PAGE 1 Technology Transfer to the Middle East September 1984 NTIS order #PB85-127744 PAGE 2 Recommended Citation: Technology Transfer to the Middle East (Washington, D. C.: U.S. Congress, Office of Technology Assessment, OTA-l SC-173, September 1984). Library of Congress Catalog Card Number 84-601109 For sale by the Superintendent of Documents U.S. Government Printing Office, Washington, D.C. 20402 PAGE 3 Foreword This assessment was undertaken in response to requests of the House Committee on Science and Technology and the Senate Committee on Banking, Housing, and Urban Affairs to examine technology trade and transfer to developing countries in the Middle East. In addition, the Subcommittee on Energy, Nuclear Nonproliferation, and Governmental Processes of the Senate Committee on Governmental Affairs requested that the assessment examine transfers of nuclear technology. This report clarifies the policy issues surrounding technology transfer to developing countries, by highlighting tradeoffs among various commercial, political, and development assistance policy goals, and by suggesting options for more consistent policies affecting technology transfer to developing countries. It follows earlier OTA work dealing with East-West technology transfer, including assessments of East-West Technology Trade and Technology and Soviet Energy Availability. The study focuses on a region of great strategic importance, one where significant development efforts during the past decade have involved the introduction of technology from the United States and other supplier countries. It examines in detail competition among suppliers of technology, and problems the recipients face in effectively utilizing advanced civilian technologies in five sectors: petrochemical production, telecommunications systems, commercial aircraft support systems, medical services, and nuclear power. The policy perspectives of the recipient as well as other supplier countries and evaluated. The report identifies U.S. policy options in light of an evaluation of future prospects for Middle East technology trade. OTA is grateful for the assistance of its distinguished project advisory panel chaired by George Bugliarello, and for the assistance and advice of numerous Middle Eastern policy makers, agencies of the U.S. Government, and individuals from academia and industry. It should be understood, however, that OTA assumes full responsibility for the report, which does not necessarily represent the views of individual members of the advisory panel. Director 111 PAGE 4 Technology Transfer to the Middle East Advisory Panel George Bugliarello, Chairman Polytechnic Institute of New York Fouad Ajami Johns Hopkins University J. S. Dana South Hampton Refining Co. Farouk El-Baz Itek Optical Systems Ragaei El-Mallakh University of Colorado James A. Finneran M. W. Kellogg Co. Eric Glasscott Telephone & General Services, Inc. Carl N. Hodges* University of Arizona Gary Hufbauer Institute for International Economics J. C. Hurewitz Columbia University Charles Issawi Princeton University T. R. McLinden Transworld Airlines Joseph Nye Harvard University Anthony Pascal RAND Corp. William H. Pickering Pickering Asssociates C O rp. William B. Quandt The Brookings Institution Joseph J. Sisco Sisco Associates Joseph S. Szyliowicz University of Denver Theodore B. Taylor Appropriate Solar Technology Institute William L. Weirich Hospital Corp. of America Samuel F. Wells, Jr. The Smithsonian Institution l Ex officio member from OTA Technology Assessment Council. NOTE: OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the advisory panel members. The views expressed in this OTA report, however, are the sole responsibility of the Office of Technology Assessment. iv PAGE 5 OTA Technology Transfer to the Middle East Project Staff Lionel S. Johns, Assistant Director, OTA Energy, Materials, and International Security Division Peter Sharfman, International Security and Commerce Program Manager Martha Caldwell Harris, Project Director Douglas L. Adkins Eric Bazques Nancy Lubin Daniel Kevin* Administrative Staff Jannie Coles Dottie Richroath Jackie Robinson Project Contractors Riad Ajami Booz-Allen & Hamilton, Inc. Nazli Choucri Chem Systems Consultants for Industry and Trade Development Decisions, Inc. Thomas Ilgen Peter Knauss The Futures Group Massachusetts Institute of Technology T. J. Pempel T. I.E.-West Corp. Tagi Sugafi-nejad l Contributor PAGE 6 Acknowledgments This report was prepared by the staff of the International Security and Commerce Program of the Office of Technology Assessment. The staff wishes to acknowledge the contributions of the following individuals, Government agencies, and organizations for their generous assistance: Agency for International Development Central Intelligence Agency Congressional Research Service Department of Commerce Warren Donnelly Embassy of Egypt Department of Energy Fereidun Fesharaki Thomas Graham David Isaak OTA Reviewers Embassy of Kuwait The Middle East Institute Marvin Miller Embassy of Saudi Arabia Clive Sinclair Department of State Transnational Group Richard Wilson Vahan Zanoyan John Alic Audrey Buyrn Larry Jenney Richard Rowberg Chuck Wilk Thomas Bull Alan Crane Gordon Law Jane Sisk Ray Williamson PAGE 7 Contents Chapter Page l. Summary and Findings . . . . . . . 3 2. Analyzing Technology Trade and Transfer: Conceptual Issues and Policy Choices . . . . . . . . . 21 3. The Middle East as a Context for Technology Transfer . 55 4. Technology Trade With the Middle East. . . . . . . 89 5. Petrochemical Technology Transfers . 119 6. Telecommunications Technology Transfers 185 7. Technology Transfers in Commercial Aircraft Support Systems 247 8. Technology Transfers in Medical Services. 303 9. Nuclear Technology Transfers. . . . 351 10. Patterns in Technology Transfer: Impacts and Experiences. 403 11. Recipient Country Policies . . . . . . . 425 12. Policies of Other Supplier Countries. . 473 13. U.S. Policies Affecting Technology Trade and Transfer 521 14. Future Prospects for Technology Trade. . . . . . 563 15. Options for U.S. Policies Affecting Technology Transfer 581 Appendix Page A. Selected Medical Services Projects in the Middle East . . 597 B. Selected Names and Acronyms . . . . ., 603 Index . . . . . . . . . . . . . . 607 Vii PAGE 8 CHAPTER 1 Summary and Findings PAGE 9 Contents Page INTRODUCTION . . . . . . . . . . . 3 PRINCIPAL FINDINGS . . . . . . . . . . 4 Technology Transfer and Trade During the Past Decade . . . 4 Technology Transfer: Competition Among Suppliers and Technology Absorption, . . . . . . . . . . 6 POLICIES AFFECTING TECHNOLOGY TRANSFER . . . 11 Recipient Country Policies . . . . . . . . . . 11 Policies of Other Supplier Countries . . . . . . . . 12 U.S. Policies . . . . . . . . .. .. . . . 13 FUTURE PROSPECTS . . . . . . . . . . 14 Prospects for U.S. Technology Trade With the Middle East . . 14 Options for U.S. Policies Affecting Technology Transfer . . . 15 Figures Figure No. Page I. Supplier Shares of Six Industrial Countries in Machinery and Equipment Exports to the Middle East, 1970 and 1982 . . . 5 2. Summary of Findings: Technology Absorption in the Middle East, 1984. . . . . . . . . . . . 10 PAGE 10 CHAPTER 1 Summary and Findings INTRODUCTIO N During the 1970s, the Middle East was the world fastest growing market for engineering products, construction, and technical services. Rising oil revenues supplied the oilproducing nations in particular with the financial resources needed to purchase these imports. At no other time in recent history has a group of developing nations attempted so quickly and dramatically to transform their economies and societies as did the Islamic nations of the Middle East during this period. The experiences of these nations, which have been in a unique position to import advanced technologies from abroad, elucidate the promise and problems of technology transfer to developing nations. U. S. firms and organizations have been major suppliers of engineering products and technical services to the Middle East, and this raises important issues for U.S. policy. These include questions concerning the competitive positions of U.S. firms in developing country markets, the long-term effects of technology transfers on the growth of export industries abroad, the effectiveness of U.S. Governmentsupported assistance programs involving technology transfers, and the military-strategic implications of advanced civilian transfers. The U.S. Government has no coherent policy governing technology transfer to developing nations, and there has been no systematic study of the policy implications of civilian technology transfer to the Middle East. The Office of Technology Assessment (OTA) research was designed to clarify U.S. policy issues germane to civilian technology transfers to Islamic countries in the Middle East. *The research focuses on six Middle Eastern nations: Algeria, Egypt, Iran, Iraq, Kuwait, and Saudi Arabia. These countries were selected because they have imported comparatively large volumes of equipment and technical services, because they have varied financial resources and labor forces to support technology transfer, and because they have different approaches to foreign policy and industrial development. Because Israel has Recipient and supplier nations alike have critical interests at stake in technology transfer. As a process that enhances the recipients capacity to produce goods and services, technology transfer is a two-way interaction. For developing countries, successful technology transfers promise economic growth, improved living conditions, manpower development, and even enhanced national prestige and influence. However, technology transfers that fail or have unintended consequences may pose economic and political problems. From the perspective of supplier nations, technology transfers may help win friends, cement political alliances, increase exports, or alternatively lead to resentment and conflicts of interest. The promises of success and problems of failure are particularly apparent when new and complex technologies are introduced into developing nations that have limited scientific and technological infrastructures. This study, undertaken at the request of the House Committee on Science and Technology and the Senate Committee on Banking, Housing, and Urban Affairs, examines the process of technology transfer to the Middle East (focusing particularly on competition among suppliers and absorption of technology by recipients) in order to identify policy issues for the United States. The Subcommittee on Energy, Nuclear Nonproliferation, and Governmental Processes of the Senate Committee on Governmental Affairs presented a supporting request that the study deal with transfers of nuclear technology to the Middle East. attained a much higher level of technological development, it is not included as a major focus of study. The term Islamic countries is used here simply to indicate that sizable proportions of the populations of these and some other Middle Eastern countries are Muslims, or followers of Islam. As discussed in ch. 3, however, there are many groups in these countries and the role of Islam in politics, economics, and social affairs varies widely. 3 PAGE 11 4 Technology Transfer to the Middle East The study ex amines technology transfers re quired for the establishment of several complex civilian production and service systems: petrochemical and nuclear power production facilities, telecommunications systems, commercial airline support services, and medical services. These types of technology transfers were selected because they are associated with large volumes of trade in equipment and technical services, because of the challenges recipients face in fully utilizing them, and because in recent years U.S. policies have restricted exports of advanced technologies for political and military reasons. This study addresses the following questions concerning advanced technology transfers: l l How extensive have transfers of advanced technologies been to the Middle East during the last decade, and what factors affect international technology trade? What factors inhibit or enhance the ability of recipients to utilize or absorb adPRINCIPA L TECHNOLOGY TRANSFE R AND TRADE DURING TH E PAST DECAD E During the past decade, Middle Eastern countries have rapidly expanded their imports of advanced civilian equipment and technologies. The major suppliers have been the United States, Japan, and the West European countries. Total exports from industrial countries to 15 Islamic countries in the Middle East rose from $5.5 billion in 1970 to about $100 billion in 1982, an eightfold increase in constant dollars. Engineering productsmachinery, equipment, and instruments-accounted for about half of these exports. Technical and managerial services have been increasingly important exports. The Middle East is a very competitive marketplace, and suppliers have specialized in exports of certain types. U.S. firms have been major suppliers of machinery and equipment, particularly nonelectrical machinery and airvanced technologies, and do the experiences of various nations differ? How effectively have U.S. firms and organizations transferred technology, and how well have they competed with those organizations from other supplier nations? What are the prospects for technology trade with the-Middle East during the next decade, and what policy options are available to the United States? Many U.S. policies affect technology transfer to developing nations in the Middle East, although these policies were not formulated with that goal. Technology transfer is often an underlying issue in discussions of development assistance, commercial, and politicalstrategic policies. Public policy debates, however, rarely center on civilian technology transfer. This study addresses the issue of whether the United States should develop more consistent policies regarding technology transfer. FINDING S craft. Like the United States, West Germany and Japan have been major suppliers of machinery and equipment, but Japanese firms have been prominent in exports of basic manufactures such as consumer electronics and dominate in exports of road vehicles. In contrast, French firms have been particularly prominent in public works projects. U.S. firms appear to have had a comparative advantage in the technical services area, including management of large projects and provision of technical support. For newly industrializing countries such as South Korea, the Middle East is a key market for construction services. Soviet bloc countries have been much less prominent in commercial technology trade, but some of them have expanded sales in certain market niches such as medical services. In 1982, the market share of U.S. firms remained approximately the same as it had been in 1970, 20 percent of machinery and equipment imports to the Middle East (see fig. 1). In con- PAGE 12 Ch 1Summary and Findngs l 5 trast, Japanese firms increased their market share during the same period from 9 to 23 percent, while Frances market share fell from 18 to 9 percent. U.S. economic interactions with the region have, furthermore, been strongly concentrated in trade with a small number of nations. Exports to Saudi Arabia and Egypt accounted for more than two-thirds of U.S. exports to the region in 1982. Although Middle East technology trade has increased rapidly, OTAs research indicates that technology transfers have been limited. For the purpose of this study, technology transfer is a process involving a supplier and recipient whereby the recipient attains, as a result, an improved capability to operate an industrial production facility or service system. Technology trade, which includes international sales of industrial rights, equipment, technical services and training, and plans and documents, is only one part of technology transfer. Technology utilization or absorption by the recipient is a critical part of technology transfer. The extent of absorption depends on the type of capability developed by indigenous personnel in a particular firm or industrial sector to operate and maintain equipment or, at higher levels, to modify the technology or design and produce new products. OTAs research shows that technology is much more easily traded internationally than it is absorbed by recipients in developing countries. In the Middle East a number of factors constrain technology absorption. They all relate to the considerable technological distance that Figure 1 .Supplier Shares of Six Industrial Countries in Machinery and Equipment Exports b to the Middle East, c 1970 and 1982 (percent) United 1970 Total value: $2.2 billion d United 1982 Total value: $42 billion d Italy United States Kingdom 9 Japan France West Germany PAGE 13 6 l Technology Transfer to the Middle East must be bridged between the suppliers and the recipients. Chief among them is a disparity be tween human and financial resources. Countries such as Saudi Arabia and Kuwait, despite their capital resources, are constrained by shortages of technical and managerial personnel. In contrast, Egypt is the Middle Eastern country with the most extensive technological infrastructure, but many Egyptian engineers and teachers have gone abroad to find work. In addition, the Islamic countries of the Middle East are challenged to use foreign technologies and personnel in meeting development goals without creating irreconcilable conflicts with traditions and among groups in their societies. TECHNOLOGY TRANSFER : COMPETITION AMONG SUPPLIERS AND TECHNOLOGY ABSORPTION OTAs analysis of competition among suppliers for sales of advanced technologies indicates that a broad array of factors has influenced contract awards. In addition to price, the willingness of firms to provide state-of-the art technologies, after-the-sale service, and training, as well as marketing strategies have been particularly important. While they have not determined overall patterns of technology trade, supplier government policies involving export financing, export controls, and representation of business have also been important factors in some cases. To assess the extent of technology absorption, OTAs research focused on the technology-using firms and industrial sectors. The experiences of suppliers and recipients in various types of technology transfers were found to differ widely. Petrochemical Productio n Middle Eastern countries such as Saudi Arabia are currently expanding their petrochemical production facilities so that by the 1990s they will be producing approximately 4 percent of all major commodity petrochemicals manufactured worldwide, and their exports in these products will account for 20 percent of worldwide trade. Petrochemical technology transfers contribute to the growth of an important Middle Eastern export industry. Middle Eastern countries building petrochemical industries (Saudi Arabia Kuwait, Qatar, Algeria, Bahrain) have financed these capital-intensive projects themselves. However, they remain dependent on foreign technical assistance, even though the technology has become fairly standardized. U.S. firms are currently playing major roles as joint venture partners, licensers of technology, and contractorsparticularly in Saudi Arabia, where joint ventures have been promoted. The quality of technology offered has been a major consideration for Middle Eastern countries in their awards of contracts to foreign firms. Kuwait, alone, has attempted to obtain petrochemical technology extensively through purchases of equity ownership in foreign firms. Petrochemical technology is transferred to Middle Eastern countries in packages. This type of technology transfer allows recipients to operate the facilities efficiently by relying extensively on expatriate managers and technicians. Over the long run, maintenance of the facilities and development of a skilled manpower base will be key issues for Middle Eastern petrochemical firms. Nevertheless, Middle Eastern nations will become world-scale producers in the 1990s. Certain aspects of petrochemical production, such as comparatively low manpower requirements, capital intensity, and feedstock requirements, make it particularly well-suited to development in the countries bordering the Persian Gulf. During the late 1980s, additions to petrochemical production capacity in the Middle East, Canada, Mexico, and Southeast Asia will have significant effects on global petrochemical product trade. Firms in western Canada and Mexico are more likely to make significant inroads in U.S. petrochemical markets than Middle Eastern manufacturers. While the United States will probably become a net importer of ethylene glycol and methanol by 1990, the U.S. petrochemical industry can remain strong, if production of specialty (and sec- PAGE 14 Ch. 1Summary and Findings l 7 end-tier) chemicals becomes relatively more important. The impacts of these changes on employment in the United States should be minimal, since U.S. firms will continue to supply a large domestic market. Petrochemical technology transfers to the Middle East therefore portend problems of structural adjustment for the industrialized countries, which will be particularly acute for Japan and Western Europe. It is unlikely that even a decline in the price of crude oil to as low as $25 per barrel would have a significant effect on the growth of the Middle Eastern petrochemical industry. A major problem involves the possible growth of protectionist barriers in Western Europe, which could be stimulated if Middle Eastern manufacturers sharply reduce prices to gain market shares. If U.S. manufacturers emphasize production of specialty and second-tier chemicals, improve efficiency of operations and invest in research and development (R&D), they should be in a position to adjust to these anticipated changes in world markets. Telecommunications Systems Telecommunications systems are important components of the national infrastructure needed for the growth of other industries and services. Technology absorption has been enhanced by the high priority placed on the development of this sector by Middle Eastern governments, by rapidly growing demand for services, by opportunities for regional cooperation, and by local production of equipment in Algeria and Egypt. On the other hand, inconsistent policies, shortages of indigenous technical workers in Saudi Arabia and Kuwait, and, in Egypt, inadequate incentives for technical personnel working primarily in government-owned telecommunications networks have limited absorption. Competition among suppliers has been intense. Japanese firms have gained market share in telecommunications exports. Exports from the United States have been primarily in advanced technology subsectors, such as satellite communications, and they have been strongly concentrated in Saudi Arabia and prerevolutionary Iran. Since the major suppliers are now on a technological par in telecommunications, other factors have influenced contract awards. These include the ability of suppliers to provide comprehensive financing, as well as their reputation as reliable suppliers, their commitment to after-the-sale support, and the involvement of a firm at an early stage of a project when initial equipment selections are made. Although U.S. firms maintain a reputation for technical capability, the ability of firms from Western Europe and Japan to put together comprehensive financing packages, sometimes including associated business deals, has been an advantage for them in some instances. U.S. Government financing, however, has supported telecommunications technology transfers to Egypt and Algeria. Commercial Aircraft Support Services Compared to other types of technology transfers examined by OTA, the most extensive technology absorption has been in the area of commercial aircraft support services. The operating statistics of these airlines (including safety) indicate that they are on a par with major international airlines. The comparative success of recipients in using these technologies can be ascribed to a number of factors, including well-defined standards of training and performance and relatively long experience. Nevertheless, some of these airlines will depend on foreign technicians (for engine maintenance) for the foreseeable future. This is not because of a lack of ability on the part of indigenous workers, but rather due to a shortage of local technical workers willing to perform these tasks in Saudi Arabia and Kuwait. U.S. firms are acknowledged leaders in avionics and aircraft engines, and have been leaders in airport management, but other suppliers are increasingly capable of providing similar equipment. U.S. aircraft sales in the region, important to sales of auxiliary equipment and services, have been negatively affected by U.S. export controls. Middle Eastern governments have in some cases sought to diversify sup- PAGE 15 8 l Technology Transfer to the Middle East pliers for political reasons, such as dissatisfaction with U.S. policy positions. Medical Services During the last 10 years, Middle Eastern governments have strongly emphasized health care by increasing budgetary allocations to that sector. Of all the technology transfers examined by OTA, those in medical services are most likely to affect directly the longevity and quality of life of the average citizen in the Middle East. In addition, U.S. policymakers have a special interest in technology transfers in medical servicesnot only because medical equipment and services are important exports, but also because health care has been a priority in U.S. assistance programs. Saudi Arabia is the largest Middle Eastern market for medical equipment and hospital management services. U.S. firms produce high-quality and reliable equipment, and they provided 18 percent of the medical equipment imported by Middle Eastern nations in 1980. U.S. firms have also been particularly prominent in the field of hospital management, providing evidence of their strong role in curative medicine. However, U.S. firms are not known for after-the-sale service. OTAs research indicates that such service has become a critical consideration for Middle Eastern buyers of medical equipment. In contrast, U.S. assistance programs carried out by the Agency for International Development (AID) have focused on preventive health care, particularly in rural areas of lowerincome countries, such as Egypt. Other supplier countries such as Sweden, Japan, Taiwan, and Belgium have aggressively promoted exports through bilateral health care agreements. A major obstacle to medical technology transfer to the Middle East has been a lack of appropriately trained local medical personnel and experienced managers. Kuwait and Saudi Arabia possess the most sophisticated medical facilities, but their indigenous technical manpower bases are much more limited than those of Egypt and Algeria. Despite the commitment of Kuwait and Saudi Arabia to training and employing indigenous populations, cultural and other factors have inhibited recruitment of nationals into medical services. Foreign expatriates will be required to staff their medical facilities well into the 21st century. On the other hand, Egypt-a nation that exports medical personnel to other Arab nationsis challenged to improve the quality of personnel and management and integration of Egypt varied health care facilities, public and private. In the past decade, U.S. firms have been independently involved primarily in large hospital development projects in the region. In the future, the most pressing need will continue to be in the area of preventive and less-sophisticated health care. While opportunities for hospital management will continue in Saudi Arabia, demand for these services may grow less rapidly. Recipients will attempt to establish joint ventures with foreign suppliers in order to obtain specialized services such as training of indigenous personnel. The market share of U.S. firms in medical equipment may shrink unless improvements are made in U.S. afterthe-sale service and maintenance. AID health projects have generally contributed to improvements in Egyptian health indicators, but programs providing specialized training and retraining of medical personnel may be particularly important in the future. Nuclear Power Generation Nuclear power is in its infancy in the Islamic countries of the Middle East: there is no commercial nuclear power reactor in operation in the region today nor is there likely to be one in operation before the 1990s. However, decisions made now concerning nuclear technology transfers may significantly affect the economic, military, and political future of the region. Middle Eastern approaches to nuclear technology transfers differ widely: Iran had the most ambitious commercial nuclear power program prior to the revolution; Egypt has the strongest rationale for commercial nuclear power, but financing remains a major constraint; Libya has most clearly expressed its intentions to develop nuclear weapons. Most PAGE 16 Ch 1Summary and Findings l 9 of the nations of the region have not yet committed themselves to nuclear programs. Despite the very high growth in demand for electricity, a number of factors reduce the attractiveness of commercial nuclear power for most Middle Eastern countries. The most important is the availability of hydrocarbon resources. In addition, only Egypt, Iran, Kuwait, and Saudi Arabia will possess the interconnected grid and electricity generation capacity needed to accommodate a 900megawatt (MW) commercial reactor by 1990.* However, if small reactors (under 600 MW capacity) become available, other Middle Eastern nations could be buyers. OTAs analysis indicates that nuclear desalination, a potentially useful application, will be attractive only to nations where nuclear power generation is economically feasible. Even for Egypt, the country with the strongest rationale for nuclear power, progress in nuclear power development has been slow. Egypts program will progress only with subsidized financing from abroad. Transfers of nuclear technology are important not only because of their potential in electricity generation, but also because transfers of certain types raise questions of nuclear weapons proliferation. OTAs analysis indicates that no Islamic Middle Eastern country will be capable of acquiring a nuclear device on a wholly indigenous basis within this decade, and most would find it impossible to do so before the turn of the century. The major constraints on the proliferation of nuclear weapons have been the weak technical capabilities of these countries and the reluctance of suppliers to sell unsafeguarded enrichment and reprocessing facilities. The most likely path to nuclear weapons production is through the use of small-scale research reactors in conjunction with laboratoryscale enrichment or reprocessing facilities over a long period of time, allowing for production of very small amounts of weapons-grade materials. Middle Eastern countries will build their *These countries will probably be able to install a 900-MW reactor that does not generate more than 10 percent of total installed interconnected electrical grid. latent nuclear weapons production capabilities gradually, unless one of the countries in the region demonstrates its capability to produce nuclear weapons and thereby stimulates other nations to follow suit, or unless supplier nations significantly relax export regulations and safeguards requirements. Prospects for nuclear weapons proliferation in the Middle East are likely to increase during the next decade because new supplier states, such as Argentina, Brazil, and India, that are not parties to the Nonproliferation Treaty may be willing to sell sensitive facilities and also because Middle Eastern countries will gradually improve their indigenous capabilities. Policy options available to the United States are limited, but they include bilateral nuclear cooperation agreements with countries developing expanded nuclear power for peaceful purposes, financing of nuclear exports to countries accepting stringent safeguards, or assistance to developing nations in assessing various energy options. Stronger consensus among suppliers to limit exports of highly enriched uranium and laboratory-scale sensitive facilities could contribute significantly to nonproliferation goals. Impacts of Technology Transfe r to the Middle East The ability of recipient countries to utilize imported technologies effectively depends not only on the sophistication of the equipment, but also on the capabilities of the indigenous work force. OTA research indicates that experiences with technology absorption differ widely across countries and technology sectors. Generally speaking, recipients have developed an independent capability to operate and maintain facilities, but not to modify equipment or significantly adapt technologies imported from abroad. Not surprisingly, technology absorption has been most limited when new and extremely complex technologies were introduced. Transfer of nuclear technology represents the extreme case-not only is experience limited and technologies complex, but most of these countries have not built an internal consensus fa- PAGE 17 10 l Technology Transfer to the Middle East voring nuclear power development. Technology absorption has been comparatively extensive when transfers contribute directly to production of locally used goods and services, as indicated by successful transfer of commercial airline support technologies. In cases where industries are not forced to compete directly with foreign firms, recipients have more leeway to introduce training and local employment requirements, though this is often costly. In contrast, technology absorption in the petrochemical sector will be limited for some years to come, mostly because this industry must compete directly with industry leaders in world markets. Middle Eastern petrochemical producers are relying heavily on expatriate personnel and the acquisition of technology in the form of packages, while gradually increasing indigenous personnel. Technology transfers in petrochemicals will benefit recipients through increased export revenues, despite the near-term limitation of technology absorption. Figure 2 illustrates a range of experiences with technology absorption in the five sectors under study. Middle East countries face varied problems in importing and using foreign technologies. A key question is how quickly to implement programs aimed at expanding the indigenous technical work force. Rapid expansion can be very costly in the short run. However, reliance on expatriate labor may limit long-term absorption, particularly if it precludes development of domestic technological capability. For both the oil-rich and oil-poor countries, inadequate supplies of technical manpower present a critical constraint on technology absorption. Egypts problem is to put to better use and upgrade the capabilities of its comparatively well-developed technical manpower base; Saudi Arabia and Kuwait must build from much smaller technical manpower bases. The technology transfers examined by OTA have certainly contributed to the growth of Middle Eastern economies and to the export revenues of supplier firms. From a commercial perspective these technology transfers have generally been mutually beneficial. For each type of technology transfer, OTA identified positive and negative effects (political, social, economic) Figure 2.Summary of Findings: Technology Absorption in the Middle East, 1984 Very high High Medium Low Very Low Potential technology absorption Highest level of absorption currently attained by firms in at Ieast one country under review Absorption that has already taken place in all of the countries under review Commercial Pelrochemical Medical TelecommuniNuclear aircraft production services cations support power Note: Height of bar indicates relative difficulty of tasks required to design construct, operate and maintain facilities independently Potential technology absorption refers to the level required to operate and maintain facilities Independently on a par with similar facilities in industrial countries Evaluation of the current extent of technology absorption IS based on an assessment of the sophistication of technologies and the efflciency of operations as well as the capabiIiIty of indigenous personnel to use them SOURCE Oft Ice of Technology Assessment on recipients and suppliers. The choices made by political and technical leaders in the recipient countries about selection and use of imported technologies lead to fundamental economic, social and political changes in their countries. In some cases, certain groups in society may benefit disproportionately from advanced technology transfers, leading to resentment and political opposition on the part of others. In other cases, the life of the average citizen may be greatly improved. Choices made by policy makers determine whether the technology transfers fit with resource endowments, meet the needs of the local population, or build indigenous capabilities. Technology transfers involve ongoing relationships between recipients and suppliers that include both potential risks and benefits. It is beyond the capacity of governments to develop policies that eliminate these risks or anticipate the potential effects of all commercial technology transfers. PAGE 18 Ch. 1Summary and Findings l 1 1 POLICIES AFFECTING TECHNOLOG Y TRANSFE R No nation has developed a systematic policy governing international technology transfer, but many recipient and supplier nations have developed policies to promote and regulate technology transfer. RECIPIENT COUNTR Y POLICIE S Policymakers in the Middle East are trying to transform their economies rapidly, largely through the introduction of foreign technologies. Yet they are attempting to do so while avoiding excessive dependence on foreign suppliers; maintaining their political legitimacy and influence over domestic economic, social, and political developments; and preserving indigenous cultures, traditions, and values. Despite these common challenges, there is considerable variation in the policies of these countries. These countries do not have comprehensive technology transfer policies, but all are attempting to improve their capacities for selecting and using foreign technologies, carried out primarily by strong government firms and institutions. Each has developed an implicit strategy for dealing with technology transfer choices in conjunction with development planning, and some have already experimented with and modified their approaches in the last decade. All face choices concerning the nature and pace of economic development, promotion of private enterprise, regulation of foreign businesses, choice of suppliers, financing, education and manpower policies, and administrative reform. Saudi Arabia and Kuwait emphasize capitalintensive technology transfers, while Algerian leaders, dissatisfied with the earlier emphasis on heavy industrialization, have come to stress labor-intensive technology transfers. While Iraq has attempted to limit involvement by foreigners, Egypt and Saudi Arabia have encouraged joint ventures. These countries face different immediate problems. For the labor-short Gulf States, Saudi Arabia and Kuwait, one challenge is to train indigenous workers to use foreign technologies effectively. In both countries, shortages of technical manpower may be allayed over the short term through a reliance on foreign labor while the local population is gradually trained. However, technology absorption may be limited in the long term unless the local population is attracted to enter technical jobs by incentives introduced by the governments. For those countries with larger populations but limited financial resources, such as Egypt and Algeria, issues of promoting private sector firms, administrative reform and the financing of technology transfer are paramount. Egypt, a country rich in human resources, is challenged to eliminate the economic disincentives such as subsidies and occupational redundancy that grew with a large bureaucracy and to introduce efficiency into public sector firms. Egyptian leaders must chart a delicate course, however, because economic reforms may give rise to conflicts among various groups. Algeria as well as Egypt must deal with the issues of administrative reform and migration of workers abroad. Both Iran and Iraq had comparatively welldeveloped infrastructural and industrial bases prior to the current Iran-Iraq War. A key issue for both is how to compensate for the diminution in resources available for civilian technology transfers resulting from their preoccupation with the war effort. In Iraq, lack of financing has already jeopardized technology transfer plans in certain sectors. The regime in Iran, though outwardly hostile to Western influences, has in recent years expanded trade with West European and Japanese suppliers. For both these countries, however, the war is the key factor affecting prospects for civilian technology transfer. PAGE 19 I 2 l Technology Transfer to the Middle East These countries have attempted to diversify their reliance on outside suppliers of technology for both political and economic reasons. Most of them also look favorably on proposals for regional economic and technical cooperation, though progress has been limited by political differences. The persistence of regional conflicts undoubtedly remains a major constraint on effective commercial technology transfer. POLICIES OF OTHE R SUPPLIER COUNTRIE S Apart from the United States, the most important countries supplying advanced technologies to the Middle East are those in Western Europe, and Japan. In comparison to the United States, Japan and West European countries emphasize economic interests more in their foreign policies, and their policies have generally supported technology trade with the Middle East. While these nations have approached technology transfer quite differently, the absence of controls on technology exportsas well as their readiness to combine development assistance and commercial promotion programs and the willingness of government officials to take a leading role in economic diplomacy-have supported expanded technology trade with the region. Supplier-government export financing has influenced competition in transfers of commercial aircraft, telecommunications, and nuclear power technologies, to countries such as Egypt and Algeria, but official export programs have not determined general patterns of technology trade. More importantly, government and business are normally on the same sidesupporting technology trade. Soviet bloc nations, in contrast, are much less important as suppliers of advanced civilian technology to the Middle East, and therefore do not figure prominently as competitors in the technology transfer sectors examined by OTA. For the Soviet Union, military assistance has been the most important channel for interactions with Middle Eastern countries, but commercial interests have become more salient in recent years. Some East European countries have expanded exports to the Middle East, but they provide only a small share of total imports to the region, and these have been concentrated in a few sectors such as heavy machinery. Despite the comparatively small role that Soviet bloc nations play in commercial technology trade with the region, some Middle Eastern countries have been recipients of Soviet military assistance, and the Middle East has been the largest noncommunist developing country export market for Soviet bloc nations. Supplier governments play important roles by setting the context for technology trade through their foreign policies. Historical and political factors strongly influence technology trade with Middle Eastern countries. French exports flow primarily to Egypt and Algeria (a former colony), while British exports go to Oman, the United Arab Emirates (UAE), and Qatar-all under British rule in years past. So viet bloc exports are concentrated in Iraq, Iran, Syria, and Algeria. In contrast, Japans technology exports are less concentrated and reflect that countrys weak historical ties to particular nations in the region. The United Kingdom and the Soviet Union, which in addition to the United States have played important political and diplomatic roles in the Middle East, have placed less stress on promotion of commercial technology trade than have nations such as Japan, West Germany, Hungary, and Romania. France, in contrast, has attempted to combine a high-profile diplomatic role with state-led trade promotion. In the past decade, Japan, a nation that has not assumed a leading political role in the Middle East, expanded its market presence in countries with differing positions on political issues. Government policies, particularly overall foreign policies concerning the Arab-Israeli dispute, remain important influences on technology trade. In some cases, the absence of political constraints on trade set by supplier governments has been an asset to foreign exporters in establishing diverse trading relations in the Middle East. PAGE 20 Ch. 1Summary and Findings l 13 U.S. POLICIE S U.S. policies affecting technology transfer have been more restrictive than those of other Western supplier nations. During the past decade, U.S. trade with countries of the Islamic Middle East has grown rapidly, despite the fact that official policies have been characterized by an unusual tension between economic and political goals. This tension has precluded the formulation of a coherent policy governing technology transfer. U.S. interactions are strongly concentrated in a few Middle Eastern countries: in commercial trade, Saudi Arabia and Egypt are the major trading partners of the United States; in economic and military assistance Egypt (and Israel) have been the most important Middle East recipients. U.S. technology trade with the Middle East thus reflects political alliances. During the last 30 years, U.S. foreign policy has reflected four themes: ensuring the security of Israel, ensuring oil supplies to the West, limiting Soviet expansion in the region, and promoting the economic and social development of Middle Eastern countries. Official U.S. policies have, however, placed increasing stress on military and security issues rather than on commercial interests during the past 10 years. U.S. Government programs designed to promote the representation of U.S. business abroad, including both high-level trade missions and routine representation by the Foreign Commercial Service, have been comparatively weak. Only a few programs are designed, even in part, to promote technology transfer. In addition, there has been continuing controversy concerning official export financing, particularly mixed credits, which combine commercial and confessional financing. U.S. export financing programs are not as broad in scope as those offered by some other Western supplier nations. On the other hand, such Government supports have only infrequently been determining factors in competition for contracts in Middle Eastern markets. Finally, the United States has established few bilateral trade or investment treaties with any nations in the region except Egypt. U.S. development assistance policies are particularly important for lower-income Middle Eastern countries, especially Egypt. AID administers a vast number of programs, but few are designed with the goal of promoting technology transfer in the industrial and service sectors examined by OTA. Congress has emphasized the importance of science and technology programs, but in Egypt these programs have not been guided by a coherent strategy and only a small number are directed toward assisting industrial end-users of technology. The United States has few Government-supported technical assistance efforts in high-income, de veloping nations in the Middle East, the most prominent being those supported by the U. S.Saudi Joint Commission. U.S. policies affecting technology transfer are distinguished from those of other Western supplier nations by the recent expansion of controls on exports. These controls heighten the political dimension of U.S. technology trade with the Middle East. There is general agreement among U.S. experts that national security and nuclear nonproliferation controls have been effective in limiting exports of military equipment and slowing nuclear weapons proliferation. There is less agreement concerning foreign policy controls, antiboycott regulations, and other types of controls. Proponents of controls argue that the United States can use them to take a stand in support of political principles and that the economic loss resulting is minimal or worth the cost. Opponents argue that foreign policy and other political controls have rarely achieved their designated goals, that the economic effects have been significant, and that they earn the United States a reputation as an unreliable supplier. It is impossible to measure precisely the impacts of various types of controls on trade, but taken together these controls have been a liability to U.S. exporters and have served to inhibit trade. OTA research did not uncover cases where the use of foreign policy controls clearly resulted in the achievement of desired political results. PAGE 21 14 l Technology Transfer to the Middle East FUTURE PROSPECT S PROSPECTS FOR U.S. TECHNOLOGY TRADE WITH THE MIDDLE EAST For the Islamic countries of the Middle East, the decade ahead will be one of slower economic growth than the 1970s. The major reason is that oil revenues are expected to grow at a slower rate (5 percent per annum or less in real terms), reducing the prospects for government spending, which has been the major driving force behind technology trade. For this and other reasons, imports of machinery and equipment can be expected to grow at roughly the same rate as oil revenues, in contrast to the 19 percent annual real growth in the 1970-82 period. The Middle East will remain an important market for technology trade in the years ahead, but the explosive growth of years past will probably not be repeated. OTAs analysis includes two scenarios for the future, involving high and low U.S. export shares to the Middle East. While the high export share is theoretically possible, OTA concludes that it is less plausible. In light of anticipated slower growth in the volume of overall exports to the Islamic Middle East, it may well be that the U.S. export share will decline. A number of factors, including a shift toward smaller projects in the Middle East and the desire of Middle Eastern countries to diversify suppliers, and the course of the Iran-Iraq War will influence technology trade. U.S. Photo credit Aramco World Magazine In less than a decade backyard generators have been replaced by power grids, like the one shown here carrying electricity to the new Industrial city of Jubail i n Saudi Arabia PAGE 22 Ch. 1Summary and Findings 15 firms, no longer enjoying an overwhelming technological edge over competitors in many sectors, must adjust to changing Middle East technology requirements in order to maintain their position. OPTIONS FOR U.S. POLICIES AFFECTING TECHNOLOGY TRANSFE R In view of the persisting tension among various policies (commercial, development assistance, military-strategic) affecting technology transfer, it is not surprising that a coherent technology transfer policy has not been established. Policy makers may wish to alter substantially the scope and nature of commercial technology transfers to the Middle East by developing a more consistent policy. In order to do so, however, a new understanding of the role of technology transfer in U.S. foreign policy would have to be established. Three general perspectives are outlined below. Perspective 1: Selective Use of Technology to Promote Politica l Interest s This approach would make technology trade the servant of U.S. foreign policy toward the Middle East. The U.S. Government would not only extend export controls to impose sanctions on countries whose policies run counter to those of the United States, but would also selectively provide advanced technologies (e.g., dual-use items) to countries associated with U.S. political positions. Development assistance programs could be used as a vehicle for rewarding friendly nations. This option has the advantage of placing major emphasis on U.S. foreign policy interests that are of central importance to policymakers. It capitalizes on denial and supply of technology to influence the behavior of recipient countries. In cases where other policy measures are inappropriate or unavailable, this approach would allow for systematic policies of denial. On a more positive note, the provision of advanced technologies to nations closely associated with U.S. positions could enhance their regional and global stature. The approach, however, has serious drawbacks. Success would depend on accurate forecasts of the foreign policies of Middle Eastern countries. One danger would be that shifts in political alignments and regime changes could lead to sudden interruptions of technology transfers. Another problem is that if U.S. policy makers control items that are readily available from foreign suppliers, buyers probably will simply go elsewhere. This option would place considerable burden on the Government to monitor and regulate commercial trade and technology transfers, despite the fact that OTAs research indicates severe obstacles to anticipating the long-term effects of technology transfers. In addition, this approach could be seriously impeded by disagreement concerning appropriate U.S. policies toward specific countries. Finally, it would rely strongly on the use of foreign policy controls, despite the fact that many observers question their effectiveness in achieving political goals. It would certainly politicize even more strongly U.S. technology trade and would run the risk of jeopardizing relations with nations not closely associated with U.S. positions, yet not strongly opposing them. Perspective 2: Decouple Commercial Technology Trade From Politica l Interest s Policymakers may wish to reduce the linkage between politics and economics which has distinguished U.S. policies from those of other supplier nations. This approach is based on the assumption that technology trade should be promoted with all nations, regardless of their political positions, because it not only brings commercial gains to the United States but also serves as a foundation for friendly political relations. U.S. diplomatic efforts would proceed independently, while trade in nonmilitary items would be permitted with any nation in the region where U.S. firms judged the mar- PAGE 23 16 l Technology Transfer to the Middle East ket opportunity worth the risk of investment or involvement. Foreign policy export controls would be eliminated, making U.S. policies more similar to those of Japan and West European countries. One advantage would be to eliminate the tension that has existed between commercial and political interests; another would be to promote technology trade with Middle East countries. It would put U.S. firms on a more equal footing with their competitors, and possibly lead to the expansion of exports to nations not currently major U.S. trading partners in the region. In addition, it would place fewer demands on the Government to regulate trade than would the first option. This option could be expanded to include improved representation of business, but the major emphasis would be on decoupling trade from politics. By eschewing the use of technology trade as a lever, this approach narrows the range of instruments available to policymakers. At the same time, it might increase the probability that U.S. firms could become targets of political opposition because of their expanded involvement in countries whose governments oppose U.S. political positions. Nor would such a policy guarantee the end of the selective technology trade characteristic of years past. OTAs research indicates that technology trade may remain strongly influenced by U.S. foreign policies: even if the disincentives for nonselective trade were eliminated and promotional policies enhanced, recipient governments might still wish to diversify suppliers for political reasons and U.S. firms might prefer to trade with countries friendly to the United States. However, ending foreign policy and other political constraints on technology trade would undoubtedly encourage wider and more flexible trading relations over time. Perspective 3: Promote Civilian Technology Transfe r Both the technology leverage and decoupling perspectives are oriented more toward technology trade than its transfer. Policymakers may wish to facilitate expanded technology transfers from the United States, and more extensive absorption of technology by recipients in the Middle East, by establishing more explicit policies. This is based on the assumption that civilian technology transfers have been generally mutually beneficial, and the U.S. Government can do more to promote them. Underlying this perspective is the conviction that it is useless to try to control transfers of civilian technology, and a recognition that U.S. firms can best maintain their technological strength by fully participating in international technology exchange. While retaining national security and nonproliferation controls, this approach would employ other types of export controls only under extraordinary circumstances, such as the Iranian hostage crisis. A variety of commercial and development assistance policy measures could be used to promote technology transfer. These include expanding assistance programs involving technology transfers in manufacturing and service sectors, upgrading the technical capabilities of the commercial representatives, expanding technical assistance and bilateral investment agreements, improving U.S. Government financing and insurance programs supporting technology transfers, as well as improving the ability of the Federal Government to record and anticipate trends in technical service trade. In light of the interrelationship of manpower problems among countries in the Middle East, U.S. Government-supported technical assistance efforts could include participants from a number of countries, including the higher-income nations. Coordination with private sector firms would be important to the success of all these efforts. One problem is to coordinate the efforts of Government agencies currently involved in various aspects of these disparate programs. This implies increased allocation of resources, challenges in designing programs aimed to transfer technology, and in evaluating their success. In addition, disagreements might well arise over when extraordinary circumstances would justify use of controls on trade. On the other hand, this approach emphasizes the positive aspects of technology PAGE 24 transfer. ably not While these programs would probdrastically affect technology trade with close political allies or with strong political opponents, they could open relations with nonaligned countries. This approach is unique in that it could also contribute significantly to regionwide development. Each of the three policy perspectives outlined above involves a consistent strategy, emphasizing political and economic objectives in different ways. Although each may have its virtues in the abstract, a new consensus on the role of technology transfer in foreign policy would be required to implement fully any one of them. Even if no consistent technology transfer policy is established, U.S. policy makers will continue to face a fundamental choice as they make decisions on a case-by-case basis: they can promote or discourage technology transfer. Civilian technology transfers to the Islamic countries of the Middle East appear to have been mutually beneficial in economic Ch. 1Summary and Findings l 1 7 terms, and are highly valued by recipient countries. Therefore, U.S. policiesregardless of which goals are maximized-will remain important to Middle Eastern countries. In the decade ahead, the Middle East will remain a market for U.S. equipment and technical services, and a region of great strategic importance. Instead of subordinating economics to politics, the challenge for U.S. policymakers is to balance these interests in a more consistent way. In the absence of such effort, the pattern of expanding controls and selective technology trade characteristic of years past is likely to continue. Technology transfers from the United States to countries in the Middle East are a major dimension of U.S. influence there. Despite the negative effects of some technology transfers, more often civilian technology transfers have supported mutually beneficial relations with countries of great strategic and economic importance to the West. PAGE 25 CHAPTER 2 Analyzing Technology Trade and Transfer: Conceptual Issues and Policy Choices PAGE 26 Contents Page INTRODUCTION . . . . ., . . . . . . . 21 TECHNOLOGY TRANSFER AND TRADE: MEANING AND MEASUREMENT . . . . . ... . . 22 Relationship Between Transfer and Trade in Technology. . . . . 22 Assessing Technology Transfer . . . . . . . . . 23 Measuring Technology Trade . . . . . . . . . . 26 FACTORS AFFECTING TECHNOLOGY TRANSFER AND TRADE . 29 Factors Affecting Recipient Demand for Technology . . . . . 29 Factors Affecting Supply of Technology and Competition Among Suppliers.. 34 TECHNOLOGY TRANSFER: THE POLICY ISSUES . . . . 37 Recipient Policy Issues . . . . . . . . . . . 38 Supplier Policy Issues . . . . . . + . . . . . 44 Policy Tradeoffs . . . . . . . . . . . . . 49 CONCLUSION . . . . . . . . . . . . . 50 Table Table No. Page I. Cumulative Current Account Balances, 1973-80: Six Middle Eastern Countries 30 PAGE 27 CHAPTER 2 Analyzing Technology Trade and Transfer: Conceptual Issues and Policy Choices INTRODUCTIO N Technology transfer to the Middle East is a complex process that occurs primarily in the commercial marketplace through transactions between suppliers and recipients. In the Middle East, governments and public corporations are the primary recipients. On the supplier side, while governments influence civilian technology trade through various policies and assistance programs, the major participants are private U.S. firms. In Western Europe, Asia, and Soviet bloc nations, the suppliers are often public corporations. Technology transfer is necessary for the achievement of widely differing goals, and its effects on recipient countries can vary considerably. For example, technology transfers can lead to improvements in agricultural yield (through introduction of irrigation technologies), better quality of life (through provision of medical services), foreign exchange revenues (through the establishment of manufacturing facilities that produce goods for export), or to the potential expansion of regional conflict (through the introduction of enrichment and reprocessing technologies which can be used to produce nuclear weapons). When technology transfer works, the recipient develops a greater capability to operate a production process or a service system, and the supplier accrues commercial and sometimes political gains. However, suppliers and recipients rightly worry about the potential negative consequences of technology transfers that fail to achieve anticipated results. This report evaluates the benefits and costs of technology transfers to the Middle East from the perspective of the U.S. Government. Generally speaking, unless overarching foreign policy interests justify restrictions on technology transfer for military or strategic reasons, the major concern is that technology transfers involve fair exchanges in which U.S. firms and organizations are appropriately compensated, that the transfers be successful in improving the recipients capability and thereby serve to reinforce mutually beneficial international relations, and that trade frictions with new recipient producers and with other supplier nations be avoided. In practice, however, U.S. policies affecting technology transfer to the Middle East have been distinguished by a tension between political and economic interests. Chapters 13 and 15 identify and assess the competing themes in U.S. policies affecting technology transfer. Analysis of technology transfer poses some difficult questions: How is commercial technology transfer-l distinguished from trade and how extensive have technology transfers, in contrast to trade, been to the Middle East during the past decade? What factors affect the ability of recipients to use or absorb imported technology? What factors influence flows of technology between suppliers and recipients in the Middle East? What choices do recipients and suppliers face as they engage in technology transfer transactions? This chapter outlines an approach to analyzing these questions. Its primary focus is conceptual; it provides a framework for the analysis of technology trade and transfer in the chapters that follow. Because of the absence of quantitative indicators which would allow us to measure technology transfer precisely, trade flows can be traced much more easily than the actual exTechnology transfer can take place illegally through theft of information documents, or products embodying technology. This report, however, focuses on commercial technology transfers. PAGE 28 22 l Technology Transfer to the Middle East tent of technology transfer. This chapter explores economic and political factors influencing technology trade, the context in which technology transfer normally occurs. It identifies factors which affect technology transfer directly at the projector firm level, as well as broader effects. A central theme of the chapter is that there are significant constraints on technology transfer, despite the rapid growth and mutually beneficial effects of trade. Technology transfer to the Middle East raises important foreign, commercial, and development assistance policy issues for the United States. The U.S. Government has a strong interest in the peaceful development of Middle Eastern nations, and Western technology can contribute to this process. This applies not only to the oil-rich countries of the region, but also to other important countries such as Egypt. Transfer of advanced civilian technologies is also important from a strategic perspective, since U.S. policies include restrictions on exports of advanced technologies (e.g., civilian aircraft), in order to achieve foreign policy goals, and technologies with military applications (e.g., some nuclear technologies) in order to reduce the proliferation of nuclear weapons. From a commercial perspective, the United States has an interest in promoting technology trade and in anticipating and avoiding trade frictions arising from the growth of Middle Eastern export industries and from unfair competition between suppliers. Technology transfers are, in turn, affected by and raise critical questions for commercial, assistance, and strategic policies of the United States. Chapter 2 begins with a discussion of the meaning of technology transfer, which includes consideration of factors directly affecting the process and problems of measurement. Next, the chapter analyzes factors affecting international flows of technology to the Middle East, since technology trade (through various channels such as sales of products and equipment, turnkey plants, technical services, direct investment, licenses and patents) is the means through which technology transfers normally occur in the commercial marketplace. Finally, the chapter deals with the policy choices that recipients and suppliers face, explicitly or implicitly, as they interact in technology transfers. TECHNOLOGY TRANSFER AND TRADE : MEANING AN D RELATIONSHIP BETWEE N TRANSFER AND TRAD E IN TECHNOLOG Y Definitions of technology and technology transfer abound. Technology is the knowledge needed to design, create, or implement a production process or the services related to the process. Technology is the specific application of scientific and technical knowledge to the production of goods and services. 2 2 See Technology Transfer: Definition and Measurement, in Technology and East-West Trade (Washington, D. C.: U.S. Congress, Office of Technology Assessment, OTA-ISC-1O1, November 1979), pp. 99-105. MEASUREMEN T As used in this study, technology transfer is a process involving at least two parties, whereby the recipient attains, as a result, an improved capability to design products or to operate a production facility or a service system. Technology transfer involves: 1. technology tradethe provision of technology by a supplier to a recipient through commercial transactions; and 2. technology absorptionthe use of that technology by the recipient; e.g., in operating and maint aining a manufacturing facility. Because technology transfer involves scientific and technical knowledge required for these PAGE 29 Ch. 2Analyzing Technology Trade and Transfer Conceptual Issues and P O I I cy Choices l 23 specific operations, it differs from the general dissemination of scientific information. Most standardized technologies are rather far removed from science. For technology transfer to occur, a variety of transactions must take place, often simultaneously. These transactions include the sale of industrial rights, provision of training, technical and management services, designs, plans, and documents, as well as the supply of equipment needed to operate and maintain a complex industrial or service system. Transfer costs incurred by both parties range from trivial to very high. Normally, these transactions take place in the commercial marketplace, but government-supported economic assistance programs and government-togovernment technical cooperation programs are also conduits. A commercial transaction (e.g., the sale of a turnkey plant) indicates only that successful technology transfer might have taken place. The teaching and learning required for technology absorption generally take place over time and imply a two-way interaction. For technology transfer to occur between parties in industrialized and developing countries, it is necessary to bridge a considerable technological distance, and this bridging usually takes place gradually 3 -particularly when the technology transferred results in the addition of completely new production capacity. Technology transfer occurs through technology trade but should be distinguished from it. If the recipient merely purchases equipment but is unable to use it, technology trade has occurred, but no absorption has taken place; in such a case, only part of the process of technology transfer has been completed. As the re cipient more fully absorbs the technology, the capability to operate and maintain it is developed. When technology is fully mastered or absorbed, the recipient is also able to design and produce new products, to adapt the technolo3 For a discussion of characteristics of technology transfer between developed and developing nations, see Organization for Economic Cooperation and Development, North/South 7echnology Transfer (Paris: Organization for Economic Cooperation and Development, 19811, p. 24. -. gy. If the recipient depends completely on expatriate workers to operate and maintain the facility, technology absorption is limited. However, even in this case, the production capacity may be an asset to the recipient if revenues accrue from sales of products or services. Technology transfer normally occurs in the context of a particular enterprise, project, or industrial sector. In order to determine the level of capability that has been developed (the extent of technology absorption), it is therefore necessary to examine the effects of technology transfer in the particular productive enterprise. Although numerous factorse. g., national development plans, education, labor, investment and trade policies, the political and economic context, and policies of and relations with suppliers importantly affect and are affected by various transfers, the effects in the productive enterprise or sector receiving the technology are the most important indicators of the extent of transfer. ASSESSING TECHNOLOG Y TRANSFE R Evaluations of the extent of technology transfer are based on judgments about the operational efficiency of the facilities, and the quality and skills of the work force in the particular firm, project, or sector. In addition, the linkage effects, or the contribution of the transfer to other economic sectors or to the countrys overall science and technology infrastructure, are also often taken into consideration. But policy makers in particular often evaluate the overall success (the net costs and benefits) taking a variety of other considerations into account. Evaluating the Extent of Technology Transfer Operational Criteria.From an operational viewpoint, transfer occurs when the transfer and production costs and the quantity and quality of output are acceptable by relevant standards. Particularly for export industries, the relevant standards may be those of the most advanced producers in other parts of the PAGE 30 24 Technology Transfer to the Middle East world. These standards may include costs of production, foreign exchange earnings, and profits of the firms that are the industry leaders. For other types of operations, such as local service systems, the relevant standards may be those of newly industrializing nations. In developing countries, it is often difficult to assess the efficiency of operations: costs may be competitive if labor is cheap, even though efficiency is low by other measures. In cases of unsuccessful technology transfer, the operation may be abandoned before it goes onstream, or the output of the facility may be of such high cost and low quality that even domestic sales in a protected market are difficult. More specifically, inefficient operations may result from lack of proper maintenance of equipment, owing to improper procedures; inadequate skills and spare parts; and inclement surroundings. Judgments about operational efficiency must be based on knowledge of the technologies and production facilities involved, and comparisons to operations elsewhere. Quality and Capabilities of the Work Force. People are essential for technology transfer. Transfer involves technology absorption learning by the work force of skills needed for effective operation and maintenance of interrelated technical, financial, marketing, and personnel functions of the enterprise. Normally, these capabilities are developed over time when the transfer involves the establishment of a new type of facility in a developing country. In such cases, expatriate workers may be needed at early stages. The number of indigenous workers alone is an inadequate indicator of technology transfer: local workers may serve in name only to fill an employment requirement. It is more important to determine what positions indigenous people hold, what capability they possess to carry out their jobs, and whether there has been improvement in their capabilities over time. Recipients in developing nations often place special emphasis on technology absorption in their assessments of the extent of technology transfer. Linkages to Other Sectors.The extent of technology transfer can also be assessed in terms of the linkages that exist between the technology-receiving firms and other firms and organizations throughout the society. The movement of skilled workers from the original enterprise to other enterprises maybe viewed as a means of diffusing technology transfer to other firms or sectors in the national economy. On the other hand, such movement may result in a loss of capability at the original enterprise. Regional manpower migration in the Middle East is a complex phenomenon, and the benefits and costs may be assessed from the perspectives of the firms, the industrial sectors, and the countries of origin and destination. Technology transfers can also be evaluated in terms of the contribution they make to the development of a science and technology infrastructure in the recipient country. When research capabilities are expanded, when the numbers of trained scientists and engineers are increased in conjunction with the transfer, the technological capability of the nation may be improved. Development of institutions and centers for research and training is essential for deepening technology transfers in the long term. Evaluating the Success of Technology Transfer Evaluations of the overall success (the net costs and benefits) of a transfer depend on the broad policy goals and priorities of suppliers and recipients. Evaluation depends on the priority placed on various political, social, environmental, and economic goals, and on judgments about the past or potential impacts of transfers. As discussed in detail later in this chapter, suppliers and recipients alike weigh a number of factors in deciding whether to engage in technology transfers and in judging their success. To expand the indigenous work force and to ensure fairness in technology transfer transactions, recipient governments introduce regulations. These may encompass ownership, control, local content, technology and output PAGE 31 Ch. 2Analyzing Technology Trade and Transfer: Conceptual Issues and Policy Choices l 25 Photo credit Aramco World Magazine Solar energy research I n SaudI Arabia involves researchers from the University of Petroleum and Minerals pricing, and the ability of the recipient to transfer to third parties. Broadly speaking, the aim is to ensure that transfer will result in a self-sustaining capability for technological development. What is desired over the long term is thus not only a maintenance and production capability}, but also an indigenous technical capability to develop technology and a demonstration that particular projects contribute to achieving this goal. Recipient governments and firms often select certain types of technologies because of other policy goals-in order to develop particular economic sectors or because of a preference for laboror capital-saving technologies. Political considerations may importantly influence choices of technologies and evaluations of success or failure. Planners in developing countries may evaluate technology transfer as problematic if production costs are substantially higher than estimates, if production machinery designed to conserve energy and labor is installed in a laborand energy-abundant but capital-poor economy, or if equipment designed for large-scale operations is installed in a small factory and operated at high cost. On the other hand, recipients may judge a project successful if they see it as adding to national prestige, regardless of efficiency of operations. At the supplier firm level, criteria of success may be much narrower than a full operational criterion. When a turnkey plant has paid off the cost, or when the risk has been passed to the government, the supplier is likely to consider the contract a success. This may occur years before the technology-receiving enterprise is fully self-sustaining, and is obviously even more true for equipment sellers whose responsibility normally ends when the goods are shipped. In certain cases, where continuing supplier relationships are contemplated or where the reputation of the firm is at stake, the technology supplier may apply the full operational criterion. When ownership of the technologyreceiving firm is involved, through joint ventures or other arrangements, profitability is an important criterion. In a multinational operation, the contribution to worldwide operations of output of the particular enterprise is also important. Supplier country governments may or may not take a broader view than that of the firms. Technology transfers are often viewed as foreign exchange earners unless other foreign policy or employment considerations are at stake. When output from the technology-receiving enterprises abroad competes with the supplier countrys domestic industries, successful transfer from an operational point of view might be considered unsuccessful from the supplier governments perspective. Similarly, projects supported by economic assistance may be judged successful if recipients are satisfied or, contrastingly, if certain goals of operational efficiency are met. In other words, evaluations of the success of technology transfers depend on the ranking of these various criteria, technology absorption is one basis for evaluating the extent of transfers, but many other criteria can be applied in judging overall success. Evaluations can be based on recognizable effects or impacts which have already occurred, or on expectations about future effects. Generally speaking, when recipients are able to effectively use technologies which fit the requirements PAGE 32 26 Technology Transfer to the Middle East of a particular production process, they are likely to judge the technologies as appropriate. MEASURING TECHNOLOG Y TRAD E Technology flows internationally through trade in machinery and equipment, investments, technical services, industrial rights, and contracts awarded. Taken together, these flows constitute international technology trade between suppliers and recipients. Such flows are only very imprecise indicators of technology transfer, but they are important in their own right because international transactions are reflected in trade balances between nations. Trade in technology is also important as the major mechanism for commercial technology transfer, and factors affecting trade also influence the technology transfer process, including technology absorption. The third section of this chapter identifies factors influencing general patterns of technology trade; chapter 4 assesses the extent and characteristics of Middle East technology trade during the past decade. However, as important as international trade in technology is as a discrete topic, it must be distinguished from technology transfer, as used hereto include technology absorption or the development of recipient capability. In order for technology transfer to occur, technology trade (or provision of technology for free through development or other assistance programs) must take place. Technology trade is thus a necessary but not a sufficient condition for full technology transfer, including technology absorption. Since technology is not measurable in any natural unit, measurements of technology flows (technology trade) are imprecise at best and provide only the roughest approximation 4 "Appropriate technology has been defined variously as capital-savings technology, community technology, environmentally sound and appropriate technology, soft technology, and intermediate technology. For a discussion of appropriate technology and its definitions, see The World of Appropriate Technology (Paris: Organization for Economic Cooperation and Development, 1983), pp. 10-11. of the resulting level of technology absorption. Nevertheless, international flows of technology in machinery and equipment, technical documents, patents and licenses, international contracting for large projects, and investments are the channels for technology transfer. Competition for these sales among various sellers is a characteristic feature of technology trade, and the positions of U.S. firms in the international market are an important concern for the U.S. Government. Problems with measuring international technology flows are significant and deserve attention. However, despite these difficulties, the various indicators can be judiciously used to assess international flows so long as their limitations are understood. Generally speaking, most of the various indicators include transactions other than those involving technology. In addition, the various indicators, such as equipment and machinery trade and contract awards, overlap. Machinery and Equipment Imports Perhaps the most easily accessible single indicator for technology trade is data on imports of machinery and equipment into recipient countries. This trade category includes capital goods, sometimes referred to as engineering The competitiveness of U.S. firms is a complex issue. See International Competitiveness in Electronics (Washington, D. C.: U.S. Congress, Office of Technology Assessment, OTAISC-200, November 1983), for a discussion of competitiveness of U.S. industry that focuses on the domestic determinants. While analysts have measured competitiveness in terms of U.S. share of world exports, there is no agreement on an approach for analyzing U.S. competitiveness in international technology trade. One approach is to look at the competitiveness of hightechnology industries, meaning those involving a high level of scientific and engineering skills, those whose R&D effort is high relative to sales, or those with a rapid rate of technological development. See, for example, U.S. Department of Commerce, An Assessment of U.S. Competitiveness in High Technology Industries (Washington, D. C.: U.S. Government Printing Office, 1983). Analysis of competitiveness also depends on whether one defines U.S. firms by ownership or location of production, or both. For a discussion, see Sumiye Okubo, Impact of Technology Transfer on the Competitiveness of U.S. Producers, paper submitted to the Economic Trade Policy Analysis Subcommittee of the Trade Policy Staff Committee, July 18, 1980, p. 6. In this report, OTA examines factors affecting sales of technology and equipment, and trends in market shares of supplier firms. PAGE 33 Ch.. 2Analyzing Technology Trade and Transfer: Conceptual Issues and Policy Choices l 27 products. G As a data base for assessing technology trade, this category has several significant virtues: It is probably the most quantitatively complete indicator of technology flows, in that virtually all technology transfers involve imports of equipment recorded in the import accounts. It can be disaggregate to subcategories important for specific types of technology transfers (e.g., telecommunications equipment). Finally, these data reflect actual flows, rather than plans for project development. However, these data also have significant limitations for analysis of technology flows. Even the finer subcategories group together many types of equipment, making it impossible to clearly distinguish advanced technology product imports. There is, furthermore, no way to ascertain the number and types of users of the equipment, or the ancillary exports of industrial rights or human capital involved in particular instances of technology transfer. It is thus impossible to determine whether equipment is destined for an entirely new production facility or for an existing facility. Nevertheless, exports of machinery and equipment make up the largest single category of exports to the Middle East. Technical Services Balance of payments data also include a category for trade in services. The value of world trade in services for 1980 has been estimated at $350 billion, compared with $1,650 billion for merchandise trade. The United States was the largest exporter of services, with exports valued at $34.9 billion during that year. 7 However, aggregate data on trade in services include a number of elements (e. g., reinsurance, transactions by defense agencies, and passenger transportation) not normally included in civilian technology transfer. 8 Thus, despite the growing importance of service trade for the United States, and the importance of exports of technical services for analysis of technology transfer, there is no aggregate data source adequate for detailed analysis of service trades of particular types, such as technical services. One recent study by the International Trade Commission carried out a survey of exporting firms in order to build a data base on trade in services. 9 The Office of the United States Trade Representative has also produced a report in support of efforts to promote liberalization of trade in this sector. Contracts Awarded Data on major contracts awarded, collected by trade publications, area valuable source of information on technology trade associated with large projects. These data have some advantages. They are organized by specific projects and therefore provide an indication of technology transfer packages. They provide information about the context of the project; for example, the names of the principal investors and the prime contractor, and the value of the contracts. However, contract data also have glaring deficiencies from the perspective of analyzing technology flows. Since the data are gathered by private sources, such as trade journals, there is no way to be certain how complete the listings are. Even some large projects may escape notice, and many small contracts may be omitted. 10 In addition, the contract data usually do not give much information on the source of the equipment, nor do they identify even large subcontractors. 6 Machinery and equipment imports are recorded in Category 7 of the Standard Industrial Trade Classification (SITC), which includes two revisions. The United Nations publishes a Bulletin of Statistics on World Trade in Engineering Products (New York: United Nations, 1983), which includes trade in SITC Revision 2, Category 7. Categorizations of high-technology products, of which there are many, all include subcategories of SITC 7. 7 Office of the United States Trade Representative, U.S. National Study on Trade in Services, December 1983, p. 111. It is widely believed that official data substantially underestimate the extent of service trade. 8 For a discussion of service trade, from a national income and product accounts perspective, see Carol S. Carson, Net Exports of Goods and Services, 1980-82, Survey of Current Business, March 1983. 9 International Trade Commission, The Relationship of Exports in Selected U.S. Service industries to U.S. Merchandise Exports (Washington, D.C.: U.S. Government Printing Office, 1982). Because the principals may wish to avoid public note, some projects may not be reported, or may be reported only in part. PAGE 34 28 l Technology Transfer to the Middle East It is thus difficult to measure with confidence the actual shares of various suppliers, since prime contractors from different nations may differ in their reliance on international versus own-country sources. Finally, contract data record commitments to proceed, not actual exchanges. Therefore, the import of goods and services associated with a particular contract recorded in one year may not take place for years to come, and in some cases, contracts may be altered or canceled and payments may be delayed.] Foreign Direct Investment Investments abroad have been an important means of technology transfer worldwide. Since, by far, the greatest volume of transfers measured in royalties and license fees goes from U.S. firms to their subsidiaries abroad, foreign investment data are important as general indicators of potential technology flows. There are, however, significant limitations to the value of these data as a basis for analyzing technology flows. Data on U.S. direct investments are not disaggregated to show types of investments in all Middle East nations. U.S. investments in the region have been limited. The data reflect past technology transfers rather than current transactions. In addition, these data do not indicate the magnitude of investment by joint venture partners. The reinvested earnings and other equity transaction data, which pertain to the current year, also do not necessarily indicate current technology transfers, both because they may reflect accounting oddities and because they may be invested in assets that have little to do with technology transfer, such as real estate. Data on the assets of affiliates and new investment are not complete or very current. Comparison of investment stocks and flows can be highly misleading, since the data on stocks may be more severely distorted by valuation problems. 11 Postponement in payments to contractors was reported during 1982-83 in the Middle East, when government revenues were below anticipated levels owing to the fall in demand for oil. See, for example, Michael Field, Prudent Spending Puts Saudi Spending Back on Target, Financial Times, Aug. 18, 1983, p. 3. Investments by Middle Eastern nations in firms in Western nations can also be a source of technology. However, available data indicate that such direct investments in the United States have so far been limited. 12 For example, some recipient firms have expanded their equity participation in Western firms in order to gain access to technology, managerial expertise, or markets. However, even if a foreign firm is purchased completely, it is not necessarily true that all of its technological capability is thereby transferred; some of its staff may depart and the operations of the firm may be changed. Technology Licensing and Royalty Payment s Technology licensing and royalty payments are commonly used to measure aggregate international flows of technology transfer, but they are of limited usefulness in assessing transfer to developing nations. First, these data are not compiled on a sufficiently disaggregated basis to show receipts for sales in all developing nations, nor do the recipient countries provide accurate reports of payments. Not all relevant transactions are included in the data, since provision of technology in the form of cross-licensing or buy-back agreements is not recorded and those associated with joint ventures are often not systematically covered. Furthermore, these statistics record past as well as present payments for technology trade transactions. 13 Technology transfer also occurs when supplier firms carry out research and development (R&D) activities in recipient countries. However, only about 7 percent of all R&D expenditures by foreign affiliates of U.S. multinational firms have occurred in developing 12 According to the Department of Commerce 1980 benchmark survey of direct foreign investment in the United States, total assets of nonbank U.S. affiliates of Middle Eastern foreign direct investors amounted to about $7.3 billion out of a total of $292 billion. See R. David Belli, Foreign Direct Investment in the United States: Highlights From the 1980 Benchmark Survey, Survey of Current Business, vol. 63, No. 10, October 1983, p. 28. 13 For example, the licensee may pay fees over a period of 5 years, but the major provision of technology may occur during the earlier period. PAGE 35 Ch. 2Analyzlng Technology Trade and Transfer: Conceptual Issues and Policy Choices l 29 nations, and only a minuscule portion in the Middle Eastern nations. U.S. subsidiaries in developing nations are the major source of payments-for royalties and fees made by developing nations: in 1978 their share totaled about 85 percent of all such payments. 15 Thus, among the limited transactions involving payments for industrial property by participants in developing nations, most occur between U.S. firms and their affiliates. 14 U.S. Department of Commerce, U.S. Multinational Companies: U.S. Merchandise Trade, Worldwide Sales, and Technology-Related Activities (Washington, D. C.: U, S. Government Printing Office, 1983), p. 60. 15 National Science Board, Science Indicators (Washington, D. C,: U.S. Government Printing Office, 1981), p. 26. Technology also flows through noncommercial transactions, such as technical publications and documents, education of foreign students in the United States, governmentsponsored technical assistance programs, and cooperation in science and technology. However, there is no authoritative source providing aggregate data on these activities and their contribution to technology transfer, and in many cases they overlap with commercial transactions listed above. A government-sponsored technical assistance project, for example, normally involves payments by the recipient government to U.S. firms and organizations carrying out the programs in-country. FACTORS AFFECTING TECHNOLOGY TRAD E AND TRANSFE R A variety of economic and political factors affect the international flow of technology to the Middle East. The discussion that follows briefly reviews these factors. FACTORS AFFECTING RECIPIENT DEMAND FOR TECHNOLOGY A nations demand for the goods and services of technology trade depends on a complex set of factors. The basic determinants are the rate of economic growth and the nature of the economic structure. In addition, a wide variety of constr aining factors limit technology absorption. The following discussion reviews major elements in recipient country demand for technology, and points to crucial institutions as the key actors in technology selection, bargaining, and utilization in Middle East nations. An important theme is that firms in developing countries, particularly those that compete in world markets, often import technology in the form of "packages. By relying on packaged technology and expatriate labor, Middle Eastern countries faced with constraints to technology transfer (arising from limited technical manpower bases and other factors) can produce products competitive on world markets. These firms and industries must promote de velopment of indigenous skills in order to increase technology absorption over the long term. Firms producing goods and services for local or captive markets are often required by recipient governments to introduce training and other programs in order to expand the employment and improve the skills of indigenous workers. In firms which export, as well as those producing for local markets, policy makers in crucial institutions make key decisions about the type and volume of technology imports and their utilization. Basic Economic Determinants For nations of the Middle East, a major stimulus to technology importation in the last decade has been economic growth based on growing oil revenues. Annual growth in the gross domestic products (GDP) of the nations examined by OTA ranged from a high of 12.1 PAGE 36 30 Technology Transfer to the Middle East percent for Iraq, to 10.6 percent for Saudi Arabia, 7.4 percent for Egypt, 7.0 percent for Algeria, and 2.5 percent for both Iran and Kuwait during the 1970-80 period. 16 While the situation changed in the early 1980s, economic growth in most of these countries during the previous decade was stimulated by the accumulation of surplus oil revenues. During the period 1973-80, four of these six Middle Eastern nations accumulated sizable current account surpluses. Table 1 presents this data. tion) and in new industries and services. Technology imports thus reflect not only the nature of the economic structure, but also planners expectations about the economy, including strategies about production for export or for local markets. Among developing countries, the oil-producing countries of the Middle East were in a unique position to rapidly expand their imports of technologies during the 1970s. However, the six Middle Eastern countries focused on in this report possess widely varying capital, human and natural resources available to support technology transfers, as For all these countries, total imports grew discussed in chapter 3. extremely rapidly during the period, ranging from a high of 25 percent for Saudi Arabia to Constraints on Technology Transfer a low of 3 percent for [ran in real terms on an annual basis during the 1973-82 period. 17 Furthermore, government revenues, which grew at rates well over 10 percent per year in these countries, were extremely large in comparison to GDP. In Saudi Arabia, an extreme case, the ratio of government revenues to GDP was almost 63 percent during the 1975-78 period. 18 The basic economic determinants, as well as patterns in technology trade during the past decade, are analyzed more fully in chapter 4. Generally speaking, economic growth engenders an increasing demand for technology, both in existing enterprises (to expand produc .16 World Bank, World Development Report, 1982, pp. 112-113, Data for Iran includes the revolutionary period in 1979 and 1980. Kuwaits comparatively low growth rate reflects falling oil production during the period. 17 Data provided in table 13, ch. 4. 18 International Monetary Fund, Oil Exporters Economic Development in an Interdependent World, April 1983, p. 45. Data on government revenues do not include Egypt. Table 1 .Cumulative Current Account Balances, 1973-80: Six Middle Eastern Countries (million U.S. dollars) Despite the growth in imports of technology, a number of factors constrain the capacity of developing nations to utilize it. With the exception of Israel, most Middle East countries, irrespective of their gross national products, have limited science and technology infrastructures. In such countries, there may be a shortage of technical and managerial skills, owing to inadequate education, training, and research institutions, or to small enrollments in very new institutions. While leaders (including government officials and industrialists) may be extremely well educated, the labor force as a whole is generally inadequately trained in the skills required for operation of complex production facilities. A related problem is that labor markets may fail to provide the incentives (monetary and otherwise) needed to attract and retain properly skilled workers. In some countries, public infrastructure services, such as electric power, transportation, and communications, are unreliable and thereby inhibit development of new industries and services. Expansion of infrastructure itself Total requires technology transfers and considerable Saudi Arabia ... ... . . . ..,-140,697 investment of resources. Kuwait . . . . . . . . 68,996 Iraq . . . ., . . . . . . 41,252 Social and cultural values also come into Iran . . . . . . . . . 34,481 Algeria ., . . . . . . . -9,700 play. Tasks such as replacing spare parts imEgypt . . . . . . . . -10,248 ported from abroad, ordering custom parts to SOURCE International Monetary Fund Oil Exporters Economic Development specification from local machine shops, buildIn an Interdependent World April 1983, p 21 ing additions to manufacturing facilities, alter- PAGE 37 Ch. 2Ana/yzlng Technology Trade and Transfer: Conceptual Issues and P O li C y Choices l 3 1 Photo credit: U. S. Overseas Private Investment Corp Mideast Engineering, partially owned by the General Electric Co., provides maintenance and repair services as well as technical training in Saudi Arabia. This IS a project Insured by the U S Overseas Private Investment Corp. ing materials handling procedures to fit local conditions, or simple troubleshooting adaptations of procedures or technologies needed to get operations going after a breakdown, are difficult enough in a developing country. Where social norms emphasize authority rather than procedures, or where operations and maintenance skills are not valued, it may be extremely difficult to solve these routine operational problems. Enterprises using imported technology are sometimes inhibited by government regulations. When spare parts sit for months in congested ports and customs areas, when permits required for minor construction are given only after long delays, and when seniority regulations require the retention of incompetent employees, the manager may find it difficult to acquire or properly utilize technologies imported from abroad. Price and economic regulations designed to produce orderly markets or to protect consumers may create distortions that hinder operational efficiency. The major challenges for developing countries that have limited science and technology bases are to operate and maintain properly the technology imported from abroad. These nations usually have isolated successes in technology transfer, but failures are not uncommon. Generally speaking, the number of local manufacturing enterprises is small, and these countries often depend on agriculture or natural resource exports, tourism, or foreign assistance for foreign exchange. In some cases, a significant pool of scientific and technical manpower may be unemployed, causing brain drain or labor migration. Policymakers in these countries seek to promote indigenous technological development so that the country can produce internationally competitive goods and services. Setting their sights on higher levels of economic, technological, and social development, variously defined, their goal is to enter the ranks of the newly industrializing countries. This involves installing a reasonably reliable physical infrastructure, promoting the growth of labor markets, and developing a capability in many productive enterprises not only to operate and maintain facilities, but also to adapt technology to changing market demand. For example, local engineers should eventually gain the capability to design new products which can be produced with existing or adapted technology. Crucial Institutions and Transfer Packages In developing nations, particularly those with limited indigenous technological capability, the crucial institutions involved in technology transfer are normally large, government-owned or strongly government-led organizations. These include government ministries and public enterprises. These institutionsbecause often they, alone, have the necessary resources lead the process of technology transfer that results in the establishment of new production facilities. Initially, these institutions concentrate their efforts on large-scale infrastructure projects roads, ports, dams, large office buildings and hotels, electric power grids, central communication facilities, and airports-usually built by international contractors hired by government agencies or by multinational corporations. Sometimes the government organization is an PAGE 38 32 l Technology Transfer to the Middle East . autonomous agency, such as the Suez Canal Authority in Egypt, but often it is a section of a government ministry. The multinational firms may be minerals extraction firms, like ARAMCO in Saudi Arabia, or international food-processing firms. The primary reason for the predominance of strong institutions is that only they are likely to have the resources (including financial resources, as well as political clout) needed to carry out large-scale importation of advanced technologies into nations with limited indigenous capabilities. These institutions often rely on technology transfer packages and expatriate labor in order to maximize the success of firms that produce for competitive, particularly world, markets. Key features of transfer packages are that substantial process technology is embodied in the hardware (making it comparatively easy to use and maintain) and that considerable technical and managerial assistance is proPhoto credit U S Overseas Private investment Corp. Suez Electronics, an affiliate of the International Telephone & Telegraph Corp., provides routine checks, maintenance, repair, and replacement for a broad range of electronic equipment as ships pass through the Suez Canal, The project is insured by the U.S. Overseas Private Investment Corp. Photo credit Agency for Internaf/onal Development The Suez Canal is over 100 years old and handles an average of more than 200 ships a day, generating nearly $1 billion annually for Egypt in foreign exchange revenues PAGE 39 Ch. 2Analyzing Technology Trade and Transfer Conceptual Issues and PolIcy Choices l 33 vialed in conjunction with the transfer. Such assistance may take the form of high-level management and technical personnel supplied on a continuing basis as part of a joint venture or subsidiary, or technical and management contracts let by an independent enterprise. Alternatively, assistance may consist of a quality-validation team sent by the equipment supplier under an offset or trademark agreement. A major feature of technology transfer packages is that they minimize the amount of technology absorption required and augment indigenous capabilities with technical assistance from abroad. It would be a mistake, however, to conclude that transfer packages eliminate altogether the need for technology absorption. In fact, a number of factors may stimulate the need to develop indigenous capabilities. It may be necessary, for example, to change products or volumes of production to fit fluctuations in demand. In addition, managers may find it necessary to alter production processes to take advantage of low-cost materials or to take account of shortages in some kinds of inputs. These factors increase the need for adaptation of technology by the enterprise. The firm may rely on new technical assistance contracts, but some local personnel may also be involved in diagnosing the problems, selecting contractors, or (later) adapting technology. For firms serving international markets, these demands for technology adaptation are likely to be especially strong. After initial market success, firms may find it necessary to expand the scale of production or alter processes. The urgency of such demands maybe particularly great when the firm is competing with world-class manufacturers from other nations. In many cases, the requirements for technology adaptation may be so high that the enterprise has no alternative but to rely extensively on foreign technical and managerial expertise. In contrast, firms producing goods and services for local or captive markets may find these demands less pressing, at least in the near term. In some instances, the strong institutions primarily involved in technology transfer may not be particularly efficient by international standards. Nevertheless, their existence is more or less guaranteed. Such enterprises may be required by the government to employ all, or great percentages of, local employees, and to introduce trainin g and other programs for improving the skills of indigenous workers. This is not to say that firms producing for local markets are always less efficient than those producing for export; the nature of markets and the orientations of the firms vary. Indeed, the capabilities of work forces to operate and maintain facilities may be improved substantially over time in firms producing for local markets, though not necessarily to the levels required for some of the firms producing for export. Because such firms are often government enterprises, their dilemma is that expansion of employment (normally promoted in labor-rich nations such as Egypt) may jeopardize operational efficiency. Even strong institutions importing technology in packages, however, face difficult problems. They may lack the expertise necessary to make good choices of technology and to negotiate good terms. Inadequate labor markets hinder recruitment, or the criteria for selection may be so political that even the available skills are underutilized. In infrastructural enterprises, there may be excess demand for the services provided. These enterprises may be overstaffed, and their services may be priced below costs of production. Strong institutions may continue to operate for years in such a fashion, presenting formidable problems for leaders wishing to introduce economic and operational reforms. Often independent local firms make smaller contributions to manufacturing production than the large government-run enterprises. Be cause the barriers to importation and use of advanced technologies are overwhelming for such firms, private firms need local political support; government policies are often introduced to promote their growth. As the number of such firms grows, and as they compete for shares of local markets, their requirements PAGE 40 34 Technology Transfer to the Middle East for technology adaptation increase. Increasingly concerned with price, quality, and marketing, the independent local firms are in that situation challenged to improve their capabilities, which they sometimes accomplish by establishing joint ventures with foreign firms. The relationship between public and private sectors in developing nations is often a subtle and interdependent one. Policymakers in developing nations often stress the importance of private sector firms in industrialization. Nevertheless, industry remains largely under government control, and private firms are, in many instances, closely associated with government ministries. The private industries may be heavily concentrated in a few sectors and function to produce for small local markets. 19 Regardless of whether the recipient firm is private or state-owned, its need for technology adaptation increases with expanded production of goods and services, particularly when firms serve competitive markets-international or domestic. Strong institutions play central roles in technology transfer in developing nations, but they are often unable to operate efficiently, much less to build a capability for self-sustaining technological adapation among their work forces. FACTORS AFFECTING SUPPLY OF TECHNOLOGY AND COMPETITION AMONG SUPPLIER S The primary factors affecting supply of goods and services of technology trade are the same economic (including the skill of individual firms in marketing their products and services) and political factors that influence international trade more generally. Economic Factors Affectin g Supply of Technolog y Economic theory provides methods for analyzing why some suppliers succeed in selling 19 See Charles Issawi, An Economic History of the Middle East and North Africa (New York: Columbia University Press, 1982), discussion of Middle East industrialization, pp. 159-169. technology and equipment in developing countries. The traditional theory of what determines the composition of a countrys exports and imports, the factor-endowments theory, holds that a country exports goods and services whose production is intensive in the resources it has in abundance. In the United States, human capital, defined as the productive abilities of the work force over and above raw labor, is now seen as a factor the United States has in relative abundance. Human capital is developed through education and training. It resides not only in individuals, but also in technology-blueprints, technical manuals, computer programs-and in the know-how embodied in functioning organizations. Empirical research has demonstrated that the United States exports goods and services more intensive in human capital than those we import. 20 Although many suppliers are theoretically in a position to provide particular types of civilian technologies to buyers in the Middle East, there is a tendency for a small number of specialists to emerge. Comparative advantage and product cycle theories provide partial explanations for this specialization. Comparative advantage is a theory which can be used to explain why particular countries export some types of goods and services and import others. The basic idea is that firms of a country export the goods and services produced with relative efficiency. (Relatively efficient production involves large amounts of the productive factors that are comparatively abundant and cheap in the countrys economy.) Conversely, importers tend to import goods and services that are produced with less relative efficiency. Comparative advantage is normally visible in lower costs and prices for goods and services. 20 See Gary C. Hufbauer, The Impact of National Characteristics and Technology on the Commodity Composition of Trade in Manufactured Goods, in The Technology Factor in World Trade, Raymond Vernon (cd.) (New York: Columbia University Press, 1970). See also Robert E. Baldwin, Determinants of the Commodity Structure of U.S. Trade, American Economic Review, vol. 61, No. 3, March 1971, pp. 126-46. This research helped to unravel the Leontif Paradox, which stated that U.S. manufactured goods exports are, contrary to expectation, less capital-intensive than its imports. PAGE 41 Ch. 2Analyzing Technology Trade and Transfer: Conceptual Issues and Policy Choices l 35 One implication of this theory is that, as the comparative advantage of the most competitive firm (e.g., a supplier of technology and equipment to the Middle East) narrows, other factors like government policies may become more important in influencing market competition. In such a situation, the ability of firms to win sales in export markets maybe affected strongly by factors such as supplier government policies, in addition to the production efficiency of the firm itself. In addition, the theory helps to clarify the fact that U.S. firms compete among themselves for exports. Therefore, a U.S. firm that efficiently manufactures technologically advanced equipment in comparison to counterparts in Western Europe or Japan (as measured in output per man hour, or other indicators of productivity) may nevertheless not export much of this equipment if there are other U.S. firms which are even more efficient producers. At the product level, it is the firms that build up comparative advantage. Because of this, it would be difficult to predict the location of the most competitive firms solely on the basis of country characteristics. Another way to approach the question of supplier competition is through consideration of the product cycle. Basically, when the embodiment of technology in goods, machinery, people, organizational units, and systems becomes standardized, it becomes transferable to countries that provide appropriate complementary factors at lower cost. This is observable on a product-by-product basis. First, offshore production of some components occurs, followed later by full production overseas of products that were once manufactured in the originating country. This pattern has been noticeable in textiles and consumer electronics, as developing countries have become the major producers, and the industrial nations, the importers. The newly industrializing countries thus gradually gain comparative advantage in certain product lines. 21 G. K. Helleiner, The Role of Multinational Corporations in the Less Developed Countries Trade in Technology, World Development, vol. 3, No. 4, April 1975, p. 167. Both comparative advantage and product cycle theories point to the fact that U.S. firms in many cases no longer hold a strong comparative advantage in exports of machinery and equipment over firms in other industrial countries or even over firms in the newly industrializing countries. In the advanced-technology sectors examined by OTA in this study, there are often many suppliers in Western Europe and Japan producing comparable equipment efficiently. Thus, while one important factor influencing competition in the Middle East market is which firms produce at lowest costs, many other factors in practice come into play and it is often difficult to determine which are operating a particular case. One way to gauge competition among suppliers is to look at market shares of firms from various nations. A rise or fall in the market shares of U.S. firms should not, however, be simply equated with gains or losses in competitiveness; market shares reflect a variety of other factors. First, some third country markets reflect strong historical or colonial ties to certain suppliers-Japan in Southeast Asia, the United States in Latin America. Second, if demand in the particular market is for more standardized goods and services, the U.S. suppliers would not necessarily be able to supply the demand at the lowest cost. Third, in some sectors such as telecommunications, where standards are particularly important, the initial selection of equipment may help determine which firms will be in the best position to provide follow-on equipment and services. Finally, the overor under-valuation of a supplier nations currency will strongly affect exports, regardless of the productivity and efficiency of particular firms and industries. These effects may be strong in the short run, but over the long term their impact on the overall export competitiveness of nations should diminish. Corporations compete for sales in a number of ways. Those with unique technological advantages or very efficient manufacturing processes are in a good competitive position, other things being equal. In distant third country PAGE 42 36 l Technology Transfer to the Middle East markets such as the Middle East, the ability of supplier firms to market their goods and services may be particularly important. The costs of opening a branch office overseas may be considerable, and a new-to-market firm may be discouraged from selling abroad, particularly in unfamiliar markets. For many U.S. firms, such as those producing telecommunications equipment, the domestic U.S. market has traditionally been so large that many did not see the need to export to distant markets. Corporate strategies, therefore, are often the critical factors influencing the resources that a firm puts into marketing overseas. In the Middle East, where many recipient countries face constraints in technology absorption, the willingness of supplier firms to put together technology transfer packages, including after-the-sale service and training, may also affect supplier competitiveness. Individual firms, moreover, may develop unique strategies that set them apart from other national firms. The U.S. hospital management firm Whittaker, for example, developed a strategy focusing specifically on the Middle Eastern market. Finally, willingness to participate as joint venture partners may also help firms to win contracts of certain types in some Middle Eastern nations, such as Saudi Arabia, where such partnerships are encouraged in order to expand technology transfers, among other reasons. Political and Other Factors Political factors often strongly influence technology trade in developing-country markets. At the most general level, long-term political relations between recipient and supplier nations (including antagonisms as well as alliances) shape the overall context within which technology trade occurs. Close political relations or alliances between supplier and recipient countries set a context conducive to technology transfer, investment, and involvement of supplier country firms. Likewise, recipient governments may attempt to reduce trade with supplier countries whose political perspectives on issues such as the Arab-Israeli conflict differ sharply with their own. On the recipient side, contract selection for large projects may be highly politicized, and in such cases the preferences of host-country actors in influential positions may be important determining factors of supplier competition. Recipient country regulations (e.g., performance and local employment requirements) may make it easier for certain firms to win contracts. Supplier governments also attempt to compete by assisting their own firms in a number of ways, including representing business interests abroad, negotiating on behalf of national firms, providing important market information, and enacting industrial policy measures, such as subsidies for their research activities. In addition, supplier governments can assist exporting firms by providing export credits and insurance guarantees that reduce the cost and risk to domestic firms of overseas business activities. Since the end of World War II, an international trading regime has been established to ensure fairness in competition. The aim has been to eliminate government regulations which provide disproportionate advantages to some firms (usually national firms) over others. As a result, while direct barriers to trade have been reduced, up until recently few specific actions had been taken to affect supplier government subsidies. The General Agreement on Trade and Tariffs (GATT) subsidies code and the Organization for Economic Cooperation and Development (OECD) arrangement on officially supported export credits are quite new and not fully tested, but their aim is to set ground rules for government subsidies. These agreements are likely to have their major effect through a combination of negotiation and deterrence, because in both cases there is incomplete coverage of countries, specific exclusions, lack of remedies, and weak enforcement. Nevertheless, such agreements do set standards for official subsidies against which deviations can be assessed. No agreements cover international trade in services-including construction, engineering, and management services PAGE 43 Ch. 2Analyzing Technology Trade and Transfer Conceptual Issues and Policy Choices l 3 7 though exploratory held. discussions have been Only since 1982 have the minimum interest rates established under the OECD arrangement been close enough to commercial rates to make much of a difference. A large loophole remains regarding sales to developing nations: the guidelines established are not valid when soft financing is offered under the guise of official development assistance (ODA). 22 In such cases, called mixed credit, official export credits are used in conjunction with concessional financing permitted for development assistance. OECD nations have discussed proposals supported by the United States to establish an agreement on mixed credits, but no agreement has been reached, To summarize, despite recent efforts to eliminate unfair subsidies, in practice supplier governments determined to support their exporting industries employ a variety of direct and indirect mechanisms. Perhaps least susceptible to international agreement are the policies which indirectly affect international technology trade included under the general category of domestic indus- trial policies of supplier nations. Tax benefits, R&D subsidies, and procurement practices favoring domestic firms may be used to support export industries. Government-owned telecommunications firms in some supplier nations are in a particularly good position to receive indirect supports of various types. All industrial nations have such policies that affect international technology trade; however, it is technically difficult to measure the subsidy element and politically difficult to build a consensus concerning rules of the game. As discussed in chapters 12 and 13, the types of assistance that various Western nations provide to exporting firms reflect differing traditions of government-business relations. In some cases, the large state-owned or strongly government-led firms (particularly telecommunications firms) are the major exporters of equipment and services to the Middle East, heightening the political dimension of large contract awards. Theoretically, competition among suppliers is determined most importantly by the ability of individual firms to efficiently produce goods and services, as compared to their competitors (including both foreign and other national firms). However, in practice, other factors come into play, particularly in situations where no firm has a clear--cut cost advantage based on the efficiency of its production, and where many firms are in a position to supply roughly equivalent technology. Analysis of competition among suppliers for sales of technology must take this wide range of factors into account. TECHNOLOGY TRANSFER: THE POLICY ISSUE S Technology transfer, from the perspective ing nations; the stakes are high for recipient of a policy maker, holds tremendous promise, governments initiating new and highly visibut also potential problems. The opportunities ble projects involving the introduction of soand the pitfalls are particularly salient when phisticated technology imported from abroad. technology flows from developed to developFor the supplier, potential losses include grow- PAGE 44 38 l Technology Transfer to the Middle East ing resentment about projects that have failed, which may, in extreme cases, jeopardize foreign relations with suppliers. Technology transfers raise difficult choices for policy makers in recipient and supplier countries because it is impossible to anticipate all the future consequences or even trace the effects of past technology transfers. Because technology transfer normally occurs in the context of economic development projects, it can be viewed as a facet of the development process. Because it is related to other trends such as urbanization, economic growth, improvement in living standards, and political and social change, it is usually difficult to distinguish the discrete effects of technology transfer at the national level. Because their potential gains and losses differ, recipients and suppliers-whether they be governments, private enterprises, organizations, or individuals-inevitably evaluate the costs and benefits of particular technology transfers in different ways. 23 Recipients and suppliers alike-forced to make choices in a context of inadequate information, experience, and capacity for anticipating resultsmay seek to maximize political and other goals rather than ensuring the success of technology transfer. Policy choices affecting technology transfer often reflect political compromises, foreign policy aims, and social values. The purpose of this section is to outline briefly the generic choices policy makers face as they seek to affect technology transfer. RECIPIENT POLICY ISSUES For developing countries, technology transfer involves learning and applying technologies imported from abroad, commonly from the industrialized nations. The Islamic countries of the Middle East have had historic ties to Europe and were among the last to experience Western colonialism. What distinguishes 23 See Joseph S. Szliowicz (cd,), Technology and International Affairs (New York: Praeger, 1981). See also Henry N. Nau, Technology Transfer and U.S. Foreign Policy (New York: Praeger, 1976), for a discussion of national perspectives on technology transfer. the region is that the end of the colonial period coincided with the discovery of oil wealth in some of these nations, providing them with unique resources for economic growth and technology transfer. 24 The oil-importing, developing nations of the region have also been affected by these developments through remittances earned abroad by their citizens, Arab economic assistance, and political-military developments in the region. However, the percapita GNP of most developing nations remains well below that of the major oil-exporting nations. 25 For policymakers in all of these countries, however, the central question is how to use Western technology to speed economic growth and attain social prosperity and, at the same time, preserve their political legitimacy and avoid clashes with traditions. Selection of Technologies To recipients, a critical problem is the selection of technologies needed to attain development objectives. Technology transfer will work for the recipient only if the recipient knows what to ask for and if the foreign supplier is willing to provide it. Disappointment with foreign firms in technology transfer often results when the recipient does not possess the knowledge or experience needed to define requirements. In such cases, the foreign partner may meet its obligations, but the level and type of transfer may not meet recipients expectations. Theoretically, technology selection should fit in with a broad range of policy concerns: economic growth, international trade, and environmental, labor, and social policies. However, because policies are rarely well defined and consistent across these areas, the problems of selection are significant. A group of Kuwaiti policymakers have characterized the problem as follows: 24 Dankwart A. Rustow, Modernization, Oil and the Arab Countries, Arab Resources: The Transformation of Society, I. Ibrahim Ibrahim (cd.) (Washington, D. C.: Centre for Contemporary Arab Studies, 1983). 25 Egypts per capita GNP in 1981 was $650, while Kuwaits was $20,900, according to World Bank figures. World Bank Development Report 983 (London: Oxford University Press, 1982), p. 148. PAGE 45 Ch. 2Analyzing Technology Trade and Transfer: Conceptual Issues and Policy Choices l 39 Developing countries should be selective in the type of technology they choose to meet a prescribed set of objectives and criteria. The choice of technology should be made with a view to enhancing their resource base, to suit their socio-economic setting, and to be consistent with their natural endowments (capitalversus labor-intensive). It should also meet certain environmental constraints, promote self-reliant development, strengthen indigenous research capability, and lessen technological dependence. 26 Considering their varied resources, it is natural that Middle Eastern countries have chosen different paths to development. The Gulf States, rich in oil and gas and small in population, have made the hydrocarbon sector the focus of development. Saudi Arabias First Five-Year Plan, for example, outlined a strategy for using oil wealth to purchase advanced technology in order to diversify the economy 27 The question is how far diversification into steel, aluminum, and petrochemicals should be taken. 28 Some of the new heavy industries in the Gulf, such as steel, are locally marketed, while new petrochemical plants will serve export markets. Technology transfer decisions are interrelated to choices about the type and speed of development, including export and import substitution strategies. The choices Egypt faces are strikingly different. With limited natural resources and capital, Egypt nevertheless has a wealth of human resources. Egypts engineering and medical schools date back to the early 19th century. By 1960, the country had twice as many university students as Britain. By 1970, it had twice as many university students among . K, Beht)ehani, \l. (;irgis, and h!. S, hlarzouk, The Role of Science and Technology in Kuwait s Development: ,4n overview, The .q>mpo.~ium on Science and Technology. For De\,elopment in Kuwait, Rehhehani, et al. {eds. ) ( I.ondon: I.ongman, 1981), p. 2. 1Fouad Alxiul-Salarn A1-Farsy, King kaisal and the First Fi\.e Year De\elopment Plan, King Fai.wd and the Modernization of Saudi .Arabia. Willard A. Beling (cd, ) (I,ondon: Croom Helm. 1980), p. 63. .\bdullah alKahlifa of th[ Bahrain 1 ndustrj Ministry articulated the question in hla~r 1983, when he asked: our declared aim LI to diversify an oil-based econorn~. But are we doing the right thing? 1s industrialization real, or is it a gold rush? See Persian Gulf Industrialization. .Vewr York Times, May 23. 1!38:), p.D6. Third World countries as would have been expected, given its industrial infrastructure. Enjoying a large population and a comparatively high proportion of technically educated people, Egypts challenge is to use these human resources fully, particularly in industrial development. Policy makers in different countries may reach different conclusions about what technologies are most appropriate, even if the national resources are comparable. Considerable attention has been paid to the potential uses of intermediate, small-scale, labor-intensive technologies by developing nations. Technologies have been defined by theorists as inappropriate for a number of reasonssuch as failure to utilize local materials, to adapt to local markets, or to introduce suitable scale of production. 30 However, in practice policymakers determine the appropriate mix of technologies; and the long-term environmental, social, and other effects are often insufficiently considered. Public and Private Sectors Technology transfer also raises questions about the relationship between public and private sectors in developing nations. As discussed earlier, government ministries play central roles in making up development plans, thereby influencing the growth of the private sector. Public corporations, such as the ministries of health and telecommunications, are usually the critical institutions requiring imported technologies. In many instances, government officials plan and implement technology transfer to developing nations. Successful transfer implies a degree of operational efficiency that is, in some cases, constrained by the presence of a large bureaucratic public sector. Such problems can be traced to high government salary scales, which draw 29 Clement Henry Moore, images of De\relopment: Egqptian En&ncers in Search of lndu.st~ (Camhridge, Mass.: MIT I>ress, IWO), p. 4. Simon Teit,el. on the (oncept of ,4ppropriate Technology for I.ess Industrialized (ountries, Technoloflcal Iorecasting and SOciaf Change, ~ol. 11, 197H, pp. 349-369. PAGE 46 40 l Technology Transfer to the Middle East qualified technical people from the private sector without using their talents effectively, to the need to reward political allies, and to the lack of experience of government officials with the actual workings of industry. As a general rule, where the public sector completely overshadows the private sector, technology transfer choices may be taken without sufficiently involving those who will use the technologies. As discussed in chapter 11, there is a wide range of variation in the capabilities of government institutions in these countries, but improving efficiency has been a goal in all of them. All of the Middle Eastern nations studied, including Saudi Arabia as well as war-torn Iraq, have announced plans to promote the growth of private sector firms and organizations in an attempt to liberalize their economies and enhance market operations. In many instances small private firms interact with and are dependent on public sector ministries for special treatment, including protection. Development of private sector firms may promote efficient use of imported technologies over the long term, but significant change in public/private sector roles may involve challenges to vested interests in public sector corporations and agencies. The Egyptian experience illustrates problems accompanying attempts to introduce changes. Egypts decision in the early 1970s to promote an open door policy for encouraging the growth of the private sector followed years of centralized planning by the public sector. However, despite the open door, the private manufacturing sector has grown slowly. (In ch. 8 the relationship of public and private sector health care enterprises in Egypt is discussed and problems relating to technology transfer are identified,) Recipient Firms and Foreign Suppliers of Technology In the Middle East, recipient governments have expanded regulations which help to determine the relationship between recipient firms and foreign suppliers of technology. This is analyzed more fully in chapter 11. For example, some nations encourage foreign investments through special tax policies, including free zones. Egypts Law 43 is designed to provide incentives for the import of modern capital-intensive technologies. Saudi Arabia has encouraged the formation of joint ventures with foreign firms because these are viewed as a prime avenue for technology transfer. This approach is based on the idea that if a foreign firm is committed over the long term, successful technology transfer is more likely to result than if the firm is interested only in exporting goods. Kuwait, in contrast to Saudi Arabia, has favored a nationalization policy that stresses direct acquisition of foreign firms. Related to these choices are larger questions about whether to pursue a strategy of technological self-sufficiency, involving a stress on indigenous technology mastery, or to plan for long-term involvement of foreign suppliers. Laws governing investments, patents, licensing and trademarks, resolution of settlements, and trade affect the type and duration of relationships formed with foreign suppliers. Similar decisions are made, explicitly and implicitly, concerning the role of foreign governments as suppliers of technology through development assistance and other programs. Participation of the foreign government may be extensivein planning a technical assistance project, staffing it, and evaluating its success. Recipient countries have sometimes complained that they have insufficient opportunity to set priorities and to participate fully in such development assistance programs. In contrast to lower-income developing countries, Gulf States such as Saudi Arabia and Kuwait receive no development assistance and have become major donors themselves. Such countries may purchase technology directly from private firms abroad or enlist foreign government involvement through technical assistance projects. In addition, developing countries have attempted to cooperate in addressing questions of relations with technology suppliers, particu- PAGE 47 Ch. 2Analyzing Technology Trade and Transfer. Conceptual /ssues and Policy Choices l 41 larly multinational firms. For a decade, developing nations have pressed for the establishment of a code to regulate international technology transfer. Access to science and technology was a primary aim of the New International Economic Order, inaugurated by the U.N. General Assembly in 1974. Developing countries argued that they were unable to bargain effectively with suppliersthat technology was too costly and that the terms of the arrangements were too restrictive. The draft International Code of Conduct on the Transfer of Technology has still not been approved. 31 Although preparation and negotiation of a draft code has continued through the fifth session of the United Nations Conference on an International Code of Conduct on the Transfer of Technology (November 1983), there appears to be little prospect of agreement in the near future. In addition, a number of multinational conferences sponsored by various U.N. agencies and international organizations have focused on regional technology transfer problems. 32 The U.N. agency UNIDO, for example, is attempting to establish a system for monitoring technology flows in developing nations, through its Technology Exchange System and its Technological Advisory Services. 33 Th e more narrowly defined efforts of UNIDO and other specialized U.N. agencies have contributed to a greater understanding by develop. . 31 Dennis Thompson. 4 lh e UNCTAD Code of Transfer of Technolo~r. ,JournaJ of }!orld 7rade law, vol. 16, No. 4, Jul\ tlugust 19fi2 (l NCTA1) held a genm-a.l conference June 6-30, 1983, and prior to the meeting, Third World countries called on t,he conference to imprr~vc data on t,e~hnologj transfer, and to explore the possibility of drafting international standards on marketing, promotion, distribution, trad~, and technology? in pharmaceuticals. The United States and other developed nations were criticized for not participating sufficiently in efforts to speed technology transfer to developing countries. See U.S. Import Weekly, May 25, 1983, pp. 301-302. See also Pedro Roffe, UNCTAD: Transfer of Technology Code, Journal of ilorld Trade Law, \ol, IH, No. 2, ~larch/April 1984, pp. 1761 ~y ff)r [I r[.\,i[.W of OUt standing issues of debate. 9JF:(W.4 t [ ~nitwl Nations Economic Commission for Western AsM) has attempted to improve understanding of problems related to technology transfer in various manufacturing sectors of this region d[teloping nations. (J N 11)0 Secretariat, Overview of Selected Problems of Technolo~ Transfer to Developing Countries, UN 1110 LES ,Joint Meeting on Problems of I,icensing Into I)e\eloping Countries, Vienna, Austria, June 22, 1982, ing countries of the problems of technology transfer, particularly the legal issues. In contrast to the U.N. negotiations that involve a wide spectrum of countries, Middle Eastern nations have also established regional organizations that attempt to improve the capabilities of member states to acquire and bargain for Western technology. Such regional organizations date back to the formation of the League of Arab States in 1945.]4 Many of the more than 400 joint Arab projects actually involve only limited cooperation among member states, and some are virtually inactive. 35 However, regional organizations such as the Gulf Cooperation Council (GCC) have recently made significant progress in economic cooperation. In December 1982, the GCC countries signed a unified economic agreement that included coordination on tariffs. Other specialized organizations, such as the Gulf Organization for Industrial Consultancy, have worked to improve the ability of member nations to select and use technology. The Islamic Development Bank has established an Islamic Research and Training Institute which aims to improve technology transfer, particularly through increased reliance on local consultants. 36 At present, there is strong interest in technology cooperation among Middle Eastern nations, but defining relations with foreign suppliers ma-y be difficult for organizations with varied membership. Promotion of Technology Absorption Another set of choices for recipient countries concerns promotion of technology absorption. Recipient governments have an interest in ensuring that indigenous capabilities are improvedthat technology is absorbed or mas34 See E;lias T. (;hantus, Arab Industrial lnte~p-:ition: .4 Strategy for Dmwloprnent (London: Croom Hehn. 1982), for ti review of the ar~gments concerning the economic benefits of rt~git)na! integration, ?$Yusif A. Sa?igh, A New ~ran](~{)rk for {(~tl~~>l(~l~~(~nti~ritj Among the Arah I;cont)njies, .lrah Resources: 7fit Yran a]s, Financia) 7jrIIes, ~~(>l}. Y, 19HI. p. 5. See also tJum:ida al-rIhani, Ioechst I)lams to Ser\icc Kuwait and Saudi Arabia, .4rabia, hlarch 1984, p. 59. PAGE 140 136 l Technology Transfer to the Middle East ect was revived. Preliminary engineering work was entrusted to C. F. Braun. The plan was for KPC and PIC to agree on the viability of a project and then proceed in concert with unrelated foreign partners. PIC commissioned development of a marketing plan for a set of proposed products. This study was completed in the fall of 1982, with indications that the project was proceeding. In 1983, however, there were reports that the project had been shelved once again, but due mainly to marketing considerations and difficulties in anticipating feedstock supplies as a result of vagaries in the oil market. The status of Kuwait petrochemical project thus remains uncertain. 14 Technology Transfer.The project is thus still in the planning stage. C. F. Braun would eventually be its likely transferring agent if the project is implemented. Since it is likely that Kuwait will not have a joint venture partner, and it owns the engineering firm, the only source of truly foreign technology will be licensors. Socioeconomic Considerations.Along with its decisions to conserve its oil, to export increasing quantities of refined products rather than crude oil (to derive added value), and to limit heavy industrialization in favor of supporting the service sector (i.e., banking and reexports), Kuwait will support petrochemical development as long as it provides a good return compared to that of other investments in its portfolio. Within this context of a general development strategy focusing on service sector expansion, petrochemical development, with its spinoff effect on employment, education, and support businesses, is far less important to Kuwait than to Saudi Arabia. 14 The project may have been effectively canceled in November 1982. There was still a certain amount of confusion with PIC spokesmen insisting that the project was still going ahead, although KPC officials said it was dead in its current form. Some combination of worries about end markets, competition from the new Saudi ventures, and perhaps the availability of sufficient gas feedstocks within Kuwait meant that the advantages of the project became less and less convincing; Wharton Middle East Economic Service, The Petrochemical Industry in the Middle East: Current Status, Uncertainties, Global Impact, Special Report #2, April 1983, pp. 27-28. While a fundamental difference between Kuwait and Saudi Arabia is Kuwait propensity to invest in foreign ventures, Kuwait also differs in its conduct of domestic projects. The Kuwaitis are involved in fewer projects, and do not favor joint venture arrangements. This reflects their desire to realize maximum benefit from their investments. The Kuwaitis, like the Saudis, are not averse to employing noncitizen Arab (e.g., Palestinian) and Western workers to run their projects as long as this employment practice does not detract from their project expectations. Algeri a Algeria is a country distinctly different from the Gulf countries previously analyzed. Perhaps more concerned to limit participation by foreigners, Algerians nevertheless find themselves in a position similar to that of many Gulf States in their need for foreign technology to effectively use hydrocarbon resources. Unfortunately, Algeria is not as rich in oil as Saudi Arabia, and therefore does not have the financial resources to purchase the technology, infrastructure, education, and industrial base at the same rate or magnitude as Saudi Arabia. Nevertheless, hydrocarbons represent over 25 percent of Algerias gross domestic product, approximately 50 percent of government revenues, and more than 95 percent of export earnings. Crude oil and LNG exports are the major factors in export earnings. Algeria is the first OPEC nation to attempt building a modern petrochemical industry using natural gas and natural gas liquids. The impetus behind its efforts reflects its determination to industrialize and reach self-sufficiency in those commodity areas where it has an advantageous position in raw materials. Sonatrach, the state energy company, is responsible for all petrochemical projects. It has been involved with one olefin and derivatives complex, three ammonia projects, and three LNG projects. A massive program of capital investment in the late 1960s and 1970s was largely directed at converting Algerias abundant reserves of PAGE 141 natural gas into export products. Thus, LNG, LPG, and condensate recovery plants were authorized as well as ammonia and petrochemicals (from ethane). During this period, Algerias principal income was from a modest volume of crude oil exports which was insufficient to support the investment program. In recent years, the rate of capital expenditure slackened dramatically as planners faced construction and then operating problems. 16 Many of the ambitious plans of the 1970s were shelved, including a refinery, an aromatics project, and a second ethylene project. Construction of the first ammonia project in Algeria was initiated by Chemico (U.S.), using its own technology. The project was later taken over by Technip and Creust-Loire, however, employing the same Chemico technology. Completed in the early 1970s, the project included a downstream urea facility, The ammonia plant never operated satisfactorily, despite repeated modifications by the contractors, and was finally shut down in 1980 for a major revamping, which was carried out by Technip/Creust-Loire. In the meantime, two new ammonia project contracts, one at Arzew and one at Annaba/ Skikda, were awarded in 1974-75 to a group of licensers and contractors. The Arzew proj ect was commissioned in early 1981. The U.S. firm Kellogg, which has a technical assistance contract with Sonatrach to operate the ammonia plant, has assigned approximately 50 men to Arzew. With Kelloggs involvement, this plant is thought to run well and is approaching design capability. However, actual production from the facility has been limited. The Annaba plant has not begun operations. The Algerians have had similar operating problems with LNG facilities. The first major Natural gas when extracted is mostly methane hut it also contains higher hydrocarbon such as pr(}pane, butane, and ethane which can create difficulties in pipeline transport. Thus the natural gas is first cooled and the higher hydrocarbons are condensed, forming natural gas liquids, SCX> h igt 1 iarle~ /\lgeria Rethinks 1 ts l+>t,rochemica]s Strate~, hfiddle Jhst ~,commli( Digest, Nlar. 23, 1984, p. 1 1; N igel I {ar~e~. Al~wria Fails To Realize Its Full I)otential, .Iliddle lr, 1982, 18 Fereidun Feshm-aki and David I. lsaak, ()})1~(, the (;uJf, and the \\orld Petrochemical Alarket .4 W ud.} in (;o ~ ernnwn t lolic~ and I)ownstream operations (Iloulder, CO1O.: 198~11, L$estliew I>ress, Inc.} pp. 204-205. 19 Martha Caldwell Harris, The Dilemmas of Japan's Oil Dependency," The Politics of Japan Energy. Strateg~r, 1 nstitutt~ of ~last Asian Studies, (Jni\ersit}r of (California, llerkele~, 19H 1, pp. 65-84. PAGE 146 142 Technology Transfer to the Middle East The Japanese Government disassociated itself somewhat, and what was once called a national project is now called a nationally supported project. 20 The on-again off-again nature of the IJPC complex and the uncertainties of the Iran-Iraq War make it difficult to predict when it might come onstream. In mid1983, Iran agreed to take on a larger financial burden, and emphasized completion of 3 of the 13 complexes originally planned. 21 This project will, however, probably be completed someday, since the present Iranian authorities are strongly, committed to developing the petrochemical sector. The new 5-year petrochemical plan is budgeted at nearly $3 billion, which allows for planned renovation of existing chemical units and the commissioning of some new ones (although completion of Bandar Khomeini alone could absorb most of this). It would probably be a mistake to write off the Iranian petrochemical industry. It should be remembered that despite all the disruption of recent years, chemical plants remain in existence, and some are operational. However, for the present and near-term, dramatic changes are unlikely in the Iranian petrochemical sector. Official commitment to this sector is strong, and the Iranians will probably concentrate on import-substitution in the short run; export-oriented projects are not in the immediate future. Iraq. Until the outbreak of the war with Iran, Iraq gave its petrochemical sector a fairly high priority. Iraq used some of its associated gas 22 to produce nitrogenous fertilizers and ethylene and was continuing construction of gas-gathering projects for the South Rumaila fields and for various northern oil fields. In fertilizers, Iraq has the added benefit of having phosphate deposits that could be exploited with mining operations. Rejecting joint ventures in petrochemicals, Iraq emphasizes turnkey plants. 20 Wharton: op. cit., p. 23. 21 "Irans White Elephant Limps on, Middle East Economic Digest, Special Report on Japan, December 1983, p. 14. 22 Wharton, op. cit., p. 25. Presently, eighty percent of Iraqs associated gas is flared. Iraqs problems in the petrochemical sector are similar to those of Iran. Its ethylene complex in Basra is affected by the war. However, unlike the Bandar Khomeini plant, this plant has good prospects for rapid completion after the end or abatement of the war. Present damage to the complex is difficult to gauge. Compared to the IJPC project, the Basra facility is fairly simple, being an ethylene cracker 23 with capacity to make polyethylenes and PVC plastic. It is directed primarily at the domestic market and is solely owned by the Iraq Ministry of Industry. The Basra project has not apparently experienced an exodus of talented technicians and administrators, and thus has a good chance of coming onstream by the end of the decade if the war abates. Egypt.As a significant producer of oil, Egypt has the potential to develop a petrochemical industry that could serve its large but relatively poor population. Although Egypt is determined to enter the commodity petrochemical sector, its impact on world markets will be small. The Egyptian Petrochemical Co. (E PC) is planning a two-phase petrochemical project in Alexandria that will result in Egypts first ethylene-based complex. In late 1982, EPC started awarding letters of intent for this complex. Due to go onstream in 1985, the project will use imported ethylene. Phase one will include production of 80,000 tons/yr of PVC and 60,000 tons/yr of chlorine/ caustic soda. The second phase of the project is expected to expand capacity to 100,000 total tons/yr of HDPE and LLDPE and 760,000 tons/yr of LDPE. Egypt is well established in the fertilizer sector, having ammonia plants at Aswan, Helwan, Tilkha, and Abu-Qir. Together, these have a capacity for 1.1 million tons/yr of ammonia and 950,000 tons/yr of urea. Also, the plant under construction at Abu-Zaabal will produce 218,000 tons/yr of sulfuric acid and 66,000 tons/yr of phosphoric acid. From its West Sebayea mine, Egypt supplies phosA cracker is used for thermal decomposition of petroleum to extract low-boiling fractions, PAGE 147 phates to the Abu-Zaabal fertilizer plant. Egypt will ultimately become a major end-user of commodity petrochemicals. For now, however, activity in this area is limited. ABSORPTION O F PETROCHEMICA L TECHNOLOGIE S Training Programs Considerable attention is placed on manpower training programs in the various countries examined. As might be expected, the most extensive programs have been instituted in Saudi Arabia. However, the logic behind all the training programs is similar: for true economic development to occur, a team of nationals must be trained to manage, operate, and support industrial growth. The gains derived from manpower training represent a continuous return on investment. For example, SABIC considers personnel training a means for: improving the efficiency of operation and maintenance; using a secured local resource; raising the productivity of employees; and increasing net returns in the long run. 24 Although the petrochemical plants involved in the Saudi Arabian joint ventures are not labor-intensive, the total number of personnel involved is greater than in comparable U.S. plants. This is because each project, large or small, is an entirely separate company and because SABIC insists that a high proportion (now 75 percent) of the staff should be Saudi Arabians at the time of startup. An inevitable duplication in management and administrative effort results. SABIC conducts training programs independently and with its joint venture partners, as appropriate. These programs provide both theoretical knowledge as well as on-the-job training. At the end of 1981, 75 percent of the personnel in SABIC joint ventures were reported to be Saudi Arabians. By the time all SABIC projects reach production, 7,000 to 10,000 Saudi Arabians should be employed. 24 SABIC, 5th Annual Report, 1981. Ch. 5Petrochemical Technology Transfers 143 -(These data include a broad range of projects outside the petrochemical sector. ) Programs conducted by Mobil and Exxon fall within the purview of SABIC. Trainees from Saudi Arabia, of junior high school age, are sent to the United States to take programs in English, science, mathematics, and specific technical skills ranging from welding and machine shop skills to operating engineers. These programs last up to 3 years, of which the last 18 months include on-the-job training. In most training programs, students are housed on campus for a period of time in order to reduce culture shock and introduce them gradually to American culture. (This acclimation period is, of course, not needed for trainees who have gone to universities in the United States.) Kelloggs program for the Algerians is similar to the program U.S. companies have for the Saudi Arabians; however, Kellogg makes greater use of plant operation simulators. In addition, it also assists in on-the-job training in the Algerian plants, The Saudis may have comparative success, due to prior experience of some trainees with ARAMCO. In addition, they plan to build a national oil training center to train 300 to 400 students which will contribute to expansion of the technical work force. 25 Eventually, 25 The $16 million training center will be built in the Eastern Province and three additional centers are planned, See Middle East Economic Digest, Sept. 30, 1983, p. 38. Photo credit Mobil 0il Corp. Saudi Arabian trainees at Mobils petrochemical plant in Beaumont, Tex. PAGE 148 144 Technology Transfer to the Middle East . both the Saudi Arabians and the Algerians should be able to operate their own facilities by the 1990s. One concern is whether this will involve excessive requirements for technical manpower, leading to shortages in other sectors. It is likely that foreign training programs with a small core of foreign personnel will still be required initially to help operate the new ventures of the early 1990s. Inter-Arab Cooperatio n Cooperation among Arab nations is another potential method for transferring skills. The transfer of technology or skills from Saudi Arabia or Kuwait to other countries in the region (i.e., Bahrain) seems remote, however, during the 1980s and is probably questionable during the early 1990s. In the Bahrain methanol/ammonia project. it is not clear how future inter-Arab cooperation will progress. It would seem that the major contributions by Saudi Arabia and Kuwait will be financial. Some Saudi management personnel and some Kuwaiti (PIC) personnel may participate in the venture. During the 1980s, however, both countries are expected to be strained for trained personnel even for their domestic operations. Nevertheless, interest in inter-Arab cooperation in petrochemical development continues. The six-member Gulf Cooperation Council (GCC) recently agreed to work with the Organization of Arab Petroleum Exporting Countries (OAPEC) in energy-related training programs. 26 Joint financing capabilities may be enhanced through the formation of the Gulf Investment Corp. (GIC), setup by GCC states to jointly fund development projects. The rationale for joint training programs and financing is clear, but the question is whether cooperation can be built among nations whose domestic resources are now more constrained. 26 "GCC, OAPEC Promote Energy-Related Cooperation, Kuwait KUNA in English, Dec. 26, 1982, reported in F.B.I.S. Daily ReportMiddle East and North Africa, Dec. 29, 1983. PERSPECTIVES OF SUPPLIER COUNTRIE S AND FIRM S FOREIGN COMPANY PARTICIPATION The transfer of technology to the various countries examined in this study can be performed through: 1) joint venture partners, 2) Licensers, and 3) contractors. Only Saudi Arabia and Qatar have taken advantage of all three principal mechanisms. The remaining countries, for the products being investigated, have selected only the licensor and contractor routes. Joint Venture Partners The foreign joint venture approach is practiced almost exclusively by Saudi Arabia. The principal incentives for foreign partners entering into Saudi joint ventures include profits, crude oil entitlements, and the potential for expanding production and marketing. The return on equity is expected to reach approximately 15 percent over time. This calculation is based on a number of factors, prime among them being low-cost feedstocks. The principle is that associated gas will be considered to have zero value at the wellhead during the initial years of any consuming project. The consumer at the point of use would pay a charge of: a fixed element, related to the fixed (investment) costs of the gas-gathering project; and an element adjusted to the crude oil price to cover the energy costs of gas gathering and separation. The process of adjustment means that, with time, the energy-related portion of the price will represent an increasing share of the total, and the overall rate of price escalation also increases. In addition, a profit-sharing formula will be applied when the cumulative average return on equity for any consuming project exceeds a specified figure, i.e., one-half of any excess profit will PAGE 149 Ch.. 5Petrochemical Technology Transfers l 145 be taken by the gas supplier, Petromin. A second factor in the calculation of return on investment is low-cost debt. Financial provisions involve coverage by Saudi Government loans at favorable rates of interest: 3 to 6 percent interest on the approximately 90 percent of debt provided by Saudi Arabia, Commercial rates would apply for the remaining 10 percent of debt provided by commercial institutions. 27 Finally, return on investment is enhanced by assistance provided by recipient governments in infrastructure development. At Al-Jubail and Yanbu, the Saudi Government is responsible for the investment burden for site development, infrastructure, and ma27 Foreign partners will enjoy a 10 year Saudi Arabian tax holiday on their share of net income from the joint ventures. However, under U.S. tax law. American companies are unlikely to derive much benefit from this provision, since the earnings are subject to foreign source income rules. jor utilities. However, operating companies will be charged by the Royal Commission on a commercial basis for services provided. The operating companies include the entire joint venture, one-half of which is Saudi Arabian. A second general incentive has been access to crude oil. Crude oil entitlements authorize the foreign partner to receive a guaranteed supply of crude oil at a commercial price and of an amount related to the partners investment in the project. Crude oil entitlements appear to have been a major incentive to foreign partners, particularly oil companies such as Shell Oil, which has no share in ARAMCO, and Mobil, whose share is only 15 percent. In the present climate of crude oil supply and demand, the value of crude oil entitlements is questionable. However, long-term security of crude oil supply is still an important objective for these companies. PAGE 150 146 l Technology Transfer to the Middle East .. Finally, foreign companies expect to expand their production and market reach through participation. The companies establishing production bases in the Middle East have diversified their sources of product supply to a location that will facilitate their marketing operations in Southern Europe, Africa, and Asia. Also, from a long-term perspective, they are in a region where the next generation of competitive facilities will be located. The value on contracts won by C. F. Braun since its parent company (Santa Fe International) was purchased by KPC was reported at $3 billion. 28 From the perspective of the supplier firms, the major impediments to the success of joint venture projects are risks, which could arise from: 1) revolution and the rise of an antiWestern government, 2) industry nationalization, 3) insistence that indigenous personnel operate the facilities before they are ready, thereby reducing efficiency of operations, 4) requirements to market the product in international markets at depressed prices, and 5) fixed crude oil prices regardless of (lower) spot market prices. While these risks arise whenever a project is considered in a developing country, the large number of projects in Saudi Arabia multiply the risks from a national point of view. Some companies have chosen to proceed after negotiating to soften the risks (i.e., renegotiating crude entitlement agreements, raising profitability goals, eliminating take-or-pay product contracts). Access to crude oil clearly tipped the balance in favor of many decisions made during the 1970s. All U.S. companies participating in Saudi joint ventures are major oil or chemical companies. In terms of total investment, most are the former. As publicly held corporations, all have, as their long-term objective, the maximization of return to shareholders. Some of the most important considerations influencing U.S. investments in these joint ventures include: 1 ) the addition of long-term supplies of imported crude, 2) repatriated profits from handling and/or producing this crude, 3) royalties to U.S. licensers, 4) profits to U.S. contractors involved in engineering and construction, 5) repatriated dividends from Saudi Arabian joint ventures, and 6) net receipts for technical and commercial services rendered to the venture, representing a net foreign exchange gain even in a no-profit situation. The most serious factor now working against a joint venture partner relationship for a U.S. firm is the potential for reduced sales in other non-Middle East markets. In the Saudi-type joint venture, the foreign partner will be expected to provide 70 to 90 percent of the market opportunity, mostly on a committed basis. In the present climate of low market growth for petrochemicals, commitment to market large quantities of petrochemicals produced in the Middle East could limit production in older facilities elsewhere in the world. Clearly, there are cases where a market can be better serviced from the Middle East than from the United States or elsewhere. In such a situation, the U.S. partners share of the net income may exceed that to be gained from locating in the United States. Finally, there is the argument that if the company does not engage in the joint venture, another will. In the case of Mobil Oil and Exxon, objectives are clear. These firms seek to maintain their relationships with the Saudi Arabians, obtain crude oil entitlements, expand their position in global petrochemical trade, locate petrochemical facilities in areas providing a long-term advantageous cost position, and realize an acceptable return on their investments. Nevertheless, in the slack oil market of 1983, these firms were in a difficult situation, partly because of their commitments to these ventures. 29 No West European companies participate in Saudi petrochemical joint ventures. However, the previous discussion about U.S. involvement will apply qualitatively to any future West European activities, though in some 28 Shaikib Otaqui, Petrochemicals Award Strengthens Brauns Kuwaiti Presence, Middle East Economic Digest, Aug. 13, 1983, p. 26. 29 See Mobils Costly Saudi Strategy, Business Week, Oct. 17, 1983, p. 76. PAGE 151 Ch. 5Petrochemical Technology Transfers l 147 ... .. cases (West Germany and France in particular), there is likely to be a stronger bias toward the use of home-based contractors and equipment suppliers. In the case of Qatar the French company CdF Chimie is the joint venture partner. Its objectives, and those of the French Government that promoted the arrangement, were to expand global market position, minimize cash outflow while maximizing revenues from a low-cost source of polyethylene, acquire financial infusions for a new domestic operation from a source that would not interfere with French management of the facility, gain oil entitlements, and secure a position for French contractors in a Middle East project. In this case, the French Government and the French firm perceived their interests to coincide. Japanese involvement in Saudi Arabia arises from objectives similar to those of the French in Qatar. The Japanese, however, did not exchange management fees and royalty payments for hard investments. Similarly, they will be responsible for profits and losses on an equal basis and will not, as in the French case, realize commissions on sales. Alternatively, and unlike the U.S. example, Japanese firms have, with their government support, put together contract packages that involve Japanese partners, licensers, contractors and equipment suppliers. This approach has been relatively successful in the case of the Saudi Methanol Co. There has been less success in the case of SHARQ (the SABIC/Japanese olefin-based complex). Mitsubishi, the lead Japanese operator, has been forced to go through the motions of competitive assessment or bidding for both technology and engineering. The approach of the Japanese Government and Japanese companies differs fundamentally from that of the United States. Japanese Government agencies are active participants in both the Japanese consortia involved at Al-Jubail, and these ventures were planned with the national interests of Japan uppermost. Licensers Much has been written about product lifecycles and the tendency of multinational corporations to exploit developing countries through the licensing of inferior technologies. The petrochemical technology licensed to the countries examined in this study is, however, state of the art. Moreover, the intense licensing activity in the Middle East reflects the viability of the market for petrochemical technology. Technology is licensed in two ways. In one case, a licenser makes an arrangement with a licensee. In the other, the contractor includes the technology as part of the total project package. Appendix 5B includes information about major technology licensers in the Middle East. Licensers operating in the Middle East are more often faced with incentives than with impediments in transferring technology. Firms such as Union Carbide and Scientific Design established the goal long ago to sell as many licenses as possible. Profits are the central motive, with fees negotiated separately in each agreement. Infrastructure and operating conditions are not major concerns. Training considerations are factored into the fees while market forces determine the value of the technology. With the slowdown in new capital investments in the West, the less developed countriesin the Middle East particularly represent a primary market for Western petrochemical technology sales. The only risks for technology licensers are the possibilities that licensing agreements may be broken or that a foreign licensee may penetrate domestic markets. However, since the technology provided is state of the art and is sold at internationally competitive prices, there is no incentive for Middle Eastern producers to break a licensing agreement by sharing the technology with others. Moreover, although these countries have the funds to support the licensing fees, they will not have PAGE 152 148 l Technology Transfer to the Middle East . --- .. the research and design capability in this decade to modify or improve a licensed technology to the point where they can claim they no longer need the license because they have their own technology 30 Finally, every indication suggests that they want to be accepted as full partners in the international business community, a desire that would not be fostered if they were to break licensing agreements. In the case of market penetration by a licensee, the risks are weighed when the corporate entity decides to market its technology aggressively. Hence, Union Carbide will market its LLDPE technology to all interested partners, while Dow is more selective in which LLDPE technology it promotes. The incentives to U.S. firms for allowing the licensing of chemical process technology are revenues from royalty payments and the maintenance of good government-to-government relations, the latter also important to the U.S. Government. Generally speaking, there is little difference between petrochemical technology available from the United States, Western Europe, or Japan. Hence, technology is made available globally on a competitive bid basis. U.S. firms have some of the best chemical process technology in terms of performance and cost; but, other good sources of the technology are available to Middle Eastern countries. The technological reputation of certain suppliers gives them a definite competitive edge: 1) Kellogg of the United States for ammonia plants, 2) Imperial Chemical Industries of the United Kingdom for methanol plants, 3) Dutch State Mine Co. for urea fertilizer plants, and 4) Union Carbide for the production of LDPE. Certain European firms (Dow Chemical Europe and Charbomage de France) have adapted the Union Carbide technology and can be expected to give Union Carbide strong competition. 30 The OPEC countries are limited by their weak technical capabilities in petrochemical industry development. See K. Nagaraja Rae, F. Baddour, and Christopher T. Hill, Strategic Aspects of Chemical Industry Development in Rapidly Industrializing Nations, Technology in Society, vol. 4, 1982, p. 153. The contents of the various licensing agreements are generally confidential and are often negotiated differently for each agreement. However, in the case of LLDPE, sufficient information is public knowledge to serve as a model of how these agreements operate and to indicate the magnitude of the revenues associated with them. Union Carbide Corp. has licensed LLDPE technology to an estimated 30 companies worldwide. Its cost to develop this process is not known. However, its revenue structure is thought to include a $100,000 fee and a secrecy agreement just to review the details of its process. If a potential client company wants to purchase the license, it is charged $18 million to $25 million up front for the process license. In addition, a royalty payment of 2 to 4 percent of net sales is paid over a 10to 15-year period to the licenser. In some arrangements the licenser has an agreement to share new resin breakthroughs with the licensee, and if the licensee develops resins with new properties, it must share them with the licensor. Training programs and startup assistance are provided. Union Carbide does not usually take an equity position in a project in lieu of its fees. With this structure, a licensee producing 200,000 metric tons per year of LLDPE and selling it for $551/ton (25/lb) on a constant dollar basis might provide Union Carbide with revenues of $21 million up front and approximately $3.3 million a year (3 percent of net sales) for 15 years or approximately $70 million (in constant dollars) over the time period. Union Carbide is the licenser of LLDPE technology for all SABIC projects. Its specific terms with SABIC are not known. Engineering Contractors An engineering contractor is relatively far removed from the decisionmaking processes involved in a manufacturing joint venture. It is unlikely that refusal by a U.S. contractor to bid for, or even to license technology for a prospective project would influence the decision to go ahead with the project. The only decision open to the contractor is whether to bid for the contract or leave it to others. PAGE 153 Ch. 5Petrochemical Technology Transfers c 149 A contractors reasons for operating in the Middle East are fees, the slowdown in major global projects outside of the Middle East, a desire to increase or create market share in this region, and the need to develop a regional track record for consideration in future projects as well as for projects in other developing countries. Most major engineering contractors view their projects from an international perspective. Thus, they tend to view risk more according to which bank or institution is securing their payment, rather than to the specific project location. Also, their fees take into account the complexity and risk involved in working in a developing country. Based on profit concerns and procurement bidding pressures by the host governments, subcontracts and equipment purchases can frequently be made from a large number of companies worldwide. Hence, the actual value of dollars flowing back to the prime contractor may not be anywhere near the total value of a given project. The typical cost structure associated with a capital project is 45 percent for procurement, 24 percent for construction, 10 percent for design and engineering, and 20 percent for owners costs, fees, and contingencies. (This will vary somewhat, depending on the project specifics.) The actual fees or profits earned on these projects by contractors are thought to be 3 percent of all tangible costs. Contingency costs tend to be greater on lump sum contracts than on open or cost plus contracts. Since a Middle Eastern project will in most cases involve competitive international bidding for each major phase of engineering, construction, and procurement, there is no guarantee that the establishment of a managing contractor of U.S. origin will lead to detailed engineering and construction contracts for U.S. companies, and still fewer guarantees for procurement from U.S. suppliers. Thus, although there may be some bias toward U.S. contractors and suppliers arising from a U.S. prime contractor from U.S. reputation and skill, the main benefit is from the revenues and profits gained by the prime contractor. Many of the Middle East contracts are very large, which is reflected in the contractors fees. On the other hand, there has been, and probably will be in the future, strong pressure for fixed price contracts or contracts with a guaranteed maximum. If this is the case, the risks to U.S.-based contractors will be relatively great. Nevertheless, Japanese and West European firms are prepared to bid on this basis if U.S. companies choose not to bid. Requirements To Modify Technolog y and Project Approac h Operating in Middle Eastern or other developing countries requires a reexamination of approaches that U.S. engineering contractors have utilized in projects in the West. Major differences include the nature of clients, scale of operations, lack of infrastructure, and availability of local skilled manpower. Typical projects in the industrial nations result from the needs of clients which are usually major operating companies with extensive experience with these types of facilities. This experience of client companies tends to minimize contractor involvement with the recruitment and training of operators, maintenance, and management personnel. In addition, while the startup and operating capabilities tend to reside with the client, the contractor must meet various performance guarantees. In the Middle East, the clients are typically either joint ventures of the operating company and host government national firm, or a government-related national firm alone. In both situations the contractor can be called on to provide special services not normally performed by a contractor in industrial countries. For example, hiring and training of operating and maintenance personnel may be carried out by the contractor. In addition, a contractor may provide personnel to assist in the startup and early operation phases; in some instances, contractors even operate the plant for an extended period of time. For example, very close coordination with SABIC is maintained by Fluor, Lummus, and Bechtel in their respective projects to assure the proper devel- PAGE 154 150 l Technology Transfer to the Middle East opment and startup of the projects. Lummus is also playing an important role in developing process simulators for training Saudi Arabians. In the case of Bahrain, contractor operators may continue for some time. Algeria continues to use Kelloggs assistance in its ammonia and LNG facilities. The projects in the Middle East are quite significant in size. The Saudi Arabian industrialization program is probably the largest program of its kind ever undertaken. Such programs require the mobilization of large numbers of people and huge quantities of material and require new management approaches and strategies for projects such as the transformation of Al-Jubail and Yanbu into modern industrial cities. The scope of these projects is so vast that no single contractor can provide 100 percent of the services necessary. Hence, while the large management contracts have been given to American firms, many subcontracts have been let to Japanese, South Korean, and firms from developing countries due to their low labor costs and limited infrastructure requirements. Most of the areas in which these industrial projects are located lack developed infrastructure. Port and road facilities, housing, hospitals, schools, pipelines, maintenance shopsall of which add to the complexity of the venture and require contractor adaptationmust be built in conjunction with the projects. Since the major planned construction sites in Saudi Arabia are in remote locations and the size of the work force to be employed is large, there has been a need to provide extensive auxiliary facilities. Harbors, roads, housing, and recreational facilities have been built. Other projects have included the gas-gathering system, a major desalinization effort, significant increases in electrical production in the eastern province, and building crude oil and natural gas pipelines across the desert from the Persian Gulf to the Red Sea. The effective advance provision of these infrastructural facilities has allowed the contracting work on the Saudi petrochemical projects to proceed more rapidly than originally expected and at a lower cost. The ability to coordinate the numerous activities required in building large-scale projects in remote locations is an art that has been developed through many years of experience by major contractors. In virtually all cases, there has been a need to establish a supply system and to recruit personnel from a variety of nations, presenting formidable obstacles to construction efforts. Major U.S. companies have service divisions that support operations managed from the United States and are also capable of undertaking certain projects independently. These overseas facilities enable firms to procure required materials and equipment on a worldwide basis and to maintain sophisticated computerized inventory procedures for managing the large stocks of necessary supplies. Remote locations also necessitate modified engineering approaches. For example, moduModularized methanol facility, supplied by Mitsubishi (Japan) PAGE 155 Ch. 5Petrochemical Technology Transfers l 151 larization and barge-mounted construction techniques are two modifications that are becoming more commonplace. In one petrochemical project, Bechtel subcontracted the modularization of many of the process components to Belleli of Italy. Mitsubishi modularized much of its methanol facility and then shipped it to Saudi Arabia. The roads in Saudi Arabia have been specially built to handle these unusually heavy loads. Manpower is another key consideration in remote locations, For many projects, work forces from many countries have been gathered. The major contractors have developed relationships in many countries and have the ability to directly hire needed individuals. Frequently, subcontracts are let to Japanese or South Korean firms who bring in large numbers of Asian employees for a given period. These subcontracts are normally cost-effective and have the virtue, from a Saudi Arabian perspective, of using imported labor, managing it within a small perimeter, and then reducing the labor force when the construction phase is complete. Asian labor has been used in virtually all projects examined in the Middle East and North Africa. With the exception of Algeria, all the countries examined in depth with regard to petrochemicals have relatively small indigenous populations and a general dislike by the local population of manual labor. Therefore, contractors must recruit crews, operating labor, management, and maintenance personnel from many nations. Almost all engineering and management personnel in these petrochemical projects are from the United States, Western Europe, and Japan. Field construction forces and maintenance and operating crews come from either the host country or countries such as India, Pakistan, Egypt, Indonesia, South Korea, Turkey, the Philippines, Taiwan, and Thailand. Many of these work crews have at least some experience. seems to be working well in Saudi Arabia, while in Algeria, due to English language problems, it has reportedly led to additional inefficiencies. Training is a key issue. U.S. contractors provide training programs that extend to all skill levels. In Algeria, Kellogg has trained field crews in basic construction skills (welding, pipefitting) and is also providing basic elementary education in mathematics and science. In many instances, construction personnel are subsequently transferred to maintenance groups after additional training. Contractors arrange for vendor personnel to provide training in specialized equipment such as pumps, compressors, and turbines. In addition, supervisors receive onsite training and the contractor typically works with local supervisors through the precommissioning phase. The lack of fully experienced local labor forces, coupled with the multinational nature of their work forces, presents both cost and efficiency problems for Middle Eastern countries. The productivity of work crews from local or developing country firms maybe lower than that of comparable U.S. and/or West European and Japanese work crews. Meeting work schedules may consequently be a difficult task for contractors, The design of facilities in these often remote locations, which often experience either extreme or unusual weather conditions (e.g., sandstorms, high heat, and humidity) and are subject to labor force constraints, sometimes involve nontraditional approaches. In some cases, different construction materials or backup facilities are required; in the case of a petrochemical complex, decoupling operations are generally incorporated in process designs. Modular or prefabricated construction techniques are often utilized to minimize field assembly. Contractors must also design with an eye toward ease of maintenance and toward limiting the risk of extended downtime. Contractors generally prepare complete lists All major contractors are willing to work of required spare parts and-review them with with local contractors and individuals dependclients. If the buyer agrees, the contractor will ing on specific conditions. This approach arrange for all parts to be delivered onsite. In PAGE 156 152 l Technology Transfer to the Middle East some instances contractors provide preventive maintenance schedules and computerized inventory control procedures. Most contracting firms are willing to assume the maintenance responsibility for a facility during its operating phase. However, this service is generally not sought. If a plant were to face serious maintenance or spare parts problems, the contractors would be willing to provide assistance for operating a plant they built. In most countries in the Middle East, operating maintenance has been a problem. THE ROLE OF U.S. FIRM S IN COMPETITION AMON G SUPPLIER S Factors that influence the choice of one supplier over the other include: 1) cost/financing, 2) technological differentiation, 3) track-record experience, 4) marketing, 5) scope of services (including training), 6) political/historical ties, and 7) effective use of local agents. In the Middle East, training, experience, and effective use of local agents (for joint ventures) have been particularly important. U.S. companies are major project participants in the Persian Gulf and Algeria, and compete on all three levels; namely, as operating-joint venture partners, as licensers, and as engineering contractors. The ability of U.S. firms to compete on these three levels reflects their major strengths in marketing and sales, technology, management techniques, and plant operating skills. Japanese (methanol and olefin derivatives) and Taiwanese (fertilizer) participation in projects in Saudi Arabia reflects the desire of Saudi Arabia to diversify its mix of venture partners and aggressive supports by the supplier governments. In the case of CdF Chimie in Qatar, th e French Government actively pursued the project, seeing it as a national priority. At the time, few U.S. companies were interested, partly because of their extensive involvement in Saudi Arabia. The case of licensers is similar to that of operating companies. U.S. firms have a wellknown technical expertise. U.S. technology produces quality products at low prices, as illustrated by polyethylene and ethylene glycol technologies provided by Union Carbide and Scientific Design in the Mobil and Exxon projects in Saudi Arabia and the Kellogg ammonia technology used in Algeria. Contractors face intense competitive pressures, owing to the sheer size of the projects in which they participate. In the projects examined here, U.S. companies have been a dominant force. However, substantial subcontracts and procurement agreements were also given to other foreign companies because of lower costs (often reflecting lower labor rates). While U.S. companies exhibit many strengths when bidding against foreign competitors, they also have certain disadvantages. These have included tax and export financing policies. 31 Saudi Arabia provides a 10-year corporate tax holiday. U.S. companies are taxed by the U.S. Government on this income as foreign source income, while their competitors are not. To put it another way, other supplier governments subsidize projects through tax exemptions. Saudi Arabia does not charge an income tax on foreign employees working in the Kingdom. U.S. employees are taxed in the United States on their foreign income (above a certain level). A higher wage scale has sometimes been paid to compensate for this factor. It should be noted, however, that U.S. tax regulations have recently been liberalized in favor of the overseas employee. Companies from Japan and France have more aggressively pursued overseas petrochemical projects with government financial support. Export financing has not, however, been a major factor in awards of contracts in the Gulf States since they have had the capital to finance projects themselves. 31 0ther concerns expressed by U.S. companies relate to the Foreign Corrupt Practices Act and antiboycott legislation. However, in the analysis performed, no projects were identified where a U.S. company actually lost a bid because of these laws. PAGE 157 Ch. 5Petrochemical Technology Transfers l 153 In the final analysis, strong and friendly refirms as technology leaders has also been a key lations between the United States and Saudi factor, although the advantages accruing from Arabia have been an important factor, setting this technological lead have been gradually a context for extensive involvement by U.S. eroding. firms. At the same time, the standing of U.S. LONG-TERM DEVELOPMENT S GENERAL TREND S The petrochemical industry is presently undergoing a difficult restructuring process, resulting from stagnant demand and uncertain growth prospects for petrochemicals and feedstock costs. This situation will be further exacerbated by the entry of Middle Eastern and other new producerswith their relatively inexpensive feedstocks for methanol, ammonia, and olefin derivatives based on natural gas and on natural gas liquids recovered from associated gas. The petrochemical world was less complex in the 1970s, when there were, in essence, three major areas of petrochemical production and consumption: the United States, Western Europe, and Japan. These areas represented 63 to 65 percent of world demand, as well as 68 to 70 percent of the world production. Manufacturers in these large homogeneous market areas were able to construct large-scale plants. In addition, feedstocks were readily available at sufficiently attractive prices to enable manufacturers in these regions to import feedstocks for conversion to intermediates and final products. Often, intermediates were exported for conversion to polymers. These products were ultimately upgraded into fabricated products for consumption in the manufacturing area, or reexported to the three major economies. Since the oil crises of 1973-74 and 1979, significant changes have been occurring in the global manufacture, as well as consumption, of the key petrochemicals, Four more major geographic entities are likely to become more important sources of petrochemical intermediates and derivatives: Canada, Mexico, the Middle East, and Southeast Asia. The Canadian and Middle Eastern developments will have the most significant impact on global trade in the mid-1980s. From Canada, manufacturers will export very significant volumes of methanol, ammonia, and ethylene derivatives. The Mexican petrochemical industry will send petrochemical derivatives to the international market. Major petrochemical centers in the Middle East, previously discussed, will come onstream during the 1980s and will export products. Finally, Southeast Asia (the ASEAN countries of Thailand, Malaysia, Singapore, and Indonesia) will become an increasingly important center of petrochemical production, consumption, and exports during the late 1980s. During the mid to late 1980s, ASEAN projects will come onstream competing with products from the new export centers of the Middle East and Western Canada in market areas once dominated by products produced in the United States, Japan, and Western Europe. 32 A major question is what effect the new petrochemical projects in the Middle East will have on producers in the United States and elsewhere. THE RESTRUCTURING O F GLOBAL TRADE I N COMMODITY CHEMICAL S Since the majority of the petrochemicals to be produced in the Middle East and the products of most concern to world market trade 32 While the feedstock base of this Southeast Asian region will not be as favorable as that anticipated for the Middle East and Western Canada, Southeast Asia will be a significant domestic market. Also, Southeast Asia, being on the prime shipping lane between the Middle East and Japan, has a strategic location, and all material that will likely move from the Middle East to the Pacific will pass the proposed petrochemical complexes of Southeast Asia. PAGE 158 154 l Technology Transfer to the Middle East are commodity chemicals, OTA analyzed prospects for market restructuring in several of these chemicals: polyethylene, ethylene glycol, styrene, methanol, and ammonia. The analysis covers the decade through 1990. Factors such as global economic performance, oil price trends, and a variety of political and other issues affect the global development of the petrochemical industry. Specific developments in each country combine to determine future trends in demand, supply, trade, and prices for each product. In order to anticipate the positions of Middle East petrochemical producers in world trade, global and country-specific demand for each type of product was first considered. (App. 5C includes tables showing these demand expectations. ) Domestic supply in each country was assessed by considering available capacity, production economics, market demand (local and export), and plans for new/expanded capacity. From these national and regional projections of demand and supply, preliminary global balances were developed for each petrochemical product. These highlighted possible imbalances in the future world supply/demand position. In practice, apart from minor inventory swings, global supply must balance demand in each year, and there must be zero net global trade. Thus, a projected potential global oversupply in the near future must be primarily accommodated by reduced operating rates in high-cost exporting regions such as Western Europe and Japan. It should be noted that many factors affect different countries petrochemical product competitiveness: 1) raw materials/feedstock price and availability; 2) size of the domestic market and economies of scale; 3) exchange rates; 4) R&D capabilities relative to new and improved products and process technologies; 5) investment levels in new plant and equipment; 6) government actions that increase the price of petrochemical products at home and abroad (e. g., taxes on raw materials or petrochemical products) or actions that assist, protect, or subsidize the domestic petrochemical industry; 7) regulatory impacts and cost; 8) labor costsas determined by availability and skills; 9) profitabilityreturn on investment; 10) marketing strategies and distribution systems; 11) energy fuel use and costs; and 12) capacity utilizationor production efficiency/productivity. 33 On most of these counts, the U.S. petrochemical industry has some special strengths. The analysis that follows indicates that the impact of Middle Eastern petrochemicals on the U.S. market will probably be concentrated on a relatively few products. According to one forecast, in 1990 products produced in Saudi Arabia will win a relatively small share of the U.S. market: 1 percent of LDPE, 0.5 percent of HDPE, 3.6 percent of ethylene glycol, 8.6 percent of methanol, and 5 percent of styrene. 34 While U.S. specialty chemicals may actually gain strength, the United States will become a net importer of ethylene glycol and methanol, mostly from Canada. The negative impacts of petrochemical trade restructuring will be felt especially in Japan and Western Europe. Map 4 shows the location of major projects and projected production capacity for 1990. Low-Density Polyethylene/ Linear Low-Density Polyethylen e (LDPE/LLDPE ) Total free world consumption of LDPE, including linear material, was 9.8 million tonnes in 1981. The industrialized regions, defined here as Western Europe, North America, and Japan, accounted for 79 percent of this total. By 1990, total consumption is anticipated to reach 15.6 million tonnes, with the industrialized regions share declining to approximately 72 percent. By the year 2000, the industrialized regions share of total consumption may recede to approximately 65 percent. Global growth rates will be relatively high for this product owing primarily to expected rapid growth in consumption in the developing regions. Table 43 shows the varied uses of polyethylene products. In these countries U. S. Department of Commerce, .4 Competitive Assessment of the U.!3. Petrochemical) Industry.\, Office of Competitive Assessment, Washington, D. C., Aug. 31, 1982. 34 Wharton, op. cit., pp. 67-68. PAGE 159 154A Technology Transfer to the Middle East PAGE 160 .- Ch 5Petrochemical Technology Transfers 155 Table 43. Middle East Petrochemical Product Uses Petrochemical products: Uses in various Industrial and consumer products 1. Polyethylene: l Low-density polyethylene (LDPE)plastic bags, agricultural films Linear low-density polyethylene (LLDPE)tourist gift bags, films, moldings High-density polyethylene (HDPE)sewer and drain pipes, wire and cable covering; household chemical and food bottIes; replacement of gallon paper milk containers; injection molding of beverage crates, paint cans, food containers and base cups for polyethylene terephtahalate (PET) bottles; heavy-duty film for food packaging bags. 2. Ethylene glycol: l Used in polyester apparel; antifreeze/coolant; production of PET 3. Styrene: l Used in polystyrene plastics and synthetic fibers 4 Methanol: Used in gasoline octane boosters, deicers, and other fuels; in thermoset resin adhesives used i n plywood and chip wood industries; in resins such as DMT used in the production of polyester fibers and films, Used i n production of formaldehyde. 5 Ammonia: l Used directly l Used in fertilizers (Including urea), synthetic fibers l Industrial uses in fiber, resin, and elastomer intermediates; explosives, livestock feed supplements SOURCE Off Ice of Technology Assessment paper and other competing materials will be replaced by LDPE/LLDPE, and market stimulus will be provided by new local production of petrochemicals, and growth in exports of finished products to the industrialized countries. Market growth in the industrialized regions, particularly in Western Europe and Japan, will however be limited by slow economic growth, market maturity, downgauging (use of thinner film), and growing imports of finished products from the developing regions. The global supply pattern for LDPE/ LLDPE will change dramatically over the next few years. Table 44 shows that the most rapid increases in supply will be in the Middle East, which is developing several exportoriented projects. In addition, Canada is also developing export-oriented projects with a focus on Pacific Basin markets; and Latin America and Southeast Asia producers will expand their capacity to meet increases in domestic demand and, in the case of Southeast Asia, for export. Table 44. LDPE/LLDPE Net Interregional Trade (thousand metric tons) 1981 Western Europe ., . 323 North America: United States . 424 Canada ., . 84 Japan ... . ... 135 Pacific Basin and Indian Subcontinent. . (284) Latin America . (293) Africa . ... . (216) Middle East . ... (81) Eastern Europe . . 100 Peoples Republic of China (l00) Total ., ... 