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Levant

Ali Kolaghassi – Q&A

by Executive Staff September 20, 2008
written by Executive Staff

Possessing a diverse and vast background in business creation and development, vice chairman and CEO of Saraya Holdings, Ali Kolaghassi, is quite an influential individual; he is also vice chairman of Saraya Aviation, vice president of Saudi Oger Ltd., senior advisor to Saad Hariri, chairman of Saraya Real Estate MENA Funds, and the list goes on. Executive sat down with Mr. Kolaghassi for an exclusive one-on-one interview.

E How would you describe Saraya’s ownership structure?

Saraya Holdings is a DIFC registered company based in Dubai. We are a holding company that is primarily owned by Sheikh Saad Hariri, and he is the chairman of the board.

The model that we rely on primarily is the private-public [partnership], where governments come in as partners and they contribute the land to the project. We focus on this model because we want governments to be involved in our projects as they assist in permitting, the zoning, the approvals, etc.

As Saraya Holdings, we focus on emerging markets; we look at locations that we can turn into destinations. Wherever we feel is a unique spot that has a huge potential for growth, we focus on it. We don’t want to stop there: today, your biggest challenge in any opportunity — especially if you’re focusing on an ‘emerging spot’ — is how to make sure that the services are associated with everything you develop. We’re going beyond the traditional real estate developer, to enhance it with the services. Thus, we will provide you with a unique lifestyle experience; we will take care of you the minute you decide that you want to escape.

We also have our own transportation fleet, all types of luxurious categories. Our destinations are mixed-use destinations; we have hotels, retail, entertainment and residential. Our residential owner gets all the services that a hotel guest can get. Most importantly, he doesn’t have to worry about his facility in terms of regular maintenance. Also, we are studying options to offer our second home buyers opportunities to benefit from their investments by creating additional revenue streams such as studying rental program options, fractional ownership options, etc.

As a developer I’m interested in taking care of my investors, where I can maximize the return for them, and I want to maximize the return for my homebuyers. A homebuyer, also, becomes a source of revenue for the project, because he is coming with his family and they will use all of the facilities made available by us — i.e. the beach clubs, restaurants, water parks, etc.

To make us unique, we partnered with the best. For our projects, we brought in names like Jumeirah, Taj Exotica, W Hotel, St Regis, Westin, Luxury Collection, Banyan Tree, Nikki Beach, etc. Also, we’re partnering with experienced people to create Saraya Holiday packages.

We have a very aggressive plan in the pipeline. Three years ago we announced our first project at the WEF on the Dead Sea. So far we have five destinations around the globe: Saraya Aqaba, Saraya Dead Sea, Saraya Ras Al Khaimah, Saraya Bandar Jissah, and Saraya Sochi. We also have a few in the works that we will announce before the end of the year. We have plans to go into the financial market; that’s why we hired Deutsche Bank as our financial advisor.

We did this in a very short period of time — I rely on a very good team that I have, which enables us to do this. The spirit at Saraya is that we are a big family, and in order for us to succeed everybody has to have a specific role. More importantly, of course, from an operational perspective we did not create a separate management team for each project, because in my opinion that is not cost efficient, nor effective. Hence, we created a centralized pool that we named Saraya Development Group (SDG) that everybody is based in, and which is a house of expertise. You have competencies, whether in finance, corporate finance, MIS, program management, design and construction, marketing, etc. These take care of all the projects. Every project has a GM who reports to the board and is the check and balance between the pool and the board, because with every project there are different partners.

It is a unique setup and one that has allowed us to progress, to reduce the operational costs, to establish a learning curve and ultimately this house of SDG will graduate people of experience and knowledge … this is how you start building the team.

E What is the strategy you are implementing for your projects? What is the timeline of this strategy?

For every project we can’t say there is one specific strategy. Of course the locations differ for each project. We always talk about the private-public model, but for example Saraya Sochi was private-private; we partnered with Sistema Hals on a 50/50 basis in Russia. The concept for each project as a strategy is that we have to be the lead developer — we have our terms of conditions, we have our shareholder agreements, our Saraya Realty contacts, our centralized marketing, and our management. But to decide on a location, there must be a checklist, which has to be met. For example, does this place have a potential? Does it have the geographical requirements: the beach, the sand, the climate, etc.? Will they support us with the infrastructure, the initiatives, the master plan, etc? Is there easy access to the airport? All these elements are taken into consideration, because they are the only way for a project to succeed.

E What is your investment strategy? Has it remained consistent?

We have certain expectations for each project from a commercial return, but we look at each project as a stand-alone case. Sometimes in a project there are returns that are different from another — it all depends on the risk, the political risk, the importance, and how much we forecast as the increase in value. There are certain countries where you go for the security factor, and you’re happy with a 15-18% return. Other projects, the only way you will enter it in the first place is if you see a return in the high 30s. Each one is evaluated on its own criteria.

We have also tried to open to the public an opportunity to co-invest in Saraya, so we created the Real Estate MENA Fund with the Arab Bank for $250 million. Saraya has created the first fund, which saw its first investment in Saraya Ras Al Khaimah, and we are creating the second as well.

E What are the current issues and concerns that Saraya faces in Jordan and elsewhere in the MENA region?

If you ask me what the biggest challenge is — I’m not going to tell you execution or finance, I’m going to tell you it is human resources. In order to combine Saraya’s concept altogether, the only way to do this is by having all the right people on board.

Another big challenge, faced by any developer, is the escalating cost of materials. Of course, there is also a financial crunch in the international markets.

E What do you believe is the need for these kinds of mixed-use development projects? Is it a social, demographic need?

Today in our part of the world, it’s a young population; especially in Jordan and the GCC, about 50% of the population is still young and under the age of 18. These have requirements for housing, education, for entertainment. So whatever we develop on a local level as an opportunity has to be attractive to them for various reasons: number one, the cost of international travel has increased significantly.

In the destinations that we are developing, we can operate for nine to 11 months due to nice weather and it thus gives us a competitive edge. We can offer the same services as European destinations and the same qualities but at more competitive rates. Also, on an international level, a lot of markets are opening up to the Middle East. Russia, for example, is a big market that is opening up to the ME. Apparently, around 2% of the Chinese population are expected to become regular travelers to this part of the world. If we can capture a fraction of this, that will get the results that we have offered.

E How would you describe, overall, the nature of development projects in the MENA region?

Some people say there is an over-development to what is being offered in the market. But whatever is being offered is sold on the spot. The Dubai model, for example, is a perfect model. When the prices reached $1,500 we said, “It has reached a peak,” but today it is at $3,000. Tomorrow it may be at $4,000, but there will end up being a correction. Jordan, for example, is in its initial stages of development. We are operating with 100% occupancy; the rates have more than tripled in the last two years — Amman is a specific example. Now look at the Dead Sea: hotels are operating at close to 100% occupancy while the rates have more than doubled. Lebanon, with all its political turbulence, has 100% occupancy in its hotels; and the same happens in Egypt. There is a major growth in the number of tourists, whether on a national or regional level.

E How does Saraya demarcate its offer compared to other developers in the region?

