Executive Magazine

Region’s insurance market has ups and downs

by Executive Staff April 12, 2007

written by Executive Staff

The insurance industry in the Middle East has been sitting on the launch pad of great expectations for a very long time. Regulatory changes and the growth of Islamic insurance services are central to suppositions that more customers will flock to insurance around the region. In terms of geography, the main carriers of promise are Saudi Arabia and Syria: two severely underinsured countries which both last year implemented legislation opening significant new spaces for insurance providers.

Saudi Arabia is currently buzzing with an insurance gruenderzeit, at least as far as its stock market. All seven companies that staged initial public offerings in the first quarter of 2007 on the Tadawul bourse were insurers, and they offered $162.3 million worth of shares to Saudi subscribers.

The largest of the seven IPOs was that of Medgulf Insurance, the biggest provider in the kingdom after NCCI, the former monopoly provider that pioneered the move of insurance companies to the Saudi stock market when the state-owned company was privatized to 70% through an IPO. Medgulf, which had previously operated in Saudi Arabia through a Bahraini offshore unit, offered 25% of its shares for $53.3 million in late February. Other shareholders in Medgulf Saudi are the companies of the Medgulf Group from Bahrain and Lebanon (together 35%), Saudi Investment Bank (19%), and 21 other investors, most of them Saudi individuals, who hold between 1% and 2% each.

Medgulf’s late February IPO was preceded by that of Malath Cooperative Insurance and Reinsurance, which offered shares to investors in a $38 million IPO in early February. By taking 47.5% of its capital to market, Malath conducted the largest IPO in the first quarter of 2007 in terms of percentage offered and was the first of 13 insurance providers to fulfill a mandate to take part of their capital public as one of the conditions under which the 13 firms received licenses from Saudi authorities in 2006.

Saudi market looking bright

In March, the Capital Market Authority in Riyadh directed five insurers to undertake simultaneous initial public offerings at the standard share price of SR10 ($2.7) set by the CMA. Subscription to the stocks was open from March 17 to March 26, and the companies offered shares worth a total of just under $71 million.

The five firms that conducted subscription in March were relatively small, offering between $8.3 million and $21.4 million in shares representing between 31% and 40% of their respective capitals for subscription periods that ended on March 26. The companies coming to market are SABB Takaful, and cooperative insurance companies Saudi United, Saudi IAIC, Saudi Fransi and Arabian Shield.

Subscription rates for the five March IPOs were not yet announced when Executive went to print. But the two earlier IPOs got the warm welcome of high demand for their share offerings. Malath reported subscription coverage of 499%, worth $189.4 million. Medgulf reported that its offer attracted subscription requests from 1.4 million persons and demand for shares reached $209 million, or a 400% subscription rate.

The high subscription rates to the two offerings may be indicative that the rulings of Islamic scholars in support of mutual insurance are having more influence than opposing views circulating in Saudi Arabia, which still maintain that all insurance is a game of chance, and thus objectionable under the ban against activities that entail elements of uncertainty and gambling, as well as taking interest from investment portfolios.

While the oversubscription figures signal that the Saudi retail investors regard insurance companies as primary market opportunities that are acceptable under the investors’ religious standards, one cannot easily surmise that the financial attractiveness of insurance IPOs with CMA-mandated issue pricing is a guarantee for the companies’ success in either the retail insurance market or on the bourse.

According to estimates quoted frequently in discussions on the Saudi insurance market, the insurance sector is estimated to value about $2 billion and to have a potential to grow to $4 to $6 billion over the next five-to-ten years (without much adjustment of these estimates in the past two years). This is a minute percentage of the country’s economy, especially when considering that GDP increased to $347.4 million in 2006 and per capita GDP (measured in purchasing power parity) has been growing at rates of more than 5% in 2006 and is expected to grow by another 5% in 2007.

The reasons for optimism on Saudi insurance sector performance in the coming years arise concretely from motor and health insurance requirements, which have become mandatory, and, in general terms, from the kingdom’s economic development and its population growth. There is little evidence to suggest that optimism on the growth of insurance awareness among retail customers and in media, or on vast expansion of insurance sector expertise and human capital, has a strong base.

While the creation of an insurance sector is seen as an important addition to the financial industry and equity markets of Saudi Arabia, it also seems unlikely that the sector’s arrival will provide a large short-term contribution to widening the institutional investment market or set new milestones in corporate governance. Examples of insurance sectors in other GCC markets over the past few years show them as holding significantly less importance than most other sectors which financial analysts track through sector indices.

Syrian market grows, too

Just as regulatory forces have been setting the pace for insurance development in Saudi Arabia, authorities in Syria have been infusing a spark of opportunity into their country’s outlook for creating a sustainable insurance industry. Since last year, insurance firms have received license approvals and started setting up shop in Damascus.

In March, Noor Takaful, a shariah-compliant insurer in Syria whose founding partners include a Kuwaiti-Pakistani insurance joint venture and Jordanian companies, said it would complete a public offering for $15.03 million, or 50.1% of its capital before the end of last month. Similarly, Kuwait-affiliated Syrian insurance company Al Aqeelah Takaful told Executive that it plans an $18.74 million offering for 51% of its capital before the end of spring. Managers at Noor and Al Aqeelah said the firms intend to start operations in April and August, respectively.

The lust for public offerings of financial companies in Syria rests on the foundation of heightened readiness by Syrian authorities to issues operator licenses to insurance providers and is nurtured by tax incentives, which offer firms a 10 percentage point lower tax bracket if they solicit capital participation from the public.

Lebanese insurance firms have been participating in prying open the Syrian market. Arope, a member of the Blom Bank Group, started operations in Damascus in July of last year. While it is too early to look at results of the venture, said Fateh Bekdache, Arope’s general manager in Lebanon, the experience of building something where no private sector insurance existed previously is intriguing. “The start is bumpy,” he said, “simply because it is a new law and a new sector. But it is extremely interesting to start something.”

