GCC

New Saudi cities set to battle Dubai, UAE

by Executive Staff
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. 

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GCC

Can EU-GCC sign a Free Trade Agreement this year?

by Executive Staff
written by Executive Staff

Do you, per chance, remember what the next big things in 1990 were? The World Wide Web had just been born and the internet was still more of an academic playground than a ubiquitous communications universe. The European Community was a club of 12 nations and the euro was a concept waiting to be discussed in the 1991 negotiations of Maastricht. Introduction of the world’s first commercial GSM 900 mobile phone network was two years away.

It also was the time when Europe and the six member countries of the Gulf Cooperation Council started talking about a free trade agreement (FTA). Seventeen dusty years after the beginning of negotiations in 1990, talks between the European Union and the Gulf Cooperation Council in the past few weeks seem to have regained momentum toward finally signing the long-awaited FTA this year.

Touring the region at the end of February in support of finalizing the agreement, EU Trade Commissioner Peter Mandelson told the Jeddah Economic Forum that a completed FTA would make an important contribution to the greater diversification of Gulf economies by encouraging inward investment and boosting the competitiveness of Gulf exporters to Europe.

‘Very close to an agreement’

Mandelson said: “We are now very close to an agreement that will not only be the first ever region-to-region FTA in the global trading system, but which has the potential to open doors for new investment and new trade beyond what we offer each other through the WTO.”

A treaty between the two regional organizations would be the first of its kind, Mandelson enthused. But of course there are quite a range of reasons why European-Gulf negotiations have taken a modern eternity and were disrupted twice for long intervals, before the two sides last month publicly voiced confidence that signing ceremonies could be on the books sometime this year. 

Rewards of a successful treaty would be substantial by helping both communities strengthen their positions in the globalization game and, from the European perspective, by increasing stability in what the EU sees as a region of immense strategic importance but vulnerable to political and security risks. 

Obstacles

The business concepts and legal frameworks of the two blocks are far apart in many respects, but the points of real obstruction in past talks were European calls for liberalization of GCC economies and Gulf wishes to gain more direct access to European energy markets. Early in the negotiations (1990 and again in 1992), the European Parliament criticized the FTA talks for alleged repercussions on the European petrochemicals and fertilizer industries and employment in these sectors.

The considerable power of the US in the Gulf and the EU’s corresponding lack of power is one of the main structural features hindering real progress or even real interest in moving EU-GCC relations forward. The US is currently viewed as the only credible security guarantor by the Gulf monarchies, while the EU mainly is seen as a civilian and economic player.

Assessing the potential influence of the EU in the region, a Danish research institute wrote in late 2006 that “the Gulf monarchies are blessed with oil and natural gas resources, and equally cursed with domestic instability, war and foreign intervention. In this strategically important corner of the Middle East, bilateralism and hard security issues still dominate the agenda, and here the EU has only limited capacities.”

The report added that the EU also faces both barriers and divergences in term of assisting reform processes in the Gulf, and the European analysts saw it as open question if first steps towards political and social reforms were genuine or mere cosmetic changes. Post-Christian civil liberties concepts made in Europe have not found a large fan base in many Middle Eastern societies and when, for example, the European Parliament lambasted Bahrain in 1997 for its practices on human rights, the GCC rejected this as meddling. 

Limitations on foreign ownership of companies and restrictions on access to domestic markets, including equity markets, in several GCC countries are barriers that could also easily block European acceptance of the FTA this year. But on the other hand, the Europeans have to think about the heightened importance of Gulf oil producers in the globally growing demand scenario for black gold. The EU policy makers also have to grapple with the fact that today, beyond the US’s Middle Eastern goals and strategic interests, which have long caused headaches in many EU capitals, China is also flexing its increasingly toned geopolitical muscles in the region, with aspirations of securing supplies of oil and generating new economic partnership opportunities for its vast industry. 

EU a model of integration

While the EU playes a minor fiddle in the Middle East military and security realities to the US, and enjoys less shared affinity with the region’s cultural conservatism than the East Asian nations, Europe has one strong thing going for itself through the EU’s model function of regional economic integration. The GCC adopted many ideas from the processes of Maastricht and Europe’s Monetary and Economic Union building in its project to forge a similar cohesion among the six GCC member countries, including plans for a joint central bank and single currency for the realm.

As a matter of fact, the GCC governments’ 1999 decision to work towards an EU-like economic integration sparked new life into the FTA negotiations between the two regions, even though the verve was short lived. It is moreover also doubtful (to be friendly) that the GCC monetary union plans will be implemented in full by their 2010 target or even in a five-sixths solution of adopting a joint currency without Oman. Nonetheless, interaction between EU and GCC institutions in the context of the project has a relationship-building capacity for years of interaction, whether an FTA sees the light of the desert this year or not.   

For the business communities of both regions, any strengthening of information and cultural ties would nonetheless be poor replacements for an agreement that opens Gulf markets wider to European investors and European markets to Gulf petrochemicals and energy players.

The EU still is the Gulf’s biggest market and incurred a $22.4 billion trade deficit with the GCC in 2006, fundamentally because of Europe’s thirst for oil. In the other direction, the GCC is currently the sixth-largest export market for the EU, with machinery and transport materials accounting for over half of sales to the region. Beyond further growth in trade, direct investments in the GCC by European companies could see a sharp increase if an FTA comes into force.

Picking up the pace of talks

For the past few years, negotiations between EU and GCC moved at a rather leisurely pace of one round of talks per annum. However, following the discussions of the two sides in February, the EU emphasized that it will eliminate its 6% import tariffs on aluminum and also abolish tariffs on basic petrochemicals after the two regions reach an FTA. What the EU seeks in return, is an end to ceilings on foreign ownership of GCC companies. A new Gulf-EU meeting at the ministerial level is scheduled for May.

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GCC

Garden of Eden for jobs?

by Executive Staff
written by Executive Staff

The Gulf region is famed for enjoying surpluses of liquidity and jobs over the available human capital. This situation has created a hunger for blue and white collar labor that boosted the ratio of imported to indigenous population to at least four to one in the UAE and some neighboring emirates.

In the past two years, the influx of new people and continuing enormous demand for labor has also created pressures on a wide front, from housing and remuneration to cultural, social, and health issues. The private and public sector agencies dealing with human capital in the various GCC countries are being seriously put to the test by these growing imbalances.

Research into labor issues in the GCC is still in its infancy, driven mostly by a few job agencies that aim to establish their franchises as suppliers and intermediaries in the market for skilled employees. The hotbed of job creation in the GCC is the UAE, and private sector job companies focus their research there. Two such employment companies published reports on salary trends and cost of living in December 2006 (Gulf Talent) and in February 2007 (Bayt).

What’s my salary?

On the salary front, annual increases in the magnitude of 7-8% and more have been the norm in the past two years, the Gulf Talent online survey of professionals found, while Bayt reported an even higher jump in average salaries of 15% in 2006 and 21% over the two-year period of 2005 and 2006.

