Executive Magazine

Morning briefing: 14 Feb 2013

by Executive Staff February 14, 2013

written by Executive Staff

Lebanon's Prime Minister intends to send the controversial salary scale package to Parliament for approval next week in a bid to prevent on open-ended strike by the Union Coordination Committee.

More from The Daily Star

Yemen’s economy is starting to show signs of recovery, two years after protests began.

More from Reuters

The World Bank has confirmed a $30 million loan agreement with the Lebanese Finance Ministry.

More from The Daily Star

A government body in the United Arab Emirates has rejected draft legislation that would have eased tight controls on foreign ownership of companies, with members citing security fears and threats to local businesses.

More from Gulf Business

Companies

Bakeries in Lebanon will go on strike on February 20 if the government fails to increase quantities of subsidized wheat flour, the association said at a news conference Wednesday.

More from The Daily Star

Residential rents in Abu Dhabi dropped by around 14 per cent year-on-year in the fourth quarter of 2012, according to a new report by property consultancy CBRE.

More from Gulf Business

A $1.6bn island development off the coast of Jumeirah Beach Residence, including what will be the world’s tallest Ferris wheel, has been approved by Sheikh Mohammed bin Rashid Al Maktoum, the UAE Vice President and Prime Minister of the UAE and Ruler of Dubai.

Beidhing time

by Farea al-Muslimi February 14, 2013

written by Farea al-Muslimi

When I first met Ali Salem al-Beidh in June last year, I was struck by the enthusiasm and energy of the 73-year-old. In his office in Beirut, the former President of South Yemen gave orders to subordinates, joked and spoke about the south in a passionate and powerful manner, belying his septuagenarian status.

Yet when I met him again six months later for this Executive interview, I was struck by the thought that I could be among the last journalists to speak with him before his death. As I entered we carried out the traditional Arabic greeting of kissing each other on the cheek three times, yet only my head moved — his appeared too weak to do so. As we sat chatting, he struggled to hold himself up and his face was pale. Yet he denied claims that he is sick, saying “Thanks be to god my health is good — especially considering my age.”

Of late Beidh has become something of a poster boy for the south Yemeni separationist movement. In late November at a protest in the southern city of Aden, where tens of thousands of people were in the streets calling for separation in the largest show of defiance in southern Yemen for a decade, many of the protesters held Beidh’s image aloft, calling for his return.

But in many ways he has had a Greek tragedy of a career. After signing a unification agreement with Ali Abdullah Saleh in 1990 under which he became vice-President, he headed to Sanaa hopeful of a bigger, better Yemen. The move was initially welcomed in most areas of the country and it was hoped the two Alis could oversee a brighter future, a sort of Yemeni version of Nassar’s Egyptian dream.

Yet the early critics of the 1990 deal pointed out it was dangerously short sighted, and so it proved for Beidh. By 1994 the love had soured between the wedded halves of Yemen, and a vicious civil war broke out. The Machiavellian old fox Saleh won, entering the south forcefully backed by tribal support. As Beidh fled to Oman, his adversary seized the South’s land and resources, and forced many of Beidh’s allies into retirement. The pain of the humiliating defeat remains still sore to this day. “We went to Sanaa (in 1990) with big dreams but we found bigger conspiracies; the acts of Sanaa were separatists”, he said.

Beidh has spent the two decades since this defeat trying to reclaim the state he once signed away. And while much of this time he has appeared marginalized, the protests last year could foreshadow a twist in the plot in his latter years on stage.

When discussing the protests in Aden last year, Beidh sat bolt upright, staring me down with excitement glinting in his eyes. “I have seen these masses twice in my life; in 1967 when the British left and in 2012”, he says. “This is the people’s will and their right to determine their destiny…we are working hard to unify southerners as much as possible.”

The ongoing internal conflict in Yemen gets little coverage in international or even regional media, but since 2007 protesters in the south — initially led by former military officers sacked by Saleh in 1994 — have been calling for greater autonomy. As the central government has consistently turned a blind eye to such calls and, in the eyes of many southerners, continued to bleed the oil-rich south of resources to feed corruption in Sanaa, those calls for more autonomy have gradually transformed into demands for separation.

This has given Beidh new relevance. Since his defection in 1994 he is the only southern leader that has consistently called for independence rather than federalism. Most other major southern leaders have announced their intention to join Yemen’s ‘national dialogue’ in 2013. The eternally stubborn Beidh condemns his rivals as “mercenaries”, accusing them of abandoning south Yemen’s dreams of independence.

“It is not hard to bring mercenaries to the dialogue table, but they can’t do anything… we don’t care about this dialogue and it means nothing to us,” he said, predicting it will fail. However, within weeks of these defiant statements to Executive in December, it emerged that Beidh had met with one of those ‘mercenaries’ — another former South Yemen president Ali Nasser Muhammed. When I rung to follow up on the reasons for this meeting, Beidh’s office assured me it was just an informal chat at Muhammed’s behest, with no agreements made.

Murky waters

Like many Yemeni politicians, Beidh in person is charming and cooperative in equal measure, as long as you do not question his authority. Several times during the interview — when asked whether an independent South Yemen could survive economically, or when prompted to discuss Sanaa’s elite — his temper was aroused. So, when I broached the topic of his funding, I expected a vicious reply.

