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Technology Transfer to the Middle East

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Title:
Technology Transfer to the Middle East
Creator:
United States. Congress. Office of Technology Assessment.
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U.S. Congress. Office of Technology Assessment
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Language:
English
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vii, 612 p. : ill. ; 28 cm.

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Subjects / Keywords:
Technology transfer ( lcsh )
Technology -- Developing Countries ( lcsh )
Economic development ( lcsh )
policy goals ( kwd )
technology suppliers ( kwd )
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federal government publication ( marcgt )

Notes

General Note:
A report by the Office of Technology Assessment (OTA) that "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" (p. iii).
General Note:
Original is missing pages 18-20, 52-54, 86-88, 244-246, 300-302, 348-350, 422-424, 578-580, 606-608.

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University of North Texas
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University of North Texas
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This item is a work of the U.S. federal government and not subject to copyright pursuant to 17 U.S.C. §105.

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IUF:
University of Florida
OTA:
Office of Technology Assessment

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Technology Transfer to the Middle East September 1984 NTIS order #PB85-127744

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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

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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

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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

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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

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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

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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

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CHAPTER 1 Summary and Findings

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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

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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

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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-

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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

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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-

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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-

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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

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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-

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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.

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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.

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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.

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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.

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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

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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-

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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

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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.

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CHAPTER 2 Analyzing Technology Trade and Transfer: Conceptual Issues and Policy Choices

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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

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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.

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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

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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

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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

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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

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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.

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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.

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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.

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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

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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-

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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

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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

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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

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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.

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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

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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

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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-

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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.

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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.

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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-

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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
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42 l Technology Transfer to the Middle East .- tered. Technology absorption is important for the user firms, and because it can contribute to the national science and technology infrastructure needed for society-wide development. The desire to use foreign technology effectively, without relying completely on foreigners, leads to difficult choices about manpower. Saudi Arabias King Faisal, like other Middle Eastern leaders, worried about massive infusions of Western technology: It is within our power, for example, to erect an enormous plant-but can we run the plant properly or get the desired results from it? In my opinion, it is far better to equip ourselves with the ability to do things on our own without relying on foreigners or on anyone else. 37 Particularly in sparsely populated Middle Eastern countries, manpower constraints affect the extent of technology absorption. The Kuwait Ministry of Planning has forecast a shortage of skilled workers .38 Kuwait and other Gulf States have made manpower development a high priority, but reliance on foreign workers will continue for years. There is an ample supply of Egyptian, Palestinian, and Asian workers and during 1983, when oil revenues fell, many of them were sent home. Many countries have used foreign consultants and laborers in the process of industrializationJapan learned from foreign advisors after the Meiji Restoration, and foreign laborers helped build American railroads and run U.S. industry. A critical question for Middle Eastern countries is how much to rely on foreign labor, particularly for professional and managerial positions. Related, of course, are issues concerning citizenship rights of foreign workers and the status of women workers. The presence of foreign labor, in itself, may not be a major problem, but related issues of indige37 Quoted in Fouad Abdul-Salam Al-Farsy, King Faisal and the First Five Year Development Plan, King Faisal and the Modernization of Saudi Arabia, Willard A. Beling (cd. ) (London: Croom Helm, 1980), p. 64. 8 Behebani, et al., op. cit., p. 10. nous skill development and efficiency of operations are certainly affected by the foreign labor mix. These are issues of considerable controversy for Middle Eastern policy makers; rapid indigenization programs are costly in the short term, but complete and long-term reliance on foreign workers certainly limits domestic technological development. However, the shortterm costs of inefficient production are also great, and in practice, these choices require balancing longand short-term objectives and setting priorities for manpower development. Technological development at a national level requires building an institutional infrastructure. This base is needed to incorporate technical, commercial, managerial, financial, and research expertise so that technical know-how will reach the users. Firms in developing countries often have limited abilities to diagnose problems or to select and fully utilize technologies. As a result, operations and maintenance of facilities are often neglected, and equipment is underutilized, or even wasted. A local technical and managerial infrastructure is thus essential for technology transfer. 39 Foreign Policies Decisions about civilian technology transfer affect and are affected by foreign policies. Acquisition of advanced civilian technologies can contribute to the political influence and prestige of a developing country, as well as to its economic development. Technology transfers enable developing countries to enhance their bargaining positions through the transformation of their natural resources (e.g., oil) into exports, such as petrochemical products. During the 1970s the power and influence of Middle Eastern countries rose in international politics as a reflection of rising revenues earned by application of oil production and refining technologies. This influence has extended not only to negotiations with industrial oil-consuming nations, but also through Arab g Harvey W. WaUender II I, Technology Transfer and Manage ment in the Developing Countries (Cambridge: Ballinger Publishing Co., 1979), p. 6.

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Ch. 2Analyzing Technology Trade and Transfer: Conceptual Issues and Policy Choices l 43 aid to developing countries worldwideespecially to oil-importing Islamic countries. Military and strategic considerations are sometimes important for technology transfer choices. Ongoing hostilities such as the ArabIsraeli dispute, the Iran-Iraq War, and interArab rivalries have stimulated demand for military technologies. In recent years, 40 to 50 percent of the worlds arms exports have gone to the Middle East. Also, the perception of Israels technological strength, particularly in the military area, has stimulated expanded demand in Islamic nations for military and dual-use technologies. However, these countries face difficult choices in balancing military needs against other development priorities, and they must anticipate the possible responses of other countries to their actions. Among the transfer sectors examined in this study, nuclear technology transfers most dramatically illustrate these choices. As explored in chapter 9, demonstration of nuclear weapons capability by any nation in the Middle East would very likely stimulate weapons programs in neighbor countries. In addition, in transferring both civilian and military technologies, suppliers interact with and perhaps gain some degree of influence over recipients, and this presents important choices for recipient nations. 40 Some recipient countries have attempted to limit their dependence on any one technology supplier by diversifying suppliers. Others have responded by building special relationships with key supplier countries. Regardless of which approach is taken, the political and strategic dimensions of technology transfer are key considerations for recipient as well as supplier countries. -. 40 One Middle Eastern leader noted the political dimensions of technology transfer: %)~i[t techn{~logy is communist. American technology is American, hourgeois and capitalist Even when these states export their technolok? abroad, thej are acti ng from political moti Yes. as we] 1 as others, including transferring their political and social character to societies in which they are exporting. Amir I skander, $addam }Iussein: The Fighter. 7% Thnker and The Man (Paris: Hachette Realites, 1980), p. 371 Impacts of Technology Transfers on Local Social, Political, and Economic Structures Technology transfer is a process closely associated with a number of factors promoting rapid change in developing nations. While controversy continues concerning the precise meaning of development, 41 few would dispute that development is characterized by far-reaching changes. In the process of technology transfer in the Middle East, foreign values and procedures (efficiency, rationality, problem-solving) may conflict with traditional values. 42 Such conflicts may arise in conjunction with the exit of working-age males from the poorer countries or with the influx of foreign workers to the Gulf States. Similarly, the introduction of modern communications systems into the domain of traditional desert nomads, the growth in numbers of Western-educated Middle Eastern women, and the growing desire of citizens to affect political choices in countries governed by royal families can result from exposure to Western ways. Viewed from the perspective of the governing elites, political instability and social discontent associated with rapid change are serious concerns. Despite the overriding importance of the impacts of technology transfer for developing countries, it is very difficult to measure effects precisely or to anticipate all results in advance. Chapter 10 assesses the impacts of technology transfers. Political choices normally dictate who benefits from transfers, and often certain groups within society such as the middle or upper classes reap the most immediate rewards from large-scale projects involving importation of advanced technology. (The term technology transfer, however, is not properly used to encompass all aspects of development.) Nevertheless, policymakers must calculate the combined effects that technology transfer, urbanization, and industrialization may have on domestic society and culture, and 41 See, for example, Yusif A. Savigh, The Determinants of .4rab Economic De~relopment (New ~ork: St. Llartins Press, 1978). 4Denis Goulet, The Uncertain Promise (New York: IDOC North America. 1977), p. 16.

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44 l Technology Transfer to the Middle East they must attempt to gauge the appropriate pace and scope of these changes. SUPPLIER POLICY ISSUES Technology transfers raise important policy issues because supplier governments sponsor programs involving transfer and therefore have an interest in their efficient operation, and because decisions about transfer taken by private firms sometimes run counter to broader national foreign policy goals. Economic Effects of Technology Trade and Transfer A central set of issues concerns the economic effects on the supplier nations of technology trade with and transfer to the Middle East. While it is difficult to measure all the economic effects of technology trade and transfer on the United States, aggregate indicators (exports, foreign investment, receipts for patents and licenses, sales of turnkey plants, technical training, and managerial services) of technology trade show that U.S. firms have benefited by sales of technology, equipment, and services in the Middle Eastern market and that these sales have helped offset the balance-of-payment effects of oil imports from the region. In most cases, technology trade and transfers from the United States to the Middle East have contributed to the growth of manufacturing and service systems that produce goods and services for local consumption. U.S. exports of telecommunications and medical equipment and services, for example, fall into this category. Supplier firms may use their revenues from technology trade to increase their production capacity, begin new marketing endeavors, and expand R&D efforts. Such exports benefit U.S. firms and the American economy more generally, as discussed in chapter 10. In a few sectors such as petrochemicals, however, technology transfers contribute to the growth of Middle Eastern export industries. The joint venture partners and the firms licensing petrochemical technology and providing contracting services, of course, benefit. In the case of petrochemicals and a few other industries, such as textiles, transfers spur the growth of new Middle Eastern industries that compete with those in the United States and other supplier countries. In view of the worldwide overcapacity in petrochemical production, the establishment of new petrochemical plants in the Middle East will hasten the need for adjustment by U.S. firms. Some have argued that U.S. firms do not get a fair return on the technology they sell abroad. Multinational firms, they assert, have, by transmitting American technology to foreign competitors, narrowed the technological lead of U.S. firms, eliminated U.S. jobs, and reduced U.S. domestic production. Those who hold this view argue essentially that multinational firms are not able to make wise choices and that the U.S. Government should institute new regulations to limit these activities by multinational corporations. 43 In addition, some observers note the expansion of recipient government regulations concerning performance requirements, standards, investment, and employment as potential bargaining leverage which developing countries may use to wrest better technology transfer terms. The question which must be posed, however, is whether the Government is in a better position than private firms to define economic interests. Proponents of technology transfer feel that the commercial gains far outweigh those potential problems. The firms best able to develop technology in the United States are often those most likely to export and invest abroad. Viewed from this perspective, technology transfer is essential for continued technological development and worldwide market success. In the vast majority of cases, U.S. firms 43 See discussion of this position and others in Edwin Mansfield, et al., Technology Transfer, Poductivity and Economic Policy (New York: W. W, Norton, 1982), p. 21. 44 S. Linn Williams, Transfer of Technology to Developing Countries, Federal Bar News and Journal, vol. 30, No. 5, May 1983, p. 266.

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Ch. 2Analyzing Technology Trade and Transfer: Conceptual Issues and Policy Choices l 4 5 transfer technology to their subsidiaries in developing nations, thereby maintaining a measure of control. Many conclude that the net effect of U.S. foreign investment has been good for the U.S. economy. 5 They also point out that the U.S. trade balance in technology-intensive products (as with services) has shown positive growth in contrast to the overall U.S. trade deficit. Developing countries account for 60 percent of the overall favorable trade balance and 38 percent of U.S. exports in R&D-intensive manufactured products. 46 In the midst of disagreements about the overall economic effects of technology transfers on the U.S. economy, policy makers are faced with decisions regarding issues such as export financing. Debates over financing highlight controversies about the appropriate role of the Government in promoting technology trade and issues surrounding coordination with other suppliers. All governments provide some financial assistance for exporting firms. The U.S. Export-Import Bank provides such financing, 75 percent of which has been used for exports to advanced developing countries, in order to match financing provided by foreign governments and thereby promote fairness in competition. As mentioned earlier, OECD nations have established general rules on interest rates for export credits through the OECD Export Credit Arrangement and separate agreements on financing of aircraft and nuclear sales. However, these agreements on official export credits cover only a small portion of total commercial technology trade. The U.S. Government has taken a lead in negotiating reductions of unfair trade barriers, but it is much more difficult to establish clear rules for domestic subsidies such as R&D grants, tax breaks, and other indirect supports often included among domestic industrial policy instruments. National Science Foundation, The Effects of International Technology Transfers on U.S. Economy, papers of a colloquium held in Washington. D.C., Nov. 17, 1973, and July 1974, pp. 4, 6 ff. National Science Board, op. cit., p. 33. Some argue that the United States must emulate the aggressive subsidy policies of other Western suppliers; others, that such actions would only accelerate movement toward use of these measures elsewhere. The opponents argue that the U.S. taxpayer should not subsidize export industries, even if taxpayers abroad are willing to do so. Chapter 13 analyzes these debates in more detail. Role of Technology Transfe r in Development Assistanc e Official development assistance (ODA), or official confessional aid for development purposes, plays a relatively minor role in technology transfer compared to commercial technology trade. However, economic assistance is particularly important for the oil-importing developing nations of the Middle East. The greater part of U.S. economic assistance to the Middle East goes to Israel and to Egypt, which in 1981 received about $1.1 billion, or about 15 percent of all U.S. economic assistance worldwide. 47 The U.S. Government has an interest in ensuring that its economic assistance is effective. One set of policy issues concerns the extent to which economic assistance should emphasize technology transfer, particularly in the manufacturing sector. During the last decade, Congress has been increasingly concerned that the science and technology component of assistance be raised so that U.S. aid programs emphasize technology rather than resource transfers. While all U.S. Agency for International Development (AID) programs involve a measure of technology transfer, in recent years about one-tenth of the total AID budget for Egypt, for example, was earmarked for science and technology. 48 Proponents of a For comparison, in 1981 U.S. military assistance to the Near East and Southeast Asia region amounted to $2.4 billionalmost as much as total U.S. economic assistance to the region ($2.7 billion). Put another way, 59 percent of U.S. military assistance worldwide went to Egypt and Israel in 1981. See U.S. Agency for International Development, U.S. Overseas Loans and Grants, July 1, 1945 -Sept. 30, 1981. 48 Third Annual Report Submitted to Congress by the President Pursuant to Section 503(b) of Title V of Public Law 95426, Science, Technology and American Diplomacy-1982 (U.S. Congress: Report to Committees on Foreign Affairs and Science and Technology, June 1982), p. 130.

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46 l Technology Transfer to the Middle East stronger emphasis on technology transfer point to examples abroad. France, for example, in recent years has provided more for technical cooperation and has sent more personnel to work in developing nations according to OECD data. 49 Nor is there any firm consensus about the extent to which economic assistance should be used to promote U.S. commercial advantage. Mixed credits, which combine grant elements with commercial loans, have been denounced by the United States, but in 1984 mixed credits were used by the United States in a few instances. In addition, U.S. development assistance is tied aid in the sense that procurement requirements favor U.S. firms. 50 Despite the fact that development assistance and commercial promotion are interrelated, there is no firm agreement about whether this linkage should be promoted or curtailed. Only a small number of government-supported programs involve technology transfer to middleand upper-income Middle Eastern countries. Included among this small group are U.S.-Saudi Joint Commission programs, valued at $580 million during the 1975-82 period and directed toward manpower, trade, industrialization, science, and technology. About 80 percent of the funds, which come entirely from the Saudi Government, are transferred to U.S. private sector firms carrying out the programs. Such programs represent a different type of assistance to nations that can well afford it. Business-Government Relations Technology transfer issues raise difficult questions about business-government relations, as the discussion of economic effects and development assistance illustrates. The traditional adversarial relationship between government and private business sectors in the United States is reflected in antitrust legisla.-.49 Development Cooperation (Paris: Organization for Economic Cooperation and Development, 1983), pp. 240-241. 50 See table II..B.5, Tying Status of ODA, 1981, Development Cooperation (Paris: Organization for Economic Cooperation and Development, 1982), p 227. tion, and in comparatively stringent regulations on the activities of firms overseas (tax laws and the Foreign Corrupt Practices Act). As discussed in chapter 13, U.S. export promotion programs have been less extensive than those of some other supplier nations not only in levels of funding, but also in institutional resources devoted to these activities. This situation contrasts with the leading role that many supplier governments have taken in carrying out economic diplomacy missions to developing nations and in their more consistent emphasis on routine commercial representation. The extent to which public officials organize, facilitate, or inhibit commercial technology transfers is influenced by long-standing traditions. In the United States, perhaps more than in any other Western supplier nation, the distinction between the public and private sectors has been maintained. However, a variety of proposals to expand export programs, including mixed credits, reveal growing support for a more cooperative relationship. Energy Requirements Energy requirements have strongly influenced decisions about technology transfers to the Middle East, particularly for Western Europe and Japan. Oil and gas make up 90 percent of the Middle Easts exports. In recent years, the dependence of Western Europe and Japan on Middle Eastern oil imports has been considerably greater than that of the United States. For the United States, oil imports from the Organization of Arab Petroleum Exporting Countries (OAPEC) have declined both absolutely and relatively since 1977-79, when they reached a peak of 3 million barrels per day, or roughly 50 percent of total oil imports. In contrast, in 1981 32 percent of French oil imports came from Saudi Arabia and 21 percent from Iraq. In 1983, about 65 percent of Japans oil still came from the Middle East, Thus, despite the fact that U.S. oil and refined product imports from OAPEC have fallen in recent years, Western Europe and Japan remain dependent on oil imported from these countries for over half of their imports.

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Ch. 2Analyzing Technology Trade and Transfer Conceptual Issues and Policy Choices l 4 7 Requirements for Middle Eastern oil have stimulated Western Europe and Japan to participate in development projects in the region. In some instances, firms transferring technology have been provided with oil supplies. Critics charge that when oil is used as a bargaining tool, Western nations and firms may be commercially disadvantaged or, in a more extreme case, that recipient governments may pressure them to change foreign policy positions. Both public and private leaders in Japan and Western Europe tend to view their political and economic interests as convergent in their exchange of technology for energy (see ch. 12). Nevertheless, differing degrees of reliance on energy imports from the Middle East influence technology transfer and political relations among the United States, Japan, and Western Europe, and between them and Middle Eastern countries. Foreign Policy Goals Decisions about technology transfer may be closely connected to foreign policy goals. The United States is the only nation that has had a formal system of foreign policy controls, under the Export Administration Act, which empowered the President to restrict exports of various kinds for political purposes: for example, imposing sanctions on countries that support terrorist activities or violate human rights. These controls have been used to restrict U.S. exports of aircraft and helicopters to countries such as Iraq, 51 Syria, PDR Yemen, and Iran and exports of a broader range of equipment to Libya. An ongoing and unresolved debate in the United States focuses on different assessments of the costs of such controls, measured in terms of lost markets for American goods and services versus the opportunity to take a political stand on important issues, regardless of the economic sacrifice. 51 Foreign policy controls affecting Iraq were terminated in 1983. However, debates continued over the question of Iraqs classification. The House of Representatives passed a version of the Export Administration Act, which reclassified Iraq. See Congress Wrestles Over Iraq, The Washington Report on Middle East Affairs, Dec, 12, 1983. Similarly, the United States is the only Western nation with a strong policy of nonsupport for the Arab economic boycott of Israel. The policy requires Government intervention to ensure that U.S. firms are not discriminated against or made parties to a boycott instituted by a foreign nation. As such, anti-boycott policies reveal familiar tensions between political principles and commercial interests. Some observers say that U.S. anti-boycott policies play a major role in restricting U.S. exports to the Middle East (particularly inhibiting the participation of firms new to the market and those transferring technology over the long term), while others argue that firms find ways to comply with the legal requirements while simultaneously expanding sales. It is extremely difficult to assess the precise impact of these policies on U.S. technology trade and transfer with the region, since many factors affect sales and only rarely can the impact of a particular type of export control b e measured. Nuclear technology transfers represent a very special case. Among Western supplier countries, the United States has the most extensive regulations dealing with exports of nuclear materials and technologies. The United States has enacted special nuclear controls designed to limit shipments of nuclear-related equipment and materials, including dual-use items, in order to reduce the spread of technologies that can be used to develop nuclear weapons. In addition, the United States participates in the International Atomic Energy Agency (IAEA) and supports the Treaty on the Non-Proliferation of Nuclear Weapons. While there are relatively few nuclear facilities in the Middle East today, and U.S. firms have been less involved than firms from other supplier nations, many Middle Eastern countries will make critical decisions during the next decade about the introduction of nuclear facilities. Chapter 9 assesses the prospects for nuclear weapons proliferation in the Middle East and outlines a limited number of policy options available to the United States.

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48 l Technology Transfer to the Middle East U.S. civilian technology transfers can be viewed as an important foreign policy asset. The bulk of U.S. civilian technology trade and transfer currently goes to friendly countries such as Israel, Egypt, and Saudi Arabia. To the extent that such transfers result in mutually beneficial relations with recipient countries in the Middle East, they can be viewed as contributing to larger U.S. political interests there. Successful civilian technology transfers help cement political alliances with friends and allies. The U.S. Government thus has an interest in promoting them. This argument can be taken further: if the United States does not pursue active technology transfer policies, Middle Eastern countries may turn to other suppliers, including the Soviet bloc countries. Policymakers in supplier countries must, however, take note of counter arguments. Critics point to white elephant projects as symbolic of technology transfers that can lead to damaged relations between suppliers and recipients. Such failures, the critics argue, signify waste of finite economic resources and also pose potential social and political problems in recipient countries. The logical extension of this argument is that since poorly planned technology transfers backfire, and sometimes reduce goodwill for the United States in the region, the U.S. Government should take a more active role in regulating commercial technology transfers. The question of what roles supplier governments can and should play in promoting or regulating civilian technology transfers to the Middle East is complex. At its center are disagreements about the extent to which transfers have been mutually beneficial, the extent to which governments can influence the volume and type of commercial trade and transfers, and, most particularly, the question of whether governments are capable of identifying the mutually beneficial projects. Despite these uncertainties, it is clear that Middle Eastern nations place a high priority on technology transfer, and other supplier governments have generally viewed such transfers as mutually beneficial. Cooperation With Othe r Supplier Countries A related issue concerns the extent to which cooperation with other supplier countries is possible or desirable. During the 1970s, European and Japanese approaches to the Middle East were sometimes seen by U.S. observers as based on short-term economic considerations. The charge she stoops for oil was repeatedly leveled against these nations. 52 On a number of occasions, American policy makers criticized the Japanese for actions such as purchases of Iranian oil in 1979. Beginning with the Washington Conference following the oil shock of 1973-74, tensions among the Western allies over Middle Eastern policy became apparent. Despite calls for coordination of policies, the Western nations during the last decade sometimes diverged in their approaches to Middle Eastern issues, as reflected in various European declarations. Nevertheless, through the International Energy Agency (IEA) the Western nations managed to establish emergency oil-sharing agreements and joint goals on reduction of oil imports. Before 1973, the European Community began talks with Middle Eastern countries and with Third World countries. The Euro-Arab dialog picked up momentum during the oil crisis as the Europeans signed the Brussels declaration, which called for bilateral cooperation agreements and included a statement of opposition to Israeli occupation of territories held since 1967. The European approach favoring negotiations with oil-producing countries appeared to run counter to U.S. calls for cooperation among suppliers. (As discussed in ch. 12, the Euro-Arab talks have progressed slowly, due in part to Arab desires to include political as well as economic and technology issues in the discussions.) These multilateral approaches reveal problems in alliance politics. Despite efforts to coordinate Western energy and foreign policies through the IEA and the Euro-Arab dia62 See Dominique Moisi, Europe and the Middle East, The Middle East and the Western Alliance, Steven L. Spiegel (cd.) (London: George Allen & Unwin, 1982), p. 18.

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Ch. 2Analyzing Technology Trade and Transfer: Conceptual Issues and Policy Choices l 49 log, supplier governments have commonly formulated bilateral policies with specific Middle Eastern countries. These bilateral ties continue to be of primary importance for technology trade. Through the United Nations, the World Bank, and other multinational institutions, supplier countries cooperate in programs involving technology transfer. Technical assistance, however, is generally carried out in bilateral programs that are not coordinated. Given the growing importance of technical assistance to developing nations, some observers have called for improved cooperation among suppliers. Nevertheless, the different perspectives of various OECD nations on development assistance and the strongly commercial flavor of many bilateral programs reduce the prospects for multinational coordination. For policymakers in supplier countries, decisions about how and when to cooperate with other suppliers are often difficult. At a fundamental level, the supplier countries and their respective firms compete with one another for shares in third country markets. On the other hand, many of the largest industrial projects involve firms from many nations working together. Indeed, the internationalization of U.S. firms (by virtue of their overseas subsidiaries and joint ventures) complicates assessment of national market shares. POLICY TRADEOFF S Both recipients and suppliers are forced to balance various economic, social, political, and strategic considerations in formulating policies affecting technology transfers. Supplier, and especially recipient, countries and regional organizations are currently attempting to coordinate such policies. Over the last decade, a number of proposals have been made for a more coordinated, comprehensive U.S. technology transfer policy, but none of them have been enacted. 53 This re 53 See, for example, Committee on Science and Astronautics, U.S. House of Representatives, hearings, International Science and Technology Transfer Act of 1974, May 21, 22, and 23, 1974. fleets, at least in part, the complex policy tradeoffs that transfer decisions raise for policymakers. Should taxpayers subsidize domestic manufacturers through tied aid? Are development assistance goals jeopardized by the involvement of profit-maximing firms? Public and private sector interests sometimes diverge in transfer choices. U.S. anti-boycott policies and foreign policy controls illustrate the tradeoffs between promoting commercial gains and upholding political principles. Recipient country governments face equally difficult but different types of tradeoffs which often center around maximizing goals such as indigenous manpower development in the short or long term. Because most technology transfers occur through commercial channels, specific supplier government policies have limited effects. (The role of the recipient governments is normally stronger, given the prevalence of public sector enterprises in developing nations.) On the other hand, the general context of foreign relations between supplier and recipient countries importantly affects prospects for technology transfer. Conversely, transfers also have implications for those foreign policies. Examples of technology transfers that failed, creating resentment on the part of recipients and perhaps financial dilemmas for suppliers, lead to a cautious approach by both sides. Policymakers are wary of unanticipated social and political consequences that accompany rapid change. On the other hand, the promise of mutually beneficial transfers is clear. For countries determined to foster economic prosperity, such transfers are a critical element in development pl anning. For supplier nations, they are a factor in international competition. As recipients and suppliers learn more about how technology transfers can be designed for mutual benefit, the risks for both sides may be somewhat reduced. However, it is inconceivable that they will be eliminated, and this heightens the importance and difficulty of policy choice.

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50 l Technology Transfer to the Middle East CONCLUSIO N Technology transfer, as the concept is used in this study, refers not only to international trade in technology but also to the process of technology utilization or absorption by the recipient. This chapter has outlined an approach to analysis of technology transfer which includes evaluation of the extent of technology absorption at the firm or sector level, as well as consideration of factors affecting technology trade. While no single indicator can be used to measure technology transfer precisely, technology trade and absorption can be analyzed by considering a number of relevant indicators. As used in this report, technology transfer involves trade in technology but is not synonymous with it. It involves the development of a capability by the recipient to operate a production facility or service system at a higher level, and this implies a two-way interaction between supplier and recipient. In technology transfer, teaching and learning usually occur over a period of time, particularly when technology is transferred from industrial to developing countries. The extent of transfer is appropriately assessed at the project or sector level because the resulting capability is specific to a particular production or service system. Technology tradeincluding international flows of technology in machinery and equipment, patents and licenses, technical documents, technical services and training-is important in its own right, because of its significance in national trade balances. It is also a necessary but net sufficient condition for full technology transfer, including technology absorption. The growth of technology trade indicates the potential for technology transfer, and trade may have beneficial effects even if full transfer does not occur. Factors affecting technology trade include a number of economic trends such as the level and rate of economic development, foreign exchange availability of the recipient, and the comparative advantage of suppliers, product cycles, and exchange rates. In addition, political factors such as industrial, labor, and science and technology policies as well as foreign relations between nations influence technology trade. Recipients in developing countries often stipulate that considerable technical training and assistance be carried out in association with imports of technology in the form of equipment and machinery. By packaging technology, the supplier may be able to reduce the effect of obstacles to operation and maintenance of facilities, such as shortages of technically trained manpower. Over the long term, however, firms and users in recipient countries must develop their indigenous technological capabilities in order to attain higher levels of technology absorption needed for adaptation of technology. The effects of technology transfer are most clearly identified in the projects or industrial sectors receiving technology. Improvements in the operational efficiency of the facility and the quality and capabilities of the work force, among other factors, indicate technology absorption. It is much more difficult to assess all the impacts of technology transfer. This is the case because it is difficult to establish the precise contribution of transfer (as distinguished from other aspects of development), to changes in customs or values, or political stability. Nevertheless, because advanced technology transfers often occur in the context of highly visible development projects, their success or failure may be viewed by recipients as symbolic of larger relations between countries. Because it is often difficult to anticipate future effects of technology transfers or to trace past results, the transfers raise complex issues for policymakers in both recipient and supplier nations. These issues are rarely systematically addressed, and often implicit in policy debates. In many cases, tradeoffs among political, economic, social, and foreign policy goals must be made in formulating policies. Careful examination of past experience with technology transfers may help policymakers to reduce

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Ch. 2Analyzing Technology Trade and Transfer Conceptual Issues and Policy Choices l 51 their risks and enhance their benefits. Howterns during the past decade are examined. ever, given the problems in assessing transThen the process of transfer in particular secfer discussed in this chapter, uncertainty tors is assessed, with special attention given about effects will inevitably remain a feature to issues of competition among suppliers and of policy choice. technology absorption by recipients. Policies The chapters that follow are designed to asof various recipient and supplier countries are sess the process of technology transfer and to outlined and compared to U.S. policies. Finally, U.S. policy options are identified with a identify public policy issues for the United States. As a foundation for this analysis, the view toward future prospects for Middle East Middle East context and technology trade pattechnology trade.

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CHAPTER 3 The Middle East as a Context for Technology Transfer

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Contents Page INTRODUCTION . . . . . . . . . . . . . NATURAL RESOURCES AND ECONOMIC STRUCTURE . . . . Natural Resources . . . . . . . . . . . . . Financial Resources . . . . . . . . . . . . . Economic Structure . . . . . . . . . . . . . Implications for Technology Transfer . . . . . . . . . MANPOWER . . . . . . . . . . . . . . Labor Force. . . . . . . . . . . . . . . Foreign Manpower . . . . . . . . . . . . . Implications for Technology Transfer . . . . . . . . . SOCIAL/POLITICAL CONTEXT . . . . . . . . . . Social Factors . . . . . . . . . . . . . . Political Context . . . . . . . . . . . . . Implications for Technology Transfer . . . . . . . . . 55 56 56 64 68 70 71 71 74 79 80 80 84 85 Tables Table No. Page 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Oil and Gas in the Middle East . . . . . . . . . . 59 Crude Oil Selling Prices. . . . . . . . . . . . 65 Balance of Payments and Financial Situation of Middle East Countries . 65 Distribution of GDP bisector, 1981 . . . . . . . . 69 Basic Indicators, Selected Middle East Countries, 1981 . . . . . 73 Number of Trained Scientists and Engineers, 1970s . . . . . Educational Enrollments in Selected Middle Eastern Countries . . . Migrant Workers in the Arab World by Country of Origin and Employment, 1980 . . . . . . . . . . . . Employment by Nationality and Economic Sector, Saudi Arabia and Kuwait, 1975 . . . . . . . . . . Employment by Nationality and Occupational Groups, Kuwait, 1975 . Figures Figure No. 3 4. 5. 6. 7. 8. 9. Population Compared to Crude Oil Reserves, 1980 . . . . . . Crude Oil Production Compared to Crude Oil Reserves, 1980 . . . . Crude Production Per Capita Compared to Crude Reserves Per Capita, 1977.. Gross Fixed Capital Formation Compared to Gross Domestic Product, 1977 Gross Fixed Capital Formation Compared to Gross Domestic Product Per Capita, 1977, . . . . . . . . Percent of GDP From Agriculture Compared to GDP Per Structure of Economically Active Population in Selected Middle East Countries . . . . . . . Capita, 1977 . . . . . 74 75 77 78 78 Page 57 57 57 57 58 69 73

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CHAPTER 3 The Middle East as a Context for Technology Transfer INTRODUCTIO N In the 1970s the rapid expansion of oil wealth in some Middle Eastern countries at early stages of economic development was the major stimulus for technology transfer. Dependence on oil for revenue, limited infrastructure, a scarcity of technically trained manpower, and political and social tensions among and within Middle Eastern countries have at times, however, posed constraints. This chapter outlines opportunities and constraints for technology transfer to Islamic countries in the Middle East. Two overarching themes form the context for technology transfer to the Middle East. The first is the disparity between human and natural resource endowments that characterizes the region as a whole. With the exception of Iran, those countries with larger populations have relatively low petroleum reserves. This basic imbalance is perhaps the most important feature of the Middle East context for technology transfer. Neither population nor oil resources are static, but they are critical parameters for economic and technological development in the near term. Technology transfer is thus constrained more in some countries by limited capabilities to purchase advanced technology, and in others by a scarcity of indigenous technical manpower. Social and political concerns also shape the context for technology transfer to the Middle East, but in so many ways that it is impossible to generalize. As Middle Eastern countries attempt to combine Western technology with traditional values, the role of Islamic tradition and culture becomes difficult to define: sometimes it may support transfer, at other times it may be an impediment. Regional conflicts often limit prospects for civilian transfer; on the other hand, opportunities for regional cooperation are also available in joint economic development projects. No one context, of course, can be considered optimal for technology transfer. Opinions vary about the significance of particular factor endowment mixes (involving land, labor, and capital resources) and of sociopolitical factors. A country with a high level of capital availability and a highly educated pool of scientific and technical manpower would certainly be more capable of obtaining and using imported technology than one that has neither the financial resources to purchase technology nor the human capability to use and absorb it. Technology can itself be considered an additional resource. While requiring other inputs to be effective, technology can also be used so as to substitute for resources in short supply. Viewed from this angle, the challenge is to carry out transfer of technologies that will utilize existing factor endowments in the most effective way. In order to do this, a variety of technologies are needed. For these countries, importation of less sophisticated technologies may be critically important in some sectors, while advanced technologies are needed in others. Definitions of the Middle East region range from the borders of the Arab states and Israel to the much broader region of Muslim states extending into North Africa, Asia, and the Soviet Union. The region represents a broad mix of resource endowments, levels of industrialization, and social and political systems. The countries of the region also vary in the levels and types of their technology imports, their technology suppliers, and hence in their prospects as potential markets for Western goods and services. 55

