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Saudi Arabia lures investors with green energy Vision

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Crown Prince Mohammed bin Salman (MbS) is a busy guy. His de facto ascension to the throne has been vigorous, simultaneously conducting a war in Yemen, an iron-fisted domestic purge, and an economic transformation. Born of a desire to transition from oil dependence, Vision 2030 is a bundle of initiatives, ranging from public health to housing and energy, meant to transform Saudi Arabian society and economy. 

However, the Vision has run into resistance from the Saudi religious establishment. Criticism is muted since most don’t want to get crossways with MbS. Under the reign of MbS, mass executions take place with nary a word about how the condemned were killed, just terse statements on the Interior Ministry’s website alluding to vague yet ominous accusations. In Saudi Arabia, the House always wins.  

Outside the Kingdom, skepticism is growing about whether the bold goals of Vision 2030 are achievable. For MbS, there’s nowhere to go but forward, no matter the cost. 

Among allies of the Kingdom of Saudi Arabia (KSA) like England, Germany and the U.S., human rights concerns must finally give way to the reality of their hunger for fossil fuels.

For companies operating in an environment of supply chain disruption, the Kingdom’s resources and largesse are irresistible. 

Even as the international community sought to isolate MbS, international investors have remained keen on the potential of the Saudi market, and the Saudi Vision attracts much ado. It’s worth digging into for a better understanding of the challenges petro-states like KSA face after peak oil and the lengths they are going to in order to meet them.

The Birth of the Prince’s Green Vision

Saudi leaders saw the writing on the wall. The International Energy Agency predicted global consumption of fossil fuels will peak in the mid-2020s and then begin declining. The investment bank USB forecast that by 2025, 20% of new cars sold will be electric. By 2030, it’ll be 40%. By 2040, all new cars sold will be electric. 

In 2016, King Salman and the Crown Prince began touting lofty, headline-grabbing projects that would end the Kingdom’s “addiction” to oil. Vision 2030 was the eye-catching yet harried result. The Vision has evolved through the years, becoming a grab bag of pell-mell projects that lack cohesion but not funding. In 2018, the Kingdom proclaimed that it would undertake “the largest renewables project ever,” billed by the Prince as “a huge step in human history,” only to scrap the whole venture seven months later. 

Aware of the gullibility of foreign investors, other leaders in the Middle East imitated MbS’s progressive-sounding schemes.

Nevertheless, the Gulf Cooperation Council (GCC), a club of resource-rich states in the Persian Gulf, is actively making preparations for the new era of green energy. Saudi Arabia has set its sights on reaching 50% renewable energy by 2030 and net-zero carbon emissions by 2060.

In a message to Disruption Banking, Kate Dourian, an independent energy consultant and resident fellow at the Arab Gulf States Institute, stated, “I don’t think any transition can be smooth and it will be no different for the Gulf Arab petro-states, who will have to redesign their economies to manage a switch from heavy dependence on hydrocarbon exports and more since renewable and clean energy currently makes up a very small percentage overall in the GCC countries. The UAE has the most diversified energy mix of all the GCC countries and has 80 percent of the region’s installed solar capacity. 

Woo Investors, Silence Dissent

MbS has reorganized Saudi society to achieve the reforms that are widely believed to be necessary. He summoned the forces of nationalism behind his rise to power, which coincided with the rise of a younger generation intent on challenging religious orthodoxy. In the process, MbS has deliberately and systematically dethroned the religious establishment. 

For the Saudi clerics and their Grand Mufti, it’s been a death by a thousand cuts, not a full-frontal assault. Businesses used to have to close five times a day for prayer. No longer! Also, the government officially prohibited the annoying, crackly loudspeakers used to amplify the prayers, ordering that the volume be turned down by no less than ⅔. An Islamic cleric who questioned the decision was promptly arrested. 

MbS sidelined the once-powerful religious police, stripping them of the power of arrest, and unilaterally bestowed the right to drive and attend sporting events to women. This infuriated conservatives, but anybody who speaks up, whether it’s a women’s rights activist or a hard-line cleric, faces arrest.  

Several prayer leaders who refused an edict to preach against the Muslim Brotherhood were fired. All of this is unprecedented, but MbS went further by directly challenging the fundamental beliefs of Saudi Wahhabism and declaring that extremists, even if they aren’t terrorists, would be viewed as criminals. 

