As the world’s largest military spender per capita, Saudi Arabia is also examining ways to balance the books by maintaining the balance of power in the Middle East. At the same time, it is examining ways to balance its books by ensuring that a growing percentage of spending is on hardware locally produced within the Kingdom. Vision 2030 aims to localise spending on military equipment from its 2017 level of 2% to more than 50% by 2030. In the 2019 fiscal budget 27% of spending, or SR294bn ($78.4bn), was earmarked for defence and security. This was the highest allocation given to any sector, with education and health receiving SR193bn ($51.5bn) and SR172bn ($45.9bn), respectively. The government is also encouraging the development of advanced manufacturing in the Kingdom, and the aerospace segment in particular is a major target for increased investment. In January 2019 the IMF cited ongoing geopolitical tensions in the Middle East as part of the risk matrix behind a downward revision of global growth forecasts. These tensions include the ongoing risk of state-sponsored acts of cyberdisruption, and in late 2017 Saudi Arabia established a National Cybersecurity Authority to take the lead on the response to these threats.
Sector Growth
Although Saudi Arabia does not publish a breakdown of the division of its military and security sector expenditures, from 2016 onwards the Ministry of Finance has provided the total allocation for the sector in fiscal budget statements. Budgeted allocations increased from SR282bn ($75.2bn) in 2016 to SR288bn ($76.8bn) in 2017 before peaking at SR311bn ($82.9bn) in 2018. In the three years recorded, actual spending was higher than the original allocations. This amounted to spending of SR305bn ($81.3bn), SR334bn ($89bn) and SR324 ($86.4bn) in 2016, 2017 and 2018, respectively. In each year the military and security sector had the highest allocation for budget expenditures, accounting for 25% of the total in 2016 and 32% in 2017 and 2018. The 2019 allocation of SR294bn ($78.4bn) was 5.5% lower than the budgeted amount in 2018 and 9.6% below that year’s actual spending.
Military Spending
According to a December 2018 report by the Stockholm International Peace Research Institute (SIPRI), Saudi Arabia is the world’s third-largest military spender behind the US and China, and is the largest spender on arms in the Middle East. SIPRA estimates that from 2008 to 2015 military spending in the country grew by 74% to reach SR339bn ($90.4bn). In addition, spending in 2017 was equivalent to 10% of GDP, while the world’s top-15 spending military powers averaged approximately 4.2%. According to data from SIPRI, in 2017 Saudi Arabia’s military expenditure dwarfed that of any other country in the Middle East. It estimates that the Kingdom spent about $69.4bn, compared to $18.2bn by Turkey, $16.5bn by Israel and $14.5bn by Iran. Within the GCC, spending by the UAE is not disclosed, but Oman, Kuwait and Bahrain spent $8.7bn, $6.8bn and $1.4bn.
According to the SIPRI Arms Transfer Database, Saudi Arabia was the second-largest arms importer globally from 1998 to 2017, and witnessed a sharp increase in numbers between 2013 and 2017. During that period 61% of arms imports came from the US, 23% from the UK, 3.6% from France and 2.4% from Spain. Switzerland and Germany each supplied 1.8%, while Italy, Canada and Turkey supplied 1.5%, 1.4% and 1.3%, respectively. Additionally, Sweden supplied 1.1% and the Netherlands 0.5%.
In November 2018 the US State Department revealed a 13% increase in its overall global arms sales, along with a 33% increase in the department’s government-to-government sales, up from $41.93bn in 2017 to $55.66bn in 2018. There was also a 6.6% increase in direct commercial sales, up from $128.1bn to $136.6bn. Notable sales to Saudi Arabia included a $6.5bn contract for littoral combat ships and a $1.6bn deal for Patriot missile defence systems. In August 2018 the US State Department revealed that Saudi Arabia was its largest foreign military sales (FMS) customer, stating that there were about $100bn in active FMS cases at that time.
A report on UK arms exports, published by the House of Commons, revealed that from 2010 to 2017 Saudi Arabia was the largest importer of arms from the country, accounting for 46% of total exports, and between 2007 and 2016 the UK was the world’s second-largest arms exporter. According to British media, from 2007 to 2017 the UK delivered 72 Typhoon aircraft, and in March 2018 Saudi Arabia signed a memorandum of intent to buy 48 more under a deal worth a potential further £10bn.