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56 l Technology Transfer to the Middle East This report focuses primarily on six countriesAlgeria, Egypt, Iran, Iraq, Kuwait, and Saudi Arabia. OTA recognizes that the six nations selected for special attention in this study are by no means representative of the Middle Eastern region as a whole, however defined. They do not include the poorest states of the region, such as the Sudan; the more radical states, such as Libya; or any nonIslamic country in the region. They also do not include the regions most technologically advanced country, Israel, since the main focus of the report is on those Middle Eastern countries which only in the past 10 to 15 years have tried to bridge the development gap very rapidly. Israels distinct historical experience and technological capabilities put it in a separate category, one that presents different issues and problems for technology transfer than those in the six countries under review. OTAs selection is intended to highlight key elements that present different opportunities and dilemmas for technology transfer. All of the countries in this study, for example, are oil producers, share a common Islamic heritage, are located in a hostile desert geographical context, and are attempting rapid economic development based largely on revenues from oil and gas. The differences among them, however, are striking and lie chiefly in levels of hydrocarbon reserves and production, financial reserves, economic structure, population size and composition, social and political systems, and past experience with technology transfer. This chapter describes the context in which technology transfer occurs and in which policy decisions must be made. The major part of the chapter discusses the natural, financial, and human resources of Middle Eastern countries of particular interest. In conclusion, the social and political context is briefly considered. Questions of how Middle Eastern leaders develop policies to utilize these resources are addressed in chapter 11. NATURAL RESOURCES AN D ECONOMIC STRUCTUR E Figure 3 illustrates the disparity in the Middle East between human resources and petroleum reserves. Oil reserves in the Middle East have been the key source of revenues and the basis for industrial development in all of the countries selected by OTA. These reserves are especially large in Saudi Arabia and Kuwait; reserves in Algeria and especially Egypt are more limited. In contrast, the manpower base for technology transfer is larger in Algeria and Egypt, while being much smaller in Saudi Arabia and Kuwait. The positions of these countries change, however, when viewed from different perspectives. Petroleum revenues in relation to production contrast sharply with the same relationship on a per-capita basis. A comparison of figures 4 and 5 shows how the positions of various countries change when crude oil reserves are calculated on a per-capita basis. As illustrated by figure 5, Kuwait, a small citystate northwest of the Persian Gulf, has the highest per-capita oil reserves of any Middle Eastern country. In contrast, Kuwait ranks on a par with Iran (fig. 4) when total oil reserves are compared. Disparities also exist among the countries in both gross domestic product (GDP) and gross fixed capital formation (GFCF) per capita, as well as in the relationship between the two (figs. 6 and 7). Kuwait emerges as the high extreme when these indicators are examined on a per-capita basis, while Saudi Arabia and Iran were the high extremes on the basis of sheer wealth and investments in infrastructure, irrespective of population size. NATURAL RESOURCE S Petroleu m The six countries included in this study are similar in their present emphasis on hydrocar-

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Ch. 3 The Middle East as a Context for Technology Transfer l 5 7 0 Figure 3. Population Compared to Crude Oil Reserves, 1980 Crude Oil Reserves, 1980 Saudi Arabia Iraq Libya Iran Algeria UAE Egypt Kuwait 0 a I i 1 1 42.5 85 (1 1980 reserves of crude oil II II 1 :1. t 170 Figure 5. Crude Production Per Capita Compared to Crude Reserves Per Capita, 1977 Kuwait Saudi Arabia l Libya I o 1977 crude reserves per capita (barrels) 56,000 Figure 6. Gross Fixed Capital Formation Compared to Gross Domestic Product, 1977 Iran* l Saudi Arabia l Algeria Turkey 0 1977 gross domestic product ($billion) 80 T = Tunisia S = Syria J = Jordan O = Oman NY = North Yemen Note The IMF does not publih natinal accounts statistics for Bahrain, Lebanon, Qatar and South Yemen. They are not included in this figure Gross Capitol Formation IS used for Israel, Iraqi, GDP data I s from 1976 Iraqi GFCF data i S from 1975 SOURCE International Monrtary Fund International Financial Statistics Year book 1982 37-507 0 84 5 : QI, 3

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58 l Technology Transfer to the Middle East Figure 7.Gross Fixed Capital Formation Compared to Gross Domestic Product Per Capita, 1977 a lncludes Egypt, Morocco, Jordan, Syria, Tunisia, Turkey, AIgeria Note The I M F does not report national accounts statistics for Bahrain, Lebanon, Qatar and South Yemen They are not Included on this figure Gross Capital Formation i S used for Israel, and Oman, Iraqi GDP data IS from 1976 Iraqi GFCF dala IS from 1975 SOURCE International Monetary Fund International Financial Statistics Yearbook 1982 bons as a source of their revenue and growth. To be sure, the centrality of petroleum is a comparatively recent development in some of the countries under review. But today, oil and gas account for over 90 percent of total merchandise exports of five of the six countries under review, and for a large proportion of domestic production. Even in Egypt, the country with the smallest oil resources, petroleum has recently become centrally important. Through the 1960s, for example, Egypt was the worlds leading producer of cotton fiber and a major producer of other agricultural products. Today, however, with population growing rapidly, Egypt has become a net importer of many basic food products, and in recent years, the importance of cotton exports has declined. Instead, Egypt relies increasingly on petroleum and worker remittances for export revenues; in 1981, oil revenues accounted for 70 percent of Egyptian export earnings. Aside from Iran and Iraq, the emergence of the Middle East as an important petroleum exporting region dates only from the middle of this century. Before World War II, few countries besides Iran and Iraq had discovered or developed oil resources. While oil had also been discovered in Saudi Arabia and Kuwait before the war, exports became significant only in the mid-1940s for Saudi Arabia, and later in the decade for Kuwait. At the beginning of the 1950s, development of Middle Eastern oil was still in its early stages; in the next 10 years, production nearly tripled, and in the following 10 years, it tripled again. Oil output in the Middle East rose from nearly 10 million barrels per day (b/d) in 1967 to 22 million b/d in 1977, an annual increase of 8.3 percent; by 1977, the Middle East alone accounted for over 36 percent of total world output and about 60 percent of total world exports.1 Despite the common importance of petroleum, however, there is a sharp division between the oil-rich countries and those less well endowed with hydrocarbon resources. Table 2 and map 1 illustrate some of the major differences in oil reserves, production, and exports among the six countries examined, with Saudi Arabia, Kuwait, and Iran at one end of the spectrum and Egypt and Algeria at the other. Saudi Arabias huge proven oil reserves, for example, estimated at 165 billion barrels in 1983, vastly exceed by as much as 18 and 50 times those of Algeria and Egypt, respectively. Saudi Arabias close to 10 million b/d in crude oil production in 1981, was more than 16 times that of Egypt. 3 Similarly, Saudi Arabias 9.3 million b/d petroleum exports vastly 1 Peter Mansfield, The Middle East (Oxford: oxford University Press, 1980), p. 87. 2 The World Bank cites Egyptian oil reserves at 2.9 billion barrels. An estimate of 3.3 billion barrels is included in Economic Trends Report: Egypt, Economic and Commercial Sections, American Embassy, Cairo, Egypt, Sept. 6, 1 982. p. 10. In 1977 before the Iranian Revolution and the outbreak of war between Iran and Iraq, Iran, Iraq, .Saudi Arabia and Kuwait accounted for about one-third of total hl iddle 1; ast crudt oil production, and Iran and Saudi Arabia numbered among the four largest producers in the world. See hlansfield, op. (it., p. 89.

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Ch. 3The Middle East as a Context for Technology Transfer l 5 9 Table 2.Oil and Gas in the Middle East Reserves ProductIon Exports Apparent consumption Crude Total prod Crude Refined Crude Oil Natural gas Oil Na.t gas Oil petroleum Dry Petroleum Dry (billion bbl) (trllllon ft 3 ) (1,000 bpd) (billion ff 3 ) exports product gas (thousand bpd) qas 1981 1971 1980 1979 33.2 2.625 1.656 460 131.5 1.294 1.012 1.539 30 542 595 ND 1124 983 5 990 0 1 786 485.0 3.178 1.662 1. 401 27.5 3.487 2.514 509 Dry gas 1979 exports 1979 1979 1979 1979 213 208 1 294 0 154 213 520 1 082 71 393 104 12q ND 267 33 ND 226 ND 390 8818 429 0 415 390 512 2407 141 134 532 358 60 3275 42 ND 191 ND SOURCE Energy Information Administration U S Department of Energy International Energy Annual 1980 (Washington D.C., U.S. Government Printing Off Ice September 1981) pp 28 29 66 67 86

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Ch. 3 The Middle East as a Context for Technology Transfer 61 exceeded the 199,000 b/d of crude oil exported from Egypt in the same year. In the 1970s, Saudi Arabia and Iran were the two largest oil exporters in the world, and oil revenues in Saudi Arabia were the largest in the world. While reserves are large in Iraq and Iran, the war between them has resulted in greatly reduced petroleum exports. This has been true especially in Iraq, where petroleum exports were at a record low of less than 1 million b/d as of 1983 in contrast with three times that level before the outbreak of hostilities. In some countries, such as Algeria and Iran, natural gas has also been important. Table 2 highlights some of the major differences in natural gas reserves, production, and exports. 4 For the Persian Gulf region, proved natural gas resources have been estimated at about 700 trillion ft 3 or about 26.6 percent of the world total. In 1980 the aggregate gross production of natural gas in the Persian Gulf countries was 4.3 trillion ft 3 But 60 percent of this was flared, and less than 5 percent reinjected into oil reservoirs. See U.S. Department of Energy . As table 2 illustrates, dry gas exports have been very important for Algeria and Iran in particular, whose reserves of natural gas are among the worlds four largest. In 1983, Iranian proven natural gas reserves, estimated at about 483 trillion cubic feet (ft 3 ), were second only to those of the Soviet Union. During the 1970s, Iran was the largest natural gas exporter in the Persian Gulf. Algerian natural gas reserves have been estimated as fourth in magnitude after the Soviet Union, Iran, and the United States. 5 The Petroleum Resources of the Middle East, Foreign Energy Supply Assessment Program Series (Washington, D.C.: Energy Information Administration, May 1983), p. 75. See U.S. Department of Energy, The International Enera Afanua), 1982 (Washington. D. C.: U.S. Government Printing Office, September 1983), p. 80. In 1981. Algeria possessed an estimated 131.5 trillion ftq of natural gas reserves, and approximately 29 trillion ft~ of probable and possible reserves; this did not include an additiond 1,5 billion barrels of liquefied petroleum gas. Dr~r gas exports from Algeria in 1979, at close to 400 billion ft3, were higher than most other countries in the Middle klast, and more than 2 times those of Iran. Photo credit Aramco World Magazine Butane and propane Iiquefied gases are stored in special refrigerated tanks prior to export from Saudi Arabia

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62 l Technology Transfer to the Middle East In Egypt, natural gas reserves are far more limited but not insignificant. Egypts proven natural gas reserves are now estimated at between 5.5 and 7 trillion ft 3 6 Although natural gas reserves in Saudi Arabia, at about 121 trillion ft 3 in 1983, are fifth in size, in Saudi Arabia and Kuwait the production of natural gas has been small relative to oil, and almost all has been associated gas (i.e., gas produced in conjunction with petroleum extraction operations). As discussed in chapter 14, however, prospects for oil and gas production in the Middle East are uncertain. on the one hand, some observers argue that oil reserves may be significantly depleted in many Middle Eastern countries by the beginning of the 21st century. One study conducted by the Department of Energy (DOE), for example, projects that if the average production during the 1990s were to remain the same as that in the 1980s, then by the year 2000 over one-half of the total known oil resource base in the Persian Gulf would be depleted. 7 On the other hand, large reserves can be expected to remain in the Middle East for the next two decades, and oil resources are not static. Several Gulf States will be able to produce some additional deposits, using more costly secondary recovery techniques, and large oil fields may yet be discovered. In addition, the importance of natural gas may rise greatly during the post-1990 period, offsetting the projected decline in oil production. Wate r Aside from oil and natural gas, the natural resources of all six countries selected by OTA are limited. With a minimum of 40 percent of the land mass of these countries classified as desertand in some instances, more than 90 percent-the limited amount of cultivable land 6 Ibid, p. 80; and Economic Trends Report: Egypt, Economic and Commercial Sections, American Embassy, Cairo, Egypt, Sept. 6, 1982, p. 10. 7 U.S. Department of Energy, The Petroleum Resources of the Middle East, op. cit., pp. 67, 82. These estimates are based on the assumption that oil production will increase at an average rate of 6 percent in the 1980-95 period; during recent years this has not actually occurred. in these countries makes extensive agricultural development difficult. The Arabian peninsula is the most arid part of the Earth, with Saudi Arabia the largest country in the world having no rivers and few streams. In the other countries under study, basic resources for agricultural expansion mainly waterhave been limited as well, and prospects for substantial improvement are uncertain. The scarcity of water is a critical constraint in most of the countries under review, although the situation has been alleviated somewhat in recent years by desalination and the construction of dams and irrigation systems. All of these countries have upgraded the delivery of potable water, particularly in urban areas. The Middle Eastern region is fed by two main river systems: the Tigris-Euphrates and the Nile. These two river systems have been the lifeline of this region for centuries, and the heart of great ancient civilizations. Both systems, however, are today limited in their ability to support the regions rapidly growing population. Agricultur e Limited water availability has precluded extensive agricultural development. Most extreme in this regard are Saudi Arabia and Kuwait, with well over 90 percent of their land mass in 1982 classified as desert. Although there is some variation among the countries under review, all have considerable expanses of unpopulated land, with a few areas of dense population. Cultivable land is generally restricted to small areas lying between vast stretches of desert and steppe. In Iran, for example, more than 50 percent of the total land area has been classified as desert, wasteland, or barren mountain range of no agricultural value. In the late 1970s, only 15 to 16 percent was regarded as land that could be farmed with adequate irrigation. 8 In Egypt, agricultural cultivation has been limited to only 4 percent of the country, with harsh desert compris8 Richard F. Nyrop (cd.), Iran: A Country Study (Washington, D. C.: Foreign Area Studies Series, The American University, 1978), pp. 330-331.

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-. Ch. 3 The Middle East as a Context for Technology Transfer l 63 Photo Credit Chevron U.S.A., Inc. Pipeline construction in Saudi Arabia ing much of the remainder. In only a few of the other countries in the Middle East outside of the six examined by OTAsuch as the Fertile Crescent in Syriacan greater wealth in agricultural land be found, but even here, rainfall is uncertain, and the amount of cultivated land small. This is not to suggest that agricultural products have been insignificant for domestic consumption or as sources of income for most of these countries. Aside from hydrocarbons, agricultural products have comprised the bulk of exports from many of them, including such items as barley, wheat, and dates from Iraq, cotton from Egypt, and dried fruit from Iran. But the resources for agricultural expansion have been limited, and the climate for expansion of crops much less favorable than in other parts of the developing world. The further development of agricultural resources is an open question. The extent of underground water resources in the Egyptian and Arabian deserts has yet to be fully determined, and in Egypt, there has been some debate over whether agriculture there has actually reached its limits, given Egypts physical environment (sun, soil, and water). Israels success in agricultural production with limited resources is perhaps a case in point. For the time being, however, harsh climate and terrain make the region an importer of many food and agricultural products. Minerals The six Middle Eastern countries selected by OTA may have significant reserves of minerals, but they have not been extensively developed. Saudi Arabia and Iran, for example,

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64 l Technology Transfer to the Middle East Photo credit U S Agency for International Development Water use and management in Egyptian agriculture are just beginning to assess their mineral bases. With significant amounts of copper, iron, gold, phosphate, zinc, lead, and some bauxite found in Saudi Arabia, some observers expect Saudi Arabia may become as important an exporter of minerals in the future as it is of oil today. 9 Important mineral resources now being extracted in other areas of the Middle East 10 include iron, phosphates, and, to lesser extent, copper, manganese, coal, and salt. Large deposits of titanium (an important structural metal element) were discovered in 9 Louis Turner and James M. Bedore, Middle East Industrialisation (Hants, England: Royal Institute of International Affairs, Saxon House, 1979), p. 3. 10 See Iran: A Country Study, op. cit., pp. 310-311. In 1975, estimated reserves of some of Irans more important mineral resources were: iron ore, 114 million tons (with a metal content of 35 to 62 percent); copper ore, 1 billion tons (much of it high grade); lead and zinc ore, 10 million tons; antimony ore, 12,000 tons; manganese ore, 720,000 tons; chromite, 7 million tons: and coal, 300 million tons. Egypts Eastern Desert in 1971, and several observers have suggested that other large areas of the Egyptian and Arabian deserts that still have not been intensively surveyed may also prove to be rich in other minerals. In addition to hydrocarbons, Algeria has valuable uranium deposits in the Sahara as well as already exploited deposits of iron, coal, phosphates, zinc, and lead, and unexploited deposits of manganese, diamonds, iron, and platinum. At present, however, in the Middle East mining and production of minerals have not been developed to a great degree, and mineral exports comprise a very small proportion of Middle Eastern production and exports. FINANCIAL RESOURCE S Oil and gas are the foundation of the financial resources of these Middle Eastern countries. High oil revenues have allowed the oil-

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Ch. 3 The Middle East as a Context for Technology Transfer l 6 5 rich countries of the Middle East to be freer of the balance-of-payments constraints found in most other parts of the developing world. But in those Middle Eastern countries with smaller reserves, such as in Egypt, financial constraints remain strong. During the current period of oil glut, moreover, the overall financial situation of all of these countries has changed. The rapid influx of large amounts of capital into the Middle East dates mainly to the early 1970s. Large-scale capital flows resulting from the oil price rises in 1973 generated massive financial resources for the oil-producing countries. Nominal prices continued to increase well into the early 1980s, while oil production remained high. As table 3 indicates, the largest price increase occurred between 1973 and 1974, but between 1979 and 1980, another jump in prices occurred, with Saudi Arabian Light, for example, almost doubling from slightly over $13 to $26/barrel (or about $17 to $30 in 1982 prices). While the large producers benefited most from this wealth, the effects were felt throughout the Middle East in: 1) private investment, public investment, and direct assistance by oil producing countries to other Middle Eastern countries; and 2) labor remittances to those countries poorly endowed with oil but which exported manpower to the labor-short, oil-rich nations. Large-scale capital flows into the Middle East, in turn, led to rising investments by oil-rich countries in the West and massive imports of goods and services from industrialized countries. Circulation of oil revenues throughout the Middle East, however, did not greatly offset the growth of vast differences in financial resources among Middle Eastern countries. Table 4 and map 2 show improvement in the financial situations of selected Middle Eastern countries between 1970 and 1980. In 1981, Saudi Arabias gross international reserves were reported as over $34 billion (U. S.) more than 20 times those of Egypt. By 1982, Saudi Table 3.Crude Oil Selling Prices a (U.S. dollars per barrel, Jan. 1, 1984) 1973 1974 1975 1976 1979 980 1981 1982 Saud i-Arabian 2.41 10,84 10.46 11.51 13,34 26.00 32.0 0 34.00 Light (34) ., ., ., . (4,72) (19.52) (19,15) (18,02) (16.29) (30.23) (34,04) (3400) Algerian 3.30 14.00 12.00 12,85 14.81 30.00 40.00 37,00 Saharan (44) . (6.47) (25.21) (19.76) (20.12) (18.11) (34.80) (42.39) (37,00) . a Figures are in normal Prices, numbers in parentheses are real prices in 1982 dollars. SOURCE Energy Information Administration U S Department of Energy 1981 International Energy Annual (Washington D C U S Government Printing Office 1983) p 47 1982 prices computed from given Table 4. Balance of Payments and Financial Situation of Middle East Countries (million U.S. dollars) Current account balance (millions of dollars) External public debt a Gross international reserves 1970 1981 1981 1970 1981 Egypt .. 148 2,135 .. 1,644 13,887 165 1,683 Algeria 125 249 b 937 14,392 352 5,915 Iran . . 507 2,193 217 17,205 C Iraq ., 105 274 472 Saudi Arabia 71 45,119 670 34,051 Kuwait . 13,758 290 5,077 . a Outstanding and disbursed b 1980 c 1979 Note Gross International reserves include holdings of gold, special drawing rights the reserve position of International Monetary Fund members in the fund and holdings of foreign exchange under the control of monetary authorities SOURCE The World Bank, World Developmenf Report. 1983 (New York Oxford Unlversity Press 1983). pp. 174-175 178-179

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66 Technology Transfer to the Middle East

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Ch. 3The Middle East as a Context for Technology Transfer l 6 7 Arabia and Kuwait claimed total official foreign assets of almost $199 billion-or more than those held by the industrial country bloc. And today, in addition to oil revenues, both Saudi Arabia and Kuwait enjoy substantial investment income as well. Oil revenues to Kuwait, for example, declined during the first 3 years of the 1980sfalling from $19.5 billion in 1980, $13.6 billion in 1981, and a projected $8 billion to $9 billion in 1982. But this decline has been offset by Kuwaits rapidly growing foreign investment income, estimated at $6 billion in 1980, $8.2 billion in 1981, and $9.1 billion in 1982. Egypt, and to a lesser extent Algeria, on the other hand, have much more limited financial reserves. Egypt is in a more favorable position than most developing countries in that it not only has some petroleum for export, but also earns considerable foreign exchange from remittances to workers from foreign countries and companies. The bulk of Egyptian foreign exchange revenues has come not only from petroleum exports, but from three main services largely connected with petroleum: workers remittances, tourism, and Suez Canal tolls. 13 But at least for the past decade, Egypt faced serious balance of payments and debt repayments problems. In 1981, therefore, Egypts current account balance was a negative $2.1 billion (U.S.), as opposed to a positive $45.1 billion See Ragaei E1-Malldd_I, U.S. Economic Ties With the Arab States of the Gulf and Egypt, The Middle East in the 1980 s: Problems and Prospects (Washington, D. C.: The Middle East Institute, 1983), pp. 17-32. For estimates of total foreign assets, see George T. Abed, Arab Financial Resources: An Analysis and Critique of Development Policies, in Arab Resources, Ibrahim Ibrahim (cd. ) (Washington, D. C.: Center for Contemporary Arab Studies, 1983), pp. 43-70. Kuwait Economic Trends, American Embassy, Kuwait, October 1982, p. 3. Figures for 1982 were preliminary estimates. Investment income for Saudi Arabia was estimated at 35 billion Saudi riyals in 1982-83 (or about $10.2 billion at a 1982 exchange rate of 3.44 Saudi riyals = $1 U.S.). See ibid., p. 21. l~In 1981, exports of petroleum and petroIeum products comprised a total of 2820 million Egytian pounds (L.E.), out of a total export revenue of 4,04O million pounds; cotton, the second largest Egyptian export, brought a total of only 310 million L.E. in export revenue. And out of a total of 4,920 million Egyptian pounds in services receipts, approximately 590 were from tourism, 888 from Suez canal revenues and an estimated 2,200 million from workers remittances. Economic Trends Report: Egypt, op. cit., p. 1. (At the end of 19811 Egyptian pound = $1.23 U. S.) for Saudi Arabia. Gross international reserves for Egypt were only about $1.6 billion, as opposed to Saudi Arabias $34.0 billion (see table 4). Indeed, Egypts external public debt registered over $13 billion (U.S.), or more than half of its gross national product (GNP). Egypt financial position has been supported by foreign aid, especially from the United States, with economic assistance in fiscal year 1981 reaching over $1 billion. Algerias financial resources are also more limited than those of the Gulf States. But while Algerias external public debt is even higher than Egypts, natural gas reserves have tended to mitigate reservations about Algerias high foreign debt and the ability to repay it; Algeria has therefore been able to borrow more freely. In the mid-1970 s, Algeria numbered among the worlds most heavily indebted less developed countries (LDCs), both in absolute terms and on a per-capita basis. By 1981 Algerias total estimated disbursed external debt was $17.5 billion, and the debt service was estimated at 25 percent of imports. But the easier access to foreign capital which Algeria has enjoyed relative to Egypt has allowed the Algerian Government to expand its investments and increase its volume of technology trade. Thus, while Algerias external public debt in 1981 was even slightly higher than Egypt (table 4), this represented a smaller proportion of Algerias GNP, and Algerias international reserves remained significantly higher than Egypts. Limited capital availability, however, still remains a serious problem for Algeria. Iraq and Iran represent a middle position. Both Iraq and Iran were important petroleum exporters before the outbreak of war, but since then their financial positions have changed dramatically. As the worlds fourth largest producer and second largest exporter of petroleum in the mid-1970s, Irans revenues from petroleum exports grew from $155 million in 1956 to a peak of $23.6 billion in 1977. Large oil revenues have also dominated Iraqs sources of foreign exchange since the early 1950s and have largely determined the level of imports. The Iran-Iraq War, however, has

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68 l Technology Transfer to the Middle East greatly eroded the generally favorable financial position of both countries. As income from sales dropped with export interruption and falling prices, and as expenditures for warrelated consumption dramatically increased, the estimated $35 billion in Iraqs foreign currency reserve were drawn down. Capital availability in Iraq has become severely limited and Iraq has turned to external loans and grants. Iran, too, has encountered financial constraints that were unknown before the revolution and the outbreak of war with Iraq. Iran was able to export more oil than Iraq during the 1982-84 period, while Iraq reportedly received considerable Arab aid. Prospects for financial resource availability in the Middle East are difficult to assess. Because of their reliance on exports of oil and external sources of income (e.g., remittances and foreign aid in the case of Egypt), Middle Eastern countries will remain sensitive to their international environment, including changes in the oil market and regional politics. Most projections suggest that the oil-exporting countries will probably have to adapt to a lower level of income growth in the coming years than in the decade of the 1970s. Opinions differ mainly as to just how much adaptation this adjustment will require. 14 One view suggests that if oil prices do not rise dramatically, financial constraints may become an important issue, even in the capitalrich states. Along these lines, one estimate projects that the price of oil, which declined in 1983, will rise moderately after 1984. 15 These projections portend only a partial recovery in revenues in the following few years of the 1980s. In real terms, this report suggests that by 1986, nominal government oil reve 14 see, for example, Joseph C. Story and Vahan Zanoyan, E CO nomic Outlook for the Middle East and North Africa, Middle East Economic Digest, June 3, 1983, pp. 39-47. 15 According to Storey and Zanoyan, by 1985, Kuwait, aong with some of the other smaller Gulf States is projected to be producing either at almost full capacity or at the production ceilings they had before the oil glut began. Saudi Arabian output is projected to grow at a more moderate rate at an average 4.9 b/d in 1983, 6.15 million b/d in 1984 and to remain between 7.2 million to 7.8 million b/d in subsequent years, ibid., pp. 38-39. nues will be about 94 percent, and their purchasing power only about 74 percent, of 1981 levels. On the other hand, other observers have noted that at least for the capital-rich states, even if revenues decline substantially in the coming years, this will not necessarily lead to more severe capital constraints in the oil-rich nations. This is attributed to these countries limited absorptive capacity, and the flexibility and diversity of capital-rich states in their sources of revenue. 16 Indeed, these observers note, despite budgetary cutbacks in certain sectors, the total 1984 Saudi budget was larger than that for 1982. These issues are discussed in chapter 14. ECONOMIC STRUCTUR E The countries of the Middle East can be divided between the traditionally agricultural and the overwhelmingly oil-based economies. Despite some diversification during the 1970s, this division still holds. Figure 8 illustrates this dualism in economic structures in the Middle East, with Egypt at one extreme, and the oil-based economies, mainly Saudi Arabia and Kuwait, at the other. Prior to the 1970s, few of the countries under review had a well developed industrial or manufacturing base, although their levels of industrial production differed. In Saudi Arabia in 1973, for example, there were four refineries, a fertilizer plant, and a small operation for producing iron and steel products for the building industry. 17 Saudi Arabia had virtually no experience with industrialization, aside from that which the Arabian American Oil Company (ARAMCO) had fostered, and data suggest that under 5 percent of the employed population was engaged in manufacturing activities in the mid-1960s. Iran was at the other end of the scale. With a larger, more skilled population and initial discoveries of oil more than 30 years earlier than in Saudi Arabia, Irans industrial development was at See, for example, E1-Mallakh, op. cit. See, for example, Turner and Bedore, op. cit., p. 4,

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Ch. 3The Middle East as a Context for Technology Transfer l 6 9 .Figure 8. Percent of GDP From Agriculture Compared to GDP Per Capita, 1977 i 60 1 North Yemen Sudan Egypt l Turkey Syria :Tunisia l ::Z;; ; J Jordan Israel Saudi Arabia l o Algeria .Libya Oman Kuwait UAE a more advanced stage. Nonetheless, until the 1970s, industry was poorly developed in most of the countries under review. During the 1970s, growth in revenues stimulated changes in economic growth and structure. In the countries under review, GDP grew rapidly throughout the 1970s, even in those countries with smaller petroleum reserves. The growth rate of GDP in Egypt prior to 1974 was a relatively poor 1 to 3 percent. Between 1975 and 1977, however, it averaged around 13 percent, before declining to an average of 8 to 10 percent annually through mid-1981. These high rates of growth greatly offset population growth rates, and per-capita income also rose rapidly. In Algeria per-capita income in 1976 was estimated as between $780 and $1,000, lower than that of the larger oil producers but substantially higher than that of neighboring countries such as Morocco and Tunisia. Table 5 illustrates the changes in the sectoral structure of GDP in selected Middle Eastern countries. The Middle East has been characterized by an almost uniform decline in the contribution of agriculture to GDP and continued importance of hydrocarbons to the growth of the GDP. One of the largest declines in agriculture occurred in Iran, where agricultures contribution to the GDP declined from 29 to 9 percent between 1960 and 1977. Between 1960 and 1981, agricultures contribution to the GDP declined from 30 to 21 percent in Egypt and 17 to 7 percent in Iraq; in Algeria, agricultures contribution to the GDP was reportedly around 6 percent in 1981. At the same time, the proportion of the hydrocarbon sector in the GDP grew rapidly in the more agricultural countries, and remained high in the oil-rich countries. The proportion of hydrocarbons in Algerias GDP grew from about 15 percent in the late 1960s to about

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70 l Technology Transfer to the Middle East 30 percent in 1979. In Egypt, from a negligible contribution to GDP of 1 to 2 percent at the beginning of the decade, the petroleum sector grew to over 13 percent of the GDP in 1979, 22 percent in 1980, and 20 percent in 1981. 18 Today, in the oil-rich countries of Saudi Arabia and Kuwait, GDP is still heavily oilcentered. Egypt remains on the other end of the scale, with a nonoil GDP still at a relatively high 80 percent of the total GDP. Iran, Iraq, and Algeria again fall in between. Declines in agriculture have not been accompanied by a rise of manufacturing with like strength. Especially for the heavily oil-centered economies, manufacturing remains a very small contributor to GDP, registering only about 4 percent of GDP in 1981. In Iran and Algeria, the proportion of manufacturing has been somewhat higher (about 11 percent), but still below the average for both lowand middle-income countries worldwide. Instead, the oil-rich countries of the Middle East have been highly service-oriented: the ratio of services to manufacturing output is 2.5 to 3.5 times higher in Saudi Arabia and Kuwait than the average for lowand middle-income countries worldwide; and while somewhat lower in Iran, Algeria, and Iraq, it is well above the world average. In Egypt, on the other hand, manufacturing contributed 32 percent to GDP in 1981, and the ratio of services to manufacturing output was well below the world average. 18 Figure for Algeria taken from U.S. Department of Commerce, Foreign Economic Trends and Their Imphcations for the LJmted States: Algeria, July 1981, p. 2. Figures for Egypt, from U.S. Department of Commerce, Foreign Economc Trends and Their Imphcations for the Uwted States: Egypt, May 1982, p. 10. Figures for oil and nonoil GDP for the remaining countries in OTAs study vary widely. One of the more conservative estimates suggests that in 1980, petroleum accounted for about 70 percent of the total GDP in Saudi Arabia, 59 percent in Kuwait, 52 percent in Iraq, and about 22 percent in Iran, although other estimates suggest the proportion may be much higher. These estimates are computed from Wharton Econometric Associates, Middle East Economic Outlook, vol. 3, No. 1 (Washington, D. C., April 1983), computer printout appendixes to each country section. There are also striking differences between the oil-rich states and the middle-income oil exporters in volume of exports. The export share of GDP is highest in the oil-rich states, reaching as high as 74, 72, and 63 percent in the UAE, Kuwait, and Saudi Arabia, respectively. Two Middle Eastern countries stand out in this context, Algeria (33 percent) and Jordan (51 percent). These data indicate diversification in Algerias economy but in the case of Jordan the important fact not revealed in the data is substantial exports despite the absence of oil. IMPLICATIONS FO R TECHNOLOGY TRANSFE R This context provides both opportunities and constraints for technology transfer. On the one hand, the oil-rich countries have substantial revenues, on a scale rarely found in other LDCs, allowing for enormous purchasing power for imports of advanced technology. Especially for the oil-rich countries, however, the heavy reliance on petroleum for both revenue and economic growth also imposes constraints on technology transfer. The price of oil has been subject to unpredictable fluctuations so large as to have strong effects on Middle Eastern economies. With continuing uncertainty surrounding the price of oil, capital constraints could become more severe, even for the oil-rich countries. Another implication for technology transfer stems from economic structure. Oil-centered economies such as the Gulf States aim to develop other economic sectors, but may face constraints in such diversification due to limitations in other natural resources. The oil-rich countries, facing uncertainty in the magnitude of future earnings, must work to increase productivity in their economies and to expand manufacturing. In contrast, countries such as Egypt less well endowed with petroleum have a somewhat more diversified resource and economic base but face severe financial constraints.

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Ch. 3The Middle East as a Context for Technology Transfer l 71 MANPOWE R Technology absorption requires not only financial resources, but also a skilled scientific and technical manpower base. Most Middle Eastern countries face shortages of manpower skilled in scientific and technical areas. This is especially the case for the oil-rich countries, while Egypt is among the countries best endowed with large and skilled population resources. The following section assesses the manpower resources of the countries under review, the role migration has played in addressing imbalances among them, and the context this situation provides for technology transfer. LABOR FORC E As illustrated in map 3 and table 6, differences in total population among the countries under review are substantial. Estimates of total population in 1981 ranged from 1.5 million for Kuwait and approximately 7 million to 9.5 million for Saudi Arabia, to populations of close to 40 million in Egypt and Iran. Because of differences in land size and terrain, population density varies considerably. Egypts territory, less than half the size of Saudi Arabia, hosts a population upwards of five times that of Saudi Arabia. And since Egypts population is heavily concentrated in approximately 5 percent of its total territory, the disparity in population density is even greater. 19 The size of the labor force also varies greatly in the six countries under review. Approximately one-half the total population of these countries in 1979 was of working age (15 to 64 years old); in Egypt, the proportion was Estimates of the total population of Saudi Arabia vary widely from 7 million to 9.5 million people, for 1980. A plausible midrange estimate is 7.7 million. Between 1970-77, most of the countries under review had population growth rates of between 3.1 and 4,0 percent per year. Egypt, with an annual population growth rate of 2.1 percent, was the exception on the low end, as was Kuwait, at 6.0 percent per year, on the high end. Indeed, 98 percent of Egypts population lives in the Nile Valley, where population density may reach as high as 2,300 persons per square mile. See J. S. Birks and C. Sinclair, Arab Manpower: The Crises of Development (London: Croom Helm, 1980), p. 215. slightly higher, 57 percent. The size of the labor force is estimated to range from about 1.8 million people in Saudi Arabia to over 10 million people in Egypt. Especially during the past decade, all of the Middle Eastern countries under review have seen rapid growth and structural diversification of the labor force; yet today, all are experiencing shortages of skilled professional and technical manpower necessary to meet the demands associated with rapid economic development and technology transfer from abroad. Matching changes in economic structure discussed earlier, the proportion of the labor force engaged in agriculture has declined over the past two decades. 20 This decline in agriculture, moreover, has been matched by a growth in the proportion of the labor forces employed in manufacturing, construction, services, and industry, and in the number of managerial and administrative personnel, professional and technical workers, and industrial production workers. Nonetheless, throughout the Middle East, agriculture and pastoralism are still the main employers of the population, while professional and technical workers comprise but a small share of the total work force in these countries. (See fig. 9.) In general, there is a sharp division between the traditionally labor-importing and labor-exporting countries. Saudi Arabia and Kuwait have indigenous populations and labor forces that are relatively small, less technically skilled, and heavily concentrated in the service sectors. On the other end of the scale are the labor-exporting countries such as Egypt, with larger populations and a more skilled and diversified manpower base, but which have experienced high underemployment and unemployment rates. 20 See The World Bank, World Development Report 1983 (New York: Oxford University Press, 1983), pp. 188-189, 147. As illustrated in fig. 9, the agricultural labor force decline may have been even greater, as indicated by the International Labour Organization, which reported an even lower proportion of the labor force in agriculture in 1977.

