A good rule of life is that there is no free lunch. The examples offered as proof to the contrary are simply misunderstood as they are pure luck, which would be clear if the many comparative failures are also taken into account. In a country – indeed a region – that has had meteoric growth over the past half-century, far too many participants seem to have confused a long-term economic bull market with corporate success.
To use the vernacular of investors, there was no alpha, which is value creation by individual companies, and it was all beta, which is company growth due to growth of the economy.
The success of companies based almost exclusively on the success of the economy has distorted the business landscape. Companies in banking, oil services and construction benefited greatly from a multi-decade boom as growth-based demand relieved any existing companies from competitive behaviour. They simply had to be present and they would win business. And now the tide has gone out, which allows us to see the real state of the economy.
A clear example is the banking sector, with about 50 licensed banks. To be fair, the number of active operating banks is fewer, but even at, say, 23 operating banks, the economy is clearly over-serviced, given the size of the population.
As a comparison, Saudi Arabia has 12 banks with a population that is about three times the size of the UAE and a domestic GDP about two times that of the UAE, on average for the past decade. There is no better indication that the existence of 50 bank licences in the UAE is not subject to full competitive pressure. It is now that we will see which banks have built the right infrastructure and which simply enjoyed a rising tide.
The fact that these banks and companies have reaped billions, and more, in uncompetitive profits over the years is not at issue. Economic growth needs dwarfed the inefficiencies of non-competitive business practices and public policy imperatives trumped free market capitalism, and they are thanked for their support of the growth of the economy.
Their personal profits are accepted as a well-deserved reward for their part in the country’s growth.
As the UAE’s focus shifts from local growth to participating in the global economy and diversifying away from oil, there needs to be a shift in the local business mindset, from an entitled approach to contracts to a more competitive approach that engenders a capitalist approach that is supportive of the UAE’s globalisation and diversification efforts.
Monopoly positions need to be restructured. For example, for a company owning monopoly agencies (such as a monopoly on selling a certain brand of car), the monopoly can be broken in at least five ways: 1. Open up agencies to all bidders; 2. Limit the number of agencies to any single beneficial owner; 3. Tax monopolies at a higher rate; 4. Force the company to either list or divest; and, 5. Some combination of the above.
It is a mistake for these monopolistic companies to believe that being more participatory with economic profits harms the original shareholders. First and foremost the monopolistic position that they maintain is not a right.
For example, the federal Government recognises the monopolistic position that Etisalat holds in some of its service offerings and has taxed the company for the position it has been awarded at about 50 per cent on the privileged services, even though the federal government owns 60 per cent of the company.
If a company that is majority- owned by the Government is taxed at such a high rate for its monopolistic position, shouldn’t private companies be taxed an amount greater than the current 0 per cent? Would it not make sense to start charging, say, a 30 per cent corporate income tax rate on monopolistic positions?
Do companies have a moral right to complain about billions in profits over the previous decades weighed against the imperative of creating a national competitive edge that can drive globalisation of the UAE economy? Do monopolistic companies have a right to throttle innovation and entrepreneurship?
Second, it is unpatriotic of companies with a monopolistic edge to try to hold on to their own profit-making ability at the expense of the economy of the UAE and its globalisation and diversification efforts.
They should not mistake the business given to them with skills that they supply, any available company would have been acceptable. Such companies need to learn to become better partners to the UAE economy, sharing the opportunities and wealth with new entrepreneurs and innovators.
The UAE deserves an effective partnership with the private sector, which needs to lead the way in removing artificial barriers to entry and ushering in complete free market capitalism, or risk the Government bypassing them by creating such an environment independently.
This article was originally published in The National.