Defence Forces
There are a number of branches of the Saudi defence forces that operate under different ministries. Crown Prince Mohammed bin Salman bin Abdulaziz Al Saud is the minister of defence. In February 2018 new commanders were appointed to key positions under the Ministry of Defence (MoD), which administers the Royal Saudi Land Army (RSLA), the Royal Saudi Air Force (RSAF), the Royal Saudi Naval Forces (RSNF), the Royal Saudi Air Defence Forces (RSADF) and the Royal Saudi Strategic Missiles Force (RSSMF). In addition to MoD forces, the Saudi Arabia National Guard (SANG) operates as a separate entity under its own ministry. It was founded by the late King Abdullah bin Abdulaziz Al Saud as a dedicated security force. The Ministry of the Interior (MoI) operates the border guard, but the MoI’s counterterrorism role was handed to the Presidency of the State Security. This is a new body created in 2017 by King Salman bin Abdulaziz Al Saud, which includes the General Directorate Investigations as well as three special forces branches and an aviation wing. Saudi Arabia does not disclose information about the numbers of people serving in the branches of its armed forces, but in 2015 the International Institute of Strategic Studies estimated that there were roughly 277,000 people serving: 75,000 in the RSLA; 13,500 in the RSNF; 20,000 in air defence; 2500 in the RSSMF; and 100,000 members of SANG.
Saudi Arabia’s armed forces are not configured as an international expeditionary force, but instead trained to defend the country from regional and internal threats. It has been leading a coalition of states in a military intervention in Yemen since early 2015. In addition to air strikes and ground operations, Saudi Arabia and its allies have conducted a naval and aerial blockade of the country. MoD strategic leadership functions are shared by the Presidency of Staff, which is responsible for training, equipping and deploying forces as well as arranging logistical support. The Joint Force Command is responsible for enhancing operational readiness and leading combat operations, responding to a variety of ongoing threats at the regional level. The MoD defence development programme seeks to create modern and high-quality armed services, while at the same time improve spending efficiency and promote localisation of military manufacturing.
Offsetting Policy
In 1984 Saudi Arabia was the first GCC country to introduce an offset policy as a means by which to attract technology, skills and jobs for Saudis as part of the deals with major international firms selling the country arms. It was considered a tool to boost domestic investment and industrial development. Notable examples of this are the Al Yamamah Programme with BAE systems, the Peace Shield Programme with US manufacturers and the Al Sawary programme with France. Vision 2030 acknowledged in 2016 that the net benefits of these efforts had been disappointing, as more than 30 years after the offset programme was established, just 2% of military equipment was manufactured in Saudi Arabia. At that time there were seven Saudi defence firms and two research centres.
In 2017 Saudi Arabia Military Industries (SAMI), which is a state-owned defence company, was created to help deliver Vision 2030’s goal of ensuring that more than 50% of arms bought by the armed forces are manufactured in the Kingdom by 2030. In August 2017 the government also created the General Authority for Military Industries (GAMI), a financially and administratively independent entity that will be chaired by Crown Prince Mohammed Bin Salman. GAMI’s core responsibilities include development of the military industries sector and the monitoring of its performance in meeting various national development goals.
Contractors
Saudi Arabia has long-standing associations with the world’s leading arms manufacturers, many of whom have permanent support teams based in the Kingdom. “Saudi Arabia’s defence partners are committed to the goals of Vision 2030, including Saudiisation and localisation targets,” Tarik Solomon, director of international business development at Shamis Technologies, told OBG.
The 2017 Riyadh summit, at which King Salman met US President Donald Trump, resulted in arms agreements worth $110bn, with the US State Department announcing in October 2018 that $14bn of those deals had been confirmed. In addition to orders for hardware, the US State Department briefing stated that: “In June 2017 the US approved the continuation of a blanket order training programme that includes flight training, technical training, professional military education, specialised training, mobile training teams and English language training, valued at $750m.” The announcement also listed four deals signed in 2017 and 2018 that were worth a potential further $34bn (SR127.5bn) for US manufacturer Lockheed Martin. These include $930m for 26 AN/TPQ-53 radar systems, $525m for a persistent threat detection system, $6bn for a four-ship multi-mission surface combatant programme, and $13.5bn for Terminal High Altitude Area Defence systems. Although these deals were put in place during President Trump’s term in office, in January 2017 Saudi Arabia began to take delivery of the first Boeing F-15SA fighter aircraft purchased as part of a $60bn deal originally made with Saudi Arabia in 2011, while former US President Barack Obama was in power. BAE Systems is another major international producer with operations in Saudi Arabia. The UK company, responsible for the Typhoon aircraft, has operated locally since 1966, employing 6100 people in the Kingdom, 68% of whom are Saudi citizens.
