Qatar - Problems Amid the Promise

The undercurrents impairing Qatar's plans for a prosperous future

Special Report for Executive magazine

Read my commentary on nationalization employment policies in the GCC and Qatar:

http://backinbeirut.blogspot.com/2011/10/deference-versus-diversity-in-gulf.html

Also read my article on the financial sector and regulations in Qatar, published earlier in the year:

http://backinbeirut.blogspot.com/2011/08/peninsula-of-protectionism.html

I wrote about Qatar's foreign policy in May:

http://backinbeirut.blogspot.com/2011/05/tiny-giant-lng-fuels-qatars-massive.html

You can read about the working conditions of migrant laborers in Qatar here:

http://www.executive-magazine.com/getarticle.php?article=14727

This September, it seemed official: newspapers and wire services reported that the world had a new wealth leader in per capita gross domestic product (GDP). According to the International Monetary Fund’s World Economic Outlook database, Qatar ranked top of the global heap in per capita GDP on purchasing power parity basis, with more than $88,200 using a census figure of 1.7 million residents. The equivalent figure for Afghanistan, the first country on the alphabetical IMF roster, was $909. Moreover, with Qatar’s expansion of GDP forecast at 18 to 20 percent this year by the IMF, the country is one of the fastest growing economies in the world and the most rapidly growing in the Middle East and North Africa, by far.

To top it all, Qatar is not only both rich and growing, it has huge investment visions. Ongoing projects in the country are valued at $250 billion, with some $80 billion invested in infrastructure, followed by oil and gas at $75 billion, real estate at $55 billion, and petrochemicals, energy and water projects some $11 billion, according to financial information provider Zawya.

With this exceptional combination of wealth and opportunities, it is virtually inevitable that the desert peninsula is viewed as a veritable gold mine by a hoard of construction firms, engineering companies, architects, service providers and infrastructure developers that have struggled to stay afloat in the wake of the global financial crisis.

“The whole world is looking to get a foot into this market,” wryly observed a Jordanian official at a construction exhibition in Doha earlier this year. “Qatar needs everything, from construction and building materials to food stuffs. There is huge demand.”

Indeed, the May 2011 Project Qatar construction show — held only weeks after a 2022 World Cup Construction Conference organized by the government in Doha and benefitting visibly from the hype created by last winter’s surprise awarding of the World Cup still over a decade away — got a size boost of some 73 percent over the previous year and attracted more than 1,700 local and international companies, according to organizers International Fairs and Promotions.

The travelling circus of opportunity seekers entailed national trade bodies and companies from more than 70 countries, champing at the bit to establish a presence in Qatar and get some of the $3 billion in tenders to be issued in 2012 for the World Cup. “Qatar is developing quickly and it’s a good investment opportunity. We are hoping Qatar will be what Dubai used to be,” said Pamela McDowell, project manager at the Italian Business Council Qatar (IBCQ). Membership in IBCQ, an organization founded in 2004, doubled from 20 to 40 companies within the past year, and the organization hopes to have 50 companies involved in hydrocarbons and construction projects by 2012.

Corporations that used to make good profits in other countries of the Gulf region have been lining up to do business in Doha. “We are seeing migration of Australian companies from the United Arab Emirates to where the money and opportunities are,” said Susie Billings, Trade Consultant-Qatar at the Australian Trade Commission.

But while acknowledging the presence of investment and business potentials for international players, experts on the Qatari market also express caution that the boom mentality is dangerously crowding the field with contenders. “The World Cup is a big boost for Qatar but people think the road will be paved with gold, and they will be in for a shock. There is tight competition out there, margins will be tight, and a lot of people want a slice of the action,” said Andrew Wingfield, a partner at international law firm Simmons and Simmons in Doha. “But such competition will be good for Qatar.”

Other experts asked by Executive about the investment opportunities they see in Qatar offered surprisingly mixed perspectives, the great enthusiasm of some juxtaposed by advice to be conservative or to not even invest at this time.

The next Dubai?

Although Qatar was not overly affected when the global financial crisis hit the Gulf some three years ago, the government did have to shell out $3.96 billion to shore up state-linked banks and real estate firms in 2009. In oversupply scenarios somewhat reminiscent of Dubai’s property troubles, overpricing and scant demand for commercial real estate space in Doha has also prompted the government to rent an estimated 20 to 22 percent of all office space to give support to Qatari developers.

“That can be a problem here. Buildings are empty until the government comes to take it off developers’ hands,” [see real estate story page 66] said one analyst who was, like several others interviewed by Executive, only ready to share his insights if his name was not quoted, noting that being candid can cost one one’s job.

But while such market “corrections” may raise questions over how level — and how well-shielded against manipulations — the playing field really is in the competition for developing real estate in Qatar, the difficulties to fill some office towers with tenants have certainly not dimmed Qatar’s aspirations.

In April, the chairman of real estate developer Ezdan, Sheikh Thani bin Abdullah al-Thani, announced plans to construct the world’s tallest tower in Qatar. In another bid for a “largest of its kind” undertaking, some $7.9 billion has been pledged by the government to fund the Sidra Medical and Research Center, the largest endowment to a medical facility anywhere in the world.

The state-linked $20 billion The Pearl Qatar (TPQ) residential project and the $5 billion Lusail development rank as some of the most expensive real estate projects on the planet and in terms of hotel construction cost, the bills are said to be the most expensive per square meter in the world.

“Why? Labor is cheap (as low as $250 a month) but it is expensive because everything is imported from somewhere, and there is a monopoly on shipping and many other things,” said a real estate analyst. Inflation, which had been rampant in the country prior to the global financial crisis, is another risk that developers and construction investors have to watch out for. It is projected to reach 3.3 percent this year, according to QNB Capital, a unit of Qatar National Bank, which is the country’s leading commercial bank and one with strong state affiliation.

There are also questions, however, as to how Qatar will manage the outcomes of its current aspirations, such as hosting the 2022 World Cup, in ways that are socially and economically sustainable. “Don’t ask about 2023. There will be 90,000 hotel rooms and 15 million square meters of office space by then. Who will take up the slack?” said a real estate analyst.

On the side of probable future liabilities, Qatar is also well on course to being the largest water consumer and have the highest carbon footprint per capita in the world, currently only nudged out of the top post by the UAE [see Greenwash story page 78].

Diversification of the national economy away from reliance on hydrocarbon exports has been a mantra for every single oil-producing Arab country for decades. In Qatar, diversifying the economy is happening, with the contribution of oil and gas down from 60 percent to 51 percent of GDP last year. However, the country’s wealth is driven up primarily by hydrocarbons. “It is the fastest growing economy in the world because it is pumping gas, not because of anything else,” said one analyst. It also doesn’t help that the private sector is still a minimal economic player and dwarfed by the state’s participation in every branch of the economy. “Some 90 percent of the workforce are employed by the government or semi-government agencies,” said Wingfield.

