Dr. Yahya Shakweh
The recently announced Saudi National Transformation Project (SNTP) 2020 focuses on key drivers to accelerate economic growth under challenging conditions for Saudi Arabia, such as the decline in oil prices, and difficult geopolitical realities and conflicts in the region. The aims of the SNTP 2020 are chiefly to diversify the economy, reduce dependency on oil, create more jobs for Saudis, support future projects and achieve maximum efficiency. It is estimated that the SNTP 2020 has the potential to double the country’s Gross Domestic Product (GDP) and create six million jobs by 2030.
The Localization process is somewhat complex in nature and requires leadership commitment from all relevant stakeholders. When technology transfer is involved, an agreement with credible foreign partners is required. It involves the development of a highly skilled multi-disciplined workforce, which takes time to develop. Most importantly it requires up-front investments. Consequently, the program is commercially characterized as high risk with a long payback period. Therefore, the role of government is critical to the success of localization.
Consolidated products and services support through local industries can help reduce overall project life cycle costs. Local industry can provide improved customer support with shorter lead-time, reducing the cost of repair and spares thus minimizing reliance on Original Equipment Manufacturers (OEMs) for support in times of crisis. For successful outcomes, local industry must recognize the apprehensions of technology partners who may be expected to re-shape their supply chain and will require an adequately skilled and productive local workforce. In addition, foreign government restrictions may obstruct the transfer of certain technologies.
By and large, localization is essential for the delivery of national economic values, and should be viewed as a strategic enabler that results in building local capabilities whilst reducing dependencies on foreign sources. It can be achieved through local research and development channels and/or technology transfer through partnering with credible international companies in key strategic areas of national interest. The Kingdom’s purchasing power, particularly for major infrastructure and defense projects, can be leveraged to incentivize international corporations to commit to technology transfer and sourcing locally, as is the case with the Economic Offset program. For example, the huge ongoing investments in national infrastructure such as railways, saline water conversion, refineries and energy, can be re-shaped so as to achieve the SNTP’s strategic objectives of diversifying the economy and job creation. A step-by-step process must be outlined with some recommendations for a practical implementation.
Thus, delivering key benefits that are consistent with the SNTP’s objectives such as (a) economic diversification, (b) technology transfer, (c) national manpower development and job creation for Saudi national and (d) strategic self-sufficiency. It is vital to obtain the selected corporation’s commitment for local content through signed plans prior to contract signature.
It is the author’s opinion that an integrated multi-institutional cooperative approach is required by various stakeholders to achieve the national objectives, involving legislators and policy makers, the Saudi Offset Program, government procurement agencies across all ministries, semi government companies, other government organizations such as Saudi Arabian General Investment Authority (SAGIA), National Industrial Cluster Development Program (NICDP), academic and scientific institutions and foreign corporations.
It is worth pointing out that Saudi Economic Offset Companies (EOCs) are inherently engaged in the localization process, and some, such as Advanced Electronics Company, have successfully diversified their capabilities to support both defense and commercial programs, whilst establishing national engineering and development capabilities that are already generating proprietary intellectual products and services. Unfortunately this is the exception and not the rule in the private sector which still somewhat further away from achieving their full potential. Government initiatives such as the Armed Forces Exhibition for Diversification (AFED) is a positive way to engage the private sector, and to boost the local manufacturing industry.
Some of the challenges facing local companies engaging in the localization process include (a) the foreign technology partners’ reluctance to break their well-established supply chain, (b) vested interests in the status quo, and resistance to change by all concerned stakeholders, (c) lack of funding allocation to support the process of acquiring and building local capabilities, both capital and human, (d) foreign Government Export / Import restrictions, (e) government procurement practices that do not favor locally-made products, (f) lack of government recognition in the procurement process towards local companies that invest in the national economy through Saudization, training and development, as well as investment in local capabilities and (g) national perception that foreign goods are better than locally-made and the perception that high-tech is limited to the west.
Setting-up a government-led ‘High-Tech Venture Capital Fund’ using available national funds, such as the Sovereign and Public Investment Funds, with the aim of accessing or transferring strategically-relevant technologies to the Kingdom. Semi-government organizations such as Aramco, SABIC, STC, SEC and SWCC can do the same, by setting up their own funds. Leading national companies with technology transfer experience can be leveraged to support this process, possibly in the form of Public-Private Partnership (PPP) ventures. After all, the private sector represents a significant force that must be leveraged to realize true localization in the form of public private partnership.
In pursuit of localization as a strategic option, it is recommended to (a) establish a national strategy for localization – possibly headed by the Offset program. This strategy must be in full alignment, if not an integral part of, the SNTP 2020, (b) the Ministry of Economy and Planning can create more economic value from project investments by aligning with national development goals. This could be particularly important in attracting investment to industries that are new in the Kingdom, (c) alignment between all SNTP 2020, National Industrial Strategy, Government Ministries, and all other stakeholders involved in the process of localizations, (d) setting-up a Government-led ‘High-Tech Venture Capital Fund’ using available national capital and (e ) develop strategies to engage the private sectors and other stakeholders in the process of localization.
Localization is a strategic enabler that should be aggressively leveraged at all levels to realize national economic development priorities, as outlined in the SNTP’s objectives. The alignment of key stakeholders, both public and private, combined with appropriate governance framework are pivotal to the successful realization of the localization benefits. After all, localization is not just an option, it is rather a National and Social responsibility.
Dr Yahya Shakweh is a Vice President of Strategy & Corporate Development, Saudi Arabia. The views expressed in this article are the author’s personal opinion. He can be reached on Email: [email protected]
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