Middle East Markets magazine issue 4

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Middle East Markets | Issue 4

Markets The Future is Bright

Dubai to Become Smartest City in the World

Also in This Issue Salaries in UAE Expected to Increase by 5% in 2016. Global Islamic Finance Industry to Undergo First Comprehensive Assessment.



Contents

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4 Latest News from Across the Middle East Region 10 Profile ACWA Power 12 Understanding Local Partners Key to Success in Middle East Markets Western corporations and investors have long enjoyed lucrative business in the Middle East - despite the political turmoil which has characterised the region, but knowing how to assess and manage the risks has always been key to success.

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16 Middle East and North Africa Makes Progress on Gender Equality, But Severe Barriers Persist Saudi Arabia, Egypt and Lebanon have enacted reforms to advance women’s economic advancement, although women in the Middle East and North Africa region face the most hurdles in getting a job or starting a business, says the World Bank Group’s Women, Business and the Law (WBL) 2016 report. 18 Dubai to Become the Smartest City in the World 5th Smart Grids and Smart Meters Summit, being held between 28-29 October 2015 at the Madinat Jumeirah in Dubai, is a unique conference-led exhibition, bringing together the MENA region’s smart grid and energy authorities. 22 Global Islamic Finance Industry to Undergo First Comprehensive Assessment of Its 40-Year History This December As industry marks key milestone, a line-up of global powerhouses to gather at 22nd World Islamic Banking Conference to take stock of Islamic finance’s achievements and shortcomings and to forge roadmap for the future. 28 Salaries in UAE Expected to Increase by 5% in 2016 A GCC-wide survey of 600 multinational companies and locally-owned conglomerates - the largest study of its kind in the Gulf region - has forecast that salary increases will average 5% in 2016, down from an anticipated 6% in 2013, 5.5% in 2014, and 5.1% in 2015. 32 Dubai Watch Week Supports Educational Initiatives and Forges Major Partnerships for Its Inaugural Edition The key objective behind Dubai Watch Week (DWW) is to support the watch industry and raise awareness on the art of watchmaking.

Cover Image: Anna Omelchenko / Shutterstock.com

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mea Markets News

ArabiaWeather to Expand Across Middle East

ArabiaWeather Raises $7.1 Million to Expand its Hyper-local Weather Offerings to Consumers and Businesses in the Middle East ArabiaWeather Inc., the Middle East’s largest weather company, has announced a new round of funding totaling $5.0 million, following the $2.1 million it raised earlier this year. The round, one of the largest venture deals raised in the region in 2015, is led by Silicon Badia and Wamda Capital, and includes the founding investor Jabbar Internet Group and DASH Ventures. The investment will be used to continue growing ArabiaWeather’s consumer and enterprise offerings in the region. ArabiaWeather serves millions of consumers across the Middle East and North Africa with weather forecasts, information, and content, delivered through its web and mobile properties. The company will invest in expanding the reach of its flagship mobile app, which is one of the most popular native Arab mobile applications on both iOS and Android. For its consumer business, ArabiaWeather is also expanding its video coverage and content, and launching new specialized mobile apps targeted at weather aficionados. Finally, the company is launching a new digital monetization unit that will allow advertisers to create smarter digital ad products which leverage ArabiaWeather’s weather and consumer data. On the enterprise side, ArabiaWeather will further invest in developing integrated industry-specific solutions for businesses in the Middle East. The decision-support solutions enable companies in sectors that are particularly affected by weather conditions - such as aviation, marine, oil and gas, agriculture, insurance and retail - to save costs, enhance safety and drive operational efficiency. Commenting on the investment, ArabiaWeather CEO Mohammed Al-Shaker said: “We are happy with the continued growth of our consumer-focused properties, and we will continue to serve our millions of users with the most accurate and

informative weather forecasts and content by enhancing our mobile offerings and expanding our original video content. We are also extremely excited to continue working with some of the region’s leading enterprises and to provide them with cutting-edge weather products and services. We are expanding our regional sales presence and have a range of exciting products in our pipeline which we will introduce to the market very soon.” ArabiaWeather’s products run on proprietary algorithms and numerical models which transform raw and isolated weather data points into processed, organized, and packaged weather information. The company plans to invest a portion of the proceeds of the round in its weather infrastructure, including expanding the deployment of its own weather stations across the region and the unique weather forecasting technology. The company also has plans to utilize its 35 million strong user-base to crowd-source more accurate hyper-local weather observations. Commenting on the investment, Badia Impact Fund Managing Partner Namek Zu’bi said: “We were thrilled with the growth and progress the company had made since our initial investment in 2014 so we decided to lead the company’s Series A alongside Wamda capital, Jabbar, and DASH Ventures. We continue to be surprised by the demand for weather products in this market. This round is purely for growth; we want to own weather in the Middle East region.” Khaled Talhouni Managing Partner at Wamda Capital added: “The funding is fully dedicated to further growing the company, which has established an exceptional track record as a premier provider of highly useful weather information in the region. We believe there is a true opportunity to further build ArabiaWeather’s portfolio of decision-support weather solutions for the benefit of companies and consumers in the region.”