We are not just a real estate developer, and that is exactly why we are different — because we want to offer a lifestyle. A lifestyle which comprises of all that a traveler may require from accommodation, transportation, entertainment and other specific needs and requirements. This put together as a package under one brand makes us unique. We believe when you are buying into a Saraya property, you are not just buying a house but also buying into a whole experience. If you buy into the destination club, you’re buying into all the other experiences and destinations.

E In ruling out the template, how adaptive could it be to regional and international markets? Or are you going to reconsider the whole concept for every country?

You have to examine each case-by-case. If you look at each market, each one has certain unique elements that you have to take into consideration. For example, are my tourists going to be local, regional, or international? For Ras Al Khaimah, for example, basically the tourists are sun seekers and they realize that Dubai is too expensive for them now and are willing to accept something that is 40 minutes away. In Oman, we are looking at the Indian subcontinent — the high end — because Oman is very appealing to them. Also, the English tourists love Oman. Here in Jordan it is more for the locals or for the Jordanians who live in the GCC. Every market is different in a way, but a template of the concept is what we have developed — and we will make adjustments and modifications as per the requirements for each project.

September 20, 2008 0 comments
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Levant

Wilt where harvests grew

by Executive Staff September 20, 2008
written by Executive Staff

Syria is in the midst of its third year of drought. Some 90% of the barley has been lost due to crop failure, the wheat harvest is down by over 50% and ground water reserves are running low.

In the face of such a crisis, Syria has had to resort to the international wheat market for the first time in 15 years, no longer self-sufficient or able to export from what was, since antiquity, one of the region’s bread baskets.

This hydrological crisis could not have come at a worst time for Syria, which is attempting to implement widespread economic reforms and reduce subsidies while food, energy and living costs continue to spiral upwards. Furthermore, the international price of wheat has risen 83% over the past year, putting strain on Syria’s budget deficit and wheat reserves.

Such hard realities could not be further from the rosy picture presented by the media and investors in the wake of Syria’s economic reforms, who cite surging investments, the financial sector’s exponential growth, a stock market in the offing and rising tourism figures.

“People are bullish on Syria, but there are problems we are facing,” said Dr. Nabil Sukkar, managing director of the Syrian Consulting Bureau for Development and Investment. “Agriculture is not fashionable, people instead talk of industry and ICT, but it should be given the priority it deserves in Syria,” he added.

Magnitude of the problem

The scale of Syria’s hydrological woes is forcing the government to rethink its agricultural policies as wheat and barley reserves dwindle. Last year, Syria produced 4.1 million tons of wheat, more than enough to meet demand for the 4 million tons consumed domestically. But the government estimates this year the harvest could be as low as 2 million tons, a drop of more than 50%, if not lower. Barley, which accounts for 10% of Syria’s grain production, has declined 90%, having an immediate knock-on effect on the livestock sector which had used 60% of Syria’s barley production as animal feed. Many small-scale farms have been forced to close as a result.

The reduced production is attributed to low rainfall, the land freezing at the beginning of this year and the over-usage of groundwater resources.

“Everywhere received only 50% of rain, and in agricultural areas this is a major problem,” said Dr. Abdullah Droubi, director of water resources at the Arab League’s Arab Center for the Studies of Arid Zones and Dry Lands (ACSAD) in Damascus. Other areas received only 15-30% of their normal precipitation levels — with the exception of the coastal regions — resulting in an average of 2 inches of rainfall or less between September 2007 and April 2008, according to the United States Department of Agriculture’s Foreign Agricultural Service (FAS).

The water shortage is most severe in the northern governorates of Al Raqqah, Al Hasakah and Aleppo, which together account for 75% of the country’s wheat production. The problem is further compounded by Syria obtaining an estimated 85% of its renewable water from the Euphrates, Tigris and Orontes rivers, but with poor rainfall in neighboring Turkey, where the first two rivers originate, Syria is struggling to meet its water needs.

“They are trying to irrigate some places with supplementary water and from ground water, but as ground water is not recharged, it is a closed cycle — no precipitation means groundwater will decrease,” said Droubi. Utilizing ground water also means less water flows into lakes and rivers, as well as increasing the salinity of ground water reserves.

Pollution, inefficient usage of water and above all a surging population — growing at 2.11% a year — is putting further strain on resources. Additionally, demand for domestic potable water is growing at 4.5% per year and consumption is expected to increase by 40% per year over the next 15 years, according to research by Makram Shakhshir at the University of Damascus.

The problem is particularly acute in urban areas such as Damascus, home to six million people, a third of the country’s population.

The growth of Damascus has impacted directly on the city’s water table, as the capital expanded from 1,900 hectares in 1945 to 8,500 today. The surrounding Ghuta oasis, a prime source of water and arable land, has also shrunk, from 25,000 hectares to 10,000 hectares, and continues to lose some 200 hectares per annum as the city expands outwards.

The Barada water basin, located under Greater Damascus, has also retreated in the past 20 years, from 50 meters below ground to 200 meters. Some experts suggest this could drop to 400 meters in the next 20 years, exacerbated by the fact that some 87% of the 25,000 wells around Damascus are illegal, according to Francesca de Chatel, author of Water Sheikhs and Dam Builders. Furthermore, due to Damascus’ ground water table shrinking, sewage is reportedly seeping in and contaminating the water below. 

With greater demand and a rising population, Droubi pointed out that Syria’s water problems are only likely to worsen. “Drought is a very big issue in the region and related to climate change, but no one knows to what extent. As for the future, the region will suffer from more drought and lowering precipitation — a 20% reduction in 50 years is one scenario,” he said.

Walking a fine line

To offset the crop reduction, Syria received 190,000 tons of wheat in aid from Abu Dhabi, and canceled a deal with Egypt to exchange 176,000 tons of wheat for rice. The government is also dipping into its estimated 4 to 5 million tons of wheat reserves to keep bread affordable as other food prices have risen by an average of 20% in the last six months, according to the World Food Programme.

“Rice went from 20 SYP ($0.40) to 120 SYP ($2.25) a kilo; olive oil, which we have for breakfast, lunch and dinner, has also risen in price. People are hurting,” said Yassir Hamod, a storeowner in Damascus.

To counter rising prices, the government raised public salaries by 25% earlier this year, but with accommodation and energy costs also surging, it may be only a matter of time before people take to the streets to protest, as has occurred in 30 countries around the world in the past year over rising food costs.

“We have not seen real repercussions from the rise in prices,” said a political analyst with close ties to the Syrian government. “Maybe in February or March 2009, when people feel the repercussions of winter fuel costs coupled with food expense, here is the test, and so we may witness some disturbances, but the crisis is not yet mature.”

Nevertheless, with so many issues converging at once, Syria is struggling to find the right balance between keeping the populace placated through cheap food and fuel — spending an estimated 15% of GDP on fuel subsidies alone — and implementing reforms that will phase out subsidies that have been a mainstay of the Baathist socialist system. Finance Minister Muhammad al-Hussein was quoted in April as saying removing bread subsidies is a “red line,” particularly as consumption of bread has increased as other staples have risen in price. But with the wheat harvest now at only half the level of domestic demand, Syria could use up much of its wheat reserves this year alone, forcing the country to buy on the international market where prices have risen 83% over the past year. Such an outcome would have an immediate impact on Syria’s budget deficit, which was 10% of GDP last year. Furthermore, Syria is now a net importer of oil and with demand for oil rising, as well demand for electricity up 5% in the first half of 2008, the budget deficit is expected to soar this year.

