The NEOM project in Saudi Arabia is ambitious. NEOM covers a region of coastline, islands, desert and mountains in north-western Saudi Arabia. It includes new-build industrial centres, supplied by a Red Sea port, as well as tourism destinations and nature reserves. There are 14 designated sectors for investment and development, ranging from sport to energy to design and construction.
In two important respects, NEOM is a helpful role model. Firstly, there is a strong emphasis on sustainability and clean technologies. Secondly, the emphasis on long-term investment in scaling businesses, including capital-intensive industries, is a sensible priority for a nation seeking to ensure diversification where a high proportion of export earnings still comes from the oil and gas sector.
When seeking to support economic and population growth, many countries have given encouragement to property developers to construct new housing developments, sometimes with insufficient attention to ensuring enough supporting services such as transport and education; or enough high-quality employment opportunities. This can result in housing developments that are not fully occupied.
The Saudi developers of NEOM have placed an initial emphasis on investment in promising businesses, which is a better priority. Moreover this includes new technologies and major industries, not confining themselves to start-ups in the knowledge economy. If the investments start to pay off, the housing and economic development will follow. In Qatar, by contrast, we saw real-estate sector developers, some which are owned by the government, racing to build housing developments without a clear plan for who would occupy them.
Qatar’s economic planners need to follow the NEOM development closely. A highly effective approach to economic development is the concept of ‘copy and improve’. The strongest economic returns do not always flow from the regions or the businesses that make the technological breakthroughs, but from those who continuously improve quality, service and value for money.
As part of a bid to diversify the economy, Qatar has encouraged development of start-ups in the knowledge economy over the past 10 years. This is to be encouraged, but knowledge work is not likely to provide sufficient diversification and employment opportunities. In addition, it helps to try to attract other industries and investors to set up base in Qatar.
Although the Qatari government budget is in a healthy position, it is not beneficial for too much employment to be in the public sector, where there are already indications of over-employment. A healthy mixed economy has a strong private sector, hence there is a need to develop industries to provide employment. Thousands of Qatari graduates are entering the job market every year, and the existing private sector has shown signs of a significant slowdown in employment, with technology speeding reductions in staffing requirements.
The establishment of a hi-tech factory or headquarters that employs, say 1,000 people directly will support the employment of many more in housing, retail, hospitality, education and so on. Some studies indicate a multiplier factor as high as five – some 5,000 jobs created for every 1,000 employed directly. The oil and gas sector, which is the dominant export earner, imports many components, so there is the potential to inshore the manufacturing of some of these. QatarEnergy has led the way with several major projects with international partners.
For building such enterprises, the capital requirement is substantial. Ultimately, the private sector has to take responsibility for business development – the government cannot own and direct a successful economy. But owners of private capital can be risk-averse when it comes to longer-term investments in capital-intensive businesses. An effective combination is for a large part of the initial capital to come from a sovereign wealth fund. The investment should be substantial, in an investment fund of $10bn, which would be invested in partnership with international co-investors in value-added mid-sized industries with considerable employment potential, but time-limited with a privatisation programme after around five years once the investment reaches positive cash flow. This will complement the major investments made in the oil and gas sector with building mid-sized industries.
Qatar is not short of either intellectual capital or financial capital. The conditions are highly promising for large-scale investment to support the development of clusters of enterprising businesses, ensuring promising careers for Qatari graduates and expats. The housing developments can follow.
The author is a Qatari banker, with many years of experience in the banking sector in senior positions.