Levant

Syria – Freeing the market’s bonds

by Executive Staff
written by Executive Staff

On March 10, Syrian Finance Minister Mohamed Hussein rang the bell to launch trading at the long-awaited opening of the Damascus Securities Exchange (DSE). Despite its humble size, the DSE is yet another sign that Syria means business about the privatization and gradual liberalization of its state-controlled economy. Ever since President Bashar al-Assad came to power in 2000, the country has made significant progress in its aim to become a “social market economy,” reminiscent of China.

Initiated by presidential decree in 2006, the DSE is a public institution that, once it stands on its feet, is scheduled to be transformed into a private shareholding company. Six companies are currently registered on the bourse: Banque Bemo Saudi Franci, Bank of Syria and Overseas, United Group for Publishing, Advertising and Marketing, Arab Bank-Syria, Alahlia Company for Transport and Bank Audi Syria.

Four other companies have applied to be registered. The DSE expects some 15 companies with an estimated value of 28 billion Syrian pounds (SP) (or $600 million) to be listed by the end of the year, about half of which are active in the banking and insurance sector.

Run and regulated by the Syrian Commission on Financial Markets and Securities (SCFMS), the DSE consists of a “main” and a “development” market. For a company to be registered at the main stock exchange, it has to be more than one year old, have at least 100 shareholders and a minimum capital of $2 million. New or smaller firms are registered at the development market. Currently, two of the six listed companies are listed at the latter.

Slow start

Trading on the first day in the life of the DSE was largely symbolic, as only three transactions took place, in which 15 shares in Banque Bemo Saudi Franci worth some $350 changed hands. By March 19, trading had picked up some pace, as over 1,400 shares were traded with a value of nearly $11,000. Mainly due to the limited number of listings, the DSE is currently open just two days a week.
According to Bassel Hamwi, general manager of Bank Audi Syria and deputy chairman of the DSE, the Syrian bourse offers several advantages to the Syrian economy.

“First of all, it creates a much-needed platform for the some 8,000 shareholders of the six currently registered companies to sell their shares,” he explains. “Before, shareholders who wanted to sell their stocks had to find a buyer and come to the bank accompanied by a lawyer to make the deal, while today they can simply open an account at a brokerage firm.”

“In addition to the classic advantages stock markets offer registered firms, such as increased access to liquidity, the DSE will help transform Syria from a frontier market into an emerging market,” says Hamwi. “In the more distant future, we hope the DSE can provide the channel for the privatization of public companies.”

Five broker firms have been licensed and their number is expected to climb to 12 by the end of the year. Trading at the DSE is subject to strict restrictions. “The Damascus stock exchange will not be open to gambling or risk- taking,” SCFMS chairman Ratib Shalah told the SANA news agency. “Shares can only be traded by those who want to invest money, not for speculation.”

Shares are not allowed to rise or fall by more than two percent during a day of trading, and cannot be bought and resold on the same day. Shorting and leverage are not allowed. Foreign investors are required to maintain their holdings with a licensed custodian and are not allowed to re-sell shares within a period of six months. The latter mainly serves to avoid instability due to the influx of ‘hot money’.

“These are temporary measures,” Hamwi says. “We hope that they will evolve, as the market evolves. The margin of two percent, for example, may prove too tight in the future and may need to be broadened.”

The long delay

The DSE has only just begun to function, nearly three years since Presidential Decree No. 55 was issued in 2006. The reason for the delay lays at the heart of the Syria Accountability and Lebanese Sovereignty Restoration Act (SALSRA). Passed by the US Congress in 2003 with the aim to fight global terrorism, the SALSRA bans the export or re-export of American products to Syria, with the exception of food and medicine.

As a consequence, specialized products such as electronic trading systems have been difficult to obtain. The same has been true for items such as Boeing aircraft spare parts. With an eye on air passenger safety, however, Washington recently allowed a shipment of aircraft parts to enter Syria. As the DSE was not able to obtain American- made products, it started negotiations with Paris-based Euronext and OMX, a Swedish-Finnish financial services firm. Yet these efforts were not fruitful, as Euronext and OMX were bought by the New York Stock Exchange Group and Nasdaq in 2006 and 2008 respectively. “Especially the latter was a major setback as negotiations with OMX had been ongoing for almost a year,” says Hamwi. “Eventually, the DSE managed to acquire a state-of-the-art system used in eight markets worldwide in late 2008.”

Despite these setbacks, most experts agree that SALSRA has failed to directly damage the Syrian economy. Indirectly, however, the trade embargo caused many European firms to be rather reluctant to invest in Syria, as American officials would remind them of the possible negative consequences of doing so. The DSE is widely perceived as the next step on Syria’s path to develop and enhance the role of its private sector. Syria’s state reserves have witnessed a downturn in recent years, mainly as a consequence of the decline in oil production. A decade ago the country’s wells produced some 600,000 barrels per day (bpd), today they are good for less than 380,000 bpd. Consequently, the state has sought new means to boost the economy, especially in terms of boosting the role of the private sector.

Following the collapse of the Soviet Union, Syria’s road to a new economy started as early as 1991, when Investment Law Number 10 was adopted, which introduced tax holidays for foreign investors and provided for the repatriation of overseas profits. The process picked up pace with a series of measures introduced since the inauguration of current President Bashar al-Assad in 2000. A crucial step in transforming the Syrian economy from a centralized socialist system to a Chinese-inspired social market model was the modernization of the country’s financial sector with the legalization of private banking in 2001, a move that has been overwhelmingly successful. Although it took until 2004 for the first private bank to open its doors, today there are roughly one dozen operating, while a handful of others have obtained licenses and are set to start operations later this year.

Banking on success

Deposits in Syrian private banks increased from some $9.4 billion in 2005 to $14.3 billion in 2007, which represents some 35 percent of total deposits. Five years ago, most foreign tourists changed their foreign currencies on the black market to avoid the official exchange rate set by the state. Today the Syrian pound fluctuates, while ATM machines and credit cards have become common.
The Governor of Syria’s Central Bank Adib Mayaleh, announced at a March economic summit in Kuwait that the government is considering allowing foreign investors a controlling stake in financial companies. So far, foreign shareholders have been permitted to own more than 49 percent of certain Syrian industrial ventures, but the same does not hold true for financial services firms. The authorities hope that investments in private banks will help to expand the industrial, tourism and real estate sectors.

