Is Neom the answer to Saudi Arabia’s post-oil economy?
Speaking at the three-day Future Investment Initiative conference in Riyadh at the end of last month, Crown Prince Mohammed Bin Salman had a surprise for the audience of businessmen and journalists. The heir apparent outlined his vision for Neom, a $500bn city along the country’s Red Sea coastline stretching from Egypt to Jordan. Spanning 26,500 sq km and valued in the trillions, the futuristic economic free zone is seen as a key pillar of Saudi Arabia’s Vision 2030 for economic transformation, with the expectation that it will add $100bn to Saudi Arabia’s GDP by 2030.
It would undoubtedly be a game changer for the country. But this, remember, is a conservative country that has traditionally been slow to change. Clearly the Crown Prince wants to speed up this process. What are his chances of success?
Game of free zones
The idea to build an economic free zone, where companies and residents are exempt from selected local laws and taxes, is a long-standing tradition in the MENA region. Dubai is the city that has most successfully implemented the concept, starting with Jebel Ali Free Zone in 1985, and accelerating greatly after 2003 with a succession of new ‘cities’, including Media City, Maritime City and DIFC in 2004.
A tide of economic free zones have swept the Middle East, with varying degrees of success since then, all attempting to coax investment and commerce into the region.
The plan is for Neom to trump all these. The high-tech haven will be a place where everything from sorting the post to garbage disposal will be automated. The Crown Prince says there won’t even be supermarkets because it will be done online. “Everything will have a link to artificial intelligence, to the Internet of Things – everything,” he told Bloomberg. “Your medical file will be connected with your home supply, with your car, linked to your family, linked to your other files, and the system develops itself in how to provide you with better things.”
In terms of larger infrastructure, a high-speed train will serve as a gateway to the Red Sea shipping routes leading to one of the world’s major shipping corridor, the Suez Canal in Egypt.
One Saudi-based CEO of a consulting firm that has worked on a series of infrastructure projects in the kingdom thinks Neom’s free zone status will allow resident companies in the area to be exempt from a range of national tariffs and local laws and regulations. “They want to create a state-of-the-art free zone, meaning many Saudi conservative standards would not apply,” says Otto Goessnitzer, from Equinox Middle East.
This means that Neom may not be hampered by the bureaucratic inefficiencies and lack of infrastructure that has blighted previous attempts at mega-projects – the most obvious one being King Abdullah Economic City (KAEC) – and has seen the kingdom ranked 94 among 190 economies in the ease of doing business ratings recorded by the World Bank in 2017. Dubai, by contrast, ranks 26.
Neom is set to become a new vibrant destination located in the north-western region of Saudi Arabia
Nevertheless, the project has two major positives going for it. Firstly, it will be fully owned, and part funded (in addition to local and international investors), by Saudi Arabia’s Public Investment Fund (PIF). The plan is to float it on financial markets alongside oil giant Saudi Aramco as part of the drive to diversify away from oil.
It also has geography on its side. The project aims to lock into the 10 percent of world trade that transits through the Suez Canal, according to Neom’s newly-appointed CEO, Klaus Kleinfeld, the former head of US engineering firm Arconic Inc.
Part of the city will be on the Ras Sheikh Al Hameed peninsula that juts about 50km into the Red Sea at the mouth of the Gulf of Aqaba in Jordan. The landmass of the city will connect Egypt on one side and Jordan on the other, making it the first private zone to span three countries.
According to sources, the crux of the masterplan, which has not yet been disclosed publicly, is to make Neom into a major transportation and maritime hub. DP World which operates Jeddah’s South Container Terminal (SCT) says it plans to use the Jeddah port as a crucial link on the Red Sea chain, cementing the region’s status as a blood-line to global trade.
The zone will also serve as a gateway to the proposed King Salman Bridge, which will connect Egypt and Saudi Arabia, the kingdom’s Public Investment Fund who will bankroll the project has said.
Changing trade patterns
The new maritime hub also promises to transform trade patterns for countries such as Dubai, Bahrain and Kuwait, the Crown Prince says. “Kuwait will export to Europe faster and cheaper… through the pipelines and the railways to Neom, immediately to Egypt, to the north of Sinai, to Europe,” Prince Mohammed Bin Salman told Bloomberg in an interview.
Rather than compete with Dubai, or other hubs further to the east, Neom will complement China’s grand plan to push rail and road connections through Central Asia with the One Belt One Road Strategy, infrastructure consultant Goessnitzer says. “It will not compete; it will contribute and provide to the value chain,” he argues. “China will endorse this project because it will help it move goods much more economically throughout the Middle East, direct to Egypt, Jordan and other countries in the region. This is the major thing to consider.”
The project will cut costs and transit times on the classic Silk Road trade route, acting as a short cut for China to MENA markets, Goessnitzer says. “It will bring billions, perhaps even trillions, in added value, enhanced trade, and at the same time lower transportation costs. This is a win-win situation.”
Goessnitzer says the streamlined supply chain and trade route will go as far as to benefit not only Europe but the whole world, from China to America.
Neom is the latest project in Prince Mohammed Bin Salman’s drive to remake the kingdom
As Saudi Arabia grapples with an economy that has gone from falling growth to a negative GDP this year, amid austerity measures and dwindling oil prices, authorities may struggle to deliver a project of such dizzying scale and ambition, experts warn.
Jason Tuvey, an economist for research group Capital Economics, says that while the plans sound impressive, there are several reasons to believe the project will struggle to achieve its goals.
“Saudi Arabia has a patchy record when it comes to fulfilling mega-projects,” he says, pointing to the $2.5bn King Abdullah Economic City (KAEC) near Jeddah that has faced repeated delays and four masterplan revisions. “On completion, the city was expected to have as many as two million residents, but at present only around 5,000 people live there permanently.”
Tuvey explains how the Saudi authorities expected KAEC to rival Dubai as a trading hub. “However, shipping statistics show that there are just 11 ships currently in port at KAEC, compared with 54 at Dubai’s Jebel Ali.”
The issues that affected KAEC have been a concern for other mega-projects, such as the King Abdullah Financial District, as well as a host of other economic cities announced in 2005, Tuvey notes.
Another issue that will require attention is the site’s location, which, as Tuvey notes, “will be built in previously uninhabited land that is likely to include parts of the Sinai Peninsula, where the Egyptian army has been fighting militant groups for many years.”
Wary from his time spent as an advisor on Saudi’s Vision 2020, Goessnitzer says that Neom reminds him of the 25-page dossier, developed by Ernst and Young for economic transformation way back in 2004. “From that study, nothing has been implemented. Then we got Vision 2030, and now we have this half a trillion dollar city. What they are aiming for is to create a hub like Atlanta in the United States, or like Dubai for high-tech and transportation. It’s a monster project.”
Initial ground-breaking for Neom begins in the last quarter of 2019. The Crown Prince says he expects the first people to start moving into Neom in 2020, while the project will open officially in 2025.
Plans for a control centre to launch the project, called Neom Bay, have been fast-tracked, to be ready before 2021, while an airport in Tabuk, along the north-west coast of the country was completed this month, which will be used by Neom employees. It will start welcoming people in 2019, while the main Neom airport will be ready after 2020, Tuvey says.
Goessnitzer, with his experience of previous attempts at economic transformation, says the next two years will be crucial to seeing how the project takes off. “This is a very ambitious project and an incredible thing to fund over several stages and years,” he says. “So we’ll see what comes up.”