Rashid Husain Syed is a journalist, energy analyst and consultant based in Riyadh and Toronto. For almost 25 years, he has served as vice-president of a leading Saudi trading and consulting house.
In a bid to diversify the Saudi economy away from the vagaries of crude markets, Riyadh on Monday unveiled plans to create the world's largest sovereign wealth fund. The fund will invest in assets overseas, generating a regular earnings stream for the kingdom. "So within 20 years, we will be an economy or state that doesn't depend mainly on oil," Deputy Crown Prince Mohammed bin Salman, dubbed as Mr. Everything in Riyadh diplomatic circles, underlined while unveiling the blueprint "Vision 2030" for the kingdom.
Yet, the 31-year-old is already impatient. He can't wait that long. "I think by 2020, if oil stops, we can survive. We will not allow our country ever to be at the mercy of commodity price volatility or external markets," he told journalists invited to his palace in Riyadh for his maiden press conference.
Saudi Arabia intends to raise the capital of its Public Investment Fund (PIF) to $2-trillion (U.S.). The source of funds for the PIF, the Prince clarified, "would come partially from transferring the ownership of the state-owned oil company, Saudi Aramco, to the PIF."
Saudi Aramco is the world's largest and most integrated oil company. It boasts proven reserves of 263 billion barrels of crude oil. Selling even 1 per cent of its value would create the biggest initial public offering (IPO) on earth, the Prince pointed out. And the amount could go up further with the listing of Aramco subsidiary companies and other publicly-held companies. All this could turn the PIF "into a global investment fund with a size of up to $3-trillion," the Prince asserted.
There is a catch, however.
Aramco has traditionally been wary of sharing details about the company or about the quality of its upstream assets. In case of an IPO, all this would have to change. Aramco would need to have an elected board and be subject to the scrutiny of analysts and investors at home and overseas. And Riyadh seems aware of this. "People used to be unhappy that files and data of Aramco are undeclared, unclear and not transparent. Today they will be transparent. If Aramco gets IPO-ed, that means it has to announce its statements of accounts," the Prince conceded.
It is clear that Riyadh senses the changing global energy scenario. It needs to wean Saudi Arabia off the oil curse by switching the economy from petrodollars to income based on investments. "Vision 2030" also envisages the raising of non-oil revenue to $160-billion by 2020 and $267-billion by 2030, from $43.6-billion last year. The government also intends to generate another $100-billion from levies on sales of such things as luxury goods and sugary drinks, among other measures.
Sweeping fiscal reform – including the cutting of unnecessary expenses – is also on the cards. Already last year, Prince Salman, who leads the government's Council of Economic and Development Affairs, cut the state budget and restarted strict controls on spending. One of his advisers told Bloomberg that "inefficient spending" in previous years had resulted in a quarter of the kingdom's entire budget going to waste every year.
Riyadh reportedly spent some $1.25-billion this year on consultants working on the transformation project. That sum has not blunted the skeptics. The IMF has called the plan an "ambitious, far-reaching effort," and noted that how it is implemented will be the key. "I hear the words but question how it will be translated into action. There has been a lack of delivery in Saudi Arabia in the past," Reuters said, quoting a senior foreign banker in the kingdom.
Return on investments will certainly fluctuate and, at times, could be insufficient to meet the fiscal needs of the kingdom. Some analysts fear that dividends from these investments will never be enough to fund a significant portion of government operations.
Furthermore, the social and political reforms associated with the transformation away from oil could be painful and Riyadh may be entering a minefield. In December, 2015, while the reform project was still being developed, the kingdom took the first step towards raising the domestic prices of fuel, water and electricity. In a country where the population is accustomed to cheap utilities and no taxes, these changes have been hard to swallow. The sudden rise in water prices, for instance (and billing mistakes that resulted in exorbitant charges for some), prompted a widespread backlash. Such was the furor, that over the weekend, King Salman had to fire his minister of water and energy, Abdullah al-Hussayen, for not handling the rise in utility charges properly.
The political picture remains hazy, too. Can Prince bin Salman's vision be trusted as the will of the Saudi royal family? Are other royals in comfortable with Prince Salman taking the lead? Big questions, indeed.
Much is at stake – including the rising political career of Prince Salman.