The leadership of Saudi Arabia (the “KSA”) has embarked on a bold transformation strategy to revitalize KSA’s economy and to position it for the demographic and economic challenges that lie ahead. The flagship transaction for the strategy appears to be the proposed IPO of Saudi Aramco, however there will be few parts of the KSA economy unaffected by the forecast changes.
The strategy is known as the National Transformation Plan (the “NTP”) and has been introduced by the new leadership to improve economic efficiencies, create jobs and increase participation by KSA nationals in the private sector, as well as to encourage foreign investment. One aspect of the NTP comprises an ambitious plan to raise up to US$200 billion through a privatization strategy for government assets. The KSA’s leadership intends to implement this plan under the auspices of a National Centre for Privatization, which will be established under the Ministry of Economy and Planning. The strategy creates a once-in-a-generation opportunity for both foreigners and locals alike to invest in a wide range of KSA infrastructure, including airports, healthcare, education, grain milling, sports clubs, energy/electricity, oil and gas, postal services and desalinization. Some 16 sectors are slated for some form of privatization process over the next few years.
The main aims of the privatization are to raise money for national projects, encourage efficiency, improve customer service, increase employee engagement and generally develop the KSA economy while reducing reliance on the public sector. The vast majority of employees in the KSA’s private sector are expatriates. One of the aims of the privatization program is to change this and increase KSA national participation in this sector to up to 50% in the next few years.
KSA ministries are readying themselves for the process and the Public Investment Fund is expected to play a key role in holding government stakes and providing investment funding for key projects in participation with the private sector.
In some cases it is not clear what form the privatization will take and there is no privatization law as yet to guide us. Much will depend on the nature of the asset, the market it services and its strategic importance to the KSA economy. The Government has indicated a willingness to consider transaction structures to encourage all types of bidders, from private equity to foreigners interested in buying out 100% of assets.
There are indications that the process will be tailored to suit the nature of the particular asset. In some cases the process is already underway:
- The state-owned oil company, Saudi Aramco is expected to be partially privatized via an IPO, although only a 5% stake will be sold.
- Public/private partnerships seem likely in parts of the healthcare sector where the government is required to act as regulator and keep a measure of control given the critical nature of the services to be provided.
- Certain key airports will be corporatized prior to being privatized, with foreign investment actively encouraged and local ownership strictly limited.
- Saudia is selling off its medical services business outright and buyers have been sought.
- Saudi Electricity Company is looking at potentially breaking up its generation business and creating competition among newly formed suppliers. These suppliers may then be listed and/or have stakes in them sold to foreign entities. Separate transmission and distribution companies may be created, similar to what has occurred in other markets.
This is just the beginning. The program will provide unprecedented opportunities for investors to invest in a wealthy country with a long history of stability.
Whilst there are opportunities, there are also challenges:
- In some cases, accessing detailed legal, financial and market information to enable accurate valuations of assets to be sold off could be difficult. Valuing the asset is a critical part of the process for a foreign investor. There is already significant debate as to the appropriate valuation for Saudi Aramco, for example, and how realistic government valuations of assets will be generally.
- Unless enabling legislation permits otherwise, for non-Gulf Cooperation Council ("GCC") companies, obtaining approval from the foreign investment regulator, the Saudi Arabian General Investment Authority, to invest in the KSA can be a lengthy process.
- The enforcement of rights against Saudi government entities can be complicated, and it will be interesting to see: the dispute resolution mechanisms which emerge to regulate disputes between the government and the buyer; the extent to which the Saudi Arbitration Law applies; and the extent to which government is prepared to allow arbitration outside of the KSA in the event of a dispute arising.
- Meeting Saudization requirements in respect of the employment of KSA nationals will also be tricky. The government will be keen to ensure nationals are major beneficiaries of the privatization process.
- Careful attention will be needed when interpreting relatively new laws, such as the Competition Regulations, and how they will apply to any asset acquired and the business it conducts.
- Companies must adhere to a tax system which applies differently to foreigners and GCC nationals, and deal with the introduction of a new value added tax law from January 1, 2018.
- Sensitivity will be required with regard to managing the issues related to the acquisition of previously state-owned assets and the expectations of the local population as to the quality and pricing of services.
In the end, it all comes down to a risk vs return analysis for foreign investors. Are the returns sufficient to warrant taking the various risks? Given that a number of large local and regional companies are already actively gearing up to participate in the privatization process, and assuming there is no change to the geopolitical situation and the global economy, these Saudi assets, subject of a once-in-a-generation opportunity, are sure to attract a lot of attention.