How complex should new economic cities be in order to meet their objective?

By Nour El Hoda Farrag

The stated objective of establishing King Abdullah Economic City (KAEC) in Saudi Arabia is to diversify the economy and reduce unemployment. Two of Saudi Arabia’s main challenges are the economy’s high dependency on oil and relatively large local population. However, the same challenges can be perceived as its two main levers, and the reasons why such an initiative can be successful. As the second largest country in the Arab World, Saudi Arabia can rely on local consumption to drive GDP growth and use this platform to scale and export to neighboring countries. With the second largest proven oil reserves in the World, Saudi Arabia has the unique, invaluable advantage of deep pockets to sponsor mega infrastructure / economic projects that can enhance value across the economy, and is incentivized to do so. Moreover, acknowledging its natural resource wealth as a key strength, the government/City’s leadership has rightfully, in my view, focused on especially expanding industries that are either energy-intensive, or oil-based, to leverage its resource, alongside other non-oil related industries. To this end, as the case indicates, early adopters of the project were companies spanning the food, packaging, pharmaceutical, and oil industries.

The project’s main shortcomings, in my view, lie in its financial planning and execution. The case quotes the president of KAEC’s Industrial Valley and City Services, Ahmed Linjawy, as saying: “The original assumption was that… anything we do, we assume we will do it ourselves.” The “Labor Camp” is an example of a responsibility, which in my opinion should be left to the project’s industrial / corporate clients. Other examples in fact include the education, hospitality and residential arms of the project; all of which seem to be dictated through a master plan, as opposed to taken care of by market demand/supply forces.

Notwithstanding interdependencies, assuming a lower initial capex bill by selecting and staging investments should allow the project to tolerate slower cash flows over a longer time frame. The private sector’s willingness to take part in the project should be sensitized against different incentives provided. In my mind, land sales at attractive discounts, access to relatively cheap energy sources, and most importantly, access to a new state-of-art seaport (with potential channels to Europe, Africa, Asia) should be sufficient motivations to jump-start activity in the city, and attract follow-on investments from real estate/hospitality/private education players. In other words, KAEC’s main objectives can be achieved at much lower complexity levels, than the ones assumed by its leadership.

The success of KAEC on its own should also indirectly address Saudi Arabia’s unemployment. Entrepreneurship can be one tool, whereby through KAEC, the government can provide special incentives to start-ups/SMEs owned by locals. Another tool is the Saudization initiative, which has already been introduced by the government few years ago requiring the private sector to recruit a minimum percentage of locals. While higher education and general training are ultimately the main tools to fight unemployment in a growing economy, I would argue that those are i) beyond the scope of this project; and ii) a long term strategy that can only be helped by the presence of KAEC and other cities that can absorb new talent and offer stimulating job opportunities.

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I have referred to Wikipedia to confirm facts about Saudi Arabia’s size and oil reserves.