With the Saudi economy growing rapidly in a short space of time, the temptation for Riyadh is to take on increasingly ambitious business ventures. The six new economic cities highlight the kingdom’s continuing affinity with the megaproject model, but are entirely different to previous efforts.

Not only are the themed cities the largest infrastructure projects undertaken by the kingdom, but they are also the largest projects of their kind in the world to be financed and managed by the private sector.

To many observers, they are the most obvious statements of Saudi Arabia’s renewed sense of purpose, but critics claim they could end up as expensive white elephants.

In the past, industrial cities were state-owned and operated, the largest being Jubail Industrial City in the Eastern Province, and Yanbu Industrial City on the Red Sea coast. The former has attracted nearly half of all foreign investment in the kingdom, focused on a series of energy-intensive downstream industries.

Traditional strengths

In December 2005, the Saudi authorities devised a radical approach, shifting from building industrial to economic zones. In contrast to the state-led model of Jubail and Yanbu, the new economic cities were to be privately owned, developed and managed. Rather than play to the traditional strengths of the Saudi economy, they are intended to kickstart new services sectors.

King Abdullah Economic City (KAEC) in the Western region is set to be the largest private sector investment in the kingdom’s history, a multi-stage development with projected investment of more than $26bn. The project, which is being developed by Emaar, The Economic City, is expected to create at least half a million jobs across a range of industries.

The centrepiece of the plan is a 14-million-square-metre port that will have capacity to handle in excess of 10 million 20-foot equivalent units (TEUs), making it one the world’s five biggest ports.

Planners say KAEC will become a natural platform for the export of goods to Europe, Africa and Asia. The port is the key to the entire economic cities project. Saudi business leaders cite DP World as one of the driving forces behind the project, as the Dubai ports operator seeks to secure alternative port outlets to handle ocean-going vessels beyond the Strait of Hormuz.

The operator is seeking to develop its capacity on the Red Sea, having recently added Sokhna Port in Egypt to its terminal at Jeddah and Djibouti. The option of using the existing Jeddah Islamic Port and having to negotiate with myriad government bureaucracies proved an unattractive prospect. “Ships are often stuck there for days having documents checked,” says one Western region businessman. “In the end, many shipping lines have simply stopped docking there altogether.”

The only viable alternative was to set up a free zone that was not encumbered by bureaucracy. But this alone would not be enough of an incentive to the Saudis, who were seeking wider development prospects.

Business leaders needed something more substantial to be sure of official support. KAEC’s main developer, Emaar, The Economic City, approached the Saudi government with plans for a massive development that would satisfy the Saudis, notably creating jobs.

Considering King Abdullah’s focus on bridging regional disparities, the state then decided to replicate the model across other regions – at Hail in the north, Jizan in the south and at Medina, also in the Western region. New cities are also planned at Tabuk in the northwest and Ras al-Zour on the northeast coast.

“The main purpose for launching the economic cities was to accelerate economic development,” says Ahmed Linjawy, city management executive director for Emaar, The Economic City. “They are the adrenaline boost for the economic progress the country is aiming for.”

Creating employment

In some parts of the kingdom, the private sector is still in its infancy. In Hail, about 90 per cent of the working population is in state employment. The new logistics city at Hail, Prince Abdulaziz bin Mosaed Economic City, should create more employment opportunities for young Saudis in the north.

But critics fear the economic cities could have the opposite effect, creating pockets of affluence that exclude the wider economy. “In Jeddah’s case, I would not know if it is going to accelerate growth there or suck life out of the city,” warns one economist. “They are building an international airport at Rabigh, but it remains to be seen if the region can sustain two airports so close to each other.”

The Jeddah economy is dependent on port traffic, with Jeddah Islamic Port handling about 40 million tonnes a year of cargo. But KAEC port is likely to draw a large volume of trade away from Jeddah. As container vessels increase in size, KAEC could prove far more competitive for re-exports than its neighbour.

