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What lies beneath

by Paul Cochrane
written by Paul Cochrane

The Middle East and North Africa (MENA) region is fortunate to be able to tap the majority of its oil onshore and in shallow coastal waters. That’s meant a minimal need for deepwater drilling and its associated risks, exemplified by the disastrous BP oil spill in the Gulf of Mexico that saw some five million barrels of crude spew out of the Macondo well over the course of three months.

But with oil fields maturing in North Africa, oil companies are exploring for black gold at ever-deeper depths in the Mediterranean Sea. In Libya, for example, the colossal Gulf of Sirte basin extends to depths 2,000 meters below sea level — that’s some 500 meters deeper than the Macondo well. Deepwater drilling is already underway in the territorial waters of Tunisia, Libya and Egypt.

Yet it was only when the tarnished British oil company BP announced in the wake of the Gulf of Mexico spill that it is to start exploration off the Libyan coast that Mediterranean states and environmental groups took note of the potential dangers, calling for a moratorium on deepwater drilling. Italy has been the most vocal in calling for a unified strategy for the Mediterranean, what with the Sirte basin only some 500 kilometers from its territory. The Italian foreign minister suggested deepwater drilling should be referred to the Union for the Mediterranean, but this body of European Union and littoral states has essentially been a white elephant thus far, initially beset by problems within the EU and stymied by the Israeli-Arab conflict. The need for a common front on deepwater drilling is a pressing one. An oil spill in the Mediterranean would be a disaster on par if not more calamitous than in the Gulf of Mexico, given the size of the sea and the 21 countries it borders. As the recent BP spill has shown, oil companies and governments are not prepared for when accidents occur.

Libya, according to the United Nations, does not yet have a national contingency plan for an oil spill, while Italian budget cuts have hampered the country’s response effectiveness. The rest of the Med is equally ill-equipped to cope with a major oil spill. With so many countries involved a unified front is unlikely, but pressure could be brought to bear on oil companies with deepwater drilling operations to hold off until the BP spill in the Gulf of Mexico has been fully investigated, as the United States and Norway have done. Indeed, BP appears to have caved to pressure, delaying the launch of deepwater operations in Libya.

But deepwater drilling is also in the cards for the Red Sea, and over in the Persian Gulf more than 1,600 offshore wells — albeit in much shallower waters — have been drilled in the past decade, according to Energyfiles. A consolidated stance on offshore drilling for the whole MENA region is clearly needed, which could be spearheaded by the Arab League and then developed in coordination with the EU and other neighbors.

While many want deepwater drilling banned outright, as long as the planet relies on oil-powered economies, we arguably have little choice but to take the oil wherever it may be found. Indeed, over the past 15 years, deepwater drilling has sourced some 60 billion barrels of oil, according to Deutsche Bank, and will account for 10 percent of global oil production between 2008 and 2015. 

Deepwater drilling should be viewed in light of the pros and cons. Sure, income is generated, but an oil spill would cost billions to clean up and have untold costs on the fishing industry and the Mediterranean’s top earner, tourism. Ten percent of global oil production coming from deepwater drilling is significant, but alternative energies could offset this, such as the solar power projects underway in Morocco.

Countries embarking on offshore drilling, particularly in deep waters, need to weigh up these upsides and downsides. In any event, energy producing states and oil companies should set up a multi-billion dollar contingency fund for any potential spill in the MENA region. With so much money being made off energy, protecting the environment should be considered an operational cost.  This makes even more sense when you consider that demands on MENA oil production are set to increase to offset lost output in the oil-drenched Gulf of Mexico.

PAUL COCHRANE is the Middle East correspondent for International News Services

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Comment

Yes is a four-letter word

by Peter Grimsditch
written by Peter Grimsditch

Campaigning for this month’s referendum on constitutional reform in Turkey has not only aroused the expected political passions, but also reduced an Istanbul bride to tears on her wedding day.

If the proposals are approved, Parliament for the first time will be involved in appointing members of the Constitutional Court. Three of the 17 members would be elected by a parliamentary majority, effectively allowing the ruling Justice and Development Party (AKP) to select candidates.

The AKP sees the Constitutional Court as an elitist, undemocratic hangover from the days of military coups. The party’s spokesmen say that reforms will modernize the judicial system and bring the country into line with European Union recommendations. Anything that helps Turkey’s tortuous accession to the EU must be a good thing, they argue. Well, not quite, according to referendum opponents, who come from almost every quarter except the AKP.

