PwC’s Middle East Local Value Creation series aims to provide a clear framework for governments in the Gulf Cooperation Council (GCC) countries when designing, implementing and managing their own national localization agendas. Through a series of papers that break down and explain each component of PwC’s Localisation Framework, we will lay the groundwork for the design of localisation programmes from top to bottom, covering the complete value chain from conceptual design to implementation across the public sector.
In this edition of the Local Value Creation series, we will focus on the first step of designing a successful localisation programme: defining the Localisation Vision. We will explain how governments can identify the key strategic objectives of their localisation programmes and build a localisation formula that allows them to stimulate value creation and capabilities development in key areas of strategic importance.
To better understand how GCC countries can adopt more value-based, dynamic, and effective types of localisation policies we need to first understand where these types of policies came from, how they have evolved, and why they have been an important policy tool for GCC countries.
Background
The GCC countries are transforming as never before. Realising the need to build local capabilities, stimulate sustainable economic growth and diversify economies away from oil and gas sectors, several GCC countries have launched a series of transformative national development strategies. Perhaps the most well-known example is Saudi Arabia’s Vision 2030, which seeks to help reduce the country’s reliance on oil and gas revenues by developing sectors such as manufacturing, tourism, defence, and logistics. Oman also recently released its Vision 2040 document, placing a strong emphasis on education and human development. Common to all of these strategies is an emphasis on development of local capabilities, strengthening of the private sector, high-quality employment opportunities, and development of new and promising industries. Localisation initiatives will play a key role in realising these objectives, providing opportunities to leverage local assets and develop local capabilities.
Initially focused on employment of locals, the concept of localisation has been around for decades in GCC countries. In the latter part of the 20th century, Gulf countries were largely reliant on foreign expertise, technology, and skilled labor, depending on western countries for technical know-how in areas ranging from infrastructure development to oil and gas production. Faced with concerns over national economic security and autonomy, these countries eventually realized the need to reduce reliance on expat labor in critical state institutions like national oil companies and government ministries. To address this issue, the GCC governments started to impose restrictions on the number and type of positions available to foreigners while at the same time promoting the employment of nationals in critical technical, managerial, and leadership positions.
As GCC countries began to develop at a quicker pace following increased government revenues resulting from the high oil prices of the 1970s, they sought to further expand localisation efforts by implementing Local content (LC) policies. LC policies aimed to increase the amount of goods and services procured from exclusively locally owned companies, primarily in the oil and gas and government sectors, by providing a competitive advantage to locally-owned companies in the procurement process. However, these policies were limited in scope and lacked a comprehensive approach to localisation, which resulted in weak governance and difficulties in measuring their effectiveness. Today, GCC governments are looking to transform and expand their localisation agendas by adopting more dynamic and comprehensive approaches to local content policy.
In the United Arab Emirates, Saudi Arabia, Oman, and Qatar, governments have already begun to transform existing LC agendas, moving away from the model of preferential treatment for locally owned companies towards the more dynamic concept of overall local value creation. For example, Petroleum Development Oman (PDO), a government-owned oil and gas exploration and development company, launched its In-Country Value (ICV) programme, targeting Omanization of oil and gas sector jobs, an increase in procurement of local goods and services, and the development of local suppliers that provide inputs into the energy sector. Abu Dhabi National Oil Company (ADNOC), Saudi Arabian Oil Company (Aramco), and Qatar Petroleum (QP) have also implemented similar programmes, seeking to drive localisation in their energy and industrial sectors.
Given the large share of oil and gas activity in GCC economies, these programmes are almost exclusively focused on the energy sector; however, there is great potential to further expand the localisation agenda into the public sector. Government organisations, including ministries, public-private partnerships, and state-owned enterprises, are in a great position to further drive the localisation agenda in GCC economies. To do so successfully, they will need to learn from the experience of the oil and gas sector and adopt the same concepts on a larger scale, across a diverse body of organisations, and each with different mandates, missions, and objectives. But first, it would help to understand the imperative for the public sector to transform and expand existing localisation policies in the region.
The localisation imperative for the public sector
Well-allocated government spending is key to the functioning of a healthy society and productive economy. Governments provide critical public goods and services such as fire protection, water treatment, policing, education, and the infrastructure upon which modern society operates. Furthermore, well-managed government expenditures support sustainable economic growth, where government spending and procurement activity can provide new business opportunities to suppliers in the private sector, increasing overall employment and business activity.
In GCC economies, governments are the main drivers of spending and investment. Public organisations in the region spend billions every year on new capital projects across healthcare, education, security and defence, utilities, and transportation. In turn, governments also pay hefty sums to maintain and operate their assets, ensuring that key public goods and services are delivered to the citizens and residents whom they serve. In most GCC countries the public sector is far larger in economic terms than the private sector. While some countries have been successful in creating a greater role for the private sector (as in the case of the UAE), overall public sector spending still averages thirty eight percent in the region, not to mention activity of state-owned enterprises and other semi-governmental organisations that may not necessarily be recorded as government spending.
