While public awareness of the dangers of global warming still has a long way to go in the Middle East, it is beginning to be taken increasingly seriously. Recent interest in the promotion of Clean Development Mechanism (CDM) policies is seeing the Gulf take a more development-oriented approach to the problems associated with global warming.

The risks associated with global warming to the broader Middle East are numerous. Some scientists have projected that the concomitant rise in sea levels could mean that by 2050 Egypt’s northern coast, including the ancient city of Alexandria (now the country’s second largest city), will be underwater.

The Gulf is already suffering from the warming of the oceans through a phenomenon known as coral reef bleaching, whereby a rise in sea temperature causes symbiotic algae that live on coral reefs to die, making the coral appear white. Equally, many of the luxury seaside developments now taking root across the Gulf could well fall pray to encroaching sea levels.

But perhaps most significant for the region in the medium-term is that the recent interest in global warming has become a new reason to encourage alternative fuels and a move away from fossil fuels, the Gulf countries’ chief export by far. It has also put pressure on the oil and gas industries in the region to go green and lower the emissions created during extraction. Due to their small populations compared to the amount of carbon dioxide they emit, Qatar, Kuwait, Bahrain and the UAE are among the top five emitters per capita in the world.

Kyoto the center of debate

For the past decade, the Kyoto Protocol has been at the center of the debate over what to do about global warming. Signed in 1997, Kyoto aimed at cutting developed countries’ emissions by 5.2% by 2008-2012. However, it has never really taken off, undermined by the demands of rapidly developing economies like China’s for the energy that drives their growth and by the reluctance of some developed countries, most notably the US (which has pulled out of Kyoto), to impose emissions restrictions on industry that might slow down its economy.

In practice, the Kyoto Protocol provides two main ways to control emissions. The most common thus far is emissions trading, a system whereby companies are given a pollution cap to which they must adhere. Unused pollution credits can be sold on free markets to companies that require them. The EU currently runs the largest operating emissions market, the EU Emission Trading Scheme. To apply this idea to Kyoto, the trading would have to be internationally standardized with one market catering to all countries rather than companies.

The main alternative to emissions trading is articulated in Article 12 of the Kyoto Protocol as the CDM. It calls for developed countries with a commitment to reduce greenhouse gas emissions to invest in emission reduction projects in developing countries instead of upgrading their own system. CDM advocates believe this will achieve the same targets in emission reduction at a lesser cost and have the added bonus of encouraging foreign direct investment (FDI) and technology transfers in the developing world. Some 434 CDM projects have so far been registered worldwide, with India and Brazil the top two advocates of the system.

Gulf countries are now trying to increase their involvement in finding solutions to tackle the challenge of climate change while maintaining economic growth. In September 2006, Saudi Arabia hosted the first International Conference on the Clean Development Mechanism, calling for more CDM projects in the region. Mohammad al-Sabban, a senior economic advisor to the Saudi minister of petroleum, described CDM projects as a win for the investor, a win for the country hosting the project, and a win for the environment.

There is a wide variety of CDM projects Gulf countries could benefit from, ranging from promoting the use of clean technology to the reduction of gas venting and flaring to carbon sinks. Some of these technological innovations could even help hydrocarbon exporters extend the longevity of their reserves by 10-15%.

CDM projects have already taken hold in other Arab countries—for example Egypt’s Zaafarana wind power plant on the Red Sea or Morocco’s Essaouira wind power plant on the Atlantic Ocean. At the Riyadh conference, participants suggested a variety of CDM applications of relevance to GCC countries, such as water desalinization plants powered by renewable energy to oil industry specific projects such as carbon trapping, where carbon dioxide is injected into oil fields rather than released into the atmosphere—which can have the effect of increasing the recoverable reserves of maturing oil fields. Countries in the Gulf have also become more aggressive in accounting for their CO2 emissions, with gas flaring now far less common than in the past, and an improvement in the shut-off valves for flare headers, to ensure minimum leakage into the atmosphere.

CDM helps bottom line

Participants at the Riyadh conference from the financial world noted that CDM projects, with their inherent public benefit, could be compatible with Islamic finance—a factor that could make it easier to raise funds regionally. But one major attraction of CDM, particularly for host Saudi Arabia, is to attract FDI as part of the kingdom’s effort to diversify its economy and encourage the transfer of technology.

