EXCLUSIVE: FRANK KHOIE ON PRISON, PROPERTY AND POWER SUPPLIES Vol. 15 Issue 3
July 2010
THE HIGH COST OF OIL After the Deepwater Horizon disaster, we ask: how prepared is the Gulf for the unthinkable?
THE BIG PRIZE
Iraq, uncertainty, and a $600 billion payday
CLEAN ENERGY
Stability key to the UAE’s nuclear success story
ETFs AHOY
New ways to invest in Saudi Arabian equities
Bahrain..............BD 1.0 Kuwait............... KD 1.0 Oman................ RO 1.0 Qatar.................. QR 10 Saudi Arabia.......SR 10 UAE.................. DHS 10
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THE DETAILS Vol. 15
Issue 3 July 2010
THE COMMENT 12 Taking Stock Savvy traders opt for bullish Saudi shares.
14 Local Knowledge Investment bankers are the white-collared crooks.
16 Money Debt refinancing threatens regional recovery.
18 Emerging Markets As the World Cup rolled into Africa, so did investors.
20 Guest Column Pockets of Dubai are still offering good returns.
22 Letters
The oil spill disaster in the Gulf of Mexico is still ongoing. The environmental impact continues to grow and there is little relief in sight for BP. With hundreds of wells in the Arabian Gulf, decaying facilities in Iraq and Iran and complicated ownership structures, we ask: what is the contingency plan?
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THE BRIEFING 24 Regional Briefing
40 Driving down cost
32 What’s the fuss about?
Is outsourcing the answer to costly fleet management?
What exchange traded funds mean for the Tadawul.
42 Tailored investing
34 Back-to-basics
Swiss bank talks of tailoring investments to female needs.
Six Senses launches a tented camp to lure big-spending nature lovers.
THE BUSINESS
36 Sweet dreams
48 Buildings of the brave
Mars launches a new factory in the diabetes capital of the world.
Rebuilding war-torn Iraq is lucrative for those who dare.
38 Drug dealing
52 Bugs in banking
Pharmaceutical giant urges action to beat counterfeits.
Be prepared
Strategic realignment needed to rid banks of poor health.
56 Cut the classroom As businesses scale back expenditure, training is one of the casualties.
60 That fission thing The UAE is applauded for its peaceful nuclear strategy.
THE PEOPLE 64 Building a reputation Frank Khoie is out of jail and reeling investors back to RAK.
70 Executive Moves July 2010 gulfbusiness.com
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THE DETAILS Editor-in-Chief Obaid Humaid Al Tayer Group Editor and Managing Partner Ian Fairservice Group Senior Editor Gina Johnson Group Editor-Business Alistair Crighton Editorial Coordinator-Business Concessa D’Souza Art Director Cris Domdom Senior Designer B Raveendran
72 74
Special Contributors and International Correspondents Berlin Wolfram Bielenstein Hong Kong Michael McKay Johannesburg Bill Cain London Robert Bailey/Karen Thomas New Delhi Rahul Bedi Shanghai Gordon Hu Washington Kevin J Kelley Hospitality Guy Standish-Wilkinson General Manager Production and Circulation S Sasidharan Production Manager C Sudhakar General Manager Group Sales Anthony Milne Senior Advertisement Manager Abraham Koshy Advertisement Manager Ajay Mathews
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71 Competition
THE LIFESTYLE
THE ESSENTIALS
72 Travel
76 Books
Unearthing Portugal’s best kept secret.
73 Art The influence of Islamic art on medieval Europe.
79 Hotels Where to stay in the GCC.
80 Stats & Facts
74 Leisure Reinvented Cadillac SRX gets soccer-mom approval.
75 Technology What is the latest ‘must-have’ watch on the market?
6 gulfbusiness.com
78 Calendar
July 2010
We unpack the data for you.
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82 Out to Lunch Neil Backhouse of Dana Jets discusses private jets over lunch at Bistro Madeleine.
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THE COMMENT LEADERS [ MARKETS ]
No excuses for ‘frontier’ economies MSCI issues its report card on GCC states: “must try harder”.
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xcitement over the UAE, Kuwait and Qatar making it into MSCI’s emerging markets list proved premature when the index provider decided at the last minute to keep the countries firmly within the “frontier” category. The effect was immediate, but limited – a fourday rally was brought to a halt, and local analysts insisted the move was not exactly unexpected and had already been priced in. It’s the long-term effects that are a cause for concern, however, as fund managers throughout the world rely on MSCI’s indices to allocate funds. An upgrade for the GCC states would have seen considerably more international funds wash ashore, bringing badly-needed liquidity to the stagnant and under-performing markets. The flight of foreign capital from the GCC has been alarming – in January 2008, as the DFM hit a two-year peak, foreign investors bought almost $3 billion worth of shares in UAE stocks. That shrunk to $136 million by the year’s end, and, by March this year, foreign investors had sold shares worth some $2.2 billion, though buying activity picked up a little in April and May. In citing its reasons, MSCI listed a litany of depressingly familiar subjects, with a lack of formal separation between trading accounts and restrictions on foreign ownership topping the list. All the more depressing given that the
markets knew exactly what was expected of them and still failed to make the grade. “The need to set up and operate with a dual account structure is still a major concern to a number of international institutional investors and is incompatible with general emerging markets standards,” the MSCI said in explaining its decision not to upgrade the UAE. It added that the Emirates and Qatar would remain on its emerging markets “watch list”, while Kuwait has been dropped as the hurdles it needs to clear are judged simply to be too great. Also not making the grade is Saudi Arabia, which is not even on MSCI’s frontier list, and is merely lumped in with its neighbours in a “GCC list”. While Matein Khalid makes a bullish case for the GCC’s largest market in these pages this month, access to the Tadawul is notoriously difficult for non-Saudi investors. The latest buzz is the exchange traded funds managed by Falcom. Effectively replicating the Tadawul – minus fees, of course – the funds promise to offer an easy entry into the Saudi market, though from the prospectus it’s hard to see any killer advantages from going the ETF route rather than buying mutual funds that Saudi banks have long offered investors. Also, given concerns about separation of accounts by MSCI elsewhere in the Gulf, potential investors should take note that Falcom isn’t just the manager of these vehicles – it’s also the custodian and market maker. ■
[ IRAQ ]
Help wanted. Apply: Baghdad Financial services professionals should look to Iraq for risky, but rewarding opportunities.
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ears of war and neglect have left Iraq’s infrastructure in ruins, and we’re not just talking about roads and buildings. The banking system is in disarray, with carrier bags of cash still being the preferred method of transaction; the legal system is both complicated and ineffectual; and finding essential insurance cover for most aspects of business and trading is frustrating and expensive.
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July 2010
But, according to speakers at a recent conference, Doing Business in Iraq, organised by Dubai-based lawyers Al Tamimi & Company, for all this – plus, of course, its ongoing security woes, political deadlock and fractious ethnic make-up – Iraq is a very, very attractive place right now. There are some $600 billion worth of essential infrastructure projects up for grabs, with the sorely
THE COMMENT LEADERS
neglected oil industry – absolutely essential to the running of Iraq’s economy – at the top of the list. But, while multinationals throng to surrounding states and tentative offices are opened within the relative safety of the Green Zone, there’s still a lot to be done before the really big movers and shakers of the global economy are ready to set up shop for good. It’s been seven years since the overthrow of Saddam Hussein, and, while it’s premature to talk of an atmosphere of normalcy, we’re a long way from the peak violence of 2007. But intrepid investors and entrepreneurs have a wealth of opportunities, and not just in fixing the leaky oil pipes, building the new refineries and pouring cement for the new office blocks and apartment
buildings. In fact, before that begins in earnest, Iraq needs to fill the huge gaps in its basic operating structure. Companies like Tamimi, with its profitable law office in Baghdad, are going some way to doing that, providing investors and contractors with an array of experienced lawyers with strong local knowledge. And other institutional voids still need to be plugged, such as accountancy, insurance, banking and all the basics. It’s in these fields that the early, intrepid entrepreneurs stand to make the most, both in terms of earnings and, vitally, in helping establish Iraq as a, if not a safe, than at least a feasible place to do business. After all, it’s only when those basics are in the place that the bulldozers can move in en masse and the real work of rebuilding can begin. ■
[ OIL ]
Who’s in charge here? Is there a comprehensive plan to tackle an oil spill in the Gulf?
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good chunk of the world’s hydrocarbons; crumbling oil infrastructure; a confusing mix of rules and regulations spanning a dozen states and hundreds of companies; and a security situation that can be charitably described as “fluid” – these factors do not bode well for the fragile Gulf ecosystem. Already host to the worst oil spill in history, during the 1991 Gulf War, events across the world in Louisiana have focused attention on the potentially huge cost to the environment of extracting oil and gas from the waters of the Gulf. Given the huge importance put on public relations – BP chief Tony Hayward’s gaffes have now entered almost mythical status – you’d expect the legions of PR operatives working for oil companies and ministries to be all over the topic, confidently explaining safety procedures and contingency plans should another catastrophe hit here. Not a bit of it. Questions on planning in the event of an emergency and on who is responsible for a clean-up, and who foots the bill, were swatted away or conveniently ignored by a large number of operators and insurers. Still, ADNOC stands out and should be applauded for an enthusiastic response that comprehensively explained its palliative and preventative strategies. The company has a team of experts
who, so far, have been restricted to drills and practice in the Gulf, but have obtained some real world experience dealing with spills in Lebanon and Egypt, and has even offered to send a team to the US to help out in the Gulf of Mexico. But the biggest oil company in one of the richest countries in the world can be expected to have first class response teams – even if a bigger one, BP, fell widely short of the mark. The gravest concerns are over the decaying wells, pipelines and storage facilities in Iran and Iraq, who share the same sea and are hardly likely, given their financial constraints, to pay the same sort of attention to expensive safety measures. Given that ADNOC is a commercial concern, however, it is only fair that it should only be concerned about its own operations, and not have to worry about footing the bill for others’ mistakes. This is the preserve of governments and their environment agencies. So it’s hardly reassuring that these agencies were unwilling to state that a comprehensive, Gulf-wide plan is in place to deal with a major spill. We can hope that, behind the scenes at least, pan-GCC groups have contingencies in place. Given the obvious PR coup this would represent, though, one would hope this information could be made public soon. ■ July 2010 gulfbusiness.com
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THE COMMENT TAKING STOCK
TAKING THE BULL BY THE HORNS ON SAUDI SHARES With record lows on the DFM and worrying indications over the strength of the euro, the quintessential value play right now is Saudi Arabia. MATEIN KHALID
T
he GCC stock markets have underperformed the rally in the emerging markets, even though crude oil trades in the mid-70s and the collapse in the euro means that imported inflation in the GCC has peaked. The DFM has fallen below 1,500 to six-month lows after successive downgrades of local banks by international credit rating agencies, the exodus of Western hedge funds, the risk aversion and scramble for liquidity in the post-Lehman financial world, debt shocks (Saad-Gosaibi, Nakheel restructuring, the failure of several Kuwaiti investment companies) and the dominant retail turnover have made country selection and stock picking imperative for investors in the GCC equities markets. I believe Saudi Arabia is the quintessential value play in the GCC for the next 12 months. Why? One, the Tadawul index is cheap at 6,200, having lost 11 per cent in May’s global financial carnage and oil price swoon. The Tadawul index now trades at 12 times earnings and two times book value. This is a fraction of its bubble valuations four years ago when the Tadawul peaked at 21,000 and Saudi bank valuations were a stratospheric five to eight times book value. The bear market is Saudi Arabia, since 2006 has been as brutal and protracted as its earlier bull run (1999 – 2006) was parabolic and euphoric. However, the big money is made when things go from catastrophic to just plain awful. This is the exchange milieu in which bull markets are born. Value investors buy fear and sell greed. Two, Saudi Arabia has the largest, most liquid, most high growth potential banking system in the GCC. Retail loans are a mere 13 per cent of GDP in the largest consumer economy in the Arab world, where youthful demographics alone dictate a secular growth explosion in auto loans, credit cards, mortgages, insurances and personal loans. The Saudi banking system is also not dependent on inter banking funding, Euromarket borrowing or offshore hot money, since customer deposits fund almost the entire loan book. The loan to deposit ratio in Saudi banking is far lower than any other GCC state, with Basle Tier One capital ratios at an impressive
15 per cent. Saudi banks will benefit most from the $400 billion government infrastructure spending. Economic growth is unthinkable without private sector bank credit growth, which has begun to revive in the Kingdom, unlike elsewhere in the Gulf, where the collapse of property bubbles and systemic debt shocks have forced banks to slash balance sheets. Three, Saudi Arabia has the largest, youngest population in the GCC with a rising per capita income and an embryonic data traffic, Internet and broadband hyper growth metrics. This is a superb opportunity for Saudi Arabian telecoms. Mobily (Etisalat Etihad), Saudi Arabia’s second mobile operator, is cheap at 10 times earnings with 18 million subscribers and almost a million new broadband subscriber additions since January 2009. Mobily commands 40 per cent margins, has a far lower geared balance sheet than Zain and a $3 billion capex budget. Saudi Telecom, the legacy operator, will also benefit from the broadband revolution in the Kingdom as its existing fixed line subs convert. Saudi Arabia has three million broadband Internet users and 10 million Internet users, a critical mass unthinkable in smaller Gulf societies. Mobily and STC are the clear beneficiaries of the Arab world’s most exciting broadband revolution. Four, Saudi blue chips offer some of the highest return on shareholder equity in the Middle East. SABIC, Mobily, Al Rajhi Bank and Saudi Arabian Fertilisers all boast ROEs in the 25-34 per cent range. This stock market does not deserve its rock bottom valuation metrics at a time when economic growth will be at least five to six per cent, crude oil prices are still above $70, King Abdullah’s reform momentum is accelerating and SAMA no longer has any reason to raise riyal money market rates as inflation falls. Saudi Arabia is cheap, unloved, and under owned. A classic value buy at Tadawul 6,000 – 6,400 for a potential one-year 8,000 target. Matein Khalid is a global macro trader, economics professor, fund manager in a royal investment office and writer in finance and geopolitics.
The big money is made when things go from catastrophic to just plain awful. Value investors buy fear and sell greed.
12 gulfbusiness.com July 2010
THE COMMENT LOCAL KNOWLEDGE
TODAY YOU DON’T NEED A GUN TO HOLD UP A BANK Forget about the small time crooks and two-bit thieves of popular culture. White-collar criminals are robbing from all of us, and on an epic scale. MISHAL KANOO
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hen we think of thefts, we think of news items about small time crooks who robbed a bank or a hotel, or a shop. Or we think of organised crimes such as the Italian/ Russian/Chinese/Indian mafias. What if I told you that the greatest thieves come in pin stripped suits, went to the best universities and actually believe that when they steal, it is not theft but a reward for their intelligence? Who, you may ask yourselves, are these people whom I am talking about? Well, here is where the picture becomes a bit blurry. They could be civil servants or bankers or businessmen – or a combination of all three. I am sure that by now I have ruffled enough feathers and have created more enemies for myself than even before but the reality is that we, as humans, punish the weak and the poor and lavishly reward the strong and powerful – not the physically powerful, mind you, but the mentally strong. For over two decades in the US, investment banks have been playing a gamble that finally could not be sustained. They bet on everything under the sun. Whether it was equities, bonds, funds, commodities or even the latest variation to the theme – subprime mortgage insurance – they did it. And what do you think a futures contract is? It is a bet that something positive or negative will happen to a certain commodity or equity, including money, in the future that the investor is betting on today. In the investment parlance they like to use the word hedging because it sounds more respectable than gambling. The fact that would have an adverse repercussion on the end user was not even factored when these artificial papers were created. It reached a point in the farce that there was far more paper being traded between these banks than the actual underlying commodities or equities. Yet nobody cared. The investors did not care as long as they made money. The regulatory bodies did not care as long as they followed the law, even though the concept itself was mad. The bankers did not care as they made a cut whether the item made money or not. When
the proverbial manure hit the fan, then the questions started to resonate in the hallowed halls. But what did they ask? Who stole money? How was it done? How long are we going to punish the people who perpetrated these actions? All questions went unanswered. Why? Because it was known who stole the money. The method was also known, as these people made no secret as to what they were doing. Why did they not try to hide their actions? Because they knew that nobody would hold them accountable. A few months after the financial meltdown, the mantra making its way around the world was that of the death of capitalism. As though a concept caused the problem! The reality is that these people who stole, obviously did not steal enough. They were given second chances and like a Swiss precision time piece, they stole again on the hour, every hour. It was said that the world finally woke up and now they would hold the thieves accountable. We have a saying in Arabic: “it is the guardian who is the thief”. How could the clients implicate the investment banks when they were complicit with allowing it to happen by feeding them the money they needed to make it happen? Moreover, how could the regulators hold the investment bankers to account when they were supposed to safeguard the clients in particular and society in general? All knew what was happening so if one was to be held accountable, so would the other parties. This is why nothing will change in the system. Thieves come in many shapes and forms. We are trained to look at the blue-collar thief, but the damage this small fry does is, well, small. We fail to see what significant damages the white-collar thieves do to society until it is too late. And even if we could, we won’t because we played a role in empowering the thief and to be honest, most people got angry not because of the theft, but because they did not have the chance to share in the theft. Mishal Kanoo is deputy chairman of the Kanoo Group. gb@motivate.ae
Most people got angry not because of the theft, but because they did not have the chance to share in the theft.
14 gulfbusiness.com July 2010
THE COMMENT MONEY
UPHILL BATTLE AS GULF STRUGGLES WITH DEBT Moody’s warns that the sheer scale of debt refinancing in the UAE could halt a nascent regional economic recovery. PETER COOPER
T
he need to refinance around $100 billion out of an estimated $148 billion owed by Gulf companies, mainly in Dubai and Abu Dhabi, over the next 18 to 30 months is going to hobble the regional economic recovery, says credit rating agency Moody’s, now rather more cautious about making economic projections than in the boom times. BNP Paribas cites $41 billion in refinancing requirements for regional companies in 2011, while Moody’s cites $28 billion of out of a total $148 billion debt maturing in 2012. These are substantial sums even for the oil rich Gulf States. This is clearly going to be a drag on the local debt market and crowd out financing for other companies. That is unless the UAE government intervenes and provides the banks with access to longer maturity debt. The lobbying for that has surely already begun. At the same time the government could take this opportunity to improve its regulatory framework, in particular the insolvency law that is widely recognised as completely inadequate for a nation as wealthy and diversified as the UAE has become in recent years. There is also the opportunity to create a market for government bonds that would facilitate better management of the currency and lower interest rates. Economists have been recommending a wider and deeper local bond market for years as a necessary part of the maturing of the UAE currency regime. Indeed what the UAE most requires for a swift economic recovery is more credit in the right places. For example, mortgage finance at reasonable cost so that nationals and expatriates can buy the growing stock of real estate. It is happening. Abu Dhabi Finance is promoting mortgage finance from 5.75 per cent, a considerable fall from the peak mortgage rates of 9.25 per cent in the early days of the real estate crash 20 months ago. But it is a shame that so far this new low rate is only available for loans on residential property in Abu Dhabi and not Dubai. Cheaper home loans create a virtuous circle by relieving pressure on the banking system by improving the finances of developers and reducing the number of bad debts.
Housing finance is also a great engine of growth for any consumer economy and would bring benefits to most businesses in the country. It does seem ridiculous that a nation as wealthy as the UAE should see its economic growth constrained by the regional refinancing of $100 billion in debts over the next two and a half years. Abu Dhabi has something not far short of $1 trillion in savings in its sovereign wealth funds. If this money is not for preserving and enhancing economic growth through difficult times then what is it for? The UAE is like China in that it has the resources available to deploy at this time. Could the wherewithal not be found to do so? It should not become a matter of bailing out everybody, or thinking that some bankrupt companies are too big to fail, but there is no reason why Europe’s new age of austerity should be repeated in the Gulf States. The economic problems of the euro zone are far away. Greek overspending should not be allowed to arrest economic development through a further credit squeeze in the GCC and push the region back in to recession. There is no need for severe belt tightening to relieve the debt burden in the GCC. Assets should be sold down overseas and the money used to pay off debts. Conglomerates should be broken up and the parts privatized. Stakes in major companies should be sold. Government bonds should be issued and that money used to re-finance short-term debt with longer maturity finance. In short, the imagination of a rich person with a short-term liquidity problem ought to be brought into play. The structural deficits of the US, Japan and Europe, including the UK, are something completely different. These are not development projects gone awry. This is a national debt that will probably only ever be paid by devaluation and inflation, whatever the austerity proponents argue, and it will leave those countries considerably poorer in the process. So let’s hope the Gulf States shake off the gloom about their debts soon, and remember their true net worth. ■ Peter Cooper is the editor of arabianmoney.net
This is clearly going to be a drag on the local debt market and crowd out financing for other companies.
