Game changer: King Abdullah Economic City

The launch of the Gulf’s newest megaport is the latest milestone for the one of the world’s most ambitious property projects, Saudi Arabia’s King Abdullah Economic City. As blue-chip firms move in, chief executive Fahd Al Rasheed says that he’s struggling to keep up with demand
Fahd Al Rasheed has been running the King Abdullah Economic City megaproject for seven years.
By Ed Attwood
Sat 07 Jun 2014 11:05 AM

Two years ago, when Arabian Business first visited the King Abdullah Economic City (KAEC) project, based an hour north of Jeddah, a lone dredger was still bringing up hundreds of tonnes of sand from the sea bed in order to create the enormous deepwater manmade port. Fast forward to 2014, and the King Abdullah Port (KAP) boasts eight huge cranes, can serve two colossal container ships at the same time, and is the kingdom’s first privately funded and owned port.

 It’s perhaps the most important milestone yet for one of the world’s most ambitious megaprojects. Announced in 2005, the KAEC masterplan involves building an entire city from scratch on a piece of land that is roughly the size of Washington DC, with investment in the project estimated to be as much as $100bn by the time it is fully completed.

 For the man who runs King Abdullah Economic City, Fahd Al Rasheed, the port’s infrastructure, and its strategic location on the Red Sea, make it a game changer, both for the city, and for Saudi Arabia. “It’s a gift that keeps on giving in terms of demand, it’s unbelievable,” the chief executive says. “We already have capacity for 1.3 million containers in operation and we’re planning four million in the next two years and seven million by 2017.

 “You’re talking about 24 percent of global trade going through the Red Sea, and this is a trend that’s never been addressed by a Red Sea port. We think King Abdullah Port is good for Saudi Arabia because it will lower logistics costs and increase our competitiveness across the board, while also changing the logistics map globally.”

 Al Rasheed admits that it was a risk to build the port — which has had $665m worth of investment pumped into it so far — without guarantees from the big global shipping lines that they would serve the facility. Now, he says, shipping lines are “rewriting their networks” to include the port, which is arguably in a far more convenient location than Dubai’s Jebel Ali.

But the opening of King Abdullah Port is just part of the KAEC story. Encircling the port is the city’s Industrial Valley, while further afield are areas set aside for residential communities, tech clusters, universities, hospitals and so on. On the eastern side of the city will be its second major link to the outside world, the Haramain Station. When that is opened at the end of next year, the city will become one of four stops on Saudi Arabia’s latest high-speed rail network, linking the megaproject with Jeddah, Makkah and Madinah. Nearby is the King Abdullah University for Science and Technology (KAUST), while to the north lies the PetroRabigh petrochemicals plant — the largest of its type in the world.

There is much work to be done before that second link comes into play. KAEC already has some 70 companies now in the process of setting up bases onsite — including multinationals like Mars, Pfizer and Danone as well as local family giants such as Abdul Latif Jameel and the Naghi Group — and is now working hard to attract mid-sized firms, as well as companies not in the specific sectors it has targeted before. That’s in line with a similar push from the Saudi Arabian General Investment Authority (SAGIA), which provides licences for foreign companies in the kingdom, and which saw a new governor, Abdullatif Al Othman, take over two years ago.

“Certainly, with the new governor, there’s a lot more focus on certain sectors,” says Al Rasheed. “We’re very focused on life sciences, we’re very focused on fast moving consumer goods [FMCG], as well as plastics and logistics. We believe the Industrial Valley story is very strong — in fact we are developing more than half of it in the next two years.

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“That’s 28 million square metres, and a tenfold increase in development on the industrial front. In fact, we already have companies committed for most of that land — it’s not that we’re developing on spec, we’re developing for demand.”

For smaller firms, KAEC has set up the Red Sea Forum, an event that will take place in New York in October, specifically to target American firms that haven’t expanded beyond their country’s shores. There, the city will be showcasing its incentives, which include ‘plug and play’ infrastructure, help from the local authorities in terms of setting up a business, cheap energy and labour costs, and even soft loans from the government to fund up to 50 percent of a company’s capital investment.

And the city is also looking to attract more tech firms as well; local telco Mobily is setting up a datacentre there, while flag-carrier Saudi Arabian Airlines is moving its full back office and IT department into KAEC.

“We’ve been focusing a lot on attracting organisations with substantial datacentres as part of our plans to add a hi-tech cluster to the city,” adds Al Rasheed. “I believe we have our industrial plans  well defined, and we’re now focused more on attracting knowledge-based industries. Now we have the big IT companies as anchors, it makes it a lot easier for start ups to join as well.”

The megaproject is a rarity in Saudi Arabia, where the government is taking advantage of a high oil price to increase direct spending on infrastructure. But KAEC is based on a public private partnership model, meaning that it has relied on private-sector investment – even during the recent economic crisis. Altogether, Emaar Economic City (EEC), the consortium that is building KAEC, and which is listed on the Saudi stock market, has raised $4bn in capital, with a further $10bn raised from other investors and from land sales in the 181-square-kilometre development. Having broken even in 2011, EEC reported $73m in profits during 2013.

