At a time when oil prices are half of what they were a year ago, the retail price of gasoline in Lebanon has been stagnant or climbing. For example, in July 2007 when the price of Brent crude was around $78 per barrel, the government raised taxes on gasoline which pushed the price from $14.90 per 20 liters — the standard measurement for gasoline in Lebanon — to $15.64 per 20 liters. This is roughly the same price of gasoline in today’s retail market, at a time when crude sells at around $50 per barrel. Needless to say, this illogical development is confusing for the consumer.

In 1985, then Minister of Finance Camille Chamoun issued a governmental decree abolishing state subsidies on gasoline; so legally the subsidy was removed. However, the government has levied a tax on gasoline, which it increases or decreases at will. When the government decreases the tax, gasoline prices drop giving the feel of a subsidy.

Further exacerbating the situation is that most people in Lebanon rely on private transport. Lebanon’s approximately 1.4 million registered vehicles consume around five million liters of gasoline per day, according to Bahij Abou Hamzeh, president of the Association of Petroleum Importing Companies (APIC) in Lebanon.

Another factor experts in Lebanon point to is unfair competition. “There is an oligopoly controlling gasoline imports to Lebanon and this is the heart of the problem,” says Jad Chaaban, professor of economics at the American University of Beirut and acting president of the Lebanese Economic Association. “The prices are set by the Ministry of Energy in consultation with the APIC. When you have an oligopoly controlling an import sector you cannot pass on decreasing or rising prices with the same efficiency as when you have a competitive market.”

Collusion in a free market

For his part, Abou Hamzeh admits that the association does collude with the Lebanese Ministry of Energy, but insists that the market is open to anyone who has the means to set up the infrastructure.

“We regulate the market in cooperation with the ministry but we have to do it because it’s the only product in Lebanon that has a ceiling for the price,” claims Abou Hamzeh. “The government is setting the ceiling of the price on a weekly basis. This doesn’t mean we cooperate in order to monopolize the market; it’s not what we are after.”

Abou Hamzeh blames the government who earlier this year raised the level of taxes on gasoline to $6.35 per 20 liters of imported gasoline when the price of oil was at around $35 per barrel. Abou Hamzeh adds that the gasoline price ceiling, set weekly, is too low. “The government imposes a ceiling according to the international prices and a small margin to cover additional costs,” says Abou Hamzeh. “This margin does not cover our costs. We cannot continue like this; we are making a loss not a profit.”

Whether or not competition is fair, one thing does remains clear: that the government is making a lot of money. Most estimates are that government revenues from gas tax will increase this year to around $466 million as opposed to $199 million in 2008. On March 19, the Lebanese General Confederation of Labor Unions gathered in front of the Lebanese parliament to protest the high prices and taxes on gasoline and around 150 cars blocked one of Beirut’s main commercial districts.

Tax of necessity

The government, however, seems to have little choice when it comes to removing the tax, since it is already drowning in a sea of debt and in need of more revenue. Furthermore, according to a high ranking member at the Ministry of Finance who spoke on condition of anonymity, the government must keep the higher gasoline tax in place because it has already reneged on two of its other promises made to donors at Paris III: the five to seven percent taxation on bank deposits and the increase of Value Added Tax (VAT). The cherry on top may be that many in the government are reluctant to enact policy due to the upcoming elections in early June.

“When we protest the government tells you, ‘you are right but now we have to have the election’,” says Abou Hamzeh.

Whatever the reasons may be, for the immediate future it seems that the high gasoline prices and price fixing will continue. Once again it seems it will be Lebanon’s people and industries that pay the final price.

Big or small, PE firms in the Middle East are faring much better than most other financial institutions in the region, despite the amount of “dry powder” — i.e. capital called or committed that is yet to be deployed — in the area. Nevertheless, sitting on a mountain of cash and not spending it because you don’t like what you see is more enviable then struggling to pay off your creditors.

The phenomenon of dry powder is not just an effect of the financial crisis and the ensuing downturn, which started to take effect in the last quarter of 2008. Investments by PE firms began to make an about-face around the beginning of 2008. PE investments over the whole of 2008 saw a significant decrease in both number and size year-on-year by 22 and 31 percent respectively, the principle reason for this being that private valuations still seem to be out of touch with public market perceptions.

“At the moment, valuations are generally too high so PE firms are saying ‘give us another six to nine months for them to fall,’” says Robert Hall, head of transaction services Middle East & South Asia at KPMG.

