Middle East Markets issue 1

mea

Markets Qatar 2022

An Imperfect Vision?

Also in This Issue 3 Things All Expat Investors Should Do...

Structuring Islamic Investments for Venture Capital Opportunities

mea Markets Contents

14

4 Latest News from Across the Middle East Region 10 3 Things All Expat Investors Should Do

By John Williams, Project Manager at ADVFN Middle East 14 Franchise Agreements in the Middle East

By Ken Dixon, Partner at Dubai-based law firm, Galadari 18

28

Regional Outlook - The Spectre of Increasing Disputes?

Written by Laura Warren, Partner at Clyde & Co, Doha 22

18

Structuring Islamic Investments for Venture Capital Opportunities Amanjit K. Fagura, Associate in the Dubai office of global law firm, Morgan Lewis considers the opportunities for venture capital with Islamic finance structures in the UAE. 28 Business Confidence Marked Deceleration in Middle East According to Global Economic Conditions Survey (GECS) jointly conducted by ACCA and IMA finance professionals, ‘Business Confidence’ has plunged in the Middle East for the second quarter of 2015. However, the declining quotient remained slow when compared to the first quarter of the year.

32 Global Ethical Finance Forum Affirms Its Pivotal Role in Forging next Chapter for Responsible Finance Industry Lord Mohamed Sheikh, Baron Sheikh of Cornhill and IFSB’s Jaseem Ahmed opened Day 2 of the historic forum with an engaging and holistic look at convergence in values, conduct and regulation.

36 UAE Bound to Lead the Healthcare Sector in Middle East Country turning its healthcare challenge into a strategic opportunity.

40 Understanding Local Partners Key to Success in Middle East Markets

By Ben Higgins, director in the Due Diligence practice of Stroz Friedberg

Page 3

mea Markets News

Business Confidence Falls in the Middle East, but Not as Quickly as in Previous Quarter, Says Survey of Finance Professionals

Business confidence in the Middle East continued to fall in the second quarter of 2015, but not as quickly as it had in the first three months of the year, according to the to the Global Economic Conditions Survey (GECS) organised by ACCA (the Association of Chartered Certified Accountants and IMA (the Institute of Management Accountants).

The slight optimism was due to a temporary reprieve in oil prices during the spring, but was a short-lived flame of hope for OPEC members, which was quickly extinguished by the prospect of Iran re-entering the market within a year.

More than any other region, firms in the Middle East began looking for opportunities in new markets in the last three months. 43% of them took this approach, while over half of firms (53%) sought ways of reducing costs during this difficult period, said respondents to the survey.

Some economies had a more difficult quarter than others.

Saudi Arabia, which has yet to achieve significant diversification away from oil, was drawn into Yemen’s internal conflict during the second quarter.

Qatar on the other hand has continued to boom, owing to large reserves of natural gas rather than oil, as well as ongoing investments ahead of the 2022 FIFA World Cup - although the corruption investigations into FIFA have cast some doubt on whether the country will be allowed to host the event. While Qatar is expected to record strong growth of 7.1% this year, the IMF revised its overall forecast for the region down by a percentage point in its April 2015 World Economic Outlook.

Meanwhile, the global economy is facing a period of volatility and major readjustments, according to the survey.

The second quarter of 2015 saw an abortive rise in oil prices, several expected and unexpected rate cuts

by central banks, a rebound in Western consumer sentiment and a stock market crash in China.

These events led to business confidence levelling off in the second quarter of 2015 following six months of improvement, according to GECS. The slowing in confidence can be traced to the world’s largest economies: many businesses in the US were affected by severe winter storms, port disruptions and a strong dollar, while those in China faced a cooling economy in the first quarter and over-heating stock markets in the second.

Of these factors, China’s economic slowdown and accompanying shift from investment- to consumption-driven growth will have the greatest long-term impact on global trade patterns, hitting the world’s major commodity exporters particularly hard.

Nearly half of those surveyed expected to see government spending increase over the next five years, while 35% expected a decrease. The survey also shows that firms remain quick to cut staff when faced with uncertainty . In the past quarter, 41% of businesses have cut staff or ceased recruitment - nearly twice the number which have increased staff levels over the same period.

The major global concern was a rise in costs, with 46% of respondent worried about the impact, while foreign exchange movements were cited as a problem by more than a third of larger businesses which have cross-border supply chains.

But there was significant regional variation in the relationship between confidence in the economic outlook and willingness to take on new staff. In North America, the number of firms creating new jobs was actually greater than those expressing greater confidence in the economy. But in South Asia and Africa, by contrast, relatively high confidence had yet to translate into new investments in people. This may reflect a degree of uncertainty about the sustainability of business growth in regions that still face numerous internal challenges and external vulnerabilities.

Faye Chua, Head –Business Insights with ACCA, said: “Since the global financial crisis of 2008, China has been viewed as the engine of the world’s economy. Yet with more sturdy fundamentals re-emerging in the US and Western Europe, the role of Western consumers in driving demand is coming back to the fore

Page 4

GSMA Urges Arab States to Maintain Flexibility in Support of Mobile Broadband Growth “ Looking ahead to the next quarter, overall confidence is set to rise in the wake of stronger economic reports coming out of the US and China.

There are a critical number of factors affecting this.

It is likely that the Federal Reserve will raise US interest rates before the quarter is out, which could intensify current currency trends though much of the impact would already have been priced in.

The outcome of OPEC’s next meeting on whether to curb oil supply; the extent to which Indian Prime Minister Modi manages to implement his reform programme for India; and the ongoing negotiations between Greece and the rest of the euro zone, will be issues which could have a huge impact on business confidence in the second half of 2015,” said Faye Chua (below).

Limited Spectrum made available for mobile by Arab Spectrum Management Group Ahead of WRC-15.

John Giusti, Deputy Chief Regulatory Officer, GSMA, commented on the outcome of the final meeting of the Arab Spectrum Management Group (ASMG) in Rabat, Morocco in preparation for this November’s World Radiocommunication Conference (WRC-15): “The GSMA welcomes the overall outcome of the ASMG meeting to identify new spectrum for mobile in a number of bands. However, we are concerned that not enough new spectrum will be available to give national regulatory authorities the flexibility they need to fully meet long-term mobile data demand.

“Mobile has already made significant progress in closing the digital divide and bringing both communications services and internet access to previously underserved populations across the Arab States, particularly given the lack of fixed line infrastructure in most countries. However, despite the progress to date, there are several markets where less than 20 per cent of the population has internet access1. Securing additional spectrum for mobile at the WRC-15 conference will be crucial to support future mobile broadband growth across the Arab States, as well as enable the mobile industry to help meet governments’ ambitions to develop smart cities, driverless cars and connected energy management in the region.

“The GSMA is pleased with the ASMG’s decision to support a portion of the L-band (1452-1518MHz) for mobile broadband. This band has met with almost global support ahead of WRC-15, which will lead to significant cost benefits for consumers around the world through economies of scale.