Like BSO Bank, the Syrian bank linked to the Blom Group, Arope Syria chose to undertake a public offering that brought it tax benefits, which Bekdache cited at a rate of 15% of local taxes instead of 25% of local taxes for companies that prefer a private ownership structure without public offering.

Adir, the insurance daughter of Byblos Bank Group and France’s Assurances Banque Populaire, opted for private ownership in its Syrian venture, which last month received a preliminary license from Syrian authorities and expects to be up and running within six months.

According to Jean Hleiss, Adir’s assistant general manager, the new company will start operating with a $25 million capital and offer general and life insurance products in Syria under the name Adonis Insurance Syria.

Although the Syrian insurance market has been a favorite topic of expansion dreams among Lebanese insurance companies for years, the difficult situation of the Lebanese economy and its repercussions on the insurance sector seem to have somewhat stifled the eagerness for going cross-border. Bank-affiliated firms like Arope and Adir appear to have advantages in venturing east because they are part of groups with deep pockets and have greater access to working capital than standalone operators.

Additionally, having a bank in Syria enhances efficiencies, because the Syrian Insurance Supervisory Commission and the central bank gave “full approval to run insurance operations in the branches of banks,” Bekdache said. Thus, in addition to its head office in Damascus and an office in Aleppo, Arope Syria can base employees in the branch network of BSO and sell its insurance products there.

Lebanon not a fertile growth area

Meanwhile, in Lebanon, insurance growth prospects are faint, at least in the short run. The sector did not take direct hits during the war in July and August of 2006, said Max Zaccar, chairman of Commercial Insurance. “The Lebanese insurance sector was not affected negatively by the war, in terms of premium income,” Zaccar told Executive, adding that marine and transport insurance lines saw small growth in premiums because of greater insurance needs in the summer, and that payment morale among insurance clients actually improved.

Despite the war and political troubles at the end of the year, 2006 was better for Lebanon’s insurers than 2005, added Bekdache. He attributed last year’s satisfactory performance to very good business in the first half and a few good months immediately after the end of the Israeli war.

But for 2007, things are a lot murkier. The main problem is that Lebanese businesses are not making new decisions, because they are waiting for political progress to materialize. Under the circumstances, which include cash flow problems in many companies and private households, “the insurance sector has no new business and companies are fighting over what is there, competing with reduced prices to take slices of business from one another,” Zaccar said.

He added that local insurers also continue to be in a clinch with the Ministry of Economy, over the ministry’s plan to legally mandate insurers to structure companies separately for life and general business, and meet $10 million capital requirements that would only make sense with much more substantial premium incomes than the providers can muster in Lebanon’s $600 million premiums-strong market.

GCC feeling the pinch

GCC insurance companies felt pressure in 2006, mostly from the downturn in returns for their investment portfolios. As many of the sector companies are highly capitalized and have concentrated on their investment portfolios for the good profits they had in 2005, shifting focus to increase underwriting income quickly does not seem to be an easy path, given that the maturing of regional insurance markets has been following the mantra of the snail, despite all sector talk about rapidly growing insurance industries in countries such as Bahrain and Qatar.

Islamic insurance products will add to the widening of the market, but also in this segment, hype over fast gains and limitless potentials has not been substantiated by the equivalent growth of underwriting activities. In Oman, for example, insurance penetration—the ratio of insurance premiums to GDP—has remained below 1% and the share of life insurance has stagnated below 15% of all premiums, according to a study by BankMuscat.

In all GCC markets, most of the underwriting, moreover, is concentrated in motor and health insurance, exactly the two coverage areas which have more risk and less reward to offer than most other insurance activities. Takaful family and takaful life products, which assist households in creating wealth, may provide a way into greater presence of the benefits that responsible insurance offers to a country, but even by one optimistic scenario for Saudi takaful life insurance growth, premiums would pass the $1 billion mark only by 2015.

The founding wave of new insurance companies thus seems to be the most positive development in regional insurance affairs for the time being. Add to this that multinational insurance firms have shown interest in the market and that a player like Allianz—the world’s number two in the insurance sector—has taken a license to establish a takaful unit in Bahrain. Lebanon also just might harvest some further gains from the interest of multinational players, as the local affiliate of a big international firm is rumored to be in negotiations to buy another firm with several branches in the Middle East, in order to broaden the multinational’s access to the region’s markets.

April 12, 2007 0 comments

Banking & Finance

Money Matters by BLOMINVEST Bank

by Executive Staff April 12, 2007

written by Executive Staff

Regional stock market indices

Regional currency rates

ARAMEX launches 30,000 square foot one-stop shop at Heathrow

Dubai-listed transportation and logistics solutions provider ARAMEX announced the merger of three of its European companies into one 30,000 square foot one-stop-shop at Heathrowairport, outside London. As such, upon the acquisition of UK-based Priority Airfreight and Dublin-based TwoWay Vanguard, ARAMEX unified these two companies with its Heathrow operations at ARAMEX House, its new premises in Heathrow. ARAMEX reported net profits of AED95.2 million ($26 million), up 28% year-on-year.

Al Baraka posts 20% increase in net profits to $123.7 million

Al Baraka Banking Group (ABG), an international Bahraini-based Islamic Bank, recorded net profits of $123.7 million, up 20% from $102.9 million in 2005. The bank’s total assets were at $7.6 billion, up 21% for the same period, while costumer deposits rose 15.3% to $6.2 billion. ABG underwent an initial public offering in June 2006, leading to a 73% increase in shareholder’s equity to $978.6 million. ABG recently signed a memorandum of understanding with the Arab Trade Finance Program (ATFP), thus becoming the program’s eleventh national agency. ATFP will thus provide credit facilities through a line of credit opened at ABG.

