Inside Dubai Inc.

By Daren Fonda

Without much oil under its sands, Dubai is no petro powerhouse. But you can't beat it for being the most colorful sheikdom in the Middle East--or the most ambitious. What other desert land can claim one of the world's largest indoor ski slopes, featuring fresh powder year round? While flying in on the stylish, state-owned Emirates Airlines, you might notice the artificial islands in the shape of a palm tree or the 56-story Burj al-Arab hotel, as tall as the Eiffel Tower, built like a billowing sail. Westerners are welcome, along with their vices. Europeans in bikinis mingle on the beach with Muslim women in abayas; alcohol flows freely at Dubai's nightclubs and resorts. With events like the Dubai World Cup, a horse race with a record $6 million purse, Dubai draws 7 million visitors a year, along with big-name acts from Luciano Pavarotti to Tiger Woods. Its economy has nearly tripled in size, to $34.5 billion, in just a decade. "We have built a success story in a short span of time," says Mohammad al-Gergawi, executive chairman of Dubai Holding, the government-run conglomerate that oversees most of the emirate's big domestic and foreign investments. "In 10 to 15 years, we put Dubai on the map."

It took some members of the U.S. Congress about a day and a half to accomplish as much notoriety for the place, such was their outrage over the latest piece of Dubai's economic development. A state-controlled company, Dubai Ports World, which aims to be a major player in the global-shipping industry, last November agreed to pay $6.8 billion to buy a British firm, Peninsular & Oriental Steam Navigation Co. (P&O), which controls terminal operations under five U.S. port authorities, including those in New York City, Baltimore and Miami. Citing security issues and a lack of information from the Bush Administration, usually free-trade Republicans like Peter King, chairman of the House Homeland Security Committee, have all but vowed to show up at the docks to stop the deal. "A lot of Republicans feel they were hung out to dry," says King. The tussle has even offered the prospect of former President Bill Clinton, a Dubai adviser, squaring off with his spouse, New York Senator Hillary Clinton, who opposes the buyout. Geopolitics makes strange bedfellows. The deal is on hold pending a 45-day national-security review that DP World asked for in the hope of winning support and easing fears about its antiterrorism credentials.

The P&O acquisition is emblematic of a Middle Eastern merchant state on the rise, one that aspires to be much more than an amusement park for jet-setters. Run since 1995 by a press-shy crown prince, Mohammed bin Rashid al-Maktoum, who became emir this year (Sheik Mo, to finance types), Dubai has established a network of holding companies, funds and corporations with more than $15 billion in overseas investments and a domestic goal of turning Dubai into a hub for everything from financial services to biotechnology. Call it Dubai Inc., a conglomerate with Sheik Mo as CEO. "We are not that different [from] small states like Singapore," says Mohammed Alabbar, head of Dubai's Department of Economic Development and chairman of the real estate developer Emaar. "They realized their economy is too small, so they said, 'Let's go to a broader market.' That's what's happening."

By most metrics, the plan has worked brilliantly. Dubai's economy is the healthiest in the Middle East, growing at a 16% annual clip and diversifying well beyond oil (which accounts for just about 6% of GDP). Dubai's ports and free-trade zones bustle. The government has built high-tech centers, including Dubai Media City and Dubai Internet City, attracting companies from Microsoft to IBM. A research park called DuBiotech is luring drug companies. The Dubai International Financial Center, a "financial free zone," aims to lead the region's securities exchanges, although there will be plenty of competition for that honor.

Sheik Mo, known for his love of thoroughbred horses, has been on a shopping spree. In recent months his investment vehicles have acquired the Tussauds Group wax museums and a 2% stake in DaimlerChrysler. U.S. purchases include the landmark Essex House hotel and Helmsley Building in New York, and 69 apartment-rental properties in southern U.S. states. And he's clearly not done. Says Alabbar: "For any businessman, you need to operate in the American economy and understand it. That's where a lot of the stuff in the world starts. That's why I am in California." (And to visit his son, who attends college in San Diego.) Perhaps most impressively, the sheik has eschewed the opaque, connection-fueled style of business typical of the Middle East and insisted on Western standards of accounting and transparency.

Dubai's embrace of Western business principles was no match for Western politicians with security fears, either real or politically opportunistic. The Bush Administration, stung by a rebellion in its own party, announced last week that it would review a deal by another Dubai firm to buy a British company, Doncasters, which makes precision parts for U.S. military aircraft and tanks at plants in Georgia and Connecticut.

Senators who want to block the ports deal, such as New York Democrat Charles Schumer, point out that the 9/11 attackers laundered money through Dubai and that the sheikdom participates in a boycott of Israel by the United Arab Emirates, of which it is one sheikdom among several. (Despite the boycott, DP World does business with Israeli firms.) Congressman King, for one, told TIME he wants assurances that al-Qaeda supporters "will not be able to work their way into the company." That task might fall to the chief operating officer of DP World--a guy from New Jersey named Edward (Ted) Bilkey.

Dubai certainly isn't short on big names coming to its aid. Power brokers Bill Clinton and Bob Dole (whose spouse is a North Carolina Senator), along with Madeleine Albright's lobbying shop, have advised DP World. Clinton has described the U.A.E. as a model Middle East government and in 2002 gave two speeches in Dubai, pulling in $450,000. Nor is the Bush Administration unfamiliar with DP World. Critics grouse that Treasury Secretary John Snow's former company, transportation giant CSX, sold its international port operations to DP World in 2004, for $1.15 billion. Dubai also works with the Carlyle Group, the Washington-based investment firm stocked with former government insiders.

The congressional uproar leaves Dubai's bosses feeling burned by a double standard, one that promotes globalization only when it is within the U.S.'s comfort zone. "The media is saying 'The world is flat', but when it comes to Arabs there are a lot of barriers," says a Dubai official. "People are thinking about the clash of civilizations. It's important for the world to see us working together." Sheika Lubna al-Qasimi, Dubai's Minister of Economy and Planning, predicts that the bottom line will win out after the review. "At the end of the day, this is about business," she told TIME. Whatever the outcome, she adds, it won't halt military and intelligence cooperation between the U.S. and her country.

Yet if the U.S. is going to block deals for what Dubai sees as political reasons, there is less of an incentive to trade with American companies--and it could bolster Dubai's effort to attract Arab capital to its nascent financial center. More concretely, Dubai is committed to $200 billion in projects, including expanding the city of Dubai's airport, and tons more hotels and condos. Dubai recently unveiled a plan to create a "global aerospace manufacturing and services corporation" that will offer leasing and repair services, challenging firms like General Electric (start-up funds: $15 billion). Emaar is building an entire city in Saudi Arabia, a $23 billion project that will include an airport, seaport, schools and hospitals.

All this activity has fed speculation that Dubai Inc. is a bubble built on debt. Certainly, Dubai is a borrower. "The big secret is that Dubai doesn't have much money," says Harry Alverson, managing director of the Carlyle Group. "Most of what they do is very leveraged." Yet borrowing to finance growth is what hot companies--and countries--do. That's why Carlyle is a partner. And why Alabbar is confident the Dubai miracle is no mirage. "The whole region needs to be served," he says, "and there is nobody there except Dubai."

With reporting by Reported by Scott MacLeod/Cairo, Eric Roston/Washington, Coco Masters/New York