Domestic Arms Production
The crown prince's strategic plan for the country, Saudi Vision 2030, calls for localizing “50 percent of military equipment spending” by the year 2030.
Saudi Arabia is the world’s largest importer of defense equipment but has negligible arms production or exports. The establishment of a strong Saudi Arms industry could alter the position of the country within the world economy. Currently, it finds itself in cycle wherein much of their oil wealth if churned back into Western economics via arms purchases and investments. The self-sufficiency provided by having a stable domestic arms industry, could change all of that.
In 2016 crown prince bin Salman announced his vision for a 2030 reform scheme to increase the country's income to prepare for a possible future with lower oil-driven revenues. The Kingdom of Saudi Arabia is to establish a state-run arms manufacturing company, which will produce ammunition, rock-launchers, armored vehicles and radars for the country's steadily strengthening military.
The country hoped as of May 2017 to provide employment to over 40,000 people from within Saudi Arabia to the industry, with a focus on Saudi nationals rather than domestic workers of foreign origin. The Kingdom's government has also put forward the optimistic speculation that the industry could contribute upward of US$3.7 billion annually to the economy.
The country's Deputy Defense Minister, Crown Prince Mohammed Bin Salman was quoted as saying that, "the company will seek to be a key catalyst… to localize 50 percent of total government military spending in the Kingdom by the year 2030. It will lead the military industries sector to increase local content, increase exports and bring foreign investment to the kingdom by entering into joint ventures with major international military industry companies."
The government is addressing this deficit by including technology transfers and offsets in its weapons contracts with international firms and by developing a manufacturing base for weapons parts and components. The government’s “Saudization” program seeks to train Saudis with specific skills so they can increasingly fill defense technology positions. US defense contractors that include a training component of the local labor force when bidding on contracts can significantly enhance their prospects over foreign competitors.
Lower global prices for oil had an impact on the country’s defense industry insofar as some purchases and programs are being temporarily put on hold, according to Commercial Service sources. Current geo-political conditions in the region, however, will likely keep these acquisitions on the government’s priority list and should resume as budget conditions improve.
Saudi Arabia spent over USD 6.4 billion on defense purchases in 2014, replacing India as the largest defense market for US. The Kingdom boosted its arms imports by 54% over the past year. Saudi Arabia and UAE accounted for the largest import share of the Western Europe. The growth in Saudi Arabia has been dramatic and based on previous orders, the import figures are only going to rise. The one out of every seven dollars spent on defense imports in 2015 is estimated to be spent by Saudi Arabia.
A small defense-manufacturing industry based on coproduction, offset, and licensing agreements with Western arms suppliers was still emerging a teh end of the Cold War. Saudi policy was to reduce its exposure to the political uncertainties of importing arms and to achieve a degree of self-sufficiency as a source of prestige in the Middle East. The chronic shortage of trained technicians and lack of skilled manpower, however, forced the industry to rely on expatriate managers, technical assistance, and imported labor. Such joint ventures were entitled to industrial development loans, tax holidays, and other subsidies.
There has been an enduring relationship between the UK armed forces and those of the KSA for a considerable time. Under the 1973 MoU British Aircraft Corporation ('BAC') agreed to maintain aircraft and equipment of the Royal Saudi Air Force ('RSAF') and train their personnel.
During the 1970s, Saudi Arabia had been involved with Egypt, Qatar, and the United Arab Emirates in establishing the Arab Organization for Industrialization (AOI). Its goal was to combine capital of the gulf oil states with Egyptian production capabilities to create an arms industry located mainly on Egyptian territory. Although Egypt carried out a number of coproduction schemes under the AOI designation, the plan foundered because of Arab anger over Egypt's 1979 peace treaty with Israel.
Saudi Arabia later established its own small arms industry at Al Kharj, producing United States and Federal Republic of Germany (West Germany) rifles, machine guns, and ammunition under license. In 1985 a royal decree by King Fahd led to the creation of the General Establishment of Military Industries to oversee and coordinate the kingdom's existing and proposed domestic defense projects. In the same year, a contract was concluded with a Boeing-led consortium committing the consortium to US$350 million worth of investments in Saudi Arabia as an offset to the cost of the Peace Shield air defense system. Under this arrangement, the Boeing group agreed to enter into a US$130 million joint project for an airframe maintenance facility and a US$117 million advanced jet maintenance and repair facility. A ten-year agreement was also concluded to develop a computer center and an aircraft hydraulics maintenance center, all to be built at King Khalid International Airport at Riyadh. The Boeing consortium also held a 50-percent interest in a local company to produce military tactical radios.
The Al Yamamah I arms agreement with Britain committed BAe to offset US$7.5 billion in Saudi arms purchases with US$1.5 billion of investments in Saudi Arabia. Under the 1973 MoU British Aircraft Corporation ('BAC') agreed to maintain aircraft and equipment of the Royal Saudi Air Force ('RSAF') and train their personnel.
Under the subsequent 1985 MoU provision was made for the supply of a range of Tornado and other aircraft together with support services through British Aerospace Plc ('BAe'), into which BAC had by then been incorporated. The support team on behalf of the United Kingdom Government ('UKG') became MoDSAP. The KSA gave the project the title 'Al Yamamah' ('AY') which means 'The Dove'. In the 1986 MoU detailed arrangements were set out for continuing provision under AY. That in turn was followed by the 1988 MoU, which provided for the provision of additional aircraft, weapons and ships.
Three such projects were underway in 1991. They included a British-American joint venture to produce missiles for Tornado fighter aircraft, the local assembly of heavy-duty trucks, and a BAe investment in an aluminum smelter at Yanbu. A West German company built a plant to produce mortar shells and as of 1990 was negotiating a contract to produce tank and howitzer ammunition.
