Economics & Policy

Q&A – Paul Griffiths

by Paul Cochrane
written by Paul Cochrane

DubaiAirports Chief Executive Officer Paul Griffiths currently oversees operationsat Dubai International while at the same time coordinating the launch of DubaiWorld Central-Al Maktoum International (DWC), which is slated to be the world’slargest passenger and cargo hub. He sat down with Executive to discuss thecompany’s activities.

E   Dubai International became thethird busiest airport in the world this year. The expectation is that it willbe the busiest by 2020, but could you reach the top spot before that date?

Basedon our growth projections, this is entirely possible. The busiest airport forinternational passenger traffic currently is London Heathrow with around 60million per annum, whereas we will reach 46 million this year and 52 million bythe end of 2011. As you know, recent proposals for a third runway have beenshot down, which significantly constrains Heathrow’s future capacity. Paris,Frankfurt, Hong Kong and Amsterdam also face capacity constraints, althoughthey are less severe and have slower growth rates. All told, we believe we canget to the top spot within the next several years.

E   What challenges are you facing tohandle such exponential growth in passenger and freight traffic?

Theprovision of timely and efficient capacity, both in terms of infrastructure andairspace, is a top priority. We have aggressive plans in place to boostcapacity at Dubai International from the current 60 million passengers per yearto 90 million by 2018 and to complete the world’s largest airport at [DWC], bythe midpoint of the next decade for 160 million passengers. Our goal is tostreamline processes and implement technologies that allow us to do this asefficiently as possible.

E   While Dubai International is thebase of carrier Emirates, what are you doing to attract more airlines?

Dubai’sopen skies policy combined with top-flight infrastructure provided atcompetitive rates has served us well to date. With 130 airlines offeringservices to 220 destinations on six continents, we already provide consumerswith a compelling range of options. That said, we are always looking to growthose numbers and do so primarily through direct and ongoing consultation withexisting and prospective client airlines.

E   DWC began cargo operationsrecently. Did this have any affect on Dubai Airport’s freight operations? Ifnot, why is that the case?

Thetwo operations are complimentary. They provide attractive options to our clientairlines whose commercial and operational requirements often vary. To date we have19 cargo airlines signed up to operate at the new airport. We expect thatnumber to increase in the years ahead as slot availability for cargo freightersdiminishes and air freight volumes reach capacity limits at DubaiInternational.

E   The Strategic Plan 2015 is forDubai to be the region’s aviation hub. What role will Dubai Airport play inthis plan, given the development of DWC? What will happen to DubaiInternational when DWC is fully operational?

Ithink it’s safe to say we are already the region’s aviation hub and haveestablished Dubai as a leading global aviation hub. The next step in thejourney is to fully develop Dubai International’s capacity and cement itsposition as the number one international hub by the end of the decade. DWC willtake us to the next level serving as the world’s largest airport with room for160 million passengers and 12 million tons of freight when it is completed atsome point in the mid-2020s. It is too early to say what will happen to DubaiInternational at that point.

 

 

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Economics & Policy

The world isn’t sinking

by Natacha Tannous
written by Natacha Tannous

After four months of anxious waiting, the Government of Dubai, along with government-owned conglomerate Dubai World and real estate subsidiary Nakheel, released official statements on March 25 regarding the restructuring of billions of dollars in debt and the reorganization of both companies.

 

The emirate stated that it intends to support the debt restructuring plans of Dubai World and Nakheel “with significant financial resources, including…up to $9.5 billion in new funding,” according to the statement by Sheikh Ahmed bin Saeed al-Maktoum, chairman of the Dubai Supreme Fiscal Committee. Acting on behalf of the government, the Dubai Financial Support Fund (DFSF) will allocate $1.5 billion to Dubai World and $8 billion to Nakheel, of which $5.7 billion stems from unused Abu Dhabi loan proceeds. The remainder will come from internal governmental resources.

