Executive Magazine

Time to lay new tracks

by Paul Cochrane June 1, 2010

written by Paul Cochrane

The Middle East and the United States have a lot in common when it comes to transportation. Both places have a love affair with the automobile and both had long-distance train networks well over 100 years ago. Both now also have an over abundance of private vehicles clogging up the roads while railways and public transport systems are substandard, if they exist at all.

There is a clear correlation that can be drawn here, between the rise of the car and the demise of rail transportation. But what is more noticeable on a macro-level is how the Middle East and the US stand out from nearly everywhere else in neglecting and underfunding their respective railway networks. Around the world, from South America to South Korea, investment in railways, metros and high-speed trains has been ongoing for decades.

In recent years a growing web of tracks has enmeshed the globe, with China alone earmarking $300 billion over the next decade to build 25,000 kilometers of high-speed railroads. By comparison, the US has just 735 kilometers of high-speed track. The Middle East has, well, zero.

The tide seems to be turning in the US, which had long practiced a policy of “starving the beast” — underfund the railways then shut them down due to inefficiency — until the American Recovery and Reinvestment Act in 2009 allocated $13 billion to improve the railways over the next five years.

It’s been a long time coming but the Middle East is also finally undergoing a railway renaissance. Jordan and Syria are both reinvesting in train lines that were built in the early 1900s and once linked Damascus to Mecca, part of the famous Hijaz Railway.

Meanwhile, in the Gulf Cooperation Council investment in railways could reach $109 billion over the next decade, according to a report by the Kuwait Financial Center. Saudi Arabia is expanding its railway network, which will include a $1.8 billion high-speed railway between Mecca and Medina; Qatar is spending nearly $25 billion on railways and a metro; and the United Arab Emirates is mulling a railway network to compliment the Dubai and Abu Dhabi metros.

All three countries would then link to the 2,177 kilometer GCC rail network slated to open in 2017. With an estimated cost of $25 billion, the network will run from Kuwait through Saudi Arabia, Bahrain, Qatar and the UAE before the last stop in Oman, or possibly Yemen. This will be money well spent, as an effective railway will better connect the people and economies of the region and reduce the environmental impact of travel.

What is remarkable is how long it has taken the GCC to roll out a regional track, despite its obvious benefits, and to not have done so as a priority over other major infrastructure projects. The same incredulity can be applied to Lebanon, with the government squandering the opportunity in the early 1990s to implement a comprehensive railway network alongside all the other post-civil war reconstruction work. A train line running down the coast between Tyre, Beirut and Tripoli would be a dream; connecting Beirut to Damascus beyond a fantasy.

But Lebanon may yet take part in the Middle East’s railway revival. The French government announced in May that they plan to fund a study to rehabilitate Lebanon’s coastal railways, which would be a start. The traffic situation around Beirut is appalling, and is set to get even worse as more cars pile onto the roads. It is the same in pretty much every major city in the region.

The public will be hoping that for once, talk of improving Lebanon’s transport network goes beyond the planning stage. But judging by some of the discourse on transportation heard in Beirut of late, they shouldn’t hold their breath.

Earlier in the year Beirut’s muhafez (governor) came up with a creative idea to solve the city’s traffic problems: sidewalks should be no wider than one meter. And in 2005, during discussions of the national master plan, investment in public transport was dismissed with the claim: “Lebanese like their cars and don’t like public transport.”

Considering the problems that the region’s cities face in terms of congestion, pollution and infrastructure, governments need to get serious about public transport planning. Their citizens deserve better than smaller sidewalks and clapped-out old taxis: it’s time to wean people off their love affair with cars and start laying tracks.

PAUL COCHRANE is the Middle East correspondent for International News Services

June 1, 2010 0 comments

Comment

Ill placed pride

by Alice Fordham June 1, 2010

written by Alice Fordham

There was a tone of triumph after Iraq’s elections. Western diplomats crowed that the polls were as democratic as any in the Arab world, ever. An American military commander told me he even yelled “attaboy!” to the Iraqi troops who kept the country relatively secure as people cast their ballots on March 7.

World leaders paid tribute to Iraqis who had committed to democracy. Even as a post-election vortex swirled and bombings filled a political vacuum, people stressed that the elections had been an achievement. As one British politician put it, Iraq was on its way to becoming a “beacon of democracy” for the Middle East; the withdrawal of American troops, which depended on successful elections, is now set to begin at the end of August.

But this election was held up with the scaffolding of an American-led international presence, which bullied and wheedled a recalcitrant Iraq into holding a poll. Although the voting had a veneer of credibility, it was not exactly a model of democratic process, and without help, it would not have happened. For there to be any crowing, the diplomats would have to be able to look to the next parliamentary elections, to the Iraq of 2015, and say with some certainty that they would be as democratic as those held in March.

The chances of that are slim. Without American support, the Iraqi government as it now exists would struggle to hold an election. The March poll happened only after telephone calls from Washington to Kurdish leaders to persuade them to stop stalling electoral legislation. All political parties — except the Sadrists — came to the United States embassy for lessons in how Iraq’s convoluted election system worked. While US soldiers were not directly responsible for security in the cities, their training is still the backbone of the Iraqi security forces.

There is also little commitment to democracy among Iraq’s leaders. Politicians showed a strong tendency toward tactics that were more than dirty politics, from the exploitation of rules to disqualify candidates for links to the regime of former President Saddam Hussein, to Prime Minister Nouri al-Maliki’s threatening to invoke his powers as commander-in-chief in calling fraud on the results, in which his rival Ayad Allawi won a plurality of the parliament seats. Security may have held during the elections, but in the aftermath, coordinated bombings — which killed dozens — have sharply increased in frequency, as have assassinations, largely of Sunni leaders.

Allawi, who campaigned on a platform of secularism and was supported by most of Iraq’s Sunni Muslims, claimed 91 parliamentary seats out of 345, two more than Maliki’s State of Law party. But he will probably be sidelined; a grand Shiite coalition is being formed, whose power will likely leave Allawi’s voters feeling disillusioned with democracy, deepening sectarian rifts.

The electoral framework is also shaky, symptomatic of a country where institution building has taken second place. Laws have been contested throughout the electoral process and the judiciary, which rules on legal disputes, is corrupt, as is the government — the fourth most corrupt in the world, according to Transparency International. Also, ordinary Iraqis continue to live without reliable electricity or clean water. Basic infrastructure, let alone the regeneration of the roads, schools and banks that the country needs, is still lacking. The recent revelation of secret prisons for Sunni Arabs shows that brutal human rights abuses are still prevalent, and it seems likely they are used for political ends.

Even with its current international presence, Iraq can only manage what John McCain called a “messy, but effective” democracy. As the country’s security forces grow in strength, it is unlikely to return to the sectarian bloodbath seen from 2005 to the end of 2007. But as oil revenues begin to pour into the country, the money will reinforce a government that tends toward autocracy, corruption and disinterest in the principles of democracy and human rights.

The US, the UN and the international community should spend less time trying to convince the world that democracy has landed in Iraq, and more time working on building law, the parliament and infrastructure, so the country does not backslide as they leave.

Perhaps then, Iraqis, who have suffered so much, might get something close to the country they deserve.

