Finance

Investment – Past the wreckage

by Executive Staff
written by Executive Staff

What do you say to an investor who has just seen a significant chunk of his equity investment drain away this year? “It’s true that the best time to invest in the market is the worst time to raise funds,” said Joe Kawkabani, head of equity asset management at Algebra Capital, which recently launched a new fund with Franklin Templeton Investments.

Only a sixth of the funds tracked by Zawya are in the green this year, with an overwhelming majority sinking in red ink. Yet the appetite of investment fund managers to source new funding has not disappeared. In November 2008, Holland’s ING Investment Bank launched ING Invest Middle East and North Africa Fund, at a time when some of the region’s most liquid markets were down by more than 60 percent.
“We aim to have assets under management of between $500 million and $1 billion,” said Fadi Al Said, head of equity for the Middle East at ING Investment Management, although he admits that most of the funds will come in early 2009 as some clients put a freeze on investments through the end of 2008.
Clearly, these are not ordinary corrections in the regional stock market and it is not surprising that even most moneyed investors are counting their losses and licking their wounds. “There is a wait-and-see approach as nobody wants to catch a falling dagger,” says Kawkabani. “Investors want to cross the big psychological barrier of this year [2008] before taking decisions.”
Led by global markets, investor sentiment in the region has collapsed, writes Credit Suisse in a gloomy report on the crisis that has engulfed regional markets. “Driven initially by foreign institutional investors deleveraging, local entities have also unwound positions. Retail investors have also joined the wave but as in previous occasions, they have lagged behind and suffered from margins calls and a depleting capital base.” There is also anecdotal evidence of capitulation across the GCC markets as investors unwind their levered positions and succumb to the consensus that earnings will weaken substantially next year, says Tarek Fadlallah, executive director at Nomura Investment Bank, in his recent report ‘Nowhere to Hide’. “The GCC markets have lost a combined trillion dollars in market capitalization from their individual peaks and aggregate valuations have become more alluring,” he noted.
Despite the market’s travails, we may be close to a bottom. Certainly some fund managers are taking the long view. “The MENA region is expected to grow at a strong pace in the coming years due to the rise in massive infrastructure spending and the emergence of business sectors, such as logistics, banking, construction, petrochemicals and fertilizers,” says Kawkabani.
Meanwhile, Kuwait’s Global Investment House has secured licenses to launch three new funds, while hedge fund manager Brevan Howard Offshore Management has listed two funds on Nasdaq Dubai exchange, showing that many investment houses are braving the storm and not allowing current market sentiment to derail their long-term plans. As Fadallah wrote, “Market excesses correct — eventually and always. It’s not doom and gloom, just a new paradigm.”

Yadullah Ijtehadi is the managing editor of Zawya.com

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Free markets – Liberty’s loss

by Michael Young
written by Michael Young

Two-thousand and eight was not the best of years for capitalist culture. The world financial system took a substantial hit starting in October, there is widespread fear that this will lead to a lengthy recession and government intervention in troubled economies has become not only publicly acceptable, but actively encouraged by many. The free market is more often these days viewed as a fount of greed than as a mechanism for the efficient regulation of human relations.

