Riyadh develops the city model for its six new economic cities

04 April 2008
Following its success at Jubail and Yanbu, Saudi Arabia is building six more economic cities, but its approach is markedly different this time around.

More than 30 years ago, critics said that plans to use booming oil revenues to transform several small villages in the deserts of Saudi Arabia into key industrial zones for the future of the country would never work. But today, investment continues to pour into the industrial hubs of Jubail in the Eastern Province and Yanbu on the Red Sea coast, and the two have a combined population of more than 150,000. Now Riyadh is hoping to repeat this success with six new developments.

At the core of the Jubail and Yanbu developments was a philosophy of economic diversification into manufacturing and industry. The Royal Commission for Jubail & Yanbu led the growth, which capitalised on Saudi Arabia’s strategic advantages: the abundance of natural oil and gas, and therefore cheap energy; and the availability of land for development.

Development plans

The success of these cities can be measured by the opportunities and continued investment. There are plans for two new $6bn refineries at both cities, in addition to several new independent water and power projects (IWPPs), and another 40 construction contracts are expected to be awarded this year for the expansion of Jubail Industrial City. The Royal Commission for Jubail & Yanbu lists a total of 82 future projects for the continued development of the two cities.

Amgad Husein, head of the Riyadh office of law firm Denton Wilde Sapte, says the two existing cities have been so successful that getting space in them is increasingly difficult. “It is getting hard for a lot of our clients to find space in Jubail now, which is part of the reason why it is looking to expand,” he says.

The industrial development of Saudi Arabia’s first industrial cities was based on a relatively straightforward idea centred around providing jobs by developing the manufacturing and industrial sectors using cheap feedstock. But the goals of the new cities are much more varied. In addition to promoting Saudi Arabia as an industrial base, the new cities will take on more abstract goals, such as promoting learning and understanding of technology with the Knowledge Economic City in Medina, and the education zone at King Abdullah Economic City (KAEC).

This means that the new developments will require a different approach to encourage investment and achieve the ambitious population targets. For example, Jubail Industrial City has a daytime population of 143,500 people, but a night-time population of only 94,500, indicating that commuters remain a major source of the city’s workforce.

By contrast, John Sfakianakis, chief economist at the local Sabb bank, says KAEC will have to be dominated by full-time residents if it is to achieve its aim of raising the per capita gross domestic product (GDP) of the area by two and half times to SR125,625 ($33,500).

Improving Saudi Arabia’s poor GDP per capita figures is a key aim of all the cities. While GDP figures of SR1.4 trillion ($378bn) and growth in nominal GDP of 7.1 per cent for 2007 sounds impressive, GDP per capita of $15,416 is growing at a less impressive 4.6 per cent from a very low base. In contrast, average annual growth in GDP per head in China is 22.2 per cent, and in Russia it is 24.8 per cent -although this is partly because Russia’s population is shrinking - indicating that the standards of living for the population are improving much faster elsewhere. It also puts Saudi Arabia far behind some of its regional peers

Private backing

The new cities are aimed at tackling this and, in contrast to the Jubail and Yanbu cities, much of the finance is coming from the private sector. KAEC, for example, will be entirely financed by private investment. For the new cities, the government will take on the role of regulator, facilitator and promoter, with the private sector providing capital, developers and landowners.

The government had a much more active role in the development of Jubail and Yanbu, also providing the capital and developing the infrastructure, although it is now seeking greater private sector involvement.

“The greater involvement of the private sector in the new cities will mean there are greater questions to be asked about how economically viable the models for development are,” says George Dinic, programme manager at Bechtel, consultant to the Royal Commission for Jubail & Yanbu for the development of Jubail.

The development of the six new economic cities is forecast to cost as much as $500bn, according to Sabb, but could rise even further. This presents its own problems. Each development must be given the necessary publicity and promotion by the body overseeing the developments, the Saudi Arabian General Investment Authority (Sagia), to ensure that each manages to attract the required number of foreign-licensed businesses and investment.

Attempting to manage these competing interests will be difficult, and there is little prior experience of managing such significant volumes of potentially conflicting private investment. “Although each of the new cities has a distinct theme to separate it from the other developments going on, there is a degree of overlap within the new cities and the existing ones,” concedes one adviser to companies looking to enter the kingdom. “So inevitably, they will be competing for investors.”

Attracting investment

For instance, the aluminium smelter at Jizan Economic City being developed by Aluminium Corporation of China (Chalco) will be competing for investment with a high-profile smelter being developed in KAEC by Emirates Aluminium (Emal).

This development will not only be able to capitalise on the name of the country’s first new city development, but also its more central and strategic location, and the fact that the city will contain one of the region’s biggest ports in the $6bn Millennium seaport.