In December 2007 the related Al Salam project with a supporting MoU was entered into for the supply of Typhoon aircraft.
Prime Minister Tony Blair ordered the cessation of a three-year Serious Fraud Office investigation into BAE Systems in 2006 as it would affect “thousands of British jobs”. Citing the “public interest”, Mr Blair said the defence giant should not be prosecuted for paying bribes worth hundreds of millions of pounds to the Saudi royal family in order to secure the multibillion-pound al-Yamamah arms contract. When members of the Saudi government found out that the SFO was probing their personal Swiss bank accounts, they also threatened to cut off all intelligence to Britain.
The particular characteristics of the KSA include the secretive nature of its society. It is of course an absolute monarchy and powers of state are, and were, very much maintained within the Royal family, particularly in the hands of the King and the senior princes. The concept of freedom of information and transparency is generally alien to their culture.
Between 30 July 2004 and 14 December 2006 a team of Serious Fraud Office lawyers, accountants, financial investigators and police officers carried out an investigation into allegations of bribery by BAE Systems plc (BAE) in relation to the Al-Yamamah military aircraft contracts with the Kingdom of Saudi Arabia. On 14 December 2006 the Director of the Serious Fraud Office announced that he was ending the SFO’s investigation.
In October 2005 BAE sought to persuade the Attorney General and the SFO to stop the investigation on the grounds that its continued investigation would be contrary to the public interest: it would adversely affect relations between the United Kingdom and Saudi Arabia and prevent the United Kingdom securing what it described as the largest export contract in the last decade. Despite representations from Ministers, the Attorney General and the Director stood firm. The investigation continued throughout the first half of 2006.
In July 2006 the SFO was about to obtain access to Swiss bank accounts. The reaction of those described discreetly as “Saudi representatives” was to make a specific threat to the Prime Minister’s Chief of Staff, Jonathan Powell: if the investigation was not stopped, there would be no contract for the export of Typhoon aircraft and the previous close intelligence and diplomatic relationship would cease.
A report from the Sunday Times dated 10 June 2007. The report states that: “Bandar (Prince Bandar bin Sultan bin Abdul Aziz of al-Saud) went into Number 10 and said ‘get it stopped’ [words omitted]. Bandar suggested to Powell he knew the SFO were looking at the Swiss accounts…if they didn’t stop it, the Typhoon contract was going to be stopped and intelligence and diplomatic relations would be pulled.”
A personal minute from the Prime Minister to the Attorney General dated 8 December 2006 stated that “It is my judgment on the basis of recent evidence and the advice of colleagues that these developments have given rise to the real and immediate risk of a collapse in UK/Saudi security, intelligence and diplomatic cooperation. This is likely to have seriously negative consequences for the UK public interest in terms of both national security and our highest priority foreign policy objectives in the Middle East."
There is no evidence whatever that any consideration was given as to how to persuade the Saudis to withdraw the threat, let alone any attempt made to resist the threat. No-one suggested to those uttering the threat that it was futile, that the United Kingdom’s system of democracy forbad pressure being exerted on an independent prosecutor whether by the domestic executive or by anyone else; no-one even hinted that the courts would strive to protect the rule of law and protect the independence of the prosecutor by striking down any decision he might be tempted to make in submission to the threat.
Ministers advised the Attorney General and the Director that if the investigation continued those threats would be carried out; the consequences would be grave, both for the arms trade and for the safety of British citizens and service personnel. In the light of what he regarded as the grave risk to life, if the threat was carried out, the Director decided to stop the investigation. This announcement created a substantial amount of negative media and public comment.
BAE always contended that any payments it made were approved by the Kingdom of Saudi Arabia. In short they were lawful commissions and not secret payments made without the consent or approval of the principal. The cause of anti-corruption is not served by pursuing investigations which fail to distinguish between a commission and a bribe.
US aerospace parts exports to Saudi Arabia averaged over $1.5 billion annually between 2004 and 2013. Parts represented 96 percent of Saudi Arabia’s aerospace imports from the United States during that period. U.S. companies have established a dominant position in the country, with 59 percent of Saudi Arabia’s aircraft parts imports originating from the United States.
The major commercial players within the aerospace sector are predictably the large aircraft manufacturers – Boeing, Airbus; engine manufacturers GE, United Technologies (maker of Pratt & Whitney engines), SNECMA and Rolls Royce. Also included are major defence contractors such as Lockheed Martin, Raytheon, Thales and BAE. The major national sources of innovation follow these major players, e.g. France/Germany (home of Airbus parent EADS), the United States.
Saudi activity in aerospace is concentrated in King Fahd University of Petroleum and Minerals and Saudi Aramco – and therefore concentrated to some extent within propulsion and fuel related research. The activity from Saudi Arabia compares very well in terms of technical impact benchmarking against the leading nations as well as local competitors and nations of similar economic activity.
For government procurements, contractors are required to subcontract at least 30 percent of the contract’s value to firms that are majority-owned by Saudi nationals and to establish a training program for Saudi nationals. The government may also favor bids that involve a joint venture with a Saudi company. Foreign investors have been hesitant to participate in Saudi ventures because of the long tradition of government interference in the marketplace, bureaucratic nuisances, and concerns about instability and terrorism. Moreover, the government continues to ban foreign investment in national defense or certain sectors with religious significance such as health and pilgrimage services.
Saudi Arabia has initiated a National Industrial Clusters Development Program whose goal is to double the manufacturing sector’s contribution to GDP by 2020. Small and medium-enterprises (SMEs), and suppliers of aftermarket parts, particularly for commercial aircraft, helicopters, and military aircraft could consider Saudi Arabia as an additional export market.
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