TheChek News Flow

Government agency has a mandate to regulate securities, not technology

Imagine a scenario in which the US government — suddenly, arbitrarily and without any justifiable authority — outlawed a commodity like petrol. Now imagine this occurred in the early 1900s, right as Henry Ford emerged on the scene, creating a model for the automotive industry that has endured for over a century. A ban on petrol would have equated to a ban on driving altogether, crippling the burgeoning auto industry, allowing the rest of the world to pursue game-changing innovations and creating a lasting, depressive impact on the way Americans live.

This comparison may seem extreme but it is instructive regarding the potential impact of a US Securities and Exchange Commission ruling on the future of ether, currently under consideration. Ether is the digital commodity that, like petrol, powers programs running on the Ethereum network, the world’s largest programmable blockchain.

This network has the potential to usher us into the next phase of the internet, where content, identity, ownership, security and accessibility are, crucially, controlled by the user, not any big tech company. That’s why many companies, including BlackRock, Franklin Templeton, Nike, Adidas, Gucci and Publicis, are working on software applications that involve the tokenisation of physical and financial assets, loyalty and engagement systems and much more, using Ethereum. 

Yet, in an unprecedented power grab, the SEC has recently waged war on digital assets like ether and, by extension, the entire Ethereum ecosystem — likely sparing no company, developer or user in its seeming attempt to recategorise ether as a security. This is a reversal from historical and recent statements made by the Commodity Futures Trading Commission, which defines ether as a commodity, as well as prior guidance from the SEC itself.

Reclassifying ether via a set of arbitrary enforcement actions would cripple our industry in the US, with a profound chilling effect elsewhere. The SEC has been unwilling to follow the fundamental principle of separation of powers in the US, where it is the job of Congress to legislate, not agencies. Instead, it is attempting to regulate by post facto punishment. In the process it will kill technology it doesn’t favour. The SEC has a mandate to regulate securities, not technology. As its commissioner Hester Peirce recently stated, “Congress did not design the SEC to be a merit regulator, and the resulting flexibility for market participants is an important contributor to create the dynamic market environment where entrepreneurs thrive.”

Make no mistake: if the SEC succeeds in defining ether as a security, the ensuing registration requirements would render it unusable — the modern-day equivalent of banning petrol. It may in effect outlaw all buying and selling of the digital commodity within the US except in very special circumstances. This would signal the end of Ethereum in the country, given that ether is vital for executing any transaction on the network. It would essentially disconnect the US from the next generation internet, leaving the rest of the world free to evolve it through unfettered innovation. Unless, of course, the US puts pressure on other nations to follow suit.

The implications would also extend far beyond the confines of digital asset trading. The SEC’s misappropriation of regulatory authority threatens to dismantle a sector that supports thousands of American jobs and also stands at the cutting edge of technology, the way we store our data and the future of how we interact digitally.

We at Consensys are choosing to use litigation to stand up to the agency. This is not merely about protecting our digital asset. It is about safeguarding the future of innovation in the US. An overzealous financial regulator must not hold game-changing technology hostage. 

New levies and fees worldwide add cost to electric-car buyers as sales growth cools

Global policymakers are imposing new taxes on electric vehicles as the shift away from combustion engines threatens to leave a $110bn hole in government revenues owing to a drop in receipts from fuel duties. 

The UK, New Zealand, Israel and the majority of US states are among jurisdictions introducing tax changes and charges on EVs and hybrid vehicles designed to raise funds and compensate for declines in petrol and diesel excise taxes. 

The measures are varied, running from registration fees to road usage charges based on mileage and taxes on public charging points. EV owners and green campaigners say they will slow society’s switch from gas-guzzling vehicles to lower-emissions alternatives.

“It is more like a penalty,” said Jeff Shoffner, who drives an electric Chevy Bolt in Tennessee, where annual fees doubled this year to $200. “I’m not averse to paying the extra fee, but I think it’s too high.”

The new levies come at a tricky time for electric vehicle adoption. While global sales are expected to reach record highs this year, declining profit margins and slower growth are leading automakers to pump the brakes on their electrification plans. 

Last week, Tesla chief executive Elon Musk shut down the group’s entire supercharger division, laying off hundreds of staff in response to falling revenues at the EV maker.

“A lot of these policies are not politically popular. It’s hard to raise taxes, but it is needed,” said Rachel Aland, transportation director at the American Council for an Energy-Efficient Economy, a Washington DC-based think-tank.