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Procera Sees Surge of Growth in Middle East

Saudi Arabia Financially Strong Despite Problems

Saudi Arabia’s fiscal position is weakening but is still relatively strong, with volatile oil prices will continue to weigh on the government’s balance sheet, says Moody’s Investors Service in a recently published report. It expects that lower oil revenues will result in continued large budget deficits, a drawdown in reserves, and increased sovereign debt issuance. Although the government has begun to cut back on expenditures, further cuts are likely to reduce the fiscal deficits. Without such cuts and/or non-oil revenue increases, the Kingdom’s creditworthiness will be affected. “Given Saudi Arabia’s dependence on the volatile hydrocarbon sector, we expect that low oil prices will continue to drive fiscal deficits for several years. While the kingdom’s large assets provide a cushion, we believe that further measures to address the deficit will be forthcoming,” says Steven Hess, a Moody’s Senior Vice President. With Saudi Arabia’s 2015 budget estimating that 80% of revenues will be derived from the oil industry, Moody’s expects a 2015 fiscal deficit of SR411 billion (USD110 billion), or 17% of GDP. As a result, the rating agency projects that Saudi Arabia’s debt issuance will continue to increase, with the ratio of government debt to GDP rising to 6.4% at end-2015, from 1.6% at end-2014. However, Moody’s also notes that the Saudi government’s financial reserves accumulated before the oil price decline provides a solid buffer, with a decade of considerable fiscal surpluses allowing it to finance large deficits without undermining its fiscal strength in the near term. A slowdown in government capital spending will negatively impact wider economic growth, according to Moody’s. The rating agency estimates real GDP growth of 2.5%-3.0% over the next two years, down from the 5.5% decade average, as the government adapts to lower oil revenues and as some government-financed projects are wrapped up.

Firm opens training facility in Dubai, addressing surge of growth in Middle East. Procera Networks, Inc., the global Subscriber Experience Company, today announced expanded operations in the Middle East to serve the needs of partners and network operators in this rapidly growing region. The expansion includes growing the company’s sales and operations presence by opening a state-of-the-art training facility in Dubai’s popular Media City innovation hub. The new facility will serve regional customers and partners providing knowledge and skills to help improve subscriber experience with a reduced effort and operational cost. Training programs will include Procera’s Traffic Management, ScoreCard, Policy & Charging and PacketLogic/V NFV-ready solutions for both fixed, mobile and Wi-Fi broadband networks. “The Middle East is one of the most technologically innovative regions in the world and we view it as a strategic market,” said Lyn Cantor, President and CEO of Procera Networks. “By expanding operations as well as opening a world-class training facility, we are signaling our long-term commitment to do business in the Middle East and signaling to our partners and customers that we are here to help them achieve success in their next-generation infrastructure deployments.” The Middle East leads innovative initiatives such as Smart Cities and is poised for explosive growth especially in the IoT market, which will in turn require industry-leading traffic management technology to ensure positive customer experiences on the region’s stretched networks. Analysts expect the Middle Eastern IoT markets to continue to outpace global rates, further accelerating adoption of IoT devices and deployment of associated IoT services across the region. “The rapid demand and growth that operators in the Middle East are facing requires many to embrace the customer experience as a network-wide philosophy across all departments,” said Angus MacCormick, Middle East Sales Director for Procera Networks. “Procera’s award-winning ScoreCard solution provides an attractive method of evaluating network operators’ subscriber experience readiness that is critical to ensuring the success and growth of Smart Cities and other innovative IoT deployments happening here in the Middle East.” Gaining the intelligence to accurately gauge network quality readiness in the age of IoT is now a priority for network operators around the world, who are increasingly turning to ScoreCard to meet these needs. ScoreCard is a subscriber experience management solution that rates the experience that the operator’s network is capable of delivering in application categories that matter to customers. By providing meaningful insights into network Quality of Experience, operators are able to prioritize their investments to achieve maximum ROI and take actions that will have the greatest effect on network quality. ScoreCard recently won the LTE Asia Awards 2015 in the category of Best Test/Measurement Solution, received a Broadband Technology Report Diamond Technology Review ranking of 4.5 out of 5 Diamonds, and is a finalist for the CommsMEA Awards 2015 in the category of Most Innovative New Service of the Year.

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mea Markets News

The Construction Market in the Middle East: An Overview New report looks into Global Construction Markets, with Middle Eastern countries increasing spending in the sector. Mordor Intelligence has released their report, the Global Repair Construction Market. The report elucidates the situation of the market around the world and studies the market sectors which include infrastructure, oil & gas, medical, power and mining. The report is also divided by geography - North America, Europe, the Asia-Pacific (APAC), South America and Middle-East & Africa (MEA); where-in the market share of each region is analysed and estimates are provided for the next five years. The Global Repair Construction Market has been predicted to grow at a CAGR of 8.1% until 2020. The North American market, which has become energy independent over the last 5 years, is predicted to see a gradual slope in growth at 6.4% CAGR due to the falling oil revenues. The Asian markets, which are entirely dependent on oil imports, have a higher potential for penetration and are poised to register a growth of 10.5% CAGR (2015-2020), which is much higher when compared to the growth of 7.6% from 2008 to 2014. After the 2008 economic slowdown, most of the countries started trimming their budgets and big-ticket items were shelved as a concerted effort to reduce spending. Europe is still recovering with many countries’ economies still in the red. However, 2013-14 saw a resurgent Europe and North America pulling through and putting their days of economic austerity behind them. Investments started to pour-in into the construction industry and these investments consequentially repaired the industry, which was on a hiatus. Falling oil prices has been a boon to countries that import oil. The price of crude oil has dropped over 40% this year and as a result, many countries have benefited from the drop in inflation. Reduced spending on oil imports has allowed governments to use oil savings to boost domestic investments.

