The Maktoum's Dubai is a global success, providing a development model for the new millennium, but the Emirate's finances remain opaque. GSN looks at the motors of Dubai's emergence as a world player.
Everyone loves the Dubai so cleverly created by Ruler Sheikh Mohammed Bin Rashid Al-Maktoum (MBR): the estimated 30m passengers passing through its airport; the multinationals who cover the Middle East and swathes of Africa and Asia from their glass towers; the British PR gurus and Indian salarymen who suffer its traffic jams to inflate their pensions; and the Iranian, Russian and other investors ploughing money into 'off plan' and other real estate plays.
The hosts to this cosmopolitan, materialist throng are not just building a global hub at home. A decade ago Dubai's international press profile was dominated by Sheikh Mohammed's Godolphin horse racing operation; now the financial media are focusing on its property giants and investment funds.
The Maktoums' Dubai provides a model talked up even by the World Bank, as well as by the best PR machine money can buy. But for such a paragon of post-modern development, Dubai's finances remain remarkably opaque - especially as so much business remains in government hands, in line with MBR's (not very World Bank) view that government should be the "engine" which drives development (GSN 802/11, 788/15, 771/1).
None of the UAE's seven emirates publish transparent accounts - a challenge for the federation's prime minister since early 2006, MBR (GSN 773/20). But none of the others are yet at the cutting edge of global business like Dubai - whose lack of transparency, coupled with brash, conspicuous spending, inevitably raises suspicions among those used to full disclosure of public finances.
Even in data published by the rigorous International Monetary Fund (IMF), shown in a table below, nearly 60% of the emirate's revenues are classified as 'other', with no meaningful footnotes to explain what that revenue source really is.
What this data does show is that in 2006, oil and gas receipts earned Dubai less than $400m. The emirate has never been a significant energy producer, but
Dubai has excelled in providing the kind of services that have sucked in funds from other energy producers, from nightlife unique in the region to the chance to speculate on buildings that haven't even been built yet. Dubai serves as Iran's business lifeline (GSN 782/12), and has provided an entrept favoured by Indian and Russian gangsters (GSN 797/6 & 7). It now prefers to cater for Wall Street and luxury second home buyers.
Sources of income
According to IMF figures for 2006 - the latest available - Dubai earned around Dh1.33bn from profits generated by emirate-owned enterprises such as Dubai Aluminium Company Ltd (Dubal), Dubai Natural Gas Company (Dugas) and Emirates Airlines. In the same year, Dubai earned D3bn from oil and gas revenues.
Revenues from both sources pale into relative insignificance compared with the Dh11,651 the IMF describes simply as 'other' sources.
One theory that still does the rounds is that Abu Dhabi 'bankrolls' Dubai.
This may have been true at times in the UAE's 35-year history, but there is little evidence of the larger emirate subsidising Dubai to any significant extent recently. The last known major arrangement between the two senior (sometimes duelling) emirates was a complex deal struck in the 1990s,which defined relationships including specific agreements regarding cheap gas supplies fromAbu Dhabi to Dubai, ownership of enterprises in strategic sectors such as aluminium and who should pay the bill for federal defence and determine the UAE's strategy.
Global revenue streams
Apart from developing profitable business sectors in trade and tourism, a substantial and growing source of revenue is Dubai's stable of investment companies, which have proved capable of making some substantial profits (GSN 790/8).
How much, if any, of these profits find their way back into the emirate's budget is not clear. Dubai's investment funds - there is no single or major 'sovereign wealth fund' like Abu Dhabi Investment Authority or Qatar Investment Authority channelling the commercial emirate's money - appear in constellations managed by entrepreneurial stars that MBR trusts mplicitly (see box article on page 3).
These include state-owned Dubai Hoding (DH), chaired by MBR's right and man in business and more recently in politics, federal Minister of State for Cabinet Affairs Mohammed Al-Gergawi (GSN 788/23, 775 Supplement,14 February 2006).