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72 l Technology Transfer to the Middle East

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. Ch. 3 The Middle East as a Context for Technology Transfer l 73 Table 6.Basic Indicators, Selected Middle East Countries, 1981 Population Average annual Adult Urban population (millions) Area population growth Iiteracy a as percent of total (mid-1981) (1,000 km 2 ) (1970-81) (O/., 1980) population (1981) Saudi Arabia . . . . 9.3 b 2,150 4.5 25 68 Kuwait . . . . 1.5 18 6.3 60 89 Iran ., . . ... . . 40.1 1,648 3.1 50 51 Iraq . . . . . . 13.5 435 3.4 NA 72 Algeria . . . . . 19.6 2,382 3.3 35 44 Egypt ., . . . . . 43.3 1,001 2,5 44 44 Average middle-income economies . . . NA NA 2.4 65 45 NA = not available a Adult literacy represents the percentage of persons aged 15 and over who can read and write, Data for Iran, Algeria, and Egypt are for years other than 1980 but not more than 2 years distant from the other estimates b As iIlustrated in the text of this report, this is among the higher estimates for the total population of Saudi Arabia j which range between about 7 million and 95 million. 100 90 80 70 60 50 40 30 20 10 G Algeria Egypt I ran ( 1977) (1979) ( 1976) 22 I.0 0.8 12 31.2 105 I o 7 1.6 Iraq Saudi Arabia Kuwait (1977) (1974-5) (1 975) Size of Total Labor Force Iran Iraq Saudi Kuwait (19771 (1979) (1976) [1977) Arabia (1975) (1974-5) Country Agriculture Mining Manufacturing Utilities Construction Trade/Commerce Transport&Communicatons Finance Community & Social Services Other 35-507 0 84 6 : QL 3

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74 l Technology Transfer to the Middle East Many occupational categories are important for technology transfer, among them trained scientists and engineers. Their contribution as managers of projects, in particular, is important. Table 7 shows the number of trained scientists and engineers in these countries in the 1970s. Egypt and Kuwait are at opposite ends of the scale, although scientists and engineers comprise a relatively high proportion of Kuwaits total labor force. Expansion in education suggests that the availability of scientists and engineers will improve, but that disparities among countries may remain wide. In all of the countries under review, educational enrollments have grown rapidly compared to those of other middleincome countries. Between 1960 and 1980, as table 8 shows, the proportion of the age group enrolled in secondary school more than doubled-and in some cases more than tripled. By 1980, it had reached as high as 75 percent in Kuwait, 57 percent in Iraq, and 52 percent in Egypt, compared to the average weighted growth for middle-income countries in general of 39 percent. Educational training has been extensive in Egypt, while in the labor-short countries under review, the numbers and percents of school enrollments are still low. In 1980, 15 percent of Egypts population aged 20 to 24 was enrolled in higher educational establishments, as opposed to half that amount in Saudi Arabia. Generally speaking, the availability of indigenous scientific and technical manpower can be expected to increase as a result of these efforts. Today the disparity among countries is, however, especially pronounced in the vocaTable 7. Number of Trained Scientists and Engineers, 1970s Country Total Kuwait (1975) ... . . . . . 27,246 Algeria . . . . . . . . NA Egypt (1973) . . . . . . . 593,254 Saudi Arabia (1974) . . . . . 33,376 Iran (1974) . . . . . ... 161,183 Iraq (1972) . . . . . . . 43,645 a a Estimated data for Iraq include persons in government Institutions only Note: Current data are not available. SOURCE: UNESCO, Statistical Yearbook, 1981 (London Computaprint, Ltd 1981), pp V 23-5 tional and technical fields. In Egypt, almost one-fifth of all students enrolled in secondary or higher level schools in 1976-77 were in vocational and technical schools. The proportion was considerably lower than this in all of the other countries under review, especially in Algeria. While some of this difference maybe accounted for by the different structure of technical training in the countries under review (see ch. 11), these data indicate shortfalls from country plans and perceived requirements. In Algeria, the National Development Plan anticipated a need for 80,000 highly skilled and 180,000 medium-skilled personnel by 1984; 50,000 people of the latter group were to be in technical, scientific, and production areas. In 1978, however, less than 2,000 degrees were awarded in Algeria in scientific and technological fields; as of 1980, higher educational enrollment was 67,000 students, but only 27 percent were in the scientific and technical fields. FOREIGN MANPOWE R The disparities in the size and quality of manpower resources have led to high levels of migration in the Middle East, both within the region itself and from without. This migration of labor is a relatively recent phenomenon. Until the early 1970s, the Islamic Middle East was conventionally viewed as a closed labor market, with little inflow or outflow of population. The oil price increases of 1973, however, led to an exploding demand for labor in the newly rich oil-exporting countries. Wages increased, employment opportunities grew, and labor from other countries responded rationally -i.e., by moving from low-wage areas to those of higher wages. Once a relatively contained region with little migratory movement of labor (aside from the migration of workers from Algeria to France and the resettling of many West Europeans in Israel), the Middle East became a region of dynamic and massive labor migration. The migration involved both skilled and unskilled labor, and entailed movement both among the Middle Eastern countries and from almost all other regions of the world.

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. Ch. 3The Middle East as a Context for Technology Transfer l 7 5 1 I 3 .ii l-u --f z

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76 Technology Transfer to the Middle East During the 1970s, therefore, the pattern of labor movement in the Middle East became highly complex, affecting employment in all economic sectors. Algeria continued to export unskilled labor mainly to France while importing skilled labor from other countries in the Middle East. The oil-rich countries became importers of all skills in greater numbers, while Egypt became a major exporter of all skills. The Sudan and the Yemens continued to export unskilled labor. And some countries, such as Iraq, began to both import and export labor simultaneously. As the demand for manpower rose, the numbers of migrants in the Middle East grew, so that by the mid-1970s, one-fourth of North Yemens labor force and almost one-third of Jordans was employed in other countries of the Arab world, 22 while close to three-fourths of Kuwait labor force was comprised of foreign personnel. Table 9 illustrates one set of estimates of the magnitude of migrant workers in the Arab world in 1980. According to these data, the number of Egyptians working in other parts of the Arab world grew to almost 750,000 in 1980. Beginning in 1976, Asian laborPakistanis, Indians, Bangladeshis, Koreans, Baluchis, and others, or people from countries which traditionally had little contact with Arab economies-began to migrate to the Middle East as well. The number of Pakistanis and Indians working in the Middle East grew to more than 650,000 in 1980. 23 At the same time, the influx of personnel from Western countries also increased, mainly to work in highly skilled professional and technical positions. 21 For a discussion of the development of engineering skills in particular in Egypt, and problems of utilizing skills most closely associated with technology transfer and industrial development, see Clement Henry Moore, lmages of Development; Egyptian Engineers in Search of Industry (Cambridge, Mass.: MIT Press, 1980). 2 2 Nazli Choucri, Migration in the Middle East: Transformations, Poli~es and Processes, Technology Adaptation Program, Massachusetts Institute of Technology, Cambridge, Mass., 1983, p. 3-4. 23 According to another estimate, the number of Pakistanis alone working in the Middle East grew from less than 200,000 in 1975 to almost 1.25 million in 1979, See ibid., pp. 3-10, 3-11. Table 10 illustrates the sectoral distribution of foreign workers for two of the largest laborimporting countries in the Middle East, Saudi Arabia, and Kuwait as of the mid-1970s. Both Saudi Arabia and Kuwait have been particularly dependent on foreign workers in their manufacturing, construction, and commerce sectors. In Kuwait, the construction sector is nearly completely (95 percent) dominated by foreign workers, with about 90 percent of the manufacturing sector being comprised of foreigners as well. According to one estimate, Egyptians and Turks make up between 20 and 25 percent of Iraqs work force, a significant proportion of whom are in agriculture, services, and construction. In many Middle Eastern labor-importing countries, Asian labor mainly Korean, Indian, and Pakistani-has dominated much of the construction sector, while Egyptian labor has dominated manufacturing and such services as education and medicine. Foreign workers are generally concentrated in either the technical occupations or in the lowest skilled, manual occupations, while indigenous personnel are concentrated in either the managerial positions (often with foreign assistants or deputies) or in the service occupations outside of the production process. Table 11 illustrates the occupational distribution of the labor force in Kuwait. In Kuwait, Egyptians and Jordanians make up large percentages of the professional and technical workers. Kuwaitis make up a larger share of the managerial and clerical workers, with Jordanians being the major foreign group filling these jobs. In the second half of the 1970s Saudi Arabia likewise grew increasingly reliant on foreign labor in the managerial, professional and particularly the technical occupational groups. Information on the number of migrant workers in Iran has been unavailable since the Iranian revolution. While there may have been upwards of 1 million foreign workers in Iran in 1977, there is little reason to believe that more than a fraction of these workers remains. Prerevolution patterns were that the unskilled

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78 l Technology Transfer to the Middle East a5N. ,.. . . . . . . . . . . #. . . . . . . . . ,. . . . . #. . . . . . .0.,..... ,. . . . ::::::... . em. . .

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Ch. 3 The Middle East as a Context for Technology Transfer 79 workers came from Afghanistan, while the skilled workers came from the Far East. For many of the labor-exporting countries, on the other hand, large-scale out-migration of technical and professional manpower has led to shortages in these skills at home. Due to out-migration of skilled personnel, Egypt, traditionally a labor surplus country, has experienced labor shortages in many of the skilled occupations, such as administrators, teachers, and clerks, of which Egypt continues to be a major supplier to other Arab countries. Algeria today exports over 15 percent of its labor force. The bulk of Algerian migrants go to Europe, particularly to France, where these migrants work mainly as laborers and semiskilled workers, primarily in the heavy industries and construction. Projections concerning migrationary movements and changes in Middle Eastern labor resources are uncertain. With the decline in oil prices and shifts in development plans and policies (discussed in ch. 11), some observers have already noted an apparent stabilization, if not decline, in the magnitude of migration to and within the Middle East. Iraq is one of the only exceptions: owing to the drain on its labor force caused by the war with Iran, Egyptians and other foreigners have been recruited to move there in greater numbers. Labor issues in the 1980s will be determined not only by magnitude of demand, but by its structure and composition. A World Bank study predicted that the oil-rich nations manpower requirements will rise sharply in the next few years especially in manufacturing. 25 This study, carried out in the late 1970s, estimated that demand will be greatest in the Emigration of workers, for example, has allegedly created bottlenecks in Egypt particularly in the construction and petroleum sectors. See, for example, Saad Eddin Ibrahim, Oil, Migration and the New Arab Social Order, Rich and Poor States in the Middle East Malcolm H. Kerr and El Sayed Yassin (eds.) (Boulder, Colo.: Westview Press, 1982), pp. 38-44. See Ismail Serageldin and James Socknat, Migration and Manpower Needs in the Middle East and North Africa, 197585, Finance and Development, vol. 17, No. 4, December 1980, pp. 35-36. Note, however, that the study was carried out prior to the period of lower oil exports in the early 1980s when many foreign workers were sent home from the Gulf States. technician category and in the professional and technical occupations. It is difficult to predict whether increased education and training at home will be sufficient to meet these demands, and to what extent demand will have to be met with foreign manpower. But for the labor-importing countries, most projections indicate that the demand in the technical and professional sectors may be met largely by foreign workers. The same World Bank study estimated that by 1985, between two-thirds and three-fourths of the manpower requirements of the oil-rich nations, in four out of the top five occupational levels will be filled by foreigners. 26 The impacts of the recent decline in oil prices on migration, however, remain to be seen. If economic growth rates remain high, labor requirements will grow as well. But if further retrenchment in economic activity should occur, the need for foreign labor will decline. Large layoffs of foreign workers in Saudi Arabias petroleum industry, especially in the Eastern province, for example, and Kuwaits decision in 1983 to send many Asian workers home are cases in point. But there is no way of judging now whether a large-scale exodus of other types of foreign labor will occur. IMPLICATIONS FOR TECHNOLOGY TRANSFER Implications of the manpower situation for technology transfer are difficult to assess. For the labor-importing countries, for example, it is unclear at what point the dependence on foreign labor becomes a problem. Foreign workers can provide enormous economic benefits for recipient countries, aiding technology transfer by filling jobs for which the appropriate skills cannot be found among indigenous personnel. But if one aim of technology transProfessional and technical personnel, other professional personnel, technicians, and skilled office and manual personnel requirements were expected to be filled largely by foreigners; only other subprofessional occupations were projected to be staffed largely with nationals. See ibid., p. 35. See, for example, Kingdom Restricts Foreign Work Force, Middle East, vol. 2, No. 4, Mar. 20, 1983, p. 3.

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80 Technology Transfer to the Middle East fer is to maximize technology absorption among the indigenous personnel, then the continued presence of foreign workers may highlight a bottleneck in the technology transfer process. What is clear, however, is that the labor-importing countries of the Middle East remain heavily dependent on foreign labor in sectors and occupations critical for technology transfer, and levels of training in the technical fields suggest that this situation may not significantly change for some time. The manpower context for technology transfer in the labor-exporting countries is twosided. On the one hand, the export of skilled labor provides remittances, providing countries such as Egypt with substantial revenue and thus enhanced purchasing power for advanced technology from abroad. Some have also argued that job vacancies created in Egypt by out-migration could stimulate upward mobility among those who stay behind. 28 On the other hand, the loss of highly skilled manpower in many labor-exporting countries has exacerbated problems at home. 29 Many observers have argued that the out-migration of doctors, teachers, engineers, and other highly skilled manpower has left shortages which it will take years of training to fill. The policies different Middle Eastern countries have adopted to deal with these issues are discussed in chapter 11. 28 See Georges Sabagh, Migration and Social Mobility in Egypt, Rich and Poor States in the Middle East, op. cit., pp. 72-73. 29 Choucri, op. cit., p. 9-4 and ibid., pp. 72-73. SOCIAL/POLITICAL CONTEX T Technology transfer both affects and is affected by the social and political milieu in which it occurs. In the Middle East, religious and cultural factors, domestic social strains, and regional politics all play a role in technology transfer, in addition to the economic and manpower factors described above. This section briefly discusses the role of Islam, social stratification, social attitudes toward work and women, and regional politics as they relate to technology transfer to the Middle East. SOCIAL FACTOR S The past decade in the Middle East has been characterized by two sometimes contradictory tendencies: increased modernization, secularization, and/or Westernization on the one hand, and a greater reaffirmation of Islamic traditional values on the other. Rapid economic development has brought with it substantial change in social structures and attitudes throughout the Middle East. Until the middle of this century, the Middle Eastern countries under review were largely tribal-nomadic or agricultural societies where Islam formed the basis of culture and tradition. The migration to the towns and the settlement of nomads, however, which came with economic growth and industrialization, in some cases changed the social systems and attitudes of the indigenous populations and created new cleavages and classes along urban/rural and social and economic lines. Economic development and technology transfer coincided with the development of new urban upper-middle classes and the emergence of a new class of often Western-educated technocrats. The influx of foreigners to the Middle East brought with it new Western ideas and consumer goods often embraced by the indigenous populations. In all of the countries under review, however, these changes have been accompanied by powerful conservative strains as well. First, the vast majority of the indigenous populations remain relatively removed from the industrialization and technology transfer process; indeed, a schism has sometimes appeared in these countries between this majority and the minority of people who are most involved

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Ch. 3 The Middle East as a Context for Technology Transfer l 81 in and who reap the benefits of economic growth. Among almost all groups and classes, moreover, traditional and family/kinship values and norms, based on the Islamic religion, endure. More than 90 percent of the population of each of the six countries under study are Muslims, and Islam remains an important source of legitimacy for Middle Eastern governmentsas well as for opposition groups. Although the interpretation of Islamic tradition and culture varies widely among nations and different social classes and groups, 30 the rise of Islamic fundamentalism throughout the Middle East has reaffirmed the importance of ret aining Islamic tradition and culture in the face of economic change. Opinions vary as to the context these social factors provide for technology transfer. One argument is that Middle Eastern and Islamic tradition and culture are intrinsically at odds with technology transfer from the West. This view is based on the notion that Islam is fundamentally resistant to change, and thus represents an impediment to economic development and technology transfer. Although this view has generally been discredited, it is one that still colors the vision of some Western observers .31 Some Middle Easterners, however, also worry about an incompatibility between Islam and Western technology. Here, the argument is that Western technology must be carefully se 30 The underlying current in all of the countries under review, the precise nature of Islam is nevertheless quite varied, with sharp splits among Sunni and Shi ia, fundamentalist and more liberal, urban, and rural, etc. The fundamentalist Shiia Islam of the Ayatollah Khomeini, for example, is in many ways different from the conservative Sunni Islam of the government of Saudi Arabia or the more liberal interpretations in Egypt. In many Middle Eastern countries, the more symbolic and socially conservative popular Islam of the poorer classes contrasts with the more liberal, intellectualized Islam of the wealthier, educated classes, In all cases, however, Islam is a key factor in individual and group identity. See, for example, Michael Hudsons discussion in The Islamic Factor in Syrian and Iraqi Politics, Islam in the Political Process, James P. Piscatori (cd.) (Cambridge, Mass., 1983). 31 For a di9cu9sion of some of these arguments, sw Michael C. Hudson, Islam and Political Development, lshn and De velopment, John L. Esposito (cd. ) (New York: Syracuse University Press, 1980), pp. 1-25. For a discussion of this view as relevant to the developing world as a whole, see, for example, Denis Goulet, The Uncertain Promise (New York: IKOC/North America, Inc., 1977), pp. 17-30. lected and adapted to meet indigenous needs, or the viability of a traditional, Islamic social and cultural fabric will become severely threatened. Contemporary Western technology, proponents of this view argue, embodies its own Western values, both in terms of those inherent in the technology and those embodied in the channels through which technology is transferred. These values are considered to conflict with the human values, traditions, and social patterns found in traditional Muslim society. In line with this view, many Islamic fundamentalist groups, for example, are now advocating a return to the fundamental values of the past and a rejection of much that is modern or Western. In their view, technology transfer is a disruptive process, one at odds with traditional society and demanding fundamental changes in the recipient countrys whole social fabric to conform to the values embodied in the technology. In this view, technology transfer may be often rejected outright, or the stress laid on transferring appropriate technology. In contrast, others believe that Middle Eastern and Islamic culture and tradition complement technology transfer from the West. Proponents of this view argue that nothing inherent in Islam would oppose technology transfer; on the contrary, Islamic tradition is regarded as having traditionally encouraged scientific inquiry and modernization, and technology transfer is regarded as a means of enhancing this process. Resistance to technology transfer in the name of Islam, proponents of this view argue, therefore has little to do with the essence of Islam itself. Instead, they argue, Islam is being used simply as a rallying cry or a source of legitimacy on the part of those disaffected social or economic groups opposed to technology transfer in one form or another. I slam, one such observer writes, is an instrument espoused both by incumbent governments and opposition forces as they try to obtain legitimation and mass support for their programs and policies." 32 Proponents of this 92 Hudson, op.. cit., p. 13. Whether in economic or political affairs, another observer argues, Islam has become the language of both power and resistance to power (Vatin, p. 98 in Piscatory).

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82 l Technology Transfer to the Middle East view argue that values associated with Western technology can be shaped by the social milieu into which this technology is transferred, and combining science and faith has been the theme of several writings and political parties in the Middle East. 33 Depending on the technology and its method of transfer, proponents of this view argue, Western technology may be used to buttress, if not to further promote, traditional values and beliefs. 34 A third argument is a combination of these two. In this view, technology transfer is viewed as intrinsically neither destructive nor 33 See, for example, Ziauddin Sardar, Science, Technology and Development in the Muslim World (London: Croom Helm Ltd., 1977). 34 Ziauddin Sardar, ibid. For a broader discussion of this, see John D. Montgomery, Development Without Tears, Technology and International Affairs, Joseph S. Szyliowicz (cd. ) (New York: Praeger, 1981), esp. pp. 155-170. supportive of traditional Islamic values, but as having the potential to lead to a new and distinct situation that contains elements both traditional and modern. As illustrated in the case of Japan, for example, adherents of this position argue that it is possible for Western technology to interact synergistically with traditional culture, neither destroying the traditional nor the modern, but ultimately creating a new and more productive pattern. 35 Because interpretations of Islam vary, there is no one way in which Islam can be said to blend or conflict with economic development and technological change so as to resolve these arguments. Little in the writings of Islam and 35 For a discussion of some of these ideas, see Charles Weiss, Jr., Mobilizing Technology for Developing Countries, World Bank Reprint Series: No. 95, reprinted from Science, vol. 203, Mar. 16, 1979, p. 1. Photo credti Saudi Arabian Ministry of Commerce Muslims from all over the world travel to Mecca in Saudi Arabia. For centuries, this has been a place of pilgrimage

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Ch. 3 The Middle East as a Context for Technology Transfer l 83 religious practice spells out clearly the extent and ways in which technology should be used or adopted. Because all practices associated with economic or technological change are not explicitly discussed, the evaluation of technology and its consequences by Islamic precepts has had to rely on interpretation of law and practice, and these have varied among countries and Islamic groups. Thus, Islamic tradition and culture can be viewed as comprising a social context that may be either hostile to or favorable for technology transfer, depending on other social factors and the attitudes of the government in power. In addition to issues concerned with the interplay of Islamic tradition and culture with technology transfer, two commonly cited examples of the effect of social attitudes on technology transfer are attitudes towards female employment and attitudes concerning occupational prestige. In light of the labor constraints discussed above, both of these issues are often regarded as having important implications for technology transfer. While the role of women in Middle Eastern Islamic societies is certainly complex, and although there is wide variation among Middle Eastern countries, a womans role in the Middle East has traditionally been outside of the labor force and segregated from men. One result has been to limit the potential size of the total labor force. Especially for the labor-short countries, this may have contributed to the manpower shortages affecting economic development and technology transfer. 36 Today, evidence suggests that the role of women and attitudes toward female employment in the Middle East have been changing: even in Saudi Arabiaamong the most conservative Middle Eastern countries in this regardthe proportion of women in schools and in the labor force has grown considerably since the early 1970s, But the number and proportion of women employed is still low, especially in the professional and technical occupations, 36 See, for example, discussion in .~l-lli~ad, No\. 22, 1983, p. 17 translated in Study Examines Role of }1omen in Replacing Foreign I.abor Force, reported in JPR5: .\ear East, Scmth Asia, Jan. 11, 1984, pp. 80-84. and female employment probably will not significantly help to meet expected labor demand for some time. Some observers have also noted that common historically or culturally shaped prestige values, such as aversion to manual or industrial labor, can also act as constraints on technology transfer. The high value placed on leisure, two specialists on Middle Eastern manpower note, the disinclination to work in manually strenuous jobs, and the desire not to be subordinate to an impersonal outside authority comprise, in the words of these authors, an important explanatory factor behind many Saudi Arabians reluctance to enter a wide spectrum of employments in the modern sector. 37 Similar observations have been made regarding even those Middle Eastern countries where the labor force is regarded as more highly developed: in Egypt, another observer notes. social values have reduced 37 See J. S. Birks and C. Sinclair, The Kingdom of Saudi Arabia and the Libyan Arab Jamehiriya: The Ke\ Countries of Fjmployment, Migration for Employment lh-eject, Working Paper WEP 2-26 WP39 (C,eneva: International I,abor organization, 1979), esp. pp. 21-26. .4s explained by another observer. despite the enormous achie~ements accomplished b? Islamic scientists and thinkers throughout the centuries, the emphasis on enjoying Crod bounty rather than earning (;od grace through hard labor tends to deprive Saudi society of a work ethic capable of efficiently harnessing the countr~, human resources. See ,John A. Shaw and David E. I.ong, Saudi .4rabian Modernization, No. 89, vol. X of the Mashington Papers, series published by the Center for Strategic and 1 nternational Studies, Georgetown (University (Washington, D.C.: Praeger Special Studies, 1982), p. 2. Women students in laboratory

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84 l Technology Transfer to the Middle East technical education and vocational education to a second-class type of education. Social values, this analyst adds, may be the factor which has the strongest impact on the educational and training system. 8 Because one aim of technology transfer is the transfer of skills to indigenous personnel, the low prestige associated with technical fields may well be a constraint on the technology transfer process. But examples such as the successful training of Saudis in ARAMCO to take over many managerial and technical jobs would suggest that, like female employment, these attitudes too may be changing. In other words, traditional values and beliefs provide a mixed context for technology transfer to the Middle East. On the one hand, traditional values and beliefs could be regarded as impeding technology transfer, to the extent that the latter shapes new attitudes and visions often disconsonant with the patterns of traditional Islamic society. At the same time, traditional attitudes can enhance technology transfer in other ways--for example, by providing legitimacy for technology transfer decisions or creating a context for increased cooperation in technology transfer efforts. A central challenge for Middle Eastern governments today is to balance economic development aims with the maintenance of Islamic values and beliefs, and to avoid choices that might result in social discontent that might find its expression in opposition to technology transfer. POLITICAL CONTEX T Political systems in the Middle East vary greatly, ranging from the oldest ruling monarchy in the world, to republican and socialist systems. These different political systems directly shape the way technology transfer decisions are made and implemented. Of the countries under review, for example, the governments of two, Saudi Arabia and Kuwait, are presently monarchies, with leader 38 See Bent Hansen and Stir Radwan, Employment Opportunities and Equity in a Changing Economy: Egypt in the 1980s (Geneva: International Labour Organization, 1982), p. 255. ship based on heredity. While the last 10 years have seen the development and growth of a cabinet government and ministries in both countries, power still resides in the hands of the monarch-the King in Saudi Arabia, the Amir in Kuwait. Neither country has political parties; public opinion is expressed through the National Assembly in Kuwait (a formally elected representative institution), or the majlis in Saudi Arabia (an informal institution). Prerevolutionary Iran was also a monarchy with, theoretically, an independent legislature (a majlis, or parliament) and an independent judiciary. In practice, the monarchy was the central place where power resided, and the Shah personally played an active role in all affairs of state. Both Iraq and Algeria, on the other hand, are one-party states, socialist in orientation and also based on Islam. Iraqs political system today is under the control of one party, the Arab Socialist Baath (Resurrection) party, with the Partys high command (the Regional Command) being headed by one dominant leader: Saddam Hussein. Like Iraq, Algeria is socialist in orientation and legally a singleparty state, with the Front de Liberation Nationale (FLN) as the official party. In contrast, since 1952 Egypt has had a republican form of government, with an elected president as head of state and government. The executive branch is headed by the president and his cabinet, which dominates the unicameral elected legislative body, the Peoples Assembly, and the judiciary, although each is constitutionally independent. Also providing a perhaps unique context for technology transfer are the strains of conflict and cooperation that characterize Middle Eastern regional politics. For the past two decades, almost every country in the Middle East has been involved in war: conflicts ranging from the Arab-Israeli conflict, the Iran-Iraq War (and the revolution in Iran) and, for countries such as Algeria, the West Saharan dispute. These conflicts have set the stage for political alliances in the Middle East, often pitting Muslim against Muslim, and one Middle East government against another. At the

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Ch. 3The Middle East as a Context for Technology Transfer l 85 same time, however, efforts to promote greater Islamic and Arab ties continue through a myriad of regional organizations established for cooperation in the political, social, and economic arenas. Because of the importance of oil to the world economyand especially after the Soviet invasion of Afghanistan, which brought Soviet forces to within only a few hundred miles of the Gulf region-the Middle East has also been seen as an area of great geostrategic significance and superpower rivalry. IMPLICATIONS FO R TECHNOLOGY TRANSFE R These domestic, regional, and international issues affect all aspects of political and economic relations in the Middle East and create a political context for technology transfer that extends beyond questions of resource or manpower availability. A key challenge for policymakers is to make decisions about technology transfer which take into account economic, political, and social factors and to ensure that these decisions are consistent with broader interests in the Middle Eastern region as a whole. The ways in which different governments have attempted to meet these challenges are discussed in chapter 11.

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CHAPTER 4 Technology Trade With the Middle East Contents INTRODUCTION: EXPLOSIVE GROWTH OF TRADE AFTER 1973 . . Page 89 TECHNOLOGY TRADE WITH THE MIDDLE EAST IN GLOBAL CONTEXT . . . . . . . . . . . . 90 INDICATORS OF TECHNOLOGY TRADE WITH THE MIDDLE EAST . 92 Analysis of Machinery and Equipment Imports . . . . . . . 92 Analysis of Contract Data. . . . . . . . . . . . 94 Analysis of Data on Direct Investment . . . . . . . . . 97

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SUPPLIER COUNTRY EXPORT SHARES IN MIDDLE EAST TECHNOLOGY TRADE . . . . . . . . . . . 100 Trends in Industrial-Country Export Shares . . . . . . . . 100 Product Export Specialization of Major Supplier Countries . . . . . 104 Contracting Specialization of Supplier Countries . . . . . . . 106 Contracting Specialization of Supplier Countries in Four Technology Sectors . 106 Factors Affecting Supplier Shares . . . . . + . . . . . 109 CONCLUSION . . . . . . . . . . . . . . 112 CHAPTER 4 STATISTICAL APPENDIXES. . . . . . . . 114 Tables Table No. Page 12. The Importance of Exports to the Middle East for the Major Industrial Countries . . . . . . . . . . 89 13. Trade With the Middle EastData for Six Importing Countries . . . 90 14. Industrial-Country Exports to the Middle East in World Context . . 91 15. Production Machinery Exports to the Middle East in World Context, 1982 91 16. Imports Into Middle Eastern Countries From Major Industrial Countries, 1982 . . . . . . . . . 92 17. Imports Into Six Middle Eastern Countries From Six Major Industrial Countries, 1982 . . . . . . . . . 93 18. Structure of Production in Middle East Countries Compared to Other Developing Countries, 1981 . . . . . . . . . 94 19. Middle East Telecommunications Imports From Industrial Countries, Selected Years . . . . . . . . . . . . . 95 20. Middle East Aircraft Imports From Industrial Countries, Selected Years .... 95 21. Middle East Medical Equipment Imports From Industrial Countries, Selected Years . . . . . . . . . . . . . 96 22. Contract Awards by 15 Middle East Countries, 1980-82 . . . . 96 23. Contract Awards by Technology Sectors, 1978-82 . . . . . . 98 24. U.S. Direct Investment Position Abroad, Year-end 1981 . . . . 99 25. Change in U.S. Direct Investment Position Abroad, 1980-81 . . . . 100 26. industrial-Country Exports and Export Shares to the Middle East, 1982 . 101 27. industrial-Country Exports to the Middle EastMarket Share for Selected Years.. . . . . . . . . . . . . . 102 28. Supplier Export Shares to the Middle East by Commodity Class, 1982,1978 105 29. Supplier Shares of Middle East Contracts, 1979-82 . . . . . . 107 30. Supplier Share of Middle East Contracts in Four Technology Sectors, Aggregated, By Type of Contract, 1978-82 . . . . . . . 107 31. Supplier Shares of Middle East Contracts in Four Technology Sectors, By Type of Contract, 1978-82 . . . . . . . . . . 108 32. Percentage Distribution of Supplier Trade With Middle East Countries, 1982 111

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CHAPTER 4 Technology Trade With the Middle East INTRODUCTION: EXPLOSIVE GROWT H OF TRADE AFTER 197 3 terms and the value of industrial-country imports from the Middle East increased substantially. Technology trade with the Middle East has also grown rapidly within this dynamic overall trade context. Real expenditure on U.S. exTable 12. The Importance of Exports to the Middle East for the Major Industrial Countries Exports to Exports to Machinery and Middle East Middle East equipment exports as as percent of as percent of percent of exports country exports. country exports, to Middle East Country 1970 1982 1982 United States 2% 8% 67% Japa n 3 12 59 West Germany 2 8 68 France 6 10 52 United Kingdom 4 9 51 Ital y 4 15 56 of Trade Statistics Yearbook, 1975 and 1983 volumes 89

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90 l Technology Transfer to the Middle East primarily because they exported varying amounts of petroleum. As seen in table 13, the average annual growth rates of the real value of total exports of the six countries examined most closely by OTA ranged from 3 percent in the case of Kuwait to 17 percent in the case of Saudi Arabia over the period 1973-82. Total imports of the Middle Eastern countries also grew at diverse rates (table 13), because the countries that exported large quantities of petroleum had large positive trade balances, while the countries exporting smaller amounts of oil were constrained by small surpluses or negative balances. During 1983 and 1984 changes in the petroleum market-price and quantity shortfalls from earlier levelsresulted in reduced export revenues. Together with continuing high imports, the result has been severely diminished trade surpluses and increased trade deficits. (Table 13 gives imports as a fraction of exports for 1979 and 1982 for six countries.) This chapter analyzes technology trade with the Middle East over the last decade and evaluates factors affecting the export shares of the major technology suppliers. Table 13.Trade With the Middle EastData for Six Importing Countries Average growth of Average growth of real exports, 1973-82 a real imports, 1973-82 a Imports as percent of exports Country (percent per annum) 1979 1982 Saudi Arabia. . 17% 25 % 41 % 43 % Egypt ., . . 8 17 198 239 Algeria. . . 14 9 75 71 Iraq . . . 12 27 40 159 Iran . . 3 3 38 59 Kuwait . . 3 17 28 84 a Export or import values adjusted for changes in the general purchasing power of the dollar using the U.S.G.N.P. deflator .. SOURCE International Monetary Fund, Direction of Trade Statistics Yearbook 1979 and 1983 volumes world table, pt A. TECHNOLOGY TRADE WITH THE MIDDLE EAS T IN GLOBAL CONTEX T Exports from industrial countries to all developing countries considered together are very large business. West European countries send about one-third of their total exports, and also of their manufactured goods exports, to less developed countries (LDC S ). 3 The United States and Japan export even highe percentages of exports to LDCssomewhat less than half of both total and manufactured exports for the United States and somewhat more than half of both categories for Japan (see table 14). OTA categorizes the Middle East high-income oil exporters (Libya, Kuwait, Saudi Arabia, and UAE) as LDCs for purposes of this calculation. Source of the data cited in this paragraph is the World Bank, World Development Report 1983 (New York: Oxford University Press, 1983), tables 12 and 13. There is a contrast between the United States and Japan, on one hand, and the West European countries, on the other, in exports of machinery and equipment, a trade category which gives a closer indication of technology transfer. While the United States and Japan had the highest supplier shares in 1982, they sent only 20 and 27 percent, respectively, of their production machinery exports to LDCs to the Middle East. The West European countries, with lower market shares, sent 35 to 47 percent to the Middle East (see table 15). To put the Middle East in world context, for industrial countries, individual Middle Eastern countries are in some cases export markets as large as all but their largest industrial coun-

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Ch. 4Technology Trade With the Middle East l 9 1 Table 14. industrial-Country Exports to the Middle East in World Context Manufactured Total exports to exports to LDCs as Manufactured Total exports to Middle East as percent of total LDC s a as percent of percent of exports to exports to Middle manufacturing East as percent of countrys exports all LDCs exports, those to all LDCs, Country 1981 b 1982 1980b 1982 United State s 43% 16% 45% 19% Japan 51 25 51 26 West Germany 24 43 22 44 France ... ., ., 30 33 28 33 United Kingdom ., ... ., ., 30 31 33 32 Italy . ., . 36 53 30 52 Industrial market economies 32 28 d 31 30 d a Less developed countries ( LDCs) are defined here to incIude the high income oil producers of the Middle East: SaudiI Arabia, Kuwait, Libya, and the United Arab Emirates b calculated from percentages in W O rld Development Report 1983, there may be some inaccuracy due to rounding c Fourteen West European countries plus the United States, Canada, Japan, Australia and New Zealand d United States, Japan, West Germany, France, United Kingdom, and ltaly, only. SOURCES World Bank World Development Report 1983 tables 12 and 13 Organization for Economic Cooperation and Development, Trade Series C. obtained from Data Resources Inc. data bank Table 15. Production Machinery Exports to the Middle East in World Context, 1982 a Production machinery exports Countrys market share of to Middle East as percent of production machinery countrys total production Country exports to the Middle East b machinery exports to LDCs United States, . 24% 20% Japan ., . 23 27 West Germany. ... ., 19 41 France . 12 38 United Kingdom ., 13 35 Italy . ... 10 47 a SlTC ( Revision 1) Categories 71-72 Nontransportation machinery and equipment (incIudes electrical-mechanical consumer durables) b Data for 15 Countries Saudi Arabia, Algeria Egypt Iran Iraq Kuwait Libya, United Arab Emirates, Syria, Lebanon, Jordan Qatar, Oman, North Yemen, and South Yemen SOURCE Organization for Economic Cooperation and Development Trade Series C, obtained from Data Resources Inc., data bank. try trading partners. For instance, Saudi AraLibya was the eighth largest buyer for Italy bia was the sixth largest customer of the in the same year. United States in 1982, larger than France. Iran was in a strong bilateral position with the These data indicate clearly that the Middle United States in 1978; at that time it was the East is important in world trade in general, tenth largest export market for the United and particularly for imports of machinery and States. As other examples, Algeria was the equipment. ninth largest customer for France in 1982, and

