Saudi Arabia is likely to spend $1.1 trillion in developing infrastructure from 2019-2038, while the UAE is expected to invest $350 billion over a similar time frame, according to a recent study.
These large-scale development schemes can allow local companies in the region to substitute imports and grow non-oil exports, according to management consultancy Strategy&, part of the PwC network.
As the GCC spends significant sums to develop infrastructure, measures to promote localization of infrastructure become increasingly important.
“The trend toward local content requirements reflects an increasing recognition that the trillions of dollars that governments spend on mining, oil and gas, power, water, and transportation infrastructure could potentially fuel economic growth, create jobs, and support broader national strategies,” said Raed Kombargi, Partner, Strategy& Middle East.
According to the report, GCC governments need to seriously consider how they balance the need to localize manufacturing while pursuing sound economic policies.
As governments in developing economies seek to expand the share of local goods and services in large infrastructure projects, the Strategy& report outlines three key biases that can interfere with robust, fact-based analysis and policy design:
- False aggregation of demand. Policymakers tend to overestimate the localization potential from a given product category, failing to factor in the huge disparities in sizes, designs, and costs of goods in that category.
- Affixation on familiar objects. Policymakers tend to focus disproportionately on familiar product categories, such as consumer goods, wind farms, or solar panels, rather than lesser-known goods and industries that hold greater potential to create value.
- Absolutist target-setting. Policymakers aim for higher percentages of local content without analyzing the underlying economic value created. Some inputs will always be cheaper to import.
“Overcoming these biases will require analytical and behavioral safeguards that complement and reinforce each other,” said Shihab Elborai, Partner, Strategy& Middle East.
“Regarding analytical measures, policymakers need to develop a detailed view of procurement spending, establish a baseline of local supply chain capabilities, and quantify the trade-offs from specific initiatives.
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