She said fuel tax collection has been falling for some time due to increasing fuel efficiency of internal combustion engine vehicles. The growing prevalence of EVs on the road is putting extra pressure on an important source of government revenues. 

By 2030 EVs are forecast to displace 6mn barrels a day of global oil consumption, according to the International Energy Agency. Demand in 2023 was 102mn b/d.

IEA data shows the shift to EVs displaced $10bn in revenues from petrol and diesel taxes globally last year, net of modest gains from new electricity tax revenue. The net loss is projected to rise to $110bn by 2035 if countries meet their electrification targets, robbing governments of vital funds that are often ringfenced to pay for road maintenance and transport improvements.

Europe, where countries tend to charge higher taxes on petrol and diesel compared with the US and China, made up 60 per cent of global revenue losses last year. While countries will claw back some funding in electricity taxes, the revenue is marginal compared with the loss in fuel taxes, the agency said.

As a growing number of governments set deadlines for the phaseout of combustion engine cars, policymakers are being forced to consider unpopular tax reforms.    

Last month New Zealand introduced road use charges based on distance travelled for EVs and plug-in hybrid vehicles for the first time, saying the policy was badly needed to raise revenues for road maintenance as fuel tax collections fell.  

Owners of light EVs face charges of NZ$76 ($46) per 1,000km, a fee in line with equivalent diesel-powered vehicles. Plug-in hybrid owners must pay NZ$38 per 1,000km, a lower charge because they already pay tax on fuel.

“This transition to road user charges is about fairness and equity. It will ensure that all road users are contributing to the upkeep and maintenance of our roads, irrespective of the type of vehicle they choose to drive,” said Simeon Brown, New Zealand’s transport minister, when justifying the policy change.   

The charges were slammed by EV lobby groups and green campaigners, which have warned they will slow uptake of non-polluting vehicles and result in plug-in hybrid EV drivers paying more than those driving standard cars. 

Israel tax authorities are proposing a similar travel usage charge for EVs, which is intended to come into force in 2026 to tackle congestion and the budget deficit, which has soared due to the war with Hamas. 

But many governments facing a similar drain on fuel tax revenues, such as the UK and Ireland, have so far baulked at introducing unpopular mileage-based road user charges for EVs. Instead, they have begun to phase out or reduce tax breaks for EV drivers to bolster tax collection. 

David Metz, honorary professor, Centre for Transport Studies, University College London, said road user charges were not really being talked about by the UK government because they were such a “hot topic” and there had been significant protests linked to previous attempts to raise fuel excise taxes.  

“All the politicians and civil servants feel it’s just too difficult at the moment,” he said.

But Metz added that a new system of road user charges was needed, not only to replace the “big chunk” of fuel tax revenues lost through the uptake of EVs but also to reduce road congestion and take polluting vehicles off the roads. He said congestion charges in Stockholm and London, which are levied using CCTV and automatic number plate recognition technology, provided a potential model that could be expanded.  

In the US at least 38 states have annual registration fees for EV and hybrid car owners, including some states that otherwise offer incentives to buy or charge EVs that extend beyond a $7,500 federal subsidy for eligible vehicles.

Last month New Jersey signed into law a $250 annual fee for EV drivers, requiring new buyers to pay four years’ worth of fees up front, totalling $1,000. The Democrat-led state separately offers up to $4,000 in tax credits to buy an EV, plus rebates for home-charging systems.

“It’s discouraging. We were glad to be at the forefront with incentives and adoption rates . . . This particular thing with the registration fees seems to go against that,” said Patrick McDevitt, a Tesla driver in New Jersey.

Corey Cantor, an electric vehicle analyst at BloombergNEF, said the annual registration fees had come at an early time in EV deployment and risked hampering their growth. 

“Any time you’re increasing that upfront cost of an EV, it will by definition be problematic for growth,” Cantor said, calling costs one of the main “barriers to adoption”. 

But slapping registration fees on EVs will not solve the challenges facing US states and federal authorities posed by dwindling petrol taxes. In February the Congressional Budget Office forecast the US Highway Trust Fund, a federal transportation fund financed by fuel taxes that pays for road and mass transit projects, would be insolvent by 2028 without policy reforms.

How deep are the problems at St James’s Place?

A regulatory clampdown has led to lower inflows, a falling share price and talk that the wealth manager could face a takeover bid

Every year, St James’s Place, which over the last three decades has become one of the UK’s most successful financial services companies, organises a glitzy show for its thousands of investment advisers.