“The private sector doesn’t drive anything, it’s the government,” said a real estate analyst. “Everyone is waiting under the government tap for some drips, as it was very much turned off over the past two years. But with projects that were slated to be finished by 2030 now having to be done by 2022 — so compressed into just 10 years — there is so much to do.”

A portrait at Doha's Souq Waqif of the Emir holding up the World Cup after Qatar's successful bid to host the event in 2022

Vision 2022 or 2030?

Being pulled in numerous directions, Qatar is now at a crossroads as to where it should go on a national level. Follow the economic model promoted by the West — of the kind Dubai fully embraced with major ramifications — or pursue a model that will preserve its identity and culture while focused on being a knowledge-based society?

The National Vision 2030 is quite explicit about the direction the country is to take. It talks of the country’s “abundant wealth” creating “previously undreamt of opportunities and formidable challenges,” and that it is “imperative for Qatar to choose the best development path that is compatible with the views of its leadership and aspirations of its people.” Its main four pillars are human, social, economic and environmental development, which “emerged from an intensive consultation across Qatari society.”

As Wingfield noted of the Vision 2030, “There is some quite frank stuff about what needs to be done; I was surprised.”

However, it has to be asked how effective the supposedly open discussion over the country’s direction can be if all the consultants, professors, analysts, real estate experts, bankers and so on that were interviewed were wary of making any negative comments, even constructively critical ones. As one professional said: “I’d like to have certain quotes off-the-record, as this is a country in which you mind your Ps and Qs.”

The question how can you truly progress if there is no re-evaluation, no taking stock of development, may be vital also for Qataris themselves, who traditionally have little say in the country’s future, with the decisions made at the top level. Political parties are banned and only the fourth municipal elections were held this year. Under such conditions it is not easy to undertake a wide societal discussion that includes constructive criticism of the direction the country is going in. Also in corporate decision making, evidence during the extensive research for this report strongly suggested that final decisions would often be imposed from the top-down, and sometimes even totally out of the blue, making management consensus a matter of acquiescence instead of effective team work.

Executive is committed not to fall into the mold of non-critical, starry-eyed views of countries so it is the mission of this Qatar investment report to support real development by reporting in a constructive manner. Potential investors and businessmen need to know, now more than ever, what is going on, particularly in times when global financial uncertainty is converging with regional unrest.

One lesson from the mistakes of Dubai was the absence of careful reality checks by gushing media punting unending promotions of limitless growth, luxurious lifestyles and presumably easy money. Doha should also not want to repeat the Dubai error of falling for the money-driven fine-weather-only consultants who put out serial reports of great promise and then vanished, along with the validity of their research, when harsher realities required actual solutions.

For those with genuine care for Doha’s long-term appeal and fulfillment of its potentials in regional and global communities, now is a time of concern even as Qatar’s own experts speak assuringly of the next few years.

“We will catch up with Dubai, but Dubai was obliged to change its economy (due to depleting hydrocarbons), and we don’t have that problem here,” said a Doha-based analyst.

Certainly Doha wants to make its mark on the world stage, but such incredible growth and change needs to be carefully managed.

“If the time to 2030 is not filled in the right way, it will be wasted,” said Ali al-Humaidi, managing director of Almaras Management Consultancy in Doha. “We are rushing into being a modern country, but upgrading so fast is short-sighted. And you can’t cheat on learning, we can’t kid ourselves and say what others have done in 20 years we can do in five.”

Questioning 'Qatarization'

Self-defeating policy complicates Qatar's drive to improve its homegrown talent

Qatar is striving to be about more than just its natural resources, despite holding the third largest gas reserves on the planet and last year becoming the world’s top exporter of liquefied natural gas (LNG). By 2012, the government aims to generate 40 percent of gross domestic product (GDP) from non-energy related activity. It is still quite a way off from achieving this figure, although the GDP contribution from the mining and quarrying sector, which includes the oil and gas industry, dropped to 51 percent at the end of 2010, down from 60 percent in previous years.

Doha is using the billions of dollars derived from hydrocarbon exports to diversify the economy and improve its knowledge base. But it is a long road ahead given the slow roll out of small and medium-sized enterprises, the fact that the government is still the country’s largest employer [see commentary page 13] and the lack of economies of scale. The country’s small population creates further problems; the low numbers of university students graduating creates difficulties in implementing the pan-Gulf Cooperation Council (GCC) nationalization employment policy aimed at getting more locals into the private sector, in this case Qatarization.

The most important organization in the knowledge-based economy drive is the Qatar Foundation, a non-profit organization set up some 16 years ago by Sheikh Hamad bin Khalifa al-Thani. The Qatar Foundation, has been on a spending spree aimed at attracting private Western universities and researchers to its purpose-built Education City on the outskirts of Doha. The ventures in the complex include the Qatar Science and Technology Park (QSTP), a conference center, radio stations, the Qatar Luxury Group, a joint venture with mobile phone operator Vodafone and the soon-to-be-finished $7.9 billion Sidra medical center.

The government has further bolstered spending on public education, rising from $57 per capita in 1991 to $3,750 in 2009, according to a report by the Qatar Permanent Population Committee. Since 2006, 2.8 percent of GDP has been allocated for spending on research and development (R&D) projects — placing Qatar just behind Japan and the US in R&D spending as a percentage of the economy.

“There is a genuine emphasis on education not evident anywhere else in the Gulf, and Qatar has invested in education like no other country in the region,” said David Roberts, deputy director of Britain’s Royal United Services Institute, a think tank with a branch in Doha.

A multi-million dollar education

The move to improve education is certainly needed, particularly at the school level, which is currently being overhauled by advisors from the RAND Corporation. Indeed, in the US Department of Education’s 2007 Trends in International Mathematics and Science Study rankings, based on education levels of fourth and eighth grade school students in these subjects, Qatar was placed last in the Middle East (including Iran). In the 2009 Organization for Economic Cooperation and Development (OECD) Pisa study, which rates student performance in reading, math and science, Qatar ranked fifth from bottom behind Indonesia, Kazakhstan and Albania. Such low academic achievement is presenting problems at the university level. While Qatar Foundation, will have spent a projected $33 billion on Education City by 2016, according to KEO International Consultants, and shelled out $132 million for the campus of Carnegie-Mellon, $154 million for Georgetown University, $186 million for Northwestern University, $332 million for student housing and $250 million for the library, the admission standards of these prestigious universities remain unattainable for most Qataris.

“The problem is that these institutions have such high standards to get in that they have to draw on expatriate students as few Qataris are meeting the requirements. So it is essentially a program run for expats as they wouldn’t have a program at all if they limited it to Qataris,” said an academic who wanted to remain anonymous.