Restructuring and reactions

Dubai World’s $23.5 billion of outstanding debt is broken down between $14.2 billion in external debt (including United Arab Emirate banks) and $9.3 billion owed to the Government of Dubai through the DFSF. Given the sheer size of the tab, there were many turmoil-filled scenarios that had circulated through the Gulf financial world before the debt restructuring announcements — which have been greeted with a general sigh of relief.

Three key takeaways from these announcements were: First, the DFSF capital injection of $1.5 billion will be used to fund Dubai World’s working capital and interest payments on its restructured debt. Second, the Dubai government will equitize $8.9 billion out of its $9.3 billion debt outstanding, and such restructuring – meaning the capital injection plus the equitization “will allow Dubai World to focus on its core holdings and to manage and realize full value from its assets,” stated the Government of Dubai. Finally, the 97 non-DFSF creditors — of whom Emrati and United Kingdom banks own the lions share of the debt — will see their $14.2 billion claim fully restructured with a haircut on the principle, through the issuance of new debt into two tranches of five and eight-year maturities.

The announcements were well received by the markets, bringing down the cost of insuring Dubai’s debt. This is most clearly exemplified by Dubai’s five-year credit default swap spread dropping 14 percent, sliding from 420 basis points to 360 basis points. To crunch a few numbers, with the current 6.5 percent discount rate — as opposed to February’s 10 percent — and a 50 percent principal repayment in five years and the other half in eight years, the net present value is 67 cents on the dollar; much less of a hit than creditors had initially feared.

Nakheel restructuring and the real estate sector

The DFSF capital injection of $8 billion will be used to fund Nakheel’s operations and to terminate its current outstanding debt. Moreover, the government will also “recapitalize Nakheel through the equitization of the Government’s $1.2 billion claim.”

Even if the terms of the announced deals vary according to the type of creditor, all Nakheel debt holders will receive full repayment — when, however, is another question, as most maturities are as yet unclear. The schedule of Nakheel sukuk Islamic bond holders is set though, and should be fully repaid on their 2010 and 2011 maturity dates.

The bottom line
$9.5 billion in fresh funds to be injected by the Dubai government
$1.5 billion into Dubai World
$8.0 billion into Nakheel
Of which:
$5.7 billion is from unused Abu Dhabi loan proceeds
$3.8 billion is from internal Dubai government resources Dubai World’s $23.5 billion debt breakdown:
$9.3 billion owed to the Government of Dubai (of which $8.9 billion will be equitized)
$14.2 billion owed to external creditors, who should receive full repayment via new debt, in tranches of five and eight year maturities

 

Since Nakheel developments amount to a substantial amount of the pending projects in Dubai, the proposal “will have a significant direct impact on the construction and real estate sectors and the wider economy,” stated Sheikh Ahmad.

Challenges remain

The announcements bring some much-needed positive sentiments back to the market. However, “the restructuring process is expected to take several months to implement,” highlighted Sheikh Ahmed, and the high capital injection and governmental equity share might decrease the potential support for other struggling government-related entities. Furthermore, the financial support increases UAE government exposure to Dubai World: a situation not as welcomed by creditors as a government guarantee would have been. Finally, even if Nakheel’s restructuring proposal helps investors regain confidence in the real estate sector, the oversupply of product built and near completion remains.

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Real Estate

Waking the sleepers

by Rayya Salem
written by Rayya Salem

Grandiose visions of splendor have dissipated for Dubai’s developers after a sobering couple of years spent rethinking their payment schemes and trying to re-galvanize investor confidence. Now they are left with an array of unfinished projects, many of which are currently dormant.

 

“Not many projects have been restarted except the Nakheel ones,” says Charles Neil, chief executive officer of Landmark Advisory, a division of Landmark Properties. “Most of the ones that are stalled will remain stalled.”