ALICE FORDHAM is a Baghdad correspondent for The Times of London

June 1, 2010 0 comments

Comment

Sex, lies and politics

by Peter Grimsditch June 1, 2010

written by Peter Grimsditch

While politicians caught with their trousers down are noted for inventiveness in deflecting blame, Deniz Baykal has elevated the practice to an art form. The 72-year-old Turkish opposition leader resigned last month after a video showing him in bed with his former secretary, now a member of parliament, was posted on the Internet.

To Baykal, the culprit was obvious. “This is not a sex tape, this is a conspiracy,” the leader of the Republican People’s Party (CHP) told reporters. Baykal pointed his podgy finger at the ruling Justice and Development Party (AKP), saying its leaders must have had prior knowledge of the tape.

In the murky world of politics in Ankara, anything is possible. But it makes little sense for the AKP to bring down a man who has not won an election for almost two decades. Some even argue that Baykal’s divisive and dictatorial stewardship of the CHP is more an asset to Prime Minister Recep Tayyip Erdogan than a threat to his political future.

Indeed, Baykal’s explanation of his affair with Ankara deputy Nesrin Baytok well illustrates how his eccentric logic continues to befuddle voters. “If this has a price, and that price is the resignation from the CHP leadership, I am ready to pay it,” he said. “My resignation does not mean running away or giving in,” added Baykal. “On the contrary, it means that I’m fighting it.”

Erdogan called his own press conference and denounced Baykal’s comments “as cheap and ugly as the video itself,” although he didn’t say whether he had actually seen it.

The nine-minute soundless tape, filmed with a camera that was hidden in a wardrobe in the bedroom of a private house, was first posted on Habervaktim, a radical Islamist website. It was then reposted on the comparatively benign YouTube, which, ironically, is banned in Turkey.

“Once my friends informed me about the incident,” said Erdogan, “I ordered the transportation minister to block Internet circulation of the video. We could not have remained silent in the face of such footage, which may damage society’s moral values.”

The prime minister has asked the head of military intelligence to investigate the video. Baykal is a stout defender of the army and is campaigning to disrupt the AKP’s proposed constitutional reforms. These include forbidding judges to close political parties without the say-so of a parliamentary commission, allowing military officers to be tried in civilian courts and lifting the amnesty that the 1980 military coup leaders granted themselves before leaving power.

The AKP narrowly escaped one closure attempt and fiercely secular judges are more likely to see off the Islamic-leaning party in court than Baykal is at an election.

There is another theory behind the bedroom movie, as well as a suggestion for how the affair started. Baykal has survived several attempts to oust him by stacking the delegates, who vote for leaders, with his own supporters. Some longtime CHP activists would like to see a democratic, secular and successful party, free of army influence. Since ‘fair’ means have failed to dislodge Baykal, the alternative was to indulge in the ‘foul’ variety. In this vein, it has been suggested that the tape could be one of a set, with release of the rest hinging on Baykal’s agreement not to stage a comeback.

Meanwhile, the junior partner in the Baykal-Baytok bedroom coalition has been talking to the press about the virtue of family values. She told the Aksam daily that her husband, Can Baytok, and the couple’s daughter have been very supportive. “This is a great test and I know that I have passed that test in the eyes of my family,” she said. Then, there was the little matter of her husband’s ailing and failing computer business.

Baytok said she had never used her political influence to get favors for her husband. “The allegations that he won contracts from CHP municipalities are lies,” she claimed. “In the past 20 years, he has applied for only one municipal tender… and Can sold a small number of computers at very low prices,” said Baytok.

At least she is displaying consistency, a rare trait in Turkish politics. The two men known to be in her life have both been failing at their jobs for the past 20 years.

PETER GRIMSDITCH is Executive’s Istanbul correspondent

June 1, 2010 0 comments

Economics & Policy

Regional equity markets

by Executive Editors May 27, 2010

written by Executive Editors

Beirut SE (One month)

Current year high: 1,200.49 Current year low: 737.84

> Review period: Closed: April 21 – 1,143.23 Period change: 2.74%

A cone-shaped rise and fall on the Beirut Stock Exchange kept the MSCI Lebanon index gains modest in the review period. BLOM Bank was the best gainer in April with 16.1%, followed by Byblos Bank (common shares) with 14.8%. Byblos shareholders approved a 66% rights issue on April 12, boosting interest in the scrip around that time. Other good news for banks came from ratings upgrades by Moody’s, in line with a sovereign upgrade, and by Fitch. Market cap leader and real estate stock Solidere weakened in the review period.

Amman SE (One month)

Current year high: 2,968.77 Current year low: 2,396.28

> Review period: Closed: April 21 – 2,561.04 Period change: 1.72%

Rather noticeable volatility reigned on the Amman Stock Exchange, where the ASE benchmark index could not sustain an intra-month rally and closed the review period only 1.72% up from the last close in March. Earlier in April, the index had risen to near 2,650 points, its highest level since last October. Although the Housing Bank for Trade and Finance moved 6.3% lower, other banking stocks showed resilience and their sector index ended the period 4% higher. Market cap leader Arab Bank gained 7.6%. The indices for industrial and insurance stocks dipped into negative territory.

Abu Dhabi SM (One month)

Current year high: 3,239.74 Current year low: 2,441.28

> Review period: Closed: April 21 – 2,820.45 Period change: -3%

There was no fun and gains for equities in Abu Dhabi this April, but for the year to date the index was still up 2.8%. The general trend was downward across all sectors on the exchange and the best performing stock in the review period was out-of-towner Qtel, which advanced 22.6%. Aldar Properties lost 9.1%. The worst performing sub-indices were consumers, down 9.7%, followed by real estate and telecommunications, which lost 6.7% and 6.3%, respectively. Pundits have it, however, that the investor confidence in Abu Dhabi and across GCC markets is on a positive track.

Dubai FM (One month)

Current year high: 2,373.37 Current year low: 1,533.36

> Review period: Closed: April 21 – 1,730.51 Period change: -6.1%

Book and run was the motto of Dubai investors, who apparently hurried to cash in gains achieved in March and reacted nervously to any hint of unfavorable news on the DFM. Investor behavior sent the index tumbling in the review period and pushed it back into negative territory for the year to date – the region’s only index to be in the red by that measure. For the three weeks in April, only six stocks on the DFM could show gains. Losers included well-known names across all sectors, such as Aramex, Oman Insurance, du, Arabtec, Emirates NBD, and Emaar.

Kuwait SE (One month)

Current year high: 8,371.10 Current year low: 6,650.80

> Review period: Closed: April 21 – 7,244.30 Period change: -3.84%

Being far south of Iceland’s ash cloud didn’t do much for equities in Kuwait in April. The KSE index was the GCC markets’ second worst performer in the review period, dropping below 7,300 points for the first time in two months. The downward push at the end of the review period uniformly affected the major sectors whose indices all entered the red. Banking, down by 0.43%, was the least affected. Market champion Zain Group shed 5.9%.

Saudi Arabia SE (One month)

Current year high: 6,894.55 Current year low: 5,407.31

> Review period: Closed: April 21 – 6,730.12 Period change: 1%

The petrochemicals sub-index had the best performance, up 3.63%, whereas energy and utilities fared worst at minus 11%. Losers outnumbered gainers and included the largest bank by market cap, Al Rajhi, which dropped 6.4%. Market-heavy manufacturers SABIC advanced half a percent. Optimistic voices on the year’s equity performances remained dominant but — except for volcanic emissions in unpronounceable Nordic locales — April, on the whole, was a steam-less month in GCC equity markets.

