King Abdullah Economic City: Time to deliver on promises

04 April 2008
The first of the economic cities has been promoted as offering the potential to transform the Saudi economy. It now needs to prove it can attract the investment to do so.

Saudi Arabia’s biggest economic city shares the king’s name, and as the first of the mega cities, there is a lot of pressure on it to succeed. King Abdullah Economic City (KAEC) will cost nearly $27bn, cover 168 square kilometres and house a seaport, industrial district, waterside resort, financial island, residential district and education zone. If all goes to plan, the city will be operating as early as 2016.

Some parts of the project are already falling into place. Considering the unstable financial markets and a cultural tradition of investing in real estate, it is no surprise that KAEC’s biggest advances have been in this sector. On its September 2007 launch, the city’s first integrated residential community, Bay La Sun Village, had a robust response from investors, and houses in the first phase were quickly sold out.

The project backer, Emaar, The Economic City, brought forward the release date of the second phase of residential units to meet the demand for apartments and houses. The keys to the first residential units will be handed to their owners by the end of 2008.

Contract awards

A construction contract for the waterfront mall and hotel is imminent, with the plot expected to cover 50,000 square metres. Saudi Freyssinet was awarded the contract for design and construction of the first phase of the business park in Bay La Sun Village in February 2008.

As part of the first phase of the SR348m ($93m) contract, Freyssinet will build two office buildings and a two-floor basement parking area covering 258,000 square metres. The first main tenants for phase one of the business park are the two prime facilitators of the scheme: the Saudi Arabian General Investment Authority (Sagia) and Emaar.

Slowly, contracts are starting to be let for utilities and infrastructure work needed to make the economic city a commercial reality, and convince the private sector that locating to the city is a viable and practical option. In February, the local Civil & Electromechanical Company (Cemcco) won the contract for
utilities and infrastructure work on 1.58 million sq m of the city’s 63 million-sq m industrial zone. The SR115m ($30.7m) contract will involve Cemcco undertaking infrastructure work in a zone dedicated to industry and light manufacturing.

However, such contract awards have been the exception rather than the rule in recent months, and need to be augmented by a series of major deals that demonstrate the city is capable of living up to its billing as a regional investment hub.

Hitting deadlines

The city’s need for progress resulted in the appointment in January of Fahd al-Rasheed as chief executive officer of Emaar, The Economic City, having formerly worked at Sagia as deputy governor for economic cities. His remit is to focus on the completion of the project on schedule.

Having created massive interest at the project’s inception in 2006, Saudi observers have seen some of the project’s momentum dissipate over the past year. “The deliverables have been slow and people are quite apprehensive,” says one Riyadh-based banker.

Emaar officials claim the project is on schedule, but they have also been vague about what that schedule actually comprises. According to Al-Rasheed, development at the city is happening in phases and the authorities are ensuring that its various components are developed according to a schedule devised by the developers and the regulator, Sagia.

Attracting a raft of Saudi property investors to the new residential districts is positive, but the city’s sponsors know the success of the venture depends on the city maximising its industrial and port capabilities.

The project’s real intention is to draw private investment into several major export-oriented downstream industries. The pressure is on to attract heavyweight investments that will reinforce the project with a renewed level of confidence.

Plans for the city show it intends to host more than 2,500 industrial companies in a space that covers more than one-third of the city’s total land area. Emaar says several key companies have already shown interest. Others may follow.

“We are in discussions with global players,” says Ahmed Linjawy, executive director for city management at Emaar, The Economic City. “Most are looking for manufacturing facilities but are also looking to KAEC as a logistics hub to serve the Gulf region and beyond.”

Strategic location

Although there is a degree of scepticism in the Saudi business community about the economic cities, Emaar points out it has managed to enlist some local firms to set up in the industrial zone. “Most people who have signed up and are moving in in September are local manufacturers either in the construction materials business or in the plastics industry,” says Linjawy.

In December 2007, Emaar signed a memorandum of understanding with Saudi Total Lubricants Company (Satlub), a local joint venture with France’s Total, to set up a manufacturing plant for producing advanced lubricant products.

Satlub believes the city will make a strong strategic location for a facility to export the products to Africa and other Middle East countries, targeting lubricants and speciality products for the automotive, industrial and marine sectors.

The plant will be commissioned within two years and will have an initial production cap-acity of 35,000 million tonnes a year (t/y) of finished products, with the potential for cap-acity expansion.

So far, the biggest blue chip company to go public with a billion-dollar investment in the city is the UAE’s Emal International, a joint venture of Mubadala Development Company and Dubai Aluminium Company, which, at the end of January, signed a memorandum of understanding worth $5bn to set up an aluminium smelter at the city.

The announcement was the first evidence that the UAE’s noted commercial pulling power may be able to work to the economic city’s advantage. With Dubai investment giant Emaar the main driver behind the economic city, and Dubai’s DP World aiming to become involved in the Millennium seaport, the Saudis want to replicate the ‘Dubai effect’ on their western seaboard.