Although the economic cities have made much of their pitch for foreign investment, they are also intended to galvanise Saudi investor interest. Yet MEED’s survey of major Saudi corporates suggests a cautious attitude prevails. Several Saudi businesses have already taken up the challenge of the economic cities – Savola, a diversified Saudi food and retail group, is a 40 per cent anchor investor in Medina’s Knowledge Economic City (KEC) and also has a small stake in KAEC. But most firms are yet to commit to any of the schemes.

The economic cities also need to be internationally competitive. KAEC needs to work as a trans-shipment port feeding the GCC economies.

All the other factors depend on the port’s commercial success.

Not that sponsors have any doubts over the port delivering. “This is not just our vision, it is based on studies that show the Red Sea location is key to making it succeed in global trans-shipment terms,” says Linjawy.

KAEC will be the test for those that follow. “The challenge is in the execution,” says Said al-Sheikh, chief economist at National Commercial Bank. “If this one succeeds, there will definitely be more.”

Setting incentives

A big unknown is whether the private sector will bear the investment burden. In the past, the state was responsible for financing the Jubail I and II and Yanbu industrial cities. The government’s role now is to regulate the process, setting the incentives for the private sector.

The state’s provision of these incentives, whether through cheap feedstock supplies or exemption from Saudisation quota requirements, will make the economic cities a successful and profitable proposition in the long-term.

Without incentives, private investors will be wary of supplying the necessary resources, say analysts. “They have focused on industries that rely on cheap power, using the kingdom’s comparative advantage in cheap energy,” says Al-Sheikh. “The electricity share of the unit cost of production in the steel plant at KAEC will be sizeable.”

Keeping costs down will be another big challenge for developers. A recent study of costs at the six economic cities by local bank Sabb puts construction expenses at SR325bn ($86.6bn), but this could increase to more than SR417bn by 2009 if contracting and materials costs continue to rise.

The ultimate guarantor of confidence is derived from the blue chip credibility of the main sponsors.

“If Singapore Ports Authority and DP World are putting in billions of dollars of investment, then obviously they have done the economics,” says Al-Sheikh. “Why would they do it otherwise?”

Key fact

The current construction cost estimate for the six economic cities is $86.6bn.

The economic cities

Knowledge Economic City

  • Location: Medina

  • Size (km2): 12

  • Cost: $7.7bn

  • Sponsor: Developer consortium comprising Savola Group, PMDC, Taibah Investment & Real Estate Development Company, Quad Investment Real Estate Development Company and the King Abdullah Foundation

  • Focus: Technology

  • Proiect comprises: Technology zone; IT studies institute; campus for medical research and life sciences; medical services zone; retail zone; business district; residential zone

  • Jobs: 20,000

  • Residents: 150,000

  • Completion: 2014

Prince Abdulaziz bin Mosaed Economic City (Pabmec)

  • Location: Hail

  • Size (km2): 156

  • Cost: $8bn

  • Sponsors: Rakisah Holding Company, local/ regional investors

  • Focus: Transport/ logistics

  • Project comprises: Logistics and a supply chain zone; educational district; agriculture and food processing services area; mining services area; entertainment hub; residential district

  • Jobs: 30,000

  • Residents: 80,000

  • Completion: 2018

Tabuk Economic City

New development proposed

Ras al-Zour Resource City

New development proposed

King Abdullah Economic City

  • Location: Western region, near Jeddah

  • Size (km2): 168

  • Cost: $26.6bn

  • Sponsor: Emaar, The Economic City (UAE)

  • Focus: Residential/ commercial development, centred on an industrial port

  • Project comprises: Sea port; industrial district; waterside resort; financial island; residential district; education zone

  • Jobs: 500,000

  • Residents: 75,000

  • Completion: 2016

Jizan Economic City

  • Location: Jizan

  • Size (km2): 117

  • Cost: $10bn

  • Sponsors: MMC Corporation, Saudi Binladin Group

  • Focus: Industry

  • Project comprises: Oil refinery and integrated petrochemicals complex; steel rebar and DRI; copper refinery and smelter; aluminium complex; power and desalination plant; fisheries and agriculture industry

  • Jobs: Up to 500,000

  • Residents: 250,000

  • Completion: 2011