This mismatch further exacerbates the amount the government spends on education. A high percentage of expatriate students are on scholarships due to tuition fees of around $60,000 a year. “Some 88 percent of the branch campus students receive financial support. Of those, 50 percent are on scholarships,” said Tariq al-Sada, a spokesperson for Qatar Foundation. Given the small student body, the cost of educating each student at Education City is in the millions of dollars, said the academic.

This is reflected in the low numbers of students graduating from Education City’s six universities, with less than 250 finishing this year, the largest number yet. Since being established in Doha in 2003, Texas A&M University has graduated only 200 engineers, of which just 100 were Qatari. This year, there were 52 engineering graduates from 16 countries, of which 30 percent were female. As a reference, the state-run Qatar University has graduated 30,900 students since 1973, and alumni comprise 80 percent of the Qatari workforce.

However, according to Sada, Qatar’s education drive is already gathering momentum. He said, “Qatar Foundation is already providing a continuum of world class education, work experience and career opportunities to our young people, and the benefits of that are already being seen, with Qatar’s first homegrown doctors graduating in 2008.”

Complicating the knowledge-based economy drive, and the Qatarization drive, is that while an estimated two-thirds of Qatari university students are women, young men favor working for the public sector with its stable jobs, good salaries (which a government decree recently increased by a whopping 60 percent) and generous pensions that can be accessed as young as 40, according to a National Development Strategy report.

“Many Qatari students find it is easier to go and get a job with the government, so it is not easy to convince them to go into the private sector, whether to start up a business or work for one,” said the unnamed academic. Indeed, according to government data from 2007, only 5 percent of Qataris work in the private sector.

Some educational reforms are being opposed, such as the mixed-gender education of the Qatar Foundation universities, which the government had planned to implement at Qatar University. In a questionnaire carried out in 2009, 80 percent of parents opposed introducing co-education at the university instead of the current segregated class set-up.

A positive example of the successes of the education drive is found at the College of the North Atlantic-Qatar (CNA-Q), a Canadian institution originally set up as a public college in the province of Newfoundland and Labrador. Here some 80 percent of the 1,500 students that have passed through its doors are Qatari and there are over 2,500 students currently enrolled in classes in technical and post-secondary school education.

CNA-Q has been pivotal in improving the workforce and contributing to Qatarization of the workforce. “Qatar Petroleum, Qatargas, Qatalum and other government companies are the largest sponsors at CNA-Q, sending people for technical training, business studies, accounting, marketing and human resources programs, and we are helping to educate the workforce,” said Curtis Avery, an entrepreneurial mentor at CNA-Q. “When the government got serious about having 20 percent of the financial and banking sector Qatari it was good for my department, as we trained a lot of people.”

Such Qatar Foundation-linked programs have helped boost the number of Qataris at major companies, with Shell employing 204 nationals as of 2011, 10 times more than four years ago.

The Qatar Financial Center is also working to improve young Qataris’ acumen through the Qatar Finance and Business Academy (QFBA). Currently in its first year, the QFBA has eight students enrolled in a 12-month course aimed at developing the skills required of future financial leaders.

“The government is focused on the macro level [and] so often misses the micro due to unintentional oversight, and there is an enormous need to broaden the financial knowledge of 25 to 40-year-olds, which earlier education didn’t address,” said Solveig Nicklos, director of operations at the QFBA.

But the education drive will take time. “We are already seeing the fruits of the investment, but to affect the whole population will take generations, not just 10-15 years. It is a numbers game — if you train 1,000, 100 end up being successful,” said Avery.

R&D and healthcare

The knowledge-based focus is as much about creating a research and development hub as a pipeline of skilled graduates. In R&D, the Qatar Foundation universities are involved with the QSTP, set up in 2006, which currently has 31 member organizations and over 100 research partnerships. Meanwhile, the National Priorities Research Program has provided over $230 million to fund 266 research projects involving some 620 researchers, half of which are in Qatar and the rest carrying out research in 30 different countries.

“There has been a strong focus by the Qatar Foundation on technical education, and at the QSTP we are seeing quite a few successes,” said Anil Khurana, director of operational strategy and private equity at management consultants PRTM. “It will take time for there to be a return on investment, but it will… help build the value chain.”

Research has focused on Qatar’s hydrocarbon sector, downstream projects, alternative energies and mechanical products. Indicative is Shell’s unit, which filed its first patent in 2009 for a fixed-bed Fischer-Tropsch reactor that prevents catalyst activity loss, a part of the gas-to-liquids process.

“What we are really seeing now is knowledge-based investment,” Khurana added. “Investment is getting more technology intensive, particularly in industrial products, pharmaceuticals and medical devices, and the government push to develop healthcare has led to such demand.”

Souq Waqif in the 1970s

Outnumbered

In 1990, Qatar’s population was around half a million. By 2010, it was 1.67 million, with 1.27 million men and 399,421 women, according to the Qatar Statistics Authority. With foreigners around three-quarters of the population, Qataris are seriously outnumbered. This rapid change in demographics has presented problems for Qataris and foreign workers alike.

For expatriates, race and skills differentiate them from one another, with professionals paid good salaries while laborers earn as little as $250 a month. Yet all — from the managing director to the window washer — are reliant during their stay on Qatari sponsors, who have full control over residency, employment and travel in and out of the country.

The government is addressing some of the shortcomings in the treatment and status of workers. Qatar’s National Development Strategy (QNDS) notes that the current sponsorship system “hampers the development of a workforce commensurate with aspirations for a knowledge economy”. As such, it is considering granting permanent residency to expatriates who meet “pre-determined criteria”.

“The subject of sponsorship is going to raise its head soon,” said an economist, who wanted to remain anonymous. “You can see why it is important when a small local population is vastly outnumbered, but a system where nationals are able to prevent staff changing jobs or leaving the country is archaic. As Qatar moves forward to the World Cup, the eyes of the world’s press will be on the country and issues like human rights and the treatment of the under-class will come to the fore.”

While laborers are still banned from walking on the corniche or entering upscale malls on weekends, officials are keen to tout certain improvements in living conditions. State-owned real estate developer Barwa is to build housing for laborers, while stricter guidelines for “labor camps” and improved space requirements have been introduced, increasing it from 3.2 to 4.6 meter square per person. [See last word page 88 and photospread 32] Yet by comparison prisons in the US and Europe have an average of 10.5 meter square per inmate.

Qatarcentric

While Qataris have by and large embraced the socio-economic changes in the country and the subsequent clout the state now has on the world stage, progress has its price. “Some people are afraid of change but happy to be part of the international community,” said Ali al-Humaidi, managing director of Almaras Management Consultancy in Doha. “Either you are part of the change or a bystander, and more Qataris are choosing the first and embracing change. Yet there is this feeling that everything we have is borrowed from another culture.”