Muscat SM (One month)

Current year high: 6,933.75 Current year low: 5,049.03

> Review period: Closed: April 21 – 6,906.66 Period change: 3.21%

The Muscat Securities Market index close represented the best GCC performance in the review period. Poultry farming company A’Saffa Food doubled its share price as the MSM’s top gainer in April after the company undertook a 10 for one stock split at the end of March. The banking sector index led the market’s upward performance sector-wise and the banking index outperformed the general index by almost 3%. Market cap leader BankMuscat ended the review period 5.1% higher; telecommunications operator Omantel was in the balance with a 0.1% drop.

Bahrain SE (One month)

Current year high: 1,656.43 Current year low: 1,413.28

> Review period: Closed: April 21 – 1,540.52 Period change: – 0.42%

Significant fluctuations rocked the Bahrain index, which closed down 65 points from its intra-month high but still up 5.64% for the year to date. The banking index, in a rough ride, outperformed the market but the investment sector underperformed. Market cap leader Ahli United Bank was among the top gainers, up 2.94%; the scrip has appreciated 61% in the year to date. At the other end of the scale was Gulf Finance House which could not stem its price slide and closed the April 21

session 19.2% down on the month.

Doha SM (One month)

Current year high: 7,801.33 Current year low: 5,426.04

> Review period: Closed: April 21 – 7,617.62 Period change: 2.1%

The Qatar Exchange was the second best GCC performer from April 1 thru 21. The close on April 21 represented a gain of 9.5% for the year to date, almost on par with the Saudi Tadawul’s y-t-d gain of 9.9%. Like several other regional exchanges, the QSE index reached new 18-month highs in April but couldn’t sustain them. There were more gainers than losers on the QSE and Al Khaleej Insurance and Doha Insurance topped the gainers’ list with respective share price increases of 17.3% and 16.8%. Insurance was the best sector index in the review period, followed by banking.

Tunis SE (One month)

Current year high: 4,772.39 Current year low: 3,337.48

> Review period: Closed: April 21 – 4,738.92 Period change: 1.53%

The Tunindex of the Tunisian Stock Exchange stayed its course with little volatility compared with the last session in March. The index closed a five-point whisper below its year high from February 9. Insurance company Assurances Salim, which debuted on April 1, gained 42% from its issue price but any stock performance in the review period was incomparable to that of telecommunications infrastructure firm Servicom, whose price reportedly rose nine fold on a trade of three shares.

Casablanca SE (One month)

Current year high: 12,137.95 Current year low: 9,997.56

> Review period: Closed: April 21 – 12,038.45 Period change: 5.4%

The Casablanca Exchange was the number 2 upward outlier among MENA securities markets in April, with a rise of 5.4% during the review period. Dropping in the first week of the month, the MASI benchmark index rose strongly from April 12, scaling a new 17-month high with 12,137.95 on April 20. The majority of stocks showed gains, including the market heavies Maroc Telecom (up 1.26%) and Attijariwafa Bank, which ended the period 4% higher after profit taking on April 21.

Egypt CASE (One month)

Current year high: 7,591.37 Current year low: 4,953.53

> Review period: Closed: April 21 – 7,581.71 Period change: 11.4%

The Egyptian Stock Exchange raced to the top of the regional charts in the April review period, heaving the EGX 30 index to a 22.1% rally from the start of 2010. Index readings reached in mid-April have been the highest since mid September 2008. Orascom Telecom Holding, the number two by market cap on the EGX, was top dog in share price appreciation during the review period and rallied 33%. Telecom Egypt gained 8.9% and Orascom Construction, 3.3%.

May 27, 2010 0 comments

Economics & Policy

IPO Watch

by Executive Editors May 27, 2010

written by Executive Editors

Insatiable” was not the word to describe the behavior of actors in Middle Eastern primary markets in April 2010. While it appears credible that investors have been hungering after opportunities, the dearth of initial public offerings (IPOs) and secondary offerings in April 2010 was so complete that no actual primary market performance numbers were available from the Gulf or the Levant.

The only market to report any securities market entrant and any new offering in April was Tunisia, where two insurance companies took listing steps. Tunis Re, the reinsurance company, carried out the subscription period for its IPO from April 5 to 16, offering 22 percent equity for $10 million. The results of subscription were not published at the time of this writing.

Assurances SALIM started trading at the beginning of April following its $7 million subscription offer for 25 percent equity in March, which was over-subscribed almost 30 times. The company’s share price, $10.62 at issue, started trading at $15.22 on its first day and closed at $15.20 on April 20.

The underperformance of Middle Eastern IPO activity this year is noteable when compared with international markets. According to Zawya, the count of eight IPOs between January 1 and April 20, 2010, represented a slight increase from seven in the same period a year ago, but the cumulative value of the eight recent IPOs was less than $440 million, down 60 percent from $1.1 billion a year ago.

By contrast, global IPO activity in the first quarter of 2010 increased fivefold to 267 public offerings, the aggregate value of which skyrocketed to $53.2 billion from only $1.4 billion in the first quarter of 2009, said a report by financial auditor Ernst & Young.

The value of issues ballooned in part due to venerable Japanese life insurer Dai-ichi’s $11 billion conversion from a mutual company owned by policy holders to a public listing.

Beyond this mega issue — the world’s largest IPO in two years — and two large insurance IPOs in South Korea, the usual emerging markets champs China, India and Brazil were named as the prime grazing grounds for IPO investors so far this year. Proving them right, the state-owned Agricultural Bank of China said in April that it wants to stage the world’s largest IPO ever, to raise $30 billion in the third quarter of 2010.

Reinforcing the image of a pale Middle Eastern IPO ice princess, companies in the region that recently announced planned offerings promised long-term marvels while keeping the veil tight on timing and details. Lebanon’s Middle East Airlines wants to privatize about 25 percent through an IPO in 2011, the airline’s chairman Mohammed Hout said in a replay of listing plans that were shelved due to the upheavals of 2006. In the Gulf, officials of retailer Landmark and building materials firm Danube each hinted at IPO plans, but with time frames ranging from two to four years.

More tangible investment opportunities, albeit with eligibility limits, came from two companies with rights issues on their agenda. Saudi Stock Exchange-listed insurer Saudi Fransi Cooperative in early April obtained shareholder approval to double its number of outstanding shares to 20 million through a $33.3 million rights issue. Shares were issued at $3.33 apiece between April 10 and April 19. The company’s share price, which had risen sharply at the beginning of April, dropped back in the course of the month to close at $11.47 on April 20.

In a new rights issue announcement on April 19, United Arab Emirates telecommunications firm du revealed that it was seeking a billion-dirham capital infusion from shareholders, through a 25 percent rights issue which will increase the company’s total number of outstanding shares to 5 billion.

Officials at du said the new capital will be used for network expansion and new tech capacities. Pending shareholder approval in May, the issue will be carried out in May/June as the second sizeable rights issue in the UAE in nine months.