Bayt gathered responses from what it called a “cross-section of the labor force” around the GCC but did not disclose the sample size and methodology used in its study when publishing the results. It reported that average monthly salaries in the GCC last year, with the exclusion of Oman, ranged from $2,700 in Qatar and $2,750 in the UAE to $3,100 in Kuwait.

In a breakdown by company type and sector, the survey found that multinational companies provided average monthly salaries of $2,222 and large regional companies similarly rewarded their employees (average $2,148/month) whereas public sector and small local companies forked out about $500 less per month.

By sector, earners in law firms sat on top of the Bayt survey, commanding an average of almost $5,900. The oil/gas/petrochemicals sector paid over $3,700, and jobs in advertising and banks were good for an average of $3,500. On the low end of the scale, hospitality, education, electronics (excluding IT), and health services (excluding MDs) offered average salaries ranging from $2,444 down to $1,926. 

Loving Dubai

While the three most recent Gulf Talent surveys gave no indication of average salaries per country and industry, the job agency stated that among some 11,000 queried professionals outside of the GCC, among those who wanted to work in the GCC, 73% named the UAE as their preferred place of employment in the region. Dubai was mentioned specifically by 38%. The survey’s number two and three targets of choice were Qatar and Saudi Arabia, with 9% and 8% positive responses.

By Bayt’s count, the preferred place of work in the GCC is Dubai, with 49% of answers from an overlay poll picking the city as their choice, followed by Saudi Arabia (16%), Kuwait (14%) and Qatar (11%). Although the methodologies and polled samples in the two surveys are hard to compare and results showed notable variations, findings of the two companies concurred strongly that the UAE is the preferred destination for foreign employees and job seekers who work or want to work in the GCC.

This highlights the UAE’s role as the center of the multi-national job market in the GCC, with the highest percentage share of expatriate employees. The most recent government research on employment and population figures tallied the UAE population in a census of population, housing, and establishments that was conducted in 2005. Released last month, preliminary results of the census said that the UAE’s seven emirates have a combined population of about 4.1 million—including nationals, registered expatriate workers and other expatriates—at the end of 2005. The census found that 78.1% of the total resident population included in the census were non-nationals.

The preliminary results did not provide a full data set on the numbers of people in each gender/age/nationality bracket and the composition of the labor force. However, it stated that of the registered population aged 20 to 64 years, almost 2.4 million are foreigners while the nationals in this group numbered less than 400,000. On top of that, the census assumes a presence of 335,000 foreigners (not included in the census tally) who work without permit, were on leave on the census date, or commute into the country. This hints that there could be as many as seven, eight or even nine expatriate employees and workers for every citizen in the national workforce, in line with estimates by some UAE academic leaders who have rung alarm bells over the country’s national identity.

Working the force

Regardless if the foreign workforce accounts for 80 or 90% of the UAE working population, the country’s 75% population growth between the last census in 1995 and end of 2005 relied greatly on inflow of foreigners, and the trend is estimated to have only accelerated since. Analysts at Global Investment House, a regional financial firm headquartered in Kuwait, estimated last month that the UAE population numbered 4.7 million in 2006 and will be above 5 million at the end of this year, suggesting further increases in the percentage of expatriates, despite the fact that more than half of the UAE nationals at the end of 2005 were younger than 20, meaning that the birth rate among citizens of the UAE has in recent years been high indeed for an affluent society.

The combination of high economic growth, the influx of new people, and extra liquidity from oil revenues in the GCC has taken an unavoidable expression in inflationary pressures that put a strong dash of vinegar into the lemonade of the UAE labor market. According to Bayt, the UAE in 2006 was the region’s “worst affected country in terms of erosion of consumers [sic] purchasing power with salaries being outpaced by cost of living increases to the tune of over 13%.”

This assumption is based on an estimate or perception that consumer price inflation in Dubai was 28% in 2006, based on responses by polled persons. The CPI estimate of the Economist Intelligence Unit for the UAE in 2006 was an increase of 13.5%.

Cost of housing is the main new burden on foreigners. Gulf Talent’s survey produced responses saying that rents in Dubai increased by 60% in the space of 24 months (November 2004-November 2006). The agency also reported that rent payments in Qatar and the UAE consumed 33% and 30% respectively of respondents’ household incomes, significantly above rent costs in Saudi Arabia (19% of incomes) which are closer to numbers for many developed countries.

Also, the savings rate among expatriate workers has gone down, a telltale sign that financially, the stay in the GCC is less attractive than it was 10 or even five years ago. Gulf Talent reported that 43% of expatriates working in the UAE are not putting money into savings and 7% even said that cost of living was not covered by their salaries and they had to rely on savings or support from family to sustain their lives.

However, the shrinkage of disposable or remittable income is no fundamental deterrent, as the job surveys showed significant shifts in the priorities and expectations of international job seekers in the GCC. First, people said that they were looking for a career more than for fast earnings. “Many of the newcomers are attracted by long-term aspirations and interesting career opportunities now available in the region, with short-term financial considerations playing a less dominant part in the overall value proposition,” Gulf Talent found.

Secondly, increasing percentages of the people relocating to the Gulf are doing so under a perspective of making the region their home in the long term and not just regard it an intermediary career step. This reorientation is an expression of both the region’s increasing depth of career choices and its broadening range of housing, entertainment, shopping, and cultural environments. And while the newcomers are not deeply rooted in local heritage, they appreciate the high mobility of their lives, characterized by the contemporary airports, hotels, shopping malls and recreation centers.

With careers and long-term living perspectives—according to Gulf Talent, 78% of professionals currently working in the UAE plan to stay; according to Bayt, a slightly larger 26% share of people intend to move away from the UAE—it fits together that people are not driven into other countries by cost of living changes as much as by other factors. Bahrain’s smaller cost of living increase did not cause expatriates there to consider moving away in larger percentages than their peers in the UAE, for example. The simple point is that it not only matters how much it costs to live in one locale of the Gulf, it matters equally or more what quality of life one gets in the cities of the region.

Of men & women

Salary surveys and census data are insufficient for describing the entire set of social and life options that determine personal satisfaction and integration of foreign workers into a new country. One census result that is of relevance in this regard is the immense overhang of the working-age male gender in the UAE population. Not only are some 49% of non-nationals between 25 and 40 years old, expatriate men in the three age categories—20 to 24, 25 to 29 and 30 to 39—outnumber expatriate women by factors increasing from 2:1 to 3:1 and then more than 4:1 for those in their thirties. 

The towering discrepancy in the ratio of men to women in the UAE is a deterrent to the country’s ability to be the natural center of living and planning for the members of its expatriate population.

Another obstacle to balanced social development is the stratification of the workforce into nationalities, where citizens of some origins are automatically paid better than those of others, a factor that may be decreasing but is far from having disappeared. Their is also the economic rift between professionals and blue collar labor.

As Gulf Talent concluded in an October 2006 report on compensation trends in the GCC construction industry, only the managerial and professional workers benefited from the almost 13% hike in salaries observed by the agency last year for the sector. Laborers, which make up the majority of construction sector employees, “have experienced little or no rise” in their remuneration, the report wrote. A huge portion of the expatriate workforce is working poor in the GCC; they live and work under conditions of increasing costs with pay raises that do not cover inflation.     

