NEOM: DELIVERING THE VISION

Introduction

Plans to create NEOM, the ambitious new city situated in the north-west segment of Saudi Arabia, bordering the Gulf of Aqaba, were bolstered in the first half of 2020 by a renewed financial commitment to fulfil its potential in defiance of many sceptics.[1] Despite the COVID-19 pandemic, the construction of the futuristic showcase city remains a top priority for Crown Prince Mohammed bin Salman (MBS). Since the outbreak, he has chaired government meetings from NEOM using video links, from a specially built palace. Here, in September 2020, he played host to Jared Kushner, (former) US President Donald Trump’s son in law, and it is rumoured that the secret meeting between MBS and Israeli Prime Minister Benjamin Netanyahu, who flew to the Kingdom in November of last year, was located there.

The ultimate goal is to create a smart city 30 times larger than New York incorporating a financial hub, a technology complex and a wide range of leisure and entertainment facilities. It is worth stressing that entertainment and tourism are identified as crucial elements of the development programme, not least because it is recognised that they are vital generators of employment for younger people in the non-state sector. Faced with a rapidly growing population which has a relatively young demographic profile, Saudi Arabia recognises that it is important to promote wealth creating enterprises and give as much encouragement to the private sector as possible. According to World Bank data, the young person age dependency ratio as a proportion of the working population was 34.7% in 2019, whereas the total unemployment rate for that year was 5.9%, ILO data records a much higher youth unemployment rate (ages 15-24) of 28.6%. Given the pressures on public finances and the need to diversify away from the oil industry, finding rapid growth opportunities in new sectors is a prime economic objective.

This is the promise of NEOM whose marketing campaign claims the city will be “an accelerator of human progress, built as a living laboratory – a place where entrepreneurship will chart the course for a new future.”

Map: This is a rough estimate of the size and boundaries of NEOM.[2]

The underlying economic context for this mega project

NEOM’s initial budget is truly substantial. Up to $500 billion (USD) has been earmarked for investment over the lifespan of the initial phase of the project. It is very much the brainchild of Crown Prince Mohammad bin Salman, (known better in the West by the acronym MBS), who pledged the considerable wealth of the House of Saud to this long term mega project, scheduled to involve decades of investment. Yet this is a challenging time to commit such substantial funds to a brand new project. Saudi Arabia has not escaped the need to navigate the impact of the global COVID-19 pandemic, which has decimated the global demand for oil, exacerbating the problems linked to an oil price that was already plummeting before the virus crisis struck. In fact, global fuel demand has tumbled by a third due to coronavirus-related lockdowns and business shutdowns.

The sinking oil price has dealt a serious blow to the country’s finances. In the autumn of 2020 the oil price — gauged by the posted price of Brent oil — hovered around $45 a barrel and is now (January 2021) balanced at around $55. What is more, the running average for 2020 was a mere $44.13 compared to a figure of $ 64.28 in 2019 (see Table 1). At one stage, in Spring 2020, the oil price collapsed to below $10 a barrel.

Table 1: Brent Oil Price: Yearly Averages

The dramatic fall in oil export revenues has obliged Saudi Arabia to tap its foreign exchange reserves to fund NEOM and a range of other ambitious infrastructure projects. They are now at their lowest level since 2011. The country’s Foreign Exchange Reserves, it should be explained, are held in the form of foreign assets held or controlled by the Saudi Arabia Monetary Authority (SAMA), the country’s central bank. The reserves comprise gold or a specific currency – in practice mainly made up of US dollars. They are also made up of special drawing rights and marketable securities denominated in foreign currencies such as treasury bills, government bonds, corporate bonds and equities and foreign currency loans.

The pressure on the country’s finances has not escaped the attention of the leading global credit agencies. Moody’s, for instance, reviewed its credit rating for Saudi Arabia downwards in May 2020 at A1 with negative outlook. Meanwhile, Standard & Poor’s credit rating stands at A- with stable outlook while Fitch apportion a credit rating at A with stable outlook.

On a more positive note Moody’s pointed out that, “The plans to diversify Saudi Arabia’s economy away from oil could lift the country’s medium- to long-term growth potential.” But the rating agency also warned that, “the risks associated with the implementation of the diversification agenda are high and the benefits will likely take many years to materialise.”

While there are clearly significant pressures on the country’s finances Moody’s commented that the government’s balance sheet was “still relatively robust, albeit deteriorating” and that it only had moderate debt level coupled with substantial fiscal and external liquidity buffers.[3] But if Saudi Arabia’s credit rating falls further, this will make borrowing more expensive on the international capital markets.

