Aramco IKTVA contractor matrices are now well established
For the Aramco IKTVA program to succeed, it had to be seen to be systematic, fair and transparent, and above all, a single window to Aramco for interested contractors.
The launch of the program in December 2015 set out some guiding matrices to measure the “added value” brought to the Kingdom by a supplier. In an unusual move for Gulf state enterprises, the matrices were co-developed with suppliers.
In 2015, Aramco spelled out the amounts in detail. There was $57 billion allocated for drilling materials, and $119 billion for rigs and wells services, which was broken down further to $60 billion in rig drilling operational services and $59 billion in well services.
A further $56 billion was earmarked for surface facility materials and $75 billion for surface facility construction, with Aramco again providing very detailed breakdowns.
The company provided detailed project submission matrices that detailed the evaluation of contractor compliance for more enhanced local content, utilization of local material and supply chain partners, and the quantity and quality of local job creation.
The mode of participation for foreign contractors was left open: Either through wholly owned local manufacturing plants or joint ventures, or through technology transfer licensing to Saudi operators, without compromising on quality or price competitiveness.
The new contractor evaluation matrix also assesses for local content export potential. There are more than 100 IKTVA action plans now being executed, covering multiple services and commodities in onshore and offshore engineering, but also in new areas, including digital transformation, environmental application, unconventional resources such as Saudi shale gas — especially from the vast Jafurah unconventional gas fields — and nonmetallic carbon fiber manufacturing. These are deemed to be at the heart of Aramco’s next generation processes.
The application of the IKTVA vendor matrices is based on four key pillars, with data requested for the past three years from suppliers applying for Aramco projects.
To start the process, revenue sales are broken down by in-Kingdom sales and exports, and then the following key matrices are applied: First is the portion of goods and services purchased in-Kingdom and from abroad. The second pillar concerns the employment of Saudi nationals and the total Saudi salary and compensation payments as a percentage of total employee payments. The third pillar focuses on the training given to Saudi employees and their qualifications, by number and cost. The fourth pillar examines in-Kingdom capex expenditures and R&D operating expenses, again for in-Kingdom expenditures from outside suppliers. The IKTVA ratio index is then calculated by adding all of these four cost pillars and dividing by the revenue figures to arrive at a certain percentage.
All of this might seem complicated and off-putting, but the annual Aramco IKTVA meetings will ensure that new vendors are familiarized with the application process.
In arriving at a contract award decision, Aramco places great emphasis on research and development. This is important as it will assess whether the vendor is advancing in-Kingdom value by utilizing research to make sure that components are built within Saudi Arabia. Levels of investment in this category is also an important selection element.
Aramco uses the final IKTVA score to allocate business in a transparent manner. If vendors do not have an IKTVA, they are not invited to apply for Aramco work. But there are thresholds which have to be met within an IKTVA score. It could be that one supplier has 40 percent and another 60 percent, which means that the latter is adding more value to the Kingdom by buying more, investing, doing R&D and exporting from the Kingdom. The company is therefore rewarded in doing business with Aramco.
Being a regional export champion in the program is a big plus in supplier selection. If suppliers export from the Kingdom, they get an improved IKTVA score. If they manufacture locally, they will hire locally, leading to national economic benefits including market diversification and an independence from Aramco.
Some international companies have applied IKTVA concepts with enthusiasm, seeing opportunities not only in the Saudi market, but also beyond, through using the Kingdom as a springboard. In line with Saudi Vision 2030 and Aramco’s IKTVA program, Siemens delivered its first gas turbine built in the Kingdom in 2016 — the first of five.
The turbine was produced at the Siemens Dammam Energy Hub, the Kingdom’s first gas turbine manufacturing facility and the largest in the Middle East, after meeting the IKTVA score criteria. Other multinationals doing work with Aramco have taken the Siemens model on board.
The IKTVA formula has evolved over the years to accommodate supplier and contractor motivations. It has become a successful program that is seen to be fair and transparent by all parties, an important factor in its longevity. Supplier and investor interest is surging.
Last year, the two-day IKTVA Forum and Exhibition drew more than 4,000 participants representing 1,000 companies from 40 countries. This speaks to the global and local interest shown in IKTVA.
Dr. Mohamed Ramady is a former senior banker and Professor of Finance and Economics, King Fahd University of Petroleum and Minerals, Dhahran, and author of “Saudi Aramco 2030: Post IPO challenges.”