17. Could Egypt Be The Next Dubai?


Yes it can. Egypt is located 30 minutes from 60% of the world’s oil and 45% of its natural gas. It sits in a sea of investment capital that could rapidly transform it, like Dubai, into a modern economy (hopefully with a little less speculation).  But whether Egypt becomes the next Dubai or the next Yemen, will depend almost entirely on the major GCC investors.

It is the Waleeds and Olayans of Saudi Arabia and the Mubadalas and Emaars of the UAE that are the capitalist engine of the Middle East. It was the GCC investors and entrepreneurs that fueled Dubai’s rise in logistics, real estate and banking; moved Saudi Arabia and Qatar downstream into energy-intensives; and brought Egypt’s pop stars to the Arab world. They are the prime movers of the region’s private sector.

I spent much of the last ten years working for Prince Waleed, the most prominent of the GCC investors. Based in Riyadh, I worked on his one mile skyscraper, his housing development the size of Manhattan, his internet companies, his banks, his hospitals, his schools, his Four Seasons Hotels, his Saks Fifth Avenue stores and so on.  The projects in the Middle East eventually exceeded twenty billion dollars – but I never once considered Egypt.

For thirty years, the major GCC investors have avoided Egypt and its sclerotic politico-economic environment.

Egypt under Mubarak has been a story of the repression of political but also economic liberty. A story of centralized political power leading to highly concentrated economic opportunity. As a result, the economic state of Egypt today is completely unsurprising – a few powerful individuals controlling most of a stagnant economy and the bulk of the population living off the scraps. This is not an environment in which major investors will bet their fortunes and futures. But that may be changing at the current time.

The political upheaval in Egypt has focused most attention on democratic vs. autocratic questions. But the primary factor for Egypt’s future – and the critical challenge for virtually every Middle Eastern government today – is economic freedom and the creation of a more dynamic private sector. Absent a diversification of the economy away from a few government-driven industries, Egypt’s political future, regardless of form, will be one of continued economic stagnation and exclusion. And this brings us back to the GCC investors as the ultimate deciders of Egypt’s fate.

The good news is that GCC investors could easily move tens of billions of dollars into a new Egypt in the next several years – as well as the brain power required to turn it into successful private enterprises. They view Egypt as their home market and they are comfortable with limited press and rule-of-law environments, in a way European and American investors are not. Additionally, Dubai’s hyperactive bankers and lawyers now enable capital to move quite freely within the region (perhaps too freely) so structuring the investments is relatively easy. Even Egypt’s decayed infrastructure is not that much of a deterrent. GCC investors are equally good at building shopping centers and water treatment facilities (the GCC is the project finance capital of the world). They could start deploying very large capital into Egypt this year.

The bad news is that Egypt does have three serious hindrances to attracting GCC investment and resuscitating its private sector: perceived instability, limited private property rights, and a “3 c’s” government (chaotic, corrupt, and crony). These are all deal-breakers for attracting large GCC dollars and unfortunately, these are deeply entrenched problems that Egypt can only solve over time.

The way around this is to copy Dubai. Launch special economic zones that sit outside the entrenched politico-bureaucratic system.  Copy the Jebel Ali Free Zone and specific developments such as Dubai Internet City and Dubai Media City in which foreign investors have clear property rights and favorable government policies.  These zones also place foreign businesses and their capital beyond the reach of government officials, which is critical.

A Dubai-type approach makes intuitive sense for Egypt:

First, large investment dollars could begin to enter the country almost immediately. There is a significant construction and fixed assets component to this approach so much of the investment happens in year one.

Second, Middle Eastern investors are generally crazy about real estate. If they will build an underwater hotel in Dubai and buy every third building in Knightsbridge, they will build resorts in Sharm El Sheikh, revitalize a Cairo district or design a new sunny suburb outside of Alexandria.

Third, high profile GCC investors can easily be brought in to lead these types of self-contained projects. The involvement of a reputable lead investor like Waleed would have a dramatic impact on the comfort level of every other GCC investor.

There is no reason why Egypt cannot follow Dubai on a rising economic path. Political freedom is still an unknown in the Middle East, but the roadmap to economic freedom is proven and can be copied. Remove the current deal-breakers, bring in a few high profile GCC investors and then focus on incremental, but gradually increasing successes. Successful private sector projects will quickly create confidence and naturally open the doors to the region’s vast sea of petrodollars. That’s how a new Egypt becomes Dubai and not another Yemen.

Jeffrey Towson is the former Head of Direct Investments for MENA and Asia Pacific for Prince Waleed, and is the author of the forthcoming global investing book from FT Press: What Would Ben Graham Do Now? (May 2011)


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