Last year, in a gleaming white hangar on Saudi Arabia’s west coast, the country’s business and political elite gathered to applaud one of Crown Prince Mohammed bin Salman’s riskiest bets yet.

Lucid Group Inc.’s first electric cars assembled in Saudi Arabia gleamed under the spotlight at a factory designed to show the world how an oil-based kingdom can attract foreign investment and become a global hub for the industry of the future.

The short-term reality is more complex. California-based Lucid is increasingly draining Saudi funds to stay in business. Last week, it received a $1 billion cash lifeline from Saudi Arabia, on top of the $5.4 billion already infused by Saudi Arabia’s Public Investment Fund (PIF).

Lucid counts PIF as its largest shareholder, and the company has been seen as a model for foreign companies investing in Saudi Arabia’s multi-trillion-dollar “Vision 2030” economic transformation plan. But Lucid’s need for Saudi money shows that the country’s hasty reinvention attempt is paying for itself out of pocket, with the country relying heavily on its oil wealth to lure companies in.

“The government has to provide a huge incentive for Lucid to come,” said Karen Young, a political economist at Columbia University’s Center on Global Energy Policy who studies the Gulf.

It also spoke of the difficulties foreign companies face in Saudi Arabia, which has little experience in complex manufacturing or heavy industry outside of the oil industry.

“Lucid is fully committed to its long-term partnership with PIF and supports the goals of Saudi Arabia’s Vision 2030,” CEO Peter Rawlinson said in a statement to Bloomberg. “Lucid is creating hundreds if not thousands of new jobs for Saudi talent.”

PIF did not respond to a request for comment.

Saudi Arabia has long recognized that its funding needs will be supported primarily by local capital and only partially by foreign funding. Still, China wants annual foreign direct investment to reach $100 billion by 2030, an amount roughly three times what it has achieved in the past and about 50% higher than India’s current investments. Between 2017 and 2022, annual foreign direct investment flows into the country averaged just over $17 billion. Preliminary figures for 2023 show foreign direct investment below target at around $19 billion, according to a statement from the Investment Ministry.

The goal of expanding to 2030 currently appears out of reach as foreign investors remain cautious, according to conversations with bankers, lawyers who advise investors and people familiar with Saudi Arabia’s fundraising efforts.

This has led to a reckoning for the government as it weighs the possibility of self-financing most economic reforms in a tight time frame. It has begun cutting back on big projects aimed at revamping its $1.1 trillion economy. It has also issued billions of dollars in bonds to help cover a fiscal deficit that was not forecast until late last year.

How it uses its money has implications for its investments at home and abroad, as well as the oil policies that shape global markets.

“ridiculously expensive”

The Crown Prince (MBS) wants foreign investors to transfer expertise and co-finance large projects, such as the development of the Neom project. The $500 billion plan envisions turning the remote Northwest into a carbon-free high-tech hub filled with robots.

While Neom has launched marketing and investor roadshows, it has yet to make significant progress in raising funds, people familiar with the matter said.

It’s not just the underdeveloped coastline that faces resistance to projects. An entertainment city called Qiddiya near the capital promises more than $1 trillion in spending, but it is backed entirely by the PIF and a Saudi developer it owns, two people with knowledge of the project said.

David Dawkins of London-based investment data firm Preqin said: “If we don’t have clear evidence that there will be more money by the end of the year, it’s certainly worth asking where the money for these projects will come from. “Analyzing trends in Saudi Arabia. “They’re ridiculously expensive.”

Delays in approval of Neom regulations have left investors with question marks. Many say their reluctance to provide funds to the kingdom is often due to unclear and untested laws governing contracts and investments.

There are signs that momentum is building for more outside capital. The Ministry of Investment said in a statement that 232 investment transactions were completed in 2023, many of which contained a “significant” foreign investment component that could start to “affect” foreign direct investment figures in 2024.

Recently, Amazon.com Inc.’s cloud unit led a group of companies that agreed to invest more than $10 billion in Saudi data centers.

shrinking money jar

But as the government burns cash, it is stepping up efforts to attract more foreign capital. The company has asked smaller neighbor Kuwait for more than $16 billion in financing for projects including Neom this year, people familiar with the matter said.

MBS faces the ambitions synonymous with Vision 2030. While companies such as Air Products have signed joint venture agreements with Neom, Saudi Arabia remains responsible for nearly the entire cost — roughly half of it. current economic output.

“This is actually still a public sector-led development model,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank PJSC. “They are currently fully implementing this transformation plan, and I think the plan will continue to be in the future. Mainly a Saudi-led development plan.”

Saudi Arabia’s approach to spending cash will resonate around the world, given that its investment footprint now extends from London airports to golf and private equity, making it a key source of funding for Wall Street and governments. As Saudi Arabia fills its domestic financing gap, it will rely on the way it knows best to make money: oil.

This realization is leading to a way to consolidate spending power in the hands of PIFs. Saudi Arabia recently added an additional $164 billion worth of Aramco shares to the fund, which will mean paying out at least $20 billion in dividends this year.

Mohamed Abu Basha, head of research at Cairo-based investment bank EFG Hermes, said the move was essentially “raising money from one public pocket at the expense of another.”

He said this showed the country was still reliant on high oil prices to sustain its diversification plans.

Jean-Michel Saliba, Middle East and North Africa economist at Bank of America, said Saudi Arabia may advocate for OPEC+, the oil cartel it co-leads with Russia, to extend output curbs, which could help support oil prices.

However, despite production cuts limiting supply, prices remain below the king price needed to fund his ambitious goals. When considering domestic spending on the PIF, Saudi Arabia needs at least $108 a barrel of crude oil to balance its budget, according to Bloomberg Economics. Brent crude oil prices have risen in recent weeks but remain below $90.

Pay attention to the interval

The PIF is already feeling the pressure. As of September, it controlled about $900 billion in assets but had just $15 billion in cash reserves.

Yasir Al-Rumayyan, president of the fund, said the fund, which previously allocated nearly 30% of its capital to international investments, now aims to allocate 20% to 25%, but the absolute number will still rise over time.

“Our deployments will continue internationally, but our focus now is on our projects in Saudi Arabia,” he said in February.

Finance Minister Mohammad Al-Jadaan also acknowledged the funding shortfall and signaled that more debt would be issued. He was a member of a committee chaired by MBS to study Vision 2030’s huge financing needs and compare them with the Kingdom’s expected revenue streams.

“There’s a gap,” he told Thmanyah’s Socrates podcast. “We call it a gap study.”

Postponing and canceling some projects will fill the hole, he said, without giving details.

This marks a crossroads for some of Saudi Arabia’s most ambitious projects. The city of Riyadh, home to Expo 2030, may start to prioritize it. People like Lucid will see the Kingdom investing more money, not less. Saudi Arabia sees it as part of a broader plan to build an automotive supply chain, in which PIF also works with suppliers such as Hyundai Motor Co and Italian tire maker Pirelli & C. SpA.

But other Vision 2030 dreams will disappear or be curtailed, according to people familiar with the matter.

“Some of these strategies were us saying to ourselves: We don’t actually need to spend money on this,” Jardine said.

(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)