92 NOTE Parentheses indicate net imports SOURCE Office of Technology Assessment 1985 1990 (loo) 180 15 270 455 30 (180) (253) (235) (180) (498) (182) (58) 110 641 125 110 (l00) (150) Because of the increasing economic advantages enjoyed by producers with access to lowcost ethane feedstock, the overall level of interregional trade in LDPE/LLDPE will grow, and the pattern of trade will change significantly, as shown in table 44. It is anticipated that: 1) Western Europe and Japan will become major net importers, a reversal of their traditional positions; 2) Latin American imports will probably grow significantly since local production will be unable to keep pace with demand and many of these countries do not have the resources to support local production; 3) Southeast Asian projects will backout some exports from the Pacific Basin but will be unable to balance regional demand; 4) Canadian exports will grow, despite the current project development delays; and 5) Middle Eastern exports will grow to dominate global trade patterns, with continuing project development expected in the 1990s after the current round of projects is completed. The major factor in the U.S. domestic LDPE market is the impact of LLDPE rather than any major import threats. The competitive effect of LLDPE will be felt most strongly in the film area, where LLDPE offers excellent properties. Thus, a gradual decline in the importance of LDPE over the period can be expected. At the present time, the demand for LLDPE is limited by supply, while U.S. producers now have more than enough plant ca- PAGE 161 156 Technology Transfer to the Middle East pacity to meet current and future demand for LDPE. The decline in consumption forecast for LDPE indicates that producers will probably convert some of their capacity to LLDPE. Also, plans for producing LLDPE in Western Canada could relieve potential shortages of LLDPE in the United States. It is anticipated that the United States will retain a net positive trade balance in LDPE/LLDPE during the forecast period; however, U.S. exports are expected to become marginal because of the emergence of major export-oriented facilities in Western Canada and the Middle East. While material produced in Canada and the Middle East is not expected to penetrate the U.S. domestic market significantly, 35 it is expected to expedite the conversion of much of the U.S. industry to LLDPE. Other segments of the industry will exploit specialty applications, catering to those markets best serviced by LDPE, or will shut down. In general, the West European market for both LDPE and LLDPE is expected to be highly competitive during the 1990s, arising from a continuing overcapacity for LDPE and substantial imports of LLDPE. In the early 1980s, the United States is expected to be a major source of these imports; however, in the mid-1980s and into the 1990s, the new and more cost-competitive plants in the Middle East will supply a growing proportion of West European imports. 36 These imports will be handled by U.S. companies such as Exxon and Mobil, which have ventures in the Middle East and are able to sell the product through their own European organizations. Lack of West European competitiveness due to its feedstock position, small unit size, and age of facilities is expected to result in sizable LDPE shutdowns in the future. Established producers of LDPE in Western Europe will attempt to use their plants for specialty grades and in some cases will convert these grades to the production of LLDPE. Except for com.. 35 Canadian imports are expected to rise, but from a net trade position, they are expected to be offset by equal amounts of U.S. exports to Latin America and elsewhere. 36 This assumes that excessive tariffs or other protectionist measures are not instituted by the Europeans. panics with access to North Sea gas, it will become increasingly difficult to compete with Middle Eastern general-purpose resin. These conditions, combined with market maturity and greater use of LLDPE, will result in rising net imports for Western Europe during a period of significant overcapacity. Japan will eventually become a significant net importer of LLDPE, a change from its current position as a major exporter. Japanese producers will, however, maintain minimum exports of 100,000 to 125,000 tonnes per year of specialty grades while importing commodity grades such as LLDPE. Japans loss of international competitiveness is being partially offset by Japanese offshore projects in Saudi Arabia and Singapore. Traders can be expected to market additional supplies of LLDPE from non-Japanese associated Middle East projects, in Japan as well as in traditional Japanese export markets in Asia. While producers have expressed an interest in producing LLDPE, the Japanese Government has approved only three ventures, each of which involves the participation of more than one producer: Mitsubishi Petrochemical, Mitsui Petrochemical Industries, and Nippon Unicar. Other producers are evaluating the feasibility of retrofitting existing high-or lowpressure polyethylene capacity for the manufacture of LLDPE. Thus, both Western Europe and Japan will become net importers of LDPE/LLDPE while the United States will remain in net trade balance. High-Density Polyethylene (HDPE) Free world consumption of HDPE should increase from 5 million (1981) to nearly 10 million tonnes (1990), with the industrialized regions share declining from 80 percent (1981) to approximately 75 percent (1990). Although global growth rates of HDPE will be relatively high, growth in many developing countries will be uneven. Nevertheless, countries in Africa and the Pacific Basin may experience comparatively high growth in demand (more than 10 percent growth annually). Market growth in industrialized regions, par- PAGE 162 Ch. 5Petrochemical Technology Transfers l 157 .. ticularly Western Europe and Japan, will be limited by slow economic growth, low population growth, market maturity, and competition from polypropylene. The global supply pattern for HDPE will change over the next few years with the greatest supply increases coming from: 1) Canada, which will become a major exporter to the Asia/Oceania markets; 2) Mexico and South America, which will add HDPE plant capacity to satisfy the projected strong increase in demand; 3) Eastern Europe, which will also add capacity to remain self-sufficient in HDPE; and 4) the Middle East, which will be a significant factor in global trade with its export-oriented projects. Due to the increasing economic advantages enjoyed by producers with access to cheap ethane feedstock, the overall level of interregional trade in HDPE will grow, with the Middle East producers becoming important exporters, as shown in table 45. This increase in trade will be further facilitated by LLDPE producers, who will be able to produce HDPE with their spare LLDPE capacity. The major changes in trade shown in table 45 are based on the anticipated completion of a number of export-oriented plants in Canada and the Middle East. Japan will shift to a net import position by 1990 and both the United States and Western Europe should be able to maintain a reduced net export position. However, exports from Canada and the Middle East will be relatively limited and are not expected to Table 45.World HDPE Trade (thousand metric tons) offset exports from the United States or Western Europe. Japan and East Asia may be major target export markets for Middle Eastern HDPE. Blow molding, used to produce household chemical and food bottles, will continue to be the largest outlet for HDPE in the United States, accounting for about three-fourths of current demand. Table 43 shows the various product uses for HDPE. U.S. HDPE producers have a current production capacity of 2.7 million tonnes per year. New capacity is expected to be brought onstream during the mid1980s to meet domestic requirements and incremental exports. No significant restructuring of the U.S. HDPE industry as a result of Middle East or Canadian export projects is expected. However, LLDPE will influence HDPE production as a result of some market penetration and the ability of some LLDPE facilities to make a full range of polyethylene products-from LLDPE to HDPE. In Western Europe no significant restructuring of this industry as a result of Middle East projects is expected. Unlike the United States and Western Europe, Japan is expected to move into a deficit position in HDPE by the later 1980s as a result of Middle Eastern and other projects. This is the result of Japans conscious move to discontinue expansion of olefins projects, which will limit its position in HDPE as well. Nevertheless, Japan is expected to maintain an export position in specialty grades for film, fiber, and other extruded products. Imports will consist of molding and blow molding grades of resin. Ethylene Glyco l By 1990 total consumption of ethylene gly col will probably have risen 50 percent from 1980, with the industrialized regions share dropping from 83 to 75 percent in 1990 and to 70 percent by 2000. The relatively strong annual growth rate in demand in developing countries is driven by several factors; for example, continued strong growth in domestic polyester textile use in Southeast Asia, India, PAGE 163 158 l Technology Transfer to the Middle East Latin America, and other developing areas, expansion of polyester apparel exports to the United States and Western Europe from the low labor-cost areas, particularly Southeast Asia, and increased use of ethylene glycol as an antifreeze/coolant while local demand and availability increases. In the industrialized regions, growth will be influenced by several opposing factors. These include slow growth in polyester fiber production, little or no growth in antifreeze use in Western Europe and the United States, and strong growth in polyester film and in PET resin for bottles. The global supply picture for ethylene glycol will change substantially over the next decade. The most rapid increases in supply will be in the Middle East, which will become the largest regional exporter by far (see table 46). Canada, which has recently started one large export-oriented project and has another under development, and several countries of the Pacific Basin (India, Taiwan, Thailand, Indonesia) will also be important interregional exporters. As with LDPE, the increasing economic importance of access to less expensive ethane feedstocks will result in a substantial increase in the overall level of interregional trade in ethylene glycol. The major source of U.S. imports is expected to be Canada. Middle Eastern exports will dominate global trade patterns from the late 1980s onwards; additional projects are expected during the 1990s. While the pricing of this material is not expected to be disruptive or destabilizing, the current world recession could cause rates of growth in demand to be below anticipated levels. The net effect of this could be large volumes of product with smaller markets than originally expected for the mid-1980s, and severe price competition erupting during the startup period for many projects. Tariffs currently in force will make Middle Eastern ethylene glycol economically unattractive in the United States. In Western Europe, tariffs are not currently in force, but have been discussed 37 With the decontrol of natural gas prices in the United States, ethylene glycol costs will rise. However, imports may come primarily from Canada rather than the Middle East. 38 The major producers are co remitted to limited domestic expansion and recognize that strong international positions can only be maintained by countries having access to low-cost, gasbased feedstocks. With limited future capacity expansion likely, due to the loss of export markets and pricing strongly influenced by feedstock factors, plant shutdowns by the smaller, high-cost U.S. producers appear inevitable. The major producers have expressed little desire to invest in additional ethylene glycol capacity, preferring instead to upgrade available ethylene oxide (a precursor to ethylene glycol) to higher valued derivatives such as surfactants, glycol ethers, and ethanolamines. By 1990, therefore, it is likely that the United States will become a net importer of ethylene glycol. Western Europe will also become a net importer of ethylene glycol. Any capacity additions are likely to be offset by shutdowns of small, old units. Material coming onstream in the Middle East, in combination with Canadian and East European capacity, will preclude Western Europe from export markets. Several West European producers are considering closing their glycol plants. 37 Susannah Tarbush, EWoUniOnS Tackle Threat of Gulf Chemicals, !l%e Middle East, September 1983, pp. 55-56. Union Carbide will import from Alberta, Canada, where it is constructing a new facility. Union Carbide dominates the U.S. ethylene glycol industry, with 40 percent of total installed capacity. PAGE 164 Ch.5Petrochemical Technology Transfers 159 Japan will import material from offshore projects in which it is a participant and also from the international merchant market. With the import of ethylene glycol, the integrated ethylene oxide-glycol producers would be able to upgrade available ethylene oxide to higher valued derivatives, an option that would not necessitate additional investment in ethylene oxide-glycol facilities. Thus, it is anticipated that Japanese ethylene glycol producers will come through the petrochemical industry restructuring period intact because part of the reduction in Japanese ethylene glycol production will be compensated for by the growth in nonglycol markets for ethylene oxide, in which the Japanese producers will retain their strong position. Styren e In 1981, the industrialized regions of Western Europe, North America, and Japan accounted for over 89 percent of total styrene consumption. By 1990, total styrene consumption is expected to reach 10.5 million tonnes, of which the industrialized regions share will decline to 82 percent. By the year 2000, the industrialized regions share of global demand is expected to decrease further to approximately 75 percent. The relatively strong growth in demand in the developing regions reflects the rapidly growing markets for appliances and other consumer durables in the more advanced countries such as Korea, Taiwan, the ASEAN countries, Mexico, and Brazil, growth of the electronics industry in the East Asian countries, and development of large markets for disposable products. In the industrialized regions, growth will be constrained by slow growth in consumer durables, production market maturity in disposable products (and some consumer/environmental reaction against them), mature synthetic rubber (SBR) markets, and increased competition for polystyrene from polypropylene. The global supply picture for styrene will change substantially over the study period, with the most rapid increases in supply occurring in the Middle East, Canada, Latin America, the Pacific Basin, and the United States. The Middle East will become the largest regional net exporter by 1990, as shown in table 47, while Canada now has a strong export position and another export-oriented project under development. Latin America (Mexico and Brazil) and several countries of the Pacific Basin (India, Taiwan, Korea, and, ultimately, Indonesia) will produce the styrene required for their growing polystyrene and other derivatives industries. The United States, which will continue to be cost-competitive, will increase production to meet domestic demand and support continued exports. Demand growth, coupled with benzene limitations, 39 will result in rapidly growing imports to Japan and other Pacific Basin countries and will result in a steady increase in the overall level of interregional trade in styrene. Japanese imports will grow substantially, owing to benzene supply limitations; Hong Kong will continue as a major importer; and Korea and Taiwan will ultimately become major importers. U.S. exports of styrene can be expected to decline but remain substantial. Canadian exports will grow with the completion of major export-oriented capacity, and Latin America will continue to import, despite production growth. Finally, Middle Eastern exports will become a major factor in global .-. The composition of styrene is approximately 70 percent benzene, a refinery product, and only approximately 30 percent ethylene. Lack of refining capability limits benzene supply and hence limits styrene production. Table 47.Styrene Net Interregional Trade (thousand metric tons) 1981 1985 1990 Western Europe ... ... (l00) (l00) (l00) North America: United States . . 508 500 295 Canada . ... . 157 200 210 Japan . ... . (161) (250) (390) Pacific Basin ... . . (187) (136) (246) Latin America . . . (120) (141) (185) Africa ., ... ... ... . (15) (28) Middle East . ... . (5) (12) 450 Eastern Europe . . (50) (30) (30) Peoples Republic of China Total ... ... ... ... 27 3 4 NOTE Parentheses indlcate net imports SOURCE Office of Technology Assessment PAGE 165 160 l Technology Transfer to the Middle East trade patterns from the late 1980s onwards, with most production flowing into Japan and East Asia. Historically, the United States has been a major producer and exporter of styrene. Polystyrene accounted for 62 percent of total U.S. styrene consumption in 1981. Over 60 percent of the styrene produced in the United States is used for captive (within plant) purposes. Packaging and disposable items consume approximately one-half of the general-purpose and impact grades. Over the next decade, export shipments of styrene are not expected to decline as dramatically as those of other ethylene derivatives. U.S. producers are expected to maintain their export positions because of the availability of benzene from refinery and olefin operations that will be cost competitive with those in other areas of the world. There is adequate U.S. styrene capacity to last through the late 1980s. However, additional capacity will be required during the 1990s. The relatively weak position of the West European styrene industry reflects a combination of very mature markets (i.e., polystyrene) and a weak raw material position. As such, net imports of styrene have been 100,000 to 150,000 tonnes per year for the past several years. These have come mainly from North America. This condition is expected to continue, with the source of imports switching in favor of the Middle East. Japans three largest styrene producers have capacities smaller than the large low-cost facilities in the United States. The combination of these scale factors and the feedstock costs in Japan relative to those in the United States minimizes the competitiveness of the Japanese styrene producers in the international market. Over the next few years, it is anticipated that the Japanese styrene industry will be restructured to reflect its changing situation. A number of small and energy inefficient units will be shut down, although some may be rebuilt into a unit having a higher capacity. New units will be at least 150,000 tonnes per year in size. In addition, Japans imports of styrene are anticipated to grow substantially. 40 Methano l The United States, Western Europe, Eastern Europe, and Japan now account for approximately 90 percent of the global demand for methanol. This market share is expected to recede to approximately 75 percent by 2000. Current global methanol demand is almost entirely for chemical applications. Growth in this area will be led by rapid growth in methanol demand for acetic acid manufacture because of the preferred economics of methanol carbonylations as compared to alternative techniques. Formaldehyde, by far the largest current market for methanol, will continue to grow in line with the demand for forest products, the most significant formaldehyde enduse market (see table 43). The rapidly growing methanol markets will be for fuel-related uses such as for MTBE (methyl tert-butyl ether), an effective gasoline octane booster. Direct blending with gasoline is a potentially large market, but this end-use will develop slowly, owing to concerns about performance as well as the short-term soft outlook for fuel products. These fuel-related uses may account for approximately one-quarter of total methanol demand by the year 2000. In 1981, production in the United States, Western Europe, and Japan accounted for 63 percent of the global supply, reflecting the historical concentration of methanol capacity in industrialized nations. However, over 80 percent of the new methanol plants being built worldwide are outside the three major consuming regions. This is reflected in table 48, where major new suppliers are seen to be Canada, the Middle East region, and the ASEAN region. This highlights the economic advantage enJapanese styrene producers have pursued equity participation in offshore styrene projects, such as those in Canada, to obtain low-cost styrene or benzene to enhance either their domestic or export market position. See Takuya Araoka, Petrochemical Industry Striving for Revitalization, Journal of Japanese Trade and industry, No. 6, 1982, pp. 18-21. PAGE 166 Table 48. Global Methanol Supply/Demand Balance (thousand metric tons) North America: United States Canad a Eastern Europe Western Europe Japa n ASEAN ... 1981 1985 1990 300 155 (1 ,400) .. ..,, 200 1,370 1,440 ,. 100 600 800 (580) (1,740) (3,105) (326) (1,030) (1,970) ,. (55) 723 1,225 joyed by producers with access to larger supplies of relatively inexpensive gas. It is expected that Canada and Mexico will become major sources of U.S. methanol imports as well as significant competitors in East Asian markets. Western Europe and Japan will continue as the largest net importers of methanol. The Middle Eastern suppliers will become the largest net exporters of methanol worldwide. The future of methanol has been fiercely debated in the chemical industry during recent years. Already the sixth largest industrial chemical in volume, methanol has been promoted as one of the leading candidates for a nonpetroleum-based fuel for a variety of applications. These markets are potentially many times the size of the chemical markets. Nevertheless, the U.S. industry is in an uncertain state since the recent global recession depressed the chemical demand for methanol. At the same time, while the current weak energy market is undermining the impetus for development of fuel-related applications of methanol, major export projects in Canada, the Middle East, Mexico, and Trinidad are in various stages of completion to take advantage of anticipated fuel markets. The United States will gradually become a net importer of methanol. Additional domestic methanol capacity beyond that already anCh. 5Petrochemical Technology Transfers 161 nounced will not likely be based on natural gas because of inadequate supplies. U.S. methanol producers are reluctant to commit themselves to alternate feedstocks such as coalbased plants because of the high capital costs and fear of competition from Canada and the Middle East, where relatively inexpensive natural gas is available. Unless more domestic capacity is planned beyond that currently foreseen, a major deficit in methanol supply could result by 1990. It is expected that substantial methanol imports will be utilized in advance of the construction of coal-based methanol plants in the 1990s, with the most likely sources being Canada, Mexico, Trinidad, and Saudi Arabia. Western Europe, which is already a net importer, will continue to experience shutdowns in its methanol industry caused by lack of competitiveness with Middle Eastern and East European projects. New capacity will be limited and keyed to North Sea gas and possibly coal gasification in West Germany. Western Europe will face a rising deficit in methanol supply from regional sources and therefore will increase its dependence on imported methanol. Low-cost imports will likely lead to a situation in 1985 where European consumers rely on imports to meet 40 percent of demand. Likewise, Japan will become an increasingly large net importer. Due to Japans weak raw material position, it will be increasingly dependent on Canada, Saudi Arabia, New Zealand, and ASEAN nations as its primary sources of supply. Japans methanol industry is not cost-competitive with methanol produced at these locations, which have natural gas costs that are substantially lower than those of Japans current supply sources. Methanol production in Japan may eventually decline to about 400,000 tonnes per year. Ammoni a Nitrogen fertilizer supply is increasing rapidly in the gas-rich developing countries, 41 Demand will grow especially in highly populated developing countries including the Indian Subcontinent, Latin America, Africa, and China. PAGE 167 162 l Technology Transfer to the Middle East while the developed countries are unable to justify new capacity additions because of high feedstock costs. This is a reversal in the historical pattern of world trade. The United States, Western Europe, and Japan will become (as a group) net importers of nitrogen fertilizers. Historically, anhydrous ammonia has not been a major item of interregional trade, owing to its high shipping costs. However, a major long-distance international trade has developed, and can be expected to grow. Major importers will be the United States, Western Europe, and Japan. Three of the major exporters will be the Middle East, Mexico, and Canada (see table 49). The United States consumes large quantities of ammonia primarily to support its role as a global exporter of foods and grains. Approximately 80 percent of all ammonia consumed in the United States is for fertilizer. Currently over 97 percent of U.S. ammonia capacity is based on natural gas feedstock. As U.S. natural gas becomes less abundant and more costly, the United States will continue to import large quantities of ammonia. Future coal gasification projects are expected to be insufficient to close this trade gap, and while some new capacity will be added it probably will not replace capacity lost to the closing of old units. The most important suppliers of import nitrogen to the United States (mostly anhydrous ammonia) are currently Canada, Mexico, the Table 49.Anhydrous Ammonia Trade (thousand metric tons) 1979-80 1984-85 1989-90 Asia/Orient. . . . . (43) (814) (1,186) Indian Subcontinent. . . (loo) (200) (500) Peoples Republic of China United States . . . (1,073) (2,400) (3,000) Canada . . . . . 400 450 550 Latin America ... . . 935 1,200 1,500 Middle East . . . . 70 680 1,010 Africa . . . . . 320 440 Western Europe . . . (1,080) (1,730) (2,870) Eastern Europe . . . 1,400 2,540 4,060 NOTE Parentheses indicate net Imports SOURCE Office of Technology Assessment U. S. S. R., and Trinidad/Tobago. The importance of these major sources of supply is expected to grow with little or no prospect for Middle Eastern exports to the United States. Imports of ammonia and urea from the U.S.S.R. will grow if the political climate is favorable. Since U.S. companies are closely involved in the Trinidad/Tobago operations, a large part of this production will enter the United States. The West European ammonia industry is strained. Escalating feedstock costs and continued pressure on ammonia and nitrogenous fertilizer prices are squeezing profit margins for the traditional producers in Western Europe. The forecasted global overcapacity and the concentration of competitive plants in the Middle East and Eastern Europe present a long-term threat to the West European countries. Many high-cost plants have already been closed, and more closures are expected. As imports grow, some producers and industry associations may seek government protection in the form of import quotas, tariffs, or subsidies. Pressure from the farming lobby for continued access to low-cost nutrients, plus external political and economic constraints, will limit such protection, provided total imports do not exceed levels considered strategically reasonable. At present, ammonia and urea production in Japan are conducted under a cartel arrangement set up when Japanese firms lost their cost-competitiveness as a result of high feedstockprices. 42 Under this arrangement, ammonia and urea capacities were reduced, and a ban was placed on ammonia and urea imports until 1984. Despite this arrangement, the Japanese competitive position has deteriorated further. Effects of Crude Oil Price Decreases Currently, much uncertainty exists in world energy markets. Crude oil prices have declined, and supplies have generally grown in a manner unforeseen by governments, economists, or industry. This situation has simultaneously Naptha accounts for 50 percent of the feedstock used for ammonia production in Japan. PAGE 168 Ch. 5Petrochemical Technology Transfers l 163 .. stimulated the economies of many nations and aggravated the debt position of others. In this environment, even those nations on the Persian Gulf with relatively small populations may be forced to delay some projects, withdraw foreign investments, or consider developing nonassociated gas for their hydrocarbon-based projects. The net effect of this would be decreased competitiveness with the United States in some markets, after allowance for freight to target markets. Moreover, these project delays are expected to have a delaying effect on second generation projects in the region. The slower growth in crude oil prices has also reduced the petrochemical production costs of regions such as the United States, Japan, and Western Europe. Middle Eastern nations will at best have the same zero value for their raw materials, thus making them less competitive with these industrial regions. The major industrial trading regions will benefit from the decline in crude oil prices. There will be an upward push on GDP and a downward pull on inflation. This may further stimulate GDP-related demand, which already benefits from the current economic recovery. In addition, synthetic (petrochemical-derived) materials, which have been competing with natural materials, will receive an added boost. This should be the pattern even for products having high energy costs. It reflects the nature of petrochemicals, which use energy products for fuel as well as for raw materials. Products using natural raw materials such as paper, however, can only take advantage of low crude oil prices in their fuel costs. The recent effect of increased demand (due to GNP growth), delayed projects, and more competitive traditional petrochemical producers can be expected, in most instances, to result in firmer prices (in the West), a greater 43 As stated in Wharton op. cit., April 1983, p. 78), A SUStained fail in oil prices toward $251 barrel is unlikely to have much effect on the generation of petrochemical plants already being constructed in the Middle East. Their economics may become marginally less attractive, but not enough to lead to any further significant cancellations. Where an oil price fall will have an effect is on the next generation of plants, which are still at the stage of initial discussion. utilization of capacity already in place (healthier domestic industries), and a more gradual rationalization of the West European and Japanese petrochemical industries. As far as the United States is concerned, it will make it even less likely that Middle Eastern olefin derivatives will penetrate its shores. Moreover, the lower profitability profile expected for the Middle East argues against any attempts by these producers to penetrate U.S. markets by undercutting prices. Olefins Derivatives.The olefins derivatives examined here are polyethylene, ethylene glycol, and styrene. In each case, the impact of lower crude oil prices will be to increase consumption. Since the decline in crude oil costs will lessen the cost of petrochemical-derived products more than it will lessen the cost of naturally derived products, consumption of petrochemical-derived products will increase. Although this may not be reflected in mature markets such as those for bread wraps, it can be expected to help LLDPE penetrate the U.S. grocery (Kraft) bag market and the more GNPsensitive applications, where increased consumer disposable income provides added impetus to demand. This latter category includes agricultural films (LDPE), tourist gift bags (LLDPE), and injection molded toys, and household, consumer, and industrial items (HDPE and styrene). In addition, from a national standpoint, lower crude oil prices will increase U.S. competitiveness in foreign markets. Ethylene glycol is used primarily for polyester and automobile anti-freeze. Growth prospects for these applications will tend to reflect the simulative effect of lower crude oil prices on individual national economies. However, while polyester fiber may also benefit from increased cost competitiveness with cotton, fashion trends also tend to dictate the amounts of each consumed. Styrene trade has been less affected by the drop in crude oil prices because only 22 percent of styrene is ethylene, the balance being benzene. Moreover, benzene prices in the Middle East tend to follow West European prices (any reduction in profitability would be shown PAGE 169 164 l Technology Transfer to the Middle East in the refinery operations from which the benzene is produced). Nevertheless, the United States will benefit to some degree in styrene export markets, owing to its increased competitiveness (U.S.-manufactured benzene is competitive, and its ethylene will become more competitive). In addition, styrene consumption will improve because of the improved nature of the world economy. (This may be reflected in increased demand for styrenics in toys and appliances.) Methanol and Ammonia. The impact of lower crude oil prices on methanol and ammonia will vary. While consumption will be favorably influenced by increased U.S. automobile usage and continuing demand for food worldwide, U.S. firms will continue to lose competitiveness in methanol and ammonia production, and significant imports can be expected in the future. In the case of methanol, lower crude oil prices will result in more competitive U.S. facilities since the gap between U.S. costs and foreign competitors raw materials costs will not be as great (as in a $34/barrel market crude oil scenario). However, if marginal U.S. producers continue operations and lower crude oil prices result in a delay in the use of methanol in energy applications, the world oversupply would be further aggravated, pricing pressures would continue, and imports would still be expected. A delay in using methanol in gasoline blends, for example, could result simply from the availability of crude oil, a perception that energy alternatives are not necessary and, in those markets where methanol will be used as an octane enhancer rather than as a gasoline extender, increased competition from other materials (toluene). In the case of ammonia, U.S. producers, with or without renegotiated natural gas contracts, can be expected to stay competitive longer. However, since there are fewer new ammonia projects coming onstream (as compared to methanol) and demand is large, the business environment is expected to be different than that for methanol. Nevertheless, the United States will import sizable quantities of ammonia during the 1980s. IMPLICATIONS OF MIDDLE EAS T PETROCHEMICAL INDUSTRY DEVELOPMENT S IMPACTS O N RECIPIENT NATION S As petrochemical plants are built in the Middle East, a major effect has been rising demand for skilled manpower. These effects have been strongly felt in Saudi Arabia and Kuwait, where dependence on foreign manpower at all levels (but particularly in technical, professional, and managerial occupations) is high. These trends can be expected to continue for the foreseeable future. The petrochemical industry has a broad occupational profile. The wide variety of jobs is partially due to the diverse range of products created in the industry, as well as to the industrys complexity. The high skill levels required in the industry indicate the need for extensive specialized training, for technicians, scientists and engineers, mechanics, and machine operatives. The occupational breakdown of this labor force may be approximated using the labor profile developed for the Middle East petrochemical industry by the United Nations Industrial Development Organization. Approximately 20 percent of these jobs will be technical or managerial. 44 All evidence indicates that in Saudi Arabia the great majority of these jobs, especially at the higher skill levels, will have to be staffed by nonnationals for several years into the future. In 1981, the 44 International Centre for Industrial Studies, Draft WorldWide Study of the Petrochemical Industry (Vienna: United Nations Industrial Development Organization, 1978). PAGE 170 Ch. 5Petrochemica/lTechnology Transfers l 165 Saudi labor force in the chemical, petroleum, and plastics sector numbered approximately 8,000. About 87 percent were non-Saudis. 45 A doubling in this work force may be required. Like Saudi Arabia, Kuwait will also rely very heavily, almost exclusively, on foreign work ers if its expansion in petrochemicals proceeds Algeria, on the other hand, may need ap proximately 3,000 workers to satisfy its pe trochemical program, most of whom are al ready in place. This would include about 600 professional and technical workers, 500 skilled workers, 900 operatives, and 500 clerical workers. With over 200,000 professional and technical workers in the Algerian labor force, an d around 2,000 new university graduates pe r year in science and technology fields, the re quirement of a few hundred additional tech nical workers should not present a problem to their petrochemical sector. Similarly, Egyp t will probably be able to meet its manpowe r needs. The only possible problem area coul d be in the managerial positions, owing to lim ited previous labor force experience with pe trochemical production. The major manpowe r difficulty in Egypt would thus be the quality of labor and its productivity. In contrast, both Iraq and Iran had substantial petrochemical manpower forces prior to the Iran-Iraq War. The Iraqi labor force in petrochemicals was estimated at over 17,000 workers in 1977. Iran also had a large trained cadre of petrochemical workers operating about 10 petrochemical plants. The ongoing war between Iran and Iraq and the unknown damage to their petrochemical plants make future manpower supply or needs impossible to predict for these two countries. IMPLICATIONS FO R U.S. POLIC Y A gradual erosion in the competitiveness o f U.S. petrochemical producers can be expected .. Kingdom of Saudi Arabia, Census of Primm.y Lstabiishments, 19/+1, cites a total figure of 8,196 workers in these categories. See also Federal Democratic Republic of Algeria, AS II)C, UNIDO, .Status of Arab lndus.tq and Future Concept for Arab industrial I)e\eioprnent Up to the Iear 2000, 1979, which gi~es a figure of 6,400 workers in the chemical industr~r for 1973. because of feedstock advantages in other regions of the world, among other factors. The impending decontrol of natural gas prices will make U.S. commodity petrochemicals less competitive on world markets and may further increase imports of ammonia into the United States. The U.S. petrochemical industry may, however, remain strong, owing to large domestic demand, increasingly efficient operations, and R&D efforts. The industrys major loss will be in exports. No major loss of U.S. jobs in the petrochemical sector is anticipated. U.S. contractors and licensers have had a strong presence in the Middle East and projects there yield revenues to the United States through taxes and income. U.S. producers will, however, be challenged to adjust their production and strategies in order to respond to anticipated changes in the world petrochemical market. No cases were identified where contract s were lost because of the Foreign Corrupt Prac tices Act or antiboycott legislation, and recen t changes in the tax laws concerning income tax on U.S. citizens foreign earnings have reduced this as a disadvantage to U.S. firms. Expor t financing has been a less significant factor in contract awards in this sector than in some others examined by OTA, due to the fact that the Gulf States (Saudi Arabia in particular) have been in a position to provide attractive financing terms to foreign investors. A major concern for U.S. policy makers will be with potential protectionist measures abroad. U.S. tariffs on petrochemicals after the Tokyo round of tariff reductions are not generally judged excessive, but countries in the Middle East want more favorable tariff treatment. Restructuring of the U.S. petrochemical industry is occurring, as in Japan. In Western Europe, however, the admittedly necessary restructuring is progressing slowly, as political pressures make plant closures or rationalization difficult. 46 In 1983 in the 46 A Working Groups Report to the European Economic Commission. restructuring the West European Petrochemical Industry," (Gatti-Grenier Report), May 1983. In this report, the following reductions in West European petrochemical capacity were recommended: ethylene 20% (from 15 to 12 million tons/year), LDPE 24.5% (from 5.3 to 4.0 mt/yr), and HDPE PAGE 171 166 Technology Transfer to the Middle East ... European Economic Community, capacity uti lization remained below 60 percent on average, despite a beginning upturn in productio n worldwide 47 If protectionist measures are im posed by the West Europeans, more produc t than anticipated could end up flowing to th e United States, at best; at worst, severe com modity chemical price cuts could occur. Tabl e so shows tariff rates on petrochemicals im ported to the United States, Japan, and West ern Europe The Middle East producers aspire to be ac cepted as major players in worldwide petro chemical trade. If the need arises, however they have the wherewithal (owing to inexpen sive feedstocks, surplus capital, and state-of the-art facilities) to force their entry. In th e long run, however, price cutting would be det rimental to all producers. In response, the Eu ropeans will be reluctant to take a purely pro tectionist stand against the new petrochemica l exporters, because this would be a diplomati c embarrassment to the ECC 49 On the othe r hand, protectionist advocacy has been eviden t in West Europe, directed against the Japanes e CONCLUSIO N 24% (from 2.5 to 1.9 mt/yr). See also Paul Cheeseright and Carla Rapoport, European Groups Fail to Agree on Chemicals Cuts, Financial Times, June 1, 1983, p. 1. See Commission of the European Communities, European Economy, Supplement B, No. 11, November 1983, pp. 4-5; i Facts and Figures for the Chemical Industry, "Chemical and Engineering News, June 13, 1983, p. 26. Saudi Counter-Measures if Europeans Impose Protectionism, reported in JPRS, Near East. )South Asia, Oct. 12, 1983, from A1-Mustaqbal, in Arabic, No. 333, July 9, 1983, pp. 5152. See also SA131C Warns Against Protectionism, Middle East Economic Digest, Aug. 12, 1983, p. 45, and Petrochemical Producers Urged to Ccmperate, lfiddle East Economic Digest, November 11, 1983. 4< Wharton, op. cit., pp. 66-67. Table 50. Petrochemical Tariffs (percent) Western Product Euro pea Polyethylene ... . 14.7 Ethylene glycol. . 15.1 Styrene monomer. . 6.3 Methanol . . . 13.7 Ammonia . . . 11.1 United States Japan a 13.4 6.2 13.1 12.0 9.0+0.7/Ib 8.0 18.6 5.3 3.8 a Middle Eastern imports are currently duty free However, as Middle Eastern exports increase in volume, they may be subject to the same tariff rates used by the United States SOURCE Off Ice of Technology Assessment and the newly industrializing countries, suc h as Hong Kong, South Korea, and Taiwan. Per haps the greatest contribution the Unite d States can make is to encourage multilatera l agreements so that the new petrochemical pro ducers of the Middle East and other regions whose entry into world markets is certain, wil l cause as little disruption as possible Thus, U.S. policy options are limited. Meas ures which encourage U.S. firms to adjust t o the anticipated worldwide restructuring of th e petrochemical industry could be a contribu tion. The traditional stress on R&D character istic of the industry must be maintained s o that U.S. firms can specialize in the develop ment of higher valued-added fine chemicals produced through more efficient processes Opportunities for the U.S. industry lie in operations further downstream. Rather than sec tor-specific policies, those that promote the development of technical manpower in th e United States, and those that encourage R%D across a broad spectrum of industries shoul d contribute to readjustment A major shift is occurring in the worldwid e petrochemical industry. The Middle East (a s well as Canada, Mexico, and Southeast Asia ) will become more important as a source of pe trochemicals in the near to midterm. Canadian and Middle Eastern developments will hav e the most significant impact on global trade in the mid and late 1990s. Middle Eastern pro ducers, such as Saudi Arabia, want to b e world-scale producers of petrochemicals an d have the means to do it. Generally speaking they intend to prevent large disruptions in pe trochemical markets, but they hope to reac h their goals Firms in western Canada and Mexico ar e more likely to make significant inroads int o the U.S. petrochemical market than Middl e East manufacturers. In any case, U.S. petro chemicals will remain generally strong despit e the fact that the United States will become a net importer of ethylene glycol and methano l by 1990 (mostly from Canada). The Unite d PAGE 172 Ch. 5Petrochemical Technology Transfers l 167 States is already a net importer of ammonia However, U.S. specialty chemicals may ac tually gain strength, and employment effect s should b e minimal because U.S. producers can be expected to continue to supply the domes tic market in many product areas The effects of the growth of petrochemica l production in the Middle East may be mor e severe in Western Europe and Japan. West ern Europe must continue to rationalize its pe trochemical industry, but this will be a pain ful process. Japan has already realized that i t cannot compete against low-cost feedstock s and is bowing out of direct production. Japa nese firms are participating in development o f the Middle East petrochemical industry be cause this is viewed as in the national interest, among other reasons Manpower and maintenance will be the key problems for Middle Eastern petrochemica l producers. However, for many of these coun tries petrochemical production is an appropri ate technology. As a result of their aim to be come world-class exporters of petrochemicals Middle East manufacturers will remai n strongly dependent on foreign expertise unti l the turn of the century. By working with for eigners and obtaining technology develope d abroad, they should be able to achieve thes e goals Technology transfers to the Middle East wil l contribute to the growth of a major petro chemical export industry there. While it ap pears that U.S. producers will remain signifi cant in most product areas, their exports wil l diminish as the new plants now under con struction in the Middle East and elsewher e come on line. Because petrochemical produc tion technology has become fairly standard ized (with the exception of some catalysts), no one nation can maintain a position of clea r leader as a supplier across the board. Technol ogy transfer to Middle Eastern and other de veloping countries will increase regardless o f the strategies adopted by specific U.S. firms From the perspective of U.S. policy makers policy options to offset these trends are fairly limited. On the one hand, efforts to negotiat e multinational agreements supporting fre e trade may help to stave off a protectionis t backlash in Europe which could result in in creased flows of product to the United States On the other hand, policies designed to encourage R&D and expansion of the technical man power pool may ease adjustment in the U.S petrochemical industry as in other industrie s facing global trade restructuring APPENDIX 5A: PETROCHEMICAL PRODUCT USES At the heart of the petrochemical industry are key chemical building blocks (e.g., ethylene) that can be derived from the processing of natura l gases or from byproducts of the oil refining process. Some building blocks can be produced from either source Oil refineries produce a range of produces including naphtha and gas oil which can be treated in plants known as crackers to produce building blocks such as ethylene, propylene, or butadiene 1 Based on the appendix of Louis Turner and James M. Bedore, Middle East industrialization A Studj of Saudi and lranian Dm+rnstream ~n~estment, Saxon House, 1980. pp. 203-206. Also see Dale F. Rudd, Petrochernicai 7echnoio~ ,4sses.wnent (New York: Wylie tnterscience, 1981). (generically, these are called olefins). Naphtha can also be processed in a reformer to produce the major aromatic building blocks, benzene, toluene, and the xylenes. These building blocks can then be processed further to produce derivative products ranging from explosives to plastic films. The problem with the refinery-based approach is that the more gasoline needed from a refinery, the less naphtha is produced; this, in turn, forces petrochemical producers to build expensive steam crackers to convert more difficult refinery byproducts, such as gas oil, into the desired building blocks. In the case of olefins, it is possible to take the alternative route of using natural gas. Natural gas PAGE 173 168 l Technology Transfer to the Middle East . can be broken down into the simplest carbon molecules, C l (methane), C 2 (ethane), C 3 (propane), and C, (butane). Methane can be further processed into products such as ammonia or methanol. The other three feedstocks can be turned into varying proportions of the olefin building blocks. (By weight, ethane yields 80 percent ethylene, while butane yields proportionally less ethylene and more propylene.) Figure 5A-1 gives a simplified illustration of the various ways the basic building blocks of the petrochemical industry can be produced. It clearly shows that there is considerable flexibility in producing olefins. Much of the controversy about the comparative economics of producing these in the Middle East or in the industrialized world rests on the fact that one can start with either gas or crude oil. Typical end-uses of derivative chemicals produced from the main building blocks are: 1. Outlets for ethylene derivatives: l l l l l Polyethylenefilms, moldings, pipes, cable covering, netting, etc. Ethylene oxideintermediate product in chain leading to antifreeze, polyester fibers (terylene) and detergents. Styrenepolystyrene plastics and synthetic fibers. Ethylene dichloride-step towards polyvinyl chloride (PVC) plastics, used for leathercloth, piping, guttering. Other derivativesethyl alcohol and acetaldehyde, 2. Outlets for propylene derivatives: l l l l l Polypropylenefilms, fibers, and plastic moldings. Cumeneintermediate products for plastics, nylon, and solvents. Acrylonitrilebase for acrylic fibers; used in chain leading to nylon. Propylene oxide-intermediate for manufacture of plastic foam. Other products are involved in detergent and resin manufacture. 3. Outlets for butadiene and other C 4 olefins: Butadienes derivatives are heavily used in synthetic rubber production. l Other end-uses of butadiene and the other C 4 olefins include solvents, sealing compounds and the raw material for nylon. 4. Outlets for aromatic derivatives: Benzene Styrene (also from ethylene) polystyrene plastics and synthetic rubber. l Phenolintermediate for resins. l Cyclohexane-intermediate for nylon production. l Other products are used for detergents, dyestuffs and polyester glass-fiber plastics. Toluene l Derivatives used for plastic foams, resins, explosives (TNT), and paints. Xylenes l Derivatives used for paints, lacquers, insecticides, polyester fibers, and resins. SPECIALTY CHEMICAL S Specialty chemicals can be defined as small volume products, with a variable composition, that are sold to a performance specification. Examples include antioxidants and oil field chemicals. These types of chemicals have higher value added, and hence profit, than commodity chemicals for those companies that can produce them. 2 They are also generally identified by brand name and are often produced by proprietary processes. Due to competitive pressure facing commodity chemicals manufacturers from rising raw material costs, slower than expected growth in demand, and increasing competition from new export-oriented petrochemical plants, specialty chemicals have received renewed interest. Specialty chemicals cannot, however, by themselves be the salvation of petrochemical companies forced out of the commodity chemical business due to competition. The changing environment of the petrochemical industry encourages a move toward the higher margins afforded by some specialty chemicals. In order to realize these margins in practice, however, there must be careful selection and promotion, and increased R&D funds generally are required. 3 In addition, it must be recognized that the cash flow associated with specialties will be small in comparison to commodities. If production of the specialty begins to reach substantial quantities, new producers can be expected to enter the market. Thus these low-volume, high value-added specialty chemicals are unlikely to be a complete answer to petrochemical industry problems, but if carefully selected can be a welcome addition to the companies operations. 2 See for example: Larry D. Rosenberg and Charles H. Kline, Seeking Profits Downstream: The Lure of Specialty and Fine Chemicals, Platts Petrochemical Conference, Lausanne, Switzerland, May 12, 1981; and Peter B. Godfrey, Specialty and Fine Chemicals: A Panacea for Profits? The Outlook for Petrochemicalsprofitin g in a Troubled World, paper presented at a conference held by the Energy Bureau, Inc., Nov. 30Dec. 1, 1982, Houston, Tex. 3 "Specialties pOSe Problems, Challenges for Chemical Firms, Chem. ical and Engineering News, Apr. 23, 1984, pp. 8-9. PAGE 174 Figure 5A-1 .Simplified Flow Diagram Natural gas Natural gas Separator and Iiquids (methane) of Primary Petrochemical Production Crude Oil LPG I Ammonia plant I Amonnia Methanol plant I Acetylene plant 1 Acetylene Ethylene Cracker (for olefins) (usually ethane and propane Propylene and sometimes butane) Dehydrogenator I Butadiene Refinery including catalytic craoking Ethylene Refinery offgas Recovery Propylene 1 l Ethylene Gasoline-precursor Liquids (naphtha) Heavy Iiquids (gas oil) Craoker (for olefins) Propylene Butadiene Unrestricted fuel byproducts Restricted fuel byproducts Aromatics (optional) Olefins I Aromatics I Unrestricted fuel byproducts Restricted fuel byproducts l Furnace Carbon black Carbon black PAGE 175 170 Technology Transfer to the Middle East APPENDIX 5B: PETROCHEMICAL PROJEC T PROFILE S Venture name: Products: Capacity: Location: JV partners: Financing: Structure: Table 5B-1 .Saudi ArabiaMobil Joint Venture Saudi Yanbu Petrochemical Co. (Yanpet) Ethylene; LLDPE; HDPE; ethylene glycol (EG) Ethylene,000 metric tons LLDPE,000 metric tons HDPE,000 metric tons EG,000 metric tons Yanbu SABIC 50%; Mobil 50/0 Debt: 60% Saudi loan (preferred rates) . ... ... .. .$1,200 million 10% commercial loan (standard rates) ., ... 200 Equity: 15% Saudi . . . . ... . . 300 l l l 15% Mobil . . . . . . . 300 Total . . . . . ... ... ... ... ... .$2,000 million Standard Saudi Arabian agreement Based on this project and the refinery project, Mobil will receive an estimated 1.4 billion barrels of crude over 15 years Mobil is committed to market approximately 75 percent of products produced, while SABIC can market up to 25 percent. In the initial years Mobil is likely to market nearly all material produced Mobil is responsible for technical, marketing, and management training Project initiation: 1980. First study was conducted in 1976 with Mobil and Bechtel. The estimated value at that time was $817 million for the project, The study cost an estimated $10 m i I lion Project startup: 1985 Major contracts: BechtelProject management, construction, procurement. Also process engineering for LLDPE/HDPE Lummus Design and engineering of ethylene facility and process Iicense. Will also develop process simulators for training Union Carbide Corp.LLDPE/HDPE license Scientific Design (SD)EG license HaIcon (SD subsidiary) -Process engineering of EG facility Belleli (ltaly)Construction of modular units under Bechtel contract Target markets: Japan, Southeast Asia, Western Europe, Africa, and miscellaneous other, Limited exports to the United States are possible in the late 1980s SOURCE Office of Technology Assessment PAGE 176 . Venture name Product Capacity Location JV partners Financing Structure: Project initiation: Project startup: Major contracts: Target markets: Ch. 5Petrochemical Technology Transfers l 171 Table 5B-2.Saudi ArabiaExxon Joint Venture Al-Jubail Petrochemical Co. (Kemya) Linear low-density polyethylene 260,000 metric tons Al-Jubail SABIC 50%: Exxon 50% Debt 60% Saudi loan (preferred rates) . ... ... .$ 780 million 10% commercial loan (standard rates) . 130 Equity 15% Saudi . ., ... 195 15% Exxon 195 Total ... ... . ... . ..$1-,300 miIlion l Standard Saudi Arabian agreement Exxons crude entitlement is 405 million barrels over a 19-year period Ethylene is received from Shell JV (Saudi P/CSADAF), Total volume is approximately 260,000 metric tons To avoid paying an ethylene transfer price to SADAF, Exxon payed for approximately 38 percent of the cost of the olefins cracker and support facilities. Since Exxon does not own a percentage of the facility, it is equivalent to paying for ethylene in advance, Once the facility comes onstream, Exxon will pay for its proportionate share of operating costs. The rationale for this structure was the difficulty in finding a suitable benchmark mechanism for establishing an ethylene transfer price in Saudi Arabia l Exxon is responsible for all export sales, except for the surrounding region. SABIC would like to eventually assume the responsibility for 50 percent of all sales Exxon is responsible for the technical and market training program 1980, Preliminary study and discussions in 1977 Contingent on Shell startup, approximately 1985-86 FluorProject management. construction and procurement Union Carbide Corp.LLDPE/HDPE license Daewdo Shipbuilding (South Korea)Modules, under Fluor contract East Asia, Western Europe, Africa, and miscellaneous other SOURCE Office of Technology Assessment PAGE 177 172 l Technology Transfer to the Middle East ... Table 5B.3.Saudi ArabiaMitsubishi Joint Venture Venture name: Product: Capacity: Location: JV partners: JSAMC partners: Financing: Saudi Methanol Co. (SAMCO) Methanol 600,000 metric tons Al-Jubail SABIC 50%; Japanese Consortium (JSAMC)% Mitsubishi Gas Chemical% of JSAMC Japan Overseas Economic Cooperation Fund% of JSAMC Sumitomo Chemical% of JSAMC Mitsui Toatsu% of JSAMC Kyowa Gas, Chemical% of JSAMC C. ltoh% of JSAMC Debt: 60% Saudi loan (preferred rates) ... ... ... ... ... .. .$161 million 10% commercial loan (standard rates) . . . 27 Equity: 15% Saudi . . . . . . . ... . 40 15% JSAMC . . . . . . . . 40 Structure: Project initiation: Project startup: Major contracts: Target markets: Total . . . . . . . . . .. .$268 million The total cost of this project when completed in 1983 was estimated to be $500 million l Standard Saudi Arabian agreement l Japanese Government uses the Overseas Economic Cooperation Fund (OECF) to support the joint venture. OECFs $14 million project loan was instrumental in securing this venture as well as additional oil supplies, The exact amount of crude entitlement is not known but is estimated at approximately 20 million barrels per day over a 15-year period 1979 1983 Chem Systems Advisors to SABIC on project definition and process design Mitsubishi Heavy IndustriesProject management, construction (built modules in Japan) and procurement Mitsubishi Gas ChemicalsProcess license, design, and engineering Japan, East Asia, and miscellaneous other SOURCE Off Ice of Technology Assessment Table 5B-4.Kuwait Petrochemical Project Venture name: Products: Capacity: Location: JV partners: Financing: Structure: Project initiation: Project startup: Major contracts: Target markets: PIC Petrochemicals Olefins and derivatives; possibility of aromatics derivatives Products under consideration are: l Primary products: l Ethylene,000 metric tons per year LLDPE,000 metric tons per year Ethylene glycol,000 metric tons per year Styrene,000 metric tons per year Benzene,000 metric tons per year (for styrene production) l Secondary (speculative) products: o-Xylene,000 metric tons per year p-Xylene,000 metric tons per year Shuaiba None intended at present, earlier proposals included BASF (LDPE) and W. R. Grace (aromatics). Hoechst would be a logical choice Would likely be internally financed. Total value $1.3 billion Intended ownership (100 percent) Petrochemical Industries Co. KSC (PIC), a wholly owned subsidiary of Kuwait Petroleum Co. (KPC). The latter is a state-owned holding company Feasibility study for olefins and derivatives undertaken in 1976-77 by Chem Systems Not yet fully committed. Likely start up in late 1980s Chem Systems Feasibility study, 1976; market study, 1982 C. F. Braun a Preliminary engineering 1981-82 East Asia, Western Europe, and miscellaneous other. Potential exports to the United States a C. F. Braun IS controlled by KPC, being a subsidiary of Santa Fe Corp., recently acquired by KPC. SOURCE Off Ice of Technology Assessment PAGE 178 Ch. 5Petrochemical Technology Transfers 173 Table 5B-5.QatarCdF Chimie Joint Venture Venture name: Qatar Petrochemical Co. (QAPCO) Product: Ethylene/LDPE Capacity: Ethylene,000 metric tons LDPE,000 metric tons Location: Umm Said JV partners: CdF Chimie%; QGCP% Financing: Total value $600 million. Exact structure or payments by CdF not known due to complexity of associated agreements. However, general structure is an 85/15 debt/equity arrangement. Euroloans were once associated with the project, but later assumed by Qatar Debt: 50% French credits (@ 8.25%) . . . .$300 million 35% Qatar loans (preferred rates). . . . . 210 Equity: 13% Qatar, . . . . . . . ... ... 76 2% CdF Chimie ., ... . . . . 14 Total . . . . . ... ... ... ... ... ..$600 million Structure: l Project was conceived as a back-to-back deal following 60-40 JV with CdF Chimie and Qatar in Dunkirk, France. Capacity at Dunkirk is 225,000 metric tons ethylene and 150,000 metric tons LDPE. The JV was French-Government promoted to foster French Arab Cooperation and the recycling o f petrodollars. The Dunkirk startup was in 1978 l CdF will manage Qatar faciIities and be responsible for marketing. Revenues will be earned on a commission basis. Sales offices have been set up in Hong Kong, Singapore, and Bangkok Project initiation: 1977 Project startup: 1980 Major contracts: Chem SystemsPrefeasibility of Qatar Project; Assessment of Dunkirk FaciIity Technip (France)Construction of ethylene cracker Coppee Rust (Belgium)Construction of LDPE plant (stamicarbon process) TurbotechnicaSupply to 50-MW power station CdF ChimieSupply LDPE technology and overall project responsibility Target markets: Middle East and Southeast Asia SOURCE Off Ice of Technology Assessment Table 5B-6.Bahrain Venture name: Gulf Petrochemical Co. (GPCO) Product: Methanol/ammonia Capacity: Methanol,000 metric tons per year Ammonia,000 metric tons per year Location: Sitra island (artificial island) JV partners: BANOCO (Bahrain National Oil Co.)/PIC/SABICequal ownership Financing: Debt: Arab Consortium (85%; soft terms) . . . ..$300 million Equity: (15%) ., ... . . . . . . . . 50 Total . . . ... . . . . . .$350 million Project initiation: 1980-81 Project startup: 1984-85 Major contracts: Snamprogetti Engineering services and construction, detailed engineering, equipment procurement, construction UhdeResponsible for licensing ammonia technology and Uhde/lCl methanol technology King WilkinsonEngineering and construction advisors Wimpy Labs (UK)Site survey and sales analysis Cowiconsult (UK)Project site consultants Target markets: China and Southeast Asia SOURCE Office of Technology Assessment PAGE 179 174 Technology Transfer to the Middle East Table 5B.7.Algeria Sonatrach Ammonia (Arzew) Venture name: Sonatrach Product: Ammonia Capacity: 272,000 metric tons Location: Arzew JV partners: None Financing: International commercial rate; total value estimated at $150 million as compared to the 1976 estimate of approximately $100 million to $115 million Project initiation: 1976 Project startup: 1981 Major contracts: Creust-Loire (CLE)Project management, installation Pullman KelloggDesign, engineering, and training prior to startup; operating and training contract since startup Chem SystemsTechnical advisors through 1978 Target markets: Domestic consumption and incremental exports SOURCE: Office of Technology Assessment. Table 5B-8.Algeria Sonatrach LNG #2 (Arzew) Venture name: Sonatrach Capacity: 1 billion scfd of gas Location: Arzew JV partners: None Financing: Local commercial financing . . . . . ... ... ..$ 300 million Foreign government financing: Canada. . . . . . . . . . . 125 U.S. Ex-lm Bank . . . . . . . . . 350 Japanese Government financing . . . . . 350 Belgium/Holland financing . . . . . . 100 Total . . . . . . . . . . ... .$1,225 million Foreign government loans tend to be tied to procurement from those nations. The United States does not maintain this type of policy. However, the United States requires 50/0 of the value of its loan shipped on U.S. flag ships Project initiation: 1976 Project startup: 1981 Major contracts: KelloggProject management, design/engineering, and construction Target markets: United States and Western Europe SOURCE: Office of Technology Assessment Structure: PAGE 180 Ch. 5Petrochemical Tecbnology Transfers 175 APPENDIX 5C: PETROCHEMICAL PRODUC T DEMAND PROJECTIO N Table SC-1 .Free World LDPE Demand (thousand metric tons) Western Europe . . . North America: United States . . ... Canada . . . ... Japan . . . . . . Pacific Basin and Indian Subcontinent Latin America ... ... ... . Africa . . . . . Middle East ., . ... Total . . . . . . 1981 3,450 2,985 345 920 721 850 304 229 9,804 SOURCE OffIce of Technology Assessment 1985 3,930 3,930 450 1,170 1,083 1,165 397 300 ,425 Compound annual growth rate, % 1990 1981-90 4,330 2.6 4,985 5.9 575 5.8 1,440 51 1,537 8.8 1,768 8.6 563 7.1 418 6.9 15,616 5. 3 (average) Table 5C-2.Canadian and Middle Eastern LDPE/LLDPE Export Mix, 1990 (percent) Middle East Canada United States . . . . . . N N Western Europe . . . . . . 10-15 Japan/East Asia . . . . . 45 60 Other. . . . . . . . . . . 38-40 40 Total . . . . . . . 100 100 N = negligible SOURCE Office of Technology Assessment Table 5C-3 .U.S. Demand for LDPE/LLDPE (thousand metric tons) Compound annual growth rate, % 1980 1981 1985 1990 1981-90 Film and sheet . . . 1,824 1,856 2,365 2,996 4.9 Injection molding . . 235 238 390 490 6.2 Extrusion molding 235 256 270 280 1.0 Wire and cable . . . 152 157 235 295 5 7 Other. ...... . . . 414 478 670 925 6.3 Total . . . . . 2,860 2,985 3,930 4,985 5.1 (average) SOURCE Office of Technology Assessment PAGE 181 176 l Technology Transfer to the Middle East .... Table 5C-4. Free World HDPE Demand (thousand metric tons) Compound annual growth rate, /0 1980 1981 1985 1990 1980-90 Western Europe . . 1,424 1,450 North America: United States. . . . 1,720 1,880 Canada . . . . 177 186 Japan . . . . . 543 507 Pacific Basin . . . 392 384 Latin America . . . 383 374 Africa . . . . . 169 165 Middle East . . . . 80 87 1,700 2,960 270 755 648 578 258 135 2,000 4,165 390 920 994 872 431 180 3.6 9.2 8.6 6.8 11.1 9.9 11.3 8.4 Total . . . . . 4,888 5,033 7,304 9,952 7.9 SOURCE Office of Technology Assessment Table 5C-5.U.S. High-Density Polyethylene Demand (thousand metric tons) Compound annual growth rate, 0 / 0 1980 1981 1985 1990 1981-90 Blow molding . . . 733 781 1,175 1,645 8.6 Injection molding . . 425 457 pipe and conduit . . 685 885 7,6 175 194 355 465 10.2 Film and sheet . . . 136 170 280 530 13.5 Wire and cable . . . 48 50 80 115 9.7 Other. . . . . . 201 227 385 525 9.8 Domestic demand . . 1,718 1,879 2,960 4,165 9.3 (average) SOURCE Office of Technology Assessment Table 5C-6.Free World Ethylene Glycol Demand (thousand metric tons) Compound annual growth rate, 0 / 0 1981 1985 1990 1981-90 Western Europe . . . . . 690 North America: United States . . . . . 1,779 Canada . . . . . . 136 Japan . . . . . . . 400 Pacific Basin . . . . . . 370 Latin America. . . . . . 164 Africa . . . . . . . 34 Middle East . . . . . . 35 Total . . . . . . . 3,608 735 2,075 143 495 517 258 72 62 4,357 805 1.7 SOURCE: Office of Technology Assessment PAGE 182 Ch. 5Petrochemical Technology Transfers l 177 . Table 5C-7.Projected Canadian and Middle Eastern Export Mix, 1990 (percent) Middle East Canada United States ... ~.. ... ... ... ... .. ... ..... N 23 West European . . . ..., . . 33 Japan/East Asia . . . . . 45 45 Other. . . . . . . . . . 22 32 Total . . . . . . . . . 100 100 N = negligible SOURCE OffIce of Technology Assessment Table 5C-8.United States Ethylene Glycol Demand (thousand metric tons) Compound annual growth rate, % 1980 1981 1985 1990 1981-90 -.. Antifreeze:. . . 769 733 800 2.2 Polyester fibers. ., . 760 796 905 1,075 3,4 Polyester film . . 67 65 90 130 8.0 PET bottle resins . . 58 68 140 260 16.1 Other . . . . . 122 116 140 185 5.3 Total . . . 1,776 1,778 2,075 2,545 4.1 (average) SOURCE Office of Technology Assessment Table 5C-9 .Free World Styrene Demand (thousand metric tons) Compound annual growth rate, % 1981 1985 1990 1981-90 Western Europe ., ..., ...... . 2,500 2,600 2,700 0.9 North America: United States . . . . 2,647 3,175 3,830 4,2 Canada .... . . . . . 219 280 360 5.7 Japan . . . . . . . 1,256 1,495 1,785 4.0 Pacific Basin ., ..., ..., ..., 413 615 858 8.5 Latin America. . . 384 606 880 9.7 Africa .....,..,..,,.. . . . . 34 47 70 8.4 Middle East . . . . 23 30 35 4.8 Total .............. . . . 7,476 8,848 10,518 3.9 (average) SOURCE Office of Technology Assessment Table 5C-10.Projected Middle Eastern and Canadian Styrene Export Mix (percent) Middle East Canada United States United States . . . . . Europe. . . . . . . 30 Japan/East Asia. . . . . 60 100 50 Other . . . . . . 10 50 SOURCE Office of Technology Assessment PAGE 183 178 Technology Transfer to the Middle East Table 5C-11.U.S. Demand for Styrene (thousand metric tons) Compound annual growth rate, 0 / 0 1980 1981 1985 1990 1981-90 Polystyrene . . . . 1,595 1,633 1,970 2,320 4.0 SBR/SBR latex. . . . 254 238 265 290 2.2 ABS resins . . . . 238 234 285 375 5.4 SB latex . . . . 168 177 215 255 4.1 Polyesters . . . . 150 169 205 285 6.0 SAN resins . . . . 37 38 45 50 3.1 Other. . . . . . 152 158 190 255 5.5 Table 5C-12.Global Methanol Demand (thousand metric tons) Compound annual growth rate, % 1981 1985 1990 1981-90 North America: United States . . . . . Canada . . . . . . Eastern Europe . . . . . Western Europe . . . . . Japan . . . . . . . ASEAN Group . . . . . Australia New Zealand . . . . Other Asian . . . . . . Mexico . . . . . . . Central and South America . . . Middle East/Africa . . . . . Other . . . . . . . 3,510 240 2,600 3,060 1,060 85 63 378 145 205 85 80 5,025 290 3,300 3,990 1,430 137 525 600 200 303 120 128 7,170 580 4,100 4,905 2,370 205 1,580 800 720 422 815 200 8.3 10.3 5.2 5.4 9.4 10.3 43.1 8.7 19.5 8.4 28.6 10,7 Table 5C-13.Global Methanol Market by End Use, 1981 (thousand metric tons) Chemical applications. . . . .... . . . . . . 11,061 MTBE . . . . . . . . . . . . . . 350 Gasoline blending . . . . . . . . . . . . 390 Power generation . . . . . . . . . . . 10 Total . . . . . . . . . . . . . . 11,811 SOURCE Office of Technology Assessment PAGE 184 Ch. 5Petrochemical Technology Transfers l 179 Table 5C-14. Global Methanol Supply/Demand Balance a (thousand metric tons) North America: United States. . . Canada . . . . Eastern Europe ... . Western Europe . . Japan . . . . . ASEAN . . . . Australia/New Zealand . Other Asian . . . Mexico ., . . . Central and South America. Middle East/Africa . ..., Other, . . . 1981 1985 1990 (1,400) 1,440 800 (3,105) (1,970) 1,225 320 (600) 810 233 2,065 (200) Total . . . (320) 907 (382) -. a Due to timing uncertainties associated with the growth in fuel demand, no attempt was made to zero balance trade as was the case wlth other products in this study Parentheses Indicate net Imports. SOURCE Office of Technology Assessment Table 5C-15.United States Methanol Demand (thousand metric tons) Compound annual growth rate, % 1980 1981 1985 1990 1981-90 Applications: Formaldehyde . . 1,280 1,290 1,630 1,880 4.3 Dimethyl terephthalate ., 147 145 160 160 1.1 Methyl halides ... ... 238 240 335 405 6.0 Methylamines . . 168 165 195 228 3.7 Methyl methacrylate ., . 153 150 222 310 8.4 Solvents ., ... . 315 320 395 485 4.7 Miscellaneous . . . 267 500 638 847 6.0 Subtotal . . 2,568 2,810 3,575 4,315-4.9 Emerging applications: Acetic acid . . 315 420 450 700 5.8 MTBE ., ... ... 165 150 450 555 15.7 Gasoline ...,..,. 90 120 500 1,300 30.3 Power Generation .... .. . . 15 10 50 300 45.6 Subtotal . . 585 700 1,450 2,855 16,9 Total demand . . 3,153 3,510 5,025 7,170 8.3 SOURCE Office of Technology Assessment -. Table 5C-16.Global Fertilizer Demand (thousand metric tons) Compound annual growth rate, 0 / 0 1979-80 1984-85 1989-90 1980-90 Asia/Oceania . . . . ., 3,8 Indian Subcontinent ... . . 4.8 Peoples Republic of China ... . . 7.0 United States . . . . . 9.9 Canada . . . . . . . 0.7 Latin America ., ., . . . 2.8 Middle East . . . . . . 1.2 Africa ., . . . . . 1.5 Western Europe ., ... ... ... 9.2 Eastern Europe . . . . 13.3 4.9 7.8 9.7 11.8 1.0 4.5 1.5 2.2 10.4 16.0 5.9 11.4 13.2 13.3 1.2 6.3 2.0 3.0 11.8 19.0 3.9 7.2 5.7 2.1 3.9 6.9 5.6 6.2 2.1 3.6 Total, . . . . . . . 54.2 69.8 87.1 4.3 SOURCE Off Ice of Technology Assessment PAGE 185 180 l Technology Transfer to the Middle East Table 5C-17.Global Ammonia Demand (thousand metric tons) Compound annual growth rate, 0 / 0 1979-80 1984-85 1989-90 1980-90 .. Asia/Oceania . . . . 5.4 6.5 7.7 3.1 Indian Subcontinent . . . 2.9 6.4 10.0 9.6 Peoples Republic of China . . 6.3 8.7 12.7 6.5 United States . . . . . 15.1 15.2 17.0 1.2 Canada . . . . . . . 1.5 1,8 2.3 3.9 Latin America. . . . . . 2.0 4.4 6.5 9.2 Middle East . . . . . 1.4 2.2 3.2 8.5 Africa. . . . . . . 1.0 2.1 3.1 11.2 Western Europe . . . . . 13.7 14.6 16.4 1.8 Eastern Europe . . . . 19.4 25.3 29.6 3.8 Total . . . . . . . 68.7 87.2 108.5 4.1 SOURCE Office of Technology Assessment ..-. Table 5C-18.U.S. Ammonia Demand (thousand metric tons N) 1978-79 1979-80 1984-85 1989-90 Synthetic fertilizer production . . 10,906 12,015 11,235 12,330 Ammonia demand: Fertilizers . . . . . . 11,260 12,175 11,580 12,720 Industrial demand . . . . 3,060 2,940 3,690 4,315 Total . . . . . . . 14,320 15,115 15,270 17,035 SOURCE Office of Technology Assessment. Table 5C-19.U.S. Nitrogen Imports, 1979.80 Country Metric tons Canada . . . . . . . . 847 U.S.S.R. . . . . . . . . 689 Mexico . . . . . . . . 286 Trinidad/Tobaga . . . . . . 276 SOURCE. Office of Technology Assessment PAGE 186 . Ch. 5Petrochemlcal Technology Transfers 181 APPENDIX 5D: REFINING CAPACITY I N THE MIDDLE EAS T The close relationship which exists between petrochemical production and refinery product mix makes the status of Middle Eastern refining capacity and future plans important 1 Surplus capacities and low operating rates have resulted in poor profitability in the world refining industry in recent years. Despite this, plans for construction of new distillation capacity in th e Middle East have continued unabated through the late 1970s and into the 1980s. At the end of 1981, plans were announced for new projects that would increase world crude distillation capacity by approximately 10 million barrels per calendar day (mmb/cd) or 12 percent over current capacity. In view of small predicted growth in demand and a current world overcapacity in excess of 20 mmb/ cd, if these were to be completed, the world surplus would surpass 30 mmb/cd, for a surplus of 50 percent. The fact that capacity is planned does not, of course, mean that it will actually be built. Fesharaki 2 predicts that as much as 7.6 mmb/cd will come onstream, with 60 percent of this likely increase coming from major crude oil exporters OPEC, Mexico, and Egypt. About half of the planned capacity increase in OPEC nations is al 1 ila[{r]al in t h~ i app(,ndix ({)m+,+ from f [(~+h:]rak] and 1 ) I. 1 +,iak 01F,( ~ht (;ulf, :Ind the t{orl(f l)t~troleun~ ,Ifark(,[, 19h, { Chaptt,r Y The ~t,f]nlng I ndustr} ( f)mp(otf t(~ F;cononucs of [ nitt~d .s( Z][(J. iln(l Fore]Am f{t,f]n~ng, pr~~partci for the [ ~ S I k,partrnent of F:ncrgf 1)} t ht, I)A( 1<. ( f) ( {)n~ultant+ and Iing]nwr<, I n( I 1Oustf)n, cx., 1 )twen)h{,r 1 ~j~ !) %{,~.t ~~)n (< an~i J.;, ~ a~l{)nal 1)[,t r~)]~.u n] (, ~u n{.~1, [T~)rnn) i[ t ~,{, on [{ ~,. f[nt,rj l-l(,xll]il[~y l{<,t_ln[jr,} Ifc.YIhIII(\ Ikwcn]t)vr 1 !)ho. (haptcr 1(r,n)ptt]t ]t [ I)r)+]t ](]n t)f Larlou+ %gment + of t h(, [ S J{(,flning [ nclu+ trf (hapL[>r 1( <~n]petlLl\c ~;(f)n(lnli~s of Supp]? lng ] ncrt,ment n] L S F: ast [{,zie}, What I;uturr f~v Irat) Iteflnc,r+?, !lfddlt l.;asf ~~conon]i( [)igest, I:tIh :~, 1984, pp. 20-, an(i .Jl)hn ,igilahu{, b;urope+ Jf orrltwi I{efiners, 7h(, .\ ew }ork 7irn(~.s, Nla~ 1, 1 9X4, p D 1 2 Ibid, p 86. ready under construction, while most of the other OPEC projects planned for the mid-1980s have already gone through the feasibility and engineering stages. There are several reasons for OPEC nations to push ahead with downstream processing. Four of them, however, may ensure their aggressive pursuit of oil refining as a downstream operation. These are: 1 ) limited alternative development opportunities within many OPEC nations; 2) massive amounts of capital can be channeled into these prestigious and visible investments without contributing significantly to inflation in the domestic economy; 3) OPEC nationals have already achieved considerable experience and success in the hydrocarbon sector; and 4) these countries hope to capture a major share of the world market. Table 5D-1 shows present and planned refining capacities in OPEC and the Gulf through 1986. More than a 50-percent increase in OPEC capacity is planned for the mid-1980s. Kuwait Petroleum Corp. (KPC) has acquired West European firms such as Gulf Italiana SPA, allowing it to market oil output in the form of products rather than crude oil. The goal of the strategy is to obtain the maximum value-added. It was reported that in December 1983, 118,000 b/d were sold by KPC and its subsidiaries in Europe, where the firm sells under the Gulf brand name. During the 12 months ending in September 1983, Kuwait sold 5 million tonnes of refined products in Europe, considerably less than Algeria (7.75m) or the Soviet Union (32.5m). 3 SW }tlcharci ,Johni, Kuwa]t akf~s LIp ( ;ulf ( )]1+ F;ur{)pt,an 11 ant 1(,, Fi~8Jlcid rlm(l.s (I,ondonl, l~{>t) 1, l:lh$, p 11 PAGE 187 182 l Technology Transfer to the Middle East Table SD-1 .Current and Projected Refining Capacity in OPEC and the Gulf, 1981-86 (thousands of barrels per calendar day) Under Additional 1981 (+) construction (+) planned (=) 198 6 Iran b . . ... . 1,235 1,235 Iraq b . . . . . 249 140 389 Kuwait . ., ... 554 58 154 766 Qatar 14 47 61 Saudi Arabia c . . 787 734 466 1,987 UAE . . . . 126 56 172 354 OPEC Gulf ., . . . 2,965 1,035 792 4,792 Algeria . ... . . 442 344 786 Ecuador . . . . 87 108 195 Gabon . . . . . 20 20 Indonesia . . . . 486 196 265 937 Libya . . . . . 142 220 362 Nigeria . . . . . 260 260 Venezuela. . . . . 1,349 150 1,499 Other OPEC..... . . 2,786 406 867 4,059 Total OPEC . . . 5,751 1,441 1,65 9 8,851 Bahrain . . . . 274 274 Oman . . . . . 47 47 Other Gulf . . . . 321 321 Total OPEC and Gulf . 6,072 1,441 1,659 9,102 a As discussed in the text, plans exist for refining additions beyond those shown in this table; some are spurious some speculative and others fairly clearly planned, but for the post-1986 period. b The situation in Iran and lraq is confused. The extent of the war damage is not clear. Moreover, both countries had completed new capacity on the eve of the war and both had plans to scrap someoutmoded capacity These capacity estimates should be treated with circumspection c Saudi Arabia Includes Neutral Zone refining of 80 rob/cd SOURCE: Fesharaki, 1983 PAGE 188 CHAPTER 6 Telecommunication s Technology Transfer s PAGE 189 Contents INTRODUCTION . . . . . . . . Page . . . . . . . 185 TELECOMMUNICATIONS IN THE MIDDLE EAST . . . . . . . 186 Telecommunications Systems . . . . . . . . . . . . . 186 Manpower Requirements . . . . . . . . . . . . . . 190 Telecommunications Systems in the Middle East. . . . . . . ........: 191 Perspectives of Recipient Countries and Firms . . . . . . . . . 211 Perspectives of Supplier Countries and Firms . . . . . . . . . 227 IMPLICATIONS FOR U.S. POLICY . . . . . . . . . . . 236 CONCLUSIONS . . . . . . . . . . . . . . . 237 APPENDIX 6A. TELECOMMUNICATIONS PROJECT PROFILES IN SELECTED MIDDLE EASTERN COUNTRIES. . . . . . . . 238 Saudi Arabian Project Descriptions . . . . . . . . . . . 238 Egyptian Project Descriptions . . . . . . . . . . . . 240 Algerian Project Description . . . . . . . . . . . . . 242 Iranian Project Description . . . . . . . . . . . . . 242 Tables Table No. Page 51. Market Shares of Telecommunications Equipment Exports to Saudi Arabia From OECD Countries, 1971, 1975-80 . . . . . . . . . . 194 52. Selected Telecommunications Contracts in Saudi Arabia . . . . . . 194 53. Market Shares of Telecommunications Equipment Exports to Kuwait From OECD Countries, 1971,1975-80 . . . . . . . . . . . 198 54. Selected Telecommunications Contracts in Kuwait . . . . . . . 198 55. Market Shares of Telecommunications Equipment Exports From OECD Countries, 1971, 1975-80 . . . . . . . . . . . 202 56. Market Shares of Telecommunications Equipment Exports to Algeria From OECD Countries, 1971,1975-80 . . . . . . . . . . . 204 57. Market Shares of Telecommunications Equipment Exports to Iraq From OECD Countries, 1971, 1975-80 . . . . . . . . . . . 206 58. Selected Telecommunications Contracts in Iraq . . . . . . . . 206 59. Market Shares of Telecommunications Equipment Exports to Iran From OECD Countries, 1971, 1975-80 . . . . . . . . . . . 208 60. Saudi Arabian Telecommunications Budgets As Compared to Total Budgets . . 212 61. U.S. Competitive Position in Telecommunications Markets in the Middle East Between 1974 and 1982 . . . . . . . . . . . . . 233 Figures l0. Apparent 11. Apparent 12. Apparent 13. Apparent Page Telecommunications Sector Breakdowns-Saudi Arabia, 1974-82 . . 195 Market Share, Saudi Arabia, 1974-82 . . . . . . . . 196 Sector Breakdowns-Kuwait, 1974-82 . . . . . . . . 197 Market Share-Kuwait, 1974-82 . . . . . . . . . 200 PAGE 190 CHAPTER 6 Telecommunications Technology Transfers INTRODUCTIO N The countries of the Middle East realize the importance of modern, efficient telecommunications systems to their future development and security. Middle Eastern leaders consider telecommunications as important a part of their infrastructure as roads and ports. This is reflected in several of the 5-year plans and budgets of Middle Eastern nations. Kuwait, in particular, wants to become a regional and international financial center and has developed telecommunications capabilities necessary to reach this goal. The centrality of telecommunications to development planning is also reflected in cooperative regional efforts such as Arabsat, a regional satellite communications system. There is today great disparity in telecommunications systems in the Middle East. Some countries, like Kuwait and Saudi Arabia, have extremely modern, efficient systems; others like Egypt have comparatively dated equipment and systems which are much less reliable. With the notable exception of Algeria (and in a few cases, Egypt), the countries under study have opted for the most advanced telecommunications systems available-whether microwave transmission networks, satellite communications, or automatic electronic switching. Kuwait and Saudi Arabia in particular have used their financial resources to purchase state-of-the-art technology. This has allowed them to leapfrog conventional technology, becoming testbeds for some technology so new that it is not installed anywhere else in the world. Iran and Iraq found some of the most sophisticated systems as best suited to their needs. Algeria, in contrast, opted for more conventional technologies in order to lessen dependence on foreign expertise and to promote indigenous equipment manufacture. Middle Eastern countries, through their PTTs (post, telephone and telegraph) ministries have made major investments in telecommunications infrastructure during the past decade. In many cases, subscribers have only recently begun to feel the impact of telecommunications, yet the experience has generated a set of rising expectations and further demand for sophisticated equipment and services among business and industry, government agencies, the military services, and residential users. A number of factors have contributed to this growing demand for telecommunications, among them the perceived novelty of the improvements, prestige associated with telecommunications as a sign of modernity, and the utility of improved communications in achieving other development goals. The rapid expansion of national and regional telecommunications systems in the Middle East has made the region a major new market for equipment sales, operation and maintenance, consulting services, and training. This continuing transfer of technologies has increased the capabilities of these countries to expand their commercial and industrial bases; to improve domestic communications; and to explore possibilities for regional and international cooperation. On the other hand, continuing dependence on foreign suppliers, and the use and control of the systems, are sometimes controversial issues associated with these technology transfers. This chapter first examines the present status of the telecommunications systems in each of the six study countries and in the region. Perspectives of recipient and supplier countries and firms are then discussed. U.S. suppliers have won sales of all types of telecommunications equipment and services in countries such as Saudi Arabia and prerevo185 PAGE 191 186 l Technology Transfer to the Middle East .- lutionary Iran, but overall, U.S. firms have not In assessing competition among suppliers and been a dominant force in telecommunications implications for U.S. policy, special attention trade in the region. In the world telecommuis paid to the role of supplier government finication market, U.S. firms have lost ground mincing in competition for sales of telecommuto Japanese suppliers during the past decade. nication technology. TELECOMMUNICATIONS IN THE MIDDLE EAS T TELECOMMUNICATION S SYSTEM S Telecommunications systems generally include: 1) telephone and telex equipment, 2) transmission equipment, 3) mobile radio, 4) video and radio broadcasting equipment, and 5) data communications equipment. During the past decade, telephone and telex have been the major imports of the Middle East, making up well over 50 percent of total imports of telecommunications equipment and services for most countries. Transmission equipment imports have been the second largest, valued at 20 percent of total telecommunications imports in some cases. The following section briefly explains the application of the major telecommunications technologies in each of these categories. Telephone and Telex Equipment A standard telephone set consists of an apparatus that includes a telephone transmitter, receiver, and switchhook. Other types of telephone equipment used onsite by a subscriber are coin telephones, answering machines, intercoms, call restrictor devices, and station accounting systems. A telex is a direct-dial telegraph service wherein subscribers can communicate directly through circuits of the public telegraph network. Teleprinters (instruments with a typewriter keyboard and printer) send and receive messages through the system. Both telephone and telex use switching mechanisms to interconnect the circuits of the equipment. Manual switching requires a switchboard staffed by an operator, whil e automatic switching can be performed electro mechanically or electronically. Electromechanical switching uses analog technology, wherein mechanical (dialing) and voice signals are transformed into a continuous signal of varying frequency and used to activate the switches. Electronic switching uses electronic devices to connect circuits and usually involves computer-controlled (software) circuitry. It can operate using analog or digital technology (see box A) Digital technology converts dialing and voice signals into discrete electrical pulses that form computer-understandable streams of information. Because it uses the power of a computer, digital switching technology can offer additional subscriber services such as abbreviated dialing, call transfer, conferencing, speed calling, call cost readouts, and reliable billing. Technically, digital technology is an improvement over analog equipment becaus e it results in less deterioration of the trans mitted signal, higher speed, and simultaneou s transmission of multiple calls. At the sam e time, because digital technology is more so phisticated, use by local personnel in develop ing countries may be more difficult. Indeed software engineers for digital systems are i n short supply worldwide, not just in develop ing countries 1 Almost all of the worlds telephone plants evolved using analog transmission; most of them will remain so for years to come because of the billions of dollars invested. However it is probable that if telecommunications com panies were to start anew, telecommunication s channels would be almost entirely digital, with the possible exception of the local loops be Information provided by Continental Page, December 1983 PAGE 192 Ch. 6Telecommunications Technology Transfers l 187 Box A.Analog v. Digital Transmission There are two basic ways in which information of any type can be transmitted over telecommunication media: analog or digital. Analog transmission entails transmittal of a continuous signal in a continuous range of frequencies. Sound consists of a continuous spread of frequencies from about 30 to 15,000 Hz (Hertz, or cycles per second), or at most 20,000 Hz for persons with excellent hearing. (Sound cannot be heard by humans below 30 or above 20,000 Hz.) Although it is technically possible to transmit across this large range over the telephone wires, the telephone companies, conscious of costs, transmit a range of frequencies that may vary only from about 300 to 3,000 Hz, a range wide enough to make a persons voice recognizable and intelligible. When telephone signals travel over lengthy channels, they are packed together, or multiplexed, so that one channel can carry as many such signals as possible. The multiplexed signals have different frequencies so that they do not interfere with one another, but they are still transmitted in an analog form. Digital transmission means that a stream of on/off pulses is sent, such as occurs in computer circuits. These pulses are referred to as bits. It is possible today to transmit at extremely high bit rates such as 4,800, 9,600, and 56,000 bits per second. An analog and digital transmission signal are shown below: analog: A transmission path can be designed to carry either type of transmission: this applies to all types of transmission paths, whether wire pairs, high-capacity coaxial cables, microwave radio links, satellite, waveguides, or fiber optics. Any type of information can be transmitted in either an analog or digital form. For example, the telephone channel is generally an analog channel, but computer data can be sent over the telephone lines by using a modem (modulator/demodulator), which converts the digital data into a continuous (analog) range of frequencies. In a similar manner, any analog signal can be converted to digital signals for transmission. Codecs are circuits that convert signals such as speech and television into a bit stream and convert such bit streams back into the original signal. SOURCE: Adapted from James Martin, Future Developments in Telecommunications (Englewood Cliffs, N.J.: Prentice Hall, Inc., 1977), ch. 4. tween a subscriber and the nearest switching office. Some developing countries, such as Kuwait and Saudi Arabia, are installing pulse code-modulated (PCM) systems in which voice and other analog signals are converted into a stream of bits that look like computer data The economic factors favoring digital over analog transmission stem from two aspects of these technologies. First, it is becoming possible to build channels of high bandwidth, those with high information-carrying capacity. Thus, many existing wire-pair channels, which represent an enormous financial investment, could be made to carry much more traffic. Second, whenever the signal is amplified in analog transmission, the noise and distortion is amplified with it. As the signal passes through its many amplifying stations, noise is amplified and cumulative. With digital transmission, however, each repeater station regenerates the pulses and new clean pulses PAGE 193 188 Technology Transfer to the Middle East are reconstructed and then sent to the next repeater. Thus, the digital pulse train is more impervious than the analog to distortion in the signal. Several factors are thus pushing the economic calculus in favor of digital transmission: 1. the trend to much higher bandwidth facilities; 2. the decreasing cost of logic circuitry, which is used in coding and decoding the digital signals and in multiplexing and switching them; 3. the increase in capacity that results from use of digital repeaters at frequent intervals on a line; 4. improvements in codec design, enabling speech to be encoded into a smaller number of bits; 2 and 5. the rapidly increasing need to transmit digital data on the networks. Facsimile systems transmit information on a written page by scanning the page electronically and more rapidly than one character at a time. Their benefits include more rapid transmission of written material than via telex, the elimination of typographical errors, and the possibility of transmitting graphics. Facsimile machines are gaining popularity in the Middle East, where difficulties have been encountered in transferring Arabic script to electronic keyboards. Current choices in facsimile systems involve low-, medium-, or high-speed models and analog or digital equipment. Transmission Equipment Transmission equipment enables transmission of information within the exchange area and on shortor long-distance hauls. The transmission can involve physical connections between two points (wire), or transmission which occurs through a space (wireless). It can involve analog technology that enables only one telephone conversation per circuit, or digital technology that enables many telephone conversations to be transmitted simul. 2 See Box A for definition of cock. Bits are binary digits which can take on one of two values, typically written as O or 1. taneously on one circuit. The advantages of digital over analog technology include higher reliability, better reception, and the transmission of voice, data, text, and video over the same circuit. Transmission lines include wire and cable for trunk lines that connect subscribers between two central offices or switching exchanges. Also included are coaxial cables which are transmission lines consisting of a small copper wire insulated from another conductor of larger diameter (usually a copper braid). Coaxial cable is often more desirable than wireless transmission equipment in that it is more secure for transmitting sensitive information and it provides high-quality service unaffected by changing weather conditions. Other transmission lines include wiring within the exchange and cable laid underwater (submarine cable). High-frequency radio (other than mobile) involves wireless transmission and is often used for military applications. Microwave uses high-frequency, highly directional radio signals (above 890 megacycles per second) to transmit multiple communications channels (broadcast or video circuits between two points that have relay stations). The quality of transmission is comparable to that of coaxial cable. Repeater or relay stations receive signals through antennas, amplify them, and retransmit the signals to the next station. Two types of microwave systems are available, line-of-sight and over-the-horizon. Lineof-sight systems permit transmission in relay links of about 30 to 35 miles on average, although single links of 100 miles may be possible if ground terrain permits. Transmission can extend to distances of 3,000 to 4,000 miles with many links. In comparison to cable transmission, attractive features of line-of-sight systems are high and flexible channel capacity, easy expansion of capacity, shorter installation time, and better adaptation to difficult terrain. Over-the-horizon systems often use tropospheric scatter technology to span longer distances (up to 700 miles) without relay links. Signals are diffracted in the atmosphere. Be- PAGE 194 Ch. 6Telecommunications Technology Transfers 189 -.- cause of the long distances, these systems are useful for transmitting across large bodies of water. They require very large antennas and very high-powered transmitters and thus tend to be costly and sometimes unreliable. Fiber optics are composed of fine glass fibers that transmit information by converting digital electrical impulses into light beams. The information is carried through the fibers, which physically connect sender and receiver. These fibers are smaller and lighter than conventional copper wires and can carry much more information than a typical metal cable using digital signals. A single optical fiber, for example, may carry thousands of telephone calls. Optical fibers can carry a mix of signals simultaneouslytelephone, cable television, radio, video, and data. They can also transmit signals four times farther than metal cables without repeaters to amplify the signal. The fibers are manufactured with glass of high silica content and few impurities. The raw materials used in making glass fibers, unlike copper, are among the worlds most plentiful substances. 3 They also do not conduct electricity and are not subject to electromagnetic interference, which means less noise in data communications. Fiber optic transmission is difficult to intercept or interfere with and is adaptable to hazardous conditions, making it useful in many military applications. This technology is, however, still comparatively experimental for long-haul distances and costs are higher than for other transmissio n methods. There are three types of multiplexer, which enable the simultaneous transmission of several channels on a single circuit. There are three types. Frequency division multiplex transmits two or more signals on a common path by using different frequency bands for each signal. Those with large capacity can carry, for instance, one television channel and 600 to 900 telephone channels on a single microwave carrier. Time division multiplex transmits two or more signals on a common path by using different time intervals for different signals. This technique is less expensive to implement than frequency division multiplex, but is not compatible with frequency division multiplex systems and is not suitable for a large number of channels. Finally, pulse code modulation obtains a number of channels over a single path by modulating each channel on a different frequency and demodulating it at the receiving point. Satellite transmission uses a satellite placed in geostationary orbit 4 to communicate telephone, radio and television, and data signals. The satellite operates essentially as a microwave relay in the sky, receiving microwave signals and retransmitting them to Earth. The Earth station is a dish-type antenna that receives and transmits. Mobile Radio Mobile radio involves radio service between a fixed station and one or more mobile stations. Land mobile radio includes conventional mobile radio and mobile telephone (mobile stations hooked into a central public telephone switching network). The new cellular type of mobile telephone system allows a higher user .. 4 A geostationary orbit is that of an object traveling about the Earth's equator at a speed matching the Earth's rotation, thcrcby maintaining a cOnstant relat,iOn to c(rtain point+ on the Earth. PAGE 195 190 l Technology Transfer to the Middle East density in a geographic locale but requires sophisticated computer control. Paging systems are small frequency-modulated (FM) one-way radio receivers which page individuals. Many pagers can occupy a channel if receiving only data messages rather than voice. Current choices include tone only or tone and voice paging. Marine radio involves radio transmission between two units at sea or between sea and land, and air-ground communications involve radio transmission between aircraft and the ground for navigation and communications purposes. Video and Radio Broadcasting Equipment Closed circuit television (CCTV) includes cameras, monitors, receivers, control consoles, scan converters, and lines interconnecting the system with the receivers. Radio broadcast transmitters and studio equipment include amplitude-modulated (AM) and FM transmitters, antennas, lines, consoles, and recordin g and playback equipment. Television broadcas t transmitters include very high frequenc y (VHF) and ulta-high frequency (UHF) trans mitters, antennas, Lines, consoles, recordin g and playback equipment, cameras, and mobil e vans 5 Data Communications Equipment Data communications equipment connects computers to the telephone network. Up to 4,800 bits per second of data can be transmitted on regular voice telephone lines. Modified lines enable faster data transmission. This equipment includes concentrators, modems, multiplexer, and data communications switching. MANPOWE R REQUIREMENT S From the perspective of Middle Eastern countries importing telecommunications technologies, a central concern is with manpower a Very high frequency refers to a band of radio frequencies between 30 and 300 megahertz. Ultra-high frequency refers to a band of radio frequencies between 300 and 3,000 megahertz. requirements for operating and maintaining equipment. Contracts for supply of equipment almost always include requirements that the supplier maintain the equipment for some years. As the discussion that follows shows, some of the most advanced telecommunications technologies require less maintenance than traditional equipment. Telephone operations (the center of these systems) remain, however, labor-intensive. Because skilled manpower shortages are a major factor constraining effective absorption of telecommunications technologies in many of the countries under study, it is important to note that modem analog telephone systems are more people-intensive than digital electronic systems. As a rule of thumb, approximately 150 employees are required for every 10,000 lines of analog equipment, compared with 135 to 145 employees for digital lines. The skill mix also differs, with more college-trained technical personnel and computer and programing specialists required for digital systems. An advantage of electronic switching systems (ESS) compared to electromechanical switching systems (EMSS) is that EMSS requires 10 to 20 inside plant personnel per 10,000 lines in order to maintain (continually oil and adjust) the switches. The work force consists primarily of semiskilled laborers. In the electronic system, only one inside plant person per 10,000 lines is needed; the system is almost unattended. The central operation and maintenance center has a computer monitor that keeps track of the system. If a fault occurs in a line, it is registered and reported on teletype. The system identifies the faulty printed circuit card, and a skilled worker (who has a supply of all needed types of circuit cards) is then sent to replace the card. The repair is thus a card-changing procedure, not a work-bench operation. The faulty card is returned to the manufacturer for repair or disposal. Servicing and maintaining telecommunications equipment is a major issue in the Middle East, and particularly in Saudi Arabia and Kuwait. Saudi nationals are generally not PAGE 196 Ch. 6Telecommunications Technology Transfers l 191 trained in maintenance functions; these tasks are left to foreign nationals. In Kuwait, the Japanese consortium that installed and conducted initial servicing on the telephone systems was called back after 3 years of local maintenance; the local maintenance reportedly left the system in need of major overhauls. All of the major suppliers provide extensive training programs. U.S. firms that were interviewed, however, noted that nationals often lack motivation and that supplier personnel normally are required to perform maintenance. With foreign contractors involved in servicing and maintenance, the installed equipment reportedly functions well. Analysis of contracts in the six nations under study indicates that much of the equipment purchased since the early 1970s is still serviced by foreign suppliers. The harsh physical environment of the Middle East further hampers maintenance of telecommunications equipment. Digital systems require air conditioning and special modules to protect equipment from dust and sand. Where required, these elements are always included by suppliers as part of the equipment package. These special applications further complicate maintenance procedures and normally prolong dependence on the supplier. These problems associated with maintenance clarify the preference of Middle Eastern leaders for some of the more advanced technologies. Digital switching, for instance, is less expensive to maintain then analog switching. Similarly, microwave relays can often last thousands of hours between repairs, while cable networks require almost daily maintenance. Manpower requirements in telecommunications are geared heavily toward clerical and craft workers. As a point of reference, in the United States the telephone subsector of communications clerical workers comprise 45 percent of the total work force, and craft workers 33 percent. 7 . Japan [l(c~Jtl>l ]lunic:itiIJrls 1<1 ngintcrin~ and (t)n~ult)ng (,J f~ ( I Kuwait i{[luct,2int [art rl~, r, \licfdle 1<.a.st F;(ono[r]ic f)f~est, oct. 1.>. 19X2, p !)(). [ S llur(au of I,al)rjr Stat istic~. I)ull(tin ::20h6, \pril 1981 Telephone equipment provided to Egypt under U S Commodity Import Program Telephone operations tend to be very intensive. The more advanced the telecommunications technology, the higher the proportion of professional, technical, and managerial personnel required and the fewer total workers required. The skill mix also differs, with more college-trained technical personnel and computer and programing experience required for digital systems operations. Skilled manpower shortages have been a major factor constraining effective telecommunications technology absorption in the Middle East. In Egypt where unemployment has been a problem, decisions about telecommunications technologies have been made to take account of broader social goals. The result has been that operations are less efficient, judged by international standards. 8 ,, !,: the laborTELECOMMUNICATION S SYSTEMS IN TH E MIDDLE EAS T Saudi Arabia Saudi Arabia has taken the advanced-technology route to telecommunications. Working 8 For example, ARENTO in Egypt employs more personnel than are needed in order to help solve the countrys high unemplo~ment problem. The 1 W! 1 statistics show that f+;g~pt haci oter 1,000 emplo~ees per 10,000 lines (,AT&T I,ong I.ines, 7ht1 t{orfd .s Telephones, itlorris f}lains, N,tJ.. 1982), which is six or se~en times greater than the ratio deemed adequ at[ for efficient operations, PAGE 197 192 l Technology Transfer to the Middle East closely with foreign firms, the country has built an extremely efficient telecommunications network. The network was greatly expanded in the last decade, with the number of exchange lines quintupling between 1976 and 1981. In 1982 there were 789,000 telephone subscribers, or 11.2 lines per 100 inhabitants, just over the world average of 10.5 lines. 9 This coverage is quite extensive by Middle Eastern standards, given that the World Telephone Zone 9 (Middle East and Southeast Asia) average is 1.1 lines per 100 inhabitants. Much of this telephone expansion began in 1978 with the awarding of a contract to L. M. Ericsson of Sweden and Philips of the Netherlands to install 480,000 new telephone lines. Of the six countries under study, Saudi Arabia has the second highest percentage of automatic telephone operation, with 99.4 percent being automatic switching system control (97.1 percent electronic control [ESS] and 2.3 percent electromechanical control [EMSS]). Saudi Arabia is also the only country which has private telephone operations, which encompass 12 percent of the total telephones. With regard to telephone use in the Kingdom, 70 percent are for residential use (60 percentmain, 10 percent-extension) and 30 percent are for business use (20 percent-main, 10 percentextension). Several large-scale projects have been completed to enhance the transmission network. The Backbone Telecommunications Project consists of 1,420 kilometers of east-west coaxial cable between Taif and Dammam via Riyadh and a 160-kilometer microwave link between Jeddah to Taif via Buhr, Mecca, and al-Hada. The work was performed by Sartelco, a Saudi Arabian-based subsidiary of Sirti (Italy), using cable from Philips. The Intra-Kingdom Microwave Communications Project enhances long-distance transmission for telephone and television and covers 10,000 kilometers. It links Al-Ain with 9 AT&T, Long Lines, The World Telephones, Morris Plains, N. J., 1983. See also Robert Bailey, Telecommunications, Middle East Economic Digest, Nov 18, 1983, p. 14. King Khalid City, Hofuf, Salwo, and Dawaheen, and Riyadh with Dormah and Zolam. The system was implemented by Western Electric International of the United States and includes 300 microwave towers with a 35,000 line capacity. Microwave links have also been established between Saudi Arabia and Sudan, with a capacity of 300 telephone lines and 92 television channels. A smaller, local digital microwave system was implemented by Telettra of Italy in Riyadh to link government buildings with certain government official residences. Saudi Arabias domestic satellite communications network, Domsat, links 11 cities Jeddah, Riyadh, Medina, Hayel, Abha, Borayda, Tabik, al-Bahah, Jizan, Najran and alJawf. Harris Corporation of the United States supplied the mobile Earth stations with 11meter antennas to link with Intelsat satellites. As of 1979, three Earth stations for use through Intelsat were installed by Mitsubishi Electric Company of Japantwo in Riyadh and one in Taif-with a total of 569 circuits. 10 Saudi Arabia has begun to experiment with domestic optical fiber transmission systems. A 45-kilometer, 6-fiber cable has been installed by Philips in Jeddah and Riyadh. The exchanges have a capacity to handle 1,920 telephone calls per fiber. By 1980, 1,200 public pay telephones had been installed in 23 towns and cities. By 1982, 2,000 mobile telephones had become operational, having been integrated into the exchanges installed earlier using Ericsson technology. In addition, a fully electronic, multiplex-exchange telex system was completed in 1979. Using six computers, it has a capacity of 15,000 lines and serves 100 cities and towns. It was developed by a Saudi Arabian prime contractor, Hajji Abdullah Alireza Group, in cooperation with Fredericks Electronics Corporation (U.S.). J. Chamieh (cd.), Saudi Arabia Yearbook (1.ebanon: The Research and Publishing House, 1981 ). 1 I International Trade Administration, U.S. Department of Commerce, Market Survey: The Telecommunications and Electronic Data Communications Market in the Middle Flast, Washington, D. C., 1982. PAGE 198 There are currently 12 telex machines per 10,000 inhabitants in Saudi Arabia, which, on average, is the highest ratio in the world. 12 Facsimile terminals and other data transmission equipment are also being imported. Facsimile machines are popular in the Middle East, since they scan and transmit an entire page electronically and thus are ideal for communicating information in Arabic. Saudi Telephone is managed by Bell Canada under contract. Bell Canada has also assisted in establishing eight repair service centers in Riyadh, Jeddah, Dammam, Abha, Taif, Mecca, Medina, and Borayda. Ericsson has established four computerized operation and maintenance control centers at Riyadh, Jeddah, Damman, and Taif to trace faults in the system. An engineering department has been set up with recent Saudi engineering graduates, assisted by Bell Canada staff. Also, two permanent 32-room training facilities in Riyadh and Jeddah with two mobile training units have been established. Bell Canada conducts training, averaging 60 hours per student, in Arabic and English with advanced courses provided in Canada. 13 Saudi Arabia has adopted advanced technology in all telecommunications sectors-switching, transmission networks, mobile telephones, and telex. Partly because of this, Saudi Telephone has improved productivity and reduced its manpower ratio by 10 percent to 43 employees per 1,000 working lines. During this rapid expansion period, despite continuing system enhancements and increased usage, service is reportedly satisfactory. In 1980, more than 1 million international calls per month were completed by 500,000 subscribers (annual average of 24 calls per subscriber); 58 percent of these calls were made directly by the subscriber. 14 In 1981, total international calls topped 17 million, with the most calls going to (rank ordered) the United States, Kuwait, Great Britain, and Bahrain. 15 12 Ibid, 1 ,\l id dJ( Ea.sf J;conomir l~igest, Sept. 1 /+. 1981. ltobert llaile~r, Saudi Arabia, Telecommunications, L;leLtronics, and the Nliddle flastSpecial Report, .tfiddle East I;conomic Digest, ,Januaqr 19%1: International Telecon~munication Union ( ITU), Iearbook of COmmm Carrier Tekwrm]umcation Statistics, Geneva, 1980. AT&T, op. cit., 1983. Ch. 6Telecommunications Technology Transfers l 193 The system in Saudi Arabia is highly responsive. Bell Canada reported that: 1) 94 percent of customers in Riyadh receive operator services within 10 seconds, 2) 75 percent of national long distance calls are answered within 10 seconds, 3) almost 80 percent of directory assistance calls are answered within 10 seconds, and 4) nearly 50 percent of calls to international operators are answered within 10 seconds. The system is also reliable: 90 percent of all calls are successful, and 98 percent of subscribers receive a dial tone within 3 seconds. 16 During the 1970s, imports of telecommunications equipment underwent tremendous growth-from OECD countries it went from $17.4 million in 1971 to $740.6 million in 1980 (in nominal dollars). The beginning of the Second Development Plan in 1976 ushered in a rapid increase in telecommunications imports. Also, a large influx of population in the cities between 1974 and 1980 increased demand on the existing infrastructure and spurred major telecommunications expansion projects, carried out primarily by Ericsson of Sweden and Philips of the Netherlands. During 1970 to 1980, the volume of telecommunications imports amounted to 2 percent of Saudi Arabias total import volume and almost 4 percent of world imports of telecommunications equipment. A slight retrenchment in telecommunications import spending began in 1980, owing to an increased focus on agriculture, industry, and health sectors in the Third Development Plan and to completion of some major segments of the networks. Three supplier countries are prominent in Saudi Arabias telecommunications market, as shown in table 51. Table 52 shows selected telecommunications contracts awarded by Saudi Arabia. Firms from the Netherlands and Sweden together have accounted for more than half of the contracts, in terms of dollar value, in recent years. U.S. firms had a 16 percent share in 1980, which represented a major shift from the mid-1970s, when they had approximately a 30 to 48 percent share of the Saudi Arabian telecommunications market. 16 Saudi Arabia Yearbook, op. cit., 1 WI. 17 SITC #764, 7249. See table 51. PAGE 199 Table 51 .Market Shares of Telecommunications Equipment Exports to Saudi Arabia From OECD Countries, 1971, 1975-80 (SITC 764 or 7249) United West United Total exports Canada States Japan France Germany Italy Netherlands Kingdom Sweden (in 000 U.S. $) 1971 . . 0.3 15.1 2.4 11.1 1,4 2.2 0.0 55.9 10.4 17,406 1975 ....., 0.4 21.4 8.5 2.9 8.2 7.9 0.7 18.5 14.1 92,814 1976 . . 6.5 28.0 3.2 1.6 3,8 5.4 2.3 36.5 10.6 134,756 1977 . . 2.8 47.9 4.7 6.3 5,2 5.3 0.6 14.8 10.8 288,246 1978 . . 1.5 33.9 4.2 1.8 4,1 4.0 21.5 9.4 18.5 568,962 1979 . . 1.4 17.7 4.3 2.3 2,7 4.3 31.6 13.3 19.7 883,836 1980 . . 0.8 15.9 4.9 4.0 4,4 0.7 44.0 7.1 16.0 740,561 NOTE Market shares calculated as value of exports reported by exporter as a percentage of total telecommunications exports to recipient reported by all OECD exporters SOURCE Compiled for OTA from Organization for Economic Cooperation and Development (OECD), Trade of Commodities Market Summaries Exports (1971 1975-80) Table 52.Selected Telecommunications Contracts in Saudi Arabia Amount Supplier country Year Supplier Description (millions of dollars) Canada . . . 1978 Bell Canada Norway . . . 1977 Teleplan United Kingdom. . 1978 Preece, Cardew, and Rider France/Saudi Arabia 1982 Cegelec Contracting Co. (joint venture company) Italy/Saudi Arabia ., 1981 Sirti/Sartelco Japan. . . . 1982 Nippon Electric Co. (N EC) Netherlands/Sweden/ 1977 Philips/L. M. Ericsson/ South Korea/Norway (6 phases) Dong Ah/NorconsuIt United States . . 1979-82 Litton Industries (Sub: Aydin (4 phases) Corp. and Karkar Electronics) SOURCE Compiled for OTA from selected issues of the Middle East Economlc Digest Management of Saudi telephone system Management of telephone network expansion Design and supervision of telecommunications network Construction and maintenance of communication network Installation of telecommunications system in Yanbu Supply of fiber optics communications system linking Ras Tanura with Barri and Abgaig with Dhahran Increase telephone network from 200,000 lines to 1.2 million by installing worlds first stored program control (SPC) system Improve military communications systems, provide national air defense communications network, provide digital multiplex equipment 1,000 185 22.3 14.3 65 16 4,400 1,720 PAGE 200 Ch. 6 Telecommunications Technology Transfers 195 Saudi Arabia invested between 1974 and 1982, approximately 62 percent of telecommunications expenditures for telephone and telex, 20 percent for transmission, 15 percent for video and radio, 2 percent for mobile radio, and 0.1 percent for data communications (see fig. 10). For telephone and telex (1974-82 total expenditures of $8,035 million), the largest allocations were made in the switching and total communications subsector. U.S. firms maintain slightly more than 30 percent of this market, with firms from Sweden and the Netherlands holding about 20 percent shares each. In transmission equipment sales, firms from South Korea captured 49.2 percent of the sales, due to their role in expansion of the Saudi cable network. In video and radio equipment sales, U.S. firms had a minor share of 7.6 percent, while those from France had 70 percent and dominated this market. U.S. firms had an over 90 percent share in mobile radio and data communications, but these represented only about $290 million total expenditures by Saudi Arabia from 1974 to 1982 (see fig. 11). By far the major growth areas in Saudi telecommunications over the last decade have been in development of integrated communications systems. The Philips-Ericsson-Dong Ah-Norconsult-Bell Canada consortium has received the major share of this market and has effectively closed off the market to other suppliers. U.S. and U.K. firms have been supplying communications systems for specialized Figure 10. Apparent Telecommunications Sector BreakdownsSaudi Arabia, 1974-82 Mobile radio% I Telephone and telex% SOURCES: Complied for OTA from Intel-Trade: Inbucon. 1980: MEED Telecommunications applications such as air traffic control and military and industrial communications. Kuwait In 1981, Kuwaits telephone exchange capacity reached 286,200 lines, a 100 percent increase over 1979. The number of lines in active use numbered 171,427, with 231,640 telephones connected to these lines. This amounts to about 15.8 telephones per 100 residents, the highest ratio among the six countries in this study. Despite this relative abundance of capacity, forecasts of population growth and business demand have lagged behind actual growth. As a result, while some exchanges have excess capacity, others cannot meet the demand. In some newly developed areas, businesses and residences reportedly must wait 2 to 3 years for a telephone, owing to shortages of lines and equipment. Almost two-thirds of all telephones are residential; the rest serve business. The system is 100 percent automatic: 89.9 percent EMSS and 10.1 percent ESS. All switching equipment installed between 1980 and 1982 is fully electronic digital systems. There are 16 local telephone exchanges and all telephone operations are government-run. Three Earth satellite stations are linked to both the Atlantic and Indian Ocean Intelsat networks. Domestically, a mobile telephone system is in place, with 4,019 mobile units in use as of 1981. In 1979 an electronic telex enchange of 7,500 lines was completed by Olivetti of Italy. Kuwait had only one TV broadcasting station in 1979, but a second channel was to be available later that year. The station range includes Bahrain and parts of Iraq and Saudi Arabia. Estimates of TV receivers number 375,000, and radio receivers number 1 million. The Kuwait telecommunications system has generally been a reliable network. Recently, however, there have been localized problems. Kuwaits development began earlier than that in most neighboring countries and many difficulties can be traced to the strain imposed by explosive population growth on systems be PAGE 201 196 l Technology Transfer to the Middle East Figure 11 .Apparent Market Share, Saudi Arabia, 1974-82 Total telephone and telex$8,035 + million Switching equipment$6,369 4 + million United Kingdom 10.6% Norway 2.9% West Germany 1.92% ltaly 0.82% / Saudi Arabia 0.1% Belgium 0.2% Japan 0.2% France 0.6% Training, maintenance, consulting $1,3971 + million United States 6.0% Sweden2.3% Saudi Arabia 0.2% Total video and radlo $2,000.7 + million United States 7.6% Unknown.2% Saudi Arabia 0.9% Finland 0.7% I / United Kingdom 12.7% Netherlands-24.40/0 Italy 1.0% France 0.2% i Sweden-24.7% Japan 0.1% u Saudi Arabia 0.1% United States.8% Total transmission$2,596.2 + million United Kingdom 3.9% Italy11.4 /0 United States31.6% Japan- 2.22% Saudi Arabia.2% Sweden 0.2% South Korea.7% Netherlands .1% [ I Total mobile radio$266.5 + miIlion Norway 3.4% 1 Japan 3.3%, Saudi Arabia 0.3% c PAGE 202 Ch. 6Telecommunications Technology Transfers l 197 ... Figure 12. Apparent Sector Breakdowns Kuwait, 1974-82 Mobile radio Video and radio% Telephone and telex% SOURCES: Compiled for OTA from Intel-Trade: U.S. State Department cables ginning to age. The Communications Ministry has adopted two sets of measures to deal with the problemseveral contracts for rehabilitation of the cable network, and more reliance on microwave links and other technologically advanced equipment. Its major shortcoming is in keeping up with localized demand, which requires accurate planning for exchanges that require excess capacity in order to support future increased needs. One of the worst problems for Kuwaits telecommunications users has nothing to do with outmoded or overburdened equipment, but with routine loss of service due to cutting of cable by contractors working on roads and buildings. To alleviate this problem, a utility management system will be installed by a Japanese consortium at a cost of $28 million. This system will include computerized mapping of all underground utility networks in the 500-square-kilometer city. l8 Kuwaits average of telephones per 100 inhabitants is 15.8, well above the world average of about 10.5. Moreover, usage of the system by subscribers is the highest among the countries under studyan average 20.4 international calls per subscriber during 1980. While Kuwaits telephone system is the smallest of the six countries, it provides the greatest amount of capacity to its population and is the most heavily used. Given Kuwaits small population and geographic area, its recent development of the most extensive and most used telecommunications network among the six countries reflects its desire to become a world business and financial center. This requires an excellent communications system, especially internationally. Kuwaits extensive satellite transmission facilities and data transmission capabilities, and its recent purchases of high-technology equipment to expand its telecommunications network are evidence of the commitment to this goal. Early expansion of oil production capacity of Kuwait in the 1950s resulted in large development expenditures throughout the late 1960s and 1970s. Expenditures in the telecommunications sector reached almost 3 percent of all Kuwaiti imports in 1970. Imports of telecommunications equipment, parts, and accessories from OECD countries rose from $7.7 million in 1971 to $90.1 million in 1980 (in nominal dollars) as shown in table 53 and represented from 0.2 percent to 0.7 percent of world telecommunications imports. Table 53 also lists the market share of telecommunications equipment exports to Kuwait from OECD countries in 1971 and 1975 through 1980. As shown in the table, Japanese firms have controlled between one-quarter and one-third of Kuwaits telecommunications market during the 1970s. Kuwaits ties with its former colonial ruler Britain are still strong, as evidenced by a large volume of British exports in this sector to Kuwait. Over the last decade, Swedish firms have had several large contracts in telecommunications, but failed to maintain a stable foothold. Firms from West Germany and the United States have succeeded in gaining about 15 percent each of Kuwaits market. Table 54 shows selected telecommunications contracts awarded in Kuwait. Kuwait investment in the telecommunications sector from 1974 to 1982 was approxi- PAGE 203 Table 53.Market Shares of Telecommunications Equipment Exports to Kuwait From OECD Countries, 1971, 1975-80 (SITC 764 or 7249) United West United Total exports States Japan Belgium France Germany Italy Netherlands Kingdom 1971 . 4.3 38.5 4.9 Sweden Switzerland (in 000 U S $) 0.8 4.8 0.0 0.6 15.6 10.9 1.5 7,700 1975 . 11.8 15.7 2.4 12.5 7,3 4.6 0.4 10.6 30.4 2.2 16,742 1976 . 26.8 20.0 0.5 18.2 10.1 3.0 0.1 6.1 10.8 0.5 52,701 1977 . 20.2 22.0 0.4 4.8 3.3 4.2 0.1 21.3 16.8 4.8 55,315 1978 . 5.8 23.1 1.2 3.8 5.8 1.0 0.6 28.4 17.9 9.1 68,506 1979 . 5.6 35.6 0.7 2.2 10.3 0.7 0.9 11.7 28.6 1.4 1980 . 14.3 26.8 0.5 1.7 15.5 0.8 68,534 3.2 23.1 10.8 0.5 90,084 NOTE Market shares calculated as value of exports reported by exporter as a percentage of total telecommunications exports to recipient reported by all OECD exporters SOURCE Compiled for OTA from OECD, Trade of Commmodities Market Summaries Exports (1971, 1975-80) Table 54.Selected Telecommunications Contracts in Kuwait Supplier country Year Supplier France . . . 1980 CIT-Alcatel and Cables de Lyon United Kingdom. . 1981 Pye Ltd. United Kingdom. . 1980 Pye Telecommunications Sweden . . . 1979 L. M. Ericsson Kuwait . . . 1980 Abdel-Aziz Abdel-Mohsin al-Rashid Kuwait . . . 1981 Kuwait Prefabricated Buildings Company Japan . . . 1980 Nippon Electric Co. Japan. . . . 1980 Japanese Telecommunications Consulting and Engineering Japan. . . . 1981 NEC United States . . 1979 Ampex international Amount Description (millions of dollars) Coaxial cable linking Kuwait and Safwan, Iraq 5.0 Complete communications system for Kuwait police 10.8 Telecommunications network maintenance 5.9 Telephone exchange extension; AXE type equipment 15.0 Underground cable installation International telephone network extensionsSalmiya Exchange Satellite ground station installation; repairs on NEC station completed in 1966 Telephone network consultancy for management improvement, planning of repairs, preparation of specifications for international tenders, provision of training 7.0 7.5 4.4 7.4 SOURCE Compiled for OTA from selected issues of the Middle East Economic Digest Install one central microwave station and six auxiliary ones. Design 13.0 is by Kuwait Ministry of Communications Supply of mobile television unit with auxiliary equipment 1.5 PAGE 204 Ch. 6Telecomrnunications Technology Transfers l 199 mately 75 percent in telephone and telex, 17 percent in transmission, and 4 percent each in mobile radio and video and radio (see fig. 12). As figure 13 shows, in contrast to the situation in Saudi Arabia, Swedish firms have been dominant suppliers of telecommunication equipment in a number of categories. Egypt The number of telephone lines in Egypt in 1981 was estimated at 375,000 lines for between 400,000 and 500,000 telephones. 19 Approximately one-half of the telephones are residential and one-half commercial, yielding about 1.2 lines per 100 inhabitants, a very low ratio. Telephone service availability varies widely by geographical location, as large urban areas have a telephone density of 4.35 per 100 population while other areas have a density of 0.36 per 100 population. 20 In 1978 the waiting list of subscriber applications numbered 200,000 with only 48 percent of registered demand being met. 21 The telephone system is operated by the government and is 89.2 percent automatic. By all reports, in recent years Egypt telephone system has been generally antiquated (some parts dating back to 1929) and in poor repair. A 1978 master plan developed by Continental Telephone International of the United States recommended major rehabilitation of and extensions to the Egyptian system, upon which the government acted by awarding a major contract to a European consortium in 1980. Small exchanges in remote villages often consist of manual switchboards. These con 19 U.S. Department of Commerce, Marketing in Egypt, O;rerseas Business Report, 81-31. 1981. AT&T, op. cit., 1983. R. J. Saunders, ,J. J. Warford, and B. Wellenius, Telecommunications and Economic lle~efopment, JHU Press, published for The World Bank, July 1983. trast with the larger, multiexchange, crossbar automatic switching equipment used in Cairo and Alexandria. In 1979 an Alexandria exchange was renovated by CIT-Alcatel (France); their E-10 digital electronic exchange equipment supplied 10,000 lines. Ericsson of Sweden supplied 20,000 lines at Al-Mazha in Cairo in 1979. Extensive cable and microwave linkages (supplied by Raytheon of the United States) connect the smallest exchanges to Cairo, where most of the international traffic flows. Other international switchboards exist in Alexandria and Port Said. International calls are handled by two submarine cables with 480and 230channel capacities or via an Earth satellite station linked to the Intelsat Atlantic Ocean network. For training purposes, CIT-Alcatel has installed an E-10 model exchange in the Arab Republic of Egypt National Telecommunications Organization (ARENTO) trainin g center. Continental Telephone and Arthur D. Little are both being funded by the U.S. Agency for International Development (USAID) under-its $200 million loan and grant program to ARENTO to supply managerial and technical advice. Two telex exchanges operate in Cairo and Alexandria, and mobile telephone service has been established in the Cairo area. In addition, special microwave transmitters, using tropospheric scatter technology, have been established to facilitate communications between cities, oil terminals, gas plants, and offshore oil complexes. 22 -. *Tropospheric scatter technology involves use of radio frequency waves reflected off the troposphere and received at a distant station on Earth. 35-5137 0 84 14 : QL 3 PAGE 205 200 s Technology Transfer to the Middle East -. Figure 13.Apparent Market ShareKuwait, 1974.82 Total transmission $754 + million Kingdom0.8%, India 0.2% Radio and television broadcasting is well developed. A network of 24 radio transmitters have the capability of reaching the entire population. Fourteen transmitters have shortwave range and the 10 others are mediumwave. Between 6.6 million and 6.8 million radio receivers exist, according to 1979 estimates. Twenty-eight television transmission stations, some with color capability, reach 1.3 million receivers and 7 million people. 23 The 1978 Continental Telephone study assessed the efficiency of the Egyptian communications network. Study participants found that only 23.9 percent of all calls dialed in Cairo were completed, emergency telephone Switching equipment $269.3 + million United Kingdom 2.8% + Unknown 2.2% Japan 0.8% West Germany 0.6% lndia 0.1% (Ericsson) ) Total video and radio$15.5 + million France-9.70/0 1 numbers were frequently inoperable, and 50 percent of all service vehicles could not be used, owing to lack of spare parts. Moreover, the report concluded, Egypts current problems could be attributed, in part, to the many different types of equipment in the system supplied by many different firms. Maintenance and interoperability problems could arise in the future, the report warned, if similar procurement strategies are followed in rehabilitating and expanding the system. Attempts have been made recently in the Egyptian telecommunications sector to make its administration more efficient and cost effective. Outside consultants in the late 1970s stated that some of the major problems plaguing the Egyptian telecommunications opera- PAGE 206 Ch. 6 Telecommunications Technology Transfers l 201 tions stemmed from the inclusion of telecommunications in the public sector. As a result, 1) realistic rates and tariffs could not be set for telecommunications service or equipment installation, 2) employees could not be easily hired and fired, and 3) all money went into and came out of a central revenue fund, allowing for no fiscal autonomy. The consultants recommended that telecommunications be made an autonomous public entity, much like Egypt Air or the Suez Canal Authority. Egypts response was to pass law No. 153 in 1981, which established the National Organization for Wire and Wireless Telecommunication, whose shares are 100 percent owned by the government. The organization still reports to the Ministry of Communication but is otherwise autonomous. Although it is still too early to gauge the long-term effects of this change, tariffs and installation charges have recently risen to more realistic levels, and the new organization can retain its own earnings. 24 Redundant labor will continue to be a problem, however; attrition has not eased the burden. The problem will become more severe when the electromechanical switches in the Egyptian system are converted to electronic switches, displacing many semiskilled workers. 25 For many reasons, major layoffs of these personnel are not expected. By far, Egypts telephone system is the least extensive of the six countries in this study. It reaches just over 1 of every 100 inhabitants. As for system usage, 1977 statistics show low international usage (an average of 1.1 international calls per subscriber in 1977) but high domestic use (an average of 50.0 national calls per subscriber that year). 26 Imports of telecommunications equipment, parts, and accessories from OECD countries went from $11.9 million in 1971 to $180.4 million in 1980 (nominal dollars). 27 Telecommunications equipment comprised about one percent of the Egyptian budget and from 0.2 to 0.9 percent of world imports in telecommunications during these years. As shown in table 55, Frances position in the Egyptian telecommunications market has continued to grow. CIT-Alcatel and ThomsonCSF are major French firms, along with West German and Austrian companies, doing business in Egypt. Thomson-CSF won a major $1.8 billion contract to overhaul and expand the Egyptian telephone network. Great Britain and Sweden have also held sizable and fairly stable market shares. The share held by U.S. firms has expanded substantially over the last decade, from 2.6 percent in 1971 to 17.9 percent in 1980. This was due partly to Egypt improved relations with the United States. USAID grant and loan programs to rehabilitate the Cairo telephone system have provided major opportunities for introducing U.S. telecommunications firms into the Egyptian market. Telephone and telex was the major area of investment in the telecommunications sector by Egypt from 1974 to 1982, accounting for 83.5 percent of total telecommunications expenditures. Transmission accounted for 11.7 percent, while video and radio, and mobile radio accounted for 4.5 percent and 0.2 percent, respectively. Of the over $2,300 million spent on telephone and telex, France had a 36 percent share; West Germany, 26 percent; Austria, 26 percent; Sweden, 5.5 percent; and the United States, 5 percent. Of the $324 million total spent by Egypt from 1974 to 1982 on transmission, U.S. firms dominated, with a 48 percent share. Those from West Germany had a 28 percent share; Japan, 10 percent; and Great Britain, 9 percent. The major shares of the video and radio expenditures of $123 million from 1974-82 went to firms from Great OF;CII 7rade of (ommoditre.s: .Ifarket .Sumn]aries. i;xport, s, 1971, 1975-80, see table 55, PAGE 207 Table 55. Market Shares of Telecommunications Equipment Exports to Egypt From OECD Countries, 1971, 1975-80 (SITC 764 or 7249) United West United States Japan France Germany Italy Netherlands Kingdom Sweden Switzerland 1971 . 2.6 2.0 16 25.9 3,0 0. 2 13.0 43.6 1.2 1975 . 2.7 17.8 26.3 8,5 0.7 0.4 15.2 21.9 2 2 197 6 4.2 9.5 25,6 9.3 3.7 0.8 30.4 13.5 13 1977 .. 14.4 2,5 23.7 10.0 0.6 0.5 31.6 12.9 1.8 1978 . 16.8 5.3 26,0 10.8 3,7 1,0 14.9 14.4 1.2 1979 .... 14.4 9.3 36,3 8.6 3.2 1.0 11.2 12.1 0.4 1980 ., ... 17.9 8.5 31.2 4.4 3.9 4,3 14.7 10.7 0.6 NOTE: Market shares calculated as value of exports reported by exporter as a percentage of total telecommunications exports to recipient reported by all OECD exporters SOURCE Compiled for OTA from OECD Trade of Commodities Market Summaries Exports (1971, 1975-80) Total exports (in 000 U S $) 11,886 59,479 70.377 97,262 141,882 183.286 180.440 I i I PAGE 208 Ch. 6 Telecommunications Technology Transfers s 203 .. Britain (47 percent), Japan (29 percent), the United States (17 percent), and France (6 percent). Algeri a The number of telephone lines in Algeria is approximately 606,000. The telephone system is government-run and involves only 63.1 percent automatic switching. About two-thirds of registered telephone demand has been met. 28 Twelve satellite ground stations have been in existence since 1979 for domestic telephone, telex, and television transmissions, connecting 14 Saharan towns with major population centers. An international Earth satellite station connects Algeria to the Atlantic Ocean Intelsat network. All major towns are connected to Algiers by telex, and several have their own international telex linkages. 29 Television and radio broadcast centers are located in Algiers, Oran, and Constantine. Radio transmissions operate on medium and short wave, covering territory well beyond Algerias borders. Microwave linkages with France ensure reception of European television broadcasts. By 1982, there were over 2 million radio receivers and 350,000 television receivers in the country. Despite the rather limited coverage of the telephone system.3 telephone lines per 100 inhabitantsdomestic usage by subscribers is relatively high, with an average of 31.2 domestic calls per subscriber in 1979. To deal with geographic difficulties in network transmission, Algeria opted for advanced satellite systems for part of its domestic operations. Algerias telephone service is, however, frequently unreliable and slow, with long-distance service usually surpassing local service. Algerian imports of telecommunications equipment, parts, and accessories peaked in 1976 at about $140 million. The 1976 figure represented slightly less than 3 percent of Algerias total imports. In recent years these im-U.S. I)epartment of Commerce, \larketing in Algeria, ()~(rwvi.v Bu.sines.y Ii(port, 82-07, 1982; AT&T, op. cit., 1983. II 1, Nelson (cd,), Algeria; .4 Ccwnt~Tr Stud: (J!ashington. 1). (,: The American Uni\ersitjr, 1979). ports have made up about 1.5 percent of the total. Algeria represented from 0.3 (1970) to 1.7 (1976) percent of world imports of telecommunications equipment, parts, and accessories from 1970 to 1979. During the 1970s, Algerias national plans emphasized investment in heavy industry and development of natural gas resources. Associated development of a satisfactory telecommunications infrastructure was critical to achieving these investment goals. Algerias extensive use of satellite technology for much of its domestic transmission network has facilitated communication linkages to the major population centers from natural gas fields, mining areas, and industrial production complexes across vast areas of sparsely populated desert. Table 56 presents the market shares of telecommunications equipment exports to Algeria from OECD countries in 1971 and 1975-80. France has historically been a large supplier to Algeria. By 1980, French firms held 28 percent market share, much reduced from their 79 percent share in 1971. Algeria has attempted to diversify its technology purchases for political reasons and to improve its position in negotiating prices for its liquefied natural gas. 30 U.S. firms have maintained their market share in the Algerian telecommunications area. This share has, however, fluctuated noticeably. Some observers believe that Algerias support for the Palestinian movement and its nonalignment policy may serve to stimulate diversification of suppliers, rather than extensive purchases from U.S. firms. Telephone and telex represented 68 percent of the Algerian telecommunications market from 1974 to 1982; transmission, 30 percent; and video and radio, 2 percent. Total telephone and telex expenditures during this period were approximately $456 million, with Spain winning 70 percent of this, Sweden winning a 27 percent share, and the United States, 2.5 per30 Martin Roth and Michael Frost, Algeria Welcomes Japanese Export Drive, Middle East Economic Digest, Aug. 28, 1981, pp. 4-5, PAGE 209 I -. i Q s Table 56. Market Shares of Telecommunications Equipment Exports to Algeria From OECD Countries, 1971, 1975-80 (SITC 764 or 7249) I ~ ~ 2 United West United Total exports I States Japan Belgium Denmark France Germany Italy K I ngdo m Spain Sweden Switzerland (In 000 U.S. $) 1971 . :. I 0.8 0.3 0.2 0.0 790 7 4 2.3 5 9 11 0 0 28 13.338 1975 . 5.4 3.0 0 3 0.3 377 15.4 1.0 4 3 145 161 17 120.062 I 1976 .., 3.0 4,2 0.5 0.2 26.0 9 4 14 4 0 170 329 11 138.301 1977 . 9.2 8.7 2 7 0.3 228 100 2.3 6.6 131 227 1.6 94,908 1978. 8.9 11.9 0.9 3.3 156 215 2.0 6 8 9 5 168 11 101.048 1979 .., ., 8.2 3.1 11 2.3 180 223 1.5 5.8 200 73 8.7 128.918 I 1980 ...., 4.8 2.6 5.6 3.4 278 17.4 15 12.7 7 5 7 6 6.1 100.068 I NOTE Market shares calculated as value of exports reported by exporter as a pe,.e~tar~e L t(]tal tde~ornrnurl, at((,,~ r. ~ t. tn reri~ ,en, ~fJpo-tPc b} ,31 I OECD ~ x .Jo~tP~~SOURCE Compiled for OTA from OECD Trade of Comrnod/t/es ~ar~et SUrnrnarles Exports (1971 1975-80) I I PAGE 210 Ch. 6Telecornrnunications Technology Transfers l 205 . cent. Of the total transmission expenditures further civilian expansion in the telecomof $200 million from 1974 to 1982, Japan had munications area. a 53 percent share; France, 39 percent; and the United States, 6 percent. Iraq Statistics on Iraqi telecommunications are largely unavailable. The number of telephones in Iraq numbered approximately 320,000 in 1977, which amounts to 2.6 telephones per 100 inhabitants. Existing facilities include crossbar automatic telephone switching equipment with new exchanges installed in Baghdad, Nineveh, and Tamim, and microwave networks between major cities. Two Earth satellite stations exist at Dubail for use in international communications; they were built by Telspace, a subsidiary of CIT-Alcatel, of France. ] A telex system located in Baghdad had 1,462 lines in 1980, but a contract has been awarded to triple this number. The number of radio receivers in the country is estimated at 2 million. Based on rather scarce information, it appears that rapid progress was being made prior to the war with Iran to build the capacity of the Iraqi system. Major upsurges in government spending, begun in the mid-1970s, resulted in a near doubling of the number of telephones. Iraq has chosen crossbar switching and advanced digital systems, although usage in Iraq is still lowamong the lowest of the six nations in this study. Large-scale importation of telecommunications equipment by Iraq did not begin until 1975, when expenditures on OECD imports reached $65.5 million. Imports of telecommunications equipment, parts, and accessories from all suppliers represented over 3 percent of Iraqs total imports and over 1.1 percent of the total world imports of telecommunications equipment for these years. 32 Shrinking oil exports, beginning in 1982, and the prolonged war with Iran have, however, dampened Telecommunications, Ielectronics, and tht~ hliddle I;ast Special Report, )Iliddle F;a.st Economic Digest, Januar> 1981. &[ h. Jeartmok of International Trade .Statis[ics, op. cit., 1982. Table 57 lists the market shares of telecommunications equipment exports to Iraq from OECD countries in 1971 and 1975-80. With more than a 49 percent market share in 1980, France was dominant. Since the mid-1970s, Iraq has sought a leadership role among the Third World nonaligned nations and reduced its technology trade with the Soviet bloc countries. As a result, Japan, Britain, and the Netherlands made minor inroads into the market. U.S. firms won less than a 1 percent market share. Table 58 includes data on representative recent telecommunications contracts awarded by Iraq. By telecommunications sector, telephone and telex have taken the major share of Iraqi expenditures (58 percent). Transmission has taken a 19 percent share; video and radio, 17 percent; and mobile radio, 6 percent. Of the total $1,170 million spent on telephone and telex between 1974 and 1982, Japan garnered 62 percent of the market; France, 13 percent; Yugoslavia, 11 percent; and Sweden, 2 percent. Of the total transmission expenditures of $380 million during this time period, 45 percent went to Sweden, 25 percent to Japan, 11 percent to Italy, 7 percent to Great Britain, 6 percent to France, and 5 percent to unspecified suppliers. Swedish firms were particularly strong in wire and cable and land mobile radio, while Japan and Italy were both strong in microwave systems. Total video and radio expenditures from 1974-82 were over $340 million, with France having a 54 percent market share; Japan, 27 percent; and Switzerland, 8 percent. Japan was dominant in television (with 75 percent) and France was dominant in radio (84 percent). Total mobile radio accounted for $115 million in this time period; Sweden had 93 percent of the market and Japan and Great Britain had minor shares. Iran By 1979, Iran had 1,234,000 main telephone lines (95.8 percent automatic percent EMSS, 3.8 percent ESS), which is approxi- PAGE 211 Table 57. Market Shares of Telecommunications Equipment Exports to . United West States Japan Belgium France Germany Italy . 1971 3.8 4.6 2.8 26.3 0.8 1.9 1975 . 2.4 26.9 1.6 19.4 7.7 3,3 1976 ... 7.6 21.3 2.4 14.3 11.6 2.6 1977 ., ... 2.0 9.9 0.8 51.5 4.6 0.6 1978 . 0.5 14.0 0.3 42.3 2,7 0.2 1979 . 0.4 13.4 1.0 43.4 4.1 0.7 1980 . 0.8 8.2 0.3 49.4 2.3 1.8 .. Iraq From OECD Countries, 1971, 1975-80 (SITC 764 or 7249) United Total exports Netherlands Kingdom Sweden Switzerland (in 000 U.S. $) 0.2 24.9 0.4 22.7 0.1 31.8 0.1 22.6 11.8 20.4 14.1 9.6 7.8 16.7 32.7 0.3 6.7 5.2 3.7 1.3 3.6 1.5 1.8 4.2 4.8 6.3 6.1 1.1 NOTE Market shares calculated as value of exports reported by exporter as a percentage of total telecommunicatlons exports to recipient reported by alI OECD exporters SOURCE Compiled for OTA from OECD Trade of Commodities Market Summaries Exports (1971, 1975-80) Table 58.Selected Telecommunications Contracts in Iraq Supplier country Year Supplier Description France . . . 1981 Thomson-CSF Provide 27 microwave telephone exchanges France . . . 1980 Thomson-CSF Turnkey construction of telephone network West Germany . 1977 Siemens Reinstallation and expansion of telephone exchange Hungary . . . 1977 Elektroimpex Supply 2,500 color television sets Italy . . . . 1982 Telettra Set up two microwave systems Japan. . . . 1979 Nippon Electric Co. and Construct four computerized telecommunication and video control Mitsui Co. systems Japan. . . . 1981 Sumitomo Construction Co. Supply and install telecommunications facility Japan. . . . 1979 Furukawa Electric Co. Supply 17 telephone networks in Baghdad and surrounding areas, providing an additional 200,000 telephone lines The Netherlands . 1981 Philips Install telephone network Sweden ., . . 1981 SRA Communications Install mobile telephone system Sweden ., . . 1981 L. M. Ericsson Supply and install telephone cables United Kingdom. . 1980 Cable & Wireless Expand international exchange lines Soviet Union . . 1981 NA Construct telecommunications center Yugoslavia . . 1980 Energoinvest Construct two transmission lines NAnot applicable SOURCE Compiled for OTA from selected issues of the Middle East Economic Digesf 4,797 65,513 70,686 76,131 185,410 193,784 254,860 Amount (millions of dollars) 152.0 144.5 0.6 1.0 42.0 19.1 64.5 59.3 11.1 82.2 166.7 3.9 3.3 21.0 PAGE 212 Ch. 6 Telecommunications Technology Transfers 207 mately 3.4 lines per 100 inhabitants. Irans system is completely government-run. Eightyone percent of the lines are residential, and about one-half of them are located in Teheran. The 1979 waiting list for subscribers amounted to 750,000, meaning that only 62 percent of registered demand had been met. Data from 1976 indicate that 8.9 million national calls were made that year compared with 1.1 million international telephone calls. 33 The major long-distance transmission networks in Iran employ microwave systems rather than multichannel cables, owing to the countrys difficult terrain and other technical advantages of microwave systems. As of 1977, this microwave network consisted of four segments: 1) the CENTRO cross-country network, which traverses 2,300 kilometers and has 45 relay stations, beginning at Tabriz and serving Porn, Kashan, Isfahan, Nain, Yazd, Kerman, Barn, and Zahedan; 2) the TeheranAssadabad large-capacity network; 3) the Isfahan-Shiraz network linked to Teheran; and 4) a nationwide microwave network encompassing six major routes, covering 3,560 kilometers, and having a capacity of 960 telephone channels. In addition, a ground satellite station is located at Assadabad near Hamadan to facilitate international traffic. There are direct dial facilities to 27 foreign countries and 74 operator-assisted switchboards at the international telephone exchange. To deal with its vast geographic area, dispersed population, and rough terrain, Iran opted for microwave transmission in the rnid1960s and continued to expand this network nationwide. Despite rapid growth in exchange capacity during the 1970s, the number of lines per 100 inhabitants (3.4) is well below the world average of 10.5. Moreover, usage statistics by subscribers as of 1976 were among the lowest of the six countries in this study an average of 1.6 international calls and 13 domestic calls per subscriber in 1976. In 1979, Iran had over 2,980 telex lines and automatic computerized telex centers in several cities. One hundred and fifty cities were equipped with modern teletype and teleprinter systems, which replaced the old telegraph network. Under the Shah, three television channels and four radio networks were operated. Estimates of radio receiver ownership in 1976 were 4.3 million households; of television receivers, 1.6 million households. 34 Iran developed its telecommunications infrastructure earlier than the other countries covered in this study. In its Fourth Development Plan (1968-72), Iran focused extensive investment funds on building its nationwide microwave networks, meeting existing demand for communication services and anticipating requirements for the future, During this period, between 3 and 6 percent of all Iranian imports involved telecommunications equipment, and Iran became a major world market for such items, acquiring 4.5 percent of world imports of telecommunications equipment in 1971. However, in 1972 and 1973, owing to a worsening balance of payments and capital shortage problems, investments in this sector declined. The rapid oil price increases of 1973 and 1974 at the beginning of Irans Fifth Development plan resulted in a major revision, doubling investment allocations. Expenditures on telecommunications projects again increased, reaching a peak in 1976 of $330.5 million. Budget deficits caused by lower oil revenues in 1975 and 1976 resulted in a leveling off of spending by the end of the plan period. Figures on telecommunications imports since the 1979 revolution are not available but, based on OECD export figures, such imports probably fell in the early 1980s to about one-quarter of the 1978 trade total. During the 1970s, firms from the United States and West Germany shared the Iranian telecommunications market almost equally, about 25 percent each, as shown in table 59. The positions of firms from Japan, Italy, and the United Kingdom fluctuated rather widely from year to year but maintained an aver ITU, op. cit., 1980. M. Tehranian, Communications Dependence and Dualism in Iran, Intermediary, vol, 10, No. 3, 1982, pp. 40-44. PAGE 213 Table 59 .Market Shares of Telecommunications Equipment Exports to Iran From OECD Countries, 1971, 1975-80 (SITC 764 or 7249) ~ m Canada 1971 . 6.5 1975 . 4.3 197 6 6.9 1977 . 4.6 1978 0.9 United States 15.2 23.8 38.0 27.0 226 Japan 219 13,9 7 7 9.0 127 Belgium France 1.2 3.9 2.1 7.8 0 4 5.7 0 8 11.8 0 7 7.5 West Germany 22.1 26.8 247 244 21.1 Italy 19.7 9.2 7.4 98 91 Netherlands 0.3 0.4 0.2 0 5 94 United Kingdom Switzerland 5.6 2 5 8 0 10 6 3 1.2 9.5 0.7 13.2 18 Total exports (in 000 U.S $) 91,859 207,965 330.461 252.898 315,323 1979 . 0.0 219 7.2 0.2 4.9 29.8 187 104 5.0 13 139.420 I 198 0 0.0 0.0 173 0.2 2.0 32.6 32.7 14 9.5 21 75,069 NOTE Market shares Calculated as value of exports reported by exporter as a percentage of total telecommunications exports to recipient reported by all OECD exporters 1 SOURCE Compiled for OTA frem OECD Trade of Commodities Market Summaries. Exports (1971, 1975-80) I I PAGE 214 Ch. 6Telecommunications Technology Transfers 209 age of only about 10 percent of the market each. Market shares, as could be expected, have shifted since Irans revolution. With the United States effectively out of the picture, Japan and Italy have been the beneficiaries, assuming 17.3 and 32.7 percent of the market, respectively, in 1980. West Germany strengthened its position to 32.6 percent of OECD telecommunications exports to Iran by 1980. Telecommunications sector breakdowns in Iran between 1974 and 1982 were approximately 70 percent for telephone and telex, 27 percent for transmission, and 3 percent for video and radio. Supplier market share in each of these sectors has changed dramatically since the revolution. As a historic reference point, telephone and telex shares in 1974 were United States, 74 percent; Japan, 13 percent; Sweden, 6 percent; and the United Kingdom, 7 percent. U.S. firms had an 85 percent share of transmission equipment exports to Iran. For video and radio, France had a 77 percent share, the United Kingdom had 14 percent, and the United States had 8 percent. Regional Telecommunications Development The Middle East has focused attention on improving telecommunications among neighboring Arab countries. Several regional projects are under way, many having received their impetus from a telecommunications development plan for the Middle East drawn up by the International Telecommunication Union (ITU) in 1978. 35 The largest regional project being planned is Arabsat which promises to bring significant benefits to countries of the region through improved communications. The system as planned will provide the capability for expanded and more efficient communications not only among countries in the Middle East, but also between them and other parts of the world. Therefore, on the one hand: the technology may be used to promote free flows of information. On the The ITU is a specialized agency of the United Nations, comprising varitJus for-a which plan and administer the details of international telecommunications. other hand, the benefits of the system will depend upon who controls it and how it is used. In light of the different approaches these countries have taken to television broadcasting and their different political stances, they will be challenged to produce joint broadcasts. Furthermore, decisions taken by leaders in each country about what types of broadcasts should be shown could limit information available to local viewers. Thus, the advanced technology embodied in Arabsats planned system could be used to expand or restrict information flows, depending on how the broadcasting is handled. The first Arabsat satellite is now scheduled for launch in November 1984 on a European Space Agency (ESA) Ariane launcher. The second was scheduled for launch by NASAs shuttle STS-25 Atlantis in May 1985. 36 A third will be kept as a spare. Each satellite will have an operational lifetime of 7 years. s7 The main ground control station will be in Riyadh, and an auxiliary station maybe located near Tunis. The concept of Arabsat grew out of a 1953 Arab League agreement to develop effective telecommunications links throughout the Middle East region. This agreement led to the creation of the Arab Telecommunications Union (ATU) in 1958 and its affiliated Arab Satellite Communications Organization (ASCO). ASCO is made up of five permanent Space Shuttle Payloads and Experirnents, S1S Itlissions, 1 through 81, Rockwell International, December 1983. This will be the first flight for Atlantis. Arabsat: A Giant Step for the Middle East, ,Iliddle }+~ast F~corIonic Digest, oct. 15, 198, p, 84: Ford Aerospace to Bui]d Arabsat, Atiation Week and Space 7echnolo~, June 1, 1981, p. 24; Illiddle East ~;conomic Dikrest, Special Report Telecommunications, October 1983. p. 8: Ali A1-M ashat, I)ata Con]munications Ser\ices in the Arabsat S\stem, paper presented at the 2nd Gulf Computer ConferenceDubai, Dec. 14-15, 1982. o illustrate the potential that the s?stem presents for controlling information Arabsat has reportedl~ considered encrypting tclmision broadcasts so as to ensure that the~ can be recei~ed onl} b} appropriate members and that signals cannot be intercepted. See Arabsat Satellites Control Signafs \$ill Be F~ncr}pted, .4 \iation \$eek and Space Technolok?-, hla~ 21, 1984, pp. 1 76-177. PAGE 215 210 l Technology Transfer to the Middle East members (Saudi Arabia, Libya, Iraq, Kuwait, Qatar) and four members elected by the general assembly for 2-year terms. The general assembly consists of the member countries Posts and Telecommunications ministers and is the governing body of the organization. In 1969, the Arab States Broadcasting Union (ASBU) was formed. In 1972 several of the governments of the Middle East asked the United Nations Development Program (UNDP) for assistance in setting up a telecommunications network in the Middle East and the Mediterranean. The UNDP asked the ITU to study technical aspects of such a plan. In the first 5-year phase of the study, ITU drew up a master telecommunications plan for the region, compiled from detailed local surveys. It focused on creating and improving satellite, land, and submarine telecommunications links among the several countries (28 sponsoring governments approved the master plan in 1978Iran, however, was not one of them). ITU estimated that the expenditures for just the international portions of the work would reach $3,000 million by 1990. Egypt, Iraq, Kuwait, Lebanon, Oman, Saudi Arabia, and the United Arab Emirates (UAE) will contribute 35 to 40 percent of the cost; UNDP will contribute a similar share, and the rest will come from nonArab Mediterranean States. In the second 5-year phase, ITU conducted subregional feasibility studies with an emphasis on improving communications in the Red Sea area by using microwave and submarine cables. The third phase will look at the ground network and the training of Arab nationals in telecommunications and broadcast engineering and management. 38 The master plan also suggested diversifying the telecommunications routing so as to increase reliability. Plans are also being made for an intra-Gulf coaxial cable linking the UAE, Qatar, Bahrain, and Saudi Arabia, with a later extension to Kuwait. In 1976, Comsat, of the United States, was given a $100 million contract to provide technical consulting for the Arabsat program. Political issues delayed the program. The contracts for building the three satellites were awarded in May 1981 to Ford Aerospace (United States) and Aerospatiale (France). The final U.S. export license approval was not granted to Ford Aerospace until February 1982. Aerospatiale was reportedly named as the prime contractor because Ford was on the Arab boycott list. However, Ford received 59 percent of the total contract value ($79 of $134 million) and has the largest share of the work. Ford provides the antennas, propulsion units, power converters, communications subsystems, and altitude control systems. Another $40 billion telecommunications master plan MEDARABTELformulated by ITU and funded by the U.N. Development Program and participating countries, is now being implemented. In June 1982, Telettra (Italy) and Thomson-CSF (France) obtained an $18 million contract based on this plan for a microwave link between Saudi Arabia, North and South Yemen, Djibouti, and Somalia. The plan also includes extended telecommunications links with Europe and national and international transmission routes for radio and television broadcasting. Other regional projects under way or planned in the Middle East include: 1) international sea navigation satellites; 2) trans-Gulf cable links; 3) an intercontinental submarine cable between Saudi Arabia, Singapore, Indonesia, and Sri Lanka, costing about $500 million; 4) a coaxial cable link between Algeria, Tunisia, Morocco, and Libya; 5) a coaxial cable link between Kuwait and Iraq in which CITAlcatel of France and BICC Telecommunications of Great Britain are involved; and 6) a telephone network being built by Philips of the Netherlands along a l,200-kilometer highway linking Syria, Jordan, and Kuwait via Baghdad. There are few discernible trends yet in technol38 Middle East Economic Digest, Oct. 15, 1982; Times of Lonogy trade for projects awarded for regional work. don, Feb. 2, 1981. Arabsat, the ITU plan, and MEDARABTEL PAGE 216 Ch. 6Telecommunications Technology Transfers l 211 should create a great deal of business in expanding transmission networks, including Earth stations, submarine and coaxial cables, and microwave systems. Stress has been laid on expansion of the transmission network. By far the largest subsector of expansion has been satellite systems, with U.S. firms holding 76.5 percent of the market and French firms the remaining shares. In microwave systems, the Italian firm Telettra captured a 65.4 percent share. Frances Thomson holds 34.6 percent of that market. Overall, in the transmission sector, which represented $283 million in expenditures from 1974 to 1982, the principal actors have been U.S. firms with 63.2 percent of the market, followed by French firms, with 23.9 percent. PERSPECTIVES OF RECIPIEN T COUNTRIES AND FIRM S Saudi Arabia The rapid expansion of the Saudi telecommunications network has resulted in one of the most modern systems in the world. The Posts, Telegraphs, and Telecommunications Ministry (PTT) has not been averse to introducing advanced technologies-they have installed the worlds first nationwide stored program control telephone system, used electronic digital switching, employed microwave and satellite transmission extensively, and experimented with fiber optic transmission. Given the size of the projects, the rapidity of implementation, and the sufficient funding of the program, it is likely that the firms, as well as the technologies involved will gain increased credibility in the international market. The highest levels of expenditure in the most recent Saudi Arabian 5-year plan are for municipalities, electricity, education, civil aviation, health, roads, and desalinization. Telecommunications allocations are next on the list, representing about 3.7 percent of total expenditures, or $8.7 billion. Most of this amount is set aside for finishing ongoing projects, such as the Telephone Expansion Program and the Intra-Kingdom Microwave Project. The telecommunications budget for the 5year plan and the first three yearly budgets are presented in table 60. Expenditures have fluctuated on a yearly basis since the beginning of the plan and appear to be ahead of schedule. Between 1980 and 1982 alone, over $6.8 billion was allocated in yearly budgets. While the value of contract awards in telecommunications throughout the Middle East fell from 13.9 percent in 1982 to 4.2 percent in 1983, Saudi Arabia increased its purchases in this sector from $570 million in 1982 to $1,726 million in 1983. 40 Demand for telecommunications equipment in Saudi Arabia is expected to continue to rise during the next 5 to 10 years as the telecommunications modernization program is completed. Government ministries and public corporations have accounted for about 85 percent of the purchases of equipment and services; of this, 80 percent is purchased by the PTT and the Ministry of Information. Other ministries are building new headquarters and have a need for large private automatic branch exchange (PABX) systems. To conduct business with the Saudi Arabian government, a local agent and office is required. Joint ventures with Saudi interests are also encouraged. In evaluating responses to tenders, Saudi ministries reportedly give preference to 100 percent Saudi-owned firms over 51 percent Saudi-owned joint ventures. These firms are, in turn, favored over agent-represented foreign companies. In business, Saudi Arabian customs reportedly emphasize trust and personal contact as the basis for consummating business deals. The largest purchaser in the private sector is ARAMCO, which operates an independent 27,000-line phone network, but demands will increase from other purchasers as hotels, uni4 1 op. cit., 19~2 PAGE 217 212 l Technology Transfer to the Middle East Table 60.Saudi Arabian Telecommunications Budgets As Compared to Total Budgets (in millions of U.S. dollars) 1980-84 Plan 1979-80 1980-81 1981-82 1982-83 Total budget .. $237,100 $48,500 $71,418 $86,868 $91 .357 Telecommunications. $ 8,700 $ 1,429 $ 2,574 $ 2,154 $ 2,080 Video and Radio ., ., NA NA NA $ 459 $ 461 Percent of total .. 3.7 2 9 3.6 3.0 2.8 SOURCE J Shaw and D Long Saudi Arabian Modernization The Impact of Change on Stability The Washington Papers New York Praeger 1982); Edmund O'Sullivan Saudi Budget Shifts Emphasis From Infrastructure to Human Resources Middle East Economic Digest Apr. 30 1982, pp 1618 versities, airports, office buildings, and industrial facilities are completed. Minimum requirements for all equipment are the norms recommended by the ITUs CCITT and CCIR. 41 U.S. modifications to these standards appear to be acceptable. 42 Private equipment connected to the public system must be approved by the PTT. For broadcasting equipment, important long-term supplier decisions are made when particular contracts are awarded, since European and American systems are often not compatible. Often, the detailed requirements for specific projects are drawn up by foreign consultants to the PTT. This is true in Saudi Arabia, where Arthur D. Little, Norconsult, Swedetel, ITU, and Preece, Cardew, and Rider have worked on the plans and requirements for large telecommunications programs and then served on the bid evaluation committees. 43 The telecommunications subsector likely to receive the greatest attention over the next decade is that of telephone and telex. With goals to once again double phone capacity and to increase telex capability, large projects are likely to be awarded. Established suppliers who have won the confidence of Saudi Arabian officials and who have long experience in the market are in the best competitive positions. This means that Ericsson and Philips in the switching and user equipment area and Cable and Wireless for telex may benefit particularly from the projected expansion. 41 The International Consultative Committee for Telegraph and Telephone (CCITT) and the International Consulting Committee for Radio (CCIR) are two of the ITU's largely autonomous permanent organizations. 42 Intel-Trade, May 15, 1979. 43 U.S. Embassy, Riyadh, Market Research of Telecommunications Equipment, February 1980. Growth in capacity often reveals hidden demand. So it is with subscriber usage of the expanded telephone system in Saudi Arabia. In 1977, with only 200,000 subscribers, the average number of international messages per subscriber was 5.8 calls. In 1980, with 700,000 lines in operation, each subscriber initiated over 24 international calls. While there appears to be relatively high usage by current subscribers, the physical capacity of the network commissioned may exceed the expected demand through 1990 by about 500,000 lines. Saudi Arabia is, however, building now in anticipation of future demand, given projected rates of urbanization and industrial growth. One indicator of the ability to absorb telecommunications technology is the number of employees per 10,000 phone lines. For a particular quality of service, the fewer persons required the more efficient the operations. In 1980, the total number of employees was given as 12,571, or 284 per 10,000 lines; an estimate for 1981 showed an improvement with 189 per 10,000 lines. 44 By comparison, AT&T used 102 employees per 10,000 lines in 1982. 45 These figures also compare favorably to the estimate of 140 employees per 10,000 digital lines for inside and outside plant operations. Although the figures describe a Saudi system in transition, they show increasing efficiency by employees in operating and maintaining the equipment. The numbers are supported by other information on Saudi Telephone (Sauditel). While 62 percent of Sauditel 44 D. Fargo, World Telecoms Tell Their Plans for Growth, Telephone.}, Sept. 24, 1979, pp. 88-111. 45 AT&T, Statistical Report, AT&T, Basking Ridge, N. J., 1981. PAGE 218 Ch. 6Telecornmunications Technology Transfers 213 employees were nationals in 1981, the proportion of Canadian supervisors was being reduced. The employment goal for the company is 80 percent Saudi nationals. 46 Nationals hold all public interface positions and many managerial roles. Saudi Arabian personnel aim to take over parts of the training program themselves. Saudi nationals, once trained, reportedly have good ability to operate telecommunications equipment. While some with prior education in the United States are already oriented to Western technology, those who are products of the Saudi Arabian educational system have reportedly sometimes faced difficulties in moving from rote learning to programs centered around understanding causes and effects of operations. Planned growth in telecommunications capacity takes into account anticipated growth in demand in conjunction with Saudi Arabias rapidly growing population. 47 At the same time, the country has been experiencing a large influx of population into the cities since 1974. The average population growth rate in urban areas was 7.6 percent annually between 1970 and 1980. In comparison to the overall national rate of growth, this urbanization effect is extreme and may present future problems in that certain exchanges may be overcrowded while others are underutilized. With an estimated 70 percent of its 2.5 million work force being foreign, Saudi Arabia set a goal of reducing the growth of the foreign work force. Projections indicate that the overall labor force may continue to grow through the year 2000. 4 Shortages exist within the managerial, professional, technical, and skilled labor categories, which all affect the labor situation in the telecommunications sector. Estimates suggest that non-Saudi labor encompasses more than one-half of the work force Rijadh (ailingast and F; fficientlj. ,Ifidd)t l.as[ Kf~jnornic Difyl.st, .$pe~ial Report on Saudi Arahi:i, .1 ul~ 19h 1, p. 27. -SeCI (h. 4 for a discussion of ~aric)us e+t irnates of Saudi population, Saudi Arahia-1h[ !tIanpovwr Controters?, .Iliddl( fi~a.st F,conomic Digest, Apr. 24, 1981, pp. 40-41, in these categories, vital to effective absorption of telecommunications technologies. Computer training programs have been established at Sauditels data center and by the National Guard. Telecommunications and broadcasting training institutes have also been conducting programs in Riyadh and Jeddah since 1971. However, these programs have not attracted the number of trainees originally envisioned and have reportedly experienced high dropout rates. 50 Most contracts for telecommunications equipment currently include training (in Eng Industrial Studies and Dcwelopment (enter, .4 (;uide to lndu.~tria] IX\wlopnmnt in Saudi .4r4hii), ~ii~adh, 1 97, ,$liddle 1.;:]s[ b;conon]ic l)i~yst Spmi:i] ii(~port on Saudi ..\r:~bia, ,Ju1}T 19S 1: ITA, op. cit., 1982. At ARAMCOS Ras Tanura Industrial Training Shop, a student tests electronic circuitry PAGE 219 214 l Technology Transfer to the Middle East lish and Arabic), operations, and maintenance provisions. The training goal is often to bring nationals to a level of operational proficiency rather than preparing them to take over all aspects of maintenance, which is usually handled through joint ventures. This has been the case with the Intra-Kingdom Microwave Project, where Western Electric training in management and operations and maintenance was accomplished by Western Electric personnel for the first 12 months after installation and by Sartelco personnel (an Italian-Saudi joint venture) subsequently. Maintenance work is delegated to foreign contractors; thus dependence on suppliers continues. As discussed in the Saudi Arabian project profiles (included in app. 6A), U.S. firms bidding on the telephone expansion contract in 1978 had high cost estimates for operation and maintenance. These estimates may have been instrumental in loss of the contract. Saudi Arabia encourages foreign investment that results in domestic assembly plants and manufacturing facilities for import substitution. To date, there have been limited attempts at local manufacture in the telecommunications field. The Saudi Cable Company, a joint venture with Philips, plans a major expansion. Telephone Industries Co., Ltd., a joint venture with Ericsson, was established in 1976 to manufacture telephone equipment, apparatus and cable. It was licensed by Ericsson to produce cable, 50,000 lines of automatic exchange equipment, 40,000 lines of PABX systems, and 12,000 phone sets per year. By 1979, however, production had not begun. In addition, a Finnish company established a factory to produce TV tubes in 1977. Without plans for extensive local development of a telecommunications equipment manufacturing industry, Saudi Arabia will remain dependent on foreign sources. Increased usage by the residential, business, and government sectors has revealed a pentup demand for telecommunications equipment and services. One particular application of CCTV has had a major impact on education The Economist Intelligence Unit, Quarterlov Economic Re~iew, I,ondon, April 1981. in the Kingdom. By custom, women have been segregated from men at all levels in the educational system. This has also extended to the required use of female instructors to teach female students. Because there have been shortages of female instructors, educational opportunities for women have been stymied. However, the introduction of CCTV into the classroom has enabled male instructors to teach women. As the telecommunications network reached the small towns and villages in the Kingdom, it has provided local businessmen and traders with easy access to the national economy. The network thus has increased local employment, and brought increased prosperity to the outlying regions. Increases in telecommunications capabilities have also enabled the construction of refineries, industry, and exploration sites in remote areas of the country. Expansion of both the civilian and military telecommunications networks in the Kingdom also has had national security implications. The government has acted to integrate these networks and thus improve its command and control capabilities. Litton Industries, of the United States, is participating in this project to integrate the networks. While Saudi Arabias telecommunications infrastructure has grown rapidly, capacity to absorb technology effectively has increased at a slower pace. Accounts of Sauditel accomplishments are impressive. Nevertheless, manpower shortages in managerial and skilled technical areas present continuing problems, despite efforts to establish training programs. Absence of a domestic telecommunications industry means that Saudi Arabia will be dependent on foreign suppliers into the foreseeable future. On the other hand, there is no doubt that Saudi Arabia can operate and maintain an efficient telecommunications system, because the country can afford to pay for operations and maintenance assistance. Kuwait Kuwait has aspirations to be an important regional and international financial center. A PAGE 220 Ch. 6Telecommunlcatlons Technology Transfers ~ 215 .. reliable and advanced telecommunications network is a prerequisite. Kuwaits extensive international investments and foreign assistance programs also require modern telecommunications facilities. In addition, Kuwait Petroleum Company (KPC) has plans to establish itself as a major integrated international oil company. Such an operation requires extensive international communications to support management, production, and distribution. Advanced technology transfers will also enable the Kuwaiti government and business to establish links with databanks overseas. The Ministry of Communications projects a doubling of telecommunications capacity between 1980 and 1985, as follows: 52 1980 1985 1990 Telephone capacity 269,000 381,000-500,000 1,100,000 Telephone subscribers 160,000 345,000 900,000 Telex capacity 6.000 15,000 na Telex subscribers 2,400 5,500 7,500 A major goal is to rehabilitate the telephone system. Major repair expenses are being incurred for telephone cables; $1.38 billion has been allocated to replace damaged underground telephone cables with waterproof ones. Kuwait has imposed large fines on contractors who damage these cables during construction, but the fines have not resulted in an elimination of this problem. Actual construction expenditures for telecommunications grew as follows: 1978 $ 72.2 million 1979 80.6 million 1980 79.1 million 1981 105.7 million 1982 152.4 million During 1982-83, allocations by the PTT fell slightly from $212.9 million in 1981-82 to $201.6 million. The Ministry of Communications is the major consumer of telecommunications equipment. Other major government purchasers are the Ministries of Defense and Public Health. Sales are by tender and are always carried out through a local agent. 52 Kuwait Ministry of Communications, Present and Future Telecommunications in Kuwait, March 1981. rIh[ I;conc)nlist Intelligence [Jnit, Qum-ter)j F,conomi( R(L ~i(}{, I,ondon. Nlarch 1982. Mid-range electronic PABX equipment (10 to 100 lines) can be only sold to the Communications Ministry, which then provides it to private users. Smaller and larger private exchanges can be sold directly to end-users. Most other equipment is marketed directly to private companies and individuals, such as the KPC, shipping agents, newspapers, and banks. Kuwait continues to import the latest and most advanced telecommunications systems. Europe and Japan have come to dominate many key segments of this market, where American firms have lost bids owing to their higher prices. The number of local telephone exchanges is expected to double over the next decade, as will the number of international trunk lines. Sophisticated subscriber equipment, including autodialing, and electronic PABXs, are popular among businesses. Over the next decade, Kuwait is planning to spend $1.5 billion on expansion of special telecommunications networks at ports and transportation centers and along highways. In the transmission field, demand for satellite technology has been generated by the data transmission requirements of banks and financial institutions. Additional microwave linkages and uses for fiber optics will probably be identified over the next 10 years. Since there are no plans to develop a domestic telecommunications equipment manufacturing industry, Kuwait will continue to be dependent on imports into the foreseeable future. In 1981, there were 347 telecommunications employees per 10,000 lines in Kuwait. 54 This compares with an estimated 140 employees usually required to operate and maintain digital equipment. It is also significantly higher than the employee-to-line ratio in Saudi Arabia and Iran. Based on data reported by the ITU (1980), Kuwait annual expenditures for maintenance and repair have been erratic. Through 1973, 54 AT&T Long Lines, op. cit., 1982 35 507 0 84 1 ~ : QL 3 PAGE 221 216 l Technology Transter to the Middle East the costs were low$3,000 to $6,000 per 1,000 main lines per year. The costs in 1974 and 1975 were very high in comparison-$75,000 per 1,000 main lines. Expenditures since then declined, but rose slightly again recently. These costs may be related to two factors. First, the use of many types of equipment and many suppliers during initial implementation of the telecommunications network is making it difficult to maintain sufficient inventories of spare parts and obtain replacements. Second, there have been problems in equipment maintenance. Overall, while there appears to be high demand for a variety of telecommunications services, the capacity of local Kuwaitis to operate and maintain the network efficiently has been limited. With a high rate of population growth and a large expatriate population, Kuwaits demand on international trunk lines is likely to be high. Due to the large population shifts and changing needs of subscribers, it has been difficult to predict and match demand and exchange capacity. The waiting list for telephone subscribers has been large, fluctuating between one and five percent of the total population. Kuwait faces manpower shortages that limit technology absorption in the short term. In the 1975 census, there were a total of 298,415 people classified as economically active. Of these, only 29 percent were Kuwaiti nationals. This situation has created a strong dependence on foreign contractors. For example, a Japanese consortium of Nippon Telegraph and Telephone and Kokusai Denshin Denwa (KDD) planned, designed, and installed the telephone system between 1965 and 1975. Three years after the system was turned over to Kuwait, the Japanese were asked back to renovate, maintain, and operate the system, which had reportedly deteriorated. The new Japanese consortium, Japan Telecommunications Engineering and Consulting (JTEC), that accepted the job rejected a contract renewal offer. Citing payment withholdings and difficult working conditions, JTEC allowed another foreign contractor to take over the role of operator, maintainer, trainer, and consultant for the Kuwaiti PTT. 55 The Kuwait Telecommunication Training Institute was established in 1966 to train nationals in maintenance, operation and supervision of telecommunications systems. Courses cover a broad range of subjects, including English, switching and transmission technologies, broadcasting and tr aining methods. In response to rapid expansion of telecommunications services in Kuwait and limited numbers of Kuwaitis interested in the training, enrollment was recently expanded to a small number of non-Kuwaitis. 56 In the construction field, Kuwaiti firms are apparently becoming large and capable, winning many civil works contracts. Except for Kuwaiti trading companies that procure telecommunications equipment from foreign suppliers for the government, local firms are often not capable of fully absorbing the advanced technology installed. Egypt As its telecommunications facility is modernized and as Beirut has been the site of prolonged civil war, Cairo is likely to emerge as a major regional commercial center. Already, it is serving as a cultural center in the Arab world, exporting television and radio programs from its large broadcast studios. Radio and microwave transmission facilities have improved communications for Egyptian oil companies between headquarters, oil wells, and refineries. Improved and more reliable transmission will probably create a new computer and data-processing industry, producing a demand for indigenous computer programmers. The increased investment in the telecommunications network may help slow the outflow of technically trained and experienced workers from Egypt to elsewhere in the Arab world. Japan Telecommunications Engineering and Consulting (JTEC) Kuwait Reluctant Partner, Middle East Economic Digest, Oct. 15, 1982, p, 90. Telecommunications Training Institute, Prospectus Telecommunications Training Institute, TTI, Safat, Kuwait, 1983. PAGE 222 Ch. 6Telecommunications Technology Transfers 217 Satellite links also have enabled more reliable and timely communications between the Foreign Ministry and Egyptian embassies abroad. Moreover, Egypt has been a major purchaser of military communications equipment from France and other suppliers. The British, for instance, have a joint venture in Egypt to manufacture military radio products. The 1978 master plan for telecommunications developed by Continental Telephone International has apparently been adopted as Egypts official 20-year plan. That plan and the initial budget figures for the 1980-84 development plan in the transport and communications sector allocated $2.4 billion to project investments over a 5-year period. 57 The basic goals are to: 1) increase the number of telephone lines from 700,000 to 1.6 million by 1985, 3.0 million by 1990, and 4.5 million by 2000; 2) attain a telephone line density of 3.7 per 100 inhabitants by 1985; 3) install 12,000 new telex lines by 1985 and 26,000 by 1990; 4) install new and replacement coaxial cable linkages between major cities, submarine cable between Egypt and Saudi Arabia, and microwave linkages between Upper and Lower Egypt and to the Sinai; and 5) establish new broadcasting stations and towers and renovate or replace existing equipment. Eighty percent of all contracts in this field are with the public sectorARENTO (Arab Republic of Egypt National Telecommunications Organization), ministries, or 11 other public-sector organizations. In the public sector, agents are required to represent foreign firms, financing is essential, and political clout is reportedly useful. The private sector, in comparison, has greater access to funds and can buy directly from suppliers. In fact, one source indicates that the key factor in making a successful sale to the government is the availability of favorable financing; the technology chosen is a direct result of the best financial package. 58 Decisions 57 Charles Richards, Egypt Embarks on Crash Modernization Program, .Jliddle Ijas[ Economic Digest, oct, 15, 19R2, ~, H, of convenience rather than technological planning may have resulted in the purchase of a large variety of equipment types that must now be made compatible. The standard for electrical current in Egypt is 220 volts, which benefits European suppliers over American firms. There is no formal statement concerning telecommunications standards; ARENTO and its contractors have developed them as the need arose. The estimated cost for the 4.5 million new telephone lines by the year 2000 is $17.4 billion. Feasibility of the telecommunications plan largely rests on the availability of financing from suppliers, donor countries, and international organizations. Even if the projected 700,000 new telephone lines are successfully completed by 1985, there will still be an estimated shortfall of 400,000 lines. This pent-up demand helps explain the likely focus of requirements over the next 10 years. Telephone and telex equipment will be the largest sector for expansion, mostly in switching and subscriber equipment. While most of the current exchanges are of the crossbar type, fully electronic digital equipment is expected to be used increasingly. There is a shortage of telex capacity in Cairo as a result of increases in the number of businesses opening offices there. ARENTO is planning to spend $17.2 million to install additional telex exchanges, telex traffic is expected to quadruple by the year 2000, placing further strain on capacity. The transmission network is in great need of renovation and replacement. The major market will be in coaxial cable and carrier trunks. Enhancements to microwave systems and high-frequency radio are secondary markets. In addition, as digital transmission takes over there will be a developing market for Time Division Multiplex (TDM) equipment. ARENTO is forced to employ more personnel than needed in order to help alleviate the countrys high unemployment. This has led to underemployment, problems in supervision, m U. S. I)epartrnent of Commerce. (communications l+;quipmrn[ in the .~irat) Hepuhlic of I.~pt, Lfrashington. D.C., 1980. 59 Ibid. PAGE 223 218 l Technology Transfer to the Middle East -.. .. and a resulting poor quality of workmanship and service. Annual expenditures for maintenance and repair of the telephone service slowly escalated from a 1970 level of $62,651 per 1,000 main lines to $81,580 per 1,000 main lines in 1976 (in constant 1979 dollars). This gradual response to an apparently rapid deterioration of the network was a major contributor to poor service. In 1977, major increases to the maintenance and repair budgetreaching $146,961 per 1,000 main lines--signalled the beginning of of the quick fix approach to restoring quality service. 60 The major domestic source of telecommunications equipment is the Telephone Apparatus Company, which is government-owned. Previously a joint venture with Ericsson and now under license to that company, this facility produces 35,000 lines of crossbar exchanges, 7,000 lines of PABX systems, and 35,000 phone sets per year. Annual sales in 1978-79 were $12.9 million. The factory appears to be well managed. It produces many of the technical components and is not merely a subassembly operation. However, because it is a state-owned factory, pay is on a low, government scale, and good technical staff are reportedly lost to private enterprise. Egypt also has a radio and TV production plant. The labor force at this facility totals 200 and is trained in manufacturing, management, quality assurance, and design. Among Middle Eastern countries, Egypt has a comparatively large population and a fairly high percentage of its population aged 20-24 enrolled in higher education-15 percent in 1978. In 1978-79, there were 11,117 graduates and 72,306 students enrolled in engineering, science, technology, and electronic curricula in Egyptian universities. These numbers increased rapidly during the 1970s, which suggests that a growing base of technically qualified manpower will be emerging shortly. One problem will be to keep them employed within Egypt. 60 ITU, op. cit., 1980. Egyptian fitters and technicians are reportedly capable. But at the same time, these skilled laborers go abroad, depriving Egypt of experienced technicians. As a result, there is a lack of experienced skilled workers to operate and maintain the telecommunications network. Much of the existing network is maintained by foreign contractors. Under USAID funding, Continental Telephone and Arthur D. Little are providing extensive training in craft skills such as telephone installation and cable splicing. They are also attempting to transfer broader technical knowledge to the more advanced employees. Training sessions are held at ARENTOs Telecommunication Training and Research Institute in Cairo. The training, which is provided in both English and Arabic, includes formal classroom as well as on-the-job learning experience. Thomson-CSF is commissioned to train Egyptian technical staff to take over operation of the enhanced network within a 3-year period. Apart from this training, the Ministry of Interior has established a separate institute of telecommunications training. This ministry is responsible for fire, police, security, emergency services, and traffic functions-and thus has very special communications needs. Training at all levelsfrom technician upward and from telex machine repair to microwave circuitry design-is conducted. Although skilled manpower shortages represent one major constraint to absorption, it may be possible to overcome this problem in the short term by retaining in-country skilled technicians who are emerging from the universities and training programs. The most difficult constraint to absorption, however, is the availability of sufficient capital to pursue the planned development of the telecommunications network. Algeria The planned expansion of the telephone and telex networks has enabled Algerian national planners to begin to address the needs of other industries. The growth of LNG production, PAGE 224 Ch. 6 Telecommunications Technology Transfers l 219 liquefaction plants, and export markets will require increased domestic coordination and international linkages through telecommunications. Planners are also encouraging smallto-medium private enterprise and decentralizing industry from Algiers and the coastal plain; both efforts will entail better telecommunications facilities. The expansion of the telecommunications network is likely to integrate the rural areas with the political and social mainstream of the nation. At the same time, the urban population explosion and planned increase in housing construction will put greater demands on the capacity of the telecommunications network. The 1980-84 Algerian development plan allocates $2.5 billion, or 2.5 percent of total allocations, to telecommunications. Overall, one-quarter of the funds are devoted to complete projects currently under way, and the remainder to new projects. The breakdown of projected investment is (in millions of U.S. $): 61 Switching $ Transmission Buildings Network plant Improving quality of service Support equipment Other services Radio and TV 757.7 453.0 363.2 342.3 68.9 48.0 54.3 400.0 Total $2,487.4 As occurred with previous development plans, it has been impossible to spend the allocated plan funds within the expected time frame, owing to manpower shortages, construction delays, and insufficient installation capability. Very little, if any, telecommunications equipment or services are purchased by private industry in Algeria. National ministries and state-owned companies do all the tendering, selection, and procurement, even for private concerns. The Posts, Telegraphs, and Tel > N1 ichael Frost, Algeria: elecommunicat ions k;xpansion U rider Way, Jliddle hlast lia] lteport on (:in:~d:l, hl a~ I 9hl, p. I 1 sf~f al w) 11 1~ 11{(1 rnon(l. I)}rnanli[< [)f T[(tlnfJlf}~j rahsf~r ( anii~ia \f ork It) S:iudi Irtil)ia. Td(ph(m}, ,)fu~. 24, ] !)h ] pp. 30-32. facture its own equipment, it helps Japanese manufacturers by advancing them part of the purchase price. This reduces costs and often enables them to underbid the competition. The Japanese government has offered credits to some countries (Algeria for one) to purchase Japanese telecommunications equipment. In addition, the government sponsors high-technology research. NTT supports basic research in telecommunicationsvery largescale integration (VLSI), optical fibers, and digital networksand participating firms gain access to research results. Japan has entered the Middle East telecommunications market only in the past 10 years. Many Japanese companies have become very competitive. In the early 1970s, exports represented only about 8 percent of Japans telecommunications sales; in recent years they have made up nearly 20 percent. Major Japanese firms active in Middle Eastern telecommunications markets are Nippon Electric Company (NEC), Fujitsu, Ltd., and Hitachi. Ltd. U.S. Competitive Position There has been volatility in the patterns of telecommunications exports of the major supplier nations. The increasing popularity of digital technology and the aggressiveness with which some suppliers have promoted product development have had important effects. Too, aggressiveness in designing effective marketing strategies and enlisting government support for these efforts have also been evident. Market shares of major suppliers in 1980 and net changes in worldwide market shares over the past decade are presented below. 87 Market Share 1971 1980 Japan 13.6 21.4 United States 18.7 15.6 West Germany 14.7 12.6 Netherlands 7.4 7.2 United Kingdom 11.1 7.0 France 5.4 6.5 Sweden 7.2 5.6 Share Poin t Difference 1971-80 + 7,8 3. 1 2.1 --0.2 -4.1 +l.1 1.6 PAGE 237 232 Technology Transfer to the Middle East . Major shifts in market shares over the past 10 years consist of: l l l l A major increase in Japans share, exceeding those of the United States and West Germany. A decline in U.S. and West German shares. A major decline in Britains shares. A slight improvement in Frances position. Even small changes in share points are substantial when translated into dollars, since the size of the world market itself grew extensively over this period. Japanese firms have benefited in the world market from the structure of Japan domestic telecommunications market, the depreciation of the yen, and a major industrial shift to high technology industries. The French have marketed their advanced technology aggressively and have made major inroads in the sale of military equipment worldwide. On the other hand, the West Germans and British were late in developing digital telecommunications equipment to meet world demand. Focusing more specifically on the six Middle Eastern countries in this study, the following suppliers have been dominant in the national markets for telecommunications equipment and services. based on contract activities between 1974 and 1982: Algeria 1. Spain 2. Sweden 3. Japan Egyp t 1. France 2. Germany 3. Austria Iran 1. United States (until 1979) Iraq 1. Japan 2. Sweden 3. France Kuwait 1. Sweden Saudi Arabia 1. United States 2. Sweden 3. Netherlands 4. France U.S. firms were predominant in Iran prior to 1979, but their work then came to a halt. The only other national market in which U.S. firms have had firm control is Saudi Arabia. This situation is likely to continue. U.S. firms have also won large numbers of Arabsat contracts. The positions of U.S. firms can be clarified further by analyzing market dominance at the technology sector level within each country. The sectors in the Middle East in which U.S. firms were strong competitors between 1974 and 1982 are shown in table 61. In Algeria, U.S. firms had strong positions in two relatively small technology sectors satellite and multiplex. In Egypt, the U.S. firms dominated or were strongly competitive in a variety of small sectors. The picture in Iran is very different; prior to the revolution, U.S. firms monopolized all of the key technology sectors except for video and radio broadcasting. In Iraq, the United States had virtually no presence, and penetration of the Kuwaiti market was minimal. Saudi Arabia is the one national market in which U.S. firms were predominant or strong competitors in all of the major technology sectors. U.S. firms also dominated in the regional Arabsat project. It is difficult to discern any pattern in these data to suggest that U.S. suppliers are especially competitive in certain telecommunications technology sectors, except that U.S. firms have been dominant in satellite systems, both in satellite components and Earth stations. The ability to win contracts in Middle Eastern markets is determined by many factors, some of which are discussed below. U.S. Supplier Advantages Overall, U.S. suppliers have had a high technical reputation. U.S. technology has been viewed as being high in quality and dependable and reliable. Moreover, the reputation of U.S. telecommunications technicians and engineers is attested to by contracts from many national PTT ministries to provide consulting services to support planning, operations, and maintenance functions. After-sales service by PAGE 238 Ch. 6Telecommunicatlons Technology Transfers 233 Table 61. U.S. Competitive Position in Telecommunications Markets in the Middle East Between 1974 and 1982 Dominant position Algeria Satellite Multiplex Egypt Cable Microwave Consulting HF Radio Iran (1974-79 ) Switching Cable Telex Satellite Iraq ., None Kuwait . .. . Saudi Arabia . . . Switching Microwave Mobile Other telephone Data Communication Multiplex Regional Satellite SOURCE Office of Technology Assessment U.S. firms was also highly regarded and viewed as dependable. U.S. manufacturers were also considered major suppliers of advanced technologies in emerging fields, such as data communications and office automation systems. In the six nations covered by this study, however, these high-technology areas were less important in trade than telephone and telex sectors. Since most new telecommunications technologies involve the use of microchips, the competitive position of the United States, which is still one of the top suppliers of these valued components worldwide, has been boosted. In fact, several foreign manufacturers of telecommunications equipment (e.g., Thomson-CSF) were dependent on the United States for these components. Until recently, U.S. telephone companies outside the Bell system bought their small electronic switchboards from GTE, ITT, or Stromberg-Carlson Corporation. More recently, however, 75 percent of such sales have been made by the Japanese firms Oki Electric Industry Co., NEC, Hitachi, and Fujitsu. This suggests that one factor contributing to U.S. market shares in the past is now less important. Strong competitor Television None Television Radio SatelIite CCTV SectorTotal size (millions) market $ 11 2 $ 6669 1.8 230.4 2,8000 72.5 677 351 9.2 1,900,0 2,8000 689.9 180 6.0 2,000.0 7 0 4310 6,400.0 12.9000 1,000.0 3964 257.5 685 19.2 18.9 18.6 4.2 234.0 2943 In addition to civilian communications equipment, many U.S. suppliers are major manufacturers and exporters of high-technology military communications products. Military communications networks are a major technological component in command and control, military preparedness, and national security, and thus are central to the modernization of a nations armed forces. U.S. military equipment sales have served to facilitate the sale of both military and civilian communications equipment. As discussed earlier, U.S. government programs in Egypt and Saudi Arabia promote telecommunications technology transfers to those countries. U.S. Supplier Disadvantages Probably the most important difficulty experienced by U.S. suppliers of telecommunications equipment and services has been in establishing competitive prices and in arranging comprehensive financing packages. Not heavily subsidized domestically or for export, the industry must reduce its costs internally through higher productivity and lower overhead to come up with the best pricing bid. PAGE 239 234 Technology Transfer to the Middle East U.S. suppliers have at times been at a disadvantage in competing against firms in Japan and Western Europe, where governments provide complete and attractive financial packages. Although U.S. Government agencies such as the Export-Import Bank and OPIC support U.S. exporters, they apparently have not had the flexibility of some foreign governments in providing long-term soft loans, extensive export credits, and bartering arrangements. For example, a West European consortium won the $1.8 billion contract for modernizing Egypts telephone network, reportedly primarily because of the attractive financing offered with the assistance of their governments. This project is described in appendix A. Most U.S. suppliers, catering primarily to the domestic market, design their equipment to North American standards, which are modifications of CCITT norms. Except for Saudi Arabia, the six Middle Eastern countries in this study, as well as most European nations, abide by straight CCITT norms. Some have viewed this as a problem for U.S. suppliers, but Japanese manufacturers also produce equipment for their domestic market using modified CCITT norms. Until recently, U.S. firms did not actively market digital electronic switching technology abroad. In comparison to the product lines of digital switching leaders, such as CIT-Alcatel and Ericsson, U.S. modern analog offerings were not as sophisticated or new. Moreover, U.S. prices were high for this older technology. On the other hand, some U.S. manufacturers (GTE for instance) have been bidding on digital equipment contracts. In fact, some suppliers offer greater flexibility to customers because they do not restrict themselves to sale of their own equipment. (In certain cases, this last point may constitute an advantage.) In addition to complaints about weak U.S. government representation of business mentioned earlier, Government regulations and taxation were said to impede the flexibility and competitiveness of U.S. suppliers. Recently, however, many of the obstacles for U.S. firms operating overseas have been moderated. Tax laws were changed in 1981 to relieve U.S. citizens working abroad of paying taxes on the first $75,000 earned. (Workers from Japan, West Germany, Great Britain, Italy, France, and Sweden do not pay taxes on salaries, bonuses, health insurance, or retirement benefits earned overseas.) In 1982, revisions were made to the Sherman Anti-Trust Act, relaxing restrictions on companies involved in foreign trade. The Export Trading Act of 1982 and the Bank Export Services Act established an office in the Department of Commerce to promote export trade associations and investment in export trading companies. 