Saudi Arabia is furthering plans to create the world’s largest sovereign wealth fund and use it as a vehicle for driving economic growth, a move that will have a far-reaching impact on regional and global markets, as well as open opportunities for investment.
Unveiled on October 25 the Public Investment Fund (PIF) Programme 2018-20 is a development roadmap which aims to position the PIF as one of the world’s top sovereign wealth funds.
Key objectives of the plan are to increase assets under management from $230bn today to $400bn by 2020 and $2trn by 2030, and achieve average investment returns of 4-5% by 2020, up from the current 3%.
Yasir Al Rumayyan, managing director of the PIF, was more optimistic for the longer term, telling Bloomberg in October that the fund was looking to generate returns of 8-9% per annum by 2025.
In comparison, Norway’s sovereign wealth fund – the largest in the world at a value of $1trn – currently provides an average return of 4%.
The PIF Programme 2018-20 is part of a broader reform package being rolled out by the government, including the National Transformation Programme 2020 and the longer-term Vision 2030, all aimed at diversifying the economy away from its dependence on hydrocarbons and supporting social development.
Another significant element of the plan consists of increasing the PIF’s overseas asset base. Foreign partnerships are projected to account for 25% of assets by 2020, up from the present level of 5%. This represents a major diversification of holdings – one of the key performance indicators of the programme – and will be the principle source in terms of doubling the fund’s assets within the next three years.
This process is already under way, with the PIF having invested $3.5bn in ride-hailing app Uber, committing $20bn to an infrastructure fund being established by US-based equity firm Blackstone and announcing it would undertake investments of up to $10bn in partnership with the Russian Direct Investment Fund.
One of the largest single commitments by the PIF was made in May when the government said it would invest up to $45bn in a new technology fund being developed by SoftBank of Japan. The investment seeks to position Saudi Arabia at the forefront of the information revolution, as the SoftBank Vision Fund is actively targeting investments across the technology sector, including robotics and artificial intelligence.
On October 26 the PIF looked even further afield. Officials announced it would invest $1bn in the space tourism programme of Virgin Group’s Galactic company.
In its efforts to increase offshore asset holdings, the PIF also sees tie-ups with overseas partners as a driving force to attracting foreign direct investment (FDI) to local endeavours, particularly where knowledge transfer is required to localise development of new technologies. Cumulative FDI between 2018 and 2020 is forecast to be SR20bn ($5.3bn), partly driven by foreign partnerships.
Some of the funds required for the PIF’s investment scheme will come from Saudi Arabia’s privatisation programme. A number of industries and state activities are slated for partial or total sale, presenting opportunities for domestic and foreign investors.
Key to this programme is the planned offering of 5% in state oil giant Saudi Aramco, expected in 2018.
Overall, the privatisation programme aims to generate $300bn, according to officials quoted in the media.
Additional resources will be borrowed through the capital markets and raised from the revenue of existing assets being placed back into the fund.
One of the flagship developments backed by the PIF is the Neom project, a 26,500-sq-km industrial zone along Saudi Arabia’s Red Sea and Gulf of Aqaba coastline. The zone, financed with around $500bn by the PIF and the local and international private sector, will also include land in Jordan and Egypt.
The project foresees the widespread use of automation and data exchange – including cognitive computing and the internet of things – to improve the city’s efficiency in areas including water and utilities, renewable energy, biotechnology, food and agro-processing, and advanced technology manufacturing, as well as residential, recreational and entertainment facilities. Most importantly, Neom is intended to become a digital sciences and robotics centre.
The zone will require extensive infrastructure investments in what is an under-developed region, with greenfield transport and logistics work needed before the principle undertaking can be rolled out.
The scale of Neom and other projects could have a significant impact on the domestic building industry, with 256,000 construction jobs created in the period to 2020, according to PIF programme estimates.
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