by Lee, M
I felt I’d really landed on my feet at Showtime. The finance team I was part of was great. It included Brits, Scots, Indians, Filipinos, Lebanese, Yemenis, ‘Safas’ (South Africans), and two other Aussies. I liked and respected our CEO and CFO, both of whom were French. There weren’t any requirements to employ Emiratis as there were in many other Dubai companies; everyone was there to work and we made good progress.
There were, however, quite a few parts of daily life in Dubai that chafed. I really missed the relaxed, outdoors lifestyle we’d had at home, for instance. The dusty, dry air started to get to me. The beaches in Dubai were not like the beaches we’d known in Australia; the water was incredibly salty and the biggest ‘surf’ was a minor shore break on a windy day. There were no cheap little outdoor bars to have a drink and a bite to eat.
As ridiculous as it seemed, even getting petrol was a major pain. Abu Dhabi, the neighbouring emirate, was floating on the stuff and it was dirt-cheap throughout the UAE, with sales controlled by the government. But petrol stations were few and far between and they were often closed for no discernible reason. So you’d find yourself driving 20 kilometres to get to a petrol station, then lining up for an hour and a half to get to the bowser. But I reminded myself we were only there for three years. We just needed to stay focused on the big picture, save for our goal and get on with things.
MARCUS
Unlike Julie’s company, Nakheel did have employment quotas for Emiratis. The idea was to build skills among the locals, readying them to take their place on the international stage. The intention was fine but the reality fell far short. In fact, the quota’s failures compounded the problem it was trying to solve. Foreign executives who experienced quotas in action became so cynical that even if an outstanding Emirati were to present as a job candidate in an open field, they simply wouldn’t have considered him or her.
All Nakheel’s directors and managers were required to have an Emirati working directly with them and I was told to interview some locals for this role. Tariq Al Zarooni was the only one who showed up out of the four I was scheduled to interview, so I hired him. He was 23 and had completed nine years of schooling, which put him a long way ahead of the average. His English wasn’t too bad and he said that the reason he wanted to work for Nakheel rather than a Dubai government department (where most Emiratis worked) was so he could further improve in the language.
In common with most Dubai Emiratis, Tariq was seriously rich. Or, at least, his family was. I would come to learn that Tariq’s second uncle had made his money out of a mix of tourism and construction. He also owned ‘a few’ shopping centres. Tariq drove a brand-new gold Mercedes CL65 AMG that retailed for well over AUD300,000 and had a slightly lesser model that he used as a spare. He had unlimited access to his father’s platinum Visa card. There was little incentive for Tariq and the many Emiratis like him to do any real work. At first I thought it was just a Nakheel thing when I saw these quota employees in action, turning up to the office now and then, having coffee and a catchup chat and perhaps doing some of their own personal business before taking off. But I heard from people at other companies that this kind of behaviour was common throughout Dubai. Fixing it would require deep-seated generational changes, not ticking a box on a quota form.
In time, Tariq became disenchanted with me because I wanted to get on with the job and he wanted to talk, drive around or catch up with friends — anything other than produce cashflows, assess project feasibilities and set up business systems and processes. But before we parted ways he invited Julie and me to his family’s compound, giving us a glimpse into the lives of wealthy Emiratis. Among other trophies, Tariq proudly showed us his pet lion, the poor thing kept cramped in a small cage in a darkened barn, and a hunting falcon. He then produced a fur wrap that he wanted to give to Julie as a gift. She and I shared a horrified glance — the idea of a real fur was unpleasant enough but, even worse, this was the kind you might see on society ladies in movies from the 1930s or ’40s; it was complete with the fox’s head. Quick-thinking Julie thanked him very much for the thought but said unfortunately she couldn’t accept it because our dog wouldn’t like it. Bizarre as the reason was, it seemed to satisfy him.