These societal and socioeconomic imbalances apparently have led already to higher rates of social unrest, sexual abuse and other crimes, disease and suicide, evidenced daily by media reports. However, statistics for problems such as the number of expatriates who contract HIV are not available from UAE officials, who only said that the country immediately expels foreigners who test positive for the virus.

Finally, the UAE government has produced a draft for a revised labor law and stepped up efforts to address grievances by the expatriate workforce and violations of labor codes by employers. However, when Human Rights Watch published a press release at the end of last month that asked for further changes to the law and for affirming international labor rights such as unionization, UAE authorities avoided direct responses to the NGO’s challenges, but acted defensively by quickly circulating statements through the state’s media mouthpiece that the country has already made much progress in dealing with “these issues.”

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Levant

Abdali: The future of Amman

by Executive Staff
written by Executive Staff

Abdali represents the past, present and future of Amman. What once was the Jordanian intelligence headquarters is today an enormous hole in the earth, in which bulldozers prepare for the arrival of the future: a 21st century city center for the capital of the Hashemite Kingdom. With a price tag of $1.5 billion, and covering a total surface area of 350,000 m2, the Abdali Urban Regeneration Project is arguably the largest construction effort Jordan has witnessed to date. 

The Abdali area is located west of downtown Amman, adjacent to the banking district of Shmeisani, and is home to such landmark buildings as the parliament and King Abdullah Mosque. The Abdali regeneration project is a mixed-use development that aims to create a central business district, complete with both high-end residential and retail elements. In addition, and more ambitiously, the project hopes to relocate the “heart” of the city from what is today the rather run-down downtown area to Abdali when it is completed.

With a total built up area (BuA) of some 1.5 million m2, the Abdali project will drastically change the face of Amman, a predominantly “horizontal” city. The development will introduce the first cluster of high rises, among which is the country’s tallest tower, the 220-meter-high headquarters of the Capital Bank of Jordan. A 350-meter-long pedestrian shopping boulevard will connect the towers to the “Central Market” mall and residential parts of the project. (For details, see Box I.) 

“The Abdali Urban Regeneration project is ‘a story of firsts,’ which will drastically change living and working in Amman,” said Jamal Itani, general manager of Abdali Investment and Development (AID). “Abdali will create the city’s first central business district, in the sense of a homogenous area of fully equipped, technologically advanced, state-of-the-art commercial buildings. Centered around the boulevard, Abdali will become the first retail hub in the city.”

An interesting characteristic of urban Amman is that it has no genuine central districts. The traditional heart of the city is the downtown area near the King Hussein Mosque and Roman amphitheater. Yet this is a rather rundown—and heavily congested—area, with no international retail and, at best, some three-star hotels. Over the last decade, Amman has witnessed the emergence of hypermarkets and shopping malls, which are spread throughout the western suburbs. (For a brief history of Amman, see Box II.) 

Likewise, the business community is scattered around town. To a certain extent, the Shmeisani area can be defined as the financial and administrative center of the city, as it features 25 banks and financial institutions, 16 government institutions, as well as 12 hotels and nine hospitals. However, any company that aims to establish a presence in Amman will face great difficulty finding vacant office space in Shmeisani, which is why many international firms in recent years have converted villas and apartments throughout western Amman into workplaces. Embassies too are mainly located in villas between the 3rd and 5th circles in West Amman.

Private-public partnership

Founded in 2004, AID is a private shareholding company—initially, a private-public partnership between Mawared, an investment company owned by the Jordanian government, and Oger Jordan, a subsidiary of construction giant Saudi Oger. In 2007, however, Kuwait Projects Company (KIPCO), through its Jordanian branch, United Real Estate Corporation (URC-Jordan), came in as a third partner. It bought 12.5% of Abdali psc shares, which left Saudi Oger and Mawared with 43.75% each, respectively.

Essentially, Mawared brought in the land, while Saudi Oger had the know-how. It should be noted that the Abdali project is part of a wider government initiative to move military barracks and quarters to the outskirts of the city and use the land for urban development. AID is responsible for preparing terrain and infrastructure, as well as the project’s master plan. Saudi Oger will further develop and manage, in partnership with KIPCO, both the boulevard and mall, which represent about 25% of the total BUA.

The remaining 75% has been sold to private investors, including the Dubai Contracting Company, which is building a residential tower, the Capital Bank of Jordan, Rotana Hotels, Madaen Al Noor Real Estate Investment and Development, FCP Holdings, and Damac, the Dubai-based property developer. Damac is set to construct a 35-story high-end residential tower dubbed The Heights. 

While top residential sale prices in Amman amount to about $1,400 per m2, Damac’s starting price lies around the $1,500 mark for the first floor and increasing to $3,300 per m2 for the top floor apartments. The penthouse has a price tag of over $4,000 per m2. Following the success of The Heights, which according to the Damac sales department has been almost completely sold, the company last month announced it will also construct the 20-story Business Heights.

“We’ve completed the site’s infrastructure, which includes all amenities, such as fiber optic cabling and gas lines,” said Itani, an American-educated engineer who previously worked in Beirut when Lebanon’s former Prime Minister Rafik Hariri appointed him President of the National Council of Development and Reconstruction. “In addition, about 80% of investors had their architectural designs approved and have fenced their plots of land, while about half of them will start excavating in April.” 

Excavations have also started for the boulevard. Both the boulevard and city center are set to be completed by the end of 2009. To illustrate the sheer importance of the Abdali project, Itani pointed at a recent decision by the mayor of Amman, who designated four areas specifically for high rises, among which is the future central business district. 

The question remains, however, if there will be sufficient demand within Amman for such a significant amount of office and retail space. “We’ve done several feasibility studies both in Jordan and other countries, and believe Amman has potential as a significant regional business center. Several factors play a role: Jordan is a politically stable and secure country that has a sound legal framework, so investors know what to expect. What’s more, oil prices are likely to continue to soar, with Arab nations reluctant to invest in the West. And, last but not least, Jordan is close to Iraq.”

It is no exaggeration to state that demand for office space and high-end residential apartments since 2003 has been strongly linked with the situation in Iraq. First, many well-off Iraqis fled to Jordan following the American invasion and established themselves in western Amman. As a consequence, average prices doubled and even tripled. Second, due to the security situation in Iraq, most companies doing business with Iraq are based in Jordan. The same is true for UN staff and non-governmental organizations. 

Even though many malls have opened in the outskirts of Amman, Itani believes the Abdali project will offer an appealing edge to attract consumers, as it features the sole high street in the capital city, which will be characterized by international brand names similar to those found in Dubai and Beirut.

Beirut vs. Amman

Itani worked in Lebanon, and both Saudi Oger and Solidere are part of the late Rafik Hariri’s business empire: the obvious question is, to what extent can the regeneration of Amman and Beirut can be compared? According to Itani, there are both similarities and differences. 