Hisham El Khazindar, managing director and co-founder of Citadel Capital, adds that “in the grand scheme of things valuations across the board are 70 percent of what they were two years ago.”

When the region’s PE firms will start to sprinkle their powder around will, for the most part, depend on how long it will take owners’ willingness to break away from their egos and admit that they are in trouble.

“A contraction is taking place, but certainly we are not seeing the valuations that are in the public sector. We are not in a situation where we see distressed shareholders who are willing to sell at any price,” Christophe de Mahieu, co-head at Gulf Growth Capital at Investcorp, said to The National.

Yahya Jalil, senior executive officer and head of private equity at The National Investor in Dubai, remarks that, “it’s a little bit of an ego thing to admit that things have gone bad; this region is not known for being forthcoming as people like to contain their problems.”

Overcoming egos aside, many shareholders and owners don’t see the point of going into the market.

“People who have been in the market for 20 to 25 years see the blip in the market as very temporary, so they are thinking: why should they off a portion of their equity at these valuations,” says Jalil.

Ammar Al-Khudairy, managing director and CEO of Amwal Al Khaleej Investment Co., says “one private consumer goods company said to me, ‘I brought in one of the big four, they did a valuation for me and said my company was worth $100 million back in August [2008] and nothing has changed since. I sell no less if not more and, in fact, my cost of raw material has come down. So why should I sell for less than 100?’”

The stalemate that is brewing between firms and investors doesn’t seem to be going away anytime soon and it remains to be seen if the same understanding with regards to delaying capital calls will be extended to the firms for much longer.

Stressed out

The possibility of distressed or mezzanine funds is something that many in the industry are starting to look at as a result of the trauma being suffered by many regional organizations. Significantly, the Dubai Financial Services Authority (DFSA) wants the Dubai International Financial Center (DIFC) to consider establishing the Gulf’s first private equity secondary market. This could provide a respite for many PE firms looking to rid themselves of their dry powder.

“The whole issue of distressed assets in this region hasn’t been fully experienced in previous recessions. If you look at what the ‘ultimate’ distress is, which is a company becoming insolvent and unable to pay debts as they become due, then you really haven’t seen much of that yet,” says Hall. “In the recession this time around, the economy is much bigger and there are undoubtedly going to be some companies that will have significant problems. For PE firms this will provide some great opportunities.”

However, for the time being things don’t look that bad and the omnipresent attitude in the region today is not one of going after high risk and high return opportunities.

“Mezzanine capital is definitely more expensive than traditional forms of capital and it works well when valuations are improving and in upward cycle,” says Tamer Bazzari, deputy CEO of Rasmala.

Jalil says, “in the long term mezzanine is a huge unmet need in the region, but for the next year or two I think that, relatively speaking, it is not going to be interesting for investors — the risk profile between mezzanine and secured is night and day.”

With the financial crisis at hand the question is: what are businesses going to do about it? The response many businesses in the region have is to look inwards and improve internal business processes in order to hold down the fort until the onslaught subsides. The next and perhaps more important question is: how will regional businesses restructure their organizations?

Despite the dismal undertone of the business news coming out of the region, there are a few encouraging signs. One sector that is doing surprisingly well as a result of the need for businesses to restructure and improve efficiency is the Enterprise Resource Planning (ERP) industry. According to the International Data Corporation (IDC), ERP growth within the GCC will range between nine and 12 percent, an enormous figure considering many regional states will not grow at all this year.

“We will probably have the best month we have ever had this month,” says Bill Tomlinson, general manager of Dynamic Vertical Solutions, a multinational Microsoft partner that specializes in vertical add-on solutions to Microsoft Dynamics ERP platforms.

Much of this anomalous growth results from owners and managers  realizing that ERPs can increase efficiency for them.

“Before the crisis there was more time and more money,” says Sergio Maccotta, managing director of SAP Middle East and North Africa. “Now companies are taking the opportunity to change, through IT adoption, in order to improve their internal processes.”

The industry itself is also experiencing a paradigm shift in relation to its operating environment. Before the crisis, many regional businesses were hesitant to adopt standard ERP processes, opting instead to fit the system to their businesses or not to adopt one at all. Today, however, the tables have turned.

“What we are seeing that we didn’t see before is that many of the upper to mid-market organizations are coming to us, while we used to go to them and try to prove our solutions,” says Tamer Elhamy, regional business solutions manager at Microsoft Gulf.

What’s on offer?

