Adopting the all-inclusive model pioneered by King Abdullah Economic City, Jizan Economic City (JEC) faces the starkest development challenge of all four of the Saudi mega cities currently under way.

The southwest is among the kingdom’s most deprived areas, with little indigenous industry and few natural resources to draw upon.

Unemployment is high, the infrastructure dilapidated and political tensions persist in pockets between the minority Ismaili population and the Saudi authorities.

King Abdullah’s ambition to redress the most egregious disparities in wealth in the kingdom therefore make Jizan an obvious location for an economic city, despite the widespread perception of the area as an economic failure.

JEC is gearing up to mimic the full range of industrial activities promoted by the larger cities, with a seaport, an industrial zone, a commercial business district, residential areas, hospitals and schools, as well as other academic and vocational training institutions in a 103-square-kilometre area located 60km northwest of Jizan city.

Ambitious plans

Given the low base from which it is starting, Jizan’s ambitions exceed those of King Abdullah Economic City in scale, and may even rival the former’s investment needs, with an estimated $30bn development cost - although it is stretched out over a far longer timeframe than the Rabigh-based economic city.

Like its northern counterpart, Jizan has brought on board a prominent foreign investor, Malaysia’s MMC Group, which is jointly developing JEC with Saudi Binladin Group.

MMC’s participation indicates the ambitious industrial thrust behind JEC: it is a utilities and infrastructure group with interests in transport and logistics, energy, engineering and construction. MMC operates Malaysia’s largest container terminal, its biggest independent power producer and is a major supplier of natural gas to the local non-power sector. It is also an investor in Jeddah port’s new container terminal.

As the building blocks for JEC would be the proposed 5,000MW power plant and a multi-purpose port, which are areas of MMC’s core expertise, the company believes it is well placed to drive the project forward. The Malaysian connection could have other advantages: Malaysia’s national oil company, Petronas, has already expressed interest in the planned 250,000-400,000-barrel-a-day oil refinery in the city.

JEC’s focus is on heavy industries, particularly energy-intensive industries, with two-thirds of the city designated for primary and secondary industries. Among the industries that will be set up are two aluminium smelters, an alumina refinery and a steel mill and iron ore hub. JEC’s masterplan provides for an oil refinery, a primary metal processing and fabrication facility, a pharmaceutical plant and an agriculture-based industry. A power and desalination plant will cater to the demand for power from these industries and other users within the city.

Energy advantage

Like other major investors in the economic city, MMC highlights the availability of cheap energy feedstock as the decisive factor. Electricity is the major cost incurred in the production of aluminium, accounting for about 30-35 per cent of overall production costs in refining, says MMC.

“JEC’s value proposition is the availability of cheap power, and JEC will be attractive to any energy-intensive industry that wishes to leverage on the low cost of energy, which will drastically reduce production costs,” says Feizal Ali, MMC’s group chief executive officer.

According to Ali, JEC’s low power tariff provides a competitive advantage for industries such as aluminium smelters and steel plants, which would otherwise be vulnerable to rising energy costs elsewhere in the world.

JEC is now making strong progress, he says. “When the project was launched by King Abdullah in November 2006, it was envisaged that it would attract $30bn in investments over a period of 25 years,” says Ali. “Within one year of its launch, the project had already attracted almost $20bn in investments. This is a significant achievement.”

Construction work began in November 2007, with the centre’s marketing complex the first building to be built, and expected to be completed by the end of the year. Other pieces of the puzzle are fitting into place, according to Ali. “The feasibility study for the aluminium smelter is in progress and construction is expected to start towards the end of the year,” he says. “The detailed design of the port is also in progress and we are planning to start construction by year-end.”

Increasing productivity

Cynics remain sceptical about Jizan’s business model, which appears to rely on the imposition of heavy industries in a region with barely any industrial capacity. Linkages and transport infrastructure are still poor. Jizan port is operating below 30 per cent capacity, with much of the port traffic serving the local fish-farming industry. With cargo throughputs dropping by 23 per cent year on year in the first half of 2007, Jizan port needs to massively increase its productivity.

But JEC’s strategic location on the Red Sea is still regarded as a key competitive advantage as it reduces the transport costs of both the raw materials and finished products for many of the industries that are planning to set up facilities in JEC. Jizan port operator the Saudi Sea Port Authority (Seapa) has cut port charges and offered five-year incentives and a concession package to shipping lines. It is currently enjoying a five-year suspension of tariffs on trade, along with loading charges reduced by 40 per cent.

“It will primarily be a multi-purpose port catering to the needs of the industrial development in Jizan Economic City, providing port facilities to support the development of its various industries, and handling liquid, bulk
and general cargo for the economic development stemming from the city’s future acti-vities,” says Ali. “The port will also handle the importation of raw material for the city’s industries and the export of processed products worldwide.”

However, the port will only make sense if the full spread of planned industries go ahead. “The port at KAEC can sustain itself if they get the transport and fee structures right,” says John Sfakianakis, chief economist at the local Sabb bank. “But Jizan is in a region where overall industrial development is non-existent. The port has nothing to do with anything else and will only exist if there is something to use it for.”

