Monday, November 30, 2009

Dubai: Xanadu meets Atlantis

The financial press has been obsessed with Dubai for years. CNBC and Fortune (among others) have fawned over this city-states officials and their so-called accomplishments in recent years.

An exotic, mysterious place with unimaginable wealth experiences torrid growth thanks to a visionary, omnipotent leader. Dubai had it all. This week we learned the story is a myth. It's been a long time in coming.

Dubai did move mountains of sand in recent years, but most of the economic activity was based on mountains of debt. The result: a massive waste of capital.... a desert mirage and an enormous (as yet unpaid) bill.

This week saw Dubai announce that it would delay the repayment of its debt thought to be $80 billion. Creditors should have been a bit more skeptical.

A 2004 Forbes article entitled "Arabian Knight" contained many red flags. It began:
Dubai is a place where the act of moving around sand dunes always involves billions of dollars. You might recognize the sail-shaped $1 billion Burj Al Arab superluxury hotel jutting into the Persian Gulf. Perhaps you haven't heard of the $3 billion construction of two islands in the shape of palm trees. Or the 480,000-square-foot hole for a new $4.1 billion airport terminal. That's in front of the site for Dubailand, an improbable $5 billion Disneyesque project comprising indoor snow skiing, an animal safari and amusement rides--but not a single mosque.

The guy driving all this construction is a bit of an oddity himself. Sheikh Mohammed bin Rashid Al Maktoum, 54, who rules this tiny city-state (roughly the size of Rhode Island, is Dubai's de facto Muslim leader, but he has a distinctly capitalist tilt.
Capitalist, really?

The article goes on to say:
It's not quite the business mecca it pretends to be, not yet, anyway. Technically, foreigners can't own land in Dubai - or anywhere in the United Arab Emirates... The economy remains opaque because there's little distinction between government fisc and private treasure of the sheikh and his three brothers, estimated at $10 billion.

The sources of that wealth are a little fuzzy. Mohammed gets $2 billion a year in income from assets accumulated by his father, Sheikh Rashid. Then there's an estimated $2.5 billion a year, a subsidy from the UAE to the ambitious autocrat and his family. In addition, Mohammed controls luxury hotels, banks and at least six beachfront palaces, not to mention a stable of 1,200 Arabian racehorses.
He likes horses!!!
Think of Dubai as a corporation and Mohammed its chief executive--without a board of directors getting in his way. He can increase the value of land simply by building, say, a marble-clad hotel on a portion of it. The airline he launched delivers tourists who stay at his hotels and buy goods sent through his ports. To keep things humming, he funnels cash to his friends in the form of highway and hospital contracts. "Under Sheikh Mohammed," says Khalaf Al Habtoor, a billionaire construction magnate whose firm helped build hotels, hospitals and airport facilities, "anything is possible."

Anything except failure. In 2000 the sheikh's friends Abdullah and Majid Al Futtaim couldn't agree on who should run their $1 billion-plus auto-trading and real estate business, which includes exclusive selling rights for Toyota, Jeep, Volvo and Chrysler, as well as a 1-million-square-foot shopping mall. Squabbling might have driven both ventures into the ground. Mohammed ordered each sib to bid on the assets, highest number takes all. "His Highness never wants to see anyone go bankrupt in Dubai".
Utopia! No directors, no failure... anything is possible.

Hey, this is that new Bernanke-Geitner brand of capitalism!

Forbes continued:
Not all the sheikh's projects make money. The Burj Al Arab hotel doesn't. Taxi drivers in Dubai know it as "the world's only seven-star hotel"-- but its nightly rates of $1,500 to $7,332 aren't enough to turn a profit. "You have to think of why it was built," explains pal Al Habtoor, whose firm helped construct it.

Symbolism can pay off. Weeks after Sept. 11 Mohammed authorized the purchase of $35 billion worth of Boeing and Airbus jumbo jets for Emirates, just as other customers were abandoning their orders. He looked like a hero--and managed to negotiate discounts amounting to $20 billion. Last year the sheikh spent at least $400 million and sent his ministers on multiple trips to Washington to beat out Singapore as host to the annual meetings of the World Bank and the International Monetary Fund. The events brought 15,000 visitors to Dubai, along with the global media.

Now to attract more foreign capital. Remember that pair of man-made islands in the shape of palm trees, 3.5 billion cubic feet of sand? Someone like Donald Trump might be interested: Due for completion in 2007, the project will offer $400,000- to $1.5-million ocean-view villas, 40 hotels--plus a water theme park with dolphins and killer whales--and a $550 million shopping mall.

Trouble is, no federal law permits foreigners to buy land in the UAE. Still, Mohammed has authorized the state-run property development company, Nakheel, to allow foreigners to invest in real estate via 99-year leases. But the draft of a new bill from the 40-member UAE federal national council leaves open the question of whether foreigners can resell property, or will it upon death, even if Islamic law prohibits it.
The article briefly mentions some (minor) issues regarding foreign criminals using Dubai to launder money, terrorists (possibly) using Dubai to plan September 11 and smuggle nuclear materials, and a general lack of financial transparency and liquidity. My kind of place!

How can anyone ignore this stuff? One has to ask: With all these issues why did anyone loan money to Dubai?

