As director-general of the Saudi Arabian General Investment Authority (Sagia), arguably the most important government investment arm in the Middle East, Abdulaziz Y Al-Babutain is one of the main protagonists behind a series of massive infrastructure and development projects in the kingdom. He talks to GTR.
Within his portfolio, the director-general of the Saudi Arabian General Investment Authority (Sagia), Abdulaziz Y Al-Babutain, includes the Economic Cities project. This mega project could amount to more than US$1.25tn in new spending when the six multi-use cities are completed – as well as the estimated US$50bn that Saudi Arabia is planning to allocate for transport projects alone until 2015.
Although times are good in Saudi Arabia – oil revenues are estimated at US$165bn in 2007, foreign assets are pegged at US$251bn and HRH King Abdullah recently unveiled the kingdom’s largest budget in its history at US$109.33bn – there are also a number of dangers, not least of which is rising inflation as well as the lingering question of whether all the planned investment is a result of government desire or private sector interest.
Nicolas Noe caught up with Al-Babutain recently to ask him about how Saudi Arabia plans to spend this cash.
GTR: What is the core motivation behind the Economic Cities project
Abdulaziz Y Al-Babutain: We think the Economic Cities is one of the best things we have achieved in the last few years. It focuses around two areas of interests – local and international.
For international investors, we developed the project to build a platform where we have integrated services and a good lifestyle. This is what most of the investors need in our evaluation.
In terms of the local agenda, we want to develop the cities to stimulate regional development and create jobs. These are the main drivers for the project. It is based on a public private partnership where the private sector will take the lead in the development and execution.
This, we believe, will make the project more dynamic. So we will build the infrastructure according to the demands, the needs of investors.
GTR: Is demand driving this or is the government driving Economic Cities
AB: It is both. The Saudi government wants to diversify its economy, to create jobs. They want regional development.
From the other side, international investors and even local investors have no doubt about the potential of the Saudi market but they did not have a platform – a good industrial city with all the integrated services.
We have Al Jubayil and we have Yanbu. These are two success stories but these are only two places. The potential is far greater than that.
In Saudi Arabia we have two things: energy and location. Anything around these two poles we are competitive regionally and globally. The Economic Cities will help us leverage these two competitive advantages.
GTR: There have been some fears expressed that despite WTO admission in 2005, the kingdom is not moving quickly ahead with regulatory reform or reform generally that impacts investment. How do you counter these fears
AB: I think things are moving in the right direction. In the last two years we have noticed the improvement in our ‘Doing Business Report” ranking which jumped from 67th to 38th to now 23rd. This is in three years, which is a big achievement.
In terms of facilitation we have achieved a lot. We reduced the cycle of import-export paperwork, but still we need to do more work.
The government has granted Sagia the right to form a facilitation committee for trade and transportation. We already have hired Booz, Allen, Hamilton and we developed the structure and the charter of this committee and defined the members and the projects.
It will be activated in early January.
The main focus is to review all policies and regulations at each entry point, whether air, sea or border point. We will enhance the policies and regulations to increase facilitations.
One area we are focusing on is customs, and there we are working with a number of agencies to improve the process.
The committee will be the tool that will eventually improve the overall import-export process and this is what traders need.
GTR: How far behind is Saudi Arabia in terms of reform vis-íÂ -vis your neighbours and is that apparent gap a problem
AB: If you talk about volume and potential we are very much ahead. We are the biggest market – 60% of the regional market. The bottleneck is in the facilitations and some infrastructure, like at the ports. We have considered this and are developing the right approach.
With Economic Cities we are developing a number of transportation and logistics hubs that will bring bonded areas, for example, that ease the movement of goods. So we are catching up in terms of facilitations and the platforms.
In reality the gap with our neighbours is not huge. But at the same time, we are not doing this to compete with other GCC countries. We believe that this is our potential; it meets our needs and enhances our competitiveness
GTR: Given the region-wide building boom, Saudi Arabia is facing unprecedented inflationary pressures, shortages of skilled labour and raw materials. How much of a problem is this for potential investors
AB: The challenge is in the implementation and having the right resources within the developers and Sagia to develop these mega projects. But I will say simply, the idea is great, the time is right and the only challenge, not an obstacle, are the resources – on both sides, the developers and Sagia.
