High profile projects are not always reality, as the cancellation of the 200GW solar project of the Kingdom and Softbank are showing. After a media hype after the announcement of an agreement between Saudi Crown Prince Mohammed bin Salman and Japanese investment fund Softbank’s CEO Son in the USA, skepticism increased about the feasibility of the overall project.
Saudi officials openly questioned the overall project, and indicated since long that the decisions were made without conferring with all Saudi stakeholders, especially the Ministry of Energy, Petroleum and Mines. Today’s statement that the giga solar project has been shelved is not a surprise, but a possible indication that realism is taking over from months of dreaming and presenting fata morgana’s . The Kingdom’s economic transition plans, as presented in Saudi Vision 2030, are already challenging path to climb the coming years, the construction of a functional giga solar project would have most probably overstretched financial and material capabilities of the Kingdom, threatening stalling other more pressing projects in due course.
The ideas behind the 200GW solar project are clear. Taking advantage of one of the Kingdom’s natural resources, the sun, seems a logical and technically possible opportunity. Implementing the overall plan, which would in one go propone Saudi Arabia from Kingdom of Oil to the new Sun King, a dream but in theory possible. Economically, using renewable energy sources to counter growing oil and natural gas use to produce power and water (desalination) a real possibility and in the long-term even an attractive one. Still, the overall gigantic scale and need of investments was too large to continue. As some Saudi officials have diplomatically stated the Kingdom will be working on a "broader, more practical strategy to boost renewable energy." The fact that 200GW would be three times higher than Saudi’s daily needs in energy just was overlooked by most pundits. Without any functional other markets, as a MENA power grid is still in its infancy while demand is not high enough to counter production, technical challenges for these volumes are staggering.
Some Saudi advisors were even less diplomatic. A senior advisor even stated that “it is easy to sway or grab one's attention, but difficult to do any execution". It seems that the only ones working on the project were journalists, no others. It also has become clear that internal opposition has also a material factor behind the shelving of the project. Already from the start, MBS’ supporters such as Khalid Al Falih and others have been voicing their concerns about the overall approach or even openly criticized it totally. Sources indicated that the Ministry of Energy or Economy were totally surprised with the announcement of the project during the visit of MBS in March to the US.
Others also see it as a possible growing split between Saudi Arabia’s leading MBS supporters and Softbank, which is a partner in the $200-billion project. After a couple of years of ‘success stories’ between Softbank and Saudi Arabia, the honeymoon weeks seem now to be over. At present, Softbank and the Saudi sovereign wealth fund Public Investment Fund (PIF) have still set up a $100-billion venture, called The Vision Fund, which is aimed to boost or acquire technology investment in the country. The overall commercial success until now is still disputable. Several high profile international investments have been made by the Vision Fund, but largely in non-Saudi ventures, while real large scale new technology ventures in Saudi Arabia are not yet being presented. The majority of funding has flown into non-Saudi ventures outside of the Kingdom. Internationally the position of Softbank and its CEO Son already has been scrutinized. The success ratio of Softbank projects and investments is not seen as very impressive the last years.
Just before the shelving of the 200GW solar project was announced, international media has been focusing on the growing nuclearization of the Middle East. Saudi Arabia is currently discussing the construction of one or more nuclear power plants, largely to counter future energy demands. The solar fata morgana, which now has disappeared in a fog of political and economic statements by officials, however could be a major push for other options. The only real possibility is currently nuclear. Confronted by increased power demand the coming years, while trying to deal with an increased demand for its own crude oil and petroleum products, Saudi Arabia will not have a wide range of choices. If Riyadh does not want to be confronted by a situation in which more oil is being used domestically the next years, which would diminish not only its overall revenues but also be a possible threat to its geopolitical position, nuclear will be put in place on a larger scale than currently was expected.
