The Gulf Cooperation Council (GCC) countries are situated in some of the world’s most inhospitable desert terrain with practically no natural freshwater resources, limited agricultural production, and a climate where temperatures can reach fifty degrees Celsius in the summer months. Yet despite these perennial challenges, which regional governments have faced for generations, the GCC states still depend almost entirely on imports of critical goods, such as food, medical equipment, and spare parts for the region’s life-sustaining desalination and power plants. Now, with the onset of the COVID-19 pandemic and its disruption of global supply networks, GCC countries could find it increasingly difficult to provide a secure and steady flow of these imported goods.
Fortunately for the GCC states, no country has yet faced an emergency shortage of critical supplies; but nonetheless, there is a potential that key trade partners could suspend exports to the region. For example, Ukraine, a large exporter of wheat and agricultural products to the GCC, announced that it would consider exports of wheat to ensure sufficient supplies for its own domestic market. In India, a major exporter of agricultural products to the Gulf states, rice traders have faced labor shortages and logistic challenges, causing exports of premium basmati rice to remain “stuck at ports or in the pipeline” and not delivered to countries like Saudi Arabia, Iraq, and Iran during the March/April period.
Given their status as highly import-dependent countries vulnerable to external supply shocks, the GCC states have long considered food, water, and other essential goods supply security as a key concern for national security. Nonetheless, the scale and impact of the COVID-19 pandemic on countries around the world could push the Gulf states to speed up initiatives to strengthen and secure their supply chains of critical goods. Achieving this will be essential to ensure economic security and prosperity for the region into the future.
Securing the Supply
Prior to the COVID-19 pandemic, GCC governments had begun to adopt several approaches to secure supplies of critical goods and services. These approaches have tended to fall into three categories, ranging from relatively easy in implementation to far more time consuming and capital-intensive processes. They include, first, accumulating stockpiles of goods and equipment; second, diversifying supply sources and investing in productive capacity overseas; and third, localizing production of goods and services nationally.
Increasing stockpile capacity has become a major policy measure throughout the region in recent years. In Qatar, for example, following a supply shock resulting from the economic blockade imposed in June 2017, the government moved to increase its strategic stockpiles of food by boosting inventories to last nearly a year in the event of a prolonged shortage. Similarly, the United Arab Emirates (UAE) constructed a large complex including a port and storage silos in the country’s easternmost emirate of Fujairah, providing the country with six months of wheat supply and an access point that sits outside the Strait of Hormuz chokepoint.
In addition to food stockpiling, regional countries have also focused on increasing storage of precious freshwater resources. Several Gulf states have begun to construct new reservoir capacity to ensure sufficient supplies for the region’s growing populations. For example, Saudi Arabia, which is almost completely reliant on desalination for freshwater, plans to increase its water storage capacity from just over one day of consumption in 2017 to more than seven days of consumption by 2030. In neighboring Qatar, work has commenced constructing what will essentially be the largest water storage tank in the world. The “Mega Reservoir Project” will increase the small emirate’s freshwater storage capacity by nearly 150 percent, or the equivalent of 180 Olympic-sized swimming pools, ensuring supplies of drinking water for an extended period of time. Additional freshwater reservoirs and storage tanks will not sustain life on the peninsula for any extended period of time, but it will provide the government more time to address any emergency disruption in the country’s desalination system.
Diversifying supply routes and investing in productive capacity overseas is also an approach that Gulf states have used to acquire critical goods – even in times of crisis. In 2017, Qatar lost access to key air, ground, and maritime shipping routes after fellow GCC states Saudi Arabia, the United Arab Emirates, and Bahrain imposed a blockade on the country. Facing potential significant supply shortages as a consequence of the blockade, Qatar quickly moved to secure supplies by identifying alternative shipping routes through countries like Iran, Oman, and Turkey. By using Iran’s airspace to ship air cargoes of critical goods and increasing imports of food products from Turkey and elsewhere, the country has further diversified its national supply chain and reduced its dependence on hostile neighboring countries.
Investments in productive capacity overseas have also helped GCC states secure supplies of basic agricultural commodities. Saudi Arabia and the UAE, for example, have established holding companies to invest in farm capacity as far away as Australia and Ukraine to ensure continuous imports of agricultural products and livestock. Last month, the Saudi Agricultural and Livestock Investment Company (SALIC) delivered its first shipment of 60,000 tons of wheat from agriculture holdings in Ukraine. Such holdings will help ensure a steady influx of agricultural commodities to countries that are essentially unable to conduct large-scale and economically feasible agriculture because of a lack of water and arable land.
