Jeddah: making of the regional hub with more than $100bn investments

Interview with Mazen M. Batterjee, Vice President of Jeddah Chamber of Commerce and Industry

It seems doing business in Saudi Arabia is getting harder. In 2011, Saudi Arabia ranked 10th in the World Bank’s doing business survey. In 2012, it was on the 12th position, and now 2014, the latest one is 49th position—and that’s a significant drop. Indeed from our interviews, we are gathering information and it seems that doing business is also getting more difficult, more regulated, with Saudization, with different laws. What is your opinion on this subject?

Doing Business in Saudi Arabia is getting harder, but it is well organized. At least now there is a law how to reach a certain amount of Saudization, a certain percentage allocated to each sector. If you match it, you can get your visa.

This is concerning our labor law and labor force. Unlike before, today you won’t encounter something that breaches the law. Entities that are not organized or registered, be it a Saudi or foreign company, won’t have a chance to survive.

Now regarding foreign direct investment, there are few statistics about this but it’s obvious that there is a decrease in inflow of foreign direct investment. It appears to be US$ 7.8 billion in the fourth quarter of 2014 as opposed to US$ 9.3 in 2013. What is your opinion on the foreign direct investment? What is the outlook?

Saudi Arabia has changed its laws. Many laws were amended and the consequences of these regulations are harsh. In Saudi Arabia, we don’t need funds. Previously, they were encouraging the foreign investors to come and invest in Saudi Arabia either with their know-how or even with their funds.

Now, they changed many rules, which decreased the inflow of foreign investors, which is subsequently not good for the local economy, and many of these foreigners now figure under the name of a Saudi person. Foreign companies pay 20% tax to the Saudi principal and save another 10% of profits, which creates a grey zone in the economy.

Sometimes the Saudi pricipal dies and the foreigner thus loses his assets and companies registered under the name. In addition, as a result, the flow of know-how into Saudi has been weakened.

Many foreign investors closed their companies and left the country. To increase the flow in the market and economy, and even in the Saudization, I believe we need to go back to the old systems and its rules.

Saudi Arabia is going to open up its stock market, which might trigger some in-flows. Is that going to help?

The experience of the Far East with the foreign investors entering the stock market is tentative. In 2002, 2007, foreign investors exited the countries before the market peaked and left many countries bankrupt as a result.

We have to be careful about this kind of investment. Saudi Arabia has experienced a market crash in 2007 that caused by local investors. Many retail investors lost value because of the crash. Saudi retail investors are still hesitant to enter the stock market in full force.

The foreign reserves at the SAMA have dropped by US$36 billion, or 5%, over the past 2 months. King Salman uses the funds to fund increases domestic borrowing to fund public sector salaries and large development projects. The latest data show Saudi’s foreign reserves dropped by $16bn to $708bn in March. What is the outlook for the economy?

The foreign investments flows into the private sector, thus does not affect the public sector spending. We hope the prices of oil will recover and shrink the deficit by the end of the year.

Let’s talk about Jeddah, which is one of the most exciting stories in the world. Jeddah has a massive city next door being built, Emaar Economic City or King Abdullah Economic City, with the projected investment value of $86 billion to $100 billion according to Emaar website. This economic city will boast a port with the estimated capacity of 20 million TEUs and plus the existing port that is currently at 2-7 million, so that will be 25. With the capacity, Jeddah will become the third busiest port in the world after Shanghai and Singapore. Also we have the enlargement of the Suez Canal. These are massive developments. How are all these projects going to position Jeddah on the global map?

At the Chamber, we are trying to promote Jeddah. We want it to be a center of business in the whole area. When you look at the location of Jeddah, most of the pilgrims or who is doing Umrah to visit the two holy mosques, they have to pass through Jeddah, so yearly around 20 million people pass through Jeddah on their way to Mecca and Medina.

With the new airport to be open in the first quarter of next year, Jeddah will be capable to receive up to 30 million visitors, and until 2020, we’ll be capable to receive up to 100 million visitors. Also, for example, if a Muslim living in Europe transits Jeddah on the way to his country in Asia, he can fly Saudi Airlines and make use of the 48 hours transit visa to visit Mecca and Medina.

In terms of the economic scope, there is also Rabigh, which has the biggest petrochemical complex worldwide.  Saudi Aramco wants to become the world’s top three petrochemical companies. Part of that strategy is Rabigh.

The firm produces petrochemicals at its Petro Rabigh joint venture with Sumitomo Chemicals, which in addition to making refined products also operates a 1.3m tpa ethane cracker and has around 3m tpa of total petrochemicals production capacity. The facility is also currently being expanded under a $7bn project known as Rabigh II, which includes construction of a new ethane cracker and aromatics complex and which will see it start to produce additional petrochemicals including paraxylene/benzene, methyl methacrylate monomer and ethylene propylene rubber in 2016.

Education is another major pillar for the city. King Abdullah University already boasts more than 2,000 international students only for research. South of Jeddah, there are there will be a new airport and a new seaport. We say Jeddah will be the Silicon Valley. For Jeddah Islamic port, the current existing capacity is not 5 million but 12 million TEUs. Another expansion is earmarked in the future.  Coupled with the trains, the traffic in Jeddah will definitely rise.

