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Fortress America in Baghdad

by Paul Cochrane
written by Paul Cochrane

Opened in the midst of the slaughter in Gaza and the twilight of Bush’s presidency, the new American embassy in Baghdad garnered less coverage than when its astronomical budget was first publicized in 2005.
The opening was more than the completion of the largest and most expensive embassy in the world. It marked the day the US diplomatic corps moved out of Saddam Hussein’s former palace and handed it over to the Iraqi government, five days after US forces officially came under an Iraqi mandate on New Year’s day.
Many Iraqis are eyeing warily the move from one palace to what is essentially an even larger one. The embassy is far grander — albeit minus the gold plated bathroom fixtures — than anything Hussein ever built during his nefarious reign.
It is on a level of Cold War era grandeur, similar in scope to the colossal project Nicolae Ceaucescu attempted in Bucharest, the centerpiece being a palace the Romanian leader wanted to be seen from space.
The 104-acre embassy complex, which is the size of approximately 80 football fields, nearly turned into a similarly sized white elephant as costs ballooned to $700 million and the project taking nearly two years longer than expected. In that time it became a symbol of the quagmire Iraq has become for the US, with no end in sight and costs spiraling upwards. But with the embassy finished and operational, it now represents the most prominent symbol of ‘fortress America’ today and, moreover, that America wants to stay in Iraq for longer than Barak Obama’s presidency will last.
As the International Crisis Group commented in 2006, “the presence of a massive US embassy co-located in the Green Zone with the Iraqi government is seen by Iraqis as an indication of who actually exercises power in their country.”
Visible from space and larger than the Vatican, the embassy draws historical comparisons to the Crusader castles of the middle ages. All that is missing is a crocodile infested moat around the walls.
But secure it certainly is, nestled inside the Green Zone, with a 4.5 meter thick perimeter wall to protect this city within a city that includes a power station, a water treatment plant, schools, restaurants, swimming pools and a shopping area.
With an annual budget of $1.2 billion, the 5,550 Americans and Iraqis working at the embassy — half listed as security — are certainly not roughing it. The residence of the US ambassador to Iraq is 1,500 square meters, while the deputy chief of mission has a “cozy cottage” measuring 900 square meters.
Tough though a posting to Baghdad may be for the diplomats, State Department, FBI, and federal agents that are to work out of the embassy, it is far from the realities of the “red zone” that lies beyond the walls, of power cuts, broken sewage pipes and violence.
That the US needed a secure site is understandable, given the track record of attacks on US embassies. In Beirut, the Americans are in their third embassy in less than 30 years, while the former US embassy in Tehran stands as a memorial to the overthrow of the Shah, and resultantly the American presence in Iran, the walls covered in colorful murals depicting the US as an oppressor, imperialist and warmonger. As Ayatollah Khomeini said in December, 1979: “This place is not to be considered an embassy but rather a ‘spy center’.” Following the US embassy hostage crisis in Tehran, the US had to resort to the somewhat farcical position of operating out of the Swiss embassy.
A drive past other embassies in the region indicates how seriously security is taken, with the Istanbul compound a veritable fortress, as is the one in Amman, with armored personnel carriers lined up outside and reportedly surface- to-air missiles within the sandstone complex.
But as Niccolo Machiavelli points out in the section on fortresses in that Bible of realpolitik, The Prince, “If they are beneficial in one direction, they are harmful in another.” Indeed, despite US ambassador to Iraq Ryan Crocker saying at the launch that the new embassy is a testimony to America’s commitment to a “long-term friendship with Iraq,” given the US role in the country over the past nearly six years it is hard to see the embassy as a symbol of friendship. Furthermore, with the embassy a fortress, it doesn’t exactly give off the impression of amiability. But that is the Catch-22 situation in which America has placed itself due to its foreign policy decisions over the years in the Middle East. At the same time as presenting itself as a beacon of hope, democracy and freedom to the world, to gain access is akin to entering a maximum-security prison.
As Machiavelli remarked: “So, all things considered, I commend those who erect fortresses and those who do not; and censure anyone who, putting his trust in fortresses, does not mind if he is hated by the people.”

PAUL COCHRANE is a Beirut-based journalist

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Power for a Persian rapproche

by Riad Al-Khouri
written by Riad Al-Khouri

As instability in the region shows no signs of abating, the launch of a dialogue between the new administration in Washington and Iran is seen in the West and the Middle East alike as important for durable peace. While helping to solve long-standing regional issues, including problems like Gaza that affect stability in the Levant and beyond, talks between Tehran and the US could also shore-up the iffy American position in the region.

