As Saudi Arabia balances its economic and social reforms in an increasingly complex political environment, the newly-launched futuristic city known as ‘NEOM’ presents territories to experiment with new rules within the ultra-conservative kingdom.
If successful, the envisioned Dubai-like metropolis, a $500 billion city spread across 23,500 square metres, would lead the Saudi push to wean itself off oil dependence in the rest of the kingdom, with potential spillovers to the neighbouring UAE emirate.
“At its core, NEOM is effectively a Charter City that seeks to establish a new set of institutions (economic, political and judicial) within Saudi Arabia, yet which will be separate from the existing legal and regulatory framework of the country,” Jean-Paul Pigat, the head of research at Dubai-based Lighthouse Research, told Zawya by email.
The concept of Charter Cities is not new and their size and age have varied - from established, global hubs such as Hong Kong to proposed new cities in places such as Honduras, Pigat noted.
The main motivation of implementing a Charter City is to allow a degree of experimentation and flexibility within national borders that would overcome existing barriers that are perceived to undermine investment, growth and job creation, he said.
“In the specific case of NEOM, it is clear that authorities have acknowledged the need to fundamentally overhaul Saudi Arabia’s existing institutional framework if they are to achieve their objectives under Vision 2030,” Pigat said. “Implementing international best practices – in the judicial, regulatory, and perhaps most importantly, social arena – is a step in the right direction.”
Saudi Arabia’s crown prince Mohammed bin Salman unveiled NEOM as his biggest project yet at a major investment conference, dubbed ‘Davos in the Desert’, which was held in Riyadh in October.
Described by the young crown prince as a city offering “a new way of life”, the name of the project stands for “NEO”, a Latin word meaning “New”, and “M”, which represents the first letter of the Arabic word meaning “Future”.
The huge business and industrial zone is set to extend both to the Jordanian and Egyptian borders near major maritime routes at the Red Sea and the Gulf of Aqaba. It will incorporate a stretch of coastline reaching over 468km. Renewable energy will power the special economic zone, and robots will outnumber people. The project’s first phase is set to be complete by 2025.
Bahraini economist Omar Al-Ubaydli said that the attractiveness of mega-city projects in countries like Saudi Arabia is partially because they represent a relatively quick way to overcome entrenched, bureaucratic interests that might otherwise slow down economic progress.
“All government organisations across the entire world have a propensity to over-regulate, and to exceed their original mandate, creating a legal maze for businesses trying to create value,” he told Zawya by email.
“Deregulation is politically very difficult (though not impossible) as bureaucracies resist attempts to disarm them,” Al-Ubaydli said. “A good alternative is creating new economic zones that fall outside the jurisdictions of existing regulatory bodies, so that a new, leaner and more efficient legal code can be written from scratch. This is likely to be part of the motivation behind NEOM,” he said.
Mohammed bin Salman and his father, King Salman, have heralded a wide set of social reforms that have included the lifting of a longstanding ban on women driving in the kingdom, and a curbing of the role of the once-powerful religious police. Balancing act required
As Saudi authorities attempt to push ahead with difficult and often controversial reforms within a deeply conservative society, there is clearly a balancing act underway, Pigat noted.
“In this sense, NEOM – as a non-coercive Charter City (i.e. anyone who wishes to work or invest in the project is able to do so) is perhaps an attempt to strike this balance between reformers and those who prefer the status quo,” he said.
In June, Mohammed bin Salman became the next in line for the throne of the Arab world’s largest economy.
On the political front, the 32-year-old prince has also taken bold steps and initiated a major shakeup among the kingdom’s political and business elites. Earlier this month, several powerful royal family members and businessmen were detained on allegations of corruption, money laundering and bribery.
Adil A. Al-Qusadi, CEO of Gulf Think Tank sees a trio of economic benefits from NEOM, with the first element being an entrepreneurial approach and the second a partnership-based trend where "investment diplomacy" plays a central role.
“Quite differently from the past, we can say that the Saudi cabinet ministers are becoming more of ‘enablers’ of such a role and are frequently deployed to every part of the world to expand that cause,” Al-Qusadi told Zawya by email.