Kemal K?l?çdaro?lu, leader of the Republican People’s Party (CHP), argues that a two-thirds majority should be mandated since this would broaden the parliamentary views required to elect a member of the court. He is also concerned that the opportunity has been missed to remove the Minister of Justice from the Supreme Board of Judges and Prosecutors, which would emphasize the separation of powers between politicians and the judiciary.

But more important than any high-flown political philosophy is one of few things shared by both the AKP and the CHP — deep mutual mistrust. The AKP could correctly point to the use of the Constitutional Court by the opposition as a tool to stymie moves that it doesn’t like but is unable to stop through democratic parliamentary means, such as the election of President Abdullah Gül. The opposition, meanwhile, suspects the AKP of having ulterior motives.

The AKP controls parliament and the presidency, leaving only the Constitutional Court free from its direct influence. In 2008, the court considered imposing a five-year exclusion from politics of Prime Minister Recep Tayyip Erdo?an, Gül and around 70 AKP members of parliament for Islamic activity incompatible with the constitution. The verdict was little more than a finger-wagging but it increased the AKP’s mistrust of the court, whose membership it now wants to broaden.

Voters are split down the middle. An opinion poll last month said 50.9 percent are opposed to the reforms, with 49.1 percent in favor — a marginal increase in the ‘anti’ vote from a poll conducted in July.

The referendum will be a harbinger for next year’s parliamentary polls, so winning has a huge secondary significance. But, according to Hurriyet Daily News, that clearly was not on the mind of Fatma Ormanc? last month. Despite being head of the AKP’s Women’s Branch in Beykoz, a district of Istanbul, Ormanc? was on a day off from politics when local mayor Yücel Çelikbilek performed her son’s wedding ceremony.

Çelikbilek, also an AKP supporter, received the traditional three replies of “evet” (yes) from the bride and groom, before adding: “I expect you to say ‘yes’ on September 12, too.” The bride’s father squared up to the mayor to complain about turning his daughter’s wedding into a political meeting. At one point, wedding guests intervened to keep the dispute from escalating into a fight. Even Ormanc? was not happy with the mayor’s political ad lib (she was also furious with the behavior of her son’s new father-in-law.)

The near-brawl in Beykoz followed a more peaceful nuptial political stunt 24 hours earlier in the distinctly secular confines of Izmir on the Aegean coast. Ediz Tat?, son of a local CHP mayor, and his bride, Vildan Sever, opted to say ‘I accept’ instead of the ‘evet’ increasingly visible on AKP supporters’ baseball caps.

Deniz Baykal, former head of the CHP and a fierce advocate of a ‘no’ vote, praised the couple’s refusal to say ‘yes’, even to each other.

A lawyer said the ceremony was binding as no law dictates brides and grooms must use the word “evet”. ?lkhan Elçin was quoted in Hurriyet as saying: “Marriage depends on being in front of a registrar, signing the book and expressing that you want to marry in an open way that everyone can understand.”

Marriages may be agreed to in an “open way that everyone can understand,” but that’s more than can be said for the upcoming referendum.

PETER GRIMSDITCH is Executive’s

Istanbul correspondent

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Comment

India opens up to Iran

by Gareth Smith
written by Gareth Smith

As President Barack Obama struggles for direction in Afghanistan, the prospect of reconciliation between the United States-backed government of Hamid Karzai and Taliban members has concentrated minds not just in Pakistan, which backs the idea, but also in Tehran and New Delhi. Iran’s deputy foreign minister, visiting New Delhi in early August said the two countries’ views on Afghanistan were “close.”

India is skeptical over Tehran’s desire to phase out US-led Western troops, but both countries want a stable, strong government in Kabul that can contain the Taliban. Iran and India have been wary of Sunni militants in Afghanistan since the US and its Saudi and Pakistani allies fostered a “holy war” against Soviet secularism in the 1980s. But Iranian ministerial visits to India in July and August focused not just on cooperation over Afghanistan, but on also improving economic links.

Iran and India have complimentary energy interests: India, which hopes for a sustained 8 to 10 percent growth despite meager energy resources, has long eyed Iran’s substantial oil and gas reserves — each the world’s second largest. It already imports around 14 percent of its crude from Iran, worth $11 billion annually. Such signs of trade and partnership go down like a lead balloon in Washington, which is pushing for greater isolation of Iran over its nuclear program. Back in 2006, Washington warned it would end nuclear co-operation with India if New Delhi did not vote in the International Atomic Energy Agency to refer Iran to the United Nations Security Council.  Since then, India has reluctantly followed the US lead, despite domestic criticism. Pressure from Washington has intensified under Obama, but so has Indian disquiet.

