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Saudi Arabia

DESPITE

A PERIOD OF UNPRECEDENTED WEALTH FOR

Intelligent infrastructure

City, north of Jeddah, will be the among the world's 10 largest on completion. Air services are expanding too, as two private lowcost airlines have recently launched services alongside flag-carrier Saudi Arabian Airlines. Competition is also growing in the telecoms sector as the government has opened the market to a host of new operators. Competition for new mobile subscribers is expected to be fierce, but it is broadband that offers the greatest potential for growth, analysts say. Some 38% of Saudis have PCs, yet only 1% can currently access high-speed broadband. From residential complexes to industrial clusters, large-scale construction continues apace, both as a result of the oil boom and as a catalyst for the development of the non-oil sector. The economic cities planned nationwide are central to this latter aim. However, despite the furious pace of development, environmental awareness is increasingly visible and some progressive steps have been taken to ensure sustainability is built into every new project.

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SAUDI ARABIA, KING ABDULLAH IS COMMITTED TO AN AMBITIOUS REFORM AGENDA . AND DELIVERING A WORLD-CLASS INFRASTRUCTURE IS CENTRAL TO HIS GOVERNMENT'S PLAN FOR ECONOMIC DEVELOPMENT.

W

With $350 billion in new projects, Saudi Arabia has embarked on a significant economic development program with the goal of establishing the kingdom as a global industrial force. To support this aim, and to position the country as a regional transport and logistics platform, much of the investment is directed at the creation of a sophisticated infrastructure. From water desalination plants to improved health-care facilities, the government is upgrading capacity to meet the challenge of a growing and increasingly affluent population. But nowhere is this more evident than in the country's transport system. The country's rail network is preparing for change, on a massive scale. New lines will link the east and west coasts of the country and population centers from north to south. The country's ports and port-storage facilities will also be expanded as the kingdom seeks to establish itself as a regional transshipment center, in competition with established Gulf hubs. The Millennium Port, to be built as part of the ambitious King Abdullah Economic

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Despite one of the longest periods of high oil prices in history, with crude currently around $70 to $75 a barrel ­ a level sustainable for the foreseeable future, given strong demand from Asia ­ Saudi Arabia has pressed ahead with the comprehensive political and economic reform agenda it first outlined at the start of the decade. "Reforms look set to continue, while spending has been quite sensible, generally aimed at long-term projects such as infrastructure, boosting the non-oil sector (notably pharmaceuticals and services) and facilitating the development of new industrial and knowledge cities," says Gerd Nonneman, senior professor in ArabGulf Studies at the U.K.'s Exeter University. Others agree. "The Saudi Arabia of today is transforming on many fronts, with changes introduced at all levels of society," says Christian Koch of the Gulf Research Center in Dubai. Nobody doubts that the changes can be ascribed to King Abdullah, who recently celebrated the second anniversary of his ascension to the throne. As Crown Prince under his predecessor, the late King Fahd, King Abdullah was one of the driving forces for reform. Today, he finds himself the nation's economic steward at a time of unprecedented wealth for this country of 25 million. GDP has almost doubled to $350 billion since 2002, with growth last year alone some 10%. Oil revenues last year were just shy of $200 billion while the current account surplus reached an unprecedented $100 billion, a level most observers believe will be exceeded in 2007. King Abdullah is using every opportunity to secure long-term prosperity for a population that is not only one of the fastest-growing in the region (rising at almost 3% a year) but which has high levels of expectation, thanks to oil, world-class education and, still today, the widespread belief that the state will always provide. "King Abdullah is looking at every infrastructure project, every type of diversification. If there is benefit for the people he will never say no," says Marwan Nusair, President and COO of the Alujain Corp., a joint-stock company specializing in investment in Saudi hydrocarbon and mineral projects. After two years on the throne, King Abdullah remains committed to economic reform and diversification, in spite of high oil prices. "The means to support this development is available now and he is using it wisely." King Abdullah's strategy, aimed at increasing the country's employment and making Saudi Arabia a key player in industry. stabilizing role in the Middle East, as well as maximizing the eco- Financial services, information and communications technology, nomic benefits of high oil prices at home, has economic, political energy-related investment (plastics, petrochemicals) and port serand diplomatic dimensions. Using the cushion of oil wealth, Sau- vices are all priority areas. di Arabia has been pressing diligently ahead with the reforms the "The economic cities are a new product. Not just in Saudi Aracountry committed to when it joined the WTO in December 2005. bia, but globally. There are about 3,000 special economic zones, free These include greater transparency at all levels, an improvement zones and processing zones around the world, but what we have in the domestic investment environment and a steady reduction in introduced is all the above, plus," says SAGIA's Dabbagh. "When it the tariffs Saudi Arabia used to apply to imports. Although dis- started, King Abdullah Economic City was 55 million square cussions with the European Union over a comprehensive free- meters. Now we're talking about 180 million square meters ­ that's trade agreement continue, numerous other bilateral agreements the size of some of our neighboring countries." Most importantly, have already been signed. Dabbagh says, it's a private sector-led initiative. "We are in the back The success of policies designed to create a pro-business, seat supporting, facilitating, providing facilities and incentives, but investor-friendly environment was highlighted by the ranking of the private sector is running the show," he says. Saudi Arabia as the world's 38th most attractive business environA greater role for the private sector extends to finance, too. ment in the IFC/World Bank's 2007 Doing Business Report, for the In Aug. 2006, the Saudi Arabian Capital Markets Authority second year. "Saudi Arabia is ahead of all Middle Eastern and awarded Jadwa Investment a license to offer all types of investArab countries, and even some European countries," says Amr ment services including dealing, managing, custody, arranging Dabbagh, Governor and Chairman of the Saudi Arabian General and advising, and all the services provided are fully Shariah-comInvestment Authority (SAGIA). "This is confirmation that Saudi pliant. "It started when the government allowed the private secArabia is very much open for business." tor to invest in the market," says CEO and Managing Director

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Indeed, King Abdullah used his April state of the nation speech to stress once again the importance of the private sector to the country's future. "Increasing numbers of people are active, for the first time, in construction, property and industry ­ the type of activity is quite broad," says Nonneman of Exeter University, pointing out that parastatal entities such as SABIC, the largest non-oil company in the Middle East, have been pursuing joint ventures with the private sector. The rising importance of the private sector has also been reflected in the phenomenal growth of IPOs. The highest profile has been the $860 million IPO of Prince Alwaleed Bin Talal's Kingdom Holding, but in the year to date there have been 20 others, raising some $3.7 billion. Forthcoming IPOs are expected to include Saudi Arabian Airlines, the nation's flag carrier. And the private sector is taking the lead in the development of the new industrial cities planned nationwide, a key part of the government's $350-billion strategy targeting economic diversification. These phased developments are aimed at boosting regional

Photo: Courtesy of Faisal Al Saud

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Ahmed Al-Khateeb. "We wanted to create a world-class investment bank in Saudi Arabia and from there to become an investment house in the MENA region." Al-Khateeb and his partners, including the Chairman, Prince Faisal Bin Salman Bin Abdulaziz, are experienced finance professionals, and Al-Khateeb feels Jadwa Investment is a natural choice for foreign investors looking to establish a presence in the kingdom. "If I were to invest in China, I wouldn't do it myself, I would rely on local companies. If [multinationals] want to invest in equity funds, or corporate-finance transactions or conduct an IPO in Saudi Arabia, we have the network and we have the expertise. In a country like Saudi Arabia you need a local partner, and we stand for quality and trust."

Ahmed Al-Khateeb, CEO and Managing Director of Jadwa Investment

Jadwa is already establishing relationships with global players. The company has partnered with Russell Investment Group, the global leader in multi-manager investment services, to bring clients a new breed of Shariah-compliant investment solution. To date, AlKhateeb says, Shariah investors have had access to a limited number of asset managers offering suitable investment products. Through Russell's unparalleled access to fund managers, the partners aim to utilize some of the best asset-management talent in the world to manage Shariah mandates. The government also hopes that the private sector will play a key role in its ambitious infrastructure developments. These include improving electricity infrastructure, building desalination plants, expanding port and port storage facilities, boosting health care capacity and, in particular, upgrading the transport network, which rising wealth and a growing population are putting under increasing pressure. The well-developed road network is being upgraded, while domestic and regional air links have been improved by the emergence of two private low-cost airlines. But most attention is being focused on a massive expansion of the country's rail system. The $5 billion east-west Saudi Landbridge project will connect the Red Sea and Gulf coasts for the first time. Built by a private consortium to be chosen in early 2008, it will have 50-year operating rights for the project. Meanwhile northsouth connections will benefit significantly from the $2.8 billion NSR (north south rail) project, which ­ though state funded ­ will be privately operated and maintained. While emphasis has been given to the development of the non-oil sector, Saudi Arabia hasn't neglected the mainstay of its economy, reinforcing its position as the world's leading producer. In May 2006, the government announced an $18-billion plan to

