First with Financial Comment from Arabia

Aggressive Dubai public sector in full retreat for 2010

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The six per cent fall in the annual budget published by the Government of Dubai at the end of last week confirms the retreat of the once aggressive Dubai public sector as the motor of economic growth.

And as if to underline that the baton is being passed over to the private sector it was announced that the next Dubai Electricity and Water Authority plant will be the emirate’s first ever privately managed power and desalination project, with consultants invited to bid by February 22nd to advise on ‘an independent power and water (IWPP) model’.

The fate of the publicly financed $2.7 billion Hassyan ‘P’ station for which five bids were tendered last November is not known.

Spending cuts

The Dubai Government is clearly in retrenchment mode and cutting expenditure by six per cent to $9.6 billion while revenues are estimated at $8 billion, leaving a $1.6 billion budget deficit, not exactly in the same league as US budget deficits and easily covered.

Some economists even think the Dubai Government actually substantially underspent its budget last year – with project suspensions and slowdowns common – and that this might mean an actual increase this year.

That said the government is no longer able to push ahead multiple projects on all fronts, and for government owned conglomerates like Dubai World and Dubai Holding there is clearly a Day of Reckoning. Dubai World has a $22 billion debt standstill until May and all eyes will be on what happens then.

The boom years when spending by Dubai World developers Nakheel and Limitless fired up the local economy are over. Many seasoned business observers in Dubai reckon that this marks a ‘back to basics’ period for the emirate where profit margins from regional trading and logistics are historically high.

However, having been pushed aside by an aggressive public sector-led expansion in the boom years, it is going to take time for the private sector to gather up its confidence. That confidence will have got a boost from the launch of the Burj Khalifa, the world’s tallest building last week.

Burj Khalifa

And let us not forget that the Burj Khalifa is the work of the Dubai private sector in the shape of publicly quoted Emaar Properties, albeit the Government of Dubai is a founding shareholder with a 32 per cent stake. But it is private sector discipline and business practices that have delivered the prize of the world’s tallest building.

It is a great strength of Dubai that it has a diverse multicultural and multinational private sector. Indian businessmen say it is the best Indian city for doing business, and Arabs say the same of Dubai as a hub for Middle East business. City financiers from London see the potential of the Hong Kong or Singapore of Arabia.

Ultimately a dynamic private sector – and that includes the many billionaire family-owned business empires of Dubai – is a far better allocator of capital than the government, and market forces will work wonders from the current bottoming out process, but maybe not in 2010.

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Written by Peter Cooper

January 9, 2010 at 9:07 am

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