Boldness is part of Amr Al Dabbagh’s heritage. The governor of the Saudi Arabian General Investment Authority, a cabinet-level agency that promotes foreign and domestic investment, Al Dabbagh comes from a prominent Jeddah family. His father, Abdallah, graduated from Cairo University in 1946 as the first Saudi to earn a Ph.D. in agricultural engineering; he went on to become the Kingdom’s first minister of Agriculture, then in 1962 founded one of Saudi Arabia’s most successful trading firms, the Dabbagh Group Holding Co. Amr Al Dabbagh succeeded his father as CEO at the tender age of 25 in 1991, led the group’s expansion into housing, real estate and telecommunications and built the family’s fortune to an estimated $1 billion-plus.
All of those achievements pale, however, in comparison with the scale of Al Dabbagh’s latest ambition. At Sagia he is spearheading a plan to transform the Kingdom’s economy by building at least four new cities from scratch at an estimated cost of at least $79 billion. Inspired in large part by the breakneck development of Dubai over the past decade, the so-called economic cities project aims to diversify the Saudi economy away from oil and natural gas and to provide housing and jobs for its fast-growing population of 28 million.
This audacious program was conceived in 2005 when oil prices were on the rise and Saudi Arabia, like other Gulf nations, enjoyed a heady influx of global capital. The sky was literally the limit as developers in Dubai and Saudi Arabia raced to draw up plans to construct the world’s first kilometer-tall skyscraper. Today, however, that vision seems as hazy as a desert mirage. Dubai, the very model for the grandiose building plan, has seen its dizzying boom turn to bust over the past year: Property values are in free fall, an exodus of expatriate workers is under way, and the debt-burdened emirate had to turn to the central bank of the United Arab Emirates last month for a $10 billion emergency credit. Dubai’s woes serve as more than a warning, as the developer of the largest planned Saudi city is controlled by Dubai builder Emaar Properties.
In the meantime, the collapse of oil prices has tipped the Saudi budget from a massive surplus to a burgeoning deficit. The deepening global recession has caused foreign capital to dry up across the region and prompted the Saudi central bank to inject $5 billion in deposits into the country’s banks.
In such circumstances it might seem fanciful, if not foolhardy, for the Saudis to plow ahead as if the world hadn’t changed. Al Dabbagh is unbowed, though. Not only does he remain determined to proceed with the massive construction projects, but he insists that Saudi Arabia can do it all by sticking with its original plan of relying entirely on private investment rather than public money.
“Keeping momentum going at the economic cities is absolutely critical when it comes to the overall credibility of efforts to diversify our economy and attract both foreign and domestic investment to Saudi projects,” Al Dabbagh, 42, tells Institutional Investor at Jeddah’s Qasr Al Sharq hotel, a sumptuous building overlooking the Red Sea with honeycombed archways and crystal-chandeliered rooms decorated with gold leaf and elaborate arabesques.
Dressed in a flowing, white Arabian thobe and looking relaxed and confident, the tall and imposing Al Dabbagh gives an interview in the midst of a daylong series of meetings with businessmen and entrepreneurs who he hopes will invest in the economic cities. “In a time of global crisis, psychology needs to be managed, but the fundamentals of the Saudi economy are sound,” he asserts. “I have no doubt we will deal with the psychology and keep these projects on track by communicating that positive message to investors, corporations and individuals.”
Al Dabbagh has his work cut out for him. Many bankers believe that the Saudis will have to delay or downsize their development plans in light of the global credit crunch and economic downturn.
“Sagia will have to announce a major scaling back of their plans soon,” says the chairman of one of the Kingdom’s largest banks, who spoke on condition that he not be named. “We are lending to very few private infrastructure projects, and we are providing nothing on the scale of what it will take to realize the vision of the economic cities.” Adds John Sfakianakis, chief economist of SABB, a Riyadh-based bank owned 40 percent by HSBC Holdings and the rest by Saudi investors: “The private sector, whether it is property developers, industrial companies or service providers, located either in Saudi Arabia, regionally or internationally, has less of an appetite and much less capital in these difficult times to invest in the economic cities.”
Sfakianakis, who conducts Saudi Arabia’s only monthly business confidence survey, is projecting that the economy will eke out growth of just 0.6 percent in 2009, down from an estimated 4.2 percent last year, and he says he may revise that forecast to zero if there isn’t a significant rise in oil prices or Saudi production soon. “The economic cities could very well exist in some form, but not in the form they were presented at the outset,” he notes.
By any standard the scale of the Saudi project is monumental. The four cities cover a combined area four times the size of Hong Kong. They are projected to house a total of 4.5 million people — three times the size of Dubai — and provide 1.3 million jobs by 2020.