Neil adds that it was the combination of the financial crisis and many developers’ lack of experience that led to the huge swaths of unfinished projects scattered throughout the emirate. Certain areas like Business Bay and Dubai Marina have a concentration of unfinished work, though some slow and cautious crane activity recently restarted. In June 2010, Proleads, a construction consultant, said $5 billion worth of Dubai projects were stalled, some of which had never physically started construction. More recent data published in The National suggests that more than a fifth of Dubai’s projects are postponed or have been cancelled completely.

According to Fadi Moussalli, regional director at Jones Lang LaSalle in Dubai: “Some projects went beyond the point of no return; depending on the project’s financing [or re-financing], how much was sold and how much of the down payment has been paid in cash, a developer may reach a conclusion that it would be less costly to re-launch building [work] rather than do nothing because of the liabilities on that building.”

Dubai World’s property arm, Nakheel, repaid $930 million to creditors as early as September of last year, announcing a mighty revival of construction on eight of their stalled projects (see chart). Though priority was given to Al Furjan and Jumeirah Park villas, Nakheel, in a November 12 announcement, only mentioned reactivating the first phases of construction. That means Arabtec, the construction company assigned to Al Furjan, is back on payroll but will complete only 800 units out of the 4,000 originally planned by the first quarter of 2012, after it had halted work in January 2010.

Pauling Middle East and Al Huda Contracting Company will both go back to stacking up villas in Jumeirah Park, but Al Huda will only deliver 289 out of the 2,764 villas originally planned by the fourth quarter of 2011. In response to investor frustration over Nakheel’s delivery delays, Chairman Ali Rashed Lootah said in February that about half of the company’s liabilities to buyers were swapped for these and other units to be completed in the next two years.

Landmark Advisory’s Neil believes most developers have opted to downsize their projects: “For people who put down payments on five villas, their deposits will all go towards one villa; that’s how they consolidate.”

The cost of stalled projects

A project’s revival will be driven by its uniqueness, its location and “the possibility of securing an anchor tenant, if that’s relevant” said Mark Fraser, partner at Dubai law firm Taylor Wessing, who believes that “it’s not just Nakheel that will be resuscitating projects.” Areas other than Business Bay, Dubai Marina (where Abyaar and Omniyat are trying to restart projects) and Jumeirah are seeing re-construction, such as the tourism mega-project in Dubailand, City of Arabia, which is being developed by Dubai Properties.

The biggest issue for developers is reeling in their contractors. “If you renegotiate with the appointed contractor, there are certain running costs in addition to remobilization costs for the stalled projects,” said Rizwan Shaikhani, managing director of Shaikhani Contracting. “If you appoint a new contractor, he’s got big liability concerns because he has no idea how it was built by the other contractor and has to go through complicated legal formalities and project details to ensure nothing has been overlooked.”

Any delays pose structural concerns, as exposed projects are subject to Dubai’s harsh environment. When slabs under the foundation are exposed to high temperatures for years it can cause a defect, posing a legal headache for the old and new contractor as well as safety concerns for the owner and future residents. The United Arab Emirates’ civil code does not specifically address who is at fault in such a situation, but, as Fraser asserts, “Given the potential liabilities that a contractor can face under the UAE civil code, he is going to implement exhaustive surveys to manage such risks.”

For example, exposure to salt and humidity in porous concrete can alter its composition after a year or two, depending on its quality, according to Tanmay Biswas, an engineer at Meinhardt Dubai who spoke at a June 2010 conference in Dubai about the risks of re-constructing stalled projects. Exposed pumps, electrical cablings, rebar and steel also need to be protected from the elements, but owners and consultants often spar over who should pay the maintenance fees when a project has been stalled, according to Biswas.

Anyone in business knows that time is money. But for Dubai’s half-built structures, time is more costly than elsewhere because the climate weighs heavily on the cost of re-starting construction. According to Taylor Wessing’s Fraser,    when Thailand was finally bouncing back from the 1997 Asian financial crisis some five years ago, half-built developments that had been stalled for six or seven years were resuscitated. Contractors weren’t particularly concerned about degraded materials because of Thailand’s wet tropical climate.