Guest speakers have included Bill Clinton, Bob Geldof and David Beckham, while top-performing advisers were paraded onstage to huge cheers from their colleagues at a company that was famed for its sales-driven culture.

One former employee says they were “gobsmacked” at how “lavish” that event was in 2020, despite moves to scale it back that year. 

This year’s gathering at London’s O2 arena, however, was an altogether more subdued affair. Shares in the company, which provides financial advice and investment management services to 960,000 well-off clients, have fallen 60 per cent over the past year, primarily due to intense scrutiny of the fees it charges. 

The new chief executive Mark FitzPatrick was keen to underscore a break from the past for the company, the UK’s biggest provider of financial advice. “It felt this year like there was a ‘change agenda’,” says one person who has regularly attended the event. 

According to critics both inside and outside the company, the charging model that ultimately funded the lavish entertainment and other rewards for top-grossing advisers is both opaque and expensive.

Baroness Helena Morrissey, a City grandee who was a non-executive director at SJP for 16 months, says she told the company four years ago that it needed to “do something about the fees” but was informed that the subject was “completely off the table”.

But the structure is now coming under increasing scrutiny after the Financial Conduct Authority, the UK’s financial regulator, introduced a new “Consumer Duty” last July.

The new rule, which imposes a legal obligation on companies to treat their clients fairly, impacts the entire financial services market from banks to asset managers. But SJP, which employs one in eight of the UK’s 38,000 financial advisers, is more affected than most.

“Consumer Duty has been a complete body blow for St James’s Place in terms of its existing business model,” says Richard Buxton, a fund manager who has held SJP shares in the past.

The asset management industry has been convulsed over the last decade by regulatory shake-ups and the advance of index-linked funds, which are cheaper than the managed funds that wealth managers have traditionally offered and which have focused the attention of clients more clearly on the fees they are paying.

Until recently, SJP seemed remarkably resilient to these shifts. But over the past year, the wealth manager has been pushed to change its fees, axe a much-criticised exit charge on some products from next year.

It has made a £426mn provision for potential refunds to customers who claim they did not receive the ongoing financial advice that they were charged for each year. Net inflows in the first quarter were £700mn, lower than forecast and down from £2bn a year earlier.

The company’s dividend has been cut and the sharp drop in its share price has put it at risk of expulsion from the FTSE 100 index. Some analysts believe its shrinking market value could make it a takeover target.

FitzPatrick maintains that independent research has found its charges are “very competitive” and is pledging an overhaul of the company’s business model.

He and others believe that the overall market for financial advice is likely to grow because of an ageing population and changes to UK pension rules. “About 8 per cent of the UK population receives advice so it’s a huge opportunity,” FitzPatrick tells the Financial Times.

But David McCann, an analyst at stockbrokers Numis, says that “what has become more questionable over the past year . . for SJP in particular, is how much profit per unit of client assets will firms be able to achieve for shareholders in the future?

“The answer is no longer as clear as it once was, in our view.”

At the core of SJP is an entrepreneurial sales culture that dates back to its founders. The Gloucestershire-based company was set up in 1991 by South African entrepreneur Sir Mark Weinberg, the late businessman Mike Wilson and Lord Jacob Rothschild, who passed away earlier this year, as J Rothschild Assurance Group.

Its modus operandi was based in part on Allied Dunbar, a previous Weinberg company that was known in the financial services industry as “Allied Crowbar” because of its aggressive sales tactics.

By the late 1990s, J Rothschild Assurance had been reversed into Weinberg’s listed vehicle, St James’s Place Capital, giving it a stock market listing.

In the decades that followed the company grew rapidly, particularly under David Bellamy, who was chief executive from 2006 to 2017. Its shares entered the FTSE 100 index in 2014 and its acquisition of Rowan Dartington the following year gave the company a stockbroking business and a discretionary fund management arm. 

SJP has nearly quadrupled assets under management over the past decade. It was the first model of its kind: similar to a franchise, it has about 2,700 financial advice firms, known as the partnership. These are independent businesses, operating under their own names and employing almost 5,000 advisers, but they sell only SJP investment products, many of which are run by external asset management firms. The company also trains its own advisers through an in-house academy.

Following the Retail Distribution Review, a set of rules introduced in 2012 to prevent financial advice being influenced by commissions from product providers, most independent advisers now charge clients directly for advice when and if it is needed. The running costs of investment products are covered by a separate set of fees levied by their providers.