High government spending and investment, sustained almost exclusively by oil and gas revenues, has helped transform these former desert oases into modern, highly developed metropolises. Yet, there remains a great opportunity to leverage this spending to create more value for the local economy and develop domestic capabilities to sustain it. Much of regional government spending is leaked out of the local economy to foreign businesses and individuals, with a high reliance on foreign skilled labor and imports of manufactured goods and high-skilled services. GCC countries are also largely dependent on imports of things like food, automobiles, electronics, advanced machinery, professional services, and pharmaceutical products, possessing limited capability to produce these goods locally. Localisation initiatives provide an avenue through which governments can promote local value creation and development of the capabilities necessary to produce such goods and services domestically.
*2018 data for UAE and Bahrain are not available; numbers presented are from 2017.
While each country will define its own vision and strategic objectives based on its unique characteristics and development goals, the concept of localisation aims to achieve several high-level objectives, including:
PwC’s localisation framework
We have designed a localisation framework to help government officials and decision makers drive localisation across the public sector. PwC’s localisation framework, which is made up of the following components, has been designed to help government decision makers drive and execute successful localisation strategies:
Localisation Vision
A clear, unified localisation vision and strategy, identifying the strategic focus areas and targets, along with a formula tailored to each country’s unique social and economic objectives.
- Localisation mission and objectives
- Localisation formula and measurement
- Localisation driver
Procurement Integration
An analysis of localisation potential across an organisation’s categories of goods and services procurement, including design of a mechanism to incentivise procurement of local goods and services, and development of the tools and templates required.
- Localisation policy development
- Localisation opportunities
- Tools and templates
Capacity Development
Initiatives to build the skills of the local workforce and develop the capabilities of local suppliers.
- Local workforce capabilities development
- Development local suppliers
Enabling Environment
A host of policies and initiatives that seek to improve a country’s business environment and enable localisation, including fiscal incentives, ease of doing business, and infrastructure.
- Ease of doing business
- Provision of land and world-class infrastructure
- Fiscal incentives and financial support
Localisation Governance
Development of the localisation governance model, enabling technologies, and monitoring and evaluation approach.
- Program operating model
- Technology
- Robust audit and certification mechanism
Formulating the localisation vision
The following sections of this edition of PwC’s Local Value Creation series will focus on the first component of the Localisation Framework; namely, the Localisation Vision. The Localisation Vision provides the basis upon which the rest of the localisation framework components are developed. It entails several elements, including definition of the localisation strategic objectives, creation of the formula and calculation mechanism and identification of the localisation champion.
1. Definition of localisation strategic objectives
Identifying the high-level objectives of a country’s localisation programme will differ from one country to another depending on each one’s unique challenges and development objectives. For example, faced with the challenge of high demand for youth employment, a large local population, and a limited presence of women in the workforce, Saudi Arabia decided to focus one of its localisation strategic objectives on increasing overall employment of women in the workforce. In Kuwait, however, where there is a much smaller local population and a high per-capita GDP, the government may decide instead to focus on employment of nationals in certain key positions, primarily in public sector organisations. To determine the correct strategic objectives, the government should rely on its existing national development strategies and vision documents.
These strategy documents will contain a tailored set of goals, targets, and key performance indicators to help guide the process of selecting and customizing the localisation strategic objectives. While these will often differ from country to country, the following list of objectives tend to be present in many GCC countries’ development strategies:
- Enhance economic resilience and self-sufficiency
- Diversify the economy
- Provide employment opportunities
- Build local workforce capabilities
- Drive entrepreneurship and private sector growth through SMEs
- Other objectives
Enhance economic resilience and self-sufficiency
Supply chains in the GCC tend to be heavily dependent on goods imported from overseas. Dependency on imports leaves these countries more exposed to several risks, including commodity price fluctuations, global economic crises, political instability, natural disasters, and other factors that can obstruct imports of essential commodities and adversely affect import-dependent industries. GCC countries can increase economic resilience and sustainability by localizing activities critical to the continuity of domestic production, such as manufacture of spare parts, production of essential raw materials, critical maintenance and repair services, and provision of agricultural products.
Conclusion
With high levels of government spending in the region likely to continue for years to come, GCC countries can benefit from implementing new or transforming existing localisation policies to achieve their national goals. As previous initiatives implemented by GCC countries have no longer proven adequate to drive the localisation agenda, the need for comprehensive and carefully designed localisation policies for the public sector has become more urgent.
While some GCC countries are yet to start developing their own localisation programmes, countries that have already established local content initiatives are well positioned to take localisation beyond the energy sector and expand it to the wider public sector.
In this first edition of our Local Value Creation Series, we have focused on the drivers of local content policies for GCC countries and explained how to establish a successful localisation programme starting from objectives to designing the right localisation formula. In coming editions, we will continue exploring the remaining elements of PwC’s Localisation framework.
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