Comment

The Arab trading bloc

by Riad Al-Khouri
written by Riad Al-Khouri

Based on recently released figures, Arab investors have been paying more attention to business in neighboring countries, while looking less at “traditional” Western markets. The size of inter-Arab direct investment inflows grew 64 percent in 2008, with Saudi Arabia receiving the largest share of investments and the United Arab Emirates being the top investor in other Arab states, according to the Investment Climate in Arab Countries 2008 report.

The report, released by the Kuwait-based public Arab Investment and Export Credit Guarantee Corporation (better known as Dhaman), notes that the total volume of inter-Arab investments reached $34 billion in 2008, up 64 percent from 2007. This is a remarkable jump, and may have a lot to do with the sorry state of Western economies last year, which put off Arab investors and made them look to less risky business closer to home.

Saudi Arabia received the largest share with 38 percent of Arab investments in 2008, reaching $13 billion, according to Dhaman. The kingdom was followed by Algeria which attracted 17 percent of total Arab investments or $5.7 billion last year, then Sudan, accounting for 14 percent or $4.8 billion of the total. Lebanon was fourth in terms of attracting Arab inflows, receiving 8 percent or $2.7 billion worth of investments, much of them in the tourism sector, which is currently booming with the influx of Gulf visitors.

Of the dozen Arab economies covered by the survey, most saw an increase in investment inflows; only a handful of countries, including Lebanon and Jordan, received a smaller share of investments in 2008 compared to the previous year. The shortfall of money flowing into Beirut was the result of the drawn-out government crisis there that culminated in street battles during May of last year, but the trend in 2009 seems to be up. Jordan, on the other hand, is a different story: the latest figures show that foreign direct investment from all sources — Arab or otherwise — fell sharply to less than $220 million during the first quarter of this year, compared to $920 million in the same period of 2008.

The UAE was the top regional investor in Arab countries in 2008, with its direct investment outflows reaching $10.7 billion or 32 percent of the inter-Arab total. UAE investments went primarily to the Saudi market, which received $5.8 billion of the Emirates’ outflow. UAE and other inter-Arab investments were concentrated in the services sector, which made up 62 percent of total investments, including to tourism, transport, telecommunications and finance, among others.

Yet, in many other areas, investment from the UAE and other Arab states continues to flow to the West, which remains attractive for certain types of business, particularly high tech. An interesting example of this came in July, when Aabar, an Abu Dhabi investment fund, paid around $280 million to buy nearly a third of commercial space-travel startup Virgin Galactic. In exchange, the state-controlled fund will acquire exclusive regional rights to eventually launch Virgin Galactic tourism and scientific research spaceflights from the UAE capital. Aabar’s buy-in boosts Virgin’s space tourism venture at a time when many Western funding sources have dried up. (Read more about this transaction on page 112.) This also gives Abu Dhabi a chance to broaden its economy beyond oil, in line with the emirate’s plans to embed technology, research, and science in the economy. It also complements the aim of being an international tourism magnet.

Whether in outer space or back down on Earth, Aabar has emerged as an active investment fund. Among other recent deals, it bought 9 percent of Mercedes-Benz maker Daimler in March, and in August signed a vehicle production deal with the Algerian government to develop a network of vehicle and engine manufacturing plants in conjunction with five German companies (including Daimler). Up to 10,000 cars and trucks will be assembled each year with operations expected to start in 2010, following the modernization or development of plants; products identified for potential manufacturing include four-wheel drive vehicles and engines.

With automotive manufacturing taking off in neighboring Morocco and elsewhere in the region, I predict that cars and trucks will be the latest sunset industries to move out of the developed world and into Arab economies (among other developing ones), just as lower-end clothing production made an exodus from Western Europe and America in the late 20th century.

Now that the Dubai bubble has burst, and with economies slowing down in most of the region, the short-run continuation of this Arab-to-Arab investment trend might seem in doubt; but in the long-term, investments by regional players inside the region are probably going to accelerate, no matter what happens to the West’s faltering investment climate.

RIAD EL-KHOURI is senior associate consultant at the William Davidson Institute of the University of Michigan in Ann Arbor, and dean of the Business School at the Lebanese French University in Erbil

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Society

Crepaway – Claude Thoumy (Q&A)

by Nada Nohra
written by Nada Nohra

Crepaway was founded in 1984 by two brothers, Charles and Claude Thoumy, as a limited liability company and was incorporated in 2003. Today, Crepaway Corporation operates eight outlets in Lebanon with two seasonal restaurants, and four franchises in Egypt, Saudi Arabia and Qatar. Charles Thoumy has been the chairman and general manager of Crepaway since its founding as a small kiosk serving crepes. He spoke with Executive about he and his brother’s successful chain of “casual dining” restaurants.

E How is the casual dining industry performing, and what are the major problems in the industry?
The major problem is basically inconsistency. In a country like Lebanon, even if you go by strategic planning, you have to have a tactical approach in dealing with circumstantial ups and downs. Sometimes you go for a five or six year plan, and something happens, like a war or a crisis, and then you have to [halt] your plans and go for tactical little things to make your thing work. Again you are not working on a road map to achieve your goals. It is a temporary deviation.

E So you always have to have a plan B? 
And C and D sometimes.

E Other than the inconsistency, are there any problems that you are facing with government regulations?
No, but you are working in a country that is not really structured. Sometimes you have to deal with different departments, sometimes they overlap, sometimes they do their job and sometimes they don’t. There is no system that you can abide by. You do not feel that there is someone to help you. When the government structures its departments again, we will be able to deal easier with their rules and regulations. Even though we know that rules and regulations, like everything else, need to be updated.

E What corporate strategy do you use to deal with competition?
We have fierce competition. The fiercest competitor we have is ourselves. We compete with ourselves to do better every day. I think competition is a source of richness. Competitors learn from you and you learn from them; that is  basic. You do better in something, they do better in something else. Then you upgrade, they update and that is the nice game of competition. On the other hand, since we have been leading since 1984, we have had a lot of people coming and copying… well not copying, but it is a normal thing in business when people look at businesses that are working well and try to do something similar. That is another confirmation that we are doing well and where we feel we have the responsibility to do better than we did before. That is the main scope of our competition.

