By Invitation

Uncodified knowledge: The Middle East‘s unique innovation opportunity

by Fabrice Saporito
written by Fabrice Saporito

For many years, the developed world had a near monopoly on technical innovation. European, US and Japanese companies conducted high-end R&D in their home markets and then sold the results at home or adapted them for other developed markets. But over the last few decades, the number of companies with innovation centers outside their home market has grown, from 45% in 1975 to more than 65% in recent years, according to a Booz Allen Hamilton study.

Over time, these emerging markets have succeeded mostly by developing particular niches — wide screen television in South Korea, for example, or distributed computing in India. Now, the Middle East is at a stage of development where it too might become a home to innovation. But in a world awash in advanced expertise, which niches remain unclaimed? The answer is a kind of innovation that’s not so easy to put into a box and ship, or to attach to an email. It is a kind of innovation Middle Eastern companies are uniquely suited to developing: uncodified innovation.

Unlike the innovation that is now developed in markets such as India and China, which focuses almost entirely on technical improvements to products and processes, in fields as diverse as the automotive or chemical sectors, uncodified innovation is the kind of innovation that happens as services and products are adapted to the needs and preferences of a new set of customers.
 

Cracking the Code

The growth of globally distributed innovation occurred because companies have grown increasingly good at codifying knowledge. Once codified, each piece of the knowledge that made up a product could be sent to the place where the most cost-effective advances on that product might be made. This reduced the redundancy within the system and in essence avoided the need to replicate R&D centers in each market.

A similar opportunity exists now for uncodified knowledge. In other words, instead of just shipping information about a new product and adapting it to the needs of the market almost as an afterthought, one could ship critical cultural understandings about multiple markets to a single innovation centre. Such a center could ease the cultural adaptation process and indeed the entire customer service experience, whatever the origin of the ultimate customer: essentially, to use a software term, to act as a kind of middleware that translates service offerings between cultures, to help insure, for example, that a hotel chain meets the hospitality needs of its Muslim customers, or that entertainment products are designed to appeal to a Middle Eastern audience.

The Middle East at the Innovation Crossroads

The Middle East is uniquely positioned to take up this challenge. Like the successful Silk Road economy of the 12th to 14th centuries, the new Middle East economy is ideally positioned between West and East. Indeed, it might even be said to be both eastern and western, since places like the UAE are now home to people from a wide range of nationalities, motivated by a set of economic incentives no other economy can provide.

In addition, the demand for new products adapted to the unique cultural and environmental traits of the Middle East is pushing many companies to innovate their products and services. For example, the decision of Time Warner to open a studio in the UAE to develop films and video games in English and Arabic is opening up a new market that was previously untapped.

Whether that means developing video games that respect Islamic cultural values, or developing new financial products to meet the demands of Islamic customers, the core activity involved is creating services that begin by understanding the needs of the customer, not the capabilities of the technology. And that particular process of customer-centered innovation is something the new Middle East could leverage to develop products and services for consumers elsewhere in the world who also have specific cultural sensitivities but are now grossly underserved by one-size-fits all services.

Creating a truly international innovation centre

Although this kind of innovation began with the need to adapt services to Muslim consumers and the specific challenges of developing a world-class business center in just a few short years, the ultimate function of becoming a center for uncodified innovation will be to provide better service to many different peoples all over the world. In this too, the new Middle East will have an advantage, in that it can leverage its identity as a uniquely cosmopolitan region, testing service solutions on local sub-markets and ultimately exporting these to other markets.

Tapping into the unique characteristics of this emerging international innovation lab to create a truly global innovation center will require companies to both apply discipline and yet be flexible. As with any R&D, there is a process of sensing, accessing, and melding knowledge, but the key difference here will be that the essential intellectual capital being created will be not be technology or a technical process, but a knowledge of the people for whom the product or service is designed — knowledge about the customers themselves, whoever and wherever they may be.

Fabrice Saporito is a principal at Booz allen Hamilton,

 

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By Invitation

Orient‘s budding markets beckon equity industry

by Rend Stephan, Ahmed Youssef & Albert Khoury
written by Rend Stephan, Ahmed Youssef & Albert Khoury
 
The private equity (PE) industry in the MENA region (i.e., the Middle East and North Africa) has witnessed significant change over the past five years, evolving from infancy stage to a multi-billion dollar growth market.

In 2003, the MENA private equity market was embryonic, with only 20 firms managing less than $3 billion in capital. In the five years since then the industry has mushroomed to more than 80 firms, with more than ten-fold growth in committed or announced funds. Furthermore, the private equity industry in the MENA region now accounts for a considerable portion of total mergers and acquisition (M&A) activity.

Behind this growth are a number of MENA-based private equity firms, which can be segmented into the following categories:

• Pure-play firms, both regional — such as Abraaj Capital, Amwal Al-Khaleej, and Citadel Capital — and international — such as Carlyle Group — focus solely on private equity and are typically wholly-owned by their general partners to ensure high alignment of incentives.

• Institution-linked firms — such as EFG Hermes Private Equity, NBK Capital Equity Partners, and Shuaa Partners — typically affiliated with regional banks or large conglomerates, can leverage their institutional relationships for fundraising, sourcing deals, issuing debt, and exiting.

• State-backed firms — such as Dubai International Capital — are owned by or linked to regional governments and possess strong networks, often at the government-to-government level, that enable them to source investment opportunities, particularly in regulated sectors.