The biggest of the four, King Abdullah Economic City, is situated 60 miles north of Jeddah on the Red Sea coast and is intended to become a diversified industrial center as well as the Middle East’s largest port. The others — Jizan Economic City, 450 miles south of Jeddah on the Red Sea; Knowledge Economic City, within the holy city of Medina; and Prince Abdulaziz bin Mousaed Economic City, in Hail, some 450 miles north of Riyadh — will be geared primarily toward heavy industries, such as aluminum, steel, plastics and fertilizer, all energy-intensive businesses that can take advantage of Saudi Arabia’s cheap and abundant oil supplies.
Few observers doubt the need for the projects. Saudi unemployment is already running at 9.8 percent, and with 65 percent of the population under 25, the labor force is set to swell dramatically in coming years. The government will need to foster the creation of millions of jobs to maintain the Kingdom’s prosperity and stability. The new urban centers are also designed to relieve severe strains on housing, power and water services in the big cities of Riyadh, Jeddah and Dammam and to spread development to the country’s poorest regions in the south and north.
If successful, the cities are expected to increase the country’s economic output by $150 billion, or 28 percent of current gross domestic product, and generate per capita GDP within the cities of $33,500, roughly on a par with Singapore, Asia’s second-richest nation after Japan, according to Al Dabbagh’s projections. His urban planners and engineers are also studying the viability of two additional economic cities: one in the north at Tabuk, near the border with Jordan, and the other in the east at Ras Al-Zour on the Persian Gulf.
The biggest question mark hanging over the planned cities is financing. Although Dubai spearheaded its development through entities owned by the state or by the emirate’s ruler, Sheikh Mohammed bin Rashid Al Maktoum, it did so in a period of robust global growth and easy credit. Saudi Arabia, by contrast, is embarking on a project that is more ambitious than Dubai’s and is relying on private financing in the midst of a global credit crisis.
Doubts about the project are reflected in the share price of Emaar the Economic City, the developer of King Abdullah Economic City (or KAEC, as it is known). The stock has fallen to 8.60 riyals ($2.29), below its July 2006 IPO price of R10.00 and well down from its peak of R40.25 in October 2006.
As part of a Saudi scheme to more equitably share wealth and economic opportunity, 30 percent of EEC was sold to 4.6 million Saudi citizens in 2006 through the IPO, just as the initial ground leveling was getting under way at KAEC. Dubai-based Emaar Properties controls 50.6 percent of EEC, and the remaining 19.4 percent is held by a group of just over 20 investors, mostly wealthy Saudis — including members of the royal family.
Emaar Properties reported a loss of 1.77 billion dirhams ($482 million) for the fourth quarter of 2008 because of write-downs at its U.S. property unit, John Laing Homes, which filed for bankruptcy last month. At the same time, the company announced that it was putting new projects in the UAE on hold.
Al Dabbagh dismisses any concerns about EEC’s financial firepower or its commitment to develop KAEC, which Sagia estimates will cost $27 billion just for basic infrastructure. “EEC has no debt, and they are highly capitalized, with over R2 billion ($533 million) in cash and deposits,” notes Al Dabbagh. “The company is solid financially, and today the land value of EEC is probably north of R20 billion.”
So far, EEC is the only developer involved in the economic cities project that has sold shares to the public, although Sagia’s plans call for the developers of all of the cities to create listed vehicles.
If the private sector does fall short of financing, it is highly unlikely that the state will step in, say observers — and Al Dabbagh. The government has an estimated $500 billion in reserves, but it is also committed to funding more than $400 billion in other infrastructure projects over the next five years, everything from roads to power plants to waterworks and sewer systems. Moreover, lower oil prices have put a strain on public finances. The government announced in January that its budget would swing to an estimated deficit of R65 billion, or 3.3 percent of GDP, this year, after six consecutive years of surplus.
Notwithstanding today’s tough financial climate, Al Dabbagh insists that the Saudi economy has strengths that will attract investors and ensure that the cities will rise from the Arabian desert. “I’m not suggesting building these cities will be an easy ride,” he explains. “But I’m also not saying the projects will be burdened with what is happening around us.”
Al Dabbagh is upbeat on the Saudi economy, dismissing forecasts like SABB’s that project a dramatic slowdown in growth. He believes that a number of measures taken by the government recently — an injection into the banking system of $5 billion in medium- and long-term deposits by the Saudi Arabian Monetary Agency, the central bank; the lowering of bank reserve requirements to 7 percent of risk-weighted assets from 10 percent; and a 16 percent increase in government spending this year — will sustain growth and keep investment flowing to the economic cities.
