The viability of Riyadh’s plan to build six economic cities is increasingly being questioned as countries around the world enter recession and the global downturn reduces the availability of foreign finance.
When the Saudi Arabian General Investment Authority (Sagia) announced the launch of King Abdullah Economic City in 2005, it heralded the beginning of a new drive to diversify the country’s economy.
The city, to be built at Rabigh near Jeddah on the Red Sea coast, will be the first of six planned by Sagia to rely on private investment rather than government backing. The cities will help the kingdom diversify its economy and address the pressing issues of providing employment and housing a young and expanding population - 70 per cent of the country’s population are under the age of 30.
International developers were brought in to attract regional and international investment, and provide technical knowledge. Dubai-based developer Emaar Properties set up a subsidiary - Emaar, The Economic City - to develop King Abdullah Economic City, and Malaysia’s MMC Corporation is to develop Jizan Economic City with the local Saudi Binladin Group.
Economic Cities in numbers:
| City | Investment ($bn) | Population | Jobs created |
| KAEC | 35 | 2 million | 1 million |
| Jizan | 27 | 300,000 | 100,000 |
| Prince Abdulaziz bin Mosaed | 8 | 300,000 | 55,000 |
| KEC | 7 | 150,000 | 20,000 |
| KAEC=King Abdullah Economic City; KEC=Knowledge Economic City Source: Sagia | |||
Financial doubt
But since the early rush of activity, doubts have been raised over the ability of developers to raise the billions of dollars in investment required at a time when international financial markets are in turmoil.
With countries around the world entering recession, it will also be difficult to persuade companies to expand or build new facilities in Saudi Arabia when many are struggling to maintain demand from customers. In short, 2009 could prove to be a defining year in the economic cities programme.
The flagship King Abdullah Economic City has not escaped this heightened level of scrutiny, with doubts being raised over the speed of progress on the development, as well as its ability to attract sufficient investment.
Googlemap: Saudi Arabia's Economic Cities
Despite the fact that SR130bn ($35bn) in investment was raised for the city in 2008, sources at the project continue to voice concerns that tightening financial markets are having an impact on the 167-square-kilometre development. “I suspect there is a slowdown with King Abdullah Economic City, and the economic crisis will seriously hit the development,” says one local contractor. “It is a huge investment and Sagia’s model depends on foreign investment. I am not sure if there is enough.
“I think it will slow down. It cannot sell as planned; there are so many units, villas, apartments and office space that need investment.”
“It does seem like they [the developers] have no money,” says another local contractor working on the development. “Work on the city is very slow.”
According to local finance industry sources, some banks are worried about the level of financial support needed for the project, given the government’s insistence that the city should rely on private finance.
“They [Emaar and Sagia] do not find financing easy and the economic city is not having much luck attracting finance” says a source at one Riyadh-based financial advisory firm. “There are certain components in a normal environment that would be supported by the government, but that is not happening here. It is not helping itself.”
Sagia remains confident that its economic cities programme is on course, and that the kingdom will be able to ride out the current international economic downturn because of its strong financial foundation and limited exposure to failing markets. “The majority of the projects are moving ahead as planned,” says Omar al-Madhi, vice-president for energy & economic cities at Sagia. “Overall, we are seeing a positive outlook and our expectation is that Sama [Saudi Arabian Monetary Agency, the central bank] has taken strong steps towards maintaining that balance. If any problem arises, measures will be taken to alleviate possible loan issues.”
Al-Madhi says there is no inherent weakness in the economic cities that cannot be fixed. “We revisit our viability studies continually, depending on the economic situation and what we see in the market,” he says. “We feel that our cities are very viable.
“Primarily, we would update the numbers, because the cost of capital changes, the cost of construction changes and our demand forecast might change. But overall, we have not seen huge discrepancies that would necessitate any major overhaul of what we are developing. Simply, it is tweaking here or there to make sure whatever numbers we have in our financial models are pragmatic to what is available in the market.”
