Aramco may have grabbed the biggest headlines, but the oil giant’s delayed initial public offering is just the latest sign of Saudi Arabia’s slowing privatization push.
The program is part of Crown Prince Mohammed bin Salman’s Saudi Vision 2030 to transform the economy and envisages the sale of stakes in ports, railways, utilities and airports. When the government began to consider the plans almost three years ago, Brent crude traded at less than $40 a barrel.
With oil prices now twice as high, there seems to be less urgency, even though the International Monetary Fund in July recommended privatization be accelerated. News in August that the sale of shares in Saudi Arabian Oil Co. was on hold was the most dramatic suggestion that officials were taking their feet off the pedal.
“It is undeniable that the privatization schedule is running behind what was initially assumed,” said Jean-Paul Pigat, head of research at Dubai-based Lighthouse Research. “I’m not sure there yet exists a coherent long-term strategy that actually finds the proper balance between the roles for the public and private sector in the economy, and until this is formulated, delaying the privatization program might actually be in their best interests.”
Saudi Arabia wants to boost non-oil revenue by selling stakes in state assets, including Aramco, the stock exchange and soccer clubs. It set up the National Center for Privatization in 2017. Privatizations could exceed $350 billion in about five years, Mitsubishi UFJ Financial Group Inc.’s Middle East and North Africa co-head Elyas Algaseer said in August last year. In April, authorities put forward a target of as much as 40 billion riyals by 2020 ($11 billion).
Among proposed transactions yet to be completed are plans to sell a stake in King Khaled International Airport, which are on hold, according to two people familiar with the process. Saudi Arabia’s General Authority of Civil Aviation didn’t respond Wednesday to an emailed request for comment. The sale of the $7.2 billion Ras Al Khair power plant is also yet to be done. BNP Paribas was hired to advise on the deal in September last year.
While the delays aren’t likely to hurt the economy in the short-term, they raise questions about the government’s commitment to reform and whether its targets were realistic. In addition to boosting non-oil revenue, the sale of state assets was seen as a crucial step to reduce the dominant role of the state in an economy long-dependent on public spending to create jobs and generate growth.
Privatization center Chief Executive Officer Turki al Hokail said the body had “completed a large number of significant milestones” over the past 14 months and the program’s inclusion in Vision 2030 and its political, institutional and regulatory backing showed the government’s commitment to the plans. At least 10 projects are underway, he said in response to questions on Sept. 12.
One of the initiatives that is moving forward is the sale of four flour milling companies by Saudi Grains Organization, with a Nov. 30 deadline for bidding qualification applications announced on Sept. 5. Still, that’s three years after the idea was announced, and well past the initial target of end-2016 completion.
The Aramco IPO delay reflects complexities the government faces in opening up the public sector, which suggests that progress in privatization strategy will be gradual, Moody’s Investors Service Inc. said in a report earlier this month.
Steffen Hertog, an associate professor at the London School of Economics, said progress has been slowed by the sheer scale of the program, along with gaps in the legal framework and the lack of corporate structures, separate balance sheets or clear revenue models in some targets.
“Privatization is also made more complex by the fact that the rights of existing Saudi employees will need to be protected and that there are often trade-offs between efficiency, profit and social criteria,” Hertog said. “Public employment is a core plank of the Saudi social contract and it would be politically difficult if privatized entities suddenly started shedding workers.”
Slower privatization may be down to a combination of institutional constraints, concerns over public opposition to the sale state assets, and a reassessment of the eventual benefits from the process, Lighthouse’s Pigat said.
“Most assumptions over the pace and scope of the entire reform process were wildly optimistic to begin with,” he said. “Change in Saudi Arabia has historically occurred at a glacial pace, and while there has undoubtedly been an incredible turnaround and progress in many areas in recent years, expectations need to get recalibrated to a more realistic baseline.”
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