St James’s Place levies upfront and ongoing charges for both advice and products. The fees vary by product type, but calculations by EY on behalf of the company show that they would reduce the returns from a £100,000 investment into an open-ended fund growing at 5 per cent a year by about 2.2 percentage points annually.

Critics say that structure is opaque and makes it harder for customers to shop around for a better deal.

“It has been our view for a considerable time that the FCA has allowed SJP to indulge in anti-consumer practices in terms of fee transparency, onerous contracts and aggressive sales tactics,” says Gina Miller, co-founder of investment firm SCM Direct and a campaigner for clearer fees in the industry. “The question remains, why does the FCA continue to let SJP off the hook whilst being tougher on other firms?”

The FCA said it did not comment on individual companies but added that the Consumer Duty “sets higher and clearer standards of consumer protection in financial services”.

“We recognise that some firms have needed to make significant changes to their business model to improve consumer outcomes, and we welcome where firms have done this.”

SJP declined to comment.

Clients who purchase certain products face exit charges if they move their money or encash their investments within the first six years. This hedge against the loss of fee income has been described as SJP’s “secret sauce”, according to one person close to the company. Critics say it is anti-competitive.

Morrissey, who stepped down from the St James’s Place board in 2021, says she questioned the fees shortly after joining: “I was given an A5 booklet . . . I thought: that’s not great.

“I told a senior executive that we needed to do something about the fees, or else the regulators will do something, because they’re not clear . . . But I was told it was ‘completely off the table’ and that there would be no discussion on fees.”

The company declined to comment on Morrissey’s remarks.

SJP worked hard at client retention in other ways. Advisers have been known to send customers bottles of champagne at Christmas or fund lunches at Michelin-starred restaurants. 

This “snob factor” was part of the allure for some customers, says one independent wealth manager, adding that such clients regarded the private-bank style treatment as proof that they had made it. A former SJP adviser adds that many clients “knew they could get a cheaper car” but wanted what they saw as a Rolls-Royce.

Advisers in the partnership were incentivised for recruiting new clients and persuading existing ones to invest more with rewards such as luxury trips abroad with their families and racetrack days driving Lamborghinis, alongside the annual jamboree in London.

The former employee says the annual advisers’ gathering, with its impressive staging, was “definitely a cheerleading day . . . It ended up being a jolly, I could see everyone was having a whale of a time.”

Another former staff member compares the sales culture to mortgage brokers in the early 2000s. “They were trying to get more people and flog them more products,” the person says.

As press reports began circulating about excessive rewards for advisers, the company began to cut back on the more lavish freebies. But people close to the company believe it will take a long time to reform the culture.

“They are struggling to shake off the old sales mentality,” says the former staff member. “The culture there is male, pale and stale on steroids.” Unlike AJ Bell and Hargreaves Lansdown, which are focused on execution-only business and operate largely online, St James’s Place continues to focus on face-to-face advice, the person adds.

SJP said in response that it was “focused on attracting, retaining and developing diverse talent and fostering an inclusive environment where everyone can thrive”.

Just as Consumer Duty came into effect last July, SJP chief executive Andy Croft was preparing to step down. Executive search firm Russell Reynolds scouted FitzPatrick, the former chief executive of insurer Prudential.

FitzPatrick already knew Croft and his predecessor Bellamy, having met the latter while working for Deloitte. He had also worked with Paul Manduca, the SJP chair, who had held the same position at Prudential until 2020.

But despite his connections with former directors, FitzPatrick is keen to tread his own path. The theme of this year’s annual adviser meeting was “our future, our story”. A glossy TV advertisement was rolled out a few weeks later.

“I’m looking for a culture where everybody is very focused on the client,” he says. He is now undertaking a review of the entire business with the help of consultants to ensure SJP can sustain its growth trajectory.  “One of the things we were very conscious of was to be able to demonstrate to investors and the market [that] the SJP model is resilient.”

He also believes there is ample opportunity still ahead, citing multiple changes to UK pension rules and growing fears among the better-off about inheritance tax. “All of that means people need more advice than ever to protect the wealth they’ve created,” he says.

Still, the road ahead is fraught. The most pressing risk is the potential compensation bill it is facing over historic issues with record keeping. For many clients, there is no evidence that their adviser provided the regular advice that was meant to come with the ongoing fees.

The company has implemented a new system and has tied a portion of advisers’ remuneration to logging their client meetings. But the final cost of compensation is still uncertain.