Asian economies, being among one of the top oil users, have seen a rise in investment and opportunities. India and China have commissioned a surfeit of projects for construction to boost domestic demand and reduce unemployment. Middle Eastern countries, which form the majority of OPEC countries, have huge foreign exchange reserves and can withstand this slump in prices for an extended period. These Middle Eastern countries have stated that there will be no slowdown in domestic investments and are going ahead with their pipelined projects, and have commissioned more. Their strategy for the past decade has been to diversify their economy from crude oil and gas based revenues; research proves that this strategy has paid them off handsomely. Saudi Arabia, which is the world largest producer and exporter of crude oil, has increased spending in the construction sector. By 2015, the Government hopes to have built and/or renovated over 4,000 schools, 50 new technical colleges, 50 higher institutes of technology for women and four teacher training colleges, in order to increase the schooling capacity to over five million and university capacity to 1.7mn students. The Government is also developing six new economic cities across the country all requiring extensive new infrastructure. The need for new roads, bridges, homes and other structures is significant; this need provides opportunities for contractors and consultants worldwide to participate in their delivery. Repair Construction can be segmented by ‘Ingredients’, ‘Submarkets’, ‘Geographies’ and ‘Companies.’ Ingredients of this market are polyurethane foams, ethylene propylene diene monomer (EPDM), flame-retardants, silicones, adhesive, silicone, green coating, paints & coatings, adhesives & sealants, etc. Geographies of this market are Asia-Pacific, Europe, Middle East, Africa and North America. Companies in this market space are Grupo ACS, Vinci S.A., Hochtief AG, Bouygues S.A., Bechtel Corporation, Uretek, Leighton Holdings, Shanghai Construction Group (SCG), STRABAG and Others. The major market drivers for the industry are: economic growth of countries; social pressure for infrastructure development and maintenance; urban regeneration and private sector investments and reconstruction time and raw materials (availability of technology and expertise).

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Ratings Remain Stable for Saudi Arabia’s Banking System

Strong Growth Expected in Middle East & Africa Big Data Market The Middle East & Africa Big Data market is expected to grow at a CAGR of 45.30% representing in huge opportunities in this sector. This growth is driven by increasing penetration of big data, increase in analytics services and availability of affordable big data solution and services to end users according to new report by Research and Markets. Middle East & Africa Big Data market controls market share of 4.50% in terms of revenue in Global Big Data market. It is expected to control fourth largest market position in 2020. UAE, Iran, Kuwait, Zimbabwe, South Africa and Nigeria are key countries in Middle East & Africa Big Data market. Organizations worldwide are turning their attention to Big Data as a useful means to derive insights from the huge amount of data generated from various sources. Technologies such as NoSQL databases and MapReduce/Hadoop frameworks are at the core of the solutions heralding a paradigm shift. This research found that high investment costs, lack of awareness and novelty have been the main threats for new entrants in the Big Data space. There are a few major players who control the entire value chain. However, many smaller players have mushroomed who provide consulting in the Analytics space. This research also found that most organizations misunderstand Big Data and it is important to educate the end users through face to face interactions.

Moody’s Investors Service has maintained its stable outlook on the Saudi Arabian banking system. This decision reflects the rating agency’s expectation that in the context of persistently low oil prices, banks’ profitability and capital buffers will remain resilient and underpin their solid credit profiles. The outlook expresses Moody’s expectation of how bank creditworthiness will evolve in the system over the next 12 to 18 months. “Countercyclical government spending will continue to support the non-oil sectors, to which most bank lending is directed,” says Olivier Panis, a Moody’s Vice President -- Senior Credit Officer. “It will also help to moderate the negative effect that prolonged low oil prices would otherwise have on the domestic economy.” Despite a softening of the operating environment for Saudi banks, Moody’s forecasts real GDP growth of 2.8% for 2015 and 2.7% for 2016 (consistent with Moody’s forecast of Brent oil at $53 per barrel in 2016), slower than the 3.5% in 2014. As a result, the rating agency expects credit growth to moderate to 8% in 2015 and around 5% in 2016. In addition, loan performance is expected to weaken from the strong 1.4% non-performing loan,. “Asset quality is expected to weaken but will remain strong overall with the ratio of total non-performing loans to gross loans remaining below 2.5% for 2016,” says Panis. “At the same time, despite slowing credit growth, banks’ solid profitability will support a modest increase in capital buffers from already solid levels.” Moody’s base case is that the combination of solid net income and moderating credit growth will result in an average tangible common equity (TCE) ratio of around 16.8% at end 2016, an increase of about 100 basis points from year-end 2014. These buffers provide, in Moody’s view, a significant mitigant against both the expected asset quality pressures and the high level of concentration risk in banks’ loan books. Saudi banks will also continue to benefit from a low-cost and stable deposit funding base, although high levels of depositor concentrations, primarily from the public sector, continue to represent a structural challenge to the banks’ funding, particularly in an environment of low oil revenues. “Bank liquidity is tightening across the region as a consequence of persistently low oil prices and increased government borrowings,” says Khalid Howladar, Senior Credit Officer based in Dubai. “While we expect further modest reductions in public sector deposits, Saudi, like other Gulf sovereigns, has chosen to avoid major outflows to prevent further funding pressures on local banks.”

Spanning over 116 pages and 75 exhibits, Middle East & Africa Big Data Market 2015-2020 report presents an in-depth assessment of the Middle East & Africa Big Data market from 2015 till 2020.

Saudi slowdown in deposit growth remains relatively modest (4% growth in the first half of 2015 versus 7% over the same period in 2014) and Moody’s anticipates that liquidity buffers will remain solid into 2016 with around 33% of their total assets in liquid assets as of June 2015.

The report has detailed company profiles including their position in big data market value chain, financial performance analysis, product and service wise business strategy, SWOT analysis and key customer details.