In today’s battered world nothing can beat the long-term promise of a nation sitting on top of 25 percent of the world’s known oil reserves, says Al Dabbagh. “All these elements will definitely ensure that the Saudi economy is not affected by the current global economic crisis,” he asserts. “In 2009 one of the tools we will use to attract investment to the cities is the availability of Saudi debt financing in a world largely starved of it.”
People who know Al Dabbagh describe him as an ambitious, can-do optimist. He graduated with a BA in business administration from Jeddah’s King Abdulaziz University in 1988 and then spent the next three years preparing himself to take over the reins of the Dabbagh Group by enrolling in training programs at investment banks and private banks, including Merrill Lynch & Co. in New York, London’s Coutts & Co. and Banque Worms in Paris. During his years as CEO of the family company, he honed his skills with executive courses at Harvard Business School, Harvard’s John F. Kennedy School of Government, the Wharton School at the University of Pennsylvania and the London Business School.
Admired in business circles for his work at the Dabbagh Group, Al Dabbagh first gained national attention in 2000 by founding the Jeddah Economic Forum, an annual gathering of regional movers and shakers modeled on the World Economic Forum in Davos, Switzerland. In 2004 he enhanced his reputation as a groundbreaker by using the forum as the setting for panel discussions in which men and women had direct exchanges for the first time in Saudi Arabia. The event, and Saudi newspaper coverage showing unveiled women in attendance, outraged the country’s religious conservatives, who demanded Al Dabbagh’s ouster as chairman of the Jeddah Marketing Board, which promotes business opportunities in the city. But far from reprimanding him, King Abdullah — then serving as the country’s ruling crown prince under his brother, King Fahd, who died in 2005 — shook up Sagia by installing Al Dabbagh as governor in place of Prince Abdullah bin Faisal bin Turki Al Saud, a member of the royal family.
Combining administrative talent with marketing prowess and a streak of showmanship, Al Dabbagh pushed through corporate tax breaks and streamlined the registration process for new businesses. Those initiatives helped boost foreign direct investment more than 12-fold in four years, to $23 billion in 2008.
To buttress his claim that the development of the cities will stay on track despite the global downturn, Al Dabbagh cites memorandums of understanding that promise to bring $34.7 billion in infrastructure and industrial investments to KAEC over the next 11 years. KAEC has also seen the most significant amount of construction among the four cities. In late January, when II visited, EEC was scrambling to finish eight residential buildings, two office buildings and a small industrial complex on a largely empty stretch of Red Sea coastline. The buildings are scheduled for handover to residents and workers late this month, when Attieh Steel Co., a privately owned and unlisted Jeddah-based steel producer with approximately $530 million in annual sales, will begin production at the complex. At the same time, Sagia will relocate its Jeddah offices to one of the completed office buildings and EEC will partially occupy the second. The first school is scheduled to open in September, and by the end of the year, KAEC is supposed to have 1,500 residents. But that will be just a drop in the bucket. The first buildings occupy less than 1.5 percent of the city’s projected 65 square miles — the size of Washington, D.C. — and the city’s population is expected to swell to close to 2 million by 2020.
By far the most impressive project yet proposed at KAEC is a $4.9 billion aluminum smelter. The plant is a joint venture between Abu Dhabi’s state-owned investment group, Mubadala Development Co., and Dubai’s state-owned Dubai Aluminum Co. Work on the smelter is supposed to begin by 2011, with production starting by 2015. The plant is expected to provide 2,500 jobs directly and an estimated 5,000 indirectly among suppliers and support services. The master plan for the city also includes a $2 billion project by Chicago’s Capri Capital Partners, a mostly U.S.-focused real estate investment firm with $4.4 billion under management, to develop two five-star hotels along with a retail, restaurant and conference center, and a lubricant blending plant to be built by Saudi Total Lubricants Co., the Saudi subsidiary of French oil company Total. Those projects have no firm start or completion dates, however. U.S. confectioner Mars has promised to undertake a feasibility study for a chocolate factory to serve as its regional manufacturing hub. Sagia has signed other memorandums of understanding to build the city’s road, port, electricity, water and technology infrastructure, but those projects depend on other companies’ and investors’ committing to factory, office and logistics contracts.
“If you are doing a project like ours at KAEC that is linked to so much else that needs to be built, it is hard to set a time frame for it,” says Rehan Atiq, the Capri partner overseeing the real estate investment group’s project. “There is uncertainty surrounding the economic cities because of the global crisis, but frankly, people who are smart know that this is the best time to invest for the long term, when a lot of others are putting investment plans on hold.”
Al Dabbagh is going to have to find a lot more investors who think like that to keep the ambitious economic cities project on track.