“It is a mounting crisis and measures are minimal compared to the extent of the crisis,” the analyst said. “The government doesn’t have a clear view on how to manipulate price rises and salaries; it is still very ad hoc and experimental. The government will support employees, but leave the others to the rule of the market,” he added.

Agricultural solution

It is in agriculture that the biggest changes need to be made, however, as it is the biggest net user of water with some 45% of the sector irrigated, a figure hydrologists consider an inefficient usage of water. And with the state the sole buyer of wheat, barely, sugar beet, millet and cotton, the onus is on the government to reform.

“The debate in Syria is what priority agriculture should take,” said the analyst. “In principle, what is needed is a revision of the state plan for agriculture regarding the distribution of crops and harvests.”

The government has already embarked on a scheme to reduce cotton production to solely cater for local needs, particularly as cotton is highly water-intensive as well as accounting for nearly 25% of the total global insecticide market — a further cause of land and water degradation. However, Sukkar said agriculture is still operating along traditional lines as land reform has not been implemented.

“We are faced with constraints, such as land reform laws which put a ceiling on ownership and prevent mechanization of agriculture,” he said. “Law 10 of 1986 allowed joint public-private projects in agriculture … It was meant to encourage commercial agriculture but it didn’t work — it was a failure,” Sukkar added.

In reforming other areas, such as reducing production of certain crops like tobacco and cotton, it will be a case of losing export dollars but at the same time helping to ensure water sources, said Droubi.

“Water policy should be more important than politics, as water decides economic development in the country, but this is lost in bureaucracy and the public sector is not at the right level,” Droubi said. “We need a technical revolution and support from developed countries, especially as the trouble in the region will impact on the Europe and the USA.”

One solution put forward is for Syria to build desalinization plants. “It was discussed during the peace process and has good potential,” said the analyst. But at $1.5 billion and upwards for a facility, as well as the time for construction, the suggested solution for the short term is improved water usage, stopping leakages, and public awareness campaigns.

“One of the key issues is people are wasting water, as there is not a culture of saving resources,” said Poul Gadegaard, team leader of the Syrian Enterprise Business Centre. “The government is more focused on petrol and diesel than water, but it should be the other way around. Water prices should rise as people need to learn to economize — I think this is a big, big problem.”

Hydropolitics

Syria’s water woes go beyond crops and potential social unrest to geopolitics. Hydropolitics is the proverbial 1,000lb gorilla in the room that somehow gets overlooked amid the region’s ongoing political crises.

“Water should be a top priority now; we are not in the 1960s or ‘70s. We can see that the situation is dropping very fast, and there is no time to even think of a solution,” said Droubi. “Cooperation is needed on a regional level.”

Some progress has been made, with Syria, Turkey and Iraq earlier this year agreeing to establish an institute to find solutions to water and environmental issues between the three water-linked countries.

“Where political relations have had an impact on the water crisis is that Turkey is now allowing more water through its dams to Syria,” said the analyst. But in rain-starved southern Syria the issue is still a political one. The Israeli-occupied Golan Heights provid an estimated 30% of the Jewish state’s water, while the water basin connects to Syria, Western Jordan and Northern Israel. Access to Golan water will be pivotal in any peace discussions between Damascus and Israel, but Syria should not bank on gaining much water, the analyst said, despite the Golan’s proximity to Damascus.

“Syria cannot expect big amounts of water to come from this area. I don’t think the Golan will add much — Syria should look for a solution elsewhere,” said the analyst.

Ultimately, unless a multi-pronged solution to Syria’s water woes is enacted — politically, socially and economically — the country could face rising socio-economic problems just as it is opening up to the world.

September 20, 2008 0 comments
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MENA

The public hand up

by Executive Staff September 13, 2008
written by Executive Staff

With the current worldwide inflation levels, governments around the region are giving more attention and time to the issue of subsidies, a form of financial assistance destined to either individuals or the economic sector.

There are two different approaches to subsidies, which can be defined from either a supply or a demand perspective. Ultimately, subventions work by either contributing directly to people’s income or by financing industry sectors.

“Subsidies generally result in a transfer of wealth from one group to another, and mainly targeting low income households,” said Marwan Mkhael, head of research at Lebanese BLOM Bank.

Direct subsidies are based on the transfer of a cash amount to individuals who are either unemployed or belonging to a lower income population category. According to Mkhael, “This type of subsidy is one of the most efficient and the least practiced in Lebanon, as it requires specific data in order to identify people in need.”

Other types of subsidies include tax subsidies (i.e. “tax breaks”) and production subsidies; the latter involve a direct financial contribution to certain production areas in order to promote their development. Trade protection measures are also considered indirect or hidden forms of subsidies, as they ultimately support the local industry which benefits from protective measures. They may also refer to government actions limiting competition or raise the prices at which producers are allowed to sell their products, by means of tariff protection.

Procurement subsidies are usually used when governments decide to buy products from a certain industry at a higher price than the regular market price.

Some types of subsidies can often go unnoticed, as many consumption subsidies — which usually provide goods or services at lower prices than the market — are frequently taken for granted by the public. Such subsidies are applied to sectors such as education and health care, as well as the development and maintenance of infrastructure.

Not always on target

Each regional country has a different approach to subsidies. Mkhael believes that in Lebanon the implementation of indirect subsidies is not efficient as it does not reach its target, which is the poorest portion of the population. “If we take the example of wheat that is used in the production of local bread, we observe that the industry is often plagued by corruption. Although we don’t have actual figures to know how much wheat is needed to produce the bread to cover national consumption needs, we know for sure that part of that subsidized wheat is either sold on the black market or used for other products, such as cakes and sweets,” he said. By the use of such indirect subsidies the government in Lebanon is thus financing wheat across the board, with the rich benefiting as much as the poor, in the absence of accurate market data to guide the government’s efforts.

In addition to local bread, the Lebanese government also subsidizes the tobacco industry by buying tobacco at higher than market prices, an initiative that is currently costing Lebanon some $50 million per year. Gas is another household expense that is indirectly subsidized. “In this particular case, the government has progressively decreased taxation until it was simply eroded,” Mkhael pointed out. A budget is also allocated for financing fuel oil used specifically in winter for heating homes, a decision taken by the government every year in the fall. In 2007, this particular subsidy cost the government around $30 million. The Lebanese economist underlined that the issue of subsidies to the Electricité du Liban (EDL, Lebanon’s national power company) remains the thorniest issue on Lebanon’s agenda. According to Mkhael, EDL’s electricity is still priced at the rate of $25 per barrel of oil while prices have gone up to over $140, which in conjunction with the lack of sector reform will cost the budget as much as $1.5 billion this year.

