1. COVID-19 ramifications on GCC’s mega-projects and procurement expenditures
As economies struggle to come to terms with the COVID-19 crisis, the pressure on public expenditure is growing due to a severe reduction in government earnings and an increase in economic stimuli. As GCC member states have announced large economic stimuli packages, they are also implementing austerity measures to lower costs. For example, the Kingdom of Saudi Arabia (KSA) has announced a national economic stimulus package amounting to SAR 177 billion (US $47 billion), of which SAR 47 billion (US $12.5 billion) is allocated to the healthcare sector and SAR 130 billion (US $34.5 billion) to support the private sector and individuals. KSA’s government has also announced an increase in valued-added tax (VAT) and plans to reevaluate financial aid given to public sector employees. The KSA Ministry of Finance plans to shore up revenue and rationalize spending worth US $26.6 billion to ensure public finances are in a good state to support the local economy as it returns to a relative state of normalcy after the COVID-19 lockdown.
Record-low oil prices have added to the effects of the COVID-19 pandemic on regional economies. The IMF projects that the GDP of GCC countries will decline, and KSA will with a 2.3 percent reduction in 2020. This GDP fall will impact government spending, resulting in slowdown, reprioritization, and postponement of the GCC states’ visions, especially assetheavy projects. According to recent statements made by the KSA Minister of Finance, HE Mohammed Al-Jadaan, “Some of the national projects’ infrastructure that was supposed to be built by the government could be delayed in delivery time, whether it is roads, water pipes, etc., based on the new prioritized schedule of such projects, which have a combined budget of over SAR 10 billion riyals.” In this context, for public sector institutions, spend efficiency will become critical like never before.
Visions of new megacities such as the future city of Neom in KSA, Silk City in Kuwait, Lusail City in Qatar, and other infrastructure-intensive projects determine large spending and activities focused on public procurement. This type of procurement is executed by governmental entities and typically affiliated with central, regional, or local public procurement.
Public sector procurement, by virtue of being funded by governmental earnings (e.g., from taxes) must principally focus on increasing social value and long-term economic impact. Although profit orientation is not the government’s focus, procuring value for money and cost reduction must still be a key objective for all public institutions. Prevailing public procurement laws, such as the governmental tender and procurement law (GTPL) in KSA and local content requirements in all GCC member states, govern public expenditure towards this objective. However, public procurement with procurement laws and other regulations could also pose hurdles to agility within public procurement processes and leave little room for adoption of creative procurement practices observed in the private sector.
From a global perspective, public procurement is transforming towards increased use of e-procurement and shifting towards agility, digitalization, and other innovative measures in procurement to create social value, rather than merely focusing on cost-cutting and efficiency measures. In the GCC, similar developments are observed that follow many other advanced countries.
In Europe, many governments, such as Estonia, have adopted public procurement strategies and implemented best practices and innovative technologies based on the private sector’s procurement excellence. For instance, Estonia implemented e-procurement early on. The Ministry for Economic Affairs and Communications set up its Procure2Innovate project in 2000 with the goal of fostering innovation procurement with collaboration between authorities and suppliers. Estonia managed to implement European Directives 2004/17/ EC, 2004/18/EC and 2007/66/E within the country’s Public Procurement Act (PPA) to enable a central e-procurement platform that would offer end-to-end services to contracting authorities and bidders free of charge.
Comparatively, public institutions in the GCC have not yet reached the same maturity level. For instance, on the execution path of KSA’s Vision 2030, multiple nascent public entities have been established in the Kingdom, with significant spend responsibility for procuring high-quality goods and services, and they are growing in size and maturity. Crises such as COVID-19 have put the government under pressure to focus on an expanding scope, such as managing supply-side risks at the forefront and spend efficiency. Therefore, public sector entities have an increasing role to play in managing supply chains, supplier portfolios and associated risks. Hence, these times are a chance for public entities of the GCC to accelerate and jump to the latest level of procurement excellence.
2. Overview of public procurement and procurement functions in GCC
Within the last few years, many GCC countries renewed or amended their public procurement laws, such as the new GTPL in KSA and the New Tenders Laws in Kuwait and Qatar, which lay the foundation for public procurement. The GTPL, for example, became applicable to all Saudi government projects from 29 November 2019. The GTPL was initially introduced in 2006. It imposed a robust administration of public tendering and procurement and had a direct effect on the rights and obligations of vendors and consultants conducting governmental projects. KSA’s public procurement is driven by this law from both a standardization and centralization perspective. To best leverage this law, public institutions need to build the right understanding of the levels of flexibility available to them, define strategies to leverage their respective levels and, accordingly, build their procurement organizations to establish stronger focus on category planning, supplier portfolio management and contracts execution and management.
