Non-OECD states are likely to spend a whopping $57 trillion on  infrastructure projects over the next 20 years, compared to $34 trillion by OECD countries, according to a recent study by management consultancy Strategy& Middle East (formerly Booz & Company), part of the PwC network.

In conjunction with this spending, policymakers in non-OECD countries have increased their commitment to promote localization of their infrastructure spend. Nearly 300 local content requirements measures are currently in place in non-OECD countries.

According to the Strategy& report, such an approach is particularly important for the GCC, where governments are investing significant sums to develop infrastructure.

Saudi Arabia, for example, is likely to spend $1.1 trillion from 2019-2038, while the UAE is expected to invest $350 billion over a similar time frame. These large development schemes can allow local companies not just to substitute imports, but also to grow non-oil exports by enhancing their capabilities.

Commenting on the report, Dr Raed Kombargi, Partner, Strategy& Middle East said the trend towards 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 programs 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, he noted.

According to him, the GCC governments need to think logically about how they balance the need to localise manufacturing while pursuing sound economic policies.

There are many capabilities that the region does not possess because of its small size and hence needs to import to build infrastructure, observed Kombargi.

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, he stated.

Governments in developing economies are increasingly crafting policies to expand the share of local goods and services in large infrastructure projects worth trillions of dollars, he added.

The Strategy& Middle East 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.
•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 analyzing the underlying economic value created. Some inputs will always be cheaper to import.

Dr Shihab Elborai, Partner, Strategy& Middle East, said: "Overcoming these biases will require analytical and behavioral 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 behavioral measures, policymakers must be aware of biases, encourage dissent and constructive debate, and require adversarial reviews of the policy recommendations," he noted.

Elborai pointed out that the sourcing of manufactured goods and services from within the local economy continues to play a central role in the industrial policies of a growing number of governments, particularly in developing countries.

In Indonesia, for instance, up to 71 per cent of electrical power infrastructure spending come from local suppliers, along with as much as 50 per cent of expenditure on equipment used in wireless broadband services and base stations.

Brazil has steadily raised its local content requirements from 30 per cent to 65 per cent on offshore deep-water oil and gas exploration and development projects, across multiple bidding rounds, he stated.

Dr Yahya Anouti, Principal, Strategy& Middle East, said: "Policymakers in developing countries are justifiably keen to derive maximum economic value from massive public expenditure. Still, creating a policy framework for local content development that nurtures economically sustainable and internationally competitive domestic industries has proven remarkably challenging."

"A mounting sense of urgency and public expectations of immediate job creation, national business support, and non-resource-based GDP growth typically drive local content development policies," added Anouti.-TradeArabia News Service