First-movers such as Abraaj Capital, Amwal Al-Khaleej, and Citadel Capital have made a large number of investments over the last three years and several successful exits to date. First movers have built substantial knowledge, networks, capabilities, and reputations that have well-positioned them to raise greater amounts of capital and have a good view as to where it can be efficiently deployed.

Challenges of MENA private equity

While overall trends bode well for an industry clearly poised for growth, the MENA PE market remains underdeveloped in comparison to other developed and developing markets.

First, compared with other economies, the MENA region’s private equity market is small relative to its gross domestic product (GDP), with the size of the industry in MENA at less than 0.5% of GDP versus 2-3% for developed economies. This indicates significant untapped potential should the necessary investment enablers evolve to facilitate greater PE activity.

Second, PE market growth has been largely driven by a few mega-deals, with limited growth in the number of transactions over the last three years and an increase in deal size, with media transaction size increasing from around $10 million in 2005 to $30-50 million by 2007. The slow growth of transactions could indicate potential pent-up demand or simply difficulty in deal sourcing.

Third, deal sourcing remains highly proprietary, built on closed social and business networks beyond the few privatization or secondary buyout transactions. Many MENA private equity firms who are backed by high-net-worth individuals as their limited partners often source the bulk of their opportunities through their LPs, giving them a competitive advantage over their peer firms.

Finally, and reflecting the industry’s early stage of development, most PE firms have largely focused on “low-hanging fruit” deals — arbitrage, pre-initial public offerings (IPOs), and capital-restructuring plays — as opposed to more complex value creation plays, such as Greenfield investments, roll-ups, and turnarounds. While simple plays have generated returns in excess of 50% to date, this is typical of any young market dominated by first-movers who quickly exploit market inefficiencies.
 

Future outlook for MENA private equity

In order to capture market opportunities, MENA private equity firms will have to capitalize on three major industry trends expected to dominate this sector over the next five years:

First — Continued market growth: Significant investment opportunities in a number of sectors in the MENA region will create many opportunities for MENA private equity firms. This is particularly true in high-growth, capital-constrained markets where private equity can fill funding gaps that exist in the market. In addition, many geographic markets continue to remain “virgin territory” for the private equity industry and are now undergoing significant structural transformations, including trade liberalization, privatization, and capital markets modernization.

Second — Separation of leaders from laggards: The second trend we anticipate is that there will be more differentiation between top quality firms and other “me too” firms. Given the capital excesses and pressures to invest/exit, there may also be some level of consolidation over the coming years. Some less performing firms may end up positioning themselves as co-investors on deals led by top-tier firms, while others will try to compensate through alternative investment classes.

Third — Increased prevalence of more complex value creation plays: In line with the previous trend, top performing PE firms are likely to increase their use of more complex value creation plays, relative to simple plays that depend most on market inefficiencies. This trend is inline with developed markets where leverage and exit multiples play less of a role than operational enhancement in creating value.

Conclusions

Clearly, the MENA private equity industry has made considerable progress over the past five years. However, much territory remains uncharted with significant potential. As firms consume the remaining “low hanging fruit” there will be an increased focus on more complex (and lucrative) value creation plays, such as roll-ups and Greenfield investments, which require greater expertise.

It will, however, continue to be quite competitive and each PE firm will need to carefully think about where and how to play to add value. Each PE firm will need to have its own unique strategy in order to become more differentiated as the MENA PE industry matures.

 

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By Invitation

Which investments have been money-makers in 2008? How to invest in global macro hedge funds and commodities

by Madilean Coen & Christopher Peel
written by Madilean Coen & Christopher Peel
 
With financial markets becoming increasingly more volatile and correlated, investors have found the pursuit of positive returns and capital preservation difficult and are asking the question “Where do I invest in 2008? What sort of investment vehicle can profit from downside and upside market volatility and still provide an investor with liquidity, diversification and accurate pricing?

”The answer year-to-date has been (1) the Global Macro hedge fund strategy (+6.2% through end of February 2008 as measured by the HFRI Macro index) — a strategy that seeks positive returns trading within global financial markets using a multitude of asset classes and financial instruments which includes both long and short directional exposure to stock market indices, currencies, commodities and bond markets; and (2) investments in commodities (+11.23% through the end of February 2008 as measured by the Goldman Sachs Commodity index).

Both of these sectors are arguably best accessed via hedge funds, which have attracted the top investment talent globally over the past several years and have been the natural choice for investors seeking to generate absolute returns from long and short positions rather than long-only passive investing. Historically, hedge funds have been well-equipped to deliver superior risk-adjusted returns and offer a low correlation to more traditional types of investment. However, the huge explosion in the numbers of hedge funds over the last few years has meant investors can sometimes become overwhelmed when trying to navigate the sheer number of choices of trading strategies and funds that comprise the hedge fund industry.

Given the complexity of many hedge fund trading strategies it is no surprise that funds of hedge funds (FOHF) offer a way to invest into this asset class. These specialist money managers offer a perfect vehicle: investment into several actively managed hedge funds in a single portfolio. However, most funds of hedge funds lack a focused strategy and in fact have become more over-weighted towards equities, thus depriving the investor of portfolio diversification when it is most needed.

