Saudi Arabia’s Neom Makes China’s Evergrande look practical

Saudi Arabia’s Crown Prince Mohammed bin Salman announced the designs and the plan of The Line project at Neom on July 26. The Line, a civilizational revolution that puts humans first, providing an unprecedented urban living experience while preserving the surrounding nature. (Source: NEOM)

Everything about Neom — the futuristic city being developed near the shores of the Red Sea by Saudi Crown Prince Mohammed bin Salman — seems fantastical.

From flying elevators to 100-mile-long skyscrapers to a floating, zero-carbon port, it seems to owe more to Coruscant and Wakanda than to any urban forms outside of science fiction.

Even Neom’s financials are superlative. The first phase of the project until 2030 will cost $1.2 trillion riyals ($320 billion), with half of that amount provided by the Public Investment Fund, Saudi Arabia’s sovereign wealth fund, Salman told reporters in Jeddah this week. By 2030, he expects some 1.5 million people to be living in the twin horizontal skyscrapers, called The Line.

Believe it or not, those numbers aren’t as implausible as they seem. Take China Evergrande Group, the vast Chinese developer that’s mired in vague restructuring plans after ratings companies labelled it a defaulter last year. Neom’s promise to eventually become home to 10 million people seems, if anything, modest next to Evergrande’s boast that it’s housed 12 million. Evergrande’s investment cash outflow, net of divestments, has been 605 billion yuan ($89 billion) since 2010, about 28 percent of Neom’s budget. Given China’s income levels and construction costs have been about 40 percent of Saudi Arabia’s over the past decade, that suggests a budget that’s on the generous side, but far from insane.

Of course, if you were to choose a model for Saudi Arabia’s future it would probably not be a distressed developer from a Chinese property sector that S&P Global Ratings thinks may be headed as a whole toward insolvency.

Still, the biggest problem with Neom isn’t so much its cost and scale. Instead, it’s the way a will-to-power grandiosity is written into its very DNA, as Vivian Nereim explored in a recent Bloomberg BusinessWeek article.

For all Evergrande’s problems, it was always a pretty efficient user of capital. One reason it’s been hit with mortgage strikes of late is that it depended on pre-sales, in effect getting interest-free loans from its customers for the full value of properties before they’re built — something that becomes a problem when construction work goes into extended hiatus. China’s fastest developers could turn round a project in 12 months from conception to return of cash. At least in its early years, Evergrande’s numbers suggested it was consistently returning more than its cost of capital.

The foundations of its business model, moreover, were essentially solid. Some 200 million people moved to China’s cities over the past decade, while nominal gross domestic product per head doubled. That’s a compelling story of organic urban growth. Indeed, much of Evergrande’s downfall can be attributed to the way that it tried to buck organic trends for political reasons. Beijing wants to see rural migrants move to smaller, so-called ‘Tier-3’ cities in preference to its crowded, dynamic east coast metropolises. Evergrande’s land bank became more and more concentrated in such lower-quality locations. That attempt to reverse the gravitational pull of the country’s economic power centres was always likely to end in tears.

If a property developer focused on Chinese Tier-3 cities can turn into a disaster, though, how should one rate the prospects of a brand-new city in a desert distant from both oilfields and the unique pilgrimage destinations of Mecca and Medina? Neom’s vision of zero-carbon living for the 21st century is seductive — but if it is achieved, the economic prospects of the nation that’s using billions in oil money to build it are grim indeed. A world in which Neom’s innovations in urban living work is one in which Saudi Arabia’s main exports are superfluous. If Neom is intended more as a rebranding exercise for a country determined to sell every last drop of its crude, there are far cheaper ways to recalibrate your public image.

The lesson Saudi Arabia should draw from Evergrande is that infrastructure and property development work best when they follow the people, rather than trying to lead them. The kingdom will benefit far more from the humdrum metro networks being built in Riyadh, Mecca, Medina, and Jeddah, and from its long-delayed cross-country rail corridor, than from another aborted construction project on the shores of the Red Sea to join its predecessor, the King Abdullah Economic City. Similarly, actually fulfilling its plans to tap its vast and barely utilised solar and wind resource would provide cheaper power locally while freeing up petroleum for export.

Salman has his work cut out fixing his country’s sprawling, congested cities for a population of some 36 million expected to grow by a third by 2050.That task is hard enough amid signs that oil demand may go into decline, even as Saudi Arabia’s supply potential appears to be maxing out. That would be a far better use of the kingdom’s cash flows than a vast folly in the desert. For all Evergrande’s mistakes, it never tried to build its castles in the air.