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 Building the Public Investment Fund (PIF) into "the largest fund in
the world by far" is a cornerstone of radical economic reforms
announced by Deputy Crown Prince Mohammed bin Salman last month to
cut the kingdom's reliance on oil.
The PIF, founded in 1971 to finance development projects in Saudi
Arabia and until now little known abroad, is to grow from 600
billion riyals ($160 billion) to over 7 trillion riyals, helping
make Riyadh a global "investment power", he said. The biggest
sovereign fund so far is Norway's, worth $852 billion.
"There will be no investment, movement or development in any region
of the world without the vote of the Saudi sovereign fund," Prince
Mohammed told Al Arabiya television.
Under the plan, Saudi Arabia would partly live off returns earned on
the PIF's foreign investments, which would help offset Riyadh's loss
of oil revenues due to low crude prices.
But the PIF is also being pressed into service for a second purpose:
it is to use its money to revitalize the Saudi economy and create
jobs by developing new industries and pushing through stalled
multi-billion dollar development projects.
The PIF will "help unlock strategic sectors requiring intensive
capital inputs. This will contribute toward developing entirely new
economic sectors and establishing durable national corporations,"
the reform plan reads.
For example, the government will transfer ownership of Riyadh’s
floundering King Abdullah Financial District to the PIF, sources
told Reuters.
The PIF may also get involved in areas such as mining, shipbuilding
and developing six industrial cities. The government says it is
examining ways to salvage the industrial city scheme, plagued for a
decade by delays and a lack of enthusiasm among potential tenants.
The result, say bankers and consultants familiar with Saudi official
thinking, is that in the initial years at least, the PIF's resources
and management attention are likely to focus more on domestic
projects than foreign markets. The PIF did not respond to requests
for comment.
Sven Behrendt, head of German consultancy GeoEconomica, said the
PIF's foreign role, where it would face pressure to maximize returns
by taking risks, would contrast with its domestic role as a
strategic investor, where returns would be secondary as projects
could not be allowed to fail for political reasons.
“If you look around the world, you will see there are only a few
funds that have this double mandate. Usually it’s one or the other.
"The two approaches require different investment philosophies –
different capabilities, different management skills and different
evaluation criteria...It’s difficult to square."
ASSETS
Bankers and consultants in touch with the PIF say the fund, under
new secretary-general Yasir al-Rumayyan, a former chief executive of
Saudi Fransi Capital, is still designing its new operations and
structure, while looking to hire managers within the kingdom and
abroad.
To build up the fund, the government has been transferring corporate
assets and land to it, including ownership of state oil giant Saudi
Aramco. But that simply makes the PIF a large holding company rather
than a fund that can funnel large sums into new investments.
A total of $579 billion in net foreign assets held by Saudi Arabia's
central bank (SAMA), which has traditionally served as Riyadh's
sovereign fund, will not be transferred to the PIF, the sources
said.
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So to raise money that the PIF can reinvest, Riyadh plans to sell shares in PIF
companies over coming years - a complex process that will depend on the appetite
of foreign investors for Saudi assets in an era of cheap oil.
The sales will include up to 5 percent of Aramco; Prince Mohammed estimated the
company was worth over $2 trillion, implying the offer could raise $100 billion.
A number of bankers and consultants are skeptical of that figure, however,
saying it will depend on factors such as Aramco's dividend policy, political
risk and willingness to disclose sensitive information to investors.
Some analysis suggests all of Aramco might have a market value of $250-460
billion, excluding the value of refining assets and guaranteed access to oil,
said Washington-based consultancy Foreign Reports.
In any case, the PIF looks set to have much less than $2 trillion to play with
in global markets for the foreseeable future, limiting its contribution to Saudi
state finances.
Norway's sovereign fund returned an average 5.6 percent in 1998-2015, before
costs and inflation. Earning that on $100 billion raised from selling Aramco
shares would deliver about $5 billion annually - not much against a state budget
deficit near $100 billion.
Shanker Singham, head of British-based consultancy Competere, said the PIF might
successfully imitate Singapore’s Temasek, which in addition to investing abroad
has played a strategic role in the economy by managing major state assets.
“The fund could achieve substantial returns by investing in commercial projects
at an early stage when no commercial investor can go in," he said. “It could use
its money to make unbankable projects bankable.”
The PIF might also try to make foreign investments that secured expertise or
market access for projects in Saudi Arabia. For example, it might buy a stake in
a foreign mining firm to support the reform plan's emphasis on growing the
mining sector.
But if the PIF is deployed for Saudi geopolitical ends – for example, to try to
win commercial or political influence abroad, it could hurt its ability to make
money, Singham added.
Saudi officials say investment decisions are made on exclusively commercial
grounds.
(Additional reporting by Hadeel Al Sayegh and David French; editing by Philippa
Fletcher)
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