In recent years Yemen’s government and the international community have attempted to smear his name by alleging that he receives funding from Iran. He is certainly well resourced for a man with no fixed income and in Lebanon he appears to have allies in the movements allied with Iran; the three times I have met him, both in his residence and his office, it has been in areas well-known to be under the watchful eye of Hezbollah.

But in response to my prodding regarding accusation of being on Tehran’s payroll, he remained calm and succinct. “There is no relationship with Iran in the direction that is being talked about,” he said, before declining to give specific information on where he receives money from. “We welcome any support from any side in the world; from any side that will stand with our cause and against the injustice we are facing [but] the accusations of getting funds from Iran are political maneuverings.”

Droning on

This denial came as little surprise, but as the conversation drifted onto the topic of United States drones in South Yemen he said something that rather shocked me. The strikes are a huge public controversy: Yemen’s government claims the attacks focus on Al Qaeda members, in areas including Aden in the south, but many in those areas claim civilians are the ones who are dying. In the most notorious example, in December 2009, a US cruise missile targeted the village of Al Majalah, killing 46 civilians, including four pregnant women and a number of children.

I was expecting Beidh to give me a noncommittal answer — neither backing the strikes nor vowing to end them. Yet when I raised the issue he admitted, for the first time to an English-language publication, that he would allow them to continue. “Al-Qaeda is our enemy and we will welcome any cooperation against it,” he said, emphasizing the point by adding: “No doubt — we will allow [the] US to conduct counterterrorism operations in Yemen.” Yet he claims that under his watch the Americans would need to provide evidence of their goals to avoid civilian deaths. “I don’t mind drones when they are targeting specific targets in the south, but not when they hit civilians as happened in Al Majalah,” he said.

The final act

After our meeting I heard that Beidh’s health had deteriorated, leading to a brief period in hospital from which his office reported that he recovered fully. Beidh has much company on the long side of 70 in Yemen’s political scene. As he was talking it crossed my mind that Yemeni politics is dominated by old men, despite the fact that the country has one of the highest youth populations in the Middle East. I asked whether that will remain the case if he gets his own state. “No, we depend on youth… the youths are our treasure,” he said. When I pointed out the lack of youth in his team he pointed to his assistant, in his 40s, and said: “These are the youths; you think he is too old?”

Beidh undoubtedly hides skeletons in the shadows of his past and present, but after almost 20 years out of power his star seems to be rising again in Yemen’s south. Should his health continue to weather the weight of his years, he is likely to wield much influence over political developments and any potential resolutions to the conflict. Time, however, is not on his side; Beidh must know that the longer his biographers are forced to wait to write the tale of his triumphant return to glory, the more likely it will be that his becomes another tragic odyssey of ambitions fallen short.

February 14, 2013 0 comments

The Buzz

Big stakes in little Cyprus

by Joe Dyke February 13, 2013

written by Joe Dyke

The largest external investor in Russia in 2011 was not the world’s biggest economy, the United States. Nor was it one of the emerging economic behemoths China or India, or even one of the country’s neighbors.

The country from which the most money entered Russia was in fact the world’s 121st largest economy, an island of just 850,000 people. The tiny Mediterranean state of Cyprus was responsible for 22 percent of the $18.4 billion in foreign direct investment that went in to Russia in 2011.

Yet, as Mark Twain wrote, there are “lies, damn lies and statistics”, and that fact means little without knowledge of the Cypriot economy. In the past decade economic relations between Russia and Cyprus have increased exponentially, as political alliances have improved. The country’s President Demetris Christofias is a fluent Russian speaker and, as the European Union’s (EU) self-described only communist leader, appeals to a Moscow leadership that may have formerly shed the Soviet title but is still led by many schooled in its basic principles.

As political relations have improved, tens of thousands of Russians have put their money in Cypriot banks, an estimated $26 billion in total, a sum greater than Cyprus’ gross domestic product of $17 billion. Much of this is eventually funneled back to Russia, thus explaining the investment figures.

Until recently the increasing ties, in a formal sense at least, had largely been one-way. While Cyprus opened up to Russians to move their capital into the collective market of the EU, Moscow was officially hostile to Nicosia, with Cyprus on its so-called ‘black list’ of tax havens.

Yet all that has now changed. In 2010, the two countries agreed to a formal double-tax treaty to enable cooperation between their respective tax authorities, but with the inevitable delays it only came into force last month. This coincides with the removal of the black mark against Cyprus’ name. A similar tax agreement Cyprus struck with Ukraine in November 2012 also offers potential with another emerging economy.

“I would say the treaty we have with Russia, the recent one, possibly is one of the best that the government has managed to sign,” said Kyriakos Iordanou, general manager at the Institute of Certified Public Accountants (ICPA), on a trip to the island state organized for Executive by the Cyprus Trade Center in Beirut. “It allows Russian investors to come to Cyprus, set up businesses with deposits in the bank, and reinvest back to Russia through Cypriot companies.The benefit is tax — it is not tax evasion but they take advantage of the different tax structure.”

Different indeed. In Russia the flat rate of corporate tax is currently 20 percent, while in Cyprus it is just 10 percent. Across the EU the figure varies from 10 percent in Bulgaria to around 33 percent in France, with the smaller economies generally using lower taxes to lure business.

Cyprus has long prioritized its services sector, with its lowest tax rates in the 27-member EU (along with Bulgaria) as the cornerstone of that principle. For foreign investors seeking access to the EU without having to pay much for the privilege, Cyprus is a perfect location.

