Abu Dhabi enacts new rules for greater benefit of local hydrocarbons investment

For decades, Abu Dhabi National Oil Company (ADNOC) has been a catalyst for growth and development, due to its oversight of the emirate’s vast hydrocarbons resources. This role is now being strengthened by the company’s in-country value (ICV) programme, which is designed to boost domestic product and service suppliers, create highly-skilled jobs for Emiratis, keep more value from ADNOC’s huge investments within the country and strengthen local supply chains. In 2018, its first year of operation, the ICV programme generated upwards of Dh18bn ($4.9bn) for local suppliers, and looks set to bring further benefits as major partners aim to strengthen their position in upcoming bids by achieving higher ICV scores.

Rollout

The ICV programme went through two key stages of implementation before being fully embedded in all of ADNOC’s tender evaluations and award processes. Four months after its launch on January 1, 2018, ADNOC stopped considering suppliers’ self-certified ICV scores, obliging them to obtain an attested ICV certificate through an approved body. Then followed a five-month intensive consultation period with suppliers and partners. Open sessions, face-to-face meetings and a survey were conducted in order to compile views and feedback on the scheme and integrate it into revisions.

An enhanced version of the ICV scheme was launched in November 2018, since which time ADNOC has been engaged in implementation and communication of its requirements and benefits to suppliers. Rather than a top-down regulatory approach, the national oil company has sought to conduct an open and evolutionary approach to implementing ICV, while remaining focused on the end goal of strengthening domestic businesses.

Formula

A company’s ICV score is calculated on a range of factors. Some 50% is determined by procurement behaviour in the supply of goods and services – through the manufacturing cost incurred within the UAE or the value of goods and services procured from vendors and subcontractors and their own ICV. A further 25% is determined by a company’s investment in the UAE; 15% based on the level of compensation employees receive; and 10% according to the number of expatriates employed.

The enhanced formula introduced in November 2018 takes into account a range of new factors, including procurement from agents within the UAE; contribution towards training for Emiratis not employed by the company, either through Sondoq Al Watan – a programme for non-oil research projects run by local businesspeople – or a government university; and operating costs. Notably, the revised formula includes an ICV assessment of a company as part of the tender process, which evaluates what the company has accomplished and what it is capable of accomplishing in the future.

Assessment based on ICV takes place at the commercial evaluation stage of project awards, following tender floating and technical evaluation, which are open to all qualified suppliers. At the commercial evaluation stage, suppliers are ranked by their commercial bids and a combination of their ICV score and improvement plans. During the final stage, ICV evaluation is brought to the forefront, with commercial participants ranked from highest to lowest on ICV score, and granted rights of refusal consecutively from highest ranked to lowest on agreeing to a contract at a set target price.

As of the fourth quarter of 2018 there were six certifying bodies for the programme, including Germany’s accounting and advisory firm Baker Tilly, with ADNOC looking to increase this number further in the future to boost competition.

Gains

In November 2018 the national oil firm announced that its ICV spend for the year would be over Dh18bn ($4.9bn), and that more than 1500 suppliers had obtained certification under the programme. The value gain through ICV reflects the scheme’s success to date. ADNOC expects the proportion that it and its contractors and partners spend on domestic goods and services to increase further in the coming years, particularly as its Dh486bn ($132.3bn) 2019-23 capital investment plan is rolled out. Beneficiaries will include local manufacturers, service providers and infrastructure companies. ADNOC’s procurement forecast foresees growing opportunities for the private sector in a range of areas, including front-end engineering and design, construction, drilling equipment and services, heat exchangers, gas turbines, instrumentation, thermal equipment, and vessels and tanks. The huge investments being made will help create skilled employment opportunities for nationals and further increase the use of local products, services, and manufacturing and assembly facilities.

“We’ve seen a tremendous change in the approach of our main strategic suppliers,” Ali Foolathi, ICV programme manager at ADNOC, told OBG. “They have started thinking differently, taking care of the ICV aspect, rather than immediately buying from companies that they already know. ICV is now part of the process of investing, and what we’re seeing now is companies are looking really hard at building more ICV. We fully expect the number of certified companies to grow, as firms that want a high ICV score for big tenders push up their supply chains to encourage suppliers to get ICV certified.”

Building Competitiveness

In addition to fostering new local partnerships, a central aim of the ICV programme is to strengthen knowledge and technology transfer to domestic companies and generate business opportunities for them. According to Foolathi, by participating in ADNOC projects, Emirati firms can build on their expertise and capacity and become more competitive in international markets.

One of the beneficiaries of the developing ICV environment has been Ducab, a UAE-based copper and aluminium wire producer co-owned by Abu Dhabi’s industrial conglomerate Senaat and the Investment Corporation of Dubai. In November 2018 Ducab won three contracts worth a total of $58m to supply Samsung with more than 5000 km of extrahigh voltage, high-voltage, medium-voltage and low-voltage cables, as well as all aluminium alloy overhead conductors, for ADNOC-related projects. Ducab won the contracts in an intensely competitive tender open to international companies for projects such as the Bab Integrated Facilities expansion, the Waste-Heat Recovery project being developed with Samsung at Ruwais and phase two of ADNOC’s onshore Qusahwira Field Development.

Ducab, which was founded in 1979, has focused on developing a full range of cable products for the oil and gas industry, leveraging strong domestic and external demand. It also supplies partners in sectors such as property, industry, health care and aviation. It was the first company to manufacture high- and extra-high voltage cables in the Middle East. The company designs and produces all of its products in the UAE, where it has six manufacturing sites, shortening supply chains for customers operating in the country and increasing their flexibility in infrastructure planning.

ADNOC has described Ducab as “an ideal partner for ICV programmes” and praised its development of specialised manufacturing capabilities and pool of technically skilled workers in the UAE. Ducab sources its insulation materials from Borouge, the growing Ruwais-based petrochemicals producer co-owned by ADNOC and Austria’s Borealis, bringing further cascaded benefits to the domestic economy.

Tomorrow 21

The ICV programme dovetails with Abu Dhabi’s Ghadan 21, or Tomorrow 21, blueprint for economic growth, which was launched in September 2018. The plan consists of a Dh50bn ($13.6bn) budget and 50 initiatives designed to improve the business environment, stimulate investment, encourage innovation and create jobs, including 10,000 new jobs for Emiratis in the public and private sectors. It aims to boost economic growth over the coming three years, with Dh20bn ($5.4bn) earmarked for 2019 alone. It has a number of targets that should support the development of ICV, by encouraging the domestic development of the sort of knowledge-intensive, innovative businesses that ADNOC and its partners require.

In addition to strengthening the role of small and medium-sized enterprises, both Tomorrow 21 and the ICV scheme focus on enhancing research and development, including through improved regulation, and increasing the use of automation – areas with the potential to strengthen the competitive advantages of ADNOC’s domestic suppliers. Training also plays a central part in both programmes, with the aim of developing Abu Dhabi’s skills base and encouraging skilled workers to move to the emirate.

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The Report: Abu Dhabi 2019

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