KING ABDULLAH ECONOMIC CITY STILL SEEKING CRITICAL

C O N F I D E N T I A L SECTION 01 OF 02 JEDDAH 000414

SIPDIS

RIYADH PASS TO DHAHRAN
DEPARTMENT FOR NEA/ARP, EB

E.O. 12958: DECL: 09/28/2018
TAGS: ECON EIND EINV ELAB EPET SA
SUBJECT: KING ABDULLAH ECONOMIC CITY STILL SEEKING CRITICAL
MASS

REF: 07JEDDAH508

Classified By: Consul General Martin Quinn for Reasons
1.4 (b) and (d).


1. (C) SUMMARY: An official at the Saudi Arabian General
Investment Authority (SAGIA) confided that despite
construction progress, the success of the King Abdullah
Economic City (KAEC) is far from assured. Although a core
group of multinational companies have committed to opening
operations in KAEC, the city will require many more such
anchor tenants before it is a viable economic center. SAGIA
seeks to attract these investors with assurances of KAEC's
business-friendly environment and Western-style freedoms.
Privately, the official admits that the laws needed to
safeguard these advantages are still "works-in-progress."
END SUMMARY.

A new city for new industries
--------------


2. (C) During a September 7 meeting at SAGIA's Jeddah
offices, Director General of Operations for Economic Cities
Ahmed Al-Bader (strictly protect) told PolEconOff that his
office is increasing efforts to attract foreign direct
investment into KAEC, largest of the "Economic City"
megaprojects designed to diversify the Saudi economy.
Located 90 miles north of Jeddah, the KAEC site occupies 65
square miles and is composed of six zones: industrial,
financial, educational, resort, residential, and seaport
(Reftel). SAGIA, the agency responsible for improving the
Kingdom's investment climate, seeks to attract multinational
companies in the financial, petrochemical, and technology
sectors that can build local human capital through knowledge
transfer. Al-Bader noted that with 60 percent of the
Kingdom's population under 30, creating jobs for young Saudis
is a priority.

With construction on track, tenants sign up
--------------


3. (C) Al-Bader said that the pace of construction has
improved greatly over the past year, largely in response to
personal, unscheduled inspections by King Abdullah. 5,000
construction workers are currently involved under the
direction of Dubai-based developer Emaar the Economic City
(EEC),and an expected total of 10,000 will be on site within
a year. The road and canal networks have been greatly
expanded, with over SR 350 million ($90 million) in road
contracts awarded to the Saudi Binladin Group (SBG).
Al-Bader also said that many residential units are nearing
completion, and that sales of these units to brokers have
surpassed SR 1 billion ($265 million). The first phase of
KAEC's business park has also been completed. He added that
he was surprised that more U.S. firms were not bidding on
KAEC's construction contracts, which are expected to total
$120 billion.


4. (C) Al-Bader said that KAEC has attracted about 40
"anchor tenants" who have committed to opening operations
within the city. EMAL International, a UAE-based aluminum
producer, has signed a memorandum of understanding to invest
SR 18 billion ($5 billion) in the construction o a smelter
complex in the city's industrial zone Dubai Ports World has
signed a memorandum to buld and operate the KAEC Sea Port,
expected to opn in 2009. Mars and Nestle have committed to
opning manufacturing plants. Additional memorandumshave
been signed by Cisco and Ericsson.


5. (C To attract investors to the Economic Cities, Al-Bader
said that SAGIA offers a more streamlined visa process with
less stringent restrictions than those imposed on the general
economy. SAGIA assumes the role of visa sponsor, enabling a
guest worker to move to another company within KAEC without
forfeiting the visa. The Saudization quotas will also be
more lenient within KAEC, with a mandated 5 percent Saudi
workforce versus the 10-20 percent currently required in most
sectors of the general economy. Furthermore, the quota is
aggregated, allowing KAEC the freedom to lower the quota in
one sector while raising it in another according to labor
requirements.


6. (C) The Kingdom's greatest attraction to foreign direct
investment, according to Al-Bader, is access to low-cost
energy. He cited aluminum and ammonia production as good
matches for this advantage, saying that these processes are
so fuel-intensive that the energy input can effectively be
considered a raw material rather than a utility. By courting

JEDDAH 00000414 002 OF 002


energy-intensive industries while expanding the downstream
petrochemical sector, SAGIA hopes to diversify the Saudi
economy while still leveraging the Kingdom's comparative
advantage of easy access to oil.

Still needed: Critical mass, legislative support
-------------- ---


7. (C) Al-Bader confided that KAEC will need many more
corporate tenants before the city is a viable economic center
with the critical industrial mass to grow on its own
momentum. He listed security, labor, and culture as the
three concerns raised most frequently by prospective tenants,
particularly Western multinationals. Of these, security
apprehensions have been the easiest to allay. It has been
more difficult to convince international companies that they
can find enough skilled labor in the Kingdom, or that their
existing employees will want to live and work in an
environment with so many cultural restrictions. He added
that many prospective investors are also concerned that the
Saudi system of commerce law is drastically insufficient to
handle modern international trade.


8. (C) Al-Bader said that the Economic Cities were designed
to address precisely these concerns by acting as cultural and
legal incubators, but admitted that their future is not yet
secure. He said that without continued support for these
cities from the aging King Abdullah, a reactionary movement
against perceived Westernization could "wash away their
walls." Contradicting some open sources, he said it is not
certain that women will be able to drive within KAEC.
Al-Bader stressed that he hopes for a critical milestone in
the next few months: a royal decree in support of the
Economic Cities, to be followed with bylaws that clearly
delineate the freedoms and protections that he is already
promising prospective tenants.


9. (C) Asked about the most promising strategy towards this
goal, Al-Bader drew a parallel to the low-profile course
taken by the Supreme Commission for Tourism, which has pushed
for decrees to make the Kingdom more accessible and
attractive to visitors. He said the Commission has
downplayed its successes domestically until policy changes
have become entrenched. Similarly, he hopes that the
Economic Cities can avoid a large conservative backlash until
they have grown into powerful centers of trade and
employment. "Then," said Al-Bader, "the walls will withstand
whatever they can throw at us."


10. (C) COMMENT: Al-Bader clearly expects KAEC's job
creation function to play a critical role in winning over
public support and averting a conservative backlash. It is
therefore notable that the sectors SAGIA is courting are
capital-intensive rather than labor-intensive, and that those
jobs they do create often require skills that are
undersupplied by the domestic labor force. The truly
critical mass may not be the number of corporate tenants
housed by KAEC, but rather the size of the Saudi population
who can benefit from its opportunities. END COMMENT.
QUINN