 Anticipating the latest US sanctions targeting gasoline supplies to Iran, the Indian private sector group Reliance Industries ended sales last year. But this summer New Delhi resumed talks with Tehran over the ambitious “peace pipeline.”  This project had been bantered about for the past decade, though India had dragged its feet under US pressure, pricing disagreements and worries over the transit route through Pakistan. In March the project morphed into an Iranian-Pakistani pipeline scheduled to pump at least 7.7 billion cubic meters (bcm) of gas each year from 2015 to 2040. Renewed talks to extend the pipeline to India show New Delhi is still hungry for what Iran claims would be 55 bcm of natural gas annually.

In return, Iran wants Indian investment in its vast but undeveloped South Pars gas field, and has targeted the state-owned Oil and Natural Gas Corporation Videsh (OVL) and the privately owned Hinduja group. Short of capital thanks to Western sanctions, Tehran needs some $200 billion to increase gas production from 0.6 bcm per day to 1 bcm by 2014. In August Iran stressed its desire to boost bilateral trade between the two countries from its current $15 billion, emphasizing India’s role in developing Chabahar port in Iran’s Sistan-Baluchestan province, which New Delhi sees as a major trade route that bypasses Pakistan into Afghanistan and central Asia. Iran seeks to raise the port’s annual capacity from two million to 12 million tons.

Chabahar is probably now the litmus test of Indian-Iranian relations, as Tehran may link Indian participation to wider co-operation. New Delhi has already helped finance a highway from Chabahar to Milak, on the Afghan border, where there is a crossing to Zaranj, in Afghanistan, to which India has laid a 213-km road from Dilaram, a major Afghan transport hub.

India is keen to develop the potential of this route. There is even speculation over an undersea gas pipeline to India, bypassing Pakistan, to supply Iranian and Turkmen gas.  Fresh Indian investment into Iran may irritate the US, but New Delhi cannot ignore new trade patterns in central Asia that are giving China access to Siberian timber, Mongolian iron ore, Kazakh oil, Turkmen natural gas and Afghan copper through roads, railways, pipelines and the Pakistani deep-sea port of Gwadar.

Gwadar, constructed with Chinese assistance and just 72 kilometers from the Iranian border, gives Beijing an economic edge over India and a military vantage point to monitor the US navy in the Persian Gulf and the Indian navy in the Arabian Sea.

Without access to Iranian and Turkmen gas, India will be short of energy. Hence New Delhi has reiterated its support for diplomacy over Tehran’s nuclear program. How all this squares with tighter US sanctions — much less US or Israeli air-strikes — remains to be seen.

GARETH SMYTH is the former Tehran correspondent for the Financial Times

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Society

Risk it

by Emma Cosgrove
written by Emma Cosgrove

Beirut has the unique ability to bend, shape and mold brand identity to fit its flamboyant clientele. When Hermes opened it doors in Beirut Souks, the brand’s tradition and timelessness suggested that it might not be as susceptible to the same affection for flash to which so many fall prey. But, once again, the city proved that few are immune to its call to opulent arms.

Never mind that the abounding platform stilettos sunk straight into the grassy sod laid especially for the opening on Hermes’s corner of Marfaa Street. Never mind that the generator powering the crane swinging an angelic dancer above the crowd was so loud that it drowned out the music played for the spectacle. And never mind that the restricted entrance and exit, due to Prime Minster Hariri’s presence, meant that the tree-enclosed soiree was packed like a can of extremely expensive sardines.

The July 30 opening of the Hermes boutique was an example of brazen one-upmanship that we all should have expected.

But the sheer scale of it all, the extravagance, the excess, and the obvious staggering cost begs the question: what happens after the party? When the guests have gone and Hermes’s executives go home to Paris, who will be minding the store and what happens if the worst comes around to downtown Beirut again?

Why would Hermes, and all the other luxury brands invading downtown of late, take the risk of having to close a store if Lebanon’s cancerous instability comes out of remission?

They do it because the risk is not their’s to take.

Most of Beirut’s monobrand luxury boutiques are franchises, Hermes included. This means the location, and entire inventory of the store, is financed by the local franchise partner. Every item is bought and paid for before it hits the floor, which is why many developing markets, often being franchise-heavy, feature products at a significant mark-up.

