LONDON, 23 August 2004 — The National Company for Cooperative Insurance (NCCI) is preparing to sell off 25 percent of its shares to Saudi citizens through an initial public offering (IPO), which is being arranged by HSBC and Saudi British bank. NCCI is 50 percent owned by the Public Investment Fund (PIF); and 25 percent each by the General Organization for Social Insurance (GOSI) and the Retirement Pension Agency. The 25 percent stake that is being sold off is half of PIF’s shares.

NCCI’s partial share sell-off is just the latest in a spate of planned IPOs in the Kingdom. Other IPOs planned include a partial sell-off of the shares of the National Commercial Bank (NCB), the largest bank in the Arab world; Al-Bilad Bank whose license application was approved by the Cabinet in early June and merges the operations of eight largest money lenders in the Kingdom; and the Power & Water Utilities Company for Jubail and Yanbu (Marafiq).

Asset sales in state and semi-state utilities, which include those stakes owned by the likes of PIF, effectively the investment arm of the Ministry of Finance, and GOSI, will no doubt boost the Saudi budget further, with rating agencies such as Capital Intelligence (CI) already projecting a budget surplus for 2004 of around 5.8 percent of GDP due to the current favorable oil market dynamics, which has seen the price of a barrel of the benchmark Brent crude touching the $50 mark. In fact, CI’s budget surplus projection for Saudi Arabia excludes any receipts from these asset sales and from the sale of mobile phone licenses.

The Kingdom recently awarded the second GSM license and the first 3G license to a consortium led by Etisalat as part of the deregulation of the Saudi telecom market, which effectively ends the monopoly of Saudi Telecom.

With all this IPOs and license sales, how well-equipped is the Saudi capital market to cope with all this activity. Although the capital market law was approved last year, the Capital Markets Authority which will regulate the market has yet to be finalized. The Tadawul Stock Exchange, although already operating, has also yet to be formally launched. While these anomalies are likely to be in place sooner than later, although the sheer time it is taking has raised some frustrations and concerns about the Kingdom’s commitment to economic reforms, there are other serious obstacles that remain. One such obstacle is the restrictions on foreign investors who wish to invest in the market.

Take for instance, the Dow Jones Arabia Titans 50 Index which was launched last year in cooperation with the Dubai International Financial Center (DIFC). The DJ-DIFC Arabia Titans Index in fact does not include a single Saudi corporation, and is heavily Kuwait-weighted. The reason for this, according to Dow Jones Indexes, is that Saudi Arabia is excluded from the index (though it carries the Arabia tag) because it fails one of the rules governing country inclusion — foreign investors cannot invest directly in the Saudi stock market and have to go through a local fund.

For markets such as Saudi Arabia, the challenges are more to do with the type of privatization and the utilization of the proceeds. Privatization in the Gulf especially in Saudi Arabia at best can be described as “paternal privatization” where semi-utilities such as the PIF, GOSI and even the Retirement Fund play a key role in acquiring assets in some banks, insurance firms, and corporations which usually have a monopoly.

The government then allows a partial sell-off to the general public of a small percentage of the shares owned by the semi-utilities. This is what is happening with NCCI and with NCB, when it finally decides to sell off some of its shares.

Privatization and mobile phone license sales are one-off events. As such the proceeds should not be used to finance government debt; tax handouts; or the like.

For a country like Saudi Arabia especially with a young population and so heavily dependent on one commodity (crude oil), it becomes even more imperative to plan and utilize windfall revenues from privatization and license sales on a sustainable basis to underwrite the development of the Kingdom’s own version of a baby boom generation.