“Third, is the extensive customisation of the Saudi legislative, economic, cultural, social and human capital industries to fit the new Saudi land of untapped opportunities, i.e. where merely talent and added-value are the determining factors,” he added.
While the International Monetary Fund endorsed the ambitious project
saying that it would stimulate trade and benefit the entire region, it highlighted the need to balance the massive cost of the zone with the urge to cut the state’s budget deficit. Major private sector participation thus is significant for the project’s success, according to a senior IMF official. Finance, time and security
NEOM will be financed by the Saudi government along with domestic and international private investors and it will be fully owned by Saudi Arabia’s sovereign Public Investment Fund (PIF) until it is floated on financial markets.
“Historically, such a mega-calibre initiative takes plenty of time in the ‘incubation period’,” Al-Qusadi said. “But this is no longer the case. NEOM was announced, key investors were on the stage (and then) the contract with Klaus Kleinfeld as NEOM CEO was signed in the same-day coffee break,” he added, stating that the Vision 2030 blueprint announced by the kingdom 18 months ago is silently influencing the whole region’s way of doing things.
“These initiatives redefine the relationship between politics and economics, and overcome the traditional political, ideological and social divides,” he said.
Yet ambition and vision alone may not be enough to deliver a project of this magnitude, according to Jason Tuvey, an analyst at London-based Capital Economics.
Following NEOM’s announcement last month, Tuvey issued a note stating that while the plan sounded impressive, there were a number of reasons why it may not materialise, not least its location. Part of the site comprises previously-uninhabited land at the Sinai Peninsula, where the Egyptian army has been battling militant groups for many years.
Tuvey also said the kingdom’s record in delivering mega-projects is “patchy”, citing repeated delays at King Abdullah Economic City (KAEC) as an example. He said the city was due to have two million residents on completion, but currently only about 5,000 people live there.
“The troubles that have blighted KAEC are evident in other mega-projects, such as the King Abdullah Financial District, as well as a host other economic cities that were announced by King Abdullah in 2005,” the note said.
He argued that it would have been better for the government to maintain its focus on the economic reforms announced under the Vision 2030 plan. Spillovers to Dubai
Observers have said that the launch of NEOM embodies a vision by the Saudi prince to create a Dubai-like economy within Saudi borders. Yet analysts differ on how this massive undertaking would impact the UAE emirate, if successful.
NEOM is set to expand the options of investment for Saudis within the kingdom’s borders, thus, reducing capital outflows, the Public Investment Fund (PIF) said.
Meanwhile, elements of social reforms and freedom in the project also seem to be designed to draw foreign companies to establish a significant presence within the kingdom.
“Many firms active in the Saudi market base their employees out of Dubai simply due to the emirate’s quality of life and more liberal social policies,” Pigat said.
“Although NEOM, if successful, would pose a risk to this Saudi-focused business activity in Dubai over the long term, in the short term we suspect that the emirate could benefit as the project slowly takes shape, as it will require an influx in foreign expertise that will still most likely be based out of the UAE,” he noted.
Saudi authorities have already started to remove some of the barriers to foreign investment in the kingdom and it was recently announced that foreign investors would soon be allowed to own more than 10 percent of Saudi listed companies.
Al-Ubaydli believes that Dubai would benefit from the success of NEOM as it would raise the overall attractiveness of investing in the Middle East, and would help to decrease security fears, which sometimes scare away investors, he said.
“The most productive way to address the region's security problems is to generate economic growth, as a growing economic pie encourages people to direct their efforts toward production rather than conflict. Moreover, there are likely to be knowledge spillovers from NEOM to Dubai and vice versa, benefiting both, in the same way that Stanford benefits from its proximity to Berkeley, or Harvard from its proximity to MIT (Massachusetts Institute of Technology),” he added.
While some of the projections of NEOM, such as having the highest GDP per capita in the world by 2030, seem out of reach, the project shows that the leadership has identified some of the largest constraints to developing its non-oil economy, Pigat said.
© ZAWYA 2017