The Roadmap to Successful Ventures in the Middle East Series – No 6
Tackling Localisation and In-Country Value
By Hugh Fraser, managing partner
Welcome to my weekly note with some personal views on what does/does not work when structuring business ventures in the Middle East region. My sixth theme is “Localisation and In-Country Value (ICV)”.
This is a highly topical theme in the Middle East with Saudi Arabia rolling out its IKTVA (In-Kingdom Total Value Added) programme and Abu Dhabi’s ADNOC and Oman pushing forward with their ICV policies. Localisation policies can come in various shapes and sizes including minimum shareholdings, participation in management, investment, procurement of goods and services, employment and training of nationals, and technology transfer. It is now widely accepted that a solid and effective ICV strategy is one of the cornerstones for successful ventures in the region.
Here are my top 5 golden rules on this theme:
- Joint Ventures to squeeze out Agencies & Distributorships?
It is highly unlikely that companies who seek to penetrate and expand into the region will be able to continue to do so under traditional agency or distributorship models. Although this model has been the conventional model of market entry for many decades it has been increasingly under pressure due to low levels of success and this will be accentuated as ICV requirements bite. Local presence will out punch buying-in from overseas when set head to head in an ICV boxing ring and this is anticipated to drive more equity joint ventures.
- Beneficial and Registered Ownership of Shareholdings
The 51% local ownership rule is still present in several of the regional jurisdictions despite ongoing WTO pressures and this gives rise to contractual re-balancing of equity and profit-sharing interests (beneficial interests), contrary to the registered position. These rules impose a significant legal risk element which is not present in territories where 100% or majority foreign ownership is permitted. In addition, one of the most time consuming and frustrating processes for businesses is satisfying banks as to the verification of ultimate beneficial ownership in group structures which have different beneficial and registered ownership interests. The legal risk issue can be addressed in part (but certainly not in full) by contractual and commercial structuring arrangements and the bank UBO challenges can be mitigated by ensuring a full corporate paper trail is available and is maintained up to date.
- Social Investment is Good for Business
It is rare these days for a business comprised of “ex-pats” to be competitive and fully connected to the market. Investment in local personnel through employment and relevant training programmes can be seen either as an unwelcome sidetrack to more overheads or a direct route to an expanded labour pool with greater connectivity to local contacts and language skills. In the internet world, importing expensive ex-pats has gone with the wind and their place is now on video-conference training and leadership support programmes. It’s also a great opportunity for our universities and technical colleges. However, the commitment needs to bilateral and contract terms, confidentiality clauses and protective covenants should be honoured as part of the deal.
- Watching the Time Limits on Patent Rights
The protection and licensing of intellectual property rights is a key aspect of the technology transfer world. It’s always a surprise how little attention is given to protecting western technologies in some of the biggest energy production markets in the world. The 12 months roll out allowed on Patent Co-Operation Treaty (PCT) patents can be overlooked and gone and so staying close to the patent attorneys should go hand in glove with an ICV strategic plan.
- Moving the Supply Chain Westwards
Asia has now been king in the procurement world for two decades and shifting the focus to Middle Eastern suppliers is going to be the biggest challenge to the region’s ICV objectives. This is where bidding advantages, customs duties and other import controls are going to be pivotal. The free trade world is in retreat and the GCC is imposing 20% plus tariffs on certain products and commodities so a close watch on the activities of the GCC competition authorities is a must.