Fuzzy thinking can lead to poor local content policy, says Strategy&

14 September 2018 Authored by Consultancy-me.com

With non-OECD nations set to spend up to $57 trillion on infrastructure projects over the next 20 years, including a nearly $1.5 trillion combined investment from Saudi Arabia and the UAE, the Middle East branch of strategy and management firm Strategy& has sounded a warning against common cognitive biases in decision-making.

False aggregation of demand. A fixation on familiar objects. Absolutist target-setting – while these may sound like fuzzy phrases from the self-help phrase-book, they are in fact concepts rooted in behavioural science. Strategy& asks: which out of Germany, Denmark, Switzerland and France has highest per capita consumption of cheese? If you answered France,* your thinking may have been subject to salience bias – the tendency to focus on familiar concepts.

And while such a bias might personally see you suffer no more than forfeiting a piece of pie in a game of Trivial Pursuit, when it comes to big business there can be big consequences – and long-term capital infrastructure spending is about as big as business gets for governments, with, as stated recently by KPMG, current projects determining “the development of our countries and cities for decades.” Avoiding cognitive pitfalls in planning then would seem rather somewhat desirable.

This is the contention of Strategy& at least in a new report on ‘local content development’, that is, policy-making geared toward expanding the share of local goods and services in large infrastructure projects – sensible in of itself, with trillions of dollars in play and the desire to circulate as much of it as possible within the home economy, but as subject to cognitive illusions, biases, and distortions as picking the winning thoroughbred at the Dubai World Cup.

Number of local content measures around the world

Strategy& cites three particular biases which can impact clear policymaking. The first, ‘false aggregation of demand’ – a form of confirmation bias – sees policymakers tending to overestimate the localisation potential by failing to account for the often huge disparities in the size, design and cost of goods across particular categories, lumping everything in as one and the same as to local market opportunities.

The second common bias is ‘absolutist target-setting’, an optimism bias which, put directly, concerns the ‘partiality for positive expectations divorced of context and freed from nuance’. Here, policymakers may place a simplistic value on local content, with the higher the percentage the better, without determining how or where local content in each instance creates national economic value, which in some cases it doesn’t.

The last of the cited blind-spots – a fixation of familiar objects – falls under the umbrella of a salience bias. In this respect, policy-makers are prone to focusing on familiar end-products, with Strategy& forwarding the examples of solar panels, wind turbines, automobiles, and household appliances. As such, fundamental base industries, unfamiliar intermediate products, and obscure sub-components, the firm says, are often overlooked, with the potential to disadvantage the overall value chain when local content policies are poorly designed.

Analytical and behavioral safeguards for local content policymaking

And these concerns for cloudy thinking may be especially pertinent with respect to Saudi Arabia and the UAE (as well as the other nations of the GCC and OECD in general), which, while projected to spend close to $1.5 trillion combined on major infrastructure projects in the next 20 years, are doing so with the attendant goal of diversifying their economies and boosting local job and capacity growth – creating as such the added temptation to maximise local content development wherever they can.

That sense of urgency, the report states, is commendable, but can lead to short-sighted and counterproductive policies. Yahya Anouti, a Principal with Strategy& and one of the its authors, says, “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.” Yet: “creating a policy framework for local content development that nurtures economically sustainable and internationally competitive domestic industries has proven remarkably challenging.”

In respect to that challenge, and the impact of bias, fellow report author and Strategy& partner Shihab Elborai says that overcoming them 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.”

*The Danes eat an average of 28.1 kilograms of cheese annually per person, ahead of the French who consume only 27.2 kilos each per year.

Related: Saudi Arabia will need to learn from the past for future mega-project success