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1996-201 1996-2011 PUMP UP THE VOLUME Bahrain BD 1.0 Kuwait KD 1.0 Oman RO 1.0
1996-201 1996-2011
1996-201
1996-2011
1996-201 1996-2011 PUMP UP THE VOLUME Bahrain BD 1.0 Kuwait KD 1.0 Oman RO 1.0 Qatar
1996-201 1996-2011 PUMP UP THE VOLUME Bahrain BD 1.0 Kuwait KD 1.0 Oman RO 1.0 Qatar

PUMP UP THE VOLUME

1996-201 1996-2011 PUMP UP THE VOLUME Bahrain BD 1.0 Kuwait KD 1.0 Oman RO 1.0 Qatar

Bahrain

BD

1.0

Kuwait

KD 1.0

Oman

RO 1.0

Qatar

QR 10

Saudi Arabia

SR

10

UAE

DHS 10

BD 1.0 Kuwait KD 1.0 Oman RO 1.0 Qatar QR 10 Saudi Arabia SR 10 UAE

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1996-2011
1996-2011
ABDALLA SALEM EL-BADRI, SECRETARY GENERAL, OPEC
ABDALLA SALEM EL-BADRI,
SECRETARY GENERAL, OPEC
1996-2011 ABDALLA SALEM EL-BADRI, SECRETARY GENERAL, OPEC REGIONAL NEWS, PEOPLE, NUMBERS AND EVENTS MATEIN KHALID The

REGIONAL NEWS, PEOPLE, NUMBERS AND EVENTS

GENERAL, OPEC REGIONAL NEWS, PEOPLE, NUMBERS AND EVENTS MATEIN KHALID The falling oil price and buying

MATEIN KHALID The falling oil price and buying BP shares.

DR TOMMY WEIR Company succession planning is vital.

OLIVER CORNOCK Metro stations are good for business.

DR TOMMY WEIR Company succession planning is vital. OLIVER CORNOCK Metro stations are good for business.

FINANCE Islamic scholars get their act together. M&AS Regional mergers are on the up. INDUSTRIES

FINANCE Islamic scholars get their act together.

M&AS Regional mergers are on the up.

INDUSTRIES Cement firms face closure as UAE projects are culled.

POLITICS Will Morocco and Jordan join the GCC?

AVIATION Private jet travel boosted by Arab Spring talks.

A SHOT IN THE ARM The region’s health and pharmaceutical sectors are set for another massive cash injection.

PROFILE: MEDICINE MAN TVM Capital MENA CEO on bringing the first private IVF clinic to the region.

TOP TECH TRENDS AT GITEX Cloud computing and cybercrime on the agenda at this year’s mega-tech event.

HOW THE RICH GOT RICHER Saudi Arabia’s banks are riding the government spending wave.

BRAIN GAIN Local business schools get top marks as pupils scramble to update their CVs.

A CALL FOR ARMS The region’s defence spend is set to explode as GCC security fears grow.

scramble to update their CVs. A CALL FOR ARMS The region’s defence spend is set to
scramble to update their CVs. A CALL FOR ARMS The region’s defence spend is set to
scramble to update their CVs. A CALL FOR ARMS The region’s defence spend is set to

  TRAVEL Unwind in the mountains at Six Senses Hideaway Resort. CRUISE Reviewed: Rolls Royce
  TRAVEL Unwind in the mountains at Six Senses Hideaway Resort. CRUISE Reviewed: Rolls Royce

 

TRAVEL Unwind in the mountains at Six Senses Hideaway Resort.

CRUISE Reviewed: Rolls Royce Ghost EWB.

PLACES TO BE Does Dubai’s La Petit Maison live up to its French reputation?

STATS Regional mergers, acquisitions and bond issuances.

GULF BUSINESS PREFERRED HOTELS A selection of the region’s top rooms.

EVENTS The Gulf’s top business conferences.

IN YOUR SHOES Paul Kenny, CEO of Cobone.

top rooms. EVENTS The Gulf’s top business conferences. IN YOUR SHOES Paul Kenny, CEO of Cobone.

34% 5,200 $434m 120%

34%
34%

5,200

5,200

$434m 120%
$434m
120%

2,700 $20.4m 62% $64m
2,700
$20.4m
62%
$64m

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Saudi and UAE to send Egypt loan lifeline

Saudi and UAE to send Egypt loan lifeline Egypt expects to reach a loan agreement with

Egypt expects to reach a loan agreement with Saudi Arabia and the UAE worth several billions of dollars each soon, while another $500 million should come from the Arab Monetary Fund. According to Egyptian Finance Minister Hazem al-Beblawy, the country is likely to strike a deal on loans before the end of the year. “There are talks about a package coming

from Arab countries, from Saudi Arabia, from the Emirates. We are under discussion, but both of them have presented proposals of a couple of billion dollars each,” he said. Egypt turned down a $3 billion International Monetary Fund loan in June. Its economy contracted 4.2 per cent in the quarter that ended in March amid the worst political crisis to hit the country in three decades.

SOAPBOX

SOAPBOX

Dubai can expect robust growth ahead thanks to support from buoyant revenues in the trade sector, a government official has said. Abdul Rahman Saif Al Ghurair, chairman of Dubai Chamber of Commerce and Industry, said: “Dubai’s economy will grow between three and five per cent in 2011.” In an interview with Arabic daily Al Khaleej, he said the emirate’s economy will be strongly supported by the trade sector and added that he expects more than six per cent growth next year.*

economy will be strongly supported by the trade sector and added that he expects more than
that he expects more than six per cent growth next year.* Bad debt hampers UAE banks
that he expects more than six per cent growth next year.* Bad debt hampers UAE banks

Bad debt hampers UAE banks

The UAE is still suffering the painful side effects of escalating non-performing loans (NPL), with provisions rising 29.8 per cent year-on- year in July, according to data released by the central bank. Bank provisions for NPLs increased 2.3 per cent month-on-month to Dhs48.4 billion in July 2011, and are up

9.3 per cent for the first seven months of the year. This was despite bank loans edging up by just 2.6 per cent during the last year. Bank deposits, on the other hand, are up 11.5 per cent year-on- year to Dhs114 trillion although the month of July saw a 1.1 per cent decline in total deposits.

up 11.5 per cent year-on- year to Dhs114 trillion although the month of July saw a
up 11.5 per cent year-on- year to Dhs114 trillion although the month of July saw a

How to rule the world like

to Dhs114 trillion although the month of July saw a 1.1 per cent decline in total

project focus
project focus

Saudi mega steel mill open in nine months

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On the Radar

++++++++++++++++++++++++ On the Radar The Saudi unit of ArcelorMittal, the world’s largest

The Saudi unit of ArcelorMittal, the world’s largest steelmaker, expects to start production at its new mill in Jubail in the first half of 2012, according to local media. The $700-million plant will produce 600,000 metric tonnes of pipes a year for the oil and petrochemical industry, said Mohammed Al-Jabr, ArcelorMittal’s managing director in Saudi Arabia. Al-Jabr was formerly the vice president of Saudi Basic Industries Corp.’s steel unit.

SOAPBOX

Nakheel cleans up its act Nakheel, Dubai’s biggest developer by assets, told creditors it wrote
Nakheel cleans up its act
Nakheel, Dubai’s biggest developer by assets,
told creditors it wrote down its real estate by
$21 billion after property values in the emirate
fell by more than half.
The state-owned company wrote off
Dhs301.4 million in the first half of last
year, Dhs73.8 billion in 2009 and Dhs4.44
billion in 2008, according to its Islamic bond
prospectus obtained by Bloomberg News.
After the write-offs, the company’s share
capital dropped to Dhs10.6 billion as of June
2010 from 87.1 billion in 2008.

GCC and the world

company’s share capital dropped to Dhs10.6 billion as of June 2010 from 87.1 billion in 2008.