“We further commend the ASMG’s support in making 3.4-3.6GHz available in the high capacity C-band for mobile use, giving Arab States citizens access to high-speed mobile broadband in dense urban areas. We will continue our discussions to increase the availability of harmonised spectrum in the 3.44.2GHz frequency range to further optimise the delivery of mobile services.

“However, we were disappointed with the ‘no change’ vote for the sub700MHz UHF band (470-694MHz), which has characteristics suitable for expanding affordable mobile broadband connectivity to remote and underserved communities. Strong support from some Arab countries for a co-primary allocation for mobile and broadcast in the UHF band was underscored by findings of a GSMA study presented to the ASMG, which showed that terrestrial TV penetration has dropped below 20 per cent in the region and continues to fall2. We call on administrations to support a change in the radio regulations at WRC-15 that would give them flexibility to manage this important UHF spectrum resource efficiently and address local market demand.

“Looking ahead to this November, we hope that the WRC-15 process will create a framework that will enable the Arab administrations that want to move forward to secure the future of the mobile internet to do so. We urge all governments throughout the region to plan ahead now and ensure they have the flexibility to satisfy future mobile data demand, as well as achieve the substantial social and economic benefits that mobile broadband would deliver.”

www.middleeast-markets.com

mea Markets News

Three Key Foreign Currencies Linked to Dubai Real Estate Price Decline

for apartments and down by 8.6% for single family homes in H1-15 compared to H1-14.

Phidar Advisory has released its Q3 mid-quarter Dubai residential research note. The report shows that residential prices in the third quarter of 2015 continue to decline, compared to the previous quarter. However, the most significant finding was in a statistical analysis of the relationship between currencies and Dubai real estate prices.

“The increase in yield is a positive and necessary trend in Dubai real estate,” said Ms. Downs. “Especially in the context of global volatility, this is part of a healthy and necessary, market correction,” she concluded.

Apartment lease rates decreased a nominal 0.4%, while sale prices decreased 2.7%, pushing yields up to 7.4%. Lease rates for single family homes decreased 1.3% and sale prices decreased 2.6%, which pushed yields up to 4.8%.

“Analysis reveals a significant relationship between three key foreign currencies and Dubai real estate prices,” said Jesse Downs, Managing Director of Phidar Advisory. “Unsurprisingly, the key currencies are the Indian Rupee, Great British Pound and Pakistani Rupee. Changes in Dubai property prices appear linked to fluctuation of these currencies.

So, currency trends may help us to understand and forecast local property prices,” she said.

Phidar’s Dubai Real Estate International Demand Index (REIDI) fell significantly in the first half of the year, driven primarily by currency fluctuations, indicating a very low propensity for international real estate investment into Dubai. In H1-15, the midpoint exchange rates for all currencies included in the REIDI are down against the dollar compared to 2014, except the Chinese Yuan and Hong Kong Dollar. This is not a measure of actual capital flows, but a real time indicator intended to assess the propensity for attracting capital inflows into Dubai real estate.

“Sales volumes for apartments and single family homes were down in July compared to the previous month, but marked a surprising increase compared to July 2014” said Ms. Downs. “This is likely due to seasonal travel patterns shifting around the holy month of Ramadan.” she added.

In H1-15, apartment transaction volumes were up 3.0% compared to the same period in 2014, but transactions for single family homes, also referred to as villas, were down 3.2% compared to H1-14. For the communities tracked by Phidar’s House Price Index, transaction volumes were down by 28.2%

Page 6

Call for More Emirati Legal Specialists in Domestic Market to Enhance Capabilities in Country’s Legal System University of Dubai organises first LLM Annual Forum to promote direct communication between students and legal experts The first LLM Annual Forum of the Faculty of Law, organised by the university in Dubai recently, called for more legal specialists in the domestic market, especially Emiratis with high academic qualifications capable of contributing to the development of the legal system in line with international best standards.

The event was attended by Dr. Eesa M. Bastaki, President of University of Dubai ; Dr. Harold Koster, Dean of UD College of Law; H.E. Shamlan Al Sawalehi, Judge at DIFC Court; and Hikmat Beaini, UD Communications Manager, who moderated the forum, apart from a number of legal experts, lawyers and law students of the Masters programme at the university.

Speaking on the occasion, Dr. Bastaki said the first Annual Forum of the Faculty of Law is part of a series of events in the legal field, organised by the University of Dubai to strengthen direct interaction between students and faculty on the one hand and between judges, lawyers and legal experts in the country on the other. Such events would enable the students to gain practical information in the field of law rather than just academic perspective, he pointed out.

Dr. Bastaki said apart from the annual forum, the university organises specialised lectures and training programs for lawyers and judges. Stating that the Faculty of Law at the University has been witnessing a large turnout of Emirati students, Dr. Bastaki said the university is cooperating in this regard with key entities in the field such as the Dubai International Financial Centre Courts, and the Financial Audit Department of the Government of Dubai and others.

On the occasion, Dr. Harold Koster said the academic specialisation in law is critical in view of its importance in every sphere of economic and social activity. With a specialisation in law, students will be able to enter advanced levels in their careers and contribute to expanding relationships with other major sectors. He said the annual forum of the Faculty of Law will provide an opportunity for students to communicate directly with legal experts and benefit from their experiences.

HE Justice Shamlan Al Sawalehi described his experiences in the field of law, stating that the UAE labour market needs specialists with high-quality education in the legal field. HE Sawalehi commended the University of Dubai for its efforts in this area, especially through its Master’s programme, to achieve the UAE Vision 2021 which aims to provide high quality education in all fields to achieve sustainable development.

He said the LLM programme at the University of Dubai has helped the students to enhance their experience and enabled them to enter unique career opportunities. HE Justice Sawalehi encouraged more students to join the programme considering its contribution towards encouraging effective communications with major sectors.

www.middleeast-markets.com

mea Markets News

Dubai Exports Sharpens Focus on Fast-Growing East African Markets continued co-operation through these forums and initiatives to promote our bilateral relations,” His Excellency added.

Five-day mission to Kenya will look at partnerships for bilateral and regional trade exchanges.

Dubai Exports , the export promotion agency of the Department of Economic Development in Dubai, is leading a trade mission to Kenya in a bid to further strengthen bilateral exchanges and connect more and more UAE businesses to the promising East African markets. The five-day mission will include conferences, business-to-business (B2B) meetings and site visits in the Kenyan cities of Nairobi and Mombasa.

Political stability and competitive human capital along with a strong agricultural sector and transport infrastructure have enabled Kenya to lead the East African Community (EAC) by way of a 40% GDP share. In 2014 Kenya was ranked 136 by the World Bank in the Ease of Doing Business and 133 in Trade Across Borders.

In Mombasa the Dubai Exports mission organised a business forum together with the local government, supported by the UAE embassy in Kenya. A series of meetings with senior officials, buyers, and government agencies was also organised and field visits conducted to a number of companies in Nairobi and Mombasa. More than 100 B2B meetings were also held as part of familiarising UAE companies with government tenders and export procedures.