Finally, Moody’s considers it very likely that the Saudi government would support the banking system in case of need. The rating agency notes however that, in line with global practices, the Saudi authorities have committed to the eventual implementation of a banking resolution regime which may negatively affect the support available for troubled banks once implemented, although the rating agency still awaits regulatory clarity in this regard.

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Feature

Accelerating Mobile Broadband and Smartphone Adoption across Arab States Mobile operators investing in networks, jobs and innovation throughout the Arab States according to new study.

Mobile broadband networks will support more than two-thirds of all mobile connections across the Arab States of the Middle East and North Africa by 2020, according to a new GSMA study published at the GSMA Mobile 360 Series – Middle East conference being held in Dubai this week. The new study, ‘The Mobile Economy – Arab States 2015’, finds that there will be 350 million 3G/4G mobile broadband connections in the Arab States by 2020, accounting for 69% of the region’s total connections by 2020, up from just 34% at the end of 2014. This rapid migration to higher-speed mobile networks is being driven by operator investments in 3G and 4G networks and rising smartphone adoption. The number of smartphones connections in the region is forecast to almost triple between 2014 and 2020, reaching 327 million. “The mobile landscape in the Arab States varies considerably in terms of market maturity, ranging from the fast-developing North African markets to the highly advanced Gulf Cooperation Council (GCC) states, but the entire region is benefiting from the shift to mobile broadband networks and devices

triggered by rising mobile operator investment,” said Alex Sinclair, Acting Director General and Chief Technology Officer at the GSMA. “We encourage governments in the region to adopt policies that will further accelerate mobile broadband adoption, for example by releasing more internationally harmonised spectrum; introducing incentives that encourage the deployment of infrastructure in remote and economically challenging areas; and revising taxation and regulatory policies that can negatively impact uptake of innovative new mobile services.”Over the last four years, mobile operators across the Arab States have spent more than US$40 billion on capital investments, or approximately 18% of total revenue. Investments have focused on improving network coverage, increasing network capacity, and deploying 3G/4G mobile broadband networks. According to the report, 3G networks are now live in every country in the region except one, while there are 23 live 4G networks in ten countries in the region and 4G launches planned in a further eight markets.

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Feature

A Diverse Mobile Landscape The Arab States encompasses 18 markets across the Middle East and North Africa. The number of unique mobile subscribers in the Arab States as a whole reached 199 million at the end of 2014, equivalent to 54% of the region’s population. However, the levels of market maturity vary considerably across the region in line with economic development; the Arab States are home to three countries – Bahrain, Kuwait and the UAE – that have penetration rates above 75%, but also four (Palestine, Sudan, Syria and Yemen) where fewer than half the population has a mobile subscription. It is forecast that the number of unique mobile subscribers in the Arab States will reach 233 million by 2020, representing 57% of the expected population by this point. However, subscriber growth will be slower than the global average over this period and subscriber penetration will fall behind the 59% global figure expected by 2020. This can be attributed to several factors: the declining growth potential in already highly penetrated markets; the challenge of growing penetration in the lower income and rural-based groups in less developed markets; and the unstable political and economic conditions that currently exist in several regional markets.

The mobile industry is also a key source of jobs and public funding in the region. It is calculated that the industry directly and indirectly supported 1.3 million jobs across the Arab States in 2014, a figure expected to surpass 1.5 million by 2020. The mobile ecosystem also made a total tax contribution to the public finances of the region’s governments of US$12.6 billion in 2014, excluding regulatory fees and spectrum auction payments. It is forecast that this contribution to public funding will rise to US$14.3 billion by 2020. “The mobile industry has a pivotal role to play in addressing social and developmental challenges in the Arab States, challenges that are becoming increasingly acute in those regional markets that are seeing high unemployment levels, a youthful population, and ongoing social and political instability,” added Sinclair. “In many of the region’s emerging markets, mobile is connecting unconnected populations by providing essential access to the internet where there are no other alternatives and enabling mobile-powered solutions in essential areas such as banking, healthcare and education. Meanwhile, in developed markets, mobile operators are launching advanced services in sectors such as digital commerce, digital identity, digital security and the Internet of Things.”

Mobile Industry Delivering Economic Growth, Employment and Public Funding In 2014 the mobile industry in the Arab States made a total contribution of US$115 billion to the regional economy in value-added terms, equivalent to around 4 per cent of the region’s total GDP. It is forecast that this contribution will grow to U$160 billion by 2020, equivalent to 4.5% of projected regional GDP by this point.

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Feature

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

The latest market that is exciting investors from all sectors is Iran, amid expectations that it will open up to foreign corporations after apparently resolving its differences with the international community over its nuclear programme. But early entrants into the Iranian market will have to tread carefully: the pitfalls include remaining US sanctions, state involvement in the economy, a complicated bureaucracy and widespread corruption. One risk in particular is the number of companies which have links to Iran’s Revolutionary Guards, a paramilitary force and still the subject of strict US sanctions. These ties will typically be obscured through “bonyads” – the webs of charitable trusts that control up to a quarter of Iran’s economy. Such opaque ownership structures are also a problem in other countries, where prominent sheiks often seek to mask their relationship to a business.

Across almost all of the Middle East, finding a local partner with which to work is essential for corporations and investors considering an opportunity. Indeed, outside free trade zones, it is usually mandatory to conduct business in a manner that involves a local partner. A good partner will be able to offer knowledge of local culture and business practices, make introductions and help guide the JV through the necessary bureaucratic hurdles. It is often desirable or even necessary for the local partner to have political contacts and clout, but this is a fine line beyond which the main dangers regarding western anti-corruption legislation lie. Most companies set out to win and retain contracts and clients without the slightest intention of acting unscrupulously. However, many that commit unethical business practices do so inadvertently, because they fall prey to relationships with the wrong third parties.