As for that other facet of capitalist culture, liberty — whether political, cultural, social, or otherwise — it has been knocked well down the agenda in inter-state relations. That can be put at the door of the Bush administration’s failure to move much beyond rhetoric in its so-called “freedom agenda” for the Middle East, but more broadly because of the widespread skepticism the administration elicited. The world is happy to see George W. Bush go and therefore everything he was associated with seems to be fair game for dismissal — the baby with the bath water.
That’s a pity, because while the Bush administration largely came up short in its support for democracy, and while the abysmal postwar planning in Iraq virtually ensured the United States would not soon attempt again to put dictators on the spot, for the first time in decades the ideas of liberty and democracy were actually being discussed. Bush may have ended his term in office by supporting the old despotisms of the Middle East, but he did remove a mass murderer from power in Iraq and replace it with something far more pluralistic. In Lebanon he did, along with France, push for a Syrian military withdrawal that ended 29 years of hegemony by Damascus — wherever the present uncertain aftermath leads.
All the signs are that the new Obama administration in the US, while its differences with Bush when it comes to the Middle East may be less flagrant than many were led to believe, will be even less concerned about placing democracy and human rights at the center of its regional policy. Many of those in the next administration served under President Bill Clinton, whose wife Hillary will be secretary of state, and if the Clinton years were any indication, we may see an administration devoted to the status quo regarding liberty.
When it comes to the markets, things are likely to be rather different. Thanks to their majorities in both houses of Congress, the Democrats have an open highway when it comes to state intervention in economic affairs, and now a rationale for doing so as the markets buckle. The Republicans were no slouches in expanding the federal government’s powers over the economy, or over the lives of many Americans in the so-called “war on terror”, but the Democrats are supported by constituencies that will make economic intervention far more likely and extensive.
While these two developments — a greater ability to play with free markets and declining interest in the promotion of liberty — are worrisome, they are also taking place in a very different context than when Bush entered office eight years ago. The talk in the past two months on Western governments having effectively “nationalized” their financial sectors by buying stakes in troubled companies, or injecting them with capital, is laughable. Ultimately, the success or failure of this policy will be judged by market forces, by whether these interventions are deemed efficient by the societies involved and by whether salvation’s price was worth the payback. In all likelihood, regulatory frameworks will be tightened across the board, but the aim will be to avoid persistent interventions since few states can afford massive bailouts. The real question in the coming year will not so much be whether the free market is discredited — it will not be — but whether states can impose the proper balance between allowing markets to function efficiently and what their societies will demand from them when it comes to stabilizing the markets. The fear is that too much intervention demanded may undermine free markets.
More uncertain is the fate of liberty in the near future, particularly political liberty. When it comes to that issue, both the US and Europe remain wary of challenging their allies or business partners on matters of democracy or human rights. In the Middle East in particular, the Bush administration’s “freedom agenda” all but collapsed after 2005, as Washington was compelled to rely on alliances with leading Arab autocracies to contain Iran and to stabilize the situation in Iraq. Ten years after the start of the Barcelona process the Europeans essentially admitted, in 2005, that the democratization facet of the project had failed among their southern and eastern Mediterranean partners. The EU was forced to admit that economic liberalization in no way guaranteed more political openness.
With those failures in mind, the likelihood in 2009 is that liberal democracies will push ‘liberty’ to the background. As they work to find the right dosage to rejuvenate free markets, expect much less interest from the US and Europe when it comes to bolstering free societies.

Michael Young

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Shoes, footprints and carbon tax

by Peter Speetjens
written by Peter Speetjens

December 2008 was dominated by shoes and footprints. At an anti-government protest in the Icelandic capital of Reykjavik, Sirry Hjaltested said that her grocery bills had gone up by half in recent months. She blamed the country’s bankers for the ruined economy. “If I met a banker,” she told the Economist, “I’d kick his ass so hard, [that] my shoes would be stuck inside.”
From now on George W. Bush’s Iraqi footprint may be measured by another man’s shoes. As a ‘goodbye present’ in the name of the Iraqi people, TV-journalist Muntadar al- Zaidi hurled his footwear at the outgoing US President who, it must be said, dodged the attack perfectly.
Still, as the pair of size-tens was sent flying during a live press conference, its impact is likely to be felt for years to come. The shoes were an instant hit with US comedians and talk show hosts, while the Internet’s merciless all-seeing eye, Youtube, claimed over 5 million viewers within days. EU leaders and President-elect Barack Obama may have giggled in private upon seeing the incident, yet in public were occupied with quite a different kind of footprint.
The EU adopted a plan to fight global warming by reducing its 2020 CO2 emission levels by 20 percent compared to its 1990 carbon footprint. As so often with these grand scenarios for the earth’s well-being, satisfied politicians are quick to pat themselves and each other on the back, while environmentalists call the result a “sell-out.”
“These are the most ambitious plans in the world” and “we mean business,” the triumphant European Commission President Jose Manuel Barroso told the press, while French President Nicolas Sarkozy termed the deal “historic.” Organizations such as Greenpeace and the WWF had a slightly different view. According to them, it was “a black day” that saw leaders choose “private profits over the will of European citizens and the future of their children,” as European industries get free emissions permits when facing a five percent cost increase.
On the other side of the Atlantic, US Presidential elect Barack Obama presented the political team that in the coming years is to formulate a sound energy and environmental policy. Obama set the stakes high. Acknowledging that past US governments, both Democrat and Republican, have failed to live up to expectations, “this time must be different,” he proclaimed. “This [fighting global warming] will be a leading priority of my presidency and a defining test of our time. We cannot accept complacency nor any more broken promises.”
His most promising appointment is no doubt Dr. Steven Chu as energy secretary. A 1997 Nobel Prize Winner, Chu is Professor of Physics at the University of California, where he has pushed academics and industry scientists to work on biofuel and solar energy technologies. Unlike a major part of the US Republicans, Chu believes that a decrease in burning fossil fuels is essential to combat global warming.
Although few people will disagree that Chu seems the man for the job, it remains to be seen if he and Obama can make a major impact. It is no exaggeration to state that the environment is but the latest victim of the global financial crisis and economic downturn. With profits falling and jobs vanishing, who needs an extra burden and who is willing to lose votes over a far-away Arctic meltdown?
And yet, the Americans and others have got some work ahead when it comes to reducing their carbon footprint. While the world average carbon output amounts to about four tons, the Americans emit 20 tons per person. As a political solution is not on the horizon any time soon, some people may opt to at least reduce their own footprint. That, however, may be easier said than done.
Last June, MIT professor of Mechanical Engineering, Timothy Gutowski, asked his students to compare the energy consumption of people in different socio-economic classes. A total of 18 different lifestyles were chosen ranging from vegetarian students to professional golfers. Interestingly, the researchers found that even Americans with the lowest energy usage, including a homeless person, a five-year-old child and a Buddhist monk, still had a carbon footprint twice the size of the average global citizen. This is because the services provided for every American, including infrastructure and public services, guarantee a minimum that no American can drop below.
However, the research found that as income rises so do emissions. Bill Gates, who was taken as a case study, had an estimated carbon footprint of about 10,000 times the American average, as he flies around the globe in his private jet. The study concluded that voluntary reductions by most people are unlikely to make much of an impact, yet considerably more can be done by the wealthy. Gutowski suggested that the best way to lower footprints is to tax carbon use.
Now there’s a shoe for the American president.

