Governments play key role in 60% of major projects in GCC

Governments have a direct role in more than 60 per cent of the of the $2.1 trillion (Dh7.7trn) of major projects currently taking place in the GCC, making them less prone to risks of cancellations or suspensions, a new NBK Research report says. Across the GCC $833 billion or 39 per cent of all active projects are being developed by the private sector, while $822bn or 39 per cent are being sponsored by the public sector. In its analysis of existing and planned projects the report points out that UAE, construction sector has taken a big hit from project cancellations and suspensions compared to all other GCC countries. With a large number of join ventures being undertaken – $479bn or 22 per cent of active projects – the government has a direct stake in majority of the major projects taking place in the region, the report said. "Clearly, its ability to do this has been supported by a surge in budget revenues over the past five years as oil prices have climbed. "Between 2004 and 2008, GCC governments generated combined estimated budget revenues of $1.7trn, well over double the preceding five years," said the report. Stating that the public sector projects have proved more resilient in the downturn, the analysts said, "the government's share of projects actually under way is about 20 per cent more than that of the private sector, while it was exactly opposite in the near past." However, UAE has the most private sector participation in projects compared to other GCC countries. At $486bn the value of realty projects with private participation in the country is greater than all GCC countries put together. By contrast, the share of all UAE projects being undertaken by the government sector is just 28 per cent, compared to the GCC average of 39 per cent. Following UAE is Oman as only 33 per cent of projects – worth $95bn – is being undertaken by the government. In Bahrain, Kuwait and Qatar, the government is responsible for the majority of the projects. The government participation the report says could prove to be an asset in the downturn, shielding activity from rising risk aversion and credit constraints in the private sector. However, 19 per cent of all projects being put on hold or cancelled, is in indication that the global economic downturn is taking its toll. The number could rise over time as investors readjust to more sober economic conditions, adds the report. "Some projects have already been cancelled outright, totaling $9bn as of end second quarter of 2009. This is a relatively small number, but is almost certain to rise over time. "Far more important is the number of projects that have been placed 'on hold'. These had reached a massive $506bn by the 2Q09, up from just $26bn a year earlier. The two categories account for 19 per cent of the region's total project market," says the report. Among the cancelled projects the construction sector – which is mostly real estate but also some infrastructure such as ports, bridges and railways – has taken the hardest hit. This sector accounts for 80 per cent of the value of all cancelled or on hold projects compared to 42 per cent in June 2008. The 261 construction projects are now reported as either 'cancelled' or "on hold", reflecting the contraction of the real estate sector and the slump in property prices. The industry report also adds that more than two-thirds of all cancelled or on hold projects are from the private sector, much higher than its share of all projects underway. By contrast only 29 per cent of cancelled or on hold projects are from the government sector and just three per cent from joint ventures. This division the report argues may partly reflect the obvious difficulties in obtaining funding for private sector projects as credit conditions have tightened. But it may also reflect the fact that government-led projects may be less risky or ambitious in nature, making them more robust in a downturn. "If this is true, then the strong government presence in the sector should be a considerable source of support for project activity going forward," said research analysts. Commenting on the impact of the large number of cancellations and suspensions on the economy the report stated: "Since the total value of these projects is currently $515bn, their loss could theoretically knock some 10-15 per cent per year off GDP growth. "Nevertheless, the ultimate impact is likely to be much lower than this. If the projects do not go ahead, imports of labour, machinery and materials will not take place. In addition, some projects may slowly come back on stream as economic conditions improve, although this could be offset by further cancellations. The loss the report adds will end-up being a good thing for the economy. "Some of the abandoned projects – initiated in a period of excessive exuberance – were likely to turn out to be bad investments, so should never have been initiated. Moreover, the cancellation of "uneconomic" projects should lead to lower input costs