Friday, June 25, 2010

Dubai pins hopes on return to basics

Dubai’s financial centre is to refocus on its core business of attracting financial institutions as the indebted emirate seeks to shrug off past excesses, according to its governor.

Ahmad al-Tayer, a former finance minister who has gained influence as Dubai seeks to revive its economy, said the tax-free Dubai International Financial Centre was to restructure to boost competitiveness.

This process, moulded by a report from McKinsey, the consultants, has included dozens of redundancies as the DIFC tries to keep costs down. But it will be complemented by attempts to attract financial institutions by pledges of a more competitive leasing structure.

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FT interview: Ahmed al-Tayer
Published: June 24 2010

Ahmed al-Tayer, a former finance minister, became governor at the Dubai International Financial Centre last year. The close adviser to Dubai’s ruler is tasked with maintaining the centre as the region’s financial services hub. Mr Tayer also plays a major role in dealing with the emirate’s usd100bn debt mountain. He was interviewed in Dubai on June 22.

Financial Times: The DIFC has been going through a process of review and restructuring following the global financial crisis. Are you planning a change of focus?

Ahmed al-Tayer: The DIFC is five years-old and as a centre in the Middle East, between Singapore and Hong Kong, and international centres like London or Frankfurt – this is a region rich in financial resources and in the past these resources were being invested abroad. There was a need to have a centre in order to create an environment, an ideal environment, of low taxes, to attract international companies, financial companies, and to attract companies that serve them, like law firms, accounting firms, Islamic businesses and asset management firms.

During five years, the DIFC made important strides, and it has served the region really by providing expertise and saving costs for companies – it’s cheaper for companies to be based here and conduct their business from here, their people can easily travel. And after five years the centre has proved its reputation and it has become one of the international financial centres.

There has been a global crisis, the biggest perhaps since the 1930s, and it hit Wall street and the US and spread across the world. Of course there was an impact. And in these cases, you don’t stand still. You review your plans and your strategies - and that is what has happened here.

After five years and faced with these challenges .... here at the DIFC, as DIFCA (the Dubai International Financial Centre Authority) AND DFSA (the Dubai Financial Services Authority) we are reviewing and we are also looking to also take advantage of the challenges. There are voices calling for higher taxes in other parts of world and as a centre here, without taxes, we look at how can we attract more companies.

What do we need, what are the policies that we can have? We didn’t want to do this on our own. We called in McKinsey which had worked on first strategy for the DIFC. And we gave them complete freedom - they spoke to our partners at the centre to see what are our weaknesses s and what we should change in our regulations in order to produce a five year strategy going forward. Based on that there will need to be a restructuring.

In the past the DIFC had made investments in order to diversify revenues. I think they were not successful investments. And we have now said that we will take a $500m of impairment charges ... At the same time there is also a revamp of the organisation chart... and the focus is on core business.

FT: So DIFC will not be looking to invest abroad anymore?

AT: Today no one is talking about outside investment given market conditions. We want to improve our assets but our main focus is on our core business.

FT: So what happens to DIFC investments?

AT: We look at all the performance of each investment and we booked all impairments and cleaned our books. No we’re focussed on how to improve these assets.

FT: Will you invest in the assets?

AT: We are investing in the existing assets and we are trying to improve because some of that dependant on the market for performance, such as private equity, some investment here and overseas, but we booked all the impairments and are moving on.

FT: Should the DIFC still be involved in things like aerospace though?

AT: We are focussed on our core business, as a centre, to attract financial services and related businesses. We are looking at how to increase the number of clients here. Thank god, even during the crisis, there was no decrease in the number of companies. This year there will be a 17 per cent increase in our clients. We expect the number of companies, which are now 755 - including 301 regulated entities, and 454 non regulated - to reach 905 next year.

FT: But what is the broader strategy of the DIFC?

AT: There is a department for business development that will focus on attracting more financial institutions. People are looking for a competitive place, people are moving, there is beauty in the centre and in it being in Dubai, we are a centre in a centre for tourism, logistics, trade. We have infrastructure for communications, transport, aviation, ports - this takes us 20 years into the future. We want to take advantage of the infrastructure... and despite the crisis there is growth in aviation, in tourism. Also, in the past five years there was inflation, now there’s surplus in housing and office space and prices are attractive.

FT: Is there a greater focus today on attracting companies from emerging markets?

AT: From emerging markets, from Europe, from the US. Some companies now are starting to work from Dubai to service Africa. We see this happening. Emirates Airlines covers most countries in Africa. The Chinese use Dubai as a centre for their businesses in Africa. The world is changing and it’s moving east. There’s a lot of attention on the east. We’re a centre that brings together east and west.

FT: Do you believe the DIFC’s past strategy was misguided?

AT: I don’t talk about mistakes or blame anymore. There is a new phase and each phase has its challenges.

FT: There have been redundancies at the DIFC, why were they necessary?

AT: There is a restructuring and a focus on the core business and the attempt to benefit from opportunities. We look inside as well. Sometimes you forget yourself, you relax, eat more, you don’t exercise and gain weight. I thought over five years the centre gained some weight. Any restructuring in the corporate world has pluses and minuses. But we are recruiting also. We are recruiting in IT, in business development ...

FT: Rents have also been reviewed?

AT: We are looking at this. The market changed and we have a unified policy for rents and we differentiate between clients who take large spaces. Those who bring 1000 employees are different from those who take a desk. But we want to encourage companies to operate with the most efficient costs.

FT: Other parts of Dubai are also going through a restructuring. You are now one of the top people involved. What is the new strategy for the future?