Historically, the Royal Family maintained a power-sharing arrangement with the clerical establishment. The House of Saud benefited by having a scapegoat for the lack of reform, and clerics benefited with the power over millions of Muslims, far beyond the Kingdom’s borders. By sweeping aside the clerics and detaining dozens of his relatives in the Ritz-Carlton, MbS consolidated his power

Since then, the social goals of Vision 2030 have begun to materialize, according to Mohammed Alkhereiji, the editor of Gulf Affairs. In a message to Disruption Banking, he wrote, “when it comes to women’s rights, recreational options, and just a general way of life. That said, the conservative element still exists but does not have the state’s backing, which they previously enjoyed.

Part of the liberalization has focused on tourism and entertainment. The changes are noticeable, according to Kate Dourian who recalled:

From a recent visit to Riyadh, I could see a dramatic change in the city, which has been transformed with entertainment venues, high-end restaurants, outdoor leisure and music festivals that have given Saudi youth a welcome relief from the restrictions that prevailed before Crown Prince Mohammed bin Salman instituted radical social change, including allowing women to drive. That has made him very popular with Saudi youth and they make up the majority of the population.” 

At the same time, MbS has been on a global charm campaign, sidling up to big business and governments around the world with sparkly presentations and continuing to generate headlines as Western governments claimed to show MbS the cold shoulder. And it’s not hard to see why; their plans are full of razzle-dazzle. 

Observe the masterful dialectic of the Saudi Press Agency

We reject the false choice between preserving the economy and protecting the environment. Climate action will enhance competitiveness, spark innovation, and create millions of high-quality jobs.” 

In January 2021, MbS announced that the Kingdom would offer $6 trillion in investment opportunities over the next decade. This lofty claim, delivered at the World Economic Forum, was sure to raise eyebrows. It would seem that MbS is a betting man. He’s betting the House of Saud that green energy will pay off big. 

In an email to Diruption Banking, Yayha Assiri, a Saudi human rights activist and former member of the Royal Air Force, warned, “Reforms that do not enshrine human rights are either toothless or reversible. If corporations do not take human rights concerns seriously, they will run the risk of becoming Saudi authorities’ partners-in-crime.

NEOM: The Saudi El Dorado

An initiative that sticks out for its audacity, even among all the other eye-catching projects, is NEOM, a smart city to be built on the coast of the Red Sea. The city is a fixture in both Vision 2030, as well as the KSA’s green hydrogen strategy.  

NEOM will be emissions-free. No one will drive cars. Voi-la! The cost of building this as-of-yet nonexistent city? A cool $500 billion. Don’t look now, but they’re planning another exotic sister city, 50 KM away, Trojena, replete with an artificial lake and the GCC’s first ski resort.

Where is the money coming from? NEOM didn’t respond to Bloomberg’s request for comment on the origins of the funding. However, NEOM’s CEO and CFO were reportedly in New York City at invitation-only events for private equity firms and bankers. 

The project now has more than a thousand employees on-site, and some former executives lured from Buro Happold, a consulting firm, as well as U.S. conglomerate General Electric and RWE, a German multinational energy company, are planning the economy and urban design

The former CEO of RWE, Peter Terium, is head of energy, water, and food for NEOM. He told Bloomberg that KSA intends to sell green hydrogen produced in NEOM by 2026. The $5 billion project is called Helios, a joint venture between Air Products, ACWA Power, and NEOM, and it is the cornerstone of the KSA’s hydrogen strategy.

Kate Dourian stated, “Saudi Arabia intends to build the world’s biggest green hydrogen plant at the futuristic city of Neom in the north and at lower cost, which would give it an advantage. But that again will take years to complete.”

Capitalizing on its existing gray hydrogen facilities and its location between Europe and Asia, the Kingdom aims to attract forward-thinking businesses to NEOM. The success of the sensational project may depend on the buy-in of foreign investors and foreign executives, meaning that a central impediment was the Kingdom’s own reputation for barbaric repression.

NEOM fell victim to this when several illustrious Silicon Valley investors resigned from NEOM’s advisory board, after MbS’s involvement in the torture and dismembering of Jamal Khashoggi emerged.

MbS went from trading encrypted messages on Whatsapp with the U.S. President’s son-in-law, Jared Kushner, to a complete shut-out by the Biden administration. However, as Boris Johnson’s recent trip to KSA shows, Western energy needs continue unabated. Sooner or later, the U.S. White House will come calling.

Vision 2030: After 6 years, there’s progress, but…

The audacious initiatives of Vision 2030 seem partly aimed at young Saudis and partly aimed at foreign investors. Both are needed for the transformation that Vision 2030 calls for, but foreign direct investment (FDI) and human capital must be matched by massive government spending and economic expansion.