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improve oil production capacity from the current level of around 11 million barrels per day (bpd) to 12.5 million by 2009 and 15 million by 2015. Recognizing that the decline rate of existing wells is around 8% ­ Saudi Aramco needs to add 700,000 bpd in additional capacity just to keep production steady ­ the 2007 drilling budget was set at around $4 billion, with 427 onshore and offshore fields drilled. And there is more good news. With 260 billion barrels of proven reserves, oil minister Ali Al-Naimi has said Saudi Arabia could add, "as much as 200 billion further barrels after an extended period of investment and exploration." The potential for gas, of which Saudi Arabia is the world's fourth-largest producer, looks good too: national oil company Saudi Aramco says that only 15% of the country has been "adequately explored," suggesting significant additions to proven reserves of 240 trillion cubic feet. While industrial development is key and the importance of oil and gas to the Saudi economy is undisputed, environmental awareness is increasingly visible. Xenel-Balderrie is the first Saudi Arabia-based company specialized in the policies, project finance and technologies associated with greenhouse-gas reduction in the oil & gas, industrial, petrochemical, power, and energy sectors. It also offers advisory services to governments on climate-change policy. "The need to reduce greenhouse-gas emissions is crucial," says Rachad Itani, Xenel-Balderrie's President. "And the fact that a country like Saudi Arabia has shown that it is embracing the Kyoto Protocol sends a significant message around the world. It says we are doing our bit to help." King Abdullah's reforms have not been confined to the economic sphere. Despite the fact that many powerful figures within the ruling elite oppose any shift from the conservative status quo, the King's open, consultative approach has done much to boost his popularity. Within broader society, King Abdullah has encouraged debate even about matters formally considered sensitive, such as the role of women in Saudi society. The emergence of a tough, no compromise approach to terrorism has also reassured those concerned about stability. After foiling several attacks in late 2006, a roundup of militants in April confirmed that security forces are taking the threat from terrorism seriously. "The security [initiative] has been very successful and has contributed to the new mood of confidence in the country," says Rodney Wilson, professor at Durham University's Institute for Middle Eastern and Islamic Studies in the U.K. It has been matched by what is possibly the most proactive foreign policy in the kingdom's diplomatic history. Recognizing the limitations of U.S. policy in the region, Riyadh has been at pains to emphasize the importance of Arab nations working together to secure stability and peace, stressing the high cost of past disunity. The resurrection of King Abdullah's Peace Plan, first floated five years ago, is the most obvious manifestation. However, Riyadh has also been talking with all parties in Lebanon to secure stability there and with Hamas and Fatah to seek agreement within the fragile Palestinian Authority. However, it is clear that King Abdullah and his government see the economy as crucial to Saudi Arabia's long-term evolution. Although high oil prices look set to stay, they have lived through many past price collapses and seem determined to stay the course in creating a genuinely diversified economy, where foreign banks and companies play a significant role. When asked what he thinks is next on King Abdullah's reform agenda, SAGIA's Dabbagh is circumspect. "In order to be competitive and to receive more investment than your competition, you need to keep on reforming and raising the bar and making it more difficult for others to compete with you," he says. "I can't predict what will happen next, but I can assure you that it will be significant." BY JUSTIN KEAY

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"A business-friendly destination"

THE SAUDI ARABIAN GENERAL INVESTMENT AUTHORITY (SAGIA)

AND FACILITATING FOREIGN INVESTMENT IN THE KINGDOM AND KNOWLEDGE-BASED INDUSTRIES. WAS CREATED IN

APRIL 2000

AS PART OF A

COMPREHENSIVE NEW FOREIGN INVESTMENT LAW. IT IS CHARGED WITH CREATING A PRO-BUSINESS ENVIRONMENT

­

PARTICULARLY IN THE FIELDS OF ENERGY, TRANSPORT

THE

FOLLOWING EXCERPTS ARE TAKEN FROM AN INTERVIEW WITH AND

SAGIA'S GOVERNOR

CHAIRMAN, AMR DABBAGH.

various transport modes. We have made a great deal of progress How effective has the new foreign investment law been at but the sky's the limit in terms of potential. creating a pro-business environment? For instance, the Red Sea today has a capacity of 10 million conIt has been very effective and has helped pave the way for signifitainers, and there is annual growth of 20%. We need to enhance our cant amounts of foreign direct investment (FDI) as well as domestic infrastructure, so we have launched a mega seaport linked to the investment. In the past few years, Saudi Arabia has been ranked the [King Abdullah] economic city to number one recipient of FDI to the complement existing capacity on MENA region and Arab World. This the Red Sea. We have a dedicated is a vote of confidence both that our strategic business unit promoting foreign investment law [reaches] Saudi Arabia as a transportation and international standards and in the logistics hub, not only to cater to effectiveness of Saudi Arabia as a the local market but to 250 million destination for FDI. Of course, the consumers. sky's the limit in terms of how we can improve. Some of our initiatives What steps are you taking to are designed to complement the encourage investment and partforeign investment code in terms of nerships in knowledge-based introducing new incentives and industries? highlighting opportunities correlatIn terms of knowledge-based indused to our competitive advantages. tries, what we are interested in is not We will continue raising the bar as financial flow but knowledge and The growth of major cities such as Riyadh is testament to the an investment promotion agency know-how flow into Saudi Arabia. economic boom that Saudi Arabia is undergoing. and are confident we will maintain That's what makes knowledgeour position as the region's number one recipient of FDI. based industries, and there we're focusing on four sub-sectors: ICT, health, education, and life sciences, and we have created specific A five-year plan instituted in 2004 places an emphasis on investbusiness units for each of these. For a country that is an exporter of ment promotion in three key fields. How successful have you capital, the flow of investment is not as important as the flow of been at driving investment into the energy sector, for example? knowledge, ideas and innovation. Therefore, we are trying to develWe focus on three strategic business sectors ­ energy, transportaop strategic partnerships with global players. For instance, we tion and knowledge-based industries. In energy, we are focusing on signed a strategic partnership with Cisco during the visit of John four sub-sectors: anything that relies on gas as feedstock such as Chambers, the Chairman of Cisco, and we signed another with Intel petrochemicals; anything that relies on petrochemicals as raw during the visit of Craig Barrett, Intel's Chairman. More and more material such as finished plastic products; any energy-intensive global ICT leaders are visiting Saudi Arabia and we are entering into industries such as minerals; and power and water. strategic partnerships that will precipitate the flow of knowledge We have big initiatives in the field of energy. For example, we have and know-how into the country. Only then can knowledge-based launched The Plastic Initiative. Today, our global market share is less industries be stimulated. than 1%, but our goal is to hit 15% by 2020. And we have introHow has WTO membership impacted Saudi Arabia's business duced a number of initiatives to help us achieve that. Also, our global market share in petrochemicals has been increasing rapidly. environment? Our accession to the WTO was a vote of confidence, that our laws, Today we are at 7%, but we are expected to reach 14% in five regulations, policies and procedures are up to international stanyears. That sort of progress shows that Saudi Arabia is definitely dards. Saudi Arabia has always been a market-driven economy, an the destination for energy-related investment. Do you share the government's vision of Saudi Arabia as a open market and a business-friendly destination, despite some of regional logistics platform? How is that impacting transport the misperceptions. The ease of doing business here is far superior policy? to some or all of the Middle Eastern and Arab countries. Saudi After energy resources, the second competitive advantage of Arabia has been receiving FDI for decades, but the WTO serves as Saudi Arabia is its location, between East and West. There are confirmation that the country is definitely open for business. about 250 million consumers within three-hours flying time of The WTO is important because it opens markets for Saudi exports, the center of Saudi Arabia. So today, we aren't promoting Saudi rather than opening the Saudi market for imports because the SauArabia only on the strength of its own market, we are promoting di market has always been open for imports, with marginal duties the country as the launch pad for 250 million consumers. That compared to other countries. We believe that the WTO will provide means you need to develop your transportation infrastructure, us with a platform that will strengthen the industries correlated you need to have the right legislative environment and you need to our competitive advantages ­ energy-related, petrochemical, to have multiservice providers in all aspects: airports, airways, finished plastic products and so on. It will help us achieve our goal seaports, roads, rail, and so on. Only then can you integrate the of securing a greater global market share.

istockphoto/Callan Emery

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PME Safeguarding the kingdom's natural assets

RESPECT

IN FOR THE ENVIRONMENT IS A CONSTANT IN

BEDOUIN

CULTURE.

NOW,

A GOVERNMENT AGENCY

SAUDI ARABIA

HAS CODIFIED ANCIENT LAWS INTO INSTRUMENTS TO FIGHT GLOBAL WARMING.

