The GCC region has gone through an extraordinarily rapid infrastructure build-up since 2000. The pace of implementation has varied somewhat in response to oil price dynamics, with government capital expenditure among the first things to take a hit in a lower oil price environment. Both the 2008 price correction and the new oil price dynamics since late 2014 left a legacy of project delays and even suspensions.
Overall, however, these reversals have been relatively short-lived and the multitrillion-dollar infrastructure agenda continues to be characterised by a high degree of continuity. For instance last year, in spite of historically low oil prices, the project pipeline expanded by 11 per cent.
A combination of countercyclical and strategic factors is driving this unprecedented injection of capital. The need for countercyclical spending has been obvious at a time of economic volatility. But there has been a growing preference for ensuring that a significant element of that spending, short-term cuts notwithstanding, should go into infrastructure projects that can deliver not just a short-term stimulus but also a potential boost to the long-term production potential of economies. The ability of governments to implement such investment has been boosted by a growing reliance on new funding solutions, such as partial or full privatisation, public-private partnerships and project bonds.
At the same time, elements of capital spending have become increasingly strategically anchored and seen as an important way of unleashing or enhancing the non-oil growth drivers of the regional economies. At the most fundamental level, infrastructure investment is needed to capitalise on the region’s key structural growth drivers, notably demographics, diversification and connectivity.
The internationally high population growth rates of the Gulf economies continue to necessitate massive investments in housing as well as social infrastructure, above all education and healthcare. Creating the basis for sustainable non-oil growth requires investments in a whole range of productive and logistics facilities, not to mention transportation and communications infrastructure. Demographics and diversification together are driving strong demand growth for energy, water and other resources.
Connectivity is a particularly important growth driver in view of the unique characteristics of the GCC region. Even with rapid growth, the population base of the GCC is relatively modest at just over 50 million people. This has, for years, driven a heavy reliance on imported manpower. At the same time, the rapid development of the regional real estate markets have been aligned with efforts to draw talent, investors and entrepreneurs to the Gulf. Such efforts are likely to grow in importance against the backdrop of a global competition for creative talent.
But one of the most unique and compelling advantages of the GCC is the strategic location at the crossroads of Asia, Europe and Africa. Capitalising on this unparalleled advantage necessitates large-scale infrastructure investments that route traffic through the Arabian peninsula, rather than other geographies. This indeed has been – and continues to be – a key focus of the regional investment agenda. The successes of regional airlines and seaports witness the transformative success of this agenda.
A region that had a population base of barely 10 million people 50 years ago has now emerged as one of the more important global conduits for trade, investment and travel. Moreover, a great deal has been done to capitalise on this hub status to develop a range of services to add value to these flows or to capture elements of international value chains. Investments in tourism and real estate represent important, and highly successful efforts by the regional economies to immobilise this traffic, temporarily or more permanently, to further stimulate activity in local economies.
The regional integration agenda in the GCC is further driving such infrastructure investments by improving connectivity and improving mobility among the member states. Recent examples include the GCC grid. A regional railway network is, similarly, being developed.
Infrastructure investments have also played a critical role in encouraging intra-regional mobility – for instance through increasingly popular investments in holiday and second homes.
Even in the historically dominant hydrocarbons sector, project spending is driving a gradual transformation in favour of horizontal integration to achieve greater local value addition. The GCC is, with success, positioning itself as an increasingly important global hub for refining, petrochemicals and related manufacturing activities. The further these value chains are stretched, the greater the local value addition, sustainable job creation and export diversification. For a region where resource endowments are dominated by hydrocarbons, such investments are likely to remain an important element of the diversification agenda, whatever the future dynamics of the oil price.
The fact that so much of the expansion of the non-oil sector in the GCC has been driven by physical capital accumulation has raised obvious concerns about diminishing returns to scale. Indeed, most independent estimates suggest that fiscal multipliers have been falling in the GCC in recent years. This has been the case particularly after the significant increases in government spending after 2008. Moreover, the ongoing fiscal re-engineering means that the economic development model of the GCC will have to become increasingly reliant on productivity-led growth.
But this may still not mean that the era of infrastructure investments is about to draw to a close. For one thing, the list of key structural growth drivers is likely to continue to revolve around demographics, diversification and connectivity for a long time to come. All three will continue to entail significant infrastructure needs. While the increased focus on productivity may well weaken the erstwhile momentum of factor accumulation, even productivity gains will, in many cases, require infrastructure investments, whether in increased modernisation, smarter buildings, more efficient technology, renewable energy, or the digitisation of value chains. The net result may well end up being smarter infrastructure, rather than substantially slower infrastructure investment.
Furthermore, after an exceptional period of unprecedented infrastructure investments, future success is likely to be more than ever about having a clear strategic vision for utilising these assets. In connection with these, the importance of more efficient ways of coupling these assets with human capital and technology will grow. Such decisions will be critical for determining the returns that the “golden age” of infrastructure investment will ultimately deliver.
About the author
Jarmo Kotilaine is chief economist at the Bahrain Economic Development Board