“Both Amman and Beirut concern developments built around a central business district and both aim to offer a homogenous development in terms of working, shopping and living,” he said. “One difference is that the regeneration of Beirut was a much bigger project, with about 4 million m2 of BUA, while Abdali amounts to about 1.5 million m2 of BUA, which could be extended in the near future by a further 1 million m2.” Itani declined to give further details, yet it seems likely that future developments will take place on the edge of the current project site, where some military buildings remain.

“Another major difference between Amman and Beirut,” Itani continued, “is the limitations that were involved in the development of the city. Solidere had to take into account the restoration of historic buildings and the protection of archeological remains. Consequently, Solidere was limited in the number of underground parking lots it could create. Generally speaking, we had much more freedom in terms of planning and design with the Abdali project.”

“Another difference is the role of the government, especially in terms of accessibility,” Itani concluded. “The Jordanian government plays an active role in upgrading the roads and intersections around the project site. It speaks for itself that the Abdali project is not an island. You cannot have top notch roads and parking facilities inside the project and be surrounded by secondary roads. In that sense, it is very important we have the full and active support of the municipality that is upgrading the infrastructure in and around the Abdali project.”

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Banking & Finance

Private equity booming

by Rami Bazzi
written by Rami Bazzi

The United Kingdom’s National Union of General andMunicipal Workers (GMB Union) has recently accused privateequity firms of evading tax payments on billions of poundsthat have been borrowed to fund their buyouts. The Union hasblamed the tax code for encouraging investors to overloadcompanies with debt in order to claim tax relief on theinterest payments.

However, evidence indicates that the private equity housesare delivering enviable results for investors and in factthe private equity industry has become a great Britishsuccess story.

The benefits are not simply the high rates of return oninvestment. There is evidence that takeovers by privateequity firms will, in the medium term, generate jobs, ratherthan destroy them. For instance, a study by NottinghamUniversity’s Center for Management Buyout Research studiedprivate equity deals over a five-year period, (1999-2004),and concluded that there was a significant increase inemployment, up by an average of 26%, after five years. Thatstriking figure suggests that private equity injectsefficiency and generates growth.

As a result, the private equity industry is booming inmany parts of the world and is highly regarded in the MiddleEast and other emerging markets including China, Sydney andthe US. According to Thomson Financial, private equity netreturns outperformed the S&P 500 19% to 9.7% for the 12months to last September and 14% to 9.7% for the past 20years. The firm predicts that new money will keep flowinginto private equity as long as the public market fails toallocate capital efficiently.

The immense benefits of private equity to the overalleconomy make it a vital cog in any market. Private equityhouses and activist fund managers of all kinds, includinghedge funds, play a much more valuable role than anygovernment or regulator in propelling the liquidity of ourcapital markets, in reducing the cost of capital, in drivingforward a country’s growth and in equipping the industry tosurvive and compete in the more challenging global marketsof today.

What we also need to remember is that private equity hasproven its potential in enabling the institutionalization offamily businesses and in the implementation of propercorporate governance, key to the sustained growth of today’senterprises.

Critics of private equity also highlight the limitedaccountability as one of the drawbacks. What they fail tounderstand is that in reality, when a private equity firmpurchases a company, ownership and control are much moreclosely aligned on the main shareholders. On the otherhand, in public companies, mechanisms of accountability haveto be developed because of the separation of ownership andcontrol.

The concentration of ownership in private equity meansthat formal accountability mechanisms become far lessimportant and the owners are actively engaged in thesupervision and management of the business.

If the importance of private equity has been wellestablished in developed markets, its role in supporting thedevelopment of emerging markets will be even moresignificant, especially in sectors such as IT and telecoms.For instance, in China, the total investment for 2005 was anincredible $1.057 billion invested over 233 enterprises in2005. As a result, hoards of foreign private equity firmshave rushed to quickly establish a physical presence in thecountry to take advantage of its huge domestic market, largepool of low cost engineering talent, technologicalinnovation and fast growing economy.

In the Middle East, the Islamic module of private equitypractices presents the optimum solution for many of thechallenges faced by private equity. The shariah law governsthe mechanics as well as the integrity of the investingoperations. For example, the shariah law prohibits investingin industries that are considered detrimental, such asalcohol, tobacco and weapons. The money invested also needsto be from permissible industries and cannot be from a fixedincome ROI whether it’s interest-based or interest-like.Another shariah investment requirement relates to acceptableleverage ratios. The ratio of the total debt of a targetcompany to its total assets must be less than 33%.

In Malaysia, such Islamic banking practices are popularamong non-Muslims and have proved to be a mainstreambusiness in many emerging markets, especially in the MiddleEast where the Islamic funds are mushrooming at anaccelerated rate. Those funds have proved to be lucrativeand trustworthy, as they can be a good alternative to theconventional funds whose integrity is in question.

Unfortunately however, the campaign against the privateequity industry is not tenuous. The growing use of“shareholder loans” in highly leveraged structures allowsprivate equity groups to disguise the equity as debts andobtain tax deductions. On the other hand, controversialquestions are being raised over jobs and working conditions,about private equity firms who made staff redundant andintimidate workers to maximize short term profits in firmsthey buy out.

The UK private equity industry continues to be the largestand most developed in Europe, and accounts for more thanhalf of the total annual European private equity investmentin 2005. Although private equity has been criticized by thelabor unions, wisdom dictates that the issue is actuallyrelated to tax policies and not necessarily to thefundamental characteristics of the private equity industry.We need to realize that exceptions cannot become the normsin free and open economic markets if economic progress isour underlying concern.

Rami Bazzi is principal fund manager at Injazat Capital

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Banking & Finance

Private Equity: A close look at a maturing asset class

by Executive Staff
written by Executive Staff

The Middle East and North Africa region has become apowerful magnet for private equity investment, as the totalnumber of capital raised reached $4.1 billion in 2006,according to insiders in this segment of the financialindustry. The experts expect private equity investments toincrease greatly in 2007, but also warn that the challengesfor the year ahead continue to be dominated by thedeployment of private equity cash into attractive companies.

By some measures, the region is poised to become the nextbig market in private equity, analysts say. “The privateequity industry globally is benefiting from enormous growthand the Middle East is no exception,” Colin Taylor, managingdirector and head of Credit Suisse’s Alternative CapitalDivision in Europe, told Executive. “There is a high levelof liquidity, enabling private equity players to raisesubstantial funds,” he added.

The region’s private equity evolution is trailing a fewyears behind the development of this industry in G7countries and is still small when compared with the region’seconomic engine and leading source of liquidity, the oilsector. OPEC is expected to generate close to half atrillion dollars this year, and the Middle East’s shareestimates are in the range of $320 billion in oil and gasexports revenues.

Despite a lot of buzz about private equity in conferencesand press statements, and despite the formation of aregional association for the industry, the real muscle ofprivate equity funding has not yet been shown to the curiouspublic. Numbers compiled by the international EmergingMarkets Private Equity Association (EMPEA), the regionalorganization Gulf Venture Capital Association andresearchers are several billion dollars apart in the amountsthey quote as results of Middle Eastern private equityfundraising for both the past decade and the past twoyears.

