Dubai's fierce growth hinges on state-run companies operated like private ones

DUBAI, United Arab Emirates -- Dubai Ports World's $6.8 billion purchase of Britain's P&O is drawing heightened scrutiny because it includes the takeover of significant operations at six U.S. ports. But the deal represents just a small part of this desert city-state's headlong rush into global investing -- a rush almost without precedent.

The stated goal of the tribal sheiks who run Dubai is to mold it into a global hub of trade and luxury tourism. Until now, though, less attention has been paid to the billions being spent by their state-owned investing arms -- as well as where that money comes from and how the investments are performing.

The purchases include everything from apartment complexes in the U.S. sunbelt to trophy hotels and office towers in New York City to the Tussaud Group's wax museum franchise worldwide and a $1 billion investment in carmaker DaimlerChrysler AG.

There is no secret to the magnitude of Dubai's transformation. The sheikdom's dozens of ultra-luxurious resorts -- most sitting on white sandy Gulf beaches -- lured in 5.6 million tourists in 2004. State-connected firms are building the world's tallest skyscraper amid forests of shorefront high-rises and reclaiming islands in the Gulf in the shapes of palm trees. And in Saudi Arabia, a Dubai developer has just broken ground on a $26.7 billion project to build an entire city on the shores of the Red Sea.

Tax-free country

Analysts suspect earnings must be quite good because tax-free Dubai is able to fund an enormous and ongoing building boom that includes new highways and bridges, power plants and a subway system. Still, there is an air of mystery about where the money comes from since less than 6 percent of Dubai's income comes from its own oil, unlike other members of the United Arab Emirates and Saudi Arabia.

One way to look at how what could be dubbed Dubai Inc. works is to compare it to private buyout firms like Kohlberg Kravis Roberts or the Carlyle Group. Except that instead of being funded by pension funds and rich individuals, it acts as a conduit for neighboring countries flush with oil money: Saudi Arabia, Iran, Kuwait and the neighboring emirate of Abu Dhabi.

"Dubai has been serving as a financial center of a sort, channeling the investments internally first, and now diversifying internationally," said Abdul Khaleq Abdulla, a political scientist at Emirates University.

Many experts here believe bolstering transparency is Dubai's next logical step, one that would put in place laws requiring greater disclosure of corporate ownership stakes and financial results.

"Of course it's an enormous success story. But is it time to pause and reorganize the home front? I think so," said Dubai-based political risk analyst Youssef Ibrahim of the Strategic Energy Investment Group.

"When you jump like this on the global scene, you have to have your internal front secure," Ibrahim said. "You've got to give the world a chance to digest Dubai. You can only push so fast."

Little-known entity

The owner of Dubai Ports World is a little-known entity called simply The Corporate Office, or TCO, a government holding company whose portfolio includes some of Dubai's most profitable assets. TCO is overseen by Dubai's leader, Sheik Mohammed Bin Rashid Al Maktoum, hailed locally as the architect of Dubai's physical transformation. Outside Dubai, Sheik Mohammed is best known for establishing the prominent Godolphin horse racing stable and his sponsorship of the Dubai World Cup, the world's richest horse race, with a $6 million purse.

Among TCO's other holdings is Nakheel, the real estate developer in charge of reclaiming three resort archipelago in the shape of date palm trees, among 15 huge developments worth a collective $30 billion.

TCO also operates Dubai's customs and free zones, the Dubai Metals and Commodities Center, investment bank Istithmar and mortgage lender Tamweel. All the TCO companies, including DP World and Nakheel, are headed by Sultan Ahmed bin Sulayem, who sits on the TCO board.

Dubai's airport is already the region's busiest, its Jebel Ali port and free zone is the world's largest manmade port and its airline Emirates -- which does release financial results -- is the Arab world's largest and one of the world's most profitable.

Dubai's government developers also are clearing the desert south of town to build Dubai Logistics City, a trade zone that will ring a new international airport with warehousing, offices and homes.

Until recently, most of the investment focused on construction inside the emirate. But with many signs pointing to the coming saturation of Dubai's real estate sector, Dubai's government investment arms have started looking outward.

Dubai Holding's Jumeirah International, this year bought Manhattan's Essex House hotel and renamed it the Jumeirah Essex House after one of Dubai's beachfront neighborhoods.

Abdulla says Dubai has long emulated Singapore's success as a trade and logistics hub and he said TCO is modeled on successful government-run holding companies in that the Southeast Asian city-state.

TCO "is a government entity that runs like a private business," Abdulla said. "It's not bureaucrats running enterprises. They unleash them and give them to CEOs to run to private sector standards."

DP World's outbidding Singapore's PSA International for Peninsular and Oriental Steam Navigation Co., a British port operator, also signals that Dubai is prepared to take on Singapore directly on the world stage.

A filing last year by P&O showed that DP World's profits were $185 million in the first half of 2005. But a company spokesman said that figure does not include results from the company's $1.14 billion purchase last year of U.S.-owned CSX World Terminals.

Dubai Ports' profits surged from $200 million in 2002 to $333 million in 2004, the filing shows.

On Sunday, DP World offered to submit to a broader review of potential security risks from its deal to take over operations at six American ports. The company also promised to create an American subsidiary that would function independently of executives in Dubai.

The rancor about Dubai's investments in the United States is not reciprocated here. The United States cuts a large profile in Dubai: the U.S. Navy has a permanent presence in Dubai's ports, allowing the ports to handle incoming warships making port visits. U.S. Customs has a container inspection team based at the Dubai ports. Even the UAE dirham, the currency here, is pegged to the U.S. dollar.

And U.S. companies have been cashing in on Dubai's boom. Microsoft Corp., Sun Microsystems Inc. and IBM buildings dot an office park here. Harvard Medical School is building a satellite campus, while U.S. construction giants Parsons, Turner and Bechtel are managing construction across the emirate, overseeing buildings designed by American architectural powerhouses like Skidmore, Owings and Merrill.

Even so, a realization appears to be sinking in: America has limits to the level of its friendship with Dubai or any Arab state.

"They're learning they have many enemies over there," Ibrahim said.