In addition, the Syrian government adopted a series of measures to attract foreign investments, as a means to stimulate social and economic development. According to the World Bank, foreign direct investment in Syria amounted to $885 million in 2007, an increase of nearly 50 percent compared to 2006. Most foreign investors hail from the Arab world, Turkey, Iran and China.

Syria’s success in attracting foreign capital and the increased role of the private sector is illustrated by the rapid growth of the country’s industrial cities. Following the completion of several feasibility studies in the late 1990s, construction started in 2001 of three industrial cities at Sheikh Najjar (4,412 hectares) near Aleppo, Hassia (2,500 hectares) near Homs, and Adra (7,000 hectares) near Damascus. The government acquired the land, installed the necessary infrastructure in terms of roads, water and electricity, before selling the land to both Syrian and foreign investors, who are exempted from a range of taxes and custom’s duties.

By the end of 2007, a total of 1,162 hectares had been sold for industrial use in Sheikh Najjar, 838 hectares in Hassia and 1,680 hectares in Adra. Some 162 companies had also started production in Sheikh Najjar. In fact, according to Khalil Mouases, director of industrial cities and zones at the Ministry of Local Administration and Environment, Sheikh Najjar met with such success that it is likely be completed by 2012, instead of 2020. The warm welcome has prompted the authorities to announce the establishment of eight more such industrial estates.

The right ingredients

The recipe for the cities’ success has not just been cheap land and facilities, but also Syria’s relatively cheap and well-educated workforce, low energy prices and the country’s strategic location between the EU, Turkey, Iran and the Arab world. Syria has also signed the Greater Arab Free Trade Agreement and free trade agreements with Turkey and Iran.

Although state-owned companies continue to play an important role in Syria’s economy, over the past decade the private sector has become the main contributor to the country’s GDP, which is perhaps best illustrated by the pharmaceutical industry. While in the early 1980s, there were two state-owned pharmaceutical plants that produced enough medicine to meet 15 percent of domestic demand; in 2008 there were 52 pharmaceutical firms that met 90 percent of domestic demand. With these developments in mind, it should come as no surprise that the Syrian authorities have earned praise from the International Monetary Fund, which concluded that the Syrian government has taken crucial, albeit slow, steps towards liberalization, which will enable Syria to deal with the consistent decline in oil reserves.

“We are quite bullish about the Syrian economy, which is diversified and has a lot of potential,” saysd Hamwi. “If properly regulated, we think the DSE will increasingly be able to mirror the state of the Syrian economy.”

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Madoff’s unanswered billions

by Peter Speetjens
written by Peter Speetjens

On March 12, former Wall Street icon Bernard Madoff pled guilty to all criminal charges brought against him, including fraud, theft, money laundering and perjury. Most people will be more than happy that the 70-year-old confessed and that he will get no less than 150 years behind bars.

The latter is of course a symbolic figure, essentially meaning a life sentence. The length of sentence mainly gives weight to the notion, at least among the general public, that justice will be done. At the same time, however, it obscures the fact that as a consequence of Madoff pleading guilty, no in-depth trial will take place and many questions will likely remain unanswered. For example, it is still unclear if his wife and sons will be charged or if the family fortune will be drawn on to pay back his victims.

Also, as no jury-trial will take place, we will probably never know how Madoff operated. How was a well-respected member of Wall Street’s inner circle, and former Nasdaq chairman, able to fool not only his clients, but the entire finance and banking community for almost 30 years? Where were the institutions that are supposed to apply checks and balances to Wall Street?
These questions are all the more pressing as Madoff’s fall from grace follows hot on the heels of the sub-prime crisis and the collapse of the financial markets, which has given investment bankers worldwide a bit of a bad odor. Notably, almost no financial institution or publication saw them coming either. Madoff stands accused of running a Ponzi scheme described by the US authorities as “extraordinary” and “unprecedented” in scale, as losses could amount to $65 billion. Named after an Italian swindler who immigrated to the US in 1903, a Ponzi scheme pays returns to investors from their own money or money paid by later investors, rather than from actual profit. In other parts of the world it is more commonly known as a pyramid scheme.

Madoff is said to have run the scheme since the 1980s. He apparently told clients he had found a magic formula, one that could not go wrong, as he spread investment risk over volatile stock markets and more secure government bonds. Now, anyone who is familiar with investing and stock markets should know there is no such formula, yet Madoff’s clients were keen to believe him.
While many people were angry to hear that Madoff lived on bail in his $7 million New York apartment after his arrest, they will be even more furious if Madoff’s wife and two sons are not prosecuted. So far, no charges have been brought against them and there is a widespread fear that Madoff may have pleaded guilty in exchange for his family to be let off the hook.

Madoff’s defense team argues that he was the only one in charge and the only who knew what was really going on in the company. This is very hard to believe. His wife and former high school sweetheart, Ruth Madoff, who was at his side when he set up the firm in 1960 knew nothing? His sons, both senior executives, knew nothing? None of them thought it odd that most of Madoff’s possessions were in Ruth’s name?

Court papers filed in March revealed that the net value of Madoff’s ownership in his firm was $700 million, while the estimated net worth of Bernard and Ruth Madoff amounted to some $826 million, most of which is in Ruth’s name. The papers, for example, listed real estate in Manhattan, Florida and France worth $22 million, a $17 million bank account at Wachovia bank, $45 million in municipal bonds and a $12 million interest in an aircraft company, all in Ruth’s name. What’s more, a few weeks before Madoff’s arrest, Ruth withdrew $15.5 million from her account.

The claim that a banker or investor acted on his own — a rogue trader — has become quite familiar in recent years. Just think of the cases of Nick Leeson and Jerome Kerviel who lost billions for Barings Bank and Société Générale respectively. Now suppose they did indeed act on their own, the question remains: should not someone within the bank, or some financial watchdog outside the bank, have noticed? Or were they just happy to go along for the ride and to give them the benefit of the doubt, as long as profits were made?
The same appears to be true for Madoff. As he pled guilty, we may never know how the web around him worked or if any institutions related to his firm could be held responsible for negligence.