The rising cost of construction, however, is a global phenomenon. It is not related to Saudi Arabia only. If I am a manufacturer in steel or aluminium, if I develop it in China, Saudi Arabia or Europe I will have the same problem.
In Saudi Arabia, I will have an advantage with the cost of energy, so still I will go to Saudi Arabia even though the cost of construction is high.
Keep in mind, too, that the private sector is the developer of these projects and they will not put their money in unless it is very efficient and at the right time, in the right place.
It’s not only about financial incentives, it is also about policies and regulations and facilitations. And that is what the government is focusing on. When you talk about taxes, of course, we are very competitive – we rank fifth or sixth globally.
GTR: The focus on port building and transportation infrastructure will be critical to the overall Economic Cities proposition. What is the core trade goal now for the kingdom
AB: We have an ideal location and we never leveraged it before – in terms of being a hub between east and west and our proximity to the Red Sea. We want to leverage our location as a hub, and we believe we are the right gate to the African market with valuable natural resources, capital and cost of living, utilities and industrial land.
We are the ideal location for re-export and distribution. All of these components are ideal for global manufactures and global companies generally making Saudi Arabia the Middle East and African base for redistribution and re-export.
The Economic Cities is the right platform, which is why we have located three cities on the Red Sea, including King Abdullah Economic City.
They are all on the Red Sea and are focused around industry and around logistics for the African market and regional redistribution.
Keep in mind, if you are based in one of these Economic Cities, you are already in the middle of the Middle East. If you are at Jebel Ali in Dubai, you have to fly two hours over Saudi Arabia and the Red Sea.
Second, the cost of living. We are 25% less expensive than Dubai or Jebel Ali and less in terms of the cost of energy, utilities, and so on. So we are offering good ingredients that are critical for global traders.
GTR: How are fuel incentives being conceived, if at all
AB: We are convincing the government to leverage fuel, whether for bunkering ships or for jet fuel. We want to offer it at very competitive prices with enough quantities for local and international users.
We have the fuel but have never leveraged it for trade. This is a very important point, we believe, for traders – and it will directly impact on how much it will cost to ship, import and export.
GTR: The Landbridge project aims to build a US$5bn, 1,100km railway linking Jeddah, on the Red Sea, with the capital Riyadh and the Abdul Aziz port at Dammam on the Gulf. How is this proceeding
AB: We are capitalising on the expansion of our rail network and there are two projects there.
First, the Landbridge, which is moving ahead as planned. Four consortia have submitted proposals. The Saudi railway organisation is reviewing these and early during 2008, they will select the best bidder and will start construction.
The second important line is called the North South line that connects the northern border of Saudi Arabia to Riyadh. Even though this line was originally meant to leverage mineral resources, Sagia coordinated with other agencies to study and then to build a rail connection to Europe.
This is very important. The line is already at our border with Jordan and there is only a 150km gap. Once we close that gap, Jordan is already connected to Syria and Turkey is connected to Europe.
We already communicated this concept to other agencies and have convinced them.
We have also spoken to the largest rail operator in Europe, Deutsche Bahn. They already operate two trains daily between Istanbul and Europe.
Furthermore, we have active a SR14bn programme to enhance and expand road transport. We are dominated by road transport because we have not completed our railway expansion.
GTR: A number of GCC countries have focused intensely on India and China as key trade and investment partners. Is Saudi Arabia behind in this regard
AB: I don’t think we are behind. We already have strong relations with China and India for example, and are focusing more on these countries – as the visit of our king to both countries demonstrated.
At the Jazan Economic Cities we already have huge investments by China in the aluminium sector and there are a number of investors there under discussion with China.
The Chinese have been particularly interested in our Economic City as a platform for redistributing to the African market. Mixing the energy base with the location is proving to be the right platform.
We have studied Singapore’s model too. They do not have the natural resources that we have. We have the energy and the natural resources and we think we have the location. So we have no doubt we will be able to make Saudi Arabia into a launch pad which will attract even more interest beyond even manufacturing for the Chinese, the Indians and others across the globe.
- Is it merely less expensive fuel in the kingdom to which you are referring