Talking about strategies, there are different strategies to deal with competition. First, when you talk about competitive strategy, [it] is when you see what the competitor is doing and try to do better. We are not into war with our competitors — we try to complete each other, so there is not really an approach where we look closely at what they are doing and then try to block the way for competition. It is a nice game everybody is playing, and people who win have to be complemented.

E In the last couple of months, many restaurants have increased their prices. Do you know the reason?
We also have extra running costs concerning electricity and generators… we are living that today. The increase in prices happened in the last couple of years. And again the cost of real estate has increased a lot. Which means that the rent went up a lot. At all levels, you have an increase in your costs. In the end you are in a business that requires high running cost. We haven’t increased our prices in the last two or three months. Beginning in spring, we have added sometimes 500 or 1,000 Lebanese lira because of the fluctuation of the Euro. So, we had to.

E How has the financial crisis affected Lebanon and your business?
The economic downturn of course has an adverse impact, not only on Lebanon but on the global level. It leads to a decrease in purchasing power. We have witnessed a decline in the purchasing power, especially from the people and expats who used to come from Dubai and Qatar. They were loaded with money, so they used to come and spend their money with more freedom. These were affected. But we cannot say people are refraining… but there is for sure a drop in average spending.

E Do you have an idea how severe the drop has been?
I cannot tell you really, but I can say that it doesn’t show a lot because we tried to increase the volume (the number of people) and the flow of tourists was high. But we can say that the average check that was $15 could go down to $13. But you can tell that in big restaurants that serve champagne and wine, because some people that used to spend $300 for a bottle of wine are now spending $70, for example. It is an attitude. Instead of ordering three platters and appetizers and a dish and a desert, people would share. It goes back to the average check.

E If we want to talk about tourism this summer, what do you think is the difference?
[With] the stability of the political situation we have seen a very high flow of tourism. Even in our branch in Egypt, where Arabs used to go, our management there said they were affected by the flow of tourism that hasn’t been very substantial there, and they say that all the tourists went to Lebanon. They sensed it in the Egypt branch because usually Egypt is a destination for Arabs in summer. You can also tell by the hotel reservations. I can tell that definitely there is a 35 percent increase in our sales.

E What about other branches in the Gulf. Are you sensing a negative effect?
The casual dining industry is able to face the financial crisis, even in the regional markets, because the average check is affordable. There is no doubt that they were affected because there was less tourism and these countries also rely on tourism. But the affect was not on a large scale, because it is not a luxury product. For an expat working in Saudi or Qatar, he would definitely [rather] go spend $15 or $20 for a meal than $50. But in Dubai, the yield changed drastically.

E What are your plans? Are you planning to expand in the future to other countries?
Strategically, growth is a constant objective; it is the main motivation, we cannot stop. We have one opening in Hamra [district in Beirut] probably in a month’s time, and there is a new mall in Saida — we are opening there. There is also a plan to grow into micro markets but the idea is not consolidated yet. We have plans for several locations in the KSA, Qatar, Syria, and Dubai. We are planning for all that. We were planning to open in Dubai the beginning of this summer, and we postponed that until next year.

E Do you expect to do better than last year in terms of profits?
Yes I expect it to be better because when the volume goes up, you have better opportunity to make a profit. We work on a volume basis. In our industry, we are not defined by what 50 people would [spend in one] night, with an average of $200 per person… if we have three bursts per year like we have this summer, I think our industry would be fine. We invested a lot in organization last year, so our profits were slower last year because we were in an investment mode. But this year we amortized that and we know we have around a 40 percent increase in profits.

 

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Society

McLaren – Ian Gorsuch (Q&A)

by Paul Cochrane
written by Paul Cochrane

Since 1963, McLaren has been renowned for its race cars and is the only racing team to have won Formula 1, Indianapolis 500, Can-Am and Le Mans championships. McLaren Automotive was established in 1989 and eventually manufactured the iconic McLaren F1 which, when it launched in 1992, was the world’s fastest production road car with a top speed of 386 kilometers per hour. Only 100 were built. Executive spoke with Ian Gorsuch, McLaren’s regional director for the Middle East and Africa, in Beirut after his company announced McLaren Automotive’s launch as a new, high performance car company.


E You said in your presentation that a McLaren F1 sold for $4.1 million some eight months ago. That is quite remarkable in a recession, no?
People were surprised as it was at the height of the recession. But it shows there is an interest and understanding of what we did in the world [at the time], the first luxury super car that was way above $150,000 — at $1 million, but now there are many [brands] at that price. It was great to see such confidence in McLaren… [F1 driver] Lewis Hamilton has been promised one if he wins three F1 championships with McLaren.

E How is the Gulf market for super cars compared to the rest of the globe?
The US and Europe are the major markets. Here is perhaps 10 percent of demand because, although there are a lot of wealthy people, [the population is smaller], and there are more millionaires in the US than here, although here [they] may be retaining their wealth better.

 
 

 E What super cars does McLaren compete with, in the Middle East and globally?

People will benchmark us against Ferrari and Lamborghini — favorably.

E The world is going through a financial crisis. Why are you marketing now for the 2011 launch?

I think it was good planning but also good luck; develop in the recession and hopefully by 2011 — what everyone is saying — the recession will be over, and we’ll launch the McLaren P11. We have also been very conservative with our figures, not looking at the 2007-2008 market — a record year with sales up — but at 2003-2004, when sales were lower. And we’re lucky, when we sell in 2001, we will have demand and not a stock situation, but a clean sheet.

 E How has the slowdown affected McLaren?
Our competitive benchmark has suffered a slowdown in sales, but Lamborghini, Ferrari and Aston Martin are still selling, in less amounts, and that is why we have a conservative model from several years ago, not last year.

E And how have sales of McLaren been in the Gulf?