4,000
4,000

Myself. I believe in myself. Whatever I’m doing now in the world championship is not

Myself. I believe in myself. Whatever I’m doing now in the world championship is not
Myself. I believe in myself. Whatever I’m doing now in the world championship is not
Myself. I believe in myself.
Whatever I’m doing now in
the world championship is not
an opportunity handed to me.
I worked hard to build this
opportunity. The idea of Abu
Dhabi tourism backing the
world championship started
with my belief and the support
of the Abu Dhabi government.
a
I always loved motorsports. I started with carting and then in
2002 I tried out a rally car and decided to master it well and
participate in the UAE championship event to see how it felt.
In the first year itself when I won most of the titles it boosted
my confidence in attempting outside my terrain. I believe if
you put a goal in your head, you can achieve that goal.
is
When you’re competing in a world championship and
have keen drivers and have already secured big sponsors
like Abu Dhabi, Ford and Castrol then you’re really not
looking for more big sponsors and any new sponsor
wanting to enter the team will need to bid high. So it’s
not a problem when it comes to WRC, but when we are
doing a regional event that has nothing to do with WRC
it can get quite difficult.
Yes, perhaps in two to three years it could happen. There’s
a lot of work to be done and if the interest continues to
hold good then yes, it’s possible.
The Bugatti.
I’m really happy with my performance so far; the only
think I’d like to see is more Emiratis do what I’ve done.
I always wanted to motivate people in this region to try
motorsport and be an inspiration as an ambassador.

ADIA backs Virgin’s bid for Lloyds bank branches

ADIA backs Virgin’s bid for Lloyds bank branches The Abu Dhabi Investment Authority has emerged as

The Abu Dhabi Investment Authority has emerged as one of

group of investors backing Virgin Money’s bid for the 632

branches put up for sale by Lloyds Banking Group. The online bank, part of Sir Richard Branson’s Virgin empire, has already expressed an interest in buying state-owned Northern Rock, but with funding now in place to back a larger deal, it is

also poised to enter a second round bid for the Lloyds branches. Abu Dhabi’s sovereign wealth fund, which has assets in excess of $600 billion, could be the necessary ingredient to ensure Richard Branson’s company launches a successful tender. Other new backers include the private equity group Carlyle, General Atlantic and the Universities Superannuation Scheme, all of which will take a minority stake in the online bank if it

successful in acquiring either Northern Rock or the Lloyds

branches, or both.

a minority stake in the online bank if it successful in acquiring either Northern Rock or
a minority stake in the online bank if it successful in acquiring either Northern Rock or

COMMENT Matein Khalid is fund manager in a royal investment office and a writer in
COMMENT
Matein Khalid is fund manager in a
royal investment office and a writer
in finance and geopolitics.

a MAJOR FALL IN CRUDE OIL IS inevitable this autumn. Why? Three reasons. One, the momentum of global economic growth has clearly decelerated since July. German and US GDP growth has been revised sharply downwards. The US economy created zero new jobs in August, a bad omen for gasoline demand in the planet’s leading energy consumer. Chinese GDP has peaked even as South Korean/Taiwan industrial exports begin to soften. A Greek default is the kiss of death for Eurozone growth. The macro storm clouds have now turned oil bearish. Two, the collapse of the Gaddafi regime means a credible new Libyan government is in place, even though the IEA estimates that it will take at least another year to resume exports, given the war damage to refineries, pipelines and ports. This means that the geopolitical/oil supply risk premium due to Libya will unwind in the next three months. Three, Saudi Arabia ignored the OPEC quota system and increased its production to its highest ever levels. OPEC output is now 30 million barrels a day, the highest in five years. There is no sign of an imminent U-turn in the kingdom’s oil pricing and production strategy. Saudi Arabia is OPEC’s swing producer and there is no immediate prospect of a Saudi output cut. As both global supply and demand curves shift, Brent could well decline by $25 to the $80–85 range. Oil futures markets also suggest that traders expect a fall in oil prices, as open interest in out of the money put options has surged on the

NYMEX West Texas crude contract with a $50 strike price. This means that the smart money expects at least a $30 fall in prices from current levels. The oil market clearly wants to hedge against

a 2008-style black swan event when the failure of

Lehman Brothers, global recession and the seizure of

the world’s credit market led to an epic meltdown in black gold, with crude oil falling from $147 to below $40 between July and December 2008. While another free fall is unlikely, the spike in the dollar, the high Volatility Index (VIX) and Europe’s bank funding woes is highly oil negative. Asian economies are nowhere near recession, though GDP growth in India and China has probably peaked in early 2011 as monetary tightening bites. Moreover, Saudi Arabia announced a $138 billion social welfare spending hike and it needs a budget breakeven price of at least $80 Brent to avert budget deficits and contractor debt crises. This means that Saudi Arabia, Kuwait and UAE will act to cut output to preempt a major fall in oil prices. Saudi Arabia publicly protested speculative bullish spirals in oil prices in April because they hit industrialised economies and increased global recession risk. The kingdom has, in essence, a strategic economic interest in cutting output. Saudi Arabia has offered the oil market a de-facto floor against a ruinous collapse. The fall in oil prices is bearish for the shares of listed energy producers in London and New York. Yet a compelling opportunity in BP shares will emerge if they trade in the 300-320 pence range in London. Thanks to the Deepwater Horizon debacle in the Gulf of Mexico and the collapse of CEO Robert Dudley’s Rosneft share swap deal to explore for oil in the Siberian Arctic, BP shares trade at a valuation discount of 30 per cent to its Big Oil peers and offers

a dividend yield of 4.6 per cent, more than double

the yield on the US Treasury ten year note. BP has

a stellar balance sheet, a global exploration,

production and downstream franchise and significant growth opportunities in India, Brazil, the Caspian Basin, West Africa and Angola. As oil prices slide, so will BP shares. Yet bottom fishing in Big Oil’s deep value Cinderella could well prove profitable for investors eager to drill for oil on the London stock exchange.

deep value Cinderella could well prove profitable for investors eager to drill for oil on the

COMMENT Dr Tommy Weir, advisor on fast-growth and emerging market leadership, and author of The
COMMENT
Dr Tommy Weir, advisor on
fast-growth and emerging
market leadership, and
author of The CEO Shift

i N MY TWENTIES I WAS LIVING IN VIRGINIA, US,

when a major ice storm broke. Amid the clean up operation one of my friends taught me a life lesson that I hope to never forget – SPF (single point of failure). Nearly every time it is the SPF that keeps you from reaching your goal. Following the storm, the guys did the macho thing and gathered our chainsaws, put on our boots and headed to my friend Steve’s house to help him clean up the fallen trees. Right in the midst of what started out to be a productive day of cutting wood, we all learned the lesson of the SPF. One of the chains popped off the saw and while attempting to fix it we realised that no one had the necessary screwdriver. This one oversight kept us from finishing our task. If you are thinking that it was a stupid oversight to forget a common- sense tool, you are right. Oftentimes the SPF is an obvious oversight. Now, back to the business environment, what is the SPF (single point of failure) for your business? If my observation is accurate, for most businesses in the region the SPF lies in succession planning – the act of identifying and developing future leaders for a business. And the most critical role to be planned for is that of the CEO. Does the $13 billion Ralph Lauren Inc. have a ready successor for the 71-year-old founder Ralph? Unfortunately, it does not appear that they are ready for the departure of their and CEO. During the calls for Rupert Murdoch to step down during the News Corp. phone hacking

scandal it was obvious that succession planning is their SPF as they are left without a designated and ready successor. I wonder how many of the family empires across the GCC have a successor in place and are prepared for the future? Succession planning is especially tough for founders of companies where they have been the leader, brand representative and patriarch. When Silicon Valley legend Steve Jobs retired in August, Apple quickly announced that Jobs was to be succeeded by longtime heir apparent Tim Cook. Because this succession was well planned, analysts do not expect Jobs’ resignation to derail the company’s fabled product-launch roadmap. In my conversations with founders and other senior executives there is a general concern about the quality and readiness of a future cadre of leaders. Apple is known for its great bench strength of candidates for internal promotion and ready qualifications to lead at higher levels. There are three points to think about when you take on this strategic exercise:

You must calculate the risk of vacancy and impact of a position on the business. The higher the risk and the impact, the more crucial it is that you have ready successors in place.

Succession planning is very similar to athletics. Teams that have great ‘bench strength’ – players who are ready to replace another who gets hurt or tired – usually outperform their competitors. Through succession planning an organisation is ensuring that they have leaders in line for each leadership position.