As far as full initial public offerings with pizzazz and a powerful Middle Eastern corporate ingredient, regional investors may look to India where Emaar MGF, the property joint venture led by Emaar Group, has announced its intent to raise $770 million through an IPO before the end of the summer. That offering will considerably spice up the Indian IPO market, which boasts so far 20 IPOs with cumulative worth of $1.2 billion from January through March 2010.

May 27, 2010 0 comments

Economics & Policy

For your information

by Executive Editors May 27, 2010

written by Executive Editors

IMF estimates for Lebanon

According to International Monetary Fund estimates, Lebanon registered the second highest growth rate in the Middle East and North Africa behind Qatar last year. The Fund estimated that Lebanon’s economy grew 9 percent in 2009, which placed the country in fourth place globally in terms of real gross domestic product growth. This year the IMF estimated that Lebanon will grow 6 percent, 2.5 percent higher than the MENA region average, and by 4.5 percent in 2011, 0.3 percent below the MENA average. In parallel, the fund estimated that inflation during 2010 would average 5 percent, 1.5 percent below the MENA average. The IMF also forecast Lebanon’s current account deficit at 12.8 percent of GDP, 2.06 percentage points above the finance ministry’s proposed budget deficit for the year. In conclusion, however, the Fund noted that forecast accuracy is mitigated due to Lebanon’s weak statistics regime and stressed that real sector statistics should be provided on a more timely basis.

SME’s lap up loans

Kafalat, the publicly-sponsored financial institution offering loan guarantees for small and medium-sized enterprises in value added sectors, has reported that the value of loans extended to these businesses in the first quarter of 2010 has grown by 57.5 percent year-on-year. The total value of the loans guaranteed by the institution totaled $46.3 million in the first three months of the year. The number of loans also grew by 83 percent, from 214 in the first three months of 2009 to 392 during the same period in 2010. That said, the year-on-year average value per loan decreased 24 percent, to $118,173 per loan. The largest portion of loan guarantees were extended to projects in the agricultural sector, which captured 49.2 percent of total guarantees in the first quarter of the year. The region with the most guarantees was Mount Lebanon, accounting for 39.8 percent of the total number of guarantees over the covered period.

At last – 2008 figures announced

Almost a year and a half after the fact, the government of Lebanon has released official figures for real sector growth in 2008. The figures were compiled by the National Accounts Unit with the aid of the French research firm L’Institut National de la Statistique et des Etudes Economiques (INSEE). The report states that gross domestic product in 2008 reached $29.9 billion, reflecting a real GDP growth of 9.3 percent during the year. The real negative trade balance came in at $8.7 billion in 2008, compared to $6.3 billion in 2007. The figures confirm that commercial services were still the dominant sector in 2008, comprising 33 percent of the economic output, followed by trade (27 percent), construction (13 percent), industry (9 percent), government (9 percent), transport and communications (7 percent), and then agriculture and livestock (6 percent). The only sector that contracted in 2008 was the energy and water sector, with 4 percent sliding down the drain.

Bond boost from ratings firm

The global ratings agency Moody’s has upgraded Lebanon’s government bond ratings from B2 to B1. Last December the agency rated Lebanon as having a positive outlook because of “sustained improvement in external liquidity, the strengthened ability of the country’s resilient banking system to finance fiscal deficits and an amelioration of the domestic political situation following the formation of a consensus government last November.” Moody’s also upgraded the country’s foreign currency bank deposits to B1 from B2 and its country ceiling for foreign currency bonds to Ba3 from B1, while maintaining a stable outlook on sovereign ratings. The agency also stated that increased foreign assets at Banque du Liban, Lebanon’s central bank, “[placed] the country in a more favorable position to absorb financial shocks (including any potential rise in deposit dollarization), while also providing ample cover for the government’s maturing foreign currency debt.” However, Tristan Cooper, vice president and senior credit officer at Moody’s Sovereign Risk Group, cautioned that “despite the recent improving trends, Moody’s notes Lebanon’s significant political and economic vulnerabilities. These include wide twin deficits, a very high public debt overhang, a tense domestic political environment, and the persistent threat of an escalation with Israel.”

Broadband lumbers forward

Telecommunications Minister Charbel Nahas said last month that the project to develop a national fiber-optic network to increase Internet speeds in Lebanon will cost $92.9 million. The announcement was made at a conference on April 12, after the minister had announced in January that the project would cost some $166 million. In March, Executive cited telecommunications experts at the International Telecommunications Union, the United Nations agency for telecommunications, as stating that the project should cost no more than $40 million. Speaking at the conference, Nahas said that $66.3 million had been requested from the Council of Ministers, Lebanon’s cabinet, to start funding the project. The figure is close to the previous minister’s estimate of $64 million to implement the project. Lebanon is still in the process of passing a budget for the year, before which new projects cannot be funded from government coffers. According to Naji Andraos, director general of construction and maintenance, the project requires some 4,000 kilometers of fiber optic cable, most of which will be laid in two “super rings” that will carry the bulk of the data around Lebanon to be transferred to “metro rings” in population areas. The “access layer,” the final crucial link between telecommunications infrastructure and the user, is still being studied by the ministry, which hopes to finish its assessment by mid-2011, according to Abdulmenaim Youssef, the head of Lebanon’s incumbent public operator, Ogero. Youssef also heads the Directorate of Operations and Maintenance at the Ministry of Telecommunications, whose job it is to oversee Ogero’s operations. Without defining the access layer, an accurate financial estimate of how much the project will cost is near impossible. “The tender for the optical backbone and the metro backbone is still in the planning phase,” said Anders Lindblad, president of Ericsson in the Middle East. “Sure there is a budgetary estimate, but the competition [in the vendor market] will determine the price.” He added that the project will likely take 10 to 15 years to complete. In related telecom news, Kamal Shehadi, the chairman of Lebanon’s Telecommunications Regulatory Authority (TRA), has resigned, according to a TRA press release dated April 26.

The LNG alternative

A study by Poten & Partners commissioned by the World Bank has found that liquefied natural gas (LNG) could prove to be an effective solution to Lebanon’s current energy problems. The study stated that Lebanon could relieve itself of its high oil bills by switching the Zahrani combined cycle gas turbine (CCGT) power station to LNG, saving the country between $75 million and $80 million a year. The study also stated that while the Beddawi plant in the north of the country was being supplied by the Gasyle 1 pipeline, it would be too expensive to transport gas to the south of the country from the station. Poten & Partners estimated that Lebanon needs 1.5 million to 2 million tons of LNG per year, which could be procured from the expected 80 million extra tons coming online in the global market between 2009 and 2013. If Lebanon acts fast and takes advantage of current market surplus, the firm believes that the country would not have to pay an additional country-specific risk premium and could acquire gas at a price of $7 per million British Thermal Units.

growth for First quarter tourism

The number of tourists who visited Lebanon in the first quarter of this year has grown by 32.1 percent when compared to the same period in 2009, according to Byblos Bank. The total number of tourists who visited the country between January and March came in at 393,212. The lion’s share of tourists came from Arab countries, which accounted for 43.2 percent of total visitors, followed by Europeans (22.5 percent), Asians (21.6 percent), then travelers from the Americas (8.8 percent), Oceania (2.2 percent) and Africa (1.6 percent). Just over 40 percent of the total number of tourists entering Lebanon in the first quarter came in March, which registered 158,411 tourist visits. According to Global Refund, the VAT refund operator, visitors from Saudi Arabia spent the most in Lebanon during the first quarter of this year, comprising 21 percent of all tourist spending. Spending by visitors from Syria also rose by 57 percent year-on-year during the first quarter. The highest product category for tourist spending was fashion and clothing, at 67 percent of the total. Speaking to the press last month, Fadi Abboud, Lebanon’s tourism minister, stated that Arab visitors account for 70 percent of tourism revenue. According to Abboud, the total amount granted to the ministry to promote Lebanon abroad in the proposed budget is just $4 million. He added that he hopes to raise an equal amount from the private sector and to establish a promotional board for Lebanon between the private and public sectors to promote tourism.