Country profile: Egypt

International rating agency Moody’s Investors Service released its latest report on Egypt affirming Egypt’s government bond ratings at Baa3 with a negative outlook in local currency, and Ba1 with a stable outlook for foreign currency bonds. The report stated that Egypt has been experiencing upturns in growth since 2004, mainly boosted by a rise in international oil prices, a strong tourism sector and strong export performance. Moody’s estimates Egypt’s GDP real growth rate at 6.9% in 2006, up from 4.6% in 2005, and forecasts real growth rates of 6.0% and 5.5% in 2007 and 2008 respectively. Moody’s notes that Egypt’s fiscal deficit declined in 2006 for the first time in five years. The reforms introduced since 2004 are starting to materialize as tariffs and taxes are being reduced and privatization is being revived. Moody’s also stated that despite a manageable external debt burden and an important geostrategic position, the government’s weak fiscal position and fast-growing population are the main credit challenges facing the Egyptian government.

April 12, 2007 0 comments

Cover story

No nukes are good nukes? Gulf not so sure

by Executive Staff April 12, 2007

written by Executive Staff

Electrical power generation in the Middle East may have become a bargaining chip in a different power contest—a contest over security cum political dominion. The region has pressing needs for developing new power-generation capacities to supply its growing economies, but when the GCC heads of state decided at the end of last year to pursue a research program into civilian use of nuclear energy, the political questions were inevitable.

Does the GCC want to challenge Iran’s controversial nuclear program—that red flag for the US and most Western governments because of its military potential—by making sure it does not fall behind a threatening neighbor in nuclear technology?

Or does the GCC plan have a primarily economic rationale?

Over the past few weeks, supporters of building nuclear power plant(s) in the Middle East have argued that a plant could be completed in seven to 17 years’ time. The UAE—but also Jordan and Egypt—were named as countries where Middle Eastern nuclear reactors could be located.

Supporters of the idea pointed to the fact that France relies on nuclear power for a large portion of its electricity production. Arguments in support of developing nuclear capacities even went as far as saying that countries like Turkey have the same skills and human resources as developed countries, shifting the issue towards national self-assertion vis-à-vis other nations.

Energy demands racing ahead

In light of the growth of existing production capacities and demand, it is usually said that the energy needs of MENA countries are growing at about 6% per year, with an expected continuation of that high-growth scenario for at least another 10 years because of the region’s population growth and ambitious development plans.

However, adding a nuclear component to regional power projects—from the GCC electricity grid under implementation to national power generation programs in North Africa—may require shifts in energy policies and, as one Kuwaiti academic suggested, a cultural shift to make countries more collaborative.

In Saudi Arabia, which accounts for just under half of GCC power generation, electricity generation grew at a cumulative average growth rate of 6.9% between 2000 and 2005. The Saudi Electricity Company has a number of new power generation projects lined up, with an investment volume of over $12 billion from today until 2017 in power generation from fossil fuel.

Egypt, which relies heavily at present on its Aswan Dam for power generation, has a program for refurbishing and expanding gas-burning plants—but it is also looking at the nuclear option. The reason for the country’s interest in a nuclear reactor is said to be that the Nile republic will only be able to export liquefied natural gas to Europe in the amounts it plans if it covers its domestic needs with nuclear production.

According to available research, investments into MENA power projects over the next four years will have to exceed $35 billion to increase the generating capacities by more than 40%. These additions are almost all in conventional power and have advanced beyond the initial planning stage.

Nuclear units under construction worldwide

Source: International Atomic Energy Agency PRIS database
Updated: 2007

A nuclear reactor project, by contrast, is not likely to be on the books for several years after the day that the GCC plan for a nuclear research program is implemented. Considerations in preparation for such a reactor project will have to include serious issues that go far beyond financing and the feasibility of nuclear power generation during the lifespan of a reactor, which, with current technology, is described by European experts to be around 40 years at best.

Few installations are more heavily scrutinized by the international community for security reasons than nuclear reactors. The memories of Three Mile Island and Chernobyl rest heavy on the minds of emergency planners, because one extreme incident in a nuclear power plant can affect an entire region for years. This is not a question of some countries having a better track record on safety than others: in Japan, one of the most safety-conscious countries, several minor incidents last month led to a further tightening of technical reporting and oversight regulations for civilian nuclear facilities.

Secondly, at least in the perception of some planners, putting a nuclear power plant into the Middle East may be like putting a juicy bone in front of a dog. Potential terrorist threats against a nuclear reactor in Yanbu or on the UAE coast would, certainly, raise serious objections in Western nations, who would likely oppose selling the requisite number of reactors to the Arab world for extensive electricity generation in the GCC or North Africa. (The Levant, as long as peace is absent between Israel and its neighbors, seems the least likely candidate for a nuclear power plant.)

Nuclear technology has been a remote issue for American and most European energy planners for at least the past two decades. The high cost of building a secure nuclear plant has been one deterrent, which led energy companies to shift their focus from nuclear power in the 1990s. In several European countries, most notably Germany, basic fear and grassroots political opposition to anything nuclear has forced a halt of new nuclear power plants, both light water or heavy water reactors.

Top 10 countries generating nuclear power – 2005 (Billion kWh)

*Includes Taiwan, China
Source: International Atomic Energy Agency and Global Energy Decisions / Energy Information Administration
Updated 11/06

A lot of trouble, but an opening of discussion

The dangers of uranium enrichment, the processing of nuclear waste, and most of all, the need for storing this waste for centuries, have restricted the civilian nuclear options. The way in which North Korea’s Kim Jong Il has played the nuclear threat card in his impoverished country’s poker game with the United States, and the uproar created by the Iranian nuclear program despite Tehran’s insistence on the program’s civilian aims, have drawn new attention to the possibility of using nuclear programs in contemporary political power games.

The high costs of energy worldwide and perhaps less nuclear-phobic attitudes among younger people today seem to have encouraged supporters of nuclear power to return to the table and discuss the use of this technology anew. The current plans for a feasibility study on a nuclear program for the GCC is not the only recently reignited debate over atomic energy. In Europe and the US as well, nuclear power is a growing discussion topic.