When Saudis hear the word sustainability they don't necessarily think of carbon emissions. Instead, the word is associated with the inter-relationship of life forms on earth. For thousands of years, the sustainable use of resources has been part of the cultural priming in the Arabian Peninsula. Sir Wilfred Thesiger, the British explorer, marveled at the way Bedouins in the Empty Quarter rationed local resources. Water, a scant commodity, was shared by different tribal groups. The Presidency of Meteorology and Environment (PME) has incorporated this ancient belief system into its strategic planning. Its tenets are enshrined in the Basic Law, a charter of 83 articles that governs the kingdom day to day. According to Article 32, the Saudi authorities are responsible for protecting the environment and fighting pollution. In 2001, in an effort to strengthen its environmental framework, the PME developed a new action plan. It included a slew of strict regulations to comply with the U.N. Commission on Sustainable Development. The PME also promoted Prince Turki Bin Nasser Bin Abdulaziz, a former pilot, to the position of president. His rank is equal to that of a minister. So what does environmental sustainability mean in Saudi Arabia? Judging by the PME's upgraded status as an implementing agency, it means serious business. Instead of restricting its mandate to legislation, PME officials can now enforce environmental standards and penalize non-complying parties. An example could be fines imposed on a company that illicitly dumps waste into the Red Sea or uses asbestos to cut costs at a building site. Prince Turki's Presidency is also in charge of evaluating the country's ecological health by conducting studies and collecting data. It carries out meteorological and climatic modeling to determine global trends. The Presidency is a keen awareness builder. It supports educational tools such as a Pan-Arab news channel devoted to wildlife. Armed with a set of bylaws, the PME has defined new controls for air and water quality, carbon emissions and hazardous waste. The standards are in synch with changes in international law. The PME also holds yearly meetings with neighboring countries to coordinate work in sensitive areas such as the Red Sea, home to a large

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coral ecosystem, and the Gulf, vital to the global economy due to the heavy transit of oil tankers. Prince Turki is a tireless traveler, attending meetings in Europe and the U.S. to raise awareness about environmental issues affecting the Middle East. And the agency is keen to learn from the past. "We now monitor cities that are up and coming from the very beginning. We make sure that they are environmentally friendly and as clean as possible, taking care to address the challenges we faced in our cities in the 1970s," says Prince Turki. In its first phase of largescale development, the kingdom rarely included environmental impact studies. With the passing of new legislation in 2000, that has all changed. From day one, environmental impact is built into any industrial or earthmoving project. "All companies emitting gases or liquid discharges in violation of regulations have five years to correct themselves. If these are not corrected, the companies may be closed," says Prince Turki. Evidence of the Saudi commitment to sustainable development is that Prince Turki's ministerial duties are now on a par with other cabinet members. This allows the PME to coordinate tasks across ministries. As an example, Prince Turki cites his ability to consult with any Amarah (governor) on urban-planning issues, just as any other minister would. "We are putting a number of new staff in Riyadh, Jeddah, Medina and elsewhere for inspections. We have the power to inspect any facility, whether it is state-owned or private," says Prince Turki. The PME is particularly attuned to issues of global warming, which Prince Turki is quick to label a disaster. Saudi Arabia is a staunch supporter of lowering gas emissions from cars. "I'll give you one statistic about the environment: At U.N. meetings, the environment takes up 25% [of the time] at all the conferences. It is huge," says Prince Turki. The PME is preparing to receive former U.S. Vice President and environmentalist Al Gore for a series of panel talks in Saudi Arabia. "Without clean air and a clean environment," says Prince Turki, "life is not going to continue."

BY PAUL DE ZARDAIN

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Telecommunications: the connected kingdom

THE

ARRIVAL OF NEW FIXED AND MOBILE OPERATORS IS SET TO MAKE TELECOMS MARKET AMONG THE MOST COMPETITIVE IN THE

Saudi Arabia is set to become one of the most competitive telecommunications markets in the Middle East, following a burst of licensing activity earlier this year. The state-controlled Saudi Telecommunications Co. (STC), which until recently held a monopoly of all voice and data communications, will by the end of 2008 be facing competition from six voice and data operators (three mobile and three fixed) and two data-only operators. In March, the auction for the country's third national mobile telephony licence, overseen by regulator the Communication and Information Technology Commission (CITC), was won by a consortium led by the Kuwait-based operator Mobile Telecommunications Co. It bid a massive $6.1 billion, the highest per-person fee

SAUDI ARABIA'S REGION.

ever paid for a mobile licence ­ some $223 per head of population, according to Informa Media & Telecoms, a London-based research and market intelligence company. In April, the CITC awarded fixed-link voice and data licences to three companies ­ Verizon Communications of the U.S., PCCW of Hong Kong and Bahrain Telecommunications Co. (Batelco). The CITC had already licensed two carriers to provide data-only services ­ ITC and Al Bayanat Al Oula (First Data). The increased competition is expected to boost the number of mobile telephone subscriptions, which stood at about 24 million at the end of June, according to Informa, equivalent to a penetration rate of 87% of the population. The figure has been growing rapidly since the launch in May 2005 of the mobile operator Etihad Etisalat (operating under the brand name Mobily and controlled by Etisalat of the UAE). This company, which now has about 35% of the mobile market, has been the only real competitor to STC until now. Abdul Ghafar, Informa's research analyst for the Middle East and North Africa, predicts that total subscriptions will reach 29 million at the end of 2009 (equivalent to 102% of the population) and 34 million by the end of 2012. "Despite the high penetration figure,

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the market remains far from saturation," says Ghafar. He estimates that between 35% and 40% of subscribers have two SIM cards, so the actual number of users is about 14 million or just over half the population. "That leaves plenty of room for growth." Bo-Erik Dahlstrom, President of Ericsson Middle East, agrees: "When you look at population growth and the economic boom, you foresee substantial subscriber growth and business opportunities for all market players. In order to fulfil the demand of subscribers it's a natural development that competition is introduced." Daniel Jones, research analyst at Analysys, a Cambridge, U.K.-based consultancy and research company, argues that the new entrant will probably focus initially on selling to low-income users who do not currently have a mobile, rather than trying to win affluent customers away from STC and Mobily. "It is likely to introduce attractive prepaid offers to target under-penetrated segments such as the youth market," he says. Fixed voice penetration stood at 68% of households at the start of this year, according to Pyramid Research. But given the rapid growth of mobile services, this figure is expected to grow only to 77% by 2011. The success of new fixed-link entrants will depend on how quickly they can attract existing customers away from STC. But the main opportunity in the fixed-line sector is in the provision of broadband services, where penetration is low. According to Pyramid Research, only 1% of households had broadband at the start of this year. But another 18% had narrowband, and 38% had PCs, indicating the size of the opportunity. Pyramid expects broadband penetration to rise to 3% of households by the end of this year and 20% by the end of 2010. Dearbhla McHenry, Pyramid's Middle East analyst, predicts that there will be "quite a race" between the fixed-line operators to roll out their networks. "STC is now installing digital subscriber line as fast as possible," she says. But this technology is still not available to more than half of the population. McHenry adds that there will also be strong competition from high-speed mobile services ­ not least because these can be offered quickly to under-served regions. In some parts of the country, Mobily is already offering services at speeds of up to 3.5 Mbit/sec over its 3G network. And higher speeds are possible. Dahlstrom of Ericsson Middle East, which is working with STC and Mobily, says his company is now enabling speeds up to 14.4 Mbit/sec. "The mobile network now provides subscribers with mobile data access at high speeds, with very competitive packages. Subscriber figures and data traffic will reach new highs," he says. "Operators will be looking for more services and fast time to market to stay competitive and meet the market demand." BY NEIL MCCARTNEY

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Transport:

transforming the landscape

THE

KINGDOM'S TRANSPORT INFRASTRUCTURE IS PREPARING FOR CHANGE, ON A MASSIVE SCALE.

THE

GOVERNMENT AND PRIVATE

SECTOR ARE WORKING TOGETHER TO PUT THE COUNTRY AT THE CENTER OF A REGIONAL TRANSPORT NETWORK.

S

Saudi Arabia has embarked on a massive economic development drive with over $350 billion in new projects currently underway to support its goal of becoming a global industrial and business force. A good share of the investment is going into developing an efficient and cost-effective transport infrastructure that will enable the kingdom to become a shipping and logistics hub for the region. Developing an effective transport system in a country of Saudi Arabia's size, difficult landscape and climate, and soaring ambitions, is a formidable challenge. The government is already scrambling to keep up with the growth of existing urban and industrial centers even as plans for new cities are coming off the drawing board. To date, four new cities are at the development stage ­ King Abdullah Economic City north of Jeddah, Prince Abdulaziz Bin Mousaed Economic City in Hail, which is earmarked as a landbased transport and logistics center, Jizan Economic City in the south of the country and Knowledge Economic City near Riyadh ­ and several others are being planned. They will help to extend the benefits of development throughout the country but will also add to its transport demands. In his state of the nation address in April, King Abdullah made clear that he wants the private sector to become a strategic partner in

Booking online at Sama's offices

Saudi Arabia's economic development, and transport infrastructure is already showing the way. The new transport initiatives could also tempt Saudi travelers out of their cars as rail, air and sea links are upgraded in a country that has traditionally relied largely on road transport. Major rail projects now under development will transform the transport landscape over the coming decade. Saudi Arabia has a rail network, but with a 556-kilometer track built in 1956 and used for freight and a 449-km link built in the 1980s for passenger use, both of them linking Riyadh and Dammam on the Gulf coast, it is limited for a country that matches Western Europe in size. Planning is now underway for the $5-billion Saudi Landbridge, a 1000-km line that will connect Riyadh with Jeddah on the Red Sea coast and give Saudi Arabia its first coast-to-coast railway link. The Saudi Landbridge will cut transport times, boost efficiency and open new opportunities for the country to develop

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as a transport hub for the region. The government has already pre-qualified four consortia of local and international companies to develop it on a build-operate-transfer (BOT) basis. The winning consortium is expected to be chosen early in 2008 and will have 50-year operating rights for the project, which could possibly be extended to connect Jeddah Islamic Port with the industrial city of Yanbu. The new 2,200-km North-South Railway project (NSR) will connect the phosphate mines at Al-Jalamid and the bauxite mines at Zabirah to facilities in Ras Azur, while a passenger and general freight line will go from Qurayyat through a number of urban centers to Riyadh. The government will carry the estimated cost of $2.8 billion for the NSR but will leave its operations and management to the private sector. Saudi Arabia's aviation sector is also changing with plans for the privatization of Saudi Arabian Airlines (Saudia) and the launch of two private low-cost airlines in 2007, Sama and National Air Services (NAS). Both airlines have started well but are not expecting an easy ride. Saudia has already announced that it is planning to set up its own low-cost carrier. In addition, the airlines will not enjoy cheap fuel supplies as Saudi Arabia produces plenty of oil but imports its aviation fuel. However, there is certainly scope for air traffic in the country to increase. General Authority of Civil Aviation figures show that domestic air traffic has grown by just 42% over the past 10 years, while international traffic was up by just 32.9%. The figures are modest for a large country with a fast-growing population and a booming economy. Sama Chairman Prince Bandar bin Khalid Al Faisal is confident his airline will be a winner. "We know there is demand in Saudi

Arabia for such a service," says Prince Bandar. "We just have to overcome the normal obstacles that face any industry when you start to liberalize." He says the company chose the low-cost model "because we wanted to bring something new and because the low-cost model also means a greater utilization of facilities and equipment as you get more passengers going through a terminal but spending less time and this means good revenue for the airports."