May 27, 2010 0 comments

Real estate

For your information

by Executive Editors May 27, 2010

written by Executive Editors

Ras Beirut’s rampant real estate

A recent study by Al Iktissad wal Aamal magazine on the Ras Beirut area said that 41 residential real estate projects, valued at more than $800 million, are currently under construction. These include 695 high-end apartments, totaling 252,820 square meters. Fifty-three percent of the apartments have already sold for a total of $570 million. The report states that five of these projects are private and not for sale, while six other buildings are not priced, since developers are waiting to see how the market will fare. The study also states that 20 projects will be finished this year, with the others handed over in 2011 and 2012. Some 35 percent of the apartments are between 200 and 300 square meters, while 30 percent are between 300 and 400 square meters, 12 percent are between 400 and 500 square meters, 17 percent are below 200 square meters and 6 percent are above 500 square meters. In terms of prices, apartments that have a sea view are averaging more than $9,000 per square meter, with prices decreasing further up Hamra Street, reaching $3,800 per square meter. Most apartments (57 percent) are priced at between $4,000 and $5,000 per square meter.

Palestine re-builds

For the first time in three years Israel allowed a shipment of construction materials to enter the Gaza Strip last month via the Kerem Shalom crossing in the south, according to Agence France Presse. Palestinian customs official Raed Fattuh told AFP that the shipment carrying wood and aluminum belongs to Palestinian tradesmen and had been stored at the port of Ashdod since mid-2007. Fattuh added that Israel decided to allow shipments of wood and aluminum to enter Gaza every day except Friday and Saturday. Forbidding construction material to enter Gaza has created substantial problems as foreign agencies stopped funding construction projects, causing a housing crisis. “Now foreign donors don’t want to get involved in any project with smuggled concrete brought in — along with a multitude of other goods — through a network of tunnels between Gaza and Egypt,” Mahmud Abed, treasurer at the Palestinian contractors union told AFP. Although Israel also agreed to permit the deliveries of concrete to the UN-mini projects, AFP quoted an Israeli military official saying, “Israel will not allow the reconstruction of Gaza, which we regard as a terrorist entity because it is controlled by Hamas.”

Kuwait gives homes and farms

The Kuwait Fund for Arab Economic Development (KFAED) recently handed over eight newly constructed buildings in Beirut’s southern suburbs, as part of its contribution to the reconstitution of the capital after the July 2006 war, reported Kuwait News Agency (KUNA). Five more buildings are yet to be handed over as part of the $22 million project. Meanwhile, Zakat House Kuwait, a governmental organization, launched an initiative to build a $300,000 livestock farm in the village of Al Sammouniya in northern Lebanon, under sponsorship of the Kuwaiti Ministry of Justice, Awqaf (endowments) and Islamic Affairs. The project will be built in coordination with the Lebanese Alms House for Orphan Care. The farm will be constructed on a 40,000 square meter plot of land and would accommodate 200 head of cattle. Its proceeds will be used for helping orphans, widows and the poor, reported KUNA.

Work may recommence after Nakheel offers 40 percent deal

After a meeting held between the debt-laden developer Nakheel and its trade creditors last month, the company announced that it is offering a portion of repayment in cash (40 percent) and the rest in tradable securities with a 10 percent annual interest. The construction company Arabtec, one of Nakheel’s creditors, told Emirates Business 24|7 that as a result of negotiations work may recommence on the Al Furjan project, which was halted at the beginning of the year after Nakheel’s missed payment; contracting firms like Khansaheb and Six Construct are also in talks with the company to discuss payment schedules. The Dubai government announced in March it was injecting $8 billion into Nakheel to enable it to pay contractors and finish projects.

Egyptian edifices attract investment

According to the organizers of Next Move, the largest real estate investment and finance exhibition in Egypt, the building and construction sector in the country is expected to attract some $7.3 billion worth of investment by 2015. The event’s organizers also said the construction sector and related industries employ some 8 percent of Egypt’s labor force. Moreover, non-residential projects are expected to comprise the largest share of the investment ($6.7 billion). Arab News quoted an Egyptian tourism ministry report stating that since visa regulations tightened for Saudis traveling to the United States and Europe, they have started purchasing properties in Egypt and currently own more than 600,000 flats, mostly in Cairo and around Alexandria.

Deyaar does the senior shuffle

In the first week of April, the Dubai-based developer Deyaar Development announced the dismissal of chief executive officer Markus Giebel, and his replacement with Saeed Al Qatami, who has been working at the company since 2007 as president of business development. “The appointment is part of an ongoing management restructuring being undertaken in line with the company’s long-term strategic objective,” said the company in an email statement, according to Dow Jones. Maktoob News Business revealed that Giebel was not the only one to leave Deyaar. The company’s Chief Financial Officer Krishnamurthy Sundaresan and Vice President of Strategic Planning Dimitre Michev also left last month. Giebel, who was CEO of Deyaar since August 2008, told Maktoob Business that his departure was not related to that of the other executives. “I am leaving on 100 percent good terms,” he said. “Deyaar was my home for one and a half years and I wish the company all the best.”

Summerland hotels swing investment sweetener

In line with its role in promoting and facilitating investment opportunities in different sectors of the Lebanese economy, the Investment Development Authority in Lebanon (IDAL) has granted Summerland hotels a contract deal for a new $155 million project, according to Bank Audi. The package consists of exemptions from real estate registration and the reduction of work permit fees, as well as full tax exemptions on income and distribution of dividends for the next 10 years. The project will include a five-star hotel, a club, a cabin, a gym, as well as a marina for yachts and boats.

Damascus preserves its past

According to Syrian Arab news agency, 11 heritage hotels were inaugurated in the Old City of Damascus last month after being renovated, with no alteration to their original architecture. The restoration of the old hotels cost $22 million and is part of the overall framework to conserve the Old City, known as a tourist hotspot as one of the world’s oldest inhabited cities, said the news agency. The Syrian Minister of Tourism Saadallah Agha al-Qalaa announced that additional hotel projects will be inaugurated by the end of the year to increase the city’s capacity to host visitors. “Tourist utilities would make it possible for millions of tourists to get acquainted with Damascus’ heritage,” he said.

