As part of its long-term plans for economic diversification away from hydrocarbons, Saudi Arabia has set far-reaching goals for the development of its tourism sector. It seeks to achieve 100m domestic and international tourist trips per year, a significant target when compared to global benchmarks. For comparison, France, the global leader in international tourist arrivals, received 90m international visitors in 2019.
Ultimately, success in meeting the 2030 target will depend on the country’s ability to promote a value proposition that appeals to diverse source markets; the expansion and improvement of infrastructure, human capital and technological capabilities; and the adoption of sustainable financing strategies.
Demand Diversity
The Covid-19 pandemic and subsequent inflationary pressures in 2021 and 2022 disrupted the international tourism market. While the purchasing power of some international travellers has been affected, the most affluent segments have been largely immune to these price pressures, which is positive news for niche tourism segments such as ecotourism and heritage tourism. In light of this, Saudi Arabia is opening up as an international destination at a time of increasingly complex tourism demand. Indeed, the diverse nature of the Kingdom’s tourism giga-projects reflects the intent to cater to this market. For example, The Red Sea Project offers a diverse array of sustainable land and sea luxury experiences, developments in Al Ula and Diriyah capitalise on the Kingdom’s cultural heritage, while NEOM offers opportunities to explore many different concepts including unique nature experiences.
To sustain demand for these extensive projects, Saudi Arabia is looking to attract tourists from a wide variety of source markets. As well as nurturing demand among Muslim pilgrims for the Kingdom’s expanding tourism attractions, Saudi Arabia seeks to increase arrivals from both Western and Asian markets for non-religious tourism. However, the pool from which Saudi Arabia can draw foreign tourists for non-religious activities is finite, and there is strong competition from other more established tourism destinations in the region.
As a result, policymakers are seeking to capitalise on the potential of the Kingdom’s sizeable domestic tourism market, with the government aiming to attract up to a quarter of the $20bn Saudis spent on tourism abroad annually before the pandemic – particularly in destinations such as Bahrain and Dubai – by 2030. These regional destinations have traditionally benefited from insufficient leisure opportunities in Saudi Arabia, where two-thirds of the country’s population is under 35 years of age.
Addressing Gaps
Boosting the number of visitors and tourism expenditure will require an expansion of Saudi Arabia’s transport infrastructure, human resources and digital know-how. With regards to transport, facilitating more arrivals to the Kingdom will be as important as improving internal mobility.
In terms of arrivals, the Saudi Tourism Authority and Dubai-based passenger carrier Emirates signed a memorandum of understanding (MoU) in February 2022 to leverage the airline’s global network and boost inbound tourism. In July 2022 the authority announced it would cut airport charges by up to 35%, a move that in part responds to the fierce competition in a region with some of the world’s largest air hubs. It also follows plans to introduce incentives for airlines to fly unprofitable routes, establish a new Riyadh-based airline and build a new airport in the capital, as it targets a vast increase in tourist arrivals.
As for internal mobility, movement in an out of Makkah, Medina and the holy sites is being facilitated through road improvements and the upcoming commissioning of the Haramain High-Speed Rail. Plans are also under way to build a tram system connecting the various landmarks at Al Ula. At a country-wide level, the Saudi Railway Company and Cruise Saudi signed a MoU in April 2022 to advance the integration of marine and railway passenger services.
In terms of human resources, as visits increase and hotel capacity expands – with the expected addition of 310,000 new hotel rooms by 2030 worth $110bn – preventing bottlenecks will require striking the right balance between Saudiisation commitments and operational needs. Efforts to support skills development in the sector will likely be needed.
Digitalisation
One of the key tasks for future talent in Saudi tourism will be communicating the Kingdom’s evolving national image and socio-cultural profile effectively in line with its tourism aspirations, as well as building and promoting detailed value propositions for each demand segment. In this regard, boosting the digitalisation of the tourism sector, particularly at the level of marketing, communications and analytics for service development, is viewed as key to transforming the travel industry.
According to a 2021 report by Tourism Economics and Google, the Kingdom is only in the initial stages of tourism digitalisation compared to other destinations. In this context, the report estimates that, with the right set of digitalisation policies and investment, potential gains attributable to digital advances could be vast by 2025. Around 139,000 new jobs could be directly or indirectly generated, and a cumulative increase in tourism spending of $12.2bn could be registered between 2020 and 2025.
Sustainable Financing
To develop appealing destinations and acquire the right capabilities, the Kingdom will have to mobilise vast financial resources. During the fifth iteration of a gathering organised by the Future Investment Initiative – a non-profit organisation run by the Public Investment Fund, Saudi Arabia’s sovereign wealth fund – the Ministry of Tourism set the amount of planned investment in the industry at $1trn over the next 10 years. To deploy this level of funding in ways that increase private participation, mitigate risks and promote sustainability – all key aspects of Vision 2030 – collaborative and multi-stakeholder frameworks are required. In this sense, recent developments around the financing of giga-projects indicate what the future might hold.
In January 2022 The Red Sea Development Company (TRSDC) – the developer of The Red Sea Project and Amaala – achieved financial close on a SR14.1bn ($3.76bn) term and revolving loan facility with four leading Saudi banks in what constituted the firstever riyal-denominated green finance facility. This opens the possibility of raising additional financing by capitalising on rising investors’ appetite for green assets. Such funding can support TRSDC’s commitment to have more than 75% of its buildings achieving a LEED Platinum rating, an internationally recognised certification, and to provide net-zero flight schemes for guests. TRSDC’s focus on sustainability integrates with international Saudi Arabia-led initiatives in sustainable tourism, such as the creation of the Sustainable Tourism Global Centre (STGC) in 2021, and the launch of STGC’s Tourism Panel on Climate Change in April 2022, a scientific initiative modelled after the UN’s Intergovernmental Panel on Climate Change.
Multi-pronged Strategy
Elsewhere, NEOM’s funding roadmap reflects a multi-source approach. Crown Prince Mohammed bin Salman bin Abdulaziz Al Saud stated at a press conference in July 2022 that investment in NEOM’s first phase could reach SR1.2trn ($320bn) by 2030. The Public Investment Fund would cover roughly half of the required financing, with the remaining half being drawn from other sovereign wealth funds in the region, private investors and an initial public offering of NEOM itself on the Saudi Exchange by 2024. The creation of NEOM is a project of urban development involving many mixed-use spaces which, by their very nature, allow for risk mitigation by balancing opportunities across several sectors aside from tourism, such as residential and commercial real estate.
Beyond giga-projects, public-private syndicated financing is also being deployed to increase the contribution of small and medium-sized enterprises (SMEs) to the sector. To this end, in June 2022 the Tourism Development Fund (TDF) and Arab National Bank launched an $80m Tourism Finance Programme for SMEs and to boost the development of the tourism sector. Meanwhile, a July 2022 tripartite agreement between the TDF, London-headquartered hospitality company Ennismore and asset management firm Al Rahji Capital set up a SR1.5bn ($400m) investment fund for the development of lifestyle hotels.
The Kingdom will have to apply a multi-directional approach in terms of sourcing tourists, addressing capability gaps and ensuring that financial risks are mitigated in a volatile context marked by environmental pressures, and international political and economic instability. Recent developments indicate that the Kingdom’s government and corporate leadership understand the key steps required for success.
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