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US authorities in particular have made increasingly clear that they will hold corporates responsible for the behaviour of third parties. Most sizeable corporations have dealings in the US, so will fall within the remit of the Foreign Corrupt Practices Act. Meanwhile, the UK Bribery Act is also intended to hold to account those firms with operations in Britain. Companies therefore need to be careful that the local third parties they work with are not using untoward means to gain business for the partnership. This does not just refer to cash bribes and would include using family ties or favouring companies with which they have connections. The UK Bribery Act makes clear that ignorance is no excuse – but there is a defence based upon having made all possible attempts to ensure there is no corruption taking place in a local partnership – in other words, a robust internal compliance programme that can be demonstrated to have left no stone unturned. As well as the hidden dangers of third parties exposing a company to allegations of corruption or breaching sanctions, financial firms in particular must note the dangers surrounding terrorist financing. A number of banks have been caught out and suffered fines and significant reputational damage, but most major financial firms have now tightened their due diligence programmes. Those wishing to launder money or use it for nefarious purposes are therefore looking for new conduits for their funds, while regulators and intelligence agencies are working hard to expose them. For example, Western firms considering a partner in Saudi Arabia should be aware that a number of prominent Saudi business families have been accused of funding terrorism, with varying degrees of evidence. However, these links at the very least have the potential to cause major embarrassment, and a

thorough search of US court filings relating to 9/11 would be prudent before agreeing a business deal. Indeed, it is critical to gain a clear understanding of the reputations and track records of all local third parties that will be involved in a venture, so that the risks can be identified and mitigated. A firm considering doing business in the Middle East should therefore put in place an enterprise-wide anti-corruption framework. Deploying an effective top-down compliance programme and anti-bribery strategy is crucial. This must permeate every aspect of the company’s day-to-day operations. The anti-corruption framework should be geared to evaluating all third parties a firm is contemplating working with, insisting on full accountability and transparency from potential partners and placing the highest level of scrutiny on the riskiest relationships. A robust due diligence operation can remove elements of a deal likely to lead to difficulties further down the line and allow a company to enter a lucrative new market with a minimum of risk. Indeed, it is not just dangers from sanctions, terrorist associations and corruption that may be unearthed. A firm may find its proposed partner is worryingly litigious, has a track record of incompetence or lacks the political clout it claims to have. Carrying out due diligence checks is rarely straightforward – Middle Eastern countries often do not have reliable financial and political news reporting, archives may not be publicly available or digitised, and business ownership structures and political ties can be deliberately obscured. Often, discreetly interviewing sources “on the ground” is the only way to build a true picture of the situation. What action a company eventually takes having procured a thorough due diligence report will ultimately

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depend on its risk appetite and the other options available. Often, a number of potential partners will be vetted and considered together before a decision is made. These are exciting times in the Middle East, and although some markets have closed, others are opening. Nobody wants to miss a good opportunity or be late to the party, but due diligence and a careful approach is more important than ever to ensure trouble-free trade and investment.

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

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Feature

How to Avoid Being Trapped in The Carbon Bubble We investigate the issue of the Carbon Bubble and why it has the potential to drive investors in the Middle East towards sustainable investments.

The Carbon Bubble is the idea of a bubble in the valuation of companies related to fossil-fuel-based energy production. It results from the true cost of carbon dioxide’s role in intensifying global warming not being taken into account in a company’s stock market valuation, and it is becoming an increasingly real possibility. Countries with heavy investment in oil and other fossil fuels, which include many countries in the Middle East, may face profound financial difficulties as a result, and this may in time drive them towards sustainable investments. The issue will affect investors internationally. When it bursts, the Carbon Bubble could be worth anywhere between $21trn (Carbon Tracker) and $100trn (Citigroup), eclipsing the $15trn Mortgage Bubble. Jochen Wermuth is Founding Partner and Chief Investment Officer of Wermuth Asset Management. He has investigated the Carbon Bubble and its likely impact on global investments. Here he explains how the bubble came about and what Wermuth Asset Management’s outlook for the future is.

“The Carbon Bubble will collapse because renewables are now competitive without subsidies in many parts of the world. This is a “New Industrial Revolution” where the new Rockefellers and the new JP Morgans will be born. There were only steam-engine railway companies on the first Dow Jones Industrial Index. In 1900 there were no cars on the Easter Day parade on Wall Street, just horse-drawn carriages. In 1913 no horses were left and on the Dow Jones Industrial Index no steam-engine railway companies were left. The same is happening in the world today. The age of the combustion engine and fossil fuel is over and all the companies and businesses in this industry will soon disappear. “The distinguishing feature of our research is that we say that we expect the bubble to burst due to market forces - an agreement at COP21 in Paris this December is no longer required. The long-term oil price will be under pressure from low renewable fuel prices: Sunedison is offering 200MW solar power in Austin Texas at $4cent/kWh. Oil would have to fall to $7/kWh to compete.