Research & Development
Since the announcement of Vision 2030, a number of international companies have made commitments to increase the proportion of Saudis they employ and train. One challenge is that many of these companies do not wish to lose control of the intellectual property inherent in their systems. Vision 2030 noted that there were only two research centres in the Kingdom that specialise in developing new military expertise. The King Abdulaziz City for Science and Technology (KACST) runs the National Centre for Sensors and Defence Systems Technology. It aims to develop advanced technology in radar and electronic warfare, establishing advanced factories and laboratories. It will also proceed to draw together experts in defence systems, modelling, simulation and defence information systems.
In 2008 the Prince Sultan Advanced Technology Research Institute was created by King Saud University and the RSAF. It conducts research and training for civilians and military personnel, and has laboratories dedicated to the development of autonomous vehicles, communications, electro-optics, microwave and antenna systems, and electronic warfare.
Procurement Policy & Process
The Saudi Arabian General Investment Authority (SAGIA) publishes and periodically reviews a negative list of business functions that foreign companies are unable to undertake within the Kingdom. In December 2017 it published a list which included the manufacturing of military equipment, devices and uniforms, as well as catering services for military bases, private security and detective work. However, international companies and contractors have been able to carry out ancillary services after selling military systems to the government, including maintenance, repair and overhaul (MRO), training, spare parts, mounting and installation of equipment and technical support.
The legal firm Dentons suggests that in the future, SAGIA’s restrictions on defence manufacturing may not apply to joint ventures with SAMI if those ventures were formed to promote Vision 2030 defence localisation initiatives. One sign of change in the procurement process was the 2017 publication of a draft government tender and procurement law, which included dozens of measures such as the possible creation of a more highly advanced government procurement strategy unit.
Domestic Security
Saudi Arabia’s security forces face ongoing threats from terrorist forces, with threats on Jihadist websites and social media urging attacks against Westerners, as well as on military and transport targets. From mid-2016 to mid-2018, 11 members of the Saudi security services were killed and more than a dozen were injured in seven separate incidents spread across the country. Missiles from Houthis fighting in Yemen have been fired into southern Saudi Arabia, however, in a limited number of cases they have been intercepted over Riyadh and shot down by the RSADF.
Aerospace
If the Kingdom is to manufacture more than half of its military equipment by 2030, the localisation of defence aircraft manufacturing must play a key role. A growing number of Saudi companies have become partners to international aerospace manufacturers, offering MRO services to both military and civil aircraft. “Local engineering capability is currently supporting the localisation process within the defence sector,” Fawaz Mohammed Sharabi, CEO of GDC Middle East, told OBG.
In 2018 Crown Prince Mohammed Bin Salman inaugurated a new factory that will start manufacturing aircraft components from 2020 using composite materials that are stronger than metal and lighter than aluminium. According to the Associated Press, the global composite materials market is expected to grow at a compound annual growth rate of 4.1% until 2023, when it will be worth an estimated $38bn. Therefore, the new factory being built as part of the TAQNIA Aerostructure Programme will help the Kingdom tap into a lucrative and growing market. “When the factory first opens we will be able to make parts that are 9 metres long, and with the opening of the next building in 2022 we will be capable of making individual components that are up to 38 metres in length,” Muneer Bakhsh, who is leading the project for TAQNIA, told OBG. In 2019 TAQNIA is recruiting staff for the new factory, and Bakhsh is positive about the availability of Saudi talent. “There are a lot of Saudis out there, both men and women, who are highly qualified with aerospace and engineering degrees from the best universities in the world, and these are the people I am looking for to be a part of this exciting new venture for the Kingdom,” he said. The new plant is a wholly owned Saudi venture that will be capable of making components for fixed-wing and rotary-wing civilian and military aircraft, as well as unmanned aerial vehicles. The project is being supported by KACST, which also operates a space programme and has launched 13 satellites since 2000. In 2018 two new satellites, Saudi 5A and Saudi 5B, were launched into space from China. The satellites will be managed from a control centre at KACST and will provide relevant government agencies with high-resolution imagery.
The General Authority of Civil Aviation (GACA) has stated that the skies above Saudi Arabia are becoming increasingly busy with civilian aircraft. It reported a 7.4% increase in airline passenger traffic in 2018, with more than 98m people passing through the Kingdom’s airports in that year alone.