Indeed, Saudi Arabia’s keenness to move ahead with CDM projects was striking. Al-Sabban, the conference’s chair, promised proactive implementation of CDM policies; public-private cooperation on projects; the rapid development of a legal and structural framework; the creation of workshops to educate local businesses and incentives to reward leading CDM projects.

Such enthusiasm could go hand-in-hand with many GCC countries’ recent focus on encouraging local research and development, especially considering the very specific needs of these countries. CDM technology is, in many ways, on the leading edge of technological innovation. These companies are beginning to realize that companies on the other side do research, says Dr. Jim Holste, the associate dean for academic affairs at Texas A&M University in Qatar, which specializes in petroleum industry research and teaching. If you simply sit back as a consumer of technology, you’re always behind.

One example of technological innovation Holste gives is the recovery of associate gas—gas dissolves in an oil field. Currently associate gas is flared (burnt) which is wasteful and not good for the environment, he said. Synfuels—a Dallas, Texas, based company—has been developing new methods to recover these gases and convert them to liquid fuel (GTL) with a much leaner installation than ordinary GTL facilities. There have been discussions between Synfuels and Kuwait and Qatar about implementing the new technology. It has the ability to be profitable on a much lower scale, Holste says.

CDM, then, could kill two birds with one stone: help GCC countries do their bit against global warming and encourage research that can give a longer lease of life to ageing oil fields.

It has been a busy few weeks for Kuwait’s telecommunications sector, with the country’s existing mobile phone network operators announcing ambitious expansion plans overseas, while facing the prospect of a new rival in the domestic market.

Kuwait’s mobile phone market is set for a major upheaval after the government announced on Dec. 17, 2006 that it would allow a third license to join Mobile Telecommunications Company (MTC) and the Wataniya Telecom Company.

Decision comes from political pressure

The decision by the Kuwaiti cabinet to back the proposal for a third operator came after considerable pressure from the opposition, which had long contended that the establishing of Wataniya in 1999 had not done enough to boost competition in the telecoms market.

Under the cabinet’s proposal, 60% of shares in the new firm will be available to the public, 24% to state-owned authorities including a pension fund and an investment body and the other 16% to a core local or international investor. The government had rejected a bill tabled by the opposition earlier this year to set up a third operator but appears to have accepted both the economic viability of a new venture and the public pressure for a wider range of options.

The third license has been something of a political football in Kuwaiti politics, with the government contending that it was a matter for the cabinet to decide on while the opposition-dominated National Assembly took the position that it was a legislative issue.

Speaking on December 10, before the cabinet formally approved the proposal for the new network, Communications Minister Maasouma al-Mubarak said that while the government was not opposed to issuing a third license, or more if needed, any such company would be set up through the ministry of commerce and industry and not through mechanisms established by the assembly.

The government firmly believes that establishing companies is the sole jurisdiction of the government and not the legislative power, she said.

Regulation required

Al-Mubarak also said that the government was looking to establish a communications commission to regulate the telecom market, a step that would, to some degree, allay opposition concerns over a lack of competition and ensure transparency.

Whenever the new company becomes operational, it will face fierce competition in the tight Kuwaiti market. The country already has one of the highest levels of penetration in the world, with 2.5 million of Kuwait’s population of 3 million currently subscribing to either MTC or Wataniya.

Though Kuwait’s two domestic mobile phone firms may be facing additional competition at home, the threat hasn’t fazed either MTC or Wataniya. Both have recently announced new plans to expand their already sizeable international operations.

On Dec. 17, MTC announced that it was considering placing a bid for Paktel, Pakistan’s fifth-largest mobile phone company, after the operator’s Luxembourg-based owner Millicom made public plans to bow out of the Pakistani telecoms sector. If the sale goes through, it would give MTC a further 1.5 million subscribers to those it has in its 20 existing overseas operations and allow it to access a rapidly growing market.

Only days before, the international arm of rival Wataniya signed an agreement with the Palestine Investment Fund (PIF) to set up a new mobile phone company in the Palestinian territories. The deal will see the Kuwaiti company manage the operation and hold 40% of the new firm’s shares, with the PIF having another 30% and the remaining slice being offered to the Palestinian public through an initial public offering (IPO).

In September, the Palestinian government’s Ministry of Telecommunications and Information Technology awarded Wataniya the tender to establish the second mobile phone network after the company submitted a bid of $179 million for the rights.

The expansion into the Palestinian market will further consolidate Wataniya’s overseas holdings, with the company also operating in northern Iraq, Tunisia and Algeria.

