Will Saudi Arabia’s latest megacity venture deliver on the hype?

Will Saudi Arabia’s latest megacity venture deliver on the hype?

In the process of diversifying its economy to become less reliant on its oil reserves, Saudi Arabia recently announced the launch of a megacity and special economic zone called Neom. GRI assesses its potential.

A futuristic project

On 1 January 2018, the Saudi authorities converted the government-owned oil company Aramco into a joint-stock company, with plans to sell 5% of its shares this year. The move is one of Saudi Arabia’s latest efforts to attract more investments and become less reliant on oil as the main source of state revenue. The sale of Aramco’s shares is also expected to finance a new project announced by Crown Prince Mohammad bin Salman (MBS) in October 2017: Neom.

Neom will be a megacity, an innovative business hub, and an independent economic zone (IEZ), all rolled into one. The Kingdom has already announced that its Public Investment Fund will put more than $500 billion into backing the project. It will span 26,500 square kilometres across three countries: Saudi Arabia, Egypt, and Jordan, and be strategically located by the Red Sea. The first phase is expected to be completed by 2025.

The IEZ will be regulated by its own laws and social norms, sheltering investors from the restrictions associated with Saudi Arabia’s conservative legislative framework. But its main purpose will reside in its innovative business and economic components, with the hope of attracting billions in investments from foreign state funds and companies.

Nine specialised sectors will be available for investment, including biotech, food, media, and entertainment, but especially energy – the clean kind.

The energy sector and Saudi Arabia’s Vision 2030

The Neom project is intended to follow “a new blueprint for sustainable life.” This includes setting up renewable energy industries to produce wind, solar and water power aimed at making Neom a self-sustaining area and eventually providing clean energy to the country.

Clean energy production fits well with Saudi Arabia’s Vision 2030 programme, which underlines the need to undertake an overhaul of its weakening economy (GDP growth fell to 0.7% for the year 2017, compared to 4.1% in 2015) by moving away from oil.

According to the latest official figures, oil and gas make up about half of Saudi Arabia’s GDP and almost 90% of earnings derived from exports, making the country one of the most significant players in the market of oil worldwide. However, oil prices have shown a propensity to fall. As a result, the Kingdom has outlined an initial target of producing 9.5 gigawatts of renewable energy in its Vision 2030.

A sufficiently realistic project to seduce investors?

Neom is only the last in a string of economic megacity projects undertaken by Saudi Arabia. These have not exactly been a resounding success: for example, the King Abdullah Economic City launched in 2005 on the coast of the Red Sea is only one-fourth developed or under development.

The current initiative also shows some indications of aiming higher than it can attain. Neom is described in overblown terms as “a new kind of tomorrow in the making”. Its gigantic size, diverse investment sectors, and the associated labour demand are almost utopian in scale.  In total, the Saudi government expects around half a trillion dollars to be invested in the project in the next few years.

However, interest thus far has been strong: the Russian Direct Investment Fund has already announced that it would invest billions of dollars in Neom by establishing several companies working in a number of sectors, including energy, artificial intelligence and high-speed transport. Japan’s SoftBank Group has indicated that it will contribute to building up the solar energy industry in Neom via direct investments of up to $15 billion.

Outlook

Among the risks facing the project, most notable to watch are regional tensions and the potential for social discontent.

Firstly, Saudi Arabia is of course not the only regional power aiming to position itself as an innovation hub and pioneer in renewable energy. In the UAE, Dubai has a head start in pursuing a similar strategy, among other things by launching the world’s largest Concentrated Solar Power project in 2017. Dubai also purports to become a global producer of clean energy over the next few decades. Despite MBS’s assurances that Neom will be good for Dubai, the project by its very nature is poised to be a source of renewed rivalry between the Kingdom and the UAE, and it’s not clear that Saudi Arabia has the advantage in terms of ability to attract investment.

Another neighbour, whose territory will be partly occupied by Neom, is Jordan. Tensions between the governments of Saudi Arabia and Jordan have arisen due to their differing stance on the question of Jerusalem as Israel’s capital and the recent detention of the Jordanian-Saudi businessman Sabih al-Masri, officially on corruption-related grounds. Deteriorating diplomatic relations risk slowing the progress of Neom’s development – as a high-profile, symbolic undertaking, it would be a logical target for the Jordanian side.

Finally, the Kingdom’s efforts to prevent social unrest due to recent cuts in welfare programmes and an unemployment rate which reached 12.8% in the second quarter of 2017 need to be maintained. One of Neom’s stated goals is to create employment. However, MBS reportedly said that “it is not Neom’s duty to create jobs for Saudis,” which is contrary to the government’s directive to operate a “Saudisation” of the workforce over the past few years after high unemployment rates sparked protests during the Arab uprisings in 2011. Attracting thousands of foreign workers in a country where companies already heavily rely on a foreign workforce risks provoking discontent among Saudis and creating social instability. This in turn could result in less enthusiastic state support for seeing the project through to completion.

About Author

Syreen Forest

Syreen Forest is an experienced researcher on MENA-related socio-economic, political and education topics. She has worked in Amman, Jordan as a Researcher and a Grants Officer for two years. She holds an MSc in Middle East Politics from SOAS, University of London.