Saudi likely to spend $1.1 trillion on infrastructure projects in the next 20 years

Saudi Arabia is likely to spend $1.1 trillion on infrastructure projects from 2019-2038, a new report by Strategy& has found.

The report, which looked at infrastructure spending worldwide for the next 20 years, found that the kingdom’s spend will account for 1.2 per cent of the global total.

Meanwhile the UAE is expected to invest $350bn during the same time period on infrastructure.

In terms of investment, non-OECD states are projected to spend more than $57 trillion on infrastructure projects, compared to $34 trillion by OECD countries.

“Policymakers in non-OECD countries have increased their commitment to promote localisation of their infrastructure spend. Nearly 300 local content requirements measures are currently in place in non-OECD countries,” the report stated.

For instance, in Saudi Arabia, Saudi Aramco aims to achieve 70 per cent localisation by 2021 as part of its In-Kingdom Total Value Add (IKTVA) programme, which puts local content at the core of the company’s procurement process and makes it a requirement for doing business with it.

In the GCC, large development schemes can allow local companies not just to substitute imports, but also to grow non-oil exports by enhancing their capabilities, the report stated.

However, regional governments need to “think logically” about how they balance the need to localise manufacturing while pursuing sound economic policies, it stressed.

There are many capabilities that the region does not possess because of its small size and hence needs to import to build infrastructure. Additionally, policymakers need to stress the importance of economic openness and free trade given the region’s need to export.

“However, many governments have a sense of urgency that, although commendable, can lead to short-sighted and counterproductive policies,” the report added.

Raed Kombargi, partner, Strategy& Middle East stated: “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.

“However, many local-content programmes fall short of their objectives because policies are affected by the conceptual biases of policymakers. By understanding and addressing these biases directly, developing countries can ensure that they retain the bulk of the economic gains from the coming wave of infrastructure spending.”

The report outlined three key biases that can interfere with analysis and policy design –

• False aggregation of demand Policymakers tend to overestimate the localisation potential from a given product category, failing to factor in the huge disparities in sizes, designs, and costs of goods in that category.

• A fixation 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 analysing the underlying economic value created. Some inputs will always be cheaper to import.

Shihab Elborai, partner, Strategy& Middle East added: “Overcoming these biases will require analytical and behavioural safeguards that complement and reinforce each other. 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.

“As for behavioural measures, policymakers must be aware of biases, encourage dissent and constructive debate, and require adversarial reviews of the policy recommendations.”

Gulf Business Contribution Time: 05-Sep-2018 13:24 (GMT)
Gulf Business Last Update Time: 05-Sep-2018 13:24 (GMT)