Recent years have seen Saudi Arabia surrounded by conflict and unrest.
To the north, Iraq and Syria have descended into armed conflict, giving birth to insurgent-administered enclaves; to the south, civil war in Yemen has triggered the greatest humanitarian crisis on the Arabian Peninsula; to the west, piracy has disrupted Saudi trade and armed conflict has divided the Sudan; and, to the east, lies Iran.
In this context, Riyadh has sought to build its military as a key deterrent against the growing threats to its national security, and allocated more than $55bn to defence spending in 2018 alone.
Under the stated goals of Vision 2030 and the National Transformation Programme 2020, the Saudi government has also begun partnering with the world’s leading defence contractors with the aim of incubating an indigenous defence manufacturing sector.
This strategy has been led by Crown Prince Mohammed bin Salman, who has pledged to make Saudi Arabia – a top-four military spender globally and the world’s second-largest importer of military supplies – a global leader in the industry.
Traditionally, opportunities for defence contractors in Saudi Arabia have been limited to the sale of armaments and other military equipment to the government and ancillary services, such as maintenance, repair and overhaul.
The sphere for defence firms has been further restricted by regulations prohibiting defence contractors from engaging agents on a commission basis and a ban on foreign investment in the manufacture of military equipment, devices and uniforms.
Vision 2030 could modify these restrictions under its stated goal of developing manufacturing to meet the kingdom’s military needs, create job opportunities and retain resources within the country.
Citing how only 2 per cent of Saudi Arabia’s military spending is conducted within the kingdom, the Vision 2030 plan is to localise more than 50 per cent of military equipment spending by 2030, beginning with “less complex industries such as those providing spare parts, armoured vehicles and basic ammunition” and to “expand this initiative to higher value and more complex equipment such as military aircraft”.
This would see Saudi Arabia build “national expertise in the fields of manufacturing, maintenance, repair, research and development”, before working to become an international exporter of military equipment.
While Vision 2030 promises foreign defence firms opportunities in establishing Saudi Arabia’s local military and defence capabilities, it is not yet clear whether there will be a formal lift of restrictions on foreign ownership in local defence manufacturing by the Saudi Arabian General Investment Authority.
The Supreme Economic Council, with a view to protecting Saudi national security, has traditionally restricted foreign investment in the military manufacturing sector.
At the same time, exporting nations routinely impose their own restrictions over security concerns. In the US, for example, the International Traffic in Arms Regulations restrict exporting certain forms of sensitive intellectual property.
Vision 2030 and the National Transformation Programme 2020 could nonetheless bring fresh opportunities for partnerships between the Saudi Arabian government and leading defence contractors.
Moving forward, military exporters such as the US could grant waivers and exceptions to permit the transfer of sensitive intellectual property to potential buyers.
This could encourage Saudi Arabian Military Industries (Sami) and other potential partners to proceed with joint-venture agreements on the basis of the transfer of intellectual property.
Vision 2030 will grant foreign defence firms opportunities to procure contracts not only with the Ministry of Defence and its branches (the Royal Saudi Arabian Land Forces, the Royal Saudi Navy and the Royal Saudi Air Force), but also with the Ministry of the National Guard, the Ministry of Interior, and state-owned enterprises such as the Military Industries Corporation, which will oversee major facets of the development of the Vision 2030 local defence industry.
Opportunities will abound for foreign companies willing to become involved through joint ventures aimed at technology transfer, job creation and training opportunities.
Implementing the vision
Following the announcement of Vision 2030 in 2016, the Saudi government launched the General Department for Local Manufacturing Support to help forge public-private partnerships between the Saudi armed forces and private sector actors.
In one sign of progress, the 2018 Armed Forces Exhibition for Diversity of Requirements and Capabilities exhibition in Riyadh showcased some of the first “Made in KSA” armoured vehicles.
Steps to localise defence manufacturing can also be seen in the supply contracts between the Ministry of Defence and defence contractors. Today, the ministry is requiring defence contractors to provide for the local manufacture of certain elements of supply contracts.
Finally, we are seeing an increase in joint ventures between foreign defence contractors and their Saudi counterparts.
The joint venture between Lockheed Martin and TAQNIA Aeronautics, named Rotary Aircraft Manufacturing Saudi Arabia, for example, recently signed a letter of intent to build Black Hawk helicopters in Saudi Arabia.
In April 2018, Sami also signed a joint venture agreement with and US-based Boeing to localise more than 55 per cent of the maintenance and repair of fighter jets and helicopters in the country.
Looking forward, given the unprecedented opportunities presented by Vision 2030 and the National Transformation Programme 2020, the frequency of such deals looks set only to grow.
About the author
John M B Balouziyeh is a senior legal consultant at Dentons. He advises defence companies investing in the Middle East on government contracts with the Saudi Ministry of Defence, the Royal Saudi Land Forces, the National Guard, the Ministry of Interior, and other public bodies.
This article is a redacted version of a longer report on defence contracting in Saudi Arabia, the full-length version of which can be downloaded here
The region’s military spending, 2016-17
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