What happens Next: Part B

Just about the time I had posted the last blog, I read about a prominent World Bank official speak about Dubai and the future. Indeed I endorse the views of the learned World Bank official, especially on a number of issues. Most importantly the feeling that the debts that are maturing in the year ahead will be met and it would add that it is unlikely that the fiasco that was caused by abrupt announcements will happen again; all the more because lenders and the borrowers are in discussions.

However, some underlying anomalies within the economic system need to be corrected, and while this may take time, the building blocks needs to be put in place surely soon. One of these basic steps is to consider these measures, obviously in more detail than a blog can narrate, and then take a concerted view on the matters. I do feel that the economy has, since 2001 become highly skewed in two directions:

a. The private sector contribution to the GDP being an abysmal 13% imply that either government or government related entities were fueling the pace of the GDP growth. The result was that sectors like Hospitality (Jumeriah Group), and Real Estate (Nakheel, Emmar, Dubai Properties and others) were the dominant players and hence in a sense creating a huge concentration of rapid growth in the semi public sector or public sector hands. While as an impetus to start things off this is not a bad idea at all, but at some stage the diversification of this process into private hands through IPO's should have been considered.

b. The development cycle was being fueled by a high debt level, as most of the real estate developments involved infrastructure build out and the pace of planning outstripped the resources needed, resulting in a scramble for debt to fuel the engine. This was at no time seen in a broader perspective perhaps even considering inviting the private sector into a utility model to build the infrastructure, as is done in a number of countries.

This propensity of concentration in the sectors mentioned and the leveraging of the debt has to go through a process of de-leveraging and privatization. Ofcourse both these avenues pose some unique problems.

De-leveraging can only work with liquidity and appetite available for restructuring the loan profiles of the current debt, and this seems to be under way. However, privatization in the current market has to be put on the back burner. I personally think that this is somethign that should be given thought to.

Here is what I would do.

Announce soon after the debt resconstruction that the privatization is an option and to float mezzenine funds to take equity positions in some of the assets with a clear idea that within say 24 months the privatization will occur. This wll give the market the confidence that is needed, redress the private sector contribution to the GDP and most importantly decouple the existing situation. Yes it sounds simple, but it is actually something that needs planning and can be done selectively. eventually the government or GRE's can own about 30-40% of the entties and sell off the rest. I suspect the cash flow from these would be ample to redress the existing situation.

I believe some assets are perfect for this strategy, i.e. the hospitality sector, while others may have to be repaired and their timing of privatization may well be in the end of 2 years from now. But the intent itself, if made public, brings about the interest in the private sector, demonstrates a will to take structural measures to fix things and most of all shows the world the way out of the situation.