One of the anchor projects intended to service the port is a planned aluminium complex sponsored by a joint venture of Malaysia’s MMC, Saudi Binladin Group and Aluminium Corporation of China (Chalco), which are to develop and operate an aluminium smelter with a capacity of 1 million tonnes a year (t/y) as part of the Sino-Saudi Jizan Aluminium joint venture company. The overall investment costs are expected to be close to $5bn.

Construction of the aluminium smelter and power plant is scheduled to begin in the second half of 2008 and be completed by 2012.

The plant’s requirements for alumina will be supplied by Chalco, which will also guarantee the offtake and distribution of the aluminium. Technology support is also guaranteed with the participation of Chalco.

Chinese demand for aluminium remains strong, with consumption growing by 46 per cent year on year in the first nine months of 2007, to 8.8 million tonnes.

Confidence boost

Chalco’s presence is a confidence booster for JEC. “Chalco is the sole producer of alumina in China, the second-largest producer of alumina in the world, and among the top five largest producers of aluminium in the world,” says Ali. “In addition to providing technology for the plant, the requirements for alumina will be supplied by Chalco.

“It will also guarantee the offtake and distribution of the aluminium produced.”

MMC is confident that other offtakers will emerge in time. A power plant with a generation capacity of 1,860MW, estimated to cost $2bn, will meet the smelter’s power needs. MMC will own a minimum 50 per cent stake in the power plant, which will form part of a larger power plant complex that is planned to have an eventual generation capacity of about 5,000MW.

Other anchor tenants at JEC include the local Pan Kingdom Investment Company, which is to build the Middle East’s first integrated steel cluster. The complex will comprise a steel plant with production of 1 million t/y and a connected rolling mill for the production of 500,000 t/y of rebar (reinforced steel bars). The product will be marketed mainly in the southern region of Saudi Arabia, as well as in Yemen, Djibouti, Sudan and Ethiopia.

The focus on heavy industry is intended to have some symbiosis with other light industries. Jizan’s sponsors intend the primary anchors of the port - power and desalination, oil, aluminium, steel and copper - to provide strong downstream opportunities with industries as diverse as pharmaceuticals, food processing and high-value agricultural technology producers.

“For JEC to evolve from an industrial city into an economic city, there is a need to bring a multitude of industries that will, in turn, bring about related businesses such that, in the end, we have a vibrant and strong community running various business activities, each serving the others to produce a whole host of goods,” says Ali.

The city also envisages a series of vocational training centres to ensure an adequate labour supply is available.

All this will involve massive investment, and MMC and Saudi Binladin Group are planning to launch an initial public offering (IPO) to raise funds to part-finance construction of the city. The IPO will also go a long way towards determining the overall appetite for the project among Saudi investors.

The joint venture company needs to raise at least $12bn for the development, for which it has been granted permission to float 30 per cent of its shares.

Saudi Investment Bank has been brought in as adviser for the listing exercise. “We are working towards an IPO by the end of the year,” says Ali.

“The details of the IPO, such as the amount to be raised, are still being worked on and the IPO proceeds will be used predominantly to fund the development costs for JEC.”

The project sponsors still need to overcome the Jizan region’s geographical isolation if JEC is to meet its development mandate. The south-west is cut off from the rest of the kingdom and has few ties with the Gulf littoral centres. Its focus is the Horn of Africa and Yemen, a region riven by poverty and political instability.

This could yet be turned to JEC’s advantage. The populations in the immediate regions of Yemen, Sudan, Ethiopia and Eritrea are expected to nearly double over the next 25 years. Furthermore, connectivity to other parts of the Arabian peninsula will be improved with the construction of a new international airport located 60km south of the city. There will also be new roads and rail links to Jeddah and other urban centres.

“The Saudi Arabian government has laid out a blueprint for logistics development in the kingdom, comprising expressways, a rail network and airports throughout the country,” says Ali. “Once completed, this comprehensive transportation network will provide the backbone infrastructure required to transport cargo and passengers effectively and efficiently throughout key areas within the kingdom.”

Perhaps the biggest challenge confronting JEC’s sponsors is to maintain traction on a project with a construction timetable spanning three decades. Some within the Saudi business community suspect that the Jizan scheme has been tacked on to the economic city projects as a sop to an underdeveloped region that stands to become even more disadvantaged over time.

However, this accusation is unfair. Major Chinese and Malaysian companies are investing large volumes of capital to make its industrial projects a reality. And just because the region is underdeveloped now, that does not mean it must remain so in perpetuity. After all, the Eastern Province itself was little more than a sleepy backwater reliant on pearl fishing just half a century ago.

But, of course, the Eastern Province had oil in abundance. So far, Jizan has a wealth of good intentions.

Key facts

• Joint venture developer is Malaysia’s MMC Group with Saudi Binladin Group.

• Iinitial public offering for 30 per cent of developer to be launched by the end of 2008.

• Petroleum & Mineral Resources Ministry is planning $10bn refinery.

• MMC and Binladin are planning a $5bn port redevelopment.

• Chinese Aluminium Company is investing in a $5bn aluminium complex.

• Pan Kingdom Investment Company will build a 1-million-tonne-a-year steel plant.

• Saudi Railways Organisation is planning a $1.5bn rail network linking local area with Jeddah.

Table: Jizan Economic City projects

t/y=tonnes a year; b/d=barrels a day; EPC=engineering, procurement and construction; na=not available. Source: MEED