So if any of downtown’s gleaming luxury palaces were forced to close their doors, it is local companies who would lose, with the brand escaping conflict with nothing more than a PR scratch. This is not to say that the embarrassment and public relations snafu of closing a store means nothing to an industry whose value is rooted in image. Luxury brands care what happens to their products, and especially their name.

On the day of the opening, Hermes International Chief Executive Officer Patrick Thomas told Executive that he chose Galop SAL as Hermes’s franchise partner out of many interested parties for its “long term” vision and singular focus. Michele Garzouzi, Galop’s president, said that she was not interested in offering, as many regional luxury franchises do, a smattering of trendy items and iconic pieces. She offered the full line and it nearly sold out in the first weekend.

And though her savvy buying strategy and dedication to Hermes — Galop’s only luxury brand — is proof of her long-term thinking, she has no contingency plan for Hermes’s fate if a conflict should crop up.

“You cannot plan for it really,” said Garzouzi. “When you have such an unstable situation you can’t really have a ‘Plan B’.”

Garzouzi is not alone in knocking on wood and hoping for the best; everyone hopes Lebanon will have no need for contingencies. But frankly, we should all stop being so grateful that these luxury titans are opening in our tailor-made shopping havens. We’re spending the money and taking all the risk, so bring on the absurdly extravagant parties downtown — we’ve earned them.

 

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Society

The East Moves West

by Paul Cochrane
written by Paul Cochrane

Labeling this region as the “Middle East” or the lesser used “Near East,” is standard practice in the West, but the region can equally be called “West Asia,” the opposite end of a vast landmass that spreads from Vladivostok and Shanghai all the way to the Bosporus and the Suez Canal. This designation makes sense given the area’s historic ties and the ancient Silk Road trading routes.

Today there is a new Silk Road, with flourishing two-way traffic between the rest of Asia and the continent’s eastern end, particularly Gulf Cooperation Council (GCC) countries and Iran. In Geoffrey Kemp’s book “The East Moves West,” he sets out the case for this burgeoning relationship and where it is likely to go. Kemp, an American foreign-affairs think-tank director, adeptly steers the reader through the ties that bind Asia together, from the geo-strategic importance of Central Asia to the big players: China, India, Pakistan, Japan and South Korea, covering economics, energy, politics, military ties and infrastructure projects. 

It is a relationship that is clearly centered on energy supplies, with some 40 percent of China’s oil coming from the GCC, India receiving 45 percent of its oil from the Middle East, and Japan reliant on the region for 90 percent of its oil. Such reliance on the region’s resources has resulted in mutual dependence.

With Eastern economies in ascendancy while the West hobbles along, this relationship is set to flourish, with significant economic and political ramifications. Energy dependence on Iran, for instance, has been crucial in allowing Tehran to survive the economic sanctions imposed by America and Europe to curb its nuclear program.

The big question, as Kemp sees it, is whether Eastern Asia’s role in the region will grow beyond the traditional buyer-seller relationship. Economically, it has started to change over the past five years, with Asian countries inking contracts worth $500 billion for infrastructure projects in the Middle East, while the GCC has invested more than $250 billion in East and South East Asia. Both East and West Asia want more.

Iran and Saudi Arabia have adopted a “look east” approach for market growth, while New Delhi considers the GCC, to quote India’s former commerce minister, “as part and parcel of India’s economic neighborhood.” The statistics only reinforce this. For India, the economic relationship with the GCC is more important than with the European Union, the Association of Southeast Asian Nations and the United States, totaling $86.9 billion (excluding oil) in 2008-2009.

The UAE is India’s jewel in the GCC crown, the country’s second biggest export destination and the Emirates’ largest importer, accounting for a third of its trade in the Middle East. With Indians making up 33 percent of the UAE’s population and 50 percent of its workforce (of which 25 percent are unskilled workers, 50 percent semi-skilled and 25 percent professionals), it’s no wonder the UAE labor minister said in 2007: “God forbid something happens between us and India and they say, ‘Please, we want all our Indians to go home’… our airports would shut down, our streets, construction…”

With the US flailing in Iraq and Afghanistan and its credibility shot in much of Asia, East Asia seems set to be the new player at the table. But so far the Asian nations have largely refrained from the political arena of the region’s western extremity.

As Kemp notes: “How long they can sustain their hands-off approach is questionable if…they get drawn into the messiness of Middle East politics at a time when the US becomes disillusioned by the burdens of hegemony.”

There are a lot of “ifs” in the book, but given all the certainties proclaimed by Washington of late in its future prognosis for the region, Kemp refreshingly gives plenty of room for thought about the potentials of the new Silk Road.