“[Dubai] is obviously different because of salt and heat issues, but you could still resuscitate a building 3-5 years after, if a reputable survey company, either local or international, has carried out a comprehensive examination of the building,” said Fraser.

Oversupply

Given the oversupply across all sectors in Dubai and the resulting negotiating power of the tenant shopping around for the best deals, one of the prickliest thorns for developers is not reconstruction but rather trying to fill the units after they are finished.

Dubai Pearl shining up a treat
Pearl Dubai FZ Chief Executive Officer Santhosh Joseph seems to have weathered the financial storm better than most. In a February email to Executive, Joseph said that fundraising was underway for phase one of the Dubai Pearl – a 1.86 million square meter ‘city-within-a-city.’ “A total of 3 million man hours have been spent since work started and over 70,000 cubic-meters of concrete has been poured on what is one of the largest construction projects still being developed in the UAE,” he said.
 
It has been a long road for the project since it was conceived in 2003. Pearl Dubai FZ, a consortium headed by Abu Dhabi’s Al Fahim group, took control of the project in 2007 after its previous owners had to give up on it due to financial concerns. In November 2008, the UAE’s largest construction group, Al Habtoor-Leighton, bagged the $2.4 billion main construction contract, the largest deal in the region at the time.
 
The initial phase will cost $2.5 billion to build, but construction “[has] never stalled and remains on schedule” since starting in March 2010, though it was earlier announced that construction would begin in January 2009 after structures were demolished on-site during the enabling works phase in September of 2008. Most probably because of the change of ownership and drastic “revival plan” that called for a $6 billion project instead of the originally planned $800 million project on the cards, the project was “stalled” for years, according to various local and non-local media outlets.

In 2011, Dubai’s total housing stock will see an increase of 25,000 new units, bringing the total number to around 335,000, according to Jones Lang LaSalle’s fourth quarter 2010 report released in January, adding that the value of transactions dropped 65 percent in the year leading up to the third quarter of 2010. Reports issued last month say properties such as Jumeirah Lakes Towers are still empty, as is half of Dubai Marina, where 36 crane sites are actively humming along.

Jones Lang LaSalle’s Moussalli said, “It’s very tough to fill a building with over 100 units when tenants are dictating [the market].”

Landmark Advisory’s Neil adds to the gloomy mix: “I think the investors don’t have a lot of confidence that these projects will be completed on schedule. For example, we [Landmark Properties] get some of these houses on the secondary market.

Buyers are not interested because there’s plenty of choice to buy something ready and functioning and because you have no idea when they will be completed.” There are also problems such as a lack of utilities connections and infrastructure in zones like Business Bay, meaning that even if homes are complete, they are still not immediately livable. 

Next target… malls

Developers seem to be turning to Dubai’s greatest pastime, shopping, to grease the cash-flow wheel since it became rusty in the dry financial climate of the last two years. Emaar, the other Dubai-based construction giant often described as Nakheel’s rival, pulled in 24 percent of its 2010 revenue from its retail and hospitality sector, according to its 2010 earnings statement released on February 10. In 2009 it was about nine percent of revenue.

Perhaps that’s why Nakheel is set to expand its Dragon Mart and Ibn Battuta malls in Dubai as soon as the eight priorities it listed in September are brought to fruition, as a serious cash inflow would be more of a priority than finishing work on other stalled projects.

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Economics & Policy

Regional equity markets

by Executive Editors
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%.

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Economics & Policy

IPO Watch

by Executive Editors
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.

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Economics & Policy

For your information

by Executive Editors
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.

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Real estate

For your information

by Executive Editors
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.

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Banking & Finance

Money matters bulletin

by Executive Editors
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. 

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Banking & Finance

For your information

by Executive Editors
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.

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Feature

Logistics Superbowl

by Executive Editors
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.

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