The ERP companies in the region are increasingly being queried about how their systems can help companies save on the more costly elements of doing business and keep in touch with their customer base.

“People want to manage their [human] resources a lot better now so they are looking for payroll and HR solutions more than ever,” explains Tomlinson. Maccotta adds that, “the money in the market is lower, so in order to secure your portion you have to execute better and stay closer to your customer.”

It should be noted that internally, ERP solution providers are also benefiting from some of the more sinister effects of the global downturn, such as rising unemployment, decreasing real estate valuations and weakening currencies. Although there has been “no drastic change,” according to Maccotta, in the resource pool for providers, there has been a decrease in the acquisition and retention costs of consultants for providers. “The [Indian] rupee rate is at 51 to the dollar, whereas it used to be 39 to the dollar and that cuts 25 percent of cost because I am on dollar fixed,” says Tomlinson. “Another benefit of the crash is that all the rents are down by about half, so if you want to bring in some big people for a project then you can do it cheaper and it’s making our job easier.”

The argument within the industry, however, is centered around the size of the solutions on offer.

“Many of the customers are deciding to adopt an ERP to increase their efficiency but they are trying to start with the minimum number of users and functionalities and taking a step-by-step approach,” says Elhamy. That approach is prompting many people in the industry to predict that smaller and less expensive ERP solutions will be the trendsetters in the future.

“In the global scheme of things, SAP and Oracle’s figures are down because they are too expensive. People are more cash conscience now and are actually exposing the product for what it is,” claims Tomlinson. Perhaps unsurprisingly, that assertion is being bitterly contested by the larger and more complex solution providers.

“I don’t agree when you say we are more expensive because our solution is extremely flexible, as well as scalable, and can fit any kind of business,” counters Maccotta. “We still see a lot of demand and having the vertical competence is putting SAP at a competitive advantage.”

“In order to secure your portion you have to execute better and stay closer to your customer”

Last year food was big news as prices soared globally by 54.9 percent and associated riots erupted in 60 countries. In the Arab world alone the shortage in food sufficiency was estimated at $18 billion by the Arab Authority for Agricultural Investment and Development (AAAID). In the Gulf countries, dependent to the tune of $12 billion a year on imports and with agricultural water consumption at unsustainable levels, the issue took on grave importance. State and private investors promptly started eyeing up arable land in Africa and Asia to secure food for a region that is expected to increase import dependency to 60 percent by 2010, according to the UN’s Food and Agriculture Organization (FAO).

But while food prices and commodities have reduced in the wake of lower oil prices and the global financial crisis, the issue of food security has not gone away. However, it has yet to be seen whether all the touted agribusiness projects will take off as Sovereign Wealth Funds (SWFs) and private investors tighten their belts in the face of the global economic slowdown.

The big issues

The Arab world’s population ballooned 121.9 percent between 1975-2005, while over a similar period, 1980-2004, the region’s food grain and meat production increased by 93 percent.

The shortfall was not overly concerning given access to the free market and that staples such as wheat and rice were fair cheap, at least affordable enough for governments to subsidize. Additionally, countries such as Saudi Arabia, Syria and Iraq were involved in large-scale agricultural projects to boost domestic production.

Saudi Arabia, for instance, spent a staggering $85 billion on agricultural development between 1984-2000, according to estimates by Elie Elhadj in The Middle East Review of International Affairs.

But the cost of such investment has gone beyond budgetary concerns. It is worth noting that while Saudi Arabia was paying up to $500 per ton for domestically produced wheat — when international market rates were around $120 —  to maintain local agriculture some 300 billion cubic meters of water was used between 1980-1999, two-thirds of it non-renewable, says the Ministry of Agriculture and Water. Such a gigantic amount of water was needed to grow produce in the kingdom’s arid climate, which is two to three times more water than required in a temperate climate.

After investing an estimated $16 billion to $18.7 billion over the last 30 years on its wheat program, according to BMI, last year Riyadh decided to phase out production due to water shortages. The costs versus the benefits were no longer sustainable, having been self-sufficient in wheat since the 1980s when production hit 4 million tons per year, Saudi Arabia is now a net importer and as of 2016 it will be totally dependent on imports. Furthermore, with Saudi Arabia joining the WTO, the kingdom has to abide by the organization’s requirement to reduce state support for agriculture to 13.3 percent over the next decade. This will have other knock on effects, such as on the 12 percent of the workforce involved in a sector that accounts for just 3.3 percent of GDP.