 

 

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Society

Putting the ‘sport‘ back into SUV

by Executive Staff
written by Executive Staff

Ever since the Porsche Cayenne debuted in 2003, it has faced a tough question: how to hold its niche in the luxury SUV market without jeopardizing the character of the Porsche brand.

Most critics and drivers agree that in terms of drivability and comfort, the Cayenne succeeded in meeting the public’s expectations. But seven years later, even though the Cayenne is now one of the company’s top-selling vehicles it still stands out as something of an anomaly in the Porsche family — like the one black sheep in a herd — and the company is looking for ways to bring it deeper into the fold. The new generation of Cayennes that entered the market this summer shows how Porsche plans to streamline this transition.

The bodywork of the Cayenne and Cayenne S Tiptronic, Cayenne Turbo, Cayenne Diesel and Cayenne S Hybrid all show noticeable development and look more in line with the Panamera — Porsche’s first four-door luxury Sedan — than their progenitors in the Cayenne line. The bodywork has taken a more forward-leaning, muscular design, incorporating elements of a sports car into what has otherwise been a utilitarian vehicle. 

But the changes to this new generation of Cayennes are not just cosmetic — far from it, in fact. The specs for the new Cayenne read like a user’s manual for the Hadron Collider: “Tiptronic S automatic transmission,” “Auto Start Stop,” “recuperation of the on-board network” and “variable overrun cut-off” are but a few of the highfalutin features the Cayenne boasts.

So what does this complex jargon mean when it comes to performance? In industry terms, 23 percent higher fuel efficiency than that of earlier generations of Cayennes. To put it colloquially: more bang for your buck. Like a lot of auto manufacturers these days, Porsche has enrolled itself in a serious weight-loss regime. They’re trimming excess mass wherever it can be found, shifting to lighter-weight materials — carbon fiber in particular — and pioneering intelligent technology to capture energy, conserve expenditure and transfer power to rechargeable sources. That process has shaved the new generation of Cayennes down by almost 200 kilos.

Easy on the gas

Fuel economy is particularly an issue as Europe prepares to begin enforcing stringent CO2 emissions caps and the United States mulls over its own fuel economy standards. Porsche’s response to this is the upcoming Cayenne S. Hybrid, the company’s first fusion gas-electric vehicle. In terms of mechanics, the company had been at pains to draw attention to its Tiptronic 8-Speed Automatic transmission, available in two of the new Cayenne models. The tiptronic transmission operates in generally the same manner as an ordinary automatic transmission, but offers the driver a manual override feature to force-change gears on their own. This gives the driver control over faster acceleration, engine breaking, gear holding going in and out of curves, downshifting before passing or early upshifting for cruising. Veteran Porsche drivers may wonder why the new Cayennes don’t include the dual-clutch transmission of the Carrera and Panamera, which has proven a favorite feature among drivers; the company claims that the dual clutch module does not fit size-wise with the Cayenne’s mechanical make-up.

Tardis effect

The new Cayennes are only slightly larger, but there’s a noticeable difference in space from inside the vehicle. A number of subtle interior adjustments, including a slight tip to the angle of the passenger seats, gives a little more legroom in the already ample interior.

Do the new generations fundamentally redefine the model’s personality? No, probably not. But they do suggest a clear direction that the Cayenne, and Porsche in general, is taking. The new line is increasingly efficient, and has taken notes from other Porsches from both ends of the spectrum, adding subtly to drivability, luxury and power. While priority has clearly been given to a higher standard of fuel economy, it is also clear that Porsche doesn’t want to lose touch with its sports car roots, and is moving forward with a clear vision of a unified image for all its cars, whether they be SUV, sedan or sport.

 

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Society

Cash Stash

by Sam Tarling
written by Sam Tarling

I was born a collector,” says Abdo Ayoub, the man who has put together the world’s largest collection of Lebanese Lira notes. Since 1985 the former Sleep Comfort co-owner has collected more than 500,000 individual banknotes, all issued as legal tender in Lebanon between 1920 and the present day.

As a youngster he hoarded his weekly Tintin newspaper comics before moving onto stamps, filling some 800 albums. Ayoub also holds one of just 23 complete Michelin Guide collections, dating back to 1900 and including an ultra rare edition issued by US military intelligence in 1939. The last full collection sold for 60,000 euros.

Valuing Ayoub’s cash cache would be a mammoth task, but with some of his more rare notes worth more than $15,000 alone, the figure is likely to be staggering.