While McLaren builds the SLR, it is Mercedes-Benz that actually sells them and possesses all the information relating to sales in the region. Globally, the SLR has been the most successful supercar ever in its price bracket. What we are doing at McLaren Automotive now is to create a completely new car company — not only will we build our own cars, but we will market them through our very own distribution network.

E When was the first McLaren bought in the Gulf?
It was the McLaren F1 in the early 1990s.

E McLaren will have distributors in Kuwait, Abu Dhabi, Dubai, Doha, Manama, and three in Saudi Arabia. What’s the plan until they open?
Our current focus is on building an understanding and awareness in the region of what McLaren, and in particular McLaren Automotive, is about. Currently some people know the brand from Formula 1, some from the McLaren F1 supercar and others from the success of the Mercedes-Benz SLR McLaren. We are also in the process of appointing a retail network and building a prospect and depositor base.

E A prospect and depositor base?
This is particular to the luxury car markets, the brand and the dealer. Customers order in advance to assure early delivery.

E There will be dealerships in the Gulf, but why not in Beirut?
When the car is launched, we will build 1,000 for the world. There will be large demand and we will not be able to open everywhere. We need a dealership to be profitable as they look after customers better. We want our customers to be comfortable when in Beirut. So in the initial stages cars will only be looked after here in Beirut, at a service center.

E Have you found a center yet?
We are still looking for a service operator. I think we have identified one, and it will be the same one that deals with top end customers with super cars.

E But given the road conditions in Lebanon — driving aside — there are potholes, speed bumps and other obstacles, is Beirut the right place to drive a McLaren?
If a guy comes here for his summer holidays and brings one to two cars, he might decide to bring say a Lamborghini and a Aston Martin because there is a service center, but not bring his McLaren — even though he loves driving it — so we want him to be comfortable and have the confidence to bring it here.

E There is a Formula 1 track in Bahrain, and over the past few years there has been talk of F1 tracks opening in Qatar and Dubai. That must be good news.
The whole region is car mad, and aware of cars, and loves racing cars… often on the streets. For F1 to be in Bahrain, it is good for us to be a major player at the cutting edge of technology, and for us to be there in the region.

E McLaren is known for its gold covered engines. Excessive?
It is not actually the engine that has a gold cover, but the engine bay of the original McLaren F1 supercar. This was for purely practical reasons, as gold was found to be the best material for heat insulation. Indeed, at McLaren we have a saying that everything we do is done for a purpose.

E You mentioned many brands that McLaren has worked with in the presentation. Is this still the case?
We developed the engine of the F1 car with BMW. During the 1980s, the Formula 1 cars’ engines were from Honda. Nowadays, we have Mercedes-Benz engines in our F1 cars, and of course we have been working with Mercedes-Benz on the SLR. What working with other brands has shown is that one plus one equals three. We learned a lot from our partnership with Mercedes on the SLR. With the new car, we will be building on all this experience yet producing a car that will be totally McLaren.

E Over the next few months you are going to be doing hot weather testing in the Gulf. Why there, not say in the deserts of Nevada?
The Gulf temperatures are hot and humid, and in the deserts [there is] low humidity and high temperatures, so a good environment for testing. A major concern of our Gulf customers is whether the car will be able to handle the conditions of the Gulf.

E You are to have a shareholding of $407 million. Will there be an initial public offering (IPO), or are you looking at an investor, or investors?
It’s all in equity, there is no debt, so we are looking for an investor.

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Executive Insights

Those who lead and those who follow

by Rany Kassab & Ramsay G. Najjar
written by Rany Kassab & Ramsay G. Najjar

During these times of unending political squabbles, we often hear people sitting in cafes basking in Beirut’s sun arguing and vigorously calling for the emergence of a new leadership that can help replace some of the “old guard” and resurrect the country from its quasi-lethargic political quagmire.

Elsewhere in the Arab region, the “identity confusion” that has characterized certain societies, in terms of a lack of unified values and divergent aspirations, has also triggered a quest for a leadership capable of fulfilling people’s expectations.

Meanwhile, on the other side of the world, on Manhattan island, and in the midst of one of the worst financial crises seen since 1929, what used to be the “golden boys” of finance and young executives are desperately hoping for a new corporate leadership that can help shield their gloried financial institutions from bankruptcy, and bring back the good old days of mouth-watering bonuses and lavish lifestyles.

In all cases, however, certain questions come to mind: What exactly makes a leader? Is political leadership, in essence, any different from leadership in the corporate world?And possibly the more fundamental and age-old question remains, is leadership an innate or a nurtured quality?

What’s certain is that while leadership is most often associated with political figureheads and CEOs, it nonetheless is evident all around us, whether in the way a team captain leads his team to victory, a school teacher pushes her pupils to explore their full potential, or a general leads his men into battle. Leadership is also certainly not restricted to humans, as it also extends to the animal kingdom where “alfa” males try to impose their authority and dominance over the pack.

Leadership, thus, is that ability to influence others, to rally and galvanize people around an agenda. It is the capacity to communicate a certain vision in a way that allows it to get across to its intended recipients and very often change perceptions and entrench principles and convictions. Whether these convictions are considered “good” or “bad” is a matter of personal opinion.

In fact, while we might find Hitler, Mussolini, Genghis Khan, Pol Pot, or even Rupert Murdoch’s views and actions appalling, no one can argue their ability to influence people into believing them and in them, which is a quintessential leadership trait.

All such leaders have in common certain sets of skills and attributes that reinforce the perception of leadership that others have of them, most notably charisma, linguistic skills, physical aura, confidence and determination.

While some of these characteristics are arguably innate, most are acquired and developed through the years, and communication plays a central role in this. The way a person communicates, both verbally and physically, can go a long way in establishing his leadership, granted that the physical “package” is coupled with a core “product,” or message that matches, if not surpasses it.

Eye contact, facial expressions, hand gestures, tone of voice, posture and clothing are all bits and pieces of a larger puzzle that when rightfully pieced together can help accentuate and showcase a person’s leadership.

