While the Dubai government is working diligently to raise the capital needed to meet its creditors' demands for 2010 and beyond, it must also look into the causes of this crisis.
To safeguard our future, learn from mistakes of the past
The financial loan package provided by Abu Dhabi to Dubai last month has allowed us all to breathe a sigh of relief, for the time being at least. But while the Dubai government is working diligently to raise the capital needed to meet its creditors' demands for 2010 and beyond, it must also look into the causes of this crisis. It's time for Dubai to graduate from developing-economy status and proceed like other ambitious emerging economies into the big league. The biggest measure of responsibility and good governance at this time would be to look inwards and investigate exactly what led to Dubai's accumulation of $80 billion in foreign debt, equivalent to its annual Gross Domestic Product.
This inquiry must be carried out by independent, practical and professional individuals. It should be chaired by someone who is not involved in the government related entities (GREs) under investigation nor should it be a figurehead who comes from an unrelated industry. Also, it would be ideal if the committee were federal, since the Dubai debt issue is not a localised event but a nationwide concern.
The United States dealt with the current financial crisis by initiating steps to remedy its effects, as well as by launching an 18-month inquiry into its causes by establishing the Financial Crisis Inquiry Commission. The 10-member bipartisan committee started work in the summer of 2009, with the task of examining what led America into the financial debacle, and is due to present its findings on December 15 this year. This commission has been armed with wide ranging authority, including adequate staff and subpoena powers. It has also been assigned $8 million to ensure that it is able to conduct its work independently.
In fact, this is not the first such financial inquiry in the US. In 1932, the US Senate set up an inquiry to establish the causes of the 1929 Wall Street Crash. The inquiry, which became known as the Pecora Commission when Ferdinand Pecora was appointed its chief counsel in 1933, lasted for two years and interviewed powerful bankers and stockbrokers. Its findings paved the way for the establishment of the Glass-Steagall Banking Act of 1933 to separate commercial and investment banking, the Securities Act of 1933 to set penalties for falsifying financial information, and the Securities Exchange Act of 1934, which set up the Securities and Exchange Commission to regulate stock exchanges.
In the wake of the recent global meltdown, Australia and the European Parliament have launched similar inquiries. And the Republic of Ireland, another state that has gone through the same cycle as Dubai, has launched a comprehensive investigation into what went wrong with the Irish banking system. Such an inquiry would ensure that the mistakes made by some of the GREs will not be repeated. It would also ensure that how GREs use the funding provided to them by the Dubai government would be adequately monitored in the future. For instance, heads of GREs need not use private jets to travel to meetings overseas when Dubai has one of the world's leading airlines that flies to more than 100 destinations.
The findings of this inquiry will also enable the government to understand how paper-based gains were passed on as realised gains, thereby allowing some individuals to claim premature bonuses. The Dubai inquiry would also learn why the debt of $80 billion was accumulated using short-term loans to finance long-term projects, meaning that payment was due much in advance of the projects' completion. Some of the money that Dubai has earned through decades of hard work was also spent on trophy assets abroad that had more to do with media headline-grabbing than sound investment strategies. My proposed Dubai financial crisis inquiry commission will be able to investigate the reasons why so many GREs disregarded basic sound investment rules.
We have already seen how in some cases the left hand of some Dubai GREs did not know what the right hand was doing. One example of this was in 2007, when Dubai World raised a $2.7bn sukuk, or Islamic bond, while its subsidiary DP World was also negotiating a large loan. One thing is for certain: the role of this inquiry commission, should my suggestion ever be taken seriously, will not be easy. There may also be resistance to the questioning of executives and related parties. Ultimately, human beings are prone to making mistakes, but there must be a clear, transparent and systematic process put in place that needs to be followed to the letter for Dubai to emerge as a stronger city, as we all hope it will.
Finally, the findings of this commission should be a warning to any GRE that is embarking on a major spending spree, thereby strengthening the financial foundations of the country. Sultan Sooud Al Qassemi is a non-resident fellow of the Dubai School of Government