Make sure that you have future roles planned for gifted leaders. And make sure they know that you do. Otherwise, your talented employees will not stick around. Across the region, CEO succession is one of the most neglected and strategic risk mitigation strategies. It is time to erase the SPF called succession planning and confront the challenge.

strategic risk mitigation strategies. It is time to erase the SPF called succession planning and confront

COMMENT Oliver Cornock, regional editor for the GCC, Oxford Business Group
COMMENT
Oliver Cornock, regional
editor for the GCC, Oxford
Business Group

d UBAI’S PROPERTY MARKET IS VALIDATING

the adage that the three most important factors in real estate are, indeed, ‘location, location, location’. While much of the market is expected to post modest gains this year before rebounding more strongly in 2012, properties that are close to the emirate’s growing metro network are increasing in popularity and value at a healthy pace. According to data from property management firm Asteco, rents for residential properties near some of the 29 stations on the Red Line – one of two lines of the Dubai Metro network – have risen by more than 10 per cent since the route opened in September 2009. Vineet Kumar, the head of business development at Asteco, said easy access to transport connections is a major selling point for clients looking for property and the demand for prime locations will drive up returns. “People like to be near a transportation link,” Kumar told reporters last month. “Since the opening of the metro, properties in close proximity to a station have become a priority for many tenants, who are prepared to pay extra for the privilege.” Both commercial properties in the city centre, as well as residential units along the Red Line’s 52km route, have seen a boost in demand, and that trend is set to continue now that the 23km Green Line is in operation. Daniel Norman, the director of sales and marketing at the Crowne Plaza Deira-Dubai, located within two minutes’ walking distance of the

new line, has already begun encouraging hotel patrons to use the metro. “We’re really very delighted about the metro opening up just down the road,” he said. Proximity to the new metro line, which is served by 18 stations and runs from Etisalat to the Creek, is a priority for residential tenants, many of who would prefer to reside close to public transport. According to Asteco, a small property within walking distance of the Green Line could command an annual rent of Dh50,000 ($13,600), while a similar unit further away would only see Dh40,000 ($11,000). Elaine Jones, the chief executive officer at Asteco, said she believes the rail network is in the process of changing the local property market. “The Dubai Metro has added a whole new market dynamic and as the network is rolled out across the emirate, the rental disparity will become even more pronounced than it is already.” To some degree, the metro is also dependent on real estate projects for its operational success. The Al Jadaf and Creek stations will remain closed for the time being because the property developments they are intended to serve have not yet been completed. They will become operational when there is demand for it – possibly in the next year or so. The popularity of the metro with commuters from residential districts inspired the Roads and Transport Authority (RTA) to declare that it would increase late night and weekend services. Any increase in services will also boost the business opportunities of shopping and recreational centres close to the stations, which, in turn, could raise their rental and sales value. Although Dubai’s property market cannot depend on expansion spurred solely by the improving transport network, the rising prices along the main metro corridors are set to put the sector on a fast track to wider growth.

network, the rising prices along the main metro corridors are set to put the sector on

A S INDIVIDUALS THAT hold the key to unlocking an industry that could soon be

A S INDIVIDUALS THAT hold the key to unlocking an industry that could

soon be worth $5 trillion, Islamic finance scholars have traditionally opted for a rather informal approach. Over the last decade, the potential wealth locked up in Gulf has encouraged international banks to enter Islamic finance in their droves. And when launching Islamic products, these financial institutions have called on

scholars to authorise their products as Shari’ah compliant. The handful of well-known scholars that operate in the region have become keenly sought by banks for their Islamic legitimacy. In the search for a ‘fatwa’ (or seal of approval for an Islamic product) bankers would call around until they found a scholar that would oblige. It was dubbed ‘fatwa shopping’, and scholars built a reputation for running around with briefcases and a cell phone issuing decrees left right and centre. This is starting to change though according to Islamic finance analysts, who have seen Islamic scholars begin to formalise their operations and often mimic the Western conventional models of doing business.

Ayman Khaleq, an Islamic finance specialist at law firm Vinson & Elkins, said: “They are setting up more on an institutional basis, so they have an office, with junior associates that can help in their absence. “Banks like to know where a Shari’ah scholar is if he’s not at his desk. Before, you had a hotmail or gmail account and a mobile number, and you just hoped he answered.” Khaleq said in recent years there had been a groundswell of demand from finance professionals, especially at Islamic banking meetings and conferences in the Gulf, for scholars to change. “Institutional investors are not used to the ‘lone ranger’ approach and need more of the institutional model that they’re familiar

with in their dealings with law firms and accountants.” Bankers have complained in the past that until the credit crunch the scarcity of Shari’ah scholars was the biggest drag on growth of the Islamic finance industry. But, despite this, the number of scholars qualified to pass judgment on products has remained low. The Islamic finance industry could reach $5 trillion by 2015, up from $1 trillion currently, according to the latest forecasts by Moody’s Investors Service. This is three times the size of China’s mutual fund asset base. The fact that there is no formally accepted definition of Islamic finance poses the biggest threat to this growth. In some cases a product is deemed Shari’ah compliant in one market and not in another, which is especially the case with Malaysian products, which are often judged not Shari’ah compliant in the more austere Gulf. This is less of a problem for Islamic banks in the Middle East, which are obliged to have a Shari’ah supervisory board to approve or ban transactions, products and services. They often depend on an even narrower clique of about a dozen or so ‘brand name’ scholars who usually chair their Shari’ah boards. Jawdat Al-Halabi, CEO of Jeddah- based NCB Capital, the largest Islamic wealth manager in the Middle East, said the bank’s Shari’ah board looks into all products that go out and tests them for authenticity on a regular basis. “You do have different interpretations from scholars in different countries, even within Saudi Arabia. But there’s enough commonality in most of the structures and products. “When you’re innovating and exploring untested products, that’s when it becomes trickier; there are some scholars that are stricter than others. As a rule, we tend to err on the side of caution and pursue a

a rule, we tend to err on the side of caution and pursue a more strict

more strict interpretation on our products. Historically, the risks associated with the shortage of qualified Shari’ah scholars in the Islamic financial industry has been a major obstacle. Currently, financial advisors, Islamic financial institutions and their Shari’ah committees are grappling with how to structure Islamic finance to properly integrate with conventional finance. The end result has been the development of a cumbersome and document-heavy structure that in many respects echoes conventional financing. GCC scholars that are heavily versed in Shari’ah law often don’t have the financial background needed for modern sophisticated banking products. Still, Al-Halabi added that there are some scholars that are becoming increasingly globalised and are being used by various institutions, whether its in the GCC, MENA or more internationally. It’s likely that as Gulf scholars take on a more formal, institutionalised approach

to doing business, so their international client list will expand. The appetite for Islamic finance has strengthened given the battering that conventional banking suffered during and after the global crisis. Financial transactions in Western Europe and North America were left in tatters, while Islamic finance witnessed a refreshing burst of growth. Largely shielded from the economic downturn, although not entirely immune, there is a significant opportunity for the Islamic financial system to provide an attractive alternative to conventional financing. One Gulf-based banker said: “The financial crisis hit Islamic banking, but not as hard as conventional banking. This spurred interest from clients for Shari’ah compliant investment. “Since the start of 2011, clients have looked for value and growth and better returns than they’ve seen in the past. Whereas they were previously sitting on the sidelines post-crisis, they are now becoming more demanding,” he added. Islamic finance hubs in Asia, including Malaysia and Singapore, have long been wary of the region’s enormous growth potential on the international stage. Although Malaysia is by far the bigger and more sophisticated market, the Middle East is seen as a sleeping giant. If local Shari’ah scholars continue to upgrade and modernise then the dynamic of the Islamic global marketplace could shift dramatically in the coming years.

to upgrade and modernise then the dynamic of the Islamic global marketplace could shift dramatically in