With Emal International an anchor tenant, Saudi strategists are looking at aluminium to become one of the city’s main industrial props. The proposed aluminium smelter complex will produce 700,000 t/y in its first phase and have the potential to double production capacity. Financing for phase 1 comprises a $1.8bn term loan, a $2.6bn equity bridge and a $270m letter of credit underwritten by Emirates Bank.

Construction of the smelter will start at the end of 2008. Emal managers say the aluminium complex could catalyse larger investments in the city, as well as the five other economic cities being planned. “Aluminium has been identified as one of the key industries that Sagia is looking to promote, so all of the cities are announcing aluminium as the key thing they are promoting,” says Adel Abu Bakr, a project director at Emal.

Emaar says the aluminium plant will drive downstream industrial investment in the city, creating a dynamic industrial investment hub in the region.

“It is all about what the smelter brings in terms of capital investment on the ground and the employment it will create,” says Linjawy. “More importantly for us, there is the impact of promoting the downstream industries, which we see as having a bigger multiplier effect in terms of job creation.”

The aluminium smelter is intended to attract industries exploring the investment options provided by the city, says Al-Rasheed, creating up to 2,500 direct jobs and 5,000 indirect jobs.

The focus on aluminium as the industrial lynchpin of the economic city is understand-able. With the nearby PetroRabigh refinery preparing to pump out 1.3 million t/y of ethylene, and several private Saudi petrochemicals producers boosting output, there is no sense having its industrial zone business case rest on petrochemicals. There is strong global demand for aluminium and Middle East producers are planning to build up to seven smelters across the region over the next few years.

“We think there will be a shift to this region where we have competitive energies,” says Abu Bakr. “Prices are high and going higher. China is looking to become a net importer and is seeing several smelters facing difficulties because of the high cost of electricity.”

The aluminium output will be geared for export, but project backers hope it will eventually help to supply the Saudi market.

Emal International has already commissioned a feasibility study for the project and, once completed, will reveal a full timeframe for the aluminium smelter’s construction. The rapid escalation of engineering, procurement and construction and materials costs remains difficult to budget for, complicating efforts to keep the myriad industrial programmes on track.

“Costs are going up so fast they are quickly outdated,” says Abu Bakr. “We need to know the rough capital costs and construction schedule, as getting equipment these days takes longer, so lead times are getting longer.”

Even with a successful aluminium smelter, the city’s sponsors will still need to build a strong business case to encourage other investors. Existing industrial cities at Yanbu and Jubail in the Eastern Province are able to attract private firms with existing infrastructure.

The focus on promoting a downstream industry such as aluminium, which is reliant on energy supplies, at a time when gas feedstock availability is severely circumscribed across most of the Gulf has led some to question the strategy. Under the kingdom’s existing allocation policy, petrochemicals producers have been prioritised for gas feedstock supplies. Emal will need to push to the front of the queue to have a chance of meeting its production targets.

Energy demand

“In terms of their energy needs, aluminium smelters are the most challenging in an economic sense,” says John Sfakianakis, chief economist at the local Sabb bank. “Feedstock availability is something that the economic cities have yet to resolve properly.

“It poses a challenge to the industrial logic of all the economic cities. If they have limited gas resources and are looking for alternative resources like crude oil for aluminium smelting needs, then they should think twice whether aluminium is a necessity.”

Emal officials have played down such concerns. “We are confident about feedstock” says Abu Bakr. “We are doing a number of similar projects to this one, and unless we were really confident of the market situation, we would not do it.”

The development of the Millennium port is equally pivotal to the long-term prospects of the city and, given its mandate to operate as a trans-shipment port to feed other GCC economies, it is perhaps the most important part of the plan for the city. The centrepiece of the plan is a 13.8 million-sq m port that will have capacity to handle in excess of 10 million 20-foot equivalent units (TEUs), pushing it into the world’s top five largest ports. Emaar envisages investment of SR15bn in the port.

Dubai’s DP World and PSA of Singapore are shortlisted to manage container operations at the Millennium port. The first phase of operations is due to start as early as 2010. The port will have facilities to handle cargo and dry bulk, and will benefit from the city’s’ strategic location on the Red Sea and the instant access to major urban centres in the kingdom. It will have a designated area for light industry and logistics, and will be a natural platform for the onward movement of goods to Europe, Africa, Asia and beyond.

As a driver for inward investment, the port is envisaged to add SR10bn to the Saudi economy once operational, says Al-Rasheed. It is also expected to provide 15,000 jobs.

Yet the port will have to compete with other trans-shipment hubs along Saudi Arabia’s western coast. The biggest of these is Jeddah Islamic Port (JIP), which is responsible for the vast majority of Saudi port traffic - an estimated 3.5 million TEUs in 2006, out of a total 3.8 million TEUs. JIP was responsible for the majority of this capacity and plans to increase its container capacity to 6 million TEUs by mid-2009 through the addition of a third cargo terminal. But the Millennium port is intended to outstrip this, with capacity of more than 9.5 million TEUs.