Consumerism is one of the most striking societal changes, evidenced in a report released in April by the QNDS that showed that three-quarters of Qatari families are in debt, with many in the red by more than 250,000 Qatari riyals (QR) [$68,650]. The report attributed such high debt levels to an insensible financial culture among Qatari families and a tendency to spend beyond their means. A 2007 study covering a sample of 1,368 Qatari households showed that loans for speculation on the stock market reached QR297,000 [$81,500], entertainment and traveling loans QR203,000 [$55,477] and the average car loan QR111,000 [$30,480]. The QNDS aims to halve the number of families in debt in the next five years.

While the consumerist lifestyle has had its pitfalls, it is the lack of integration between Qataris and expatriates, which Qatarization arguably exacerbates, that is affecting attitudes about the country and its direction towards a knowledge economy.

“Expats can live for years without having social contact with Qataris other than in the workplace. And there is the myth that all Qataris are rich, whereas that is not the case; a comfortable life maybe, but people do have concerns like everywhere else,” said Humaidi. “I want to take away any feeling of differentiation. I feel Qatarization is divisive as it puts people into two groups. Instead of people working together this disappears when you say Qatarization,” he added.

Humaidi advocates a “Qatarcentric” approach, whereby new expatriates are assigned a mentor to ease them into the country and its culture, and at the introduction of majlis gatherings in the workplace to foster communities. “We really need to introduce Qatari culture into the workplace, as for Qataris and Arabs this would make them feel the workplace is not alien and strictly geared towards expatriates.”

The Qatar Foundation’s Sada argues the answers for Qataris and expats alike is to build the knowledge economy as outlined in Qatar’s Vision 2030. He said, “Over the next 10 years, the people of Qatar will increasingly recognize themselves as part of a progressive society, where debate and discussion are an everyday part of life, where cultural life is enhanced and heritage protected… our work to address social needs will also continue, ensuring no one is left behind in this exciting journey.”

The Peninsula of Protectionism

GCC and international firms face challenges investing in Qatar

Qatar’s “open market” is “committed to free trade” and “warmly welcomes foreign investors” to help diversify the economy, according to the Ministry of Business and Trade’s Investment Promotion Department’s latest report, “Rise With Qatar”. In other words, very much standard fare for investment promotion boards around the world.

Despite the rhetoric, while Qatar’s major spending spree on infrastructure and hydrocarbon projects are certainly generating much interest and opportunities, away from such sectors the options for private investors are rather restricted.

“Opportunities are limited to high level projects like roads and railways, and while local players can’t do it all there is a need to create space for private companies to develop,” said Narayanan Ramachandran, head of advisory for Bahrain and Qatar at consultancy firm KPMG. “The challenge is that the percentage of private activity needs to increase. Government and quasi-government sectors dominate so the private sector needs to grow.”

The Qatar Exchange (QE) is still off-limits to foreigners — Gulf Cooperation Council citizens are entitled to 25 percent of shares in a firm — while setting up a business has a $55,000 [AED 202,015] price tag, 100 percent foreign ownership is restricted to specific sectors, other ventures require 51 percent ownership by a Qatari national, and bankruptcy laws are vague. Even purchasing property, confined to 18 areas for foreigners, does not grant much security, with only a few ownership deeds having been issued and the residency permit that comes with a property “just an open-ended tourist visa,” as one analyst put it.

“Qatar seems first world but in reality [it is] not that open. From the outside, Qatar looks like a good and free market, but to buy anything you have to go to this or that guy with the experience and the connections. There are many monopolies to contend with,” added the analyst.

Hopes that foreign investors would have greater access to the market were dashed in early May when the Advisory Council opposed a government proposal to allow non-Qataris to invest in exclusive dealerships selling foreign goods and services. “Any move to permit non-Qatari capital in exclusive dealerships would gravely endanger Qatari businessmen,” the Advisory Council said in Qatari daily The Peninsula.

The move was criticized anonymously in the press as ensuring the existence of monopolies and curtailing competition, with the ruling pushed forward by several prominent local businessmen that are members of the council.

Sectors where foreign investors can have 100 percent ownership are restricted to “priority sectors,” namely business consulting technical services; IT; cultural, sports and leisure services; distribution services; agriculture; manufacturing; health; tourism; development; exploitation of natural resources; energy and mining.

“The government increased this year the number of sectors that can be invested in — over 49 percent — for foreigners. The authorities know the restrictions are not helpful for encouraging investment, but they need to bring the local constituency along with them over time,” said Andrew Wingfield, a partner at international law firm Simmons and Simmons in Doha.

Despite the seemingly broad swathe of investment opportunities now on offer in Qatar, barriers to new foreign businesses are still considerable.

Limited liability companies (LLCs) that want to set up in the country are required to have a paid-up capital of QR200,000 [$54,913 or AED201,695].

“That is expensive, even before you open the business’s door, but the rationale is that it stops the fly-by-nights and [ensures] the businesses that come here will be serious,” said Wingfield. “But for LLCs to borrow from local banks, the Qatar Central Bank (QCB) will not allow lending unless shareholders give a guarantee. Such a requirement is not mandatory in many other jurisdictions but it is in Qatar. It could be said to be a very prudent move to protect the banks, but it is another hurdle to investment.”

The message being put out is that companies have to be willing to pay to get in on the action. While this flies in the face of the country’s propounded open market, it reflects a protectionist approach, which is not necessarily a bad thing if well regulated and transparent. Indeed, it is a policy widely used by developing countries to build up their economies, as South Korea has done and is still doing, albeit primarily to protect the industrial and manufacturing sectors.

“There is a degree of protectionism on one side, but there is the intent by the government to open up sectors to be competitive that were not,” said Anil Khurana, director of Operational Strategy and Private Equity at management consultants PRTM. “For instance, on the automotive side, the prime minister said in the future there will be no exclusive dealerships and there will be competition.”

Yet while the economy is set to open up more, currently GCC companies are not being given preferential treatment, despite the supposed tenets of the Gulf common market that allow for the free movement of GCC companies and citizens. “There is a new law to allow GCC companies to set up branches in Qatar, but we’ve not seen the law yet. That should help business as at the moment they need a subsidiary,” said Wingfield.

That said, there are some 289 Saudi Arabian companies in Qatar and later this year a trade delegation comprising more than 100 businessmen from the kingdom is slated to visit Doha to scope out the possibilities of joint ventures, bag infrastructure contracts related to the World Cup and discuss the establishment of a joint Saudi-Qatari bank. Given Qatar and Saudi Arabia’s recent political rapprochement, this could signal preferential tenders to Saudi companies, said an investment analyst off-the-record.

Regulatory constraints

On top of the high entry requirements for businesses, the QCB in April implemented stricter regulations on Qatari banks’ retail lending to help reduce leverage in the retail segment. Personal loans were capped at QR2 million [$549,000 or AED2 million] for Qataris and QR400,000 [$109,000 or AED 400,357] for expatriates, limited to 72 months and 48 months respectively, and equated monthly installments are not to exceed 75 percent of a Qatari’s monthly income or 50 percent of an expatriate. In the short-term such a move will restrict retail lending and impact on banks margins, but in the long-run it is expected to improve asset quality and prevent the level of defaults that abounded in the wake of the financial crisis.