This is especially true when considering that 70 to 90 percent of communication is non-verbal, relayed through body language. Both consciously and sub-consciously, your body tells observers what is really going on with you. As the old adage goes, you can lie with your words but never with your eyes.

Likewise, although subtle, even the smallest of hand gestures can, according to some schools of thought, be associated with a specific image in people’s minds, be it positive or negative.
On the other hand, a person’s posture, stride and gestures, can either convey the image of a strong, forceful and dynamic person, or that of an unassertive and nervous individual who is lacking self confidence and assurance.

But while physical demeanor is key to nurturing one’s leadership skills, it is only one side of the equation, with the second being the content of the person’s message and his ability to engage his audience and to deliver his message in an impressive and resonating manner.

Having the right ideas is a main ingredient for leadership, but being able to convey them through the media to stakeholders in a catchy and simple way that makes them understood by the masses is equally as important, particularly at a time of increased media awareness.

Media skills, both in terms of physical language and message delivery, can nowadays make or break a leader. Case in point, Democratic hopeful Howard Dean killed his chances early in the United State’s 2004 Democratic primaries due to an emotional holler (the “Dean Scream”) during one rally that gave bloggers and late night show hosts in the US ample material for comedy that ruined his “presidential” allure.

Less than a month ago, Hilary Clinton’s inability to control her emotions at a public meeting in the Congo became an online sensation that some political pundits argued undermined her aura and revealed her Achilles heel.

It is because of such examples that established and aspiring leaders alike, both those in the political arena and in the corporate world, have recognized the importance of media training, which has become a skill sought by many across the world. Media training can provide the dos and don’ts of communication that are pivotal to would-be or seasoned leaders, as they can help to enhance the power of their rhetoric while increasing their ability to influence and impact others.

In the Middle East, many corporate heads and politicians are also starting to realize the pivotal role of communication in cementing their leadership. But much is still needed in terms of mastering such skills in a way that does not dilute their image or over-expose them. Their goal should be to ultimately reach the level of “media maturity” that allows their discourse to move from simple propaganda to a truly content-rich and engaging discourse.

In the end, a person’s aptitude to properly communicate and express himself, effectively reaching his audiences and speaking a language that strikes a chord with them, both through his physical demeanor and messages, can determine whether he truly is a leader.

Rudyard Kipling surely said it best when he said:
“If you can talk with crowds and keep your virtue,
Or walk with Kings — nor lose the common touch;
If neither foes nor loving friends can hurt you,
If all men count with you, but none too much…
Yours is the Earth and everything that’s in it,
And — which is more — you’ll be a Man [and almost certainly a leader] my son!”

Rany Kassab & Ramsay G. Najjar S2C

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Executive Insights

Front-office self-assessment is good for the firm

by Tommy Weir
written by Tommy Weir

Look in the mirror and take a long look to see how well you are doing as a leader. This can be very scary, as a mirror reveals reality and all of the blemishes that we try so hard to hide. It has probably been a long time since you took a real look at the quality of your leadership and you will be anxious from the results.

Guess what? You are probably not doing as effective a job as you may have thought, at least according to your followers. For this past year the average difference, globally, between how effective managers say they are and how effective the non-managers say the managers are is a startling 12 percent, according to the Kenexa Research Institute’s Employee Confidence Index. This is a significant gap that organizations must address.

It is no surprise that leaders think they are better than non-managers say they are, as they seldom take the time to look in the mirror. Isn’t it strange that in organizational life, leaders try to cover-up, hide and masquerade their leadership quality when every employee sees the real story and knows the truth?

In this region, the typical manager’s reaction is to argue about the results, blame others and make excuses for the difference. Because of pride and prestige, they find this research a very hard truth to swallow. Immediately upon learning that they are not as effective as they think they are, managers start making excuses and blaming everyone possible. Here is a list of common reactions:

They blame the organization, saying it did not give them the support needed.
They blame the human resourses deparment, saying they hired these people who are questioning the effectiveness of their leadership.
They blame the global recession.
They blame the employees saying they do not know what quality leadership is.
And, they conclude that the employees are just wrong.
They blame everyone, except for the real source of the leadership deficit, which is themselves. Instead of blaming and making excuses for their lack of effectiveness, the managers need to take responsibility, recognizing that they are not performing as well as they think. Then, and only then, will they be in a position to do something about it and to get better.

Business, political parties and governments are at great risk if they do not pay attention to what the research says. It may be revealing that the level of employee engagement is off, employees are loyal to themselves and not the organization, and the organization is not receiving top performance from the non-managers. The employees are stating a painful reality that organizations need to address in order to mitigate the risk associated.

So what should an organization do to improve reality to the level of perceived leadership effectiveness?

First, an organization needs to discover the truth through a global standard leadership effectiveness survey.

Then, leaders need to see and accept the reality of what the non-managers say about the effectiveness of their leading. No more blaming, hiding or masquerading. They need to accept the results and be accountable for them. 

Finally, organizations need to invest in developing the effectiveness of their leaders. This should happen through organizational systems, processes and approaches that provide accountability and through leadership development.

In this region, only 50 percent of organizations invest in developing their leaders. And for the majority of the ones who do invest, the development is limited to aspiring leaders — not the ones who already occupy the managerial posts. The result is less than optimum effectiveness in leadership, as most managers do not continue to improve their capability once they attain the aspired managerial position. 

If an organization wants to mitigate its risk exposure, it must get serious about its leadership reality/effectiveness and do something about it.

This 12-point difference reminds me of the monkey who climbs all the way to the top of the tree. Once he reaches the top he looks back and sees a crowd of people staring up at him. As he looks at this crowd he sees them pointing and smiling. Success! Right? But what is it that the people are seeing when they look up from the ground to the monkey in the tree? They are laughing as the monkey is exposing his backside.

Are you at the top of the tree? What do you see? What do the non-managers see of you?