88 U.S. firms have also complained about other laws which have not been changed, such as the antiboycott program and the Foreign Corrupt Practices Act (FCPA) of 1977. The FCPA, they say, makes little distinction between bribes and commission agent fees or foreign sales representatives bonuses. In many Middle Eastern countries, they claim, these costs are the accepted mode of doing business. 89 Some businessmen also claim that in Algeria, where the agent system does not operate, corruption is minimal. However, OTA research did not uncover any cases where the FCPA was a major factor in lost sales. The Arab boycott of Israel influenced the nature of contract awards, as mentioned earlier, by Arabsat. U.S. firms were, however, able to participate. In general, the following factors, ranked roughly, have been critical in marketing telecommunications technology effectively in the Middle East. 1. Low price. Despite their large revenue base, many of the oil-producing countries are increasingly cost-conscious. Price has often been the most important decision criterion. Public Law 97-290, 1982. Charles Wohlstetter, chairman of Continental Telecom, Inc., says his company could not win a contract to install a phone system for Saudi Arabia because we were unable to pay a bribe. U.S. law, he says has kept American companies from providing big systems in the Middle East, Business Week, Oct. 24, 1983. PAGE 240 Ch. 6 Telecornrnunications Technology Transfers c 235 (See, for example, the Saudi Arabian telephone expansion project profile, appendix A.) In fact, selection of the low bidder is sometimes mandated by law. Depreciation of certain national currencies over the past few years and the ability of companies to profit from domestic subsidies have tended to make particular suppliers more attractive. go 2. Complete financial package. Ability to supply a complete financial package with attractive terms to the buyer is often a key determining factor in a contract award. 3. Reputation. Technical competence, product reliability, and the ability to point to operating installations using the suppliers equipment are key selling factors. 4. After-sale support. A suppliers willingness to train local personnel, provide spare parts, and operate and maintain the equipment it installs is a critical decision factor. This type of commitment is often exhibited through establishment of a local office or joint venture. 5. Associated business deals. By offering extra carrots, suppliers can develop unique packages that are attractive to the buyer. For instance, in addition to the telephone modernization work in Egypt, the Siemens consortium promised to conduct efforts to improve railway signaling and rolling stock, perform a feasibility study on Egyptian coal resources, and establish a joint-venture consulting organization. Moreover, Thomson and Ericsson apparently tie civilian communications sales to military equipment transfers. On the other hand, the reported attempt by U.S. suppliers \+ stated h~ ,Jf~hn 1, k!oore in R, 1). (;lenn (op. cit., 19821, h[~ currem?r r(~]ation~hips m-e such that one could almost rule L).S. ct~nlpanie+ (Jut of cornpe~ition on price, without regard to project finance except in projects where the U.S. still has an edge on technology or mass production due to the scale of our economy, or efficiency and certainty of meeting delivery schedules. to link an Egyptian telephone project to a threat of withdrawing certain military aircraft sales, was not successful. 6. Early program involvement. Participation by a foreign contractor in a programs early stagesa pre-engineering or master plan phaseis often helpful in gaining the customers confidence and in establishing an organization in-country to handle the follow-on tasks. This was true in the case of AT&T in Iran and, in part (since the Siemens consortium won the large contract), with Continental Telephone in Egypt. Being the first to introduce a new technology in a countrymicrowave networks, digital electronic switching, Earth stations, or mobile radio networks, for instance-has also assisted companies in gaining control of those markets. 7. Local operations. In each of the six countries except Algeria, it is necessary to operate through a local agent. As discussed in appendix A, the Ericsson/Philips/Bell Canada consortium was said to have been aided in its successful bid by use of Prince Fahds son as an agent. In most countries, joint ventures with local interests are given preference in contract award evaluations. Such joint ventures, however, may involve potentially costly risks, since suppliers have less control over their investments. 8. Political neutrality. Political neutrality in Middle Eastern issues has apparently enhanced Japans opportunities to export to a wide range of ideologically diverse Middle Eastern countries. In other cases, such as Saudi Arabia and Egypt, political alliances have served to promote U.S. telecommunications exports. 9. Corporate financial soundness. In order for a supplier to profit in conducting business in the Middle East, it must be able to withstand payment delays, as well as a host of other investment risks. PAGE 241 236 l Technology Transfer to the Middle East IMPLICATIONS FOR U.S. POLIC Y Specific U.S. laws and policies, such as the Foreign Corrupt Practices Act, taxing of U.S. workers abroad, and antiboycott legislation, although having an influence, have not been major determinants of U.S. competitiveness in Middle Eastern telecommunications markets. Although together they do represent obstacles to U.S. suppliers, the major factors sometimes negatively affecting U.S. presence and market share have been price and financing arrangements of foreign competitors. Technical reputation, reliability of spare parts supply and after-sales service, and favorable diplomatic ties follow as secondary determinants. U.S. foreign policies have set the context for trade. The United States has had great success in countries with favorable ties, such as Saudi Arabia, prerevolutionary Iran, and, increasingly, Egypt. U.S. supplier presence in Iraq and Algeria has been minimal, and it is nonexistent in present-day Iran. The United States is an acknowledged leader in state-of-the-art telecommunications technologies, such as satellite systems, but these have often represented smaller dollar-volumes of sales in the Middle East. The more conventional technologies and the increasingly dominant digital systems are strong technologies for non-U.S. suppliers, technologies that are often tailored by them to export markets and can be promoted effectively against a strong dollar, particularly with advantageous financing. Some options could be considered which could assist U.S. firms in winning sales of telecommunications equipment and services which help promote the Middle Eastern nations development plans. They include: 1. Establishing more foreign manpower training programs in the telecommunications field, which increases expertise and 2. 3. 4. familiarizes Middle Easterners with U.S. equipment. As one example, the U.S. Telecommunications Training Institute involves a number of U.S. firms working in a joint effort supported by the U.S. government. Promoting mutually advantageous development assistance/contingent contract awards. This could be accomplished by explicitly linking assistance and export programs (through use of mixed credits) 91 or by expanding technical assistance programs in telecommunications involving private U.S. firms as well as government agencies. (As discussed in chapter 13, many fear that assistance goals could be distorted by explicit linkage.) Promoting regional cooperation in telecommunications. This approach would only improve the positions of U.S. firms if their participation was central to cooperative technical efforts, such as in a telecommunications technology transfer center. Upgrade the technical expertise of Foreign Commercial Officers and AID staff to deal more effectively with telecommunications-related projects. OTA's research indicates that the comparative position of U.S. firms in Middle Eastern markets stems only in part from U.S. Government policies. With the assistance of the U.S. Government, financing, commercial representation and cooperative programs involving private-sector firms could be improved; but the marketing and technology transfer efforts 91 In July 1984, the U.S. Export-Import Bank announced that it would provide 90 percent financing and 8 percent interest to support the U.S. firm Scientific Atlanta in its bid to sell a satellite communications network to Algeria. This step was taken in an effort to counter Japans use of mixed credits. See Washington Post, July 11, 1984, p. D1. PAGE 242 Ch. 6Telecommunications Technology Transfers l 237 of the firms themselves are key determinants Egypt and Saudi Arabia have certainly been of success in contract competition. Indeed, promoted by U.S. Government policies. telecommunication technology transfers to CONCLUSION S Despite overuse of the term, there has indeed been a world telecommunications revolution in the last decade. With telecommunications deregulation in the United States and pressures to deregulate in other countries, changes in the next decade may be even greater. What was previously a necessary but not very dynamic sector, generally run by a governmental PTT, telecommunications has been transformed with computers, microchips, and satellites into a sophisticated, rapidly changing sector. Even firms in industrial countries have been pressed to keep up with recent developments in automatic exchanges, fiber optics, data transmission, digital systems, and satellite technology. Technological advances in telecommunications come rapidlysystems can become obsolete before they are installed. Distinctions between communication, information transfer, and processed data are no longer clear, owing to improved communication links, increased computer ties, and transborder data flows. In the Middle East, the gradual shift from conventional analog to digital electronic equipment will become even more apparent, as will a shift from large public network development to sophisticated systems and services for private end-users. Service industries involved in repair, maintenance, and supply of the telecommunications infrastructure can be expected to develop in the private sector within the recipient countries. Computer and dataprocessing industries are also likely to emerge. Banks and financial institutions have already been among the first to push for sophisticated telecommunications services, office automation, and data-communications features. Despite the stated desires of the Middle Eastern nations and the well-conceived plans for domestic as well as regional communications, there is great disparity in the availability of telecommunications facilities, the reliability and efficiency of operations, and usage from country to country. Systems range from the efficient, heavily used, but possibly soonto-be-overtaxed systems of Saudi Arabia and Kuwait; to the Egyptian system, where less than one local call in three is completed; to Iran, which recently had an average of only 13 domestic calls per subscriber per year over the 3.4 lines per 100 inhabitants. The local need is there; pent-up demand exists across all telecommunications sectors and represents excellent future markets for foreign suppliers: potential also exists for developing indigenous capabilities in equipment manufacture, installation, operation, and maintenance. In telecommunications, several critical factors tend to facilitate technology absorption by Middle Eastern countries: they include a national resolve to build adequate infrastructure, demand for telecommunications technology from other sectors of the economy, strong national security objectives, the existence of domestic telecommunications production facilities, and decisions to stay with more conventional technology. Factors constraining absorptive capacity in telecommunications include skilled manpower shortages, rapid population growth (producing burgeoning demand), and inconsistent or changing public policies regarding telecommunications development. U.S. firms have done relatively well in advanced telecommunications sectors in the Middle Eastbut these, up to now at least, represent small dollar amounts in total teIecommunications expenditures in the region. U.S. suppliers have exported many types of telecommunications technologies to Saudi Arabia and pre-revolutionary Iran, but over- PAGE 243 238 l Technology Transfer to the Middle East all, the U.S. firms have not been a dominant force in telecommunications trade in the region. This has been due to many factors, including political relations between the U.S. and nations in the region, a strong U.S. dollar in recent years, and difficulties in arranging financing as compared to the financing offered by other suppliers. In addition, until recently, the large, captive U.S. domestic telecommunications market was the prime concern of U.S. equipment suppliers. U.S. policy options for improving the positions of U.S. firms and for furthering development goals of the Middle Eastern nations include improving the technical capabilities of U.S. commercial representatives in the region, allowing more flexibility to government agencies in arranging financial assistance to exporters, promoting regional cooperation in telecommunications, and increasing cooperative technology transfer efforts involving the private sector. APPENDIX 6A.TELECOMMUNICATIONS PROJECT PROFILES IN SELECTED MIDDLE EASTERN COUNTRIES SAUDI ARABIAN PROJEC T DESCRIPTION S Telephone Expansion Progra m l The Saudi Arabian Telephone Expansion Program, an ambitious program to expand the telephone network in Saudi Arabia from 200,000 lines to 1.2 million in a 5-year period, began in January 1978. A consortium of Ericsson (Sweden), Philips (Netherlands) and Bell Canada head the project team. There were three serious bidders considered by Saudi Arabia for this jobthe Ericsson/Philips/Bell team, ITT (U.S.), and Western Electric International (U.S.). Separate cost estimates were requested from each bidder for the three segments of the contracturban systems, rural systems, and operations and maintenance, Overall, the winning contractors offered the lowest bid, as can be seen below: Bids (in billions of U.S. $) Urban Rural Ops & Maint. Total ITT $1.25 $0.20 $2.00 $3.5 Western Electric 1.47 0.23 1.20 2.9 Philips/Ericsson/Bell 1,49 0.25 0.47 2.2 While ITT projected the lowest costs for the urban and rural systems, it estimated the highest costs by far for the operations and maintenance segment of the job. Western Electrics estimates in this regard were also almost triple that of the non-U. S. consortium. The high cost estimate for this work segment may have been instrumental in the final selection, since it portends future operations and maintenance costs for the equipment 1 R. Raggett, Desert Project Blossoms, Telephon.y, July 28, 1980; Intel-Trade April 15, 1979; World Business Weekly, June 9, 1980; Middie East Economic Digest, July 1981, Feb. 19, 1982, Oct. 9, 1981, March 13, 1981, May 23, 1980, Aug. 17, 1979, Feb. 17, 1978. proposed by each supplier. Another factor in the bidding that probably influenced the award decision was that Philips had hired Prince Fahds son as its agent in Saudi Arabia. In terms of financial arrangements, the Dutch firm arranged for guarantees from three banks and received a direct Dutch government guarantee. The Swedish firm was able to amass a $277.4 million guarantee through Citibank (U. S.) and 11 other Swedish banks. The evaluation team consisted of members of the Saudi PTT, Norconsult (Norway), Arthur D. Little (U.S.), and the International Telecommunication Union. The total contract has grown from $2.2 billion in 1978 to over $5.0 billion, The projects scope includes installing the worlds first national stored program control (SPC) telephone system. Over 795,000 new lines were to be installed and 197,000 existing lines on crossbar exchanges were to be converted to computer control, In addition, a national automatic mobile telephone system was to be installed. Philips and Ericsson agreed to split the work and revenues equally. Essentially, each firm supplied the following equipment: Ericsson Large-capacity local exchanges Rural container exchanges All-tandem trunk and international exchanges Equipment to upgrade existing crossbar exchanges All telephone instruments, coin boxes, and mobile telephones Some local cable All network equipment Philips Small and medium exchanges Container exchanges PCM multiplex equipment Trunk cables and most local cables Building designs Subscriber rural radio PAGE 244 Ch. 6Telecornrnunications Technology Transfers l 239 Bell Canadas role involved a 5-year operations, maintenance, and training function. Given its $1 billion segment of the job, Bell Canada was to establish and control Saudi Telephone under the auspices of the Saudi PTT. Its other functions included installing and maintaining subscriber lines, indicating new network installation priorities, assisting in the test and acceptance procedures, training, subscriber billing, developing phone directories, and building construction. The consortium drew on 200 subcontractors to supply equipment and services. Principal among them was Dong Ah Company (South Korea), whose functions were to construct, install, and provide initial maintenance for the outside plant and buildings, Norconsult and A. D. Little provided consulting services. The contract was based on a pre-engineering study conducted by A. D. Little in 1974-75. Its report recommended that the Saudis update existing crossbar exchanges with digital equipment, expand the phone network, and increase the number of main phone stations by 476,000 digital lines. After the initial contract was signed, Philips and Ericsson formed a Saudi joint venture to manage the supply and installation of equipment and coordination of other subcontractors. One of the first tasks was to provide living quarters for the employees. Three fixed-location villages were constructed beginning in 1978 near Riyadh, Jeddah, and Dammam for 1,500 employees and their families at a cost of $48 million. Compounds for 230 unmarried employees were also developed in Riyadh and Jeddah. In addition, mobile camps for installation engineers in remote areas were established. Although the Dutch and Swedish employee population was the largest, 43 other nationalities were represented, including many British. Dong Ah brought in more than 6,000 Koreans and Indonesians. The crew was characterized by a very low absentee rate and high contract renewal rate. To meet the very tight schedules, a massive logistics effort had to be planned and executed to transport equipment to the required sites. Over 200,000 cubic meters of supplies were shipped from Europe by air and sea and then stored in Jeddah and Dammam until distributed by truck. To avoid on-site delays, exchanges were pre-assembled in Europe before shipping. A minicomputer was also shipped to the consortiums on-site headquarters to help plan, project, inventory, and control the complex production schedule. Detailed monthly progress reports were generated in English and Arabic for discussion with the PTT, consultants, and subcontractors. Other obstacles also emerged as the project progressed. Local and municipal government officials had to give their consent to where the trenches were dug and where buildings could be located. Only Muslim staff were allowed into the holy cities of Mecca and Medina. Subscriber hookups were often delayed because Muslim custom prevented telephone technicians from entering homes when a male member of the household was not present. Moreover, the two consultants, A.D. Little and Norconsult, modified priorities over the course of the contract, given new developments in technology. Their recommendations resulted in the use of fiber optic technology in Riyadh. At the same time, the project team had a goal of keeping the systems within the operational capabilities of Saudi personnel, despite the advanced technology that was employed. Training occurs in Europe, Canada, and on-site. While few trainees have any technical background, they undergo an intensive program that covers the outside plant and the inside plant (operations, system maintenance, and technician levels). Trainees get 2-3 months of field experience between course segments. There has been some difficulty in finding sufficient numbers of trainees; highly qualified engineers are often attracted to private companies. There has also been a high dropout rate. So far, the system has experienced minimal downtime and is highly responsive in providing customer services. There is also a high usage rate among new subscribers, helped along by low phone rental charges and low rates for calls. Intra-Kingdom Microwave Program Western Electric International Inc. (now a part of AT&T International) was awarded this $408 million project in June 1977 by the Saudi PTT, based on a tender released in September 1976. The job entailed the engineering, furnishing, installation, operation, and maintenance functions for 12 months, and the training of local personnel for a 6,200-mile, 46-route, 300-site microwave communications project, The system was built to provide 35,000 long-distance telephone circuits, as well as telex, television, and data transmission channels. In addition, a 405-phone emergency roadside sysK. Jackson, "Linking up with the Future, Telephonj, Aug. 27, 1979; Saudi Arabia Yearbook 1980-81: Middle East Economc Digest, August 1978, Jan. 1981, (let, 5, 1979, January 1981, Aug. 27, 1982; Electronics ,\Tews, Sept. 6, 1982; Intel-Trade Apr 15, 1979. PAGE 245 240 l Technology Transfer to the Middle East tern was designed and installed, as well as 10 maintenance centers and two surveillance centers to detect faults in the system. The system was integrated into the national long-distance network. This project was actually begun by the Italian firm, SIRTI, which provided microwave links between Jeddah, Taif, Riyadh and Dammam. Norconsult of Norway, Swedetel of Sweden, and Preece, Cardew, and Rider of Great Britain were consultants to the Saudi PTT on this project for the SIRTI and Western Electric phases. Western Electric, as prime contractor, was responsible for overall orchestration of the project. It supplied the multiplex equipment, Rockwell-Collins Systems International, Inc., of Dallas, was a major subcontractor (with a contract worth more than $100 million), supplying the radio relay equipment and supervising field testing. Anixter Communications Systems constructed over 687 shelter modules; Charles Payne and Company helped design and engineer the shelter building; Shafat GmbH supplied the AC generators and Harmer & Simmons Ltd. provided the DC generators. Other subcontractors were used to supply towers, antennas, and in-country construction and support services. The project team faced several difficult problems from the outset: l l l Tight schedule: The first eight routes were promised to be cut into the national system within 16 months, with the rest of the system completed in phases by 30 months (December 1979). Some estimates suggest that given the extensiveness of the work, it would normally take at least twice as long to complete a project this size. Equipment protection: Techniques had to be developed to protect the sensitive equipment against a harsh environment. Transportation and installation: Problems arose in transporting the equipment and installing it in a country with limited facilities and limited trained technical help. In order to meet the tight schedule, Western Electric immediately commenced production of the multiplex equipment. Living quarters and offices were constructed immediately in several locations. Sites for the microwave stations were inspected. An assembly and equipment testing facility was established in Atlanta. To avoid on-site problems, it was decided to assemble the system components in a modular fashion in the United States and implement needed changes in the United States before shipment. In line with this decision, the equipment was preinstalled in shelters. Project requirements and environmental conditions necessitated modification of some equipment design. The radio relay and multiplex equipment at each site had to operate unattended for 4 months at a stretch, with high reliability and minimal maintenance. There was also a need to design and produce transportable, stand-alone, and selfpowered buildings with an air-handling system that provided air conditioning and dust filtration. Bell Laboratories was commissioned to modify Western Electric multiplex designs developed for the U.S. market so that they would meet international standards. A building was developed to shelter site equipment to withstand desert and mountainous conditions, salty sea air, high and low temperatures, and possible earthquake tremors. Bell Labs, along with Payne, designed a lightweight, strong, and insulated shelter that doubled as a shipping container for the equipment. These units were developed in a modular fashion to allow them to be fit together in different patterns to meet the particular specifications of each site. The modular design was also efficient for preassembly, with power generators being shipped directly to Saudi Arabia from their European suppliers. Western Electric provided trainin g on the microwave network in system management and technical operation. This was conducted at the same time the system was being designed and installed. Although Western Electric maintained the system for the first 12 months after completion, Sartelco, a joint Saudi-Italian venture, won the subsequent $75 million maintenance contract. It will use 120 Italian and 180 other technicians on its staff, several presumably being Saudi nationals. The Saudi PTT in August 1982 awarded AT&T International a $377.5 million contract to expand the microwave network and supply 150 new towers. This will double the existing telephone capacity to 70,000 voice frequency channels and expand and strengthen the networks radio and TV channels. EGYPTIAN PROJEC T DESCRIPTION S Telecommunications Modernization 3 The modernization of telecommunications in Egypt was awarded to a European consortium consisting of Siemens (West Germany), ThomsonCSF (France), and Siemens Austria in September 1979. No formal request for tenders was ever 3 .Middle East Economic Digest, April 1979, Sept,. 21, 1979, January 1981, Oct. 15, 1982, Oct. 24, 1980; Frith, Kirk, and Spinks, 1980, PAGE 246 Ch. 6 Telecommunications Technology Transfers l 241 issued. However, following the completion of the 20-year master plan by Continental Telephone International (U. S.) in 1978, several firms made presentations to the Egyptian PTT describing how they would implement it. Major competitors included an American consortium consisting of Continental Telephone International, AT&T, and GTE. Ericsson, ITT, and Philips were also serious contenders. The most important factor in the Egyptian award decision was financing. Egypt was looking for 75 percent of total financing from the supplier countries and the remainder from financial institutions. The European consortium was the only bidder that could provide this type of package. Soft 15-year loans with 5 percent interest and a 5-year grace period were offered by the three supplier countries in the consortium. Moreover, supplies and export credits were made available by France and West Germany. The winning team used other marketing strategies as well in its successful bid. While the master plan identified a $2,400 million expenditure in the first 5 years of implementation, the consortium estimated the cost to be only $1,800 million. The consortium also benefited from the intervention of Austrian Chancellor Bruno Kreisky, who, as a long-time friend of President Anwar Sadat, sent a personal emissary to Egypt to promise additional German and Austrian investments in Egyptian industrialization. Siemens Austria promised to finance the renovation of Egypt railway signaling network and its rolling stock. Siemens promised to finance a feasibility study along with Krupp of West Germany on Egypts coal resources. In addition, the two companies offered to establish a management consulting firm along with Egyptian interests. The other bidders also made their interests known to Egyptian authorities, although they could not match the low-cost, long-term financing package of the consortium. The U.S. team sent its chairmen and presidents to meet with President Sadat and present its proposals. European bidders held that the U.S. team attempted to tie the sale to possible U.S. military exports to Egypt and tried to prevent open tendering. Using a less aggressive, but persuasive strategy, CIT-Alcatel (France), which was already under contract to install digital electronic switching systems in Egypt, received permission from the French PTT to install equipment originally earmarked for domestic use in order to meet contractual deadlines. Although the contract was awarded in September 1979, work startup was delayed for over 3 years, until October 1982. This delay resulted from details in the agreement that still needed to be finalized. Siemens agreed to a memorandum of understanding concerning the prices for equipment (which could be no more than 15 percent higher than U.S. equipment provided under the AID package) and the use of local contractors for civil works (laying cable and installing ducts). Thomson agreed to a similar memorandum on prices, engineers salaries, and training of Egyptian technical personnel. The contract and memoranda then had to be ratified by the Egyptian parliament. The scope of this 5-year project includes: 1) installation of 500,000 new phone lines and renovation of 350,000 existing lines, losing 100,000 existing antiquated lines in the process; 2) supply of analog switching systems; 3) provision of coaxial cables in Lower Egypt and microwave systems for Upper and Lower Egypt linked to Cairo; 4) establishment of repair centers; 5) provision of 3 years supply of spare parts; and 6) training of Egyptians to enable handing over of operations within 3 years. The Continental Telephone master plan projected that additional telecommunications projects through the year 2000 could amount to over $17 billion. The European consortium would appear to be in the most advantageous position to win much of this additional business. Technical and Managerial Services 4 Following the submission of Continental Telephones master plan for Egypts telecommunications system in 1978, the company put in a bid, along with AT&T and GTE, to implement the first 5 years of the plan. It lost to the Siemens consortium. In May 1980, a contract was awarded to Continental Page Consultants (a subsidiary of Continental Telephone) and Arthur D, Little International for $20.5 million to supply managerial and technical advisory services. Of the total, $17.4 million was provided by USAID. Consulting work is expected to continue through 1985. The work is equally divided between the two firms. A. D. Little is focusing on improvements in planning, management, operations, and training. Specifically, the company will design and develop managerial, financial and data systems. Continental is providing more of the technical, plant-related workrehabilitating existing equipment, designing and installing four electronic exchanges and 4 Telephony, June 16, 1980 comrnunic~tor, summer 19R 1 PAGE 247 242 Technology Transfer to the Middle East three outside plant systems in Cairo and three electronic exchanges and outside junction cables in Alexandria, and training Egyptian personnel in operations and maintenance. The team will award hardware contracts to U.S. firms. In the training effort, Continental is attempting to transfer not only specific knowledge on installation and repair, but also broader technical concepts on the operation of telecommunications networks. On-the-job training is implemented along with extensive formal classroom training. Owing to language barriers, Continental trains Egyptian instructors who then teach the craft employees. ALGERIAN PROJECT DESCRIPTION Telecommunications Project 5 This project was awarded in 1974 to a U.S. firm following a competition involving about 12 companies; the United States and Japanese firms were the front runners. The apparent critical factors in winning the contract included: 1) a desire by the Algerian PTT to loosen its dependence on the French; 2) a desire for reliable U.S. technology, and, most importantly, 3) price. The American firm offered the lowest bid. Project specifications in the tender were written by another American firm that had conducted a 1year pre-engineering study prior to the award. This firm continued to provide consulting assistance to the Algerian PTT for 4 to 5 years into the contract. The contract had open financing, which resulted in payment delays of 2 to 3 years. No irrevocable letter of credit was issued by the PTT to ensure payment. Apparently, Algerian ministries will not issue such letters to foreign contractors, but some national companies will. As a result, large amounts of investment capital were put at risk by the company. The project staff consisted of 42 employees at its peak, mostly American and British technicians, with nationals hired for clerical assistance. No PTT personnel participated in the project with the contractors staff; it was handled as a turnkey operation. The work involved installation of equipment, sometimes in remote sites. No major modifications to the equipment were required, although additional engineering costs were entailed to deal with special ventilation and sand filtration sys5 This description is based on interviews heId in December 1982 with a program manager at a large U.S. telecommunications manufacturer that has done business in Algeria. Details of the technology itself have been omitted to retain anonymity. terns that were necessitated by local conditions. In some locations where the equipment was installed, climatic and terrain problems resulted in difficulties with the dual diesel generators. For 3 years after installation, the firm was under contract to operate and maintain the equipment and train nationals. Formal training of about 40 Algerians took place in the United States and Algeria, with on-the-job training for 3 years side-byside with American and British technicians. The training was provided in French or with translators. Most trainees had some form of engineering degree, but their formal education and practical experience varied widely. Most visible to the trainers was the apparent lack of motivation by many nationals in the program. While some equipment sites were well maintained with low downtime records, others were in poor shape. The U.S. Government played no role in aiding the company to obtain the original procurement. During the course of the project, the program manager as well as other American businessmen had regular meetings with the U.S. ambassador to discuss problems encountered in conducting business in Algeria. Common difficulties included local taxation, contractual problems leading to nonpayment, and problems in getting contractor property out of the country after the project was completed. Although the ambassador listened, the businessmen felt that no action was ever taken by the U.S. Government to remedy these problems or to bring them to the attention of the Algerians on a government-to-government level. The last Americans involved in the project finished their tasks and left Algeria in 1980, Since then, the Algerian PTT has issued a tender to purchase more of the same type of equipment. While the American company that provided the original systems is in a dominant position relative to foreign competitors, it has decided not to bid because of the investment risks and financial losses it experienced during its initial contract. IRANIAN PROJECT DESCRIPTION Telecommunications Trainin g Progra m 6 American Bell International Inc. (ABII), a subsidiary of AT&T, began work in Iran in 1975 to evaluate existing telecommunications facilities *Interview with supplier representative, held in December 1982; Telecommunications, August 1979. PAGE 248 Ch 6 Telecommunications Technology Transfers l 243 and to identify future requirements. This work was initially conducted under contract to the U.S. Air Force, which was a consultant to the Iranian government. A year later, a master plan for telecommunications service was completed and ABI I was awarded a new contract to help implement the 10year plan, Chief among ABIIs tasks was technical consulting, integrating and supervising other contractors, and training Iranian managers, engineers and technicians in the efficient operation and maintenance of the evolving network. ABII reported to the managing director of the Iranian PTT. By mid-1977, the training effort began with a staff of six people. By 1979, before the overthrow of the Shah, the effort included 29 ABII trainers and over 100 Iranian trainers. Most of the training took place in Teheran and several field locations, although some initial formal instruction was conducted at AT&T facilities in the United States. Training was conducted in Farsi by Iranian instructors and translators. However, highly technical hardware courses and management courses were taught in English. Irans stated goal was to establish self-sufficiency in training within 10 years. With this in mind, joint training policy committees were formed so that Iranian management would feel a sense of ownership in the contractors training program. An Iranian training organization was established and courses were developed in coordination with ABII. Hardware training dealing with maintenance and repair was developed by several equipment manufacturers. Successful graduates were then to train other employees in the field, This instruction proved to be effective in that it was practical and involved hands-on experiences. Courses included: 1 ) telephone maintenance procedures, 2) telephone cable fault locating, 3 ) management training, 4 ) record keeping for outside plant facilities, 5) cable laying, 6) outside plant engineering, and 7) sources of supply. Other conceptual and management courses tended to be more difficult for the Iranians to grasp. The management skills courses proved to be too culture-bound and alien to many Iranians. The PTT also gave higher priority to the technical courses, giving management and administrative courses second place. Concepts such as team problem-solving skills, which are common in the West, were difficult for the Iranian trainees to accept and implement. Dropout rates in some of these courses reached 50 percent. In retrospect, some of the ABII trainers felt that these concepts should have been introduced more slowly, and a more extensive cultural orientation should have been given to Americans before they were sent to Iran. PAGE 249 CHAPTER 7 Technology Transfers in Commercial Aircraft Support Systems PAGE 250 Contents Page INTRODUCTION . . . . . . . . . . . . . 247 COMMERCIAL AIRCRAFT SUPPORT SYSTEMS IN THE MIDDLE EAST. 249 Commercial Aircraft Support Systems . . . . . . . . . 249 Commercial Aircraft Support Systems in the Middle East: Current Status . 251 Perspectives of Recipient Countries and Firms . . . . . . . 261 Perspectives of Supplier Countries and Firms . . . . . . . 275 Future Prospects . . . . . . . . . . . . . 291 IMPLICATIONS FOR U.S. POLICY.. . . . . . . . . 292 SUMMARY AND CONCLUSIONS . . . . . . . . . 293 APPENDIX 7A: COMMERCIAL AIRCRAFT SUPPORT SYSTEMS: SELECTED RECENT CONTRACTS IN THE MIDDLE EAST . . . 296 Tables Table No. Page 62. operating and Performance Statistics of Selected Airlines for 1982 . . 253 63. Employee Totals for Representative Airlines, 1982 . . . . . 253 64. Airport Traffic Statistics for Representative Airports . . . . . 254 65. Commercial Airline Fleets in the Middle East in Servicers of March 1984 256 66. U.S. Exports of Commercial Transport Aircraft . . . . . . 277 67. Typical Configurations and Purchase Prices of Various Competing Aircraft 278 68. Ten Leading U.S. Exporting Companies. . . . . . . . 280 69. Export-Import Bank Total Authorizations of Loans and Guarantees and Authorizations in Support of Aircraft Exports . . . 282 70. Export-Import Bank Summary of Commercial Jet Aircraft Authorizations for Loans and Guarantees . . . . . . . 283 7A-1. Selected Recent Commercial Aircraft Support Systems Contracts in Saudi Arabia . . . . . . . . . . 296 7A-2. Major Projects and Sources of Investment, 1971-81: Commercial Aircraft Support in Egypt. . . . . . . . 297 7A-3. Major Projects: Civil Aviation in Algeria, 1979-82 . . . . . 297 7A-4. Selected Recent Commercial Aircraft Support Systems Contracts in Iraq 298 7A-5. Selected Commercial Aircraft Support Systems Contracts in Iran ....,... 299 Figure Figure No. Page 14. Aerospace Industry Funds for Research and Development . . . . 281 Map Map No. Page 5. Airports in the Middle East and North Africa . . . . . . 255 PAGE 251 CHAPTER 7 Technology Transfers in Commercial Aircraft Support Systems INTRODUCTIO N The Middle East has been one bright spot in the generally depressed worldwide commercial airline industry in recent years. Sales to the region of large commercial aircraft and related services required to support airline operations grew dramatically in the 1970s and have continued into the 1980s, despite the recent depressed condition of world air transport. This was due to both increased oil revenues and to the increased transport needs of the Middle East during their decade of dramatic business expansion. The airlines of the Middle East have the newest fleets in the world, with the average age of jet and especially non jet aircraft considerably lower than the world average. 1 The number of passengers carried by Saudia alone increased from 1.3 million in 1974 to 10 million in 1982. From 1980 to 1981, Kuwait Airways ranked second in the world in growth rate of scheduled revenue tonne-kilometers performed. 2 According to International Civil Aviation Organization (ICAO) statistics, scheduled air passenger traffic in the Middle East region will increase by 10 percent annually up to 1992. This represents the most dynamic growth pattern of any region in the world. ] While the Middle Eastern countries may have the financial resources necessary to purchase aircraft, operations and maintenance re The a~era~x agc of non jet alrrraft in the \l iddle h;ast is 5,() >ear~, ({)n~parwd to 1:}. 7 ~ew-s for such aircraft worldwide. For j~t air(.raft. the nurnlxr is X.2 ~ears, and the world ti~erage 9./i }.(;irs 2 The ~um of the pr(du{t+ ohtairmi })? multipl}ring the numher of tonne~ ( 1 tonne 1,000 kg) of re~enue load carried h~ the flight distances mtasured in kilometers is the numher of re~[~nu[~ ton nt~k ilometer performed, Separat. [j calculation+ are made for passengers (including baggage). freight {including expr(ss). and mail. Rohert llaile~r, Hoeing Strikes Ilack, Jfiddle l;ast Ijconomic l)ige.st, Feh. u), 19H4, p. 35. quire substantial ongoing efforts. Whether commercial airlines are mere symbols of national prestige or important components of economic and technological development depends on the extent of technology transfer, particularly in aircraft support systems. Commercial aircraft support systems cover a wide range of capabilities which include: 1) airport design, construction, and management; 2) basic airplane ground support including fueling and loading/unloading of passengers, baggage, and freight; 3) routine maintenance/inspection of aircraft; 4) major aircraft (airframe and powerplant) overhaul; 5) passenger reservation and cargo routing operations; 6) air traffic control flight operations; and 7) in-flight operations including piloting and avionics control/communications. Each of these areas requires specialized equipment, which entails training in its use and continued maintenance. The emphasis in this chapter is on large commercial (mostly international) operations although the discussion touches smaller civil aircraft, and civil helicopters. Aircraft sales to the region are covered, particularly as they relate to technical services, training, and spare parts availability and to U.S. policy issues such as official financing and export controls. Military aircraft sales and servicing are explicitly excluded, but the analysis does clarify the limited utility of commercial aircraft and related services for military uses. Compared to other technologies covered in this study, technology absorption has been extensive in the commercial aircraft support sector. Operating statistics of these airlines (including safety) are comparable to those of major international airlines. This chapter analyzes the reasons for this comparative success. 247 PAGE 252 248 Technology Transfer to the Middle East The analysis makes it clear, however, that while indigenous personnel in the Middle East are increasingly operating commercial aircraft support systems, some airlines may never become fully staffed by nationals. The United States is an acknowledged leader in avionics and aircraft engines, but adequate substitutes are increasingly available from other supplier countries. U.S. aircraft sales in the Middle East region, important to sales of auxiliary equipment and services, have been negatively affected by U.S. foreign policy controls on exports. The European Airbus consortium on the other hand has expanded sales in the region, and, to prevent future loss of sales, has even considered recertifying the Airbus with British Rolls-Royce engines instead of its present U.S. origin Pratt and Whitney or G.E. engines in order to avoid possible delays arising from U.S. export licensing procedures. Some U.S. observers feel that U.S. companies are also disadvantaged by subsidies which the Airbus receives from its European partners, and by a comparative lack of highlevel diplomatic support. This view, however, is not shared by the Europeans who feel that U.S. aircraft sales are subsidized by U.S. Export-Import Bank and indirectly by NASA research programs. All Middle Eastern countries under study have national airlines, but few turn a profit. Some, such as Saudia, are presently heavily subsidized. In contrast, Gulf Air, a consortium of several Middle East countries, 5 has been Members are Aerospatiale of France (37.9 percent ownership), Deutsche Airbus of Germany (37.9 percent), British Aerospace (20 percent), and Construcciones Aeronautics of Spain (CASA) (4.2 percent). Bahrain, Qatar, Oman, and the UAE. profitable even during the recent recession period, despite its tragic crash in 1983. 6 This chapter analyzes commercial aircraft support systems technology transfer to the Middle East. First, requirements for commercial aircraft support are identified and their status is surveyed in the six countries under study. The technologies include a broad spectrum of application and complexity, but tend to be well established and governed by international norms. Recipient perspectives are then reviewed, focusing on development plans in this technology sector and their absorption of the technologies. Most of the countries under study have placed great emphasis on transportation needs, particularly civil air transport (passenger and freight) requirements. Plans include construction of new airports, expansion of existing airports so that they can accept larger aircraft and international traffic, and increased personnel training facilities. Experiences with technology absorption have varied, but capabilities have been improved at a rapid rate over the past 10 years, particularly in in-flight operations and passenger reservation and cargo routing. Although aircraft routine maintenance and major overhaul work is increasingly performed by the airlines themselves, many of the workers are expatriates and, in Saudi Arabia and Kuwait, will probably remain so for some time. The chapter also analyzes competition among suppliers. Likely shortand long-term developments for the recipient nations and for the suppliers are then described, and finally implications for U.S. policy are given. One important issue addressed is the role of U.S. export controls in affecting competition among suppliers. The Gulf Air crash of a Boeing 737 near Abu Dhabi on Sept. 23, 1983, with a loss of 111 lives is still being investigated. PAGE 253 Ch. 7Technology Transfers in Commercial Aircraft Support Systems l 249 .. COMMERCIAL AIRCRAFT SUPPORT SYSTEM S IN THE MIDDLE EAS T COMMERCIAL AIRCRAF T SUPPORT SYSTEM S Commercial air transportation systems consist of two interdependent components: first, airline operations (including maintenance and operation of aircraft); second, airport and aviation support services (e.g., air traffic control) provided by an outside agency, usually governmental. In both, equipment ranges from the simple to the very sophisticated. Labor and capital requirements differ between the two components of the air transportation system. The operation of aircraft is highly capital intensive, with small flight crews operating very expensive equipment to serve large numbers of customers. Ground operations, by contrast, are far more labor intensive since they use less expensive equipment but employ large labor forces to service and turn around aircraft in the shortest time possible. 7 The occupational structure of air transport is consequently very diversified. Airline personnel range from low skill level (clerks, baggage handlers) to very high skill level (managers, pilots, mechanics, air traffic controllers). Air transport requires labor mainly in the clerical, professional, craft, and service categories. One key occupational group is present in each categorynamely, ticket agents, pilots, mechanics, and flight attendants. Each occupational group has its own very specialized training requirements. 8 7 According to the U.S. Civil Aeronautics Board, flying operations made up 39 percent of the expenses of the U.S. airline industry in 1980. Expenses for other subsectors included (in percent): maintenance-10,8; passenger service-9.4; aircraft and traffic servicing 16.4; general and administrative.9; promotion and sales.l; and depreciation, amortization, other.4. See U.S. Civil Aeronautics Board, Air Carrier Financial Statistics, March 1980. 8 In the United States, the occupational breakdown for the air transport industry includes: professional and technical, 19 percent (including pilots); clerical, 30 percent; craft workers, 20 percent (including aircraft mechanics); service workers, 14 percent; laborers, 4 percent; managers, 6 percent; operatives, 6 percent; and sales, 1 percent. U.S. Bureau of Labor Statistics, Washington, D. C., 1981. The operations of airlines also depend on the aircraft manufacturing industry. While none of the Middle Eastern countries under study have civil aircraft manufacturing facilities, Egypt is presently manufacturing military aircraft of U.S. design. 9 The high costs of purchasing and operating modern aircraft are dominant factors in the financial positions of airlines; in the United States, direct flying operations, maintenance of aircraft, and depreciation makeup over half the total expense of airlines. A new McDonnell Douglas DC-10 in 1980 cost about $60 million, 10 and the ratio of the capital value of flight equipment to ground equipment owned by U.S. airlines was more than 4:1 in 1980. These high aircraft costs affect labor requirements in two ways: first, flight operations themselves are very capital-intensive. With a trend towards larger aircraft in the 1960s and 1970s, there has been a tendency to use smaller flight crews serving larger numbers of passengers. Second, the high cost of aircraft on the ground puts a premium on rapid turnaround so as to keep the aircraft flying. Labor represents the single largest cost item for airlines worldwide, with nearly 10 percent of the work force being cockpit crew. 11 In the airline industry, labor is highly skilled and must assume a high degree of responsibility. Mark Lambert, Egypt Rebuilds Its Aircraft Industry, InteraviaAerospace Reviews, February, 1984, pp. 157-60. 1o Aircraft prices vary considerably, depending on plane configuration and customer needs for training and spare parts. For example, a Boeing 747 in 1984 reportedly ranged in price from $77 million to $84 million (747-SP) to $91 million to $106 million (747-300 extended). Labor and fuel are the two largest cost categories in the industry worldwide. See William E. OConnor, An Introduction to Airline Economics (New York: Praeger, 1982). Cost per gallon of jet fuel for U.S. air carriers increased from 12.7/gal. in 1973 to 57,8/gal. in 1979 to 104/gal, in 1981, and dropped slightly to 98. l/gal. in 1982. Cost of fuel as percent of cash operating expenses moved from 12.2 percent in 1973 to 28.1 percent in 1982. Aerospace Industries Association of America, Inc., Aerospace Facts and Figures 1983/84, Washington, D. C., July 1983, p. 86. Cost of fuel for airlines in the Middle East depends on refining capabilities and subsidies of the individual countries. PAGE 254 250 Technology Transfer to the Middle East PAGE 255 Ch 7Technology Transfers in Commercial Aircraft Support Systems 251 Ground-loading operations for Saudia Airlines Strict standards in employee selection and training are essential. Ground operations by the airlines also require considerable training. Aircraft servicing and maintenance require specific skills and training, as does passenger service to a lesser extent. Cargo and baggage handling may appear to be the least skilled aspect of ground operations, but in fact skill is required to safely handle shipments in international service which on average weigh 600 pounds. Security personnel are also a vital part of the ground operations since air cargo in storage and transit is particularly vulnerable to theft. 12 The pressure to turn aircraft around rapidly and the need to meet peak demands, add to the labor-intensity of the ground operations. COMMERCIAL AIRCRAF T SUPPORT SYSTEMS I N THE MIDDLE EAST : CURRENT STATU S During recent years, the Middle East/Far East route with a load factor of 65 percent has experienced the highest passenger growth (22 percent) of all IATA (International Air Transport Association) route areas worldwide. 13 The Europe/Middle East routes remained at 1981 levels, however. Saudia ranked 17th in scheduled tonne-kilometers performed in 1982 of all 121 IATA members and had a 22.8 percent growth rate from 1981 to 1982. Kuwait Airways had a 20 percent growth rate in tonnekilometers from 1981 to 1982. Saudia ranked 15th among the 121 IATA members in sched13 The average load factor worldwide in 1982 was 64.2 percent. PAGE 256 252 l Technology Transfer to the Middle East uled passenger-kilometers 14 in 1982 with 12,277 million. 15 Saudia now ranks among the major international carriers, as shown in table 62. According to IATA and ICAO data, operating statistics for these six airlines in the Middle East such as revenue passenger load factor, average daily aircraft utilization, and safety are comparable in most cases to those of other national flag carriers operating internationally. Also shown in table 62 is the fact that these airlines increased operations during 1982 while several airlines from other regions of the world experienced decreased operations. As another indication of the relative size of the airlines, table 63 gives employee totals for several airlines in 1982. Saudia airlines is by far the largest air carrier of the six study countries with total personnel numbering close to that of TWA or Japan Air Lines. The number of in-flight personnel of Saudia, however, is much lower than that of the non-Middle Eastern airlines listed. Iraqi Airways, with 4,863 total personnel, is the smallest airline included in the tabulation. Table 64 includes airport traffic statistics for representative airports in the Middle East and the United States. Although not all international airports existing in these countries are listed in the table, relative traffic volumes can be noted. Bahrain, Qatar, and the United Arab Emirates (UAE) are included in the list since they carry significant air traffic in the region. Major international and domestic airports in the Middle East are shown in map 5. Descriptions of the airlines of the six countries under study are given in more detail below. As a reference, relative sizes of several of the commercial airline fleets in the Middle East are given in table 65. Scheduled passenger-kilometers is the sum of the products obtained by multiplying the number of passenger seats scheduled by flight distances measured in kilometers. International Air Transport Association, World Air Transport Statistics, No. 27, 1982. Saudi Arabia Saudia, the national airline, has the greatest number of route miles of all national airlines covered in this study and has surpassed the beleaguered Middle East Airlines of Lebanon. Saudia has a fleet which includes 12 Boeing 747s, 17 Lockheed TriStar L-1011s, 9 Boeing 707s, 20 Boeing 737s, and 11 smaller planes. Saudia ordered 11 Airbus A300s to be delivered during May through September 1984. TWA and Saudi Arabia have been associated in civil aviation since 1945 when President Roosevelt gave a DC-3 to Saudi Arabias King Saud. The first contract was signed in 1946 between TWA and Saudi Arabia with subsequent ones through 1984. TWA participated extensively in the management and operations of the airline in the early period, but since 1979 its involvement has decreased markedly. With the new 1984 contract, the Saudis have taken over management of the airline. A successful program of training and upgrading of facilities and personnel led to gradual Saudization of the work force even while the company was expanding at a faster rate than any other national airline in the world. During the 1970s, Saudia had neither sufficient fleet nor personnel and facilities to accomplish the task of moving foreign workers in and out of the country. The main airports at Jeddah, and Riyadh especially, used aged facilities designed for the DC-6 era. Temporary airport buildings were rushed to completion within 18 months and by late 1976 the airline began to lease aircraft and integrate them into operations on a temporary basis. Some leased aircraft, mostly Boeing 747s and Douglas DC-8S, still are being used, usually during the annual Haj pilgrimage. 16 Saudi Arabia is continuing its large-scale airport expansion projects which include both international and domestic airports. Eleven domestic airports will be upgraded to handle increased passenger traffic at a cost of approxThe Haj is the pilgrimage of Muslims from all over the world to Mecca, located in Saudi Arabia. PAGE 257 Table 62.Operating and Performance Statistics of Selected Airlines for 1982 Passengers Tonne-kms performed Available tonne-kms Load factor Country Airline 000s change Millions change Millions change Passenger Weight Saudi Arabia Saudia . . . 10,060 41.9% 1,478 22.8 3,047 12.40/o 64.20/o 48.50/o Kuwait Kuwait Airways. . 1,461 16.6 456 19.9 849 6.7 65.7 53.6 Egypt EgyptAir. . . . 2,433 9.2 395 14.1 702 2.6 60.3 56.3 Algeria Air Algeria.. . . . . . . . . . . . Not reported . . . . . . . . . Iran Iran Air. . . . 2,009 30.5 215 15.7 352 22.0 67.3 61.6 Iraq Iraqi Airways . . 481 5.2 187 12.7 388 20.3 59.3 48.2 United States -.. TWA . . . . 17,854 .6 4,429 .5 8,149 .1 63.9 54.3 United States Eastern Airlines . 35,500 ,4 4,334 .0 8,014 .5 57.7 54.1 United Kingdom British Airways . . 14,838 .1 4,310 .4 6,827 .9 67.4 63.1 France Air France . . . 11,584 0.2 4,218 1.8 6,765 3.8 64.1 62.3 Federal Republic of Germany Lufthansa . . . 12,775 .5 3,746 4.4 6,317 8.5 59.6 59.3 Japan Japan Airlines . . 13,329 .4 4,993 3.2 8,125 .6 62.5 61.4 Total a . . . . . . . . . . . 384,610 .9% 87,529 0.4% 152,901 .3% 62.0% 57.2% Note: IS percent change from previous year data a Total industry value for IATA Members in 1982 based on approximately 121 IATA member airlines SOURCE: International Air Transport Association. World Air Transport Statistics, No 27 1982 Table 63. Employee Totals Other Pilots and cockpit for Representative Airlines, 1982 Maintenance Ticketing Cabin and overhaul and sales Total Trafficchange handling All other over Country Airline copilots personnel attendants personnel personnel personnel personnel Number 1981 Saudi Arabia Saudi . . 670 216 2,67 1 4,014 2,626 5,43 7 8,096 23,730 5.70/o Kuwait Kuwait Airways 174 76 487 1,808 1,139 734 2,113 6,531 4.9 Egypt EgyptAir . . 251 81 633 1,981 6,537 10,731 4.2 Algeria Air Algrie . . . . . . . . . . . Not reported . . . . . . . . . . Iran Iran Air . . 193 81 721 1,378 882 2,253 4,027 9,535 .7 Iraq Iraqi Airways . 136 120 330 1,958 390 478 1,451 4,863 4.3 United States TWA. . . 1,802 971 4,905 7,051 3,752 7,739 3,024 29,244 .3 United States Eastern Airlines. 2,839 1,212 5,987 10,228 5,036 10,324 4,325 39,951 .7 United Kingdom British Airways 2,104 447 4,375 9,009 3,376 8,943 9,700 37,954 .8 France Air France . 1,320 771 4,239 8,767 34,537 2.8 Federal Republic of Germany Lufthansa . 1,564 562 3,938 8,353 4,361 6,603 5,331 30,712 0.1 Japan Japan Air Lines 1,355 646 5,132 4,951 3,575 3,449 2,632 21,740 0.9 SOURCE: International Air Transport Association, World Air Transport Statistics, No 27, 1982 PAGE 258 Table 64.Airport Traffic Statistics for State City Aircraft movements (000) Airport Commercial air transport Saudi Arabia: Jeddah a Jeddah International .. Kuwait: Kuwait c Kuwait Internationa l Egypt Cairo Cairo International Algeria: Algiers Dar El Beida Iran: Teheran Mehrabad lnternationa l Iraq: Baghdad Baghdad Internationa l Bahrain Bahrain Bahrain Internationa l a Qatar: Doha Doha International ., U .A. E.: Abu Dhabi Abu Dhabi Internationa l a United States: Washington, D.C. Dulles International United States: San Francisco, Cal If. San Francisco International United States: Philadelphia, Pa Philadelphia International ., NOTE Totals may not add up due to rounding 87.5 b 273 518 401 15 8 6.3 38.2 156 347 29.2 2686 255.6 Representative Passengers (000 embarked and disembarked) Airports (1981 unless otherwise noted) Total 7,505 2,376 5,239 2,870 1,689 618 1,588 662 924 2,133 19.848 9,009 International Domestic 3,499 2,376 4.741 1.520 283 618 1,588 662 899 377 2!170 468 4,006 0 498 1,350 1,406 0 0 0 25 1,755 17.678 8,540 Total 478 55.1 568 32.2 39.1 16.7 174 16.7 261 23.2 3179 933 Freight Mail (000 of tonnes) (000 of tonnes) International Domestic Total International 350 551 563 28.4 33.7 167 174 167 NA 114 NA 8.9 12.8 0 05 38 54 0 0 0 NA 118 NA 843 NA 2.2 NA NA 17 0 5 1 5 0.5 NA 179 1051 459 a 1980 statistics. Complete data not available for the King Abdul Aziz airport but later 1981 data imply a rate of over 100.000 total commercial air transport movements per year NA 22 NA NA 16 05 15 0 5 NA 2.3 NA 0 5 Domestic NA o NA NA 01 0 0 0 NA 157 NA 455 data point C Kuwalt as a city-state has no domestic air servlces NAnot available SOURCE International Civil Aviation Organization Airporl Traffic 1981 Digest of Statistics No 287 1982 PAGE 259 Ch. 7 Technology Transfers in Commercial Aircraft Support Systems l 255 PAGE 260 Table 65.Commercial Airline Fleets in the Middle East in Service as of March 1984 (on order as of March 1984 in parentheses) Boeing Douglas Lockheed Country Airline 707 727 737 747 757 767 DC8 L1011 Saudi Arabia Saudia . . . . 9 20 12 6 b 17 Kuwait Kuwait Airways . . 7 4 4 Egypt EgyptAir . . . . 6 7 (3) C Algeria Air Algrie . . . 11 13 Iran Iran Air . . . . 5 10 4 10 Iraq Iraqi Airways . . . 3 6 3 4 Bahrain, U. A. E., Oman, Qatar Gulf Air . . . . 9 Lebanon Middle East Airlines . 7 e 3 8 Libya Libyan Arab Airlines.. 4 10 Jordan ALIA. . . . . 5 6 3 5 Syria Syrianair . . . . 3 2 Cyprus Cyprus Airway s . . 4 Airbus A300 A310 A320 a (11) (3) 3(5) 8 2 d 6 (5 plus 14 options) f (6) (4) 1 (2) (4 plus 4 options) Totals (existing and firm order) . . . . . . 50 45 59 35 0 (3) 6 30 16(20) 4(16) (4) a The development funds for the Airbus A320 were approved by the consortium in March 1984 b Leased from Overseas National and Icelandalr. c These three Boeing 767 extended range versions due to be delivered July 1984. d Leased from Lufthansa. e MEA previously had 18 707s (lATA, WATS 1982) but 6 were destroyed and 5 extensively damaged in the Lebanon Conflict f These may have been canceled, although the contract has not been formally abrogated, according to the M/dd/e East Economic Digcst, Feb 3, 1984, p 35 SOURCE Taken from Exxon International C O Air World SurveyTurbine-Engined Fleets of thre Worlds Airlines 1983. Florham Park, N J and OTA communications with Boeing Commercial Airplane Co Ren.ton, Wash and Airbus Industrie, N.Y., March 1984, Note that firm orders for a particular jet and options in particular can be fairly volatile numbers The 707, 727, DC8, and L1011 are no longer in production. PAGE 261 Ch. 7Technology Transfers in Commercial Aircraft Support Systems l 257 imately $295 million. At five airports (Medina, Gassim, Gizan, Abha, and Tabouk) the expansion is designed to accommodate wide-body jets (Lockheed TriStar and Airbus) which will be equipped to meet the highest international navigational standards. At the smaller airports, the projects are designed to accommodate Boeing 737 aircraft instead of Fokker F28s. These airport projects in rural areas were originally tendered in 1983. However, in 1984 it was reported that the Presidency of Civil Aviation (PCA) was retendering these domestic airport expansion projects in order to economize on expenditures. 18 Saudi Arabias major international airports consist of: Dhahran International, Jeddah International, and Riyadh International. Presently, only Saudia calls at King Khalid International Airport (KKIA) at Riyadh, but KKIA will soon open to international carriers according to Civil Aviation President Sheikh Nasser Al-Assaf. 19 Pan American Airways and Saudia presently operate a joint service between New York and Dhahran. Saudia also now flies to New York from Jeddah. Foreign carriers which serve Jeddah or Dhahran include Alitalia, Air France, British Airways, Lufthansa, Middle East Airlines, and Iran Air. Some 44 airlines now fly into Saudi Arabia, and Saudia flies to major European, North African, Arab, and South Asian cities. Riyadhs King Khalid International Airport was completed in 1983 at a total cost of about Saudi Business, Oct. 16-27, 1982, and Oct. 23-24, 1982; Saudi Report, Nov. 29, 1982. It is also believed to be the first case of a retendering prompted by King Fahds recent decree that all government tenders must be announced publicly. Airport Expansion Projects To Be Retendered, Saudi Business and Arab Economic Report, No. 6, May 28, 1983, reported in JPRS, Near East South Asia, June 30, 1983. I t is reported that Saudi Arabia may revise a portion of its ambitious airport modernization program because of anticipated cuts in government spending due to decreased oil revenues. This is not, however, expected to stop any of the large construction or upgrade plans included in the latest phase of airport modernization, but it may result in a scaling down of certain programs, such as those in the Eastern Province. See Jeffrey M. Lenomvitz, Slack Oil Funds May Force Saudis To Cut Airport Plans, Aviation iJeek and Space Technology, May 21, 1984, pp. 41-45. Tony Odone, KKIA: Beginning a New Phase in Saudia Arabia, Middie hast Economic Digest, Nov. 11, 1983; Saudi Report, Nov. 29, 1982. $3.2 billion. It began receiving commercial flights on December 5, 1983. 20 The airport was designed to handle 7.5 million passengers in its first year while it was still in the first stages of initiating its operations. The number will reach 18 million passengers annually by the year 2000. 2] Servicing the pilgrimage, with its 800,000 visitors, more than 70 percent of whom travel in and out by air, is the second most important task for Civil Aviation, after supplying facilities for national needs. During the 45to 60-day period preceding and following the Haj pilgrimage period to Mecca each year, the traffic density at Jeddah airport approaches that of some of the busiest U.S. airports, such as OHare in Chicago. Hundreds of charter flights, many by airlines not normally servicing the Kingdom, must be guided to safe landings and their airplanes serviced rapidly. It is a unique problem, and the Saudis have increased their use of modern computer techniques both to handle the aircraft and the pilgrims themselves. The Jeddah airport in its design and operations thus represents adaptation of commercial aircraft support systems to local requirements. Egyp t Cairo is among the most active air centers in the Middle East and is served by a number of international air carriers. Egypts one international airport is located in Cairo. Facilities at the Cairo airport are to be expanded to handle a projected fourfold increase in passenger traffic and rapidly increasing air freight tonnage. Alexandrias El-Nouzha Airport, located on the eastern outskirts of the city, resumed scheduled operations for domestic flights in late 1980. The airport has two operational runways, one of which will be lengthened to accommodate international flights. Jim Bodgener, U.K. Airlines Battle for KKIA Rights, Middle East Economic Digest, Sept. 11, 1983, p. 38; Jan. 27, 1984, p. 26. King Fahd Opens the King Khalid International Airport: A Tour Through Riyadhs New Airport, Which Is One of the Biggest in the World, Al-Majallah, No. 196, Nov. 12-18, 1983, pp. 18-21, as reported in JPRS, Near East/South Asia, Jan. 30, 1984. PAGE 262 258 l Technology Transfer to the Middle East Haj Terminal, King Abdul Aziz International Airport, Jeddah, Saudi Arabia. The roof structure i S evocative of bedouin tents The national airline, EgyptAir, has six 707s (plus two more leased), seven 737s, eight Airbus A300s, two Fokker F-27s (leased), and two Cessnas. EgyptAir (formerly United Arab Airlines) has been operating since 1931. It provides flights to about 40 cities in Europe, Asia, 22 International Air Transport Association, World Air Transport Statistics, No. 27, 1982; also ~msonal communication, Airbus Industrie, New }rork, Xlarch 1984. Africa, and the Middle East. The airLine is considering the creation of an all-cargo subsidiary. A private cargo company, International Air Cargo Corp., was formed in early 1977. Algeri a Algeria has a relatively good transportation network and is devoting substantial resources to its expansion and modernization. Algerias international airports consist of Dar el Beida in Algiers, Annaba, Ain-el-Bey in Constantine, and Es Senia in Oran. Other major airports are located in Bechar, Hassi Messaoud, InSalah, Tamanrasset, and In-Amenas. Fiftyfive smaller airports are located across the country. Air Algrie, the state-owned and operated airline, continues to expand its international services. At the end of 1981, Air Algrie was operating a record 250 scheduled domestic flights weekly, for cargo as well as passengers. Its fleet consists of 11 Boeing 727s, 13 Boeing 737s, and 3 Lockheed Hercules aircraft as well as 42 Beechcraft and Grumman aircraft for crop spraying, pipeline surveillance, and other purposes. Most of the equipment in Algerian civil aviation is made by U.S. firms, although Air Algrie leases two Airbus A300s from Lufthansa. The leading foreign suppliers rank ordered by total sales in 1979-82 were the United States (aircraft and engines, $165 million), India, Belgium, and Hungary. By total expenditures since 1979, civil aviation projects ranked second for Algeria among the five technology sectors studied in this assessment ($265 million from 1979-82). This was a significant rise over the total value of contracts awarded during the 1972-78 period ($5.7 million). In addition, the absolute number of contracts approved in the later period was higher than the number approved in the earlier 1972 ) U.S. Department of Commerce, Overseas Business Reports, OBR 81-31, Marketing in Egypt, December 1981. U.S. Department of Commerce, Foreign Economic Trends, Algeria 198.2, p. 11. Information provided by` the U.S. Embassy, Commercial Section, Agiers, 1982. PAGE 263 Ch. 7 Technology Transfers in Commercial Aircraft Support Systems l 259 78 period, reflecting the Algerian Development Plans emphasis on transportation. Kuwai t Kuwait, as a city state, has one international airport and no domestic airline routes. Its international airport has recently been expanded to handle 4 million passengers and 30,000 tons of cargo per year. 26 Kuwait Airways, the national airline, has four 747s, seven 707s, four 727s and two Hawker Siddeley HS 125s. Kuwait Airways owns three Airbus A310s and has five more on order. Three Airbus A300s are also on order. This company has the fewest route miles of the six national airlines covered in this study. Kuwait Airways is an independent line item in the Kuwaiti budget; it is given a subsidy and capitalized as an extraordinary item. Operating losses in 1980 reached $33.3 million, reflecting the fact that flying expenses increased by 56 percent in 1 year, 1979-80, due partly to aviation fuel cost increases. Passenger traffic grew between 1976 and 1980 by 45 percent, while freight traffic grew by 160 percent. The airlines capital has been substantially raised to permit purchase and amortization of the first six Airbuses scheduled to be delivered in 1984. In addition to Kuwait Airways, Kuwait is served by Gulf Air, Saudia, Iran Air, British Airways, Air France, KLM, and Lufthansa. Ira q Iraqs international airport is located in Baghdad. The first phase of the new Saddam Hussein Airport has now been completed, and as of 1980, work was underway on a new international airport at Basra. The present status of both these projects, however, is uncertain, due to the war with Iran. In the north, an international airport at Mosul is under design. 27 U.S. I)epartment of Commerce, ()\rerseiis Business Reports, OIIR-79-18, Marketing in Kuwait. ,June 1 !)79, -1 nf{)rmation prf)~-ided h~ the IJ ,S. I)epartment of (ommerce, 1 nternational Trade Administration, Fel). 10, 19/+3, Iraqi Airways presently has three 707s, six 727s, three 737s, and four 747s. Iraqi Airways ranked 44th out of 121 IATA members in 1982 international tonne-kilometers performed, but it grew 12.7 percent by the same indicator during the 1981-82 period. Ira n Iran has international airports in Abadan, Esfahan, Teheran (Mehrabad International), Shiraz, and Zahedan. There are 36 major and secondary domestic airports open to civil aviation, Iran Air, the national flag carrier, was founded in 1962, taking over limited freight and passenger operations from two private companies. Its load factor grew appreciably, and in 1977 it served 25 different domestic airports and provided services in international routes to 24 different countries in North America, Europe, and East Asia. Iran Air has five 707s, ten 727s, four 737s, ten 747s, and six Airbus A300s. Iran Air ranked 50th out of 121 IATA members in 1982 scheduled tonne-kilometers performed and 49th in scheduled passenger-kilometers. Regional Efforts There are a number of regional efforts to develop commercial airlines and support systems in the Middle East. These include technical assistance programs, as well as one regional airline company, Gulf Air, which is jointly owned by four Middle Eastern countries. Many technical assistance programs are being pursued with foreign participation. The U.S. Federal Aviation Administration (FAA), for example, is presently conducting technical assistance programs promoting the regional development of commercial aircraft support in the Middle East. These include assistance in design and development of the Kuwait International Airport, where the National Aviation System has two resident U.S. advisors. In Saudi Arabia, the FAA runs Saudi airman certification services for the Boeing 707/737/747 and the Lockheed L-101 1. During the period 1951-82 the FAA trained over 550 personnel in the six countries under PAGE 264 260 l Technology Transfer to the Middle East study in air traffic control, air navigation facilities, airport services, and flight standards. 28 AACO (Arab Air Carriers Organization) has attempted to organize an aircraft spare parts pool similar to those in Europe such as the ATLAS (Boeing 747) and KSSO (DC-10), but the results have been mixed. Saudia is the holder of L-1011 spares at Jeddah, but Lockheed spares are also stored in Amman, Jordan by TriStar Parts Ltd. 29 The IATA Program for Developing Nations Airlines (PDNA) assists airlines in developing countries in funding for individual or joint airline projects and in arranging and coordinating consulting and airline training services. 30 A training seminar, sponsored jointly by AACO and IATA, was held in Amman, Jordan in April 1983. The basic purpose was to determine the specific training needs and priorities of airlines in developing countries and to establish the foundation for a comprehensive PDNA training program in the future. In addition, initial steps have been taken to explore the possibility of conducting detailed feasibility studies for a Regional Airline Training Center in Amman. 31 ICAO also promotes civil aviation in developing countries worldwide. A major instrument in this work is the United Nations Development Program. So far, most of the organizations work in this area has been directed toward the development of the ground services required for civil aviation and in particular air traffic control, communications, and meteorological services. [n the past few years, with the advent of larger and more complex .--- --..-- 8 Quentin S. Taylor and J. Stuart Jamison, FAAs International Training Programs, Journal of Air Traffic Control, October-Dececember 1982, pp. 6-9. 29 These spare parts generally include only airframe line replaceable units, with engine parts inventories held elsewhere. Information provided by TriStar Parts Ltd., January 1983. 30 See for example International Air Transport Association, 4Consultancy and Training Services Directory, first edition, Nov. 1, 1981; IA TA-Improved Productivity Through Common Effort, August 1982; and Wings for the Developing World, 1982. As stated by IATA, the basic objective of the PDNA is for member airlines to develop self-reliance, thereby strengthening the global commercial air transport system. 3] IATA Annual Report and Executive Committee Report, 1983, p. 24. aircraft, requests for assistance are increasingly in the more sophisticated fields of aviation. Assistance has been provided in the organization of government civil aviation departments and the location and operation of facilities and services, particularly personnel training. In Egypt and other Middle Eastern countries civil aviation training centers have been created or assisted. Gulf Air is a joint venture between Bahrain, Qatar, the UAE, and Oman. Gulf Air was founded in 1950 as Gulf Aviation Co. and was nationalized in 1974 to become the flag carrier for the four countries. 32 It is now one of the regions largest passenger carriers, carrying numbers of passengers comparable to Iran, Air and EgyptAir. After rapid expansion in the 1970s, the airline plans to consolidate certain operations in the 1980s and must cope with problems such as the worldwide trend toward fare deregulation, and overcapacity due to increased competition on Gulf routes. Overcoming difficulties which included lack of infrastructure and competent personnel, Gulf Air realized a small profit in 1979 which steadily increased to $10 million in 1980, $19.4 million in 1981, and $34 million in 1982. 33 Gulf Air has recently expanded its network somewhat. In 1982, it started flights to Amman, Jordan and Larnaca, Cyprus, reopened a link to Athens, and inaugurated a London-to-Cairo service. By the end of 1982 it was operating a fleet of eight Lockheed L-1011 TriStars and nine Boeing 737s. 34 Historically, the dominant airline in the region was Middle East Airlines (MEA) of Beirut. It was largely responsible for making Beirut the hub of international air travel to the Middle East. In 1979, Lebanon began a Gulf Air: Flying Against the Flag, Middle East Economic Digest Special Report, September 1981, pp. 41-43; and Dudley Nigel, Gulf Air: A Servant of Four Masters, Middle East Economic Digest, Mar. 21, 1980, p. 10. t~Ibid.; ~d Gulf Airs profits Flv Against the Trend, Middle East Econormc Digest, vol. 27,-Issue 4, Jan. 28, 1983, pp. 8-9, and Gulf Air Posted 34 Million Dollar Profit in 1982, An-Nahar Arab Report and Memo, vol. 7, Issue 27, July 4, 1983, p. 8. Arab Airlines: Co-Operation in the Face of Competition, Middle East MagazineAviation Survey, August 1983. PAGE 265 Ch. 7Techno/ogy Transfers in Commercial Aircraft Support Systems l 261 $300 million program to expand and modernize Beirut airport, and in 1980 MEA announced its planned fleet expansion would include the purchase of five Airbus A310 aircraft, plus an option for 14 more. MEA survived the civil war of 1975 and the political instability in the late 1970s, but the 1982 war in Lebanon caused severe problems for the carrier. MEA lost six Boeing 707s and another five may be scrapped because of extensive damage. In addition, its ground facilities were damaged in the fighting. Insurance will provide only a small portion of the replacement costs, due to the restrictiveness of war risk coverage. The airline reportedly began to base its operations from Larnaca, Cyprus instead of Beirut. MEA does apparently plan to replace the aircraft lost and to continue its fleet modernization/expansion program based on the A310. The war has, however, eroded Beiruts position as a gateway, and MEA as a major factor in Middle East commercial aviation. PERSPECTIVES OF RECIPIEN T COUNTRIES AND FIRM S Keeping an airline fleet operating is a technically demanding business. This section first outlines requirements for maintenance of commercial aircraft, reviews training programs associated with aircraft sales, and discusses the requirements such as airport design. Next, the experiences of six Middle East countries are analyzed in order to assess the extent of technology absorption and the significance of commercial airline support systems in their economic development programs. Requirements for Commercia l Aircraft Operatio n Routine Maintenance. Each aircraft model has a routine maintenance program for operation in scheduled service. Routine maintenance tasks consist primarily of inspection of the airframe, engines, systems and components to assure safety and satisfactory operation of the aircraft. Such routine maintenance is carried out by the individual Middle Eastern airlines. Usually, these routine inspections or checks are based on flight hours and are called Preflight, Transit, A, B, C, and Structural Inspection checks. The Pre-flight check is performed each morning prior to dispatch and anytime the aircraft is on the ground for more than 4 hours. The Transit check is performed before each flight, usually in a walk-around inspection. The flight crew can perform this check if maintenance personnel are not available. The A, B, C checks are called scheduled checks since they are performed at specific time periods. Each operator develops and obtains approval for his pattern of scheduled checks, but in broad terms the A check usually is performed approximately weekly (every 100 hours) with the B check interval four times that of the A (every 400 hours) and the C check interval four times that of the B. 36 In order to avoid peaks and valleys in maintenance work and numbers of personnel, the checks are often combined into a phase check which consists of elements of all three checks, e.g., A + B/2 + C/8. There are many variations of these phases, normally established to correspond to a particular operational schedule. Each inspection generates additional maintenance not part of the routine maintenance. A complete maintenance cycle includes these routine checks as well as major overhaul (structural inspection). Over the course of a complete maintenance cycle, nonroutine maintenance man-hours approximately equal the routine maintenance man-hours. The number of personnel required depends on the type of check being performed and the The maintenance check is defined as a maintenance action requiring thorough examination of an item, component, or system for general condition with emphasis on proper attachment, safety wiring, cotter pins, fasteners, clamps, latches, tubing, plumbing, electrical wiring and connctions, linkages, bearings, alignment, clearances, lubrication, obvious damage cracks, delamination, fraying, operating pressures, fluid leakage, excessive wear or play, corrosion, evidence of overheating, rubbing, aging, preservative coating or finish, cleanliness, and general appearances. The Structural Inspection (or airframe overhaul) is usually performed at intervals 10 times that of the C check, or, in the example noted 16,000 hours. Major overhaul is discussed below. PAGE 266 262 l Technology Transfer to the Middle East length of time the aircraft is available for maintenance. The size of the aircraft also determines maximum crew size. The Boeing 747, for example, requires a maintenance crew approximately twice the size of that required for the 737. While a Pre-Flight or Transit check can be performed with as few as three to five people, a Phase (or C check) could require up to 50 people (for a 747) or 25 (for a 737). Crews must include personnel skilled in airframe and systems, powerplant, electrical, avionics, sheet metal, and interiors. These personnel must include some who are licensed to work on and, particularly, to signoff work for release of the aircraft to operations. Crew composition for a scheduled maintenance crew should be approximately 50 percent airframe and system mechanics, 20 percent engine specialists, and the remainder equally divided among electrical/electronic, radio, instruments, sheet metal, interior, and quality control specialists. Additional specialists from the operators maintenance shops are utilized on an as-required basis on airplane checks. The suggested ratio of licensed personnel to skilled is approximately 1 to 3. Each operator, if purchasing an aircraft from a company such as Boeing or Airbus, receives information in the form of documentation, complete drawings and verbal briefings, as to the ground support equipment required Photo credit Saudi Arabian Ministry of Commerce Jet turbine engine repair to maintain the airplane. The specifications and/or engineering drawings of equipment required to maintain a particular aircraft model are supplied to the buyer as part of the sales package. The buyer can purchase equipment through the seller, from outside sources, or can manufacture the equipment. Availability of equipment or manufacture of equipment at a particular operators maintenance base depends entirely on the industrial capabilities of the local area. In most areas in the world, there are local industries capable of manufacturing the required equipment. Provisioning of equipment, whether through the aircraft seller, or from other sources, is a separate negotiation. A potential customer can include these costs in the total package. Maintenance provisions and their costs can be very important in making an aircraft sale. Equipment investment forecasts are performed regularly for presentation to potential customers, Since spares and ground support equipment investment and maintenance costs comprise about 20 to 25 percent of an airlines operating costs, improvements in methods of maintenance, extensions in maintenance schedules, and reductions in numbers of special tools and equipment required are factors influencing sales. Over the life of an airplane, spare parts sales can easily equal the purchase price of the airplane. Efficient management of spare parts inventories has become increasingly important, due to the high costs of maintaining excessive stock and the long leadtimes required for obtaining certain aircraft parts. Major Overhaul.Major overhaul is costly and technically demanding. A fleet of approximately 15 airplanes is normally required to justify establishing an overhaul center, but there are many other considerations such as fleet composition, age, and engine types. The only major overhaul center presently in the Middle East is in Saudi Arabia. Despite attempts to establish a regional center, such a facility has not been set up, and seems unlikely in the near future. A major overhaul of an aircraft is usually considered to be a structural inspection, during which the airplane is moved into a hangar with built-in work stands (or docks) which allow ac- PAGE 267 Ch. 7 Tecbnology Transfers in Commercia/ Aircraft Support Systems c 263 cess to all areas of the airplane. The aircraft is lifted on hydraulic jacks high enough to allow landing gear retraction and extension. The interior furnishings (seats, galleys, and lavatories) are removed and interior wall and ceiling paneling and insulation are taken out. Components are removed, serviced, or repaired as required. Personnel required to staff a major overhaul center include those skilled in engineering, training, production planning, quality control, spares planning and procurement, and shop personnel skilled in many different functions, such as electronics, welding, instruments, nondestructive testing, sheet metal, machining, and plastics repair. A total of approximately 450 people is required to staff such a maintenance base. Guidelines for major overhauls in the United States are established by the FAA, and these guidelines are also used in the Middle East, region. Frequency of major overhaul depends on the operators approved maintenance schedule and on flight hours. Boeing recommends a major overhaul at 16,000 flight hours for the 737 airplane. A structural inspection would be performed every 6 years for an operator flying 7 hours a da-y, 2,500 hours per year. 38 Many operator-s contract to perform all levels of maintenance including structural inspection for Middle Eastern airlines. The structural inspections are performed mainly in Europe or the United States, but there are facilities available in the Far East and other parts of the world. Normally, the operator determines where and how much contract maintenance will be carried out. Training Programs Associated With an Aircraft Sale. Through training, airlines seek to 1 .S (oti[ of F[dera] l{f~ulat irm~, I;3 17, Fedora] .1 Yiation Icirlllnistr:i[]on. ]tk 11 /\eronauLic\ and Spa((~Iurt .$~l, i\ppendix A Major Alterations, Mojor Repairs,. and Preventive Maintenance, p. 624 ff. Only two systems for overhaul are used i n t ht, ~{~rld, t 1][> [ 1.>. f+/\ ,+3 sj+tt,n~ an(i ii f~rlt ish s} st[~n~, wit h th{ 1;/l )1 sjst [m domlnat ]n~ w~)rldwid(, I ATA ar;d 1( ~10 clo n CII prom u IEa t (J {~~(v-h a u I sp[{ i fi ca t i on \ lpor a ft~wmg 717 i[ is rc~(~~nlrl~~~r~cle(j that a nl:i,j(jr {J\~rha[]l ~ xxwr a ft~r X) ,()()~) h( jurs I { IJw(t[r, the ;-i 7 n{)rnlal 1~ flit~ 1( jn~rt,r. fli~ht w~m[nt.~ A\suming 12 h~}ur< p{ir (la} utilizat ]on. {Jr i. tot) h~)ur+ ~]tr~(,ar. t h[ in~p{,ct ion M()\Il(i 1)[ ptrforn~lwl t,l [,r~ i I Jre:i r< become self-sufficient in aircraft operation and maintenance. Training thus directly contributes to technology absorption. Generally speaking, the smaller the airline the greater the need for follow-on training as the pool of experienced personnel and trainers is smaller. A comprehensive and professional training program is considered extremely important to the sale of aircraft. While a superlative training program will not win the sale, lack of such a training program can significantly contribute to loss of a sale. I n the competitive environment of commercial aircraft sales. this fact is well known, hence all suppliers stress training in their packages. Because of this, no one supplier has a significant advantage over competitors because of the training programs offered. Personnel training associated with the sale of a commercial aircraft generally includes both flight operations and maintenance. 39 A typical training program offered by major aircraft manufacturers and included in the price of an airplane consists of: 1) flight operations, usually including complete training for a certain number of flight crews, 40 dispatchers, and flight attendants: and 2) maintenance training, usually including training in airframe and systems, electrical systems, avionics systems, corrosion prevention, and control, and post delivery practical maintenance training. The three major U.S. aircraft manufacturers provide about the same level of flight operations training support. Of the three, Boeing is the most prominent in the commercial airline field, with Lockheed (maker of the L-1011) no longer producing commercial aircraft. (The McDonnell Douglas DC-10 jumbo jet is out of production except for a military version, but 39 Personnel trained for flight operations include: pilots, flight engineers, performance engineers. (1 l~j)il [4ht, r\. f] i~l] [ ;lt t (,11( i ants, instructors suptm iwrs, iiIICi k )a(i lr] :ic-t [ Lt-\ I )( M )n] f ~ptr:i t I Ir \ [)(~rsonnel trained for maintenance intlu(i[ t[~.l r](i:ilr+, Iirfr:irrlf and systems spt~cialists. akit )nic ~ spt(l :~1 ] ~t ~, :i n(i ] n + [ ru{t f ~r~ >1] p[~rl ] ~( 1l-s. Ihc> t~pi(al t(xk~]]t (.rti~ ~t)nslst + of a pilot, first offlf(r ((st ~pll(~t ) iin(i flight [m~inw~r. SOIII(I of tht new(r p]ancs SUL a~ t 11( I )tIugl as hl I )-,<( ) or ll{xln~ 767 r[~f~u I r-(, ( }n 1} t w{ 1 pfu ~] )It, n:itn[~ t ht~ pilot ami (>opilf)( This is due to improved instrumentation and more automatic features. PAGE 268 264 Technology Transfer to the Middle East their MD-80 142passenger airliner, previously called the DC-9-Super 80, is still being produced.) The amount, type, and technological sophistication of training techniques in courses offered by Airbus are roughly comparable to that offered by Boeing in both flight crew and line maintenance training. Most airplane customers have a significant number of options with respect to brand names of equipment, control and functions of the avionics equipment and numbers of systems to be installed in their aircraft. Much of the avionics equipment is used by several different airplane manufacturers. The new integrated digital avionic systems introduced in the Boeing 757/767, McDonnell Douglas MD80, and Airbus Industrie A310, for example, are expected to have an impact on air carrier operations equal to the introduction of radio navaids (navigational aids) and two-way voice radio half a century ago. 41 In this case, the entire collection of avionic sensors and subsystems has been designed to function as an integrated flight control and management system. This will enhance operational efficiency and flight safety and ease flight crew work load. Aircraft companies generally provide training in the Middle East similar to programs provided to customers in other developing or developed regions. From a flight crew viewpoint, there is not much variance among operators arising from special qualifications required to fly a specific aircraft. At the request of the customer, courses can be extended to deal with language difficulties. All Middle Eastern students must, however, meet minimum requirements before attending maintenance training courses. According to U.S. industry experts, training of personnel in aircraft maintenance and 41 "New Avionic Systems offer Efficiency, Safety Benefits, Aviation Week and Space Technology, Apr. 19, 1982, p. 52. Training programs for the use and maintenance of avionics packages at the line maintenance (or systems) level are modified for each customer. The shop level (or test repair overhaul level) is not considered as critical, and courses generally teach typical configuration components to several customers at a time. operation in the Middle East has proceeded successfully. From a flight operations viewpoint, Middle Eastern students generally are well educated and have sufficient knowledge of English to permit efficient and effective training. (Since all flight and maintenance classes are taught in English, training time and efficiency depend on the English fluency of the students. ) Language problems in aircraft operations training are usually most noticeable in the case of ground support personnel. Egypt and Algeria have the largest numbers of nationals maintaining their aircraft, while the Saudis and the Kuwaitis the smallest. Since being a mechanic is not a prized occupation in these latter two countries, reliance on Pakistani, Egyptian, Jordanian, and Palestinian mechanics will probably continue far into the future. Airport Development. In the Middle East, some of the worlds newest and most technologically sophisticated airports have been built to accommodate expanded airline operations. Several of the newer, larger airports in the Middle East have been planned, designed, and sometimes constructed by foreign consultants and contractors. The selection of a site suitable for a new airport normally depends on certain criteria which are also applicable to the expansion of existing airports. The location of an airport is generally influenced by the following factors: 1) type of development of the surrounding area, 2) prevailing weather conditions, 3) accessibility to ground transport, 4) availability of land for expansion, 5) presence of other airports in the general area, 6) surrounding obstructions, 7) economy of construction, 8) availability of utilities, and 9) proximity to urban centers. These factors vary greatly among the Middle Eastern countries. The design of the passenger terminal complex must accommodate different types of userspassengers, visitors, airlines, airport operators, and concessionaires. Different design objectives, and consequently criteria, can be identified for the different users. The most PAGE 269 Ch. 7 Technology Transfers in Commercial Aircraft Support Systems l 265 important evaluation criteria for passenger terminal planning are: 1) ability to handle expected demand, 2) compatibility with expected aircraft types, 3) flexibility for growth and response to technology changes, 4) compatibility with prevalent ground access modes, 5) compatibility with the total airport master plan, 6) potential for delay, and 7) financial and economic feasibility. In addition to the passenger terminal, airfreight handling and storage facilities, control tower, powerplants, fuel storage, repair hangars, administration buildings, fire station, communications, concessions, parking, often hotels or residential facilities, and public safety facilities are needed. Airport planning and development is thus a complex architectural, engineering, and logistical task. Air Traffic Control.Air traffic control (ATC) requires various types of navigational surveillance and communication equipment (both in the cockpit and on the ground). The technologies involved, while widely used, are fairly complex, and training in their use, maintenance, and repair is not trivial. The equipment presently installed in the Middle East ranges from state of the art to outmoded. Aids to aerial navigation can be broadly classified into two groups: 1) those that are located on the ground (external aids), and 2) those installed in the cockpit (internal aids). Some aids are designed primarily for flying over oceans; other aids are only applicable to flight over land masses; and finally there are aids that can be used over either land or water. Some aids are used only during the en route portion of the flight, while other aids are necessary in terminal areas near airports. 42 The principal aids for ATC are voice communications and radar. English is the international language of ATC. The controller monitors the separation between aircraft by means 42 Rohert lloronjeff. })mmng and Design of .4irports (New }rork: hlc(; raw-1 Iill, inc., 1975), For further descriptions of alterna[ iie AT( s~sten]s+ consult ,\irport and ,4jr Traffic (ontm] SjFstem.S, OTA-SI17,5 ,Januar} 19%2, and Re~rie~r of the F.-l ,A j :)xy ,fatjon~ .lir,sp~cc ,S~5tem Plan, oT44-sT1176. August 19S2, both publications of the U. S. Congress, office of Technology Assessment, Washington, D.C. of radar and instructs the pilot by means of voice communication. 4s The Operation of Commercial Aircraft Support Systems in the Middle East Designing airports, and operating and maintaining commercial airline fleets are complex and technically demanding tasks. Some Middle Eastern countries have effectively used these technologies. A major purpose of the discussion that follows is to analyze factors contributing to this comparative success in technology absorption. Saudi Arabia.The Saudi Arabian national airline, Saudia, is one of the fastest growing airlines in the world. Carrying 4,000 tons of freight in 1970, it grew to accommodate 100,000 tons of cargo and 9.4 million passengers in 1981. Saudia systemwide traffic increased 11 percent in 1983 to 11.1 million passengers, and the airline expects continuing expansion in 1984, particularly on routes to the Far East. The stated goal of the International Airports Project directorate under the Ministry of Defense and Aviation is to plan and build airport facilities vital to the continued social progress and economic growth of the kingdom. 4 All three international airports in Saudi Arabia are undergoing or recently completed major expansions. Jeddahs new $6 billion airport (opened in spring 1981), the King Abdul-Aziz International Airport covers 104 square kilometers, making it in area the biggest in the world. Bechtel (U. S.) supervised construction while a Ralph M. Parsons/Daniel joint venture There are t~~ t~p~s of radar: Primar} and heacon. Irimar} radar shows reflections from the aircraft bod~ as small h]ips; on a radarscope. Beacon radar (sometimm referred to as secondar~r radar) consists of a radar recei~er and transmitter on the ground that transmits a strong coded signal to an aircraft if that aircraft has a transponder. A transponder is an airborne receiver and transmitter which receives the radar signal from the g-round and responds by returning a coded reply to the interrogator on the ground. Most commercial aircraft carry transponders. Saudia Continues (~rowth At a Cost, .iliddle I;as[ }4.c(}norni(> I)igest, Aug. 28, 1981, p, 29; Roy Allen, 4 Air Freight Ilusiness Zooms Ahead, .-l~iation: .4 Aliddle East fi;conomic IIige.st Business Feature, ,June 25, 1982, pp. 62-64; iSaudia Expects Traffic Rise to Continue, ,4 ~iation Iitwk and Space Technolo~~, NI a~ 28, 1984, p. 37ff. PAGE 270 266 Technology Transfer to the Middle East i t New Riyadh Gateway King Khaled international Airport i S the new aerial gateway to Riyadh, capital city of the Kingdom of Saudi Arabia. Its four-passenger terminals are alI served by air bridges The mosque, center left, rises 40 meters above the arrivals level roadway operates it. The new Riyadh airport, which will exceed Jeddahs in eventual size, was also built by Bechtel, using more than 12,000 workers from 35 countries. 45 The third major airport is Dhahran International. Saudia has had a predominantly U.S.-manufactured fleet until its latest purchase of 11 wide-bodied Airbuses for delivery in 1984. In order to service its large fleet, Saudia has established extensive maintenance facilities. Saudia completed a comprehensive maintenance facility in 1979 and can perform all of its own aircraft checks and overhauls. TWA has had a deep influence on Saudia standards and operating procedures, but European influences have also been felt. .- 45 Transport: Airport Iacilitie+ Keep Iace \$it,h Kingdoms (; rowth, Saudi .\r:~bia: ,Iliddje East .Speciaj Heport, John Nhe]an ([d ). Nlicidle E; ast F;conomic I)igest Iiouse, 1,ondon (August 1 9/+2), pp. 161-164. See also, Roberl Bailey, Countdown Begins for,Jt!ddah Airport .\liddle lnor7]i( l)i~vj.st, A ug, 2!), 19x(), p. I X ; itl ackie, op {it, .Jenah Tutnj i, Arah Wings: Flying th~~ (hm-kr tta~, ;lli~idlt l.a.~( lNl ichat Frost, Algeria I)lans !vlajt)r Airport I;xpansic)n, :Jliddle J,ast h;conomic l)ig~.s[, Aug. 28, 1981, p. 7. -.lfiddle ];ast ~,cor?on]ic l)igest, .Jul~ 2, 19H 1, [). 4: 1 ndian> Sign ,lirporl (ont ract <, ,}tiddli~ l+;a,st F,(onon]it ljigf.st. \ ()\. 5, 1 WY, p 13. PAGE 276 272 c Technology Transfer to the Middle East example, Lufthansa (West Germany) will train Air Algrie crews on A300s at the Frankfort/Sieheim base of Lufthansa. 68 This arrangement is part of the terms of a lease for two Airbus Industrie medium-range passenger planes. Eight Air Algrie maintenance teams will also receive technical training. Until the Algerians are fully able to take over operations, Lufthansa itself will provide crew and maintenance technicians. According to some estimates, Algeria may need up to 25 Airbus Industrie A300s in the next 15 years. 69 Although the comparable Boeing 757 is less expensive, Airbus is said to have the edge. In this case the French have offered to train Algerian engineers and aircraft mechanics at Airbus factories in Toulouse. Moreover, the French proposed to setup complete maintenance facilities for Air Algrie at El-Djazair within 3 years. A civil aviation school for pilots and technicians is planned as a step towards implementation of the current development plan. 70 The school, to be located in Constantine, will be modeled on the Ecole Nationale dAviation Civile in Toulouse. Its estimated value as a turnkey package is from$115 million to $230 million. Funding of $818,800 has been provided through the United Nations Development Program while the Algerian Government has allocated some $68.2 million. The Enterprise Nationale dExploitation Meteorologique et Aeronautique, within the Transport Ministry, is in charge of the project. Tractional (of Belgium) is carrying out preliminary studies for the proposed 636-student institute. Algeria plans to purchase sophisticated equipment for use in training and research. For example, Algerian leaders have been discussing the purchase of flight simulation equipment from Latecoere (France). The simulators would be used for testing the physio. 68 "Air Algrie Leases Airbuses, Middle East Economic Digest, May 22, 1981, p. 8. 69 "Airbus Looks to Air Algerie. Middle East Economic Digest, Oct. 15, 1982, p. 6. It presently has no Airbus or Boeing aircraft on order, however. 70 Frest, op. cit. Middle East Economic Digest, Feb. 27, 1981, p. 8. logical effects of flying on the flight crews as well as for testing aeronautical equipment. 72 Algeria has plans to purchase a research aircraft with the help of a $7 million loan from the Arab Fund for Economic and Social Development (AFESD). It will be used for testing ground control equipment by some African and all Arab countries. 73 If Algeria proceeds with its planned fleet expansion, investment on the order of $55 million could be required and an additional 1,000 workers could be needed. It appears that the overall composition of the national labor force could support the annual levels of growth planned in airline-related occupations, given adequate vocational training in the specific occupations required. Serious attempts are thus being made by Algeria to develop manpower apace with increases in air traffic and airport expansion. Airbus Industrie, with its multigovernment support, is said to offer attractive training arrangements and financing terms. Thus Airbus is said to be favored for large purchases of aircraft in the coming years. Iraq. Iraqi Airways uses Lufthansa service for its aircraft maintenance but performs its own routine maintenance (A and B checks). Plans have been laid to build new airports in most provinces with a view to expanding and improving Iraqi Airways services. There are plans to expand the domestic network through airports to be built at Arbil, for which the design contract has already been let, and at Amara, Kirkuk, and Najaf. 74 Decreased oil revenues and the strains of the Iran-Iraq War, however, make delay of these plans likely. Iraqi Airways has experienced impressive growth, especially since 1977, and considerable investments have been for new airports, both international and domestic. Foreign contractors from a wide variety of nations have 72 "Aviation Contract Discussed, Middle East Economic Digest, Apr. 11, 1980, p. 22. The contract was valued at $45 million. 73 Middie East Economic Digest, Aug. 8, 1980. pp. 15-16. Information provided by U.S. Department of Commerce, International Trade Administration, Feb. 10, 1983. PAGE 277 Ch. 7Technology Transfers in Commercial Aircraft Support Systems 273 participated. Pacific Consultants of Japan won contracts for airport design studies in 1976 and 1978. The major construction contract for the Baghdad International Airport (valued at $900 million) was awarded in 1979 to the French company Spie-Batignolles and Fougerolle. The major Basra Airport construction contract was awarded in 1980 to an AustriaWest Germany consortium of Universal Hoch and Treflou and Bil Pinger. In 1978 Scott, Brownringy and Turner of the United Kingdom received a contract of unspecified amount for design of passenger terminals; another British group, Kirkpatrick and Partners, received an airport consultancy contract in 1982. In conjunction with the contract, Pakistans Feedai Agency is supplying labor for this construction. The primary suppliers of passenger aircraft and parts have been U.S. corporations. Three Boeing 727s and 747s, at a cost of $183.6 million, were sold in 1981. Three other 727s were sold in 1980. In 1975, two 747s, three 727s and one 737 were supplied by Boeing at a cost of $150 million. The State Organization for Civil Aviation has plans to build a comprehensive training institute. Programs in operation and maintenance of airports, aircraft, air traffic control, and radar equipment will be offered. Pilots and cabin crew will be trained in a broad range of skills, including foreign languages. 75 Iraq has been active in developing specialized manpower for its commercial aviation sector. Now that women as well as men are being admitted to train as pilots at the Takrit air force academy, the pool of skilled labor that could be eventually drawn from military to civil aviation may be expanded once the Gulf war is ended. 76 This move is indicative of national policy to expand the indigenous labor force. The government is not waiting for domestic facilities to be completed before intensifying training activities. In October 1981, British Airports International won a $1.3 million illiddfe Jjast I;conornic Digest, Apr. 10, 1982, p. 28. ,i!liddle East Economic Digest, Apr. 9, 1982, p. 5. contract to train over 400 Iraqis in airport electronics. The courses to be given in the United Kingdom will include both classroom study, at universities and technical institutes, and hands-on training at airports and at centers of aviation equipment manufacture. A similar contract worth $530,000 to train Iraqi air traffic controllers in the United Kingdom was awarded at the same time. British firms thus have been particularly successful in the Iraqi aviation training market. Some companies have had long-time working relationships with Iraq, such as the Lancer Boss Group which has been dealing with Iraqis for 20 years, Non-British firms have made inroads in this market. For example, in January 1982 an airport staff training contract worth $1.4 million was awarded to the West German firm Flughaven Frankfort am Main. The national airline of Iraq continues to operate despite the war with Iran. Under present circumstances, however, it is unlikely that Iraq would divert capital investment or occupational training (pilots and aircraft mechanics) from the military in order to build up the commercial airline industry. Iran. Iran Airways presently handles most of its own routine maintenance, with the assistance of technical specialists from other countries. Major overhauls are carried out abroad. Irans Fifth Development Plan, (197377), under the Shahs regime, called for expansion of existing airports and the construction of new airports, including the new Teheran airport scheduled for completion in 1980. Authoritative information on the current status of these projects and of Iran Air is unavailable, although it can be assumed that military capabilities have been given priority over commercial aviation in the air transport sector. As of 1982, Iran Air was reported to have a labor force of 5,500 trained technical personnel. Iran carried on negotiations with Australia to set up a training program for Iran Air. 77 Middle East Economic Digest, Oct. 16, 1981, p. 28. PAGE 278 274 l Technology Transfer to the Middle East .. .. About 150 commercial pilots of the national airline would be involved in the program. Iran reportedly has budgeted some $33 million over the next 5 years for building a new international airport south of Teheran. Design and preliminary construction were completed prior to the Shahs overthrow. Plans have been scaled down from an annual capacity of 20 million passengers to 7 million. Total cost is now estimated at between $100 million to $200 million. Despite the political situation, Irans commitment to the airport project suggests that the government expects more internationa-1 visitors and is willing to provide modern facilities for them. 78 Regional Efforts.The expansion of air traffic in the Middle East over the last few years has seen considerable cooperation among regional and national carriers. One official, speaking about joint provision of air services between the Middle East and North America, summed up the general situation quite succinctly: At the moment we do not have the equipment, the machinery, or the manpower to do it [cover demand for services] individually. The idea is for a pooling of resources to benefit every body. 79 In 1980 a technical consortium was formed that included Middle East Airlines, Saudia, Kuwait Airways, Gulf Air, and ALIA (the Royal Jordanian airline). The consortium also held discussions with other members of the Arab Air Carriers Organization (AACO), but none have yet joined. Programs being considered or actually underway include shared services (especially telecommunications) and unified training. Shared Services.Sharing electronic equipment and technical services may be an attractive option for Middle East carriers. Highly specialized electronic and telecommunications may cost as much as 20 percent of the total sum required for a new airport. Elements typically included in a turnkey package are radar, 78 Middle East Business Intelligence, vol. 2, No. 13, Aug. 15, 1983. 7 Arab Airlines Plan Atlantic Route, Afiddle East Economic Digest, June 20, 1980, p. 16. telecommunications, navigational aids, and lighting. Multinational corporations or consortia of suppliers of equipment and services generally offer to install, maintain, and staff the airport. In order to limit the number of expatriate workers who form the largest proportion of the technical staff in most cases, airlines in the Middle East have the option of automating operations. Keeping the labor component to a minimum while at the same time developing regional capabilities requires coordination in telecommunications services. Perhaps the most impressive effort is the joint computerized reservation system. Based in Bahrain, it will handle an estimated 10 million reservations a year for the 10 airlines involved: ALIA, Domestic Yemen Airlines Co. (South Yemen), Gulf Air, Kuwait Airways, Libyan Arab Airlines, Middle East Airlines, Saudia, Sudan Airways Corp., Syrian Arab Airlines, and Yemen Airways (North Yemen). At present only Gulf Air has its own computer reservation facilities; the rest lease services from outside the region. Iraqi Airways did join the group because it has a central computer judged to be adequate. Another labor-intensive service that could be performed more cheaply through a regional center is the calibration of instruments. Among the Arab countries, only Saudi Arabia has such capabilities. A regional air traffic control system may be attractive from an economic perspective, but there is overlap between the military and civilian control networks so that such cooperation may not be politically feasible. Aircraft maintenance centers and joint catering services are under discussion. Unified Training. Royal Air Marocs experience with training Moroccan nationals for technical flight staff shows how expensive training can be. 81 In 1980, the airline announced its goal of complete staffing with Moroccan nationals by 1982. The 1980 defi. --. [Robert Bailey, Airlines Plan Computer Reservation Centre, Middle East Economic Digest, Apr. 11, 1980, p. 19. The project is estimated to cost $30 million to $40 million. Da\id Hawley, RoyaI Air Maroc Facing the Competition, A}iation: A Nfiddle East Economic Digest Business Feature, ~rol. 26, June 26, 1982, pp. 62-63, PAGE 279 Ch. 7 Technology Transfers in Commercial Aircraft Support Systems l 275 cit of $2.6 million (up from $1.9 million the year before) was attributed largely to training costs totaling $3.8 million in 1980. As of June 1980 approximately 60 percent of the technical staff was Moroccan. Nevertheless, the airline has expanded its role in regional training. The At-ah Civil Aviation Council has considered promoting Morocco as a base for a civil aviation high technology institute. 82 The Royal Air Maroc center in Casablanca is training some African airlines students (e. g., from Air Mali, Air Zaire, and Air Mauritania) in addition to Moroccan nationals. The AAC() has met with some success in joint training of management-level staff. The Douglas Aircraft Co. (subsidiary of McDonnell Douglas Corp., U.S.) organized a popular seminar for the 18-member AACO in August 1981. This was followed the next year by a marketing course offered to 25 executives from the group. Sessions included fleet planning, aircraft financing, performance assessment, and forecasting. 83 In September 1981 the chairmen of several Arab airlines met to consider a unified training system as well as the joint building of a large airport hangar. The airlines involved were Kuwait Airways Corp., Saudia, Middle East Airlines, Gulf Air, and ALIA. There has, however, been no reported progress in these ventures. There is general agreement that cooperation among Arab airlines is economically desirable and perhaps necessary to reduce staff requirements of individual carriers. The AACO is the most comprehensive organization, but various smaller groups of countries have participated in joint programs, The notable achievement has been the development of the Bahrainbased, centrally computerized reservation system, Joint provision of other telecommunications, maintenance, and training services has been discussed rather more than implemented. PERSPECTIVES OF SUPPLIE R COUNTRIES AND FIRM S Commercial aircraft support systems comprise a variety of equipment and services needed to operate and maintain local airlines in the Middle East. As discussed earlier, they fall into two groups: the goods and services needed to operate aircraft, and those needed to operate airports. The former are usually supplied by other airlines, aircraft and aircraft engine manufacturers, and aircraft maintenance firms. The latter are supplied by a diverse group of communications, aerospace electronics, and airport construeti(jn firms. The diversity of products exported to be parts of airports and air navigation traffic control systems, and the large services component in aircraft maintenance and operation preclude any simple analysis of trade flows. While most equipment for aircraft and aircraft engine maintenance is exported as aircraft parts (SITC 7349), a large portion is linked to the original aircraft purchase. 84 A multitude of equipment manufacturers often coordinated by construction management firms, provide the various airport systems components. For example, Bechtel was has the construction manager for the new Riyadh airport, but the equipment installation and construction was handled under a number of separate contracts. The French firm Jh~, r]]tijc~r qulpmen[ Ittlrn+ in t hi< <(([( lr :ir(, 1 IS[ t(1 ;I((I )r(llng to Standard I ndu st rial ( las~l 1 IC:I t I( )r~ [ S 1() :Ln(i St ,ln(iur(] 1 ndu+t ri:il Trad[J (la+sifl(.lti(~rl ~ S 1 ( (( Klt I r] (I rlll)[,r+ SIC code 3662 3721 3724 3718 1611 PAGE 280 276 l Technology Transfer to the Middle East Thomson-CSF is supplying air traffic control and navigation systems. Firms from the United Kingdom are also active, particularly in Saudi Arabia. Germanys major presence has been in Iraq, while U.S. firms are primarily involved in Saudi Arabia. Some recent commercial aircraft support system contracts awarded in several Middle East countries are shown in appendix 7A in tables 7A-1 to 7A-5. Aircraft maintenance and support are performed by the local airline, by foreign personnel employed by the local airline, or by foreign airlines and maintenance firms on a contract basis. The contracts in the Middle East (and elsewhere) cover a 3to 5-year period. This is done to spread the nonrecurring costs over a broader base, thus lowering the person-month rate. 85 As mentioned previously, after the initial aircraft sale, there is a substantial amount of follow-on training for flight operations personnel, especially for smaller airlines which do not have their own training program. Crews and performance engineers are trained and previously trained personnel are brought up to instructor qualified level. There may be a significant amount of follow-on maintenance training in the more specialized areas, such as rigging and composite repair. The degree and magnitude of the follow-on spare parts business is determined by many variables, including. 1. The amount of spare parts initially purchased from the manufacturers and suppliers prior to delivery of the first aircraft. 2. The degree of customer expertise in airplane maintenance and repair of parts removed from aircraft. 3. The number of airplanes of a particular make the customer has in operation. For example, the same quantity of certain high-cost repairable spare parts is sufficient to support one or several aircraft. As a general rule, however, the larger the fleet, the more spares that are needed over time. Person-month rate is the cost of employing a person for 1 month including salary, benefits, and general overhead. 4. 5. Daily utilization by the customer of the fleet and the route structure. The higher the utilization rate of the aircraft, the more spares are needed in inventory at the main base and at those locations included in the route. The extent to which a customer participates in pooling of inventory with operators in the same region. Fleet homogeneity assists in maintenance since the publications, training, ground support equipment, and spare parts needed reflect only the differences between early aircraft and later model aircraft of the same model. Maintenance capabilities can be pooled, but usually these capabilities and services are contracted. There are, however, several consortiums whose members perform maintenance for each other. These usually do overhaul work for the consortium. For example, one operator may do engine and auxiliary power unit work; another hydraulics; another airplane structures. Regional airline spare parts pooling agreements are administered and controlled by the airlines-prime manufacturers are not participants. Most Middle East customers currently participate in the International Air Transport Pool (IATP). Competition Among Suppliers in Technical Assistance and Commercial Aircraft Sales The factors which affect competition among firms supplying technical assistance to airlines in the Middle East are, not necessarily in order of importance, fleet compatibility, geographical proximity/route compatibility, historical ties, and commitment to service. Fleet compatibility, or capacity for type-specific maintenance and support, and geographical proximity are more prerequisites than competitive factors. Historical ties have been an important determinant of technical support relationships, but they must be reinforced in order to remain influential. Underlying historical ties with foreign airlines are bilateral political relations. With the exception of MEA and Trans-Mediterranean (all cargo), Middle Eastern airlines are governm ent owned, heightening PAGE 281 Ch 7 Technology Transfers in Commercial Aircraft Support Systems 277 the importance of political factors. While the contracting of maintenance services is not necessarily a long-term commitment, combined with other technical services and assistance it is an important aspect of airline operations and is unlikely to be entrusted to an airline of a country with poor or faltering political relationships. Price, which is always a factor, is sometimes not as important a consideration as quality and efficiency of service combined with commitment. It is costly and disruptive to have aircraft grounded; airlines have been willing to pay for reliability in service. Sales of large commercial aircraft lead to sales of auxiliary equipment and services. Table 66 shows the large U.S. export value of sales of large commercial aircraft. In 1982, sales to the Middle Eastern region were surpassed only by sales in the European and Asian regions. The Boeing Commercial Airplane Co. hopes to sell aircraft valued at $600 million to $800 million to Middle Eastern customers in 1984 alone. According to projections from Boeing, the world market for commercial jet aircraft between 1983-95 will be worth about $185.1 billion at constant 1984 prices. Of this, 3 and 4 percent will come from the Middle East and Africa, respectively, representing total sales of $12.9 billion. 86 Middle Eastern sales may be an important indicator for sales in the rest of the world. Whether carriers in the Middle East will invest in brand new aircraft, or refurbish or buy used planes in order to meet their expected growth, is a major question for supplier firms. The chief rival of Boeing and McDonnell Douglas is Airbus Industrie, a multinational group of companies that are wholly or partly owned by European governments. Members of Airbus Industrie are Aerospatiale of France (37.9 percent ownership), Deutsche Airbus of Germany (37.9 percent), British Aerospace (20 percent), and Construcciones Aeronautical of Spain (CASA) (4.2 percent). 87 Airbus Industrie was formally constituted in December 1970. Its first plane, the A300, a shortto mediumrange twin-engine wide-body transport, went into service in May 1974. A smaller Airbus, the A310, was delivered to customers beginning in the spring of 1983. 88 *Rolwrt l]aile~, Boeing Strikes Ilackl ,Ifiddl[ 1,ust Fjconomic Dig~~st, Fet), 3. 1984, pp. :34-35, Th[ French ( ;o~rernment owns more than 97 p[rcent of Acrospatiak, the l~ritish ( io~ernmmt holds $~.~] Perctjnt of 13rit ish Aerospac~~ shares with the rest held privately. CASA is wholly owned by the Spanish Government. Deutsche Airbus is a subsidiq of two commercial companies that are in the pr(xess of merging. Richard C. Schroeder, rlr-ouhled Air Transport Industr?. i;diforid Re.warch Reports, ~ol. 11, No. 20. NOI, 2f~, ] 982, p 882, Table 66.U.S. Exports of Commercial Transport Aircraft (33,000 lb and over airframe weight, 1978-82) 1978 1979 1980 1981 1982 Total number exported . 111 200 237 255 121 Canada ., ., ... ... ... 4 20 22 25 13 Latin American and Caribbean 14 19 31 35 13 Europe . . ... ., ... ., 36 68 109 108 31 Middle East ... ... ., . 17 17 9 21 13 Asia . . ... ... 24 60 53 34 25 Oceania . . 6 6 7 19 8 Africa ... ... . 10 10 6 13 18 Total value (millions of dollars ) $2,558 $4,998 $6,727 $7,180 $3,834 Canada . . 132 373 299 584 294 Latin America and Caribbean 187 423 640 1,027 301 Europe . . . . . 906 1,601 2,670 2,528 938 Middle East. ... . . ... . 541 582 236 841 699 Asia . 478 1,722 2,467 1,405 1,096 Oceania . . . . 118 149 179 559 234 Africa . . ... ... 196 148 236 236 272 SOURCE Bureau of the Census U S Exports Schedule B Commodity by Country." Report FT 446 (annually), in Aerospace Industries Association of America Inc.. Aerospace Facts and Figures 1983/84 Washington, D C July 1983 p 133 PAGE 282 278 c Technology Transfer to the Middle East -... -. Commercial aircraft, however configured, are costly, as shown in table 67. Enormous capital outlays are required for developing and producing new models of large commercial aircraft. A new airline program can cost $2 billion to $3 billion before deliveries even begin. 89 This figure may exceed the companys entire net worth. 90 There is no guarantee that even a best-selling plane will be a major revenue earner. Of 23 models of commercial jet-powered transports produced, only two are believed to have been profit-earnersthe Boeing long-range 707 and the medium-range 727. (over 1,800 727s have been delivered.) Lockheeds L-1011 lost $2.5 billion by the time it was canceled, after approximately 200 were delivered. The supersonic transport Concorde, developed by the British and French, was a S(v~ ch } 1, rIh(~ f:con[)miis oi I,:irgc ransp(jrt I)LJ\L~lopm[~n t, I r( xiuc. tion, ;ind ( )p[~rat i( In in tht~ [ I ni t ed St at[~s, ..\ ( fJII]pctiti~c t.~seh.nt of the i ..S. (i\il .iircraft industr>. ( i ,S, 1 )t,[);ir[ n]errt of (omnl(r(w, I ndustr! An:il!sis 1)i\ision, ( )fficc {Jf I ndu \t r} .,1 sw~s~m(nt, hl ar~.h I 9H4. lht~ (it(>ision t{) Iwild a nt~w j~,diner ha~ lx~trl r~~ferred to :i~ }NIL L ing the c.onl~):in} S(w ,) ohn Ntwhous~~, h(~ Sport} ( ;:~m( Table 67.Typical Manufacturer/country Airbus lndustrie France, United Kingdom, Configurations Federal Republic of Germany, Spain Boeing United States McDonnell Douglas United States technical success but a major financial failure; only 16 were produced. 91 Boeings newest planes are both twin-engine jetliners with new, fuel-efficient engines. The 767, a twin-aisle wide-body, smaller than the 747, began flying commercially in the United States in September 1982. It has seven seats across with a capacity of 211 passengers. The 757, under delivery beginning in 1983, is a shortto medium-range jet with 186 seats. Some observers note that, until recently, no aircraft available on the market had 150 seats to accommodate a smaller number of passengers. This perceived gap in the market led aircraft manufacturers in the United States and Europe to begin work on a smaller airplane. This size is desired by airlines for its fuel economy. Boeing disputes that the 150-passenger aircraft need must be filled by a completely re .,~nnahellti Nlti}, (oncordeIIird of 1 iarnl(m~ or Iolit i{:]] ~lll)at ross: In F;xiimination in t h~~ (ontt~xt of I)rltish 1~ort~ign lolic~. lnt(/7]ati(jn/~l or~wniz:ltion, Jol. ;l~l, N {), 1, 19, pp. 481-50H. and Purchase Prices of Various Competing Commercial Aircraft Model A300 A310 A320 C 737-200 737-300 737-400 747-SP 747-200 747-300 757-200 767-200 767-300 7-7 d MD-80 Year available 1974 1983 1988 1968 1984 under review 1976 1971 1983 1983 1982 1986 late 1980s 1980 a Number of seats depends on seat pitch (spacing) used. First number is for a typical layout Seating (seating range) 260 (250-260) 210 (200-210) 150 (134-174) 115 (122-149) (134-161) 331 452 496 186 211 261 140(133-155) Cost b (millions 1984 dollars) 50 45 24 16-20 23-25 NA 77-84 86-101 91-106 38-42 48-54 56-61 23-24 b Costs are highly variable and are given as a reference only Aircraft configuration customer needs provision of spare parts and other factors make exact numbers for aircraft or cost comparisons between companies difficult c The Airbus A320 project received final go ahead funding from the consortium in March 1984 d The Configuration of the 7-7 is unknown it wiII probably make greater use of Composites and may use a Iighter Weight metal skin. SOURCES The Air War Boeing Airbus Fight for Jetliner Contracts All Around the World." Wall Street Journal, Mar. 20, 1984; information provided by Boeing Commercial Airplane Co. Airbus Industrie and McDonnelI Douglas Corp., March 1984 PAGE 283 Ch. 7 Technology Transfers in Commercial Aircraft Support Systems l 279 . designed (and hence very expensive) airplane. Their 737-300 model can accommodate a maximum of 149 seats. f] Under study are a 737400 configuration (a stretched version of the 737-300) with 134 to 161 seats, and a shortened version of the 757-200 (presently 186 seats). Boeing has recently reached agreement with the Japanese for development of a new plane, presently termed the 7-7, which could end up being in the 150-seat range. ) ] The Douglas LID-80 has 142 seats and might be stretched into the 150-seat range. The MD-80 series plane is already selling well in the United States and elsewhere, with three models in production (the Super 80, MD-82, and MD-83 seating up to about 155 passengers). This makes the aircraft already an effective rival in the 150-seat market. 94 McDonnell Douglas is now studying a new version, the MD-88, which would seat up to 164 passengers and use the projected new international V2500 engine being developed by the multinational International Aero Engines consortium. 95 The latter powerplant is being developed by a group of seven companies in five countries, with Pratt and Whitney of the United States and Rolls-Royce of the United Kingdom the project leaders. The engine is expected to be available around 1988 and probably will also be used in the Airbus A320. The need for a new 150-seat jetliner was a major concern in the deliberations leading to approval of funding for the A320 by the separate members of the Airbus consortium. 96 The .[ iermain (ham }mst, Iheings 7;~7-;N)o: A Step Into the 150SLIaL hlarket. lnter:~~i:~-,lerospact l{e~riew, \larch 1984, pp 240-241. < [lf)~ing, Japan Sign J$or-k Share Iact for 7-7, .AI ~ration 11e(k and Spacv Twhndo~:\, NI ar. 19, 19/+4, p. 32, ~lichae] I)ixon, hl(I)onnell-I) (Juglas Stud~ing N1 1)-M) Airlin[r I)(ri~ati\t, ~inan(.iaJ Tim(s, Nlar. 16, 1984, p. 6. Il)i(l,; .1 Iia[ion llwk and .Sp:Ict~ echnolo~?, hlar-, 19, 1984, p. :11. I)uring delitwratir)ns h~ t ht~ Ilritish, ~largarct Thatcher was quoted as sa~ing, I dont want another Concorde. J$here is the market? (1eter Ridden, U K Aid for Airhus I I )ont J$ant .,lnother Concorde. Financiaf Times, hlar 7, 19841. The flrit ish (; o~ernment finall~ appro~ed 250 million pounds in launch aid to 13 ri t i sh Aerospace for its shartj of the ,,1320 project i n earlJ. hl arch 1 W-1. Ilritish Aerospace argued that the A ;120 was not a technological breakthrough into an untested market like ( oncorde hut an updated and impro~(d ~cv-sion of the existing production go-ahead for Airbus Industries A320 Transport program (which will cost a total of over $2 billion) was endorsed by European governments under the condition that the consortium work to improve its profitability and more equitably distribute equipment contracts among participating countries. The 150-seat aircraft is expected to make its first flight in February/March 1987. Certification and start of deliveries are planned for spring 1988. 97 Government Roles in Aircraft Sales Competition between Boeing and Airbus is already intense and will probably become more so once the 150-seat A320 is introduced in 1988. Each company complains that the other enjoys unfair marketing advantages. Boeing argues that Airbus is subsidized by the participating governments, allowing it to provide preferential financing. Boeing also contends that nationally owned European airlines naturally prefer Airbus planes. Airbus refutes this by pointing to sales of the Boeing 757 to British Airways. As a response to charges by U.S. aircraft manufacturers, Airbus states that aerospace research undertaken by the U.S. National Aeronautics and Space Administration (NASA) and made available to American manufacturers, constitutes a subsidy for U.S. companies. Airbus also states that the U.S. Export-Import Bank devotes an inordinate amount of its resources to financing overseas aircraft sales. Boeing has the largest exports of any U.S. company, as shown in table 68. One of the reasons given by the Europeans for their government support of Airbus is that European industry faces a fundamental problem in its lower volume of production in comparison to U.S. manufacturers. According to this view, long production runs give the U.S. manufacturers, particularly Boeing, economies European Airbus project which would replace existing mediumrange aircraft. Firm orders and options for the A320 number approximately 100, It is estimated that 600 must he sold for break-even, or more than 700 for the British Government to earn a reasonable return on its investment, (Ibid, Riddell.) -tJeffre? hl, I,enoro\itz, I+; uropeans Endorse A320 Produc tion, A ~iation I!mk and Space 77tchnolog\, Nlar. 19, 1984, p, 29-:]0. 35-507 0 84 19 ~JI, 3 PAGE 284 280 Technology Transfer to the Middle East Table 68.Ten Leading U.S. Exporting Companies -. Total sales a Exports a Percentag e Rank Company (in billions) of sales 1 Boeing . . . . . . . ... $ 9.78 $6.10 62.40/. 2 General Motors . . . . . . 62.69 5,72 9.1 3 General Electric .., . . . . . 27.24 4,34 15.9 4 Ford Motor 38.24 3.74 9.8 5 Caterpillar Tractor, . . . . . 9.15 3.51 38.3 6 McDonnell Douglas, ., . ., ., ..... 7.38 2.76 37.5 7 E. I. du Pont de Nemours . . . . 22.81 2.64 11.6 8 United Technologies.. . . . . . 13.66 2.63 19.2 9 IBM . . . . . . . . 29.07 1.85 6.3 10 Eastman Kodak ., . . . . . 10,33 1.80 17.4 a For 1981, as reported by Fortune, Aug. 9, 1982, p. 68 Boldface denotes companies that are engaged wholly or partly in aircraft manufacture SOURCE Richard C Schroeder, Troubled Air Transport Industry." Editorial Research Reports, vol. 11, No. 20 Nov. 26, 1982, p 883 of scale which are extremely difficult for the Europeans to match unless they can secure a sizable share of the huge U.S. airplane market. 98 They note that out of 353 A300/A310 Airbuses ordered to date, a total of only 36 have been ordered by two U.S. airlines. 99 Viewing Airbus investments as very speculative, these observers argue that the bulk of the funding has to come from their governments. For their part, U.S. aerospace industry leaders point out that U.S. aerospace companies fund a substantial amount of research and development (R&D) themselves. A National Science Foundation (NSF) analysis of industrial R&D shows that the aerospace industrys R&D funding far outpaces the average for all U.S. manufacturing industries. In 1981 aerospace company funding of R&D (civil plus military) was 4.2 percent of net sales, compared to 2.0 percent for all U.S. manufacturing industries. Total aerospace R&D funding (company plus government) was 15.3 percent of net sales while the comparable all-industry percentage was 2.9. 100 Figure 14 shows the Federal and company funds spent on aerospace R&D (civil and military) from 1970 to 1983 in current and constant dollars. 98 "The Airbus Example, Financial Times, Mar. 5, 1984. g Michael Donne, U.S. Airbus Protests Arouse Little European Sympathy, Financial Times, Mar. 22, 1984. The Europeans also note that Airbuses have approximately 30 percent [J. S. content by dollar value. w Aerospace Industries Association of America, Inc., Aerospace Facts and Figures 1983/84, Washington, D. C., July 1983, p. 109. The issue of subsidization becomes more complex if one examines only the component of U.S. Government support for commercially oriented aeronautical R&D. The Federal Government, through NASA, devotes roughly $300 million a year to these commercial aeronautical R&D projects. 1O1 NASA supports long-term R&D in some areas that may be underfunded by private firms, such as aircraft noise and safety. Other programs support the development of more fuel-efficient and better performing aircraft, goals for which some feel private incentives may be adequate. On the other hand, some believe that there are no grounds for favoring this industry over others also facing international competition but receiving little R&D support. Advocates of NASAs support argue that reductions in these programs could have a negative effect on the international competitiveness of the U.S. civilian aircraft industry. The federally supported U.S. Export-Import Bank (Eximbank) lends money at subsidized interest rates to foreign purchasers of U.S. products. The industries benefiting most from Eximbanks subsidized overseas lending in the last decade have been manufacturers of com ) Reducing the Deficit: Spending and Revenue Options, a Report to the Senate and House Committees on the BudgetPart 111 (Washington, D. C.: U.S. Congress, Congressional Budget Office (CBO), February 1984,) p. 173. CBO listed elimination of NASA commercially oriented aeronautical R&D programs as one way to reduce nondefense discretionary spending. This one change. if adopted, could generate savings of $1.9 billion over the 1985-89 period, according to CBO estimates. PAGE 285 Ch. 7Technology Transfers in Commercial Aircraft Support Systems l 283 Table 70.Export-lmport Bank Summary of Commercial Jet Aircraft Authorizations for Loans a and Guarantees b (fiscal years 1957.82, values in millions of dollars) Number of jets Export value Number of credits Gross authorizations Year Loans Guarantees Loans Guarantees Loans Guarantees Loans Guarantees New authorizations: 1957 C -68 . . . 1969 . . . 1970 . . . 1971 . . . 1972 . . . 1973 . . . 1974 . . . 1975 . . . 1976 . . . 1977 . . . 1978 . . . 1979 . . . 1980 . . . 1981 . . . 1982 . . . Cumulative new authorizations . Transfers and reversals . . Cumulative gross authorizations (net of transfers and reversals . 322 55 142 126 145 129 189 136 77 31 29 118 136 121 13 1,784 1,784 1 6 25 5 7 21 18 7 187 187 $2,572 451 1,749 1,539 1,334 1,729 2,195 2,070 1,017 330 479 2,938 3,975 4,568 441 27,603 (8) 27,595 $ 331 207 3 40 9 25 5 139 902 253 317 901 637 113 4,064 640 4 58 18 38 49 29 23 22 10 11 14 5 10 24 17 2 333 4,064 644 333 $ 1,520 197 598 481 475 690 895 691 398 138 189 1,399 1,693 2,550 199 12,208 (24) 12,184 $ 274 111 79 363 183 191 133 64 87 294 77 239 1,088 533 78 3,853 (20) 3,833 NOTE: Detail may not add to totals because of rounding. a Loans are commitments for direct financing by the Export-import Bank to foreign buyers of U.S. equipment and services, including direct credits and loans authorized under the Cooperative Financing Facility (CFF) until the termination of the CFF program in 1981, but excluding Discount Loans, which are made by the Export-Import Bank to commercial banks and which subsequently may be guaranteed by the Export-Import Bank, in which case the value of the loans is included with Guarantees. b Guarantees by the Export-lmport Bank provide assurances of repayment of principal and interest on loans made by private lending institutions, such as Commercial banks, for major export transactions cFirst year of commercial jet aircraft authorizations. SOURCE: Export-Import Bank of the United States, in Aerospace Industries Association of America, Inc., Aerospace Facts and Figures 1982/84, Washington, D. C., July 1983, p. 137 grounds that they give an advantage to some firms over others, and create income transfers from taxpayers in the United States to assisted firms and also to foreign buyers. These issues are complicated by the fact that complex buyback arrangements are not uncommon in jet airliner sales. The manufacturers do not disclose details of individual deals, but Boeing is understood to have an inventory of approximately 50 aircraft (including jets of other manufacturers) that it has either already bought back, or has agreed to acquire at a future date, in order to win new sales of its own jets. In another case of competition for sales in Kuwait, it was reported firms were proposing to buy back jets manufactured by their competitors and not yet delivered in order to win sales. 103 High-level supplier government economic diplomacy has frequently been employed. The sale to Egypt of three Boeing 767-200 ER (extended range) worth $163 million was a par103 Michael Donne, Why Boeing is Buying Airbuses to Win Key Orders, Financial Times, Feb. 2, 1984, p. 5. These buybacks are reportedly sometimes at above market rates. In the battle between Airbus and Boeing for a Thai Airways International order for two planes, which Airbus eventually won, Boeing offered to purchase three old DC-8s from Thai Airways International at $5 million each. Airbus offered $5.1 million for each with spare engines. The market value for DC-8s is presently $2 million to $3 million. See William M. Carley, The Air War: Boeing, Airbus Fight for Jetliner Contracts All Around the World, Wall Street Journal, Mar. 20, 1984, p. 1. PAGE 286 282 l Technology Transfer to the Middle East mercial aircraft and heavy equipment, including power generators. The large share of loans for commercial jet aircraft exports from the Export-Import Bank is shown in tables 69 and 70. Table 69 lists total Eximbank authorizations of loans and guarantees as well as separate exports for fiscal years 1974-82. In the years 1979, 1980, and 1981, aircraft exports represented 37.3 percent, 41.8 percent, and 50.3 percent of total loan authorizations. This percentage, however, fell dramatically in 1982 to 7.8 percent of a much smaller total loan authorization of $3,104 million. Total authorizations for loans in support of aircraft exports in 1982 were less than one-tenth that of the previous year. Some of the reasons for the decrease were the soft market for aircraft sales during the worldwide air transport recession, lower total Eximbank funds, and questions as to which U.S. planes truly were up against unfair competition.] Table 70 gives a summary of commercial jet aircraft authorizations and the number of jets involved. The number of jetliner exports covered by these loans and guarantees fell sharply from 1981 to 1982. Supporters of the Eximbank program maintain that it is a necessary response to the sometimes predatory policies of foreign competitors offering advantageous financing terms to attract and retain buyers. They also feel that export programs stimulate U.S. employment and promote development of technology. Critics contend that such programs are inappropriate interference in the free market causing economic inefficiency. They also criticize the programs on the iIhe F;xport-Import Bank determined that loans would only be pro~ided in cases where U.S. exporters faced direct competition from foreign suppliers. Table 69.Export-lmport Bank Total Authorizations of Loans and Guarantees and Authorizations in Support of Aircraft Exports (fiscal years 1974-82, millions of dollars) Authorizations in support of aircraft exports a Total Percent of total Year authorizations Total authorizations Loans: c 1974. . . 1975 .., . . . 1976, . . . 1977 . . . . 1978 .., . . . 1979. ., . 1980 .., ., . 1981, ... . ., 1982. . . Guarantees: d 1974 ......, . . 1975 ......, . . . 1976 . . . . . 1977. . . . . . 1978 ........, . . . 1979 . . . . . 1980 ..., . . . 1981 . . . . . 1982. . . . . . $3,981 2,701 2,285 747 2,927 3,825 4,087 5,079 3,104 $1,594 1,574 1,661 1,021 589 908 2,510 1,513 727 $ 946.2 710.4 421.9 139.0 195.2 1,427.7 1,710.1 2,555.0 241.4 $ 154.0 84.5 107.6 307.5 97.6 261.4 1,131,9 562.6 104.2 23.8% 26.3 18,5 18,6 6.7 37.3 41.8 50,3 7,8 9.7% 5.4 6.5 30.1 16.6 28.8 45,1 37.2 14.3 Commercial jet aircraft $ 894.6 691.2 398.4 137,6 189.5 1,399.4 1,692.6 2,550.3 199,1 $ 132.9 64.0 87.2 293.9 77,2 239.3 1,088.1 533.4 78,4 Other aircraft b $51.6 19.2 23.5 1.4 5.7 28.3 17.5 4.7 42,3 $21.1 20,5 20.4 13.6 20,4 22.1 43.8 29.2 25,8 alncludes complete aircraft, engines, and Parts blncludes business aircraft, general aviation aircraft, helicopters, and related goods and services c Loans are commitments for direct financing by the Export-lmport Bank to foreign buyers of U.S.equipment and services including direct credits and loans authorized under the Cooperative Financing Facility (CFF), until the termination of the CFF program in 1981, but excluding Discount Loans, which are made by the Export-import Bank to commercial banks and which subsequently may be guaranteed by the Exporf-import Bank, in which case the value of the loans i S Included with Guarantees d Guarantees by the Export-import Bank provide assurances of repayment of principal and interest on loans made by private Iending institutions, such as commercial banks for major export transactions SOURCE: Export-Import Bank of the United States, in Aerospace Industries Association of America, Inc., Aerospace Facts and Figures 1983/84 Washington, D C July 1983, p 136 PAGE 287 Ch. 7Technology Transfers in Commercial Aircraft Support Systems l 283 -. Table 70. Export-Import Bank Summary of Commercial Jet Aircraft Authorizations for Loans a and Guarantees b (fiscal years 1957-82, values in millions of dollars) Number of jets Export value Number of credits Gross authorizations Year Loans Guarantees Loans Guarantees Loans Guarantees Loans Guarantees New authorizations: 1957 C -68 . . . . 322 53 $2,572 $ 331 92 58 $ 1,520 $ 274 1969 ., ., ... 55 23 451 207 23 18 197 111 1970 ... ... 142 1 1,749 3 44 3a 598 79 1971 ., 126 9 1,539 40 58 49 481 363 1972 ., 145 2 1,334 9 44 29 475 183 1973 ... ... 129 4 1,729 25 60 23 690 191 1974 ., 189 2,195 79 22 895 133 1975 ., 136 1 2,070 5 64 10 691 64 1976 ., 77 6 1,017 139 34 11 398 87 1977 ., 31 25 330 902 16 14 138 294 197 8 29 5 479 253 18 5 189 77 1979 : : : : : 118 7 2.938 317 35 10 1,399 239 1980 ... ., 136 21 3,975 901 36 24 1,693 1,088 1981 ... ., 121 18 4,568 637 26 17 2,550 533 1982 . 13 7 441 113 5 2 199 78 Cumulative new authorization s 1,784 187 27,603 4,064 640 333 12,208 3,853 Transfers and reversals (8) 4 (24) (20) Cumulative gross authorizations (net of transfers and reversals 1,784 187 27,595 4,064 644 333 12,184 3,833 NOTE: DetaiI may not add to totals because of rounding .. a Loans are commitments for direct financlng by the Export-Import Bank to foreign buyers of U.S. equipment and services including direct credits and loans authorized under the Cooperative Financing FaciIity (CFF) untiI the termination of the CFF program in 1981, but excluding D IS c OU nt Loans which are made by the Export-Import Bank to commercial banks and which subsequently may be guaranteed by the Export-Import Bank in which case the value of the loans IS included with Guarantees b Guarantees by the Export-Import Bank provide assurances of repayment of principal and interest on loans made by Private Iending institutions, such as commercial banks for major export transactons. c First year of commercial jet aircraft authorizations. SOURCE Export Import Bank of the United States in Aerospace Industries Association of America, Inc., Aerospace Facts and Figures 1982/84 Washington D C July 1983 p. 137 grounds that they give an advantage to some firms over others, and create income transfers from taxpayers in the United States to assisted firms and also to foreign buyers. These issues are complicated by the fact that complex buyback arrangements are not uncommon in jet airliner sales. The manufacturers do not disclose details of individual deals, but Boeing is understood to have an inventory of approximately 50 aircraft (including jets of other manufacturers) that it has either already bought back, or has agreed to acquire at a future date, in order to win new sales of its own jets. In another case of competition for sales in Kuwait, it was reported firms were proposing to buy back jets manufactured by their competitors and not yet delivered in order to win sales. High-level supplier government economic diplomacy has frequently been employed. The sale to Egypt of three Boeing 767-200 ER (extended range) worth $163 million was a par. ltlichael Donne, Why Boeing is Buying Airbuses to J4in Ke~ Orders, Financial Times, Feb. 2, 1984, p. 5. These buybacks are reportedl~ sometimes at above market rates. In the battle bet ween Airbus and Boeing for a Thai Airways International order for two planes, which Airbus e~entuall~ won, Boeing offered to purchase three old DC-8S from Thai Airwa~s International at $5 million each. Airbus offered $5.1 million for each with spare engines. The market value for D(73s is presentl~ $2 million to $3 million. See William M. Carle3, The Air War: Boeing, Airbus Fight for Jetliner Contracts All Around the \\orld, 11all Street Journal, Mar. 20. 1984, p, 1. PAGE 288 284 l Technology Transfer to the Middle East ticularly difficult one. Between the initial agreement in September 1983 and formal contract signing on January 12, 1984 (for delivery in July and August 1984), the governments backing Airbus reportedly instructed their ambassadors in Cairo to lobby Prime Minister Fuad Mohieddin to persuade EgyptAir to choose Airbus. 104 In a final but unsuccessful effort to thwart the Boeing sale, Aerospatiales chairman, Henri Matre, was said to have offered Egypt a role in producing the airliners. 105 It thus appears that both U.S. and European manufacturers of commercial aircraft are being subsidizedbut the extent of the subsidies, either direct (through subsidized loans) or indirect (through R&D programs or diplomatic support) are difficult to gauge. Both sides see the growth of government assistance as a response to the unfair practices of the other players. Boeing Commercial Airplane Co., as a private, for-profit business, must compete against Airbus, an essentially staterun business which is predicated on other factors in addition to turning a profit. Because of continuing disagreements over subsidies, a special aircraft sector agreement was established in 1981 between the United States and major European countries to set clearer rules of the game in financing exports of commercial aircraft. This common-line agreement (subject to renewal every 6 months) sets a minimum interest rate and maximum cover for government agencies. Thus, in the past few years progress has been made to ensure that supplier governments adhere to similar rules of the game in financing exports of commercial aircraft. Aircraft Engine Suppliers Aircraft engine manufacturers have been involved in maintenance facilities in the Middle East. General Electric, for example, recently assisted Egypt in setting up an engine mainRobert Bailey, Boeing Strikes Back, Middle East E CO nomic Digest, Feb. 3, 1984, pp. 34-35. [ Ibid., also David Marsh, France Offers Egypt Airbus Work in Bid to Beat Hoeing, Financial Times, Dec. 6, 1983. tenance facility. This is a limited modular facility capable of expansion, but it is not now conducting major overhauls. Similarly RollsRoyce is providing Saudi Arabia with engine overhaul equipment. The engine manufacturers play an important role in supplying equipment for local maintenance bases, but much of this equipment can be supplied by other types of firms involved in aircraft and engine maintenance. Chief among these are the major airlines. Commercial aircraft engine manufacture and sales is a separate realm of competition. Ten years ago, the situation was fairly simple: Pratt and Whitney (U. S.) dominated the market and each plane model was matched with a specific engine from a specific company (almost always Pratt and Whitney). Today, the Pratt and Whitney Aircraft Group (a division of United Technologies Corp. ) has two strong competitors: Rolls-Royce (U. K.) and the General Electric Aircraft Group (U.S.) 106 G.E. also has a joint venture called CFM International with the French corporation, Snecma. Today, each of the new, more efficient airplanes, the Boeing 757 and 767 and the Airbus A300 series, can be fitted with engines from at least two of the manufacturers. In addition, a multinational consortium, International Aero Engines, is now developing the V2500 engine which will be able to power the A320 now under development (the A320 can also be powered by the CFM International CFM56-4). The fact that an airliner can now be built with engines from different manufacturers is important on two counts. First, it intensifies competition among the engine makers who may be willing to make concessions in order to win contracts for particular planes. Second, if an aircraft manufacturer feels that its sales may suffer because it carries a particular engine (e.g., U.S. controls on exports of U.S. engines [Worldwide projected market shares for jet engines in the 1982-86 period are projected as Pratt and Whitney (36 percent ); G.E. (30 percent); CFM International (23 percent); Rolls-Royce (9 percent); and other (2 percent), according to Forecast Associates, Inc. See Agis Salpukas, Aircraft Engines: Stiff Rivalry Pratt Loses Its Big I.cad, The New York Times, Jan. 21, 1983, p. D1. PAGE 289 Ch 7 Technology Transfers in Commercial Aircraft Support Systems l 285 prevented sales of Airbuses to Libya), the company may opt for another engine which does not present those risks. Competition among engine manufacturers, particularly in fast-growing markets such as the Middle East or Asia where an entry in the lucrative market is desired, has been hard fought. In competing for sales of the two new jetliners for Thai Airways International, the aircraft manufacturers and engine manufacturing groups that initially teamed up to bid later shifted sides. 107 Airbus Industrie is becoming increasingly cautious about using U.S.-origin engines in their airframes. U.S. export controls reportedly delayed the sale of Airbuses to Libya. 108 The Airbus consortium therefore considered using engines made by Rolls-Royce as a way to circumvent the U.S. ban. 109 A study was carried out in 1983 by Airbus Industrie to determine what components would have to be changed on the A300 or A310 in order to export these aircraft to Libya. 110 The study indicated that Airbus aircraft include more than 30 percent U.S.-built content by dollar value (much of this due to U.S. engines), and that with such a high percentage of U.S.-built equipment, the aircraft are effectively under the restrictions imposed by U.S. export controls. Although the new A320 being developed may not be free of these restrictions since both available engines are partly U.S.-built, the Europeans talk of reducing U.S.-built content as much as possible so as to limit [J. S. influence on Airbus export sales. 111 See William >1. (arle}, Ihe Air War-130eing, Airhus I;ight for .Jetliner (ontracts All Around the \$rorld, Jt,alj sfree~ ,I(jurnal, hlar. 20. 19H4, p, 1 The real winner of this contest ma? ha~t) lxx~n t h(~ customer-Thai I nternationaf. Thai Senior ~ice I resident, hlr, I,urnholdt, was quoted as saying, "We got a wonderful deal with all the concessions, we figure we got one !$50 m i 11 i( )n a i rpl ant for free, I)a\id \lhit{, }Jlrhu+ [)eli~rcries to I,ih}a [Ma~red. Financial [inle.~, Aug. :). lgHZ I,ih)ran 4 irlines Negotiates Airhus I,ease, Nfiddie I.ast ]<;ace Techn(~lo~, ltlar. 19, 1984, p. 29. 1 R0115 Signs V2500 l~xport Plan, .4 iiation iieek and Space TechnoIog\, Mar. 19, 1984, p. 32, See also .\ ~iation Ittwk and Space, Nm. 7, 1 W;), p. 30. ] I bid.: .4 tiation lieek and Spact Ttchnok]hp, Alar. 19, 1984, p. :12. see alw A irhus orders for Rollsl{o~ce, linanc>ia) Times, 31aJT 1 i, 19x1, p. 8: and Keith F. !LIordoff, .!irhus (~ off~r \ 2500 option on Ai120, A ~iation 11 eek and .Space Techncdo~<~, h! a~ 21, 1984, pp. 33-34. PAGE 290 286 l Technology Transfer to the Middle East Abu Dhabi recently opened a new airport, and major work has been underway in Cairo and Baghdad. Algeria has more modest plans for upgrading and expansion. Airport development in the Middle East has relied extensively on technical assistance and equipment from the West. This has been provided by a variety of firms including airport consultants, architects, airlines, construction firms, civil aviation authorities, aerospace manufacturers, and a multitude of equipment manufacturers. This scattering of activity among so many different types of firms makes it extremely difficult to analyze the factors determining commercial success in supplying and transferring the technical skills for the development of airport systems. Bechtel (U. S.) had the role of construction manager for the Jeddah airport project. The firm was responsible for up to 60 primary contracts at any given time since 1978. Some of these contracts involved extensive subcontracting; one reportedly involved 1,500 subcontracts with equipment suppliers. Yet public information on most of these contracts is not generally available. The bulk of the primary contracts are said to have gone to non-U. S. firms, but there is no way to document this. Although much of the actual equipment orders sourced through subcontracts reportedly have been won by U.S. firms, there is no way to verify this. The civil aviation authorities of Western countries have been a major source of technical assistance in airport planning. France, the United Kingdom, and the United States have been the most active in this respect. Traditionally, such services were provided largely on the basis of colonial and historical ties, but today these links are less important. France actively seeks technical assistance relationships, and often assumes the costs under foreign aid. The United States responds to requests for assistance, which has been on a fully reimbursable basis since 1967. The United Kingdom pursues an approach similar to the United States, although it does occasionally assume the cost of technical services. The actual implementation of airport development projects, such as those in Saudi Arabia, is normally carried out by groups of firms with separate contractual responsibilities. U.S. construction firms, Bechtel and Parsons, in joint venture with Saudi firms, are providing construction management services at Riyadh and Jeddah. The actual work and equipment contracts have gone to a multitude of firms from several countries, as mentioned above. In contrast to this type of multicontract international division of labor is the French approach of providing a comprehensive package which includes planning and design, construction, equipment installation, and even financing. This approach has reportedly enhanced the positions of French firms, as illustrated by the Cairo airport modernization work. This project began with a feasibility study by Aeroport de Paris in 1978, which included design of the terminal and construction supervision. Thomson-CSF supplied and installed the electronic equipment for the air traffic control system, and terminal construction was carried out by a French/Egyptian joint venture. Some financing was also made available through official export credits. This size of package would not have been sufficient to accommodate projects such as those in Riyadh or Jeddah. This approach does, however, allow for coordination of all facets of project development and implementation, which the French foster through this type of consortium. Technical support in the operation and maintenance of airport systems is provided by a wide variety of firms. The Dhahran airport is operated by a services division of the Boeing Co. In other areas, technical assistance is provided by affiliates of airlines such as British Airports International, which has been active in the Gulf States, diversified aerospace companies such as Lockheed, which had a contract for the first phase of Saudi Arabias air traffic control system, and equipment manufacturers. In Saudi Arabia, the major responsibility for operation and maintenance of the air traffic control system is handled by Bendix under a 1980 contract from the Presidency of Civil Aviation (PCA). PAGE 291 Ch. 7 Technology Transfers in Commercia/ Aircraft Support Systems l 287 The case of the Bendix air traffic control contract illustrates factors influencing competition. Bendix won a contract in 1980, replacing the U.S. firm Lockheed. Bendix has overall responsibility for the air traffic control system, including staffing, equipment maintenance, training, and advising on new equipment for expansion. Logistical arrangement of the system is an important component of the contract, due to the variety of equipment types installed and the need to replace parts from many different countries. Bendix manages a training center in Jeddah, which has mockups of all the major systems in use. The major aim of the contract is to train Saudi Arabian nationals for eventual takeover. However, due to the shortage of qualified personnel, complete takeover by the Saudis is still a long time in the future, Bendix has over 1,000 foreign nationals under contract in Saudi Arabia, but some portion of these are in support services such as housing, transportation, etc. Bendix did not have a proven track record in managing similar operations in other countries, but the firm did have 20-years experience with NASA projects in the United States, Its principal competition was from Lockheed and SEL, a German equipment manufacturer. Bendix had done extensive work in Saudi Arabia, for the navy and army, and was well known to the PCA. Primary factors affecting the contract award were reportedly price and the efforts of a well-placed Saudi agent. Bendix was the low bidder on the project, and also set forth an institutional arrangement and contract proposal which satisfied PCA's concerns about logistical functions and internal decisionmaking. Bendix met these concerns by establishing an autonomous division in Saudi Arabia capable of handling the logistical and other responsibilities. Bendix also emphasized training Saudi nationals as controllers and system managers. The most important factors influencing airport systems contract awards appear to be a proven track record in the technology or technical management area, a demonstrated willingness to train nationals, the effective use of local agents or joint venture partners (especially in Saudi Arabia), historical relations with a country or firm, perhaps including the involvement of the civil aviation authority, and price/financing. In different countries, these factors are of differing importance: Saudi Arabia, for example, has been comparatively less concerned with price and is increasingly attempting to diversify suppliers. Air Traffic Control/Avionics Air traffic control (ATC) in the Middle Eastern countries under study ranges from Saudi Arabias state-of-the-art system to Egypts visual sighting. ICAO periodically publishes a status report for airport ATC throughout the world which lists requirements for raising major airports to ICAO international standards. In this publication, Middle East airports rate, as expected, from excellent to poor. Upgrading recommendations are generally for airfield lighting, markings, radio navigational aids, AFTN (Aeronautical Fixed Telecommunications Network), and AMS (Aeronautical Mobile Service-approach control). New aircraft such as the Boeing 757/767 and Airbus 300/ 310 come with the state-of-the-art ATC compatible equipmentbut these are of no use if the airport does not have adequate ground ATC equipment, such as is the case in Egypt. Improved ATC enhances airline efficiency and safety and is thus a priority in airport modernization. Raytheon (U.S.), Bendix (U.S.), and Thompson-CSF (France) are major competitors in ATC equipment. Aircraft avionics encompasses both ATC functions and aircraft systems monitoring. Collins Avionics (a subsidiary of Rockwell International) and ARINC (Aeronautical Radio Inc.) are leaders in aircraft monitoring equipment. Delco and Litton Industries, also from the United States, are the leaders in general inertial navigation systems with Honeywell specializing in laser-gyro based inertial reference systems. Major competition for U.S. firms comes from Thomson-CSF and Aerospatiale ATEC equipment, which supplies the Airbus. New digital equipment also is being manufactured by Frances Sfena in coopera- PAGE 292 288 l Technology Transfer to the Middle East . -tion with Great Britains Smiths Industries and Germanys Bodenseewerk Geratechnik for the Airbus. Although. avionics seems an ideal entree for Japanese electronics technology, Japanese firms have not yet entered into this field. Color cathode-ray tubes for crew alerting systems are made by Toshiba and Mitsubishi, and Japan Aviation Electronics Industry, Ltd., is developing a laser-gyro inertial reference system for use in the Kawasaki XT-4 trainer. It is generally assumed that the Japanese will soon take significant steps into avionics, particularly digital systems. Avionics will become dominated by digital systems (as opposed to analog) in the next few years, much as turbine engines largely replaced piston engines in large commercial transports. Digital systems are more expensive but more reliable (two to three times the mean time between failures) than analog systems. However, when they do malfunction, highly trained personnel with sophisticated equipment are needed to service them. Manpower requirements will thus shift even further to highly skilled technicians. At present, digital equipment manufacturers often give 3year warranties which cover microprocessors and software modification. After that period, investing in spare parts for the equipment may be less expensive than developing digital maintenance expertise. Aircraft simulators can cost up to $7 million each, $400 per hour to operate, and require highly trained personnel. However, when compared to the cost of actually flying a plane, the lifecycle cost savings are significant. Presently simulators are available for 13 commercial transport types and an equal number of smaller regional/corporate aircraft. Helicopter simulators are also available, although they are not as numerous. Major manufacturers of civil aircraft simulators include CAE Electronics, Ltd., of Canada, Conduction (U.S.), CurtissWright (U.S.), Thomson-CSF (France), Redifon (U.K.), and Singer-Link (U.S.). Demand for simulators will grow as simulator fidelity (likeness to real-life) continues to improve. 114 See ICAO Bulletin Special Issue: ATC and Flight Simulators, vol. 37, No. 5, May 1982, for six articles on aircraft simulators. Private Aircraft and Helicopters In addition to private travel within and outside some Middle Eastern countries, general aviation is used in air photography for oil and minerals, mapping, spraying, servicing of remote construction sites and drilling rigs, and for light freighting. Ownership of executive aircraft is concentrated in the Gulf area. The use of private aircraft is limited by local problems. Many airports have a limited capacity for dealing with private aircraft, which will be expanded as airports are improved. In addition, because of security considerations, some governments have restricted registration of civil aircraft and individual aircraft movements. 115 Among the smaller aircraft used by corporations, the Gulfstrearn, British Aerospace, Canadair, Falcon, and Lear models dominate the Middle Eastern market. Helicopters are used to service oil derricks in the Gulf, worksites for fire control and first aid, such as at pilgrimage sites. Helicopters have been used to offload cement and steel pipe at Saudi ports and to lay pipe in the interior. Major suppliers in Saudi Arabia include: Agusta (Italy) primarily for military use, Bell Helicopter (U.S.), and Kawasaki (Japan). Helicopter sales to the Middle East fell in 1982, although the downturn in world sales was sharper. 116 Nevertheless, the demand for helicopters in the Middle East has been fairly bouyant. It is estimated that 95 percent of the helicopters sold in the Middle East are for military uses. The largest helicopter sales at present in the Middle East are in Iraq (primarily due to the Iran-Iraq War) and Saudi Arabia. 115 This assessment is found in The New World of the Executive Jet, Middle East MagazineAviation Survey, August 1983. i Market Survey, Saudi Arabia U.S. I)epartment of Commerce, ITA, May 1981; Building Up the Helicopter Fleets, Middle hast MagazineAviation Sur\wy, August 1983; Saudis Expand Kawasaki KV-107 Helicopter Fleet, ,4\riation Med and Space TechnoloM, May 21, 1984, pp. 150-151. PAGE 293 Ch 7Technology Transfers in Commercial Aircraft Support Systems s 289 U.S. Export Controls At the end of 1981, sale of Airbuses to Libya was restricted by U.S. foreign policy controls. The sale of ten aircraft were blocked because they were to have General Electric engines, Six of the aircraft were not built. Four completed Airbuses destined for Libya reportedly remain at the Airbus production headquarters in Toulouse, France. Table 65 shows the fleets of Middle Eastern airlines, including aircraft on order. While there is a preponderance of Boeing and Lockheed aircraft, reflecting the historical U.S. dominance in commercial aircraft, most aircraft on order are Airbuses. Indeed, Boeing has sold only three of its new generation aircraft (757 and 767). Airbus has made almost all sales of twin-engine, wide-bodied aircraft sales in the Middle East. Opponents of foreign policy controls believe that these controls have strongly contributed to U.S. market losses in commercial aircraft sales in the Middle East. Potential buyers include countries designated as supporters of terrorismcurrently Libya, Syria, and the Peoples Democratic Republic of Yemenas well as other countries in the region that may turn to non-U. S. suppliers out of resentment of controls used for political purposes. Kuwait, for example, has urged other Gulf States to seek alternative suppliers of aircraft, in direct response to U.S. antiterrorism controls. The U.S. Department of Commerce cites such reactions as a partial basis for the reduction in sales of U.S. aircraft and avionic equipment in one of the largest and fastest growing markets in the world. In testimony before the House Foreign Affairs Subcommittee on International Economic Policy and Trade on March 19, 1981, Mr. Harry Kopp, Deputy Assistant Secretary for Economic and Business Affairs in the Department of State, stated that: In no other area of the world were the successes of the competition so spectacular and 117 David Marsh. A irt)us (omponent + I)lans Face I)rotfsts Pt-om ( ,S., Jinancia] ime.~, Nlar. 21, 19H4, p. 1. our own sales performance so dismal as in the Middle East last year. Jet aircraft sales in the region climbed to $1,977 million, of which U.S. suppliers won only $259 million, or 13 percent, as compared with U.S. sales of over $1.5 billion the year before. Airbus, in contrast, selling $1.7 billion, captured 87 percent of the Middle Eastern market. [Our] regional civil air attache in Tunis notes that the enormous decline in U.S. fortunes was not likely due to technical considerations, a lack of effort on the part of our manufacturers, not even to the quality of the airbus (sic). Rather, pivotal factors most mentioned by his contacts were: financing, political considerations, including foreign policy controls; high-level political support for Airbus; and the U.S. Foreign Corrupt Practices Act. New orders for large U.S.-origin transport aircraft destined for the Middle East dropped from a peak of $1.1 billion in 1979 to $186 million in 1980,$380 million in 1981, and $89 million in 1982 (through September). On the other hand, Airbus orders for the same countries were $289 million in 1979, $1.2 billion in 1980, $484 million in 1981, and $661 million in 1982 (through September). Airbus orders for the Middle East totaled $2.3 billion during the 1980-82 period, compared with $655 million for U.S. aircraft. Undoubtedly, various factors explain this shift in market sham, including differing availabilities of export finance as well as a desire in the Middle East to diversify sources of supply for civilian aircraft. Because U.S. export controls in this area were uniquely restrictive, they contributed to the decline in the position of U.S. firms. The U.S. embargo of spare parts sales to Libya, especially, further added to the reputation of the United States as an unreliable supplier. For Middle Eastern countries whose positions differ with the United States on issues such as the Palestinian problem, such controls present a real potential risk that they may be denied access to U.S.-produced aircraft.1g The recent modification of controls -. 118 A Saudi manager recently said: Another element [for Airbus selling so well in the Middle East Persian Gulf area] is the political climate thew days. !vlany Middle East countries want to reduce their reliance on the LJ. S, This should not be underestimated in e~aluating Air buses sales success in the re- PAGE 294 290 Technology Transfer to the Middle East by U.S. officials to permit sales to scheduled airlines represented an effort to mitigate the adverse impacts of these controls. Summary of Supplier Perspectives Sales of large commercial aircraft are important both for the large dollar volume of aircraft sales and for the sales of auxiliary equipment, which includes testing and maintenance equipment, avionics packages, and spare parts. Planning, building, or operating airports, air traffic control, and navigation systems in the Middle East normally entail consulting or management contracts, a major area of strength for U.S. firms. U.S. firms have led in commercial aircraft, avionics, and airport management. However, the stiff competition afforded by West European firms in each of these subsectors indicates that U.S. firms cannot count on continued technical superiority as the key to effective sales. Other factors such as low-cost bids, on-site support, and reputation for longterm supplier reliability may be critical in contract awards. The main competition for aircraft sales in the Middle East presently is between the Airbus 310 and the Boeing 767. Industry experts note that neither one has a clear technical advantage over the other. While Airbus Industrie claims an edge in its avionics (aviation electronics), Boeing claims superior fuel efficiency. Both planes compete in the mediumrange market, covering flights of 1 to 5 hours, which account for about 37 percent of departures worldwide. In the Arab world, this sector is expected to be worth $20 billion over the life of this generation of aircraft.119 Commonality of aircraft and engine type within an airline fleet is an important but not overriding consideration. If the price and financing terms offered by suppliers are similar, and future availability of spare parts is not gion, quoted in Middle, Near East Airlines Increase A300/ A310 Use, Aviation Week and Space Technology, May 14, 1984, pp. 47-49. NO Holds Barred in the AirbusBoeing Battle, Aliddle East Magazine-Aviation Survey, August 1983. a problem, in most cases airlines mixed feets. In airport systems development a assemble multitude of equipment manufacturers provide the various system components, often coordinated by construction management firms. For example, Bechtel has the construction management contract for the new Riyadh airport, but the equipment installation and construction is being handled under a number of separate contracts. Supplier firms such as Thompson-CSF of France have special strength in supplying ATC and navigation systems. The United Kingdom is active in the Middle East commercial aircraft systems market, particularly in Saudi Arabia. West Germanys major presence has been in Iraq. The United States is primarily involved in Saudi Arabia. Official diplomatic support (involving the use of official negotiating leverage to influence contract awards) is a factor in commercial aircraft support systems. However, relations among airlines such as the 30-year TWA-Saudia relationship, or the previous Pan Am-Iran technical assistance agreements, may carry more weight. The importance of government support has some relevance in airport systems contracts, but strong links are often established through technical assistance provided by civil aviation authorities. Technological differentiation is limited among firms supplying equipment and services for commercial aircraft support systems. The technologies and equipment are fairly standard; many firms from several countries can provide adequate support. The basic technologies (although constantly improved) are relatively mature and well dispersed among the major industrial countries and even some newly industrializing countries such as Hong Kong (aircraft overhaul) and South Korea (airport construction). Indeed, India and Pakistan have been involved in airport construction in the Middle East (see tables in app. 7A). The standing and experience of the supplier firm is sometimes important, although aircraft operation and maintenance relationships are based more on initial provision of aircraft. PAGE 295 Ch 7 Technology Transfers in Commercial Aircraft Support Systems l 291 The use of local sometimes required, support contracts agents is an important, means of winning aircraft throughout the Middle East. This has been especially the case in Saudi Arabia and Kuwait. While in the past, local agents have been used solely to garner political influence in bidding contracts, their role has generally expanded to involvement in assuring contract performance and maintaining continuing client relationships. Hiring well placed agents has been an important means of penetrating new markets for firms with little prior experience in a country. Price is important in aircraft operation and maintenance, because of the routine nature of these services and the fact that the-y are current, not capital expenditures. Price and financing are becoming more important in the traditional oil-surplus countries, as the extensive development plans conceived in the 1970s progress into implementation while surpluses from oil revenues have diminished. Pricing and particularly financing arrangements have been important in commercial aircraft sales. Stiff competition for aircraft sales in the Middle East and the large future stakes believed to be involved have led suppliers to use, along with attractive financing, purchase incentives. These include buy-back of competitors planes, package agreements for spare parts, training, or engine maintenance centers, or promises of assistance to the buyers aircraft or even nonaircraft industries. These purchase incentives seem likely to continue in aircraft sales in the Middle East. The expansion of foreign policy controls on U.S. exports of aircraft along with other types of export controls and regulations on U.S. business, have affected U.S. exports negatively. West European governments have subsidized the Airbus consortium; at the same time, the U.S. Export-Import Bank has supported sales of U.S. aircraft with loans. What distinguishes the policies of supplier governments is the absence of export controls in Western Europe, and their greater use of high-level economic diplomacy. FUTURE PROSPECT S In the short-term, the recipient nations will continue to carry out their commercial aircraft plans incorporated in their 5-year plans. For Iran this may be difficult; for Iraq, almost impossible. Saudi Arabia has the most ambitious plans and can be expected to complete its present airport infrastructure goals without major problems. Algeria has a fairly well-developed airport system, and its needs are more in the area of modernization and expansion than building new airports. Kuwait, with one major airport, will continue to consider a second airport. Egypt, despite major financing difficulties, will attempt to improve its existing airports and ATC systems. In the long-term the world airline industry is expected again to prosper, and increased airline traffic worldwide in general and in the Middle East in particular, will provide a climate conducive to improved profitability. Freight transport in particular is expected to increase dramatical. All of this will place increased demands on Middle East air traffic control, airport management needs, and aircraft service. The Middle East countries will build on their positive experiences with technology transfer in this sector, and will eventually fully staff their commercial aircraft support systems with indigenous workers. U.S. firms can be expected to maintain their leadership in the civil aviation sector in certain countries in the Middle East for the near termhowever, U.S. firms can no longer rely on technological superiority. Aviation technology is becoming increasingly international. PAGE 296 292 l Technology Transfer to the Middle East IMPLICATIONS FOR U.S. POLIC Y The importance of supplier reliability is especially evident in commercial aircraft support systems due to spare parts compatibility and training needs. The United States has gained the reputation of being an unreliable supplier, in large part because of U.S. export controls. U.S. export controls govern sales of commercial aircraft, in that sales can be restricted if countries are seen as supporting terrorist activities. These controls are used to impose sanctions on countries supporting terrorist acts. The military applicability of civilian technologies is, however, limited. Equipment that can be used directly for military purposes includes radar capability, troop transport airplanes (e.g., C-130 S), dual-use runways, and fuel storage and maintenance facilities. Concerns have been raised regarding applicability of commercial aircraft maintenance to military aircraft maintenance. However, maintenance, diagnostic tools, and training are vastly different for military aircraft that are not derivatives of commercial aircraft. While it provides a general base of knowledge in maintenance and repair, commercial aircraft training is not directly applicable to nonderivative military aircraft such as the General Dynamics F-16 air combat fighter or the Northrop F-5G. Military equipment, as compared to civilian, is built to different standards and requires different spare parts, and different maintenance training. Civilian helicopters are not easily used as military equipment, except for simple surveillance and transport. Thus, technically, there is little overlap between civil and military technologies and equipment. Some aircraft, however, do have both civilian and military uses, such as the U.S. C-130, or can be modified for military use. Subsidies for manufacturers of commercial aircraft exist for both the United States and European rivals, either in the form of support for aircraft development, or subsidized loans. Diplomatic channels are often pursued by the Europeans in the form of trade missions by high-ranking government officials in order to promote sales, a route the United States does not often pursue. Boeing and Airbus are engaged in intense competition, as illustrated by the Thai case mentioned earlier. In the Middle East, where many major purchasers of aircraft are less constrained by financial considerations than most developing countries, political factors have been particularly important in influencing sales. While it is often difficult, if not impossible, to identify the precise effects of politics on a particular sale, it is clear that the Europeans have in some instances benefited from their political support for Arab States. In contrast, strong U.S. support for Israel and the use of foreign policy export controls has undoubtedly served as an irritant to potential buyers in the Middle East. As a result, competitors are able to argue that the United States maximizes politics above trade, and recipient governments can point to purchases of comparable aircraft from non-U. S. firms as evidence of support for Arab positions. The Airbus Industrie consortium, in its short 14 years of existence, has become a significant supplier. Although the consortium wants its aircraft to be profitable, motivations other than profits (employment, diversification of supply, technology development, prestige) are important, thus ensuring their continued support even if investors do not realize a favorable rate of return. U.S. policymakers must recognize that competition between Airbus and U.S. aircraft manufacturers, when carried out on fair terms, can be a good thing (for the companies and consumers alike). Enhancing, or even maintaining, U.S. market presence in commercial aircraft and aircraft support in the Middle East will be increasingly dependent on cost, financing arrangements, diplomatic support, and especially, consistent policies regarding export controls. PAGE 297 Ch. 7Technology Transfers in Commercial Aircraft Support Systems 293 SUMMARY AND CONCLUSION S Each of the countries under study has a civil passenger airline (Kuwait Airways Corp., Saudi Arabian Airlines Corp., EgyptAir, Air Algrie, Iraqi Airways, and Iran Air) with the longest route miles being covered by Saudia and the shortest by Kuwait Airways. Operating statistics of these airlines (e. g., revenue passenger kilometers flown, revenue passenger loads, and average daily aircraft utilization) are comparable, in most cases, to those of other national flag carriers operating internationally. The airlines of the Middle East have a preponderance of Boeing aircraft (707, 727, 737, and 747 in several variations), a smaller number of Lockheed L-1011s, and an increasing number of Airbus A300s and A310s. The airlines also have smaller planes such as the Fokker F-27, De Havilland DHC-5, and Hawker Siddeley 748. The average age for Middle Eastern jet aircraft is much lower than the world average for nonjet planes. All air carriers can perform routine maintenance and checks at their own facilities. Saudia, which had a comprehensive maintenance facility completed in 1979, can perform major overhauls as well. Aircraft engines for large commercial aircraft are manufactured by Pratt and Whitney, General Electric, Rolls-Royce, and CFM International. All of the airlines rely on expatriate labor to some extent, with Kuwait and Saudi Arabia being the most dependent and Egypt and Iran being the least. The airlines are making efforts to reduce expatriate labor (e.g., Saudia has been successful in making one-half of its pilots Saudi nationals) but in the near term complete self-sufficiency will be difficult if not impossible to achieve-particularly among maintenance and overhaul personnel needed for Saudi Arabias and Kuwaits airlines. Thus, Middle Eastern airlines will continue to need technical support in aircraft maintenance and operation from foreign sources. The six countries under study have carried out significant airport development, with the efforts of Saudi Arabia being the most ambitious. Most major new airport construction is complete or near completion. Future plans emphasize upgrading existing airports rather than initiating new, expensive projects. Upgrading of a regional airport to handle international (wide-body jet) flights is planned for Saudi Arabia, Algeria, and Iraq. Upgrading of air traffic control is also planned for all but the newest airports. Major airport designers/prime contractors are all from the West and include Bechtel, Aeroport de Paris, and Hochtief. Actual construction work is, however, increasingly done by Korean firms. Future work will emphasize improvements in freight handling, airport access, runway expansion and strengthening, and construction of maintenance facilities. Commercial aircraft support thus involves fairly well-defined, well-established technologies and technological processes which can, and have been, increasingly performed by indigenous personnel in the Middle East. The fact that the process of training indigenous personnel takes so long demonstrates that, even for moderately complex systems, technology absorption can be difficult and requires considerable efforts on the part of both recipients and suppliers. Despite the moves towards self-sufficiency in this sector in the Middle East, in some countries all aircraft operations may never become fully staffed by nationals. This is, however, not due to lack of capability on the part of local workers, but to a shortage of indigenous manpower willing to perform certain tasks, such as engine maintenance in Saudi Arabia or Kuwait. These two countries should be able to complete the expansion of their commercial aircraft support systems but will have to continue to use foreign workers at some levels. For Algeria, Egypt, Iraq, and Iran, the local labor force could support an expansion of commercial aircraft systems. Attention will have to be paid to the training of aircraft mechanics, in particular. Civil air traffic expansion is unlikely in Iraq or Iran while their war continues. Technology absorption in the commercial aircraft support systems sector can be expecte to be- PAGE 298 294 l Technology Transfer to the Middle East . come more extensive in the years ahead, due to expanded facilities and training programs currently underway. The fuller absorption of commercial aircraft support systems technology by the recipient Middle Eastern countries compared to other technologies in this study stems mainly from three factors: 1) a commitment on the part of the recipient governments to develop this technology for transportation infrastructure needs and for prestige; 2) the fact that training and performance in this sector are well defined by international standards; and 3) the relatively long experience with these technologies which are in some respects not as demanding as nuclear power or certain types of telecommunications systems. Commercial aircraft support worldwide is becoming increasingly sophisticated and will require more highly trained personnel in the future. The heavy responsibility which comes with commercial airline support services with regard to human lives, invested capital, and reputation is a continued impetus to maintain high standards. The increased complexity of avionics systems, simulators, and air traffic control will ensure expansion of training throughout the world, not just in the Middle East. Airline operations in the Middle East are generally on a par with internationally accepted standards except for air traffic control. Egypt is considered to have one of the least effective ground ATC systems in the world although it is now being improved. The ATC system of Iraq is also poor. Increased passenger and freight traffic will require modernized systems to maintain and improve airline efficiency in the Middle East. Airport planning and construction has been performed primarily by expatriates, both working for private firms and international organizations such as ICAO and IATA, Construction has been managed by Westerners, with construction crews often from the Far East. Airport management in the Middle East has often been performed by nonnationals, particularly in the Gulf States where U.S. firms have been active. Indigenous personnel are being trained and will increasingly take over these operations. The United States is generally acknowledged as a leader in avionics and aircraft engines. Increasingly, however, adequate substitutes are available for U.S. technology. The United States has recently been perceived as an unreliable supplier in the Middle East due to U.S. export controls, and more Middle Eastern countries are attempting to diversify suppliers. The Airbus, for example, uses U.S. engines and hence deliveries to Libyan Arab Airlines have been delayed due to U.S. foreign policy controls on exports to Libya. The Airbus consortium was considering recertifying the Airbus with Rolls-Royce engines (despite the considerable cost) in order to avoid such delays. That the new Airbus A320 will contain less U. S.manufactured equipment appears certain, partly in response to concerns about U.S. export controls. A major concern for U.S. aircraft manufacturers is the inroads the Airbus 300 (and potential inroads of the Airbus 310 after 1984) have made in the Middle Eastern market. The new fuel-efficient Boeing 757 and 767 have not been purchased extensively by buyers in the Middle East. Some say this is not because of the technical superiority or better after-sale service of the Airbus, but because the United States does not support aircraft sales financially or politically in the manner that the French sell the Airbus consortium. Through U.S. Government support for aerospace R&D in the form of export credits, however, the U.S. aircraft industry has been promoted. U.S. export controls are also often cited as a reason for lack of new U.S. sales of aircraft in the Middle East region. Future sales of U.S. civil aircraft, and perhaps of aircraft engines in the growing Middle Eastern market are hindered by these controls, despite the aggressive sales techniques of U.S. manufacturers and the high quality of their products. Sales of export aircraft, plus their long-term attendant support services and spare parts, are a significant factor in the U.S. balance of trade and PAGE 299 Ch. 7 Technology Transfers in Commercial Aircraft Support Systems l 295 in U.S. employment. Other large markets which may eventually develop in Latin America and Africa could also be affected by the fear of potential purchasers that they might be subjected to future controls. While supporters of export controls see them as a means to exert pressure on countries supporting terrorist activities, policy makers must also take into account the commercial costs and the evidence that foreign policy controls do not appear to have by themselves resulted in change in the policies of foreign governments. Modification of present U.S. foreign policy control policies concerning commercial aircraft sold to foreign commercial airlines deserves serious consideration. PAGE 300 296 l Technology Transfer to the Middle East I F c u)+ mmlm a) .(/7 u : .. .. PAGE 301 Table 7A-2.Major Projects and Sources of Investment, 1971-81: Commercial Aircraft Support in Egypt Foreign nations Source of funds Project I nvolved Year started Level expenditures $150 million Contractors Produce Study Upgrade to international capabiIity General Electric Overhaul aircraft engines Thomson-CSF Radar control system Comments Not a U S company USAID feasibility study requested Cairo airport expansion World Bank Luxor airport Imbaba airport (Cairo) United States $14 million Turnkey project EgyptAir engine shop United States 1981 French government 8-9, Commercial aircraft France 10-year term radar system U.S. foreign military sales credits Benha Factory (No. 144) United States Expected to be signed soon Licensed production under discussion Westinghouse TPS-63 military radar SOURCE Off Ice of Technology assessment Table 7A-3.Major Projects: Civil Aviation in Algeria, 1979-82 Description of projects Clients Contractor Location Value of contract Not stated Year 1981 1. Design of 2. supply of with Pratt 3. supply of aircraft 4. Design of runway 5. supply of aircraft pilot training centers Ste. Metal-urgique Tractional Thenia Rias-Bajas (Belgium) Boeing 737s and 727s Air Algrie Boeing Co. and Whitney engines (United States) six C-130 Transport Air Algrie Lockheed (United States) airport with 3,000 meter Air Algrie Uvaterv Tiaret (Hungary) three Hercules L100-300 Air Algrie Lockheed (United States) $35 million 1981 $100 million 1981 Not stated 1981 $30 million 1981 6. Turnkey contract to design and Air Algrie International Setif and Batna build airports Airport Authority (India) SOURCE Off Ice of Technology Assessment $100 million 1982 PAGE 302 298 l Technology Transfer to the Middle East ) . -. o PAGE 303 Ch.7 Technology Transfers in Commercial Aircraft Support Systems l 299 0 L a K al I I n I I I I I I II I I Q I I I -m aJ I I I I I I c Cu m (-) c WI 0 L 0) z .0 L o T c L u) U7 r 0 Q z al r-mm m r= PAGE 304 CHAPTER 8 Technology Transfers in Medical Services PAGE 305 Contents Page INTRODUCTION . . . . . . . . . . . . . 303 MEDICAL SERVICES IN THE MIDDLE EAST . . . . . . 304 Medical Requirements and Facilities . . . . . . . . . 304 The State of Medical Capabilities in the Middle East..... . . . . . 306 PERSPECTIVES OF RECIPIENT COUNTRIES AND FIRMS . . . 316 Plans for Development of Medical Services . . . . . . . . 316 Assessment of the Absorption of Medical Technologies . . . . . 320 PERSPECTIVES OF SUPPLIER COUNTRIES AND FIRMS . . . . 333 The Middle East Market for Medical Equipment and Services . . . . 333 Factors Influencing Commercial Technology Transfer in the Medical Sector. . 342 FUTURE PROSPECTS . . . . . . . . . . . . 345 Potential Political and Social Dimensions of Health Care. . . . . . 345 Implications for U.S. Policy . . . . . . . . . . . 346 Tables Table No. Page 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. Population Per Physician and Hospital Bed . . . . . . . 306 Summary of Health Indicators and Health Sector Organization . . . 307 Budget of the Ministry of Health as Proportion of Total Budget, Saudi Arabia, 1970/71-1981/82 . . . . . . . . . . 317 Labor Force in Kuwait by Sex and Occupation Groups: Census of 1965, 1970, 1975 . . . . . . . . . . 326 Total Kuwaiti Manpower Requirements for 1985, 1990, and 2000 Compared With December 1980 Staff in Post . . . . . . . 327 Algerian Medical and Paramedical Personnel . . . . . . . 328 Demand and Supply of Manpower by Occupation During the Fifth Plan for Iran . . . . . . . . . . 329 Estimated Level of Medical Technology Absorption in the Middle East Countries Under Study . . . . . . . . . 332 Imports of Medical Equipment and Supplies, 1980 . . . . . . 334 U.S. Exports by Industry Sector and Subgroup to the World Industry Sector: Medical Instruments, Equipment, and Supplies ., . . 335 Representative U.S. Exports of Medical Instruments, Equipment, and Supplies to Saudi Arabia. . . . . . . . . . . . 336 Major U.S. Suppliers of Medical Equipment in Saudi Arabia and Relative Market Position ., . . . . . . . 338 Major Third-Country Medical Equipment Suppliers and Saudi Arabia. . 