The $500 Billion Dream in the Desert called Neom

As you walk up to One Canada Square in London, several big screens greet you. Sometimes there are adverts for hospitality tickets at Chelsea football club, or the newest Cartier watch. Other times, of late, these adverts have shown a large mirror-like ‘line’ set in the backdrop of some majestical mountains. Otherwise known as ‘Neom’, the futuristic city being built in the north west of Saudi Arabia.

Even Bloomberg have been running adverts for the desert dream. However, questions about whether or not the city can succeed continue to be asked. Even with both the largest financial resources and huge interest amongst professional services companies. Practical questions about the building of the city. As well as questions surrounding what kind of occupants or companies will reside there, continue to dominate online news.

Why are they building Neom?

The response to Dubai and Abu Dhabi, to help the Kingdom of Saudi Arabia (KSA) to pivot to a tourism and business location. This is just one of the reasons to build Neom. Additionally, the country has been going through massive changes since Mohammed bin Salman (MBS) became Crown Prince of the Kingdom of Saudi Arabia.

The Crown Prince has laid out a Vision 2030 including his leadership message. In it MBS explains how there are three pillars to the vision. The third pillar explains the desire to transform “our unique strategic location into a global hub connecting three continents, Asia, Europe and Africa. Our geographical position between key global waterways, makes the Kingdom of Saudi Arabia an epicenter of trade and the gateway to the world.”

When considering Neom, a trading hub seems like a good idea. Would a mere trading hub provide real competition to the likes of Dubai or Doha though? Probably not.

How much money do you need to build a City like Neom?

According to the World Bank the population of the Kingdom of Saudi Arabia is nearly 36 million. The Kingdom is actually only the size of Spain, Poland or the U.S. State of Texas when it comes to population.

But there are a few differences between the Kingdom and countries of a similar population. One of these differences is the oil giant Aramco. In 2022 Aramco was heralded as the world’s largest company by market cap. Larger than Apple Inc, Aramco was valued at $2.43 trillion. In fact, it made more profits in the second quarter of 2022 than Shell did during the whole year. $130 billion was what the firm reported in profits during 2022 so far at the end of the third quarter.

Aramco is owned by the Saudi government. Although it has had a lot of U.S. involvement in its past.

Then there is the Public Investment Fund (PIF) of the Kingdom. Where HRH Prince Mohammad bin Salman (MBS) is the Chairman of the Board and provides guidance over the long-term strategy of the PIF. It is also the sixth largest sovereign fund in the world.

Coupled with the funds available to MBS through the PIF, there are further companies like Aramco that are owned by the government, albiet none so big. Additionally, if Aramco goes public in Hong Kong (big ‘If’), the funds that become available could also be added to the kitty.

It all starts to add up. However, there remains the chance that $500 billion may not be enough. So, usefully the country has trillions of dollars available if needed. While the oil keeps being pumped. But, more importantly, how many trillions can the Kingdom really afford to invest into a city that might hold 9 million people? Is it a viable gamble to take?

Who runs Neom?

It makes sense to put someone in charge of Neom who used to work at Aramco. Which is Nadhmi Al-Nasr’s story. Al-Nasr is in regular contact with MBS who remains engaged with the project. Al-Nasr is also reported to be a tough taskmaster. He pays well, but demands a lot from employees.

There is a similarity to how China now positions Hong Kong on the international stage. And how Neom could help create new opportunities for the Kingdom. Just one of the similarities between China and Saudi Arabia. Another similarity is the pace of growth of both economies. In the last 30 years China and the Kingdom have both grown astronomically. Both their populations as well as their public infrastructure.

But as to who runs Neom, its not just about MBS and Al-Nasr. On the topic of Trojena, the ski resort part of Neom, MBS had the following sound-bites to share last year:

“Trojena will redefine mountain tourism for the world by creating a place based on the principles of ecotourism…. This forward-looking vision will ensure that mountain tourism will be another revenue stream to support the Kingdom’s economic diversification while still preserving its natural resources for future generations.”

Al-Nasr was also quoted in the story, but his quote was added under the statement made by MBS. It all follows a certain hierarchy. But without the help of external parties can the dream come true? Who are these external parties? First we wanted to focus on the size of the challenge though.

How big is Neom?

Oxagon, the Line, Sindalah, Silver Beach and Trojene. Neom is more than at first meets the eye. The Line part of the whole plan is effectively just the flagship and one small part, albeit an important one. Neom has four distinct elements, not including ‘Silver Beach’. The first one, Sindalah, a luxury island, is set to be ready by 2024. Trojena, amazingly, needs to be ready for the Asian Winter Olympics in 2029:

As to how big the project is. Yes, it’s taking place on a piece of land the size of Belgium. It will also be trying to compete with mega-projects like Dubai. But there is one more piece to the jigsaw.

Cop27 took place at Sharm el-Sheikh just a few months ago. The Egyptian travel hotspot is also a huge tourism hub. It also just happens to be 52 kilometers from Neom. Additionally, there are plans that a land bridge will be built across the sea to link the two tourism sites to eachother.

Maybe there is some method behind Neom. When you consider that Sharm el-Sheikh currently attracts over 11 million tourists each year. The location of Neom starts to make more sense.