At the same time, Tehran’s need for friends and partners internationally will nudge it along the path to Washington. As with any sound diplomacy, a new approach to Iran needs sticks as well as carrots. Regarding the former, Germany said late last year that it wanted further sanctions to be imposed against Iran, hitting the bank and transport sectors. The suggested new measures aim to give the incoming US administration further means of pressure on Iran in any future dialogue, offering the carrot of incentives along with the threat of tougher sanctions over Tehran’s nuclear ambitions.
Iran, a leading oil and gas producer, denies seeking atomic weapons and says that its nuclear program aims to provide energy for a growing population when reserves of fossil fuels run out. At first glance, such an argument may appear strange, given that Iran has a massive reserve of hydrocarbons — especially gas, in which it is a world leader. For the time being, however, Tehran’s internal energy equation is precarious, but not because of lack of gas or crude oil underground. Rather, it is a question of politics and pricing.
One problem in this respect is that Tehran’s populist government tries to keep the poor happy through a subsidy system. Direct and indirect subsidies on goods in Iran amount to the equivalent of many tens of billions of dollars a year. However, under increasing financial pressure, Iran is considering a measure that would abolish costly subsidies on fuel and electricity, while compensating poorer people with cash. Currently falling oil prices encourage this and similar steps, which are part of a wider plan to make the country more efficient. Gasoline and electricity, among other basic items, are very cheap in Iran, but if the proposed measure comes into effect, prices of such vital supplies will rise at least fourfold.
Yet the point is being made in Tehran that prices need to become a reflection of real economic forces for the system to be reformed and that 60 percent of the money saved would, in any case, be used to boost the spending power of people with low and middle incomes. One of the basic problems of the Iranian economy is that despite the country’s wealth of varied natural resources, oil revenues still account for 80 percent of foreign currency receipts, making Tehran highly vulnerable to petroleum price shifts. The inability to diversify is partly due to lack of foreign investment and other forms of failure by Iran to engage with the world economy.
Meanwhile, crude output might fall drastically and the Islamic republic could even cease exports because of ageing oil fields and a lack of foreign technology. Crude oil production may drop to as little as three million barrels per day (bpd) by 2015 from over four million last year and the country could even halt petroleum exports (having shipped about 2.3 million bpd overseas in 2008).
Is this unthinkable? No. Without major new investments in Iran, its output and exports of crude oil will surely drop over the next few years. Though the Iranians are the second-largest producer in the Organization of Petroleum Exporting Countries, Tehran faces the prospect of an eight percent annual decline in production over the next decade because of the twin problems of lack of investment and old technology. Sanctions by the West and the tight credit market resulting from the global crisis have continued to cut financing for Iranian projects, while a lower demand for energy has already caused crude oil prices to sink. As a result, Tehran is looking for new partners to develop major projects, but because of sanctions, cannot find them in the technologically advanced West.
One of the problems for Iran’s energy sector is that it extracts less oil from the ground because of lack of adequate projects to enhance recovery. New developments using high technology could help compensate for natural declines in mature oil fields. But unless current impediments facing the oil industry are removed, rising internal demand may force crude exports down to one million bpd by 2015. This makes reconciliation with the West even more urgent.
The alternative is more Western-Iranian enmity, which risks destabilizing the Levant, the Gulf and eventually the whole world.

Riad al Khouri is senior fellow of the William Davidson Institute at the University of Michigan in Ann Arbor

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Death and deceit for Gazans

by Peter Speetjens
written by Peter Speetjens

Whatever happens in Gaza, blame Hamas! That was the official line of Israel’s well-oiled PR-machine and it was largely swallowed by most Western politicians and mainstream media. Hamas started it, so the argument goes, and if you hit someone, you may expect to be hit back. Hit Israel and expect to be hit back hard.
This is of course a quite simplistic view of things. First of all, Hamas did not start it. As Israeli columnist Uri Averny pointed out, the cease-fire between Hamas and Israel held for months. It was Israel that provoked Hamas by sending an army patrol into Gaza killing three Hamas militants allegedly digging a tunnel. Gaza’s ruling party replied by firing a salvo of Qassam rockets into Israel.
Now, one may argue that shooting homemade rockets into Israel is not the most effective way of promoting one’s cause and that it is time to find another method, but one is on thin ice to claim that Hamas initiated the conflict. In fact, as Averny also pointed out, it was predominantly Israel that did not live up to the conditions of the cease- fire, as it refused to lift the economic blockade that has strangled Gaza since 2007.
Nearly every international aid agency last year sounded the alarm. UNRWA reported last summer that half of Gaza’s population lived on food handouts, while unemployment amounted to 70 percent and that 87 percent of the population lived under the poverty line of $2.40 a day. The World Bank last year warned that the Gaza economy ran the risk of “irreversible collapse.”
Yet these gloomy observations hardly made headlines and they fell on deaf ears among Israel’s diehard supporters — and Hamas’ many enemies — who claim Hamas is to blame for the sorry state of Gaza’s economy. The fact that Israel has failed to implement the Oslo Agreement since 1994, long before Hamas even came to power, does not change things a single bit. That’s just politics, stupid!
The 1994 Paris Protocol on Economic Relations between Israel and the Palestinian Authority stipulates, “there will be free movement of industrial goods, free of any restrictions, including customs and import taxes between the two sides,” and “the Palestinians will have the right to export their industrial produce to external markets without restrictions.”
More importantly, the question of who is responsible for what in the latest wave of death and destruction in Gaza cannot solely be answered by determining who started it. Even if Hamas initiated the Israeli attack by firing rockets, that does not justify disproportional military retaliation. No courtroom in the world allows one to endlessly stretch the required link between cause and effect, as the right to self-defense is limited by the principle of proportionality. Yes, Israel has the right defend itself. No, it cannot respond in any way it wishes.
To put it in simple terms: if you hit someone in the face, the recipient is entitled to hit you back. They, however, are not entitled to bring out a crowbar to break both your knees, bomb the electricity plant in which you work and kill your whole family. On January 18, the day Israel unilaterally announced a cease-fire, Hamas rockets over a period of some three weeks had killed three Israeli civilians and 10 Israeli soldiers were killed. Over the same period, at least 1,300 Palestinians were killed, an estimated one third of whom were children. The immense material damage has since been estimated at nearly $2 billion.
Finally, the role of international media, such as BBC and CNN in the spectacle of death was highly embarrassing. Not allowed into Gaza, their reporters stood quite literally on the Israeli side of things. Their job was essentially to read out Israeli press releases and make sure that any accusation of wrongful conduct from Palestinians or the United Nations was countered by a smooth-talking Israeli press officer who, no matter what happened, blamed Hamas.
Israel bombed not one, but four UNRWA schools filled with refugees? Hamas is known to fire rockets from UN sites. Israel bombs a UNRWA truck killing its driver? Hamas is known to have fired at UN trucks in the past. Israel bombed a mosque filled with people? Hamas is known to hide weapons in mosques.
The Western media proudly claim to be objective, as they show both sides of the story. Yet, giving equal attention to both sides of a conflict that is essentially unequal, means taking sides. The war takes place in Gaza, Palestinian victims outnumber Israeli casualties by at least 100 to one and yet the New York Times publishes an equal number of photos of destruction in Gaza and Israel, therefore producing a false impression of the conflict.
To me, the war and its coverage are best summed up by a fragment starring BBC reporter Bethany Bell. Standing inside Israel, she first told us that some 60 air strikes hit Gaza overnight. We see black smoke behind her. Meanwhile, she continued, 12 Hamas rockets were fired into Israel. One of them hit a kindergarten. The kindergarten, Bell said, was empty.

