Cooperation Program regarding the Purchase of Products and Services to be Made in Accordance with Article 3(u) of the Public Procurement Law numbered 4734; published in the Official Gazette dated February 15, 2015 and numbered 29268.

8 Under the Regulation, the term "innovation" means the processes or the results of the processes consisting of a new product or good, service, application, method or a business model idea; which can be successfully submitted to the existing markets that fulfill the social and economic needs, or which can create new markets.

9 Under the Regulation, the term "localization" means the provision of the ratio of local content as undertaken within the scope of a Project.

10 Under the Regulation, the term "technology transfer" means the transfer of technology, information, design, method, manufacturing methods and systems with the purposes of manufacturing or developing new products, services, processes or applications.

11 This amount was USD 5,000,000 in the draft version of the Offset Regulation.

12 Under the Offset Regulation, the term "Project" means all of the Main Supply and Industry Cooperation Program activities as conducted by the relevant authority and head of department holding the procurement, following the approval of the written request of such relevant authority, which is regarding the commencement of the subject project, by the Commission.

13 Within the upper limit of 20% for both cases

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Serap Zuvin
Beril Hepagir
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