Tough choice for Gulf leaders

Cancellations or delays of government-backed deals worth tens of billions of dollars may be inevitable.

Infrastructure projects throughout the region are under threat because of the global economic crisis.

As GCC leaders gather in Muscat today, the deepening global economic crisis may force them to choose between multibillion-dollar projects proposed during more optimistic times. Cancellations or delays of government-backed deals worth tens of billions of dollars have already been announced in industries from petrochemicals to aluminium production and oilfield expansion. On Sunday, the Kuwaiti government issued an 11th-hour reversal and cancelled a US$17.4 billion (Dh63.9bn) deal to create a petrochemical joint venture with the US company Dow Chemical.

A key topic on the agenda in the Omani capital today is a proposed 1,940km rail network to connect the six nations of the GCC. It could cost member states more than $14bn. There was disagreement within the bloc over the best way to finance the project, said Mohamed al Mazroui, the GCC assistant secretary general for economic affairs. A feasibility study by the GCC secretariat of the proposed rail network - intended to carry both freight and passengers - would be submitted for approval during the summit, he said.

Although financing may be difficult to procure, analysts say projects such as these are needed and are likely to proceed. "Exchanges in resources like water and power create greater economic scale," said Simon Williams, the chief economist at HSBC in Dubai. "Over the medium term I think they make a good deal of sense." The GCC has nearly completed one joint infrastructure project - a Gulf-wide electricity grid - that many point to as a model.

"We will throw the first switch in mid-January," said Ahmed Ali Ebrahim, the director of system operations at the GCC Interconnection Authority. "This is more than just a power project. Its significance is as a demonstration of co-operation." Still, as a group and individually, Gulf states face tough choices amid the dramatic shift in global economic and financial conditions. Despite having signed a binding agreement on the proposal at the beginning of the month, Kuwait's Supreme Petroleum Council bowed to opposition in parliament and cancelled the Dow Chemical deal. Parliamentary opponents said the deal was too expensive since chemicals industry revenues were plummeting.

"I think Kuwait, right now, is satisfied with the collapse" of the deal, said Mohammad al Obaid, an independent member of the parliament who opposed the agreement. "The deal is bad because of the situation with the international economy." Other petrochemical projects are likely to proceed because they are too far advanced to cancel, said Pat Rooney, the Middle East director for CMAI, a global chemicals consultancy. In Saudi Arabia, at least five petrochemical projects are "way deep in construction at this point", he said, adding that they remain appealing because of their low projected operating costs.

"These are being made to withstand the bottom of the cycle." Cancelled deals have not been limited to the petrochemical sector. On Dec 17, Ma'aden, the Saudi Arabian mining giant, announced that a proposed $10.5bn aluminium joint venture with Rio Tinto would not proceed. The project would have developed a bauxite mine, an alumina refinery and aluminium smelter but is on hold after Rio Tinto pulled out, citing the financial crisis.

Saudi officials have also suggested that several multibillion-dollar oil production capacity expansions could be delayed until conditions improve in the oil market. Development of the Munifa offshore oilfield, estimated to cost $15bn, would probably miss its target construction date of 2011 because of the "market situation", Ali al Naimi, the Saudi oil minister, told Bloomberg last week. The kingdom also issued a fresh construction deadline of 2015 for an oil refinery at Jazan, a two-year delay to the original schedule, the London-based weekly Middle East Economic Digest reported.

But recent progress has been made at the Jubail oil refinery, where Saudi Aramco and Total, the French oil company, yesterday awarded a construction contract for its $12bn refinery and petrochemical facility. Other large-scale industrial projects under scrutiny include a proposal to develop a new port, airport and free-trade zone at Duqm in Oman. The sultanate has already poured $12bn into developing a top-class port and industrial zone in Sohar to facilitate new centres for logistics, petrochemicals and metals, and press reports have suggested one of the anchor tenants, Shadeed Iron and Steel, is having difficulties raising financing for its $760 million plant.

Oman has similar plans for Duqm, including a new oil refinery, petrochemical complex and fisheries facilities. While industrial projects in the UAE appear safe, there have been a number of delays to several high-profile master-planned communities. Nakheel is delaying its plans for a Trump Tower on Palm Jumeirah, and has also slowed dredging work on the much larger Dubai Waterfront and Palm Deira projects. Planners of Dubailand, which will feature homes, theme parks and hotels in the Dubai desert, say they are reviewing the construction schedule and could announce delays in the coming weeks.

A project with strong backing from government planners is Dubai World Central, the $33bn airport and logistics zone in Jebel Ali. "The project is long term and we view the global economic crisis as a short-term crisis," said Abdulla al Falasi, the project's director of marketing and corporate communications. "It is not going to slow down the progress at Dubai World Central." * additional reporting by Chris Stanton and James Calderwood

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