The Aramco initial public offering, or IPO, is a big deal, but it should not be. In essence, the three-year hype of the Aramco offering will conclude with the sale of a very small portion, perhaps just 1%, of the mammoth company to a small pool of domestic investors, some bullish institutional investors and maybe a government investment arm of China. At a $1.7 trillion valuation, a 1% sale of shares would earn the government just $17 billion. (For analysis on just how far a 1% or 2% share sale goes to meet Saudi Arabia’s fiscal needs, read here.)
The gap between the expectation and the outcome of the “world’s biggest IPO” only underscores the region’s failure to incubate and nurture new business giants. Aramco is a large and successful state-owned monopoly, forced to sell off shares to citizens and friends of the government. However, it does not inhabit a regulatory environment or rules-based economy that can make it a global, investor-owned, publicly traded powerhouse.
Across the region, the volume of IPOs of firms is low. Part of the reason is that it is difficult for businesses to grow. For most people in the private sector, they end up working in small businesses. Researchers at the World Bank find that small‐scale activities provide the majority of jobs in the Middle East and North Africa, or MENA, with some variation across countries. The share of employment in microbusinesses with less than five employees dominates the private sector in Egypt and the West Bank and Gaza, reaching almost 60%. It is significantly lower in Jordan (40%) and Tunisia (37%), and the lowest in Turkey (34%). The share of jobs in establishments with at least 1,000 employees is below 10% in all five countries. In high‐income countries, larger firms are more likely to employ a large portion of the workforce (and to train and promote them). The World Bank study on "Jobs or Privileges" compares firms' growth in MENA to that in the United States, where 48% of all employees work in firms with more than 10,000 employees. Because many medium and larger firms in the Middle East become part of a cycle of elite "state capture," they tend not to continue growing, productivity lags, and there is little reason for meritocracy in promotion.
IPOs in the Middle East fall into three categories: toxic and inefficient state-owned assets; amalgamations of real estate holdings (often via REITs, or real estate investment trusts) that do little to boost economic productivity; and the rare unicorn of a real business, which may also be partially or fully government-owned. Aramco is the latter. For investors in the Middle East, there are slim pickings. Aramco’s listing drives home the reality that citizen investors are starved of opportunities and frequently cheated by their governments.
Citizens from Saudi Arabia to Egypt are encouraged to buy shares of government-owned entities that they probably should be given, not sold. Egypt is currently in a flurry of pre-IPO activity, but you might not have heard about it. That is because the government is under pressure by the International Monetary Fund (IMF) to sell off state-owned assets, mostly owned by its military, to demonstrate its commitment to a more open economy and secure a further IMF funding package by March 2020. Egyptian officials aim to sell off stakes in over 20 firms across a range of sectors, from petrochemicals to finance and real estate, with hopes of raising close to $5 billion.
Some of these Egyptian military-owned firms have recently been profitable. It helps that President Abdel Fattah al-Sisi's government exempted them from a new value-added tax implemented in 2016, and some 600 military-owned firms are exempt from real estate tax, while also accessing favorable credit lines from state banks. While these firms have survived on noncompetitive contracts from the state, untaxed and with access to finance, private Egyptian firms have struggled with a devaluation, new taxes and the lifting of energy subsidies. No wonder that few are growing and listing on local or international exchanges.
One listing of an electronic payment platform, Fawry for Banking Technology and Electronic Payments S.A.E., owned by local and international investment banks, stands out as an exception. Fawry provides a cashless payment platform, convenient in an economy that relies on informality. Banks funded a product that would expand their market of customers. And customers in Egypt need more access to financial products. The listing raised $97 million for the firm; employees own about 8% of shares of the company.
A survey of IPOs across the Middle East and North Africa by the consultancy EY found 69 initial public offerings from the first quarter of 2017 to the third quarter of 2019, with just nine of them in 2019. The year 2019 has been slow, with fits and starts, and the volume of capital raised is even more disappointing. While the second quarter of 2019 had the highest level of quarterly proceeds raised in more than two years at just over $2.6 billion, the third quarter of 2019 saw just $190 million in issues raised in MENA. There can be wide variation in the size and quantity of listings from quarter to quarter as in any regional market, but the MENA region can be especially volatile. Globally, in the third quarter of 2019, there were 256 IPOs, raising $40.2 billion. While the most recent quarter of activity is more of a snapshot indicator (one big issue can skew the data widely), it demonstrates the low and inconsistent volume the Middle East generates.
There are unicorns in the Middle East, but even they are subject to the appreciative gaze of the state. Take ACWA Power. Formed in 2004, ACWA Power is now the largest developer of power and desalination projects in the Middle East and North Africa, with a specialization in renewable and solar projects. ACWA’s management has been talking about an IPO of the company for over a year now, but the listing has been delayed, as the company takes on more private investors, most notably the Public Investment Fund of Saudi Arabia, or PIF.
The PIF has gradually increased its ownership stake (in increments of 12%, then 25% and now 40%) in ACWA since 2017, as opportunities for investment in renewable energy in both Saudi Arabia and the Gulf Cooperation Council have expanded with respective national renewable energy targets. As the CEO of ACWA recently said in an interview with MEED, “They [the PIF] bring the ability to invest as co-investors in some of the larger projects we do.” Those larger projects include Saudi government contracts, which now also benefit the PIF as investor and owner.
There are some other successful IPO stories, notably in areas where the provision of state services is poor or in need of reform. Take the private school provider Ataa Educational Company, which listed on the Saudi Tadawul in the third quarter of 2019. The listing raised $93 million. The company provides K-12 education in Saudi Arabia, something the state also does, but hopes to do less so that citizens can pay out of pocket and the demands on fiscal outlays on education spending might decrease.
The Middle East needs more IPOs, but first it needs to grow companies that neither compete with the state for business, nor depend on the state as a key investor or customer. Citizen investors are not ATMs for government attempts at finance raising, nor do they benefit equally from the shift to privatization of social services. Real growth opportunities will come from firms that meet local needs and have the capacity to grow across the region and beyond, without three years of constant media hype or political intervention.