Peter Speetjens is a Beirut-based journalist

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The linchpin of peace

by Claude Salhani
written by Claude Salhani

Lebanon has been to taking on a more prominent role in the overall Middle East peace process as the conflict gets more complex with every passing year. And the delay in finding an amenable solution to the crisis — now 61 years in the making — is serving no cause except that of extremism on both sides.

Ironically, during the earlier years of the Arab-Israeli crisis when Lebanon still had no direct quarrels with Israel, it used to be said that Lebanon would be the second Arab country to sign a peace treaty with the Jewish state. But since then, more blood than water has run under Lebanon’s bridges. Today, given the twists and turns that fate and geo-politics have thrown at Lebanon, the Lebanese will very likely be the last people in the region to sign a peace treaty with Israel.

The fact that Lebanon is increasingly playing a more prominent role in the regional conflict is not terribly good news for the Lebanese. And neither is the news that Islamist fighters have taken refuge in many of the country’s Palestinian refugee camps. The US said it would equip the Lebanese army with M-60 Main Battle tanks, as did the Germans who promised to deliver Leopard tanks and the Russians have pledged ten MiG-29 fighters (NATO designation: Fulcrum). Obviously, none of that hardware is intended to outfit the Lebanese armed forces to fight any external threats. Logic would dictate, therefore, that those weapons are intended for internal housekeeping and meant to be used if and when the day comes that Lebanon is forced to get its house in order so as to close a peace deal with Israel.

In fact, many analysts are saying that there could not be a regional solution to the Arab-Israeli dispute if the Palestinians and the Syrians each sign a peace treaty with Israel and Lebanon remains at war with the Jewish state.
Until just a few years ago, despite it being the stage of much of the Middle East’s turmoil, Lebanon was a reluctant pawn in the greater Middle East games of war and peace. Lebanon’s role in the Middle East dispute came about as a result of the presence of the Palestine Liberation Organization (PLO) and its affiliated groups who set up shop in Lebanon.

Until recently it was not considered essential to include Lebanon in regional peace talks, but now Beirut finds itself at the forefront of a final settlement of the Arab-Israeli dispute.

As difficult as it may be, the Obama administration must realize that Lebanon cannot remain the only country bordering Israel to remain in a state of war with the Jewish state.

At the same time it is of paramount importance to the future stability of the Middle East that Lebanon not be sacrificed at the altar of a Syrian-Israeli or a Syrian- American rapprochement.

One cannot stress enough the importance of ensuring that when such a peace treaty is signed between Israel and Syria, Lebanon is not left out in the cold.
The fact that Lebanon is a small country does not mean it is irrelevant. While Lebanon does not constitute a threat to Israel, the country’s geographic location — on the border of Syria and Israel — gives it an advantage, or as the case may be, a disadvantage. Certain elements within Lebanon have the power to create serious problems for Israel along its northern border, and in so doing, keeping the Arab-Israeli dispute going, even if Syria were to sign a separate deal with Israel.

Among them are Hizbullah and a number of pro-Syrian paramilitary organizations, as well as the vast network of intelligence agents Syria left behind in Lebanon when it withdrew shortly after the assassination of former Prime Minister Rafiq Hariri.

It is without doubt to the advantage of the United States and Israel to ensure that Lebanon remains an independent and stable nation.

History has shown us what happens when the state is weak, as was (and remains) the case in Lebanon. History is also repeating itself in Lebanon, where the Palestinians first took advantage of the weak central government and the PLO became a state within a state. After the departure of the PLO from Beirut, the central government continued to be weak, allowing other groups, some acting at the behest of foreign powers, to emulate the Palestinians and establish themselves as a parallel authority to the Lebanese government.

Let there be no doubt: Lebanon’s continued instability only serves the enemies of democracy in the region. All the more reason why Lebanon must not be omitted from the next round of Middle East peace talks, if and when they take place.

Claude Salhani is editor of the Middle East Times and a political editor in Washington, DC

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GCC

Oman – Docking infrastructure

by Executive Staff
written by Executive Staff

While construction workers are putting down their tools throughout the Gulf and the future of many massive infrastructure projects is in jeopardy, the Sultanate of Oman is bucking the regional trend by investing billions of dollars to bolster its nascent tourism sector, aviation sector and industrial base.Compared to its GCC neighbors that have spent lavishly over the past decade on infrastructure and real estate projects, the sultanate, the relative poor man of the Cooperation Council, has lagged behind in infrastructure roll out.

That Oman is doing so now is not down to Muscat possessing a financial crystal ball that foresaw the cost of raw materials plunging from record highs and contract bidding becoming more competitive. For Oman, the projects are out of necessity, to catch up with regional developments and to be viewed as more of a GCC player than merely the better half of the lower Arabian Peninsula.

The sultanate has always had to be prudent with its revenues, and never so much as at present with tumbling oil prices accounting for some 75 percent of national revenues. The last two immediate budgets, which ran a $1.04 billion deficit in 2008 with revenues of $14.06 billion, were both based on $45 a barrel. That was conservative thinking 16 months ago when oil hovered around the $100 mark, but roughly on par for this year.

If prices drop, some projects could be frozen, but Oman also has new oil and gas fields coming online and is aiming to average out production at 550,000 barrels of oil per day. Furthermore, Oman has not been hit to the same degree by the financial crisis as the more service-based economies of the rest of the Gulf, in addition to only relaxing property laws as late as 2006, which had previously prevented foreigners from owning property and restricted GCC citizens to just three plots of land. As a result, the real estate sector has only started to flourish over the last few years, further compounded by the entrance of international realtors that have changed the face of the sector in addition to driving up rents.

But the path the sultanate wants to tread doesn’t differ much from that of other GCC countries: investing heavily in airports, roads, ports, industrial zones and high-end tourism projects. Oman is just the last member of the GCC to board the ‘speed-development’ train.

Infrastructure roll out

Talking of trains, Oman is mulling the idea of its first railway, a goods carrier that would run 200 kilometers between the industrial city of Sohar and Barka. Reportedly in its consultancy phase, the line would eventually cater to passengers.

