September 11th accelerates economic reform

The fall-out from the events that have unravelled since September 11th continues to impact on the Gulf States, and it will be sometime before the new status quo becomes really clear. However, one thing is immediately apparent, the economic reform lobby has become even stronger.

Rather like the recession in the US and Japan, this fact of life was already apparent before September 11th, but it has become even more apparent since then. You only have to follow the news to see what is happening.

This week Big Oil began leaking its complaints to the western press as part of the wrangling that now surrounds the $25 billion Saudi Gas Initiative. Saudi Aramco is apparently not willing to sign over existing gas reserves and wants Big Oil to concentrate on finding its own gas supplies in the Kingdom. This is not what these foreign direct investors of heroic scale had in mind. They wanted some low-risk business to balance against the high-risk stuff.

So the threat is that negotiations for the project will drag on until the end of the year and not be wrapped up by the end of March. Expect to see a flurry of activity, some concessions from Saudi Aramco and a much quicker deal. Times have changed, and such foreign direct investment has moved from being politically incorrect to being a political imperative.

Gulf rulers know that in order to satisfy the aspirations of their growing and increasingly youthful populations, they have to get their state-dominated economies moving, and moving fast. Fortunately, enlightened and often western-educated officials have seen that foreign direct investment in major energy projects can supply this impetus.

All the GCC states are at it. The UAE and Qatar have their $3.5 billion Dolphin gas project to capture gas in Qatar's North Field and transport it through a new pipeline to fuel power stations in Abu Dhabi and Dubai. Kuwait has its $7 billion scheme to revitalise the northern oilfields with foreign investment, and is pushing this project ahead despite opposition by its unpredictable parliament. And Oman is hoping to move ahead with further plans to develop its LNG sector this year.

These heroic energy infrastructure projects now total almost $40 billion in value, and are moving ahead fast. This sort of investment in a region that has a GDP that fluctuates between $200-300 billion is really impressive, and will have a huge multiplier effect on the local economies.

Moreover, gas development brings its own spin-off industries such as fertiliser production. But all sectors of the local economies stand to benefit, from the bankers who provide the syndicated debt to fund the projects to the real estate developers that house the new expatriate workers from the projects.

In the wake of September 11th and the subsequent military and financial blows struck against religious extremists, the modernists are in the ascendant and unlikely to feel much of a backlash from conservatives within their own ranks. And this rallying to the cause of economic reform rather than religious fundamentalism can only be to the economic benefit of the Gulf Oil States.

For major foreign direct investment projects in the region this is something of a golden age, with a unique combination of political will, finance and economically viable schemes. September 11th initially looked very frightening for foreign investors, but will actually accelerate economic reform and step up the pace of progress on major projects, and that has to be good news for business in the Middle East.