Alan Whaley, General Manager of Al Saif Motors

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Prince Bandar is keen to move beyond the airline's current license restriction that confines it to the domestic market for its first two years, especially at a time when other low-cost operators in the region are picking up Saudi traffic. "It is not something we like because it cuts us out of the lucrative international market, but we will deal with it," he says. Although Saudi Arabia is exploring new transport options, the road network is certainly not being neglected. The country already has a comprehensive national road network with 150,000 km of roads, including a highway network linking Riyadh to Jeddah, the Eastern Province and population centers in the north and south of the country. In the 1980s, Saudi Arabia and Bahrain led the region with the 26-km King Fahd Causeway, a project that is now inspiring other ambitious causeway schemes in the Gulf region. Since 2003, the government has been spending heavily to upgrade the road system, allocating $5.3 billion for 3,950 km of new roads in the five-year period to 2007 and getting a raft of new projects underway, including a new expressway linking the established Jubail Industrial City with the new Jubail-II that was opened in 2007. Work is now underway on dozens of projects with a major focus on upgrading existing highways. Saudi Arabia's transport planners have to cope with an economic boom that is translating into more and bigger cars on the road. Major distributor Al Saif Motors, which counts prestige brands such as Jaguar and Range Rover in its stable, reports sales increases of as much as 20% a year, and it is aiming for even higher growth. "We are already among the leading distributors in the executive sector," says General Manager Alan Whaley, "and with all our expansion plans, we intend to become one of the largest in the Gulf."

King Abdullah has made clear that he wants the private sector to become a strategic partner in Saudi Arabia's economic development, and transport infrastructure is already showing the way.

The growth is good news for distributors and their customers but it is putting strains on urban transport networks and forcing the authorities to look for new solutions both in terms of infrastructure and management. Riyadh is now undertaking a five-year program to upgrade its road network but it is also looking to a metro system to help ease pressure, while both rail and bus options are part of the mix in an integrated public transport system now under consideration for Medina. The government has brought the private sector in to manage some new urban schemes with the Fluor Corporation of the U.S., for example, project managing a $530-million plan for new roads, bridges and other facilities for the Jeddah Municipality. Saudi Arabia's ports are already very much in the hands of the private sector with terminals at the country's eight ports all privately managed. King Abdullah Economic City north of Jeddah and Jizan Economic City in the south of the country are both to include major new privately financed and managed ports. It all adds up to a dynamic and fast-changing transport infrastructure in the kingdom where government and the private sector are working together to make Saudi Arabia's challenging geography an asset rather than a challenge. BY PAM DOUGHERTY

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Saudi Arabian Airlines: flying the flag

THE KINGDOM'S FLAG CARRIER FACES NEW COMPETITORS AT HOME AND FIERCE COMPETITION ON ITS INTERNATIONAL

ROUTES.

FURTHERMORE, INVESTORS ARE WATCHING CLOSELY AS THE AIRLINE GEARS UP FOR PRIVATIZATION.

THE ANSWER TO BOTH OF THESE CHALLENGES? NEW ROUTES, NEW TECHNOLOGY AND A FOCUS ON THE CUSTOMER.

With Saudi Arabia's ports already in the hands of the private sector and new operators poised to enter the telecoms sector following a round of new licenses issued earlier this year, the kingdom's aviation sector is also being opened up to market forces. Two private low-cost carriers recently began serving domestic routes and the nation's flag-carrier, Saudi Arabian Airlines, is preparing for privatization. Executives are readying the airline for both challenges with new routes, new technology and a renewed commitment to customer care. Saudi Arabian Airlines' Director General, Khalid A. Almolhem, embraces the more competitive market,

Above: Khalid A. Almolhem, Director General of Saudi Arabian Airlines right: Yousef Attiah, Vice President of Customer Services

and even suggests that it will be good for business. "Competition is beneficial as it promotes efficiency and sets high service standards," he says. "Saudi Arabian Airlines has always believed in the advantages of competition and has benefited from it in its international operations. It not only helps competing entities perform to higher standards, but benefits the customer in many ways from lower costs and better services to increased options." Almolhem points out that a vibrant economy, development projects spread nationwide, the kingdom's strategic location between Asia and Europe and the privilege of being the land of the Two Holy Mosques bring benefits of their own. Saudi Arabian Airlines, he says, "is determined to use this as an opportunity to improve its service and set new standards in customer care." That dedication to customer care is already yielding dividends. The launch of e-ticketing on domestic routes on Feb. 4 proved a resounding success. "Today, all 26 domestic stations are issuing e-tickets," says Yousef Attiah, Vice President of Customer Services. Attiah says the domestic rollout was successfully followed by the issue of e-tickets for key international routes. He's bullish that by Dec. 31, the airline will be enabled for full e-ticketing, and not only at airline offices and travel agents. "We have already launched e-ticketing through our Web site. From

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the launch on April 1 to mid-May, we issued some 5,000 tickets this way, which is very encouraging." A relaunched Web site with new content, greater customization and a simplified booking process is also expected to yield results. "It is friendlier and more practical. In two years, we expect to get 30% of our business through the Web site," Attiah says. "Our culture is very accepting of new technology." New routes attest to confidence that demand will remain buoyant. In the year to June 2006, passenger numbers grew more than 9.5% and a positive performance was recorded on almost all key indicators. In June, Saudi Arabian Airlines launched new routes to Munich (from Riyadh), Vienna (from Jeddah), Athens and Manchester. "Our planning depends on a lot of research to ensure these flights will be successful," Attiah says. A new flight schedule to the U.S. and promotional fares signify a strong push into that market. "The airline offers special fares to our customers in the U.S. market. Many of our customers are students and the government wants to help them." Despite the intense competition on international routes and growing competition at home, Saudi Arabia's General Authority of Civil Aviation (GACA) suggests there is room for expansion. According to GACA figures, there has been a 42% rise in domestic air traffic over the past 10 years in Saudi Arabia. Compare this though with another large and economically vibrant country: In China, domestic air traffic grew 16.7% in the first half of this year alone, compared with the same period a year earlier, according to China's aviation regulator, the General Administration of Civil Aviation. The figures give an indication of the potential of Saudi Arabia's domestic aviation market. This potential, combined with Saudi Arabia's rising affluence and an expectation that the market for tourism is likely to be developed, will certainly be of interest to investors. Saudi Arabian Airlines' privatization is due to be completed by 2009. The airline will be split into six strategic business units (SBUs) and these will be put to the market individually. The first, Catering, is to be privatized this year and the remaining five ­ Cargo, Ground Handling, Technical Services, Flight Academy and the core airline business ­ will follow. The catering unit has operated profitably and independently since its launch in the 1980s, so was considered a good test of market interest. The six SBUs, each with their own functional departments, strategic partners and investors, will work under a common mother company. "For me, privatization is a must," Attiah says. "It will make the organization more dynamic and more responsive to the customer." Despite the challenge of greater competition in his home market, Attiah remains confident that the strong focus on customer care will win over the Saudi traveler. "New competitors have entered the market giving more freedom and more choice to customers," he says. "It's a challenge, but we have to deliver new products and services to these customers." But he insists that the service speaks for itself. "We have good products and a modern fleet equipped with the latest technology and the latest entertainment systems. I'm not biased, but I can tell you as a customer, Saudis prefer Saudi Arabian Airlines because they feel secure, they feel safe and they feel at home," he says. "Saudi Arabian Airlines is a symbol of Saudi Arabia."

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SAUDI ARABIA Infrastructure

Expanding horizons

SAUDI

PORTS ALREADY ACCOUNT FOR

95%

OF THE COUNTRY'S BURGEONING IMPORTS AND EXPORTS, BUT THEY HAVE SET THEIR SIGHTS ON A REGIONAL ROLE.