News of the shareholders agreement came only a day after the Kuwait Projects Company announced that it was considering selling its 24.9% stake in Wataniya, with the proposed move being linked to the general downturn in the region’s stock markets.

As is the case with most of the states in the Gulf region, Oman is actively working to broaden the base of its economy and to provide employment opportunities to its expanding local workforce. One sector that has been identified as having great potential is that of tourism, an industry that Oman is particularly well positioned to foster.

Slow out of the blocks

In some ways, Oman has been slow out of the blocks in the race to promote itself as a holiday destination, with a separate Ministry of Tourism only established in 2004. That said, the Sultanate already had in place a sound tourism infrastructure and has fast become a serious rival to other Gulf states, such as the UAE, that have also seen tourism as a viable option for their economies.

Market analysts are predicting the Omani economy to expand by 5.9% in 2007, following 5% growth last year, placing it just behind Qatar and the UAE and well ahead of Bahrain, Saudi Arabia and Kuwait. Contributing to the solid growth rates in 2006 and 2007, the tourism sector grew by 16% in 2006 and looks set for a bumper year in 2007.

Oman’s tourism sector launched itself into 2007 on a high, fuelled by strong bookings through the Eid al Adha break, with hotels and resorts reporting a 90% occupancy rate during the holiday.

Oman has joined the regional mania for building whole self-contained metropolises from the ground up, with the announcement of the Blue City project on the coastal region at Al Sawadi. The project, with a total budget estimated at between $15 to $20 billion, will include more than 200 villas, some 5000 apartments, four hotels, golf courses and retail centers.

According to Renny Borhan, senior vice president of Hill International, the US construction firm that won a six-year contract in early January to provide technical advisory and oversight services for the project, the new mega development will be a significant boost to the Omani tourism industry. “The Blue City development will make the country of Oman a major destination in the Middle East,” Borhan said.

Tourism as a cure for unemployment

Oman’s government has identified the labor-intensive tourism sector as a way of relieving the growing unemployment problem. The 2007 budget unveiled by Economy Minister Ahmed bin Abdulnabi Macki on January 7 included a number of large ticket items to boost tourism-related infrastructure. Foremost among these are funding for further improvements to the Muscat Seeb International Airport, as well as consultancy studies for the construction of two new airports. Other general infrastructure projects, including major highway links and water, wastewater processing and electricity upgrades will all have a positive effect on the country’s tourism sector.

In addition, the state has provided the required land and a soft loan of $7.75 million to assist in the development of a golf course, a residential complex and hotels close to Muscat. On January 6, the Oman Arab Bank and Bank Dhofar signed an agreement to finance the residential phase of the project, which has already seen the completion of a series of high-end villas and apartments that will cater to the region’s golf lovers and those from further afield. The course will be fully grassed during 2007 and brought up to international standards, another step in Oman’s campaign to increase its share of the tourism market in the Gulf.

However, while Oman has seen a flourishing of tourism developments in recent years, with many lavish new projects either on the drawing board or set to start construction in 2007, the country has also somewhat sought to distance itself from the luxury brand holidays offered by its neighbors. Omani tourism operators, encouraged by the government, are looking to cash in not only on the sun and fun aspects of tourism but there has also been a strong emphasis on adventure tourism including diving, safaris, off-road driving, trekking, camping and mountain climbing.

Despite the market volatility throughout the Gulf Cooperation Council (GCC) region, the Muscat Securities Market (MSM) has experienced overall growth of 12% in 2006.

In a report issued in August, Merrill Lynch named Oman as one of the top four most attractive markets in the Middle East and North Africa region. The other countries named in the report were Egypt, Bahrain and Kuwait.

Neighboring markets in the Gulf slumped from record highs earlier last year. In Saudi Arabia, the downturn came after three years of growth.

Ahmed Saleh al-Marhoon, the director general of the MSM, said that what happened this year was unprecedented in the region. The unrealistic index increases were bound to lead to a correction, which is what started happening in late February 2006.

In Saudi Arabia, the Tadawul All Share Index grew almost eightfold between March 2003 and February 2006. By late November, the Tadawul was operating 49% lower than the same period during the previous year. Meanwhile, the Dubai Financial Market had fallen 64% and Doha 42% over the same period.

MSM sees realistic increase

Comparatively, the MSM did not suffer from such a slump. “If you trace the movements, you will see a realistic increase reflecting real economic growth,” al-Marhoon said.