As the GCC and other Middle Eastern nations to investigate their nuclear options, the new nuclear files come with many open questions about political and security risks, but also costs and viabilities. The rich countries of the region are among the world’s heaviest consumers of electricity per capita. Before the region is likely to see nuclear power sources for its economies, power conservation and increases in conventional production are likely to be the topics that can have the most positive impact on the energy sector.

April 12, 2007 0 comments

North Africa

Tunisia’s sell-off slowdown

by Executive Staff April 12, 2007

written by Executive Staff

The privatization process in Tunisia is starting to run out of steam, though not from lack of support for the program from the government. It has instead become a victim of its own success, as the state is beginning to run out of assets of interest to investors.

Although the program is ongoing, the pace at which it is moving is less than in the past. On Jan. 12, Direction Générale de la Privatization, Tunisia’s privatization authority, announced it was calling for tenders for a 76% stake in the state-owned retail chain Magasin Général. The winning bid for the profit-making chain of 43 outlets is set to be made public in the second quarter of 2007.

Bids have also been called for the privatization of state-owned electrical transformer and power and solar water heater producer Société Anonyme de Constructions Electromécaniques (SACEM). As with the sale of Magasin Général, Banque d’Affaires de Tunisie, which has become something of a specialist in the field of privatization, is serving as the main adviser for SACEM’s sell off.

Another enterprise that has recently been put up for sale is Nour El Ain Hotel, operated by Ain Draham Tourism Society. Located in the north of the country, close to mountain ranges and hunting preserves, the 60-room hotel has drawn strong interest from investors. The tender process for the hotel closed on March 20.

Early adopter of privatization

Tunisia was an early convert to the privatization process in the region, first launching its program in 1987, after the policy shift away from a centralized economy. The program can be divided into three distinct phases. The first ran from 1987 until 1994, when many unprofitable state enterprises were sold off, the majority being in the tourism, commerce, fishery and agro-foods sectors.

The second phase, which covered a four-year period from 1994, saw the state put in place legislative procedures to allow it to sell off more profitable assets, launch initial public offerings and block sales, laying the foundations for the expansion of the program.

Since 1998, the focus has shifted to the privatization of major state enterprises, in strategic areas such as heavy industry, communications, energy, transport and retailing.

To date, Tunisia has achieved solid success, having sold off just over 200 state enterprises, spread across three broad categories—services, industry and fisheries/agriculture—with 45 sell-offs in the tourism sector, one of the most important for the Tunisian economy. Over the past 20 years, some $4.2 billion has been raised from the sales.

During the period of Tunisia’s 10th five-year economic plan, which commenced in 2002, 47 state enterprises were partly or fully sold off. In terms of numbers, this was only exceeded by the preceding five-year term, in which 75 state assets went under the hammer. However, as far as revenues go, 2006 broke all records, with $2.37 billion being transferred into the government’s coffers.

An interesting aspect of Tunisia’s privatization program is the high level of interest it has attracted from overseas investors. Of the total $4.2 billion generated so far, $3.7 billion has come in the form of foreign direct investment (FDI).

Tunisie Télécom a moneymaker

The success of 2006 has been underpinned by the sale in July last year of a 35% stake in Tunisie Télécom to Tecom Dig, a subsidiary of Dubai Holding. The sale raised $2.25 billion, accounting for more than half of the program’s total revenue and the vast majority of FDI.

Another achievement is the ongoing viability of the vast majority of enterprises after their shift away from the public sector. According to studies conducted by the privatization authority, almost all of the businesses and assets privatized have prospered, even those loss makers that the state divested itself of early in the program.

While Tunisia’s privatization program may not have generated some of the highest levels of revenue garnered by other countries in the region, the process has been a steady and carefully moderated one, rather than a “fire sale” of assets. Moreover, according to state surveys, most enterprises have upped their profits and taken on staff following their privatization, translating into an ongoing benefit to the economy, instead of a one-off windfall. As Tunisia is discovering, boosting the private sector can prove fortuitous.

April 12, 2007 0 comments

North Africa

Algeria’s industrial strategy

by Executive Staff April 12, 2007

written by Executive Staff

During a conference with various employers’ associations in March, Hamid Temmar, the minister of state shareholdings and investment promotion, unveiled the Algerian government’s new strategy for industry. The state program consists of several growth plans, with a special focus on restructuring and upgrading production facilities to make Algeria more competitive and bring the country in line with international standards.

Temmar emphasized the need for companies to become more independent and act as sole decision-makers in their businesses. “Industrial companies,” Temmar said, “must seek to become modern enterprises with regards to technology. Besides, in the long term, industrial exports are expected to account for an integral part of the liberalized economy.”

If plans for economic diversification are to move ahead, industrial products will make up a greater share of exports, thus reducing the country’s reliance on hydrocarbons. Not only does this shake-up concern the existing industrial sector, including public and private companies, but also any future industrial investments, as they will need to be made with this logic in mind.

Set up in the 1970s and 1980s, the current industrial facilities are outdated and inefficient due to the political turmoil of the 1990s. This era prevented Algeria from following major technological developments. Although foreign direct investment (FDI) has picked up, most of it is still earmarked for the oil and gas sector, while the manufacturing sector in the country has been suffering from poor equipment and foreign competition from low-cost imports.

Time for companies to take center stage

Temmar added that while the government will remain a key actor in implementing the new strategy, individual companies will have to take center stage and not rely on the state for advice and assistance. Firms will need to build on their own strengths and comparative advantages in order to grow. Companies must adapt to world industry standards, create independent decision-making processes, and focus on technical, technological, financial capacities and human resources.

Indeed, among Algerian industrial companies, the training deficit is huge. Issad Rebrab, CEO of Cevital, described it as “the major stumbling block.” He added that “finding the right people in any position, but notably at top managerial posts, is increasingly difficult.”

