Enjoying bad news

The sudden departure of Ismail Osman from the Arab Contractors company signals a turning point for the region's largest construction conglomerate. Aziza Sami spoke to the company's former CEO about the reasons for the change, and his vision for the company's future
The news, published in a small item in the daily papers on 26 November was unexpected. "Ismail Osman, chief executive of the board of the Arab Contractors will be succeeded as chairman by his first deputy Ibrahim Mahlab. Osman has been appointed advisor to the Minister of Housing and New Urban Communities." Coming a little more than two years before Osman reaches the legal retirement age (he turns 60 on 21 December 2003), the move ended the tenure of one of the country's most popular CEO's, and with it, the pervasive influence the Osman family has wielded over the Arab Contractors since it was founded in 1940 by his uncle, Osman Ahmed Osman.
The move is striking in light of the family's tenacity in maintaining control of the conglomerate, having managed to do so in spite of its nationalisation in 1961, when the Osmans' continued stewardship was made possible by the issuing of a decree by President Gamal Abdel-Nasser. The decree was issued in conjunction with the Arab Contractors' mandate to undertake the building of the Aswan High Dam, the biggest infrastructure project Egypt has seen.
The Arab Contractors, whose full name still includes that of its founder, subsequently undertook the widening of the Suez Canal and built most of the nation's highways and bridges. Today, the Arab Contractors' operations extend to countries throughout the Middle East, Africa, Asia and Eastern Europe. The company has acquired a reputation for demonstrating efficiency comparable to that of an army's engineering corps. It has been described as a public sector company run with a private sector mentality.
Osman Ahmed Osman's influence over the conglomerate continued under President Anwar El- Sadat. In 1973, he was appointed minister of housing, his son subsequently marrying Sadat's daughter. The Osman family's management of the Arab Contractors continued, with Ismail Osman taking over as CEO in 1993.
Following Osman's departure from the company at the end of last month, a flurry of press reports presented the move as a confirmation of rumours that had been flying for months, suggesting that differences had arisen between Osman and Minister of Housing and New Urban Communities Ibrahim Soliman. The differences, it was said, had been triggered by the company's financial difficulties, which peaked during fiscal year 1999-2000. Not only was the state approximately LE3.5 billion in arrears to the Arab Contractors, but as well, no agreement had been reached to settle the company's debts to the banks, incurring LE480 million in interest annually.
Eight months ago, Minister Soliman replaced many of the directors on the Arab Contractors' board, fuelling rumours that he was trying to curb Osman's influence and bring the company more closely under the ministry's control.
I interviewed Ismail Osman at his home -- located next to the residence of his mentor Osman Ahmed Osman -- in Marioutiya near the Giza pyramids.
In his typically courteous manner, Osman refused to be drawn into discussion of conflicts or strife. "First, I want to stress that President Hosni Mubarak has been most supportive of me and the company throughout -- something that I have respected and deeply appreciated. You could say that what occurred was a difference of opinion about how institutions should be run. Anyhow, it is a fact that the government owns this company, so maybe it was time for a change."
Osman's detractors charged that he had caused the company to lose money because he refused to downsize and consolidate operations. They said that his management of the company which employs 70,000 employees was geared towards job creation, despite financial difficulties.
"You cannot afford to take risks when you represent a company owned by the government. Management is entirely an issue of social responsibility," Osman said.
Designated by his uncle to work at the Arab Contractors, Osman, in the 1960s, left his academic career and joined the company, specialising in construction management. He worked on the High Dam and the Suez Canal, and at offices throughout the region, such as Libya, focusing on developing the company. In 1999, Osman obtained a PhD in performance assessment for large construction companies from Loughborough University in England.
During Osman's eight-year tenure as chairman, the Arab Contractors' turnover increased from LE1.5 billion annually to almost LE6 billion, as he steered the company along the fine line between minimising risk and trying to achieve the "break-even point."
While the conglomerate pursued this goal, it took on work equivalent to 45 per cent of the state's investment budget in infrastructure. The Arab Contractors built and upgraded infrastructure for water, sewage and transportation as well as constructing and repairing public buildings. Meanwhile, the government still owed it money and it accumulated new debts and interest on the loans it took to keep its operations going.
"The problem did not start yesterday," says Osman. "For 20 years, we have been making recommendations in the form of board resolutions, saying that this company has not been treated fairly. The government owes us money, and we owe the banks money, yet the state does not pay us the interest on our late payments to the banks. It is not the fault of the company. It is the fault of the overall system, which assumed that such a company -- because it can finish projects on time and maintain quality -- could continue without being paid, because the state had other economic priorities, and companies that were collapsing and needed help. All of this has created artificial losses for the Arab Contractors."
