Saudi mega cities challenge the private sector
By MOHAMED A. RAMADY
Published: Nov 8, 2010 22:44 Updated: Nov 8, 2010 22:44
SAUDIA Arabia is being literally transformed, but unlike desert mirages, the Kingdom is witnessing the birth of some of the most ambitious economic and social engineering projects in the Middle East through its planned mega economic cities.
Compared with some other Arab economies hard hit by the global financial downturn, there is a mood of quiet optimism in Saudi Arabia and consumer confidence indexes reveal that Saudi citizens believe they will not be as badly affected as other countries worldwide.
This sense of self-confidence seems sustained by bolder strategic economic and social reforms implemented by King Abdullah, whether in the judiciary, educational or economic fabric of society.
Buoyed by several years of budget surpluses, the Kingdom has embarked on structural economic reforms in both capital infrastructure and human capital development and the planned mega economic cities are but one manifestation of this mood of self-confidence.
Unlike earlier large infrastructure developments, a key element of this strategy has been reinvigorated regional economic diversification and more equitable wealth creation for Saudi citizens. This has been translated into the launching of special economic zones, seemingly alike, but in reality each planned to specialize in certain niche core activities to leverage on each area’s location advantages. As of 2009, four economic cities have been launched with two more economic cities expected in Tabuk and Dammam. The planned infrastructure expenditures on these mega cities are enormous, totalling some $140 billion in the first phase. The largest is the King Abdullah Economic City at Rabigh on the Red Sea coast, with a planned area of 168 million sq meters and $ 80 billion in basic infrastructure cost. It will be the largest government and private sector integrated development project since the 1980’s when the Kingdom embarked on creating the Jubail and Yanbu industrial cities. Unlike the capital intensive projects of the earlier period, Saudi Arabia is now focussing on job creation and private sector participation from the start, and the King Abdullah Economic City, upon its completion in 2020, will aim to generate 1 million new jobs, promote energy and transportation related industries, and establish a new sea port of 13.8 million sq. m. and handling some 300,000 pilgrims.
The other planned mega economic cities are also just as ambitious with some $ 23 billion planned expenditure for Prince Abdul-Aziz bin Musaed Economic City in Hail, supporting agro industrial and mineral exploitation projects in that region, and a $30 billion planned expenditure in Jizan Economic City, the southern region of the Kingdom, concentrating on heavy industries (aluminium, refinery, steel, power) as well as secondary industries such as fisheries, and pharmaceuticals and generating 500,000 new jobs. Phase 2 of the project is expected to be completed by 2013 and the final phase by 2037. The fourth planned mega economic city is in Madinah and will focus on knowledge-based industries, create 20,000 new job in this high value sector, attract 150,000 new residents and complete by 2020 at a cost of $ 7 billion.
By 2020, it is expected that the major phases of the economic cities will have been completed and the forecasted impact on the Saudi economy are far reaching. According to the Saudi Arabia General Investment Authority (SAGIA) some 1.7 million new jobs will be created, with the economic cities adding $150 billion to the Saudi GDP. They will attract over $100 billion of new investments domestically and from abroad, and their population will be three times that of Dubai, with an area four times that of Hong Kong.
The government of Saudi Arabia is forecasting that from both the private and public sectors, a staggering $800 billion will be invested in these economic zones and other mega projects including those being planned by Saudi Aramco and SABIC in these mega cities.
No other country in the Middle East can match such grand project expenditures, which upon completion, will unleash Saudi Arabia as one of the major economic power houses of the world in league with India, China and Brazil as the undisputed leaders of the developing world. What is of more significance for Saudi Arabia, is the potential for the direct and indirect multiplier effect of these mega projects on secondary local industries and job creation in the wider Saudi economy.
The real test of success will be the level and scope of private sector participation in the grand projects, whether from Saudi investors or from abroad. Given international economic and financial uncertainties, Saudi investors and others from the Gulf, seem to have been encouraged at the opportunity to share in local risk as the Saudi government has spent political capital into ensuring that the second phase of its economic diversification strategy succeeds. It is not a coincidence that one of King Abdullah’s favorite project- the King Abdullah University of Science and Technology (KAUST), with an independent endowment fund of over $15 billion, is also taking shape at Rabigh near the King Abdullah Economic City. The hope is that an infusion of knowledge, technology, new skills and job creation unleashes a new dawn of prosperity for the Kingdom. Dr. Mohamed A Ramady is a former banker and visiting associate professor, finance and economics at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia.