Moreover, if fundraising is the bulging biceps of PEmanagers, it has to work in productive interplay withinvestment activity as the triceps for distributing theaccumulated power into the corporate world. The fewavailable confirmed numbers on PE investments suggest thatit has been a challenge to turn collected funds intoprofit-making ventures.

A review of the funds that were active in 2006 or havebeen announced by the region’s PE firms shows that 20 fundswere in their fundraising phase with a cumulative targetamount of $4.15 billion. According to Zawya Private EquityMonitor, in total, 18 funds were in their investing phase.They had $5.76 billion in their war chests but did not sayhow much of that had already been invested into concreteprojects. For future funds, eight funds had been announcedwith combined target size of almost $3 billion, in additionto which market rumors knew of another seven fund projectsthat would be worth $1.54 billion.

Apart from the impact of the oil boom, analysts attributethis rapid growth in the private equity market, in both thenumber and size of funds, to reduced restrictions on foreigninvestment, the real estate boom—both in the GCC and Levant regions—substantial investmentsin infrastructure development and privatizations, familyconglomerates who are now interested in restructuring andgrowth strategies and favorable results for private equitymanagers from the recent high number of IPOs in the GCC.

“There is a fundamental reason why interest in emergingmarkets remains so strong: returns have not only beenimproving over the last three years, they are looking fairlyrobust on both an absolute basis and on a relative basiscompared to other PE markets,” said a report by EMPEA.

Big Deals

Private equity funds started to gain prominence in theregion in the mid-1990s, and by 1998, a small number offirms had over $300 million under management. Notsurprisingly, the overall industry picture has changeddramatically over the last three years. The private equityhas matured as an asset class with record fund raisings, asharp rise in average fund size and increasing acceptance ofprivate equity by leading institutional money managers.Today there are an estimated 83 firms with over 123 funds—announced, rumored, fund-raising, invested or closed—including those with multiple funds such as Abraaj Capital,Global Investment House, Swicorp Financial Advisory Servicesand EFG Hermes.

Although it’s growing fast, private equity in the MENAregion has yet to show the scale of returns and deal volumethat make PE a force in other global markets. Butnevertheless, there have been big deals in successfuloutbound investment, such as the $1.23 billion paid in 2006for UK’s Doncasters Group, an engineering firm, by DubaiInternational Capital for a majority stake, and Istithmar’sacquisition of billion-dollar stakes in Standard CharteredBank, pension insurance institutions, and properties in theUS and UK.

An example for a successful regional transaction was theDubai-based Abraaj Capital’s acquisition of a 25% stake inEFG Hermes, Egypt’s largest investment banking firm throughthe Abraaj Buyout Fund II in a deal valued at $501million.

And the big deals will continue to dominate in 2007, withDubai Islamic Bank and Dubai World’s announcement of a $5billion family of private equity funds to participate instrategic transactions on a global scale. Another rumoreddeal is from the US-based Carlyle Group MENA Fund, which isexpected to raise over $1.8 billion. Other substantial dealsinclude the $500 million Evolvence Private Equity GCC Fund,by Evolvence Capital, to invest in private companies invarious sectors in GCC.

The list also entails some international names that targetthe Middle East, with Credit Suisse and General Electriclaunching Global Infrastructure Partners, a $1 billion jointventure focused on energy, transportation and water projectsglobally. The fund is expected to take on infrastructureprojects in the GCC.

The need for regulation

The growth explosion in the industry and its economicimportance have not gone unnoticed by governments and themedia. This importance and the growing public awareness thatit brings have created a call for responsibility andaccountability to investors. Both in the United States andthe European Union, calls for increased regulation or for“tightening” the rules that govern private equity groups arenot new.

These same calls are now being echoed in the MENA region.Observers agree that the region should not fall in the sametrap as the US and EU, and should be prepared by developingmodern policies that would ensure the commercial climate isas supportive and competitive as possible, to protect bothsides on the private equity deal. “Regulatory changes willcontribute to growth by opening up investment opportunitiesfor PE, like the FDI rules for India, and by introducingplatforms like the DIFC to operate a PE business,” RodPalmer, a Dubai-based partner in international legal andmanagement firm Walkers Global told Executive.

Financial experts are suggesting a review of the industryin the region to promulgate new regulations that wouldensure market stability and create an oversight body forsupervision of registered firms. For example, the new bodywould look into the potential risk that PE activities mightpose to the broader financial system. Investigators shouldlook at the levels of debt in buyout deals and the growingprevalence of private equity backed bids for listedcompanies and the impact that this might have on the publicmarkets.

There has been another suggestion by experts in the EUthat call for moving away from a prescriptive mode ofregulation toward a more principles-based approach. Thisapproach places the burden on individual firms to spot therisks relevant to their businesses and to develop andimplement procedures to mitigate those risks. The biggestbenefit of this approach is that it provides a proportionateand flexible regulatory regime, allowing firms to have agreater hand in the way they implement policy. And finally,fund managers must provide more transparency by publishingdetails of their investments, investors, management andtrack record.

Some fund managers have suggested starting the wholeprocess by educating fund recipients and the public ingeneral in the dynamics and structures of the industry,thereby improving familiarity and clarifying the benefits ofprivate equity. “There needs to be a move towards educationon private equity, and then regulation should beconsidered,” Ashish Dave, partner and head of privateequity, Middle East and South Asia at KPMG, said. “PE willnot be hindered by appropriate regulation, but thegovernment and private equity firms should focus on adoptinga prudential approach to regulation,” he added.

What’s ahead for 2007?

Some experts argue that a historic shift from public toprivate equity is occurring and that the region has alreadywitnessed the birth of an asset class, which by all measuresseems to have a very bright future. “Clearly, private equityhas huge potential in the Middle East, and we expect stronggrowth in both the number and size of new private equityvehicles,” Rod Palmer of Walkers said.

Most fund managers agree that PE has an advantage overother alternatives (in particular, hedge funds), becauseit’s comparatively easier to launch a shariah-compliant PEfund, which will be acceptable to a wide range of investorsin the region. Other benefits include the important role ofprivate equity in financing and fostering innovative firms,and in reallocating capital to more productive sectors ofthe economy. “PE benefits from the fact that local investorsunderstand and are comfortable with the nature of PE andthat many of the PE funds in the region areshariah-compliant,” Palmer added.

Palmer said the industry will face some challenges in thenext two to three years that are unique to the region. Oneof the challenges will be managing investors’ expectationsof high returns, as more and larger PE funds are launchedthat are all chasing deals in the region.

Another challenge is the lack of solid and attractiveventures out there. “We expect that it might become a caseof too many dollars chasing too few deals, and funds whichout bid others will end up with a high cost associated totheir investment,” said Jamil Brair, vice president of PEfirm SHUAA Partners in Dubai. “Proprietary deals become keyand it is the fund with the best network that will be ableto keep its deals off the market and away from biddingprocesses,” he added.