Covering the essentials

Indirect subsidies are also used by Gulf countries. Qatar and Saudi Arabia heavily subsidize their petrochemical industries. Other forms of subsidies include electricity, gas, and basic food items such as rice and sugar. However, according to Dr. Mahdi Mattar, head economist and strategist at SHUAA, “The financial burden of subsidies on government is offset by international soaring oil prices that benefit oil producing countries.”

Mattar explained that this type of subvention when applied to the industry certainly offers the sector an unfair edge as it provides it with higher profit margins. For example, in Saudi Arabia gas is sold to the petrochemical industry for $0.75 per million BTU (British Thermal Units) and $1.25 per million BTU in Qatar while global prices are currently estimated at $10 per million BTU. “However this form of subvention can’t be described as unfair competition as long as industries are not dumping goods on international markets,” he added.

According to economist Dr. Heba Nasser, vice president of Cairo University, subsidies applied in Egypt target mainly basic products such as bread, rice, oil and kerosene, with over 50% of gas and about 40% of wheat prices currently subsidized.

“The main problem we are currently facing in Egypt is how to reach and improve living conditions of lower income households. In order to improve efficiency of subsidies, a household budget survey has been recently conducted, which has provided us with an actual poverty map,” Nasser said.

Disparities in subsidies exist from one country to another. Throughout the region, countries that had adopted a socialist system naturally tended to subsidize more goods and industry sectors — whether by relying on direct or indirect subsidies — than liberal economies. “As an example, the Syrian government subsidizes bread and many other products used by the masses,” said Mkhael.

In some cases, subsidies may effectively reduce the competitiveness or delay the development of products’ possible substitutes. In Lebanon, subsidies to the agricultural sector have led to market inefficiencies. Export Plus, a program which was sponsored for five years by the Lebanese government and recently renewed for another five, allows for subsidies for transporting local agricultural products. “This program in conjunction to certain protective measures has led to increase of prices of certain products on the local market,” explained Mkhael. Another of its disadvantages is that it mostly benefits traders and not farmers. Other market distortions arise when a subsidy for the consumption of a basic product may appear to benefit consumers, but supply of this particular product is constrained, resulting in higher demand and, subsequently, higher prices. In these cases, the producer will benefit and the consumer does not derive a net gain, as the higher prices for the product offset the actual subsidy. However, Mkhael averred that “Export Plus has certainly improved quality controls on Lebanese farm produce,” which in and of itself is a gain for consumers.

Further distortions that might be created by subsidies are, in some cases, the deterrence of new entrants into a market because selective sectors or companies are supported. In addition, in the case of debt ridden countries such as Lebanon, subsidies may also lead to an increased public deficit, and thus are not a good policy if the country aims to control its debt.

Economists interviewed by Executive argue that direct subsidies are preferable to other forms of subventions — such as hidden subsidies or trade barriers — because they specifically benefit the poor. In addition to being more efficient, direct subsidies also offer the advantage of transparency.

Many economists believe that subsidies should be used only in the short term. Ultimately, however, the choice to put a subsidy in place is one of a political nature, which also allows maintaining social stability. In conclusion, Mattar said that, “subsidies are certainly an inefficient tool in the longer term, but they remain a powerful instrument as long as governments can afford them. Subsidies undoubtedly alleviate poor living conditions of lower income population, and thus promote fair economic development, however, only on the short run.”

September 13, 2008 0 comments
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Dishevelled antiquity

by Norbert Schiller September 13, 2008
written by Norbert Schiller

The first time I saw a truly remarkable museum was when I visited London in the mid-1970s. The British Museum was not only grandiose but each artifact was displayed in such a way that visitors felt they were seeing something special. I remember walking through the Ancient Egyptian section of the British Museum and noticing the impeccable detail taken when displaying and lighting each of the artifacts. For the first time I really could appreciate the splendor of ancient Egypt. I continued on to Paris and visited the Louvre and again I marveled at the way they displayed antiquity from ancient Egypt, Iraq, Lebanon and Syria. Since then I have also visited museums in Rome, Berlin, Madrid, and Washington, to name a few places, and no matter the size or how prestigious the museum, the common thread that has linked all of the ones I visited is the importance that the curators place on giving each artifact space and proper lighting.

A few years after that initial visit to London and Paris, I took a year off to tramp around Europe, Africa and the Middle East. When I arrived in Cairo it was only natural that one of the first things that I wanted to visit was the Egyptian Museum. I still had those lingering first impressions from the British Museum and the Louvre and I kind of took it for granted that the Egyptian displays I saw in London and Paris would be minute in comparison to what I was about to see.

When I first stepped inside the Egyptian Museum I was awestruck by the vast amount of artifacts that were crammed into every nook and cranny. Everywhere I looked there were giant statues climbing up the sides of the walls and sarcophagi and display tables covering the floor. Actually, it was so overwhelming that for the first few minutes I just stood at the entrance and stared at everything. There was no set way to visit the Cairo museum; one had just point themselves in a direction and walk — and that’s just what I did.

After setting off it didn’t take long for my initial feeling of “awe” to wear off. Suddenly, I realized that as impressive as everything was, it was like I was not walking through a museum but rather a glorified storage facility.

Rather than displaying half of the artifacts as best they could, the curators of the Egyptian Museum filled every space with as many items as possible in hopes that quantity would win over quality. And for almost 100 years that way of thinking actually worked. Since the museum’s inauguration in 1902 not much has changed in the way Egyptian antiquity has been displayed. For the most part, the vast majority of visitors to the Cairo Museum have been awed by the sheer quantity of artifacts on display and for the Egyptians that has been good enough. But pull any visitor aside and they will tell you that the museum is just too cluttered and the displays are outdated.

Egypt is not alone in that way of thinking. Since my first visit to the Middle East in the 1970s, I have continued to traverse the Arab world and I have found a similar scenario played out at each museum I’ve visited from Baghdad to Casablanca. Granted, many of the countries I went to were either in a state of war at the time or had just ended years of conflict. But in countries like Egypt, Syria or Tunisia, where tourism plays such an important part of their economy, I was amazed to see the poor state of the museums. Even in the Iraq of the 1980s, when Saddam Hussein was investing heavily into preserving the grandeur of Iraq’s ancient civilization, the the museums along the Tigris and Euphrates were in an abominable state.

The first real noticeable change, that I can remember, came when the first Mummy Room opened at the Cairo Museum in 1994. For the first time care was taken into the display and the lighting of each individual mummy. That little extra attention didn’t come with the admission ticket though — if you wanted to see the Mummy Room you had to pay extra. A few years later, in 1997, this “new” approach was finally taken a step further when the Nubian Museum in Aswan opened. For the first time there was a museum in the Arab world comparable to any museum in Europe or America. Since then a number of other smaller museums have opened and a second Cairo Museum is planned that will help ease the congestion of the first.

Hopefully, with this new Cairo Museum there will also be a change in mentality as well and an asserted effort to highlight the beauty of each individual item and not think that by cramming a room full of antiquity you can fool visitors for another 100 years.

