Scotland making the case for investment

05 October 2009

The Scottish government is looking for ways to make the country more attractive to Middle East investors as it seeks to double the amount of Gulf money invested in the country.

Scotland is rapidly building a repu-tation as one of Europe’s most attractive investment opportunities. Foreign direct investment (FDI) in Scotland in 2008 totalled $41bn, and the country has been named Europe’s foreign investment region of the future for 2008-09 by the UK’s FDI Magazine. The capital, Edinburgh, is ranked the most attractive small city in Europe for foreign investment, while Dundee, Scotland’s fourth largest city, is ranked fourth.

International investors, including Gulf companies and funds, are attracted to the country by its reputation for high-quality produce, innovation and technology. MEED estimates that investors from the region either hold or are planning investments in Scotland worth about $4.6bn, about 10 per cent of the total.

Although credit controls are tighter and investments are likely to be more carefully scrutinised in 2009, the falling value of the pound – down more than 25 per cent against the dollar from one year previously at the time of writing – makes further investment into the country an attractive proposition.

“Scotland looks like a pretty good destination for gulf investors,” says Alan Shanks, Dubai-based partner at Edinburgh-based law firm HBJ Gately Wareing. “In terms of the UK, it is more accessible than London and the southeast, and for things like engineering and alternative energy, it is one of the key places in the world.”

Sovereign cash

Shanks says Scotland is a particularly good investment opportunity for the Gulf’s cash-rich sovereign wealth funds.

“Sovereign wealth money is patient money invested for the long term,” says Leo Koot, managing director of Taqa Bratani, a wholly-owned subsidiary of Abu Dhabi National Energy Company (Taqa). “It is looking for long-term returns rather than a quick flip like private equity. Funds would be looking for opportunities in proven assets, and Scotland has a lot of those.”

Under Koot, Taqa Bratani has acquired three key North Sea oil and gas assets since January 2008, when the company bought Canadian firm Talisman Energy’s oil and gas operations in the Brae area of the North Sea for $631m.

In August this year, the company took over the operation of the key Brent oil pipeline system, which transports 8 per cent of the UK’s oil, and on 3 September it bought four oil and gas exploration and production blocks from Esso, a subsidiary of the US’ ExxonMobil Corporation, and the UK/Dutch Shell Group.

Taqa has not disclosed the total value of its acquisitions, but analysts estimate the company paid more than $2.2bn under the deals. That is before an $834m capital expenditure programme to upgrade its assets over the next five years. The company has also boosted the local economy, creating 800 jobs since it opened its Aberdeen office in June 2008.

Koot says this is something the previous owners, looking for higher profit margins, would not have been able to do. “It is good for the country to have Taqa here,” he says.

Taqa is not the only UAE fund to be attracted to Scotland, although it is the country’s national pastime – golf – and its potential as a major tourism destination that have attracted other investors.

In May 2008, the Turnberry golf resort was bought for about $90m by Leisure-corp, a subsidiary of Dubai-based sovereign wealth fund Dubai World, which was later absorbed into real estate developer Nakheel. The fund spent a further $65m refurbishing the resort, taking its total outlay to $155m.

Meanwhile, Jumeirah Hotels & Resorts, part of Dubai Holdings, is planning a $200m hotel development in Glasgow.

“There are big opportunities around tourism,” says Lena Wilson, chief executive officer  (CEO) of Scottish Development International, the Scottish government’s inwards investment and trade agency.

Taking Scotland’s reputation as a tourism destination with a strong service culture and adding the luxury element of the Dubai model has worked well for Dubai World. “If you look at the investment in Turnberry, they have taken a brand and elevated the quality and status even further,” says Wilson. “Why five star, why not six star?”

SDI’s relationship with Guy Crawford, CEO of Jumeirah Group and part of the agency’s GlobalScot network, helped her to pitch the Glasgow hotel, as did the government’s vision for the city’s future.