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When the 2.6-million-square-meter Millennium Port in King Abdullah Economic City is completed north of Jeddah it will be one of the 10 largest in the world, and a clear indication of the change in Saudi Arabia's thinking about its position in the regional and global economy. Previously, Saudi Arabia had focused on developing its ports to serve domestic needs. Now it is looking to a combination of expanded port facilities and the Saudi Landbridge project ­ a new rail link that will connect the east and west coasts of the country ­ to establish the kingdom as major transshipment hub linking Asia, Africa and Europe. It promises shippers considerable advantages in terms of time saving, lower costs and convenience and already talks of competing with established Gulf hubs such as Dubai. The Millennium Port typifies the new approach. Designed to handle the world's largest super vessels, it will be supported by an integrated transport system that will include rail, road and air links. Its developers say this should make it a hub, both for the kingdom and for goods moving between Europe, Asia and Africa. It is a prospect that regional transport analysts are beginning to take seriously. Mike Wing, Director (Transportation) at U.K.-based Hyder Consulting believes that Saudi Arabia could be the most logical hub in the region. "Saudi Arabia already has the largest population and market in the region, while as a hub it has the ability to serve Jordan, Iraq, Bahrain and Qatar, and if the planned

causeway between Bahrain and Qatar goes ahead, there will be terrific interconnection for the entire Gulf," he says. Wing doesn't necessarily see a win/lose situation developing, even if competition with established regional hubs heats up. "Geographically and spatially, Saudi Arabia is better structured for the movement of the heaviest goods and materials and is already the largest market [for them] in the region," he says. "And if the rail network develops as planned and as the new economic and industrial cities develop, Saudi Arabia is likely to focus on industry-related activity and the movement of the heaviest goods while Dubai is likely to retain its particular market in higher value goods." While the Millennium Port remains a distant prospect, the development of Saudi Arabia's existing ports over the past two decades has already generated impressive improvements in capacity, efficiency and productivity. Since the establishment of a single Saudi Ports Authority in 1976, all ports have worked under unified rules and regulations. And since 1997, the authority has completed a privatization process that has led them to be fully managed and operated by the private sector on a commercial basis. As each of the ports already had independent terminals for the handling of different types of cargo, such as containers, general, reefer and bulk, each element has been privatized separately. Saudi Arabia currently has eight ports, including three main container terminals ­ two at the Jeddah Islamic Port on the Red Sea coast and one at Dammam on the Gulf coast ­ while the industrial cities of Jubail and Yanbu each have both a commercial and an industrial port. The port of Dhiba at the north of the Red Sea coast has good access to the Suez Canal, while the southern Red Sea port of Jizan is well located for traffic to and from Asia and Africa. Since the mid-1990s, total capacity at the ports has increased from 31 to 183 berths; productivity has trebled from 489 tons per berth to 1,550 tons; while operating costs have declined from $40 per ton to less than $1.60 per ton. Today, some 95% of all Saudi imports and exports pass through its own ports, with exports making up 70% of all cargo. The total cargo handled by the ports reached 133 million dead weight tonnes in 2006.

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The development of Saudi Arabia's existing ports over the past two decades has generated impressive improvements in capacity, efficiency and productivity.

The ports are now introducing the SaudiEDI system, which has been developed by the Ministry of Finance and the Customs Department to promote more efficient interaction between government agencies and private business, and offers electronic services to facilitate both import and export activity. As Saudi Arabia uses the revenues generated by high global oil prices to finance a massive economic expansion program, its port network is being expanded to meet the needs of scores of new industrial, commercial, residential and tourism ventures. International Port Services (IPS), which operates the container terminal at the King Abdulaziz Port in Dammam on the Gulf coast, has completed an multimillion-dollar project to expand capacity to some two million TEUs (twenty-foot equivalent units). The port serves the needs of the energy industry in the Eastern Province and General Manager Naeem Bin Ibrahim Al-Naeem says it registers an 8% to 10% increase in traffic each year and he anticipates reaching 1.5 million TEUs within the next six years. Al-Naeem is confident about Dammam's prospects. "We are the main port in the east of the country and close to the main industry in Saudi Arabia, we serve both Riyadh and the south and we are close to Bahrain, Kuwait and Qatar," he explains. He points out that the port is also updating its operations. "With our new products, equipment and operations system, we are ready to push our volumes and we can compete with any port in the world." He welcomes the new Saudi Landbridge project. "The benefit will not only be for the port or for Saudi Arabia but for other countries as well. The Landbridge will save a lot of time as it will take just 12 hours for the cargo to get from Jeddah to Dammam and on to other Gulf countries and this is very good for us," he says. "It will make a huge difference in the exchange between East and West but also between the east of the country and Jeddah." Jeddah Islamic Port is already the major hub for the Red Sea region and Director General Saher Tahlawi says the construction of the Landbridge will extend its reach right across Asia. "We are already going for a major expansion with the building of a third terminal," he says. "Now we have an agreement with the operators of our two existing terminals to add five new berths."

The third terminal at Jeddah will be built and operated on a build-operate-transfer (BOT) basis by Saudi Commercial and Export Development Company (Tusdeer) under an agreement signed with the Saudi Ports Authority in May 2006. The $443million project is due for completion by 2009 and will be able to handle 1.5 million containers, boosting the port's overall capacity by 45%. Even before the third terminal is completed, Tahlawi says the Saudi Landbridge project is encouraging the port "to think of even more expansion." King Fahd Industrial Port at Yanbu on the Red Sea coast, some 300 kilometers north of Jeddah Islamic Port, was purposebuilt to serve the Yanbu industrial complex and is a major terminal for loading crude oil, refined products and petrochemicals. It has proven its quality by winning the "Century International Diamond Quality award" for three consecutive years. The King Fahad Industrial Port in Jubail is adjacent to Jubail Industrial City and handles the import of raw materials required by local industries and heavy industrial exports including petrochemicals, refined petroleum products, chemical fertilizers and sulphur. In June 2006, a new $97million, 800,000-square-meter wharf for petrochemicals was opened at the port, and with both Jubail and Yanbu now expanding to a second phase, their ports are slated for further expansion. The benefits of developing new port facilities will be felt across the economy and will support the expansion of less visible industries in the kingdom, such as fishing. It has a long history in the country but has been upstaged by the vast energy and industrial sectors. However, Saudi Arabia still has one of the largest fishing industries in the region and firms such as the Saudi Fisheries Company are gearing up for another wave of expansion. The company was created in 1980 as a mixed public/private-sector venture working in the Red Sea and the Gulf, and it later added shrimp farming to its activities. Chief Executive Officer Abdullateif M. AlMubarak says it is now expanding and upgrading on all fronts. "I am planning on applying new technology in processing, increasing our retail outlets, opening seafood restaurants, establishing national markets and also expanding the shrimp farm," he says. The company has also developed a wide spread of export markets including the U.S., Japan, Korea, the Middle East region and the GCC, and Al-Mubarak says he is keen to enter the European markets as well. The upgrading of Saudi Arabia's ports generally, and specific measures such as plans to include facilities for the fisheries industry in the port at Jizan Economic City on the Red Sea coast, some 730 km south of Jeddah, will help support his ambitions. BY PAM DOUGHERTY

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MGC: landing opportunities

AT

THE HEAD OF A CONGLOMERATE THAT SPANS SECTORS AS VARIED AS PUBLISHING AND TRADING, OF

NABIL AL-JAMAL IS SURE OF MGC'S CONSTRUCTION, AND HIS COMPETITIVE EDGE.

CORE BUSINESS

"I was practically born on a construction site," says Nabil Al-Jamal personally sponsored several Saudi students abroad and is looking to establish a foundation to encompass all of the company's with a smile. social activities. "There is also a general labor shortage which Based at MGC's headquarters in Jeddah, the 47-year-old company could be solved by making it easier to bring foreign workers President and CEO, who comes from a family of contractors origiinto the country." nally from Jordan, has built one of the fastest-growing civil conThe Ministry of Labor recently increased quotas for foreign struction companies in the kingdom. "To say that the construction workers in the construction industry from 70% to 95%. Rules business here is booming is an understatement," says Al-Jamal. have been relaxed to support the large-scale infrastructure pro"We can safely say that it's exploding." jects underway in the kingdom ­ some 800,000 new visa appliA resident of Saudi Arabia since 1966 and a Saudi at heart, Al-Jamal cations were accepted last year. However, Saudi officials are speaks of the kingdom as a land of opportunity, comparing it to the considering the possibility of increasing expatriate recruitment U.S. "At the moment, this country offers one of the most attractive costs for the private sector as a way of easing rising unemploybusiness environments in the world," he states confidently. ment among young nationals. The country's economic boom is posing a massive challenge for To address the shortage of construction materials, Al-Jamal is construction companies to meet the demand for ever-more sophisticated and ambitious projects. These are some of "the problems of looking to manufacture building materials such as concrete, steel and aluminum in the near future. "I see a new edge in the busisuccess," according to an economist at National Commercial Bank, ness of manufacturing," he says. Steel consumption in particular is the kingdom's largest. picking up rapidly as the ability to build very quickly with it has Megaprojects aside ­ the multibillion-dollar King Abdullah Ecounderpinned a big market share in private-sector construction, nomic City among them ­ Saudi Arabia is in constant need of new and innovation has been spurred by hotels, residential developments, and competition with other materials, retail and office space. These are sectors particularly concrete. of the construction industry where MGC While lavish public-works contracts has already established a reputation over may be less common in Saudi Arabia, the past five years. The company combuild-operate-transfer (BOT) contracts bines financial power with technical with private firms are on the rise, an expertise and provides a full range of serevolution which businessmen like Alvices, including civil works, construction Jamal greatly appreciate. "I believe in and cost control. "We have executed partnership," he says. "Rightly, we are some 39 major projects in the kingdom now treating international investors as in the past five years, and in Jeddah our partners, not contractors to be disalone we have built more than 20 shopcarded when a project is over. The realping malls," says Al-Jamal. He notes ity is that they are making a positive quietly that MGC delivers projects in impact and that the Saudi market really record time and cheaper than the comneeds them." petition. "And we do not cut corners to Al-Jamal also praises the economic stewmeet deadlines," he adds. ardship of King Abdullah, who, in spite of One of the company's showpieces is the high oil prices, has seized the opportunispectacular 300,000-square-meter Alty to press forward with reforms to further Andalus Mega Mall in Jeddah, a project liberalize the domestic market. "While completed in only 18 months. "The comother countries would be complacent petition," Al-Jamal points out, "needed Nabil Al-Jamal, President and CEO of MGC with a similar economic performance, this nearly double the time." government has not sat back and used "At the moment, we are negotiating to prosperity as an excuse to avoid taking really tough decisions," he build a new hotel in Mecca for one of our clients," says Al-Jamal. remarks. "Who today can doubt that industrial and commercial The holy city of Islam has undergone astonishing development in development work better in the hands of the private sector? Some recent years, and prime building land is sold today at some people in the kingdom have been nervous to become part of the $300,000 a square meter. great global economy, but I am not among them." The building boom has inevitably created bottlenecks. Al-Jamal Half of Saudi Arabia's real GDP growth in 2006 is attributed to the talks about the shortage of manpower and building materials as non-oil sector, where exports are increasing some 13% a year. "This some the biggest challenges facing Saudi Arabia's construction country is growing into an industrial and commercial powerhouse industry. Shortages have led to rising construction costs in recent that will thrive and prosper whatever happens to the oil price," says years, as much as 15% in 2006 alone. "There is a lack of expertise Al-Jamal. "Saudi Arabia is changing slowly, but surely." in some engineering disciplines, which needs to be addressed by encouraging careers in the industry," says Al-Jamal, who has BY AMANDA TAYLOR

