On the Red Sea coast, north of Saudi Arabia's second city Jeddah, the first buildings are starting to take shape in the kingdom's biggest ever industrial and infrastructure project. It is being built from scratch and will include a state-of-the-art port and a city larger than central London. No project says more about the ambitions of the liberalisers who currently have the ear of King Abdullah (monarch for 15 months, but de facto ruler for almost a decade): they are determined to open up the country to foreign investment and give the private sector a more important role in the economy.
The scale of the project is breathtaking: the city, called King Abdullah Economic City (KAEC), will cost $27 billion, will be completed in 10 to 12 years and will cover 55 sq km. The 2.6 million sq m port will be able to handle 10 million containers a year; an 8 million sq m industrial estate and 500,000 sq m of offices will be built, as well as residential accommodation and leisure facilities. It does not stop there. At least two more new cities - somewhat smaller than KAEC - have already been announced and the government has hinted that several more grand designs will be launched before the end of the year.
Significantly, these cities will be developed by the private sector - and international firms will have an important role to play in projects that a decade ago would have been government-driven. Many Saudi Arabian companies will be involved, but an indication of the new openness is that the master developer for KAEC will be Emaar Properties of Dubai, one of the world's fastest growing property companies.
"This project shows that Saudi Arabia is well into a period of economic reform and liberalisation, with a view towards creating a modern and diversified, globally competitive economy guided by best international practices," says Amr Al-Dabbagh, governor of the Saudi Arabian General Investment Authority (SAGIA), a government body set up to encourage investment in the kingdom.
It is hard to overstate the change in attitude. At the end of the last century, Saudi Arabia was essentially a government-driven economy: the stock exchange was moribund, foreign banks could not operate, international companies were treated as contractors rather than partners, and getting a visa was a tortuous process for visiting businessmen. The country has a long way to go before it is completely open, but the stock exchange is vibrant - if volatile - and for the first time foreign residents can buy shares. In October, 30% of the shares in Emaar the Economic City (the consortium, led by Emaar Properties, that is building KAEC) were successfully floated on the Riyadh stock exchange.
Last year the country joined the World Trade Organisation (WTO), a measure that has huge implications as it opens up the kingdom to overseas banks and companies, and provides export opportunities for Saudi firms. There is a great determination to attract direct long-term investment - for the first time in 30 years, international oil companies such as Exxon-Mobil and Shell are working as partners with state-owned oil giant Saudi Aramco to develop the gas reserves.
The pressure for change had been growing in the 1990s, but the emerging market crashes of 1997 were seen as a warning of the dangers of over-dependence on international money, which can flow rapidly in and out of markets. This delayed the pace of reform, but the decisive factor that has enabled the reformers to regain the initiative is Saudi Arabia's need for additional money to finance its infrastructure projects. High oil prices may have made the kingdom wealthier than at any stage since the 1970s, but billions of dollars have to be spent on building facilities for a rapidly growing population, which now totals 27 million, of which some 40% are under the age of 14.
"The total cost of projects under way or in advanced planning for execution in the next several years will total about $283 billion," says Brad Bourland, chief economist at Riyadh-based Samba Financial Group. "In contrast with the previous periods of intense infrastructure activity, much of the current development is financed and owned by the private sector."
That means that the country needs to attract foreign direct investment. In recent years, SAGIA has played an important role in reducing bureaucracy, encouraging foreign companies to look more favourably on private-sector proposals for power and water projects. Local companies also appreciate the benefits of raising money from the stock market. Historically, they have borrowed directly from their banks - floating companies on the exchange had proved very difficult, as the Ministry of Commerce's obsession with protecting investors from any risk meant there was little attraction in taking the company public. Today, a series of privatisations and corporate issues - every infrastructure development with foreign investment has to float an element of the company on the stock exchange - have ensured a vibrant market.
The leading banks are now committed to developing investment finance in the kingdom. HSBC has pioneered some of the more complex privatisations and helped create the bond market. The enthusiasm for the potential has been demonstrated by Deutsche Bank, which launched a brokerage only a month after its branch opened. "This is the first time a broker from outside the region has become a full member of the Gulf's largest stock exchange," says Ricardo Honegger, Deutsche Bank's head of global markets for the Middle East and North Africa.
Indeed, the presence of banks, and the tough competition they will provide for the lucrative financing deals, is the first consequence of an opening up of the economy that will, in the coming years, be driven by membership of the WTO. Negotiations, which were completed last year, have taken more than a decade, with a significant group within the Saudi government worried about the effect on jobs and local companies. Liberalisers, though, are convinced that this threat is exaggerated and that foreign investment will create jobs and diversify the business base, reducing the country's reliance on oil.
It won't be all plain sailing. There are relatively few Saudi-based corporations with an international standing - petrochemical giant Sabic is an exception - and the competition and loss of subsidies will come as a shock to some senior executives. But the foundations are strong and in many areas, such as petrochemicals and metal production, the subsidies have already been significantly reduced. Last year, non-oil private sector growth rose to 8.9% in real terms, a 25-year record.
WTO membership could provide a further stimulus. "I believe that non-oil exports could grow by more than 13% a year as a result of WTO membership," says Fawaz Al-Alami, WTO negotiator and under-secretary at the ministry of industry and commerce. An added bonus is that the obligations of joining the WTO mean that it is all but impossible for the conservatives to turn back the clock. It will also drive forward further reforms and force more Saudi companies to adopt the best Western and Asian business practices.
A new tiger economy? Almost certainly not. But if the liberals are right, it will enable Saudi Arabia to take its place as a major international non-oil trading nation.
With a quarter of the world's oil reserves, a population of 27 million and demand for massive investment, it is no surprise that Saudi Arabia is one of the most powerful countries in the region and that it is a key partner for Western governments and corporations. Relations between the country and the US have been fractious, particularly after 9/11 when it became clear that most of the terrorists were Saudis. But ultimately the two countries need each other: the US requires a strong ally in the region - particularly one that can help control oil prices - while close links with Washington have been the basis of Saudi foreign policy for more than 50 years.
There are also lucrative defence and industrial spin-offs for Western countries - all of which keep bulging commercial departments in their embassies in Riyadh. The scale of the rewards was illustrated most recently by the $18.8 billion deal won by BAE Systems to sell the Eurofighter Typhoon to the kingdom. This raised BAE Systems' sales to Saudi Arabia to more than $75 billion over the past 20 years.
Saudi Arabia is also the dominant regional power. It uses its position carefully, but when there are disputes - for example, a planned gas pipeline between the UAE and Qatar passes through Saudi territory - relations with its neighbours can become frosty. However, an advantage of Saudi Arabia's membership of the WTO is that the Gulf states will present a united front in trade negotiations.