16 gulfbusiness.com July 2010
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THE COMMENT EMERGING MARKETS
AFRICA LOOKS TO 2010 WORLD CUP FOR SUCCESS The continent’s football teams might not match international expectations, but some of its economies are exceeding them. MICHAEL PREISS
I
t is the first time that a sporting event as significant as the FIFA Football World Cup has been held on African soil, and, while the event may be in South Africa, it is truly a World Cup for all of Africa. Not just on the football fields but also in economics, growth figures and stock market performance, Africa’s time has come. Year-to-date, three out of the 10 best performing equity markets are in Africa. Nigeria (+22 per cent), Kenya (+19 per cent) and Ghana (+18 per cent). Compare this with America’s S&P500 (+0.2 per cent), Japan’s Nikkei (-5.3 per cent), China’s Shanghai Composite (-23 per cent) or with Greece (-40 per cent). 2010 is the year the world increasingly focused on Africa. Nigeria now trades at a tighter spread in the bond markets than some European countries. This is a clear vote of confidence that African markets are now a fundamental part of the global economy. Over the past 10 years, Africa’s annual output grew by +4.8 per cent, twice as fast as in the 1990s and faster than the global average of +3.8 per cent. Most of the natural resources helping to develop India are coming from Africa, and African minerals are a key component of China’s growth story. Many investors increasingly realise that you cannot have a China strategy, or an India strategy, without having an Africa strategy. Thanks to rising living standards, some 200 million Africans will enter the market for consumer goods in the next five years. Traditionally, the best investment theme is one that is over-looked and under-researched, somehow illiquid and often considered boring or insignificant by many. In addition, the most profitable investments for clients have virtually no LTV (loan-to-value ratio). This was the case for most emerging markets in the last decade and it is now the case in Africa. However, in this decade, emerging markets have come of age and many investors realise they must have a large part of their wealth invested in the growth markets of the future. When it comes to emerging market investing, being too conservative often is the biggest risk. Illiquidity is often a risk in emergng markets, but it tends to be ‘smoothed’ out over longer periods of time. Receiving
no investment is a bigger risk than medium-term volatility. Africa presents a largely under-explored investment area. African economies and capital markets are still over-looked and under-researched by many, hence offering excellent long-term returns for the far-sighted investor. Over the past three years, African markets have consistently provided some of the world’s strongest returns, despite the perceived risk. You have to get beyond the perception to see the opportunity. By definition, the way to make money is to be ahead of the curve and to invest in markets that are still overlooked and under-researched, but have an underlying growth momentum in their favour. Africa arguably is the ‘Last Frontier’, both in terms of assets and geography, in an emerging market portfolio. Strong underlying growth and the fact that East/West African markets and stocks in particular are un-correlated to Western markets, and the already emerged of emerging markets, means that investors benefit from diversification and low correlation risk. Today, many parts of Africa have undergone a considerable transformation and development, and they now offer far-sighted investors the chance to get exposure to the last frontier markets and an expanding universe of high quality and attractively valued African companies. Africa as a continent is indeed richer than you might think. Africa is richer than India on the basis of gross national income (GNI) per capita, and a dozen African countries have a higher GNI per capita than China. Over time, Africa will capture a larger share of the global savings pool. While there is risk in investing in Africa, some or even most of these risks are over-stated due to a lack of familiarity with the reality of Africa in 2010. The World Cup is changing this. No matter who will win the final in Johannesburg, the reality of the Africa story is now unfolding. It’s a win/win for the whole of Africa and its changing perceptions. In the final analysis, in business just like in the financial markets, when and wherever there is a gap between reality and perception, the best business and greatest returns are to be made. Michael Preiss is an investment advisor and finance professor and can be reached at: Michael@michaelpreiss.net
Thanks to rising living standards, some 200m Africans will enter the market for consumer goods in the next five years.
18 gulfbusiness.com July 2010
THE COMMENT REAL ESTATE
BARGAINS TO BE HAD FOR THOSE IN THE KNOW Despite the declining real estate market, pockets of Dubai still offer investors healthy rental yields, but the wise are investing for the long haul. MOHANAD ALWADIYA
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oth local and overseas buyers, seeking value with long-term investment returns, are looking to Dubai. These buyers are astute and are looking for properties that provide the fundamentals to guarantee long-term capital growth along with an acceptable rental yield. With prices somewhat stabilising in parts of the Dubai property landscape, the opportunities for buyers and investors is unlikely to get better. With the recent economic downturn, the price of entry has never been lower. The appeal lies in the fact that prices are not expected to fall further and the most desirable areas are now established as iconic locations. However, the generation of a short-term net yield of around five to six per cent should not be an issue, as the immediate appeal for prospective tenants is derived from the project‘s reputation, infrastructure, amenities and location. Demand in the longer-term will be driven by the same factors and should ensure a healthier capital growth of six to eight per cent per annum, as Dubai emerges from the gloom of the global recession. A Palm residence will always be a sought-after address, derived from its prestige, distinction and status, while Downtown Dubai comes a close second, providing an excellent lifestyle, close to the heart of the city with virtually every amenity available. Dubai Marina, Emirates Living and JBR are prime examples of well-established and respected areas of Dubai. The Marina Walk and the JBR Walk have attracted a lot of interest from investors, owner-occupiers and visitors alike and with the opening of the Marina Mall, the area has gained even more popularity. Apartments can be bought for as little as Dhs 750 per sq ft in the Marina while a beachfront apartment within JBR can now be purchased for Dhs 930 per sq ft; prices which are 35 per cent down from June 2008. Opportunities do not only reside in the iconic developments. Jumeirah Lake Towers (JLT) is a case in point and it is considered to be very much underrated. JLT possesses a very good balance between office and residential space, which will reflect positively on the lifestyle it provides. The price of entry is lower than some of the more established projects, with prices at least 15 per cent below those of Dubai Marina.
At the lower cost end of the spectrum, developments such as International City, Discovery Gardens and the soon to be released Sky Courts in Dubailand also offer good long-term prospects, while requiring a smaller initial investment. Created to provide a more affordable lifestyle without compromising on quality, Sky Courts has significant potential given its appeal to the middle-income earner. Spacious studio, one bedroom and two bedroom units can be bought at as low as Dhs 630 per sq ft. While off-plan opportunities are being viewed suspiciously, investors should not dismiss the opportunities that reside in projects that are nearing completion. Distress sales by owners who are facing difficulties in making final payments or meeting mortgage commitments can lead to big savings. Investors will always consider the elements of yield and capital growth. While the aim is to maximise both, different properties in different areas will provide varying performance levels in each of these two elements. There are properties in Dubai that will provide a minimum four per cent net rental yield (the annual rental income received as a percentage of the property value, after maintenance and service charges have been deducted). For this reason, investors should be diligent in investigating what the service charges will be. Service charges vary widely, from around Dhs 15 per sq ft for a Marina apartment to as high as Dhs 30+ per sq ft for a Downtown Dubai apartment. The difference can have a significant effect on yield. A higher net rental yield may be on offer in some areas, but the longer-term capital appreciation may not be as promising. Capital growth projections require some careful thinking. This is where certain considerations such as location, property type, quality of structure, fit and finish and amenities are taken into account. As with all investments, professional advice should always be sought from consultants who are experts in the industry. Real Estate investing is for the long-term, so the more investigation and consultation prior to making a decision will help reduce risk and increase the expected return. Mohanad Alwadiya is managing director of Harbor Real Estate
Distress sales by owners facing difficulties in meeting their mortgage commitments can lead to big savings.
20 gulfbusiness.com July 2010
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THE COMMENT letters@gulfbusiness.com LETTER OF THE MONTH HOSPITALITY SURVEY: DOWN BUT NOT OUT IN THE REGION’S BIG CITIES Vol. 15 Issue 2 June 2010
Action!
How the Gulf’s booming cinemas are throwing the spotlight on local talent NEW FRONTIERS
Opportunities for the brave in Sri Lanka and Taiwan
BACK ON TRACK
Kuwait’s mega projects finally get under way
HOME GROWN
Saudi shrimp farm to make big waves
HEALTHY GROWTH
Western insurers drawn by lure of the uninsured Bahrain..............BD 1.0 Kuwait............... KD 1.0 Oman................ RO 1.0 Qatar.................. QR 10 Saudi Arabia.......SR 10 UAE.................. DHS 10
WWW GULFBUSINESS COM
GB Regional June cover .indd 1
5/30/10 10:46:52 AM
CONFUSION OVER VISAS
I started reading with keen interest the above article having become a victim of the abrupt about turn in the Investors’ Visa arrangement for property buyers in Dubai. The article states that “originally the law stated that, upon purchase, freehold properties provided the foreign owner with a six-month renewable visaâ€?. This is not the case as I know it. I was granted a three-year renewable visa based upon which I could sponsor my wife and maid and do all the things a resident can do. As I understand it, that’s what everyone got. The article goes on to say that “last year there was some progress made on the issue‌â€?. Wrong again. Last year’s shock announcement was of the withdrawal of three-year visas to be replaced by six-month renewable visas. These visas do not enable residents to live like residents and this announcement was a major, major blow – progress seriously in reverse. All this dampened my expectations of the positive changes forecast towards the end of the article. We, and many others are in a very uncomfortable position. We sold our Mediterranean retirement house and bought here having lived and worked in Dubai for over 20 years, only to have the Visa rug pulled out from under our feet.
Keith Stack, Dubai
THE EDITOR WRITES: At any one time, visas from three months to three years in length, or even none at all, have been promised by developers and the government alike, with adverts, offers and official policy frequently contradicting one another. The magazine reiterates its view that confusion on this continues to have a negative impact on the property market here, and does not necessarily share the optimistic outlook of the experts quoted in the article.
CINEMATIC HISTORY Making Movies (Gulf Business, June 2010) made a good script of its own. The plot includes three key pointers, which I have decided to tag the “3i’s� of movie making – notably infrastructure, investment and interest. Taking these in turn, from the infrastructure epitomised by Abu Dhabi’s ImageNation; through the investments prompted by the boom in shopping malls with Grand Cinemas and Cinestar ever present, as well as partnerships with international production companies in Los Angeles, India and Singapore; to the renewed interested typified by box office takings grossing about US$71.3 million in 2009. Undoubtedly cinema in the UAE has not only come of age but has also become
big business. While reading about City of Life, the first locally-produced feature film directed by Ali Mostafa, an Emirati, however, I was surprised to learn about Dubai’s reluctance to allow itself to be the backdrop of international blockbuster movies. Obviously such stifling approvals procedures may not only mar Dubai’s, and by extension, the UAE’s rankings in the Doing Business in the Arab World report, but could impact the triple bottom-line of the country for three related reasons. Waiting for the big game such as James Bond, which according to Tim Smythe, producer of City of Life, is better associated with ‘Brand Dubai’, may not be the best way of attracting investments. In terms of interest, this is bound to
increase amongst the local population when they see popular attractions such as the Dubai Mall, Dubai Metro and the Burj Khalifa in Hollywood movies. One of the reasons we are told why Bahrain’s cinema market is so strong is that Saudi Arabian nationals can drive across the causeway into Bharain to watch films. How long will it be before we start flocking to Oman? Let’s not forget that the Cannes Film Festival is not the Oscars, but then again it has put Nawaf Al Janahi’s “ Sea Shadow in the media spotlight – despite the fact that the Emirati film is yet to shoot until October/ November. Are sweet dreams really made of these? Dr Nnamdi O Madichie University of Sharjah
Gulf Business welcomes your comments about the magazine or issues regarding business in the region. Please write to: The Editor, Gulf Business, Motivate Publishing, PO Box 2331, Dubai, UAE; Fax to + 971 4 2827593; or email to: letters@gulfbusiness.com. We reserve the right to edit correspondence.
22 gulfbusiness.com July 2010
THE BRIEFING THE REGION
30
[ GCC ]
Seconds to make sense of…online retail
GCC roaming tariff cap
Saygin Yalcin CEO, Sukar.com
What exactly is Sukar.com? Sukar is the first online private shopping club in the Middle East, providing invitation-only access to fashion, lifestyle and luxury brands at up to 70 per cent off retail. There is no membership fee or obligation to buy. Isn’t all this “exclusive” and “luxury” stuff like, so 2007? Don’t you know there’s a recession on? Sukar does not focus on luxury, but rather offers a vast variety of lifestyle items to its members. While always respecting the brands’ look and feel, Sukar will remain invitation-only to ensure controlled, privileged sales. Sukar’s business model has been recession-proof, as it offers a unique way of combining high-value items with privileged prices. Don’t people like to shop for these kind of up-market items in a real store? Yes, they do. Sukar does not cannibalise any of the offered brands’ offline sales. Sukar is an additional distribution channel for our brand partners. How quickly do you deliver? If the products are already in our warehouse, our call centre will confirm all orders with our customers within three days and ship it one day later to the respective destinations, free of charge (for a limited time). If the products are still in the warehouse of the respective brand partners, we deliver within 10-14 days. How many customers do you expect to get by year’s end? Sukar is growing very fast. Even before launch, 45,000 people registered to become a member. Within the first month of launch, we have almost doubled this number, as our members are very active inviting their friends and we are rewarding them with $25 per friend, who buys. By the end of this year, we are expecting to exceed half a million registrations.
OFF THE CHARTS BP faces a clean-up bill that could see annual profits wiped out. Contrast the daily cost of the clean-up operation – that’s the big barrel – versus daily profits in the first quarter of this year.
$100 million
24 gulfbusiness.com July 2010
$66 million
The GCC Telecommunications Ministers Committee has approved the recommendation of the Telecommunications Steering Committee for setting a maximum cap on mobile roaming tariffs within GCC countries. The Telecommunications Regulatory Authority (TRA) is now working on an appropriate approach to implement the roaming recommendation by September 1, 2010. The GCC mobile roaming recommendation sets a maximum price cap for origination calls or calls made by the roaming customers either back to their home country or any other GCC country. The approved recommendation will provide a reduction of up to 38 per cent on roaming charges currently paid by GCC consumers. Commenting on the approved recommendation, TRA chairman and acting general director, Dr Mohammed Al Amer, stated: ’’This recommendation, when implemented, will support cross border business activities and support growth in the roaming traffic.‘‘ Adel Darwish, manager of Market and Competition and head of the Bahrain delegation in the Working Group committee, stated that “current roaming charges for Bahraini customers within other GCC countries reach as high as 550 fils and with this recommendation approved consumers will benefit and will feel more comfortable in using their mobiles while roaming‘‘. The approved recommendation will set the price ceiling at around 340 fils in the first year and down to 250 fils in the second year of implementation. The rates will also be reviewed annually. Operators still have the opportunity to provide prices lower that those recommended. The next objective assigned to the working group is to study roaming charges for SMS, MMS and Data. Meanwhile, the Bahrain Telecommunications Co, (Batelco) has embarked on a project to expand its mobile network services with an investment of 14.5 million Bahraini dinars ($38.46 million) in order to meet growing demand from local customers. Demand for mobile broadband services keeps on growing extensively due to an increase in consumers’ use of mobile data cards, smart phones, and BlackBerry devices to access the Internet and emails and to download data while on the move, according to Gert Rieder, chief executive of Batelco.
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THE BRIEFING THE REGION ■
■ ■ ■ ■
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Construction Industries (OCIOC), has won a $265 million contract as part of a joint venture with the Haji Hassan Group to build the North Manama Causeway in the Kingdom of Bahrain. Besix Group’s share of the contract is approximately $203 million, or 78 per cent of the total contract value, OCIOC said in the statement. The project will provide road access to the Bahrain Financial Harbour and Bahrain Business Bay.
[ QATAR ]
refinery will be located south of JEC, or 60 kilometres north of the province of Jizan, bordering Yemen, said Mohammed Al Attas, JEC’s public relations manager.
World Cup spurs work
[ KUWAIT ]
Banks told to disclose Banks in Kuwait are expected to submit to the country’s central bank detailed financial statements for the past 17 quarters, Al Qabas newspaper reports. The Central Bank is increasingly looking into the dispute between various firms in Kuwait since the financial crisis and this information is essential for a better understanding of those cases and their repercussions on the overall economy, the paper adds.
[ BAHRAIN ] Al Attas said that Saudi Aramco was commissioned by the government to build and fund the 250,000 to 400,000 barrels per day refinery in place of the private firms that had bid for the project.
[ BAHRAIN ]
Besix in Manama Causeway The Besix Group, part owned by Orascom
[ SAUDI ARABIA ]
Oil refinery site set
State oil company Saudi Arabian Oil Co. (Saudi Aramco) has determined the location of a $10 billion oil refinery project within the Jizan Economic City (JEC). The long-awaited oil
Public debt hits high Bahrain’s public debt grew 1.07 per cent in April to 1.89 billion Bahraini dinars ($5.02 billion), or 38.75 per cent of the country’s gross domestic product at fixed prices, according to Manama-based Al Wasat. The growth was the result of the central bank issuing treasury bonds worth BHD85 million and sukuk worth BHD22 million during that month, the paper reports. Meanwhile, Bahrain banks’ loans to the local business sector dropped to 3.75 billion Bahraini dinars ($9.94 billion) in April, down BHD62 million or 1.6 per cent compared with the previous month, according to Al Wasat.
Qatar’s Public Works Authority (Qatar Ashghal) plans to implement infrastructure projects worth $20 billion in the country over the next five years, the Doha-based Al Arab daily reports. Local companies are able to compete for these projects and they will be awarded 30 per cent of the projects’ value, said Jamal Al Kaabi, manager of drainage and road design at Ashghal. Saad Khodr, senior transportation engineer at the ministry of municipality and urban planning, said the fact that Qatar is bidding to host the World Cup in 2022 will accelerate the implementation of these projects, Al Arab reports.
July 2010 gulfbusiness.com
25
THE BRIEFING THE REGION [ REAL ESTATE ]
[ TECHNOLOGY ]
Qatar’s sovereign wealth fund is set to take over Songbird, the listed owner of Canary Wharf, as the Gulf state steps up its London spending spree. The Qatar Investment Authority (QIA), which already owns Harrods and stakes in Barclays (BCS), the London Stock Exchange (LSE), and 24 per cent in Songbird, plans to spend more than GBP700 million to buy the remaining 76 per cent. Qatar recently added another landmark to its portfolio with the GBP250 million acquisition of Park House, a 310,000 sqft property on Oxford Street, London. The Qataris have invested heavily in the UK since 2007 and are now estimated to hold assets worth as much as GBP10 billion.
A team of researchers from Saudi Arabia and China are the first ever to map the full genome of the Arabian camel (Camelus dromedarius). The research team from King Abdulaziz City for Science and Technology (KACST) and BGI (formerly known as Beijing Genomics Institute), were the first to fully sequence mammalian livestock in Saudi Arabia. The research revealed that camel genome is approximately 2.2 gigabase (billion nucleotides) in size with remarkable similarities to other reported mammals, particularly cattle, and interestingly also possess 57 per cent shared genes with the human genome, which is a comparable to findings in other sequenced mammals. The Arabian camel genome research project has generated an enormous database of genetic information that will be used to improve camel, as well as human, health. The completion of the genome will help in understanding the physiological and biochemical characteristics
Canary sold for a song
[ AVIATION ]
British Airways in charm offensive British Airways has acknowledged the need to regain the faith of its customers in the Middle East by launching a sale on economy and business class fares to Europe and North America. Despite Middle Eastern routes remaining fairly stable during the volcanic ash incident and recent industrial action, the airline is determined to reward the loyalty of its passengers. Paolo De Renzis, British Airways’ area commercial manager, Middle East, said: “We are well aware of the challenges facing the airline industry, and we remain absolutely determined to keep our passengers flying.”
26 gulfbusiness.com July 2010
ME meets Far East in genome map
F that enable this animal to survive in such inhospitable environments as the desert. Further, unlocking the unique aspects of the camel immune system will help to develop new vaccination approaches, novel therapeutic antibodies, and small peptide-based therapy. The camel genome data will also be utilised to reconstruct metabolic pathways for milk production in camels,
thereby elucidating genetic aspects of camel milk composition and also helping in the selective breeding of animals with increased yield of milk. Compared to other dairy animals, the milk from camels is highly nutritious and believed to have remarkable medicinal properties that can help fight diseases like cancer, AIDS, Alzheimer’s and Hepatitis C.
[ BUSINESS ]
Glass ceiling reflects lower pay for women Almost half of all women working in the Gulf are paid less money than their male colleagues for the same workload, with less chance of promotion, according research conducted by Bayt.com, in conjunction with research specialists YouGovSiraj. With 51 per cent of women feeling that appreciation in the
workplace is based on merit (and a comparatively small 15 per cent claiming men receive more recognition), it seems most women in the region feel reasonably content about their career worth. However, the picture becomes more complicated when looking at remuneration. Some 90 per cent of women claim to work equal
or longer hours to their male colleagues, but 42 per cent feel they receive less pay (as much as 54 per cent less for Western women and 53 per cent less for GCC). Furthermore, 43 per cent feel they have a lesser chance of promotion and 20 per cent feel women in their company are not able to progress beyond a certain level or ‘glass ceiling’.
THE BRIEFING THE REGION [ BANKING ]
[ ENERGY ]
[ FINANCE ]
[ BUSINESS ]
Fitch Ratings has affirmed the Saudi Investment Bank (SAIB) Long-term Issuer Default Rating (IDR) at ”A” with a Stable Outlook. Fitch also affirmed SAIB’s Short-term IDR at ”F2”, Individual Rating at ”C/D”, Support Rating at ”1” and Support Rating Floor at ”A”. SAIB‘s Long and Short-term IDRs and Support Rating reflect the high probability of support from the Saudi authorities. The Individual Rating reflects SAIB’s new strategy, adequate liquidity and capital position. The rating is constrained by its small franchise, high loan and deposit concentrations and weakened asset quality indicators.
Iraq is seeking around $20 billion to build four new refineries as it looks to become a net exporter of petroleum products. Iraq aims to boost its refining capacity by 740,000 barrels per day (bpd) on top of the current 550,000 bpd through construction of the four refineries in the central province of Karbala, in the northern oil hub of Kirkuk and in Nasiriyah and Maysan in the south of the country. “The investment will not be constrained – we are looking for real partners and in any ratio,” said Oil Minister Hussein al-Shahristani. “Any investor can invest in full or in partnership with Iraq,” he added.
The Dubai International Financial Centre (DIFC) should encourage the renewable energy industry by establishing a carbon exchange, requiring carbon certificates and taxes, according to DIFC chief economist Nasser Saidi. ”We want to be promoters of renewable energy and can do this by developing carbon trading in emissions,” Saidi told delegates at a Dubai energy conference. Saidi said governments should provide regulatory and financial incentives for increased consumption and production of renewable energy, and phase out subsidies for petroleumbased energy production.
Dubai-based Zafco Holding, a diversified tyre distribution and manufacturing company, plans to tap the capital market with a Dhs700 million ($190.5 million) initial public issue next year. This will be one of the first family-owned businesses to go public. Listing is planned on the Nasdaq Dubai, Luxembourg and Singapore bourses, said Zafco CEO Gopiraj KV. The company is now valued at $136.1 million and by the time it is ready for approaching the capital market, sales will have reached $999.1 million from the current $272.2 million, Gopiraj said.
SAIB rated A with a Stable Outlook
Iraq seeks to export petroleum
DIFC in green trading drive
Zafco to raise capital with IPO
July 2010 gulfbusiness.com
27
THE BRIEFING THE REGION [ CURRENCIES ]
GCC-wide stock exchange proposal The committee of stock exchange chiefs from across the Gulf Cooperation Council (GCC) will discuss an incorporation plan during a forthcoming two-day meeting at the Secretariat headquarters in Riyadh. The ministerial meeting will consider a proposed working plan based on a clear timeline and studies conducted by GCC stock exchanges. The committee is directed towards meeting the needs of GCC’s joint market regarding equal treatment of GCC countries in all economic fields and especially share trading and establishing companies.