Nonetheless, pressures on the country’s international credit rating did not curb the Kingdom of Saudi Arabia from transferring, in Spring 2020, $40 billion from its foreign reserves to fund an extensive range of international investments. This move was a strategic step aimed at acquiring assets that underpin infrastructure projects at home, most notably the new hi-tech city of NEOM.

The main rationale behind this major acquisition programme was to capitalise on buying opportunities that had sprung up as a result of the COVID-19 pandemic. Indeed, Saudi Finance Minister Mohammed al-Jadaan has stressed this is a one-off occurrence is to take advantage of a perceived commercial opportunity. Time will tell if this is indeed an extraordinary spree or an astute move.

The Public Investment Fund (PIF), the country’s sovereign wealth fund,[4] invested substantially in a number of major publicly quoted US corporations such as Facebook, Walt Disney and the hotel group Marriott International. It has also made significant investments in entities like Cisco Systems, Citigroup, Bank of America, the cruise liner Carnival and Live Nation Entertainment. In addition, it bought a stake worth $714 million in Boeing.[5] Europe has not been overlooked. The PIF has invested substantial sums in blue chip companies such as BP, Total and Royal Dutch Shell interestingly, all primarily in the oil business despite the country’s stated objective to diversify away from a reliance on fossil fuels in its own export earnings. The extent of this investment programme is detailed in Figure 1 (below).

Figure 1: The PIF’s Investment Programme, Financial Times

Yet, taking into account the structure of its domestic monetary policy, the Saudi Arabia will need to maintain at least around $300 billion in reserves to maintain its peg with the US dollar. In May 2020, the Saudi Arabia Monetary Authority (SAMA) was obliged to reiterate its commitment to the dollar peg after March's foreign reserve decline triggered some speculative activity centred on a possible decoupling of the currency. For the full twelve months of 2020 Saudi Arabia is expected to have continued to draw down from its accumulated foreign reserves to fund a deficit forecast to be equivalent to nearly 13% of national output. To plug the spiralling fiscal gap, the government has tripled its value-added tax rate, eliminated many allowances for state workers and cut spending on major headline projects.

These fiscal measures are all designed to stabilise the country’s finances whilst also providing the funding for its longer-term strategic diversification of the economy, so that it is no longer over reliant on the hydrocarbons sector. Hence, the commitment to invest in sources of renewable power.

NEOM: The Current Investment Programme

Ali Shihabi, a member of NEOM’s advisory board, has recently affirmed that this ambitious project is “proceeding”, albeit he adds that the final schedule has yet to be finalised.[6] He cautions that NEOM will probably move ahead at a more “moderate pace.” The first phase of the project is due to be completed by 2025. It is focusing on the fundamentals—the basic underpinning infrastructure that a large new community requires. In practice that means concentrating resources on the basics — the essential backbone of infrastructure that provides water through desalination plants, optical cable for broadband and reliable sources of power: in NEOM’s case, this will be entirely reliant on renewable sources of supply — in other words, solar and wind rather than oil.

Work is already under way on a variety of infrastructure schemes, including a commercial airport, which has now commenced operation. NEOM has accelerated work during 2020 in many areas including a contract with STC, Saudi’s telecom utility, to create a 5G telecom network infrastructure. This is a crucial step in accelerating NEOM’s digital ambitions; the speed at which this is implemented will determine how far these goals are met. Extensive residential neighbourhoods are being built for construction workers which will provide homes for up to 30,000 individuals. Many of them are likely to be recruited from abroad. However, it is important to stress that NEOM offers a pivotal opportunity to train and develop the country’s own human capital to construct and deliver this city aimed at underpinning the country’s future prosperity. But in order to achieve this objective, a start has to be made urgently on incentivising and enthusing Saudis’ youth to undertake careers in civil engineering, transportation and IT services instead of civil service administration. For some specific roles this may well necessitate recruiting and training one key source of Saudi’s human capital accounting for 52% of all university graduates: its young and often highly educated women.

Saudi Arabia is also home to some major construction companies such as the family run Saudi Binladin Group and Saudi Oger, both of whom have roots going back many decades in the Kingdom. They continue to win major projects, but in recent years they have been competing against a raft of other smaller but rapidly growing local firms along with joint ventures between the Kingdom of Saudi Arabia contractors and international companies. Table 2 provides a ranking of the top 25 construction groups operating in Saudi Arabia.

These joint ventures will be crucial in delivering NEOM as envisaged. Saudi Arabia has reached out across the globe to attract the necessary skills and expertise that will make it possible to build this vast city of the future. NEOM represents one of the world’s major opportunities for long term, consistent income generation for leading international civil engineering and construction groups such as Aecom, Bechtel and Mott MacDonald. Bechtel, for example, based in San Fransisco, California, is the largest US construction company employing over 50,000 people generating $32.8 billion in annual revenues. The group has been working in Saudi Arabia since the 1940’s. It has already won sizeable contracts to develop the city’s primary infrastructure. Bechtel has extensive experience of working in the Kingdom having been involved in many other high-profile Saudi projects, including Jubail Industrial City and the Riyadh metro.