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

September 13, 2008 0 comments
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The train to Israeli divestment

by Peter Speetjens September 13, 2008
written by Peter Speetjens

In recent years, investing has gradually become a more moral affair, as shareholders have grown aware of the fact that owning a company stake, however small, brings along a shared responsibility for any illegal or harmful actions. Consequently, they may voice concerns at annual meetings or opt to divest, as French companies Alstom and Veolia Transport (VT) have encountered due to their participation in the Jerusalem light rail project.

Formulated in 2000, the project foresees the construction of eight tramways by 2020. A 30-year-BOT contract with a value of some $500 million to construct the first line was awarded to Citypass, a consortium of several Israeli firms, Alstom and VT. Alstom started construction in 2006 and will also supply the carriages, while VT is to operate the line from 2010 onward.

As part of the project, in June 2008 the Jerusalem municipality inaugurated the landmark Bridge of Strings, which with a height of 119 meters now dominates the city skyline. So far, it seems all business as usual. Due to the hike in oil prices, public transport is making a grand comeback all over the world and the Holy City is no exception.

But then business is never just “as usual” in Jerusalem. The problem with the 13 km railway is that it links West Jerusalem, via East Jerusalem, with two of the largest settlements in the West Bank. Opponents argue the project violates the 4th Geneva Convention and UN Resolution 242, which calls for a complete withdrawal of Israeli forces from the territories occupied during the 1967 War. By participating in the project, Alstom, VT, and their shareholders help strengthening an illegal occupation.

As soon as news of the Citypass contract reached Europe, pro-Palestinian organizations started to vent their objections, which rapidly reached the ear (attention) of shareholders. In March 2006, some 1,000 made their concerns heard at the Alstom annual general meeting. Two French pro-Palestinian organizations even went on to sue Alstom and VT for violating international law. The next hearing will take place on September 15.

The French firms have so far downplayed allegations, arguing that both Palestinians and Jews can use the tramline, and that the Palestinian Authority (PA) has embraced the project. The first may be true, although most of the tramway clearly aims at connecting Jewish suburbs. However, PA President Mahmoud Abbas has objected to the project. And so did the Arab League.

The story did not stop in France. In May 2006, a group of account holders at the Dutch ASN Bank raised questions over the bank’s shares in VT’s mother company Veolia Environment. ASN markets itself as an “ethical bank,” which means it does not only apply financial criteria when selecting investments, but also takes into account environmental and social criteria, including human rights violations, whereby UN resolutions are perceived as a moral guide.

The shareholders’ protest was joined by two peace organizations, including a prominent Jewish one, which prompted ASN by the end of 2006 to announce: “We believe Veolia’s involvement in the light rail project is not in line with the UN’s demand to stop all support for Israel’s settlement activities, and is therefore not in line with the ASN Bank’s social criteria.” ASN is the first European bank to withdraw from a company linked to the Israeli occupation.

VT ran into some sort of trouble in Ireland as well. Having heard about the details of the Citypass contract, Dublin tram drivers working for VT Ireland called off a plan to train Israeli employees who are to operate the future railway. The Jerusalem project may have further consequences for the two French firms, while it could set a precedent for other companies doing business in Israel.

One of the most pressing questions Alstom shareholders presented the board of directors was if the Citypass contract might lead to negative repercussions elsewhere. A fair point, seeing that Alstom is one of the world’s leading suppliers of rail and tramway equipment and is active in Arab cities such as Tunis, Casablanca and Algiers.

Meanwhile in Holland it is expected that more investment and pensions funds may withdraw investments from Veolia, while ASN Bank has come under pressure to also end its relationship with the Irish company Cement Roadstone Holdings (CRH), which is the co-owner of the Israeli Mashav Group and as such a major supplier of cement in the construction of settlements and the wall between Israel and the West Bank.

Furthermore, there is increasing pressure on the Dutch ABN AMRO Bank, as it has shares in Caterpillar, a major manufacturer and supplier of bulldozers to the Israeli army, some of which come tailor-made with heavy armor and machine guns. While it is too early to tell if the actions by French and Dutch shareholders will set a precedent, the case did prove that the actions of a few can influence the policies of banks and major corporations. Who knows, maybe the private sector can succeed where politicians have failed for decades?

Peter Speetjens is a Beirut-based journalist.

September 13, 2008 0 comments
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The crude Iranian crux

by Claude Salhani September 13, 2008
written by Claude Salhani

Would a naval blockade by the United States, France and Britain on the Islamic Republic of Iran succeed in forcing the mullahs in Tehran to abandon their nuclear dream and turn the population against the ruling theocracy, and maybe with a little bit of luck and a discreet nudge from the West, help bring about regime change in the country? That is what the Bush administration is betting on. It would be Bush’s final hurrah before leaving the White House in about five months. Five months during which the oil markets — and Iran — will remain jittery.

Or instead, would an intervention by the Western powers have the opposite effect by uniting the population against the “foreign invaders,” giving the mullahs and their maverick President Mahmoud Ahmadinejad unexpected support they might otherwise never dream to win?

Indeed, as one observer pointed out, sanctions could have a positive effect with the government mandating that domestically produced cars migrate towards compressed natural gas.

Iran ranks fifth on the list of the world’s top producers of crude oil and second in the Middle East, pumping 4.15 million barrels a day (behind Saudi Arabia, the world’s top producer, at 11 million barrels a day). But Iran’s problem, dating back to the days of the shah, is that it never invested enough in developing its refining capacity, electing instead to ship its crude oil to other countries, principally India, and then re-importing the refined product.

If it made sense at the time, that decision is now coming back to haunt the Iranians because it is that very dependence on importing oil that renders Iran so vulnerable to potential foreign naval interventions and blockades.

In the event that US and allied fleets elect to impose a military blockade on the Islamic republic, it would cripple the country’s economy, though perhaps not entirely to the degree the foreign powers might expect. There are several reasons for that.

First, as mentioned above, the knee-jerk reaction from the Iranian people to foreign interference in their internal affairs might well be the catalyst which ends up uniting Iranians around the country’s leadership, thus producing the reverse effect that Washington, London and Paris (and Jerusalem) wish for.

Thus such a move would re-enforce the mullahs’ position and raise the level of anti-Americanism in the region. This would not be good news for US troops currently serving in Iraq, and one must not forget Iran’s proxy militia in Lebanon, Hizbullah, which could be directed to launch hostilities against Israel from southern Lebanon.

Second, no blockade could really be effective against Iran given its advantageous geographic position. The only possible scenario under which US/EU sanctions and a blockade could truly affect Iran would be if it was total: meaning that not only the shoreline along the Persian Gulf would need to be monitored, but the thousands of miles of border separating Iran from its neighbors through some of the planet’s most inhospitable terrain.

Additionally, sanctions against Iran would never work as long as Iran keeps its umbilical cord linking it to its century-old trading partner, Dubai. Imposing a trade ban on the UAE and policing the 250 miles of coastal waters between Iran and the United Arab Emirates, including all the coves the region’s dhows can sneak in and out of undetected by larger Western gunboats, will be close to impossible.

Also, given the fact that the UAE is a close US ally, it would be unthinkable to impose a ban on the Emirates.

