Take note: lenders hate unpleasant surprises


Much has been written in the international financial press about debt and Dubai, but the emirate is showing no sign of slowing its leverage-fuelled diversification.

Yesterday brought news that Dubai will borrow a further Dh15 billion to help fund the next stage of its infrastructure development, which is expected to cost some Dh53bn over the next five years as the emirate seeks to put in place the roads, bridges and utilities that will support its ambitious growth plans until 2015.

And why not? Money is cheap, and getting cheaper all the time as interest rates fall. Leveraged investment is a proven strategy for Dubai, and current levels of borrowing are not high by historical, or even contemporary global standards. Borrowing money to invest in infrastructure is essential if the emirate is to achieve its move away from energy-related revenue.

But there are caveats too, and Dubai would be well advised to heed the warnings that have emerged recently in Europe. Above all, the lesson is that lenders hate unpleasant surprises, and much prefer open, accountable transparency in the tricky creditor-debtor relationship.

Lesson number one from Europe comes in the shape of a huge cost over-run on the most expensive transport schemes ever contemplated. The European Union wants a web of rail and road links criss-crossing the continent from France to the Ukraine border, but new estimates of the cost suggest Europeans will have to find an extra €40bn (Dh231.31bn) to pay for it. The total cost of the plan now amounts to €380bn, which puts even Dubai’s ambitious plans in the shade.

Lack of costing transparency and management inefficiency are being blamed for the discrepancy.

The second case Dubai should examine closely before it embarks on its huge infrastructure spend is that of Eurotunnel.

For anyone who did not notice it, yesterday was a truly historic day – the Anglo-French tunnel operator turned in its first profit in the 20 years of its existence. It made €1 million.

That is good news, and testimony to the new regime at Eurotunnel, but it will never compensate for the billions written off in operating losses, massive interest charges and lost shareholder value that the company has suffered for the past two decades. And all this can be traced back to the origins of the project, when it kept shareholders and bankers in the dark about the true cost until it was too late.

Dubai should take note: infrastructure investment always costs more than you think; and the lenders like to be told before they are asked to put up more money.