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Courtesy of Asdaa

Masterplan for the multibillion-dollar King Abdullah Economic City, north of Jeddah

The shape of things to come

FROM

RESIDENTIAL COMPLEXES TO INDUSTRIAL CLUSTERS, LARGE-SCALE CONSTRUCTION IS A RESULT OF THE OIL BOOM. IT ALSO SERVES AS A CATALYST FOR THE NON-OIL SECTOR.

L

Like neighboring countries, the Kingdom of Saudi Arabia is feeling the impact of billions of petrodollars. State coffers have amassed some $300 billion, according to analysts. That is what oil prices can do for an economy that is 80% dependent on natural resources. Much of the capital at Riyadh's stock exchange is being allocated to construction and development. But in the country's second development thrust, talk is of intelligent cities and industrial clusters, and for the first time environmental concerns have been integrated into urban planning. While the kingdom is not looking to compete with the glamour offered by nearby Dubai, the overall strategy is the same: to promote growth in the non-oil sector. Central to that objective are the new cities planned for development across the country. Through the economic cities initiative, the government aims to develop vibrant urban areas with a business-friendly environment that leverage Saudi Arabia's competitive advantages ­ low-cost energy and a strategic location. The development of King Abdullah Economic City alone will cover some 180 million square meters north of Jeddah and will comprise an industrial zone, a central business district, a resort district, an educational zone, residential communities and a

seaport expected to be among the world's largest on completion. Facilities will include a grand mosque, 4.5 million square meters of parks, a sports stadium and a university. The government has made clear that this is to be a private-sector led initiative, but will work with the developers to ensure that the cities offer stateof-the-art, custom-designed infrastructure. In the 1970s, during Saudi Arabia's first major development phase, urban contractors built roads, hospitals, pipelines and sewage systems for the state. Sports complexes and power plants came shortly afterward. This led to an eclectic urban grid of manufacturing plants built alongside office buildings, hospitals, schools, stadiums and mosques. During the first phase, the Dallah Albaraka Group was involved in major construction projects nationwide, including the building of roads, hospitals and the installation of pipelines and a utilities network. The company is responsible for Riyadh's sewage system, the central sports complex and electric power stations. Since 1994, Dallah Albaraka has overseen the maintenance of the two holy mosques and key pilgrimage sites in Mecca and Medina. Soon after, the company opened phase one of Durrat Al Arus Tourist City on the Red Sea, 60 kilometers north of Jeddah.

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Saleh Ali Al Turki, President of Nesma Group

Construction, even in this first wave, made economic progress for the private sector possible: by 2006, Dallah Albaraka was ranked 5th among the kingdom's top 100 companies. Today, the group comprises eight different holdings with specialized activities ranging from construction and service projects to international trade, finance and media production - and generates a multibillion-dollar turnover. According to its President and CEO, Abdullah Saleh Kamel, the aim of his conglomerate is to enhance the lives of all Saudis, from family television to the roof over their heads. Dallah Albaraka is currently at work on

two megaprojects: the construction of King Abdul Aziz Road, which connects the mercantile city of Jeddah to the holy city of Mecca; while at Durrat Al Riyadh, Dallah Real Estate and Tourism Development Co.'s head engineers are moving the desert to make way for an exclusive 800-residence suburb to provide state-of-the-art housing. The trend toward residential complexes is another consequence of economic as well as demographic growth. According to Khalid Alireza, the Vice Chairman of Xenel Industries, the mortgage boom is giving new momentum to a construction sector that has so far focused principally on developing a first-class infrastructure. "A middle-income person, instead of forcing his children to live in the same house may build a house next door for them. What does that mean? That means more cement, more blocks and more cable. That's good for me and, more importantly, for jobs," says Alireza. The financial institutions underwriting the mortgages are also keen to see construction ride out an environment of high oil prices. "When we first began in construction in 1980, most of the contractors were non-Saudis. The sector was dominated by East Asian companies," says Saleh Ali Al Turki, President of Jeddahbased Nesma Holding Co. From its beginnings in governmentdriven maintenance projects, Nesma began to move into infrastructure and today the company is heavily involved in oil and gas construction. "We work wherever Aramco is," Al Turki

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In this second development thrust, talk is of intelligent cities, industrial clusters and the environment.

says. In this field, the company now has Spanish and Canadian partners. While Nesma's core business areas have traditionally been project-based, there has recently been a move to incorporate more consumer-based activities within the group. Today, among other activities, the company boasts the largest hotel operation in the kingdom, and is moving into telecoms, electronics, information technology and real estate. "The more sophisticated the market becomes, the more you have to develop your services," says Al Turki. "Today, construction is our best business, but we have learned that every aspect of a business is important." Al Turki is constantly on the lookout for business partners, recognizing the key role they play in the company's development. "A large measure of our success depends on our ability to work with partners. In fact, our growth came through joint ventures," he says. "We are looking for partners in construction and we are looking for partners in oil and gas to complement our businesses. This is because there is lack of [resources] and competition is not only about getting the business but about keeping the resources. Qatar is booming, the Gulf is booming, China is booming, so everybody is competing with everybody else. That is the major problem with any country in the world, a lack of resources and qualified manpower," he says. Since Saudi Arabia joined the World Trade Organization (WTO), interaction with foreign firms has taken on new meaning. They are no longer regarded purely as sources of knowledge transfer, but more as globalizing agents. Joint ventures have turned Xenel Industries into a world-class player. Khalid Alireza, the Vice Chairman, is at ease managing a real estate project in Orlando, Florida, while keeping an eye on a $1.6 billion hydroelectric dam in Pakistan. "We have to sustain diversification," says Alireza. The aim is to maximize local assets through ingenuity, not oil crude alone. Large conglomerates like Xenel Industries can maintain their cash flow in the construction sector, but increasingly they can spin off into added-value manufacturing of petrochemicals, pharmaceuticals, chemicals and food. Even tourism is no longer driven by religious pilgrimage alone. "Within three or four years, we're going to see the number of visitors move up from four million to 10 million a year. These people will require hotels, motels and restaurants," says Alireza. Fahad Al Jarbou might be the perfect example of an engineer turned global entrepreneur. As Managing Director of the Saudi Chemical Company, a specialist in explosives, and Sitco Pharma, a leading distributor of pharmaceuticals, he is also versed in multitasking. "Until 1985, explosives [for the construction sector] were mostly an import business. That is until we built a factory," says Al Jarbou. Prior to that, all the dynamite needed at construction sites and strip mines was shipped in via Swedish partners. The story of explosives has not changed dramatically, according to Al Jarbou. He mentions a shift away from traditional dynamite, which is unstable. The firm has developed a self-deteriorating explosive product that makes it safer to store. "You cannot have an accident with this product," Al Jarbou says reassuringly. Relations with foreign investors helped Al Jarbou attain several benchmarks along the way. In 2000, Saudi Chemical was awarded ISO 2000 certification. Al Jarbou adds that knowing a country like the back of your hand also helps. "Our experience is a very safe bet for any multinational." BY PAUL DE ZARDAIN

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Building-materials firms offer a local advantage

THE EXPLOSION OF CONSTRUCTION ACTIVITY IN SAUDI ARABIA HAS GENERATED A BOOM FOR THE BUILDING-MATERIALS INDUSTRY. LOCAL

MANUFACTURERS OF STEEL BEAMS AND RESIN LAMINATES ARE LEADERS IN THEIR SECTOR.