“We are delighted to be partners with Dubai Exports in organising this event, which indeed is a strategic opportunity to highlight export opportunities for UAE companies. Kenya is regarded as the fast growing in Africa in light of the economic boom in the region around us,” said His Excellency Ali Hassan Joho, Governor of Mombasa.

“We will support the UAE companies and seek to learn from their experiences in the fields of quality of service and speed of delivery. We are striving to develop our investment infrastructure in Mombasa to facilitate such partnerships, and we thank Dubai Exports and the UAE Government for their

The mission includes UAE companies from the industrial, food, trade, construction, metals and commodities, security and safety sectors as well as clean energy companies.

His Excellency Abdul Razak Mohamed Hadi, UAE Ambassador to Kenya, remarked that the trade mission is significant in the context of the growing bilateral relations between the UAE and Kenya as well as the strong prospects for further co-operation between the two countries.

“Organising such business gatherings for UAE companies complements the role of our embassy in Kenya, and we co-operate with the authorities concerned in Kenya to ensure their success,” said the Ambassador.

“Kenya is key to Dubai’s standing as a supply chain hub for Africa as well as to any effective strategy to tap East Africa. Connecting to Kenya will open up new possibilities for the growing number of manufacturers and exporters in the UAE who are looking towards emerging markets worldwide,” commented Engineer Saed Al Awadi, Chief Executive Officer of Dubai Exports .

“Widely acknowledged as the economic anchor and gateway to the expanding East African Community Kenya is also one of the UAE’s prominent trade partners in Africa. Exports and re-exports from Dubai to Kenya in 2014 were together worth more than AED3.2 billion, comprising petroleum products and automobiles to glass, cement and electrical goods,” said Al Awadi.

Al Awadi said the Dubai Exports Trade Mission will enable delegates to identify market opportunities in East Africa and connect with potential private and government partners.

Page 8

World Bank Faced with Shortage of Financial Resources

Gold’s Gym UAE Wins International Laurels

The World Bank asked for the support of members of the African Caucus to raise funds to replenish the International Development Association (IDA).

Al Ahli Holding Group’s Gold’s Gym UAE won the prestigious President’s Award for exemplary performance at the Annual Gold’s Gym International convention 2015.

The World Bank (WB) Vice-President for Development Finance [Joachim] Von Amsberg asked for the support of members of the African Caucus to raise funds to replenish the International Development Association (IDA).

Al Ahli Holding Group (AAHG), a UAE-based multi-diversified international conglomerate has won the prestigious President’s Award from the global fitness brand Gold’s Gym International for successfully operating the UAE franchise of the brand with exemplary results in the year gone by.

In order to finance development in an intelligent fashion, the WB needs to mobilise some US$135 thousand million in Official Development Assistance (ODA). This amount will attract and leverage new public and private investments.

“We have a large portfolio, a series of projects in preparation that will drive private investment. These are projects for which there is great demand and we are seeking to mobilise possible resources. There is the Ebola problem, floods in Malawi and the earthquake in Nepal as well, which is why the response budget for three years was already exhausted in the first year,” explained the World Bank VP in his presentation on the topic “Funding Options for ODA.” The record ODA replenishment of US$52.1 thousand million aims to maximize impact on development by leveraging public and private resources, in addition to knowledge, with solid results and efficiency at a low cost.

The demand for regional projects in Africa remains large, and most resources are committed to regional infrastructure projects.

“The strong replenishment of ODA and financial innovations are crucial to fulfilling the agenda for transformation in Africa,” he concluded.

The current Chairman of the African Group of Finance Ministers and Central Bank Governors affiliated with the International Monetary Fund and the World Bank is the Angolan Minister of Finance; its first Vice-Chair is the Minister of Finance of Benin and the second Vice-Chair is the Minister of Finance of Benin (sic). The position of the organisation’s Secretary is held by the Egyptian Minister of Finance.

Al Ahli Holding Group, that holds the exclusive largest franchise for Gold’s Gym in the Middle East and Africa region was honoured during the annual Gold’s Gym International convention 2015 held in Dallas, USA. The prestigious President’s Award recognizing the US-brand’s best international franchise for all-round excellence in all business aspects was conferred upon AAHG’s Gold’s Gym UAE and Nitesh Seebran, Chief of Operations at Gold’s Gym UAE received the trophy on behalf of the brand, by Aaron Watkins, President of Gold’s Gym. “It is indeed a great honour to be chosen as the best performing partners amongst Gold’s Gym International’s 700 gyms across the world. We have performed outstandingly in the year 2014, in all aspects of the business, including operations, sales and marketing. More than that, we have managed to take fitness to the masses, through our highly sophisticated training regimes, that provide people with routines that are best suited to their personal physique. The fact that we have grown to over 60,000 members this year speaks of our achievement in the region,” said Nitesh Seebran, Chief of Operations, Gold’s Gym UAE. The annual Gold’s Gym International convention 2015 also celebrated the brand’s monumental 50th anniversary, as the gold standard of fitness and brought together hundreds of franchise owners, gym managers, corporate leaders, fitness celebrities and vendors from across the world.

Meanwhile, Gold’s Gym UAE also hosted its quarterly ‘GGQ’ awards this August, honouring all the top performers across the franchises’ 17 operating clubs. The awards this year were held in a wide array of categories like top clubs for collections, operations and renewals, best club general managers, front desk managers, lifestyle specialists, rookies, sales teams, new trainers and most consistent performers and clubs.

Gold’s Gym UAE, that is gearing up to launch its two bigger projects, the opening of its Al Ain and Oman clubs shortly, also gave away 13 big ticket prizes this quarter as a culmination of its highly successful, Gold’s Gym Goldsvantage campaign. The campaign conducted across Dubai, Abu Dhabi, Fujairah and RAK concluded in a raffle draw that was picked this August and had 13 winners who won a year’s free membership from the brand.

www.middleeast-markets.com

mea Markets

3 things all expat investors should do Living in Dubai, Abu Dhabi or anywhere else in the UAE as an expat is a lot of fun and a great way to save for your future.

Whether you spend your Fridays brunching, crashing round the desert in a white Land Cruiser, paddle-boarding round the Burj al Arab or jumping out of a perfectly serviceable aeroplane above the Palm Jumeirah (Spoiler alert: the plane lands at the end, despite what your instructor tells you) you should be thinking about how best to make the money you earn work for you.

tools for charting and other bits and pieces.

Ideally though, you should register on a website like ADVFN.com that is dedicated to providing market data, analysis tools and discussion forums. Unlike trading platforms that are mainly focussed on tools for buying and selling stocks, information sites like ADVFN provide tools to make your investment decisions easier and better informed.

Investing in the stock market can be a great way to make your nest egg grow during your time in the Middle East.

Quality tools like streaming charts and financial data analysis as well as reliable live prices and Level 2 can make a big difference. The more information at your fingertips, the more empowered you will be, hopefully leading to better investment decisions.

There are many ways to pick stocks and a whole horde of people eager to share their methods with you. I won’t be dealing with specific stock-picking techniques in this article though; today I’m simply interested in helping newcomers get started.