Peter Speetjens is a Beirut-based journalist

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How the West was humbled

by Paul Cochrane
written by Paul Cochrane

The double whammy of the subprime market crisis followed by the deepening financial crisis has seen a remarkable change in fortunes among the vanguard of economic power. Recall British Prime Minister Gordon Brown’s visit to the Gulf in November to essentially beg for money to help shore up Britain’s ailing industry.

Not even a year ago, such a trip by the leader of one of the world’s leading financial centers — and accompanied by 27 senior business executives — would have been unthinkable. Rather the trip would have been about cementing economic relations, making some speeches about the value of the free market, a veiled reference to democracy and the hopeful flogging of British goods, services, and weapons.
But these are different, more difficult times and pride is making an exit, replaced with knitted brows and forced smiles of gratitude — if the money is made available.
And perhaps rather unsurprisingly, there are elements among this increasingly dishevelled elite that are not happy about this change, particularly when it comes to non- Western entities buying up landmark buildings and sizeable assets in Europe and the USA. The British popular press is a glaring example, which appears unable to accept the shifts in economic power, with regular commentaries and articles bemoaning such ‘humiliation’ on the world stage. Gulf sovereign wealth funds (SWFs) have come under particular criticism over the past year and a half, due largely to knee-jerk jingoism of the sensationalist kind. Take this example from an editorial in The Daily Express in November: “There is mounting concern about individuals and sovereign wealth funds in the Middle East that are buying into key British businesses… Now they are buying out our assets, our country, with our own money. It is a sad, sickening prospect.” That a change in fortunes affects the psyche of a former world power is somewhat understandable, though there is little need to bite the hand that feeds you. But such resentment has been around for quite some time and recent changes are no exception. One notable factor in this new alignment of the financial stars is how pragmatic political leaders are in comparison to popular sentiment. Just think back a few years to Dubai Ports World’s attempt to acquire the rights to run American sea ports. The Bush administration was all for it, whereas US media made a mountain out of a mole hill. Newspaper cartoons depicted terrorists hidden inside containers, Arabs dressed in jelabas turning a blind eye to dubious cargos sailing past the Statue of Liberty and all the old, staid Orientalist clichés were dragged out. They seemed to confirm what the Arab world has long suspected, that Americans and the West view Arabs as untrustworthy and as potential terrorists. The Dubai Ports episode was a particularly virulent case and the emirate did well to back out quietly without making a fuss. The spate of SWFs buying up assets and icons over the past year is being taken in a rather different light, but is nonetheless seemingly dependent on the acquisition. After all, Manchester City’s supporters couldn’t have been more enthusiastic about the Abu Dhabi United Group for Development and Investment purchase of their soccer team this year. But when it came to Abu Dhabi’s SWF pumping some $7.5 billion into Citigroup and Kuwait investing in Merrill Lynch a year ago, up went the cry of the barbarians at the gates and concern over vested political interests. As if Western multinationals, the International Monetary Fund (IMF) or the World Bank don’t have vested political interests everywhere they operate! But as with jingoistic attitudes having to change, so it looks as if the West’s dominance of the IMF may also have to adapt to the fallout from the financial crisis. The fund is looking to the Gulf’s finances — with oil producing countries generating some $1 trillion over the past few years from high oil prices — to help the IMF’s bail out packages. In return, Gulf countries will want more than just a seat at the IMF’s table; they will want to have an actual role in the fund’s decisions. As Brown said in Abu Dhabi, “I very much accept the argument that countries which do contribute in this way should have a greater say in the overall governance of the IMF.” Whether this will happen, and to what degree, will have to wait until the next meeting in April. And as for the Gulf helping to shore up British business — despite the reservations of the popular press — Brown’s visit helped to land $1.5 billion in deals, while Barclays Bank bypassed a handout from the British Treasury through a $11 billon stake from the Abu Dhabi royal family. The times are changing and hopefully so will attitudes as the axis of financial power starts to shift.

