GCC governments must go beyond conventional means to address current fiscal crunch

Monday 18 July 2016
Fadi Adra, partner with Strategy& and a member of the public sector practice in the Middle East

Dubai - MENA Herald: GCC countries are facing budgetary problems which could result in long-term deficits if not addressed. While every GCC government has announced spending cuts to conserve budgets, conventional cost-cutting is only a short-term fix and could potentially slow a country’s growth over time, according to a recent study by management consultancy Strategy&, formerly Booz & Company.

For GCC governments to cut costs and grow simultaneously, Strategy& recommends adopting a ‘Fit for Service’ framework. This approach would allow GCC government entities to achieve sustainable reductions in their budgets while also reinforcing investment in the services that are essential to long-term security and robust growth.

Advising on the importance of tackling the current fiscal crunch, Fadi Adra, partner with Strategy& and a member of the public sector practice in the Middle East, said: “The GCC’s budgetary problems are not a cyclical condition that will resolve themselves with time. The price of oil for example, which contributes to three-quarters of GCC government revenues, has fallen to its lowest levels in over a decade, while the cost and demand for core public services continues to rise. Oil-based budgets however are also not viable over the long-term, whether or not the price of oil rebounds. To put this into perspective, even if GCC governments can grow non-oil revenues by 10% annually over the rest of this decade and the average price per barrel of oil returns to $50, their budgets would still need to be reduced by approximately $100 billion on an annual basis - this is 7% of the GCC’s total GDP - in order to eliminate fiscal deficits. This is why adopting a ‘Fit for Service’ approach is critical for GCC nations.”

According to Strategy&, adopting a ‘Fit for Service’ approach is driven by four actions: 1) articulating a strategy, 2) transforming the existing cost structure, 3) building critical capabilities needed to execute the strategy funded by cost savings and 4) reorganizing the operating model for optimal performance. “For example, every GCC government should be able to articulate clearly a coherent way to service its constituents, quickly find savings to reduce deficit spending and release funds needed, maintain a multitude of capabilities to execute its strategy and develop the appropriate operating models aligned with the strategy”, said Ashish Labroo, principal with Strategy& and a member of the firm’s Energy, Chemicals and Utilities practice in the Middle East. This work should also be supported by having the necessary digital technologies, people skills and organizational culture in place.

Commenting on the effectiveness of implementing a ‘Fit for Service’ framework, Rawia Abdel Samad, director of the Ideation Center, the leading think tank for Strategy& in the Middle East, said: “Adopting ‘Fit for Service’ initiatives are worth the effort because the leaders of GCC member states cannot simply cut costs by conventional means if they are to transform the cost base of their future governments and create a more sustainable future. By adopting a ‘Fit for Service’ approach, GCC governments for example can achieve 20 to 40% reductions in their cost structures. ‘Fit for Service’ emphasizes the digital transformation of government entities and identifies ways for minimizing the digital costs of government while using digital as a means to improve efficiency and reduce costs across the board.”
Some GCC governments have already taken steps to adopt initiatives aligned with a ‘Fit for Service’ approach. In Dubai, for example, the government has worked to develop the appropriate operating models and become more customer-centric, having developed a rating system for all its service delivery channels. Furthermore, Smart Government is a key pillar in the Smart Dubai initiative that aims to improve the city experience for residents and visitors of Dubai with more than 500 current and planned smart services.
Highlighting the value of the ‘Fit for Service’ approach, Sevag Papazian, principal with Strategy& and a member of the digital business and technology practice in the Middle East, said: “It is easy to see why conventional cost-cutting has become the default solution to budgetary shortfalls in the public and private sectors. It is simple to mandate across-the-board budget cuts. However, such conventional cost-cutting is a short term fix that uses today’s numbers to disguise tomorrow’s crises. By using a ‘Fit for Service’ approach, GCC government leaders can undertake an economic and governmental transformation that will set their budgets on the right track and provide the volume and quality of services that their constituents are demanding for the long-term.”

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