How viable is a privatization plan for Dubai?

Dubai shares fell sharply yesterday in response to an official admission that privatization of government assets was one of the options being considered by the city to reduce its debts, estimated to total $109 billion by the IMF with $40 billion plus due over the next two years.

Perhaps the government has taken heart from the US Government’s sale of $22 billion in General Motors’ stock last week, the largest share offering in history. But then the S&P 500 is up 70 per cent in the past 20 months, while the Dubai Financial Market hit the bottom this summer and seems now to be ending a modest rally since then.

Supply and demand

Local analysts immediately commented that the last thing a fragile local stock market needed was to be flooded by massive issuing of shares. Lest we forget in any marketplace if there is an excess supply of something then prices fall. Dubai shares are just another commodity, and market forces apply.

The government too would surely want to wait for a higher stock market, perhaps even a booming one, before selling its shares. Otherwise it will be getting a depressed valuation, not a high one.

For example when DP World shares were sold a couple of years ago the stock sold for $1.30 a unit, not a share price seen again since then, and DP World currently trades around half that valuation.

That said the world’s most profitable airline Emirates would find new shareholders now, even if they declined to pay a peak of market premium. More shares in DP World could be sold but only at the risk of lowering the present depressed valuation.

Equity release

On the other hand, it is good to hear that the Dubai Government is now considering all its options. There is substantial value locked up in state-owned companies that can be released and debt can then be effectively swapped for equity.

But there is also an issue here of throwing good money after bad. Taking money out of profitable companies and using it to prop up companies that should be allowed to fail is not going to do anything to help the recovery of the local economy.

In any recession there are survivors and casualties. The survivors go on to be the successes of the future. The mistakes have to be eliminated and forgotten. Only then will the stock market begin to feel more confident about the future, and start to allow the recapitalization necessary to fund expansion again.

Management buy-ins

A truly radical privatization plan would look at ways to bring in new management with option schemes to rebuild companies ready for later flotations. Big state entities might be broken up as a part of this process and divided into units with a viable business plan and those without one.

By refocusing on transport, tourism, trade and logistics the Dubai Government is on the right path. It does, however, still have to deal with the problems left by the real estate crash, and sort out its development companies and banks.