As Algeria is embracing free market principles, local companies need to start acting and thinking in line with the changing economy. The state will target several sectors for development where it feels the potential is strong and where there are real synergies with other segments. The government has currently singled out the petrochemical industry, pharmaceutical industry, fertilizers, food-processing businesses, the steel industry and mechanical and construction material-making as areas of potential development. Two new activities are to be given priority: automobile production and information and communications technology.

Furthermore, some sites have also been targeted for the implementation of this strategy. Three types of zones have been established or are in the process of development. Firstly, there are “competivity poles,” which will involve the restructuring of facilities located in Algiers, Blida, Oran, Mostaganem, Annaba, Setif-Bordj Bou Arreridj, Boumerdes, Tizi-Ouzou and Ghardaia-Hassi R’mel. Secondly, there are “technopoles,” which will be located at Sidi Abdullah near Algiers for new technologies, Bejaia for food processing and as an export hub due to its sizeable port, and Sidi Bel Abbes for electronics. Finally, “specialized zones” will be developed at Arzew, Hassi Messaoud, Skikda and Oran. Other regions may also be identified in order to promote other sectors such as tourism, agriculture and fishing.

While companies are expected to upgrade their infrastructure, human resources and management remain key to the strategy’s success. An estimated $1 billion will be allocated to support its development, though how this is used will greatly determine the direction economic growth takes in Algeria.

April 12, 2007 0 comments

North Africa

New competition on line three

by Executive Staff April 12, 2007

written by Executive Staff

The launch of Morocco’s new telecom operator, Wana, was greeted with much popular relish, revealing the appetite Moroccans have for the fruits of telecommunications liberalization. The high-profile launch comes on the heels of the decoupling of Maroc Télécom’s network and ahead of measures to ensure number portability between operators.

As a sign of the competition gearing up, the newly re-branded Wana (formerly Maroc Connect) launched its Bayn array of services in both the mobile and fixed-line markets on Feb. 7. The company’s offices were swamped by interested customers, with some 24,000 signing up on the first day, over twice the amount expected.

Through an investment of $703 million, the new operator, controlled by two holding groups close to the royal family, ONA and SNI, expects to turn a profit by 2010. Having installed 500 base stations across the kingdom, Wana has tapped into the 4,600 km fiber-optic network installed by the electrical group ONE (Office National de l’Electricité).

While the two existing operators, Maroc Télécom and Méditel, have kept their market shares relatively stable over 2006, Wana states it plans to aggressively gain up to 20% market share in the next three years. Maroc Télécom still dominates the market with 67% of all lines.

Industry insiders are hoping for big things with the new competition in town, expecting a substantial growth in associated telecoms services.

“The new operator, Wana, is welcome to the market, as the competition will drive improvements in service and range of products on the market, while at the same time providing a driving force for our sales,” said Jarmo Santala, Nokia’s general manager for North and West Africa.

Competing for services

A number of technologies are to be implemented by Wana to drive the competition for services, including using Code Division Multiple Access (CDMA) technology, rather than GSM, which will allow the deployment of large-scale fixed telephone and internet services over wider areas, thus optimizing the capacities of Wana’s network.

This noteworthy start was also witnessed at the corporate service level, as Wana has plans to install the local copper infrastructure at Casashore, an industrial park specializing in offshoring. It is estimated that the companies based at Casashore, which is expected to be operational by the fourth quarter of 2007, will benefit from a 30% fall in prices.

The success of the new offer has bred its own problems, however. The excess demand on the first day of services overloaded the network and disrupted communications. In addition, the Bayn numbers are not accessible to subscribers of the two other networks, Méditel and Maroc Télécom, as yet.

These issues, to be resolved shortly according to Wana, arose despite the uncoupling of the local copper loop maintained by the dominant Maroc Télécom. The National Agency for the Regulation of Telecommunications (l’Agence Nationale de Réglementation des Télécommunications, or, ANRT) approved the technical and tariff offer proposed by Maroc Télécom on Jan. 29.

This first phase of the liberalization specifies that, retroactively from Jan. 1, Maroc Télécom’s competitors can offer services using the local loop built and maintained by Maroc Télécom for a fee of $5.90 per user. This phased liberalization process will culminate in the full opening of the local loop on July 8, 2008, at which time all telecoms service providers will be able to use the local loop without paying a fee.

The reduction in this interconnection price should translate into further savings for consumers, as telecoms operators are allowed to compete without having to invest in building their own local loop copper infrastructure.

Additionally, number portability across service providers will have been introduced on March 1. This step will help consumers move between operators, allowing for a more fluid pricing structure.

“The upcoming implementation of number portability between mobile operators proves the level of cooperation within the industry. 2007 is set to be a very healthy year for the telecoms market,” said Santala.

As Inigo Serrano, CEO of Méditel, put it, “The lock-in effect will be broken and consumers will be free to choose an operator without concern about changing their number. We have been working with the other operators and the ANRT for a few months now to organize this transition, which will take effect soon.”

Analysts, however, do not believe these moves will impact Maroc Télécom’s market share, given that penetration rates are set to progress at a healthy rate.

While the market penetration rate for mobile phones rose to 53.4% at the close of 2006 (reaching over 16 million subscribers), fixed-line penetration actually dropped by 5.6% over the same period, to stabilize at a mere 4.24% of the population. With the weakest fixed-line penetration rate in the Maghreb, Moroccans seem to prefer mobile rather than fixed connections, a trend noticed in many other African countries with poor fixed-line architecture.

April 12, 2007 0 comments

North Africa

Housing boom for Egypt in 2007

by Executive Staff April 12, 2007

written by Executive Staff

The real estate sector in Egypt is looking to build on its strong 2006 performance, with new regulations encouraging home ownership. The hoped-for result? As mortgage financing becomes increasingly available, economic growth is expected to help fuel a property boom.