Osman referred to a newspaper item published the day before we met, announcing that the state was settling LE3.8 billion in debts with 21 public contracting companies. "They published this as though it happened only yesterday, but this arrangement was agreed on two years ago. Just as they settled the debt for these companies, who are all rivals of the Arab Contractors, and just as they settled the debt for Hassan Allam [another major public sector contractor], the same must be done for the Arab Contractors."
He continued, "If you look at the board of directors resolutions over the past 20 years, you will find repeated recommendations that the government write off some of the interest and provide the company with soft loans so it could initiate ventures and develop markets. Unless you have a certain volume of work, you will not break even."
As we spoke, Osman's mobile phone rang incessantly, signalling calls from friends and former colleagues, even competitors like the Allam brothers. The show of support, confessed Osman, had reduced him to tears. Over the years, Osman had built bridges, not only in the literal sense.
"We suggested that to support the company, creditor banks participate in its capital, taking on part of the debt. This would be money that the company would not have to pay interest on, while the bank would receive a return on its investment in the form of profits at the end of the year. "
"To those saying that the company was making losses, I say, 'sorry,'" he said emphatically. "The company was overburdened by a financial situation that was, from our point of view, completely unfair."
More kudos than criticism have been directed at Osman for running the multitude of interests affiliated with the Arab contractors. He did this while keeping alive the sense of an extended family in work relations -- a tradition started by his uncle. This sense of familial responsibility is manifest in the country's record pension fund -- estimated to comprise LE100 million -- and in the continuation of the policy of giving three per cent of profits to workers as incentive bonuses. The conglomerate also has a national football team and, until recently, provided funds to support programmes to overcome drug addiction and to help children with special needs.
"You must remember that this company provides jobs for 70,000 people. We could have done better financially if we only had 35,000 employees. But would this have been better for us as a country? The Arab Contractors, in its current situation, represents the government. It is not a business or entrepreneurial entity that should make money to pay shareholders. I am not saying that to do so in principle would be wrong, on the contrary, but when we discuss the Arab Contractors, this dimension needs to be taken into account."
Since the late 1970s, the Arab Contractors has diversified its activities to include banking, insurance, agriculture, manufacturing foodstuffs, industry, hotel services, health care and engineering services. It has 38 construction subsidiaries in the Middle East, Africa, Asia and Europe. It has participated in establishing 17 new companies, in which the Arab Contractors' percentage of ownership varies between 40- 100 per cent. Domestically, the conglomerate has 65 local companies, comprising joint ventures in which the Arab Contractors' ownership ranges between five and 90 per cent.
Over the past 15 years, the Arab Contractors has worked with the pBritish, Germans, French and Japanese to build the Ahmed Hamdi Tunnel (underneath the Suez Canal), Cairo's underground metro, sewage systems, water purification plants. the Ferdan Bridge, crossing the Suez Canal, and the Alexandria Library. "I think that the Arab Contractors was successful because it offered a cheaper economic model, and has the ability to utilise labour in a way the multinationals do not."
But why, despite the expansion, has the company fallen short of its potential to become a truly multinational conglomerate? I asked.
"We could have been a multinational," he said emphatically, "but this did not happen because we were extremely undercapitalised. Our debt/ equity ratio was more than one to four, whereas it should have been one to one, or one to two. How can you survive while paying 12 per cent of your turnover in interest, when, if you are to be competitive, this interest should exceed no more than 2 per cent? The company's survival so far has been due to its knowledge and expertise in leading projects, even if at slightly higher cost, because it was qualified to do so. We strove less for profitability and more for breaking-even. I admit that the government last year paid us more than it did the year before, despite the liquidity shortage, and that it gave us work by direct order [as opposed to a system of competitive bidding]. And now, they are giving [the Arab Contractors] more work by direct order. But sustainability does not work this way." Osman said that the solution is "to work by balanced contract, which, according to all systems and international regulations, means that you have to take into account the cost of financing a project. That is a matter I have raised with the minister of housing."
The company is currently at a turning-point, and may be on the brink of a complete management overhaul. Where does he think its potential strengths lie in the coming phase? "In its ability to market, manage and use new technology. The most important element in any contracting company is the individual. What we need are wealth creators. The question is no longer one of offering my services for a project, now it is I who must create the project,"
Osman said, referring to the company's involvement in local BOT (build-operate-transfer) projects. The Arab Contractors, amongst other ventures, participated in the BOT project to construct Media City, and is a minority owner along with the Sony Corporation and an international consulting firm.