PAUL COCHRANE is a Beirut-based journalist

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Iraq’s northern Cinderella

by Riad Al-Khouri
written by Riad Al-Khouri

With the Crash of ‘08 ushering in the 2009 worldwide slump, it is clear that the economic crisis will hit richer countries more than others. According to the Organization for Economic Co-operation and Development (OECD), 2009 growth estimates for the United States, Iceland, and Switzerland, are respectively -1 percent, -9 percent and zero percent, while for China, India, and Indonesia they are eight percent, seven percent and five percent. In the European Union, it is noteworthy that wealthy Holland and Britain are set to do badly next year, with projected growth of zero percent and -1 percent respectively, while relatively poor Slovakia and Poland are due to expand at four percent and three percent. Though this is not an absolute rule — for example lowly Portugal will not do well in 2009, growing at zero percent, while better off Slovenia is set to expand by two percent. It is interesting to see how some economies with sophisticated securities exchanges have got into a mess, while less advanced countries avoided such hassles and as such could grow more. Of course, the correlation is imprecise, but for once 2009 may be a case of the rich not getting richer, while the less well off do relatively better. This phenomenon might also be observed in the Middle East, where the free-wheeling Dubai and Kuwait, for example, have not done well over the past few months and do not enjoy a rosy short-term outlook, while poorer areas in the region are less affected and might perform relatively better next year. The economies of Syria and Yemen have not nosedived, nor has there been a share price crash in Damascus or Sanaa for the simple reason that they do not have stock markets. Kurdistan in the north of Iraq may be just such a Cinderella economy in 2009, going from neglect to becoming something of a star. Baghdad and other parts of central and southern Iraq are unstable, but the Kurdish province in the northeast is another story. For a start, there is security and a low crime rate, with a prison population of about 1000 in a region where five million people live. The comparable ratio in the US is 50 times higher.

Politically autonomous within Iraq, Kurdistan has lots of potential. The province enjoys abundant natural resources and advantages, including a pleasant climate, fertile soil and high oil reserves. Growing investments in housing, tourism and industry have come to the region in the past few years and there is also great potential in other sectors. Vital petroleum reserves are abundant, a main attraction for investors. Only about 10 percent of the region has been explored and there is probably a lot more oil waiting to be tapped. Additionally, oil production costs are among the lowest in the world, with vast deposits of petroleum lying close to the surface in much of the province. Kurdistan is also abundant in cattle, sheep, cereals, fruits and vegetables. The province is now developing the infrastructure to get these and other products to regional and world markets, with new highways being built and others under repair. One problem is underdeveloped air transport, especially important for the landlocked province. However, with a major airport expansion project in the regional capital of Erbil set to come to fruition very soon, Kurdistan will open up to tourists and investors alike. Though already served by several carriers such as Turkish airlines, Royal Jordanian, Austrian and Emirates — as well as Iraqi Airways — the big new airport opening in Erbil in 2009 will make it easier for businesses to operate in Kurdistan, as well as promote it as a tourism destination.
Kurdistan has a lot to offer. Erbil is one of the oldest continuously inhabited cities in the world and boasts a huge citadel designated by UNESCO as a major historic architectural site. Yet, for that and many other spectacular natural or historic areas throughout Kurdistan to attract tourists, hotel facilities need to be upgraded. Although several international five-star hotel brands will arrive in Kurdistan next year, most notably the German company Kempinski in Erbil, the province still has some way to go in the development of tourism. In these and other areas, with Arab money pulling out of world bourses, the province could become a regional investment magnet. For Kurdistan, war could be a thing of the past and like its poorer neighbors in the region, it may be on the road to economic development in 2009, despite the world crisis.