Becoming an investor can seem like a daunting process, especially from overseas. I’m here to show you that it can be simple and painless.

There are 3 main things you will need to do to get started; get access to good research tools, read some good books and open a trading account, preferably in that order.

Get access to good research tools Online trading accounts will sometimes give you access to live stock prices and some even have basic

Possibly the most important aspect of a site like ADVFN is its discussion forums. These allow you to chat about companies with other investors, gauge the opinion of the market and increase your knowledge about a stock. They are also a lot of fun to read and take part in.

DYOR – Do Your Own Research – is the mantra of online stock discussion forums and is some of the best advice you’ll receive. Don’t take someone’s excited recommendation for a stock to buy or sell on faith, have a look into the details and make your own decision. A site like ADVFN lets you chat about stocks and get ideas, but also gives you everything you need to do your own research.

Page 10

www.middleeast-markets.com

mea Markets

Read some good books A lot of people start investing with no strategy or with poorly formed ideas about which stocks to pick. These are generally the guys who are flat broke and no longer investing 6 months later.

There is no shame in seeing how other people have made a success out of investing and emulating them. Learning from the mistakes and successes of others is fundamentally sensible. Rushing headlong into trading with no plan is not.

Read a few books, don’t just get one and blindly follow it. Every investor has different goals, so one successful person’s rules and ideas might not be completely applicable to your situation.

The more you read, the more you will understand about what is involved in investing and what strategy will work best for you.

Books like 101 Ways to Pick Stock Market Winners

by Clem Chambers and The Naked Trader by Robbie Burns are good places to start your reading.

Take ideas from your research and mould them to your own personal investment needs. Use the ideas of successful investors to create your own plan.

Open a trading account Whatever you do, don’t skip to this step without first getting your tools and plan in order. You wouldn’t put a $50 Ikea wardrobe together with no allen key or instructions, so why would you put your financial future on the line without the equivalent tools and strategy?

If you are confident you have your tools and plan in place now and only now it is time to open a trading account.

Decide whether you want to trade online via a website or app or whether you would prefer to pick up the phone and speak to a broker to place your orders. It comes down to personal preference, so have a think about what would be most convenient for you.

There are many online options available. Do some googling for reviews, have a look around and take your pick. Some will offer trial accounts letting you paper trade so you can get a feel for how their system works without risking any money.

Find a broker you are comfortable with and be prepared to send them various forms and documents.

It can feel like a bit of a pain, but the process is designed by the regulators to keep you and your money safe and the firms accountable. A firm that only asks for your name and email when you sign up should not be trusted.

Conclusion Don’t rush into investing. Get prepared, educate yourself and stay sensible.

The stock market can be used to make your future more comfortable and secure, but it can take time to develop a winning strategy.

Stay focussed, keep your wits about you and above all else DYOR!

If you have opened a free research account with ADVFN and bought and read some good investment books you should by now be a lot more knowledgeable on the subject of investment.

By John Williams, Project Manager, ADVFN Middle East

Page 12

www.middleeast-markets.com

mea Markets

Franchise agreements in the Middle East Well known Western brands are perennially popular in the region and the ability to introduce new brands to UAE consumers through franchising is generally perceived as a good businesses opportunity. Yet there are many elements of a franchising relationship which need to be carefully considered before concluding a franchise agreement, each of which if not properly considered can otherwise prove to be costly.

The UAE Commercial Agencies Law (Federal Law No 18 of 1981) and the Regulations promulgated thereunder is the principal legislation governing franchising agreements in the UAE. The legislation is extremely broad and encompasses commercial activities ranging from a classic principal/agent relationship to franchising and distribution relationships, without drawing any legal distinction between these. For this reason the words franchisee and agent are used interchangeably.

In general the legislation champions the rights of the local commercial agent, normally at the expense of the foreign principal, and imposes certain restrictions on the actions of principals while conferring benefits on the local agents. The rationale behind this seems to originally stem from the perception that commercial agents are often in a relatively weak position when contracting with principals, although whether this is in fact true in today’s market – with more and more companies seeking to expand their customer base and develop new markets – is highly debatable.

Any commercial agency covered by the Agency Law must be registered in the commercial agencies register maintained by the Ministry of Economy in the relevant Emirate or, if the rights granted pertain to the entire UAE, with the Ministry of Economy in Abu Dhabi. In order for an agreement between a principal and agent to be registered: •

• •

The franchisee, if a natural person, must be a UAE national, or if a corporate entity, its entire shareholding must be held by UAE nationals Exclusivity (either in any one or in more than one of the Emirates) must be granted to the franchisee The agreement will be required to be in Arabic and the signatures thereto must be notarised.

There is little doubt that the registration of an agreement under the provisions of the Agency Law is for the benefit of the agent/franchisee.

This becomes abundantly clear when examining the termination provisions, and potential consequences thereof.

Page 14

Sorbis / Shutterstock.com

www.middleeast-markets.com

mea Markets

Under Article 8, notwithstanding the written terms of an agreement, no termination of or failure to renew a registered agency agreement is effective unless there is a “valid reason” for the termination, or the parties expressly agree thereto. Whether or not a valid reason exists is determined by the Commercial Agencies Committee, a committee especially created to administer relationships established under this law. The legislation is silent on what constitutes a “valid reason”, however this may include: • •

•

Failure by the agent to meet specified agreed sales targets Where the actions of the agent damage the reputation of the principal or its products or services Where the agent undertakes activities pertaining to other products which compete with the products or services of the principal.

Any breach by the agent on which the principal may seek to rely in being able to terminate, will have to be substantial, material, and result in reasonably severe consequences for the principal, before it will be considered justifiable by the Commercial Agencies Committee.

Unjustified termination (or non-renewal) of an agency agreement by a principal can result in the imposition of compensation awards to the agent.

The exact calculation of a compensation payment is not set out in the Agency Law, however the following are often taken into consideration in establishing compensation awards: • • •

The Agency Law also provides that a principal may not import any product(s) covered by the agency agreement either directly or indirectly through another agent while the agreement covering the relevant product is registered. If a principal does, it will be liable to compensate the registered agent for commissions earned. The franchisee also has the upper hand in that they can instruct the UAE ports and customs authorities to stop any goods or stock, for which they are the registered agent, entering the UAE without their consent, leaving the franchisor in an extremely difficult position as far as its product is concerned.

It is therefore not surprising that many principals/ franchisors do not want their agreements registered, as unregistered agreements would only be subject to the general laws pertaining to commercial contracts, such as the UAE Commercial Transactions Law and Civil Transactions Law. Notwithstanding the provisions of the UAE Agency law, an ever increasing number of new brands and products (whether registered under the UAE Commercial Agencies Law or not) continue to enter the UAE each year. There seems little doubt that, provided a party wishing to bring a new product or service into the region – whether under an agency, franchise, or distribution arrangement – does so with knowledge of the existing laws, the potential rewards are significant.

The duration of the agency agreement; The demonstrable efforts of the agent in promoting the products or services of the principal the net profit generated by the agent, being the value of the contract.