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92 l Technology Transfer to the Middle East .... .. .. INDICATORS OF TECHNOLOGY TRAD E WITH THE MIDDLE EAS T This section analyzes a number of indicators of technology trade with the Middle East: machinery and equipment imports, large contracts, and direct investment in the Middle East. ANALYSIS OF MACHINER Y AND EQUIPMENT IMPORT S Middle East Imports of Machinery and Equipment The size and prominence of machinery and equipment imports into the Middle East is striking. As table 16 shows, in recent years more than half of the Middle East imports from the major industrial countries have consisted of machinery and equipment. In this limited sense, trade with the Middle East can be thought of as the exchange of oil for technology. In 1982, imports of machinery and equipment into 15 Middle East countries 4 and from the six major industrial countries were valued at more than $42 billion. These imports from six industrial countries constituted 57 percent of total imports for the 15 Middle Eastern countries, according to official trade statistics. The predominance of machinery and equipment imports was also apparent for the individual countries. In 1982, the percentage of machinery and equipment imports varied from 51 percent for Iran to 67 percent for Iraq (see table 17). These machinery and equipment import percentages were much higher than those of other large groups of countriese.g., middle-income LDCs (31 percent) or even industrial countries (22 percent,). 6 The Middle East has thus imported machinery and equipment at a rate unmatched by other developing countries during the past decade. Table 16. Imports Into Middle Eastern Countries From Major Industrial Countries, 1982 a Total 6 countries: Total 15 countries Import category Millions of dollars Percent MiIIions of dolIars Machinery and equipment $32,66 57.7% $42,070 Nonelectri c 11,262 199 13,945 Electri c 8,021 142 10,394 Telecommunication 1,724 3 0 2,358 Electrical medica l 118 0 2 144 Other electric 6,179 109 7,892 Transpor t 11.235 198 14,523 Road vehicle s 8,577 15.2 10,819 Aircraf t 1,351 2.4 1,810 Other transpor t 1,307 2 3 1,895 Other imports 23,939 42,3 31,746 Food, beverage and tobacco 4,036 7.1 5,204 Material, chemical, miscellaneous 5,849 10,3 8,424 Other manufactures 14,055 24.8 18,119 Total imports $56,603 100.0% $73,816 a Data are for the six major industrial countris United States, Japan United Kingdom, France West Germany and Italy onIy b Saudi Arabia, Iran, Algeria, Egypt Iraq, and Kuwait. C The above six countries plus Libya, United Arab Emirates, Syria, Lebanon, Jordan, Qatar, Oman, North Yemen, and South Yemen SOURCE Organization for Economic Cooperation and Development Trade Series C Data Resources, Inc. data bank Percent 57.0% 189 14 1 3 2 0.2 107 19.7 147 2 5 2.6 43.0 7 0 11.4 24.5 1 00.00o

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Ch. 4 Technology Trade With the Middle East 91 Table 14.lndustrial-Country Exports to the Middle East in World Context Total exports to LDCs a as percent of countrys exports Country 1981 b United States ... . . 43% Japan . ., . . 51 West Germany . . 24 France . . . . 30 United Kingdom . . . 30 Italy . ., . . . 36 Industrial market economies 32 Total exports to Middle East as percent of exports all LDCs 1982 16% 25 43 33 31 53 2 8 d Manufactured exports to LDCs as percent of total to manufacturing exports, 1980b Manufactured exports to Middle East as percent of those to all LDCs, 1982 45 % 51 22 28 33 30 31 19 % 26 44 33 32 52 30 d a Less developed countries ( LDC s) are defined here to include the high-income oil producers of the Middle East: Saudi Arabia, Kuwait, Libya, and the United Arab Emirates b calculated from percentages in World Development Report 1983, there may be some inaccuracy due to rounding c Fourteen West European Countries pl US the United States, Canada, Japan, Australia, and New Zealand d United States, Japan, West Germany France, United Kingdom, and Italy only. SOURCES World Bank, World Development Report 1983, tables 12 and 13, Organization for Economic Cooperation and Development, Trade Series C, obtained from Data Resources, Inc., data bank Table 15. Production Machinery Exports to the Middle East in World Context, 1982 a Production machinery exports Countrys market share of to Middle East as percent of production machinery countrys total production Country exports to the Middle East b machinery exports to LDCs United States. . . . 240/o 20 J/o Japan . . . . 23 27 West Germany. ... . . 19 41 France . . . . 12 38 United Kingdom . . . 13 35 Italy . . . . . 10 47 a SITC (Revision 1) Categories 71.72 Nontransportation machinery and equipment (includes electrical-mechanical consumer durables). b Data for 1 5 countries Saudi Arabia, Algeria, Egypt, Iran, Iraq, Kuwait, Libya, United Arab Emirates, Syria, Lebanon Jordan, Qatar, Oman, North Yemen, and South Yemen SOURCE Organization for Economic Cooperation and Development, Trade Series C, obtained from Data Resources, Inc., data bank try trading partners. For instance, Saudi AraLibya was the eighth largest buyer for Italy bia was the sixth largest customer of the in the same year. United States in 1982; larger than France. Iran was in a strong bilateral position with the These data indicate clearly that the Middle United States in 1978; at that time it was the East is important in world trade in general, tenth largest export market for the United and particularly for imports of machinery and States. As other examples, Algeria was the equipment. ninth largest customer for France in 1982, and

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92 l Technology Transfer to the Middle East INDICATORS OF TECHNOLOGY TRAD E WITH THE MIDDLE EAS T This section analyzes a number of indicators of technology trade with the Middle East: machinery and equipment imports, large contracts, and direct investment in the Middle East. ANALYSIS OF MACHINER Y AND EQUIPMENT IMPORT S Middle East Imports of Machinery and Equipment The size and prominence of machinery and equipment imports into the Middle East is striking. As table 16 shows, in recent years more than half of the Middle Easts imports from the major industrial countries have consisted of machinery and equipment. In this limited sense, trade with the Middle East can be thought of as the exchange of oil for technology. In 1982, imports of machinery and equipment into 15 Middle East countries 4 and from the six major industrial countries were valued at more than $42 billion. These imports from six industrial countries constituted 57 percent of total imports for the 15 Middle Eastern countries, according to official trade statistics. 5 The predominance of machinery and equipment imports was also apparent for the individual countries. In 1982, the percentage of machinery and equipment imports varied from 51 percent for Iran to 67 percent for Iraq (see table 17). These machinery and equipment import percentages were much higher than those of other large groups of countriese.g., middle-income LDCs (31 percent) or even industrial countries (22 percent). 6 The Middle East has thus i m ported machinery and equipment at a rate unmatched by other developing countries during the past decade. Table 16. Imports Into Middle Eastern Countries From Major Industrial Countries, 1982 a Total 6 countries k) Total 15 countries c Import category MiIIions of dollars Percent Millions of dollars Percent Machinery and equipment $32,663 57.7% $42,070 57.0% Nonelectric ., ... ., ... ., 11,262 19.9 13,945 18.9 Electric . . . 8,021 14.2 10,394 14.1 Telecommunicatio n 1,724 3.0 2,358 3.2 Electrical medical . 118 0.2 144 0.2 Other electric ., 6,179 10.9 7,892 10.7 Transport ., . . . . 11,235 19.8 14,523 19.7 Road vehicles ... 8,577 15.2 10,819 14.7 Aircraft . ... ... . 1,351 2.4 1,810 2.5 Other transport . . 1,307 2.3 1,895 2,6 Other imports 23,939 42.3 31,746 43.0 Food, beverage and tobacco . . 4,036 7.1 5,204 7,0 Material, chemical, miscellaneous 5,849 10.3 8,424 11,4 Other manufactures . . . 14,055 24.8 18,119 24.5 Total imports $56,603 100.0% $73,816 100.0% a Data are for the SIX major industrial countries United States, Japan, United Kingdom, France, West Germany, and ltaly only b Saudl Arabia, Iran, Algeria, Egypt, Iraq, and Kuwait C The above SIX countries Plus Libya, United Arab Emirates, Syria, Lebanon, Jordan, Qatar, Oman, North Yemen and South Yemen SOURCE Organizatlon for Economic Cooperation and Development, Trade Series C, Data Resources, Inc data bank

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Ch. 4 Technology Trade With the Middle East l 95 Table 19. Middle East Telecommunications Imports From Industrial Countries, Selected Years -. Telecommunications TelecommunicationsTelecommunications imports 1978 a Percent Imports, 1980 C Percent Imports 1982 d Country or country group (millions) "Infrastructure" b (millions) Infrastructure" b (millions) (1 ) (2) (3) (4) (5) Saud Arabia $ 786 56 60/0 $1,164 63 70/0 $ 658 Egypt 195 718 258 698 268 Iraq 207 797 357 71 4 526 Iran 360 81 4 120 625 52 Algeria 125 808 138 725 86 Kuwait 150 447 294 306 134 Total 6 countries $1,823 66.5% $2,331 61.8% $1,724 Total 15 countries $2,417 68.2% $3,362 59 3% $2,358 As percentage of total Imports 2.9% 2.0% 4.0% 2.4% 3.2% As percentage of machinery and equipment 7.4% 5.1% 10.3% 6.1% 5.6% a SITC Revision 1 #724 Telecommunications Apparatus b Telephone switchingand line equipment and television broadcast equipment, which might be called Infrastructure, are included in SITC Revision 1# 7249 and SITC Revision 2 #726 and it i S these subcategories that are used to calculate the percentaqes in cols 2 and 4. While these categories do exclude television and radio receivers (and also gramophones for #726) they include all other telecommunications equipment andparts and hence only roughly measure the infrastructure component C SITC, Revision 2.#76 Telecommunications and Sound Recording and Reproducing Apparatus and Equipment d SITC, Revision #724, 1982 data for six major industrial countries only Table 20. Middle East Aircraft Imports From Industrial Countries, Selected Years (millions of dollars) Country or country group Aircraft Aircraft and parts Aircraft and parts Imports, 1978a imports, 1978b imports, 1982C Saudi Arabia . ... $ 267 $120 $ 620 Egypt ... . . . 26 21 218 Iraq ... . ... . 0 14 229 Iran ... ... ... . 182 90 103 Algeria . 3 7 50 Kuwait . . . . . 170 21 131 Total 6 countries . . $ 64 8 $278 $1,351 Total 15 countries . . $1,016 $559 $1,810 As percentage of total imports 1,5% 0.8% 2.5% As percentage of machinery and equipment . 3.1% 1.7% 4.3% a SITC Revision 1 #734 less #7349 Aircraft and parts less parts b SITC Revision 1 #7349 parts of aircraft airships and balloons (not including rubber tires. engines, or electrical parts) and airships and balloons C SITC Revision 1 #734 Aircraft and parts 1982 data for S ix major industrial countries onIy SOURCES 1978: United Nations Trade With Industrial Countries, supplement to the World Trade Annual, 1982: Organization for Economic Cooperation and Development, Trade Series C, Data Resources, Inc., data bank data has been extensive enough to allow OTA to separate the projects into the expenditure categories of technical services, equipment supply, and construction. 12 Table 22 includes contract values for the period 1980-82. Difficulties in analyzing contract data were discussed in ch. 2 at greater length. They include incompleteness (with large projects disproportionately represented), double counting of contracts and subcontracts, the fact that awards are subject to substantial changes in both project design and amount, and the paucity of data on certain projects. A great number of contract awards have been made in recent years. In 1980-82, total contracts awarded (and recorded) were valued at $40 billion to $75 billion per year. These contracts were highly concentrated in a few countries. In 1981, Saudi Arabia and Iraq awarded the greatest shares of the contracts. The concentration of contract awards in various countries has shifted strikingly in recent years, owing to political events and to events

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96 Technology Transfer to the Middle East Table 21 .Middle East Medical Equipment Imports From Industrial Countries, Selected Years (millions of dollars) 1978 1980 1982 Electrical Professional Electrical Professional Electrical Professional Country or medical and scientific medical and scientific medical and scientific country group equipment instruments equipment instrumente d equipment e instruments e Saudi Arabia . . Egypt . . . . Iraq . . . . Iran . . . . Algeria . . . Kuwait . . . Total 6 countries . Total 15 countries . As percentage of total imports . As percentage of machinery and equipment imports 0.1% 0.30/0 $ 445 70 90 256 79 117 $1,058 NA 1.3 % f 2.8% f 0.1 0/0 0.3% 1.3 % 3.0% 0.2% 0.3% 1.2 % 2.1% a SITC Revision I #726 Electrical apparatus for medical purposes and radiological apparatus. b SITC Revision 1 #86profe55iona[, scientific, and controlling instruments; photographic and optical goods, watches and clocks C SlTC Revision 2 #774 Electrical apparatus for medical purposes and radiological apparatus. d SITC Revision 2 #87 Professional, scientific, and controlling instruments and apparatus, n.e.s. e 1982 data for six major Industrial countries only f calculated on data for six Middle East Countries NAnot available SOURCES 1978: United Nations, Trade With Industrial Countries, supplement to the World Trade Annual, 1980: Organization for Economic Cooperation and Develop. ment, Statistics on Foreign Trade, 1982; Organization for Economic Cooperation and Development, Trade Series C, Data Resources, Inc., data bank Table 22.Contract Awards by 15 Middle East Countries, 1980-82 Total contract Percent of Total contract Percent of Total contract Country or awards 1980 a 15-country awards, 1981 a 15-country awards, 1982 Percent of country group (millions) total b (millions) total (millions) 15-country total Saudi Arabia . . $15,697 37.1% $21,847 28.5% $27,107 60.3% Egypt . . . . 1,709 4.0 4,248 5.5 1,382 3.1 Iraq . . . . 12,647 29.9 23,018 30.0 3,832 8.5 Iran . . . . 70 0.2 899 1.2 928 2.1 Algeria . . . 1,083 2.6 1,375 1.8 2,704 6.0 Kuwait . . . 3,522 8.3 3,564 4.6 2,814 6.3 Total 6 countries . $34,728 82.1 0/0 $54,951 71.6 0/0 $38,767 86.3 0/0 Total 15 countries . $42,304 100.0 /0 $76,789 1OO.O O /O $44,939 100.0 /0 a Total contract awards refers to the annual contract amounts compiled in Middle East Contracts Data and Analysis, MEED Consultants, London, semiannually This i S an incomplete total both because smaller contracts escape notice and because information on value is sometimes not available There is an unknown amount of double counting of contracts and their subcontracts b saudl Arabia, Iran, Algeria, Egypt, lran, Kuwait, Libya, United Arab Emirates, Syria, Jordan, Qatar, Oman Lebanon, Yemen, and South Yemen are not included for 1980 These three countries awarded contracts in the MEED compilation of only $780 million in 1981 NOTE: Total contract awards for 1983 amounted to $33,984 million for the six countries under review Saudi Arabian contracts reported were valued at $14,980 million SOURCE: MEED Consultants, Middle East Contracts Data and Analysls, various issues in the international oil economy. In certain past years Iran (in 1978) and Libya (in 1980) have both been large contract purchasers, but neither were large contract purchasers in 1981. In another example, Iraq was the largest contractor in the Middle East in 1981. In 1982 and 1983, however, Iraq scaled back its civilian contracting effort, primarily because of the war-related diminution of its oil revenues. Its payments on existing contracts were also cut back, leaving in jeopardy the completion of many projects contracted for earlier. 1 3 Countries such as Saudi Arabia and Egypt have experienced large unexpected changes in their financial positions owing to the recent changes in the price of oil, and these changes have affected their willingness to undertake See, for instance, West Germans in the Iraq Quagmire, Financial Times, Oct. 17, 1983, p. 14.

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Ch. 4 Technology Trade With the Middle East l 97 contracting on the same scale as previously. Saudi Arabian international contracts continued to expand in 1982, with total contracts of $27 billion, but in 1983 only about $15 billion in contracts were awarded. 14 The annual amount of large construction and equipment contracts has varied greatly. Contracts like the $1.8 billion Siemens Group contract to install the new Cairo telephone system or the $3 billion Fluor Corp. contract to build a petrochemical complex at Jubail, Saudi Arabia, are not likely to be duplicated in these same countries. Since each such large contract is a significant fraction of a countrys contracting in a given year, annual totals are quite variable. With many of the large infrastructure contracts completed, service and maintenance has emerged as an increasingly important area of contracting. This is a natural follow-on to technology transfer in the original projects. 15 In general, as the structure of Middle Eastern economies changes the emphasis will shift toward management, financial, and technical services contracting. OTA analyzed of contract awards in the Middle East for four of the technology sectors. Where information is available, the total contract amounts are broken down by technical services, equipment supply, and construction. Table 23 summarizes this information by technology sector. Contracts with Saudi Arabia dominated the tabulation in all four sectors; three-fourths of all the contracts tallied were with Saudi Arabia. Iraq came in a distant second, with significant participation in three of the four sectors. Although Iraq was a significant contractor overall in 1980 and 1981, it did not invest in 14 see, Edmund OSullivan, Saudi-Arabia-The Construction Bubble Bursts, Middle East Economic Digest, June 17-23, 1983, pp. 8-12; *Proof That the Bubble Has Burst, Middle East Economic Digest, April 1983, special report. see Service and Maintenance-The Way to Go in the Kingdom, Middle East Executive Reports, October 1983, p. 18; Cleaning Up the City Streets, The Middle East, October 1983. these sectors to nearly the extent that Saudi Arabia did. Iraqs civilian contracting program decreased markedly in 1982 owing to the Iran-Iraq War. No contracts were reported for the construction of nuclear powerplants during the 197882 period. In fact, contracts for two 900-megawatt (MW) plants, which were to have been built in Iran by Framatome of France, were canceled in 1979, and a letter of intent given by Egypt to Westinghouse Electric of the United States was canceled in 1981. Nevertheless, as analyzed in chapter 9, a number of Middle Eastern countries are considering commercial nuclear power development. For instance, Egypt has accepted bids on a $2 billion nuclear power project. Saudi Arabia also was the only country extensively purchasing technical services in identifiable contracts. As noted in chapter 2, the technology transfer package normally includes technical and management assistance when the transfer is to developing countries with limited technical capabilities. Thus, the absence of identifiable technical services contracts does not mean that technical assistance was not provided, but rather that it may have been included in other contracts. 17 ANALYSIS OF DATA O N DIRECT INVESTMEN T Direct investment from the industrial countries has not as yet been a major mechanism of technology transfer to the Middle East, except in petroleum extraction and refining. The U.S. direct investment position in the Middle East (excluding Israel and including Turkey) was only $3.3 billion in 1981 ($2.2 billion in Financial Times, Sept. 1, 1983, p. 1, 17 The large Fluor contract to build the Jubail petrochemical complex is an example of both points. Although the technical services aspects of the contract were identified in press coverage of the contract, no amount was given; thus, in this case, it was not possible to ascertain the value of the technical services component. Much of the technical services (as an identifiable part of a turnkey project or separately) were to be provided in this project by multinational joint venture partners.

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98 Technology Transfer to the Middle East Table 23.Contract Awards by Technology Sectors, 1978-82 a Technology sector Telecommunications ., . Saudi Arabia . . Egypt ... . . . . . Iraq . . Iran ..., ..., . . Algeria . . . . ..., Kuwait . . . . . Commercial airline support systems. Saudi Arabia ..., ..., Egypt . . . . . . Iraq . . Algeria . . . Kuwait. . . . . Medical services . . . Saudi Arabia . . Egypt . . . . . Iraq . . . Algeria . . . . Kuwait . . . . Petrochemica/facilities . . Saudi Arabia . . . . . Egypt . . . . . . Iraq . . . . . . . Algeria . . ..., Kuwait . . . . . Four sectors (total) . . Saudi Arabia ., . . ..., Egypt . . . . Iraq . . . . Iran . . . ..., . Algeria . . . . . Kuwait, . . . . Technical services $1,412 1,362 21 15 1 13 963 953 7 3 1,926 1,925 1 54 54 4,355 4,240 28 18 55 14 a lncomplete coverage especially for 197879 and 1982 See notes to table 30 SOURCE OTA compilation the petroleum sector) out of a world total of $227 billion (see table 24). Other industrial countries have limited direct investments in the Middle East, with the United Kingdom being the principal source besides the United States. Data on their direct investments are often inadequate to determine their positions in individual countries. 18 While U.S. data on direct investment are better, .18 In 1978, the United Kingdom had direct investments of $2.8 billion in oil-exporting countries out of a world total of $50.7 billion, and in 1977 West Germany had direct investments of $l.0 billion in OPEC out of a world total of $22.8 billion. Yearend stock figures were not available for France, Japan, and Italy but investment flows to the Middle East were relatively small OECD, International Investment and Multinational Enterprise, Recent Trends in International Direct Investment Paris, 1981. Millions of dollars Equipment supply $9,339 5,881 2,442 828 111 4 73 488 338 135 11 1 3 69 31 3 16 1 18 884 751 2 131 10,780 7,001 2,580 857 111 6 225 Construction $479 293 4 149 26 7 3,992 2,348 122 1,486 36 4,283 2,950 47 1,264 22 4,804 4,497 168 139 13,558 10,088 341 2,899 26 204 Total $11,230 7,536 2,467 992 111 31 93 5,443 3,639 264 1,500 1 39 6,278 4,906 50 1,280 1 41 5,742 5,248 168 2 54 270 28,693 21,329 2,949 3,774 111 87 443 Percent 100.0% 67.1 22,0 8.8 1.0 0.3 0.8 100.0% 66.9 4.9 27.6 0.0 0.7 100.0% 78.1 0.8 20.4 0.0 0.7 100.0% 91.4 2.9 0.0 0.9 4,7 100.0% 74.3 10,3 13.2 0.4 0.3 1.5 and data are country coverage is restricted suppressed in various categories. 19 Nevertheless, U.S. direct investment data do allow conclusions to be drawn concerning the role of direct investment in technology transfer to the Middle East. First, U.S. nonpetroleum direct investment in the Middle East is small compared to that in developing The suppression is designed to avoid revealing confidential data about individual companies. The data are subject to surprising instability from year to year, and accounting reevaluations can affect changes in positions. For example. considering countries in the non-African part of the Middle East and not including Israel, the investment position of U.S. companies in OPEC countries plummeted by $655 million in 1981, while increasing almost tenfold in non-OPEC Middle East countries.

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Ch.4Technology Trade With the Middle East l 99 Table 24.U.S. Direct Country or region Petroleum Middle East (not Including Israel) Egyp t 934 Libya 473 Other Saharan Africa 139 Other OPEC b . 312 Other . 362 C Total . $ 2,220 Other less developed countries Israel ., 43 C Latin America 4,499 Asia and Pacific 4,183 Sub-Saharan Africa d 1,187 Total . . 9,912 Developed countries 37,348 World total e ... $52,107 Investment Position Abroad, Year-end 1981 (millions of dollars) Chemicals and Other Trade,banking. Other alIied products manufacturing finance industrie s Total 8 12 91 38 1,083 0 16 0 12 501 15 147 180 C 20 405 3,719 12,043 14,371 4,252 38,884 770 2,139 2,851 1,043 10,986 96 283 321 612 2,499 4,600 14.612 17,723 5,927 52,774 15,380 57,784 45,004 11,596 167,112 $20.000 $72,481 $63,224 $19,533 $227.345 a The total for Egypt and other Saharan entered under Egypt b Saudi Arabia, Iraq I ran, Kumait, United Arab Emirates and Qatar c Estimated as follow S : rouqh division of the $128 million U.S. Investment in trade subsidiaries in Israel and non-OPEC Asian Middle East ($70 million for Israel $58 million for non-OPEC Asian Middle East which was not dIsaggregated in the source in order to avoid discIosure of (ndividual company data alIows us to dIsagregate petroleum investment between the two for the purposes of this table d Doe s not include South Afrlca, which I s I ncIuded I n developed countries e World total includes "international" petroleum and shipping Investment of $799 miIIion which cannot be allocated to Individual countries SOURCE: Based on U.S. Department of Commerce Survey of Currenf Business, August 1982 table 14 p 22 countries generally. Only 2.5 percent of total U.S. nonpetroleum direct investment in developing countries was in the Middle East. The Middle Easts share of U.S. investment in LDC manufacturing subsidiaries was extremely smallone-half of 1 percent. This contrasts with the large Middle Eastern share of exports to LDCs (13 percent of industrial-country exports of manufactured goods to LDCs in 1980), and with the vast contracting effort that has been occuring in recent years. The lack of foreign direct investment in the Middle East reflects manufacturing output relatively small fraction of gross national product (GNP) for most of the countries in the region. Where direct investment is relatively large in developing countries, manufacturing is typically its largest destination. Direct investment in manufacturing in Egypt is practically nonexistent, despite the relatively high fraction of Egypts GNP that comes from manufacturing, the strong bilateral relationship with the United States, and favorable Egyptian investment law. Political risk, the lack of import barriers in most countries to stimulate domestic investment, small internal markets for many manufactured goods, and anticipated difficulties in technology transfer have all probably deterred manufacturing investment. The major exception to this is the Saudi petrochemical plants that are now starting to come into production. The availability of generous debt financing for joint venture partners, which reduced the amount of direct investment they were required to contribute to 15 percent in some Saudi Arabian joint ventures, was a powerful incentive. 20 Most of the nonpetroleum direct foreign investment in the Middle East has been in subsidiaries in trade, banking, finance, and other industries, such as hotels and construction. Middle Eastern governments provide investment incentives to foreign firms willing to 20 W)il entitlements have also been cited as an attraction to joint venture partners, but this ~as less of a benefit during the earl~r ] ~)~()s ~h(~n demand for oil fell.

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100 c Technology Transfer to the Mlddle East form partnerships with local firms. ] Even in trochemical sector, little direct investment the chemical industry, which includes the pewas recorded as of 1981. Table 25 shows that -.. ... U.S. direct investments in the Middle East 21 The existence of such joint ventures may be the explanadeclined slightly in the early 1980s, in contion of the significant direct I nvestment position in other industries in the other OPE C countries (table 24). See discustrast to the pattern of increasing direct investsion of plans to set up the National Industrialization Company ment in other LDCs. in Saudi Arabia to promote joint ventures with local firms in "Saudi Arabia's NIC Seeks Foreign Partners, Middle East Economic Digest, Apr. 6, 1984, p. 45. Table 25.Change in U.S. Direct Investment Position Abroad, 1980-81 Percent of 1980 4.3% 12.9 5,3 .0 861.8 5.7% Other less developed: Israel . . $ 379 $ 405 $ 26 6.90/o Latin America 38,882 38,884 2 0 Asia and Pacifi c 8,505 10,986 2,481 29.2 Sub-Saharan Africa a 1,975 2,499 524 26.5 Total . . . $ 49,741 $ 52,774 $ 3,033 6.1 0/0 Developed countries $158,350 $167,112 $8,762 5.50/0 World tota l a ... ... ., ., $215,579 $227,345 $11,766 5.50/0 a See notes for table 24 SOURCE U S Department of Commerce, Survey of Current Business August 1982 tables 13 and 14, pp 21-22 SUPPLIER COUNTRY EXPORT SHARES I N MIDDLE EAST TECHNOLOGY TRAD E TRENDS IN INDUSTRIALEastern countries, as follows, in 1970 and COUNTRY EXPORT SHARES 1982: Supplier shares of total exports of all industrialized countries to the Middle East have remained fairly stable in most cases during the past 12 years, despite changes in the oil economy, the exceptionally rapid expansion of Middle Eastern trade in the 1970s, and political conflicts and the shifting alliances in the region. For instance, according to tables 26 and 27, four of the principal suppliers had shares in industrial-country exports to 15 Middle Total export shares (percent) 1970 1982 United States 18 18 West German y 15 15 United Kingdom ., 11 9 Italy 10 11 In contrast, the shares of two other countries, France and Japan, did change steadily and markedly over the 12-year period. The

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. Ch. 4Technology Trade With the Middle East l 101 Table 26.lndustrial-Country Saudi Arabia ., Egypt Iraq Iran Algeria .,..,.... Kuwait . . 6 countries Libya . . . Oman Qatar . UAE . . . Jordan Lebanon, ......,. Syria, . . ., North Yemen ,. . . South Yemen . . 15 countries ., ., United States 29.3 30.1 6.0 2.0 11,1 15.9 19.7% 5.1 10.3 9.8 17,2 22,8 13,3 8.3 4.5 2.1 17.9% Japan 21.4 6.9 19.5 15.6 8,3 30.2 18.0% 4.8 27,3 22.1 23,3 9.2 7.2 10,2 22.6 22,9 17.2% Exports and Export Shares to the Middle East 1982 West Germany 11.4 12.0 22.2 23.2 16.5 13.8 15.2% 25,7 9.6 9.6 11.3 14,8 11.1 22,0 12.4 4.6 15.4% France 6.4 10.4 10,2 5.5 25.9 5.3 9.6% 7,2 4.5 12,1 8.5 6.3 15.1 12,0 14.2 9.3 9.5% United Kingdom 7.7 6.2 10.8 9.6 4,2 8.9 8.0% 7.7 27.4 27,5 15,3 18.9 5.3 9.4 10,9 16.0 9.4% Italy 8. 0 8.7 118 12,0 8.1 10,6 9.3% 36.0 5.2 5.0 9.2 11,6 22.3 14,4 12,5 14,4 71.2% Other industrial countries 15. 8 25.7 19.5 32.2 25.9 15,2 20.1% 13.6 15,7 13.9 16.4 16.4 256 23.6 23.0 30.7 19.5% Total value (millions) $30,820 9,557 14,105 6,031 8,198 5,908 74,619 5,952 1,680 1.564 6,403 2,714 2,209 1,663 847 388 $98,039 NOTE Supplier shares calcuIated on the basis of total Industrial-country exports to the MIddle East countries listed SOURCE International Mone!ary Fund Direction of Trade Statistics Yearbook 1983 shares of the two countries were as follows in 1970 and 1982: Total export shares (percent) 1970 1982 Japan 10 17 France 17 9 Changes in supplier country export shares were more noticeable for machinery equipment exports to the Middle East: Machinery and equipment export shares (percent) 1970 1982 United States 23 20 West Germany 23 22 United Kingdom 16 9 Italy 10 14 Japan 9 23 France 18 9 This calculation of supplier shares is based on total exports for the six major suppliers only. In machinery and equipment exports, a decline in the position of the United Kingdom and an improvement in Italys position occurred during the period. These changes in share for Japan and France are related to events that probably have run their course. In the case of Japan, the expansion in exports to the Middle East follows the striking expansion of Japans exports to the world in general. Japans relative earlier neglect of export markets of all but the major countries of the distant Middle East changed to greater interest because of the increase in the size of the regional market, Japans official desire to redress bilateral trade imbalances and develop relations with oil suppliers, and the improvement of global communications and transportation. The increased importance that Japans government and private sectors placed on the Middle East following the oil shock of 1973 was matched by a substantial increase in both commercial and government presence. On the commercial side, trading companies opened new branch offices, and on the government side, high level official delegations visited various capitals and helped negotiate large contracts. In this way, Japan developed a competitive position in the Middle East fully consistent with its worldwide position. With the removal of the Middle East as an exception to Japans world trading pattern, the factors that affect Japans worldwide export share-the rate of growth of the Japanese economy, the governments general export promotion policies, the pattern of Japans comparative advantage, and the value of the

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102 l Technology Transfer to the Middle East ... Table 27 .industrial-Country Exports to the Middle EastMarket Share for Selected Years (percent) .- 1987 Saudi Arabia . . Iran . . . . . Algeria . . . . . Egypt . . . . . Iraq . . . . Kuwait . . . . Total 6 countries, .., . Total 15 countries . 1980 Saudi Arabia . . . Iran . . . . Algeria . . . . Egypt . . . . . Iraq . . . . . Kuwait . . . . . Total 6 countries. . . Total 15 countries. . 1975 Saudi Arabia . . . Iran . . . . . Algeria . . . . Egypt . . . . . Iraq . . . . . Kuwait . . . . . Total 6 countries.. ..., Total 15 countries. . . 1970 Saudi Arabia . . . Iran . . . . . Algeria . . . . . Egypt . . . . . Iraq . . . . . Kuwait . . . . Total 6 countries . . Total 15 countries. . . United States 27 4 8 29 7 18 17 16 25 0 6 26 7 0 15 14 30 28 13 22 8 21 22 20 26 23 6 13 8 16 16 18 Japan 23 19 5 1 23 30 19 18 23 20 5 6 23 28 19 17 27 16 5 7 20 22 16 15 16 13 2 2 6 24 10 10 West Germany 12 20 14 15 22 11 15 14 11 20 16 13 19 12 12 14 11 19 12 14 26 12 16 16 12 23 10 21 7 11 16 15 France 7 9 27 14 11 4 11 10 7 9 30 14 11 5 12 11 9 6 39 14 10 6 12 12 5 5 55 11 13 8 19 17 United Kingdom 8 9 5 7 9 11 8 9 8 12 4 8 8 12 8 8 9 10 4 8 7 13 8 9 15 11 4 8 21 18 11 11 Italy 8 10 16 11 10 9 10 14 9 7 15 9 10 8 10 12 6 5 11 12 6 7 7 10 6 6 9 11 6 7 8 10 NOTE: Supplier shares calculated on the basis of total industrial country exports to the Middle East countries listed in table 26 SOURCE Compiled for the OffIce of Technology Assessment, from International Monetary Fund, Direction of Trade Yearbook. various issues yenwill be key factors influencing Japans Middle East trade. In the case of France, the decline in its export share to the Middle East was almost entirely caused by the steady decrease in its share of the postcolonial Algerian market from 55 percent in 1970 to 27 percent in 1981 (see table 27). Its exports to Algeria in that year also dropped to 24 percent of its exports to the 15-country region. Given the historical relationship between France and Algeria, within which French firms have developed significant market presence, there should be no simple expectation that the decline in the French share in Algeria will continue. Some further reduction in the French share of the Algerian market may take place, but in view of the decreased importance of the Algerian market to France, it is unlikely to have a large impact on Frances region wide share. In the past decade, to reiterate, the overall shares of most countries have been relatively stable and those that have changed significantly have done so for reasons that are not likely to persist. Nevertheless, a number of changes in bilateral political relationships did have effects on bilateral trade in the last decade.