339 PAGE 306 CHAPTER 8 Technology Transfers in Medical Services INTRODUCTIO N During the last 10 years, most Middle East countries and particularly those focused upon in this study, have placed increasing emphasis on improved health care. This emphasis has been reflected in both budgetary and public policy plans. The strides made in medical care during this period have been enormous, but much remains to be done. Some of the major health problems today involve diseases that have largely been conquered in the industrial countries, such as infectious and parasitic diseases, respiratory infections, problems related to childbirth, and diarrheal disease. Chronic diseases, such as heart disease, which have become common in the industrial countries and to which much of the newer medical technology is addressed, are, by many accounts, far down on the list of health problems in the Middle East. Many Middle Eastern countries need comprehensive public health programs to help meet their goals. Of all the technology transfer sectors examined by OTA in this study, medical service transfers are those most likely to affect directly the quality and longevity of life of the average citizen in the Middle East. Since these transfers entail the promise of substantial improvement in local living conditions, U.S. Government programs supporting medical technology transfers are particularly prominent. However, medical services are also big business; U.S. firms have been important exporters of medical equipment and services, particularly in the hospital management area. Therefore, both the development assistance and commercial aspects of medical service technology transfers may have important implications for public policy. The medical services sector covers a broad range of activities, from design and construction of medical facilities, to training of personnel, to management of varied types of health care. The large increase in petroleum revenues, the increased commitment to health care demonstrated in national development plans, and increased public health needs and expectations have converged to cause a rapid expansion in medical services technology transfers in the Middle East in the past decade. Saudi Arabia, for example, is one of the worlds largest importers of medical equipment and hospital management services. Although decreased petroleum revenues may slow the regions pace of growth in this sector, increasing medical needs and the commitment to improve health care will continue, with effective technology transfer a major factor. Trends indicate an increased emphasis by recipients on local level preventive health care, as opposed to more costly, sophisticated curative care. Training of indigenous personnel at all levels and proper specification and maintenance of equipment will be the recipients major concerns. Expatriate personnel may be required well into the future to fill personnel requirements in some medical services categories, particularly if the ambitious health care plans of some Middle Eastern countries are implemented. An extremely significant aspect of medical technology absorption is the ultimate benefit to the patient. In the absence of direct indicators of this benefit, several dimensions of the health infrastructure in each country are used as proxies. A number of factors relevant to assessment of absorption of medical services technology are considered, including facility design and construction, equipment, staff, education and training, and research and development (R&D) programs. The number, quality, and capability of health personnel in303 PAGE 307 304 l Technology Transfer to the Middle East volved in the five areas are investigated. The most pressing need will continue to be in the level of medical technology absorption in the area of preventive and less sophisticated health Middle Eastern countries under study is found care. U.S. development assistance programs to vary widely by country and medical servhave focused on health care of this type. ice category. This chapter ex amines the nature and extent U.S. firms have established strong positions of technology transfer to the Middle East in in medical services in the Middle East, but the the medical service sector. It examines the U.S. market share may decline, particularly in the medical equipment field. This is primarily due to their poor reputation for after-thesale maintenance and service. The U.S. position is expected to remain strong, however, in hospital management contracts, since U.S. firms have a reputation for efficient operation and U.S. medical practice is highly regarded in the Middle East. In the future, however, the MEDICAL SERVICE S MEDICAL REQUIREMENT S AND FACILITIE S There are many types of health care and several ways to arrive at this care. Primary care is often associated with local village needs as well as preventive medicine. Secondary and tertiary care are more frequently associated with curative medicine and often comprise what is considered modern medicine. There is a need for proper integration of health care systems. Private medical care in developing countries usually comprises a small percentage of total health care. Government health ministries decide the countries medical priorities and set the policy for the mix and emphasis to be placed on various types of health service. Profile of Medical Services and the Medical Services Industry Medical care is a large and diverse industry with no clear boundaries separating it from related sectors of the economy. In industrialized countries the health care system includes a wide variety of facilities and personnel totaling up to 10 percent of the total economic activmedical technologies and services involved and evaluates the development plans and strategies of various Middle East nations for improving medical services. It outlines the factors that influence sales of equipment and services, as well as the success of governmentsupported medical technology transfer. Finally, implications for U.S. policy are outlined. IN THE MIDDLE EAS T ity of the society. ] In developing countries, the delivery of health care interrelates strongly with other factors such as food and nutrition, sanitation, water supply, literacy, and income distribution. In general, government is the main provider of health care; social insurance schemes are viewed as a public responsibility. In industrialized countries the health care sector relies heavily on highly trained professionals and sophisticated facilities, although more than half of the workers are support personnel with little or no advanced medical training. In developing countries, various options exist for developing a medical labor force that relies to varying degrees on highly trained professionals. Generally, developing countries rely less on advanced personnel and facilities, both because of the shortage of available personnel and capital and because of the urgent need to deliver basic primary health care (with an emphasis on prevention) to low-income groups. .- 1 U.S. Census of Service Industries, 1978; For discussions of measurement of health personnel, see Robert Kohn and Kerr L. White (eds.), Health Care: An International Study (London: Oxford University Press, 1976); Milton I. and Ruth J. Roemer, Health Care Systems and Comparative Manpower Policies (New York: Marcel Dekker Inc., 1981). PAGE 308 Ch. 8 Technology Transfers in Medical Services l 305 Thus, two models can be used to characterize this broad technology area: 1) the developed country model, which relies heavily on hospital care, fully trained doctors, and an extensive pharmaceutical industry; and 2) the basic health care model (as in China), which relies heavily on larger numbers of health care workers with minimal tr aining. A mixed model is prevalent in many developing countries. Medical Service Categories Medical services include the following categories, which may be emphasized to different extents in various countries: 1. 2. 3. 4. 5. 6. Hospitals. Specialized facilities for health care, including physician and nursing services. Specialized clinics. Dental, vision, and mental health services, in addition to other nonphysician services such as care of patients by midwives. Special health programs. Examples include public health education, nutrition programs, sanitation programs, birth control campaigns, environmental health programs, and immunization programs. Medical training and education. Training of health personnel, ranging from short training programs to the operation of medical schools and teaching hospitals. Pharmaceuticals. Includes the distribution of medicines to patients and in some cases the manufacture of those medicines, and possibly R&D of new medicines. (This chapter does not deal extensively with the pharmaceutical industry, but treats it where necessary to understand the quality of services provided through medical facilities and personnel.) Administration. Management for health facilities and administration of health programs. Manpower Characteristics As a point of reference, medical services in the United States illustrate the characteristics of health personnel in an industrialized country. It should be noted that exact definitions of these characteristics are not possible because there is no agreement as to exactly which personnel should be included in the category health personnel (i.e., those actually trained in medical work, those performing supporting roles, etc.). In the United States, total expenditures for health services represent a considerable portion (about 10 percent) of GNP, with these expenditures concentrated in labor inputs. Of the total value of health services, about two-thirds represents labor input, one-sixth inputs of physical capital, and the remaining, one-sixth, goods and services purchased from other industries. Among health care personnel in the United States, physicians and nurses make up the largest contingent of professional workers, together accounting for almost 40 percent of the total. In contrast to the situation in many developing countries, the majority of physicians work outside the hospital. Nurses make up by far the largest single group of U.S. health personnel, or about 30 percent of the total. Nursing aides and orderlies constitute nearly one-fourth of the direct health care workers in the United States. 3 Improvements in health technology have also necessitated an expansion of allied health personnel, such as pharmacists and technicians. In order to compare the situation in the United States and other industrial nations to that in the Middle East, several measures can be used to assess the amount and type of health personnel in a country. One measure is the number of physicians per capita. Although this measures only one component of the health system, it is generally available and gives a first approximation of health resources. Care must also be exercised in that definitions of what constitutes a physician in various countries may differ. Typical levels of population per physician (and the equivalent measure of physical infrastructure, population per .... -In f]s~al ~ear 1974-75, it was calculated that total (1. S, Expenditures for health seriices reached $118 billion, or about 8 percent of ( j N P. See Alan 1,. Sorkin, I{ealth Nfanpower ( I.exington, \f ass: I.exington Books, 1977}, p. 1 3 Ibid., p. 6. PAGE 309 306 l Technology Transfer to the Middle East hospital bed) for six Middle Eastern countries and representative developing and industrialized countries are presented in table 71. As the data indicate, there is over a hundredfold variation between levels of physicians per capita in the richest and poorest countries. In the Islamic Middle East, only Kuwait approaches the level of health care of industrialized countries. (However, there are also substantial variations within industrialized countries, which do not necessarily correlate with health levels of the population. 4 ) Measures such as population per physician or per hospital bed have been criticized as inadequate for assessing health care delivery. In the considerable literature on the measurement of health personnel resources are studies that have measured the use of health resources (e.g., frequency of visits to physician) or the actual levels of health of the population (e.g., longevity and mortality data) rather than ... Milton 1. Roemer and Ruth J. Roemer, Health Care Systems and Comparative Manpower Policies (New York: Marcel Dekker, Inc., 1981). See, for example: Brian Abel-Smith, Value for Money in Hetdth Servhs (New York: St. Martins Press, 1976); Eli Ginzberg, Health Manpower and Health Policy (Montclair, N. J.: Allanheld, osmun & Co., 1978); Milton I. Roemer, Health Care Systems in 14or)d Perspective (Ann Arbor, Mich.: Health Administration Press, 1976); U.S. Department of Health, Education, and Welfare (Office of International Health), Guidelines for.4nal~sis of Health Manpower Planning, prepared by E. H. White Co., San Francisco, Calif. (Rockville, Md.: Office of International Health, 1979). number of physicians. 6 The socioeconomic standards are also important determinants of health care. Basic availability data such as that in table 71, however, continue to be the most widely used measurements of health personnel and facilities. Types of Technology Transfers For Middle Eastern countries, the most important types of technology transfers involve imports of medical hardware and supplies, imports of services needed for construction, and staffing and management of hospitals. In the Gulf States, where there is limited local production of medical equipment and shortages of skilled medical personnel, turnkey hospital construction and the purchase of hospital management services have been utilized. One important facet of technology transfer involves training of local professional staff; another involves assistance in health care planning. In contrast, in Egypt there has been little use of international hospital managment firms, extensive participation of domestic firms in hospital construction, and reliance on bilateral foreign aid and technical assistance projects in the health field. Thus, there is a wide variety of types of technology transfers in the medical service sector in Middle Eastern countries. While government health ministries are everywhere central actors on the recipient side, supplier firms independently transfer technology to Gulf States. Assistance programs are also a major mechanism in Egypt and Algeria. In all of these countries, medical services technology transfer spans those needed for smallscale rural clinics to the most technologically advanced hospitals, as the next section indicates. THE STATE OF MEDICA L CAPABILITIES IN TH E MIDDLE EAS T Judging by factors that affect medical technology transfer, the six countries under study ) Robert Kohn and Kerr L. White (eds. ), Health Care: An Internationai Study Report of the World Health Organization (Londorn Oxford University Press, 1976). PAGE 310 Table 72.Summary of Health Indicators and Health Sector Organization United States 4 . > ., 1.5 2.160 a 0.6 1,550 a 33 12820 259 IJ! 25 5 0 !, 35 50 26 99 b {ml 120 over 100 117 101 81 111 139 (13) 16 90 60 65 40 Dysentery. TB. whooping C ough, measles. malaria Malaria. trachoma, bilharzia TB. whooping cough chicken pox Chronic disease Ministry of Public Health. Ministry of Defense. Ministry of Interior. private Ministry of Health. other Ministry and Unlversiti.es Public ans Private sectors 3 Government Ministries MOH (85%) (31 Wilayas). Ministry of Defense (160 Dairas Ministry of Higher Education Also Social Security Organization National Health Instltute. Sonatrach and other state-owned corporations have their own Ministry of Health (over 50%) Unlversity Police. Military Social insurance, private MOH departments. 18 Governorates handle all but military small private Many varlatlons PAGE 311 308 l Technology Transfer to the Middle East can be broadly categorized into three groups: 1) countries typified by substantial capital, rapid development, and a small indigenous population, such as Saudi Arabia and Kuwait; 2) countries with less capital, more population, and quantitatively larger trained medical cadres and infrastructure, such as Egypt and Algeria; and 3) countries whose extensive medical services plans have been halted or greatly decreased in scope because of civil strife or war, such as Iraq and Iran. Table 72 summarizes the health status of the six countries and gives information on the United States for comparison. The brief descriptions presented next on the medical sector organization and health status of the six countries are not meant to be all-inclusive. They do demonstrate, however, the diversity of health sector organization, medical personnel resources, facilities, and types of health care in the Middle East. They also show that, given these differences. there is no preferred avenue toward improved health. Although many problem areas remain, great strides have been made in medical services in the last decade in most of the countries-partly due to increased oil revenues, but especially due to an increased commitment to improved health care, education, and living conditions by the respective governments. Saudi Arabia The development of modern hospitals and other medical facilities was among the most outstanding achievements of the second plan covering 1975-80. Saudia Arabia differs from most Western markets in that it has no medical equipment production of its own, is far away from medical supply and instrument producers, is a large country with a low population density, and has a small indigenous manpower force to draw on. In Saudi Arabia various organizations are independently involved in health care services. They each have their own financial appropriations, staff, and facilities. At present, there is little coordination of their respective activities. The greatest responsibility for health organization and for the improvement of health in the Kingdom rests largely, but not completely, with the Ministry of Health (MOH), which operates 65 hospitals and about 1,000 dispensaries, health centers, and specialized facilities. In addition, 13 agencies (plus the private sector) offer health services for their employees and their dependents or are responsible for specialized health services. Among the most important of these are the Ministry of Higher Education, with responsibility for the medical colleges and teaching hospitals; the Ministry of Interior, for medical service for the police force, and the Ministry of Defense and Aviation (MODA). In addition, the National Guard has more than 10 hospitals and several clinics. The majority of hospital beds are concentrated in the large cities, particularly Jeddah and Riyadh; preventive care is inadequate in many more remote communities. One of the aims of the third plan is therefore to provide the population in every region with improved facilities and medical service. Preventive health care is still largely neglected, especially away from the large towns. This lack of preventive care is one of the factors leading to an overload of the MOH hospitals. The small number of nursing staff, medical administrators, and technicians together with the limited number of doctors constitutes an acute shortage of staff. The most serious problem is the low percentage of Saudi medical staff: according to some experts only 8 percent of the physicians and some 5 percent of the allied health personnel are Saudisand most are naturalized Saudis. 7 The policy of the Saudi Government to decrease the dependence on expatriate medical staff and administrators has led to a shortage of personnel in several hospitals. The shortage of indigenous staff will no doubt slow the pace of hospital construction and staffing and will lengthen the time Estimates of numbers of Saudis and non-Saudis vary. The 8 percent figure is based on combined estimates of U.S. experts in the medical services field. Saudi estimates for 1980 for numbers of non-Saudi physicans working in the Ministry of Health were considerably higher. See Ministry of Health, Saudi Arabia, Statistics Department, Statistical Review (1971-80). PAGE 312 Ch. 8 Technology Transfers in Medical Services l 309 before Saudis can effectively take over their medical systems. This manpower shortage constitutes one of the most important constraints on medical technology transfer in Saudi Arabia. Recently, Saudi health care standards have greatly improved, but the country still clearly faces a number of medical problems that are not unusual for a rapidly developing country. 8 The most prevalent problems are high rates of diabetes, polio, and blindness. Tuberculosis is also a problem, and maternity and infant mortality rates are unacceptably high. There have been a few cases of leprosy reported each year, and malaria exists. In both cases the trend has been significantly downward in recent years. Recurrent outbreaks of cholera are swiftly checked, and some believe that cholera and malaria can be eradicated in 10 years. Finally, both traffic and work accidents are numerous. 9 The status of medical services and its accessibility, as viewed by the Saudis themselves, depends on who is asked and where they live. Differences exist in staff and equipment standards between the specialist hospitals and the public hospitals run by the MOH, which are normally attended by the average citizen. King Faisal Specialist Hospitalwhere operating a bed costs $300,000 annuallyis probably the best hospital in the Kingdom, with the best and most experienced staff and comprehensive medical equipment and systems. This institution admits all patients and works through regional medical committees, which refer serious cases. Nevertheless, there has been a widespread view that those who are not rich do not have the means to receive the best medical care the Kingdom has to offer. Besides poorer Saudis, three minority groups have had, and in some cases still have, problems obtaining adequate health care. The large group of foreign workers are sometimes admitted to the older, lower-standard hospitals or clinics unless special arrangements can be made. The more than 1 million pilgrims who flood into Mecca each year have received poor care in Saudi Arabia in years past, but this situation has been improving. The Bedouins are gradually being drawn into the health systems of MODA and the National Guard via their sons who join the armed forces. The MOH is well aware of the availability of hospital beds in Riyadh and Jeddah and the lack of proper health care in other parts of the country. Its plans, which are slowly being implemented, include the establishment of regional hospitals that will function as centers of a widespread network of local health centers and clinics. Some of the newly constructed, highly sophisticated MOH hospitals are situated in areas previously least-served. If the manpower situation can be improved, it is expected that many of the more obvious regional and population differences in medical care will be greatly reduced in the next 10 to 15 years. The Ministry of Health has developed an ambitious plan to build 36 new hospitals (with PAGE 313 310 Technology Transfer to the Middle East 7,000 beds) and to add 2,000 beds in existing hospitals. Kuwai t Kuwait probably has the best medical services of any of the countries under review. Swift socioeconomic development has brought improved health status and an expanding health care system. Kuwait medical facilities have expanded from 100 hospital beds in 1949 to 6,400 in 1982. There are, however, some health problems related to the growing population, urbanization, the changing patterns of disease, overuse of health services, and dependence on an expatriate health work force. The Ministry of Public Health is responsible for the overall control of all health services in Kuwait, including both the public and private sector. There is little delegation of authority to the individual public sector hospitals as all planning, budgeting, administration, organization of domestic and technical services, staffing, and procurement remain under ministry control. Ministerial authority over the private hospitals is less direct, being exercised only through its licensing authority and supervision of standards. In 1982, of the 6,400 hospital beds in Kuwait, about 5,000 were in Ministry of Public Health hospitals. All medical treatment, including prescribed medicines, dental treatment, and provision of eyeglasses, is free of charge in the public sector clinics, polyclinics, and hospitals, which serve all residents regardless of nationality. The basis of the Kuwaiti health service is a primary care network of clinics and polyclinics. These, in turn, are subordinate to preventive health centers. Everyone is required to register with the nearest clinic, which is usually staffed by both male and female general practitioners and sometimes a pediatrician. The clinics usually have a small pharmacy and are open 8 hours a day. Some clinics, usually attached to one of the hospitals, specialize in maternity, dental, or child care. For more specialized treatment, patients are referred to one of these or to one of the collective health centers. In spite of the ambitious health care program, pressures continue on the public sector hospitals and clinics. Many wealthy Kuwaitis still seek consultations and treatment in Europe. Even less wealthy Kuwaitis often prefer private sector facilities, because of the delays and problems in liaison between public hospitals and out-patient clinics. The present population of 1.4 million has more than doubled in the last 10 years and is expected to double again by 2000. This rapid population expansion has overwhelmed the health care system, despite the program for 3,000 new beds initiated in the second half of the 1970s. Each person averages five to six visits to a clinic each year. Many of the visits are for social rather than medical purposes, but it is nevertheless policy that each patient must be seen by a doctor. As a result, each of the 251 doctors, supported by 582 nursing staff in the primary care network, sometimes sees more than 100 patients per day. 10 Kuwait has a falling death rate and a decrease in new cases of tuberculosis. Tuberculosis used to be one of the major problems in Kuwait, but a compulsory screening program of all school children and newcomers to Kuwait and wide-reaching health education have significantly reduced the incidence of tuberculosis. The major causes of death for adults in Kuwait are traffic accidents, heart disease, and cancer-all associated more with the industrialized world than with developing countries. Kuwait is already heavily dependent on expatriate skills and administrative ability throughout its health service and will remain so for many years to come. When the current hospital building program is complete, it is estimated that Kuwait will have to recruit 15,000 extra staff. Kuwaiti doctors enjoy a privileged status and therefore tend to remain in Kuwait. Expatriate doctors, particularly those from Western countries, often find the social structure and living conditions difficult to adjust to. 11 Kuwaits shortage of doctors PAGE 314 Ch. 8 Technology Transfers in Medical Services l 311 has also been accentuated by a tendency of expatriate doctors, both Arab and non-Arab, to go to Kuwaits neighbors, especially Saudi Arabia and the Emirates, where salaries and status are higher. Egyp t Egypt has a fairly well-developed health care system, but it also faces serious problems. Free medical care is provided through the Ministry of Healths network of hospitals, district health centers, and rural health units. A private health care sector also exists, with some outstanding facilities for those who can afford their services. Thus, the Egyptian health care sector is now moving along two distinct tracks. one is for the basically healthy, wage-based employee, who lives in an urban area and pays for services through socially financed health insurance or fee-for-service payments. The other track is for the low-income, unskilled worker in rural and suburban areas, who relies on traditional medicine, pharmacists, or the Ministry of Health system for services. The Ministry of Health (MOH), which is charged with the promotion and protection of the health of the entire population, is underfinanced and overextended. Its current infrastructure does not permit it to conduct efficient operations to serve the group that is least able to pay for health services of any kind. Nevertheless, in attempting to compete with the emergent public/private sector, it has opted for additional investments in high-cost curative care services (hospitals and emergency medical services) that offer visibility and professional satisfaction to an expanding group of physicians. 13 The health portion of the national budget has decreased substantially in recent years. Egypt spent approximately 5.6 percent of its total budget on health care in 1976. By 1979 the figure fell to 4.0 percent, and the estimate for 1980-81 was 3.6 percent. This budget de12 U.S. Agency for I ntt~rn;ition:il I)e\vlopn~vnt, \ Rfport on I {[4al Lh I )(t(lopnlcnt in th( :\rah R[~puhlic of I:g}rpt: .! S(ctor in riins]t](]n, N1 :ij -, Jun(, 1982. 13 Ibid. crease must be viewed in light of the fact that the personnel side of that account is increasing at an average rate of 11.4 percent per year. Thus, salaries consume an ever-increasing share of a shrinking resource base. In spite of its fairly well-developed health care system and relative abundance of doctors, Egypt has several problems related to sanitary facilities, water supply, housing, and population growth. Family planning programs have not prevented a rise in the Egyptian birth rate in the 1970s; poverty and inadequate sanitary facilities result in a large number of pre-school deaths from diarrheal disease; there is a high incidence of bilharziasis, respiratory diseases, and other enteric diseases. Perhaps two-fifths of the countrys 43 million people now harbor the bilharzia parasitesa public health burden of staggering proportions. Egypt nine state medical schools graduate about 3,500 new physicians each year. With the present structure and scope of the governmental and private sector health system, this number more than fulfills the national demand for doctors. There is, however, a drain on the supply of doctors due to a substantial emigration to other Arab states, Africa, the United States and the United Kingdom. New physicians emigrate because of their dissatisfaction with low salaries and limited opportunities for postgraduate work. According to the view of the Medical Union, Egypt produces but does not have an overabundance of doctors. Egypt is also chronically short of well-trained nurses and other essential backup personnel. Another problem is the concentration of qualified physicians in the urban areas and the corresponding shortage in the more remote parts of the country. Medical graduates are expected to spend their first 4 years of obligatory service to the MOH in rural health services, but the majority of doctors leave in less than half that time. In order to change this imbalance in health services, a community medicine element has been introduced into all medical courses at the state-run teaching hospitals, and greater emphasis has been placed on practical skills than on acquisition of theo- PAGE 315 312 Technology Transfer to the Middle East retical skills. With assistance from the U.S. Agency for International Development (AID), the curriculum has been upgraded at the medical college of Suez Canal University to emphasize a community-oriented approach to medicine. Algeri a Although impressive gains were made in the development of Algerias heavy industry under past development plans, conditions in housing, health, and other social sectors tended to deteriorate. Rapid population growth and heavy rural-urban migration expanded needs for social services, but the low level of investments in social sector infrastructure failed to keep pace with the expansion of needs. The current Algerian plan, 1980-84, seeks to redress the imbalance of past development plans by reorienting investment toward social sectors, particularly medical care. Three governmental ministries have the main responsibility for health care services in Algeria. The most important of these is the Ministry of Health (MSP, Ministre de la Sante Publique), responsible for some 85 percent of all health care establishments in the country. The other two are the Ministry of Defense and the Ministry of Higher Education responsible for the planned university medical centers but not for the existing ones. Several other organizations are also involved in health care activities. The Social Security Organization is responsible for mother and child care, for care of the handicapped, and for establishing sociomedical centers in residential areas. The National Health Institute is responsible for the training of health personnel other than physicians. In addition to these, state-owned corporations (practically all medium-sized and large corporations are stateowned) often have their own health care. The largest corporations are Sonatrach and SNS, dealing in petroleum and steel, respectively. These corporations are responsible to various ministries, often the Ministries of Heavy and Light Industry. The private sector is insignificant and consists mainly of private practitioners working half-time in their own practice and the rest of the time in MSP hospitals. While resident population increased by 32 percent between 1969 and 1978, the number of hospital beds increased by only 12 percent over the same period. The increasing density of population per health facility in Algeria during the last decade reflects the low level of investments in health infrastructure during the period. This slow growth of health infrastructure has led to a serious shortage and crowding of health facilities. The current health plan aims to improve the overall availability and regional distribution of health facilities through an ambitious program of health sector investment. The most striking increase in programmed health facilities is planned for health centers, which are seen as the basic outlet for provision of primary health care in the country and as a filter to control the use of more specialized health facilities, such as hospitals, polyclinics, and maternity centers. Thirty-nine new general hospitals are planned, and seven new specialized hospitals for psychiatric care, pediatric care, burn care, cancer treatment, and treatment of cardiovascular disorders are scheduled to be completed in 1984. Better health requires environmental improvements affecting water supply, sanitation, and nutrition. Evidence from other settings has shown that improvements in these areas often do more to promote health by reducing exposure and susceptibility to disease than do health efforts in treating illness and disease. One area where potential progress is possible in Algeria is in improved supplies of drinking water for newly weaned children. An experimental program of dehydration therapy has recently been undertaken by the MSP to determine the most efficient approach for reducing the incidence of infant death from diarrhea. An important part of this program is the provision of information to mothers about the necessity of maintaining fluid intake for children. Such efforts may lead to important benefits in reducing deaths from diarrhea, but further improvements will depend on improved water PAGE 316 Ch. 8 Technology Transfers in Medical Services l 313 supplies and sanitation to control the transmission of diarrheal organisms. One of the specific areas of health intervention which is clearly given priority in the current Algerian health plan is the government newly adopted population policy, which calls for lowering the overall rate of population growth through a vigorously expanded birthspacing program. Further increases in female school enrollments and female employment are also expected to decrease the rate of population growth. Ira q Since 1978, Iraqs rulers have become much more concerned about the welfare sector. With the rise to power of Saddam Hussein in 1980 came stress on mobilizing the masses, and a clear commitment by the government to expand the scale and scope of the welfare state. All hospitals in Iraq with the exception of military facilities are managed by the Ministry of Health (MOH). The MOH is divided into five departments; the country is divided administratively into 18 governorates, each with a chief medical officer responsible for all health services and institutions in the governorate. In 1980, there were 200 hospitals with 30,000 beds. Health conditions in Iraq gradually improved over the last few decades as hospital services were introduced. In 1978, the government initiated a substantial hospital and health care development program, but this was scaled down considerably in recent years. Medical personnel, particularly nursing staff, remain in short supply, despite the expansion of medical schools, and support services are inadequate, A rural health program, begun in 1963 to assist in the elimination of chronic disease, including malaria, trachoma, and bilharziasis, has met with mixed success. Parallel construction of new and improved rural water supplies and the spread of education has helped to bring better standards to most, although not all, regions. In 1981, a foreign consultant was commissioned to study long-term health care development for the MOH. Because of the war, this work has been postponed, as were most of the projects in Iraq that are not considered essential. The president of the State Organization of Buildings said in 1981 that the organization was engaged in carrying out hospital development projects valued at $800 million. The largest projects were the expansion of a huge Medical City, five general hospitals, and six pediatric and maternity hospitals. Early in 1982 ongoing health care projects included some 25 MOH projects and 15 military hospitals, all in different stages of development. Several of these projects have been terminated, however, owing to the changed wartime priorities. In 1981, Iraq ranked as one of the largest Middle East importers of medical products, comparable with if not equal to Saudi Arabia. The continuing war with Iran and the reduction in oil exports from 3.3 million barrels per day (b/d) in 1980 to 0.7 million b/din early 1983 sharply reduced oil revenues. With war expenditures escalating, Iraq has had to slow down the pace of its vast economic development plans and concentrate its financial and human resources instead on support of the war. Health care now ranks behind the war, war-related projects, energy, and industry in priority. The military, however, whose health care expenditure comes out of its own budget, continues to spend on an increasing scale, owing to war casualties. Ira n Little authoritative information is available concerning the present state of health care and health care facilities in Iran. In prerevolutionary Iran, however, the system of health care delivery was relatively extensive. The government health care budget in 1978 totaled $950 million, over half of which was administered by the Ministry of Health (MOH). A large majority of the 50,000 hospital beds were operated by government agencies or univer- PAGE 317 314 Technology Transfer to the Middle East sities. Thirty-eight hospitals were affiliated with universities throughout Iran, seven of which provided training for students at medical colleges. The 125 private hospitals in Iran were mostly small but provided better treatment than the government facilities. In 1978, there were about 3,000 clinics, run mainly by the government through the MOH or special health corps. At the time of the revolution, the government had drawn up a much-publicized master health care plan designed to provide the country with 15 regional hospitals, 130 smaller hospitals, some 2,000 new health clinics, and 10 other medical projects, including extensions of 6 existing specialist hospitals. A few of these projects were under construction, and several were in an advanced design stage in 1979. There is no doubt that Iran had made significant progress in its medical services up until 1978. Several problem areas remained, however, particularly with manpower allocation. People outside of Teheran, and especially the more remote populations, received treatment significantly poorer than that given residents of the capital. Some 45 percent of the hospital beds and about 60 percent of the doctors were located in Teheran, which had only an estimated 10 percent of the total population. Imports of physicians did improve health care standards in the provincial areas, but the growth rate in the number of Iranian doctors per hospital decreased in the latter part of the 1970s when the number of foreign-trained, homecoming Iranian physicians could not match the number of doctors leaving the country. It was estimated that some 60 percent of Iranian medical staff training abroad would not return home, and that about 15,000 Iranian doctors were living abroad in 1978. The Iranian revolution apparently led to drastic changes in health care and in medical education. 14 There is reason to believe that the new government has not yet been able to take active measures in the health care sector. IraThe information on present Iranian health care is based on interviews conducted for OTA during 1983. nian revolutionary leaders emphasized the need to improve health care in remote areas, and health ministers called for importing foreign physicians to serve the villages. The new government initially closed down all medical schools, however, and projects for auxiliary health worker training reportedly ended. Female students were not encouraged to go on with their studies. A large number of physicians were expelled from the university hospitals, and many Teheran University Medical School faculty members were dismissed or forced to leave the country. During the reign of the Shah, 2 years of health corps work was mandatory for all medical graduates; currently 5-year compulsory service in the rural areas is recommended. As a result of deteriorating capabilities in the public health departments, vaccinations reportedly have declined and epidemics of infectious diseases have risen. The only school of public health, in Teheran, was closed. Regional Efforts Attempts at regional cooperation among Middle Eastern countries in health care, medical products manufacturing, or disease eradication have been largely unsuccessful, partly because, even within countries, conflicting goals exist among the different ministries and organizations responsible for health care. Other reasons include: 1) the relatively recent stress on improved health, 2) the diversity of health problems and financial and manpower resources available to deal with them, and 3) large political differences separating countries in the region. Attempts have been made to produce medical disposable (syringes, gauze, etc.) and pharmaceuticals regionally, since the market in just one country would often not justify establishment of production facilities. Kuwait is establishing a syringe factory, and Egypt produces several medical products (pharmaceuticals, in particular). Egypt also has plans for production of medical furniture. Extensive plans for regional distribution are, however, still far in the future. The Arabian Gulf Universitys medical school in Bahrain is today the only regional medical PAGE 318 cooperation project initiated and administered by the countries themselves. It is being cofinanced by Bahrain, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. The school, which will form an extension to the Salmaniya Hospital Complex in Manama, is scheduled for completion in 1984, enrolling 50 students from the participating countries, with a majority from Saudi Arabia, Kuwait, and Iraq. Although highly unstructured, medical training and physician emigration probably most closely approximate regional cooperation. As often occurs in scientific endeavors in the civilian sector, medical training and information is freely exchanged among the medical communities of the Middle East. Most hospitals in the Middle East have a staff composed of diverse nationalities with a large regional contingent. Transfer of medical skills from country to country also occurs through emigration for financial or political reasons, although sometimes to the detriment of the training country, which has spent years and substantial public resources on their training. Efforts in the Middle East by outside organizations such as the World Health Organization (WHO) and Project HOPE have met with substantial success, particularly in control of infectious diseases and training of preventive care personnel. Both organizations emphasize effective training and technology transfer in the medical sector. WHO sponsors medical projects in the region through the Eastern Mediterranean Regional Office (EMRO) in Alexandria, Egypt, which covers all countries under study except Algeria. It has initiated and carried out a substantial number of health care projects in the region despite a background of repeated changes and frequent realignment of policies by the member countries. A few of the most ambitious projects are: 1 Maintenance and repair of medical equipment. WHO is taking a multiphase approach, which includes services of consultant engineers and activities in the Regional Training Center for Maintenance Ch. 8 Technology Transfers in Medical Services l 315 Preventive medicine has made Important contributions to public health in the Eastern Province of Saudi Arabia 2. 3. and Repair of Medical Equipment in Cyprus. This involves technician training, including specialized courses on medical equipment, and training of biomedical engineers. Expanded program of immunization. All member countries collaborate with EMRO mainly in interregional training activities, but also in implementation, evaluation, and program reviews. Promotion of environmental health. This includes establishment of sanitary engineering laboratories, assignment of sanitary engineers in Iraq, Egypt, and the UAE, and establishment of a Regional Center for Environmental Health Activities. This center will assist in developing training capabilities, will develop a re- PAGE 319 316 l Technology Transfer to the Middle East gional information and reference center affecting medical services and general health for environmental health, and will provide have focused on agricultural production, hosa means for technology transfer within pital administration, health service delivery the region. systems, nutrition survey techniques, public U.S. efforts in foreign assistance in the counadministration, and foreign investment protries under study have centered on AID promotion and negotiation procedures. AID programs in Egypt, rather than on regional efgrams are discussed in more detail below. forts in the health care field. Typical programs PERSPECTIVES OF RECIPIENT COUNTRIE S AND FIRM S PLANS FOR DEVELOPMEN T OF MEDICAL SERVICE S In order to assess the perspectives of the recipient countries with regard to utilization of medical technologies, a brief review of government health policy is presented in this section. Great diversity in emphasis is noted among the countries under study. For example, Saudi Arabia and Kuwait now have well-developed medical infrastructures and are thus redirecting their efforts toward preventive health care and indigenous manpower training. At the other extreme, Iran and Iraq, torn by war and internal strife, have had to postpone many of their plans for the medical services sector. Future developments in their health sectors will depend on the duration and severity of the war. Saudi Arabia Vast oil wealth combined with a strong commitment to provide free health care services to Saudi Arabias inhabitants has sustained a striking growth in medical services in the last 10 years. Table 73 shows the budget of the MOH as compared to the general budget of Saudi Arabia from 1970 to 1981. In this time period, the MOH budget increased almost forty fold, staying at a relatively constant percentage of about 2.5 percent of the total Saudi budget. Much of the increased expenditure went to infrastructure construction, rather than to programs designed to upgrade the quality and distribution of health care. Hospitals using very sophisticated technology were built in the public and private sectors. In the past the concentration has been on curative medical services and on secondary care through hospitals rather than on preventive medicine and primary care. This was seen as the most appropriate way to provide for immediate treatment of disease and has been reflected in budgetary allocations. Even today the legacy of the ambitious hospital building program promoted in the mid and late 1970s commands the major share of the health budget, with a further 36 MOH hospitals providing 7,500 additional beds scheduled for completion in the 1983-90 period. The third national development plan, however, attaches a high priority to the restructuring of health care. A fully integrated and comprehensive system is planned for every re gion, with emphasis on preventive health measures that include vaccination programs, environmental health, early screening, and mother and child care programs. This goal will be achieved by expanding and reorganizing the system of dispensaries and health centers to meet local population requirements. More than 300 health centers are to be established. Through the establishment of a National Health Council, the government hopes to guide the development and improvement of all health services. One goal is to delineate the responsibility between the government health PAGE 320 Ch. 8 Technology Transfers in Medical Services l 317 Table 73. Budget of the Ministry of Health as Proportion of Total Budget, Saudi Arabia, 1970/71-1981/82 General Budget Ministry of Health Budget Years (millions S. R.) (millions S, R.) Percentage 1970/71 . . 6,380 117 2.8 1971/72 . . . 1,078 279 2.6 1972/73 ... 13,200 420 3.2 1973/74 ... ... 22,810 582 2 5 1974/75 45,743 1,162 2 5 1975/76 : : : : 110,935 3,197 2 9 1976/77 ., 131,296 2,972 2,3 1977178. 134,253 3,384 2,5 1978/79 : : 144,558 4,040 2.8 1979/80. . 185,820 4,177 2.2 1980/81. 245,000 5,656 2.3 1981/82. .. 298,000 6,831 2.3 NOTE: 3.4 Saudi riyal (S.R.) $1.00 SOURCES: Ministry of Health Saudi Arabia Statistics Department Statistical Review 1391-1300 A.H. (1971-80) pp 162-164 Business International Middle East Market Opportunities May 1982 pp 14 15 agencies and the private sector and coordinate their activities. Whether the council will be able to reign over the independent MOH, the powerful military health organization, and the private sector remains to be seen. Training is a central feature of Saudi health care plans. 15 Present government plans envisage a 90 percent increase in the number of physicians over the next 5 years. According to the previous Health Minister, Saudi doctors will comprise half of all physicians by 1995. Outside observers judge this to be overly optimistic. While the large increase in student numbers is consistent with that objective, expansion will be limited by high dropout rates and some migration to the West of newly qualified doctors seeking higher training. A fourth medical school was scheduled to open in 1983, with a philosophy based on increased community orientation and a balanced exposure to clinical medicine and health ecology. Five nursing training institutes are also planned, although the number of graduates in the years up to 1990 is not expected to rapidly increase the share of Saudi nurses. Large-scale training of technicians and administrators is not being planned. It is difficult to anticipate supply and demand for medical manpower, but estimates have been made that during the 15 Ministry of Planning, Saudi Arabia, Third Development Plan, 1980-85. next decade the governmentwithout counting the other health care agenciescould need an additional 20,000 medical, paramedical, and ancillary staff, Kuwai t With a small, geographically concentrated population and a fairly good medical facilities infrastructure in place, Kuwait did not pursue as vigorous a hospital building program as Saudi Arabia. Government health expenditures have nevertheless grown recently. Health ministry expenditures grew 11.5 percent between the two last budgets, from 171.7 to 191.5 million Kuwaiti dinars, while the miniseries budgets grew by 5.3 percent. 16 In Kuwaits National Health Plan of 1981, emphasis is placed on development of manpower as well as facilities, medical education and disease prevention. Kuwait plans to build three new regional hospitals, extend four, and provide 40 district health centers, 22 of which will be new facilities and the rest replacements. Health promotion measures span the fields of health education, mental health measures, social security, improved housing, and sanitary waste disposal. Immunization, maternal and child health, and control of communicable diseases are stressed under disease prevention. 16 National Bank of Kuwait, Vol. 1, No. 2, October 1982. ( 1 Kuwaiti dinar = $3.40) PAGE 321 318 l Technology Transfer to the Middle East Plans emphasize early diagnosis and prompt treatment of disease through health registration, screening, and community-based medical care. Manpower is a major problem since in 1980 over 75 percent of Kuwaits medical personnel were expatriate. Total medical staff are expected to increase from 26,000 in 1980 to 41,000 in 1990 to 58,000 in 2000 (at least 50 percent of whom, it is hoped, will be Kuwaiti). Key elements in Kuwaits manpower strategies include training programs for senior and mid-level administrators, which provide incentives for Kuwaitis in health careers through community education, salary and other incentives, and career development. Community health-oriented teams consisting of a general practitioner, nurse, and social worker are planned. In addition, measures have been introduced to promote postgraduate training in public health, and to increase medical school annual enrollment from 50 to 150 students as quickly as possible. The number of Kuwaiti nurses is to be expanded by enhancing the prestige of nursing and by providing exposure to a nursing career through educational programs in schools and on television. ..- -. 1 7The manpower plans may be difficult to achieve. The practical plans for implementation since the 1981 proposals were made, however, include: 1. The Medical School will increase enrollment to between 150200, 2. The jointly founded Gulf University in Bahrain is expected to meet some of the manpower demand. 3. The policy of overseas trainingincluding postgraduate trainingwill be continued. 4. Increased and improved employment incentives are planned. 5. Recruitment is being tried through contracts with foreign medical institutions, which may produce better results than through the individual contract approach used in the past. 6. Health accords will be made with countries like Great Britain, Pakistan, Sweden, and Denmark, mostly involving exchange of expertise and training of doctors. 7. The Nursing Institute will be expanded. 8. A 5-year program has started in schools and through television and other media to convince Kuwaiti families that nursing is a respectable profession. 9. Productivity is given special attention in ongoing hospitals. See Ministry of Public Health, Kuwait, Kuwait Health Plan ( 1981). Egyp t Reducing the rate of population growth in Egypt is an important goal of the Egyptian government. In a 1982 speech, President Mubarak called on the Egyptian people for hard work to reach a more balanced relation between the number of population and the volume of gross national production, and asked the nation to attentively consider the rate of population growth. The Minister of Health, Dr. Zaki, has outlined the general strategy for the health sector. Health insurance is considered the cornerstone of health care, and the number of be n eficiaries should be increased each year to provide complete coverage of the population by 1990. Emergency medical care services and first aid services are to be developed and expanded. The public sector will ensure a large portion of the drug supply. In the meantime the private sector should be encouraged to contribute toward completing the ministrys plan for providing drugs to the population at reasonable costs. 18 In addition, the government hopes to improve the efficiency of preventive health services, with emphasis on given to immunization, environmental sanitation, food control, and early detection and treatment of endemic diseases (particularly bilharziasis). Health manpower resources will be upgraded through education and training for medical and paramedical personnel. The pressing problem of improving water and sanitation will be seriously addressed. .. -. 18 Key ingredients of the Egyptain drug plan are: 1. a commitment to provide drugs to the population at reasonable costs; 2. continued subsidies of imported products not produced in the country; 3. a prescription system that will continue to allow people to buy whatever drugs they like from the pharmacist; 4. increased protection of locally made drugs against foreign competition; 5. encouragement of joint ventures between foreign and local companies to increase technology transfer; and 6. improved health education in order to reduce misuse of drugs. Middle East Health Magazine, Great Britain, March 1982: American Public Health Association: A Report on Health Devel opmen t in the ARE (Arab Republic of Egypt), 1982. PAGE 322 Ch. 8Technology Transfers in Medical Services l 319 Algeri a The policy guidelines for the 5 years covered by the latest plan include emphasis on investment in health care infrastructure, featuring an increase in hospital beds from 45,000 in 1979 to 64,000 in 1984, 1,000 new health centers and dispensaries, and over 100 maternity centers. However, in the past, plan targets have not been achieved: only 19 percent of the number of hospitals and about 30 percent of the health centers planned under the previous plan were actually constructed. g The expansion of training of health manpower of all kinds remains a major priority. In addition, environmental health, water supply, sanitation, nutrition and birth control are important areas. Several measures are included which are aimed at lowering the infant mortality rate: 1) from 1979 to 1984 the number of maternity centers will be increased from 58 to 172, 2) two new hospitals for pediatric care will be established, 3) sufficient maternity facilities will be established to assure that more than 50 percent of deliveries are assisted in health facilities by 1987 (in 1982 only 40 percent of the births percent in rural areas-occurred in a medical facility), and 4) water supplies and sanitation will be improved to control the transmission of diarrheal organisms, and programs of dehydration therapy will be instituted. Ira q In the early 1980s Iraq began to study longterm health care needs. The government prepared a long-term health plan for the 1980-95 period, with the ultimate goal being health care for all by the year 2000. This plan embraced the primary health care (PHC) approach. It reflected a change from the traditional curative approach of the health services to one based on preventive public health. This was to include strengthening of mother and child health care, including the promotion of breastfeeding, reinforcing environmental health activities, and an expanded program of immu1yWorld Bank, Ihe Five-Year Development Plan 1980 -84, .June 1982. nization and tuberculosis control. The plan called for local production of essential drugs and quality control of imported pharmaceutical products. 20 Also included were improving existing health care facilities with a special emphasis on basic health care provided in medical centers and clinics in both urban and rural areas and an increase in the number of regional multidisciplinary hospitals. Tertiary care in new specialized hospitals in the major cities was also to be provided with the focus of investment on the Medical City in Baghdad, the largest medical complex in the Middle East. 21 However, due to the war with Iran, these plans have been postponed. Ira n Irans government has made few statements to clarify plans for health sector development in the past 5 years. Before 1979, the fifth development plan emphasized the following: 1) health services, with a special focus on control of infectious diseases through immunization, mother and child health and environmental sanitation; 2) birth control, (in 1978 net population growth was 3.1 percent); 3) health facilities, with a target of increasing the ratio of hospital beds to 10,000 people from 15 (in 20 Quality control of imported pharmaceutical products is a problem in Iraq, as well as in other Middle Eastern countries. Imports of pharmaceuticals to Iraq come from 400 foreign companies, with few restrictions. Iraqs limited capacity to regulate drug imports and its badly organized distribution system make it difficult to prove accusations that low-quality pharmaceuticals have been directed to this market. Imports of illegal drugs do take place in these countries, In 1982, Kuwait drafted stiff laws aimed at ending drug trafficking and abuse. Trading in drugs was restricted, and only qualified doctors were allowed to prescribe drugs. See: U.S. Department of Health, Education and Welfare Iraq Health Sector Plans, 1977; Middle East Health Magazine, West Sussex, Great Britain, May 1982. 2 In 1979, the Medical City consisted of an 800-bed teaching and general hospital. In 1980 a contract was signed with South Korean contractor Hyundai to build phase 2 over a period of 4 years. This was to include a 650-bed surgical hospital, a 250bed private nursing home, a 200-bed childrens hospital, a conference center, and administration and service buildings. This second stage of development has fallen well behind schedule. Also, the existing complex is said to be serving fewer patients than anticipated because of the shortage of medical staff. See World Medical Markets Iraq, Great Britain, October 1982; Middle East Health Magazine, Great Britain, May 1982; U.S. Department of Health, Education and Welfare, Iraq Health Sector Plans, 1977, PAGE 323 320 l Technology Transfer to the Middle East 1978) to 20 (in 1984); 4) rural medical and health services, with a major objective being to add 600 new medical and health centers with responsibility for outpatient treatment, immunization, birth control, and nutrition information at the village level; 5) training, with the establishment of 2 new medical faculties, 3 schools for auxiliary health workers, and 26 nursing schools; and 6) research, with emphasis on fields related to birth control, environmental sanitation, development and production of vaccines, and nutritional problems. ASSESSMENT OF TH E ABSORPTION OF MEDICA L TECHNOLOGIE S In order to evaluate the use of medical facilities and technologies in the Middle East, this section deals with the following medical services categories: 1) health care planning, 2) use of medical equipment and systems, 3) servicing and maintenance, 4) local production of medical equipment and supplies, 5) hospital design and construction, 6) hospital management, and 7) training of local personnel. Key problems are identified in training of local personnel and servicing and maintenance of equipment. Health Care Planning Technology transfer occurs through foreign assistance in medical education and health Photo credit Middle East Economic Digest Nursing training in Iran planning. As teachers and curricula from the United States and the United Kingdom have been incorporated into Saudi Arabias medical education, and as Saudi students have pursued postgraduate studies abroad, the professional skills of Saudi medical personnel have been improved and preferences for medical systems and equipment developed. Foreign advisors together with a group within the Kingdom, have reappraised Saudi achievements in the health care sector. The result is shown in the priorities of the current 5-year plan, which represents a departure from earlier preoccupation with hospitals and curativebased services. Such services are said to have done relatively little to redress the underlying health problems, especially at the local level. Instead, the importance of preventive medicine, primary care, environmental health, and coordinated health planning is recognized, and they are becoming components of the national health policy of Saudi Arabia. Use of Medical Equipment and Systems Simple equipment can be rendered useless when local needs and customs are not considered in technology transfer. For example, in a prerevolutionary Iranian health project, elaborate fiberglass chairs were purchased for a mother and child center in a rural area. Assuming that the chairs were put there for decorative purposes, the mothers refused to use them, preferring to sit on the floor with their children as they were accustomed to doing. In Iraq, scissors imported from the West for use in cutting plasters were found to be useless because the plaster casts used in Iraqi hospitals were harder than those used in Europe. In both cases, the purchase decision was made by people who did not have the necessary knowledge of local conditions. A member of the Faculty of Engineering at Cairo University has furnished some detailed examples of successful and less successful transfers of medical equipment and systems in Egypt. 22 An example of a successful trans.. .-22 Ahmad Gaber, "Appropriate Health Care Technology Transfer to Developing Countries, Project HOPE Conference, Millwood, Va., April 1982. PAGE 324 Ch. 8 Technology Transfers in Medical Services l 321 fer to Egypt is the Diagnostic Ultrasound Center, established at Cairo University Hospital with the assistance of the U.S. National Science Foundation and the Alliance for Engineering in Medicine and Biology. This project, operating since 1976, was established as a nucleus for the development and diffusion of such services. The development of ultrasound diagnos tic services was a high medical priority, bu t the technology was complex and transfer ability, in terms of local ability to maintai n the systems in operation, was difficult. Many factors contributed to the success of thi s transfer : 1. 2. 3. 4. 5. 6. Excellent cooperation between donors and the receiver. Sound planning at all stagese.g., equipment specification, procurement, relations with manufacturers, staff training, and supporting services. Adequate training of sufficient numbers of all types of staff: medical, operating, and maintenance. Good routine management, with regular coordinating meetings between all involved groups, progress evaluation, and educational workshops. Adequate budgetary allocations, which covered staff incentives and technical support needs. Ample provision of maintenance facilities and commitment to this work. An example of a relatively unsuccessful transfer of medical technology to Egypt concerns Neonatal Intensive Care Centers. 23 These were established in eight Egyptian University hospitals with assistance from the U.S. Department of Health, Education, and Welfare. The three units opened so far have experienced great difficulties in various stages of their development. In one hospital none of the more than 20 incubators functioned satisfactorily. Reasons cited were: 1. Poor initial specification of equipment to be procured. Many incubators were sup plied with the wrong main voltage characteristics. 23 Ibid.. 2. 3. 4, 5. 6. Faulty installation and commissioning by the manufacturers agents. In many cases the operating temperatures of the incubators could not be set above 901 F. Inadequate provisions for preventive maintenance or repairs. No available inhouse staff had the technical competence for this job, and there was inadequate distribution of spare parts ordered with the initial purchase. No technical service manuals were provided. Lack of any engineering voice in the management of the technology. No arrangements were made for technical advice or support. Inadequate training of nurses. Only the senior staff had received useful training, and they were not involved in the day-today control and operation of equipment. Poor relationships between hospitals, manufacturers, and their agents. Effective use of medical equipment and systems requires sound planning and initial specification, adequate training, and good day-today management and maintenance. Servicing and Maintenance The problem most frequently discussed in connction with transfer of medical equipment and systems is not the question of appropriateness of the technology, but that of servicing and maintenance. Servicing and maintenance are considered crucial in the analysis of technology absorption, since, 20 to 60 per-cent of existing medical equipment in the Middle East may be out of order at any given time. 24 Thus, successful future transfers of medical technology will require substantial improvements in this area. Some key aspects of this problem and examples of ways of dealing with it are discussed below. EMRO states that the availability of diagnostic and therapeutic services is substantially lower than might be indicated from trade and ft-t)rlcf Iieafth organization, fi~ast,ern illediterranean Region office, Ilicnnial Report of the I)irector, 1979-1981 Alexandria, p. xxi~. IJnfortunatel\, this report gi~es no figures for t)~pes o r categories of equipment most prone to difficulties. PAGE 325 322 l Technology Transfer to the Middle East statistical sources, owing to the large quantity of equipment which has not been properly serviced or repaired. With the rapid expansion of health services in this area in recent years, there has been a large accumulation of equipment. This equipment, purchased from widely different sources and with a wide range of sophistication and complexity, must be continuously repaired and maintained if it is to be used effectively. Generally speaking, tremendous expenditures have been made for purchase of equipment and supplies, while comparatively little budgeted for effective maintenance. 25 As a result, medical equipment, even with minimum damage, may be out of service for extended periods, or even permanently. WHO believes that the major reasons for these problems are: 1) lack of understanding of the need to plan and budget for maintenance and repair, 2) inadequate administrative mechanisms to ensure prompt and regular delivery of spare parts and expendable supplies, 3) failure of maintenance and repair services to reach peripheral areas, and 4) competition between the various suppliers and agencies sometimes selling equipment without guarantee of spares or service. Until recently, Saudi Arabian buyers reportedly rejected maintenance contracts. Increasing awareness of the maintenance problem is also apparent in Iraq .. 2bAccording to a representative of Hospitalia International-a company which has Aablished some 400 hospitals in LDCsa hospital in Saudi Arabia should budget between 15 to 20 percent of its medical expenditures for effective maintenance of equipment, compared to about 5 percent in a Western hospital. This 15-20 percent figure could be reduced if the hospital were to follow some of these suggestions: l l l l l l Make serviceability an important criterion for selection of equipment. Understand the importance of standardization, which not only reduces the cost of basic equipment, but also permits staff to move around among various clinics and provides the opportunity to improve service since consumables, reagents, and spare parts can be obtained in quantity and stored centrally at lower costs. Allow the installation personnel stay on the job to train staff in appropriate utilization. Include a spare parts package included in the original contract. Establish a preventive maintenance schedule for the technical maintenance team. Make sure that all documents and manuals are onsite and in the proper language. and Algeria, where government decrees insist that a training component be included in contracts signed with foreign companies, and also that suppliers be held responsible for service and spare parts for up to 3 years after delivery. Most foreign suppliers of medical equipment are prepared to provide service and maintenance packages and training of local technical personnel, when compensation for these efforts is seen as adequate. One approach is to offer a service and training package in the equipment purchase price or as a related contractual arrangement. The hospital equipment company Hospitalia International warrants all equipment for 12 months, making service an important component. The products of WarnerLambert Company (medical diagnostics) also carry warranties; the company does not introduce a product unless it has established mechanisms for full service. Two examples of training local manpower in operation, maintenance, and service are noted. One is the Regional Training Centre for Maintenance and Repair of Medical Equipment in Cyprus (funded by WHO), which has already been briefly described under regional medical cooperation projects. The other is the Department of Medical Equipment at Abbassia, Cairo, established by the Ministry of Health with assistance from the Great Britain Overseas Development Administration and the Department of Clinical Physics and Bioengineering in Glasgow. The latter project, successfully progressing since 1978, was designed primarily to provide manpower development facilities and to build a service organization for using medical equipment maintenance engineers and technicians. The project was given high priority, since it was recognized that much existing equipment was ineffectively used or inoperable for lack of engineering staff, and that successful future technology transfers would require the presence of a skilled and well-organized group of such personnel. In this case the model adopted by th e Egyptian Department was based on one de veloped in Glasgow, but many modification s PAGE 326 Ch. 8 Technology Transfers in Medical Services l 323 were required to adapt it to local circumstances. The following elements were crucial: The close coupling of manpower development activities to the needs of the health services, thus ensuring that training was relevant to the needs and also attracting user support. Ongoing institution-to-institution links between the Abbassia and Glasgow Departments. This involved long-term exchanges of staff which helped keep objectives on target, gave continuity, and built mutual trust and respect. Local Production of Medical Equipment and Supplies Local production of medical supplies and equipment is very limited in the six countries under study. More than 90 percent of their medical equipment is imported. Prospects for local production vary. Currently, local production is negliable in Saudi Arabia and Kuwait. In both cases, the domestic markets are comparatively small and scarce labor resources are committed to other types of manufacturing operations. In neither case is it likely that local production will substantially displace imports of medical equipment and supplies during the next 10 to 15 years. Prospects for local production are much better in Egypt and Algeria. Egypt has plans to locally design and assemble more sophisticated medical equipment. To date, however, production has been limited to supplies of nonchemical consumables, and custom-built items such as prostheses used in rehabilitation. Many firms are also involved in manufacturing beds, chairs, and kitchen and laundry equipment used in medical facilities. Algeria did not produce medical equipment or disposable locally in 1980. Although the current 5-year plan stresses the importance of a domestic industry in this sector, implementation of these plans by 1990 is uncertain. Any manufacturing unit established is likely to produce initially simpler kinds of equipment and disposable articles. The Algerian national steel industry is working on a project to produce simple medical equipment. This project will probably not materialize until after 1985, if at all. Even if domestic production of medical equipment does begin in the next few years, Algeria will probably remain strongly dependent on imports of medical equipment for the next decade. Iraqs local production of medical equipment and supplies is limited, and imports accounted for approximately 90 percent of the market in 1980. There are no plans to produce medical equipment locally. West German, Japanese, and French equipment constituted about 70 percent of total medical equipment imports in 1980. Iran produced no medical equipment and only limited medical supplies in 1978. Total imports of medical equipment and supplies in 1978 were $50 million, with West Germany, the United States, Japan and the United Kingdom as the main exporting countries, in that order. Almost 80 percent of the imports were channeled through local dealers. Most foreign suppliers were on contract to install and maintain their equipment, and in the latter half of the 1970s several joint venture companies were established to service government medical facilities. Despite the fact that local production of medical equipment is limited, there is a strong rationale for it in Middle Eastern countries. The forms of local production theoretically feasible are design of basic medical equipment systems, local assembly of instruments and apparatus under license agreements, and design and assembly of medical equipment from locally manufactured or imported subsystems. The major reason for local involvement would be to produce simpler and cheaper equipment, which may be more appropriate to local needs. This is especially true since many users in the region feel that the imported equipment is often overengineered. 26 Local production also -)of the ct)untries of concern in this report, a del)attj on tht, question of 10C21 production and on appropriate nledi~al te(.hnolog~ is going on onl~ in J:gypt. Se\eral p(rsons inter~ritwed at I+;kvl]t \I( )] I kin{] (airo [ ni~(>rsitl f(lt that most inlp{)rt~d PAGE 327 324 Technology Transfer to the Middle East promotes technology transfer and saves foreign exchange. In the future, Middle Eastern countries such as Egypt, Algeria (and Iran and Iraq) may significantly expand local production of medical supplies and equipment, but imports will remain significant for many years. Hospital Design and Construction Capabilities in hospital design and construction in the Middle East vary widely. In Saudi Arabia, turnkey hospital construction has been dominated by Western contractors, who still have a competitive edge over their Far Eastern competitors. Consultants, mostly from Western Europe and the United States, often do feasibility studies, design, and planning. In turnkey hospital construction, the contractor is responsible for all parts of the project. Equipping and supplying the hospital can be performed by the original company or can be subcontracted to a medical equipment company or a consultant. The largest hospital constructor in Saudi Arabia, Philip Holzmann, has several arrangements for equipping hospitals, depending on the project. If the firm does not itself provide equipment, it may use the services of an international turnkey hospital subcontractor such as Hospitalia, or international equipment firm such as Labsco, or a Saudi equipment agent such as Dallah Medcenter. In Egypt, owing to the limited allocations for new hospital construction in the last few years, the activities of foreign firms have been limited. Domestic firms carried out a major share of the construction, while European (mostly British) and some U.S. firms are cooperating with Egyptian counterparts in hospital design and civil engineering, medical equipment was over-engineereds for a countrylike Egyptwhich has limited financial resources available to finance imports and wants to extend health coverage more widely. One example of adapting medical technology to specific markets is Johnson & Johnson Co., Ortho Diagnostics Division, which assesses appropriate technology and product use for each potential foreign market. The potential user has the option to choose the level of technolo~ which is right for him. See Appropriate Health (are Technolo~T Transfer to I)eveloping Countries (Nlillwood, Ia.: Project 1{ OI)PI, 1982). in Algeria, the more comprehensive hospital construction projects are the university hospitals, with the current plan calling for seven new universit y centers, all designed by foreign consultants from Great Britain, Sweden, Finland, Japan, and the United States. 27 The construction is a cooperative effort between foreign and local contractors. In both Iraq and Iran hospital design and construction have been carried out by both local and foreign companies. Iran had quite a few good consulting architects who were able to work with or without their Western counterparts. Present efforts, owing to the war, are directed at maintaining existing infrastructure. Hospital Management Another prominent type of medical technology transfer in certain countries in the Middle East, particularly Saudi Arabia, has been staffing and management of hospitals. Companies like Hospitalia (a West German/Dutch joint venture) or Hospital Corporation of America (HCA) of the U.S. offer complete consulting, supply, installation, and maintenance services, but not construction. To date, only the MODA and the National Guard have contracted out the running of hospitals to foreign companies. MOH has not followed their lead, on the grounds that such a policy might inhibit development of Saudi expertise. Others say that hospital management can be carried out in such a way as to promote indigenous medical expertise. With several constructed hospitals not operating because of insufficient staff, and in view of the ongoing hospital building program, the Ministrys stance on foreign contractors may change. In the last 5 years, Kuwait has been reluctant to become involved in the turnkey ap. 27 The foreign consultants are Devecon Arkitekter, Helsinki, Finland, for the Uni~ersit~ Hospitals of Annaba and Setif; Uniconsult Arkitekt, Stockholm, Sweden, for the Universit~ I{ospitals of Constantine and Alger; Kenzo Tange, Tokyo, Japan, for the University Hospital of Oran; Skidmore, Owens, and Merrill, U. S., for the University Hospital of Illid~ W. S. Atkins Architects, I.ondon, Great Britain, for the University 1lospital of Tlemcen. T4or)d Health ilfarkets, Algeria (Wrest SusseY (;reat 1~ritain, 1982). PAGE 328 Ch 8Technology Transfers in Medical Services l 325 .. preach to hospital construction, staffing, and administration. 28 Therefore, the new public health hospitals were specified, equipped, and commissioned by MOH. The original designs by Western consultants were redrawn with the consultation of WHO specialists. These hospitals will be among the best equipped in the world. 29 All equipment for government facilities must be purchased through Kuwaiti agents. Kuwait has recruited mainly in the East, to attract medical staff. Agreements with foreign universities and governmental agencies have also been made in order to improve administrative and planning capacity. One such example is an agreement with the Johns Hopkins University to provide assistance in a new 20-year plan for Kuwaits health services. A few international companies have been involved in private Egyptian hospital projects, but on a limited scale. The U.S.-based American Medical International (AM I), terminated its management and staff contract in 1982 with the prestigious private 300-bed As Salam hospital. 30 one of the r-eas{ms for Kuwaits reluctance to hecorne in\(J1\LId in turnke~ hospital construction is the relati~el~ high l{iel of competc~nce of their hlinistr~ of Puhlic Iiealth. There are alw) agr~[~ments between the Health hl inistr~r and W() and Ixlt w[wrr t.hc m inist r~ and (; r-eat IJrit ain Regional 1 lealth Auth(JritJ, whereh~ both organizations suppl~ consultation s[r~ice~ in training, de~ign, and equipping. Also there are se~= era] conlptent joint \ent ure construction firms based in Kuwait which are ahle to huild hospitals with assistance from the F;uropean join L \enture partners. 29 The K D 10,000 budget is for equipment and supplies, It is estimated ( Kuwait 71nNs, Feh. 24, 1982) that the annual operating cost for the 500-bed A1-Ad. an 1 Iospital will he in the region of K I ) 16 million-about $,5;1 million-corresponding to an annual co~t p[~r Ixd of ahout $ 106,0[)0, which is comparable to [or e~en aho~re) expenditures for a }1estern hospital. Accwrding tt ~ an inter~iew in ,$liddle F,a. st 1 iealth Magazine, (;reat Ilr-itain, Septemher 1982, a representati~e of AM I ( )~ers[a~ ( )p~~r-ations explained the major reasons for AN1 1s termination of the contract as being: 1. The costs ran far over budget and substantial payments were not honored; 2. Changes in AMI's contract were made that reduced the company's degree of control over the hospital management (mainly the right to select and hire key staff); ;1 he txct~t~itt t,irn(~ tak~n to suppl~ wtitcr-, electri(it~, an d ~~>wera~e +(rflw, 4. tht. failuro to rt~ease hospital ~~quipment through customs; and 5 ,}s a r[su]t {)f tht a} MJ\re, expatriate administrative staff spent 9 months doing ~rer~ Iittl( The need for additional hospital management expertise in Egypt has not been adequately addressed. A report on Egyptian health care noted that there is a desire for such training on the part of physicians serving as administrators in rural health work, as well as on the part of supervising nurses in hospitals. 31 In both Iraq and Algeria, the turnkey approach to hospital design, construction and management has not been popular. Algeria has attempted to limit involvement of foreign medical personnel. The Iraqi Health Ministry is apparently confident enough in its staffing and managerial skills to organize the second phase of the Baghdad Medical City project itself. The South Korean firm Hyundai was awarded a contract for construction, but the Iraqis themselves are coordinating the project. In Iran management and staffing were largely taken care of by the Iranians themselves in the late 1970s. Training of Local Personnel Medical Manpower Development Plans. Saudi Arabia is overwhelmingly reliant on expatriates to run its hospitals. Saudis makeup only 5 to 8 percent of the doctors and about 10 to 15 percent of the nursing staff, with most of these being naturalized citizens. The ratio of physicians to beds in Saudi Arabia should rise, considering the number of students currently studying in the four medical schools or abroad, but it will not rise significantly, since the number of hospital beds is also increasing. By 1986, MOH will be responsible for some 20,000 beds, compared to the present 13,000. The number of doctors, nurses, and technicians is projected to increase by more than 60 percent. Medicine is a popular curriculum among Saudi students, many of whom study abroad. When the Saudi students 31 "A 11), A Report on E~ptian Iiealth Care: A .Sector in Transition, hla~rtJune, 1982. PAGE 329 326 l Technology Transfer to the Middle East return, 32 they generally need additional special training to practice in the Kingdom. 33 Traditional attitudes affect manpower in medical services. The role of women, for example, is limited by a tradition that male patients should not be cared for by women from outside the immediate family. The nursing profession is also considered low in prestige even among women who have few other work opportunities open to them. These attitudes are being relaxed to allow Saudi women to train and work as nurses, although facilities and staff are still extremely limited. Kuwait also has a large expatriate work force in the medical service sector. Table 74 disaggregates the medical labor force, by sex and by occupational groups The Kuwaiti health work force increased substantially over the 10-year period. As in Saudi Arabia women represent a low proportion of the total work force, particularly in nursing. According to the Kuwaiti census, the largest number of nonKuwaiti physicians were Egyptians, Jordanians, Palestinians, and Indians, representing approximately 45 percent, 21 percent, 7 percent, respectively, of the total number of government physicians (2, 102) in 1980. Kuwaitis 32 Saudi students have always had a relatively high return rate compared to other Middle Eastern countries. In addition, in the United States at least, new immigration laws targeted at medical students make staying in the host country difficult. qFrom interviews with U.S. physicians with experience in Saudi Arabia, the students will need further training in three specific areas, namely: 1 ) experience with treatment of specific Saudi or Middle Eastern diseases; 2) experience with different attitudes of Saudi patients, who sometimes view the doctor with skepticism; 3) experience in operating independently of the professor and others from whom the student learned. comprise approximately 16 percent of the physicians. The Kuwait Health Plan specifies future manpower requirements, as seen in table 75. The largest percentage increases will be among dentists (400 percent), technicians (21 1 percent), pharmacists (193 percent), and nurses (157 percent). Except for dentists, Kuwaiti nationals will continue to makeup a small share of these medical professionals. In contrast to the modest expansion of health facilities during the past decade, Algerias performance in training health personnel has been impressive. Table 76 shows the increase in medical and paramedical personnel from 1969 to 1978. The greatest gains in this area have been made in the training of paramedical staff, who are well suited to preventive rather than curative care, which is emphasized in Algeria. Between 1969 and 1978, the number of Algerian physicians in the country increased more than sixfoldfrom 521 in 1969 to 3,156 in 1978. As a result, the countrys reliance on expatriate physicians was substantially reduced. Paramedical personnel increased from a total of 6,377 in 1969 to 23,658 in 1978. The very rapid increase achieved in paramedical personnel during the past decade is projected to continue with even greater strength: 4,000 paramedical technicians and 26,000 paramedical agents are scheduled to complete training between 1980 and 1984. If this very ambitious training goal is attained, it will lead to a more than doubling of the nations paramedical personnel. To meet these goals, Algeria has signed several bilateral Table 74. Labor Force in Kuwait by Sex and Occupation Groups: Census of 1965, 1970, 1975 Censuses 19651970 1975 Occupation groups and sex NonKuwaiti Kuwaiti Non Kuwaiti Kuwaiti Non-Kuwaiti Physical scientists and M 193 13 251 47 538 related technicians F 3 36 6 183 Physicians, dentists, and M 473 23 609 44 820 veterinarians F 70 1 111 3 182 Professional nurses M 952 49 176 1,626 F 1,185 23 1,639 57 2,703 Pharmacists and other M 501 207 1,287 289 486 medical related workers F 37 25 98 9 51 SOURCE: Kuwait Ministry of Planning Annual Statistical Abstract 1981 (Edition XVIII), Kuwait Central Statistical Office, 1981, pp. 10811 Kuwaiti 95 54 76 27 334 178 107 15 PAGE 330 Table 75.Total Kuwaiti Manpower Requirements for 1985, 1990, and 2000 Compared With December 1980 Staff in Post a 1985 1990 2000 December 1980 Percent change Percent change Percent change Staff group staff in post Number from 1980 Number from 1980 Number from 1980 Physicians . . . . 1,918 (14 %) b 2,411 25.7 3.017 573 4,136 115.6 Dentists . . . . . 182 (43%) 393 1159 525 1885 911 400.0 Pharmacists . 272 (18%) 476 750 579 1129 798 193.4 Administrative . . . . . 3,688 (52%) 4,452 20.7 5,883 460 7.383 100.2 Technicians 3,156 (27%) 5.594 772 6,867 1176 9,806 210.7 Nursing staff . . . 6,881 ( 7%) Vocational workers . 5,100 (42%) Laborers 4,906 ( 8%) Total . . . . 26,183 (24%) Population (000s) 1,355.8 (41%) NOTE: Manpower Requirements do not include staff nulmbers to replace 9,449 373 11,898 72.9 17,648 156.5 6,223 22.0 6,501 27.5 7,432 45.7 6,021 20.8 7,023 40.9 9,443 89.4 35,019 33.7 41,793 59.6 57,557 119.8 1.728.9 275 2.098.3 54.8 2,891.5 113.3 resignations a By main staff group w I th percent I ncrease for each year from the December 1980 figures. bFigures I n brackets for December 1980 show percent Kuwaiti SOURCE: Kuwait Health Plan 19822000 vol. 4. Executive Summary p. V-12. PAGE 331 328 l Technology Transfer to the Middle East Physicians Algerian. ... ... Foreign, Pharmacists Algerian . . Foreign Dentists Algerian, . Foreign ., . Paramedical technicians Specialized paramedical agents . Paramedical agents (nurses) . Paramedical aides Total paramedical personnel ... Table 76.Algerian Medical and Paramedical Personnel 1969 1972 1974 1975 1976 521 784 1,125 1,420 2,027 1,179 1,201 1,253 1,392 1,448 206 317 341 549 664 59 38 101 52 41 142 211 350 469 553 80 97 84 88 90 477 667 917 1,098 1,167 460 342 426 620 696 1,634 3,088 4,672 6,056 7,857 3,806 6,271 8,355 9,008 9,092 6,377 10,368 14,370 16,782 18,812 SOURCE World Bank Algeria The Five-Year Plan. 1980-84 Washington D.C. 1980. agreements for medical service training especially with France. 34 Table 77 shows the demand and supply of manpower by occupation during the Fifth Plan of Iran. A shortage of 1,300 people was predicted for senior medical personnel, while the shortage of other medical personnel was predicted to be as high as 21,300. In the past, most Iranian medical students went abroad for their postgraduate training. Training Experiences of Hospital Management Corporations.Both former Saudi Ministers of Health, Drs. Jazairi and Algosaibi, have expressed concern that foreign firms have been more worried about profits than about technology transfer. w U.S. management firms, for their part, say that training local staff is the only viable long-term means for promoting technology transfer, and that it is consistent with their strategies. All U.S. hospital management firms working in the Middle East train local professional staff. This is a contractual duty in Saudi Algeria and France have signed several agreements in the past 10 years primarily involving exchange of teachers and students. In conjunction, French firms have won contracts for design and construction of medical facilities. 35 Dr. Ghazi Algosaibi became Ministry of Health in October 1983 after several months in the postion of acting minister. He was dismissed in late April 1984 after incurring the disfavor of senior members of the Saudi royal family. See Michael Field, Controversy on Dismissal of Saudi Minister, Financial Times, Apr. 25, 1984, p. 1. 1977 1978 2,726 3,156 1,295 1,752 666 708 40 41 713 813 120 138 1,233 1,922 743 432 9,719 11,040 9,789 10,264 21,484 23,658 Arabia, where specific requirements include numbers or percentages for local staff. Large U.S. hospital management firms operating in Saudi Arabia employ as many as 3,000 personnel, of which about 10 percent have been Saudi nationals in recent years. In one instance, the majority of the local staff held positions as drivers, but in another instance the chiefs of medicine, pediatrics, and the hospital director were all Saudi nationals. Evaluations of experiences with trainin g differ, but U.S. firms have been skeptical about achievements. In one case, a U.S. firm maintained that it was difficult to fill required positions with Saudi trainees, because most candidates prefer to enter a business profession. Another company reported that, despite its efforts to recruit Saudis and its arrangements to facilitate their enrollment in U.S. institutions, success has been minimal. In both cases, on-the-job training techniques are stressed, and new curricula have been designed which include instruction in Arabic as well as English. To summarize, both Saudi Arabian officials and U.S. firms express their belief that goals have not been achieved. Training at a U.S. University. One example of an assistance program between a Middle Eastern medical school/university hospital and a U.S. medical school was the project between the King Saud University Hospital in Riyadh and the University of Colorado PAGE 332 Ch 8 Technology Transfers ofM e Table 77 .Demand and Supply of Manpower by Occupation During the Fifth Plan for Iran (1,000 persons) Category Architects, town planners, and civil engineers ... . Electrical and electronic engineers ., ., ., . Mechanical engineers ., Chemical, mining, and metallurgical engineers ., ., Other engineers ., ., ., ... ., Senior medical personnel . Other medical personnel ,. Educational personnel .,. ,:: :, . . Higher educational personnel ,. . .,, ,, Technicians ., ,,, ..,,. . . . . ,. ,. ,. Other technical and vocational personnel. ,. ,. .,, ::,. Managerial, administrative, and sales personnel . Mining, drilling, and extractive workers. ., ,. Transport workers ,.. ,,,., ,..,., ., Skilled and semiskilled industrial workers ., Skilled constructlon workers Unskilled workers Total Demand a supply 7 8 5.5 6 9 2,0 14.2 8.5 356 2874 22.5 1166 8 0 185,0 230 41.0 5200 2900 538.0 4.0 28 4.2 1.0 83 72 143 2300 210 750 40 185.0 150 410 2300 200 5280 2,112.0 1,3908 Shortage 3 8 2.7 27 10 59 13 213 574 15 416 4.0 8 0 2900 2700 100 721.2 a Demand for additional workers in each category to enter the work force during the 1973/74-1977/78 period SOURCE Plan and Budget Organization of Iran and Fifth National Development Plan, as reported by the US Department of Commerce 1978. School of Medicine in the United States. The contract was signed in 1981, but the Saudis requested that it not be continued beyond February 1984. The program included advice on curricula and faculty facilites in Saudi Arabia, supply of U.S. hospital administrators and faculty members for periods of a few months to up to 2 years, and teaching of Saudi students in their last year of education. By the beginning of 1983, the university had supplied 35 administrators and 10 faculty members, including two groups in oncology and one group in pediatrics, for 3 to 6 months, One problem was difficulty in recruiting U.S. faculty members to the program. According to a university representative, faculty members were reluctant to leave the research program at Colorado, and their families were hesitant to move to Saudi Arabia. Only three Saudi students (all female) were sent to Colorado. They arrived with limited knowledge of English, and eventually decided to return to Saudi Arabia before completing their training. This was the result of a number of problems, the fundamental one being that that Saudi medical students do not gain clinical experience in their course of study in Saudi Arabia, and therefore find it difficult to make the transition to the U.S. program, which strongly emphasizes hospital experience. In this case, there was limited space at the university and the hospital for additional students, and the foreign students needed special individual training. The Saudi students had difficulties in meeting the stiff U.S. requirements for both residency and examination. This experience indicates the importance of careful preparation, both in the U.S. organization and in the Middle East country, prior to beginning training. According to U.S. participants, this experience should not be taken to indicate that such programs cannot succeed, but rather that special preparation in clinical experience must be provided. This means that Saudi medical training must be augmented with special courses in order for such student exchange programs to function effectively. Experiences From U.S.-Sponsored Health Care Activities in Egypt.Cooperation between Egypt and the United States in training and educational activities occurs mainly through AID programs. These projects have included some funded under the Special ForForeigners who want to come to the United States to study medicine or to practice medicine must pass the Visa Qualification Examination. The tests are closely related to the regular examination of U.S. medical students administered by the National Board of Education. The VQE is a difficult examination, and the percentage of those passing is about 20 percent. Source: American Medical Association, Chicago, Ill. PAGE 333 330 Technology Transfer to the Middle East eign Currency Program. 37 Nonprofit private organizations like Project HOPE are also involved. Health has been a priority area for AID programs. AID-sponsored health programs, which currently involve 35 different projects, concentrate on preventive medical services such as oral dehydration, family planning, mass immunizations, and school health. Appendix A includes a list of major AID projects in the health field in Egypt. The total funding for the entire life of these projects initiated over the past 8 years is $261 million. In addition, $24 million has been allocated under the Commodity Import Program for procurement of medical equipment. One example of an AID program is the Suez Canal University Community Health Personnel Training Project, which includes cooperation between Boston University, the Egyptian MOH, and the Suez Canal University. The project was initiated in 1980 with the objective of establishing an integrated medical education and health services program for five governorates bordering the Suez Canal. The project assists in developing a new curriculum and a new mode of teaching physicians, and provides preventive and community-based primary health services. One unique aspect of the training is the involvement of students with care of patients. Another is the training in the United States of up to 50 junior and senior faculty members each year in primary health service courses that are not available in Egypt. Through group practice, the program emphasizes bringing needed primary health care to the surrounding community. The project was established in 1980, and was given high marks in an evaluation carried out in late 1982. 38 As the program becomes more complex with the addition of new courses, one central challenge No new funds have been allocated to the SFC since October 1981. This fund is part of the Public Law 480 program, which involves assistance projects payable in foreign currency. Projects in the health field supported by these funds have mostly included research and provision of equipment for laboratories. Some of the projects may be continued through funding from AID. m See E~aluation Report of the Suez Community Health Personnel Training Project (Cairo: AID, Oct. 12, 1982). will be for the Faculty of Medicine to effectively coordinate efforts with the Ministry of Health. This specialized training program represents an example of U.S. assistance contributing to the upgrading of health manpower skills in a focused way to meet the needs of the community. The U.S.-Egypt Special Foreign Currency Health Program has concentrated on improving local research capabilities, mainly in treating epidemiological diseases, in environmental health and health services. The program has included some 400 projects, running from 1 to 5 years (sometimes more) with total budgets ranging from $10,000 to several million dollars. These normally involve a U.S. funding institution (often the Department of Health and Human Services), a U.S. project officer either from the funding institution or from a university, and an Egyptian counterpart from a university or from MOH. Collaborative research designed either to advance knowledge or solve development problems has been the central focus. Successful projects have involved capable researchers in well-run laboratories, adequate salaries, and an American research partner. One program jointly financed by AID and the Special Foreign Currency Program is an Emergency Medical Services (EMS) system. This project was started in 1976 at the strong recommendation of the Egyptian Ministry of Health, with specific objectives to: l Establish a viable EMS entity in the MOH and an appropriate organization in each of the designated governorates. Train physicians, nurses, and technicians in basic and advanced life support treatment. Establish national standards for EMS in manpower, communications, critical case units, disaster planning, emergency departments, and public information. Most of the objectives of the EMS system were attained. Key accomplishments were the establishment of five EMS training centers, purchase of over 600 ambulances, updating of emergency departments in the demonstration project hospitals, successful training of over PAGE 334 Ch 8 Technology Transfers in Medical Services l 331 2,400 students and nurses in basic life support, U.S. training of physicians, and recruitment and training in basic life support of 850 ambulance attendants. Communication equipment was installed in 15 MOH hospitals. However, despite the fact that the project met many of its goals, it was criticized as too costly and dependent on high technology. The primary beneficiaries of the project were an elite group who have telephones and are able to use the service. 39 For these reasons, an assessment team recommended that the project not be funded further. Although the EMS project was a program which the Egyptian government viewed as a high priority and one which achieved many of its goals, it was evaluated quite differently by observers who emphasized provision of basic health services to the average citizen. Overall, AIDs health programs have made an important contribution to improving health care in Egypt, with a special emphasis on projects that involve direct and high-impact medical services to the population. These program s generally have been distinguished by thei r broad coverage and emphasis on provision o f medical services needed by the average Egyp tian Citizen A third area for U.S.-sponsored health care transfer is the HOPE-sponsored activities in Egypt. These have concentrated on three major areas: biomedical engineering, nursing education and scientific exchange. HOPE works jointly with Cairo University, MOH, the Ministry of Higher Education, and the National Academy of Science, with the objective of giving Egypt self-sufficiency in biomedical engineering. HOPE is involved in developing a new Institute of Nursing at Assiut University. Currently, 50 U.S. student nurses are being recruited for teaching positions. The nursing program emphasizes clinical training and preventive health practice in a densely populated but rural part of Egypt. More than 200 Egyptian and U.S. health scientists have participated in HOPEs Scientific Exchange Program since 1975, Major reasons given for HOPE success include concentration on high-quality teaching activities and on health areas which have a high priority in Egypt, its status as a small but effective organization without any political attachments, and a strong feeling of commitment on the part of HOPE personnel. Evaluation of the Level of Medical Technology Absorptio n While there are no accepted measures of technology absorption, a number of factors can be used to gauge the overall quality of medical technology and local capability to use it: 1) facility design and construction, 2) equipment, 3) staff, 4) education and training, 5) R&D programs, and 6) the ultimate benefit to the respective patient. An evaluation of the level of medical technology absorption based on these indicators must be used cautiouslypartly because the information available is not complete, and partly because the available indicators are not comparable in quantity or quality. Table 78 summarizes OTAs estimates of the extent and use of medical technology in the Middle Eastern countries under study PAGE 335 332 Technology Transfer to the Middle East Table 78.Estimated Level of Medical Technology Absorption in the Middle East Countries Under Study a Individual factors (1) Facility design and construction Overall quality. . . . . . Local capability to design and construct. (2) Equipment Overall quality . . . Local production capability . . Overall operability and serviceability Local capability to operate and maintain (3) Personnel (a) Physicians Total number/0000 population . Percent local ... . . ... Overall quality ... . . . Local quality ., ... . . . (b) Nurses Total number/0000 population ., ... Percent local ... . . Overall quality . . . Local quality . . . . . (c) Technicians Total number/0000 population ... Percent local . . . ... Overall quality . . . . . Local quality . . . . . (d) Administrators Total number/0000 population . Percent local ., . . . . Overall quality ... ... ... Local quality . . . . . (4) Education, training (a) Physicians Number of students and funding . Quality . . . . . . (b) Nurses Number of students and funding ... Quality . . . (c) Technicians Number of students and funding ... Quality . . . . . (d) Administrators Number of students and funding . Quality . . . . . . (e) On-the-Job Training Overall scope . . . . Quality . . . . . (5) R&D programs (a) Overall scope ...,..... . . (b) Local capability . . . . . (6) Extent of use of medical technology among patients . . . . Countries Saudi Arabia Kuwait Iraq Egypt Algeria H L H VL M L L M L L H VL L VL H VL M VL M VL L L L L L M L VL L L L VL H L H VL H L L L M L M VH M M VL H M L L VL M VL M VL M VL L L M L L VH M M L H L L VL VL M VL L VL M VL L VL L L M VH M M VL L L VL M L M L M M M M L M M M L VH L L M M L L H M M M M M H H L M VL VL L L M L M M L L VL VL VL VL L VL M M L L M M L L L L L L L L L VL L VL VL VL M M L L VL VL L L VL L M M L L L-VH M-VH L-H VL-H VL-M KEY VH Very High, HHigh, MModerate, LLow, VL Very Low when compared to U S or European standards NOTE These estimates are based on expert judgments and are presented as illustrative of variation The estimates should be used only as general references a lran IS excluded due to lack of current information SOURCE Off Ice of Technology Assessment PAGE 336 (Iran is excluded, owing to lack of relevant, recent information). A very high (VH) notation indicates that the facility or personnel are on a par with those in the United States or Eur ope. Overall, medical technology absorptio n has been limited in the Middle East. Kuwai t and Saudi Arabia have the highest overal l range and quality of available medical tech nology, but absorption has been very limited. This is the case because much of their medical service is, and will continue to be, provided by expatriates at least for the mid-term. Egypt presently has the highest level of absorption in medical services owing to its large, trained, medical personnel base. Egypt, among the countries studied, has the greatest indigenous capability to operate and maintain medical Ch. 8 Technology Transfers in Medical Services c 333 equipment. The quality of indigenous Egyptian medical personnel is comparatively good; infrastructure and poor administration are major obstacles. Algeria has, until now, been relatively successful in training indigenous medical personnel. Its ambitious social plans, however, coupled with weak medical education and training programs, strained ability to maintain large gains in training nationals in the past few years. In this regard, Iraq falls somewhere between Saudi Arabia and Kuwait on the low end and Egypt and Algeria on the high end. Iraqs strongest suit is in administration, but the countrys civilian medical programs have been constrained by the Iran-Iraq war. PERSPECTIVES OF SUPPLIER COUNTRIE S AN D Judging from the state of health care and health care facilities in the Middle East and government policy statements, the general needs and specific requirements for medical services technology in the Middle East are substantial, diverse, and changing. The prospective commercial supplier of medical technology services must be aware of the distinction between the need for medical technology and the effective demand for it, which could be defined as the ability and willingness to purchase the technology at a given price. In this section, characteristics of the market for medical equipment and services are briefly reviewed. Dissimilarities in technology transfer and market approaches taken by firms from various supplier nations are identified. The competitive position of U.S. firms is then analyzed; their advantages and disadvantages in promoting technology transfers in the medical sector are identified. U.S. firms are on a technological par with other foreign supplier firms, but poor after-the-sale service is one factor limiting U.S. sales. Finally, incentives and objectives of noncommercial suppliers are reviewed. FIRM S THE MIDDLE EAST MARKE T FOR MEDICAL EQUIPMEN T AND SERVICE S Hospital design and construction, equipping medical facilities, and hospital management are the dominant types of commercial transfers of medical technologies in the Middle East. Medical Equipment and Supplies The market for medical equipment and suppliesexcluding pharmaceuticalsin the six countries concerned plus the three small Gulf States of Qatar, Oman, and the UAE, was estimated at approximately $250 million in 1980.40 The corresponding market in 1975 was estimated to be about $95 million. The Middle East medical equipment market grew rapidly; at a rate of 20% annually in recent years. Nevertheless, imports of medical equipment were valued much lower than imports of construction and technical services, discussed below. (J, S. I)epartrnent of (ornmerce. 1$ashington, I). ( hl arket Sur\e~s-\ledical h~quipment, 1981. PAGE 337 334 Technology Transfer to the Middle East Table 79 shows total imports of medical equipment and supplies for the six countries of this study, and the market shares of the major supplying countries. In Kuwait, U.S. firms held the greatest market shares and they earned the second-largest market share in Saudi Arabia in 1980. In addition, combined total imports of medical equipment and supplies in Qatar, Oman, and the UAE were $17 million in 1980. The United Kingdom was the dominant supplying nation for this group (with almost 35 percent of total imports), with the United States having a market share of approximately 12 percent. Care should be taken in reviewing statistical information on medical equipment imports, because substantial shifts in the total market and in the ranks of the suppliers can occur from one year to the next. This has been the case for Algeria, owing to bulk purchases and/or specific requirements for one or two large hospital complexes. U.S. exports ] of medical equipment to the world in 1980, excluding Canada, 42 totaled $1.7 billion, of which approximately 3 percent went to the Middle East ($60 million). See table 80. 43 The large domestic (and Canadian) market for U.S. medical equipment and the relatively small Middle Eastern portion of such U.S. exports has been cited as one reason why U.S. .L)~L~ collected by U.S. l]ureau of the Census, Mashington, D. C,, in U.S. Exports Schedule 1? Commodt.v b~ Countq, Report FT 446, published annually. The U.S. export market ti Canada in this sector is large and would add approximately 20 percent to the world total exports. 43 The $60 million export figure does not match the total of $45.8 million of imports from the United States from the preceding table, owing to different data sources and different medical supplies which are included in the tabulations. Table 79. Imports of Medical Equipment and Supplies, 1980 I m ports (miIlion) Saudi ArabiaTotal Imports $84 miIIion West German y $30 United State s $20 United Kingdo m $11 Japa n $ 7 KuwaitTotal imports $30 million United States $10 West German y $ 4 Italy $ 3 United Kingdom $ 3 EgyptTotal imports $40 miIIion France $10 West German y $ 6 United States ., $ 5 United Kingdo m $ 5 East German y $ 3 AlgeriaTotal imports $18 million Franc e $ 8 West German y $ 4 Belgium . . $ 2 United State s $ 08 Iraq Total imports $28 miIIion West German y $ 8 United Kingdo m $ 4 Franc e $ 4 Japa n $ 3 United States $ 2 Iran ( 1978)Total imports $41 miIIion West German y $125 United State s $ 8 Japa n $ 5 United Kingdom S 4 Market share (percent) 36 24 13 8 33 13 10 10 25 15 125 12.5 7,5 48 21 10 4 29 14 14 11 7 30 20 12 10 PAGE 338 Ch. 8 Technology Transfers in Medical Services l 335 .. Table 80.U.S. Exports by Industry Sector and Subgroup to the World (excluding Canada) (value in $000) Industry Sector: Medical Instruments, Equipment, and Supplies SITC Number Product Descriptlon Medical instruments 7741010 7741020 7741030 7741040 7741050 7741060 7741070 7741080 7741090 7742010 7742020 7742030 7742050 8720405 8720410 8720415 8720420 8720425 8720430 8720450 Pacemaker s Diathermy units. ... ., ., ... Ultrasound therapeutic devices. . . . Other therapeutic apparatus . Electrocardiographs, . . Electroencephalographs . Complete patient monitoring systems ..., . . Electro-medical apparatus, NSPF (not specifically provided for) Electro-medical apparatus parts. . . X-ray tubes . . Parts for X-ray tubes . . X-ray apparatus and parts for medical or dental us e Radiological apparatus and parts for medical or dental use Ophthalmic instruments and appliances and parts . Anesthetic apparatus and instruments and parts (except syringes) Bougies, catheters, drains, and sondes and parts Basal metabolism and blood pressure apparatus and parts Hypodermic syringes and parts . ... ... Other syringes and parts. NSPF . . . Other medical, etc. Instruments and apparatus and parts, NSPF Total for Industry subgroup Medical instruments Medical and hospital appliances and equipment 7416016 Sterilizers and autoclaves and parts . . 7853020 Wheelchairs and parts ., . . 8212100 Other hospital, medical, dental, etc., furniture, NSPF ., ... ., 8720320 Mechano-therapy appliances and massage apparatus and parts 8720340 Artificial respiration, ozone, oxygen, aerosol therapy, etc. 8996100 Hearing aids and parts, NSPF ., ... ... ., . 8996250 Bone and joint prosthesis, plates, screws, nails, etc. . . 8996280 Other orthopedic appliances Total for industry subgroup Medical and hospital appliances and equipment Dental instruments and equipment 5419060 Dental cements and filling (except alloys) . ... . 5988025 Dental impression plates 8720440 Dental hand Instruments and parts . 8720445 Other dental and instruments, NSPF ., . . 8996225 Artificial teeth and dentures of plastic ., . 8996240 Other artificial teeth and dentures, NSPF . . . Total for industry subgroup Dental Instruments and equipment. . Medical supplies 5419010 Opacifying preparation for radiological examination . . 5419020 Other diagnostic agents (except biological), NSPF . 5419030 Waddings. gauze, dressings, etc. with medicinals . . 5419040 Other waddings, etc., NSPF ... 5419050 Surgical sutures and materials, etc. sterile . 8482020 Surgical and medical gloves ., . 8720435 Hypodermic needles . . 8822620 X-ray film, medical, ex dental . . ... 8822625 Other X-ray film . . . ... 8841120 Contact. ophthalmic lenses not mounted . . 8841140 Other ophthalmic lenses . . . . 8842100 Eyeglasses, etc., frames, mountings, and parts . . 8842120 Eyeglass fronts and temples . . . . 8842140 Parts, NSPF, for eyeglasses, lorgnettes, goggles, and similar items . . . . . . Total for I ndus t ry subgroupMedical supplies . . Industry sector total ., ... ., 1978 39,847 417 7,969 40,216 7,074 1,415 29,153 153,463 55,772 4,350 1,157 97,357 17,251 23,745 7,955 38,367 17,054 11,050 3,380 149,416 706,436 14,818 2,730 35,334 8,000 50,391 6,383 26,168 20,938 164.762 14,279 3,519 13,766 24,002 2,726 6,155 64,387 6,041 39,839 6,405 19,455 32,320 14,642 7,071 35,900 10,953 4,004 16.305 10,273 203,216 1,138,801 1979 41,006 450 6,624 59,704 8,687 2056 34,050 193,030 97,003 5,717 1,521 145,029 22,000 28,450 8,889 51,335 20,167 16,034 5,826 159,521 908,867 16,161 2.649 38,689 6.457 60,143 7,899 31,751 21,117 184,866 13,513 3,977 19,184 34,202 4,725 7,898 83,499 8,124 52,154 5.594 24,198 36,600 19,427 7,700 45,803 11,623 8,193 20,086 3,176 7,963 250,729 1,427,961 1980 46,447 760 8,056 74,027 8,621 1,226 53,449 238,742 103,111 8,214 3,618 153,043 17,713 29,360 10,670 63,103 23,430 20,221 7,963 179,584 1,051,374 18,549 3,135 53,249 8,299 77,928 9,645 36,588 26,292 233,685 22,798 5,304 23,279 41,853 6,092 9,048 108,374 10,252 53,650 5,099 30,845 36,845 29,189 10,617 72,720 23,511 12,343 24,617 4,883 7,244 321,616 1,715,049 SOURCE U S Bureau of the Census U S Exports Schedule B Commodity by Country Report FT 446 Annual 1978, 1979 1980 PAGE 339 336 l Technology Transfer to the Middle East companies have not emphasized Middle Eastern sales. As shown in table 81, U.S. exports to Saudia Arabia (the largest Middle Eastern importer of U.S. medical equipment) have been overshadowed by such exports to other parts of the world. The trend for U.S. exports was upward from 1978 to 1980 in most categories of medical equipment. The exception was Iran where total medical equipment exports from the United States fell 80 percent between 1978 and 1982. Algerias imports from the United States ($262,000 in 1980) were very limited, most hospital appliances and equipment. 44 .- See United States Department of Commerce, Washington, D.C., Meciicd Equipment .Saud Arabia (Country Market Survey), CMS 77-022, November 1977, for forecasts of Middle East markets. Table 81 ,Representative U.S. Exports of Medical SITC Number 7741050 7741070 7741080 7741090 7742030 7742050 8720405 8720410 8720415 8720420 8720425 8720430 8720450 7416016 7853020 8212100 8720320 8720340 8996100 8996250 8996280 8720440 8720445 8996225 8996240 5419010 5419020 5419030 5419040 5419050 8482020 8720435 8822620 8822625 Saudi Arabia and Kuwait have maintained their significant levels of imports of medical equipment, even in the recent period of reduced revenues. The ambitious government hospital construction programs in both countries and the upgrading of some substandard equipment in existing MOH hospitals should boost sales of cardiology equipment, operating room equipment, pediatric equipment, and rehabilitation products. Automated monitoring systems are increasingly being used to counter staff shortages, and a rapid increase in the use of disposable is expected, owing to staff scarcity, high labor costs, mounting awareness of the need for hygiene, and a limited concern over price. Instruments, Equipment, and Supplies to Saudi Arabia . (value in $000) Product Description Electrocardiographs ., . ., . . ., Complete patient monitoring systems . . . . . Electro-medical apparatus, NSPF (not specifically provided for) Electro-medical apparatus parts. ., ., ., ., X-ray apparatus and parts for medical or dental use ... ., Radiological apparatus and parts for medical or dental use ., ., Ophthalmic instruments and appliances and parts ., ., ... ., Anesthetic apparatus and instruments and parts (except syringes) Bougies, catheters, drains, and sondes and parts . Basal metabolism and blood pressure apparatus and parts Hypodermic syringes and parts ., . Other syringes and parts, NSPF . ., ... Other medical, etc., instruments and apparatus and parts, NSPF Sterilizers and autoclaves and parts Wheelchairs and parts ., ., ... . ., Other hospital, medical, dental, etc., furniture, NSPF . Mechano-therapy appliances and massage apparatus and parts Artificial respiration, ozone, oxygen, aerosol therapy, etc.. . . . Hearing aids and parts, NSPF . Bone and joint prosthesis, plates, screws, nails, etc Other orthopedic appliances ... Dental hand instruments and parts ... ., ., Other dental and Instruments, NSPF ... : Artificial teeth and dentures of plastic ., ., Other artificial teeth and dentures, NSPF . . . Opacifying preparation for radiological examination . Other diagnostic agents (except biological), NSPF Waddings, gauze, dressings, etc. with medicinals Other waddings, etc., NSPF Surgical sutures and materials, etc sterile ... ., : : Surgical and medical gloves ., Hypodermic needles . ., X-ray film, medical, ex dental ., ., . ., ... : : : : : ,. Other X-ray film . ., ., 1978 40 1,514 1,082 424 1,427 473 349 221 724 176 143 196 4,473 532 39 5,347 739 1,665 84 19 193 210 397 19 10 6 313 655 196 142 59 15 858 56 1979 13 153 2,069 748 448 31 75 60 647 172 196 243 4,638 408 221 5,320 1,144 1,206 4 31 231 137 400 17 30 8 531 475 363 163 254 52 128 31 1980 46 325 5,832 686 826 323 646 491 932 39 350 298 5.345 241 222 14,980 1,172 1.978 43 27 893 311 1.792 25 97 17 837 445 444 378 222 160 252 167 SOURCE U S Bureau of the Census U S Export/Schedule B Comrnodity by Country Report = T 446 Annual 1978 1979 1980 PAGE 340 Ch.8 Technology Transfers in Medical Services l 337 While countries such as Saudi Arabia and Kuwait have installed the best possible medical equipment in several of their hospitals, countries like Algeria and Egypt have avoided the overly sophisticated equipment and systems that are not considered appropriate for their facilities at this stage. The majority of the existing health care facilities in these two countries operate with much older equipment. The current situation in Iraq and Iran makes projections on medical equipment market development difficult. Once the war has ended, however, both countries may emerge as strong import markets for medical equipment and supplies. Major U.S. suppliers of medical equipment in Saudi Arabia are listed in table 82. Major non-U. S. medical equipment suppliers in Saudi Arabia are given in table 83. Health care equipment suppliers and consumers interviewed in the Middle East stated that medical equipment from countries like the United States, West Germany, Sweden, and the Netherlands could generally be considered equal in quality, The United States has for many years been the world leading supplier of advanced medical equipment, but those interviewed felt that the technological advantage once held by the United States over Europe no longer exists. However, several firms, of which many are U.S. firms, are considered technologically outstanding in their specific fields. 45 Price has not been a major competitive issue in Saudi Arabia, Kuwait, and prewar Iraq. This is now slowly changing. Price has been one of the most important competitive factors in the other countries, where U.S. exports especially in the last 2 to 3 yearshave been affected negatively due to the strength of the dollar. A major finding of interviews with industry experts in the Middle East is that service htw ~n(lu~[, ,lir Sh~tld\ [[ ,S, ) pediatric t>quipment. ,\mscfJ (1 S.) {)ptraLing r{)(~nl tqulpnlc,nt, (oult~r i [ I S I ant~ 1} /~r\. llt~kt[)n & I)i(k[r>t)n ( [ I S.) -disp{}~al)l~~, Si{nltn\, ~ ff cst ( it~rrllan?).X-ru}. 1 Iellig[ ~ \\ ( j ) LsiUYholC)~} tquipnwnt. l)rtif,~t,r (\$ (i ) anesth~t i( [quipn~~nt. and ( ianll)r~~ {SM td~r]~ dial?w + (quipnl(nt. is probably the most important single factor influencing competitiveness in all countries. Service could include delivery, set-ups, testing (when necessary), provision of manuals, provision of spare parts and continuing maintenance or calibration. West Germany is unanimously considered to offer the best services, followed by Japan. U.S. suppliers are generally not considered to put as much emphasis on service as they do on developing new medical technology. West Germany is the leading supplier of medical equipment to the Middle East, with about 25 percent of the total import market. German companies have combined quality products with an aggressive marketing approach, including excellent after-sales services. West German strongholds are X-ray equipment, electrocardiogram equipment, patient monitoring systems, microsurgery equipment, and microscopes. The United States is the second largest supplier to this region, with some 18 percent of total imports in 1980. Sales are concentrated in clinical laboratory equipment, electromedical equipment, computerized medical services, disposable, and nearly all types of advanced instrumentation requiring a high degree of accuracy. U.S. products are generally considered competitive in terms of technology, quality, and reliability, but U.S. firms supplying medical equipment are not known for their afterthe-sale service. The United Kingdom, as the third largest supplying nation to this region, had about a 12-percent market share, an almost 50 percent drop from the mid1970s. The British are still competitive in some product areas like anesthetic equipment, X-ray equipment, and surgical instrumentation. Their lack of competitiveness has been attributed to failure to develop new products in the fastest growing product areas, among other factors. France ranks as the fourth largest supplier country to this region, with a 10-percent market share, owing mainly to the strong French position in Algeria and Egypt. PAGE 341 338 l Technology Transfer to the Middle East Table 82.Major U.S. Suppliers of Medical Equipment in Saudi Arabia and Relative Market Position Supplier/equipment Relative Position Supplier/equipment Relative position -. Cardiology equipment Hewlett-Packard ., . . . . Ohio Medical . . . . . Air Shields . . . . . Pulmonary equipment Hewlett-Packard . Ohio Medical . . . Renal equipment Cordis Dow . . . . Travenol . . . . . Pediatric equipment Air Shields . . . . . Ohio Medical . . . . . Gamco . . . . . . Ivac ... . . . . . . Ophthalmological equipment American Optical . . . . Bausch & Lomb. . . . Welch Allyn . . . . . General hospital equipment American Optical/monitors . Digital Equipment/computers . Hewlett-Packard/monitoring systems IBM/computers . . . Kodak/X-ray supplies . . . Physio Control/X-ray monitoring. . Searle Medical/nuclear. . . . General Electric/X-ray, computers Honeywell/computers . . . . Picker/nuclear . . . . . Good Good Marginal Dominant Good Good Marginal Dominant Good Marginal Marginal Good Good Marginal Good Good Good Good Good Good Good Marginal Marginal Marginal Operating room equipment Amsco/tables, lighting . . . Air Shields/vacuum . . . American Optical/defibrillators, blood pressure, monitors ., . . Castle/autoclaves, lighting ... . Ohio Medical/anesthesia . . Narco Pilling/instruments . . Clinicial laboratory equipment Beckman/automatic analyzers . . Coulter/blood analysis equipment American Optical/microscopes, pH . Corning/pH . . . . . Cutler/solutions. . . . ... Hewlet-Packard/chromatography . Bausch & Lomb/microscopes, solutions . Chicago Surgical/centrifuges Disposable Beckton & Dickenson . . . American Hospital Supply Co. . Ethicon . . . . . Johnson & Johnson . . . Stryker . . . Kendall . . . . . . Rehabilitation products suppliers Birdick/artificial organs, therapy ... Franklin/hearing aids . ... . Stryker/therapy equipment . . Cordis DOW/artificial organs ... ... Metler/diathermy equipment . SOURCE: U.S. Department of Commerce, Market Research Division, Medical Equipment Market, Saudi Arabia 1981 Dominant Good Good Good Good Marginal Dominant Dominant Good Good Good Good Marginal Marginal Dominant Good Good Good Good Marginal Good Good Good Marginal Marginal Japan is quietly but efficiently increasing its market share in every country in the region. Spectrophotometers, X-ray equipment, medical supplies (including disposable), surgical instruments, and a broad range of optical products are some of the Japanese strengths. Japans 7 percent market share was expected to grow. Design and Construction of Health Care Facilities Hospital design in the Middle East is a field where European firms especially British and Frenchfirms have been successful. Some U.S. companies are active in the area, but their activities are limited almost exclusively to Saudi Arabia. The value of hospital and medical facility construction contracts far exceeds that of equipment imports to the Middle East. The Middle East hospital design market was estimated at $770 million in 1981. 46 As table 31 in chapter 4 shows, construction contracts have been the largest component of medical service exports to the region in recent years. The design of a hospital in the Middle East requires substantial knowledge of local disease patterns, climatic conditions, social mores, and socioreligious customs. For example, the climatic conditions require special arrangements for ventilation and cooling and protection against damage from sand and dust. In addition, planning must take account of a higher relative share of burns, infectious and parasitic 46 No official market magnitude or market share data in hospital design in the Middle East are available. European experts associated with Middle East Construction (a monthly U.K. magazine) estimate that the total Middle Eastern hospital design market was valued at about $770 million in 1981, and that the U.S. share was 8 percent, Great Britain, 30 percent, France, 15 percent, Italy, 10 percent, and West Germany, 10 percent. PAGE 342 Ch. 8 Technology Transfers in Medical Services l 339 Table 83. Major Third-Country Medical Equipment Suppliers in Saudi Arabia Hellige ., West Germany Zeiss . . . . ., West Germany Heine . . . . West Germany Siemens ., West Germany Draeger West Germany Storz (U. S. subsidiary) . . . West Germany Cambridge United Kingdom Zimmer Orthopaedi c United Kingdom Downs Surgical ., United Kingdom GEC Medical Equipment United Kingdom Daikyo ., Japan Shimadzu ., Japan Nagashima Japan Olympus . . . Japan CGR France Reichert . . . . Austria PhiIips Net her lands Control room of the King Faisal Specialist Hospitals two-channel closed-circuit television broadcast system serving patients and staff diseases, and diseases of the digestive system. The facilities must have a high degree of flexibility to keep abreast of constantly changing methods of treatment and teaching. (Part of a newly constructed hospital in Baghdad, is planned to function independently in case of war. ) In planning, consideration must be taken of the large number of outpatient treatments and in many countries the limited number of staff, which makes it vital to promptly treat patients. In some of the countries a strict separation of male and female patients is required, In Saudi Arabia separation is required bet,ween administrative staff and nurses. In many Cardiology equipment Microscopes Microsurgery X-ray equipment Anesthesia equipment Endoscopes Electrocardiographs (ECG) Rehabilitative equipment Surgical instruments X-ray equipment Supplies X-ray equipment Surgical instrument s General medical equipmen t X-ray equipment Laboratory equipment X-ray equipment ( 5, f ~ > 8 i 1981 the waiting room facilities have t o be very spacious in order to make room for the rest of the family and accompanying relatives and to use these facilities for demonstrations and teaching activities. Also, separate waiting rooms for males and females must often be provided. One example of U.S. participation in hospital design and planning is the $2 billion medical city project on the site of Jeddahs old international airport, where the proposed complex will comprise an 800-bed hospital and colleges of dentistry, pharmacology, and other medical sciences. Henningson, Durham and Richardson Architects have the design subcontract and Daniel International of Saudi Arabia, a subsidiary of the Fluor Corp. (U.S.), has the overall coordination responsibility. The hospital will be constructed according to U.S. standard specifications, but every attempt is being made in the design to adapt it to the local cultural environment. Special manuals both in English and Arabic have ah-cad? been prepared to brief staff and project members on local requirements. The programming element prior to the detailed design is the most expensive and specialized part of the project, and U.S. health care consultants are used for advice on special facility needs. 1 nt(rii[w with {Jffi[i/i]\ of ] i~,nning~[)n, I )urh:i J]] :in[] I{i t.h :ird son /\ rch it [~ct l 1,( JU i si :in a. PAGE 343 340 Technology Transfer to the Middle East In the market for turnkey hospital construction, experienced Western contractorsprimarily German and Frenchstill have a competitive edge. Philip Holzmann of Germany is the leading hospital turnkey contractor, with seven completed projects totalling 3,400 beds in the area in the last 5 years. The major part of the Middle Eastern hospital contracting market is currently shared between West Germany, France, South Korea, Italy, and a growing number of local contractors in joint venture with foreign companies. Up until 1981, South Korean firms, so successful in other Middle Eastern infrastructure projects, were not invited to bid as general contractors on the Saudi hospital projects. This is now changing rapidly, and in 1982 South Korean firms were successful or low bidders on nine hospital projects in Saudi Arabia, Iraq, and Kuwait. The respective governments desire to increase the local share of public construction work is clear also in the health care sector. In Saudi Arabia, some of the local contractors in joint ventures, mainly with French and British firms, have been successful in winning contracts over foreign competitors. Two examples are Beta Construction and El Seif Engineering and Construction, locally owned Saudi contractors that have been approved to pre-qualify for the Health Ministry hospital program. In the last 2 years, the successful European companies have formed joint ventures to bid and carry out hospital contracting work. Joint venture arrangements will be used increasingly in the health care contracting field in order to secure government contracts. In Saudi Arabia, the Government has stated its intention to award the majority of contracts to Saudi companies. U.S. companies are not active in the Middle Eastern hospital construction market. Only three U.S. firms are included in the list of over 40 contractors bidding for MOH projects in Saudi Arabia, and very few major hospital construction contracts have been awarded to U.S. companies in the Middle East since 1980. Observers cite a number of factors as reasons: The dominance of turnkey hospital contracting in Saudi Arabia, the largest and most lucrative market, where European contractorsespecially German, French and Italian-have established themselves as leaders. The nonexistence of U.S. companies in the market specializing in hospital contracting work. The declining competitiveness of U.S. contracting services, partly due to the increased competition from European and Asian rivals, and the value of the dollar, which is reflected in lower bids by other contractors .48 The so-called disincentives for U.S. exporters in general, which mainly concern the overseas tax situation, and the laws on antitrust, antiboycott, and anticorruption activities. 49 Although being disincentives to U.S. companies, these do not appear to be as major a factor as the three factors listed above. Hospital Management Saudi Arabia is by all accounts the greatest importer of hospital management services, although management contracts have also been awarded in the UAE, Egypt, and North Yemen. 50 Whittaker Corp. has ongoing negotiations with Iraqs MOH for a management contract in Baghdad, which if it materializes, 48 For every $1.25 bid by a Far East contractor, the U.S. firms will, on the average, bid $ 1.70a 37 percent variance. Middle Z3as.t Ziconormc Digest, quoting a U.S. Department of Commerce representative; U.S.-Arab Trade, October 1982. USITC publication (September 1982) The Relationship of Export!; in Selected U.S. Service Industries to U.S. Merchandise Exports, pp. 246-247, gives three examples: 1 ) even in countries where U.S. health management companies are currently active, such as in Saudi Arabia, the Foreign Corrupt Practices Act was cited by a health care management company as being a major reason why the company failed to obtain more contracts; 2) U.S. antiboycott laws were also cited by several companies as constituting a barrier against foreign trade expansion: 3) U.S. antitrust laws were cited by some health industry representatives as inhibiting foreign trade expansion. 50 Ibid p. 257. The report states that U.S. hospital management firms held about 70 percent of the contracts awarded in Saudi Arabia in 1981, with the total Saudi hospital management market worth more than $500 million. PAGE 344 Ch. 8 Technology Transfers in Medical Services l 341 will be the first of its kind in that country. Outside of Saudi Arabia and except for other scant examples, the predominant policy of the governments has generally been to administer the health care facilities themselves, and in case of foreign manpower needs, to establish health accords on a bilateral basis with foreign governments. Thus, in other parts of the region imports of other types of technical services (training, operation and maintenance, etc.) are the major types of imports, in addition to construction services. As shown in table 31, these service imports represent a large share of medical service sector imports. HCA a strong presence in the Middle East since assuming management of the very modern King Faisal Specialist Hospital and Research Center in Riyadh when this complex opened in 1975. HCA is also managing the hospital at Al Batin, the King Khaled Military City. In 1982 HCAs local subsidiary, HCA Saudi Arabia, won the much sought-after contract for operation, maintenance, and management of the 500-bed Saudi Arabian National Guard (SANG) hospital complex in Riyadh. Whittaker Corp. signed the first contract with Saudi Arabia in 1974 for management of MODAs three military hospitals at Jeddah, Tabuk, and Khamis Mushayt. This contract has been extended three times. Two more hospitals and a number of clinics have also been added, bringing Whittakers current staff in the Kingdom to about 3,000. The corporations emphasis is on basic medical and surgical treatment, including some preventive medicine and public health services. The recent decision of the Saudi Arabian Government to open these contracts to competitive bidding led to a shift in the firms position. 51 Whittaker also has two management contracts in neigh ]Sec lhc 11al] Strrct t]ournal, No\ember 198:1 and Michae l PetriwRitchie, Allied Medical ( ;roup I AM(;) Reenters Saudi !Lledi(al Scene, ,llfiddle East l;conomic Digest. Nlarc.h 16, 1984, p. ~17 \fhitt akt)r the present management c>ontactor for th[~ three \loI)A hospitals at .Jeddah. Khamis hlusha~rt an d a})uk was t h[~ highest hidder for th~ n(~w thret~~[,ar nlarlag[~rnent contra~t at $1, 114,7 million when th~~ hids were open(d on NI arch 11, 19X4. The lowest of the nine bidders, at $5 1.5 million, was the [J. K. Allied i$ledical Group (A MG ) which teamed with ttw local F1l-!+eif I )e\relopment F;stablishment, The boring countriesfor a 535-bed hospital in the UAE and a hospital in North Yemen (financed by Saudi Arabia). National Medical Enterprises (NME) manages the 318-bed Al-Hada hospital in Taif for MODA; the 105-bed acute care hospital at King Abdul Aziz Airbase in Dhahran, also for MODA; and the 120-bed Public Security hospital in Riyadh. NME also has contracts to equip seven MOH hospitals, ranging from 50 to 300 beds, under construction throughout the Kingdom. AM I is the only U.S. hospital management company that runs a MOH facility, the 355bed general hospital at Al-Baha. AMI Saudi Arabia Ltd. has also signed a contract with the Ministry of Finance and National Economy for the full operation of a 263-bed specialist eye hospital in Riyadh, which will function as a leading referral center in the country for the treatment of eye disorders. Other U.S. health care management firms in Saudi Arabia that have substantially smaller operations, mostly in the private sector, are Charter Medical, American Health Facilities International, International Medical Services, University Association for International Health, and Herman Smith Associates, International. Based on the experience of U.S. firms contacted primarily in Saudi Arabia, factors affecting competitiveness on individual contract awards for hospital management are summarized below. 52 l l l performance track record and longevity of firm, effective use of local agent or joint venture relationship, political support of bidding government, prior experience and reputation in the Middle East, price, project was split into three packages, with AMG/Seif winning management contracts for two hospitals; a U.S.-Saudi joint venture (Fairview) won the other hospital management contract. See Middle East Economic Digest Special Report-Saudi Arabia, July 1984, p. 89. J Those firms include Whittaker-, HCA, and AMI. PAGE 345 342 l Technology Transfer t O the Middle East responsiveness to the request for proposal and tender specifications, and l involvement of individuals from the higher echelons of the corporation. U.S. firms have had can advantage over those of other countries because of the perceived superiority (especially in Saudi Arabia) of U.S. medicine. For sophisticated medical care, Middle Eastern countries have consistently looked to the United States. This technical advantage applies not only to medical practices but also to hospital administration. The major U.S. firms have established reputations for efficient, cost-effective hospital management, and expect the demand for such services to grow in countries such as Egypt and the Gulf States. 53 British firms are the major competitors in Middle East hospital management. The major British health care management firm is the Allied Medical Group. It is 70-percent owned by the British government through the National Enterprise Board and has the management contract for two MODA hospitals. The other major British health care management company is the International Hospitals Group (IHG), which is a consortium of health care companies organized on an ad hoc, project-byproject basis. The major IHG involvement in Saudi Arabia is the contract for managing the 500-bed SANG hospital in Jeddah. This contract was arranged through direct government-to-government negotiations. In addition, countries like Denmark, Sweden, West Germany, and Taiwan have concluded agreements for management work in Saudi Arabia. In contrast to the U.S. and British contracts, which have been signed primarily with non-MOH agencies, the MOH has signed health agreements with the respective health ministry of each country concerned, thereby meeting its manpower needs through bilateral agreements rather than through private health care management contracts. iMiddle East hconomic Digest, Health Contracts Test U.S. Responses, U.S.-Arab Trade, October 1982, p. 24. See also Michael Petrie-Ritchie, Saudi Arabias Healthcare Market The Prognosis is Good, Middle East Economic Digest, No~ember 1983, p. 38, The management firms are also beginning to face increased competition from firms organized within the host countries. In Saudi Arabia, a 100-percent Saudi company has been formed which hires Westerners to staff and manage hospitals. U.S. health care management firms have prepared for the inevitable increased local involvement in Saudi Arabia by opening partially Saudi-owned subsidiaries or by organizing joint ventures. Selected medical services contracts in Saudi Arabia, Egypt, Algeria, and Iraq are shown in appendix A, tables Al through A4. These are not all-inclusive lists, but show the diversity in types of projects and costs, foreign involvement, and ownership structure. U.S. firms will undoubtedly remain major suppliers of hospital management services in the Middle East. Recent experience in Saudi Arabia indicates that willingness to work with local companies and marketing will be increasingly important aspects of contract awards. FACTORS INFLUENCING COMMERCIAL TECHNOLOGY TRANSFER IN THE MEDICAL SECTO R Controls Regarding Medical Exports U.S. manufacturers of medical equipment must comply with the reliability and efficiency regulations issued by the Bureau of Medical Devices of the U.S. Food and Drug Administration (FDA) .54 Some exporters say that controls on exports of some high-technology items involving computers and microprocessors have limited some medical equipment exports. Array processors, sometimes used in computerized tomographic (CT) scanners, are, for example, subject to export controls. There have been no cases where these regulations clearly constituted a disadvantage to U.S. firms in the Middle East region which OTA was able to document. But as medical tech(ITA forthcoming report on Federal Policies and the Medical Devices Industry will include review of various regulations affecting medical devices sales. PAGE 346 Ch.. 8Technology Transfers In Medical Services 343 nology becomes increasingly sophisticated, concerns may grow if export controls are extended to cover many types of medical equipment involving optical equipment, electronic equipment, and computer hardware and soft ware. Financin g In the Gulf States, supplier financing has been a minor ingredient in awards of contracts for health care projects. Saudi Arabia, Kuwait, the smaller Gulf States, prerevolutionary Iran and prewar Iraq have all been capable of providing financing and other factors such as quality, serviceability, speed, manpower, and training have been more important in contract decisions. In Algeria and Egypt, foreign companies engaged in health care projects are required to conform to certain principles, including regulations concerning foreign exchange. The U.S. Export-Import Bank has supported exports to Algeria, but few in the medical equipment or hospital construction sector. French and Belgian firms, in contrast, have financed two Algerian hospital projects with governmentbacked soft loans. In Egypt, financing arrangements strongly influence the competitive positions of suppliers. Many Western supplier countries have established government-to-government agreements with Egypt in the health care field in recent years. Under these agreements, large hospital projects have been undertaken by French, Belgian and Japanese firms with financing provided by respective supplier governments. There is no doubt that financing will continue to be of critical importance in determining the award of health care infrastructure contracts in Egypt and Algeria, and also in Iraq, if and when a resolution of the IranIraq conflict occurs. Beginning in 1983, some Gulf countries also began to consider external financing for their planned health care projects. Other Types of Foreign Government Involvemen t There is a growing trend of bilateral agreements and health care accords in the region. Some bilateral health care cooperation projects in the region include: 1. Saudi Arabia-Taiwan. Signed in Riyadh in February 1983 with the following components: a) exchange of medical experts, b) training of Saudi Arabian students in the medical field, and c) administration and operation of King Fahd Hospital in Hoful and King Fahd Hospital in Jeddah, and furnishing of physicians, nurses, and supporting staff for the two hospitals. 55 2. Kuwait-Sweden. Signed in Stockholm in 3. 4. October, 1981 with the following key provisions: a) Sweden to provide some 60 physicians and 40 senior technicians in 1982/83, b) exchange of expertise and further training of doctors who are practicing in Kuwaiti hospitals, and c) cooperationmainly on curricula and training methodsbetween Kuwait Medical School and the Karoliaska Institute in Stockholm. Egypt-United Kingdom. Signed in Cairo in 1980, covering the following main fields of medical expertise exchange: a) pharmaceutical control experts, b) TB-screening experts, c) cancer diagnostic experts, and d) maternal and child health center experts. 57 Egypt-Belgium. Signed in Cairo on two occasions, in 1976 and in 1982, with some of the key areas of cooperation being: a) emergency facilities and procedures, b) pharmaceutical quality control, c) environmental medicine, d) dentistry, e) nursing, f) tropical medicine research, and g) research in pesticides and parasites. 58 35-507 0 84 23 : QIJ 3 PAGE 347 344 l Technology Transfer to the Middle East 5. 6. Egypt-Japan. An agreement involving cooperation in health care infrastructure development. The only project so far consists of a Japanese grant for construction of a pediatric hospital at Cairo University. 59 Kuwait-United States. The U.S. Department of Health and Human Services is providing technical assistance in health to Kuwaits Ministry of Public Health under a Memorandum of Understanding signed in 1981. Technical assistance is provided for five projects: a) emergency medical services: b) hypertension control; c) reduction of infant morbidity and mortality; d) health manpower development and utilization; and e) vital and health statistics. 60 Some U.S. health care firms with experience in the highly competitive Middle Eastern region claim that these bilateral agreements provide entrees for foreign firms, since purchases of health care goods and services in these projects generally are made from firms in the donor country. 61 The United States is involved in bilateral health agreements in the Middle East and AID programs provide commercial opportunities to U.S. and developing country suppliers of medical equipment and services. 62 Supplier countries like France, Great Britain, West Germany, and Japan have been said to use cooperation in the health care field in the Middle East in a systematic way to support their respective commercial interests in areas such as hospital construction which are not central to AID program. In all cases, however, economic assistance programs in the health area provide commercial opportunities to donor country firms. 59 U.S. Embassy, Cairo, February 1983. 60 Science, Technology, and American Diplomacy 1983, Fourth Annual Report Submitted to the Congress by the President, Washington, 1). C., September 1983. > The health care accord reached between Egypt and Japan (number 5 in the list of bilateral health care cooperation projects) states that Japanese equipment should be used. In the agreements reached between Egypt and Algeria, on the one hand, and France, Belgium, and the United Kingdom, on the other, it is not stipulated that design, construction, and equipping of health facilities should be monopolized by the assisting country. But, according to the U.S. Embassy in Cairo and the British Overseas Trade Board, Great Britain, the services and equipment in the facilities come almost exclusively from the assisting country. ),4 11) actitities in Elgypt haie certainl~ pro~-ided commercial opportunities for U.S. firms, particularly through the Commodit} Import Program. U.S. health care suppliers sometimes claim that foreign firms involved in health care service exports to the Middle East are strongly assisted by the formal and informal sponsoring of their governments. When the International Hospitals Group of Great Britain was awarded the management contract for the Saudi Arabian National Guard 500-bed hospital in Jeddah, negotiations were reportedly handled by the British Ministry of Defense, supported by the Department of Health and Social Security. A visit by Prime Minister Margaret Thatcher to Saudi Arabia helped bring the negotiations to a close. During negotiations for health care contracts, especially in the Gulf countries, the foreign firm or consortium may be represented by a prestigious government official. The U.S. Foreign Commercial Service provides routine representation of U.S. firms and has activities designed to assist trade promotion missions in the medical services field. 63 Nevertheless, U.S. health care exporters to the region argue that support provided by the government, through official U.S. commercial representation in the area, is not comparable to that of some other Western nations. The British, West German, and Scandinavian commercial representatives are said to maintain extensive direct contact with business at home and actively pursue and create business opportunities in the Middle East. 64 Data are not available that would allow for comparison of the dollar value of allocations for trade promotion in this area, but it does appear that in many cases non-U.S. suppliers recruit highquality personnel to work in official trade promotion activities. U.S.-Imposed Trade Disincentives U.S, suppliers cite the FCPA and antiboycott regulations as barriers to foreign trade expansion because foreign competitors are not subject to equivalent regulations. As discussed in chapter 13, together such regulations present a disincentive for exporters to some degree, but OTA was not able to document specific cases where contracts were lost because of them. > U.S. Department of Commerce, March 1984. Based on interviews held with U.S. health care exporters in 1383. PAGE 348 Ch. 8 Technology Transfers in Medical Services w 345 FUTURE PROSPECT S This section discusses the potential political and social effects of medical technology transfer to the Middle East. U.S. policy options are also identified. POTENTIAL POLITICAL AN D SOCIAL DIMENSIONS O F HEALTH CAR E Developments in the health care sector contribute indirectly to social and political changes in recipient countries. While it is impossible to anticipate all the effects of health care development, it is important to identify several types of potential effects. Increased Health Care Expectations During the last decade, the expectations for improved health care have risen as allocations to the sector have been increased. As a result, health standards have improved and the effects on local living conditions have been generally stabilizing and beneficial. Public health education programs have also made people more aware of the potential benefits of health care. One potential problem could occur if a fall in oil revenues were to lead to a severe cutback in allocations to the health care sector up to present, however, most of these countries have attempted to maintain their social investments. 65 Integration of the Health Care System into the Culture Grassroots involvement is important to properly integrating health care into the society. For example, where the effort toward r Financial Times, Apr. 26, 1 982; Apr. 14, 1983. Human r[Jsourcws and 1 abor detelop ment remained high priorities in the Saudi budget. The decline in allocations to health programs was about 20 percwnt In 1983-84 o~er the 1982-83 budget. See Edmund () Sullivan, Spending Squeeze Continues in 1983 W, ,?liddlf~ I<;ast l<;cvnonli( Di~est, Apr. 15, 1983, p. 54. rotd stat e spendin~~ in 19x+85 was projected t<) increa. w~, howe~er, hJr $12 billion from the 19H;3-H4 levels. The hlinistr} of Health was one of thc~ few ministries to receiie increased allocations in the 1984H5 Saudi l)udgtlt. [ SW hl ichael Field and Finn llarrt~, Saudi Arabia Boosts spending to $75 billion, Finan(i,af Times, Apr. 2, 19H4, p, 1.) curative facilities is unmatched by an equivalent effort in preventive medicine, dissatisfaction may arise. This will be particularly evident when there is a lack of local involvement which results in the perception that health care is being imposed and not integrated into the cultural system, or that it is manned or managed exclusively by expatriates. Role of Wome n The future role of women in the work force is a crucial issue in some Middle Eastern countries. In light of the significant labor shortages in Saudi Arabia, the medical sector could be promising area to bring more women into the productive workforce. But so far, significant social barriers remain. In Algeria, Iraq, and pre-revolutionary Iran, on the other hand, change in this area has been more rapid. 66 Staffin g Plans already under way call for major expansions in staffing. Much of this expansion, it would appear at this time, cannot be met from the countries internal resources. This means that in the medium-to-long term, expatriates will be required. If qualified personnel One indicator of the role of women is the number of females working in the medical sector in eacil countr~r. 1. IrI Iran, of the total number of physicians in 1968, 7 percent were females. The first year of medical school sample contained 24 percent females, whereas the final ~~ar students group had 10 percent females. There was an accelerating trend in the acceptance of female medical students in I ran in the 1960s. (A, Torab-Mehra Orientation of Iranian I>hJsicians, Iran Foundation, 1969. ) In 1978, 25 percent of the medical students in Iran were female. Of an estimated 21,000 nurses in Iran in 1978, 82 percent were Iranian, and of these, over 90 percent were female. (A Health Care Revolution, Middle East Health Magazine, October 1982, ) 2. Out of 354 medical students in Iraq in 1976, 21 percent were female. Out of 4,5oo nurses in 1976, an estimated 65 percent were Iraqi, and of these over 70 percent were female. (U. S, Ilepartment of l{ealth, Education, and We]fare: Iraq Iiealth Sector, 197, ) 3. The total number of nurses in ,41geria rose from 2,400 in 197 to o~er 9,000 in 1978. and over 90 percent were Algerian women. { Morld Hank, AlgeriaThe Fi\[~1ear De\relopment Plan, 1982.) PAGE 349 346 Technology Transfer to the Middle East cannot be recruited, standards may fall and facilities may not be effectively utilized. Underutilization of facilities due to staff shortages has indeed already occurred in Saudi Arabia. Unless the number of technicians increases drastically, much of the equipment installed over the last decade may not be used properly. There are hopeful signs that the importance of maintenance is increasingly recognized, but it is unlikely that maintenance needs can be met from local resources for some time to come. Expatriates will remain critical in the intermediate phase, particularly to Saudi Arabia and Kuwait. In Egypt, future manpower development activities are expected to concentrate on improving the quality of education in all staff categories, expanding opportunities for continuing education, incentives to reduce the multiple employment (most government physicians also run a private practice), and increasing general management capabilities. Key areas for future transfers of technology in the manpower field will be foreign assistance in public health training, postgraduate education and training of biomedical engineers, and training of medical equipment maintenance engineers and technicians. In the past, Middle Eastern countries have taken widely differing approaches in their selection of medical technologies and delivery systems. Countries like Saudi Arabia have worked to expand medical facilities that include extremely sophisticated and costly medical technologies; Egypt and Algeria, with larger populations and more limited resources, have placed more emphasis on community health programs involving simple technologies. In the future, however, the most pressing need throughout the region will continue to be for less sophisticated medical technologies, used in preventive medicine. Even in the richer Gulf States, providing such health care to remote rural locations will remain imperative, if the benefits of medical technology transfers are to be spread more equally throughout society. Generally speaking, U.S. firms have not been major independent suppliers of less sophisticated medical equipment or staffing and servicing of small-scale clinics, outside their involvement through AID programs. AID programs in the health sector will thus remain critical to meeting the most pressing basic requirements for medical services in the developing countries of the Middle East. IMPLICATIONS FOR U.S POLIC Y Export Promotion/Export Regulatio n I n the Gulf countries, financing has been a minor determinant in the process of awarding contracts in the health care sector. It has become more important, however, for war torn Iran and Iraq, as well as other Gulf States whose revenues fell below expected levels during the oil glut. In countries like Egypt and Algeria, it will continue to be of decisive importance. Therefore, supplier government financing support may become an increasingly important influence on competition among suppliers. U.S. policy makers may wish to consider policy options to improve financing of medical equipment and services through the Export-Import Bank and through programs involving investment guarantees provided by the Overseas Private Investment Corp. One approach would be to extend international agreements among suppliers to reduce the use of mixed credits and tied aid; another would be to adopt such programs because our competitors have them. These issues are discussed more fully in chapter 11. A different type of approach is to improve capacity of the U.S. foreign commercial service to provide assistance to firms interested not only in exporting medical equipment, but also in transferring technology through training and other specialized programs. Bilateral agreements to promote cooperation between the United States and Middle East nations in medical science and technology could be extended to facilitate such efforts. Development Assistance and Foreign Policy Issues One approach which could be considered would be to expand U.S. participation in mul- PAGE 350 Ch. 8 Technology Transfers in Medical Services 347 tilateral assistance programs, such as those of the United Nations. EMRO promotes technical cooperation between the countries in the area in order to reduce the dependence on imported expertise and to enhance their self-reliance through training and research. The impact of EMROs work has been limited, however, by political disagreements, restricted financing (with an annual budget of about $20 million to cover activities in 22 countries), and differences in health care policy issues across the countries of the region. EMRO is promoting the use of intermediate level medical technology and is striving to limit the use of imported manpower, whereas the Gulf States emphasize the acquisition and use of a broad spectrum of medical technology and have accepted foreign personnel as a temporary solution to their manpower needs. U.S. health care development assistance to the region is today concentrated in Egypt. U.S. projects focus on delivery of medicine and health care at the community level rather than larger infrastructure projects. For example, hospital construction is not a U.S.-assisted priority area, mainly because the cost-effectiveness of such ventures is considered to be low in view of Egypts basic health needs. U.S. health assistance is apparently perceived as generally effective by both Egyptians and Americans. One of the reasons for this is cooperation between the respective U.S. organization and MOH in choosing the projects to be sponsored. MOH also cosponsors each project financially with at least 25 percent of the total cost. Another explanation is the high caliber of U.S. staff employed and otherwise engaged in the projects. Projects often stand or fall depending on the ability and commitment of the local counterpart, and local participation has contributed to successful projects. Nevertheless, policymakers may wish to further direct AID policies in order to meet varying goals. One approach would be to expand commercial opportunities for U.S. firms through use of mixed credit and continuing procurement policies favoring U.S. firms. Another approach would be to emphasize more strongly programs which promote technology transfers in specialized areas such as upgrading health manpower, establishing centers of medical research excellence, and improving servicing and maintenance of medical equipment. AID is now studying ways to improve its science and technology programs in Egypt, and this effort can be expected to sharpen the focus of S&T programs in the medical field. OTA's research indicates the important role played by nongovernmental organizations such as Project HOPE; expanded government support for such programs could also be considered. Health care has been a foundation for U.S. assistance programs and will undoubtedly remain a priority area for AID. As overall U.S. economic assistance to Egypt increases, one question will be whether to promote programs involving medical technology transfers (which require considerable personnel and comparatively long time periods for completion), or rather to stress the expansion of commodity import and other programs supporting imports of medical equipment. OTAs research indicates that there is a clear need for specialized programs designed to upgrade the quality of medical manpower throughout the region, and that aid programs serve to meet needs for medical services and training that would probably not otherwise be filled independently by private U.S. firms. PAGE 351 CHAPTER 9 Nuclear Technology Transfers PAGE 352 Contents Page INTRODUCTION . . . . . . . . . . . . . 351 NUCLEAR FACILITIES IN THE MIDDLE EAST . . . . . . 352 Commercial Nuclear Power Reactors. . . . . . . . . . 353 Research Reactors . . . . . . . . . . . . . 355 Enrichment and Reprocessing Facilities . . . . . . . . . 356 Paths to Nuclear Weapons . . . . . . . . . . . 356 PERSPECTIVES OF RECIPIENT COUNTRIES ON NUCLEAR TECHNOLOGY TRANSFERS. . . . . . . . 361 Economic and Energy Considerations . . . . . . . . . 362 Technical Manpower Considerations: Technology Absorption . . . . 375 Military Applications Considerations. . . . . . . . . . 383 SUPPLIER COUNTRY APPROACHES TO NUCLEAR TECHNOLOGY TRANSFER . . . . . ... . . . . 392 U.S. Policies . . . . . . . . . . . . . . 392 Policies of Other Western Nations. . . . . . . . . . . 393 Soviet Policies.. . . . . .. ... ... ....... . . . . . . 395 New Supplier States. . . . . . . . . . . . . . 395 CONCLUSIONS: THE FUTURE OF NUCLEAR TECHNOLOGY TRANSFERS TO THE MIDDLE EAST AND OPTIONS FOR U.S. POLICY . . . . 397 Future Prospects for Nuclear Technology Transfers . . . . . . 397 U.S. Policy options . . . . . . . . . . . . . 398 Tables Table No. Page 84. 85. 86. 87. 88. Implications of Technology Transfer Policies for Proliferation of Nuclear Weapons . . . . . . . . . . . . . 361 Electrical Demand in the Middle East and North Africa . . . . 365 Potential for Nuclear Reactor Installation, 1990, 2000 . . . . . 366 Range of Projected Electricity Demand in Egypt . . . . . . 372 Middle Eastern Students Receiving Doctorates in Technical Fields in the United States, 1981 . . . . . . . . . . . 383 89. Hypothetical Cost of Dedicated Nuclear Proliferation Program for Selected Countries . . . . . . . . . . . . 391 Figure Figure No. Page 15. Kilowatthour Cost as Function of Plant Capacity and Load Factor . . 369 PAGE 353 CHAPTER 9 Nuclear Technology Transfers INTRODUCTIO N Nuclear technology transfers are different from the other technology transfers examined by OTA because some nuclear technologies can be used to supply the materials necessary to construct nuclear weapons. Since the 1950s, when it first began to be developed for peaceful purposes, nuclear technology has become the epitome of dual use technologies those that have both civilian and military applications. On the one hand, developing nationsparticularly those not well endowed with oil and other natural energy resourcessee in commercial nuclear power a way to meet their rapidly growing demand for electricity. In addition, many developing countries view nuclear research as a means to build their national technical and scientific infrastructures. On the other hand, because of their potential weapons applications, some nuclear technology transfers raise critical military and foreign policy questions. Nuclear technology transfers to the Middle East, a region that has experienced major wars and changes of regime, as well as growing oil revenues during the last decade, thus raise important technological, commercial, and strategic questions for countries in the region. Nuclear technology transfers to the Middle East are also of central importance to U.S. nuclear nonproliferation policies. In contrast to the other technology transfer sectors examined in this report, commercial nuclear power is currently at a very early stage of development in the Middle East. Nevertheless, decisions taken now about nuclear technology transfers can directly affect the political, military, and economic future of the region. There is today no commercial nuclear facility in operation in the region, but there are a number of nuclear research facilities, and a few nations have plans for commercial nuclear power development. The Islamic countries of the Middle East 1 have widely differing plans for nuclear technology. Before its revolution, Iran had the most extensive plans for such development. In Egypt the rationale for commercial nuclear power is comparatively strong, and planning for a commercial program is under way. Saudi Arabia and Kuwait have not committed themselves to nuclear power. Libya has clearly expressed an interest in nuclear weapons applications, as well as nuclear power. OTAs analysis indicates that no Islamic country in the region will be capable of acquiring a nuclear explosive device on a wholly indigenous basis within this decade, and most would find it impossible to do so before the turn of the century. Egypt has the strongest technical infrastructure, but would not be able to produce nuclear weapons independently before the late 1990s. With assistance from foreign scientists and engineers and suppliers of critical items, however, these constraints posed by weak indigneous technical infrastructures could be reduced or eliminated, depending on the extent and type of assistance. While it is unlikely that any of these nations will acquire large enrichment and reprocessing facilities that could supply very large, dedicated weapons programs, 2 smaller-scale nu- 1 This report deals with the countries of the Islamic Middle East. Because Israel has attained a much higher level of technological development, it is not included as a major focus of study. However, Israels nuclear capabilities are discussed in this chapter as necessary for an understanding of nuclear technology transfers to the region. The term Islamic countries is used here simply to indicate that sizable proportions of the populations of these countries are Muslims, or followers of Islam. As discussed in ch. 3, there are many groups in these countries and the role of Islam in political, economic, and social affairs varies widely. Enrichment and reprocessing technologies are referred to as sensitive technologies because of their applicability to weapons programs. 351 PAGE 354 352 l Technology Transfer to the Middle East clear technology transfers (involving research reactors and laboratory-scale sensitive facilities) are expected to increase. These smallscale sensitive facilities are required for peaceful research, but they can also be used (albeit with difficulty) for production of nuclear weapons materials. Therefore, the prospects for nuclear weapons proliferation in the Middle East will increase in the years ahead as these facilities are introduced, as new supplier nations not parties to the Nonproliferation Treaty (NPT) enter the market, and as Middle Eastern countries improve their technical capabilities. During the next decade a number of Middle Eastern countries could begin operation of commercial power reactors. By themselves power reactors do not pose a significant direct proliferation risk. It is technically impossible to use a light-water power reactor (LWR) or a Canadian Deuterium Reactor (CANDU) to produce plutonium for a nuclear explosive without access to enrichment in the case of LWRs, and to reprocessing for both. .. The risk of a nations using either fuel or spent fuel from such power reactors in the production of nuclear weapons is minimal when safeguards are effectively enforced, and nonexistent when no sensitive facilities (open or clandestine) are present. However, it is technically possible to support a significant nuclear weapons program by using a reprocessing facility of moderate size to reprocess spent fuel from the power reactor. In the case of a safeguarded power reactor, spent fuel would have to be diverted to a clandestine reprocessing facility or utilized in a reprocessing facility acquired for the ostensible purpose of peaceful research. Despite the contribution that nuclear power could make to meeting anticipated rapid growth in the demand for electricity, a number of factors limit the attraction of nuclear power to many Middle Eastern nations. These include the high costs of nuclear plants, limited interconnected grids, and the availability of hydrocarbon and other energy sources, including solar energy. Of all the Middle Eastern countries, Egypt has the most extensive current plans for commercial nuclear power but will be able to acquire reactors only with subsidized foreign financing. This chapter describes the constraints and opportunities for nuclear technology transfers to the Middle East, paying special attention to both commercial and military applications, and identifies the implications for U.S. policy. The issues discussed are of particular concern because the spread of nuclear weapons in the Middle East would not only threaten the national survival of Middle Eastern countries but also substantially reduce the ability of the United States to influence events there. In addition to the six nations of primary consideration in the report, this chapter deals peripherally with a number of other countries that must be considered in an analysis of nuclear technology transfers to the Middle East. One goal is to identify major factors recipients must consider as they make choices about nuclear technology transfers; another is to clarify trends important for U.S. policies in the years ahead. NUCLEAR FACILITIES I N THE MIDDLE EAS T Developing countries account for only a minor part of commercial nuclear capacity worldwide. At the end of 1980, there were 256 nuclear power reactors operating around the world, with an installed capacity of 136 gigawatts electric (GWe), or about 7 percent of installed world electrical generation capacity. About 98 percent of this capacity was located in the Organization for Economic Cooperation and Development (OECD) nations, 4 and the Soviet Union and Eastern Europe. For nuclear power or nuclear weapons, certain types of nuclear technologies, fuel or material, technically trained manpower, systems for delivering either electricity or weapons, .- 4 0ECD nations include the United States, Japan, Australia, New Zealand, and major West European nations. PAGE 355 Ch. 9Nuclear Technology Transfers l 353 and political commitments are necessary. The requirements are different for commercial power production and weapons production, but some facilities can be used for both. The discussion that follows briefly identifies various types of nuclear technologies that have been or maybe transferred to Middle Eastern nations, and then evaluates their significance for both commercial power and weapons programs. COMMERCIAL NUCLEA R POWER REACTOR S Commercial power facilities include a number of reactor types currently in operation, such as LWRs, including pressurized water and boiling water types, and CANDU. Most of these reactors were developed for use in industrial nations and are comparatively large scale, or more than 600 MWe in capacity. Iran and Egypt: Countries With Current or Previous Nuclear Power Plans Most of the major countries in the region have at some point studied the feasibility of nuclear power for generation of electricity and desalination. Iran under the Shah developed the most ambitious program for nuclear power development of any of the Middle Eastern countries. Irans program, which came to a halt after the revolution, called for building 23 reactors in 20 years to generate 23,000 megawatts of electricity (MWe) by 1994. 5 Iran carried out negotiations with a number of suppliers during the 1970s, and the West German firm Kraftwerk Union began construction of two 1,300-MWe pressurized light-water reactors near Bushehr on the Persian Gulf. When work stopped on these reactors in late 1978 with the mass exit of German technicians during a nationwide Iranian labor strike, the two reactors were 75 percent and Daniel Poneman, ,tuclear Pourer in the I)e\eloping tiorld (Imndon: Allen and Unwin, 1982); Bihan Mossa\ar-Rahmani, ~.ner~ Poiic) in lran I New lork: I)ergamon Iress, 19811, p. 105. 65 percent complete. In the past year, some official Iranian spokesmen have indicated interest in a renewed nuclear program, but construction has not been resumed on the two reactors, although a feasibility study was under way in May 1984. 6 Egypt today has more extensive plans for commercial nuclear power development than any other Middle Eastern country under study. By 2000, its official plan is to have 8 reactors in operation, with a total generation capacity of 8,000 MWe, amounting to 40 percent of its electricity. However, Egypts nuclear plans have been quite volatile over the years, with activity in the mid-1960s, followed by inactivity until 1973-76, followed by more delay. The Egyptian program is stimulated by insufficient alternative power sources and a comparatively large nuclear manpower pool, but owing primarily to financing problems, construction has not begun on any of these reactors. Negotiations with France progressed to an advanced stage, and that nation signed preliminary agreements to supply two 950MWe turnkey reactors to be located at El Dabaa, northwest of Cairo. French spokesmen continue to state that final agreements are imminent and that the reactors will go online in the early 1990 s. Egypt selected the Swiss firm Motor Columbus to work 011 an 18-month contract as the consulting engineer for the first two reactors and to help prepare the tenders for the bids for the second two reactors. In early 1983 the Egyptian Government called for bids on four reactor units, and by the end of the year the French firm Framatome. the West German 6 Kraftwerk Union and the Atomic Energy Organization of Iran signed a contract under which Kraftwerk Union will carry out an inspection of the Bushehr site in order to determine the feasibility of completing one of the reactors: the same report claims that site maintenance has been good, See Kraftwerk Inspects Nuclear Plant, Middle East Economic Digest. Dec. 9, 1983, p. 12. See also Official Comments on Iranian Nuclear Research, Iranian News Agency, Mar. 16, 1982. Kraftwerk Union spokesmen confirmed that 40 engineers were carr}ing out a feasibilit~. stud~ on site in May 1984. According to the Current Timetable, Egypt and France Should Come to Terms, .Vuc)eonics 1$eek, ,June 10, 1982, p. 7; 4 In Brief, ,Jliddle F,ast J;conomic Digest, \ol, 26, No. 51, 1982. PAGE 356 354 l Technology Transfer tc the Middle East firm Kraftwerk Union, and U.S. firms Westinghouse and Bechtel had submitted bids. a Thus, negotiations continue with firms from various nations for supply of reactors, but Egypt has reached no firm agreements, and technical assessment of the bids continues. Middle Eastern Countries Considering Nuclear Powe r A number of other Middle Eastern countries have shown interest in developing commercial nuclear power, but none of them is as far along as Egypt. Libya has plans to acquire four nuclear reactors by 2000 and is negotiating with the Soviet Union to purchase a 440-MWe reactor from the Soviet export organization Atomenergoexport. 9 The Syrian government has plans for two to six reactors, but has done little to carry out these plans. In 1981 the Minister of Electricity announced that feasibility studies had been initiated. The French firm Sofratome was selected to carry out a feasibility study in the summer of 1982, but the study was delayed through the end of that year. Discussion in Syria has focused on two power reactors, each with a capacity of 660 MWe. 10 Iraq has expressed interest in a commercial nuclear program, and at the Second Arab Energy Conference in 1982, it was forecast that Iraq will have an installed capacity of 1,400 MWe by 2000. Negotiations with France for the purchase of a 900-MWe pressurized-water reac 8See Egypt: Nuclear Bids InWill Financing Follow?, A4iddle East Economc Digest, Dec. 2, 1983. See also, Paul Taylor, U.S. and Japanese Groups Link in Egyptian Nuclear Power Bid, Financial Times, Sept. 1, 1983, p. 1; Consultants Bid to Egypt Show Huge Gap; EDF Leads French Reactor Offer, NUCkOmCS Week, vol. 23, No. 4, Jan. 28, 1982, p. 1. Robin Miller, Nuclear Power Plans Outlined, Jamahhya.h Review, No. 22, March 1982, p. 17. See also, James Everett Katz and Onkar S. Marwah, Nuclear Power in Developing Countnes (Lexington, Mass.: D. C. Heath, 1982), p. 8. Press reports indicate that the Belgian firm Belgonucleaire may also participate in the project. See Libya-Belgian Firm to Supply Plants, Paris International Press Service, 1245 GMT, May 23, 1984, reported in FBIS, May 23, 1984 1oRob Laufer, Syria Plans Nuclear Power Unit by 1991, Nuc)eonics Week, vol. 22, No. 24, June 18, 1981, p. 1. tor were mentioned. 11 More recently, it was reported that the Iraqi nuclear energy organization signed an agreement with the Soviet firm Atomenergoeksport to carry out the first phase of a study to choose a site for a nuclear power station. 12 Algeria has made no firm commitment to nuclear power development, but government planning organizations have considered nuclear power in mediumto long-term development plans. In 1976, for example, a special decree was issued which called for establishment of nuclear reactors as a stimulus to industrial development. 13 Similarly, Kuwait has no formal plans for a nuclear power program, but a number of feasibility studies have been carried out, some regarding use of nuclear reactors in desalination. More recently, the Kuwaiti Government discussed the possible purchase of four CANDU reactors with Canadian officials in 1982, but these discussions were not continued. 14 Thus, while Middle Eastern nations have considered nuclear power programs, few have carried these plans very far, and those that have, have experienced delaysIrans program came to a stalemate during the revolution, and Egypt is still negotiating for the purchase of its first commercial reactor. It is unlikely that any Middle Eastern nation will 1lAdnan Shihab-Eldin and Yusef Rashid, Cooperative Development of Nuclear Energy in the Arab World, paper presented at the Second Arab Energy Conference, Mar. 6-11, 1982, sponsored by the League of Arab States, the Arab Fund for Economic and Social Development, Arab Industrial Development Organization, and Organization of Arab Petroleum Exporting Countries, pp. 10 and 20. z Contract with USSR to Study Nuclear Power Site, JN071i!Ol Baghdad INA in Arabic 1052 GMT 7 March 84, reported in FBIS, Daily Report.Middle East and Africa, Mar. 7, 1984, vol. v., No. 046, annex No. 016. See Adnan Mustafa, Nuclear Fuel Resources in the Arab World, paper presented at Second Arab Energy Conference, ibid.; sce also Interministerial Committee Set Up to Define Nuclem Energy Policy, El Moudjahid (Algerie), Nov. 1, 1980, p. 5. Can,~dian officials reported that they would not sell the reactors unless Kuwait became a party to the NPT. See Offer to Sell Reactors Denied, Cana&an Radio, in FBIS Jan. 28, 1982. Kuwait has signed but not ratified the NPT, PAGE 357 Ch. 9Nuclear Technology Transfers l 355 have an operating commercial reactor before the mid-1990s. RESEARCH REACTOR S A second type of nuclear facility currently in operation in the Middle East, the research reactor, is used in conjunction with nuclear research at several training centers in the Middle East. Research reactors provide a source of neutrons and/or gamma radiation for physics, biology, chemistry, and metallurgy research; for investigation of the effects of radiation on many types of materials; and for production of isotopes used in medicine, industry, agriculture, and training and teaching. There are more than 350 research reactors worldwide. Israel was the first Middle Eastern country to build a research reactor; in 1960 it completed a 5-MWt 15 IRR-1 research reactor using highly enriched uranium (HEU) and a few years later, a 26-MWt research reactor at Dimona. 16 Egypt is the Islamic nation with the oldest research reactor in the Middle East. Built with Soviet assistance in the early 1960s, Egypts 2-MWt research reactor using 10 percent enriched uranium is located at the Inchass Nuclear Research Center. It has been operated since 1972 by Egyptians without foreign assistance. In addition, West Germany has agreed to sell Egypt a l-MWt research reactor. 17 Iraq has constructed the largest number of research reactors. One is a small pool-type research reactor supplied by the Soviets, which was upgraded to 5 MWt in 1978 and is located at the Tuwaitha Nuclear Research Center. This IRT-2000 reactor is suitable for small1 MWt would produce approximately 0.3 Mwe. Unless otherwise noted, MW indicates megawatts (electric). Thermal megawatts ( Mk$t) is used to refer to capacity of reactors not used for production of electricity. No U.S. observers have inspected the Dimona facility since 1969, and Israel says that it has no nuclear weapons. However, informed opinion is that Israel does have nuclear weapons capability. Some claim that the Dimona reactor was upgraded to 70 MWt capacity in the 1970s. See George H. Quester, 4Nuclear Weapons and Israel, The ilfiddle East Journal, \ol, 37, No. 4, autumn 1983, p. 548. T (lerrnan Minister %ks Trade Increase, Afiddle East ECO nomic Digest, vol. 26, No. 13, 1982, scale medical and civilian research applications and can be fueled with uranium of various enrichments. Two other research reactors were supplied by the French in the 1970s. Isis (or Tamuz 2) is a small 800-kilowatt critical assembly, which has a negligible annual fuel utilization. Osirak, as the French called it, or Tamuz 1 was a research reactor before it was destroyed by Israel in 1981. According to the IAEA, this reactor had a capacity of 40 MWt. Iraq has discussed rebuilding the reactor with the French, but this has not occurred. Among the points of controversy was the suggestion that medium-enriched uranium (MEU) fuel be used in a rebuilt reactor, which was opposed by Iraq. It is not clear whether Irans 5-MWt reactor provided by the United States in the 1960s and located at the Teheran University Nuclear Center is still in operation. 19 Finally, Libya has a 10-MWt Soviet-built (WWR-C) research reactor fueled by 80 percent enriched uranium. 20 A number of nations have plans for or are considering building research reactors. Algeria, for example, has a nuclear research institute and has carried out some discussions with the U.S. firm General Atomics concerning construction of a research reactor, but no purchase has been announced. 21 Morocco has purchased a 100-kilowatt TRIGA Mark I research reactor from General Atomics, but the facility has not yet been constructed. 22 Saudi Ara. aSee France, Iraq Unveil Secret Nuclear Accord, Ener~r DaileV, June 19, 1981; Mideast Nuclear, Reuters Report, Mar. 19, 1982. The U.S. Department of Energy cited a 70 MWt capacity, but the French said that the reactor had a 40 M1lt capacity. Due to limitations of the heat rejection system, the reactor would have been operated at 40 MWt, according to the IAEA. See IAEA, Background Briefing Paper, Safeguards and the Iraq Nuclear Centre, December 1981. gZivia A. Wurtele, Gergory S. Jones, Beverly C. Rowen, and Marcy Agmon, Nuclear Proliferation Prospects for the itliddle East amd South Asia (Marina de] Rey: Pan lieuristics, 1981), p. A-18. Development of Nuclear Capability Reviewed, The Arab Mrorld k%eek)~. (Jan, 24, 1981), reprinted in JPRS Nuclear Development and Proliferation l{rorldwide Report #84, Alar. 3, 1981. Algeria To Go Nuclear, 8 lla~w, Feb. 28, 1981, pp. 46-47. 2iExtraction of Uranium from Arab Phosphate: The Arab World Decides to Turn to the Nuclear Alternative, Al Duster (1.ondon), No. 231, Apr. 26, 1982. PAGE 358 356 l Technology Transfer to the Middle East bia has plans to build a nuclear research center, but no research reactor has yet been built, although feasibility studies have been carried out. 23 In Kuwait, similarly, discussions about research reactors have been pursued, but those organizations interested in purchasing one have not appropriated funding for fiscal year 1984 to proceed. Likewise, Syria and Tunisia have also considered research reactors, but in neither case have negotiations been finalized. ENRICHMENT AN D REPROCESSING FACILITIE S No Middle Eastern nation currently has such facilities on a commercial scale, nor is it likely that any of these nations will have commercial-scale enrichment and reprocessing facilities in this century. However, a number of countries are reported to have small-scale reprocessing facilities. (There is, however, no authoritative source identifying all small reprocessing facilities worldwide. ) Only a few Middle Eastern nations are reported to have small-scale reprocessing facilities in operation. At the Inshass Center, Egypt has a small complex of hot cells which were supplied by the French. Iraq contracted with the Italian firm SNIA in 1976 for a radiochemistry laboratory. Construction on the facility was completed in 1978. The lab consisted of a hot cell complex. Such hot cells are used to manipulate radioactive substances and have many potential peaceful uses, but also could be used to separate small quantities of plutonium from dissolved uranium in the Osirak reactor. Italy also reportedly agreed to provide Iraq with four additional labs designed to give the Iraqis mastery of the fuel cycle, in the words ~ !~~et ~een 1976 and 1982 Genpra] Atomics attempted to Per suade King Saud University to purchase a small Triga Mark 1 reactor, but was unsuccessful. The Saudis signed a memorandum of understanding with Great Britain in late 1981 to facilitate nuclear research and training. The physics department at the University of Petroleum and Minerals has ordered a 14-MeV neutron generator, and has plans for a linear accelerator. The University of Riyadh is acquiring a 2.5-MeV Van de Graaf generator for its physics department. Thus, the Saudis are initiating a low-level research program. of Dr. Umberto Colombo, head of the firm CNIEN. These labs are said to have included a fuel fabrication lab, a chemical engineering lab, and a radioisotope lab. The exact status of these projects is not clear. 24 The only other laboratory-scale sensitive research reported in the Middle East are efforts in Israel and prerevolutionary Iran. Iran acquired experimental laser enrichment technology in late 1978 from a U.S. firm. The fate of this equipment is unknown. Observers believe that separation facilities in the form of hot cells exist at two Israeli reactor facilities. 25 PATHS TO NUCLEA R WEAPON S A number of Middle Eastern nations do possess research reactors and laboratory-scale sensitive facilities, and a few have plans for nuclear power programs. A key question is whether these facilities now in place, or those planned, could result in proliferation of nuclear weapons in the Middle East. The term proliferation is used hereto refer not only to the manufacture or acquisition of nuclear weapons by nations that do not now possess them, but also to programs that prepare for the construction or testing of a weapon and that would allow nations to produce a nuclear device in a very short period of time. 26 Israel, for example, is generally credited with the capability to produce nuclear weapons in a very short period of time. Just as commercial nuclear power development promises to enhance the electricity-generating capacity of Middle Eastern nations, nuclear weapons -. -. For the most detailed published account, see Richard Wilson, A Visit to the Bombed Nuclear Reactor at Tuwaitha, Iraq, Nature, vol. 302, Mar. 31, 1983, pp. 373-376. The report is based on observations made onsite in early 1983. More recent reports of onsite conditions are not available. According to information provided by Dr. Wilson in July 1984, about 30 scientists and 100 others (non-military), as well as 100 soldiers are onsite at Tuwaitha; French and Italian technicians are not present. 5 Roger F. Pajak, Nuclear Proliferation in the Middle East (Washington, D. C.: National Defense University, 1982), p. 38. 26 This definition, and a more detailed explanation of the weapons applications of various nuclear technologies, can be found in Nuclear Proliferation and Safeguards (Washington, D. C.: U.S. Congress, Office of Technology Assessment, OTA-E-48, 1977) and appendix vol. 11. PAGE 359 Ch. 9Nuclear Technology Transfers 357 proliferation would have significant implications for the balance of power in the region, including not only tension between Israel and its Arab neighbors but also rivalries among Islamic states, and for the strategic interests of the superpowers. Commercial power reactors cannot, by themselves, be used to manufacture nuclear weapons, To make nuclear weapons, plutonium or highly enriched uranium is needed. Low-enriched uranium is used as fuel for light-water nuclear power reactors. Such fuel would have to be enriched in an enrichment plant to boost the concentration of uranium 235 to the level required for weapons production. OTAs study, Nuclear Proliferation and Safeguards, stated that it is impossible, not merely impractical, to use light-water reactor or CANDU reactor uranium fuel in a nuclear fission explosive without an expensive and technologically advanced enrichment facility. 27 Another method of producing weapons involves plutonium. Plutonium is produced when uranium atoms in reactor fuel are bombarded by neutrons during the normal operation of a nuclear reactor. Such plutonium, however, must be separated from used (spent) fuel through a process called reprocessing. Therefore, in addition to a light-water reactor, either an enrichment facility or a reprocessing facility would be required to produce suitable uranium or plutonium for weapons production. All of the nations that now have nuclear weapons have obtained them through dedicated programs devoted to military purposes, but there is at least a conceptual possibility that a country might use commercial nuclear facilities, specifically reactors, in conjunction with an enrichment or reprocessing facility, to acquire or produce weapons materials-plutonium and/or highly enriched uranium. Diversion of materials needed for weapons production from a commercial reactor could occur through evasion of safeguards or through use of unsafeguarded facilities. 27 For analysis of diversion potential from light-water reactor and other nuclear power systems, see Nuclear Proliferation and Safeguards, op. cit., pp. 23, 154-189. Because light-water reactors require considerable time for removing spent fuel assemblies and replacing them with new fuel assemblies, it is unlikely that spent fuel could be diverted to a reprocessing plant for weapons use without considerable economic and power penalties, except at a normal discharge and loading operation or from the spent fuel storage pool. This would make clandestine evasion of safeguards difficult. Use of commercial reactors without associated enrichment or reprocessing facilities constitutes at best a very indirect path to nuclear weapons production from the standpoint of the manpower involved as well. There is a limited overlap between personnel requirements for a commercial nuclear program and a nuclear weapons program. About a quarter of the personnel normally involved in operating a commercial reactor require specialized nuclear training. A weapons program would also require personnel with specialized training, some of it in different areas. Therefore, some personnel working in a commercial program could be used for a weapons program (assuming that many were retrained) along with personnel possessing specialized skills in areas such as nuclear engineering, physics, and the handling of high (nonnuclear) explosives. 28 In Egypt, the Middle Eastern nation most likely to acquire a new commercial power plant in the next decade, policy makers have indicated their preference for turnkey plants. With a turnkey contract, indigenous personnel are gradually trained either in the host country or abroad, and the contractor may also be responsible for operations. Thus, the turnkey approach implies a delay in development of indigenous capabilities. For a nation that wants to keep its nuclear weapons option open, commercial power plants (particularly turnkey plants) raise no direct proliferation considerations. Indirectly and over a long time, howRrhe total number of personnel required to operate a nuclear pIant in the United States is 600 to 800, including both onsite and off site personnel. See Glenn A. Whan and Robert L. Long, Nuclear Power: Manpower and Training Requirements, paper presented at the Workshop on Nuclear-Electric Power in the Asia-Pacific Region, Honolulu, Hawaii, Jan. 24, 1983. PAGE 360 358 Technology Transfer to the Middle East ever, such facilities could contribute to the creation and maintenance of a technical infrastructure that would be useful if the nation later decided to develop nuclear weapons. In contrast to commercial power reactors, which do not pose proliferation risks by themselves, are small-scale sensitive facilities which can be used in conjunction with research or power reactors to extract small quantities of weapons materials if facilities are unsafeguarded or safeguards are evaded. During the next decade, it is quite likely that more research reactors will be supplied to contribute to the creation of a local science and technology infrastructure in developing countries. However, research reactors can also be used, at least theoretically, as components of programs oriented toward weapons production. The critical considerations are: 1) the size of the reactor, with those over 10 MWt of particular concern; 2) the use of very highly enriched uranium as a fuel; 3) the presence of reprocessing technology; 4) the strength of safeguards to monitor fuel and spent fuel stockpiled within the country; and 5) the operation of such reactors. 29 One concern is that HEU could be diverted and used in weapons production, although this would entail considerable effort to obtain sufficient quantities. Most safeguarded research reactors fueled by HEU contain less than 25 kg of U 235 in inventory. During 1981, the International Atomic Energy Agency (IAEA) conducted inspections at 176 research reactors and critical assemblies, of which about 43 contained more than one significant quantity (SQ) 30 of highly enriched uranium or plutonium. . 29 The discussion on research reactors draws from the work of Marvin M. Miller and Carol Ann Eberhard, The Potential for Upgrading Safeguards Procedures at Research Reactors Fueled with Highly Enriched Uranium, for the U.S. Arms Control and Disarmament Agency, contract No. AC2NC104, November 1982. One SQ = 25 kg of [J], Most of the proliferation concern regarding civlian applications has been with the use of very highlv enriched uranium (VHE U) containing 93 percent UJ used in research reactors. Smaller quantities of about 5 kg U or between 2 and 8 kg Pu are also of proliferation concern. See Miller and Eberhard, The Potential for Upgrading Procedures, op. cit. Another concern is that more powerful research reactors might be modified to produce plutonium through irradiation of uranium targets in the core or the use of a uranium blanket around the core. 31 Small, but significant, quantities of plutonium could be produced in reactors with a capacity of more than 10 MWt. (If such a reactor were fueled with HEU, the uranium inventory would probably be of more proliferation concern than would potential plutonium production.) IAEA inspections would detect activity involving modifications in safeguarded facilites, but some plutonium could at least theoretically be produced between inspections. In the event that quantities of plutonium could be produced through such means, ability to produce nuclear weapons would depend on the presence of a reprocessing facility. Hot cells, such as those in the small radiochemistry lab provided by the Italians to Iraq, are generally limited to gram-scale reprocessing therefore limiting the amount of plutonium that could be produced annually to several kilograms, at most. Research reactors larger than 10 MWt and fueled by very highly enriched uranium (VHEU) thus raise proliferation concerns. These include reactors constructed in the 1960s to the late 1970s. More recently, the United States, France, and other nations initiated efforts to encourage the use of low enriched uranium (LEU) in order to reduce the potential for nuclear weapons proliferation from diversion of HEU fuel. There have been few U.S. research reactor exports in recent years; the United States exercises restraints over research reactors abroad through decisions about supply of enriched uranium fuel. Libya is the only Islamic nation with a research reactor having a capacity of 10 M Wt. 32 The Israeli 26-thermal megawatt (MWt) Di. l See Hans Gruemm, Safeguards and Tamuz: Setting the Record Straight, IAEA Bulletin, vol. 23, No. 4, December 1981. Wichard J$rilson confirmed in August 1984 that the So~iet Jt\$rR C reactor at Tuwaitha, Iraq, has a 5-hlWt capacity. PAGE 361 Ch. 9Nuclear Technology Transfers l 359 mona reactor is estimated to be capable of producing 8 kilograms of plutonium (kg Pu) annually. 33 For nations wishing to produce weapons covertly, it is at least possible for research reactors to provide an avenue, albeit one much less convenient than acquisition of large-scale sensitive facilities. However, diverting enough HEU or plutonium from these small reactors to support a weapons program (especially one geared to the production of more than one experimental device) would take some time; during that time, a strong safeguards program would probably detect diversion, or at least suspicious circumstances. The nuclear technologies raising greatest concern in terms of proliferation are enrichment and reprocessing technologies. Because Iraq has purchased laboratory-scale reprocessing equipment, concerns arose about whether or not that country was attempting to produce nuclear weapons, a subject which will be discussed in more detail in the section that follows. Sensitive facilities raise proliferation concerns because they could be used in a weapons program if safeguards were inadequate or circumvented. Requiring only a modest sum of money and a modest construction effort in comparison to large-scale facilities, smallerscale reprocessing facilities could be used to produce clandestinely the material for a small number of bombs annually if the spent fuel were available. Although time-consuming, such an operation is not technically difficult. Construction of either unsafeguarded enrichment or reprocessing facilities would constitute a violation of the Nuclear Nonproliferation Treaty (NPT), which all Middle Eastern nations except Algeria, Israel, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE) have ratified or signed. Dedicated weapons programs could potentially use some safeguarded facilities: e.g., in theory low-enriched uranium could be diverted from a safeguarded reactor and boosted in a dedicated enrichment plant, However, this would be a time 33 Miller and Eberhard, op. cit., P 21. consuming and difficult process if safeguards were in place. As OTAs study of Nuclear Proliferation and Safeguards outlined, the path to weapons production most accessible to developing countries with modest technical infrastructure is one involving construction of a 25-MWt plutonium production reactor (which would produce enough plutonium for one or two explosives per year) and a small reprocessing plant. The two facilities together would require 10 to 20 professional engineers for operation. The reprocessing plant requires more expertise in remote control, the handling of very radioactive materials, and chemical engineering procedures, but the equipment and supplies needed are generally available on world markets. 