Russians have a long history of investments in Cyprus, dating back to the fall of Soviet Union, when a lot of money was moved into the country. Nowadays Russians are estimated to be involved in more than 20 percent of new property purchases; there are Russian banks, schools, shops and even a Russian newspaper on the island.

While property investment has been increasing there has been an even greater surge in tourism. In 2005, 97,000 Russians visited the country, but by 2011 that number had risen to 334,000. Initial estimates suggest the figure reached 400,000 by the end of 2012, while an estimated 50,000 have made the tiny island their permanent residence.

These huge increases have offset the decline in tourists from Western Europe where the economic downturn has hit vacationers; in 2011, the 800,000 or so travelers that came from the United Kingdom — Cyprus’ largest source of tourists — was 200,000 fewer than those who came in 2008.

Christos Moustras, from the Cyprus Tourism Organization, sees even more potential in the market. “We estimate that in the next couple of years we may still have 15-20 percent growth [in the numbers of Russian tourists],” he said.

The bear gases up

Yet Russian interest is not just about getting a nice tan. Since the discovery of offshore gas in the Aphrodite field in late 2011, foreign energy companies have had a new reason to invest in Cyprus, but not all of it seems to have been above board.

In October, the Cypriot government announced the winners of four tenders for the country’s newfound offshore oil and gas. To help the Cyprus’ cabinet come to a decision, they had commissioned an independent committee to advise on the best potential bids. In three of the four cases, the top-ranked bid was selected.

But in the case of Block 9, the most potentially lucrative, a joint Russian-French bid headed by Total and Novatec — a subsidiary of Russian state-energy company Gazprom — was initially chosen, despite being ranked as the fourth-best by the panel. With regard to the financial criteria, effectively an assessment of value-for-money of the deal, the top-ranked bid vastly outperformed the Total and Novatek proposal.

The companies that lost despite being higher-ranked started legal proceedings to appeal, claiming political alliances were put before economic sense. Speaking to Executive in November, the government officially denied any political motivations, with Eleni Mavraki from the Cypriot Energy Ministry rejecting allegations of favoritism influenced the decision.

“The committee sees the technical and financial criteria but there are other criteria when the Council of Ministers decides who will start the negotiations,” she said, without elaborating on those criteria. “The deal was published in the European newspapers…[and] it is legal. The Council of Ministers is the licensed authority that gives licenses.”

However in late December the Cypriot government claimed that insufficient progress was being made and suspended the Novatec agreement. A rival consortium made up of ENI and Kogas won the bid in late January 2013.

For some, however, there is a wider Russian plan to influence gas supplies to Europe. Speaking to Executive in late 2012, Fouad Makhzoumi, head of Future Pipe Industries — one of the world’s largest companies supplying pipes for oil and gas projects — said Moscow was planning to invest billions in a Liquefied Natural Gas plant in Cyprus as part of a geopolitical game to ensure prices remain stable.

“If they control [the gas plant], they will make sure that this gas will not be delivered to Europe at a lower price than they are delivering [through Eastern Europe],” he said.

The dragon follows

It appears that Moscow’s increased interest in Cyprus is being followed by an even bigger waking giant, China, though the main project that could have been a solid foundation for that growth has not materialized as yet. In the early part of 2012, the Cypriot government announced a $600 million deal for the Chinese Far Eastern Phoenix company to develop a disused airport in Larnaca into a commercial center for Chinese companies to use as a base for investing in the EU.

Yet the deal fell through in August 2012, with Cypriot media reporting that investor Yang Ki blamed lengthy and complex procedures for his change of plans. The Cypriot government has not officially abandoned finding a new buyer, but as Executive went to press hopes of a deal were small.

While that deal may have fallen through, the trend for increased Chinese investment is clear.

Speaking in November, Panayiotis Loizides, secretary general of the Cyprus Chamber of Commerce and Industry, said that the second half of 2012 saw huge investments in real estate from Chinese individuals, particularly in the coastal town of Paphos. “They are coming to Cyprus and investing in houses — in the last 2 or 3 months they have bought over 600 houses in Cyprus,” he said, estimating the investment at more than 200 million euros ($269 million).

As with the Russians and the Ukrainians, the primary selling point for the Chinese is access to the huge market of the EU, taking advantage of favorable rules on immigration. Under Cypriot law, an investment of more than 300,000 euros (roughly $404,000) in real estate gives access to permanent residency.

“Having permanent residency in Cyprus, they can move freely throughout the European Union,” Loizides said. “And China is moving toward Europe, so they can do business freely and this is the main reason why they are coming and buying all these houses.”

The increase in investments is so new (having boomed in 2012 in particular) that it is difficult to tell whether it is a blip or a trend. But with regards to tourism, it appears that as yet there has been no crossover — fewer than 1,000 Chinese visited Cyprus for tourism in 2011.

The trouble with Troika

Cyprus’ move towards Russia and other investors has not gone unnoticed in Western Europe. And since the Cypriot banking sector crashed in late 2011 — following the decision by major credit ratings agencies to downgrade Cypriot debt due largely to their heavy exposure to Greek banks — Nicosia has found the EU less willing to provide support than it might have hoped.

In November, the leading German magazine Der Spiegel cited an intelligence report that claimed that an EU bailout for Cyprus would help Russian oligarchs. It argued that the island was a well-known base for tax evasion and was used to launder money both back into Russia and into the EU.