Ultimately all roads lead back to the personality cult of Mohammed. Even after raising some key points, Forbes did its obligatory part.

(He) is a very busy man these days. "He doesn't sleep much," says Lynton Jones, a British expat hired last September to open Dubai's new stock exchange. "He'll show up early on a Saturday morning and say, ‘Show me what's going on.' And if you present him with a problem, he wants to sort it out instantaneously." Like deciding to add dozens of customs and immigration agents after visiting the airport's overcrowded arrivals hall at 1 a.m.

No detail is too small to vet. Mohammed weighs in on lease proposals for Dubai Internet City, part of a tax-free, 5-million-square-foot office park for silicon and software. He analyzes new ways to process parking fines on the Web and locate missing animals that escape a wildlife park. He has perused 50 studies from 42 different consulting firms for Palm Island.

"There have [always] been critics and naysayers," he says. "We have the will, the passion and the resources to drive this success."

All such stories started (and ended) with a focus on crowned prince Sheikh Mohammed bin Rashid Al Maktoum. And why not, the biography on his personal website entitled “Leader, Equestrian, Poet” says that Sheikh Mohammed’s “present day status” is as “a global leader, whose vision has transformed the face of Dubai and the UAE."

No mention of debt payments or defaults.

Fanciful images of bin Rashid’s vision are everywhere online and in print. Most look like Thomas Kinkade paintings. Literally.

Quick, which one is in Dubai?

I guess it's better than showing a construction site.

Much of Dubai remains unfinished despite all the attention paid to the indoor ski resort, the world’s tallest building, the world’s only 7 star hotel, the new home of the QE2, etc. When does it become obvious that this is a farce? Image over substance.

When money is cheap and plentiful, nobody asks questions.

Is there a sizable market for luxury homes with views of the Persian Gulf?

If you go to Google Maps and type in "Dubai", the resulting map contains two predominant colors: blue (water) and brown (sand). The two colors meet at the southern coast of the Persian Gulf. It is here (in particular) that the story of Dubai becomes clear (via satellite).

Al Maktoum succeeded in building his Palm Islands. Zoom in and look closely. Like a defunct Florida condo development, Palm Jumeria (Phase I) is only partially done. Whole streets are vacant. On others, the grass and houses abruptly stop. As planned communities go, palm-shaped islands are imaginative, but the story is an old one.

Build it and they may not come.

I wonder how many of the homes are in foreclosure. Is that even possible in a country with no property rights? As near as I can tell from 30,000 feet, commercial space isn’t faring much better. On a spot labeled The Taj Exotica Resort and Spa only sand is visible. With a name like that, there should be a waiting list, no?

The Trump Dubai (no joke) is doing better. According to Forbes, the completion date was supposed to be 2007. Now it’s 2010. Hey, at least its under construction. Please click the link to see the video. Quite a sales pitch.

Despite an overabundance of homes and hotels, Palm Jebel Ali (aka Phase II) is under construction. So far there are are no roads or buildings. Only the islands that make up the palm tree are under construction. Care to own (um, lease) a sand bar? As if Phase I wasn’t failure enough. Hey, not all the sheikhs projects make money!

This is what you get without free markets. This is government planning at its "best".

One man. One vision. No questions please.

For those who question the wisdom of this visionary, look no further than that website. There are 16 pages of notable quotes. One of my personal favorites:

“Money is like water, block its flow and it will stagnate.”
Taking his own advice, Dubai's leader has seen to it that money flowed like water. And when he needed more, he borrowed. And borrowed. And borrowed.

Nobody should be surprised that it has ended this way. One man who doesn't know his own limitations. Supreme arrogance and staggering ignorance.

Just read the sheikh’s quotes:
The successful team is the one that makes 1 plus 1 equal 11.

I don't punish those who work and make mistakes, quite the opposite, I support them and encourage them to be more creative, even if they make more mistakes.
No kidding. If you’re rich and royal, everything you say is profound.

Perhaps the free market can intrude and finally put a stop to serial mistake-making. To me, the visionary running Dubai is looking all too human, but Dubai creditors, take heart. As the visionary leader always says:

We have succeeded because we have always believed that tomorrow is a new day, that yesterday's achievements are in the past and that history will record what we achieve in the future, not what we have achieved in the past.
The debt is "in the past".

Ever the micro-manager, nothing escapes Mohammed's commentary:
Camels exhibit a number of unique characteristics and are of great importance to the UAE’s heritage. The attention given to them stretches back thousands of years and is a part of the care we give to the heritage of this land.
Who loaned money to this guy?

The mainstream media is having a tough week. Their myths are dying by the day.

First the “settled” science of anthropological global warming blows up and now the genius of Dubai.

Oh, wait. His Highness knows all about global warming:

We have to face facts; advanced industrialised countries must accept the majority of responsibility for cleaning up the environment because their plants are emitting most of the pollutants. They are not doing enough…some developed countries do not want to take responsibility under the pretext that it would undermine the progress of their economy, and affect the welfare of their society. This is both unfair and selfish.
A lesson on science and selfishness from the mouth of a sheikh.

Disclosure: The author did not lend any money to Dubai!

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