King Abdullah Economic City is one of four cities that have been officially launched by Sagia. Work has also started on Jizan Economic City on the Red Sea coast, Knowledge Economic City in Medina, and Prince Abdulaziz bin Mosaed Economic City at Hail, 720 kilometres northwest of Riyadh.
The city at Hail has been dogged by problems since it was launched in 2007. When completed, the 156-square-kilometre site will become the second-largest economic zone in Saudi Arabia and the largest transport and logistical services hub in the Middle East, with a planned investment of $8bn over 10 years.
However, Sagia replaced Riyadh-based developer Rakisa Holdings with Kuwait-based Al-Mal Investment Company in late September 2008 because of concerns that the development was not progressing to the expected timeframe.
At the time, Abdullah Hameedadin, deputy general governor and head of economic cities at Sagia, said the decision was made following a presentation of the proposed masterplan by Rakisa, when it became clear that more help on the project would be needed.
A consultant is set to be appointed to draw up the masterplan for Hail in the first quarter of 2009, several months later than expected. Two international consultants - Singapore-based Jurong International and Kuwait’s KEO International Consultants - are bidding for the work, which was previously expected to be awarded by the end of November 2008.
Tenders for the first construction packages at the economic city were also expected in January, but have been pushed back until the detailed engineering work is complete.
“We are still negotiating, it is taking some time, but we are confident it [the masterplan] will go ahead,” says a source at one of the bidders for the masterplan.
According to Al-Mal, it will establish a new firm with SR5bn in capital to develop the city, and the work should be completed in 2025. Al-Madhi says Sagia will give a further update on progress being made on the city in March.
To the southwest of Hail on the outskirts of Medina is the site for Knowledge Economic City, which is being developed by a consortium including the Jeddah-based conglomerate Savola Group and the King Abdullah Foundation. The site will cover an area of 4.8 square kilometres and have a built-up area of 9 square kilometres. The project is valued at SR25bn and will house about 150,000 residents.
Sources close to the development say it is also being affected by the slowdown. “I know they [Sagia and the developers] are looking at the masterplan again to review it, particularly in terms of its phasing” says one source within the kingdom. “The level of activity at Knowledge Economic City has slackened off. We have been told certain things are on hold. It seems that they are rethinking the phasing of various sectors of the city, such as the industrial and residential sectors.”
Of the four cities that have already been launched, progress on Jizan Economic City in the far southwest of the kingdom appears most assured. Located 50km north of the town of Jizan, it is being developed by a consortium headed by Saudi Binladin Group and MMC Corporation, and several key contracts are due to be awarded in the coming months.
Making progress
Among these is a SR1bn infrastructure contract for the first phase, which is due to be awarded by late February or early March. The contract covers ground preparation, levelling and earth moving.
It will also cover the construction of a series of access and link roads so that contractors can reach different sections of the 117 sq km site. This work alone is expected to take 18 months to complete.
An award is also expected in March for a SR45bn refinery, following the issue of a tender in September 2008. However, according to one source close to the project, the economic climate may cause the deadline to be extended to allow the necessary finance to be raised.
Of the six cities planned, two, at Tabuk and Ras al-Zour, have yet to be launched and there is no indication from Sagia when any development work might start. But the government body insists they will go ahead.
“The last two cities will definitely happen, it is just a case of timing and tying up the loose strings here and there in terms of developing the capacity of the various developers, as well as ensuring the time is right,” says Al-Madhi. “There are a lot of variables we need to look into so I do not think a firm decision has been made on those cities yet in terms of when they will be launched, but they will be.”
Despite the tough economic climate, Saudi Arabia must develop employment opportunities and housing for its young population, and the economic cities programme plays a central role in this.
“These are commitments we have made and we feel they are justified given that Saudi Arabia over the next five to 10 years has to build the same number of housing units that were built in the past 25-30 years,” says Al-Madhi.
Others close to the economic city programme argue that the whole scheme needs to be reassessed to ensure it is still economically viable in the current climate. With so little financial capital available in the market and banks unwilling to lend, it could be that the government will have to step in with some financial assistance if its ambitions are to be achieved.
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