By bailing out the banking sector, the leaked Bundesnachrichtendienst (Germany’s foreign intelligence agency) report argued that the EU member states would be guaranteeing Russian deposits in Cypriot banks, adding that the Cypriot government had willfully turned a blind eye to money laundering.

The normally affable Cypriots became noticeably pricklier when such accusations were put to them.

“Cyprus follows full regulations internationally, and International Monetary Fund regulations for anti-money laundering. We as a profession have issued our own anti-money laundering regulations,” said ICPA’s Iordanou. “We are following all European regulations as well. So I find it a bit difficult for someone to claim that Cyprus is like some other countries — a haven for evasion and other illegal activity. I find it very, very difficult.”

Irrespective of their accuracy, allegations of favoritism toward Russia — which has already bailed out Cyprus once with a 2.5 billion-euro ($3.3 billion) loan in December 2011 — are unlikely to ease negotiations with Troika, the committee led by the European Commission with the European Central Bank and the International Monetary Fund which is responsible for an EU bailout.

As Executive went to press, media reports said that Eurozone finance ministers told the government in Nicosia that the 17 billion euro ($23 billion) package would be delayed until the spring, following concerns about the size of the offering.

In reality, the upcoming presidential elections, due to take place on February 17, are likely to have had as much bearing on the decision as the size of the package.

Critics have accused President Christofias of being reluctant to make a deal that cuts spending. Iordanou said his organization has made a series of proposals to Troika about potential areas of expenditure that could be cut, particularly in the public sector, but believes that the communist leader finds the thought too unpalatable to contemplate.

“Until now we haven’t seen the strong political will to reform the government sector. The reason is obvious — every now and then we have got elections so if we touch this sensitive issue possibly we would lose percentage points,” he said. “This is something we stressed with the Ministry of Finance, that his ministry would need to take action, irrespective of political cost.”

The elections may well have a major influence on Cyprus’ relations with both the EU and Russia.

Christofias has decided not to run, instead throwing his weight behind Minister of Health Stavros Malas. He will go up against Giorgos Lillikas and Nicos Anastasiades, both of whom are seen to be less favorable to Moscow than Christofias’ Progressive Party of Working People.

Either way, as Cyprus continues to be part of a global struggle for power and influence, those awaiting the government’s decision wish that it would come sooner rather than later. In late November, ratings agency Fitch downgraded Cyprus by two notches, from BB+ to BB-, saying the “delay in negotiating official support [for a bailout] has contributed to the deteriorating economic conditions and raised uncertainties about public sector reform and the correction of macroeconomic imbalances.”

While a deal on a bailout may well be reached after the elections, for many in the business community the wait is hurting trade. “We have a large increase in [interest] but it is not materializing [into investment] because, naturally, every serious investor wants to know tomorrow and the day after tomorrow,” said Charis Papacharalambous, director general of the Cyprus Investment and Promotion Agency. “We need clarity, we need to get rid of the mist of the morning if we want to see development in the future.”

Note: The original version of this article claimed that Total and Novatec had won the bid for Block 9. This had been accurate at the time of Executive’s visit to Nicosia but by time of publication was no longer so.

February 13, 2013 0 comments

The Buzz

Morning briefing: 13 Feb 2013

by Executive Staff February 13, 2013

written by Executive Staff

Economics

Bahrain’s economic growth is expected to pick up sharply this year on the back of a stronger oil sector, large industrial investments and a robust regional economy, the government said on Tuesday.

More from Reuters

Lebanon’s Central Bank governor has said he expects no unpleasant surprises for the country’s financial sector in 2013.

More from The Daily Star

A long-standing dispute over oil exports from the semi-autonomous Kurdistan region is delaying passage of Iraq's 2013 budget.

More from Reuters

Companies

Bahrain Air, the country’s second airline, has closed down, blaming financial losses accrued as a result of “the unstable political and security situation in Bahrain”.

The slow rebirth of Valentine’s Day

by Nabila Rahhal February 13, 2013

written by Nabila Rahhal

As Valentine’s Day looms closer, store displays turn red, email inboxes are flooded with wine or chocolate promotions and prices for the day’s favorite mascot — the rose — doubles. Falling after the sluggish month of January, retailers see in Valentine’s Day an opportunity to bring life back into the sector. Lebanese retailers are no exception though it seems fate has been working against them for the past decade.

Bassem Fahham, owner of Sparks Balloons and Gifts shop in Kroitem, Beirut, remembers how eagerly consumers in Lebanon adopted Valentine’s Day back in the mid-1990s, aided by the many western TV shows which portrayed that special day.

This infatuation with the day continued to flourish, until that fateful February 14^thin 2005 when former Prime Minister Rafiq Hariri was assassinated in Downtown Beirut, in an explosion that also killed 22 others. The immediate effects of the event — unprecedented street protests which eventually forced the Syrian army to withdraw from Lebanon — undoubtedly fundamentally reshaped the country, but there was also an indirect, undocumented effect on the nation’s love lives.

Fahham recalls that for approximately three years following the assassination, Valentine’s Day was virtually nonexistent, as the day was dominated by street protests. “Other than the fact that there were country wide demonstrations for several years after this event virtually paralyzing the market, people were also just not in the mood to celebrate,” says Fahham. He adds that he still senses a subdued mood around Valentine’s, though nowadays he does not attribute this solely to Hariri’s assassination.

