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How will 'Vision 2030' affect defense sales to Saudi Arabia?

April 27, 2016 (Photo Credit: Staff Illustration)

 

The recently announced Saudi “Vision 2030” plan comes after a year of declining oil prices, continued regional instability and a change in regime. The latter has not only seen the transfer of power to one of the last remaining sons of the founder but also, and more importantly, assisted a generational change within the Saudi leadership.

The part of Vision 2030 known as the National Transformation Plan (NTP) aims to diversify the Saudi economy and dissuade the state from oil dependence, thus recasting its rentier state status.                                                                                                                  

The NTP is a latecomer to the field of national strategy policies, falling behind the region’s most successful plan in the neighboring United Arab Emirates. A common element, however, is the stressed importance on the manipulation of the defense spending apparatus. The Gulf Cooperation Council states are routinely among the world’s highest spenders on military equipment and, according to some estimates, have trillions of dollars in outstanding offset obligations.

 

The NTP’s focus on defense spending clearly indicates a renewed interest in applying offsets and other contractual mechanisms, consequently enabling the Saudi economy to reap the benefits of what is expected to be years of heightened defense spending. 

Saudi offsets have been in place for decades, yet have been largely underused. Up to this point, there had not been a conscious effort to develop a defense industry in Saudi Arabia with the stand-out firms, Advanced Electric Co. (AEC), Al Salaam, International Systems Engineering Co., and Middle East Propulsion Co. all risen from offset transactions going back decades.

This change in focus is set to shift with the NTP's focus on the use of defense sales to diversify the Saudi economy. Lessons can and should be learned from BAE Systems, Boeing and GE, which have all successfully contributed to the development of capabilities within Saudi Arabia.

Capability development, employment and a fusion of public-private initiatives will all contribute to future defense deals with Saudi Arabia. Following the steps of the UAE, Saudi Arabia will incrementally contest their existing and potential tenders’ offers, requiring competitive bids, not only in price but also in participation. As a consequence, this will undoubtedly complicate matters for the kingdom, especially with US firms due to International Traffic in Arms Regulations and their balancing of relationships with other regional allies.

 

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Matthew Hedges
Photo Credit: Courtesy of Matthew Hedges

As original equipment manufacturers cooperation exists within the Saudi maintenance, repair and overhaul sector, US firms will struggle to find unique avenues to position their industrial participation efforts. As a result, US companies will have to work alongside Saudi and US government counterparts to find commercially attractive, yet regulation-permissible partnerships; otherwise they will find that the years of uncompetitive tender bids are well and truly over.

European firms and other nontraditional suppliers will have a greater influence in Saudi procurement, as they face fewer internal restrictions regarding technology transfer. While many US firms are heavily US-based and focused, European companies have a longer and more experienced legacy with international markets. This is likely to see a continuing presence, particularly for British and German manufacturers in the aerospace and naval domains. This will require further concentrated focus from international firms.

It will also demand infrastructure and business environments that are able to absorb the funds and projects that will inevitably arise from continuing defense sales. Lessons can and should be learned from other nations that have had offset regulations for decades. This will assist the Saudi authorities in achieving the goals they have prescribed for the resulting partnerships accomplished through defense sales.

Through institutions such as the Saudi Economic Offset Program, Military Industries Co. and Taqnia, defense firms will be guided through the partnership process. By increasing the number of commercial partnerships with Saudi Arabia, the NTP is ensuring further stability in the Saudi economy through inter-dependence of commercial ties. However, if firms don’t cooperate, Saudi Arabia will either get access to more innovative technology, cheaper tenders (or both), due to the increased competition of bids. 

Until updated offset legislation and formal frameworks for industrial participation appear within Saudi Arabia, it is difficult to envisage what specifically the Saudi regime is looking to target; will there be a focus on research and development? On manufacturing? Or are they looking to generate funds from indirect offsets?

The former CEO of Saudi Arabian Basic Industries Co. (SABIC) Mohammed al Mady was installed as president of the Military Industry Co. (MIC) last year by Deputy Crown Prince and Minister of Defence Prince Mohammed bin Salman. His role is integral, as the MIC is central to the development of the Saudi defense industry. Much like what Emirates Defence Industries Co. has done for the UAE, the MIC looks set to become the fulcrum for all industrial cooperation and development within the kingdom.

If a mutually beneficial partnership can be orchestrated, Saudi Arabia’s economy will thrive. There is the possibility, however, that this may stall procurement in the kingdom thus weakening the effectiveness of its armed forces.

Matthew Hedges is an adviser at Gulf State Analytics. Based in the UK, Hedges is a regular commentator and contributor to Defense News, Gulf States Newsletter, International Institute for Strategic Studies (IISS) Military Balance, Defence Procurement International, and the Royal United Services Institute. He has a wide array of experience in the legal, due diligence and research sectors and specializes in matters pertaining to defense, security and political economy. He is a Ph.D. candidate researching national security strategy in the GCC states.

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