Compliance with the Consumer Duty requires the unbundling of fees from next year — meaning that clients will be able to compare more easily how much they are paying for advice and investments and potentially increasing the risk that they will take their business elsewhere.

FitzPatrick believes the move will be positive, saying that “everyone will be able to see all the different components and with that will be able to see further that we are, and will continue to be, very competitive in the market”.

Profit margins face further strain as SJP explores expanding into passive investments. Until now, its advisers could only offer actively managed funds that are often marketed based on past performance and carry higher fees. Justin Onuekwusi, chief investment officer, says the company “will continue to remain fierce advocates of active management”.

Another looming pressure point is the succession model. When advisers want to downsize their businesses or retire, they can sell their client books to other advisers within the network, who use loans facilitated by the company to acquire them.

But pressure on this model is growing as the interest rates on these loans, currently 3.5 percentage points above the Bank of England’s base rate, have risen. The amount of these loans classed as in arrears more than doubled last year. 

FitzPatrick could also face a takeover threat. The fall in the share price has led to speculation that a high street lender might make a move for the company given its big market share, though the rising redress bill and their own past misadventures in wealth management may put them off.

Buxton, the former shareholder, acknowledges that “there’s clearly still a worth to the largest advisory business in the UK” but questions what will happen if partners start to leave.

Recent issues have “naturally affected the strength of the franchise,” he says. “The scale of their margin will never be the same again.”

The company is leaning on its long history of chip development in the effort, code-named Project ACDC

Apple AAPL -0.91%decrease; red down pointing triangle has been working on its own chip designed to run artificial intelligence software in data center servers, a move that has the potential to give the company an advantage in the AI arms race.

Over the past decade, Apple has emerged as a leading player designing chips for iPhones, iPads, Apple Watch and Mac computers. The server project, which is internally code-named Project ACDC—for Apple Chips in Data Center—will bring this talent to bear for the company’s servers, according to people familiar with the matter.

Project ACDC has been in the works for several years and it is uncertain when the new chip will be unveiled, if ever. Apple has promised many new AI products and announcements at its Worldwide Developer Conference in June.

An Apple spokesman declined to comment.

Apple has been closely working with its chip-making partner Taiwan Semiconductor Manufacturing Co. 2330 1.27%increase; green up pointing triangle to design and initiate production of such chips, yet it remains uncertain whether they have yielded a definitive result, some of the people said.

For Apple’s server chip, the component will likely be focused on running AI models—what’s known as inference—rather than on training AI models, where chip maker Nvidia will likely continue to dominate, according to some of the people.

An Apple server chip could come at an opportune time as rivals such as Microsoft and Meta have spent billions and moved quickly to reorient their businesses around so-called generative AI after the explosive emergence of OpenAI’s ChatGPT service.

Apple investors have grown impatient over the company’s perceived lack of progress in AI. Tech rivals have seen their share prices jump with splashy AI announcements. Microsoft has enjoyed the biggest bump thanks to the company’s close and early partnership with OpenAI. Earlier this year, Microsoft overtook Apple as the world’s most valuable company, and its lead has only grown.

Apple Chief Executive Tim Cook has sought to assure investors that it is investing in the technology and that it will have major AI announcements soon.

“We believe in the transformative power and promise of AI, and we believe we have advantages that will differentiate us in this new era, including Apple’s unique combination of seamless hardware, software and services integration,” Cook said on a conference call for the company’s recent quarterly earnings.

Generative AI systems, such as large language models that power ChatGPT, often crunch immense amounts of data using computer servers hosted in data centers. For that computing power, most large tech companies rely heavily on servers full of chips from Nvidia, which has found itself in the middle of an AI gold rush.

Most of the largest tech companies have developed their own AI server chips or are exploring the possibility, to untether themselves from Nvidia, which has a market share estimated at over 80% in such chips. Google has perhaps the most mature internal AI server chip product, with its tensor processing units, having started on the project in 2013. OpenAI is also in discussions to fund an ambitious internal chip project, The Wall Street Journal previously reported.

Apple’s existing chip prowess might be one avenue where the company can find a critical advantage over other tech giants in AI. Among its rivals, Apple has had the longest history and most success in designing custom silicon. The company first began incorporating its own processing chips into iPhones and iPads in 2010.

In 2017, Apple began incorporating AI-focused processors into its mobile chips. In 2020, it started replacing Intel chips in its Macs with its own custom silicon. These chip efforts have helped differentiate Apple’s products from its rivals’. It is possible that advanced versions of Apple’s M-series chips, which are currently planned for its consumer products, could be capable of performing certain AI functions, such as inference in servers, one source said.