Peter Speetjens is a Beirut-based journalist

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Terror.com

by Mohanad Hage Ali
written by Mohanad Hage Ali

Last November, senior military leaders in the United States took the unusual measure of briefing the president on “a severe and widespread electronic attack on Defense Department computers.” According to a Los Angeles Times’ report, the attack, which was believed to be originating from Russia, targeted combat zone computers and the US central command overseeing operations in Iraq and Afghanistan. Nevertheless, the security services’ primary concern was whether its non-state enemies could acquire the capability to conduct cyber attacks against Western targets.
More than two years earlier, US authorities warned there was a threat, posted on a website affiliated with Al Qaeda, to attack the stock market and banking services online. The threat was apparently issued as revenge for the detentions in Guantanamo Bay. The US Homeland Security Department called it an “aspirational threat”.
The magnitude and consequences of such attacks are best comprehended when the Internet economy’s size is taken into consideration. Internet dealings and transactions today are a vital part of Western economies. According to a University of Texas at Austin study, the Internet economy “supported an additional 650,000 jobs in 1999 as revenues soared to $523.9 billion” in the US alone. The same study, conducted just under a decade ago, noted that even then the Internet economy “directly support[ed] 2.48 million workers, more than the insurance, communications and public utilities industries and twice as many as the airline, chemical and allied products, legal, and real estate industries.” This growth has prompted the Organization for Economic Co-operation and Development (OECD) to ask in a 2008 report, “has the economy become an Internet economy?” The OECD also stated, “increasingly, the largest productivity gains for businesses come from using online networks in some form.”
The online economy is growing to the extent that hacking a single company’s website for a day costs millions of dollars. For instance, BBC news reported in 2004, “three- quarters of UK companies have been hit by security breaches in their computer systems over the past year, costing billions to industry.” It was noted in the same report that “the average computer incident costs large companies $165,000 a time.”
The US warning against Al Qaeda cyber attacks in 2006 held some credibility as the Internet played an increasingly significant role in its operations. The new threat cyberspace poses was also shown when U.K. based extremists used the Internet to recruit other members, including teenagers. Through password protected web forums and chat rooms, they indoctrinated and prepared those recruits to launch suicide operations. Even the explosives used were home prepared according to “recipes” widely distributed on Al Qaeda web forums.
The militants’ success in exploiting the Internet was most apparent in last year’s failed Exeter bombing. Nicky Reilly, a 22-year-old of Irish background, entered the Giraffe restaurant’s toilet in Exeter to assemble his bomb before detonating himself. A slight mistake in his “internet bomb recipe” prompted an early explosion inside the lavatory, which left him with facial injuries. According to the police investigation, militants situated on the Pakistan-Afghanistan border area “groomed” Reilly through online chat rooms to become a suicide bomber. Sitting on his computer for long hours everyday, he watched more than 2,000 Al Qaeda videos, researched possible targets and then downloaded a bomb recipe.
In that same year, the trial of Aabid Hussein Khan’s Bradford terrorist cell exposed the Internet’s extended or unconventional use. This cell, which was plotting to attack the Queen and members of the royal family, not only compiled detailed information about different targets from the Internet, thus lessening the need to physically survey the area, the cell members also allegedly sought recruitment and training from the World Wide Web.
This British online terror saga started right after the Afghanistan and Iraq invasions, with the case of a young Moroccan immigrant named Younis Tsouli — whose online alias was Irhabi 007 — who dazzled the Western intelligence agencies for years before his capture in a tiny West London flat. For two years, Western intelligence services chased the 22 year-old Internet hacker, trying to uncover his real identity. Irhabi 007’s Internet activities involved propaganda, distributing training manuals, instigating others to commit acts of violence, hacking websites and distributing a hacking manual online. He was dubbed “the master” of online attacks, hacking, programming, and digital media design.
According to some reports, Irhabi 007 was making “explosive new use of the Internet,” specifically through websites and password protected forums that “cater for would be Jihadists.” Tsouli disseminated training manuals and propaganda material online, and then began helping radicalized youth to perpetrate attacks.
So far, Internet staged and planned attacks have failed to achieve their goals, but will 2009 be the year cyber terrorism makes its mark?

Mohanad Hage Ali is political editor at al-Hayat newspaper

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Society

IWC – Gianfranco D‘Attis (Q&A)

by Executive Staff
written by Executive Staff

IWC brand manager, Gianfranco D’Attis and famed IWC watch designer Kurt Klaus recently made a stop at Cadrans in downtown Beirut to promote their new Vintage line in commemoration of the International Watch Co.’s 140th anniversary. The Swiss company has a long history in the Middle East. Executive Magazine sat down with D’Attis to discuss customers, sales and strategy.