Riad al Khouri, co-founder and principal of KryosAdvisors, is senior fellow of the William Davidson Institute at the University of Michigan, Ann Arbor

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Editorial

The new beast of burden

by Yasser Akkaoui
written by Yasser Akkaoui

It’s easy to do well in a boom, when the money runs almost as freely as champagne, and when investors feather their nests with the profits of successful speculation. This was never more so the case than in the GCC, where oil money transformed the local capital markets into the biggest bull on the Arabian block.

After the booming bull has come the bear of bust. It is a bitter pill to swallow, especially when it has not been our fault. The inescapable truth is that business cards from the world’s blue chip banks and finance houses have lost their luster — rogue hedge fund investor Bernard Madoff saw to that when his $50 billion scam wiped out the asset portfolios of some of America’s most powerful investors. A well-cut suit, a Harvard MBA and a Manhattan employer are no longer enough to get people to part with their money.

For the time being at least.

All of this means that in 2009, a year in which we can expect the champagne to dry up, CEOs will have to prove their mettle by showing their respective boards that they can step up to the plate and deliver real solutions in this era of change — for there will be massive change and we are not just talking about the global recession. The whole financial dynamic has shifted, as has the flow of global investment.

We were once told that every dollar would return to the US, but now the dollar is leaving America and taking up extended residence in China, in Russia, in India and in Brazil. No one saw it coming, but the flaws in the US free trade agreement are coming back to haunt the architects of its design.

The implications of all this need to be taken on board. CEOs will have to reacquaint themselves with the basics of macroeconomics and devise micro-strategies to maintain their companies’ competitive edge. And they must do this within the parameters of good corporate governance, sticking to their mission and managing ethically.

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Financial Indicators

Global economic data

by Executive Staff
written by Executive Staff

Thinkforce

Researchers per thousand employed, full-time equivalent, 2004 or latest available year

Researchers are professionals engaged in the conception and creation of new knowledge, products, processes, methods and systems, spanning civil, military and business interests. Latest figures show nearly four million R&D professionals in the OECD area, of which about two-thirds are in the business sector. That makes about seven researchers per thousand employees in the OECD area, compared with 5.8 per thousand in 1992 for instance. The number of researchers has increased over the last two decades. Finland, Japan, New Zealand and Sweden have the highest number of research workers per thousand persons employed. Outside the OECD, China has also seen growth, but at 1.2/1000 in 2004, remains relatively low.

Women in parliament

OECD countries, 2006

Women political leaders are a rarity in OECD countries, but did you know that men still vastly outnumber women in all the world’s parliaments? Nor can country differences in wealth explain much, for as a neat little OECD booklet called ‘Women and Men’ points out, women hold close to half the seats in Rwanda and Sweden and about a third in the Nordic countries, Cuba, Costa Rica and Argentina. In nine OECD countries at least a third of parliamentary seats are held by women. The Nordic countries and the Netherlands stand out, with more than 35%. In most OECD countries, though, women hold under a quarter, with 15% or less in Italy, Japan and the US.

Educating medics

Number of medical graduates per 1000 physicians, 1985 to 2005

Ageing will boost demand for health care, but as health care professionals are ageing, how can that demand be met? Even with no growth in demand for doctors, retraining of new medics is needed to replace those leaving or taking a break from the profession. That retraining requirement rises sharply when there is some growth in demand for staff, say, as people get older. However, medical graduation rates have been declining over the past 20 years, as the latest OECD Health Data 2007 shows. The average graduation rate for doctors was about 34 per 1000 practicing doctors across the OECD area in 2005. This is too low to meet the expected increase in demand, and raising pressure to bring in doctors from poorer countries where they are badly needed.

Public debt

As a percentage of GDP, 2006

In the 1990s a general government debt of 60% of GDP was one of a handful of targets European governments selected as preparation for economic and monetary union, and eventually the euro. As well as central government, it includes debt of local and regional governments, for instance. General government debt had eased in many countries, but, has risen again in several countries on the back of higher global interest rates. The euro area average stood at 76% in 2006, with Italy’s at over 100% of GDP, and no less than seven of the euro 12 easily overshooting the original 60% mark, including Germany and France. It is interesting to note that these countries have also had unspectacular growth. Fast-growing countries such as Ireland and Luxembourg, as well as Korea, were among those countries with the lowest government debt. US debt stood slightly above 60%.