On Tuesday, Apple is expected to unveil a new iPad with potentially a new M-Series processor.

While Apple has succeeded in developing processing chips for its devices and is now seeking to do so with servers, the company has been struggling to develop a cellular wireless chip to replace mobile chip leader Qualcomm. The launch of an internal Apple cellular modem continues to miss deadlines and get pushed out, the Journal reported last year.

Apple prefers that most uses of AI happen on an iPhone or Apple Watch, but it still needs to run some processes on remote servers accessed over the internet, which is when the Apple server chip would take over. By handling more of those tasks itself, even with the chips in the data center, Apple can have more control of its AI destiny.

The investment will help Wayve develop AI products to enable carmakers to efficiently upgrade vehicles to higher levels of driving automation

Wayve Technologies raised more than $1.0 billion to accelerate its efforts to redefine autonomous driving via artificial intelligence and expand operations and partnerships in new markets.

The U.K. startup said Tuesday that SoftBank Group 9984 3.28%increase; green up pointing triangle led the $1.05 billion series C round, with new investor Nvidia and existing investor Microsoft also contributing to the fundraising.

Wayve said the investment will support the company in developing AI products to enable carmakers to efficiently upgrade vehicles to higher levels of driving automation.

“Vehicles can now interpret their surroundings like humans, enabling enhanced decision-making that promises higher safety standards,” said Kentaro Matsui, managing partner at SoftBank Investment Advisers. “AI is revolutionizing mobility.”

SoftBank joined Wayve’s board of directors as part of the transaction.

The U.K. startup said funds would allow it to expand operations and partnerships in new markets, build geographically diverse data assets and attract global talent.

Wayve said it is developing hardware-agnostic products that can allow any vehicle to perceive its surroundings and safely drive through various environments. The company has conducted trials on U.K. public roads since 2018, it said.

“I’m incredibly proud that the U.K. is the home for pioneers like Wayve who are breaking ground as they develop the next generation of AI models for self-driving cars,” U.K. Prime Minister Rishi Sunak said.

Saudi Arabia’s plans for twin 105-mile-long skyscrapers have lost momentum amid spiraling costs and construction glitches

The engineers saw a mountain-sized problem.

For weeks, thousands of trucks and diggers had worked 24 hours every day, scooping millions of cubic feet of sand at the world’s biggest construction project known as Neom in Saudi Arabia. But the workers had dumped the massive pile of dirt—now hundreds of feet wide—in the very spot where architects planned to dig a waterway out to the Red Sea.

So, the trucks and diggers went back to work, picking it all back up and making a new mountain of sand nearby in a costly hiccup that epitomizes the Saudi project’s turbulent journey from an audacious concept to a sprawling operation that has faltered in its execution.

Defying skeptics, Saudi Arabia is barreling ahead with hundreds of billions of dollars in projects at Neom, a built-from-scratch region the size of Massachusetts, typified by sci-fi architecture, an arid ski resort and a laundry list of flashy projects meant to attract a population larger than New York City’s.

None is more brazen than a multitrillion-dollar pair of skyscrapers taller than the Empire State Building designed to run 105 miles long and house nine million people, the flagship development dubbed “The Line.” Its champion, Saudi Crown Prince and de facto ruler Mohammed bin Salman, has likened the project to Egypt’s Great Pyramids.

The kingdom in recent months downsized the Line’s first phase, facing the reality of costs at a time the country is spending far more than it is taking in. Now organizers plan to initially build around 1.5 miles of the structure by 2030, rather than the roughly 10-mile first chunk that had previously been envisioned, multiple people briefed on the plans said. Still, even that truncated section would be by far the world’s largest building, the equivalent of more than 60 Empire State Buildings of square footage.

Asked in a CNBC interview last month about a Bloomberg report on the scaled-back first phase, Saudi Minister of Economy and Planning Faisal Al Ibrahim signaled the long-term ambitions for the Line remain the same.

“There is no change in scale—it is a long-term project that is modular in design,” he said, adding that “today, the economy in the kingdom is growing faster, but we don’t want to overheat it.”

The stakes for Saudi Arabia are as outsized as Mohammed’s ambition. Neom is the ultimate symbol of his plans to transform the kingdom’s economy, reduce its dependence on oil revenue, and make it a magnet for money and talent from around the world. But he risks squandering much of the country’s cash on an unprecedented experiment in city building that could prove too difficult to deliver.