E What is IWC’s best selling model in the Middle East market?
We have a number of watches in our portfolio. The basic watch range includes the Aquatimer, the Ingenieur, the Pilots and the Portofino. That is the basic entry price, from $3,000 to $10,000. Then we have the manufacture pieces, made with precious materials. These are basically the Da Vinci line, the Portuguese and some complications. The best selling line overall in the Middle East, with about 50 percent of commercial turnover, is the Portuguese. The second best selling line, with 25 percent of the market, is the Pilot. Together they make about 75 percent of the turnover, not only in the Middle East, in fact, but worldwide. These are icon products. These are products that are differentiating themselves from the competition, because they are unique.

E How long has IWC had a presence in the Middle East?
IWC has been in the Middle East for over 30 years. Cadrans has already been working with us for 30 years. Richemont bought IWC seven years ago. Then we started integrating their platforms five years ago. So for the last five years we have been aggressive, expanding in the Middle East, increasing brand awareness, investing in marketing, and investing in boutiques and sales staff. The brand has really been developing quite fast in the last three to five years and it is performing extremely well. We have a team of six people in Dubai and we are constantly expanding. Now we are trying to penetrate the Indian market, which is a very strategic market for IWC in the future. As mature markets will be under pressure over the next two years, we believe that emerging markets will be absorbing the pressure and that they will deliver profits. This will help the brand to balance turnover and performance.

E What are the strongest markets for IWC in this region?
The strongest market is obviously the UAE. We have our largest regional distribution there with two boutiques and about five points of sale. The second strongest market is Turkey, because we also manage Turkey from Dubai. Then immediately after Turkey, you have Lebanon, because the Lebanese like IWC. They like it because it is also a strong brand in Europe, because it is understated, it’s chic, it is more or less what the Lebanese are looking for in a watch.

E How many points of sale do you have in Lebanon?
Right now we have two points of sale. We are working with two partners, Cadrans and Atamian. We are also planning to open a boutique sometime in the next 12 months. When Solidere opens its new addition, we will be present there.

E Does IWC keep the number of its points of sale low in order to maintain brand image?
We are actually reducing the number of points of sale and upgrading existing ones to boutiques. We really want to have a selective distribution network. For instance, five years ago we had 1,200 points of sale around the world and we are reducing that to about 800. The strategy is really to make it exclusive, selective and to upgrade the existing network to boutiques.

E Do you foresee a time when IWC watches will only be available in IWC boutiques?
That would be the ideal scenario. But obviously we need strong partners on our side in these special times. IWC is not a retail brand, IWC is a wholesale brand. That is why we need to find the right balance. Retail is for image, wholesale is to find a new customer that may not necessarily want to come down to a boutique. He likely has a special connection to our partner and we may not be able to reach him.

E What was IWC’s profit for 2008?
We do not publish profits or sales numbers. This is strictly forbidden by the group.

E Is IWC a publically traded company?
Richemont is publically traded. IWC is just one brand within this holding company Richemont. They hold brands like Cartier, Montblanc, Vacheron, IWC and Panerai.

E What percentage of totals sales does the Middle East represent for IWC?
We have aggressively developed the share of turnover in the Middle East. We started from nearly zero percent five years ago and today it is between five and 10 percent. When IWC got its start in the region 30 years ago, it had a small but important turnover. We had very personal relations in the Middle East with certain big families. In Oman, we were producing special quantities for the Sultan; in Dubai we were doing something for the sheikh. IWC was a very niche brand for special families in special quantities. So it was an important market, but the turnover was not very significant.

E What do you see as some of the biggest challenges that IWC will face in the near future in light of the ongoing global financial crisis?
Luxury in general will suffer because people are scared for the future. They don’t know when the economy will turn around. We feel that products in the price range of $7,000 to $20,000 will not be greatly affected and products below $5,000 will be much more affected. So this middle segment will be suffering, but the high-end should remain strong.

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Executive Insights

Talent recruitment for the human capital agenda

by Rabih Abouchakra, Bahjat el-Darwiche & Soon Rabb
written by Rabih Abouchakra, Bahjat el-Darwiche & Soon Rabb

In today’s economic environment it is easy to focus on a company’s financials and ignore what has for the past two decades been an increasingly challenging priority — talent acquisition. Given the number of companies reducing workforce numbers by the thousands or going out of business, it might even seem that human capital is in oversupply. While the immediate recruitment requirements of many companies may be more easily met these days, human capital issues still account for some of the greatest challenges businesses face. Recent Booz & Company research and experience with multinational clients highlight key challenges faced by human capital leaders.

  • Escalating competitive pressures. These include the demand for new skills and capabilities, ever-higher standards for productivity and a less-benign regulatory environment that increases the need for employee education.
  • Labor market changes. These include an aging workforce, a lack of qualified workers in key industries and professions, and Generation Y workers’ expectations for employment relationships.
  • The changing nature of work. These shifts include greater emphasis on knowledge work, the extinction of the apprenticeship model, a lack of linear career paths and increased demand for immediate results.
  • Competition in a “flatter” world. This is shown in globalization, industry consolidation, collaboration across organizational and geographic boundaries and the need for rapid knowledge capture, dissemination and protection.