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Ch. 4Technology Trade With the Middle East l 103 ... . For example, the U.S. export share to Egypt went from 13 percent in 1970 to 31 percent in 1974, and the U.S. export share to Iran went from 24 percent in 1978 to zero in 1980. Similar gyrations in shares have affected bilateral U.S. trade with Iraq, Libya, Syria, and Algeria at various times. Nevertheless, diversification within the portfolio of export opportunities resulted in substantial stability in the U.S. market share in the Middle East region. Even the complete cessation of exports to Iran after 1979 only reduced the U.S. 15country share from 18 percent in 1978 to 14 percent in 1980. By 1982, the U.S. share had recovered to 18 percent. 22 These developments were strongly influenced by U.S. superpower .. 22 The ( .S. {)~er:il] ~hart~ reach[d n high of 20 to 22 pvtwnt I n t he 1) I-7i ptrlfd status and strong U.S. political positions in the Arab-Israel dispute. Therefore, despite overall stability of U.S. export shares, there has been striking variation in particular country markets which has been affected by political factors. The experience of other industrial countries over the period was similar to that of the United States in the overall stability of their regional export shares, despite some shifts in particular country markets, such as West Germanys growing share in Iraq or the volatility of Japans share in Iran. Year-to-year country changes in share for the other industrial countries usually varied gradually. As a rule, countries with dominant trading positions in former colonies or protectorates have seen these positions deteriorate (although they are still

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104 l Technology Transfer to the Middle East Photo credit Perry Ketchum Algerian port. France and Algeria have been Important trading partners, with the Mediterranean Sea offering a convenient shipping route strong). This has been true of France in Algeria and the United Kingdom in the Gulf countries. Table 27 presents export shares for supplier countries in various Middle Eastern countries and country groups in selected years. PRODUCT EXPOR T SPECIALIZATION OF MAJO R SUPPLIER COUNTRIE S Export shares by product category show a significant degree of supplier specialization. Table 28 gives the market shares of the six major industrial countries by product category in 1978 and 1982. Similar tables for six Middle Eastern countries are presented in appendix tables 4A-4F. From these tables it can be seen that the United States, Italy, and France had large shares in food and other raw material exports. All the major West European countries (except Italy in 1982) exported larger shares of chemicals to the Middle East than did the United States and Japan, probably because of transportation cost differentials, In 1978, Japan and Italy were relatively strong in basic and other manufactures. By 1982, however, Italys share of the combined category of basic and other manufactures had declined substantially. In the machinery and equipment category, certain specializations emerged in the export data for the Middle East: Japan was the dominant supplier of consumer electronics and road vehicles in both 1978 and 1982. Japan also gained the largest overall market share in machinery and equipment exports in 1982. In 1978, West Germany and the United States were clearly the most important exporters of production machinery (SITC 71 and 72), 23 but Japan, France, the United Kingdom, and other OECD countries were all significant exporters of production machinery as well. In 1982, both the United States and Japan in Standard International Trade Classification.

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creased their shares relative to West Germany in both nonelectric and electric machinery. West Germany, which in 1978 had the highest share in both categories, relinquished first place in 1982 to the United States in nonelectric machinery and to Japan in electric machinery. Except for Italy, all of the major industrial countries participated significantly in telephone and other nonconsumer telecommunications equipment exports, judging by 1978 and 1980 data. 24 -... F[w 1 !~?h II
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106 l Technology Transfer to the Middle East Some other machinery and equipment specializations were notable. The United States was the dominant supplier of aircraft and parts in both years. All the industrial countries, except Italy, were strong in instruments in 1982. Finally, Italy had a specialization in office equipment exports. CONTRACTING SPECIALIZATION OF SUPPLIER COUNTRIES Because of the incomplete coverage 25 of the data on contracts, and because the magnitude of many of the individual contracts lends instability to the data from year to year, the data presented in table 29 support only limited judgments about supplier shares and about their significance. Four major suppliersthe United States, Japan, West Germany, and Francehad about equal shares of the overall MEED contract data totals for 1979-82. In addition, the United Kingdom and Italy together had a share about equal to one of the leading countries. The United States had a smaller 4-year contracts share than the other three leading countries. 26 Ideally, OTA would carry out detailed analysis of the components of these contracts to estimate the benefits to the various supplier percent), In both 1978 and 1980, smaller industrial countries as a group, notably the Netherlands and Sweden, also exported significant shares of telecommunications, n.e.s. equipment to the Middle East 17.9 percent of the total for industrial countries in 1978 and 36.5 percent in 1980, 25 The major source of contractor data used here is Middle East Contracts, MEED Consultants, London, annual issues for contract years since 1979. MEED relies on voluntary reports of contracts and on information from correspondents. As discussed in chapter 2, small contracts may be missed and certain country data may be unreliable. A further source of difficulty is that joint venture contracts with various Western suppliers may be attributed to local contractors. 1 n this case it also is impossible to determine the nationality of the international contractor. Supporting the judgment that the United States has not been the leading prime contractor during the past few years is the expectation that unreported Iraqi data would not be likely to favor the United States if they had been included. On the other hand, some local Middle East companies receiving about one-fourth of contract awards in 1982 were joint ventures with industrial-country firms, and some of these undoubtedly involved U.S. firms particularly in Saudi Arabia where most of the contracts were awarded. There is no way to determine whether or not U.S. firms play a disproportionately large role in these joint ventures, although the direct investment data presented above suggest that they do. countriese.g., to determine the employment supported by these contracts in the various home countries. Unfortunately, the contract data do not generally include information concerning subcontractors, or other detailed data below the prime contract level. Trade data indicate that the United States exports large amounts of machinery and equipment to the Middle East. The value of machinery and equipment exports ($8.5 billion) in 1982, for instance, was larger than that of 1981 reported contracts awarded to U.S. firms. 27 This suggests that prime contracts of other countries were serviced by large amounts of U.S. machinery. The contract data may, therefore, underestimate the underlying U.S. share of contract expenditure. CONTRACTING SPECIALIZATION OF SUPPLIER COUNTRIES IN FOUR TECHNOLOGY SECTORS The picture changes substantially when one examines contracts in the four technology sectors examined in depth in this report. Table 30 indicates that the United States was the dominant contractor country for the four-sector total, with 44 percent of the total identified contract amounts of $19.7 billion going to the major industrial countries. This was true of all three types of contracts as welltechnical services, equipment supply, and construction. The United States was particularly dominant in technical services, as indicated by data presented in table 31 which examines the four sectors individually. U.S. contractors had 42, 96, and 78 percent, respectively, of the technical service contracts in communications, aircraft support systems, and medical services. 28 27 There would be a lag between contract award and machinery import, so 1981 contract awards should be compared to 1982 machinery imports. 28 This is not to suggest that the United States is dominant in services exports in general. 1980 International Monetary Fund data, as compiled by the Office of the U.S. Trade Representative, show that the United States was only fourth in services exports worldwide other than transportation, travel and tourism: West Germany ($15.5 billion), United Kingdom ($13.3 billion), France ($12.8 billion), and United States ($10.8 billion). (Source: Office of the U.S. Trade Representative, U.S. National Study on Trade in Services, December 1983, table 3, p. 114.

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. Ch. 4Technology Trade With the Middle East l 107 Table 29. Supplier Shares of Middle East Contracts, 1979.82 a Supplier 1979 1980 1981 1982 Total 4 years $185.7 59.3% 12.9 6.2 21.7 100.0 $110.1 17. 2% 20.9 17.5 10.5 21.5 12.3 100.0 Total amount b (billions of dollars) $41.1 $36.2 57.5% 12.0 4.8 25.7 100.0 $67.6 57 .2% 13. 4 9.3 20.0 100.0 $40.8 52.8% 16.5 4.0 26.7 100.0 S IX major Industrial countries South Korea East Europ e Local and Middle Eas t 70.7% 9.1 4 3 15.9 Tota l 100.0 S IX major Industrial countries (billions of dollars) $29.1 $20.8 11.2% 16.1 14.6 11.7 32.1 14.3 100.0 $38.7 $21.5 22.9% 23.5 17,2 9.3 20.1 70 100.0 17.1% 19.1 22.8 7.8 17.6 15.6 15.8% 254 11.6 161 201 11.0 Tota l 100.0 100.0 Table 30.Supplier Share of Middle East Contracts in Four Technology Sectors, Aggregated, By Type of Contract, a 1978-82 Type of contract Equipment supply Construction Technical Supplier services Total amount (billions of dollars) $4.4 Six major Industrial countries . . . . 46. 1% Other. . . . . 23.2 b Local and Middle Eas t 30.7 Total $10.8 $13.6 $28.8 69.1% 76.1% 30.3 C 16,2 0.6 7.6 68.9% 225 8.5 S IX major Industrial countries (billions of dollars ) $2.0 $ 7.4 $10,3 $19.7 United State s 75.5% 37.2% 43.6% 44.4 % Japa n 3 4 16.5 7.9 10.7 West German y 2.8 10.2 7.0 7.8 United Kingdo m 16.3 11.6 1.5 6.8 Franc e 0.2 21.5 30.9 24.3 Italy ., ... 1,9 2.9 9.1 6.1 Total major Industrial countries . . . 100,0% 100.0 % 100.0 % 100.0% a Comrnunications commercial aircraft S upport systems, rnedical services and petrochemical faciIities incomplete coverage especially for 1978-79 and 1982 b Comprised entirely of one large Canadian communications technical services Contract (Bell of Canada). C Comprised primarily of a few Sweden/Netherlands telecommunications equipment contracts SOURCE Office of Technology Assessment. A detailed compilation of the contracts by supplier firms and awarding Middle Eastern countries for the 1978-82 period i S available from OTA upon request

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108 l Technology Transfer to the Middle East _. .-.. Table 31 .Supplier Shares of Middle East Contracts in Four Technology Sectors, By Type of Contract, a 1978-82 (percent or millions of dollars) Technology sector/ Technical supplier country services Communications Major industrial countries $2669 United States. 42.0% Japan ., 8.4 West Germany. ., ., ., 20.2 United Kingdom ., ., 15.2 France ... 0.2 Italy . . . . 14.1 Total : 100.0% Commercial aircraft support systems Major Industrial countries ... $462.7 United States ... 96.3% Japan . West Germany, ., 0.3 United Kingdom . 2.8 France 0.6 Italy ., ... Total ... ... ., 100.00/0 Medical services Major industrial countries $1,231,1 United States. 77 .80/0 Japan ., . West German y. ., . United Kingdom . 22.2 France ., ., ... ... ., 0.1 Italy ... ... ... Total ... ... 100.0 /0 Petrochemical facilities Major industrial countries ., $45,0 United States. ... ... Japan ... . . 100,0 /0 West Germany. ... United Kingdom . France ., ... ... . Italy . . . . Total . . . . 100.0% Type of contract Equipment supply Construction Total $6,079.6 $167.7 $6,514.1 44.6% 1.0 % 43.4% 10,0 79.4 11.7 11.8 11.9 12.2 12.0 19.8 19.6 19.0 1.6 2.1 100.0% 100.0% 100.0% $488,7 0.2% 2.3 3.5 15.8 77.1 1.0 100.0 % $44.7 56.00/o 4.1 39.9 100.0% $2,873.8 $3,825.3 6,5 {o 16.5 /o 2.6 2,3 20,4 15.8 3.5 5.0 67.0 60.3 0.1 100.0 % 100.0 % $2,841.9 6.4% 21,4 4.4 a 1.6 43,5 22.7 1 00.0% $4,117.7 28.3% 14.8 3.0 8.2 30.1 15.7 100.0% $883.8 $4,429.2 $5,358.0 93.1% 76.9% 67.6% 12.0 2.1 0.2 0.5 17,5 2.9 12.8 6.7 7.7 100.0% 100.0% 100.0% a lt appears that West German firms received a number of sizable hospital construction contracts Contract values were not available, however SOURCE Office of Technology Assessment The telecommunications figure would undoubtedly be higher if American participation in the large 1978 Bell of Canada technical services contract in Saudi Arabia were given weight. In petrochemicals, technical service contracts were not reported separately to any extent. Nevertheless, a large component of technical services is undoubtedly included in the large U.S.-dominated petrochemical construction contracts. All this supports the hypothesis that the United States has had a comparative advantage in the sale of technical services in the Middle East that matches the comparative advantage it has in human capital-intensive trade in general. No such suggestion of a general comparative advantage in equipment supply can be gleaned from the four-sector contract data. U.S. contractors did well in telecommunications and medical equipment supply, but France and Japan were dominant in supply of equipment for aircraft support and petrochemical facilities, respectively. Except for the petrochemical

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. Ch. 4Technology Trade With the Mlddle East l 107 Table 29.Supplier Shares of Middle East Contracts, 1979.82 a Supplier 1979 1980 1981 Total amount b (bill Ions of dollars) ., ., ... ., ... $41.1 $36. 2 $67.6 S IX major Industrial countries . . 70.7 % 57.5% 57 .2% South Korea. . . . . 9.1 12.0 13.4 East Europe . . . 4.3 4.8 9.3 Local and Middle East. . . 15.9 25.7 20.0 Total , . 100.0 100.0 100.0 S IX major Industrial countries (billions of dollars) $29.1 $20,8 $38.7 United States.. . . 22.9% 11.2% 17.1% Japan . . . . 23.5 16,1 19.1 West Germany . . . . . . . . 17.2 14.6 22.8 United Kingdom . . 9.3 11.7 7,8 France ..., ., . . . . . . . 20.1 32.1 17.6 Italy . . . . . . . . . . 7.0 14.3 15,6 Total . . . . . . . 100.0 100.0 100.0 1982 $40.8 52.8* 16.5 4.0 26.7 100.0 $21.5 15.8% 25.4 11.6 16.1 20.1 11.0 100.0 Total 4 years $1857 59.3% 12.9 6.2 21.7 100.0 $110.1 17.2% 20.9 17.5 10.5 21.5 12.3 100.0 a Contracts were awarded in a range of categories including above $5 billion in 1981 defense housing industry marine petroleum, and roads and railways Smaller total contract amounts were awarded in agriculture aviation education, health, urban development, publlc buildings, telecommunications, tourism vehicles and water b This total is for contracts identified by contractors home country Jolnt venture companies are characterized accordlng to place of registration Consortia allocatlons have been divided proportionally Countries or country categories not Iisted are not Included in total SOURCE MEED Consultants Middle East Contracts-Directory and Analysis, 1982 second half, p 9 Table 30.Supplier Share of Middle East Contracts in Four Technology Sectors, Aggregated, By Type of Contract, a 1978-82 Type of contract Technical Equipment Supplier services supply Construction Total Total amount (billions of dollars) . $4.4 $10.8 $13.6 $28.8 Six major industrial countries 46. 1% 69. 1% 76.1% 68.9% Other. ., 23.2 b 30.3 C 16.2 22,5 Local and Middle Eas t 30.7 0.6 7.6 8.5 Six major Industrial countries (billions of dollars) . $2.0 $ 7.4 $10.3 $19.7 United States. . . 75.5% 37.2% 43.6% 44.4% Japan . . . . 3.4 16.5 7.9 107 West Germany 2.8 10.2 7.0 7 8 United Kingdom . 16,3 11.6 1.5 6.8 France . 0.2 21.5 30.9 24.3 Italy ., . 1.9 2.9 9.1 6.1 Total major industrial countries 100.0% 100.0% 100.0% 100.0% a Communications, commercial aircraft S upport systems medical services, and petrochemical facilities Incomplete coverage especially for 1978-79 and 1982 b Comprised entirely of one large Canadian communications technical services contract (Bell of Canada) c Comprlsed Primarily of a few Sweden/Netherlands telecommunications equipment contracts SOURCE Off Ice of Technology Assessment A detailed compilation of the contracts by supplier firms and awarding Middle Eastern countries for the 197882 period is available from OTA upon request

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108 c Technology Transfer to the Middle East . Table 31 .Supplier Shares of Middle East Contracts in Four Technology Sectors, By Type of Contract, a 1978-82 (percent or millions of dollars) Technology sector/ Technical supplier country services Communications Major industrial countries $266.9 United States. ., . 42.0% Japan . . 8.4 West Germany. . 20.2 United Kingdom . 15,2 France . ... 0.2 Italy . . . 14,1 Total ., . ... 100.0% Commercial aircraft support systems Major industrial countries $462.7 United States. ., . 96.3% Japan . . . West Germany. ... . 0.3 United Kingdom . 2.8 France ... . ... 0.6 Italy . . . . . Total ... . . 100.0% Medical services Major industrial countries $1,231.1 United States. . . . 77.8% Japan . . . . West Germany . . . United Kingdom . . 22.2 France ., . . . 0.1 Italy . . . . . Total . . . . 100.0% Petrochemical facilities Major industrial countries . $45.0 United States . . . Japan . . . . 100.0%0 West Germany . . . United Kingdom . . France . . . . Italy . . . . . Total . . . . 1 00.00/0 Type of contract Equipment supply $6,079.6 44,60/o 10.0 11,8 12.2 19.8 1.6 100.0% $488.7 0.2% 2.3 3.5 15.8 77.1 1.0 100.0% $44.7 56.0% 4.1 39.9 100.0% $883.8 67.6% 2.1 17.5 12.8 1 OO.O O /O Construction $167.7 1.0% 79,4 19.6 100.0% $2,873.8 6.5% 2.6 20.4 3.5 67.0 100.0% $2,841.9 6.4% 21.4 4.4 a 1.6 43.5 22.7 100.0% $4,429.2 93.1% 0.2 6.7 100.0% Total $6,514.1 43.4 /0 11,7 11.9 12,0 19.0 2.1 100.0% $3,825.3 16.5% 2.3 15.8 5.0 60.3 0.1 100.0% $4,117.7 28.3% 14.8 3.0 8.2 30.1 15.7 100.0% $5,358.0 76.9% 12.0 0.5 2.9 7.7 100.0% a lt appears that West German firms received a number of sizable hospital construction contracts. Contract values were not available, however SOURCE: Office of Technology Assessment The telecommunications figure would undoubtedly be higher if American participation in the large 1978 Bell of Canada technical services contract in Saudi Arabia were given weight. In petrochemicals, technical service contracts were not reported separately to any extent. Nevertheless, a large component of technical services is undoubtedly included in the large U.S.-dominated petrochemical construction contracts. All this supports the hypothesis that the United States has had a comparative advantage in the sale of technical services in the Middle East that matches the comparative advantage it has in human capital-intensive trade in general. No such suggestion of a general comparative advantage in equipment supply can be gleaned from the four-sector contract data. U.S. contractors did well in telecommunications and medical equipment supply, but France and Japan were dominant in supply of equipment for aircraft support and petrochemical facilities, respectively. Except for the petrochemical

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Ch. 4Technology Trade With the Middle East l 113 exporting countries the United States, West Germany, the United Kingdom, and Italy maintained their overall export positions through the decade (despite variations in particular types of exports or markets). Japan and France exchanged share positions, with Japanese firms dramatically expanding export shares while French firms lost ground. The share of U.S. firms in contracting in the region was similar to that of the United States and 16 percent in contracts in 1982. However, for the four technology sectors examined in this chaptertelecommunications, aircraft support systems, medical services, and petrochemical facilities-the U.S. share for 1978-82 contracts was 44 percent. This higher market share in these advanced technology sectors confirms the view that the United States has a comparative advantage in R&D and human capital-intensive trade. in total exports percent in total exports

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114 l Technology Transfer to the Middle East CHAPTER 4 STATISTICAL APPENDIXE S Appendix Table 4A. Supplier Export Shares to Saudi Arabia, by Commodity Class, 1982 United United Total value = States Japan Germany France Kingdom Italy 100 percent Commodity SITC a (percent) ($ millions) Food and live animals . . . Beverages and tobacco . . . Crude materials . . . . Mineral fuels ., . . . . Oils and fats . . . . . Chemicals . . . . . . Manufactured, classified by material Machinery and equipment . . Machinery, other than electric Electrical machinery. ... . Telecommunications apparatus ., Electrical, medical and radiological . . Transport equipment . . . Road motor vehicles . . Aircraft . . . . . Miscellaneous manufactured goods. Instruments and apparatus . Not classified according to kind . Total . . . . . . 0 43.4 3.2 1 36.6 28.6 2 71.1 2.9 3 8.5 0.2 4 73.4 1.0 5 29.1 4.1 6 22.7 45.1 7 32.8 27.7 71 42.7 21.3 72 29.9 28.0 724 25.6 51.1 10.5 0.5 5.4 0.8 10.6 15.4 11.3 17.9 14.4 16.0 12.4 26.4 0.8 12.1 26.5 6.5 13.5 10.3 5.4 7.4 8.0 4.7 15.7 22.9 6.6 4.3 6.0 31.2 9.1 8.1 13.2 7.9 6.2 0.8 10.6 2.0 59.7 2.6 6.6 1.4 8.2 1.0 10.2 0.0 1,032 322 69 486 30 949 4,739 13,757 4,850 3,405 658 45 4,676 3,687 620 2,014 301 693 24,090 726 40.7 7.9 73 30.4 39.1 732 21.0 48.7 734 81.6 2.1 8 27.5 24.2 861 35.5 29.8 37.4 21.2 24.7 0.0 10.7 11.0 1.5 2.3 1.8 1.8 9.9 10.4 9.3 4.3 2.9 11,3 10.4 12.2 3.3 2.6 0.8 3.3 17.3 1.0 6. 6 14.6 0. 1 8.2 & 5 9.8 Note Percentages for the S ix supplier countries sum to 100 percent (except for rounding error) a Standard International Trade Classification b Scientific, medical, optical, measuring and controlling SOURCE OECD, Trade Series C, obtained from Data Resources, Inc. on-line service Appendix Table 4B. Supplier Export Shares to Iraq, by Commodity Class, 1982 United United Total value = States Japan Germany France Kingdom Italy 100 percent Commodity SlTC a (percent) ($ millions) Food and live animals . . . Beverages and tobacco . . Crude materials . . . . Mineral fuels . . . Oils and fats . ... ., . Chemicals . . . Manufactured, classified by material Machinery and equipment . . Machinery, other than electric . Electrical machinery. . . Telecommunications apparatus. ., Electrical, medical and radiological . Transport equipment . . . Road motor vehicles . Aircraft . . . . . Miscellaneous manufactured goods. Instruments and apparatus ... Not classified according to kind . Total . . . . . . 0 38.8 0.4 1 0.0 0,3 2 16.8 36.2 3 3.6 7.2 4 10.6 2.3 5 8.4 9.1 6 1,9 34.2 7 8.2 24.2 71 14,3 25.4 72 3.2 28.2 724 2.2 32.1 8.0 5.7 18.3 16.3 6.0 32.3 25.8 28.9 28.1 10.7 7.2 47.2 7.3 13.8 10.9 5.4 18.6 18,9 8.9 10.7 17.8 30.3 3.8 65.2 13.0 43.2 11.5 24.0 12.3 12.2 16.9 16.8 28.2 1,7 21.5 1.8 18.8 64.2 7.7 6.8 17.6 4.5 23.3 0.1 336 126 28 26 5 362 2.083 7,560 2,283 1,985 526 726 47,5 11.3 73 8.7 26.6 732 2.6 33.3 734 73.8 0.0 8 2.6 25.1 861 3.5 17.9 9 0. 7 6. 0 7.4 24,3 19,4 41.6 49.0 0.0 22.2 31.7 65.5 27.8 4.5 2.9 2.5 5.4 15.6 16.1 3. 1 12.5 13.2 7.8 8.0 1.7 23.7 29.7 0. 7 13.5 4.2 12.4 4.6 19.1 10,9 1.1 16 2,599 2,027 299 613 132 184 11,324 23.9 14.6 Note Percentages for the S ix supplier countries sum to 100 percent (except for rounding error) a Standard International Trade Classification b Scientific medical optical, measuring and controlling SOURCE OECD, Trade Series C obtained from Data Resources, Inc on-Iine service

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exporting countriesthe United States, West Germany, the United Kingdom, and Italy maintained their overall export positions through the decade (despite variations in particular types of exports or markets). Japan and France exchanged share positions, with Japanese firms dramatically expanding export shares while French firms lost ground. The share of U.S. firms in contracting in the region was similar to that of the United States in total exports percent in total exports Ch 4 Technology Trade With the Middle East 113 .. and 16 percent in contracts in 1982. However, for the four technology sectors examined in this chaptertelecommunications, aircraft support systems, medical services, and petrochemical facilities-the U.S. share for 1978-82 contracts was 44 percent. This higher market share in these advanced technology sectors confirms the view that the United States has a comparative advantage in R&D and human capital-intensive trade.

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114 l Technology Transfer to the Middle East CHAPTER 4 STATISTICAL APPENDIXE S Appendix Table 4A. Supplier Export Shares to Saudi Arabia, by Commodity Class, 1982 Commodity Food and live animals . Beverages and tobacco . . Crude materials . Mineral fuels ., . . Oils and fats ... . . Chemicals . . Manufactured, classified by material Machinery and equipmen t Machinery, other than electric ... Electrical machinery. Telecommunications apparatus ., Electrical, medical and radiological Transport equipment . Road motor vehicles ., Aircraft . . . Miscellaneous manufactured goods. Instruments and apparatus . Not classified according to kind Total . . . . . . SITC a o 1 2 3 4 5 6 7 71 72 724 United United -., States Japan Germany France Kingdom (percent) 43.4 3.2 10,5 26.4 36.6 28.6 0.5 0.8 71.1 2.9 5.4 12,1 8.5 0.2 0.8 26.5 73.4 1.0 10,6 6.5 29,1 4.1 15.4 13.5 22.7 45.1 11.3 10,3 32.8 27.7 17.9 5.4 42.7 21.3 14.4 7,4 299 28.0 16.0 8.0 25.6 51,1 12.4 4.7 726 40,7 7.9 37.4 1.5 73 30.4 39.1 21.2 2.3 732 21.0 48.7 24.7 1.8 734 81.6 2.1 0.0 1.8 8 27.5 24.2 10.7 9.9 861 35.5 29,8 11.0 10.4 9 7.0 1. 5 6. 6 29.7 27.5 14.6 0. 1 8.2 15.7 22.9 6.6 4.3 6.0 31.2 9.1 8.1 13.2 7.9 6.2 9.3 4.3 2.9 11.3 10.4 12,2 8. 5 9.8 Italy 0.8 10,6 2.0 59.7 2.6 6.6 1.4 8.2 1.0 10.2 0.0 3.3 2.6 0.8 3.3 17.3 1,0 76,3 10.2 Note Percentages for the S ix supplier countries sum to 100 percent (except for rounding error) a Standard International Trade Classification b Scientific, medical, optical, measuring and controlling SOURCE OECD Trade Series C, obtained from Data Resources Inc on-Iine service Appendix Table 4B. Supplier Export Shares to Iraq, by Commodity Class, 1982 Commodity Food and live animals . Beverages and tobacco ., ., ., Crude materials ., Mineral fuels .. Oils and fats . ~ Chemicals ., ., ... ., Manufactured, classified by material Machinery and equipment . Machinery, other than electric Electrical machinery. ., ... Telecommunications apparatus Electrical, medical and radiological Transport equipment ., ., Road motor vehicle s Aircraft . Miscellaneous manufactured goods. Instruments and apparatus . Not classified according to kind Total . lotal value = 100 percent ($ millions) 1,032 322 69 486 30 949 4,739 13,757 4,850 3,405 658 45 4.676 3,687 620 2,014 301 693 24.090 SITC a 0 1 2 3 4 5 6 7 71 72 724 United United Total value = States Japan Germany France Kingdom Italy 100 percent .. .-. (percent) 38.8 0.0 168 3.6 10.6 8,4 1.9 8,2 14,3 3.2 2,2 0.4 0.3 36,2 7,2 2.3 9.1 34,2 24.2 25.4 28.2 32.1 8.0 5.7 18,3 16.3 6.0 32,3 25.8 28,9 28.1 10,7 7.2 47.2 7.3 13.8 10.9 5.4 18.6 18.9 8.9 10.7 17.8 30.3 726 47.5 11.3 19,4 4,5 73 8.7 26,6 41.6 2.9 732 2.6 333 49.0 2.5 734 73,8 0.0 0.0 5.4 8 2.6 25,1 22.2 15.6 861 3.5 17.9 31.7 16.1 3.8 65.2 13.0 43,2 11,5 24,0 12.3 12,2 16.9 16.8 28.2 13.2 7,8 8.0 1.7 23,7 29.7 0. 7 13.5 ($ millions) 1.7 21.5 1.8 18.8 64.2 7,7 6.8 17,6 4.5 23.3 0.1 4.2 12.4 4.6 19.1 10,9 1.1 23.9 14,6 336 126 28 26 5 362 2,083 7.560 2,283 1,985 526 16 2,599 2.027 299 613 132 184 11,324 Note Percentages for the S ix supplier countries sum to 100 percent (except for rounding error) a Standard International Trade Classification b Scientific. medical, optical, rneasuring and controlling. SOURCE OECD Trade Series C obtained from Data Resources Inc on-Iine service

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. Ch. 4Technology Trade With the Middle East 115 Appendix Table 4C. Supplier Export Shares to Egypt, by Commodity Class, 1982 Commodity Food and live animal s Beverages and tobacc o Crude materials Mineral fuels ... ., . Oils and fats Chemicals ., ... Manufactured, classified by material ., Machinery and equipment ., ., Machinery, other than electric ... Electrical machinery. Telecommunications apparatus Electrical, medical and radiologica l Transport equipment ., ., ... Road motor vehicles .. Aircraft . . ., ., Miscellaneous manufactured goods. Instruments and apparatus ... ., Not classified according to kind Total ., ., SITC a o 1 2 3 4 5 6 7 71 72 724 726 73 732 734 8 861 United United States Japan Germany France Kingdom Italy (percent) 65,0 1.8 5.9 24.0 2.5 0.9 62.0 0.0 0.4 1.2 11.5 24.9 58,9 2.1 12.6 11.4 11.9 3.1 209 0.0 1.8 12,7 5.7 59.0 98.3 0.0 1.2 0.4 0.1 0.0 13,1 3.4 29.4 19,5 22.7 119 22.3 20.5 19.4 19.0 9.6 9.1 27.2 12.6 22.3 14.7 8.2 14.9 39.7 7,4 26.5 12.8 12,3 1.4 20.2 22.8 11.0 13.3 8.9 23.8 20.6 49.8 5.5 13.6 10.4 0.2 23.7 16.8 39.2 10.5 9.3 0.6 21,1 13,0 29.1 21.7 3.1 12,0 14.1 21.5 35.9 15,5 3,5 9.4 39.0 0.0 0.0 49.2 3,7 8.1 23,0 19.0 16.0 12,9 20.2 9.0 29.0 15.1 20.4 12.7 21.2 1,7 9 9 2. 3 15.0 0. 7 44.7 29.4 33.3 10.4 18.0 15.8 9.3 13.2 Note Percentages for the SIX supplier countries sum to 100 percent (except for rounding error) a Standard International Trade Classification b Scientific, medical, optical, measuring and controlling SOURCE OECD Trade Series C obtained from Data Resources Inc on-Iine service Appendix Table 4D. Supplier Export Shares to Iran, by Commodity Class, 1982 lotal value = 100 percent ($ millions) 881 124 74 222 175 448 770 3,335 1,349 885 268 9 918 487 218 249 78 75 6,353 United United Total value = States Japan Germany France Kingdom Italy 100 percent Commodity SIT C a (percent) ($ millions) Food and live animals ., ., Beverages and tobacco . ... Crude materials . ... ., Mineral fuels ... Oils and fats . Chemicals ., ... ., Manufactured, classified by material Machinery and equipment ... ., Machinery, other than electric . Electrical machinery. . Telecommunications apparatus ., Electrical, medical and radiologica l Transport equipment . Road motor vehicles ... ., Aircraft . ., . Miscellaneous manufactured goods. ., Instruments and apparatus b ., ., Not classified according to kind ., Total ., ., ... ... ., ... ... ., 0 10.0 2.0 1 0.0 0.0 2 1.0 44.0 3 0.3 0.1 4 22.8 1.4 5 2.3 11.9 6 0.3 51,0 7 3.6 20.0 71 7.6 32.6 72 2.6 14.6 724 0.1 21.9 726 73 732 734 8 861 9 4.5 1.2 0.8 2.9 5.8 5.7 35.6 15,1 15.0 0.0 21.4 30.9 15.9 23.0 Note Percentages for the SIX supplier countries sum to 100 percent (except for rounding er a Standard International Trade Classification b Scientific, medical, optical, measuring and controlling SOURCE OECD Trade Series C obtained from Data Resources Inc on-line service ror). 39.2 69.7 27.0 14,6 65.7 42.5 32.1 34.6 34.2 33.6 68,5 41.1 41.3 54.0 0.0 45.2 35.5 15.9 34.4 44.1 0.0 2.5 0.9 7,6 9.2 3.5 7.3 4.5 3.5 2.4 4.4 13.7 1.9 89.1 5.6 3.8 0. 7 8.1 4.3 2,7 25.0 1.2 1.7 18.2 8.1 16.7 18,5 11.3 7,0 9.9 21,4 27.5 6.7 20.3 23,0 04 27.5 0.5 82.8 0.7 159 5.1 17,8 2.6 344 0.0 4,4 7.2 0.8 1.3 1.7 1.1 43,8 17.8 216 33 109 271 10 468 757 2,069 724 434 52 9 754 557 103 116 55 13 4.060

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116 Technology Transfer to the Middle East .. Appendix Table 4E. Supplier Export Shares to Algeria, by Commodity Class, 1982 United United Total value = States Japan Germany France Kingdom Italy 100 percent Commodity SITC a (percent) ($ millions) Food and live animals . . Beverages and tobacco . . Crude materials . . . Mineral fuels . . Oils and fats . . . . . Chemicals . . . . Manufactured, classified by material Machinery and equipment . Machinery, other than electric Electrical machinery. . . . Telecommunications apparatus. Electrical, medical and radiological . . Transport equipment ... ... Road motor vehicles . Aircraft ., . . . . Miscellaneous manufactured goods. Instruments and apparatus ., . Not classified according to kind Total . . . . . 0 1 2 3 4 5 6 7 71 72 724 22.0 0.1 4.3 0.0 42.3 9.2 33.4 2.2 56.6 0.1 3.5 1.3 4.7 14.4 11.3 15.4 12.3 16,0 6.4 18.3 14.6 18.6 30.0 0.0 13,9 8.6 19.7 23.1 29,0 22.8 27.3 13.7 38.3 28.1 0.9 28.5 5.3 23.6 63.1 45.3 35.8 39.0 28.4 11.3 19.7 1.4 5.7 26.9 0.0 4.6 3.6 3.7 3.4 4.7 17.2 0.1 93.3 0.5 23.6 0.0 4 3 3.0 11,0 2.1 28,4 0.0 567 205 52 183 29 367 967 3,164 1,272 554 86 726 73 732 734 8 861 9 0.1 7.7 14.1 15.5 10.9 17,9 97.6 0.0 3.0 13,7 1.8 12.3 23.8 22.5 22.3 0.0 20.0 27.2 60.3 41.1 43.5 0.1 52.4 51.6 1. 4 36.6 4,6 4.3 3.6 2.3 3.4 5.5 3.6 2.6 0.8 0.0 7.4 1.6 50.8 11.4 31 1,169 1,013 50 271 88 7. 0 2. 1 11.3 11.6 35.0 23.2 3. 7 5.9 29 5,834 Note Percentages for the SIX supplier countries sum to 100 percent (except for rounding error) a Standard International Trade Classification b Scientific, medical, optical, measuring and controlling SOURCE OECD Trade Series C, obtained from Data Resources Inc on-line service Appendix Table 4F. Supplier Export Shares to Kuwait, by Commodity Class, 1982 United United Total value = States Japan Germany France Kingdom Italy 100 percent Commodity SITC a (percent) ($ millions) Food and live animals . . Beverages and tobacco . . Crude materials . . . . Mineral fuels . . . . . Oils and fats . . . . . Chemicals . . . . . Manufactured, classified by material Machinery and equipment ., . . Machinery, other than electric ... Electrical machinery. . . Telecommunications apparatus. Electrical, medical and radiological . . . Transport equipment . . . Road motor vehicles . . Aircraft. . . . . . Miscellaneous manufactured goods. Instruments and apparatus . Not classified according to kind . Total . . . . . . 0 23.0 6.0 1 41.8 5.3 2 79.5 2.7 3 16.6 2.8 4 69.0 0.1 5 19.2 7.4 6 10.5 63.4 7 20.8 36.1 71 25.8 39.4 72 10.2 37.9 724 10.1 74.2 18.5 0.5 3.1 6.5 6.3 19,5 8.9 19.0 19.5 13.4 6.7 25.7 0.9 3.8 10.9 4.6 11.7 5.5 5.1 4,2 10.5 1,4 26.6 37.5 10.9 10.2 11.8 39.3 10.3 9.3 10.6 16.0 7.6 0.3 14.0 0.0 53.0 8.2 2.9 1.3 9.7 0.4 12.1 0.0 129 66 11 40 3 162 962 2,778 784 758 134 7 1,119 805 131 514 43 277 4,942 726 25.4 3.9 73 26.5 36.4 732 24.1 41.3 734 68.5 0.0 8 11,7 29.1 861 16.8 33.0 26,8 24.1 28.6 0.0 13.1 19.1 0.2 2.6 1.3 6,8 11.7 6.5 31.6 4.8 3,6 1.8 14.0 23.7 12.2 5.6 1.1 22,9 20.5 1.0 9 5. 5 0. 9 17.4 36.2 20.9 16.2 & 9 11.7 65.8 12.2 Note Percentages for the SIX supplier countries sum to 100 percent (except for rounding error) a Standard International Trade Classification b Scientific, medical. optical. measuring and controlling SOURCE OECD, Trade Series C, obtained from Data Resources, Inc on-line service

