Saudi Arabia To Overhaul Military In Plan For Life After Oil

Saudi Arabia's plans to overhaul every corner of its economy won't spare the military.

The kingdom will put its armaments industry under a holding company as it prepares for a post-oil era. Part of that reboot will seek to meet more of its military needs domestically and diversify its economy, Deputy Crown Prince Mohammed bin Salman said.

Prince Mohammed, second in line to be king and the power behind the throne, is leading the biggest economic shakeup since the founding of Saudi Arabia in 1932, with steps that include selling less than 5 percent of Saudi Arabian Oil Co., cutting subsidies and bringing more Saudis into the labor market. His goal: end eight decades of the dependency on oil.

"When I enter a Saudi military base, the floor is tiled with marble, the walls are decorated and the finishing is five stars. I enter a base in the U.S., you can see the pipes in the ceiling, the floor is bare, no marble and no carpets. It's made of cement. Practical," Prince Mohammed said in an interview with Saudi-owned Arabiya television before details of the "Vision 2030" plan were announced. "We have a problem with military spending."

Saudi Arabia has one of the biggest military budgets in the world, and was the leading Middle East spender on arms in 2015 at $46 billion, according to IHS Jane. It allocated 213 billion riyals ($57 billion) in its 2016 budget for defense spending. "We are the third- or fourth-largest in terms of military spending in the world, yet our army is ranked in the twenties. There is a problem," the prince said.

"We are now about to establish a holding company for military industries, 100 percent owned by the government, that will be listed later in the Saudi market," Prince Mohammed said. "We expect it to be launched by end of 2017 with more details."

Raising the proportion of military equipment bought from Saudi producers to as much as 50 percent would create jobs and boost the economy, he said. The kingdom will seek to restructure several military contracts to tie them to Saudi industry, he said.

Saudi Arabia's military has been tested in Yemen, where it's fighting with a coalition of Muslim nations against the Shiite Houthi rebels they accuse of being backed by Iran.

"Building a military industry in Saudi Arabia would be difficult given its limited technology and skills base," said Paul Sullivan, a professor of security studies at Georgetown University in Washington. "This could take decades. A functioning and sustainable military industry takes a lot of investment, education, training and proper policy making."

While an expanded Saudi defense industry may provide competition to U.S. contractors, the Obama administration has urged Saudi Arabia and other Gulf Cooperation Council members to develop their own defense capabilities rather than depending on the U.S. as much as they have in the past.

"U.S. military exporters may find this something of a threat to their bottom line -- even though they could be the beneficiaries in some ways," Sullivan said. "The U.S. government may see this as the beginning of less leverage over such things in the future."

© 2016 Bloomberg L.P. 

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