While some analysts have voiced doubts regarding a continuation of the Middle East’s real estate boom, pointing in part to the slowing of the market in the last months of 2006, such concerns don’t appear to be affecting Egypt.

In part, the Egyptian real estate sector has not experienced the same frenzied activity as in the Gulf states, nor seen the same massive levels of investment. Growth has been somewhat more measured, but has increased over the past two years.

Strong price gains in some areas, mainly around Cairo, have occurred. However, the high level of appreciation in some parts of the market does not presage an equally spectacular fall.

According to Maher Maksoud, CEO of the 6th of October Development and Investment Company (SODIC), one of Egypt’s largest home-grown property developers, there is no risk of the real estate bubble bursting.

“Not even close,” said Maksoud in one recent interview. “Egypt is changing significantly. We have a massively frustrated demand for all kinds of real estate, not only housing. Purpose-built office and retail space is still a rarity. The demand has existed for several years now, but the economic situation in the country has previously stood in the way.”

This changing situation has been accelerated by the entry into the market of major Middle Eastern property developers, though many of the ventures by such firms in the Egyptian market have been in the tourism sector. One of the most notable exceptions has been the Dubai giant Emaar, which last year announced plans for a massive $14 billion development outside of Cairo, combining residential, commercial and recreational facilities.

A chronic shortage of housing

Lavish as this and other top of the market developments are, they do little to address the chronic shortage of housing facing the man in the street. Recent figures show that Egypt needs 2.5 million housing units just to meet existing demand and a further 350,000 annually to keep pace with its burgeoning population growth.

One project that will go some way to help is the Talaat Moustafa Group’s Madinaty City development to the east of Cairo. When completed, the new satellite city will comprise 80,000 residential units, a mix of apartments, villas and townhouses, complementing the group’s nearby Al-Rehab development, home to some 200,000 people.

Egypt’s residential property market has received a number of boosts from the government, which in recent years has simplified and speeded up the registering of property and slashed registration fees to $350. The state has also been encouraging the country’s banks to be more active in providing financing for prospective homebuyers. Currently, there are just 12 banks and two mortgage financing companies operating in the domestic market, a figure the government hopes will increase this year.

At least in part, it appears that the government’s hopes are being realized, with Dubai-based finance firm Amlak announcing on Jan. 9 that it would be expanding into Egypt to offer financing and real estate services.

Amlak is to offer long-term housing finance of up to 20 years, using financial models in line with the principles of shariah. Until recently, most home financing on offer in Egypt had a maximum term of just five-years, limiting the number of Egyptians who could avail themselves of the service.

Entering a small market

Amlak is entering what is by global standards a small market. Figures released by the Egyptian Mortgage Finance Authority show the level of mortgage loans at less than 0.5% of GDP. This compares with the UAE’s figure of 2% in 2005, or 39% in the EU.

There is the danger that many middle income earners could be priced out of a market that is just opening up to them. With land and housing prices rising well above the 2006 inflation rate of 12%, potential buyers could be playing catch up in the still tight market.

However, with the Egyptian economy tipped to expand by around 7% this year, and both greater access to financing and an expanding middle range property market, many more Egyptians may end up owning the roof over their heads.

April 12, 2007 0 comments

GCC

Bridge to drive economy

by Executive Staff April 12, 2007

written by Executive Staff

It’s hard to believe that a 9-mile bridge could link two continents and potentially draw a life-changing economic course for Yemen and Djibouti, whose strategic coastal locations offer an ideal setting for a connecting bridge.

Yet this ambitious enterprise is precisely what is currently being studied. According to Al-Bayan newspaper, the Middle East Development Company of Dubai is in talks with the governments of the two nations regarding the construction of the bridge, hoped to serve as a gateway for tourism and commerce for the source countries.

Previously connected only by common hardships, the two nations will now be able to share in what promises to be no less than an economic revival. The bridge project, rumored to launch in early spring 2007, is estimated to cost $1 billion, with no word yet on the completion date.

In addition to the highway encouraging inter-continental visits, the bridge will include a railway track, which will offer Yemeni exporters a faster alternative to maritime shipping and a more cost-effective option over air transport. With the increase of free-trade agreements and inter-regional construction projects, the ease of transport between the two regions should extend export advantages for Arab countries in product and labor costs.

Yemen’s exports, which include crude oil, vegetables, coffee and cotton, among other necessities for Africa’s arid countries, are sure to rise with the construction of this bridge.

The bridge will also open promising doors to labor exchanges with the continuously thriving GCC countries in the areas of manufacturing, construction and engineering.

Djibouti, a major regional port, trans-shipment and refueling center, and the oil-exporting nation of Yemen both stand to benefit from such an enterprise, because of its restorative economic potential in the areas of trade, tourism and labor. Thus this bridge could envision the fairly rapid and much-needed insertion of funds for their ailing economies.

April 12, 2007 0 comments

GCC

Building the new Karachi

by Executive Staff April 12, 2007

written by Executive Staff

Emirati developers want to build another Dubai on thousands of acres of land across Pakistan’s sprawling business capital, but some question whether their billion-dollar investments makes any sense.

Chundrigar Road, named after a former prime minister of Pakistan, is the heart of Karachi’s central business district. On it stand relics of British colonial architecture like the State Bank, the Karachi Port Trust and the Cotton Exchange, buildings from another age which sit uncomfortably alongside new corporate HQs.

But this is not your average CBD. Aging guards with bright henna in their hair and ammunition clips flung over their shoulders sit on plastic chairs inside dilapidated tower blocks. Darting through the traffic are flocks of multicolored rickshaws, driven by hunched men with skullcaps and beards down to their chests. There are wooden carts with donkeys, homeless beggars, open drains and even the occasional camel lying around.