With the new tender and procurement laws come major changes to the existing regulation of tendering and contracting. These enhanced legislations provide a favorable procurement process framework covering all aspects of procurement. However, each institution must adapt and apply a robust procurement operating model and processes landscape to benefit from the standardization and flexibilities offered by these frameworks.
A special cornerstone of the tender and procurement laws is the local content, which requires strategic attention from public procurement functions. Local content helps to develop localization programs in order to improve the country’s economic prosperity by contracting a high percentage of local suppliers. In order to achieve these results, public entities have to deal with the complexity of identifying existing and suitable suppliers, developing existing or new suppliers, and finally, keeping track of their own spend to fulfill all reporting requirements. Compliance with those obligations is a key cause of increased process complexity, which leads to longer cycle times. The complexity of legal and business requirements demands that an elaborate strategic procurement role is delivered to the respective entity with the required effectiveness and agility. To comply with the requirements from the tender and procurement laws, and especially from local content, public sector procurement has to cease strategic, organizational and process-related opportunities derived from changes that come along, specifically as relates to:
- Formulation of a procurement strategy to enable a specific public entity’s mandates and business requirements in line with the overarching tender and procurement laws.
- Repositioning procurement’s focus from pure compliance and formalization of spend (e.g., for local content requirements) leads to more strategic value creation.
- Implementing cross-industry best practices for greater agility, flexibility and value orientation of processes, e.g., industry standards-driven contract management practices.
- Expanding the use of innovative IT software and lean IT landscapes by adopting and integrating with the local online tendering platform (e.g., ETIMAD in KSA).
In summary, the enactment of new tender and procurement laws is a unique opportunity for public entities to standardize procedures and manage spend on large infrastructure projects. Nonetheless, public entities must define their respective procurement strategies, leveraging global best practices to build a bridge between regulatory compliance and strategic value creation.
3. ADL’s view on strengthening public procurement functions post-COVID-19
To develop procurement excellence functions in line with international best practices, public entities need to develop integrated strategic procurement frameworks that allow public procurement to be more agile and increase its performance.
To be effective, the framework needs to consist of three key differentiators, which are built on six dimensions, or so-called enablers.
Differentiators are the key for leading procurement functions to deliver maximum and sustainable value – these differentiators relate to a subset of all enablers. The three procurement differentiators comprise the following:
- Strategic impact: Successful procurement organizations are involved in shaping the strategic management agenda and driving its implementation. This includes, for example, active implementation of strategic value levers such as focusing on core competencies (make or buy) and developing capabilities for new business areas.
- Innovation catalyst: Procurement as a value driver is a catalyst for innovation. Procurement brings in new and innovative suppliers and their solutions for new technologies or unsolved business requirements. Procurement also operates processes, methods and contractual regulations for demand-oriented purchasing of agile development solutions, innovative technologies and start-up suppliers.
- Digital lean: Procurement has established standardized and lean best-practice procurement processes with focus on internal customers. The possibilities for digitization and automation cover not only transactional, but increasingly also strategic/tactical, processes. As a result, significant efficiency and process cost potentials are realized.
The overall procurement performance is given by the total score of all three differentiators, the aggregate of all sub-scorings of each enabler category. Furthermore, in order to effectively gain countable value from the procurement differentiators, public sector procurement functions should consider the following three necessary elements for a successful transformation:
- A solid procurement strategy derived from the entities’ vision and mission.
- A well-functioning target operating model for the procurement function (including organizational design, processes, procurement templates, and technology.
- Country-specific requirements particularly related to local content and which could greatly impact the procurement function. The below sections describe in detail how these elements need to be optimized to ensure a solid and agile public procurement function.