Ken Dixon is a partner at Dubai-based law firm Galadari

Page 16

www.middleeast-markets.com

mea Markets

Regional Outlook – The spectre of increasing disputes?

The MENA region is already a premier function and event destination globally with its close proximity to the East and West, and status as a global aviation hub making it an attractive choice.

The UAE and Qatar already have a number of annual sporting, business and cultural events which attract participants and attendees from around the globe, however the upcoming FIFA World Cup 2022 and Dubai Expo 2020 will see an unparalleled number of visitors to the region and a number of large scale infrastructure projects and associated developments have been earmarked to showcase the region and provide for this influx.

Large scale, innovative projects coupled with short timeframes for completion carry with them the risk of construction disputes. Against this backdrop we examine the regional outlook for disputes in Qatar and Dubai leading up to these events and focus on those ways to manage the risk of disputes.

Qatar The award of the World Cup has fuelled an enormous amount of investment and construction in Qatar. Contracts have been signed for the construction of the 12 stadia, the estimated 21 new hotels to house the 400,000 predicted fans and various other related facilities.

In addition, large infrastructure projects such as IDRIS, the Doha Metro, the orbital expressways and the New Doha Port are taking shape, in line with the requirements of the Qatar National Vision 2030.

With some new projects nearing completion and as the deadlines of others draw closer, we expect to see a steady increase in construction related disputes, with resolution through the local courts remaining popular but an increasing trend toward resolution through local and international arbitration.

Page 18

Sophie James / Shutterstock.com

www.middleeast-markets.com

mea Markets

sources, particularly if required to achieve accelerative measures, will require adequate cashflow at all project levels. If not managed properly this could lead to difficulties in terms of payment disputes.

Dubai World Expos have a legacy of transformative developments and iconic architectural achievements.

Examples include the Crystal Palace erected for the 1851 ‘Great Exhibition’ in London and the Eiffel Tower for1889’s World Fair in Paris.

A number of large scale infrastructure and related developments are earmarked to coincide with Expo 2020, including: • • • • •

Trade Centre Jebel Ali Al Maktoum International Airport expansion The Dubai Creek expansion Rail infrastructure Hospitality and leisure developments

Edging closer to 2020 and 2022 the effects of ‘hard’ deadlines will be felt, and the potential for construction disputes will increase as the timeframes for completion of projects become tighter.

Looking ahead, care will need to be taken to actively plan and manage project delivery. Without it, it is not difficult to forecast the following issues giving rise to disputes: •

•

•

•

To avoid these disputes, parties will need to carefully define project scope and specific obligations at the outset of projects and ensure there is clarity as to where those obligations sit between the project participants. The risk of scope creep and the passing of design responsibility are all too common across the MENA region. Proactive and rigorous contract administration (on all sides) will also be key to ensure any disputes are avoided, or otherwise addressed, as they arise.

We expect that arbitration will remain the preferred mechanism for formal dispute resolution in construction projects leading up to Expo and the World Cup. Arbitration has several advantages over litigation in the local courts, including the ability of parties to appoint suitably experienced experts to act as arbitrators and given the increased scrutiny on project delivery, both national and international, the confidential nature of the process will also appeal.

Scope variations – particularly in respect of design obligations, where important decisions or details are deferred and responsibility for obtaining approvals impacts project delivery; Acceleration – given the ‘hard’ deadlines likely to be associated with a number of projects, we see acceleration of works as being a key point of contention; Defects – the complexity and scale of the projects coupled with ‘hard’ deadlines will see resources stretched giving rise to an increased risk of defective or non-compliant work; and Cashflow – mobilisation of sufficient re-

Written by Laura Warren Partner at Clyde & Co, Doha

Page 20

www.middleeast-markets.com

mea Markets

Structuring Islamic Investments for Venture Capital Opportunities Amanjit K. Fagura, associate in the Dubai office of global law firm Morgan Lewis considers the opportunities for venture capital with Islamic finance structures in the UAE. The increase in the number of young entrepreneurs and new start-ups being seen in the United Arab Emirates and the Middle East in general, offers the market an opportunity to utilise one of the seldom used Islamic financing structures, Mudaraba.

The prevalence of what was once regarded as the back bone of Islamic finance, profit and loss sharing (“PLS”) and which is the main concept underpinning the Mudaraba structure, has seen a consistent decline and almost depletion in spite of efforts of many Islamic scholars and institutions to realign the current trends in Islamic financing principles with a true participation by Islamic investors in the performance of the projects to which they seek economic exposure.

Mudaraba is one of the original forms of Islamic partnership finance which gave the most credence to the principles of PLS. However, the demise in its implementation is largely due to the more attractive alternative Islamic financing structures that are available and generally the prevalence of the conventional interest-based or bench-marked funding structures which we see today. Whilst the principles of Islamic partnership are guided by the need for equitable and just treatment their conventional counterparts are less concerned with

such principles hence have seen an increase in their implementation. However, the need to nurture and facilitate the growth of new start-ups and venture capital opportunities in the UAE itself is something which can refocus the use of Islamic partnership and financing structures going forward and hopefully could be the starting point for the revival of structures such as Mudaraba.

Venture Capital Opportunities The UAE Islamic finance market has seen significant growth and renewed interest from many corners of the world, particularly from conventional banks and investors looking to diversify their investment portfolios and delve into Islamic financing opportunities. Additionally, the rise in the number of young entrepreneurs and investment opportunities in the UAE and, in particular Dubai, is a positive indicator for the UAE economy and the businesses that are established there.

In particular, the UAE has recently advocated many initiatives and programmes to cultivate entrepreneurial growth and start-ups in the region including, but not limited to, the ‘Entrepreneurs Development Program’ (Tejar Dubai) and the ‘Mohammed bin Rashid Establishment for Young Business Lead-

Page 22

www.middleeast-markets.com

mea Markets

ers’ (Dubai government) as well as more established programmes such as the ‘Emirates Foundation’ who are based in Abu Dhabi and promotes projects to improve the welfare of youth across the UAE. Additionally, there have also been sporadic efforts by some professional investors to form ‘angel investor’ clubs to assist new talent in the market although this is yet to become commonplace.

Whilst the breadth of opportunities for new start-ups has increased, the venture capitalists in the UAE also have a duty to facilitate and translate these opportunities into reality. There are many ways this can be achieved but we will highlight a couple of the Islamic structures that can be used to do so and also how businesses, including law firms and service providers, can assist in this vision.

How to invest Investments by private individuals and/or companies can take two main forms: passive investment or active investment. The former denotes an investor who contributes capital to a venture and receives a return on such investment but otherwise has little influence in the day-to-day management and decision-making of the venture – this is particularly common where an entrepreneur has a business idea but little or no finances to implement the same hence needs to source funding from venture capital funds or wealthy individuals. The latter is a more ‘hands on’ investment with decision making and returns being shared amongst the parties (in varying degrees).

The main structures that can be implemented to promote venture capital opportunities in an Islamic manner in the UAE are those of: (i) Wakala (agency); or (ii) Mudaraba (partnership), which are discussed in more detail below.