Data going back to 1992 has shown that the rolling 36-month correlation between the MSCI Europe, Africa and Far East index and the HFRI Fund of Funds index had risen from near zero in 1992 to over 80% by December 2007. This highlights weaknesses in both the style and the bias of many funds of funds. Put simply, many fund of funds managers have increasingly focused on investing in equity trading strategies and therefore returns may be lower in the future given the forecasted slowdown in world growth.

This is a very strong argument for a sector-specific fund of hedge funds when considering this type of investment. Investors should be diversifying away from equities and into hedge fund management styles that have performed best when equities are in a bear market phase. Additionally, they should look for a fund of funds that targets performance over size of assets under management, where the fund of funds has a high level of expertise in their chosen area of investment and can identify the top hedge fund managers and gain access to those hedge funds. For example, the most highly regarded global macro hedge fund managers have long track records (+20 years) and have demonstrated profiting from the 1987 stock market crash, the 1990 Kuwaiti oil Gulf crisis, the 1997 Asian emerging market crisis, the 2002 global stock market correction and, of course, and the volatility demonstrated in 2008 thus far.

The problem is that managers who have successfully realized positive returns in the above environments are often closed to new investment and/or have large minimum investments (often $10M plus). A superior fund of funds can source, perform qualitative and quantitative due diligence, and negotiate capacity into these top hedge funds. It will also pool client assets together so that investors may invest in several of these top single manager hedge funds — thereby mitigating single manager investment risk at a much lower minimum investment amount for the individual investor.
 

Global Macro Fund of Funds

Global macro hedge fund managers are typically known to utilize a top-down, thematic investment approach and pursue directional trading strategies in the world’s financial markets utilizing stocks, bonds, interest rates, currencies and commodities.

In practice, what this means is that the hedge fund manager does not restrict himself to a single market or asset class but trades on an opportunistic basis across many different markets. Successful macro fund managers apply their specialist econometric understanding of the world and allocate risk within this framework. This means that they will be looking for markets to be long or short without having to favor one style or market over another. The upshot of this is that macro funds have been proven to capture both the upside of any equity market rally, but more importantly have shown an excellent history of returns when equities have fallen out favor.

An astute reader might now ask why all hedge funds of funds are not invested in macro strategies?

The answer lies in the fact that most hedge fund of funds managers are not equipped to fully understand macro strategy. They have been wary of macro hedge funds because they are difficult to pigeonhole as equity, fixed income or commodity funds. But a fund of hedge funds that specializes in investing in macro funds can offer an excellent opportunity to gain some exposure to this non-correlated type of hedge fund trading strategy, even if the manager has a proven long-term track record and is closed to new investment.

Commodity Fund of Funds

Commodity hedge fund managers typically utilize a fundamental investment approach that combines both macro economic research and traditional supply/demand analysis to construct directional, commodity trades within energy, metal and agricultural commodity futures and option markets.

As a result of falling global supplies and increased global demand, over the past five years many of the commodity markets, from fuel and energy to agricultural commodities and precious metals have seen an incredible rally. Irrespective of the present state of the equity markets, the rally in commodities will likely continue as demand from emerging economies such as China and India seek to:

1. Improve their diets and standard of living (agricultural commodities: meats, coffee, sugar, cocoa, eggs; as well as energy: crude oil, natural gas, etc).

2. Improve their infrastructure by building new homes, railroads, airports and even cities (base and precious metals). The above will likely replace any fall-off in demand from developed nations.

In addition, commodities have traditionally acted as an excellent hedge against inflation. Commodities will therefore continue to benefit as an asset class as central banks universally relax their focus on fighting inflation as they cut interest rates to promote growth and financial stability.

Finally, the commodity markets are themselves very distinct in nature from the equity markets. They can be constrained by factors such as the supply of land on which to grow crops or the rate of discovery of new mineral deposits, they may be influenced by weather or the cost and availability of transportation. All of these factors add up to make the commodity markets quite independent of equities and an excellent asset class for portfolio diversification. However, most investors are wary of investing directly in commodities, a long-only index or even a single commodity hedge fund manager. Again, for long/short commodity exposure to the top commodity trading talent a fund of hedge funds pool focusing on the commodity sector clearly makes the most sense.

 

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Capitalist Culture

USA – Primary mistakes

by Michael Young
written by Michael Young

As the US primary elections wind down, with some dozen left between April and June, largely absent from the debate has been the matter of democracy in the Middle East.

Even the Bush administration, with democracy as its rhetoric centerpiece, has largely ignored the practical implications of this when dealing with its autocratic Arab allies. Given the rise of Iran in particular, the US has systematically played down human rights abuses and political under-representation, believing now is not the time to embarrass governments whose priority is, like Washington, containment of the Islamic Republic.

Rather than focusing on democracy and how the US can spread its values overseas, the candidates, particularly the Democrats, have started from a premise that American efforts to push its values onto others has harmed America’s image overseas. So, for example, Hillary Clinton argues on her website that “America is stronger when we lead the world through alliances and build our foreign policy on a strong foundation of bipartisan consensus. [I] will lead by the words of the Declaration of Independence, which pledged ‘a decent respect to the opinions of mankind’.”

Barack Obama also supports “bipartisanship” in US foreign policy, but also proposes talking to America’s foes, such as Iran and Syria (unlike the “Bush-Cheney approach to diplomacy that refuses to talk to leaders we don’t like”), and wishes to employ American diplomacy proactively. His campaign website promises, for instance, that he will “stop shuttering consulates and start opening them in the tough and hopeless corners of the world … [Obama] will expand our foreign service, and develop the capacity of our civilian aid workers to work alongside the military.”