34 A more demanding route would be the use of centrifuge enrichment facilities. In either case, the facilities would have to be constructed and operated without detection. Five years is the estimated time between the point when a nation begins discussion of a dedicated route and the point when the weapons material could be in hand. In addition to these two dedicated routes, the next decade could see progress in advanced isotope separation technologies such as laser isotope separation, which could greatly accentuate proliferation problems. It must be emphasized that in the Middle East, where manpower is a major constraint on transfer of advanced technologies, it would be difficult to assemble a team with the appropriate specialized skills. Even in newly industrializing countries, such as India, with much larger pools of scientific and engineering manpower, construction of reactors has required more skilled workers than are needed in industrial countries. A small national program designed to produce weapons clandestinely without testing would require a core group of more than a dozen well-trained and very competent people experienced in many fields of science and engineering, and access to open technical literature. 34 See Nuclear Proliferation and Safeguards, op. cit., pp. 174-79. 35-507 0 84 24 : ~1, 3 PAGE 362 360 l Technology Transfer to the Middle East In addition, a staff of technicians, diverse laboratory facilities, a field-test facility for handling experiments with large-scale (nonnuclear) explosives, and financial and organizational resources to purchase or fabricate items required for the assembly mechanism would be needed. 35 Any one of these components might be easy to acquire, but Middle Eastern countries face strong obstacles to assembling the entire package of skills needed and to retraining personnel over a long period of time. More important than the sophistication of the facilities is the competence of the individuals involved in the program. Manpower is thus a critical constraint to nuclear technology transfer in the Islamic Middle East. A final route to nuclear weapons is theft or purchase of nuclear material or weapons on the black market. This would eliminate the need for the expensive and demanding technologies described above. Libya has reportedly attempted to purchase not only sensitive nuclear technologies (reprocessing and enrichment) but also a nuclear bomb. 36 While there is no evidence that such a black market now exists, one may develop if second-tier suppliers enter the market to sell unsafeguarded facilities and if plutonium recycle becomes more extensive. The black market is the least technically demanding route to nuclear weapons. This discussion indicates an ascending order of proliferation problems, with commercial reactors at the bottom and sensitive facilities at the top of the list. In the case of power reactors, the commercial applications are most important for these Middle Eastern nations, particularly where the recipient possesses none of the more sophisticated reprocessing or enrichment equipment. For commercial powerplants, particularly those built through turnkey contracts, there is no direct proliferation risk if reprocessing and enrichment facilities are not present. The most worrisome path to a weapons capability would be one that involves acquisition of small-scale fuel cycle facilities that could be rationalized, more or less reasonably, as logical . . 35 Ibid., p. 140. 36 Steven J. Rosen, Nuclear Proliferation and the ,\ear-,VucIear Countries, (Cambridge, Mass.: Ballinger, 1975), p. 178. components of an orderly long-term effort to develop a broad capability for using nuclear power. Such facilities, designed with great flexibility of operation in mind, maybe capable of producing materials adequate for one to a few weapons per year. However, it must be emphasized that such facilities would have to operate over considerable periods of time and escape safeguards in order to be used for weapons production. If a nation were to succeed in this covert weapons production path, it might produce a few small-scale, untested nuclear weapons. Some observers believe that in the Islamic Middle East a number of nationsIraq, Libya, Egypt, Syria, and Iran 37 -might by the turn of the century be in a position to develop such small nuclear forces (comprising 5 to 10 deliverable and militarily serviceable fission bombs or warheads). If present nuclear supplier policies remain in force and are accepted by new suppliers, the Islamic nations of the Middle East will not be able by themselves to produce weapons for many years, unless they abrogate or violate safeguarding agreements. In that case, production of weapons would be difficult, and because the separation of plutonium required for a single weapon would take many months (depending on the type of reprocessing facility), detection of the program would be probable. However, if new suppliers enter the market who are willing to provide sensitive facilities and assistance, and if recipients abrogate safeguards, the possibility of nuclear weapons proliferation would increase dramatically. Table 84 outlines the nuclear proliferation implications of policies of supplier and recipient countries, in their current form and under theoretical modifications. The section that follows explores the plans of these and other Middle Eastern countries for nuclear power development. The technical capabilities of these nations to utilize nuclear technologies are evaluated in the light of stated policy toward commercial power development and toward weapons programs. Center for Strategic and International Studies, Proliferation of Small Nuclear Forces (Washington: CSIS, 1983), p. i. PAGE 363 Ch. 9Nuclear Technology Transfers l 361 Table 84.implications of Technology Transfer Policies for Proliferation of Nuclear Weapons Recipient policies Acceptance of full-scope safeguards (party to NPT or equivalent) Acceptance of safeguards only as required by individual suppliers Suppler policies No changes i policy, no new suppliers Suppliers, possibly new ones, willing to provide sensitive facilities (as well as reactors), with, however, Insistence on safeguards on facilities they provide Suppliers, possibly new ones, willing to provide anything without safeguards No change in policy, no new suppliers Suppliers willing to provide sensitive facilities (as well as reactors), with insistence on safeguards at least on facilities they provide Suppliers willing to provide anything without safeguards No changes in policy. no new suppliers Unwilling to accept Suppliers willing to provide sensitive safeguards on anything facilities (as well as reactors), with insistence on safeguards on at least facilities they provide Suppliers willing to provide anything SOURCE: Office of Technology Assessment 1. 2 3. 4. 5 6 7 8 Implications for weapons programs Recipients could obtain reactors but no capability for obtaining plutonium or HEU, except through faciIities of an undeclared or clandestine nature (although abrogation of safeguards would allow for Pu path) Weapons capability would be Iimited several years for a single weapon Could obtain everything necessary for a fairly large-scale weapons program. but weapons could be obtained only after abrogation or violation of safeguarding agreements Same as 2. above Same as 1 Same as 2 Recipients could acquire essentially unlimited weapons potential Weapons capability for recipients confined to currently existing facilities Recipient might not be able to obtain additional shipments of HEU; therefore, proliferation potential remote Same as 7, above 9 Same as 6 above PERSPECTIVES OF RECIPIENT COUNTRIE S ON NUCLEAR TECHNOLOGY TRANSFER S A number of economic, political, and manpower-related considerations restrict the ability of Middle Eastern nations to develop nuclear power and pursue a nuclear weapons option. Despite the growing awareness of the problems associated with nuclear powerincluding waste management, potential for accidents, and economic costssome developing nations see nuclear power as essential for their economic development. Likewise, despite the potentially destabilizing effects of nuclear weapons acquisition, some developing nations have apparently invested considerable resources in attempting to keep a nuclear weapons option open. This section explores the various types of constraints on nuclear technology acquisition in the Middle East, with reference to specific countries and programs. One important theme is that the manpower required for indigenous technology development is a significant constraint for all of these nations. Also, the volatility and early stage of nuclear programs PAGE 364 362 l Technology Transfer to the Middle East in the Middle East reflect an absence in most of these countries of the political agreement and leadership needed to support a large-scale nuclear program. ECONOMIC AND ENERG Y CONSIDERATION S In deciding whether to promote commercial nuclear power, developing nations face significant constraints related to the following requirements: financing, validity of projected energy demand, electricity grid size, political agreement concerning the appropriateness of nuclear power in view of overall development strategies, and competing requirements for resources. OTA analysis leads to the conclusion that, despite the potential which nuclear power holds for meeting anticipated rapid growth in electricity demand, only a few developing Middle Eastern nations are likely to have operating power reactors within this century. Egypt, the Middle Eastern nation with the most extensive program for nuclear power development, is likely to obtain nuclear reactors only with subsidized financing. Financial Requirements In developing countries, where financial resources are scarce and demand for central power station electricity comparatively small, coal, oil, and hydropower have commonly been used to meet electrical demand. For Middle Eastern nations, particularly those with abundant hydrocarbon resources, the rationale for commercial nuclear power is far from clear. Herein lies the central question: What changes in the incentives and disincentives for nuclear power which heretofore weighed against nuclear power in the Middle East might tip the logic in its favor? Cost and financing terms for the purchase of nuclear reactors severely constrain the ability of many developing nations to acquire reactors. While costs of reactors vary, depending on a variety of factors such as reactor types, safety standards, and construction delays, a 1,000-MWe reactor costs a minimum of about $1 billion in industrial countries, and could run double or triple that amount elsewhere. Including indirect costs (interest, manpower training, administration), a 600-MWe reactor alone has been estimated at $1.5-$2 billion (in 1981 dollars) for developing nations. Financial constraints have been particularly salient for Egypt. Despite Egypt signed letter of intent to buy a 626-MWe pressurizedwater reactor from Westinghouse in 1976, financing of $1.2 billion in loans was never resolved and the sale was never completed. 39 In 1981, Egypt set up a alternative energy fund whereby oil revenues were to have been set aside at the rate of $500 million annually. As of December 1983, Egyptian Government officials stated that $800 million had been deposited in this fund, 40 and that another $300 million would be added in 1984. Financing continues to be a major factor influencing Egypt nuclear power plans. The reluctance of the U.S. Export-Import Bank to grant loans and congressional opposition to loans to finance U.S. nuclear reactor exports has been a continuing issue in negotiations carried out by U.S. firms. Similarly, financing has been the sticking point in Egyptian negotiations with the French for two 950Mwe pressurized-water reactors valued at $2 billion. Egypt announced plans to finance 20 percent of the project itself and sought financing for 80 percent of the project at 8 percent interest rates. For the last 2 years, the pro .. In Taiwan, where labor costs are very low and skilled manpower exists, two 950-MWe reactors were built at a total cost of $1.7 billion in 1983, This low cost reflects the lack of public hearings and very limited backfitting, conditions not present in the United States. See Nuclear Costs, En~neering NewsRecord, May 26, 1983, pp. 27-28. See Ian Smart, The Consideration of Nuclear Power, in James Everett Katz and Onkar Marwah (Marwah) Nuclear Power in Developing Countries: An Analysis of Decision Making (Lexington, Mass.: Lexington Books, 1982), p. 28. !%x: U.S. Department of Energy, Joint Egypt-United States Report on EgyptUnited States Cooperative Energy Assessment, 5 vols. (Washington, D. C.: U.S. Government Printing Office, 1979). !%e Seminar Discusses Nuclear Safety, London A1-Sharq A1-Awsat in Arabic, Nov. 24, 1983, p. 7 reported in JPRS TWD 84-002; see also Charles Richards, Four Bids Expected for Elgypt N-Plant, Financial Times, Nov. 24, 1983. ] Egypt Seeking Direct U.S. Aid for Nuclear Plant Purchase, Nucleonics Week, vol. 21, Feb. 14, 1980, p. 2. PAGE 365 Ch. 9Nuclear Technology Transfers `* 363 jected date for beginning construction of th e two reactors has been continually postponed For a country like Egypt, which has limited oil resources, a rising demand for food imports, and growing government expenditures, th e viability of its nuclear program has bee n strongly affected by financing problems. With declining oil prices, remittances from Egyp tian workers abroad initially fell, as did income from the Suez Canal. Egypts current accoun t deficit increased from $820 million in fisca l year 1979-80 to $1,406 million in fiscal yea r 1982-83 4 The nations changed financial position is illustrated by its modified requests for exter nal financing of nuclear reactor construction : In 1980, Egypt was negotiating to finance 50 percent of the reactor project at 8 percent in terest; in 1982, 80 percent financing was re quested at the same interest rate. Meanwhile contributions to the alternative energy fun d fell from the $500 million per annum an nounced in 1981 to $150 million in 1982 43 Al l of these factors suggest that unless Egypt i s offered a nuclear reactor at highly subsidized rates, its current nuclear plans are unlikely to come to fruition The history of Irans nuclear program illus trates that even in oil-rich developing nations political difficulties may arise from excessiv e costs accompanying a rapidly developing nu clear program. In 1975, the Canadian consult ing firm Monenco (Montreal Engineering Co Ltd. ) estimated nuclear construction costs in Iran at $690 per kilowatt installed capacity At the time, this estimate made nuclear powe r appear very attractive; cost estimates com pared favorably with an average $700 t o $1,000 per kilowatt for developed countries However, the installed costs approache d $3,000 per kilowatt, as construction neare d In 1982, Egypts financial situation improved somewhat as earnings from the Suez Canal and remittances increased. See hfiddle East EcorIonic Digest, E~rpt Special Report, JUIJ 1983, p. 9. See also Egypts Economy on the Right Track? Middle F;ast Economic Digest, Dec. 2, 1983, p. 11. In Brief, Middle East Economc Digest, vol. 26, No. 45, 1982. By early 1984, it was estimated that a total of $700 million to $900 million had been set aside under the fund. completion before termination of construction following the revolution. The cost discrepancies were due largely t o inflation, cost overruns, large infrastructur e expenditures for associated road and port con struction, the system of commissions paid t o royal family members, and the government s mismanagement of the bidding process. Cri tics charged that Irans hasty drive to develop nuclear power met with such difficulties be cause, among other factors, decisionmaker s lacked sufficient technical expertise Determinants of Electricity Demand In addition to costs and financing terms, ex pectations about future demand for electricity are key considerations for planners in devel oping nations. The demand for energy, an d specifically for electricity, is determined by a variety of factors including populatio n growth, economic growth, energy intensity o f economic growth, energy prices, and techno logical change Population growth is a major factor affect ing energy demand in developing countries Based on current trends, population growt h in all the Middle Eastern countries will remain high, at least until the end of the century While population growth may eventually de cline under the impact of urbanization, in creases in education, income levels and stand ards of living will tend to lower mortalit y rates. Population growth in all of these nations is expected to average well above 2 percent annually until the turn of the century. The Per sian Gulf States, as a group, are projected to experience the worlds highest levels of population growth, averaging 2.6 percent annually according to World Bank estimates 4 s Expansion of Middle Eastern economies de pends strongly on the rate of oil income. A s chapter 14 explains, it is extremely difficul t Nuclear Still Wrong for Iran, But Events May Dictate Otherwise, Analyst Says, N UC le O ni CS Week, Oct. 16, 1980, p. 6. 46 World Bank, World Development Report 1983, p. 185. Population growth for Saudi Arabia for the period 1960-2000 is pro jected at 3.4 percent annually, 2.6 percent for Kuwait, and 2.0 percent for the UAE. PAGE 366 364 Technology Transfer to the Middle East to predict economic growth rates for variou s Middle Eastern nations. However, if the current trend in slack oil prices continues, economic growth rates could fall far below those achieved by Middle Eastern nations during the 1973-74 and 1979-80 periods of dramatic expansion. Since many countries already have a large amount of electrical generating capacity in place or under construction, if economic growth proceeds at rates well below those of the 1970s, demand for additional generating capacity will be dampened. Therefore, as countries complete their conventional powerplants now under construction, there could even be overcapacity by the mid-1980s if Middle Eastern economies grow at a slower rate than anticipated in the early 1980s. The structure of economic growth also has an important bearing on energy demand. Development strategies favoring industrialization and urbanization are more energy-intensive than strategies stressing agriculture and service sector development. Generally speaking, during the early stages of industrialization, increasing rates of growth in energy consumption occur. Those Middle Eastern nations where diversified heavy industrialization is under way will thus experience a more rapidly rising demand for electricity. Demand for energy is also affected by prices. Governments in the Middle East tend to set oil-based fuel prices lower than the opportunity cost to the economy. In Egypt, for example, the price of kerosene used in home heating and cooking was 15 percent of the world market price in 1980. 46 Subsidized energy prices, which are politically popular but reduce incentives to conserve oil and to diversify to other energy sources, have probably contributed to acceleration of growth rates of energy consumption. During the period 1974-76, these rates averaged over 20 percent in Saudi Arabia, Libya, Algeria, and Egypt. Although some fuel efficiency improvements will take place through import of energy-efficient goods from nations where energy costs are high, sig 46 World Bank figures, cited by R. Mabro, Factors Affecting Future Energy Demand in Arab Countries, Second Arab Energy Conference, March 1982, Qatar. nificant energy savings are unlikely to occur in the presence of continued subsidization of energy prices. All of these factors help influence the pattern of growth in demand for energy. Historically, the pattern has been that electricity consumption has risen more rapidly than energy consumption. Fifty years ago, for example, electricity represented only 4 percent of total primary energy consumption worldwide; today the figure is 27 percent. The proportion of commercial primary energy transformed into electricity is projected to rise in developing countries from 25 percent in 1980 to 31 percent in 1990. 47 Annual growth rates of electricity consumption in the Middle Eastern countries during the past decade have been dramatic, in many countries approaching 15 percent. At this rate, consumption doubles in less than 5 years. In the late 1970s, Iran, Egypt, Algeria, and Saudi Arabia all ranked among the 20 largest consumers of commercial energy among developing countries. 48 Table 85 presents a summary of data relating to electricity demand in the region in the year 1980. Growth in electricity demand was, during the last decade, strikingly high in Gulf States such as Saudi Arabia and the UAE. During 1980, Egypt, Iran, and Saudi Arabia were the countries with the highest levels of electricity generation. Interconnected Electricity Grids There is a wide diversity in projections of electricity consumption for the next decade. Planners must consider regional and sectoral demand in their analysis of the relative costs of various electricity-generating systems. National projections of electricity demand and installed, connected, electrical grid, however, provide a general context for evaluating the rationale for nuclear power in specific countries. 47 World Bank, Energy in Developing Countries (Washington, D. C.: World Bank, 1980), p, 63. 48 Joy Dunkerley, William Ramsay, Lincoln Gordon, and Elizabeth Cecelski, Energy Strategies for Developing Nations (Was)lington, D. C.: Resources for the Future, 1981), p. 41. PAGE 367 Ch. 9Nuclear Technology Transfers 365 Table 85. Electrical Demand in the Middle East and North Africa Growth in demand for electricity 1980 Installed 1980 Installed 1980 electricity Country 1971-80 (percent) capacity (GWe) connected grid generated (GWh) a Algeria 112 18 1,4 6,400 Egyp t 8.7 4.5 4,5 18,500 Ira n 7,5 5 3 5 3 17,000 Iraq 134 12 12 8,000 Jorda n 166 0.4 0 4 1,100 Kuwait 134 2 8 2 6 9,300 Lebanon 27 0 7 0.7 1,800 Libya 17,0 12 0.9 3,100 Morocco 8 0 12 10 4,800 Oman 220 0 4 0 4 800 Qata r 165 0.5 0.5 1,500 Saudi Arabia b 40 0 6 2 3 0 17,000 Syri a 125 11 0.9 3,400 Tunisi a 107 0 9 0 8 2,800 UAE . . 360 11 11 4,500 AR Yeme n C 180 002 002 70 PDR Yemen 0 0 007 0,07 200 a GWh gigawatt-hours. b 1975-80 C 1971-77 NOTE: There ia a wide disparity in data provided by the United Nations. the Central Intelligence Agency, and other sources concerning current electricity production as well as future growth projections. This compliation is based on U.N. dat a which are gathered from government sources, but uses other estimates as well. SOURCE: United Nations. Statistical Yearbooks 1970-79: Central Intelligence Agency, National Basic Intelligence Factbook. 1974-82 additional materials used for each country estimate. Power workmen string Iine on the Saudi Consolidated Electric Company's 230 kw power distribution network A rule of thumb is that no single generating plant should constitute more than 10 percent of the systems total installed interconnected grid. This criterion is based on considerations of system reliability, reserve capacity, and economics. For example, if a power station in an electrical grid fails, reserve capacity must be brought online or portions of the load must be shed if the operating frequency of the system is not to be reduced by the added load of the remaining generators. To prevent this, some fraction of the installed electrical capacity is usually kept spinning in synchronization with the grid (spinning reserve ), ready to take over in seconds until other components of the reserve capacity such as quick-start turbines can be brought online. Requirements for spinning reserve are smaller if load can be shed. Although load shedding is not a normal practice in industrialized countries, many developing countries shed load during peak hours. The smaller the size of the largest plant, the less reserve margin is needed to achieve a given system reliability. Developing nations such as India, South Korea, Argentina, and Brazil all have had nuclear powerplants constituting less than 10 percent (and as low as 6 percent) of their grids at various times. On the other hand, in 1978 when Taiwans Chin-shan 600-MWe reactor went critical, it represented 10 percent of a basically integrated national grid estimated at 6.5 GWe, and Pakistans 125-MWe KANUPP reactor was designed with a capacity to make up 17 PAGE 368 366 l Technology Transfer to the Middle East percent of Karachis interconnected grid, although it has apparently rarely been operated at that level. The 10 percent rule of thumb has been more common for industrialized countries than for developing countries, but it does help to indentify situations where addition of a nuclear reactor might not be clearly warrented. In practice, the upper limit may be higher or lower, depending on analysis of the nature of the grid, its load, and acceptable outages and load shedding. The rule of thumb points out cases where the installation of a power reactor might be questionable in terms of energy and economic considerations. Applying the 10 percent rule to projections for electricity grids in various Middle Eastern nations indicates that most of them would not be in a position to install a 900-MWe reactor in this decade. Morocco, Tunisia, Jordan, Lebanon, Oman, Qatar, and North and South Yemen would not be in a position to do so until after the year 2000. Algeria, Iraq, Libya, Syria, and the UAE (only under high-growth assumptions) would have the installed grid to accept a 900-MWe reactor by the year 2000, but not as early as 1990. As table 86 indicates, only Egypt, Iran, Kuwait, and Saudi Arabia would be able to accommodate a 900-MW e reactor at 10 percent of grid size by the year 1990. These projections are based on assumptions that interconnected grids will be expanded rapidly. If Middle Eastern countries move to link their electricity grids, an option which has been discussed, power reactors might be accommodated earlier without violating the 10 percent rule. 49 Small Reactors The feasibility of nuclear power reactors could change substantially if small nuclear reactors (less than 600 MWe) were as readily available as large reactors on world markets. While a few older, small reactors are in operation, the Soviet 440-MWe reactor is the only small reactor currently available on the international market. According to U.S. industry, a major reason why such small reactors are not available is that there are marked differences in economies of scale for smaller units. 49 The Gulf Cooperation Council (GCC) nations are considering the feasibility of linking national grids in a regional power grid, but there is some doubt that these countries will be willing to contribute the massive capital costs that would be necessary. See The Pros and Cons of Regional Power Grid, Middle East Economic Digest, vol. 27, No, 43, Oct. 28, 1983, p. 19. Interconnection of grids was discussed at the 2nd Arab Energy Conference, Mar. 6-11, 1982, held in Doha, Qatar. Table 86. Potential for Nuclear Reactor Installation, 1990, 2000 1980 Size of Actual grid hypothetical capacity in GWe reactor Algeria (1.4) 440 MWe 900 MWe Egypt (4.5) 440 900 Iran ., (53) 440 900 Iraq . (1.2) 440 900 Kuwait ., . (2.6) 440 900 Saudi Arabi a (3.0) 440 900 x reactor could be installed and not exceed 10 percent of projected grid Demand assumptions 199 0 2000 Low High Low High x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x NOTES Other countries able to install a 900-MWe reactor by 2000 under 10 percent assumptions Libya, Syria, UAE under high electricity growth assumptions Other countries unable to I nstall a 900-MWe reactor until after 2000 under the same assumptions Morocco Tunisia Jordan Lebanon Oman Qatar North and South Yemen SOURCES Computed from table 91 World Bank Energy in the Development Countries (World Bank Paper August 1980) back ground Information prepared for the paper and energy analyses, Joseph Egan. Small Power Reactors in Less Developing Countries: Histroical Analysis and Preliminary Market Survey (Westmont, Ill,: ETA Engineering Inc., 1981) additional sources for individual countries (For example the high demand estimate for Egypt is based on U S Department of Energy, and the low demand estimate I s based on Shuli, as indicated in table 93 PAGE 369 Ch. 9Nuclear Technology Transfers l 367 For reactors larger than 600-MWe, a 0.7 scaling law is normally applied to direct construction costs. Therefore, a 1,200-MWe reactor would cost only about 60 percent more to build than would a 600-MWe reactor. The standard unit built by major reactor vendors increased to the 9001,200-MWe range typical today; these larger reactors are more appropriate for industrialized nations where grid size is not a major constraint. A second factor is research and development (R&D) costs of several hundred million dollars, which firms must take into account when considering commercial development of small reactors. Industry experts believe that only if a firm could anticipate 5 to 10 orders for such reactors would it be reasonable to proceed with the necessary R&D. Despite these factors, which some believe weigh against small reactors, some factors are in their favor. Smaller units may require less construction time, and therefore reduce prospects of cost overruns. It is not clear whether small reactors are more reliable than large reactors.) While some older, smaller reactors, such as the 220-MWe Rapp 1 heavy-water reactor in India, have poor reliability records, others such as the 325-MWe Atucha 1 heavywater reactor, built by the German firm Kraftwerk Union in Argentina, have been worldwide leaders in uninterrupted operation. The Argentine reactor has had a capacity factor of 90 percent since it began operation in 1974. Small reactors have several potential features, such as compatibility with shop fabrication and barge transportation, that might tend to compensate for higher direct construction costs per kilowatt installed. To summarize, scale issues are complex. In the face of uncertain demand and limited resources, developing countries may see small reactors as attractive because of the possible reduced risk involved in building several short lead-time plants rather than one large unit. W. Komormff, Power Plant Cost Escalation (New York: Komonoff ~; ner~ Associates, 1981 ). See also, huc]ear Power in an Age of Uncertaint~ Iifashington, D. C.: U.S. Congress, Office of Technology Assessment, OTA-E-2 16, 1984), pp. 106-107. Availability of small reactors would enhance the feasibility of nuclear power for developing nations with comparatively small grids. For example, if demand for electricity grows at a high rate, Iraq could be in a position by 1990 to install a 440-M We reactor that would meet the 10 percent rule of thumb. Similarly, Egypt would be able to meet this criterion even under low electricity demand growth assumptions by 1990. Flexibility would be increased further if large reactors could be derated (operated at lower capacities) during initial stages of operation and still be operated efficiently. Two factors could significantly change the prospects for small-reactor sales. The Soviet Union has exported a few 440-MWe power reactors. If the Soviet-designed VVER 440MWe reactor can be manufactured and sold at attractive prices, Middle Eastern nations may be interested in importing it. In 1980, there were five such reactors operating in the Soviet Union, and plans exist for installing a few additional reactors. However, since Soviet construction facilities are pressed to meet construction deadlines for larger reactors now at the center of Soviet nuclear plans, construction of the smaller reactors has been shifted to the Skoda Works in Czechoslovakia. VVER 440 reactors, reported to be reasonably reliable and economical, will be installed in East European nations. The question is whether the Czech works will have the capacity for exports, and whether small reactors produced there will gain a reputation for reliability .51 In addition, India has built a 235MWe heavy-water reactor for domestic use, but it is not attractive for export. The second possibility is that some of the Western firms with design concepts for small power reactors would decide on a commercialization strategy. A handful of companies in Western nations have such design concepts, and if such small reactor designs embodying inherent rather than engineered safety were commercialized, developing countries more See Technology and So+iet Ener~ A valabilit>r (J$ashington, D. C.: U.S. Congress, Office of Technology Assessment, OTA-1f3C-153, 1979), pp. 116, 130, 295. PAGE 370 368 l Technology Transfer to the Middle East concerned with safety in the post-Three Mile Island era might find them attractive. Kraftwerk Union of Germany, for example, has a design for a 400-MWe boiling water reactor that features uncomplicated safety technology. In all cases, however, these designs have not advanced beyond the drawing board, and a major R&D effort would be required in the country of origin to produce an attractive export product. 52 Nevertheless, if small reactors could be marketed near the turn of the century, that could change the prospects for nuclear power in some Middle Eastern countries. Other Incentives for Commercial Nuclear Power Nuclear power plants have two other civilian applicationsto supply process heat for desalination of sea water and in stimulating heavy oil production-which Middle Eastern nations may wish to develop in addition to generating electricity. Nuclear desalination is currently economically feasible only in conjunction with nuclear generation of electricity. While the UAE, Qatar, and Oman conventionally desalt large amounts of water, their electricity grids are too small and poorly integrated for introduction of nuclear desalination plants at the present time. In contrast, nuclear desalination appears more feasible for Saudi Arabia and Kuwait. The only commercially available option for nuclear desalination involves the use of light-water reactors, using backpressure steam or extracted steam. Other specially designed reactors, such as the French Thermos, the Swedish Secure, or Soviet designs, are not currently commercially available. Economic tests of the feasibility of nuclear desalination depend on capital and fuel costs of the nuclear plants versus conventional plants, as well as on water demand and electricity requirements. As a general rule, if nuclear electricity is economically feasible, then the cogeneration of low-temperature steam 53 See .Joseph R. J3gan, Smafl Power Reactors in Less De\eloped Countries: Historical And-vsis and Preliminary .blarket Survey (Westmont, 111,: E;TA Engineering, Inc., 1981), F;xcess steam used in the production of electricity that can be used for other purposes. Al-Khobar Desalination Plant (used in desalination) makes the system more attractive. Small reactors have not been viewed as particularly attractive for desalination. Kuwait, for example, drafted specifications in 1977 for a 40 MWt water desalination and research reactor, but owing to the small scale of the reactor and to its multipurpose usage, the project was canceled when it was determined that the costs per kilowatt would have been extremely high. Use of heat produced in nuclear powerplants for stimulating heavy oil 55 production does not appear to be a major option for Middle Eastern nations. Heavy oils sufficiently viscous to profit from enhanced steam recovery have been discovered in Kuwait and Libya, but they are of only marginal interest for these nations, given the large quantity of proved reserves of conventional oil. Nor would standard reactor designs produce steam of appropriate pressure and temperature to drive the large Middle Eastern oil reservoirs. Uranium Resources Presence of uranium deposits does not provide sufficient economic justification for a nuclear program. The mining and refining are expensive and enrichment is a complex and 54 Power produced in this reactor would ha~e cost ,$1 ~ ~()()(~ Per kWr. See Egan, op. cit., p. 5-1. l~eavy oil is a term used to apply generally to an~r crude oil of less than 20 percent API (or with a spe{ific gravity of (),934 ]r more). PAGE 371 Ch. 9Nuclear Technology Transfers l 369 technically demanding operation; thus, most developing nations with commercial nuclear programs contract for supplies of enriched uranium. Algeria and Morocco illustrate this point. Algeria has the richest reserves of uranium of any Middle Eastern nation. These reserves have been estimated at 26,000 tonnes at a recovery price of $80/kg. 56 Algeria has been exploring for uranium since 1969; the state mining company, Sonorem, is building a uranium mine in Algeria that is expected to open in 1985 and produce 1,000 tonnes annually. Algeria could also produce uranium as a byproduct of phosphate mining, although no plans have been announced to do so. But while Algeria has emphasized its uranium reserves as an asset in nuclear planning, the nation has no commercial or research reactor. Morocco also has considerable uranium deposits, and uranium will be extracted in conjunction with fertilizer production. One plant is being modified for uranium production. When it begins operation in 1985, Morocco will be in a position to export 200 tonnes of uranium annually. Like Algeria, Morocco is also considering nuclear development, but the presence of uranium deposits has apparently not been a major factorin this regard. Total world production of uranium is well in advance of demand, and this situation is expected to continue into the future. 57 Therefore, the attraction of uranium production is no t great for developing nations not already ex porting. Indeed, since all light-water reactor s require enriched uranium for fuel, the purchas e of enrichment services from abroad would stil l be a requirement, even for nations producin g uranium 58 However, uranium production b y nations such as Algeria and Niger, which ar e not parties to the NPT, raises proliferatio n concerns, since they are not covered by safe OF;() ~-uclear pjn[jr~qr ~\genc}. and I.AF; A, {~ranium: lies~}ur[y~q, l~rwiuctjon, :In{i [kmand ( [aris: ( )1+:( 1), 1 9X2). S{w 1 )cpartment f~f l~nfjr~. tlf)rfd [ franium ,Supp)! and 1)(1rnancl: lrn~act on }wier:d Ifjljcic.+ ( Wrash ingtf~n, 1 ). ( (1 s (jf)~ernment lrinting offlc~, 10Hf\), p, ~\6. lhe (A N 1)[) reactor {Jpertites {In natural uranium. eliminating the need for enrichment. guards and could theoretically export to nations having clandestine weapons programs. Alternative Energy Sources -Judgments about nuclear power focus more on the alternative means of meeting electricity requirements than on the presence of uranium or the other commercial applications of nuclear power mentioned above. (The use of nuclear technologies in civilian research programs important for building a science and technology infrastructure will be discussed later in the context of technical manpower considerations.) In the Middle East the obvious alternatives to nuclear power are oil and gas. Cost comparisons between oil and nuclear energy are sensitive to the assumed price of oil, capital costs of oil and nuclear plants, costs of financing, and load factors. Figure 15 illustrates the cost of nuclear power as a function of plant size and load factor. Figure 15. Kilowatthour Cost as a Function of Plant Capacity and Load Factor ) I I s factor I 200 400 600 800 1,000 1,200 Capacity, MW(e) Note Th(s figure IS based on the following assumptions 30 year des~gn [depre c[atlon I I I fe for both 01 I and nuc leaf plants starttng from the date ot plant start up w It h a cost of f Inane Ing of 5 percent per year (In conslant dol Iarsi I nstal led capital cost for 011 plants of $1 000/k W(e) and for nuclear $2 x 104 S /kW(e) where S !s plant capacity in megawatts(e), fuel cost for nuclear of $0 )01 kWh opatlons and rna!nta[nence costs of $75{ kW(capac it yt yr and $40 for nuclear and oll respectively This figure should be re gardpd as IIlustratlve only consldert~q fhe very grea~ uncertainties that must attach to some of these parameters part ic u Iarlv n sta I led capital costs PAGE 372 370 l Technology Transfer to the Middle East The oil-nuclear indifference curve (in dashes) illustrates the relationship between load factor and break-even size for oil versus nuclear plants at two different assumed oil prices. Under the assumptions used, there will bean advantage for nuclear power for conditions to the right and below the oil-nuclear indifference curves. While this figure is merely illustrative, it suggests that if oil is priced at $25 per barrel, oil and nuclear-generated power will be about equally costly if nuclear powerplants of 630-MWe are used at a load factor of 45 percent. As the price of oil declines, the advantages of nuclear power are reduced, but such power is still attractive under reasonable load factors. However, if the oil price drops significantly, as it did in 1983, it will be more difficult to raise the capital to build nuclear plants, and the incentives for developing nuclear power will be further reduced. Comparing gas and nuclear power is a more complex issue because up until 1979 most gas in the Middle East was flared. This occurred because the costs of collecting and transporting gas in the Middle East were extremely high in comparison to its market value in the Middle East. After the oil price increases, however, gas became more attractive in industrial operations such as petrochemical and fertilizer plants. Gas-fired generating capacity is being built while nuclear is not, and in many situations it will have an edge over nuclear power. In addition to cost advantages, gas-fired plants can be installed more quickly, require lower investment, are available in small sizes, demand fewer highly skilled operating personnel, and raise fewer waste disposal and safety concerns. Some experts believe that associated gas may be more profitably used in industrial applications than in electricity generation, since the amount of gas available depends on the level of oil production. 59 The attraction of gas for electricity production is strongest in countries such as Saudi Arabia that have flared gas. There are, however, other potential Photo credit Saudi Arabian United States Joint Commission on Economic Cooperation Solar collector panels of the SOLERAS project, focusing on solar energy research and development uses for gas: in petrochemical production, and (for Algeria) exports. In addition, there is an extensive list of renewable energy resourcesincluding solar energy-for Middle Eastern policymakers to consider. For many developing nations, including those in the Middle East, there is insufficient understanding of the potential role that these sources of energy might play. In the Middle East, some countries such as Iran and Iraq may be able to develop hydroelectric power more extensively. 60 Likewise, some believe Iran, Algeria, and Egypt could use biomass as an energy source. 61 Direct use of solar energy in areas such as the Sahel offers potential for crop drying and other agricultural uses. Other technologies, such as solar photovaltaic systems, are under development, but are comparatively costly. The United States and Saudi Arabia jointly fund a $100 million solar energy research program through the U. S.Saudi Joint Commission; the program includes establishment of a 350-kW power station in a solar village. In Egypt, AID has sponsored research on solar energy for rural development. However, solar energy for rural electrification is a longer term option 59 See T. Stauffer, Oil Exporting Countries Need Nuclear Power, paper delivered at the Uranium Institute, London, September 1982. 6O Dunkerley, et al., op. cit., pp. 160-161. 61 Ibid., p. 178. PAGE 373 Ch. 9Nuclear Technology Transfers c 371 ..... Nevertheless, technical assistance programs that help clarify all energy options make an important contribution. The Economic Rationale for Nuclear Power in Egypt Of all the nations in the Middle East, Egypt currently has the most extensive official plans for commercial nuclear power development. Its electricity grid is one of the largest in the Middle East, and electricity demand grew rapidly during the 1970s. By 1980, the installed grid capacity reached 4.5 GWe. The Egyptian Government has estimated that demand for electricity will grow at an annual rate of 9.9 percent from 1975 to 2000to 12 GWe by 1990 and 26 GWe 2000. Egypts leaders believe that there is a strong economic rationale for nuclear power, based on these projections. Egyptian officials have plans to develop a system for monitoring electricity flows throughout the connected grid at the National Energy Center. When the center is complete, it will have the capacity to accommodate planned nuclear plants, as well as thermal and hydroelectric facilities. Alternative energy sources may be insufficient to meet projected rise in demand. Much of Egypts hydroelectric energy potential is already exploited by the Aswan High Dam (2,100 MWe) and the Aswan Low Dam (345 MWe). The only options for expansion of hydroelectricity include installing additional turbines at the Aswan Dam and constructing three low dams and four barrages (for a total of about 500 MWe). 63 In addition, pumped storage with a potential of 4,300 MWe capacity could be added at seven locations along the Nile. 64 Finally, the Qattara Depression Project, Cited ;n LJ. S. I)epartment of F:nergy, Joint E~qpt-U.S. Report. Lo], 1, op. cit., p. 42. The Pjgyptian Nlinistry of I+; lectricity and E: nergy cites a total capacit~ of 4,7 (iWe for 1980, in .4nnual Repor( of h;lectric Statistics, 19H0, p, 8. For 1981-82, a figure of 5.0 (iifre total electricity; generating capacity is cited in Arab Republic of E;gypt, f~lectrlcit} and I+;ner~r in the .4rab Republic of Egypt, 1983, p. 20, The three low dams could be located at I!sna, Nag Ilammadi, and Assiut. The four additional barrages could be located at Silsila, Qift, Sohag, and Deirot. one pump storage facilit~ was under construction at Port Suez. K, l;. A. F: ffat, H, Sirry, M, F. 111-Foul~, E, fi; l-Sharkaw~, and A. F, fi~l-Saiedi, Projected Role of ,\uclear i)o~er in ll~pt and Problems Encounter-ed in [implementing the First ,Yucltar Ilant (~ienna: 1 nternational Atomic h~ner~ Agenc3, 19. which would involve excavating a canal and generating electricity from the flow of water from the Mediterranean into the depression, could produce 670 MWe by the year 2000. 65 Solar energy and other alternative energy sources can contribute to Egypt energy supply in the years ahead. U.S. AID funding supports a project sponsored by the National Science Foundation on solar energy in the development of an Egyptian village, mentioned above. Nevertheless, while alternative energy sources appear promising for small-scale rural applications, costly large-scale solar programs involving technology now under development would be required to contribute significantly to electricity requirements. Egypt has limited hydrocarbon reserves. Oil exports have been used for export earnings. Production increased from 450,000 barrels in 1977 to 775,000 in 1983. Oil will probably not be used to provide a large amount of new electricity production because it is the mainstay of Egyptian export earnings. Accounting for 37 percent of export revenues in 1978 and 65 percent in 1980, it made up a remarkable 70 percent in 1981. In addition, domestic consumption of oil at highly subsidized prices is increasing at about 12 to 15 percent annually. The nations small coal reserves, estimated at 50 million tonnes, are to be used to replace This project is being evaluated by the Swedish firm Sweco and is estimated to cost $1.2 billion, or approxin~atelJ the amount Egypt plans to spend on its oil and natural gas pr(Jgram from 1982 to 1987. PAGE 374 372 l Technology Transfer to the Middle East coke in the Helwan Iron and Steel Works and to fuel a 1,200-MWe power station planned in the Sinai. Coal mines at Maghara in the Sinai are also being developed to fuel a 1,200-MWe powerplant at El Arish. Egypt has 203 billion cubic meters of gas reserves, which are expected to increase substantially in the next 10 years. A substantial amount of gas could be utilized for electricity generation if the 88 percent of associated gas which is currently being flared were piped to and used in thermal power plants. However, Egypts ability to use this natural gas is severely constrained by a lack of facilities to collect and transport the gas. If Egypts total gas production in 1980 were dedicated to the generation of electricity, about 20 percent of electricity demand for that year could be met. The Egyptians intend to use this gas for other industrial purposes, especially steel production. Egypt situation thus contrasts sharply with that of other Middle Eastern countries where gas production is sufficient to meet all immeTable 87. Range of Projected Author 1980 Shulli (1) diate and even near-term projected electrical generation needs. Gas, nevertheless, represents an important energy source, and additional gas-fired plants are planned for upper Egypt. Even if all of the nonnuclear sources are utilized, if the Egyptian Government projected growth rates for electricity hold, nuclear power may be used to provide a substantial fraction of generating capacity. A joint U.S.-Egyptian study completed in 1979 concluded that 40 percent of Egyptian electricity could be generated by nuclear reactors by 2000. 66 Under high electricity growth rate assumptions, Egypt could accommodate a 900-MWe reactor by 1990. Under low-growth assumptions, which appear more realistic, such a reactor could be installed and not make up more than 10 percent of the grid by 1995. Table 87 presents a summary of the range of projections 66 U.S. Department of Energy, JoirIt EgY@-U. S. RePort, oP. cit. Electricity Demand in Egypt 1985 1990 1995 2000 Capacity (GWe) . . . . 4.460 8.815 15,480 Production (GWh) ... . . 15,518 23,338 34,424 47,847 61,744 Egan (2) Capacity (GWe) . . 4.595 7.36 10.103 13,392 16,769 World Bank (3) Capacity (GWe) ... . . 3,915 6.734 9.708 13.168 (17,870)a Production (GWh) ., . ... 18,430 28,350 39,770 55,780 (78,234) a U.S. DOE (4) Capacity (GWe) . . ... 6.954 22.036 Production (GWh) ., . ... 27,520 88,000 a Calculated using the same growth rate as the Previous period NOTE Assumptions of Electricity GrowthShulli: 1 By 2000 the gross domestic product (GDP) will be divided with 14 per cent from agriculture, 30 percent industry, 2 percent building, 12 percent transportation, 16 percent commerce and 26 percent services (In 1977 it was 29 percent agriculture, 25 percent Industry, 4 percent building, 7 percent transportation 13 percent commerce and 20 percent services), 2 Population growth will be 24 percent from 1980 to 1985 and 23 percent from 1986 to 2000, 3 GDP growth wiII be 82 percent from 1981 to 1985, 7 percent from 1986 to 1990.6 percent from 1991 to 1999, and 47 percent from 1996 to 2000, 4 Electrical consumption by 2000 wiII be divided, with industry requiring 56 percent, housing 21 percent; transportation, 8 percent agricuIture 8 percent, and other, 6 per cent (1975 Industry, 49 percent, household, 20 percent transportation, 2 percent, agricuIture, 8 percent, and other 21 percent) 5. Natural gas will provide 52 percent of electrical production by 2000, 6 Nuclear power wilt provide 2500 MWe by 2000 Egan: Electricity growth assumptions 17 percent 1979-80; 9.2 percent, 1981-85.72 percent, 1986-9058 percent. 1991-95, 46 percent, 1996-2000, World Bank: Electrical growth assumptions 11.4 percent 1980-85 75 percent 1985-90 63 percent 199195 U.S. DOE: 1 Electricity consumption by the year 2000 will be 54 percent industry 6 percent agriculture 7 percent transportation, 7 percent public utilities, 22 percent residential 4 percent other, 2 Electrical growth assumptions 1975-85127 percent, 1986.20008 percent SOURCES 1) Abdul Rahman Shunt A Energy Consumption Forecast for EJypt and Sudan !{1 the Year 2000 a paper presented at the Second Arab Energy Conference, Qatar, Mar 6, 1982, 2) Joseph R Egan, Smal( Reactors (n Less Developing Countnes Hlstor/ca/ Arra/ysfs and Pre//rn~r?ary Market Survey (VVestmont Ill ETA Englneertng Inc 1981) 3) World Bank, Erergy In fhe Deve/op/ng Cour?tr/es (World Bank Paper August 1980), background {n formation prepared for the paper and energy analyses 4) U S Department of Energy, ./o/nf Egypf/Un/fed States Report on Egypt/Unf(ed Sfafes Cooperaf~ve Energy Assessment 5 VO l S (Washington, D.C. U.S. Government Printing Off Ice, 1979) PAGE 375 Ch. 9Nuclear Technology Transfers l 373 of Egyptian electricity demand. Even if Egyptian electricity demand rises at a low rate, it appears that the rationale for nuclear power may remain comparatively strong in Egypt. Lower oil prices, however, enhance the attractiveness of oil and reduce the ability of the Egyptian Government to finance these projects. In the final analysis, the ability of Egypt to develop nuclear power depends on its ability to obtain subsidized financing. Indeed, it is precisely the reluctance of the U.S. ExportImport Bank and financing agencies in other Western supplier nations that has repeatedly delayed the project. As a result, U.S. and Japanese firms teamed up in 1983 to bid jointly. Practically speaking, the politics of export financing 67 may influence Egypt nuclear program more than the various energy-economic considerations mentioned above. Irans Prerevolutionary Nuclear Program Irans experience with nuclear power development prior to its revolution illustrates the susceptibility of a large nuclear program to being criticized as unsound for economic, political, and infrastructure reasons. 68 While the ambitious nuclear program initiated under the Shah was ended by the new revolutionary government, criticism of the program had already begun. Irans nuclear program was viewed by critics as grandiose and wasteful, indicating that nuclear power development is a critical choice even for oil-rich developing countries. Irans 1974 program called for rapid construction of nuclear plants so that 23 reactors would generate 40 percent of the nations electricity by 2000. The Atomic Energy Organization of Iran saw its budget grow from $30 million in 1975 to $1 billion in 1976. By the end of the 1970 s, the Shahs nuclear program ital~r-reportedl? promised to contribute 40 percent of the cost of building a nuclear power station. according to a protocol with h~gvpt signed in earl} 1984, H7his discussion of Iran debates about nuclear power is based on Bijan Mossanar-Rahmani, Ener~ Polic~ in lran: Domestic Choices and International Implications (New York: Pergarnon l)ress, 1981). p. 105. came under direct attack by the revolutionary opposition on a number of grounds. Some criticisms focused on political factors. A small group of energy specialists and economists (from both the government and the university community) charged that a small group of foreign businessmen and advisors close to the Shah who were not competent to make technical judgments had spearheaded the nuclear program. The royal family, they said, had reaped huge commissions amounting to 20 percent of the total contracts, or several hundred million dollars per reactor. Other criticisms, on economic grounds, highlighted the exorbitant cost overruns in the construction program. Construction costs on two planned French-built reactors grew 90 percent, interest payments included. Additional costs for consultants fees, training, and installing reserve capacity and high-voltage transmission lines could have added several billion dollars to the cost of the first four reactors, according to some estimates. At a time when oil export revenues declined and budget trimming was required, the costs of the nuclear program became a problem, Construction by the West German firm Kraftwerk Union, however, progressed on two power reactors at Bushehr to the point where the steel dome was complete on one reactor and partially complete on the other when construction was interrupted after the revolution, Part of the cost problem stemmed from Irans underdeveloped infrastructure. With a shortage of reserve capacity and problems with brownouts, the additional reserve capacity to back up shutdowns of the 1,000-MWe reactors would have been extremely costly. In addition, critics worried that the Bushehr plants were not designed for a region with seismic activity. Furthermore, the water temperature and salinity of the Persian Gulf created additional design problems relating to cooling capacity and increased erosion. Most important, perhaps, was the long distance from the Persian Gulf to the main centers of industrial electricity consumption and the inadequacy of the national grid. Enormous PAGE 376 374 l Technology Transfer to the Middle East costs to build high-voltage lines, and inevitable transmission losses, reduced the attractive ness of plants sited along the Persian Gulf when these factors were taken into consideration. The Ministry of Power, not the Atomic Energy Organization, was responsible for transmission lines. At the end of 1977, Tavanir, the company contracted by the Ministry of Power to build the transmission and distribution network, had not yet begun construction on the 400,000-volt lines to carry power from Bushehr to other parts of Iran. Gg Despite statements by Iranian leaders, such as Rafsanjani in 1982, that Iran must promote technical independence and reinvigorate the Bushehr reactors, only limited budgetary allocations have been made under the revolutionary government to support these statements. The case for nuclear power in Iran has not rested on strong economic arguments in the past, nor is it likely to in the future. The Iran-Iraq war may determine the future of the Bushehr reactors. Energy resources have been targets of Iraqi air strikes. If Irans large hydroelectric Karun River and Dex plants were hit, the case for nuclear power might be stronger. On the other hand, the Bushehr plants might also be damaged. Most certainly any revived Iranian nuclear program would be smaller than that envisioned under the Shah. The West German firm Kraftwerk Union agreed in 1984 to conduct a feasibility study of the Bushehr site, but announced that it would not complete construction until the end of the war with Iraq. 70 Other Nations Prospects for nuclear power in Saudi Arabia are very uncertain. The nation has abundant oil and gas deposits, and large infrastructure projects have been scaled back in order to promote manpower development and completion lVucJeonics Week, Feb. 2, 1978, p. 10. ~OIt wag reported in December 1983 that Kraftwerk union had signed a contract to inspect the Bushehr site. See A4idcile East Econormc Digest, Dec. 9, 1983, p. 12. Kraftwerk Union spokesmen reiterated intentions to delay resumption of construction until the end of the war in communication with OTA, May 1984. of current projects. While estimates of installed electrical capacity differ widely, production of electricity has grown rapidly during the last decade. By 1985 the Saudi Arabian Government expects to have 12.4 GWe of installed capacity, not including considerable additional capacity of at least 4 GWe under the Saline Water Conversion Corporation. Currently, there are three major disconnected load centers and several smaller disconnected regional centers. However, the Eastern Province alone has a large grid system with an installed capacity of approximately 3 GWe, and another 4 GWe under construction. (The 1980 installed capacity figure for Saudi Arabia in table 85 reflects this capacity. ) Because most of this electricity in the Eastern Province is generated to desalinate water, it is possible that a nuclear reactor of 900 M We could be accommodated by 1990. However, no firm nuclear plans have been made in Saudi Arabia. Algeria also has no firm plans for nuclear power. The nation has a grid that connects the main population centers along the Mediterranean coast. Algerias primary near-term option for production of electricity rests on the use of its large natural gas reserves and large existing natural gas collection and distribution system. Algerias production of natural gas in 1980, for example, could have generated five times as much electricity as was consumed during that year. Algeria could have 4.3 GWe of installed capacity by 1990 and 10 GWe by 2000; this would be sufficient to accommodate a 900-MWe reactor not exceeding 10 percent of the grid by 2000, but not before. Given the current financial constraints facing Algeria, the availability of electricity generation from use of its abundant gas, and the results of preliminary studies by the IAEA and SONEGAZ which indicated that nuclear power was not an economic solution for generating electricity, it is not likely that Algeria will have an operating nuclear power reactor prior to 2000. Kuwait has a relatively large electricity grid and could theoretically accommodate a 900 MWe reactor by 1990. Despite the fact that PAGE 377 Ch. 9Nuclear Technology Transfers l 375 a number of feasibility studies have been carried out, Kuwait has no definite plans for a nuclear power program. Anticipated declines in the historic rate of growth in electricity consumption and budgetary constraints indicate that Kuwait is not likely to have a power reactor until the mid-1990s, at the earliest. For Iraq, even more than Iran, the Iran-Iraq War provides a strong constraint on nuclear power development. Iraqs grid is much less extensive. Faced with a severe fiscal crisis and planning uncertainty due to the war effort, it appears highly unlikely that Iraq will acquire a nuclear power reactor until the war is concluded or the level of conflict significantly reduced. In contrast to the situation in Iran, Iraqs gas resources are not sufficient to provide a large portion of electricity generation. TECHNICAL MANPOWE R CONSIDERATIONS: TECHNOLOGY ABSORPTIO N For all the countries of the Middle East, lack of technical manpower is a major constraint on indigenous development of nuclear power. The dilemma for developing nations is that while nuclear power often is viewed as a means to reduce dependence on foreign supplies of energy, a nuclear program inevitably increases dependence on foreign suppliers for materials, equipment, technology, and skilled manpower. IAEA has taken the position that a systematic program for developing requisite personnel, both engineers and technicians, must precede construction of nuclear powerplants. This approach implies a long lead-time, since qualified personnel are scarce in the Middle East. Developing countries likewise have emphasized building their indigenous nuclear technological base as a means to raise the general level of scientific and technological development. An alternative approach is to have foreign contractors build complete turnkey plants. In this case, the vendor is fully responsible for design and construction of the facility, which is operated by the vendor or by an experienced foreign firm, such as Electricit de France (EdF), working in conjunction with the vendor. The turnkey approach normally involves a degree of technology transfer, even though the buyers staff may participate in training programs to only a limited extent during construction work. Technicians continue on-thejob training when the plant is operating. Over time, more host country personnel are trained, partly in the vendor country and partly onsite. In sectors such as national airlines and petroleum refining there is a precedent for such a turnkey approach in the Middle East. While some argue it may limit the training of indigenous personnel, others view it as a means to eliminate manpower as a constraint on nuclear power in developing nations. The indigenous approach is more costly in the shortrunin terms of time and human resourcesthan the turnkey strategy. Over the long run, however, the developing nation that has invested in building a technical manpower base is in the best position to adapt and master advanced technologies. The discussion that follows examines the technical manpower availability and political/ administrative resources of Middle East nations. These factors, in addition to the choice of an indigenous or extended turnkey strategy, determine the ability of Middle Eastern countries to absorb or fully utilize nuclear technology. Manpower Requirements for a Nuclear Program The nuclear industry in Western nations involves an unusually high proportion of scientific, engineering and technical workers. l Few 71 In 1975, 49 percent of the U.S. work force in the nuclear industry was made up of scientists, engineers, and technicians. See Ii. Miessner, 4 ManpowerSources for .Yuclear I)ower Irc)grammes, in I ntemational Atomic I: ntr~q .Agencj., .lfanp~ )l{r[~r Requirements and De\elopment for ,\ucleiir 1)o\~er lrogramrnes: il-oceedings of a S~mposiun], Sa(.la?, .\pril 197$) (Vienna: IAEA, 1980). Another source indicates that tht~ occupational distribution for [J. S. nuclear powerp]ant workers in 197 included 17,4 percent engineer-s, 35 percent technicians, and 2.8 percent scientists, See ,J. S. (hewning, D. 1,, Couchman, and G. 1 I. Katz, hleeting the NI anpower (hallenge in th~~ Transfer of Nuclear Technology\ to I)e\eloping (ountries, in I AkIA, .\ucIear loi+er and Its Fue] (~cle, Irocecldings of a n International Conferenct>, SalLhurg, ,Aust ria. !! a~ 21;], 1 !)77, \ol. 6, pp. 259-272. PAGE 378 376 l Technology Transfer to the Middle East countries in the Middle East have even a limited technical manpower base necessary to support a nuclear program. The exceptions are Egypt, Algeria, Iran, and Iraqwhich have limited technical manpower pools. In examining the technical base, two kinds of considerations are pertinent. One is the quantity and quality of scientists and engineers (high-level manpower), and the other is the quantity and quality of supervisors and skilled craft laborers (technical manpower). Many developing countries in other parts of the world have found that while their scientific base is limited but adequate to support nuclear programs, the scarcity of administrative, technical and craft labor places significant constraints on the operation and maintenance of nuclear powerplants. Leaving aside for a moment the issue of scientists and engineers, the requirements for technical laborers and supervisors are particularly great during construction of a nuclear powerplant. Construction of one 600-to 1,200MWe light-water reactor requires 12 million to 15 million man-hours, including 10 million to 12 million man-hours of skilled labor such as welders, electricians, operating engineers, and quality control specialists. Iran imported the required manpower from the supplier country for its nuclear power construction program. There, the vendor, Kraftwerk Union, brought in most of the skilled labor and practically all of the managerial personnel from West Germany. The bulk of technical labor requirements come during the 5 years before the start of commercial operations. For a plant of 600 to 1,300-MWe capacity, a peak work force of about 5,000 is required for plant construction and manufacture of equipment and components. Utility officials experienced in nuclea r powerplant construction in developing coun tries conclude that first-level supervisors who have 5 to 20 years of experience are particu larly important during the construction phase In the view of U.S. officials working in an international division of a major vendo r company : An adequate craft labor force is not a controlling factor in developing countries becoming self-sufficient, but the development of an adequate first-line supervision is. The needed skilled labor can be drawn from existing resources or by recruiting and training th e available and often highly motivated re sources. Single skills are quickly and readily acquired, [However,] experience has shown that nuclear power plant construction re quires a significantly larger ratio of first-level supervisors to craft than is needed on other heavy construction projects 7 2 After the plant is built, about 300 to 40 0 workers may be needed to operate it, depend ing on the type of reactor 73 IAEA spokesme n emphasize that developing nations ofte n underestimate the requirements for highl y skilled manpower needed to ensure safety and reliability in nuclear plant operations. Even fo r turnkey plants, there is a need for a core o f indigenous qualified manpower from the be ginning of the planning for a nuclear powe r project. 7 4 In addition to requirements fo r scientists and engineers, about one-quarter o f the operating personnel require specialize d training specific to nuclear plants in areas such as radiation protection, nuclear chemistry, and operations. The types of other personnel required are similar to those needed for an oil-fired plant, but the general capabilty of all technicians, especially the maintenance personnel, must be higher in order to ensure safety and reliability of operations. In most developing countries, additional personnel must be trained to allow for back-up and attrition, meaning that the first powerplant may demand twice as many technical personnel as a conventional powerZllavid R. Zaccari, Francois R. Martel, and Eric L. Westberg, Establishing a Nuclear Program: Some Perspectives, a paper presented at Montevideo, Uruguay, May 12, 1980. TslNhen Offsite per90nnel are taken into account, 600 to 900 personnel may be required to operate a nuclear plant in the United States. The Connecticut Yankee 580-MWe pressurizedwater reactor in 1981 had a staff of 387 onsite and 187 off site personnel. See Lelan F. Sillin, Management Initiatives Manpower, Chief Executive Workshop, Institute of Nuclear Power Operations (INPO), Sept. 1, 1981. 741. Mautner-Markhof, Manpower Development for Nuclear Power, in Manpower Requirements, op. cit., p. 359. PAGE 379 Ch. 9Nuclear Technology Transfers l 377 plant of the same size. Many of those in the specialized technical category must be grounded in the basics of engineering, including computer science, while those in the second category can often be trained on the job. The importance of supervisory and skilled craft labor to the operation of a nuclear powerplant cannot be overemphasized. South Korea, for example, found that it had the core group of nuclear physicists needed for scientific research but lacked the welders and specialized technicians needed to build reactors. Major suppliers of reactors provide training as well as services to deal with special problems as they occur in the operation of a reactor. In a typical reactor sale, training is provided during the 6or 7-year period between the signing of the contract and the startup of a turnkey facility. During this period, a large number of people are trained in a wide range of skills, from graduate engineer to nondegree-holding operators. Westinghouse, for example, typically brings hundreds of local engineers who must be fluent in English to the United States for training, While the recipient may purchase simulators at a cost of $7 million to $10 million to train personnel in the host country, it is generally believed that a country should have more than one power reactor in operation to justify such an investment. Eventually, such training programs may evolve into a means for more extensive technology transfer. Recipients wishing to acquire the ability to design and fabricate equipment and construct facilities may seek to purchase the technology itself. If the supplier agrees, licensing agreements could be worked out with the respective nuclear organizations in the host countries, and design groups from the host country might work alongside supplier firm personnel in the United States. This level of technology transfer normally occurs only after the recipient has built up considerable experience in operations and maintenance. Based on experience in the United States, once a nuclear powerplant is built, most of the operating staff have practical training and experience but not necessarily a professional scientific education. While a developing country may have a relatively large pool of technical labor, operating and maintaining a nuclear plant requires considerable additional training in specialized areas such as health and safety, instrument calibration and repair, quality assurance, and nuclear records. As noted earlier, at least a quarter of the technical work force require specialized training in an engineering-based curriculum. Requirements for back-up staff, and the need to bring together individuals who can work together as a team, mean that relying on indigenous labor would be viable for Middle Eastern nations only over a long-term period. All the Islamic nations of the Middle East that seek to develop nuclear power will have to depend on foreign vendors for a considerable period of time after startup of facilities for training of personnel, spare parts, and repair. Egypts decision to purchase its first nuclear reactors on a turnkey basis reflects a recognition that it would now be impossible to construct and operate such a facility with only indigenous personnel. Operating a nuclear power reactor does not require a pool of research scientists trained in fields such as nuclear physics. 75 However, scientists and engineers are needed to run the regulatory and pl anning organizations that administer nuclear programs in developing nations. In addition, without a scientific and engineering research sector, it is unlikely that a developing nation would be able to surmount the turnkey stage of comparatively low-level nuclear technology transfer and move into independent large-scale design and fabrication of equipment, including both commercial and military applications. Because nuclear programs require long leadtimes, and because they imply a trend toward electricity-based industrialization, the ability of highly trained scientists and engineers to See Ian Smart. The Consideration of Nuclear Power, in .James Evert Katz and Onkar S. Marwah, Nuclear Power in Developing Countries: An Analysis of Decision-Making (I.exington, Mass,: Lexington Books, 1982), p. 152. PAGE 380 378 l Technology Transfer to the Middle East work with political leaders in establishing nuclear program stability and continuity is a key requirement for developing nations. It is not enough that a country possess a large pool of academic research scientists: even more critical are individuals with specialized advanced education who can act as planners and managers. The highly trained scientists and engineers play key roles in assuring the political/ administrative success of nuclear programs. Middle Eastern Nations With Comparatively Large Technica l infrastructure s In contrast to Israel, the nations of the Islamic Middle East have limited technical manpower infrastructures. Israeli scientists, engineers, and technicians are among the best in the world, and Israel has the technical capability to support the most advanced nuclear technologies. Israel, then, is in a situation completely different from the countries of the Islamic Middle East. Egypt.Of all the Islamic nations in the Middle East, Egypt has the largest pool of scientists and engineers. The Egyptian Atomic Energy Establishment was formed in 1955, almost three decades ago. Even so, a lack of appropriately trained technicians precludes the possibility of Egypt developing commercial nuclear power on its own for some time. Egypts experience is especially significant, since other nations in the region face even more severe manpower problems. The 2,000 Egyptians at the nations nuclear research center are far fewer than the 18,000 people included in the scientific and technical staff of the Indian Department of Atomic Energy. 76 It has been estimated that Egypt has almost 1,000 nuclear physicists with doctors or masters degrees. 77 In 1980, the Inshas Nuclear Research Center employed approximately 2,200 people, including 500 physicists and .. see Richard P. Cronin, Prospects for Nuclear Proliferation in South Asia, The Middle East Journal, vol. 37, No. 4, autumn, 1983, p. 597, for figures on Indian personnel. 77 Mohammad E1-Sayed Selim, Egypt, in Katz and Marwah, op. cit., p. 152. engineers, 200 of whom held doctorates. 78 However, these scientists have been criticized for their strong academic orientation by those who would prefer that they contribute more directly to the establishment of a nuclear power program. The Egyptian nuclear scientific community is neither well-integrated nor supported with financial resources adequate for the large nuclear program envisaged. Faced with a lack o f adequate research facilities, Egyptian scien tists have been forced to accept teaching posi tions in Egyptian or other Arab universities The Minister of Electricity called on thos e scientists working abroad to return home t o take part in the nuclear program, but appar ently few have done s 0 7 9 Major decisions about nuclear power i n Egypt have been taken at the highest politi cal levels. The Higher Council for Nuclear Energy (HCNE), formed in 1975, is the formal de cisionmaking body, composed primarily o f politicians. President Sadat himself, in consul tation with the HCNE, made the decision i n 1975 to pursue a commercial nuclear powe r program. Critics of the program, however, in clude university professors and politician s from opposition parties such as the Socialis t Labor Party .60 Three state corporations pos sess the major responsibilities for carrying ou t the program, but they have been periodicall y reorganized, and the advice of the technical experts in these agencies has not always bee n heeded by politicians in making decisions Some observers say that the Egyptian Atomi c Energy Corporation, one of these three, wa s not fully consulted about a plan to store Aus trian nuclear waste in Egypt, which was late r abandoned 8 1 On rare but significant occasions, such a s the opposition of people in the Alexandria area 7Louise Lief, Egypt Reviews its Stance as MidEast Nuclear Arms Swell, Christian Science Monitor, Aug. 18, 1980. See also U.S. DOE, Joint Egypt-United States, vol. 5, op. cit., p. 17. g See Selim, op. cit., p. 153 and Abdel-Gawad Sayed, The Reality of the Arab Nuclear Capability, A1-Mustabkba/ AlArabi, January 1980, p. 162, (translated and quoted in Selim). Ibid., p. 148. ] Ibid., p. 147. PAGE 381 Ch. 9Nuclear Technology Transfers l 379 to proposed local siting of a nuclear plant, nuclear policy choices have become matters of public debate. In that case, President Sadat himself ordered suspension of siting plans after the Alexandria council passed a resolution rejecting the plant. In Egypt, where professional engineering and scientific authority has long been politically suspect, scientists and engineers have played a much less important role in giving technical advice than their numbers might suggest. 82 Iran. In comparison to Egypt, other Middle Eastern countries face even more severe constraints on nuclear technology transfer by virtue of their small technical manpower pools. In Iran, where the Institute of Nuclear Science was established in Teheran in 1958, it is doubtful that the revolutionary government will be able to launch a new nuclear program based on indigenous technical expertise, as the head of the Isfahan Nuclear Technology Center has advocated. 3 Owing to political, social, and economic dislocations of the revolution and the war with Iraq, a revised Iranian nuclear program would have to start off with only a fraction of the prerevolutionary technical base. In the 1970s, hundreds of Iranian students were trained in the United States and Europe in nuclear-related fields, but many of these technicians and scientists fled from Iran during the revolution. The revolutionary government has passed legislation encouraging them to return, offering the incentive that their property holdings will be guaranteed. However, there is no evidence that this group has returned. Irans technical manpower base is thus currently weaker than it was prior to the revolution. Therefore, despite recent indications that Irans leaders have begun to consider completing the Bushehr power reactors, it appears that inadequate local manpower will For a discussion of the limited role technical advisors played in the decision to build the Aswan Dam see Clement Henry Moore, The Politics of Technical Consultation, Images of Development: Egyptian Engineers in Search of lndustry (Cambridge, Mass.: MIT Press, 1980), pp. 156-165. See Es fahan Nuclear Technology Center Reactivated, reported in JPRS, Nuclear Development and Proliferation, No. 138, Apr. 14, 1982, pp. 26-27. remain a constraint, particularly if Iran should emphasize a program based on independent development of nuclear power. Iraq.Iraq has commi tted itself to a nuclear research program and has acquired a number of operating research reactors and a laboratory-scale reprocessing facility. It is impossible to gauge precisely the number of Iraqi nuclear scientists and engineers, but they number far fewer than those in Egypt. Currently, education and training in nuclear fields is limited to undergraduate studies in Iraq, and for the foreseeable future Iraq will depend on foreign countries such as France and Italy for training. Italy agreed to train 100 Iraqis in the fuel cycle labs they provided, and the French agreed to set up a nuclear university at Tuwaitha to train 600 scientists and technicians. While information concerning the quality of current programs is not available, these assistance programs have not been officially discontinued in the post-Osirak period. The combined impacts of the Iran-Iraq War and Saddam Husseins imprisonment of members of the nuclear community have resulted in a setback to the nations nuclear program. 84 Iraq, through a technical cooperation agreement with Brazil, is acquiring training, uranium exploration technology, and engineering services. Because Brazil is not a signatory to the NPT and the country has received nuclear technology from West Germany, West Germany negotiated a bilateral nonproliferation provision with Brazil which extended safeguards over West German technology retransferred by Brazil. While it appears that Brazil did not transfer any West German know-how, Brazils position as an importer of Iraqi oil raised concerns about the possibility that Iraq might receive sensitive technologies from Brazil not covered in the Brazil-West Germany accords. 8s See [J. S. Congress, Senate, AnaJ\7sjs of Six Issues About Nuclear (apahilities of India, Iraq, l;itj~a and Pakistan (Nashin#mn. 1). (.: [J. S, (lo~rernment Printing office, 1982); and lew Scientist, Aug. 28, 19HO), p. 635. See also Richard Mrilson, op. cit., for a report on a \isit to Tuwaitha in earl~ 19K3. See Flrazil and Iraq Signed a Nuclear Cooperation Agreemerit, Nucieonics Week, vol. 21, Jan. 17, 1980, p. 10. PAGE 382 380 Technology Transfer to the Middle East Other nations such as West Germany and Sweden have agreements with Iraq that include training; however, it appears that far fewer Iraqi students have studied nuclear engineering in Western countries than have Egyptians and Iranians. In 1981-82, for example, the Institute for International Education Survey showed that five Iraqi students were studying nuclear engineering in U.S. universities, four at the graduate level. 8G Iraqs cooperative agreements with the Soviet Union are still valid, and the number of Iraqis trained in the Soviet Union is considered to be significant. Algeria. -In Algeria a nuclear research organization was set up in the mid-1960s, and education in physics, chemistry, and nuclear engineering is available throug h the undergraduate level. Algerias Center for Nuclear Technology and Science (CNST) is developing a broad-based nuclear science research program that provides Algeria with the fourth largest pool of nuclear manpower in the Middle East. The center has research divisions working on uranium ore processing, fuel fabrication, reactor engineering, nuclear physics, applied nuclear research, and health physics. It employs 170 scientists and has a total staff of 500. CSTN spends an estimated $9 million annually and operates two Van de Graaf accelerators (3 Mev and 2 Mev). 87 Algeria has tentative plans to build a nuclear research center at Ain Oussera, but no announced plans to expand graduate-level education at the new technical universities that are to be built. As a result, most advanced training in nuclear fields takes place outside Algeria, in Western nations. The nation has technical cooperation agreements with Belgium, Brazil, and France. In years past, the Soviet Union provided some limited nuclear assistance, but there is no indication that significant cooperation still Institute of International Education, Detailed Cluster Report on Nuclear Engineering, correspondence, Feb. 1, 1983. see Cooperation is the Ke~ to Arab Nuclear Development, Nuclear En~neering International, January 1982, p. 14. See also, papers by Adnan Mustafa and Adnan Shihab-Eldin for the Second Arab Energy Conference, Doha, Qatar, Mar. 6, 1982. occurs. Given the extreme limitations to training programs for advanced technicians and the absence of a formal decision by Algeria to emphasize nuclear technology acquisition, it appears that Algeria might develop the manpower base required to operate nuclear reactors built on a turnkey basis and the skills needed to support limited uranium mining-all by the turn of the century. However, advanced training will entail foreign study for the next 20 years. Limited Technical Infrastructures in Other Middle East Nations.In contrast to Egypt, Iran, Iraq, and Algeria where a small technical infrastructure exists, Libya and other Middle Eastern nations have much more limited technical manpower bases. In Libya, despite a high-level political decision to acquire nuclear technology, mixed results have been achieved-owing primarily to the reluctance of foreign suppliers to involve themselves and to Libyas comparatively late start in the early 1970s. Unable to acquire technology from many Western nations, Libya has relied primarily on the Soviet Union and Belgium. The Tagiura Nuclear Center near Tripoli was built with Soviet assistance and a 10-MWt research reactor, fueled with approximately 3 kg of 80 percent enriched uranium, was provided. This reactor went critical in late 1981 or early 1982, but reportedly experienced some startup difficulties. 88 Libya has received assistance from the Belgian firms Union Mirac and Belgonucleaire for uranium exploration and fuel fabrication. It is also negotiating with the Soviet Union for a 440-MWe reactor, which would probably be imported on a turnkey basis using skilled labor from Bulgaria and Yugoslavia. As mentioned earlier, a Belgian firm may participate in the power reactor project 89 Given its lack of facilities for advanced study in nuclear fields, Libya will be dependent on study programs abroad, particularly in Eastern bloc nations, for many years to come. -. n See Zivia Wurtele, Gregory S. Jones, Beverly C. Rowen, and Marcy Agmon, Nuclear Proliferation Prospects for the Middle EasI and South Asia (Marina Del Ray, Calif.: Pan Heuristics, 1981 ). 6g Robin Miller, Nuclear Plans Outlined, Jamahiri-yah Review, No. 22, March 1982, p. 17. See footnote 9. PAGE 383 Ch. 9Nuclear Technology Transfers l 381 This discussion underscores the weakness of the nuclear technical manpower base in the Islamic nations of the Middle East. All of them, except Iran under the revolutionary government, have publicly committed themselves to a strategy of near-term reliance on foreign suppliers rather than attempting a purely indigenous route. (And in Iran it is doubtful that the rhetoric can be translated into practice. ) Because of their limited technical infrastructures, none of these nations can construct, fuel, operate and maintain nuclear powerplants without considerable foreign assistance at this stage. Bilateral Nuclear Cooperation Nuclear technology transfer, particularly the training component, has occurred most often in a bilateral context. Normally, governments establish bilateral nuclear cooperation agreements that open the door for commercial sales and training programs. The United States has established bilateral agreements for nuclear cooperation with a number of Middle Eastern nations. A bilateral agreement was signed with Iran in 1957, and a revised agreement was negotiated but not signed prior to the revolution in Iran. The United States provided technical assistance though its Atoms for Peace Program. Under that program, a total of about 230 people from Egypt, Iran, Iraq, Jordan, Kuwait, Lebanon, Libya, and Saudi Arabia were trained. More than half were Egyptians, and the total number of trainees was far smaller than that for countries such as India (1,104) or Taiwan (713).90 The United States has a few programs in the nuclear field with Israel; the Nuclear Regulatory Commission (NRC) has a 5-year agreement to exchange nuclear safety and environmental information with Israel. g] The most important bilateral agreement in the nuclear field with any country in the Is90 See U.S. Congress, Joint Committee on ~~t~mi~ Energy, S. 1439: Export Reorganization Act of 1976, hearings, 94th Cong., 2d sess.; Mautner-Markoff, op. cit. U.S. Congress, Committee on Science and Technolo~, Science, Technolo~r and .4merican Diplomac~ (Mashington, D. C.: U.S. (;overnrnent Printing Office, 1982), p. 174. lamic Middle East is the one with Egypt. In 1981, the United States and Egypt signed a full nuclear cooperation agreement that contains strict provisions concerning controls and safeguards. Programs sponsored under this agreement have included special attention to safety issues. Egypts decision to ratify the NPT and its willingness to accept bilateral controls opened the way for more extensive technology transfers. The bilateral agreement between the United States and Egypt has thus contributed to U.S. nonproliferation policies. Many other supplier nations have also established nuclear cooperation agreements with Middle East nations. Bilateral cooperation agreements provide the assisting nation with a measure of influence over the nuclear program of the recipient in exchange for helping the recipient develop indigenous technical capabilities. The inability of the U.S. ExportImport Bank to finance Egyptian reactor sales is seen by some as evidence that cooperation is limited, posing a significant problem for Egypts leadership. Middle Eastern Students in the United States As discussed in chapter 13, foreign student enrollment in U.S. educational institutions may be an important channel for technology transfer. To date, comparatively few Middle Eastern students have been enrolled in technical fields, but this pattern is likely to change as those students who first came to the United States in the late 1970s begin to consider advanced graduate training. An increasing number of engineering graduates from the 30 U.S. institutions which offer degree programs in science and engineering are foreign nationals. The Federal Government has not collected data on the exact numbers of Middle Eastern students by fields of study enrolled in such U.S. programs, but of the almost 62,000 foreign nationals who received science and engineering doctorates between 1960 and 1981, there were 1,600 IraSee ~. Henry M. Schuler, Will ~lgypt Be Denied its Peace Di\~idend? American-Arab Affmrs, No. 7. winter 1983-84. PAGE 384 382 l Technology Transfer to the Middle East nians, 500 Iraqis, and almost 1,400 Egyptians. About one-third of these degrees were awarded during 1960-81 in engineering, of which about 1,000 were awarded to students from Iran, Iraq, and Egypt. These numbers are far smaller than the numbers of students from the East Asian region (about 15,000) who earned similar degrees during the period. 93 In 1981 alone, 189 Iranians, 26 Iraqis, and 77 Egyptians were awarded doctorates in all science and engineering fields from U.S. institutions. In the more specialized fields of nuclear engineering and physics, fewer Middle Eastern students received degrees. Table 88 shows numbers of doctoral degree recipients from these nations for 1981. Middle Eastern students make up only a very small percentage of student enrollment and doctoral recipients in science and engineering. According to data collected by the Institute for International Education, during 1981-82 there were about 20 Middle Eastern students enrolled in nuclear engineering programs. 94 These data are inadequate indicators of Middle Eastern study in technical fields, however, because a doctorate is not a prerequisite for an engineer to function effectively in most developing country projects. The small number of Middle Eastern students enrolled in and receiving Ph.D. in technical fields contrasts sharply with enrollments in all programs. In 1981-82, 326,300 foreign students were enrolled in various programs of education in the United States. Among this group, 74,390 students were from the Middle East. The largest number (35,860) were from Iran, followed by 10,220 from Saudi Arabia, 6,800 from Lebanon, 6,180 from Jordan, and 3,330 from Kuwait. 95 The enrollment of foreign students from the Middle East grew very rapidly during the 1970s. However, only a small number of these students were studying subjects such as nuclear engineering. With the exNational Science Foundation, Science and Engineening Doctorates: 1960-81, NSF 83-309, p. 68. Data provided by the Institute for International Education, January 1983. Institute of International Education, Open Doors: 198182 (New York: IIE, 1983), p. 18. ception of Iran under the Shah, there is little evidence of a directed effort by any Middle Eastern nation to train a large number of students in nuclear engineering or in related disciplines in the United States. In 1983, the Reagan administration issued an order forbidding Libyan students to study nuclear engineering or aviation in the United States. However, officials in the State Department and the Immigration and Naturalization Service were unable to verify estimates that 2,000 students from Libya were actually enrolled in all U.S. programs, much less how many were pursuing studies in nuclear engineering or civil aviation. In August 1983, deportation hearings began for nine Libyan students whose visas had expired. 9G The only other instance of such restrictions on foreign students from the Middle East occurred during the time of the hostage crisis, when an investigation was conducted to verify the legal status of Iranian students studying in the United States. Nuclear technology transfer also occurs through the IAEA. U.S. contributions totaling $5 million in 1981 supported the IAEAs Program for Technical Assistance for Safeguards. This organization carries out training programs in nuclear manpower development in a variety of fields. The organization estimates that its programs have trained about 40 percent of the personnel needed by developing countries. 97 During the 4-year period 1975-78, fewer than 100 people from the Middle East were trained in IAEA programs, with the largest numbers coming from Egypt (23) and Iran (27). IAEA has forecast that no Middle Eastern nation will attain the highest stage of capability (self-sufficiency) in nuclear technology by the year 2000. Also, even under extremely optimistic assumptions concerning growth in nuclear power, only Egypt and Iran might at96 "Libyan Students Held as Risks Freed on Bail; Deportation is Expected, New York Times, Aug. 14, 1983. 97S. B. Hammon, and M. A. Kanter, Nuclear Power: Project Training for Engineers from Developing Countries, ErI~neer,ng Education, January 1982, p. 316. PAGE 385 Ch. 9Nuclear Technology Transfers l 383 Table 88 .Middle Eastern Students Receiving Doctorates in Technical Fields in the United States, 1981 Ph.D.s Country of origin engineering Iran 74 Iraq ., . 4 Jordan. ..., 8 Kuwait ,...., . 3 Lebanon ..., ..., 8 Saudi Arabia .,...,. . 15 Syria .,..., . 1 Algeria . . . . . . . 4 Egypt . 41 Libya, ..,. . 5 Total Middle East ., 163 Total non-U S, citizens .,.., 1,241 Taiwan .,, ..,,..,..,.,,, 201 Physics and astronomy 13 1 1 0 2 0 1 0 1 1 20 715 37 NOTE It IS difficult to determine where these students wiII go after receiving their degrees data is collected well before graduation. Out of 13 students receiving Ph.D.s in physics and astronomy for example 3 planned to stay in the United States 2 planned to return to West Asia and 8 had not made plans when the survey was taken SOURCE Data provided by the National Science Foundation August 1983 tain the level of a confirmed program with two or more plants in operation. 98 While many of these countries are developing nuclear research programs, the quality of these programs varies, and only Egypt and Algeria have established programs that could be considered indigenously based. Given these factors, it appears highly unlikely that any of these Islamic Middle Eastern nations except Egypt will be a position to undertake a reactor project indigenously before the turn of the century, unless there are dramatic shifts in policy. tJ. (sik, Nlanpower Requirements for Nuclear [)ower in I)e\reloping Countries, in I A F] A, ,$lanpower Requirements, op. cit., p. 18. MILITARY APPLICATION S CONSIDERATION S The Middle East is generally viewed as a part of the world where nuclear weapons would be particularly dangerous because of its history of political turbulence and conflict. Tension exists not only between Israel and its Arab neighbors, but also between other states in the region (Iran and Iraq, Egypt and Libya) and within states. The introduction of nuclear weapons could affect the regions balance of power. Moreover, the Middle East is strategically important to the superpowers, whose interests would be affected by the spread of nuclear weapons in the region. U.S. ability to influence events there could be substantially PAGE 386 384 l Technology Transfer to the Middle East reduced if weapons proliferation reduced the willingness of nations in the region to cooperate with the United States or to exercise restraint in their military programs. It seems unlikely that nuclear proliferation in the Middle East would be a stabilizing influence. Arguments about stabilization have been based on the assumption that some states would have a second-strike capability, but the possibility that any country in the region except Israel could develop such a capability in the next 20 years appears remote. In addition, given Israels stated intention not to allow any states in the region to develop a nuclear explosives capability-and its destruction of Iraqs Osirak reactorthe spread of nuclear weapons is almost certain to elicit response by major states in the region. The analysis that follows leads to the conclusion that because of shortages of skilled manpower and the restrictive export polices of supplier nations, most Middle Eastern nations will be unable by themselves to construct nuclear weapons until well into the next century. Nevertheless, political variables will strongly influence the course of nuclear proliferation in the region. If one nation were to demonstrate its ability to use a nuclear device, other nations might try to catch up. Similarly, if supplier nations (including countries such as India and Argentina that are likely to emerge as suppliers) loosened restrictions on nuclear exports, proliferation would become more likely. Intentions While a host of technological, manpower, and financing considerations affect the spread of nuclear weapons, political considerations are paramount. Political factors that stimulate proliferation include the perception that Israel has the technical capability to produce nuclear weapons in a short period of time. It is likely that, barring a lasting peace settlement, the major motivation for weapons acquisition by other countries in the region will be as a deterrent to Israel. A second factor involves concern that a countrys weapons capability is on a par with that of other Islamic countries in the region. Syrias increased interest in nuclear technology may, for example, be due in part to concern about Iraqs program. If Libya acquires a militarily significant nuclear weapons capability, Egypt might reevaluate the direction of its nuclear program. Nuclear cooperation among nations in the region could, under certain conditions, accelerate weapons proliferation. Reported contributions by Middle Eastern nations to Pakistans nuclear program could be motivated by a desire to obtain nuclear technology or by the wish to ensure that the other contributors will not obtain an advantage. Overt proliferation by any state in the region would undoubtedly stimulate activity by others. Finally, if the export policies of supplier nations (including smaller nuclear states likely to become suppliers) become more lenient, the incentives for weapons acquisition will increase. Pace and Nature of Nuclear Proliferation in the Middle East Despite incentives for weapons acquisition, overt proliferation has not occurred. Inhibiting political factors include safeguards and the reluctance of major supplier states to provide sensitive technologies. The perceived fear of the consequences of weapons proliferation, especially for small states and those dependent on geographically clustered industrial or oil facilities, has most certainly acted to limit nuclear weapons acquisition. Another major factor limiting nuclear weapons programs has been the domestic politics of Middle Eastern nations: political leadership has not been strong enough to sustain steady development of commercial nuclear programs, much less to launch highly focused crash weapons programs. Nevertheless, the persistence of deep and costly conflicts such as the Iran-Iraq War might propel leaders to attempt to steal or fabricate unsophisticated nuclear weapons. PAGE 387 Ch. 9Nuclear Technology Transfers l 385 While the existing nuclear weapons states developed their weapons in programs dedicated wholly or substantially to military purposes, and while these nations proved their capability through testing, it appears that latent proliferation in conjunction with small research-scale facilities is the most likely path for nations in the region. (Indeed, Israels assumed capability is based on comparatively small-scale facilities. ) This is the case because, as mentioned earlier, most of these countries are not likely to acquire commercial-scale sensitive facilties and because of the nonproliferation controls of supplier nations. While it is theoretically possible for a state to purchase nuclear-grade graphite or heavy water and attempt to design and build its own plutonium production reactor and a facility for extracting the plutonium, such a project would be difficult for nations with such weak technical infrastructures. In addition, a weapons program that includes facilities such as those listed above would involve substantial importation of equipment and, for all nations except Egypt, of technical personnel; it would be apparent to outside observers that a program was under way. Given these factors, the most worrisome path to weapons capability is the acquisition of small-scale fuel cycle facilities that can be rationalized, more or less reasonably, as logical components of an orderly long-term effort to develop a broad capability for using nuclear power. India represents an extreme example of this path. Some of its power reactors are safeguarded, but not all. India acquired unsafeguarded research and materials-testing reactors, pilot-scale reprocessing plants, and heavy-water production facilities in the 1960s, with substantial assistance from foreign companies and governments. Buying these facilities probably cost considerably less than would have construction of commercial-scale plants. A program of this type, using research reactors, could be comparatively inexpensiveon the order of $300 million. 99 Libya.Among the Islamic nations of the Middle East, only Libya has made an overt effort to acquire nuclear weapons, although there is strong circumstantial evidence that Iraq has attempted to equip itself with necessary facilities. If these nations are categorized as those with high intentions, most of the Islamic Middle Eastern nations should be viewed as having medium or low intentions, based on nuclear technology trade patterns and policy positions. Despite Libyas well-advertised intentions to acquire nuclear explosives and its willingness to use oil money to purchase any type of nuclear technology possible, its nuclear ambitions are severely limited by the weakness of its technical manpower base and lack of coherent planning and research programs. As a result, it is unlikely that Libya will be able to achieve nuclear independence at Indias level for 30 years, Libyas overt designs on nuclear weapons have made supplier nations reluctant to sell, Colonel Qaddafis request for sensitive nuclear technology, and worldwide concern over Libyan-Pakistani nuclear cooperation, prompted the French government of Giscard dEstaing to cancel an agreement to sell Libya a 600MWe reactor in 1975. Libya also failed in its attempt to obtain tactical nuclear weapons from China in the early 1970s and to acquire Indian nuclear explosives and production technology in the latter part of the decade. -99 Vari~~s ~stima~es have been made of the cost of mo~ing to the first nuclear bomb test for a nation with no reactor or nuclear base. These estimates are re~iewed in Gordon W. Smith and Ronald Soglio, Economic Development and Nuclear Proliferation: An Overview, in Dagobert L. Brito, Michael D. Intriligator, and Adele W. Wilk, Strategies for Managing Nuclear Proliferation (Lexington, Mass.: I.exington Books, 1983), pp. 75-76. The authors conclude that the economic costs are less a constraint than the policy costs to less-developed countries of moderate income and population which are determined to acquire nuclear weapons. PAGE 388 386 Technology Transfer to the Middle East Through financial assistance to Pakistan, Libya attempted to obtain sensitive nuclear technology, but relations between the two nations cooled after the fall of Prime Minister Bhutto and under pressure from the United States. Of greatest current concern are reports that Niger has sold at least 788 tons of uranium to Libya, some of which may have been shipped to Pakistan, thus circumventing IAEA safeguards. 100 These sales apparently were ended in 1981, but the transactions raise a number of problems. The uranium could be stockpiled for use in an undeclared facility located either in Libya or abroad. Currently, Libyas ability to acquire sensitive nuclear technology depends to a great extent on the policies of the Soviet Union. If Soviet exports become less restrictive or new suppliers enter the market, Libyas ability to acquire technology might increase. However, it is striking that the Middle Eastern nation most committed to a nuclear weapons path has been so unsuccessful in acquiring sensitive technology. Iraq.The case of Iraq illustrates many of the difficulties in assessing the proliferation potential of individual nations. Although Israel justified destroying the Iraqi Osirak reactor in 1981 on the grounds that it is intended, despite the camouflage, to create atomic bombs, U.S. Government officials stated that the U.S. intelligence community had not firmly concluded that Iraq was, in fact, planning to build a weapon. 101 Public attention has focused on the possibility that Iraq was pursuing a quick-fix rapid weapons building effort, when it appears more likely that the primary thrust of Iraqs program was to acquire nuclear facilities and experience needed to produce nuclear weapons some years down the line after expiration of - It is not clear whether shipments planned for 1981 were completed. If they were, the total shipped would have amounted to about 2,000 tons. See Libya Buys Uranium Secretly, The Times, London, Aug. 29, 1981, p. 4. See Roger Pajak, op. cit., pp. 53 and 56. For a review of the evidence concerning an Iraqi nuclear weapons program, see Jed C. Snyder, The Road to Osirak: Bagdads Quest for the Bomb, Middle East Journal, vol. 37, No. 4, autumn 1983, p. 587. its bilateral accords with the French. The covert and latent nature of the proliferation potential of Iraq underscores the importance of examining the long-term implications of technical infrastructure building. At the heart of debates about Iraqs ability to produce a nuclear weapon are questions of the effectiveness of safeguards. Because Iraq is a party to the NPT, concern about potential Iraqi nuclear weapons proliferation has highlighted uncertainties about the coverage of safguards, Iraqs record of nuclear technology acquisition has led many to question whether a nation might pursue a weapons program while publicly adhering to the NPT, and later abrogate the NPT when it is convenient to do so. Evaluation of Iraqs future ability to produce nuclear explosives requires an examination of the proliferation scenarios considered credible prior to the bombing of the Iraqi reactor. One scenario involved Iraq acquiring sufficient highly enriched uranium (HEU) to make a bomb. Using the IAEA definition of a significant quantity of uranium needed for a nuclear weapon, Iraq would have had to obtain 25 kg of HEU in order to construct a nuclear device. Concern focused on the HEU supplied to Iraq for its two research reactors. France initially agreed to supply 70 kg of 93 percent HEU. HEU of this type could have been used directly in the production of nuclear weapons. This amount would have been sufficient for production of several nuclear devices, but IAEA safeguards and the presence of French technicians onsite would have made diversion difficult, though not impossible. Debates ensued within the French Government about whether caramel, or low enriched uranium, should be supplied as a substitute. Such uranium would have to have been further enriched in order to produce HEU. Ultimately, Iraq rejected this caramel option and the French decided on a compromise plan that involved shipments of HEU in consignments of about 12 kg, sufficient for a core-loading reactor but insufficient for weapons manufac- PAGE 389 Ch. 9Nuclear Technology Transfers l 387 ture, as the reactor was to be operated contenuously. 102 After the destruction of Osirak, the Frenc h promised to assist Iraq in rebuilding the Osirak reactor but French spokesmen reportedly called for strengthened safeguards and the use of low-enriched uranium fuel in the rebuilt reactor. Iraq opposed this, some believe, on the grounds that it did not meet the conditions of the original contract and that the neutron flux resulting would have been lower and inadequate for certain types of research operations. 103 No agreement has been reached at this point, and fuel shipments from France apparently have not occurred. Nor has the Tammuz 1 Osirak reactor been rebuilt. The second major diversion scenario involved the production of plutonium for a nuclear device. This diversion path would not be eliminated with the supply of caramel fuel. Osirak could have been used to produce plutonium by irradiation of uranium targets in the reactor core or by installation of a uranium blanket around the core, According to IAEA sources, removing the reflector elements from the reactor and irradiating fertile elements both inside and outside the core could provide up to one or two significant quantities of plutonium per year, or approximately 8 kg. French physicists estimated that the reactor could produce 3.3-10.0 kg per year; however, the actual amount is dependent on the plutonium production scenario. In a core scenario, uranium targets could be placed in the reactor core and irradiated. Tammuz 1 was designed as a materials testing facility; such a facility in industrialized countries is for studying irradiation of power reacThe French also reportedly irradiated the IIEU, making it much more difficult to use in weapons production. irradiated 1;II U would have to be reprocessed in order to make it usable in nuclear weapons; ~apabili~ies to do so would have been limited by the small size of Iraqs repr~cessin~ laboratories. 3 France, Iraq Un\eil Secret Nuclear Accord, Enera Dai]J, June 19, 1981. More Nuclear Guarantees From Iraq to be Sought, I.e Monde, ,Jan, 18, 1982, p. 7, reported in FIIIS: France, See also Andrew I,loyd, *Can France Stop the 1 raqi flomb?, .\ew .Scienti,st, ,,\pr. 2, 19H2, p. 201. for a report on ~~rench dc~bates on the caramel option. 1Ilans Gruernm, Safeguards and Tamuz: Setting the Record Straight, IAI;.4 Bulletin, Iol, 2:3, No, 4, December 1981. tor construction materials and fuel elements. Substituting uranium would not have been difficult because of in-core inspection limitations. The procedure might have been difficult to detect given the short irradiation time (weeks) required. However, the core size limits the amount of uranium that can be irradiated, making plutonium production cumbersome. I n order to gain 8 kg of weapons-optimal pluto nium, 8,000 to 10,000 kg of uranium woul d have to be irradiated. The IAEA could have detected this activi ty through existing safeguards techniques but sufficient time passes between inspection s to allow the production of some plutonium With the presence of French technicians an d substantial improvements in IAEA inspectio n techniques under consideration, detectio n would have been highly probable The second scenario for plutonium produc tion requires a natural or depleted uraniu m blanket to be placed around the reactor core The length of irradiation is a function of th e neutron flux-that is, the density of neutro n emission from the reactor core. Since the blan ket is outside the core, and therefore farthe r away from the core, there is less neutron flux and irradiation time is longer. In addition greater cooling capacity would probably b e necessary to remove the excess heat generated by irradiation of the blanket. Despite thes e constraints, much more uranium could be ir radiated at one time. The probability of detec tion would depend on how easily the blanke t was installed and removed. However, onc e again, with French technicians present an d IAEA surveillance cameras operating, thi s scenario could have been detected with exist ing safeguards techniques If Iraq had succeeded in irradiating urani um, it would have obtained plutonium, but re processing limitations would have diminishe d the prospect of near-term accumulation of sig nificant quantities of plutonium. The smal l 105 Less optimal plutonium with 0.2 percent concentration would require irradiation of 4 tonnes (metric tonsl of uranium, The light-water reactor design is not a \erJ convenient path to plutonium production because it does not produce the spare neutrons necessar~ for a high rate of plutonium production, PAGE 390 388 l Technology Transfer to the Middle East laboratory provided by the Italians woul d have permitted reprocessing on only a smal l scale Both of these plutonium production scenar ios are constrained by technical factors an d safeguards. For a country with Iraqs limite d technical manpower base, indigenous plutoni um production would have been difficult. Dur ing the nearterm, the presence of the Frenc h and the application of safeguards, as well a s the international attention focused on Iraq would have made diversion of HEU or modi fied usage of the facility unlikely unless Iraq withdrew from the NPT. 10 6 However, the thrust of Iraqs program ma y have been acquisition of nuclear weapons ove r the longer term. Given the presence of French technicians until 1989, it seems likely that th e goal was to buildup a technical capability ove r the near term, leaving open the option fo r weapons production after the departure of for eign advisors and the development of a group of highly trained Iraqis. This long-term sce nario, requiring 15-20 years, would eventually provide Iraq with the ability to develop a nu clear arsenal rather than a few unsophisticated bombs. While some believe it may have set the program back, Israels raid on the researc h reactor thus did not eliminate the long-ter m possibility of an Iraqi weapons program sinc e technical assistance in reprocessing-relate d technology continues. More important in di minishing longer term proliferation prospect s is the combined effect of the Iran-Iraq Wa r and the reported imprisonment of members o f Iraqs nuclear community Before the reactor is rebuilt, a number o f issues will have to be worked out. The French have expressed their intention to extend safe guards and to internationalize the projec t by insuring that the new administrative scien tific director would be a Frenchman or a rep resentative of the IAEA. External Relation s Minister Cheysson has stated that Frenc h [~If the French had been willing to cover up illegal actions by the Iraqis, a prospect feared by Israel, the possibility of detection would have been significimtly reduced. assistance will be resumed only With the "doubling or quadrupling of safeguards.1 7 The case of Iraq illustrates the possibilit y that with combined improvements in fuel an d facility design and in safeguards, the threa t of proliferation could be substantially reduced while retaining a legitimate nuclear program Three changes could enhance this possibility First, reduced enrichment fuels (caramel or sil icide) now under development might be use d in research reactors presently fueled wit h HEU. The use of low-enriched uranium fuel if it could be fabricated to maintain the neu tron flux of HEU, could serve nonproliferation goals 108 Second, a new research reactor coul d be designed to make the installation of a blan ket outside the core virtually impossible. Fi nally, better remote-sensing and inspectio n techniques could upgrade the quality of safe guards. Iran.While it is difficult to ascertain the intentions of the Khomeini regime in Iran con cerning nuclear weapons, it appears that th e pressures of warfare with Iraq may limi t Irans ability to engage in a crash weapon s program. At the same time, its motivation s for doing so may be increased. A sudden up braiding of Iraqs program might stimulate re evaluation by Iran. It appears that the cur rent regime like that of the Shah, ma y emphasize acquisition of sophisticated conven tional weapons. The acquisition of nuclea r weapons would be seen as provocative by th e Soviets. In addition, a restart of Irans nuclea r program would be impeded by the flight of scientists and engineers from the country following the revolution. Syria.Syria was apparently as concerned about the development of Iraqi and Iranian nuclear capability as Israel was. Syrias approach to nuclear development reflects a de () Nuclear Supplies to Iraq Dependent on Tougher Safeguards, France Asserts, Nucleonics Week, vol. 22, No. 26, July 2, 1981, p. 1. [] However, this results in the production of more plutonium. In addition, some experts question whether lower-enriched uranium fuel could be used so as to maintain a high enough neutron flux needed for cutting edge experiments. PAGE 391 Ch. 9Nuclear Technology Transfers l 389 sire not to fall too far behind any of the other Islamic nations in the region. Consequently, setbacks to any of the other programs may mitigate Syrian proliferation prospects, particularly if Israeli capability remains undemonstrated. Syrias important step has been to develop plans for commercial reactors and scientific research facilities, and Syrias military expenditures have been concentrated on maintaining the front against Iraq and Israel and on local interventions in Jordan and Lebanon. The Soviet Union, Syrias major military supplier, apparently has not provided Syria with sensitive nuclear technology. Syrian capability to produce a nuclear explosive device indigenously will probably not develop until the turn of the century. Egypt.Egypt has a greater technical capability than any other Middle Eastern Islamic nation to develop nuclear weapons if such a political decision were made. However, its nuclear technology purchases indicate that no steps have been taken in this direction, and the nation is generally not considered to be a proliferation threat at present. Egypt rejected a proposal in the early 1960s for a 200-MW natural uranium-fueled, heavy-water reactor that could have produced a large amount of plutonium. The nation currently has no fuel fabrication plans and has concluded that an indigenous enrichment program would not be cost effective. Egypt has little research relating to the front end of the fuel cycle, and no known R&D program related to uranium enrichment. Although the argument has been made that Israel still may pose a major threat to Egyptian security, Egyptian leaders have said little about Israels nuclear capability since the Camp David accords. Whether because Egyptians have chosen a strategy of conventional preemptive attack or because the perceived threat has diminished, Egypt acceptance of the NPT indicates an emphasis on a long-term strategy designed to develop the technological foundation for a nuclear power program. After acquiring a large amount of commercial nuclear technology and considerable experience, Egypt could, of course, move toward a nuclear weapons option later if the political choice were made to do so. 109 However, in order to do so Egypt would have to acquire sensitive facilities. The development of nuclear weapons by Libya, if this were to occur, could seriously alter Egyptian thinking about the nuclear weapons path. Likewise, if Israel demonstrates nuclear capability or is perceived as having expansionist rather than status quo intentions, the pressure to develop nuclear weapons would be increased in many Islamic nations, Egypt probably included. 110 Algeria.Algerias limited nuclear infrastructure precludes indigenous production of a nuclear device until the end of the century. Because Algeria has been moving closer to the West and is unlikely to experience a geopolitical change sufficient to cause it to initiate a crash weapons program, it does not appear that Algeria has made the decision to pursue a weapons path. It could, however, build a broadly based program which could form the foundation for a nuclear explosives program in the 21st century. The nation has not signed the NPT; therefore, in order to import nuclear technology, Algeria may be forced to accede to safeguards. If Algeria exported uranium, it would be under no legal obligation to require safeguards, a situation that could raise proliferation concern in the next century. Saudi Arabia.Saudi Arabia currently has no significant nuclear research facilities or nuclear power plans. However, since the Saudis have the capacity to finance programs in other nations, they are important in the context of Middle Eastern nuclear weapons proliferation. Saudi Arabia has a strong interest in the stability of the Middle East and therefore is likely to view weapons development programs in other states as alarming. It could support regional and global efforts to reduce Israels incentives to adopt an overt nuclear stance; for example, participation in the nuclear programs An editorial writt,en ~J the editor-in-chief of Al Abram ad\ocated ratification of the N PT on precisely these grounds. See Selirn in Katz, op. cit., p, 156. See CSIS, op. cit., p. 56, PAGE 392 390 l Technology Transfer to the Middle East of other nations could be directed at enhancing Saudi Arabias capability to limit the spread of nuclear weapons technology in the region and to ensure the peaceful orientation of such programs. Some believe that Saudi Arabia may have provided financing for Pakistans nuclear program in order to preclude exclusive cooperation between Pakistan and either Iraq or Libya. Assistance to Iraq for reconstruction of its reactor could be given in such a way as to restrain Iraq from producing weapons. Another method would be to emphasize regional security interests through organizations such as the Gulf Cooperation Council as a counterbalance to unilateral weapons production programs in individual states. Other Limiting Factors For Middle Eastern nations wishing to pursue a nuclear weapons path, gaining sufficient weapon-grade fissionable materials (with all the accompanying technical expertise required) presents a more serious constraint than does weapons design or delivery. As Middle Eastern nations develop the technical manpower and industrial infrastructure to produce independently weapons-grade nuclear materials, the design and fabrication of simple, lowyield (10to 20-kiloton) fission weapons will also become feasible. Assuming that such weapons would weigh as little as 1,000 pounds much less than those first produced by the United Statesdelivery using aircraft already in the region would be possible. Therefore, if Middle Eastern nations are able to produce nuclear weapons, they will probably also be able to deliver them with a moderately high probability of success, at least against their immediate neighbors. With small air forces, limited numbers of bases, and limited air defense capabilities, such delivery systems are, however, likely to be quite vulnerable to destruction by preemptive attack, either conventional or nuclear. Given the technical difficulty and additional expense required, initial nuclear capabilities are not likely to be of a secure second-strike character. One final issue is the expense of nuclear weapons programs. Based on historical data, a small dedicated nuclear weapons program would cost about $300 million annually. 111 Such an expenditure would, of course, be more feasible for the richer oil-producing nations, but it would not be prohibitive for many countries in the Islamic Middle East. Four countries-Iran, Iraq, Egypt, and Saudi Arabia could operate such a program over 10 years at a cost less than 3 percent of their annual defense budgets. Table 89 provides cost estimates of a dedicated program for each of the countries, using average annual defense expenditures for the 1970-79 period as a baseline for calculations. Historically, no nation that has developed a nuclear weapons program has spent more than 3 percent of its annual defense on such a program. 112 Some nations of the region could certainly spend more than this amount, but it is quite possible that bureaucratic infighting among military leaders would result if the program were seen to be jeopardizing improved conventional capabilities. As table 89 indicates, the economic constraints would be much greater for phase 2 and 3 programs, which include dedicated delivery systems and development of a secure second-strike capability. These conclusions should not, however, be interpreted to indicate that there is little cause for concern about nuclear weapons proliferation in the Middle East. In the years ahead, as new suppliers enter the market it may well be that developing countries determined to obtain nuclear weapons will be able to acquire the required technical assistance and sensitive facilities more easily. This is a major theme of the section which follows. In addition, political variables will continue to weigh heavily in determining the prospects for proliferation. If one nation in the region were to demonstrate its nuclear capability, this would probably 111 Estimates are based on costs of the Indian Phase 1 program and include costs of heavy-water and nuclear-grade graphite. See Thomas W. Graham, The Economics of Nuclear Weapons in Nth Countries, in Brito, et al., op. cit., pp. 16-18. 112 Stephen Meyer, The Dynamics of Proliferation (Cambridge, Mass.: Ballinger, 1983). PAGE 393 Ch. 9Nuclear Technology Transfers l 391 Table 89.Hypothetical Cost of Dedicated Nuclear Proliferation Program for Selected Countries Percent of defense budget Average annual defense Phase 1 Phase 2 Phase 3 Country expenditure (1970-79) ($300 million) ($2 billion ) ($5 billion) Algeria ., ., ., ., . 447 6.7 44.7 111 Egypt ., ., 1636 1,8 12,2 30 Iran a 7596 0.4 2.6 7 Iraq ., ., 1811 1,6 11.0 28 Jordan . 236 12,7 84.7 212 Kuwait . . 716 4,1 27.9 69 Lebanon . . 97 30.8 205.0 514 Libya, . . . 418 7,1 47.8 119 Morocco. . . . . 478 6.2 41.5 105 Oman ..., . . 530 5,7 37.7 94 Qatar . . 718 4.1 27.8 70 Saudi Arabia . . . 6802 .5 2 9 7 Syria ., ..., . Tunisia ., ..., ..., ., 67 44.0 297 742 North Yeme n 107 27,9 186 465 South Yemen ..., ..., 55 53,7 350 896 USE . . . . . 187 15,9 106 266 Selected countries of proliferation concern Argentin a 1245 2,4 16,0 40 Brazil . . 1785 1.6 11.2 28 India ., ., ..., ., ..., 3111 1,0 6.4 16 Israel .. . 3361 0.9 5.9 15 Pakistan ., . 913 3,3 21.9 55 South Africa ., . . 1410 2.1 14.1 35 South Korea. ., 1739 1,0 11.4 29 a Data for rerevolutlonary Iran. NOTE Phase 1 Acquisition of a few fission devices based on plutonium (includes both demonstrated and bomb In the basement type programs) Phase 2 Acquisition of a thermonuclear weapons capability with a dedicated aircraft delivery system. Phase 3 Development of a secure second strike capability SOURCES US Arms Control and Disarmament Agency World Military Expenditures and Arms Transfers 19701979 (Washington DC US Government Printing Of fice, 1982) Thomas W Graham The Economics of Producing Nuclear Weapons in Nth Countries in Strategies for Managing Nuclear Proliferation, Brito, et al (eds) (Lexington Mass Lexington Books 1983) stimulate weapons programs in other states. Military conflict and political disputes in the region thus heighten the danger of proliferation. Even if a nuclear weapons program were made a matter of highest national priority, no Islamic country in the region is now capable of producing a nuclear device on a wholly indigenous basis within this decade, and most would have difficulty doing so before the turn of the century. Therefore, while political and military conflicts continue in the region, the weak technical capabilities of these nations reduce their ability to obtain weapons-grade materials in domestic facilities and to produce nuclear devices. Egypt, the nation with the strongest technical manpower base, might be in position to independently produce a nuclear weapon by the end of the 1990s if policies were changed to emphasize development of sensitive technologies. With the assistance of foreign experts willing to work in clandestine programs, however, the technical manpower constraints to independent weapons production could be significantly diminished in these Middle Eastern countries. 35-507 0 84 26 : QL 3 PAGE 394 392 l Technology Transfer to the Middle East SUPPLIER COUNTRY APPRoACHES TO NUCLEA R TECHNOLOGY TRANSFE R Because Middle Eastern countries have limited nuclear infrastructures, the possibility for and rate of proliferation will be strongly influenced by the amount and kind of external assistance provided by supplier nations. The policies of the major nations supplying nuclear technology worldwidethe United States, Great Britain, Canada, France, West Germany, Italy, Belgium, Switzerland, the Soviet Union-range from a reluctance to sell any nuclear materials to countries in the Middle East to a willingness to sell sensitive facilities under IAEA safeguards. It is not likely, because of treaty constraints and domestic political decisions, that any of the current suppliers would sell any type of unsafeguarded nuclear facility to the region. Nevertheless, the types of small-scale facilities and the nature of training and technical assistance they are willing to provide will affect the rate at which Middle Eastern nations develop indigenous capabilities to absorb nuclear technologies-both for commercial and military purposes. It is much more difficult to anticipate the policies which may be developed by new suppliers such as Argentina, Brazil, and India, which may enter the market in the years ahead. While the new supplier nations all have limited capabilities to produce nuclear technologies and are not likely to export until the 1990s, the fact that they are not parties to the NPT, and therefore not under obligation to require safeguards on the export of nuclear materials or equipment, makes their policies of particular concern. U.S. POLICIE S While different U.S. administrations have placed emphasis on different nuclear nonproliferation policy issues, American policies in practice have precluded the sale of unsafeguarded facilities or even sensitive safeguarded facilities, such as enrichment or reprocessing plants, to any Middle Eastern country. U.S. sales of major nuclear items such as reactors or fuel have generally been made only to countries accepting full-scope safeguards on their facilities. It appears likely that nuclear exports by U.S. firms will remain comparatively limited to fuel, power reactors, or research reactors. 113 It is not only these treaty and legislative obligations but also bipartisan American leadership in international nonlproliferation efforts that indicate continuation and strengthening of policies designed to limit nuclear proliferation. Amendments to the Export Administration Act passed separately by both the U.S. House of Representatives and Senate in 1983 and 1984 would, if enacted, widen the definition of prohibited nuclear export items. In addition, lower dependence of the United States on Middle Eastern oil nations reduces the possibility that oil leverage could be used to cause serious modification to these policies. U.S. firms such as General Electric and Westinghouse have emphasized sales of fuel cycle services, such as fuel fabrication and spare parts, rather than reactor sales. Therefore, while the subdivisions of these companies producing reactors would obviously benefit from increased reactor exports, the firms are not solely dependent on reactor sales. U.S.-made research reactors are technically and financially competitive on international markets, but in most cases require supplies of 25-percent U.S. policies do not preclude assistance to nations not parties to the NPT, and in recent months nonsensitive spare parts have been provided to such nations in an effort to keep a dialogue open with them, according to administration officials. See, for example, statement by Richard T. Kennedy before the Sub committees on International Security and Scientific Affairs and International Economic Policy and Trade, House Foreign Affairs Committee, Nov. 1, 1983. One type of proposed legislation would extend export restrictions to a broad variety of dual-use items, primarily computers. This legislation would prohibit sales of any dual-use items to nations not signatories to the NPT. Another type of proposed legislation which gained wider support in the 98th Congress would expressly prohibit sales of nuclear components and technology to nonsignatories. (In the view of proponents of the legislation, the fact that such sales are permitted while sales of major nuclear items are prohibited amounts to a loophole which should be closed.) PAGE 395 Ch. 9Nuclear Technology Transfers l 393 enriched uranium. In addition, since 1977, Congress has reviewed all nuclear technology sales involving financing by the Export-Import Bank, with the result that exports of nuclear technologies financed by the bank have declined in recent years. 114 The United States has the most comprehensive export control system covering nuclear equipment and technology of any supplier nation. However, controversy has arisen as to how this system can be strengthened. Recent changes in the policies of the Reagan administration, such as those loosening controls on reprocessing by friendly nations such as Japan, have no significant or direct impact on the nuclear programs of Middle Eastern nations. l15 However, critics worry that this discriminatory nuclear export policy represents a general softening in policy and leaves the door open for reclassification of some developing nations as not being proliferation risks and therefore as potential buyers of sensitive U.S. facilities at some time in the future. On the other hand, under the Reagan administration countries such as Iraq, Libya, and Israel, suspected of developing nuclear weapons, have been added to the list of nations requiring specific U.S. Department of Energy authorization for exports of sensitive nuclear technology by U.S. firms,] As noted earlier, some advocate widening the scope of exports barred to non-NPT signatories (to additional nuclear items, or to a broad array of dual-use items). In neither case is it clear that the prohibitions would, if enacted, have strong or immediate impacts on the nuclear programs of nations in the Islamic Middle East. 117 114 Export-import Bank of the United States, Report to the U.S. Congress on Export Credit Competition and the ExportImport Bank of the United States, December 1982, p, 27, In 1981, authorizations for nuclear power-related exports totaled $212 million, out of $1.3 billion for all energy-related exports. The Export-Import Bank supported no authorizations for nuclear exports in 1982. See, Report to the U.S. Congress, 1983. 115 See Harry R.Marshall, Jr., The Challenge of Nuclear Technology, State Department Bulletin, September 1982. I)OFJ Moves to Expand List of Nations Needing Special (). K. for Nuclear Deals, Inside Energy, .Julj 2, 19H2, p. 4, -l+lffects on (J. S. exports would be more sikmificant. I)uring the ,Ju13T 19/! 1 -,June 1982 period, Israel imported $102 million worth of dual-use equipment, while Saudi Arabiahnolog}r Transfer, Rt.warch }oli(s,~, 12 { 13831, pp. 287-296. for an elahorat ion of this point. PAGE 400 398 l Technology Transfer to the Middle East emphasis on acquisition of nuclear technologies needed for a peaceful nuclear power program indicate an absence of intention to do so.) For nations of the Middle East, financing and delivery systems do not present great obstacles to development of small weapons programs. More important are manpower constraints (particularly in the near term) and political factors, including the policies of supplier nations. Overt proliferation has not occurred in the Middle East. One major explanation is surely that the suppliers have not been willing to transfer sensitive technologies without adequate safeguards. Thus, the nonproliferation regime through which suppliers limit their exports has been the major factor influencing the pace and nature of proliferation in the region. This analysis underscores the critical importance of the new supplier states and the need to bring them into the nonproliferation regime. Incentives for latent proliferation can be expected to persist and grow, however, and safeguards cannot fully guarantee that facilities are used for peaceful purposes. Assuming that the current situation continues and disputes between Israel and its Arab neighbors and among Islamic countries are prolonged, the possibility of nuclear weapons proliferation may increase in the Middle East during the next 20 years. There are two reasons for this pessimistic conclusion: 1) the new supplier states may be more willing to transfer sensitive technologies, and 2) nations in the region will gradually improve the technical manpower and infrastructures required to support weapons programs. Unless a nuclear device is actually used, most of the nations in the region will probably move slowly toward developing expertise and importing facilities needed to start a weapons program. Nevertheless, technological advances such as development of laser isotope separation would increase the potential for nuclear weapons proliferation. While it is impossible to anticipate the way in which nuclear weapons proliferation might occur, there are a number of possibilities. A new supplier state might provide sensitive and unsafeguarded facilities, perhaps in exchange for oil supply guarantees. The reluctance of both Brazil and India to succumb to such pressure exerted by Iraq and Libya suggests that the new suppliers would probably have to perceive a significant threat to their security interests to do so. Likewise, the policies of one of the major Western nations or the Soviet Union now supplying nuclear technologies might change, permitting freer transfer of sensitive nuclear technologies. Still another possibility is that nations might accelerate their progress down the path to nuclear weapons production through joint programs, perhaps involving some of the newer supplier states. On the other hand, it is difficult to imagine which nations might forge a political alliance strong enough to support such a joint program over a number of years. In addition, it is not clear which suppliers might be induced to participate, even under the guise of a peaceful program. A nation or nonstate group might try to purchase or steal a nuclear device. However, nations such as Libya have failed in their attempts to do so. In addition, detonation of a single nuclear device is unlikely to provide the long-term deterrence or defense capability required. The most likely pattern for nuclear proliferation in the Middle East may, therefore, be a slow and indirect path. Given the technical dependence of most of these nations, they may choose to develop their technical manpower bases and import nuclear technologies that can be justified as parts of a peaceful nuclear program, thus increasing their capabilities to institute a weapons program sometime down the road if they make the political decision to do SO Assuming that suppliers continue to require IAEA safeguards, however, the probability would be high that covert weapons production programs could be detected. U.S. POLICY OPTION S OTA's analysis of nuclear technology transfers to the Middle East indicates that while PAGE 401 Ch. 9Nuclear Technology Transfers l 399 U.S. leadership in establishing the nonproliferation regime has been important, only a limited number of policy options are available and even fewer exist that the United States could introduce unilaterally with significant effect. Options that the United States could adopt unilaterally include an extension of restrictions on Government-supported financing of nuclear exports by the U.S. Export-Import Bank. Export-Import Bank support for nuclear sales has declined sharply in recent years, and this is seen by many as contributing to the reduced overseas sales of reactors by U.S. firms. z However, sales of turnkey reactors do not by themselves pose a nuclear weapons proliferation risk, and they contribute only indirectly and over a very long time to building a technical manpower base in developing nations. U.S. firms may form partnerships with foreign firms and seek financing elsewhere. Another possibility might be to selectively subsidize reactor sales to countries that accept stringent nonproliferation restrictions. In this case, nuclear technology would be used as a reward to countries that agree to certain political conditions. Second, the United States could move to limit the number of foreign students admitted to nuclear physics and engineering programs. However, only in the case of Iran under the Shah have large numbers of Middle Eastern students been enrolled in such U.S. programs. In view of lack of precise information about what foreign students are studying, it would be difficult to implement such restrictions. Moreover, because of the apparently small number of Middle Eastern students currently enrolled in such programs, it appears that U.S. leverage is not strong, Associated questions of the freedom of American academic institutions would certainly be raised, and developing countries in other parts of the world might react negatively. Finally, since foreign stu -. hese restrictions do not prohihit U.S. firms from turning to foreign goyernments for financing. I n late 19R3{ it was announced that Westinghouse and the ,J apanese firm NI itsuhishi had decided to bid jointly on the F;gyptian reactor contract, presumably with financing pro~rided h} ,Japanese hanking institutions. dents are free to enroll in programs in other supplier nations, U.S. restrictions would not severely restrict their ability to study in these fields unless other supplier nations instituted similar restrictions. A more positive type of approach that the United States could independently pursue would be an extension of nuclear cooperation agreements with other Middle Eastern nations, similar to that with Egypt. In many respects, the U.S.-Egyptian nuclear accord represents a model by virtue of its detail and the strength of safeguard provisions. One argument in favor of extending such accords is that the offer of assistance to a developing nation might be more persuasive than the threat of denial of U.S. technologies. However, in order for cooperation agreements to be perceived by the recipient as significant, real assistance must be provided, resulting in the recipient developing greater technical capability. Cooperation agreements of this type are most easily negotiated with nations having close relations with the United States. Failure to follow through with cooperative efforts or inconsistent policies (e.g., those limiting financing of U.S. nuclear exports to Egypt) can lead to frictions which may diminish the importance of the agreements. The United States could also make greater efforts to assist nations in developing alternative energy sources and to help them assess the feasibility of nuclear power. Of the possible alternatives or supplements to nuclear power in the region, the role of indigenous natural gas and the potential for greater efficiencies in energy-use merit further analysis on a country-by-country basis. Such assistance should be viewed as strongly contributing to U.S. nonproliferation policies. Those who oppose U.S. assistance to commercial nuclear power programs would welcome expanded efforts to develop alternative energy sources in these countries. A number of other policy options would require coordination with other suppliers. One approach would be to continue support for the development of low-enriched uranium fuels in PAGE 402 400 l Technology Transfer to the Middle East programs such as the Argonne National Laboratory research and test reactor (RERTR) program. In addition, study of the plutonium production potential of research reactors should be promoted so that technical refinements could be introduced that would make it difficult to misuse such reactors. Because risks of proliferation are smaller when research reactors with a capacity of less than 10 MWt and fueled by low-enriched uranium are used, other suppliers could be encouraged to provide such types of research reactors. Nations such as the Soviet Union could also be encouraged to provide only low-enriched uranium fuel. In addition, a very important contribution would be to clarify the upper bounds on hot cells and other fuel cycle facilities and to establish limits on their export. The United States could also make a major effort to develop and maintain a consensus among suppliers that they not assist in the development of capabilities that will permit Middle Eastern nations to separate kilogram quantities of plutonium per year from irradiated fuel. Similarly, the United States could encourage formation of a consensus not to export enrichment technologies to the region. Such efforts could be combined with a willingness to cooperate with Middle Eastern nations in nuclear power and civilian research programs. The United States can continue to promote strengthened safeguards, such as the use of remote sensing in reactor cores and more frequent inspections. While critics have pointed out the potential weaknesses of safeguards, the safeguards system contributes to the identification of potential proliferators. It is unlikely that international safeguards can be substantially strengthened outside the IAEA and the NPT. The IAEA is the major international working organization involved in nuclear training and technology transfer, and the U.S. must participate in order to influence its programs. In the past, the United States has encouraged nations to sign the NPT. In the Middle East, a number of key nations including Algeria, Israel, and Saudi Arabia have not signed the treaty. It maybe difficult to persuade Saudi Arabia to sign the NPT unless equal pressure is placed on Israel. In the case of Algeria, Soviet and French support would be critical, and French nonaccession is a definite liability in this respect. Agreement by the countries of the region to a nuclear test ban treaty could also limit the prospects for detonation of a nuclear device. Policy options open to the United States are thus limited, and most of those likely to achieve significant results require the cooperation of other nations supplying nuclear technology. It is clear that Middle Eastern countries no longer regard the United States as the worlds dominant supplier of nuclear technologies, and that a number of them may develop nuclear power for peaceful purposes in the years ahead. It is therefore essential that U.S. energy and nonproliferation policies stress multilateral efforts to reduce the spread of nuclear weapons. PAGE 403 CHAPTER 10 Patterns in Technology Transfer: Impacts and Experiences PAGE 404 Contents Page INTRODUCTION . . . . . . . . . . . . . . . 403 IMPACTS OF TECHNOLOGY TRANSFER IN THE SECTORS EXAMINED BY OTA. 404 Commercial Aircraft Support Systems. . . . . . . . . . . . 404 Telecommunications Systems . . . . . . . . . . . . . 405 Medical Services . . . . . . . . . . . . . . . 406 Petrochemical Production. . . . . . . . . . . . . . 407 Commercial Nuclear Power . . . . . . . . . . . . . 408 Comparison of Sectoral Impacts ....... . ........ . . . . . . 409 Variations in National Experience . . . . . . . . . . . . 411 BROADER IMPLICATIONS OF TECHNOLOGY TRANSFER . . . . . 413 Technology Transfer and Political Instability . . . . . . . . . 414 The Terms of Technology Transfer . . . . . . . . . . . . 415 Appropriate" Technology Transfer . . . . . . . . . . . 416 The Question of Dependence on Foreign Workers . . . . . . . . 418 The Vulnerability of Suppliers of Technology to Recipient Leverage . . . . 418 CONCLUSION . . . . . . . . . . . . . . . . 421 Table Table No. Page 90. Major Areas of Impact of Technology Transfers infectors Examined by OTA . 410 PAGE 405 CHAPTER 10 Patterns in Technology Transfer: Impacts and Experiences INTRODUCTIO N Transfers of advanced civilian technologies can have significant effects, positive and negative, on both recipients and suppliers. Because technology transfer is a complex process, assessment of impacts requires consideration of the interrelationship between technology transfers and major social, economic, and political changes. As discussed in chapter 2, evaluations of success inevitably depend on rankings of the political, economic, and social criteria used in evaluation. Assessment of the impacts, or the effects of complex processes such as technology transfer, is necessarily inexact and tentative. Analyzing experiences with civilian technology transfers to the Middle East during the past decade is nevertheless essential because it provides insights useful to U.S. policy makers as they develop policies affecting technology transfers in the years ahead. The purpose of this chapter is to compare and contrast findings concerning impacts across sectors and countries. The major questions include the following: Have technology transfers of certain types been particularly conducive to technology absorption? Have the experiences of various recipient and supplier nations differed significantly? Have the effects of these civilian technology transfers been generally favorable or adverse for suppliers and recipients? The impacts discussed here include those related to technology absorption by recipients, as well as other economic, political, and social effects important to suppliers and recipients. The effects of technology transfer are more readily assessed at the firm or sector level than at the national level. This is because these effects depend on the content of the technology transfer, and because the changes in capability that result are most apparent in the recipient firmits efficiency of operations and the skills of its personnel. This chapter compares and contrasts impacts of technology transfers in commercial aircraft support systems, telecommunications systems, medical services, petrochemical production facilities, and nuclear power production. The extent of technology absorption across these sectors varies considerably. While technology absorption has been limited in all sectors, it has been more extensive in sectors where goods and services are being provided for local markets. Even in sectors such as petrochemical production where technology absorption has been limited, however, recipients benefit from technology transfers that help to build world-class export industries. The chapter also examines broader issues relating to the larger (nonsectoral) implications of technology transfer. The analysis underscores the point that it is extremely difficult to predict these larger effects. In light of OTAs findings, it also addresses controversies concerning the broader national implications for technology transfers. Some observers have suggested that technology transfers to developing nations necessarily challenge the status quo because they involve the introduction of foreign personnel, values, and equipment into traditional cultures, In their view, technology transfers are fundamentally destabilizing. Others see technology transfers as contributing to economic growth, which brings benefits to and improvements in the recipient society. A major theme 403 PAGE 406 404 Technology Transfer to the Middle East in the discussion that follows is that the effects of technology transfer are conditional upon a number of factors, such as the pace of change, the distribution of benefits, and the wisdom of political leaders. Technology transfers, in conjunction with other social, political, and economic developments do have important effects, but it is not possible to identify the discrete contribution of all technology transfers on societywide change. The civilian technology transfers examined by OTA have in most cases contributed to growth of Middle Eastern economies and the expansion of export revenues for Western nations. At the same time, OTA identifies problems associated with some technology transfers (e. g., potential nuclear weapons proliferation, anticipated export competition with Middle Eastern petrochemical manufacturers, and the symbolic use of technology transfer by various political groups) which are legitimate concerns for policy makers. IMPACTS OF TECHNOLOGY TRANSFE R IN THE SECTORS EXAMINED BY OT A Chapters 5 through 9 examined the process of technology transfer in a number of civilian production facilities and service systems in the Middle East. The primary focus of that analysis was technology transfers occurring during the last decade of rapid economic growth. The sections that follow analyze and compare the effects to date. Technology transfers in these sectors are still underway, and in some cases, just beginning. Therefore, potential impacts are also mentioned where it seems appropriate. The major emphasis, however, is on analysis of impacts already apparent. COMMERCIAL AIRCRAF T SUPPORT SYSTEM S The primary effects of technology transfers in the commercial aircraft support systems sector have been economic. Sales of large commercial aircraft are significant in terms of the large dollar-volume of aircraft sales and in follow-on sales of auxiliary equipment, including testing and maintenance equipment, avionics packages, and spare parts. Requirements for technical services (including ground support) have made this sector an important revenue earner for the supplier firms, including not only the aircraft manufacturers and airport construction firms, but also airport management firms. For the recipient countries, these airlines are in many cases not great revenue earners, but they have added to the expansion of transport infrastructure. The most significant problem, from the perspective of the suppliers, has been that competition among them has led to the expansion of government-supported export credits. These official credits represent a cost to the supplier governments and to taxpayers. In some cases, attractive financing has played an important role in competition for sales. The Organization for Economic Cooperation and Development nations have reached a special agreement covering export credits for aircraft sales. Nevertheless, continuing competition for sales of aircraft and support services among U.S. and West European firms indicates the need to strengthen agreements among suppliers about international trading rules. The political or military effects of technology transfers in this sector are less clear-cut than the economic effects. Supplier governments have in some cases attempted to assist their exporting firms through high-level economic diplomacy, and the involvement of U.S. PAGE 407 Ch. 10Patterns in Technology Transfer: Impacts and Experiences l 405 firms in sales and servicing of aircraft in Saudi Arabia was preceded by discussions involving President Roosevelt. However, foreign policy controls affecting sales of U.S. aircraft have earned the United States a reputation as an unreliable supplier and have acted to reduce U.S. sales in the region. To many developing nations, commercial airlines stand as symbols of national prestige. In response to foreign policy controls, Middle Eastern countries have in some cases attempted to diversify suppliers. Because commercial aircraft exports have been subject to foreign policy controls, the political factors have strongly influenced trade in this sector. Runways, fuel storage facilities, and radar capability contribute in a general sense to strategic defense capabilities. However, military equipment is much more specialized and complex than commercial airline support equipment, and civil aircraft maintenance experience is not directly applicable to military aircraft. Nevertheless, export controls have been used to restrict aircraft sales by those concerned about the spread of terrorist activities, who see these controls as necessary regardless of the consequences for commercial trade. Among the sectors examined by OTA, technology absorption has been comparatively extensive in this sector. Indigenous personnel in the Middle East are increasingly performing the tasks needed to support and operate these airlines. For example, over one-half the pilots of Saudia (the Saudi Arabian airline) are currently nationals, in contrast to much lower representation of indigenous personnel in many other sectors (e.g., medical services). Indigenous personnel also hold key managerial positions in these airlines. However, particularly in Kuwait and Saudi Arabia, nonnationals, generally from other Middle Eastern countries, are performing maintenance and servicing functions. Therefore, despite comparatively high levels of technology absorption, some aircraft operations will probably not become fully staffed by nationals for many years. There are a number of possible explanations for this pattern of fairly extensive technology absorption. First and foremost is the considerable length of experience. In a sense, commercial airline support systems represent a model for technology absorption in other sectors because many Middle Eastern countries have had commercial airlines for as long as a generation and the process of building indigenous capability has developed gradually over that comparatively long period. Secondly, the technologies involved are straightforward and well established, and procedures for training and operations are fairly standardized. Requirements of airline safety and maintenance have provided clear operational standards. Finally, Middle Eastern airlines serve local markets primarily and, while they have not all been profitable, they are viewed as important symbols of national prestige. TELECOMMUNICATION S SYSTEM S The economic impacts of technology transfers in the telecommunications sector have also been particularly prominent. Telecommunications systems can be viewed as infrastructure in the sense that they provide the services needed for growth in other sectors. Of the Middle Eastern countries examined in OTAs research, Kuwait and Saudi Arabia have the most effective telecommunications systems. Kuwaits importance as a regional financial center depends, at least in part, on this system. In contrast to the aircraft support sector, local production of telecommunications equipment (including cables, crossbar switching, and television) has begun in some Middle Eastern nations and contributes to their ability to absorb the technology and to expand employment. The effects in job creation have been more notable in Egypt and Algeria, where more conventional technologies have been introduced, than in Kuwait, where stateof-the-art, capital-intensive technologies are preferred. Regional economic cooperation, PAGE 408 406 c Technology Transfer to the Middle East through Arabsat, is particularly noticeable in this sector. For the supplier firms, exports of telecommunications equipment and services have been important sources of export revenues. While large firms and consortia have been central as prime contractors, many small firms have also been involved as subcontractors and suppliers of equipment. The specific requirements of Middle Eastern countries have stimulated suppliers to modify and adapt equipment. As is the case in the aircraft support sector, official government export subsidies, including mixed credits, have been used extensively. As the disparity among the major suppliers in technological capabilities has narrowed, West European and Japanese suppliers have aggressively marketed their most advanced technologies in order to win contracts. Political and social effects of telecommunications technology transfers include the linking of rural and urban areas and expansion of communications with other nations. In some cases, such as Egypt, the poor functioning of telephone systems has tarnished the reputation of supplier nations providing assistance in some projects. In Iran, the telecommunications system was used by revolutionaries to consolidate their power. Like civil aviation, telecommunication systems contribute to a countrys strategic infrastructure, but the more sophisticated the military establishment, the more limited the overlap and substitutability of civilian and military communication systems. Certain applications of these technologies have important social effects. Radio and TV, for example, have been instrumental in the health education efforts of several Middle Eastern countries. Technology absorption in telecommunications has been comparatively extensive, particularly in Egypt and Algeria, and in Iran before the revolution. Recipient governments have increasingly extended requirements for training by supplier firms, and supplier firms have established specialized technical training programs. However, in nations such as Egypt, where unemployment is high, the PTT (ARENTO, in this case) has expanded the number of employees beyond requirements demanded by the technologies, with a resulting decrease in efficiency of operations. Furthermore, due to the extensive requirements for lower skilled technicians in this sector, the Gulf States have faced problems attracting and keeping indigenous workers in these positions and in developing suitable curricula. Thus, the Gulf States have relied heavily on foreign Middle Eastern nationals to fill these positions. Telecommunications, like aircraft support systems, function primarily to meet local requirements, and this provides a partial explanation for the development of recipient capability to operate and maintain the systems. Telecommunications systems serve captive markets. State-owned PTTs have introduced training and employment requirements in order to develop local capabilities. Local production, limited though it is, also certainly assists recipient firms in mastering standards and technology requirements. Regional cooperation in Arabsat also contributes to telecommunications planning capabilities in these countries. MEDICAL SERVICE S To a greater extent than is true for the other sectors examined in OTAs study, the impacts of technology transfer in the medical services sector have been socioeconomic. During the last decade, the quality and longevity of the life of the average Middle Eastern citizen has improved because of better and more extensive medical services. These services have certainly contributed to the expansion of the productive work force. On the other hand, the urban middle and upper classes have benefited disproportionately from technology transfers in this sector, a trend that Middle Eastern planners are now attempting to rectify. Medical services employ large numbers of workers, and the personal contact required between medical personnel and patients accentuates the social and cultural effects on the society. PAGE 409 Ch. 10Patterns In Technology Transfer: IIpacts and Experiences s 407 For suppliers, technology transfers in this sector have been priority concerns for development assistance. The U.S. Agency for International Developments programs involving preventive and rural health care have been generally well received in Egypt and have contributed to good political relations. Requirements for after-the-sale service and maintenance of medical equipment have stimulated private firms, particularly those in Europe, to provide specialized technical services. Personnel requirements at both professional and lower technical levels in the Gulf States have stimulated a large influx of foreign workersfrom Western developed, Asian developing, and other Middle Eastern nations, such as Egypt and Jordan. Foreign medical workers there have been rewarded with high salaries, but they have also been obliged to accept restrictions on their behavior and political participation. In medical services, technology absorption has been most varied, reflecting the wide range of channels for provision of servicesranging from small rural health clinics to large-scale, state-of-the-art curative hospitals. In the Gulf States, where large hospital complexes have been very recently established, technology absorption remains quite limited and reliance on foreign medical personnel will continue into the next century. In Saudi Arabia, for example, Saudi nationals make up only about 5 to 8 percent of the doctors and 10 to 15 percent of the nursing staff. Of all the countries included in OTA's study, Egypt has the greatest indigenous capability to operate and maintain medical facilities, but administration and infrastructure remain problem areas. It is difficult to generalize about technology absorption in medical services across these countries, because they have developed strikingly different strategies for public health care. In the future, prospects for more extensive technology absorption appear good, because of growing experience and because of the pressing need for these services. Decisions made by government planners to promote curative or preventive health care will strongly determine the nature and extent of medical services technology transfers in the years ahead. PETROCHEMICA L PRODUCTIO N Like telecommunications and commercial aircraft support systems, the impacts of technology transfers in the petrochemical sector have been primarily economic. For recipient countries, the principal effect is in the potential that petrochemical production offers for providing substantial export revenues and for diversifying domestic economies now heavily centered on the oil sector. These effects will be particularly evident in Saudi Arabia, the nation with the most extensive petrochemical projects underway, but may also be significant for Algeria and possibly Kuwait. In addition, petrochemical production will allow these countries to use their natural resources better: in Saudi Arabia, for example. expansion of petrochemical production will provide an opportunity for better use of natural gas, which was previously often simply flared. For the supplier countries, the economic effects have been twofold, albeit, somewhat less positive. As illustrated by the experience of the Japanese firm Mitsui in Iran, the export of petrochemical plants and technology has been associated with investment risk. While investment risk is common to all the sectors, the large scale of the petrochemical projects may leave foreign firms more exposed. In addition, the growth of a Middle Eastern petrochemical industry will affect domestic production by supplier country firms, requiring some restructuring. This is particularly evident, in Japan, where declines in anticipated market share and the perceived inability to compete against low-cost feedstock countries have already contributed to plant closure and industrial restructuring. Only in this sectorhave Middle Eastern firms extensively used equity investments in Western firms as a means to acquire technology. II 1 1 T PAGE 410 408 Technology Transfer to the Middle East The political and social effects of technology transfers in the petrochemical sector, on the other hand, have been comparatively limited. As a capital-intensive and export-oriented industry, employment effects are minimal, and the production of petrochemicals in the Middle East is expected to have only limited effects on local consumption patterns. Joint ventures such as the Saudi and Kuwaiti project in Bahrain promise prospects for greater regional cooperation in this sector. Disputes have arisen between supplier and recipient governments over petrochemical projects, and concerns have grown among West European producers over future import penetration by petrochemicals produced in the Middle East. These political disputes between recipient and supplier governments concerning petrochemical production in the Middle East have, however, been exceptions rather than the norm. Compared to the other sectors discussed above, the extent of technology transfer in the petrochemical sector has been limited. Expatriate workers predominate in both production operations and management. As illustrated by efforts in Egypt, however, technology absorption may be extended through improvements in managerial capabilities and the establishment of manufacturing firms using petrochemical products to produce consumer and industrial goods. COMMERCIAL NUCLEA R POWE R Of all the technology transfer sectors examined by OTA, commercial nuclear power is today the least developed in the Middle East. Nevertheless, there have been significant political, military, and economic effects. Even for oil-rich nations with considerable financial resources, planning for nuclear power development requires political commitment. Irans ambitious peaceful nuclear power development program under the Shah, for example, became the object of criticism by revolutionary leaders who saw the program as grandiose Westernization, as well as by technocrats who questioned the scope of the program and the technical choices made. In Egypt as well, controversy over powerplant siting led to the revision of plans after opposition grew to the proposed Alexandria locale. Even more serious have been the dilemmas faced by nations intent on acquiring sensitive nuclear technologies. Iraqs program raised concerns among neighboring countries that ultimately led to a preemptive military strike by Israel. Suppliers of nuclear technologies to these countries have been able to influence the nuclear programs of recipients. Nuclear cooperation agreements, like the U.S.-Egyptian accord, have provided incentives for recipient nations to accept full-scope safeguards and to provide assurances that intentions are peaceful. Suppliers have also influenced recipient programs through denial of certain types of technologies and through insistence that requests be modified to include technologies less susceptible to use in nuclear weapons programs. French proposals to use low-enriched uranium fuel for Iraqs research reactor are a case in point. Suppliers have been forced to expend considerable resources in attempting to build consensus among themselves on export policies, but the benefits in slowing weapons proliferation have been significant. Because OTAs analysis indicates that the likelihood of nuclear weapons proliferation in the Middle East will increase in the years ahead, the long-term risk of proliferation is certainly a liability that all supplier nations share. Economic effects have also been noticeable. In the future, commercial nuclear power may provide low-cost electricity in countries such as Egypt, but to date, planning and preparation have been costly. Egypt will be able to develop nuclear power only with subsidized financing. Supplier firms involved in Irans program have gained export revenues, but they also faced difficulties as construction was terminated by the new revolutionary government. In the future, supplier firms could be stimulated to develop small reactors to meet Middle Eastern requirements, but so far, firms have generally not considered such efforts to be cost effective. Some nations supplying nuclear technology have received oil from recip- PAGE 411 Ch. 10Patterns In Technology Transfer Impacts and Experiences l 409 ient countries, but there is little evidence that oil for technology deals have provided supplier countries with assured oil supplies in times of crisis. Indeed, France in 1983 was pressed to purchase Iraqi oil as the only conceivable means Iraq had to repay its debts. While in the future nuclear power may contribute to electricity generation in some Middle Eastern countries, the major economic effects to date have been felt by countries such as Iran and Egypt where purchases of and negotiations for nuclear power reactors have been carried to comparatively advanced stages. Technology absorption has been quite limited in the nuclear sector, but a science and technology infrastructure is the foundation for future absorption of advanced technologies. Egypt has the largest nuclear research establishment, but the number of scientists and engineers working at the national nuclear research center (about 2,000) simply do not compare with the 18,000 in Indias nuclear establishment, for example. Egypt has decided to import turnkey reactors. The major explanations for the limited technology absorption in this sector certainly lie in the complexity of the technology and in the reluctance of suppliers to provide sensitive facilities. On the other hand, in the years ahead, Egypt in particular may be able to improve gradually the capabilities of its scientists, engineers, and, most importantly, technicians, and may eventually operate and maintain power reactors independently. In the future, as Middle Eastern countries build their technical capabilities and as new suppliers perhaps more willing to sell sensitive technologies enter the market, military and political problems associated with nuclear weapons proliferation can be expected to grow. COMPARISON OF SECTORA L IMPACT S OTA's examination of the technology transfer process in all of these sectors indicates that technology absorption has been limited to the capability to operate and maintain technologies and equipment imported from abroad. In no case have recipients developed the capability to design or significantly adapt these technologies themselves. To be sure, adaptation of technologies has taken place, as exemplified by special features of the airport in Jeddah, Saudi Arabia (designed to accommodate the special requirements of the Muslim pilgrimage), the modification of telecommunications equipment for use in desert climates (heatand dust-resistant modules), and the preparation of special training manuals for medical and technical personnel. In these cases, foreign consultants have generally carried out the modifications to meet requirements identified by recipient country nationals. This assessment of the extent of technology absorption, it should be stressed, applies only to the advanced civilian technology sectors examined in this study. In other sectors and in particular countries, the extent of technology absorption may be much greater. Egypt, for example, has had an Engineering and Industrial Design Center for a decade, and technology adaptation may have been carried out in certain sectors such as textile production and agriculture. (See fig. 1.) In addition to the effects associated with technology absorption in the five sectors examined by OTA, there has also been considerable variation in associated economic, political, and social effects. While economic effects are apparent in all cases, social impacts were identified as particularly salient for medical services technology transfers, and political effects for nuclear technology transfers. In these sectors and during the time period examined by OTA, recipients have been more directly affected than suppliers. For policy makers in the Middle East, technology transfers in these sectors are central to national development plans. With the exception of technology transfers that raise issues of subsidies, export controls, and weapons nonproliferation, technology transfers have been more directly relevant to supplier firms than to supplier governments. There are a number of possible explanations for the variations observed in technology absorption. Table 96 lists major areas of impact, PAGE 412 410 Technology Transfer to the Middle East Table 90.Major Areas of Impact of Technology Transfers in Sectors Examined by OTA 1. Commercial aircraft support systems X x x 2. Telecommunications ., . xx x 3. Medical services . x x 4. Petrochemical production . xx x x x 5. Nuclear power . . . KEY XXX large Impact, XX moderate I m pact X small impact SOURCE Office of Technology Assessment including technology absorption as well as other types of economic, political, and other effects. Indigenous capabilities to use imported technologies have been most extensively developed in those sectors, commercial aircraft support systems and telecommunications systems, where there has been longer term experience with imported technologies and where the systems are currently serving local markets. In such cases, the industries and services are not forced to compete headon with foreign firms, and recipient governments have the leeway to introduce local employment and training requirements. In contrast, technology absorption in petrochemical production in the Middle East may be comparatively limited for some time, owing to the complexities of the technologies and to requirements ensuing from anticipated direct competition with petrochemical manufacturers abroad. In order to produce quality petrochemical products efficiently on world-class scales, Middle Eastern industries rely heavily on packaged technology imported from abroad and on the ongoing participation of expatriates. Packaged technology, in the form of turnkey nuclear powerplants, may also allow Middle Eastern nations to meet international operational and safety standards so important in that industry. Extensive technology absorption by recipients is only one indication of the effects of technology transfer; in sectors such x xx x c xx xxx xxx x xxx xxx xxx x L xxx xxx x xx xx xxx xx x xx x x xx x xxx as petrochemical production, recipients will reap foreign exchange revenues from transfers even though absorption is limited. Because medical services technology transfers are so varied, involving both large-scale, capital-intensive hospital projects and smallscale, rural health clinics, it is particularly difficult to generalize about the extent of technology absorption in that sector. The prospects for development of indigenous capabilities in medical services appear good since these services are provided to meet local requirements, are comparatively labor-intensive (and therefore offer prospects for expanded technology absorption in countries like Egypt where labor is comparatively abundant), and have been given high priority by leaders in Middle Eastern countries. Impacts of technology transfer vary widely across these sectors, but the most noticeable effects have been in expanding the productive capacities of countries in the Middle East. Improvements in medical and telecommunications services contribute indirectly but significantly, while expansion of petrochemical production directly contributes to manufacturing and export growth. By relying on technology importation in the form of packages that include long-term involvement of foreign workers, the firms importing technology can ensure PAGE 413 Ch. 10Patterns in Technology Transfer: Irnpacts and Experiences l 411 proper functioning of facilities, even if indigenous capabilities are developed only gradually. VARIATIONS IN NATIONA L EXPERIENC E For both recipient and supplier countries, major issues have been associated with the importation of advanced technologies during the past decade. There has been considerable variation in the experiences of the supplier and recipient countries, and in the importance of political, economic, and social questions. From the perspective of Middle Eastern leaders in these countries, the overall effects are undoubtedly viewed in a positive light. The fact that governments in all of these countries place high priority on technology transfer and are attempting to improve their capabilities to select and use foreign technologies indicates that their general assessment is favorable. Planners in the Middle East see technology transfer as essential for economic development, improvements in the technical expertise of the indigenous populations, greater social and economic welfare, an improved position in international markets, and as important in regional integration. They see technology transfer as generally raising national prestige, both regionally and internationally. For Middle Eastern countries it has brought expanded revenues from exports and remittances earned by workers working in the Gulf States. On the other hand, however, Middle Eastern leaders do not disregard the potential negative impacts that technology transfer can bring in its wake: dependence on foreign suppliers of technology, an influx of foreign workers that may influence the social and political fabric of the recipient country, the creation of new social schisms among indigenous groups, disaffection among those groups that do not benefit from technology transfer, or the potential for embarrassment when technology transfers fail to achieve intended results. Saudi Arabia, Kuwait, and Iraq have found it necessary to import many foreign workers to carry out their development strategies, but at the same time these countries have attempted to limit the participation of expatriates in politics and society in an attempt to preserve national values and traditions, and in order to limit political disaffection. With the growth of Islamic fundamentalism, projects involving technology transfer have in some cases become targets of criticism by those who fear that Western influences are inimical to Islamic traditions. Although technology transfer, for the most part, is thus viewed in a positive light, the challenge for Middle Eastern planners is to minimize the associated real and potential negative impacts. Given these potential problems, it is not surprising that Middle Eastern policymakers increasingly emphasize technology transfers that contribute to the development of a local capability, rather than imports of high-technology equipment per se. For many recipient nations, the political dimensions of technology trade have become increasingly important in the past decade. Hoping to exchange oil for technology and foreign expertise, some recipient countries have at times included promises of oil supplies in negotiations over technology imports carried on with foreign firms and countries. All of the recipient nations have come to emphasize the goal of diversifying suppliers, to greater or lesser degrees, for political and economic reasons, as discussed more fully below. On the supplier side, the most noticeable dimension of technology trade in the sectors examined by OTA has been commercial, and the most direct effects of these technology transfers have been on firms rather than on governments. However, these commercial efforts are more significant for nations such as Japan, Italy, and Francewhose worldwide trade is much more strongly directed to the Middle Eastthan for the United States. In a period of worldwide recession, the Middle East represented a fast-growing market for these supplier nations. Negative effects, in terms of investment losses due to revolution in Iran or repayment problems in Iraq, have been considerable for a few firms. For Western supplier governments as well as newly industrializing countries and many Soviet bloc countries, the PAGE 414 412 l Technology Transfer to the Middle East The Nasser Sabah Al-Nasser Al-Sabah Mosque in Kuwait City major economic effects have been growing export revenues. Suppliers have been stimulated to adapt technologies to requirements of Middle Eastern countries, and revenues from sales of equipment and technical services in the region have contributed to the ability of supplier firms to continue to innovate and develop technology. Much of this research and development takes place outside the region, but there are exceptions such as solar energy development in Saudi Arabia. The newly industrializing countries such as South Korea and India have been primarily involved in exports of construction services, including lower skilled laborers and, in the latter case particularly, technical personnel. In general, these nations have not provided advanced technologies, but they have been involved in staffing and infrastructure building for large-scale projects. The major impacts on these supplier nations have been in the form of contracts and remittances earned by workers temporarily in the Gulf States. However, during the recent period of falling oil prices, many workers have been dismissed as the Gulf States cut back on new infrastructure projects. For many West European nations and for Japan, technology trade with the Middle East has provided markets for industries faced with recession at home. In some cases, firms from supplier nations have, however, suffered investment losses associated with political and economic changes in host countries. With respect to the West European nations, technology trade has contributed at least in part to continuing but uneven efforts to establish multilateral policies toward the region. Competi- PAGE 415 Ch. 10Patterns In Technology Transfer: Impacts and Experiences 413 tion among suppliers has stimulated some governments to intervene with export subsidies and supports for domestic firms. With the exception of the United Kingdom, most of these major Western suppliers of advanced technology continue to import large proportions of oil from the Middle East. For the United States, the effects of technology trade have been similar to those affecting Western Europe and Japan. However, both exports to and imports from the region have been slightly less important in total U.S. trade than is the case for Japan, France, or Italy. Nevertheless, exports of technology to the Middle East have increased export revenues in a period when trade frictions between the United States and other nations have increased. As the postwar leader of the Western alliance, the United States has developed policies that emphasize political interests more than do those of most other Western suppliers. In part because of this emphasis, problems associated with the political dimensions of technology trade (including charges that advanced technology transfers may be destabilizing for the Islamic nations, or that they undermine relations with Israel) have been the subject of controversy, Technology trade and transfers have certainly helped to reinforce good political relations with countries such as Egypt and Saudi Arabia. On the other hand, foreign policy controls may well discourage or inhibit relations with other countries whose political relations with the United States are more ambiguous. Finally, the overwhelming preference of Islamic Middle Eastern countries for Western technology indicates that technology trade is an asset for the United States and other Western countries in countering Soviet influence. Technology transfers have thus had important political effects. Through their policies governing nuclear transfers, suppliers have been able to influence the development of nuclear programs in these nations. While there has been some criticism of certain development projects, civilian technology transfers have reinforced good relations between the United States and the major recipient nations, such as Egypt and Saudi Arabia. On the other hand, because the United States alone has used foreign policy controls to limit exports of certain types for political purposes, these have undoubtedly reduced sales of certain types by U.S. firms and led some Middle Eastern governments to favor non-U. S. suppliers. For the Soviet bloc nations, commercial technology trade with the Middle East has been quite limited in comparison to that of the Western nations. Nevertheless, exports to the Middle East make up a large share of these nations exports to less developing countries worldwide. Egypt in particular changed policies and consciously reduced the involvement of Soviet advisors some years ago, an action that signified a setback for the Soviet Union. Political concerns remain paramount for the Soviet Union in its interactions with the region, but economic factors are increasingly important. For the East European nations, commercial exports, though limited to specialized niches, have been and remain at the center of their economic interactions with the region. The interest of Middle Eastern countries in diversifying suppliers may provide limited entrees for Soviet bloc exports in the years ahead. BROADER IMPLICATIONS O F TECHNOLOGY TRANSFE R The previous discussion focused primarily development. The long-term contribution of on the past effects of technology trade and the technology transfers studied by OTA will transfer. However, a decade is a relatively probably not be clear for another 10 years, and brief period and many projects are still under in some cases even longer. PAGE 416 414 l Technology Transfer to the Middle East Nor have all effects on the lives of individuals and groups within these nations been identified. OTAs research was designed to focus primarily on the effects significant for the supplier and recipient governments and firms involved. In order to understand the effects on individuals and groups better, it would be necessary to ask their opinions and to observe the actual operation of the facilities. For example, such research might clarify whether male patients are troubled by the presence of female nurses in hospitals, whether foreign laborers resent restrictions placed on them by recipient governments, or whether certain ethnic or regional groups complain about unequal distribution of the benefits accruing from technology transfers. Perhaps even more complex are questions concerning the indirect effects of these technology transfers. The technology transfers studied by OTA have generally occurred in a larger context of rapid change in the recipient countries. It is often impossible to identify the discrete effects of technology transfer, that is, to separate those effects from others associated more closely with social phenomena such as urbanization or expanded communication and political participation. Together with these other changes, the implications of technology transfer can be substantial. Experts disagree about the causes of nationwide transformations, such as political revolutions and value change. Isolating the unique contribution of technology transfer to such developments is simply not possible. The decisions made by policy makers about what types of technologies to import, how rapidly to promote change, who should be involved, and who benefits are key to understanding the broader implications of technology transfer. If the term technology transfer is used vaguely to refer to all social changes, however, it loses its meaning. The content, determined by policymakers, is thus the key to evaluation of effects. Policymakers nevertheless make decisions about technology transfer in the midst of uncertainty about its effects. While OTAs research cannot conclusively resolve the continuing debates about the broader effects of technology transfer, such disputes can be tentatively evaluated in light of this research. Controversies concerning the broader effects of technology transfer are evaluated in this section, with special reference to Iran. Iran is the one nation in this study that has recently experienced fundamental political changes. The anti-Western character of the revolutionary government has been viewed by some as a reaction against rapid Westernization under the Shah, one aspect of which was technology transfer. TECHNOLOGY TRANSFE R AND POLITICAL INSTABILIT Y Some have argued that technology transfers are inherently destabilizing, meaning that they embody foreign (usually Western) norms and values that come into conflict with traditions. In some cases, the argument goes, these conflicts erupt into opposition to the ruling regime, and sometimes lead to its downfall. Another approach to these issues is to see ruling elites as challenged to spread the benefits of technology transfer and to adapt it to local requirements and traditions in order to preserve their own political legitimacy. The first approach, it should be noted, equates technology transfer with all foreign influences and assumes an irreconcilable conflict between foreign and traditional values. The second places emphasis on the choices of leaders who determine the substance of technology transfer, and assumes that foreign and traditional values can be integrated or reconciled. The second approach is useful for understanding the course of events in Iran. Under the Shah the problems of unequal distribution of benefits of technology transfer gradually became glaring, but these problems were the direct result of decisions taken by the ruling elite. The recipients of advanced technology in Iran were fiercely loyal to the Shah. The political elite were rewarded for their allegiance with technical assistance, feasibility studies, market surveys, and loans. In addi- PAGE 417 Ch. 10Patterns in Technology Transfer: Impacts and Experiences l 415 tion, technology transfers were selected to meet the growing consumer desires of the emerging middle class. A case in point were the modern private medical service centers established in Teheran as joint ventures between U.S. and Iranian firms, which were out of the reach of the average citizen. Since modern industry and the communications media served the Westernized upper-middle class, the resentment and frustration of other classes grew. The government promoted growth poles (called industrial estates), and the population of the cities swelled, accentuating the gap between the urban and rural areas. Technology transfers could have been promoted to achieve other purposes, such as enriching the countryside, but that was not done. The choices of political elites, rather than technology transfers per se, helped create the conditions that led to revolt. Nor is it likely that the course of history would have been different if the United States had adopted an arms-length attitude. The Shah could have turned to any number of alternative suppliers in Western Europe and Japan to fulfill his technology requirements. If the Western nations had been unwilling, Soviet bloc nations would have been available as suppliers. The conclusion that must be drawn is that even if foresighted U.S. leaders had anticipated Irans problems and instituted policies designed to reduce or modify technology flows, it is unlikely that such policies alone could have changed the political outcome. Certainly large projects have, on occasion, become the objects of political criticism. In Iran, the revolutionar y leadership criticized the ambitious nuclear program of the Shah as evidence of his craving for Western high technology. In other instances, large projects such as new airports in Saudi Arabia are viewed by many local citizens with pride, as symbols of national accomplishment. Because large projects involving technology transfer are highly visible in developing countries, they can be easily identified as objects of either criticism or pride. Choices made by leaders in recipient countries, and the ability of leaders to ensure that many groups in society benefit, shape political events rather than technology transfers per se. THE TERMS OF TECHNOLOG Y TRANSFE R Many observers have argued that technology transfers are fundamentally unfair. In their view, the supplier firms and governments have disproportionate power to dictate the terms of the transfers, with the result that the recipients pay too much, or receive technology that is out of date, or that suppliers are unwilling to provide the knowledge necessary for the recipients to absorb the technology fully. Underlying such criticisms are suspicions about the monopolistic character of multinational corporations, a theme that has reverberated in the debates over the proposed New International Economic Order. On the other hand, supplier firms point to their extensive training efforts, the investment risks associated with doing business in developing nations, and the inability of recipients to select and utilize technologies. The basic assumption of those who hold this view is that profit-maximizing firms are willing to sell technology, equipment, and services, but the recipient Training programs carried out by the Xerox Corp. involving more than 200 local technicians are designed to Improve communications and business support services in Egypt PAGE 418 416 l Technology Transfer to the Middle East . must know what to ask for and be willing to pay a fair price. Many Iranian entrepreneurs objected to restrictive clauses and practices that prevented the full diffusion or utilization of imported technology. These complaints included claims that foreign partners would not provide adequate training and that unnecessary hurdles were placed in their way when they tried to use local components. Many Iranians saw themselves as increasingly capable of handling more complex tasks than they were assigned in production facilities. Some pointed to cases of influence-peddling by foreign firms. On the other hand, expatriate supervisors and managers sometimes found recipients unable to handle certain tasks. In fact, there were cases of both successful and unsuccessful cooperation between U.S. and Iranian firms. In retrospect, the ability of both partners to understand and respect each other and the emphasis on training and technical assistance were distinguishing factors of those instances viewed positively by both sides. The role of Westinghouse in the military-owned Iran Electronics Industries Corp. has been cited by some as such a case. When both supplier and recipient firm partners prepared workers to understand and appreciate the values and norms of the other, the partnership was more often viewed as a success. In prorevolutionary Iran, however, there were many cases of very costly projects which failed to achieve desired results. Anxious to introduce advanced technologies quickly and lacking the expertise necessary to make good choices or monitor progress, Iranian leaders sometimes accepted terms set by foreign firms which would not have been acceptable elsewhere. The foreign firms and the Iranian political elite in those cases benefited directly, while other groups in Iran grew more resentful. All of these Middle Eastern countries have set restrictions on foreign direct investment, as outlined in chapter 11. Some countries, such as Iran under the Shah and Saudi Arabia today, encourage foreign investment more than others, but all maintain some restrictions. Such restrictions are designed to limit dependence on foreign capital. In Iran before the revolution, the percentage of foreign equity declined, but it is unclear that this came as a result of government policies. Throughout the region, the level of foreign investment remains quite limited. However, OTAs research does not indicate that low levels of equity participation by foreign firms necessarily ensure that reliance on expatriate expertise will be limited or that projects will achieve desired results. The extent of technology absorption, the economic benefits of the partnership, and the perspectives of both sides concerning success do not relate consistently to the level of foreign equity participation in the technology transfer sectors examined by OTA. In some cases, such as petrochemicals, continuing involvement by the foreign supplier is essential for the proper functioning of the production facilities. As discussed in chapter 11, Middle Eastern countries have developed different policies governing foreign investment; their assessments of potential gains and losses are in no sense uniform. Regulations introduced by recipient (and to some extent supplier) governments attempt to ensure fairness in commercial technology transfers. Controversies continue, however, concerning the terms of technology transfers, indicating the serious concerns of developing nations. Recipients are improving their capabilities to select, bargain for, and utilize imported technologies. As this capability is improved, and as supplier firms have more experience in these markets, both sides may become more adept in striking terms which ensure that the projects are viewed as mutually beneficial over the long term. Competition among suppliers from many firms and nations for sales of advanced civilian technologies serves to limit the ability of any one actor to dictate terms of technology transfers. APPROPRIATE TECHNOLOGY TRANSFE R The term appropriate technology means different things to different people. It has been used to refer to capital-saving technology, small-scale technology, and technologies PAGE 419 Ch 10Patterns in Technology Transfer Impacts and Experiences 417 needed for rural development. The underlying assumption of those who advocate the introduction of appropriate technologies has been that it is possible to identify technology transfers that are especially needed for the longterm well-being of developing countries. Some would also argue that particular types of technologies are inappropriate for developing countries. This last statement, in particular, has been disputed by leaders in many developing countries, who resent what they see as an attempt by those in developed countries to deny them state-of-the-art technologies required to compete directly with developed country firms. OTAs approach has not been to assume that certain types of technologies are appropriate, but rather to examine the process of technology transfer in a number of sectors and to observe results. The emphasis has been on assessing the extent of technology absorption and on understanding the perspectives of the supplier or recipient governments and firms concerning these technology transfers. Policymakers in the Middle East must make critical judgments about what kinds of technologies fit with their long-term economic development strategies. Such judgments require anticipating what the economy and society will be like some years hence and also require political leadership in building a consensus on how to get there. Technology transfers such as those involving petrochemical production facilities that appear well-suited to Saudi Arabia would not be popular in other countries, where there is a larger indigenous labor force and smaller oil and gas reserves. As mentioned earlier, Kuwait has chosen capital-intensive, state-ofthe-art telecommunications equipment, while Egypt has relied more on conventional telecommunications equipment that is more laborintensive. Similarly, these nations have developed different health care strategies, with correspondingly different choices of technologies. Certain types of technology transfer (those introduced in systems operating to produce goods and services for local markets) were found to be particularly conducive to building recipient capabilities. Others such as telecommunications systems create linkages to other sectors, thereby causing multiplier effects in the economy. Of the technology transfer sectors examined by OTA, those in telecommunications and medical services had perhaps the most extensive effects on other domestic industries and on general living standards. In contrast, the critical effects of nuclear technology transfers have been political and military, What is appropriate in one country may be seen as inappropriate in another. Judgments about the appropriateness of the technologies depend on the fundamental goals and values PAGE 420 418 Technology Transfer to the Middle East -. of policymakers and citizens in these nations. Foreign suppliers are properly cautious when there is clear disagreement among various groups in recipient nations concerning certain types of technologies. Unfortunately, such disagreements often arise only after a project has been undertaken. THE QUESTION OF DEPENDENCE ON FOREIGN WORKERS Some argue that the presence of foreign workers in a developing nation is undesirable because it signifies ongoing dependence on foreigners and may lead to political and social unrest at home. Others argue that foreign workers make an important economic contribution and that their presence is generally beneficial to the host nation. OTAs research suggests that both types of impacts have been concerns in the Middle East. Expatriate workers in the Middle East must be present for technology transfer to occur, and the key questions are how long they stay and what they teach local workers in the process. Since no nation can be completely self-sufficient, the challenge is to utilize foreign workers effectively, based on a realistic understanding of both the problems that can arise and the potential contribution they can make. The question of foreign workers is part of a larger issue of dependence on foreign suppliers faced by developing nations. Middle Eastern countries, particularly the labor-short Gulf States such as Saudi Arabia and Kuwait, have attempted to promote policies that utilize foreign workers while reducing potential political problems. Their concerns have been with potential political instability and with the prospect that foreign workers might attempt to influence host country policies, domestic and foreign. In Kuwait, for example, incidents of violence, both within and outside of the workplace, have been reported involving Palestinian workers, Indians, and others denied the rights and benefits afforded Kuwaiti citizens. On the other hand, developing nations appreciate the indispensable contribution of foreign manpower and expertise to economic growth. As discussed in chapter 11, these recipient nations have developed manpower policies to address both goals simultaneously, including the use of enclaves, to deal with the problems associated with employing foreign workers. Foreign labor is also an important issue for supplier countries. In Egypt, for example, the supply of manpower to other Middle Eastern countries has been associated with both positive and negative effects: the migration of Egyptian skilled workers to other parts of the Arab world has brought with it significant revenue in the form of workers remittances, but it has also proved to be the root cause of a brain drain in certain sectors. These issues are equally if not more salient for the labor suppliers outside the Middle East. The migration of Pakistani workers, for example, brought remittances amounting to approximately 50 percent of Pakistans foreign exchange earnings in recent years, but it also caused social dislocations at home when men left their families behind. Because of the large number of Asian workers in the Middle East, the Asian countries that supply labor to the Middle East could be affected socially and economically by a sudden and sweeping dismissal of workers. THE VULNERABILITY O F SUPPLIERS OF TECHNOLOG Y TO RECIPIENT LEVERAG E Some observers worry that suppliers of technology can become susceptible to undue leverage, economic and political, by the recipients. Underlying this perspective is the recognition that technology transfer involves long-term relationships between individuals and firms in both countries and the assumption that when supplier involvement is great, the result can be vulnerability to the whims of the recipient governments. In particular, some supporters of Israel fear that involvement by U.S. and Western firms in Islamic nations might result in those supplier nations succumbing to po- PAGE 421 Ch. 70Patterns in Technology Transfer: Impacts and Experiences l 419 -. .