The next steps for Saudi Arabia's sovereign Public Investment Fund

The Public Investment Fund (PIF) was established in 1971 as the sovereign wealth fund of the Kingdom of Saudi Arabia. The fund’s objective is to provide financial support for projects and investments aligned with the strategic expansion of the Kingdom’s economy through the expansion and creation of new sectors.

With assets worth approximately US$300 billion, the Public Investment Fund is currently the 10th largest sovereign wealth fund (SWF) globally. Its capital is expected to increase dramatically, targeting US$400 million by 2020 and US$2 trillion by 2030.

The fund has a multi-sector investment approach, with a number of key investments in new and leading technologies across the globe and also major infrastructure both within the Kingdom and major international cities. Public Investment Fund is one of the rarer types of sovereign wealth funds, typically described as a strategic development sovereign wealth fund.

Alignment with Vision 2030

“The 2030 Vision outlines the reduction by the Kingdom on the reliance of the energy industry by boosting the private sector.” PIF’s strategy is directly aligned to the 2030 Vision, enabling strategic and sustainable diversification, through both the establishment of new sectors and supporting the expansion of existing business sectors.

The fund has six key areas of investment – Saudi equity holdings, Saudi sector development, Saudi real estate & infrastructure development, Saudi giga-projects, international diversified pool, and international strategic investments. In 2015/2016 PIF initiated a number of high-profile investments that highlighted the new investment strategy to the global financial community, including an investment in Uber and the announcement that it would be a major investor in the SoftBank Vision Fund over the next five years, with plans to invest up to US$45 billion.

In April 2017, the Council of Economic and Development Affairs (CEDA) introduced the new “PIF program” in order to strengthen the Public Investment Fund, in line with the Saudi Vision 2030. The PIF program will derive its funds through a range of funding sources, i.e. capital injection from the government, transfer of government assets, loans and debt instruments, international investments, giga-projects and retained earnings.

The objectives of the fund are:

• The growth of PIF assets: To grow the fund into one of the largest SWFs, maximizing the value of under-utilized government assets and investments
• Unlocking new sectors: To stimulate the necessary actions to achieve economic diversification by launching new sectors, i.e. creating new ecosystems, large-scale infrastructure and real estate projects
• Building strategic economic partnerships: Focused towards developing PIF’s assets in international markets. International assets are likely to reach 25% of its total assets in 2020
• Localizing edge technology and knowledge: To encourage organizations in Saudi Arabia to expand their R&D efforts. The fund will Invest US$55 billion SAR210 billion in advanced technology sectors and R&D, both locally and internationally, creating 11,000 new direct high-skilled jobs

The PIF program is also undertaking numerous steps to achieve its objectives with 30 initiatives spanning local initiatives (to boost and support companies in KSA), international initiatives (yo increase revenues by investing in global projects) and institutional initiatives (to raise PIF’s profile and promote it as an institution/ investment fund).

Driving projects forward

Since 2015, Crown Prince Mohammad bin Salman has highlighted a list of projects including the King Abdullah Financial District and others which were led predominantly by domestic companies. Looking forward, PIF is now one of the key sponsors/managers of projects totaling almost US$1 trillion, including Amaala, Qiddiya, The Red Sea Project, and largest of all, NEOM.

In order to meet the expected standards, PIF has been actively investing in the construction sector, either through acquisition or through the formation of joint ventures with international construction firms.

PIF’s impact across the wider community

The Public Investment Fund currently invests 25% to 30% of its assets into overseas opportunities, whilst a significant portion of the remainder is invested in strategic domestic projects; these assets have included a significant portion of the monies raised from the listing of Saudi Aramco.

The recent appointment of PIF’s director, HE Yasir Al- Rumayyan, as the chairman of the board of Saudi Aramco highlights the strategic links between these two entities and likewise the importance of PIF to the KSA economy.

Socioeconomic impact

Saudi Arabia currently has US$1.15 trillion of future projects in the pipeline with construction and infrastructure, and transportation being the biggest future sectors. The PIF program plans to be an active investor in order to maximize PIF’s assets, drive growth and improve the performance of projects.