Emaar profits soar in first quarter

Dubai’s largest property developer Emaar Properties issued its first quarter 2010 results last month, recording a 221 percent increase in profits and an 87 percent increase in revenues compared to the same period last year. Total profit for the first quarter amounted to $207 million, while revenues amounted to $786 million. In the company’s statement, Emaar’s Chairman Mohamed Alabbar said that the company’s growth strategy this year would focus on the Middle East, North Africa and South Asian regions, which are home to more than 30 percent of the world’s population. “Our strategy is to develop integrated lifestyle communities in these markets that meet the growing demand for affordable luxury,” said the chairman. Despite the positive numbers, Moody’s Investors Service announced in late April that it has assigned a corporate family rating (CFR) and a probability of default rating (PDR) of B1 to Emaar with a negative outlook. Moody’s said that this rating is issued to conclude the review that was initiated on December 8 of last year, in which, pending the conclusion of the appraisal, Emaar was downgraded to B1 and put under review due to decreased government support. “The B1 rating reflects execution risks that Moody’s has identified and that largely relate to the sale of unsold units in Dubai and in international markets, the cash collection of presold property and refinancing,” said Martin Kohlhase, Moody’s Dubai-based assistant vice president.

May 27, 2010 0 comments

Banking & Finance

Money matters bulletin

by Executive Editors May 27, 2010

written by Executive Editors

Regional stock market indices

Regional currency rates

Zubair Corporation allies with Tefirom

Zubair Corporation, an Omani business conglomerate, and Tefirom, a Turkish multi-national business group, signed a strategic alliance on April 13 with aims to develop a portfolio of business opportunities estimated at $500 million, particularly in renewable energy, construction, water management, natural gas and manufacturing sectors. As a result, they announced a co-development of wind-based projects for renewable energy in Turkey and Oman. The alliance was signed after six months of negotiations and would give both parties advantage in market presence, execution tools, know-how and skills across different sectors. The two companies are to create separate joint venture companies for each project and may introduce other partners depending on the merits of the project.

Arab fund will allocate $359 million in loans and grants

The Arab Fund for Economic and Social Development (AFESD), a Kuwait based pan-Arab institute, announced in early April its plans to finance various development projects within the MENA region. AFESD, which consists of 22 member countries, will support Arab infrastructure ventures by providing $359 million to recipient governments and organizations; 95 percent of the allocated amount will go to Morocco, Sudan, Djibouti and Yemen in the form of concessionary loans. The remaining 5 percent will be granted to Egypt, Jordan, and Lebanon, as well as the Arab Thought Forum and the International Center for Biosaline Agriculture. Of the outstanding loans, Morocco will receive the highest amount: $190 million to build a new highway, followed by Sudan, which will receive $104 million to complete the construction of a sugar refinery. Djibouti and Yemen will receive $31 million and $24 million, respectively, to modernize transportation networks and update flood protection infrastructure. Grants are expected to be handed to the Arab Open University in Egypt ($1.7 million) the King Hussein Cancer Foundation in Jordan ($764,000) and civil action societies in Lebanon.

$6 billion for Iraqi railways

Iraq plans to build and renovate six major railway lines in order to restore the country’s infrastructure. The most important line consists of a loop around Baghdad, which will be able to transport 23 million passengers per year and carry 46 million tons of goods. This project will run more than 1,243 kilometers of tracks across the country and cost $6 billion, with expected completion by the end of 2014. The Iraqi government is planning to construct the project in partnership with the private sector on a build-operate-transfer (BOT) basis. Consequently, the authorities must find international investors to finance the project and launch construction. Investors will benefit from the returns for the coming 20 to 50 years. This railway will eventually be linked to the planned Gulf Cooperation Council railway network, slated for completion in 2017, covering 2,000 kilometers from the Kuwait-Iraq border to Oman.

May 27, 2010 0 comments

Banking & Finance

For your information

by Executive Editors May 27, 2010

written by Executive Editors

Bank ratings upgrades

Four of Lebanon’s banks received ratings upgrades from Moody’s Investors Service in April. The agency raised the long-term foreign currency deposit ratings of BLOM Bank, Bank Audi, Byblos Bank and Bank of Beirut from B2 to B1. Byblos Bank’s foreign currency senior and subordinated bond ratings were also raised from B1 to Ba3. The ratings were all deemed stable by the ratings agency. The upgrades are due mostly to the upgrade in Lebanon’s sovereign ratings. Fitch Ratings also followed a sovereign upgrade with bank ratings upgrades in April. Both Byblos Bank and Bank Audi’s long-term issuer default ratings were upgraded from B- to B. Both raters noted that while these upgrades were the result of an improvement in Lebanon’s sovereign rating, they are hampered by the banks’ high exposure to the sovereign and holdings of government paper. Fitch Ratings mentioned that about one half of Lebanese banks’ balance sheets are invested in government debt.

Housing Bank lending to rise

The Housing Bank raised the ceiling on several of the loans it offers this month. The maximum amount obtainable in real estate loans went from $300,000 to $400,000 on loans for building new homes or purchasing existing ones. These loans are usually for a tenor of 20 years. The ceiling on loans for house repairs, carrying a 10-year tenor, was raised from $100,000 to $132,670. Both loans generally carry a grace period of between three months and two years before payments must be made. These raises come at a time when housing prices in Lebanon are also rising. The Housing bank issued $83 million in loans in 2009 and is expected to increase its portfolio by $166 million in 2010.

UAE Central Bank calm over DW exposure

The United Arab Emirates Central Bank issued a circular on April 22 instructing the country’s banks that they need not book provisions for exposure to Dubai World. The memo said: “Banks are not required at the moment to make provisions for loans given to Dubai World.” The central bank also said that it would “provide further guidance to banks concerning the treatment of Dubai World debt in their books.” Some banks have said that they will continue to book provisions despite the circular. The exposure of UAE banks to Dubai World’s debt is estimated to be $15 billion, but the central bank justified their directive by saying that provisions are unnecessary until there are precise figures for exposure and a concrete restructuring plan is in place. Analysts said that forgoing provisions would prevent banks from feeling the full effect of their exposure in their first quarter results. Non-performing loans in the UAE rose 2.4 percent in March from the previous month.

HSBC joins with Allianz-SNA

HSBC and Allianz-SNA announced a new partnership on April 26 which has led to the launch of HSBC Insurance Services Lebanon (HISL). “We are currently in the process of implementing the new bancassurance retail strategy for HSBC that will be launched through a promotional campaign featuring a special promotional offer for our customers,” said James Gebara, senior manager of personal financial services at HSBC at a press conference. HISL will offer six products including life saving, term life, personal accident, home protection, travel and assistance, as well as foreign maid insurance plans. Xavier Denys, chief executive officer of Allianz SNA, implied at the conference that these six offerings would be the beginning of a wider offering to come. “We believe that this partnership is only the start of several goals that we would like to achieve in the Bancassurance relation with HISL,” he said.

Halal on credit in Canada

Mastercard launched its first ‘halal-approved’ credit card in North America in April. The iFreedom Plus Mastercard will be offered by Canada’s UM Financial, an Islamic financial Institution based in Toronto. The card has no monthly fee, no transaction fees and no usury, the element of credit transactions forbidden in Islamic Law. The card also includes discounts on Etihad Airways flights. Omar Kalair, president of UM Financial, told the Associated Press that it will be available in the United States by the end of 2010. According to Kalair, only one other sharia-compliant credit card is available in the West and it is offered in the UK. Kalair estimated that there are more than one million Muslims living in Canada. He also mentioned that non-Muslims may choose to apply for the card as well.