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“The current volume of oil will no longer be required for transportation. Fewer cars will be owned and driven, as improved technology and IT lead to improved car-sharing initiatives and public transport systems around the world. At present, 30% of city traffic is accounted for by vehicles searching for a parking spot. Moreover, electric cars will replace fossil fuel-driven cars because they will be cheaper from a total cost-of-ownership perspective. “Upmarket electric cars are already available – the Tesla S model has become a serious contender for the Mercedes S-class, the Maseratis or BMW’s 7-series in markets such as California and Norway. In Switzerland, Tesla sold more of its luxury models than Mercedes in 2015 - it has become market leader in that segment. For pick-up trucks and small cars the tipping point is approaching, as batteries become cheaper and even useable as power storage plants, generating income for the car owner – a concept pioneered by one of our portfolio companies, The Mobility House.” The issue is particularly pertinent for investors in Middle East markets, as oil producing companies and countries risk the possibility of their value collapsing. Without diversification, the credit ratings of oil producing countries will fall. A country like Qatar, for example, with robust natural gas reserves, may be a bit better off because CO2 emissions from natural gas are much lower than from coal and oil. But many other countries will experience problems, because much of their export values rely on fossil fuels. Mr. Wermuth added that his firm believes that, in the future, investors in these countries will be looking towards sustainable investments.

Qatar as an example: assuming they sit on $2.25tr of natural gas reserves – based on a market price of $2.50 per 1 million Btu – this could collapse to near zero in value if they tried to sell them on the futures markets. Even if they don’t, it is pretty certain that natural gas prices will continue to decline, following the lead of crude oil. To hedge against this risk, financial assets should aggressively be invested and/or re-allocated into securities of firms whose products are carbon-free or relatively ‘green’.” “In order to deal with the anticipated increase in interest from Middle Eastern investment institutions our firm is introducing the “Green Gateway Fund 2”, which invests in growth-stage resource-efficient EU companies. It will bring them to the Middle East and other growth markets where energy consumption per unit of GDP is typically four times higher than in the EU. This is also highly profitable: our Green Gateway Fund 1 has seen the revenue of its EU portfolio companies grow by a factor of almost four in just three years. Investing in such firms is good for the environment and the economic future of the Middle East - resource efficiency is the way forward.” It is likely that the Carbon Bubble will drive the diversification of markets and, whilst financial crashes are never a positive experience, it could create greener, more sustainable markets in their place.

Contact Name: George Allen, Instinctif Partners Email: George.allen@instinctif.com Phone Number: +971 5660 96749 Company name: Wermuth Asset Management Website: http://www.wermutham.com/home.aspx

“We are anticipating a strong demand from the region for sustainable investment funds. If we take

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Dubai’s new PPP law The publication on 20 September of Dubai’s new PPP law (Law No.22 of 2015) is significant because it signals a clear statement of Dubai’s intent to use private sector finance and expertise to help meet its future infrastructure needs.

Whilst Dubai has implemented a handful of PPP projects prior to the introduction of this new law, notably the recent solar photovoltaics projects, the general approach has been to procure infrastructure on a pure Energy Performance Certificate basis, with those infrastructure assets then being owned, managed and run by “Dubai Inc”.

Union Oasis project, private developers are currently completing the prequalification requirements; it is intended that this project will be a mixed used development project with a 30 year concession period. Given how far advanced the RTA is, we expect many of the early Dubai PPP deals will come through this agency.

The expression “PPP” refers to “public-private partnerships” and what the new law is aiming to do is to create greater collaboration between the private and public sectors in Dubai. In particular, the Dubai government is looking to develop new forms of long term concessions or partnerships. This will result in future tenders being released giving the private sector a more strategic role in the design, construction, financing and ongoing operation of certain Dubai infrastructure assets.

What does the new law say? Objectives of the new law include (i) lessening the financial burden on the state budget, (ii) transferring risk from the public sector to the private sector, and (iii) changing the key role of the public sector from “investor and developer” to “policy maker and regulator”. Given Dubai’s breathtaking growth over the last few decades, it is no surprise to see this change in emphasis.

Recently, Dubai’s Roads and Transport Authority (RTA) announced its intention to develop both the Union Oasis INSIGHT Station and The Dubai Transportation Academy projects as PPPs. For the

Why is a new law needed in Dubai? Most PPP style projects could be implemented in Dubai without this new law. Whatever potential legal and regulatory impediments may exist for a particular infrastructure sector or project can almost certainly

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be overcome by appropriate contract drafting. So why pass a new law?

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Most importantly, this new law sends a clear statement of policy intent to the developer, investor and lender community. The new law says to the market that (i) this style of project is welcome and has the full backing of the state, and (ii) you can expect future “dealflow.” The second reason is particularly important because bidding for this type of project is time consuming, complex and the front end bid costs are high. Normally, bidders and lenders will need to engage their own legal, financial and technical consultants to assess the proposed contractual framework and suite of project documents, with lenders passing their costs on to the bidder. What this means is that the developer community will not normally be interested in focusing on a jurisdiction where there are occasional ad hoc PPP deals; they would rather commit to a market where there are multiple bid opportunities so that if they invest the time and money, the chances are they will eventually succeed in winning a project.

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What noteworthy provisions are contained in the new law? The new law came into force on 18 November 2015. A summary of some of the key provisions are set out below: • there is flexibility as to what form of contract can be used (management/operating agreements, leases, concessions etc.) • the new law applies to all government agencies that are funded by the state budget • projects in the power and water sector are not covered by this new law • a private sector developer is permitted to make an unsolicited PPP proposal

ultimate oversight for the PPP lies with the Dubai Financial Audit Department a public body is permitted to take market soundings and undertake initial “strawman” work from potential bidders prior to officially going to the market with an RFP a detailed RFP needs to be fully developed before any new PPP project can be put out to tender bidders are permitted to form consortia the government may take an equity stake in the project special purpose vehicle(SPV) save in exceptional cases, all projects must be executed through an SPV whose sole purpose is to undertake the relevant PPP project the form of PPP contract has to provide clear terms in relation to a number of matters, including Emiratisation quotas and environmental protections save in exceptional circumstances, the maximum tenor of a PPP contract is 30 years subcontracting and sale of PPP assets is not permitted save with the consent of the relevant government agency UAE governing law is mandatory disputes cannot be subject to overseas arbitration

Some general observations One issue that is not addressed is whether the Dubai government will issue sovereign payment guarantees to sit behind any offtake/payment obligations of a government department or agency. These have been previously been on offer for Dubai power projects. Additionally, the law is silent as to capitalisation requirements for the SPV, whether a project SPV can be established in a free zone, and whether the 51/49 rule will apply. Supplementary regulations to the new law will be promulgated but no indication has been given as to when these will be issued.