[ EQUITY ]
Crisis deters corporate raiders The global financial crisis has left fewer corporate raiders vying for deals in the Middle East, with those remaining hoping for a revival in buyout activity by the end of the year. “The private equity industry was challenged over the last two years, resulting in less players chasing opportunities,” said Amjad Ahmad, senior managing director of Alternative Investments at Dubai-based NBK Capital. In 2009, the total number of private equity transactions in the Middle East and North Africa region dropped almost 71 per cent to just 15, worth a combined $156.8 million. This compared to 51 deals a year earlier, valued at $5.18 billion, according to Kuwait’s Global Investment House.
28 gulfbusiness.com July 2010
[ BUSINESS ]
Middle East and Africa activity returns Following a dry spell of merger and acquisition (M&A) activity in 2009, the Middle East and Africa (MENA) are core areas for Technology, Media and Telecommunications (TMT) transactions in the next three years, according to Value Partners, a leading global management consultancy firm. Assets worth between $25 billion – $30 billion are being considered for sale in the region. “The availability of attractive targets is due to market consolidation and government privatisation programmes, combined with the presence of buyers with cash-rich balance sheets. “This is conducive to a
Zoran Vasiljev, managing director, Value Partners Dubai.
new phase of M&A, but with more well-defined strategic objectives and more prudent investment principles,” said Zoran Vasiljev, managing director, Value Partners Dubai. Value Partners expects that the next wave of acquisitions will aim to grow capabilities in other
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revenue-generating services. Hence, another focus will be on acquiring capabilities in technology, content, and innovation. Further activity is expected as IPTV technology matures in the region, and popular platforms emerge. Value Partners claim that while acquisitions used to be part of aggressive expansion plans in the region, the current phase of consolidating gains and streamlining operations will be more focused on either making acquisitions of a strategic importance, or on the opportunistic acquisition of assets as a medium-to-long-term investment vehicle.
[ FINANCE ]
Credit Suisse predicts GDP boost The Middle East and Africa (MENA) region is expected to record sustained GDP growth rates over the medium to longer-term, backed by structural advantages and robust fundamentals, according to Credit Suisse analysts. Kamran Butt, head of Middle East Equities Research at Credit Suisse, Private Banking, said: “In
our view, stable oil prices and improved business confidence will be the major catalysts for a robust rebound in GDP growth in 2010. “While the region is set to witness improved economic conditions across all markets, the growth in GDP will not be evenly distributed, with Qatar leading in 2010.“ Commenting on regional
[ INVESTMENT ]
KHC looks to Qatar deal The Kingdom Holding Company (KHC) has discussed future potential business collaboration with Qatar Holding, the prime vehicle for strategic and direct investments by the Gulf state. As the owner of KHC, Saudi Arabia‘s billionaire Prince Alwaleed Bin Talal
Bin Abdulaziz Al Saud, held a meeting in Riyadh with Ahmad Al-Sayed, the chief executive of the investment arm of the Qatar Investment Authority (QIA), the Gulf state‘s sovereign wealth fund. In April, Qatari Diar, the property investment arm of the QIA, paid 3.2 billion Saudi riyals ($847million)
markets, Mohammad Hawa, head of MENA Equity Strategy and Financials Research at Credit Suisse, Investment Banking, said: “MENA markets, although flat year-to-date, have managed to outperform GEM and EMEA equities, which suffered from fear of the contagion effect from Greece, Hungary, and the possibility of slowdown in China.” for a 40 per cent stake in Fairmont Raffles Holdings International, a subsidiary of Kingdom Holding Company. Prince Alwaleed, who owns 95 per cent of KHC, has focused his investments on banks, hotels and media firms, building sizable stakes in companies like Citigroup Inc, News Corp, Apple Inc, and Time Warner Inc.
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THE BRIEFING INVESTMENT
ETF fever hits Middle East With the launch of Saudi Arabia’s first exchange traded fund, investors have been flocking to see what the fuss is about. SARAH ABDULLAH reports from Jeddah.
O
ver the past few years, Exchange Traded Mutual Funds, or ETFs, have been getting a lot of press, with investment companies worldwide seemingly launching a new type of ETF daily, but what are ETFs and why have they been gaining popularity with some investors while others shy away? The main reason behind investors’ apprehension in ETFs is confusion over how they work. They are said to be mutual funds but actually are not, as they spread risk by diversifying investments and they pose drawbacks such as the management and operating expenses associated with managing mutual funds. Another unappealing characteristic of ETFs is that they tend to merely occupy a portfolio for years without the ability for investors to take advantage of short-term market movements as investors must wait until the end of the business day to calculate Net Asset Value ( NAV) before they can purchase shares. Therefore, the time it takes to buy and sell the shares could remove the chance to profit because of the split-second fluctuations in prices, such as commodity and Forex markets. In fact, Deborah Fuhr, BlackRock’s Global Head of ETF Research & Implementation Strategy, commented on the issue of confusion and its effects on the ETF market in her predictions for the market into 2012. “We are at a crossroads in the ETF industry. We are seeing funds calling themselves ETFs which do not provide transparency on their underlying portfolios, they also do not offer in-kind creation/redemption and do not have real time indicative Net Asset Values. Products which are not even funds are being called ETFs. Now that the industry accounts for over $1 trillion, product developers are working hard to find ways to put structured products, hedge funds,
32 gulfbusiness.com July 2010
and active funds into an ETF wrapper without maintaining the basic features of an ETF. “If this is allowed to continue we risk confusion, disappointment and disillusionment among investors which would be very negative for the ETF industry,” Fuhr said. She added that clarity is critical if the industry is to help investors understand structure, mechanics, tax and the regulatory implications of using ETFs. “Agreeing definitions for the various product structures is one of the pressing needs of the industry in 2010,” she said. Aside from these issues ETFs have been gaining rave reviews with global investors mainly because of their ability to mirror indexes while being tradable like stocks, providing investors more flexibility and reduced risk due to the diversification. One of the biggest advantages to investors, however, is that ETFs are much cheaper than actively managed mutual funds or index funds. Investors have especially fallen in love with
the low expense ratio, meaning that investors have more available money to invest, making ETFs the best investment choice in today’s volatility. Because of these features, Fuhr believes that ETF assets will rise by 30 per cent this year and expects European ETF AUM to exceed $500 billion by 2012, adding that the preference for core beta ETFs will continue with significant growth across both institutional and retail investment markets. “Regulatory changes, such as the Retail Distribution Review (RDR) seeking a ban on commission in the UK retail market, will have a significant impact on ETF usage in the next 18 months,” she added. Proving their mettle, ETFs have shown to have preformed well even with major international exchanges suffering losses. According to Dubai’s Arabian Money.net, a basket of 10 short ETFs gained more than 4.5 per cent in May as the Dow Jones had its worst moment since 1940, and the S&P fell to 1962 lows. Boasting the largest economy in the
CONFUSED? FOR ALL THEIR POPULARITY, ETFS ARE COMPLICATED VEHICLES The Relationship Diagram for FALCOM’s first ETF 2.1 Submit creation application
Fund Manager 3. Approve creation application
1. Purchase Stock Basket
ETF Acc.
Custodian
2.2 Transfer basket of stocks
4. Transfer basket of stocks MM Acc.
5. Submit creation request
Tadawul (CSD)
Equity Market
Market Maker 7. Transfer ETF units
6. Deposit new ETFs units
Tadawul Secondary Market
8. Place ETF orders
ETF Market
10. TF units
Investors 9. Cash
THE BRIEFING INVESTMENT
Gulf, Saudi Arabia is the latest to join the bandwagon and introduced its first ETF three months ago. The “FALCOM Saudi Equity ETF,” a Shari’ah-compliant exchange traded fund, has allowed the Kingdom to attract investment to its equity market from both domestic and international investors. The move has been called unprecedented as it allows for the first time non-GCC residents to participate, when up until now foreign investors have been banned from trading openly on the Saudi Stock exchange, also known as the Tadawul. According to the Capital Market Authority (CMA), regulators of the Saudi bourse, the fund was initially launched to include only Saudi stock shares, however, plans are also in the works to allow Saudi exchange traded funds to include Islamic bonds or Sukuk and commodities such as silver and gold. According to statistics from the CMA, there are currently 139 listed companies on the Saudi bourse estimated at a market capitalisation of $365 billion, making the Saudi equity
by FALCOM since its launch of the ETF, Biswas said: “Foreign investors have been gradually bee-lining to invest in the market through ETFs, they understand the value of it, you probably know ETF AUM are worth $1 trillion and include 3,000 plus ETFs of various shapes and sizes across the world enjoying tremendous growth. “The global community was eagerly awaiting this news. Once compliance and specific investment related issues such as market risk and allocations are sorted out, it is a matter of time before you see them [other financial institutions launching ETFs] coming into the region as it is fairly secure and remains untouched by the European crisis, and because of this we have had a terrific response so far and they are willing to come in both the primary and in the secondary market.” Commenting on the safety of investing in the company’s ETF, Biswas said: “Since the study to launch ETF in Saudi and with the beginning of FALCOM 30, it was clear that the characteristics provide full protection
We risk confusion, disappointment and disillusionment among investors. market the largest in the region, in addition to being one of the only economies to have weathered the global and European financial crisis. “We have been working with the CMA and Tadawul for the last two years to participate in the enabling process of gradually opening up the financial services sector and to connect the capital market to international investors who see tremendous opportunities and a robust economy but had no conduit to participate or invest,” Shankar Biswas, head of marketing, FALCOM Financial Services in Riyadh, told Gulf Business, predicting a continuous growing involvement in the GCC market concerning the company’s ETFs. Talking about the response received
to both investors and financial institutions. We have not heard of any abuse.” But with the success story of one company which has managed to break the glass ceiling on certain financial regulations, always comes a flood of others seeking the same success. One of the early birds to announce that it too was in talks with the CMA to launch an ETF, is Shuaa Capital Saudi Arabia which announced in March that it would be opening up its exchange traded fund in either the third or fourth quarter of this year. The group has aimed at opening several types of ETF, with one being called a “plain vanilla” structure to trace rising stock prices, and others for hedging purposes.
TOP TEN ETFS TO WATCH 1
SPDR Russell/Nomura Small Cap Japan ETF
2
WisdomTree Dreyfus Emerging Currency Fund
3
SPDR Barclays Capital High Yield Bond ETF
4
Utilities Select Sector SPDR Fund
5
IndexIQ CPI Inflation Hedged ETF
6
Global X FTSE Nordic 30 ETF
7
iPath S&P 500 VIX Short-Term Futures ETN
8
Dow Jones Emerging Markets Financials Titans Index Fund
9
Market Vectors Gaming ETF
10
PowerShares Global Listed Private Equity Portfolio
Source: SeekingAlpha
In both their conventional form and Shari’ah-complaint structure, the doors have been opened to more ETFs to enter the Kingdom by way of individual company launches to partnerships between international investment firms and Saudi companies. In the Kingdom last month, Nigel Denison, executive director and head of markets at Bank of London and the Middle East (BLME), said that he sees the launch of the first ETF in Saudi Arabia as a bold move which will both open up the local market and expand the market by including foreign investors. He agreed that it would most likely be only a short time until others follow launching similar products in Saudi Arabia, and is not ruling out the likelihood that BLME would like to enter the market itself. “It would be quite nice to launch a Shari’ah-complaint ETF in Saudi Arabia perhaps after BLME has grown and we have located a partner in the Kingdom to work with on this,” he said. ETFs have become the chosen way global investors, and those in Saudi Arabia and the Gulf, are investing, especially in such a globally volatile market. We will have to wait and see what else will emerge as far as new investing products, but one thing is clear, the wait won’t be long as the ETF market continues to heat up worldwide. gb@motivate.ae July 2010 gulfbusiness.com
33
THE BRIEFING SIX SENSES
Green is the valley The Six Senses resort group is hoping a back-to-basics tented camp will lure big-spenders to the most remote places in the Gulf. ALISTAIR CRIGHTON reports
G
reen washing” – the opportunistic promotion of faux-environmental credentials for marketing purposes – is reaching epidemic proportions, with the hotels and resorts sector one of the most susceptible to the disease. So it’s refreshing to see a hospitality company making an effort to ensure its latest enviro-tourism venture is a lot more than just a brochure made from recycled paper. To be fair, Six Senses, the global resort brand that operates some 16 developments in six countries, already has an impressive track record in the region in eco-friendly tourism. Its Zighy Bay resort, tucked away in a hard to access part of Oman’s Musandam Peninsula, may have drawn some ire at first for developing on what had been one of the region’s best kept secrets, but the resulting resort has garnered rave reviews for both its setting and its commitment to ecologically sound practices. Contrast that with Bahrain’s Banyan Tree, whose “green” claims drew the ire of the UK’s Times newspaper in what must have been the most damning resort review every printed. Now Six Senses, along with Horizons Nouveaux and Al Marsa Musandam, are taking the back-to-nature idea a step further with a tented campus concept that promises to have not just a minimal impact on the landscape, but a genuinely positive one. “The tented camps have zero impact on the environment. Actually, we take away bags and bags of garbage from the sites, so, when we leave, they’re cleaner than they were before,” says Six Senses Deputy Chairman, Bernhard Bohnenberger. The project consists of three campsites, each offering different surroundings and experiences. Food and drink – inspired by local dishes
34 gulfbusiness.com July 2010
– follows the chain’s “slow-life philosophy”, as does the use of bread from local bakers, fish caught in the Gulf and locally grown fruit and vegetables. It’s an interesting concept that has garnered plenty of favourable press coverage, and the company is banking on it being a success – launching in January 2008, the Zighy Bay resort barely had time to find its feet before the full impact of the economic crisis hit Gulf shores.
down to economics, of course: the general mood in the economy, the volcano flight issues recently; the red tide for nine months.” That red tide, the uncontrollable environmental factor, was a natural accumulation of algae that rendered beaches un-swimmable and littered with dead fish. This pollution lasted nine months, dealing a blow to the tourism industry along the east coast. Earlier this year, nerves were frayed as a similar “brown tide” rolled in,
We take away bags and bags of garbage from the sites, so, when we leave, they’re cleaner than they were before. Bohnenberger freely admits that, while weekends are proving popular with short-stay business from Dubai, midweek has been a struggle, as a result of the economic crisis and, perhaps ironically, a few environmental factors out of his control. “It’d be a lie to say the crisis hasn’t affected us. Business has been down,” he says. Crucially, the all important well-heeled European travellers stayed at home in their droves, and while a fresh focus on emerging markets, is replacing some of that core market timing simply hasn’t been on the resort’s side. “We lost a lot of our historic European market,” Bohnenberger says. “That’s
dumping more dead fish (and the odd live sea snake) along the pristine sand, but it dispersed after a mere three days. “We were all sweating a bit on that one,” Bohnenberger says. If the tented camps prove successful on their launch in October, Six Senses can look to any site, anywhere in the world for growth. While Bohnenberger admits the initial set-up of the facility wasn’t cheap, with serious investment required in portable recycling facilities and solar-energy generation, that’s mostly a one-time expenditure: given the past two years, the ability to pack up and leave political or environmental hotspots must be a tempting business model indeed. ■
THE BRIEFING CSR
Bittersweet sympathy With the opening of a new factory in the UAE, Mars Inc is treading a fine line between maximising sales and educating the public on healthy lifestyles. MICHAEL GORDON reports.
W
ith one in every five UAE residents suffering from diabetes, a new chocolate factory is arguably the last thing that the country needs. However, Mars Inc argues that what is needed is balance. That is a balance of diet, exercise, awareness and scientific development and, of course, sales. With double digit growth year on year since the beginning of the decade, and net sales exceeded $450 million in 2009, Mars GCC opened a new $40 million chocolate bar factory in Dubai last month, with ambitions to double its business, to $1 billion sales, by 2015. The company is also in the process of completing feasibility studies for a further factory in the GCC, based in the industrial zone of the King Abdulla Economic City (KAEC), in Saudi Arabia, which has a similar diabetes pandemic to the UAE. The company argues there is room in everyone’s diet for chocolate providing it’s consumed responsibility. Ashraf Shehata, scientific & regulatory affairs manager, Africa, India, Middle East – Mars GCC, said: ”As a responsible company we promote the consumption of chocolate in moderation and as part of a healthy balanced lifestyle.” Yet for those averse to calorific treats, the company is currently developing sugar-free alternatives, although these are limited to the US market for the foreseeable future. More interesting, though, is the company’s work in flavanols, which are naturally occurring super foods found in the cocoa bean itself. Ironically, it is these wonder drugs that could offer relief to the many diabetes sufferers that chocolate has blighted. In the US, Mars Inc has a business segment called Symbioscience which operates as a research centre, working in partnership with various institutions. This research has led Mars USA to
36 gulfbusiness.com July 2010
develop a sugar free Dove (Galaxy) chocolate bar. The product is made with non-sugar sweetener, which makes the product easier to assimilate for sugar-intolerant consumers and it is even suitable for diabetics. Production is still restricted to the US; although plans to roll it out globally are under consideration. “We are in advanced research in the US and we are looking to roll out our lower sugar content chocolate, but at end of day we recognise chocolate is a pleasure food and fits nicely in a balanced diet if consumed in moderation,” said Ahmed Bayoumi, general manager of Mars GCC. Along with low sugar products, Mars Inc has done extensive research into flavanols. Research suggests that flavanols may provide healthful benefits to people with type-2 diabetes. Studies have concluded that the daily consumption of a beverage rich in cocoa flavanols can positively impact blood vessel dysfunction. Those participants that regularly drank a cocoa flavanols beverage, made using the Mars Inc. Cocoapro process, experienced a 30 per cent improvement in blood vessel function at the end of a 30-day trial. The traditional processing of cocoa beans destroys many of the beneficial phytonutrients, but Mars Inc’s scientists have perfected this process
to reduce the cocoa bean’s exposure to high temperatures, helping protect the flavanols inside. Shehata said: “To date we have been limited to delivering these compounds through dark chocolate. However, we have now found a way to truly harness their health value and pack them into a patented extract.” Known as Cirku, this recently launched extract has led to the development of a new dietary supplement drink mix called CirkuHealth. Again, this extract is currently only available in the US market, yet it has been proven to help maintain healthy circulation, which is essential for us all, and especially diabetics who suffer from poor circulation. Reiterating the CSR commitment of Mars Inc, Shehata added: “Mars is proud to be one of the first chocolate companies worldwide that has voluntarily decided to implement Guideline Daily Amount (GDA) nutrition labeling on all of its chocolate, nonchocolate confectionery and other food products. All packages will be redesigned to feature new graphics on the front and back of packages, which contain consumer-friendly, clear and easy to understand nutrition information that will help consumers make informed choices at the point of purchase.” gb@motivate.ae
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THE BRIEFING PHARMACEUTICALS
Drug problems Merck Serono hopes to level the playing field for pharmaceutical producers by eliminating counterfeits and collating cost effectiveness data, as MICHAEL GORDON discovers.
E
ver taken medicine that never really delivered a remedy, or worse still, compounded the problem? Chances are you were supplied counterfeit pharmaceuticals, because a staggering 10 per cent of the entire global supply is counterfeit, according to Karim Smaira, managing director Middle & Near East, Merck Serono. “This could be counterfeit packaging, counterfeit products or worse still a counterfeit active substance,” he says. You could require 10mg of an active substance to ward off a heart attack but your medication may be as little as 1mg, but how will you know until it’s too late? Merck Serono is one of the primary partners of the World Health Organisation (WHO) in fighting counterfeit products. “We let the WHO test the originality of products in 350 of our labs worldwide as part of our corporate social responsibility,” says Smaira.
to 1668. As a majority owned (70 per cent) family business, it is now in its 14th generation. The company reached a turnover of $9.5 billion in 2009. Merck Serono is a bio pharmaceutical/biotechnology drug company, born from an acquisition in 2007. The company focuses on specific disease areas with an unmet medical need. Having been in the Gulf for more than 50 years, Merck runs operations in 13 Middle Eastern countries, with 240 employees across the region, all centralised through its headquarters in Dubai. Smaira says: “We would like to become even more of a local player. Manufacturing in the region has improved dramatically in the last few years and we would like to look for local partnerships.” The company already does local packaging in Saudi Arabia and Lebanon, with intentions to expand this operation to Iran by the end of
This problem will never disappear, all we can do is implement measures that make it more difficult to distribute counterfeits. “We also give training to customs officers at the Ministry of Health [MoH] or at ports and airports in means of detecting counterfeits. “The biggest problem is tracing the origins. Largely, we find that the counterfeit products are coming from emerging markets in Asia, China, India, and a little from Latin America. “This problem will never disappear, all we can do is implement measures that make it more difficult to distribute counterfeits,” he adds. Merck, the parent company, is one of the oldest chemical and pharmaceutical groups, dating back
38 gulfbusiness.com July 2010
2010 and the UAE by Q2/Q3 2011, with each facility dedicated to national distribution. In Iran, local manufacturers supply 96 per cent of all pharmaceuticals and there are 72 million people to cater for. Because of the strict specification laws in the Middle East, Merck is unable to centralise production and distribute from country to country, due to differences in the permitted chemical compounds. Smaira adds: “Some of the specifications are very different from market to market so we can’t shift standardised products between
markets; we can only sell what we have registered with each MoH. “In the future, if the GCC goes into a market union, on the model of the European Union or the Monetary Union, it would facilitate the export of goods. For us to prepare for this we are building a warehouse in the UAE from which we can distribute to all GCC countries – aside from Saudi Arabia.”
