Saudi Arabia’s plans to build the city of the future

There can’t be many Saudi projects that can claim to have been unaffected by the oil price slide, but then again, King Abdullah Economic City (KAEC) is no ordinary undertaking.

Located an hour’s drive north of Jeddah, KAEC has been described as the world’s largest real estate project. By the time it is completed, probably at some point in the mid-2030s, roughly $100bn worth of investment will have been ploughed into the city, which is set to play a vital role in the diversification of Saudi Arabia’s economy away from oil.

A public private partnership between Dubai’s Emaar and local investors, the megaproject involves the construction of an entire city — from scratch — on a site that’s about the size of Washington, DC.

“We don’t have a direct funding relationship with the government so the oil price doesn’t affect us,” says Fahd Al Rasheed (pictured below), the long-serving group CEO of publicly listed Emaar Economic City, the firm behind KAEC.

“But I think the biggest challenge is whether you see a slowdown in growth because companies are not investing. We have not seen that yet — we are still signing one company a week.”

Launched about a decade ago, some of the city’s components, such as King Abdullah Port, are now operational. Some of the world’s most famous companies, including Mars, Sanofi, Pfizer and Danone, are among the 100 corporates that have set up shop in KAEC’s Industrial Valley, while a slew of big-name local firms are also building facilities there.

And in a part of the world where commercial vehicle manufacturing is conspicuous by its absence, KAEC notched up another milestone last month, when the first Volvo truck rolled out of the Arabian Vehicles & Trucks Industry plant in the city. It will be one of the first factories worldwide to produce Volvo and Renault trucks from the same assembly line. By the end of this year, city planners are hoping to have 50 factories up and running.

With numbers like those, it’s not surprising that KAEC is now regularly getting attention from the global media. For the developers behind the city, the decision to put the heavy infrastructure in first and effectively induce residential demand as a result appears to have paid off. The city may only have 3,000 residents right now, but more are clearly on the way. Last year, KAEC sold 2,500 units, making it one of the largest private developers in Saudi Arabia. In a country where the cost of land and soaring house prices is always a topic for worried discussion, this is no small feat.

Despite only launching last year, King Abdullah Port is swiftly becoming one of the largest in the world, and has signed up two of the biggest shipping lines, Denmark’s Maersk and Geneva-based MSC. “Our port has probably had the fastest ramp-up in capacity and demand for utilisation in the history of ports,” Al Rasheed says.

Its strategic location on the Red Sea means that it is a competitor to more established locations such as Dubai’s Jebel Ali Port, and newer ports in Oman, like Salalah, Sohar and Duqm. Capacity now stands at 2.7 million twenty-foot equivalent units (TEUs) but Al Rasheed says that will grow to 4 million in 2016, 5 million the year after, up to a final total of 20 million TEUs.

“The port operations room is being run today by 80 women from a nearby village,” the CEO says. “They tell all the boys what to do, and they are very happy about it.”

Alongside the port opening last year, another piece of the puzzle that will connect KAEC to the outside world is likely to fall into place by the end of this year. Testing is currently taking place on the Haramain high-speed railway, a network that will link Madinah to Makkah, with stops at KAEC and in Jeddah. Although the project has had its problems — the government has accused the Spanish consortium building the link of foot-dragging — the 450-km track is likely to prove a game-changer for the city. According to the Saudi Railways Organisation, around 19,600 passengers will travel on the route every hour. It will take just 30 minutes for KAEC’s residents or visitors to travel to the newly revamped King Abdulaziz International Airport in Jeddah.

“We’ll certainly have part of the link done this year [the stretch between Madinah and KAEC],” Al Rasheed says. “Next year, the other components will happen, and we expect by the end of next year, the whole thing will be operational.”

The link will enable KAEC to tap into Saudi Arabia’s colossal religious tourism market. In fact, the CEO says that tourism is the most important sector for the city right now, helped by the fact that the new rail link will put KAEC in the heart of a triangle that will attract around 20 million visitors every year.

“We don’t want to compete with the traditional players in the field — Dubai, Paris, New York and so on — because we don’t have to,” he points out. “We’re the 17th most-visited country in the world, thanks to Hajj and Umrah, and we have a large population — more than 10 million Saudis spend their holidays outside the kingdom.

“We want to give them an alternative in Saudi Arabia for the rest of the year — not just for vacation but also as a weekend destination.”