Among the three approaches, however, the most challenging – yet most rewarding – is for GCC states to invest in localizing production of goods that can be produced at home. Localization initiatives aim to increase the share of local content in procurement and develop local productive capabilities in a given industry or sector. For example, a country may decide to invest in building a factory to manufacture generic pharmaceuticals domestically, rather than rely on imports from overseas. Such initiatives have garnered increasing attention from policymakers in the region given the benefits they provide in meeting the objectives of regional economic diversification and development strategies, such as Saudi Vision 2030.
The bulk of localization efforts have focused on the energy and power sectors given their outsized share in regional economies. Saudi Arabia, for example, has implemented localization initiatives across major state firms, such as Aramco’s In-Country Total Value Added (IKTIVA) Program, SABIC’s Nusaned Program, as well as smaller initiatives from the Salt Water Conversion Corporation and the Saudi Electricity Company. These programs seek to develop local talent and manufacturing capabilities, setting up shops to produce parts, perform maintenance operations, and provide technical know-how to the country’s biggest enterprises. In the Saudi desalination sector, for example, the government seeks to invest hundreds of millions of riyals in goods and equipment, including membranes, filters, pumps, and intake screens.
Localization initiatives in the region have also targeted food production. Through Qatar’s National Food Security Program and a strong push for self-sufficiency among Qatari leadership, Doha was able to rapidly increase agricultural and livestock production following the blockade in mid-2017. After quickly importing dairy cows and other livestock, alongside the construction of a large facility outside of Doha, Baladna, the dairy company established following the crisis, can now provide around 100 percent of Qatar’s demand for milk, cheese, and other dairy products with a surplus for export to countries like Afghanistan, Oman, and Yemen – indeed, some analysts have even argued that the blockade has actually better prepared Qatar to deal with the COVID-19 pandemic.
Responding to the Crisis
COVID-19 has brought renewed attention to global supply chains as news reports outlining supply shortages and operational logistics challenges emerge. In this context, GCC members seem to have adopted a mix of the three approaches by stockpiling key medical and food supplies while continuing to identify new means of improving local production capabilities.
In an effort to coordinate food security across their six member states, the GCC countries recently came together to establish a joint food supply safety network. While specific details about the joint initiative have not been released, it is nonetheless a positive step in advancing food security across the region. In Saudi Arabia, the government has also pledged $2 billion for the kingdom’s agriculture development fund to ensure continuity of food imports during the coronavirus crisis. Implemented through direct and indirect loans, this initiative will, at first, be limited to yellow corn, rice, soybeans, and sugar, but later expanded to encompass more products.
Localization and rapid development of manufacturing capabilities may also help GCC countries ensure sufficient critical supplies throughout the COVID-19 crisis. In the UAE, IBC Group, a boutique consulting and technology investment firm, plans to quickly develop a facility to produce between 300,000 to 600,000 surgical masks per day. These supplies will be used in the domestic market and exported to foreign countries as needed. A second UAE firm, Immensa, has reconfigured its 3D printers, shifting from manufacturing components for the oil and gas industry to producing upwards of 20,000 medical face shields per week.
In Saudi Arabia, a local venture by General Electric’s GE Grid Solutions Khobar Integration Facility (KIF) has ramped up production of electrical grid equipment such as control panels. Nationally manufactured control panels, which protect critical electrical substations in the kingdom, will help ensure a steady electricity supply during the coming harsh summer months in the country and counteract any potential supply disruptions from global suppliers.
With strong financial backing, these approaches have allowed the region to largely avoid any significant shortage of goods and supplies. Moreover, some countries, including the UAE and Qatar, have even committed to shipping supplies of medical goods to countries hard hit by the pandemic, indicating that local supplies of medical personal protective equipment are not being exhausted. Over the long term, however, the Gulf states will need to continue to strengthen their national supply chains.
As the world continues to grapple with COVID-19, GCC states – like many countries worldwide – must deal with major challenges stemming from supply chain disruptions. Globally, there is a need for governments and businesses to view international supply chain shocks as a wake-up call but also as a valuable opportunity to address risky dependence on imports. The circumstances are appropriate to engage in a careful and timely reassessment of where, and by whom, supplies, and goods are produced.
Brett Sudetic is an advisor with Gulf State Analytics. As a management consultant, he has advised government ministries and state-owned enterprises in the Gulf region on strategic planning, program management, supply chain, and industrial policy implementation. Brett has lived and/or worked in Saudi Arabia, Qatar, Morocco, Lebanon, Japan, Belgium, and the United States, as well as brief engagements in Turkey and the United Arab Emirates. He is fluent in Arabic and proficient in Persian-Farsi.
Giorgio Cafiero is the CEO of Gulf State Analytics, a geopolitical risk consultancy. Follow him on Twitter @GiorgioCafiero.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Gulf International Forum.