When Saudi Arabia said it was going to sell five percent of its state-owned energy giant Saudi Aramco to public investors, top stock exchanges sat up and took notice. The flotation was tipped to happen this year, but now, Saudi Aramco says it needs to review its options for the listing.

So what's behind the delay and what does it mean for Saudi Arabia and potential investors?

"I think they ran into serious problems. And the problem was created in April 2016 when [Saudi Crown Prince] Mohammed bin Salman first announced the privatisation because at that point, he put a valuation on Saudi Aramco of $2 trillion. This was achieved by a rather simplistic piece of arithmetic - you take the reserves 266 billion barrels and then multiply it by an oil price. And the oil price they took was $7.5 a barrel, which was the price that Total had paid when they bought Maersk," Paul Stevens, a fellow at Chatham House, tells Counting the Cost.

I suspect that they're more likely to go ahead with a private sale because the beauty of a private sale is: nobody will know if it's failed or succeeded because you won't actually know what the price is. Paul Stevens, a fellow at Chatham House

"But the problem with that is, that to say then they're going to take 5 percent gives a benchmark, $100bn, and if the privatisation goes ahead and they get less than $100bn, this will be seen as a failure, and this is bad news from MBS' point of view. So my sense is they're desperately trying to sort of riggle out of the privatisation process because the valuation is grossly overstated and they're unlikely to get $100bn. And the last thing MBS needs at the moment is some sort of an obvious failure."

While he says that the IPO delay is not necessarily a setback for reforming the Saudi economy, Stevens believes that making "the IPO the proverbial jewel in the crown was a mistake because they've created a benchmark by which you can judge the success or failure of this. I think this is the reason for the delay in the process."

"I suspect that they're more likely to go ahead with a private sale because the beauty of a private sale is: nobody will know if it's failed or succeeded because you won't actually know what the price is."

Stevens says the delayed IPO and the lack of transparency isn't "particularly good news" for investors, but "more important was the arrest in November of a number of senior businessmen in the Kingdom. This illustrates a fundamental problem in Saudi Arabia and that is a lack of real property rights, and if you're a foreign investor, I think you're going to be looking pretty hard at the Kingdom before putting money in there, and indeed the private sector within Saudi Arabia will also look hard at investing within the Kingdom."

Asked about the implications of the IPO delay for the Saudi economy domestically, Stevens says "it shouldn't stop the much-needed process of economic reform that is under way ... I don't think it's going to make a huge amount of difference to the reform programme - providing it's not seen as a failure, in other words providing they are not going to go ahead with the IPO and getting significantly less than the $100bn."

Source: Al Jazeera