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Banking & Finance

Money Matters by BLOMINVEST Bank

by Executive Staff
written by Executive Staff

Regional stock market indices

Regional currency rates

$1.9B for Cleveland Clinic in Abu Dhabi

The Cleveland Clinic project on Abu Dhabi’s Sowwah island has been granted to a joint venture between the local Arabtec Construction and Greece’s Aktor. The design and construction contract has been estimated at AED7 billion ($1.9 billion). The new project will include a 360-bed hospital and a 324-room clinic. The total area of the project will be 417,000 square meters and will include parking space for more than 3,000 cars.  The clinic is scheduled to open in 2011. Local developer Aldar Properties is managing the construction on behalf of the government-controlled Mubadala Development Company and the consultant is UK’s Driver Consult.

Emaar awarded $100M Cairo project

Emaar’s Egyptian subsidiary, Emaar Misr has won a contract to develop and project manage a 2.2 million square meter social housing project on the Cairo-Suez road. With homes of 70 to 90 square meters, the city is planned to have the largest possible number of residential units in a given area. The project will also create job opportunities in line with the socio-economic growth objectives of Egypt. The new project will be called the Sheikh Khalifa Bin Zayed Residential City after the president of the UAE.

Iraq to cut budget spending in 2009

Since oil revenues constitute around 94% of Iraq’s budget receipts, Iraqi Finance Minister Bader Jabr Solagh is considering more cuts in budget spending in 2009 as oil prices are expected to fall further. The budget was prepared on the basis of oil  prices at $50 per barrel with exports reaching 2 million barrels per day. Moreover, the plan will allocate $15 billion for investments and $2 billion for reconstruction of the oil industry. In addition, $8 billion will be reserved for security and another $650 million will be allocated for water distribution projects. In total, this will lead to a forecasted budget deficit of $15 billion in the coming year. On a parallel front, Iraqi finance minister pleaded with the Chinese government to write off the remaining Iraqi debts worth $8.5 billion as a goodwill gesture to support the Iraqi people and government. In a related note, General Electric Co. (GE) signed a $3 billion deal with Iraq in order to help them increase the country’s power generation capacity by some 7,000 megawatts, in an effort to reach the goal of around 13,000 megawatts.

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North Africa

Black gold’s dark side

by Executive Staff
written by Executive Staff

At a hotel by the Nile, politicians and civil society representatives from oil producing regions are indignant about the activities of oil companies in their home areas.

Entire villages have been uprooted to make way for oil firms to dig sand out of the ground for the oil roads. Millions of trees have been cut, with their proceeds not seen anywhere. As well, hundreds of thousands of people, they say, have been displaced without compensation.

“What happened in Northern Upper Nile does not make sense,” said Gatkuoth Duop Kuich, a member of parliament from Jonglei and the chairperson of the Land and Natural Resources Committee in the Parliament of the autonomous Southern Sudan. “People were forced off their lands and everyone just watched.”

The Oil War, as Kuich refers to the 21-year civil war that ended with the Comprehensive Peace Agreement, taught the people that oil explorers value money more than human life.

To be fair, oil was just a factor, otherwise southern Sudanese would not have been fighting the Khartoum government as early as the 1950s. But oil was a major factor, and it kicked off more marginalization of the South.

In the late 1970s, the Sudanese central government dishonored a peace agreement signed with the rebels in 1972, rejected returning Abyei to the South after oil was discovered there, and murdered Abyei politicians who were visiting the area, touching off an uprising in 1981.

Three years after the Comprehensive Peace Agreement ended the war, the people in oil producing areas are still fighting on.

At the conference, the participants are from different areas. They came from Abyei, Southern Kordofan and Blue Nile provinces, which will determine through a referendum in 2011 whether to belong to the South or the North.

Oil companies to be reigned in

In Jonglei, upon the arrival of the White Nile Company, the mistrust by the local people nearly led to a community war. White Nile, which in Jonglei operates in partnership with the British Ascom, was seeing its hold on oil Block B challenged by rival Total and started to fan community sentiments against the French company. That was easy to do. During the course of the war, Total had annually paid $1.5 million to Khartoum to renew its rights to the oil block after it suspended operations because of the fighting. While a purely business decision, many in the South saw it as having gone to bed with the enemy.