Hassan Takkoush, the owner of Takkoush Flowers in Jean D’Arc Street, Hamra, also speaks about a decline in business at Valentine’s in the last few years, but attributes it as much to the economic and political situation in the country as the death of Hariri. “No one is in the mood for or can afford love anymore,” Takkoush jokes. While he used to sell 3,000 roses in the build-up to Valentine’s, despite the global doubling in price of the flowers on that day, this year they expect to sell some 1,500. He adds that many more customers are now cutting back on the number they buy, with the bold romantic gesture of the bouquet often giving way to the solitary, symbolic flower.

But while the trend may be towards more frugal ways of showing affection, there are still some that buck it. Fahham agrees that many middle and lower-income consumers are unable to afford Valentine’s Day any more and may attempt to satisfy their loved ones with one of the many cheap teddy bears imported from China. But he points out that some of his customers dish out $4,000 to $6,000 for such romantic ideas as having a loved one’s entire room decorated with symbols of love or a box full of cuddly toys and an iPhone.

”Nowadays, it is not enough to get your sweetheart roses or a teddy bear: you have to get her a proper gift; usually the latest phone or a piece of jewelry, and it has to be romantically and creatively presented. This is where we come in,” says Fahham.

Frugal or wealthy, old or young, Lebanese or not, most lovers still hope for some sort of acknowledgement on Valentine’s Day, offering a sliver hope to retailers that they might feel some of that love some Valentine's Day soon too.

February 13, 2013 0 comments

The Buzz

Morning briefing: 12 Feb 2013

by Executive Staff February 12, 2013

written by Executive Staff

Economics

Lebanon’s Finance Minister Mohammad Safadi has denied media allegations that he has proposed raising the value added tax from 10 to 12 percent.

More from The Daily Star

The United Arab Emirates attracted about AED30bn (US$8.2bn) of direct foreign investment last year, the UAE's prime minister said on Monday.

More from Reuters

The United States has urged Egypt to move fast to agree a loan deal with the IMF, reform its energy sector and guarantee investors against "arbitrary acts" to avert a deeper slide in its economy.

More from Reuters

Lebanon thwarted the largest ever cigarette smuggling attempt to Egypt in December, the Egyptian Embassy announced Monday.

More from The Daily Star

The Sudanese has government signed a Qatar-sponsored ceasefire with a splinter Darfur rebel group, Sudanese and Qatari state media said, raising hopes of an improvement in the economy there.

More from Reuters

Companies

Kuwait Energy says it is firmly fixed on pumping gas and finding oil in southern Iraq and will not risk aggravating Baghdad by seeking contentious deals with the northern autonomous region of Kurdistan.

More from Reuters

The number of containers handled by the Port of Beirut rose in January 2013 by 28.5 percent to reach 56,239 compared to the same month last year, according to the latest statistics.

More from The Daily Star

Oil companies that buy Saudi Arabian crude have not requested extra supply and sources in the kingdom say production policy is unchanged – indicating steady output despite a jump in prices to US$118 a barrel.

More from Reuters

Lebanon’s Banque BEMO S.A.L. has announced 2012 net profits of $5.3 million, down by 19.4 percent from $6.6 million in 2011. Net interest income amounted to $15.7 million in 2012, up by 42.3 percent.

More from The Daily Star

February 12, 2013 0 comments

Economics & Policy

Sky’s the limit for aviation growth

by Fadi Majdalani, Fadi Majdalani & Fadi Majdalani February 12, 2013

written by Fadi Majdalani, Fadi Majdalani & Fadi Majdalani

Aircraft manufacturers must love the Gulf Cooperation Council (GCC) right now. In a time of global caution GCC countries keep filling the order books of many aircraft manufacturers.

On the military side, Oman in December 2012 placed a $3.75 billion order for British-assembled Typhoon and Hawk planes. Saudi Arabia’s orders for military aircraft from the United States last year entailed 84 new F15 fighter jets and 84 upgrades, along with orders for assorted helicopters and transport aircraft.

In commercial aviation, low-cost and full-service carriers in the GCC have made large purchases of single-aisle airliners in recent years, in addition to making global headlines with mega-sized orders for 90 Airbus A380s by Emirates and 40 Boeing 787s by Etihad in the United Arab Emirates, plus 30 B787 orders by Qatar Air.

The aggressive growth of GCC-based carriers and defense investments by regional governments are great news for aircraft manufacturers. Yet the most important development for aviation in the Middle East is not these big ticket orders. Far more significant for regional economic growth is the emergence of the GCC as a producer of aerospace products and provider of aviation services.

Booz & Company forecasts that the region’s air traffic, as part of a global trend, will double in volume during this decade. Next to the ongoing growth of GCC-based carriers into global aviation brands that compete in the top league of carriers, GCC countries are already investing in this trend by upgrading their airports — making them important stop-over points in international air traffic.

But two other trends also play very favorably to the region’s aviation ambitions. Recognizing the growing needs of commercial airlines and jet owners for on-the-ground services, the GCC is becoming an aviation supplier in its own right, providing maintenance, repair and overhaul (MRO) services for aircraft, components and subsystems.

Moreover, the commercialization of space is set to dramatically change and enhance the aerospace industry over the next decade and Gulf countries are tapping into this new potential with significant investments. In aligning themselves with both trends, GCC states are opening up growth chances for new high-end employment and economic gains for the entire region.