To keep Saudis from travelling to traditional holiday destinations like the US and Europe will be a tall order. However, KAEC officials believe there are plenty of factors in their favour, not least the 50km-long stretch of the city’s beachfront that overlooks the Red Sea. As the housing districts open up, parks and trails will also be built throughout the city. There’s plenty on the drawing board in terms of golf courses — the first of which, an 18-hole championship course, should be open by the end of this year — as well as marinas and theme parks.

While one hotel is already open in the city, another nine properties will be launched over the next five years, giving the project a total of 2,000 rooms. Al Rasheed says KAEC is targeting 100,000 visitors this year, 160,000 in 2016 and 1 million by 2020.

“We created our own brand and brought in Al Khozama from Riyadh to manage our first hotel and we will do something similar for the second, but the remaining eight are still in negotiations,” the CEO says, adding that the hotels will span the full range of services, including residences and serviced apartments.

The city is also currently building a polyclinic, which will be able to address emergency cases, and Al Rasheed says that KAEC is also searching for a partner to invest in a 200-bed hospital, which will be based next to the high-speed link.

More generally, Saudi Arabia sees foreign direct investment (FDI) as a crucial plank in its bid to diversify its economy. Last year, the governor of the Saudi Arabian General Investment Authority (SAGIA — the government body tasked with improving the business environment, issuing company licences and boosting FDI in the country — said that foreign inflows into Saudi Arabia had reached $199bn. That’s about 40 percent of all money flowing into the Middle East and North Africa. But it’s not just about the money; the kingdom is hoping to attract the right type of investment as well.

“We’re going after value-added investments — and our definition of that is investors that create quality jobs that contribute to the transfer of technology, and larger anchor investments that could support and catalyse SMEs,” Prince Saud Al Faisal, the deputy governor of SAGIA, told this magazine earlier this year.

With that in mind, Al Rasheed sees education and entrepreneurship as keys sector where KAEC can make a difference.

“We don’t see education as a moneymaker, we see it as an enriching part of the city,” he says. “They say if you want a great city, build a university and wait 200 years. Well, we can’t wait 200 years, so we’re building right now a college of business entrepreneurship with the help of Babson Global.”

The tie-up with the Boston college — often referred to as America’s ‘entrepreneur’s college’ — should yield results quickly; the CEO says the first MBA programme should begin in January next year. There’s also an incubator on the cards, which Al Rasheed says will attract innovators from around the region, and talks are ongoing with the government to build six vocational training colleges.

“We are now talking to different funding partners, as well as creating markets for these entrepreneurs to address,” he says. “And we are launching an initiative with the king of Jordan to make KAEC a landing pad for entrepreneurs from Jordan.

“About 75 percent of all digital Arabic content is produced in Jordan — they just need to scale. And the best place to scale is Saudi Arabia.”

As well as colleges and schools, the city has concentrated on training programmes, and is trying to find jobs for the companies that have based themselves in KAEC. The CEO says that for the 2,500 jobs that were offered for KAEC clients, there were 20,000 applicants.

“The quality of the applicants was unbelievable,” he adds. “I think there is a perception of a lack of a skills [in Saudi Arabia] but frankly, on the ground, I don’t see it.”

The ongoing development at KAEC is playing out against a background of strong financial results, as investment increases despite the drop in the oil price. Last year, Emaar Economic City reported a 39 percent rise in net profits to $101m in comparison to 2013. The same results statement indicated that the city had attracted $10bn worth of investment.

“We have a balance sheet that has SR8.5bn ($2.3bn), SR5bn of long-term loans from the government, and SR4bn in private debt from the banks,” Al Rasheed says. “So this is both a stamp of confidence, but also shows you the kind of liquidity we have because we’ve been performing at a high level over the last few years.”

For the future, the CEO says KAEC will also benefit from new leadership, following the ascent to the throne of King Salman earlier this year. One of the more immediate changes has been to create a new Council for Political and Security Affairs, headed by Crown Prince Mohammed Bin Nayef, and a new Supreme Council for Economic Development, headed by the youthful Deputy Crown Prince Mohammed Bin Salman Al Saud.

“You see a much younger leadership — they have the stamina to address the challenges you see in Saudi Arabia and around us, and we believe this is going to be a big boon for the economy in the next five years,” Al Rasheed says.

“What you’re seeing today in the kingdom is the de-bureaucratization and the meritocrisation of government.

“Everybody has to deliver or they’re out — irrespective of age or who they are.” Arabian Business