Instead, the government’s backing comes in the form of the general act for the economic cities, which established the Economic Cities Authority (ECA), the regulator. The ECA has been instrumental in ensuring that KAEC offers a different value proposition from competing locations in Saudi Arabia and across the Gulf. Both individuals and companies have been offered 100 percent foreign ownership, and a bonded zone allows for the customs-free movement of goods. In addition, government services in the city are offered on a 24/7 round-the-clock basis.

In building an entire city from scratch, Al Rasheed and his team have faced something of a conundrum; do you build the city first, and wait for the demand to arrive, or do you hold on for the interest and then build afterwards?

The answer is that neither approach is perfect. What KAEC has tried to do in the Industrial Valley is put all the infrastructure — the roads, electricity, sewerage and so on – in place, so that companies can get a headstart on their operations when they sign up. For housing, it’s a much trickier task of building homes in chunks in a bid to match demand.

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“For the longest time, these projects were hard because this is not a satellite city, it’s not building off demand from an existing city,” Al Rasheed says. “We are one hour away from Jeddah, which is enough of a distance to make commuting impossible. So people had to choose — and we struggled with demand for real estate for the longest time.

“But then we reoriented ourselves towards building that demand, creating that support and it’s completely shifted. Now we have captive demand — all our apartments are full and we have waiting lists for hundreds of people, literally.”

The chief executive points out that each of the 70 corporates moving into the city will each bring between 100-500 personnel each, and the waiting list for individual apartments has now stretched to 500 names.

“The demand is now outpacing supply,” Al Rasheed adds. “That’s why we’re building 5,000 units right now, which honestly, in my opinion, will not be enough. We will have to easily go to 12,000 units in three years – and that is an understatement.”

Of course, housing is not just an issue for the city, it’s a critical concern for Saudi Arabia as well. As values have shot up, more and more Saudis have found themselves unable to buy a new home, while plans from a newly launched Housing Ministry to build hundreds of thousands more homes have been slow to get off the ground. Affordable housing — a topic that is often discussed but rarely implemented in the GCC — will be of huge importance to the city.

Al Rasheed says that KAEC will provide housing for every wage bracket — from labour to luxury — and that affordable housing will be launched in two months time. However, he also admits that construction costs and affordability are the biggest challenge the city faces right now, and may well result in some dents in the balance sheet.

“If you’re trying to address 100 percent of the market, only 15 percent of that is high end,” he says. “The rest of the 85 percent is acutely price sensitive, so if there are any changes in the costs by, say, 10 percent, the proposition doesn’t work.

“The problem with affordable housing is that it has to be affordable or you can’t build it, there is no other way. Our product will offer good-sized homes, but also be environmentally sustainable.

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“We won’t hit on all segments, but this is the minimum of what ‘affordable’ should be, even if it creates margin constraints.”

Alongside the homes comes social infrastructure. The city’s first school, The World Academy (run by Dubai’s GEMS), is now in its second academic year and hosts 250 students, with capacity for 600. Again, demand is such that the school is being expanded to a capacity of 1,100, while the chief executive says that two other middle schools are being planned. KAEC is also negotiating with the government to build another three public schools. There is one clinic onsite, with a polyclinic being built, and Al Rasheed says that the city is in talks with the authorities over a public private partnership proposal for a new hospital.

KAEC’s first hotel, Bay La Sun Hotel & Marina, has been open for seven months, with a further eight to ten hotels in the works. In addition, a golf course, activities park and sports complex will all be completed by the end of next year. A look at the contracts section on the KAEC website gives some indication as to the scale of work that is currently ongoing, with 100 contracts awarded in 2013, and seven so far this year. A bit further down the line is a destination mall, which will be built near the Haramain Station part of the city.

“We want it to be very family oriented, very entertainment oriented, and to offer brands that are not available elsewhere,” Al Rasheed says of the mall. “We want it to be an experience, and worth using the high-speed rail for 30 minutes to get to.

“We’re doing lots of planning on what that means and how it will be interesting in a Saudi context, but we think it’s a no brainer and we are going to put our money behind it, as we did with the port.”

The mall links in with a central plank of KAEC’s future strategy — tourism. As Saudi Arabia increases the number of pilgrims who will visit the country for hajj and umrah from 10 million to 20 million, the city’s location on a high-speed rail link between the two holy cities has the potential to provide it with an impressive number of visitors from a standing start. Al Rasheed says tourism is “our biggest way forward today” and is targeting weekend and holiday travelers from inside Saudi Arabia, as well as business tourists via exhibitions, events, forums and the like.

And as more Saudis visit the city, the hope is that some will take jobs and stay there. Al Rasheed says that KAEC has now created 17,000 jobs and is targeting 27,000 jobs on the ground by 2020. Frankly, he seems remarkably relaxed about the pressure to deliver. Then again, the results so far have been pretty impressive.

“It’s fun — every day there’s something new, it fuels you,” he says. “This is my seventh year, and it’s amazing — I’m working harder than ever.”

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