M ERGERS AND ACQUISITIONS (M&A) are set to pick up this year due to the

M ERGERS AND ACQUISITIONS (M&A) are set to pick up this year

due to the narrowing of the price gap between buyers and sellers, pressure on some companies’ capital structure and sovereign wealth funds investing in enterprises to bolster their local economies, analysts and investors said. Although this year marked the scrapping of the estimated $12 billion sale of a stake in Kuwait mobile operator Zain to UAE’s Etisalat, the M&A landscape has been busy with deals from corporates and sovereign wealth funds. “At the start of 2011, when the political unrest was in full swing, there was an initial expectation that the levels of M&A activity could decline. We have conversely observed a noticeable uptick in activity, particularly in the intra-regional mid- market space,” said Omar Mehanna, HSBC head of advisory for the Middle East and North Africa. “In certain sectors,

there are strategics that have survived the crisis remarkably well with their capital structures intact. They view this period as an opportune time to diversify and consolidate their position both regionally and internationally.” M&A deal value in the Middle East and North Africa in the first half of 2011 rose 30 per cent to $21.17 billion from a year earlier period, according to portal Zawya.com. The largest M&A deal was Abu Dhabi-government backed IPIC’s $5 billion acquisition of an incremental equity investment in Spanish oil firm Cepsa taking its stake to 100 percent. “The first half was a bit surprising. It will continue with the same trend, keeping an average of 30% growth this year (compared with 2010),” said Youssef Saada, Zawya’s head of financial research. HSBC currently has a pipeline of mandates for inbound and outbound transactions involving Sovereign Wealth Funds and large family groups, with activity centered in the UAE, Qatar, Saudi Arabia and Kuwait, said Mehanna, declining to give specific figures. He expects increased activity

in the larger mid-market deals in the $100-$300 million range, which are usually led by family businesses and mid- sized corporates. “Since late 2008, a number of corporates have effectively been buying time or living in denial regarding the pressures on their capital structures,” said Mehanna. “They have been requesting temporary debt rollovers from their banks. For many, it has got to a stage now where their strategic capital raising options are becoming more limited, so what’s left is effectively M&A.” HSBC acted as M&A advisor for several recent deals, including Qatar’s Mannai Corp acquisition of a stake in UAE mobile phone retailer Axiom Telecom, the Qatari sovereign wealth fund’s purchase of a stake in German builder Hochtief and the Kuwaiti sovereign wealth fund’s investment in French nuclear group Areva. The regional unrest and financial woes gripping the US and Europe, as well as capital and debt restructuring of various corporates in the Gulf have pushed prices to a level conducive to deals.

“A year and a half ago there was a fundamental disconnect between buyers and sellers,’’ said Mehanna. “The vendors’ mindsets were still pre-crisis and it was very difficult to convince them of the fundamental value of their businesses. With the political unrest, the price disconnect between buyers and sellers has narrowed.” And with the fixed-income market remaining open to select high-rated corporates, the equity markets in the doldrums and bank lending selective, many companies are turning to M&A for capital. One example is Axiom Telecom, which cancelled its IPO last year due to market conditions and opted instead to sell its stake to a firm this year. HSBC’s views on prices are echoed by UAE contractor Drake & Scull, which has been actively snapping up companies in the Gulf region, with the most recent acquisition this year in Saudi Arabia. “Valuations in the market have come down tremendously,” said vice-chairman and CEO Khaldoun Tabari. “What we thought were opportunities in 2009-2010,

today they are better than in 2009, which were also good valuations at the time. Today there is more pain.” But the M&A arena remains fraught with problems in terms of regulation and politics within a company and country, which are thwarting potential deals. Big-ticket cross-border items such as the scrapped Zain-Etisalat tie-up remain sparse and are unlikely to increase, given the current ecosystem. Louis Besland, partner and vice president at consultancy A.T. Kearney Middle East, said: “I do not expect significant growth in number or value of M&A deals in the short term because of regulations in the region, the lack of visibility and the shareholding structure, which is very much linked to families. In some cases, there are conflicting interests between stakeholders. They (shareholders) think their investment is their inheritance that they can and need to keep.” The thin line between shareholders and management is often blurred and the fact that most large publicly-listed companies have some sort of government connection does not help. Many sectors, such as banking, are ripe for consolidation, but little activity has occurred because it is viewed as a strategic sector. “There are no real cross-border regulations. It is very much country- specific, which makes large deals difficult and complicated,” said Besland. “Cross- sector regulation is unpredictable and for international companies, it is a bit worrying to deal with the region, when you also have the unrest.

to deal with the region, when you also have the unrest. If you look at the

If you look at the regulations for local employment, it is changing rapidly and this creates uncertainty for international corporations.” Meanwhile, sovereign wealth funds, who invest heavily abroad, are unlikely to significantly slow down their investments, despite the financial crash in the US and Europe. But their future investments are set to become more selective and geared toward importing technology and know- how because governments are under increasing pressure to answer to a restive population demanding better jobs and economic prospects. IPIC’s investment this year in CEPSA fits well with Abu Dhabi’s efforts to expand its refining capacity, while Qatar’s investment in Hochtief will prove handy as the Gulf state embarks on a building spree for its World Cup in 2022 and other mega projects. “I can see an increase in international investments (from sovereign wealth funds), particularly where, not only the value proposition is compelling, but also the strategic angle can yield tangible benefits back into the local economy,” said Mehanna. “In the past, the strategic angle was there, but it was not as prominent.”

into the local economy,” said Mehanna. “In the past, the strategic angle was there, but it

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A S GRANDIOSE CONSTRUCTION projects are scaled back, looming overcapacity is biting the UAE cement

A S GRANDIOSE CONSTRUCTION projects are scaled back, looming

overcapacity is biting the UAE cement industry. The country’s production has slumped in the past two years, and industry players believe that that volumes will more than halve in 2011 from a peak of 20.8 million tonnes (mt) in 2008. With as much as 43 per cent capacity owned by unlisted companies this year,

the UAE will feel excessive pain as these owners are unable to share losses with

outside equity holders. Industry insiders say that a collapse in capacity utilisation to around 26 per cent will take place in 2012, a figure that fell to 37 per cent in 2010. Plant shutdowns are inevitable. In contrast, the prospects of Saudi Arabia’s cement industry are solid with

a construction boom contributing to

brisk activity in the sector, a new report from Kuwait’s Global Investment House (GIH) said. Saudi plants account for half of GCC production capacity and the effects of the global financial crisis on its cement industry are likely to be muted. The outlook for Kuwait and Qatar

is neutral.

Excluding Saudi Arabia, GCC countries continue to witness an erosion in profits:

“The UAE saw a decline of 56.1 per cent year on year in 1H2011, while Oman has seen a decline in profitability by 53.3 per cent year-on-year in the same period,” said GIH, adding that UAE excess capacity was also adversely impacting the Omani cement sector, with UAE-produced cement being dumped in the sultanate. “Cement prices in the GCC averaged around $66 per tonne in 1H2011, compared to $68.60 per tonne enjoyed in 1H2010,” said the report. High prices of around $85 per tonne in Kuwait and $75 per tonne in Oman in early 2010 have now moderated to $80 and $65 respectively. Elsewhere, prices averaged

between $60-70 in Saudi Arabia and Qatar, although UAE prices are now testing the $50
between $60-70 in Saudi Arabia and Qatar, although UAE prices are now testing the $50

between $60-70 in Saudi Arabia and Qatar, although UAE prices are now testing the $50
between $60-70 in Saudi Arabia and Qatar, although UAE prices are now testing the $50

between $60-70 in Saudi Arabia and Qatar, although UAE prices are now testing the $50 floor.

At a cement industry conference in Dubai in late 2008, the signs were there but the industry was reluctant to face them: the sector was headed for disastrous levels of overcapacity. An official from a UAE-based company said he was determined to be optimistic, but the passage of time has shown otherwise. His verdict today:

“Everybody [in the UAE] is losing money now. I just heard that [only one company is] on course to break even [in 2011]. The rest are losing money.” It is difficult not to feel some sympathy. As the real estate boom gathered momentum in the years to 2008, cement producers were left struggling to meet a deluge of demand. Cement plant build- out usually takes at least two years, so decisions to go ahead with expansions or greenfields are coloured by the current operating environment. As a result, in 2008, UAE capacity grew 24.7 per cent, Saudi 32.7 per cent and the GCC as a whole 26.1 per cent. Herein lies the root of the UAE’s trouble. With the overall projects market having

fallen from around $900 billion in mid- 2009 to around $800 billion a year and a half later, according to MEED, the pain in the UAE cement sector is set to continue.