DH's Dubai International Capital DIC) subsidiary, established in 2004, has made very big global investments.DIC has a 3.12% stake in European aircraft manufacturer EADS and equity in HSBC Holding. In November,DIC's $2bn Global Strategic Equities Fund (GSEF), acting through NewDawn GSE Asset Management, bought a "substantial" stake in Sony, although it did not disclose the amount.
Such moves are increasing scrutiny of Dubai's aggressive investment parastatals. Also in November, DIC once more refused to disclose the amount it had spent on, or the number of shares it had bought, building a "substantial" stake in HSBC; any stake over 3% would require disclosure to the London Stock Exchange (LSE).
DIC has gone on record as saying it wants the GSEF to swell to 5bn. And why not? DIC has shown it can perform, taking big profits from earlier private equity investments (GSN 802/11). In March 2005, it paid Charterhouse Capital Partners 800m for Tussauds Group; two years later it sold 80% to Blackstone Group for $1.9bn. Last May,Tussauds merged with Merlin Entertainments Group; DIC still holds a 20% stake.
In March, DIC said it had cut its substantial holding in motor manufacturer DaimlerChrysler.
DIC essentially doubled its money onTussauds, and retained a 20% stake in what morphed into the world's second biggest family entertainment group after Disney. DaimlerChrysler shares were trading at 32 Euros each in January 2005, when DIC bought sufficient to make Dubai the automaker's fourth largest shareholder (DIC said it invested $1bn); around the time they were sold, they were worth around 55 Euros - a near 70% killing.
Already DIC has shown itself big enough to shake global markets. In November 2006, chief executive Sameer Al- Ansari said he would consider selling DIC's stock once prices reached around 45 Euros; this comment reportedly precipitated a 21% surge in DaimlerChrysler's share price.But the investment fund doesn't rely on trading shares.
DaimlerChrysler's dividend distribution in 2006 for the 2005 financial year was 1.5bn Euros. A 3% shareholder would have been entitled to dividend payments of around 45.5m Euros, equivalent in 2006 to around 7.5% of Dubai's oil and gas revenues.
DIC now wants to focus on opportunities inAsia, and staged an early December conference at Dubai International Financial Centre (DIFC) to prove its point.
On 29 November, DIC played another typical card in its drive for global legitimacy - appointing well-known business leaders as advisors - naming former Sony chief executive Nobuyuki Idei and ex-BMW chief executive Helmut Panke as members of its advisory board, and announcing that GlaxoSmithKline's Jean-Pierre Garnier would join once he steps down as head of the UK pharmaceuticals giant in May 2008. They will "provide the fund with valuable insights,"Al-Ansari said.
Global equities strategy
A complex set of deals involving the new Borse Dubai and global players including the LSE and Nasdaq reflects a strategy to position Dubai at the centre of a global stock market network.
It has rivals in these ambitions, notably from other ambitious Gulf states. On the same day Dubai announced its LSE holding, the rival Qatar Investment Authority (QIA) announced its purchase of a 20% stake of the London exchange; QIA also bought the final 3% of Nasdaq's LSE holdings. This means Qatar can veto any attempt by Dubai to take full control of LSE - and has publicly said it will.
Such plays are placing Dubai, Qatar and other emerging players under unaccustomed scrutiny. There are concerns that if LSE is taken over by parastatal institutions such as Borse Dubai an independent private limited company will be owned by a foreign state-owned entity.
This is not a new story. Assets that were privatised by the British government such as the former British Rail's erstwhile ferry operator Sealink are now in the hands of the Dubai government via Dubai World, whose DP World subsidiary in 2006 bought the venerable P&O, which in 1998 had merged with a subsidiary of Sealink's successor Stena Lines. As part of the P&O purchase,DPWorld was famously barred from taking over US ports (GSN 778/16, 776/16).