@ Photo credit Aramco World Magazine Udhailiyah, located near the center of the giant Ghawar oil field, is the newest of Aramcos four permanent family communities pressures counter to the interests of litical Israel. Others argue that technology transfer is primarily a commercial exchange and that the political leverage accruing to recipient governments is minimal or manageable. Some would take this argument further to suggest that the supplier actually gains considerable influence over the recipient in the process. Debates over recipient leverage represent the obverse of questions concerning recipient dependence on suppliers. The major focus of concern has been with the issue of oil leverage, or the idea that Western governments in particular can be forced to take political stands contrary to their interests because of their dependence on Middle Eastern oil. Both Japan and a number of West European nations remain heavily dependent on oil imported from the Middle East and will remain so for years to come. Particularly during the period immediately following the oil crisis of 1973, West European and Japanese leaders moved to build bilateral alliances quickly with oil-producing nations, offering assistance in large development projects (including technology transfer) in conjunction with assurances of oil supplies. U.S. policy makers viewed these bilateral initiatives with concern because they seemed to some to diminish the ability of the Western nations to coordinate their policies through the International Energy Agency. In addition, the West Europeans and the Japanese took political positions independent of the United States and in some cases were more strongly supportive of Arab nations and the PAGE 422 420 s Technology Transfer to the Middle East rights of Palestinians, increasing the concern about oil leverage. There is no question that oil is a major factor in the strategic and foreign policies of supplier nations, and technology transfers certainly occur within this context. On the other hand, it does not appear that the nations that most aggressively attempted to build bilateral relations have been particularly successful in securing oil supplies in periods of crisis. While a multilateral embargo of oil by Arab nations would undoubtedly have considerable effect on consumer nations if it were prolonged, the threat of oil leverage by a single oil-producing nation is limited by the availability of alternative suppliers. In the near term, the recent leveling of demand for oil in the West has diminished the feasibility of oil leverage. In addition, Western nations have gradually put in place a number of policiesincluding emergency oil-sharing schemes, stockpiles, and energy conservationwhich strengthen their capabilities to respond to sudden changes in the oil market. To be sure, oil is an important element in the relationship between France and Iraq, for example, and in the growing ties between Japan and Iran. OTAs research indicates that the joint venture partners in the Saudi Arabian petrochemical projects were attracted by guarantees of oil supplies in addition to favorable returns on investment. However, there is no evidence that the oil-producing nations have (through the use of oil leverage alone) successfully forced supplier governments to take positions which they themselves view as counter to their own interests. Indeed, some cases, such as the cancellation of British Foreign Minister Pyres trip to the Middle East in 1983 discussed in chapter 12, suggest that some suppliers are unwilling to subordinate their political principles to economic interests. It is beyond the scope of this study to analyze the broader issues of Middle Eastern politics and diplomacy. However, OTAs research on the foreign policy context of supplier nation policies indicates that Western nations have established widely varying political relations with Middle Eastern countries. Chapter 12 analyzes the tendency of Western Europe and. Japan to bring economics more to the fore in their policies than is the case in the United States. In some instances, these nations have developed policy perspectives that diverge from those of the United States. Some West European spokesmen, for example, question the appropriateness of an allied Middle Eastern policy and call instead for harmonization of policies. In their view, the alliance is strengthened when various Western nations develop relations with different Middle Eastern nations, rather than prohibiting trade with certain nations. Oil is certainly a consideration in these foreign policy perspectives of the technology-supplying nations, but it would be incorrect to conclude that Japanese and West European policies are determined solely by oil concerns. Nor would it be correct to assume that suppliers gain no influence over recipients through technology transfers. While there is no evidence indicating that supplier nations have effectively forced recipients to modify their foreign policy positions simply by threatening to withhold or by offering to supply civilian technology, there have been cases where suppliers have successfully negotiated terms for transfers that maximize broader foreign policy interests. Suppliers have noticeably affected the type and extent of nuclear technology transfers. For example, by offering nuclear cooperation, the United States has persuaded Egypt to agree to very stringent safeguards on nuclear transfers. In contrast to nuclear export controls, however, there is little evidence that foreign policy controls have been implemented in the sectors examined by OTA so as to significantly reduce their access to advanced civilian technologies or change the political positions of the recipients. This discussion does not resolve the issue of supplier vulnerability, but it does serve to caution against simply equating commercial relations with political positions. Evidence of both suppliers and recipients exerting influence is most apparent in the specific technology transfer contracts shaping the terms of transfer. Because the interests of supplier firms and their governments sometimes di- PAGE 423 Ch. 10Patterns in Technology Transfer: Impacts and Experiences l 421 verge, it is not necessarily the case that the but sometimes the result is resentment and commercial strategies of the firms will be disagreement, while at other times mutual unstrongly supported by governments. Technolderstanding leads to shared views and perogy transfer relationships require long-term spectives. interactions between suppliers and recipients, CONCLUSIO N The impacts of technology transfers in the sectors examined by OTA have been widely varied across nations and technology sectors. It is difficult to identify and assess all the impacts of past technology transfers, and the task of anticipating future effects of proposed technology transfers is even more demanding. The implications for public policy are that it would be beyond the capacities of a supplier government to evaluate all proposed civilian technology transfers to ensure that all projects attain intended goals and that those are consistent with the national interest. Nevertheless, choices are currently made by many actorssupplier and recipient firms, in particular, and governments. The long-term significance and promise of technology transfer is as a process that can stimulate continuing and self-sustaining economic growth in recipient nations, and one which can further the economic and technological progress of the suppliers as well. Whether these goals are achieved depends to a great extent on the wisdom of political leaders, particularly those in the recipient countries. The technology transfers examined by OTA have in most cases contributed importantly to the process of economic growth and technological development. Another aspect of long-term significance is the influence of politics on technology transfer, seen in recipient attempts to diversify suppliers and in increased efforts by suppliers to use technology as a lever to reach political goals. Both supplier and recipient partners necessarily consider not only the risks of technology transfer, but also the promise of mutually beneficial exchange. The next chapters analyze efforts by both recipient and supplier governments to introduce policies which attempt to ensure that techology transfers achieve desired results, PAGE 424 CHAPTER 11 Recipient Country Policies PAGE 425 Contents Page 425 425 426 427 428 430 430 431 432 435 435 437 438 440 441 442 444 444 448 453 462 467 INTRODUCTION . . . . DEVELOPMENT STRATEGIES Algeria . . . . . . Egypt . . . . . . Iran . . . . . . . Iraq . . . . . . . Saudi Arabia... . . . . Kuwait . . . . . . Implications for Technology Transfer . . . . . . . . . . . . . . . ., . . . . . . . ,..,., ., . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PLANNING AND ADMINISTRATIVE INSTITUTIONS. . Egypt . . . . . Algeria. . . . . Iraq . . . . . Iran . . . . . Saudi Arabia... . . . Kuwait . . . . . TECHNOLOGY TRANSFER: Regulation .,.. . . . Financing . . . . Manpower Policies . . KEY POLICY ISSUES . . Technology Transfer and the Foreign Policy Context CONCLUSION Government . . . . . . . . . Tables Table No. 91. Algeria: Page 427 428 429 431 432 449 455 465 469 Investments 1980-84 . . 1982-83 to 1986-87 . . . 1973-78 . . . . . 92. Egypt, Planned Investments, 93. Iran: Total Fixed Investment 94. Saudi Arabia: Planned Government Expenditures, 1975-80 and 1980-85 . . . . . . . . . . . . 95. Kuwait Government Draft Budget: Expenditures by Ministries 96. Oil Exports and Government Revenues, 1980 . . . .,.,, . . . . . . . . 97. Total Expenditures on Education Per Capita in the Middle East, 1970-75.: . . . . . . . . . . . . . . 98. OPEC Aid in Comparative Perspective . . . . . . . . 1A-1. Summary Recommendations of Major Policy Studies on Science and Technology in Egypt, 1972-80 . . . . . . . . . PAGE 426 CHAPTER 11 Recipient Country Policies INTRODUCTIO N Leaders of developing countries in the Islamic Middle East face a central challenge. With greatly diverse human, capital, and natural resources, they are making a determined effort to transform their economies rapidly, largely through the introduction of foreign technologies. In doing so, they are attempting to avoid excessive dependence on foreign suppliers of technology, to maintain their political legitimacy and to preserve Islamic traditions. Despite these common challenges, however, the policies of these countries reveal substantial variation in the ways they address these issues. While many of them are establishing policies and programs affecting technology transfer, none of these countries in the Middle East has implemented an explicit and cornprehensive technology transfer policy. Instead, technology transfer choices are normally made within the context of broader development strategies, and these have depended on the resources of each country, the vision of political leaders, and the social context. OTA's examination of policy approaches is designed to focus on the problems and promise of technology transfer for these recipient nations. This chapter reviews policy choices made by Middle Eastern countries that affect technology transfer. Development goals and strategies are compared; the capabilities of central planning institutions to formulate and implement technology transfer are discussed: and specific regulatory, financing, and manpower issues are addressed. In each case, stress is laid on the central tradeoffsbetween public and private leadership in economic development, between building an indigenous technological base and reliance on foreign assistance. Finally, technology transfer choices are set in the broadercontext of foreign policies. The analysis highlights common themes in the approaches taken by these countries, perhaps the most central being attempts to liberalize economies to promote the growth of private sector firms, particularly in the manufacturing sector. Strongly associated with this trend have been efforts to regulate the involvement of foreign firms and organizations to enhance technology absorption, limit dependence, and promote political goals. While success has been uneven and approaches have varied. leaders in all of these countries have attempted to promote these dual goals of economic liberalization and regulation of foreign business. DEVELOPMENT STRATEGIE S Development strategies have important imever, reflect the aims of Middle East planners; placations for technology transfer choices. Dethey indicate where development priorities lie velopment plans, of course, do not necessarily and how they change over time. For this reaprovide a good indication of actual performson, it is useful to examine briefly the developance. Crafted mainly as a guide to development plans of each of the six countries under ment, plan shortfalls have often been great review as a basis for understanding policies and priorities often reshaped. 1 Plans do, howrelating to civilian technology transfer. S(x$ for (xamplv, NI inistry of [)lanning, S:Iud I II r;il)l:i, }J;(iw Despite the broad similarity in aims, there cation Statistics Manual, summary. 1979 have been significant differences in the de425 PAGE 427 426 l Technology Transfer to the Middle East velopment strategies that each country has chosen. Some countriesEgypt, Algeria, and Iraninitially emphasized rapid development associated with heavy industrialization. Irans industrial dream, Algerias aim for heavy industrialization, and Nassers ambitious plans for Egypt in the 1960s were all examples of the desire to develop at a rate that would move each country into the 20th century within a matter of years. Saudi Arabia, Kuwait, and Iraq, in contrast, had somewhat more broadly based development strategies from the start, and the emphasis on heavy industry, if present at all, came at a later stage of development. In the 1960s, Egypt, Algeria, and Iraq emphasized a socialist approach to development; Kuwait, Saudi Arabia and Iran stressed the importance of market forces, even though the government played a leadership role in all three. Government budgets also differ in size: Saudi Arabias planned budget for 1984/85 is 60 percent higher than Irans, and exceeds by a far greater margin those of Egypt, Algeria, Iraq, and Kuwait. During the past decade all of the countries under review have reevaluated their development strategies, and in some cases dramatically shifted priorities. This occurred earliest in Egypt, with the adoption of the Open Door policy in 1973 in an effort to liberalize the Egyptian economy. In all of the countries under review, in the late 1970s and 1980s, the scope of plans was scaled back and sectoral priorities were shifted in response to oil revenue declines. ALGERI A Algeria began its development program by stressing rapid industrialization in the context of a socialist model of development. Toward the end of the 1970s, however, priorities shifted toward emphasis on the long-neglected agricultural and infrastructural sectors, and the economy was liberalized. Socialism has not been abandoned, but has been made what Western observers termed more pragmatic to meet the demands of contemporary Algerian society. In 1967, the Algerian Government launched its program of massive heavy industrialization, an orientation that continued well into the second and third plan periods. In the 197077 period, Algeria invested heavily in industry to the virtual exclusion or neglect of agriculture. During that period, the plan called for investment of 44 to 45 percent of the total budget in industry. Especially after 1978, with the death of President Boumedienne, domestic critics within the government planning community began to criticize the strategy of heavy massive industrialization. Facing financial constraints, moreover, planners reassessed the role of the private sector and foreign involvement. In the late 1970s, there was a marked shift in Algerian priorities toward the development of infrastructure, human resources, and agriculture. Efforts were made to open the economy more to private sector initiative and foreign participation, Table 91 shows the breakdown of expenditures for the latest 5year plan, 1980-84. This plan calls for total investments of $104,527 million, almost half of which is to be allocated for programs studied and/or approved in previous plans. Gross domestic product (GDP) is projected to grow at 8.2 percent annually. The largest investment, totalling $40,339 million, will be in industry, but its share of total planned investment has declined to 38 percent. And while industrial development is still fundamental to Algerias long-term policy, the focus has shifted from heavy to light industry. The countrys critical housing sector received an allocation of $16,656 million, or about 17 percent of total planned investment, and education and training and social infrastructure together com. 2 By 1978, Algeria had achieved a status which was unique in the Middle East. The rate of investment in domestic industrial development (and related) projects was approximately 40 percent. But this high level of investment was at the expense of improved social, housing and consumer levels, and caused regional imbalances in Algerias development. For planned and actual investments in agriculture and industry, 1970-77, see Invertisements, SYnthese du Bilan Economique et Social de la Decennie, prepared by the Ministry of Planning apd Regional Development (Algiers: Repuhlique Algerienne Democratique et Popu]aire, May 1980), p. 5. PAGE 428 . Ch. 11Recipient Country Policies l 427 Table 91 .Algeria: Planned Government Investments 1980-84 (AD million) Preprogrammed schemes industry . . . . . 79.5 Hydrocarbons . . ... 28,4 Agriculture .,, .,,, . . 17.8 Forests .,,..,, . 0,7 Agriculture ., . ..., ..., 6,0 Water . . . . . . 10.9 Fisheries ., ..., ..., 0,2 Transport/economic Infrastructur e 19,9 Communications . . 6.8 Railways . . . 1.8 Telecommunications. . . 1,8 Storage and distribution 8 8 Industrial zones . . 0.7 Housing, education, and training ..., . 30,3 Social infrastructure . 6.7 Health . . . . . . 3.6 Collective equipment . 2.4 Production enterprises 3,4 Total, . . . . . 196.9 Exchange rate $1 AD 38325 (19801 a Totals may not add because of rounding Expenditure, Expenditure Total 1980-84 beyond 1984 New schemes 132.2 49,2 41,6 3.3 17.9 19.1 1.3 36.2 12,5 7.1 6.2 9.0 1.4 35.4 14,3 6.2 10.9 21.6 3636 211.7 77.7 59,4 4,0 23.9 30.0 1.5 56.1 19.3 8.9 8.0 17,8 2.1 65.7 21.0 9.8 13.3 25,0 560,5 154.5 63.0 47,1 3.2 20.0 23.0 0.9 37.9 12,5 5.0 6.0 13.0 1.4 42,2 16.3 7.0 9.6 20.0 400.6 57.2 14.7 12,3 0.8 3.9 7,0 0.6 18,2 6.8 3.9 2.0 4.8 0.7 23.5 4,7 2.8 3.7 5,0 159,9 SOURCE Government of Algeria statistics and Middle East Economic Digest Nov. 21 1980 p 20 prised about 16 percent of total planned investment. The current plan thus represents a distinct shift away from the earlier preoccupation with heavy industrialization. EGYP T Egypt also had a socialist orientation and a similar emphasis on heavy industrial development during the 1960s, but this changed dramatically in 1973 with the economic liberalization initiated through Sadats Open Door policy. During the 1960s, rapid industrialization along socialist lines, intended to reduce dependency on exor neo-colonial powers, was the dominant theme of Nassers development strategy. Initially the Egyptian economy grew reasonably rapidly: industry and services increased their output and employment shares, while less emphasis was placed on the development of the traditional sector, agriculture. Concurrently, central planning became pervasive throughout the economy. By the late 1960s and early 1970s, however, the rate of economic growth in Egypt began to slow, and the rate of both investment and domestic savings sharply declined. Inefficiencies in the economy, costly external adventures such as the Yemen and-l 967 wars, heavy defense expenditures, and a rapidly increasing population posed heavy burdens. In addition, the industrial strategy of Egypt, which had relied on import substitution or on building indigenous industries protected by high tariff walls, proved problematic. Instead of a decreased import bill, the rising import costs of raw materials and spare parts could not be offset by the export of locally produced products. With the death of Nasser in 1970 and following the October War of 1973, the principles of a new economic strategy were put forth in President Sadat October Working Paper. In order to accelerate economic growth, the private sector was given a greater role and foreign investment was encouraged. The Open Door policy emphasized expansion of production capacity and the introduction of modern technologies (management systems as well as equipment) to realize that production. The Open Door policy has not achieved its stated goals, particularly the dynamic expansion of the private sector in industry and investment. But while fundamental economic reform re- PAGE 429 428 Technology Transfer to the Middle East mained elusive, Egypts economy grew at a comparatively vigorous rate during the 1970's. 3 The death of Sadat marked another change in development priorities, as a troubled world economy, the oil glut, and growing imports severely eroded Egypt foreign exchange balance. Although at the time Egypt was in the second year of the 1978-82 plan, a new 5-year plan was submitted in 1979. Table 92 shows projected targets in the present Egyptian plan for 1982/83-1986/87. The present plan calls for a total fixed investment of 34,790.6 million Egyptian pounds, with priorities directed to infrastructure (housing, utilities, electricity, transport, and communications) industry, and projects to increase exports. According to -GDP grew 8.1 percent annually during the 1970-81 period, and the manufacturing sector at 8.7 percent, The World Bank, J1orld lle~wloprnent Report 1983 (New York: Oxford Universit~ Press, 1983}, p. 150. For a detailed analysis of the complex relationship of public and pri~.ate sectors in Egypt, see John t$aterbury, The E~pt of ,Vasser and Sadat (Princeton, N.,J.: Princeton (lnitersit~ Press, 1983), especiall~ ch. 8. Table 92. Egypt, Planned Investments, 1982-83 to 1986.87 (in million Egyptian pounds) a Total Sector investments Agriculture and land reclamation ., ., 1,6784 -Irrigation and drainage ., 2,061,3 Industry and mining ., . 8,616,9 Oil . . . . 1,336.7 Electricity ., . ., 2,903,9 Contracting (building and construction) 9417 Total commodity sectors ., 17,538,9 Transport, storage, and communications 5,779,1 Suez Canal . . . 335.1 Commerce and trade ., ... ., 461.0 Finance and insurance ., ., . 119,2 Tourism ... ., ... ., . 452,5 Total production services 7,146,9 Housing . ... ... 4,636,8 Public utilities ... . ., . 2,858,6 Education services ... . . . . 920.8 Health services . ., 651,0 Other services ., ., . 1,037.6 Total social services ., ., ., 10,104,8 Total fixed investment . 34,790,6 Investment spending ., . ., ... 695.5 Total investment . . ... ., 35,486.1 Some totals may not add because of rounding a $1 0.8260 Egyptian pounds (July 1983) SOURCES Egyptian-British Chamber of Commerce Stephen Timewell and Robert Bailey, "Weighing Up the Prospects for Success Special Report Middle East Economic Digest July 1983 p 4 Egypts General Authority for Investment and Free Zones, the most important characteristic of the current plan is its emphasis on agriculture/agroindustry and infrastructure as targets for investment. This represents a shift from the reliance on basic industry as the key to future growth which characterized earlier plans, although development of manufacturing industry as well as petroleum and tourism is still given an important place. The emphasis is on transforming more of Egypts economy to an industrial base without minimizing the present and future roles of the nonindustrial sectors. IRA N Like Egypt and Algeria, Iran under the Shah embarked on a program of industrialization. But unlike those two countries, Irans program was market-oriented from the start. In Irans case the reevaluation that began in the late 1970s was accentuated by internal revolution. The Shah had consolidated his royal power in the early 1960s and initiated a reform program called the White Revolution. 5 By the early 1970s, the Shah declared that Iran would become one of the top military and industrial powers in the world by the turn of the century, and that by 1990 Iranians would enjoy the standard of living enjoyed by West Europeans. These dreams were called the Great Civilization, a sweeping 19-point program, which was reflected in Irans Fifth Plan (1973-78). Firstunlike Algeria and Egypt of the 1960sthe overall framework of the economy was to remain market-oriented, with the public sector providing the social overhead as well as a regulatory and supervisory function. At the same timeas in Algeria and Egypt industrialization would be accelerated. For this, the government would carry on some . 4 The General Authority for investment and Free Zones, The Official Guide to ln~estment in Egypt (Cairo, Egypt, 1982), p. 11. The White Revolution was a multifaceted modernization program begun in 1963. It consisted of six reforms, with one of the most important being land reform. These formed a basis for other reforms made subsequently, PAGE 430 Ch. 11Recipient Country Policies l 429 ... functions of entrepreneurship and financing. Third, stress was laid on basic needs in health, education, and welfare and on enhancing freedom and decisionmaking capabilities Finally, priority was given to large, capital-intensive projects, to be initiated by the government if the private sector hesitated. As shown in table 93, this plan called for a total investment of $36.8 billion during the 5year period, of which $22.2 billion was to come from the public sector and $13.5 billion from the private sector. Rapid growth in oil income, moreover-, permitted an upward revision of the fifth 5-year plan, with greatly increased spending on economic development, social welfare, defense infrastructure, and public administration. The revised plan, submitted in 1974, provided for a near doubling of investment, to $69.59 billion. Investment priorities remained with industry, oil and gas, and housing, but the shares of investment in transport and communications slightly increased. Performance, however, did not meet expectations. I n the mid to late 1970 economic activity was slowed by work stoppages, supply shortages, overloaded infrastructure, inflation, and inefficiency. It became increasingly clear that Irans economic activity could not continue at the same frenzied pace; it had to decelerate gradually into a more sustainable tempo in order to ensure continued long-term growth.) A new cabinet, installed ,Jt to NI :~jlis, (h ran I )orn(st i~$ Ser\ic>( i n 1(rs i an, ~ ( )i U!!, 1 !}~; i, t rarl~l:it t~d in 1 111 S, l)ail~ Report, South ~lsia, \ (1J ,H), 19x;). p. 1 ;\. Stw Iahe Petrossian, 4Khonl~~lni I ran l{adiat t,+ Sclf(onfidencc, ,Ifiddlt) i;;ls( F;(on[ ){]11( / )lg~ st, 31 [ir 1 ,R, 1 !)h:l, p 20; wv a]SO \ ~h(~ 1%t r~wsi:ir], Llh( [ ranian [;(onf)nl} l?n(k to hlssentials, .\liddlc }+;fist }+;(onon]i( l)if.~(~+[, \pr [i. I 9X4, p 1 H. Table 93. Iran: Total Fixed Investment 1973-78 (billion U.S. dollars) Share of Increase on revised original Original Revised budget (%) budget (%) Industry and mine s 818 1253 18,0 53 Agriculture/natural resources 2.67 458 6.6 72 Transport and communication s 279 729 105 161 Housing 596 13.78 197 130 011 and gas 683 11.72 16.8 72 Others 1041 1077 287 90 Tota l 3634 6959 1000 NOTE: Conversion based on $1 Rs67.50 Source: Complied from Bank Markazi Annual Report, 1974-76, p.34. from Robert Graham, The Illusion of Power, (New York St. Martin Press, 1978, p.31 PAGE 431 430 l Technology Transfer to the Middle East stated. Despite earlier statements that Iran did not need the presence of outside experts, the Iranian Government is slowly bringing back foreign experts from Western Europe, Asia, and the Soviet bloc. IRA Q Like Algeria and Egypt in the 1960s, Iraq began its economic development program with a socialist orientation; but unlike these two countries, the goal was not rapid industrialization. Instead, Iraq placed greater emphasis in the 1960s on agriculture and light industry. And beginning in 1972, major efforts were made to create a triadic economy based on oil, resource-based industries, and agriculture. Initially, this was conceived as a three-step process: In 1972, oil production and export facilities such as terminals and pipelines were expanded and modernized. Next, heavy investments were made in export-targeted, resourcebased industries in 1974-75. The development of downstream facilities related to hydrocarbons and petrochemicals was a centerpiece of this effort. The third step in the development plan involved consolidation and elimination of manpower and infrastructural problems. Significant emphasis was placed on agricultural development for the long term. Educational, medical, and housing sectors, which contribute to productivity of labor, were also central concerns. As elsewhere in the Middle East, a decline in real oil prices in the late 1970 caused a reevaluation of development strategies. But for Iraq in particular, the necessity to trim back development plans was exacerbated by the outbreak of war with Iran. Initially, Iraq adhered to a policy that emphasized continuing both the war effort and economic development policies full steam. Today, however, with no end to the war in sight and tremendous declines in oil revenues, Iraq has been forced to abandon this policy. In 1983 the decline in aid from the Gulf States, coupled with the shutdown of Gulf oil terminals and the Syrian pipeline, led to severe austerity measures, with only the most strategic development projects continuing to receive public funding. g In the latest 5-year plan (1981-85), expenditures were projected to reach $75 billion, with emphasis on services, electricity, transport, and construction. SAUDI ARABI A Saudi Arabia and Kuwait (discussed later) are both market-oriented, oil rich, and relatively poor in indigenous labor. They are attempting, through the purchase of advanced technology with their tremendous oil wealth, to diversify their economies away from oil. But whereas Saudi Arabia has emphasized industrial development, Kuwait as a city-state has shied away from this-outside of the petroleum sector. From the early 1970s Saudi Arabias development strategy focused on balanced economic development in a free market economy. Saudi Arabias relatively balanced and modest first 5-year plan (1970-75) reflected these aims. Spending, including defense, was only $8.8 billion (1970 rate of exchange) and was primarily aimed at basic infrastructure, such as ports, roads, and schools. When the oil price increased in the middle of the first plan, there was no chaotic rush to development; instead, the first plan was extended by 2 years, to 1975, generally along the same guidelines. The second Saudi 5-year plan (1975-80) was aimed at industrial development and human services, particularly higher education and telecommunications, with health services (in contrast to those of Kuwait) receiving only 2 percent of the budget. Total spending rose to a supposed $142 billion, or more than 16 times that of the first 5-year plan. But as a result of substantial underspending and earnings much higher than anticipated, reserves grew to more than $100 billion by 1980. During the decade of the 1970s, then, initial emphasis on infrastructure gave way gradually to stress on industrial plans and manpower development. 9 Human losses from the war with lranestimated at over 50,000 as of ~ec~mb~r 19&j ha~~ drained 1 raq of much-needed manpower resour~~s. See l~o~er Nlatthews, 4 raq: lhe fleal and Unreal ~rar, Iinancia] ?imes, l)ec. 9, 1983. PAGE 432 Ch 11Recipient Country Policies 431 With the decline in oil revenues in the early 1980s, Saudi development plans were cut back, although shifts in sectoral priorities were not as great. Table 94 shows total government expenditure by sector for the second and third development plans. The third 5-year plan reflects a continuing commitment to finish basic industrial plants. But instead of the past emphasis on high growth in all sectors, relatively free import of foreign labor, and infrastructure development, the plan now stresses selective growth, consolidation of the foreign labor force, and economic and human resource development. Infrastructure, for example, received half the total development budget in the second plan, but only a planned 35.5 percent. of the budgeted funds in the third plan. Instead, the third plan places heavy emphasis on training Saudis and replacing foreigners, reflecting the concern about the failure to reach the manpower training goals of the second development plan. Beginning in 1982-83, Saudi Arabia began to slow (and even cut in absolute terms) the level of public expenditure. In 1983-84, expenditures were reportedly about $68 billion, and revenues were about $64 billion, producing a deficit estimated at $3 billion to $14 billion. Saudi Arabia made a comparatively smooth adjustment to lower income levels. 10 Fldnlun{i ( )Sulli\:in, .Saudl :Ircll]i:i: 1 .[>tirnin~ t{) 1 ,l~t, on 1,(+>, lliddl(I }..a,s[ }<;(on(m]i( l)ig~).st, NI ar. 9, 1 $)x 4, p. 20. Like other Middle Eastern countries (e. g., Egypt in its free zones), Saudi Arabia stresses regional development in its plans. One feature which stands out in this regard in scope and scale are two industrial development projects, Yanbu and Jubail, which the Saudi development plan accords special consideration (see ch. 5). In this respect, the objectives of the third plan include the construction of massive whole new ports and cities for basic petroleum and energy-related industries, as well as the building of needed industrial and community infrastructure and the training of Saudis to man the industrial plants, Today, the Saudis have begun planning the fourth 5-year plan period, scheduled to begin in the spring of 1985. With much of the essential infrastructure already in place, efforts will continue to diversify the oil-centered economy. The challenge of building the manufacturing sector in a period of slower growth in oil revenues will undoubtedly be a central issue in the years ahead. KU WAI T Of the Middle Eastern countries under review, only Kuwait decided early not to build large nonoil industries, recognizing that it was too small to support more than a few industries, and mostly those associated with petroleum. Instead, Kuwait has plans to emerge as Table 94. Saudi Arabia: Planned Government Expenditures, 1975.80 and 1980-85 (in SR billion, current prices) Total planned expenditures b 2nd plan 3rd plan 3rd plan percent percent Function of expenditures (1 980-85) (1 975-80) (1 980-85) Economic resources development ., 261,8 251 373 Human resources development 1296 15.9 185 Social development 61.2 9.4 8 7 Physical infrastructure ., ., 249,1 496 35.5 Subtotal: development . . . ., 701.7 1000 1000 Administration . . . . . . 31.4 6 7 4 5 Emergency reserves, subsidies . . . 496 159 71 Total civilian expenditure 7827 1226 1116 a $1 U.S. 3.33 SR (1980 year average) b The total excludes 1) tranfer payments 2) noncivilian sectors, and 3) foreign ai d ( ~dc,Frj r,. ,j t II ,jl an (j P st \ m aterj +ICil LIr,s I c n ~ rlerl r ( 1 Iti(, ; f I +< fj H Jrr 11St dt r IIC I I Irl Pc, PII n, r~ I~S /, I h Jirim,jr +,1 Ir!l II I, ,At ift (l I t 11 \ dn{j jU(j II Id ,in(l ,+1 I Q I { JLIC, ,~qt.Ic I(. S SOURCE: Kingdom of Saudia Ministry of Planning Third Development Plan.1400-1405, A.H. 1980-85, A.D. p.88 PAGE 433 432 Technology Transfer to the Middle East a financial and service center for the region. In the early to mid-1970s, therefore, government investments were concentrated mainly in public works and services. Despite the establishment of the General Authority of the Shuaiba Industrial Area, industrialization has remained a lower priority, and the approach has been cautious and gradual. As in other Middle Eastern countries, the financial pressures ensuing from lower oil revenues caused a basic change in the pace of Kuwaiti development which began in the late 1970s. In 1983, project expenditures were substantially reduced, and several large projects long underway were temporarily stopped or canceled. 11 But in light of continued high investment income for Kuwait, these changes represented more of a scaling back of existing plans rather than a reorientation of priorities. Government investment in industry is mainly confined to oil-related enterprises, where the goal is to upgrade and expand the refining sector and perhaps to build a petrochemicals complex. Outside of the oil sector, Kuwaiti plans have stressed expenditures in urban development, ports, transportation and roads, power generation and transmission, and social programs (table 95). The government, although providing some incentives, leaves industrial development to Kuwaiti entrepreneurs. To summarize, all of the Middle Eastern countries under review have had generally similar development goals: sustained economic development, infrastructure building, development of manpower resources, and improvement in basic living standards. All of them have reevaluated development strategies during the last decade, with the result that emphasis has in most cases shifted away from exclusive stress on heavy industrialization and toward economic diversification. Nevertheless, specific development goals vary widely (ranging from Kuwait aim of becoming a financial center to Algerias stress on agriculture and light industrial development) as do approaches to : A (>use i n point w.~s th[ i ndd init~ p~stp~nem~nt of ~ l]illion dollar petrochemical complex. See Coping in the (;ulf, The J1a.shington Report, hla~ 30, 1983, pp. 4-5. Table 95. Kuwait Government Draft Budget: Expenditures by Ministries (Kuwait Dinars, in millions) Expenditure by ministries 1981-82 Defense, Interior, and Justice 312.8 Education . 221.5 Health . . . . . 171.7 Information . 40.0 Social and Labor Affairs 43.2 Electricity and Water 538,7 Public Works . . 260.2 Communications 75,8 Finance (General Adm. and General Accounts) ., .....1,127,8 Oil 3.3 Planning : : : : : : : : : : : : : : : : : 21.8 Housing and Government Property . . 1,6 Commerce and Industry 44,5 Endowments and Islamic Affairs . . . . 9.5 Foreign Affairs ., . 23.9 Amiri Court and Others ., 33.4 Supplementary allocatio n 66.6 Total expenditures .......3,007.7 a 1 KD $359 U S (1981 average) NOTE Does not include investment income 1982-83 338,0 246,0 191.5 39.2 48,9 619.0 231,5 73.8 1,012.4 90,5 27,9 1,2 44.3 9.6 20.2 38,7 124.3 3,168.0 Percent change 8.0 11.0 11.5 .0 13.2 14,9 11.0 -2.6 10.4 374.2 28,0 25.0 ,5 1.0 9 15.8 86,6 5.3 SOURCE: National Bank of Kuwait vol One No 2 October 1982 these goals. These different development strategies have important implications for technology transfer. IMPLICATIONS FO R TECHNOLOGY TRANSFE R Technology transfer from abroad has been a major requirement of all the development strategies pursued by Middle Eastern countries. Initially, however, little explicit attention was given to technology transfer in official policies. Iran was probably the most vigorous in its early pursuit of Western technology transfer; other countries such as Algeria and Egypt initially relied more on the Soviet Union. In the past decade, however, all of these countries have come to place high priority on the acquisition of Western technology. In addition, as development goals were reevaluated, issues concerning the scale and type of technology transfer, the relationship to foreign suppliers, and the role of science and technology policies were more directly addressed. PAGE 434 Ch. 11-Reclplent Country Policies l 433 One key issue has been the decision about whether to import capitalor labor-intensive, industrial or nonindustrial, technologies. With a limited manpower base, Saudi planners have chosen capital-intensive technology in order to build world-class industries. In prerevolutionary Iran, where the population was many times greater, leaders likewise attempted to acquire state-of-the-art, capital-intensive technology while talking about employment-generating, foreign exchange-saving, or linkagecreating technologies. In those countries poorer in capital but richer in labor, this has become a central issue, In Egypt it is being debated and official policy remains unclear. Some planners argue that capital-intensive technologies are needed in some sectors to complement continuing laborintensive production in others. Other planners, however, oppose this approach, which they see as weakening local manufacturers while making Egypt even more dependent on foreign suppliers. In Algeria, where development plans shifted away from heavy industrialization, labor-intensive technology importation has become more prominent. While capitalintensive technology transfers remain central to the development strategies of all those countries, in some cases there has been growing interest in labor-intensive technologies. A second major issue has revolved around relationships with foreign suppliers of technology. Desiring technology developed abroad, but wishing to limit dependence on foreign technology, these countries have adopted widely differing approaches. Kuwaits approach to technology transfer has been to purchase directly from foreign suppliers. In some cases, this has involved the equity purchase of foreign firms. To Kuwaiti planners, investment in foreign companies and technology transfer go hand in hand. Probably the best known example is Kuwait Petroleum Corp. (KPC) purchase of Santa Fe International Corp. in 1981. The purchase of Santa Fe for $2.5 billion has given KPC substantial upstream capability in exploration and oilfield services. C. F. Braun & Co., Santa Fes subsidiary, provides KPC with in-house process engineering capacity, already being utilized in a major domestic refinery upgrading scheme. Kuwait 25 percent investment in the West German firm Hoechst reportedly led to an ammonia supply agreement with that company. 12 This investment-oriented approach has been questioned at home by those concerned with costs and by observers in the West who worry about foreign acquisition of domestic firms. While investment in a foreign firm does not guarantee technology transfer, it may open up markets for products and facilitate long-term interactions. In Saudi Arabia, on the other hand, planners have emphasized technology transfer through joint ventures. Foreign capital investment in the field of manufacturing, the Saudi Consulting House states, particularly in the form of a joint venture for which considerable incentives are granted, is highly encouraged in the Kingdom. The basic objective is to effect a transfer of technology and management know-how." 13 Saudi leaders welcome continued foreign involvement because they believe it ensures technology transfer. The Saudi strategy requires the joint venture foreign partner to provide advanced technology, sometimes to market the product, and often to provide training for Saudi nationals. Egypt also encourages joint ventures, but more for financial than manpower reasons. In Saudi Arabia, the shortage of technical manpower is a main stimulus. In years past, Algeria, Iraq, and prerevolutionary Iran, more wary of foreign involvement, have all stressed acquisition of technology in turnkey plants, with technical assistance designed to lead more quickly to independent operation. Iraqi planners set a strategy whereby foreign expertise may be utilized in Iraq for a period of time t o train indigenous cadres, but only on a short-term basis. PAGE 435 434 l Technology Transfer to the Middle East Algeria has also traditionally emphasized technology transfer through turnkey operations, for many of the same reasons. But unlike Iraq, Algerian planners began in the early 1970s to promote joint ventures with foreign partners, albeit on a more limited basis than did Saudi Arabia. The Chadli government currently supports joint ventures with foreign firms on a close to equity basis rather than large-scale turnkey contracts because such joint ventures will, it hopes, encourage more technology transfer through in-house training of Algerian personnel and the greater longterm commitment of the foreign partner to the joint enterprise. As technology transfer has increased, many Middle Eastern countries have attempted to establish a more coherent plan for linking science and technology development. Especially during the past few years, many of the countries under review have begun national planning exercises to define policies better in this area. Policy makers concerned about the ad hoc nature of their approach to technology transfer and limited technology absorption believe that policies must be greatly improved in this area. For some years now, Egyptian leaders have been working to build a science and technology policy for their country, (App. 11A includes a summary of major recommendations from studies on science and technology in Egypt.) An Egyptian 5-year plan for science and technology, completed in December 1982, marks the first time that such a plan has been attempted, and is an impressive achievement. The plan is very broad in scope. One problem has been linking the general discussions of science and technology to the immediate needs of the end-users of technology. For example, a draft code on technology regulation is under development, but sectoral priorities have not been set. This exercise has undoubtedly increased coordination and awareness among government agencies, however. In many of the other countries under review, organizations have been established to formulate national science and technology policies. In Saudi Arabia, for example, an independent agency-the Saudi Arabian National Center for Science and Technology, or SANCSTwas created in 1977 to formulate and coordinate a national science policy for the Kingdom, to direct scientific research to areas of national interest, and to oversee the acquisition of foreign technology. Two objectives have been central to Saudi discussions of a science and technology policy: the transformation of societys material conditions through the selection, transfer, and management of advanced technology while simultaneously preserving cultural values; and the development of the Kingdoms natural and human resources by reducing the economys dependence on foreign manpower and on depletable hydrocarbon resources. All of the countries have viewed scientific research as important to building an indigenous technical base. Science is, however, generally rather removed from the immediate needs of industrial end-users of imported technology in developing countries. It is therefore striking that in all of these countries, technology transfer has become an issue in its own right. As a matter of national debate among key leaders, the emphasis has often been on coordinating the various government agencies involved in an attempt to formulate a more consistent policy. In practice, however, routine decisions about which technologies to import, from whom, and under what conditions tend to be driven by development plans as implemented by the functional agencies. PAGE 436 Ch 11Recipient Country Policies l 435 PLANNING AND ADMINISTRATIV E INSTITUTION S Institutions that plan and carry out development strategies are critical for technology transfer because they incorporate technical, commercial, managerial, financial, and research expertise required to diagnose problems effectively and to select and fully absorb technologies. The purpose of this section is to review institutional mechanisms developed in Middle Eastern nations. The central themes are changes in institutional structure, and the relationship of public and private sectors in formulating and implementing technology transfer policies. As in other developing countries, Middle l+; astern leaders face two central institutional issues important for technology transfer: creating an effective network of institutions to formulate and implement technology transfer policies and defining the respective roles of the public and private sectors. The countries under review range from those, such as Egypt, where the number of organizations involved in technology transfer is very large and the decisionmaking apparatus very diffuse, to countries such as prerevolutionary Iran, where decisionmaking was highly centralized under one man. Similarity, variation is evident along the second dimension as well: Saudi Arabia and Kuwait encourage the private sector to play a central role in technology transfer, while socialist countries such as Algeria and 1raq have in years past more carefully circumscribed the private sector role. Despite these differences, the countries under review have much in common. First, these countries are not unique in their efforts to create efficient institutions and in their struggle with issues such as centralization versus decentralization of decisionmaking. Second, it should be stressed from the outset that the public and private sectors are actually closely interrelated in the countries under review; and while it may appear on the surface that the two are at odds, they are very much mutually dependent. In all of the countries under review, moreover, the state plays the pivotal role in technology transfer, while the role of the private sector has been limited. It is particularly striking that in recent years, all of the countries under review have increasingly pursued policies aimed at more administrative decentralization and a greater degree of economic liberalization in promotion of the private sector. This has been true even in those countries, such as Algeria and Iraq, that have pursued a socialist and centrally directed course of development. In attempting to develop effective institutions, policy-makers in the Middle East must deal with concerns of various political and social groups. Powerful groups-such as those that have vested interests in the status quo often oppose reform aimed to improve efficiency. Institutional questions therefore should be viewed not only as matters of efficience, but also as political and social issues. EGYP T In Egypt, a large number of government organizations-ministries, authorities, agencies, and departments-participate in the planning, project implementation, and operation of public companies, and the number of government employees is comparatively high. By the mid1970's, more than 1 million employees were concentrated in government administration. During the latter part of the 1970s, the number continued to grow reflecting a tradition of guaranteeing a job to all university graduates. By the late 1970s the Egyptian Government employed about one-third of the total work force and paid nearly two-thirds of the national wage bill. 14 Within this wide range of people and institutions, the Ministry of Industry and Mineral Wealth-which is responsible for the formula14 Waterbury, op. cit., p. 244 PAGE 437 436 Technology Transfer to the Middle East tion of industrial policies that influence technology transfer and their implementation is a key institution. Its main operating arm, the General Organization for Industrialization (GOFI), formulates the long-term industrial strategy and makes routine decisions that directly affect technology transfer to Egypt. The main functions of GOFI that relate to technology transfer include the formulation of industrial development plans to guide the public and local private sectors; cooperation with foreign and domestic organizations and firms transferring technology; collection of data on industrial production and assistance in the dissemination of information on technological innovation; identification of investment opportunities; conduct of preinvestment and feasibility studies for industrial projects; participation in conjunction with concerned companies in concluding contracts for machinery and equipment deliveries; review of applications submitted by foreign investors; and examination of applications submitted to the Ministry of Industry for licenses to establish or expand Egyptian industrial private enterprises. GOFI has a broad mandate and exercises considerable authority in dealing with specific cases of technology transfer. In addition to GOFI, a number of other institutions are involved in different aspects of technology transfer. Under Law 43 of 1974 the main law governing foreign investment in Egypt (see below)the General Authority for Foreign Investment and Free Zones (GAFI) was established as its primary implementing agency. While the Board of GAFI must approve all private investment proposals, however, the technical evaluation of proposed investments is made by the appropriate line ministry and is ultimately reviewed by GOFI. The Academy of Scientific Research and Technology (the ASRT) functions as a coordinator of science and technology policies, as mentioned above. The ASRT, in turn, is comprised of a number of specialized research councils, such as the National Council of Education, Scientific Research, and Technology (NCESRT), the National Council of Production and Economic Affairs (NCPEA), and principal committees, that work to build policy consensus in various areas. The ASRT and its committees, however, are not the actual implementors of technology transfer. As mentioned earlier, the private sector has also been promoted in Egypt since the early 1970s. Today, however, the role of the nonagricultural private sector in the Egyptian economy is still limited, and the public sector predominates. The large Egyptian Government bureaucracy has gained a reputation for inefficiency and lack of coordination among the large number of public enterprises, government agencies and organizations, and private companies. Indeed the present Egyptian 5year plan expresses concern over problems in the public sector, including poor administration, managerial and technical capabilities, inadeduate allocations for replacement and renewal of assets, increasing indebtedness and liquidity problems, increasing losses due to the governments attempts to control price movements 15 Technology transfer is constrained by long delays in approving foreign investment projects and lags in delivery of goods. 16 Economic and bureaucratic reform remain common themes among Egyptian planners. But while Egyptian planners stress the need to streamline the public sector and provide the private sector greater scope, most of the investment envisaged in the present 5-year plan is allocated to the public sector, and decentralization of decisionmaking has progressed slowly. Egypts Minister for Investment Affairs and International Cooperation, Wagih Shindy, has since assuming his post in 1982 announced a series of antibureaucracy measures" directed at encouraging foreign investment. 15 Quoted in Charles Richards, Made in Egypt-A Presidents Dream, ~j~~le ~~s~ Hconomjc Digest, Special Report, July 1983, p. 20. Although the public sector accounts for about 90 percent of current industrial investment, for example, it pro\ides less than three-fourths of industrial output. 1For a discussion of this, see David Ignatius. k;gyptian BureaucrzlcJ. G ails Both the Public and Foreign Investors, 7he \{.all S,h-eet JournaJ, Mar. 24, 1983, p. 1. For a discussion of some of the private and public sector debates, see Hen~ Br-ut,on, L]rivate I+;nterprise and Social Welfare, In~estment Re\riew, July 1980, p. 3. PAGE 438 Ch. 11Recipient Country Policies l 437 These include shortening the review period for foreign investment proposals and consolidating the authority to eliminate the confusing overlap of responsibility among various ministries. While it is too soon to know whether the effect of these measures will be to improve the Egyptian investment climate, these steps indicate strong commitment among some Egyptian leaders to reform. ALGERI A Although there are many who play a role in technology transfer to Algeria, decisionmaking in Algeria as it relates to technology transfer is comparatively centralized, with a limited role reserved for the private sector. The main actors are the ministries and the 60 to 70 state companies, or the societs nationales, under their jurisdiction. The Ministry of Planning and National Development, the most significant organization in setting overall priorities for technology transfer, determines the goals of the 5-year plan and any subsequent modifications. Other ministries are responsible for decisions concerning their particular sectors. The ministries currently responsible for setting priorities and planning for the government in the five sectors studied by OTA, for example, are the Ministries of Planning and Regional Development, of Energy and Petrochemical Industries, of Health, of Posts and Telecommunications, and of Transportation and Fisheries (for civil aviation), and the Presidents Commission for the Development of New Forms of Energy (for nuclear power). State companies such as the oil and gas company Sonatrach are the end-users of the technology in most cases. Algerias private sector has traditionally played only a small role in technology transfer. During the first 6 years after President Boumedienne came to power ( 1965-71), most of the industrial and service sectors and all major foreign and domestic enterprises were nationalized and organized into national, stateowned corporations. It is estimated that by 1972, Algerian state-owned companies controlled 90 percent of the industrial sector and employed 70 percent of the industrial personnel; the public sector was clearly dominant in most areas of economic development and almost all areas of technology transfer. Nonetheless, despite this heavy centralization of the public sector, a small but significant private sector has continued to exist in Algeria, with the public sector clearly dominant and the private sector concentrated in light industry and the services. The Algerian Government encouraged this by offering strong material incentives to private investors, for example, to invest in projects deemed vital by the government. 17 In the mid-1970 s, under the new Chadli government, the private sector was further expanded. With a significantly better record for productivity than the state or public sector, the private sector was officially encouraged to participate in the development process and was allowed greater leeway in its participation. In theory, the authority to make decisions about technology transfer is clearly specified. The appropriate minister (e.g., of Energy and Petrochemical Industries) decides on a given project after a state company (e.g.. Sonatrach) makes the proposal. The sector of Sonatrach that has initiated the project then negotiates the project, being responsible for the publication of the tender, the selection of the most appropriate offer made by international contractors, and the negotiation and implementation of the contract terms. However, the minister may exercise veto power. Once the contract is approved by the minister, the state company responsible for initiating the project purchases equipment and begins implementation. In practice, however, a high degree of centralization in decisionmaking requires a large number of intermediate steps that often result -As outlined in the I n~est ment code of 1967, t hcse includwi a 1 O-} Car total or partial ext~rnption from real est atv tax; w du(t ions on s(}me import (Iut ie<; tax exemptions: and (Jt h[r ln (ent i~es to att rac>t part icularllr Iargtj pri~at(~ sector in~rwt nl{~nts in industr~. PAGE 439 438 l Technology Transfer to the Middle East in considerable delays. Technology transfer at every step of the process in Algeria, from visits of the chief executive officers of major U.S. firms to Algiers to the signing and execution of contracts, has been fraught with delays and a degree of bureaucratic arbitrariness that seriously impedes smooth and harmonious cooperation. 19 According to foreign businessmen, approximately 60 signatures may be required by Sonatrach to authorize the purchase of spare parts for a gas liquefaction plant. In general, delays from 1 to 2 years from contract letting to final contract approval are apparently not uncommon. To combat these shortcomings, the Chadli government has instituted a number of measures to decentralize decisionmaking in many public sector institutions and to further legitimize the role of the private sector. It has also introduced a number of measures to cut down on corruption 20 and to streamline the operations of existing institutions-such as the establishment of the Audit Council. The recent decentralization of Sonatrach into 13 sectors, for example, and the reorganization of other state companies (e. g., Sonacome, the State mechanical engineering company) suggest a greater concern with efficiency in Algerias public sector. In addition, a resolution adopted in late December 1981 by the Central Commit n an incr~a~in~l~ r~~ul~ted, incr~asin~l~ superlrised and ino-~~sin~l~ i n~ffi~i~nt ~orld, the A l~eri~n bur~aucr~q n) ~int ains its standing us onc of the most difficult with which to deal tJf)hn Nellis, hl :Ila{inlini str:]tic)n: (auses or Result of ~]nderd(~{~}opl~~ent! h(~ Algerian I<; xample, Canadian tJournd of .A\fricarI Studies, Trol. 13, No. 3, 1 W), pp. 410. 1 ntertriews in 1988 with two French officials direct]} int[)l~ed in ntgot i at ing cent racts with :Ilgtrians for in frast ructural projects {e. g., dams, railroads and rapid trtinsit s~stems) suggested that the many. intermediate steps- negotiations on tont ract terms, the written acceptance of the contract b~r both parties the issuance of a letter ot award b~r the Algerian part}, t ht formal signing of the contract, ministerial approval of the cwntract b? the rele~rant ministr?, financial appro~al of the (Y)ntract b~~ the !LIinistry of Finance, issuance of an import license {authorlsatitm generale-are frought with dela}s and red tape. -kor a discussion of this and other nleasur~s to n~onit(~r or cut down on corruption in publir sector organizations, see R. Kh. lhe 1 n-l louse opposition Mhich Bendjedid 1 nherited Krorn IIoumedienne and Augmented is a I%e\rentive Measure That I)id Not f~orestall opposition Outside the Government. .41 \ahar .41.4ral)i Wa A~-Duwa]i, No. 190, No\emher 1982. PP ZZ-2H; translated in 1 I S, Stat us of I,(Nal opposition ,lnal~zed, Joint Iublications Ilesearch Ser\ice, Near I{ast South Asia, tJan, 1, 198;1, pp. 1-3. tee of the Front de Liberation Nationale (FLN) Party assigned a greater economic role to Algerias private sector. The Planning and Regional Development Ministry, for example, has set up a new department to promote industrial opportunities for private businessmen in Algeria. 21 But while the private sector is being strengthened, the Algerian Government has not departed from preserving the leading role for the state in the strategic sectors and most aspects of technology transfer. The role of the private sector thus remains circumscribed, and the public sector is still clearly dominant in large-scale industry, finance and imports, and much of agriculture. IRA Q In Iraq, technology transfer decisions in particular, and planning and supervision of economic growth generally, are centralized in the presidency, the Revolutionary Command Council (RCC), the Bath Party, and the ministries of government. The RCC and the party set economic targets and priorities, with input mainly from the Central Bank, the Planning Ministry, the Finance Ministry, and the line ministries. While major project goals are formulated at all levels, proposals compete for attention at the RCC and planning levels and the RCC serves as final arbiter. The inner workings of the RCC and Bath are not well understood outside Iraq. Keeping in n-m-id that directives from administrative or party superiors may be interposed at any point in the process, however, the basic elements of decisionmaking can be briefly described. Details of the proposed project are J n addition, beginning in Januar}r 19H~l, the 31 wilayates, or pro~incial gotrernrnents in Algeria ha~e been gi~en the authorit} to recei~e contracts from pri~ate Algerian firms to initiate public projects with the provincial go~wrnment or with municipal go~~rnn~ents, although this ma~ not exceed about ;10 million .I. L), (approximately $6.6 million). See Algeria Relaxes Iri\ate Sector Iiarriers, ,$lici~lf~ l;a,st l{conomic 1)igest, hla~ 13, 1983, p. 40. YIhe National Assembly, recentlJ resurrected, has not attained the importance it held in planning before the rise of the l~aath Pa:~:, particularly in its high]? centralized current form. Also significant here could lx the l{egiona] I\ner~~ (on~nlission, b ~t this has }et to become apparent. PAGE 440 Ch. 11Reclplent Country Policies l 439 sketched out by planning board officials, often in consultation with foreign experts and advisors. Preferences for certain kinds of equipment have been developed by the line ministries, based on political considerations, past performance, reputation, and other factors such as terms of credit. Bids are invited largely through resident commercial attaches. Three criteria have been important in the selection of a project to be implemented by a foreign concern in Iraq: the projects importance for the countrys welfare, its speed of implementation, and its size. A final decision to proceed is made by the Committee, composed of the Oil-Affairs, Follow-up, and Agreement Implementation Committees. Once a project has been selected, it is carried out under the direct supervision of the committee or, if the committee so decides, of a ministry or other official or semiofficial authority. The committee is the legal authority to which the contractor must appeal for making necessary decisions relating to the project and for granting any exemptions. A technical co remittee is also formed to coordinate and study the mode of implementing the project. The technical committee may award special exemptions and privileges, such as tax exemptions and lifting restrictions on work permits. Thus the contracting officials have considerable discretion in defining the terms of the contract. The Ministry of Industry, especially its Standing Committee for Growth and Development and its Organization of Industrial Investment, regulates technology transfer. In practice, several observers have cited a relatively high degree of centralization and coordination in Iraqi economic planning. A significant factor accounting for this coordination in policy, these observers feel, has been the personal loyalty due the President and the similarity of background of a number of leading participants; several, for example, have come from the village of Tikrit, are relatives of the President, or have served with the President in other capacities. Nonetheless, the system is not monolithic in Iraq. The technocrats, who have been increasingly Western-educated, are afforded opportunities to make proposals that may be at odds with those of the main political leaders. In Iraq, the input of technocrats is considered important, but their views may be overruled at any point by a relatively small group of political superiors. As Iraqs President Saddam Hussein has stated: You cannot deal with the major economic and technical questions without consulting the technical experts. But do not leave the job of economic leadership to them. Give them no opportunity to assume the role of leader. Instead, they must always work under the direction and leadership of the revolution, which has unlimited capacity and expert technical knowledge. It knows the revolution, understands the methods by which to alter society in general and which direction the change should take, and uses every economic movement to serve itself and its aims. 23 Although the private sector has traditionally played a very small role in Iraq, in recent years the government has attempted to liberalize the economy and invite private firms to play a larger role. In Iraqs first 5-year plan, for example, 50 million Iraqi dinars were set aside for industrial private investment; the present plan (1981-85) includes 380 million dinars for the purpose. The Iraqi Government has also been expanding the industrial cooperative bank, offering low-interest loans to private industrial investors. And Law No. 115 enacted in 1982 offered other incentives to private investors. The permitted ceiling on the size of private investments was raised and tax exemptions were offered to private indus. We .Anlir Iskander, Saddam Iiusscin: ht> lighttr, ht> hinker, and The ,Ilan (Paris: I{achettc Realites, 19H()}, p. 2;1:]. See [;okernment Encourages Pri\ate Sector. translation of The Baghdad Obser\wr (Clela Khoshaha), Sept. 24, 19S;1. p 4, in tJ PRS Near F;ast South .Asia, Ihx. 14, 1 !)Hl]. p. 20 1 n rtspc~nse t {~ t hest and other measures, t ht amount of pri \ a t (I i m ~e+t ment in 1 raq has clear]} grown }~cc(lrding to official Iraqi est i m at [s. pri ~ate in~est mcn t in i ndus t rn grew from 1 I ) 24 4 million 197 2- H 1 peri(d tt~ 1 I ) 150 million in 1982 PAGE 441 440 l Technology Transfer to the Middle East .. trial firms; profits which are reinvested into research and development and the purchase of patent rights and know-how, for example, are now tax exempt. Iraqi decisionmaking is thus comparatively centralized, but differences in the viewpoints of the political and technocratic leaders nevertheless surface, and the private sector has been promoted. Political leaders, however, make the final decisions. The war with Iran has led to many strains on the system, leading to delayed negotiations with and payments to foreign contractors. IRA N The administrative framework for technology transfer was quite centralized in prerevolutionary Iran. It rested largely in the hands of the monarchy .25 The cabinet, consisting of some 20 to 30 ministers and other technocrats handpicked by the Shah himself, was responsible for translating the Shahs broad objectives into actual plans. But unlike many other constitutional monarchs, the Shah played a personal and direct role in the decisionmaking process. While the various ministries were in charge of implementing projects, the Plan and Budget Office (PBO) drew up the national development plans. Under the nominal jurisdiction of the Prime Minister, the director of PBO enjoyed a great deal of autonomy and direct access to the Shah. PBO drafted the 5-year development plan as well as the governments current expenditures budget. A second layer of more functionally specific institutions provided funds or addressed specific aspects of project implementation. The two most important funding institutions to facilitate the goals of industrialization were the Industrial Credit Bank (ICB)affiliated with PBO and mandated to provide loans, equity financing, and technical assistance, primarily to the public sector companiesand the Industrial and Mining Development Bank (IMDBI), a quasigovernmental bank whose functions included 25 See Robert Graham, Iran: The Illusion of Power (New York: St. Martins Press, 1978), chs, 8 and 12. loan, equity, and technical assistance to the private sector. In addition to financial institutions, the Ministry of War also had access to financial resources and sometimes directly imported or set up its own industries. The Military Industries Organization (MIO), an umbrella organization established by the Ministry of War, set up firms such as the Iran Electronics Industries (IEI). IEI, for example, was established with the goal of making the military, and eventually the entire economy, self-sufficient in a wide range of electronic products. It set up subsidiaries and signed a variety of technical assistance contracts with major U.S. electronics firms such as Westinghouse and Control Data Corp., and by the eve of the revolution in Iran at the end of 1978, had assembled a professional cadre of about 2,000 electronics engineers and other specialists. In the civilian sector, a similar nucleus of industrial innovations and entrepreneurship was the Industrial Development and Renovation Organization (IDRO), created by Parliament in 1967. IDRO was an autonomous government corporation mandated to: 1) establish and operate certain heavy industries; 2) renovate and rejuvenate the deteriorating government factories through technical, managerial, and financial assistance; and 3) contribute to the development of technical and managerial skills in Iran. IDRO created a management and technical training school (Industrial Management Institute), a consulting group (Technology), several dozen manufacturing firms such as the Arak and Tabriz machine tools factories, and the Metallurgical Research Center Co But while the government of Iran was the prime instigator of development and technology transfer, as IDRO exemplified, the private sector grew to be a significant part of the economy and, in particular, an important source of investment. Iran saw the rise of industrial private entrepreneurs, oriented toward export industries, who were increasingly involved in technology transfer. Postrevolutionary Iran initially appeared to be a sharp departure from the Shahs Iran. PAGE 442 Ch. 11Recipient Country Policies l 441 Some institutions of government were dismantled, new Islamic institutions were created, and state control of the economy was expanded. Recently, however, Iranian Government and religious leaders have reestablished some institutions from pre-1979 and appear to be trying to provide a bigger role for the private sector. In contrast to earlier statements, Iranian leaders have recently encouraged a greater role for the private sector in the Iranian economy. 26 Thus, in Iran today as before, the relationship of the government to the private sector firm remains an unsettled issue. The dominant role of government planning, however, remains the central theme. SAUDI ARABI A Government decisionmaking in Saudi Arabia remains primarily in the hands of the royal family, but many other people are also involved in economic decisionmaking. 27 The key participants in the formulation and administration of technology transfer policies are the ministries, a number of specialized agencies that have been created during the past 12 years (including industrial, consulting, and research organizations), and funding organizations such as the Real Estate Development Fund and the Public Investment Fund. The key ministries responsible for industrial development are the Ministry of Industry and Electricity and the Ministry of Planning. The latter is responsible for preparing the Kingdoms 5-year development plans. The former >For a discussion of the role of the pri~rate sector in postre~olutionar} I ran, see Kind J1ords for the I)ri\ate Sector. .Iliddle East Fjconomic Z)igest, No\T. 25, 1983, p, 11. The article quotes Ayatollah hlontazeri as stating on .No\. 9: 4 Past experience has shown that go~ernment without reliance on the pri~ate sector and without adequate protection for it will be unable to meet popular needs I f the government wishes to establish an efficient system of distribution without the need for engaging more and more salaried personnel, it should work in cooperation with the private sector hl aj lis Speaker Ilasherni Rafsanjani is quoted as ad~ocating a greater role for the pri~ate sector as well, albeit within limits: The private sector should be present, and free enterprise is one of our primarj principles. For a detailed description of Saudi Arabias political system, including the Council of NI inisters, see louad A1-Farsy, Saudi Arabia. .-t Case .5tud.\ in Development ( I.ondon: Kegan Paul, 1982), ch, 4. Photo credit Aramco World Magazine K I ng Khalid holds impromptu court at inauguration of Ju aymah Fractionation Plant and Marine Export Terminal, 1980 is responsible for processing foreign investment applications and for regulating domestic industrial development and industrial cities. Of the specialized agencies, four are most important in the development of hydrocarbonbased industries, and hence for technology transfer associated with them: the Saudi Basic Industries Corp. (SABIC), the Royal Commission for Jubail and Yanbu, The General Petroleum and Minerals Organization (Petromin), and ARAMCO. A government holding company under the chairmanship of the Minister of Industry, SABICS purpose is to carry out an industrialization program based on Saudi Arabias gas and oil resources. With an authorized capital of over 10 billion Saudi riyals (SR) in the late 1970s, SABIC has set up a number of petrochemical and metal projects in cooperation with foreign investors. SABIC also setup the Royal Commission specifically to guide the development of Jubail and Yanbu, two industrial cities on the east and west coasts, respectively. Petromin, the Kingdoms oldest hydrocarbon development organization, and ARAMCO (now fully owned by the Saudi Government) have for years been important actors in technology transfer. The Saudi Consulting House (SCH), an independent organization, provides consulting services to government agencies and private PAGE 443 442 l Technology Transfer to the Middle East investors. Formed as a spinoff from the Ministry of Commerce in the mid-1970s, it provides professional and technical services in three areas: engineering and technical services, economic industrial and management services, and legal services. Also a spinoff of the Ministry of Commerce, but still under its jurisdiction, the Saudi Arabian Standards Organization (SASO) maybe increasingly important to technology transfer to Saudi Arabia because its purpose is to develop national standards for all commodities. SASO has participated in international and regional organizations since its founding in 1972 and has been assisted by the U.S. National Bureau of Standards under the auspices of the U.S.-Saudi Joint Commission. In addition to these institutions, R&D is promoted by other institutions, some mentioned earlier, such as the Saudi National Center for Science and Technology (SANCST). The University of Petroleum and Minerals is also a major resource for industries; it houses the Saudi Arabian Institute of Scientific Research, which has links with research institutes in the United States, Europe, and Japan and is undertaking projects in environmental science. The Public Investment Fund (PIF) is the key funding institution for basic industries and technology transfer. Chaired by the Minister of Finance, and capitalized at a total of 16.6 billion SR (about $4.88 billion) in 1978, PIF has been involved in major petrochemical joint ventures under the third plan and is also empowered to buy and sell shares in newly established companies. Other funding organizations include the Saudi Industrial Development Fund (SIDF), the Real Estate Development Fund (formed in 1975), and the Saudi Arabian Agricultural Bank, which was formed in 1962 but did not become very active until the late 1970s. Unlike Algeria, Iraq, and 1960s Egypt, promotion of the private sector has always been at the core of Saudi development strategies. Emphasis on the private sector has increased in recent years. In Saudi Arabia, incentives such as loans on favorable terms have been provided to private investors by SIDF. In addition, promotion of joint ventures between Saudi Arabias growing private sector firms and foreign partners was to be carried out through the planned National Industrialization C 0 28 Other incentives include tariff exemption on imported equipment and materials; tax incentives assistance with studies and operations; provision of low-cost utilities and fuels; and the provision of infrastructure, including industrial estates. Thus, the general approach is for the state to take a lead in the planning and execution of major industrial projects at an early stage and to promote private enterprise in nonoil manufacturing. KUWAI T In Kuwait, the development of financial institutions has been the main effort, in line with Kuwaits efforts to become a financial center in the Middle East. Central to this effort are Kuwaits three large investment banks, or the three Ks, as they are commonly called: the Kuwait Foreign Trading Contracting and Investment Co. (KFTCIC); the Kuwait Investment Co. (KIC); and the Kuwait International Investment Co. (KIIC). KFTCIC, formed in 1965, is the largest of the three and is 80 percent government owned. Unlike the other two, it is actively involved in the Eurocredit market and in direct investment abroad. KIIC, on the other hand, established in 1973, is smaller, almost exclusively privately owned, and involved primarily in Kuwaits domestic economy, primarily in tourism, shipping, and the hotel industry. In the middle, both in terms of size and in combination of public and private sector ownership, is the KIC, formed in 1962 with 50 percent ownership by the government and 50 percent by private interests. The 28 The SIDF provides interest-free loans of up to 50 percent of capital to industrial projects with a service charge of 2 to 3 percent, and managerial advisory services. See also, Michael Petrie-Ritchie, Saudi Arabias NIC Seeks Foreign Partners, Middle East Economic Digest, Apr. 6, 1984, p. 45. The same article reports that the number of privately owned industries grew from 600 in 1975 to 1,600 in 1984 (with a total of almost $8 billion invested). PAGE 444 Ch. 11 Recipient Country Policies 443 KICs main purpose is to develop investment opportunities for Kuwaiti surplus capital, emphasizing joint ventures with Kuwaiti equity participation. In addition to the three Ks, Kuwaits six commercial banks, three specialized banks (real estate, industrial development, and savings and credit) and other financial institutions such as the Kuwait Finance House (KFH, Kuwaits only Islamic bank) play a key role in Kuwaiti development and technology transfer. Most important among them is the Central Bank of Kuwait (CBK) which is the second largest commercial bank in Kuwait. In addition to acting as banker and financial advisor to the government, the CBK also finances Kuwaiti development projects. Although its international operations are extensive, the thrust of the banks activities is domestic, Major domestic projects in which CBK participates are the industrial relocation of Sabhan, the supply and installation of switchgear at Shuaiba North power station, road construction and other services, and performance guarantees for refineries and drilling platforms. To handle overall responsibility for the general management and supervision of Kuwait investments (over $75 billion in 1983), the National Investment Authority was approved by the National Assembly in June 1982. The National Investment Authority will gradually take over management of all Kuwaits reserves, which amounted reportedly to $74 billion in mid-1983. Outside the financial sector, several other Kuwaiti institutions are also important for technology transfer. In addition to the ministries that are involved in purchasing and transferring technology, the state-owned Kuwait Petroleum Co. (KPC) is the main institution acquiring technology in the hydrocarbon sector. KPC has been involved in long-term investment development of Kuwait oil industry. During the past few years, KPCs domestic operations have been extensive: oil and gas exploration, drilling, and production fall under the purview of its Kuwait Oil Co. (KOC); production, marketing, and sales of petrochemical products fall under the Petrochemical Industries Co. (PIC); crude oil and gas refining and marketing of refined products fall under the Kuwait National Petroleum Co. (KNPC); and overseas exploration falls under the Kuwait Overseas Petroleum Exploration Co. (KOPEC). Chapter 5 discusses Kuwaits downstream investments in Europe, where refined products will be marketed. The Kuwait Institute for Scientific Research (KISR) is the key institution for R&D. With a wide mandate, KISR supports assessments of industries and technological development in Kuwait and joint scientific projects with foreign organizations. KISRs National Scientific and Technical Information Center (NSTIC) is considered a major source of information on science and technology, KISR currently is involved in research ventures with international institutions such as the Battelle Institute in West Germany, the Institute of Petroleum in France, the IFAS in Sweden, Nevadas Desert Institute and Chicagos Gas Institute in the United States, and with several American universities. In Kuwait there have been attempts to control the growth of the civil service to make government more efficient and less dominant in the economy. As a city-state, Kuwaits goal of becoming a regional financial center sets it in contrast to the other nations under review. PAGE 445 444 l Technology Transfer to the Middle East TECHNOLOGY TRANSFER: KEY POLICY ISSUE S REGULATIO N Middle Eastern countries have established laws and regulations to encourage technology transfer and to ensure that a capability to operate and maintain technology is gained, that unfavorable impacts are minimized, and that dependence on foreign assistance is limited. The specific legislation and regulations of each country, therefore, include both incentives, in response to the demand for technology and know-how for rapid development, and regulations, in response to the desire for extending indigenous capability and control. On the one hand, all of the countries under review have offered incentives for technology transfer such as tax holidays, guarantees against nationalization, and security of investments and import/export regulations. On the other hand, regulations have been introduced to channel foreign investment into certain economic sectors or geographical areas of the country, to ensure a level of local ownership, and to require training of indigenous personnel. The use of agents-required in some Middle Eastern countries, and prohibited in othersprovide both incentives and disincentives for technology transfer. And licensing although limited-has also been accompanied by regulations that require provision of technical services in each of the countries under review. Despite these overarching similarities, there is substantial variation among the countries. The legislation and regulations of Egypt, Saudi Arabia, Kuwait, and prerevolutionary Iran, for example, have tended to be more supportive of technology transfer than those of Iraq and Algeria. In the latter two countries, regulations have generally been more stringent, but both countries appear to be loosening controls. Similarly, the prominence of Islamic law varies throughout the region, although its direct impact on technology transfer has generally been limited. Egyp t A complex combination of incentives and regulations is perhaps best illustrated in Egypt. Although not specifically designed as a legal instrument for regulating the transfer of technology, Law 43 of 1974subsequently revised in Law 32 of 1977sets the legal context in which technology transfer occurs. Devised as part of Sadat Open Door policy, its purpose is to attract foreign investment and technology transfer mainly from the Western industrial nationsto develop the country and to channel that investment into areas of the private sector. With regard to incentives, investors who form a company under Law 43 are given tax breaks, financial support, and assurances about nationalization and import/export regulations. Under a comprehensive tax reform law passed in 1981, companies covered by the law enjoy a tax holiday of 5 years; they are excused from all taxes on income and distributed profits for a period of 5 years from the year following commencement of the project. This exemption also covers reinvested profits, special reserves, and undistributed profits earned during the 5-year period but not distributed until later. Foreign employees under Law 43, moreover, are not subject to a general income tax; instead, they pay special purpose taxes associated with it. Law 43 enterprises are subject to few foreign exchange controls and are guaranteed against nationalization or expropriation of private property. And while Egypt export-import regulations were liberalized in 1975 for the business community as a whole, Law 43 companies enjoy further exemptions. In addition to these incentives, Law 43 stipulates a number of regulations governing types of technology transfers permitted and other performance requirements. The benefits of Law 43, with few exceptions, are available PAGE 446 Ch. 11Recipient Country Policies w 445 only to foreign investors who set up joint venects involving majority Egyptian particitures with Egyptian companies (public or pripation. vate) or Egyptian individuals. According to Article 3 of Law 43, foreign investment must Saudi Arabia, Prerevolutionary first of all be in projects requiring internationIran, and Kuwait al expertise and foreign capital and must fall into categories contained on the list prepared by the General Authority and approved by the Council of Ministers. Projects proposed in the fields and activities not included on such lists may nevertheless be considered when they are of particular importance to the development plan and general policy of the state. Law 43 As in Egypt, legislation in many of the oilrich states, such as Saudi Arabia and prerevolutionary Iran, has also been designed to attract foreign investment. While financing is less a concern for these countries, foreign investment is encouraged as a means of gaining foreign technical and managerial expertise. gives special priority to projects that will genIn Saudi Arabia, joint ventures are viewed crate exports, reduce the need to import basic as a means of encouraging Saudi involvement commodities, and stimulate regional developin industrial development, and firms with Saument. For example, it encourages foreign indi partners are given preference in contract vestment in construction outside of the maawards. The Saudi Government therefore projor cities, like Cairo and Alexandria, and vides significant incentives for forming joint especially in newly created free zones." 29 Egypt has recently become more encouraging of joint ventures. In general, approved projects must involve some Egyptian participation although apart from classes involving local currency banks, construction contracting projects, and technical consulting firms, there is no legal minimum percentage. 30 This contrasts with the investment incentive laws of many of the other countries under ventures. The government provides up to 60 percent of the financing for new industries at 3 to 6 percent interest rates. The Saudi Government formerly offered crude oil supplies at a rate of 500 barrels per day (bbl/d) for each $1 million of actual investment by a foreign partner in petrochemical projects. While SABIC no longer offers crude oil incentives, several benefits remain: low-cost loans, infrastructure benefits, and tax holidays. study that impose strict limits on the extent In prerevolutionary Iran, foreign investof foreign participation (generally 49 percent) ment was also encouraged, largely through the in all but very high-risk projects. Nonetheless, Law for the Attraction and Protect ion of Forin practice Egyptian leaders emphasize proj eign Investment (1955) and the Law for Broadening the Industrial Ownership Base (1975). Act of 1954). West Germanv (the Promotion who plan to export the majorityof their production." In conwith Great Britain, Italy. and France were negotiated to foster foreign investment and other goals. Saudi Arabia and Iran have also instituted a number of restrictions. Saudi planners have begun to exercise greater selectivity in projects, favoring manufacturing enterprises. Foreign commercial representation is limited to Saudi nationals, and Saudi law stipulates that preference be given in contract awards to joint PAGE 447 446 Technology Transfer to the Middle East ventures more than 51 percent Saudi-owned. And a recent resolution by the Council of Ministers requires that 30 percent of the work under Saudi Government contracts must be subcontracted to local Saudi contractors. While this resolution has been somewhat controversial and serious questions remain as to interpretation, it reflects a growth of regulations encompassing foreign employment, training of indigenous workers, tendering of bids and technology transfer. 31 Iranian legislation prior to the revolution governing technology transfer did not stipulate 51 percent ownership, but administration of Iranian law made it impossible to create wholly owned subsidiaries there and was increasingly explicit in limiting foreign equity holdings. Kuwait has for some time generally been somewhat more restrictive of foreign investment than have Saudi Arabia or prerevolutionary Iran, although Kuwait is considered to have a liberal trade policy. Kuwaits Industrial Law of 1965 limited foreign commercial representation to Kuwaiti nationals, generally limiting foreign entry to Kuwait and raising the cost of doing business there. The Law of Commercial Companies (1960) requires a majority Kuwaiti interest in all forms of business enterprise. In joint ventures, 51 percent of the capital in a joint venture with a foreign partner must be Kuwaiti, and any non-Kuwaiti participant must be guaranteed by a Kuwaiti. In addition to these restrictions, however, Kuwait has also extended a number of incentives to investorsin areas such as tax and customs duty exemptions, profits, tariff protections, and government purchases. Algeria and Iraq Toward the other end of the spectrum are Iraq and Algeria, where restrictions are more stringent. But there are signs this situation See H. Richard Dallas, *The 30 Percent Rule: Understanding and Complying With Resolution No. 124, Middle East Executike Reports, March 1984, pp. 9 and 21-4, See also 6Saudiization: The Emerging Trends, Middle hast Executive Reports, June 1984, p. 16. The article reports that an Offset Committee has been established to promote technology transfers in advanced technology sectors. may be changing. The overarching law affecting technology transfer in Algeria is the 1966 Investment Code, as amended in 1982. The law, as amended, allows for foreign companies to invest in the Algerian manufacturing sector as joint venture partners with Algerian state-owned firms. New legislation proposed by the National Assembly in 1983 introduces new economic incentives for joint ventures such as tax holidays and special tax treatment for reinvested profits. These proposals also permit foreign firms to repatriate the distributed portion of their net annual profits, but the amount is not to exceed 15 percent of the value of foreign equity in the investment. These incentives are designed to encourage the acquisition of new technology that may be more appropriate for the new enterprises success and profitability, and to thereby avoid expensive imports and acquisitions that the foreign firm may have sold to the Algerian firm if it were operating independently. In the area of management, these incentives encourage in-house sharing of managerial skills between the new partners in an attempt to make the state-owned sector more efficient in the long run. The Algerian Government also stipulates several conditions in its contracts with foreign suppliers: 1) the suppliers must guarantee the quality of the final product they contract for; 2) the bona fide offers of foreign firms must be guaranteed by the foreign suppliers government against bankruptcy, default, or failure to honor the terms of the contract; and 3) the training of Algerians must be mandated in every contract. (This is also true in many of the other countries; see below.) In addition, the following conditions are also stipulated: 1) all joint ventures must allow for local manufacturing and licensing and must contain provisions for introducing new technology or know-how to Algeria; 2) joint ventures must be made with state-owned companies; and 3) a detailed contract (protocole daccord) must be drawn up before a joint venture is entered into, which must include licensing and training provisions but which cannot set production limits or fix prices for products manufac- PAGE 448 Ch 11Recipient Country Policies l 447 tured. Foreign firms cannot be granted a monopoly in Algeria. In Iraq, legislation and regulations concerning technology transfer are more restrictive. The basic law covering mechanisms for interacting with foreign firms in Iraq is the Commercial Company Law No. 31 of 1951, as amended. This law provides the structure for the formation and management of partnerships, companies, branches, or agencies of a foreign company. The few joint ventures involving foreigners in Iraq are involved primarily in special projects in technical fields. For these projects, three forms of partnership are recognized by Iraqi officials: collective company (general partnership), commandite company (limited partnerships), and partnership at will. Local Agent Laws The use of local agents is an important, and often required, means of winning contracts throughout some countries of the Middle East, such as Saudi Arabia and Kuwait. Where required, such agents are used to gamer political influence in bidding contracts. Their role, however, has generally been expanded to involve assuring contract performance and maintaining continuing client relationships. Hiring well-placed agents, therefore, has been one of the most important means of penetrating new markets for firms with little prior experience in a country. The Saudi Agent Law, for example, specifies that every foreign company must be registered through a Saudi agent, meaning either a Saudi company or corporation, A foreign contractor who has no Saudi partner must have a Saudi service agent. The only exception is in the provision of sales and services to the Saudi Ministry of Defense and Aviation. Kuwaits New Commercial Law of 1981 also requires that all business conducted in Kuwait be carried out through a Kuwaiti agent or through a Kuwaiti majority-owned company. An exception might be made for consultants and engineers, as long as they are not offering management services; otherwise, they, too, must have a local agent. 32 Elsewhere, the use of agents is greatly limited, if not specifically proscribed, by law. In Algeria, for example, the use of agents is prohibited by law, since all foreign trade is transacted by the government or the national companies. Use of agents is governed by the foreign intermediaries law of February, 1978, which explicitly proscribes the use of foreign agents for foreign firms in Algeria that might solicit contracts. Foreign suppliers are required to sign an affidavit certifying that they did not use agents. Licensin g For all of the countries under review, a relatively small share of technology transfer occurs through direct licensing to local firms, and most technology transfers occur between joint venture partners or within a multinational to a subsidiary in the Middle East. As discussed in chapter 4, technology transfer to the Middle East has occurred largely through technical service contracts, which were valued at $4.4 billion during the 1978-82 period (see table 30). Even in petrochemical production, where large payments for licenses have been made, these have been associated with large projects which include construction, project management, training, and operations and maintenance. Transfer of know-how to developing countries in the form of technical assistance has grown in recent years, but it is in many cases impossible to assess the value of discrete payments for patents or licenses. Some Middle Eastern recipient nations have introduced restrictions both in the magnitude of licensing payments allowed by law and in the structure of the licensing agreements themselves. For example, in many of the countries under review, foreign investment laws See Quent in Flemin&T, ( i uide to l)oing l)usiness on c hfI \ r:i l)i:In }eninsul;i ( New }ork: ,4maconI, 19S 1 ), pp. 51-57. SLY also Saudi Arat)io: (onlmercial Agenc} 1 ,aM, lfiddl(~ F;:i,<[ /,(()nc)mi( l)i~w.~t, A pr, 4 and 27, 1984. PAGE 449 448 l Technology Transfer to the Middle East place limits on the amount or rate of licensing payments and place restrictions on patents and trademarks. In Egypt, which is itself an exporter of technology to other Middle East countries, protection for patents is granted for 15 years initially, renewable for 10 or more under certain circumstances. 33 Algerian Patent Law (Ordinance No. 66-54 of Mar. 3, 1966) specifies a 20-year period for which patents of inventions will be issued. In Algeria, patents of invention must be used within 3 years from their grant or 4 years from their filing date, whichever is later. Like foreign investment, moreover, the structure of licensing agreements has changed as well. Although licensing agreements are formally vehicles for the simple sale of a license or patent, today they have come to represent a complex package of increasingly high technological and managerial proportions. Broadly speaking, there are two ingredients in a technology license agreement: the transfer of patent, trademark, and other rights and the provision of technical and managerial assistance to a licensee. The majority of technology transfers include organizational and production management assistance as well as the transference of rights and documentation, so that the recipient country will be able to translate the rights and technical documentation into viable production output, In many Middle Eastern countries, the proportion of technical and managerial services in licensing packages is relatively high. In Algeria, for example, the technical services paid for by enterprises component of technology license payments amounts to 70 to 80 percent of the total. In most cases, however, only scanty information 33 By taking a flexible approah, the Investment Authority. states, the go~rernment, is trying to make it as easy as possihle for I+:gyptian priirate and public sector industries to get the benefits of useful new technolom. he (;enera] AuthoritJ for I ntrestrnent and Free Zones, The official (;uide to ln\(stmtIrI/ in };~~rpt, op. {it., p. 40. For discussion of ~j~~pt role us a technology exporter, see Tagi Sagali-Nej ad, *Transfer of T~~chnolo~ From J+;g~pt, paper presented at .+lmerican E;conomic /association, New }ork, I)ec. !28-30, 1982. Fo r (1 NT 11)() t,stinlat(>s of te{hnolog? transfer to de~.eloping countries, see (Jnited Nations 1 ndust ia] I)e\elopnwnt organization, .St~c.on(i \lorld Ilide Stu(i> of tht~ l)c[ro(ht[z]i~:~l Industr>,. hla~ 1 :), 198], 11) Jf(; ;1:16 3, p. 27:). is available on payments for licenses and patents. Islamic Law Another aspect of Middle East law which may affect technology transfer is that found in the Koran. 34 All of the countries in the Islamic Middle East adhere to Islamic tenets in their judicial system. Approaches differ, however: Saudi Arabia emphasizes comparatively strict adherence to sharia (sacred Islamic) law, while Kuwait has developed a system of codified laws seen as consistent with Islamic texts. Islam has often been a unifying force in regional efforts at cooperation in technology transfer and scientific research, and efforts have been made to promote Islamic science." 36 But in all of the countries under reviewwith the possible exception of Iran-the role of Islamic law has not been significant in technology transfer and has not been a constraint to the notion of technological change. In Iran, justice systems are based entirely on precepts and interpretations of Islamic law. But even here, there have been controversies concerning the meaning of these precepts for technology transfer, reflecting varying interpretations of Islam. 37 FINANCIN G For the six countries under review, paying for technology imports has posed less of a problem than it has for most developing countries. Stated in simple terms, financing involves allocation of revenues among various development priorities, decisions which in turn determine patterns of technology transfer. One facet of the issue is whether a countrys exports during a given year are sufficient to Tile sacred text of Islam. )See ]Ierhert J. I.ietwsny, 7he l.:iwF of [he .\ear and Aliddle East Albany, N.}.: State Universit?r of New lrork Iress. 1975), pp. 11)i and 111. S(I( Riches and I)o\ert~ in the Muslim Mor]d. Financial {6 ~ 7in]es, ,July 12, 1977, p. 15: and Ziauddin Sardar, Science, Technology} and Lkrelopment in the Afuslirn Horld ( I,ondon: Croom flelrn, 1 977), passim. -See Riad Ajami, Arah Response to the ,ifultinationals (New }ork: lraeger lublishers, ] 979}, pp. 136-137. PAGE 450 Ch 11Recipient Country Policies 449 cover imports, as indicated in current account balances. Because all of these countries depend on oil exports as a major source of revenues, as indicated in table 96, they have all been challenged to adjust to a period of lower oil revenues in the early 1980 s. Related issues involve the degree and type of dependence on foreign sources of funding (including aid), as well as policies concerning foreign investments and use of foreign reserves. Finally, the capabilities of domestic financial and commercial institutions (public and private) influence exchange rates as well as capital formation domestically. The discussion that follows focuses primarily on the first two sets of issues involving the relationship of the economies of recipient countries to foreign sources of capital and investment. With regard to their capabilities to finance development projects involving technology transfer, these countries fall into two groups: those that finance with and those that finance without foreign assistance. For the oil-rich countries of the Middle East, such as Saudi Arabia, Kuwait, Iran, and Iraq, imports have been financed without assistance from foreign official credit agencies. As shown in chapter 2 in table 1, these four countries built up sizable cumulative current account surpluses in the 19-80 period. As oil revenues have recently fallen, financing has become a concern even for these countries, but as discussed in chapter 3, most of them still have large reserves and investment incomes. For those countries whose exports and reserves have not been sufficient to cover imports and debt service, such as Egypt and Algeria, questions of financing technology transfer have been very important. Both Algeria and Egypt accrued cumulative current account deficits of approximately $10 billion each during the 1973-80 period. The Iraq-Iran War has reduced Iraqs oil exports and led to a drawdown in reserves, with the result that beginning in 1981 the country was unable to cover imports with exports. Iraq, thus, in the short term has joined the group of countries where financing is a major problem. Despite the common concern about financing among these countries, their approaches to financing technology imports differ, with Algeria presently relying primarily on hydrocarbon exports; Egypt, on foreign aid and borrowing in addition to oil exports and remittances; and Iraq, on producer credits and the reshaping of financing terms, long-term commitments for oil puchases, and loans from other Arab countries. Egyp t Very little financing for development projects in Egypt now comes, or will come in the immediate future, from the national budget. Instead, the current pattern is to finance technology transfer through debt (medium or long term), government-to-government financial assistance, international donor grants or loans, or supplier financing in the form of concessionary loans. Accordingly, Egypt is most dependent on external sources of financing. U.S. economic assistance (of about $1 billion) and aid from other Western nations to Egypt amounted Table 96. Oil Exports and Government Revenues, 1980 Oil exports as Oil revenue as percent of 011 exports as Country percent of total exports percent of GDP a government revenue b Saudi Arabia . . . . . 963 72.4 89.3 Kuwait ,. 99.9 878 91 2 Iraq 99.2 651 852 Iran 944 16.3 643 Algeria 918 308 554 Egyp t ,. 230 74 200 a 1980 b 1979 ( Iraq 1977. Iran 1978) C Net Oil exports. SOURCE: Jahangir k II ,,IC,< F, ,)f, r-, Uek e), I ; IIII. J I ~ I P ,Irl t] f(ir[~I,IIF ,1, ~!, I ( L$, i >r/L~ L5J ds!I I qt 1,rl D C I nler nat II I r ,;1 t,l I t j r [ I I I 1 4 i ~ t ,ik f t f r n it 1 t ,J [ 11 PAGE 451 450 l Technology Transfer to the Middle East together to more than $2 billion annually in the early 1980s. Egypt has been seeking to facilitate financing of technology transfer through revitalization of private sector banks, encouragement of foreign development banks, and efforts to maintain levels of remittance flows. Because the banking industry is dominated by public sector banks, the main form of financing is that negotiated by the central government and arranged for through the four public banks. After a restructuring of the banking system since 1973, private banks now sometimes play a role in financing projects involving technology transfer. The new Cairo Hospital, for example, a $30 million project, is a combined Kuwaiti-Egyptian investment with a scheduled 25 percent return on investment and a 3to 5-year payout. 3 Investment banks also play a limited role in financing technology transfer to Egypt. While there were few offshore banks in Egypt prior to 1973, Law 43 created a much expanded group of investment and business banks. As of 1981, there were 25 special banks registered with the Central Bank, of which 17 were branches of foreign banks, and 8 joint XI,~ans covered 70 percent of costs ($12 million) and were pro\rided by a consortium of private banks at an interest rate of 11.5 percent for a 7-vear period, Photo credit: U.S. Agency for International Development Baking bread in Egypt. U.S. Public Law 480 assistance provides wheat and flour to Egypt, while efforts are made to increase agricultural output of Egyptian farmland ventures with a growing loan portfolio and deposit base. These banks may establish investment companies and, with 51 percent Egyptian ownership, may also operate with local currency. But while this group of investment and business banks has experienced enormous growth in Egypt, their investments have been more in tourism and real estate than in capital projects. The Egyptian Government is reportedly attempting to ensure the continued flow of remittances, a major source of foreign exchange earnings. Under an agreement reportedly concluded with Iraq, remittances from Egyptians working in Iraq will be regulated through Egyptian public sector banks, to assist Egyptian workers to remit their earnings from Iraq and to create more foreign exchange in Egypts commercial bank pool. 39 Thus, the base for more extensive financing of the purchase of technologies has expanded in Egypt in the past 9 years, but Egypt remains dependent on foreign aid and borrowing. The extent to which other domestic sources of financing will serve that purpose more extensively in the future depends in part on reform of the public sector and growth in the private sector. Algeri a Although none of the countries under review rank among the more extreme LDC debtors such as Brazil or Mexico, Algeria, like Egypt, has also incurred large debts during the past two decades. However, Algeria has recently attempted to turn away from foreign aid and borrowing. Instead, present Algerian policies stress that the main sources of financing should be exports of natural gas and crude oil, followed by increased private investment and binational loans. Indeed, since 1980, Algeria imposed a moratorium on foreign borrowing. Organizations such as the International Monetary Fund or the Common Market are no longer major lenders. In the present 5-year plan, 60 percent of funds for investments are Pad to Raise workers Remittances From Iraq, Cairo, MENA, in Arabic, Aug. 20, 1983, reported in FBIS PAGE 452 Ch 11Recip/ent Country Policies l 451 expected to come from the foreign exchange earned from estimated annual revenues of$12 billion from petroleum and natural gas. The explanation for this policy must be traced to the high government debts accumulated during the 1970s. During the 1960s and 1970s, public enterprises accumulated enormous debts which were financed in large part by advances from the treasury. By 1980, the national enterprises had accumulated bank debts of almost $5 billion, and the manufacturing sector alone accounted for almost $3 billion of this debt. Since 1978, the Algerian state has held a monopoly over foreign trade. The socits nationales and the government ministries have been the exclusive importers of foreign technology and have been financed by resources from hydrocarbon revenues and by foreign loans and grants of credit. In 1980, the Chadli government made it official government policy that hydrocarbon revenues be used effectively to stimulate production.) One major effect of this decision was practically to eliminate international borrowing by state enterprises in 1980-82. In 1983, however, Algeria turned to the World Bank and Arab funds for financing. 41 Emphasizing hydrocarbon exports as the major source of foreign reserves, Algerias financing policies have been strongly related to oil prices. Like Nigeria and Venezuela, Algeria has gained a reputation as a maverick within the Organization of Petroleum Exporting Countries (OPEC) by frequently demanding higher than agreed-on OPEC prices per +llgtrian [cc)nomitt I]ennisad wrote rewntl}r the international wdtrenc~ of Algeria resides in her present, in her re~enues from the explt)ration of oil and in the immediate future in the execution of contracts for the export of natural gas. See hl. ~;. 11~nnisad. J;conon]ic> du l)e~eloppement de 1 Xlgeric, sousde~elopp~m[rrt et sfxialiwne, 1 962-/32 (Paris: Economica, 1982), p. 252. IIA\ dIwuswId In c}). ;), total deht has remained high: in 19/31 th( tota\ tstirnat(d disl)urs(d external debt was $17.5 hillion, and t hr deht ser~ ic~ w a \ est i ma t ed at 25 perccn t of i reports. I n 198:1, Algeria\ $! })illiorr in foreign deht ser~ice pa~m[nts amounted to ~~4 percent of its exports. Th[> dt>ht ser~ice ratio i~ (xpec. ted to fall in 1984 and thereafter. See Nigel I I ar~c}, Jllgeria. .Iliddf( F.:i.st l;c.~~nf~mi( I)igest, hlaJ 4, 19~4, p. 52. barrel of crude oil, but has usually succeeded in selling all oil lifted to foreign purchasers. Recently, exports of natural gas have offset any shortfall Algeria may have felt from the slack oil market in the early 1980 s. Because of an impressive hydrocarbon production record, Algeria will probably continue to enjoy relatively easy access to international lending markets at favorable interest rates throughout this decade. Long-term prospects hinge on Algerias ability to expand nonoil revenues to replace dependence on hydrocarbon exports. Ira q Iraq is a newcomer to heavy borrowing. During the 1970 s, foreign reserves grew. Beginning in the late 1970 s, however, the situation began to change, and the war with Iran has rapidly depleted foreign reserves. According to one estimate, Iraqs $12 billion surplus in 1980 fell to an annual deficit of $8 billion to $10 billion by 1983. 43 In light of dramatically declining reserves caused by war expenditures and declining oil revenues, Iraq has turned for financing to producer credits and to long-term commitments for oil purchases. In addition, the Iraqi Government has relied on substantial external borrowing. In contrast to the early pattern of reliance on loans from the Soviet Union and Eastern Europe, major support has been provided by neighboring Gulf States, including Kuwait, Saudi Arabia, and the United Arab Emirates {UAE) in the form of interest-free loans, repayable over a period of 10 years. It was estimated in early 1983 that these loans totaled $25 billion for the period since the inception of hostilities with Iran. For Iraq, in particular, the war with Iran and a slack oil market have seriously affected the country ability to finance civilian technology transfer. lor a brief period in 1981, Algeria recei~red $40 per barrel for her premium sweet crude (i. e., 10W= SU1 fur content p(~~ r~)Icuml. 1 n 1 S) H?, aftt~r extensi~e n(gotiations Algeria f,~ f~nt uallj reduced its price per harrel to $~] 7.50, ~hich was more in Iinr with the () I>F;C price of $;14 per harrel. ~ Torn Seal\, J$est ( ;errnans in the Iraqi Quagmire Finam cizd 7inws, ( )c.t. 17, 1983. PAGE 453 452 l Technology Transfer to the Middle East Saudi Arabia Saudi Arabias oil export revenues allowed for increased expenditures on technology transfer in the 1970s, In recent years, however, financing has become a more salient consideration. By the early 1980s, public spending was tightly restrained, affecting the volume of business in all sectors. The government cut spending in the fiscal year 1982-83 (ending April 1983) by 15 percent compared to the previous years actual level. During that period, Saudi Arabia sharply reduced its contracting. In April 1984, the Saudi Arabian Government announced plans for a $74 billion budget, the same level as the previous budget which was underspent by 14 percent. Income is budgeted at $61 billion. The deficit is to be financed by drawing down reserves. 44 The current period of greater austerity has been marked by several measures affecting technology transfer, efforts to improve the cost effectiveness of government expenditures, and a salary and recruitment freeze for public officials. While reserves are still large, more concern surrounds the effective management of this wealth. These trends set a context for increasing involvement by commercial banks. The central bank of Saudi Arabia, the Saudi Arabian Monetary Authority (SAMA), has in the past dominated lending for local industrial projects. SAMA has introduced measures designed to promote the growth of commercial banks. Saudi Arabias fiscal policy has been conservative and rather tightly controlled. Kuwai t Kuwait has followed largely the same pattern as Saudi Arabia, by adopting stringent fiscal policies in 1981, Government subsidies were gradually reduced, and a fundamental change occurred in the overall way in which 44 Pressures Mount on Public Spending, special Report on Saudi Arabia, Middle East Economic Digest, July 1983, p. 8. See also Saudi Budget Signals a Thaw, Middle East Economic Digest, Apr. 6, 1984, p. 47. budgets were prepared. Since the 1982-83 budget, only schemes that are ready to go into effect have been included in the development budget, and funds are budgeted in a much more discriminating way than before. As an aspiring regional financial center, Kuwait has an extensive banking system, comprised of the central bank and an array of commercial banks, specialized banks, and several major nonbank financial institutions. 45 As discussed earlier, these often play a major role in financing development projects. In addition, the Kuwait Fund for Arab Development has provided major funding for development projects in other countries. Unlike Egypt, few foreign banks operate in Kuwait; most of the commercial banks are totally Kuwaiti-owned. Instead, services for particular banks in Kuwait, for example, have been provided by foreign banks such as the Chase Manhattan Bank (for the commercial Bank of Kuwait) and the Credit Lyonnais of France (which oversees the operation of the al-Ahli Bank). Generally speaking, foreign banking in Kuwait is internationally oriented, as evidenced by operations of the Islamic Development Bank, the Non-Aligned Fund, the Afro-Arab Development Bank, and OPEC and Organization of Arab Petroleum Exporting Countries (OAPEC) facilities. The Kuwaiti stock market collapse in 1982 may have tarnished the credibility of the Kuwait market, but few direct effects on technology transfer have been noted. Ira n Prorevolutionary Iran saw little need for foreign financial aid in connection with technology transfer projects. Generous loans, grants, and concessions provided by the government and private banks to the private sector alleviated the need for large-scale external financing by individual firms. According to the last annual report of the Industrial and Mining Development Bank (IMDBI) prior to the revoFor an excellent description of Kuwaits banking s~stem, see R, 111 Mallakh and Jacob A. Ata, The Absorptive Capacity of Kuwait (I,exington, Mass.: I,exington Books, 1981 ), chs. 3 and 4. PAGE 454 Ch. 11 Recipient Country Policies c 453 lution (1977-78), the bank had a total investment of nearly $4 billion in firms that it helped establish, 46 In addition, about 30 public and private banks, some in collaboration with U.S. banks, also provided capital for new ventures and for expansion projects. By the late 1970s, however, Iran experience a mild recession, and some projects were scaled back. Since the revolution, Irans situation has changed dramatically, but the country has been in a position to maintain oil exports. With continuing oil revenues and expanded barter and other arrangements, imports expanded again in 1983 after falling precipitously in years before, Thus financing technology imports has become a major concern for these countries, the Gulf States included. The terms offered by foreign suppliers are an increasingly important consideration as is long-term productivity of investments, both domestic and foreign. MANPOWER POLICIE S The policies of all of the recipient countries attempt a balance between reliance on foreign labor needed for rapid economic development, and the training and use of a native labor force to shape that development in the future. Manpower issues are most pronounced in countries such as Saudi Arabia and Kuwait, where labor resources in general, and skilled labor in particular, are most scarce. Egypt marks the other extreme, where a large, relatively skilled population and an extensive network of educational institutions already exist. There, the key policy issues include emigration of indigenous skilled personnel to other countries of the Arab world and effective utilization of trained manpower at home. Employment of Foreign Workers and Project-Level Training In an immediate sense, manpower policies affecting technology transfer are felt most directly at the project level. All of the coun }$kw 1 NI 131)1, /\nnual l{ep{~rt 2536, 1977-78 (Tvhran: 1 NI}31)I, 1 97X1 tries under review have established regulations that limit the participation of foreign personnel and require foreign companies to train indigenous workers. In general, these regulations have been relatively successful in assuring participation by indigenous personnel. They have, however, brought problems as well: because of a frequent dearth of indigenous personnel willing or able to participate in certain sectors in some of these countries, enforcement has often been lax; and where such regulations have been enforced, they have often led to redundancy and sometimes even delays in indigenous skill development. While in recent months a downturn in economic growth in Gulf States has led to an exodus of foreign workers, the long-term challenges of establishing policies that regulate the involvement of expatriate labor will remain. The Saudi Labor and Workmen Law of 1969 (the Labor Law) requires minimum percentages of Saudi employment in all foreign enterprises working in Saudi Arabia. According to this law, a firms workforce must be 75 percent Saudi and at least 51 percent of its payroll paid to Saudis, but these requirements are often reduced when a sufficient number of skilled Saudis is not available. 47 It is difficult to assess the degree to which such regulations have been enforced, or the success of training programs. The case of ARAMCO stands as a relative success, because indigenous Saudis have continued to move up the ladder and assume many high-level managerial and technical posts. In fact, ARAMCOs management training program served as a model for Saudia Airlines. In other cases, however, the result has been labor redundancy in joint ventures, as total employment levels have been raised to accommodate greater numbers of indigenous personnel and skilled foreign workers, since it is often impossible to recruit enough Saudis with appropriate skills. Foreign firms have reportedly faced delays in obtaining ap For a discussion of the Saudi Labor Law, see Paul Herzog, Problems (ommord} Confronting F;mployers Under the Saudi I.abor and Morkmen I.aw. illicfdle East 1+,xecutiie Reports, .J1llJ 1979, p, 2. See also I,aron 1,, tJensen, ,$ marketing in Saudi ,lrahia, [1. S I)epartment of Commerce, (herseas Business Reports. ~ecemher 1979. pp. 37-39. PAGE 455 454 l Technology Transfer to the Middle East Photo credit Aramco World Magazine ARAMCO employees in training session proval for exemptions when qualified Saudis could not be found. Similar employment requirements are found in Egyptian law, and there a trend toward increased stringency is apparent. Egyptian regulations stipulate that no more than 25 percent of the personnel of foreign companies in Egypt may be expatriate. Proposals were under discussion in 1983 to stop issuing work permits to foreign companies if more than 10 percent of their staff is expatriate. 48 Likewise, Kuwait has regulations requiring foreign companies to hire Kuwaitis for 25 percent of their work force. Partly to enforce this, foreign companies in Kuwait require a No Objection Certificate for every new employee. In many cases, these regulations have been regarded as mere formality, and the Ministry of Commerce and Industry often waives the first requirement if no qualified Kuwaitis are available. Two factors distinguish the Kuwaiti approach. First, the early decision to permit women to work gives Kuwait a broader labor base than that of, for example, Saudi Arabia. Secondly, Kuwaits strategy of equity acquisition in foreign firms also has manpower implications. At Santa Fe International, the hope is that the training of Kuwaitis will lead to the development of a permanent high-level career -..... 48 See Colin MacKinnon, ~~~prpts ~~t Issuing ~c)rk P~rnlits, ~~~ .!lj~~l~ I+;ast i~xwwti~e Reports, (XXober 1983, p. 7. track. So far, there have been no apparent pressures to integrate Kuwaitis quickly into the actual operations of the company, and company headquarters and main base remain in the United States. But in the opinion of one senior Santa Fe official, the seconding of personnel for combined training and integration will take place naturally and over a long period of time. The Chairman of the Board, Shaikh Abdul Malik Gharabally, is a Kuwaiti and an experienced petroleum official. In other Middle Eastern countries, regulations and laws concerning foreign manpower at the project level have in principle been equally stringent, but their enforcement has often been more lax. In Iraq, for example, Regulation No. 30 of 1973 prohibits foreign labor in excess of 10 percent of the work force of a project. Because of the demand for technicians and managers to relieve war-caused labor shortages in development projects, however, exemptions for skilled labor can usually be obtained. In contracts with foreign companies, most machinery and equipment exporters are required to establish maintenance centers in which to train Iraqis, and the foreign exporter must supply 25 percent of each centers training staff. The centers are to be supervised by public sector companies for 10 years, after which they are to be bought by the Iraqis. Companies supplying computers must ensure that training is given to operators and maintenance engineers, and manufacturers are also sometimes required to set up regional support centers. In other Middle Eastern countries, such as Algeria, regulations on foreign labor have generally been even more lax and the policies illdefined. Today, however, Algerian policies governing foreign employment are now being refined to deal with the growing number of foreign personl operating and constructing new facilities and plants. Some Algerian planners argue that this has inhibited development of an indigenous expertise. By 1978, more than 86,000 foreign technicians were employed in Algeria. 49 In Algeria, responsibility for train4YJ. ~lin~w, 1. .4)gerie de Boumedienne (Paris: Presses de la Cite, 1978), p. 50. PAGE 456 Ch. 11Recipient Country Policies l 455 ing has been shifted to the foreign contractor. Algerian leaders believe that the immediate need is for maintenance workshop and services within each corporation or group of corporations." 50 Algerias 1980-84 plan provides for a national apprenticeship program to encourage onsite training. The government intends to expand technology transfer requirements in contracts, such as requiring contractors to train local staff to run the plants that they establish. This relatively new trend in contracts developed from a dissatisfaction with turnkey contracts wherein plant and equipment was provided without the expertise to operate them. ] General Education and Training Programs From a national perspective, building a technically skilled indigenous manpower base has been a major concern. Efforts have concentrated on expanding the general educational level of the population; creating new institutes l, 11(na~hcnhf~u, fp(jr[i~n Firms and the Transfer of ltIc})nolog~ t (~ t h~> ~1 Igeria n }; c{ )n{)rn ~r (( ;f~n[~ka. I ntt}rnational I ,:1bor offic~~, october 19761, p. 2[; For examplc~, in th~> Socivtc .Yationalc de Sidcjrurgie, tht ~\lgerian Steel [,, .llgerians f)pt~rating the st([~1 mill will t)t r~placed t,en~p{)raril~ 11~ ,J apanese production worker>, with t h[ hopes that Algerian workers will learn l)} obser~ing the torrect methods of op(rating t h[ mill and will appreciate t h( in]pa{t of t h{> c)ptrat[)rs corn pet {n{.{ on i nd us t r~ per forma ncf~. and organizations to transmit technical skills; expanding technical skills by sending students for training abroad; providing greater incentives to attract indigenous populations to enter technical fields, and facilitating better job placement on graduation. Despite these efforts, however, many problems remain, and these policies will continue to demand revision and reevaluation in the years ahead. Table 97 illustrates the substantial expenditures spent on education in the countries of the Middle East. The Arab countries spent an average of 15 percent of the government budget for 1977-78 on education, ranging from 13 percent in the oil-rich countries to over 22 percent in the oil-poor countries. By 1975, educational expenditures in the Arab world, per capita and per student, had grown to a level considerably above the average for LDCs worldwide. 52 Emphasis was placed especially on scientific and technical education. Middle Eastern Technical Training.All of the countries under review are attempting to expand their national system of technical education, often with foreign assistance, but approaches have varied widely. Efforts to develop an educational infrastructure, especially in the scientific and technical fields, have been 52 See Paul Shaw. Mobilizing !!un]:in ht~sour(-e.~ in th(~ ,i r:])] 11orld ( ].ondon: Ke~an IJaul 1 nterna( ional, 19H~l ), ;) 1 [i2. Table 97.Total Expenditures on Education Per Capita in the Middle U.S. dollars per U S dollars per capita enrolled student b Country 1965 1970 1975 1975 Developed countrie s 140 268 636 1,227 LDC s 7 19 47 110 Arab worl d 14 51 102 324 Oil rich C 24 197 226 1,085 Oil-poor . . . . 11 21 77 134 Selected Arab countries: Iraq 18 30 119 142 Kuwai t 132 346 674 1,616 Saudi Arabia 19 471 284 3,637 Algeria . 19 37 124 211 Egypt 10 17 61 98 Syria . . . . 11 26 52 115 a Per enrolled student and as a percentage of current government expediture s b This column includes all students enrolled in the primary, intermediate., secondary and higher level s C Comprised of eight countries: Bahrain, Iraq, Kuwait, Libya, Oman, Qutar, Saudi Arabia, and the UAE. East, 1970-75 a As percent of all public expenditures 1970 1974 204 8.9 11 8 14.7 9 8 8.2 12.9 14.3 146 17.6 9 3 8.5 PAGE 457 456 Technology Transfer to the Middle East .. especially prominent in Saudi Arabia and Kuwait. Enrollment in Saudi Arabias 30 technical and vocational training schools rose from about 500 to over 11,000 students during the 1970s, while the number of graduates rose from 500 to 5,550. 53 In 1981, Saudi Arabias General Organization for Technical Education and Vocational Training (GOTEVT) was established, a merger of the Ministry of Educations technical education department with the vocational training division of the Ministry of Labor and Social Affairs. The organization offers vocational training at all levels. Seventeen new vocational training centers are currently in various stages of construction, with another 11 to be built by 1985: these are expected to more than double GOTEVTs present training capacity of 8,000. Similarly, in Kuwait, the Public Authority for Applied Education and Training was established to function as an umbrella organization promoting training programs relevant to a number of ministries and sectors, It has a separate budget account from related ministries and aims to encourage teacher retraining in technical fields and student education. The Institute of Applied Technology, under the jurisdiction of the authority has been allocated a $1.5 million budget for programs involving 1,000 students. It has relatively new facilities and offers a number of specialized courses in almost every technical area, as requested by various government agencies. The goal of the program is to develop shop floor managers and to allow students to attend both lecture courses and practical workshop sessions. The Telecommunications Training Institute is illustrative of institutes in Kuwait that are more closely connected with one ministry in this case the Ministry of Telecommunications. With an enrollment of about 350 students, the institute offers 1and 2-year courses in areas covering the whole spectrum of telecommunications technologies. In Egypt, where the numbers of trained personnel and varied educational institutions are $ Kingdoms }rocational Training Bringing CmmLrJr (loser to Saudiization, Saudi Report. ,4ugUst 1983. relatively high, the emphasis on training is less on expansion as on upgrading and adjusting educational policies to labor demand. Egypts educational institutions are comparatively extensive. In 1977-78 there were 179 higher education institutes with over 23,000 teachers and 550,000 students in Egypt. In Egypt, universities are overcrowded and the quality of education has suffered, partly as a result of policies that have emphasized open admissions. While vocational and technical education have not been stressed as much as university education, the present plan of the Ministry for Higher Education and Scientific Research calls for building 25 technical schools and 6 more secondary schools, using some World Bank Funding. To develop industrial skills, specialized institutes of postgraduate studies have also been established in different branches of Egyptian industry, such as the El-Tebbin Institute for metallurgical studies. In addition, other measures have been introduced to reduce the shortage of skilled manpower in industry, such as establishing specialized applied research centers to provide technical training and to contribute to the technological development of industry (e.g., the Centre for the Development of Textile Industries), and raising the amount and proportion of investment allocated for vocational training in the 5-year plan through the Ministry of Industry. Algeria is presently in the process of restructuring its entire educational system. Since the Ministry of Higher Education and Scientific Research was founded in 1970, the number of institutes of higher learning has expanded rapidly. The phasing in of a new system beginning in 1975 involved heavy emphasis on vocational and technical education. One major reform is the replacement of the existing primary and middle school system by a technical education course of 9 years, consisting of 3-year cycles; at the end of the second cycle, those with a technical orientation are channeled. into preprofessional training schools. Those who complete the third cycle, and remain in the formal educational system, ma-y go on to academic secondary school, special- PAGE 458 Ch. 11 Recipient Country Policies 457 ized technical school, or professional training schools. By the 1978-79 academic year, Algeria had 22 technical schools, with close to 12,000 students and over 1,000 teachers. The 1980-84 plan allocates approximately $76 million for building professional centers, and additional funds for building and equipping 268 training institutes and 300 vocational education centers. In addition, Algeria also emphasizes the development of technological institutes, conceived in 1964 as a solution to the shortage of qualified middle-level and senior technicians, a shortage exacerbated by the departure of the French following Algerian independence. These technological institutes are intended to attract those who have never had access to formal education and dropouts from the traditional educational system. One such technological institute, the INELEC (the Institut National dElectricit et dElectronique) was established with the cooperation of American universities and industrial firms in March 1976 to serve as an institute for training Algerians in electrical engineering and electronics. The American contractor, Education Development Centre (EDC), had the responsibility of recruiting professors and training Algerian teaching staff; 300 students were enrolled in 1978. Prerevolutionar~ Iranian and Iraqi policies that involved expansion of vocational and technical education have been disrupted by the Iran-Iraq War and the revolution in Iran. In the 1960s to early 1970s, Iran placed great emphasis on improving higher education facilities and expanding research. Indeed, prior to the revolution, it had attained one of the highest levels of technological development in the Islamic Middle East, and educational development and technology transfer through educational exchange were actively pursued by the government. In 1977-78, there were 224 universities and colleges in Iran, with 146,000 students: there were about three times as many technical vocational schools. The revolution in 1979, however, and the subsequent outbreak of war with Iraq, have accentuated the shortage of engineering skills in Iran, as many senior and middle-level technicians and engineers left the country, and as the army continues to absorb scarce skills. More recently, it appears that government efforts to expand technical training are again intensifying. Since the late 1970s, Iraq has placed special emphasis on increasing the number of vocational and technical institutes. In the late 1970s, the number of vocational schools and student enrollment grew rapidly. Between the 1976-77 and 1979-80 school years, for example, the number of vocational school students nearly doubled, from around 28,400 to 53,400. One of the most important efforts was the establishment in 1975 of the University of Technology (UOT) in Baghdad. With the objective of training most Iraqi and foreign students in scientific, technical, and professional fields of study that are related to the process of economic and social transformation in Iraq, 54 the University had 8,500 undergraduate students and 200 postgraduates in the early 1980s. The 1980 government program anticipated the establishment of 27 industrial, 17 agricultural, and 15 trade schools, at a total cost of $14.2 million. A technical institute costing $37 million was also planned to open in 1980-81 for 1,560 students in management, accounting, and technology. 55 The war with Iran, however, necessitated substantial revision of the 1981-85 plan. The impact of the war on the universities is evidenced by the cancellation of foreign university teachers 1982-83 contracts and the decision to increase the teaching commitments of local university teachers by 50 percent or more; this step is expected to save over $30 million to help finance the war effort. 56 To support the development of an education and training infrastructure, a number of con See I)r. hlohammed Shihab, in Tht~ }~aghd:~d ohser~er. oct. z.!, 1 ~~:], ~1, .I, lrarls][ited in ,J PR.S, Near l+: ast South Asia, DCT. 19, 1983, p. 42. rhliddlt l;,a,st F;conon]if I)igest, ,June 20, 1980. p. :12: lliddl(~ l;;~st F;con{)n]ic Digest, Feb. 2(1, 19R 1, p, 24 J\lidd)c F;as[ l+;conomic l)ige. The U.S.-Saudi Joint Commission was initiated in 1974 to assist in the internal development of Saudi Arabia through cooperative pro~ams, Approximat,elkv 17 U.S. (government a~en~i~s have been introlved in the commission. The U.S. Arm~ (orps of l]ngineers has also played an important role in providing technical ser~.ices. preferred working with specialized outside consultants rather than cooperating on a government-to-government basis in technical training. In prerevolutionary Iran, one of the most important efforts to develop local training programs was conducted by creating links wit h various American universities. More than 25 American universities were involved in linkage programs with specific Iranian universities. Iraqs efforts to expand vocational and technical institutes have also involved foreign aid and assistance; foreign contracts have also been used to promote training internally. The Soviet Union has helped establish engineering education, while Scandinavian countries have been involved in setting up technical institutes, and the Japanese and British in other technical projects. Recently, for example, Mitsubishi was asked to establish a technician training center and to provide industrial training, particularly in steelmaking and petrochemical production; the ILO signed a $948,188 contract with the State Organization for Labor and Training to train people at Waziriya. A British corporation, Tecqipment Intremath, which has been providing curricula for technical schools in Iraq for several years, has a $4.7 million contract to construct teaching laboratories and to provide in Great Britain training for technical college students and staff. Another way in which Middle Eastern governments have sought to increase the level of skills and the number of skilled workers has been through government-sponsored training abroad. While little aggregate data are available, growing numbers of Middle Easterners are studying abroad, as indicated by data on foreign students in the United States (see ch. 13). In the 1981-82 school year, there were approximately 56,000 Iranian, and at least 10,000 Saudi students enrolled in U.S. colleges and universities and specialized training programs. 58 Specialized training programs in A~~ordin~ to the Saudi Nllnistr-v of llannin~, about Z:~,000 Saudi ~tudents attended s~hools of ~11 kinds in the 1980-81 school year. out of the 211 Saudis who received Ph. 1). s abroad during the 1927-74 period, 97 of them recei~red their degrees in the United States. See Al-Farsy, op. cit., p. 164. PAGE 460 Ch. 11 Recipient Country Policies l 459 other countries have also been arranged. For example, 30 trainees from Petromin, the Petroleum and Mineral Organization, recently completed 2 years of training in West Germany in various technical fields such as industrial mechanics, industrial electricity, handling of delicate equipment, and welding works. The program is sponsored by West Germanys Technical Cooperation Development Agency and is aimed specifically at training Saudi youths in technical subjects associated with the petroindustrial and petrochemical fields. Present Challenges. In short, the range of policies to train local personnel is extensive and varied, including requirements for training associated with specific projects to expansion of general vocational and technical training at home and abroad. Success has been significant, as indicated by the wide range of technical institutes established and the gradual movement of indigenous personnel into positions of responsibility. Nevertheless, significant challenges remain. One key question is how to provide incentives to attract indigenous personnel to the technical sectors in the first place. Middle Eastern governments realize that technical training programs can be successful only if the local population is willing to participate. As discussed in chapter 3, in most of the countries under review, the indigenous labor force is concentrated in the government or service sectors of the economy, with relatively small proportions entering the scientific and technical fields. This situation is due mainly to two factors: first, a lack of wage and other incentives to enter technical fields; and second, a general aversion to many kinds of industrial and manual labor. In Saudi Arabia, Kuwait, and Egypt, the government guarantees employment and a minimal wage for every citizen. For Saudis and Kuwaitis, -this salary is quite generous, thereby providing little incentive to move to technical fields where the salary difference may be marginal. As a result, indigenous populations have tended to remain in traditional occupations, which are generally viewed as more prestigious. Recent articles in the Saudi press, for example, have noted the abundance of graduates of the theoretical disciplines and a dearth of graduates of the scientific and applied disciplines." 59 According to these reports, the number of students applying to the scientific departments is very troubling, insofar as it is far outpaced by the number of those applying to the humanities departments. Similarly, in Kuwait there is still a decided preference for business and finance, and despite the governments training efforts, few Kuwaitis are attracted to technical fields. While the government expands support for technical schools, most Kuwaiti students continue to earn degrees in the liberal arts. In Egypt, where a larger pool of technically trained personnel exists, the comparatively rapid rise in civil service jobs and wages has been a disincentive for Egyptians to enter the technical fields in the private sector. A large number of those who have entered the technical fields, moreover, have subsequently chosen to work elsewhere in the Arab world, where wages are higher. A second problem is that many students who study abroad may choose not to return home. While data on the number of returnees are limited, in 1977, 1,000 Algerians reportedly were sent abroad to the United States and elsewhere to train in gas and petroleum technology and civil engineering. Although most of these trainees were obliged by the Algerian Government to return home after their period of study, estimates were that the majority chose not to. Other countries throughout the Middle East, including Syria and Iraq, apparently face difficult y in encouraging recent uni %e, for example, F;ducation Polic? Criticized for Xot hleeting I )eveloprnent Needs, translation of article in .4)}ramamah, oct. 19. 19/33, pp. 31 1; translated in ,JIHS; Near J.ast, South .+l.~ia. Dec. 2, 198:), pp. 44-58. A recent stud} ~.onducted b} th~ King Saud Uni~,ersit~ that onl? about one-fourth of th[ graduates from the two universities are from the scientific d(lpartments, which comprise 15 colleges { 1 hid., p. 46). ) See I]enl 1 Ienson and S. Radwan, J;mpioJrmcnt oppf~rtuni[ies, ch. 12. pp. 2 2 -228. See also Materbury, op. cit.. p. 2-i 1. PAGE 461 460 c Technology Transfer to the Middle East versity and technical school graduates to work at home. 61 Still another problem relates to the distribution of trained personnel once they have been graduated. Expanded vocational training does not necessarily solve labor problems. A study in Kuwait conducted by the Ministry of Social Affairs and Labor in 1974, for example, found that almost 50 percent of graduates of vocational and technical training would not accept manual work even though their training was for such positions. In addition, over 86 percent of graduates who did work in their fields of specialization required retraining before they could be employed. In Egypt, employment and wage policies, which do not encourage students to enter scientific and technical fields in the first place, 62 also provide little incentive to remain in Egypt upon graduation. A recent survey showed that as many as 45 percent of the graduates prefer to work for private firms or overseas than to work for the government, despite the fact that many of them do become civil servants. G3 To combat these problems, a number of policy measures have been discussed or adopted, but few have been sufficiently wide-ranging to change the situation rapidly. Suggested measures in Saudi Arabia to combat low student enrollments in the scientific and technical fields, for example, include limiting enrollment and/or withholding stipends for students in colleges of literature and administration, expanding stipends for students in the scientific and technical fields, or changing hiring policies so that the state would not be obligated to hire graduates in the nontechnical fields for whom demand may be minimal. 64 Indeed, especially Sei> Sh~w, ,Ifobilizing Iluman Resources, op. cit., pp. 17117, One source indicates that in 1980, 50 percent of Arab doctorate holders were not living in Arab countries. See Shamlan Y. Alessa, The Afanpower Probfem in Kuwait (Boston: Kegan Paul International, 1981), pp. 74-75. l For example, public sector employment is guaranteed in a certain wage grade for a certain formal level of education irrespecti~e of specialization. In the public sector, it is therefore not possible to offer higher pay for specializations in short supply, such as certain types of influences, technicians, and professionals. See Ileason and Radwan, pp. 217-224. Sarah Graham Brown, main author \losaic: }iome Grown (~raduates Part 4, The Afiddle East, August 1982, p. 1. ltducation Polic? Criticized op. cit., pp. 44-58, in the Gulf States, significant monetary incentives have often been offered to attract and keep indigenous personnel in technical fields. In Saudi Arabia, larger scholarships are offered for study in the new technological institutes. Students in training programs in the new industrial city of Jubail pay no tuition or boarding fees and receive, in addition, free transport, work clothing, and an allowance of about 675 Saudi riyals, or $200 per month. 65 Similarly, in several countries, greater emphasis has been placed on job placement policies. In Kuwait, strong links between universities and enterprises have been established to facilitate job placement. The Kuwait University science faculty has strong, established links with hospitals, banks, and oil companies, as well as with KISR, where many graduates also work. In both Saudi Arabia and Kuwait, the government is the main employer of nationals. In Saudi Arabia, in fact, graduates work for the government for the same number of years that they studied at the university or else repay the cost of their education (about $20,000). 66 Finally, Middle Eastern countries have tried to ensure that students who study abroad return home. These efforts have been particularly pronounced in Syria and Iraq, which offer both a series of restrictions on studying and working abroad and incentives to return home once a course of study has been completed. Iraq, for example, restricts study abroad for undergraduates and requires that all physicians and engineers traveling abroad submit a guarantee to return. Iraqis abroad with a masters degree or higher are offered several incentives upon their return, including land, loans to build a home, tax exemptions, transportation costs, travel expenses, and other salary incentives. These policies were apparently successful in Iraq. 67 But in most of .- 5 In\estin~ in Youth, Euromone}, october 1982, p, 31. This is true in most states on the Arabian peninsula. In Bahrain, a technical graduate is paid BS 350 (close to $1,000 per month), on his first job, whereas literature graduates earn only BS 250. See %rah Graham Brown, Mosaic: Home Grown Graduates ... op. cit., p. 2. fiBrown, op. cit. 7 Shaw, Mobilizing Human Resources, op. cit., p. 180. PAGE 462 Ch 11 Recipient Country Policies c 461 the countries under review, including Iraq, despite the wide-ranging financial and other incentives, the preference for nontechnical employment persists, Labor Migration Policies Middle Eastern countries have attempted to regulate migration, but the issue of labor migration is complex, for both the labor-importing and labor-exporting countries. For the labor-importers, the tradeoff is between the immediate need for foreign expertise and the potential negative social or political effects. For the exporters, the tradeoff is between the brain drain and the foreign exchange gained from remittances of those working abroad. Policies concerning labor migration have tended to shift with economic conditions. In the early stages of rapid economic development, when demand for labor was high, both the Saudi and Kuwaiti Governments established open migration policies whereby any person willing to work in their countries was allowed to do so. Especially in the early 1970s, both governments undertook a series of measures to encourage the in-migration of foreign workers, both skilled and unskilled. During the mid1970 s, for example, entry regulations for foreign workers in Saudi Arabia were eased, and income tax on foreigners was abolished altogether; the only deduction from earnings became the 5 percent social welfare tax, or the zakat. 68 In Kuwait, such incentives included relatively high wages, rent-free homes, and other perquisites. By the late 1970s, however, both countries faced growing concern about the political, social, and economic effects of such a rapidly growing expatriate labor force. Consequently, laws and regulations governing the settlement and employment of foreigners were tightened. While both countries still offer incentives for skilled foreign workers, they have more stringently implemented visa and other regulations governing foreigners already in the country.] Many foreign personnel reportedly have been laid off, including a reported 10,000 ARAMCO workers, mainly American. 70 Restrictions on foreign workers in the Gulf States vary widely. In Saudi Arabia, foreign personnel working in the Kingdom are concentrated in foreign enclaves. Kuwait, on the other hand, has encouraged rapid turnover of foreign personnel working on large projects. In both countries, noncitizens are limited in many areas (e.g., landholding, welfare benefits, housing), and naturalization and citizenship are quite limited. 71 other labor-importing countries have also established a mixture of incentives and regulations for foreign workers. While Iraq has traditionally placed restrictions on immigration and employment of foreign workers, the drain on manpower resources due to war has forced the Iraqi Government to seek expatriate management and operations teams to staff many industrial projects and health services. 72 Like Saudi Arabia and Kuwait, therefore, Iraq has ,!c(.c)r~iin~ (t) t hls r(por[ ( ht nunll)(~r of \ i~c{~ i++(]t [i w ;I\ :ippr(~x i m a t ( 7 72,00(), LI d r( )p t )t t )i(,r ()(1() i rt ~111 t t) (, pr~ ,1 I uus ~ear. S{ItI Ringcion] Htstric[s for(l~n \l Ilrk I(jr{t. A(I ,lfrddltI 1,,i.~t, Yol. )?, N(). .1, \l ar 20, 1 !)(~~), ]) :) t)id p. ;1 I S(I(J Sh.ih(wn ;I}TuIJI. Kuwait 1<:xpatriattj I.a~)(Ir [<(11 (( (ause for (on(>errr? paper deli~er~d at th( hl i(idlt I;a~t St u[li(s ,\ ss[xiatit)n, l)hilad[~lphia, Ia,, ~-~)~(~nl})t~r I !)M2 \ ):1~~ ~):i~~[(~ in 1 ~[;~ +t :itwi that on]? Kuwal t is an J t)n t i t lt,( ] I t I rt,~i ~t t~r i n t h[, Kuwait l,am~(rs .As>()[iation St( Shciml:in } ,ll[s~;i, 7htI .Jl:lnp{)}{er l)roh~cn] in hu;~dit 11 .{)not)r): K(~,g(I II I :i II1 1 nt (Jrnii tional, 1981 i, pp. ~1-~~). According to A>mhi, op. cit., :Irtlcl[ I of t }]( ( I( ]/~n~hll) I,:]w of 1959, Lis amended in 1960, 1965, and 1 :~b 6, St iI t I ~ [ h :i t K t]~ ait i n at ion alit?. is rwo~y il.t~(i on 1} for ptwpl( w h ( ) h ;i~(~ [ N(JII r(sid(nt i n Kuwait b~~fore 1920; all ot her-s arc cl assifi~~(i :i < n( IIIKuva]t I. ,Artlc>l(>s -1 :ind H spe(if~ that nat uraliztit lon i( JInon Kuwaitis of Arab or-i~in requires a 1 ()-> ear residencj btfort ii])pl}ing; for those of non-Arab origin. the requirement is 1 f) jears. Art icle .I also, howe~er-, places L he Ii mi t on t be n u mt)er ( lf foreigners who ma~ be naturalized in anj one jwar at 50. /\}u}Ji. I ~ 1 op. cit, S[x~ a so ,icqueline S. 1 smael, h u wrait Sm>ial (h :]n~~t ~ in lfis[ [)r]cai })erspe(ti~.e ( Sjrr;icuse: S~racuse [ J ni ~rersi ( j 1r(~s~, 1982), p. 118. :F(~r a discussion of this ph{~nommon in the htalth care and industrial st~.t or-s, stY .J on at h an (r-u SOII, For[i~~n Ski 11s 1 ULF I raqs \l arrpower I )rain, Afiddlt l.~ast l+~cwn(~n]ic J)ig(. st, .J an ?8, 19H:I, p 19, PAGE 463 462 Technology Transfer to the Middle East attempted to offer significant monetary incentivesespecially to highly skilled manpower from abroad. In the late 1970s, salary incentives in the Middle East for certain types of skilled personnel were highest in Iraq and Saudi Arabia. (In contracting, for example, a general manager in Iraq earned up to $5,614 per month, as compared to $4,941 in Saudi Arabia, also the upper limit for a chief consulting engineer there. 73 ) Thus, particularly for skilled manpower, the labor-importing countries offer financial incentives, while at the same time often restricting the integration of foreign nationals into local society. In contrast, especially for Egypt and Algeria, the key issue is emigration. The case of Egypt illustrates the dilemma. While the government of Egypt would like to restrict the outflow of labor of certain types, particularly of Egyptian technicians, labor has also been one of Egypt main exports, generating much needed foreign exchange. So far, the government has not imposed rigid restrictions on the emigration of skilled personnel. Egyptian planners nevertheless worry that the labor outflow may lead to domestic problems, since the exported skills may be in short supply in Egypt itself. In Algeria, similar policy debates are taking place. In Algeria the flow of emigrants has been almost as large as that from Egypt, but mainly in the direction of France. During the latter part of the 1970s to 1980s, upwards of 30,000 skilled and unskilled Algerian workers were leaving each year in hopes of finding employment in France. Although this causes concern to Algerian planners, no policy on such emigration has been established. The implications of the manpower situation for technology transfer are complex. As discussed in chapter 3, it is expected that the demand for foreign labor in the oil-rich countries will be reduced in the near term owing not only to reduced expenditures on large new projects, but also to the entry of many of the Gulf States into a stage of consolidation following SW ,Jonat han (rusoe, rlht l.ost of I.iling in the hliddle J:ast, ,Iliddl( J,asf i~conomic l)igest, Feb. 1, 198~1, p, 15, the rapid expansion of infrastructure in the past decade. But, while the total numbers of foreign workers can be expected to decline, requirements for highly skilled foreign manpower will certainly remain strong. These factors will continue to draw manpower from the Middle East labor exporting countries, leaving shortages in certain skilled occupational categories at home. Expansion of scientific and technical education and more attention towards migration policies are helping to address some of these problems. But questions of gearing supply to demand, especially in the scientific and technical fields, and of regulating migration to meet domestic requirements remain major challenges in all of the countries under review and key factors which will continue to affect technology transfer. TECHNOLOGY TRANSFE R AND THE FOREIG N POLICY CONTEX T Technology transfer choices are often shaped by broader foreign policy concerns, particularly issues of dependence and vulnerability as reflected in economic interactions, and political alliances and conflicts with other countries. This section briefly discusses implications for technology transfer of three types of foreign policy issues: the question of dependence on foreign governments or suppliers, the effect of regional conflicts on economic relations, and regional cooperation in development and technology transfer efforts. The Question of Dependence on Suppliers Prior to the 1970s, some Middle Eastern countries relied on a limited number of foreign suppliers for imports of technology, products, and food. In many cases, suppliers were chosen largely on the basis of historical or colonial ties, geographical proximity, and political alliances. Some countries such as Algeria and Iraq traded heavily with the Communist bloc. Others, such as Saudi Arabia and Iran, relied much more on the West. PAGE 464 Ch. 11Rec/pienf Country Policies l 463 The past decade, however, has seen a marked reappraisal of supplier relationships in all of the countries under review, and all have begun to diversify their reliance on foreign suppliers. As analyzed in chapter 3, trading patterns have become increasingly complex, and many countries which traditionally traded extensively with Soviet bloc countries are now relying on Western suppliers. Egypt, prerevolutionary Iran, and Iraq have made a marked shift from trade dominated by Eastern bloc nations, led by the Soviet Union, to trade dominated by the Western industrialized nations led by the United States and West Germany. Prior to the revolution, Iran shifted its imports from the Soviet Union and Great Britain to the United States, France, and Great Britain, with Japan becoming a more important supplier in 1975. For Iraq, the Soviet bloc was the major source of technology until the mid-1970s; beginning in about 1974, however, Iraq shifted to a variety of sources, mainly Japan, West Germany, Great Britain, Italy, and the United States. Similarly, Algeria has recently shown a preference for contracts awarded to EEC countries. At the same time, there is some evidence that traditionally Western-oriented countries may now consider the Soviet bloc nations as potential suppliers, albeit in a still limited way, and that they have attempted to diversify Western suppliers. Saudi Arabia has pursued policies that leave the close Saudi-American alliance intact but that aim to develop a degree of independence from American influence through diversification among Western suppliers. Consequently, the market share of the United States in Saudi Arabia has declined. Similarly, Egypt since the Camp David Accords and the expansion of U.S. economic assistance has relied increasingly on the United States as a major supplier. Nevertheless, if Egypt is fully reintegrated into the Arab world, diversification of suppliers could occur. 74 There is little agreement whether diversification of suppliers is a conscious political strategy or simply the result of changes in the economic marketplace. Undoubtedly, elements of both play a role. Some countries, such as Saudi Arabia and Iran, have stressed economic factors in these decisionsi.e., the desire to obtain the best technology on the most favorable terms. In others, such as Iraq, the emphasis has been on avoiding political dependence. Saddam Hussein, for example, has noted the political essence of technology transfer and has expressed wariness over the potential loss of freedom of action that could come with heavy dependence on one supplier for technology transfer. Iraqs leader has stated, Soviet technology is communist. American technology is American, bourgeois and capitalist. French technology is French, bourgeois and capitalist Even when these states export their technology abroad, they are acting from political motives, as well as others, including transferring their political and social character to the societies to which they are exporting. Algerias former President Boumedienne emphasized in the 1970s the importance of economic independence for a countrys development. Diversification of trading partners and control over the domestic economy were important themes, as well as Algerias emphasis on a new world economic order based on equality among developing and developed countries. While it is unclear that these concerns alone would stimulate a conscious diversification of suppliers, they certainly play a role in choices of suppliers. Thus, shifts in choice of suppliers can reflect alignments with the superpowers and other political concerns, as well as a pragmatic choice based on technology quality. In some instances, diversification of suppliers can lead to more economically advantageous deals for recipients, or possibly expanded political influence over the supplier (see ch. 10). .lnlir 1 sk~n~c)r, Saddam liussein: 7he Fi@ter, 7he Thinker and The lfan ( 1w-is: I I achet tc H eali t&, 1980), p. 371. J iarold .Yelson (cd. t, .lrea Iiandtxmhfor .4)geria [}$ashingtf~n, 1). (,: Anl{ritan [ I ni;trsit]. 1 979). p 2~19. PAGE 465 464 Technology Transfer to the Middle East Certainly Middle Eastern countries have had the opportunity to be more selective in technology acquisition, based on their wealth and on the West reliance on Middle Eastern oil. All of them have gained in capability to set the terms of technology transfer and to choose their suppliers. On the other hand, deliberate diversification of suppliers can also lead to problems in the integration and management of technologies from various suppliers. Regardless of the rationale, the trend toward increasing diversification has certainly stimulated competition among suppliers. Regional Conflict Perhaps the most salient example of the direct effect of regional conflict on policies affecting civilian technology transfer stems from the major political conflict in the region-the Arab-Israeli dispute. The effects lie in two main areas: in the desire of Arab countries to catch up with Israels scientific and technological leadership, and in their desire to affect the political stance of supplier countries through such mechanisms as the boycott of foreign firms or companies trading with Israel. The stringency with which Middle Eastern countries have enforced the boycott has, however, varied. Saudi Arabia and Kuwait, for example, have been among the more stringent adherents. While the Saudis have shown flexibility in attempting to use language acceptable to the United States and consistent with the boycott, enforcement might be stronger in the future, owing to the use of a new computerized boycott list and the desire of some middle-level Saudis to tighten up enforcement. The boycott has often been laxly enforced by other countries in the region when it conflicts with other important policy goals. Iraq, for example, has traditionally enforced the boycott rather stringently in a way that reduced contract awards to American corporations. However, since the late 1970s and then the outbreak of war with Iran, Iraq has exhibited increasing flexibility in enforcement, and apparently has often invoked the national interest exemption to the Arab Leagues boycott rules. This has allowed both the Iraqis and foreign companies to sometimes disregard the certification procedure which requires foreign firms to guarantee that goods did not originate in Israel, South Africa, or Hong Kong. It is often difficult to measure the exact relationship of foreign policy to technology transfer. To cite one example, British Prime Minister Margaret Thatcher prohibited meetings between her government and a high-level Arab League delegation that included a representative of the Palestine Liberation Organization (PLO) in December 1982. Subsequently, Saudi officials hinted that the dispute might jeopardize the $8 billion yearly trade between the two countries. 77 Although it is unclear to what extent this incident actually hurt British trade with Riyadh, threats of trade retaliation can nevertheless be easily invoked by both recipients and suppliers and often substitute for serious actions. Regional conflict has also had an impact not only on supplier choices, but also, of course, on interactions among countries in the region. Among the more salient examples of this are the isolation of Egypt in the Arab world, and the effects of Khomeinis revolution on the policies of other Middle Eastern states. In the case of the former, for example, the linkage between foreign policy concerns and technology transfer was dramatically clear. President Sadat initiated the infitah, or liberalization policy, in 1973 to promote political and economic cooperation with the West, especially the United States. Later, after Camp David, Arab trade with and capital flows to Egypt fell dramatically. Today, Egyptian trade and foreign relations are improving with the rest of the Arab world, with prospects for increased capital flows to Egypt and joint projects. Trends in technology trade thus have clearly reflected Egypts political stance. The revolution in Iran also had a significant effect on technology transfer to that country; il. ~. Apple, S~udis ~etaliak for ~ri~~ins Stand on 1l,(), j~~~r ~ ork Times, Jan, 5, 1983, p. A8. 7NAlgerian handbook, op. cit. PAGE 466 Ch. 11Recipient Country Policies l 465 trade declined, and imports from the United States in particular became reduced to a trickle. Furthermore, the revolution in Iran caused other countries in the region to reexamine their own development policies and raised concerns about the potential adverse political effects of rapid economic development. Finally, as discussed in chapter 3, regional conflicts have also greatly expanded imports of military technology and equipment. Iraqs purchase of five super Etendard jet warplanes from France, or Saudi Arabias purchase of AWACs from the United States, have been prominent examples. Many Middle Eastern countries, Israel included, devote a very high proportion of government expenditures to defense. Regional Cooperatio n Despite protracted regional conflict, the Middle Eastern countries have increased efforts to promote regional cooperation in industrial development and technology transfer efforts. Especially in light of the vast differences in resources which exist among the Middle Eastern countries, efforts have been made to share these resources in order to promote more effective regionwide development. An obvious example of regional cooperation is the aid provided by the capital-rich Arab nations to other Islamic nations. Kuwait was the first Arab state to establish a massive assistance program for poorer Arab nations and other Third World countries. Other Gulf States have followed suit, and aid and loans from the capitalrich Middle Eastern countries to those lesser developed occurs on a large scale. As table 98 illustrates, aid from OPEC countries has remained formidable. About 70 percent of KuIl(tw(f>n 197TI-H 1, f{lr (YaInplt, Saudi Irahias defens~ t~xp[n(i]t ure~ rfjw ~h:~rpl}, with p~r capit:1 ri(ffn~( spending estimated at about $1,700 in 1979. S{jL~ [ I S. Arms (ontro] and I )i~:irnl:inltnt ;lg~nt} It f)rlcl .Ilil][ :1[} l;,lptndit urf.s imd .-lrnl,+ r{tn+ftr+, 1<)71 -1 !)+(), ?I:irih 1 98:1, pp ,,~1 iind 65, I)(,tweerl 197iho, .~h{~u t 10 II[jrc[n ( of [(J( a] :trrr)s (~.ypf)rts wor](~wi[jt~ went t o th( \l I(i(il( l: ,ist and h ( irt h Ifrica. S(II Iutrick ((~k}]urn, hl i(ieast hl i li t ar~ 1 nlpf)rt + \l t}it her Fall i n ( )il t)ri~x~, Fintin[l ii] in)fl.~, lla~ 9, 19NI, p ~,: an(i Saad ]{ddin 1 I)rahim oil, t! igrat Ion and t,hc Nt~w /\ rah Sotial order) i n l(if O EC D r at I Jr) ~ -CM EA count r r~t I n I I {I ~ I*J t 11 t U S S F B(I I qdr I i C:, t <1,+, ]k I i C, EIF H I r (] iry Pol and aPC R [,,11a II d SOURCE" Organization for Economic Cooperation and Development. Aid From OPEC Countries (Paris OECD, 1983) p.14 waits assistance has been provided to Arab countries. ) OPEC countries provided over $63 billion in confessional assistance between 1973 and 1982, most of it in the form of general support assistance offered without conditions, but in recent years levels of assistance have declined. 81 A similar example of efforts for more regional cooperation is found in trilateral ventures, which bring together Arab capital, Western technology, and Egyptian manpower. This concept has been discussed in the context of the Euro-Arab Dialogue, as reviewed in chapter 12. Political differences have presented obstacles to implementation of trilateral ventures, particularly in Egypt. A number of organizations have been established for regional cooperation in economic development, technology transfer, and other areas. They include the Gulf Cooperation Council, the Arab Fund for Social and Economic Development, the Kuwait Fund, and the Gulf Organization for Industrial Consultancy (GOIC). 80 R. k;l h! allakh, .4 h.wrptite C;ipai(,t of KtII{ [~i~ ( 1,txingt(~n. hlass.: I,exingt on Ilooks, I !)~ I ), p, I b~ ] F inan{i:ll assist an~( fronl :lr:il~ IitI(lfJ1)tl](r]t fund~ reported]~ f(~ll to S 1.1 hilli(~n in th~~ first h:df of I !)h~], a 20-pt,rcwnt drop comp:ired to thti second half (If I !)~~ 1 i o~cter, t ho prcJportiorr of funds going to .,\ral} count r-i(s grt~t from ;;I percent of th[ t ( )t al i n t h( ww(~nd h:ilf of 1982, to almost ont)-ha]f (.IH percent ) of tht totul in t ht~ first half of 19S~l. S(W I)a~id 11 ,IW1(, ,~rah ,Aid ({)rTlrllitr]]trlt~ I[ill Sharply in 1983, Middle East l.c{)noIIIi~ I)igt.~t, .Noir. 1 H, 1983. S[~{I ;ils{I I,arrj [i, Newels, ;( Aid Lo t }1(1 Third \\orld, Con~mJssi(JnaJ Rfwar(h .Ser\i(( hrlit~{ \ {)1 ;), No. 3, March 1984. PAGE 467 466 l Technology Transfer to the Middle East The Gulf Cooperation Council (GCC), since its creation in the early 1980 s, has rapidly expanded economic cooperation in investment, customs, tariff, and in other areas among its six member states: Saudi Arabia, Kuwait, Bahrain, Oman, Qatar, and the UAE. Joint economic projects formulated in the June 1981 Unified Economic Agreement include removing trade barriers, establishing joint stock companies, lifting currency restrictions, and unifying industrial laws and banking and investment procedures. Today, another GCC initiative is to try to coordinate new business activities by Gulf nations. A technology transfer committee was set up in the GCC, which is now also considering a proposal for a Gulf Center, which would promote technology transfer and technical development. Recently, the GCC established the Gulf Investment Co. (GIC) to act as an investment vehicle, and it is now also attempting to form a common market which its members hope will be operational by the end of the decade. $ The Gulf Organization for Industrial Consulting (GOIC) is a regional organization devoted specifically to technology transfer in the industrial sector. Member countries of GOIC have already undertaken a number of projects, such as a fiberglass plant in Saudi Arabia, a steel mill in Bahrain, and have planned aluminum and petrochemical facilities. A feasibility study was initiated for a large petrochemical complex (see ch. 5). Most of the projects are now in the feasibility study stage. The Arab Fund for Social and Economic Development (AFSED) is one of the most impressive of the regional organizations involved in technology transferalthough it considers technology transfer only one of a number of criteria in evaluating projects for selection. Establishment of a Technology University in the Arab world has also been discussed. In contrast to AFSED, the Kuwait Fund is primarily a financing organ, rarely involved in evaluating the projects it funds. 83 see, for example, 44~C~ Summit: 1%e~iew 1 I: Towards a True Unification, .4rab Banking and Finance, No. 8, October 1983, p. 49; reprinted in Obstacles Facing Economic Integration in Gulf Discussed,< JPRS: Near East, South .4sia, Dec. 21, 1983, pp. 7-8. Soliman Demir, Arab De\elopment Funds in the Middle I;ast (New York: Pergamm Press, 1978). Efforts have also been made to pool or jointly develop manpower resources. The Kuwait Institute for Scientific Research (KISR), for example, has advocated improving knowledge about technology on a regional level so that Arab countries can make better choices and rely more on their own consultants in technology transfer decisions. Kuwaits Social Affairs Assistant Undersecretary, Abdullah Ghalum Husayn, has proposed an Arab employment fund, stating that such a joint venture would lead to the promotion of national manpower resources, particularly in heavily populated regions. Many efforts at regional cooperation have been promoted by countries emphasizing their common Islamic heritage. The Islamic Development Bank, for example, channels funds to development projects in Islamic nations worldwide. The banks first project was approved for funding in 1976, and it now has 170 projects, 27 of which involve technical assistance, although most of this has gone to feasibility studies. Some observers see the bank as a marriage of Islamic principles and modern financing; interest is not charged, but members nonetheless earn a profit. Between 1972 and 1982, the bank provided funding valued at $3 billion; about two-thirds of that went for foreign trade financing for LDCs and about one-third for project financing. Project financing covers a broad range: loans, equity participation, leasing of equipment, profit-sharing, and technical assistance. The bank has financed a few projects solely; typically it teams up with other multinational development organizations or uses other Arab funds for project support. Increasingly, bank projects involve leasing of equipment and technical assistance. While bank officials tend to emphasize the importance of technology transfer, only about 25 percent of the projects are said to focus on technology transfer, largely because many of the projects are in nations that cannot yet absorb advanced technologies. The Islamic Foundation for Science and Technology is being established as an outgrowth of the Organization of Islamic Countries. The foundation, presently being set up by Ali Kettani, has a governing board comprising the Secretary General of the Organiza- PAGE 468 Ch. 11Recipient Country Policies l 467 tion of Islamic Conference (OIC), Kettani, and 14 scientists nominated by Foreign Ministers of various OIC states. The goals of the foundation are to bring together researchers throughout the Islamic world in order to avoid duplication of effort and to pool common resources. Among current projects are the establishment of a computer network that would allow scientists and technical personnel to have online access to technical information in English, Arabic, and French, and the promotion of advice and consultancy within the foundation. Other plans call for the establishment of a common research framework for member nations, with shared laboratories and facilities to the extent possible. Kettanis vision is fundamentally Islamic, and is based on a belief that the weakness of science and technology in the Islamic Middle East is a problem the Islamic countries themselves must overcome. In his view, Western organizations can play a role in this processbut the problem and that role must be defined by the Islamic countries themselves. Since the foundation is only in its infancy, it is impossible at this stage to anticipate how quickly the vision will be fully implemented. To generalize, efforts have been made to promote regional cooperation in the area of technology transfer, but results remain limited. This is due partly, of course, to the continued volatility and shifting alliances in the Middle Eastern region itself, which add additional incentives for most countries to focus on national development first. Regional cooperation is nonetheless an attractive concept for policymakers in the region, and actions of the Gulf Cooperation Council and other groups suggest that there could be significant movement toward cooperation in certain areas. CONCLUSIO N Two overriding policy challenges related to technology transfer face planners throughout the Islamic Middle East: the challenge of using social, political, and economic resources effectively to promote economic, and especially industrial, development; and the challenge of doing so without unduly increasing dependence on foreign governments or suppliers. To meet these challenges, policy makers in the Middle East continue to debate about the pace and type of development strategy and of technology transfer, and the institutions most effective for meeting these ends. The second challenge is reflected in policies to regulate foreign involvement in technology transfer, both directly-through specific restrictions on the terms of technology transfer, manpower, and foreign investment-and indirectly, through general efforts to diversify suppliers. All of these issues are complex, and the approaches to solutions have varied. Some Middle Eastern countries such as Saudi Arabia and Kuwait continue to emphasize the transfer of capital-intensive technologies into market-oriented economies. Others, such as Algeria, may be shifting to less heavily capitalintensive technologies, while remaining Socialist. Some countries, such as Iraq, have made extensive efforts to limit foreign involvement. Others, such as Egypt and Saudi Arabia, have encouraged foreign involvement, but with significant regulation. As a number of economic and social indicators of development show, moreover, all of these countries have achieved a measure of success in economic development during the past decade. Despite these successes, however, barely more than one or two decades have elapsed in most of the countries since development efforts were begun in earnest, and significant challenges remain. For the labor-short countries such as Saudi Arabia and Kuwait, manpower policies remain among the most critical policy areas, as these countries continue to attempt to train indigenous workers in technical skills and scientific and engineering professions. In these countries, the manpower problem may be said to have been temporarily PAGE 469 468 l Technology Transfer to the Middle East solved by policies of importing laborers and limiting and circumscribing their activities, while simultaneously encouraging the continued training of indigenous personnel in technical skills. But incentives for indigenous populations to enter technical occupations are still limited, and this remains a decided constraint on the successful implementation of policies to develop indigenous capabilities. For those countries with more varied resources but limited financial reserves, such as Egypt and Algeria, issues of administrative reform, as well as financing, remain paramount. Among countries in the Islamic Middle East, Egypt presently has a rich human resource base, but its administrative and political context often produces inefficiency. The key challenge for Egypt remains in fully utilizing its human resources in light of political and administrative problems which act as constraints. Rapid reform may stimulate political opposition, but inaction may also produce negative consequences for the leadership. A key challenge for Egypt is to weave a delicate path between these two courses. For Algeria as well, issues of administration remain a critical policy area, as does the need to reverse the brain drain of skilled personnel. Policies to deal directly with these issues are only beginning to be formulated. Both Iraq and Iran had a relatively well developed infrastructural and industrial base before the outbreak of war between them. A key issue for both, therefore, is to compensate for the diminution of resourcesfinancial, human, and otherwisefrom the continuation of the war effort. New resource demands may lead to substantial differences in the way technology transfer may be conducted. In Iraq, capital constraints on financing of technology transfer may become serious problems for the ruling regime. But for both countries, technology transfer policies depend on the course of the war. Today, the Islamic Iranian regime remains outwardly hostile toward Western technology. But increasing overtures to the West and the restarting of several projects begun before the revolution suggest prospects for Iranian reintegration into global trade. For the Islamic Middle East as a whole, regional cooperation in technology transfer and industrialization continues to be emphasized. Indeed, economic integration would benefit most Middle Eastern countries, given the large resource imbalances among them. The persistence of regional conflict, however, remains a serious impediment to these efforts. The challenge for all Middle Eastern countries is to create the conditions for greater cooperation in the midst of conflict and to accommodate far-reaching economic and technological changes while keeping the essential core of Islamic tradition vital and relevant. In short, technology transfer policies are in practice geared to the requirements of specific projects and sector development programs, despite efforts to establish a comprehensive framework. No nation can afford to purchase all available technologies, and the capacity to absorb advanced technologies is limited by a number of factors, especially shortages of technical manpower. Thus, Middle Eastern countries continue to be faced with tradeoffs i n selecting technology purchases and suppliers, in formulating development strategies and goals, and in developing an indigenous capability to operate and maintain technology effectively while simultaneously seeking independence from foreign influence. The challenges facing all of the Islamic developing countries in the Middle East, therefore, remain formidable, and a large role for foreign assistance will be required for development aims to be attained. Foreign suppliers, for their part, must be sensitive to the demand of recipient countries to sustain their own independence and sovereignty over development and technological decisions and to the economic and political effects of these choices in the Middle East as a whole. PAGE 470 Ch. 11 Recipient Country Policies 469 ,,-. a) u) z o v 0 c o E c-d m ml r) u) rCN c+ u? U)r. Lo w z 3 In 1= CD UI on PAGE 471 . Table 11 A-1 .Summary Recommendations of Major Policy Studies on Science and Technology in Egypt, 1972-80 (continued) Study title Date Sponsoring agency/organization Major observations/recommendations National Science and Technology 1975 UNESCO 1. Policy in Egypt (60 pp.) Arab League, Cultural and Scientific Organization 2. Egyptian Development and the Potential Role of Science and Technology (268 pp.) A National Strategy of Scientific Research Transfer and Development of Technology in Egypt (32 pp.) 1976 USAID 1. (University of North Carolina was the prime contractor) 2. 1977 ASRT 1980 UNCTAD 3. 1. 1 2 3, 4 aThls organization formed in 1971 replaced the Ministry of Scientific Research as the Unit responsible for SIT Planning NOTE The Near East Bureau of AID was conducting an assessment of SIT programs in 1984 SOURCE Compiled for the Office of Technology Assessment There is no comprehensive national science and technology p/an or consensus as to national problems and priorities. The ASRT has an important role in facilitating articulation of these It is difficult to get scientific personnel to commit to group/national research objectives if these are not consistent with their individual research interests The scientific community is isolated from potential users of technology There is insufficient interaction between researchers and end-users of research findings Development planning by government agencies, technology planning by public sector enterprises, and science planning by the ASRT and its related council is too compartmentalized, There is no communication between these respective planning units, between planners and project managers, and between planners, managers, and end-users ASRT effectiveness must be improved to give it a stronger coordinative hand Solution to technology problems must be found with emphasis on resolving those where the expectation of success is high Any national scientific research an must focus on concepts and issues of strategy in: the transfer and adaptation of technology; food security; natural resources; housing; health; energy; scientific and technological information; management development; communications linkages; and the Open Door policy Only recently (circa 1978) has Egypt paid attention to the import of technologies in its official policies There needs to be an explicit policy for dealing with foreign technology There are a number of critical gaps in the present GOE arrangement regarding technology transfer and development, both at the poilcy level and in the coordination of the various institutions involved A National Center for the Transfer and Development of Technology should be established and affiliated with the ASRT and coordination PAGE 472 CHAPTER 12 Policies of Other Supplier Countries PAGE 473 Contents Page INTRODUCTION . . . . . . . . . . . . . 473 I: WEST EUROPEAN AND ASIAN SUPPLIER COUNTRIES . . . 474 Trends in Economic Interaction . . . . . . . . ., . 475 Foreign Policy Contexts . . . . . . . . . . . . 478 Institutional Mechanisms for Promoting Technology Trade . . . . . 482 Financing Technology Trade . . . . . . . . . . . 489 Development Assistance and Training Policies . . . . . . . 494 Multilateral Policy Formation: The European Community and the Euro-Arab Dialog . . . . . . . . . . . . 497 Policy Variation and the Future of Western Technology Trade . . . . 501 II: SOVIET BLOC SUPPLIER COUNTRIES, . . . . . . . 503 Trends in Soviet Bloc Economic Interactions with the Middle East. . . . 503 Soviet Bloc Policies Affecting Technology Trade. . . . . . . . 506 The Record of Soviet Technology Transfer Policies . . . . . . 511 Explanation of Soviet Bloc Performance . . . . . . . . 513 The Future of Soviet Bloc Economic Interaction . . . . . ., . 516 III: CONCLUSION: TRADE AND POLITICS IN SUPPLIER COUNTRY POLICIES. . . . . . . . . . . . 517 Tables Table No. Page 99. Exports and Imports to Middle East as a Percentage of Total Exports and Imports for Western Nations, 1973 and 1981 . . . . . . . 475 100. Egypt, Industrial Country Aid and Market Shares, 1981 . . . . 478 101. Significant Bilateral Relations in Civilian Technology Trade, Late 1970s . 478 102. Comparison of Official Export Support Programs, 1982 . . . . 494 103. Soviet, U. S., and French Military Arms Transfers to the Middle East 1976-80 . . . . . . . . . . . . . . 504 104. Middle East Imports From Selected Western Countries and the U. S. S. R., 1970 and 1978.. . . . . . . . . . . . . 505 PAGE 474 CHAPTER 12 Policies of Other Supplier Countries INTRODUCTIO N The governments of other supplier nations have developed different approaches to technology trade and transfer, but their policies have been generally viewed by U.S. observers as comparatively supportive of technology exports by domestic firms. The policies of other supplier governments are important, because debates about U.S. policies often center on questions of what other governments do, and how important their policies are in affecting the pattern of technology trade. The purpose of this chapter is to analyze variation in the policies of both Western and Soviet bloc nations, and to evaluate the significance of those policies for technology trade with the Middle East. First, as background to the treatment of specific policies, patterns of economic interaction between various suppliers and Middle East nations during the past decade are examined, and explanations for observed patterns considered. Government policies affecting technology transfer to the Middle East (including foreign, commercial and development assistance policies) are then discussed and variation assessed. Finally the chapter evaluates the effects of these policies on the extent and nature of technology trade with the Middle East. This analysis provides a foundation for assessment of U.S. policies in chapter 13. The chapter deals with two sets of supplier nations: West European and Asian supplier countries in Part I and Soviet bloc supplier countries in Part II. In addition to the United States, the most important nations supplying advanced civilian technologies to the Middle East are advanced industrial nations in Western Europe and Japan. Developing nations such as South Korea have expanded their role in Middle East markets, primarily in laborintensive construction projects, Firms from Western Europe and Japan can, in most cases, supply advanced civilian technology comparable to that of the United States. In Great Britain and France governments have been noticeably involved in Middle East politics and diplomacy, but in all of these industrial countries public and private sectors have cooperated through a broad range of institutions to promote technology trade and transfer. While in no case are foreign policy positions simply derivative of economic and energy interests in the Middle East, many supplier countries have formulated foreign policy by emphasizing economic interests, and some have concluded that enhancing their economic welfare may bring political benefits as well. Taking different approaches, most have developed policies more favorable to technology trade with the Middle East than those of the United States, as outlined in chapter 13. The Soviet Bloc countries, in contast, conduct comparatively small amounts of commercial technology trade with the Middle East and therefore do not figure as prominently as competitors in the sectors examined by OTA. For the Soviet Union, military assistance has been the most important channel for interactions with Middle East nations, but interest in expanding commercial trade has grown in recent years. Some East European countries have been more active in civilian trade than has the Soviet Union, but they still provide only a comparatively small share of total exports to the region and their sales have been concentrated in a few sectors such as heavy machinery. Despite the comparatively small role that Soviet bloc nations play in commercial technology trade with the Middle East, the region has been important to them as a focus of military assistance and their largest noncommunist developing-country export market. 473 PAGE 475 474 Technology Transfer to the Middle East The analysis that follows concludes that governments play an important role in setting the context for technology trade through development of overall foreign policies toward the region. The context for economic interaction is thus set by political and historical factors. French exports flow primarily to Egypt and Algeria (the latter a former colony), while British exports go to the Gulf States, including the United Arab Emirates (UAE), Qatar and Oman (an area under British rule in years past). Japans technology trade relationship is less concentrated, a trend reflecting the fact that Japan is a relative newcomer to the region. Soviet bloc trade is most notable with Iraq, Iran, Syria, and Algeria. Former colonial ties, oil import requirements, and political alliances have been important factors influencing the volume and nature of technology trade between the various supplier and recipient countries. Generally speaking, those countries playing central political and diplomatic roles in the Middle East (Great Britain and the Soviet Union) have placed less stress on commercial promotion of technology trade than countries such as Japan, West Germany, Hungary and Romania which have not taken such leading roles. Only France has attempted to combine a high-profile political role with governmentled trade promotion. This analysis indicates that the Western countries eschewing leading political roles have in some cases been able to establish extensive trading relations with a politically diverse group of Middle Eastern countries. Foreign policies set the context for technology trade, but all of the Western nations have a wide range of specific policies designed to promote technology trade by putting buyers and sellers in contact, by financing exports, through development assistance and some multinational efforts such as the Euro-Arab dialog. These specific policies and programs support expansion of technology trade but certainly do not determine its nature or volume. It is quite striking, however, that in Western Europe and Japan government and business commonly end up on the same side, promoting technology trade. I: WEST EUROPEAN AND ASIA N SUPPLIE R During the last decade economic involvement of West European and Asian countries in the Middle East has increased rapidly. By the end of the decade, the area had become a key trading region for them. This growing economic interaction is illustrated by the fact that the Middle East replaced the United States as the largest market for exports from the European Community (EC). In 1980, Japan became the supplier country with the largest volume of exports to the Middle East. Newly industrializing nations such as South Korea, which are heavily dependent on petroleum imports from the region, have also rapidly expanded exports in less advanced technology COUNTRIE S products and services to the Middle East. In 1981, more than 15 percent of South Koreas exports went to the Middle East. These countries were stimulated to increase such trade in order to cover their rising energy imports from the Middle East. Generally speaking, despite the fact that they have attempted to reduce their dependence on oil imported from the Middle East, they all remain heavily dependent on those hydrocarbon imports. The Middle East is Japans energy lifelinemore than 64 percent of Japans crude oil and refined product imports came from the region in 1982. Similarly, the Western Europe PAGE 476 Ch 12Policies of Other Suppller Countries l 475 imported more than 60 percent of its oil and refined products from the Middle East in the same year. Middle East demand for technology trade and transfer grew along with the energy requirements of the Western supplier nations. TRENDS IN ECONOMI C INTERACTIO N Table 99 shows that the Middle East market has become increasingly important for Western supplier nations, in terms of both exports and imports. Imports of these nations from the Middle East are overwhelmingly oilrelated. Some, such as Japan, have had a continuing balance of payments deficit with the Middle East, due to large oil and gas imports which have far outstripped rising exports. Were it not for Japans extreme dependence on Middle East oil, the countrys overall trade balance throughout the world would have been approximately three times as favorable as it was in 1983. Another factor which distinguishes the economic interaction of the supplier countries one from another is the extent of their arms sales in the region. Japan is unique among these supplier countries in its policy of not selling arms. West Germany has not officially embraced arms sales in its interactions with the region, but does export armaments to countries in the Middle East. France ranks a distant third to the U.S.S.R. and the United States in arms sales to the region. The United Table 99. Exports and Imports to Middle East as a Percentage of Total Exports and Imports for Western Nations, 1973 and 1981 Exports 1973 1981 Japan ... ., 4 11 France ., 5 9 West German y 3 8 Ital y 5 17 United Kingdom 4 9 United State s 3 8 Imports 1973 1981 12 30 9 17 6 9 12 22 7 7 2 6 NOTE Middle East incIudes Saudi Arabia, Iran, Algeria, Egypt, Iraq, Kuwait, Libya UAE, Syria Lebanon, Jordan, Qatar, Oman, North Yemen, South Yemen Kingdom ranks a close fourth. Among the non-U. S. Western suppliers, France has capitalized on arms sales to the Middle East. French exports of arms to the Middle East quadrupled between 1974 and 1980, and of $4.8 billion in French military sales worldwide in 1981, 72 percent went there. Therefore, for France and to a lesser extent the United Kingdom, arms sales in the Middle East are a significant part of their economic interactions with the region. Japanese economic interaction is further marked by large plant exports, averaging around $3 billion annually to the Middle East in recent years. z This represents roughly onequarter to one-third of Japan total plant exports worldwide in recent years. Japan also exports large volumes of chemical and heavy industrial products. Up until the oil crisis of 1973-74, Japans direct investment in the Middle East was severely limited. By 1981 the total proportion of cumulative Japanese investment in the region, much of it in resourcerelated investments such as petrochemical operations, had risen to 6.2 percent of total foreign investments. Such investments, however, are minuscule in comparison to the total volume of Japanese exports to the Middle East$ 170 million compared with $14 billion per annum in recent years. In Japans approach to Middle East markets, the major trading companies have figured prominently. Preferring to establish their own outposts, various Japanese trading companies have concentrated on specific country marketsMitsui in Iran, Marubeni and Mitsubishi in Saudi Arabia, Nissho Iawai in Ku.See Anthon~. 