Saudi Aramco’s determination to press ahead with a 400,000 barrel-a-day oil refinery in Jizan Economic City (JEC) despite spiralling costs is a clear vote of confidence in the economy of the remotest province of the kingdom. The state oil company is set to spend upwards of $7bn to build the refinery and a 2,400MW integrated gasification combined-cycle power plant in Jizan, when at face value there are more compelling locations for such a project than the southwest region, where there is no existing oil infrastructure.

Aramco’s strong backing is not just a shot in the arm for JEC; it also represents a substantial boost for the entire Saudi economic cities programme, which was launched with much fanfare in 2005 as a means of diversifying the economy. The proposals for a series of planned cities dotted around the kingdom’s extremities surfaced as the government considered ways of using its surging oil revenues to add value to the economy and develop its more neglected regions. Yet progress has been distinctly uneven, not helped by the interruption caused by the 2008 global financial crisis.

Aramco lifeline

Aramco’s commitment to making JEC work therefore provides a much-needed lifeline for the southwestern economic city, as it is the most credible anchor tenant in the kingdom. It plainly will not be smooth sailing, even with the oil giant’s billions being spent, as evidenced by the rising budgets and delays to the JEC power project.

JEC has endured the most arduous gestation period of all the Saudi economic cities. Devised in 2006 with a sizeable $27bn budget, the aim was to attract capital and jobs to the most deprived of Saudi Arabia’s regions. But until Aramco stepped in with its planned refinery, little of the investment had materialised, beyond a small steel plant.

There is now a better prospect of revitalising JEC, although it will struggle to match the progress of the largest and most advanced of the economic cities: the sprawling King Abdullah Economic City (Kaec). Kaec remains the flagship economic city, encompassing some 180 square kilometres at Rabigh, 100km north of Jeddah.

Kaec is being developed by Emaar, The Economic City (EEC), a subsidiary of Dubai’s Emaar Properties, and will eventually house up to 2 million people in 250,000 apartments and 25,000 villas, creating 1.3 million jobs. It will comprise a seaport; an industrial valley; an educational zone; a central business district with commercial, mixed-use and retail outlets and a financial island; resorts; and a residential area.

Kaec progress

The city will be delivered in four five-year phases, with much of the current thrust devoted to building infrastructure. In September, EEC secured a SR2bn ($533m) Islamic loan from Saudi British Bank (Sabb), which will be used to build residential and infrastructure projects in Kaec. Overall plans call for spending SR125bn on infrastructure in the coming years, after a review of its masterplan in 2012 that announced a more conservative delivery schedule than previously conceived.

Over the past year, Kaec has seen some big international names move in, with the likes of Mars, Total, Pfizer and Sanofi establishing facilities in the city’s Industrial Valley, which has so far attracted about 80 companies to set up shop.

This year started strongly for Kaec, with the commencement of operations at King Abdullah Port. On completion, it will handle mega vessels, with a capacity of 20 million 20-foot equivalent units (TEUs) via 30 deep-water berths. There is growing confidence among Saudi strategists that the port will be in a position to draw custom away from rivals such as Dubai’s Jebel Ali port, given that 25 per cent of global trade traverses the Red Sea. But other parts of Kaec are progressing at a slower pace. Plans to develop a financial centre are currently on hold, as the Kaec leadership focuses on other areas including industry, logistics and hospitality, rather than financial services.

Tourism has become a central feature of Kaec, with plans to build 10 hotels over the next six years, offering 2,000 rooms. Bay La Sun Hotel and Marina, the first of the five-star resorts, is already open. As more blue-chip firms move in, EEC CEO Fahd al-Rasheed expects the city’s hospitality market will grow from an annual rate of 71,000 room nights in 2014 to 550,000 by 2020.  

All this confirms Kaec’s status as the most promising of the economic cities. This is partly because of its prime location, says Fahad Alturki, chief economist and head of research at the local Jadwa Investment. “The soft opening of the seaport at Kaec last year and the commercial opening this year will give a big boost to the development of the city, be it in infrastructure or the industrial zones.  On that front, there is light at the end of the tunnel.”

