With $300bn on the table, Saudi Arabia gets ready for sale of the century

As bankers and business execs home in on Riyadh this week for the annual Euromoney Saudi Arabia Conference, they have before them a glittering prize — $200 billion worth of privatization deals to be won and executed in one of the biggest state sell-offs in history.

You have to go back to the British privatization program of the 1980s, or the great sell-off of assets by the former Soviet states in the 1990s, to find a program of comparable magnitude and significance.

As if to whet the appetite of the financiers and advisers heading to the Saudi capital, Mohammed Al-Tuwaijri, the minister for economy and planning, has offered a kind of menu of the delights in store for them.

The minister told Reuters that he had prepared a detailed series of studies of valuations and market demand for the great sell-off to come over the next few years, as part of the National Transformation Program (NTP) 2020 and Vision 2030 strategy.

It amounts to a smorgasbord of corporate assets for their delectation: Health care, sports facilities, electricity generation, water provision and grain silos. Among the first of the assets on offer will be one of the country’s top medical institutions, the King Faisal Specialist Hospital and Research Centre (KFSHRC) in Riyadh, the minister said.

And, of course, Saudi Aramco, which is on course for an initial public offering (IPO) next year, according to official statements.

It should be noted that the $200 billion tag Al-Tuwaijri put on the asset sale excludes the value of up to $100 billion hoped for from Aramco. With a total value of $300 billion, the privatization program will be worth nearly half of the Kingdom’s gross domestic product (GDP).

Al-Tuwaijri stressed that the process is very well advanced. “This year, we have a crystal-clear idea of market demand size, valuation, financial advisers, the appetite locally and globally, cash flow certainty, government off-takes, structure. That is all done,” he told Reuters.

Spirit of entrepreneurship

If Saudi Arabia gets this right, it will transform the economy, business culture and society of the Kingdom in a profound way by putting large parts of its corporate structure in private hands, hopefully igniting a spirit of entrepreneurship for the young generation who are its future, and bridging the gaps in state finance that have been opened up by the fall in the oil price.

It would also go a long way toward achieving the goal of reducing dependency on the oil economy, which is the overriding goal of the Kingdom’s economic policy.  

So what could possibly go wrong? That will be the subject of much debate at the Euromoney gathering, which is held under the theme: “2030: Delivering the Vision.” You should not underestimate the extent of the delivery challenge, which Al-Tuwaijri himself conceded to Reuters. It is comparatively easy to draw up grandiose strategies, especially with an army of expert consultants as the Kingdom has employed, but the execution and implementation are more difficult. With enterprises in 16 sectors earmarked for privatization by 2020, some deals would be difficult and complex, he warned.

But he said that Saudi Arabia would be flexible in choosing structures that potential buyers wanted, like IPOs, private placement of shares and private equity transactions. These are in addition to the full panoply of public-private-partnership transactions in which the state shares investment costs — as well as risks and potential profits — with the private sector.

The Euromoney agenda has identified three challenges to achieving the great transformation: Sustained low oil prices; liquidity issues; and continued regional instability. Each is formidable.

The oil price will continue to be the key economic variable even as the Kingdom advances the diversification program. The US has emerged as the main threat to a recovery in oil prices, with its shale producers expanding at a rate that was not supposed to be possible at $50 a barrel.

Just last week, President Donald Trump announced he was freeing deep-sea exploration from regulatory shackles, in a clear sign that America is looking to further expand oil production in its own backyard. Neither of those is positive for the oil price, despite Saudi Arabia’s ongoing commitment to production limits.

Liquidity is also a serious issue. The Saudi stock market, Tadawul, had a market capitalization of about $400 billion in the first quarter of this year, so the privatization program will be a huge bite for it to swallow and digest. It is no surprise that the Kingdom’s policymakers are looking for help from foreign exchanges in the great sell-off.

Regional insecurity goes with the turf in the Middle East. President Trump’s comments last week that some countries in the region were not being “fair” to the US in military spending was bizarre and incongruous from an administration that has been broadly welcomed in the region as a bulwark against terrorism and Iranian expansion. There will always be a significant risk factor in regional markets and global investors will have to learn to live with that.

The financiers at Euromoney will have all those reservations in mind, but their main focus will be the enormous opportunities available in Saudi Arabia’s sale of the century.