AT: Dubai’s philosophy was that it was set up as a services and trade hub for our region. We serve roughly 2bn people in the region. We have ports with big capacity, we have an airport and a new one opening up, and we have an open skies policy. We have a liberal financial sector and we have a competitive sector. Dubai is like a big warehouse for good sand services. We have vibrant trade with Africa, the sub- continent, the GCC (Gulf Cooperation Council) and we are the second economy in the GCC. So after the boom and the experience … we find that we have the infrastructure. Those spending on infrastructure now have to catch up while we’ve done a lot. It’s true that real estate created a boom in the past but real estate was never the real engine of growth. So now our philosophy and vision and what everyone is working on, whether in the government or in the private sector is to go back to our core business, to the roots, which is that Dubai is hub for trade, re-export and services.

FT: what was the problem with the old strategy?

AT: With the boom and the outside investment and the expansion, there was no control or a lack of administration in some cases. The scale of initiatives went beyond our ability to exert control. And there was negligence in … corporate governance because that may not have allowed some work to go on quickly. And there was conflict of interest and that hurt a lot perhaps.

FT: What do you mean by conflict of interest?

AT: Among some of the administration and officials there was conflict between focussing on companies and on their personal business. Now all these things will be dealt with and hopefully there will be stronger corporate governance.

FT: How is that being achieved, through which measures introduced?

AT: There are boards and we’re bringing in people with expertise for these boards, people with experience, clean people, and with loyalty. And we have (activated) the (government) audit department, which was not overseeing the companies in the past but only the public administration. In companies that didn’t have internal audit systems, we are putting that in. And we are bringing in risk management systems, and activating general shareholder meetings.

FT: What percentage government interest makes it a government company?

AT:: all companies with government shareholding.

FT: There is far more centralisation now in how policies are executed?

AT: Yes there is centralisation in oversight, in budget controls and governance of public institutions, and review of some regulations to make them more transparent and avoid conflict of interest.

FT: Has reputation of DIFC been affected by case against Omar bin Sulaiman, the former governor, who has to repay back bonuses?

AT: I don’t think so. This is an invidivual case. It happens.

FT: But there are many cases against senior people who worked in state related companies, they have to pay back bonuses, and there’s a feeling that this campaign has gone too far and is paralysing decision-making.

AT: I don’t think so. There is as saying “don’t steal, don’t fear.”

This is public money. And if there was abuse or waste of public money, it’s like taxpayers’ money, and there is justice, there is transparency. People should apply rules to themselves and others.

This is a healthy phenomenon and it gives credibility for Dubai and its institutions.

There’s no shame in looking into it.

FT: Aren’t you worried there is a whole layer of management that’s now discredited?

AT: Dubai is a breeder. It has expertise and it has men and women we are proud of. I don’ think ther will be a problem in finding people. Discovering what was wrong is not a bad thing. And you can count the cases on your hands.

FT: But there are questions here about the justice system.

AT: There is justice.

FT: Moving on to the issue of Dubai ’s debt. We have a clear idea of how you are managing the debt this year but what about in future years? You still have $15bn to $20bn of repayments every year.

AT: There is restructuring in Dubai World and a repayment schedule of 5 to 8 years. And hopefully this process will be resolved soon. At Nakheel also there’s a restructuring.

FT: But beyond that, you have a big bill to pay every year. Where will the money come from, given the recession.

AT: Which recession? We speak of the UAE economy, not the Dubai economy, and all indicators are that there will be growth this year. There are sectors that have been growing in first half of year – tourism, aviation, trade, logistics. We can see the growth.

Real estate will take time. And it (prices) rose too much. Now if prices go back to the past that would be an advantage for the economy. It gives people greater ability to spend on other things.

FT: But real estate is depressed and banks are not lending so how do you get back onto a healthy growth track?

AT:: Banks do lend to established businesses. Not for real estate, because there is a surplus in the market. But companies that want to expand, genuine businesses can expand.

In the 1980s we had a problem with loans to the real estate sector and the government intervened. Since then the central bank has established limits on real estate lending. Banks provide up to 70 or 80 per cent of value. In the recent period, many of the loans were partly repaid, so even if there is impairement, the value of the real estate is still bigger than the loans. So there is big repayment to the banks and people are not defaulting. And at the same time, banks are still giving out personal loans , car loans, credit cards. But not 20 credit cards for one person. It’s just more organised now.

FT: Is there a feeling among officials in Dubai today that the crisis and therefore the slowdown was necessary?

AT: Look, there are cycles everywhere. We always talk about Dubai but the whole world has had problems. And everyone was coming to us, all the delegations, and telling us open your markets, liberalise, remove all the boundaries so that we are naked and affected by what happens outside. Countries that were shielded had not opened up as much. But we looked at these people coming to us and said they have blue eyes, they know better.

Those who werent’ affected by opening up were shielded. Now you see in the US and Europe they are going from globalisation to nationalisation.

FT: So are you saying you should now be more protectionist?

AT: No, we’re a trading hub. But we want to see what went wrong. We were running a marathon and we were coming out first. We can be in the middle.

FT: Do you think the UAE companies law should be change to allow a greater share of ownership to foreigners, from the current limit of 49 per cent?

AT: My personal opinion is that it should stay as it is 49 per cent to 51 per cent, since we have free zones. If we give up everything, where will our nationals do, who will provide jobs for them? Do we just want them to be employees or do we want them to be involved in business?

FT: We used to be told that in Dubai expatriate population growth will continue to be high, perhaps as high as 7 per cent a year. After the crisis what are the projections?

AT: There is a problem with demographics so I don’t think the growth (of expatriate workforce) will continue like that. And we should look for quality, not just quantity.

FT: Finally, we’ve heard you might be at DIFC as an interim phase and until a restructuring is completed, but not permanently.

AT: I was appointed to this job – I have no plan to leave in two, three months.

by The Financial Times Limited