The stock market flotation of the state-owned Saudi oil company Saudi Aramco is one of the central projects of Crown Prince Mohamed Bin Salman’s (MBS) “Vision 2030”. While the public debate focuses on the question of the real value of the company, the possible effects on Saudi Arabia's national budget are almost entirely ignored. This is all the more remarkable because Saudi Aramco has been the country’s most important source of income. The oil giant has the exclusive right to develop and sell the country’s oil reserves. And according to the public budget statement for the fiscal year 2019, the Saudi state’s oil revenues of nearly $180 billion in 2018 accounted for around 68 percent of total state revenues.
So far, Aramco has contributed to the state budget in the form of royalties, taxes, and dividends transferred to the treasury. In the past, this transfer mechanism was not particularly transparent. In 2017, however, in preparation for the IPO, a royal decree massively reduced Aramco’s income tax. As a result, dividend payments became much more important for the treasury. Whereas in 2016, the company paid only $3 billion to the state, in 2018, the dividend payments totaled $58 billion. Even more, the dividend payout is expected to increase even further. In 2020, the company plans to pay a base dividend of $75 billion. For private investors it will be guaranteed that the dividend per share won’t fall until 2024.
The IPO now has two effects on public finances. First, the sale of shares generates one-off income for the state. The proceeds of the IPO will be transferred to the Saudi sovereign wealth fund (SWF), the PIF, which is headed by none other than Crown Prince Bin Salman himself. Second, the state permanently loses part of the company’s dividend inflows. With the sale of 1.5 percent of the company's shares in the announced IPO, 1.5 percent of the dividend will perma-nently go to the new shareholders (for example, a dividend amount of $75 billion would only yield $1.125 billion). Such a percentage is a negligible figure compared to the government revenue forecast of $222 billion for 2020.
The revenue shortfall for the public budget could, however, be significantly higher in the future if the Saudi government sells any more parts of Aramco or – more important – if it implements another announcement of Vision 2030. In fact, the Saudi Aramco’s IPO is only one of two measures MBS proclaimed regarding Saudi Arabia’s state oil company. The Vision stipulates the transfer of Aramco’s ownership to the PIF, which would thereby become the largest sovereign wealth fund in the world. That such a transfer is still on the political agenda is more than obvious. At the beginning of September, the government appointed Yasser al-Rumayyan, the governor of the PIF, as chairman of Aramco.
The change of ownership within the state could have major consequences for the company’s dividend flows. So far, the Saudi Aramco Supreme Council, chaired by MBS, has controlled the company. He also acts as the representative of the only shareholder: the government of the Kingdom of Saudi Arabia. Whether this is formally the state or the king remains somewhat vague, and ultimately, this is immaterial in an absolute monarchy like Saudi Arabia. In any case, the dividend payments appear to have been made directly to the treasury (the Ministry of Finance). After an ownership transfer, future dividends must be paid to the SWF first, rather than automatically to the public budget. Such a stipulation would initially cause a massive loss of revenue for the treasury. Based on the figures for 2018, the budget could lose a quarter of its revenue (public revenues were $239 billion, and dividend payments totaled $58 billion).
So far, there is no indication that the PIF will transfer its revenues to the state budget. On the contrary, the Saudi finance minister said that the PIF’s investment policy is medium and long-term oriented; therefore, short-term revenues for the state budget are not to be expected. In fact, financial flows in recent years have gone in the opposite direction. The PIF has received significant financial transfers from the state, including funds from the central bank. Today, it could have more than $300 billion in assets, and with the proceeds of the Aramco IPO, it could reach its $400 billion target for 2020. However, the transfer of Aramco ownership may add a new dimension. The PIF could have a regular, predictable source of income through which it could not only make public investments but also take over state transfer payments or finance the budgets of entire ministries. As a result, the SWF could constitute a real parallel budget.
It could be argued that this is all merely a redistribution of financial assets and flows within the state and, therefore, only an accounting effect. Only a small part of the Aramco dividend payment would be permanently lost. IPO proceeds, which the PIF could invest profitably, would offset the low dividend payment. It could be further argued that whether the bulk of the dividend would be transferred to the PIF instead of the public budget does not matter: the government and, in effect, the Saudi king control both. However, the expansion of the PIF into a parallel budget is a highly concerning challenge for effective fiscal management and accountability at the national level.
The SWF is even less transparent than the public budget, which has improved in this respect in recent years. This has also been noted by the IMF, which described the SWF’s disclosure praxis in its most recent country report as still limited, even in comparison to other sovereign wealth funds. Furthermore, by expanding the PIF at the expense of the real state budget, the existing public policy crisis is growing. The PIF’s investment behavior supports the topdown policy-making approach of Vision 2030, which bypasses formal state institutions by relying primarily on foreign consultants. Investment projects are planned accordingly on the drawing board, circumventing a lengthy but necessary policy process. Such a shortcut leads to urban mega projects like Neom city, whose public benefit is at least questionable.
In the end, the expansion of the PIF into a parallel budget, which the Aramco IPO will further boost, could, above all, benefit Crown Prince Bin Salman himself. He could keep his Vision 2030 promises and make the public budget more transparent according to international standards. At the same time, he could exempt a large part of the financial resources of the state from these reforms and keep them under his personal control. With this direct access to a considerable portion of state revenues, MBS would have an important tool for political power consolidation. He could thereby secure the loyalty of strategically important groups, such as the security establishment, which will be of particular importance if Vision 2030’s development goals for the Kingdom fail to materialize.
Stephan Roll is a researcher with the German Institute for International and Security Affairs (SWP) in Berlin. Follow him on Twitter @swp_mea.