A year after White Nile and Ascom were made to drop their challenge against Total, the anti-Total tempers have tapered off, but pockets within the community still feel short-changed.

“Total gave an undisclosed amount of money to Jonglei State for community development, but we advise them to come with proper legal documents and to respect the community,” Kuich said. “Ascom has done nothing.”

But it is not just Ascom. A whole host of drillers and prospectors are behaving unethically, as far as the European Commission (EC) on Oil in the Sudan (ECOS) sees.

“No single company has ever shown true compassion with the victims,” says the report ‘Whose oil?’ released in April 2008 by IKV Pax Christi and ECOS. “No company has made an effort even to assess the level of suffering and destruction that has been inflicted upon these people to secure its operations.”

Unity and Upper Nile provinces, where oil drilling has gone on for years, bore the brunt of the government actions at a time the world was not looking. In Unity, White Nile Petroleum Company (WNPOC), a Petronas-led consortium, arrived in 2006. The consortium went about building a low-sulphur crude oil venture. Two years later, the officials report at least two dozen people dead from contaminated water.

And according to ECOS, around Paloich, in northern Upper Nile, cases have been documented of entire villages being dug out to obtain sand for the oil roads. “Even the ancestral graves disappeared into the new roads,” says the report. “To secure the oil fields, tens of thousands of people were killed, maimed or wounded, women raped, boys and girls abducted.”

According to the report, many of the displaced still live in dire circumstances, some in the desolate slums of Khartoum, others in local centers like Bentiu.

“Security in Upper Nile State is not good because the community is angry about being displaced by oil communities without compensation,” Kuich said. “This is what we are seeking: We need our communities to be compensated in developmental ways — build schools and hospitals and engage in other projects.”

And because a history of an oil communities’ empowerment is nonexistent, communication between the communities, the oil firms, and government remains weak.

“Until recently, the issue of oil could not be talked about openly,” said Deng Chulol, another MP from Jonglei, referring to the fact that since oil firms started operating here they have ignored the communities. Politicians feared the oil firms and social workers did not want to be seen to oppose the all powerful oil firms, backed by the government machinery. The result? Oil firms got away without fulfilling obligations.

“They destroy the environment, grab land and other resources,” Kuich said of the oil firms.

But not for long, lawmakers from oil-rich areas are saying. They have formed an independent body that wants to regulate the activities of oil explorers in the country. The body, according to the MPs, would work according to international oil standards.

The Sudan Oil Human Security Initiative (SOHSI) would work both as a pressure group and a community representative. It would have separate certificates for northern and southern Sudan. The plan is to make the initiative an affiliate of the National Petroleum Commission. Under the Comprehensive Peace Agreement, the NPC, with equal representations of the North and the South, has the final say on oil in the country. The government in Khartoum relented only last year to form the body, after refusing to do so for two years, for fear of losing control, according to analysts.

The new initiative by the lawmakers from the oil producing regions, Kuich said, is a realization that the NPC won’t do much unless the people rise up and demand their representation to the commission. The body would hold oil firms to international standards, and development commitments.

The communities would still need a lot of good luck. At the end of the day, the new venture would depend on government goodwill because a law must still be passed to empower the new body as an arbiter in disputes between the communities, government and the oil firms.

John Luk Jok, the Minister of Mining and Energy in Southern Sudan, has offered himself to spearhead the law. He has no choice. Luk comes from Unity State, which produces an estimated half of all the oil that Sudan exports. Plus, the peace agreement mandates that the communities have a say in all issues of oil management in their areas.

The energy ministers from the Southern Sudanese Government and the Khartoum-based national government have formed a high-level committee within the National Petroleum Commission.

Luk explained that the NPC has resolved to form another committee that would exclusively look into the issues of the environmental impact and whether oil firms are actually developing the community projects they are meant to when they win the oil concessions.

“The committee will look into the oil mathematics to see how to improve the areas where these companies are operating,” Luk said, adding that the new group would be incorporated into this committee.

Community empowerment

Sudan’s failure to reign in those oil firms that are behaving badly is caused less by a lack of laws and more by a failure to empower communities to hold the oil drillers, long backed by the Khartoum-based government, to some standard.

According to ECOS, some 150 laws exist to curb the destructive effects of oil development, but the government is reluctant to create the implementing mechanisms. Such laws derive their authority from the peace agreement and the constitution.

