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. Continue reading