11. Cordesman, Jordanian ,4rn].s and the L!lid dfe Aast Balance (11ashington, L). C.: illiddle Ijast Institute, 1983), pp. 150151. Plant exports combine capital equipment, technology}. com struction and managerial ser~ices in one package. 1 n 1982, for example, 141 Japanese plant exports to the Middle East valued at S3. 1 billion occurred. These exports represented almost one-quart er of all Japanese plant exports wwrld~ide. See 7susanshf) Koho (hl ITl Gazettat, June 23, 19H3. ,Japanese hlinistr? of Finance data show that the hulk of these in~est ments wer( in real estate. hranch offices and nlanufacturing. The largest part of the manufacturing in~estments are in the petrochemical indust r~r and oil-related investments. PAGE 477 476 Technology Transfer to the Middle East wait. The trading companies with their diversified trade portfolios are major conduits for economic interactionone selling TVs to Egypt, water and crude oil pipe to Iraq and Saudi Arabia, construction machinery to Iraq, Iran and Turkey. 4 Japans operations in the Middle East are thus quite varied, including direct investment and joint ventures, but featuring sales of equipment, products and most particularly plants. In contrast, South Koreas forte has been construction services. In 1981, South Korea ranked second in the world in the value of construction contracts won by its firms. Almost the entire number (93 percent) of the $13.7 billion worth were won in the Middle East. To illustrate their importance, these contracts totalled four times the nations exports to the region in that year, and about equalled Japans exports to the Middle East. South Koreas economic interaction with the region-like that of the Philippines, Pakistan, and Thailand has featured construction services involving the temporary export of Korean labor. Most other developing countries, such as Taiwan, export comparatively small volumes of light manufactured goods, including clothing, electrical appliances and light manufactures. Taiwanese exports to the Middle East in 1981 totalled $1.2 billion. Newly industrializing nations export light manufactures and construction services to Middle East nations, and have not been major exporters of advanced technologies and equipment. These nations thus play important roles in large Middle East development projects, but as a rule do not compete directly in advanced technology trade. This situation is changing, as indicated by the growing awards of Saudi Arabian hospital design (and construction) contracts to South Korean firms. The proximity of Europe to the Middle East and the dependence of many West European nations on petroleum imports have served to stimulate economic interaction. West Euro4 C. 1tohs include these varied operations, in addition to a number of others. See ~i~de ~~s~ ~co~o~jc lljges~, December 1982, p. 23. Photo credit Middle East Economic Digest Korean construction worker in the Gulf pean exports have been concentrated in electrical equipment and machinery, and this pattern is particularly noticeable for West Germany and Italy. French telecommunications exports have surpassed the nations heavy machinery exports to Egypt and Iraq, and British telecommunications exports have been particularly strong in Egypt, Iraq and PAGE 478 Ch 12Policies of Other Supplier Countries l 477 -. Saudi Arabia. France and Italy have been perhaps most willing to strike technology for oil deals with oil-producing nations such as Iraq. Bilateral government-to-government oil purchases have become increasingly important, and associated with them have been sales of advanced technologies, including nuclear technology transfers. 5 All of the West European nations have favored turnkey plant sales, rather than direct investment. Britain has been less successful in overall exports; however, there are estimated to be 30,000 British consultants working in the lower Gulf region alone, indicating British strength in technical services. The French and the West Germans, with their traditions of technical education, have been sensitive to training needs of Middle East nations. Each of the West European nations thus specializes in particular types of technology trade with specific Middle East countries, and as a rule their joint-venture equity participation in the region is quite limited. Still another distinguishing feature of economic interaction of supplier states is their economic assistance to Middle East nations. In a number of cases, government-supported economic assistance projects involve government and private sector working together. In terms of the total value of official development assistance (ODA), all of these nations rank below the United States, which provided $5.7 billion worldwide in 1981, compared with $4.1 billion for France, $3.2 billion for West Germany and Japan, and $2.1 billion for the United Kingdom. Pleasuring ODA as a share of gross national product (GNP), France (.73 percent) ranks well ahead of the United States (.20 percent), followed by West Germany (.47 percent) and Britain (.44 percent), and Japan (.28 percent). No Western nation directs to the Middle East more ODA proportionally than does the SC,() 1)~~~ id 1, I )[(~~t .Ind 1.inda 11 !LIllltr. \festtrn P;ur{}p{, I n f.ntrgl [f n(i .%c.uri[,t, [)ti~id .4 I)twstl and ,J[)stph S. NJ~J ~ (Ki~ t [(an~l)ridgt,, Nlass : liallin~~,r, 19H 1 I. The tiutht~r~ not~~ t hat, d[>~plt[ the f:ict that }Jran{e has m[)st a~g-r[ssitt}l~ pur\LItd Ijilattrd dtal~, t h~ I;rench h a~{ rtap(d no {)1)\ i( )U \ :Id J ;In t ~ig(~ in [ernl~ of tiisur(d f~il {lp (it ., p. !-). lxxal cost sup~x)rt i< credit or Kuaranttt suppt~rt for costs incurred in th[ pur{ha>ing cf)untr} that w-( a~s(xiatefi with the [xpc)r[ tran~act ion -l;xp(jrt1 rnp(}rt [lank, 1 W 1, op. {it., pp !6 and 102, more costly, though the differences are not great. Like Japan, Germany offers considerable local cost support. Export Credits in France Export credits, as opposed to insurance, are in France handled by the Banque de France, and Banque Francaise du Commerce Extrieur (BFCE), and commercial banks, most of which are now nationalized. France supports the most extensive officially subsidized export financing system of any of these nations. In 1981, it was estimated that French Government subsidies to long-term export finance totaled $466 million (compared with $382 million for the United Kingdom, $203 million for the United States, $79 million for Japan and zero for Germany), 38 (Table 111 in chapter 13 provides comparative information on credit subsidy and interest rates in nations under review here and in the United States. ) France and the United Kingdom have been the countries with largest government subsidies for export financing, but in the latter case the subsidy element has been largely eliminated since 1982. The BFCE has authority to provide financing in foreign currencies. In the case of medium-term financing (2-7 years), the BFCE first endorsed the loans, which are provided at preferential rates by the Banque de France. In recent years, the value of new BFCE loans increased from $10.6 billion in 1980 to $11.7 billion in 1982. In addition, the size of Frances mixed credit program grew considerably, by approximately 25-30 percent annually. (In 1980, the aggregate value of these credits was $1.7 billion, according to the U.S. Export-Import Bank.) 39 French tax policies deserve mention. Income earned abroad by French companies is not taxable, nor is 95 percent of dividends received by French firms from foreign subsidiaries. Companies may set up tax-deductible reserves [+: ~port -1 n~port [lank of the I lnited States, Report to the [. .5. (ongrt.+s, f:xpor(import hank of tht ( nitd %t:~t(w, Sep L{rnher 19H3. pp 5-N. Llllid pp. 13 and 4H, PAGE 493 492 l Technology Transfer to the Middle East to cover export credit risks, development and other promotional costs. Foreign losses are deductible from domestic income taxes even though foreign profits are not taxed. In 1983, the French Government also eased foreign exchange restrictions so as to boost exports by small firms. Export Credits in the United Kingdom The United Kingdom also offers comprehensive government programs supporting export finance. A new Projects and Exports Policy Division was established within the Department of Trade in 1980 to focus on exports to Third World markets. The ECGB uses refinancing arrangements with private bankers to ensure adequate funding at competitive rates. U.K. banks are thus able to provide export credits at OECD consensus terms, because the government pays the banks a direct subsidy to cover the gap between the credit and the normal bank lending rate. During 1980, the ECGB provided financing for $4 billion in long-term financed exports and $17.9 in medium-term financed exports. Export Credits in Japan The Export-Import Bank of Japan is the primary vehicle for government-supported export financing. As in West Germany, the subsidy element in Japanese export credits has been comparatively low. Owned by the government and overseen by the Ministry of Finance, the bank has channeled less than 10 percent of all its loans and guarantees to the West Asia region (which includes the Middle East), with the vast majority of investments in the petrochemical and chemical sectors. 40 Short-term credits are provided by commercial banks, and longer-term credits are refinanced by the Export-Import Bank at preferential rates in combination with some commercial financing. Japans Export-Import Bank is one of the largest banks of its kind, with total credit authorizations valued at $7.35 billion in 1981. 40 Nihon Yushutshunyu Ginko (The Export-Import Bank of Japan), Gyomu Hokokusho (Annual Business Report] fiscal year 1981, pp. 10, 17, 20. The Bank administers long-term development loans, which are not considered export credits because they are not tied to procurement. These loans often are linked to imports of fuels or raw materials. In 1981, a mixed credit program was established to match programs in Europe. This program is administered by the Overseas Economic Cooperation Fund, a public corporation which provides loans to Japanese corporations and foreign governments for financing various development programs. In Japan, as in West European nations, official export credits are thus often awarded in conjunction with development assistance projects by the Overseas Economic Cooperation Fund. A distinguishing feature of Japans approach has been the designation of some overseas projects as national projects, such as the Mitsui petrochemical project in Iran. In that case, the risk associated with Japans largest overseas effort was spread among a group of firms in consortia financing. The number of firms was further expanded as the project fell on hard times. In addition, the government stepped in with additional loans and assistance. The core group of Mitsui firms suffered heavy financial losses due to project delays caused by the Iranian revolution and later damage during the Gulf war, which precluded resumption of construction work. Export Credits in West Germany German financing for exports comes primarily from the private sector, particularly commercial banks, and the subsidy element has been low. The willingness of commercial banks to extend export credits owes much to their close relations with corporations. As equity shareholders in export-oriented firms, the banks are sensitive to the importance of export financing. In addition, the KfW (Kreditarstalt fr Wideraubau), a public agency with private sector representation on its Board of Directors, provides long-term financing to German exporters selling capital goods to developing countries. Because of a shortage of government funding, the KfW has increasingly gone to capital markets to finance large projects, with the result that the blended rate offered has been at or above the OECD rate. PAGE 494 Ch. 12Policies of Other Supplier Countries l 493 .. The Japanese tanker Sun River i S shown taking on the first shipment of liquefied petroleum gas (LPG), from one of the twin Ioading berths at the tip of the 10-kiIometer-long trestle at the Juaymah Marine Export Terminal, Saudi Arabia A second source of capital at preferential rates is the AKA (Ausfuhrkredit GmbH), a private commercial bank syndicate which has access to a rediscounting facility of the Deutsche Bundesbank and the KfW. one type of credit is available at preferential rates for medium-term supplier credits to developing countries, and this type of financing can be combined with other financing at market rates. In addition, the government offers mixed credits, which combine development assistance and commercial financing at a combined effective rate of about 8 percent. In contrast to the situation in France, the private sector rather than the government has played a more important role in export financing. Because the German commercial banks work so closely with corporations in financing exports, there is less need for direct government action. Summar y The conclusion that can be drawn from a review of export financing in these supplier nations is that all of them have similar packages of policy instruments. While the subsidy element has been higher in French and British export credits during the past decade, since 1982 subsidies have been greatly reduced everywhere but in France. French, Japanese, and British financing and insurance programs are comparatively more extensive in coverage and funding. As shown in table 102, Japanese, French, and British official programs cover a much larger share of exports than do U.S. and West German programs. German commercial banks work closely with corporations, reducing the need for direct government assistance. All of the suppliers have expanded mixed credits, combining loans at market rates with development assistance funding. In many cases, PAGE 495 494 l Technology Transfer to the Middle East Table 102.Comparison of Official Export Support Programs, 1982 A ($ billion) B ($ billion) C (%) France ... ., . $ 96.2 $0.29367 30.6% West Germany . 176.4 0.16461 9.4 Japan . 137.7 0.51862 37.7 United Kingdom 97.2 0.39270 40.4 United States 212.2 0.12149 5,7 KEY A Total Merchandise Exports in current $U.S.billion B Officially Supported Export Transactions, in current $U.S. billion Includes total value of all exports supported by official long and short term loans insurance and guarantee authorizations for the year, as reported by supplier governments In the case of the United States fiscal year 1982 data are given, for other countries data are for calendar 1982 CB A SOURCE Export Import Bank of the United States data provided to OTA in May 1984 programs include extra measures (such as local cost support and exchange rate insurance) to support exporters. Analysis of technology transfers in chapters 5 through 9 indicates that in a few notable cases foreign government financing has strongly influenced the awards of contracts. In aircraft sales and telecommunications contracts, a few widely publicized cases have received public attention. The instances where export financing appears to have had the most significant effects are those involving sales of very costly equipment which is roughly comparable to that available from other suppliers, and particularly where foreign suppliers are public corporations or firms closely connected to government programs. Even in those cases, however, other factors have influenced the outcome. Those factors include U.S. controls on exports as well as corporate strategies of some U.S. firms (including decisions to focus on domestic or export markets). The vast majority of technology trade transactions are not determined by foreign government financing, but rather by the price and quality of technology offered, the willingness of firms to provide after-sale services required for technology transfer, historical and political relations between buyers and sellers, and marketing prowess of private sector firms. Nevertheless, official export financing is an important support offered to firms doing business overseas, and it has at times been a critical factor in Middle East sales. In the last analysis, the organizational resources of the government agencies involved, and the pattern of business-government relations may be as important as the dollar value of financing support from supplier governments. In these Western supplier nations, governments rarely block and usually facilitate, or in the case of France coordinate, export financing activities. Public and private sectors share a common view that exports to developing nations are increasingly important. The precise contribution of this comparatively supportive context is difficult to measure but nevertheless important. In few instances, however, have actions taken by governments alone determined the outcome of competition for contracts. DEVELOPMENT ASSISTANC E AND TRAINING POLICIE S In comparison to other policies affecting technology trade with the Middle East, development assistance per se occupies a comparatively minor role. Because oil-exporting nations such as Saudi Arabia and Kuwait are themselves aid donors, they receive no development assistance from supplier governments. Other Middle East nations, including lower income oil-producing nations such as Egypt and Algeria, do receive development assistance. Egypt in 1981 received $1.1 billion in economic assistance from the United States, or about 15 percent of that provided by the United States worldwide. In addition to development assistance policies focusing on help for the poorer nations, supplier governments also participate-sometimes in conjunction with private sector firms in technical assistance and training projects in the richer developing countries. Underlying both types of programs are considerations of foreign policythe responsibility that industrialized nations have to assist developing countries, as well as the desire to foster political alliances with friendly nations. In addition, but less often overtly emphasized, are considerations of commercial gain associated with all development assistance. PAGE 496 Ch. 12Policies of Other Supplier Countries l 495 The supplier nations in West Europe and Japan have placed considerable emphasis on commercial considerations in their development assistance programs, This commercial perspective is reflected in the fact that the OECD Development Assistance Committee was studying in 1983 the adequacy of development assistance to export expansion and diversification. Franc e French development assistance still reflects the notion of/e besoin de rayonnement (the inherent need to spread ones ideas or values to other parts of the globe): French programs stress education and training. 41 The Ministry of Cooperation, with 10,000 people, provides grants and indirect funding for technical cooperation. It shares responsibility with other agencies such as the Directorate-General for Cultural, Scientific and Technical Relations. While these programs are not particularly well coordinated or given high priority in Paris, they have ensured a considerable French presence overseas. In 1981, French expenditure for bilateral technical cooperation exceeded that of any other nation, according to OECD statistics, including the United States; France also officially supported far more students and trainees than any other nationmore than 36,000 in comparison with about 9,000 for the United States in the same year. (Many more foreign students, most of them financing their own educations, study in the United States than in France, however. ) By the mid-1970s, France sent abroad onethird to one-half of all technical personnel from developed countries working in developing nations. Many of these people work in education, some also assisting in research efforts. The French have long been aware that the relations established between French and developingcountry technical personnel may lead to the choice of French products and equipment. Stekwn 11. Arnold, lmplexnenting I)e\relopnlent .i.ssi.~tanct { Boulder, (.: \lesttfiew, 19821, pp. 11 and 18. 4Jol~(). Z)e\el~)pn2ent Cooperation-1982, op. cit., p. 240. France has also been at the forefront in using mixed credits. In 1980, mixed credits, involving 3.5 percent interest rates and 20-year maturity periods on the aid portion of the loans, amounted to about 10 percent of the nations total export credits, totalling $1.7 billion. 43 The United Kingdo m In Britain technology transfer through education and training has been handled by the private sector, with some assistance from the government. Many large firms doing business in the Middle East, especially telecommunications firms, run training centers for students from abroad. In addition, the British Council teaches English-language skills abroad and operates a full range of programs in the Middle East. Nationalized industries such as British Electricity International offer specialized programs in the Middle East. This ad hoc approach has been made more necessary by cuts in development assistance under the Conservative government. The British Minister of Overseas Development articulated a new emphasis on mutual advantage in development assistance when he stated: We believe that it is right at the present time to give greater weight in the allocation of our aid to political, industrial and commercial considerations alongside our basic development objectives. 4 Reflecting this emphasis, the U.K. government announced a new mixed credits program in 1981 which was estimated to cover $230 million to $460 million of overseas business. 4s The tied share of Britains aid has always been comparatively high; critics have argued that the result has been to foster high-technology and capital-intensive projects at the expense of others. Flxport-1 rrqmrt Bank of the U. S., Report to the Congress ,, 1981, op. cit., p. 43. Arn(JId, op. cit.. p, 14. h~xport-import Hank of the (;. S,, i+eport to the Congress ..., 1 9!? 1, op. cit. p, 79. 4Seltct Conunitte( on ()~wrseas I)e~elopn~ent, 7he lattern of ilnited Kingdom .4id to India {First Report, Session, 197879, 11 hl S() 19791, p. xxi~, cited by Arnold, p. 157. PAGE 497 496 l Technology Transfer to the Middle East Japan Japans government economic cooperation programs, some of which are carried out in conjunction with private sector organizations, have up until the past decade been comparatively small-scale and oriented toward Asia. The amount of Japanese ODA flowing to the Middle East increased rapidly in the 1970s, reaching a peak of almost one-quarter of the total in 1978, when large shares went to Iran and Egypt. 47 While the Japanese Government has pledged itself to expand Japans ODA rapidly in the next few years so as to raise the percentage contribution of GNP to a level more on a par with other OECD nations, in 1981 and 1982 Japans ODA fell in dollar value. 48 In 1983, the Government of Japan announced that its goal of boosting ODA was unattainable, due to budget deficits and other factors. The Ministry of Foreign Affairs is the primary body responsible for official economic cooperation; the Overseas Economic Cooperation Fund (OECF) provides assistance to projects which may be politically important but not commercially viable, and the Japan International Cooperation Agency (JICA) runs training programs for people from developing countries both in Japan and abroad. The OECF and the JICA receive direction from parts of the government with different mandates, leading to problems in coordination. Official policy statements emphasize technology transfer, along with financial assistance, as essential components of aid. Technology transfer to Middle East nations is viewed as a particularly important component of Japans relations with these nations. 49 But deJapan International Cooperation Agency, (Thukinto ni tai suru JICA K}oryoku Ji~,o no (;aijvo (Tokyo: ,JICA, 1982), p. 3. During that year more than 10 percent of Japans ODA went to the Middle East. 4HJE1 Report, No. 23B, June 17, 1983, p. 4. k% Ministry of Foreign Affairs, The De\eloping Countries and Japan, ,Japan hconorruc Cooperation (Tokyo: MFA, 1979), p. 20. One industry leader assessed technology transfer to the Middle East in the following way: It is important for Japan to develop friendlier relations with such oil-producing countries as Saudi Arabia, the UAE, Iraq and Kuwait in the Middle East, regardless of its oil purchase from these countries. Economic spite the rhetorical support for technology transfer, the number of Japanese technical experts in the Middle East supported by government programs remains comparatively small. In 1981, there were about 300 overseas volunteers (in JICA programs) in the Middle East, and about 3,000 people went as team members on expert survey visits to the region. so Even more important are the efforts of private companies in support of various technical assistance activities. As mentioned earlier, Japan has recently greatly expanded its mixed-credit program; in fiscal year 1981 $1.9 billion in confessional credits were to be funded by the OECF. In comparison to other OECD countries, Japans aid has been more in the form of loans than grants. West German y The West German development assistance program is characterized by administrative separation between the policymaking agency (the Ministry of Economic Cooperation), and two implementing agencies: the GTZ (Deutsche Gesellschaft fr Technische Zusammenarbeit) in charge of technical assistance and the KfW, which, as mentioned above, handles financing. Since the early postwar period, the German Government has relied on a host of independent organizations to carry out development assistance projects elsewhere handled by governments. One (DED) is responsible for training, another (DES) for arranging conferences and seminars, still another (DIE) for research and consultancy. The German Development Co. (DEG) promotes cooperation between German and developing-country enterprises through equity investments and loans. DEG is a partner in a and technical cooperation is considered instrumental in cementing these relations. As oil-producing states have abundant capital available for development, it is necessary to step up technical cooperation based on technology transfer through such cooperation programs as formulation of economic and social development plans, export assignment and acceptance of trainees, Hiroshi Irisawa, Technical Cooperation Toward Middle East Countries, Digest of Japanese Industry and Techndogj, No. 175, 1982, p, 12, (Japan International Cooperation Agenc~, 1982, p. 27, PAGE 498 Ch. 12Policies of Other Supplier Countries 497 joint venture with Saudi Arabia, the purpose of which is to evaluate projects and bring corporate partners together. The GTZ has subcontracted 200 technical training projects to outside private consultants. A number of churches, political foundations, and private organizations also receive grants to carry out development programs. One distinguishing feature of German development assistance is the comparatively strong emphasis placed on technical assistance: between 1976 and 1980 about one-third of the bilateral German development assistance went toward technical assistance, a level second only to that of France. 51 According to OECD data, during 1980 the level of German technical cooperation expenditures ($990 million) for example, exceeded those of the United States ($724 million). In the 2 years following, the level of U.S. assistance of this type was greater, but Germany still ranked third after France and the U.S. in its bilateral disbursements. As mentioned earlier, West German technical assistance has been particularly prominent in some of Middle East nations, including those rich in oil but needing technology transfers. West Germany also supports independently through government funds a large number of students and trainees, numbering almost 22,000 in 1982. In addition, Germany ranks second only to the United States in the value of private voluntary contributions for development cooperation. The level of untied bilateral aid is higher in West Germany than in most other supplier nations. Many of the government-sponsored projects fall somewhere between commercial promotion and development assistance. Mixed credits have been utilized, though less frequently than in some other countries; the strength of German financial institutions such as the KfW and the private AKA reduce the need for mixed credits. Development assistance is carried out by a variety of organizations in these supplier nations. Technical assistance receives considerable emphasis in French and German programs, while Japanese policy statements indicate that government officials view this as a priority area. The development assistance policies of these nations all have a strong commercial flavor. Mixed credits is but one indication; involvement by German private organizations, some of which promote joint ventures in the Middle East, is another. It is not an exaggeration to say that all of these nations view commercial gain as concomitant with development assistance. Generally speaking, West European and Japanese policy makers have not been reluctant to consciously emphasize the commercial side of development assistance. MULTILATERAL POLIC Y FORMATION: THE EUROPEAN COMMUNITY AND TH E EURO-ARAB DIALO G While the multilateral dimensions of policies affecting technology transfer to the Middle East are clearly less salient than the national policies discussed earlier, they are worthy of consideration. All supplier nations provide development assistance through multilateral agencies such as the United Nations, but the relative share of multilateral assistance in the development assistance of these nations has fallen in recent years from 31 percent in 1977 to 23 percent of official development assistance in 1981. 53 Through a variety of other organizations such as OECD, the International Energy Agency, and the International Monetary Fund, supplier governments attempt to coordinate their efforts, some involving technology transfer. However, OECD has been in- PAGE 499 498 Technology Transfer to the Middle East volved primarily in studies of development issues rather than implementation of programs. There are currently few coordinated efforts by OECD nations to provide assistance to Middle Eastern countries. Assistance provided to Lebanon has been one of these. While such multilateral efforts have been important, more specialized regional programs involving these nations are particularly worth consideration, not only because the results of ongoing efforts such as the Euro-Arab dialog illustrate some of the problems associated with multilateral approaches, but also because these programs have at times been viewed as running at cross-purposes to those of the United States. In addition to bilateral policies, West European nations have used the institutions of the European Community to manage their relations with the Arab world. European leaders have been stimulated by the prospect of linking Western technology to Arab capital in development efforts. Arab countries have looked to Europe not only as model of economic integration, but also for allies in pursuit of resolution of Middle East conflicts. Background to Multilatera l European Programs Despite the fact that the ingredients of a significant political and economic bargain have been apparently available, the history of the Euro-Arab dialog over the last decade reveals a persisting problem in defining terms acceptable to both sidesthe European Community and the Arab League. There are several reasons for this difficulty. First, the large number of participants has made it difficult to reach agreement. Discussions have been delayed by the inability of Arabs in particular, but also Europeans, to agree among themselves. Some states have found bilateral deals more attractive than multilateral arrangements. A second problem has been the European desire to stress economic issues in contrast to the Arab view that political concessions should precede economic agreement. 54 A third constraint has been the role played by outside states, particularly the United States. In the early 1970s American leaders viewed European overtures to oil-producing states as undermining the common economic interests of supplier states and impeding U.S. efforts to promote a peace settlement. 55 Despite slow progress, the Euro-Arab dialog is important as an example of a multilateral attempt to coordinate policy in technology trade and transferone in which the United States has not participated. European Community (EC) interest in cooperating with the Middle East predates the oil crisis of 1973-74 and should be placed in the context of relations with former colonies and the Third World in general. In the late 1960s the EC began a series of trade-related initiatives with the ACP countries in Africa, the Caribbean and the Pacific which resulted in a preferential trade package finally agreed on at Rome in 1975. At the same time, there was growing interest in complementary accords with Arab and other countries in the East and South Mediterranean rim. 56 54 0n the Arab view, see Nijmeddin Dajani, The Euro-Arab Dialogue: The Arab Viewpoint, in Euro-Arab Cooperation, E. J. Volcker ted.) (I,eyden: A. W. Sijthoff, 1976), ch. 13 and Dieter 13ielenstein, Europe Futuns in the Arab View (Sam-bracken: Verlag Greitenback Publishers, 1981). For the European view, see John P. Richardson, Europe in the Middle East: Shaping a Political Role, SAIS Review, winter 1981-82, pp. 107-17; Udo Steinback, Western EuroPea and EEC Policies Towards Mediterranean and Middle East Countries Colin Legum, Middle East Contemporary Survey, vol. 12, 1977-78 (New York: Holmes & Meier, 1979), pp. 40-48; Stephen J. Artner, The Middle East: A Chance for Europe? International Affmrs, I,ondon, vol. 56, summer, 1980, pp. 4!20-442. See D. J. Allen, *The Euro-Arab Dialogue, Journal of Common Market Studies, vol. XVI (June 1978), pp. 323-342; Adam Garfinkle, America and Europe in the Middle East: A New Coordination, Orbis, vol. 25, No. 3, fall 1981; Alan R. Taylor, The Euro-Arab Dialogue: Quest for an Interregional Partnership, Middle East Journal, vol. 32, No. 4, 1978, p. 443. 5fiSee H. A. H. Gadel Hak, The Mediterranean Policy of the European Community (Doctoral Dissertation: University of Amsterdam, 1978). See also Samy Afify Hatem, The Possibilities of Economic Cooperation and Integration Between the European Comrnumty and the Arab l.ea~e (Munich: Florentz, 1981 ). PAGE 500 Ch. 12Policies of Other Supplier Countries l 499 . The October war and the oil embargo of 1973 provided a stimulus to the dialog. In November 1973, the EC issued the Brussels Declaration urging bilateral cooperation agreements, and stating European opposition to Israeli occupation of territories held since 1967 and support for the rights of Palestinians in a Middle East peace settlement. A month later the Europeans announced their support for negotiations with oil-producing countries on comprehensive arrangements comprising cooperation on a wide scale for the economic and industrial development of these countries, industrial investments and stable energy supplies to the member countries at reasonable prices." 57 Two sets of negotiations followed, one concerning bilateral cooperation agreements and the other the Euro-Arab dialog concerning issues of common concern to both sides. Bilateral Cooperation Agreements Identical bilateral cooperation agreements have been concluded between the EC and Israel as well as 11 of the 20 Arab League states. These agreements provide preferential trade treatment permitting entry of Arab manufactured goods into European markets unhindered by tariffs. (However, it is important to note that the few industrial products produced by Arab states, including textiles and petrochemicals, are not covered by thes e agreement s.) In addition, the agreements promote financial and technical assistance. While the amounts of funding are relatively low, they carry weight in the sense that they provide a framework and are usually used in conjunction with other investment funds. A much wider range of cooperationin science, technology, environment, sales promotion and marketing, industrial management, and private investmentis anticipated. These agreements provide a context for ongoing cooperation. Some Europeans expect that such agreements will be established with the wealthy Gulf states, perhaps via the Gulf Cooperation Council, as well. The bilateral character of the agreements has allowed the Europeans as a group to maintain good relations with individual states even when relations between the regions have deteriorated or cracks emerged in the pan-Arab movement. European cooperation with Egypt, for example, did not terminate with the nation ouster from the Arab League because of its participation in the Camp David accords. These bilateral cooperation agreements have been important in setting the stage for private sector involvement in Middle East nations, since they signify official government support for commercial interactions. The Euro-Arab Dialo g The second and more political negotiations of the Euro-Arab dialog have been characterized by a tension between the Arab desire to focus on political issues and the European determination to separate politics from economics. The dialog was launched in July 1974 to discuss negoitating procedures. However, work was delayed because of two issues: the European decision to conclude a cooperation agreement with Israel, and Arab insistence on Palestinian representation in their delegation. The former issue remained a source of irritation, while the latter was resolved by the Dublin formula, which ruled that delegations should be homogeneous rather than serving as representatives of particular states or groups. Palestinians could therefore participate without raising the representation question. Since the first deliberative session held in Cairo in 1975, technology-related issues have received attention. Working committees were set up to handle a variety of issues, including scientific and technology cooperation, The meeting produced a joint memorandum which recognized the dialog as a product of joint political will that emerged at the highest level with a view to establishing a special relationship between the two groups. More specifically, it called for the development of the Arab world in its entirety and of lessening the PAGE 501 500 l Technology Transfer to the Middle East -. technological gap separating Arab and European countries." 58 The progress of the dialog between 1975 and 1978 was not dramatic, but some important projects were initiated which relate to technology trade. The working committee on industrialization proposed creation of Euro-Arab resource and information centers, and a study of programs for education and training in standardization and quality control. In addition, a subcommittee dealing with petrochemicals proposed market studies in the Arab world and Europe, but the Europeans were less enthusiastic than their Arab counterparts about this proposal. In late 1983, moreover, a draft investment convention was under discussion at a technical meeting held in Tunis. The working committee on scientific and technological cooperation identified a number of areas for study, including the feasibility of an Arab water desalination and water resources center, an Arab polytechnic institute, and a study of the scientific infrastructure for oceanography in the Arab world. Finally, members from both the industrialization and technological cooperation committees proposed the establishment of a Euro-Arab center for technology transfer to be located in the Arab world. The work of the dialog was suspended following the signing of the Camp David accords in 1979. As a show of their displeasure with Egypt, the Arabs suspended that nation from the Arab League and moved the headquarters of the organization from Cairo to Tunis. The bureaucratic disarray caused by the ouster of Egyptian officials and the loss of Arab League records was probably just as damaging to negotiations as the decision to suspend discussions. These delays caused by political events thus much more negatively affected the EuroArab Dialog than the bilateral cooperation efforts. For the last 4 years, leaders on both sides have sought to renew the dialog. In June 1980, 58 Taylor, op. cit., The European Community and the Arab World, p. 29. the Europeans took the initiative in issuing a declaration calling for relaunching of the dialog, An economic task force was organized to secure agreement on issues such as the EuroArab technology transfer center prior to a high-level ministerial meeting scheduled for the summer of 1981. That meeting, however, never occurred. Arab opposition to European participation in the Sinai peacekeeping force, and later the war in Lebanon strained relations within the Arab nations. By late summe r 1982, the Arab League proposed resumption of the dialog. The European response was uncertain in the midst of American efforts to mediate between Israel and Lebanon. In late 1983, the fifth session of the General Commission of the Euro-Arab Dialog was convened. While no statement was issued at the end of the meeting, it was significant that high level political discussions were resumed for the first time in 4 years. Many EC officials are skeptical that the Euro-Arab dialog has a viable future. The stalemate of the period following 1979 highlights the fact that the dialog has been strongly affected by political developments. By linking economic and political issues in the framework of the dialog, it has been difficult to pursue cooperation at the technical or economic levels without resolution of political problems. In the last analysis, it is probably true that politics will never be far removed from these discussions if negotiations require a large group of countries to coordinate their positions. This may explain why European nations acting independently have been more successful in pursuing economic and technical cooperation with individual Middle East nations. The Euro-Arab dialog is nevertheless likely to remain a feature of relations between the two regions for some time to come. The common interests identified a decade ago have changed, but in some ways become more important. The Europeans are less dependent on Arab petroleum in a period of excess supply and falling prices, but they have become increasingly involved in Arab markets in order to sustain export levels during a time of reces- PAGE 502 Ch. 12Policies of Other Supplier Countries 501 .. .. sion in the West. The Arabs still look to Eutheless, the strongly state-led approach of rope for a somewhat different political perspecFrance contrasts sharply with the lower-protive from that of the United States concerning file and more indirect supports offered by the the Middle East, and Europe will become more government of the Federal Republic. and more important as a market for Middle East products such as petrochemicals. The multinational character of the discussion reveals the perceived common West European interest in building bridges to the Arab world. Technical issues concerning industrialization and trade may occupy a more central place in the dialog during the years to come. On the one hand, Arab nations have long been interested in focusing attention in the dialog on commercial cooperation in petrochemicals and refining. Simply put, the Arab nations wanted outlet guarantees for their petrochemical production, most of which will come onstream in the late 1980s. While cautious, the Europeans supported a market study of a dozen basic petrochemical products which was complete prior to the suspension of the dialog in 1979. Working groups have continued discussions on petrochemical trade issues. However, European industrialists remain skeptical of the whole process and there are indications of possible protectionist responses when Arab petrochemicals hit European markets. The EC position has been that the dialog could be used to stave off such potential trade frictions with the Middle East, but it is not clear that industry can be persuaded. Arab nations maintain great interest in resuming such talks. If and A second feature, which distinguishes European and Japanese policies from those of United States discussed in chapter 13, is the absence of controls on exports of advanced civilian technologies and equipment to developing nations generally, or the Middle East specifically. Outside the Coordinating Comm ittee (CoCom), the multilateral controls on exports to communist nations, these nations have few official disincentives for nonmilitary exports. Japans liberalized foreign exchange law, for example, requires only that investors notify the Bank of Japan when they make investments in the Middle East, unless the enterprise involves banking, fishing, or military production. Approval of plant exports is normally automatic if contracts are signed. g Similarly, all German exports must be approved by the Federal Office of Commerce in Frankfurt-Eschborn, but few denials are made except for items on the CoCom list. All of these nations have special regulations on nuclear exports, but as discussed in chapter 9, there has been considerable variation in implementation. Nor do these nations have antiboycott policies similar to those of the United States. 60 Their comparatively vigorous trade promotion efforts and the absence of controls set the policies of these supplier countries in contrast to those of the United States. when the dialog is resumed wholeheartedly, The different policy approaches certainly resuch economic issues may be a central focus fleet historic patterns of business-government of concern. relations in these nations, as well as variations POLICY VARIATION AN D in propensity of nations to play a great-power diplomatic role. Reflecting these differences, THE FUTURE OF WESTER N these nations have each developed expertise TECHNOLOGY TRAD E in particular types of technology trade. The There is considerable variation in the ap----------preaches various supplier governments have 59 See Japan's Plant Export Activities, JEIl Report, No, taken to policies affecting technology trade 112A, .Aug. 26, 1983, p. 3: I,ook Japan, ,Jan. 10, 1980, pp. 12-13. ))1 n I !)70, U.K. f?nc~rgl. Secretarj Ton~ Berm issued a st at(~with the Middle East. While none of these nament (~ffecti~d~~ harming sales of North Sea oil to 1 srael. This tions have developed clearly articulated and poli~}r was challenged in court on the grounds that a 1975 agreem(nt !x~t we(,n t }~e l~; I; ( and I srael proh i hi ted an~ n{w rts t ri ccoherent technology trade policies, all of them Lions on trad( with I sra~~l, See linancial 71n]es, I)w. ). 19H~3, have an array of supportive policies, Neverp. 3. PAGE 503 502 Technology Transfer to the Middle East French, for example, have through their stateled approach succeeded in putting together large package contracts involving many French firms, including public enterprises. This approach has encouraged French participation in large public works contracts. Japan has emphasized plant exports, while West Germany exports capital equipment and training; in both cases, private sector firms play particularly important roles in technology trade and historical interrelationships of economic institutions (corporate groupings and close business-government relations in Japan, and the interaction of financial and corporate institutions in the FRG) have facilitated trade. The British approach is distinguished by a clear separation of public and private institutions, and an absence of large consortia bidding that is more common among firms from nations where banks and corporations work more closely (Japan and West Germany). The conclusion that must be drawn from this analysis is that there is no one national approach which is clearly superior. All of these nations remain important competitors in Middle East technology trade today and will continue to be so in the years ahead. Among the Western suppliers, French and British market shares declined slightly during the last decade, while only Japan decidedly increased its share. There is no evidence to support the argument that government policies consistently determine patterns of technology trade. In some instances, such as the Japanese Governments support for large national projects or French Government-led negotiations for largescale contracts, governments have certainly helped to foster specific projects, but these cases are the exceptions rather than the rule. On the other hand, all of these nations have developed policies supporting technology trade which are assets to exporting firms. The dollar value of direct export subsidies is, in this regard, perhaps less important than the organizational resources which governments have at their disposal for putting buyers and sellers in contact, for coordinating public-private sector activities in technology trade, for combining commercial and philanthropic aspects of development assistance. Firms have generally been the major actors in technology trade: the strengths and weaknesses of particular firms and industries generally are more critical in winning a sale than the actions of government policymakers. However, in some cases these actors are one and the same (e.g., nationalized telecommunications firms). With the exception of Britain, all of these countries have during the past decade allowed economic and energy concerns to rise to the fore in their policies toward the Middle East. Their ability to put together large consortia packages has been an asset; in the decade ahead the expertise of smaller and more specialized technology exporters may become more important in less rapidly growing Middle East markets. Thus, the newly industrializing countries as well as smaller firms in West Europe may expand their market shares in specialized niches. West German firms appear particularly well placed to take advantage of a growing demand for specialized technical assistance. Japanese firms, particularly the corporate groups associated with trading companies, are also in a good position to expand exports in a number of areas such as telecommunications equipment. Governments play important roles in setting the overall foreign policy context within which technology trade occurs. The fact that historical and colonial ties are still reflected in technology trade relations indicates the importance of government policies at the highest level. In few instances have specific trade promotional or financing programs solely determined the competitive success of firms, but they have provided significant support for exporting firms. The environment of cooperative PAGE 504 Ch. 12Policies of Other Supplier Countries l 503 business-government relations characteristic ests with assistance and politics set the poliof some of these nations, combined with the cies of other Western suppliers in contrast to comparative absence of controls, and the genthose of the United States. eral receptivity to coupling commercial inter11: SOVIET BLOC SUPPLIER COUNTRIE S As a group, the Soviet bloc countries, including the U.S.S.R. and Eastern Europe, have not been particularly successful in expanding their share of commercial exports to the Middle East region. In contrast to the Western supplier nations which are important competitors with U.S. firms and organizations in Middle East markets, the role of the Soviet bloc countriesparticularly the Soviet Unionis particularly important to military and strategic issues in U.S. policy. The remainder of this chapter identifies major trends in Soviet bloc economic interactions with the Middle East, highlights policies affecting technology transfer to the region, explains why these nations have played a comparatively limited role in civilian technology trade with the region, and looks ahead to future prospects. As in other areas of research on the U. S. S. R., it is difficult to assemble reliable data on Soviet bloc trade and policies. What is clear is that during the last decade, Soviet interactions with the Middle East have included considerable military assistance, while East European interactions have been concentrated more in commercial trade. Training, however, has been a key element in technology trade relations with the Middle East, both for the U.S.S.R. and Eastern Europe, and in both the military and civilian spheres. There is little doubt that the ability of Soviet bloc countries to compete with Western suppliers in commercial technology trade remains limited, and will probably remain so during the next decade. However, there are indications that Soviet bloc policies towards encouraging technology trade have been strengthened in recent years, and some signs that Middle East countries may wish for a variety of reasons to expand economic relations with these countries. Therefore, despite the comparatively small role that these countries play in commercial technology trade with the Middle East, they represent another group of supplier countries whose actions are of importance to U.S. policies. TRENDS IN SOVIET BLO C ECONOMIC INTERACTION S WITH THE MIDDLE EAS T Military assistance has undoubtedly been a more important component of Soviet economic interaction with the Middle East than economic assistance and commercial trade. In contrast to East European military aid, which has been quite limited, Soviet military assistance remains high relative both to Soviet military aid to other parts of the world and to military aid from other suppliers. Between 1956 and 1979 the U.S.S.R. committed close to $35 billion in military aid to the Middle East and North Africa, or about three-fourths of all Soviet military aid to non-Communist developing countries worldwide. G In 1976-80 alone, Soviet arms transfers to the Middle East (including Libya and Algeria) were valued at $19.8 billion. During the same period, U.S. arms transfers to the Middle East, including Israel, were valued at $14.2 billion (table 103). 61 CentraI Intelligence Agency. Washington, D.C., (communist ,4id .Acti~ities in Non-Comn~unist I.ess l)e~wloped (70untries, 19 and 1954-79, Research Paper, 19/30. This does not include additional militar? agreements totaling almost $8 t]illion with North Africa. 61(J nited States Arms (~nf,r~j and I)isarmamen ( }\ WIICJ. 11orlci ,lljljtar~ 1+,xpenditur(~s and .Arms Transfers 1971-80, ,!(),4 Publication 115, Ill arch 19N3, pp. 117-119, Total So~iet arms ( ransfers to de~eloping nations not including tht~ \\arsaw 1act during t ho s:!mr p[~riod w~rcj $26.2 hilbon (in (u rren t dollars). PAGE 505 504 Technology Transfer to the Middle East Table 103.Soviet, U. S., and French Military Arms Transfers to the Middle East, 1976-80 (million U.S. dollars) Supplier recipient Total United States U.S.S.R. France Africa . . ,500 825 11,300 2,400 Algeria 2,300 N 1,800 N Libya . . 8,600 N 5,500 410 Middle East ., 38,600 14,200 12,500 3,500 Egypt 1,900 430 20 600 Iran 8,300 6,200 625 200 Iraq . . . 7,800 N 5,000 950 Kuwait . ..., 800 390 50 130 Saudi Arabia ..., . 4,700 2,000 N 700 Syria . 6,600 N 5,400 290 Israel, ..., 4,300 4,300 N N Jordan ..., 1,000 725 N 280 N Indicates eithter none or negligible SOURCE World Military Ependitures and Arms Transfers. 1972-80, ACDA, March 1983 PP 117-120 The United States and France are the two largest Western suppliers of arms to the Middle East While the lions share of Soviet military assistance to developing countries has consistently been directed to the Middle East, this assistance has been focused on a limited number of countries: Egypt until the early 1970s, and currently Syria, Iraq, Libya and to a lesser extent Algeria and Iran. In contrast to the pattern of Soviet economic relations which are heavily weighted toward military assistance, East European military assistance has been more limited and commercial trade relatively more important. Although most economic interaction with the Middle East has been in the military arena, Soviet economic assistance to Middle East countries has not been insignificant. During the last 25 years, Soviet military assistance to the Middle East and North Africa has been twice to three times as large as economic assistance to these countries; this economic assistance, estimated at about $11 billion, 1954-79, was nonetheless substantial, and comprised about 60 percent of the total extended by the Soviet Union to non-Communist developing countries worldwide. 63 As with military assistance, East European economic assistance has been much smaller than that of the Soviet Union, and the recipients have included roughly the same group of countries. 63 CIA Communist Aid Activities ..., op. cit., pp. 13, 14, 1821, 24, and 28. In contrast to the decade of the 1960s, when Soviet bloc commercial trade with the Middle East grew to a level comparable to that of many individual Western countries, during the 1970s the Soviet bloc share of exports to the Middle East declined markedly. In 1970, Soviet exports to the Middle East were roughly comparable in value to those of West Germany, and exceeded those of Japan, France, and the United Kingdom. During the 1970s, moreover, Soviet bloc exports to the Middle East continued to rise. Indeed, Eastern Europe found in OPEC its fastest-growing foreign trade, 1970-78; and although Soviet bloc exports to developing countries made up only about 3 percent of total foreign trade in 1978, the OPEC countries accounted for about 40 percent of all East European trade with developing countries. More than 70 percent of Hungarys industrial exports, for example, have gone to the Middle East in recent years. 64 This growth, however, was outpaced by a growth of Middle East trade with the West, and during the 1970s the Soviet bloc share of total trade with the Middle East became very small. Table 104 shows Soviet exports to 64 See Ronald G. Oeschler and John A. Martens, Eastem European Trade With OPEC: A Solution to Emerging Energy Problems. ~ in U.S. Congress, Joint Economic Committee, East European Economic Assessment (Washington, D. C.: 1981), p. 514. See also Middle East Ewnomc Digest, Special on Hungary in the Middle East, May 18, 1984, p. 55. PAGE 506 Ch. 12Policies of Other Supplier Countries 505 Table 104.Middle East Imports From Selected Western Countries and the U. S. S. R., 1970 and 1978 (millions U.S. dollars) Egypt Iran Algeria Iraq Saudi Arabia Kuwait Libya Syria United States 1970 77.0 3260 61.1 22.2 140.4 61.6 1078 11 1 1978 1,131.8 3,6782 3733 316.2 4,295,4 725,5 4228 1337 U.S.S.R. . 1970 362.9 187,6 69,4 65.9 6.0 108 143 464 1978 2169 636.1 129.8 990.3 11.9 538 76.1 1929 Japan 1970 12,4 178.8 20.2 15.9 838 944 31.4 16.1 1978 400,3 2,691,1 729,3 951.5 3,254.3 774.1 3537 88.2 Franc e 1970 63,5 67,3 5624 35.1 29.2 32,5 424 186 1978 553.8 889.1 1,530.6 502.4 8750 2102 5361 2714 West Germany 1970 122,3 3216 99.0 19.2 650 422 458 234 1978 6745 3,3807 1,275.2 802.0 2,078.8 3469 8219 262,8 Italy ., 1970 648 82.5 93,6 15,4 34.6 259 1336 20,9 1978 407,9 1,068.6 949.2 323.5 1,4668 2879 1,306.5 2376 United Kingdom 1970 44,4 154.9 40,2 55.4 781 701 55,4 142 1978 3938 1,428.7 231.1 4152 1,5053 636.9 4109 110,8 SOURCES: Data for the United States, Japan and France U.N. Supplement to World Trade Annual Trade of Industrial Countries With the Developing Countries and Eastern Europe (New York Walker & Co. 1979) Data for the U.S.S.R from the Central IntelIigence Agency computerized data compiled from official Soviet the Middle East as compared to those of selected Western nations in the 1970s. Whereas the total volume of Soviet and East European annual exports to the Middle East almost quadrupled in 1970-78, the volume of annual exports from the West grew almost twelvefold. By 1978, the U.S.S.R. accounted for only 5 percent of the Middle East market. Decline in the Soviet blocs share of foreign trade with the Middle East countries was particularly steep not only in Egypt, but in Iraq, Syria, and Algeria. Iraq is the only country examined by OTA where imports from the Soviet Union have exceeded those of any one major Western supplier in recent years. But even here total exports from the U.S.S.R. were far exceeded by the combined total of exports from the West. (In 1978, Soviet exports to Iraq were estimated at $603 million, as opposed to $4.6 billion from the six major industrial countries.) Trade with Saudi Arabia and Kuwait remains quite limited; trade with Syria, Algeria, and Iran (which remains East Europes largest OPEC trading partner) has been larger but still far below the level of trade with Western countries. [)~t~ for U.S.S.R. from (l A, lreject Trader (computerized printouts compiled from official Sotiet foreign trade handbooks. I)ata for industrialimd countries from [l,\ Supplement to 11orld 7rade ,4nnual: 7rade of lndu.strial Countries Iiith the I)eieloping Countrie.? and h~ast~rn I+lurope (New }ork: \falker & Lo., 1979}. I t is unclear what proportion of so~iet exports n~aJ ha~( been military rx)lated. Only a very small portion of Soviet bloc commercial exports to the Middle East have been technology-intensive products in the sectors examined by OTA. For the past decade, Soviet bloc exports to the Middle East have consisted mainly of primary products such as food, intermediate goods (chemicals, steel, cement, glass, textiles), services (including construction, training and medical services), and for the Soviet Union a growing portion of machinery and equipment. In all five technology sectors examined by OTA, imports from the West have far exceeded those from the Soviet bloc in the Middle East. 66 In the five sectors selected by OTA, there is evidence that Soviet bloc countries have exported comparatively small volumes in the following subcategories: airplanes and helicopters, chemical technology including fertilizer plants, aerial communications systems, and medical construction services. The Soviet Union has comparatively strict control on exports of nuclear equipment, but has assisted in nuclear programs or planning over the years in Iraq, Libya, Syria, and Egypt. Data do not permit conclusions about the degree to which Sotriet exports are in technology-intensive sectors. Nearly half of total .Soliet exports to 1 raq in 1978. for example, werr in machiner? and equipment a relat i~el} technolom-in tensi~r~~ export categor}. 1+ owe~w-, it is impossible to identif~ the conl position of these exports, except to note that aerial communications facilities, geological sur~e~ equipment, and oil field equipment were included. PAGE 507 506 Technology Transfer to the Middle East While overall exports in advanced-technology sectors examined by OTA are therefore quite low in comparison to those of the Western suppliers, Soviet bloc countries have managed to win contracts in some specialized areas: Czech participation in design of an airport in Iraq 67 ; Romanian participation in petrochemical joint ventures in Iran 68 ; Hungarys Medipex, along with West German and French companies, in a licensing agreement with Egyptian public sector pharmaceutical companies; the Hungarian telecommunications firm Budavox in a Libyan telephone cable network project. G9 In specialized areas, East European firms have developed considerable strength in advanced technologies subsectors of aerospace being an example. 70 The one area of civilian technology transfer where the Soviet bloc countries have maintained a strong presence is training. The number of Soviet bloc l economic technicians serving in the Middle East and North Africa has far exceeded the number designated as military technicians, the former numbering about 70,000 and the latter about 11,000 in 1981. 7 Of the total of economic technicians about half came from East European countries. Most of these technicians are located in the same group of countries with relatively strong economic interactions with the Soviet blocLibya, Iraq, Algeria, and Syria. See Vladimir 13roz, Technical and Personnel Assistance in the Industrialization of Developing Countries, Projects for Other Countries, and other information taken from scanning the Czechoslovak journal Polytechna. See also CzechoslovakIranian Cooperation in Petrochemistry, Czechoslovakias hconomic Digest, September 1982, p. 5. Orah Cooper, Soviet Economic Aid to the Third World, Soviet Econom-v in a New Perspective, compendium of papers submitted to the Joint Economic Committee, U.S. Congress, Washington, D. C., 1976, p. 295. Information taken from contract data listed in the kfiddlt~ East Economic Dig&t: Contract Data for 1977-1981. See alsc) Patents for Hungarian Chemical Products, Hungaro Press: Economic Information, 1982, No. 20, pp. 176-177. For examples of other joint ~entures with Hungary and Mest Germany in the Middle East, see Reaching Third Markets Through Sicontact Co., I,td. Hungaro Press: Economic Information, 1982, No. 24, pp. 5-6. 7( Czechs Gear for East F:urope Sales, A}iation Meek and Space Technology, June 11, 1979, p. 282. 71 Soviet and East E~uropezm Aid to the Third World, 1981, ( U.S. Department of State, February 1983, pp. 2, 20. These figures include numbers serying in Algeria and I.ibya. In addition, Soviet bloc countries educate many Middle Eastern students in technical fields in their own domestic schools. While the number of Middle Eastern students studying in the Soviet bloc is far less than those studying in the United States, they appear to be roughly comparable 72 to the numbers studying in individual major Western supplier nations. In 1981, more than 23,000 students from the Middle East and North Africa were enrolled in Soviet bloc academic institutions, about 57 percent of whom were in the U.S.S.R. 73 Soviet bloc training of Middle Eastern students, both in the Middle East and in the Soviet bloc, thus remains central in Soviet interaction with Middle East countries. To summarize, Soviet bloc economic interactions with the Middle East are strongly concentrated in a few countries. Interactions of the Soviet Union have been oriented toward the military sphere. For Eastern Europe, the Middle East appears more important as a market for commercial trade. Despite the fact that these countries have captured only a small share of civilian exports to the Middle East, these sales remain proportionally significant in Soviet bloc total trade with developing countries worldwide. SOVIET BLOC POLICIE S AFFECTING TECHNOLOG Y TRAD E Soviet bloc policies regarding technology trade with the Middle East clearly reflect official state goals in the larger political sphere. 7JAvailable U,N. data, however, include all students from Asia as well as from the Middle East. According to these data, in 1978 almost 22,000 students from Asia and the Middle East were studying in the U.S.S.R. The overall number of students from the Middle East and Asia was slightly more than in France (about 20,000), and almost the same number as in West Germany. The number studying in the United States, however, was almost seven times greater, at 147,280. WJ.S. Department of State, Soviet and East European Aid. op. cit., pp. 22-23. France ranks above the Soviet Union, and second to the United States in total enrollments of foreign students from all nations. See Institute of International Education, Open Doors: 1981-1982, 1983, p. 5. Enrollments in 1978 were 263,940 in the United States; 108,286 in France; and 62,942 in the U.S.S.R. PAGE 508 Ch. 12Policies of Other Supplier Countries 507 While it is accurate to describe the policymaking systems of the Soviet Union and Eastern Europe as comparatively centralized in official state institutions, foreign trade policymaking is a diverse and complex process, with competing interests and objectives evident at almost every stage. This, in turn, has affected changes in policies affecting the extent and nature of Soviet bloc technology transfer to the Middle East. For the most part, Soviet policies have traditionally been shaped by political concerns, but economic objectives have apparently been gaining importance in the decisionmaking process. Individual East European states, on the other hand, tend to formulate policies which are generally complementary to but more commercially oriented than those of the U.S.S.R. Before discussing differences in policy objectives and actual policies, it is useful to first discuss the context in which technology transfer policies are made. Institutions and Objectives An examination of the institutions involved in Soviet trade and foreign policymaking reveals a striking variety of actors and considerable overlap in responsibility. 74 The overall framework for Soviet foreign and trade policymaking lies in the U.S.S.R. planning system. This system generates a series of plans designed to coordinate all economic activity in the U. S. S. R., including foreign trade. Altogether, five plans are most critical for foreign trade, including: the export and import plans, plans for the the delivery of exports and imports between foreign trade organizations and the domestic economy, the plan for the delivery of equipment and materials for projects built abroad with Soviet technical participation (the foreign aid plan), the balance-ofpayments plan, and the plan for economic inFor a discussion of the evolution of foreign trade organizations and foreign trade policymaking in the U.S.S.R. see Glen Alden Smith, Soviet Foreign 7rade (New York: Praeger, 1973), pp. ~~1 ~~: ~fillianl ~elson hrpin, ,So\r~et ~oreigm Trade (I,eXington, Mass.: I,exington Boods, 1977); and Stephen (1 ardner, ,$otiet ioreigm Trade (Boston: K1uwer-,Nijhoff Publishing, 19X?). tegration with other Council for Mutual Economic Assistance (CMEA) 75 countries. These plans, which are generally published only in very abbreviated form, govern economic interactions with foreign countries and with other CMEA members. A network of domestic Soviet and CMEA agencies are involved in their preparation and implementation, in a process which begins at the top of the Soviet governmental and party hierarchy. These plans are then reviewed and expanded by officials farther down the hierarchy, and finally coordinated again at the top, where final decisions are made. In foreign trade policymaking, the Communist Party leadership and the Council of Ministers are the key actors, operating on information from the State Planning Commission, Gosplan, and the foreign trade and aid ministries. The Presidium of the Council of Ministers has two trade-related commissions to perform these tasks, and six main central agencies under the Council of Ministers play important roles in foreign trade planning. Of the six agencies under the Council of Ministers, three have general planning duties: the State Planning Committee (Gosplan), the State Committee for Material and Technical Supply (Gossnab), and the State Committee for Science and Technology. As the main planning organ of the U.S.S.R., Gosplans input is probably the most important; its role is mainly to coordinate the planning process for all of the other agencies. Gosplan develops the methodological framework, assists in cost-benefit analysis used in foreign trade decisionmaking, and sets the initial plan targets which each ministry must use in compiling draft plans. Ultimately, therefore, Gosplan is responsible for allocating the most important products and resources, and for uniting the individual agency plans into one unified plan. r Council for Mutual Economic Assistance countries include Bulgaria, Cuba, Czechoslovakia. East Germany, Hungary, Mongolia, Poland, Romania, the U. S. S. R., and Vietnam. PAGE 509 508 l Technology Transfer to the Middle East The State Committee for Material Technical Supply, or Gossnab, is responsible for allocating a broad range of commodities and for distributing all producers goods. In terms of exports, Gossnab plays an important role in coordinating the supply of equipment for projects built abroad under the sponsorship of the State Committee for Foreign Economic Relations (GKES), the Soviet aid-giving body. Finally, the State Committee for Science and Technology (SCST) formulates policies regarding research and development (R&D), and the introduction of new technologies. It is also responsible for buying and selling patents, as well as many of the international aspects of science and technology. The SCST negotiates and implements intergovernmental and private agreements on cooperation in science and technology and technology exchange with other countries through its organization Vneshtekhnika. Also involved in foreign trade decisionmaking are three financial agencies under the Council of Ministers: the Ministry of Finance, the State Bank (Gosbank), and the State Price Committee. The Ministry of Finance monitors the effects of foreign trade on the state budget and develops the balance-of-payments plan. Gosbank is responsible for managing the system of foreign exchange control, for setting the exchange rate of the ruble and for the performance of the international banking service through Vneshtorgbank, its Bank for Foreign Trade, and through its interest in a number of banks such as the Moscow Narodny Bank of London. The State Price Committee participates in export pricing (as well as setting domestic prices on imported goods) and in debates on cost-benefit analysis of Soviet foreign trade. In addition to the above planning institutions are a number of agencies which actually coordinate and carry out policies, including the Ministry of Foreign Trade and the State Committee for Foreign Economic Relations (GKES). Both of these institutions have some planning responsibilites, but the former also has exclusive right to sign contracts with foreigners and coordinates the agencies actually carrying out foreign trade. The latter concludes agreements with developing countries for economic and technical cooperation, administers foreign aid, and approves plant exports, including nuclear facilities. In 1979, the U.S.S.R. established the Research Institute of Economic and Technical Cooperation under the GKES to improve the implementation of aid projects and to be responsible for the marketing and after-sales service of Soviet machinery and equipment provided under the aid program. There are also several individual ministries, enterprises and agencies which produce products and equipment for export some of which are empowered to transact business directly with foreign countries. Each of the above implementing organizations has associated with it a number of Foreign Trade Organizations (FTOs) which are so varied in their duties and structure that one observer has noted, the only thing they have in common is that they are all authorized to sign commercial contracts with foreign parties. 76 Of the 64 FTOs under the Ministry of Foreign Trade, most import or export a specific group of products; three are authorized to carry out border trade with particular countries, of which one, Vostokintorg, deals with countries in Asia and the East. In addition to the 11 FTOs subordinate to the GKES, there are seven others dealing in foreign trade under other ministries and organizations. On paper, the division of responsibility appears clear, but in practice the lines between these ministries and FTOs are overlapping and vague. A given commodity, for example, may be exported by a particular FTO under the Ministry of Foreign Trade if it is sold conventionally, or by an FTO under GKES if it is sold under a governmental credit agreement. Licenses for technology transfer may be traded by Litsenzintorg, an FTO under the Ministry of Foreign Trade, or Vneshteknika, under the SCST, or by other FTOs depending fi Stephen Gardner, Soviet Foreign Trade, op. cit. PAGE 510 Ch. 12Policies 0f Other Supplier Countries l 509 on the type of equipment sale associated with the license. Other ministries, such as the Ministry of Foreign Affairs, not directly responsible for trade affect it, nevertheless, through their definition of overall relations with particular countries, including scientific and cultural cooperation. The Academy of Sciences, through its research institutes and laboratories in the Soviet Union and through its liaison with foreign academies of science, is involved in exchange of scientific information. While Soviet trade with the Middle East is undoubtedly shaped by a variety of economic, political and other concerns, political objectives have traditionally been most central. Foreign trade in general is considered to be less important to the U.S.S.R. than to Western countries, and trade has generally comprised a relatively small part of GNPless than 8 percent in 1975. Where more extensive foreign trade has developed, however, the objectives have tended to be largely political in nature. This was particularly true in the 1960s: Soviet leaders saw in their construction of the Aswan Dam, for example, an opportunity to promote political ties with Egypt. Premier Nikita Khrushchev himself noted: By building the dam we would be winning the priceless prize of the Egyptian peoples trust and gratitude. And not just the trust of the Egyptian people but of all the other underdeveloped countries Furthermore, we knew that strengthening the Arab countries meant weakening the camp of our enemies." 78 Experts debate the precise political aims of the Soviet Union in the Middle East, but these goals can be generally described as increasing Soviet influence in the region and, as a corollary, diminishing that of the West. Whether hi+ tt)n~piirt,s to al}{)ut 13.4 percent for the United State< in ( ht sner~ A ~ailabilit~r (ktashington, 1).C.: U.S. (ongress, Office of Technology Assessment, OTA1S(1 h~~, 19H 1 ), ch. 10, The .So~iet B1OC and i$orld Ilner~r Markets. 5 Unallocated umbrella credits are untied credit, -i.e., credit lines which are not allocated to any specific project,, hut under which projects would be established once the credit had been given. feasibility studies, and more attention, at least in stated policy, to the needs of the developing countries. The trade policies of East European countries were also revised in tandem with those of the Soviet Union. In the 1960s, East European terms of aid and trade with developing countries reflected the concessionary flavor typical of Soviet policies. As a Polish trade official commented, to compete, the Communist countries, especially the smaller ones, have to provide the sweetener of credit. Without credit, the developing countries would buy from the West. This is important to Poland, since we now have to worry about securing markets for our own domestic industry. Our heavy industrial sector is overbuilt, and we are unable to sell all we produce within Poland or even to other Communist countries." 86 Beginning in the late 1960s, the East European countries, strongly dependent on foreign trade, began to view aid to and trade with developing countries in more clearly economic terms. Many of these nations acknowledged their reduced capability to provide large credits; they shortened payment terms and eliminated subsidies. 87 In the 1970s, therefore, Soviet and East European terms of trade became more similar to those offered by Western countries. Today, for example, both the U.S.S.R. and East European countries generally charge world market prices. Nevertheless, Soviet bloc countries continue to employ different vehicles, including payment in local currencies, tied aid and barter trade, in an attempt to expand their market shares in the developing world. Barter trade, used here to include countertrade, buy-backs and compensation agreements, is an important feature of Soviet bloc trade. An early example was the agreement between Romania and Iran, which included Romanian export of a tractor plant in return for crude oil shipments from Iran. fiQuoted in Ttlarshall {;oldman, So}ie[ Foreign lid (New }ork: Iraeger. 1967), p, 186. -hlichael Radu, op. cit., pp. 94, 171-173. and 333-343. PAGE 513 512 l Technology Transfer to the Middle East Such agreements begun under the Shah continue today .8 Similarly, Poland is building 20 major industrial facilities in Iraq, employing 2,500 workers, and will in turn be supplied with oil. 89 In addition to barter trade, joint ventures and specialization increasingly characterize trade between East European and developing countries. In October 1982, a working group was formed within the CMEA to promote joint marketing of turnkey projects-in third countries in order to reduce duplication of efforts by East European countries and improve their ability to offer more comprehensive packages for development projects. 90 These examples illustrate the growing commercial orientation of foreign trade policies of Soviet bloc countries. During the 1970s, several East European countries also made administrative and organizational shifts designed to increase trade through promotion of market forces and participation of private interests. Perhaps the most flexible system of foreign trade emerged in Hungary. Changes have included allowing large Hungarian manufacturing firms to trade directly with foreign firms and companies, and introducing an element of competition among FTOs and in export financing. While foreign trade is still a Hungarian state monopoly under the Foreign Trade Ministry, more than 150 companies now have the right to trade directly with foreign partnersbypassing the FTOs. Manufacturing firms that do trade through FTOs now have the freedom to shop around among the more than 40 FTOs. In addition, a number of Hungarian companies have established joint ventures or foreign offices, such as one established to promote trade with the Gulf States. g It would appear that, in official policy rhetoric at least, technology transfer has become Xltornania lhu-tem with hircl P1orld Partners, South, April 1982, p. 22. S=> also Pompiliu Verzariu, Countertrade Practices in fi~ast Europe. the Soviet Union and (hina (Mashington, D. C.: (J. S. Ikpart,ment of Commerce, April 1980). !vlichael Radu, op. cit., p, 3 } 1. k; ast F;umpean Contracts: Comecon Pines Mrest, Financial Times, Nov. 29, 1982, Information on llungarian trade reorganization comes primarilJ from the Financitil Times. May 10, 1983, pp. 1-IV. increasingly emphasized in these overall foreign trade policies, but in very general terms. One Soviet writerL. Zevin, of the U.S.S.R. Academy of Scienceshas written that scientific and technical relations are now regarded as a distinct and increasingly important category of Soviet foreign policy making. 92 In official statements, two themes stand out: that technology transfer requires a comprehensive reordering of the recipients social and economic infrastructure in order to promote full utilization, and that a global restructuring along the lines of the New International Economic Order is necessary. With regard to the first point, Soviet emphasis on comprehensive technology transfer, adapted to local conditions and fostering nationwide economic development, is contrasted with the approach taken by Western countries, which is characterized as fragmented and leading to the continuing dependence of recipients. Manpower training is stressed as important for the growth of scientific and technological potential in the recipient country and the development of production. Intergovernmental agreements on science, technology and cultural cooperation are viewed as the most suitable organizational and legal framework for technology transfers. 93 With regard to the L. Zevin, An Integrated Approach to Technology Transfer: Soviet Cooperation With Developing Countries, Impact of Science on Societ.~~, vol. 28, No. 2, Moscow: April-June 1978, pp. 183-191. Several other articles in the Soviet press have dealt with this theme. See, for example, P. Khoinik, Slozhn~e problemy torgovliirazvitiia (Complex Problems of rade and Development), Mirovma hkonomika i Mezhdunarodn.ve Otnosheniia (M. E. M.0./, (World Economics and International Relations) May 1982, pp. 40-50; 1. Egorov, Vneshneekonorniccheskaiia strategiia razvi~aiushchikhsia gosudarstv (The Foreign-Economic Strategy of Developing Governments), M, E. M.0., May 1982, pp. 154-55; I. Diakova, Razvivaiushchiesia Stran~ AziiEksportery Tekhnologii (Developing Countries of AsiaExporters of Technology), Azia i Afrika Segodnia (Asia and Africa Today), No. 12, 1981, pp. 35-36; and A. Tkachenko, i Malye kompanii: Ekspansiia v raz~ri~raiushchiesia strany (Small Companies: Expansion to De~eloping Countries), Azia i Afrika Segodnia, No. 7, 1982, pp. 33-35. i Ibid., p. 187. See also Razvititie otnoshenii sotsialisticheskikh stran c pazvivaiushchimicia stranami v oblasti peredachi tekhnologii (Development of Relations of the Socialist Countries with Developing Countries in the Sphere of Technology Transfer), Vneshn~a Torgmdia (Foreign Trade), vol. 3, 1983, pp. 25-31. PAGE 514 Ch. 12Policies of Other Supplier Countries 513 second theme, Moscow has supported the con cept of an international code governing tech nology transfer, in order to eliminate the economic barriers created by translationa l corporations to the social and economic pro gress of developing governments. 9 4 Discussions of technology transfer in the East European literature echo these themes According to one East German scholar, tech nology transfer should be a component of th e development plans of recipient countries, and socialist countries are particularly suited t o transfer to technology because of their centra l planning and long-term strategies, and be cause they are prepared to export labor-con suming" technologies 95 Among the East Eu ropean countries, Romania has been the mos t vocal advocate of a New International Eco nomic Order There is evidence to suggest that Soviet bloc countries are now emphasizing technolog y transfer through a variety of channels such a s sale of patents and licenses, consultant serv ices in the field of economic planning and management, education and training, and build ing of research and design institutes. I n contrast to the pattern of earlier years, wher e technology transfers from the Soviet bloc were associated primarily with equipment deliveries in conjunction with large-scale projects, there is a broader perspective on international technology transfer today. 96 Among the varied channels of technology transfer currently considered as appropriate, stress on manpower training represents a continuation of past trends. Technical cooperation at the individual level is promoted through scientific conferences where representatives from the U.S.S.R. meet those from developing nations, through joint research projects and exchange of scientific publications. A variety of mechanisms have been used, such as on-the-job training in Soviet projects, Soviet personnel teaching in local schools, and scholarships for study in the Soviet bloc. In all of these training programs, stress is laid on mass training of developing-country personnel in sectors most critical to economic development through group study methods. This emphasis on training in Soviet programs may be interpreted as intended to further economic and political aims by propagating Soviet ideology among local populations, and to ensure absorption of technologies exported, or as a method of tying operation of facilities over the long term to Soviet equipment and methods. To summarize, Soviet bloc countries have developed a general approach which lays considerable stress on technology transfer as a part of foreign policy. For the Soviet Union, technology transfer is in rhetoric at least viewed as an instrument for furthering political aims of building alliances with developing nations. Training has been and continues to be a central feature of this approach. (Soviet policies dealing with nuclear technology exports, which have been comparatively stringent in years past, are discussed more fully in ch. 9.) The strongly political orientation of Soviet bloc policies affecting technology transfer is clear, but East European countries have placed more emphasis on commercial aspectsand these considerations have recently come more to the fore in Soviet policy as well. Nevertheless, the striking fact is that, despite strong official support for technology transfer, these nations have not been very successful in commercial technology trade. SW \. A, hll ke~ish, S. Sh. A-Raz~i~iaushchiesia strany: perwdacha tekhnologii (The (ISA and lle~eloping (lmntrit~s: EXPLANATION OF SOVIE T Technolog~ Tran~feri. Ineshnaia Torgo\rlia, Jo]. 3, 1983, pp. 46I 7 for a re~rl(,~ of a book t)~ R. 1, Zimenko~ on American BLOC PERFORMANC E echnolog~ Tran~f(v-, Jerz} Kleer and l,ech Zacher, echnolo~ Transfer Frorn The pattern of limited Soviet bloc involvethe (N1 F;A Lountries to the Third World, r[~search report prement in economic interaction with the Middle pared for the Austrian Institute for F;conomic Research l N(), 56, No\en3her 1979, p. I, East requires explanation. A number of fac*Zetin, An 1 ntegr-atwi Approach op. tit., pp. 1 H71 xh. tors act to limit the extent of Soviet bloc ex PAGE 515 514 l Technology Transfer to the Middle East ports, but other factorsalbeit weaker in total effectsuggest that there is a potential for expansion of technology trade in the years ahead. Perhaps the most obvious explanation for the limited role that Soviet bloc exports play in the Middle East market is the fact that Soviet civilian products are generally perceived to be inferior in quality of technology. During the last decade, many oil-producing nations of the Middle East have been in a position to purchase the best equipment available. The view that Soviet technology is inferior has been articulated by Middle East leaders themselves. Saddam Hussein, leader of Iraq, stated in 1982: Take technology and expertise. Do these exist in the Soviet Union or in America? I will answer you. The technology we require exists in the United States, or in Europe and Japan." 97 To be sure, the Soviets do export some advanced technology in sectors such as oil field equipment, hydropower, aerial communications and geological survey equipment-particularly military-related equipment. Indeed, they are considered to be among the most competitive suppliers of power equipment and desert irrigation in the world. However, in most of the sectors examined by OTA, Middle East nations have purchased primarily Western technology, although Soviet-made 440 MWe nuclear reactors may be exported to the Middle East in the future, as discussed in chapter 9. Concerns about the quality of equipment and sophistication of technology extend to East European-made exports as well as Soviet. In specialized areas such as Hungarian exports of buses and pharmaceuticals, East European firms have carved out niches in foreign markets. But in many product sectors, it appears that East European products are on a par with those from other developing Quoted in K. Dawisha, The U.S.S.R. and the Middle East: Superpower in Eclipse? Foreign Affairs, winter 1982-83, p. 444, Similarly, in the same text, Syrias Minister of Information is reported to have stated that Soviet military machinery and equipment used by Syria in the war in Lebanon was inferior in quality to U, S. weaponry. countries. 98 The East Europeans themselves have noted that their level of manufacturing sophistication is in many cases not noticeably higher than that of many of the developing countries. Nevertheless, the fact that Middle East markets make up anywhere from onequarter to two-thirds of many East European countries total exports to developing nations (although a minor share of total exports) indicates that these exports are at least significant for Soviet bloc countries. The fact that a large amount of Eastern Europes commercial exports are in militaryrelated equipment, and that these exports are normally compatible with Soviet-made equipment, illustrates the linkage of East Europes commercial trade to Soviet policies. Where the recipient is a country politically allied with the Soviet Union, the East Europeans may reap commercial gains-particularly in comparatively less technologically sophisticated conventional arms sales. 99 Similarly, the continuing growth of East European agricultural exports to Middle East nations during the last decade while finished manufactures exports declined in terms of share, corroborates statements that Soviet bloc technology is in many sectors generally not on a par with that of Western countries. 100 Another factor inhibiting Soviet bloc trade with the Middle East is the rigidity in their trade and administrative systems. While Soviet literature points to long experience with planning as a key asset in technology transfer, as noted above, the fact is that in many instances bureaucratic red tape and overlapping responsibilities have resulted in delayed shipments and inability to change product lines in response to shifts in export market demand. An interrelated problem is the tendency of East European countries to depend on trade with communist countries. This stress on the K. ~. Poznanski, New Dimension in International Trade: East-South Competition in the Wrest, unpublished paper, ])epartment of Economics, Cornell UniversitJ~, I)ecember 1982. LJ. S. Department of State, Con\entional .4rn]s 7ransfers in the 7hird Itrorld, Special Report No. 102, August 1982, p. 8, l~~~~oes(.hsler and Martens, op. cit., p. ~~~ 1. PAGE 516 Ch 12Policies of Other Supplier Countries l 515 home market has resulted in weakness in worldwide marketing and a lack of flexibility in responding to changing conditions in the marketplace. 101 The comparative underdevelopment of Soviet bloc institutions carrying out trade with developing countries is perhaps the root cause of this inability to market and change production in line with shifts in demand abroad. Finally, East European writers have also noted the comparative lack of historical economic interaction with the Middle East as a factor limiting their commercial interactions, In their view, since Western firms already dominate Middle East markets, East European firms must expend considerable efforts to gain a presence. Because most CMEA trade is carried on among socialist bloc countries, as noted above, this absence of historical ties with the Middle East is reinforced. For the Soviet Union, however, the picture is somewhat different. As a major exporter to the Middle East during the 1960s, and with numerous personnel in the region, the Soviet Union has a longer and deeper history of relations. However, as the expulsion of Soviet advisors from Egypt illustrates, in some cases good will has not resulted. Other factors act to stimulate increasing economic interaction with the Middle East, but to date these factors have been less salient than those mentioned above. To a certain extent, Middle East countries which previously purchased equipment from the Soviet bloc may find it necessary to continue purchases of spare parts. While requirements for spare parts present a stimulus for trade with the Soviet bloc, it must also be noted that countries such as Egypt have succeeded in producing their own parts at the Helwan (Egypt) factory for use in Soviet-built civilian and commercial aircraft. Using reverse engineering where design drawings are not available, the Egyptians have received high ratings for their organization, management and engineering quality at Helwan. Even in the case of military equipment, nations are often able to find suppliers in third countries. 102 Nevertheless, under normal conditions recipient countries may prefer to go to the original supplier for spare parts. A second factor with the potential to stimulate trade is the cheapness of Soviet bloc goods, and the willingness of these supplier nations to engage in barter trade. During a period of reduced revenues from oil production, Middle East countries may find trade with Eastern bloc nations more attractive, particularly given the requirements of nations such as Romania for oil imports which might be provided in exchange for Soviet bloc goods. Similarly, for good economic reasons, Middle East nations may naturally diversify suppliers in order to gain better bargaining leverage. The economic benefits of diversification of suppliers are, however, not unlimited. By relying on too many suppliers, the costs of spare parts and difficulty in ensuring compatibility of systems may increase. Finally, Middle East countries may wish to expand relations with the Soviet bloc for political reasons. While on the one hand the Soviet invasion of Afghanistan undoubtedly diminished Soviet standing with many Middle East nations, the war in Lebanon and the inability of the United States to mediate a lasting peace in the region which resolves the Palestinian question may have heightened impatience with U.S. leadership. Debates about the need to include the Soviet Union in a Middle East peace settlement are accentuated by the rejection of the IsraeliLebanese agreement. The fact that the Brezhnev peace plan was more congruent with the )< When 1 ran was cnlbar~oed h~ the United State+. it reported) r(rria, and \ orth Kor{a. 1 raq has re~ei~ed Solict parts fn)m I~g~pt. S(w, for example, ntc~rnat ional I{t~p(~rt, l)f~f(n.st lijlec>tr~)ni(s, ( )(tol)cr19H2. p, 19, ~.itc~d b~ Stt~phanit~ NtIllnlan in rIhlrd if orld I )t~fenw I ndustri[>s, pap[>r pr(~):irtci for ( 1 S Stat t> 1 )t!part nlt~nt, I \ R, hl a} 19H,I, PAGE 517 516 Technology Transfer to the Middle East Fez Plan proposed by the Arabs indicates a potential receptivity to Soviet positions. In July 1984 Egypt announced that formal relations with the Soviet Union would be restored. The participation of Saudi Foreign Minister Prince Saud in a seven-member Arab delegation to Moscow, and King Fahds message to then Premier Yuri Andropov both marked unusual Saudi overtures toward the Soviet Union in 1983. 103 Egypt also signed a trade protocol with the U.S.S.R. and Iraq an economic and technical cooperation protocol in 1983. While there is some dispute concerning the significance of these developments, increased openness toward diplomatic relations with the U.S.S.R. could well have an impact on trade relations. Interpretations of these interactions between Middle East countries and the Soviet Union differ. On the one hand, such overtures may be viewed as a means of applying pressure on the United States to modify its policies in the region, specifically as a sign of disappointment with U.S. peacemaking. On the other hand, some observers argue that for Middle East countries which have established relations with the United States, the opening of relations with the U.S.S.R. merely establishes formal interactions with the other superpowera fact of normal diplomacy for most nations in the world. Neither interpretation clarifies implications for technology trade, but the latter would suggest less dramatic changes in interaction than the former. THE FUTURE OF SOVIET BLO C ECONOMIC INTERACTIO N Judging by the volume of Soviet bloc exports to the Middle East, the performance of these nations in commercial technology tradeparticularly in the sectors examined by OTAhas been weak. The declining share of bee, for example. 111 { Ukaz sees Need for Soviet Midh;ast Role in Foreign llrc~dcas[ Inibrmation Ser\ice (FBIS) D&lj Report, Afiddle l;ast, Jan. 20, 1983, p. C. 1; As-siyasah Inter~iews Crown Prince Abdallah, in FBIS Dailj Report: Middle fi,ast, !LIar. 23, 1983, p. (.1; and Ghali on Tabah, Relations Mith So~riet (Jnion, fil~lS llail~r Report: Afiddle East, Mar. ~~, 1 :)~;], pp. 1). 1 ). 3 Soviet bloc commercial exports as compared to those of Western suppliers indicates that these nations have achieved only minimal success in civilian technology trade with the Middle East. Considering the rather modest levels of expenditure in terms of aid disbursements to the Middle East, it could be argued that Soviet bloc countries nevertheless have benefited from economic interaction with the Middle East. Deliveries of crude oil and natural gas from Iran and Iraq have contributed to meeting Soviet bloc energy requirements, and there has been a net flow of hard currency to the U.S.S.R. from the Middle East. While Middle East countries have often been dissatisfied with Soviet bloc development projects, the Soviet Union has gained recognition from a few strikingly visible projects such as the Aswan Dam in Egypt and the Euphrates Dam in Syria. The effects of training are more difficult to judge, but these include at the least hard currency earnings and presumably in some cases expanded influence on opinions and decisions. 104 Thus, the argument can be made that for a rather modest investment considerable gain has accrued for the Soviet Union in particular from trade with some Middle East countries, even though Soviet influence, however defined, may remain limited. Will Soviet bloc countries become more important suppliers of technology to the Middle East in the decade ahead? During the last decade, Middle East countries including even traditional trading partners of the Soviet bloc have increasingly turned to the West in technology trade. More recently, however, a few moderate Arab states have indicated a willingness to consider expanded political ties with the Soviet Union. As discussed above, political as well as economic factors may stimulate a modest but limited expansion in trade with the Soviet bloc. 1[CIA, Communist Aid Activities p. 9. By 1979, hard currenc~ earnings from exports of technical services exceeded $100 million annually for the U.S.S.R. PAGE 518 Ch. 12Policies of Other Supplier Countries l 517 There is, however, little indication that these changes dramatically. In specialized areas, countries will become significant suppliers East European and Soviet suppliers may exacross the board in technology trade, or in all pand sales in the region, but these countries the sectors examined by OTA. Middle East will in all likelihood continue to play a limited countries will probably continue to acquire adand secondary role in civilian technology vanced technology primarily from the West, trade. unless the political and economic context III: CONCLUSION: TRADE AND POLITIC S IN SUPPLIER COUNTRY POLICIE S This examination of approaches to technology transfer taken by non-U. S. suppliers in the West and in the Soviet bloc reveals a unifying theme: those supplier countries which have exercised or aspired to exercise a leading political role in Middle East politics have in most cases placed less stress on commercial promotion as a matter of public policy than the other suppliers. This is certainly the case for Great Britain (a former great power in the region) and the Soviet Union. Both nations export civilian technology to the Middle East, but they have not in the last decade captured rapidly expanding shares of the Middle East market. This is not to suggest that playing a leading political role necessarily requires de-emphasis on economic issues. Among the Western suppliers, the French Government has woven political and economic policies most closely together in an active state-led approach to the Middle East. While this combination has not resulted in a rapid expansion of French civilian technology trade, some see it as perhaps important in preventing a more precipitous decline in French share that might have otherwise occurred. Nor is it the case that countries playing leading political roles gain no economic benefits. All of the nations playing a role in high-level politics nevertheless derive economic benefits from significant arms sales in the region. In addition, strong political alliances between suppliers and recipients have in many cases coincided with strong trading relationships, Some countries opting for a lower-profile diplomatic and political roleincluding Japan and West Germany in the West and East European nations such as Romania and Hungary-rapidly increased their exports to Middle East markets in the 1970s. 105 By eschewing a high-profile diplomatic role, these countries have in some cases concentrated their interactions with Middle East nations in the economic sphere. All of themparticularly Japan and Romaniaimport some oil from OPEC. These nations are also secondary but significant members of their respective Western and Eastern political alliances. The extent to which politics set a context for supplier-recipient technology trade relations is illustrated by table 101, which indicates the concentration of economic interactions of the supplier nations with a comparatively limited group of Middle East nations, in contrast to comparatively wideranging trade relations of nations such as Japan and West Germany. Among the supplier nations in both the East and the West, those that have allowed economic interests to come more to the fore in their foreign policies have developed technology trade relations with a wide spectrum of Middle East nations. However, it would be a mistake to conclude that these nations com. Between 197.! and 1978 Romanian exports to OPF~C nations increased annuall~ 35,5 percent, and Hungarian 32.7 percent. See oechsler and Martens, p, 522. PAGE 519 518 l Technology Transfer to the Middle East pletely shun political roles. West Europeans have argued that, by engaging in trade with Middle East nations not closely associated with the West, they keep the door open for communication and interaction, thus performing a role complementary to that of the United States. Periodic frictions with the alliance leader, as were noted during the past decade in U.S.-European discussions of energy policies, have sometimes ensued. Nor would it be accurate to conclude that simply by renouncing a high-profile political role a nation necessarily will reap commercial rewards or that governments, particularly in the West, through public policies strongly determine the competitive positions of nations firms in foreign markets. As observed in part I, there is little evidence that any one approach to technology transfer is clearly superior. The interplay of politics and economics in technology trade is complex. Economic gains and losses of different types are associated with various political sources. By bringing economics to the fore in foreign policy and by developing policies which support technology trade initiatives taken primarily by the private sector, many supplier governments have set a positive context for economic interaction with Middle East nations. Governments thus play important, but not determining, roles in affecting the pattern of technology trade by establishing the broad political context of relations (including military and development assistance programs in Middle East nations), and then by supporting (or impeding) specific technology trade initiatives taken primarily by the private sector. PAGE 520 CHAPTER 13 U.S. Policies Affecting Technology Trade and Transfer PAGE 521 Contents Page INTRODUCTION . . . . . . . . . . . . . 521 U.S. ECONOMIC INTERACTIONS WITH THE MIDDLE EAST. . . . 522 Commercial Technology Trade . . . . . . . . . . . 522 Economic Assistance . . . . . . . . . . . . . 523 Military Assistance and Arms Sales . . . . . . . . ...... 525 THE FOREIGN POLICY CONTEXT . . . . . . . . . 527 The Evolution of U.S. Foreign Policy . . . . . . . . . 527 Implications for Technology Transfer . . . . . . . . . 528 Energy Policy and Technology Transfer . . . . . . . . . 529 COMMERCIAL POLICIES . . . . . . . . . . . 531 Promotional Export Programs . . . . . . . . . . . 532 The Subsidies Controversy . . . . . . . . . . . 535 The U.S. Export-Import Bank . . . . . . . . . . . 536 The Overseas Private Investment Corporation. . . . . . . . 538 International Agreements and Negotiations. . . . . . . . . 540 DEVELOPMENT ASSISTANCE . . . . . . . . . . 542 Development Assistance and Commercial Promotion . . . . . . 542 Recipients and Types of Development Assistance . . . . . . . 545 Middle Eastern Students in the United States. . . . . . . . 547 Multilateral Assistance . . . . . . . . . . . . 549 MILITARY AND STRATEGIC POLICIES: CONTROLS ON TECHNOLOGY TRADE AND TRANSFER . . . . . . . 551 National Security and Foreign Policy Controls . . . . . . . 552 Nuclear Nonproliferation Controls . . . . . . . . . . 554 Other Policies Inhibiting Technology Trade . . . . . . . . 557 CONCLUSION . . . . . . 0 . . . . . . . . 559 Tables Table No. 105. 106. 107. 108. 109. 110. 111. 112. U.S. U.S. U.S. U.S. Page Trade With the Middle East . . . . . . . . . 522 Shares in the Middle Eastern Market, 1970-82 . . . . . 523 Economic Assistance to the Middle East, 1981 and 1946-81. . . 524 Military Assistance to the Middle East, 1981 and 1946-81 . . . 526 Comparison-of U.S. Commercial Trade, Economic, and Military Assistance to the Middle East, 1981 . . . . . . 526 DISC-Related Exports to the Middle East, 1979 . . . . . . 535 Comparison of Credit Subsidy and Interest Rates, 1981 and 1982 . . 537 1981 Export-Import Bank Authorizations to Selected Middle East Nations 538 PAGE 522 CHAPTER 13 U.S. Policies Affecting Technology Trade and Transfer The ongoing tension between policies that promote and policies that control technology trade and transfer is a distinguishing feature of official U.S. policies affecting technology trade with and transfer to the Middle East. In practice, policy decisions affecting technology transfer have reflected changing views about which of several goals should be maximized: promoting U.S. commercial interests, ensuring that technology transfers are consistent with American security and foreign policy aims, or fostering effective development assistance. During most of the postwar period, U.S. technology trade with the Islamic countries of the Middle East was limited to the oil production sector. During the 1970s, as technology trade between the United States and these countries rapidly expanded, government policies sometimes promoted and at other times inhibited the growth of technology trade. On the one hand, the growing strategic importance of the region, concern with the security of Western energy supplies, and export opportunities offered by the growing Middle Eastern market for advanced technology imports, stimulated increasing American economic interaction with these nations. On the other hand, the close U.S. relationship with Israel and the growing resolve to reduce flows of technology to the Soviet bloc and to countries whose foreign policies run counter to those of the United States have stimulated policies aimed at controlling and reducing technology transfers. Compared to the policies of other Western supplier countries (discussed in ch. 12), U.S. policies during the last decade that affect technology transfer have been characterized by growing restrictions. This chapter identifies competing policy goals and analyzes their effects on technology trade. The sections that follow deal in turn with the general pattern of economic interaction with the region, the overall U.S. foreign policy context, international commercial policies, development assistance policies, and military-strategic policies. A major theme is that competing interests at stake have been reflected in an ad hoc approach to U.S. policies. In addition, official policies have emphasized technology trade more than technology transfer. The focus of the discussion is those policies which are most relevant to U.S. technology trade with the Middle East, rather than general policies affecting technology trade with all developing nations. Therefore, issues such as U.S. antiboycott policies are examined, while the U.N. debates over the new international economic order receive less attention. 521 PAGE 523 522 Technology Transfer to the Middle East U.S. ECONOMIC INTERACTION S WITH THE MIDDLE EAS T COMMERCIAL TECHNOLOG Y TRAD E During the past decade, the Middle East has been the fastest growing market for U.S. exports. By 1982, U.S. exports to 15 Islamic countries of the region amounted to almost $17 billion about 8 percent of total U.S. worldwide exports. In that year more than 9 percent of U.S. exports went to the Middle East region (including Israel), and about 6.3 percent of total U.S. imports came from the region during the same year (see table 105). Almost half of U.S. exports to the Middle East have been in the form of machinery and equipment, while American exports of basic manufactures have been much less important. U.S. firms received Middle Eastern contracts valued at more than $6.6 billion in 1981 and $3.3 billion in 1982. 1 U.S. imports from the Middle East have been primarily in the form of oil. In 1980, the United States imported about 15 percent of all Middle Eastern exports, valued at $36 billion. The United States had throughout the See Middle East Contracts: Directory and Analysis, 1982 Second Half (London: Middle East Economic Digest, 1983), p. 9. In 1983, U.S. firms won $10 billion worth of contracts, but $4 billion were in Turkey and another $3.9 billion were in defense contracts in Saudi Arabia. See Middle East Contracts: Directory and Analysis, 1983, p. 11. International Monetary Fund, Direction of Trade Statistics Yearbook, 1983 (Washington, D. C,: IMF, 1983). Table 105.U.S. Trade With the Middle East (million dollars) Exports Imports Middle East World Middle East World 1982 . . 19.8 212.2 16.2 254.8 (9.3%) (6.3%) 1981 . . 18,3 233.7 30.6 273.3 (7.8%) (11.2%) 1980 . . 14.2 220.7 36.1 256.9 (6.6%) (14.0%) 1976 . . 10.5 115.4 16.8 132.4 (9.1%) (1 2.7%) 1972 . . 2.1 49.7 58.0 (4.2%) (1.% ) NOTE Sixteen Middle Eastern nations included Algeria, Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, United Arab Emirates (UAE), Egypt, Israel, Jorclan, Lebanon, Syria, North and South Yemen (During 1982, U.S. exports to Israel were valued at $22 billion, and imports from Israel at $1.2 billion ) SOURCE International Monetary Fund Direction of Trade Statistics Yearbook, 1983 and 1979 decade a trade deficit with the Middle East and with the Organization of Petroleum Exporting Countries (OPEC), owing to the greater value of oil imports relative to the growing level of U.S. exports to the region. However, because of the slack oil market and reduced U.S. oil imports, the United States achieved in 1982, for the first time since 1973, a favorable balance of trade with oil-exporting nations of the Middle East collectively. By 1982, U.S. oil imports from members of the Organization of Arab Petroleum Exporting Countries (OAPEC) had fallen to less than half the amount imported in 1973. U.S. direct investments in the Middle East have been limited and concentrated primarily in the petroleum sector. During the 1970s, when Middle Eastern governments assumed larger equity shares in oil companies such as ARAMCO, the United States experienced negative investment flows. But by the end of the decade, U.S. direct investment in the Middle East totaled about 1 percent of a total of $227 billion invested worldwide. Middle East oilproducing nations have made relatively few direct foreign investments in Western firms, concentrating their funds instead in bank deposits, bonds, and other portfolio investments. (In 1981, direct investments in the United States by OPEC amounted to $3.5 billion, or about 4 percent of all foreign investments in the United States.) However, Middle Eastern holdings in U.S. bonds and deposits in banks were much more extensive, estimated at $70 billion in 1982. 4 The product export, contract, and investment flows outlined above established the context for economic interaction between the United States and the Middle East. Three important themes, outlined more fully in chapter 3 Data include Egypt, where U.S. direct investment totaled $1 billion in 1981. Department of Commerce, Survey of Current Business, August 1982. See R. David Belli, Foreign Direct Investment in the United States; Highlights from the 1980 Benchmark Survey, Survey of Current Business, October 1983. See also U.S.-Arab Trade (Middle East Economic Digest, October 1982), p. 35. PAGE 524 Ch. 13US. Policies Affecting Technology Trade and Transfer l 523 4, are particularly relevant to technology trade and transfer. First, American technology trade with the Middle East has been increasingly in technical service areas. At the same time, U.S. product exports of machinery and equipment, particularly in subsectors such as aircraft and nonelectrical machinery, remain important. In 1981, 8 percent of all exports of U.S. engineering products (valued at $7.4 billion) went to the Middle East. 5 Quite striking was the large proportion of technical service contracts awarded to U.S. firms. During the 1978-82 period, U.S. firms won half of the $2 billion worth of technical service contracts awarded in the medical sector, a third of the equipment supply contracts, but less than 5 percent of the construction contracts in that sector. U.S. firms also played leading roles as project managers for large development efforts involving design, construction, staffing, and operations. American expertise in advanced technology, services (particularly management and technical services), and personnel trainin g has been in demand in Middle Eastern markets. 6 United Nations, Bulletin of Statistics on World Trade in hngineering Products, 1981. According to one study, the United States lost its dominant market share in OPEC markets, in 4 of 14 high-technology export marketschemicals, electrical power machinery, transistors, and scientific instruments. In other markets-aircraft, fertilizers, office machines, electrical measuring equipment-U. S. share increased between 1970 and 1978. For a more detailed discussion, see Raymond F. Mikesell and Mark G. Farah, U.S. Export Competitiveness in Manufactures in Third World Markets, CSIS Significant Issue Series, 1982, p. 52. Table 106.U.S. Shares in the Middle Eastern Market, 1970-82 Year Percent 1970 ., . ... . . . 18 1971 . . ... . . 19 1982 ... ... ... . . . 19 1973 ... ... 19 1974 ... . 21 1975 ., . . . . . 10 1976 . ... . . 21 1977 ... ... . . . . 22 1978 . . ... . . . 18 1979 . ... ... . . ... . . 17 1980 ., . ... ... ... 14 1981 ... ... . ... . . . 16 1982 ... ... . ... ... . 18 NOTE Data Include total imports for 15 Islamic countries SOURCE International Monetary Fund Direction of Trade Statistics Yearbooks 1982 Secondly, although the overall market share of the United States in the Middle East has fluctuated during the past decade, in 1982 the U.S. share of exports to 15 Islamic countries remained about what it had been in 1970, about 18 percent of the total. Table 106 shows the consistently strong position of U.S. firms in Middle Eastern markets. (Japan, however, became a larger exporter to the region than the United States in 1980.) This same export strength was seen in the U.S. machinery and equipment exports, as discussed in chapter 4. Finally, U.S. economic interactions are concentrated in a few Middle Eastern nations, with Saudi Arabia and Egypt being the most important export markets. In 1982, $11.8 billion in U.S. exports went to those two nations. The U.S. presence in Kuwaiti and Omani markets is also strong, as it was in Iran before the revolution. Patterns of trade thus strongly reflect political alliances. However, the United States has sometimes traded with nations, such as Libya, not closely aligned with U.S. policy positions. In 1980, about 40 percent of Libyas exports went to the United States, but Libyan imports from the United States made up less than 1 percent of the total. ECONOMIC ASSISTANC E U.S. economic assistance, including official confessional aid for development purposes (ODA) and other types of economic aid, plays a relatively minor role in technology transfer compared to the volume of exchange in the commercial marketplace. It is, nevertheless, critically important to some Middle Eastern nations. During the period 1946-81, almost one-third of all U.S. economic assistance granted worldwide went to nations in the Near East and South Asia region, and in 1981, 36 percent of the total went to the region. 7 Two See Agency for International Development, U.S. Overseas Loans and Grants and Assistance from International Organizations, July 1, 1945 -Sept. 30, 1981, pp. 4, 7. Economic assistance includes loans and grants for AID programs, Food for Peace, the Peace Corps, Contributions to International Lending Organizations, and other economic programs. Economic Support Fund loans and grants administered by AID are included here. PAGE 525 524 l Technology Transfer to the Middle East nations, Egypt and Israel, today receive by far the largest share of U.S. economic assistance to the region. Economic and military assistance to Israel grew rapidly following the 1973 October war, and economic assistance to Egypt increased after the Camp David accords. In 1981, the United States provided Egypt with $1.1 billion in economic assistance and Israel with $764 million, together amounting to 66 percent of the $2.7 billion sent to the region. Table 107 indicates the importance of Egypt and Israel in U.S. economic assistance to the Middle East. 8 A comparatively small percentage of U.S. economic assistance to the region is directed to programs supporting technology transfers in the industrial and service sectors examined by OTA. Most U.S. economic assistance to the Middle East involves grants and loans from the Economic Support Fund (ESF), which have amounted in recent years to $750 million annually for Egypt and about $1 billion per year for Israel, the largest program recipient. For Egypt, between one-third and one-half of the ESF funding has been devoted to the com . For fiscal year 1984, the U.S. Congress approved $750 million in ESF assistance to Egypt and $910 million in economic assistance to Israel. The House of Representatives approved $1.1 billion in ESF aid to Israel and $750 million in ESF aid to Egypt for fiscal year 1985. Table 107.U.S. Economic Assistance -1981 modity import program (CIP), designed to alleviate balance-of-payments problems. (For Israel, funds are provided as a cash transfer and are not tied directly to development programs.) ESF funding is used primarily to support imports of raw materials, spare parts, and capital equipment to Egypt, While such imports include machinery and equipment, such as telecommunications equipment, most of these programs are not aimed specifically at promoting technology transfer. Egypt also receives about $250 million in Public Law 480 funding, almost all of which has been used in recent years to support wheat imports from the United States. 10 A comparatively small share of U.S. economic assistance (about $100 million, for Egypt) has in recent years been explicitly earmarked for programs involving science and technology; 11 most of the programs support commodity imports, infrastructure development, and improvements in basic living standards. ___ .. U.S. House of Representatives, Committee on Foreign Affairs, U.S. Economic Assistance to Egypt and Sudan, Dec. 30, 1982, p. 6. See also, General Accounting Office (GAO), U.S. Assistance to the State of Israel, GAO/l S-83-51, June 24, 1983, p. 111. Agency for International Development, Congressional I+esentation FY 1983, Annex IV, Near East, 1983, p. 17. In fiscal year 1982$35 million in new funding was provided for science and technology programs in Egypt. See House Committee on Science and Technology, Science, Technology and American Diplomacy, 1983, p, 94. to the Middle East, 1981 and 1946.81 1946-81 Million Percent Million Percent dolIars of world dollars of world Egypt ... . . . 1,130 15 7,476 5.0 Israel . . . . 764 10 6,350 4.2 Bahrain . . . 2 Iran . . . . . 766 Iraq . . . . . 45 Jordan . . . . 10 1,433 Lebanon . . . 4 188 Oman . . . . 1 8 Saudi Arabia. . . . 31 Syria . . . . 2 588 PDR Yemen ... . 4 Yemen Arab Republic . 21 143 Total Near East and South Asia region 2,757 38 41,360 28 Total worldwide . . 7,305 148,872 (Algeria). . . . 203 NOTE Total for entire Near East and South Asia region includes in addition to the nations Iisted above Afghanistan, Bangladesh, Bhutan, Cyprus, Greece, India, Kuwait, Nepal, Pakistan, Sri Lanka, and Turkey. SOURCE U S Agency for International Development, U S Overseas L O ans and Grants, July 1, 1945Sept. 30, 1981 PAGE 526 Ch. 13US Policies Affecting Technology Trade and Transfer 525 .. The U.S. Government also supports technology transfer through programs such as the U.S.-Saudi Joint Commission, which is paid for by the Saudi Arabian Government. Saudi Arabia has itself become a major donor nation. In 1981, it provided $5.6 billion (about 15 percent of the total provided by all nations worldwide) in official development assistance. 12 Th e U.S.-Saudi Joint Commission programs involved reimbursable expenditures totaling $700 million during the 1975-82 period, and about 80 percent of the funds for these programs were transferred to the U.S. private sector. While U.S.-Saudi Joint Commission programs are specifically directed at development of manpower, industry, science, and technology, they have also been important in promoting U.S. trade. 13 The U.S.-Saudi Joint Commission programs involve U.S. Governmentsupported technology transfers, but these projects are fully funded by the Saudi Government and therefore should be viewed quite differently from the economic assistance programs mentioned above. Compared to other Western nations, the United States is still the major donor nation i The U S Department of Labor is working with the Saudi Arab Ian General Organization for Technical Education and Vocation Training to establish a nationwide vocational training system providing economic assistance to countries in the Middle East. The United States contributes about one-fifth of all official development assistance provided worldwide by the Organization for Economic Cooperation and Development (OECD) nations; U.S. economic assistance makes up a large share of the total received by Middle Eastern countries. In 1981, for example, Egypt received $1.7 billion in ODA commitments, of which the United States provided $1.1 billion J (see table 100, ch. 12). Compared to programs of other OECD nations, U.S. economic assistance to the Middle East has thus been substantial and it has been concentrated in support for Egypt and Israel. MILITARY ASSISTANCE AN D ARMS SALE S The United States has been a major supplier of military equipment and services to Middle Eastern nations. During the 1973-77 period, U.S. arms transfers to 15 Middle Eastern nations (including Israel) totaled $10.5 billion, compared to $7.5 billion for the Soviet Union. 15 These statistics include for the U.S. various types of military-related expenditures (construction, training, and management) not included for the Soviet Union or other suppliers, making it difficult to compare expenditures. In addition, there are problems with the values of the arms transfers, since offsets, commodity barter, and soft currency sales all may distort the values of transactions. During the 197781 period, however, the United States supplied Middle Eastern nations with more weapons than the Soviet Union in two categorieslight armor and other military aircraft. In six other categoriessurface-to-air missiles, subsonic combat aircraft, supersonic combat aircraft, 1TotaI (3DA commitments include $1 .{5 hillion in l)llatera] iinti s().2 billion in multilateral aid, See, (;eogr-aphical l)i,stril~u(i~~n of Financial Fiows to Detwioping Countrie.~ (Paris: ( )1; ( ), 1 982), p. 79. (J .S. Arms Control and I)isarm[iment Agenc}, 11{jrlci ,lfilitar,~ fi..ypt~nditures and .4rn]s ran.~fers 196A77 (11 :i~hingt{)n, I), C.: [J. S. (;oternment Printing ( )ffi(e, 1979), p. 156 ll~tr]:~ is not in~.luded in the list, hut did rwei ~e $$70 mllllon ] n iii-m\ transfers from the So\iet Union during the p(~r]ml PAGE 527 526 l Technology Transfer to the Middle East major surface warships, artillery, and tanks the Soviet Union provided more weapons. 16 U.S. military assistance, like economic assistance, has been directed mainly to Egypt and Israel, which respectively received $550 million and $1.4 billion in 1981, or together more than three-quarters of total U.S. military assistance to the Near East and South Asia region. This region, moreover, received threequarters of U.S. military assistance worldwide during the same year (see table 108). Both Egypt and Israel receive assistance in the form of financing for foreign military sales (FMS). Most of the repayments for this assistance have been forgiven; in 1983 Israel was allocated $750 million and Egypt $425 million a% U.S. Department of State, Conventional Arms Transfers in the ?hird WorM, 1972-81, Special Report 102, August 1982, pp. 1, 14. in forgiven credits, out of total funding of $1.7 billion and $1.3 billion, respectively. 17 In addition to official U.S. military assistance, commercial exports of military-related equipment licensed under the Arms Export Control Act amounted to almost $3.3 billion for shipments to the region between 1950 and 1981. This represented about one-quarter of total commercial military sales worldwide. 18 Table 109 compares the value of various types of U.S. economic interactions in the Middle East for 1981. 17 Gener~ Accounting Office, p. 20. In fiscal year 1984, Israel was provided with $1.7 billion in military assistance (of which one-half was forgiven) and Egypt with $1.365 billion (of which $465 million was forgiven). @ut of the total, about $1.6 billion went to Israel during the period. See Department of Defense, Security Assistance Agency, Foreign Mfitary Sales, Foreign Mihtary Construction Sales and Military Assistance Facts, September 1982, p. 32. Table 108.U.S. Military Assistance to the Middle East, 1981 and 1946-81 ... 1981 1946-81 Million Percent Million Percent dolIars of world dollars of world Egypt . . . . 551 17 2,052 2 Israel . . 1,400 43 14,304 16 Bahrain . . . Iran . . . . . 1,405 Iraq . . . . . 50 Jordan . . . . 44 1,039 Lebanon . . . . 20 136 Oman ... . . . 25 50 Saudi Arabia. . . . 292 Syria . . . . o PDR Yemen . . . Yemen Arab Republic . 1 3 Total Near East and South Asia region 2,472 76 29,645 33 Total worldwide . . 3,244 90,715 SOURCE U S. Agency for International Development, U S Overseas Loans and Grants, July 1, 1945Sept. 30, 1981 Table 109.Comparison of U.S. Commercial Trade, Economic, and Military Assistance to the Middle East, 1981 Value, 1981 Category (billion dollars) Commercial exports . . . . 18.3 Contracts awarded . . . . . 6.2 Economic assistance . . . . . 1.9 Military assistance . . . . . 2 Arms sales . . . . . . . 3 NOTE. Middle Eastern region includes 15 Islamic nations and Israel As discussed in ch 2 there Is some overlap among these categories SOURCE Tables 105108, ch 13, and table 30, ch 4 of this report PAGE 528 Ch. 13U.S. Policies Affecting Technology Trade and Transfer w 527 THE FOREIGN POLICY CONTEX T THE EVOLUTION OF U.S. FOREIGN POLIC Y Technology transfer normally occurs in a larger context of foreign relations, and the patterns of commercial trade outlined above illustrate the influence of politics on trading relations, and vice versa. Because technology transfer involves more than simply exporting products, a deeper and longer-lasting relationship between the parties involved is required. During the postwar period four themes have recurred in U.S. foreign policy toward the Middle Eastsecuring oil supplies for Western nations, ensuring the security of Israel, limiting Soviet expansion in the region, and promoting peaceful economic and social development of the nations of the region. Over the years the problems surrounding these issues have changed, resulting in modifications to U.S. policy. The four themes remain, but debates continue about how best to define and achieve each type of foreign policy goal. Until the end of World War II, U.S. political, military, and economic involvement in the Middle East was rather limited. During the first half of the 20th century, U.S. firms began oil exploration and production in the Middle East. The State Department, through its insistence that the British maintain an open door policy regarding Ottoman Empire oil holdings, helped American firms gain entry to Middle Eastern oil fields in the 1920 s. Palestine remained under the British mandate be tween 1919 and 1948, and it was not until the immediate postwar period that a clear U.S. policy emerged favoring the establishment of a Jewish state. 20 19 Louis Turner, Oil Companies in the International System (London: George Allen and Unwin, 1978), p. 27. American policies were somewhat contradictory during the World War II period. In 1945 President Roosevelt assured Saudi King Abdul Aziz that no action hostile to the Arab people would be taken, a statement seen as diverging from his 1944 electoral campaign provision favoring a Jewish commonwealth. After violence grew in Palestine between Arabs and Jews and proposals for partition stalled, the Truman administration recognized the new state of Israel minutes before the British mandate expired in 1948. The situation in the Middle East changed after World War II; the result was a gradually expanding U.S. role in the region. First, the Middle East oil fields boomed, fueling Western economic recovery. American firms in the ARAMCO group took the lead in Gulf oil development, encouraged by U.S. tax provisions that allowed the firms to count taxes paid to the Saudi Arabian government as credits against U.S. taxes. Secondly, concern with Soviet influence in the region grew as the British retreated from their former role as peacekeeper in the region. The rise of a nationalist Egyptian Government associated with the Soviet Union raised U.S. concerns about security in the region, particularly when President Nasser nationalized the Suez Canal in 1956. Third, United States ties to Israel grew during the postwar period. While no formal security pact was signed with Israel, the United States became that nations largest arms supplier after 1967, when France cut off most arms supplies. 21 The 1967 war was a turning point for U.S. policies toward the Middle East. The failure of the United States to negotiate a comprehensive peace settlement with the Soviet Union was followed by the emergence of joint European policies favoring U.N. Resolution 242. U.S. diplomatic efforts focused on terminating the fighting between Israel and Egypt. As Britain ended its military commitments east of Suez, the Nixon Doctrine was announced. Accordingly, the United States increased provision of weapons and military training to nations such as Iran, which were viewed as important in regional security. During the 1970s a number of important changes occurred in U.S. policies toward the Middle East. The 1973 Arab-Israeli war and the Arab embargo of oil shipments to nations supporting Israel demonstrated the growing power of Arab Middle Eastern nations. U.S. military assistance to Israel grew rapidly in (Congressional Quarterly, The Middle East (Washington, D. C.: U.S. Government Printing Office, 1981), p. 11. PAGE 529 528 Technology Transfer to the Middle East this context. U.S. policies favoring concerted action by Western governments to coordinate their energy policies developed in the International Energy Agency eventually met with some success. At the same time, Western Europe and Japan also pursued independent policies aimed at building economic ties with the oil-producing nations. While U.S. firms participated in the Middle Eastern development boom fueled by growing oil revenues, American policy makers instituted restrictions of various types on military and civilian sales. (These restrictions are discussed more fully later.) In addition, the fall of the Shah of Iran and the Soviet invasion of Afghanistan led to a growing emphasis on military and strategic themes in U.S. policies that were embodied in the Carter Doctrine, which identified the Persian Gulf as an area strategically important to the United States. By the end of the decade, the United States established the Rapid Deployment Force and set up air and naval bases on the island of Diego Garcia. The 1970s not only brought stepped-up U.S. policy efforts to ensure the energy security of the West and the military defense of the Gulf States such as Saudi Arabia, but also extensive American diplomatic attempts to establish a lasting peace between Israel and its Arab neighbors. The accord between Israel and Egypt reached at Camp David in 1978 brought peace between the two nations but left open questions of the final status of the Gaza and West Bank areas occupied by Israel and home for many Palestinians. Egypt was, however, ostracized by Arab states and the Soviet Union, which had not participated in the negotiations. The United States pledged expanded aid to both Egypt and Israel and provided special security assurances to Israel in the event the treaty with Egypt fell apart. 22 Despite the success of Camp David, talks on the autonomy of the occupied territories stalled, and Egypt suspended discussions in 1980 after the Knesset of Israel declared Jerusalem to be the nations eternal and undivided capital. 23 22 Congressional Quarterly, op. cit., p. 27, 23 Ibid., p. 28. Following the Israeli invasion of Lebanon in 1982, the United States once again attempted to promote peace between Israel and the Arab world. The Reagan peace plan called for an association of the occupied territories with Jordan, a proposal which Jordan never fully embraced and one denounced by various Palestinian groups. Another set of negotiations were aimed at bringing withdrawal of foreign troops from Lebanon and beginning economic reconstruction in that nation. The agreement for troop withdrawal reached between Lebanon and Israel in 1983 was, however, rejected by Syria, a nation receiving military assistance from the Soviet Union. As civil violence grew in Lebanon, U.S. Marines in the multinational peacekeeping force were redeployed offshore in 1984. The presence of U.S. troops in the multilateral peacekeeping force in Lebanon and the stationing of a U.S. aircraft carrier off the coast of Libya during Libyas invasion of Chad suggested the possibility of changes in the nature of U.S. military activities in the region. Finally, the prolonged and bitter war between Iran and Iraq raised concerns about the security of the Gulf States and the oil fields. In recent years, debates over U.S. policies toward the Middle East have centered around issues of arms sales, security commitments to friendly nations, and the nature of U.S. military activities. IMPLICATIONS FO R TECHNOLOGY TRANSFE R Security and diplomacy have become the central themes in U.S. policies toward the Middle East during the 1970s, while commercial issues have remained secondary concerns. Nevertheless, commercial U.S. technology trade with the region expanded rapidly. Following actions taken by the oil-producing nations to raise oil prices in the early 1970s, the demand for American equipment, technology, and services-both civilian and military grew as the Middle Eastern development boom began and spread from the Gulf States to other Islamic countries in the region. These PAGE 530 Ch. 13U.S. Policies Affecting Technology Trade and Transfer l 529 nations viewed science and technology as a way to catchup to the industrialized West and to reduce the technological gap between the Islamic nations and Israel. 24 Many businessmen and political observers saw growing U.S. commercial involvement with moderate Arab nations such as Saudi Arabia and Egypt in a positive light. They emphasized the contribution of technology trade and transfer to the promotion of special relationships with nations supplying oil and to countering Soviet influence in the region. Others, particularly some primarily concerned with the security of Israel, viewed growing commercial involvement with alarm. In their view, closer relations with the Arab states could endanger U.S. co mmitment to Israel. As a result, in the 1970s policies were developed to restrict U.S. commercial exports to the region for a variety of political and strategic reasons. American antiboycott policies, foreign policy controls used to restrict trade with nations supporting terrorist activities or violating human rights, and nuclear nonproliferation policies were all designed to restrict or oversee U.S. trade in order to further political or military goals. The fall of the Shah, moreover, heightened concerns about the risks of extensive U.S. involvement in nations of the region undertaking rapid economic development programs. Thus, while American technology trade has grown along with U.S. military, strategic, and energy interests in the Middle East, technology trade has increasingly been regulated by official policies in order to achieve political or military goals. Those favoring export restrictions have viewed technology transfer with concern and have attempted to refine controls over exports of militarily critical technologies. In some cases, such as exports of sensitive nuclear technology, the controls have been instituted to further nonproliferation policies not See Feud Ajami, The Arab Predicament (Cambridge: Cambridge University Press, 1981), p. 195, for a discussion of the problems posed by Western technology. See also Seth P, Tillman, The Umted States and the Middle East (Bloomington, Ind.: Indiana University Press, 1982), pp. 21-22, for a discussion of the Arab reaction to Israels superiority in science and technology. specific to the Middle East. In other cases, such as foreign policy controls governing exports of commercial aircraft, or antiboycott policies, controls and regulations have been instituted to foster political aims in the Middle East. As discussed in chapter 12, no other major supplier nation has instituted such extensive controls over exports as has the United States. On the other hand, close U.S. relations with countries such as Saudi Arabia and Egypt have provided a context favorable to expanded U.S. technology trade there. ENERGY POLICY AN D TECHNOLOGY TRANSFE R During the decade of the 1970s, debates over U.S. energy policy focused on Middle Eastern oil. The central theme reverberating through all perspectives on U.S. energy problems was the goal of reducing oil imports. Policy perspectives evolved over time, each with different implications for technology transfer to the Middle East. Energy Independence Immediately following the 1973 price increases and oil embargo, energy independence became the central theme of government policies. Project Independence aimed to end all dependence on foreign energy by the end of the 1980s. Confrontation with OPEC was a major theme, particularly in the early part of the decade. In an effort to break what some called a producers cartel, a number of proposals were made, including military action, oil import fees, food embargoes, and government oil purchasing. 25 As self-sufficiency receded as a feasible goal, emphasis gradually switched to enhancing domestic energy production, increasing flexibility in management of energyrelated adjustments, and alternative energy development. The general thrust of the energy independence perspective, particularly in its earliest sSee, for example, House of Representati~es, .41ternati\res to Dealing With OPEC, hearings before a Subcommittee of the Committee on Government Operations, June 20, 1979. PAGE 531 530 l Technology Transfer to the Middle East vestiges, has been to limit technology trade and transfer with oil-producing nations. Confrontation with OPEC implies a general climate inhospitable to extended technology trade involvement in Middle Eastern oil-producing nations. In recent years, however, there has been less stress on confrontation with OPEC, especially when oil prices fell in the early 1980s. The general thrust of this perspective has been to reduce technology trade with the Middle Eastern oil producers. Allied Bargaining The underlying rationale of allied bargaining, a second general perspective on U.S. energy policies, is that energy problems can best be solved jointly through coordination of policies with the Western nations in the International Energy Agency (IEA) and in summit conferences. Initially, proponents of allied bargaining saw it as a means to build a consumer bloc or cartel capable of countering OPEC. However, as Western Europe and Japan were more inclined to favor a wider, global energy dialog and because bilateral relations with producing nations continued to serve national goals, allied bargaining has been more narrowly focused in practice. Emergency oil sharing schemes, joint targets for stockpiles, and import reductions have been primary products of allied bargaining. At the same time, bilateral deals with producers and other new actors in the international oil market expanded in the latter part of the decade, limiting the coverage of allied policies. Allied approaches to energy policy stimulate technology trade and cooperation among the Western consumers, particularly in development of energy technologies. In theory, an allied bargaining approach could contribute to a constructive dialog between oil producers and consumers. If such a dialog were success-. ful in producing a comprehensive agreement on energy pricing and production in exchange for a Western commitment to provide technology and investment opportunities, the effect would be to stimulate multilateral technology transfers involving groups of suppliers and recipients. But while such a global bargain has long been advocated, in practice neither the producer nor the consumer blocs have been able to hold their members to even less stringent agreements. The members of each bloc have widely divergent short-term interests, exemplified by disputes between price hawks and doves in OPEC and by friction between the United States and Japan over spot market purchases of Iranian oil. Nevertheless, allied bargaining-even in its more limited IEA contextdoes serve to promote technology trade among participants. Energy Security A third approach has stressed energy security, implying a commitment to coordinate U.S. energy policies with military and security policies in order to reduce U.S. vulnerability to both short-term disruptions and longterm transitions in energy markets. Since the announcement of the Carter Doctrine in the late 1970s, programs such as the Rapid Deployment Force, the Strategic Petroleum Reserve, and emphasis on security of sea lanes have become central to discussions of U.S. energy policy. On the domestic scene, in order to promote energy security, the U.S. Government has been involved in promoting conservation, alternative energy development through price decontrols, and other measures. This vigorous approach to U.S. energy problems implies an active role for the Government, both domestically and internationally. Emphasis on the security dimensions of energy policy has led to the fostering of special relationships with key oil-producing nations. Saudi Arabia, in particular, has been seen as a pivotal moderate nation in the Gulf. The energy security approach thus implies the stimulation of selective technology transfers to nations sharing mutual energy and security interests with those of the United States. At the heart of this approach is the notion that realistic bargains involving exchange of oil supply guarantees for technology exports can be struck. This approach demands considerable political leadership, since a vigorous domestic policy is also required. PAGE 532 Ch. 13U.S. Policies Affecting Technology Trade and Transfer l 531 Subordination of Energy Policy to Defense Policy.Another approach to energy issues common in recent years has been to subordinate energy policy to defense policy. Proponents of this approach see international energy policy problems as fundamentally defense, and less frequently trade, issues. Instead of focusing on energy per se, proponents of this approach favor building strong bilateral and regional alliances in order to improve U.S. capability to respond to political developments that essentially determine energy politics at the international level. On the domestic scene, a deferral of energy choices to the private sector has been the major theme. In contrast to the energy security perspective, which places considerable burden on the U.S. Government to affect domestic energy markets, this approach implies withdrawal by the Government from all energy-related programs except those such as the Strategic Petroleum Reserve. By eschewing price and other types of intervention, proponents say, the Government can encourage market forces that spur economically efficient adjustments to changes in energy markets. This last perspective accentuates the military and political dimensions of international energy policy beyond those of the energy security approach. Proponents tend to view technology transfer as a lever (sometimes as a counterbalance to the use of oil as a weapon) which can be used to achieve larger political and military goals. Like the energy security perspective, this approach serves to promote bilateral and selective technology transfers to specific Middle Eastern nations. It also stresses military technology transfers in conjunction with regional security arrangements. Different perspectives on U.S. energy policy thus have diverging implications for technology transfer. During the last decade, each of the four perspectives has been advocated and has remained a part of the policy debate even after official directions have shifted to another approach. As a result, policymakers in the Middle East, as well as U.S. businessmen, have found it necessary to readjust frequently to new policy directions. In the early 1980s, U.S. oil imports, including imports from OAPEC, fell. As a result, energy policy issues receded in discussions of Middle East policy. Changes in the energy policy climate during the past decade have accentuated uncertainty for firms and organizations involved in technology trade with the Middle East. COMMERCIAL POLICIE S In the United States, the private sector has played the leading role in promoting and financing international technology transfers. In contrast to the approaches taken by some other supplier governments discussed in chapter 12, the U.S. Government has not taken the initiative in organizing and negotiating on behalf of technology exporting firms. Among U.S. commercial policies reviewed, only a few are designed, even in part, explicitly to promote technology transfer. Those include investment guarantee programs of the Overseas Private Investment Corporation and private voluntary efforts (e.g., Volunteers for International Technical Assistance). This section briefly evaluates the importance of various promotional programs, financing programs, and trade agreements for technology transfer to the Middle East. Major attention is paid to the issue of export financing, in light of concerns that foreign supplier governments have developed more extensive programs in this area. Taken together with analysis of technology transfer in chapters 5-9 and policies of other supplier countries in chapter 12, this review of U.S. commercial policies indicates that, while U.S. Government financing and insurance programs have not been as extensive as those of some other supplier nations, such differences in supports to exports have only infrequently been key factors influencing competition for sales in the PAGE 533 532 l Technology Transfer to the Middle East Middle East in the sectors examined by OTA. (Upon occasion, attractive financing packages have helped suppliers to gain an edge in negotiations for sales of t&communications, aircraft or nuclear technologies.) There area number of reasons for this. First, many Middle Eastern countries have been in a position to finance technology imports themselves. (For capital-short countries such as Egypt, in contrast, financing has been a more central consideration.) Secondly, the subsidy element of export financing has been gradually reduced in recent years under the terms of the OECD Arrangement. Nevertheless, U.S. Government-supported extraordinary export support programs (involving mixed credits, guarantees, inflation and exchange insurance) remain less extensive than those of most other Western suppliers, and such programs may be increasingly important in the future. PROMOTIONAL EXPOR T PROGRAM S Representation of Business In the United States, a small percentage of the Federal budget is devoted to export promotion programs. 26 U.S. official representation of business, at both high diplomatic and routine commercial service levels, has not been as extensive as that of other supplier nations, as discussed in chapter 10. The Department of Commerces International Trade Administration (ITA) has been the major locus of educational and promotional activities related to foreign exports, but few of these programs have been directly aimed to promote technology transfers or exports of technical services. ITA programs provide information for potential U.S. exporters, assist them in penetrating foreign markets, and in .. sAccording to one report, the United States has spent on export promotion programs less to promote manufactured goods exports than have Japan, the United Kingdom, Italy and France but more than have Canada and West Germany. See U.S. Senate, Committee on Banking, Housing, and Urban Affairs, Subcommittee on International Finance, Export Policy, A Report, February 1979. Unfortunately, no data are available clarifying total Government support for exports (including all State programs, export financing, and insurance costs.] crease the awareness of potential foreign buyers. Surveys of various Middle Eastern national markets and reports outlining export opportunities in particular sectors, such as medical services, are published regularly. In an unusual display of U.S. Government support, Secretary of Commerce Malcolm Baldrige led a U.S. trade mission to Saudi Arabia and Algeria in 1982. However, export promotion programs generally have not been given high priority in the United States, and instances of high-level economic diplomacy on behalf of the private sector have been comparatively rare. In contrast to the situation in Western Europe and Japan, during the postwar period relations between the U.S. Government and business have been more adversarial, with the emphasis in public policies on regulating business. In 1980, a new Foreign Commercial Service (FCS) was created in the Department of Commerce, officially transferring responsibility for business representation from the Department of State. While improvements have been made in the commercial services provided both to U.S. exporters and to potential foreign buyers, problems remain. Not the least of these arise from division of responsibilities between the FCS and the State Department. Indeed, the transfer of positions has not yet been completed, and in some cases commercial staffs in U.S. embassies overseas reportedly lack the resources and autonomy required to carry out all their functions. One report found, for example, the FCS to be inadequate in Saudi Arabia. 27 U.S. Government representation of business interests overseas is undoubtedly complicated by the fact that the FCS is required to maintain neutrality, and therefore is restricted in pointing out the special expertise of particular U.S. firms when they are competing with other U.S. firms. Nor does the FCS officer normally possess extensive technical expertise required to enhance the technology transfer component of overseas business transactions. General Accounting Office, Problems Hamper Foreign Commercial Service's Progress, GAO/ID-83-10, October 18, 1982, p. 12. PAGE 534 Ch. 13U.S. Policies Affecting Technology Trade and Transfer l 533 Private Sector Programs While official U.S. export promotion programs affect technology trade on the margins, the primary force in U.S. exports is the private sector itself. As mentioned earlier, there are many private sector firms and organizations involved in technology transfer. Cooperative efforts involving either groups of private sector firms or mechanisms for government-business cooperation in international technology trade have been less prominent than in some other Western supplier countries. Traditionally, U.S. antitrust law prohibited joint private sector export efforts that restrict competition in the United States. A new law on export trading companies was signed in 1982, permitting the expansion of joint export efforts through antitrust exemptions, an extension of coverage to exports in services, and the participation of banks through bank holding companies. It is too early to determine the impact of this legislation on technology trade with the Middle East. Proponents anticipate expansion in exports, but opponents note that the largest exporting firms have already extended the involvement of other firms through contracting practices. In 1980, for example, Boeing was the largest U.S. exporter: almost 3,000 U.S. firms received orders through Boeing, for a total value of $4 billion. 2s Private sector organizations such as the U.S. Chamber of Commerce have been active worldwide. Other institutions supported by the private sector, such as the U.S.-Egyptian Business Council and the U.S. Business Roundtable in Saudi Arabia, provide and disseminate information about regional market conditions. Private sector mechanisms also exist for encouraging technology transfer. One of the oldest is the International Executive Service Corps, a private nonprofit organization that sends retired American businessmen abroad to work on development projects requiring their specific expertise. This organization has congressional Research Service, Export Trading Companies, op. cit., p. 4. as a primary goal the transfer of technology to developing countries, but its activities have also led to expanded exports for U.S. firms. About 36 percent of the foreign clients in the 500 or so projects carried out annually have purchased U.S. machinery or equipment. The number of projects undertaken has dropped, apparently due in part to the fact that other supplier countries offer similar programs at even lower costs. 29 Similarly, Volunteers in International Technical Assistance (VITA) is a private, nonprofit corporation that assists through correspondence individuals and small businesses in developing nations. More recently established, with support from the U.S. Government, is the U.S. Telecommunications Training Institute, which offers courses for managers and technical personnel from developing nations. Another notable example is Project HOPE, a private nonprofit organization devoted to health care education and technology transfers to the developing world. In Egypt, Project HOPE has conducted extensive teaching programs for health science professionals that include programs in biomedical engineering, nursing education, and scientific exchange. Such private sector efforts are important in promoting technology transfers to developing nations. The Role of Small Business The role of small business has been a point of controversy over the years in debates about U.S. export policy. Proponents of promotion programs for small businesses argue that such businesses could play a much larger export role. Small firms, however, have not been particularly prominent in technology trade with the Middle East. In the late 1970s the Department of Commerce announced that export promotional programs would target small, new-to-market .. g Statement by Thomas S. Carroll, International Executive Service Corps (IESC), hearings before the House Committee on Foreign Affairs, Role of Private Sector in Development Abroad, Feb. 24 and 25, 1982, p. 152. IESC receives $5 million in support from AID, $5.3 million from its developing country clients, and $1.4 million from other sources. PAGE 535 534 Technology Transfer to the Middle East firms with high export potential. 30 During 1982 and 1983 about $3 million was provided (under the Small Business Expansion Act of 1980) to support exports by small businesses. Matching grants were given in organizations contacting small businesses, conducting seminars on exporting and trade missions, although few of these programs were aimed at the Middle East market specifically. In addition, the Small Business Administration was authorized under the same legislation to begin a new financial assistance program for small exporters. During fiscal year 1982, about $10 million in loans was given to small businesses to support their exports. Beginning in 1984, the Export-Import Bank planned to set aside 6% of the Banks lending authorizations to support small business exports. It is difficult to assess the success of these programs, since information is not available concerning the record of small businesses that have come into contact with them. Such efforts are costly and time-consuming, and short-term programs are not likely to become self-sustaining. Finally, the Export Trading Company Act of 1982 was expected to assist small exporters by permitting trading companies to handle legal, financial, shipping, and marketing matters often difficult for smaller firms operating in distant markets. Most Department of Commerce programs have assisted smaller firms that have already begun to export, and proposals for establishment of quotas for small business participation in overseas trade missions have been rejected on the grounds that programs should assist firms that are best in a position to export rather than merely fill quotas. In 1982, a new program was established under the auspices of the U.S.-Saudi Joint Commission to promote joint ventures among small and medium-sized firms from both nations. This program, which was slow in getting off the ground, represents anew role -. .. U.S. Senate, Committee on Banking, Housing, and Urban Affairs, Subcommittee on International Finance, Export Policy, part 6, hearing, Apr. 5, 1978, pp. 210-211. General Accounting Office, Efforts to promote Exports by Small, Non-Exporting Manufacturers, Jan. 18, 1983, pp. 2, 11. for the government as a matchmaker between U.S. and foreign firms. 32 Despite these programs, large corporations continue to be much more prominent in foreign markets than small firms .33 Tax Polic y For years, businesses operating in the Middle East and in other foreign markets complained that U.S. tax policies burdened American citizens working overseas. In 1981 the tax exclusion on incomes of Americans working abroad was increased to $75,000 per year, eliminating many of the complaints. The tax exclusion on income earned abroad is scheduled to increase to $95,000 by 1985. Controversy surrounded the Domestic International Sales Corporation (DISC), which allowed U.S. firms to establish domestic corporations that served as channels for exports and were given favorable tax treatment. A large export subsidy was provided by the DISC after its creation in 1971, and DISC was criticized as a violation of GATT rules by Europeans. In 1984 Congress established a Foreign Sales Corporation (FSC) to replace the DISC. 34 Two aspects of DISC are relevant to technology transfer. First, the DISC was set up to cover product and commodity exports, and these tax advantages were not available to exporters of technical services. Secondly, the major beneficiaries of DISC have been larger firms, such as those that export chemicals, machinery and equipment, and aircraft. 35 As table Saudi Arabia, U.S. Establish Bilateral Working Group to Spur Joint Ventures, U.S. Import Weekly, Sept. 20, 1982. Wkmgressional Research Service, Export Traoing Companies, IB80044, Dec. 2, 1982, p. 1. 94Thomas Kwako, International Tax Rules, in Gary Clyde Hufbauer (cd.), U.S. Intemationall?conomic Policy, 1981, draft report (Washington, D. C.: Georgetown University Law Center, 1982), pp. 6-27, For a summ ary of legislation proposing the Foreign Sales Corporation, see Administrations DISC Substitute Bill Introduced in Both House, Senate, U.S. Import Weekly, Aug. 9, 1983. See also Hobart Rowen, The Great Tax Grab, The Washinngton Post, July 5, 1984, p. A21. The FSC will allow for a 16 percent tax exemption on the combined earnings of the FSC and the parent corporation. The estimated tax loss for the DISC since 1971 was $12 billion. 9sDepWtment of the Treasury, The ~JM3rtl~jOn ~~ Eff~t f the Domestic International Sales Corporation Le@slation, 1980 Annual Report, pp. 7, 22, 27. PAGE 536 Ch. 13U.S. Policies Affecting Technology Trade and Transfer l 535 110 shows, the gross receipts of DISC firms in Middle Eastern markets were valued at more than $8 billion in 1979, out of $11 billion in total U.S. exports to 15 Islamic nations in the Middle East. These exports were concentrated in sales to Saudi Arabia and Iran. Exporters of machinery and equipment to the Middle East in particular have benefited from DISC. The new FSC does not cover service exports, nor is it likely that it will be used to a markedly greater degree by smaller firms. Government Support for Financing Exports and Foreign Investments The primary mechanisms of Government support for financing involve loans and grants for exports and insurance to reduce the risk of exports and foreign investments. In the United States, the Export-Import Bank and the Overseas Private Insurance Corporation are the two most important Government institutions involved in financing. These financing programs have never been fully reconciled with other aspects of U.S. international economic and foreign policy. 36 Export financing Roger E. Shields and R. Craig Sonksen, Government Financial Institutions in Support of U.S. Exports, CSIS Significant Issues Series, vol. 2, No. 4 (Washington, D. C.: Georgetown University, 1982), p. 2. Table 110. DISC-Related Exports a to the MiddIe East, 1979 Gross receipts Geographical Number of of DISC firms destination returns (million dollars) Algeria . . ... 439 341 Libya ., ... . 643 301 Egypt . . . . 1,003 494 Iran . ... ... 1,790 2,529 Iraq ... ... . . 524 205 Kuwait ... ... . 985 548 Qatar . . . 392 68 Saudi Arabia . . 1,808 3,081 UAE . . . 834 333 Israel . . . 2,315 1,045 Other Middle East countries . 1,797 591 Total Middle East (excluding Israel) 10,215 8,489 Total U.S. Middle Eastern exports ... . 11,371 Total U.S. exports worldwide . . 182,025 a Manufactured and nonmanufactured products NOTE Deferred taxes amounted to 1 1 percent of gross receipts in 1980 SOURCE Office of the Secretary of the Treasury Office of Tax Analysis remains a controversial issue in the United States. THE SUBSIDIES CONTROVERSY On the one hand, some argue that the Governments role in promoting exports and in supporting U.S. investments abroad should be reduced. Opponents of export financing view Government support as a subsidy for business which is not necessary or appropriate. A central theme of this argument is that American taxpayers should not be asked to support business exports. Particularly in light of the leading role that the United States has taken in negotiations to reduce trade barriers worldwide, opponents view export subsidies as distorting international trade and thereby inhibiting necessary adjustments by U.S. firms. A variation on this argument would support U.S. Government involvement in areas that have been mutually agreed on as acceptable, such as Export-Import Bank loans, but severely limit others, such as mixed credits. A second argument is that in practice export financing assists a few of the Nations largest industries and businesses, and therefore benefits are directed to a relatively small number of firms. Finally, some critics focus their attack on those programs promoting U.S. investments abroad, seeing them as ultimately contributing to foreign production capacity, and potential U.S. employment loss. While the critics of export financing have played the major role in policy formation, proponents also make persuasive arguments. They argue that international trade does not really operate in a free market context and that since some other supplier countries have developed extensive export financing programs, the United States should to do likewise. In addition, the use of various indirect, domestic industrial policies by other supplier nations indicates their co remitment to support industries in a variety of ways. Instead of seeing the benefits of expanded exports as accruing to a few large firms, the proponents point to the subcontracts awarded to smaller U.S. firms and to the resulting gains in balance of payments. Despite continuing disagreements about the value of exports directly attributa35-507 0 84 35 : QL 3 PAGE 537 536 l Technology Transfer to the Middle East .. -. ble to export financing, proponents argue that the gains are substantial and benefit the entire economy. Proponents view international trade and technology transfer as essential for the continuing competitiveness of U.S. firms, and many of them argue that U.S. exports and investments abroad open up new markets and contribute revenues which American firms use for research and development (R&D) investments necessary to maintain their cutting edge in technology development. Evaluation of these arguments centers around the comparability of U.S. financing programs to those abroad, and around the question of how much difference export financing makes in determining the competitive positions of firms. Export insurance, financing, and Government support for foreign investments are briefly reviewed with these questions in mind. These are, however, complex issues that cannot be treated fully here. U.S. export financing programs compare with those abroad but generally have been less extensive. However, it should be remembered that only in a small number of instances, where capital costs are great and equipment and technology are similar, have export credits made the critical difference in winning contracts in the sectors examined by OTA in chapters 5-9. Sales of aircraft, nuclear reactors, and telecommunications to nations such as Egypt are thus the exceptions to the general rule. There is, however, little evidence of a clear relationship between the level of official credit subsidy and the export success of domestic firms. THE U.S. EXPORT-IMPORT BANK The major institutions providing insurance and guarantees to reduce risk to U.S. exporters are the Export-Import Bank and the Foreign Credit Insurance Corporation (FCIC), the latter being an association of 50 private insurance companies. The insurance and guarantees are used to support short-term transactions involving repayment terms of up to 180 days. The FCIC underwrites most commercial risks and the Export-Import Bank, most political risks. Coverage of up to 90 percent for commercial and 100 percent for political risks is provided. During 1981, the fees charged by these institutions were midway between those charged by France (at the high end of the scale for Western supplier nations) and those of Japan, at the low end. 37 Medium-term insurance coverage is also provided. During 1982 the U.S. Government provided insurance and This data and evaluations of the comparability of U.S. export financing programs that follow are taken from the Report to the U.S. Congress on Export Credit Competition and the Export-Import Bank of the Umted States, for the period Jan. 1, 1981 through Dec. 31, 1981, Export-Import Bank, December 1982, p. 19. Photo credit Export-Import Bank of the United States High-technology heat exchangers, specified and procured by the Pullman Kellogg division of Pullman Incorporated, are loaded aboard a freighter for shipment to Algeria to be installed in a liquefied natural gas plant. The project was supported by the U.S. Export-Import Bank PAGE 538 Ch. 13U.S. Policies Affecting Technology Trade and Transfer l 537 guarantee coverage amounting to $5.8 billion, which supported 5.3 percent of U.S. exports. (The value of U.S. insurance and guarantee programs has been slightly more than 10 percent of those of Japan. 38 ) In the area of longterm loans and transactions, the United States does not offer many of the extraordinary export support programs such as inflation insurance, exchange rate risk, bond insurance, and foreign currency loans that most of the other major suppliers provide. Thus, the United States does not offer as wide a range of financing and insurance programs as do many major Western supplier countries. Export financing is used more extensively by some foreign governments than by the United States. Congress sets annual limits on the loans the Export-Import Bank can authorize. The Bank supports with loans a comparatively small percentage of total exports. In 1982 the bank authorized $3.1 billion in direct loans, supporting $4.7 billion in exports out of a total for the year of $212 billion. 39 In the area of long-term export credits, the level of subsidy provided by the United States has been lower than that provided by France or Great Britain, but above that provided by West Germany and Japan. Nominal and effective interest rates charged for these loans have also been higher than those in other supplier nations. Table 111 shows the level of subsidy and the effective interest rates for 1981 and 1982, as calculated by the Export-Import Bank. During 1982, under the terms of the OECD Arrangement, the subsidy element was almost eliminated from export credits of major OECD nations except France. As a medium-term credit program was established by the U.S. Export-Import Bank in 1982, the bank programs became increasingly competitive with those of other major Western nations. On the other hand, the U.S. Export-Import Bank calculated that $400 million in U.S. exports were .. .- 3nIbid., p. 66 and p. 77. Ibid., p. 76; also, Highlights of U.S. Trade for 1982. See also Export-Import Bank of the United States, Report to the CorIgress, 1983, pp. i, 4-13. Table 111 .Comparison of Credit Subsidy and Interest Rates, 1981 and 1982 France . . 466 250 8.61 11.75 West Germany 0 0 11.61 9.55 Japan ... ... 79 0 8.05 9.50 United Kingdom ., 382 0 8.75 11,80 United States ... 203 0 11.50 12.65 a Calculated as nominal cost of the Iife of a $10 billion 10-year credit. The amount of subsidy IS that amount present when nominal export credit rates are compared to then-prevailing interest rates on government bonds of similar maturity in the same country and the relative attractiveness of a given interest rate to borrowers b Effective interest rate, estimated total cost of financing SOURCE Export-Import Bank of the United States, Report to the U S Congress on Export Credit Competition and the Export-Imporl Bank of the United States, September 1983, pp 5 and 8 lost because of the expanded use of mixed credit programs abroad. Despite the fact that U.S. export financing was less extensive and offered on terms less favorable than that offered by some major competitors during the past decade, U.S. firms have nevertheless been successful in major less-developed countries (LDC) export markets when competing against officially supported export credit agencies in France, West Germany, Japan, and Great Britain, according to the Export-Import Bank. 40 These same patterns prevailed in medium-term export financing, but the effective rates on loans in that case have been higher for U.S. Export-Import Bank credits. Thus, while U.S. export financing programs were generally not competitive in every respect with those offered by other major suppliers, some U.S. programs have recently been expanded, and there is no evidence that there is a clear relationship between the level of official credit subsidy and export success. In the Middle East, export credits have been most important for sales in nations such as Egypt, where financing is a major problem. During its history, the Export-Import Bank of the United States has provided credits, guarantees and insurance supporting exports to the Africa and Middle East region totaling $17 billion, or less than 17 percent of its total 40 Ibid., p. 12. PAGE 539 538 Technology Transfer to the Middle East authorizations to support exports worldwide. Credits and insurance for exports to Egypt during the period 1934-80 were valued at $413 million; Algeria, $2.1 billion; Iran, $2.3 billion; Iraq, $59 million; Israel, $1.9 billion; Kuwait, $643 million; and Saudi Arabia, $1.5 billion. 41 Table 112 shows Export-Import Bank authorizations for loans, guarantees, and insurance for fiscal year 1981. As discussed later in the context of mixed credits (those that combine confessional financing with official export credits), financing has been a key element in awards of Egyptian telecommunications contracts and (as discussed in ch. 9), in that nations nuclear technology transfer plans. THE OVERSEAS PRIVAT E INVESTMENT CORPORATIO N In contrast to Government organizations which provide support for exports, the Overseas Private Investment Corporation (OPIC) is the major mechanism for Government assistance to American investors in developing nations. OPIC was set up in 1971 and is authorized to help finance only those projects that contribute to economic and social development in the host country and are at the same time consistent with U.S. balance of payments and employment goals. OPIC operates on a self-sustaining basis, but Congress reviews its operations annually and has directed OPIC to meet specific objectives. For example, Congress instructed OPIC to avoid support for investments that are restricted by U.S. Export-Import Bank, Cumulative Record by Country, Feb. 12, 1934, to Sept. 30, 1980. host country performance requirements and could have adverse impacts on U.S. trade. 42 In 1978 Congress instructed OPIC to put priority on projects in the poorer developing countries, and in 1981 Congress raised the restriction on gross national product (GNP) per capita to $2,950 in 1979 dollars. OPIC is unique as a U.S. Government instrument for promotion of overseas investment and technology transfer. Unlike the other commercial programs, OPIC funds investments in services and other ongoing operations that are more relevant to technology transfer than product exports. OPIC is a comparatively small agency; its significance is therefore as an instrument which could be used more extensively. Its loan and loan guarantee commitments were valued at $110 million in 1983. 49 During the 1979-83 period, OPIC supported 166 investment projects in 10 Near Eastern nations with almost $3 billion worth of insurance and $625,000 in project financing. During 1983 alone OPIC insurance supported $1.14 billion worth of U.S. investment in the region. OPIC offers investment insurance to protect U.S. investors against loss from war and insurrection, expropriation, civil strife, and inconvertibility of capital and profits. It also offers direct financial assistance and programs for U.S. investors. OPIC supports a program to provide management tr aining and technology transfer and a UNIDO program that trains investment pro motion officers from developing nations. Organization for Economic Cooperation and Development, Investing in Developing Countries (Paris: OECD, 1982), p. 106. 43 Overseas Private Investment Corporation, Development Report 1983, p. 28. Table 112. Export-Import Bank Authorizations to Selected Middle East Nations (million doiiars) 1981 1981 1982 1982 Nation Authorization Total U.S. exports Authorization Total U.S. exports Algeria . . 21 717 7.9 919 Egypt . . 64 2,159 66.7 2,875 Iran . . . 0 300 0 122 Iraq . . . 0 914 0 846 Israel . . 275 2,521 7.9 2,271 Kuwait . . 17 Saudi Arabia . 976 12.6 941 36 7,327 75.4 9,026 SOURCE Export Import Bank of-the United States, Fiscal 1981 Annual Report pp 27-30, Fiscal 1982 Annual Report, pp 31-34 PAGE 540 Ch. 13U.S. Policies Affecting Technology Trade and Transfer l 539 . Technology for recovery and recycling of key metals was I ntroduced in Egypt by a U.S. firm in an OPICsupported project The project also accomplishes goals of eliminating hazardous wastes, and restoring land prervously used as dumping grounds In recent years, U.S. direct investment in developing countries has represented almost half of the total invested by OECD nations, both in terms of stock and flow. In 1981, for example, OECD countries invested $14.6 billion in developing nations, of which U.S. investors made up $6.4 billion. 44 The share in total U.S. foreign investments in the Middle East, however, has been relatively small: Egypt f Saudi Arabia, and Iran together received less than one-tenth of one percent of all direct foreign investments made in 1981. Nevertheless, U.S. investments in developing countries are important mechanisms for technology transfer, and OPIC is the primary government channel for directing and encouraging them. Because OPIC is charged with encouraging investments that do not pose potential adverse economic impacts on U.S. employment and the balance of trade, its review process for prospective projects constitutes the most extensive preproject impact analysis carried out by any U.S. agency of purely commercial projects. OPIC has refused assistance to projects with potential adverse impacts, including some high-technology projects. 45 Congress has required OPIC to carry out developmental impact assessments, in light of what was perceived by some Members of Congress as a lack of sufficient detailed evidence to permit anticipation of economic and social effects. Criteria for assessing impacts include employment, technology transfer, productivity, multiplier effects on other industries, contribution to host government revenues, foreign exchange, concentration of project ownership, environmental and safety effects, and compatibility with other development assistance programs. 4G Thus, OPIC takes local impacts, including technology transfer, into account in its project review. On the other hand, since 1981, Congress has directed OPIC to consider the potentially adverse effects of performance requirements, and to consider issues such as sensitivity of U.S. imports and the competitiveness of U.S. exports. OPIC reports indicate that 51 percent of all Near Eastern projects reviewed had performance requirements, the highest level of any geographical region of the world. Local content regulations, particularly in energy and minerals projects, have been most common. Of the Middle East projects reviewed, Saudi Arabia and Egypt have had the highest number of projects with performance requirements. However, in fiscal year 1982, none of these projects was found to reduce substantially positive trade benefits to the United 45 U.S. Overseas Iri\ak In\restment Corp., 1981 Annual Report, p. 49. SW Senate Foreign fielations (ommittee, O\erseas Pz-i\ate ln~r.stmenf (corporation, hearings, June 11, 12, 1980, pp. 84-90, PAGE 541 540 Technology Transfer to the Middle East States. 47 OPIC is designed to complement but not duplicate the goals of U.S. development assistance, and project reviews are designed to carry out this function. OPIC operates a small contractors guaranty program, which supports exports of technical services and is designed to improve the positions of U.S. engineering and contracting firms operating in the Middle East. In addition, OPIC can provide insurance against the risk that a licensing or management fee will not be paid and can insure the capital investment of the license itself as part of the overall investment, assuming that it extends for a minimum of 3 years. Both of these programs directly promote technology transfers. OPICs insurance against expropriation of property is a support for firms that transfer technology and have long-term overseas involvement. OPICs record of settlement has been good. By the end of 1982, the corporation had settled 134 claims. In 1983 alone, 17 claims were settled, with payments amounting to more than $6 million. It is important to note that $10 million has been paid in settlements of four de facto expropriation cases arising from investments in Iran. OPIC is pursuing in the Iran-U. S. Claims Tribunal its own claims against Iran that arose from these payments. OPICs interpretation of what constitutes expropriatory action could presumably include host government requirements that the investor make proprietary technology available to those outside the original agreement. 48 In contrast to export promotional programs, OPIC financing and insurance programs for overseas investment in developing countries contribute directly to technology transfers. The relatively small share of direct investment in Middle Eastern nations indicates that U.S. firms have found other regions, South America in particular, more attractive as sites for U.S. Overseas Private Investment Corp., OPIC Experience with Trade-Related Performance Requirements, fiscal years 1981 and 1982, papers. 4S. Linn Williams, The Transfer of Technology to Developing Countries, Federal News and Bar Journal, May 1983, p. 269. investment. Nevertheless, as Middle Eastern nations attempt to expand technology transfer through promotion of foreign investment, these programs could be used more extensively. 49 INTERNATIONAL AGREEMENTS AND NEGOTIATIONS International agreements relevant to technology transfer to the Middle East include the GATT and OECD subsidies codes agreements, discussed in chapter 2, and commercial treaties between the United States and individual Middle Eastern nations. In addition, United Nations negotiations regarding a proposed code governing technology transfers have increased awareness of LDC technology transfer issues. Since the 1960s, developing nations have attempted to improve their ability to bargain for and acquire technology from the developed nations by working through a number of organizations, the most important of which is the United Nations Conference on Trade and Development (UNCTAD). In 1980 the U.N. General Assembly adopted the draft code on technology transfer as an advisory instrument only. The thrust of the proposed code is to promote technology transfer to developing nations through limitations on licensing practices, promotion of exchange of technological information, and indigenous technology development. 50 Nevertheless, the code has not been formally adopted, signifying the ongoing discord between the developing and developed nations. At the heart of the dispute is the call from developing nations to loosen the protections of the Paris Convention, administered by the World Intellectual Property Organization, which governs international agreements on patents. U.S. patent laws provide greater protection to patent holders than the Convention does, and the United States has consistently Sam Ayoub, How a U.S. Businessman Operates in the Middle East Today, Tax Executive, vol. 35, October 1982, p. 78. UNCTAD, UNCTAD Btietin, No. 192, April 1983, pp. 13-14. PAGE 542 Ch. 13U.S. Policies Affecting Technology Trade and Transfer 541 opposed loosening the international agreements. In the opinion of U.S. spokesmen, loosening the restrictions would not aid developing nations but would simply reduce the incentives for U.S. firms and firms from other developed countries to invest in the Third World, thereby limiting technology transfer. In addition, not all new technology developments are covered by patents. Middle Eastern nations have participated in the debates over the proposed technology transfer code. Because their purchases of patents and licenses have been extremely limited, the significance of the debate for Middle Eastern countries is in the seminars and in workshops offered by UNIDO and regional U.N. agencies devoted to the study of technology transfer and science and technology policies. In addition to the international negotiations and agreements mentioned above, international treaties between the United States and Middle Eastern nations have set the immediate context and parameters for the involvement of U.S. firms. In 1982 the U.S. initialed a bilateral investment treaty granting Egypt most-favored-nation status. The treaty, which covers treatment of foreign investments, compensation for expropriation, transferability of payments, and the settlement of disputes, is not yet fully implemented. Such treaties give U.S. firms an extra level of protection, but effects on exports are difficult to assess. In contrast to many other supplier nations, the United States has bilateral trade accords only with Brazil among the developing nations. Except with Egypt, there are no official and comprehensive U.S. trade or investment agreements with Middle Eastern nations, although the United States and Israel began negotiations in 1984 on a joint free trade agreement. The Department of Commerce announced it has no plans to grant Saudi Arabia most-favored-nation status, although that nation has requested it. 51 A bilateral investment treaty with Saudi Arabia is, however, a possibility. Egypt is thus the only Middle East nation with which the United States has officially promoted U.S. commercial involvement through trade or investment agreements. 52 Technology transfer involves international trade in services, an export area of growing importance to the United States but one not effectively covered by international agreements. U.S. negotiators have attempted to introduce proposals for such an agreement, but none has yet been approved. A major difficulty in this regard is a lack of data needed to effectively analyze service trade. A number of congressional proposals have been made to improve the collection of such data, and to limit foreign access to the domestic U.S. service market to promote reciprocity. For a variety of reasons discussed in chapter 2, improved analysis of service trade could contribute to the development of more effective U.S. policies affecting technology transfer. 51 Saudis Rebuffed Over Most-Favored-Nation Status, Middle East Econonuc Digest, May 13, 1983, p. 11; Investment Treaty Protects U.S. Firms, Middle East Econormc Digest, Oct. 8, 1982, p. 19. Saudi Arabia contends that U.S. refusal to grant Generalized System of Preferences (GSP) status constitutes a violation of a 1933 treaty. U.S. law excludes OPEC countries from GSP status granted to most developing countries. U.S. Government actions prohibiting Kuwait from holding leases on public lands may provide disincentives for trade with that nation. See House of Representatives, Subcommittee of the Committee on Government Operations, Federal Response to OPEC Country Investment in the United States, part 2"Investment in Sensitive Sectors of the U.S. Economy: Kuwait Petroleum Corporation Takeover of Sante Fe International Corporation, October 20,22, November 24, and December 9, 1981, and part 3Saudi Arabian Influence in Whittaker Corporation, Apr. 6, 1982. It should be noted that the U.S. and Morocco have signed a bilateral investment treaty. PAGE 543 542 w Technology Transfer to the Middle East DEVELOPMENT ASSISTANC E While technology transfer occurs primarily in the commercial marketplace, U.S. Government assistance programs, including bilateral economic and military assistance and multilateral programs, play a particularly important role in developing nations such as Egypt. Development assistance serves a number of objectives; humanitarian, political, commercial, and strategic interests all figure in at different times and in different ways. Since the early 1970s, the basic thrust of American economic assistance programs has been to help the poorest developing countries meet the basic human needs of their populations. 53 Agriculture, rural development, population planning, health, education, and nutrition have all been major priorities of the Agency for International Development (AID) programs. Thus, programs undertaken in the last decade differ somewhat from earlier programs targeting growth sectors and infrastructure building in developing nations. Generally speaking, U.S. assistance programs in the Middle East have supported provision of products and food rather than aiming specifically to transfer technology in industrial and service systems examined by OTA. The major type of assistance provided by the United States to nations in the Middle East is carried out through the ESF. ESF programs are intended to provide immediate assistance and may be used for balance-of-payments support, financing of infrastructure and capital projects, and commodity imports. The major recipient of development assistance funding, as opposed to ESF funding, in the Middle East has been the Yemen Arab Republic, which was provided with $27 million during fiscal year 1983. A third type of assistance is the Public Law 480 program, which is used to finance U.S. food exports. Egypt is the major recipient of Public Law 480 funds, and in recent years loans and grants have totaled $300 million. However, Jordan, Syria, and the Yemen Arab Republic have also received 53 Congress passed the New Directions Mandate in 1973, which directed AID to set these as priority areas. Photo credit Overseas Private Investment Corporation More than 670,000 metric tons of U.S. grain are handled annually at the Marine Shipping Corporations off-loading facility in Port Said, Egypt smaller amounts of Public Law 480 funding, which contribute to development assistance and also open export markets for U.S. firms. 54 Technology transfer is one among a variety of concerns that AID officials take into account in designing programs, so it would be a mistake to place too much emphasis on technology transfer as a criterion for program evaluation. U.S. assistance programs nevertheless affect the volume and nature of commercial technology transfer, and insofar as some of these programs are designed to promote technology transfer, their effectiveness is an important concern for U.S. policymakers. DEVELOPMENT ASSISTANC E AND COMMERCIA L PROMOTIO N An unresolved issue in debates about U.S. assistance policies is the relationship between assistance programs and the commercial activities of U.S. firms. A related issue concerns the role of U.S. assistance programs in developing the private sector in host countries. Congressional Budget Office, cited in GAO, Donor Approaches to Development Assistance: Implications for the United States, GAO/ID-83-32, May 4, 1983, p. 17. PAGE 544 Ch. 13U.S. Policies Affecting Technology Trade and Transfer l 543 About 40 percent of U.S. official development assistance has been classified as tied or partially tied aid, which restricts associated procurements. On the other hand, the grant element of U.S. aid has risen in recent years to 82 percent of the total commitments in 1982. Thus, while ODA provided by the United States includes a comparatively high percentage of grants, the assistance is in many cases tied by procurement regulations which bring contracts to U.S. and host country firms. Because critics of mixed credits say they commercialize aid and thereby distort its goals, the United States has traditionally opposed their use. Mixed credits combine foreign aid with export financing so that loans are provialed at interest rates below the minimums set in the OECD export credit arrangement. France uses mixed credits extensively, while West Germany, Japan, and Britain use them only moderately. During the first 10 months of 1982, 78 mixed credits were awarded by OECD nations. They were valued at $1.6 billion, and 23 of them were extended by France. In contrast, the United States has generally used mixed credits only in unusual circumstances. The OECD members have agreed that when mixed credits (with grant elements of 20 to 25 percent) are used, other countries will be notified in order to make the action transparent and subject to international competition. To the extent that nations employ mixed credits to subsidize exports and large-scale development projects, they explicitly link commercial promotional polices to development assistance. The charters of the Export-Import Bank and of AID do not prohibit the use of mixed credits, but neither organization has used them extensively. The 1983 Trade and Development Enhancement Act calls for institution of a mixed credit program by AID and the Export-Import Bank. 56 The purpose is to allow Organization for Economic Cooperation and Development, Development Cooperation, 1983 Review (Paris: OECD, 1983, pp. 196-197. Vestirnony prepared for Subcommittee on International ECO nornic Policy and Trade, House Committee on Foreign Affairs, Oversight Hearing on the Tied Aid (Mixed Credit) Program, Jan. 26, 1984. Senate Committee on Banking, Housing, and Urban Affairs, Export-Import Bank Amendments of 1983, Mar. 22 and 24, 1983, pp. 2, 8, 104. the U.S. Government to provide confessional financing matching that of other supplier nations. Other legislation was introduced in 1983 requiring the Export-Import Bank to cooperate with the Commodity Credit Corporation in subsidizing agricultural exports. 57 Proponents of these initiatives hope to expand the financing capability of the United States because in their view a billion dollars worth of sales have been lost because the United States does not offer competititive financing. Opponents charge that it is unfair and inappropriate for the American taxpayer to subsidize exports. Their special concern is that mixed credits may distort the goals of development assistance by shifting aid more toward the middle-income countries and to commodity imports rather than technical assistance. The Export-Import Bank and AID have established guidelines for the selective use of mixed credits, and two mixed credits were granted for projects in Cyprus and Indonesia in early 1984. The goal of the program is not to match every mixed credit provided by other supplier governments, but rather selective use of mixed credits in order to discourage their use elsewhere. Linked to efforts to persuade OECD members to disavow the use of mixed credits, U.S. officials see the strategic use of mixed credits as a means of increasing bargaining leverage needed to build a new consensus. The critical question for U.S. policymakers is whether selective use of mixed credits can serve this end, or whether the result will be to institutionalize them. Proponents of mixed credits point to a few cases where the use of such financing has been critical to U.S. sales in Egypt, a major recipient of mixed credit financing. In 1979 a consortium of U.S. telecommunications firms lost to a European consortium a contract for an expansion of Egypts telephone network owing, in the opinion of many observers, to the confessional financing offered by the Europeans 58 (see ch. 6). The loss of this major con 7 S. 510, introduced Feb. 17, 1983, by Senator James Exxon. nThe Europeans offered 5.5 percent interest rates, payable over a 15-year period, while the Americans offered 8.5 percent. See Robin Day Glenn, Financing of United States Exports of Telecommunications Equipment (Washington, D. C.: Georgetown University Law Center, 1982), p. 31. PAGE 545 544 l Technology Transfer to the Middle East tract led the United States to develop a new approach to financing. In 1981 the Export-Import Bank made a $7.7 billion loan commitment to Egypt in conjunction with AID funds used on other parts of a large telecommunications project. Although the Export-Import Bank maintains that the two transactions were separate, many view the financing as a case of mixed credits. 59 Thus, in recent years, AID spent almost $242 million during the 1978-82 period on telecommunications in Egypt, and the associated contracts were awarded to U.S. firms. The terms of the financing are extremely soft: a $202 million grant and a $40 million loan have been provided. The loan will be repaid at 2 percent interest rates over the first 10 years, and then at 3 percent annually thereafter. The repayments will thus take place over 40 years and in 61 installments. 60 In the opinion of experts, the soft financing provided through AID has been the critical factor preserving a presence for U.S. telecommunications firms in the Egyptian market. In 1982 a Trade Financing Facility (TFF) was set up as a mechanism for assisting U.S. firms competing for contracts in Egypt. Those evaluated as low bidders in terms of international procurement but which may lose a sale because of the financing offered by other supplier governments are eligible for TFF assistance. The program, designed specifically for use in Egypt, involves grants of up to $10 million in value. The use of the TFF is rather cumbersome, since it requires the U.S. firm to provide clear evidence of a foreign government export subsidy. Funding for the TFF diminished from $67 million during 1982 to $25 million, and the TFF has not been utilized in recent months. 61 Nevertheless, the establishment of the TFF, like the proposed amendments for Export-Import Bank use of mixed credits, reflects growing interest in linking commercial promotional policies to assistance programs. g Gary Clyde Hufiauer, U.S. International Economc Policy, 1981, Draft Report (Washin@n, D. C.: Georgetown University Law Center, 1982), pp. 7-22. SOMwre, p. 26. In&Wiew with AID officials, C~O, EgYPt! April 1983. 61The Trade Financing Facility made only one Iom, of $6 ~lion, in the first half of 1983, to finance Westinghouse and GE sales of powerplants. Some question whether capital-intensive projects which have been supported by mixed credits contribute substantially to development. Others argue that such projects are essential for the development of Egypts infrastructure and involve considerable technology transfers. The AID-funded telecommunications program, for example, involves substantial technology transfer in the form of training of ARENTO (Arab Republic of Egypt National Telecommunications Organization) personnel. Technical training courses in 18 fields have been offered to hundreds of individuals. 82 The question of linkage between assistance and trade policies arises also in regard to private sector involvement in AID programs. In 1979 AID began a private sector development program in Egypt, with funding of $400 million. The program reflects a broader emphasis within AID to promote private sector initiatives in development assistance; these programs are under the jurisdiction of the new Bureau of Private Enterprise. In contrast to the pattern of the past, when government institutions were typically viewed as the primary instrument for achieving development goals, these programs aim to encourage the participation of U.S. business. They include credit financing facilities and technical assistance for the Egyptian private sector, incentives to promote U.S. private sector investment, and advisory services and technical training to develop institutional capabilities. B3 Considerable criticism, both from within AID and from without, has been directed at these private sector initiatives programs. One report on the program concluded that the difficulties stem primarily from a lack of Egyptian institutional support, project design weaknesses, and the requirement to buy U.S. origin and source goods. It is doubtful that some projects will achieve their objectives. 64 Problems in coordinating with Egyptian counterInformation provided by AID; training contract for ARENTO. 8$The9e proWm9 were stimulated by the Humphrey endment to the International Security and Assistance Act of 1977. 