While these challenges are common across companies, industries and even countries, knowing how to respond to them has been and will be a source of competitive advantage. These challenges are as critical as ever in Middle Eastern and North African (MENA) countries. The global financial crisis offers organizations in the region the chance to build their talent pool. In a region of unprecedented growth that is experiencing talent shortages, it is crucial to invest in recruitment, nurture leaders, and redesign workforce practices to build capability and competitive advantage. Effective recruitment starts with a forward-looking vision and long- term plan for talent acquisition. For the past decade, finding enough of the right people has been a challenge. A key lesson for human resources is to develop “employee insight” by using employee segmentation. Employee segmentation is the basis for modern human resources and customized career alternatives for a diversified workforce. In the MENA, the primary effort has been to recruit and build capacity. Now, with its variety of talent segments (e.g. skilled expatriates, local workforce, interim employees), using employee segmentation may be an opportunity for companies here to build capacity and capability. Understanding employee segmentation is one strategy. Understanding and effectively using one’s brand is a complementary strategy. Employer brands that attract talent often articulate a clear, shared purpose above the profit motive. Few MENA companies take full advantage of employer branding, but those that do will reap the benefits of attracting and retaining the best people. Forecasting talent needs is essential. Organizations must be prepared to act whenever exceptional people appear — even in economic hard times.
One German industrial company, ThyssenKrupp AG, established a special hiring fund in its technologies business. The budget is dedicated to building the talent pool in that specific business and it is separate from the traditional hiring budget. The imperative is to find the talent, hire them and then decide how to deploy them in the business. In highly competitive talent markets such as the MENA region, strategies that focus on leadership, learning and adaptability will be critical to the human capital agenda, while successful leaders obtain higher levels of employee engagement and retention. The best training and learning programs are closely integrated with the business, driving change, innovation and value. While the learning function should resemble a sophisticated, efficient and cost-effective adult education enterprise with measured outcomes and ROI, the individual also takes an active role in learning. This linkage between individual learning and organizational goals is critical, as individuals begin to ask themselves what they need to learn to have an impact on the bottom line rather than being told by managers and trainers.
Human resource’s capabilities, competencies and focus must be tightly aligned with the company’s business priorities. A business savvy HR function will realize that people are competitive assets and will design a compelling strategy to realize that asset’s value. This strategy habituates high performance in the people who work in every function, region and business unit of the company. Saudi Telecom’s human resources strategy, like its operational strategy, is designed around the needs of customers. Using a shared-services model in which human resources is a strategic partner with the business units, human resources professionals think in terms of providing services. Either they are able to develop the right training for customers inside the company or the business units are allowed to obtain the training they need from outside vendors. Human capital development remains at the forefront of MENA’s development agenda. While the region has not been immune to the financial crisis, MENA organizations may still be able to use the crisis to move from more tactical recruitment efforts to developing and implementing a human capital agenda that builds and develops much needed workforce capability.

Rabih Abouchakra is a partner and Bahjat El-Darwiche and Soon Rabb are principals at Booz & Company

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Executive Insights

Ziad Ferzly

by Ziad Ferzly
written by Ziad Ferzly

The Middle East region, especially the Gulf, has experienced a great boom over the last few years. With rising oil prices and ambitious projects, many thought this would continue ad infinitum. However, the global economy has gone into a recession and the Middle East is not immune. The financial market crashes around the world and region have been followed by economic downturns that are having a severe impact on companies everywhere. As people come to grips with this shock to the system, they must adapt to new realities. This recession is real and must be dealt with decisively. Managers need to admit that there is a problem. It is important to avoid getting sucked into collective self-deception, whereby company stakeholders put on blinders and convince themselves that they are immune to the decline and can ride out the storm without consequence. Companies need to be as proactive as possible because the longer they wait, the more difficult it will be to recover.

