Aramco IKTVA: The five letters that have come of age

The announcement by Saudi Aramco on Dec. 1, 2015 to local and foreign contractors to officially roll out its In-Kingdom Total Value Add program, which this author had the privilege to attend as a keynote speaker, has come of age.

Now in its sixth full year, IKTVA has established itself as a concept and a brand in the energy sector, and holds annual meetings. It has been a story of tangible, incremental success and is a cornerstone of Aramco’s strategic policy. The stated intent of the program is to localize 70 percent of the company’s supply chain content by 2021, while raising energy-related exports to 30 percent and creating thousands of jobs for young Saudis by the creation of an additional 500,000 new direct and indirect jobs from its own capital expenditure by 2020.Given that around 1.8 million Saudis worked in the private sector, such an incremental job creation by Saudi Aramco alone would represent a significant increase to wean Saudis from public sector job preferences. Over the next decade, the projected spend for Saudi Aramco is in the region of SR1.5 trillion ($400 billion).

Although IKTVA is specifically focused on Aramco’s energy-related procurement plans, the concept of “in-Kingdom” localization is now part of a much wider strategy to diversify the country’s economic base, create sustainable employment and reduce foreign reserve outflows.

Since its launch, IKTVA has created best-in-class infrastructure, streamlined business processes, pioneered industry initiatives that ensure sustainability and enabled new opportunities, especially for the SME sector. According to CEO Amin Nasser, the roots of IKTVA are now well established and the COVID-19 pandemic showed the resilience of the program in helping the company to meet its supply chain disruption challenges.

In 2022, Aramco seeks to build on this progress under the theme of “Paving the Way to Economic Success” to strengthen its readiness and resilience. Innovation and sustainability are also key objectives and IKTVA is a mechanism for embracing new technologies and the circular carbon economy.

Saudi Arabia has made its IKTVA objectives explicit: Increase local content and create new jobs from current and planned projects. The choice is stark for international contractors: join the Kingdom in fulfilling this “made in Saudi Arabia” vision or lose out on lucrative project awards.

The rewards are tempting for those that comply. Aramco said in 2015 that some $334 billion, later raised to $400 billion, had been earmarked for its capital program expenditure for the 2015-25 period of the IKTVA launch. It also provided a detailed breakdown for an average yearly spend of $33 billion over the period, with a high level of transparency not often seen in the Gulf region.

It is not only in the energy sector that localization has been given a high priority, but also in other large expenditure government sectors, including defense procurement with the introduction of the AFED program to increase local content.

IKTVA’s results to date have been laudable. Local suppliers have doubled their local spend on materials and services, increased their spending on Saudi workers by 60 percent, while the training and development of Saudis has increased fourfold.

From a modest start in 2015, the IKTVA program has become a viable and strategic element of what can be achieved with perseverance without compromising Aramco’s high vendor standards.

Dr. Mohamed Ramady

There are more than 100 IKTVA action plans being executed covering multiple services and commodities. While creating quality jobs, building a well-trained workforce and stimulating economic growth are key objectives, localization is ultimately about sustainability, according to Aramco executives. Closing supply chain gaps is also paramount, with the company creating more than 140 investment opportunities, which attracted more than 460 investments with an estimated capital expenditure of $6.5 billion.

Some analysts believe IKTVA is about increasing Saudization, but in essence it is about localization and keeping the supply chain near to home, making it more reliable and adding to GDP growth. Having company inventories rooted in the local marketplace greatly increases reliability and improves cost-efficiency. The COVID-19 pandemic, supply chain disruptions and cost increases have shown this IKTVA objective to be correct.

In the final analysis, governments and institutions like Saudi Aramco have to create the appropriate enabling climate for localization measures to succeed. These include creating appropriate business ecosystems for local suppliers to participate, especially by fostering high quality SMEs, re-investment by in-Kingdom suppliers, having the right environment for foreign direct investment, improved logistics and transportation, and a capable and technically educated labor force.

Above all, a synchronized strategic direction and focus is required that promotes and encourages international contractors to undertake local higher risk/higher value industries.

Collaboration has been a byword for IKTVA and the program has seen Aramco partner with entities such as the Saudi Industrial Development Fund, the Saudi Arabian General Investment Authority, MODON, the Local Content and Government Procurement Authority, Monshaat, the General Authority for Statistics, the Export Authority, and the Royal Commission to share best practices and achieve success in localization.

Also, Saudi Aramco is developing the King Salman Energy Park — an energy industry hub and city that will help it and other major companies in the Kingdom to localize their supply chains and allow for a continued increase in local procurement.

From a modest start in 2015, the IKTVA program has become a viable and strategic element of what can be achieved with perseverance without compromising Aramco’s high vendor standards.

• Dr. Mohamed Ramady is a former senior banker and Professor of Finance and Economics, King Fahd University of Petroleum and Minerals, Dhahran.