According to Credit Suisse’s Taylor, the asset classesattractive to PE investors in the region are maturing interms of geographic and deal diversity. “In the Middle East,we see investment potential in the energy, infrastructure,financial services and real estate sectors. We also expectopportunities to emerge in healthcare, media, retail andservices,” Taylor said.

In order to take advantage of these opportunities, PEplayers will have to attract and retain qualified assetmanagement professionals, Palmer said, adding that fundsthen would also grow further outside of the region. “Iexpect that as the market continues to mature, we will seean increase in outward investment by regional managersexpanding their investment mandate. We are already seeingthat with the real estate PE market, where a number ofwell-established based investment houses with stellarperformance records in MENA real estate are now expandingthe mandate of their PE funds and operations into realestate in Europe,” Palmer said.

What does the future hold for private equity in the MENAregion? Experts predict that within three years, aconsolidation phase will have started to take shape, and2007 will be a year to write home about.

“2007 will continue to announce new records in privateequity in the region—largest fund announced or raised, newindustry-focused funds,” said Jamil Brair.

Private equity as an asset class has been so far successfulin the MENA region and is on its way to playing an evengreater role in building corporate and national wealth.Players in the industry have gained much and have addedvalue and leverage to small companies benefiting from theunexpected growth. However, it remains unclear how effectiveprivate equity funds will be at deploying capital in deals10 times larger than what’s available now. Most expertsagree that there is no question that private equity in theregion has the critical mass and the diversity to warrant alot of attention. According to Palmer, the trend ofincreasing size of the funds launched will continue,“particularly as size and experience of the asset managementteams within the PE houses grow and they can handle morecapital.”

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Banking & Finance

Global private equity has a long reach

by Imad Ghandour
written by Imad Ghandour

The Middle Eastern Private Equity Internationalconference, held each year in the third week of March inDubai, has become the annual hotspot for the region’s PEindustry. Heads of international PE funds, like Carlyle’sDavid Rubenstein and CD&R’s Joseph Rice, descended on Dubaito explore how to expand their sprawling reach to one of thefew remaining untapped markets. In addition, rising PE starsfrom the region lectured about their experiences and theirvisions, eyeing further international expansion, and aimingto attract the attention of global PE giants.

Carlyle’s Rubenstein, in his keynote speech, predictedthat the Middle East will be the fourth pillar in the globalPE industry after US, Europe and the Far East. The region,loosely defined from India to Morocco, has more than 2billion inhabitants, $1.5 trillion GDP, and is one of themain exporters of capital. Rubenstein is practicing what hepreached by setting up a $1.8 billion fund targeting theMiddle East and Turkey.

Sarah Alexander, President of Emerging Market PrivateEquity Association (EMPEA), noticed the remarkable evolutionbetween the first conference in 2005 and the 2007 edition. In 2005, the local presenters were inquiring if it can bedone, how it can be done, and how lucrative it will be ifdone well. Today, local PE champions are speaking withconfidence about deals closed, problems overcome, exits madeand real realized returns. Between 2005 and 2007, theprivate equity industry has quadrupled in size, and controlsnow more than $15 billion in assets under management.

Where to go from here?

Rubenstein and Rice’s appearance at the conferences onlyhighlight the increasing attractiveness of the region as atarget for global PE funds. Other PE heavyweights have beenscouting the region and assessing its potential. Secondtier global PE players, like 3i, Ripplewood, Actis, CVC,HSBC and Emerging Market Partnership, have already starteddeploying funds since 2003. By tying up the region to theglobal PE network, regional investment practices will besignificantly alleviated, and PE will rise further invisibility.

In 2007, the $2 billion fund benchmark will probably besurpassed with the closing of Abraaj’s Infrastructure fund.In 2005, PE practitioners could barely identify a dozensmall-size deals. Today, the prospects have improvedsignificantly. A multi-billion privatization program, a direneed for infrastructure investment, an active need forpre-IPO institutional investors and a relentless need forequity financing to support corporate growth are presentingfunds with a continuous stream of investment opportunities. Infrastructure funds will become larger and larger in orderto finance the privatization and infrastructure programs,but the mid-cap market targeting investments in the $25-150million range will remain very active as well.

Global private equity has been under scrutiny bygovernments and media in both US and Europe. However, localPE leaders have been from the onset more proactive,advocating the benefits of PE for the region’s economicdevelopment. PE is frequently prescribed as a remedy for the“unemployment bomb” threatening the social and politicalstability in the region and the institutionalization of theprivate sector.

Access to capital was definitely not an issue that cameacross the conference speakers’ minds. Unlike other parts ofthe emerging world, the GCC is one of the largest exportersof capital. This excess liquidity will fund PE investmentsand their IPO exits.

UAE as the fourth capital of private equity

UAE is already the regional capital for private equity:three quarters of all PE funds are managed out of UAE, andthe UAE is the largest recipient of PE investments. AbuDhabi Investment Authority (ADIA) is also rumored to be theworld’s largest investor in private equity funds.

But reaching global prominence over the next few years is,to a large extent, in the hands of the leading firms. Themacro environment is expected to remain favorable in themedium term and investment opportunities will be abundant. The biggest challenges for PE firms are to identify, train,attract and retain talented and experienced professionals,and build a competitive advantage through the development ofsystems and operations at par with international standards.

Imad Ghandour is head of strategy and research at Gulf Capital

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Iraq needs its own Ataturk

by Claude Salhani
written by Claude Salhani

Some months after the fall of Saddam Hussein, I found myselfin Kuwait sharing a taxi from the airport to my hotel withan Iraqi journalist who had just come from Baghdad to attendthe same conference. We talked about the situation in Iraq,the violence and how it should be dealt with.

One of the first questions I put to my Iraqi colleague waswhat he thought should be done to bring stability to Iraq.Without a moment’s hesitation he said, “Iraqis need a‘Saddam-lite,’ a benevolent dictator. Someone not as bad andpowerful as Saddam, but someone who can frighten the peopleinto accepting discipline.”

It was a strange but nonetheless realistic point of viewthat chaos in Iraq could only be contained by installing aleader who could rule with an iron fist, while working tobring democracy to the country—an Arab Atatürk if you will.(Mustafa Kemal, better known as Atatürk or “father of theTurks,” emerged as a military hero in the Dardanelles in1915. He led the founding of the modern Turkish republic in1923, after the collapse of the 600-year rule of the Ottoman Empire. After a three-year war ofindependence, Atatürk led Turkey into the 20th century andmodernization, and did so with a firm rule.)

Indeed, at a time when President George W. Bush had highhopes that Iraq would be the new shining light from whichdemocracy would spread throughout the Arab world, similarthoughts were being put forward by moderate Arab countries.One was King Abdullah II of Jordan.

Abdullah saw that a possible solution out of the Iraqiquagmire would be to install a strong military leader. Sucha leader, said the king, could instill law and order in thechaos that is Iraq today.

“I would say that the profile would be somebody from inside,somebody who’s very strong, has some sort of popularfeeling,” said the Hashemite monarch in the InternationalHerald Tribune, on his return from Washington where he metwith President Bush. “I would probably imagine—again this isoff the top of my head—someone with a military background who has the experience ofbeing a tough guy who could hold Iraq together for the nextyear.”