Table 2: Saudi Arabia’s 25 largest civil engineering and construction contractors ranked in order of their establishment and on recent contract awards. Source: Construction Week

1. Saudi Bin Ladin Group

2. Al Rashid Trading & Contracting Co. (RTCC)

3. Al Ayuni Investment & Contracting Co.

4. Al Harbi Trading & Contracting Co. Ltd.

5. Arabian Bemco Contracting Co.

6. Al Shoula Group

7. Almabani General Contractors

8. Al Fouzan Trading & General Construction Company

9. ABV Rock Group

10. El Seif Engineering & Contacting

11. Baytur Construction & Contracting

12. International Centre for Construction Company (ICC)

13. Saudi Oger

14. Freyssinet Saudi Arabia

15. A.S. Alsayed & Partners Contracting

16. Saudi Lebanese Tarouk Contracting Co.

17. Al Arrab Trading & Contracting

18. Al Latifia Trading & Contracting

19. Azmeel Contracting Establishment

20. Abdul Rahman Saad Al Rashid & Sons (Artar)

21. FARE Constructions - Fawaz Al Hokair Trading & Contracting Establishment

22. Al Habtoor Leighton

23. Al Rajhi Construction (ARC)

24. TAV Construction

25. Arabtec Construction

Another essential element in the infrastructure underpinning NEOM was recorded earlier in 2020 when a contract was signed worth US$5bn with Air Products, a US company, and Acwa Power, a Saudi company (40 per cent owned by the PIF), to develop a reliable renewable energy project - the world’s largest green hydrogen and green ammonia plant - scheduled to be operational in 2025. This should provide some of the reliable power which is essential for the realisation of the programme’s goals (the difficulties surrounding reliable power generation with respect to the Eko Atlantic[7] project in Lagos, Nigeria, demonstrate how important power supply is to large scale civil projects).

NEOM will be the world’s first purpose built, completely sustainable, mega-city. According to a new study published in 2021 from Prince Mohammad Bin Fahd University, NEOM could use a mix of solar thermal, photovoltaic, wind, and battery energy storage with all of these sources bundled together with artificial intelligence (AI). The study noted that AI will resolve most of the issues related to renewable energy integration, mainly by matching energy demand from individuals and organisations to supply.

The Digital Opportunity

The global shift to online work, shopping and education that has occurred in response to the corona pandemic has highlighted the importance of economic activity on having a robust digital infrastructure to link households, firms and institutions. A dedicated digital infrastructure, enabling residents and workers to access a wide range of cutting-edge technologies is one of the distinctive features of the whole NEOM programme. This infrastructure seeks to integrate genetic and smart technologies with artificial intelligence so that NEOM’s facilities will be able to offer real-time assessments and what are referred to as “digital twins” for both residents and overseas visitors alike.

The thinking behind the concept of “digital twins” is that individuals will have the opportunity to have a digital twin of themselves created. This will enable specialists to develop tailored, bespoke medical treatments for these patients, removing the need to general treatment as everything will be centred on an individual’s specific genomic profile. These techniques already exist and have been proved to work, but as of yet they have not been developed on any significant scale. NEOM, and its medical hub ,aims to plug that gap.

The objectives behind this programme are striking and highly ambitious. But Saudi Arabia is building on firm foundations. The Saudi Human Genome Program (SHGP), launched in 2013, aims to sequence the genomes of the entire Saudi population, leading to the early diagnosis of genetic disorders and preventing common hereditary diseases. NEOM plans to stand at the forefront of a revolution in the health sector with a clear focus on genetics, bio-digital interfaces, telehealth and artificial intelligence. The objective is to enhance the ability to predict, prevent and treat medical conditions drawing on all the latest in medical science and research.

It therefore comes as no surprise to find that biotechnology is one of NEOM’s 16 priority industries, with the city aiming to position itself at the forefront of developments in gene therapy, genomics, stem cell research, nanobiology, and pharmaceutical manufacturing.