Moreover, KSA is making huge developments, aiming ultimately to become a global tourism hub, for which PIF is developing a series of giga-projects which will have a vast socioeconomic impact on the economy. The idea behind such large investments in the tourism and hospitality sector is to attract a share of the US$20 billion that Saudi nationals spend outside Saudi Arabia.

This vision is heavily reliant on five giga-projects:

NEOM, a new region in North West KSA, which will be built as a living laboratory, is focusing on developing a number of industries, and is expected to contribute over US$100 billion to GDP based on 1 million residents. The approximate project budget is SAR 2 trillion.

The Red Sea Project, a luxury tourism resort, anticipates one million tourists per annum by 2035. By the end of phase two, it is likely to create 8,000 housing units and 10,000 hotel rooms, and is expected to contribute SAR 22 billion annually to GDP. PIF plans to phase this project in an innovative partnership with foreign investment. The approximate project budget is SAR 50 billion.

The Qiddiya Project is a new city close to Riyadh, focused on entertainment sports & culture, likely to see 17 million visitors per year by 2030 and is projected to contribute SAR 17 billion to GDP and 57,000 new jobs. The approximate project budget is SAR 45 billion.

AMAALA, a high-end luxury resort, is focused on culture and well-being, with 2500 hotel rooms to be completed by 2028. The approximate project budget is SAR 12 billion.

King Abdullah Financial District (KAFD) is a new mixed-use development, now overseen by PIF, which on completion will house 45,000 people in a live-work environment. The estimated project cost is SAR 35 billion.

The Public Investment Fund has also undertaken initiatives in real estate and infrastructure projects, generating economic, social and financial returns. It launched a real estate refinance company, the Saudi Real Estate Refinance Company, to inject liquidity into the property market with the aim of growing the rate of home ownership to 52% by 2020.

One initiative is Sakani housing program, which is offering free land to 90,000 families and pre-fabricated housing units to 117,748 families, as well as allocating 39,332 under construction housing units to increase the national rate of home ownership, aiming to serve 300,000 new families by 2020.

Additionally, PIF has also partnered with South Korean and Chinese firms to build a million low-cost homes in the coming five years and with US-based contractor Katerra to build 4,101 homes across the Kingdom, to increase home ownership and expand mortgage financing.

Attracting investment

Increased government initiatives under Vision 2030 and progress on giga-project developments will create new opportunities in the Kingdom. KSA is undertaking initiatives to change its conservative image to attract investment, lure foreign visitors, create jobs, and improve life quality.

Some of the further key opportunity areas are:

Entertainment
The Kingdom is focusing on the untapped sector of entertainment with the intention of attracting business, talent and investment through events. The government is eyeing numerous sports, events and exhibitions, such as NBA basketball and Spanish-style running of the bulls. Such events are likely to bring together developers, researchers, businesses, and designers – opening significant retail opportunities (known as ‘shoppertainment’) in KSA.

The development of the retail sector is expected to create 1 million jobs for Saudi nationals by 2030

Healthcare
Saudi Arabia’s healthcare transformation outlined in Vision 2030 will take place in three phases:

• Phase I involves capability building. It commenced in 2018 and will finish by the end of 2020. This phase includes clinical systems improvement, capacity and capability building and preliminary institution building
• Phase II will include developing autonomy and value, and will see the re-purposing of the Ministry of Health to implementing health in all policies, starting in 2021 and to be completed by 2025
• Phase III is expected to commence at the beginning of 2026 and run until the end of 2030. This will include the extension of the National Health Insurance Scheme (NHI) to all citizens, residents and visitors

Transportation
Public transportation represents a major opportunity through programs like the Saudi railway network, Riyadh and Jeddah metro and the new bus network and metro system being developed in Saudi’s holy city, Mecca, intended to bring major construction projects delivering social benefits

Localization
The Kingdom has undertaken measures to support its localization ambitions. For example, in communications and the IT sector, the Saudi government has launched a program to nationalize 14,000 jobs.

An article by Neal Beevers and James Hewitt, a Partner and Director at Deloitte in the Middle East.