It's the equity, stupid

This is an open letter to all the stakeholders of the combination of the words ‘Dubai' and ‘Debt'.

According to everyone from the Western media, Dubai is on the brink of bankruptcy. They cite Dubai's looming $80 billion (Dh294.2 billion) of debt. They cite Dubai World's now infamous request for a six-month standstill on repayment of debt maturing on December 14; which would arguably constitute a ‘technical' default even if the idea was accepted by the bondholders. The local media, especially the Arabic media, have been overly defensive, stating that the reaction of the West is shortsighted. Others have gone further and accused everyone, regionally and globally, of feasting on Dubai's hard times.

Dubai's Department Of Finance has made a clear distinction between sovereign debt and the commercial debt of entities that are owned by the government but are not necessarily part of the government. In an effort to avoid a run on the banks, the UAE Central Bank has made further facilities available to local and foreign banks operating in the country. Abu Dhabi, through two of its banks, says it will subscribe to half of Dubai's second tranche of its bond programme, valued at $10 billion. It has only made $1 billion available so far and will transfer the rest throughout 2010.

The reality is that despite the doomsday scenarios and the conspiracy theories, Dubai will recover — albeit through some form of sacrifice. Dubai continues to face challenges. These are trying times, but these pains are growing pains. This kind of pain is a harsh reminder that the era of trophy assets, arrogant accusations and vanity projects is over. Let's face up to the facts and admit that we had no business investing in Barneys, MGM Grand or even Villa Moda. These investments were, regardless of what the ‘synergy' slides of the investment presentations stated, not strategic. We have to accept that there were errors of judgment and take stock of the consequences of these decisions, keeping an eye on the big picture. One must always ask how a particular investment is good for Dubai the city, as opposed to just the investment groups.

One must note that an unfortunate habit in Dubai's financing style has gravely affected its debt problems. Most entities tend to have a healthy mix of debt maturities; short-, medium- and long-term. Dubai has been a fan of short-term debt due to its lower rates and often refinances this with more short-term debt. This cycle ground to a halt in September 2008 once the economic crisis became a local reality as opposed to an international phenomenon. And so, suddenly a large amount of debt that Dubai had planned to refinance became due. This is one of the top reasons why speculation about a default has become so prevalent.

Silver lining

It is important to note that Dubai has, to date, averted talk of privatisation. As with any business, raising debt is always preferable to equity, psychologically at least. Even if the cost of debt is at times more expensive than the cost of equity, the thought of surrendering control and opening one's books is always a deterrent.

I have a feeling that this mental block will be overcome soon due to the gravity of the current situation. There comes a time when raising additional debt and refinancing existing debt is no longer possible; this time is now.

A quick look at Dubai's portfolio of infrastructure assets:

• Dubai Airport, which handled 37.4 million passengers and 1.84 million tonnes of cargo in 2008, and is expected to have handled 40.5 million passengers and 1.8 million tonnes of cargo by the end of this year, despite the economic downturn. Dubai Airport could privatise and an airport management company along the same lines as BAA in the UK could emerge.

• Dubai Electricity and Water Authority, which happens to be very profitable and has continuously upgraded its capacity and technology. From the United States to Abu Dhabi, utilities have been privatised, not just to cut costs and secure funding, but also to gain access to expertise.

• Emirates airline, with its fantastic fleet that is projected to grow to 163 aircraft by 2012, has an excellent track record of year-on-year growth. It is worth noting that its decrease in profits relative to the years before is not related to a decrease in passengers as much as it is due to the re-evaluations of the derivatives they use in hedging the costs of fuel.

What I'm trying to say is that these assets, to name a few, continue to have sound reputations — not to mention balance sheets — and any large bank would almost immediately provide bridge financing for their (partial) sale. The question that remains is whether Dubai Inc will make this psychological leap. If not, what else can it do?

A smaller government holding structure would be the ideal evolution of Dubai, sanctioning a more entrepreneurial private sector and finally mark a much lauded break from the, so far, almost identical track of Singapore government conduct of affairs. It is high time we developed our own model

Mishaal Al Gergawi is an Emirati commentator on socio-economic and cultural affairs in the UAE.