Today, four years on, Iraq is experiencing an unprecedentedcrime wave. Aside from the politically-related violence, which is claiming hundreds of lives on adaily basis, the country is being hit by organized and pettycrime and the contrast between Saddam Hussein’s 30-year rule as an absolute dictator who cracked down hard oncrime, and the sudden void of authority felt in the countryafter the dissolution of the army and the Baath Party couldnot have been greater.

I remember asking my traveling partner what he expectedwould happen when the US-led coalition handed over partialsovereignty to an Iraqi government. “I fear there will becivil war,” he replied. “Perhaps not immediately, butcertainly in due course.”

He was equally skeptical about democracy. “Forgetelections,” he said.

“They are simply not ready for it,” he said, and then,echoing King Abdullah’s sentiments, he went on, “Give them astrong army man who can pull it together. Someone who canrule with an iron fist and bring back law and order. Someonenot as bad as Saddam, but who has experience in themilitary, and in getting respect. That’s what we need.”

But there are two problems in putting such an idea intopractice. First, it would be in-your-face evidence that theBush Doctrine of freedom for the Middle East, with Iraq as ashowpiece, was a failure—something this White House wouldsavagely oppose. And second, the mechanism needed to realizesuch a venture—mainly a strong military—is no longer present in today’s Iraq. Alas, this means Iraqmay be destined to live through more years of instabilityuntil a strong figure can emerge to lead the country out ofthe darkness.

It wasn’t exactly what President Bush had in mind,especially as it would mean accepting that the democracyexperiment in Iraq has failed, at least for the moment, butamid the mounting chaos that is gripping Iraq today, theidea of a benevolent dictator—an Iraqi Atatürk—is beingtouted as a genuine option, one that was even debated—“Thishouse believes only a new dictator can end the violence inIraq”—recently on the BBC’s Doha debate.

Identifying an Iraqi “Atatürk” might not be all that simple—just think of the ethno-religious hurdles: a Sunni would be rejected by Shi’ites and vice versa. For sadly, Saddam’s over-inflated megalomaniac ego did not leave room for any Iraqi heroes—at least not any whose hands are not stained with Iraqi blood.

CLAUDE SALHANI is international editor and a political analyst with United Press International in Washington

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Banking & Finance

Regulating the shadows – Hawalas test global financial system

by Executive Staff
written by Executive Staff

During a recent conference at the Abu Dhabi Central Bankattended by members of the financial sector and experts fromthe region, Europe and the US, a focus was on how to betterregulate the informal money transfer system of hawala, whichhas been linked to money laundering, organized crime andterrorist financing.

Hawala, which can be traced back to the 8th century, is apopular, cheap and effective way to send money that isfrequently used by the Gulf’s massive expatriate Asianpopulation.

Money is transferred through a network of hawala brokers,or hawaladars. A customer approaches a broker in one cityand provides a sum of money to be transferred to a recipientin another country. The broker who has received the moneycalls his counterpart in the recipient’s city, providinginstructions on the disposal of the funds and promising tosettle the debt at a later date.

Although much of the money transferred is legitimate, adrug bust by the Italian police late last year connectedseveral Pakistanis with a Dubai-based Indian who receivedmoney through his informal bank to channel funds to drugcartels and arms dealers.

This incident is far from unique, with the UAE and Britishauthorities busting a drug network operating between the UKand Afghanistan only last month (March) that used the UAE asa ’cash pool’ to launder an estimated $194.7 million.

The ancient versus the modern

The problem facing central banks and regulatory bodies isthat the majority of hawala transactions are completelylegal and a primary source of income for many people aroundthe world. According to the UN, in 2005 there were 175million migrants worldwide sending remittances in excess of$300 billion, of which some $167 billion went to emergingeconomies and accounted for up to two-thirds of GDP incertain countries.

That trend is likely to increase, particularly as thedemand for young workers spikes in the aging populations ofEurope and North America.

The issue is of particular importance in Somalia, where upto 15% of the population lives abroad and remits $1.5billion annually to the Horn of Africa.

“The Somali economy is more dependent on remittances thanany other country on earth,” said Muhammed Djirdeh of theSomali Money Transmitters Association. Around 40% of theSomali population is reliant on remittances from relatives,and remittances are a source of finance for up to 80% of newbusinesses.

But with the recent clamp down on the hawala system,hawaladars are feeling the heat.

“We suffer, like all others in this business, from animage problem,” said Djirdeh, citing the example of theMogadishu-based Al Barakat money transmitter that was closeddown after 9-11 by the US authorities for connections toterrorism.

“Our problems are regulations, forcing some of us to quitthe business or work without compliance. The US is veryprohibitive for us to work in and with as we are the smallboy in the neighborhood—banks close our accounts, and wecannot do without working in the system. On top of that,transaction costs are going up. We charge 5% to send$100-$150, but have to pay agencies and commissions, so theoperator gets a small income,” added Djirdeh.

By comparison, a bank in Europe or the UAE will charge upto 20% for a transaction of the same amount.

But low costs are not the only reason for using the hawalasystem. In many developing countries, the banking system isso underdeveloped that informal money transmitters are theonly means to transfer money. In addition, hawala is highlyefficient, taking a maximum of two days to get to therecipient.

“What’s amazing is in today’s electronic world it takesfive days for a check to clear in the UK,” said ProfessorHannah Scobie of the European Economics and Financial Centerin London. “If there were hawala brokers between the UK andItaly, we would use them, as banks can take up to twoweeks,” she added.

Some observers also believe that hawala has been unfairlysingled out as a system abused by criminals and terrorists.As World-Check, a British company that runs an intelligencedatabase on financial risk, has pointed out, 60% of all bankfraud is internally driven. Equally, other forms oftransmitting funds are widely used but garner less attentionby regulators, the financial system or the press.

For instance, settlements can also be made via a cashcourier, as cargo, via diamond smuggling or through multi-country settlements.

“The latter is particularly popular as it is a way to cutcosts and make money on currency exchanges,” said NikosPassas, professor of criminal justice at NortheasternUniversity.

“The money of migrants wanting to send money goes into acash pool. The dollars go to an exporter of goods, and thenrupees go to the families—that’s how you minimizecross-border transactions and score tons of money,” headded.

As another example of avoiding cross-border transactions,Passas said Taiwanese boats going to meeting points ininternational waters to trade narcotics for commercial goodsthat will then enter Hong Kong, which acts as the financialhub to effectively launder the money.

“The other ways are through goods. The value of a good mayofficially be declared at $30, but only worth $1.20, whichis fraud,” said Passas.

Finding the right balance

The struggle for regulators is to find the right balancebetween over- and under-regulating informal moneytransmitters.

“It is difficult to regulate hawala without driving itunderground,” said Jean-Francois Thony, assistant generalcounsel of the financial integrity group at the IMF.“Regulations are not the panacea to avoid misuse,” he added.

If a regulatory body is particularly zealous, it will notonly be hawaladars and low-income workers that areaffected.