The kingdom’s bloc of eight listed cement companies is extremely long in the tooth – the first was set up as early as the 1950s – and for decades saw negligible levels of debt and unfeasibly high levels of profitability. Three years ago, analysts were expecting a major rollout of new construction and this is ongoing. In March this year, global real estate consultants Jones Lang Lasalle reported that the kingdom would need “900 new houses per day completed over the next five years,” or a total of 1.65 million homes. Several big-ticket projects will also bolster the Saudi industry. The consultancy identifies major elements of government infrastructure investments totalling SR133 billion: six airport projects; two port projects; and 23 railway projects. The central region, focussed on Riyadh, is forging ahead, with established player Yamama, and recent entrants, Najran, Madina and Riyadh Cement Companies accounting for the bulk of volume growth, GIH said.

“The biggest construction sites in Saudi Arabia are now the biggest in the world,” said a regional construction services supplier. “This situation will continue for [at least] the next two years.”

The outlook for cement in Qatar is bright, with several major projects, including roads, rail and construction having received a boost by Qatar’s winning World Cup 2022 host bid. Qatar and Oman have much smaller cement capacities than their two larger GCC partners, at 6.2 million tonnes per annum (mtpa) each. However, Qatar National Cement has announced it will add 930,000 tonnes of capacity soon, to bring it to 5.36 mtpa.

Oman has witnessed the halving of sector profits owing to a 37 per cent increase in costs and a “huge increase in financial charges,” GIH said. Raysut Cement’s revenues grew by 20.7 per cent while Oman Cement’s saw a drop of 13.9 per cent. Pioneer Cement’s entry into the market has increased sales volume.

Accounting for around 80 per cent of GCC sales, the contrasting fortunes of Saudi Arabia and the UAE will continue to be the focus of investor sentiment. Certainly, many regional players are looking to the kingdom’s vibrancy to offset the UAE slowdown. “We are at the same level or higher [in terms of operations] than 2009 because of Saudi Arabia,” says Peter Vogel, general manager, Doka Gulf FZE. “[In the UAE alone], we are half where we were [then].”

Arabia,” says Peter Vogel, general manager, Doka Gulf FZE. “[In the UAE alone], we are half

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W ILL THE SIX GCC countries become seven, or even eight? Meetings at foreign minister

W ILL THE SIX GCC countries become seven, or even eight? Meetings at

foreign minister level held in Jeddah last month brought closer the possibility of Jordanian – and Moroccan – membership of the GCC over the next decade, but a time-scale for formal accession has not yet been clarified. The GCC has announced that it will set up specialised committees to look at the question of Jordan and Morocco’s membership, while the council has unveiled a five-year economic development assistance programme for the two monarchies and Jordanian Foreign Minister Nasser Joudeh confirmed that Jordan’s formal membership request was submitted on 10 September. “Jordan requested to join and the GCC initially accepted, based on the last summit in Saudi Arabia in May,” said Riad Kahwaji, security expert and CEO of Inegma (the Institute for Near East & Gulf Military Analysis). “No one had any idea about admitting new countries, while the two countries that were interested in joining the

GCC were Yemen and Iraq. Both have not been admitted.” According to a report published in the Kuwait Times in August, there is far from unanimous opinion for Jordan’s bid to join the GCC. “The attitude of GCC states’ governments towards Jordan’s application to join the Gulf bloc seems to vary from country to country, with some, such as Saudi Arabia and Bahrain, welcoming the move, and others like Kuwait and Qatar expressing reservations on the idea,” the paper said. “Oman and the UAE, meanwhile, have wholly rejected the idea of Jordan’s becoming a member, although they were initially supportive of it.”

Jordan applied to join the GCC in the eighties and again in 1996, while Morocco’s enthusiasm for membership is said to be tempered by distance and the desire to stand on its own two feet. Both countries would welcome the economic benefits of joining but the advantages to existing GCC members are less clear, despite the clear potential benefits of fellow Middle Eastern and Arab monarchies broadening the base of the organisation. Kahwaji says the original news about Jordan’s bid to join the GCC was a complete surprise to some of the [GCC] states. “What is understood so far is that this was a Saudi initiative to include the Jordanians, and to invite Morocco to join. In principle, this was not a comprehensive effort; it was more or less unilateral [by the Saudis] and pulled the rest on board in support. Nevertheless we have seen the GCC leadership feel compelled to join in inviting the Jordanians, while many officials in their circles remain hesitant, suspicious, and even disapprove of the idea.” “It is not clear why the GCC invitation was made. Jordan had made the request years ago and it was ignored for a while. The Arab Spring did help but no one is sure why,” says Jordan-based journalist and commentator, Daoud Kuttab. “Some say that GCC countries wanted the use of Jordan’s security and intelligence service. Others say it was a way of creating a royal club of monarchies.” It is too early to say what kind of membership Jordan will be offered if its bid is successful. “Jordan is more interested in the… economic opportunities and not so much in full or partial membership,” says Kuttab. “Jordan’s interests are economic, while the GCC’s are political and security-related.” The apparent lack of homogeneity between Jordan and the GCC has led to concern in Amman. “[Accession to the GCC] is a big worry for many liberals. It has even become the butt of jokes questioning when Jordanians will have to wear the dishdash and hijab,” Kuttab said.

It has even become the butt of jokes questioning when Jordanians will have to wear the

W HILE THE COMMERCIAL aviation market nosedived during the Arab Spring this year, regional private

W HILE THE COMMERCIAL aviation market nosedived

during the Arab Spring this year, regional private jet usage soared. In times of crisis, the need for urgent high-level talks and diplomatic relations increases, as does the need for convenient, safe transportation. “This year, the regional private jet market will grow by around seven to eight per cent, having experienced negative growth of 10 to 11 per cent in 2010,” said Shane O’Hare, CEO of Abu Dhabi-based Royal Jet. “The private jet market is maturing, and we are getting to the places airlines don’t fly to.” The added regional flying activity as heads of state frantically flew between states to stymie this year’s Arab Spring

crisis directly bolstered the bank balances of private jet companies. “Global crises can stimulate the need for more travel because of the need for more delegations and summits. Last year there were also an unprecedented number of summits and meetings, both at a global

level and regional level, directly caused by the economic crisis, and that’s good for our business. This is where our business

is quite unique,” said O’Hare. The dwindling corporate market has

tempered the growth of the private jet industry, as jittery businesses made travel cutbacks to protect their bottom lines in an uncertain economic climate. Semi- government-owned Royal Jet services

a mix of corporate, government and

presidential sectors. “Corporate travel represents about 20 per cent of our business. It accounts for around 50 per cent in the US, 30 per cent in Europe and 20 per cent here,” said O’Hare. “It’s up and down, so our growth this year has been balanced out by different factors.”

In a nod to the growing demand for chartered services, the private jet firm recently launched its Premium Connect service for UAE airline Etihad’s VIP customers, allowing customers to switch

directly from a commercial flight to a private jet and fly to the destination of their choice. “The old adage that time is money has become increasingly important. Premium Connect offers a seamless global network and can connect customers from Abu Dhabi to anywhere in the world,” said O’Hare. “The private jet industry is maturing very quickly and the consumer

is increasingly understanding the value

of private jet travel, security and check-in

times. People want to travel when they want to travel.” Royal Jet is also counting on its thriving

medical tourism business as a growth pillar. T he firm currently has 11 aircraft, seven of which can be utilised for medical services. Royal Jet provides an on-board medical service, which can be compared to a flying hospital, and Europe, Asia, Bangkok in Thailand and Washington in the US are currently the most popular destinations for health trips. From 2008 onwards, Royal Jet identified a five-year expansion strategy that is aimed at creating solutions to address the Middle East’s business aviation growth in conjunction with Abu Dhabi’s wider 2030 vision to boost traffic and tourism to the emirate. “Royal Jet works closely with Etihad and Abu Dhabi corporations and it’s

a collective effort to drive traffic to

Abu Dhabi. It’s driven from the top,” said O’Hare. The Abu Dhabi Tourism Authority released its report on the industry’s first-half year performance at the end of July, showing that the emirate’s hotels hosted more than one million guests during the first six months of the year, an increase of 11 per cent over the same period in 2010.

than one million guests during the first six months of the year, an increase of 11

OPEC’s Secretary General knows a crisis when he sees one. And, despite a recent downward revision of global oil demand, Abdalla Salem el-Badri is not a man to panic. “What I’m seeing is not a crisis in the oil market, it’s a slight slowdown.” While OPEC recently trimmed back 150,000 barrels a day in oil demand for the rest of the year to reflect 2011 growth of 1.1 million barrels a day, growth in 2012 is expected to be 1.3 million barrels a day. However, El-Badri admits that the US stimulus packages are floundering. “You cannot reduce unemployment by hedging and speculating on commodities.” He urges that something

must be done to increase employment in North America. “I hope these negative signs will not continue through the remainder of the year and throughout 2012. We hope solutions can be found.” The health of the global economy is always uppermost on the minds of OPEC members. Oil producers require healthy demand from the world market and any slowdown will have a direct impact. The September OPEC Monthly Oil Market Report estimates the world economy will grow by 3.6 per cent in 2011 and 3.9 per cent next year. The downward revision on the figures is only a small percentage, but the slowdown in industrial activity in the developed world is

evident and remains a major concern in the short-term. El-Badri watches the industry and the

evident and remains a major concern in the short-term. El-Badri watches the industry and the markets on a daily basis and he concedes, “there is a slowdown in economic growth and a decrease in oil demand and this will affect the balance of supply and demand.”

