May 01, 2016

The beginning of the road for Saudi Arabia

New tower under construction in Saudi capital Riyadh

WASHINGTON - The announcement of Saudi Arabia’s adoption of a National Transforma­tion Plan (NTP), dubbed “Saudi Vision 2030”, can certainly be applauded for its bold economic goals.
Indeed, according to Vision 2030’s chief architect, Saudi Dep­uty Crown Prince Mohammed bin Salman bin Abdulaziz, implemen­tation of the plan would enable the kingdom to “live without oil” with­in five years, in part by channelling profits from the partial sale of state oil giant Saudi Aramco into a newly created public investment fund.
Meeting that goal by 2020 would be an admirable, if not incredible, achievement, given that as much as 80% of the Gulf country’s rev­enues have traditionally derived from oil sales. If Saudi Vision 2030 is put in place in anywhere close to the time frame suggested by the deputy crown prince, it would be a remarkable departure for a gov­ernment that has long earned the reputation for being conservative and cautious in adopting reform of any kind — be it political, social or economic.
Deputy Crown Prince Salman noted that “2015 was the year of the quick fix; 2016 is the year of the more organised quick fix, and 2017 will be the year the Vision begins”. But the grand scope of shifting the economy from oil-based to one that will be built on the success of a giant sovereign wealth fund that is initially fed by the limited sale of the country’s crown economic jewel would prove challenging in any given time frame, let alone the abbreviated one being promoted.
Even if the regime had the full backing of the rest of the royal fam­ily, the religious establishment and key merchant families for all of its plans to meet their target dates, a lot of economic restructuring needs to take place quickly without being bogged down by red tape. And the Saudi government must take into account the potential for domestic backlash along the way.
Case in point: The dramatic cuts to energy and utility subsidies that were instituted in late 2015 have had a mixed reception within the kingdom. The mounting public outcry over large increases in wa­ter prices and subsequent billing errors that resulted in many cus­tomers being grossly overcharged led King Salman bin Abdulaziz Al Saud to fire Water and Electricity Minister Abdullah al-Hussayen on April 23rd and temporarily replace him with Agriculture Minister Ab­del Rahman al-Fadli.
This should be an instructive les­son for the Saudi government in what happens when you move too quickly on policy changes and fail to implement them correctly. The leadership should be mindful that a citizenry with other state-provid­ed amenities that may also be taxed soon will be holding government of­ficials more accountable and will let the regime know when it has made a serious misstep.
Deputy Crown Prince Salman made it clear in an interview with the New York Times last November that streamlining how the govern­ment functions as part of the eco­nomic reforms is critical to fighting corruption, an issue he indicated was “one of our main challenges”. With any profitable state entity be­ing privatised, there runs the risk of corruption unless appropriate mechanisms are put in place. The listing of up to 5% of Saudi Aram­co and offerings in its subsidiaries on stock exchanges in Riyadh and New York must be conducted with­out any question of impropriety.
Perhaps mindful of the concerns that potential investors may have about the Saudi Aramco initial pub­lic offering (IPO), Deputy Crown Prince Salman noted in a television interview that “Aramco’s listing has many benefits, the most important and before everything is transpar­ency… It will be under the supervi­sion of all Saudi banks, all analysts, all Saudi bankers. Even more, all international banks and research and planning centres in the world will monitor it extensively.”
Transparency, however, has never been the Saudi government’s strong suit and that is where there could be stumbling blocks in regard to a Saudi Aramco IPO. The state oil firm has never disclosed standard financial figures, such as annual revenue, profit or debt and would be forced to open its books and be forthcoming with that detailed in­formation to potential investors.
Deputy Crown Prince Salman has insisted that the IPO for Saudi Ara­mco would not involve excluding the company’s most profitable oil production operations. It is unclear if this will indeed be the case when the IPO is eventually announced. If those upstream operations end up off limits, it will be fascinating to see how much the firm is then val­ued when it lists its shares.
As ambitious as the goals of Saudi Vision 2030 are, it is unre­alistic to expect Saudi Arabia to “live without oil” by 2020, as opti­mistically projected by the deputy crown prince. Perhaps 2030 is even a stretch. Despite the inevitable failures and miscalculations, how­ever, the road to real change has to begin somewhere.

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