“Over-regulation can lead to capital flight,” saidProfessor Scobie. “But banks and regulators have gonecompletely wild following 9-11. Every time you turn around,there is a new form to fill in. This is very disturbing forcustomers, and on looking closer, these forms are for banksto get more information to sell more products.”

So what is the solution between excessive regulation thatcould drive informal transmitters underground and bankstrying to flog extra services?

In the UAE, the central bank has started encouraginghawaladars and exchange commissions over the last threeyears to come forward to register themselves.

“We realize hawala could be used to launder money andfinance terrorism, so we want to control—not end—hawala, asit is important for people in poor countries,” said AhmedIsmet of the UAE central bank

Initially expecting around 100 applicants, 215 dealershave been officially certified and 43 applications are stillpending.

“The first stage is registration [by hawaladars]. Morestringent and restrictive regulations will come in time asit could be counterproductive if done earlier,” said IbrahimAl Hosani of the UAE Central Bank.

Countering terrorist financing and money laundering is notconfined to reining in the hawala system, as such informalmoney transmitters also use official banking channels. Sothe financial community also needs to be brought onboard.

The issue is of major significance for banks, as evenallegations of being a channel for criminal activity couldhave long-lasting effects on a bank’s reputation and brandequity. Equally, Arab banks with branches in the US have tobe proactive in countering money laundering and terroristfinancing to comply with the USA Patriot Act’s InternationalMoney Laundering Abatement and Anti-Terrorist Financing Act of 2001.

But figuring out the bad transactions from the good is noeasy task.

“If every A4 paper transaction made by LloydsTSB worldwidewas piled up over a week, it would endanger a 747 jet flyingto the US—that’s 35,000 feet of paper. To single out one badtransaction is very difficult,” said Richard Stockdale, headof LloydsTSB Global Services.

Agreements between banks and central banks for automatedclearing houses to reduce the cost of money transfers inbanks was suggested as one way to wean customers off thehawala system.

Alex Cunningham, head of the New York-based Middle Eastand Balkans Program at the Financial Services VolunteerCorps, thought that one way out of the dilemma was a morerepresentative banking system.

“Banks need to become more focused on low-income bankingand offer different products, such as lottery tickets andphone cards in low-income branches,” he said.

Greater transparency between the private and public sectorwas also highlighted as necessary to make it easier to spotsuspicious activities.

“The whole financial control framework does nothing if tradeisn’t transparent,” said Passas. “Despite all thisinfrastructure for anti-money laundering and counter-terrorist financing, take a look at the business environmentand there are huge holes—not loop holes—but black holes thatany half-decent criminal entrepreneur can take advantageof.”

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Bush understands Lebanon

by Lee Smith
written by Lee Smith

The US’s former ambassador to the UN, John Bolton, recentlyconfirmed that Washington rejected calls for a ceasefirethis past summer and let Lebanon wither under Israeli attackfor several more weeks. An early cessation of hostilitieswould have been “dangerous and misguided,” said Bolton, whowas “damned proud of what we did.” So, maybe it’s worthwhileasking, with friends like the Bush administration, who needsenemies?

And yet strange as it may seem, certainly to thoseunfamiliar with the tangled relationships that constituteMiddle Eastern politics, this White House, having sponsoredor backed a series of UN resolutions supporting Lebaneseindependence and pledging almost $1 billion in foreign aid,is probably the most pro-Lebanese US administration inhistory. And that’s no small feat, since the US has had astake in Lebanese affairs ever since it became thepre-eminent Western power in the region shortly after theend of World War II.

The key date is 1956, after the Suez crisis, leaving the USwith the primary responsibility for containing Sovietinfluence in the Middle East. Eisenhower’s sending troops toBeirut to shore up the Chamoun government suggests that forWashington, clarity in Lebanon has tended to look like twosharply polarized sides, with one clearly pro-Western, andthe other decisively not. When the internal Lebanesesituation is muddier, as it was during the fifteen-year-long civil wars, US officials have had a much harder timefiguring out where American interests lie—and hence whataction to take. Indeed, when Ronald Reagan dispatched theMarines in 1982, the only clear divide was in theadministration itself, which debated the wisdom of gettinginvolved for as long as US troops were based here.

It was partly because American blood was shed in Lebanonduring the ’80s for no apparent reason, as well as placatingHafez al-Assad, that the current president’s father showedvirtually no interest in Lebanon, a state of affairs thatcontinued through the Clinton years. And without aremarkable chain of events these last seven years, thingsprobably would’ve remained the same during the tenure ofthis administration.

It may seem paradoxical in light of last summer’s war withIsrael, but as I was reminded recently during the annualAmerican-Israeli Public Affairs Committee (AIPAC) PolicyConference, it was largely the power of the Israeli lobbythat kept Lebanon a live issue here in Washington when noone else was paying attention. In 2003, the US House ofRepresentatives passed the Syria Accountability and LebaneseSovereignty Act, largely meant to force the Executive branchto reconsider its dubious policy of constructive engagementwith Damascus.

Still, it wasn’t until the Iraq war that Washington realizedwhat it had in Lebanon—not just a staging ground to rollback a confrontational Syrian regime and a fight aregion-wide Iranian agenda, but a high-profile showcase forthe keystone of the administration’s new national securitystrategy: Middle Eastern democracy. It is hardly lost onthe White House that to date, Lebanon, for all its problems,is the most successful part of its regional portfolio.

What’s bizarre is not Washington’s support of Lebanesedemocracy, but that so much of the rest of popular USopinion seems to have turned its back on Beirut. Ever sincethe formation of James Baker’s Iraq Study Group, there hasbeen intense domestic pressure on the White House tonegotiate with Damascus. Though seriously weakened with itsfailing position in Iraq, the Bush administration does notbelieve that solving Baghdad means acquiescing to Bashar in Beirut.

And then there’s the American media. Bush, explains theclueless Seymour Hersh in a recent New Yorker article, isbacking Al-Qaeda militants through the offices of theSeniora government. Other media reports also contend that USfunds used to shore up the Internal Security Forces areessentially being used to create Sunni death squads to waragainst the Shia.

Through it all, the Bush administration has brought Lebanoneven further within the fold. To date, in addition todiplomatic support and financial aid, Washington has devotedan unprecedented amount of White House prestige to Beirut. And as for Lebanese officials making their way toWashington, the State Department, Pentagon and White Househave all thrown open their doors to leaders from every sect,including a host of younger Shia hopefuls who seek anotheroption for their community other than that articulated bythe grim Islamic resistance.

And now with Bush having only a little more than a year leftin office, the natural question is, what happens to the Washington-Beirut relationship when the most pro-Lebanese president in the shared history of the twocountries leaves the White House? As today, Washington’sinterest will be determined by circumstances, and mostimportant among them, it is the will of the Lebanese peoplethat will decide if in, say, 20 years time, we will lookback on the beginning of the 21st century as the goldenyears of the US-Lebanon alliance, or as merely the start ofa beautiful friendship.

LEE SMITH is a Hudson Institute visiting fellow and reporter on Middle East affairs. 

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