Furthermore, an international military force would have to police — and prevent — contraband trade from finding its way across the 550-mile Iraq-Iran border. We have seen the inability of Iraqi, US and coalition forces in preventing anti-US jihadists from entering Iraq across the Syrian border since the US invasion. Why should things be any different on Iraq’s eastern border?

That same international police force would also be tasked with controlling the 560 miles of border between Iran and Armenia, Azerbaijan and Turkey and across the 500-mile border between Iran and Turkmenistan. Add to the list another 275 miles shoreline of the Caspian Sea; and the 400-mile border Iran shares with Afghanistan and another 400 miles or so shared with Pakistan. That represents close to 3,000 miles of land borders and 900 miles of shoreline.

So, would diplomacy stand a better chance? It has been tried, argue those hawks in favor of an aggressive response, and without result. In the meantime, no doubt Iran’s leadership is keeping eyes out on two fateful dates, probably marked in large red circles on their calendars: November 4, the day the United States votes for a new president, and January 20, the day the new president moves into the White House. If Iran’s leadership manages to deter any intervention until then, they win this match in the great Middle East chess game.

How these developments affect the markets remains to be seen.

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

September 13, 2008 0 comments
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Syria’s tourist playground

by Paul Cochrane September 13, 2008
written by Paul Cochrane

Unlike the heady summer of 2006, this year’s season is hardly a memorable one. It was back to business as usual, and as the summer winds down and tourists pack their bags to head home, the tourism sectors of Lebanon and Syria are no doubt pleased there actually was a summer season.

That Lebanon needed a calm summer far more than Syria is a given, particularly following the July War and the ensuing 18-month political debacle. But Syria has also benefited from greater stability in Lebanon, especially when it comes to attracting tourists from the West who have a tendency to lump the Levantine countries together and avoid the region if there is a crisis.

Both countries were therefore lucky that the May clashes and the resulting Doha Agreement happened when they did, giving ample time for tourists to plan a summer visit.

The big difference between Lebanon and Syria’s tourism sectors, however, is that Syria is beating Lebanon hands down when it comes to attracting visitors.

Earlier this year Syria made the sound decision to advertise in the Gulf — bar Saudi Arabia — and the county is resultantly chock-a-block with khaliji tourists, reflected in the joke circulating around Damascus that if you want to get a taxi outside any of the major hotels you have to wear a white dishdasha or otherwise you’ll never get a ride.

The other noticeable difference is that Syria is getting tour groups by the busload, sweating their way around Damascus’ old city and the country’s numerous historical sites. Indeed, sitting in the lounge area of a hammam after a rigorous scrub one sultry August afternoon, I was taken aback by a dozen South American tourists that swarmed in and started snapping away at everything in sight. My fellow hammam clientele also seemed a little bewildered, with a chap opposite me rolling his eyes. But as soon as all the ajnabi tourists left, he then thrust a camera in the hands of a hammam attendant to take a photo of himself bedecked in towels, and then asked me to join him. Ahmed, as he introduced himself, was from Libya and marveled at what Syria had to offer, regaling me with his trip around the country.

Lebanon on the other hand doesn’t seem to be doing much to attract tourists other than appealing to expatriate Lebanese to come home for the summer. True enough, expat Lebanese spend a bundle when they are over here, as a trip any night of the week to Sky Bar and downtown shows, but Lebanese returnees with foreign passports aren’t exactly tourists, particularly as most stay with friends or family. And while Gulf Arabs are back on the streets of Beirut, the tour groups are conspicuously absent. It is quite clear Lebanon needs to develop a tourism plan and start marketing the country globally.

After all, if tiny Dubai with just shopping malls and flashy hotels can attract 6.4 million tourists a year, then Lebanon can surely boost figures from an estimated 1.5 million, especially if a modicum of stability prevails.

Lebanon has much to offer, and has a clear advantage over Syria when it comes to quality accommodation, restaurants and services. That isn’t to say that Syria does not have the latter, but the country is desperately short of hotel rooms, reflected in a supply gap of 2 million nights per year in the four to five-star range.

But while Lebanon has few plans to boost tourism numbers, Syria aims to turn the country into a prime tourism destination, with 377 investment projects underway worth some $3.3 billion and international chains clamoring to get in. Damascus has also offered three huge locations for tourism development that are expected to attract up to $15 billion in investment.

How successful Syria’s tourism developments have been so far is reflected in the stats, with tourism numbers surging from 2 million in 2004 to some 4.6 million last year, spending $2.8 billion and accounting for 14.5% of the country’s GDP. Of the tourist numbers, 73% were Arabs, a figure that has increased 15% since 2005, and some 500,000 were from Iran, predominantly coming on pilgrimage. As Faisal Najair, director of Damascus’ Tourism Department was quoted as saying: “We hope to make Syria a resort for all Arab and Gulf tourists.”

With such developments underway, Syria could soon surpass — if it hasn’t already — Lebanon as the preferred destination in the Levant for higher-end tourism and even tourism of the more dubious kind. According to reports, the number of super nightclubs in Damascus has soared in the last three years from 15 to 40.

It’s time Lebanon, for once, took a leaf from Syria’s book if it wants to remain the region’s playground, as well as give the economy a much need boost.

PAUL COCHRANE is a freelance journalist based in Beirut.

September 13, 2008 0 comments
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Democracy’s fuel

by Riad Al-Khouri September 13, 2008
written by Riad Al-Khouri

The century-old concept of ‘economic quasi-rent’ is a return to factors of production in inelastic supply — or in layman’s terms income going to producers of relatively scarce commodities getting a lot of income for little extra effort. The outstanding examples of this in modern times are celebrities and oil-producers. The latter in particular have been having a great run over the past few years (the former have always done well). As the price of oil remains high, despite recent corrections, the Arab Gulf states are making even more unearned income. In other words, for a very small effort, they get a large return.

Aside from limited examples of diversified commerce, and some other services including tourism in a few places like Dubai, the Gulf countries can be described as “rentier states.” In the 1980s, writing on the notion of a “rentier state,” Giacomo Luciani implied that democratization in the Middle East was not viable. So long as states have sufficient income they may have little reason to reform, and into the 1990s and the beginning of the 21st century, his theory seemed to describe the facts.

The need to raise revenue is a basic reason why the state has an interest in the prosperity and economic well-being of its people. Without such an interest, it is possible that “rentier states” could display little tendency to evolve democratic institutions.

One factor that impedes democracy in the Middle East and North Africa, especially in oil-producing countries, is the lack of government dependence on citizen support, the state instead relying on oil revenues, of which there are plenty. However, Kuwait’s example over the last few years shows that this relationship of no-taxation/no-representation may not be immutable. Politics and the public space in Kuwait are becoming broader. The potential for a democratizing Kuwait is greater now that the price of oil has gone up, contrary to the theory’s prediction. Rentierism may thus not be the enemy of democracy.

Democracy in Kuwait is still a long way from what prevails in Western Europe or North America, but the emirate is far from being just a petro-state with nothing happening except oil gushing out of the ground and money being pumped into state and private coffers. The country is undergoing open debate about state institutions. Parliament requests ministerial testimony about possible corruption, prompting government interference in the legislature. Islamists have influence, and promise laws against the secular character of the state.

