Royalties levied on the profits of Etisalat and du are not sustainable, says the head of telecommunications investments at a federal fund that controls a large chunk of shares in both the UAE's telecoms companies. Kaj-Erik Relander, the chief telecoms investment officer of the Emirates Investment Authority (EIA), said similar royalty systems around the world have been prone to failure.
"If you look at the worldwide phenomenon, one of the outcomes is that it's not a sustainable policy," Mr Relander said, adding that he felt the UAE royalty system would change soon. About one third of Etisalat's annual net profit is claimed as a royalty charge by the UAE Government, while du has provisionally set aside 50 per cent of its profits for royalties but has not yet transferred the funds.
EIA is the majority shareholder of Etisalat with a 60 per cent stake, and holds a 40 per cent stake in du. A change in royalty payments would be welcomed by Mohammed Omran, the chairman of Etisalat. The operator's officials have repeated calls to lower the operator's royalty payments to reinvest profits back into the company. "Our royalty is very high compared to international standards, while du now has not paid any royalty, which puts us at a disadvantage," Mr Omran said. "We have talked to the Government [and said] that they need to review the royalty system in order to have fairer [ways] to charge the royalties."
After being established by royal decree in November 2007, the EIA is the sole entity responsible for the management of Federal Government stakes in more than 40 corporations across the Gulf, including Etisalat, du, Gulf International Bank, United Arab Shipping Company and Gulf Investment Corporation. The EIA is ranked the 48th largest global sovereign wealth fund by asset size, below other UAE funds such as the Abu Dhabi Investment Authority (ADIA), International Petroleum Investment Company and Mubadala Development, the latest figures from the SWF Institute show.
Mr Relander also said the fund was looking to diversify its holdings away from the telecoms sector. "EIA is very heavy with telecoms and one of the long-term interests is to diversify into other strategic sectors for the UAE, which would be in the area of transportation, logistics, financial services, agriculture," he said. "We seek to find a role that is natural for a federal organisation, that there is no need to compete or have overlapping features with competing sectors. We're carving out a role for us and there's plenty to do.
"The majority of the activity is that the telecoms assets have been put into the EIA and we are building a team to provide the Federal Government an ownership function that is best suited for the purpose and we're in the process of figuring out what that is," Mr Relander said. He pointed to the agriculture industry and improving the UAE's food security programmes as a likely area for the EIA to focus its investments.
"There's a business opportunity and it's an important question for the UAE, just from a national security perspective," Mr Relander said. He also questioned how sustainable a payment model with Etisalat and du contributing a share of their profits to the government was and said he felt it would be modified soon. Tristan Cooper, the head analyst of Middle East sovereigns at Moody's Middle East, said the EIA's diversification strategy was in line with other regional sovereign wealth funds to hedge against their reliance on oil income.
"EIA is a bit of a different animal to a sovereign wealth fund like ADIA and is more of an asset management entity," said Mr Cooper. "EIA is a federal sovereign wealth fund and receives its budget from the Federal budget, which does not run large surpluses and have the same volume of inflows as ADIA does from Abu Dhabi." The Federal budget is expected to post a surplus this year due to a strengthening of oil prices from last year. Although the budget is believed to be based on an oil price forecast of about US$45, both government spending and revenue often overshoot official targets.
An expenditure programme of Dh43.6 billion (US$11.86bn) is contained within this year's budget - a 3.4 per cent increase on last year's spending. Falling oil prices and the cost of dealing with the effects of the global financial crisis last year drained the country's surplus completely, according to an official report by the National Bureau of Statistics. One of the largest sovereign wealth funds in the world, ADIA has an estimated $500bn of assets across stocks, bonds and other investments.
@Email:dgeorgecosh@thenational.ae @Email:tarnold@thenational.ae