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It will be interesting to see which government agencies now push ahead with new PPP initiatives. Clearly, the RTA will be at the forefront, and perhaps we will see some of the government departments responsible for social infrastructure projects moving forward to launch their own projects in the healthcare, education or affordable housing sectors. In any event, the new legislation will be welcomed by the market. It is a clear and well drafted law that will encourage the private sector to seek out future PPP opportunities in Dubai.

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Private Capital Increasingly Flowing To Saudi Arabia As Stock Market Opens To International Investors UAE are no longer the only net importer of private capital, but remains overall winner due to diversified economy, with decline in inflows from Emerging Markets, including Russia, offset by greater inflows from MENA and GCC markets, new study by Invesco shows.

The opening of the Saudi Stock Exchange to foreign institutional investors in June 2015 has contributed significantly to the direction of private capital flows in the GCC region, according to Invesco’s sixth annual Middle East Asset Management Study, which launched today - an in-depth market study based on 167 interviews with sovereign wealth funds, state pension funds, local insurance companies, family offices, banks and IFAs across the region. Last year’s study found the United Arab Emirates (UAE), with its perceived “safe haven” status and strategic position as a hub between Asia and Africa, to be the main beneficiary of inflows of private capital into the GCC region. However while the UAE remains popular, with 73% of respondents saying that investable assets and people are in net inflow into the UAE (compared to 89% last year), this year’s study reveals a remarkable turnaround in the net respondent view scores on the direction of capital flow to Saudi Arabia, from -17% last year to +61% this year. This is a significant finding in the context of low

global oil prices and declining government surpluses in Saudi Arabia. Bahrain has also seen a notable turnaround in sentiment on capital flows, moving from a 73% net negative view score last year to a positive score of 27% for 2015. There is a causal link here to Saudi Arabia as a key regional partner and although the stabilisation of Bahrain’s local political environment was a contributing factor to this sentiment, participants recognised that Bahrain is no longer a major financial centre and its fortunes are dependent on its neighbours. Saudi success The primary driver of inflows in Saudi Arabia was positive perceptions of the economy and the opening of Saudi capital markets (see figure 11). The opening of the Tadawul, Saudi Arabia’s stock market, to international investors in June this year, was eagerly anticipated by participants and seen by many as a first step towards market liberalisation and future reforms. Many expect this change to be a key driver

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of medium term capital inflows, even if it would only have a relatively small impact on capital flow in the short term. Stock market performance and opportunities to participate in IPOs were named as the second most important drivers behind positive perceptions of capital inflows in Saudi Arabia. Respondents cited strong medium term performance for the Saudi stock market and a relatively robust recovery to the market shock following the OPEC announcement on oil production levels in December 2014. Furthermore, 2014 saw some of the largest IPOs in the region, notably National Commerce Bank in Saudi Arabia2 and Emaar Malls in the UAE3. Figure 12 shows that the overall deal value for IPOs on the Saudi Arabia stock market rose significantly in 2014 and is approaching the levels seen in 2007 before the global financial crisis. Some family businesses in the region now see an IPO as an excellent way to raise capital, improve governance and resolve succession planning issues in one go. Nick Tolchard, Head of Invesco Middle East, noted: “Our conversations in the region show that whilst there has been optimism surrounding the regional economy and capital markets, concerns such as the oil price and government finances persist. Whilst things can change quickly in the Middle East, it will be interesting to see if positive sentiment amongst local, especially Saudi, investors translates into reality over the next 12 months and whether the anticipated effects of the opening of capital markets take hold.” Declines in inflows from Emerging Markets, including Russia, offset by growth from MENA and the GCC

An example of a rapid year-on-year reversal in sources of capital inflows is the decline in private capital coming into the UAE from Emerging Markets, including Russia. Last year’s study showed inflows from Emerging Markets at 58%, dropping down to 41% this year. Flows from Russia in particular are thought to have been affected by the decline in the rouble reducing the buying power of affluent Russians in the UAE real estate and tourism sectors. Nick Tolchard commented: “This decline in Russian capital inflows, may be cyclical given the strong and ongoing ties between Russia and the GCC. Furthermore, in 2015 greater capital inflows from MENA and other GCC markets have offset declines from Emerging Markets. These findings underline the diversified nature of the UAE economy, especially with capital flowing increasingly from MENA and the GCC. This could be transformational for the UAE given the longer term profile of GCC capital inflows and is a much more stable and sustainable source of capital than relying on negative events in international markets causing short-term capital flight.” Nick Tolchard concluded: “The opening of capital markets is certainly an encouraging development that has the potential to impact positively on investment in the region. Looking across retail and institutional investor segments, we have seen that sovereign investors are viewed as leaders on investment strategy and asset allocation so smaller institutional investors and family offices often follow their example. Sovereign investor participation in stock markets, IPOs and bond issuances has helped to create the GCC financial markets for other investors and the scale of sovereign assets contributes to the confidence levels of retail investors in the region. It will be fascinating to keep monitoring how these developments and relationships will drive capital flow and asset allocation decisions in the region.”