Demand for oil from China and Asian countries have been key driving forces in the market in recent years. Chinese GDP growth remains robust at nine per cent, despite Chinese government intervention to curb inflation. As El-Badri oversees an aggressive investment plan by OPEC members, he seeks to know China more intimately. “The country will become the

world’s biggest energy player and while there are good relations between individual OPEC countries and the Chinese, OPEC as an organisation is anxious to improve the dialogue with China.” OPEC has succeeded in building strong relations with the EU and the IEA, despite its recent release of reserve stocks seen as unnecessary by some OPEC members and many in the market. There’s still a distance with China since their last meeting in 2007 and El-Badri says he needs “to talk to the Chinese and exchange data and information.” As OPEC looks to increase production in the future, El-Badri says his members want to feel confident there will be demand for the additional oil. Without

this assurance, “investment will be just shooting in the dark and new supply will never go to the market.” OPEC also wants to see stronger ties with the BRICS; Brazil, Russia, India, China and South Africa. “It’s good for us both to help forecast our numbers and forecast exactly how much oil we should

produce. If they are confident there are no negative signs then we will produce what they want, but we really don’t know now.” Despite an uncertain future for the world economy and global oil demand, there remains considerable investment

in the energy sector. OPEC members

have sealed a robust investment plan,

committing to a quarter of the world’s energy investment needs, according

to OPEC’s World Oil Outlook 2010.

A healthy sum of $312 billion has been

allocated for expansion of OPEC member oil projects in the coming years up to

2015. Price fluctuations will always be

a concern, but El-Badri makes it clear

that OPEC has no price target in place with OPEC decisions determined by “a reasonable price where we can invest and where it does not adversely effect world growth.” Industry analysts and many ministers

have hinted at a price around $85 a barrel

to please all parties and recent aggressive

social spending programmes in producing

countries in the Middle East would tend

to support this figure. El-Badri says that

all member countries are still going ahead with planned investment in the oil industry, particularly in Iraq. “All the countries have contributed this amount

ahead with planned investment in the oil industry, particularly in Iraq. “All the countries have contributed

to increase oil supply by 21 million additional barrels by 2015. We care about bringing

to increase oil supply by 21 million additional barrels by 2015. We care about bringing additional supply to the market.” Investment in Libya is currently at a standstill, but the Secretary General hopes this will restart in the near future. According to the IEA’s World Energy Outlook 2010, Middle East countries will collectively invest around $37 billion per annum from 2010 until 2035. Much of this investment will be in the upstream sector, such as the upcoming $20 billion Aramco/Dow Chemical petrochemical Sadara plant in Saudi Arabia. The IEA has studied the countries in the Middle East that can add the incremental barrels and agrees the bulk will come from Iraq, but also from Saudi Arabia, Kuwait and the UAE. El-Badri says “member countries realise they are also consuming more, so they are all looking to find additional oil or gas to satisfy domestic demand as well.” OPEC may have revised oil demand downwards slightly for this year and next but El-Badri says the long-term energy demand is what member countries are planning for. “In 1960, energy demand was around 55 million barrels of oil equivalent, in 2011 it is 235 million barrels. Looking ahead to 2035, the world needs 355 million barrels of oil equivalent to satisfy demand.”

Fossil fuel will remain essential and El-Badri adds that “oil and coal will go neck to neck.” The rise of alternative energy is inevitable but, with a projected 50 per cent rise in global energy demand to 2035, El-Badri says “there is room for all kinds as every country is looking for more energy and demand will accommodate all types of energy.” But surely the growth of alternative energy is gaining strength and will be a threat to the oil business? Not so, he says. He adds that some sources of alternative energy present dilemmas like using land for food or fuel and the nuclear issue remains uncertain since the catastrophe in Japan. “They are growing from a really low base and we encourage all sources of energy and we see growth in the energy mix as demand rises.”

Medium to long-term demand may be secured, but in the shorter term, the market would like to see OPEC

demonstrating a more unified front in decision making. The lack of agreement at the June meeting this year may have appeared negative but El-Badri insists that OPEC members have lived through tougher times than a disagreement over supply and demand figures. He says we need to remember the context under which the meeting took place. “The outside environment was not so friendly; there were many negative signs like the state of the US economy, the European debt crisis, and fears of a slowdown in China. Added to that, we had one country out of production and six new ministers at the meeting.” El-Badri presented his report to the June meeting indicating fears of a shortage of 1.5 million barrels in the third and fourth quarter of this year. “Some countries agreed with my report, some countries did not, but this is hardly a crisis.” He reminds us that “OPEC has faced a lot of difficulty in the past, real difficulties where some countries invaded each other and fought each other but we have been able to overcome these difficulties.” He says a real test of unity came in 2008 when the oil price dropped from $147 to $30 a barrel. “OPEC took a decision and spoke with one

of unity came in 2008 when the oil price dropped from $147 to $30 a barrel.

voice then to reduce production, and we

did it successfully.” This current slowdown in oil demand should not be viewed as

a crisis, he says, especially when the

market has more pressing issues at hand, such as job creation and re-instatement of consumer confidence.

The Secretary General is relieved and encouraged to see Libyan oil coming back to the market. “Restoring oil production in Libya is an emergency, it must happen without delay and any obstacles.” The past few months has been a time of personal and professional concern for the Libyan-born oil official who has watched

the demise of his country and its oil industry with fear and sadness. “I spent all my life working in Libya – from clerk to chairman of the National Oil Company.

I know all of the oil fields by heart.” It

was also a time of immense personal distress as members of his family were left behind in the country. Months later, the future looks brighter. His family is safe and well, the war is coming to a close and the outlook for the oil industry is hopeful. El-Badri is optimistic about the future of energy in Libya, and says restoring oil production is vital. “This is the only

source of income they have.” The priority he says is to “restore their production and restore their exports because it’s important the Libyan people have an income, medicine, food and other things needed to get back to normal as it was or even better.” He says the country now needs the full cooperation and investment of the international oil companies. He urges them to waste no time. “I encourage them to come back immediately and without delay as they are part of the game, they must be there from day one and take the initiative.” Libyan oil expertise is first-class and he is confident that the expat workers

is first-class and he is confident that the expat workers and management will also return in

and management will also return in their droves once the security and political environment is more settled. “Security must be 100 per cent and financial help must be given.” He said the oil industry has the leadership and the expertise to succeed. “I have great confidence in the chairman of the National Oil Corporation, Dr. Nuri Berruien. The country has some of the best oil experts and the National Transitional Council must support them, this is a top priority.” He says he expects Libya to be producing up to a million barrels a day in six months and he expects oil production to be back to pre- war levels of 1.6 million barrels a day within 15 months. El-Badri also suggests that current oil prices have a built-in political unrest risk- premium of $16 – $20 a barrel. If Libya can return to normal soon, this premium should shrink, although continuing turmoil in the region means it is unlikely to disappear altogether. The oil price has hovered above $100 most of this year with Brent Crude becoming the benchmark of choice. The relative strength of the oil price, given the weakness of the global economy, has surprised the market as well as the Secretary General, but many analysts say it underlies longer-term tightness in the market. El-Badri is not worried about members over-producing at a time like this, the market has not been flooded, but he expects OPEC members to reduce excess production when Libya comes back on track. “As long as other member countries have a different oil from the very sweet Libyan oil, then this cutback will automatically happen. Libya has a strong customer base in Italy, France, Spain and Austria; the market will take care of this shift.”