Main Islamic Structures Wakala – Agency The principle of Wakala is an Islamic financing technique whereby an agent acts for and on behalf of the ‘principal’ for an agreed Wakala fee.

For venture capital investments, the Wakala structure can be utilised when venture capitalists wish to invest their monies in specific types of ventures and they appoint the entrepreneurs or new start-ups to act as their agent, in return for paying a fee for their services. Hence the venture capitalist can invest money with new start-ups whose vision and business ideas are in line with its investment parameters.

This can also be achieved through specific venture capital funds whose objectives are in line with the initial investors objectives. In such cases the objects of the venture capital fund will only permit them to invest in limited types of ventures. Ultimately, the fund will be acting on behalf of the investors as if such investors were the parties’ privy to the underlying legal documentation themselves. This Wakala structure can then be use by the fund to on-invest with new start-ups.

However, whilst the Wakala structure is often used in such funding structures, it leaves investors with no equitable interest in the underlying venture itself (even if they are entitled to performance fees) which is where Mudaraba financing structures could be seen as a more attractive alternative.

Mudaraba – A form of Partnership Typically, in a Mudaraba partnership, an investor (a “Rab Al Mal”) provides the funding for an entrepreneur (a “Mudarib”) to create, manage and grow an investment where the Rab Al Mal has little or no right to participate in the day-to-day management of the investment/venture. This clear demarcation

Page 24

www.middleeast-markets.com

mea Markets

occasionally blurs where venture capitalists participate in certain strategic decisions of the venture but otherwise they often leave the Mudarib to proceed as they believe fit (subject to pre-agreed investment policies and guidelines) – this also avoids the stifling of operations of the venture through micro management by the Rab Al Mal.

the Mudarib to the Rab Al Mal, as the Rab Al Mal has a direct stake in the underlying investment.

This could be seen as a very attractive model to new entrepreneurs as no collateral apart from the venture itself will need to be put forward – this could ultimately assist to foster the growth of new start-ups and entrepreneurial talent in the UAE.

Ultimately, if the project or venture results in a profit this is shared in a pre-agreed ratio between the parties and if there is a loss the Rab Al Mal bears such loss solely. The Mudarib in such instance is considered to have lost the effort exerted by them in the venture and the opportunity to share a possible profit hence does not share any financial losses.

Nonetheless, in some instances, if the loss was a direct result of the negligence of the Mudarib and the Mudarib had not taken the necessary degree of care expected of them in managing the investment they will then also be liable for the financial losses.

In general, however, the concept in Mudaraba structures is less PLS and more profit-sharing-andloss-bearing for the investor.

Conclusion It is apparent that many new start-ups often suffer from poor advice, lack of funding and a general lack of knowledge of the market in which they operate, including the financial structures available to them and their ventures.

In a relatively young market, it is imperative that the UAE try to manage such issues and cultivate growth of home talent in the correct manner at the outset. Hence the obligation to do so should go beyond government and national initiatives and should fall to and be promoted by those companies and businesses which are contributing to and seeking the prosperity of the economy in which they operate – all businesses in the UAE.

The Mudaraba structure can be applied in one of two main ways: directly between the ultimate investor/s and entrepreneur; or through an intermediary such as a fund who would act as the Rab Al Mal on behalf of the investor/s, thereby the intermediary would have full legal rights in the venture. Using such intermediary provides both the investors and the start-ups with higher prospects for success in the investment/venture as the intermediaries help facilitate and create opportunities for both parties by finding the right investment for the Rab Al Mal whilst getting the required funds for the Mudarib to bring their idea to fruition.

It should be noted that unlike other Islamic financing methods no security needs to be provided by

To this end, many local and international law firms are spearheading pro bono initiatives to promote homegrown talent and entrepreneurs in the UAE. As an example, Morgan Lewis has recently established a legal clinic to assist regional start-ups, that do not have the means or resources to obtain professional help in incorporating their businesses, managing their legal affairs and raising capital. The aim is to promote local talent and also ensure the interests of the start-ups are better represented without investors taking undue advantage of the bargaining power they may have over entrepreneurs.

Nonetheless, the efforts of a few will not see a significant change in attitude and a more concerted effort needs to be made on a wider scale if Dubai and the UAE are to attract global investment and venture capital firms and to perform as a full scale global financial hub as the government has envisioned.

Written by Amanjit K. Fagura, Associate, Morgan Lewis – Dubai

Page 26

www.middleeast-markets.com

mea Markets

Business Confidence Marked Deceleration in Middle East According to Global Economic Conditions Survey (GECS) jointly conducted by ACCA and IMA finance professionals, ‘Business Confidence’ plunges in the Middle East for the second quarter of 2015. However, the declining quotient remained slow as compared to the first quarter of the year.

During spring, the provisional reprieve in oil prices brought a little optimism for OPEC members.

But, Iran’s prospective return to the market within a year has snubbed their hope.

This survey report also showed that Middle East was on the crest of searching good opportunities in the new markets. Moreover, in last three months, 43% firms in Middle East have adopted this approach while the rest of 53% reduced the expense costs to survive through this rough span.

Some economies faced more difficult period than others in last quarter.

Saudi Arabia had extremely tough economic period because of its intrusion in Yemen’s conflict in the second quarter. KSA has yet to gain momentous diversification away from oil.

While Qatar kept on booming mainly because of the large reserves of natural gas instead of oil. Qatar’s investments in the 2022 FIFA World Cup has added great value to its economy and is expected to record the resilient growth of 7.1 percent this year.

According to GECS, the global economy is passing

through the period of volatility and major reformations. 2015, in second quarter, has observed several rate cuts by central banks, china’s stock market crash, an abortive rise in oil prices, and also a rebound in the Western consumer sentiment.

Survey says that these big events are major cause behind the declined business confidence in last three months. This deceleration in confidence can be traced to the world’s biggest economies. For instance, a lot of US-based businesses faced the distress because of severe winter storms and the port disruptions plus a strong dollar. On the other hand, China marked the over-heating stock markets in the previous quarter.

Economic slow-down in china accompanied with swing from the investment to consumption driven growth is anticipated to have the greatest and exhaustive impact on international trade patterns and might get hard on the world’s major commodity exporters predominantly.

About 35% of survey respondents expected to see a decrease in government spending over the next 5

Page 28

www.middleeast-markets.com

mea Markets

years while nearly 50% assumed the increase. GECS also deciphered that many firms reduced their workforce upon facing the uncertainty. In preceding quarter, 41% of businesses have either ceased the new inductions or cut off the staff that’s nearly twice the number which have increased staff levels over the same period.

The Biggest Global Economic Concern: Rise in costs appeared as a major global issue, for which, 46% of respondents exhibited worry about the unsolicited impact. Whereas, the foreign exchange happenings were cited as a big problem by more than one-third of the giant businesses having cross-border supply chains.

There was, however, a noteworthy regional variation found existing in between the confidence in the economic vista and the readiness to shoulder the new staff. In North America, the number of firms creating new opportunities for job seekers was quite greater than others expressing good confidence in the economy.