But where Oman is really placing its infrastructural transport emphasis is on roads and airports. In such a large country with populated areas confined to Muscat and the cities of the northeast, and a vast, relatively empty expanse of 1,000 kilometers to the second major city, Salalah in the south, a developed road network has been vital. Some $1.9 billion was earmarked in the 2008 budget for highway and road development, in addition to improving traffic flow in Muscat, according to Gulf Construction.

The impacts are already being felt, with the newly opened Muscat-Sur highway — so new the tollbooths are still not operational — slashing two hours off drive time.

But with tens of billions to be spent on industrial projects, ports and tourism projects, roads alone are not enough to connect areas like Duqm, Salalah and Sohar.

“To speed up access to Duqm, as four to five hours by road from Muscat, an airport is ‘essential’ infrastructure,” says George Bellew, chief executive officer of Oman Airports Management Company.

Airports are where the big money is being invested, to the tune of $3 billion for the expansion of Muscat International Airport (MIA) and billions on six other airports.

“Like everywhere else, there has been an increase in travelers, tourism and commercial trade in Oman. Six airports are to be built, maybe more,” says H.E. Sheikh Mohamed Bin Sakhar Al-Amry, Under Secretary for Civil Aviation Affairs. “We will build airports as needs dictate,” he adds. Some $43.86 million has been earmarked for consultancy studies, design and supervision of the airports.

All airports are to be located in areas of industrial activity or tourist destinations, a potential major currency earner given Oman’s nature, history, 2,700 kilometers (km) of coastline and two months in the summer — known as Al Khareef — when the area surrounding Salalah is uniquely endowed with monsoon rains that transform the landscape into a lush green oasis.

“There is a determination by the Omani government to diversify non-oil revenues and an aspect of that is clearly tourism and air travel,” said Bellew.
Numerous multi-billion dollar tourism projects are underway in Oman, including the $7 billion Blue City, the $2.5 billion Wave Muscat, the $2 billion Salam Yiti, the $1.6 billion Omagine and the $400 million Muscat Gulf Course.

In Salalah, the Dhofar Tourism Company is developing the $2.85 billion Mirbat project, consisting of residencies and hotel resorts, while the Muriya Tourism Development Company, a joint venture between Oman’s Ministry of Tourism and Egypt’s Orascom Development Holding, is developing Salalah Beach. Covering 15.6 million square meters, the project will have 3,000 residences, a marina, a PGA golf course and hotels from the major chains Club Med, Rotana and Movenpick.

To meet the expected surge in tourism when such projects are finished, Salalah’s airport is being expanded from the current needs of 300,000 passengers per year to accommodate two million in phase one and eventually to four million.

Domestic links

Three domestic airports are to be built in the southern towns of Haima and Shaleem, as well as in Adam, a gateway city to Oman’s interior region some 300 km south of Muscat.

Duqm is to be the country’s third international airport with a capacity for 500,000 passengers per year and it is the site of a $1.8 billion port project, refinery, shipyard and tourism resorts. Firms are currently bidding for a $200 million contract for the construction of the airfield and infrastructure projects.

Further airports are to be built in Ras al Hadd and Sohar, located 200 kilometers from Muscat on the way to Dubai. “Ras Al Hadd is being progressively developed as a tourist area, where turtles nest [at Ras al Jinz] and covers the local area of the city of Sur. There also is the expectation of eco-tourism developing along the Eastern coastline,” said Bellew.

Sohar has risen as the country’s foremost industrial hub, driven by more than $12 billion of investment in the city’s port, a joint venture between the government and the Port of Rotterdam. The Sohar Special Economic Zone (SSEZ) is also under development, primarily catering to downstream petrochemicals and the steel industry as well as logistics at a 500-hectare site. The SSEZ will compliment the 220-hectare Sohar Industrial Estate and the Oman International Container Terminal, which the country is banking on to bolster trade due to Sohar’s proximity to Muscat and the nearby UAE. The Sohar airport is slated for completion by 2013, although a $300 million tender for the passenger terminal has not yet been appointed. The biggest airport development is at the MIA.

“MIA is a gateway airport with one main runway. The plan is to build a standalone midfield terminal,” says Bellew.

The first expansion phase will allow for 12 million passengers a year, with a new passenger terminal control tower, 32 air bridges, VIP building, air traffic management center, 6,000 car parking spaces and a cargo terminal to handle some 200,000 tons per year. The second terminal will be connected to the rest of the airport via an underground metro system, with the design brief making it possible to expand to 48 million passengers per year by 2050. “In six months we will finish the planning and award contracts,” adds Bellew.

There was a need, however, to expand in March to increase capacity to seven million passengers per year. Indeed, last year MIA saw air traffic rise 18 percent over 2007 to 4.5 million passengers. In January, passenger numbers were up by 19 percent, largely due to Oman hosting the Gulf Football Cup.

“January figures are an anomaly to the global figures, where there has been a lot of negative results, largely due to the underdeveloped nature of the market here,” Bellew notes.

The sultanate will no doubt be hoping that Oman is an anomaly in weathering the financial storm as so many projects get off the ground. Economic growth, however, is expected to slow from seven percent in 2008 to three percent this year, but major projects are nonetheless still years off completion.

“We budgeted for this a long time ago, so I don’t think we will change plans,” states Al-Amry.

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Swapping bullets for ballots

by Mohanad Hage Ali
written by Mohanad Hage Ali

Samarra, 78 miles north of Baghdad, is more than just a city: it is an indicator of tension between Iraq’s Sunnis and Shiites. The majority of Samarra’s population is Sunni, but they make their living out of Shiite pilgrims who come to visit the shrines of two holy imams. On February 22, 2006, those shrines were bombed in an Al Qaeda attack that ignited a bloody sectarian conflict leaving tens of thousands of people killed. What happened on that day divided both cities and neighborhoods into Shiite and Sunni enclaves. Today Samarra is conveying another sign.

The city’s mayor announced last week that its holy sites are receiving 15,000 Shiite pilgrims every day. This was a good indicator of how the security situation is improving in Iraq. But the effects of the sectarian reconciliation are not only visible in Iraq’s security; they have also reshuffled the political priorities in the country. The Iraqi political scene is shifting from sectarian strife to mundane daily politics, including corruption and patronage.