Attracting investors to the more isolated location of Jizan could be more troublesome for Sagia despite plans for a new port in the southern city.

While the two established cities of Jubail and Yanbu no doubt provide a limited blueprint for development for the new economic cities, there seems to be little real knowledge transfer so far. Sources close to both schemes say they are not aware of much advice being passed on from those involved in the original cities. “I am sure there are some [lessons], and if they ask we will tell them,” says Dinic, who was involved in the original development of Jubail.

The most important lesson to learn for the new cities is planning, says Ali al-Meiman, director general of corporate strategy at the Royal Commission for Jubail & Yanbu. “Writing the masterplan, developing it and then maintaining it, with as much forward planning as possible, is vital for the new cities to be a success,” he says. “We have spent a lot of time on planning for Jubail and Yanbu, and continue to plan for the next 20 years and beyond.”

Dinic agrees that the most significant challenge will be attracting people to the new cities and encouraging them to stay there. “It takes a long time to populate a city, and they will need to offer jobs and all the associated infrastructure to attract people to go there in the first place,” he says.

It also seems that the existing cities can learn from the new ones. Jubail and Yanbu are plotting their expansion into more knowledge-based enterprises and the education sector, in response to moves by the new cities to become regional education and technology hubs. The Royal Commission has commissioned US consultant Booz Allen Hamilton to update its strategic plan.

City evolution

However, Al-Meiman says this is not a reaction to the new cities but part of the project’s evolution. “What we are doing now is reviewing our strategy for the next 20 years,” he says. “This will include looking at how Jubail and Yanbu will integrate with the economic cities. We have to ensure that they compliment each other and that the synergies are established. This will take a lot of work between ourselves and Sagia.”

Al-Meiman says he does not see any competition emerging between the cities. They are all operating for the benefit of the kingdom and they are different in terms of their strategy.

Dinic also insists that the existing cities will not suffer as the new developments emerge. “Jubail is a completely unique industrial city,” he says.

Jubail and Yanbu are also moving in the direction of attracting a residential workforce, with a greater emphasis placed, in recent years, on the development of shopping malls, schools and other infrastructure.

Providing jobs for Saudi nationals is another major part of the strategy for the new cities, although it is also something that will require careful management by Sagia.

“A lot of companies want to start up new operations using their own skilled and experienced workforce,” says one foreign businessman working in the country. “Forcing them to employ locals through the Saudisation scheme will make some think more carefully about establishing in the kingdom.”

Husein says: “We used to advise companies coming to Saudi Arabia ‘don’t worry about Saudisation targets, they are never enforced.’ Then, suddenly, the targets started to be very strictly enforced, and this created a lot of
confusion among business looking to come to the kingdom.”

However, Sagia seems to have realised this and has given some leeway to new companies entering the country to bring in their own workforce initially, and then gradually start employing Saudi nationals.

Sagia will have to find a balance between being flexible enough to attract foreign businesses and ensuring it is fulfilling its other goals of providing job opportunities to the domestic workforce.

Population challenge

Al-Meiman says people will pose the greatest challenge to all the cities. “It will be a challenge for everyone getting the right people when there is so much expansion going on.”

He adds that the Royal Commission is undertaking a comprehensive review of its own compensation packages to ensure it can remain competitive.

While the official line is that it is unlikely that any direct competition will go on between the cities, some indirect competition for investors and in attracting the population will undoubtedly occur. Handling this will be a new task for Sagia, and something of which the Royal Commission for Jubail & Yanbu has little experience.

With ambitions to provide jobs for 1.3 million people, a living environment for 4.5 million people, and to add $150bn to Saudi Arabia’s GDP, such a huge task presents plenty of opportunity for mistakes to be made. So far, the mood is generally one of optimism, even among existing cities that feel no threat from the new developments. Sagia and the Royal Commission say they do not see themselves as competing with each, as they are doing completely different things.

In 1982, Time magazine reported on the Jubail project: “The search for historical comparisons with Jubail is daunting - In all the expansive sweep of civil engineering, from the pyramids to the Nile to the construction of the Panama Canal, nothing so huge, or costly, as Jubail has ever been attempted by anyone.”

The kingdom now hopes to pull off the same feat again, in several different places simultaneously. It has the possibility to change dramatically both the physical and economic geography of the country. Mistakes will undoubtedly be made, and lessons will have to be learned. But equally, the Saudi government will undoubtedly find a way to overcome these challenges and potential pitfalls as they present themselves.

Key facts

  • Saudi Arabian General Investment Authority (Sagia) is responsible for developing economic cities

  • Cost of development is $111bn

  • The largest is King Abdullah Economic City, costing an estimated $27bn

  • Between them, they can house more than 500,000 people

  • They are aimed at creating more than 1 million jobs

  • Surface area is more than 450 square kilometres

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