Due to the current climate, Osman was unable to give an optimistic forecast for the economy. "To create one job, you need at least LE20,000. The Arab Contractors requires LE3.5 billion in capital to maintain its operations. Where can we get this now? At the same time, we cannot dissolve the Arab Contractors. Privatisation is needed, but no one will pay what the company is worth because of its debt."
The solution, he said, is to focus on sustainability. "I am a believer in the approach of being pound-wise and penny-foolish -- not the opposite. In the case of a company like the Arab contractors, which has not been privatised, it should not aim to cut expenditures, but to strive for sustainability. If the new board is supported by the government temporarily, but given a mandate to privatise, utilising the experience that they have, then the company need not down-size. On the contrary, it could expand, by working with banking and financial institutions and launching BOT projects locally. If the Arab Contractors did these things while upgrading its management, it could really look at other markets in which it could thrive and thereby create more jobs in Egypt." Osman is a firm proponent of foreign direct investment (FDI), suggesting that the process of encouraging FDI's and actually attracting them offers the host country a "win-win situation."
The Egyptian construction sector's future within the context of globalisation is an issue in which Osman is particularly interested, having written about the steps that he thinks need to be taken to ensure the sector's survival under the agreements of the World Trade Organisation. "Orienting our business to e- commerce and e-procurement should be priorities because in construction they are very important. This task is urgent, and laws and regulations have to be developed in that area."
Osman was an adviser to United Nations Industrial Development Organisation (UNIDO), one of whose initiatives is the International Business and Advisory Committee for the private sector (IBAC). Currently IBAC vice-president, Osman is helping the organisation to fulfil its aim to develop states' expertise in concluding financial, legal, engineering and contracting arrangements, and in the field of risk assessment.
"In today's world, a contractor is part of a team that typically concludes upwards of 40 agreements [for a single project]. If he does not know where he has a say, the situation can be very dangerous. We have to educate our contractors and our government on these matters: the government the one needing more education. We need to have the right expertise to conduct and attract business, because no one will come [to Egypt] and invest unless they feel that the economic situation is under control." Osman spoke of the need for governments to realise that the language of the world today is private-public partnership, meaning that private money is invested in public services and the full range of infrastructure. "We must concede that we are competing for FDI's with construction markets like Hong-Kong, Singapore, East Asia and the new European states. If you assess Egypt's position [in terms of attractiveness for FDI's in construction] you will find that it ranks 30th. But still, Egypt has a name, and can create its own demand. We have 60 million people whom we can turn into either an asset or a liability."
Osman has branched out from his work in philanthropic endeavours to playing an active role in other areas of public life. In the world of sports, he currently heads the MENA (Middle East-North Africa) board for the Special Olympics for Children and is the president of the Ismaili Club, in his home town Ismailiyya, whose famous football team he helped bail out of financial difficulties . Osman also sits on the board of the Egyptian Council for Foreign Relations, whose headquarters are in the Arab Contractors building in Mohandessin. He helped found the American Chamber of Commerce in Egypt and was the first non-German to be elected head of the German Arab Chamber of Industry and Commerce. He chairs the Business Associations' Society for Environmental Preservation, and is a board member of the Egyptian Businessmen's Association, and deputy head of the Federation of Arab Contractors.
His personal library is impressive in size and organisation, containing hundreds of books on management and corporate culture. His heroes are CEOs like Jack Welch, the legendary former chief of General Electric, and his favourite writers are authors like Tom Peters and Edward DeBono. Osman, whose leadership of the Arab Contractors was based on a broad delegation of powers, espouses a management philosophy that values both faith and humour. "If we want people to be trustworthy, then we must trust them and give them the right to make mistakes. Leadership needs to penetrate downwards, and create great horizontal contacts, not just go for the top. The whole concept of management is changing and evolving, and hierarchical organisations are no longer the preferred method of management. So we must either develop and grow with it, or we will reach a critical situation that will affect the standard of living in our economy. The issue should not become one of interpersonal conflicts, but of competition for the better."
He appears to harbour no bitterness over the manner in which he was removed from the helm of the company he had helped build and which had been his home for 40 years. And, he declined the offer to become adviser to the minister of housing.
"Bill Gates once told me that we must, as managers, learn to enjoy bad news. So you could say that I am enjoying the situation now."
Did he, in retrospect, regret not having used his resources to build a private company of his own?
"I am a fatalist." he said, with characteristic humility, "And then, you never know, I might not even have succeeded in setting up a small business."
He is now contemplating a return to academia. The lessons he would impart to students would go beyond mere theory, because the instructor himself has experienced the utility of much of that he was teaching. "Or, you could put it another way," he said, with the perennial twinkle in his eye, "If you can't do it, then teach it."
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