Developers have been urging Dubai to invite private investment into its utilities sector for years. But it is unfortunate that the emirate has chosen to launch its first independent water and power project (IWPP) now.

In the wake of December’s debt crisis at Dubai World, when the state-owned conglomerate had to rely on a bailout from Abu Dhabi to pay off its debts, investors are wary of doing business with Dubai.

So doubts about the emirate’s creditworth-iness could significantly delay progress on the private power and water scheme in Hassyan.

New developments in neighbouring Abu Dhabi also raise further important questions about Dubai’s strategy.

Abu Dhabi Electricity & Water Authority has put plans to develop its own next IWPP – known as Taweelah C – on hold and has instead opted to go ahead with a smaller independent power project, Shuweihat 3.

It would not have been easy to raise the $4bn in debt required to finance a project as large as Taweelah C in the current climate and bankers say it might have taken until 2011 to do so. The smaller project at Shuweihat, which does not include a desalination plant and which has a lower power capacity, should prove more manageable.

If wealthy Abu Dhabi thinks it is sensible to hold back on large schemes while it waits for the project finance market to pick up, how can debt-ridden Dubai cope?

It will be some years before financing for Dubai’s Hassyan IWPP will need to be in place. By then the financial climate may have improved so that government guarantees are no longer such an issue for investors.

But Dubai Electricity & Water Authority already has excess power generating capacity and can afford to bide its time. It would be well advised to copy its neighbour and delay its IWPP until markets have improved, rather than launching the project now in the hope that conditions will get better in time.