(Bloomberg) -- Days before Saudi Arabia kicks off its flagship investment conference, a handpicked selection of guests will get the first glimpse of Crown Prince Mohammed bin Salman’s trillion-dollar bet that the kingdom has a future beyond oil.
An exclusive group of financiers, entertainers and influencers from around the world will this week descend upon Sindalah Island, the first project to open its doors at the planned city of Neom. The resort is now home to ultra-luxury hotels and unspoilt beaches, plus an 86-berth marina where the uber rich can dock their yachts and dive into the crystal clear waters of the Red Sea.
A lot is riding on the success of Sindalah and the wider area in the kingdom’s northwest that’s been re-branded as Neom and is expected to cost anywhere from $500 billion to $1.5 trillion to build — Crown Prince Mohammed’s boldest move yet. The opening comes days before the kingdom kicks off the eighth edition of its Future Investment Initiative, a Davos-style confab that’s expected to draw top executives from Wall Street and Silicon Valley.
“There is still considerable effort to go in partnerships and investment, so timing with FII would make sense,” said Karen Young, a senior research scholar at Columbia University’s Center on Global Energy Policy. “If investors see some major infrastructure in place for power, water, transport, that would do a lot to instill confidence about government commitment to major installations in Neom.”
Designed to be everything from a futuristic port, a high-end tourist destination and a clean-energy hub to a venue for the FIFA World Cup and the Asian Winter Games, Neom has never been short of ambition.
It was to be the city of the future that sought to “revolutionize everyday life.” Not just a chance to reshape Saudi cities — replacing oil-burning power plants that belch carbon dioxide with renewable energy plants — but a bold promise to re-imagine how cities globally should look and function.
Yet, its development has been plagued by challenges related to transforming Crown Prince Mohammed’s vision into reality. Foreign investors have been slow to back the plans and the outlook for state coffers has been weaker than expected just a few years ago, with oil trading well below $100. As a result, budgets have been cut and development on some parts of the project has been delayed.
This story is based on interviews with over half a dozen people close to the project, who asked not to be identified as the information is private.
“These ambitious projects are big gambles,” said Robert Mogielnicki, senior resident scholar at the Arab Gulf States Institute in Washington. “My sense is that the Saudi government is prepared to shoulder the main financing burden for many giga-projects over the short term, with greater private-sector and foreign investment anticipated to materialize over the medium and long terms.”
In a statement, a spokesperson for Neom said that all of its five regions are “under active development.”
Ambitious Timeline
Crown Prince Mohammed began conceptualizing Neom in 2015, describing the need for Saudi Arabia to have a “commercial and economic capital.”
He laid out his vision for a city where everything was connected by artificial intelligence, from shopping to entertainment to health care and travel. An ambitious timeline envisioned an initial public offering of the city before 2020 and the main project opened by 2025.
In reality, Neom has been harder to build than it was to imagine.
Besides Sindalah, around a dozen other futuristic tourism projects have been publicized — many look like they’ve borrowed from the sets of a science-fiction film. An $8.4 billion green hydrogen plant is being built. In one mountainous area, dubbed Trojena, ski slopes will be constructed to host the Asian Winter Games in 2029. Both projects are slated to open in 2026.
But what has most captured imaginations — and incited skeptics — is The Line, a pair of 500 meter tall and 170 kilometer (105.6 miles) long mirror-clad buildings stretching from the coast into the desert, at times merging into the mountainous landscape.
More than any other part of Neom, The Line has proved most challenging. Plans to get around the two skyscrapers by elevators that can travel vertically and horizontally face significant technological hurdles, one person familiar with the matter said.
Another plan to link together residents of The Line through a super-fast train system meant to ensure no one was ever more than 15 minutes away from any other resident, despite the huge physical distance between them, faces similar problems.
The Line is being constructed in stages, with phase one well underway and on track, the Neom spokesperson said. The technology for multi-directional lifts exists and the project is evaluating various options and providers, according to the statement.
It’s not just the practicalities of building some of the futuristic aspects of the development that have been a challenge. The sheer scale of the plan threatens to strain even Saudi Arabia’s vast financial resources, which include a sovereign wealth fund with almost $1 trillion of assets and the income from the kingdom’s huge oil revenues.
The government has approved only about 80% of the budget that Neom was asking for this year, one of the first times its spending plans haven’t been waved through, Bloomberg has previously reported. To help fill the gap, Neom planned to tap Saudi investors by issuing its first Islamic bonds. That’s also been delayed because the company does not have a set of accounts for 2023 prepared to show investors, according to a person familiar with the matter.
The combination of strained finances and practical difficulties means that parts of The Line have had to be scaled back. The government at one point hoped to have 1.5 million residents living in The Line by 2030. It has since cut back how much it expects to have built, now aiming to house less than 300,000 residents by then.
Broadly, Neom was to become a vision of the future of the country. It wasn’t just going to be a giant real estate project, but would have its own legal zone and regulations. Yet — seven years from its launch — development of the promised regulatory code has been as beset by problems as its physical development.
A team of lawyers has spent years writing the legal framework for the city, but it is still not yet finalized. Until that is complete, attracting foreign investors into a jurisdiction of uncertain legality has proven to be a challenge.
“I would be surprised if some form of special economic zone status is not applied eventually to Neom,” said Mogielnicki, who also wrote a book about the role of free zones in the region. “Effective and appealing legal frameworks associated with economic zones take time to formulate, and building foreign investor trust in these legal frameworks takes even more time. Even though policymakers would like it to be the case, there aren’t really any easy shortcuts here.”
To be sure, Neom has managed to attract some foreign firms. The green hydrogen project has the backing of US-based industrial gas supplier Air Products, and Sindalah is set to feature several hotels operated by Marriott International Inc. There’s increasing investor interest in the legislative agenda being developed for Neom, a spokesperson said.
In an attempt to boost the reputation of the project and convince investors, financiers and construction firms that Neom is going to be built, it has held several receptions on the site. In April it hosted representatives from four dozen global and regional institutions so they could see the development’s progress.
It also launched a website, Ground X, to display images from a network of 452 time-lapse cameras, 63 live cameras, and more than 300 drone locations from across the site to show that work was progressing, as part of a bid to push back against skeptics.
Images from the website, including satellite photos, show vast amounts of construction work and long trenches that have been dug in the desert, marking out the path The Line is expected to course through the Saudi landscape. The pictures demonstrate that despite the skepticism and technical challenges, the kingdom is plowing on with development.
For now, much hinges on Sindalah.
“I think the government is calibrating expectations on one hand, and showing fiscal and planning prudence on the other, while still sticking to the ‘wow’ factor they want to achieve for both domestic and international audiences,” Young said.
(Updates with added detail on FII)
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