OPEC celebrated its 50th anniversary last year and “this economic organisation is still relevant and vital to the world economy,” says El-Badri. Now in his second term as Secretary General, he looks forward to the remaining year and a half

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despite the challenges. The organisation combines the production efforts of 12 member countries, eight of

despite the challenges. The organisation combines the production efforts of 12 member countries, eight of which are in the Middle East. In this very uncertain world, the future for OPEC will be more of the same, ensuring the stabilisation of oil markets. No new member countries are being considered “we are not out knocking on doors and no-one is knocking on our door right now.” El-Badri does not rule out future expansion but says “we have no immediate intention to grow, if any countries are interested, they are welcome to talk to us, but they must qualify and

abide by the OPEC statutes.” OPEC and other major energy-related organisations are busy collecting data throughout the

year and longer-term reports such as OPEC’s Annual World Oil Outlook and the IEA’s World Energy Outlook are due out before the end of the year. The International Energy Forum’s Joint Oil Data Initiative’s investment guide will be published sometime in 2012. This collective information will help guide costly investment decisions in a world of economic uncertainty. The need for solid energy data has never been so urgent; clearer data and more transparent facts and figures can only make OPEC Secretary General El-Badri’s job a less difficult one in the coming 18 months.

facts and figures can only make OPEC Secretary General El-Badri’s job a less difficult one in

SHOT IN THE ARM he region’s healthcare sector is and expatriates become more entering a

SHOT IN THE ARM

he region’s healthcare sector is

and expatriates become more

entering a golden age as nationals

demanding about their health needs and pharmaceutical firms grow their bases in the region. MENA region spending on healthcare is now likely to hit $125 billion in 2015, up from $65.6 billon in 2009, according to Al Masah Capital research. As the GCC’s standard of living continues to benefit from high oil prices, it is clear that attainment of “Western” style standards of healthcare today do not match progress in other lifestyle areas. The US allocates four times as much in GDP spending to healthcare as the GCC, while per capita health spending is dwarfed by American spending levels that are eight times as high. Taking MENA as a whole, per

capita health spending is less than a twentieth of that in the US. There are three US hospital beds for every two in the GCC and only one physician in the region for every two in the US. Speaking to reporters last month, Amitava Ghosal, partner at Al Masah Capital Management, said investing in healthcare was bound to increase. “On the demand side, high population growth rates, at two per cent for the last 10 years, exceeded global rates of 1.3 per cent. Life expectancy was also up, with lower mortality thanks to new medical techniques. There were also more older people in the region's growing population.” “Awareness about healthcare facilities has increased among locals, who are demanding higher quality services. And healthcare insurance is also undergoing massive change. We lag behind. Some 200,000 new beds are needed in the region,” he said.

The belated decision by Dubai’s Ruler, Sheikh Mohammed, in May to appoint his wife, Princess Haya, to take over the reins at Dubai Healthcare City as Chairwoman of the DHC Authority, is another sign of the reassessment of health priorities. In tacitly endorsing a refocusing of the City’s strategy away from real estate and back onto turning Dubai into a healthcare tourism hub, there seems to be recognition at the highest political level that excellence in healthcare cannot be compromised.

Nimble private equity companies committed to fast venture creation have capitalised on the opportunity. According to Al Masah, almost $900 million was invested by regional houses in 13 healthcare ventures in the region between 2005 and 2010. The UAE’s openness saw it win six of the projects and just over half of the total investments, while Saudi Arabia, with its booming economy and Egypt, with

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a population approaching 80 million people, the rest.

Gulf Healthcare International (GHI), set up in Dubai Healthcare City in 2009 as

a joint venture by Kuwaiti private equity

players Global Capital Management and the Varkey Group, which was later bought out by JP Morgan, owns a total of 19 business units with interests in diagnostic laboratories, polyclinics and occupational health clinics. “The UK has a ratio of 23 per cent obesity and seven per cent diabetes. In most of the Middle East, obesity is

above 50 per cent while diabetes is at 23 per cent,” says Mark Adams, GHI’s CEO. “In Saudi Arabia, 50 per cent of those over age of 40 exhibit full-blown diabetes. These diseases involve huge costs to the healthcare system, involving cancer, heart disease, strokes and limb amputation if not treated.” Abraaj Capital’s healthcare portfolio invested in a number of transactions, mainly in 2008. Through its funds, it bought a 90 per cent stake in Egyptian medical business Al Borg Laboratories. It has also invested in Acibadem Healthcare

Laboratories. It has also invested in Acibadem Healthcare              

Laboratories. It has also invested in Acibadem Healthcare              

 

 

 

 

 

 

 

 

2010

 

2011

 

2012

 

2013

 

2014

 

2015

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A G R

 

2013   2014   2015 C A G R               2013   2014   2015 C A G R              

 

 

 

       

   
 

 
 

 

 

     

   
 

 

   

   

   

 

   

 
 

   
 

   
     

   

 

     
 

 
 

     

 

 
 

   

   

 
 

 

 

 

     

 

     

 

 

 
 

   

 

   

     

 

   

 

 

   

     

 
         

     

Group, a Turkish hospital chain, and in Tadawi Group, the largest wholesale pharmaceutical chain in

Group, a Turkish hospital chain, and in Tadawi Group, the largest wholesale pharmaceutical chain in

Group, a Turkish hospital chain, and in Tadawi Group, the largest wholesale pharmaceutical chain in Saudi Arabia. Through its funds, Abraaj Capital maintains a 50 per cent stake in Acibadem and a 49 per cent stake in Tadawi. “The long-term situation for GCC healthcare is simple: the outlook is very strong as everything in the region is coming from a very low base,” says

Ahmed Badreldin, senior partner at the firm. ”For example, the average number of diagnostic tests done per person per year totals to around 15-20 in Western Europe. In Egypt, the figure is 3.5 tests per person, 5-6 in Jordan and the same in the GCC.” The Al Masah report says that diagnostic centres, offering a range of services from X-rays, MRI and pathology, and high-street pharmacy chains are attractive to private equity players. With lower overheads than hospitals and clinics, which are still the major preserve of government health authorities in the region, the potential for expanding revenues is good. “Diagnostics business offers attractive profit margins,” it said. Meanwhile, the historical development of the healthcare sector via government vehicles and free service to local nationals has meant that the private sector has traditionally been underrepresented in the sector. Al Masah research puts the government share of total spending in healthcare in the MENA

region at 64 per cent. Clearly, as costs rise, GCC governments want to allocate a part of the infrastructure spending to the private sector to free up valuable spending for other targets. Ghosal says several initiatives are taking place at government level to bridge the gap between public sector provision and private sector entry.

are taking place at government level to bridge the gap between public sector provision and private

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16.2 PER CENT     4.3 PER CENT 3.8 PER CENT Paradoxically, the Arab Spring

16.2 PER CENT     4.3 PER CENT 3.8 PER CENT Paradoxically, the Arab Spring

16.2

PER CENT

 

   

 

4.3 PER CENT
4.3
PER CENT

3.8 PER CENT
3.8
PER CENT
PER CENT     4.3 PER CENT 3.8 PER CENT Paradoxically, the Arab Spring has seen
PER CENT     4.3 PER CENT 3.8 PER CENT Paradoxically, the Arab Spring has seen

Paradoxically, the Arab Spring has seen government expenditure levels rise significantly. “The private sector is now being welcomed by the government to invest in a big way. Public-private partnerships are increasing in popularity. As a private equity player, we feel there are immense opportunities to come in,” he says.