Appearances notwithstanding, this is the financial hub of a metropolis of 15 million people, one of the developing world’s megacities and amongst the most dangerous places on the planet to be a US diplomat. The city is so run-down, disorganized and underdeveloped that many wonder how it actually manages to produce over a quarter of the Pakistani economy. But if some newly-arrived Gulf investors have their way, Karachi is about to get a Dubai-style facelift.

The developers enter the picture

On the back of some impressive economic growth and a gradual process of privatization, a wave of foreign investment has swept into Pakistan during the last two years. Most of it has been channeled into growing sectors like energy, pharmaceuticals, telecoms and IT.

Now, flush with capital and ambition, Emirati property giants looking eastwards towards the subcontinent have signed up for a string of high-profile and controversial projects in Karachi.

In spring 2006, Limitless, part of the state-owned Dubai World group which also controls the emirate’s port and free zone interests, signed a joint venture with the Pakistani authorities to develop the Karachi Waterfront project. When finished, this will be a 14-kilometer high-rise strip of commercial and residential towers, costing $1.5 billion in an initial stage and roughly $20 billion in total.

At around the same time, Emaar, the largest real estate developer in the Arab world by market share, announced it would lead a $2.5 billion project in Karachi called Crescent Bay. Covering 75 acres, the residential and commercial development is planned to occupy the beachfront of an upmarket housing district in the city.

This was followed in September 2006 by the announcement of a second, more controversial project in which Emaar would develop a brand-new city on two empty and half-submerged islands off the Karachi coast. Dubbed the “Diamond Bar Island”, the development is estimated to cost some $43 billion and will doubtless include many familiar Dubai-esque features such as a marina, shopping malls and luxury housing.

Then in February this year, Nakheel, the developer behind the perennially delayed ‘Palm’ projects in Dubai, joined the fray by signing up to construct a completely new district to the west of Karachi. With the provisional name of “Sugar Land City”, the project will reportedly cover no less than 60,000 acres and cost a staggering $63 billion.

If all goes to plan, the total cost of development in Karachi over the next 10-15 years, from these UAE firms alone, adds up to more than $100 billion. For many, this is an extraordinary sum to spend in an underdeveloped third-world city with a history of mismanagement, poverty and regular political unrest.

These Emirati developers are not averse to risk, having invested heavily in relatively unstable and untested markets like Algeria or Syria. But Karachi represents arguably the most hazardous venture that they have embarked upon so far, not just because these projects are amongst their largest, but because the political, social and economic environment in the country can at best be described as fragile.

At your own risk

Pakistan’s economy has performed well in the past few years, with GDP rising at 6-8% per annum since 2004 and the authorities earning plaudits from the IMF and the World Bank for implementing some much-needed reforms. An ongoing process of privatization has seen the government sell off stakes in assets such as the Pakistan Telecommunications Company, with foreign direct investment reaching all-time highs in 2006.

Middle-class incomes are on the rise, thanks to the wider economic growth and greater private-sector involvement, whilst the property market has rewarded investors with double-digit returns in recent years.

There are also growing ties between the UAE and Pakistan, largely in terms of labor force. Hoards of unskilled laborers are shipped in to work on construction sites in Dubai or Abu Dhabi, but many Pakistanis also find employment in better-paid jobs. Most send their earnings back home, contributing to record remittances of $4.5 billion in 2006, whilst wealthier expatriates, particularly in the UK and the US, are a large potential source of buyers for the property developers.

Yet the country still faces crippling economic problems, not least of which being outside perception. Transparency International rates Pakistan 144th out of 158 countries in the world in terms of corruption and bribery, which is generally believed to be endemic at most levels of decision-making.

Poverty still affects almost half of the population, crime is rife and according to some analysts, the gap between the rich and poor is only widening. Many analysts seriously question whether the Karachi market, or indeed any city, is capable of absorbing $100 billion of new developments aimed at a small elite, especially since foreign tourists are virtually non-existent and are likely to remain so in the foreseeable future.

Underlying all this are persistently high levels of social and political instability. In March 2006 a suicide bomber detonated himself outside the US Embassy in Karachi, killing several people. Another bomb went off outside the Islamabad Marriott hotel in February this year, just a few weeks before an attempt to blow up Islamabad airport was thwarted by police. Similar attempts are commonplace in other parts of the country, although most are fairly unsophisticated affairs.

This type of regular unrest is unlikely to abate, at least while the Afghanistan conflict continues to spill further across into the quasi-lawless mountain zones of northern Pakistan and then spreads onwards to the major centers of population.

For the past six years, President Musharraf’s secular regime has been forced to tread an increasingly narrow path between appeasing Washington, which has put intense pressure on Pakistan to support the US-led invasion of Afghanistan in the wake of 9/11, and subduing the powerful, anti-American and increasingly radicalized Islamic currents within Pakistani society.

Musharraf is due for re-election later this year, and is expected to remain in power, but no-one is quite sure in what manner he will decide to do so. Most observers believe that the current president will lead the country for some time yet, although the forthcoming series of elections will turn the spotlight on the nature of his regime.

Cities for the rich?

On top of these various uncertainties is a sense that these Gulf mega-projects are not necessarily welcomed by local residents, especially given the chronic shortage of budget housing for the hundreds of thousands of poor rural immigrants. The Pakistani media, for one, has not been afraid to perceive these multi-billion dollar deals as a case of the authorities generously lining their own pockets by inviting in the Gulf investors.

Others fear that a massive new stock of luxury housing, aimed purely at high-earners, will push Pakistan’s already dangerous levels of inflation through the roof. Critics say that these new cities will widen the gap between rich and poor, worsen overall standards of living and simply provoke more anger and antagonism towards a regime which is already walking on thin ice.

Advocates of the new-look Karachi, on the other hand, claim that construction alone will create thousands of jobs for the local population, as well as later attract companies or investors who were previously put off by the lack of decent infrastructure.

The critical question is one of stability: if the uneasy status quo in Pakistan can be maintained or improved, then the economy will have the chance to grow even more rapidly and release some of its massive potential. There might even be enough people to afford all the houses and apartments that the Emaar, Nakheel and Limitless want to build. But if things deteriorate, then the grand plans for these new cities might turn into some very expensive white elephants.