There is certainly much to be said about hostility toward the Bush administration around the world. Some of that antagonism may be justified, though one has to wonder whether Iraq factored disproportionately into the thinking of many. After all, Washington has not behaved any more unilaterally than its predecessors when dealing with such crises spots as Lebanon, Afghanistan, North Korea, Iran, Venezuela, Palestine, Kosovo, even Iraq after the initial phase of the war ended.

Indeed, one might argue that when it came to Iraq, but also Afghanistan, Lebanon, and Kosovo, the Bush administration’s willingness to be hard-nosed made all the difference in liberating previously stifled peoples. It is undeniable that the Iraq war could have been managed infinitely better, savings tens of thousands of lives, and that Afghanistan is far from stabilized; but without the US, Saddam Hussein would still be in power, to the chagrin of a majority of Iraqis, and the Taliban would, similarly, be imposing their mad, medieval designs on Afghans. Few are the Lebanese who regret the Syrians’ departure, and it is largely thanks to American backing that Kosovo’s independence has become a reality.

In contrast, those who speak about “improving America’s image in the world” seem less clear about what this means in practical terms. No doubt being hated is a problem for any country, particularly so powerful a country as the United States that needs to build international coalitions to forward its preferred agendas. But is there any sign that “being loved”, or even just being “liked”, makes much difference globally? Not really. Why is it that Americans alone seem so keen to raise this odd question of affection, when most other states pursue their interests without bothering about whether they are liked or disliked?

What the Bush administration has gotten wrong, and its successor will likely get wrong too, is that the only credible benchmark for global influence is respect, therefore success, not popularity. In focusing on affection as the goal in improving America’s image, policy thinkers ignore that no powerful nation is ever truly liked. America’s condition will not improve because Arabs or Asians tell Pew researchers in a year’s time that they admire America more than today. America’s condition will improve when the foundations of its admired capitalist culture are strengthened. These include a defense of open markets and open minds, a rejection of despotism, and a reliance on the soft power of persuasion and example, in addition to a willingness to use hard power when this proves unavoidable.

To expect the US, or any state, to be absolutely consistent in its behavior is asking too much. Politics doesn’t work that way. But to have no guiding principle to base action on can be almost as damaging as appearing to fail in one’s aims. That’s why the Bush administration has paid so heavily for its efforts in Iraq, Afghanistan, and elsewhere. It is seen as a loser, whether this view is fair or not.

All the US candidates should remember this when they issue vapid proclamations about America’s image in the world. To be cliché: there is no success like success, particularly in the defense of liberal values. What all the candidates should be doing now is determining whether their foreign policy options will actually meet this standard.

Michael Young

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A Universe Apart

by John Defterios
written by John Defterios
 
The Great Eastern Hotel near Liverpool Street train station was designed with the City of London financier in mind. Its minimalist interior, clean lines and discrete atmosphere create the right setting for business people to work on a deal or attend a mid-sized forum.

I escaped into the Great Eastern in late March for a few hours at a gathering of Egyptian ministers and business people to discuss the outlook for the region’s most populated country. The talk inside the meeting room was about robust growth of 7%, foreign direct investment hitting a record $11 billion dollars and re-positioning Egypt to capture more than its fair share of Gulf petrol dollars.

On the way over to the meeting, I read my morning paper with headlines reacting to the Federal Reserve’s orchestrated bailout of Bear Sterns and yet another drastic cut in U.S. interest rates to help cushion the blow of the slowdown. This was followed by rampant rumors in London of an imminent collapse of a leading retail bank. The rumors sparked an investigation.

Inside the foyer I took time for a few interviews to sound out my views that we are not living in one global economy right now. “It really does seem like two parallel universes,” said Marwan Elaraby of Citadel Capital the Egyptian investment bank.

“You drive around Dubai or the more frontier emerging economies of the region, you would never guess what is happening in the world economy. What is happening on Wall Street or the City of London seems like a universe away,” added Elaraby.

The dollar continues to tumble; oil continues to surge; prices everywhere for staples are skyrocketing. Despite the rosier economic outlook, protestors in Cairo demanded that President Hosni Mubarak do something about the cost of bread. History buffs know from Roman times that economic growth alone does not deliver votes, but affordable access to bread certainly does.

Finance is Confidence

Middle Eastern players are not ignoring the red-lights of concern flashing on Wall Street, quite to the contrary. They are hoping to minimize the impact. As co-founder of Beltone Financial, Aly El-Tahry noted: “Finance is confidence. As long as you don’t have a catalyst or something that diverts the present expectation from this negative mood, we’ll continue to have uncertainty.”

For Egypt that may translate into a drop of up to 1 percentage point of growth this year according to the country’s Investment Minister Mahmoud Mohieldin. While he acknowledged the challenge, the 42-year-old minister added some bigger picture thoughts on what this might eventually mean.

“I’m much more concerned about the policy formulations in the future because the kind of extreme pragmatism that we’re witnessing today could be justified in the short term by uncertainty, by requirements of having to make and to do some quick actions to fix problems,” said Mohieldin. The Worldcom fiasco led to Sarbanes-Oxley. This severe credit crunch he worries may lead a new White House occupant to move into action to limit trade or the flow of financial investments.