THE BRIEFING PHARMACEUTICALS
Although restricting, these regulations do have an upside in that they also preclude any parallel trade, and to ensure it never materialises, Merck is keen on the introduction of a formalised regional level playing field. He adds: “If you have harmonised prices you avoid parallel pricing or a grey market.” Another emerging trend in terms of
pricing is that some multinationals are looking at the GDP income, or the means available in the countries they sell to, and setting up prices accordingly – this is known as “an affordable price”. This is where cost effectiveness data becomes important on a national scale. With every disease there are direct costs and indirect costs. The cost being
the medicine and the indirect cost being lost man-hours, hospitalisation costs, hired help, etc. If a treatment can prove to reduce both direct and indirect costs, then the cost effectiveness is positive. However, Smaira does not prescribe to a global level-playing field, he says: “It would be very difficult to establish because the regulations and requirements of developing versus developed worlds are not harmonised and the GDP ratios differ. I don’t think we will ever see one harmonised standardised global trade of pharmaceutical products – there will always be national differences.” Despite the growing generic drug market, Merck Serano has not recorded any negative impact. Smaira explains: “People are brand oriented in this region and we have a strong brand equity. “We have also seen huge improvements in patent protection and international property rights. Genetics will, however, play a significant role once the patent production of the original products is expired, which is normal global practise. “The main point then must be to ensure the safety of the generic product – not just the price. There are some very good generic companies but others are not up to the standard.” Merck Serono is now in the implementation of a five-year strategy, established in 2009. “We expect to double sales from $98.4m by 2013 with organic growth, some new product launches and business development. In this regard we are looking at in and out-licensing opportunities. “We have signed two in-licensing agreements with Biocodex (French) and Lallemand Pharma (Canadian), and we are looking for more. If I look around and see all of the mergers and acquisitions that have taken place I look for more licensing opportunities as products often lose the necessary strategic focus,” adds Smaira. From licensing, Merck hopes to generate $24.5m by 2012. ■ gb@motivate.ae July 2010 gulfbusiness.com
39
THE BRIEFING FLEET MANAGEMENT
Efficiency drive The inefficient management of vehicles is costing Gulf companies a fortune. Is it time to look at outsourcing, asks RICHARD WHITEHEAD
T
o rent or to buy, be it cars, homes or even television sets, has been an age-old dilemma. On the one hand you have the material value of owning that treasured commodity, but on the other you have to look after it and you can’t return it when it’s tired or out-of-date. For fleet operators in large organisations with several hundred cars to manage, the dilemma becomes even greater. There is no such dilemma for Robin Voogd of Leaseplan who says the solution is clear-cut: “Companies who own their own cars aren’t as efficient as they should be,” he adds: “It’s a waste of resources.” As an international fleet leasing company, Leaseplan often comes up against businesses with wild operating inefficiencies. One recent example involved a company that employed 50 staff to manage its fleet of 450 vehicles. “This is absolutely mad. We only need two or three people to look after that number of vehicles,” Voogd adds. Another leasing firm is Fast Rent A Car, who install their own fleet coordinators at a customer’s premises to help fleet management run smoothly. “It’s all about efficiency,” explains Ahmed Abood, CEO of the car rental and leasing firm, which is based in Abu Dhabi. “There is less red tape, our customers save many man hours. There are no hassles with registration and insurance. “Instead of running and maintaining their own fleet of vehicles, companies who choose to lease save money, avoid risk and ultimately function more efficiently.” This is bad news for fleet managers, according to Voogd. He says: “It’s extremely rare that we come across a company that manages its fleet as well as it could.” It is no surprise that most corporate fleet personnel are happy to keep the status quo, especially
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as a change to leasing might mean swinging departmental cuts. “Some fleet managers quite like having a large group of people reporting to them. But leasing will catch on more and more,” claims Voogd. “Fleet managers don’t have any external benchmarks — they only look internally — and so aren’t able to get the best prices. When it comes to buying or repairing cars and dealing with insurance costs, leasing companies are in a much better position to negotiate good deals. They may think they are doing a good job,
cent increase in the leasing business this year across its operations in Abu Dhabi and Dubai. The bulk of its business is provided by the major government and engineering works taking place in Abu Dhabi. “Not only are there operational advantages to leasing, there are also clear cost benefits,” adds Abood. “Companies will save on admin costs and they can also cut out the misuse of vehicles and unnecessary manpower. They will not have to worry about depreciation, repairs and high purchase costs. Our purchasing strength reflects on the prices we pay for new cars – and thus the comparatively low cost of leasing – and then we can keep costs down by using our own, in-house workshops for repairs.” And when a firm leases its fleet, it has one fixed figure on the budget sheet that doesn’t change. This does away with the age-old variables of depreciation, maintenance and labour.
What they consider a good insurance price is likely to be much higher than a leasing company will find. but in reality they do not have access to outside data. What they consider a good insurance price is likely to be much higher than a leasing company will find. “Another major problem is that they are doing the job more or less on their own with no one to keep them motivated and oversee their work. Typically their superiors have no idea what is required to run a fleet of cars efficiently so they are not in a position to assess their performance; and whether or not they are out to do so, there is nothing to stop most fleet managers from taking advantage.” Fast Rent A Car forecasts a 25 per
So what does the future hold for corporate fleets? “As organisations move towards outsourcing these kind of non-core functions, the role of fleet managers will move from organising their own teams to managing a professional relationship with leasing companies,” says Voogd. “Leasing is still relatively new in the market, but already we are seeing tremendous growth and it’s only a matter of time before more companies get rid of their private fleets and move to leased ones. I can only assume that those who haven’t already done so haven’t yet taken time to really review the situation.” gb@motivate.ae
THE BRIEFING BANKING
Gender studies According to Swiss bank Lombard Odier, the current financial climate offers opportunities for risk-averse female investors. MICHAEL GORDON reports
I
f Lehman Brothers were Lehman Sisters, the investment bank wouldn’t have ended up the way it did. That, at least, is the view of Arnaud Leclercq, head of new markets at Swiss bank Lombard Odier, who last month spoke to the Dubai Chamber of Commerce on “The Role of Women to Preserve and Transmit Wealth”. “We have many very successful women, and they have different means of managing wealth to men. They are more risk averse, less leveraged, not keen on debt, and they tend to have a much longer-term view,” says Leclercq. However, he argues that female investors, particularly in the Middle East, have been too focused on local real estate; an investment vehicle which , as we all know, has crashed. “For some years there was a lot of growth in real estate; but nevertheless, diversity was needed as was a liquidity in finance, because when the market turns sour, as it has here, you need to be able to move that investment.” Along with real estate, Middle Eastern women often keep their wealth in cash, but today the cash market provides no return and is not as secure as it used to be. In the past, people would put deposits in large world banks or sovereign funds, but since October 2008 the world has changed. Sovereign bonds are not perceived as being as secure as they once were because of the huge debts of Western countries, and the cash and security of banks is also not viewed in the same way, as many banks closed and others had to be saved by the state. “People should not forget this,” warns Leclercq. He adds: “You cannot put your money in an institution you feel is safe if it is giving credits with your money, as a commercial bank does. That is why we only give credits based on portfolios, not on our balance sheet.”
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With $143 billion of assets under management today, Lombard Odier is the second largest private bank in the world, but Leclercq says it is important to look at Lombard Odier as two entities, a bank that is extremely conservative with strong risk management, and an investor with a full range of tailored services. “It all depends how clients want their money managed – it can be more
would adopt a long-term view. When there is a clear understanding of longer trends and we are sure we can grow, we will invest.” Today, Lombard Odier’s long-term investments are two fold – the first being energy, particularly oil and gas, and the second being products tailored to our ageing population. While Leclercq is an advocate of renewable energy, he argues the market
When the real estate market turns sour, as it has here, you need to be able to move that investment dynamic, more risky – depending on the client and their time of life. “If you receive money in your 30s you want to grow and expand and generate more, but if you are in your 70s you want to consolidate and secure funds for future generations.” Because of the volatility of the investment market, Leclercq also suggests that clients split their wealth into “two buckets of investment”. “One bucket of money would be short-term investments – bonds, FOREX, etc. The market visibility is very limited and when you drive in the fog you should slow down. “For the second bucket of money I
is too immature to invest in right now. “The problem is that these energies are subsidised and not profitable. The level of government support has changed dramatically. For the next five to10 years we will stick to nonsubsidised energy.” The second element of long-term investment is catering to all aspects relating to the world’s ageing population. Leclercq believes that healthcare for the elderly is becoming a global concern – especially in Asia, which has a rapidly growing elderly population – because breakthroughs in science mean we are all living longer. ■ gb@motivate.ae
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THE BUSINESS BIG OIL
What lies beneath As the blowout in the Gulf of Mexico shows the quest for oil can come at a very heavy cost to the environment. MICHAEL GORDON investigates just how at risk the Arabian Gulf is, and how prepared companies are to deal with the unthinkable.
A
n estimated one million tonnes of crude oil have been dispelled into the Gulf in what has been described as the largest spill in human history. As it washes ashore, nobody seems able to forecast the ecological effects of such a large quantity of oil on the fragile coasts, but images of oil-coated wildlife and ruined beaches hammer home the magnitude of the calamity. Although the Gulf has long been subjected to oil pollution, both from natural seepages and industrial activities, the size of this spill requires a swift, international response. No, we’re not talking about the Gulf of Mexico. This scenario unfolded way back in 1991, and the sea in question was the Arabian Gulf. The devastation was caused when Iraqi forces opened oil terminal valves and dumped the crude from several tankers into the sea during the first Gulf War in 1991. Given the Gulf’s history, and the current attention on BP’s uncontrollable blowout in the deep waters off Louisiana, it’s a scenario that oil producers in this part of the world need to be acutely aware off – and, given BP’s woeful lack of preparation, capable of handling. But how at risk is the Gulf – our Gulf – from Big Oil? Alan Taylor, upstream sector commercial consultant, ATenergy, highlights the concerns: “The main
44 gulfbusiness.com July 2010
point in the Arabian Gulf is that it is an enclosed space and if there was a major oil spill, like in the Gulf of Mexico, it would be devastating for the region. “At least the Gulf of Mexico has very deep water in which the oil can be dissipated, but the Arabian Gulf is shallow, no more than a few hundred feet, and so it would take no time for the oil to reach the shores.” However, while the deep water aided The Gulf of Mexico, it also hindered it.
In the Arabian Gulf, a prescient warning comes from Hamish McNinch, a former energy advisor to Coalition military commanders in Iraq who is now engaged in helping Iraq to develop its energy infrastructure. Writing in the Wall Street Journal recently, he said: “The infrastructure through which about 80 per cent of Iraqi oil exports flow has suffered from years of neglect, and is operating at maximum capacity.”
The Arabian Gulf is shallow and so it would take no time for an oil spill to reach the shores. Taylor suggests that the deep water was the reason, not the cause, of the disaster because it made access to the leak so much harder. “Problems become difficult to fix and you are always working on the edge of technology,” he says. Additionally, in shallow water the well is connected to the surface by the riser where the blowout preventer (BOP) and control systems are located, ie, on the drilling rig or platform. But in deep water the BOP is at the sea floor, hence “in deep water anything that goes wrong with the BOP and control valves is not easily accessible and far more difficult to fix, as we have seen in the Gulf of Mexico,” adds Taylor.
Iraq currently owns two terminals in the Arabian Gulf, which are well past their designed life expectancy. They were neither inspected nor repaired during much of the Saddam era, according to McNinch, who adds: “Experts fear that inspecting them now with modern technology might damage them beyond repair. Consequently they are being operated at reduced pressure, while plans for replacement have remained under consideration since 2003. “In the meantime, the risk of a major oil spill from a fractured pipe remains real and largely unmitigated. This would damage not just the marine life and the Iraqi economy, but potentially
July 2010 gulfbusiness.com
45
THE BUSINESS BIG OIL
Ocean oil spills (Barrels) Largest spill First Gulf War Kuwait 1991 5,700,000
Largest US spill Deepwater Horizon Gulf of Mexico April 28, 2010 –(ongoing)
2,100,000 to 3,600,000*
Largest spill from a well Ixtoc 1- Mexico 1979
3,300,000
Largest previous US spill Exxon Valdez Alaska, USA 1989
200,000
*Based on 35,000 to 60,000 barrels a day USGS estimate the supply of water to the Gulf states,” he wrote. Only last month, WesternZagros lost control of an onshore well in the Kurdistan Region of Iraq. There was a very real risk of the damaged drill pipe failing and releasing hydrocarbons to the surface. Although ageing pipelines are prevalent, we can, at least, be thankful that the pressure of the reservoirs in the Middle East is ‘normal’, or considerably lower than the high pressure and high flow rates compounding BP at the moment. Low-pressure reservoirs are easier to drill, control and manage the risk, as well as repair if anything does go wrong. Another point in our favour, which Taylor wishes to stress, is the level of familiarity and experience in the region. In the Arabian Gulf drilling work has been ongoing for decades, so there is a lot of experience, but in the Gulf of Mexico virtually every well drilled is different in terms of geology and the technology required. “In the Arabian Gulf it would be very unusual to encounter something new that couldn’t be controlled, the chances of a disaster are therefore very low but the consequences are very high.”
46 gulfbusiness.com July 2010
Regardless of our threat potential, Taylor reassures that all disasters lead to a better understanding of the issues and much tighter regulations to help stop situations arising again. “The US government has already responded by stopping activity elsewhere in the Gulf of Mexico while checks are made, and any new regulations are usually adopted in all major production areas.” Of further reassurance in the UAE is the crisis management team, which is on hand should any disasters occur. This unit is run through the Supreme Petroleum Council (SPC) and the stateoil company Abu Dhabi National Oil Company (ADNOC), which is today also the sole exploration company in the region. The head of that crisis management team, Craig Buckingham, explains: “The Supreme Petroleum Council Crisis Management Team was formally established within the Supreme Petroleum Council in 2005, however, ADNOC has maintained an oil spill response capability in terms of oil spill response teams and equipment bases since the mid 90s. “Those oil spill response teams were originally trained by oil spill response consultant companies but over
the last few years we have carried out our own staff training. In addition we exercise with other organisations to ensure we remain current in our capability,” he adds. The primary focus across ADNOC operations is on prevention, so thankfully the team is very rarely deployed in emergencies. However, it has deployed teams to assist in oil spills in Egypt and Lebanon in the past. It also regularly deploys teams for training exercises within Abu Dhabi to ensure ongoing preparedness. In light of the Gulf of Mexico disaster, the crisis team has offered to send a group of experts to the US to help with the clean-up effort. Buckingham has 30 experts on standby, made up of some six Emiratis along with technicians from Egypt, Sudan, Algeria and the Philippines, all of whom are based in the UAE. He says: “The offer to the US Government has been an offer of support to a major environmental crisis. A team of 30 oil spill professionals, as well as a package of oil spill booms and recovery equipment, has been the basis of the offer.” Buckingham would not be drawn on how great the threat was of a similar incident to that of the Gulf of Mexico, happening here in the Arabian Gulf. But he did say that “the Gulf of Mexico is already being looked at and we will review the lessons learned closely”. He adds: “Each ADNOC operating company regularly assesses its operating environment and likely risks and within the Supreme Petroleum Council we have an HSE department who provide oversight of these likely risks and appropriate mitigations.” To ensure the ADNOC unit remains up-to-date, it announced plans to buy a number of high-speed offshore response vessels and escort tugs by the end of this year, to strengthen its emergency response preparedness. One high-speed offshore response vessel will be equipped with offshore oil spill response tools, and ADNOC will build two equipped for oil spill operations and two as offshore ambulances. “As well as oil spill equipment at each
THE BUSINESS BIG OIL
operational site we have two oil spill response bases (one at Mussafa and one at Ruwais). These are equipped with a large stockpile of floating booms, oil recovery skimmers, temporary storage tanks as well as all the logistical needs to mobilise equipment to spill locations if required,” adds Buckingham. He reassures: “SPC has also prepared shoreline protection plans to limit the impact of any oil spill on the coast.” Currently, SPC has over 50 fulltime trained oil spill responders and ADNOC has over 50 offshore vessels equipped with dispersant spray capability and three tow back tugs equipped with built-in oil spill recovery capability. Buckingham highlighted the leadership commitment, clear accountability on preparedness and response, codes of practice, planning and continued monitoring of the resource capabilities against risks within the group. But he refused to comment on the security protocols in place to limit the impact of a spill, how equipped the group would be in the event of a similar incident, or to hypothesize as to which Arabian coastlines would be likely affected by a spill.
The chances of a disaster are very low but the consequences are very high. Meanwhile, when questioned, the UAE Environment Agency said it had no contingency plans of its own against the threat of an oil spill; instead it works in conjunction with the Critical National Infrastructure Authority (CNIA). The CNIA is the government authority tasked with handling the protection and security of Abu Dhabi’s vital assets and infrastructure from potential threats, possible disruption and imminent destruction. To return to the US, it is too early to put a cost on the Gulf of Mexico disaster in terms of loss of life, loss of income, pollution and remediation. But the cost to-date is already way north of $1 billion. Naturally BP will pay a heavy toll, in terms of reputation, share value and even potential legal threats, but how much of the impact could the company insure against.
The Abu Dhabi National Insurance Company (ADNIC) is one company in the region that is experienced in insuring exploration projects. Jugal Maadan, deputy chief underwriting officer, explains that all offshore/inland oil exploration activities can be insured. He adds: “The limit of liability depends upon the nature of the operations, any region specific factors and the estimated clean-up and removal cost, etc.” Maadan says that ADNIC’s current risk exposure, or client base, covers a major part of the UAE’s total energy risks. Undoubtedly, BP will be insured, but the question is to what extent. We are no longer talking about the loss of revenue – the biggest concern is the cost of remediation and the ever-rising threat of legal action from individual fishermen right up to Senate level. If the Arabian Gulf spill in 1991 hasn’t been enough of a warning, the material damage to BP’s share price – and the vilification of CEO Tony Hayward in the press – should be warning enough for oil executives and governments here to make sure everything possible is being done to prevent a similar disaster, and to have the contingency plans in place in case it does. ■ gb@motivate.ae July 2010 gulfbusiness.com
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THE BUSINESS IRAQ
Frontier territory With half a trillion dollars worth of vital reconstruction projects in the pipeline, Iraq is the ultimate prize for those willing to brave a still precarious security situation and a virtual absence of basic financial services. ROBERT BAILEY reports.
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ecently described at a conference in Dubai as “the deal of the century, a prize that outweighs all risks” rebuilding Iraq is likely to involve half a trillion dollars of investment contracts. This enticing prize is proving elusive though. There are too many unanswered questions concerning not just the future direction of Iraq’s economy, but also political stability following a bitterly contested election and security concerns as the remaining 70,000 US troops prepare to withdraw from the country. Few would contest Iraq’s long-term potential, but in the near-term mobilising resources and stimulating vital investment is proving difficult. The main inhibitors are a lack of political consensus and failure to build a viable coalition government. A cohesive and strategic approach to short and medium-term economic and social problems is the core task of whoever forms the new administration. However, a clear co-ordinated strategic investment blueprint has yet to be implemented. The country’s 2010 budget proposes expenditure of $72.1 billion, a third of which is scheduled for capital projects. Implementation is difficult though, due to a lack of adequate investment finance, but most of all a shortage of managerial talent hindered by a scle-
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rotic governmental bureaucracy tainted by allegations of corruption. The International Monetary Fund expects Iraq’s economic growth in 2010 to average 7.3 per cent, higher than the 4.2 per cent achieved in 2009. Iraq still requires additional financing to fill a $5 billion gap in its 2010-2011 budget. The IMF approved a $3.6 billion loan at the end of February to help Iraq manage the shortfall. A big handicap for Iraq is that it lacks an international credit rating which
Revenues generated are likely to be more than enough to satisfy Iraq’s disparate elements. Within a decade, Iraq could even challenge Riyadh’s regional dominance of the oil sector and gain all the political clout such wealth bestows on its owner. James Hogan, CEO of HSBC Iraq, believes that bank profitability in Iraq could increase one hundred fold within the next 10 to 20 years. The financial sector has enormous growth potential. There are at present some 36 banks with
Iraq is still a cash society with the physical transfer of “bricks” of money still the norm. makes it difficult to attract investment, as potential investors see the risks as just too high. The country’s oil revenues are pivotal to economic growth. Iraq has faced persistent deficits since the 1990s. The IMF expects that Iraq will face two more years of budget shortfalls before stronger oil prices and increased production lift it back into surplus in 2012. In spite of the downside, there is an opportunity for a much brighter future as long as meaningful reforms take place and the country holds together. The key is releasing Iraq’s oil and gas potential.
about 800 branches serving a population of 31 million. This contrasts with Saudi Arabia which has 3,000 bank branches serving a smaller population of 26 million. For the moment though, Iraq is still a cash society with the physical transfer of “bricks” of money still the norm. This reflects a lack of trust in the overall system which is compounded by “an immature accountancy profession.” Nevertheless, “We are remarkably bullish and can see a lot more activity in the oil sector including spin off industries,” Hogan says. John Bowler, director of country
THE BUSINESS IRAQ
risk at the Economist Intelligence Unit is quoted as saying: “the last 10 years have been a golden period for emerging markets, like China and India. But these countries are no longer cheap. So that means people will look for riskier investments – frontier markets. As far as frontiers go, Iraq is the Wild West. If you get in early, that’s where the real money is to be made.” International oil companies are talking about a series of multi-billion dollar projects to boost the country’s oil production to around seven million barrels a day (b/d) by 2015 and as much as 12 million by 2020. This could boost national income by as much as 400 per cent. Iraq’s oil minister has said another
200,000 b/d of production capacity is expected by the end of 2010, bringing total output to 2.7 million b/d. Baghdad predicts that it can boost its crude capacity to as much as 12 million b/d in just seven years, from around 2.5 million b/d at present. Analysts predict that the second licensing round that took place earlier this year should increase the country’s oil output to 4.8 million b/d by 2018 and provide an extra $100 billion a year in revenues. In May, Iraq signed off the final licence out of the 11 oilfield development licences offered in an international bidding round last year. The latest licence was ratified with China National Offshore Oil Corporation.
The main political leaders, Ayad Allawi and Nouri Al-Maliki, have stated they will stand by the signed oil contracts, despite persistent challenges to their legality. However, little significant development work is expected in Iraq’s oil fields until a new government is in place. A crucial caveat concerns agreement on a new oil law which will form the legal bedrock of Iraq’s entire hydrocarbon sector. Proposed legislation has been outstanding for four years and there is no sign of a fractious parliament signing off a final agreement. Oil companies also face technical and logistical difficulties. Observers say the quality of seismic data available is often poor. Companies are also July 2010 gulfbusiness.com
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THE BUSINESS IRAQ
going to need vast amounts of water for injection into the oil fields in order to maintain their pressure as well as power supplies, access roads and not least convincing security. In spite of Iraq’s economy still being mostly stuck in the slow lane, there has been noticeable expansion of activity over the last 18 months with business access to Iraq gradually being normalised. UAE exports to Iraq, for example, increased 41 per cent in 2009 to $4.24 billion while Iraq’s exports to the Emirates grew nearly ten-fold to $778 million.