Tommy Weir is managing director of leadership solutions at Kenexa

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Finance

Food security – Harvesting another’s crop

by Mona Alami
written by Mona Alami

Last year’s soaring food prices caused a global crisis that triggered a shopping spree on farm land around the world. Rich countries that normally import food have now bought up large tracts of land in poor food-exporting countries.

Arab countries have gotten in on the act, as a result of losing confidence in normal food supply chains. To ensure their food security, many have bought millions of hectares of farmland in Africa and Asia, creating offshore food sources in countries like Indonesia and Ethiopia.

“It seems that it has become an important concern for countries in the Arab region which want to meet the growing demands of their populations,” says Devlin Kuyek, a researcher at GRAIN, an international non-profit organization that supports small farmers.

Last year, Egypt signed a contract with Sudanese President Omar al-Bashir to produce 2 million tons of wheat per year in the north of Sudan for export to Egypt, according to GRAIN, which includes Egypt in a report on “land grabbing” countries. Egypt has also leased 840,000 hectares from the Ugandan government, which represents about 2.2 percent of Uganda’s total area.

Countries such as Saudi Arabia, Bahrain, Kuwait, Libya, Jordan, Qatar and the United Arab Emirates have also been featured in GRAIN’s land grabbers report. In September 2008, the governments of Qatar and Vietnam announced plans for a $1 billion joint investment fund, of which some $900 million was invested by Qatar’s sovereign wealth fund, the Qatar Investment Authority.

“In August 2008, Ethiopia’s prime minister told the Financial Times that he was eager to give Saudi investors access to ‘hundreds of thousands’ of hectares of farmland for investment and development,” notes GRAIN’s report.

“It is however very difficult to estimate the total value of land grabbed today as most deals remain in the negotiations phase and are, for the most [part], very obscure,” says Kuyek.

But the United Nations’ Olivier de Schutter, the UN’s special rapporteur on the right to food, quotes an estimate from International Food Policy Research Institute (IFPRI) that between 15 and 20 million hectares of farmland in developing countries have been subject to transactions or negotiations involving foreign investors since 2006.

Not always a fair deal
“States would be acting in violation of the human right to food if, by leasing or selling land to investors, whether domestic or foreign, they deprived the local population from access to productive resources indispensable to their livelihoods,” he said. “They would also be violating the right to food if they negotiated agreements that might lead to a situation of food insecurity, a dependency on foreign aid or on increasingly volatile international markets.”

The land purchased by countries is usually fertile farm land with relatively easy access to water.

Some say the purchases can have adverse repercussions on indigenous people and pastoral populations who are evicted from the land they have used for generations for cultivation and irrigation.

“Land grabs are becoming institutionalized as clear strategies that are developed by governments, which also rely on the private sector and international organizations,” insists Kuyek.

For example, the Saudi Eastern Province Chamber of Commerce has sent a circular to all businessmen in the eastern region, directing them to invest in agriculture projects overseas, following a government directive that the private business sector should undertake agricultural production ventures abroad, according to the Saudi Gazette.

“The objective is to achieve long-term food security for Saudi Arabia and secure a continuous supply of food to the kingdom at low and fair prices,” Adnan al-Naeim, secretary general of the Asharqia Chamber in the Eastern Province, told the Gazette.

The buyers
Governments, often through sovereign wealth funds, are negotiating acquisition or lease of farming land.

“The Bin Laden Group signed an agreement to invest about $4.3 billion, on behalf of a consortium of 15 Saudi investors [know as] the Middle East Foodstuff Consortium, to develop 500,000 hectares of rice land in Indonesia,” the GRAIN report said.

In August 2008, three Gulf firms — Abu Dhabi Investment House (ADIH), Ithmaar Bank and Gulf Finance House — announced the creation of AgriCapital, a new $1 billion Islamic investment fund which purchases land overseas to produce food for the region, as well as fund biotechnology research.

The report also quoted Abraaj Capital, a private equity firm, saying it had acquired, together with the UAE government, about 324,000 hectares of farmland in Pakistan for rice and wheat production.

“Gulf countries are also operating through the Islamic Development Bank,” adds Kuyek.
A spokesperson at Abraaj, speaking on condition of anonymity, told Executive, “This is the first time I have heard of such a thing.” ADIH and the Binladen group did not reply to requests for comment.

Beyond food security concerns, it appears that land purchases are increasingly being perceived as a powerful investment tool for global firms. A flurry of investment companies and private funds have been acquiring farmland around the globe, banking on increasing food prices in the future and cheap fertile land. Among the companies named by the GRAIN report are Goldman Sachs, Deutsche Bank, Black Rock and the International Finance Corporation.

“In August 2008, Goldman Sachs invested $300 million to acquire full control over more than 10 poultry farms in Hunan and Fujian provinces in China,” says the report.

In spite of the power and influence these countries and international companies exert, more and more opposition groups are fighting the deals.

“In the Philippines and Madagascar, opposition groups are challenging such deals and taking them to the government,” says Kuyek.

But many countries around the world remain unaware of the possible dangers lurking in the near future. According to the Saudi Gazette, Saudi Arabia launched a major food security initiative, in cooperation with the International Fund for Agricultural Development, identifying Mauritania, Yemen, Algeria, Senegal, Sudan, Morocco, Bosnia and Lebanon as countries where land may be purchased to guarantee food security. 

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Finance

IPO Watch – A Saudi solo

by Executive Staff
written by Executive Staff

Optimism about a year-end pickup in initial public offerings (IPOs) cannot conceal that August was yet another bone-dry month, which continued the plunge of all IPO measures in the MENA region in 2009.

Only one company, the Saudi medical services firm Al Mouwasat, undertook a subscription in the Gulf Cooperation Council last month. Al Mouwasat offered 7.5 million shares in a bid to raise $88 million; it did not announce any over-subscription after its IPO closed on August 21.

Another company undertook an IPO on the floundering Damascus Securities Exchange (DSE): Qatar National Bank-Syria. The company said its offering of 3.4 million shares for $37 million met with substantial demand, resulting in an over-subscription of almost 2.5 times. The IPO closed on August 10.

