June 2, 2016 / 2:35 PM / 4 years ago

Saudi signals new investment strategies in $3.5 bln Uber deal

* Signature deal for revamped Saudi sovereign fund

* Move away from conservative, low-profile investment

* Aiming for higher returns

* Uber also ties in with economic reform strategy

* Widely used by working women

By Andrew Torchia and Katie Paul

DUBAI/RIYADH, June 2 (Reuters) - Saudi Arabia has signalled it is adopting new strategies to invest its petrodollars - more aggressive, more high-profile and more closely linked to its economic development plans - with the $3.5 billion purchase of a stake in U.S. ride-hailing firm Uber.

The deal, announced on Wednesday, makes the Saudi state’s Public Investment Fund (PIF) a player in the technology start-up market - a break from Riyadh’s past emphasis on conservative, low-risk foreign investments.

It also makes Riyadh part-owner in a firm which could help to rescue the kingdom from low oil prices by diversifying the economy and creating jobs for local citizens. Uber is a popular form of transport for Saudi women, who are banned from driving.

PIF Managing Director Yasir al-Rumayyan referred to these goals in a statement on the deal, saying the fund aimed not only to make money but also to support a sweeping economic reform plan announced in April.

The plan focuses on “unlocking strategic sectors such as tourism and entertainment, boosting employment opportunities and women’s participation in the workforce, and encouraging entrepreneurship”, he said.

For decades, Saudi Arabia was a low-profile investor in global markets, using the central bank as its main sovereign fund. It stored most of its oil wealth in assets such as U.S. Treasury bonds and bank accounts, instead of the large strategic stakes in top Western companies bought by other sovereign wealth funds such as Qatar Investment Authority (QIA).

That is changing as low oil prices saddle Riyadh with an annual state budget deficit of nearly $100 billion, forcing it to find ways to earn higher returns on its assets and develop non-oil sectors of the economy.

In April, Deputy Crown Prince Mohammed bin Salman identified the PIF as a key part of this drive. He said the fund would expand from 600 billion riyals ($160 billion) to over 7 trillion riyals, helping make Riyadh a global “investment power”.

The Uber deal signals this process has begun, said an adviser to sovereign funds in the Gulf, declining to be named because he was not authorised to speak to the media.

“It’s possibly more of a ‘signature deal’ to show their presence - a first deal that will make headlines - rather than a good deal financially,” he said.

Uber said its most recent financing round valued it at $62.5 billion, implying the PIF obtained a stake of about 5 percent. The Saudi fund may have bought at a less attractive price than investors in earlier rounds of financing for Uber, such as QIA.

However, the deal may reassure global markets by suggesting that even though Riyadh is drawing down its financial reserves to cover its budget deficit, it still feels rich enough to invest large sums when opportunities arise.

ECONOMIC STRATEGY

Uber, which has operated in Saudi Arabia since early 2014, did not announce any specific agreement to expand its business in the kingdom because of the PIF deal. But Rumayyan will take a seat on Uber’s board, giving the Saudi government direct involvement in the company’s decisions.

The deal may therefore help to remove any legal difficulties for Uber in Saudi Arabia. Earlier this year, local media quoted a spokesman for the Roads and Transportation Administration in Mecca as saying foreign taxis using smartphone apps were illegal as they did not have licences from the transport ministry.

Uber, as well as Middle East-based ride-hailing firm Careem, which also operates in Saudi Arabia, fits into the kingdom’s economic strategy in several ways.

Traditional taxis are often seen as inconvenient and potentially dangerous for Saudi women, so Uber has quickly become widely used by them; the company says about 80 percent of its over 130,000 riders in the kingdom are women.

Prince Mohammed’s reform plan envisions increasing women’s workforce participation to 30 percent from 22 percent by 2030 in order to raise household incomes and cut the country’s expensive dependence on foreign labour. A lack of cheap and convenient transport for women is a big obstacle to their employment.

The PIF deal “is a bold step in the right direction”, said Maryam al-Subaie, a Saudi businesswoman who uses Uber almost daily. She owns a mobile phone repair shop used exclusively by women, the first such shop licensed in Riyadh.

“Because of the nature of my work and my need for transportation, it used to be very difficult because I couldn’t afford my own driver. Or a driver couldn’t get to me when I needed him.”

Greater use of services like Uber could improve the Saudi balance of payments since up to a million foreign chauffeurs are estimated to be in the kingdom driving women around. Cutting the need for them could save household budgets hundreds of millions of U.S. dollars which the chauffeurs remit home annually.

The economic reform plan also aims to push more Saudis into private sector employment, so that the cash-strapped government does not have to provide so many state jobs, and to encourage entrepreneurship and tech start-ups among young Saudis. (Additional reporting by Hadeel Al Sayegh in Dubai and Angus McDowall in Riyadh; editing by Susan Thomas)

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