Life insurance ascends

Life premiums in Lebanon’s insurance sector increased by 11.3 percent from 2008 to 2009, according to the annual survey conducted by Al Bayan magazine. The value of total life premiums went from $290.5 million in 2008 to $323.4 million in 2009, with 15 of Lebanon’s 35 life insurance companies posting double-digit growth and three companies showing triple-digit growth. American Life Insurance Company (ALICO) continues to hold the largest percentage of market share, though this margin has been dropping in recent years. ALICO posted $69.6 million in life insurance premiums representing a 21.5 percent market share, down from 26.7 percent in 2008 and 2007, and 34 percent in 2006. In second place, Allianz-SNA posted $49 million in premiums in 2009. Bancassurance and AROPE followed with $34.8 million and $33.2 million respectively, and LIA showed $27.6 million in life premiums. These five insurers represent 66.2 percent of the market. The survey also noted that the top 10 life insurers in Lebanon are all affiliated with commercial banks. Al Bayan’s survey conducted through an exclusive agreement with the municipalities in which premiums are extrapolated from the tax the companies are required to pay on each policy to municipalities. While this method of calculation is imperfect, there currently is no other independent tool for collecting insurance premium data.

Byblos in the Democratic Republic of Congo

Byblos Bank announced that it has acquired Solidaire Banque Internationale in the Democratic Republic of the Congo (DRC) in April, becoming the first Lebanese bank to expand its network into the country. The private Congolese bank has been renamed Byblos Bank DR Congo and offers corporate and commercial services, trade finance, consumer banking and investment services. Byblos said that the acquisition is in line with its strategy of expanding into emerging markets, the goal of which is to have a minimum of 40 percent of Byblos Bank Group’s assets and income coming from locations outside of Lebanon. Walid Kazan, assistant general manager and head of the international network division at the bank told Executive that Byblos chose to move into the market due to its relationships with Belgian traders in the DRC, which was formerly a Belgian colony. Byblos has a correspondent bank in Brussels as part of Byblos Bank Europe, as well as operations in Syria, Sudan, Iraq, the United Arab Emirates, Nigeria, France, the United Kingdom and Cyprus.

Tehran’s big bond offer

One of Iran’s state banks is reportedly planning to issue $270 million in bonds, the Islamic Republic News Agency (IRNA) reported on April 4. The Central Bank of Iran has given the Export Development Bank of Iran permission to issue bonds with one, two and three-year maturities, according to the report. These new bonds come at a time when the United States and the United Nations are threatening the country with new sanctions. Iran is also attempting to modernize its investment capital markets. “The government is now offering broader incentives to foreign investors with fewer regulatory strings attached. [Foreign companies] will be exempt from paying tax and will no longer be subjected to excessive regulation,” said Ali Saleh Abadi, director of Iran’s Securities and Exchange Organization, in an interview with Press TV. Earlier this month, an Iranian official announced that the government would privatize more than 500 state firms in an effort to raise $12.5 billion, but it is still unclear whether these entities will indeed go to private buyers, or be transferred within the Iranian public sector. Though Iran’s lack of integration with the global financial system protected it from the global financial crisis, the country still requires foreign capital to develop its oil industry, according to analysts. However, Iran’s thoroughly publicized intentions to continue its nuclear program have left foreign investors wary.

May 27, 2010 0 comments

Feature

Logistics Superbowl

by Executive Editors May 27, 2010

written by Executive Editors

It has been called the “logistics Super Bowl” and compared to reversing a faucet or shoving a basketball though a narrow pipe. But despite the amusing turns of phrase, the United States military is orchestrating a massive effort to get out of Iraq. It’s turning out to be a daunting task for military officials, and a huge opportunity for logistics firms in the region.

Striking the set

Among US President Barak Obama’s first actions after taking office in 2009 was to order the American troop presence in Iraq to be reduced from 142,000 to 50,000 by August 2010, with a complete exit by December 2011, giving a tough deadline for what General William Webster called the largest military operation “since the buildup for World War II.”

There is no consensus on how much “stuff” the US Army has in Iraq, and differing reports from high-ranking officials indicate that the military itself is unsure. On April 2, Webster stated that 2.8 million pieces of equipment would be moved over the course of the operation; the same day, Ashton Carter, US undersecretary of defense for acquisition, technology and logistics, put that number at 3.4 million items. Other reports have suggested a total of 1.5 million pieces of equipment, ranging from radios and coffee makers to M-16 rifles, body armor, bulldozers and combat vehicles. The only thing that is agreed upon, it seems, is that the amount of work involved will be staggering.

As such, the US is gearing up to spend tens of billions of dollars on the movement, repair and redeployment of what Webster estimated to be $54 billion worth of the army’s effects.

“We have six years’ worth of stuff that we’ve gathered here,” said General Ray Odierno, US commander in Iraq, at a “rehearsal of concept” drill held at Camp Arifjan in Kuwait in December 2009.

At that drill, military officials reported that between May and December of 2009, the US military orchestrated the exit of 76,000 pieces of equipment from Iraq, which, by April 2010, had skyrocketed to 2.2 million items, according to Carter. All this is now piling up at Camp Arifjan, as will the windfall to come.

Arifjan and logistics hub Joint Base Balad, 64 kilometers north of Baghdad, are constant hives of activity. Countless combat vehicles roll onto carrier planes while rows of Humvees sport a litany of defects, listed on their sides in chalk.

In these bases, the equipment is sorted, repaired if possible, and shipped either back the US, Afghanistan, or other regional commands. Equipment damaged beyond repair is scrapped, or destroyed to preserve the confidentiality of proprietary technology.

Most of the material can be transported by trucks and rail, some provided by contractors and some by the US Army, but some big-ticket items present unique challenges.

The Mine Resistant Ambush Protected (MRAP) vehicle for example, weighs 265.35 metric tons. A US Department of Defense (DoD) statement in February said that there are 8,500 MRAPs on the ground in Iraq, all of which must eventually be transported to Kuwait.

Inevitably, cost-benefit analysis has led to the conclusion that some items will be left behind.

For example, ‘non-tactical’ sports utility vehicles, which were purchased for $30,000 several years ago, are worth about $5,000 today. The shipping cost of each vehicle is around $10,000, so the US Army has decided that these will remain in Iraq.

The Headliner

Logistics contractors operating in combat zones provide a wide range of services from building bases to staffing cafeterias and transporting essentials such as food and water.

At Joint Base Balad, the largest in Iraq and a logistics hub for the withdrawal operation, contractors help the soldiers to catalogue and handle cargo coming through the base. Trucks containing incoming cargo, and buses full of personnel are often driven by contractors and protected by Army escorts.

The biggest civilian player in the “Operation Iraqi Freedom” logistics game has been KBR, based in Houston, Texas, formerly a subsidiary of Haliburton, where former US Vice President Dick Cheney was chairman of the board from 1995 to 2000.

As of March 29, KBR was operating in 61 permanent locations in Iraq and rotating through another 105. In Afghanistan, the contractor services 63 locations full-time and rotates through 34 more. The company also has a permanent presence in eight locations in Kuwait. So far, KBR has closed some 50 bases in Iraq.