This decidedly Lebanese collection comes from surprisingly cosmopolitan sources, including archives at the Banque du France, auction houses in London and paper money conventions in Italy and Belgium.

The majority of the collection is carefully catalogued and stashed in neat boxes around Ayoub’s cavernous library. Not content with just one example of each of the lira’s many manifestations, the consummate collector has hundreds of each, preserved sequentially in neat display books. Dusty stacks of notes still lie on the library floor, awaiting their carefully catalogued home.

Although the most recent addition arrived just a month ago, Ayoub says that after 25 years he’s winding down his collecting and looking to sell some 15,000 of his rarest specimens to a bank or museum.

One hole remains, however: a 1920 LL100 note, worth around $100,000 today due to its immense rarity. “I don’t think we’ll ever find that one,” says Ayoub. “It’s already 90 years ago.”

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Economics & Policy

Executive Insight Booz & co.

by Ahmed Youssef
written by Ahmed Youssef

Despite the financial downturn of the last few years, there is still plenty of money in the world looking for a home to call its own. Perhaps understandably, many investors are cautious about stashing that cash in the Middle East. But to ignore the region altogether could mean missing out on prime investment opportunities. 

Investors’ fears may be soothed by a better understanding of the current state of private equity in the region, where the last decade saw breakneck growth followed by near whiplash-inducing collapse. A recent study by Booz & Company and INSEAD shows that up until 2000, only eight funds existed in the Middle East, with an average $37 million under management. But the region’s economic development and liberalization created opportunities and encouraged the Gulf’s sovereign wealth funds and wealthy families to look for investments closer to home.

By 2004, the region had 26 funds. The subsequent increase in the price of oil between 2004 and 2008 stimulated capital formation, quadrupling the number of funds to more than 100. The amount of money raised jumped from less than $500 million in 2004 to about $10 billion in 2008.

That heady growth obscured some critical weaknesses in the Middle East’s nascent private equity market — weaknesses that were exposed once the global economic downturn put a halt to new fund creation in the first half of 2008.

For one, most fund managers had limited experience and track records. Private-equity firms did not have to get deeply involved in their investee companies as much of the money made during this period resulted from rapid arbitrage opportunities — holding periods were very short, in many instances under a year. Furthermore, significant gaps existed in the region’s legal and regulatory frameworks; in many countries, laws related to issues such as bankruptcy or the delisting of companies were still either nonexistent or, conversely, too rigid. Several Middle Eastern countries are addressing these gaps and some reforms have been made, but still there is room for improvement.

A shorter leap of faith

Now that the euphoria is over, many potential investors are seizing on these shortcomings as reason to think twice about committing funds, but they should be viewing the consolidation of businesses and industries through a different lens — as growing pains in a private equity market that is still immature by almost any standard. Investors looking to make a play in the region will still need to make a leap of faith, but that leap isn’t as wide or unnerving as it once was thanks to a number of factors lining up in the region’s favor.

First, the Middle East is still a region of increasing wealth and a growing population that needs new and better services. Health care service providers, retailers and consumer finance companies are among those sitting in the sweet spot, especially for private equity firms. Another huge opportunity looms in the region’s infrastructure development. The richest countries are investing billions in large-scale projects and private money will be needed to supplement the public spending and support the creation of enabling industries, such as materials and equipment, construction services and financing.

Furthermore, the family-owned businesses that account for roughly 40 percent of the region’s non-oil economy are more open to working with outside firms. Money was so abundant before that there was no need for equity financing to fund their businesses, many of which spread themselves too thin over multiple sectors. With access to capital now drying up, they are looking to shed non-core operations or introduce strategic investors to help manage them because they lack the requisite talent and capital.

Finally, there is bound to be less competition for these emerging opportunities. Most funds were established in 2007 and 2008, when investors were concerned about missing the ride and were not exercising due diligence. Investors have since wised-up, and they are going to be short on patience when those funds fail to show results over the next two years, accelerating their demise.

Do the due diligence

Investors looking to take advantage of these opportunities can and should equip themselves to better manage this transition. Part of the challenge will be resetting expectations, both for liquidity and returns; they will also need to understand and manage their limited partnership agreements. Exits will take longer, more debt may be required, and returns will need to be risk-adjusted for market opacity and regulatory changes.

The absence of market and industry information will necessarily shift investors’ focus to the strength or weakness of the management team. Questions investors should be asking during due diligence include: How much experience does the team have of operating in the region? What are their credentials in the industry of focus? How strong are its governance policies? Does its network and capabilities align with its investment philosophy? The answers to these questions will help investors gain enough confidence to take the leap of faith with a given team or seek out a more suitable partner.