84GeneraJ Accounting Office, Lessons Learned from AIDs %vate Sector Development Efforts in Egypt, GAO/ID-83-18, Feb. 28, 1983, p. 11. PAGE 546 Ch. 13U.S. Policies Affecting Technology Trade and Transfer l 545 .. -- parts have apparently limited the effectiveness of these programs. The goal of promoting the development of the Egyptian private sector is shared by Egyptian officials. As discussed in chapter 9, despite almost a decade of open door policies, the public sector remains overwhelmingly important in the Egyptian economy. While the mere size of the public sector does not necessarily indicate inefficiency, the need to promote market-oriented policies has been generally recognized. It is not surprising, in this context, that AID programs aimed at promotion of the Egyptian private sector have faced problems. As U.S. AID officials have tried to encourage Egyptian economic reform, they have come under criticism from Egyptians. Egyptian officials, wary of the large AID presence in Cairo, dissatisfied with the high costs of feasibility studies and administrative overhead required by AID, and aware of the freedom Israel has in spending economic assistance funds, have called for increased flexibility in use of AID funds. In a general sense, Egypt and a few other recipient nations have become increasingly dependent on U.S. economic assistance. This raises a fundamental dilemma for U.S. policymakers: the more they encourage Egyptian leaders to liberalize the Egyptian economy, the more U.S. programs become vulnerable to charges that they involve too much outside interference; however, without real economic reforms, it is doubtful that AID programs will achieve desired results. In other words, while U.S. aid to Egypt has cemented friendly relations, extensive U.S. involvement has led to some disagreement about how to achieve proposed economic reform. RECIPIENTS AND TYPE S OF DEVELOPMEN T ASSISTANC E In addition to general questions concerning the overall effectiveness of U.S. economic assistance programs, there are unresolved questions about which nations should receive aid and what types of assistance should be provided. For example, during recent years, U.S. assistance has been targeted to the poorest countries. During a period of budgetary constraints, some believe that funds should be directed to a few of the countries most in need, and that this focus may result in improved administration of assistance programs. 65 Nevertheless, middle and higher income developing nations need U.S. technical assistance. The Trade Development Program (TDP) is one of the few official U.S. Government programs directed toward middle-income developing nations. TDP finances planning services of U.S. firms needed by developing countries in major capital-intensive projects. These services assist the country in design, engineering, and construction. According to TDP, foreign firms have aggressively offered, in addition to export financing, feasibility studies and other project pl anning services at confessional rates. It has been estimated that the Italians currently provide $25 million-30 million, the French $100 million and the Japanese $200 million for these studies. 66 TDPs program includes support for feasibility studies; a $16 million budget was requested in fiscal year 1984. Although TDP is a comparatively small program, it combines the goals of promoting development assistance and trade promotion in a unique way. TDPs policy is to provide assistance only where U.S. technology is internationally competitive but unlikely to be purchased without TDP intervention. In fiscal year 1983 about 11 percent of the program obligations were made for projects in the Near and Middle East and about $1 million was spent for these projects. The vast majority of these projects were in industrial and agricultural sectors, many of them in Turkey and Tunisia. The United States-Saudi Joint Commission, which is fully funded by the Saudis, has sponsored a number of projects involving technol65 General Accounting Office, Donor Approaches, op. cit., p. iii. *U.S. Trade and Development Program, FY 1985 Congressional Presentation, p. 2. See also House Foreign Affairs Committee, Role of Private Sector in Development Abroad, hearings, Feb. 24 and 25, 1982, p. 38. PAGE 547 546 l Technology Transfer to the Middle East ogy transfer, including vocational training, assistance in science and technology policy development, establishment of a national center for financial and economic information, solar energy research, and customs administration training. However, the shortage of appropriately skilled Saudi participants has, in a number of instances, hampered the implementation of programs. A Joint Commission for Economic and Technical Cooperation was set up with Oman in 1980, and AID is playing a major role in programs which are designed to develop manpower skills. Programs of this kind promote technology transfer needed for development and at the same time offer export opportunities for U.S. business. There is, however, no comprehensive strategy for promoting U.S. technology transfer and assistance to all upper and middle income nations in the Middle East. AID does, however, attempt to establish parallel financing with Arab donor countries. 67 Since Title V, on Science, Technology, and American Diplomacy, was inserted into the Foreign Relations Authorization Act of 1978, Congress has maintained a strong interest in promoting U.S. assistance programs involving science and technology. The law requires that the President report annually to Congress on the status of science and technology programs and agreements of and personnel requirements for U.S. officials working on these programs. This legislation was designed to promote programs involving science and technology transfer as an element of U.S. foreign policy. There has been no consistent strategy for U.S. assistance programs in science and technology in the Near East. Among the projects funded under the $100 million science and technology program in Egypt, the largest program allocation is devoted toward building Egyptian science and technology institutions capable of comprehensive planning. The major emphasis of these programs has been to General Accounting Office, Status of U.S.-Saudi Arabian Joint Commission on Economic Cooperation, GAO/ID-83-32, May 26, 1983, p. iv. See also AID, Near East Bureau Strategy 1983-1988, December 1983, pp. 29 and 75. Photo credit Saudi Arabian United States Joint Commission on Economic Cooperation Joint Commission projects include the development of an automated on-line bilingual inventory management and order processing system at the National Computer Center in Saudi Arabia assist Egyptian leaders in formulating a more coherent science and technology policy, and in institution-building at the national policymaking level. Only a few programs are aimed at providing direct assistance to the end-users of industrial technology; they include a management development project and a project designed to promote applied technology in smaller Egyptian enterprises. While such programs have been comparatively few in number, they undoubtedly are probably most likely to contribute to technology transfer in the sectors examined by OTA and perhaps to become selfsustaining. PAGE 548 Ch. 13U.S. Policies Affecting Technology Trade and Transfer l 547 Egyptian officials and AID staff agree that these science and technology programs are important, and that they must set clearer priorities. The Near East Bureau of AID, accordingly, began an assessment of its science and technology programs in the fall of 1983 to this end. Considering the U.S. commitment to the science and technology program in Egypt, it is important that a clearer focus for these programs be developed, perhaps by projects that provide tangible benefits to Egyptian endusers of technology in industrial and service sectors. Of all the technology sectors examined by OTA, medical services is undoubtedly the area where AID programs have been most important. 68 Traditionally, improved health care has been a major goal of U.S. assistance policies, and health care programs have been comparatively effective, as discussed in chapter 8. In 1982, $50 million in ESF funding went to support Egyptian health-care programs involving family planning, rural health, and education. The thrust of AID programs has been to provide preventive health care to as many people as possible, especially those in rural areas. In a sense, almost every program funded by AID involves some technology transfer, and this makes it difficult to assess the value and amount of AID resources devoted specifically to technology transfer. Only a small number of AID programs have industrial technology development as an explicit goal. AID programs are designed to achieve many goals; improving the success of technology transfers in complex industrial and service systems is just one. If U.S. policymakers decide to make this a top priority, it will be necessary to design programs that directly involve the users in recipient nations, to emphasize projects that have a strong economic rationale and are likely to be self-sustaining over the long term, and to encourage the involvement of U.S. firms having the required technology and those that are capable of operating effectively in the Middle East. U.S. economic assistance to Egypt in particular among the Islamic countries is so great that efforts to improve the effectiveness of the technology transfer component of programs there appear appropriate. MIDDLE EASTER N STUDENTS IN TH E UNITED STATE S One mechanism for technology transfer is the technical education of foreign students in the United States. Middle Eastern students trained in fields such as engineering, construction trades, mechanics and equipment repair, precision production, and health sciences may develop specialized skills needed in the technology transfer process in sectors examined by OTA. The number of foreign students in the United States has grown in recent years, and their education has become a policy issue. The number and share of Middle Eastern students in the United States has grown rapidly during the last decade, but available evidence indicates that only a small proportion are enrolled in technical fields. In the 1981-82 academic year the number of foreign students studying in the United States rose to at least 327,000growth both in absolute numbers and as a percentage of degree recipients. Moreover, in recent years an increasing number of foreign students have been receiving degrees in technical fields, such as engineering. The share of engineering doctorates awarded to non-U.S. citizens increased by a factor of seven during the last 20 years. In 1981, over half the graduating engineering doctorates were nonU.S. citizens. 70 In that year, 1,241 Ph.D.'s i n engineering were awarded to non-U. S. citizens, of which 41 were awarded to Egyptians, 74 Iranians, and 4 Iraqis. In all fields of science and engineering, however, students from the Islamic nations of the Middle East have made up a relatively small percentage of doctoral graduates-less than 10 percent in recent years. Health programs are generally not included in science and technology programs, except those that emphasize research. WIotal funding for all health-related AID programs was $100 million in 1982, according to AID officials in Cairo. National Science Foundation, &ence and Engzneenrg Doctorates: 1960-81, Special Report, NSF 83-309, pp. 8, 71. PAGE 549 548 l Technology Transfer to the Middle East There is currently no source of official U.S. Government data on numbers of foreign students enrolled by field of study in the United States, but overall Middle Eastern enrollments in various levels of graduate study (as opposed to numbers of doctoral recipients) are high. 71 In 1981, for example, while only 74 Iranians received doctorates in engineering, almost 56,000 Iranian students were in the United States, according to I remigration and Naturalization Service data. 72 According to data collected from 2,800 schools by the Institute for International Education, 74,390 Middle Eastern students were enrolled in U.S. educational institutions in 1981-82, with the largest numbers from Iran, Saudi Arabia, and Lebanon. This represented almost 25 percent of all foreign students during that year. 73 Iran, before the revolution, and Saudi Arabia, currently, have been among the six largest countries of origin for nonimmigrant students in recent years. Since overall enrollments of Middle Eastern students have grown, Middle Eastern enrollments in technical fields of study may increase in the future. It is difficult, however, to evaluate the precise contribution to technology transfer in the Middle East. While some students prefer to remain in the United States, many return to their homelands to assume key positions in governments and firms importing technology. America-Mideast Educational and Training Services, a nonprofit organization, provides information and assistance to Middle Eastern students interested in U.S. educational programs. Many of its programs are funded by the United States. For example, with an AID grant, the organization is bringing 600 Egyptian graduates and professionals to the United The Immigration and Naturalization Service is now establishing a system to collect data on numbers of foreign students in the United States, by field of study, school and country of origin. 7zBayard L. Catron, The President Management Improvement Council Report on Foreign Students in the United States, July 1981, app. table 4. Institute for International Education, Open Doors: 198182, Report on International Educational Exchange, 1983. According to these data, there were 35,000 students from Iran, 10,220 from Saudi Arabia, 6,800 from Lebanon, and 6,180 from Jordan. States to study. Currently, more than 1,600 Middle Eastern students are involved in these programs, a few involving education and training in-country .74 Such programs, particularly those oriented toward training Middle Easterners in technical fields, can contribute to the technology transfer to the region. However, the technical training programs involve only a comparatively small number of Middle Eastern students. The policy of the United States since the passage of the Immigration and Nationality Act of 1952 has been to admit nonimmi grants to study in the United States under certain conditions specified by law. The presumption has been that this policy served U.S. foreign policy objectives in a number of ways, for example, by cementing ties with developing nations and helping transfer technology. U.S. educational institutions have benefited economically, since four out of every five foreign students had their primary source of funds in personal income or family or home government support. Proposals have been made to restrict the number of foreign students in the United States, primarily for national security reasons. Two cases have involved added restrictions on study by Middle Easterners. An unprecedented investigation, spurred by the charge that many Iranians illegally resided in the United States, was carried out in the wake of the Iranian hostage crisis. The investigation revealed that 88 percent of the Iranian students had verified status to study in the United States. By early 1981 about 2,600 Iranian students were found to be illegally in the United States and were deported. In the spring of 1983 the U.S. Government announced that Libyan students were barred from studying aviation or nuclear physics in the United States because such studies were detrimental to U.S. security. As discussed in chapter 9, however, Government sources did AMID-East, September 1983. 7K Craufurd D. Goodwin and Michael Nacht, Foreign Students Still Flock to the U.S., Wall Street Journal, July 21, 1983. 7Catron. Ibid. PAGE 550 Ch. 13US. Policies Affecting Technology Trade and Transfer l 549 not have sufficient information to say how many Libyan students were studying in the United States; estimates ranged from 2,000 to 4,000 (in all fields and at all levels). In the summer of 1983, nine students were held for deportation hearings under the ruling. Thus, in neither case were large percentages of students found to be illegally residing or studying in relevant fields. Lack of enthusiasm for restrictions on foreign students stems from the fact that U.S. schools and businesses benefit by educating and employing foreigners-sometimes in fields not popular among U.S. citizens. The open and excellent system of advanced education, moreover, continues to draw students from all over the world. Only in rare instances have restrictions on study by Middle Easterners been imposed. When they have been, the direct impact has been narrow. Education and training of students from both U.S. educational institutions and corporate programs remains an important mechanism for improving the absorptive capacity of developing countries. The effects of these educational experiences are long-lasting, since familiarity with U.S. institutions increases the likelihood that interactions will continue after the foreign student returns to his or her native country. There are, on the other hand, often extra costs of educating foreigners that are incurred because of language difficulties and other cultural differences. MULTILATERA L ASSISTANC E During the 1970s the contributions of donor nations to multilateral organizations such as the World Bank and the United Nations grew as a share of official development assistance. In 1980 more than one-third of U.S. development assistance went to multilateral organizations, a slightly higher than average contribution. 78 Yet, the rate of increase has slowed, and major donor nations have all registered [. ibyan Students Held as Risks Freed on Bail; Deportation is Expected, New York Times, Aug. 14, 1983. ECD, Development Cooperation (Paris: 1983), p. 211. a decline in recent years in their multilateral contributions as a percentage of donor nations GNP. The United Nations Development Program, which has been the central funding source for technical cooperation provided by U.N. agencies, has been receiving a declining share of multilateral funding. Meanwhile, technical cooperation programs of more specialized U.N. agencies have grown. Viewed from the Middle Eastern perspective, those nations receiving economic assistance, such as Egypt and Algeria, depend much more heavily on bilateral than multilateral flows. Egypt, for example, received in assistance commitments more than eight times as much bilateral as multilateral assistance in 1981. By far the largest part of multilateral assistance was provided by World Bank-related agencies, such as the International Bank for Reconstruction and Development, the International Development Association, and the International Finance Corporation. 79 Like the other major oil-producing nations such as Saudi Arabia and Kuwait, Algeria has itself been a donor of multilateral assistance, valued at $10 million in 1981. 80 For most of the Arab world, and for Egypt prior to Camp David, multilateral aid from multilateral Arab sources such as the Arab Fund for Economic and Social Development and the Islamic Development Bank has been important. American multilateral assistance through the United Nations has also benefited Middle Eastern nations through programs sponsored by specialized agencies such as United National Industrial Development Organization (UNIDO), International Labor Organization (ILO), the World Health Organization (WHO) and the International Telecommunications Union (ITU). UNIDO, for example, maintains a technological information exchange system and sponsors a number of projects and seminars in the Middle East. In sectors such as .-. ~go~~aiZation for ~conomic Cooperation and Development, Geographic Distribution of Financial Flows to De\e]oping Countries (Paris: OECD, 1982), pp. 78-9. During 1981, these World Bank-related organizations provided almost two-thirds of the multilateral assistance received by Egypt. Organization for Economic Cooperation and Development, Development Cooperation, p. 158. PAGE 551 550 l Technology Transfer to the Middle East telecommunications, ILO training programs and ITU agreements importantly affect the development of indigenous technicians, standards, and international use and trade in equipment and services. Similarly, the regional U.N. organization operating in the Middle East has organized a number of conferences on technology transfer to the Arab world. There are, however, few jointly administered economic assistance efforts in the Middle East involving the United States and other Western nations as a group, although in some cases donors provide complementary assistance. For example, the United States has participated in a World Bank-designed reconstruction package for Lebanon; the relief was primarily provided by Western countries. OECD has a Development Center, a Commi ttee for Science and Technology Policy, and an ad hoc group on technology transfer to developing countries. OECD programs sponsor studies of technology transfer and development issues, but there are no joint programs involving members in development programs in the Middle East. This lack of coordination among donor nations has been identified by some observers as a growing problem. (The Development Assistance Committee of the OECD is primarily a consultative body, and the United States does not participate in efforts to coordinate assistance with other Western governments, except in the case of Africa.) 81 Particularly in the area of technical assistance, critics say, the need for coordination of programs is great. The European nations have attempted, albeit with only moderate success, to establish joint economic and technical assistance policies toward the Middle East. Although AID has recently begun efforts to coordinate parallel funding with Arab donors, the United States has not cooperated with regional Middle Eastern organizations such as the Islamic Development Bank or the Gulf Cooperation Council in technical assistance. Political differences undoubtedly explain the lack of multilateral technical assistance efforts in the Middle East involving the United States. ] Overseas Development Council, U.S. Foreign Policy and the Third WorM, Agenda 1982, p. 119. In addition, only a small number of AID programs in the Near East are devoted to programs simultaneously involving more than one recipient country. The one exception to this pattern of bilateral assistance is the trilateral science and technology cooperation program involving Egypt, Israel, and the United States, initiated since the Camp David accords. This cooperation has been viewed as a significant and concrete way to build the structure of peace in the Middle East, and an important part of U.S. foreign policy .82 From the beginning, it was recognized that the program, which involves scientists from all three nations working together, would be a difficult undertaking. Given the imbalance in science and technology resources between Egypt and Israel, the comparatively low priority that Egyptians have attached to cooperation with Israel in view of their longer relationship with the United States, and the need for open exchange of information, cooperation has proceeded slowly and has been limited to a few narrowly focused efforts. In 1981, for example, the U.S. National Institute of Allergy and Infectious Disease, Ain Shams University in Egypt, and Hebrew University in Israel began a long-range project aimed at controlling three arthropod-borne diseases in Egypt and Israel. Other projects in agriculture and industry were also proposed, but few have been implemented. Nevertheless, the trilateral science and technology cooperation project remains an important, though still largely symbolic, multilateral effort which suggests the potential role for science and technology in American foreign policy toward the region. Outside the health care sector, only a small number of programs have as their primary goal encouragement of industrial or service sector technology transfers in the sectors OTA examines in this report. While promotion of technology transfers needed to ensure better operation of industries and services appears to be a high priority for Middle East policy z House Committee on Foreign Affairs, Letter of Transmittal, Planning for Trilateral Scientific and Technological Cooperation by Egypt, Israel, and the United States, Oct. 31, 1980, p. 1. PAGE 552 Ch. 13U.S. Policies Affecting Technology Trade and Transfer l 551 makers, the difficulties in designing assistance time and follow-on activities. In addition, techpolicies directed at improving technology nology transfer projects generally require transfer should not be underestimated. Projmore coordination between the assistance-pro ects aimed to promote technology transfer are viding agencies of the U.S. Government and people-intensive and require considerable lead the local agencies and firms. MILITARY AND STRATEGIC POLICIES : CONTROLS ON TECHNOLOGY TRAD E AND TRANSFE R During the past decade, American controls over exportsparticularly over exports of advanced technologies and equipment-have expanded. The Government has increasingly used these controls to regulate U.S. exports worldwide, including technology trade with nations in the Middle East. The impetus for controls stems from a number of sources, some of which are not specific to the Middle East. Concerns about nuclear proliferation and about potential diversions of exports from third countries to the Soviet Union are among those general factors. In addition, factors more specific to the Middle East, such as the adversarial nature of U.S. relations with countries such as Libya and strong U.S. support for Israel, the apparent nuclear ambitions of some Middle Eastern nations, the alliance of some Middle Eastern countries to the Soviet Union, and the comparatively high level of conflict and terrorism in the region have all stimulated attempts to restrict U.S. exports of advanced civilian technologies to the Islamic Middle East. As noted earlier in the discussion of the foreign policy context, controversy over controls has focused specifically on exports of military equipment, such as the AWACS early warning plane. However, as detailed below, a number of other American policies, such as foreign policy controls, antiboycott policy and restrictions on American overseas business practices, more directly affect civilian technology trade. These various controls on exports, instituted for military and political purposes, distinguish American policies affecting civilian technology transfer from those of other supplier nations. Before examining regulations limiting technology trade, it is important to understand arguments for and against controls. OTA has analyzed these general debates in the context of East-West technology trade. 83 Proponents argue that restrictions on American exports can be effectively used as a lever in achieving American foreign policy goals. Given the inappropriateness of the use of military force in many situations and the unavailability of other policy instruments, proponents view trade restrictions as a way to demonstrate American condemnation of certain actions taken by foreign governments. There is widespread agreement that restrictions are necessary for exports of military equipment critical to the national security of the United States. However, there is less agreement concerning restrictions such as foreign policy controls. The President is empowered by the Export Administration Act 84 to use such controls in order to achieve political goals (e.g., applying sanctions against nations determined to be supporting terrorist activities). In August 1984, discussion was under way in Congress on possible revision of that Sgs% TW~~o)o= m~ J3agt-West Trade (Washington, D. C.: U.S. Congress, Office of Technology Assessment, OTA-ISC-1O1, November 1979), and Technology and East-West Trade: An Up date (Washin@on, D. C.: U.S. Congress, Office of Technology Assessment, OTA-ISC-209, May 1983). The Export Adminstration Act expired on Sept. 30, 1983. Congress was debating proposals for renewal and revision of the act in late 1983 and early 1984. PAGE 553 552 l Technology Transfer to the Middle East legislation. Foreign policy controls have been used to reduce the flow of nonmilitary exports to specific nations in the Middle East. Other types of regulations affecting American business actitiviessuch as the Foreign Corrupt Practices Act and antiboycott policies-are viewed by proponents as necessary for upholding higher principles such as fairness of business practices and nonsupport for the Arab boycott of Israel. According to proponents, the costs of the controls in lost sales are relatively minor in comparison to the political benefits to the United States when the United States takes a strong, political and principled stand. Few question the need for controls on exports of military and sensitive nuclear equipment and technology, but a number of arguments have been made against expansion of other types of controls. Opponents point to what they view as the inordinant costs of controls to U.S. firms and, in some cases, to the United States more generally. Market losses, growth in foreign sources of components, and the perception abroad that the United States is an unreliable supplier are, in the view of the opponents, among the considerable costs. Since many suppliers abroad can supply equivalent technology and equipment and few foreign supplier governments have instituted such controls, opponents of controls see them as simply injuring U.S. business without effectively restricting the ability of the recipient to actually acquire the technology. Opponents see controls as heightening unnecessarily the political dimension of U.S. economic interactions with the Middle East. Debates continue about the appropriateness and effectiveness of controls on advanced civilian technology and products, both at the general level of controversy over renewal of the Export Administration Act, as well as over specific cases such as the institution of foreign policy controls on exports to particular Middle Eastern nations. These debates over controls are confounded by the fact that it is often difficult to measure their precise trade effects. In general, it has been easier to institute than to withdraw controls. The discussion that follows briefly reviews U.S. export controls and evaluates their significance for technology trade and transfer to the Middle East. NATIONAL SECURIT Y AND FOREIGN POLIC Y CONTROL S The Export Administration Act of 1979 is the central piece of legislation that established the authority of the President to control exports for national security and foreign policy reasons. The purpose of national security controls is to restrict exports that contribute significantly to the military potential of another country and would be detrimental to U.S. national security. The controls are exercised on applications for export of items contained on the Commodity Control List, which includes both items that are unilaterally controlled by the United States and those controlled by CoCom (the allied Coordinating Committee for Multilateral Export Controls) to restrict trade with the Soviet bloc nations. In most cases, the Office of Export Administration in the Department of Commerce reviews applications for export and makes a determination, but the Departments of Defense, State, and Energy, among others, sometimes review applications or exercise licensing authority, depending on the type of commodity .85 In addition, the U.S. Government controls all exports of munitions and military equipment. In reviewing export license applications, the Department of Commerce makes determinations based on, among other factors, relations between the United States and nations to which exports are destined. All of the nations of the Middle East, with the exception of Libya, are categorized in Country Group V, which includes most of the nations of the world, such see U.S.Department of Commerce, International Trade Administration, Office of Export Admnistration, Export Administration Annual Report FY 1982 (Washington, D. C.: U.S. Government Printing Office, 1983), pp. 14-15 for a list of agencies involved in review of export licenses. The role of the Department of Defense in particular has been expanded in recent years. See Paul Mann, New Center to Oversee Export Licenses, Aviation Week and Space Technology, Sept. 19, 1983, p. 71. PAGE 554 Ch. 13U.S. Policies Affecting Technology Trade and Transfer 553 as Great Britain, Japan, West Germany, and France. National security controls restrict the export of military and strategically sensitive items (including dual-use items) which have potential military application in the exporting country or which might be diverted to the Soviet Union. In recent years, only a small number of denials have been made for national security reasons on exports to the Middle East. 86 By far, the majority of applications for export to the Middle East are processed through the front door licensing procedure of the Department of Commerce, where a preliminary screening finds them not in violation of the export regulations. With respect to civilian technology trade with the Middle East, foreign policy controls are more important than national security controls in restricting specific types of U.S. exports, particularly aircraft. Foreign policy controls are instituted by the President in order to achieve political purposes, such as imposing sanctions against nations violating human rights or supporting terrorism, or in order to promote regional stability by prohibiting the export of certain military items. The most extensive use of foreign policy controls in recent years has been those applied to trade with Libya. Foreign policy controls were imposed on exports of certain aircraft, helicopters, and aircraft parts and avionics to Libya in October 1981. In 1982, as Libyan military activity in neighboring nations increased, the controls were made progressively stricter. On March 10, 1982, the controls were tightened to include an embargo against Libyan oil, following a closure of the Libyan embassy in Washington and a request from President Reagan that all Americans residing in that nation depart. As a general policy, licenses for all high-technology exports to Libya are denied and all exports, except for food, medicine and medical supplies, and nonstrategic products require licenses. Libya has thus been placed in a special country category that reInformation provided by the office of Export Administration, Department of Commerce, March 1983. quires most exports to be licensed. The controls on exports to Libya are extensive, but during the latter part of 1982, 1,650 licenses for export of nonrestricted goods valued at $340 million were approved, while 16 valued at $13.8 million were denied. 87 Trade with Libya continues, but is limited to specific types of exports and at a much reduced level. Foreign policy controls denying items to countries involved in terrorist activities have been applied to Iraq, the Peoples Democratic Republic of Yemen, Iran, and Syria (in addition to Libya) in recent years. These controls apply to exports of aircraft valued at $3 million or more and to helicopters over 10,000 pounds. 88 In addition, other commodities and technical data under national security controls are covered if the export is valued at $7 million or more and destined for a military enduser or end-use. In March 1982, Iraq was deleted from the list of nations subject to antiterrorism controls. The regional stability controls require a validated license for export of military vehicles and certain commodities used to manufacture military equipment, and they have been applied in recent years specifically to Libya, Iran, and Iraq. However, these controls are effective vis-a-vis virtually all nations except NATO countries. In fiscal year 1982, denials for exports of military vehicles to Iran (for a total of $38 million) and to Iraq (for a total of $204 million) were made. Formerly, during the hostage crisis, the United States instituted an embargo of exports of all types, except for food and medicine, to Iran. 89 Foreign policy controls were reinstituted against Iran in early 1984. Under section 6 of the Export Administration Act, the Secretary of State is required to provide an explanation when controls are inDepartment of Commerce, Export Admimstration, 198,2, p. 32. HAfter March 1982, sales of civilian aircraft for use by regularly scheduled airlines based in Syria and PDR Yemen were exempted from the controls. Whis action was taken on Apr. 7, 1980, and followed suspension of oil imports from Iran, denial of exports of military equipment and spare parts, and freezing of Iranian assets in the United States. Diplomatic relations with Iran were severed in April 1980. PAGE 555 554 Technology Transfer to the Middle East stituted. The explanation must include consideration of a variety of criteria, such as the probability that the controls will achieve their intended results, their compatibility with other foreign policy objectives, the anticipated reactions of other countries, effects on the competitive position of the United States, and feasibility of enforcement. The Secretary is not, however, strictly bound by these criteria. (Section 3[8] of the act stipulates that the President shall make efforts to secure the reduction of terrorism through international agreementor cooperation before resorting to the use of foreign policy controls.) Given these various statements in the act, there is considerable ambiguity concerning the conditions required to institute or remove antiterrorist controls. Generally speaking, the Department of State is reluctant to institute these controls unless there is evidence of repeated and serious problems. Past experience has shown that controversy inevitably develops concerning changes in controls, which are often easier to institute than to withdraw. Nor is there any clear agreement concerning the effectiveness of the controls. Impacts measured in reduced sales are most apparent in the case of exports to Libya. Prior to 1981, when foreign policy controls against Libya were first introduced, U.S. exports amounted to $813 million, and the United States was a major importer of Libyan oil. Subsequently, the U.S. share of total Libyan imports declined from 5.4 to 2.1 percent and exports fell at an annual rate of $500 million. Although some of this decline is attributable to Libyan economic difficulties, experts conclude that foreign policy controls were the most important factor. However, there is little evidence that Libya has moderated its policies because of the imposition of these controls. The impact of foreign policy controls is most evident in civil aircraft sales. As discussed in chapter 7, new orders of large U.S.-origin transport aircraft destined for the Middle East dropped from a peak of $1.1 billion in 1979 to $89 million in September 1982. In contrast, Airbus orders for the same countries were valued at $289 million in 1979, and $661 million as of September 1982. Undoubtedly, various factors explain this shift in market share, including differences in export finance and the desire in the Middle East to diversify sources of supply. U.S. controls were unusually restrictive in this area and contributed to the decline in the U.S. market position. It is difficult to assess precise impacts of the controls. Aircraft industry sources claim that $500 million in direct sales were lost by the end of 1981, as were 20,000 jobs in the aircraft and related supply industries. Department of Commerce sources estimate that $10 billion worth of future aircraft contracts may have been jeopardized during the next decade. Recent modifications of the controls to permit sales to regularly scheduled commercial airlines were taken in order to mitigate such commercial impacts of these controls. As is the case with foreign policy controls applied to nations in other parts of the world, only in rare instances has use of controls clearly caused a change in the policies of the target country. A major problem arises from the ability of other foreign suppliers to provide comparable technology and products, allowing buyers to simply go elsewhere. Nevertheless, proponents would argue, the controls demonstrate the firm resolve of the United States to condemn acts of international terrorism. Whether or not the costs outweigh the benefits clearly depends on whether one believes that taking such a principled stand is appropriate or effective. NUCLEAR NONPROLIFERATION CONTROLS Nuclear nonproliferation controls have been authorized by the Nuclear Non-Proliferation Act of 1978 and the Export Administration Act. These controls restrict the export of weapons-usable materials (plutonium and highly enriched uranium), sensitive nuclear facilties, and classified and sensitive nuclear technologies. Dual-use commodities which can be used indirectly (whether or not the item is Department of Commerce, Export Adrninstration Annual Report, 1982, op. cit., p. 144. PAGE 556 Ch. 13US, Policies Affecting Technology Trade and Transfer w 555 specifically modified for purposes such as designing, constructing, fabricating, and operating nuclear explosive devices or facilities) are also included on the Nuclear Referral List, which is incorporated in the Commodity Control List. In reviewing applications for export, the nonproliferation credentials of the recipient nation, the guarantees applicable in the specific case, the significance of the export for nuclear purposes and its availability elsewhere, and its stated end-use are taken into consideration. These controls are consistent with the Treaty for the Nonproliferation of Nuclear Weapons (NPT) which requires International Atomic Energy Agency (IAEA) safeguards on all such equipment, materials, technologies, and facilities. This requirement for safeguards on exported fissionable material has been clarified and expanded by the Zangger committee guidelines. This is an informal agreement among the 21 NPT supplier state signatories that they will not export any item on the Zangger committees trigger list unless it is subject to IAEA safeguards, a no-explosive-use pledge is obtained, and the assurance is received that the recipient nation will not retransfer this item. The United States also subscribes to the export guidelines of the Nuclear Suppliers Group. As outlined in chapter 9, only in a few instances have U.S. nuclear exports been made to nations in the Middle East, which undoubtedly reflects the strength of these controls. Between July 1, 1981, and June 30, 1982, U.S. exports of dual-use and nuclear-related equipment to Middle Eastern countries were valued at approximately $330 million, according to the General Accounting Office. In a few instances, such as the export of lasers and related equipment to Iran in 1978, controversy grew regarding whether or not authorization of exports had been appropriate. 91 Such examples of controversy have not .. ] For information on the value of U.S. dual-use and nuclear exports, see General Accounting Office, Controlling Exports of Dual-Use, Nuc]ear-lielated Equipment, GAO/N SIAD-83-28, Sept. 29, 1983, See General Accounting Office, Circumstances Surrounding the Government Approval of Nuclear-Related Exports to Iran, report to Senator Cranston, Mar. 17, 1980. been common. Nevertheless, since the Department of Commerce deals on a case-by-case basis with applications for export of items on the Nuclear Referral List, some critics favor extending the controls to include a blanket denial for export of dual-use items, such as large-scale computers, to nations not signatories to the NPT. In recent years only about 6 percent of all dual-use exports (most of them computers) have gone to the nations of the Islamic Middle East. Because U.S. controls on exports of nuclear equipment and technology are comparatively strict, the major challenge to the nonproliferation regime has been the policies of other supplier governments. As chapter 9 outlines, in a number of significant cases, the United States has succeeded in dissuading other nations from providing sensitive materials or technologies, or in requiring safeguards and other assurances. Major steps were taken under the Carter administration to extend these controls and to make nonproliferation a high-priority issue in U.S. foreign policy. Congressional interest began earlier under the Nixon and Ford adminstrations, when a number of bills were introduced. In the future, sensitive nuclear contracts, the scope of safeguards, and other nonproliferation regulations may become factors in the competition for exports of nuclear technology, in which a growing number of smaller supplier nations will participate. OTAs findings in chapter 9 point to the need to develop policies that bring the new suppliers into the nonproliferation regime by persuading them to require return of spent fuel, by requiring recipients to agree to safeguards, and by limiting exports of sensitive reprocessing and enrichment facilities. Bilateral cooperation agreements in nuclear energy have been central to U.S. nuclear export policy. The existence of such an agreement is a prerequisite for export of U.S. nuclear technology, equipment, and fuel. Bilateral agreements have been used to implement and extend restraints agreed on multilaterally and to bring nonnuclear states into the international nonproliferation regime. As discussed in chapter 9, the bilateral nuclear agreement with Egypt was accompanied by that nations accession to the NPT. PAGE 557 556 l Technology Transfer to the Middle East The United States has also worked through the IAEA, the primary institutional mechanism for carrying out inspections to ensure that countries are living up to their commitments to enforce safeguards against proliferation. The IAEA does not have police power, nor does it have roaming rights to inspect any and all facilities without prior notice. Doubts about the reliability of IAEA safeguards grew in light of Iraqs nuclear program, since that nation was a signatory to the NPT but attempted to acquire sensitive facilities that could be important for a weapons program. Israels preemptive strike against Iraqs Tammuz 1 research reactor heightened concern that nations would take unilateral actions weakening the influence of international nonproliferation norms. Concerns have also risen about the politicization of the IAEA. In 1982 the United States withdrew from participation in the 26th General Conference of the IAE A after member states denied credentials to Israels delegation, but later resumed full participation in the IAEA, The dangers of politicization are great, since the agency remains the primary mechanism for verification of safeguards enforcement. While the IAEA cannot prevent long-term efforts to develop weapons capability, it does contribute to the international nonproliferation regime. In order to influence its programs and maintain support for international safeguards, the United States must participate in the IAEA. There have been few changes in U.S. nonproliferation policies directly affecting nations in the Middle East. Reagan administration policies ending no-reprocessing export restraints and stressing the need to ensure that the United States is viewed as a reliable supplier have had the most significant effects on nuclear programs in nations such as Japan. 92 Under the Reagan administration, prevention of nuclear weapons proliferation has been seen more as a political than a technical problem. In the Middle East, for example, promotion *Proponents of stiffer regulations on exports of reprocessing facilities argue that the loosening of exports to nations considered not to be proliferation risks opens the door to the possibility that some day exports could be extended to other nations, as well. of regional stability and recognition of the legitimate security needs of nations in the region have been viewed by administration officials as important to nonproliferation goals. 93 Critics worry that recent decisions affecting new supplier countries represent a relaxed at titude toward nuclear exports which coul d have repercussions in the Middle East. The decision to supply spare parts for Indias Tara pur reactor in 1983 raised concerns becaus e India has refused full-scope safeguards and be cause India may become a supplier of nuclea r technology to the Middle East 94 Following a decision in late 1982 permitting France to sel l uranium to India, critics worried that the com mitment to require full-scope safeguard s would be further eroded. Critics of these deci sions worry that countries such as India an d Pakistan may be more willing to export sen sitive nuclear equipment and technology in th e future to the Middle East. Proponents, reit erating their commitment to nonproliferatio n goals, argue that it is necessary to deal with non-NPT states through provision of nonsen sitive nuclear technologies in specific cases in order to influence their programs Over the years, Congress has enacted a number of provisions that reinforce and extend prohibitions on the provision of economic and military assistance to nations that do not accep t full-scope safeguards, but do acquire sensitiv e facilities. The Symington and Glenn amend ments, passed in 1976 and 1977, respectively are the central examples of this legislation. In addition, since 1978, Congress has placed lim its on the ability of the Export-Import Ban k to provide funding for nuclear exports. All Export-Import Bank actions in this area requir e congressional review, and in recent years Ex port-Import Bank support for such export s dropped sharply. The restrictions on nuclea r exports have undoubtedly served to reduc e %x Warren H. Donnelly and Joeseph F. Pilat, Nuclear Export Strate~es to Restrain the Further Spread of Nuciear Weapons in the 1980s, CRS Report No. 83-118 S, June 1983, pp. 53-56. In 1980, the Carter administration waived provisions of the act to sell India 38 tons of nuclear fuel. Philip Taubman, Shultz Tells India that U.S. Will Drop Reactor-Parts Ban, New York Times, July 1, 1983, p. A4. PAGE 558 Ch. 13U.S. Policies Affecting Technology Trade and Transfer l 557 U.S. nuclear sales worldwide. In bidding fo r nuclear power stations in Egypt, however U.S. firms unable to obtain U.S. Export-Im port Bank financing joined Japanese firms i n order to obtain financing 95 This example, lik e reports of foreign sourcing of aircraft engine s and other aircraft parts in the wake of U.S foreign policy controls, illustrates that con trols may stimulate firms to seek alternativ e options for financing and supply of parts It is impossible to measure the impact o f U.S. nonproliferation controls on exports. Un doubtedly, the level of trade in nuclear tech nology and equipment with the the Middl e East, both by U.S. and foreign suppliers would be higher without such policies. Th e strict provisions incorporated in the U. S. Egyptian bilateral agreement stand as mode l in that they provide a framework for th e United States to assist Egypt in its commer cial program while at the same time reducing the prospects for nuclear weapons prolifera tion. In addition, the United States has bee n successful in persuading other supplier nation s to harmonize and broaden the scope o f guidelines While nonproliferation controls have thu s contributed to slowing the spread of nuclea r weapons, during the years ahead the growt h of Middle Eastern technical capabilities an d the entry of new supplier states into the mar ket will present significant challenges to U.S nonproliferation policies. Chapter 9 outline s a number of policy options that could be used to further nonproliferation policy goals in th e Middle East OTHER POLICIES INHIBITING TECHNOLOGY TRAD E Policies regulating the activities of U.S. businesses operating in the Middle East have long been viewed by businessmen as constraints on trade. The antiboycott program and the For 9f See Paul Taylor, U.S. and Japanese Groups Link in Egyptian Nuclear Power Bid, FinanciaJ Times, Sept. 1, 1983, p. 1. Westinghouse confirmed that it had signed a preliminary agreement with Mitsubishi Heavy Industries to bid for the Egyptian contracts. eign Corrupt Practices Act {FCPA) are the two examples most often cited, in addition to re strictions on government financing, discusse d above. As with other types of restrictions, policy debates about these policies revolve around the question of whether the political principle s involved are worth the perceived commercia l loss The antiboycott provisions of the Expor t Administration Act are aimed at discourag ing and, under certain circumstances, prohib iting, U.S. companies from taking or know ingly agreeing to take actions with inten t to comply with, further, or support any boy cott fostered or imposed by a foreign country against a country which is friendly to th e United States and which is not the object o f any form of boycott pursuant to United State s law or regulation The Office of Antiboycot t Compliance (OAC) of the Department of Com merce has enforced the antiboycott progra m since 1978. In practice, the antiboycott pro gram is directed solely toward reducing th e participation of U.S. firms in the Arab boycot t of Israel The Arab boycott dates from the late 1940s, when the state of Israel came into existence Administered by the Arab boycott office i n Damascus, the purpose of the boycott is to re duce commercial or financial transaction s which promote the economic or military devel opment of Israel. Companies trading with Is rael are blacklisted" so that member state s are encouraged not to deal with them, but in practice, each nation implements the boycot t differently. The Arab countries thus throug h their boycott of Israel have used trade as a lever in furthering their political goals In general, the enforcement of the antiboy cott program by the Department of Commerc e has been accommodated by many of the Arab nations % Specifically, if the commodity o r technology is considered vital for national de velopment, Arab governments have show n flexibility in their application of the boycott Computerization of the list of boycotted com Charlotte A. Phillips, The Arab Boycott of Israel, CRS 79215F, May 1979, p. 6. PAGE 559 558 l Technology Transfer to the Middle East panics and the renewed commitment by na tions of the Gulf Cooperation Council to en forcing the boycott lead observers to believ e that the boycott may be more tightly enforced in the future 97 Department of Commerce sta tistics indicate that Kuwait continues to b e the nation from which the largest number o f U.S. companies received requests to compl y with or support the boycott. More than 35,000 requests reported by U.S. firms during 198 2 came from Kuwait; this represents more tha n 60 percent of the total 98 Following Kuwait i n number of requests were Saudi Arabia, th e UAE, Qatar, and Bahrain No other supplier country has a progra m like the U.S. antiboycott program. Whil e many supplier countries have expressed thei r opposition to the Arab boycott, none have es tablished antiboycott programs, and only a few have considered enactment of legislation 9 9 The U.S. program employs about 30 people During 1982, the OAC issued 2,500 notices to companies to report and 182 formal warnin g letters for late reporting. In the same year, th e OAC carried out 140 investigations, resultin g in the disposition of 43 cases through settle ment and involving $548,750. To cite one notable example, in 1983 Citibank was required to pay a fine of $323,000 for failure to repor t promptly about 337 boycott-related requests During the past few years, the size of fine s awarded and the number of enforcement ac tions taken by the OAC have increased Proponents of the antiboycott program ar gue that it allows the United States to tak e a strong stand of nonsupport for discrimina tory economic boycotts of friendly nation s such as Israel. Most of them question the ex tent of real trade loss resulting from the boy cott and view it as not seriously injurious to the overall trade position of the United States Citing the fact that American firms retai n strong positions in Middle Eastern markets SW The GCC: Tougher Boycott Action, Alit-idle J3ast 13xecutive Reports, October 1983, p. 5. a Department of Commerce, Export Adnmstration Annual Report, 1982, p. 81. s France has legislation that has not been implemented. A bill has been introduced in the Netherlands. they argue that commercial damage to U.S firms has been minimal. In practice, propo nents argue, there are many ways to circum vent the boycott, and many firms now trad e with Israel as well as Arab governments Opponents of the antiboycott program vie w the situation differently. In their opinion, th e fines are a mere indication of sales lost from the boycott. Firms, particularly new-to-marke t companies, may be discouraged by the lega l intricacies of the antiboycott provisions an d therefore forego business in the region. In ad dition, they cite the repeated criticism of U.S antiboycott policies by governments in the re gion as evidence of resulting ill will. The dif ficulties encountered by U.S. firms in comply ing with antiboycott regulations hav e reinforced the impression that U.S. policies ar e restrictive; the result, critics say, is that th e United States is viewed as an unreliabl e supplier There is no way to resolve the dispute s about the economic impact of the antiboycot t program. A number of estimates have bee n made of trade loss, but it is difficult to sepa rate the effects of the program from other U.S. regulations of trade, such as the Foreign Cor rupt Practices Act and the Sherman Anti Trust Act. In addition, both the Departmen t of Commerce and the Department of th e Treasury are authorized under separate stat utes to carry out antiboycott policies, the lat ter allowing for denial of tax benefits to U.S companies complying with the boycott. Sinc e behavior that is acceptable under the Expor t Administration amendments may be prohib ited under the tax code, the situation is con fusing to businessmen. Furthermore, becaus e firms are prohibited from responding to fals e allegations by foreign governments that the y have failed to participate in the boycott, com panies have been inaccurately added to th e blacklist but unable to protest because of an tiboycott provisions. Thus, unmeasurable bu t real disincentives to trade in Arab nation s clearly result from the antiboycott program On the other hand, firms often have succeeded in circumventing the boycott. In a celebrate d case, Arabsat awarded a prime contract to th e PAGE 560 Ch. 13U.S. Policies Affecting Technology Trade and Transfer l 559 French firm Ford Aerospatial; the blackliste d U.S. firm Ford Aerospace was nevertheles s able to participate as a major subcontracto r in the project. While it is impossible to gaug e the precise commercial costs, the antiboycot t program has, at a minimum, discouraged smal l firms, particularly smaller new-to-marke t firms unfamiliar with the intricacies of th e program The FCPA restricts business activities in al l foreign countries and therefore is not uniquely relevant to technology trade with the Middl e East. Enacted in 1977, the FGPA prohibit s U.S. firms from bribing officials of foreign governments and requires them to keep detaile d and accurate records of their transactions. Th e Securities and Exchange Commission regu lates the activities of U.S. businesses abroa d under the act. Penalties for violations of th e act include corporate fines of up to $1 million, and fines of up to $10,000 and imprisonmen t of up to 5 years for individuals Proponents of the legislation argue that t o uphold standards of democracy and fairness the law is necessary to support foreign governments and to maintain the confidence of th e American public in corporate and financial in stitutions. Those who favor changes in the law point to what they consider to be burdensom e recordkeeping requirements and some ambi guity concerning restricted practices. Legis lation is currently under consideration in Con gress which would amend the FCPA so as to take these criticisms into account Despite their considerable criticism of th e FCPA, few businessmen have advocated doing away with it altogether. As with the antiboy cott program, it is impossible to determine th e value of sales lost solely because of the FCPA. During the 5 years of the acts implementa tion, the Securities and Exchange Commission has prosecuted no bribery cases involving U.S firms for activities in the Middle East. The Department of Justice has prosecuted one brib ery case involving a U.S. firm operating i n Qatar. oo Undoubtedly, the law acts as a re straint on the actions of U.S. businessmen in the Middle East, where payments to agent s have often been customary; however, it ma y well enhance the prestige of U.S. business over the long term by promoting the integrity of American business. The public criticism that arose in Iran in reaction to what was widely viewed as personal aggrandizement by members of the royal family indicates the positive contribution of U.S. laws limiting the involvement of American businessmen in such activities. w Information provided by the Securities and Exchange Commission, Enforcement Division, October 1983. The case brought by the Justice Department resulted in a civil injunction for actions involving Ministry of Petroleum officials in Qatar. CONCLUSIO N The growth of technology trade with the Middle East during the 1970s occurred despite the fact that U.S. policies have included restrictions not common in other Western supplier nations. There is thus a discrepancy between the fact of growing U.S. economic involvement in the region and official policies, which have had inconsistent and oftentimes inhibiting effects on technology trade. The primary explanation for the lack of a coherent policy governing technology transfer is that conflicting interests are at stake. There are at least three general perspectives on technology transfer: commercial, development assistance, and military-strategic. Those concerned primarily with promoting U.S. market share and with ensuring the effectiveness of U.S. development assistance programs generally favor promotion of technology trade. In contrast, controls on technology trade hav e been expanded by those more concerned abou t restricting access to U.S. equipment and tech nology by the Soviet Union or nations carry ing out terrorist activities and about other ac tions seen as running counter to U.S. interests. PAGE 561 560 l Technology Transfer to the Middle East During the past decade the expansion of controls has been a striking feature of U.S. policies, one which distinguishes American policies from those of other supplier nations. Many types of government policies and programs indirectly affect technology trade with the Middle East, but none are more significant for setting the overall context than general foreign policies-political and economic. Technology trade, and particularly technology transfer, require long-term interactions between firms and organizations that develop most smoothly in the context of friendly government relations. The strong presence of U.S. firms in Saudi Arabia and Egypt indicates that political and economic interests have converged in setting a context conducive to technology trade. Similarly, policies affecting exchange rates and other international economic policies significantly affect prospects for U.S. exporters. At another level are various policies-export promotion programs, development assistance programs, and export controlsthat more directly affect specific technology trade transactions. It is impossible to quantitatively assess the impacts of these various types of measures on technology trade. In comparison to policies of some other supplier nations, U.S. export promotional programs of certain types have been limited in coverage. U.S. policymakers have been reluctant to engage in high-profile economic diplomacy, routine representation of business has been less extensive, and the United States has not used extraordinary export support programs (such as mixed credits and exchange rate insurance) to the degree that some other suppliers have. OTAs study of technology transfer to the Middle East has identified only a few instances, however, where foreign government programs such as the provision of attractive export credits determined the outcome of contract competition. U.S. development assistance policies have been important for Egypt and lower-income developing nations in the Middle East, but they have not been strongly oriented toward technology transfer in industrial sectors. While development assistance and commercial promotional programs are generally complementary, U.S. policy makers have been reluctant to link them explicitly. Export controls have been increased in number and in importance over the years. Nuclear nonproliferation controls have played a critical role in slowing the pace of nuclear weapons proliferation. While there is general agreement that nuclear nonproliferation and national security controls have contributed to the achievement of important political aims, there is disagreement concerning the appropriateness and effects of foreign policy and political controls. In the context of comparatively weak commercial promotion policies, export controls in particular distinguish U.S. policies from those of other Western supplier nations. Most U.S. policies influence technology trade more directly than they do technology transfer. Only a few programs, such as project reviews by the Overseas Private Investment Corporation and AID programs aimed at promoting technology application and technical manpower development, are specifically designed to promote technology transfer. In practice, technology transfer occurs mostly in the marketplace, and private sector firms rather than the U.S. Government agencies are normally the key players. Corporate strategies directly affect the scope and nature of technology transfer from the United States to Middle Eastern nations. This suggests that if policymakers decide to promote technology transfer, they could emphasize programs involving cooperation with the private sector, which will undoubtedly retain the lead in U.S. technology transfers to the Middle East. Because U.S. policies affecting technology trade have been characterized by a tension between political and economic interests, no comprehensive policy has been developed. In contrast, other Western suppliers have brought economic interests more to the fore in their export credit and promotion program, and other industrial policies. Options for more consistent U.S. policies are outlined in chapter 15. PAGE 562 CHAPTER 14 Future Prospects for Technology Trade PAGE 563 Contents . .. ... THE VOLUME OF TECHNOLOGY TRADE . . . .. .,.0... l Forcasting Oil Export Revenues . . . .. .... .. ... .. ... Impact on Trade ................... The Effect of Other Scenarios on Trade The Impact of Changing Economic Strucutre on Technology Trade . . . . . . Page 563 PROSPECTS FOR SUPPLIER SHARES .. .... . . .. ... . .. .... ,. ..., .. ... . . . . . .. ... . . Share Trends High U.S. Export Share Scenario . . Low U.S. Export Share Scenario . . . . ... CONCLUS1ON: PROSPECTS FOR THE 1990s . . . Tables 563 566 567 568 571 571 572 574 576 Page PAGE 564 CHAPTER 14 Future Prospects for Technology Trade Will technology trade with the Middle Eas t continue to grow rapidly for the next decade has it reached a plateau, or will it decline in the remainder of the 1980s and in the 1990s? OTAs analysis indicates that much slowe r growth of real exports to the Middle East i n the period 1985-90 appears likely. This will be on the order of 2 to 5 percent per annum i f Middle Eastern countries keep their import s within the bounds of their export earnings. For the decade 1990-2000, it is more difficult t o predict trends, but stagnation in real export s seems likely In this chapter, OTA assesses prospects fo r future Middle East technology trade. Tw o scenarios, involving high and low U.S. expor t shares, are constructed. While the high expor t share scenario is theoretically possible, OT A concludes that it is much less plausible tha n a lower U.S. export share. In light of antici pated slow growth in the volume of overall exports to the Middle East, it is likely that th e U.S. export share will decline from the roughly 18 percent share of industrial country export s held by U.S. firms in the past decade Politically, the Middle East has been th e scene of much international conflict and rev olutionary ferment, and political factors wil l continue to exert strong influence over Mid dle Eastern technology trade. The potentia l exists for conflicts that could affect trade a s catastrophically as the Iranian revolution o r the Iran-Iraq War; such conflicts have gener ally reduced civilian technology trade. Th e Arab-Israeli conflict, internal revolutions great-power tensions, and local wars all hav e the potential for trade disruption The rapidly developing economies of the re gion have already achieved substantial eco nomic complexity and will continue to develop in the future for two basic reasons: 1) the process under way has already built up a certai n momentum, and 2) resources will continue t o be provided by the oil sector. On these point s economists generally agree, although they dis agree about how difficult it will be to make a variety of adjustments which are being forced on Middle Eastern economies by events in the international oil economy and by structural changes in their domestic economies. For example, Wharton Econometric Forecasting Associates, Middle East Economic Outlook, April 1983; .Jahan~ir Amuzegar, Oil Expozters Economic Development in an Interdependent Morld, International Monetary Fund, April 1983. THE VOLUME OF TECHNOLOGY TRAD E In assessing prospects for technology trade, war industrial reconstruction programs of Iraq the principal uncertainties concern: 1) what the and Iran may be. growth of real oil revenues will be in the coming decade for each of the producers; 2) how FORECASTING OIL EXPOR T much drawdown of foreign investment and use REVENUE S of trade deficits there will be; 3) how the nonoil sector in the Gulf countries will manage the The level of Middle Eastern oil revenues will transition from infrastructure development to be one of the key determinants of technology a more diversified manufacturing economy (or, trade during the next decade. Forecasting deindeed, if such a transition will be made); and velopments in world oil markets and their ef4) how effective the industrial rationalization fects on Middle Eastern oil revenues is an enprograms of Egypt and Algeria and the postterprise subject to great error, and OTA does 563 PAGE 565 564 c Technology Transfer to the Middle East not undertake it in this report. Instead, we review several of the basic forces that drive the oil market in order to provide a rough approximation of the likely range of oil revenues of the Middle East. The oil-exporting countries of the Middle East must determine individually and as part of OPEC how much of their depletable oil resource to ship during any given period to meet national objectives of current consumption and future income growth. Oil left in the ground constitutes a speculation on its future price. Keeping it there does not earn current income, in contrast to selling it and investing the proceeds in interest-bearing bonds or in economic development projects. There is a capital gain from leaving the oil in inventory if it will command a higher price when sold in the future. At any point in time, the expected capital gain may constitute an attractive enough return to make keeping the oil in the ground a rational investment decision. Increases in the real price of oil are, in fact, to be expected in the long run because of the way oil owners attempt to manage their exhaustible asset. The removal of any barrel from the ground increases the value of each barrel remaining there, everything else being equal. From the narrow investment point of view, the production rate of oil should be set so as to increase its value in the ground at the rate that would maximize the expected present value of future returns. When the production rate is optimized in this way, everything else equal the real price rises, as withdrawals from reserves add value to the remaining reserves. Most actual projections of oil prices, in fact, take this into account and project rising real prices at least in the longer term. The world is more complicated than the abstract investment model in many different ways, however. Governments must make deciFor classic references on the economics of exhaustible resources, see Harold Hotelling, The Economics of Exhaustible Resources, Journal of Politid Economy, vol. 39, April 1931, pp. 137-175; and Robert M. Solow, The Economics of Resources and the Resources of Economics, American Economic Review, vol. 64, May 1974, pp. 1-14. sions about what fraction of oil revenues to allocate among current consumption, foreign investment, and domestic capital formation. How the benefits are distributed among various groups of the population is invariably a key element in domestic politics and therefore enters the decision process. The international political dimensions are also important because countries use their oil wealth to gain international power and prestige and to develop military strength. At least for particular member countries, OPEC production decisions are also an important determinant of production rates. Such production rates are the subject of negotiation within the cartel and governments take them very seriously. Iran, for instance, despite the bitter war, continues to participate fully in OPEC along with Iraq and its Arab allies. How much impact OPEC has on overall production and prices in the long run, however, is subject to debate, since actual production rates differ substantially from those agreed on. On the demand side, important factors that must be taken into account in making forecasts of prices and production rates in the next decade are: first, the delayed effects of the 1979 oil price rise on the miles-per-gallon characteristics of the stock of transportation vehicles and the efficiency of stationary industrial energy uses (in other words, conservation); and second, the rate of economic growth in the industrial countries. 3 A number of forecasting groups have recently attempted to take all these elements into account and make mediumand long-term oil price and production forecasts. Table 113 lists a selection of forecasts made in 1983 by various energy forecasting groups and compiled by the Department of Energy (DOE). 4 Most 3Estimates of the changes in transportation energy use efficiency and price and income elasticities of transportation energy demand for the United States are presented in Douglas L. Adkins, Forecasting Transportation Demand for Petroleum: A New Generation of Econometric Models of Highway and Airline Industry Fuel Use, paper presented to the Transportation Research Board, National Research Council, January 1983. Department of Energy, Office of Policy, Plannin g, and Analysis, Energy Projections to the Year 2010, October 1983, tables 7-1o, 7-11. PAGE 566 Ch. 14Future Prospects for Technology Trade w 565 Table 11 3. Projections of the International Oil Price and OPEC Oil Production (1982 dollars per barrel or million barrels per day) Date 1990 2000 forecast OPEC OPEC published Forecasting group Price production Price production 6/8 3 Department of Energy, National Energy Policy Plan Scenario B . $32 26 $57 28 4/8 3 Energy Information Administration, Annual Energy Outlook Middle Scenario 37 27 59 2/8 3 Data Resources Inc. . . . . 36 26 51 Marine and Preckel, Stanford ., . . . . . . . 36 6/8 3 23 58 25 2/8 3 Oil Company B . . . . . . . . . 26 30 6/8 3 Oil Company C . . . . . . . . . . . . 21 27 2/8 3 Oil Company D . . . . . . . . . . 23 28 4/8 3 Chase Econometrics . . . . . . . . . . 34 42 4/8 3 Wharton Econometric Forecasting Associates . . . . . 35 4/8 3 American Gas Association . . . . . . . . . . 37 45 1/8 3 Energy Study Centre . . . . . . . . . . 53 64 SOURCE Department of Energy Office of Policy Planning and Analysis Energy Projections to the Year 2010 October 1983 tables 710 and 7 11 See this source for a Iistinq of the publications in which the above forecasts appeared of the projected 1990 price forecasts fall in a narrow region of around $35 per barrel (1982 dollars), and most of the 1990 OPEC production forecasts are approximately 25 million barrels per day (b/d), million b/d. This range of forecasts is consistent with those of the International Energy Agency (IEA), which we used to make forecasts of Middle Eastern oil export revenues (table 114). The record of the past 12 years leads us to be skeptical about all oil market forecasts. They are based on stated and unstated assumptions that are subject to change. For instance, the 1982 price forecasts for 1990, which are cited in the DOE report referenced above, are generally considerably higher than those published in 1983. The 1982 price softness in the oil market was the occasion for Table 114.Projected Middle East Oil Export Revenue a 1980 19831985 Real Oil price (1982 dollars): High revenue scenario b ... ... ... ... ... $36 C $28 C $32 d Low revenue scenario f ... ... . . 36 28 C 3 0 d Middle East oil exports (million barrels/day): g High revenue scenario ., ... . . . 19C 10 C 16 d Low revenue scenario . . ... ... ... ... ... 19C 10 c 18d Middle East oil export revenues (1982 dollars, billions): High revenue scenario . ... . . . . $250 $102 $187 Low revenue scenario . . . . . . . 250 102 197 Change in real revenues (percent per annum, average) . 80-83% 83-85% 85-90% High revenue scenario. . . . . . . -29.9% + 30.3% + 5.2% Low revenue scenario . . . . . . . . -29.9% + 32.9% + 2.1% 1990 $37 30 18 20 $243 219 1995 $43 e 30 e 16 e 21 e $250 230 90-95% 95-2000% + .6% 0% + 1 .0% + o.9% 2000 $49 30 14 22 $250 241 a Middle East members of OPEC Saudi Arabia Iraq Iran Algeria, Kuwait, United Arab Emirates, Qatar and Libya The IEA projections of Middle East OPECs share of total OPEC production were in the 78 to 81. percent range for the period b OTA's high oil revenue scenario IS the same as IEAs low demand scenario combines low world economic growth and high oil price assumptions that in combination result in relatively low demand world economic growth 4 percent to 1985, 27 percent thereafter, real 01 I price I ncrease at 3.0% per annum after 1985 c Actual price and output DolIar magnitudes converted to 1982 dolIars using the GNP deflator (Source ClA, International Energy Statistical Review J u n e 26 1984 pp 2-3, 19). Estimated exports of natural gas Iiquids added (Source Middle East Economic Digest, June 29 1984, p 15) d lEA's 1985 Projections assume full European recovery from the recession. Since this may not characterize all of 1985, they may be better Interpreted as indicating the rate of exports and the 011 price when recovery IS complete, rather than a forecast for calendar year 1985 e Interpolated f OTA's low oil revenue scenario i S the same as IEA's high demand scenario combines high world economic growth and low oil Price assumptions that in combination result in relatively high demand world economic growth 6 percent to 1985 32 percent thereafter, real 01 I price constant after 1985 g lncludes natural gas Iiquids. lnventory changes are not considered Derived from IEA projections of OPEC production under the low and high demand scenarios except that for 2000, IEAs estimate of the production under a maximum sustainable capacity scenario (33 million b/d) IS substituted for high demand estimate of 28 million bid If OPEC production should be only 28 million b/d Middle East oil revenues would decline by 16 percent per annum in 1990.2000 SOURCE Based on International Energy Agency, World Energy Outlook Organization for Economic Cooperation and Development (Paris 1982) pp 23-26 80 460461 Dollar magnitudes converted to 1982 dollars using the GNP deflator (table B-3 Economic Report of the President March 1984) PAGE 567 566 l Technology Transfer to the Middle East forecasters to rethink t heir approaches to the forecasting problem, and they tended to move together in revising their forecasts downward. 5 Although this tendency for forecasts to change as the current price of oil changes may stir skepticism, recent forecasts nevertheless represent the best current professional thinking. With this caution in mind, OTA uses the IEA projections of world oil supply, demand, and price for 1985, 1990, and 2000 under two scenarios that combine plausible economic growth and oil price assumptions that would together produce high demand for oil, on the one hand, and low demand, on the other. Table 114 contains historical data and presents projections of Middle Eastern oil export revenues based on IEAs two scenarios. After quintupling from 1973 to 1980, Middle Eastern real oil export revenues fell precipitously from 1980 to 1983 (at an annual average rate of 30 percent). Real 1983 revenues were only 41 percent of those of 1980. OTA does not expect revenues to persist at this depressed level, however. Based on the IEA projections, OTA expects them to return to within the $185 billion to $197 billion per annum range by sometime in 1985, when the European economic recovery is complete. The rapid growth of revenues during this recovery period will reduce short-term pressure on the balances of payments of Middle Eastern countries. All forecasters expect rapidly increasing revenues to to be only temporary, however a reflection of the world economic recovery. For a worldwide survey of approximately 200 projections of the international oil price and of interregional oil and gas exports, see Alan S. Marine and Leo Schrattenholzer, International Energy Workshop: A Summary of the 1983 Poll Responses, The Energy Journal, January 1984, pp. 45-54. Most of the projections reported in this article were done in the years 1981-83 and few are derived directly from formal models. Between the 1981 and 1983 polls, the median oil-price projection for the year 2000 declined 18 percent (p. 51). For a historical analysis of how U.S. energy projections made since 1950 for years in the 1980s have changed over the period, see DOE, op. cit., ch. 7. Derived from the sources cited in table 120. This growth in real revenues can be expressed as an average annual rate of 22.5 percent. The revenue increases, of course, occurred mainly in 1973 and 1979 and real declines occurred in other years. A new era of slow growth or even slight decline of Middle Eastern oil revenues is expected to begin in the period beyond 1985 once recovery from the world recession has been completed. Even under the high revenue scenario, real export revenues in 1990 ($243 billion) recover only to the 1980 level, staying roughly constant at that level through 2000. Under the low revenue scenario, Middle Eastern oil export revenues never again reach the 1980 level. They increase slowly at 2 percent per annum during the 1985-90 period and even more slowly (at less than 1 percent per annum) during the 1990s. 7 In summary, OTAs Middle Eastern oil revenue projections can be stated as follows: Vigorous near-term growth of revenues as economic recovery in the industrial countries takes place; real revenues, nonetheless, remain below the level of 1980. Slow growth in revenues from 1985 to 1990 at 2 to 5 percent per annum. Stagnation in the 1990-2000 period. IMPACT ON TRAD E If exports of goods and services from the industrial countries to the Middle East grow relatively slowly, in the 2 to 5 percent per annum range that appears likely to be financed by oil exports from the Middle East, the new trade era will be completely different from that reIn IEA computer simulations, the economic growth and price assumptions are somewhat inconsistent in the 1990s. This is particularly evident in the high demand (low revenue) scenario, as the IEA points out, since the projections were based on the assumption that policies are unchanged. Changes in policies are, of course, difficult to forecast, but the IEA has also devised a reference set of plausible policy changes to promote inter-fuel substitution that would eliminate excess demand for oil in the 1990s at the scenario prices. An implicit assumption of the IEA high demand scenario, which OTA believes to be plausible enough to construct the scenario, is therefore that the prospect of higher oil prices will induce policy changes or conservation that, in absence of a serious supply disruption, will prevent prices from rising beyond the indicated levels. On the supply side, we use IEAs maximum sustainable capacity scenario in 2000 to indicate our belief that, given declining prospective oil revenues, Middle Eastern countries might attempt to increase production beyond the previously targeted levels and that this more plausibly sets an upper bound than IEAs low demand scenario for that year. PAGE 568 Ch. 14Future Prospects for Technology Trade 567 cently experienced. The contrast can be seen when one considers that Saudi Arabias and Iraqs imports grew at over 25 percent per annum during the 1973-82 period (table 13, ch. 4), and that both Egypts and Kuwaits grew at 17 percent per annum during the same period. Certain Middle Eastern countries have the option of increasing trade at a rate much greater than the rate at which oil revenues increase because large trade deficits can be financed out of foreign investment earnings, by a drawdown of the investments themselves, or by credit based on investments. Nevertheless, in an era when Middle Eastern oil exports are growing slowly, it is unlikely that imports would grow at the phenomenal rates of the past, The Middle Eastern oil exporters have recently demonstrated their ability to undergo massive current account deficits. The Middle East, as a whole, experienced a current account deficit of $12 billion in 1983, and the International Monetary Fund forecasts a deficit of like amount in 1984. 8 Whether or not the Middle Eastern oil exporters are willing to undergo such deficits is another question. Wharton Econometric Forecasting Associates expects the Saudi deficit to disappear in 1986. 9 If so, it will be the combined effect of the world recovery and the determination of the Saudi Government to live within current resources. Assuming that total imports of Middle Eastern countries over the next decade will be constrained by the growth of exports just as they are for most countries,) annual imports international hlf)netar} Fund, Jlor]d l~conon]ic Outlook. Washington, D. C,, 1984, table 17, p, 1H7. ~~$rharton I+lc{~non]etric Ftn-ecas Ling A ssociates, fifiddle F;ast I;conomic {)u[lfmk, ,.\priJ 1 98{1, p, 111, This is not to suggest a lock-ship relationship between export earnings and the ability to import, Countries can finance trade deficit~ in a number of ways; ne~erthpless, for most countries export rarning-t are the principal source of ability to import. We should now that l+;~pt and Kuwait are partial exceptions to this, F;glljts import ~owth will also depend substantial} ( jn t h{ growth of d{~elopment assistance. For Kuwait, in~;strnent income will be of roughlj equal magnitude tc~ oil re~enues, and growth in investment incornc will support growth in its imports, will be likely to grow 2 to 5 percent per year until 1990 and then stagnate or possibly decline thereafter. THE EFFECT OF OTHER SCENARIOS ON TRAD E OTA also considered the possibility of vastly different scenarios of oil prices and revenues and attempted to assess their impact on imports into the Middle East. A disruption scenario, such as the closing of the Strait of Hormuz or a revolution in Saudi Arabia, is a possibility. Since the world oil market is in a glut, and important non-Gulf producers, such as Nigeria, Mexico, and Libya, are standing by with excess capacity, such a disruption might have less of an impact on the price of oil than it would have had in earlier periods of market tightness. Nevertheless, disruption in the flow of oil from the Gulf could lead to a substantial increase in the price of oil, which would depend on the size of the actual loss of supply .1 This would reduce revenues of the disrupted countries but increase revenues of other Middle Eastern exporters. 12 What the net effect would be would depend on the characteristics of the disruption and the impact on the oil price, but a disruption in the Persian Gulf could negatively affect oil exports from four of the countries of major concern in this studyIran, Iraq, Kuwait, and Saudi Arabia. A major oil industr~ executite sees the political situation in the Middle East as the one thing that could ha~e a dramatic effect on the world oil market. New }rork 7inws, Sept. 12, 1983, p. D1. See also, Congressional Research Senrice, Wrestern \ulnerability to a Disruption of l)ersian (; ulf oil Supplies: U.S. Interests and Options, Mar. 24, 19X3: and [J. S. Congress, office of Technology Assessment. Strate~tic Re.~ponses to an fi~xtended oil Disruption, forth~.oming, 1984. We assume in the discussion that follows that Ix)th the shortand long-run price elasticities of demand are suhstant iaIl~r IPS,S than one, so that an increase in price r[~sults in an increase in r-exenues and ~ice-versa, A disruption scenario in~ml~ring nom~!iddle P;ast de\elopingcountry producers, notabl j. Mexico, Nigeria, 1 ncl~nesia, and Venezuela, can also he constructed, hut the potential impact of a disruption of an~ single count r} among them on the world oil econom} during the next decade is limited. 1 ~; A expects all such countrips together to produce onl~ about one-fifth of world oil supply in 1990, of which ahout one-third would be produced h} hlexico. A full disruption of hlexican supply would ha~e sig- PAGE 569 568 l Technology Transfer to the Middle East A scenario of a fall in revenues owing to a large fall in the price of oil is also possible, although it is difficult to estimate how likely it is. This scenario would be based on the judgment that the current price of $29 per barrel (1984 dollars), which is under market pressure at present, is not sustainable in the intermediate future, even with world economic recovery. 14 Such a judgment depends in turn on other judgments about a number of fundamental questions, such as whether OPEC really has the power to effectively determine total world output and the international oil price and whether large new low-cost producers might appear on the scene. If the $29 price should fall significantly, because OPEC loses power or for another reason, oil revenues would fall substantially in the short run. If the inevitable long-run increase in the real price of oil from that level should also be held off by large new low-cost production being placed on the market at the lower price, the low price and revenues could persist through the next decade and beyond. Neither of these widely divergent scenarios on the oil price would lead to total Middle Eastern oil revenues growing as rapidly in the future as they did in the 1970s. In the disruption scenario certain Middle Eastern countries would stand to increase revenues, but others would stand to lose. In the low-price scenario, all exporters would lose, and total Middle Eastern oil revenues would decline. 1s Thus, one is left with a reasonably strong conclusion, taking into account the unlikely scenarios, that Middle Eastern oil revenues are unlikely to increase rapidly in the next decade. Such slower revenue growth is also likely to result in slowly growing Middle East imports from the industrial countries. nificant impact on world oil prices and would increase Middle East oil export revenues, all else equal, but estimating this impact is beyond the scope of the present study. Significant real oil price declines in 1984 are indicated in an article on the international oil market (New York Times, July 7, 1984, p. 36) and add plausibility to this scenario. 15 See footnote 12. One implication of a new foreign exchange constraint on imports in capital-surplus countries is that Middle Eastern policymakers will have to face explicitly the tradeoffs between imports of consumer goods, raw materials, and capital goods for the first time in a decade. If machinery and equipment imports increase at a higher rate than total imports, imports of consumer goods and raw materials would have to increase at lower rates or might decrease. The mechanisms for limiting imports in the face of limited oil revenues are basically two: a decline in the value of the currency, which makes imports more expensive and therefore less demanded, or a foreign exchange allocation scheme that politically and/or administratively determines who will be given the right to import. A marked reduction in imports of consumer goods, with or without large increases in their prices, would probably have unpleasant political ramifications that governments may not be prepared to shoulder. The unexpected slowdown in foreign exchange growth, therefore, brings a new and unpredictable politics of distribution among competing uses and groups. THE IMPACT OF CHANGING ECONOMIC STRUCTURE ON TECHNOLOGY TRAD E The economic structure of the oil-exporting countries of the Middle East appears to be changing in several ways that will affect technology imports. The emphasis on investment in infrastructure 16 projects that has characterized the economic development and technology transfer activities, particularly, of the capital-surplus countries is starting to give way to a new phase in which more official emphasis is being placed on the development of the Infrastructure refers to the type of economic activity that directly or indirectly provides generalized inputs, usually services, for other enterprises, Physical infrastructure is conventionally defined to include transportation, communications, power, water, and gas services. Social infrastructure, a looser term, is usually used to refer to education, health and the legal/ regulatory apparatus of the society. Once defined as infrastmcture, the service involved is usually measured in toto, whether or not it is provided to enterprises or to consumers directly. PAGE 570 Ch. 14Future Prospects for Technology Trade l 569 manufacturing sector. In this transition, technology transfer will be increasingly important. Continued Infrastructure Development It would be a mistake to conclude that infrastructure development will not continue; the contracting emphasis may shift, however, to smaller and more specialized firms, with local firms playing a greater role. Each of the countries OTA has examined now has a large domestic construction industry. In Saudi Arabia, for example, the construction industry (foreign and local firms participating) has been making a contribution to gross domestic product (GDP) more than four times the contribution of the manufacturing sector. Kuwait continues to place heavy emphasis on telecommunications development. In Algeria and Egypt, considerable force seems to have developed behind continued airport expansion. In Iran and Iraq, destroyed or postponed infrastructure investments of all kinds may give rise to large new construction projects after the war. All countries continue to invest heavily in social infrastructure sectors such as medical services and education. Considering the infrastructure projects already completed or under way in the region, operations and maintenance requirements for existing projects will also be a growing source of demand for technology imports. Thus, for many different reasons, including domestic politics, infrastructure development will continue to be a stimulus for large imports of machinery and technologies even if the manufacturing sector begins to grow more rapidly in many Middle Eastern countries. 1 According Lo the .Ifiddle blast Economic l)ig~>st, the share of contracts awarded to local and other Middle I+; ast firms rose to a high of 22.9 percent of the total across all sectors in 1982 before dewlining to 15.6 percent in 1983. See Contracts A warded, Second Iialf, 1983, p. 1,5. In hlarch 198, Saudi Arahia issued a royal decree requiring that foreign construction companies subcontract 30 percent of their work to Saudi firms. mJ$harton l;conometric Forecasting Associates, hliddle East b;c<)nomic outlook, April 1983. The manufacturing sector includes a small nonpetroleum mining component. The Expanding Manufacturing Sector The expanding Middle East manufacturing sector will be a second important source of demand for technology imports in the next 15 years. All countries except Kuwait currently place substantial emphasis on official plans for the development of their manufacturingsectors, but they start from different positions. In Saudi Arabia and the other capital-surplus countries of the Gulf the desired development of the manufacturing sector must expand from a small base. In Egypt, which already has a sizable, diversified, but inefficient, manufacturing sector dominated by public enterprises, the government seeks to rationalize and reinvigorate it. In Algeria, Iraq, and Iran, all of which have smaller, but also inefficient, manufacturing sectors, the emphaPhoto credit Middle East Economic Digest Mercedes plant in Saudi Arabia PAGE 571 570 Technology Transfer to the Middle East sis (post-Iraq-Iran War) will probably be on both renovation and expansion. Despite the desires of planners, there is substantial uncertainty about how large machinery and technical services imports will be for Middle East manufacturing. The existing small manufacturing sectors of Saudi Arabia and Kuwait will probably maintain their current modest momentum of growth. (Real manufacturing output was growing at about 6 percent per annum in both countries in the early 1980s. 19 ) But imports of technology to support continued growth at this rate would not result in a surge of technology trade in the next decade comparable to what infrastructure development produced in the last. Manufacturing growth would have to be much faster to boost the demand for technology imports in the manufacturing sector into a large fraction of the total. Looking at the case of Saudi Arabiaby far the major U.S. trading partner in the region a number of considerations are involved in whether Saudi Arabia will develop a manufacturing sector rapidly enough to generate a significant demand for equipment and technical service imports in the next decade. The first consideration is technology absorption. Obstacles to absorption, discussed in chapters 2 through 10, are particularly pertinent to the development of the Saudi manufacturing sector. Manufacturing firms generally require greater adaptive technological capability than infrastructure enterprises do, and they also require marketing skills necessary to appeal to customers who usually have alternatives to any given companys manufacturing output. In relatively open economies, firms engaging in import substitution must be able to face competition from abroad. One critical area of uncertainty is whether technical and entrepreneurial skills will be adequate to meet these challenges. A second consideration affecting how rapidly the Saudi manufacturing sector will grow is whether other competing demands for foreign exchange will give way to demands from this new sector to finance technology and raw material imports. Perhaps the greatest unknown would be whether a primarily private nonoil manufacturing sector could compete successfully for scarce foreign exchange with government-led social and physical infrastructure projects. Third, in an era of greater foreign exchange scarcity, the riyal exchange rate is likely to decline, and this would have a number of effects. The most powerful, perhaps, would be an increased incentive to manufacture import substitutes, since competing foreign goods would now be more expensive. To be sure, so would the imported inputs of the new manufacturing enterprises, but since the government currently subsidizes the local inputs of Saudi manufacturing enterprisesfor instance, through subsidized credit and energy pricesa decrease in the exchange rate would undoubtedly still constitute a powerful incentive to expansion. Fourth, import-substituting enterprises may be able to convince the government to protect them with tariffs and other trade barriers. Such measures might lure erstwhile foreign exporters to Saudi Arabia to set Up local manufacturing enterprises. The relatively small Saudi domestic market for many commodities, however, would still limit investment opportunities. Despite all the uncertainties, however, the Saudi manufacturing sector is likely to generate a growing, if initially moderate, demand for technology transfer and trade. By the end of the next decade, even a moderately fastgrowing manufacturing sector (say, 7 percent per annum) would double its current size and probably its imports. Many of these observations apply in somewhat different form to other Middle Eastern countries. In Egypt, a relatively large and diversified manufacturing sector has been generating significant technology trade. The question about Egypts manufacturing sector is whether recent changes in economic policy will PAGE 572 Ch. 14-Future Prospects for Technology Trade l 571 allow it to continue to expand. Considering that Egypts industry is primarily in the public sector and that foreign investors have yet to enter the open door in any numbers, the chances of continued rapid expansion of the manufacturing sector in the future would not seem bright. It cannot, be ruled out, however. Despite long-standing conditions of bureaucratic inefficiency, Egypts manufacturing sector has been expanding relatively vigorously by world standards (10 percent per annum in real terms in the last few years). 20 Algeria, 1raq, and Iran have significant bu t not highly developed manufacturing sectors, which, however, are well behind Egypt's i n size and diversification. They are likely to generate fairly rapidly growing technology imports in the next decade, if the war betwee n Iran and Iraq is concluded, since manufacturing is being emphasized in current economic planning. It should be emphasized that even if the manufacturing sector does not develop as rapidly as it might, the Middle East will continue to constitute a large market for technology trade, as continuing investment is made in physical and social infrastructure and in other service sectors A burgeoning demand fo r manufacturing technology} is likely to be sat isfied at the expense of infrastructure rathc r than at the expense of military or consume r imports, in the context of the relative foreign exchange scarcity that we have forecast, i n light of the political sensitivity of military and consumer imports. In the conservse situation low growth in manufacturing--imports for in frastructure investment will be likely to tak e up a good deal of the slack, and the Middle East will remain an important market fo r Western technology. While the substitutabil ity between manufacturing and infrastructur e demand for imported technology will tend t o maintain the volume of technology imports, the composition will vary depending on the relative importance of manufacturing. PROSPECTS FOR SUPPLIER SHARE S PAGE 573 572 l Technology Transfer to the Middle East ination of past trends, quantitative high and low export scenarios are constructed. Underlying these are assumptions about the effect of politics (and other factors) on patterns of technology trade. On the one hand, prospects for expansion of supplier shares are limited by the desire of Middle Eastern nations to diversify suppliers for economic as well as political reasons. As discussed in chapter 6, for example, Algeria consciously sought to reduce dependence on France during the past decade. While the upper bound to supplier shares in a particular Middle Eastern country market is difficult to quantify, the existence of such an implied upper bound even when political relations between supplier and recipient are strong leads to the conclusion that it is highly unlikely that the United States will expand its position very much in either Saudi Arabia or Egypt. On the other hand, if political relations between supplier and recipient are severely strained, the supplier is unlikely to win or maintain an overwhelming share of the market. The sharp decline in trade between the United States and revolutionary Iran illustrates the negative effects of political disputes on trade. Persisting political hostility between supplier and recipient, it is hypothesized, will eventually preclude a large supplier share. However, the record of the past decade indicates that this assumption must not be interpreted too rigidly. The United States and Libya were major trading partners until the early 1980s. In addition, countries such as Iraq which have not always supported U.S. political and diplomatic positions have preferred Western, and in some instances U. S., technology. Over the course of a decade, however, overt political hostility between recipient and supplier can be expected to limit the suppliers shares. HIGH U.S. EXPOR T SHARE SCENARI O The U.S. market share in exports to the Middle East is strongly dependent on high individual shares for Saudi Arabia and Egypt. In both of these countries, the United States has a higher market share than Japan and West Germany, the two principal competitors of the United States in the region. In contrast to the United States, neither Japan nor West Germany has taken a strong political position in the region nor attempted to couple foreign policy with trade policy. It is possible to quantify an illustrative highshare scenario for the United States based on an assumption that the United States share equals the 1982 share of Japan, West Germany, or the United Stateswhichever was highest-in each Middle Eastern country. Thus, the United States keeps its (high) shares of the Saudi Arabian and Egyptian markets; takes on the German share in the Iran, Iraq, Libyan, and Algerian markets; and assumes the Japanese share in Kuwait and the Gulf kingdoms. (See table 32 for the 1982 country share data.) Applying these assumptions to 1982 exports, the United States overall Middle Eastern share would have been 32 percent of the total exports of the six major industrial countries rather than 22 percent. 22 This would appear to set an upper bound to what the U.S. share might become in the next decade under greatly improved performance in all countries where the United States did not have the larger share. In 1982 this superior performance would have increased U.S. exports by $7 billion over the $19.8 billion actually realized, and U.S. exports to the Middle East would have increased from 16 to 22 percent of exports to all LDCs. The question is whether there is a set of events that might make the high market share scenario come true. First and most important, the United States would have to maintain its preeminent share in Saudi Arabia and Egypt. *Note that these supplier share percentages (and most others cited in this chapter) are based on calculations including only the six major Western suppliers, and do not include total industrial country exports. To be specific, the 22 percent U.S. share was derived from the data in table 26 as follows: the U.S. share of total industrial country exports to the Middle East 17,9 percentis 22.2 percent of the 80.5 percent total for the six major industrial countries. PAGE 574 Ch. 14Future Prospects for Technology Trade 573 This, however, is somewhat unlikely. One reason for the U.S. preeminence in Saudi Arabia was the existence in the late 1970s and early 1980s of the mega construction projects, where the United States had a comparative advantage in technical and managerial services. In an era of foreign exchange limitation (by Saudi standards) and growing buyer sophistication, the proportion of smaller unbundled construction projects will probably increase and will probably result in a smaller share for U.S. contractors. Furthermore, if it follows the general pattern in the Middle East, Saudi Arabia will lessen its dependence on a single supplier. In Egypt, a policy that explicitly links aid policy to commercial policy could theoretically result in an expanded U.S. market share, especially of machinery and equipment imports (see table 100 inch. 12). However, this seems unlikely in view of Egypts steps toward rapprochement with the other Arab countries and concerns about dependence on the United States. The high shares of Japan and West Germany in certain countries probably result in part from their ability to stay aloof from Middle Eastern politics. However, it seems unlikely that the United States could similarly disengage itself from Middle Eastern politics without suffering considerable political costs, even if it desired to do so for commercial policy reasons. Therefore, it is unrealistic to expect that the United States might obtain the nonpolitical maxim urn share in all countries. If foreign economic policy were given more emphasis, however, it might be possible to increase the U.S. share slightly. Even if foreign policy disengagement is not vigorously pursued as an across-the-board policy, policymakers might decide to decouple trade from foreign policy in a few specific cases. For example, if a conscious decision were made to do so because of changed political or other circumstances, nations such as Iran, Iraq, Syria, and Libya, which have not been closely allied with U.S. diplomatic positions, could become stronger trading partners. Since it is not clear how much effect controls and antiboycott/corrupt practices policies have had on the U.S. market share independently of broader foreign policy, the magnitude of any decoupling effect is uncertain. OTAs judgment, based on subjective evidence, is that decoupling would have a small but significantly favorable effect on U.S. market share. Likewise, expanded efforts to represent U.S. business in the Middle East, including high-level support, as well as improvements in the foreign commercial service, might improve U.S. export performance by a small amount. An end to the Arab-Israel conflict would extricate the United States from the unhappy situation of trying to be friends with those at odds with one another. The effect on exports is hard to determine, however. Where exports from the United States have been reduced because of the conflict, the United States would gain; where a strong political position has resulted in a high export share and where this strong position would dissipate with Arab-Israeli peace, the United States might lose its share. On balance, there would probably be opportunity to expand the U.S. share. The U.S. market share would also tend to increase if international trade agreements reduced unfair export competition by other countries. For instance, if the new interest-rate provisions of the Organization for Economic Cooperation and Development (OECD) arrangement on officially supported export credits lead to less subsidization of exports by other suppliers, as they appear to be doing, 23 all three of the major suppliers may benefit, since neither West Germany nor Japan use large amounts of subsidized export credit. Regarding Egypt and Algeria, all suppliers have used aid and mixed credits in connection with exports, so it is not clear what impact a possibly emerging international agreement on mixed credits would have on the U.S. share of Middle East trade. that the new provisions will phase out most remaining export credit subsidies by July 1986, p. 4, PAGE 575 574 l Technology Transfer to the Middle East . -. --. All in all, the improved international trade rules that might be obtained would probably have only a minor effect on market share in the Middle East, because it seems unlikely that they could be tightened enough to fully hamstring those supplier governments intent on helping their exportersand because the aid/trade connection will always exist. Currency realignment would probably be relatively powerful over a period of time in changing the U.S. export share in the Middle East. If those who think that the dollar is substantially but temporarily overvalued compared to the yen and the mark are correct, U.S. exports in the Middle East and elsewhere could receive a significant price-effect stimulus in the future. In the last analysis, basic changes in the comparative advantage of U.S. exports z4 and in the economic growth rate of the United States will probably be the most important economic factors determining the U.S. export share in the Middle Eastas they will be in worldwide trade. Long-run changes in comparative advantage in the international economy are virtually impossible to predict, however. The leading industrial economies may become more similar, or the United States may keep its comparative advantage in exports that depend heavily on research and development and highly skilled professionals. To sum up, the factors that could raise the U.S. export share, which are specific to the Middle East, appear to be either not very likely or not very powerful. Those which could raise the long-run worldwide U.S. export share, including its share of exports to the Middle East, exceptionally fast U.S. economic growth throughout the period or shifts in comparative advantage, are together unlikely to raise the U.S. share more than a few percentage points except possibly in the very long run. The fundamental change in the relation of the United States to the international economy that would have to occur for the United States to have a materially larger export share worldwide because of these two long-run factors is probably not likely to occur, and it is certainly not predictable with any confidence. This leaves currency realignment as the factor most likely to give a material upward booston the order of a few percentage pointsto the U.S. export share in the Middle East and elsewhere. 25 Taking all these factors together, it does not appear likely that there will be a large increase in U.S. market share in the Middle East. LOW U.S. EXPORT SHAR E SCENARI O On a more pessimistic note, a low-export share scenario can be quantified on the arbitrary assumption that U.S. firms receive the lowest shares of the three major Western exporters. Under this assumption the United States would keep its 1982 share of exports to Iraq, Iran, Syria, and the Yemens; it would take Japans share of Egypt, Algeria, Libya, Jordan, and Lebanon; and West Germanys share of Saudi Arabia, Kuwait, and the Gulf kingdoms. For 1982, the resulting U.S. Middle Eastern export share would have been only 10.8 percent of the six major industrial country total, rather than the 22 percent it actually was. This less satisfactory performance would have decreased U.S. exports by $9 billion, and exports to the Middle East as a share of exports to all LDCs, all else remaining the same, would have decreased from 16 to 8 percent. In fact, such a precipitous fall in market share could result simply from reducing the U.S. share of exports to Saudi Arabia and Egypt to the levels of the other two major competitors. To demonstrate how dependent the overall U.S. share is on its high shares of exports to its major Middle Eastern trading partners, the following possibility is considered: if the United States had the West German share of exports to Saudi Arabia and the Japanese share of exports to Egypt, and mainAs an indication of how much difference a decrease in the value of the dollar could make, if the long-run price elasticity of the U.S. six industrial country export share was in the range of 0.5 to 1.0 (moderate sensitivity), the increased export share that would be induced by a 10 percent drop in the value of the PAGE 576 . .. Ch 14Future Prospects for Technology Trade l 575 ... tained its export share at the actual share level it had in 1982 for the other 13 countries, its regional share would have been only 12.4 percent of the total for the six major industrial countries in 1982, which is comparable to its share under the low export share scenario, and far lower than its actual share of 22 percent. Since such a high fraction of U.S. exports to the Middle East goes to Saudi Arabia, any factors that would lower either Saudi Arabias total imports more than those of other countries in the region or would lower the U.S. share of Saudi imports would be likely to reduce the U.S. regional share. Slower growing Middle East oil revenues in the 1980s and 1990s, and hence slower growing exports to the region, are, in fact, likely to affect Saudi Arabia disproportionately in absolute magnitude, since its import growth was so rapid in the 1970s. If exports to Saudi Arabia become a smaller fraction of total exports to the Middle East, all else equal, a smaller U.S. share will result. It is not unlikely, furthermore, that the U.S. share of the Saudi market will decline, for a number of reasons. With the passing of the mega project era, an area of particular U.S. comparative advantage may also have passed. If it wasnt comparative advantage but politics or established position in the Saudi market that resulted in a U.S. export share 36 percent higher than Japans in 1982, any dissipation in these latter factors would also be likely to result in a regression of the U.S. market share toward those of its major competitors. An active policy by the Saudi Arabian Government to reduce its dependence on any one supplier could have the same effect. Diversification could result from either dissatisfaction with U.S. policy in the region, or the desire to improve bargaining position by increasing competition among potential suppliers. Saudi use of trade as a weapon against the United States, during a period of rough bilateral relations, could be even more damaging to the U.S. share. On the U.S. side, a widening of national security controls to limit the export of technologies having both civilian and military uses would tend to reduce the U.S. share. Finally, regime change or political instability would raise the possibility of a full break in relations similar to the break with Iran (and for the same reasons), which in the latter case resulted in a current U.S. market share onetenth that of its share of the Saudi Arabian market. Considering all these possibilities, together with the competition from other firms for Saudi Arabian sales, OTA judges it to be more likely than not that the United States will have a smaller share of a Saudi market, which would result in a significant decline in the U.S. share of Middle Eastern exports. Likewise, analysis of the Egyptian market leads to similar conclusions, although the United States is in a stronger position to influence events there through its economic assistance policy. A decline in the U.S. export share to Egypt, though, would have less of an effect on the overall U.S. export share, since Egypt is a smaller market. An end to the Iran-Iraq War would probably increase the Middle Eastern market, but it is not clear that U.S. firms would necessarily benefit disproportionately from this trade opportunity. Dramatic political as well as economic changes would have to occur in order to expand U.S. export shares to the two countries percent of exports to Iran and 7 percent of exports to Iraq from the six major industrial countries in 1982sufficiently to soon bring them up to the 1982 regional figure of 22 percent. Furthermore, if U.S. exports remained a relatively small share of expanded Iranian and Iraqi markets, the U.S. regional market share would drop. In any case, it is difficult to anticipate events in these countries, and trade data are distorted by sales of U.S. products through third countries. 26 PAGE 577 576 Technology Transfer to the Middle East A sharp increase in unfair export competition from the other leading industrial countries might result in a decrease in the U.S. export share if U.S. policies were not changed to provide matching subsidies. Other important factors that could possibly reduce the U.S. share of exports to the Middle East are the fundamental ones that would affect the level of U.S. exports everywhere; for instance, low relative economic growth in the United States or disadvantageous shifts in comparative advantage that could result in perhaps lengthy adiustment periods decrease in the U.S. export share in the Middle East. These principally involve the potential for a fall in the U.S. position in Saudi Arabia and Egypt and the possibility of a continuing low U.S. share in post-war Iran and Iraq, which together could occupy a larger fraction of the regions imports. Other factors mentioned could also lead to a diminished U.S. share of exports. On a more optimistic note, only a decline in the value of the dollar holds clear promise for increasing the U.S. export share. OTA judges the low U.S. export scenario, therefore, to be more plausible overall than Thus, there appears to be a set of plausible the high export scenario given the events factors that could easily result in a significant underlying both. CONCLUSION: PROSPECTS FOR THE 1990 s Because a significant decline in U.S. market share seems considerably more likely than an increase, and because maintenance of the current share depends primarily on maintenance of the U.S. export, share with Saudi Arabia, where it maybe difficult for U.S. exporters to maintain their 35 percent 1982 share of exports from the six top exporters, we come to the overall conclusion that the U.S. export share in the Middle East vis-a-vis the other major industrial countries will probably decline in the 1980s. A not completely, improbable low-share scenario could see the U.S. portion drop by half. Instead of securing 22 percent of the exports from the top six industrial countries exporting to the Middle East (18 percent of total industrial country exports) the U.S. share might very well drop significantly. We also conclude that after a resurgence in 1984 and 1985, total industrial country exports to the Middle East will grow much more slowly in the 1985-2000 period than in the last decade because of very far-reaching changes in the oil economy. It seems plausible that over this 15-year period, exports to the Middle East will grow no faster than oil exports from the region. In the 1985-90 period this would mean a growth of imports of 2 to 5 percent per annum, if we use the range defined by our low and high revenue scenarios, followed by stagnating demand for imports in the 1990-2000 period. There are important implications of this pessimistic trade outlook for the likely nature of future technology transfer to the Middle East and the role of U.S. firms and organizations in it. Technology transfers may increasingly take the form of the provision by Western firms of more specialized technical services in smaller contracts (more often with local joint venture firms). As a result of slowly growing revenues and because of past experience, Middle Eastern buyers may become more selective in their purchases of foreign technology, and local government intervention may help them to negotiate favorable terms. The emphasis that Middle Eastern countries have placed on diversification of suppliers, for political as well as economic reasons, can be expected to persist. To the extent that financing terms are also important considerations for buyers, mixed credits and other extraordinary supports for exports may be utilized more extensively by suppliers, despite the fact that the subsidy element has been greatly reduced in standard official export credits. These various trends suggest that technology trans- PAGE 578 Ch. 14Future Prospects for Technology Trade l 577 fers will involve more two-way interaction, in which suppliers are required to tailor transfers to the specific needs of Middle Eastern buyers. While none of these trends identified above promises by itself to materially alter the volume of trade, they do point to changes in its nature and in the mechanisms for technology transfer. OTAs analysis in this chapter indicates that U.S. firms and organizations will probably not be able to substantially expand their positions in this changing Middle East market context, and that they will be challenged to maintain their shares. While there is no question that the United States will remain an important supplier country, the issue is whether the apparent comparative advantage that U.S. firms had in large-scale technical service exports during the past decade can be converted into a continuing advantage in smaller and more specialized exports of technical know-how, training and management that will contribute to a growth of indigenous technological capability in the region. PAGE 579 CHAPTER 15 Options for U.S. Policies Affecting Technology Transfer PAGE 580 Contents Page POLICY TRADEOFFS. . . . . . . . . . . . . 581 Controls v. Commerce . . . . . . . . . . . . 582 The Role of Technology Transfer in Foreign Aid . . . . . . 585 Economic Assistance and Commercial Promotion . . . . . . 586 The Costs and Benefits of Commercial Promotion Policies . . . . 587 The Promotion of Technology Transfer Through Commercial Policies . . 589 POLICY PERSPECTIVES. . . . . . . . . . . . 589 Perspective 1: Selective Use of Technology to Promote Political Interests . 590 Perspective: Decouple Commercial Technology Trade From Political Interests. 591 Perspective; Promote Civilian Technology Transfer . . . . . . 592 Conclusion . . . . . . . . . . . . . . . 593 PAGE 581 CHAPTER 15 Options for U.S. Policies Affecting Technology Transfer The United States has no coherent policy governing civilian technology transfers to the Middle East, despite the fact that Congress has considered a number of proposals to establish one. In the future, the Islamic Middle East will remain an important market for civilian technology trade, even if oil revenues grow more slowly than they did in the 1970s. The question is whether the United States can or should attempt more consistently to affect technology transfers to the region. The purpose of this chapter is to identify, in light of OTAs research, options available to policymakers in the next decade. Although U.S. policies have not been systematically formulated to influence technology trade, many nevertheless do affect technology transfer. As analyzed in chapter 13, three major objectives of such policies have been commercial promotion, assisting countries in their development efforts, and limiting certain types of technology exports for military and political reasons. In recent years, these various objectives have all been pursued in an ad hoc fashion. The result has been an inconsistent See, for example, House Committee on Science and Astronautics, Subcommittee on International Cooperation in Science and Space, International Science and Technology Transfer Act of 1974, hearings, May 21-23, 1974. set of policies affecting technology trade and transfer and an expansion of controls on exports. The dilemma for policy makers is that by pursuing one objective it becomes less possible to maximize others. Nevertheless, the absence of a strong consensus on priorities has resulted in this ad hoc approach. Because U.S. technology trade with the Middle East has been strongly influenced by politics in recent years, it is unlikely that piece meal changes taken with the goal of enhancing any one of the three major policy objectives would have strong effects on overall patterns of technology trade and transfer. Only a more consistent foreign policy perspective, which would drive policies affecting trade and transfer, would be likely to affect significantly the overall direction and nature of technology trade. This chapter outlines three policy perspectives that could be promoted in order to achieve the more ambitious goal of strongly affecting patterns of technology trade and transfer. These include: 1) selective use of technology to promote political interests; 2) decoupling technology trade from politics; and 3) promoting civilian technology transfer. OTAs analysis leads to the conclusion that it would be difficult to establish a consistent technology trade policy without a consensus on overall foreign policy goals. POLICY TRADEOFF S Congress has an interest in ensuring that to military and foreign policy goals. While economic assistance programs involving techeach of these objectives has its virtues in the nology transfer are effective, that U.S. firms abstract, the dilemma has been that steps reare free to compete on equal terms for sales quired to strengthen one require tradeoffs with in developing country markets, and that civilothers. In the discussion that follows, major ian technology transfers do not run counter tradeoffs are reviewed. 581 PAGE 582 582 Technology Transfer to the Middle East CONTROLS V. COMMERC E During the past decade, controls on civilian technology exports have been expanded in order to achieve a variety of military and political goals. The institution of controls on exports of advanced civilian technologies generally implies a tradeoff with commercial interests. The essential debate is therefore between those who favor restricting exports for military or political reasons and those who point to the chilling effects on trade. The use of controls heightens the political dimension of technology trade, particularly when individual nations are singled out for special treatment in the absence of an international crisis that would obviously justify such measures. Controls of all types are susceptible to criticism on two grounds: disproportionate commercial sacrifice and ineffectiveness in achieving political goals. On the other hand, proponents of controls view the effort to achieve national security and foreign policy aims as worth the commercial sacrifice. In some instances, where it would be inappropriate for the United States to use military force to achieve political objectives, proponents of controls argue that trade is a valuable lever, and sometimes the only arena in which action can safely be taken. In their view, even if controls are not completely effective in achieving desired results, they make the position of the United States clear. On the other hand, opponents of controls point to what they see as the limited effect that restrictive U.S. export policies may exert in the absence of coordination with other Western supplier governments. Because a number of suppliers can generally provide comparable advanced civilian technologies, the United States is not in a position unilaterally to control access. OTAs research indicates that West European nations and Japan are not willing to institute controls on civilian technology trade with the region. 2 How Japanese and West European perspectives on export controls on trade with the Soviet bloc are analyzed in Technology and East-West Trade (Washington, D. C.: U.S. Congress, Office of Technology Assessment, OTA-ISC-1O1, November 1979) and Technology and EastWest Trade: An Update (Washington, D. C.: U.S. Congress, Office of Technology Assessment, OTA-ISC-209, May 1983). ever, proponents of controls would argue that the United States should not allow other nations, even allies, to dictate its policies. As discussed in chapter 13, U.S. policymakers have introduced controls of various types affecting technology transfer to the Middle East. Some of these controls apply only to trade with Middle Eastern countries, while others apply more generally to exports worldwide. The United States has used controls on trade more often than any other nation, and these controls have been deployed more frequently with each passing decade. 3 The expansion of controls on trade with various Middle Eastern nations has been particularly noticeable in recent years. National Security Controls National security controls, which restrict militarily significant exports to Soviet bloc nations, affect Middle East nations (except Libya 4 ) as they do all nations not included in the Soviet bloc. Few question the need for national security controls or those covering military exports, but debates continue concerning the definition of military significance and concerning the treatment of non-Communist nations. Congress has considered a number of proposals to extend controls governing dual-use items (i.e., products with both military and civilian uses) such as large-scale computers, certain kinds of materials testing equipment, and items used for the production of special nuclear materials. These high-technology, dualuse items are currently included on the Commodity Control List (which incorporates the Nuclear Referral List), and official approval is required for export. While controlling the export of items that have a direct or sole mil- PAGE 583 Ch. 15Options for U S Policies Affect/rig Technology Transfer 583 itary use poses no serious controversy, there is much disagreement about inclusion of dualuse items. Experts disagree about how important such dual-use items are to military development and whether denial will seriously disadvantage the Soviet Union. One proposal under consideration in Congress would prohibit the sale of dual-use items to any nation not a signatory to the Nonproliferation Treaty (NPT). Only a small percentage of dual-use license applications (about 6 percent) have been granted for exports to Islamic countries in the Middle East. 5 It is unlikely that institution of such restrictions on dual-use items would result in denial of access to recipients, since in most instances other supplier nations are in a position to sell them, but the institution of such controls could be expected to reduce U.S. exports to some Middle Eastern countries. Some wish to extend national security controls to non-Communist nations because U.S. technology can flow through third countries to the Soviet Union, Proposals to strengthen the controls on transfer of many items to all nations worldwide acknowledge the potential threat to the United States of technology diffusion through third countries. However, such proposals would require a considerable expansion of government efforts, and the burden of more stringent controls on licensing would fall heavily on multinational corporations. It should be noted, however, that there is strong support for the national security controls currently operating. For example, there has been little debate about whether they are appropriate in discussions of renewal of the Export Administration Act; disagreement has arise n primarily about how such controls could be perfected or extended. Nonproliferation Controls With respect to nonproliferation controls, the United States is not a major supplier of nuclear equipment to Islamic countries in the Middle East. Proposals to extend controls to dual-use items, as discussed above. could specifically affect dual-use exports to those nations not signatories to the NPT, such as Algeria, Israel, and Saudi Arabia. In addition, decisions concerning supply of spare parts and nuclear technologies to nations, such as India, (which in the years ahead may become new suppliers to Middle East countries) may also be relevant over the long term. Debates continue between those who argue that the United States must carry on a dialog with such nations (and supply nonsensitive equipment to them) and opponents who question the wisdom of providing any type of assistance to nations that have not accepted full-scope safeguards and may become new suppliers of nuclear technology in the years ahead. Chapter 9 identified specific measures that could strengthen incentives for reducing the spread of nuclear weapons in the Middle East. Most of these measures would depend on cooperation with other supplier nations. These include agreements among suppliers to limit exports of highly enriched uranium and laboratoryscale sensitive facilities, an d strengthening of safeguards. including measures such as improved remote-sensing monitoring devices. In addition, the United States could unilaterally adopt some measures that could affect nuclear weapons proliferation in the region. The major controversy is between those who oppose any type of nuclear cooperation with nations in the region, and those who argue that the United States can best influence recipient countries by assisting them in peaceful nuclear programs. Those in the first group favor hindering by any means available the growth of nuclear knowledge and infrastructure, even when the relationship to a weapons program is indirect or remote. They therefore PAGE 584 584 l Technology Transfer to the Middle East support the use of strong measures, including prohibitions against Export-Import Bank financing of nuclear exports, restrictions on foreign students studying in the United States, and withdrawal of support for organizations such as the International Atomic Energy Agency over issues of political principle, such as the refusal to accept Israels credentials. In contrast, those who favor providing assistance see it as a powerful way to achieve nonproliferation goals. The bilateral nuclear cooperation treaty with Egypt is, in their view, a major accomplishment in that strict nonproliferation provisions are included in exchange for assistance from the United States. OTAs research suggests the merit of an approach based on the assumption that the United States must deal realistically with the fact that many developing nations see commercial nuclear power as an important part of their development plans. Both proponents and opponents of expanded restrictions on nuclear exports would view increased efforts to assist developing countries in alternative energy development, including solar energy, as acceptable. Rigid policies relying exclusively on denial of all nuclear technologies can be expected to reduce U.S. influence on the nuclear programs of Middle Eastern nations. Foreign Policy Controls In contrast to the situation with respect to existing nonproliferation and national security controls, where there is general support for the controls themselves and where disagreements focus on whereto draw the line between military and civilian items, there is considerable disagreement as to whether foreign policy controls are at all effective. These types of controls have been used to restrict exports of aircraft of various types to nations supporting terrorist activities, including Syria, Libya, the Peoples Democratic Republic of Yemen, Iran, and Iraq. 6 In addition, controls on trade with Foreign policy controls against Iraq are no longer in effect. On Jan. 23, 1984, Iran was added to the list of nations included to Section 6(i) of the Export Administration Act of 1979 Iran, Federal Register, vol. 49, No. 15, Jan. 23, 1983, p. 2836. Iran were used during the hostage crisis. Unlike the other types of controls discussed above, foreign policy controls have been applied selectively to Islamic countries in the Middle East. Proponents of these controls view them as, at a minimum, important for their symbolic value in clarifying the opposition of the United States to regimes supporting terrorist activities. However, the actual effect of these controls in injuring or pressuring the target is often limited because other supplier nations can step into the breach and because the target countries are, in most cases, not friendly with the United States and may therefore prefer to trade with other nations. Foreign policy controls can be effective when other OECD nations also restrict exports or support U.S. policies in other ways. Some observers believe that this was the case with foreign policy controls instituted against Iran during the hostage crisis. Opinions differ about the effects of controls used against Libya. Because the President has considerable discretion in instituting these controls, controversy inevitably surrounds their usage. In no case has the application of such controls alone led to the clear achievement of objectives such as termination of terrorist activities. While the precise effects cannot be measured, such controls certainly put a chill on U.S. trade relations with the targeted countries and may increase doubts about the reliability of the United States as a supplier. Given the availability of aircraft from other suppliers and the other problems mentioned above, it appears unlikely that foreign policy controls can be expected to restrict access severely to advanced civilian equipment, and it is doubtful that such controls will substantially modify the behavior of nations to which the sanctions are applied. Nevertheless, these controls do limit involvement by U.S. firms in certain nations, and they have been viewed as one of the few available ways that the United States can publicly im7 A recent analysis by Hufbauer and Schott, cited earlier, concluded that the sanctions imposed against Iran during the hostage crisis were comparatively successful, while the result was doubtful in the case of sanctions used against Libya. PAGE 585 Ch. 15Options for U.S. Policies Affecting Technology Transfer l 585 pose sanctions on nations for supporting terrorism. Antiboycott and Other Policies Regulating U.S. Business Overseas As with foreign policy controls, it is impossible to assess the precise trade effects of other types of regulations affecting U.S. business operations in the Middle East, such as antiboycott regulations and the Foreign Corrupt Practices Act. Both of these policies have been strongly criticized by the business community as unique U.S. policies that disadvantage U.S. firms vis-a-vis their competitors. Because it has been implemented solely in the Arab boycott of Israel, the antiboycott policy has been opposed by businessmen and others who see it as reducing U.S. commercial interactions with Islamic countries. In addition, opponents criticize U.S. opposition to the boycott as inconsistent with U.S. export controls that aim to use trade as a lever. The proponents, in contrast, say that antiboycott policies preserve U.S. commitment to the principle that controls should not be extended to third parties. They also maintain that the actual commercial losses from the boycott are minimal, noting that Arab nations often waive boycott regulations when they have special need for a particular kind of equipment or technology. OTAs research suggests that efforts to extend controls can best be focused on improving nuclear nonproliferation controls and those covering military exports. Expanding other types of controls, such as foreign policy controls which apply solely to Middle East countries (either to cover more nations or to include additional items), would certainly heighten the political dimension of technology trade, and it is not clear that they would prove effective in meeting goals such as reducing terrorism. Placing primary emphasis on nonproliferation and national security controls could increase the predictability and maximize the effectiveness of controls. Only under unusual circumstances, such as the Iranian hostage crisis, when the positions of other Western supplier nations were strongly unified and supportive, has there been evidence that controls on civilian trade have contributed to achievement of the desired foreign policy goal. Even in that case, however, other types of measures were employed, and the exact contribution of foreign policy controls is not clears THE ROLE OF TECHNOLOG Y TRANSFER IN FOREIGN AI D Two Middle East nations, Egypt and Israel, are the largest recipients of U.S. economic assistance of any nations worldwide. The importance of U.S. Government-supported assistance programs, including those designed to promote technology transfer, will probably increase if economic growth proceeds at a slower pace than was the case in the the 1970s in the Middle East. Not only the lower-income nations, but the middleand higher-income Middle East nations as well, seek to promote technology absorption in order to build indigenous capabilities. At the most general level, the major points of disagreement concerning development assistance pertain to allocation of scarce resources and the potential for political backlash. Economic Assistance and Political Influence There is no agreement concerning the relationship between economic assistance and U.S. political influence. Some worry that U.S. assistance programs may not always win friends, but may lead to resentment by recipients. On the other hand, many others argue that economic assistance is a critical element of U.S. foreign policy in the Middle East. More specifically, the express desire of many Middle Eastern nations to acquire Western technology indicates that economic assistance involving technology transfer can be a particularly important aspect of U.S. foreign policies. OTAs research confirms that effective development assistance programs can assist the United States in winning friends and counter6 0ther policy instruments, such as quasi-military actions taken in an attempt to rescue the hostages, were used in conjunction with the trade sanctions. PAGE 586 586 l Technology Transfer to the Middle East ing Soviet bloc presence. At the same time, however, it is important to temper expectations of political gain with a recognition that political backlash can also result. Recipients sometimes resent the advice given by foreign aid officials whose job it is to see that funds are spent effectively. In addition, if programs grow rapidly, recipients may find themselves facing economic problems associated with heavy reliance on foreign subsidies. Despite these problems, because nations of the region generally view Western technology as superior to that of the Soviet bloc, technology transfers from the United States are clearly important elements in the development strategies of these countries. Technology Transfer v. Other Goals of Economic Assistance A case can be made that development assistance programs emphasizing technology transfer contribute more effectively than other types of economic assistance to the long-term economic well-being of the recipient nations. In contrast to simply giving away food or commodities, programs involving technology transfer may have longer term effects because they assist recipients in developing their own capabilities. Such programs have the potential for fostering the development of lasting human relationships between individuals in recipient and supplier countries. On the other hand, programs involving technology transfer require the expenditure of considerable resourcesfinancial and organizational. It is too much to expect that all aid programs be directed at promoting technology transfer in a country like Egypt, where aid officials are pressed to expend the funds allotted. If the goal is to promote more extensive technology absorption, doubling the aid budget alone would not necessarily achieve desired results. Small-scale, focused programs, moreover, may contribute significantly to technology transfer in key sectors. While some argue that recipient countries should be given more flexibility in the use of aid funds, programs involving technology transfer require extensive coordination between individuals from recipient and supplier countries. Continuing involvement by the donor is a prerequisite for such programs, but such involvement in the host country may lead to the types of resentment mentioned above when programs grow so rapidly that they cannot be effectively managed. ECONOMIC ASSISTANCE AND COMMERCIAL PROMOTIO N Economic assistance programs clearly provide export opportunities for firms of supplier countries. Other supplier countries, such as Japan and West European countries, acknowledge and attempt to capitalize on this linkage more than the United States has. Nevertheless, in practice, U.S. economic assistance has also provided export opportunities involving equipment and technical services for U.S. firms. Indeed, procurement regulations ensure that U.S. firms are the major suppliers, sometimes despite the fact that other suppliers can provide lower cost goods. At the crux of disagreements is the fear on the part of some that aid goals would be distorted by a more conscious linkage of aid to commercial promotion. U.S. assistance policies have, in recent years, emphasized helping the poorest nations meet basic human needs, aims which are primarily humanitarian. Those who support this general thrust worry that more extensive involvement of U.S. business, in programs such as private sector initiatives, may skew assistance to those projects most in the interest of U.S. business, and not necessarily to those most likely to benefit the average citizen in the Middle East. On the other hand, many note that in practice, particularly in procurement regulations, U.S. aid benefits U.S. business. Since many other suppliers are willing to combine aid with commerce in mixed credits and other areas, such as bilateral technical assistance agreements, they say that the United States ought to do likewise. OTAs research indicates that more explicit recognition of the links between commerce and assistance could at least contribute to a better understanding of the interrelationship. Because the PAGE 587 Ch. 15Options for U.S. Policies Affecting Technology Transfer l 587 technology transfers most important for the user industrial and service firms are normally provided by private sector U.S. firms, policies designed to enhance the participation of U.S. private sector (including nonprofit) organizations could be particularly important. A related area of dispute concerns the question of whether U.S. aid should be directed solely to the poorest countries, or whether middleand even upper-income developing countries are appropriate recipients. In recent years, the view that assistance should be concentrated in those nations in greatest need has been prominent. Some, who view philanthropic goals as primary, question the appropriateness of aid to richer countries as incorrect not only in view of budgetary constraints, but also on the grounds that commercial interests may take precedence. Others observe that, particularly in the Middle East, many nations enjoying comparatively high levels of gross national product per capita nevertheless need technical assistance to expand their productive manufacturing facilities. Such assistance can be and is, of course, purchased from private U.S. firms. Other West European supplier governments have in some cases promoted technical assistance programs in the oil-rich as well as the lower-income nations of the region. OTAs research suggests the merit of programs promoting technology transfers in industry and services in addition to those that already exist in areas such as health care and agriculture. Programs focusing on the needs of the end-users of technology in manufacturing and service systems are especially critical. In particular, assistance in technology selection and the setting of performance standards, specialized technical manpower training programs, programs designed to improve maintenance and servicing of facilities, and efforts designed to adapt technology to local requirements are needed in countries throughout the region. Those programs responding to the concrete needs of the organizations and firms that carry out the production processes stand the best chance of providing tangible gains and of leading to self-sustaining activities. Such efforts are essential for all middleand upper-income Middle Eastern countries, as well as for those not rich in oil. THE COSTS AND BENEFITS OF COMMERCIAL PROMOTIO N POLICIES The benefits of commercial promotion policies are primarily economic and accrue most directly to the exporting firms, while the costs are sometimes calculated in political as well as economic terms. The major disadvantages of commercial promotional policies are that in some cases they may run counter to foreign policy goals, and they involve costs to the U.S. taxpayer. Those who oppose policies promoting technology trade with Middle Eastern countries may do so for a number of reasons. Depending on the type of export involved, they may judge that acquisition could contribute to the military power of an adversary or potential adversary. In addition, some worry that the involvement of U.S. firms overseas may lead to movement of production offshore so as to disadvantage U.S. labor. Others wish to reduce U.S. interactions with nations whose foreign policy positions do not conform to their definition of U.S. interests. In addition, some have also opposed promotional policies on the grounds that the U.S. taxpayer should not be asked to bear the costs of programs seen as benefiting only a few firms. Generally, supporters of promotional policies see commercial interactions as the foundation for peaceful relations between countries. They see the expansion of U.S. export controls during the past decade as setting a uniquely negative context for technology trade, which may lend U.S. firms a reputation as unreliable suppliers. Supporters of promotional policies note the more extensive policies of other supplier countries and argue that the U.S. Government should do more to support U.S. exports so that U.S. firms can remain competitive. In their view, the movement of production offshore cannot be stopped, since it occurs in conjunction with technological change and shifts in comparative advantage. Finally, proponents see Government support PAGE 588 588 Technology Transfer to the Middle East for exports as beneficial not only to the specific exporting firms, but also to the U.S. economy more generally. In their view, the United States can only maintain a technological lead by continuing to innovate and compete suc cessfully in world markets through both sale s of products and technology As discussed in detail in chapter 13, it is not always easy to identify U.S. economic inter ests, nor is it possible to equate them with the interest of particular firms. Large U.S. firm s have been prominent as project managers and providers of technical services. While man y smaller firms are involved as subcontractor s and their exports improve the overall nationa l balance of payments, large firms generall y have been most willing and able to take on the risk incurred when a firm commits itself to the ongoing process of technology transfer in a developing country. In addition, large Middl e Eastern projects are normally multinational involving U.S. firms along with those fro m many nations. This trend of growing tie-in s with foreign competitors is apparent in man y research-intensive industries worldwide an d certainly not unique to business operations in the Middle East. The real question, however is when and how the U.S. Government should promote commercial technology trade an d transfer. This dilemma is particularly appar ent when two or more U.S. firms compete fo r contract awards because commercial officer s are expected to maintain neutrality in thei r representation efforts Debates over export subsidies illustrate dis agreement concerning not only who benefit s and who loses from promotional policies, bu t also tradeoffs between short-term gains aris ing from mercantilist policies versus long-term benefits of a free trading system. OTAs re search confirms the widely held view tha t many Western supplier countries have devel oped more extensive commercial promotio n policies than those of the United States. Be cause the United States has been historicall y committed to pursuit of an open internationa l trading system, many are reluctant to adop t an approach that would require emulation o f the extensive subsidies offered by foreign supplier governments. On the other hand, a growing number of observers have suggested a variety of measures that would provide the U.S. Government with expanded capability to offer export credits. In their view, the U.S. Government should not stand by while other supplier nations provide more extensive supports for their firms. Debates concerning subsidies are sometimes carried out in extreme terms: whether to emulate foreign supplier programs or to withdraw. Put in other terms, there is a perceived tradeoff between the goals of expanding U.S. exports and the adverse consequences on all countries of increasing protectionism. Despite the apparent tension between these goals, a number of less dramatic measures could be employed without jeopardizing multilaterally agreed-upon trade rules. The lending authority of the Export-Import Bank could be expanded to match foreign subsidies within the limits internationally agreed on by the OECD and the GATT (General Agreement on Tariffs and Trade). Similarly, the United States could continue to work to expand international agreements covering domestic subsidies and trade in services and to identify cases of unfair subsidies offered abroad in order to call them to international attention. OTAs research indicates that improvements in routine business representation overseas, coupled with measures to improve the capability of the U.S. Government to collect and analyze information about foreign trade and investment, are additional concrete steps that would assist exporters. Thus, there are a number of alternatives open to policymakers short of emulation of the more aggressive financing policies of other supplier nations. OTAs work suggests that such moderate measures that do not constitute aggressive mercantilism would be significant in supporting U.S. business overseas. They are, however, unlikely to change the competitive positions of U.S. firms in Middle Eastern markets quickly or dramatically. PAGE 589 Ch. 15Options for U.S. Policies Affecting Technology Transfer l 589 THE PROMOTION OF TECHNOLOGY TRANSFER THROUGH COMMERCIAL POLICIES Few commercial policies have been designed with the express purpose of promoting technology transfers. One reason is the concern that technology transfers promote the development overseas of industries that will compete with U.S. firms and lead to loss of jobs in the United States. In contrast to export premotion, programs supporting technology transfer imply a longer term involvement of U.S. firms. Some see this involvement primarily as commercially beneficial, while others worry about investment risk. The one U.S. agency which assists potential investors by providing insurance and other services is the Overseas Private Investment Corporation (OPIC). OPIC in its reviews of applications for insurance considers the extent to which commercial investments in developing nations will result in technology transfers. Congress has also required OPIC to take into account the employment and trade effects on the United States of potential projects. OPICsupported projects reflect consideration of a variety of U.S. policy goals. U.S. investors are rightly cautious about investing in foreign nations; OPIC insurance guarantees could be enlarged if policy makers decided to promote technology transfers. In that situation, a number of other options could be considered. For example, firms exporting technical services could be assisted in other ways: U.S. economic assistance funding could be provided to support the technical training component of certain projects viewed as particularly worthy, or special tax treatment could be provided to firms exporting technical services required for technology transfer to developing countries. U.S. engineers worked with Saudi project managers in planning and scheduling construction at King Faisal Hospital in Saudi Arabia. The project was supported by OPIC In addition, bilateral trade and investment treaties could be considered. OTAs research showed that, among the technology transfer sectors examined, only technology transfer in petrochemicals will contribute to the growth of a Middle Eastern export industry, By far, the great majority of technology transfers to date stimulate the growth of industries and services producing for local Middle Eastern markets. Over the long term, however, Middle Eastern countries will produce more goods and services for export, and technology transfers will contribute to the growth of this export capability. In the last analysis, however, decisions taken by U.S. firms themselves more importantly influence their export success than do Government policies. Nevertheless, commercial promotional policies can provide a supportive climate for exports and technology transfers. POLICY PERSPECTIVE S Considering the tradeoffs discussed above, economic interests has been a pervasive it is not surprising that a coherent technology theme. Actions have been taken simultaneoustransfer policy has not been established. In ly to achieve differing policy goals. New measparticular, the tension between political and ures could be introduced to further any one of PAGE 590 590 l Technology Transfer to the Middle East Desert scene three general goals (commercial promotion, development assistance. safeguarding U.S. security), but it is unlikely that such measures would alter dramatically the volume or nature of U.S. technology trade with the region, Without an overarching consensus reconciling political and economic interests, the effects would remain inconsistent. Policy makers may wish to alter substantially the scope and nature of commercial technology transfers to the Middle East by developing a more consistent perspective on technology trade and transfer to the region. 1 n order to do so, a new understanding of the role of technology transfer in (J. S. foreign policy would have to be established and widely accepted. Three general perspectives are outlined below. In each case, specific policy measures of various types (development assistance, export controls, and commercial promotion) could be selected. PERSPECTIVE 1: SELECTIV E USE OF TECHNOLOGY T O PROMOTE POLITICA L INTEREST S The crux of this strategy is to provide friends and deny enemies access to U.S. technology. This policy perspective would make technology trade the servant of U.S. foreign policy toward the Middle East. The U.S. Government would extend and use controls selectively to impose sanctions on nations whose PAGE 591 Ch. 15Options for U S Policies Affecting Technology Transfer 591 policies run counter to those of the United States. All of the controls mentioned earlier could be used to deny access to U.S. technology to unfriendly nations, but technolog y could be used systematically as an incentive as well as a deterrent. As a complement to the policy of denial, the Government could reward certain nations by providing them with advanced technologies. Exceptions to overall export policies could be used to single out friendly nations for special treatment. Sales of dual-use technologies, in particular, would be promoted officially by the Government. Development assistance pro grams could be a major vehicle for providing rewards, with programs involving technology transfer receiving special emphasis. Commercial promotional programs involving U.S. businesses would be strongly tied to foreign policy goals. Thus, whether used as stick o r carrot, civilian technology would be employed for furthering U.S. foreign policy goals. This option has the advantage of placing major emphasis on U.S. foreign policy interests that are of central importance to policymakers. The attraction of this policy option is that it capitalizes on technology as a potentially effective instrument for influencing the behavior of key actors in the region. Furthermore, in cases where other policy measures are unavailable or inappropriate, this option would allow for systematic use of denial. On a more positive note, the provision of advanced technologies to nations closely associated with U.S. foreign policy positions could significantly enhance their regional and global stature. Such a policy option has some drawbacks, however. The success of this option depends on accurate forecasts of foreign policy orientations of Middle Eastern countries. Because political alignments shift with regime changes and developments in the region, one danger would be sudden interruptions of technology transfers due to political shifts, probably requiring U.S. Government compensation to firms involved. This approach would place considerable burdens on the U.S. Government to oversee commercial technology trade an d might result in buyers simply turning to other suppliers. OTAs analysis of impacts of technology transfers indicates the severe difficulties in anticipating in advance the effects, particularly political and social effects, of technology transfers. This policy option could also be impeded by disagreement within the Government or the larger society about the appropriate U.S. policies toward specific nations. It would certainly politicize even more strongly U.S. technology trade and would run the risk of jeopardizing relations with nations not closely associated with U.S. positions, yet not closely allied with unfriendly countries. PERSPECTIVE 2: DECOUPL E COMMERCIAL TECHNOLOG Y TRADE FROM POLITICA L INTEREST S Policy makers may wish to reduce the linkage between politics and economics which has distinguished policies of the United States from those of other supplier nations. This option is based on the assumption that technology trade with all nations, regardless of their political relations with the United States, should be vigorously promoted. U.S. political and diplomatic strategies could proceed independently, while trade in nonmilitary items would be permitted with any nation in the region where U.S. firms judged the market opportunity worth the risk of investment or involvement. This would require elimination of controls for nonmilitary exports designed specifically to influence exports to the region (foreign policy controls and the antiboycott program). Under such an approach, U.S. policies would more closely resemble those of other suppliers, specifically Japan and Western European countries. The advantage of such a policy option would be to expand commercial opportunities and to eliminate the tension that has existed between commercial and military/political issues. A major attraction of this perspective is that it would put U.S. firms on a more equal footing with their Japanese and West European competitors, and possibly lead to the expansion PAGE 592 592 l Technology Transfer to the Middle East of U.S. exports to Middle Eastern countries that are not currently major trading partners. In addition, it would place fewer demands on Government officials to oversee technology trade and provide opportunities for establishing a presence in nations not currently allied with the United States. Such a policy option would limit the policy instruments available to the U.S. Government, however, because the presumption would be that technology trade would not be used as a lever. In addition, because U.S. firms would be expected to increase exports to nations not closely associated with U.S. policy positions, the probability would increase that the U.S. Government might be required to protect American citizens abroad or assist firms exposed by political changes. On the other hand, such a policy would probably not be adequate to quickly or completely eliminate the selective pattern of technology trade. OTAs research indicates that technology trade has in the past been strongly influenced by U.S. foreign policies: even if the disincentives for nonselective trade were terminated and more vigorous promotional policies were put in place, U.S. firms would probably still continue to prefer sales to friendly nations where the risks of investment are perceived to be lower than in other countries. Conversely, sales would be difficult in countries where there is strong hostility to the United States. Furthermore, assuming that economic assistance policies remained strongly tied to larger foreign policies, incentives for selective technology trade would remain. In order to expand trade, this approach could be widened to include vigorous promotional policies. On the other hand, simply eliminating some political controls on trade would undoubtedly encourage wider trading relationships over time. PERSPECTIVE 3: PROMOT E CIVILIAN TECHNOLOG Y TRANSFE R Neither the technology leverage nor the decoupling perspectives are specifically oriented toward policies affecting technology transfer. In both cases, the effects on technology trade, particularly exports of products, would be more noticeable than effects on technology transfer per se. Policymakers may wish to facilitate expanded technology transfers from the United States, and more extensive technology absorption by recipients, through establishing a clear and explicit policy. This approach is based on the assumption that civilian technology transfers have been generally mutually beneficial and that the Government should do more to encourage them. Many observers see this as a natural policy, since the United States excels in technology development, and technology absorption is a key component of economic development. Underlying this perspective is a conviction that it is misguided to try to control access to U.S. civilian technology and a recognition that the United States can best maintain its strength in technology development by participating actively in international technology exchange. This approach could include the retention of national security and nonproliferation controls, and it could leave open the option of employing trade controls under extraordinary circumstances, such as the Iranian hostage crisis. However, the major thrust would be to facilitate expanded transfers of civilian technologies. Product and equipment exports could be expected to increase somewhat, but technology transfer would be the centerpiece. As indicated earlier, policy measures designed to foster commerce and development assistance could be used to promote technology transfer. These might include increasing the numbers of development assistance programs aimed to transfer technology in manufacturing and service industries; providing incentives to private sector organizations (including nonprofit organizations) to participate in such projects; expanding technical assistance to middleand upper-income nations; increasing Government financing and insuring of projects involving technology transfer (through programs of the Overseas Private Investment Corporation and the Export-Import Bank); upgrading the technical capabilities of commercial and aid representatives overseas; and expanding bilateral technical assistance agreements in specialized fields. PAGE 593 Ch. 15Options for U.S. Policies Affecting Technology Transfer l 593 OTAs research indicates that the Federal Government has only very limited capabilities to assess trends in international technology transfer. A significant step forward would be to improve data collection for trade in technical services. In addition, the Federal Government could play a stronger role, in cooperation with private sector groups, in improving the flow of information between recipients in developing countries and U.S. firms and organizations. Given the varied human, capital, and natural resources of Middle Eastern countries, technology transfer has important regional significance. The training of technical personnel in one Middle Eastern country, for example, may benefit other countriesthrough the migration of labor or through the training of foreign nationals. Some types of Governmentsupported training programs and technical assistance efforts could include representatives from a number of recipient (and perhaps supplier) countries. In addition, programs could be carried out in conjunction with regional organizations. The education of Middle Eastern students in technical and scientific fields in the United States is an important channel for technology development and transfer. Programs directed toward professional enrichment and retraining at midcareer could also be introduced. Finally, international agreements promoting fairness in service trade, in use of mixed credits or adjustments to the anticipated growth of Middle Eastern exports, could be pursued. This approach implies considerable resource allocation by the Government to new and expanded programs, and some coordination of the efforts of various agencies. One problem would inevitably be to introduce overall consistency or direction in these varied programs. Another type of challenge would be in designing programs that effectively promote technology transfer and in evaluating their success. In addition, because technology transfers involve longer term interactions with recipients than required for exports, and because the approach involves a balancing of political and economic interests, serious disagreements could arise about when extraordinary circumstances justify use of trade controls. Furthermore, regional conflict or local political instability present obstacles to the implementation of perspective 3 to an even greater extent than would be the case for perspective 2. The approach could capitalize on technology transfer as an important commercial and political asset, possibly opening relations with nonaligned countries. Assuming that a consensus in favor of civilian technology transfer to developing nations were established, such programs could enhance the influence and prestige of the United States in the Middle East and contribute to regionwide development. CONCLUSIO N Each of the three policy perspectives outlined above centers around a consistent strategy emphasizing political and economic interests to different degrees and in different ways. Because of the persisting tradeoffs between objectives (particularly the tension between political and economic interests), there are formidable obstacles to the formulation of a comprehensive policy and a consistent strategy. Although each perspective may have its virtues in the abstract, a new consensus on overall foreign policy direction would be necessary to implement any one of them fully. Even if no consistent policy were established, U.S. policymakers will continue to face a fundamental choice as they deal with these issues on a case-by-case basis: they can encourage or discourage commercial technology transfers through the choices they make. OTAs research indicates that commercial technology transfers to the Islamic Middle East have been generally beneficial economically and that all the nations in the region place high priority on technology trade and transfer in their development planning. Therefore, U.S. policies-regardless of which goals are maximized-will remain important to nations in the region. In the decade ahead, the Middle East will remain an important market for equipment PAGE 594 594 l Technology Transfer to the Middle East and technical services as well as a region of great strategic importance to the United States. Instead of subordinating politics to economics, the challenge is to balance these interests in a more consistent way. The question is whether U.S. policies can be designed to enhance the mutually beneficial aspects of commercial technology transfer without jeopardizing political interests. Without a more consistent policy, the pattern of expanding controls and selective technology trade characteristic of years past will probably persist. OTAs research indicates, at a minimum, the need to consider the implications of other policies on patterns of technology transfer. More generally, technology transfer from the United States to the Middle East can be viewed as a major component of U.S. influence in the region. Although unanticipated negative effects have occurred, civilian technology transfers have in practice supported mutually beneficial relations with countries of great strategic and economic importance to the West. PAGE 595 Appendixes PAGE 596 Appendix A Selected Medical Services Projects in the Middle Eas t PAGE 597 Project 1) Hospital staffing and management Table A-1. Medical Services Contracts in Saudi Arabia Awarded t o Ownershi p Whittaker Saudi Arabia, 70% U.S. Corp. 30% HR H Ltd. Khalid Bin Abdullah Bin Abdulrahman Al-Saud Size of personnel 2,000 to begin, later to double Dollar value: $334 million Major Saudi participants: MODA. private partner 2) Hospital area Kuk Dong Construction Korean and Saudi joint 15H Co., Ltd/Al Mashrik venture Contracting Company Size of personnel unknown Dollar value: $164.8 million Major Saudi Participants: Al Mashrik Contracting Company 3) Four 100-bed Dragages et Travaux France and Saudi Arabia hospitals Publics/El Seif Engineering and Contracting joint venture Size of personnel: unknown Dollar value: $199.6 million Major Saudi participants: El Seif Engineering and Contracting NOTES: Subcontractor: AEG of Germany for electrical work 4) Hospital International Hospital United Kingdom management Group (IHG) [Major competition came from Belgium, France and Us.] Year of Public or private Supplier nation Location initiation Product Ion level Ministry of Defense and United States Jeddah. Khamis 1981 To staff and operate 3 Aviation (MODA) contract Muchayt, Tabuk hospitals w/joint venture U.S. Corp. and private Saudi partner MODA contract with Korea King Khalid 1981 To build a 300. bed Korea private joint venture Military City, Al completion hospital companies Batin date mid-1985 Ministry of Health (MOH) France Ula, Qunfuda, 1981 contract with private joint Rabigh, Adum venture Saudi Arabian National United Kingdom Jeddah 1981 Guard contract with private firm To build, equip. furnish four 100-bed hospitals To commisston and operate the 500-bed National Guard hospital in Jeddah constructed by Eurosystem Hospitalier of Belgium Size of personnel: approximately 1,500 Dollar value: $272.8 million Major Saudi participants: NOTES Subcontractors include: International Aeradio, Grand Metropolitan, the Wellcome Foundation, PA Management Consultants, Peat, Marwick, Mitchell and Co International Laboratory Services, Cusdin, Burden and Hewitt, Donald Smith, Seymour and Rooley, and Hanscomb International for services ranging from accountancy to architecture to specialized consultancy work 5) Hospital Hospital Corporation management of America (HCA) Size of personnel: 1,500 by end of contract Dollar value $350 million Major Saudi participants National Guard United States National Guard contract United States Riyadh 1982 To staff and manage the with private firm on a 500 bed hospital for 30 government to government months basis PAGE 598 Table A-l .Medical Services Contracts in Saudi Arabia (continued) Year of Project Awarded to Ownership Public or private Supplier nation Location initiation Product Ion level 6)Two 100-bed Laing Wimpey Alireza Laing Wimpey Alireza, a MOH contract with private United Bakeriyya and 1981 To construct two 100-bed hospitals U, K./Saudi joint venture companies Kingdom, Italy, Mizheb hospitals each with Canada maternity wards, gynecology, physiotherapy, pediatrics, radiotherapy, dentistry, two operating theaters, blood bank and hematology lab, Size of personnel: Unknown Dollar value: $90.9 million Major Saudj participants: Alireza MOH contract with private France, Korea, companies NOTES: Subcontractors include: John Laing Design Associates, Totaltermica, Redi Electric, Arabian Consultant Engineering Center, Canadian Health Care. 7) Hospital El Seif Engineering Saudi, French. Korean and Contracting;/ Dragages et Travaux Publics/Samsun Construction Company Size of personnel: Unknown Dollar value: $102.3 million Major Saudi participants: El Seif Qatif 1981 Construction of a 345-bed hospital with screening clinic, ancillary buildings, housing, and all medical equipment 8) Public Security Ballast Nedam Group Hospital-Phase II and Gustav Epple (design by LlewelynDavies Weeks) Size of personnel: Unknown Dollar value: $166.7 million Major Saudi participants 9) Health services Charter Medical Saudi Co., Ltd. Netherlands and West Germany (U K.) Size of personnel: Unknown Dollar value: $113 million Major Saudi Participant: Saudi Medical Services Joint venture between Saudi Medical Services (90%) and Charter Medical Corp. (10%) Ministry of Interior Netherlands, contract with private firms West Germany (U K.) MODA contract with United States private companies NOTE: Medcom of the U.S. has $7.8 million subcontract to supply hospital training programs 10) Riyadh Medical (Project delayed) MOH contract offer Complex Size of personnel: Unknown Dollar value: Unknown Major Saudi Participants: Riyadh 1981 To expand existing 105-bed PSH to add 179 beds and establish 8 I ntensive care units, 4 units for heart patients, 7 operating theaters, and outpatient facilities King Khalid 1982 To provide complete Military City health care services to near Hafral KKMC including 100-bed Bat in acute general care hospital and related clinics Riyadh 1983 + -400-bed medical complex NOTE: One of the biggest projects planned in the MOH 1980-85 programstatus now uncertain. Plans for the complex were drafted by Rogers. Burgun, Shahine, and Deschler (U. S.) and Saudi Arabian Management Engineering and Research (SAMER) (joint venture Saudi-U S.) SOURCES Office of Technology Assessment PAGE 599 I I I I I Table A-2.Major Projects and Sources of Investment in Medical Services in Egypt (1971-1981) Foreign nations Project involved Level expendidures $17 million Year Product started Comments Source of funds Contractors European equipment I 1. Private sector Equity: Saudi/Egyptian debt: Barclays Basnco di Roma Misr. Intl. Arab Contractors Hospital Hospital lb o Equity: Saudi, German, Egyptian debt: Egyptian, German banks Misr. International Hospital European equipment 150-bed hospital $6.5 million American Medical International Dongsan Construction and Engineering Widnett & Trollope European equipment Equity: Saudi, Egyptian, American (12.50/0), Gulf States As-Salam 1-U.S. International Hospital 2-Korea 300-bed hospital management construction quantity surveyor 80-bed hospital 1980 $56 million planned $80 million actual AM I has withdrawn from management 3-United Kingdom Equity: Egyptian, Kuwait i debt: 70/0 Cairo Hospital Squibb Factory United States $30 million drugs Only fully private drug factory in Egypt Il. Public/private joint venture Pfizer Company Egypt United States Swiss Pharma Switzerland Hoescht Orient Germany El Qahira Co. Arab pharmaceuticals $20-23 million Plan as of April, 1979; new factory in Ramadan. Joint venture with Arab Investment Co. for medical industries and medical requirements PAGE 600 600 l Technology Transfer to the Middle East c T. L PAGE 601 App. A Selected Medical Services Projects in the Middle East 601 Table A-3.Medical Services Contracts in Algeria 1979-82 Client Value of contract Not stated Description of project 1. Contractor Location Year Provision of technical services and medicines for a plant to make antibiotics Supply of four mobile laboratories to analyze water and noise pollution Ministry of Health Ministry of Health Indian Drugs and Pharmaceuticals (India) Ecopol (France) Medea 1979 1980 1980 1980 1981 1981 1982 1981 1982 Not stated $980,800 $264,700 Not stated $1 million $38.8 million 2. 3. 4. 5. 6. 7. Supply of 50 refuse presses and staff training Supply of 100 incubators for premature babies Preparation of studies for hospital Ministry of Health Ministry of Health Ministry of Health Ministry of Health Ministry of Health Martex (France) Vickers Medical (United Kingdom) Uniconsult (Sweden) Constantine Supply of dental equipment Nissho Iwai Co. (Japan) Maurice Delens & Batipont Intl. (Belgium) Nissho Iwai Co. (equipment manufacture by Yoshida (Japan)) Chemokomplex (Hungary) Construction of three hospitals El-Cheliff 8. Supply of dental equipment Ministry of Health $1 million 9. Pharmaceutical plants feasibility study Ministry of Health $230,000 SOURCE Office of Technology Assessment Table A-4.Medical Services Contracts in Iraq Supplier Renault Industries Institut Merieux Stodete Country Year France. .. .1980 France ., 1977 France . .. ..1981 Ireland ..........1981 Italy ... .. .1982 Japan ...........1979 Japan ., ., .. ..1981 South Korea .....1980 Kuwait ., . ..1981 Spain ...........1981 United Kingdom .. .1982 United Kingdom .. .1979 United States .. ...1980 United States .. ...1977 United States .. ...1980 Yugoslavia. .. ,1981 Description $ amount Construction of five hospitals $116 million Provision of vaccine-producing $24 million plant Construct two ophthalmological $40 million clinics in Baghdad Construction of hospital sewerage $0.5 million Construct vaccine plant $3 million Construction of four 400-bed $1385 million hospitals Hospital construction $60 million Construct 2d stage Baghdads $338.6 million medical city Construct 2d stage therapeutic $20 milIion institute Construction of pediatric and $175 million maternity hospitals Medical equipment $10.8 million Design of reconstruction and No data expansion of Baghdads General Hospital Supply of three 0450 CT scanners, $3 million including installation, training and maintenance 2d stage Medical City $89.6 million approx. No Data Fay International Co. Olsa Construction Marunbenicorpstaiset Corp. Marunbeni Corp. and Tisei Hyundia Construction No data Huarte & Compagnia Shanning International Architects Co-Partnership Med Tech Int Roger Butler & Burgan Associates and Whiting Associates International Corp. Med Tech Int Sutjeska Fabrika Supply of renal dialysis equipment No data Supply of medical equipment No data SOURCE Office of Technology Assessment. PAGE 602 602 Technology Transfer to the Middle East Table A-5.AID Health Programs in Egypt (million U.S. $) Commodity Import Program .. ...1975 24.4 a Medical Supplies. (Commodities are procured by various 3.0 pending Government of Egypt Ministries and organizations as (for Grant allocated by the Ministry of Investment and International 606 FY 83) Cooperation. These procurements are periodically announced in the A.I.D. Export Opportunities Bulletin, published by A. I.D. s Office of Small Business.) Strengthening Rural Health Delivery . . . . . 1976 Family Planning ..............1977 Urban Health Delivery Systems ..1979 Suez Community Health Personnel Training ..........1980 Control of Child Diarrheal Diseases ..................198 1 Population/Family Planning II .. .1983 14.9 67.6 37.3 13.2 26.0 20.6 This grant project is designed to assist the government to identify and validate, through field trials, the principal factors limiting the productivity and outreach of the rural health service, and to devise strategies to reduce or eliminate these factors. To strengthen family planning delivery services. The activities include: a) expanded community-based family planning services delivery programs in rural and urban areas; b) integrated health, family planning and social services delivery projects in the Menoufia and Beni Suef Governorates; c) development of a field training site in Alexandria; d) development of a training center at Al Galaa Maternity Hospital; e) a multi-media IE&C campaign; f) innovative activities to test new approaches to FP services delivery. Fiscal year 1983 last year of obligation. This project is designed to improve the delivery of urban health services, particularly maternal-child health (MCH), family planning and nutrition services, in Cairo and Alexandria. The activity emphasizes community involvement, the use of home visitors, the delivery of health services in the neighborhoods where people live, physical improvements to facilities, and cooperation between the health services of Cairo Universities and the Ministry of Health. This grant assists the GOE in improving health services, particularly primary care, by initiating an integrated medical education and health services program which relates educational investment directly to the health needs of the population. The funds are used to train health personnel to plan, manage and provide preventive and community-based primary health services, including maternal and child health, nutrition, family planning and environmental sanitation. To develop and initiate a national campaign to reduce infant and child mortality due primarily to diarrhea caused by dehydration. To give substantial further stimulus to the several programs centered around the provision of family planning information and services through public and private channels; also to stimulate further understanding of population and family planning issues in a manner which will increase demand for existing and new family planning services and result in significant reduction of the birth rate in the next few years. Total . . . . . . .........261.6 a lncludes all but one loan for which the information IS not available SOURCE Agency for International Development, Doc. #1215H, Mar. 6, 1984 PAGE 603 Selected AACO AID AKA ARAMCO ARENTO ASBU ASCO ASRT ATC ATU BID BFCE BMFT BOTB Btu CANDU CBK CCIR CC ITT CCTV CEA CFCE CIP CMEA COFACE COMET CT DEG DISC DMZ Arab Air Carriers Organization U.S. Agency for International Development Ausfuhrkredit GmbH (FRG) Arabian American Oil Company Arab Republic of Egypt National Telecommunications Organization Arab States Broadcasting Union Arab Satellite Communications Organization Academy of Scientific Research and Technology (Egypt) Air Traffic Control Arab Telecommunications Union barrels per day Banque Francaise de Commerce Exterieur Ministry of Research and Technology (FRG) British Overseas Trade Board British thermal units Canadian Deuterium Reactor Central Bank of Kuwait Consultative Committee on Radio Consultative Committee on Telephone and Telegraph closed circuit TV Commissariats a lenergie atomique (France) French Center of Foreign Trade Commodity Import Program (Us.) Council for Mutual Economic Assistance Compagnie Francaise dAssurance pour le Commerce Exterieur Committee for Middle East Trade (U. K.) computerized tomographic scanner German Development Co. Domestic International Sales Corp. Ministry of Economic Cooperation (FRG) Appendix B Names and Acronyms DREE EC ECG ECGD ECWA EMRO EMS EMSS EPC ESA ESF ESS FAA FCPA FLN FRG FSC FTO GAFI GATT GCC GDP GFCF GIC GKES GNP GOFI GTZ GIVe HDPE HEU IEA IAEA Directorate of External Economic Relations (France) European Community electrocardiograph Export Credits Guarantee Department (U. K.) United Nations Economic Commission for Western Asia Eastern Mediterranean Regional Office (WHO) Emergency Medical Services electromechanical switching systems Egyptian Petrochemical Co. European Space Agency Economic Support Fund electronic switching systems Federal Aviation Administration (Us.) Foreign Corrupt Practices Act Front de Liberation Nationale (Algeria) Federal Republic of Germany Foreign Sales Corp. Foreign Trade Organization (U. S. S. R.) General Authority for Investment (Egypt) General Agreement on Trade and Tariffs Gulf Cooperation Council gross domestic product gross fixed capital formation Gulf Investment Corp. State Committee for Foreign Economic Relations (U. S. S. R.) gross national product General Organization for Industrialization (Egypt) Deutshe Gesellschaft fur Technische Zusammenarbeit (FRG) gigawatt (electric) high-density polyethylene highly enriched uranium International Energy Agency International Atomic Energy Agency 603 PAGE 604 604 Technology Transfer to the Middle East IATA IATP ICAO ICB IDRO IJPC ILO IMDB ITU JETRO JICA KFH KFTCIC KFW KIC KIIC KPC LDPE LLDPE LNG LPG LWR MEU MIO MOH MWe MWt NASA NIOC NPC NPT NSF NTO OAC International Air Transport Association International Air Transport Pool International Civil Aviation Organization Industrial Credit Bank (Iran prerevolution) Industrial Development and Renovation Organization (Iran prerevolution) Iran-Japan Petrochemical Co. International Labor Organization Industrial and Mining Development Bank (Iran prerevolution) International Telecommunication Union Japan External Trade Organization Japan International Cooperation Agency Kuwait Finance House Kuwait Foreign Trading Contracting & Investment Co. Kreditarstalt fur Wideraubau (FRG) Kuwait Investment Co. Kuwait International Investment Co. Kuwait Petroleum Corp. low-density polyethylene linear low-density polyethylene liquefied natural gas liquefied petroleum gas light water reactor medium-enriched uranium Military Industries Organization (Iranprerevolution) Ministry of Health megawatt (electric) megawatt (thermal) National Aeronautics and Space Administration National Iranian Oil Co. National Petroleum Co. (Iran) Treaty for the Nonproliferation of Nuclear Weapons National Science Foundation (U. S.) National Telecommunications Organization Office of Antiboycott Compliance (U. S.) OAPEC ODA OECD OECF OPEC OPIC PABX PBO PCM PHC PIF PTT PVC Petromin R&D RCC SABIC SAMA SANCST SASO SCH SCST SIDF SITC Sonatrach TDP TFF TVT UAE U.K. UN Organization of Arab Petroleum Exporting Countries official development assistance Organization for Economic Cooperation and Development Overseas Economic Cooperation Fund (Japan) Organization of Petroleum Exporting Countries Overseas Private Investment Corp. (U. S.) Private automatic branch exchange Planning and Budget Office (Iran-prerevolution) pulse codemodulated (telecommunications transmission systems) Primary Health Care Public Investment Fund (Saudi Arabia) Post, Telegraphs and Telecommunications (Ministry) polyvinylchloride General Petroleum and Minerals Organization (Saudi Arabia) research and development Revolutionary Command Council (Iraq) Saudi Arabian Basic Industries Corp. Saudi Arabian Monetary Authority Saudi Arabian National Center for Science and Technology Saudi Arabian Standards Organization Saudi Consulting House State Committee for Science and Technology (U. S. S. R.) Saudi Industrial Development Fund Standard Industrial Trade Classification Societe Nationale de Transport et de Commercialisation des Hydrocarbures (Algeria) Trade Development Program (Us.) Trade Financing Facility (U. S.) Televerket (Sweden) United Arab Emirates United Kingdom United Nations PAGE 605 App. BSelected Names and Acronyms 605 UNCTAD United Nations Conference on USTTI United States Trade and Development Telecommunications Training UND P United Nations Development Institute Program VHEU very highly enriched uranium UNIDO United Nations Industrial WH O World Health Organization Development Organization PAGE 606 Index PAGE 607 Index Agency for International Development, 8, 13, 45 appropriate technology, 26, 81 Arabian-American Oil Co. (ARAMCO), 68, 84, 128, 143 capital-intensive technology transfer, 11, 39 C. F. Braun, 136, 146 civilian technology transfer, 16-17, 21, 27, 42, 48 commercial aircraft support systems, 247-299 airports in Middle East and North Africa, 255 Algeria, 258 Egypt, 257 future prospects, 291 implications for U.S. policy, 292 Iran, 259 Iraq, 259 Kuwait, 259 perspectives of recipient countries and firms, 261 operation of aircraft support systems, 265 Algeria, 271 Egypt, 270 Iran, 273 Iraq, 272 Kuwait, 269 regional efforts, 274 Saudi Arabia, 265 requirement for aircraft operation, 261 perspectives of supplier countries and firms, 275 aircraft engine suppliers, 284 airport systems, 285 air traffic control, 287 competition, 276 government roles, 279 private aircraft and helicopters, 288 U.S. export controls, 289 regional efforts, 259 Saudi Arabia, 252 commercial technology transfer, 10, 12, 15, 21 Congress: House Committee on Science and Astronautics, 49 House Committee on Science and Technology, 3 Senate Committee on Banking, Housing, and Urban Affairs, 3 Senate Committee on Governmental Affairs, 3 Department of Commerce, 29, 70 Department of Energy, 59, 61, 62, 65 Dow Chemical Co., 128 employment trends, 74, 75, 77, 78, 83, 84 Energy Information Administration, 59, 65 factors affecting technology trade and transfer, 29-37 crucial institutions and transfer packages, 31 political and other factors, 36 recipient demand, 29 supply of technology and competition, 34-36 financial resources, 64-68 future prospects for technology trade, 563-577 forecasting oil export revenues, 563 impact of changing economic structure, 568 impact on trade, 566 supplier share trends, 571 U.S. export share scenario, 572 General Electric Co., 31 gross domestic product, 29, 30, 38, 69, 70 gross fixed capital formation, 56, 58 Gulf Cooperation Council, 41, 144 Gulf Oil Co., 134 Gulf Organization for Industrial Consultancy, 41 impacts and experiences, 403-421 appropriate technology transfer, 416 commercial aircraft support systems, 404 commercial nuclear power, 408 comparison of sectoral impacts, 409 dependence on foreign workers, 418 medical services, 406 petrochemical production, 407 political instability, 414 telecommunications systems, 405 variations in national experiences, 411 vulnerability of suppliers, 418 implications for technology transfer, 70, 80, 86 International Atomic Energy Agency, 47 International Energy Agency, 48 International Monetary Fund, 57, 58, 69, 89 International Telephone & Telegraph Corp., 32 International Trade Commission, 27 Islamic Development Bank, 41 Islamic Research and Training Institute, 41 labor-intensive technology transfer, 11, 39 League of Arab States, 41 legislation: Export Administration Act, 47 Foreign Corrupt Practices Act, 46 General Agreement on Tariffs and Trade, 36 International Code of Conduct on the Transfer of Technology, 41 International Science and Technology Transfer Act, 49 New International Economic Order, 41 Nonproliferation Treaty, 9 Suez Canal Authority, 32 Treaty on the Non-Proliferation of Nuclear Weapons, 47 Litton Industries, 109 medical services, 4, 8, 303-347 absorption of medical technologies, 320 evaluation of level, 331 health care planning, 320 hospital design and construction, 324 609 PAGE 608 610 Technology Transfer to the Middle East .hospital management, 324 medical equipment and systems, 320-324 servicing and maintenance, 321 training of local personnel, 325 future prospects, 345 perspectives of recipient countries and firms, 316 Algeria, 319 Egypt, 318 Iran, 319 Iraq, 319 Kuwait, 317 Saudi Arabia, 316 perspectives of supplier countries and firms, 333-344 controls regarding medical exports, 342 design and construction of health care facilities, 338 hospital management, 340 medical equipment and supplies, 333 requirements and facilities, 304 categories, 305 manpower characteristics, 305 profile, 304 types of technology transfer, 306 state of medical capabilities, 306 Algeria, 312 Egypt, 311 Iran, 313 Iraq, 313 Kuwait, 310 regional efforts, 314 Saudi Arabia, 308 National Development Plan, 74 National Science Board, 29, 45 Natural Resources and Economic Structure, 56-70 agriculture, 62 minerals, 63 petroleum, 56 water, 62 nuclear power generation, 8, 12 nuclear technology transfers, 3, 9, 47, 351-400 facilities in Middle East, 352-361 commercial nuclear power reactors, 353 countries considering nuclear power, 354 Iran and Egypt, 353 enrichment and reprocessing facilities, 356 paths to nuclear weapons, 356 research reactors, 355 future prospects, 397 perspectives of recipient countries, 361-391 economic and energy considerations, 362 alternative energy sources, 369 determinants of electricity demand, 363 economic rationale for nuclear power in Egypt, 371 financial requirements, 362 interconnected electricity grids, 364 Irans prerevolutionary nuclear program, 373 small reactors, 366 uranium resources, 368 military applications, 383-391 technical manpower, 375 bilateral nuclear cooperation, 381 large technical infrastructures, 378 manpower requirements, 375 Middle Eastern students in the United States, 381 supplier country, 392-397 new supplier states, 395 policies of other Western nations, 393 Soviet policies, 395 U.S. policies, 392 U.S. policy options, 398 nuclear weapons proliferation, 9, 13, 21, 47 Office of the U.S. Trade Representative, 27 official development assistance, 37, 45 options for U.S. policies affecting technology transfer, 15-17, 581-594 policy perspectives, 589 policy tradeoffs, 581 controls v. commerce, 582 economic assistance, 586 foreign aid, 585 Organization for Economic Cooperation and Development, 36, 45, 46, 49 Organization of Arab Petroleum Exporting Countries, 46 Persian Gulf, 56, 61, 62 petrochemical and nuclear power production, 4, 6, 44 petrochemical technology transfers, 119-182 implications of Middle East petrochemical industry developments, 164-167 impacts on recipient nations, 164 implications for U.S. policy, 165 long-term developments, 153-164 restructuring of global trade in commodity chemicals, 153 ammonia, 161 effects of crude oil price decreases, 162 ethylene glycol, 157 high-density polyethylene, 156 low-density polyethylene, 154 methanol, 160 styrene, 159 perspectives of recipient countries and firms, 123-144 absorption of petrochemical technologies, 143 goals and objectives, 126 petrochemical projects, 126 project profiles, 127 Algeria, 136 Bahrain, 140 Kuwait, 134 other recipient countries, 141 Qatar, 138 Saudi Arabia, 128-134 PAGE 609 Index l 61 1 perspectives of supplier countries and firms, 144-153 foreign company participation, 144 engineering contractors, 148 joint venture partners, 144 licensors, 147 requirements to modify technology and project approach, 149 petrochemical product demand projection, 175 petrochemical production in Middle East, 119-123 global context, 120 present and near-term status, 120 petrochemical product uses, 167 petrochemical project profiles, 170 refinery capacity in Middle East, 181 policies of other supplier countries, 473 development assistance, 494 France, 495 Japan, 496 United Kingdom, 495 West Germany, 496 Soviet bloc supplier countries, 503 explanation of Soviet performance, 513 future of Soviet economic interaction, 516 record of Soviet policies, 511 Soviet bloc policies affecting technology trade, 506 institutions and objectives, 507 trends in economic interactions, 503 West European and Asian countries, 474 financing technology trade: France, 490, 491 Japan, 491, 492 United Kingdom, 490, 492 West Germany, 491, 492 foreign policy contexts, 478 institutional mechanisms, 482 France, 482 Japan, 484 United Kingdom, 486 West Germany, 487 multilateral policy formation, 497 background to European programs, 498 bilateral cooperation agreement, 499 Euro-Arab dialog, 499 policy variation, 501 trends in economic interaction, 475 Qatar General Petroleum Corp., 138 recipient country policies, 425-470 development strategies, 425-435 Algeria, 426 Egypt, 427 implications for technology transfer, 432 Iran, 428 Iraq, 430 Kuwait, 431 Saudi Arabia, 430 key policy issues, 444 financing, 448 Algeria, 450 Egypt, 449 Iran, 452 Iraq, 451 Kuwait, 452 Saudi Arabia, 452 foreign policy context, 462 dependence on suppliers, 462 regional conflict, 464 regional cooperation, 465 manpower policies, 453 foreign workers, 453 general education, 455 labor migration policies, 461 regulation, 444 Algeria and Iraq, 446 Egypt, 444 Islamic law, 448 licensing, 447 local agent laws, 447 Saudi Arabia, prerevolutionary Iran, and Kuwait, 445 planning and administrative institutions, 435 Algeria, 437 Egypt, 435 Iran, 440 Iraq, 438 Kuwait, 442 Saudi Arabia, 441 Saudi Arabian Basic Industries Corp. {SABIC), 127, 128, 131, 132, 134, 143 Siemans Group, 97 social/political context, 80-85 political, 84 social factors, 80 Soviet bloc countries, 4, 12, 21, 48 Suez Electronics, 32 technology absorption, 4-17, 23-25, 29, 33, 41, 42, 71, 80 Technology Exchange System and Technological Advisory Services, 41 technology transfer and trade: meaning and measurement, 22-51 assessing technology, 23 contracts, 27 evaluating extent of technology transfer, 23 foreign investment, 28 licensing and royalty payments, 28, 50 quality and capabilities of the work force, 24 relationship, 22 telecommunications technology transfers, 185-243 implications for U.S. policy, 236 manpower requirements, 190 perspectives of recipient countries and firms, 21 Algeria, 218 50, 1 PAGE 610 612 l Technology Transfer to the Middle East Egypt, 216 factors that constrain absorption, 225 factors that facilitate Iran, 222 Iraq, 221 Kuwait, 214 Saudi Arabia, 211 perspectives of supplier Canada, 230 France, 229 Great Britain, 229 Japan, 231 Netherlands, 231 Sweden, 230 absorption, 224 countries and firms, 227 United States, 227, 231, 232, 233 West Germany, 229 project profiles in selected countries, 238-243 telecommunications systems, 4, 7, 12, 35, 93, 186 Algeria, 203 Egypt, 199 Iran, 205 Iraq, 205 Kuwait, 195 mobile radio, 189 regional development, 209 Saudi Arabia, 191 telephone and telex equipment, 186 transmission equipment, 188 video and radio broadcasting equipment, 190 trade with the Middle East, 89-116 after 1973, 89 global context, 90 indicators, 92 airline development, 94 analysis data on direct investment, 97 imports of machinery and equipment, 92 medical equipment, 94 telecommunications, 93 supplier country export shares, 100-112 contracting specialization, 106-109 factors affecting supplier shares, 109 major specific factors in export competition, 110 product export specialization, 104 U.N. Industrial Development Organization, 41, 164 Union Carbide Corp., 148 U.S. Export-Import Bank, 45 U.S. Overseas Private Investment Corp., 31, 32 U.S. policies: commercial policies, 531 international agreements, 540 Overseas Private Investment Corp., 538 promotional export programs, 532 business, 532 Government support for financing, 535 subsidies controversy, 535 tax policy, 534 U.S. Export-Import Bank, 536 development assistance, 542 commercial promotion, 542 Middle Eastern students in United States, 547 multilateral assistance, 549 recipients, 545 economic interactions, 522 commercial technology trade, 522 economic assistance, 523 military assistance, 525 foreign policy context, 527 energy policy, 529-531 evolution of U.S. policy, 527 implications for technology transfer, 528 military and strategic policies, 551 national security and foreign policy controls, 552 nuclear nonproliferation controls, 554 U, S.-Saudi Joint Commission, 13, 46 Washington Conference, 48 Westinghouse Electric, 97 0