April 12, 2007 0 comments

GCC

New Saudi cities set to battle Dubai, UAE

by Executive Staff April 12, 2007

written by Executive Staff

Saudi Arabia, immersed in the process of using its oil wealth for building sustainable economic strength, has set its eyes on a business bonanza that could provide unending riches: becoming the host for a major international financial market. To tap into this permanently renewing resource, the kingdom is pouring billions into the creation of two financial hubs.

The first of these finance centers is part of the King Abdullah Economic City (KAEC), which the Saudi king announced to the world in December 2005. The second is new. It is the King Abdullah Financial District (KAFD) project in the Saudi capital, Riyadh.

Investments into KAEC are slated in a dimension of more than $26 billion only in the first phase—which includes infrastructure development and industrial and residential structures, but not the financial island which will cover 14 hectares. The cost of developing the new metropolis’s financial center—a super-glitzy city-within-a-city, shining in the designer impressions with glass and high rise architecture—will be determined later, when the second phase of the KAEC project goes to construction around three years from now.

“We are in the first phase of the project and therefore there is not an exact amount of money for the financial district but the first phase will be completed in three years from now and will cost SAR100 billion,” said Mohammad Samman, the director of investor relations at Emaar the Economic City (EEC), a company formed for developing KAEC.

The cost of KAFD will be between SAR10 billion and SAR12 billion and the project will be developed on three stages, according to the KAFD master plan that was approved last month by the executive committee in charge of the project.

On paper, the rationale behind the mega-investments is compelling. Saudi Arabia has a rapidly growing economy that needs to secure future employment for its millions of young people, and this would be part of a move, since 2005, to set up of economic cities in four regions in the country.

In the past five years, the kingdom has issued new licenses for specialized banking and financial services providers that include leading international and regional banks from HSBC and Deutsche Bank to Lebanon’s Audi Saradar Group, UAE-based Al Mal Securities, and Egypt’s Beltone Investment Banking.

These institutions have been attracted by the growing needs for banking in the largest Arab economy and for financial intermediation on the expanding Saudi Stock Exchange. But to give further incentives to international financial firms and develop a center of excellence that can leverage the value of the Saudi market place into becoming a banking center of global weight, Saudi Arabia needs to develop its financial culture a lot further.

“The kingdom is growing at a huge potential and the number of companies that are being established is growing by 25% to 35% annually,” Samman told Executive.

The Financial District

“The Public Pension Agency is the main developer of the KAFD and it has started with the dredging works along with Capital Market Authority (CMA) which is its strategic partner,” Fahd Al Hussayen, general manager for real estate marketing at the Public Pension Agency, told Executive.

“The first phase will take four years to be completed and we are already signing memoranda of understanding with several banks which will have a presence in KAFD,” Hussayen said.

He added that the banks which signed the MoUs include Al Rajhi Bank, Arab National Bank, Audi Saudi Arabia, Samba Financial Group, Saudi Fransi Bank and Al Bilad Bank.

The KAFD will be constructed over 3 million m2 of land and will house the headquarters of the CMA and the Saudi Stock Exchange, along with an academy for finance professions. On the private sector side, the district aims to become the home of banks, brokerage services, law offices, accounting and auditing firms, analysts, rating agencies, consultants, IT providers, and other auxiliary enterprises.

The master plan for the KAFD divides the new financial center into three areas—the Leaf, the northwest area, and the south area.

The Leaf will be the heart of the KAFD. It will be a mixed-use area, consisting of 23% residential, 5% retail and the rest high-quality office space.

Two-thirds of the area will be public realm, including major attractions such as an aquarium, a museum, hotels, an exhibition center, a conference center and, of course, mosques.

Support services, utilities and parking will be located in the northwest area. The south area will be residential and office accommodation.

The first excavation work is scheduled to begin within weeks and the first building is expected to open around the end of 2008. It is expected that KAFD will offer around 43,000 job opportunities. The site is 1.6 million m2 but the built-up area is around 3.3 million m2.

Because it is owned by the Public Pension Authority (PPA), the project will create revenue streams for public sector retirees and their dependents.

“The whole Saudi economy will benefit—but especially the PPA’s pensioners, who will gain from the profit generated from our ownership and management of the KAFD project,” enthused Mohammed Bin Abdullah Al-Khrashi, governor of the Public Pension Authority.

The Economic City

To be built near the town of Rabigh on the Red Sea, the financial district of the KAEC may be a little away from the center of Saudi Arabia but the entire city aims at creating a new economic center right from the first phase, which includes an industrial city, a huge port and residential projects.

EEC had a net loss of 12.8 million Saudi riyals ($3.4 million) in its first three months of operation, ending December 2006, but reports said that the financial results were expected as the company did not close any sales deals in that period. Its marketing activities have commenced recently.

Another noteworthy aspect of the KAEC project is that it is being developed with the private sector and with wide stakeholdership by Saudi citizens. EEC undertook an initial public offering in which more than 10 million people, approximately half of the kingdom’s citizens, subscribed to shares.

While the concept of stomping two new world-class financial districts out of the ground is appealing, the timeframe for the two cities may just a bit behind. In Dubai, Qatar, and Bahrain, three ambitious emirates are already a good piece of the way into shaping their versions of financial hubs, which will be established entities when KAFD inaugurates its first buildings in 2008-09; the KAEC financial center is only scheduled to begin construction at that time.

The size of the Saudi market is a strong selling point, and local banks will in any case make it a matter of pride to be present and very visible in KAFD and later on in KAEC financial center. That will widen the Saudi financial scene and elevate its profile, but it will not by itself fulfill the vision for the two huge projects. Then again, it must be true for new financial districts what is true for the whole world of finance: without risk, there can be no profit.

April 12, 2007 0 comments