Certainly, the easy money is gone in the Middle East private equity market — or it soon will be. But the sector is maturing rapidly, and its coming of age will spell plenty of opportunities for those who do their homework. Realizing attractive returns in this market will not depend on timing or external market factors but on recognizing fundamental risk-adjusted value.

 

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Finance

No change at the top

by Emma Cosgrove
written by Emma Cosgrove

2010 net profits and growth

First half 2010 financials from Lebanon’s Alpha Banks

Lebanese alpha banks continued to gain profits and assets in the first half of 2010 with Bank Audi maintaining its lead across the board. But there have been some notable shifts among the rankings.

In terms of assets, Fransabank passed BankMed in the last year. The former’s assets grew to $11.5 billion, surpassing BankMed’s $11 billion. This step up in the assets race also shows in Fransabank’s lending figures, which jumped above Banque Libano-Francaise since this time last year, moving the bank from sixth largest Lebanese lender at the end of June 2009 to currently place fifth. 

In terms of customer deposits, SGBL regained its 10th place medal from BBAC after a year outside the top 10 by a hair’s breadth, with the bank’s customer deposits growing 23.87 percent year-on-year to reach $3.6 billion, beating BBAC’s 10.5 percent growth and $3.4 billion in deposits.

At the top of the profits podium for the first half of 2010 is Bank Audi, after having lost the top spot to BLOM at the end of 2009. Audi regained its former glory by growing profits by 21.45 percent, reaching $161.4 million. Net profits growth among the entire alpha group brought out some other surprise swells, with Lebanese Canadian Bank posting 84.74 year-on-year percent growth, SGBL at 79.05 percent year-on-year growth, Bank of Beirut at 65.26 percent, Fransabank 54.69 percent and Banque Libano-Francaise at 42.86 percent.

The assets of the entire commercial banking sector grew to $122 billion by the end of June 2010, representing a year-on-year increase of 17.4 percent.

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Economics & Policy

For your information

by Executive Editors
written by Executive Editors

A curb on oil exploration

The King of Saudi Arabia has made a royal decision to halt further exploration of oil and gas in the world’s largest crude exporting nation. The announcement was reported in early July by the official Saudi Press Agency  and quoted King Abdullah bin Abdul Aziz on his way to a cabinet meeting as saying: “I told them that I have ordered a halt to all oil explorations so part of this wealth is left for our sons and successors, God willing.” A senior ministry official quoted by Zawya Dow Jones later explained that the statement was not an outright ban on further exploration, but rather was intended to express that future exploration would be carried out more “wisely.” Saudi Arabian oil reserves are the largest in the world and stood at 260.1 billion barrels at the end of 2009, according to the state-run Saudi Aramco.

IFF blasts Lebanon’s budget

The Institute of International Finance (IIF), the global association of financial institutions, has criticized the 2010 budget proposal and suggested that Lebanon has missed an opportunity to improve its public finances. “The 2010 budget does not aim for a significant primary surplus that could have been achieved under the continued strong economic growth and implementation of the long-delayed reforms. Avoiding complacency and building consensus on reforms combined with continued stable political environment could sustain rapid growth beyond 2010 and bring down government debt to more sustainable levels,” the IIF stated in a country report on Lebanon. The report cautioned that the favorable economic conditions of rapid growth, low global interest rates and abundant liquidity in the banking sector were not likely to continue in the medium term. The IIF also advocated raising the Value Added Tax (VAT) from 10 percent to 12 percent, as well as removing exemptions on precious and semiprecious stones, and on yachts and other excursion or sports sailboats that currently do not pay VAT.

Consumer confidence confusion

The three most trusted indices measuring consumer confidence in Lebanon show differing results for the second quarter of 2010, according to BLOM Bank. The first of the these studies, conducted by Bayt.com, reported that Lebanon’s consumer confidence index (CCI) increased by 7.6 points in quarter two of 2010, leading the region in growth. According to the same survey, consumers in the UAE, Kuwait, Saudi Arabia, Egypt and Bahrain are losing confidence in their countries’ economies and their own earning and spending futures. Qatar and Morocco showed modest growth in their indices. The other two surveys, conducted by Ara’a Research and MasterCard, both showed a drop in consumer confidence in Lebanon. Ara’a’s index saw Lebanon drop 15 basis points to hit its lowest level since October 2009. MasterCard’s study showed an even more dramatic plunge, with a 30.74 percent year-on-year drop in consumer confidence for the first half of 2009. MasterCard’s index also demonstrated pessimism in the other Middle East and North Africa countries, with the regional index dropping 7.11 percent. BLOM’s analysis of these contradictions led to the conclusion that CCI studies are highly subjective and should be observed with caution, as the size and socio-economic makeup of the sample can have a significant affect on the outcome.