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Middle East Technology Markets Overview Middle East Already Embracing Five Technology Trends Affecting the Digital Transformation of Public and Private Sectors, Accenture Finds.

In its annual global technology outlook, Accenture (NYSE:ACN) has identified five technology trends that will re-shape markets by creating new digital ‘ecosystems’ and found that leading businesses and governments in the Middle East have new strategies and projects in place to capitalize on digital transformation opportunities. The five trends identified in the Accenture Technology Vision 2015 report include the personalization of the internet – Internet of Me; a shift in focus from selling things to selling results in an Outcome Economy; digital platforms that help build next-generation products and services in the Platform (R)evolution; intelligent software embedded across the enterprise, creating the Intelligent Enterprise; and intelligent machines and devices working alongside employees as a Workforce Reimagined. To supplement this report, Accenture interviewed more than 200 senior decision-makers in the public and private sectors of the United Arab Emirates (UAE) and the Kingdom of Saudi Arabia (KSA). A majority of respondents – 62 percent in UAE and 83 percent in KSA – have seen the pace of technology

adoption in their organization increase over the past two years. About half the organizations in the Middle East (48 percent in UAE and 53 percent in KSA) are actively investing in digital technologies, while another four in 10 are assessing them (41 percent in UAE and 43 percent in KSA). “Now that digital has become part of the fabric of many organizations’ operating DNA, they are stretching their boundaries to leverage a broader digital ecosystem as they shape the next generation of their products, services and business models to effect change on a much broader scale,” said Paul Daugherty, Accenture’s chief technology officer. “Leading organizations in the Middle East are already planning and executing on their digital transformation goals in response to the fast-changing needs of this digitally-savvy population.” All (100%) of the survey respondents from UAE and 97 percent from KSA are already using or experimenting with mobile technologies to engage with customers, employees or business partners, compared with an average of 94% in other countries.

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Some additional findings from the survey of Middle East respondents, broken out by the five emerging technology trends, are: The Internet of Me is changing the way people around the world interact through technology, placing the end user at the center of every digital experience.

they differ widely in their views on the impact of wearable technologies, with more than three-quarters (76%) of KSA respondents – but less than half (45%) in UAE – identifying wearables as highly influential. •

More than three-quarters of Middle East survey respondents (87% in UAE and 82% in KSA) said that having a personalized customer experience fits within their top three business priorities, and almost half (46% in UAE and 49% in KSA) said they are already seeing positive returns on their investments in technologies that enable this personalization. With the exception of mobiles and tablets, respondents from KSA are more bullish than their UAE counterparts on adopting digital technologies within the next four years, including wearables, connected TVs, connected cars, interactive kiosks and smart objects. When asked to identify the leading barrier to adopting personalization technologies, respondents in UAE cited a lack of technology maturity, while those in KSA cited security concerns. •

Digital devices on the edge are powering an Outcome Economy and enabling a new business model that shifts the focus from selling things to selling results.

More than nine in 10 Middle East respondents (96% in UAE and 91% in KSA) expect that with more intelligent hardware, sensors and devices, organizations will increasingly shift from selling products or services to selling outcomes. While respondents from both UAE and KSA said that mobile, tablet and smart technologies are three of the most influential technologies,

The Platform (R)evolution reflects how digital platforms are becoming the tools of choice for building next-generation products and services, and entire ecosystems in the digital and physical worlds.

The vast majority of Middle East respondents – 97% in UAE and 90% in KSA, higher than in any other country surveyed – believe that industry boundaries will dramatically blur as technology platforms reshape industries into more interconnected ecosystems. It is not surprising, therefore, that Middle East respondents were more likely than their global counterparts to say they plan to engage with business partners from outside their own industry on digital initiatives like joint online or mobile solutions – 49% in UAE, 50% in KSA, while only 40% in other countries, on average. The Intelligent Enterprise is making its machines smarter – embedding software intelligence into every aspect of its business to drive new levels of operational efficiency, evolution, and innovation. More than two-thirds (69%) of the respondents in KSA – and more than nine in 10 (95%) of those in UAE – reported that managing the volume, variety and velocity of data being generated today is very or extremely challenging, compared with 55% in other countries, on average. At the same time, approximately 80 percent of all Middle East respondents said they believe that software will soon be able to learn and adapt to our changing world and make decisions based on learned experiences, with appli-

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cations taking on human-like intelligence. In a Workforce Reimagined, advances in more natural human interfaces, wearable devices, and smart machines are extending intelligent technology to interact as a “team member,” working alongside employees. The vast majority of Middle East respondents (93% in UAE and 86% in KSA) believe that we have reached a tipping point in the talent shortage for IT skills that will require companies to look at emerging technology solutions to augment their workforces. About two-thirds (60% in UAE and 66%in KSA) are considering using technologies that enable business users to complete tasks that previously required IT experts. However, about four in five (82% in UAE and 79% in KSA) believe that successful organizations will manage employees alongside intelligent machines, ensuring collaboration between the two. More than half the respondents (56% in UAE and 54% in KSA) said they are already using augmentation technologies, like wearables, to better train their workforce, and more than four in 10 (45% in UAE and 42% in KSA) said they are implementing training to improve human-robot collaboration. “The pace of innovation and technology adoption that is beginning to transform companies and governments across the Middle East is only going to increase,” said Omar Boulos, regional managing director of Accenture in the Middle East and North Africa. “Pioneering organizations will focus on creating and becoming part of the broader digital ecosystems that now extend to customers, business partners, employees and other industries.”

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