King Abdullah Financial District: Riyadh's Wall St03/11/2010
By Lahem al-Nasser
Riyadh, Asharq Al-Awsat- If the last time you visited the city of Riyadh was five years ago, then you are in for a surprise if you visit it again today. The city is like a huge construction site, with cranes dominating the skyline; the streets are crowded with trucks, and giant high-rise towers are encased in scaffolding. It is as if this is part of a fierce race against time to complete development projects; as if the city is trying to make up for lost time. Perhaps the most notable or prominent of these development projects is the King Abdullah Financial District, which will become the financial center for the city of Riyadh, in the same manner as New York's Wall Street or London's Canary Wharf. The King Abdullah Financial District encompasses an area of approximately 1.6 million square meters, and when completed will house the Saudi Arabian Capital Market Authority and the Stock Exchange, in addition to the country's largest banks and companies, as well as an academy for studying financing and banking.
Due to Saudi Arabia’s enormous liquidity, its economic and political stability, and the strategic location of the country; the King Abdullah Financial District is expected to attract a number of international financial institutions, especially after Saudi Arabia recently joined the World Trade Organization [in 2005], which opened up the country to the financial services industry. In light of the fact that the Islamic banking industry [in compliance with Islamic Shariaa law] currently dominates the Saudi financial industry in general, and that Saudi Arabia's Islamic financial assets currently stand at somewhere between $91 billion and $120 billion, Saudi Arabia is now the world's second largest economy – after Iran – in terms of Islamic assets. In Saudi Arabia today approximately 98 percent of personal financing occurs via Islamic Shariaa compliant methods, in addition to 67 percent of corporate financing.
As for the stock markets, the bulk of Saudi shares are also Shariaa-complaint. Furthermore, the sukuk market only trades in Islamic Shariaa compliant sukuk's and bonds. Therefore the King Abdullah Financial District has the potential to be the world's number one center for Islamic finance, especially after officials realize that this is an achievable goal. This objective is not difficult to achieve if we have the will and strength to see this through, and if we draw up goals and make sure that they are implemented.
Perhaps one of the most important factors that will ensure that the King Abdullah Financial District will become a center for Islamic finance is the government enacting legislation and establishing specific regulations for this industry, as well as establishing special courts to deal with financial disputes arising from this industry, under the umbrella of the Ministry of Justice, away from the judicial and semi-judicial committees that misrepresent the Saudi Arabian legal system today. This is in order for potential investors to have confidence in the investment climate in Saudi Arabia. The other important factor is governmental support for this industry by providing it with the required infrastructure, such as ensuring that staff has proper vocational training through the establishment of academies and university departments devoted to teaching finance and Islamic banking. Research centres should also be established, and independent professional organisations encouraged, to work alongside the government’s already tireless efforts to operate in line with the mechanisms of the Islamic finance industry: For example, issuing sovereign sukuk instead of [conventional financial] bonds, and encouraging government and quasi-government treasuries to use Islamic financial products, particularly as this is one of the demands put forward by those who benefit from the services of these treasuries. It is also important to work towards convincing international bodies to recognize the special standards that come with this industry. Saudi Arabia is capable of demanding such conditions, in view of its economic, financial and political strength in the international community, and because the Islamic financial industry has already proven itself.
Saudi Arabia's efforts to make the King Abdullah Financial District a hub for the Islamic financial industry will have a positive impact on the country, for it will return financial capital to the country, and attract international financial corporations that seek to derive benefits from the liquidity of this industry. The King Abdullah Financial District will also ensure that Saudi Arabia has a leading role and huge influence in the Islamic financial industry. This will ensure that Saudi Arabia is the most important player in this industry, and will enable Riyadh to decide the industry's principles and criteria. Looking at the tremendous growth rate of this industry – which achieves growth rates that exceed 20 percent annually – we can only estimate the economic influence that Saudi Arabia will enjoy in the near future.