Assessment of the Saudi offset program

Sami Alhumaidi, Managing Director of PSATRI taks about the offset program in Saudi Arabia.

Between 2013 and 2025, GCC countries will have spent roughly 1 trillion on defence and about 30% of this is dedicated to capital expenditures. If a 35% offset requirement is enforced this means that 105 billion could either be invested or sourced domestically creating more than 280,000 jobs. There is a lot of opportunity in the offset program. How do you view the offset program itself, the effect it had on the economy and its implications for the future?

Saudi Arabia started the offset program more than 25 years ago. It had some very optimistic views and we had set goals and objectives. I don’t believe that the offset program so far has achieved those objectives and goals. The objectives of the offset program to create jobs and diversifying the economy of Saudi Arabia have not succeeded yet. There has to be a lot more attention given to the offset program to make sure that it is closer to achieving its objectives.

The offset program needs more attention, it needs laws to control it, and it needs better governance. The supervisory committees of the offset programs need to enforce the offset objectives more strongly. The offset program needs to be assessed and reviewed periodically and corrective actions must take place. I am not very happy with the offset program right now. It has done parts of its objectives but it still has a long way to go.

Saudi Arabia has one of the largest defence budgets in the world. There are no exact figures but the Stockholm Institute estimates it is about 80 billion dollars annually spent on defence each year. This is a huge number and this money is mostly spent on the procurement of foreign technology, which if it is spent properly could go into research in Saudi Arabia or into developing its own home grown defence industries. What are the investment opportunities in the defence sector?

The offset program needs to pay more attention to small and medium enterprises, and encourage the younger generation of Saudi Arabia to become more competitive, more entrepreneurial. The entrepreneurial culture in Saudi Arabia needs to be built. The defence industry is one of the industries in the world that could offset to other industries.

Instead of the classic approach of trying to create gigantic companies we now need to focus on small and medium enterprises and encourage the young generation to become more creative and innovative. We need to make sure that the supply chain for all the major defence contractors is available within the country so that they can source all of their components within the country rather than buying from abroad. If we manage to get that supply chain up and running in the country, eventually that will lead to other industries and the country will now start the cycle of becoming an industrial country.

The government is making effort with the appointment of Mohamed Al-Mady, former chairman of SABIC to lead Military Industries Corporation. The Ministry of Defence is reforming and updating its foreign procurement policies and so we are polarising ourselves in the defence area to improve the defence industry in the country and encourage defence contractors to source locally rather than from abroad.