While the lowdown in regional IPO activity in August has been attributed to a mixture of uninspiring first-half results, the summer vacation season and the beginning of Ramadan, it keeps local and global investment professionals waiting another month in limbo for the potential of Arab IPO markets to regain speed.

Slim pickings
So far this year only 12 companies have approached public markets, compared to 50 during the same period in 2008. The total amount of capital raised so far this year has dropped 85 percent from $13.12 billion to $1.98 billion, half of which came from the IPO of Qatar’s Vodafone.

Average oversubscription levels have come down considerably from 15.71x in the first 8 months of 2008 to 3.69x over the same period in 2009.

Although the drop in oversubscription levels may be reflective of the prevailing risk-averseness among investors, some see it as a positive development.

“We stand at a much healthier level of oversubscription because investors are being allotted a larger number of shares, so they do not lose interest anymore,” an associate vice president at a major Saudi investment bank told Regional Press Network on condition of anonymity because he was not authorized to speak with the media.

The executive attributed the slowdown in the number of IPOs in the kingdom to regulatory and administrative red tape, adding that “the IPO market in Saudi Arabia is not suffering, and the Capital Market Authority is in fact studying many applications.”

Indeed, after being propelled to the global leadership list of public offerings in 2008, Saudi Arabia again flexed its muscles in 2009 with the number of issues reaching eight and raising almost $1 billion.

Companies were able to raise 10 times more in 13 offerings during the same period in 2008, but the lower 2009 number of Saudi IPOs contrasts positively with that of neighboring United Arab Emirates, where IPO activity has stalled. Activity in the UAE fell by eight IPOs and $1.3 billion raised over the same period last year.

Amman’s IPO activity also came to a halt in 2009 through August, after 13 offerings and a total offering size of $125 million during the same period in 2008. Similarly, no IPOs have been registered in Cairo, Casablanca, or Muscat so far in 2009, after strong showings in 2008.
“Why are the Saudis so dominant?” asked Jeff Singer, CEO of NASDAQ Dubai in a recent Ernst & Young report. “You have a lot of companies that really never went public… The stock exchange in the last few years has become a truly viable market. We’re seeing what looks like a pent-up demand for companies going public.”

Saudi IPOs have indeed become the torch bearers of the move to public ownership in the region. Most recently, shareholders of SABB Takaful, one of the Saudi’s largest insurance companies, voted to increase the company’s capital by issuing shares.

The pipeline for the kingdom also holds further promises. Three insurers — Buruj for Cooperative Insurance, Al Alamiya for Commerce and Services and Gulf General Cooperative Insurance Company are scheduled to open their IPOs in early October. These insurance companies have also received CMA approval to sell shares.

The success of IPO offerings in the kingdom is in fact surpassing the initial offering stage to reach the secondary market. Ace Arabia and AXA Cooperative Insurance, whose IPOs were 11.35x and 5.71x oversubscribed, marked their Saudi stock market debut with whopping 662 percent and 267 percent spikes on their first day of trading.

Similarly, Saudi Steel Pipe Company and National Petrochemical Company which were 3.44x and 2.11x oversubscribed, respectively, and ran up 34 percent and 30.5 percent respectively on their first day of trading in August.

NASDAQ Dubai’s Singer, in his interview with Ernst & Young, also expressed optimism that the successful Saudi trend will continue.
“We’ll continue to see more companies out of Saudi Arabia than anywhere else in the Gulf. And I don’t think it’s anywhere near the demand that would exist if the market conditions were better than are right now,” he added.

Despite the concentration of IPOs in the kingdom, Bahrain, Tunisia and Syria’s markets still saw a bit of IPO activity.

Outside the Saudi game
Bahrain’s Gulf Finance House said in August it had received central bank authorization for a capital increase and, pending shareholder approval, plans a $300 million rights issue to bolster its balance sheet and fund possible investments. In addition, Manama-based Takaful International Co, an Islamic insurer, announced a 20 percent rights issue for September that will increase its capital by $2.6 million to expand its business and underwriting capacity.

In Tunisia, cement company Les Ciments de Bizerte announced plans to raise $76.3 million to finance the expansion of the plant and increase the clinker production capacity.
In the Levant, Syria is expected to see several public offerings throughout the rest of 2009, as the DSE works to increase the number of its publicly-listed companies.

Besides Qatar National Bank-Syria, which closed its IPO with a 2.5x oversubscription, Audi Bank Syria and Banque Bemo Saudi Fransi successfully increased their capital through share issuances.
The list for the next several months includes additional financial firms, of which Albaraka Bank Syria’s IPO has been scheduled for the first week of October.

Lebanon’s only action came from privately-owned chocolatier, Patchi, which said that the group is preparing for a bourse listing on the London and Dubai stock exchanges to finance international expansion.
The region’s most disappointing market remains the UAE, where no equity capital has been raised so far in 2009. A thin ray of hope came from the deputy CEO of the Securities and Commodities Authority (SCA) Mariam Butti al-Suwaidi, who said that “markets are expected to witness one IPO from a local company,” adding that “the number of applications that the SCA received since the beginning of the current year is three.”

Nevertheless, the bittersweet reality is that the practical standstill of IPO markets in several MENA countries is a situation shared by many abroad, as a result of violent equity market fluctuations and fears of being publicly snubbed by investors.

Commenting on the global drop in share issues, Edward Law, co-head of Western Europe Equity Capital Markets at Deutsche Bank, said that “companies recognize that now is not an easy time to IPO. At the moment, they are looking for broader guidance on the direction of the economy — on when we are going to see some stability in the macro environment and also in underlying equity markets.”

NASDAQ Dubai’s Singer added that “valuations across all asset classes have declined significantly in the last 12 to 18 months, and the ability to achieve an attractive valuation is an important driver to encourage owners of potential IPO candidates to sell these assets through the public markets.”

Singer predicted that “the fourth quarter of 2009 is most likely the realistic time here for when the Middle East IPO markets will open up.”