Lufthansa is due to restart air services to Iraq’s capital at the end of September after a 20-year break. Turkish Airlines resumed scheduled flights to Baghdad from Istanbul in October 2008. Gulf Air started up services from Bahrain last September. Iraq’s Civil Aviation Authority and Transport Ministry are working on a masterplan to expand and develop Baghdad International Airport. This envisages building three more terminals and doubling handling capacity to 15 million passengers a year. A cargo village, business park and free zone are also part of the $6 billion
Money has been found for a new $550 million, 65,000 seat stadium under construction in Basra for the Middle East football cup in 2010. The UAE’s two major airlines are increasing their services to Iraq. Abu Dhabi-based Etihad already has daily flights to Baghdad and Dubai’s Emirates is expected to commence services in July. Some reports suggest that the budget carriers flyDubai and Sharjah-based Air Arabia may also commence services.
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expansion plan. Meanwhile, a start has been made on a new $1 billion airport at Karbala while a $250 million expansion of Irbil’s airport is in its final stages. The latter reflects the investment focus on Kurdistan, a region that has experienced much less violence and instability than the rest of the country since the 2003 invasion. Foreign direct
investment there now stands at an estimated $12.5 billion, mostly by Turkish firms which account for more than half of foreign companies registered in the Kurdish region. The investment scene in the rest of Iraq is more faltering even though the potential is huge. The transport sector alone has $17 billion of projects planned including a metro system for Baghdad and the upgrade of the country’s 44,000 kilometres of roads in addition to rehabilitation and expansion of railways. Italy’s Impregilo is leading a consortium to design a $6 billion port at Faw south of Basra. This is planned ultimately to provide 7,000 metres of docks for container vessels as well as 3,500 metres of docks for general cargo ships. Upon completion it would rank as the 10th largest port in the world. Infrastructure is likely to be a principle investment focus for years ahead. Iraq’s electricity plants operate at only 44 per cent of full capacity. Peak demand is 13,000MW but the country is only capable of producing 7,000MW of electricity. Large amounts of power have to be imported from Turkey and Iran. Big power contracts are in the pipeline but mobilising financial resources
THE BUSINESS IRAQ
is proving difficult. One of the biggest impediments is export credit agencies don’t look favourably on Iraq, so it is proving difficult for (EPC) contractors to secure some of the guarantees, according to Jeff Larkin of US contractor Parsons Brinkerhoff. Money has been found for a new $550 million, 65,000 seat stadium under construction in Basra for the Middle East football cup in 2013. Initial construction work of the $450 million Basra Sports City began late last year with the local Al-Jabouri group working as main contractor in conjunction with the US Kansas-based 360 Architecture and Missouri-based Newport Global Project Management Group. Iraq’s greatest need is homes. Affordable housing is a big issue with the government planning to build at least 3.5 million housing units over the next 10 years. The National Investment Commission wants investors to supply more than one million units in the next three years. Abu Dhabi-based Al-Maabar has announced a $10 billion investment plan to build a mixed use residential, commercial and recreational complex on 12.5 square kilometres of the former Al Rasheed air base near Baghdad. AlMaabar is backed by four leading Abu Dhabi developers: Aldar, Sorouh, Reem and Al Qudra. Iraq’s crumbling industrial base also requires rehabilitation and more than $10 billion of projects are planned. As a consequence demand for cement and steel in Iraq is expected to soar. The government wants to raise Iraqi cement production capacity to 25 million tonnes-a-year (t/y). A consortium of France’s Lafarge Ciments and London-based Merchantbridge is investing in a new cement plant at Karbala with a two million capacity. Lafarge is also building a 2.7 million t/y plant in northern Iraq in consortium with Asiacell. Luxembourg-based steel producer Arcelor Mittal has plans to refurbish a steel plant in Basra. The company is also in joint venture with Turkey’s Dayen Dis Ticaret for construction of a new steel plant in Sulaymaniyah in
As far as frontiers go, Iraq is the Wild West. If you get in early, that’s where the real money is to be made. Kurdistan. Tourism is also a focus for construction activity. This is centred largely on the Kurdish north and the Shiite religious centres of Karbala and Najaf where some 10 million pilgrims are expected to visit this year alone. UKbased property developer Range Hospitality, with AbuDhabi-based Noor Capital, won government approval in April to commence a $110 million project in Karbala to build a 650-room hotel. Wasit Province Investment Commission has outlined plans for a $1 billion tourism development over a 500,000 square-metre site overlooking the Tigris River near Kut. The scheme has reportedly already attracted interest from companies in the US, Australia, Kuwait, Italy, Spain and Sweden. For all its many prospects, international contractors are wary of Iraq. “We haven’t ruled out Iraq, but we will look at other markets before we start to consider it as there are enough opportunities in countries such as Saudi
Arabia and Kuwait’’, Chris Gordon, general manager at UAE/Australian contractor Al-Habtoor-Leighton is quoted as saying. “We are looking at the market and may venture later, depending on the safety of staff,” says Riad Kamal, chairman of Arabtec Construction. HSBC’s Hogan is more sanguine: “Things are getting an awful lot better from a security point of view in spite of spikes in incidents, though getting around takes time and needs careful planning. Accommodation options also are still limited. Security though is a manageable cost. It is important to take a long-term perspective.” Eric Le Blan, chief operating officer of Merchantbridge, is also optimistic: “We say to people be cautious, but things are improving at a very fast speed. The situation is still complex: there is a lack of transparency, a lack of liquidity. But you don’t want to miss the boat.” ■ gb@motivate.ae July 2010 gulfbusiness.com
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THE BUSINESS BANKING PROSPECTS
A prescription for profitability The Gulf’s banking sector still suffers from poor health and niggling ills that need some serious strategic realignments to correct, ANDREW TAYLOR reports.
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ith companies facing soaring costs for credit in the Gulf – borrowing costs in the UAE rose by over 20 per cent in the first quarter of 2010 – some of the region’s most senior bankers have been calling for action to bring the cost of credit down. Michael Tomalin, chief executive of the National Bank of Abu Dhabi, says the UAE Central Bank should relax its rules governing how much banks are allowed to lend – the so-called ‘loans to stable resources’ ratio. It’s also been suggested that the UAE government could repeat its measure of October 2008, when it injected an additional $14 billion into the banking system. But non-performing loans (NPLs) in the region are up over 60 per cent in the last year, and some analysts are beginning to question whether the bankers have got their priorities right. “In my view, banks should focus on cleaning their balance sheet even at the expense of growth,” says Nuria Jorba, Emerging Markets Research analyst at Commerzbank Corporates and Markets in London. Government action so far – such as the 2008 cash injection – means that the bad debts do not pose an immediate threat to the stability of the sector, she says – but the banks cannot afford to ignore the likelihood of the problem
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getting bigger. Otherwise an issue now could turn into a major threat to future profits later. “Since the beginning of the credit crisis, banks have benefited from the necessary funding and equity injections from the Central Bank. As a result, the overall banking sector remains well capitalised,” she says. “But a continued deterioration of the quality of the loan portfolio is likely to have a negative impact on banks’ profitability going forward, since they will have to maintain significant provision
Emirates NBD said earlier this year that it expected its NPL level to continue to grow until the middle of the year. Overall, officials at the UAE Central Bank predicted earlier this year that bad loans in the UAE would probably rise from 4.4 per cent in 2009 to around 6.4 per cent – an increase of around 45 per cent. And even that may be an optimistic prediction. External analysts have warned that much greater increases are possible, with the Swiss wealth management company UBS AG suggesting
In my view, banks should focus on cleaning their balance sheet even at the expense of growth. charges in order to cover potential credit losses.” In other words, if the banks continue to stack up bad debt, they will have to seek to cover their losses by increasing charges to their customers – the very problem they are seeking to solve. Jorba’s expectation is that, with the region’s economy still weak and highly leveraged following the global recession and the financial crisis in Dubai last year, the rate of non-performing loans is likely to increase again during 2010. NBAD’s Tomalin, for instance, says his own bank will have to make greater provision for NPLs during 2010, while
recently that bad loans could eventually reach 15 per cent of total lending. It all adds up to a difficult year ahead for the region’s banking and financial sector, despite the prospect – at least in the short-term – of high oil prices. After four years of apparently limitless boom, with credit growth forging ahead in the UAE by more than 30 per cent a year, 2009 saw an increase of less than three per cent. That is largely the result of global conditions – the world credit crisis stifled economic growth, companies cut their demand for loans as they tightened their belts to see out the recession, and bank profits suffered accordingly.
THE BUSINESS BANKING PROSPECTS
TAKAFUL CONTRIBUTIONS AS % OF TOTAL PREMIUMS WRITTEN
Cheaper loans might encourage more companies to invest. But for the banks, worries about borrowing costs may prove to be a distraction from other longer-term problems, which might eventually be more serious. Analysts from the ratings agency Standard and Poor’s (S&P) have already warned that the financial performance of the Gulf’s banks over the next 12 months will be hit by the efforts they need to make in cleaning up their loan books. This does not mean it is all doom and gloom for the Gulf banking sector during 2010. In fact, UAE Central Bank
governor Sultan bin Nasser Al Suwaidi sounded positively bullish in a recent speech in Khartoum. “The situation of liquidity and deposits in the banking system is normal and compatible with the economy and its needs,” he said. “The banks lend when there is demand, when there are big projects that require a lot of financing.” Even analysts who take a less optimistic view accept that what problems exist are not spread evenly over the Gulf region. Although Kuwait and the UAE have been particularly hard-hit, paying the price for their recent boom
times and also suffering from their dependence on the international banking system, banking in the Gulf as a whole remains relatively resilient. “Credit portfolios deteriorated rapidly in these countries [Kuwait and the UAE] due to the fast expansion of credit in previous years, and their balance sheets remain highly exposed to international funding, which remains inaccessible for most of the institutions,” says Jorba. The UAE’s banking problems mirror the country’s general economic performance: while the International Monetary Fund has been predicting July 2010 gulfbusiness.com
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growth during 2010 for Saudi Arabia and Qatar of 3.8 per cent and 16.1 per cent respectively, the UAE is expected to struggle to reach one per cent. But even though the financial sectors of the various GCC states are closely intertwined, it is considered unlikely that the problems in Kuwait and Dubai will spread to the region’s powerhouses of Saudi Arabia or Qatar. S&P added Bahrain to the list of countries with particular banking problems to face during the next three quarters, but also gave the Saudi and Qatari banks a relatively clean bill of health – even though the fall-out from last year’s $22 billion defaults by Saad and Al Gosaibi means that international banks are still reluctant to lend to Saudi companies. S&P credit analyst Mohamed Damak expects to see the Saudi and Qatari banks increasing their profitability through the year. “We see a growing disparity in credit quality among banks
remains an important region. “Islamic financial institutions are continuing to deliver Shari’ah-compliant returns whilst, at the same time, focusing on effectively mitigating the associated risks through a new risk management approach, including the use of derivatives,” says the Moody’s report. Although Kuwait’s banking industry generally may be under pressure throughout 2010, there are hopes that the Islamic sector, in which Kuwait is a leader, may offset some of the difficulties. Senior bankers, including Bayt Al Mal chief executive Suliman Al Qimlas, expect to see more Islamic financial products coming onto the market as the sector continues to grow. That is one challenge highlighted by the Moody’s Islamic banking report – banks need to increase the uptake of derivatives – sophisticated financial instruments derived from stocks, bonds, loans, commodities, and currencies –
The banks lend when there is demand, when there are big projects that require a lot of financing. in the Gulf, between the stronger Saudi and Qatari banks on the one hand and the relatively weaker Dubai, Kuwaiti, and Bahraini investment banks on the other,” he says. The second big positive factor is the continued growth of Islamic banking. Usually sheltered from global financial problems by high levels of cash and liquid assets, Islamic banks are expected to continue their recent rapid growth not just in the Gulf but throughout the world. In this sector at least, liquidity remains less of an issue. Moody’s Investors Services, the influential international credit ratings agency, predicts in its latest report that that assets held by Islamic financial institutions could rise five-fold to more than $5 trillion across the world. Globally, the Islamic finance industry managed about $950 billion of assets in 2009. Many of these were held in Malaysia, which controls the world’s largest Islamic bond market, but the Gulf
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among their customers. Along with other financial instruments that are being developed by Islamic finance houses, they could provide the key to significant growth throughout the sector. Earlier this year, the Bahrain-based International Islamic Financial Market worked with the International Swaps and Derivatives Association in New York to prepare the ‘Hedging Master Agreement’, a ground-breaking package of global standards for Islamic derivatives. The aim is to encourage Islamic banks and other financial institutions to increase their trade in derivatives such as profit rates and currency swaps in order to improve the efficiency of the Islamic banking model without compromising its adherence to Shari’ah principles. The question is whether investors, concerned about compliance with the Shari’ah prohibition of speculation and the payment or receipt of interest, will be prepared to take up the new offerings.
And the third optimistic sign for companies in the Gulf, as for the rest of the world, is that borrowing costs generally seem to be easing. Charges in Europe in particular have been coming down, which increases downward pressure on costs in the Gulf. Companies in the Gulf continue to pay a premium for credit compared with their western counterparts, but big names such as Emirates Steel and Qatar Telecom have been taking advantage of the new situation by refinancing big loans to reduce their borrowing costs. It’s a process that the Gulf banks need to encourage – Commerzbank’s Jorba has no doubt that cheaper credit remains important for the regional economy. For the banks though, particularly those in the UAE, she believes it is more important to tighten up procedures and start to take a more old-fashioned attitude towards risk. “Banks in the UAE need to secure borrowing at more competitive rates in order to be able to expand their balance sheets. A rapid expansion of the loan portfolio would help to ease pressures on asset quality and provisions although, unless lending policies become more conservative, it will be only a short-term measure and weaknesses are likely to re-emerge,” she says. S&P’s most recent report makes grim reading. “Lower business volumes, asset quality deterioration and subsequent provisioning needs and pressure on liquidity appear to be affecting the creditworthiness of Gulf banks to differing degrees,” it says. But even such relatively downbeat observers believe there is the possibility of economic growth, and there are plenty of positive factors in which the banking sector can take comfort. Populations are growing, oil prices – at least for the time being – are buoyant, and most analysts believe there is considerable potential for increasing the take-up of banking services throughout the Gulf region. The next few months will show whether the global recession has been a crisis for the Gulf, or the start of a new opportunity. ■
THE BUSINESS CORPORATE TRAINING
School’s out? In these budget-constrained times, corporations around the world are giving the status quo a second thought, with executive training, and its outcome, one of the strategies called into question, ZARINA KHAN reports.
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ne result of the financial crisis has been the wave of introspection that has rippled through economists and executives the world over. After so many things went so terribly wrong on various levels, obvious truths are no longer so obvious. One of those truths – that spending on corporate training and executive education is a definite good with measurable and immeasurable returns on investment – is being subject to some rather unexpected scrutiny. Training is one of the many ‘casualties of the recession’ – as many blogs, articles and even budget spend surveys attest. Being able to spend on employee training has generally been one of the aspirations of small and medium enterprises, and it is part of the attraction of multinational and large corporations globally. Executives have viewed the ability to polish and value-add their staffers as a way of showing they ‘have arrived’ in the elite of the business world – it’s a form of self-serving largesse. Employees, on the other hand, have looked at training and education as being one of the rewards of a career managed well. Corporate training, no matter how you cut it, was a good thing. But, perhaps, not so much today. Training budgets were among the first to be cut in the recession – with critics calling the practice bloated at best, and a wasteful and ego-stroking exercise in
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futility at worst. In the early days preceding the global recession, surveys from the US showed that average training expenditures per employee fell 11 per cent in 2008, according to a report from research firm Bersin & Associates. In the US, the country that perhaps made the corporate training culture what we know it as today, the corporate training market shrunk from $58.5 billion in 2007 to $56.2 billion in 2008, the greatest decline in more than 10 years. The year following was no better, with companies in 2009 still reducing their training spend, as a survey in the UK’s The Guardian newspaper in January
Gulf reportedly dropped some 40 per cent in the year following the kick-off of the recession. “In the past year, we have seen a lot of companies trimming their training and education budgets, but this is a short-term effect,” Kevin Dunseath, director of London Business School’s Dubai Centre told local media last November. Come 2010, however, when that shortterm effect should have begun to wear off, there is little reported uptake of training. James Norbury, general manager of the Specialised Management Group, explained the situation: “Midway through
Was there one of my top 150 people who was thinking, ‘You know, Jeff, commercial real estate shouldn’t be so big.’ showed, with half its responding large companies stating they were still cutting back on training. Here in the Gulf, business schools saw a marked drop off in attendance persisting into 2009, a year that saw two executive training institutions fall victim to the recession – Bryn Mawr College, which cancelled its plans to open a campus in Abu Dhabi, and George Mason University, which shut down its Ras Al Khaimah branch. The Dubai School of Government told Gulf Business it too saw a drop off in participation in 2009 due to budget cuts. Corporate training spend in the
2009, the narrowing of training budgets was evident. However, because of organisations’ pre-committed budgets there was an impression that imminent cuts of training were not in effect…But 2010 commenced with, in many of the same companies, no training whatsoever.” And now, halfway through the year, General Electric (GE) – one of the corporations best known for its culture of instruction – is seemingly re-examining its corporate training culture. Jeff Immelt, chairman and CEO of GE, told American magazine BusinessWeek that he is undertaking a personal
THE BUSINESS CORPORATE TRAINING
re-evaluation of how GE equips its people to lead. The international technology and innovation giant has been going through an unprecedented difficult time, with its company’s market cap at nearly half what it was before the recession, and continuing operations falling 38 per cent in 2009 with no improvement in sight in 2010. GE is famous, if not slightly infamous, for its unique approach to grooming its employees. It measures its staff on five “growth traits” that are external focus, clear thinking, imagination, inclusiveness and expertise. The corporation has three levels of staff training – skills training, businessbased training and the leadership training for which it is best known. It
is estimated that GE spends about $1 billion a year on those three tiers of developing talent and devotes hundreds if not thousands of man-hours to evaluating talent. And its crown jewel of corporate training is the John F Welch Leadership Center at Crotonville. Called Crotonville for short, the facility is a 53-acre corporate learning campus in New York where every year some 9,000 of the corporation’s senior execs are put through what GE calls a ‘transformative learning experience and definitive career event’. And yet, in an interview with BusinessWeek, Immelt admitted that such regular and costly enrichment did not help GE dodge the recessionary bullet. In fact, GE is yet to recover from what
Immelt calls ‘a hellish decade’. Hence its big rethink. Immelt reportedly could not help but wonder: “Was there one of my top 150 people who was thinking, ‘You know, Jeff, commercial real estate shouldn’t be so big’, but didn’t have a way to say [it]?” But, Susan Peters, vice president of executive development and chief learning officer at GE, clarified to Gulf Business, that re-evaluation is not so much about the corporate training culture of GE, but of the entire human resources approach, structure and expected outcome. “When the recession kicked-off last year, GE made the decision not to cut back on training. Our budget for training in 2009 stayed the same at a time July 2010 gulfbusiness.com
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POLISHING THE TOP TIER Khaled El Gohary, director of the executive education programme at the Dubai School of Government (DSG), shared with Gulf Business his institute’s experiences and realisations post-recession.
when so many other budgets were slashed. The reason for this was that we felt that training was a retentive act. We felt employees would remember the experience when the markets got robust again,” Peters explained. “We don’t spend a lot of time trying to measure the value of training because we believe it’s intrinsic. GE would rather have us work on developing new programmes than trying to measure the return on investment of training,” she told Gulf Business in February. She did explain, however, that the company was tweaking and tightening its upper-most level of training. “We want to ensure we’re meeting the goals. We have a staircase of experience from beginners to executives to ensure learning. “In February 2009, GE was having one of the toughest times in its history. When we went through our development process, we, like many others, saw that a whole lot of the economy had reset or changed. We started to wonder what the connotations would be on leadership. “So we started to examine what was different in leadership today compared to how it has been historically. We wanted to understand what was needed for successful leaders today, given the changes that are constantly taking place. The term we came up with for this was 21st Century Leadership,” she said in an interview at GE’s Dubai offices.
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Q. How would you describe the benefit of DSG’s programmes for the executives and organisations they represent? The DSG executive education programme is designed to meet the needs of the corporate world by using a Western-educated faculty that understands the Arab cultural sensitivity and offers a mix of content that can help the Arab world face the real challenges of today’s business environment. Q. How can a corporation measure the return on investment of corporate/executive training? Is it a budgetary allotment that should even have a measured ROI? When the Dubai School of Government designs a capacity-building programme such as its executive education programme, we make sure each programme incorporates a practical project to ensure the participants contribute to improving the performance of their organisations. This way, any corporation can measure the ROI on its executive education programme. Q. What is the value of corporate and executive level training for a corporation in today’s economy? Executive education has assumed greater relevance during the global
Immelt is heading up that examination of leadership, and will reportedly spend the rest of 2010 gathering input from more than 100 companies worldwide. “We are continuing the engagement process. Evolving to a quality leader is a very personal journey. Throughout 2010, we are creating a number of experiences that will promote that introspection. “I suspect that at some point we’ll
economic crisis as corporations realised the real need for additional capacity building in meeting today’s challenges. The demand for such education was increasingly felt in areas such as fiscal policies, leadership, strategic thinking and crisis management. One of the most important areas in which organisations discovered the urgent need for extra skills during the crisis was in dealing with the media and company spokespersons. Q. How has the recession impacted on participation/enrolment in DSG? At the beginning of 2009, the level of participation from different sectors was very low due to budget cuts. But by the end of 2009, organisations recognised that they needed to invest more in capacity building and equip their staff with the latest management skills to meet the challenges of the economic crisis.
become more specific, but right now, we want people to engage in that thinking, revealing GE’s current and ongoing focus on redefining leadership so it can redefine its corporate culture and training programmes accordingly,” Peters added. So the value of corporate training is not being questioned by GE, so much as the efficacy of the outcome. And while Immelt pursues his new definition of
THE BUSINESS CORPORATE TRAINING
GE would rather have us work on developing new programmes than trying to measure the return on investment of training. 21st Century Leadership, GE says it is bringing its expertise in developing talent to the Middle East and North Africa region, where it already offers 38 different courses in business and leadership training. “I would say there is less enthusiasm for training in this region than we see in the corporate culture in other markets. One definitely needs to localise content to take into consideration the needs, strengths and challenges of the local culture,” Peters explained. GE is reportedly doing just that with its latest tie-up – an Abu Dhabi-based leadership institute modelled on Crotonville. “We are jointly setting up a leadership institute with Mubadala with Crotonville providing the backbone. We’re helping them create a local centre for business leadership training.