The first sign of this is the decaying public support for major sectarian political groups, many of whom were either accused of direct involvement in violence or participation in incitement. The Shiite Islamic Supreme Council of Iraq is one of them. They were accused of establishing death squads to target Sunnis in retaliation for the killing of Shiites. Their power and influence within major ministries, the army and police were expected to last beyond the American and British withdrawal. To both the groups’ and many observers’ astonishment, they have lost control over most Shiite provinces and subsequently, their major goal of establishing a Shiite autonomous region in the South faded away.

Nouri al Maliki, the incumbent prime minister who supports a strong central government, achieved considerable gains in the provincial elections at the expense of the Supreme Council and Moqtada Sadr, the young, anti-American, populist Shiite leader. What may ease their loss is that they were not alone. Other ethnic and religious groups are encountering similar changes. The Tawafoq Front, the major Sunni parliamentary bloc, whose leader Adnan Dulaimi made fiery anti-Shiite speeches during the past few years, followed suit. Their coalition crumbled over political differences related to the selection of a new parliamentary speaker. The Iraqi Islamic party, the Muslim Brotherhood, was left without its major Sunni ally, the National Dialogue Council. In different provinces, new Sunni groups emerged in the last elections, paving the way for more nuanced choices.

The most astonishing of all surprises was the Kurdish political scene. Since the mid-1990s, that is until after the autonomous Kurdish region’s infamous civil war, the two major Kurdish groups consolidated their power and left little room for dissent. Ethnic tensions and external threats helped maintain Kurdish public support for both the Patriotic Union of Kurdistan, led by Jalal Talabani, Iraq’s president, and the Kurdistan Democratic Party whose leader, Massoud Barazani, currently presides over the autonomous region’s presidency. With the relative stability of Iraq’s consensus-based regime, the Kurdish political scene has started to change. Talabani’s party is faltering. Four of its major leaders have submitted their resignation, undermining the Iraqi president’s leadership. They have denounced his family’s ascent into power and the corruption within his establishment. With those high profile politicians out, another party is expected to emerge, thus paving the way for more diversity in the Kurdish political scene.

It is still too early to consider Iraq a stable country. Al Qaeda is still active in Mosul and Diyala and it remains capable of inflicting high casualties and reviving sectarian and ethnic tensions. Nevertheless, the relatively low level of violence and the population’s adaptive trend six years on paves the way for the normalization of politics. The Iraqi security forces capabilities and training are moving forward, in conjunction with reconstruction efforts. It remains hard to predict December’s national elections results. However, six years into Iraq’s invasion we may finally learn what Iraqis really think of their politicians.

Mohanad Hage Ali is a political editor at al-Hayat Newspaper

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GCC

Q&A: Louis Hakim

by Soraya Darghous
written by Soraya Darghous

Louis Hakim joined Philips in 1998 and is currently the chairman of Philips Middle East and vice president of Royal Philips Electronics. Executive recently sat down with him for a candid chat about environmental issues facing the United Arab Emirates today. Philips has worked with private and public institutions across the globe to help them go green and in 2010 launched its ‘livable cities’ campaign.

E  A recent report revealed that the United Arab Emirates has the largest environmental footprint in the world. How can the country be more environmentally conscious?

The UAE is taking positive steps to reduce its carbon footprint; you see it in several of their activities. The metro is one of them — initially the metro began as a project to address the congestion in Dubai. Now 120,000 passengers per day take the metro.

Each emirate is looking at ways to address the issue of power consumption. This can work well in their favor, but there are definitely more low hanging fruits that could be addressed by the authorities. For example, legislation — there is no clear legislation that forces people to use any standardized energy efficient approach in construction. Secondly, there are no incentives to make people opt for greener solutions. Day to day, water boilers — my favorite topic — consume the most energy at home. We live in a country where we have 365 days of sun! If you change them to solar water boilers, you automatically save a lot of energy. But now if you ask people to go and do it, it’s a major investment for an average person.

Lebanon took a bold step a few weeks ago, granting people zero interest loans over a period of five years if they change their water boilers.

For buildings to go green, the incentive could be a deduction or percentage discount on their power bills. What we’ve been doing so far is penalizing people for consuming more — but what did we do to push them to save more? I think there needs to be a change of mindset.

I know that Abu Dhabi is investing a serious amount in reducing their carbon footprint. They’re testing converting street lighting to LED lighting. They have several smart initiatives on the table. Masdar is another major project in that respect. We need to be fair: while the consumption is high, there is a lot that is happening in the background as well. Remember, during the growth period, you could not avoid such a high carbon footprint because it was a construction site 24 hours a day.

We have pollution as well. We have too many cars on the roads and there is also the issue of the flight frequency out of the UAE. Water consumption is also very high. It’s really the same topics as most countries.

E  Is there a lack of awareness here about environmental issues?

Two years ago I would have said ‘yes’, but today I don’t think it’s the case. The people are aware, but no one knows how to go about [solving the problem]. Have we introduced smart meters in the country? No we have not. Have we pushed people or encouraged people to go into energy efficient lighting? No we did not. We really need major plans or initiatives in those respects.

E  What about using private-public partnerships (PPPs) to provide incentives for going green?

You need a regulatory framework that does not exist in the Arab world — except in Jordan and Saudi — to do PPP projects. The benefit of PPPs is that they take pressure off the government and allow the private sector to contribute, be it financially or be it through the expertise and the solutions they have. PPPs also create jobs immediately. At the same time, it benefits the environment so it’s sort of a triple win for everybody. But still it doesn’t seem to be on anybody’s agenda. This still keeps us puzzled although we advocate and keep on preaching PPP everywhere we go.

E  What does Philips do, internally, to show its commitment to the environment? How are you socially responsible from within?

Most recently we told our employees to bring in all their light bulbs and we gave them energy efficient home light bulbs for free. We recycled their old bulbs immediately. An energy efficient lamp consumes one-fifth of an incandescent lamp. A 100-watt incandescent lamp generates around 90 percent heat and 10 percent light. These are energy burners and heat generators. Go to any hotel lobby or office today, you see these spotlights. This technology is pre-1970. It’s a shame that we still use it. It should be banned. The heat that is generated by these lamps makes your air conditioning work 30 percent more!

