While private developers were erecting showcase homes and offices, like Dubai’s Palm Island and the Burj Khalifa Tower during the 2003-2009 property boom, many Gulf governments held back spending on infrastructure. Now, the roles are reversed: Banks have cut lending to private developers while governments are using increased oil revenues and drawing down on surpluses accumulated in years’ past to build roads and factories, analysts say.

“I would call it a policy-led recovery, in the sense it has come out of fiscal stimulus,” Oliver Cornock of the Oxford Business Group, told The Media Line. “It comes down largely to a broader policy in economies with very, very large population growth. All of these Vision 2020 and 2030 policy drives to diversify are largely built on this demographic issue. The construction sector is a big part of it.”

The oil business continues to dominate the economies of the Gulf region, but governments are determined to diversify to create employment for rapidly growing populations and to prepare for the day when reserves run out. That spells massive port and airport expansions, building from scratch industries from aluminum and computer chips, and creating cultural attractions and urban infrastructure to compete with the world’s leading cities.

In the countries belonging to the Gulf Cooperation Council (GCC), which groups six Gulf governments, the number of contracts awarded by private sector developers fell to $16 billion last year from $50 billion in 2008, according to a Deloitte Touche Tohmatsu report.

But that was more than offset by government contracts from the United Arab Emirates (UAE), which have more than doubled this year to $58 billion. In Saudi Arabia, contract awards jumped 65 percent to $52 billion, Deloitte said.

Indeed, government spending is not only rescuing the key construction sector but helping to lead economic growth across the region. Gross domestic product for Middle East oil-exporting countries will probably reach 3.8 percent this year and 5 percent in 2011 from just 1.1 percent in 2009, the International Monetary Fund estimated last month.

In the UAE, weighed down by the real estate collapse in Dubai, the turnaround is even ore dramatic: After falling 2.5 percent in 2009, GDP will likely expand this year 2.4 percent and accelerate to 3.2 percent in 2001, the IMF says.

“Growth is being driven by oil prices and infrastructure by government. Banking still hasn’t recovered from financial crisis,” Jean-Paul Pigat , head of Middle East and North Africa analysis at Business Monitor International, told The Media Line. “There are massive government spending projects targeting infrastructure, but it masks a more fundamental weakness on private sector. Household expenditure is still kind of weak.”

Abu Dhabi has announced plans to spend $15 billion on infrastructure by 2012. In Saudi Arabia, new construction contracts by the government are slated to increase 65 percent this year to $52 billion. Even Dubai’s government is allocating 30 percent of this year’s budget to roads, railways, utilities, power and waste-management facilities.

One of the most important long-term public works projects in the Gulf is the UAE’s first nuclear power station, for which a $20.4 billion contract was won in December 2009 by a South Korean consortium headed by the Korea Electric Power Corp. Contractors are also counting on mega-projects like the $7.6 billion Dubai Metro, and the $2.3 billion Sidra medical complex in Qatar.

With the Gulf market looking so attractive, however, it is drawing new competition from overseas builders looking to fill their order books. The nuclear contract was a global first for a Korean consortium, which beat out long-established Western rivals. And, when Larsen & Toubro last month bagged a $764 million for the design and development of Oman’s Salalah International Airport, it was the first major engineering contract in a Gulf country for the Indian group.

“Competition lists have recently grown longer, fueled by an influx of international contractors from many parts of the globe seeking to replace the dips in their order books,” Nigel Harvey, general manager at Murray & Roberts Contractors Middle East wrote in the Deloitte report, noting Chinese and Korean companies are especially active.

Residential construction may eventually join the infrastructure boom, but governments must first find mechanisms to finance it. The GCC countries don’t so much need the luxury housing that characterized the last property boom as they need middle and lower-middle class housing, said Cornock of the Oxford Business Group.

But builders won’t develop it unless they can find a way to make it sufficiently profitable and families won’t be able to afford it until mortgage laws are in place. Saudi Arabia, which Deloitte says must build five million new homes by 2020, has promised one but has yet to deliver. Only about a third of Saudi families own a home and home loans make up just 2 percent of the country's GDP.

“Just demographics alone dictate that this is a huge potential market for bankers,” Cornock said. “They need the security of a mortgage law.”