Still, change is continuing, even with blowing up hot air balloons or solar power dreams. On Sunday September 30 the Saudi SWF PIF announced a new ultra-luxurious destination on Saudi Arabia’s northwestern coast of the Red Sea, called Amaala or dubbed the “Riviera of the Middle East”. The resort is going to be initially funded by the PIF and set up in the Prince Mohammed bin Salman Nature Reserve. In a statement, the PIF said Amaala will sit alongside NEOM and the Red Sea Project as part of a giga-projects investment portfolio. Nicholas Naples, a veteran luxury hospitality and development executive, will be the CEO of the project, PIF said. The project will include marinas and a yacht club and aims to be a destination for boutique luxury cruises. The retail areas will include a mix of galleries, ateliers, artisan workshops and bespoke outlets along with a wide range of international and local restaurants. The project aims to provide 22,000 jobs across hospitality and tourism, leisure and retail, in addition to the opportunities created in construction and ancillary industries.
While the term Giga Projects has become a staple good in Saudi Vision 2030 project plans, reality also is hitting elsewhere. Saudi Arabia’s future, which will need to be build on economic diversification and high volumes of new jobs, looks to improve. With the promise that JP Morgan will include Saudi Arabia into its JP Morgan Emerging Markets Bond Index, the Kingdom can expect another infusion of cash into its economy. Analysts are speaking of around $11 billion or more. According to the Saudi debt management office the latter figure is on the safe side.
Financial figures are following each rapidly. The Saudi government has revealed another boost of government spending for 2019. The investments are increased, even that it is closely linked to oil price developments. The 2019 government budget has been increased by around 7 percent, reaching a level of 1.1 trillion riyals ($295 billion). Official figures also show a steep increase of total government revenue, based on 70 percent oil sales, reaching a level of 978 billion riyals ($261 billion), which is an 11% increase compared to 2018. The Kingdom is targeting a balanced budget in 2023.
Still, looking at the immense difficulties to implement the long list of major and Giga Projects of the PIF, the privatization of a long list of government owned companies (airports, ports, etc), the road to success will be still full of hurdles. The need for diversification of its industrial sectors is clear. Until now, in contrast to Saudi Vision 2030, a large part of investments of PIF have been done abroad. International acquisitions are understandable and needed to spread the risk of a global economic downturn, but wont bring the hard-needed 5-6 million new jobs to counter youth unemployment. Giga projects are also not a Holy Grail but only a drop in the ocean, which could however be forced by a positive economic storm in the Kingdom to head to the shores of the country. The coming years, all efforts should be focused to develop new economic, financial and technical sectors at home in areas where it does not have an obvious natural advantage. The luck of the Kingdom of Oil is also its main burden. Higher oil revenues are constraining already some of the changes. MBS has been able to tweak the financial downturn (low oil prices and crashing revenues) into an advantage. Changes to the rentier state constellation were possible due to obvious low government revenues. At present, higher oil prices, as shown in the government revenues, are removing the financial pain, but are not yet moving the Saudi oil tanker economy to become a fast-sailing clipper of new technology and economy of the future. Even that the Saudi income is impressive, but with all its might and oil reserves, based on a population of 36-38 million, its GDP is still smaller than the Netherlands (17 million people and NO oil).
Change is needed, to address a future without oil. The role of the PIF, Aramco and others, should be tweaked to fully support the domestic market diversification. It will need first additional import of technology, capital and even expats, but should be fully focused on a strong and sustainable economic development, build on several pillars, not only leisure, tourism or a Saudi Silicon Valley. To support a sustainable economy, Giga Projects and the City of the Future, should be build on a strong and innovative SME sectorial setup. Without the latter, no progress is sustainable.
Don’t look at Dubai, it has been build with a large portion of luck and the continuing financial support of its neighbors in Abu Dhabi. Saudi Arabia is too large to copy this experience. Still, the Dubai dream, combined with Dutch-German or Nordic economic financial prowess and technical savvy, should become the new basis of Saudi Vision 2.0. Success starts small. Old saying “When you want to run, first learn to crawl”.