During the boom, most companies grew, even if they were not professionally managed. Many investors made money whether they evaluated investments properly or not. As the saying goes, a rising tide lifts all ships. Yet things have changed. The wave has crashed. The ensuing flush of the system will help ensure that the stronger, better prepared players are the true survivors. Prudent companies are the ones who take this time to properly restructure their operations. Companies should follow these restructuring guidelines:
• Stabilize the situation — A company that is experiencing significant difficulties should first stabilize the situation. In extreme cases, the goal is to survive long enough to go through the restructuring process in a proper and timely fashion. Generating cash and cutting expenses are of paramount importance. The company should identify major problems and attack them quickly. It should address the root of the problem, not the symptoms.
• Appoint a restructuring team — This is the team that should lead the company out of trouble. With a combination of key internal managers and select outside restructuring advisors, this core group will be responsible for executing the entire restructuring program that will be put in place.
• Gather data — It is important to base plans on real life data collected internally from the relevant groups. Data should be gathered on production, sales, pricing, costs, customers, etc. The company must have a full understanding of the situation. Data will ensure that decisions are grounded in reality, not conjecture.
• Change leadership — Often, there needs to be a change in the top management of the company. Some managers can stay, while others must go. Strong and effective leadership should be established. The company cannot afford to have weak or incompetent management, especially in difficult times.
• Assess capabilities — The restructuring team will assess the company’s capabilities, strengths, and weaknesses. The team will then generate ideas on the options available. There needs to be a match between the capabilities of the company and the options chosen.
• Recalibrate strategy — How does the company create value? What changes need to be implemented? Where is the company headed? The restructuring team should clarify objectives and adjust strategies in a deliberate manner to focus operations and the organization on common goals.
• Develop a realistic plan — After assessment and strategic recalibration, the team should devise a playbook or turnaround plan for the company to follow. The goals should be realistic and achievable given the current state of the company and market conditions.
• Renew organization — The new vision and strategy for the company may require a new organizational structure for better execution. People need to be empowered and, at the same time, held accountable for their actions and decisions. Their rewards should be properly aligned with the company’s long-term performance.
• Improve processes — There are core processes to the business that need to be improved. Other processes might be outsourced. Whether improvement happens in terms of time, cost, or quality, addressing the different facets of the operation will produce a better run organization. This requires a thorough analysis of various processes and matching new processes to the capabilities of the employees in the new organizational structure.
• Conduct financial restructuring — The restructuring plan will inherently have a major financial component in place. Whether this relates to creditors, investors, employees, or suppliers, the financial plan that is put in place needs to go hand in hand with the strategic plan that the team has put in place. Proper financial management is critical to the success of this effort.
• Manage stakeholders — There is a wide variety of stakeholders for companies: from shareholders and employees to suppliers and customers. As the company goes through its restructuring process, it needs to effectively communicate with various stakeholders to make sure that they are aware of what is happening and, when possible, participate in helping the process succeed.
• Measure and show progress — The way to gauge progress is by measuring the results of decisions and actions taken. Whether the parameters chosen are financial, operational, customer-oriented, or otherwise, measuring performance is essential to tracking the restructuring effort. Data should be gathered throughout the process. Showing progress will excite stakeholders and will give the restructuring team the validation it needs to continue with the current plan.
Conglomerates and investment firms should consider a restructuring — as described above — of the parent, holding, or management company first, and then of the portfolio, i.e. the individual companies or investments. The restructuring team needs to:
• Decide on an overall strategy — The team should ask itself: What businesses or industries do we want to be in? Why these industries? What makes us qualified to hold and potentially manage all these companies? What is the right mix of company holdings that serves our overall strategy and goals?
• Review current holdings — The following questions should be asked: Does the current portfolio of companies and investments make sense in light of the prevailing conditions? Do the companies fit within our overall strategy? Are we too heavily skewed in one direction and do we need to make adjustments to our portfolio? Do we want to keep all the companies as they are today or do we want to entertain the idea of corporate transactions such as mergers, acquisitions, or divestitures?
• Set a strategy for each company — For each of the companies in the portfolio that the restructuring team decides to keep, they should put together a targeted strategy depending on internal data gathering, industry statistics, and market conditions. The team should follow the restructuring guidelines highlighted above.
Studies have shown that companies that went through successful restructuring efforts had a few characteristics in common:
• They were low cost producers, and had very efficient operations.
• The management teams led by example. They did what they asked their employees to do.
• They focused on the internal operations of the company addressing issues such as quality, productivity, and differentiation.
• They had an internally consistent strategic plan.
• They had a change in top management, used outside restructuring advisors, or both.
There are many companies that should have gone through a restructuring program over the last few years, but did not realize the need given their apparent success in the market. Now is a good time to act for those companies, and also for others that are experiencing difficulties because of the economic downturn. Many will not make it through this year. Companies need to ensure that they are strong enough, focused enough, and prepared to weather the storm. Those that restructure now will be well positioned to capitalize on opportunities ahead of their competitors as the economy improves. It is time to restructure.

Ziad Ferzly is managing director at Cedarwood Advisors, which provides strategic, financial, and investment management services to companies, investment firms, institutions, and governments around the globe.

 

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Executive Insights

Rethinking private equity – part I

by Imad Ghandour
written by Imad Ghandour

The sharp reversal of economic fortunes in the Gulf has sent all private equity (PE) houses back to the drawing board to redesign their investment strategy. Some are optimistic the Gulf will bounce back quickly, while conservative investors predict this recession will be deep and long and are waiting for the recession tornado to vanish so they can pick up from the carnage good companies at attractive valuations. The bulk of PE houses, however, are focusing on a selected number of defensive sectors to invest in, with the consensus being that education, healthcare, and fast moving consumer goods and related industries will survive the downturn.
Starting with education, this article is the first of a three-part series — which will also run in March and April issues of Executive — covering the dynamics of investing in each of these defensive sectors:

Back to school
Education is one of the largest global industries, yet one of the most fragmented. It is estimated that the global market size for education services is $2.5 trillion and it is ranked amongst the top three industries depending on how you count. Yet, it is one of the least represented sectors amongst listed companies. The largest education company by market cap is Apollo in the US, with a market cap of only around $7-10 billion. Just a handful of companies have revenues exceeding the billion-dollar mark.
Yet education takes a significant chunk of household and government expenditures. In Saudi Arabia, the education and vocational training budget comes second after defense, with more than a quarter of the budget allocated to it. In most societies, household spending on education is only exceeded by accommodation expenses. Furthermore, governments are offering subsidies to investors, and many are privatizing their educational system. This means an even larger pie for private sector operators.
The education sector is divided into several subsectors. The largest and the most fragmented is K-12, or primary and secondary education. Adult education and vocational training come second. Other notable sub-sectors are early childhood education (pre-school) and testing (e.g. GMAT, SAT, TOEFEL, etc).

Cash is king
From an investment point of view, education has very interesting characteristics. It has stable and predictable cash flows: students pay upfront for the service, and once a student enters a school or a university, he is likely to stay there until graduation. In the GCC, population growth and rising incomes imply continued growth in demand, and most likely shortage of supply.
Parents (clients) have limited price influence on tuition and thus tuitions increases are ahead of inflation and margins remain healthy and stable. In the GCC, for example, it is very common to have net margins of 25-35 percent.
The main challenges for institutions are the upfront investment in real estate and recruiting good teachers. Schools and universities, in particular, need a significant investment in purpose-built facilities, and investors have to balance the economics of being close to the urban demand centers and the escalating cost of land as you get closer to such centers. The other challenge is recruiting quality teachers in the wake of a shrinking global population of teachers but a growing population of students. Symptoms of teacher shortage are already evident, resulting in escalating costs.
Given the attractive investment characteristics of education and limited number of investment opportunities, listed educational institutions usually trade in the 20-30 times their earnings. This creates a significant arbitrage opportunity for investors who build new schools and eventually sell them at high valuations.
PE houses are not flocking to education for one main reason: opportunities are scarce. Yet the most creative PE players were able to enter the sector early, and will probably cash out handsomely, even in turbulent times!