Several months back we decided to no longer use regular paper, and now only use recycled paper. We did the cost analysis and the difference was minimal, so we moved ahead. We’ve been looking at the numbers, and I think we’ve managed to save something like 20 kilograms of CO2 (carbon dioxide) emissions and 200 trees during that period. We are changing our offices all around the world to green lighting — you won’t see any Philips offices that are not 100 percent compliant.

There is an ongoing engagement campaign to keep people aware. The most recent was the lamps. We’re talking about 80 percent savings on energy bills in a domestic environment.

E  What are your green advocacy plans for the UAE?

What we’re trying to push for as much as possible is making organizations aware of the benefits of energy efficiency and again, the triple win benefit of PPPs. Personally I’m a true believer that without any PPP structure, neither the government can do it alone, nor the private sector can do it alone and the people definitely won’t. So the two of us have to sit together and try to find solutions.

A good example — the Intercontinental Hotel in Festival City. A year ago we engaged in a discussion with the Dubai Tourism Board. They decided that by 2012, hotels need to be at least 20 percent more energy efficient. One of the first projects we worked on was that hotel. They had conventional lighting inside the hotel — 35,000 light points, that’s a huge number. We changed, in less than six months, all the indoor and outdoor lighting of the hotel. They saved around 40 to 50 percent in energy consumption. Today, they not only benefit from the savings but also from the improved image of being a good corporate citizen themselves.

E  What advice do you have for companies in the UAE that are trying to ‘go green’?

Any organization that doesn’t have any cash flow issues should not think twice about going green because they benefit immediately. Who does not want to save? The only thing they need to do is realize that they could save beyond their expectations.

E  You mentioned that at the time of its economic surge, the UAE’s footprint could not have been any less than it was. Why do you think developers were not using green materials a few years ago?

To be honest with you… going green has been on the table for about 20 years. Everybody knew about it and that we needed to do something about the environment. The momentum did not pick up until the last 18 months; it coincided with the crisis.

Now is the time, under the current circumstances to say ‘from now on this is how we’re going to address construction’ — it needs to be green, energy efficient and follow certain protocols. If you don’t follow certain protocols and we get a third party to come and certify that you didn’t, then you don’t get your license, for example.

Another problem is the people who build the buildings are not the people who live in them. If I were an owner, I would look at the marketing benefit and the premium that I could rent or sell a building if it’s totally green.

Being green can happen in stages. Pre-construction, you need proper insulation – glass or wall insulation. You need to use screens. Lighting is another big thing. Also, solar water heaters. Make sure that your windows are airtight. The construction needs to be very high quality.

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Big swing with a small ball

by Norbert Schiller
written by Norbert Schiller

It is amazing how the oil-rich countries of the Persian Gulf have this ability to zoom in on the most insignificant detail about their country and transform it into something of historical significance.

Take Qatar for example. In the mid-1990s I was invited by the government to attend the first tourism festival in the country. I accepted the all expense paid junket almost as a joke to find out what Qatar had to offer as a tourism destination. My early recollection of Qatar in the 1980s was wide empty spaces and open roads punctuated with a few modern buildings, including the only five-star hotel in the country. Upon arriving at the airport, I was whisked away from the other passengers then taken into a small VIP hall and treated with all the usual amenities given to visiting dignitaries. The next morning, when I went down to join the other guests at breakfast, I was pleasantly surprised to find about half a dozen gorgeous women seated at the table marked “tourism festival guests.” I parked myself next to a tall stunning blond and proceeded to make conversation only to be told that she did not speak English. I then attempted the same with a brunette on the other side and got pretty much the same response. Feeling a bit embarrassed by my frugal attempts at making small talk, I turned my attention to something more pressing and proceeded to devour my breakfast. As I was about to take my first bite, a woman seated across from me asked, half jokingly, if I was there to “attend the festival or here to meet the Polish models flown in for the fashion show.” I later found out that this woman was one of the event organizers.

After breakfast, our group of around a dozen guests, which included tour operators, travel journalists, and of course the models, was taken to a small conference room and given a briefing about our first destination, al Zubara fort on the northern tip of the Qatari peninsula. After hearing in great detail about the history of the fort, its significance and the government’s grandiose plans to turn it into a first class tourist destination, I expected to find something right out of Walt Disney’s animated film Aladdin. After an hour of traveling over barren landscape, we arrived at the fortress. At first glance I was a bit taken aback as it was nothing like the Acraba that I had envisioned during the presentation. In fact, if this fort were to be located in any other country, for example Egypt, Jordan or Syria, it would hardly be noticeable among all the other forts, castles and historic sites of antiquity. In short, the Qataris were devoting a great deal of energy to build up what little they had and to earn historic credibility in the Gulf region.

More recently, while covering the Dubai Tennis Championships in February, I received a packet which is given out to visiting journalists as a welcome gesture. The packet included a book entitled, Fly Buy Dubai, The Remarkable 25 Year Journey of Dubai Duty Free. Understandably, Dubai Duty Free is interested in promoting its achievements over the last quarter century. As a sponsor of a number of prestigious events, including the annual tennis tournament, it was only natural that the company wanted to showcase its accomplishments.

I can see publishing a pamphlet or even a small book for the occasion, but I was shocked upon seeing the 500 plus page book. Out of curiosity, I actually began reading the book to see how one could write so much about a duty free shop. Interestingly, the book begins by looking at the origins of the duty free experience at Ireland’s Shannon Airport in 1947 and examining how the concept spread from there to the rest of the globe.

It’s funny though how the book reaches to include Dubai from the very beginning. It attempts to draw a parallel between the father of the duty free concept, Irish entrepreneur Brendan O’Regan, and Sheikh Hasher bin Maktoum Al Maktoum, the great-grandfather of Dubai’s present ruler Sheikh Mohamed bin Rashid Al Maktoum. Sheikh Hasher is credited with establishing Dubai as a tax-free haven at the end of the 19th century to attract businesses to the then obscure emirate. As impressive as the move was at the time, it can hardly be compared to the duty free revolution that Brendan O’Regan embarked on.
The historical section of the book is quite informative. The most interesting tidbit was how the name Irish Coffee was coined in the 1940s by the head chef at the Shannon airport restaurant, Joseph Sheridon. On a very cold night, he decided to add a drop of whiskey to a pot of coffee he made for a group of transiting Americans. When one of the passengers asked, “is this Brazilian coffee?” Sheridon replied, “No, Irish Coffee!” The rest of the book goes into every detail about the company and draws on many anecdotes from Colm McLoughlin, the Dubai Duty Free managing director and one of the original consultants sent from Ireland to set up the duty free in 1983. The book has its interesting moments but, by all accounts, it is way too long.

