By Gavin Gibbon
Lack of government subsidies will force companies to 'stand on their own two feet'
Keeping the oil price low can be a fundamental driver of the UAE economy.
Speaking at the Arabian Business forum Success 2020 on a panel discussing ‘Turning the corner - the key steps to successfully restructuring your company’, Neil Hayward, managing director, Alvarez & Marsal, said that government subsidies were hindered some SMEs and, ultimately, economic growth.
He said: “Looking across the region, the fiscal break-even point for oil price is anywhere from $70 up to $140 so governments don’t have that surplus funds to put back into the economies and make life a little bit easier. So every business needs to stand on its own two feet. The government can’t continue to support them without taking on extra debt which then still takes money out of the economy.
“The low oil price actually helps the economy, it forces the government to take that step back. If you’re in any city in any part of the world, you’ll have the same discussion about the level of government influence. No country has it right.”
However, Hayward, who has 18 years of experience in turnarounds and restructuring, admitted that the UAE and wider Middle East was heading in the right direction. He added: “What I have enjoyed about being in the UAE and Middle East is, they’re doing it in 60-70 years what other global economies have been doing in hundreds of years and they’re almost catching up. Every year it’s got slightly better.
“The general trend is to improve.”
Sabah Al-Binali, CEO, Universal Strategy, agreed that the oil price was a huge factor in the success of SMEs, but stressed that the private sector was also playing its part.
“I think what is squashing success in entrepreneurs is being crowded out by the government that’s over-investing, being crowded out by the private sector that have monopolies and big cash cows you want entrepreneurs to grow, breaking the monopoly system and limit government investment,” he said.
“Sooner or later these zombie companies have to be allowed to fail so entrepreneurs can go in.”
According to research from The state of digital investments in MENA 2019, only 14 percent of all MENA start-ups funded in the last six years, shattered or failed. Of the start-ups studied since 2013 only 40 percent went to raise a second round of finance. Those who didn’t go for a second round of funding, 20 percent failed. Those who went on to get their third and fourth round of funding, zero failed.
Companies over-reaching was identified as one of the key areas where failure occurs, while operating outside of a company’s core business was another highlighted by the panel.
Mo Farzadi, head of PwC business restructuring team, said moving to different markets and geographies has also proven problematic in the past.
“I’ve seen businesses looking to expand into Saudi and not knowing the nuance of that market and unfortunately that’s been their downfall,” he said.
“When the dollar signs flash in front of a business owner or a business manager it might be an eye-watering number in terms of the contract that they just can’t turn away from. It’s usually the key driver.”
Abdulla Fareed Al Gurg, group CEO, Easa Saleh Al Gurg Group, stressed that, while entrepreneurs were encouraged to fail in order to succeed, such a mantra, particularly in this part of the world, was a difficult one to follow.
He said: “There’s a lot of cultural shyness in leaving or exiting a business. There’s a lot of legacy. People don't want to leave, there’s pride, there’s ego and there’s a lot of intense emotions.
“It takes a lot of courage and time to admit that and there’s a lot of denial.”