The region is losing an estimated one million hectares of arable land each year to salinity

Saudi Arabia is not the only country re-thinking its agriculture policies, with the region losing an estimated one million hectares of arable land each year to salinity, according to Dr. Shoaib Ismail, a halophyte agronomist at the International Center for Biosaline Research (ICBR) in Dubai.

“Twenty years ago there was good quality water everywhere. Now there is one-third seawater concentration in the groundwater and salinity is even higher in other places. Mismanagement has led to more salinity,” said Ismail. “Some 85 percent of water usage in the GCC is for agriculture, the highest in the world. In that sense, the question arises, how feasible is agriculture over here?”

The short answer is that it isn’t. Even producing processed foodstuffs for domestic consumption and export requires water, what has been called the “export of virtual water” and it may have to be re-thought given looming water constraints.

One solution is to use halophytes, plants that grow under high saline conditions, as opposed to glycophytes, non-salt loving plants, an alternative with which the ICBR is involved. But while halophytes could be used to replace more water intensive plants and trees, those plants would not produce adequate amounts of food. It is in landscaping, which accounts for 18 percent of water use in the UAE, that plants and non-conventional grasses can be advantageous, according to Ismail.

Oman is developing a salinity plan and it has invested in a project to clean water from the oil industry, because for every barrel of oil pumped out of the ground seven barrels of water are used. The UAE has also developed a ‘Master Development Plan’ to assess water usage and improve efficiency, such as changing irrigation systems, phasing out subsidies and expanding water pricing to include agriculture and industry.

Desalinization is another touted panacea for the region’s water concerns, but costing between $0.81-$1 per cubic meter, desalinized water is too expensive for agricultural use.

“Building new desalination plants is not the solution, as this warms up the sea and affects marine life,” said Ismail. It also increases the sea’s salinity.

Eyeing pastures new

With wheat prices rising 83 percent last year and other staples doubling in price, governments started eating into their reserves to placate populations which were spending ever-larger proportions of their income on food.

In Pakistan, the NGO Oxfam reported that, due to food inflation, the number of poor has risen from 60 million to 77 million since 2007, while in the Arab world the AAAID predicted some 35 million people were falling into poverty due to high food costs. As the region has an overwhelmingly young population and high population growth, food security is paramount.

For the GCC, the surge in food prices didn’t push people under the poverty line, but it was a contributor to inflationary pressures. And with the population expected to double by 2038 to 60 million people, demand for food will continue to grow at a rapid pace. Saudi Arabia, the Gulf’s most populated country, already imports some $5 billion per year of food and beverage items, according to BMI, and that will figure will spike in years to come.

“Food security is officially defined not just as a shortage, but also looking at availability and affordability,” said George Attala, a principal at Booz Allen Hamilton. “There are a number of ways to ensure supply is always available. One is try and diversify sources, not all wheat from say, Ukraine. Another is look at internal networks, such as imports through more than one port. A third way is storage capacity, of four to six months, while the fourth is to get into contract farming, but that is not always the best solution.”

Essentially, the Middle East is left with two choices. “The region has to import. The question is, invest abroad or rely on the free market?” said Dr Eckart Woertz, program manager in economics at the Gulf Research Center in Dubai.

Last year, Arab states appeared to be opting for the first choice in the face of high food prices, with government missions from Saudi Arabia, the UAE, Qatar, Kuwait, Egypt and Libya visiting Pakistan, Ethiopia, Cambodia, Uganda, Angola, Kazakhstan, Ukraine, Thailand and the Philippines to discuss the possibilities of buying up arable land to cultivate. The private sector also got in on the act, with the likes of the Emirates Investment Group, Abraaj Capital, Al Qudra Holding and the Bin Laden Group reportedly acquiring land in Sudan and Pakistan.

But such policies are not always popular and they are also not necessarily dependable in the long run.

“For the GCC it is a ‘pros and cons’ situation. In the short term it is profitable to buy or lease land, but it also depends on the geopolitical situation. A country may be a friend today, but might not be tomorrow, so it is a dependency issue,” said Ismail.

Last year, the FAO warned that rich countries trying to secure land overseas risked creating a “neo-colonial” system. The concerns were related to Gulf investments in Sudan where only indigenous water and land were used, whereas fertilizer, seeds, equipment and labor came from abroad. It was a similar story in Pakistan.