Public procurement functions need to define their strategies to fulfill their increasingly strategic role in the post-COVID-19 era and as the GCC’s earnings shift from oil to other sectors. A procurement function’s strategy must comply with local laws, but also try to find a way to leverage them more effectively in order to foster innovative procurement measures. Particularly, nascent public procurement functions need to align their strategic posture from mere compliance with government frameworks to more active category strategy and planning, supplier portfolio management and contracts management excellence. To achieve this, they should develop strategic capabilities around category management, define robust operating models, and build up mature methodological competences. This should be reflected in the strategy of a procurement function through five key strategic themes:
Target operating model
Public procurement functions must develop robust procurement operating models to effectively transform procurement and deliver enterprise value through serving as innovation and efficiency catalysts. The design of the operating model should be derived from the procurement strategy. The most important aspect of this transformation is to segregate but harmonize strategic, operational and excellence procurement activities. In other words, strategic procurement needs to provide expertise to business owners on category-specific products/ services and supplier markets and contribute with knowledge of sourcing approaches and processes, own and drive categorysourcing strategy definition and execution to ensure that the procurement function conducts categorization of spend on product/service categories as per global best practices, and drive the end-to-end source-to-contract process, while delivering guidance to operational purchasing. Moreover, procurement operations should support strategic procurement and business owners throughout the source-to-contract process with contract execution activities and drive the purchase-to-pay process. Finally, the procurement and supplier excellence within the procurement function should ensure stakeholder satisfaction and management, supplier/supply quality, and participation of small-to-medium enterprises in the supplier mix. It should also promote and boost the local content and economy per each country’s guidelines, ensure that the procurement function meets best-in-class standards, and govern procurement data and establish continuous capability development of procurement staff in line with best practices.
To ensure that the procurement function executes its activities in an agile way, effective processes need to be designed and fulfilled. These processes cover four categories:
- Management processes: Procurement strategy & innovation, procurement governance, and procurement budgeting & controlling.
- Core processes: Strategy-to-improvement, source-tocontract, purchase-to-pay, supplier-to-performance.
- Project procurement: Project portfolio management, project supply plan, contracting strategy, project governance, and contract change management.
- Support processes: Process management, skills & capability management, document management, data management & quality assurance, digitalization, automatization , and analytical insights, as well as IT management.
The heart of this framework embraces four core strategic and operational processes. The strategy-to-improvement process is the strategic procurement process, which aims at optimizing procurement activities in the long run. The source-to-contract process determines which supplier to select for a specific (yet not necessarily precisely defined) demand and how to ensure maximum value for spend. The purchase-to-pay process takes the right decisions to spend budgets and checks whether goods delivered, or services performed, are according to (contractual) agreements. The supplier-to-performance process helps to identify whether suppliers are performing and which suppliers are most relevant, e.g., to meet the procurement function’s quality or local (content) requirements.
In addition, to transform into an agile public procurement function, the contract management process needs to be optimized and made efficient. First, it is imperative that public procurement entities move from manual contracting processes to standardized and digital ways of contracting. Technology solutions can be used to implement clause libraries that are preapproved by the legal department, and contract templates are generated instantaneously from such digital-clause libraries. Although tender and procurement laws may not provide much flexibility at this point to deviate from certain contractual clauses, in order to improve the agility of government services, those laws should consider adding certain options in regard to the contracting framework evolution in line with international practices. For example, the current GTPL (Saudi Arabia) does not allow for contract variation above a certain percentage, and to increase agility in the procurement function, this percentage can be increased.
Finally, many nascent public procurement functions are largely operating manually. It is important public procurement functions implement digital technologies in their procurement processes. The next generation, Procurement 4.0, will replace non-value-generating activities with automation (including AI) and enable business functions to act autonomously. The future of Procurement is characterized by seven digital enablers, which will help to drive innovation within the function and manage a real-time linked supply chain. This future-of-procurement state is delineated in the following framework - for more information please read Arthur D. Little’s viewpoint “Procurement 4.0 in the digital world.”
- The first core element in this framework is supplier innovation management. It focuses on extending the innovation capabilities of the own enterprise by systematically integrating knowledge and competencies of key suppliers, start-ups and the external “crowd”.
- The second core element is digital supply-chain integration. It enables real-time configuration and coordination of all involved supply-chain parties through linked, cloud-based supply-chain management systems and digital dashboards to achieve 100 percent on-time and in-full delivery and reduce inventory.
- The third core element, digital category & supplier management, enables strategic management and continuous improvement of the increasing level of out-ofhouse value-add and technological complexity.
- Big data analytics aims at increasing analytical capabilities, predictiveness, proactiveness and innovation, i.e., suppliermarket innovation scouting, predictive SRM, identification of new suppliers globally, improving commodity strategies, and preparation of negotiations.
- Digital purchase-to-pay process enables procurement to focus on strategic, high-value-add tasks by reducing repetitive tasks.
- Strategically linked leadership is necessary to support the increased strategic relevance of procurement and position the procurement manager as a respected and preferred internal business partner. This requires, however, strengthening of own innovation and leadership competencies by hiring high-potential technologists and training purchasers in functional, management and leadership competencies.
