Oana Voda, Dentons: The trials and tribulations of the new offset legislation in Romania

Just as 2023 came to an end, the Romanian Government passed a new offset law. It took the form of the Government Emergency Ordinance no. 124/2023 for the implementation of technological and industrial cooperation measures in the fields of defence and security, the establishment, organization and functioning of the Romanian Agency for Technological and Industrial Cooperation for Security and Defense, and for the amendment of the Government Emergency Ordinance no. 57/2015.

By Oana Voda,  Head of Public Procurement, Dentons

The new law came into force on 29 December 2023 and replaced the Government Emergency Ordinance no. 189/2002 on Offset concerning Defense and National Security Procurement Contracts. Also, the former Office for Compensatory measures related to defence procurement has been replaced by the Romanian Agency for Technological and Industrial Cooperation for Security and Defence (ARCTIS).

The major change brought by the new offset law regards the applicability of offset rules on a case-by-case basis, compared to the previous “catch-all” approach. Offset requirements are now recognized as special measures, limited to exceptional and clearly defined cases, and must not go beyond what is necessary to meet national defence and security related interests. Economic considerations are no longer accepted as grounds for justifying offset measures. Consequently, the new law imposes an obligation upon contracting authorities running the tender procedures for the procurement of defence and security equipment, to cooperate with the Ministry of Economy and ARCTIS to identify the specific situations in which offset measures are justified and necessary for the protection of essential security interests.

Read more about

Dentons and PPC Romania team up on pioneering a utilities procurement compliance guide

read more

Key changes brought by the new offset law include: a shift in terminology, as the law no longer refers to compensatory measures, but to technological and industrial cooperation operations; new roles attributed to the Supreme Council of National Defense in the process of establishing the need to apply offset requirements and the value thereof; a higher value of the procurement contract above which offset requirements could be applied; the value of offset obligations which now widely ranges between 20% and 100% of the procurement contract value; the applicability of offset requirements to Government-to-Government (G2G)contracts; the forms that offsets could take; the mandatory provisions under the offset agreement and the conclusion thereof, to mention just a few.

A shift in the offset rules applicable in Romania was long overdue. The 2002 offset rules came into force prior to Romania’s accession to the European Union and failed to ensure compliance with the principles of the Treaty for the Functioning of the European Union. Under the 2002 rules, Romania required compensation from non-national suppliers when procuring defence equipment abroad. The main objective behind the 2002 offset regulation was to promote Romania’s economic interests and support the local defence industry. Offset requirements applied automatically, in all cases in which the value of the defence procurement contract exceeded the Euro 2 mln. ceiling, with very few exceptions. Such offset requirements were consistently considered restrictive measures at EU level, and deemed to infringe the Treaty principles, as discriminatory measures against economic operators, goods, and services from other Member States, and hindering the free movement of goods and services.

The new offset rules are meant to ensure alignment with the European principles and contribute to the modernization of the Romanian defence industry. However, the new offset law contains rather general provisions and lacks clarity on most of the technical aspects pertaining to the applicability of offset measures. Accordingly, the mechanism for establishing offset requirements, the methods for calculating the offset value, and the analysis required for the acknowledgement of the essential security interest justifying offset are left unaddressed. Implementing norms are due by the end of March 2024 and are much needed to ensure the soft transition to the new offset regime and clarify the new rules for all the actors involved in the complex defence sector, as they inform both commercial strategies of defence solutions providers, as well as the procurement strategies of the public beneficiaries.

Finally, it is expected that the new offset legislation and the changes brought thereby shall be reflected in correlated pieces of legislation including, without limitation, the defence procurement ordinance, and the legislation on the national defence industry. This alignment is much needed to safeguard the correct interpretation and application of offset rules and avoid confusion among both procurement authorities and economic operators on this complex topic.