Project structure

However, most of the other economic cities are facing obstacles, with the private sector finding it hard to initiate projects and ensure they are delivered on schedule.  Prince Abdulaziz bin Mousaed Economic City in Hail is a case in point.  That development has witnessed limited progress so far, while another proposed city, at Tabuk in the northwest, has already been abandoned. JEC, close to the troubled Yemeni border, has seen little momentum to date, although Aramco’s commitment provides a signal that the authorities are serious about its development. “Even in cities such as Kaec, the progress has been slower than initially planned, and that can be attributed to the project’s structure, with the private sector asked to carry all the weight,” says Alturki.

More is expected of Knowledge Economic City (KEC) in Medina, which aims to be a regional hub for the knowledge and information market, attracting SR25bn in investment and creating 20,000 jobs. KEC will cover an area of 4.8 sq km and house 200,000 residents.  The development of the first phase, in the northwest of the city, is under way. It will contain a civic centre, museums, souqs, a hospitality and commerce tower and a knowledge cluster, as well as a residential apartment complex.

The longer-term aim behind KEC is to help reposition the kingdom as a leader in knowledge-based industries, attracting global talent and nurturing a domestic skills base suited to the 21^st century.  

“There’s more going on at KEC and the project is more feasible than others in that it’s not completely greenfield; it is seeking to expand an existing city that is already an important urban centre in the kingdom,” says a Gulf economist.

KEC advance

KEC is hoped to generate SR10bn a year for the Medina and Mecca regions. Strategic agreements have been signed with international high-tech firms such as Cisco Systems, which is to provide the network architecture for the city. Major Saudi investors are also present, including food manufacturer and retail group Savola.

In November 2013, KEC set up a joint venture with Saudi Real Estate Company to sell the first of more than 200 villas that form part of the first phase of its gated Al-Madinah al-Munawwarah community.   

Confidence is high that KEC will follow swiftly in Kaec’s slipstream, making Saudi Arabia’s Western Province the most advanced region in realising the Economic City concept.

That still leaves the execution on the various economic city schemes looking patchy. Weaker oil prices may also undercut investor confidence, which is why Aramco’s commitment to the Jizan Refinery is an important catalyst for the continued development of JEC.

“When you have high-level commitments to industrial projects in the kingdom, you can be sure something will happen,” says the Gulf economist. 

That is not in itself enough to transform it into something attractive for investors. “In reality, it will be a long-term and slow-moving story, but you do now have potentially one of the pillars needed to support new industrial ventures down there,” says the economist.

Hard task

There are wider questions over whether the economic cities will ever be able to fully reposition the centre of economic activity away from the central Dammam-Riyadh-Jeddah corridor that dominates economic life in the kingdom. It is no coincidence that the least successful economic cities have been those located in the country’s northern and southern extremes: Tabuk, Jizan and Hail.

It will be no easy task to endow the economic cities with the kind of critical mass they need to succeed. The kingdom is still a long way from building an economy of Asian or European proportions. On the other hand, Saudi Arabia has, in the past, made a success of the economic city concept, as the giant Jubail and Yanbu industrial cities have demonstrated.

“Jubail and Yanbu took a while to get to maturity, but they are both doing well now, and are seen as well-planned and attractive, at least by Saudi standards,” says the Gulf economist. “In that sense, the original rationale for the economic cities in developing infrastructure to nurture key growth sectors of the economy makes clear sense.”

Other problems will have to be managed. Jeddah, in close proximity to both Kaec and KEC, suffers from neglected infrastructure. The city’s business community is concerned economic development will be stunted as a result of the prioritisation of investment into Kaec.

The economic cities will also have to overcome an additional challenge. A series of economic reforms has made it easier for private sector investors to set up projects in established urban areas. Legislation such as a new mortgage law and changes to land ownership may make it easier to develop real estate outside of the economic cities, and use infrastructure that already exists. 

The economic cities’ architects will have a job on their hands to flesh out the grand ambition. Patience is the name of the game. The move to more realistic and long-term project timescales – as seen at Kaec – suggests there is a realisation at the highest levels that the cities need time to reach their full potential. In a kingdom where change tends to proceed at a slow pace, that in itself should pose few problems.