KING ABDULLAH ECONOMIC CITY: BRAVE IDEAS, SHAKY

C O N F I D E N T I A L SECTION 01 OF 02 JEDDAH 000508

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SIPDIS

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E.O. 12958: DECL: 12/10/2017
TAGS: ECON EIND ELAB ENRG EPET
SUBJECT: KING ABDULLAH ECONOMIC CITY: BRAVE IDEAS, SHAKY
SAND

Classified By: Consul General Tatiana Gfoeller for reasons 1.4 (b) and
(d).


1. (C) SUMMARY: Nearly two years after the launch of
construction, the King Abdullah Economic City (KAEC) remains
the flagship among the megaprojects that represent King
Abdullah's push for modernization and economic
diversification. Although the King's support for the city
still appears strong, construction delays highlight the
implementation challenges facing such projects within the
Kingdom. It is also uncertain whether KAEC, once completed,
can attract sufficient participation from the multinationals
and professionals that the city is designed to aggregate.
END SUMMARY.

THE VISION
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2. (U) 90 miles north of Jeddah, KAEC will be the largest of
six "economic cities" that are being developed as catalysts
for modernization and economic diversification. The city,
planned for completion in 2016, will occupy 65 square miles
and comprise six zones: industrial, financial, educational,
resort, residential, and seaport. The city's layout and
infrastructure are designed to encourage interaction between
the zones.


3. (U) Although the core activity of all six economic cities
will be based on Saudi Arabia's comparative advantage of
low-cost energy, they are meant to diversify the Kingdom's
economy by creating jobs in the downstream petrochemical
sector and in non-oil industries. According to the Saudi
Arabian General Investment Authority (SAGIA),KAEC has the
potential to create one million jobs, many of them
high-skilled. The hope is that these will eventually be
filled by Saudis, thereby promoting the SAG's Saudization
policy.

STILL A MIRAGE
--------------


4. (C) On a visit to the KAEC site on October 27, EconOff
saw that construction progress to date included a stylish
sales center and several lavish sample villas on the
shoreline. These structures were surrounded by miles of open
desert dotted by intermittent earth-moving projects such as
grading and canal digging. Saleh Saadawi, the senior on-site
construction manager, said that the King recently made a
surprise inspection and was angry at the apparent lack of
progress. Management had responded by adding workers and
keeping full labor shifts rather than cutting back in
observance of Ramadan.


5. (C) Mr. Saadawi attributed the slow progress largely to
the difficulty of hiring a Saudization-compliant workforce,
saying that there are not adequate numbers of Saudis willing
to work in the construction trades. He also said that there
have been significant cost overruns due to the rising prices
of services and materials, which he attributed to the global
building boom. Even Chinese subcontractors, traditionally
some of the least expensive, are becoming significantly more
costly.


6. (C) Asked about the number of U.S. companies involved in
KAEC, Mr. Saadawi named Parsons International, the planner
for the city's industrial zone, but said he did not
understand why more U.S. firms were not bidding on contracts.
(Note: Commercial Consul told EconOff that U.S. companies
who decline to work in the Kingdom often cite their insurance
providers' non-coverage of employees due to security
concerns. End note.) Mr. Saadawi said although U.S. firms
tend to be more expensive than the global competition, they
are known within the region for a high level of quality and
service that is, in his opinion, often worth the price.

IF YOU BUILD IT, WILL THEY COME?
--------------


7. (C) The success of KAEC depends not only on its timely
construction but on its ability to attract the participation
of investors and tenants. Emaar the Economic City (EEC),the
consortium developing the project, held an initial public
offering which was oversubscribed in just three days,
indicating strong investor confidence. It remains to be seen
whether a critical mass of corporations will be willing to
invest directly in the city by building offices and plants
there.


8. (C) Even with a significant commitment from international

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corporations, the city will face challenges in creating jobs.
The industries to which KAEC will cater tend to be
capital-intensive rather than labor-intensive, restricting
the scale of any new employment. Nor is it clear that the
Saudi educational system can produce a significant portion of
the high-skilled workforce that KAEC is meant to employ. The
Kingdom's ability to develop more advanced industries is also
limited by weak protection of intellectual property rights
and by continued state dominance of the economy.


9. (C) EEC executives told EconOff they are optimistic about
the SAG's intent and ability to address these structural
concerns, and are particularly convinced of King Abdullah's
commitment to economic reform. They cited the planned King
Abdullah University of Science and Technology (KAUST),
adjacent to KAEC, as evidence of the King's desire to create
a highly skilled Saudi workforce. They also said that KAEC
itself will help generate skilled workers through the
undergraduate facilities within its education zone, which is
to be tightly integrated with the financial and industrial
zones.

LIMITED SPEED, LIMITED TIME
--------------


10. (C) As with his other initiatives, the octogenarian King
must make the most of the time he has without pushing for
change so aggressively as to encourage a conservative
backlash. Dr. Ghazi Binzagr, a Jeddah-based executive who
advises the SAG on economic reform, told EconOff that the
monarch is in a race against time to initiate the modernizing
projects that will be his legacy, and added that whoever
succeeds him may not have the appetite or ability to continue
this course.


11. (C) In addition to giving KAEC political cover, the King
may be providing the essential vision for the project. Dr.
Binzagr told EconOff that much of the public excitement
generated by KAEC stems from locals' desire to "look like
Dubai," and that it is easy to mistake impressive real estate
for meaningful progress. However, in Dr. Binzagr's
estimation, the King understands that the city's key
contribution should be the human capital that it is designed
to nurture.

AN IRRESISTIBLE FORCE MEETS AN IMMOVABLE OBJECT?
-------------- ---


12. (C) COMMENT: The King's support for megaprojects like
KAEC and the accompanying institutional reforms is
significant in a country whose natural resources have long
allowed it to sidestep economic and cultural change. The
oil-generated wealth available to fund these projects is at
an unprecedented level, as is pressure from the investor and
professional classes to modernize the culture and liberalize
the economy. Nevertheless, it is not yet clear that these
forces can overcome the combined inertia of the Kingdom's
conservative culture, its powerful religious establishment,
and an educational system that is still not matched to the
vision that inspires the economic cities. END COMMENT.
GFOELLER