There was another awkward moment before the day was out. Hospitality is a key part of Arabic domestic life and late in the day, as the sun was setting, his family put on a lunch feast for us, including a whole goat. As the guest of honour I was given the brain. I thanked Tariq, took a bite and quickly swallowed, trying to not think about what it was. One of Tariq’s friends, seated on the ground near us, who had said that the brain was his favourite part, enjoyed the consolation prize of gouging the goat’s eyes from its skull and eating those.
My job produced plenty of challenging moments too. In mid-2006, when I arrived, there were estimates of costs attached to Nakheel’s various projects but estimates is the key word here — no-one knew for sure. This was the problem I was tackling.
Nakheel’s then new Chief Financial Officer was Kar Tung Quek, otherwise known as KT. He had originally studied science at Glasgow University, before gaining accounting qualifications. Prior to coming to Dubai he had been Deputy CEO of the Singapore International Monetary Exchange, General Manager of the Singapore Commodity Exchange, and CFO of the Raffles company during its public float. None of this was connected with property development. But KT was in charge and he had been brought in to attract extra funding for Nakheel.
At the time, US and European banks eager to get a toehold in the region were lending money at cheap rates. The UAE was an ‘emerging market’ but it wasn’t classified as risky the way Eastern Europe and Africa were. However, banks still had to follow basic practices, which included examining cashflows for all current projects. A cashflow essentially documents the movement of money received and money paid out of a company over a period of time, enabling banks to judge what kind of risk they were taking in lending money. As Nakheel had not bothered with balance sheets or cashflows to date, it was a long way behind.
Right from the start KT showed great interest in what I was doing. Soon after I arrived in June he called me into a meeting and said he needed to know if the cashflow was for all of Nakheel’s projects. I explained that I had been hired specifically to organise Dubai Waterfront’s systems. His counter was that Dubai Waterfront only accounted for 65 per cent of Nakheel and he needed estimates right across the company. To help out I contacted Rod Gilbody in Australia and Rod worked out a consulting arrangement that would bring him back to Dubai to take on what I couldn’t.
Rod had the right software but it could only produce a meaningful report if it were fed accurate information, and as yet there wasn’t any. And yes, that was quite unusual.
Ed Sutton, whom I’d met earlier, was put in charge of co-ordinating valuations. As this was a specialised task Ed recruited Jones Lang LaSalle (JLL), who sent over two of their Australian employees. It was a huge job. Dubai Waterfront’s total area for development was one billion square feet (while metres were sometimes used, Dubai property was generally referred to in feet). Some of this would be beachfront, some canal-front, some bordering Sheikh Zayed Road, and some would be none of the above. Differing locations meant different land worth so the JLL team needed to calculate the value of the locations relative to one another, and then use comparative assessments of the local market to give each section an expected sale value in dirhams/dollars.
In July, Development Director Justin Crooks and I took JLL’s valuers out in a boat to witness the mind-blowing scale of one of Nakheel’s projects, Palm Jebel Ali. When finished, it was supposed to house 250,000 people, many in villas built on stilts over the water, and include four theme parks and other attractions. Boardwalks planned for the inner circle of the palm’s ‘fronds’ would form the shape, in Arabic words, of a poem by Sheikh Mohammed bin Rashid Al Maktoum, who had succeeded his brother a few months earlier as ruler of the emirate. The poem translated as ‘Take wisdom from the wise/It takes a man of vision to wri
te on water/Not everyone who rides a horse is a jockey/ Great men rise to greater challenges.’ (I could only assume it had lost something in the translation.) The words would only be identifiable from the air . . . for instance, from one of the Sheikh’s helicopters.
Dredging and reclamation for Palm Jebel Ali had begun in late 2002 and six months later Nakheel began selling properties off the plan. Purchasers were now being told their villas would be finished and ready to occupy in 2008 — two years away. The buyers had paid a deposit of between 10 and 20 per cent and committed to paying the rest as instalments at set intervals, with a final payment due when they accepted handover of the villa. Off-the-plan selling works if you keep tight control of your costs — but that was certainly not the case here. There weren’t even detailed engineering plans, just an ‘artist’s impression’ architectural drawing from which it was impossible to estimate construction costs.
