KSA Urban Development Reset: What To Do When You Have Too Much of a Good Thing
Transforming the urban system of a country at top speed on the back of planned megaprojects using a unique hybrid command-capitalist model, where the command and the capitalist elements often cohabitate uncomfortably, is an exciting but tricky business.
Trying to fulfill a broad, ambitious, and highly accelerated growth vision, new projects are created en masse, but in relative isolation, based on various rationales (economic, socio-political, aspirational). Do enough of this rapidly enough, and the inevitable result is a portfolio of projects of varied quality that exceeds the carrying capacity of the market and the available physical and financial resources to execute within the desired timeline.
Recent indications are that a partial reset is now underway in Saudi Arabia, currently the most dynamic urban development environment in the world.
In an environment characterized by a high degree of coopetition, where everyone is pursuing the same overall vision but doing so with a high degree of internal competitiveness, the favored project-centric planning approach is a necessary but insufficient element to manage the whole. Cost, benefits, and impacts must be considered at both the project and portfolio level, with the latter, in this case, being the entire national urban system. The tricky bit is that while most people can wrap their heads around the relatively contained bounds of project-level financial and technical feasibility, it is much more difficult to keep a running score at the national level as there are very many more moving parts and uncertain variables. At the portfolio level, one must appreciate the cumulative financial implications, overall market supply versus demand, what they bring individually and collectively to the table, and what they take from it.
Why take? Because, in addition to physical buildings and infrastructure, big projects need people and sustained economic activity outside that generated by their internal economics (construction cost and sale proceeds) to succeed. For a new project, these people and economic activities will come from one of three sources 1) natural domestic growth, 2) outside investment (FDI and immigration), and 3) the oft-underplayed factor, domestic displacement (aka cannibalism). Focusing on the latter, if you attract people or economic activity away from an existing urban area to a shiny new one, you have likely improved the lives of these people, and ensured the economic success of the new project, but what is the net gain? What happens to the old area, now drained of vitality? Urban development cannot become the concrete equivalent of slash-and-burn agriculture, where you clear one piece of forest, plant crops until you have depleted the soil of all its nutrients, then abandon it and move to the next patch of freshly cleared land. Project-level analyses, even stacked one atop the other, will not give you this net national gain answer, as they all calculate direct benefits and pay little attention to indirect costs.
Project-level business cases in a command-capitalist context also present several areas of concern. They most often do not extend to answering the most fundamental questions – “Is it the right idea in the right place at the right time? Is it viable?” – as these existential issues are predetermined, thus making the feasibility study more an exercise of retroactive justification than discovery.* The consultants most often called in to run these studies are very, very good, but simply because an analysis (financial or otherwise) is sophisticated doesn’t mean it is sound; many a project feasibility is built on foundations of sand, both literally and in the form of questionable assumptions leading to predetermined conclusions that should be treated with skepticism.
Let’s face it, consultants have an inherent predisposition to paint a rosy picture, i.e. they display the moral hazard of being incentivized to promote higher-risk outcomes that support the thesis of “do this project because it fits the mandate” because they will not bear the costs in the event of failure. Simply put, we have no skin in the game. In fact, in the right market, these same consultants can be paid multiple times during the project cycle, once to promote an overly optimistic business case for Project A, then again to restructure a similarly optimistic case originally done by others for Project B once it begins to falter - while their competitors do the inverse. Think of this as the circular economy of consulting ;-).
When multiple projects are looked at in isolation, it is also far too easy to claim the same market share repeatedly, effectively underplaying the cumulative competitive risk element, both because this risk is not often fully studied within the scope of a project-level study, and because this same market share might be needed to justify each project’s feasibility.
So, what is the way forward in such a situation? Nothing fancy, or surprising, just a reckoning, aka a portfolio balancing. This work will define the overall market characteristics (size, composition, growth rate, etc.) and estimate the required resources to fulfill this market potential. It will then tally the cumulative cost and contribution of all planned projects and arrive at a global supply-demand equation. Finally, it will identify optimal projects with solid commercial legs and good market timing, or profound national importance, and separate these from optional or marginal ones that should be delayed or canceled, thereby cleansing and “right-sizing” the portfolio. Easy to say, tough to do, particularly as mega-projects, once started, generate their own momentum and can be very difficult to stop (think sunk cost fallacy on steroids).
It is important to undertake this balancing while most projects are still in the planning, or “digital reality,” phase, as are many of the current crop of projects. There are few more expensive and counter-productive things in the urban development space than a series of struggling one-eighth-built zombie projects too big to fail completely, but without the underlying viability to succeed. If a project is not viable, it is far better to stop it before it hits the ground than after.
If handled correctly, a reset will work out for the better, with fewer, but more fundamental and successful, projects.
*Note: Feasibility in this context is a narrow financial and technical assessment focused on the ability to successfully carry out a project based on certain assumptions and performance measures, whereas viability is a broader concept referring to the project’s ability to prosper over time and generate its full range of intended positive outcomes.