“The limit on lending to individual customers and the capping of interest rates will clearly have an impact on the banks. These are going to impact the volume of growth the banks can procure, and obviously impact our rate of profitability,” said Commercial Bank Chief Executive Officer Andy Stevens to the Gulf Times following the QCB’s decision.

QCB’s orders came just months after a harder impact on the Qatari banks, when in February the central bank ordered 16 commercial banks to wind down their Islamic banking units by the end of the year. QCB justified the move by citing the difficulty to regulate the two financial sectors, with the conventional banks having to abide by Basel requirements while the Islamic banks are following guidelines issued by the Malaysia-based Islamic Financial Services Board.

While the move will benefit the country’s three dedicated Islamic banks, it is being viewed in a negative light by international lenders in the advent that other regional central banks follow suit. It has also sent mixed signals to the banking sector while raising concerns over QCB’s regulatory abilities as it stated it got “mixed up” in monitoring both banking sectors.

And while the ruling was to be expected, it was done overnight without consulting the banks. “It had been discussed by [QCB] for the past three years, but the timing and speed with which it happened was not expected by the banks,” said Ramachandran. “Whether the directive will be achieved by the end of 2011 is still too early to tell.”

The directive had particular sting for HSBC’s Islamic banking unit, Amanah, which was set up just seven months prior to the announcement and prompted the global bank to seek a “workable solution” with QCB.

A further issue in the financial market is that the central bank has not created a single integrated regulatory body to oversee all banking and financial services in the country, which was intended to bring in the Qatar Financial Center (QFC) under the same regulator as QCB.

QFC was established in 2005 to attract international financial institutions to Doha that were to operate separately from local banks and be independently regulated by the QFC Authority (QFCA), which is based on best practices in international financial centers such as London and New York. The intention to unify the framework was announced in July 2007, but four years on it has yet to be implemented.

“One challenge in the market is the integration of the regulatory framework of the QCB with the QFC, but we are not aware of the time-line,” said Ramachandran. “And while the QFC has certainly attracted service providers, the question now is the strategic thinking of overall regulations and the differences between the local players regulated by the QCB and the banks by QFC.

“I also think the QFC has to do wider business than just Qatar (if it wants to be a regional financial hub), as it is looking first at the local market. Qatar has to consider how to get that regulatory framework right and attract more regional players. So far, QFC’s framework is to bring in established players with a certain pedigree and not for new financial institutions.”

The financial viability of the QFCA has also been questioned, with the body not including their balance sheet in the 2010 review following reports that the QFC relied on state funding and was not breaking even.

With Qatar dragging its feet on the unified regulatory authority, some consider that Doha has missed the boat in terms of attracting more financial service providers, particularly over the past few months when Doha had the chance to poach players away from the established financial center of Manama amid the political unrest in Bahrain, and before that from Dubai in the wake of its debt crisis. As law firm Clyde and Co. noted about the benefits of the establishment of a unified regulator: “Such a move is likely to benefit international financial institutions in doing business within the region. It is also likely to give Qatari institutions a competitive advantage in the medium term as those businesses adapt to a more competitive international regulatory environment.”

Qatar's Green Wash?

Reality doesn't reflect Qatar's lofty goal of becoming the "green capital" of the Gulf

Every night whole office blocks, devoid of people, are lit up in the West Bay business district. Doha’s mini Dubai, West Bay is full of cutting-edge architecture providing a permanent contradiction to Qatar’s desert environment.

The dust covers the windows. The exterior buildup of sand is visible even on the thirtieth floor. It is a Sisyphean task to keep the buildings clean, requiring permanent teams to clean the windows every two or three days.

Confronting climate change does not appear to be a priority in Qataris’ daily lives. On the roads, the most popular car sold in 2010 was the Chevrolet Tahoe, a gas-guzzling 5.3 liter V8 SUV. With a liter of gasoline costing 1 Qatari Riyal (QR) [$0.23] and a liter of mineral water an average of QR1.2 [$0.34], the penchant for large engines is not surprising. “I spend more on drinking water than the gas for my car,” said an account manager.

Yet Qatar’s constitution declares that “the state shall preserve the environment and its natural balance in order to achieve comprehensive and sustainable development for all generations.” In the Qatar National Vision 2030, released in 2008, the fourth and final pillar is environmental development, with the report declaring the need to find a “balance between development needs and protecting the environment”.

These are noble goals but the implementation appears to be closer to what environmentalists call a “green wash” — a superficial marketing ploy with no real commitment to becoming more environmentally sustainable.

According to a recent article in The Peninsula, Qatar has one of the highest per capita usages of water in the world, more than double the average for Western European countries. Qataris used 1,200 liters per person per day in 2009, while expatriates consumed 150 liters per person per day. Use of desalinated water has tripled since 1995, reaching 312 million cubic meters in 2008.

Part of the problem is that Qataris do not pay for water, it is low cost for expatriates and the government recoups less than a third of water production costs as a result. Aware of the high consumption, the government is to create a National Water Act, but only by 2016. In the meantime, consumption is expected to increase 5.4 percent a year for Qataris and 7 percent a year for expats.

With gasoline prices low, electricity free for Qataris and 95 percent of all food stuffs imported, Qatar has the second highest carbon footprint per capita in the world, according to the Global Footprint Network’s “Ecological Footprint Atlas 2010”.

According to a World Wildlife Fund report, it takes about 8.1 hectares (20 acres) of forest to absorb the annual carbon emissions of the average Qatari while the average is 5.4 hectares for North Americans and 1.2 hectares for Chinese.

Only behind the United Arab Emirates, Qatar has shot up the carbon footprint rankings as its population has surged in line with economic development. From 1961 to 2007, Qatar’s population grew by over 2,000 percent and its total ecological footprint by over 7,000 percent. Biocapacity, or the territory’s ability to provide resources and absorb waste, has declined by 95 percent per person. By comparison, over the same 46 year period, the ecological footprint of the average Asian resident increased by 39 percent.

Getting to green

Awareness of environmental issues is growing, but only timidly. In the 2010 Qatar World Values Survey (WVS), carried out by Qatar University, only 6 percent of Qatari respondents expressed a concern for the environment.

The increase of environmental initiatives is, however, evident in the corporate and state sectors, from banks going green to new, more efficient, district air cooling systems. The Qatar Sustainability Assessment System (QSAS), opened over two years ago along with the Qatar Green Building Council, has been tasked with reducing carbon emissions from buildings. They have adopted proposals from the Green Building Council’s “Leadership in Energy and Environmental Design” guidelines, as well as seeking to develop an approach applicable to the Gulf’s harsh climate. Furthermore QSAS and the Gulf Organization for Research and Development aim to turn Qatar into the Gulf’s “capital of green”.

