Economic cities face funding issues in Saudi Arabia

12 July 2011

Saudi Arabia is struggling to attract the required investment for its economic cities from private investors, forcing Riyadh to step in and pledge cash   

Key fact

The $27bn King Abdullah Economic City is expected to house 2 million people and create 1 million jobs

Source: MEED

In May, the Saudi government pledged a SR5bn ($1.3bn) loan to accelerate the construction of the $27bn King Abdullah Economic City (Kaec) project north of Jeddah. The injection of the funds is intended to revive the project, which has been in the planning for six years.

In December 2005, Riyadh launched the Kaec project as part of plans to diversify its oil-based economy. In the following 18 months, the kingdom unveiled another five economic cities and several large industrial clusters.

The first of these megaprojects were to be developed and supervised by the Saudi Arabian General Investment Authority (Sagia).

In addition to the Kaec, there was the Prince Abdulaziz bin Mousaed Economic City (Hail), Jizan Economic City, the Knowledge Economic City (Medina) and Tabuk Economic City.

Economic diversification for Saudi Arabia

Sagia stated that the economic cities would contribute more than $150bn to Saudi Arabia’s gross domestic product (GDP) by 2020 and provide employment for 1.3 million people – 360,000 by 2010.

The cities were to be funded by the private sector, with the state assisting with low-priced land and energy inducements.

Projects planned at Saudi economic cities
 Total projects planned so farOn holdCancelled
King Abdullah Economic City$45.5bn$10.5bn$400m
Prince Abdulaziz Mousaed Economic City (Hail)$8bn$8bn0
Knowledge Economic City$8.6bn$6Om0
Jizan Economic City$19bn$5.5bn$4bn
Source: MEED Projects

“The idea behind the economic cities was to encourage regional diversification and diversification of the different industries themselves,’’ says John Sfakianakis, chief economist at Riyadh-based Banque Saudi Fransi.

International developers were brought in to provide technical expertise and attract local and foreign investment. Dubai-based Emaar Properties set up a subsidiary, Emaar, the Economic City (Emaar EC) to develop Kaec, while and Malaysia’s MMC Corporation was appointed to develop Jizan Economic City with the local construction firm Saudi Binladin Group.

Emaar has just received money from the Saudi government to jump-start the [Kaec] project

Riyadh-based consultant

Yet, despite an initial burst of activity, limited progress has been made on the cities and at least one of the megaprojects, Tabuk Economic City, has been scrapped. The Prince Abdulaziz bin Mousaed Economic City in Hail also appears to have come to a standstill.

“We have given up on the economic cities projects for the time being. They are very slow and we have heard that they have been put on hold due to problems with financing,’’ says one contractor in the kingdom.

The schemes were launched during the prosperous years before the global economic crisis struck in 2008.

Doubts have been raised over the ability of the projects to attract the billions of dollars required to move ahead. With many of the initial completion dates already missed, it is important Riyadh makes progress quickly before the enthusiasm for the economic city development model evaporates.

Kaec has been prioritised to prove that the schemes can work and it is hoped that its success will encourage investment in other economic cities. Kaec is being built at Rabigh, 100 kilometres north of Jeddah.

The development is expected to cover a total area of 168 million square metres. The scheme is expected to house 2 million people and create 1 million jobs. It comprises six integrated zones: the sea port, industrial zone, central business district, waterfront resort area, education zone and residential zones.

Kaec progress slow

Ground was broken on the project in 2006, but apart from the installation of basic infrastructure and utilities, there has been limited other construction activity.

“Very little progress has been made at Kaec because of financing. But Emaar has just received money from the Saudi government to jump-start the project. They will be starting the industrial development sites first,’’ says a consultant based in Riyadh.

Focus  of activity at economic cities
ProjectFocus of activity
KaecPorts, logistics, light industry and services
Knowledge Economic CityKnowledge-based industries, tourism and services
Prince Abdulaziz Mousaed Economic City (Hail)Logistics, agri-business, minerals and construction materials
Jizan Economic CityHeavy industries, lifestyle, agro industries
Source: Sagia

In another sign of new impetus behind Kaec, The first gas allocation for the project was awarded in March and it is hoped that this will help the industrial zone to move forward.

The local Al-Rajhi Steel received a gas allocation from the government to enable it to develop a $3bn integrated steel complex at Kaec. The project has been planned for several years.

“Hopefully, the project will start to move forward now there has been gas allocations. There has been limited progress on the scheme so far,’’ says a contractor, following the progress of the kingdom’s economic cities.

