IKTVA an essential aspect of KSA’s economic transformation
It is probably better known as Saudization, though that term too, like its counterparts in other Arabian Gulf countries (Emiratization, Bahrainization) has issues, implying just the provision of jobs for citizens of those states. “Localization” is too parochial; “nationalization” has too many socialist overtones.
Strategists at the Arab Petroleum Investments Corporation (APICORP), the Riyadh-based investment bank that specializes in the energy sector, call it “local content requirement” (LCR) — using content in the widest sense to include products, services and people — but we’ll stick with IKTVA.
Amin Nasser, chief executive of Saudi Aramco, highlighted the significance of IKTVA at the Dhahran meeting, and set a new and ambitious target: By 2021, he said, 70 percent of Aramco’s requirements would be sourced from Saudi suppliers.
Small- to medium-sized enterprises (SMEs) will be at the heart of this expansion. They have the local knowledge and networks required, yet these are not currently being used to the full. Nasser estimated that SMEs contribute just 20 percent of gross domestic product (GDP), about half of the proportion in industrialized countries. He imagines this rising to 35 percent in the medium term.
Those are laudable goals, but as the APICORP experts show, there are challenges and hurdles to overcome before they can be realized. There is an awful lot of history to unmake along the way.
The economic structure of Saudi Arabia and other Gulf oil producers was set in the years after World War II, when oil from the region began to flow and global demand for energy began to take off.
The Middle East had nearly half the world’s oil and gas reserves, but back then did not have the infrastructure and skills to fully exploit that good fortune. Populations were small and badly trained; the energy business requires huge amounts of capital and sophisticated machinery and equipment.
The Western oil companies had both capital and technology, but were not minded to hand them over. The “rentier” economies of the region — in which the right to exploit energy resources was effectively leased out to foreigners — were born.
As the price of oil began to trend upward from the 1970s onwards (despite occasional downturns) the Gulf countries realized they had valuable assets on their hands, but were not getting the full benefit from them. Initially, to redress this, there was a wave of nationalizations of foreign oil assets — sometimes compensated, sometimes not.
Saudization is the final stage in a process by which control of national assets is returned to citizens.
You could regard IKTVA as the final stage in the process by which control of national energy and industrial assets is returned to the citizens of the Gulf countries. Over time, locally sourced products and services will replace foreign ones.
In 2016 locally sourced assets were estimated to account for 35 percent of the national economy, forecast to reach 50 percent by 2021 and 70 percent by 2030.
Aramco is ahead of the field in this respect. Last year, it estimated that some 43 percent of its spend went to local firms. More than half of Aramco’s increased capital expenditure of $414 billion over the next decade will come from locals, much of it from SME suppliers.
However, there are challenges, APICORP recognizes. Simply imposing targets for LCR does not really do it. Quotas can be filled with unproductive staff, or low-quality services, or substandard machinery.
So governments have to rigorously enforce the implementation of new LCRs. APICORP cites two foreign examples to support the call for effective government oversight. In Iraq after the US invasion, weak central government allowed oil companies to do more or less as they wished, with the result that output dropped dramatically.
More recently in Brazil, the oil industry introduced LCRs that were too complex and strict. The result was delays, cost overruns and hefty fines for companies that could not meet unrealistic targets.
Government supervision has to be effective, but flexible, and it also has to take into account the views of foreign suppliers who still make up the majority of the economy. These have to be encouraged to participate in the IKTVA process, via training and technology transfer, and persuaded that it is in their commercial interest to do so. Some, like Siemens of Germany and Dow Chemical of the US, are already doing that.
Meeting the ambitious targets set by IKTVA will not be easy, but essential if the economic and social transformation of Saudi Arabia is to be accomplished.
• Frank Kane is an award-winning business journalist based in Dubai. He can be reached on Twitter @frankkanedubai
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