In a country with over 300 days of often searing sunshine per year, solar power may appear to be the easiest path to environmentally compatible energy solutions but this has its pitfalls. Studies in Saudi Arabia have shown that photovoltaic solar cells exposed to the elements for six months lose 50 percent of their efficiency due to accumulated dust.

For Qatar, the omnipresence of dust and its impact on photovoltaic panels mean that maintenance of such power stations would consume a precious resource: water. According to research by Chevron Qatar, “the usual solution is to wash photovoltaic panels, but of course in Qatar water is scarce.” What’s more, photovoltaic panels are less efficient in the up-to-50-degree Celsius temperatures that scorch Qatar in the summer, according to Chevron technology advisor Ben Figgis.

“Every 25 degree Celsius rise in the temperature of a photovoltaic cell causes its efficiency to fall by around a tenth,” Figgis wrote in a 2009 analysis stressing that lab tests are not adequate for measuring the performance that solar cells would deliver under real life conditions in Qatar. “The only way to be certain of a solar panel’s performance in Qatar is to test it in Qatar,” he emphasized.

Chevron is undertaking this research into solar power technology in the company’s $20 million Center for Sustainable Energy Efficiency at the Qatar Science and Technology Park.

But while energy-related research is a natural fit for Qatar, other environmentally-tinged projects are being promoted without answering many questions about their sustainability. Currently Qatar imports some 90 percent of its food needs, yet the country plans to whittle this down to 30 percent by developing an agriculture and food industry under the 2008 Qatar National Food Security Programme (QNFSP).

According to QNFSP, Qatar aims to meet 70 percent of its food requirements by 2023, despite the high water needs implicit in large-scale agriculture. The QNSF water strategy aims to meet its targets through desalination – a method challenged by critics on environmental terms. Using the “latest agricultural technology”, the country would develop a “farm city” south of Doha, according to statements that QNFSP Chairman Mohammed al-Attiyah made last month.

“We want to have the full chain, from production to end use. We’re aiming for a complete city which will include research and development, food processing, distilleries and growers, as well as utilities and universities,” said Mohamed Ahmed al-Obaidly, head of the agricultural and environment committee at the Qatar Chamber of Commerce and Industry, to Reuters. Qatar has also invested $6 billion to ensure food security by buying up land and farms in Africa, Pakistan and Australia.

Construction's Disruption

Qatar's real estate sector is awash with potential and burdened by bad management




It has been a turbulent few years for the Qatari real estate sector in the wake of the financial crisis, with both rents and prices dropping, albeit to more realistic levels. While retail and commercial space may be on the uptick, all property-related developments have major infrastructure projects to contend with as Doha scrambles to build a metro and railway link, new roads, stadiums, port facilities and a new airport in time for the World Cup in 2022.

Indeed, much of the city and its outer reaches resemble a massive construction site, with cranes dotting the skyline, roads constantly diverted due to road works and roundabouts torn up to make way for overpasses to ease congestion. When major cement-laying is in progress, at one or other of the mega-projects, trucks laden with cement stretch across the country to the Saudi Arabian border. Such rapid infrastructure development will present problems for developers trying to shift office and real estate space, and cause a lot of re-locations until major works are finished.

“In June work started on the underground system in the West Bay area, 17 holes the size of football fields. It will be interesting to see how it will affect demand for office space. I think the port area will become more attractive for a period due to the disturbance,” said Edd Brookes, director and head of valuation at real estate firm DTZ-Qatar. It is a similar conundrum for salesmen at the Lusail development north of the capital, which is due to house 250,000 residents over the next 15 years. “Even if they finish the first phase by 2012, you’ll have to live next to a construction site for over a decade,” said a real estate analyst, speaking on the condition of anonymity.

While the massive infrastructure work to get Qatar ready for the World Cup is going to cause a great deal of noise pollution and traffic jams for Doha’s inhabitants, it does have a flip side. The major real estate and infrastructure projects — from the airport to the $5.5 billion Mesaieed Port – were all under construction prior to Doha being announced as the host of the 2022 event. The successful bid has given developers a much-needed push to meet slated targets. For instance, work on the $14 billion New Doha International Airport began in 2004 and the first phase was initially to be operational in 2009 and be fully completed by 2013. Yet work has still not been finished and the scheduled completion is ostensibly 2015. “The World Cup has given a time horizon, as otherwise things drag on and on,” said one analyst. “But they are going to struggle, it will be right down to the last minute, as it was with the Asian Games [in 2006].”

Ear plugs for the office

The decision to invest in a metro and rail system, while necessary for long-term transportation needs, has arguably come too late for Doha’s central business district (CBD), West Bay, with the above earth infrastructure developed before the underground work. The timing of such infrastructure work is equally problematic, as while Doha needed a CBD and an attractive skyline of shiny towers to present a modern image of the country for its brand publicity, the new office space has not been snapped up by private investors as was expected. The large number of empty office spaces led the government to stipulate that new businesses move to West Bay, but for many it remains too expensive. Instead, financial advisory and advertising agencies have shunned a more exclusive address to opt for larger, cheaper premises away from the business district.

A further issue is the size of the offices, at an average of 20,000 square meters (sqm), whereas 47 percent of market demand was for 1,000 to 4,999 sqm offices, and 32 percent for 5,000 to 9,999 sqm, according to real estate firm DTZ-Qatar. Developers have so far resisted requests to break office spaces into smaller units more conducive to commercial needs. This has left the state sector to take up the slack. “There is not that much space available now in West Bay, as people seem to think,” said Abbas Shafiei, managing director of real estate firm Engel & Völkers. “You don’t spend money for wonderful towers and then leave them empty. It is now Qatari Riyal(QR) 170-175 [$46-48] per square meter and all [empty space has been] taken by the government.” Last year, government offices accounted for 120,000 square meters, or 25 percent, of the West Bay area.

But while government intervention has prevented whole floors or buildings from lying empty, its actions have had a knock-on effect.

“The fly in the ointment is a government committee implemented rental caps for offices at below market rates of QR170 ($46) per meter squared. This sends a message to non-government occupiers that this rate is a normal rental level. That’s had an effect on the market,” said one real estate analyst.

Buy or rent?

Qatar is hedging itself against a Dubai-style real estate bubble by restricting foreign ownership to three districts — West Bay Lagoon, The Pearl and Al Khor resort — and 18 other areas on a 99 year lease, most notably high-end projects like the $4 billion Lusail city and Musheireb.

There has been growing interest in real estate but legal complications still abound, with residency visas for foreign property buyers only being granted for the first time this March to two individuals, and based on the real estate developer being the sponsor of the residency permit. “That is not a whole lot of (residency permits) if you consider 35,000 expatriates are expected to live at The Pearl,” said an analyst. Some 70 cases of non-Qataris seeking ownership of properties are still pending with the government.