Adding to the mess, the breakwater and land reclamation wasn’t yet complete, which meant none of the actual villa construction could start. And in the three years since the sales had been made, thanks to Dubai’s feverish economy the costs of building had more than doubled. This was simply bad business — the income from the sales was fixed at 2003 levels but the costs would keep rising at the inflated prices for the three, four or five years the construction would take — maybe even longer. This meant that unless something radical changed, the project would lose money. Enormous amounts of money. This was a common theme throughout the Dubai Waterfront and most other Nakheel projects. The JLL valuers could only shake their heads at it all.
Estimating building costs was another high-level skills job for which an American multinational, Davis Langdon, had come on board. Although the company operated around the world, Dubai Waterfront would be the biggest cost-estimate it had ever undertaken. They would be figuring out the cost of getting basic infrastructure in place, so that it was ready for purchasers (‘sub-developers’) to begin putting up their skyscrapers and villas or whatever they had planned.
As a developer, Nakheel worked in two ways. On some projects (including the villas on the Palms) it would see them right through to completion. But its main role was as a master developer, readying plots of land for sub-developers to buy and build on. Sub-developers would expect this land to be ‘serviced’, meaning that sewerage systems, power and water facilities should have been installed and basic infrastructure like canals, parks, bridges and roads should be in place. All of this was part of the sales contracts. The quantity surveying team’s estimate for getting these basic services in place was AED100 billion (approximately AUD35.6 billion) over a twelve-year period.
By the time I started my new job things were tense at Nakheel. Rod and his offsider, Joe Scarf, had worked tirelessly with JLL and the other cost-estimating and development teams to generate the cashflow projections, but the task was herculean. I hit the ground running to help them, focusing on the Dubai Waterfront and Palm Jebel Ali projects. Surprisingly there was a lot of resistance to this absolutely necessary process. Most staff at Nakheel treated it as an intrusion and could not understand why it was important.
Considering the breadth and depth of the information needed to arrive at our projections, I thought it was progressing well. KT did not. One day he’d be fine but the next he would demand that the cashflows be handed over right now and become highly aggravated, shouting in meetings, sending furious emails cc’ed to all and sundry, and threatening to sack people and have them deported (though nothing ever came of these threats).
I’ve worked with many people and seen a lot of management styles — passive and aggressive, by-the-book and eccentric, egocentric and inclusive — but I’d never seen anything quite like this. I wasn’t dealing with KT on a daily basis so it didn’t have too much impact on me. But I did feel for those directly in his firing line.
Towards the end of August, JLL were ready to present its valuation of the Dubai Waterfront. As is usual, this was handed over in a draft form; it would only be considered final once agreement on items was confirmed and signed off by both Nakheel’s management and the head of JLL’s team. The projected value of land sales minus the cost of creating infrastructure was AED15 billion (roughly AUD5.3 billion).
On hearing this, KT became very agitated. This was not the figure he wanted to present to the senior management at Nakheel’s parent company, Dubai World, or to the potential banking investors. If Dubai Waterfront accounted for 65 per cent of Nakheel’s developments, and it was worth AED15 billion, then Nakheel’s full slate would be worth AED23 billion (about AUD8 billion). KT told us that the figure for Dubai Waterfront alone needed to be at least three times this, closer to AED60 billion (AUD21 billion). Apparently he had arrived at this sum by assuming that the entire one billion saleable square feet that Nakheel was mooted to develop would be sold and that each square foot would make a profit of AED100. He then extrapolated this across all Nakheel’s other projects and came up with a profit of AED100 billion.
They were some pretty big unexamined assumptions right there. Perhaps there were buyers currently willing to pay that amount, but real-estate prices don’t remain static. They go up . . . and down. Before some of this land was ready to sell to developers it would be the end of the decade, and what the market might be like at that stage was pure guesswork.
A much, much bigger problem was that the cost of developing that land to the point where it could be sold — AED100 billion at current prices — made KT’s estimated profit seem fantastical. No-one was even talking about what happened if inflation was added in.