Let’s hope not. We, however, have heard very little from the three remaining presidential candidates on what they would do about the Doha trade round, sovereign wealth funds or the sinking dollar.

Meanwhile, back in the foyer of the Great Eastern, the talk remains on creating new opportunities. Egypt is in the midst of creating a new industrial investment hubs and expanding IT centers. For that to come off the ministers know that skills need to match the demands of companies such as Microsoft or Oracle who already have a presence there.

With this economic boom underway in the region, the players are looking to India and China for inspiration, not Wall Street or the City of London .
 

 

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Closing the doors on oil’s big boys

by Paul Cochrane
written by Paul Cochrane

The halcyon days of cheap energy, pliable governments and a public that didn’t care about pollution or global warming are over for the international oil companies (IOCs). This we all know, or are slowly coming out of a somnambulant state to realize, but recent trends in the oil industry are presenting further concerns for IOCs at the very same time as they report bumper profits on the back of high oil prices.Energy giant ExxonMobil reported a $39.6 billion profit for last year, BP $17.39 billion and Shell $27.6 billion. Such profits were deemed ‘obscene’ in the British popular press, as indeed they might be perceived to be, but what was less noted amid the hullabaloo was that BP saw profits plunge 22% in 2006 — and is now laying off employees — and that Shell is to sink $26 billion of its profits into developing new projects. Likewise, ExxonMobil spent $21 billion in capital expenditure last year, but production increased by less than 1%.

So what is behind this change in fortunes? After all, the IOCs had enjoyed year-on-year record profits for the past five years, demand is still rising and oil looks like it will continue to hover around $100 a barrel.

The problem that IOCs are facing is production and access to energy reserves. The cost of production has surged from $5 a barrel in 2000 to $14 in 2006, largely due to the rising costs of extraction as well as construction of upstream and downstream facilities.

This was evident in the amount Kuwait’s National Petroleum Company (KNPC) had to shell out to build the 615,000 bpd Al-Zour refinery, the world’s largest purpose built facility of its kind.

The original budget was $6.3 billion, but with the cost of raw materials doubling and even tripling in the Gulf, no construction firm would touch the project and the refinery was on the verge of being shelved. But so important is the refinery to the Kuwaitis that the government eventually capitulated last September, earmarking a staggering $14.29 billion to get the job done.

“We are now touching un-chartered territorial waters, the value of contracts in the billions of dollars,” said Ahmed al-Jemaz, KNPC deputy managing director of the Shuaiba refinery.

Such spiraling costs are naturally of concern to IOCs — Shell admitted a 10% annual increase in inflationary costs — but of more pressing concern is the access to energy rich countries.

One by one, doors are being closed to the IOCs as countries re-nationalize resources. Last year, Russia put the screws on BP and Shell to hand over majority stakes in gas operations to the state-run Gazprom, Bolivia nationalized gas and oil fields, Ecuador used military force to take over Occidental Petroleum’s holdings, and Hugo Chavez gave IOCs a choice: handover majority stakes to Venezuela’s national oil company or face complete nationalization of operations in the Orinoco River basin.

In the case of Venezuela, BP and Norway’s Statoil Hydro opted to stay but for ConocoPhillips, which pulled out, the loss of its Orinoco holdings saw the American company’s second quarter earnings plummet by 94%.

The loss of these countries, coupled with growing competition from national oil companies (NOC) around the world — a cursory glance at the countries in which NOCs operate is more than ample to see they are not confined to exploiting their own national resources — is what Jeroen van der Veer, Shell’s chief executive, was quoted as saying is a dangerous trend.

IOCs can be thankful, then, that the MENA region is not part of this re-nationalization phenomenon, but Arab governments are savvy enough to know they don’t have to be taken for a ride.

IOCs are having to face the reality that to access the likes of recently de-nationalized Libya, with proven oil reserves of 41.5 billion barrels and only 30% of the country explored, deals are getting tough.

This was apparent at the last round of bidding in December, where 35 companies were pre-selected to bid for 41 gas blocks, but only 13 companies put in bids and only four blocks were awarded out of 12 licenses.

The lack of interest by IOCs was attributed to ‘uninteresting’ blocks offered by Libya’s NOC, but most notably it was Tripoli hand-

picking companies that would provide the highest share of production, with Gazprom offering 90.2% of any production in finds in western Libya and Shell offering 85% to search for gas.

Such tight restrictions were not there to access Palestine’s recently discovered gas, with only 25% going to the Palestinian Authority, and Iraq’s oil law looks like it will hand over the lion’s share to IOCs, but Libya is not alone in the region with its tough stance.

The only thing that the IOCs have on their side right now is the skills and technology that NOCs don’t — as of yet — have.

All in all, it looks as if 2008 will be another roller-coaster year for the IOCs while NOCs, albeit not necessarily laughing all the way, can at least show some bravado on their way to the (central) bank.
 

PAUL COCHRANE is a freelance journalist based in Beirut. His work has appeared in Britain’s Petroleum Review.

 

 

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Did they ever get it wrong…

by Claude Salhani
written by Claude Salhani

US President George W. Bush and his Secretary of State Condoleezza Rice thought they could solve the Middle East’s core problem — the Palestinian-Israeli dispute — by organizing a peace conference in Annapolis late last year. Having succeeded in bringing together Israelis and Palestinians, as well as Syrians, Saudis and numerous other countries for a meeting that was big in aspect though short in context, the administration bathed in the euphoria of its temporary success. ‘Temporary’ here is the key word because since November of last year, and since Bush’s promise of peace before his mandate expires in January 2009, the Middle East once again finds itself caught in a deadly spiral of increasing violence.

