As much as things are changing in the Gulf Cooperation Council, in terms of the relationship between state and economy with the much-heralded post-oil transformation underway, there are many aspects of state-business relations that remain the same. In a two-day conference this week at Georgetown University, scholars are investigating the relationship between the state and the private sector in the Gulf, part of a multiyear project of researchers at Georgetown University in Doha and Exeter University in the United Kingdom. One of the scholars’ principle questions is the sustainability of social and political infrastructure in a time of tremendous economic transition in the Gulf. If there is to be a diversified GCC, less reliant on oil exports for fiscal revenue, how might the state negotiate an exit from the private sector? Is it a precondition to continued economic growth in an era of lower oil prices?

The heavy presence of the state, as an investor, an owner of industry, and the driving force behind economic growth remains very real in the Gulf states. In the last period of economic downturn, during the global financial crisis of 2008-09, the United Arab Emirates experience revealed that governments and their related entities are not necessarily conjoined. Some state-related businesses did fail, while others received state support in their restructurings and debt payments. A government as parent company, or primary investor, does not necessarily equal a credit guarantor. International debt markets, however, are still struggling with how to factor Gulf state support into calculations of corporate debt.

Likewise, Gulf governments may be keen to teach their related corporates a lesson in fiduciary responsibility. But will a Gulf state allow a state-related entity to fail? And how might it treat executives who perform poorly? Government-related entities are learning that in the current fiscal climate, streamlining and efficiency will be prized and cash transfers from the “parents” may become a distant memory.

Some of these business politics are playing out in a very public case of executive performance. The role of the state, however, will be divided between protecting its financial interests and upholding legal standards in corporate governance. The chart below details Abu Dhabi government-related entities – businesses, banks, and utilities that are government-owned or related.

The UAE Central Bank recently froze the assets of two former senior officials in Abu Dhabi’s state-owned International Petroleum Investment Company and banned them from leaving the country. One of these former officials, Khadem Abdullah Al Qubaisi, was managing director of IPIC and chairman of Aabar and Arabtec. The other, Mohamed Badawy Al Husseiny, was CEO of Aabar. Aabar and Arabtec are firms engaged in construction and real estate investment. Aabar owns a substantial stake, 36 percent, in Arabtec. Aabar itself is more than 98 percent owned by IPIC, which is fully owned by the Abu Dhabi government. Arabtec’s projects in Egypt have been in line with, and at the direction of, the Emirati foreign policy and foreign aid objective of encouraging private sector development in lower income housing, though they have faced persistent delays.

Aabar has considerable debt, with bank loans in excess of $5 billion and a newly secured corporate bond of 3.6 billion Euros (about $4.05 billion) with a five-year repayment schedule, according to JP Morgan. The ability of the company to seek external financing relies on its proximity to the state, and the state’s good credit. However, the assumption that the state will guarantee the loans of the corporate is often a social one, not a legal one. The politics of business in the Gulf often tread in this gray area. The market assumption is that the state will not allow one of its prized entities to fail, but this logic could be misguided. Gulf states are increasingly focused on efficiency and performance in their delivery of social services, and in their investments. Ultimately, government-related entities are investment vehicles and they too can face the reality of declining revenue.

The secondary challenge of these government-related entities is their potential to garner unwanted attention because of corruption or wrongdoing. IPIC and Aabar are currently engaged in a problematic relationship with the 1MBD fund, a development fund set up in 2009 by Malaysian Prime Minister Najib Razak. IPIC guaranteed a bond offering by 1MBD in 2012 to enable the development fund to build power plants. To provide collateral for the bond, 1MBD paid Aabar, as a subsidiary of IPIC, $1.4 billion. The relationship between the Malaysian fund and deposits made to the personal account of Razak are the subject of an international money laundering probe. The dispute between 1MBD and IPIC is about financial reporting and the repayment of debt. One side says it paid; the other says it did not receive payment. There is also the problem of an account in the British Virgin Islands for which ownership is not clear, or claimed. The financial paper trail weaves between government entities and subsidiaries and demonstrates the complexity of dealing with large investment funds with a limited number of investment vehicles. It also demonstrates the closeness of state wealth funds to the local business community, and to a wider network of political allies and neighbors. The media attention directed at Aabar, and by extension IPIC and the state itself, could impact credit evaluation and will highlight the ability of the state to govern its markets. The reaction of the state and the corporate will be scrutinized very carefully by international financial markets.

State-led growth in the Gulf has achieved enormous success in building infrastructure and new cities, with businesses spreading inside the Middle East and North Africa region and beyond. It is the intersection of state-led growth and global markets that creates new tensions, and the potential for corporate identity to creep into state identity, and vice versa. At a moment of economic reform, transition, and transformation, this could prove an opportunity to change the state of business in the Gulf.