"We didn't privatise UK state assets so they can be renationalised by another country," the FinancialTimes associate editor and chief economics commentator Martin Wolf, told delegates at a conference during the recent DIFCWeek. Few are as bold asWolf, the FT's feistiest intellectual, to challenge even details of the 'Dubai success story' in Dubai.
Local revenues
Government stakes in listed companies are a source of revenue for Dubai's public purse. A substantial flow of dividends is produced from these holdings, which now include the giant Emirates NBD.
Just through DH, its subsidiaries and investments, the Dubai government owns 70% of Dubai Bank (total net assets at end- 2006 of Dh4.5bn), 60% of Bahrain-based TAIB Bank ($434m assets) and 40% of Bank Islam Malaysia Bhd (assets of $2.7bn at end-June).
Then come the investments in real estate. Run by another key MBR ally, Mohammed Ali Alabbar (GSN 788/23), Emaar Properties, in which the Dubai government holds a 32% stake, announced plans in March for a land-swap deal that would give the government-owned Dubai Properties a 28% equity stake in Emaar in exchange for land ownership. The deal was shelved later in the year; it would have given Dubai a 60% stake in one of the world's largest property companies and increased the emirate's already burgeoning portfolio of property developers.
Of the UAE's three other major property developers,Nakheel is already fully state-owned (operating under Dubai World), while Dubai Properties is part of DH. Only Damac Properties remains firmly in private hands, of dual Iraqi/UAE citizen Hussain Ali Habib Sajwani and his family.
Leveraging other people's money
Dubai is very good at leveraging other people's money. At the mega Dubailand project, for example, three prominent UAE investors - Abdelrahim Al-Zarooni, Abdelrahman Falaknaz and Abdelrahman Bu Khater - were co-opted to join in a consortium to build the $735m, 80m ft2 Dubai Sports City.
Bahrain-based Gulf Finance House is the originator and major arranger of financing for the landmark $3.8bn Legends project in Dubailand.
"The government works on developing the infrastructure and providing an environment that encourages the growth of business, and gives a chance for the private sector to benefit from the large investment opportunities that it provides," MBR has said. He described the arrangements at projects such as Dubailand as "an initiative that strengthens the bond between the government and the private sector."
Smaller investors contribute to Dubai's real estate development too. Nakheel told GSN it asked individual purchasers of apartments and villas to put down deposits before construction work started, and asked for stage payments that fall due ahead of the developer's construction costs.
Indeed, Dubai's construction boom has been financed by end-buyers making advance payments. This pyramid investment strategy holds one key to Dubai's success - and a potential weakness. In the 1990s, when the market slumped and cash ran out, Abu Dhabi stepped in to bale out the Maktoums (backed, even more quietly, by Saudi Arabia).
But now, it is arguable that momentum has built to such anextent that the strategy can be declared a success. According to this argument, even if property prices fall - which, inflated by hot money as well by as the global real estate boom, seems most likely (GSN 788/28) - the downturn will only adversely affect the most recent buyers or most heavily over-leveraged investors.
Borrowing concerns
It is unlikely, however, that all of the cash required for the mega-investments Dubai is making has come from enterprise profits. The IMF has expressed concerns about UAE financial institutions and corporations' levels of borrowing to finance investment.
Credit growth has picked up significantly, but it is difficult to assess how much of this is an issue for Dubai, as opposed to the wider federation. "Comprehensive information on the UAE's total external liabilities (including the non-financial private sector) is not available," the IMF said in its latest Article IV consultation.
The Fund did observe that the federation's foreign liabilities had almost tripled in two years to reach nearly $80bn at end- 2006. Dubai told the IMF it would be establishing a debt management unit, in recognition of the problem.
Conventional wisdom has it that MBR took over the management of Dubai's oil and gas sector from late ruler Sheikh Rashid Bin Saeed Al-Maktoum's confident Mahdi Al-Tajir in the 1980s, and used dwindling energy revenues to pump prime investments in new areas such as tourism and transport before the oil and gas wells ran dry.