“On the residential freehold side, each plot has a title deed issued which the owner is supposed to get, but the issuing structure still needs to be sorted out. This is an important issue, especially with regards to funding from banks, as they can take over a property without a deed. Without a clear structure, this puts people off purchasing,” said another real estate analyst.

Although interest is set to spike in the run up to the World Cup, real estate developers have not sold as many units as expected. The causes for this are primarily the high costs of properties and the perception that Doha is not as attractive a market as Dubai was prior to the 2008 crash. Equally, banks have made it difficult for non-residents to access credit, with interest rates at 8 to 9 percent.

“The principle [aim] of all the developers is to sell to foreigners, but in reality not that many have sold, especially as Qatar is not looked at as a [favorable] destination. It is difficult to sell to foreigners, even Europeans and Americans. It is much easier to sell to Qataris and to Arabs,” said Engel’s Shafiei.

As a result of such market dynamics, there has been a greater propensity for people to rent rather than commit to buying, particularly expatriates working in the country.

“The trend for new developers is to lease, not sell, as it will drive up prices as the market is more restrictive than people think. Expats are less tied to buying as they have only a two to three year commitment to Qatar,” said DTZ’s Brookes. Indeed, analysts estimate around 90 percent of the real estate sector is for rent.

“If you had a QR15,000 [$4,120] a month rental allowance you have two options: rent or buy at, say, The Pearl. Logic would tell you to buy, but unfortunately people don’t see it as 100 percent safe to buy, especially now with the problems globally and in the region, in Bahrain, Syria and so on,” said Shafiei.

Real estate sales have also been affected by delays in project completion and unexpected changes in the management of government-connected firms. Barwa City, for example, a project to house 25,000 people developed by state-run Barwa, went through three chief executive officers this year, with the last CEO only staying in the job for three weeks. He was let go over his attempts to restructure the mother company as three companies were essentially overlapping, but this required firing locals. “He did what was needed and normal, but here you can’t fire 90 Qataris without repercussions,” said the real estate analyst. With the Barwa project floundering, the state-owned Qatar Airways came to the rescue in June by agreeing to rent the entire city for QR7.1 billion ($1.95 billion).

The heavily publicized real estate development The Pearl, a $20 billion self-contained residential city built on man-made islands by the United Development Company (UDC) outside of Doha, has also faced problems. Most notably its overly high prices per square meter have warded off potential buyers in the non-secondary market, but there were also problems with cash flow due to run-away construction costs. Indeed, prices at certain developments at The Pearl have gone from QR8,000 ($2,200) per sqm in 2006 to QR22,000 ($6,040) per sqm.

“UDC only gives you fantasy. It is like an ostrich with its head in the sand as it has not sold many units for two to three years because the developers have not lowered prices while the secondary market is now 30 percent cheaper,” said a real estate analyst that wanted to remain anonymous. “And UDC is stuck in the Pearl project. While the figures announced in the newspapers all look good, the reality is that they (UDC) are starved of cash and failing to finish the project. Real estate firms have even faced legal action from UDC due to less than glowing market reports.”

But while the real estate sector is facing certain issues that need to be ironed out, analysts do stress the medium to long-term potential of buying property now, and have noted an uptick in sales following a slump in 2008 and 2009.

“Qatar really is a good place to invest,” said Shafiei. “Our figures are way over my expectations for 2011, and this is not just to do with the announcement of the World Cup. Sales have picked up across the board and there’s good value to be had across Doha. This year is good and next year things are really going to take off.”

LNG Hub of the World

Qatar's swelling coffers are filled by fuels but are investing in a diversified future

Bankrolling the 2022 World Cup, the $36 billion railway and metro system, the infrastructure projects and the television empire Al Jazeera is Qatar’s hydrocarbon wealth. The country’s recent rise to become the world’s largest exporter of liquefied natural gas (LNG) has dominated energy publication headlines and helped Qatar increase its influence in foreign policy.

Through rolling out an integrated LNG value chain, in conjunction with international oil companies (IOCs), from production, liquefaction and shipping to receiving and re-gasification terminals throughout the world, Qatar is guaranteeing itself steady income for decades to come. Notably this year Qatar bolstered annual gas exports by more than 60 percent to Japan, from 6 million metric tons (m/t) to 10 million m/t, in response to Tokyo’s spike in demand following the damage to the Fukushima nuclear power plant.

Enabling Qatar to meet such demand has been their surge in production capacity. With two new LNG production plants opening over the past year, and with the latest, Qatargas’ Train 7 LNG plant ramping up to optimal capacity, production will hit 77 million m/t annually this year. Qatar is also set to fully open the world’s largest gas-to-liquids (GTL) facility later this year: the estimated QR69 billion [$19 billion] Pearl Plant, a joint venture between Shell and Qatar Petroleum that will produce 140,000 barrels per day (bpd).

Receiving less focus than the LNG and GTL drive is the oil sector. Holding 25.4 billion barrels of proven reserves, according to Oil & Gas Journal, Qatar is the eleventh largest oil producer in the Organization of Petroleum Exporting Countries (OPEC) and sixteenth in the world with crude oil capacity of 850,000 bpd and 590,000 bpd of non-crude in 2010.

Varying the options

Although often thought of as a secondary hydrocarbon export market for the country, revenues from LNG in 2010 were QR76 billion [$21 billion] while Qatar earned QR138 billion [$38 billion] from oil, natural gas liquids and refined petroleum products, according to the Saudi Financial Group. This year, the group forecast earnings will spike to QR109 billion [$30 billion] for LNG exports and QR192 billion [$53 billion] for the oil sector due to rising output and high energy prices.

Qatar’s oil and gas sector is not just attractive to oil multinationals. For the would-be investor without the capital of an IOC — Shell has invested QR76.4 billion [$21 billion] and ExxonMobil QR58 billion [$16 billion] — or a major contractor in extraction or production, opportunities beckon in associated technologies and the downstream sector: petrochemicals and associated by-products. “The oil and gas sectors attract a need for technologies, especially away from downstream. Even small investment might have worthwhile returns. And if GTL takes off, this might attract other investments,” said Anil Khurana, director of operational strategy and private equity at management consultants PRTM.

Qatar is also banking on its low energy costs to develop energy-intensive industries such as aluminum. The QR20.7 billion [$5.7 billion] aluminum smelter project Qatalum, a joint venture between Qatar Petroleum and Norsk Hydro, started production in 2010 and is currently operating at 70 percent of its 585,000 tons per year capacity. Expected to boost the country’s GDP by QR5.4 billion [$1.5 billion] a year, this figure is slated to double through associated-linked projects in industry and manufacturing.

Qatar's Sovereign Wealth Fund

Power and profits won from the country's deep pockets

Since its inception in 2005, the Qatar Investment Authority (QIA), the country’s sovereign wealth fund (SWF), has made its mark globally through high profile purchases and a diversified investment portfolio, funded via its estimated QR310 billion [$80 billion] purse. From stakes in Hollywood’s Miramax Films to banks, property, hotels and car manufacturers, the QIA has made some canny financial moves.