Lebanon tops FDI-to-GDP table

Lebanon attained the highest ratio of Foreign Direct Investment (FDI) to GDP in the Arab world last year, according to recent figures issued by the Arab Investment and Export Guarantee Corporation, a body that provides insurance coverage and export credit. The figures show that FDI to (estimated) GDP in Lebanon in 2009 reached 14.3 percent, up from 12.2 percent in 2008. The total value of FDI in Lebanon during 2009 also increased 33 percent on 2008, coming in at $4.8 billion. The figure also constitutes the fifth highest FDI by value in the Arab world during 2009, in contrast to aggregate figures that saw FDI in the Arab world experience a 15 percent year-on-year decline. FDI inflows to Lebanon accounted for 6 percent of the total $80.7 billion dollars registered. Saudi Arabia took the lion’s share of FDI last year, making up 43 percent of the total at $35.5 billion dollars.

No national future for pipe firm

Future Pipe Industries sal, the Lebanese subsidiary of the Dubai-based Future Pipe Industries group, announced that it had closed its operations in Lebanon. The company, which produced pipes and rubber gaskets, was established in 1995 by Lebanese businessman Fouad Makhzoumi and had an annual turnover of $830 million in 2008. Future Pipe Industries was the largest private sector employer in the Akkar region with hundreds of employees. The company attributed its decision to close up shop to adverse operating conditions in Lebanon. The firm still has 10 other plants on five continents and employs some 4,500 people. It derives 76 percent of its sales from the Gulf Cooperation Council.

Lebanon and Syria’s bilateral bonanza

In another chapter of the Treaty of Brotherhood, Cooperation and Coordination signed in 1991 under then president Elias Herawi, Lebanon and Syria have embarked on a new set of agreements that come on the back of Lebanese Prime Minister Saad Hariri’s most recent visit to Damascus. The 18 agreements also took place amid the backdrop of heightened tensions over the Special Tribunal for Lebanon, which according to Hezbollah’s Secretary General will implicate members of the party and not, as was originally expected, Syria. Hariri’s Syrian counterpart Mohammed Naji Otary stated: “What links Syria and Lebanon is stronger than bets of enemies and conspirators.” Hariri was quoted by the agency as saying: “The interest of Syria and Lebanon comes before everything…. we have to prepare for the next stage through achieving economic rapprochement to strengthen our economy in the face of the global financial crisis and other future challenges.” The agreements themselves are comprised formal economic sector cooperation documents, memorandums of understanding, executive programs and protocols and cover the fields of economy, trade, education, agriculture and tourism among others, and are signed on the ministerial level, according to the Syrian state-run news agency SANA. 

The countries’ respective finance ministers inked a protocol agreement on avoiding double taxation between the two nations, which also covered ways to address tax evasion in relation to income taxes. The ministers also signed an agreement on encouraging investment and memorandum of understanding on customer protection along with their counterparts from the respective ministries of economics and trade. A total of four agreements were also signed by the agriculture ministers of the two nations, which will unify regulations for licensing and importing of veterinary medicines and agricultural pesticides, as well as covering animal and plant protection. In addition, the two education ministers signed an executive program and two agreements covering various levels of education and research. The ministers of culture and tourism also followed suit, inking a three-year executive program and a further cooperation agreement respectively. Not to be outdone, the ministers of health, transport, justice, interior and environment also approved several agreements. Minutes of the meetings of the joint ministerial and technical committees who met after the accords had been signed show that they agreed to establish mechanisms to form a joint committee for foreign and economic affairs, implement a future security and defense agreement, link the two countries by rail through a Tripoli-Homs-Riyaq-Damascus railways and establish a joint border industrial zone, in addition to demarcating borders between the two nations, and the creation of a Syrian-Lebanese Business Council. The Syrian premier also stressed that the establishment of a high-level “cooperation committee” tasked with overseeing the implementation of a free trade agreement between Lebanon, Syria, Jordan and Turkey, was of the utmost importance. “We want the Syrian-Lebanese relationship to be an example for the joint Arab market, aiming to widen this cooperation to include other Arab countries,” Hariri added.

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