Contractors will be hoping that the steel plant moves more swiftly than the planned aluminium plant, which has been delayed while the kingdom focuses on another smelter project in Ras al-Zour.

One of the most advanced projects at Kaec is a lubricants factory being developed by the Saudi Total Lubricants Company (Satlub). The main engineering, procurement and construction (EPC) contract was awarded to UAE-based Amana Contracting & Steel Buildings in the fourth quarter of 2010.

The contractor started work onsite in April, but the scheme has since stalled while the client alters the original layout designs.

In June 2010, US-based pharmaceutical firm Sanofi-Aventis signed an agreement with Emaar EC to set up a manufacturing facility at the industrial zone at Kaec. The project is still in planning stage and the EPC contract is expected to be awarded in the second quarter of 2012.

Despite slow progress with much of the scheme, work is well under way on developing Kaec’s estimated $6bn seaport. The facility is expected to start operation in 2012.

Jizan Economic City slows down

The planned $27bn Jizan Economic City (JEC) is also facing a lack of activity. Located 60km from Jizan city in southern Saudi Arabia, it was is intended to focus on heavy industries, as well as housing 300,000 residents and providing 100,000 jobs.

Jizan has no history of industrial activity and has limited infrastructure. JEC is part of King Abdullah bin Abdulaziz al-Saud’s ambitious plans to address wealth disparities in the kingdom.

State energy major Saudi Aramco is expected to tender the EPC contracts for the $7bn Jizan refinery in the second quarter of 2012. Unlike the rest of the development, the project will be fully government funded and is seen as an encouraging sign for the progress of JEC.

Some industrial projects are under way at JEC. Germany’s SMS Meer is currently building the first phase of the local South Steel Company’s $221m steel plant at JEC. However, the $5bn aluminium complex that was originally planned to be completed by 2012 was scrapped due to financing issues and a lack of a gas allocation.

Knowledge Economic City (KEC) was the third of the six economic cities unveiled in 2006. The $8bn project aims to create 20,000 jobs in Medina province and is planned to cover a total area of 4.8 million sq m.

The project is being developed under Sagia by a consortium comprising the local Quad International Real Estate Development Company, the King Abdullah Foundation, Savola Group, Taibah Investment & Real Estate and Project Management & Development Company.

Phase one of the project, representing 40 per cent of the full development, was originally scheduled to be finished by 2010. The second phase was planned to be completed in 2020.  However, like the other schemes, the initial deadlines have been missed.

Prospects for the media zone at KEC have improved since the establishment of a company to develop the city in August last year. There has been progress made on preparing the site. According to KEC’s progress report in June, earthworks and site grading have been completed and the main link connecting the project site with the sewage network is expected to be completed by the end of 2011.

The local Al-Rajhi Construction was awarded a contract to develop infrastructure over a total area of 2 million sq m in the northern part of the project in May.

The inability of all the economic city projects to raise finance has been blamed for the lack of progress. The success of these megaprojects depends on private sector investment. “The main challenge for the economic cities remains finding finance. The projects need to gain investor support and build a solid financial base,’’ says Sfakianakis.

Economists are aware that raising the finance will not be an easy task. “It will require developers and investors to have patience and perseverance for these projects to succeed,’’ says Sfakianakis. He rules out the government funding the schemes like it has done with energy centres in Jubail and Yanbu.

“The government is giving support to the cities in initial loans and cheap land, but undertaking the finance for all of these projects is another thing altogether,’’ says Sfakianakis.

“The state can provide some financing and direction, but not full investment due to the large size of the projects.”

Remote locations in Saudi Arabia

The difficulty in attracting finance has been blamed on the remote location of some of the proposed cities. The Hail Economic City and the stalled Tabuk economic city were planned to encourage investment in the kingdom’s underdeveloped areas.

The absence of infrastructure in these locations has been cited as a reason for poor interest from investors. This was acknowledged earlier in the year by Amr Abdullah al-Dabbagh, governor of Sagia, who admitted that has been “… some mistakes in selecting locations for the economic cities.’’

If planned and executed efficiently, the economic cities have the potential to diversify the kingdom’s economy and ensure wealth is shared more equally between its regions. It would also create much-needed jobs for the country’s growing population.

The recent cash injection and gas allocation to Kaec show that the government is keen for more progress to be made.

But until more enthusiasm and investment from the private sector is forthcoming, there will be little progress. Riyadh may soon be forced to make a decision on increasing state expenditure in the schemes if they are to succeed. 

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