As Woertz remarked, “the negative case is bribe an African official, then expel locals and pastoralists, so no benefit for the local population at all. There is political baggage.” Furthermore, he added, “the GCC doesn’t have a good track record of labor rights or the environment and these need to be taken into consideration.”

And while the countries being courted may be interested in foreign investment, they also have to feed their own populations. Sudan, for instance, has an estimated 200 million acres of fertile land, yet only 20 percent is being utilized. However, despite 160 million acres of available arable land, the country is importing two millions tons of wheat per year and five million people are dependent on food aid. Similarly, Pakistan is facing problems in feeding its population, as well as losing groundwater to salinity.

But although there are many reports on plans to buy land, there has been minimal information coming forth about these projects, with “transparency limited to media accounts,” said Woertz. “They announce it — billion dollar deals — but it is unclear whether it has taken off and how the private sector has been brought in.”

An additional factor is that discussions to acquire land overseas were began when oil and food prices were higher. “The urgency is not there now and there is less money to throw around,” said Woertz. “The SWFs lost money in the markets and have less revenues, so [acquiring land abroad] may not be such a widespread phenomenon as made out.”

The UAE automobile sector saw sales plunge by up to 45 percent in the first two months of the year compared to 2008, a remarkable downturn from the years of double-digit growth when the $3.6 billion sector was one of the fastest growing in the world.

“The end of the third quarter 2008 was vastly different from the fourth for manufacturers,” said Mike Devereux, president of GM Middle East. “This year we are looking at a decrease overall, with the same daily sales rates since December to now.”

But while the economic slowdown has started to bite, the sector is not sitting on the sidelines until a recovery starts. It has resorted to a change in financing strategy and a greater focus on services to shift units as access to credit tightens and consumer preferences change.

“The financial crisis has certainly affected automotive sales in the UAE, with banks applying more restrictions on financing. And since nearly 80 percent of the UAE’s automotive sales are dependent on financing, this is more evident locally,” said Waldo Galan, managing director of Ford Middle East. Ford, Lincoln and Mercury sales grew 35 percent last year.

As a result of tighter lending, manufacturers and dealers are teaming up with banks to offer zero percent interest on car purchases and making credit more readily available to customers. The most notable change in sales strategy has been the widespread introduction of leasing, a technique dealers had formerly eschewed as car prices were low and customers preferred to buy.

“Financing is a problem so schemes have to be more tactically focused. Screaming the price from the rooftops is not what it’s about, but customer issues. The change is more tactical and less general as there is too much on people’s minds,” Devereux pointed out, adding that: “Lots of people want vehicles but need financing, so we’re focusing on a partnership with the National Commercial Bank (NCB) in Saudi Arabia and in the UAE a car leasing scheme.”

In with the new but not out with old

While enticing customers into showrooms is one concern for the manufacturers, so is keeping dealerships afloat, having ordered vehicles months in advance that can now not be sold or re-exported elsewhere. This has been further compounded by 2009’s models now being on sale, yet there is excess stock of last year’s lines.

“Credit, wholesale finance and bank loans are difficult for dealers. Stock levels for dealers mean reduced working capital so less money in the inventory,” said Devereux. “We will winnow down our inventory and import much less cars.”

And while there is an excess of unsold cars, manufacturers are hesitant to offload vehicles in fleet deals and government tenders.

“We’re trying not to chase unprofitable fleet tenders that we would have done before, as there is little to no margin,” said Devereux. “We are now focusing on the retail business, with 65 percent retail and 35 percent fleet.”

Consumer preferences are also expected to shift towards more competitive fuel efficiency, fewer SUVs and more crossovers.

“While demand for luxury vehicles would possibly see a reduction, quality and value would still remain on top of the consumer’s list,” said Galan. “We believe that consumers will act more out of a rational mindset and look for quality and value for money rather than the emotional drive.”

After sales is a another area manufacturers and dealers are focusing on as sales stagnate — a sector valued in the Middle East at some $11 billion, while the UAE tire trade is valued at $1.1 billion and slated to grow this year.

“There is a big focus now on services, which will be a stable haven in a downturn. Most dealers here are under invested in service capacity and the number of vehicles has increased so quickly,” said Devereux. “There is a need to invest in new services as vehicles are coming into prime servicing years after 2-3 years since purchase.”

While manufacturers continue to monitor the local environment, they are optimistic that revenues will go up next year as supply and demand align, even though it might not be the double-digit figures of the boom years.

“There is a big focus now on services, which will be a stable haven in a downturn”