“The GCC countries are likely to experience a sharp increase in healthcare needs in coming years, primarily led by a growing and ageing population and a rise in chronic non-communicable ‘lifestyle’ diseases,” a research report published by Alpen Capital in December said. “This, coupled with favourable government policies, would drive growth in the pharmaceuticals sector in the region.” GlaxoSmithKline, which had the largest pharmaceuticals market share in the UAE in the last 12 months, has seen 17 per cent growth in its Middle East markets, which include the GCC, Jordan, Iraq,

Syria and Lebanon in the past five years, according to marketing manager, Ghandi Gharaibeh. “[Regional]

Syria and Lebanon in the past five years, according to marketing manager, Ghandi Gharaibeh. “[Regional] development is taking place very quickly,” says Gharaibeh. “Authorities and private providers are improving, and there are now centres in Dubai, Ajman, Qatar and Bahrain. It’s evolving. Screening for cancer could be better in the

region. Epilepsy treatment needs to improve. Infrastructure is good but equality of care needs attention, so you tend to find varying quality in training of medical staff and treatment guidelines.” The local industry is starting to see growth in pharmaceutical companies in Abu Dhabi, RAK and Dubai. There are six big companies

 

 

 

RAN K

 

US$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
   

                in Saudi Arabia and GlaxoSmithKline expects all of

in Saudi Arabia and GlaxoSmithKline expects all of them to grow. Oman boasts two companies and products there are cheaper, with innovative new remedies. Overall, Gharaibeh expects higher prices, more volume and higher-cost care. “It looks to us as if people in the region are going to get older, to settle longer,” he says. “We have already started to see people retire to Dubai. They are using products for hypertension, asthma, cholesterol, and obesity. The number of children is rising, and more kids need care and preventative vaccines. The average child needs 30 shots of vaccine in his first three years.” One frequently cited statistic is the around $15 billion leaving the region as patients travel to the US, Europe, India and the Far East to receive treatment. As a flagship player in Dubai Healthcare City, Adams wants to see the city turn into a centre for inbound healthcare tourism. And although the vexed issue of health insurance is complicated by the disparity of incomes in the UAE, “It is highly unlikely that you will end up with a national health service that is trying to provide the same [level of service] to everyone,” he says. “Healthcare always inflates: it’s like property,” says Gharaibeh. “There are always things people want to treat, they wish to live longer, and get more secure. As time goes on the list of products they require will only grow.”

treat, they wish to live longer, and get more secure. As time goes on the list

worried. The markets have become a bit detached from reality. Extremely successful companies have gone down by 30 per cent on their share price, on sentiment alone. But I don’t worry because healthcare is a pretty safe place to be in a recession, especially in an environment where you have mostly governments paying and where there is a constant inflow of capital through the oil revenues.” And it’s not just talk. The CEO is so confident in the local markets that he has reopened the TVM Capital MENA Healthcare fund until the end of the year and is on the lookout for a $40 million top-up. The fund is focused on capitalising on the privatisation and growth of the healthcare market in the MENA region and India and the original investors included GE Healthcare, the International Finance Corporation and Olayan Financing Company. New investors subscribing to the fund will gain access to a pipeline of “proprietary investment opportunities” as well as the original value created in the first two transactions the fund closed in 2010. The firm’s first healthcare investment was the ProVita International Medical Center, a long-term medical care

ome people would have called Helmut Schühsler crazy for setting up a private equity firm in Dubai in 2009. But what’s more surprising is that the doctor succeeded in closing his MENA Healthcare fund at

$30 million less than a year later. “It wasn’t intentional that we

launched in a recession. We’d been looking at the region since 2006 and we were ready,” says the chairman and CEO of TVM Capital MENA, Dubai. After a near death in the private equity markets in the recession, almost $180 billion of private equity was invested globally last year, up 62 per cent from 2009 but still down 55 per cent on the peak in 2007, according to research firm TheCityUK. Activity in the industry looks set to build on this recovery this year and top $200 billion in 2011. Schühsler, unlike nearly every other economist or CEO at the moment, says he’s not worried about the double dip. “It’s extremely trendy to worry at the moment, so I should probably say I’m

facility in Abu Dhabi, which reached profitability four months after admitting its first patients. The

facility in Abu Dhabi, which reached profitability four months after admitting

its first patients. The second investment, Bourn Hall International, witnessed a soft opening of its first IVF clinic in Kochi, India, in April 2011 and will open its Dubai branch next year. Schühsler says: “In 2008 we were fund raising and we were about to close the fund at $70 million but because of the recession we lost all the commitments and had to restart the process. Our interest is to only have a small group of investors, with strong connections to the region, which can help us to build our business. We are looking for another three or four investors at $10 million or so. That gives us all the money to do what we need to do, which is build six or seven companies.” TVM Capital MENA is an international offshoot of German firm TVM Capital, with offices in Germany and the US, which has raised $1.2 billion in the healthcare, IT and life sciences sectors to date. The local TVM Capital branch operates under a Dubai International Financial Centre license and is the

first international private equity house with a focus on healthcare in the region. “We wanted to pick one area for expansion and we were gravitating towards India and the Middle East. In 2007, everyone was running to China and India, there was tremendous opportunities in healthcare infrastructure, but those countries had so much cash flowing into them, especially from the US,” says Schühsler. “There was tremendous turnover in India and China

and it became extremely competitive between the indigenous private equity groups and those from the US. I just didn’t feel that it was the right time for us. I felt that the Arab world was a good bet. We were the first movers at that time and that felt good.” Indeed, the region’s healthcare sector is set to witness a $125 billion cash injection over the next five years as GCC governments work to update their respective medical sectors in line with growing, ageing, and increasingly health- conscious local populations. Schühsler sees his opportunity in investing in small, specialist clinics that “do things hospitals can’t do.” A key TVM specialism will be its IVF capabilities. While some public and private hospitals across the region already offer fertility services, Bourn Hall International is the first-mover on specialised clinics and Schühsler expects the Dubai branch will open by Q1 next year. “We believe that there is a consistently growing demand for IVF services. There is better education; people don’t marry as young as they used to and many of them cannot conceive naturally anymore. This is for local and Arab expats.” Schühsler hopes that Dubai will serve as an IVF hub for affluent clients who want to fly in from across the region to try for children. “This is a completely privately paid service. While in Dubai IVF is not paid as part of insurance, in Qatar the IVF service is government- funded for locals. The Qataris can go through the cycle as many times as they want and the government will pay.” TVM Capital is also looking to invest in pharmaceutical supply deals, as well as hospital supplies, hospital services, blood testing and genetics clinics, as part of its healthcare fund. “We want to take care of patients

who need to be taken out of hospitals and treated in the home. There’s autistic

who need to be taken out of hospitals and treated in the home. There’s autistic children or people who can’t breathe, for example. How do we take care of them? We only want to fill gaps. These opportunities emerge when you talk to the regulators, patients and hospital managers,” Schühsler says. “We’re looking at three-to-five years investment plans, possibly in existing companies. Generally our strategy is to invest in existing companies where we can help to create growth. We are not a buy-out firm, we look at smaller companies that want to grow to two or three times their original size.” He believes that the region is still underserviced by private equity firms, particularly specialised ones. The doctor says that the Gulf must review its openness to foreign investment and pay attention to its corporate governance regulations to encourage more private equity players into the fray. “Healthcare is a local business that involves assets

on the ground so I need regulation that I can depend on. If I invest in a clinic in Abu Dhabi, I can’t move that clinic somewhere else…” he says. “Saudi Arabia is a very affluent and attractive market but, as we all know, it’s not easy to do business there. We have started to look into the country as we are very close and there is certainly an openness in the Ministry of Health to consider private business.” Ultimately, all the Arab countries are currently trying to find their own ways to navigate their respective medical conundrums. The region is unanimously agreed that the MENA healthcare

system must be dramatically upgraded in the coming years. Right now, local governments may own the majority of health assets and services, but the widely- publicised impending health time-bomb will necessitate the employment of private operators to cope with the demand. “We are in the right place for what we do. We want to achieve up to 30 per cent per annum net for investors. We have achieved these returns in our innovation business in Europe, which is far more risky than what we do here,” says Schühsler. “In healthcare you can make those returns easily if you know what you’re doing. It’s all in the execution – you have to have good managers, build good relationships, and provide good healthcare to patients. You can’t just look at profits. That’s a big challenge in healthcare because in other industries you can optimise everything to drive down costs. There’s a feedback loop in healthcare and it’s a very immediate one.”

can optimise everything to drive down costs. There’s a feedback loop in healthcare and it’s a