Aviation Regulation
GACA is the regulator for civil aviation and is linked to the Ministry of Transport. It oversees the country’s civilian airports and airlines, and issues commercial licences to the full range of companies offering aviation services. These include airlines, aerial photography companies, baggage handlers and training companies. GACA is also overseeing the expansion of Saudi Arabia’s airport system. In 2018 the King Abdulaziz International Airport in Jeddah had its soft opening. It is expected to become the country’s busiest air transport centre, with an 810,000-sq-m terminal and the capacity to handle 30m passengers annually. Upgrades were also completed at Tabuk Regional Airport, while stone-laying ceremonies took place at four new airports at Jazan, Al Jouf, Al Qurayyat and Qunfudah.
Privatisation
In 2011 the Saudi Civil Aviation Holding Company (SAVC) was formed to promote privatisation in the sector, and in response to Vision 2030, a royal decree was issued in 2016 to proceed with privatisation of all GACA investment assets. SAVC is working to deliver this goal while also boosting the contribution made by the aviation sector to the country’s GDP from SR30.2bn ($8.1bn) in 2016 up to SR50bn ($13.3bn) in 2021.
There are 27 international, regional and domestic airports in Saudi Arabia, and SAVC’s privatisation programme for these will be completed in stages. In 2016 Riyadh Airports and Saudi Air Navigation Services were established to oversee King Khalid International Airport in the lead-up to privatisation.
Foreign Investment Legislation
GACA rules stipulate that any company offering air travel services can have a maximum of 49% foreign ownership, while international companies are permitted to own and operate ground support businesses such as those that provide air bridges, catering, training or baggage handling services. There are a number of joint ventures in aerospace manufacturing, the most notable of which resulted from the US Peace Shield offset scheme and which currently trades as Alsalam Aerospace Industries. Boeing Industrial Technical Group owns 50% of the equity, while state-owned Saudi Arabian Airlines owns 25%, Gulf Investment Corporation 10%, and two listed Saudi companies, Saudi Advanced Industries Company and Tasnee, holding about 10% and 5%, respectively.
Cybersecurity
In October 2017 a royal decree announced the creation of the National Cybersecurity Authority (NCA), with minister of state and cabinet member Musad Al Aiban appointed as its chairman. The board of directors includes the president of state security, chairman of general intelligence, deputy minister of the interior and assistant minister of defence. Local media reported that the NCA would have regulatory as well as operational responsibilities in the protection of networks, IT systems and data services. Part of its remit is to hire qualified Saudi citizens, build partnerships with the public and private sectors, and to invest in heightened cybersecurity measures.
The most high-profile cyberattack occurred in 2012 when the Shamoon virus shut down Saudi Aramco’s computer systems. In January 2017 state-controlled television channel Al Ekhbariya revealed that the Ministry of Labour had been hit by a cyberattack, though no data was breached, and that Sadara Chemical had experienced network disruption. In addition, in October 2018 UK media reported that Russian hackers were believed to be behind an August 2017 explosion, targeting an emergency shutdown system that was supplied by French firm Schneider Electric.
In October 2018 the NCA issued a core cybersecurity controls document outlining minimum standards for all national agencies. The NCA stressed the regulations applied equally to public and private sector entities, adding that it was its mandate to develop policies, mechanisms, standards and regulations to protect networks, systems and electronic data including national infrastructure. The NCA said it would be measuring compliance with its directives. Concurrently, the Ministry of Communications and IT published a cybersecurity threat report in 2018 stating that the Kingdom had been exposed to terrorist cyber warfare, which had aimed to disrupt vital services in the country. It said that in the fourth quarter of 2017 government entities had been the target of 48% of cyberattacks, while energy and telecoms sectors to 15% and 11%, respectively.
Private Sector Role
Although private security work is on SAGIA’s negative list, cybersecurity advice is offered by a variety of international software companies in Saudi Arabia, and there are regular cybersecurity conferences in the Kingdom as well as in neighbouring GCC countries. In fact, Microsoft publishes an annual threat assessment based on the prevalence of malware, worms and trojans found by its software on computers in different countries. Its 2018 report revealed that 25.7% of Saudi computers had malware, compared to the global average of just 18.3%. Many of the international defence contractors operating in the Kingdom also offer cybersecurity solutions. In 2018 the US company Northrop Grumman signed a memorandum of understanding with the Saudi Federation for Cyber Security and Programming in order to sponsor annual cybersecurity competitions and raise awareness of this issue.
Outlook
Defence and security received the highest budget allocation of all sectors in Saudi Arabia, with 27% of spending. This is set to work concurrently with the development of advanced manufacturing, putting the Kingdom in an ideal position to increase the localisation of its manufacturing base and continue to expand the aerospace segment.
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