Despite the global economic downturn, Riyadh is committed to its programme to expand the sector.
Saudi Arabia’s industrial development has shown little sign of abating since it launched the Saudi Industrial Development Fund (SIDF) in 1974, along with a series of five-year plans designed to gradually move the kingdom away from its dependence on oil revenues.
These initiatives were closely followed by the launch of the Royal Commission for Jubail & Yanbu (RCJY) in 1975, which was set-up to create two new industrial cities to further diversify the kingdom’s economy. Since then, further diversification programmes have followed.
In 2001, the Saudi Industrial Property Authority (Modon) was set up to create the legal framework, and physical infrastructure, for the creation of technology zones across the kingdom.
In 2007, the National Industrial Cluster Development Programme was launched to encourage industrial development through tax incentives and loans.
The global economic crisis, however, raises questions over the viability of private sector-backed schemes such as the flagship King Abdullah Economic City (KAEC) diversification project in Jeddah. The problems on the scheme clearly illustrate the impact of the global slowdown.
UAE developer Emaar, The Economic City, has been forced to delay work on the project because of the credit crunch. The kingdom’s economic cities, which will host several key industrial projects, are a source of increasing concern, with questions being raised over the viability of the model being pursued.
“There is a concern that there is not the money to complete the cities as originally conceived,” says one source. “We are hearing that the developers are lacking the funds to go forward as originally planned.”
KAEC will feature a $5bn aluminium smelter, being built in partnership with Dubai’s Emal International, which will have 700,000-t/y capacity, while other cities at Jizan, Hail, Tabuk and Ras al-Zour will focus on steel, fertilizers and petrochemicals.
Yet the massive state-backed expansion taking place at Jubail, Yanbu and through Modon shows little concern for fluctuating market forces.
The kingdom’s commitment to state spending was reinforced when in December 2008, King Abdullah bin Abdulaziz al-Saud announced the first budget deficit in six years. The Finance Ministry said spending will rise by 16 per cent to SR475bn this year, despite a dramatic fall in projected government revenues to SR410bn from SR1.1 trillion in 2008.
The government has also earmarked SR1.5 trillion to be invested on public projects in the kingdom over the next five years.
In its 2008 report, published in January, Modon announced it had attracted an estimated SR24bn ($6.5bn) in capital investment in its industrial zones over the past year, with 407 plots of land being allocated to investors over 15 square kilometres. In addition, SR1.5bn has been invested in the development and rehabilitation of existing industrial cities, such as the Jubail 2 project.
This includes SR580m on infrastructure projects for water services, and SR510m for rehabilitation projects in existing cities, including landscaping and maintenance of roads and sidewalks. Modon launched three further industrial cities in December
2008. Two are in the south, at Al-Baha and Makwah, and will cover 3 sq km and 6 sq km respectively.
The other city, which will cover 4 sq km, is at Gurayat near the Jordanian border.
In early February, Modon continued its expansion with the announcement that it was to establish a SR5bn energy service city in Dammam.
The project involves building an integrated industrial city specializing in energy services, covering about 1.5 sq km, in Dammam’s second Industrial City. It will provide support to the oil and gas sector in particular, including mechanical and chemical products, and links for pipes and drilling materials.
The local/UAE Oil Fields Processing Company will plan, develop, construct and manage the industrial city, which will include industrial, residential, educational, commercial and public services zones. Up to 120 factories are to be established in the city in the first phase of its development.
The ongoing expansion at Jubail and Yanbu is similarly ambitious.
George Dinic, programme manager at the US’ Bechtel, the consultant on the Jubail 2 scheme, which will double the size of the existing Jubail City, says the rate of progress on the industrial complex has increased despite the slowdown.
“As far as preparing the infrastructure is concerned, we are continuing to do so,” he says. “Our budget from the Finance Ministry has increased by about 40 per cent compared with last year.”
Dinic confirms that the infrastructure for stage one of the Jubail expansion will be completed by April this year, with contracts for stage two being awarded throughout 2009. “We are not concerned [about the slowdown],” he says.
“Certainly, private industries are feeling the pinch and, therefore may consider how quickly they develop in light of the economic downturn. But we are government funded.”
Dinic argues that far from being a period of slowdown and concern for developers, now is an ideal time to invest. “It is a good time to make a profit and be a developer,” he says. “Construction costs are now much lower, materials and labour is far less costly, so bids are coming in much lower than they were last year.”