King Abdullah Economic City: Open for business

04 June 2010

MEED talks to Fahd al-Rasheed, managing director and CEO of King Abdullah Economic City developer – Emaar, The Economic City

Entering King Abdullah Economic City (Kaec), it is hard to grasp the scale of the project. The numbers are well-publicised: 168 million square metres, homes for 2 million people, jobs for a million. But to drive through the entrance gate and realise that it is a 20-kilometre drive from the gate to the first phase of development is another thing altogether.

I think public-private partnership [PPP] not only has a place in the future of Saudi Arabia, I think it is the future

Fahd al-Rasheed

Far removed from the masterplan images and computer-aided drawings that first gave life to the project, Kaec is happening. It is being built. On the day the MEED arrives, officials from the project developer Emaar, The Economic City (Emaar EC) and the Saudi Arabian General Investment Authority (Sagia) join a Saudi prince to shake hands and sign contracts with an American investor who pledges $50m to build a new tourist marina in the city. Such is the daily grind at Kaec.

Urban centres

The Kaec vision is to create an urban centre along the Red Sea coast that will eventually become Saudi Arabia’s great catalyst for job creation, housing, social services and foreign investment.

Saudi Arabia’s traditional urban centres of Riyadh and Jeddah cannot sustain the kingdom’s rapid population growth, which is generously quoted as 2.6 per cent a year.

When we meet a client, we treat them as a client. The incentives we offer are there to address their needs

Fahd al-Rasheed

“Due to the fact that 65 per cent of Saudi Arabian nationals are under 30, the kingdom estimates it will need 4 million housing units by 2022,” says Fahd al-Rasheed, managing director and chief executive officer (CEO) of Emaar EC. “To put it in context, this is the same number of units available today in the kingdom. Every city in the kingdom has to double between now and 2022.”

In Riyadh and Jeddah, large-scale housing projects have been achieved, but Al-Rasheed says that building substantially more units into those cities would be difficult. Moreover, the kingdom’s initiatives to create jobs in the public sector are insufficient and the new urban centres such as Kaec, are needed to plug the gaps in private sector jobs. “With new urban centres, you need social services, such as healthcare, education and so on,” says Al-Rasheed.

“By serving the needs and leveraging the competitive advantages of the kingdom, we believe we have a sustainable model for the creation and development of Kaec.”

Kaec alone has the potential to create a million new jobs in all skills categories. This is why the government has given such priority to its economic cities initiative and courted the participation of the private sector to help fund it. “I think public-private-partnership [PPP] not only has a place in the future of Saudi Arabia, I think it is the future,” says Al-Rasheed. “With 50 per cent of the world’s population living in urban centres, from an environmental and population-growth perspective, creating new urban centres through PPP is a strategic and long-term solution.”

Rather than compete with the country’s established urban centres, the Kaec model is to simply offer something slightly more advanced. While the rest of the country has been waiting for most of the past for the long-awaited Mortgage Law to be passed to own a home, the mortgage law is part of the Economic Cities General Act. In fact, the law is fully approved and the Economic Cities Authority is in the process of issuing executive bylaws. That means mortgages are available in Kaec for those seeking home ownership.

Kaec is also planning to implement a state-of-the-art title registration land management system, so the property owned is legally protected. And, for the first time in the history of Saudi Arabia, 100 per cent foreign ownership is allowed for both individuals and corporations.

New investment

The first phase of Kaec development is scheduled to be complete by early 2012 and includes building the first half of a sea port which, once complete, will be among the top 10 ports in the world in terms of 20-foot equivalent cargo containers. It also includes an industrial zone, a five-building business park and 3.7 million sq m of city districts that incorporate schools, hospitals, homes, retail and entertainment space.

Unless you have a strategic thrust to enter the kingdom and you’re committed to it, you’re not going to win

Fahd al-Rasheed

Kaec is being developed to ensure that it is not simply a playground for the wealthy. For example, the cost of homes planned for the first phase of the development will range from SR200,000 ($53,000) up to SR60m. From Al-Rasheed’s point of view, building an exclusive development on the scale of Kaec is simply unrealistic.

“As a city, you cannot serve one segment. It’s a city. You need to serve the needs of everyone, from the labourer to the high-end luxury buyer,” he says.

To that end, Emaar EC is aggressively pursuing the development of a middle-income community called Hawadi. Tenders should be issued by the end of 2010 with completion of the 750-unit project scheduled for 2013. Over the next five years, Emaar EC expects to have enough residential units in Kaec to house a population of 40,000 people.

At present, the first phase of the industrial zone is complete with masterplanning to begin on phase two. By September this year, Kaec is expecting to announce a handful of major investments in that sector. In terms of residential space, Emaar EC will hand over more than 400 units by the end of 2010 and the developer is prepared to hand over much of the office and retail space within the same time frame. According to Al-Rasheed, demand for the established projects has been healthy and constant and Emaar EC is currently looking to court new investment.