“Mohammed bin Salman is gambling here,” said Madawi al-Rasheed, a visiting fellow at the London School of Economics and a member of a group calling for democratic reform in Saudi Arabia, an absolute monarchy.

“Spending so much money should in theory generate a tangible leap in the Saudi economy,” she said, but much of the cash so far was spent on foreign consultants and architects.

A mountain of challenges lies ahead. More than 100,000 additional construction workers must be housed in a barren corner of the kingdom’s vast desert, two hour’s drive from any sizable city. Neom’s needs for steel, exterior glass and other materials are so massive they may push up global prices and be difficult to source. Planners worry the unique central concept of the Line, a vertical city housed in twin skyscrapers the length of Delaware, could prove to be an unappealing place to live.

At the same time, the scaled-back plans for the Line put a spotlight on Neom’s enormous bill for what is now poised to be a midsize city. Neom executives now expect fewer than 200,000 residents in the project’s first phase—the population of Knoxville, Tenn.—a current and former employee familiar with the plans said. Yet Neom is spending on vast infrastructure intended for millions of people, including a giant airport, a high-speed train running through a 20-mile mountain tunnel, massive desalination plants and large civic features in the Line such as an opera house, the former executive said.

The price tag keeps rising. The projected cost of a ski resort in the region’s arid mountains has more than doubled over two years to $38 billion as of October, according to Neom documents reviewed by The Wall Street Journal. Real estate advisory Knight Frank estimates more than $237 billion of construction contracts have already been commissioned at Neom.

Even for one of the world’s largest exporters of crude oil, Neom might just be too expensive. Its official cost estimate is $500 billion, 50% more than the country’s entire federal budget for the year and more than half the value of its sovereign-wealth fund.

Executives working on the project dismiss that number as unrealistically low. The first 1.5 miles of the Line alone is estimated internally to cost more than $100 billion, two people familiar with the plans said.

If it were fully built, Neom employees expect the true price of the Line would be well in excess of $2 trillion. Construction costs per square foot are more than double what is standard on other Middle East towers, they said.

This makes it unlikely Neom will attract significant private investment to fund future phases of the Line, they say. It has been funded thus far by the Saudi government.

Neom is the centerpiece of an overhaul of Saudi Arabia’s economy and identity that Mohammed began in 2015 when his father ascended the throne. Then 29 years old, the son of King Salman outmaneuvered potential heirs and rapidly consolidated power.

Hungry for change, Mohammed allowed more Western cultural norms and eliminated restrictions that forbade mixing of sexes, women drivers and cinemas. He also put even tighter limits on speech, crushing dissent over the rapid change.

The plan, Vision 2030, called for an array of new non-oil industries such as entertainment and technology and building mega-sized real-estate developments to help it become a global tourism hub.

Mohammed’s team sought proposals from the world’s top architects for ideas to design Neom. The avant-garde Los Angeles designer, Morphosis Architects, headed by Pritzker prize winner Thom Mayne, pitched a city that was 100 miles long and 1.2 miles—or two kilometers—wide, with buildings spread across the ground.

The prince had a different idea.

“I told the team, how about if we take that two kilo and we flip it to two towers to the whole line,” he said in a Discovery Channel documentary last year, clapping his hands together vertically like someone closing a book.

The idea of the skyscraper city was born.

Architects got to work designing a pair of parallel towers 650 feet apart, shrouded in a shimmering mirror glass coat that reflects red desert sand and azure blue sea. At their highest, the towers are slated to rise 1,640 feet above the desert floor, although they will be less tall in spots depending on the terrain they are traversing.

Internal documents from 2021 call for more than seven billion square feet of floor space—29% larger than all of the buildings in New York City put together and the size of more than 2,000 Empire State Buildings. Apartments, offices, schools, police stations, museums and a royal palace would be peppered inside.

Stunning—and costly—architecture is a priority. Mohammed told Neom executives he wants a sense of “zero gravity” with features appearing to defy physics and float, former executives said.

A linear city has long captivated urban planners. In 1882, Spanish architect Arturo Soria y Mata proposed an elongated urban development that inspired the “Ciudad Lineal” district of Madrid. The Line has been compared internally to Epcot Center, a former Neom executive said, the 1960s-era complex at Disney World that was intended to be a futuristic city dependent on high-speed rail. It was abandoned after Walt Disney’s death. Epcot later became a theme park.

