Preservation vs. Monetization: A Microeconomic Analysis of Capital Allocation and Heritage Commercial Viability in Al-Balad, Jeddah under Vision 2030

This paper tackles one of the fundamental questions of microeconomic research: How to crowd in private investment in an urban heritage zone when the traditional commercial real estate measures suggest that the market is doomed to fail, even if it is rescued by sovereign capital? The short run asset return indicator (k=0.00986) computed using the Saudi Public Investment Fund’s (PIF) 18.75 billion SAR investment in Al Balad, Jeddah, through the Al Balad Development Company (BDC) is highly conservative in the terms of static multiplier analysis. In this analysis, it is shown that traditional accounting methods don’t account for structural changes in markets caused by sovereign megaprojects. Historical preservation has important positive externalities, and free market competition will naturally under invest, resulting in a large deadweight loss where Marginal Private Benefit (MPB) is less than Marginal Social Benefit (MSB). Based on a spatial structural, this paper takes an analytical approach to examining the effects of sovereign absorption of infrastructure fixed costs that are prohibitive and non-recoverable on the private sector’s Marginal Efficiency of Capital (MEC) curve. The key contribution of this framework is to show that the allocation of sovereign capital in ‘heritage’ districts should not be judged through a ‘fiscal yield’ approach, but rather its ability to remove structural failures of coordination and crowd in long term private commercial viability.