Across the healthcare sector, NEOM aims to attract potential residents by promoting itself as a cutting-edge destination for health and wellbeing, with state-of-the-art medical facilities and internationally respected treatment programmes for a range of life debilitating diseases. Dr Maliha Hashmi, an executive director at NEOM and Deputy Sector Head for the city’s Health & Wellbeing and Biotech Sector, is on record as observing, “This advanced system will be based on proactive prevention, not just treatment. The focus will be on pain management, muscular and skeletal diseases and cancer, as well as a balanced overall approach to wellbeing.” Dr Hashmi argues that through automation and digitalisation, people will be able to monitor and assess their own health on an ongoing basis thereby identify issues before they become difficult problems. “We are not only taking care of the sick; we are investing in healthy individuals,” Dr Hashmi explains.[8]

The growing market for medical tourism certainly makes such a concept attractive but, of course, the challenge will be in fulfilling the promise. NEOM’s executive plans to establish several multi-speciality ‘smart’ hospitals that aim to deliver a range of automated services. But it is worth pointing out that Saudi Arabia currently spends an estimated $12.5 billion on overseas healthcare – a vast sum – so this offers a real incentive for the country to expand its own capabilities and services in the advanced healthcare sector. If this goal can be achieved, it will be a win-win for the country’s balance of payments.

Furthermore, it is also important to highlight the growing importance of technology across media industries. Media streaming, computer-intensive production and post-production (notably CGI, sound mixing and lighting effects), along with storage of these files will boost the demand for programmers, visual effects artists, and other IT professionals. How these trends fit into Saudi Arabia’s culture and traditions has yet to be ascertained, but there is considerable scope for investment so that the country can meet the demand from its increasingly younger demographic.

Conclusion: challenges to be met to fulfil the NEOM vision

Are there any cities around the world that serve as inspiration for NEOM? When looking at the media coverage devoted to this ambitious city of the future, Dubai is invariably mentioned to be the nearest NEOM has to a model. Certainly, those close to the Crown Prince suggest it has exerted a strong influence on his thinking, particularly its ability to attract a very cosmopolitan labour force.

But if these plans are to be realised the authorities in Saudi Arabia will need to be prepared for some changes in its legal and social codes. Progress is likely to be achieved much more quickly if Saudi Arabia’s strict interpretation of its Islamic tradition is interpreted afresh for the stand-alone city of NEOM. This may well include having its own judicial system, which has long been implemented, albeit recently it has provoked controversy, in the offshore city and financial centre of Hong Kong. To realise the vision of a world class city pre-eminent in a range of new, technology-based service industries, NEOM will likely have to compromise and update its legal and social approaches to day-to-day life while still respecting the main tenets of its religious and cultural tradition.

Rather than Dubai perhaps a better model may be Singapore, which ranks as of the world’s most successful economies and has built up an enviable reputation for its ability to attract talent and know how in cutting-edge industries from across the globe.

Regulatory approaches and the tax regime will, of course, be pivotal in acting as catalysts for accelerated economic growth. To support the city’s expansion we are likely to see some highly attractive tax and investment incentives for inward investors into NEOM. Yet, in the initial phases of development at least, we may also see the Saudi Arabian authorities offering a range of supplementary financial inducements and guarantees to outside foreign investors by way of incentive for financing the objectives set for this unprecedented development. In the wake of the global COVID-19 pandemic and the project’s remorseless demands for capital, NEOM’s proponents will need to meet and satisfy the demands of investors for internationally competitive returns on scarce capital.

The next few years are likely to be full of many surprises if this ambitious project is to become a reality.

[1] For details on the project see: <https://www.neom.com/en-us/> [2] NEOM derives its name from the root neo meaning new (from the Greek neos) and the ‘m’ represents the Arabic word mostaqbal, or future. [3] Source Reuters, May 1, 2020, https://www.reuters.com/article/us-health-coronavirus-saudi-economy-idUSKBN22N05M [4] The Public Investment Fund (PIF) is the sovereign wealth fund of Saudi Arabia. It is among the largest sovereign wealth funds in the world with total estimated assets of $382 billion (USD). [5] Source: US regulatory filing in May 2020 reported in Marketwatch.com. [6] Ali Shihabi has been a member of the Neom advisory board since January 2020. An investment banker by background, he was educated at Princeton and Harvard Business School where he was awarded a master’s degree in finance. Before joining the NEOM advisory board, Shihabi was the founder of The Arabia Foundation, a think tank based in Washington DC which focuses on the geopolitics of the Arab Gulf. [7] Eko Atlantic is a public private partnership between the Nigeria based Chagoury Group and the Lagos State Government and Federal Government of Nigeria. This ambitious project aims to reclaim 10 million sq metres of land from the ocean, protected by a 8.5 km sea wall. The project incorporates state-of-the-art urban design, its own power generation, clean water, advanced telecommunications, spacious roads, and tree-lined streets but progress to date has been frustratingly slow. [8] Maliha Hashmi, MENA healthcare leader, shares NEOM's vision of healthcare model of the future’, https://insights.omnia-health.com/innovation/dr-maliha-hashmi-mena-healthcare-leader-shares-neoms-vision-healthcare-model-future