A linear city as big as the Line is at odds with how humans have developed cities for millennia: naturally building outward in a circular manner, typically around a core.

“It’s battling against the entire history of the way cities are founded and grow,” said John E. Fernandez, professor in the department of architecture at the Massachusetts Institute of Technology.

Even supporters say it is an experiment that could easily fail in practice.

In a planning document under a heading of “Key Concerns,” an employee said four different times that by fixating on building miles-long skyscrapers, Neom had turned the normal design process inside out. “USE would usually drive DESIGN. We are using DESIGN to drive USE,” the anonymous comment said.

The shape has added to challenges.

In 2020, before Mohammed unveiled the project, he asked employees to move the Line’s western end a few miles because he preferred the terrain, said people familiar with the request. Designs had to shift slightly across the entire 105 miles, causing months of extra work.

Architects have struggled to find the best ways to mix sunlight and open space in the interior. Internal documents show they wrestled with how to differentiate neighborhoods so as not to create a monolithic block—opting to build distinct half-mile sections with a different look and feel. They worried about drab living conditions at the base of the interior, given that the height of the towers would allow little light down low.

According to planning documents, designers proposed leaving gaps atop the modules to “bend” the structures around the curvature of the earth, which arches about 8 inches per mile.

Planners fretted over the billions of birds that fly on a migration route—a less-than-ideal location for a 1,600-foot-tall glass mirror.

“It is inevitable that a significant number of birds will perish,” designers wrote, with an illustration of a dead northern flicker, a woodpecker.

Looming over Neom is an inauspicious history of city-building projects, which typically die on the drawing board. Those that are built are usually scaled down, and often considered sterile.

One of modern history’s largest is Brasília, the Brazilian capital that strained the country’s finances when it was constructed in the late 1950s. After opening, residents complained of lifeless streets and a lack of neighborhood feel in the curated modernist center, which today holds less than half its expected population of 500,000. Instead, far more residents live in and around satellite towns initially built for its construction workers.

Scant progress

Seven years after launch, little has been completed other than Neom’s film studios and a sprawling new royal complex that boasts giant palaces, a golf course and at least 10 helipads, satellite images show.

Beyond the Line, Neom has a bevy of superlative-packed projects, all of them complex.

Neom is so big it has its own large-scale construction projects simply to prepare for bigger projects. A port is needed to receive materials, and Neom is spending more than $5 billion to build housing for construction workers, according to the Middle East business-trade publication MEED, which tracks Neom contracts.

Engineers and administrative workers live in a handful of Neom-built communities with schools, basketball courts, a Burger King, a Starbucks and a Hampton Inn where rooms run above $400. The first such camp already needs to be partially demolished: After a design change, the Line is now due to run right through the community, where housing is already at capacity, former employees said.

Despite being billed as zero emissions, Neom recently sought contractors to build two gas power plants totaling 800 megawatts to power the region until greener energy is sourced.

To demonstrate progress to the crown prince, engineers started putting in the foundations for the Line a couple of years ago even before architects had figured out what would go above—an unusual way to build such a massive development, engineering experts said.

Architects soon decided the first phase should be built somewhere else, leaving the Line’s initial foundations abandoned for now, said people familiar with the matter.

For over a year, the bulk of the work has been a digging operation—the world’s largest, Neom says. Four-lane makeshift construction roads are clogged with lines of dump trucks; diesel fumes from trucks and generators permeate the air.

Significant digging work has gone into swaths that even before the recent pullback weren’t scheduled to be completed for decades. Satellite images show a 60 mile gash through the desert.

The current focus is a seaside middle section, where Prince Mohammed wanted the building constructed atop a new marina that could hold the world’s biggest cruise ships. Workers are digging a hole 50 feet below sea level, over 450 acres in size. It was there that workers had excavated a small mountain of dirt, only to find it was in the wrong place.

Once foundations are laid, a key test will be if and when Neom awards the costly contracts to start vertical construction—a crucial milestone that makes it difficult to turn back.

Another question is height. Numerous executives working on Neom have questioned the need for a 1,600-foot-tall building—which carries extra engineering challenges, higher costs and makes evacuation difficult in an emergency.

Renowned British architect Peter Cook, who is involved in the Line, called the project’s height “a bit stupid and unreasonable,” according to comments published in the U.K.-based Architect’s Journal. In a later documentary, Cook, who is overall praiseful of the project, called the Line “puzzling even to those who are involved in designing it.”