Riyadh faces challenges in preparing for Saudi Aramco IPO
The government of Saudi Arabia has taken substantive steps to entice potential investors to participate in the much-anticipated initial public offering (IPO) of state crown jewel Saudi Aramco. At the same time, Riyadh is being told that it must be far more transparent in opening its books and governance policies in advance of the limited sale of Saudi Aramco shares and warned that the kingdom’s larger economic reform plan was likely to fail to meet its ambitious objectives.
Questions remain about the exact valuation of Saudi Aramco, which will have a profound effect on how much the kingdom realises from its proposed sale of up to 5% of the company in 2018. The Saudi government has put Saudi Aramco’s valuation at $2 trillion, which theoretically would generate as much as $100 billion for the kingdom.
However, estimates by industry analysts vary widely: Energy consultancy Wood Mackenzie suggested a valuation of $400 billion and other estimates range from $800 billion-$1.5 trillion.
Saudi Aramco has pledged to provide investors with 2015 and 2016 financial statements as well as preliminary 2017 data ahead of the IPO. The Saudi government is working to separate key aspects of Saudi Aramco’s finances from the government by assuming some liabilities that the state energy giant has been carrying on its books for years.
One such measure involves moving long-standing debts Saudi Aramco holds from foreign governments such as Jordan and Iraq onto the government’s books, while the Saudi Finance Ministry will assume payments owed to Saudi Aramco from other state enterprises, including Saudia Airlines and Saudi Electricity.
The government plans to establish a mechanism by which Saudi Aramco would receive compensation through tax deductions for the financial burden it bears in subsidising domestic fuels. In March, Saudi King Salman bin Abdulaziz Al Saud issued a decree cutting the corporate tax rate for the state oil firm from 85% to 50%, a significant step in boosting Saudi Aramco’s market value and generating higher dividends to future shareholders.
The stakes for a successful limited sale of Saudi Aramco are particularly high for newly minted Saudi Crown Prince Mohammed bin Salman bin Abdulaziz, who has made the IPO the linchpin of the kingdom’s economic restructuring and his Saudi Vision 2030 blueprint. Proceeds from the sale are to be fed into the kingdom’s sovereign wealth fund — the Public Investment Fund (PIF) — and invested in non-oil sectors at home and abroad, including public infrastructure, manufacturing and technology ventures.
London-based consultancy Capital Economics (CE) reported in June that expectations for Vision 2030 to fundamentally transform Saudi Arabia’s economy should be tempered, based on implementation challenges and because the government will not be addressing important factors, including non-oil exports, a radical reform in Saudi education and narrowing the wage gap between Saudi nationals and migrant workers. “The result is that Vision 2030 is likely to fall short of its lofty intentions,” CE stated.
The consultancy also noted that while Crown Prince Mohammed’s recent elevation to next in line for the Saudi throne would help advance some economic reforms, the Saudi government will face resistance from other members of the royal family with vested interests, as well as from the religious establishment, the civil service community and influential merchant families.
On another front, a New York-based non-profit organisation, the National Resource Governance Institute (NRGI), recommended that Saudi Aramco disclose key financial and operational data that have traditionally been kept under wraps. NRGI said: “One weakness is its [Saudi Aramco’s] opacity — if authorities in Saudi Arabia wish to sell shares of the company in equity markets, greater transparency may be necessary.”
In a June 28 NRGI study of 74 extractive sector state-owned enterprises examined for the quality of their disclosures and corporate governance, Saudi Aramco was one of 14 firms deemed to have “failing” governance.
“Valuation of the share offering would be better informed if Saudi Aramco increased the transparency of its finances and operations,” NRGI said. “The company does not publish annual reports with comprehensive financial statements or information about rules and practices governing its oil sales; the Saudi royal family is deeply intertwined with management of the company.”
Crown Prince Mohammed said on state television in May that decisions about Saudi oil and gas production and investments would stay firmly in the hands of the government after the IPO. Saudi Aramco is having a rare independent audit conducted of its oil reserves — a crucial component in the analysis of the company’s valuation — though the firm declared in March that its recoverable crude oil and condensate reserves totalled 260.8 billion barrels at the end of 2016, largely unchanged from 2015’s 261.1 billion barrels.