Riyadh is being called on to offer government support to ensure the private sector development of the kingdom’s economic cities remains on track as the global financial crisis continues.
Plans by the Saudi Arabian General Investment Authority (Sagia) to develop six economic cities in the kingdom are likely to suffer delays as a result of the current economic turmoil, according to sources close to the programme.
“Any project that requires financing is going to face challenges,” says one senior source. “The issue is what imaginative solutions Sagia and the shareholders are going to come up with.
"If they take a reactive approach, nothing is going to happen in a hurry. They need to take a proactive approach and probably share risk. Maybe the government should get involved.”
The six cities are all being developed with finance from the private sector rather than the government.
With the liquidity crunch affecting banks across the world, the cost of funding for developers is likely to rise.
“There will definitely be a slowdown for sure,” says another source close to the economic city programme. “You could say investors will be more circumspect.”
Four of the cities have already been launched by Sagia. Between them King Abdullah Economic City near Jeddah, Jizan Economic City, Prince Abdulaziz Bin Mousaed Economic City in Hail, and Knowledge Economic City close to Medina have a total project value of more than $80bn.
Some cities will be affected more than others by the credit squeeze, adds the senior source.
“This is going to be an issue for Jizan, for example, as it is based on a large number of infrastructure projects,” he says.
“The developers are going to invite the private sector in, which will involve the raising of a lot of finance. The oil refinery itself is a $1bn-plus project.
hat is where there is going to be a pinch point.”
With little liquidity in the region, banks are unwilling to lend money on a long-term basis, and the situation is compounded by inflation, according to John Sfakianakis, chief economist with Sabb.
“The region is being squeezed in terms of available liquidity,” he says. “Although Saudi Arabia’s banking system is liquid, there are credit concerns because the demand for projects is high and the credit availability is not commensurate to demand.
“At the same time the central bank is, correctly, trying to combat inflation,” he adds. “Therefore credit to the private sector is not as forthcoming today as it was six months ago.
“Since this is a private sector initiative, the private sector will have to assess its priorities.”
Difficulties have already emerged at one of the cities.
In September, a new developer was appointed for the second largest city, Prince Abdulaziz Bin Mousaed Economic City. Sagia replaced the local Rakisa with a Kuwaiti-firm, Al-Mal Investment, due to concerns about the progress of the project (MEED 19:9:08).
As MEED went to press Sagia was unavailable for comment.