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Saudi Arabia gets ready for the twilight of the oil age by creating the world’s largest sovereign wealth fund for the kingdom’s most prized assets.
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Over a five-hour conversation, Deputy Crown Prince Mohammed bin Salman laid out his vision for the Public Investment Fund, which will eventually control more than US$2 trillion and help wean the dominion off oil. As part of that strategy, the prince said Saudi will sell shares in Aramco’s parent company and transform the oil giant into a commercial conglomerate. The first public offering could happen when next year, with the country currently likely to sell under 5 per cent.
“IPOing Aramco and transferring its shares to PIF will technically make investments the origin of Saudi government revenue, not oil,” the prince said in an interview at the royal compound in Riyadh that ended at 4 a.m. on Thursday. “What’s left now is to diversify investments. So within Two decades, we will be an economy or state that doesn’t depend mainly on oil.”
Almost eight decades because the first Saudi oil was discovered, King Salman’s 30-year-old son is planning to transform the world’s biggest crude exporter into an economy fit for the next era. As his strategy takes shape, the speed of change may shock a conservative society accustomed to decades of government handouts.
Buying Buffett and Gates
The sale of Aramco, or Saudi Arabian Oil Co., is planned for 2018 or even a year earlier, according to the prince. The fund will then play a major role in the economy, investing at home and abroad. It would be large enough to purchase Apple Inc., Google parent Alphabet Inc., Microsoft Corp. and Berkshire Hathaway Inc. — the world’s four largest publicly owned companies.
PIF ultimately intends to increase the proportion of foreign investments to 50 per cent from the fund by 2020 from 5 per cent now, said Yasir Alrumayyan, secretary-general from the fund’s board.
The blueprint for structural change follows a series of measures last year to curb spending and stop the budget deficit from exceeding 15 percent of gdp. After December, authorities raised the costs of fuel and electricity and pledged to end wasteful budget spending after oil prices plunged.
More will follow those “quick fixes” as part of a “National Transformation Plan” to become announced within a month, including steps to boost non-oil revenue steadily through various measures including fees and value-added taxes.
“We’re working on increasing the efficiency of spending,” said Prince Mohammed, who is second-in-line towards the throne. The government used to spend as much as 40 percent more than allocated in its budget which was whittled to 12 percent in 2015, he explained. “And so i don’t think that we have a real problem when it comes to low oil prices.”
Too Late?
The question is if the reaction to the greater than halving within the price of a barrel of crude has come past too far, especially given the Saudi influence within the oil market. The country will only freeze output if Iran along with other major producers achieve this, the prince said.
An International Monetary Fund study in 2014 noted there were “many types of failure” by countries attempting to reduce reliance on energy production and few successes. Gulf Arab monarchies might have missed their best chance when oil prices were above US$100 a barrel rather than about US$40 now.
“It is clear Saudi Arabia must reform, diversify, and re-energize its economy, but this calls for not only increasing investments in non-oil industries,” said Paul Sullivan, a professor of security studies at Georgetown University in Washington. “One cannot order economic reforms like a multiple course dinner.”
Taking Control
Prince Mohammed has consolidated more power than anyone in the position because the founding from the kingdom in 1932. His attempt to change the economy comes against the backdrop of mounting domestic security threats and regional turmoil, using the Sunni-ruled kingdom fighting a war in Yemen against Shiite rebels it says are backed by Iran.
As Defense Minister, Prince Mohammed leads the military effort. Also, he oversees ministries including finance, oil and the economy with the Council for Economic and Development Affairs. The council, that was established after his father became king, also controls the Public Investment Fund.
More Casual
Appearing casually in a white robe, but with no traditional Saudi headdress, the prince sat within an office adorned with posters of King Abdulaziz Al Saud, the founding father of Saudi Arabia, King Salman and Crown Prince Muhammad Bin Nayef.
He said the wealth fund already holds stakes in companies including Saudi Basic Industries Corp., the world’s second- biggest chemicals manufacturer, and National Commercial Bank, the kingdom’s largest lender.
The fund looks at “two opportunities outside Saudi Arabia” in the financial industry, the prince said, declining to name the potential acquisition targets. “I believe that we’ll conclude a minumum of one of these.”
It has started to become more active abroad. In July, PIF acquired a 38 percent stake in South Korea’s Posco Engineering & Construction Co. for US$1.1 billion and also the same month decided to a US$10 billion partnership to invest in Russia with the Russian Direct Investment Fund.
‘Aggressive’ Plan
The fund continues to be hiring specialists for markets, private equity and risk management, said Alrumayyan, PIF’s secretary- general and a former chief of Credit Agricole SA-backed Saudi Fransi Capital.
“We’re working now on several fronts,” he explained. “The government is transferring a number of its assets, lands, some of the companies to all of us. We have different projects in tourism as well as in new industries that are untapped in Saudi.”
Over a multiple-course dinner with the prince and several top Saudi officials, he described the overseas investment plan as “very aggressive,” though said PIF would initially be skewed toward domestic assets by the inclusion of Aramco.
“Undoubtedly, it will be the biggest fund on Earth,” the prince said. “This will happen when Aramco goes public.”
Bloomberg.com