She also said that “Looking ahead to the next quarter, overall confidence is set to rise in the wake of stronger economic reports coming out of the US and China. There are a critical number of factors affecting this. It is likely that the Federal Reserve will raise US interest rates before the quarter is out, which could intensify current currency trends though much of the impact would already have been priced in.

“The outcome of OPEC’s next meeting on whether to curb oil supply; the extent to which Indian Prime Minister Modi manages to implement his reform programme for India and the ongoing negotiations between Greece and the rest of the euro zone, will be issues which could have a huge impact on business confidence in the second half of 2015.”

Full GECS Report: http://www.accaglobal.com/gb/en/ technical-activities/technical-resources-search/2015/ august/gecs-26.html

In Africa and South Asia, on the contrary, relatively high business confidence had yet to translate into all-fresh investments in people. This might be the reflection of uncertainty for the business sustainability and growth in regions facing various inner challenges and outer vulnerabilities.

“Since the global financial crisis of 2008, China has been viewed as the engine of the world’s economy.

Yet with more sturdy fundamentals re-emerging in the US and Western Europe, the role of Western consumers in driving demand is coming back to the fore”, said Faye Chua (Head of Business Insights with ACCA)

Page 30

Indian Prime Minister Narendra Modi arindambanerjee / Shutterstock.com

www.middleeast-markets.com

mea Markets

Global Ethical Finance Forum Affirms Its Pivotal Role in Forging next Chapter for Responsible Finance Industry Lord Mohamed Sheikh, Baron Sheikh of Cornhill and IFSB’s Jaseem Ahmed opened Day 2 of historic forum with an engaging and holistic look at convergence in values, conduct and regulation.

The Global Ethical Finance Forum (GEFF) far exceeded global expectations after the first day of the 2-day gathering engaged the responsible investments industry from across Europe, East Asia, the Middle East and Africa. Over 150 leaders from the Socially Responsible Investing (SRI), Environmental, Social and Governance (ESG) and faith-based investing sectors participated in historic discussions on various facets of ethical finance with the view of collectively forging the next chapter of the industry through collaboration and convergence.

The final panel from the first day included a discussion among distinguished historians on the faithbased roots of ethical finance. Professor Ibrahim Warde explained the similarities between the three monotheistic religions (Christianity, Judaism and Islam) whose “ideal has always been support for the productive economy and wariness about a financial which puts its interests ahead of the real economy”.

GEFF is truly unique in that it has recognized that bringing ESG and Islamic screens together

is a multi-billion dollar opportunity both within Western markets (coupling ‘prudent’ leverage restrictions with ESG) and as a way to get ahead of the competition in emerging markets. Nadia Sood, Founding Partner of Impact Investment Partners, explained in an earlier session the interest in being much more pragmatic and drilling down to core issues of responsible finance and quantitatively measuring its core impact.

Jaseem Ahmed, Secretary General of the Islamic Financial Services Board, kick-started Day 2 with lessons that Islamic financial governance offer to the ethical finance industry. He said, “A reputation for compliance with ethical norms is a key to branding for Islamic finance. Islamic finance compliance has been reinforced by the presence of Shariah advisory boards”. Indeed, Islamic finance has been proactive about developing linkages with regulators based on the experience of facing uneven playing fields and the need for active regulatory involvement to level the playing field. This has led it to develop a more robust infrastructure to engage with the international regulatory architecture.

Page 32

www.middleeast-markets.com

mea Markets

Mr. Ahmed’s speech is followed by a powerful line-up of experienced and respected industry practitioners. The lineup of speakers for Day 2 include powerhouses such as Harris Irfan, Managing Director of EIIB-Rasmala, Daud Vicary Abdullah, President and CEO of International Centre for Education in Islamic Finance (INCEIF), Omar Selim, CEO of Arabesque Asset Management, Sasja Beslik, Head of Responsible Investments at Nordea Asset Management, Abdulla Mohammed Al Awar, CEO of Dubai Islamic Economy Development Centre.

One highlight of Day 2 is the official launch of the Thomson Reuters - Responsible Finance Institute Responsible Finance Report 2015, delivered by Blake Goud of Thomson Reuters. The Report provides a global overview of the ethical finance industry including Islamic finance and identifies the opportunities for growth that require the type of collaboration between Islamic finance and the other areas of ethical finance that is a focus at GEFF. Paving the next steps for the industry, Mr. Goud said, “Islamic finance has an opportunity to take a leadership role and open many emerging markets for the type of growth that responsible investment has led within Western markets”.

The agenda of Day 2 includes the highly anticipated onstage interview of HRH Emir Muhammad Saunsi II, Emir of Kano by Dr. Sayd Farook, Vice-Chairman and CEO of Middle East Global Advisors. A distinguished leader in the banking world and TIME Magazine’s 100 Most Influential People, Emir Sanusi possesses a truly unique profile and his experience demonstrates that some of the most important lessons in banking reform can indeed come from the emerging world.

GEFF 2015 will culminate in an exclusive reception hosted by the Scottish Government at the Edinburgh Castle, a UNESCO World Heritage Site. The host of the evening, Humza Yousaf MSP, Scotland’s Minister for Europe and International Development, reiterated that the Scottish Government is “proud” to be supporting the forum, especially given that “Scotland has a long established expertise in financial services and a historic association with the principles of ethical finance.”

Page 34

www.middleeast-markets.com

mea Markets

UAE Bound to Lead the Healthcare Sector in Middle East Country turning its healthcare challenge into a strategic opportunity.

A rising population and improved life expectancy, together with higher incomes and sedentary lifestyles, have led to unprecedented growth of the UAE healthcare sector, particularly in terms of facilities and integration of technology. The second biggest healthcare market in the GCC after Saudi Arabia, the UAE is also evolving into a major player in the global health tourism market.

“As government authorities and the private sector race to upgrade skills and capabilities in line with growing demand and global standards, the UAE is fast emerging into a healthcare destination for the Middle East and beyond,” commented Dr.Haider Al Zubaidy, CEO, Canadian Specialist Hospital - one of the leading private sector hospitals in the UAE. Reports suggest the UAE’s healthcare expenditure rose from US$11.3 billion in 2011 to US$16.8 billion in 2013. Every year the country spends nearly US$1,200 per person on healthcare, which ranks the country among the top 20 worldwide in per capita expenditure. Alpen Capital estimated in 2014 that UAE healthcare spending will expand at 13.1 per cent over the next four years.

The UAE population crossed 9.2 million in 2013, compared to 8.2 million in 2010. “Declining infant mortality and average life expectancy hovering

around 77 years have seen the population growing at 2.7 per cent. Meanwhile, 3.3 per cent of the country’s GDP is spent on healthcare as high prevalence of lifestyle associated risks like diabetes and obesity, and demand for best-in-class medical care also remain high,” said Dr Al Zubaidy.

On the other hand, the UAE is turning its healthcare challenge into a strategic opportunity. The federal government and governments in different emirates have made healthcare a priority sector capable of driving their sustainable development agenda, mainly by way of advancing investment and tourism.