The PR problems of MBS Vision

It all looks very compelling. But its easy to remember that the Kingdom is not a place where dissent is encouraged. The story of Jamal Khashoggi is significant here. The murdered Washington Post columnist warned in March 2018 that Neom’s failure could “bankrupt the country” but that nobody was allowed to say this. He was also at the Saudi consulate in Istanbul in 2018.

And it’s not only the story of Jamal that is significant to the success of Neom. There are the local inhabitants, many thousands of them, that have also been in the news. Many of them are members of the Huwaitat tribe. One of the towns that the tribe called home, Sharma, has already been flattened to make way for Neom. Resistance to the mass relocations is futile. One member of the tribe has already died after he resisted officials.

All the above has given rise to a PR problem for both the Kingdom and any suppliers or contractors involved in Neom.

Who is making all the money?

In 2016 the Kingdom’s Ministry of Economy and Planning was nicknamed the ‘Ministry of McKinsey’. And today Saudi Arabia is the Gulf’s biggest and fastest growing consulting market. Worth $1.8 billion in contracts. But it’s no longer McKinsey raking in the majority of the fees. Today Boston Consulting Group (BCG) sit at the head of the table.

100 of BCG’s consultants are working with the Kingdom’s Public Investment Fund (PIF). In the last five years PIF has been investing into targets such as Newcastle United in the UK. One of the two leaders of the PIF, Chad Richard, head of strategy development and integration, had been a partner at BCG prior to the move to the PIF. There is also Ihab Khalil, a BCG senior partner, who it is rumored has the ear of the governor of the PIF, Yasir Al-Rumayyan.  

New York-based investment bank Lazard Ltd are also working with the Saudi government. Discussions around the listing of Aramco outside of Riyadh have recommenced. Potentially the biggest listing in the history of IPOs. There is further talk of Neom itself listing at some point. But, importantly, can Aramco afford to disclose the way the company is run? Can Aramco afford to be owned by shareholders? Shareholders who might dissent with decisions on how to use profits.

How does China come into the picture?

Hong Kong has put its hand up as an option for the oil giant to list. Aramco would be four times larger than the next biggest listing – Tencent Holdings Ltd. It may well happen. Recent relations between the Kingdom and China have been improving. Hong Kong’s leader John Lee as well as Chinese President Xi Jinping have both visited the Kingdom on separate occasions in the last few months. Lee met the head of Aramco at his visit to the Kingdom earlier this month.

Several Chinese companies have been awarded contracts to work on NEOM’s infrastructure. POWERCHINA is one of the firms to have landed a lucrative contract for example.

Whilst the majority of our readers will be considering the actions of firms like BCG or Lazard. Others will be wondering how far the Saudi – Chinese relationship might develop. The speed of Chinese industry coupled with the financial might of the Kingdom seems inevitable to happen. If Hong Kong’s stock exchange is brought into the mix there will be even more money available.

Is the future of Saudi – Chinese relations looking promising?

#DisruptionBanking asked Zahid Ali, who works with companies and organizations from China to Dubai, to help shed light on the matter. 

“Saudi Arabia and Chinese relations have actually been warming for some time now,” Zahid explained. “In December, China on an official bilateral visit, signed 34 deals worth over $30 Billion with Saudi Arabia.” The deals covered everything from green energy, hydrogen, photovoltaic energy, IT, cloud services, transportation, logistics, medical industries, housing and construction factories.

These actions by the Kingdom’s leadership appear to be invaluable to the development of its Vision 2030 (and Neom). The Kingdom’s Minister of Investment stated how Vision 2030 offers unprecedented investment opportunities in various sectors. Sectors which include renewable energy, industry, communications, IT, biotechnology, tourism, building and construction, and many more. The Minister expressed his aspiration to enhance investments between the Kingdom and China, creating a new era of Saudi – Chinese cooperation.

A Power Struggle in the Middle East?

“China is Saudi Arabia’s largest trading partner, with trade worth $87.3 Billion in 2021. Chinese exports to Saudi Arabia were $30.3 Billion, while its imports totalled $57 Billion,” Zahid elaborated.

“For China, Energy (Oil) is absolutely key! China’s crude imports from Saudi Arabia stood at $43.9 Billion in 2021, accounting for 77% of its total goods imported. It made up more than a quarter of Saudi Arabia’s total crude exports, hence the importance to both countries.”

To Xi, ‘stability’ of energy supplies, regarding price and quantity, remains a key priority. Especially for the Chinese economy, as it heavily relies on both oil and natural gas imports. This very strategic and necessary partnership has not gone unnoticed in the U.S. Which in turn has given rise to concerns about the future U.S. – Saudi relationship. However, much as the name of Aramco once stood for Arabian American Oil Company, the Saudis and other Arab nations continue to be both optimistic and heavily reliant upon the U.S. More so than on China. For now.

With ongoing challenges in Yemen for instance, there is a huge need for U.S. co-operation.

“Saudi Arabia cannot just ignore the U.S. Its dependence on military protection is not going to end any time soon. And if the U.S. so wishes, may even increase. If MBS continues to flirt with China at the expense of relations with the U.S., he may end up actually accelerating U.S. disengagement with the region. Making an already promising Chinese – Saudi relationship, far deeper aligned and strategically integrated!” Zahid concluded.

Author: Andy Samu