TIME TO COMMIT

Abu Dhabi 2019 | ENERGY | FOCUS: IN-COUNTRY VALUE

The announcement of the In-Country-Value program is a significant step for ADNOC and Abu Dhabi in growing the local private sector. Vertically, it will develop the energy industry through a trickle-down effect; horizontally, it will affect other sectors through a multiplier effect in the long-term.

In an effort to achieve optimal value from the UAE's oil and gas resources, in 1Q2018 Abu Dhabi National Oil Company (ADNOC) introduced a new In-Country Value (ICV) program. Similar in concept to the In-Kingdom Total Value Add of neighboring Saudi Arabia and the In-Country-Value development program of Oman, the ICV seeks to increase the contribution to the UAE economy from all players across the supply chain that seek to work with ADNOC. Such a standardization of the procurement and tendering processes levels the playing field for local and foreign companies. In other words, all potential business partnerships with ADNOC now include an ICV assessment as part of their tender evaluation and award process to “encourage the use of local goods, services, manufacturing and the employment of Emiratis in the private sector, to stimulate economic diversification and growth," according to ADNOC's official press release.

Six auditors have been chosen to verify the contribution to the UAE's economy: PricewaterhouseCoopers (PwC), KPMG, Baker Tilly, Ardent, Protiviti, and EY, all of which will assign a percentage score based on assessing goods produced and procured, the nature of the sub-contractors, the level of Emiratisation, investments in the UAE, and expatriate contributions. These factors highlight the ICV's focus on GDP diversification through increased expenditure on local goods and services, personal development opportunities for Emiratis in the private sector, and the localization of strategic capabilities for critical supply chain functions in the oil and gas industry.

The current structure of the ICV score is yet to be perfect and has raised concerns from both the UAE and foreign players. The first group claims the commercial evaluation of the tender comes with excessively stringent formalities, since the contractor who will be awarded the project, despite potentially having the highest ICV score, will have to match the lowest price offered by a competitor. The second group is concerned about timing issues, as improving local contribution cannot happen overnight, and companies are afraid to lose important bidding rounds in the meantime. That being said, the significance of this procurement-led initiative is multiple. First, it represents a decisive step to grow the country's economy from the inside through a trickle-down effect. For obvious reasons, local EPC contractors and sub-contractors are presented with a head-start compared to their foreign competitors, which will inevitably need to adjust to remain competitive. As expressed by Walid Hatoum, CEO of Arabian Industries, “As a Tier I ADNOC supplier and a local company, we believe this initiative reinforces our commitment to support local businesses in driving economic diversification and growth." However, the ICV is not meant only for the biggest players like Arabian Industries, as not only direct suppliers to ADNOC are required to have their own ICV scores accredited. Indeed, the calculation requires them to include the accredited ICV scores of their own suppliers and sub-contractors. This process broadens the engagement across the supply lines, untapping into the potential of SMEs and raising the standards for Tier 2 and 3 players. Rather than focusing on few local contracting giants, few of which the government holds significant stakes in, Abu Dhabi is thus likely to witness a gradual growth of its private sector. As for foreign companies or suppliers that do not possess the ICV Certificate, they can still submit their tenders, but their ICV contribution will be scored as 0%, impacting the competitiveness of their tender.

On a broader level, the ICV is a timely move to counter the negative trend affecting the UAE's non-oil private sector by investing in making a multiplier effect. According to a recent index by Emirates NBD, expansion of the country's non-oil private sector slowed to a five-month low in August as total employment shrank for the first time on record. While promoting initiatives in the service and manufacturing sectors is necessary to tackling the UAE's economic challenge comprehensively, the major bulk of the country's economy derives from government spending, and the first source of money injection comes from the energy industry. Thus, investing in the potential of a multiplier effect derived from a program such as the ICV rightly suggests that the UAE's sustainable growth is based on an inevitable paradox: to move away from its heavy reliance on the hydrocarbon industry, Abu Dhabi will still need to cater growth initiatives for oil and gas companies. This sentiment is shared by Eng. Ahmed Al Dhaheri, CEO of NPCC, an Abu Dhabi-based EPC company: “Given the importance of ADNOC in the UAE's economy, it will have a multiplying effect on other industries beyond oil and gas, and become a standard for anyone seeking to do business in the country. It allows for a level playing field and for players to invest in the country's economy." Put in other words; successfully investing in Abu Dhabi now requires one crucial factor: concrete commitment.