Kate Dourian says, “Vision 2030 has had more of a social impact than drive economic growth or job creation. The reform program was always going to be driven by oil export revenues and the state sector still dominates.

To realize the Vision, the labor market must be fundamentally altered. A substantial portion of workers needs to move from the public sector to the private sector. Women’s participation in the labor market needs to be dramatically increased, while the Kingdom cuts down its dependence on cheap foreign labor and eliminates government subsidies that supplement the salaries of state employees.

On this front, Kate Dourian explained, “There is not yet not enough private sector participation that is needed to diversify the economy away from over-reliance on the state sector. The mega projects that have been announced are being developed far from population centres and require foreign investment and expertise rather than local talent. Having said that, recent reforms to make it easier to obtain entry visas and an end to restrictions on foreign labour are all in the right direction.”

2020-2021 was a major milestone for MbS and his ministers to evaluate progress toward Vision 2030. Unfortunately, instead of a growing GDP, the Saudi GDP contracted by 4.1% in 2020, almost twice as much as the IMF predicted. However, in the last two quarters of 2021, KSA’s GDP was chugging along near 7%, buoyed by oil revenue. Still, Steffen Hertog, a professor from the London School of Economics, forecasted that it would take 16 years for KSA to reach OECD averages, even with a supercharged GDP growth rate of 5%.

Kate Dourian elaborated: “Saudi Arabia is catching up with grand plans to develop green hydrogen, solar power and unconventional gas. Both [the UAE and KSA] are investing heavily in blue and green hydrogen with Asia and Europe seen as markets for the product. But these will take time to scale up and it wouldn’t be realistic to imagine that they can export in any significant volumes before 2030. Even then, they will not earn the kind of profits that the two countries generate from oil exports.”

Both the Oxford Business Review and the Atlantic Council concluded that despite progress, the Vision’s aims were slipping away. Private sector employment barely budged since 2015, and less than half of the working-age population participates in the economy.

The Silver Lining

Economists may pile on gloom, but on the social front, change is visible. The proportion of women starting businesses has exploded, launching Saudi Arabia to the 3rd spot worldwide in its share of female entrepreneurs, who now account for 39% of all business owners in the Kingdom.

A business professor at a female college in KSA who asked to remain anonymous, says the country is changing dramatically, telling Disruption Banking:

There are many vocational female colleges in Saudi, and they all have Business Studies and Entrepreneurship courses. The ladies are all extremely motivated and passionate about starting their own small businesses. They show immense creativity at market days, where they sell their own products and services. From my personal experience, they plan to open coffee shops, small restaurants, pet shops, flower shops, health shops, etc. in the tertiary sector. The next next would be managing or owning those shops. The best indicator to me that they are supported by their families (fathers, husbands, brothers) is the fact that most of the shop attendants, sales personnel in the major shopping centers have become mainly female. The government has various programs in place to encourage small business creation and expansion, such as Misk Foundation, which includes funding and incubator opportunities. Although support for entrepreneurship can differ from family to family, Saudi is clearly creating an entrepreneurial friendly ecosystem.”

A Saudi female entrepreneur who preferred to remain anonymous told Disruption Banking in an email that female entrepreneurs can go to the Saudi government for business loans, as she did to start her business. In the first half of 2021, Kafalah, the government program that finances SME’s, doled out $115 million to 456 female-led businesses.

Despite this gap between the grand Vision 2030 and current reality, it does seem that the Kingdom has succeeded in cleared the path culturally for the next generation, while shepherding FDI and human capital into its projects. In particular, renewable energy firms and fintechs are sprouting up in the Saudi Market and attracting deep-pocketed foreign investors. Fintech startups based in KSA raised $150 million in the first half of last year, whereas only $23 million was raised in that sector from 2015 and 2020.

Other Middle Eastern nations have evidently followed suit: In the first quarter of 2021, no contracts were awarded for gas or oil-fuelled power stations in the entire MENA region, although $2.8 billion of renewable energy contracts were handed out in the same period. Foreign firms are piling in like there’s no tomorrow.

The study by the Atlantic Council recommended that the Kingdom “turn away from megaprojects and a completely top-down approach, and make serious commitments to education and human capital development,” ending with references to “greater transparency and rule of law.”

One thing that is clear about KSA under the leadership of MbS is that lectures on anything, be it political strategy, oil policy, or human rights, will fall on deaf ears.

Author: Tim Tolka, writer, journalist, and BI researcher

The Editorial Team at #DisruptionBanking have taken all precautions to ensure that no persons or organisations have been adversely affected or offered any sort of financial advice in this Article. This Article is most definitely not Financial Advice.

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