Pensions, sovereign wealth funds, and industrial policy in the Gulf: A look at fund consolidation

Introduction

The last few years have seen a lot of consolidation in Gulf financial sectors, from the creation of the Mubadala Investment Company (MIC) in 2017 to the announced merger of Samba and NCB to form Saudi National Bank (SNB) and the establishment of the Oman Investment Authority (OIA), both in 2020. In 2021, two Saudi pension funds, the Public Pension Agency (PPA) and the General Organization for Social Insurance, merged to create a $250 billion behemoth. Also in 2021, Oman followed suit and consolidated eight pension funds into two: one for the military and one for other public and private sector employees. The Saudi Public Investment Fund (PIF), while not the result of a consolidation, has been revitalized under Mohammed bin Salman’s leadership and has expanded into every sector of the Saudi economy.

Not only do these mergers create economic benefits — such as economies of scale and reductions in redundancies and waste — the merged entities also become potent tools for economic development. Saudi Arabia’s Vision 2030, Oman’s Vision 2040, and the need for all Gulf Cooperation Council countries to move their economies away from a reliance on oil meant that old spending patterns, which were defined more by habit than foresight, had to be updated. The mega-funds, and other major financial institutions like SNB and First Abu Dhabi Bank, are part of a trend where Gulf political elites sidestep ossified bureaucracies and instead centralize power in private entities over which they have even more control. In turn, these entities become a means to invest in interesting technologies on one hand, and powerful tools of economic development by funneling capital to strategic sectors on the other.

Formation

The OIA was created by merging the State General Reserve Fund and the Oman Investment Fund, in addition to taking over all state-owned enterprises (SOEs) and investments from the Ministry of Finance. The only exception is the national oil company, Petroleum Development Oman. By Gulf standards, the OIA is a fairly small sovereign wealth fund (SWF), with around $18 billion in assets. Oman’s two new pension funds, the Social Security Fund (SSF) and the Military and Security Services Pension Fund (MSSPF), are the result of a merger of eight SOE-specific or force-specific funds. Their total size is unclear because the size of their constituent funds is not always public, but estimates indicate the Social Security Fund’s assets total at least $7.75 billion while the military fund's assets are around $6.92 billion. The MIC was created in 2017 by merging the Mubadala Development Company and the International Petroleum Investment Company, two SWFs under the control of Abu Dhabi. With $243 billion in assets, it is now the third-largest Emirati SWF, after the Abu Dhabi Investment Authority ($700 billion in assets) and the Investment Corporation of Dubai ($275 billion).

There are several causes for this consolidation. First is the cost-saving rationale: Consolidation reduces redundancies, as fewer people will be doing the same job at different funds and market research does not have to be done several times over. More importantly for funds like MIC and OIA is the fact that a larger size means a better negotiating position and, especially in domestic industries where they have substantial shareholding, greater capacity to influence company strategies. For the consolidated pension funds, increased size means better risk management. A more diversified portfolio ensures a crisis in one sector will not destabilize a fund and means risk can be shared across generations to increase investment efficiency and weather financial shocks. Another reason bigger funds are better is that they can borrow more. Especially during the 2010s, with record-low interest rates after the financial crisis, borrowing on the international market was cheaper than ever. That period of carefree borrowing is now showing signs of coming to an end, but with the costs of living skyrocketing around the world, there’s political pressure on banks not to raise interest rates too much, extending the honeymoon period.

Defining industrial policy

While there is an important difference between the PIF, OIA, and MIC on one side and the PPA, SSF, and MSSPF on the other, the latter being pension funds while the former are SWFs, they are all tools for economic diversification. The PIF aims to become the world’s first SWF to issue a green bond, investing the proceeds in renewable energy and other green projects, capitalizing on the growing appetite among global investors for environmental, social, and governance (ESG) investments. With enormous renewable energy projects planned in Oman and the UAE, it is no surprise that the OIA and MIC are developing or have developed ESG frameworks that may be used to secure green financing in the future. The PPA will be a vital source of capital as it is expected that 50% of its assets will be fixed income, such as (green) corporate bonds and government securities, and another 17% (which is roughly $42 billion) is estimated to be spent on public equity, making it an important potential investor in regional renewable energy companies and projects. The pension funds will be long-term investors, while the SWFs will, at least in theory, help companies grow and then sell off a portion of their shares.

The funds effectively become states within states, sitting at the core of their respective countries’ diversification initiatives. The OIA, for example, cooperates closely with the Monetary and Stability Committee of the Central Bank of Oman (CBO), in addition to being on the Debt Management Committee together with the CBO, Ministry of Finance, and Capital Markets Authority. The OIA’s Rawabet program ensures that companies in which the OIA has a substantial shareholding “align their policies with Oman Vision 2040.” This approach is echoed by the PIF, whose program states that the Fund will “act as an economic diversification engine, developing strategic sectors” that will position Saudi Arabia for future success. Being only one of several SWFs in the UAE, MIC’s position in the Emirati economy is not as central as that of the OIA and PIF. It invests heavily in strategic sectors such as aerospace and renewables and Khaldoon al-Mubarak, MIC’s CEO, stated that the fund’s goal is to ensure investments are in “alignment with Abu Dhabi’s strategic priorities.” These priorities need not be developmental or explicitly economic. Mr. al-Mubarak is also the board chairman of Manchester City Football Club, whose ownership is among the UAE’s most visible endeavors to burnish its international reputation.

The pension and investment funds are tools to channel capital to strategic sectors and are smaller and therefore nimbler than the countries’ bureaucracies. However, as South Korea’s experience with chaebols (conglomerates that received extra support from the government to facilitate rapid industrialization) shows, close state-business relations unsurprisingly lead to extensive corruption, insider dealing, and the stifling of small and medium-sized enterprises (SMEs). For all the Gulf countries, but especially Saudi Arabia and Oman due to the necessity of finding work for a large and growing number of young people, limiting SME development will be a substantial barrier to economic growth and job creation. This means that while consolidating pension funds and SWFs makes economic sense and is the correct decision, these states have to be careful not to overlearn the “bigger is better” logic applied to their funds and implement it throughout the economy. Supporting national champions is fine, but doing so at the cost of the rest of the economy is not.

Piotr Schulkes was a non-resident scholar at the Middle East Institute in 2021-22, focusing on the political economy of the Gulf and the region's financial sectors. The views expressed in this piece are his own.

Photo by HAITHAM AL-SHUKAIRI/AFP via Getty Images