Talk about misreading signals, misjudging reactions and misguided policies.
Since the Annapolis conference Gaza, with its 1.4 million inhabitants besieged by the Israeli military and under Hamas control, sits on the brink of all-out war. As Hamas continues firing Qassam rockets at Israeli population centers and Israel hits back, civilians are caught in the cross-fire on both sides; Jerusalem has been the target of one of the worst terrorist attacks in years when a lone gunman opened fire on yeshiva students, killing eight and wounding another 10; the Lebanese presidential crisis, now in its fourth month, has pitted Syria and its Lebanese allies against the country’s government who enjoys the support of the United States, France and Saudi Arabia. As a result the Saudis have recalled their ambassador to Damascus, while the United States has dispatched three naval gunboats — including the USS Cole — to the eastern Mediterranean in what can only be seen as a revival of gunboat diplomacy. Amidst all this one must not forget Iran, who is believed to be pursuing its nuclear ambitions

So much for peace within the year. Indeed, seen from Washington, the situation in the Middle East looks quite dim, and despite Bush’s misplaced optimism, try as one may, it is hard to see any light at the end of the proverbial tunnel, unless it’s those on Merkava tanks heading for Gaza or for southern Lebanon. Analysts and diplomats have voiced their pessimism regarding the short-term future of the region. As for the long term, no one is really daring enough to venture any thoughts. Suffice to say that events are affecting the region’s economy in a way that, if allowed to continue to deteriorate, may result in drastic — and dangerous — measures.

Many believe that President Bush waited far too long to become actively involved in the Arab-Israeli dispute, and now Washington’s efforts are too little and too late. Additionally, the Bush administration’s policy of refusing to recognize the importance of talking to four major players in the region — Syria, Iran, Hizbullah and Hamas — cannot possibly advance the peace process. Syria, much as Iran, holds great influence on the Lebanese Shiite organization, Hizbullah, and the Palestinian Hamas movement. Much as the White House hates to admit it, the road to peace in the Middle East unavoidably passes through Damascus.

Meanwhile, as one of former President Bill Clinton’s campaign slogans so adequately pointed out, “it’s the economy, stupid.” The dangers of a regional flair-up cannot be ignored as Israel begins to feel the economic crunch of its war with Gaza. Cities such as Sderot, well within Hamas’ range of Qassam rockets, have seen their economy take a turn for the worse. In fact, Israel’s policy regarding Hamas has met with about as much success as Washington’s and the siege of Gaza has backfired. The storming of Gazans across the border into Egypt demonstrated that the policy of trying to contain the Strip has failed to yield the desired results and is having a negative effect on Israel’s economy.

As a result of the continued bombardment, a number of businesses have been obliged to lay off personnel as residents of border localities limit their activities to the most basic and urgent needs. Hoping to incite the people of Gaza to move against Hamas by exerting pressure through the embargo maintained by Israel, ironically, this policy is coming back to bite Israel’s own economy. And herein lies what could be the tipping point. Israel’s Prime Minister Ehud Olmert, already suffering from lack of popularity, a position amplified by the fiasco of the Lebanon War and the ongoing undeclared war with Gaza, may feel obliged to address the situation through military action. As in the past, such short-

sighted policy will only serve to strengthen those opposed to the peace process; a process which can only advance under the guidance of the United States’ influence. But for that to succeed a change of policy is first required. This is unlikely to happen before there is a change in the White House’s Middle East policy, or a change in the White House.

Claude Salhani is editor of the Middle East Times.

 

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Are UAE consumers starting to feel the pinch?

by Alex Warren
written by Alex Warren

In many ways, the UAE is a retailer’s wet dream. The population is growing quicker than almost any other in the world at around 4.5% per annum; consumers have higher disposable incomes than pretty much anywhere else in the Middle East, apart from Kuwait; and in per capita terms, consumer spending in the UAE is miles above other markets in the region.And people here have some solid reasons to be confident when it comes to spending their hard-earned cash: there is no income or corporate tax, there is no VAT, petrol costs a fraction of what it does in most developed countries, and many goods — especially things like electronics or cars — are dirt cheap.

But it’s not that surprising to see some recent signs suggesting that the UAE’s affluent consumers might just be beginning to lose a little of their confidence. A regular survey, which was last conducted in January 2008, asked interviewees to give a score out of 100 for a number of different categories based on how confident they felt for the coming six months.

Compared to the last survey, which was conducted in July 2007, the overall index fell markedly from 88.8 points down to 78.5. The biggest slide was in the ‘regular income’ category, while ‘quality of life’ and ‘employment’ also dropped off.

So what’s making people more worried than they were six months ago? First off, inflation doesn’t show any signs of falling. Officially, it stands at around 7%, but in reality it’s in double-digits: a recent study by Merrill Lynch argued that inflation was in danger of hitting 12% in 2008, which would be a 20-year high. That is still lower than Qatar, but is nevertheless growing at a much quicker rate than salaries

For your average UAE resident, it’s food and housing that have probably experienced the most alarming price jumps. Various local studies found that the cost of basic foods rose by around 27-30% in 2007, and could be rise again by as much as 40% in 2008. This has prompted the government to put artificial caps on the consumer cost of staples such as rice, and to consider stockpiling food supplies in advance to avoid other unwanted price rises later in the year.

