Saudi Arabia is on the threshold of a revolution in its financial and equity markets, as it seeks to reduce both oil dependency and the overweening power of the public-sector economy. But revolutions are notoriously difficult to control once they are set in train, and can have unpredictable consequences. Just ask the French, Russians and Iranians.
Of the two aims — lessening the importance of oil and increasing the power of the private sector — the former is the big headline-grabber, but the latter is the more difficult to achieve. If the initial public offering (IPO) of Saudi Aramco is achieved late next year or early 2019, it will be a symbolic but highly significant step toward moving away from oil dependency. Policymakers can tick one big box as “mission accomplished.”
But getting away from the domination of the public sector — much of it funded by oil revenue — will be much more difficult. The private sector still lags way behind as a generator of economic growth and employment, and is still largely dependent on government expenditure for its basic economic activity.
Under Vision 2030, a central part of the transformation is a privatization program that will hand over government-run entities to the private sector via a state sell-off. It has been estimated there is $200 billion worth of state assets that could be privatized, ranging from power generators to schools and hospitals and through to football clubs. It is the biggest and most ambitious privatization program in history.
The Aramco IPO is enormous, global and complicated. But it is a one-off. The rest of the privatization plan will be like scores of mini-Aramcos; some floated on local or international markets; some sold to private equity investors; some privatized via deals with trade buyers.
Though smaller, of course, than Aramco, each has the potential to be problematic. Saudi citizens will want to have some basic questions answered, like why they are being asked to buy something that they already own, via their government?
Or does the sell-off mean that foreigners will end up controlling vital sectors of the Saudi social fabric, like medical and educational facilities? And does the Kingdom have the legal, financial and regulatory infrastructure in place to ensure a fair and transparent sell-off process that will ultimately be profitable for citizens?
These were the kind of questions asked of privatizing governments around the world over decades, and answered with only mixed success.
There are armies of advisers — foreign and Saudi — working on how to answer those questions. Recently, State Street Corp., one of the oldest and biggest financial institutions in the US with $2.45 trillion of assets under management, came up with an idea which seeks to address some of the basic concerns of Saudi citizens as they contemplate their upcoming privatization spree.
State Street is proposing the creation of a “national privatization fund” (NPF) that could be used to implement the state sell-off in a way that would benefit both Saudi citizens, and the government.
It would be either a mutual fund or an exchange-traded fund that would bundle together a cross section of the equity that will be created in privatization, and would be sold to Saudis at a discount to the other parts of the sell-off earmarked for big regional or international investors.
This would help win over doubters among the population, who would see a clear financial benefit, but just as importantly it would have three very significant and desirable knock-on effects.
State Street’s head of policy and research Elliott Hentov said: “First, it would give Saudi citizens a real sense of ownership of the future by mobilizing their capital to be staked on the country’s success. Second, it would help build a new investor class and lay the seeds of a wider retail investor culture. And third, it would symbolize the gradual transition away from a government-dominated economy to one based much more on individual household responsibility, fostering a retirement and savings culture.”
He is right. An NPF arrangement in some form would be an ingenious way of getting buy-in from Saudi citizens to the whole privatization process, and would also help ensure that they make a profit out of it.
Some bank experts in the Kingdom detect a slowing in the pace of the privatization program as the necessary legal and corporate infrastructure proves more difficult to implement that originally envisaged.
Lloyd Blankfein, the chairman of Goldman Sachs, hinted as such when he urged the Saudi government to just “push the button” on the transformation process in September. The NPF concept — which is apparently being considered seriously by Saudi policymakers — would be a relatively easy and cost-effective way to kick-start the biggest sell-off in history.

• Frank Kane is an award-winning business journalist based in Dubai. He can be reached on Twitter @frankkanedubai

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