March 15, 2018 / 3:52 PM / 5 months ago

Breakingviews - Cox: Aramco and Amazon encourage bad behavior

NEW YORK (Reuters Breakingviews) - Amazon and Aramco would seem to have little in common apart from their shared first letter. The Saudi giant sucks oil from Arabian sands and sells it to energy-thirsty nations, sending the proceeds back to its controlling monarchy. Amazon sells stuff online, ships it to customers rapidly and reinvests the profits to destroy the economics of every industry it enters.

Britain's Prime Minister Theresa May greets the Crown Prince of Saudi Arabia Mohammad bin Salman outside 10 Downing Street in London, March 7, 2018. REUTERS/Simon Dawson

But both corporate titans are engaged in a similar game of extraction, quite separate from their business models. In Saudi Aramco’s case, the world’s financial capitals are prostituting themselves to accommodate an initial public offering potentially valuing the company at $2 trillion sometime over the next year. Similarly, Amazon’s request for proposals for a second headquarters in North America has U.S. municipalities bending over backwards to please the $765 billion behemoth.

Competition is a good thing. The fact that, say, Newark is trying to sell its charms to Amazon boss Jeff Bezos over Miami’s is a healthy exercise for New Jersey’s largest city. Even if Newark loses, the process should make the city better prepared to attract other businesses and nurture the ones it already has. Saudi’s exchange-shopping could produce similar re-examinations of the strengths and weaknesses of the financial centers and their bourses in London, New York, Hong Kong and beyond.

But there’s also another risk from what might be called the “Aramazon effect”: a shortsighted race to the bottom that sticks the winners with long-term curses their leaders, communities and institutions may live to regret.  

Take the wooing of Aramco, which went into high gear two weeks ago in the UK. Prime Minister Theresa May rolled out the red carpet for Crown Prince Mohammed bin Salman, the heir to the throne and the architect of Riyadh’s ambitious “Vision 2030” economic-reform program, for which the listing of Aramco is a key component. Foreign Secretary Boris Johnson welcomed bin Salman, who also had lunch with Queen Elizabeth and later dined at Clarence House with Princes Charles and his son William – rare treatment for a 32-year old dauphin.

There are, of course, many reasons for Britain to suck up to the son of the reigning Saudi monarch, including defense, geopolitics and general business considerations. BAE Systems, for instance, bagged an order for 48 Typhoon jets from the Saudi air force following the visit. But landing the Aramco listing is critical to helping the May government contend that divorce from the European Union will not weaken the UK’s pre-eminence as a global financial capital. That’s especially true after $158 billion consumer-goods giant Unilever, picked Rotterdam over London as its global headquarters on Thursday.

Investors in particular have protested considerations by the London Stock Exchange and regulators to water down listing, governance or disclosure requirements to assuage the Saudis. The Investment Association, which represents fund managers overseeing nearly $10 trillion of client money, has lobbied the Financial Conduct Authority not to move forward with the creation of a so-called “premium listing” category for companies controlled by sovereigns, as Aramco would be.

The worry is that by modifying the rules around related-party transactions and controlling shareholders, London’s reputation for the highest standards of corporate governance will be diluted. Recent history offers the opposition some evidence. They point to the ignominious delisting of Eurasian Natural Resources Corporation five years ago. The Kazakh mining group incinerated shareholders after its London debut amid allegations of malfeasance and a criminal investigation by the Serious Fraud Office. So did Bumi, a miner controlled by an Indonesian family, which was eventually delisted after fierce infighting among its shareholders. Both were included in FTSE indices, which the special class listing proposed for Aramco would not be.

Beyond bending rules, which the Hong Kong exchange has done as part of its ambition to best London and New York for the Aramco deal, cozying up to Saudi Arabia raises bigger questions about morality. Reformer though he may be, bin Salman’s recent roundup and detention of hundreds of Saudis has attracted widespread concern about human rights, due process and the rule of law. The New York Times reported this week on the possible beating, and subsequent death, of one detainee. While it’s perhaps just business for the exchanges to ignore these allegations, it’s uncomfortable for leaders like May and President Donald Trump - who will welcome bin Salman and his entourage on March 20 – to engage in such public bootlicking.

Amazon doesn’t kidnap people and beat them in the Riyadh Ritz-Carlton. But the contest to host its second headquarters has unleashed a similar fox-in-the-henhouse tizzy. The danger is that the winner of the competition, whom Amazon promises will see 50,000 new jobs and some $5 billion of capital investment, winds up fiscally constrained by piling incentives, tax breaks and other concessions that, in the end, produce no greater financial benefit. It has already provoked other companies to ask municipalities to match the sorts of goodies offered to Amazon.

That’s one of the reasons Richard Florida, an urban studies expert and professor at the University of Toronto, launched a “Non-Aggression Pact for Amazon’s HQ2” last month. The petition, which has been signed by leading economists, policymakers and urban planners, argues that tax giveaways and location incentives are wasteful and counterproductive. Worse still, they sap communities of funds that could be used for education, housing and transportation.

Moreover, Florida worries that Amazon is sowing the seeds for an even bigger backlash than the one U.S. tech giants are already weathering due to their dominance. What happens if the promises of prosperity don’t come true? “There will be demonstrations and protests and accusations that ‘you bankrupted our town,’” he says. “How can mayors and the heads of chambers of commerce explain to the man on the street that they are giving billions of dollars to the richest man in the world? It just doesn’t sound right.”

The risk is one that Amazon seems prepared to tolerate in asking cities to fight it out, arguably for the benefit of its shareholders today. And, who knows, landing its new HQ might actually improve the fortunes of a downtrodden city like Richard Florida’s own hometown of Newark, offsetting any expensive incentives. But whether beckoning in a tech giant or the listing of a Saudi oil producer, local and national governments ought to better consider the risks of long-term failure before handing over the keys.

Breakingviews

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