Rents, meanwhile, continue to go up in double-digit figures every year. Caps on annual rent increases have been introduced across most of the seven emirates, but only apply to those residents who are renewing their leases, and not to new arrivals, who have to pay the full market value. Great news for investors and speculators, not so good for your average employee.

Moreover, the seemingly endless decline in the US dollar — to which the UAE dirham is still pegged — has made the cost of imports much higher. The UAE has relatively little domestic production capacity in most sectors, keeping it highly dependent on importing most types of goods. With the dirham losing value daily, imports are becoming more and more expensive — with the prices naturally being passed on to residents.

Murmurings about the introduction of tax are also starting to stir up concern. Plans are reportedly afoot to unleash value-added tax (VAT) sometime in the future, although this would seem to contradict other government efforts to keep consumer prices down, and in all probability will not happen for some time. There has also been talk of the (for now unlikely) possibility of income or corporate tax, while motorists are feeling nervous over the prospect of a rise in the price of petrol.

But perhaps more revealing is the decline in the quality of life. This is a more aspect of consumer happiness, but factors such as the crippling traffic in Dubai — which shows few signs of abating despite a series of new roads and bridges — hardly make for an enjoyable working life for many people. What’s more, a recent study found that air pollution in Dubai was amongst the worst in the world.

Although, in the grand scheme of things, consumer confidence is still comparatively healthy in the UAE, companies and the government must be careful to nurture residents’ confidence levels whilst balancing them with corporate profits. The UAE is already a highly transient place, with many people tending to stay a year or two before moving on elsewhere, while in terms of culture, history or entertainment, cities like Dubai or Abu Dhabi simply can’t compete yet with the likes of London, New York or Paris.

So to attract skilled, world-class talent that will allow the country to seriously compete on a world stage, it needs to make sure that expatriates keep getting a sweet financial deal compared to their home countries.
 

Alex Warren is a Dubai-based freelance consultant and writer.

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NATO looks to the region

by Riad Al-Khouri
written by Riad Al-Khouri

The North Atlantic Treaty Organization (NATO) has expanded since the end of the Cold War, both in membership and geographic scope. The alliance and its individual countries have headed south and east: their presence in the Middle East and North Africa (MENA) has deepened, as regional states joined the Atlantic alliance’s multilateral security efforts following elevation by NATO in 2004 of its Mediterranean Dialog to a working partnership. Bilaterally, various MENA states link up with the United States as Major Non-NATO Allies (MNNAs) to work with Washington. Additionally, there are bilateral steps by some individual European countries keen on consolidating strategic positions in the region: examples of this include France’s Mediterranean Union idea, which emerged last year, and the agreement in January between Paris and the United Arab Emirates to set up a French military base in that Gulf state.Parallel to these security moves, the West has since the end of the Cold War been expanding into MENA with increasing economic force. Particularly since the mid-

1990s, the Europeans and America intensified commercial diplomacy with the region through agreements to liberalize trade. In this respect, Jordan has an advanced status vis-

à-vis the West, being the only MENA state simultaneously having US Free Trade and Qualifying Industrial Zone agreements, as well as an EU Partnership accord along with membership in the parallel Agadir process. Jordan’s strategic position has also helped the kingdom obtain MNNA status, as well as develop links with NATO. As part of the process of strengthening the latter, in December 2007 NATO launched the first Mediterranean Dialog Trust Fund, to assist Jordan with elimination of explosive remnants of war. Involving contributions from NATO states Norway, Spain, Italy, and Belgium, as well as non-members Switzerland and Finland, this first ever Trust Fund project with a Mediterranean Dialog partner marks the start of a new kind of use of the Alliance’s expertise to achieve both security and economic goals, the latter including improved land use.

Just as a security dimension is important in US and EU economic partnerships with MENA countries, this step by NATO in Jordan demonstrates that the reverse is also true, with a Western military alliance willing to work on non-

security issues in the region. As NATO’s role evolves further, and with the overall situation in MENA in a state of flux, this mixture of economic and strategic elements could become more common.

Another interesting aspect of the Mediterranean Dialog project in Jordan is that the finance comes from European states, mainly EU members, but still in the framework of an alliance the spans both sides of the Atlantic. With Europe providing the funding, can it also be in charge? Finance through a trust fund means that Europe literally entrusts NATO with managing its money, which means an American element is also part of the process. However, if, as it now looks, Europe is going to be paying for more such NATO activities, the purely “European” face of NATO could become more apparent, further emphasizing schisms that already exist in the alliance.

An alternative is for European countries to project force and look for co-operation in MENA on a bilateral basis, thus discarding the excess baggage that a link with the US sometimes brings. However, that in turn might exacerbate strains inside Europe – and within the EU in particular. For example, there is already muttering from Germany about France’s Mediterranean Union idea not sufficiently involving northern European Union countries.

Members of the Atlantic partnership will continue to be involved in competition in the region: what role could NATO play in this complex process? Apart from greater geographical scope, the alliance should also continue to broaden its horizons towards development and application of non-military means to achieve security.