Regional Press Network

 

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Real estate

UAE – Investors vs. developers

by Nada Nohra
written by Nada Nohra

Property disputes between real estate developers and investors in the United Arab Emirates have increased since the financial crisis crippled the country’s property market. Dubai’s property court has already recorded 833 dispute cases in the first six months of this year.

Analysts told Executive they believe numerous cases have not reached the courts yet, and with the continuing recession, the number is likely to increase in the coming months.

Little or no confidence 
The rise in the number of disputes stems mainly from Dubai’s property values decreasing and the sudden lack of credit and investors, which caused many projects to be put on hold or canceled. As a result, investors’ confidence in the market plunged and they started questioning if the projects would actually be delivered.

Jim Delkousis, partner and the head of mitigation and arbitration at the law firm DLA Piper, said these disputes are a catch 22: Investors claim that developments are not being built quickly enough and thus withhold further payments. On the other hand, developers say they will have to stop building due to investors’ payment defaults.

Nick Clayson, real estate partner at the international legal practice firm Norton Rose agrees, adding that there may be other parties involved who could slow the progress of construction and make the issue even more complicated.

“Some of the reasons why the properties are not being finished are because of disputes between building contractors and developers,” he said.
Investor confidence is also lower when dealing with developers who are delivering their first project, as they have no track record and are more likely to fail.

“Now that times are more difficult, a number of purchasers and investors are asking themselves if the developers are capable of completing their developments as they have little or no history to back them,” said Delkousis. Still, to know who to blame, each case has to be considered separately.

Investor groups
As investors started to worry about the completion of projects, they formed investor groups, putting themselves in a stronger position against developers. Clayson said that even though they can take no legal action as a group, they can discuss the issue and agree on taking the same steps.

One example is the 100 investors who own more than 200 apartments in the Abu Dhabi Tameer Towers that formed an investor group because they were concerned about the progress of the $1.64 billion project.

“Three CEOs in 15 months, cancelation of contracts, sacking of over half of its staff and no progress on site initiated our concern,” said one of the Tameer investors who didn’t want to be named because of the legal proceedings. 

Since the group was formed, the 100 individuals stopped making payments, explains the investor. He adds that they do not wish to discredit Tameer in any way, but have put forward a series of questions that they would like to see answered.
“We put these questions through ‘The National’ (newspaper) but they never got answered — Tameer wishes to deal individually and not with a group,” he said.

Tameer was unavailable to comment about the issue. Frederico Tauber, the company’s president, told Arabian Business in May that he would be glad to talk with concerned investors, but the company will not be able to return the money invested. He also said that some investors thought the project was canceled, which he said was a “misunderstanding.” In July, Tauber also told Arabian Business they had approached investors trying to understand their concerns, but some were reluctant to come forward. The Tameer investor said the company did not promise the group anything.

“They did say that they would work with all individuals to solve their payment issues and concerns — [a] divide and conquer strategy we feel, [as] individuals have less power compared to a collective group,” the investor said.

He also added that work on the site at the Tameer Towers has been progressing since August, but not to the extent that was promised. 
“Our way forward — well we are still evaluating this as a group — we have some good leads through some of the group’s members which we are looking into,” the investor said.

Lack of transparency
The recession is the main reason behind these disputes, but certainly not the only one. Another important factor that is negatively effecting the market is the lack of transparency between investors and developers.
“The communication is not as good as it should be, investors do not always know what is happening and they are not being kept fully informed by the developers,” said Delkousis.
The blame does not fall only on developers, since some companies might be very transparent and have offered solutions, given the current market situation. Some investors might also be “closing their minds to discussing the issue of delays, payments and things like that with developers,” said Clayson. 

Property court
The Dubai Property Court started functioning in September 2008. Delkousis draws a paralell between the courts and the issue of transparency, saying that investors are not being able to derive any guidance for their own case because most of the cases are private, confidential and run in Arabic.

It is expected that the number of property disputes will increase further, since some investors and developers are waiting to see what the next step of the other party will be. On the other hand, some cases might not even reach court. Clayson says that it would be much better for everyone to negotiate rather than go through the demanding process. Some developers might not even continue pursuing end-users who surely have no money left.

“It can be very time consuming and costly. They might be happy enough to accept that they will not get their money… [and] walk away,” said Clayson.

What about the laws?
One of the most important laws that is supposed to back investors is the escrow law, which came into effect on June 28, 2007. It applies to developers selling units off-plan and stipulates that payments by investors should be put into a special escrow account, which will be used solely for the designated project.

Delkousis said that having an escrow account is better for the purchaser, but it doesn’t make disputes easier to solve. “Investors and developers are fighting to see who is entitled to the money in the escrow [which] will depend on many things, including which party breached the contract,” he said.

Clayson said that a problem with the escrow law is that developers have been able to use the payments to pay for the land, thus leaving no money for construction and for refund if the project is canceled.

“Going forward, the escrow law now does not allow land payments to be made, that is my understanding from having spoken to the land department,” said Clayson. He added that the law should be taken one step further, and not used until the project is completed. Therefore in the case of any dispute, investors will be able to take their money back.

Going forward
The more investors hear about projects not being delivered, the more they are nervous about their  money, and the more disputes arise. So far, the market has not begun to settle down.
“I think it is safe to say that the [number of] cases is still increasing,” said Delkousis.

Clayson said investors and developers should understand that they are entering into a long-term deal, so due-diligence is necessary to ensure both parties can deliver. From the regulatory point of view, he said that the way for the market to recover is first to have a consistent legal regime. 

“Investors should be able to make their investment decisions knowing that the law is certain and will be applied fairly and consistently. That’s what the aim should be so that the market will recover,” he said.

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Economics & Policy

The single currency conundrum

by Chitro Majumdar
written by Chitro Majumdar

The mountain of bad debt still on the books of the United States banking system and now emerging in the European banking system, as well as the furious monetization of dubious assets undertaken by the Federal Reserve and European Central Banks, is coming back to haunt us.