Jeddah is a full industrial city of around 60 million square meters. It’s capable to have more than 10,000 factories. Most of the factories that are non-petrochemical are based in Jeddah.

Have the investors fully realized the potential of the city?

They know what the future of Jeddah is. You know Jeddah is an old city and we call it Jeddah because we believe that our mother Eve has her grave here.

Being an old city with a history of more than 1,000 years, we foresee a plausible future for Jeddah and thus we are encouraging people to come and open their headquarters here, and as a Chamber, we are ready to facilitate and help anybody.

Do you think that Jeddah will, at the end of the day, pose a major threat to the centers in the Arab Gulf, such as Dubai?

Of course, Jeddah located on a major trading route. 90% of trade is still seaborne. For freighters coming from Europe through the Mediterranean and Suez Canal, passing the Red Sea, it takes 4 days to reach the Gulf area.

The port in King Abdullah City will serve as a transit zone for all goods that are to reach Dubai etc., and this will reduce the time by 3 days. The goods will reach the Gulf in less than a day.

Now that’s about Jeddah. Is there anything else you would like to mention about this vibrant city?

Jeddah is a multi-cultural, metropolitan city. The buildings in the old city have a touch of Asia, Africa and Europe.

By the way, the old city is the only city in the whole peninsula where the old houses were by stones and not mud. There is maybe Sana’a in Yemen that has the same characteristics.  Mud will not stay more than 20 to 30 years. The old city in Jeddah is registered by UNESCO. Every year we organize a festival together with the governor to cherish the old city and make it nicer for visitors. Many of the old houses were transformed into boutique hotels. We hope to make it more open for visitors so they can have a walk there, sit, eat, drink or do some shopping. Within 10 years, the picture for the old cities will be completely different.

Do you know how fast is Jeddah growing at the present time?

There is perhaps 10% expansion in construction and overall size of the city.

Is there an inflow of people to Jeddah?

We have an inflow from all around Saudi Arabia.

What about the growth of the registrations of new companies?

There has been a drop. The last 2 years we had only 5% increase. We used to have 10% before.

What are your major projects you’re currently working on as a chamber to attract investors?

We are trying to make simplify procedures and expedite the administration. Our target is to make doing business in Jeddah easier. We have a partnership with the governor to give rules to the private business with the government.

The Chairman of Jeddah Chamber of Commerce and Industry, Sheikh Saleh Kamil, started an initiative called Business Development Center (Al-Masfaq). It is a pilot program to speed up

Al-Masfaq, which means “where deals take place,” is a business center, a sub division of the JCCI. The center, will be an open area that provides legal advise to business owners by helping them find trade partners, rebuild their failing businesses and start businesses from scratch.

The center will be the home for the expatriates employment campaign, which will help Green Zone companies find expatriates. The new campaign announced by JCCI in cooperation with different consulates and the participation of the ministry of labor will collect data from various consulates and place it online for easy access. It is expected that 500,000 will benefit from the service.

 With the center, JCCI is trying to help the business community in Jeddah to upgrade themselves. If they are small to come up; if they are big, how to change to the stock market; if they are in not good situations, how to find it for them a partner. How to make it easier to collaborate with the government?

Now you are also building new headquarters.

Yes, we are building two.

Can you talk about this project?

The JCCI is currently developing new towers to create income and continue the message of the chamber.

The chamber might not continue the legalization of the document and other income streams. Our challenge is to increase the income to support our ongoing programs aimed at reducing bureaucracy and improving the investment environment. We are building two big towers. One of them will be a hotel, flat and offices and other one will be a business center worldwide. The value of the project will reach up to $250 million. It will be finished in 3 years.

How does Jeddah Chamber of Commerce differ from other chambers of commerce such as the one in Riyadh?

Of course, Jeddah chamber is the first chamber in Saud Arabia, the first chamber in the peninsula.

When we had two times flood in 2010, 2009, the JCCI took the responsibility to help the people, to donate to people. Jeddah people, all of them, they are volunteers. We have more than 6,000 volunteers registered in the chamber.

In any crisis, the chamber can offer a helping hand. JCCI is one of the most innovative chambers in Saudi Arabia, partly because we are pioneers. This is the culture at JCCI.

What are the major challenges?

Tourism sector is a challenge but the tourism commission under Prince Sultan Bin Salman is very active. The first step to address the problem is to reactivate tourist visa. Jeddah has always received a massive amount of local and religious tourists. Almost 20 million visitors come every year to perform the Hajj and Umrah.  

Jeddah has great tourism potential, long virgin beaches and many historical sites. Many families they are looking for something clean with lots of sporting and cultural activities. We hope the tourist commission can reactivate the visa, which again will have many people coming as a tourist to Saudi Arabia.

What are the other challenges that could threaten the development of the region?

Development is going smoothly, but the challenge is the distance.

The new economic city is 1-hour drive from the main metropolitan area. The area will need many years to develop. At the same time it is very well connected. The King Abdullah Economic City where it is linked with the port, linked with the trains and not far from Jeddah near big petrochemical complexes.

The development will take more than 20 years to fully develop. The development is well planned and the city needs it. I don’t think there will be any threat or to worry about it.

The city will be tax free, we do not have custom duty also maximum 5% to any product. The only contribution is for Zakat paid from the profits of the company. The area is going to be business friendly.