- In digital & agile organization, culture, management systems and e-learning increase flexibility with regards to fluctuating demands and changing capability requirements.
Country-specific requirements: Local content
While public procurement functions are transforming throughout the COVID-19 crisis, the promotion of local content within each country of the GCC cannot be neglected; in fact, it becomes even more important for consideration. In this context, and closely linked to the procurement function’s strategy, five local content policy directives need to be considered in order to exploit current regulations effectively within their boundaries:
- Push local content through selection of local suppliers in the assessment framework: During the tendering phase, the procurement function needs to ensure that in the supplier assessment framework, preferential status is given to local suppliers. In addition, suppliers that use local sub-contractors and have high degrees of localization (i.e., employment of GCC nationals) should be given preferential status. Moreover, to attract local suppliers and ensure they are ready to bid for public procurement tenders, the public procurement function of a public entity could first identify target local companies in line with the entity’s strategy and create an effective engagement plan for these targeted local companies (including a marketing campaign).
- Implement a dedicated unit in the procurement function with accountability to manage and monitor local content contribution: It is imperative that there is a dedicated unit/ team within the procurement function that is accountable and responsible for local content within the procurement activities. The mandate of this unit/team should be to examine all local content requirements and create a strategic plan accordingly (from a procurement perspective); make local content requirements transparent to all procurement teams; ensure that all local content requirements are fulfilled throughout sourcing, purchasing and supplier management activities; increase the proportion of the public entity’s expenditure with national and in-country suppliers; create a local content-monitoring system, including reporting processes and KPIs in alignment with relevant process owners; and assess the public entity’s vendor base and spend against the identified local content requirements.
- Embed local content processes within the overall procurement processes: Throughout all relevant procurement processes, local content should be embedded. For example, in the management processes, key processes related to local content need to focus on developing a local content procurement strategy and a yearly local content procurement plan, communicating the local content procurement strategy and objectives to all procurement staff and main business owners, and setting target budgets for local content and controlling mechanisms to increase the portion of spending on local suppliers. For the core processes, key processes related to local content need to focus on analyzing the local content ratio of past and future supply, spend (including claims) and demand; identifying local suppliers within the market and analyzing their current capabilities; designing and awarding tenders to give preferential status to local suppliers; classifying local suppliers in relevant categories and including them in the category strategy; and building up a local supplier knowledge base through supplier relationship management methods and tools. Finally, in the support processes, key processes related to local content need to focus on updating processes and documents continuously to adhere to local content needs and creating IT interfaces for local suppliers to facilitate transactions, communication and development activities.
- Define KPIs to measure the local content performance of the public entity and procurement function: Local content can only be successfully implemented if set KPIs are defined and measured at public entity level, procurement function level, supplier level, and contract level. Key local content KPI examples are: percentage of local content budget, number of staff focused on local content, number of process KPIs and derived measures related to local content, percentage of procurement spend and transactions on local suppliers, percentage of local suppliers (in supplier database), percentage of qualified procurement employees to deal with local content processes and procedures, number of trainings provided to employees related to local content processes and procedures, levels of localization of suppliers, and percentage of contracts awarded to local suppliers.
- Implement dedicated training and development sessions for procurement employees to contribute to local content: Local content and how it impacts the procurement function need to be understood by procurement employees for a successful implementation. The procurement function should train procurement employees on local content processes/ procedures, based on a set training program (either developed internally or through an external training service provider). The training sessions should focus on local content definition by providing a typology of local content provisions applicable in the business (goods and services, workforce, know-how and technology transfer); challenges and opportunities related to local content; development of a local content plan (including contractual strategy and risks); consequences of local content provisions for the execution of a procurement contract; act of local content strategy on contracts, tendering process, awarding, and execution and control; and impact of local content provisions on workforce management.
As businesses stand still during the COVID-19 situation and aim to restart in a new world of normalcy, a unique opportunity is created to drive procurement out of its perception as a formalization and compliance function and elevate it to a value creator for the post-COVID-19 era.
Public sector procurement in the GCC is a nascent sector that is growing rapidly while learning and adapting to new legal standards, as well as adopting relevant business best practices.
With the help of a guiding public sector procurement framework that embodies core strategic, operational, and localized elements and a set of enablers and accompanying policy directives, public procurement functions will be able to boost their transformations and create greater value throughout the entities they serve, the country governments they work for, and the region in which they exist.