What is happening in Kuwait is partly a direct result of the modernization of politics that could become a formula for a limited form of rentier state democracy. While Kuwait is a typical rentier state where petroleum accounts for over 90% of exports and government income, its politics differ from those of typical rentier states, and parliamentary elections produce a collection of disparate political actors with different interests increasingly independent of the ruling family. In turn, the emir prefers to interfere more as a caretaker than a tyrant, and to allow for a modicum of open democratic politics according to constitutional rules.

Although these Kuwaiti experiences of representation leave much to be desired, despite all these limitations democratic development may be possible in the rentier state because of competing economic and social elites who benefit from the state’s drives for modernization. Future pressure may gradually produce better representation and participation.

As the price of oil soared from under $30 a barrel in most of 2003 to well over $100 during the last few months, the past half-decade has proven to be very good for oil-exporting states. With world demand for energy strong and its price rising, government coffers in the Arab Gulf countries have during that time benefited in a spectacular way. Kuwait is a case in point, as official revenues during the past fiscal year almost trebled from their 2003/4 level, mostly thanks to oil.

The bad news is that these numbers viewed in isolation suggest that Kuwait remains a classic rentier state, unwilling or unable to democratize or otherwise change for the better. If anything, the emirate should be wallowing deeper in rentierism as state dependence on oil rises. Yet the politics of the country may belie this. 

The idea of rentierism is clearly valuable, and it is also being applied to non-energy economies and sectors. For example, talking about Jordan as a quasi-rentier state, or analyzing the case of tourism in Egypt in terms of rentierism, as various writers have done recently, is instructive. However, as the last five years have shown, as far as the GCC states are concerned, the old equation of oil wealth with anti-democratic rentierism may need to be refined.

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

September 13, 2008 0 comments
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Banking & Finance

BLOMINVEST‘s review of Lebanese banks

by Stephane Abichaker, Nicole-Clémence Khoury & Nicolas Photiades September 4, 2008
written by Stephane Abichaker, Nicole-Clémence Khoury & Nicolas Photiades

In June 2008 BLOMINVEST published a review of Lebanese banks as part of its Global Equity Research Report series. The following is a summary of that report.

The Lebanese banking sector has always been at the core of the domestic economy with Lebanese banks playing a major role in the financial recovery of the country and carrying almost all of the latter’s financial intermediation activity.

• Lebanon enjoys high banking penetration rates with a deposits/GDP ratio standing at 2.82x in 2007e compared to 1.15x for the emerging markets. This is mainly due to the continuous inflow of funds from Lebanese expatriates which is driven by two important factors: the support of the international community as proven by the latest Paris III conference, and the strong track record of no default.
• The degree of fragmentation of the banking sector has been decreasing along with a fall in the number of active banks. Currently, 66 banking licenses are active out of which two thirds are Lebanese and 77% are commercial.
• This landscape results from foreign divestments, liquidity surpluses in the GCC countries, local diversification of business lines with an increasing focus on private, investment, and Islamic banking activities, and finally the BDL policy of supporting M&A activity between banks to avoid liquidation costs and to improve the efficiency of the sector as a whole. For instance, since 1997 around 30 banks were acquired or merged with the acquisition of BLC by Fransabank, with July 2007 being the most recent consolidation transaction.
• The 11 largest banks account for nearly 80% of the total sector’s deposits with BLOM and AUDI, the two largest banks, showing clear signs of pulling off the rest of the group due to higher assets, profits and greater geographical diversification.
• Despite immature local capital markets, the Lebanese banks were amongst the first banks in the Arab world to access the international capital markets by issuing GDRs, preferred shares and Eurobonds, reflecting comfortable financing flexibility.
• The major Lebanese banks have been seeking not only local but also international expansion in order to enhance their profitability, diversify their earnings’ sources and assets, increase their product range, and in time of crisis allow the channeling of funds to safer zones. Geographical expansion is also seen as essential for risk diversification.
• Traditionally, Lebanese banks have been mainly family-owned but the need in the last 15 years to raise capital via both the local and the international capital markets has diluted families’ stakes, albeit without affecting significantly their managerial control.
• The main driver of the Lebanese banks’ profits is interest income that arises mainly from inter- bank deposits, allocation of funds into mainly Lebanese sovereign bonds and treasury bills, and customers’ loans. Profitability indicators have been improving in the last few years, although the still limited diversification of income is causing return on assets and return on equity ratios to still lag regional peers. However, regional expansion is expected to promote earnings’ diversification by increasing non-interest income, and reducing the reliance on domestic income in the near future.
• Despite the cost burden that arises from the banks’ expansion strategy, Lebanese banks have managed to control their operating expenses, with BLOM leading in terms of operating and management efficiency.
• Amid the political and economic turmoil following the assassination of PM Rafic Hariri and the July 2006 War, customer deposits, the main source of Lebanese banks’ funding, grew significantly — over the past six years reaching $72 billion as at year-end 2007.
• Lebanese banks remain exposed to the Lebanese sovereign risk as around 25% of the banks’ balance sheet is accounted for by lowly rated government bonds and treasury bills denominated in both USD and LBP (Lebanon is rated B3 by Moody’s and B-1 by S&P). The high risk weighting on these government securities (as a consequence of Basel II regulations) is somehow mitigated by the high yields carried by these government securities and by the strong track record of the government in repaying principal and servicing debt. Moreover, the Central Bank has continuously enjoyed implicit support from GCC governments in maintaining high foreign currency reserve levels, and hence keeping the local currency stable.
• Loans account for a relatively low percentage (22% at end 2007) of the banks’ consolidated balance sheet. This is due to the lack of quality borrowers and to the limited ability of corporates to adequately service debt. However, NPL coverage by loan loss reserves is improving across the sector, with the smaller banks appearing to be in greater difficulty on that front than their larger peers.
• Capital adequacy of banks has improved significantly over the years with consolidated equity for the sector accounting for 7.6% of total assets as at year- end 2007. The larger banks in particular have a solid track record in capital raising within the international capital markets and have had a strong organic capital growth over the last decade due to solid profitability.

Stéphane Abichaker, Nicole-Clémence Khoury, Nicolas Photiades work at the equity & fixed income research unit of BLOMINVEST Bank.

September 4, 2008 0 comments
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Banking & Finance

Private equity – An absence of exits

by Executive Staff September 3, 2008
written by Executive Staff

On any given day, a scour of Middle East business news reveals that private equity in the region is ‘hot’, owing to favorable conditions at the macroeconomic level or data on fundraising and investment, which seem to be getting bigger. Watchers of the asset class meticulously track which funds are looking for which companies and which opportunities and sectors are attracting the most private equity. The asset class’ behemoths and large-sized deals in infrastructure and other industries dominate headlines. On the surface, the coverage of the asset class looks healthy.