Remarkably for countries with little industrial background, the GCC states are entering aerospace and aviation sub-sectors such as manufacturing, geo-info services and space through such ventures as Mubadala Aerospace (which is involved in MRO and manufacturing), Virgin Galactic (which is planning a space port in Abu Dhabi) and Bayanat (which is offering commercial companies access to its 40-year-old military database).

These are important forays into a challenging industry where incumbent players in developed economies can easily stumble. If they are to thrive, however, the GCC’s aviation and aerospace sectors will need to build capabilities in three key areas: human capital, supply and production, and global reach. Focusing on these areas will allow GCC aviation and aerospace players to enter businesses in which they can establish a lasting presence and which will also help to broaden their national economic bases.

Building human capital

The aviation and aerospace industries are human capital intensive, demanding specialized skills and considerable knowledge of dealing with highly complex engineering systems that seamlessly work together to ensure the safety of passengers and aircraft in the sky. So while aerospace and aviation have tremendous capital costs, these industries cannot operate without engineers, technicians and support staff with advanced skill sets.

Expertise in these areas is in short supply in the GCC and the wider Middle East. The small number of experienced professionals, such as designers and engineers, has led to intense competition among industrial companies and academia.

GCC aviation and aerospace companies can take internal and external approaches to deepening their pool of talent. Developing and nurturing skilled staff internally is an important long-term option. Senior engineers often need seven to 10 years to train new or junior employees. This leaves significant gaps in the talent base over the short-term.

GCC aviation and aerospace players can fill the skills and expertise gap in the short-term from external sources. They can leverage their international industrial partnerships to gain skills and capabilities.

GCC aviation and aerospace companies should also develop and display rewarding career paths that will attract high-quality staff. For instance, a career path tailored to high-knowledge middle-level managers might include defined career milestones, opportunities for international assignments and cross-functional activities.

Education also has an important role to play. For instance, in the UAE, the government and industry partners have already teamed up to establish several engineering programs and course majors at universities to match the region’s needs.

Enhancing supply chains and production

The global aviation and aerospace supply chain cannot keep up with the sector’s appetite for aircraft, a constraint that is preventing some airlines from growing, including those in the region. While most of the new demand for aircraft is coming from Asia — China alone needs 300 to 400 aircraft each year to keep pace with its demand — the Middle East is also an important buyer, requiring an estimated 100 aircraft per year for the next 20 years. More than 400 wide-body aircraft currently operate in the region.

This means that the global industry will face execution challenges, pushing up costs and forcing original equipment manufacturers (OEMs) to move toward a more global supply chain and manufacturing footprint. In order to capitalize on the global supply chain in aviation and aerospace, the GCC must also develop its supply chain and production proficiencies. Specifically, there is a trend toward consolidation in the supply chain. For example, United Technologies Corp recently purchased Goodrich in a $16.5 billion deal. This process of consolidation is forcing OEMs to understand where and how value is changing along the supply chain. OEMs therefore need to rethink their strategies to protect their value from further erosion.

OEMs can achieve this through partnerships, such as with emerging firms in the GCC, or more expensively through vertical integration. As an example, aerospace players in the region are seeking to secure access to key aircraft programs in the future and thereby secure stable, high-profile, expertise enhancing business — precisely the kind of international partnership that OEMs need.

Gaining global reach

GCC aviation players (such as those involved in MRO) also need global reach. A possible path for GCC companies aspiring to achieve leadership positions in the aerospace (i.e., aircraft and equipment manufacturing) value chain is to pursue long-term preferred risk-sharing partner positions with OEMs.

These partnerships require suppliers to invest in the development of aircraft programs to secure a share in the production of aircraft components. GCC firms can achieve this through direct contracts or through the acquisition of leading tier-one suppliers. By nurturing their relationships with the leading industry players and OEMs, emerging GCC suppliers will secure access not only to the aircraft development programs but also to new technology and new capabilities. This will in turn provide suppliers with the ability to achieve strong positioning and the means to build a sustainable business in the aerospace industry.

Achieving global reach also requires GCC players to emulate the ability of industry leaders to meet their clients’ needs, thereby placing them at the top-tier of service providers. It involves a capacity to capture the market whenever it is in an upswing and to have the skill to manage inevitable downturns. Emerging GCC aviation players can acquire global reach by joining international networks or acquiring companies in key international hubs. Both approaches will provide them the access they need to branch out overseas.

The aviation and aerospace industries have remarkable growth prospects, which GCC countries can take advantage of by building capabilities. These efforts will not only help the aviation and aerospace industries soar but also help promote the region’s national development goal of becoming high-value added, knowledge-based economies.

Fadi Majdalani and Alessandro Borgogna are partners, and Leonardo Monti a senior associate, at Booz & Company

February 12, 2013 0 comments

Finance

Time to buy Solidere

by Ziad Abou Jamra February 12, 2013

written by Ziad Abou Jamra

The current stock price of Solidere is hovering in the neighborhood of $13, far below its net asset value (NAV) estimated at $53, providing an interesting investment opportunity. In simple terms, Solidere is a real estate company that owns land, also referred to as a ‘land bank’ company. Consequently, investors who acquire Solidere shares are indirectly buying a piece of land. Land bank companies worldwide are traditionally valued using the NAV method.

