Tuesday 22 May 2018

Local economies ‘not reaping full benefits of growth’

Dubai, September 16, 2012

Out of the GCC’s current and planned $590 billion oil and gas sector investments only 17 to 20 per cent of the value will be captured by the local economies, said a report by global management consulting firm Booz & Company.

In the last decade, the development of ‘local content’ – defined in the energy industry as the share of local suppliers and service providers in project procurement expenditure – has been driven by International Oil Companies (IOC) and involved   a passive government role, according to the report.

To date, this model has not managed to fully achieve globally competitive local capabilities or establish thriving industries in developing hydrocarbon-rich states.

This is primarily due to the fact that IOC-led initiatives come with business and risk considerations and are limited by the boundaries of each company’s resources.

In parallel, in recent years, there has been a significant rise in focus by National Oil Companies (NOC) on their procurement process as an effective tool for national economic sustainability. In line with this premise, Booz & Company has assessed that, in order to unlock the long-term development promise of local content, NOCs must adopt a truly holistic vision.

A two-sided market

“An effective introduction of spend-based local content regulations relies on terms for both the buyer and supplier,” explained George Sarraf, partner with Booz & Company.

“On one side, the buyer must be transparent on its long-term spend showing a sizeable and credible expenditure program as well as have competent human resources capable of managing increased supply chain complexity. On the supplier’s side, there must be a readiness on behalf of local businesses to invest in increased capacity, and an availability of skilled local human resources and financing. Both need to operate within a private sector-friendly policy framework and possess effective local content monitoring and enforcement capabilities.”

The new wave of local content regulations is also very susceptible to political pressures.

“The successful development of the local supply base requires a comprehensive overview of national priorities, industrial competitiveness, government revenue growth, and foreign direct investments,” said Dr Shihab El Borai, senior associate with Booz & Company.

“If policymakers do not adopt a methodical strategy to local content development, procurement expenditures may likely prop up inefficient industries instead of driving economic growth.”

Local content targets

The first dimension – the optimization of local content target setting – requires a quantitative analysis of planned project expenditure, and the assessment of domestic supplier capabilities to identify a reference baseline scenario for local content. Targets are then defined by cost category, aggregated and bottomed-up into long-term objectives, and then prioritized and sequenced to produce year-on-year results.

“This particular analysis should take into account the impact on overall costs, schedule, investor profitability, government revenues, job creation and foreign direct investment – to quantify the trade-offs associated with local content policies,” said David Branson, executive advisor with Booz & Company.

“Only after developing an integrated economic model can the NOC – in collaboration with government stakeholders and international partners – improve its local requirements, define reasonable ramp-up rates and curb costs.”

Strategic enablers

The second dimension – the definition of local content enablers – requires putting in place the prerequisites of an effective local content strategy in areas such as:

1.    Education and training: Multi-stakeholder partnerships between NOCs, international suppliers, local private companies and domestic institutions can help attune education to the requirements of the job market.  A multi-stakeholder environment led and hosted by the NOC can close the feedback loop between industry and academia and expedite the development of skills that would allow locals to assume more value-added, analytical and decision-making roles in the Oil & Gas value chain.

2.    Technology transfer:  Establishing innovative Research and Development centres capable of producing and commercializing intellectual capital has proven a challenge for most NOCs.  Experience suggests that breaking into the technological development process is best achieved through sequential learning based on repeatable project designs, license arrangements for Original Equipment Manufacturers, and local/international joint ventures for ‘low-end’ technology components and services.

3.    Procurement process: Each stage of the procurement cycle presents opportunities to foster the development of local content.  A first step would be determining the materials, technologies and contracts that allow the use of local resources and create opportunities for local companies to participate, join forces and compete on a global scale. In the subsequent prequalification, contract awards, contracting and monitoring & compliance stages, NOCs should also encourage first tier contractors to develop the capabilities of lower-tier suppliers and sub-contractors.

4.    Private sector incentives framework: Local small and medium enterprises (SMEs) often have limited access to finance, infrastructure, and capabilities. To help them overcome such challenges, NOCs can either work with specialized government agencies that provide direct funding through specialized financing schemes or indirect support through advance/prompt payment policies and long-term visibility on planned expenditures. – TradeArabia News Service

Tags: SMEs | technology | Private sector | Booz & Company |

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