In the MENA powder keg in particular, NATO should try to prevent conflicts by eliminating the reasons for them through applying primarily non-military means in a proactive flexible manner. This will inevitably mean integrating NATO activities with the capabilities of different international alliances or countries. That in turn underlines the importance of improved cooperation between NATO and the EU, which of course is already a key player in MENA — but also an economic rival to the US in the region.

This brings us right back to the recent strains in the Atlantic alliance, and Western powers’ competition in MENA. In that respect, regional states’ relations will continue to evolve multilaterally with NATO and with the EU on the one hand as well as bilaterally with the US on the other. This means that Jordan and other MENA countries need to continue maneuvering diplomatically to gain the most out of Western powers’ interest in the region.

Riad al Khouri is a visiting scholar at the Carnegie Middle East Center, and Senior Fellow of the William Davidson Institute, University of Michigan.

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USS Cole comes to Lebanon

by Nicholas Blanford
written by Nicholas Blanford
 
“Once, I remember, we came upon a French ‘man-of-war,’ senselessly firing cannon shots into the African jungle,” narrates Marlow in Joseph Conrad’s “Heart of Darkness,” his novel about madness and power in 19th Century Africa. “In the empty immensity of earth, sky, and water, there she was, incomprehensible, firing into a continent. Pop, would go one of the six-inch guns; a small flame would dart and vanish, a little white smoke would disappear, a tiny projectile would give a feeble screech — and nothing happened. Nothing could happen. There was a touch of insanity in the proceeding, a sense of lugubrious drollery in the sight.”

Conrad’s description of the pointlessness of Western naval power against the impassivity of a continent came to mind with Washington’s announcement in February that it was sending warships to patrol the Levantine coast in a less than subtle message to its opponents in the region.

“This is an area that is important to us, the eastern Med,” said Admiral Mike Mullen, the chairman of the US Joint Chiefs of Staff. “It does signal that we’re engaged, we’re going to be in the vicinity, and that’s a very, very important part of the world”.

The first ship to steam to the Lebanese coastline was the USS Cole — which was badly damaged in an Al-Qaeda suicide attack in Yemen in 2000. The symbolism of deploying a ship closely associated with the “war on terror” was not lost on the Lebanese, and predictably sparked intense speculation as to what it all meant.

“Arrival of destroyer USS Cole: Is it a show of force or for the use of force?” asked a headline in Al-Hayat.

The USS Cole soon departed to be replaced by the USS Philippine Sea and the USS Ross, all part of the US Navy’s Nassau battle group, consisting of six ships including amphibious troop carriers.

Of course, US warships regularly ply the waters of the eastern Mediterranean, it falls within the purview of the US Navy’s Sixth Fleet. But the difference this time was the decision by Washington to pointedly announce the deployment beforehand.

The affair was clumsily handled by the US, however. Having apparently received no prior notice of the deployment, an embarrassed Prime Minister Fouad Siniora had to fend off opposition accusations that he was an American stooge forced to rely on US military muscle to prop up his weak government. It is hardly likely that Siniora would have requested the presence of US warships and he may well have registered his objection to a public declaration if he had been previously notified.

The Hizbullah-led opposition was handed a propaganda coup. It could point to US aggressiveness in sending warships to Lebanon, as well as the impotence of the gesture. Hizbullah and Syria, the presumed recipients of the US muscle-flexing message, would not be impressed by a couple of ships sailing a few dozen kilometers of the Levantine coast. After all, the USS Cole and the other guided missile destroyers that replaced it were hardly likely to fire their armaments of Tomahawk cruise missiles into Lebanon or Syria.

Indeed, it was a strangely old fashioned gesture for the US to make. It was redolent of a bygone era when Europe’s imperial powers responded to crises in their far flung colonies by sending a battleship — giving rise to the phrase “gunboat diplomacy”.

It may also have symbolized the frustration felt by the Bush administration at the continuing impasse in Lebanon and the inability of the US or its French and Arab partners to break the deadlock. Deploying warships to the eastern Mediterranean paradoxically demonstrated the limitations of US power in influencing developments in Lebanon and Syria. Syria long ago chose to ride out the storm of Bush administration displeasure and wait for a change in the White House. Naval maneuvers in the eastern Mediterranean will not persuade Damascus to change course.

Indeed, the history of US military muscle-flexing in Lebanon is not a happy one. The last time there was such a public display of US naval might this close to Lebanon was in 1983 during America’s ill-fated intervention in Beirut. The USS New Jersey, a World War II dinosaur armed with massive 16-inch guns, arrived off Lebanon two months after the US Marine barracks in Beirut was destroyed by a suicide bomber, killing 241 US servicemen. The USS New Jersey fired on Syrian troops and allied militia positions in what was the heaviest shore bombardment since the Korean War. Many Lebanese still recall the “flying Volkswagens”, the name given to the huge shells that struck the Chouf. The sporadic barrage, which lasted nearly two months, killed the top Syrian general in Lebanon. The shelling, in which civilians also were killed, helped cement anti-American sentiment.

In early February 1984, pro-Syrian militias took over West Beirut, spurring President Ronald Reagan to order a Marines evacuation. The Marines left by the end of the month, ending what then US Defense Secretary Caspar Weinberger called a “particularly miserable assignment.”

Nicholas Blanford is a Beirut-based journalist and author of “Killing Mr. Lebanon — The Assassination of Rafik Hariri and its Impact on the Middle East.”

 

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