TAIC: Breaking the mould

20 June 2003
Of all the pan-Arab institutions established during the oil boom of the 1970s and 80s, few have been more successful than The Arab Investment Company (TAIC). For a start, it is still a vibrant, profitable concern after almost three decades of operations in a volatile business. Second, as will undoubtedly be stressed during TAIC's 30th birthday celebrations next July, it has fulfiled its mandate with aplomb.

'We are the IFC [International Finance Corporation] of the Arab world,' says TAIC director general Saleh al-Humaidan. 'We act as a catalyst for economic development, industrial diversification and regional integration through the support of cross-border commercial activity.'

TAIC's operations are divided between direct equity investments in its shareholder countries (see chart) and general banking activities. The equity investments are managed out of TAIC's headquarters in Riyadh, supported by offices in Cairo, Tunis and Amman, and the banking operations are run out of an offshore banking unit (OBU) in Bahrain.

'When we are looking at prospective equity investments, we have three major criteria,' says Al-Humaidan. 'We look at the size of the project - our prime area is projects with total costs between $20 million-300 million - because one of the conditions of TAIC investing is a seat on the board, and on some of the larger projects this can cost too much. We look at the role the project will play in economic integration or development: priority is given to those projects producing semi-finished goods or feedstock for other regional industries. We look at how our equity investment can help in the development of indigenous resources: will it generate employment or use raw materials?'

TAIC is circumspect over the position it takes in its affiliates. It avoids holding more than 33 per cent of total equity, and usually targets positions worth 10-15 per cent. 'We want a seat on the board - we want to be able to have influence - but we don't want management control,' says Al-Humaidan. TAIC is also careful to avoid companies whose ownership is dominated by a small number of shareholders. 'We want to use our presence as a catalyst to bring in other shareholders,' he says. 'We bring capital but we also bring experience, technical abilities and access to authority, as our shareholders are also the governments of the countries the companies are operating in.'

TAIC's shareholder base is one of its strengths, but the interests of the 17 governments do not always coincide. Some take the long-term view and focus on TAIC's role as a catalyst for regional economic development. Others - usually those with more strained fiscal positions - have shown a greater interest in the dividend streams generated.

However, all have benefited from the income TAIC has distributed and the investments it has made in member countries. One of the best examples is TAIC's single largest investment, the $62.4 million placed in Sudan's Kenana Sugar Company. 'In social terms, this has been an excellent investment,' says Al-Humaidan. 'The plantation and sugar processing plant has grown enormously and is now a major employer that has, from scratch, built schools, roads and hospitals to support a major complex. It now produces 50 per cent of sugar consumed domestically and has started exporting a range of products.' A long list of successful projects could be drawn up, and it would include the likes of Jordan Petroleum Refinery and Cellulose du Maroc.

Given its overriding role as a catalyst, TAIC also has a very good eye for financial viability. It is helped by the fact that it is unhindered by any quota system either forcing or limiting investment in certain countries or business sectors. In fact, given the risk profile of its direct equity investments it has an enviable track record. Of more than 50 investments made over the last 30 years, only six have been written off.

The strength of this performance is reinforced by TAIC's long-term approach. 'We don't do many exits, maybe a total of 10 since we started operations in 1975,' says Al-Humaidan. 'Some of them were failing projects, but in most it was because we were not needed any more: our role as a catalyst had been completed, the companies had reached a point of financial and administrative independence.'

However, in the years ahead, there may be a shift in TAIC's strategy as its portfolio of investments matures. 'In the past we were shy of staging exits, and it was not something we thought about when we made investments,' says Al-Humaidan. 'But now we are thinking about doing more. It is a way of recycling funds and we have a number of sales under consideration. Of course, we would not leave a project if our departure would damage it in any way.'

Such caution is reflected elsewhere in TAIC: it is an inherently conservative institution. Provisioning is heavy, it is highly selective over projects invested in and there is rigorous control of the liabilities side of its balance sheet. It has staged no syndicated loans and while deposits are taken, they are usually from banks and regional governments.

TAIC has a consolidated balance sheet, combining the OBU operations with the equity investments handled out of Riyadh. 'This creates no clash,' says Al-Humaidan. 'Equity investments are the priority if there is competition for resources. The OBU manages liquidity through investments in international instruments and participates in regional project finance. The idea is that, through this, it can also support regional projects and also manage the timing of equity investments.'

TAIC's balance sheet illustrates this layered approach. Net loans and advances stood at $825 million at the end of 2002, of which about 20 per cent was trade finance and the remaining 80 per cent was project finance. Of the latter, about three-quarters was credit extended to the private sector.

Although much has changed in the Arab world since its foundation, there has been no decline in the need for an institution such as TAIC. The need for catalytic equity is as strong as it has ever been and TAIC has the experience and expertise to do it better than most.

However, there may be changes ahead. TAIC is a prime candidate for privatisation and some of its shareholders are openly seeking such a move. While there are no immediate plans on this front, it is likely that the idea will be explored with growing urgency. Whether an initial public offering to the citizens of its shareholders is conducted, or it is merged with another regional institution, or its portfolio is broken up and distributed among some of the sector-specific pan-Arab institutions, remains to be seen. But whoever buys into TAIC will probably be making a good investment, just as TAIC has consistently done for 30 years.


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