“It will initially be for Emiratis and those from Mubadala but it will branch out in time. We will send out local folks for a GE Crotonville training programme there,” added Peters. The Abu Dhabi Leadership Development Center opens this month and it aims to be the premier corporate leadership and management development destination in the region; developing the skills of high-performing business executives and leaders across the Middle East, Africa and near Asia region. Courses will focus on executive and emerging leaders with content ranging from strategic thinking, operational excellence and innovation to manager development, financial basics, project management and business simulation. In addition, there will be customer programmes covering executive briefings,
change management and integration. “Training helps create the culture of a corporation. It is a chicken or egg question – which comes first. Does good leadership make a good corporate culture, or does a good corporate culture lead to good leaders being formed. But either way, it is crucial. When we get new managers we train them in some basic skills, like how to have a career discussion, how to give feedback. “How do we do that as a company to become more innovative? How do we as a company develop partnerships and relationships? How do we deal with governments, which have become more and more active in the corporate realm? You know the direction the company needs to go and you embed it in the programme,” explained Peters. “Changing a culture is like moving a mountain, but clearly, it is an important endeavour.” So too, the experts say, is the need to change the culture of corporate training – how much we spend, what is its focus, and more importantly, what we expect from it. ■ gb@motivate.ae July 2010 gulfbusiness.com
59
THE BUSINESS NUCLEAR ENERGY
Gone fission The UAE has been applauded for its peaceful nuclear strategy and is setting an example to the rest of the region. ANDREW TAYLOR reports.
T
he UAE is leading the line for Arab nations, and the rest of the world, in its push for a nuclear programme, according to the prestigious International Institute for Strategic Studies. Plans have already been announced for four 1,400 megawatt (MW) nuclear reactors to be sited on a remote stretch of beach near Ruwais, some 150 miles west of Abu Dhabi. They will be staffed by more than 2,000 engineers, technicians, scientists and other workers, and the first is expected to provide power to the national grid by 2017, making the UAE the first Arab nation to generate its own nuclear energy. The three remaining reactors are scheduled to be complete by 2020. “Many Arab nations have been looking at the possibility of nuclear power for some time, but their plans led nowhere. Now they are coming to fruition,” said Mark Fitzpatrick, senior fellow for non-proliferation at the International Institute for Strategic Studies. “The UAE’s project has set a gold standard for the Arab world and beyond. There will always be debate over whether nuclear power may lead to the production of nuclear weapons, but the way that the
60 gulfbusiness.com July 2010
UAE government has handled the issue has laid those questions to rest. “Firstly, they have decided voluntarily not to pursue any of the sensitive fuel cycle technologies that could lead to weapons production, and secondly they have committed themselves to the utmost transparency. They have agreed to make extra reports to the International Energy Agency, and also to permit snap inspections by the Agency,” he said. These are the key features of the UAE’s nuclear programme that have won broad-based international support and approval. Nuclear energy generation cannot be diverted to weapons production without the enrichment of uranium or the reprocessing of plutonium – the two technologies that the UAE has agreed not to employ – while the acceptance of a tough international inspection regime provides important reassurance about future developments. “The UAE’s nuclear programme will not be the first in the region, since Iran’s Bushehr project is expected to be operating later this year. But it will be far superior to Bushehr, employing state-of-the-art technology and enjoying the full support of the international community. There will be no restric-
tions on access to international nuclear technology for generating energy,” Fitzpatrick added. The UAE’s nuclear programme, originally announced in 2008, is part of a drive to develop new sources of energy across the Arab world. In 2007, the Gulf Co-operation Council announced that it was studying the possibility of embarking on a joint nuclear programme, but since then, not only the UAE, but
THE BUSINESS NUCLEAR ENERGY
â&#x20AC;&#x153;The UAEâ&#x20AC;&#x2122;s project has set a gold standard for the Arab world and beyond. also Saudi Arabia, Bahrain, Kuwait, and Qatar have announced separate national schemes. Elsewhere in the Arab world, Algeria, Egypt, Jordan, Libya and Syria are also
pushing forward with nuclear plans, with Jordan widely expected to follow shortly after the UAE with the completion of its own nuclear power station sometime before 2020.
Saudi Arabia, Kuwait and Qatar have been talking to French companies about technological assistance, but the $20 billion UAE nuclear programme has been undertaken in partnership with a consortium of Korean, Japanese and US companies under the leadership of the Korean government-owned Korea Electric Power Corporation (Kepco). Among the major international companies involved are Samsung, July 2010 gulfbusiness.com
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THE BUSINESS NUCLEAR ENERGY
WORLD NUCLEAR POWER REACTORS & URANIUM REQUIREMENTS COUNTRY Argentina Armenia Bangladesh Belarus Belgium Brazil Bulgaria Canada China Czech Republic Egypt Finland France Germany Hungary India Indonesia Iran Italy Japan Jordan Kazakhstan Korea DPR (North) Korea RO (South) Lithuania Malaysia Mexico Netherlands Pakistan Poland Romania Russia Slovakia Slovenia South Africa Spain Sweden Switzerland Thailand Turkey Ukraine UAE United Kingdom USA Vietnam WORLD**
NUCLEAR ELECTRICITY GENERATION 2009 billion kWh 7.6 2.3 0 0 45 12.2 14.2 85.3 65.7 25.7 0 22.6 391.7 127.7 14.3 14.8 0 0 0 263.1 0 0 0 141.1 10 0 10.1 4 2.6 0 10.8 152.8 13.1 5.5 11.6 50.6 50 26.3 0 0 77.9 0 62.9 798.7 0 2560
%e 7 45 0 0 51.7 3 35.9 14.8 1.9 33.8 0 32.9 75.2 26.1 43 2.2 0 0 0 28.9 0 0 0 34.8 76.2 0 4.8 3.7 2.7 0 20.6 17.8 53.5 37.9 4.8 17.5 34.7 39.5 0 0 48.6 0 17.9 20.2 0 14
REACTORS OPERABLE 1 June 2010 No. 2 1 0 0 7 2 2 18 11 6 0 4 58 17 4 19 0 0 0 55 0 0 0 20 0 0 2 1 2 0 2 32 4 1 2 8 10 5 0 0 15 0 19 104 0 439
MWe 935 376 0 0 5943 1901 1906 12679 8587 3686 0 2696 63236 20339 1880 4183 0 0 0 47348 0 0 0 17716 0 0 1310 485 400 0 1310 23084 1760 696 1842 7448 9399 3252 0 0 13168 0 11035 101163 0 374,690
REACTORS UNDER CONSTRUCTION 1 June 2010 No. MWe 1 692 0 0 0 0 0 0 0 0 0 0 0 0 2 1500 23 25310 0 0 0 0 1 1600 1 1630 0 0 0 0 4 2572 0 0 1 915 0 0 2 2756 0 0 0 0 0 0 6 6700 0 0 0 0 0 0 0 0 1 300 0 0 0 0 10 8960 2 840 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1180 0 0 57 57,555
REACTORS PLANNED June 2010 No. 2 1 0 2 0 1 2 4 34 2 1 0 1 0 0 20 2 2 0 12 1 2 0 6 0 0 0 0 2 6 2 14 0 0 3 0 0 0 2 4 2 4 4 9 4 151
MWe 767 1060 0 2000 0 1245 1900 4400 38160 2400 1000 0 1630 0 0 16740 2000 1900 0 16532 1000 600 0 8190 0 0 0 0 600 6000 1310 16000 0 0 3565 0 0 0 2000 4800 1900 5600 6600 11800 4000 165,699
REACTORS PROPOSED June 2010 No. MWe 1 740 2 2 0 4 0 3 120 1 1 1 1 0 2 40 4 1 10 1
2000 2000 0 4000 0 3800 120000 1200 1000 100 1630 0 2200 49000 4000 300 17000 1300
2 1 0 2 1 2 1 2 0 1 30 1 1 24 0 0 3 4 4 20 10 6 23 6 345
600 950 0 3400 1200 2000 1000 2000 0 655 28000 1200 1000 4000 0 0 4000 4000 5600 27000 14400 8600 33000 6000 366,775
URANIUM REQUIRED 2010 tonnes 123 55 0 0 1052 311 272 1675 2875 678 0 1149 10153 3453 295 908 0 148 0 8003 0 0 0 3804 0 0 253 107 68 0 175 4135 269 145 321 1458 1537 557 0 0 2031 0 2235 19538 0 68,64
Sources: Reactor data: WNA to 3/6/10; IAEA- for nuclear electricity production & percentage of electricity (% e) 3/5/10.; WNA: Global Nuclear Fuel Market (reference scenario) - for U.
62 gulfbusiness.com July 2010
THE BUSINESS NUCLEAR ENERGY
Hyundai and Doosan Heavy Industries from South Korea, Westinghouse from the US, and Toshiba from Japan. Nuclear power is central to the government’s efforts to satisfy a massive projected increase in demand for energy over the next decade. Latest studies suggest that power consumption in the UAE – currently around 16,000 megawatts a year – will grow at around nine per cent a year, rising to more than 40,000 megawatts by 2020. By then, it is expected that natural gas reserves will satisfy barely half of the country’s electricity demands. Renewable energy sources, such as the solar power Masdar Initiative, will be able to meet only a small proportion of the shortfall. Training, human resource development and education programmes included in the contract will result in the building of an industrial and commercial infrastructure to service a growing nuclear energy industry. The eventual aim is to provide local engineers, specialists and technicians to take on most of the jobs within the project. Latest estimates suggest that up to 2,300 staff will be needed by 2020, and Emirates Nuclear Energy Corporation is co-operating with the Kha-
Elsewhere, Arab nuclear projects have attracted widespread interest among companies in Europe, Asia and the US. The Korean consortium only won the UAE contract after stiff competition from the US, France and Japan, and other Arab states have been negotiating with Argentina, China and Russia as well as these three main players. Egypt reached a consultancy agreement last year with the Australian firm Worley-Parsons. On a recent visit to South Korea’s most advanced nuclear installations near the city of Busan, His Highness Sheikh Mohammed bin Zayed, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the Armed Forces, said the project was needed to support the projected growth in population and urban development in the Emirates. “The Emirates will continue, as part of its development vision, the building of its peaceful nuclear programme for its pragmatic and promising prospects that will support the wheel of sustainable development,” he said. Korea’s Shin Kori nuclear power plant construction site includes the Generation 3 APR 1400 reactors, which will be at the heart of the UAE programme. Kepco has agreed to provide reactors that are sub-
The acceptance of a tough international inspection regime provides important reassurance about future developments. lifa University of Science, Technology and Research, the Institute of Applied Technology, the Federal Authority for Nuclear Regulation, other parts of the UAE educational system and leading international universities in a concerted training effort. The nuclear programme is the culmination of increasing co-operation between the UAE and South Korea over recent years. Last year, trade between the two nations increased by over 43 per cent, and more than 120 South Korean companies are currently operating in the UAE. Doosan’s involvement in UAE projects includes the recent construction of a power and desalination plant in Fujairah.
stantially the same at those at Shin Kori, but with adaptations and developments to meet the Gulf’s climactic conditions. In particular, buildings and structures at Ruwais will be designed to fulfil the latest requirements for resistance to earthquakes and aircraft impact. US President Barack Obama gave the project his personal backing last year, when he signed the bi-lateral nuclear co-operation agreement signed between Washington and the UAE in the last days of George W Bush’s presidency. The agreement, a prerequisite for the provision of nuclear-related materials and technology by the US, effectively gave the UAE’s plans Washington’s official seal of approval – in marked con-
TOP LEVEL EXPERTS ENDORSE THE UAE MODEL
O
fficials from the International Atomic Energy Agency (IAEA) said that the UAE’s approach to its nuclear programme was “exemplary”. Dr Dorel Popescu, an expert on nuclear security at the IAEA and a former nuclear inspector, stressed that safeguarding the UAE’s power plants was a matter of concern for its neighbours and the international community, towards the goal of a nuclear weapons-free Middle East. However, the UAE had demonstrated that it is committed to non-proliferation, he said, adding that the UAE regularly gives the nuclear watchdog access to its plans and is co-operative with the organisation. Dr Popescu was speaking at a fiveday conference on nuclear security, held in Abu Dhabi last month. The conference was organised by the UAE’s nuclear authorities and regulators, which include the CNIA, ENEC and the Federal Authority for Nuclear Regulation.
trast to the continuing controversy over Iran’s Bushehr programme. Although Iranian government spokesmen at the United Nations have said that their nuclear programme is exclusively for civilian purposes, Tehran has repeatedly refused to agree to international inspections, and is believed to have amassed large quantities of material that could be used to build weapons. So far, Bahrain and Saudi Arabia have made similar commitments to the UAE about sensitive technologies and the transparency of their nuclear programmes, but Jordan – widely expected to be next in line to complete a nuclear power generating scheme – has so far been unwilling to guarantee that it will never employ uranium enrichment or plutonium reprocessing technologies. Non-proliferation officials are hopeful that the success of the UAE project will encourage the Jordanian government to change its mind. gb@motivate.ae July 2010 gulfbusiness.com
63
THE PEOPLE FRANK KHOIE
Rebuilding reputations Frank Khoie is out of jail and back at work, trying to reassure investors and promising to get the huge La Hoya Bay project off the ground. In a wide-ranging interview – amid a flatlining property scene and a host of unresolved issues relating to construction, land ownership, financing and his own legal status, Gulf Business asks the CEO of Khoie Properties how on earth he expects to get his stalled project back on track.
A
self-made property tycoon who is far more at home in Dubai’s Capital Club than a cramped cell in Ras Al Khaimah, Frank Khoie is one of the more ebullient businessmen in a country that has no shortage of contenders. He has one central message he wants to get across over our lunch. He’s not a crook. He is maybe naïve, definitely overly trusting, but dishonest? No way. Indeed, fresh from serving just over one year of a three-year sentence for cheque fraud he is getting on with the task of convincing the 800 or so current investors in his ambitious La Hoya Bay project that, not only is it business as usual, but he fully expects new investors to pile in on the back of a fresh sales drive. Given the current climate, it’s tempting to ask if he’s mad, but the Iranian-born businessman, who made his first fortune in Los Angeles when, at age 27, he bought, sub-divided and sold Charlie Chaplin’s former mansion in Hollywood for a healthy profit, isn’t one for received wisdom. In a huge PR push, both from behind bars and on the outside, he has even managed to bring round some of his more sceptical investors – flying them out to Dubai to show them his busy offices in Al
64 gulfbusiness.com July 2010
Quoz, and taking them on a tour of the construction site in Ras Al Khaimah. They might not be 100 per cent convinced, but a number of optimistic testimonials are now in place on the company’s website. Since his initial success in Los Angeles in the 1970s, his CV reads as that of a serial entrepreneur: 90 villas in Bel Air followed the Chaplin success; in the late 1980s he cashed in on the PC clone business with IMI Computers – at one point it was one of the top three computer builders in Singapore, with global sales of $120 million – before the PC market suffered in the late
with a number of huge cheques issued in his name. A dispute over the provision of infrastructure to the project lead to construction woes, and, along the way a cheque for Dhs 57 million bounced. The intricacies and vagaries of the much-criticised cheque law in the UAE aside, Khoie suddenly found himself at the start of a three-year jail sentence, with a stalled project and a raft of furious investors. Released in May, he now wants to set the record state, and explained to Gulf Business how he intends to get La Hoya Bay up and running.
No true entrepreneur will leave his company, his projects, his staff and his clients and run away for fear of possible challenges every time a battlefield turns ugly. 1990s through wafer thin margins and increased competition. In 2005, right in the middle of the property boom, he launched Khoie Properties, with $10 million of his own money. By the time La Hoya Bay was launched, his firm claimed a paper value of $1 billion. But that was 2008, just before the bottom fell out of the property market, leaving Khoie struggling for cash and
Dozens of developers in your position would have simply run away – many did, after all. Why didn’t you? Running away from one’s responsibilities, obligations and commitments is a reflection of one’s character. No honest, upright, honourable man will run away. In my opinion, true entrepreneurs are no different than warriors in a given war. No true fighter in a just war will leave
July 2010 gulfbusiness.com
65
THE PEOPLE FRANK KHOIE
3,000 waterfront apartments and that is nothing for the 240,000 Britons living in the UAE who would love to have a unit in La Hoya Bay, not to mention the European and West Asian markets who find the UAE the ideal place to work and live. Let us not forget that the UAE is the only country in West Asia that has an equal or better quality of life to Western Europe and North America with a surrounding population of one billion, and if anyone thinks that we will have a problem selling the remaining 2,300 of our apartments to this market they just don’t have enough knowledge about our business.
Just because of the changes in the economic landscape we are not going to change the rules of the game and ask our clients to pay more than what was agreed. his troops, comrades and those under his protection and turn back and run. And no true entrepreneur will leave his company, his projects, his staff and his clients and run away for fear of possible challenges every time a battlefield turns ugly. He will stay and fight it out and find a solution to win the battle. This is what I did and I was sure of the outcome. You served just over a year of your three-year sentence. What’s your legal status now? From day one, this was a dispute between Khoie Properties and RAKIA [Ras AL Khaimah Investment Authority] on a technicality of the cheque law. The sentence was illegal because our cheque was a guarantee check, which meant that if there was any dispute it was a civil matter and there was no need to fight because RAKIA and Khoie Properties were in the same boat. Finally this was clarified and our four cheques were dismissed and returned
66 gulfbusiness.com July 2010
to us, and we were given the one-year extension that we had requested from day one. How did you feel on the first night of your incarceration? What was your regime thereafter? I am not going to waste your reader’s time talking about my personal feelings. My focus is on developing successfully our Dhs5 billion project, delivering our apartments to our 800 clients and creating economic activities in RAK and the UAE, and to move on with other projects and ventures. Regarding La Hoya Bay … what next? Are you scaling it back? No, we are as bullish now as we were in 2008, and we are confident that this entire half-panic, half-economic slowdown will end after Ramadan in August, and our sales will take off from September onwards. We are not reducing or scaling back any part of our project. La Hoya Bay will have
How do you intend to get the Dhs2 billion in financing to complete the work? The total cost for the entire five phases of La Hoya Bay is about Dhs2.7 billion over the next three-and-half years. We have already secured Dhs750 million which is sufficient to build phase one, La Hoya Bay Residence, and phase two, La Hoya Bay Business Village, and one of our three marinas. With part of that fund we shall pay the remaining Dhs230 million land payment to get our titles and use the titles as collateral for another trench of Dhs500 million to kick-start the construction of phase three, La Hoya Bay Regency. And by December 2011 phases one and two will be delivered, which will generate about Dhs1 billion in receivables and the same will be used to kick-start construction of phase four, the Bermuda Hotel Apartments and Yacht Club, and phase five, the Autumn Leaves, which is a very unique semi-retirement luxury complex to be completed by December 2014. What about “self-financing”? Investors currently have to pay 70 per cent of balance on delivery … can’t you ask them for funds earlier? Our company culture is based on honouring our contracts, words and commitments. Our agreements with our current 800 clients are based on 30 per cent down payment and 70 per
THE PEOPLE FRANK KHOIE
cent upon completion and 10-year mortgage financing. So just because of the changes in the economic landscape we are not going to change the rules of the game and ask our clients to pay more than what was agreed, even if we needed funds – which we don’t. Devotion to principle is the very foundation we have built our company upon and we will never compromise those principles. We honour our contracts and honour our clients. Your own ex-CFO has said the company is insolvent. How do you respond to that? The formula to determine if a company is insolvent or not is a very simple one. On any company’s balance sheet there are two columns: assets and liabilities. If the company’s liabilities are greater than its assets, that company is technically insolvent, and if assets are greater than liabilities, that company is solvent. Our balance sheet, which is audited by the world’s number one audit firm, namely Ernst & Young, shows that our assets are Dhs966 million and our liabilities are Dhs241 million. Thus, we are not insolvent. Adding that a company can be asset rich but still lack cash liquidity and lack sufficient cash to pay, for example, your Dhs57 million land-payment is not a sign of insolvency but merely a lack of liquidity. To give you a simple example: if you own a Dhs700,000 Aston Martin but happen to have no cash at a given moment for gas, that does not mean you are insolvent. Now, why did our ex-CFO say we were insolvent? Because he made a mistake and at the time what he meant was that we had a cash liquidity problem, but he failed to put it in a proper form. You’ve promised full refunds to unhappy investors: of the 800 or so investors, how many are seeking a refund? Very few are asking for refunds and we are confident that as soon as construction starts next month even those few will withdraw their
CURRICULUM VITAE Name: Frank Khoie Born: April 7, 1949 Place of birth: Tehran, Iran Education: Vocational Career: 1973: Launched IPC Engineering 1975: Migrated to the US 1978: Purchased Charlie Chaplin’s former mansion on Sunset Boulevard, Los Angeles, and transformed it into villas 1978: Developed 90-villa complex on the hills of Bel Air, west Los Angeles. 1989: Established IMI Computers Worldwide in Los Angeles 1990: Relocated IMI Computers Worldwide to Singapore 1997: Returned to Iran to introduce an innovative in-car air conditioning system 2000: Migrated to Dubai 2005: Established Khoie Properties 2009: Sentenced to 3 years in prison for bouncing 2 cheques for Dhs57m each 2010: Released
La Hoya Bay, we have been promised by Rakeen, the engineering arm of RAKIA, that a 50-Megawatt extension is underway from RAK’s Al Ghail Industrial Park where they have a 250Megawatt power plant – the largest plant yet built by FEWA.
refund requests, however, credit notes are available for those who wish to proceed and we will honour them without hesitation.