Considering the rising volume of overall Saudi and Gulf exports, there is probably room for two large ports in relatively close proximity, and the Millennium port’s free zone status should at least give it an advantage if it comes into direct competition with JIP for cargo volumes.

But the economic city faces a struggle channelling the anticipated volumes through the port. Another port serving an industrial city - Yanbu, also on the western coast - is only using about 25 per cent of its capacity.

Regional competition

The economic city’s port plans depend on a wide range of variables falling into place. The proposed Saudi Landbridge rail project, which traverses the country between Jeddah and Riyadh, is designated to funnel a large amount of international trans-shipment cargo for the Gulf states.

However, even here, the Saudi authorities still need to confirm the investment options before real progress is likely. Incentives must be attractive enough to draw companies to set up in the city rather than in Yanbu, the adjacent Rabigh facility or elsewhere in the Jeddah area.

“For the KAEC port to be workable, they need to create linkages with the rest of the country and to Dubai,” says Sfakianakis. “But for that to happen, they have to make the transport economical.

“It would have to be affordable enough to use the port rather than existing shipping lanes to take cargo to Dubai directly. So the pricing of the Landbridge would have to be attractive for the port to take off.”

Sagia is offering advantageous investment concessions to investors in the city. The exclusion from requirements such as Saudisation quotas is a clear boon for foreign investors. According to Linjawy, the aim of this is to attract foreign investment and, through that, speed up the transfer of knowledge and expertise.

“To achieve that goal, you need a level of flexibility in the attraction and movement of expertise,” he says. “There will be that flexibility at King Abdullah Economic City, but in the long term we want to ensure it meets the key objectives to train and develop local talent.

This year is critical for the kingdom’s premier economic city. Over the past two years, the city’s backers have promoted its potential to transform the kingdom’s economy and deliver jobs and growth to the western region. Now, the challenge is to start delivering, pulling in anchor tenants with confirmed project schedules and erecting the infrastructure needed to underpin its speedy growth.

“Sagia has been good at cutting ribbons and making announcements, but it is not even close to what it ultimately wants to be doing, says one Saudi-based observer. “What it really needs to do is prove it can meet expectations. If it cannot meet its promises, it will delegitimise itself.”

Key facts

  • Emaar, The Economic City, is the site developer.

  • Emal will invest an estimated $5bn in an aluminium smelter.

  • Dubai’s DP World and PSA of Singapore are shortlisted to manage container operations at the $4bn Millennium seaport.

  • Saudi Total Lubricants Company (Satlub) to set up a manufacturing plant in the industrial area.

  • Civil & Electromechanical Company (Cemcco) won the contract for utilities and infrastructure work within the industrial zone.

  • Saudi Freyssinet won the contract for design and construction of the first phase of the business park within Bay La Sun village.

Table: King Abdullah Economic City projects

ClientProject nameValue ($bn)ScopeStatus
Emaar, The Economic CityRabigh airport1New international airport at Rabigh including runways, terminal building, hangers and associated infrastructureCompletion expected end of 2012
Emaar, The Economic CityWaterside resort4A mix of hotels and boutique residences on a built-up area of more than 3.5 million square metresCompletion expected end of 2012
Emaar, The Economic CityIndustrial district4Development of buildings, warehouses and associated power, water and roads for the industrial zoneCompletion expected end of 2012
Emaar, The Economic CityEducation Zone6Universities, schools and research and development facilitiesCompletion expected end of 2012
Emaar, The Economic CityMillennium seaport6New seaport covering 13.8 million square metres with capacity for 9.5 million TEUsDP World and PSA of Singapore shortlisted for operator contract
Emaar, The Economic CityFinancial island4Commercial and residential towers with exhibition and conference facilitiesCompletion expected end of 2012
Emaar, The Economic CityResidential district3.7Facilities to house projected capacity of up to 125,000 peopleCompletion expected end of 2012
Emaar, The Economic CityAluminium smelter complex5700,000-t/y aluminium smelter increasing to 1.4 million t/yCompletion expected end of 2012
Emaar, The Economic CityDesalination plant0.530,000-cubic-metre-a-day membrane reactorEPC contract awarded in 2007 to SETE Energy Saudia for Industrial Projects
Emaar, The Economic CityPower plant0.4390MW capacity power plantEPC contract awarded to Arabian Bemco Contracting for completion in late 2009
Emaar, The Economic CityCement plant0.36New cement plant with capacity of 2 million t/yEPC contract awarded early 2007 to Thyssen Krupp and Orascom Construction Industries for completion in early 2009

Note: Orascom Cement is now owned by Lafarge Ciments of Morocco. TEUs=20-foot-equivalent-units; t/y=tonnes a year; EPC=engineering, procurement and construction

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