A key element of the Vision 2030 strategy is the establishment of SEZs offering fiscal and other incentives in competitive locations for promising sectors, among them ICT, logistics, tourism, and industrial and financial services. The SEZs are intended to capitalise on Saudi Arabia’s location, fewer than seven hours’ flying time from major cities across three global regions: Europe, Asia and MENA.
Integrated Logistics Bonded Zone
A new SEZ is to be set up adjoining the King Khalid International Airport in Riyadh, which will offer integrated logistics services and regulations designed to attract multinational companies. A government decree issued in late 2018 approved the regulatory framework for an Integrated Logistics Bonded Zone (ILBZ) at the airport, to be operated by the General Authority for Civil Aviation, and regulated by the Saudi Arabian General Investment Authority. The SEZ offers a wide range of support services, including warehousing and fulfilment, inventory management, maintenance and repair, and testing and assembly.
Companies setting up operations in the ILBZ are promised a range of incentives. There will be no restrictions on foreign borrowing or the repatriation of either profits or dividends. Likewise, there will be no restrictions on the private ownership of assets, including intellectual property. Precise details of direct and indirect tax incentives had yet to be finalised at the time of the announcement.
NEOM City
Plans for NEOM, a $500bn special zone city with a significant logistics component, continued to advance during the course of 2018. The project’s name is a combination of the Greek prefix neo (meaning “new”) and the letter M, an abbreviation of the Arabic word mustaqbal (meaning “future”). The ambitious project is set to be built over an area almost the size of Belgium and will have cross-border dimensions, with links to neighbouring Jordan and Egypt. The Public Investment Fund is providing finance for the first stages of the project, located on the Red Sea coast near the border with Jordan. Funding streams are also expected from the government and private sector entities.
Nadhmi Al Nasr, chief executive of the project, has described it as “the largest international special zone in the world in terms of size and scale of investment”. Official sources said work had begun during the course of 2018, with the project’s first airport scheduled to be completed before the end of the year, and scheduled flights expected to commence in early 2019. NEOM is ultimately planned to have more than one airport, one of which will be a dedicated international terminal.
A significant number of local and international companies have been involved or expressed interest in NEOM. According to media reports, locally based construction company Saudi Binladin Group had secured some of the infrastructure contracts for the project. UAE-based retail company Lulu Group said it intended to invest in NEOM as part of a planned move into Saudi Arabia, while German technology company SAP was said to be promoting its smart cities systems for the development.
Spark
In December 2018 Crown Prince Mohammed bin Salman bin Abdulaziz Al Saud inaugurated another new SEZ, to be known as the King Salman Energy Park (SPARK). Located in the Eastern Province between Dammam and Al Ahsa, the intention is for SPARK to host up to 300 commercial units built over an area of 50 sq km. Construction will be carried out in three phases, with the first covering 12 sq km and due for completion by the end of 2021, at an investment cost of around $1.6bn. When all stages are completed, SPARK is expected to contribute around $6bn to the national economy per year, and employ up to 100,000 people directly and indirectly.
State oil company Saudi Aramco will develop, operate and manage the new city’s infrastructure in partnership with the Saudi Authority for Industrial Cities and Technology Zones. A total of 12 agreements and memoranda of understanding were signed for development of the park with a range of energy companies including Schlumberger, Halliburton, Baker Hughes GE, Oilfields Supply Centre, Saudi Information Technology and the Al Rushaid Group. The energy park will target activities in five areas — one of which is industrial manufacturing, such as electrical equipment, liquids and chemicals. Others include a dry port with an annual capacity of 8m tonnes, a Saudi Aramco drilling and well-maintenance area, training centres, and a residential, commercial and recreational area.
At the inauguration ceremony, Khalid Al Falih, the minister of energy, industry and mineral resources, who is also chairman of the board of directors of Saudi Aramco, said the city’s aim was to unlock the full potential of the Kingdom’s energy resources in line with the country’s transformation plan. He confirmed that it would have the status of an SEZ, with companies operating within the zone able to benefit from regulatory, fiscal and non-fiscal support.
SEZ Taxonomy
It is worth considering the government’s efforts in light of the international context for special zones. A report by consultancy Oliver Wyman points out that there are now some 4300 SEZs in 130 countries around the world, employing an estimated 68m workers. While some have made critical contributions to the economic success of their host countries, many – possibly a majority – have failed. The report identified four different types of SEZs. Type I are special manufacturing zones; type II are special service zones; type III are sector-specific zones; and type IV are more advanced transnational and extra-territorial zones. On the whole, GCC countries have developed SEZs that correspond to types I and II, although Saudi Arabia’s recently announced projects fit into type III, since they include new technology frontiers, research and development, and tourism. The NEOM city SEZ could arguably be classified as type IV, because of its transnational links. In an interview with local media, Anshu Vats, a partner at Oliver Wyman, said that SEZs in the Gulf have focused on leveraging an abundance of low-cost land and an affordable labour force to overcome the absence of a major domestic market through export.
Interest in developing them spiked as governments responded to the slump in oil prices — which fell to $30 a barrel in 2016 — by pursuing rapid economic diversification strategies. Oil prices subsequently recovered to around $70 a barrel, but the host governments have continued pursuing SEZ strategies. “[W]e can understand the need for creating these zones as the appeal is clear: knowledge-based economic development with high value added,” Vats said. However, he added that global competition has complicated matters. “Selecting which sectors to rely on and designing the right value proposition will constitute an SEZ’s success.”
Competition
There are various regional sources of competition for Saudi Arabia’s SEZ projects. In February 2019 Kuwait announced that it was going to move ahead with the first phase of its $100bn Silk City proposal. A further plan has been outlined to merge this project with another, a separate integrated economic zone on five uninhabited islands. Partly because of competition from Saudi Arabia, Kuwait has sought to align its project with China’s Belt and Road Initiative of international transport infrastructure investments. In addition, following Saudi Arabia, Kuwait is pursuing technology-rich companies by connecting to a new global cable link. Its strategy is to develop a locally based, regional financial centre focused on the northern Gulf area. Here, too, it will be in competition with Saudi Arabia, which is pursuing plans for its own financial hub.