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CHAPTER 5 Petrochemical Technology Transfers Contents INTRODUCTION l!) General Trends 151 The Restructuring of Global Tade in Commodity Chemicals 153 Impacts on Recipient Nation s 164 Implications for U.S. Policy 165 Conclusio n 166 APPENDIX 5A: PETROCHEMICAL PRODUCT USE S 167 Specialty Chemicals . . .. . 163 APPENDIX 5B: PETROCHEMICAL PROJECT PROFILE S 170 APPENDIX 5C: PETROCHEMICAL PRODUCT DEMAND PROJECTIO N 175 APPENDIX 5D: REFINING CAPACITY IN THE MIDDLE EAS T 181

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Tables Table No. Page 33. Middle East and North African Ethylene Capacity, 1981 . . . . . . . . 121 34. Middle East and North African LDPE and LLDPE Capacity, 1981 . . . . . . 121 35. Middle East and North African HDPE Capacity, 1981 . . . . . . . . . 122 36. Middle East and North African Ethylene Glycol Capacity, 1981 . . . . . . . 122 37. Middle East and North African Styrene Capacity, 1981 . . . . . . . . . 123 38. Middle East and North African Methanol Capacity . . . . . . . . . . 123 39. Middle Eastern Ammonia Capacity, 1981 . . . . . . . . . . . . 124 40. North African Ammonia Capacity, 1981 . . . . . . . . . . . . 124 41. Petrochemical Production Outside of the Middle East Region, 1982 . . . . . . 125 42. SABICs Petrochemical and Fertilizer Projects. . . . . . . . . . . 129 43, Middle East Petrochemical Product Uses . . . . . . . . . . . . 155 44. LDPE/LLDPE Net Interregional Trade . . . . . . . . . . . . 155 45. World HDPE Trade . . . . . . . . . . . . . . . . 157 46. Ethylene Glycol Net Interregional Trade. . . . ~ . . . . . . . . 158 47. Styrene Net Interregional Trade . . . . . . . . . . . . . . 159 48. Global Methanol Supply/Demand Balance . . . . . . . . . . . . 161 49. Anhydrous Ammonia Trade. . . . . . . . . . . . . . . 162 50. Petrochemical Tariffs . . . . . . . . . . . . . . . . 166 5B-l. Saudi Arabia-Mobil Joint Venture . . . . . . . . . . . . 170 5B-2. Saudi Arabia-Exxon Joint Venture.. . . . . . . . . . . . . 171 5B-3. Saudi ArabiaMitsubishi Joint Venture . . . . . . . . . . . 172 5B-4. Kuwait Petrochemical Project . . . . . . . . . . . . . . 172 5B-5. Qatar-CdF Chimie Joint Venture. . . . . . . . . . . . . . 173 5B-6. Bahrain . . . . . . . . . . . . . . . . . . 173 5B-7. Algeria-Sonatrach Ammonia (Arzew) . . . . . . . . . . . . 174 5B-8. Algeria-Sonatrach LNG #2 (Arzew). . . . . . . . . . . . . 174 5C-1. Free World LDPE Demand . . . . . . . . . . . . . . 175 5C-2. Canadian and Middle Eastern LDPE/LLDPE Export Mix, 1990 . . . . . . 175 5C-3. U.S. Demand for LDPE/LLDPE . . . . . . . . . . . . . 175 5C-4. Free World HDPE Demand . . . . . . . . . . . . . . 176 5C-5. U.S. High-Density Polyethylene Demand . . . . . . . . . . . 176 5C-6. Free World Ethylene Glycol Demand . . . . . . . . . . . . 176 5C-7. Projected Canadian and Middle Eastern Export Mix, 1990 . . . . . . . . 177 5C-8. United States Ethylene Glycol Demand . . . . . . . . . . . . 177 5C-9. Free World Styrene Demand . . . . . . . . . . . . . . 177 5C-10. Projected Middle Eastern and Canadian Styrene Export Mix... . . . . . . 177 5C-11. U.S. Demand for Styrene . . . . . . . . . . . . . . 178 5C-12. Global Methanol Demand . . . . . . . . . . . . . . 178 5C-13. Global Methanol Market by End Use, 1981 . . . . . . . . . . . 178 5C-14. Global Methanol Supply/Demand Balance . . . . . . . . . . . 179 5C-15. United States Methanol Demand. . . . . . . . . . . . . . 179 5C-16. Global Fertilizer Demand . . . . . . . . . . . . . . 179 5C-17. Global Ammonia Demand . . . . . . . . . . . . . . 160 5C-18. U.S. Ammonia Demand. . . . . . . . . . . . . . . . 180 5C-19. U.S. Nitrogen Imports, 1979-80 . . . . . . . . . . . . . 180 5D-1. Current and Projected Refining Capacity in OPEC and the Gulf, 1981-86 . . . . 182 Figure Figure No. Page 5A-l. Simplified Flow Diagram of Primary Petrochemical Production . . . . . . . 169 Map Map No. Page Petrochemical Preduction in the Middle East and North Africa . . . . . . . . 154

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CHAPTER 5 Petrochemical Technology Transfers INTRODUCTIO N Petrochemical technology transfer to the Middle East is of interest for several reasons. First, petrochemical manufacture involves complex technologies that are often difficult to master, heightening the importance of training programs for indigenous personnel. Because petrochemical products are sold in a world marketplace, efficient operation and quality control are critical. Second, petrochemical production is a very capital-intensive, feedstock-dependent industry where plants with a small number of highly trained personnel and inexpensive energy supplies can be cost competitive, even in remote locations. Several Middle Eastern countries are in this situation. With their small populations, substantial oil income that permits operation at world scale-capacity, using state-of-the-art technology and formerly wasted (flared) natural gas resources, downstream operations such as petrochemicals may be the most appropriate technology for such countries. Third, actual construction, licensing, and operation of petrochemical plants and marketing of the products is a lucrative business for foreign suppliers. Finally, the huge plants presently under construction or planned in the Middle East could cause severe dislocations in world commodity petrochemical markets once they come onstream. If more capacity is brought online in a slack world petrochemical market, this may quicken the pace of industry restructuring, particularly in Western Europe and Japan. This chapter assesses the present status of Middle Eastern petrochemical production, perspectives of recipient and supplier countries and firms, and long-term developments. Finally, it addresses U.S. policy options, which are fairly limited. One major theme is that, despite limited absorption of petrochemical technology by indigenous workers, Middle Eastern petrochemical facilities can be expected to operate efficiently and contribute significantly to their export revenues. Another major theme is the potential for negative effects on manufacturers in industrial countries, possibly leading to trade disputes, as these plants come onstream. PETROCHEMICAL PRODUCTION I N THE MIDDLE EAS T Production of petrochemicals is an extremely complex industry wherein scores of international firms produce and trade many different feedstocks, intermediates, and product chemicals. Central to the process is the con- 1 Feedstocks are used in the first step of petrochemicals production and include natural gas, natural gas liquids, and crude oil, Intermediates such as butylenes arise during the course of steps leading toward production of desired petrochemical products and are generally not used by themselves as finished chemicals. Product chemicals. such as methanol and ammonia, can be used independently or further processed. version of feedstocks, such as natural gas or byproducts from the oil refining process, into basic petrochemicals such as ethylene, methanol, ammonia, and a limited range of simple derivatives such as low-density polyethylene and polyvinylchloride (PVC) (see app. 5A). Technical expertise is required in selecting appropriate feedstocks, products, and processes to produce those products; constructing, operating, and maintaining the plants; and marketing and distributing the products. 719

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120 l Technology Transfer to the Middle East PRESENT AND NEAR-TERM THE MIDDLE EASTERN STATUS OF PETROCHEMICAL S PETROCHEMICAL INDUSTR Y IN THE MIDDLE EAS T IN GLOBAL CONTEX T Several countries in the Middle East currently plan or have petrochemical construction projects underway: Saudi Arabia, Kuwait, Algeria, Qatar, Bahrain, Iran, Iraq, Abu Dhabi (UAE), Egypt, and Libya. Each countrys specific needs in developing its petrochemical sector, as embodied in invitations to bid and contract negotiations, vary and are a function of the following factors: 1 ) technological requirements, including type of process and products sought and the planned scale of production: 2) local administrative and operational capabilities; 3) the financial resources of the purchasing country or enterprise: and 4) political and cultural considerations. To take advantage of economies of scale, Middle Eastern petrochemical plants are planned to very large; the number of projects is relativey few. Petrochemical plants are complex installations that are usually custom designed. Proven technology for petrochemical processes and products is widely available from suppliers in the United States, Japan, and Western Europe. Technological competition among these suppliers has centered on marginal differences in product yield, energy use, and product mix. Often the contractors must have a track record on work of a similar scale and have proven logistics capabilities. Suppliers usually have entered into either joint ventures or the construction of turnkey plants for national companies or state-owned industrial enterprises. Even more than is the case for some of the other technology sectors analyzed in this assessment (telecommunications and commercial aircraft support), no commodity trade classifications adequately capture imports of equipment for these plants. 2 No Standard lnternational Trade Clssification (SITC) product analysis is thus attempted, since equipment used in petrochemical production is included under a number of classifications, including Revised SITC 7148 (gas turbines); 742 (liquid pumps); 7431 (gas pumps): 7284 {special industrial machinery; and control instruments). It is impossible to disaggregate the imports under these categories destined specifically for petrochemical projects. To put the petrochemical situation in the Middle East and North Africa in perspective, tables 33 through 40 list the regions 1981 and projected future capacities for ethylene, 3 lowdensity polyethylene (LDPE)/linear low-density polyethylene (LLDPE), high-density polyethylene (HDPE), ethylene glycol, styrene, methanol, and ammonia. These are all primar y or commodity chemicals: they are produced in large volume, by many companies, to standard specifications, and traded internationally, with price being a critical factor in trade. 4 Uses for these products in downstream operations are indicated later in table 43. Since various petrochemical projects have been announced and then postponed, the announced dates are subject to considerable change and are not included. Projects listed are expected by OTA to come onstream. 5 As indicated in table 33, the most significant expected development in the Middle East is the rapid increase in ethylene capacity, expected to increase nearly sixfold in 1985 to 1990, with more than half of this increase reflecting the completion of Saudi Arabian projects. An additional 15 percent of new capacity could be added if Iraqi and Iranian projects are resumed. Considering that the bulk of this ethylene volume will be ethylene derivatives for export, the impact of these projects will be significant. 3 Olefins (e.g., ethylene, p;x)p}l(ne. or hut adienc) LLr(I [f)nsid ( r~ci to Iw primar~ chemi LLals, or building t)locks w hlch (an !)(J used to prmiuc( a range of deri~ati~e prc)ducts. Chemical intermediates {sometimes referrwl to as sec(~ndL ier chemicals) are produced from other chemicals. l-or example, the intermediate chemical pc)l~rkrin~rlchloride (PJC) is itself produced from ethylene and rhlonrw, both commodit~ chemicals. Spe(.ialt~ chemicals, unlike comrnodit? chemicals, are relati~ely low-~ olunw. high value-added products which are often produced b~ one or only a few companies. They are often specifically formulated for a particular customer for uses such as water treatment chemicals, lubricating additives, special adhesives, or electronic chemicals. The cost of canceling a project is often not large if done sufficiently early. In the case of the canceled project of D OW Chemical in Saudi Arabia, approximately 1.5 years after the project was announced, the company reportedly wrote-off only $26 million: the total value of the project is $1.5 billion.

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Ch. 5Petrochemica/ Technology Transfers l 121 Table 33.MiddIe East and North African Ethylene Capacity, 1981 (thousand metric tons per year) 1981 Country/company Location capacity Feedstock Expansions (year) .... Middle East: Kuwait: PlC ., ... . . . . . . Saudi Arabia: SABIC/Shell . . . . . . . . SABIC/(Dow)/Mitsubishi . . . . SABIC/Mobil . . . . . . . . . Iraq: Ministry of Industry Iran: Abadan Petrochemical . . ..., . Iran-Japan. ., ..., ..., ..., . . . Turkey: Petkim . . . . . . . . Petkim. . . . ..., . . Qatar QAPCO . . . . . . . . . Other . . . . . . . . Shuaiba Ethane +350(1988-90) (130)a (25) a 55 280 130 120 585 Al-Jubail Al-Jubail Yanbu Ethane Ethane Ethane +650(1985-86) +500(1986) +450(1985) +130 (Restart 1985-90) Basra Ethane Abadan Bandar Khomeini Naphtha Naphtha Closed +300(1990-95) Yarimca Aliaga Naphtha Naphtha +300(1984-85) Umm Said Ethane +70(1989) North Africa: Algeria: Sonatrach . . . . . . Libya: Ras Lanuf Oil & Gas Processing . . . Ethane Naphtha +300(1984-85) 3,050 Skikda Ras Lanuf Total . . . . . . . . a Capacity installd but facility not operational as of 1984 SOURCE Office of Technology Assessment Table 34. Middle East and North African LDPE and LLDPE Capacity, 1981 (thousand metric tons per year) 1981 capacity (60) b 24 140 96 48 308 Country/company Location Middle East Kuwait: PIC ., ..., ., . . ..., Shuaiba Saudi Arabia: SABIC/Exxon . . . . Al-Jubail Product Expansions (year) LLDPE LLDPE LLDPE LOPE LLDPE LOPE LDPE LOPE LOPE LDPE LDPE LDPE LDPE LLDPE LOPE +165(1988-90) +260(1985) +120(1986) +130(1986) +200(1985) Restart (1985-90) +100(1990-95) +150(1984-85) SABIC/(Dow)/Mitsubishi . . . . Al-Jubad SABIC/Mobil . . Iraq: Ministry of Industry. . . ..., Iran: Iran-Japan . . . . Turkey Petkim ., ., ., ., ..., ..., Petkim . . . . . Qatar QAPCO . . Other . . . . . . . . Yanbu Basra Bandar Khomeini Yarimca Aliaga Umm Said +50(1 +80(1 +90(1 1.405 North Africa: Algeria: Sonatrach . . . . Libya: Skikda 987) 987) Ras Lanuf Oil & Gas Processing . . Ras Lanuf Egypt: a EGPC . . . . Alexandria 990) Total . . . . . . a Based on imported ethylene b Not operational as of 1984 SOURCE Office of Technology Assessment 35-507 ( 84 g : QI, 3

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122 Technology Transfer to the Middle East Table 35.Middle East and North African HDPE Capacity, 1981 (thousand metric tons per year) Country/company Location 1981 capacity Expansions (year) Middle East: Kuwait: PIC . . . . . . . . Shuaiba Saudi Arabia: SABIC/(Dow)/Mitsubishi . . . Al-Jubail SABIC/Mobil . . . . Yanbu Iraq: Ministry of Industry . . . . Basra Iran: Iran-Japan, . . . . . Bandar Khomeini Turkey: Petkim . . . . . . . Yarimca Petkim . . . . . Aliaga Qatar: QAPCO . . . . . Umm Said North Africa: Libya: LNOC . . . . .. Egypt: a EGPC . . . . . . . Alexandria Total . . . . . . 80(1986) 100(1985) 30(1985-90) 60(1990-95) 40(1984-85) 70(1986-87) 50 (Planned) 40(1990) 470 a Ultimately it may be a conversion and expansion of Its LDPE facility to LLDPE. An LLDPE facility could be used to produce a range of products from LLDPE to HDPE SOURCE Office of Technology Assessment Table 36.Middle East and North African Ethylene Glycol Capacity, 1981 (thousand metric tons per year) 1981 Country/company Location capacity Expansions (year) -- Middle East: Kuwait: PIC ...., . . . . . Shuaiba + 135 (1 988-90) Saudi Arabia: SABIC/(Dow)/Mitsubishi . . . Al-Jubail + 300 (1 986) SABIC/Mobil . . . . . Yanbu + 200 (1985) Turkey: Petkim . . . . . . . Aliaga +68 (1 984-85) North Africa: Libya: Ras Lanuf Oil & Gas Processing . Tobruk +50 (1987) Total . . . . . . 753 SOURCE Office of Technology Assessment Tables 34 through 37 indicate the types of to Asia, Africa, and Europe. Similar distribuderivative capacity expected onstream in the tion patterns are expected for other olefinMiddle East region during the 1980s. As derivative exports. shown in these tables, polyethyleneespecially in the form of LDPE and LLDPEwill preTables 38 through 40 for methanol and amdominate over other forms of ethylene derivmonia include export projects under developatives. Most of this material will be exported ment in the Middle East and North Africa. A

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Ch. 5Petrochemical Technology Transfers l 123 Table 37. Middle East and North African Styrene Capacity, 1981 (thousand metric tons per year) Country/company Middle East: Kuwait: PlC . Saudi Arabia: SABIC/Sheil . . . . . Iran: Iran-Japan . . . Turkey: Petkim . . . . . North Africa: Total . . SOURCE Office of Technology Assessment Table 38.Middle East and North African Country Company Location Shuaiba Al-Jubail Bandar Khomeini Yarimca 1981 capacity Expansions (year) +340(1988-90) +300 (1985-86) +20(1990-95) 20 20 660 Middle East Egypt .. . . Egyptian Petroleum Saudi Arabia . .,SABIC/Mitsubishi Gas Chemical SABIC/Celanese/Texas Eastern Bahrain . . . SABIC/PIC/BANOCO Other ., ... ., ., North Africa: Algeri a Alme r Libya Libyan Methanol Total Middle East and North Africa ., ... ... ... a Natural gas SOURCE Office of Technology Assessment Methanol Capacity, 1981 (thousand metric tons per year) significant number of the ammonia projects in this region are dedicated to domestic fertilizer consumption. For purposes of comparison, table 41 shows petrochemical production outside the Middle East in 1982 for the same eight commodity chemicals covered in tables 33-40. Middle East productionparticularly of ethylene, LDPE and LLDPE-is significant when compared with non-U. S. producers (Western Europe, Japan, Canada, Mexico). U.S. production figures Location Feedstock a Capacity Expansions Alexandria NG 10 Al-Jubail NG 600 (1 983) Al-JubaiI NG 650 (1985) Sitra Island NG 70 360 (1984-85) NG 60 Arzew NG 110 Marsa El Brega NG 330 330 (1985) 580 (year) dwarf those of all other countries, including those in the Middle East, reflecting the large domestic U.S. market. It should be remembered that, because a large part of Middle East output is targeted to export markets, these plants will have a large impact on world trade in these chemicals. As indicated in table 41, production declined in many cases in recent years. This foreshadows significant restructuring ahead as the large Middle Eastern plants come onstream during the next few years. PERSPECTIVES OF RECIPIENT COUNTRIE S AND FIRM S To understand how petrochemical technolprojects in Saudi Arabia, Kuwait, Bahrain, ogy is transferred to the Middle East and the Qatar, and Algeria. Because Iranian, Iraqi, implications of this transfer, OTA assessed and Egyptian projects will have minimal im-

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124 l Technology Transfer to the Middle East -. _. .. Table 39 .Middle Eastern Ammonia Capacity, 1981 (thousand metric tons per year) Country/company Location Bahrain; Gulf Petrochemical . . . . . Sitra Iran: Iran Fertilizer . . . . Shiraz NPC . . . . . . . . . Bandar Khomeini Iraq: Ministry of Industry . . . . . Basra Urn Qassr Al-Kain Kuwait: PIC ., . . . . . . . . . Shuaiba Shuaiba Qatar: QAPCO . . . . . . . . Um Said Saudi Arabia: Safco . . . . . . . Damman SAMAD . . . . . Al-Jubail Turkey: IGSAS . . . . . . . . Ismit Kirklareli Azot Sanayii . . . . . . Kutahya Silifke United Arab Emirates: ADNOC . . . . . . Ruwais Ruwais Other . . . . . . . . . Total Middle East . . . . . a Feedstocks: NG = natural gas, N = naphtha SOURCE Office of Technology Assessment Capacity Feedstock a Expansions (year) 28 540 272 272 330 220 480 160 270 124 80 NG NG NG NG NG NG NG NG NG NG NG N NG N N NG NG N 3,086 270(1984-85) 320(1982-83) Damaged due to war Damaged due to war 544 (Planned) 41 (1984-85) 270(1983-84) 270(1983-84) 270(1983-84) 270(1983) 270(1984) 270(1985) 270(1985-90) Table 40. North African Ammonia Capacity, 1981 (thousand metric tons per year) Country/company .... Location Capacity Feedstock a Expansions (year) Algeria: Sonatrach . . . . . . Arzew NG 270(1980-81) Arzew NG 270(1980) Annaba NG 270(1983-84) Skikda NG 270 (Planned) Egypt: Nasr . . . . . ..., . . Helwan 49 COG Kima . . . . . . . . Aswan 119 N El Nasr dEngrais et Ind Chimiques. . . Suez 48 N Talkha 98 N 325(1980-81) State . . . . . . . Abu Qir NG 326(1979-80) Libya: LNOC ......,......,.. . . . . . Marsa El Brega 270 NG 270(1984-85) Morocco: OCP . . . . . . . . . Jorf Lasfar N 270 (Planned) Nitromar . . . . . . . . Mohammadia N 90 (Planned) Sudan: State . . . . . . . . . Port Sudan N 50(1983) 50(1985) Tunisia: Groupe Chimique . . . . . . Gabes NG 270(1985) Total . . . . . . . . 584 .. a Feedstocks: NG natural gas: COG = coke oven gas; N = naphtha SOURCE Office of Technology Assessment

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Ch. 5Petrochemical Technology Transfers l 125 . 0 Ui . . . .

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126 Technology Transfer to the Middle East pacts on world petrochemical markets, they are only briefly reviewed. GOALS AND OBJECTIVE S While their priorities may be different, the goals and objectives of the Middle Eastern countries are similar. Simply stated, their objective in petrochemical development is to move away from overdependence on oil toward a profitable manufacturing area that involves use of natural resources (natural gas) that have been wasted (flared) in the past. The development, via technology transfer, of a petrochemical industry is also a matter of national pride. They expect their petrochemical development efforts to result in: l Revenues or profits to support future economic growth. Human resource developmentA dynamic industrial environment that would create employment, stimulate training with clear objectives, support industries giving an outlet to the local entrepreneurs, and foster a group of technocrats to support future national growth. The basis for future downstream industries. The goals and objectives of these countries differ little from those typical of developing countries. Some of the more fundamental questions have been how to finance technology without incurring inordinate amounts of debt, where to gain access to low-cost raw materials, the degree of capital intensity or sophistication of the technology, the availability of trained manpower, structuring relationships with multinational corporations, and the implications of modern or Western technology on local culture. The Middle East, with its unique combination of purchasing power and comparatively low level of industrialization, provides a challenging area for petrochemical development. Raw materials for petrochemicals are plentiful in this region and, in the case of the Gulf States, can be considered free because they are derived in association with crude oil production. This utilization of abundant natural resources helps mitigate the increased costs of building and operating petrochemical plants in the Middle East. Moreover, the initial capital for petrochemical projects and the hiring and training of local and foreign manpower can be financed through use of energyderived funds and anticipated future project returns for collateral. In this environment debt, a typical constraint on many less developed countries (LDCs), has not been as important a consideration. This has made it possible to acquire the best technology available. Middle Eastern countries have faced potential problems in a number of ways. By requiring competitive bids on all aspects of a project, potential overpayment is reduced, and through joint venture and other arrangements with foreign firms, marketing of products is planned. Cultural values are protected by citizenship restrictions and by limiting the incentives for foreign workers to go beyond their own enclaves or work camps. While a potential brain drain is an issue in these countries, professional opportunities and financial well-being should preclude a significant exodus of the educated in the more financially secure Gulf States. PETROCHEMICAL PROJECT S Petrochemical projects in the Middle East have been promoted by governments acting through oil ministries, state oil companies, or specialized agencies and government-controlled companies. Because local abilities of private or governmental entities to evaluate, design, engineer, construct, and operate the plants are generally inadequate to carry out these tasks independently, Middle Eastern countries have attempted to improve indigenous capabilities in these areas through participation with other countries in petrochemical projects. They also recognize a need for some level of foreign assistance from the beginning of a project through plant operation, a period generally spanning several years. Thus, through arrangements with joint venture partners, licensers, and contractors these countries expect to expedite their development process via the absorption of state-of-the-art

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Ch. 5Petrochemical Technology Transfers l 127 technologies, the development of managerial, marketing, and organizational skills, as well as import substitution and local and international market development. International marketing abilities are important because, in order to achieve the level of economic scale prevalent internationally, a major portion of the output from these petrochemical projects must be exported. Since local demand will only account for approximately 10 percent of Saudi Arabias eventual petrochemical production, the Saudi Arabian Basic Industries Corp. (SABIC) actively sought joint venture partnersShell, Exxon, Mobil, Dow Chemical, Celanese/Texas Eastern, Mitsubishi Gas Chemical, and Taiwan Fertilizercapable of marketing any surplus beyond the joint ventures own needs. The development of large petrochemical projects and related infrastructure provides the opportunity for local entrepreneurs to develop supportive industries while enhancing business skills and judgment. The modernization process entailed in these projects will create a more technical and highly educated population. Hence, even trainees in petrochemical projects who leave that industry will take with them special skills and analytical tools that they and their local society might not otherwise have. These skills can be as simple as welding or as sophisticated as the management of large productive assets. On the other hand, there are some potential disadvantages to host societies participating with foreign multinational corporations in these petrochemical projects. These perceived problems include excessive foreign profits. Multinational corporations are believed to sometimes skew their costs to the disadvantage of the host countries, drawing inordinately high returns back to their parent company while reinvesting very little, if any, funds in the host country for future development. Another type of problem involves inappropriate and inadequate training programs. All of SABICs projects will train a large number of people, approximately 7,000 to 10,000 by 1985-86. However, this is a relatively small number in light of Saudi Arabias total manpower development requirements. Furthermore, large capital-intensive projects do very little for the large number of underemployed in Algeria. There is also concern that research and development (R&D) efforts will never be based in the Middle East, and as a consequence, that true technology transfer will never occur. Others fear that indigenous business development will be preempted by these projects. Subsidizing wholly or even partially foreign-owned facilities, in their view, may prevent the development of similar facilities by local business and result in continuing dependence on foreign corporations. Finally, even those who do not believe that multinational corporations are necessarily exploitive still worry about potential corruption of cultural and religious value systems in their countries. PROJECT PROFILE S The major petrochemical projects now under way in the Middle East include three large projects in Saudi Arabia (the Mobil/Saudi joint venture at Yanbu producing polyethylene and ethylene glycol; the Exxon/Saudi joint venture at Al-Jubail, producing polyethylene; and the Mitsubishi/Saudi joint venture at Al-Jubail, producing methanol). Other major projects are in Kuwait (PIC project, producing polyethylene, ethylene glycol, and styrene which is apparently on hold), in Algeria (a Sonatrach project, producing ammonia; another Sonatrach project producing liquefied natural gas LNG), in Qatar (the QAPCO/CdF Chimie joint venture, producing polyethylene), and Bahrain (the PIC/SABIC/BANOCO joint venture, producing methanol and ammonia).* In Iran and Iraq, war has postponed petrochemical development, while in Egypt there is a well-established fertilizer industry but little likelihood that that country will become a major petrochemical producer. Summaries for each of the major eight projects are given in appendix 5B. Petroleum Industies Co. (PIC), Societe Nationale de Transport et de Commercialisation des Hydrocarbures (Sonatrach), Qatar Petroleum Co. (QAPCO). Bahrain National Oil Co. (BANOCO).

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128 w Technology Transfer to the Middle East . Saudi Arabia Saudi Arabia is the model case of a wellfinanced developing country seeking to develop a modern petrochemical industry through joint ventures with foreign companies. From the foreign partner perspective, profits, crude oil, and prospects for new business have all been important incentives for participation. Saudi Arabia has undertaken an aggressive program to establish itself as a significant world petrochemical center, although this is not immediately apparent when comparing Saudi capacity for various chemicals to world capacity. It becomes clearer in terms of the Saudi percentage of total world trade. For example, in the late 1980s, Saudi Arabia is expected to have an estimated 4 to 5 percent of world LDPE and LLDPE capacity; however, it is expected to control approximately 20 percent of world trade in this product. (Kuwait and Qatar combined could represent an additional 10 percent.) The Saudi program includes five olefins and derivatives projects, two methanol projects, and two ammonia projects. The size and type of each of the olefins projects are shown in table 42. All of these projects are scheduled for completion in the mid-1980s and, if successful, can be expected to be followed by a second generation of projects in the 1990s. However, some of these projects may be delayed. For example, the Arabian Petrochemical Co. project recently lost Dow Chemical as a participant. While SABIC has stated that it would assume responsibility for the Dow ole fins complex, some delay in startup can be assumed. Moreover, the quantity of ethylene to be produced and the outlook for the LLDPE that Dow was to produce are still in question. Most of the projects now being developed were conceived in the period 1972-74 when Petromin (the National Oil Co.) invited proposals from foreign companies. The United States, -. 6 Toby Odone, Petrochemicals-Dynamo or Drain?, Middle East Economic Digest, vol. 27, No. 42, Oct. 21-27, 1983, pp. 12-19. The downstream aspect of the project has fallen to the Mitsubishi-led consortium participating in cooperation with Eastern Petrochemical Co. in what is often referred to as the SHARQ project. Japan, and European countries responded. However, changes in the underlying crude oil situation led some companies to pursue these negotiations less vigorously, and many of the projects, including all of European origin, were dropped. Others were deferred, then revived again in 1977-78. Today, these projects are under the jurisdiction of the Ministry of Industry and Electricity. The so-called first-stage petrochemical projects in Saudi Arabia are 50/50 joint ventures between SABIC and foreign companies or consortia. SABIC is a limited company, established in 1976 for this specific purpose. It is responsible to the Ministry of Industry. All of its shares are held by the Saudi Government, but the Articles of Association specify that within 5 years of its establishment, a majority of the shares would be offered to the Saudi public, with the government maintaining a minority interest. This is now beginning to take place; 10 percent of the SABIC shares were recently allocated for public subscription to Gulf Corporation Council citizens. 7 A driving force behind the establishment of these projects was the desire to utilize the large quantities of associated gas being flared at the wellhead. ARAMCO 8 was instructed to prepare and implement a gas-gathering and extraction project. The gas-gathering scheme was originally estimated at $7 billion, but estimates rose to over $17 billion before implementation. This project is expected to be completed at a lower cost of between $10 billion and $12 billion, owing to a combination of scope modification, competitive bidding on all procurement items, the impact of the world recession on prices, and careful project management. The project is now virtually complete, and liquefied petroleum gas (LPG) has been exported for some time. Ethane and methane -. 7 Saudi Press AgencyMajor News Events, Sept. 26, 1983. 8 ARAMCO (Arabian American Oil Co. ) began with a concession agreement between Saudi Arabia and Standard Oil Co. of California (Socal) in July 1933. Texaco, Exxon, and the Mobil Oil Co. were subsequently added to ARAMCO to gain investment capital and marketing outlets. The Saudi Government had a 25 percent ownership in ARAMCO in 1972, 60 percent in 1974, and now has complete ownership.

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Ch.5Petrochemical Technology Transfers l 129 .. C3

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130 l Technology Transfer to the Middle East .. Photo credit Aramco World Magazine Part of Saudi Arabias Immense coast-to-coast network of plants and pipes for collecting, treating, and distributing oil-associated gases which were previously flared are available for petrochemical and energy uses. As part of the Saudi Arabian master plan for industrialization, two large manufacturing cities were established: Al-Jubail, located on the Persian Gulf, and Yanbu, located on the Red Sea. Plans for each include a petrochemical center, refinery, and other petroleum-related industries. The overall plan for development comprises: 1) a gas-gathering system; 2) petrochemical complexes at Al-Jubail and Yanbu; 3) methanol, ammonia and urea plants; 4) a steel mill; and 5) an infrastructure program that includes new port facilities, roads, airports, schools, universities, hospitals, housing, power generation, and desalinization facilities. Responsibility for the establishment and development of these sites was vested in a Royal Commission for Al-Jubail and Yanbu. Many U.S. contractors are involved in this development program, with Bechtel having overall management responsibility for the AlJubail Industrial City. It is also the primary contractor for the Yanpet Petrochemical Project. Fluor is the contractor for the gas-gathering pipeline network and petrochemical projects in Al-Jubail. Parsons manages the Yanbu Industrial City. In addition, large numbers of subcontracts have been let to both U.S. and other foreign firms for various phases of the projects. Goals and Objectives.The impetus behind the Saudi petrochemical program involves a desire to diversify the economy, national pride, a determination to avoid wasting natural gas and gain value-added from downstream development, and human resources development. Balance of payments considerations also

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Ch. 5Petrochemical Technology Transfers 131 underlie petrochemical development because Saudi Arabias main resource (crude oil) is being depleted and it has few renewable resources, and because Saudi Arabia depends on imports not only for most manufactured goods but also for a large proportion of its food supplies. Consumer spending is increasing rapidly as prosperity spreads across a larger proportion of the population. In 1978, current expenditures began to exceed oil revenues, and budgets had to be cut back. The 1979 oil price increases temporarily transformed the situation, but concerns were once again raised by the decline in crude prices in the early 1980s. Project Organization and Structure.Although differing in some details, the projects in Saudi Arabia have been developed and are being implemented according to what is essentially a standardized scheme similar to that used by most other countries in the region. The main features of project organization and structure are detailed below: 1. 2. 3. 4 Preliminary studies to establish the feasibility of the project (known as prefeasibility studies) are carried out, financed by aspirant joint venture partners. Following acceptance of prefeasibility study findings by SABIC and the potential partner, an interim agreement is negotiated, covering: terms for a jointly financed, full-scale feasibility study, to include sufficient engineering to establish reliable capital and operating cost estimates; establishment of a joint team to carry out this feasibility study; and training of key personnel. Detailed agreements for feedstock supply, finance, training, marketing, licensing, technical, and management assistance are negotiated. Also negotiated are the basic principles for the agreements that define the terms under which the project will be implemented. On completion and acceptance of the feasibility study, the joint venture agreement is signed authorizing the establishment of a joint company to implement the project and operate the plant. The de5. 6. 7. tailed agreements referred to above form appendixes to the joint ventur e agreement. The joint company is formed, and the project team that has supervised the feasibility study is transferred to the new company. Technology is selected, and engineering and construction agreements are negotiated with contractors. Recruitment of personnel commences, and full-scale training programs are implemented. The projects in Saudi Arabia were conceived as joint ventures in which the partners make equal contributions to, and derive equal benefits from, the projects. Thus, Saudi Arabia contributes feedstock (at well below world prices), 9 financing, and a developed site with services and utilities. The foreign partners contribute technology, management, markets or marketing skills, and training of Saudi Arabian nationals. The projects are expected to meet profitability criteria on the part of joint venture partners. The original Saudi proposal supposedly entitled a joint venture partner, from the time of signing the agreement, to lift 1,000 barrels per day (b/d) of crude oil for every $1 million invested in the joint venture. It is believed that this ratio has been changed to approximately 500 b/d of crude oil per $1 million investment. Under present world market circumstances, the value of this crude oil entitlement (to be lifted at posted prices) may be questionable. However, in more normal times, even a 2 percent net profit in handling and processing the crude would be equivalent to a 12 percent return on equity invested in the petrochemical project, and therefore, would be comparable to dividends expected from the joint venture. 9 The Saudi Government is reportedly charging the new petrochemical producers 50/million Btu for their feedstock. This compares with $4.50 to $5.00/million Btu in Western Europe, and a U.S. average of $3.30 to $3.50. While some call this a subsidy, U.S. firms involved call it a natural resource of the host country (not a subsidy). See Carla Rapoport, All Eyes on the Petrochemicals Launch, Financial Times, Apr. 24, 1984, p. 5 of Special Report on Saudi Arabia.