The UAE Vision 2021 states that the country will “invest continually to build world-class healthcare infrastructure, expertise and services in order to fulfil citizens’ growing needs and expectations.”

“In spite of being well-equipped in primary, secondary and tertiary care facilities, many UAE patients travel abroad for treatments, a trend that is now being reversed,” Dr. Zubaidy added referring to the Dubai Medical Tourism (DMT) Club initiative, in which CSH is a member.

Presently, Emiratis travelling abroad for treatment spend roughly US$250,000 per visit, as estimated by the International Medical Travel Journal.

DMT brings together healthcare providers and

Page 36

www.middleeast-markets.com

mea Markets

speciality services under the umbrella of the Dubai Health Authority (DHA) to promote Dubai as a Medical Tourism hub. The city expects over 20 million visitors by 2020, which will help it establish as a key player in the multi-billion dollar medical tourism industry.

“The UAE medical tourism sector has varied advantages - internationally accredited public and private hospitals up to tertiary level, a multinational workforce and fast connections to different geographies, to name a few. Dubai, for example, provides a cost-effective, high quality alternative to patients concerned by healthcare costs and hospital waiting times, even across developed economies such as America and Europe,” said Dr Al Zubaidy.

A key player in the health tourism segment, Canadian Specialist Hospital has been providing diverse range of care starting from comprehensive health check-ups to laparoscopic neurosurgery for hundreds of patients from abroad, particularly from Eastern Europe, Africa and other countries in the Middle East.

If a patient wishes to avail of a treatment in CSH, the hospital makes all the necessary arrangements for the patients and relatives, inclusive of visa, accommodation, consultation, admission and transportation. The hospital has been reaccredited by Joint Commission International (JCI), the world’s largest healthcare accreditor, in recognition of the hospital’s continuing commitment to patient safety, quality and ethical practices.

Page 38

Philip Lange / Shutterstock.com

www.middleeast-markets.com

mea Markets

Understanding Local Partners Key to Success in Middle East Markets Western corporations and investors have long enjoyed lucrative business in the Middle East - despite the political turmoil which has characterised the region, but knowing how to assess and manage the risks has always been key to success. Much of that comes down to finding a reliable local partner, but with US and other key countries clamping down on corruption, the wrong tie-up can prove a costly and embarrassing liability.

The latest market that is exciting investors from all sectors is Iran, amid expectations that it will open up to foreign corporations after apparently resolving its differences with the international community over its nuclear programme. But early entrants into the Iranian market will have to tread carefully: the pitfalls include remaining US sanctions, state involvement in the economy, a complicated bureaucracy and widespread corruption.

One risk in particular is the number of companies which have links to Iran’s Revolutionary Guards, a paramilitary force and still the subject of strict US sanctions. These ties will typically be obscured through “bonyads” – the webs of charitable trusts that control up to a quarter of Iran’s economy. Such opaque ownership structures are also a problem in other countries, where prominent sheiks often seek to mask their relationship to a business.

Across almost all of the Middle East, finding a local partner with which to work is essential for corporations and investors considering an opportunity. Indeed, outside free trade zones, it is usually mandatory to conduct business in a manner that involves a local partner. A good partner will be able to offer knowledge of local culture and business

practices, make introductions and help guide the JV through the necessary bureaucratic hurdles. It is often desirable or even necessary for the local partner to have political contacts and clout, but this is a fine line beyond which the main dangers regarding western anti-corruption legislation lie.

Most companies set out to win and retain contracts and clients without the slightest intention of acting unscrupulously. However, many that commit unethical business practices do so inadvertently, because they fall prey to relationships with the wrong third parties.

US authorities in particular have made increasingly clear that they will hold corporates responsible for the behaviour of third parties. Most sizeable corporations have dealings in the US, so will fall within the remit of the Foreign Corrupt Practices Act. Meanwhile, the UK Bribery Act is also intended to hold to account those firms with operations in Britain.

Companies therefore need to be careful that the local third parties they work with are not using untoward means to gain business for the partnership.

This does not just refer to cash bribes and would include using family ties or favouring companies with which they have connections. The UK Bribery

Page 40

www.middleeast-markets.com

mea Markets

Act makes clear that ignorance is no excuse – but there is a defence based upon having made all possible attempts to ensure there is no corruption taking place in a local partnership – in other words, a robust internal compliance programme that can be demonstrated to have left no stone unturned.

As well as the hidden dangers of third parties exposing a company to allegations of corruption or breaching sanctions, financial firms in particular must note the dangers surrounding terrorist financing. A number of banks have been caught out and suffered fines and significant reputational damage, but most major financial firms have now tightened their due diligence programmes. Those wishing to launder money or use it for nefarious purposes are therefore looking for new conduits for their funds, while regulators and intelligence agencies are working hard to expose them.

For example, Western firms considering a partner in Saudi Arabia should be aware that a number of prominent Saudi business families have been accused of funding terrorism, with varying degrees of evidence. However, these links at the very least have the potential to cause major embarrassment, and a thorough search of US court filings relating to 9/11 would be prudent before agreeing a business deal.

Indeed, it is critical to gain a clear understanding of the reputations and track records of all local third parties that will be involved in a venture, so that the risks can be identified and mitigated. A firm considering doing business in the Middle East should therefore put in place an enterprise-wide anti-corruption framework. Deploying an effective top-down compliance programme and anti-bribery strategy is crucial. This must permeate every aspect of the company’s day-to-day operations. The anti-corruption framework should be geared to evaluating all third parties a firm is contemplating working with, insisting on full accountability and transparency from potential partners and

placing the highest level of scrutiny on the riskiest relationships.

A robust due diligence operation can remove elements of a deal likely to lead to difficulties further down the line and allow a company to enter a lucrative new market with a minimum of risk. Indeed, it is not just dangers from sanctions, terrorist associations and corruption that may be unearthed.

A firm may find its proposed partner is worryingly litigious, has a track record of incompetence or lacks the political clout it claims to have.

Carrying out due diligence checks is rarely straightforward – Middle Eastern countries often do not have reliable financial and political news reporting, archives may not be publicly available or digitised, and business ownership structures and political ties can be deliberately obscured. Often, discreetly interviewing sources “on the ground” is the only way to build a true picture of the situation.

What action a company eventually takes having procured a thorough due diligence report will ultimately depend on its risk appetite and the other options available. Often, a number of potential partners will be vetted and considered together before a decision is made.

These are exciting times in the Middle East, and although some markets have closed, others are opening. Nobody wants to miss a good opportunity or be late to the party, but due diligence and a careful approach is more important than ever to ensure trouble-free trade and investment.

Ben Higgins is a director in the Due Diligence practice of Stroz Friedberg, an investigations, intelligence and risk management company. He specialises in the Middle East and Africa, where he has extensive experience running complex multi-jurisdictional investigations, enhanced due diligence cases, strategic research and asset traces for multinationals, law firms and financial institutions. www.strozfriedberg.com

Page 42

www.middleeast-markets.com