In short, Qatar’s tourism festival, the hype surrounding its al Zubara fort and the 500-page book commemorating the 25-year anniversary of Dubai Duty Free, are examples of how big money is spent in this part of the world to procure a place in history. Then there is the other side of the coin, countries with considerable history but with no money to preserve it.

Norbert schiller is a Dubai-based photo-journalist and writer

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Private equity – The party is over

by Executive Staff
written by Executive Staff

If there is one thing everyone in the regional private equity (PE) game agrees on, it’s that the party is officially over, albeit after a long and fruitful period of money making. Despite the economic downturn and the immaturity of PE in the region, regional PE firms managed to raise a total of more than $6.4 billion in 2008, according to research conducted by Zawya Private Equity Monitor (ZPEM) and the Gulf Venture Capital Association (GVCA). When one considers that in 2005 PE firms raised a total of $2.9 billion, the compound annual growth rate (CAGR) in the region over the past three years had registered at 30 percent, according to the GVCA. Ergo it’s no surprise that, until around October of 2008, the region was being heralded by many in the global PE industry as the next global PE hub.

The financial bulldozer

Inevitably, the financial disaster that emanated from Wall Street has dampened the promise of PE in the region, at least for the time being. The Middle East is still reeling from the effects of the crisis and even the most reliable analysts and commentators are reluctant to give an answer as to when the region will see the bottom of this downturn. The funding frenzy that has typified the regional PE market over the past few years has come to a grinding halt and those seeking to raise funds in the region face a challenging task.

“Fundraising in 2009 will be a small fraction of what was raised in 2008,” says Hisham El Khazindar, managing director and co-founder of Citadel Capital. “If we see $1 billion raised in 2009 it would be fantastic,” he adds. That sentiment is echoed across the industry, whether it comes to the funds themselves or the disposition of limited partners (LPs).

“All the PE shops that I know who were scheduled to do fund raises in the first half of this year have postponed them because the appetite just isn’t there,” says Yahya Jalil, senior executive officer and head of private equity at The National Investor in Dubai.

That said, comparatively speaking PE firms are still in a better position than many other financial institutions in the region. For one, PE firms in the region were not heavily involved in the kind of investments that got the world into its financial mess to begin with and by nature they are committed to longer spreads and lockups whose longevity may well ride out the current financial conundrum.

“The typical PE investment cycle is around four years, which means that investments made now will not ‘mature’ until 2013,” says James Tanner, head of placement and relationship management at Investcorp. “By that time, it is expected that the current downturn will have passed and we expect the region to have returned to its long-term growth trajectory.”

Lenders licking wounds

Many of the traditional financing and exit avenues for PE firms have become unattractive as banks look inward — as well as to their governments — to repair their balance sheets. Furthermore, the immaturity of PE and leveraged buy-outs (LBOs) in the region largely shielded the industry from the effects of widespread and complex leveraging prevalent in many developed PE markets.
“LBOs only covered around 25 percent of the [regional] PE market,” says Imad Ghandour, executive director of Gulf Capital.

Tamer Bazzari, deputy CEO of Rasmala, adds that “immaturity did result in limited exposure to LBOs in the Middle East market compared to the West. This immaturity was not because of the immaturity of the PE firms, which are capable of structuring these deals, but to the inability of the banks to support such transactions in the region.”

Perhaps the most important and advantageous aspect of the regional PE market, however, is the fact that PE firms in the region are still sitting on vast amounts of “dry powder” — capital called or committed that is yet to be deployed. This has placed regional PE firms in a position where they will have first dibs on opportunities once there is some kind of consensus on when the bottom has truly been reached.

“You don’t get any accolades for picking the bottom and the risk of thinking you are at the bottom when you are not is quite substantial,” says Jurgen Heppe, managing director of direct investment at Istithmar World. “I think it’s what’s holding people back, because there is a lot more comfort in investing into an uptrend then trying to pick the bottom.”

All things considered, the near term state of the regional PE industry will be one of reticence and reflection. PE firms have had a good run of luck — now they are being called upon by their LPs and the companies they invest in to show their worth by preserving the value of their portfolios in the face of an economic whirlwind the likes of which this region has never seen. The hunting season is on, except now the guns are pointed in the other direction.

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Editorial

A bane unto ourselves

by Yasser Akkaoui
written by Yasser Akkaoui

Why is it that we Lebanese fall into the same trap every time our instincts take control?

Since 2005 and the outrageous assassination of former Prime Minister Rafiq Hariri, we have seen Lebanon’s hard won equity eroded by political killings, instability, full- scale war, economic decline and civil unrest. During this period, Lebanon has lost a dozen brave reformers and national servants as well as — and here is where the really shocking figures kick in — 1,400 civilians lost to a war in 2006 that also saw the displacement of nearly one million people and the economy ripped to shreds. Today, we are still picking up the suffering, especially when one considers the subsequent deaths from unexploded cluster bombs that continue to litter South Lebanon.

And for what? All we do is pander to the same leaders whose performance, if judged in the boardroom rather than the street, would be dismissed quicker than you can say Lehman Brothers.

You see, it’s the same old story: Lebanon fights and suffers at everyone else’s expense. Now we witness presidents Barack Obama and Bashar Al Assad, not to mention the royal family of the Kingdom of Saudi Arabia, burying the hatchet. It is only at moments like this that we realize we have been taken for a very long and expensive ride. We negotiate for others but not for ourselves.

But that’s only half the joke. There are elections slated for June in Lebanon. With the decreased level of political tension in recent weeks and all the kiss-and- make-up that we witnessed in the news, one can only wonder how campaigns will look in the absence of all the hatred we are accustomed to. There will be no hatred campaigns, there will be no slogans, as our politicians know only one thing — how to segregate.

