Proceeds from oil IPOs are not for deficits

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Aden - Yasmin Abdel Azim - The Riyadh skyline is all sparkle. Gulf governments must use IPO proceeds from state-owned stake sales to future-proof economies. Image Credit: Pixabay

As was expected, more oil companies in the region will be carrying out stock market listings. After Saudi showed the way, Oman Oil Company announced it will list 20-25 per cent of its shares by the end of next year, in itself a remarkable development that highlights the rapid changes in the Gulf’s oil industry.

Certainly, there are many reasons behind this change, but the most important has something to do with the natural development of the Gulf economies, which are moving towards creating entities built on public-private partnerships. In the past, the states themselves dominated the most vital of economic sectors. However, this approach does not work out in the present, especially in light of the private sector’s significant growth in development. This is because the dynamics of economic change require the private sector to play a major role besides the state.

With Aramco’s IPO completed, the company launched an integrated programme to harness the $29.4 billion underwriting funds, according to Ahli Capita, to support the country’s growth and launch new projects. These will create a more diversified economy and provide for more jobs.

A bold step

The Oman Oil Company has so far only announced its IPO aspirations. Yet, this is an important step that needs to be followed through. We expect similar moves to be taken by other GCC countries, and these must be accompanied by development programmes to take advantage of the IPO proceeds. Otherwise, it will become difficult to avoid future repercussions.

It should be understood that IPO returns cannot in any way be used to finance the budget deficit, or that in the current account, or any other deficits some of the GCC countries suffer from. It is necessary to issue laws prohibiting the use of IPO returns for such purposes and only to be spent in new projects so as to achieve specific development goals.

So, issues related to deficits need to be solved away from IPO collections. Possible solutions are easy, but quite costly in the long run and do not contribute to implementing an economic diversification strategy and creating jobs.

Manage drop in revenue share

At the same time, the huge returns expected to be generated from this approach can be managed differently in financial and investment terms, especially as the state will lose part of the annual profits of its oil companies, which will now be distributed to new shareholders. This means new revenues must provide sources of income higher than the profits to be distributed to the shareholders - otherwise, there is no point in the subscription process.

After all, it requires a lot of transparency and clarity as to how these returns are managed, and annual reports should show how revenues have been used. Hence, there is a big difference between financing deficits and current accounts and using IPO returns to find productive alternatives that contribute to providing growth and jobs.

The first approach will contribute to temporarily solving deficit problems, but will cause the state to lose part of its most important resource and contribute in the long run to deepening the deficit crisis.

The other approach will contribute to achieving rewarding returns for the state and investors through profits and for citizens by way of new jobs. This is what is actually being sought by the GCC development approach.

Dr. Mohammad Al Asoomi is a specialist in economic and social development in the UAE and the GCC.

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