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132 l Technology Transfer to the Middle East . Technology Transfer. -In the case of the SABIC/Mitsubishi Gas Chemical methanol project (now Saudi Methanol Co.), the technology (developed by Mitsubishi Gas Chemical) to be used and the engineering contractor (Mitsubishi Heavy Engineering) were specified in the interim agreement. In this case, technology transfer could be regarded as embodied in the package supplied by Japanese companies. There was, therefore, no competitive element in the selection of processes, licensers, or contractors. Chem Systems, an outside U.S. consultant, was called in to assist SABIC in evaluating the Japanese package. In all other cases, SABIC has insisted that technology selection and engineering be on a fully competitive basis. This implies that even when the foreign partner has technology of its own for the proposed operations, it must be assessed by the joint project team against other competitive technologies. Similarly, although the foreign partners advice is sought regarding the selection of contractors, contractors are selected on a competitive basisby the joint project team for preliminary engineering and by the joint venture company for full engineering and construction. Thus, no firm link exists between basic technology transfer and the identity (or nationality) of the foreign partner. Contractor Agreements.All agreements with licensers and contractors are subject to competitive bids that allow a reasonable profit and hence incentive for the contracting party to participate in the project yet not take undo advantage of the situation. The provision of technical and management know-how by the foreign partner is covered by a service agreement. This includes both project implementation and subsequent operation. The foreign partner is expected to be able to provide this know-how even though the basic technology may be obtained from another source. The licensing of the basic technology is covered by separate license agreements between the joint venture company and the licensers. Such agreements normally cover startup assistance and (in some cases) continuing technology transfer relating to the specific process or products. Royalties are paid by the joint venture company or the licensers, as specified in these agreements. In the case of LLDPE, Union Carbide Corp. licensed its process to SABIC rather than to the individual joint venture companies producing LLDPE. In all cases, the foreign partner assumes some responsibility through marketing agreements for disposal of products from the joint venture company. In most instances, this takes the form of a commitment to market on behalf of the company a specified minimum quantity of products, normally representing a high proportion of the output of the plant. This is accomplished through the foreign partners international distribution network. There is also provision for disposal by the partner of any additional quantity on a best-endeavors basis. These commitments imply that where the foreign partner has capacity to produce the products in question elsewhere in the world, it will, if necessary, be prepared to consider the cutback of production from this capacity in order to meet its commitment to the Saudi joint venture. This situation could, in times of recession, be a serious problem for the foreign partner and a penalty for the non-Saudi countries in which the partner operates. This type of problem exists whenever a company decides to locate a production facility at a foreign locationespecially when payouts on new facilities are compared to those on old facilities. Escape clauses that allow reduced production when market conditions so dictate are reported to be included in Saudi Arabian project agreements. Continuing concerns regarding crude oil security may provide an added incentive to maximize production from Saudi sites. When the foreign partner has its own requirement for the products of the company, it may be covered by a separate offtake agreement. Such a commitment to take products may be substituted, in whole or in part, for a quantitative commitment under marketing agreements.

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Ch. 5Petrochemical Technology Transfers l 133 Financing.The financial provisions for Saudi joint ventures apply to all projects, though there may be minor variations. They are as follows: 1. 2. 3. 4. 5. 6. 7. 8. all projects are financed with 30 percent equity, shared equally by the two partners, a 60 percent loan from the Saudi Public Investment Fund (PI F), and a 10 percent loan from commercial banks, Saudi or foreign; financing covers initial fixed capital investment, interest during construction, capitalization of all expenditures under the interim agreement, initial working capital, and preoperating expenses; PIF loan and equity are in strict 2:1 proportions, with a commercial loan to cover the final 10 percent of the capital requirements; typical terms for commercial loans are for 5 years, with repayment in 10 equal installments, beginning at the time of startup. The PI F loan is for 20 years, with repayment in 22 equal installments commencing in the fifth year after startup; the interest rates on commercial loans are negotiated with banks, the PIF loan is given at 3 to 6 percent of the outstanding sum, the actual rate is dependent on the projects return on equity; dividend payments beyond a partners share of net income after tax are subject to agreed on (debt) prepayment terms and conditions; any excess of cash income over net income is to be used, after meeting other cash requirements, for prepayment of PIF loan; and prepayment terms are set. Manpower and Socioeconomic Considerations.The objective behind the training programs is not to employ large numbers of people as much as to develop a class of technically competent individuals. Hence large, efficient, capital-intensive petrochemical projects are perfectly suited for Saudi Arabia and meet the countrys training and economic development goals. Universities are being built and profesPhoto credit Aramco World Magazine A Saudi geologist uses a petrographic microscope at the Petroleum Exploration and Engineering Center in Dhahran sors are being hired to teach engineering and science. King Fahd recently opened (coinciding with the 50th anniversary of ARAMCO) the new Petroleum Exploration and Engineering Center in Dhahran, which is considered the most modern center for oil technology in the Middle East. 10 The true test of domestic economic development will be the Saudis capability to develop and manage their own projects when the second generation of petrochemical projects are undertaken in the 1990 s. Another sign of development will be the ability to hold market position through expansions in capacity, The issue of having development hinge on a large cadre of foreign laborers (and to a lesser extent managers), as is the case in the Saudi Arabian fertilizer complex and refinery, does not seem to worry many Saudis: the Saudi Arabian population is small, with an indigenous element variously estimated in the range of 4 million to 7 million and an immigrant portion exceeding 1 million. The success of the Saudi national development program over the long term, however, will depend on the ability of the indigenous population to absorb and effectively use the technology they have purchased, a process expected to bear fruit in the 1990s. Nevertheless, Saudi Arabias goal of 10 New Oil Center opened, "Saudi Report, April-May 1983.

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134 l Technology Transfer to the Middle East preserving Islamic traditions must be carried out in the context of a large foreign work force. The potential problem of foreign corporations preempting the growth of home-grown industry is being dealt with in a number of ways. First, SABIC maybe made a completely publicly held corporation. In addition, incentives are being provided to domestic companies to go into downstream product development. Saudi Arabias ability to influence the price of products their projects produce and their joint venture partners expected desire to assist in downstream development should allow local industry to develop and prosper. Kuwai t The Kuwaiti petrochemical project is the responsibility of Petrochemical Industries Co. (PIC), whose main business (started in the 1960s) is the production of ammonia and urea. PIC is a subsidiary of the state-owned Kuwait Petroleum Corp. (KPC), which is responsible for hydrocarbon exploration and development worldwide. The investment strategy of KPC distinguishes it from other petrochemical firms in the Middle East. Kuwait also has major investments in the United States, perhaps the most well-known being the Santa Fe International Corp. which is the corporate parent of C. F. Braun Engineering. Kuwait participates in projects in Bahrain, oil and gas exploration in Morocco and Tunisia, and a Volkswagen manufacturing facility in Brazil. Its most recent investments in Europe are a 25percent share of Hoechst Chemical and the purchase of both Gulf Oils refinery and gasoline station network in Western Europe. To support its hydrocarbon-related activities, the Kuwaiti Government is melding KPC into what is quickly becoming a fully integrated, multinational oil company with production, refinery, and marketing capabilities as well as chemical and petrochemical operations. Goals and Objectives.The basic rationale for a Kuwaiti petrochemical project differs little from the Saudi Arabian example. Reasons 11 Mohammad Ali Hafiz, Journal of Contemporary Business, vol. 9, No. 3, 1981. include national pride, diversification away from dependence solely on future crude oil production, availability of ethane from associated and nonassociated gas, and revenues from crude sales to finance the project. In addition, Kuwait has large earnings from foreign investments and a relatively small indigenous population (1.4 million), which matches well with the capital intensiveness of petrochemical production. Kuwait has made a great drive to expand its portfolio of investments away from oil, particularly if sufficient added value exists in downstream investments. Thus, it is developing its position as a major international investor equal in strength to its position as an oil producer. In fact, foreign investment capitalized from oil income reserves recently surpassed revenues from oil income. One fundamental difference between the Kuwaiti and Saudi Arabian approaches is that the former stresses outright equity participation in foreign downstream operations, while the latter focus on joint ventures in Saudi Arabia with foreign partners who have established expertise in petrochemical production. Kuwait, for example, acquired 3,000 gasoline stations and a number of refineries and other facilities located throughout Western Europe, purchased from Gulf Oil (U. S.). Another fundamental difference between the situations of Saudi Arabia and Kuwait is the absence of large quantities of flared gas in Kuwait. As a consequence, if Kuwait proceeds with its project, it will have to address two major issues: 1) does the return on the petrochemical project meet the standards set for their portfolio of investments? and 2) can the requisite return be realized if their natural gas is priced at a value equal to that of heavy fuel oil? It can be argued that with the absence of large quantities of excess gas, heavy fuel oil would have to be substituted for the gas currently being used for utilities and industry. 12 "Downstream Moves Complete KPC Jigsaw, Middle East Economic Digest, Special Report on Kuwait, May 1984, p. 10. See also Louis Turner, Planning an Assault on World Markets, Middle East Economic Digest, Aug. 12, 1983, p. 42.

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Ch. 5Petrochemical Technology Transters 135 Hence, this opportunity cost should set the price for ethane and the gas currently being used in utilities and for ammonia production. However, such gas is presently priced in a fashion similar to that of Saudi Arabian gas. Project Organization and Structure. Preliminary studies, feasibility studies, and marketing studies have proceeded in a fashion similar to that of the Saudi projects. Hoechst of West Germany is the only likely joint venture partner. Kuwaits leaders hope that the project will bring a good return on investment. Kuwait would also have the security of having its asset (the PIC complex) on its own soil. In addition, the project would add to the industrial base of the country. If a joint venture approach is not pursued, Kuwait is likely to structure a marketing agreement with a mat -1 ., l ~ J jor marketer or consumer of petrochemicals, such as its current agreement with Hoechst. 13 Initially, the intent was to have foreign joint venture partners. BASF (West Germany) was associated with the ethylene project and W.R. Grace (U. S.) with aromatics production. After a series of studies, completed by 1977, the petrochemical project was effectively shelved. Meanwhile, the new gas-processing project began operating in the late 1970s. Feedstock was thus directly available, and after the oil price rises of 1979-80, the petrochemical proj- 13 Hoechst of West Germany signed two 1(tters of int[~nt formalizing plans both to hu~ ammonia and to market chemical fertilizers from the Kuwait I}c~tr[~chelllic:il Industries (o., a suhsidiar~ of K 1)C. .See Carla I{apopor-t, I+otwhst Signs I)eal Mith Kuwait [etr(Khenli[> 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.

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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

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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 l
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138 l Technology Transfer to the Middle East .-. .. skilled cadre is emerging to work with contractors. Still, this is an evolutionary process; relatively long construction periods on new projects and less-than-efficient operation (by Western standards) of producing facilities can be expected for many years to come. Technology Transfer.Technology transfer is accomplished via contractors installing turnkey projects and training Algerian personnel. In the ammonia and LNG projects, contractors were hired to provide both technology and construction services. Hence, contractor fees were paid rather than licensing fees. Typically, the trend has been for contractors to be hired to operate the facilities and train personnel. Although the incentives for chemical and related projects in Algeria have many similarities to the Saudi projects, technology transfer appears to be less efficient, in the sense that some plants are completed but not operating. Financing. Algeria has typically been in a cash-deficient position and has borrowed funds from the international banking community to fund projects. They have frequently obtained favorable loan terms via intergovernmental loans. Moreover, due to Algerias abundant gas reserves, as compared to crude oil reserves, a major strategy has been to export natural gas in liquid form (LNG) at a price equal to its crude oil energy equivalent (measured in Btu). If this endeavor is successful and the undersea pipeline to Italy and associated contracts would indicate thisAlgeria will increase its ability to finance its economic development. Socioeconomic Considerations.The role of chemicals and petrochemicals in Algerian development must be viewed in the context of Algerias overall philosophy and development program. Since independence, Algeria has tried to modernize with financing from hydrocarbon export revenues, while managing the process through a combination of socialism and Islam. The first development plan of 197073 focused on the development of hydrocarbon, chemical, iron and steel, and engineering industries to serve as a base for economic growth. This was followed by a second plan in 1974-77, with emphasis on agriculture, water resources, and a continuation of the previous industrialization program. Unfortunately, in Algerias attempt to push forward rapidly, infrastructure and human development were neglected. No new plan was initiated until 1980. In the current plan (1980-84), heavy emphasis is placed on infrastructure, housing, agriculture, education, and lighter industry along with some continued thrusts into industrial development. The plan also provides for training young Algerians who can play a role in industry, government, and the army, and for remedying the countrys chronic underemployment. Nonetheless, East and West Asian labor is used extensively in construction projects, a function of both Algerian work attitudes and contractor cost concerns. Finally, while economic development is a key incentive for Algerian projects, rules and regulations with regard to Islamic law and the conduct of foreigners are well defined. Qata r The small state of Qatar has a population of approximately 220,000, of whom approximately 70,000 are Qataris. Qatar became an independent state in 1971, having been formerly a British protectorate, part of the Trucial states. When the other Trucial states formed the United Arab Emirates, Qatar declined to join. Petroleum exploration, production, and related businesses are handled by the Qatar General Petroleum Corp. (QGPC). When a decision was made to enter into petrochemical production, the Qatar Petrochemical Co. (QAPCO) was created by the government to handle petrochemical production. CdF Chimie (France) is a 16 percent joint venture partner in QAPCO; the other 84 percent is owned by QGPC. Qatar is a minor crude oil producer (1981 production rate of 350,000 bbl/d), and its reserves are declining rapidly. However, the country possesses remarkably large natural gas reserves, with the offshore North Field

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Ch. 5Petrochemical Technology Transfers 139 .. allegedly containing 100 trillion cubic feet (ft 3 ) of recoverable gas. This substantial position in natural gas underpins the countrys future prospects and makes it an attractive market for international process contractors, gas companies, and process companies. Goals and Objectives.Qatar has a relatively limited flow of hydrocarbons on which to support its economy. It has therefore selected industrialization and, in this case, petrochemicals to support its development effort. Realizing value for Qatars flared gas has been an impetus for petrochemical development. Considering Qatars size, the country has embarked on a very aggressive industrialization program, In fact, it is the first of the Arab Gulf States to establish ethylene production. Apart from the ethylene, the LDPE plants, and the proposed HDPE facility, it has built a major ammonia/urea complex and a steel plant, all using natural gas. Two gas-processing units strip the gas of ethane for ethylene and LPG, which are then exported. The ammonia/urea complex is owned by QAFCO (Qatar Fertilizer Co.), a joint venture of QGPC and Norsk Hydro (Norway), with minor participation by Davy-McKee (the original U.S. contractor) and Hambros Bank. The steel plant is a joint venture of QGPC, Kobe Steel, and Tokyo Boeki (the latter two Japanese firms). With the help of the French, Qatar brought onstream the first major olefins derivative project in the region dedicated to the export market. This project represented a major effort by the French Government and CdF Chimie to establish a position in the Middle East. In an arrangement unique among Middle Eastern petrochemical projects, the terms of the agreement called for an investment by Qatar in a French LDPE project located in Dunkirk and a similar investment by the French in the Qatar LDPE project, located in Umm Said. The French Government aggressively pursued the French venture, secured the construction and procurement activities for French-based companies, and realized an inflow of funds from Qatar (QAPCO) as a result of Qatars 40 percent position in the project. CdF Chimie took a 16 percent position in the Qatari project. France provided export credits and guarantees to help finance the project and exempted QAPCO from French income taxes. The actual inflow of French funds to Qatar was limited, owing to licensing and management fees earned by CdF Chimie. Engineering, construction, and procurement are primarily controlled by French companies. CdF Chimie later declined crude oil entitlements made available because of the pricing of the crude oil and CdF Chimies lack of adequate handling facilities. Project Organization and Structure.As in Saudi Arabia, preliminary studies, feasibility studies, and the like were conducted. Unlike the Saudi Arabians, however, Qatar has taken a major position in its domestic project, as well as a position in its joint venture partners project in France. Qatar has provided financing for both the Qatar project and the Dunkirk project and is providing low-cost feedstock for the Qatar project. However, Qatar used considerably more commercial financing than Saudi Arabia. The French contributions to the Qatar project are export credits for its suppliers, licenses, management know-how, and marketing. The principles behind the Dunkirk project are similar to those of most joint ventures in the West. Technology Transfer.Agreements developed in the QAPCO project that concern technology transfer are similar to those in Saudi Arabia. However, similar to the Saudi/ Mitsubishi agreement, the venture partner, licensor, and construction contractors are virtually all one nationalityin this case, French. CdF Chimie is primarily responsible for all marketing. Since CdF Chimie receives a commission on all sales, it has a continuous incentive to move large volumes of product. Financing. The exact nature of the project financing of the LDPE project in Qatar is not known. However, it is thought that France provided approximately $300 million in export credits at rates of approximately 8 percent. Euroloans represented approximately $200 million. This debt was eventually assumed by

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140 l Technology Transfer to the Middle East the Qataris at preferential rates. Nevertheless, since Qatar owns virtually all assets (84 percent) and CdF Chimie has a commission sales agreement and as such is more concerned with sales volume than with a project return on investment, the question of financing is not of critical importance. Socioeconomic Considerations. Qatar is a small country which is similar in population and closer in temperment to Bahrain than to Saudi Arabia. Its incentive for an LDPE complex is economically motivated. As such, it has taken an aggressive stance in upgrading its hydrocarbons and establishing with this project a future economic base for its development. It had the first petrochemical project in the region as well as the first Arab investment in a West European petrochemical project. Moreover, it used the joint venture approach towards technology transfer. Whether their arrangement with the French is superior to that established by the Saudi Arabians with others is open to debate. Bahrai n Bahrain is a small country with a population of approximately 350,000 and declining oil and gas reserves. Future prospects for gas look better than those for oil. As with other countries in the region, Bahrain uses hydrocarbon revenues to ensure a base for future economic development. Bahrains petrochemical project is unique as an Arab joint venture. Bahrains participation in hydrocarbon projects dates back to drilling and exploration activities in the early 1920s. By 1929 the Bahrain Petroleum Co. (BAPCO), a jointly owned entity of Standard Oil of California and Texaco, had built the first oil refinery in the region. A series of negotiations over 30 years resulted in the nationalization of BAPCO to BANOCO (Bahrain National Oil Co.). Aside from the oil refinery and the proposed methanol/ammonia facility, Bahrain has a gas separation plant and exports LPG. The country is a major Arab banking and recreational center. Goals and Objectives.The Bahrain petrochemical project located at Sitra Island represents the first Arab petrochemical joint venture. The project is a joint venture between BANOCO, PIC (Kuwait), and SABIC (Saudi Arabia). Project completion is expected by 1985. In addition to inter-Arab cooperation, the project is stimulated by the fact that Bahrain has a limited crude oil capability to sustain its growth, but has significant quantities of gas. Project Organization and Structure.The chemical project was initially an ammonia project. Kuwait, which has considerable experience with ammonia projects, contributed personnel in the early days of the project. These individuals were generally considered to be quite competent. However, as the project progressed and became more complex, a contract estimated at $9 million was awarded to King Wilkinson (U. S.) to help select contractors and technology and generally manage the project. Although based in Houston, King Wilkinson manages this contract from its offices in The Hague. Construction contracting was later awarded to Snamprogetti (Italy), while design and engineering of the methanol and ammonia processes were awarded to Uhde (West Germany). Technology Transfer. -Technology transfer is being facilitated via the King Wilkinson organization. At its direction, contractors and licensers have been selected, and training programs developed. Technology is simply being purchased in this project. The Arab joint venture participants will be contributing money and possibly some personnel. The structure of marketing and offtake agreements with the joint venture partners has not been published. However, it is thought that GPCO (Gulf Petrochemicals Co.) will market the material. An agreement with an international marketer is also possible. Financing. Studies have been conducted and jointly funded. However, at this juncture, technical issues associated with joint venture participation are being considered, particularly by experts at King Wilkinson. The final

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Ch. 5Petrochemical Technology Transfers l 141 .. structure and management roles are not known and are thought to be still evolving. The project is expected to receive equal contributions from the joint venture partners and to provide equal returns. The gas is expected to be priced in a fashion similar to that in Saudi Arabia. Financing reportedly will be provided on soft interest terms, probably in the 5to 6-percent range by an Arab consortium, with a debt/equity structure of 85/15. Socioeconomic Considerations.The countrys future economic growth is expected to be based on its growth as a regional banking and commercial center. This is reflected in Kuwaits location of its Kuwait-Asian Bank (to support West and East Asian business) in Bahrain and the large dry dock project recently completed in the country. Chemical projects, such as the ammonia-methanol project, are not expected to play a major role in the countrys future economic development. However, this project, like similar projects in the region, will assist in the country economic growth by efficiently using natural gas resources. It also represents joint Arab participation in the development of a neighbor Arab country. The exact participation of Kuwait and Saudi Arabia in this project is not known since it is currently in the planning stage. Other Recipient Countries Iran. Irans relatively well-advanced plans for constructing ethylene-based complexes have foundered on a variety of problems. When the Shah of Iran fell from power, Iran had the most developed petrochemical sector in the Middle East region, and the Iran-Japan Petrochemical Co. (IJPC) complex was on the verge of completion. Even in comparison to the various Saudi Arabian petrochemical ventures, this project at Bandar Khomeini (previously Bandar Shahpur) would have remained the most ambitious single project in the region through the 1980s and possibly into the 1990s. The Iranian chemical industry dates back to the 1960s, when a fertilizer plant was constructed near Shiraz. In 1965, the National Petrochemical Co. (NPC) was created as an autonomous subsidiary of the National Iranian Oil Co. (NIOC). NPC was allowed to enter into joint venture agreements with foreign concerns. In 1969, the Abadan Petrochemical Co. began with 26 percent of its shares owned by B. F. Goodrich. Its main products were PVC, benzene, and liquid caustic soda. Further joint ventures followed, with Amoco and the Cabot Corp. A large fertilizer plant, the Shahpur Chemical Co., started in 1971 as a 50/50 venture with Allied Chemical. Another large joint venture was the Iran-Nippon Petrochemical Co., which entailed cooperation between NPC and the Japanese companies Nissho-Iwai and Mitsubishi Chemical. It began operation in 1976, but owing to financial disagreements, the Japanese stake in the venture had decreased to 30 percent by the time the Shah fell. The project at Bandar Khomeini is a joint venture of the Iranian NPC and a Japanese consortium dominated by Mitsui. When completed, this venture was to be a sophisticated complex producing ethylene, propylene, butadiene, and aromatics, as well as a variety of intermediate chemicals, with a total capacity of over 1.6 million tons annually. 17 Although this plant would produce a substantial amount of exportable chemicals, it was envisaged prior to the Iranian revolution that the Iranian economy would absorb much of the output of the IJPC venture. 18 This project was conceived in 1969 and construction began around 1971. Construction was halted in 1974 due to cost increases, but resumed in 1976 after project refinancing. Construction was halted again in 1979 because of the revolution. The Japanese recognized from the beginning the advantages to be gained from cheap gas feedstocks ($0.35 to $0.60 per million Btu) and pursued the Mitsui petrochemical project in Iran as a part of their official oil diplomacy. 19 17 D. T. Isaak, Basic Petrochemicals in the 1980's, "RSI J$orking Paper, Iionolulu, Hawaii: ~;ast-~$est (entc>r, 1982, 18 Fereidun Feshm-aki and David I. lsaak, ()})1~(, the (;uJf, and the \\orld Petrochemical Alarket .4 W ud.} in (;o ~ ernnwn t lolic~ and I)ownstream operations (Iloulder, CO1O.: 198~11, L$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.

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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,

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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.

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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

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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.

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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.

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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

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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.

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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-

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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)

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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

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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.

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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.

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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.

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.- 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-

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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-

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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,

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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.

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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

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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.

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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.

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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.

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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

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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).

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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

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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

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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

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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.

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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

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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

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. 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

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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

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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

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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:

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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

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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

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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

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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

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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

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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

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. 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

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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

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CHAPTER 6 Telecommunication s Technology Transfer s

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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

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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

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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

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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

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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-

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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.

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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

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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,

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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.

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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.

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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

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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

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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

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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-

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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

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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

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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-

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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,

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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

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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,

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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

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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-

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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

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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.

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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

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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.

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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

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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

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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.

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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

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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

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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

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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.

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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.

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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,

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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 l
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220 l Technology Transfer to the Middle East ... an import market for crossbar and subscriber equipment, cable, and TV and radio receivers. There are three major local sources of telecommunications equipment production. The factory built by Standard Electrica-ITT (Spain) at Tlemcen in 1975 was designed to produce 100,000 lines of public telephone crossbar switching equipment, 20,000 lines of PABX switches, and 140,000 phone sets per year. The plant is only today beginning to reach this capacity level, because of employee turnover and the difficulty in training employees. Currently, the factory is assembling components imported from Standard Electrica in Spain; but it was originally designed to enable complete local manufacture. Two cable factories have a capacity of 10,000 tons per year of multipair pressurized cable. Production can be shifted to jelly filled cable as well. The national company in charge of these factories is contemplating microwave and multiplex production later in the decade. Another facility, built by General Telephone & Electronics (GTE) (U. S.) under a 1976 contract, is a TV and electrical production plant that is still being supplied by GTE. It has the capacity to produce 130,000 TV sets and 400,000 radio receivers annually. At capacity levels, the plant was designed to have a staff of 4,000 Algerians. By 1990, it is likely that local production will be able to handle a substantial portion of the demand. By one estimate, local manufacture will be able to meet 55 percent of domestic switching needs and 90 percent of the multipair cable requirements. 62 The telecommunications network is extensively used by subscribers. In 1979, each subscriber made an average of 31.2 domestic calls. This compares favorably with an average of 13.0 domestic calls in Iran and 15.5 in Iraq. Algeria has a high average net growth rate of population.9 percent per year. Estimated 62 Konsulterna, ibid. at 18.9 million in 1980, its population by 1990 should grow to 25.2 million. This places a continuing pressure on the telecommunications network capacity. For example, the waiting list for telephone subscribers has grown at an average annual rate of 41.8 percent over the past decade. The current push to provide more capacity will narrow the gap between supply and demand, but if Algeria fails to continue to expand the phone system beyond the 1985 goals, the result may be a low density of 3 phone lines per 100 inhabitants in 1990. Another pressure on the network is the very rapid population growth of urban areas-almost twice the projected overall growth rate at 5.7 percent per year. Capacity in already crowded urban exchanges will have to be expanded at a much faster pace than in rural areas. One goal of the current plan is to decrease the extent of foreign assistance required in manufacturing and installing additional capacity. To that end, the three local manufacturing plants have been designed to be self-sufficient. National companies are also taking charge of installing exchanges and transmission equipment. However, attracting, training, and maintaining sufficient manpower has been a problem in both production and installation, resulting in the need for continued foreign technical assistance into the foreseeable future. Although technology transfer is a national goal, the capacity of local personnel to carry out this goal has been questioned by some U.S. firms that have worked in Algeria. It is their opinion that while some Algerian trainees are conscientious in learning how to operate and maintain their segment of the telecommunications network, a large proportion is unmotivated to do so and unable to handle the technology efficiently even after extensive training. Moreover, attempts to develop higher-level training in telecommunications technology with the university in Algiers and the establishment of technical training schools were unsuccessful, owing to government funding cuts.

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Ch. 6Telecommunications Technology Transfers 221 Exacerbating this manpower problem, the modern analog telecommunications technology being installed in Algeria is more laborintensive than digital technology. Given a conservative rule of thumb of 150 inside and outside plant personnel per 10,000 analog lines, Algeria will require a minimum of 15,000 telephone employees operating and maintaining a l-million-line network by 1990. Judging from manpower requirements for telecommunications systems elsewhere, approximately 9 percent of the employees will need college degrees in engineering and management. Eighteen percent will have to be technical school graduates in electronics to serve as technicians in switching centers. Sixty-six percent will need some electrical repair training to serve as outside plant installers and repairers. The remaining 7 percent will have to be literate to serve as operators and clerks. Of the six countries in this study, Algeria has the lowest percentage of the relevant age group enrolled in higher education (4 percent) or in secondary school (31 percent). These statistics, plus the large proportion of the economically active population working abroad in France, suggest that Algeria may face the constraint of insufficient skilled manpower to fully absorb the telecommunications technology it is purchasing. As a result, Algeria will probably have to depend significantly on foreign technical help beyond 1990. If current trends and plans for development and export of liquid natural gas materialize, the necessary capital for telecommunications efforts should be available. However, there is insufficient high-level management and technical personnel to operate the telecommunications factories and the growing network. Training efforts for technician-level telecommunications personnel must compete with requirements of other industrial establishments for available manpower. These training efforts are, however, critical to more effective utilization of telecommunications technologies. Iraq Iraqs telecommunications network has brought with it efforts to expand the technically trained work force, but in the short term increased dependence on foreign technical support has resulted, Moreover, in purchasing advanced computer-based technology, Iraq may limit maintenance problems now, but expand foreign dependence later, if sophisticated training is not pursued. Iraqs motivation to expand its telecommunications networks is also, in part, to serve its requirements for improved military preparedness. At present, with oil revenues reduced and the war with Iran continuing, projects in the telecommunications field are putting an increased strain on Iraqs balance of trade. Iraq planned 525 new projects to develop the telecommunications infrastructure in the current 5-year plan. Among the goals were: 63 1. Increase telephone capacity to 1 million phone lines by 1985 and to 1.8 million by 1990. 2. Increase phone density to between 7 and 10 phones per 100 inhabitants by 1985. 3. Increase the number of telex subscribers to 6,000 by 1985 and to 10,000-18,000 by 1990. There is an absence of information on specific objectives in the telecommunications area and no cost breakdowns of planned development in Iraqs 5-year plan. As a standard for comparison, the previous 5-year plan allocated $1 billion to telecommunications programs. It was estimated that almost one-half of these funds were used to establish military communications networks. Major government contracts are usually put out to tender for international competition. Sales in telecommunications equipment and i] Intel-Trade, Mar. 30, 1979: ITU, op. cit., 1978, MEED Consultants, op. ci~., p, 7.

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222 Technology Transfer to the Middle East services are often made to ministries directly or to state trading organizations. Local representation for foreign firms is often useful in enhancing sales. Over the long term, Iraq intends to expand its telecommunications network in both rural and urban areas, using the latest digital transmission systems. An east-west microwave system has been contemplated to support international trade of food and agricultural products. Other areas likely eventually to see increased demand are PABX systems, mobile radio telephone networks and data communications networks, for state organizations. West European firms from France, Great Britain, and Sweden already dominate in many sectors. Japanese companies tend to be predominant in switching and wireless networks. It is likely that they will continue their major presence in the Iraqi telecommunications market. The Eastern bloc-Hungary and the Soviet Unionhave made only minor inroads in this market. U.S. firms, likewise, have had a very limited presence. International usage has been high and this has strained the capacity of the network. International communications traffic had grown at 30 percent annually. This was probably a consequence of the growth in business and exports as well as the large number of foreign workers in Iraq. There are several factories devoted to electronics and telecommunications equipment. A semiprivate company has the capacity to produce 50,000 telephone sets annually. A publicsector factory producing telephone wire was scheduled to be commissioned in the early 1980s. A contract was signed in mid-1981 with Thomson-CSF (France) to establish an electronics manufacturing facility, and consideration was being given to developing indigenous production of TV and radio receivers. However, given startup times for new facilities and current capacity limited to component assembly, dependence on foreign telecommunications equipment imports is expected to continue at a high level. Although figures on Iraqs manpower situation are not available, large numbers of foreign workers have built factories and infrastructure and operated and maintained Iraqs telecommunications system. 64 In part, Iraq sees purchase of advanced technology as one way of offsetting its deficiency of skilled manpower. Most contracts for equipment stipulate that operation and maintenance of that equipment by foreign contractors must include training that supports indigenous absorption goals. Iraqs plans for expansion of the telecommunications system have been delayed by the war with Iran. By far the largest share ($6.4 billion of $7.2 billion) of contracts awarded in 1983 were in the defense sector. Although authoritative information is not available, it appears that Iraqs telecommunication expansion has been concentrated primarily in the military sector in recent months. Iran Expansion of television broadcasting (reaching more than 65 percent of the population) and other mass communication vehicles has been a major instrument of political mobilization in Iran, used to discredit the Shah and then to legitimize the new regime. 65 Telecommunications have also been used by the Islamic regime to build support. The regimes priorities suggest that future investments in telecommunications will be focused primarily on consolidating military positions and ensuring readiness. Early in 1982, a 20-year development plan was approved and in September 1982 a new 5year plan was implemented in Iran. In these documents, the regime stated its wish to avoid the degree of dependence on foreign suppliers that the country experienced under the Shah. The principal objective of the current plan is economic self-sufficiency. Staple items and ..-- Jonathan Crusoe, Iraqs Spending Slowdown Disappoints Contractors, Middle East Economic Digest, Feb. 19, 1982, p. 1 (). 65 Tehranian, op. cit., 1982.

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Ch. 6Telecomrnunications Technology Transfers c 223 .. strategic and intermediate goods must be produced domestically. The PTT Ministry has selected sectors that will receive enhanced telecommunications networks. In order of priority they are: 1) security and defense forces, 2) voice and vision broadcasting, 3) government institutions, 4) productive and agricultural sectors, 5) villages, 6) trade and commerce, and 7) households. 66 In addition, goals have been established to develop telecommunications facilities for all villages of 1,000 persons or more by 1987 and all smaller villages by 1997. Some expansion and repair work is apparently proceeding. Approximately 43,000 new telephone lines are planned for installation in Teheran, Gilan province, and Rasht. Reportedly, $8.3 million has been spent through June 1982 on reconstruction and renovation of telecommunications facilities and microwave equipment. The telecommunications budget for 1982-83 was set at $27.2 million. Moreover, an amendment to the 1982-83 budget included $112 million for completion of several projects. In comparison, planned investments in telecommunications under the Shah amounted to $380 million (1978-83), $546 million ( 1983-88), and $913 million (1988-93). Given the sketchy information available on current plans and budgets, it is difficult to assess the likelihood that the goals will be vigorously pursued. Based on 1981 figures, Iran had a fairly low ratio of telecommunications employees (255) per 10,000 lines. This suggests a rather efficient operation. 67 Prior to the overthrow of the Shah, two domestic manufacturing plants were producing telecommunications equipment, primarily telephone sets. One factory was a joint venture with Siemens, and the other was under a licensing agreement from another German firm. It is unknown whether these plants are still in operation. Iran thus developed a limited level of self-sufficiency in equipment production. 66 Akhbar { Iranian newspaper-English translation), Sept. 27. 1982; Oct. 9, 1982. qAT&T Imng Lines, op. cit., 1982. Reported shortages of telecommunications equipment and spare parts in Iran since the revolution have encouraged expansion of local production and importation of materials from friendly countries. Although some requirements are being satisfied by domestic sources of supply, the domestic cable manufacturing facility reportedly has had difficulties meeting demand. 68 Given Irans desire for greater selfsufficiency, it is likely that it will attempt to increase indigenous production of telecommunications equipment and will probably draw upon West German, Italian, and Japanese expertise to expand its capability. Irans population is growing at an average annual net rate of 2.3 percent. Extrapolating to 1990, Irans population maybe 48.7 million. If previous trends continue, population growth in urban areas will increase at a rate of over 4 percent annually. These factors will serve to put more stress on the capacity of the existing system. As an indicator of this push on demand, waiting list statistics for telephone lines have increased exponentially between 1971 and 1979from 133,559 persons (0.5 percent of the 1971 population) to 750,000 persons (2.1 percent of the 1979 population). Iran made strides in addressing the problem of shortages of skilled labor in the 1970s. Statistics demonstrate that between 1969 and 1974, the number of engineering students receiving higher education in Iran more than doubled. In addition, the contract with American Bell International, Inc., focused in part on developing full self-sufficiency in telecommunications training by 1985. 70 Iranian trainees who went through the Bell training program exhibited a clear ability to master hardware operation because the training was practical, technical, and hands-on. Maintenance and administrative training were more difficult for trainees to grasp. Several Iranians who finished the courses successfully became instructors for their colleagues. lTA, op. cit., 1982. ITU, op. cit., 1980. [Telecommunications, August 1979.