A small dip was recorded from March through the summer and al-Marhoon explained this as normal market behavior. “The MSM is not immune to sentiments in the region,” he added.

A limitation for attracting investors to the MSM, despite its stability, is its size. The market has about 140 listed companies of which about 40 actually get traded. The Bank Sohar initial public offering (IPO) was the only IPO released on the market in 2006.

Earlier in January, Bank Sohar released the $51.9 million IPO, which represents 40% of the total paid up capital, the minimum required to be listed on the MSM as decided by the regulator, the IPO oversubscribed by six times.

The market wants more IPOs

Al-Marhoon said that the market would like to see more IPOs, as a way to enrich it and attract more investors.

A number of other IPOs were expected last year, notably through government privatization. However, these have been delayed. Al-Marhoon said the government was still committed to privatization but procedural matters had to be dealt with.

Meanwhile, Galfar Engineering and Contracting, the sultanate’s largest private construction company, announced last July that it would go public by November, but this was delayed until 2007. The company is expected to release $130 million, said Mohammed Ali, the managing director of Galfar.

Al-Marhoon said that most IPOs expected over the next few years would come from some of the new tourism developments and oil related industries.

The MSM has also identified the large family businesses and groups that are active in the private sector, which as of yet have tended not to go public.

Al-Marhoon said that he would like to see more family businesses go public. He said it was in their interest, as it would allow for new blood, new ideas and diversification.

On December 16, Amr al-Dabbagh, the governor of the Saudi Arabian General Investment Authority (SAGIA) discussed how the kingdom’s ambitious economic cities projects would break new ground in the integration and use of information and communications technology (ICT).

Al-Dabbagh spoke during a forum entitled Intelligent Cities, held in Riyadh. The forum discussed the concept of the project and the investment opportunities associated with the cities. All are to be solely funded by the private sector but al-Dabbagh was quick to emphasize the government was offering tremendous support to the initiatives.

In addition, the head of SAGIA also announced two new cities, which would bring the total to six. Studies are underway to establish two new economic cities in the northern and eastern regions, al-Dabbagh said.

The four cities announced to date are King Abdullah Economic City in Rabigh, on the coast north of Jeddah, Prince Abdulaziz bin Mousaed’s Economic City (PABMEC) near Hail, Knowledge Economic City in al-Madinah, and Jizan Economic City. SAGIA estimates that these projects alone will attract $80 million in investment.

Liberalizing restrictive regulations

SAGIA was founded in 2000 on the back of the government’s new Foreign Investment Law which paved the way for liberalizing some of the kingdom’s traditionally restrictive regulations regarding the rights of private foreign investors. The authority has the mandate to attract foreign direct investment (FDI) and increase economic diversification, particularly through knowledge-based enterprises.

The government’s economic strategy, of which SAGIA is but a part, centers on diversifying the economy. Another vital aspect is the creation of employment opportunities for the growing population—an estimated 60% are under the age of 14. Among these and other strategies there remains a strong emphasis on spreading wealth equitably throughout the kingdom.

The economic cities projects are intended to go some way in fulfilling both SAGIA’s stated objectives and the government’s broader economic vision by enabling diversification and creating jobs, as well as steering the kingdom into a prime position to compete on the global stage.

Al-Dabbagh and the other speakers emphasized that through the creation of completely new cities on Greenfield sites, a great opportunity existed to give Saudi Arabia a huge competitive advantage in terms of ICT and the benefits it can offer to business and industry. Combining the concepts of the ‘digital city,’ originally coined by the Intel Corporation, the ‘smart city’ by Cisco and the ‘internet frontier’ by Microsoft, SAGIA intends for the cities to be at the cutting edge of ICT systems, integrating all aspects of the infrastructure networks to enable transfer of information at every possible level. Attendant to this would be software and content creation opportunities.

Abdullah al-Rakhis, the chairman of Rakisa Holding, the company responsible for developing PABMEC, said the project would create a ‘silicon valley’ style area at a cost of some $22 million. This project at Hail is specifically intended to focus on ICT, taking a less prominent role in other areas. He said that the project had the potential to create some 600 jobs for women alone.

A human resource challenge

Al-Rakhis was also quick to highlight how aware of the human resource challenge his project and the broader ICT sector needed to be. “We have started to send a number of Saudis to the US, Canada, Ireland and Singapore for training on smart infrastructure facilities,” he said, speaking of the initial preparations already being made. He also spoke of the associations Rakisa Holding had already made with companies such as Cisco and Intel in terms of training.