However, the component of private equity which is less covered than capital raised and investments is the arm of the asset class which offers the best indicator of performance, the exit. Without appropriate exit data, it has been difficult to see what trend is following the explosive growth in the other sub-data available on private equity, beckoning the question: whither to the exits in Middle Eastern private equity?
A dearth of evidence continues to pervade estimates, but some figures have indicated that only 5-10% of private equity deals in the Middle East and North Africa (MENA) region have been exited. With private equity comprising 45% of aggregate investment in the United Arab Emirates (UAE) and 35% in Saudi Arabia, the relation between money invested and return on investment can indicate several things that a purely deal-side analysis cannot, including the asset class’ performance, potential pitfalls, and lagged performance to see if larger funds are or are not commensurate with larger internal rates of return (IRRs), the derivate used in calculating the success of funds, with ranges at 15-20% on the lower end and up to 100% in more lucrative examples. Because of some poor performance in regional bourses, private equity houses seem to be holding investments for a bit longer, waiting for appropriate exit options. With funds raised, investments complete and deals outstanding, limited partners (LPs) are going to starting demanding a return on their investment within the appropriate bounds of the fund timelines.

M&A doesn’t count
Distinct merger and acquisition (M&A) activity lies on a separate sheet from pure private equity. In M&A, a buyer bids and acquires firms to enlarge businesses both horizontal and vertically. In the case of horizontal M&A, a firm might be a competitor, but vertically, the acquired firm is a complementary entity. In the instance of a horizontal M&A transaction, a hotel chain might acquire a competitor to enlarge business or grow operations in new markets, be they different countries or a higher or lower-end of the business. In a vertical M&A transaction, the hotel chain might purchase a food services group to bring more of the hotel’s daily operations in-house. The M&A as a distinct transaction differs from the bread and butter type of private equity transaction where firms are first acquired and later exited rather than incorporated as part of a firm’s main business lines.
What then do the longer partnerships between private equity players and firms indicate? There are several speculative guesses, including the disparity in vision which could entangle maneuvering by management, making a firm reluctant to realize an exit. Another possibility is the poor exit environment, while still another is the possibility that private equity funds backed by institutional investors such as sovereign wealth funds (SWFs) are bound to the wishes of these LPs and blurring the pure business thought of profit and yielding to the ‘what’s best’ scenario for firms under management.

Trade sales
Some private equity exits have come in the form of the trade sale. This type of exit is viable for the region’s numerous family-owned firms, who would like to retain control after beefing-up the best practices instilled by a private equity firm. In June, 2008 the Foursan Group exited the Abdali District in Jordan to new investors via a trade sale, while Abraaj Capital exited both EFG-Hermes and the Maktoob Group via this route in 2007. Additionally, Injazat Capital exited its stake in Atos Origin Middle East, through a trade sale exit for the GCC-based technology firm.

Secondaries
The secondary market has given a new dimension to the private equity business. It is heralded as a way to unload a firm to another private equity player and will doubtlessly be used while more traditional exits like the initial public offering (IPO) route remain weak. The largest secondary transaction was Citadel Capital’s exit of Egyptian Fertilizers Company in June 2007 and while others have not been reported as secondary sales, the private equity to private equity nature of an investment is one way of gauging the exit type.

Strategic sales
The strategic sale of a firm to a related firm covering the same or similar industries is another possibility for MENA firms and might be the destination of most unreported or disguised exits. In June, the Foursan Group exited Arab Orient Insurance Co., a Jordanian insurance provider, to Fairfax Holdings, an insurance group looking to beef up the scope of its services.
Fairfax Holdings is a Western firm that acquired Arab Orient Insurance Co. for one possible reason: to expand Fairfax Holdings reach into a new market in the MENA region. With an ever growing population consuming ever more goods, firms servicing large markets with great potential will attract the likes of more Western firms looking to establish an arm in the region.

IPOs
The most traditional of exit options for private equity firms — the IPO — has not be used by firms reticent to face the valuation of a firm in the open market. According to Private Equity International’s survey, 33% believe that valuation and control are the greatest threats to the growth and development of the private equity industry in the Middle East while 25% believe it is non-initial public offering exits. In 2007, securities markets in the MENA region mimicked the situation globally and reported fewer groups in 2007 than year to 2006, when the turmoil on capital markets began. Although Q1 2008 performance remained poor, the situation as a whole for 2008 remains positive. For instance, the Saudi Arabian stock exchange has grown from a low in July 2007 to remain up over 25%. Regional bourses have followed similar trends.
However, a less sanguine conclusion is drawn vis- à-vis regional inflation rates, which can deteriorate investments and the value of companies choosing to list restructured operations now. In an approximated situation where capital market indices are achieving 20% annual growth in capitalization figures, double digit inflation can prick the balloon of optimism.

Large time horizons
With private equity firms tabling the immediate or traditional exit, the business is taking on longer time horizons for investments. The asset class’ main driver in the MENA region is currently infrastructure, which, by the nature of the industry, involves longer holding periods between investment and exit.
Initially evoked to describe pipes, roads, and ports, the term ‘infrastructure’ has come to include a myriad of sub-industries, including downstream industries and suppliers as well as networks involved in social infrastructure, namely the hospitals and schools being built to care for the populations of new cities and the growth dynamics associated with large Arab families.
Tertiary educational institutions, from new universities to research centers, are additionally accommodating the jobs to be demanded when the under-18-year-olds turn of age. For 51% of those surveyed by Private Equity International, infrastructure will attract the most investment interest in the next twelve months, followed by energy in a distant second at 20%. The two industries involve longer time horizons owing to the scale of deals as well as the timeline to realize results.
Private equity fits into the equation by its ability to recapitalize the infrastructure industry. Statistics have accounted for infrastructure projects comprising over 60% of new funds raised by regional private equity firms. New funds are sprouting up to bolster the demand. Al Khayyat, Rasmala, and RHT recently acquired a 13% stake of Taaleem, an educational specialist, which increased Al Khayyat’s stake in the firm to 25%. Taaleem is not the only education firm seeking or gaining capital to finance growth plans. Online educational resources, private educational institutions, books, and universities have all benefited from seeking out private equity growth capital, especially as many are battling for regional supremacy, moving beyond conquering just Riyadh and Jeddah to include operations in Abu Dhabi, Kuwait City, and Manama.
With longer holding periods and new industries in which private equity players are investing, the asset class has taken on a flavor distinct to the region. Two reasons come in play to understand this dynamic. The first includes the aforementioned style of partnership in the region, with LPs consisting of SWFs in addition to individual fund backers. Sovereign wealth does not expect the same returns on investment and deals can be political to an extent in that GCC SWFs partner with MENA-centric private equity houses to strengthen the business climate in the region. An additional factor less thought of is the need for strong financial services houses. Because private equity is the quintessentially efficient type of investment, the savoir faire of industry experts is useful in structuring the longer-term outlook of firms involved in infrastructure or energy.

September 3, 2008 0 comments
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Since its first edition emerged on the newsstands in 1999, Executive Magazine has been dedicated to providing its readers with the most up-to-date local and regional business news. Executive is a monthly business magazine that offers readers in-depth analyses on the Lebanese world of commerce, covering all the major sectors – from banking, finance, and insurance to technology, tourism, hospitality, media, and retail.

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