Saudi Arabia builds a future in the desert

Deep in the Arabian desert, hundreds of guests celebrate the birth of a city.

The Saudi government has flown them in on chartered planes to the northern city of Hail, then driven them for about half an hour in buses with police escorts to a giant marquee in the sand with a red carpet out front.

Inside, curtains with gold tassels adorn walls decorated with artists' renditions of Prince Abdulaziz bin Mousaed Economic City, which the government says will be home to 300,000 people when it's built.

After prayers from the Koran, the ceremony begins with a speech by Amr Al-Dabbagh, head of the ministry that has planned the city, who wears a formal cloak with gold trim. The audience — all male, except for one woman — sips tea and plucks chocolates off silver trays.

A film about the city offers a vision of the future: skyscrapers, science labs, kids with laptops in classrooms. As the speeches end, a Muzak version of "Nights in White Satin," the song by the British group the Moody Blues, wafts from the loudspeakers.

Oil is no longer enough for Saudi Arabia, which is the largest producer in the Organization of Petroleum Exporting Countries (OPEC). The country's population has more than tripled to 25 million people from 7.3 million in 1975 — and 57 percent of all Saudis are under the age of 25.

As the population grows, the kingdom's riches must be spread among more people: In 2008, per-capita gross domestic product was less than $19,000, versus $47,000 in the U.S. and $103,000 in Qatar.

To create jobs for its growing citizenry, the government wants to build cities and diversify into new industries.

"The impetus to change has grown as the population has grown," says Howard Handy, chief economist at Samba Financial Group, a Riyadh-based bank. "They're very focused on how to find work for all these young people."

The proposed economic city — 450 miles north of the capital of Riyadh — is one of four new metropolises that Saudi Arabia is planning in the hope of creating more than a million new jobs by 2020.

"Their dream is to become a major industrial power beyond oil," says Jean-Francois Seznec, who teaches at the center for contemporary Arab studies at Georgetown University in Washington, D.C. The Saudis are mainly looking at energy-hungry industries such as plastics, petrochemicals, aluminum and steel.

The success — or failure — of Saudi Arabia's plans could affect the stability of the whole region, which supplies the world with much of its oil and has also been a breeding ground for terrorists.

"It's a very big, populous country in a risky neighborhood," Handy says. "It's the holder of a tremendous amount of oil resources that are of great importance to the global economy. So everybody has an interest in its political future and the development of its economy."

Recognizing this strategic significance, President Obama visited King Abdullah in Riyadh on Wednesday to discuss such issues as peace in the Middle East, terrorism and the price of oil.

Obama has said he intends to tell the king that "huge spikes" in energy prices would hurt the interests of both the U.S. and Saudi Arabia.

Sitting pretty

Sitting on nearly a quarter of the world's known oil reserves, the kingdom can afford lavish dreams. As crude oil surged to a peak of $147 a barrel in July 2008, the state-owned oil-and-gas company, Saudi Aramco, generated as much as $1 billion a day in revenue.

For all of its wealth, Saudi Arabia has felt the effects of the global-economic crisis. The four-city project is a scaled-back version of the original plan for six new urban centers.

With banks and investors avoiding risk, more than $60 billion of projects have been canceled or delayed, Handy says. He expects GDP to shrink by 1.8 percent this year after growing 4.2 percent in 2008.

Until recently, most Saudis haven't needed to hold jobs. The government provides free education and health care and levies no personal-income tax. An immigrant population of 6.5 million people performs almost all of the kingdom's menial tasks. In 2007, just 4 million Saudis worked, according to the Ministry of Economy and Planning.

Only a fraction of the labor force is female, in part because of constraints placed on women by the government's strict interpretation of Islam. They're not allowed to mix in public with men who aren't related to them, for instance, and are prohibited from driving cars.

With the population growing and inflation averaging 9.9 percent last year, there's an economic need for more women to hold jobs.

"Unless you're very wealthy in Saudi Arabia, you cannot maintain a comfortable standard of living without two incomes," says John Sfakianakis, chief economist at SABB, a Riyadh-based bank. "That is compelling women to work."

Under its octogenarian ruler, Custodian of the Two Holy Mosques King Abdullah bin Abdulaziz al-Saud, the country has been trying to modernize its economy. It wants to attract foreign investment — including $500 billion for the new cities — and has opened up industries such as insurance that were previously off-limits to foreign firms.

Seznec says two big challenges remain: improving the quality of education and advancing the status of women in the workplace. "These are the two lines in the sand where the battle is taking place between the reformists and the religious forces in the kingdom," he says.

King Abdullah favors change, talking in a 2007 speech of the need to create a "culture of labor," for example. He also appointed a female deputy minister for girls' education in February, the highest government rank a Saudi woman has attained.

And he has authorized Saudi Aramco to create the country's first coed school, the King Abdullah University of Science and Technology, which will open in September.

The Saudi king and his ministers are "very logical and reasonable but are moving very slowly," says Sherifa Zuhur, a Middle East expert at the U.S. Army War College's Strategic Studies Institute.

"The majority of Saudi people are extremely conservative and not inclined to make any significant change."

Saudi Arabia needs to prepare its youth for the workplace lest they become restive and more prone to terrorism, SABB's Sfakianakis says.

"These young people need to be empowered," he says. "They can become untamed and uncontrolled if you fail to provide the right education, skills and jobs."

New cities

To drive growth, new metropolises such as King Abdullah Economic City, beside the Red Sea, need help from foreign investors.

The city, designed to house 2 million people and employ 1 million, will cost $100 billion to build, says Fahd Al-Rasheed, CEO of Emaar, the Economic City, a Saudi-listed company formed in 2006 to oversee the development.

In addition to a "financial island" with office towers as high as 120 stories, the city would also include what the developers call Plastics Valley.

Saudi Arabia can produce plastics cheaply because of its vast supply of petroleum, Al- Rasheed says.

In the desert heat, foreign laborers from countries such as India and Bangladesh toil in constructing the skeleton of King Abdullah city, burying sewage pipes, leveling roads and building the first blocks of offices and apartments.

Thousands of newly planted palm trees flank the road to the city's main gate, which is decorated with an image of the king. There are no signs yet of the port or the towers.

Al-Rasheed says the total cost of building the four cities will be about $157 billion. The government expects most of that to come from private investors ranging from plastics producers to mall developers to operators of private schools, which the government hopes to lure in part with tax breaks.

Early investors include the Kuwaiti company Al Mal Investment Co., appointed to develop Prince Abdulaziz bin Mousaed Economic City, and Abu Dhabi-based Rotana Hotel Management Corp., which plans to operate a luxury hotel there.

The government will provide land and fund a few projects such as the city's train station.

Many other potential investors, strapped by the financial crisis, may not come.

"The appetite for such things is really reduced," Sfakianakis says. "It's not an opportune time."

With hindsight, the Saudis' original project now seems too ambitious, he says, evoking the grandiose developments conceived during the boom in Gulf neighbor Dubai.

"There was a little bit of Dubai-ness to it," he says. Al-Rasheed disagrees. He says rapid population growth will create demand for millions of new homes.

And the financial crisis has helped the cities because construction costs have tumbled along with the prices of property in the region, he says.

Some foreign companies are hoping to profit from building contracts in the cities. Cisco Systems is designing the technological infrastructure — everything from broadband Internet connections to video surveillance systems to traffic control — for all four of them.

Cisco will invest $250 million in Saudi Arabia during the next five years, says Wim Elfrink, Cisco's chief globalization officer. Al-Dabbagh, the minister in charge of the cities, has asked Cisco to provide the world's fastest broadband Internet connections.