Intel Corporation’s Chairman Craig Barrett, who was in Riyadh, unveiled a series of agreements with the Saudi government, including a commitment to train 50,000 Saudi teachers in their Intel Teach Essential Program. His comments echoed those made in a similar speech by Microsoft Chairman Bill Gates back in November. He also signed a number of commitments to spur on ICT development and train Saudis.

Also, earlier this year, fellow US firm Cisco Systems announced an investment of $300 million in the kingdom’s ICT sector when John Chambers, the president and CEO, visited the kingdom.

After much speculation, two private airline licenses have been awarded, heralding the beginning of a new era for aviation in Saudi Arabia.

The Supreme Economic Council, which is personally headed by King Abdullah and steers the kingdom’s economic development, decided in 2005 to liberalize the sector and allow private operators to set up and compete with the state-owned Saudi Arabian Airlines.

There were six applicants for the licenses last year, which the General Authority of Civil Aviation (GACA) whittled down to two. The successful bidders were Sama Airlines and National Air Services (NAS) both winning on a mandate to offer low cost services across the kingdom with a view to expanding outside in the future.

Riyadh-based NAS is one of the best known regional private aviation operators in the kingdom, which has one of the highest appetites for private air travel in the world. Ali al-Naqbi, Chairman of the Middle East Business Aviation Association, recently said that the business aviation sector in Saudi Arabia accounted for 50% of the total for the whole region—a market he estimated would be worth $800 million by 2012.

NAS has developed NetJets, a fractional ownership and leasing program in the kingdom and also operates evacuation services for oil companies operating in remote locations, along with other bespoke services.

Founded in 1999 and focussing on top-end private aviation, NAS’s board announced last April at a shareholders’ meeting that it intended to increase the paid up capital to $266.7 million through a 30% equity sale to Abraaj Nas Investment Co, a subsidiary of Prince Alwaleed Bin Talal’s Kingdom Holding Co. It was said at the time that this was meant to facilitate new strategic directions, which would now appear to be towards budget travel and acquiring a civil aviation license.

Getting into the low-cost market

Mohammed al-Zeer, the president of the company, recently explained to the press that the decision to break away from the top-end of the sector and enter into the low-cost carrier (LCC) market had been made after careful consideration and consultation with companies such as the British-based budget airline EasyJet. Subsequently EasyJet has announced that it has entered talks regarding franchising its brand to NAS.

The company will start its LCC services with a fleet of five single aisle planes. In December, the company announced its intention to purchase additional craft as part of a $2 billion expansion program, which would increase its entire fleet to 100 by 2010.

The other licensee Sama is similarly aiming to develop services geared towards the low cost market. Founded by Prince Bandar bin Khalid al-Faisal, who owns Investment Enterprises, it has a paid-up capital of $53 million. Other shareholders in the enterprise include some of the largest names in Saudi business such as the Dallah and Olayan Group and some wealthy individual investors.

Sama intends to begin operations flying between Dammam, where it will be based, Jeddah and Riyadh, before pushing further afield and regionally when it receives licensing from neighboring jurisdictions.

With targets similarly ambitious to those of rival NAS, Sama’s CEO, Andrew Cowen, explained to the international press, “We plan to grow our fleet from the existing four committed aircraft to around 35 by 2010.” He declined to specify the leasing company they were in talks with, but did say that the terms would be between five and seven years.

Takeoffs as yet delayed, however

It is not as yet clear when either airline will commence full operations but they are set to compete not only between themselves but also with the state incumbent, Saudi Arabian Airlines. The national carrier is undergoing a slow and reputedly painful process of privatization. One Riyadh analyst said, referring to the reported bloated bureaucracy and over-staffing, that it should benefit from the competition in the long run—whether or not this will speed up the lackluster path to privatization remains to be seen.

What is clear though is that the consumer is set to benefit with the arrival of two new operators. With 33 million passengers passing through Saudi Arabia’s 27 airports in 2006, the market is large and all indications point to further growth. International Transport Association figures released in November 2006 indicate that regional carriers experienced a 15.4% increase during the first nine months of the year.

The GACA is spending $8 billion expanding and developing the existing airports in Jeddah, Madinah and Tabuk to bring them up to international standards. There is also an additional international airport on the drawing board as part of the enormous King Abdullah Economic City development in Rabigh, on the Red Sea coast, north of Jeddah.