Undaunted, KT came up with a plan. All those infrastructure costs, he told us, would now become the responsibility of the Dubai government. They would pay for 90 to 95 per cent of the roads and bridges, as well as power, water and sewerage systems. After all, in his view, Nakheel was a de facto government operation. Any leftover costs (other roads, canals and so on) would be paid for by a yet-to-be-created ‘off-balance sheet’, the Nakheel Infrastructure Fund. This fund would get money by charging purchasers an additional service fee to build the infrastructure that their contracts already included in their purchase price. KT then directed these costs to be removed from all valuation models so that Nakheel’s business valuations increased by fourfold.
His idea was greeted with a mixture of scepticism, disbelief and alarm by financially literate senior management. None of us could quite believe we’d understood the idea correctly. But KT went ahead, presumably with Nakheel CEO Chris O’Donnell’s sign-off.
At that time the international business pages were full of the news of the conviction of former Enron CEO Jeffrey Skilling on a raft of charges. Five years earlier Enron had collapsed in the biggest bankruptcy in history. Investigations would uncover a whole range of devious practices, but the realisation that the company had shuffled its balance sheets to make its debt-to-assets ratio look better was the trigger for its collapse. A 2002 story about these events in the Journal of Accountancy was subtitled, ‘When a company looks too good to be true, it usually is’. At Enron, upper management had made a fortune in shares by manipulating the figures. That wasn’t happening at Nakheel, but still, the removal of costs to make the valuation look better had an unpleasantly familiar ring.
No-one wants to have alarm bells going off so early in a new job, and that’s especially so in a job for which you and your partner have uprooted your lives. But my internal bells were ringing loudly.
Chapter 5
‘DUBAI’S ECONOMY IS DIFFERENT’
JULIE
Even in these very early days Marcus would come home at night and tell me, in general terms, what was going on at Nakheel. I could see he was concerned and I thought he had every right to be. When he first described the CFO’s instructions to alter the valuation process I thought, ‘That’s not right’. Just to be sure, I looked up international accounting standards and checked. That confirmed my opinion that what was being done wasn’t good practice, to say the least. This topic of conv
ersation between Marcus and I grew and grew as time passed.
We became close to two married couples, Justin and Jackie Crooks and Tony and Ali Perrin. Justin and Tony worked at Nakheel too, and we would sometimes get together for barbecues or go out to dinner. Marcus, Justin and Tony would talk about the way things were being handled at work. They had each expressed concerns about financing, construction and other aspects of the company’s operations to their managers but they’d just been brushed off. As the months went by there was a fair bit of black humour about this and many other ‘Dubai moments’ at these gatherings.
We also went out to dinner about once a month with people who used to work for Investa, including Chris O’Donnell and his wife, Linda. These were really relaxed, social get-togethers. Even though Chris was the CEO of Nakheel, he was a regular Australian bloke. We were comfortable with him in a way we never were socially with Matt Joyce. I knew Marcus had spoken up at work, expressing his concerns to both Matt and Chris. But that didn’t make things awkward with Chris — those dinners were always a good time with a lot of laughs.
MARCUS
When I spoke to Chris and Matt about KT’s approach, Matt said he, too, was concerned, but Chris thought it was a perfectly reasonable strategy. And the banks also seemed to agree.
Because the financing was done under the strictures of Islamic sharia law, Nakheel couldn’t just ask for a loan; sharia law prohibits the payment of interest. Instead it organised what was known as a sukuk, in which any money made by investors would be termed ‘profit-sharing’, rather than interest. The sukuk is a kind of bond that can be traded on financial markets.
A regular bond is guaranteed by the issuer as a way of raising money for some enterprise that will hopefully make a profit, providing enough money to pay out the bond-holders at the end of the set term. If the issuer can’t pay out the bond-holder, the holder can go after whatever has been put up as collateral or even after the issuer’s general assets. So if Acme Corporation issues a bond to cover a shopping centre it wants to develop and that project fails, the bond-holders can demand that Acme unloads some of its other assets to repay them, or they may even take control of those assets.