The land of Solidere can be divided into two major categories: the waterfront area and the central district area. Prices of potential buildable square meters (sqm) in the former average around $4,700 sqm and around $3,000 sqm for the latter. Solidere still owns about 1.5 million sqm on the waterfront and about 400,000 sqm in the central district. Adding those to the company’s already existing buildings — the Beirut Souks as well as a share in the net equity of Solidere International among other assets — we arrive at a fair value of $53.

So what causes the current market price to be so far below its NAV? Market sentiment on Solidere shares is extremely negative due to the political turbulence both domestically and regionally. Consequently, short-term investors have bailed out of the shares. Further, selling pressure is reduced given that most investors who wanted to sell their shares have likely already done so. Long-term investors who see value in the real estate company are holding on to their shares and have been paid to wait through annual dividend distributions by the company.

Back in 2008, following the Doha agreement whereby Lebanese leaders agreed on steps to end months of political deadlock, positive sentiment soared and investors rushed into acquiring shares of Solidere. Over a short period of time the shares witnessed a rapid rise in price from the neighborhood of $30 to around $40. With market players getting greedy, all those who had wanted to buy had already done so, consequently drying up the demand and eventually turning the buyers into sellers with the shares in an almost steady decline since.

As Warren Buffett said, “When people get greedy I get scared, and when people get scared I get greedy.” Given that most of the bad news is already factored into Solidere’s share price at the current depressed levels, thereby greatly reducing the downside risk, I am convinced that deploying capital in the shares today could prove to be a good investment opportunity. The upside potential will be significant as the share price eventually gravitates towards its NAV.

What would make me more positive on this investment opportunity is if the board of directors of Solidere initiate a land-for-share sales scheme such as the one they undertook in 2004. This effectively allowed interested buyers of land in Solidere to partially pay the required down payment with shares of Solidere, which the company priced at a premium to the average market share price over a given number of previous trading days.

If reinstated today, a similar, albeit, extended and more significant scheme would serve several purposes. It would have all the benefits of a share buyback program — mainly indicating to the market that management believes the shares are undervalued — while leaving untouched the cash that such programs usually require companies to pay. It would also immediately motivate possibly hesitant land buyers to make a decision while the scheme lasted, thereby directly increasing demand for the shares and the land.

The current undervaluation of the shares should make such a “buyback” scheme a priority at this stage, since we cannot foresee a more appropriate immediate positive catalyst besides a solution to the current political turmoil in neighboring Syria. With or without such a scheme, acquiring Solidere shares today is an appealing investment opportunity.

Ziad Abou Jamra is the deputy general manager of Fidus, an affiliate of Societe Generale de Banque au Liban

February 12, 2013 2 comments

Comment

A tyrant’s tiptoe

by Nicholas Blanford February 12, 2013

written by Nicholas Blanford

There are growing indications that the regime of Syrian President Bashar al-Assad is using some form of chemical agent against areas held by the opposition.

Speculation has been rife for months that Syria’s arsenal of chemical weapons — thought to be one of the largest in the world — will be deployed against the opposition. United States President Barack Obama warned in August of last year that his administration’s “calculus” would change if the Syrian regime moved or used its chemical weapons, saying it would be “a red line” for the US.

WMDs in the Middle East

Chemical Overreaction

Since then, it has become evident that some of the Assad regime’s chemical weapons have at least been moved and it may be playing a cautious game of testing Washington’s “red lines” to see how much it can get away with. In early December, the regime fired Scud short-range ballistic missiles for the first time, targeting areas in northern Syria with warheads filled with high explosives. Given the relatively poor accuracy of Scuds, they are not the most effective weapons to employ against what is essentially an insurgency. But the launchings stirred concern in the West, mainly because Scuds are well-recognized as among the possible vehicles for delivering chemical munitions. Then in mid-December, the US and Russia reportedly sent stiff warnings to Syria after satellite imagery suggested that dozens of 500-pound aerial bombs were being loaded with chemical agents at a military base.

The latest apparent “red line” testing was the alleged use of a non-lethal chemical agent in Homs in December, a development that was investigated by US diplomats in Turkey and picked up by Foreign Policy magazine.

While the US consul general in Istanbul reported that consulate staff could not say definitively whether chemical weapons had been used, a US official told Foreign Policy that Syrian contacts had made a “compelling case” that a gas known as ‘Agent 15’ was employed — an incapacitator that is not generally regarded as lethal. The US National Security Council downplayed the Foreign Policy report, however, saying it did not correspond to US intelligence assessments. There have been some further questions raised as to whether the gas allegedly used in Homs was Agent 15 or possibly a weaponized form of insecticide.

There have also been alleged uses of a similar chemical agent near the rebel-held town of Qusayr, eight kilometers northeast of the Lebanese border. During a night-time battle in mid-January in Jusiyah village just south of Qusayr, rebel fighters were incapacitated by some kind of smoke apparently released by a bomb dropped by a passing jet. The fighters were described as “paralyzed”, some were choking and most could not speak, according to other rebels who carried them away from the battle.

If the Assad regime were testing the waters by employing non-lethal incapacitating agents to judge the reaction of the West, then it would be grimly satisfied with the response.

Despite the report from one of its own consulates and the widespread conviction among rebel fighters that chemical weapons have been used against them, Washington has chosen to play down the affair. The Obama administration has shown a reluctance to play a more active role in Syria since the beginning of the uprising. From a US domestic perspective, that hesitation is quite understandable. The US withdrew combat troops from Iraq a year ago and is presently drawing down in Afghanistan. The American people are more concerned about the economy and are sick to death of the Middle East. Obama was never going to wade into Syria during an election year and now wants to concentrate his second term’s foreign policy goals on the Asia-Pacific theater.