KBR’s dominance over the US military logistical support throughout the war in Iraq was due to the Logistics Civil Augmentation Program (LOGCAP), the largest logistics contract awarded by America’s DoD. The program allows the US military to expedite contingency contracting through indefinite-quantity/indefinite-delivery contracts, meaning that KBR was required to carry out any task order made by the US military for as long as the contract stood.

The LOGCAP III contract, of which KBR was the sole provider, encompassed supplying housing, food and fuel for the US troops in multiple locations, involving the transport of all necessary materials and the building of all structures. LOGCAP III was awarded in 2001, before the attacks of September 11, 2001, and before the war in Iraq began.

Negotiated without the knowledge that KBR would soon be the largest logistics contractor in an active warzone, the contract included a ‘cost-plus’ structure with a one percent profit margin.

In other words, individual tasks within the contract are ordered, the cost estimated by the contractor, debated with military personnel and agreed upon. The contractor then fronts the cost of the action and is reimbursed with a 1 percent profit with the option of a 2 percent bonus, at the US government’s discretion.

“They low-balled LOGCAP III so much. Before 9/11 they never thought it would be such a huge contract and they shaved it to the bone,” said Doug Brooks, president of the Washington-based IPOA, a trade organization whose members include several logistics companies currently operating in Iraq. “Their idea at time was that it would be a $6 billion contract for the life of the contract and it would give them all this capacity that they could use for everything else.”

The contract ended up totaling $30 billion, but with such a low profit margin, it was no great moneymaker for KBR. “This is why Haliburton got rid of them. KBR wasn’t earning any money,” said Brooks.

Due to the eventual size of the contract and controversy over its sole-provider nature, the successor contract — LOGCAP IV — has been awarded to three different American companies: Fluor Corp, DynCorp International and KBR.

Under this new arrangement, the three contractors compete for every task order commissioned. US lawmakers and officials welcomed the competition as an improvement to the single-provider LOGCAP system.

“They low-balled LOGCAP III so much. Before 9/11 they never thought it would be such a huge contract and they shaved it to the bone”

Supporting players

KBR is just one of many logistics contractors working on DoD contracts. Though most of them are American, Kuwait’s Agility has played a sizeable role in the US conflict in Iraq.

The largest logistics firm in the Gulf, Agility has held three major contracts with the US government, some since the beginning of the conflict in 2003. But recent legal disputes between the company and the US Department of Justice (DOJ) have put a question mark over the company’s future relationship with one of its largest clients.

In November 2010, the DOJ indicted two of Agility’s subsidiaries, US-based Agility Defense and Government Services Holdings Inc. and Kuwait-based Agility Defense and Government Services KSC, for allegedly overcharging an unreported amount on $8.5 billion worth of contracts in Iraq, Kuwait and Jordan. Disputes over violations of legal process led to a second indictment from the DOJ and the company is still fighting the validity of the claim.

A source close to the case who spoke on the condition of anonymity told Executive in January that Agility had spent more than $33 million in legal fees. He also said that John Negroponte, former US ambassador to the UN, and several four star generals on Agility’s board were helping Agility with the case.

Agility will continue to service its standing contracts until their expiration, but is forbidden from bidding on new contracts until the legal issues are resolved. One of Agility’s major contracts still in effect is Heavy Lift VI, a $1.5 billion contract to transport military supplies and personnel, which it won part of in June 2005 with the final option period expiring this July. Agility, formerly the Public Warehousing Company, was awarded the Subsistence Prime Vendor (SPV) contract by the US Defense Logistics Agency in June of 2005.

The $14 billion contract procured storage and transport of food to US bases in the region. With the final option period expiring in December 2010, and Agility forbidden to bid on any new contracts, the SPV has been awarded to another regional firm, Anham LLC of Dubai, for an amount that could total $6.4 billion. The value of the SPV contract is decreasing with the continual exit of troops from Iraq and, eventually, Kuwait.

Agility will remain a major player in the region as it still holds both commercial and other government contracts which keep it engaged in Iraq, Kuwait and Afghanistan, but its future role in US military operations remains uncertain. But the source close to the case said that Agility’s “bread and butter is still the defense and government business, not the commercial business.”

The source said that if the legal disputes are not resolved, Agility would most likely consider selling its defense and government services arm.

SIGIR has found $340 million in suspicious payments, mostly involving contractors and vendors

At the sharp end

But even giants like KBR and Agility do not have the inherent capability to perform all of the tasks they are given, which is where local and regional companies play an integral role. When a large contractor is ordered to build a base, parts of the effort such as supplying water or serving food, are subcontracted to another, often local, provider. In fact, $21 billion of KBR’s $30 billion LOGCAP III contract went to subcontractors, according to a May 2009 report from the US Congress’s General Accountability Office.

A February 2010 census of contractor support for Iraq and Afghanistan performed by the office of the assistant deputy undersecretary of defense showed that there were some 100,000 contracted civilian employees working in Iraq, 6 percent of which were providing logistics or maintenance services. Of these, 20,200, were Iraqi and 52,000 originated from a country other than the US or Iraq. Just less that 28,000 were American. In Afghanistan the local contingent is even higher, constituting 80,800 of the total 107,300 contractors working there. These numbers still represent a 13 percent decrease in contractors in Iraq since the last quarter of 2009.

Stage Managers

According to a 2010 Deloitte study entitled “Performance Based Logistics in Aerospace and Defense,” yearly DoD spending on logistics more than tripled from 2001 to 2009, reaching $5 billion last year. The study predicts this amount will surge to $7.4 billion by 2013. The value of individual contracts has also been rising steadily, increasing from an average of $26.4 million from 2000 to 2002, to $59.5 million from 2007 to 2009. By 2013, Deloitte predicts that the average size of a performance-based logistics contract will be $85.8 million.

Even a simple contract such as upgrading suspension units on the MRAP, which struggled on the tough Afghanistan terrain, earned American arms firm BAE Systems & Armaments, an $82 million contract: a drop in the ocean, considering the billions to be spent in the coming months.

Government oversight and contractor supervision is not a new task for the US, but the sheer size of the contractor workforce and the number of contracts going out has overwhelmed the government’s ability to keep track of them all.

Before contracts are awarded, they go through several layers of planning by military commanders in the field as well as several secretaries in the defense department and the Defense Contract Management Agency (DCMA). After contracts are awarded, they are governed by on-sight supervisors, auditors, the DCMA and the Defense Contract Audit Agency (DCAA) and, in the case of Iraq, the Special Inspector General for Iraq Reconstruction (SIGIR). As of January, SIGIR had found $340 million in suspicious payments and transactions, mostly involving contractors and vendors. The DCAA has doubled its number of auditors dedicated to LOGCAP in the last year from 55 to 110. Oversight is slowly improving, but KBR Vice President of Operations Douglas Horn told the Senate Wartime Contracting Commission in March that too many cooks in the kitchen are making for more confusion on the ground.

“The structure and discipline of the contracting system is often at odds with the realities of the warzone operational environment,” said Horn, adding that contractors were often left unable to act while waiting for government policy to manifest into contracted services. But with current trends set to continue, the management and oversight of contractors is going to have to be sorted. And, if Afghanistan turns into anything like Iraq, contractors are going to be playing a starring role.

May 27, 2010 0 comments