Visions And Misperceptions On The Road To An Aramco IPO

Since Crown Prince Mohammed bin Salman’s (MBS) 2016 announcement of Saudi Vision 2030, commentators and analysts have maligned the plan’s “unrealistic” goals and time lines. Their negative assessment is based on a fundamental misreading of Vision 2030 as a foreordained business plan cast in stone, rather than a preliminary road map designed to send a powerful signal of the Saudi leadership’s clear intent to rigorously pursue comprehensive social and economic reform. Nowhere has this fundamental misunderstanding been more apparent than in Western media’s treatment of the Aramco IPO, which, contrary to prevailing sentiment, has clear and viable alternatives to a public listing on the New York or London exchanges.

Vision 2030 is called a vision because it is conceptual: a broad canvas of goals and aspirations that are intended to guide the reform process. It is also a vision by necessity. Producing a detailed schematic for implementing reform of this magnitude would have required years, not months, to complete. With the days of $100-a-barrel oil long gone, MBS needed a platform to clearly signal the seriousness of his intent and the urgency required to address these long-standing issues. He also needed a mechanism for effectively communicating the breadth and depth of the anticipated transformation to key constituencies like the Saudi bureaucracy, the private sector, and global stakeholders.

From minute one, the Saudi leadership understood that the details of this plan would need to be further developed and calibrated, and elements of it possibly changed or even discarded, in response to new information, market signals, and reactions from key constituencies and stakeholders. Vision 2030 would be nimble and malleable. Nothing would be set in stone. In practice, this meant that not all of the great many projects and plans announced would necessarily be carried out and a few would be left on the drawing board. It also meant that if a project or plan proved misguided or looked like it would fail to deliver as expected, it could be amended, restructured, or even canceled.Executing a plan such as Vision 2030 requires a bold and courageous leadership willing to take the enormous risks necessary to achieve monumental historic change in a short period of time, able to admit mistakes when required and move swiftly to correct them, and prepared to accept occasional failures. The maxim “No risk, no reward” has, perhaps, never been as relevant as it is in Saudi Arabia today under Vision 2030.

This political courage has already been put to the test. When the Saudi government realized that the Ministry of Finance’s attempts to rein in spending by delaying payments to contractors in 2016 was backfiring, it reversed course that autumn. Similarly, when the leadership recognized that an autumn 2016 initiative to slash benefits for civil servants was, in practice, imposing an unsustainable financial burden on the middle and lower middle classes at a time of recession and austerity, they overturned the decision early the following year. In taking these actions, the Saudi government demonstrated not only that it was alert to the deleterious impact of faulty policies but also that it was both willing and able to amend its plans accordingly.This brings us to the case of the Aramco IPO, which was conceived and announced with the same intent as the Vision that had inspired it: to serve as a preliminary road map signaling the leadership’s commitment to dramatically restructure a cornerstone of the Saudi economy. Despite the fact that the details of the IPO’s implementation were open to change, Western media treated a New York or London listing as a fait accompli; the only questions were when the IPO would occur and on which of these two exchanges the shares would be floated.

Had they been asked, experienced investment bankers would have explained that the Aramco announcement constituted a statement of intent, the path being subject to a full exploration of the company’s options. The process of taking any company public starts with the idea and the intent, and then progresses as lawyers, investment bankers, regulators, and the market all provide input to determine the best way forward. It can take years to complete this process for a small enterprise, let alone the largest company on earth.

As I explained in my April 14 article in Forbes, the objective of the Aramco IPO is primarily strategic. First, its announcement was intended to signal the Saudi leadership’s determination to encourage greater transparency across all sectors of the national economy. Since Aramco is the state’s most important and sensitive asset, a transparent Aramco would make it impossible for any other state-owned entity or company to avoid public scrutiny. The rationale here is straightforward: transparency is a prerequisite for generating economic efficiency and encouraging much-needed foreign investment. Second, attaching a value to the Public Investment Fund’s (PIF) largest holding would provide a more accurate picture of the total wealth of the state. A better representation of the state’s assets, which are commonly misunderstood as being equivalent to its liquid foreign reserve holdings, will positively impact the Saudi investment climate.

With a typical IPO, the goal is to generate cash. But this is not a typical IPO. Encouraging investment and efficiency are long-term strategic goals for building a sustainable and diverse economy. Raising cash is not necessary in the short term since the government still holds hundreds of billions of dollars in reserves. In other words, people are misreading government earnestness to pursue the IPO as a desire for a quick liquidity event.

As with Vision 2030, the Aramco announcement was a signal and an intention; the details of the plan and the manner and time line of its execution were always subject to change. Viewing the Aramco IPO in its proper context, one may appreciate why the government has not committed to a set course of action. Listing Aramco on a foreign exchange like London or New York is hardly the only option available. Given the complexities involved in listing such a large government-controlled entity on these exchanges and the potential for heightened exposure to legal risk and shareholder activism, the government’s advisors may conclude that New York and London are not, in fact, their best options.

Recent rumors coupling a direct purchase of Aramco shares by a Chinese entity with a limited public listing on Tadawul (the Saudi stock exchange) indicate an option that may be much better suited to meeting the government’s objectives. Privately placing shares with a major strategic investor like China has the advantage of being simpler, quicker, and less subject to the vagaries of public markets than a public flotation in London or New York. Such a placement would also bring an important external stakeholder onto Aramco’s board of directors, which would also serve as an important “check and balance” for the organization. Finally, this arrangement would cement ties between the world’s largest oil producer and the world’s largest oil consumer, a move that makes tremendous strategic sense for the Kingdom.

Pairing this private placement with a nominal Tadawul listing of 1 percent or 2 percent would achieve the transparency Saudi Arabia needs and simultaneously avoid the potential pitfalls associated with a foreign listing. Initially restricting participation in this local listing to Saudi citizens would give them part ownership of their country’s crown jewel, and issuing these shares at a discount of the perceived value would also serve the purpose of sharing the government’s wealth with the Saudi public. Shares could then be made available to foreign investors in the secondary market. This would generate tremendous interest among global investors in Tadawul, an important strategic objective that would be lost if the Kingdom’s stock market were to share the listing with a foreign exchange.

The Kingdom’s experience with the Saudi Basic Industries Corporation (SABIC), the largest publicly-listed company in the Middle East and one of the largest petrochemical companies on earth, demonstrates the benefits of a local public listing and is an excellent model for Aramco to follow. SABIC, unlike Aramco, has been subject to all the rigors and transparency required by a public listing while the decision to list the company locally has served as a boon to both Tadawul and the national economy. It has been widely acknowledged that this local public approach has paid off for investors, company employees, and the Saudi government, which owns a 70 percent controlling share in SABIC through the PIF.

A combined private placement–Tadawul approach could easily be carried out within the announced 2018 time line. Viewed through the proper lens, such a shift would not constitute a reversal or setback for any of the Crown Prince’s pronouncements; in fact, it would meet the stated objectives of both Vision 2030 and the Aramco IPO very nicely.