Luk pointed out that the Interim Constitution of Southern Sudan stipulates that each citizen has a right to a clean and healthy environment. “It is the duty of each and every citizen to monitor the environment,” he averred.

But can they? The new initiative will test that statement.

The founders of the body are full of optimism. Mohammed Osman works with Peace Direct-UK, an NGO that supports local peace-building in conflict areas. He sees the initiative as the door to peace in the sensitive oil areas of Blue Nile, Darfur, Jonglei, South Kordofan, Upper Nile, and Unity provinces.

Taban Kiston, program officer Southern Sudan Law Society, said “We are sure people are gong to receive the idea of SOHSI positively. Communities are always interested in what develops them.”

A participant from Jonglei State said that SOHSI is very much welcome but she believes it will work better after the CPA and the 2011 referendum, a time when, according to her, “proper laws will be in place.”

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North Africa

A momentum to maintain

by Executive Staff
written by Executive Staff

The global financial crisis is causing Maghrebi economists to rethink dependence on foreign sources of financing economic growth. As financing possibilities at the international level grow increasingly limited, Maghrebi economies must address the need to finance investment, without curbing the promising potential for a consumer society in the region. Algeria’s status as an oil exporting country is due to its relative independence from exterior financing. In 2009, Morocco and Tunisia could seek greater independent self-financing of their development by balancing investment with savings. Traditionally, these countries have had recourse to foreign liquidity via international loans, foreign direct investment and, increasingly, the remittances of workers living abroad. But a comparison between the investment and savings figures in the countries of the Maghreb reveals a significant gap between national savings and investment. If the difference is not yet a source of crisis, this is because FDI and remittances continue to fill the gap. The current crisis is already slowing down these flows and will continue to diminish them as the crisis continues.

As it is, FDI and remittances have certain intrinsic limits. FDI is designated to a specific country with a particular investment objective — it is therefore rarely adaptable to a change in situation and risks flight in the event of a significant transformation in the designated country. In the case of the countries of the Maghreb, businesses crowded to enter over the past several years to invest in textiles, call centers and other industries, as North Africa’s workforce proved it was ready to meet new challenges at lower costs. Remittances finance principally a growth in demand and imports of finished products. As for funds raised directly on the markets, these mainly concern large enterprises. These limits on foreign modes of financing pose no problems during a time of growth.

But in a time of crisis, Tunisia and Morocco should be shoring up savings as an alternative source of liquidity in order to carry out investments. Savings possess considerable advantages over other modes of financing. First, they reduce the risks of exposure to credits on the international level in the event of an exchange crisis. Second, saving protects the treasury and credit at the heart of an economy from global shocks. Third, spending savings reduces the power of foreign investors over the domestic economy.

The risk that the financial market crisis poses to Maghrebi economies proves that there are inherent risks in dependence on international liquidity. While international liquidity may support a country’s development, it should not be considered a principal vector of growth. In the framework of the current crisis, reliance on foreign liquidity must be reduced. Already, the crisis is limiting credit lines at the international level as large financial markets, in need of fresh money, seek to refinance. Analysts point to the case of the Eastern European countries, which have seen a portion of their private credit lines slow down, a trend expected to spread to other regions this year. Analysts also foresee a slowdown in FDI, while remittances and tourism already show signs of slowing down in the Maghreb region. These trends will persist until the global economic system recovers.

Tunisia and Morocco should therefore turn towards their existing savings and towards increasing their weak rates of banking penetration. Certain moves could be made to attract a higher number of deposits. Creating special accounts for small savings at reduced prices would be effective, for instance. Changing the status of microfinance institutions (MFIs) to allow them to collect savings may also be helpful. States could step up their national campaigns for the use of monetary instruments, by only accepting payments in checks or bankcards. Supplementing savings is indeed possible in Tunisia and even more so in Morocco. Close to 20 percent of Tunisia’s GDP circulates in fiduciary currency and this ratio is as high as 60 percent in Morocco. These liquidities could be brought to play a crucial role in the development processes of these two countries. A strong reaction by the Tunisian and Moroccan governments would enable them to avoid the pitfalls of the current crisis for 2009. Moreover, such long-term solutions could allow for the acquisition of savings, which could accomplish substantial projects without needing to rely on external financing. This would reinforce these countries’ international position, as well as their governing power. In other words, why turn to neighboring countries, with the risks and limitations in terms of political economy that this brings, if the country can find in its own borders what it needs to feed the economic machine?

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