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224 l Technology Transfer to the Middle East .. On the negative side, some of the Bell training courses experienced a dropout rate of close to 50 percent. Moreover, many of the management skills viewed as essential to efficient operations were found to be too Westernbound and culturally alien. These topics included team approaches to problem solving, communications skills, and recordkeeping skills. Like Iraq, Irans telecommunications expansion depends on the course of the war. In 1983, however, Iran reportedly awarded $20 million in contracts in this sector, in comparison to $1.5 million reported for Iraq. 71 Several common themes have emerged in the analysis of these six nations that serve to enhance or constrain indigenous capabilities to absorb telecommunications technology. These are described below. Factors that Facilitate Absorption National Objectives to Reduce Dependence on Foreign Suppliers. -Almost all of the countries in this study maintain as a formal national goal reducing dependence on foreign suppliers. Algeria, Saudi Arabia and Iran have set conscious goals to increase self-sufficiency in industrial production and in telecommunications in particular. These objectives have been generally implemented through major training programs. This was true with the American Bell training contract in Iran before the revolution and the Bell Canada training contract in Saudi Arabia. In some casesSaudi Arabia, Kuwait, and Iraq, in particular-these goals are critical for reducing the presence of large foreign work forces in-country. Saudi Arabia has established goals to enable rapid transfer of technical operations to the indigenous labor force. This has involved major investments in training of administrative and management methods and technical skills. Saudi Arabia has emphasized programs to improve productivity among trained nationals as a way of reducing the resident foreign work force. National Security. Iraq and Iran have expressed special interest in application of telecommunications technology to improve military readiness. Moreover, each of the six countries has made large investments in sophisticated military communications systems over the past 10 years. Undoubtedly, these acquisitions and the trainin g of nationals in the military services to operate and maintain the equipment have contributed to improvements in civilian capabilities to absorb the technology. National Objectives to Build Infrastructure. Each of these countries has taken the opportunity, afforded by the rapid increase in oil revenues during the 1970s, to rebuild a decaying infrastructure or to develop a base. They realize that without modern transportation and communication networks, electric power grids and other basic utilities, and a network of health, education, and social services they will not be able to build and develop the productive sectors of their economies. In this context, telecommunications systems have been seen as essential parts of the national infrastructure. Countries such as Saudi Arabia have seriously supported these commitments, backed them with sufficient funds, and avoided bureaucratic constraints. Indigenous Production.Domestic production of telecommunications equipment reduces foreign imports required. While production in each of these countries is limited and often consists of only component assembly plants, it provides a stable base of training in technical skills. Domestic manufacturing has taken various forms. Local firms have in some instances operated under license to a major supplier, participated in joint venture with a Western firm, or been involved in technical cooperation with a foreign corporation. In some cases, Algeria and Egypt for instance, domestic plants have the capacity to manufacture the components. At the same time, because these Middle Eastern countries invest very little in technical research and development, they are often .. 71 MEED Consultants, op. cit., 1984. constrained by the technology they originally

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select for manufacture. Hence, most domestic production in the Middle East involves electromechanical analog switching and rotary telephone instruments. Ironically, private industry and business that can afford more sophisticated equipment may import electronic digital PABX's and push button phones from foreign suppliers, bypassing domestic producers entirely, as occurred in Egypt. Decision To Stay With Conventional Technology.Another factor that enhances the capacity to absorb technology is continuity in programs, needed to ensure compatibility of technology. If a country has made a clear decision to adopt established technology as the standard nationwide and does not sway from that decision by importing experimental equipment, absorption will be enhanced. By using one type of technology, training is simCh. 6Telecommunications Technology Transfers 225 plified and focused. Algeria, for example, has chosen to stay with conventional electromechanical equipment because it is a known quantity, has been proven to be effective, and is easier to master for trainees with limited electrical background. Synergy With Other Industries.Absorption of technology is fostered by a continuing demand for improved services from a growing user community. The growth of domestic and export industries in these countries, and an increase in housing construction, have synergistic effects on the growth of telecommunications networks and on the indigenous capacity to operate and maintain them. Factors That Constrain Absorption Manpower Shortages.Saudi Arabia and Kuwait presently have work forces that lack Photo credit Saudi Arabian Ministry of /nformation Taif Earth station

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226 l Technology Transfer to the Middle East ... the technical and management skills necessary to operate and maintain effective telecommunications networks. Algeria, Egypt, and Iran, on the other hand, produce technicians but they are attracted by higher salaries to work in the Gulf States. This drain of skilled labor constrains absorptive capacity. Skilled technicians and engineers who remain in their native country are in such short supply that the telecommunications industry must compete with other industries for their talents. Since the telecommunications networks in these countries are owned by the government, workers are often paid on a government scale, and job offers from private industry are likely to be more attractive. More Saudi technician Inspects computerized telephone network Saudi Arabia was the first country I n the world to install a nationwide stored program control telephone system over, the high dropout rates and problems in recruitment indicate that motivation among trainees in these countries is often low. Several cultural factors also constrain absorption. In Saudi Arabia, for instance, cultural aversion to manual labor has limited maintenance training of nationals and focused attention on operations. In Iran, Bell trainers found that while apprentices were able to gain technical mastery of telecommunications equipment rapidly, administrative, management, and maintenance methods were, for them, abstract and foreign. Capital Availability. Each of these countries, except for Egypt, has been able to invest significant amounts of national revenues in development or renovation of telecommunications infrastructures. Only Egypt has been constrained by lack of available investment funds and has relied extensively on economic assistance for funding. If a country can afford to pay for the importation and installation of telecommunications equipment and can afford to have foreign labor operate and maintain that technology, it may choose to continue that dependent relationship while investing its limited local manpower in other sectors of the economy. Population Growth.Another factor that constrains telecommunications capacity is the rapid growth of population in these Middle Eastern countries, especially in urban areas. This growth continually strains capacity, resulting in difficulties in maintaining a high quality of service. Inconsistent or Changing Public Policy. Consistency in public policy is important in achieving high levels of technology absorption, especially when the government is the owner of the technology and the major source of development funds. Some countries such as Algeria and Kuwait have reduced telecommunications and technical training budgets despite stated national objectives, as revenues declined or as political priorities changed. As a consequence, efforts to develop a skilled manpower base to operate and maintain the technology have been disrupted or delayed.

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Ch 6 Telecommunications Technology Transfers 227 In Egypt, public-sector organizations have been mobilized to assist in solving the chronic unemployment problem. In response, the state-operated telecommunications authority employs almost ten times the number of workers required to operate and maintain the equipment. This has resulted in underemployment for some, the placement of unqualified workers in other functions, overall supervision problems, and a poor quality of service. In this case, one national goalto improve the telecommunications infrastructure-has been balanced against other policy goals of reducing unemployment. PERSPECTIVES OF SUPPLIE R COUNTRIES AND FIRM S The world telecommunications market is growing rapidly. According to some experts, sales of telecommunications equipment worldwide may double during the decade of the 1980s to $366 billion during the period. 72 Total sales amounted to $188.2 billion during the period 1970 to 1980. Sales in 1983 alone were about $59 billion. A significant portion of these sales will surely be in the Middle East. A plan adopted by the ITU to overhaul the public systems of 28 Middle Eastern and Mediterranean basin countries called for $30 billion (1978 dollars) in investments. 73 Major supplier firms have several objectives in common in pursuing telecommunications transfers to the Middle East: 1) marketing in countries with a recognized need, technological requirements, and ample budget; 2) finding new markets once their own domestic markets have been saturated; and 3) building a solid reputation that can open foreign markets for other telecommunications goods and services. Major supplier countries also have interests in recycling petrodollars to equalize trade balances, opening markets for other types of exports, and in providing technical assistance to foster friendly relations with recipients. More than 2,300 U.S. and foreign companies manufacture telecommunications equipment. 74 The number increases further if one adds suppliers of telecommunications support servicesconsulting, training, technical operations management, and maintenance. Competition among these suppliers is intense, considering that there are only about 100 major customers for public networks worldwide-i. e., the national PTTs. This section focuses on the competitive position of U.S. and other supplier firms in this market-what the U.S. share of the market has been, how U.S. firms rank within the six national markets covered in this study, and how they fare within each technology sector. Finally, critical factors that have influenced competitive success in the Middle Eastern telecommunications market are identified. United States Observers disagree about why U.S. firms have not been more successful in sales of telecommunications equipment and technical services in the Middle East. On the one hand, businessmen see the efforts of the U.S. Government as insufficient and not on par with those of other governments, particularly with regard to export financing packages. On the other hand, many observers agree that U.S. sales in the Egyptian market stem directly from AID loans supporting telecommunications system expansion (see app. A, Egyptian project profile) .75 Some also feel that, until recently, U.S. firms were not anxious to tailor technology to foreign markets since the domestic U.S. telecommunications market is so large. The American Businessmens Group in Riyadh has taken the position that the U.S. Government has not provided the means to help U.S. firms bear the large financing demands .AI&T }\nnual ReporL, 1981. lnterti(~ws with represcntat i~es of US suppliers. hlarch 1983.

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228 l Technology Transfer to the Middle East involved in doing business in the Middle East. Small and medium-sized companies find it difficult to arrange adequate financing, and companies, large and small, cannot offer complete financing packages as comprehensive as that offered by the Siemens consortium in Egypt. Through the Export-Import Bank, the U.S. Government makes loans to foreign purchasers of U.S. goods. However, corporations want the bank to do more by providing such things as bank letters of guarantee, guarantees for tender and performance, and advance payment bonds. The Overseas Private Investment Corporation (OPIC) provides political risk insurance and guarantees to U.S. firms investing directly in less-developed countries, but the countries in which OPIC operates are limited by maximum gross national product (GNP) requirements. The U.S. Government has, however, several established programs in the Middle East that particularly assist U.S. suppliers of telecommunications equipment. In Saudi Arabia, the U.S. Army Corps of Engineers is a consultant to the Ministries of Defense and Aviation in the design and contracting of military construction work. The Corps writes specifications, preapproves bidders, and evaluates proposals for the Saudis. In its construction jobs, there is usually a telecommunications component. The Corps plays a nonpartisan role in bid evaluations, and non-U.S. firms may be chosen as subcontractors. USAID has contributed $242 million in loans and grants to Egypt since 1977, all tied to purchases from American telecommunications suppliers. AT&T, Ford Aerospace, Simplex, Continental Telephone, and Arthur D. Little have been the principal recipients. AIDfunded contracts have included microwave equipment, traffic control equipment, TV broadcasting systems, navigation control networks, telephone cables, switching systems, and radar surveillance and remote-sensing equipment. Thus, while U.S. Government personnel do not normally seek out export opportunities or carry on negotiations for sales of telecommunications equipment and services, as do other supplier governments, 76 government-supported programs such as AIDs in Egypt have been important mechanisms for sales. (As discussed in ch. 11, there has been considerable debate among AID officials and U.S. policymakers concerning the appropriateness of these programs.) The United States Telecommunications Training Institute (USTTI) was established in 1982 with U.S. Government support. The purpose is for private U.S. firms to share advances in telecommunications technology with developing countries. The establishment of the USTTI also reflected the recognition that most equipment and service supplying countries use training as a vehicle for entering markets in developing countries. Training is performed in the United States by the corporate sponsors on their own equipment. Nearly 20 U.S. corporations have contributed over $2.5 million to the program in its first year including both capital and in-kind donations of technical personnel and equipment. In addition, the World Bank, the ITU, and other multilateral organizations have provided scholarships to help pay transportation and living expenses of the trainees. In the past year, 14 percent of the trainees were from the Middle and Far East, with five from Saudi Arabia, one from Kuwait and one from Egypt. Some have suggested that the USTTI should collaborate with firms in sending personnel abroad to conduct training in developing countries. This would be an important learning experience not only for the foreign trainees, but also for the U.S. firms who seek entry into foreign markets. Others suggest that the training offered by the organization should stress lower level technical skill development to a greater extent. The major U.S. telecommunications firms with dealings in the Middle East have been AT&T International, Continental Page, Inc., and General Telephone and Electronics (GTE). Interviews with representatives of U.S. suppliers; November and December 1982.

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Ch. 6Telecommunications Technology Transfers l 229 France Over the past decade, France has developed policies to promote the development of the nations telecommunications industry. The government also encourages firms to target half of the equipment they produce for export markets. It has also assisted manufacturers in standardizing equipment to facilitate integration and export to other countries. France is eager to maintain a strong export position in the Middle East to cover its imports of Middle Eastern oil, particularly oil from Saudi Arabia. In early 1982, France signed a liquefied natural gas (LNG) agreement with Algeria that included an accord to supply $2 billion worth of French goods and services, including telecommunications, to Algeria. French banks have also extended credits for export of telecommunications goods and services to Egypt. In addition to export credits, the French government provides support to telecommunications exports through the DGT (Direction Generale des Telecommunications), the telecommunications branch of the French PTT. DGT plays a diplomatic and consultative role, maintaining contacts with foreign telecommunications administrations and international bodies such as the ITU. DGT also provides information and consulting services. The major French telecommunications firms doing business in the Middle East have been Thomson-CSF and CIT-Alcatel. 78 .lfiddle East Economic Digest, Special Report on Saudi Arabia, ,July 1981; 7elecommunica.tions, March 1980. Some restructuring of the French telecommunications industry is now occurring in order to increase exports and keep France competitive internationally. Thomson-Brandt will transform its telecommunications interests. currently held by its subsidiary Thomson-C SF, into a new holding company called Thomson Telecommunications, under CGE's (Compagnie General dElectricite) management. By 1987, CGE plans to merge its subsidiary, CIT-Alcatel, with Thomson Telecommunications, thus effecti~el~ hecoming France monopoly telecommunications producer. (,\T. }. ime.s, Sept. 21, 1983: Financial Times, Sept. 16, 19WI. See also Telecom (;iants to ,Join Forces. ftfiddle f,a.~t h;conomic I)igest .Special Report on France, :\pril 19H4! pp. 4-5. Great Britain The British government in 1980 supported a high percentage (39 percent) of exports with official financing. 79 British firms have, however, lost ground as worldwide exporters of telecommunications equipment, and the government has not developed a strongly targeted policy similar to that of France. 80 Direct government support (including financing) for this industry thus appears to have been less extensive than in France or Japan. In part, British telecommunications exports may have suffered, because British manufacturers have over-engineered and over-designed equipment to meet the standards of the government-operated domestic phone system. 81 As a result, their products have been uncompetitive, overpriced, and unsuitable for foreign markets. In an attempt to turn this situation around, British Telecom, the government-owned phone authority, is cooperating with local industry to develop and market System X, a family of digital, microelectronic, and stored program control telephone exchanges. This system is intended to boost sales overseas and improve the reputation of British telecommunications technology. In addition, British embassy personnel in Saudi Arabia are reported to be effective in maintaining influential contacts with the Saudi PTT and arranging marketing meetings for British firms. 82 Major British telecommunications firms involved in Middle Eastern markets are Cable and Wireless, Standard Telephone and Cable, Ltd., and Plessey Telecommunications and Office Systems, Ltd. West Germany West Germany has provided export credits to several countries in the Middle East. The Robin Day Glenn, Financing of United St;]tes kxport~ of 7Teie~-onln]uni(ations Equipment, The International Law Institute. Georgetown [Jni~ersit~ I.a~ Center hlonograph, \$ashington, DC., 1982, p. 2;3. i ) Ihid., p. 11, elephonJ, Sept. lo, 1982. Jlinancia] Times, ,Jan, 6. 1981.

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230 l Technology Transfer to the Middle East Siemens-led consortium was probably awarded the $1.8 billion Egyptian telephone expansion contract because of the financial package in which the West German government participated through export credits and soft loans. Export credits have also been granted for exports to Iraq. 83 Domestically, the German government provides funding to local manufacturers for research and development (R&D). In 1979, for instance, the government committed approximately 3 percent of its total R&D budget to defray costs incurred by the electronics industry. 84 Siemens is the major West German firm involved in Middle Eastern telecommunications. Sweden Sweden has a well-organized government system for promoting sales overseas, although private companies compete with the government for business. Televerket (TVT) is a state= owned public utility that provides telecommunications services (telegraph, telex, telephone, data communications, radio communications) domestically and overseas. TVT has several manufacturing facilities, a consulting organization (Swedetel) that works primarily in developing countries, and a subsidiary (Swedcom) that installs, operates, and maintains telecommunications equipment in foreign countries. Another subsidiary, Teleinvest, acts as an export agent to assist in financing and export of telecommunications equipment manufactured in Sweden. In addition, the government provides some credit assistance for large projects in developing countries through Svensk Export Kredit. Swedish government entities sometimes collaborate with private companies in selling products overseas. TVT and Ericsson are equal owners of a company called Ellemtel, which was set up to design and develop telecommunications equipment. Ellemtel developed the AXE exchange, for example. Private John Y$helan, West Germans Win on IIigh-Tech, ,i!liddh+ East Economic Digest, Jan. 29, 1982, pp. 10-11. 84 Telecommunications, October 1980. companies can call on Teleinvest to assist in financing and exporting products. In 1978, faced with trade deficits largely caused by rising oil imports, Sweden initiated an export drive aimed at Middle Eastern countries. Banks increased their support to companies exporting to the Middle East, and the government organized trade missions for 100 Swedish companies. The Philips/Ericsson project in Saudi Arabia was reportedly won partly because two Swedish banks were approved as guarantors by the Saudi Arabian Monetary Agency. 85 Canad a Bell Canada is one of the worlds oldest telecommunications organizations, having started as a telephone company in 1883. It has since become Canadas principal supplier of telecommunications services, employing 57,000. In 1983, Bell Canada Enterprises was established as the parent company of a family of firms that includes Bell Canada as the operating telephone company, Northern Telecom as a manufacturing subsidiary, Bell-Northern Research as a telecommunications research and development organization and Bell Canada International (BCI). BCI was formed in 1976 in response to strong overseas demand for consultancy services. It has performed telecommunications projects of all sizes throughout the world including the five-year Saudi management contract awarded in 1978, which at that time was the largest ($860 million) communications contract of its kind in history. Under this contract, Bell Canada would organize, operate, and maintain the expanding telephone system and train Saudis to take over the operation themselves. This contract was superseded in 1983 by a $1,297 million 3-year contract to provide the Kingdom with operations and maintenance service for its telecommunications expansion program. Bell Canada has carried out other work in Saudi Arabia including one contract for ARAMCO which has involved 85 Telecomn]unications, February 1982.

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Ch. 6Telecommunications Technology Transfers l 231 provision of advice on management methods and setting up a private communications network. They reportedly won these contracts because of their proven operating track record and extensive training experience. The next biggest Middle Eastern market for BCI is Iraq, which has become the largest customer for the supply, installation, and maintenance of Northern Telecom equipment. BCI first entered Iraq in 1976 when it installed an advanced Northern Telecom exchange on a turnkey basisIraq now has 60 of these exchanges. 86 Netherlands The Dutch have escalated their efforts to obtain a larger share of the telecommunications market in the Middle East. Their major company is N.V. Philips. Prior to 1978, Dutch exports of telecommunications equipment to the region were low. However, between 1979 and 1980 the Dutch government took several steps that improved their firms competitive positions. The Netherlands had encouraged cash outflows to stabilize the Dutch guilder. As a result, Dutch banks expanded their foreign interests and have been in a better position to assist companies with financing. Dutch government aid to developing countries, which represents about one percent of gross national product, also plays a role in influencing sales to the Middle East. As part of the Philips/ Ericsson telephone contract in Saudi Arabia, the Dutch government provided a guarantee for financing. Japan Telecommunications operations in Japan have been handled under Nippon Telephone and Telegraph (NTT), a public corporation which is being reorganized. However, Kokusai Denshin Denwa (KDD) and private companies are important suppliers internationally. Although NTT has not been allowed to manu. 86 "Bell Maintalns Momentum in Saudi Arabia, Middle East f,~onorl]i( I)l,ges[ .$pw>ia] 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

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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

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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.

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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.

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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.

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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.

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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-

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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

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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.

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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,

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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

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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.

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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.

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CHAPTER 7 Technology Transfers in Commercial Aircraft Support Systems

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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

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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

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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.

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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.

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250 Technology Transfer to the Middle East

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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.

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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.

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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

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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

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Ch. 7 Technology Transfers in Commercial Aircraft Support Systems l 255

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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.

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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.

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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.

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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

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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.

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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.

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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-

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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.

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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

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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.

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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 l
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Ch. 7 Technology Transfers in Commercial Aircraft Support Systems l 267 *.. More than half of the flight crews are now Saudi nationals. In certain technical areas and in the more complex maintenance of aircraft, Saudia still depends on foreign technicians. A drive to find, train, and retain Saudis in this field is now under way, but it will be several years before the majority of such technicians are Saudi nationals. Saudia now performs all A, B, C, and D checks, and plans to carry out base checks (every 6.000 hours) on its Lockheed TriStars. Saudia can carry out major repairs and hot section maintenance on several types of engines. By 1984, Saudia plans to contruct and operate an entirely new maintenance base in Jeddah, which will meet projected maintenance requirements to the year 2015. Saudia has recently begun operations with a twin-cell civil engine test facility located in a new support area of Jeddahs King Abdul Aziz International Airport. In a given year, more than 700 hangar visits will be made by Saudia aircraft for routine checks, modifications, and repairs. Saudia uses its own Automatic Test Equipment, a computer-controlled laboratory facility, to diagnose problems in electronic equipment so that airplanes can be put back into service with the least possible delay. The Saudia Metrology Laboratory tests and calibrates the equipment used in the aircraft to ensure proper performance. Their MEMIS (Maintenance and Engi neering Management Information System) is particularly useful in time control. and in the issuance of purchasing and repair orders. Selfsufficiency in maintenance is thus rapidly being realized within Saudia, and maintenance training courses are being expanded to include more and more key personnel. The Bendix Corp. (U.S.) is engaged in a 15year agreement which aims to eventually staff Saudi Arabias airports with Saudi nationals. 46 In a separate award, Bendixs technical services subsidiary, the Bendix Field Engineering Corp., won a $337 million, 5-year air traffic control contract. It will supervise 31 airports in operations, systems engineering, and maintenance. Six hundred Saudi staff will be needed; 500 of them will be managers and technicians. 47 Saudia thus eventually expects to operate without a major expatriate work force. on the

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268 l Technology Transfer to the Middle East other hand, one reason why the airline has operated at a loss over the past few years is its massive investments in training, computerized systems, and flight simulators, as well as new aircraft and other capital investments. 48 In 1980 alone, official subsidies for Saudia Airlines amounted to almost $75 million. The airline is determined to eliminate subsidies gradually through higher fares and increased efficiency. The government, through accounting and financing procedures, is attempting to provide incentives to operate the airline as a profit-seeking enterprise. Saudias airfreight business has been an important component of its growth and Saudia is considering modifying its A-300s on order to a combination passenger-freight configuration. Aiming to make the new airport at Jeddah the hub for airfreight traffic to the Middle East, the airline plans to increase its airfreight business and enhance profitability. Saudia, which tries to restrict recruitment to nationals, expanded its training budget in the late 1970s: the budget grew by 164 percent between 1977 and 1981 to $47.7 million. In 1977, there were 4,261 trainees; the figure projected for 1981 was 9,149. 49 Approximately 1,200 Saudi nationals are being-trained by Saudia at its $42 million institute in Jeddah. Some Saudi nationals are also studying in the United States. so Saudia courses include flight crew training, computer programing, marketing, and technical and managerial skills. World Wide Languages (United Kingdom) computerizes translations and typesets manuals dealing with installation, operations, and technical specialties. Indicating the international nature of Saudia operations, the manuals are 48 Roy Allen, Air Freight Business Zooms Ahead, op. cit., pp. 62-64. 49 Edmund OSullivan, Saudi ArabiaBridging the Labour Gap, Middle East Economic Digest, May 22, 1981, p. 53. 50 The Sierra Academy of Aeronautics located at Oakland International Airport, Oakland, Calif., will use a computerized, multi-engine aircraft simulator to train pilots from Saudi Arabia. The training features the 99 instrument approaches used at King Abdul Aziz International Airport, Jeddah International Airport, King Khalid International Airport, Riyadh International Airport, Dhahran International Airport, and airports in 15 other cities in the Kingdom, Courses for Saudi Pilots Added to U.S. Program, Saudi Report, Jan. 24, 1983, p. 3. reproduced in Arabic, Russian, French, Spanish, Chinese, and English. 51 The key to the long-term objective of Saudilation, says Ibrahim Serage, Saudias training director, is giving trainees sufficient incentives and opportunities for promotion. This means we are not training people simply for jobs, but for career development. 52 In 1980, the company recruited 700 employees, of which 200 became Saudi flight crew. 53 The ratio of Saudi pilots to nonnational pilots fell from 1975 (75:25) to 1980 (50:50) as the demand for flyers grew rapidly. The goal is to raise the ratio to the 1975 level by 1985. To that end about 100 pilot trainees are recruited each year. Some observers have pointed to the tragic fire on the Lockheed TriStar L-1011 on August 19, 1980, as an indication that Saudia may be growing too fast. 54 Nevertheless, Saudia has a good maintenance record and its pilots are generally considered capable. The strides being made by Saudia are very impressive; complete staffing by Saudi nationals, however, will not occur in the near future. Successful technology absorption in several aspects of commercial aircraft support systems has come as a result of lengthy experience, and a strong commitment to training. Saudia is a comparatively independent operation and can offer technicians exceptional housing and other perquisites and has, therefore, been able to recruit and retain educated blue-collar technicians. Training programs have been costly, but they have contributed significantly to the high quality of operations and maintenance of Saudia. ] Saudi Arabia Continues Growth, op. cit., p. 30. Quotation cited in Saudi ArabiaThe Manpower Controversy, Middle East Economic Digest, Apr. 24, 1981, pp. 4041. See also Saudis Seek Technical Self-Sufficiency, Aviation Week and Space Technology, May 14, 1984, pp. 68-70. 34 Saudi Arabia Continues Growth, op. cit., p. 29. John Whelan, Airline Safety Questions Follow Riyadh Disaster, Middle East Economic Digest, Aug. 29, 1980, p. 35. The official declaration of cause for the accident which killed 14 crew and 287 passengers was a fire of undetermined origin in the cargo compartment. Factors contributing to the fatal results were listed primarily as pilot error in not making a maximum stop landing and immediately evacuating upon landing and not properly utilizing the flight crew during the emergency. Information provided by the National Traffic Safety Board, Washington, D. C., March 1984.

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Ch. 7Technology Transfers in Commercial Aircraft Support Systems 269 . Kuwait.Kuwaits aim to become a regional center and a hub in East-West air traffic has been the driving force in civil aviation policy and the growth of Kuwait Airways during the past two decades, Kuwait Airways is unusual among world-class airlines in that it has no domestic air service. Yet Kuwaitis probably travel more by air than people from almost any other nation. The airline, however, cannot make up in receipts on international air travel for the lack of domestic air service. In addition, heavy losses due to increased operating costs in the past 3 years, and the fact that longer range aircraft make stops in the Middle East less necessary than before, have changed the likely future growth pattern of the airline and probably will modify the need for building a new airport. The Kuwait Airways Corp. (KAC) has been expanding the range of services it offers using eight-seat aircraft that fly up to 6 hours nonstop. Air taxis to the Persian Gulf and parts of Europe were initiated in 1982. The goals of the new service are said to be to reduce the use of private planes and to increase sagging revenues of the company. Another tactic to boost profits is the goal of increasing KACs market share on Gulf flights. To do so, however, fares were reduced by 35 percent for trips within the area in order to make the airline more competitive. Kuwait Airways has placed a ceiling on further hiring, and the management intends to cut the substantial losses of the past few years through emphasizing profitable routes, such as the one to New York, and perhaps by offering less frequent service or canceling some routes. Politically, however, it maybe difficult for Kuwait to withdraw from certain routes while continuing to serve others. Kuwaits sole airport, Kuwait International, was built in the 1970s. In the 1970s the British firm Frederick Snow designed a runway which an Italian contractor was unable to build in the very hot climate of Kuwait. A Japanese architect, world-famous in this field, solved the problem: huge slabs had to be sawed in two at great expense. This remains a well-remembered example to Kuwaiti planners of the need to monitor technology transfers. 55 An airport development plan completed in 1975 has been largely ignored, and the present Civil Aviation Department has authorized a new conceptual study by Aeroport de Paris to cover requirements to the year 2000. An IATA team has prepared another report on the subject. Both reports identify coordination between military and civilian airport needs as a major factor in determining whether or not a new second airport can or should be built. Another key issue is Kuwaits future importance in regional and international air traffic. Studies indicate that the existing airport, with a design capacity of 4 million passengers per year, will have to cope with about 5 million passengers by 1990. This compares with 2.8 million in 1981. Like Algeria and Egypt, Kuwait is thus anticipating a growth in air passenger traffic beyond its present physical and service capacities. The aircraft support industry in Kuwait is heavily staffed with nonKuwaitis. Even prior to the completion of expansion plans, efforts were made to expand recruitment. For example, in August 1980 airline pilots (as well as employees of the fire department) were exempted from military conscription. The overburdened airport traffic controllers were to be stretched by upgrading automated controls. A computerized radar system was put into effect in September 1980 at a cost of $3.7 million. Chief executive officer of KAC Ahmad al-Mashari announced in June 1981 that an inservice training system for Kuwaiti and other Arab engineers and technicians had been started. 56 Staff training is included in the $775 million contract between KAC and Airbus Industrie Pacific Consultants, the Ballast Nedem (the Netherlands), and Soleco (Italy) were all involved in the building of the airport. Minor parts of the present airport system, including the jetways, were designed or furnished by U.S. firms. The airport development plan was drawn up by the Netherlands Airport Consultants. 56 "KAC Plans Major Projects, Middle East Economic Digest, June 12, 1981, p. 28.

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270 l Technology Transfer to the Middle East -- -. .for purchase of 11 aircraft. 57 Some say that the Boeing 767 had the technical edge over the Airbus A310; moreover the U.S. company had the advantage of having provided the rest of KACs fleet. Boeing reportedly lost this award for political reasons. The Airbus was reportedly selected because the political positions of major consortium participants, particularly France, were seen as more acceptable. Political considerations in aircraft sales in the region are covered in more detail in a following section. The political importance attached to having a national airline should not be overlooked in explaining Kuwaits strategy. In the future, KACs expected increase in services and assets will result in expanded requirements for skilled manpower, even with more extensive use of automation. Two points should be noted. First, there is no indication that the work force will be primarily Kuwaiti. Dependence on expatriates must be increased to carry out these plans. Secondly, although training is included in the plans, it is not clear whether the planned training is sufficient in view of the physical expansion. Egypt.Expansion of Egypt civil aviation sector has been uneven during the past few years, despite projections which show large future increases in passengers. While financing problems have not postponed construction of airport facilities and telecommunications improvements, EgyptAir has had to retrench plans for major aircraft purchases. 59 Redefinition of its market segment, competition, and management problems have contributed to the slowdown in expansion of the state-owned air carrier. Passenger traffic through Cairo is expected to rise rapidly from the current level of 4 million passengers per year, possibly at a rate of 57 Middle East Economic Digest. vol. 25, May 29, 1981, p 26. 5HPro-Arab Stand Wins Airbus Deal, Middle East Economic Digest, July 11, 1980, p. 34. The number of aircraft given in the 1980 announcement of the contract award was six but the 1981 figure was revised to 11. Alan Mackie, EgyptAir Trims Expansion Plans, hfidd~e l+la.qt Econonuc Digest, Sept. 5, 1980, pp. 3-4. 15 percent annually. 60 The airport at Cairo will be expanded according to designs by Aeroport de Paris. The first annex will raise overall capacity from 5 million to 10 million passengers annually when it is completed in 1984. Another 5 million may be accommodated by a second annex to be built by 1987. The airport plan allows for completion of further annexes as necessary. A complete overhaul of the air traffic control system for the whole country is underway. Thompson-CSF (France) will build and equip the Cairo air navigation centeras well as seven radar stations in other parts of the country, linked together by microwave. Air traffic controllers will be trained on the SIMCAT simulator to be supplied by Thompson-CSF. The French Government is helping the Egyptian Government to finance the packageworth $72.5 million. The French officially subsidized financing was reportedly a critical factor in the decision to choose the French company. Regional airports at Alexandria, Aswan, and Luxor are being improved. There has also been discussion of building two new international airports in the northern Delta area. These would be located at Alamein and Ameriyah and would tie into industrial development schemes for the region. 61 EgyptAir has been redefining its relationship with the government over the past few years. Ali Gamal al-Nazer, Tourism and Aviation Minister, announced in November 1980 that the company was doubling its capital to $72 million through investments from the National Bank of Egypt and the Misr Insurance Co. Independent observers noted that EgyptAir had been permitted to exercise increasing autonomy and had been commercially successful, recording operating profits of $17.4 million for 1979. 62 Nonetheless, planned investments have been scaled back. Orders for four McDonnell Robert Bailey, Safety First at Cairo Airport, Middle East Economic Digest, June 12, 1981, p. 24. i) Northwest Development Planned, Middle East Economic Digest, July 3, 1981, pp. 7-8. 62 Mackie, op. cit.

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Ch. 7 Technology Transfers In Commercial Aircraff Support Systems l 271 Douglas (U. S.) DC-10/30 aircraft were canceled in August 1980. Refer-ring to the purchase of three Airbus Industrie A300s, the Tourism and Aviation Minister said that the new investments could not all be made simultaneously. 63 The company decided to forgo the long-haul market, for which the DC-10s were ordered, concentrating exclusively on the medium-range market. Further planned investments were being limited. Discussions focused on either canceling or reducing in size by 75 percent the planned maintenance center to service the Airbuses at Cairo Airport. The government, nonetheless, affirmed its support for EguyptAir virtual monopoly as it protected the company from potential competition from a newcomer. Arabia (Arab International Airlines) was incorporated in December 1978 with $15 million in capital owned 60 percent by pritvate Egyptian and 40 percent by Saudi Arabian investors. Its staff of 150 were all Egyptians. 64 But after operating for less than 6 months, it was forced to terminate operations, It was not permitted to fly on lucrative international routes, which would bring it into direct competition with the stateowned company. Closely restricted domestically, Arabia finally succumbed to pricecutting tactics. Further evidence of the government commitment is the fact that of the $226 million allocated for civil aviation in fiscal year 1981-82, EgyptAir was to receive $103 million. The Egyptian labor profile, which includes an abundance of labor and a large professional contingent, is well suited to air transport. Specific vocational training programs are required, however, for each occupational category (the four major areas being aircraft pilots, flight attendants, ticket and station agents, and aircraft mechanics). Skilled labor occupations such as mechanics may present the greatest difficulties in terms of availability of labor, while training flight attendants and Ijgypt (ance]s 1)(-1 (.)s, ,lljridlf~ j;a.st J;((>nor7]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.

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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.

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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.

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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,

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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

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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

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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

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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

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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

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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.

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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.

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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

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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.

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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.

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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.

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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).

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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-

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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.

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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-

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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.

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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.

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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.

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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-

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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

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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.

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296 l Technology Transfer to the Middle East I F c u)+ mmlm a) .(/7 u : .. ..

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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

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298 l Technology Transfer to the Middle East ) . -. o

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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=

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CHAPTER 8 Technology Transfers in Medical Services

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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

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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

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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).

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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.

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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).

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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

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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).

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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

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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

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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-

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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

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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-

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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

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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-

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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

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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)

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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.

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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