With our politicians clueless in economics, we will be back to square one with another set of dumb strategies that will take us nowhere.

In the meantime, in the rest of the region, Dubai, Iran and Iraq — yes even Iraq — are all getting their acts together. Dubai in particular, despite all the rumors of bankruptcy and recession, is still showing signs of life. New companies are not shying away. Why? Because the private sector has the experience and the nerve to look long term and to have confidence in the role of the state.

The rest of the world — our so-called allies, be they Iran, Syria, Saudi Arabia and even America — know that at the end of the day regional maneuvering should not affect national growth and internal development.

Only Lebanon believes that it can still take international posturing and bluster at face value and attach it to a national agenda.

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Private equity – Fat times thin quick

by Executive Staff
written by Executive Staff

Unlike buying a few shares in a public company, private equity (PE) investment is a commitment that cannot be taken lightly. That is perhaps why most experts believe some two-thirds of institutional PE investors are on the sidelines waiting for better days. Who can blame them? Just like any other asset class in the region, PE is still licking its wounds after the beating that it took from the public markets, not to mention the de-leveraging costs that PE firms and portfolio companies across the region continue to shoulder as they brace themselves for a dismal year to come. Accordingly, it’s little wonder that most institutional investors who are willing to deploy money would rather consider more liquid investment options than further investment in PE, even at current market valuations.

“The nature of the private equity funds, reputed for their long term investment horizon, is not an attractive attribute for today’s investors who value liquidity,” says Rami Bazzi, senior executive officer at Injazat Capital.

The ensuing atmosphere in the region has become one of understanding between firms and limited partners (LPs) about capital commitments that were expected to be called over the past six months or in the foreseeable future.

“We told our LPs in November [2008] ‘be comfortable and relax… we are not going to be making any capital calls before we talk to you first because we don’t want to put you in an embarrassing situation of making a capital call that you can’t meet,’” says Ammar Al Khudairy, managing director & CEO of Amwal Al Khaleej Investment Co. Ironically, much of the stress on PE firms to make capital calls and on LPs to meet them has been lifted due to the systemic effects of the economic downturn.

“LPs would have defaulted initially [had capital been called], but deal making has reduced considerably considering the situation with LPs. At the same time, PE funds would not want to be at risk of signing a deal for which the funding may not come through thus jeopardizing the entire fund itself,” says Tamer Bazzari, deputy CEO of Rasmala.

To call or not to call

Nonetheless, it has already been around six months since this ‘period of understanding’ began. Since then, most PE firms have managed to hold off on making capital calls, but others have had no choice but to make that untimely call.

“At least one group has told us in January that they had frozen investment and made a capital call and only came up with 90 percent of the call. With regards to the other 10 percent, the investor just said ‘we can’t do it,’” says Benjamin Newland, partner at King and Spalding, a multinational law firm that consults in the regional PE market. The phenomenon of defaulting is indicative of a wider problem in the PE sector.

“There is going to be a ‘point of pain’ going forward for the PE industry, which is LPs being unable to fulfill their capital call obligations because of their own liquidity issues,” says Yahya Jalil, senior executive officer and head of private equity at The National Investor.

Robert Hall, head of transaction services Middle East & South Asia at KPMG, adds that “some LPs will continue to provide cash and there will be others who will refuse to make further capital calls and legal action will be taken against those.”

Having to deal with the liquidity issues of LPs is undoubtedly going to be a battle that will be waged until the end of this downturn. Nevertheless, PE firms will have to make nice with LPs whether they like it or not because, at the end of the day, firms will have to coax them into investing in an intrinsically illiquid sector at a time when cash is king.

“In an asset allocation waterfall where fixed income instruments receive most of the money… PE happens to be at the end of the asset allocation priority. Very clearly, not many LPs want to take additional risk in order to generate additional returns, when normal levels of return… are at risk,” says Bazzari. “Investors are seeking liquid investments to enable them to re-allocate when needed, a luxury private equity investments do not normally provide,” he continues.

Even institutional investors that have already committed to the PE sector will by default commit less money to the sector. “If a family conglomerate or a large institution has a target allocation for PE which is eight to 10 percent, and the value of their public portfolio shrinks, that eight to 10 percent will also shrink into a smaller base for PE with much fewer dollars [sic],” says Jalil.

In reality the current gap between the interests of general partners (GPs) and LPs was a long time in the making and despite the fact that there will be much friction in the next cycle, this is not necessarily a bad thing. PE in the region has to some extent been a victim of its own success, especially in the last three years. According to research conducted by Zawya Private Equity Monitor (ZPEM) and the Gulf Venture Capital Association (GVCA) of the total investments made in the PE sector over the last decade, approximately 86 percent were made in the last three years (2006 to 2008), with approximately 39 percent and 27 percent made in 2007 and 2008, respectively. While 27 percent in 2008 is still an admirable figure in terms of growth, it is symptomatic of a downward trend that is now manifesting itself in the industry.

Private equity activity in the MENA region has declined in 2008, both in total size and in number — 31 percent and 22 percent, respectively — according to ZPEM and the GVCA. Growing at such break-neck speeds — a CAGR of 48 percent in the past three years — has resulted in GPs charging almost exorbitant management fees and carrying commissions, while LPs were fishing for multiples that were out of sync with what the market could sustain in the medium to long term.

But as investment appetite has all but dried up, GPs are realizing that they can no longer afford to maintain a predominately opportunistic attitude towards their investors.

“Investors and LPs will be looking for a greater level of alignment of interests which will come in several respects. LPs will require GPs to have more ‘skill in the game’ and more of their own money alongside that of LPs, not just to be asset managers but also to have principle investments,” says Hisham El-Khazindar, managing director and co-founder of Citadel Capital. “There is going to be some pressure on management fees, particularly for the larger funds, as investors ask for the management fees to come down and harder return on investment (ROI) hurdles before PE firms are allowed to carry.”

As far as carries are concerned, the more intertwined the interests of funds and investors become, the less this becomes an issue.

“I don’t think anyone will be negotiating carries now because everyone realizes that there is a full alignment of interests,” says Al Khudairy. In the second quater of 2009 the PE industry will have to reconcile with the idea that unless mutual interests converge, many GPs could find themselves looking for a new profession.

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