“Guy Crawford has done a lot for Scotland,” she says. “He has given master classes and has taken people out to Dubai to show them how they operate their hotels – the ethos of quality and culture. That relationship was there, and through that we were able to talk about the ambitions we have for Glasgow in business tourism. There are lots of huge global events coming to Glasgow.”

Islamic finance

In 2008, two Bahraini funds broke ground in the country through two similar acquisitions. Both were for oil services companies, and both made use of a new facility offered by banking giant Royal Bank of Scotland: sharia-compliant financing.

In April 2008, the US’ Varel Energy acquired Aberdeen-based drilling services firm Downhole Products for an undisclosed fee. The purchase was supported by its majority shareholder, Bahrain-based Arcapita.

Two months later, Kuwait Finance House Bahrain announced it had completed the purchase of engineering subcontractor Motherwell Bridge for an estimated $440m, again through a sharia-compliant loan.

The Glasgow-based, non-profit Islamic Finance Council (IFC) wants there to be more deals like these, and says a Scottish Islamic finance house could be the perfect conduit to bring more investors into the region. The Scottish government has asked the council to advise it on how to make the country more attractive to the Muslim investors of the Gulf.

This may be connected to the government’s interest in finding Gulf investors for major infrastructure projects. These include a $4bn offshore energy grid and a replacement for the bridge over the Firth of Forth estuary on the east coast. Either deal would double the value of assets held by Gulf investors in the country.

The Forth road bridge project has been planned since 2007, but the government has struggled to find funding for the estimated $3.5bn scheme, with a proposal to borrow the money against future budgets refused by the UK’s central government. “The Forth bridge is a subject of huge debate,” says Gately Wareing’s Shanks. “It is very capital intensive but it would also create good, stable returns for an investor.”

Shanks says a further attraction could be the project’s status – the existing Forth road bridge is a landmark in Scotland. “It is an iconic project in the old world, so you can see where the attraction would be,” he says.

The offshore energy grid – a network of power transmission lines linked into offshore wave and wind electricity generation – is valued at $4bn upwards. In 2008, Paul O’Brien, SDI’s executive director for renewable energy development, said the government had discussed the scheme with two sovereign wealth funds.

In early October, Wilson will travel to the Gulf to meet current and potential investors. At the end of the month, a trade mission of several Scottish companies will also visit. The government will not comment on what topics will be under discussion, but Wilson says potential investments will be brought up.

If any deals are agreed, they are likely to receive considerable media scrutiny. Following the August release from prison of Abdel-baset al-Megrahi, the former Libyan intel-ligence worker convicted of murdering 270 people in the bombing of an airliner over the Scottish town of Lockerbie in 1988, there have been allegations that the decision was influenced by potential deals with Libya and Qatar. The Scottish government has denied any such links.

Looking ahead, the government wants to encourage further investment into all areas of the economy. Wilson has high hopes for alternative energy. “Scotland could be the Saudi Arabia of renewables,” she says.

An important part of developing interest from the Gulf is simply being in the region. “For the big markets, you need to get over there,” says Wilson.

With Abu Dhabi Future Energy Company (Masdar) planning to become a major investor in sustainable energy technology infrastructure, and others having been hit by the high-profile mishaps in the financial markets over the past year, Wilson says Scotland has a lot to offer Gulf investors.

“Sovereign wealth funds are a great fit,” she says. “This government’s focus is on sustain-able economic development, and that means in terms of risk but also in terms of low carbon and environmental developments. That is also something the funds are looking for.”

Highland Spring

The current wave of Gulf investors in the country is by no means the first. One of Scotland’s most iconic brands is owned by a UAE businessman who started life as a customs official in Dubai.

Mahdi al-Tajir set up the Highland Spring bottled water company in 1979 at his 18,000 acre Blackford estate in the central county of Perthshire. It is now the second best-selling mineral water in the UK, and the company is worth a reported $834m.

Al-Tajir was a customs official in Dubai who later became the UAE’s ambassador to the UK. He has since amassed an estimated fortune of $2.5bn, and in 2009 was ranked the richest man in Scotland.

In 2008, Highland Spring’s turnover reached $86m.

A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications