Saudi Arabia’s sleepy city offers prince a cautionary tale
Kingdom’s ambitious plans for diversification face challenge of economic reality
With its pristine beaches, manicured lawns and rows of newly built villas, the King Abdullah Economic City bears all the hallmarks of the modern Saudi Arabia envisaged by Crown Prince Mohammed bin Salman. Women walk freely without abayas, a golf course nestles up against the Red Sea coastline and international companies including Pfizer and Mars have opened factories in the city.
Yet the development instead serves as a cautionary tale of the challenges the young heir apparent faces as he pursues a highly ambitious programme to overhaul the conservative kingdom, including his own plans for a new $500bn megacity, Neom.
The King Abdullah city, also known as KAEC, was launched a decade ago as part of a $30bn project to build six cities to diversify the oil-dependent economy, attract foreign investment, create 1.3m jobs and add $150bn to gross domestic product. But only one of the six made it off the drawing board, King Abdullah city, which today has a population of just 7,000 people set against a target of 2m by 2035.
Despite offering more social freedoms than other Saudi cities, King Abdullah city, 145km north of Jeddah, feels eerily quiet and empty. It was intended to be a hub for logistics and manufacturing. But its struggle to attract investors and residents has underlined a perennial battle the kingdom faces bringing in foreign capital beyond the energy sector.
“If KAEC was viable the city would have taken off a long time ago. Their marketing was amazing but the whole concept behind it was flawed,” said a former government adviser. “The economic base was never there.”
The private sector feels more comfortable if there are basic guarantees by government, and private investors in emerging regions … tend to be more short-term focused
Steffen Hertog, LSE
It highlights the task ahead for Prince Mohammed as he pursues his “Vision 2030” plan that is aimed at reducing the dominant role of the state, creating 450,000 private sector jobs by 2020 and reducing unemployment from about 12 per cent to 9 per cent over the same timeframe.
“The business case is hard to make for manufacturing and light industry in Saudi Arabia,” says Karen Young, a senior resident scholar at the Arab Gulf States Institute in Washington.
The Neom development is the flagship project of Prince Mohammed’s plan. He unveiled the scheme at a glitzy investor conference in October where he wooed some of the world’s top bankers and executives. Neom is far more ambitious than the six economic cities launched in the 2000s: it will cover 26,000 sq m and targets attracting investment in new technologies, including renewable energy and robotics. Its goal is to contribute $100bn to GDP by 2030.
Prince Mohammed will personally oversee the project, and it is be financed by a combination of government spending, funding from the Public Investment Fund, the $230bn sovereign wealth fund, and private sector investment.
Similar diversification plans have been tried many times before and stumbled. But Saudi officials insist they have heeded the lessons of the past.
“We will learn. If we execute something and we think it’s not as we planned we will adjust our plans,” said Mohammed al-Jadaan, finance minister. “Am I confident? Yes … I’m seeing results and momentum.”
People watch a presentation about Neom, a new mega city planned by Crown Prince Mohammed bin Salman © Reuters
But Saudi companies are risk-averse as they struggle with a stagnating economy and government austerity measures. Foreign groups have also shown hesitancy to invest outside the energy sector. When Prince Mohammed embarked on a weeks-long tour of the UK and US this year, Riyadh announced only one sizeable deal, a solar power joint venture with Japan’s SoftBank.
Steffen Hertog, an expert on the Gulf political economy at the London School of Economics, says it is unrealistic to expect the private sector to build and maintain basic infrastructure.
“The private sector feels more comfortable if there are basic guarantees by government, and private investors in emerging regions … tend to be more short-term focused,” he said.
Still, officials at King Abdullah city say they are optimistic that Prince Mohammed’s reform plans will breathe new life into their development.
Officials say about 30 local and foreign companies operate in the city’s industrial area, with a similar number in the process of moving there. King Abdullah Port, described as the anchor development in the city, reported handling 1.7m 20ft equivalent units in 2017, an increase of about 20 per cent compared with the previous year.
“Vision 2030 is calling for a post-oil era for the economy and at KAEC we like to think of ourselves as a model of the post-oil economy,” says Fahad al-Rasheed, chief executive officer of Emaar EC, the city’s lead developer. “We are not government owned. We are not government-dependent. We have no revenues from oil.”
Residents say they enjoy the relaxed, peaceful atmosphere in the city.
“I’m happy that my wife can go out here without the abaya,” says one. “I can open the door and my children and dogs would run to the park without me worrying that they might get hit by a car.”
But while resident’s embrace the city’s sleepy feel, Ellen Wald, author of Saudi, Inc, a book on the kingdom, says there are clear lessons for Neom: “Sign tenants before you build and be prepared to pivot.”
“Global economic downturns and changing business strategies can always hamper grand plans,” she said.