Saudis Look Beyond Oil to New Economy in Desert

By Faiza Saleh Ambah
Washington Post Foreign Service
Thursday, July 17, 2008; A01

MEDINA, Saudi Arabia -- Clouds of yellow dust swirled in the air as tractors moved back and forth, leveling a huge, barren piece of land dotted with billboards announcing the city that will rise from the sand here.

Over the next few years, Saudi officials say this stretch of desert will be transformed into a buzzing hub of scientific research and development, with cutting-edge universities, hospitals and housing for more than 130,000 people attracted by the idea of living in the city where Islam's prophet Muhammad is buried.

The project, called Knowledge Economic City, represents a first serious step by Saudi Arabia toward building a post-petroleum economy. It is one of six major industrial centers planned to rise over the next 15 years. At a cost of more than $100 billion, the sites are expected to provide housing and jobs for the country's fast-growing population, half of which is younger than 21.

These cities-from-scratch are the most ambitious projects to date launched by a kingdom enriched almost entirely by oil since its disparate regions were unified into a state more than seven decades ago. In beginning to construct an economy to survive the end of its natural resources, the Saudi government is drawing on lessons learned during a previous oil boom when profits were squandered in part by spendthrift princes and short-term planning that emphasized infrastructure over education.

"The ruling dynasty is under pressure to show its population that the oil money is being reinvested for the good of the people. The al-Sauds have suffered from the image of the ruling family as corrupt and spending lavishly," said Rochdi Younsi, an analyst with the Eurasia Group, a consulting firm that provides political risk analysis of countries around the world.

With oil prices peaking above $145 a barrel in recent weeks, the kingdom is reaping an unprecedented windfall from its vast reservoirs of oil, which represent a quarter of the world's proven reserves. Saudi Arabia reported oil income of $200 billion last year and projects $700 billion in revenue over the next two years. The kingdom earned an average of $43 billion annually throughout the 1990s.

But Saudi officials have long feared that too-high oil prices would push the world toward alternative fuels, a concern captured by one former oil minister's tart reminder that "the Stone Age did not end for lack of stone."

To meet rising demand, as well as to slow the world's rush to develop alternative energy sources, Saudi officials have raised oil production by 500,000 barrels a day since May.

Though increased production means the Saudi reserves will be depleted faster, the government is using a burst of additional capital to develop an economy it hopes will eventually be untethered from the price of oil.

The new cities "are part of a broader effort to diversify the economy away from oil and away from its reliance on the public sector. The cities are intended to develop more of a non-oil economy, well before the oil runs out," said Jane Kinninmont, an analyst at the Economist Intelligence Unit, a research and advisory company that provides industry and management analysis of countries around the world.

Based on economic zones around the world, the cities aim to trade Saudi assets -- plentiful and cheap oil and vast open spaces -- for foreign expertise and training. But the cities also have social aims, analysts said, including creating jobs to stave off political unrest.

"When there was money, it was easy to absorb young Saudis into public jobs, but the population kept growing and the local education system did not produce enough candidates for the local job market. That caused resentment and allowed militant groups to launch against the local dynasty," said Younsi, referring to a spate of al-Qaeda-related attacks in 2003.

Saudi Arabia's ambitious economic program calls for the kingdom to be among the world's top 10 economies in terms of ease of doing business by 2010, up from its current rank of 23rd. Getting there will probably force social change in several ways.

Saudi officials said they are working on easing the lifestyle and visa restrictions that have kept foreigners from investing and living in the kingdom. One side effect of that will probably be an easing of rules that ban men and women from mingling in public unless they are close relatives.

"We're not anymore an isolated island. We realize the challenge today in order for us to be more competitive means more transparency and more gender equality," said Abdullah Hameedadin, head of the Economic Cities Agency at the Saudi Arabian General Investment Authority, the government body overseeing the projects.

Hameedadin said that 30 percent of his staff is female and that he expects women to be allowed to drive in the new cities -- which is currently banned in the kingdom. Officials also said they were seeking to attract both male and female investors to the cities.

Partly to bypass the bureaucracy and inefficiency of government ministries, and partly to buffer itself against the volatility of oil prices, the government will oversee the projects but leave the financing and management to the private sector, a mix of Saudi companies and investors from the Gulf region, Japan, Malaysia and China, among others.

King Abdullah, who ascended the throne three years ago, has pushed hard to reform the country's economy, speeding the kingdom's entry into the World Trade Organization months after he became king. One of the cities, planned to rise along the Red Sea with canals running between high-rise apartment buildings, is named for him.

"With this second oil boom, we want to build the soft infrastructure to help the business environment prosper. We want to learn from the mistakes of the '70s," Hameedadin said.

An oil bonanza in the 1970s that poured billions of dollars into government coffers turned the kingdom into a rich nation and helped modernize its infrastructure with eight-lane highways, hospitals, malls, universities and desalination plants.

Despite the decades of oil wealth, the Saudi education system is ranked as one of the worst worldwide, tens of thousands of university graduates are unemployed, and the country manufactures and produces very little. Saudi Arabia consumes locally only 2 percent of the oil it produces.

Oil accounts for 90 percent of Saudi Arabia's income. And until oil prices slumped in the 1990s, officials faced little pressure to diversify the economy.

"This is what some people call 'the curse of oil.' You don't need to train people, you don't need to work so hard," said Kinninmont, the economist. Change has come about "partly because of the experience of the '90s," she said. "Lots of political and economic problems still haunt the policymakers."

One-third of last year's budget surplus was earmarked to reduce government debt of $176 billion in 2003, incurred during years of low oil prices.

Enter the economic cities. In colorful slide shows, and on intricately detailed mock-ups that fill entire rooms, avatars of Saudi men and women sip coffee with foreigners in ancient Arabian-style souks as yachts float by in the warm sea and gleaming futuristic skyscrapers rise up from the sky behind them.

When the six cities are complete, about 2020, they will house nearly 5 million people and provide more than 1 million jobs, planners say.

The cities provide regional balance by creating jobs and industries in some of the most underdeveloped regions and cities in the kingdom, said Saudi economist Abdel Aziz Abu Hamad Aluwaisheg. "But the government has to increase investment in building roads and infrastructure in those cities to make those projects more attractive and profitable for private businesses," Aluwaisheg said.

One of the cities is planned for the southern backwater province of Jizan, where the unemployment rate for men is almost double the official 13 percent figure. Some economists believe actual unemployment in the country to be as high as 25 percent. The economic city there is expected to become a center for heavy industry, and several Chinese firms have already signed up to start aluminum smelters there, according to Saudi officials.

"Our carrot to global companies that rely on intensive energy for production is cheaper oil and plenty of land," said Hameedadin, the official in charge of the economic cities. "Instead of them buying the oil and manufacturing in their countries, we entice them here by providing them with tax breaks and cheaper crude, and we get know-how and jobs."