Has the recent oil boom produced any White Elephants?

So it is interesting to reflect on the major investments made by the GCC oil producers during the oil boom of the early 2000s and to ask how wisely this money had been spent.

Of course, it is really too early to say. What we can point to are some of the failures of the 1970s. The provision of an international airport for each of the seven emirates of the UAE, for example, was clearly ahead of its time when even road connections were in poor shape.

Today some commentators point to the creation of three major hub airports in the Gulf: Dubai, Abu Dhabi and Doha as a similar folly. There is simply not the passenger traffic, or projected passenger traffic to sustain three hub airports the size of Frankfurt, for that is what is being built.

Sector hubs

There is also a passion for service or industry clusters, or sector hubs. Again while there is probably room for say one hub in energy or science and technology, it is questionable whether the region has room for more than one.

Even for health and education the provision of multiple centers of excellence is duplicative and inefficient as the region ends up with a lot of smaller hospitals and universities without economies of scale. However, what will undoubtedly happen is that competitive pressures will ensure that only the strongest survive, once the subsidies of oil wealth begin to run out.

And this will not just be a matter of the excellence of the facilities that are being built. It will be a matter of critical mass in terms of population and demand. An airport needs a local tourism industry to serve, for example. A university needs local students, and a hospital must have patients. A free zone needs a region to serve.

Real estate

The same is obviously true for real estate. Cities which really do have a strong population growth outlook based on jobs in service or manufacturing industries will fill the towers now under construction. If these jobs do not emerge then they will be in trouble.

On thing is for sure and that is that growth expectations get exaggerated in a boom and that a cooling of oil prices since last July will cause a reassessment of the true value of recent investments. Not every project will have worked as well as another and a degree of consolidation and reassessment of plans will be required.

However, those cities which have invested most in their economic infrastructure will be better placed for the future than those which have just taken the oil revenue and sat back. For in the long run it is investment in real assets that pays dividends and those who spend rather than invest go hungry.