MBS promises ‘giga-projects’ and social change to drive Saudi reforms

Published in GSN, 2 November 2017

One thing to be drawn from the slew of announcements from the Future Investment Initiative (FII) – the high-powered conference dubbed ‘Saudi Davos’ by local media, which was hosted by the Public Investment Fund (PIF) in Riyadh from 24-26 October – is that Saudi Arabia is clearly still a big draw for international business executives, even if the economy is in recession and struggling under an austerity-driven government spooked by low oil prices (GSN 1,045/9).

A plethora of chief executives, presidents and other corporate titans showed up at the jamboree, including the heads of Japan’s Softbank Group, Masayoshi Son, and BlackRock, Larry Fink; both firms are partners of Crown Prince Mohammed Bin Salman Bin Abdelaziz (MBS)’s favoured vehicle the PIF in large investment funds. They were joined by global business celebrities including Tidjane Thiam of Crédit Suisse, Frans van Houten of Dutch electronics giant Philips, Thomas Kennedy of US defence firm Raytheon and Joe Kaeser of German industrial conglomerate Siemens, to name just a few. US treasury secretary Steven Mnuchin represented the Trump administration (on a week-long visit to the Gulf that subsequently took him to the UAE and Qatar).

MBS has clearly lost none of his ambition or taste for creating headlines. Among the announcements was a $500bn plan for a new economic zone called Neom in the uninhabited north-west, the granting of Saudi citizenship to a robot, a $1bn ‘non-binding’ memorandum of understanding with Virgin Group entrepreneur Richard Branson to invest in his space travel business and further signs that some of the strictures on society are to be loosened.

MBS and officials including PIF managing director Yassir Al-Rumayyan insisted the Saudi Arabian Oil Company (Saudi Aramco) flotation is still on track, despite persistent speculation that the initial public offering (IPO) might be delayed, confined to an in-kingdom share offering or replaced by a private sale of shares to Chinese investors (GSN 1,046/14). Neom might be floated on the Saudi Stock Exchange (Tadawul) in the future, although it is likely to be some time before the zone is ready for a listing or the bourse is able to digest another huge IPO.

While MBS and his allies are doing their best to project a sense of unstoppable momentum, there are reasons for others to be cautious. Major economic transformation plans have come and gone in the past without much actually happening and the same could easily happen to Neom (its name is derived from the Greek word ‘neo’ meaning new, and ‘m’ for the Arabic word mustaqbal meaning future). The plan to turn 26,000km2 of parched desert into an urban landscape is eye-catching, but it’s chances of success ought to be considered in light of previous schemes, such as the plan to build six ‘economic cities’ around the kingdom first unveiled in 2005 – they have either been abandoned or relentlessly scaled back since then. The King Abdullah Financial District in Riyadh also failed to fulfil its brief of becoming a new financial hub for the kingdom let along the region. Neom, which will extend into parts of Jordan and Egypt, has its work cut out too. As Jason Tuvey, Middle East economist at Capital Economics, points out, “it 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.”

Neom will be focused on nine sectors including energy, water, biotech, robotics, food, digital sciences and media production. The project is being led by chief executive Klaus-Christian Kleinfeld, a former chief executive of Alcoa and Siemens. Details remain obscure, but the $500bn needed to fund the scheme is due to come from a combination of the PIF, other arms of the Saudi state and local and international investors.

The still immature nature of Saudi financial markets will not make it easy for such expensive schemes to progress. Some of the issues were gently highlighted in a report called Transforming Saudi Arabia’s Capital Markets, issued by State Street Global Advisors at the FII. The US firm says the financial system remains incomplete, with a sound banking system offset by an immature bond market and an equity market which is still emerging. “Saudi Arabia could offer sufficient scale in its domestic markets and enough regional weight to create a hub – provided it starts building out its capital markets now,” it concluded.

Alongside the project announcements were some notable comments about transforming Saudi society by MBS – who one day roamed around the conference venue for more than an hour taking selfies with eager attendees. “I am one of the 20m youths”, he said from the stage, referring to the large young population. “They are motivating me. They are the engine pushing me forward. If they work and follow the appropriate direction, they will create another country.” On that theme, he vowed to tackle religious extremism, saying “We want to go back to what we were: moderate Islam.”

The projects being pursued by the PIF – which it likes to refer to as ‘giga-projects’, presumably because it feels the prefix ‘mega’ doesn’t do them justice – are a critical element of appealing to young and more liberal Saudis. Like the recently announced Red Sea resort project at a site further south along the coast (GSN 1,043/5), Neom will have a more relaxed social code. The authorities say Neom will be developed to be “independent of the kingdom’s existing governmental framework, excluding sovereignty.” In an interview with Bloomberg, MBS said of Neom that “we can do 98% of the standards applied in similar cities, but there is 2% we can’t do, like, for example, alcohol. A foreigner, if they desire alcohol, can either go to Egypt or Jordan.”

The PIF also unveiled a new identity for the ‘entertainment city’ planned for a site 40km south of Riyadh. To be called Qiddiya, it is due to open to the public in 2022.

For all these plans to succeed, MBS needs to bring both financiers and the public with him. While many businessmen are undoubtedly keen at the prospect of some of the projects under discussion, there are some outside Riyadh and Jeddah that feel excluded or sidelined from the wide-ranging reforms now being pursued. They represent perhaps the greatest risk to his reforms plans, although some palace insiders at least appear impassive. “A woman needs to be able to drive herself to work. Without that we are all doomed,” one unnamed senior Saudi royal told The Guardian. “Everyone knows that, except the people in small towns. But they will learn.”