To assist that process, Sagia has launched a new initiative to streamline investment and facilitate efficient business practices in Kaec. The initiative is referred to as ‘365 x 24 x 7’ and it includes having licensing and regulatory offices onsite and available around the clock. This means processes that would usually involve a trip to Riyadh and hours of waiting in queues for signatures and approvals, literally take a matter of hours.

Economic potential

The economic potential in Kaec becomes obvious from the moment one arrives onsite, but more than that, its location on the eastern seaboard of Saudi Arabia comes with two competitive advantages. First, 25 per cent of the world’s oil reserves are in the kingdom, but only 2 per cent of industry in the country is energy-based.

This creates a huge potential to leverage Saudi Arabia’s energy base and combine it with the location of Kaec. Situated on the Red Sea coast, Kaec will increase significantly the kingdom’s low port capacity and allow for strategic access to trade routes between East and West.

Investors currently considering expansion into traditional logistics markets, such as Oman, the UAE and Qatar, will have to consider Saudi Arabia once the Kaec sea port is open for business. One of the biggest reasons is the fact that Kaec is a bonded zone, which means it has free import and export for those in the trading business.

Kaec allows full foreign ownership and offers a straight 20 per cent tax on profit. As a private developer, Emaar EC is also willing to consider special lease rates and incentives on a case-by-case basis.

Al-Rasheed believes Kaec offers one more advantage that other markets cannot. “One of the best advantages we bring is that we’re a private sector developer. When we meet a client, we treat them as a client. The incentives we offer are there to address their needs rather than give them a predetermined solution.”

Digital approach

Getting involved in Kaec is easier than one might expect. While, for many, the Saudi Arabian market still comes with an air of mystery for many companies, proven processes are in place to submit documents, pre-qualify and bid on projects.

At present, Emaar EC is working with more than 350 local and international vendors and construction contractors and it hopes to triple that number to over a thousand over the next 2-3 years. The bidding process is very strict but, for the first time in Saudi Arabia, is completely digital. To integrate the amount of upcoming work with the number of potential contractors, Emaar EC has created a portal on its website where contractors and vendors can digitally submit documents and pre-qualify for tenders.

Once a contractor has submitted pre-qualification documents online, the company’s name is automatically categorised into a specific industry or industries. Then, when tenders arise for work in those industries, the company is contacted by a representative of Emaar EC. The reason for the digital approach is threefold.

First, it allows Emaar EC to efficiently manage the large amount of information it disseminates and receives. Second, it demonstrates which companies have committed themselves to the Kaec vision. Third, it automatically eliminates the potential for impropriety. Al-Rasheed explains: “It has to be a phased-process that is strictly managed, it cannot be a system where my friend introduces me to his friend and his friend introduces another friend and so on. You cannot manage a process like that.”

While Al-Rasheed is quick to point out that Emaar EC does not discriminate or play favourites with companies, he is very upfront about the reality of establishing a business in the Saudi Arabian market.

“We look for two things: Quality and price,” says Al-Rasheed. “If you qualify, it means you have the quality.The final thing is price, which is done on a competitive bidding system. The reality is, however, if you’re not set up in Saudi Arabia already and Kaec is going to be your first involvement in the market, you’re not going to be able to mobilise effectively. So your costs probably aren’t going to be that competitive,” he says.

Put simply, Emaar EC is looking to go into business with contractors that have made a commitment to the kingdom. Whether that commitment has a long history or Kaec is a contractor’s first foray into the market is irrelevant. Al-Rasheed’s point is that as a private developer, Emaar EC will accept bids from any company that qualifies but it won’t pay for the high costs of set up and mobilisation.

“A company can establish itself in Kaec without a local partner, that’s not a problem,” he says. “But the cost of procuring materials and equipment and understanding the value chain cannot be borne by the first project you get involved in. Unless you have a strategic thrust to enter the kingdom and you’re committed to it, you’re not going to win. The construction industry in the kingdom is competitive and Kaec is no exception.”

Competitive advantage

With the approval of the Economic Cities General Act at the end of 2009, Saudi Arabia became a major regional player in terms of being a destination for foreign investment. For years the kingdom sat by and watched other markets in the Middle East reap the benefits of foreign-friendly investment. With a strategic location on major trade routes, 100 per cent foreign ownership and a strictly managed procurement process, Kaec has begun to lift the veil on the Saudi Arabian market.

The kingdom’s economy is continuing to grow strongly despite the meltdown in the global economy. Couple that with the fact that Emaar EC is looking to begin work on Kaec’s 23 million sq m second phase by 2015, and the competitive advantages present themselves.

King Abdullah Economic City, is now open for business, and anybody interested in making a long-term commitment to the region should examine the new opportunity that has been created by the development.

Few countries in the world have the resources to launch a massive private strategy to build new cities to address their population and employment challenges. By bringing together the government with the private sector to developing Kaec, Riyadh is pioneering a way to mitigate risk, foster foreign investment and create a regulatory environment that is both legitimate and transparent.

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