Now it seems as though borrowings and leveraging equity investments have replaced hydrocarbons as major sources of revenue. This all sounds rather risky, unless of course one wholeheartedly believes in MBR's vision for an increasingly vibrant Dubai economy.
The good news for a visionary if sometimes ruthless leader is that nearly everybody in jobs that seriously add value to goods and services in Dubai seems to believe in MBR's vision- and barring disasters that is probably what will make it happen.
Qualitative factors underpin Dubai's investment strategy
A cocktail of factors have contributed to the effectiveness of Dubai's investment strategy, ranging from the exploitation of cheap labour to an increasingly rigorous campaign to rid Dubai of dubious business practices, which started with action against revenue siphoning from public enterprises into private pockets.
For this, Sheikh Mohammed Bin Rashid Al- Maktoum (MBR) - who has made capturing revenue for the emirate a central mission all through his career - deserves credit.
English court records of a case in which Dubai Aluminium Company (Dubal) sought to recoup losses from allegedly corrupt practices by senior Emirati officials, expatriate managers and advisors in 1998 reveal one of MBR's earliest attempts to capture revenue for Dubai. They record that on 11 March 1983 the future ruler met a Lebanese middleman implicated in an alleged scam in which revenue earned by Dubal found its way into the accounts of senior Dubai officials, as well as employees of Dubal and its advisors.
Manuscript notes of this meeting speak of a "new era in Dubai", with MBR telling a senior Dubai official implicated in the Dubal scam that "his ways of business are over." They record other actions by the young prince to overcome corruption that would ultimately damage his family.
Qualitative factors such as reducing corruption, improving investment and trading conditions, and making Dubai a much easier place to do business than anywhere else in the region, have provided the commercial emirate with distinct competitive advantages that many others are only now attempting to follow.
So has providing people who do business with whatever they want, from warehouses and freehold property to alcohol and nightclubs.
Dubai's success at avoiding an Al-Qaeda attack or other negative newsflow has done much to underpin the boom. Dubai boosters believe that even if the worst were to happen, the emirate's position as regional/global hub would survive (GSN 788/25).
Some other Dubai investment players
ISTITHMAR - the investment arm in the constellation of businesses now called Dubai World, chaired by Sultan Ahmed Bin Sulayem (GSN 788/22). Established in 2003, Istithmar recently bought luxury retailer Barneys New York for $942.3m, and has also purchased several New York City properties. In London, it owns One Trafalgar Square and bought the Adelphi building for $567m to capitalise on burgeoning demand for hotel rooms and office space in major cities. In late November,
Broadway Partners closed its purchase of 280 Park Avenue from Istithmar for $1.28bn. Given the parlous state of the US property market this was not a bad deal for Istithamar, which in June 2006 had purchased the address for $1.2bn. Istithmar also invests in the industrial and financial services sectors. There is market speculation it may merge with Dubai World's property development arm Nakheel.
BORSE DUBAI - newest kid on the block, chaired by Dubai Financial Market (DFM) chair Essa Kazim, Borse Dubai owns the DFM and Dubai International Finance Exchange (DIFX) - itself a relative newcomer (GSN 773/8). It was formed in August, just in time to make some very ambitious plays to take significant stakes in leading stock exchanges. It has a 20% stake in the US' Nasdaq and the majority of Nasdaq's holdings in the London Stock Exchange (LSE), giving it a 28% stake.
Borse Dubai has also persuaded Nasdaq to invest in the DIFX, in a deal allowing Nasdaq to take Dubai's stake in the Scandinavian stock exchange OMX, subject of a messy takeover bid last summer.
EMIRATES NBD - another major new player, the Dubai government owns 56% following the merger in July of Emirates Bank International and National Bank of Dubai. Emirates NBD has replaced Saudi giant National Commercial Bank as the Middle East/North Africa region's largest banking entity, with some $45bn in total assets.
Gulf States Newsletter 2007