Imad Ghandour is head of Statistics and Information Committee, Gulf Venture Capital Association and board member, Maarif Education and Training Holding Co, Saudi Arabia

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Executive Insights

Why Arabs lose the communication war

by Dima Itani & Ramsay G. Najjar
written by Dima Itani & Ramsay G. Najjar

How do we decide who wins a war? Do we wait for the white flag to be raised to declare a winner? Do we count the number of casualties? Do we count the number of survivors? Truth be told, in modern wars, the real winner is the side that wins the “communication war.”

Regardless of the toll a war takes on its victims, what remains in the minds of people once the fighting stops are the headlines. Who can forget the headlines about the massacres of men, women, children and elderly in Nazi concentration camps during World War II? The Jewish people have engaged over the years in massive and structured communication efforts, using powerful messages and impactful channels to portray themselves as the victims of atrocious acts and to remind the world of the horrible ordeal they experienced.
In large part thanks to this communication strategy, Israel today is a forceful and successful “brand” whose image is that of a nation pursuing stability and safety for its discriminated and persecuted people and is thus immunized against the negative publicity stemming from its military attacks. Just like the Jews’ situation during World War II, today Palestinians are facing massacres of their men, women, children and elderly. Unlike Israel and the West, however, who have always treated communication as an imperative and a top priority, the Arab world has yet to recognize the primordial importance of communication, especially in an era of globalization and the eradication of all boundaries.
To see how our region has fared in communicating its message throughout the Gaza conflict, we need to look no further than the TV screens, radios and newspaper front pages throughout the region: the messages that we see, hear and read all use the language, values and sensational rhetoric that appeal solely to the Arab audience. This “preaching to the converted” does little to reach out and change perceptions on the other side of the world. In the case of Arabs, there has been little or no effort made to understand Western audiences and identify what triggers their emotions and stirs their passions, to communicate with them and make a difference in how they see things.
This must change in order to get the message across when targeting communication to other cultures. The Arab world’s communication should use the audience’s language and idioms effectively, touch upon their values and use a discourse that resonates with them. In other words, rather than showing the same tragic images over and over again, and continuously referring to the innocent blood spilt, it would be far more powerful to draw a simple parallel between the children of Gaza and the children of the West, highlighting that while children in the US and Europe were preparing cookies and milk for Santa and waiting for their gifts, children in Gaza were trembling in fear and waiting only to see if they will live to see the next day.
Communicating effectively across cultures requires identifying a painful event in the audience’s history — one that they can relate to on a deeper level — and comparing it to the situation and difficulties faced by their counterparts in the present. Highlighting the likeness to a tragedy that the audience knows and understands goes a long way in creating a sense of responsibility for the current situation and a need to put an end to it for the sake of future generations. What is sad is that in the case of Israel’s communication, they have capitalized on past tragedies in such an influential way that it has given them a retroactive license to slay and shed the blood of innocent people and still be viewed as the victims.
However, even the most creative communication strategy that builds upon all these powerful messages cannot have an impact without the right channels to send its messages through. Although it can be said that the Arab world’s communication is leveraging new media channels along the lines of Facebook, YouTube and blogs, as citizens from around the region continue to upload photos, comments and video of their perspective on the Gaza conflict, even these channels are Western inventions that are merely being copied in the Arab world rather than being pioneered in the region. If the Arab World wants to get in on the communication game, it must work to create and innovate new channels that can grab audiences’ attention rather than trying to go through overused channels only to be drowned out by the endless numbers of other YouTube clips, Facebook groups and blog entries. Until then, the Arab world will continue to be in the backseat when it comes to communication, aggravating this region’s fears that it will never be seen from a just or human perspective.
Even if our part of the world succeeds in consolidating its messages, tailoring these to Western audiences and sending them out through the most impactful and innovative channels, we will still face another major obstacle: layers upon layers of negative prejudice accumulated over years of poor communication. But these prejudices only highlight the imperative need for effective communication strategies and immediate action in order to start tearing these misconceptions down.
Many may argue that regardless of the message, Arabs will never have the leverage or resources to carry out communication efforts that can match the impact of those carried out by the enemy. A strong narrative and story, however, spoken in the audience’s language and using themes that appeal to their deepest emotions can have just as much power as extensive, well-orchestrated, and costly campaigns.
Of course, we cannot ignore the fact that deeply ingrained perceptions seem to persist no matter how civilized or open-minded cultures get, as the side long-envisioned as the victim will always be a victim and the side seen for years as the murderer will always be the murderer. The only way to break this vicious cycle is through compelling communication that opens the door for another perspective.

Dima Itani & Ramsay G. Najjar, S2C

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Finance

IPO Watch – The time that bides

by Executive Staff
written by Executive Staff

As regional capital markets remain volatile, analysts say companies who are contemplating initial public offerings (IPOs) may not find enough takers for new equity in 2009. The IPO market had been a star in the bull markets for the last several years, but had lost its charm by mid-2008 and is likely to face bleak days ahead in 2009.
On the upside, there is still a large number of planned and announced IPOs for the first half of 2009. According to reports by Zawya Dow Jones, there are over 40 companies scheduled to launch their IPOs in the first half of 2009. Some market watchers are guardedly optimistic about this flotation pipeline, saying that investors’ sentiments are improving.
For the moment, however, all indications suggest that investors and capital seeking companies alike continue to remain on the sidelines waiting for capital markets to stabilize before they go after IPO opportunities in the region. A good example is that of Kuwait-based Burgan Bank, which cancelled its plans for a $697 million capital increase after the authorities decided against issuing a decree for the increase for reasons, observers say, “related to the turbulent regional and global market conditions.”
While there is no consensus as to when IPO activity will recover, however, announcement about new IPOs in January show that confidence in the IPO market is being built tick by tick. January witnessed the announcements of six new IPOs — much lower than the monthly average for most of 2008, which was around 10 IPOs.
“Companies are preparing for IPOs because the long-term strategic rationale for such transactions has not changed,” said Phil Gandier, a partner of transaction advisory services of Ernst & Young Middle East. Many companies are likely to push ahead with their plans in 2009 despite the global economic meltdown, Gandier added in a report in January.

