East is East, West is West, but is investing at home best?

The on-going saga about Tesla and the now infamous tweet by its CEO Elon Musk to take it private, apparently done while driving and under the influence of taking a sleep inducing medication Ambien but which unfortunately for him and Tesla investors, seemed to have caused the opposite hyper active effect, has raised questions about investing surplus funds abroad in such companies or at home.

Apparently, the Saudi Public Investment Fund already holds around 5 percent of Tesla shares and Mr Musk was under the impression that he had received encouragement and a commitment from the PIF to take the company private, when in all probability the Saudi sovereign wealth fund advised that more due diligence was needed.

Musk said his confidence was based on conversations with Saudi Arabia’s Public Investment Fund, which first expressed interest in helping take the company private in early 2017. What ever Mr Musk believed, even Tesla’s Board of Directors were taken by surprise by the tweet and the company is now under investigation by the U.S Securities and Exchange Commission after investor lawsuits were filed.

The famous saying that countries, and by extension companies, do not have permanent friends but permanent interests is very apt today, exemplified by the exit of many companies from Iran after the USA imposed sanctions on that country and affecting any companies doing business in the USA. The bewildering ebbs and flows of regional and international geo political alliances and divisions adds to economic and financial risk for investment decisions. Questions then arise for the Gulf oil producers on the central issue of diversifying their economies from oil reliance and whether the investment decisions taken create a true non oil goods and service base, preferably export led, and not dependent on the vagaries of high oil prices and government incentives and pay-outs?

The oil producers raise revenues either from energy related exports or through domestic fees and taxes. The use and direction of these revenues are of crucial importance for the future well being of the single resource economies. Do they use these primarily as part of a “financial diversification” through investments abroad in a variety of assets, hoping to gain above average financial returns, or do they primarily use these funds for “economic diversification”, investing in domestic infrastructure, and local job generation projects, with possibly lower short term economic returns until the projects cab stand on their feet and be weaned away from government subsidy support? Are these two objectives fundamentally at odds and lead to completely different outcomes, and above all, if financial diversification is the primary route, who will be the custodian of these revenue investments to ensure accountability and transparency in decision-making?

It is not that Gulf countries do not have the necessary mechanisms in place for such oversight, given their long experience with Central Banks and Monterey Agencies who have been the conservative custodians of sovereign reserves in a prudent manner, albeit on lower financial return basis. But these institutions will argue that their mandate is for prudent monetary and investment policies, primarily high rated sovereign bonds and not investment in potentially more attractive but riskier private sector institutions. Over the past few decades, there has been an emergence of Sovereign Wealth Funds ( SWF’s ) who have actively sought out international and local participation whether direct or private equity investments as economic globalization, fear of concentration in one or more financial market, credit downgrades have made SWF’s become more adventurous in their investment choices.

But the problems these SWF’s face remains the same – where to invest, which asset class, directly or thorough professional managers, how to assess risks and monitor on-going investments in the face of conflicting demand for domestic investments and societal pressure to do so, are they active Board members or passive investors, and, of major importance, do they possess the necessary professional capacity to do all these tasks.

Strategic desire

Where to invest and their consequences can be no trivial matter in an age of immediate social media scrutiny, given the collateral impact on SWF investments from potential lawsuits and inappropriate social behaviour by management as some of the more high profile SWF investments have been exposed to. Learning by doing from international investment mistakes is sometimes not a luxury that some of these SWF’s can afford.

Besides Tesla, the PIF has made substantial commitments to other technology companies or investments, including a $45 billion agreement to invest in a giant tech fund led by Japan’s Softbank. Then there’s $3.5 billion invested in U.S. ride-sharing firm Uber, the $1 billion pumped into Virgin Group’s space ventures, and another $20 billion tentatively committed to an infrastructure investment fund planned with Blackstone. The PIF fund is estimated to have over $250 billion in asset but also has many claims on its resources, both financial and political. More than half of its assets are tied up in large Saudi companies, such as SABIC and others whose stocks could be difficult to sell en masse. Above all, there is now pressure to spend money at home to create jobs, especially through a more invigorated “local content” policy that advocates some minimum local content production from foreign joint venture partners. The landmark Saudi Aramco IKTVA or In- Kingdom Total Value Added localisation program - launched in 2015 with the aim of ensuring a 70 percent local content by 2030 and many new jobs, is now emulated in the wider economy especially in the strategic big ticket defence sector.

The debate and pros and cons on where to invest, abroad or at home will continue, and it could be complementary instead of being mutually exclusive, especially if the international investment promises to transfer technology back home and help to establish a viable industrial base and job creation. This should really be one of the key criteria for international investment selection. It could be that the PIF’s initial investment in Tesla was motivated by a strategic desire to eventually set up an electric car industry in Saudi Arabia that reduces global fossil fuel consumption, although it seems difficult to square on how this fits in with an oil export dependent economy like the Kingdom.

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Dr. Mohamed Ramady is an energy economist and geo political expert on the GCC and former Professor at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia and co author of ‘ OPEC in a Post Shale world – where to next ?’. His latest book is on ‘Saudi Aramco 2030: Post IPO challenges.’