The Massive Master Plan
By Bobby Ghosh/KAEC
Amr al-Dabbagh has no doubt that if he builds it, they will come. The governor of the Saudi Arabian General Investment Authority (SAGIA) is one of the forces behind King Abdullah Economic City (KAEC), a $27 billion development rising out of the desert 62 miles (100 km) north of Jeddah, and he can already envision the arrival of its first residents. "It won't be long before it starts taking shape," he says.
There's a palpable sense of urgency at the construction site, where a line of high-rises--the first batch of offices and residences--is taking form along the aquamarine waters of the Red Sea. Dozens of businesses have signed on to set up shop in KAEC (pronounced cake), and the first 1,500 housing units sold out in days. In early 2009, the first business tenants will move in; the first residents, soon thereafter. The first school is planned to open by the end of next year, which will allow families to move in.
If all goes to plan, in a couple of years the trickle will turn into a flood. When it's completed 20 years from now, KAEC will be roughly the size of Washington, D.C., with a population exceeding 1.5 million. It will have a seaport, an industrial district, a financial center, a health-care zone, a full-fledged university and a beach resort. Not since Brasilia and Chandigarh in the 1950s and '60s has any country set out to build an entirely new city on such a scale.
Saudi Arabia is planning to build five of them. Simultaneously. KAEC serves as the flagship project. The Saudis plan for nothing less than to make the country more competitive globally, and they are willing to spend what it takes to do it.
To its critics, the plan smacks of oil-fueled excess, an attempt to one-up rivals on the mad dash across the Arabian Peninsula to build the tallest, biggest, glitziest structures. Their coffers bulging with surpluses, many Persian Gulf states are turning their desert into one giant construction site. There's the City of Silk project in Kuwait, Dubailand in Dubai and any number of ports, airports, universities and giant residential and industrial complexes abuilding in Qatar, Abu Dhabi, Bahrain and elsewhere. KAEC "is not a vanity project, but there is definitely a statement being made," says a Riyadh businessman who asked not to be identified for fear of offending King Abdullah, who is personally keen on the new city that bears his name. "It is the Saudis saying to the rest of the Arabs, 'We can build bigger than the rest of you.'"
Al-Dabbagh and his backers insist they're not trying to out-Dubai Dubai--or anybody else--and that the new cities are meant to solve pressing economic and demographic problems: with 60% of its population under the age of 25, Saudi Arabia needs to create millions of jobs and homes for young people who will come of age in the next five years. This "youth bulge" will create a demand for 6 million residential units in the next 12 years; that's a million more units than were built in the past 60 years. "When you have demand on that scale, you can't think small," says Fawaz al-Alamy, who advises King Abdullah on economic issues. "Big problems need big solutions."
The new cities are the centerpiece of Saudi Arabia's plans to diversify its economy from oil and gas and to boost its manufacturing sector, especially in energy-intensive industries like aluminum and steel. KAEC, for instance, will have a $5 billion smelter built by the United Arab Emirates firm Dubal, one of the world's largest aluminum manufacturers. Another Emirates firm, Emaar, is the city's main developer; there's scarcely any government investment or involvement in the construction. Other companies that have signed up to invest include France's Total, Sweden's Ericsson and U.S. firm Capri Capital, which has announced a $2 billion development deal that will include two luxury hotels as well as office buildings and condominium towers.
The Dubal project is a template for the kind of investment Saudi Arabia wants to attract: it will be 100% foreign-owned and will probably generate several downstream businesses. The ownership is crucial; in the past, the only way foreign companies could operate in the kingdom was through joint ventures and local agents--many of whom brought no skills and little capital to the partnership. With that barrier gone, al-Dabbagh hopes investors will pour in: he expects the new cities to generate more than $100 billion in foreign investment. Saudi businesses may kick in two or three times as much.
Al-Dabbagh is working to remove other barriers as well and crack the Top 10 on competitiveness lists prepared by the World Economic Forum and the World Bank. Since 2005, SAGIA has been pressing the notoriously sclerotic government bureaucracy to become more investor-friendly, simplify procedures and cut back on paperwork. Dahlia Khalifa, an economist on the World Bank team that produces the Doing Business report, credits Saudi Arabia with "consistent reforms over the past three years."
As a result, the kingdom is on the move. On the World Economic Forum's list, it is 27th, up from 35th last year. It sprinted up the World Bank's list, from 67th in 2005 to 16th in 2008, making it the easiest place to do business in the Middle East. In that time, foreign investment in Saudi Arabia has nearly doubled, to $23 billion. "Foreign businesses are looking at us differently," al-Dabbagh boasts. Companies with a long history of working in the kingdom say they've noticed the difference. "The say/do factor has improved significantly," says Nabil Habayeb, GE's CEO for the Middle East and Africa. "When the government tells investors it will do something, it usually gets done."
But Saudi Arabia is still some distance from being an investor's mecca. The kingdom ranks a woeful 137th on the World Bank's list when measured by ability to enforce contracts. For many investors, that will be a red flag. Saudi Arabia has also fared poorly on other lists that investors parse: it has slipped to 80th place on Transparency International's Corruption Perceptions Index for 2008, from 70th in 2005. By that reckoning, Saudi Arabia is one of the most corrupt places in the Middle East.
Businesses, homegrown and foreign alike, also face several problems that are unique to Saudi Arabia. The quality of the local workforce is poor, owing to an education system that has long placed religious studies above science and math (unlike that of the elites, who are often Western-educated). Reforms are under way, but it will be years before Saudi universities are churning out world-class engineers in the numbers the country needs. Nor can businesses expect to simply import employees, which has long been the norm in the Persian Gulf economies: mindful of that youth bulge, Riyadh is imposing a "Saudi-ization" program that requires businesses to hire more locals. It doesn't help that employers don't have access to half the potential workforce: despite some recent gains for women, only small numbers of them have overcome the stiff cultural resistance to females going to work.
Al-Dabbagh is certain these hurdles won't stand in the way of investors in the new cities. They will, he says, be "new pockets of competitiveness," like economic greenhouses for businesses. In the desert, that's the only way to make things grow.