Fresh announcements
Saudi Arabia, the region’s largest economy, which accounted for 78 percent of the cash raised through flotation in 2008, will be the host of an IPO of Etihad Atheeb Telecommunication Co. The company, one of three firms that were licensed to run a fixed-line network in Saudi Arabia, said it will offer 30 percent of its shares to the public in accordance with rules for new telecoms operators. The company scheduled its public offering to start on January 24 and to conclude on February 2, as it seeks to raise $80.08 million.
Also in line with regulatory requirements in Saudi Arabia, Al Alamiya for Commerce and Services, part of the Royal and Sun Alliance Insurance Group, is preparing to launch an IPO after it was granted a royal decree to operate as a licensed insurer in Saudi Arabia, the firm said.
While the measure is mandatory, sources close to the company say that they are optimistic that the offering will do well. Another insurance firm taking the dip after it was recently established with a capital of $53 million is the Global Company for Cooperative Insurance. The company did not provide details about the floatation but it was established by Riyad Bank who owns a 30 percent stake. The IPO is scheduled for the second half of 2009.
Moving to the most battered economy in the region from the global financial crisis, the UAE provided several announcements. The Kuwait-based Esdarat Holding Company plans to list on Nasdaq Dubai in the second half of 2009 to fund real estate development projects worth $2.8 billion. Although the company did hint at an IPO in June of 2008, instead it chose to go with a private placement first raising $110 million with Emirates NBD Capita in December.
But the amount raised in the private placement was only 37 percent of the original target of $300 million. “The management decided to raise the remaining amount though an IPO,” said Imad Awad, director and head of Equity Capital Markets at Emirates NBD Capita. Esdarat plans to launch the IPO in late 2009.
Mawarid Finance, a provider of Islamic credit and financing activities, said it will offer its shares to the public in 2009. The company will be listed on the Dubai Financial Market. Although there were no clear details as to the offering, the company’s CEO Mohammed Musabbeh Al Neaimi, told the press, “We intend to offer between 25 and 30 percent of shares to foreigners after getting approval from the general assembly.”
Meanwhile in the Levant, Syria finally launched the Damascus Stock Exchange in mid-January and is scheduled to begin experimental trading on the 29th. The launching of the exchange comes after a two year delay.
Among the first companies to be listed and the first brokerage firm to be licensed in Syria, Al Adham Foreign Exchange Company, said it will offer 70 percent of its shares to the public seeking to raise $3.69 million. It will offer 350,000 of its shares at a par value of $10.90 each. The remaining 30 percent will stay with the founders. The IPO will run from January 18 to February 6, a statement said.
Following suit, Syria’s Noor Takaful Insurance Co. also announced that it launched an IPO to sell 50 percent of its shares with an aim to raise $16.3 million. Noor has a capital of $31.5 million and is offering 1.5 million shares at $10.90 each. Noor Takaful Insurance is 20 percent owned by the Kuwait-based Noor Financial Investment Co.
Also in the Levant, Lebanon’s flagship carrier, Middle East Airlines (MEA), appears to be on and off the IPO bandwagon. Initially, MEA was scheduled to float its shares on the Beirut Stock Exchange (BSE) in 2008. But due to political instability the plans failed. And now, MEA’s Chairman Mohammed El Hout, said the company will not list its shares in 2009 due to the “unfavorable” market conditions. “We will not list part of the airline’s shares on the BSE because projections in the markets do not look very promising,” Hout said.
As far as IPO and stock market debuts, the MENA region started the year with a definite dry spell. The only noteworthy events in January were three rights issues in Kuwait and Egypt, while another rights issue on the Egyptian exchange appears to have been withdrawn. The two capital increases on the KSE accounted for almost 99 percent of the aggregate value of rights issues companies offered in January. Kuwait’s Abyaar Real Estate closed a 100 percent rights issue worth $242.5 million on January 8 and construction group MENA Holding launched its rights issue worth $316.8 million on January 13.

I see the tunnel, but where’s the light?
The IPO market in 2009 will be slow, but the few issues that come to market may provide significant returns, experts say. With many regional economies set to experience substantial growth this year it appears that 2009, or at least the second half of it, will offer fresh hope as far as new IPOs are concerned.
“With IPO volume low, many investors will be tempted to ignore the IPO market altogether as we move into 2009,” writes Renaissance Capital. “This may be a mistake. Historical precedent suggests that IPOs in periods of low issuance can generate very strong returns as companies are forced to become more realistic with their proposed valuations in order to successfully raise capital, thereby creating opportunities for investors.”
As can be surmised by the number of IPO announcements for January and the overall number for the first half of 2009, some industry players believe IPOs could pick up by the middle of the year. The MENA region is expected to possibly lead the bulk of IPOs globally in 2009.
Observers rightly point out that the region is where the faster growing companies reside. These companies need to tap the capital markets to fund expansion. As such, improved activities in the IPO market might be a clear indication that the doom and gloom of 2008 will soon be history.

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