However, the past year has seen the struggle in Syria morph from an uprising by peaceful protesters against a repressive regime into essentially a Sunni-Shiite/Alawite civil war which has allowed Al Qaeda to establish a presence through groups like Jabhat Al Nusra. There are few good choices for the West in Syria, and given the evident reluctance to become more involved in shaping the country’s destiny, the door does not seem closed against the possibility that the Assad regime could up its chemical ante.

Nicholas Blanford is the Beirut-based correspondent for The Christian Science Monitor and The Times of London

February 12, 2013 0 comments

Comment

Mitigating the cost of supporting Assad

by Gareth Smith February 11, 2013

written by Gareth Smith

Ali Akbar Salehi is a shrewd man whose conduct of Iranian foreign policy since becoming foreign minister two years ago suggests diplomacy and courtesy can still exist in the region. But can it transform inauspicious circumstances?

Salehi’s visit to Cairo in January — when he saw both President Mohammed Morsi and Sheikh Ahmed al-Tayeb, grand sheikh of Al Azhar — saw him stress the need to calm Sunni-Shia tensions. Some were encouraged: after meeting Salehi, Bishop Tawadros, leader of Egypt’s 8 million Copts, praised Iran’s tolerance of Christians, Jews and Zoroastrians.

Others were unimpressed. Government-aligned pens in Gulf Cooperation Council states, already scratching over the Egypt visit earlier in January of Qassem Suleimani, head of Iran’s Al Quds force, were soon scribbling fast. In Asharq Al Awsat, columnist Hamad al-Majid charged Salehi was spreading a “virus” in a “contaminated climate”. Gulf governments should reach out to Egypt’s new rulers, wrote Majid, and no longer maintain a distance from Hamas that had allowed Tehran to benefit from supporting the Palestinian group during Israel’s onslaught in November.

How far can Salehi’s diplomacy contain fallout from Syria, and the precipitating Sunni-Shia tensions across the region? Certainly, Iran’s foreign minister highlighted shared concerns over a conflict in which the United Nations says 60,000 have died in 21 months. But he did nothing tangible to bridge the differences in approach between Cairo and Tehran. Iran backed Syrian President Bashar al-Assad’s speech early last month, when he signaled his determination to fight on; Salehi himself called the speech a “comprehensive plan”. True, Tehran has called for a peace process, but not for the president to stand down first.

This is a core argument with Egypt, which alongside Turkey and Saudi Arabia has called for Assad to leave office as a precursor to reform. Hence Salehi’s arguments over rejecting foreign “interference” in Syria — code for anyone backing the rebels — and resisting Western attempts to stoke Sunni-Shia ill-feeling will not change the policy of Egypt, a mainly Sunni state that sympathizes with Assad’s largely Sunni opponents.

Iran’s support remains key to Assad. Its value was shown last month by his decision to free 2,000 detainees in exchange for 48 Iranians held by Syrian rebels: reportedly, Assad had refused similar deals for the release of his own soldiers, including Alawite officers.

But any influence Iran might exercise to moderate Assad’s approach will be restricted as the Syrian opposition becomes increasingly marked by a militant Sunnism hostile to Iran and even to Shi’ism. This is a vicious circle in which the Syrian opposition resents Iranian support, particularly military help for Assad’s regime. Muadh al-Khatib, chairman of the Syrian National Coalition of Revolutionary and Opposition Forces, last month flatly accused Tehran of a role in killing Syrians, adding that any country backing the regime would “pay a heavy price”.

While most Western analyses now believe Assad’s fall is a matter of time, Iran’s calculations are less clear. Some officials are hinting at the possibility of change, but this is limited. Hossein Amir-Abdollahian, a deputy foreign minister, suggested Assad’s speech outlined a path for the opposition to achieve their goals peacefully, but Amir-Abdollahian then stressed that Assad was “legally” president of Syria until 2014.

As long as the central disagreement with regional Sunni powers remains over Assad leaving power, nothing concrete can result from Salehi’s call for talks on Syria within the quartet — Saudi Arabia, Turkey, Egypt and Iran — brought together in September by President Morsi. Yet without progress in Syria, regional tensions will increase. Just as Salehi was in Cairo, eyebrows were raised in Tehran by the attendance of an Egyptian presidential assistant at a conference in the same city designed to raise support for the Arabs of Iran’s Khuzestan province.

In remarks that typify Tehran’s view of the region, Alaeddin Boroujerdi, a leading parliamentarian, said the conference was organized by radical Salafis “led by countries such as Qatar and Saudi Arabia, and with the aim of preventing the expansion of ties and cooperation between Iran and Egypt”. Tehran is very sensitive to separatist inclinations among its population, half of which is not Persian (including Azeris, Kurds and Baluchis as well as Arabs).

With Iran’s crude sales down 50 percent in a year due to stringent United States and European Union sanctions, this is no time to expect defeatist talk in Tehran. But the knock-on effects from Syria, already destabilizing Iraq, are raising the stakes all around.

Gareth Smyth has been reporting from around the Middle East for almost two decades and is the former Financial Times correspondent in Tehran

February 11, 2013 0 comments