You’ve admitted to being overly trusting in regard to some recruitment and partnership decisions. Do you really have what it takes to be a businessman? I sincerely believe that you don’t need to have a “ruthless streak” to succeed in business and even if you do succeed by being “ruthless” you will lose something far more important in life, and that is the love and respect of your fellow man, your community, your staff and even your family and that would make you a very unhappy person even though you may have millions. Success in business is not measured by your net worth, but by the number of lives you have touched and made a difference to in the process, by the friends you make and keep, and by the level of genuine respect and love you receive from your community, your clients and suppliers, your staff and your family. I can safely say that I have never been ruthless to anyone in my life and I have been, and still am, reasonably successful in business.
There have been huge concerns over infrastructure in the northern emirates. What progress is being made regarding power supply, sewage and other essentials? Infrastructure shortages are not exclusive to the northern emirates. All seven emirates, in different degrees, are facing this great challenge simply because building infrastructure takes money and time. This is handled by the FEWA (Federal Electricity and Water Authority) and they are under huge pressure to meet the requirements for Sharjah, Ajman and Ras Al Khaimah. There are huge plants under construction and it is only a matter of time before the issue is resolved, and it will be resolved without question. For
What lessons have you learned from your dealings in RAK, and your recent experience? I had the opportunity to read over 200 good books, read and re-read the biographies of many great business and political leaders, and I spent a great deal of time in prayer and spiritual fellowship with the Lord whose love and sustaining power kept me going. I wrote two books, and one of them is about my own life called Dare To Be An Entrepreneur, in which I have tried my best to encourage young entrepreneurs by reminding them that the road to success is paved by pitfalls, dangers and challenges and that they should not think that building an empire is for the faint of heart. ■ gb@motivate.ae July 2010 gulfbusiness.com
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In recent years, Patrick Lichfield has been a frequent visitor to Dubai, a destination he admires and enjoys and one which certainly provides a wealth of fascinating subjects for his camera. ' #& !#! # is the outcome of these visits; it is a rich study of one of the worldâ&#x20AC;&#x2122;s most dynamic and fastest growing cities.
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THE PEOPLE EXECUTIVE MOVES HSBC has announced the appointment of Mohammad Al Tuwaijri as head of global banking and markets, MENA. Al Tuwaijri joins from JPMorgan where he was employed as managing director and head of Saudi Arabian operations. Prior to this, he spent 12 years as treasurer at the Saudi British Bank (SABB). Al Tuwaijri has over 17 years senior banking experience, including 12 in Saudi Arabia.
Brocade has announced that it has appointed long-time networking executive, Alberto Soto, to lead the sales organisation in Europe, Middle East and Africa (EMEA). Soto will replace Ulrich Plechschmidt, who will be moving to Brocade’s corporate headquarters in San Jose to lead the Global Sales Enablement and the OEM Marketing departments. Previous to Brocade, Soto was vice president and general manager of HP ProCurve EMEA, a position he assumed in late 2006. At Brocade, Soto will report to Ian Whiting, senior vice president of Worldwide Sales, while Plechschmidt will report to John McHugh, vice president and chief marketing officer.
Rolls-Royce Motor Cars has announced that James Crichton has joined the company as regional director, Middle East. In his previous role he was sales and marketing director for the BMW Group in the Middle East and based in Dubai. Crichton has many years of experience in the BMW Group and has worked in a number of roles in the sales and marketing environment. Prior to his current role in Dubai, he was head of dealer development in the Asia Pacific, Eastern Europe, Middle East, Africa and Caribbean, having previously been general manager of customer relationship management and national sales manager at BMW Group South Africa. Deutsche Bank has announced the appointment of Nasim Ahmad as regional head for Global South Asia, for the Middle East and Pakistan in its Private Wealth Management division. He will be based in Dubai and will report to Salman Mahdi, head of Private Wealth Management, Global South Asia.
The board of directors of Etihad Atheeb Telecom Co. GO has appointed Raed Abdulrouf Kayal as acting chief executive officer, replacing Dr Ahmed Sindi. Kayal will be responsible for developing a new strategy for GO. His Royal Highness, Prince Abdulaziz bin Ahmed bin Abdulaziz, chairman of GO said: “The appointment… reflects the board of directors’ intention to better support the requirements of each operational stage, as this decision will serve the long-term strategic objectives of the company and will carry a positive impact on both the shareholders and customers.” Kayal possesses over 15 years of experience in business development and management in Telecommunication and Information Technology as he worked with various major multinational companies (such as Siemens, AT&T, Lucent Technologies, GlobTel) in Germany, the Netherlands and Saudi Arabia.
Al Mazaya Holding has announced the appointment of Naif Ahmed Al Awadi as CEO of its Dubai operations. The appointment is part of the company’s restructuring strategy, in a bid to further stimulate operations and projects in the emirate of Dubai. Al Awadi brings 17 years of experience in feasibility studies, contracting, real estate development, project management, engineering consultancy and real estate investment, both at the local and international levels.
The Board of Art Dubai has announced the appointment of Antonia Carver to succeed John Martin as Fair Director of Art Dubai. Carver is a writer and arts administrator, and has been widely recognised as a leading advocate of contemporary Middle Eastern art. She has been working in the arts for the past 16 years, and brings to Art Dubai a broad base of experience across both the commercial and not-for-profit sectors.
At Gulf Business we try to keep you up to date on the region’s movers and shakers. If you know of any new faces or company reshuffles, please write to The Editor, Gulf Business, Motivate Publishing, PO Box 2331, Dubai, UAE; fax to +971 4 2827593; or send an email to theresa@motivate.ae. We reserve the right to edit material.
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THE LIFESTYLE COMPETITION
WIN
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AN OVERNIGHT STAY AT THE DUSIT PRINCESS HOTEL IN DUBAI
ocated in Deira, â&#x20AC;&#x2DC;The Heart of Dubaiâ&#x20AC;&#x2122;, the Dusit Princess City Centre hotel is next to the shopping and entertainment complex Deira City Centre, just five minutes from Dubai International Airport, Sheikh Zayed Road, and the cityâ&#x20AC;&#x2122;s convention centres. Within a short walk of the Dubai Metro station at Deira City Centre, the hotel is truly â&#x20AC;&#x2DC;centralâ&#x20AC;&#x2122;. The hotelâ&#x20AC;&#x2122;s 120 spacious, elegantly appointed rooms and suites offer king-size beds and are equipped with modern conveniences designed to meet the needs of leisure and business guests â&#x20AC;&#x201C; including iPod docking station, tea and coffee making facilities, iron and board and flat screen TV. Hotel facilities provide an excellent selection of recreational and business services.
The Business Centre incorporates two meeting rooms and a break-out area for receptions of up to 50, and
T HE
P R I Z E
An overnight stay for two people at the Dusit Princess Hotel, Dubai, including breakfast
H OW
T O
W I N:
The Question The traditional Middle Eastern pipe is known in the Gulf as: a) Hookah b) Hubbly Bubbly c) Shisha Terms and conditions: t 5IF WPVDIFS DBOOPU CF SFEFFNFE JO DBTI PS XJUI BOZ PUIFS QSPNPUJPO PS EJTDPVOU t 3FTFSWBUJPOT BSF SFRVJSFE BOE TVCKFDU UP BWBJMBCJMJUZ 1MFBTF QSFTFOU UIF PSJHJOBM DFSUJmDBUF VQPO BSSJWBM To enter, log onto www.motivatepublishing.com/ competitions and answer the question.
theatre-style meetings of up to 30, complete with secretarial services and broadband connectivity. The rooftop Fitness Centre features state-of-the-art exercise equipment and breathtaking 360 degree panoramic views of the city. The rooftop swimming pool is the ideal place to relax, with a sunken juice bar to refresh the palate after a work-out or swim. The Chill is the hotelâ&#x20AC;&#x2122;s Thai influenced restaurant offering buffet and Ă la carte selections for breakfast, lunch and dinner with light snacks and refreshments available throughout the day at JoyBean CafĂŠ. The alfresco Shisha Zone invites those seeking to enjoy the centuriesold tradition of the shisha pipe with flavoured tobacco to relax with friends and business associates during the cooler months. July 2010 gulfbusiness.com
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THE LIFESTYLE TRAVEL
Portugal’s best-kept secret Unwinding execs can explore the Algarve’s most beautiful beaches from a stylish new hotel on the doorstep of a national park.
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here is a dramatic sweep of wild sandy beach that hints at South Africa, New Zealand or Southern Australia. But these frothy Atlantic rollers wash on to the Western Algarve coast where, in a prime location within the Costa Vicentina National Park, the brand-new Martinhal Resort and Hotel has opened its doors above the eponymous Martinhal Bay. A stone’s throw from the former pilgrimage site of Cabo de Sao Vicente (Cape St Vincent) and Europe’s most westerly point, this protected area encompasses a vast reserve of forests and wetlands characterised
by sheer rocky cliffs and wild, often dune-flanked beaches. Martinhal’s simple, low-rise buildings blend fairly seamlessly into the rugged landscape. Excavated rock has been re-used and local materials including recycled cork, natural timber, cane and stone feature throughout, while artisan skills are rekindled in the cork tables and stools and locally commissioned cane-woven lamps. For now, a timber-clad Beach Room, part of the boutique Hotel Martinhal, featuring a decked, bay-facing balcony and a generous bathroom with separate shower and large tub, is the choice accommodation, but a phased opening across the 25-hectare site will soon add 142 Ocean, Bay, Garden and Pinewoods Houses; 45 luxury garden villas with private
pools and 23 two and three-bedroom houses serviced by a Clubhouse. This is one of those places where you can do as much, or as little, as you like. The pretty fishing port of Sagres is a 15-minute cycle ride away and the entire Vila do Bispo coastline is scalloped by sandy coves. Martinhal Bay is popular with windsurfers, walkers and joggers and a footpath near the hotel’s pool meanders along the wildflower-strewn headland to empty pockets of sand. Gourmet picnics, surfing lessons, blo-karting, horse riding and wreck diving are on the agenda and guests can take advantage of preferential rates and tee times at the Parque da Floresta, Boavista, Palmares, CS Morgado and Penina golf courses. Dominating the entire peninsula is the Fortaleza de Sagres, a hugely
SLEEPS&EATS Yas Hotel DO NOT DISTURB!
Yas Island, Abu Dhabi
Surely styled on Star Wars, the Yas Hotel is all curved white walls and modern lighting, not to mention its location, which is crazily close to the race circuit. It’s also home to some world-class restaurants such as Kazu, which is catering to the capital’s sushi cravings. Throughout the summer the hotel is hosting murder mystery nights if you like to play detective while dining.
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Boulevard Café The Boulevard, Old Town, Dubai
This new Parisian-style pavement café serves up French fare from 7am until midnight. While you’ll find soups and sandwiches on the menu, the undisputed stars are the breakfast dishes, from healthy granola to a croque monsieur (served with crisps) designed to make your arteries shudder. There’s no better way to start your weekend.
Okku
Monarch Hotel, Sheikh Zayed Road, Dubai This sultry spot is a haven for cocktail lovers and Japanese junkies alike, with a sunken dining area and cool bar, complete with jellyfish tank. The new summer menu is packed with fresh flavours, including an Asian twist on salmon tartare. Book ahead for a table on Sundays when the beautiful people flock there to forget their back to work woes.
THE LIFESTYLE ART CHARLES POCOCK CANVAS OPINION symbolic fortress dating back to the 15th century. The fort was the haunt of Prince Henry the Navigator who, with a keen eye on the Saharan trade routes, set up a school here for navigators, shipbuilders and mapmakers – sparking the Voyages of Discovery and thus shaping the course of history. Back at Martinhal, the low-key ambience coupled with a generous smattering of comfy, snoozeon-me furniture causes relaxation by osmosis. Wrap-around views from the hotel’s main lounge terrace are somewhat hypnotic. After a hand-harvested seaweed wrap at the spa, why not flop into one of the poolside bean-beds, the ideal preparation, as it happens, for an indulgent six-course tasting menu.
Getting there Martinhal Beach Resort & Hotel (Martinhal Beach Resort and Hotel, Apartado 54, Sagres, 8650-908, Portugal. (351) 282 620026. www. martinhal.com, res@martinhal. com) is accessible via Faro or Lisbon airports. Hire car is advisable or the hotel can organise a private transfer (90 minutes from Faro). Terrace Room doubles from Dhs 581 with breakfast. Two-bedroom Ocean Houses start from Dhs 843 based on four sharing with a two-night minimum stay.
Mango Tree Bistro
Mirdif City Centre, Mirdif, Dubai If a manic foodcourt (packed with the usual big name suspects) puts you off your lukewarm fries, then read on. Mango Tree Bistro, the quicker cousin of the Souk al Bahar restaurant, has a vast choice of Thai dishes to help you refuel for the shops. With sharing platters, soups and a duck curry worth travelling for, you’ll never pick up a plastic tray again.
Islam and the renaissance of art The influence of Islamic art on medieval Europe, particularly Northern Italy, the home of Western Christianity at that time, is rarely looked at. This is a vast topic that includes both Coptic Christian and Islamic Cairo, Constantinople and the Orthodox Church, the Catholic Church of Western Europe and the Islamic spheres of influence in Spain and Arab-Norman Sicily. The focus of this piece is the painting and sculpture of Northern Italy, mediums which are not widespread in medieval Islamic culture but reign heavily in Western Europe. While the influence of Islamic architecture on the European school is well documented, Islamic cultural influence on painting and sculpture is not often explored. From the foundation of the Renaissance in Western European art, one can see the pervasive impact Islamic culture had on the arts. For example, Giotto’s masterpiece of the frescoes in the Arena Chapel in Padua (1304/12 AD), Crucifixion, displays Mongol elements in the rendering of the soldiers’ tunics and Arabic elements in Christ’s robe; while in Simone Martini’s Annunciation (1333 AD), pseudo-Arabic elements are visible on the cuffs of Gabriel’s robe. This continues into the 15th century, with the use of pseudo-Arabic, and more specifically pseudo-Kufic, script. The Arabic letters rendered in such works do not comprise legible words or phrases but are used as a design element, reducing the letter to a purely aesthetic form. Paintings including illegible Arabic script continued into the 19th century with the ‘Orientaliste’ European school of art. Indeed, utilising letters as a visual form is also visible in the work of contemporary artists in the Middle East, such as the Tunisian Nja Mahdaoui, who constructs his compositions through the aesthetic formation of Arabic letters as opposed to legible script. Why pseudo-Arabic script was employed by European Christian artists is not totally clear, but there have been a number of explanations. The use of pseudo-Kufic script was originally used in Byzantine art in the 11th and 12th centuries. Later, Western European artists mistakenly believed 13th and 14th century Middle Eastern script to be the same as the scripts current during the lifetime of Christ. There have also been suggestions that artists wished to express the cultural universality of the Christian faith by combining together various written languages at a time when the Church had strong international ambitions. This can be seen in Fra Angelico’s Marriage of the Virgin, which utilises both pseudo-Kufic and pseudo-Hebrew script. The works of Giotto, Simone Martini, Gentile da Fabriano, Veneziano, Fra Angelico, Fra’Filippo Lippi, Andrea Mantegna, Massacio and Donatello all display the use of pseudo-Arabic script in their art, a feature which appears in a number of their seminal works. The influence of Islamic culture on the paintings of Gentile Bellini, Andrea Prevital, Lorenzo di Credi, Antonello da Messina, Carlo Crivelli, Verrochio and Sebastiano del Piombo, is also apparent in the depiction of a number of luxury objects traded at that time, from the East to the West: glass, ceramics, metalwork, carpets and bookbinding. Such cross-cultural encounters, through trade and art – Florence and Venice, both centres of trade, also became hubs of cultural creativity – is reflected in the art of the early Renaissance. To gain a more thorough understanding of the influence of Islamic art on Renaissance Italy, I highly recommend Bazaar to Piazza by Rosamond Mack. In relation to Islamic art objects incorporated into Christian collections, I would suggest Islam Christianized: Islamic Portable Objects in the Medieval Church Treasuries of the Latin West by Avinoam Shalem. ■
July 2010 gulfbusiness.com
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THE LIFESTYLE LEISURE
A walk on the mild side tries on newly-reinvented Cadillac SRX and finds something for soccer-moms to envy. ZARINA KHAN
G
ulf Business’ motoring section is not all supercars and diamond-encrusted towncars. Sometimes we’re practical. Which is why the offer to try out Cadillac’s 2010 SRX was taken up so readily. Plus, my Jag (um, Corolla) was in the shop. On to the car. On first sight, it’s not bad. The SRX is a compact crossover with none of the overgrown hatchback effect that many of the breed fall victim to. Cadillac’s reincarnated SRX has the angles, gleam and breadth one wants when upsizing from a sedan. And the hallmark Cadillac grill and standard 18-inch alloy rims help it stand out from the generic Far Eastern offerings. The inside has its moments as well. The ‘Ultra-View’ sun roof
is massive, about double the size a sedan would have, giving it a near convertible effect when fully opened, while the Sapele Pommele wood accents gleam and the leather upholstery is comfortable. The dash stood out – with a retractable touch display screen (for when you don’t want the distractions of… radio station options?). The pushbutton brake-primed ignition was a bit annoying – what’s so hard about turning a key? And sometimes finding a button in the high-tech mix was a challenge – AC controls and door locking switches were particularly elusive. The drive was as you’d expect. Driving most manner of SUVs and their compact cousins nearly always feels like you’re zooming down the highway on a wheeled-recliner. With
that much ride height you don’t get much of a feel of the road. And consequently, with the SRX’s 3.0 V6 engine, it’s rather a bit too easy to push the speed to the point where the LED display stops showing numbers and just says “Caution! Over-speeding!” But that can be a compliment – Cadillac’s crossover handles so well and its engine is so quiet, that you can speed unintentionally. The verdict? For those practical days when you have to do a school run or transport a Labrador, it shouldn’t be too much of a blow to your cool to drive the Cadillac SRX. If you’re feeling too soccer-momlike, just switch to sport-mode, crank up the eight-speaker Bose sound system, and enjoy the wind in your perm. ■
ROBBIE GREENFIELD IN THE SWING
Unlikely hero ends Europe’s US Open drought
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icklaus, Watson, Kite, Woods… and McDowell? I guess Pebble was due’. This is a Tweet posted by legendary Golf Digest writer Dan Jenkins in the wake of a day’s golfing carnage that was X-rated, even for the US Open. It’s the kind of tonguein-cheek summation that has earned Jenkins a huge following on Twitter, but the implication that Graeme McDowell is undeserving of his place alongside this illustrious club of Pebble Beach champions nevertheless seems a little harsh. He may not possess a CV to match those former winners, and in some quarters he’s been portrayed as the beneficiary of the US Open that no one wanted to win. Yet McDowell
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has achieved what none of his more decorated European rivals have so far managed (Padraig Harrington aside) and he did it the hard way. McDowell did not come surging from behind; he led from the front, and he did so with a front row seat to the most spectacular major championship disintegration since Retief Goosen’s calamitous 80 at Pinehurst in 2005. Somehow, he was able to maintain a focus on his own game while 54-hole leader Dustin Johnson took the scenic route around Pebble Beach. Tiger Woods, Phil Mickelson and Ernie Els all struggled for form, but their looming presence on the leaderboard can’t have made Graeme McDowell’s job any easier. The man
from Royal Portrush proved he can close out a major championship on a brutally demanding layout, under the most unrelenting pressure. European golf is on the brink of a golden era to match the heydays of Seve, Faldo, Langer and Lyle, but up until last week all the focus had been on Lee Westwood, Ian Poulter, Paul Casey and Rory McIlroy. Graeme McDowell has typically been considered a streaky performer who had yet to deliver on the promise he showed as an amateur. Now he is the first British player to win the US Open in 40 years and at the age of 30, his belief that ‘careers are defined by majors and mine is now up and running’ seems entirely plausible. ■
THE LIFESTYLE TECHNOLOGY
Hot stuff
THOMAS SHAMBLER GEEK SPEAK
Rotary Aquaspeed $555 Sport isn’t all about running and pedaling, you know. Sometimes there’s shouting at the TV. And then there’s yacht racing, where timing is key. Nothing will signal your intent to achieve perfection better than wearing this precision chronograph on your tiller hand. www.rotarywatches.com
Bell & Ross BR01-97 $4,300 Perhaps best described as ‘military chic’, but there’s no doubt that B&R’s iconic square case is now a fashion accessory. The 42mm carbon fibre shell takes it into the haute couture side of horology, while the power reserve display gives it practicality. www.bellross.com
Jaquet Droz Grande Date $25,000 Jaquet Droz has a knack for creating quirky time-tellers, and this is certainly one of them. This subtle watch has a striking white face that’s delectably minimalist, with a case available in a variety of metallic finishes. www.jaquet-droz.com
Advertising, in 140 characters or less Everyone’s favourite micro-blogging platform has been testing a new type of advertising this month, dubbed ‘promoted trends’. In this new system, advertisers can shell out for space below ‘trending topics’ or the most talked-about items on Twitter at any given time. For those of you still doubting Twitter’s often infuriating reach, listen to this: right now there are over 105,779,710 registered users telling the world what they had for lunch, with more than 300,000 new would-be tweeters signing up each day (presumably to find better sandwich options). Of course, with every Tom, Dick and Ahmed now in on the Twitter action, it’s no surprise that the advertising world has lit up quicker than a bonfire-night campaign launch. But in the real world (that removed from Wi-Fi, iPads and Google) advertising is all about toleration. Offline ads are an unwelcome interference, with commercials popping up every two minutes during your Friday night Lost marathon or garishlydesigned pages interrupting the features in your favourite magazine. But the net, is a different place altogether. If a huge banner ad drops from my browser’s ceiling, I can simply close the page. If my favourite website is adorned with annoying flashy boxes selling this, that and the other, I can employ an ad-blocker to remove all trace. Twitter knows how fickle net-followers can be, and its new ‘promoted trends’ idea seems to work. Look up ‘Toy Story 3’ for example, and @ DisneyPixar is the top Tweet. Search ‘fizzy caffeinated deliciousness’ and it might be from @CocaCola. It’s advertising that’s far less interruptive and might even help users find relevant information, for a change. A novel idea, but only time and Twitter-users will tell if it works. Still, this column isn’t online just yet, and you’ve no choice but to go on reading. So while I have you, BuzzCo Blankets are the best bed-warmers out there. No really, they are. Trust me. ■ Thomas Shambler is the editor of Stuff Magazine Middle East. thomas@motivate.ae
July 2010 gulfbusiness.com
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THE ESSENTIALS BOOKS
Some waving, some drowning
U
ltimately the key to business acumen is good judgment – knowing when you push and when to back off. The anecdotal evidence in Sink or Swim,, by former Gulf Business scribe and stalwart of the Dubai media scene Richard Dean, proves that assertion very clearly. The anecdotes, from such notables as HSBC’S Mukhtar Hussain, Ryan and Linda Mahoney of Better Homes, Mishal Kanoo and others, are interesting and the reader is drawn in to empathise with some of the success and hard luck stories – although it is difficult to feel too much sympathy for a real estate agent that went bust on his way to helping create one of the most artificially inflated real estate markets in the world. The lessons learnt in this collection of stories are distinctly localised, which is both a boon and a hindrance to readers. It could be questioned whether some the guidelines on offer would stand up in a more sophisticated business climate, given that some of the case studies met their successes – and failures – through a combination of right (or wrong) place and time, blind luck and because they were operating in an inexperienced and largely unregulated business environment. The central message of the book is “don’t speculate or you’re going to get burned”, and the core of the book is probably the contrast between the fate of real estate giants Better Homes (still very much swimming) and barrow-boy real estate speculator Mike Revson, the king of the property flippers whose billion-dirham business sank along
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with Lehman Bros. Still, Dubai would be a very different, and far duller place, if it wasn’t for the crazy, rampant speculation that defined most of the 2000s. A more sophisticated tale is out there somewhere on how to exploit a boom and cash in without necessarily joining in the high stakes game of musical chairs that was the Dubai property market, and hopefully these case studies can be used as a bed rock for that or serve as fodder for Dean’s next work. Still, this is an often funny, always interesting and, perhaps surprisingly, frequently nostalgic look back on the Dubai boom, and as such is a great read for businessmen, expats and students of booms and bust alike.
