Dubai under construction (archive photo)
© Basil Soufi, Wiki Commons
Dubai under construction (archive photo)
Last updated: September 3, 2014

Gulf countries spend unbelievable sums of money on mega projects. Here's why it's important.

Banner Icon Your Middle East's business expert, Bassam Aoun, guides you through the re-emerging construction boom in the Gulf. Some call it excessive spending, but isn't there a positive side as well?

No stranger to mega-projects, Dubai’s authorities have recently announced their plans to construct the world’s first indoor city. This venture, named the Mall of the World, is set to become the largest shopping mall in the world, with a floor space of 4.5 million m2. The shopping center is also planning to keep natural climates at a distance – it will be a temperature-controlled facility. The developers at Dubai Holding, the project’s owners, are looking to incorporate designs from the world’s major cities, including New York and London. All in all, this ambitious undertaking will cost Dubai in the neighborhood of Dh 25 billion, or $6.8 billion.

The overt benefit that can be immediately noticed is the expected boost in tourism. Dubai continues to the region’s juggernaut in attracting tourists from numerous origin countries. During the first half of 2014, approximately 5.8 million tourists stayed in Dubai hotels, pushing the emirate ever closer to its Dubai Vision 2020 goal of 20 million tourists per year.

"This ambitious undertaking will cost Dubai in the neighborhood of Dh 25 billion, or $6.8 billion"

The other benefit, albeit a less obvious one, is a spark in activity for the construction sector. Construction projects – particularly those of sizable proportions and budgets – are usually sought after as a way to boost the economy in times of tepid growth forecasts.

The Mall of the World, for example, is to be completed within ten years of its announcement date. During that decade, the project will go through several phases, including a design phase, a bidding process for procurement and an execution of construction phase. Each of these stages will require a range of professionals and workforce members to supervise and execute.

From architects and engineers to financial advisors and construction workers, this project, and several like it, affect the market in myriad ways. The economy’s forecast for employment is improved for both the period before the project is completed as well as after. Retailers and advertising executives are counting down the days to promote their goods to the site’s projected 180 million visitors per year. Even the stock market stood to benefit from such an initiative – after announcing the news about the Mall of the World, the Dubai Financial Market Index rose by 4.41%.

Construction fever has not been limited to Dubai. According to a recent Meed Insight report, future construction projects in the GCC exceed $1 trillion, with the United Arab Emirates claiming $428 billion while Saudi Arabia’s were valued at $417 billion. When discussing the report, Ed James, head of Meed Insight, mentioned that in the UAE, “US$52 billion (Dh190.9bn) worth of contracts were awarded last year.”

mallofworld.jpg
Dubai's Mall of the World

As the largest sector in the GCC in gross terms, civil projects worth over $500 billion have been awarded in the area since 2006. This highlights the importance of investments in infrastructure ventures such as bridges, highways and others – aside from job creation and economic growth, better infrastructure enhances citizens’ quality of life.

Qatar – another major player in the region’s construction industry – has also been highly active in the market when it comes to new projects. Doha Festival City, for example, is the largest mixed-use development facility currently under construction in the Middle East. Upon completion in September 2016, it will be considered the prime retail destination in Qatar. The total leasable area for this facility is estimated at 250,000 m2, including 550 outlets, 85 restaurants and cafés and approximately 8,000 parking spaces.

"Aside from job creation and economic growth, better infrastructure enhances citizens’ quality of life"

In response to this project, as well as the others currently under development in Doha, the markets have reacted favorably. According to an employment survey by YouGov.com and Bayt, this boom in construction has led to 18% of respondents seeking to hire civil engineers. The rise in prospective ventures, particularly in infrastructure, has fuelled a hiring spree that benefits several skillsets within the labor force. Construction projects, therefore, continue to cause a positive ripple effect on both employment and growth.

Hosting an international event, such as Dubai’s Expo 2020 or Qatar’s World Cup 2022, has incentivized public authorities to put more focus on this sector. Firms in the private sector, however, may not always agree with such a trend. Of the total value of projects in the GCC, approximately $1.06 trillion, or 44%, is either on hold or cancelled.

A lack of private sector funding, one of the major financial avenues these projects seek to remain afloat, has been plaguing the market since the fiscal crisis struck. After the Dubai World debt crisis in 2009, funding for such mega projects has been scarce, thus explaining why over half of the deferred or cancelled projects in the GCC can be found in Dubai.

Construction matters. It creates jobs, it buoys financial markets, it enhances urban infrastructure and it boosts tourism. These projects, however, are a long-term ordeal – in order for them to be executed smoothly, several cogs have to interlock for the wheel to turn. The public sector, for example, should work with private firms, either via monetary policies, public-private partnerships or other initiatives, to encourage investments in the sector and safeguard a vital component of the region’s economies. Economic growth and development is, after all, the ultimate goal for all stakeholders.

Bassam Aoun
Bassam Aoun is a Business Editor at Your Middle East. He is currently based in Abu Dhabi and holds a BA in Economics from the American University of Beirut and an MPP (Master of Public Policy) from the University of Chicago. He has written for the Chicago Policy Review and is interested in economic and fiscal policy in the Middle East.
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