 

The Greek crisis is a direct result of an insane policy of artificially low interest rates which allowed the reckless fiscal extravagance of an entire nation to continue unchecked. Such profligacy left Greece’s terms of trade stagnating since the advent of the euro and perpetuated tax evasion — estimated at more than 30 percent of tax revenues — taking gross government debt to 115 percent of the country’s $352 billion economy.

Exacerbating this were debatable accounting practices and Goldman Sachs-engineered financial tricks that led the credit default swaps (CDS) spreads to 450 basis points.

To mitigate the impact of the Greek crisis on other European nations, the European Monetary Union (EMU) took the seemingly paradoxical step of issuing a gigantic package of almost 1 trillion euro in further debt.  This being debt, rather than the bank equity offered in the United States’ TARP program, it does not provide the benefit of the money multiplier, due to the fractional banking system. This has had the net effect of weakening the euro and spreading the contagion throughout Europe, thanks to the immediate widening of CDS spreads for some “Club Med” countries, which then extended outright to France and Germany.

As the Greek fiasco spreads, we should not forget the Gulf Cooperation Council nations, which have in recent years entered serious talks on establishing a single currency. This new currency, with its proposed US dollar peg, will now be subject to a thorough, critical revision.

Through the introduction of a single currency the GCC would provide a broader platform for economic integration and promote the non-oil sector, which could supply a more balanced mix of revenues and more distributed job opportunities to grow the region’s economy. Also, a single currency would decrease the transactional cost involved in bilateral exchange between the region’s countries. As the degree of economic integration increased, the non-oil sector would help offset foreign exchange costs, reduce accounting expenditure and other costs firms incur when operating in more than one GCC country.

However, the first lesson we can draw from the euro crisis is that a monetary union without fiscal and inevitably political unification may fail under the stress of crisis. A common currency fosters an artificial convergence of interest rates to the lowest denominator, and allows countries to defer addressing productivity disparities and fiscal imbalances, until a crisis forces a painful realignment of the fiscally weaker. A common currency imposes currency rigidity that precludes the possibility of engineering fast International Monetary Fund-type interventions, such as a dramatic devaluation to jump start growth.

So how would a single GCC currency impact the region should a crisis threaten macroeconomic stability?

Most GCC countries currently maintain considerable surpluses — collectively 26 percent of GDP in 2008 — and therefore need not issue debt. Until oil revenues constitute less than 50 percent of GDP, however, the proposed new currency will inevitably be linked to oil prices. After 2008, which saw oil peak at above $100 a barrel then plunge briefly to $30, possible volatility could be uncomfortable to say the least.       

As an April 2010 Jadwa Investment report rightly noted, Greece’s high budget deficit had been largely based on its ability to draw on Eurozone membership to borrow cheaply abroad. However, the bank said a comparable scenario was unlikely in the GCC due to the similarity of the Gulf nations’ oil-based economies, meaning imbalances between nations were less likely.

As we can see from the ongoing euro crisis, a regional common currency can be a double-edged sword. As such, the architects of a GCC monetary union will have to evaluate and incorporate lessons from the euro’s woes, and carefully consider if the next logical step — a fiscal and political union — is a wise choice for the future.

 

 

 

 

 

 

 

 

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Money Matters

Money Matters by BLOMINVEST Bank

by Executive Staff
written by Executive Staff

Regional stock market indices

Regional currency rates

Trade Bank of Iraq to issue $10 billon in credit

The Trade Bank of Iraq (TBI) aims to issue $10 billion in letters of credit in 2009. This represents an increase of 11.11 percent on 2008, amid increased private sector activity. Most of the bank’s business will remain in the public sector, with the addition of issuing around $1.8 billion in letters of credit to the private sector. In 2008, TBI’s net profit rose 41 percent to reach $359.3 million with a net operating income that rose 51 percent to reach $447.1 million. However, this profit will most likely remain flat this year as a result of the global economic crisis. The bank plans to enhance its domestic retail activities by opening five more branches in Iraq and three more branches abroad, in the United Kingdom, Turkey and Lebanon. It will also seek help from international investment banks in order to structure an Iraqi investment fund to finance tourism, infrastructure and industrial projects in the country.

ADNOC and Conoco Phillips deal

ADNOC (Abu Dhabi National Oil Company) and Conoco Phillips (US) signed a final agreement to invest in a $10 billion project known as the SGD (Shah Gas Development). The two companies signed the joint venture and field-entry agreement to create a new company with an ownership that will be split 60:40 between ADNOC and Conoco Phillips, respectively. This new venture aims to develop ‘sour’ or sulphur-rich gas reserves at the Shah gas field in the south of the emirate, and build processing and transportation infrastructure for 540 million cubic feet of gas alongside liquid sulphur pipelines and an export terminal at Ruwais. US company Fluor completed the front-end engineering and design for the scheme in March and documents for the construction phase of the project in June have been released. The Shah Gas Development project is one of the largest energy infrastructure developments to be approved in the Middle East in 2009.

Algerian expansionary policy

As oil and gas prices remain below their 2008 highs, Algeria expects its government revenue to fall sharply in 2009. Nevertheless, the Algerian government will still maintain an expansionary fiscal policy in order to boost economic activity in the country. The 2009 budget has been set at $72 billion, up from $68.5 billion in the supplementary 2008 budget, and revenue is projected at $39.19 billion, of which $16.7 billion is in tax receipts. As oil prices recover further along with the global economy, Algeria’s central budget deficit is forecasted at 2.4 percent of GDP in 2009 (compared to an estimated surplus of 9 percent of GDP in 2008). Real GDP growth is expected at 3.3 percent for 2009 and economic growth is anticipated to accelerate in 2010 thanks to a slight recovery in export markets. Average inflation is expected to fall sharply to 4.3 percent in 2009. As for the currency, Banque d’Algérie (BdA) will still maintain a managed float of the Algerian dinar in order to strengthen it. Additionally, rising oil prices are likely to continue to fuel the economy and trade surplus is expected to grow to $20.6 billion for the year.

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