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Why should Chinese construction firms be concerned about the rise of building materials made in Saudi Arabia? Because much of the expertise accumulated in the kingdom's recent construction boom is embedded in new product lines: steel re-bars with high traction grades, cement for ultra-dry weather and slick resins for housing exteriors. Many of the components, such as laminates, are not instantly recognizable, but they are there, working silently in the unforgiving climate of the Arabian Peninsula. The industry formula has changed the way head engineers in the Middle East manage their supply chain. In addition, the kingdom has implemented strict quality controls to minimize cheap imports from Asia and comply with WTO regulations. When it comes to structural mechanics, quality is the measure of all things.

The production of cable for the construction industry is soaring

Sipco Paints:

A coat for every occasion

At the time of Sipco Paints' foundation in 1983, Saudi Arabia had only one other manufacturer of external coatings, and most of the coatings for the oil and petrochemical industry were imported. Today, the company provides for the needs of Middle East customers across the spectrum, from home decoration to world-class industrial coatings. The company's product portfolio is extensive. "There are decorative coats for hotels, hospitals and villas, and industrial coatings for manufacturers of furniture, refrigerators and cars," says Ahmad Al Jomha, the General Manager. In addition, there is a range of protective coatings that cater to the oil & gas industry. "Protective coatings are for Saudi Aramco, petrochemical plants, pipelines, bridges and all the steel structures where metal needs protection from the elements." The company has stayed at the forefront of new technology, investing in technical licensing agreements and developing home-grown solutions. This, combined with a holistic sales approach, has given the company a leading edge. Seventy showrooms market the company's decorative coating products. WTO membership will pose a challenge for Sipco. But Al Jomha cites his in-house R&D unit as a competitive advantage, allowing the company to respond to specific customer needs. "Our R&D lab has been developing products to suit the environment in this region, not just for decorative paints but across the market. Our competitors just don't have that sort of facility," he says. "We know this market and we have a tremendously good track record in it."

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"Our components may be unseen, but they are important to industries that make products for everyday use. For instance, how does formaldehyde grow food? The answer is it doesn't, but it's an ingredient that determines the quality of fertilizer used in growing crops," says Mazen K. Allahiq Alnaimi, the Managing Director and founder of United Gulf Steel (UGS) and Modecor, a manufacturer of surfacing materials. Alnaimi is also the founding shareholder of Chemanol (formerly Saudi Formaldehyde Chemical Co. Ltd.), the flagship formaldehyde/methanol firm established in the industrial city of Jubail in 1991. The super-plasticizers produced by Chemanol are custom-made for the region's extreme weather conditions. Looking at a fine-grained Modecor product can be a challenge. The company's range of ultra-thin laminate surfaces comes in different colors, designs and textures, and the ready-made surfaces can be imperceptible to the naked eye. A process known as Continuously Pressed Laminate is responsible for the varying thicknesses. Chemical engineers have also devised a thermal process to seamlessly fuse components onto particle boards. With ModeShield protection, the materials are often scratch-proof. The plant, located in Jubail, uses German technology to produce edge bands, chipboards and parquet flooring. First launched in 2004, Modecor has already been ISO 9000:2000 certified. It recently passed muster at the American Society for Testing Materials, paving the way for exports. Modekor Europe, based in Rothenburg, Germany, is leading expansion into the European Union. As the largest producer of building materials in the Middle East, Saudi Arabia is a natural leader. Since 2000, the sector has optimized its role as feedstock for the construction frenzy in the region. High international oil prices means petrodollars are not reinvested in capital markets abroad but are being allocated to large-scale infrastructure developments. Figures from The National Commercial Bank (NCB), the kingdom's largest, put the contribution of construction and building materials to the economy at some $12 billion a year. Furthermore, having started from the base of import substitution in many areas, the kingdom is now a net exporter of cement, stone, glass, cable wire, flooring products and laminates. For Alnaimi, domestic investment in the sector is virtually untapped, however. International players have had to take up the slack. They have expressed interest in companies like Modecor and UGS that aspire to eliminate the constraints posed by imports. Alnaimi thinks his philosophy of combining low-cost inputs with growth in domestic demand is only logical. After all, trade finance is unnecessary because sales are in-house. "Local producers have a distinct competitive advantage over importers. The time to market is shorter and customers can choose size and shapes, thus doing away with the constraints of uneconomic import quantities. I often find that markets are bigger than people

Figures from The National Commercial Bank put the contribution of construction and building materials to the economy at some $12 billion a year.

imagine. And they always accept a player with a winning value proposition," says Alnaimi. An environment of low oil prices in 1998 first encouraged Saudi industrialists to branch out into new areas. Consistent with Chemanol's strategic diversification, Alnaimi took on the challenge of coming up with innovative solutions for old supply problems. He utilized resources at Chemanol to conceptualize the projects configuration based on methanol. One of the results was to produce a range of toxin-free solvents for coatings. Demand for the environment-friendly finishing products soared. It was the kind of adrenalin-fueled venture that Alnaimi loves to take on. "Our true competitive advantage has always been the ability to commercialize opportunities rapidly. I bring a venture-capitalist mindset to growing a company. The only difference is a venture capitalist harvests and exits. I harvest and re-invest," says Alnaimi. In the 1990s, steel imports far exceeded domestic production. Even today, Saudi Arabia is still a net importer, but cheap natural gas and high levels of automation allow Saudi steel mills to bank on cost advantages. The upsurge in construction means companies like UGS, which initially grew out of the need for locally produced steel, will continue to expand. In industry jargon, the firm has come to be known as a niche manufacturer of "medium-section long products." The half-millionton plant delivers these pieces to a variety of industries, including assembly lines for transmission towers that are later exported to Latin America. Demand for steel was pushed up a notch when the kingdom launched construction projects at Yanbu, a city on the Red Sea. With a price tag estimated at some $30 billion, orders for beams translated into a gravytrain for UGS. The $26.6 billion-King Abdullah Economic City (KAEC) near Jeddah is another case in which the private sector is playing a key role. "The strategic principle here is self-sufficiency. Middle East steel consumption should be wholly met by regional producers. We have the potential for 7 to 8 million tons of new capacity, or approximately 70% of our present import volume," says Alnaimi. With Saudi membership in the WTO, the edge for domestic firms is squarely in the field of ingenuity. WTO regulations will help set standards in construction materials by placing the sector's output under

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"Local producers have a competitive advantage over importers. The time to market is shorter and customers can do away with the constraints of uneconomic import quantities."

more international scrutiny. The tradeoff is that Saudi firms will be protected against barriers to exports of steel, laminates and paints. All this means a healthier investment climate for the kingdom. Meanwhile, the supply of cement has undergone its own imperceptible revolution. The eight cement makers in Saudi Arabia are working to keep up with the breakneck pace set by large-scale construction projects such as KAEC. A ninth cement plant will come

on-stream in 2008 near Jeddah, adding around one million tons to domestic output. Rami Al Turki, Executive Director of the Khalid Ali Alturki & Sons Group, heads one of the best-performing cement factories in the kingdom: Saudi Readymix. The factory will produce 3 million cubic meters of ready mix concrete in 2007. The firm also produces pre-fabricated concrete blocks, which offer cost advantages to developers. The staff of 1,500 at Saudi Readymix has raised quality standards to a point where exports to Europe are also an option. "We started in this industry back in 1976 through a joint venture with a U.S. company," says Al Turki, and growth has gone from rapid to explosive. Saudi Readymix is growing at 30% a year, according to Al Turki, and it has had to implement a strong acquisition strategy to meet demand. Buyouts of large cement makers in the Gulf States and other countries in the region are not excluded. The WTO poses as many benefits as it does headaches, but at the end of the day, says Al Turki, the benefits will outweigh any detrimental effects on cement makers. "It's going to be survival of the fittest and it's going to force us to improve our services. It's a natural evolutionary process." A diversified product line will also help. With high international prices for methanol and its derivatives, it makes sense for firms like Chemanol to keep producing solvents for building and coatings applications. But steel billets can guide the way into the future for UGS if oil prices were to go soft. Much of the success of Saudi building-material manufacturers will rest on production costs. China commands a 35% share of the global business, but the high energy inputs required do not make an advantage sustainable in a country poor in natural resources. Natural gas, which serves as feedstock at steel mills and downstream industries, is cheap and plentiful in the kingdom. Alnaimi thinks the current environment tips the business rationale towards Saudi Arabia. Even with an undervalued currency, he says, Saudi Arabia can meet the challenge from China. "The competitiveness of nations is entering a new phase. China and Taiwan are discovering that entering the Saudi market is a tougher proposition than in the 1990s as companies like Chemanol, UGS and Modecor, and many others, provide the edge that comes with a new phase of industrialization in Saudi Arabia," he says.

BY PAUL DE ZARDAIN

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A healthy outlook

AN INCREASINGLY SOPHISTICATED HEALTH-CARE SYSTEM FACES THE CHALLENGE OF RISING DEMAND FOR ITS SERVICES. A LIKELY OUTCOME IS A GREATER ROLE FOR THE PRIVATE SECTOR AND MULTINATIONALS.