Winning formula?
I
n reading Winning In Emerging Markets, A Road Map for Strategy and Execution, a few things immediately jump to mind. Firstly, is the impression Harvard Business Press can, despite what the blurb says about a radical rethink, make a lot of money out of stating the obvious – in this case, that regardless of geography, emerging markets lack business tools such as market research, effective supply chains or comprehensive legal regulations. That, the cynic in you might say, is exactly why they’re emerging markets. Not only that, the authors, Tarun Khanna and Krishna G Palepu, in advancing their theory of “institutional voids”, are stating an even more obvious notion: first fill these voids. Forgive the increasing cynicism here, but exactly what is revolutionary about
this premise? Remembering the days of fast food empire McDonald’s launching in Moscow, part of the PR coup wasn’t just in opening a symbol of US hegemony right by Red Square, but in explaining that in order to do so required the establishment of a sophisticated supply chain that simply didn’t exist in the country. The same goes for anything from mobile phone companies, who, in a model of complete integration, are keen to control everything from infrastructure to retail to the handsets themselves in any market they hope to exploit, and all the way back to the East India Company, who saw voids in, well, everything from shipping to construction to roads to banking to plantation management to, well, everything. And filled them. Yet another example of stating the obvious is a mantra throughout the book that business models may need to be adapted, and companies should be flexible when approaching alien ways of doing business. Who would have thought it? Once you’re over that, though, there is some useful advice. The authors go a long way to providing the intrepid frontier entrepreneur with a sophisticated set of tools to find these voids, and tailor a regional business plan accordingly. Of course, anyone who has ever stepped into a genuine frontier knows that a rule book will only get you so far and any set of hard and fast rules are more likely to be hindrance rather than help. Still, the book is nothing if not exhaustive, and for the MBA student looking for some meat for their thesis on emerging markets, or a business development manager eying opportunities in a far off place, there’s plenty of examples of hindsight, sorry, case studies, to sink their teeth into.
THE ESSENTIALS CALENDAR
Exhibitions, conferences & seminars Gulf Business presents a comprehensive listing of business-related exhibitions, conferences, events and seminars in the GCC for the forthcoming month. EVENT Dubai Summer Surprises
DATE Jun 17-Aug 7
LOCATION
ORGANISER
Dubai
DSF
Alshaam For Organizing Exhibitions & Festivals, LLC on tel: +968 24797800/ +968 24791502.
Photography Art Exhibition
Jul 3-22
The Majlis Gallery, Bastakia Dubai
Majlis Gallery
Corporate Forecasting, Budgeting and Cost Control
Jul 4-5
Hyatt Regency, Dubai
Marcus Evans
DSF (Dubai Shopping Festival) on tel: +9714 600545555.
Certificate in Strategic Finance for Non-Finance Managers
Jul 4-7
JW Marriott Hotel, Dubai
IIR
ECS (Expo Centre Sharjah) on tel: +9716 5770000, fax: +9716 5770111.
Certificate in Financial Analysis
Jul 4-7
Dusit Thani Hotel, Dubai
IIR
KIF (Kuwait Int’l Fair) on tel: +965 5387100, fax: +965 5393872.
Senior Executive Finance
Jul 4-7
Dusit Thani Hotel, Dubai
IIR
IT Leadership
Jul 4-7
JW Marriott Hotel, Dubai
IIR
Project Management for Special Events
Jul 4-7
Dusit Thani Hotel, Dubai
IIR
Aligning Project Management with Organisational Strategy
Jul 4-8
Villa Rotana Hotel, Dubai
IIR
Certificate in Advanced Data Analysis
Jul 5-8
JW Marriott Hotel, Dubai
IIR
JITCOM 2010
Jul 5-11
Sana'a Expo Centre
Apollo Co
Essential Business and Management Skills Programme
Jul 11-14
Dusit Thani Hotel, Dubai
IIR
Advanced Public Relations Masterclass
Jul 11-14
Dusit Thani Hotel, Dubai
IIR
Training Needs Analysis and Evaluation
Jul 11-15
Dusit Thani Hotel, Dubai
IIR
Nationalisation Masterclass
Jul 18-21
JW Marriott Hotel, Dubai
IIR
IFRS – Int’l Financing Reporting Standards
Jul 18-21
JW Marriott Hotel, Dubai
IIR
Muscat Sweet & Food Exhibition
Jul 20-24
Oman International Exhibition Centre Alshaam
Optimising Your Balance Scorecard Implementation
Jul 25-28
JW Marriott Hotel, Dubai
IIR
Family Expo
Jul 29-Aug 10
Kuwait International Fair, Kuwait
KIF
Ramadan Food Exhibition
Jul 29-Aug 10
Kuwait International Fair, Kuwait
KIF
Kuwait Household Exhibition
Jul 29-Aug 13
Kuwait International Fair, Kuwait
KIF
Homes Middle East
Aug 19-Sep 4
Expo Centre Sharjah
ECS
IIR Middle East on tel: +9714 3365161, fax: +9714 3352682. Apollo Co. for International Exhibitions on tel: +9671 441000, fax: +9671 448086. Majlis Gallery on tel: +9714 3536233. Marcus Evans Kuala Lumpur on tel: +603 27236604, fax: +603 27236699.
Gulf Business and Motivate Publishing accept no responsibility for errors and omissions, date and location changes or cancellations. Please contact the organisers directly for further information.
If you are organising or know of an event taking place in the GCC, please send full details to: Exhibitions, Gulf Business, Motivate Publishing, PO Box 2331, Dubai, United Arab Emirates, or fax to +9714 2827593, or email gb@motivate.ae.
Homes Middle East
Implementing your BSC
Strategic Finance course
Homes Middle East is a comprehensive consumer fair that offers exhibitors a cost-effective platform to promote their furniture and furnishing products, kitchen and bathroom designs and fittings to prospective customers. Homes Middle East is a reliable platform for distributors, dealers, manufacturers, retailers, importers and exporters to showcase their products and services.
Training in the implementation of a Balanced Scorecard (BSC) can increase its effectiveness. The data provided by the BSC helps you review your business strategy, based on a realistic assessment of your organisation’s performance. BSC can help focus your business resources and human potential on the delivery and achievement of your strategy, thus helping to maintain a competitive advantage.
Training in Strategic Finance is ideal for experienced managers and directors with a limited formal financial background, as well as managers moving into roles with financial accountability. Non-finance managers will benefit and be able to understand the full financial vocabulary and how financing decisions are made, learn the drivers of good financial performance and discover how to make more profitable business decisions.
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THE ESSENTIALS WHERE TO STAY
AL RAHA BEACH HOTEL
Abu Dhabi Al Raha Beach Hotel, created to provide the very best of traditional Arabian hospitality. This unique jewel of luxury and tranquility, offering magnificent services, awaits you for an unforgettable visit to Abu Dhabi. Tel 00971 2 50 80 555 Fax 00971 2 50 80 429
SHANGRI-LA
Sheikh Zayed Road, Dubai Offers 301 luxuriously appointed guest rooms and suites, nine restaurants and bars, health club and spa, tennis and squash courts and outdoor swimming. Tel 00971 4 3438888 Fax 00971 4 3438886 Email: sldb@shangri-la.com
LAYIA OAK HOTEL & SUITES
Al-Barsha, Dubai Offering 161 furnished units ranging from 81 sqm to 160 sqm, 3 dining venues, 3 multi-purpose meeting rooms, recreation facilities & a majestic landscaped area around the temperature-controlled pool. Tel 00 971 4 437 78 88 Fax 00 971 4 437 79 99 Email: welcome.oak@layia.net
MEDIA ROTANA DUBAI
Al Barsha South-TECOM Located in the heart of Dubai’s new business hub and opposite Dubai Media City and Internet City the Media Rotana Dubai has 460 rooms, suites and deluxe hotel apartments, 5 award winning dining venues and 15 meeting rooms. Tel: 00971 4 4350000 Fax: 00971 4 4350011 Email: media.dubai@rotana.com
SOFITEL AL HAMRA JEDDAH
Jeddah, Saudi Arabia The hotel situated in the heart of the business centre offers 211 rooms, 17 suites and 25 apartments. 5 meeting rooms and 2 reception rooms to accommodate up to 350 people. Tel 00966 2 6602000 Fax 00966 2 6604145
PARK ROTANA ABU DHABI
THE FAIRMONT DUBAI
TAMANI HOTEL MARINA
ACACIA HOTEL
HOLIDAY INN RIYADH, IZDIHAR
Khalifa Park area, Abu Dhabi Conveniently located adjacent to Khalifa Park, the property offers 318 luxurious rooms and suites, 6 world class dining venues, 6 meeting rooms and spacious ballroom with day light access and outdoor terrace. Tel 00971 2 6573333 Fax 00971 2 6573000 Email park.hotel@rotana.com
Sheikh Zayed Road, Dubai This 394-room hotel boasts 10 dining and entertainment venues a superb spa and unrivalled meeting facilities. Tel 00971 4 3325555 Fax 00971 4 3324555 Email: dubai.reservations@fairmont.com
Dubai Marina This hotel boasts 240 units, including studios, 2 or 3 bedroom units, and penthouses. There is also one restaurant. a health club, indoor and outdoor swimming pools and 5 meeting rooms. PO Box 215855, Dubai, U.A.E Tel 00971 4 3992500 Fax 00971 4 3993225 Email sales@tamanimarina.ae
Ras al Khaimah The Acacia Hotel is a superbly designed four star hotel complete with Al Nakhla restaurant, the stylish Flamingo bar, the vibrant Club Acacia, a pristine pool serving as a backdrop to varied and exciting Theme Nights, the luxurious O-Zone Spa, and high-energy Oxygen Gym. Tel 00971 7 2434421 Fax 00971 7 2434429
Riyadh, Saudi Arabia The first 5 star Holiday Inn hotel in the Kingdom, with 289 new and trendy accommodations, huge lobby with W-Fi access, outdoor pools, sauna, Jacuzzi and health club. Also has state-of-the-art meeting rooms, 24-hour business center with professional secretarial support. Tel 00966 1 4505054 Fax 00966 1 4505056
JUMEIRAH EMIRATES TOWERS
Sheikh Zayed Road, Dubai Jumeirah Emirates Towers is a sleek architectural masterpiece of steel and glass. It redefines the business hotel category, seamlessly combining form with function, high technology with unparalleled luxury and elegance with efficiency. Tel 971 4 3300000 www.Jumeriah.com
INTERCONTINENTAL DOHA
Doha, Qatar Situated in the West Bay area, yet located near the city. With its various dining options, 24 suites, 234 rooms, private beach and state-of-the-art gymnasium, it is an idyllic setting for business and leisure. Tel 00974 4844444 Fax 00974 4839555
MÖVENPICK HOTEL DOHA
JEDDAH HILTON
Doha, Qatar Located on the Corniche Road, opposite the Museum of Islamic Art, the hotel offers 154 rooms and suites, a business centre and meeting rooms. Recreation facilities are also available. Tel 00974 4291111 Fax 00974 4291100 www.moevenpick-doha.com
Jeddah, Saudi Arabia Located a 10-minute drive from the Jeddah International Airport. Offers over 414 rooms including 46 suites. 10th and 11th floors are Executive floors addressing all the needs of a modernday businessman. Tel 00966 2 659 0000 Fax 00966 2 658 2489
IS YOUR HOTEL LISTED ON THIS PAGE? To become one of Gulf Business’ Preferred Hotels and benefit from exposure to the extensive readership of Gulf Business throughout the GCC contact Circulation Department on 00971 4 2052497
Gulf Business magazine is available in all of these GCC hotels
July 2010 gulfbusiness.com
79
THE ESSENTIALS STATS & FACTS MERGERMARKET TOP DEALS OF THE MONTH Deal Value ($m)
Bidder
Target
Deal Description
464
Jindal Steel & Power Ltd
Shadeed Iron & Steel LLC
Jindal Steel & Power Ltd (JSPL), the India-based steel and power company, has agreed to acquire Shadeed Iron & Steel LLC, the Oman-based steel making company, from Al Ghaith Holding PJSC, the UAE-based holding company having interests in the steel sector, for a consideration of $ 464m.
100
Abu Dhabi Commercial Bank
Royal Bank of Scotland (UAE) (Retail Banking business)
Abu Dhabi Commercial Bank (ADCB), the United Arab Emirates-based bank, has agreed to acquire the retail banking business of Royal Bank of Scotland (UAE, the United Arab Emirates-based bank engaged in consumer banking, commercial banking and international banking, for a consideration of $ 100m.
31
Abdullah bin Nasser Al-Thani (private investor)
Malaga Club de Futbol SAD
Abdullah bin Nasser Al-Thani, the Qatar-based private investor with interest in telecommunication, sports and the entertainment industry, has acquired Malaga Club de Futbol SAD, the Spain-based football club from Fernando Sanz, the Spain-based private investor with interest in sports and the entertainment industry, the son of Lorenzo Sanz and president of the club, for a minimum consideration of EUR 25m.
25
Six of October Development and Investment Company
Palmyra Real Estate Development Company (40 per cent stake)
Six of October Development and Investment Company (SODIC), the listed Egypt-based real estate developer and investor, has agreed to acquire 40 per cent stake in Palmyra Real Estate Development Company, the Syria-based real estate developer, from MAS Economic Group, the Syria-based economic group, for a consideration of $ 25.3m.
7
Hightech Payment Systems SA
ACP Qualife
Hightech Payment Systems SA, the listed Morocco-based company which designs and provides comprehensive, modular and integrated solutions that manage electronic payment business, has agreed to acquire ACP Qualife, the France-based consulting company which specialises in training and engineering TEST Information Systems, for cash and stock consideration of EUR 5.6m.
-
National Scientific Company Limited
Greif Inc (Flexible Product Business and Multiwall Bag Business)
National Scientific Company Limited (NSCL), the Saudi Arabia-based company which supplies industrial and scientific chemicals, laboratory equipment, scientific instruments and research and training services to the scientific community and a subsidiary of Dabbagh Group Holding Company Ltd, the Saudi Arabia-based conglomerate and Greif Inc, the listed US-based manufacturer of steel, plastic, fibre, corrugated and multiwall containers and protective packaging products, has agreed to form a 50:50 joint venture, for an undisclosed consideration.
-
Check Point Software Technologies Ltd
Liquid Machines Inc
Check Point Software Technologies Ltd, the listed US-based Internet security company specialising in the VPN and firewall markets, has acquired Liquid Machines Inc, the US-based provider of data security software, from Atlas Venture, New Atlantic Ventures, Draper Fisher Jurvetson, Masthead Venture Partners, RRE Ventures, the US-based private equity firms, and Goldman Sachs, the US-based investment bank, for an undisclosed consideration.
Notes: Deals are based on the geography of target, bidder or vendor being in the Middle East, for the period between May 20, 2010 and June 17, 2010. Based on announced deals, including lapsed and withdrawn bids. Where deal value is not disclosed, the deal has been entered based on turnover of target exceeding $10 million. Activities excluded from the table include property transactions and restructurings where the ultimate shareholders’ interests are not changed.
12,000 10,000
MIDDLE EAST ACTIVITY BY INDUSTRY SECTOR YTD 2010 – VALUE Number of deals
14,000
Value ($m)
MIDDLE EAST QUARTERLY M&A ACTIVITY FROM 2004 TO JUNE 17, 2010 Value Volume
50
30
6,000
20 10
2,000 0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2004
2005
2006
2007
2008
0
2009 2010
MIDDLE EAST ANNUAL M&A ACTIVITY FROM 2004 TO JUNE 17 , 2010 200
Value Volume
25,000
150
Value ($m)
20,000
100
15,000 10,000
50
5,000 0
2004
2005
2006
2007
2008
2009
2010
Financial Services 16% Consumer 1% Business Services 1%
Defence 1% Agriculture 1% Pharma/Medical/ Biotech 3%
Transport 17%
Leisure 8%
Real Estate 19%
Energy/ Mining/ Utilities 6%
MIDDLE EAST ACTIVITY BY INDUSTRY SECTOR YTD 2010 – VOLUME
0
Number of deals
30,000
Industrials and Chemicals 17%
40
8,000 4,000
TMT 10%
Real Estate 7% Energy/ Mining/ Utilities 7%
Leisure 3%
Transport Pharma/Medical/ 3% Biotech 3%
Agriculture 1% Defence 1%
Business Services 7% Consumer 10%
Construction 1%
Financial Services 14%
Industrials and Chemicals 20%
TMT 23%
Mergermarket tracks all M&A deals of more than $5m where the target, bidder or parent is a Middle Eastern company. For further details, call +9714 4376482.
80 gulfbusiness.com July 2010
OUT TO LUNCH NEIL BACKHOUSE
Airline meals MICHAEL GORDON discovers the ups and downs of the private jet industry over
lunch at Bistro Madeleine, in Dubai’s InterContinental Hotel.
D
espite being a penchant of the über-wealthy, the private jet market has also taken a nose-dive since the global recession hit, according to Neil Backhouse, director of sales and marketing, Dana Jets. Over lunch at Bistro Madeleine in the InterContinental Hotel in Festival City, Dubai, Neil took us on a veritable journey through the history of private aviation. Neil is, as you would expect from a sales and marketing man, very enthusiastic about his business. And well he should be, having worked in aviation for many years – albeit in some wildly different guises. He says his passion for travel began as a small boy in a family car journey to visit a relative. “I had my head hanging out of the window as we drove along, oblivious to anything going on in the car. I was enthralled and encapsulated by the white lines in the road that seemed to run on indefinitely. A little while later I was shown my first map and I could see that towns and cities were linked by all these lines – or roads as they turned out to be. I was amazed at how you could get from one place to another so easily, then when I got to see a world map everywhere seemed accessible.” Neil’s first journey began at the age of 16 when, frustrated by a supermarket check out job, he packed a bag and set off alone to trek around Egypt. Bitten by the travel bug, Neil then took up a job as a flight attendant. He has gone up in the world today, quite literally, to work for a private jet firm owned by the Ras Al Khaimah royal family. Although enthralled by the tale, I pause Neil so we can order our food in this rustic French café. I opt for the goats’ cheese and beaf bacon salad, which is deliciously toasted and placed on a bed of crisp green salad, while Neil gave a resounding thumbs up to his meat paté. Mains follow, as does the chatter, and I opt for steak and frites, which is cooked to perfection, while Neil has a posh cottage pie. Neil goes on to tell me how he joined Dana Jets in December 2009, after working for two other private airlines.
82 gulfbusiness.com July 2010
Dana has a moderate fleet of six aircraft, capable of carrying between eight and 14 passengers, with a maximum reach of New York without refuelling. The company boasts a global portfolio of around 2,500 customers, varying from brokers, to direct clients to operators. However, in January 2009, which would ordinarily be the busiest month, Neil noticed a big hit in the market. “By May it was picking up again, whereas Europe and the US were showing no signs of recovery and Asia was only slightly improving. “However, our improvement was nowhere near as high as the hit we took. Furthermore, operators began to panic sell and prices were slashed by around 35 per cent. “Everyone began to watch their spend and our clients returned to business class travel on commercial airlines.” We pause again to order dessert, crêpe suzette and a chocolate mousse, both of which were beautifully presented and packed with flavour, while light and airy. Coffee follows, as does the chat. Neil continues: “In terms of demand and prices it will take a few years to return to normality.” Prior to that crash, the market grew by 10 to 15 per cent over a six-year period up until 2009. In light of the downturn, Neil believes that airline operators should work together to overcome some of the hurdles – like the grey charter market. The grey charter market refers to when a client uses a privately registered aircraft which is not registered to the GCCA or holds an Alpha 6 certificate. “These operators are not bound by the policy procedures and restrictions of the GCCA – therefore their crew may not have the same level of training and maintenance checks may not be of the same standard. Those clients are putting themselves at risk to save money. “Furthermore, this competition is destabilising the market as it forces us to drop our prices further, otherwise we could not compete. “Right now it is a buyer’s market and they are in a strong position to dictate terms, and operators are prepared to bend the rules if it means selling something.”