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Why Saudi Reforms Matter For British Businesses – Analysis

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Announcing that it will be selling 5% of state-owned company Aramco, the Saudi government’s partial privatisation of the world’s largest and most secretive company has revealed an unprecedented opportunity for foreign investors in general and British companies in particular. Expected to be the biggest IPO in history (dwarfing Alibaba’s $25 billion IPO in 2014), it forms the centrepiece of a widely publicised Saudi plan to open up its tightly controlled domestic industries to attract foreign funding. With the expected windfall, the oil-dependent kingdom plans to diversify its economy by creating the world’s largest sovereign wealth fund.

Although its value is unknown (primarily because it releases no earnings reports), Aramco is known to be the largest company in the world. Sitting on 260 billion barrels of oil, Aramco´s daily output is equivalent to that of the 10 biggest US producers combined. Considering Saudi oil production has been the wholly owned preserve of the House of Saud for the past 80 years, many investors are excited by the prospect of grabbing a piece of the mammoth corporation. The decision to bring Aramco on to the market gradually (starting with the initial 5% offering) has also been supported by market analysts, as a larger offering would likely glut the market. Even still, the Aramco news is a sign of changing times in terms of both the world energy market and the internal politics of the Kingdom.

The sale of 5% of Aramco should be enough to push the Saudi Public Investment Fund towards the expected $2 trillion mark – large enough to buy Apple, Google’s Alphabet, Microsoft, Berkshire Hathaway and then some. While the fund might have the cash on hand to make such landmark purchases, the order of the day in Riyadh is diversification – particularly as the current push for economic reform is the result of the crash in global oil prices, which Saudi Arabia had relied on for historic profits over the past decade. Since the height of the oil boom, London has been a popular destination for Saudi investors looking to acquire assets, particularly in real estate. The Manafea Holding Company, for example, acquired properties on King William Street for £65 million in 2012 and at 3 Bunhill Row for £80 million in 2011.

Indicative of how quickly the tide is going out on fossil fuels – the mainstay of the Saudi economy – is the fact Norway has announced that it will ban the sale of new petrol cars from 2025. Belgium, Switzerland, and the Netherlands look likely to follow suit by 2030, and there are already calls in London to ban diesel vehicles from the city. These are hardly the world’s largest car markets, but the rest of Europe and the planet could very well follow. In the immediate term, Saudi Arabia is also facing the extreme short-term pressure brought about by the collapse in oil prices. While prices of Brent crude were safely over $100 a barrel in June 2014, they plummeted to less than $30 a barrel this past January and are not expected to recover much in the near future, particularly as Iranian oil re-enters international markets.

The Saudi ruling class, for its part, is well aware of the energy market’s near-term prospects and the precariousness of its own position, especially as it asks its citizens to accept subsidy cuts and other economic reforms. For the Saudi state, diversification is indispensable to long-term economic health. Fortunately, a new generation of Saudi leaders seem to have embraced this challenge wholeheartedly. The death of King Abdullah in 2015 has bumped up a number of younger princes into positions of power, notably Mohammad bin Salman, Deputy Crown Prince to his father Salman (who replaced Abdullah on the throne). The young Prince Mohammad is the driving force behind the country’s recently announced economic reforms, of which the Aramco IPO has been the most widely covered.

In a wide-ranging interview with The Economist, Prince Mohammad spoke about the sale of other states assets, the proceeds of which will be added to those from the Aramco sale to make the Saudi sovereign wealth fund twice the size of the Norway’s (currently the world’s largest). In what could be a telling sign of things to come, the prince welcomed the Economist’s comparison between his reforms and Margaret Thatcher’s economic revolution. A sweeping privatisation project is apparently in the offing in the areas of healthcare, education, transport and others. While they are sure to face stiff competition from American and other companies also present in-country, a few British companies (the Serco Group and construction firm BuroHappold among them) are particularly well-placed to take part in Saudi Arabia’s proposed public-private partnerships.

According to the prince, some $400 billion worth of state-owned assets will be up for grabs over the next few years. For example, Saudi Arabia possesses 6% of the world’s uranium reserves; though currently untapped, these too will be opened up for mining. As the investment fund swells from the proceeds of the sell-off, the expected funds will be used to finance new projects and spin off new companies (resulting in more IPOs). The chemicals, mining, retail and tourism sectors should all be poised to benefit.

The reform programme could be a major development for British businesses. Saudi Arabia is already Britain’s largest trading partner in the Middle East, with over 200 joint projects worth over £12 billion. According to a December report by McKinsey, the Saudi economy has the potential to double in size by 2030. The authors of the study single out eight sectors in particular as potential growth engines: mining and metals, petrochemicals, manufacturing, retail and wholesale trade, tourism and hospitality, healthcare, finance, and construction – all areas in which British companies are poised to invest. As the Saudi government divests assets and streamlines opportunities for foreign investors, British investment in the Kingdom (which already stood at well over £11 billion in 2014) should see ample opportunities to grow.

* Matthew Summers, is an independent financial consultant. Though currently based in London, he previously worked in Dubai and advised international investors interested in Gulf markets.

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