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Saudi Arabia is building a reputation for medical excellence and sophisticated research and is attracting highly skilled staff from around the world to work in its modern hospitals and dedicated research facilities. But, like many European countries, the kingdom is expected to experience a sharp increase in demand for healthcare services and will need to create a system that is more responsive to the needs of Saudi citizens. A report from the global management consultancy Booz Allen Hamilton says population growth, an aging society, and the conditions that affluence often exacerbates, such as diabetes, cardiovascular diseases and cancer, will mean that growing numbers of people will require access to world-class health care. The percentage of people aged 60 and over is expected to more than double by 2020 from about one million (4% of the

population) to about 2.5 million (7%). At the same time, obesity is on the rise, says the Booz Allen Hamilton report entitled The New Saudi Arabian Healthcare Market. In a bid to deal with increasing demand, there is a boom in hospital and clinic construction. Figures from Research and Markets indicate that in 2005 alone $448 million was allocated to the construction and renovation of health facilities in the kingdom. But while building continues apace, the cost of treatment will also continue to rise ­ the kingdom spent $13 billion on health care in 2005 and this is expected to grow to over $20 billion by 2016.

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Ziad Fares, a health expert at Booz Allen Hamilton, says: "In order to cope with the future needs of the country, Saudi Arabia is finding that it must make substantial changes to the way it conducts health care." Currently, the Saudi Arabian government funds most of the country's health care ­ which is free to all Saudi citizens. This includes a network of health-care centers and national specialist tertiary-care hospitals to deal with patients who need advanced or specialized treatment. However, the private sector is likely to play a much bigger role in the future, as Fares explains: "Saudi Arabia's health-care system is ripe for investment opportunities. The growing affluence of Saudi Arabia and the GCC region as a whole means that the healthcare systems of these nations will need both money and expertise from outside sources in order to cope with an aging population."

Jeddah BioCity

Leading the development of a knowledge-driven economy

istockphoto/Andrei Tchernov

Kingdom Hospital employs state-of-the-art equipment

And he adds: "The fully nationalized system that served an earlier era well is no longer suited for the complex, dynamic country that Saudi Arabia is becoming. For both economic and public health reasons, the government is committed to a course of change that will in the end create a system that meets the needs of Saudi consumers." Saudi Arabia has a shortage of home-grown doctors and nurses and has identified the need for new medical schools ­ some of which will involve investment from the private sector. The kingdom is also looking to create partnerships with leading medical schools overseas. In addition, Saudi Arabia is creating a stronger framework to promote private-sector investment in health care and the production and distribution of pharmaceuticals and medical supplies. Currently, the Saudi Arabian pharmaceutical market is the largest in the Gulf region and was worth an estimated $1.14 billion

Jeddah, one of the oldest cities on the Arabian Peninsula, was also one of the first in the region to venture into the biotechnology field with the establishment in 2002 of the Jeddah BioCity Company. This venture is just one component of the kingdom's concerted push toward a knowledge-driven economy. Part-owned by the King Faisal Specialist Hospital and Research Center in Riyadh, Jeddah BioCity Co. aims to make Jeddah the center of the biotechnology industry in the Middle East. "Jeddah BioCity is a futuristic concept that blends innovative research and manufacturing in an economic [zone] that will contribute to the welfare and prosperity of our society," according to its Chairman, Dr. Sultan Bahabri. The objective, he says, is to turn innovations into marketable products. "This pioneering and unprecedented project aims to make Saudi Arabia the focal point of biotechnology in the Middle East region and Jeddah the focus of Saudi biotechnology." The company is in the process of creating a "BioPark," a highspecification biotechnology research zone covering one million square meters in Jeddah's King Abdul-Aziz University complex. In advance of this construction, however, Jeddah BioCity already provides a number of services to start-ups and companies locating a related facility in and around Jeddah. For biotech companies that meet the criteria, investment is available in the form of venture capital and non-guaranteed loans. Based on performance there is then the opportunity for further investment until the company reaches maturity, estimated to be between five and eight years after the initial investment. Other services available include up to 1,400 square meters of fully serviced laboratory space, including office and ICT facilities; pre-clinical research services; and the facilities of a number of departments of the King Faisal Specialist Hospital and Research Center. An example of the work of the BioCity is its partnership in the foundation of Jeddah-based Arabian Pharmaceutical Products Co. (Arabio), which is establishing a factory in Mecca to manufacture human vaccines. This will be the first private company in the Arab and Islamic world to manufacture such products. Jeddah BioCity is also investing some $150 million in Genway, a company specialized in the manufacture of antibodies. Jeddah BioCity will have exclusivity to market the products in the Middle East, Europe and North Africa. One of the key aims of Jeddah BioCity is to hasten the transfer of technology and knowledge to Saudi companies and universities. This, it is hoped, will assist in producing a work force able to compete in the international biotechnology arena. BY MARTIN JONES

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in 2005, according to a report from market research firm BMI. Although imports dominate the market at around 90% of drug consumption, BMI says in its report: "The government is looking to curb health spending and is encouraging generic substitution [of branded drugs] which should provide a boost to domestic manufacturers." Fahad Al Jarbou, Managing Director of Saudi drug distribution company SITCO, says: "The future of pharmaceutical distribution in Saudi Arabia looks promising for the immediate and long term. I see a consolidation of the distribution network as the pressure grows to increase services while controlling costs. As in many other markets, consolidation is a natural maturing of the market and will create efficiencies while improving service to both the companies that we represent and our customers." Booz Allen Hamilton's Fares says the changes that Saudi Arabia's health-care system is going through will also have an impact on the medical-supplies market. "The rapidly growing market and more effective regulation will make it more attractive to produce locally common medical supplies and devices such as catheters, dentures and X-ray film," he says. Among recent changes, the Saudi government has given the go ahead for the first local private company to produce vaccines for the Saudi market. Arabian Pharmaceutical Products Co. will manufacture 15 different vaccines from its factory in Mecca for use in the kingdom and other Middle Eastern countries. And the Tamer Group, one of the leading health care trading, investment and manufacturing groups in the kingdom, is optimistic about the changes taking place. Ayman M. Tamer, President of the group which his grandfather founded when he set up the first pharmacy in the kingdom in 1922, says: "I see that the healthcare sector, mostly private, with the right regulatory environment and support, will continue to grow in terms of infrastructure, facilities and quality." The Tamer Group is building strategic relationships with some of the world's leading pharmaceutical companies, including Novartis, Pfizer, Schering Plough, Sanofi-Aventis and Roche Diagnostics. "Partnership, we believe, is the key to success," Tamer says. "We are always looking to be associated with multinational companies dedicated to health care, beauty care and other medical businesses. We welcome any company that wishes to have a [presence] in the health-care industry in Saudi. We wish to cooperate even with our competitors to improve the quality of life of patients in Saudi Arabia." But perhaps its most important partnership is its involvement in the Saudi Arabian Japanese Pharmaceutical Co., a joint venture between Tamer and a consortium of Japanese partners to produce the latest medicines for regional markets. Similar partnerships between Saudi companies and those from overseas are expected to increase as the Saudi health-care market changes. A briefing from the U.S. Dept. of Commerce outlines the possibilities: "The increase in Saudi investment in local pharmaceutical and disposable medical products manufacturing represents a major opportunity for U.S. companies to license their products or explore joint-venture possibilities in Saudi Arabia." And Booz Allen Hamilton's Fares sums up the trend: "The transition to a market-driven health-care system will not only be good news for Saudis and the Saudi economy. For international health-care providers and investors, the coming liberalization of the sector will mean increased access to the largest health-care market in the Middle East and an exciting opportunity to help millions of Saudis live longer, healthier lives." BY HELEN JONES

Center of excellence

The King Faisal Specialist Hospital and Research Center

Saudi Arabia boasts a number of specialist hospitals but perhaps chief among them is the King Faisal Specialist Hospital and Research Center (KFSH & RC) in Riyadh. Opened in June 1975 and named after His Majesty the late King Faisal Bin Abdulaziz, it is the kingdom's largest hospital and has earned a reputation for innovation and excellence beyond Saudi Arabia. KFSH & RC is the kingdom's national referral center for oncology, organ transplants, cardiac surgery and genetic diseases, among others. Before it opened, patients had to seek specialized treatment abroad. The state-of-the-art, 800-bed tertiarycare hospital provides specialized treatment and promotes medical research and education programs as well as working collaboratively with international medical institutions. It employs medical professionals from around the world and its highly sophisticated 140,000-square-foot research center boasts expertise in biological and medical research, genetics and comparative medicine, among other specialist areas. Among the Centers of Excellence at the hospital is the King Fahad National Center for Children's Cancer and Research ­ the only children's cancer center in the Middle East. Modeled on the worldleading St. Jude's Children's Research Hospital in Memphis in the U.S., the Center now accepts more new patients annually than St. Jude's and provides both inpatient and outpatient services to pediatric hematology and oncology patients. KFSH & RC's King Faisal Cancer Centre (KFCC) cares for adult patients and has ambitions to become the leading international center for cancer research, prevention and treatment. Accredited by the World Health Organization as a Collaborating Center for Cancer Prevention and Control, KFCC is actively involved in institutional, national, and international research. Another of KFSH & RC's specialist units is the King Faisal Heart Institute (KFHI) ­ a tertiary cardiac care delivery center with international standards of excellence. With its four clinical sections ­ Adult Cardiology, Pediatric Cardiology, Cardiac Surgery and Cardiac Surgical Critical Care ­ KFHI is determined to meet the kingdom's growing need for all types of cardiovascular care. It aims to minimize referrals abroad, through cutting-edge research and advanced education. BY HELEN JONES

a VEGA MEDIA creation www.vegamedia.com

MARKETING: L. Desmaretz - RESEARCH: R. Pratt - EDITOR: P. Drennan PRODUCED BY: C. Moura - DESIGN: M.Fuoco - PHOTOS: M. Venditti; B. Luque

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