Considered one of the world’s most aggressive SWFs, this year it plans to increase last year’s QR72 billion [$20 billion] overseas investments to up to QR127 billion [$35 billion] as it ventures into the American and British real estate markets and commits QR1.5 billion [$429 million] in Spanish banks.

Politics vs profits

Yet the fund has also sustained losses as a consequence of Doha’s foreign policy moves this year. Backing the rebels in Libya has resulted in writing off a QR7 billion [$2 billion] joint venture between the QIA and the Libyan Investment Authority, along with QR29 billion [$8 billion] in other investments in the North African country, notably by the QIA’s real estate arm Qatari Diar. Meanwhile, the Al Jazeera network’s antagonistic news coverage of the uprising in Syria — reportedly at the behest of the Qatari royal family — has provoked the ire of Damascus which suspended an estimated QR21 billion [$6 billion] in Qatari investments in the country, including Qatari Diar ventures and two power generators to have been built by the Qatar Electricity and Water Company.

Doha seems willing to take such a financial hit as it becomes more active in international politics and cements its position in the Gulf Cooperation Council, following warmer ties with regional superpower Saudi Arabia. Losses elsewhere can be offset by securing financial and military backing in the West and the Far East, where Qatar has helped shore-up the financial system. Yet as one analyst noted, “they can afford to lose billions in Libya and Syria, but can you imagine if these companies were owned by shareholders?”

The QIA, however, is predominantly controlled by the ruling family, the Thanis, who account for four out of the six board members. Advising the QIA are some of the world’s top investment bankers poached from leading financial firms.

One of the fund’s most savvy financial moves was when investment arm Qatar Holdings acquired QR12 billion [$3.3 billion] in shares, and the Qatari royal family-owned Challenger Universal a QR3.5 billion [$1 billion] stake, in Britain’s Barclays Bank in 2008. In 2010, the QIA sold off 379 million of its shares to make a cool QR3.5 billion [$1 billion] in profit. Stakes in Credit Suisse have equally generated massive returns, having acquired shares in the wake of the global financial crisis, and the institution has become Doha’s investment bank of choice.

Strategic vision

While Qatar continues to acquire trophy assets like Harrod’s in London and is reportedly bidding for British toy store Hamley’s and a stake in the struggling French bank BNP Paribas, emerging markets and long-term strategic ventures are increasingly important. “They have bought trophy assets, not just as trophies but for the long-term potential,” said Andrew Wingfield, a partner at international law firm Simmons and Simmons in Doha.

Over the past year among other investments the QIA sunk QR22 billion [$6 billion] into the Agricultural Bank of China, signed a QR18 billion [$5 billion] agreement with Malaysia to invest in real estate and energy, and acquired a 5 percent stake in Banco Santander Brasil.

With Qatar slated to generate QR302 billion [$83 billion] in hydrocarbon sales alone this year, according to government statistics, it is no surprise that the QIA is being heavily courted around the world for ailing economies to get a much needed injection of foreign direct investment. However, with Qatar’s budget surplus lower than expected over the past fiscal year, at 2.9 percent of economic output, the QIA will have to be selective rather than go for political-economic strategic alliances.

Where would you invest $20 million in Qatar?

“Definitely hospitals and schools, nothing else. A nation is as strong as its education and health, not how big its bank account is,” said Ali Al-Humaidi, Managing Director of Almaras Management Consultancy.

“In engineering, consulting or market research as these are services Qatar really needs, as is a scaleable business with not a lot of upfront capital required,” said Curtis Avery, Entrepreneurial Mentor at the College of the North Atlantic – Qatar.

“I wouldn't, not anymore. I've become more fiscally conservative for one, but how do you protect your investment in Qatar? Rules can change overnight, and there are new regulations all the time. Or what if you kiss a girl on the beach and get caught? You'd have to leave, and what would happen to your investment then?” said an analyst that wanted to remain anonymous.

“I'd invest in a company providing good maintenance and services, plumbing and carpentry, for residences in Qatar. It is a gap in the market. If you don't live in a compound with a maintenance team, it is hard to get someone to do it that speaks English and knows what they are doing,” said Andrew Wingfield, Partner at international law firm Simmons and Simmons

“I would probablly look to invest in mid-range hotel assets, for example Ramada Encore, decent business style hotels. Why? An area that shows the most growth in the next 10 years. The time to get out of Qatar is 2017-2018 not the day after the world cup. Who knows how much the economy would've diversified in 10 years time, and education and health care will have expanded,” said Edd Brookes, Director and Head of Valuation at real estate firm DTZ.

“I'd invest in manufacturing industry with export capability to the GCC and nearby markets like Iran, Iraq and the Indian subcontinent. I would say don't build another hotel as there are enough players in that space, whether hospitality or services. The government says that it is easy to invest in real estate but gets into population game and looking at Qatar like Dubai,” said Narayanan Ramachandran, KPMG Head of Advisory for Bahrain and Qatar

“I'm not sure I would. I would probably lean towards something with not much upfront capital cost that could be wound down pretty quickly rather than be stuck with fixed assets that may not have any fixed value at the end. Definitely there are opportunities but there is a lot of risk to start up a company here. Hopefully that will start to change. The whole sponsorship rule is not foreign investor friendly, and for 90 percent of business you need a Qatari partner. If I put in $20 million, he owns 51 percent,” said an economic analyst off-the-record.

“I'd say three or four options to mind. Advanced building materials given all the construction underway. Second, in education, as although there is significant investment it is still under-invested in terms of local needs; not universities but schools and training. Third, the oil and gas sector attracts a need for technologies, especially away from downstream. Four, even small investments might have worthwhile returns,” said Anil Khurana, director of Operational Strategy and Private Equity at management consultants PRTM.

Sanctions on Syria: The Slow Crush of Attrition

A man closes the doors to his store at the Buqayaa smugglers market on Lebanon's border with Syria

Eleven years of gradual economic reform have sputtered to a halt in Syria over the past six months amid nationwide revolts against the regime of President Bashar al-Assad. Gone are the halcyon years of a booming tourism industry, the headway made by the region’s youngest stock exchange and the foreign direct investment that had spiked since 2005 to reach $2.9 billion in 2010. Meanwhile, the expatriate Syrians lured back from corporate jobs in the Gulf and the West to join the fledgling financial sector have, by and large, packed their bags and left as the crackdown on demonstrators escalates. Between 2,600 and 5,400 have been killed, according to varying estimates, as Executive went to print.

The short-lived economic renaissance of sorts steered by Assad and Abdullah Dardari, a London School of Economics graduate and now former deputy prime minister, took a further blow when the United States and the European Union slapped multiple sanctions on prominent members of the Syrian regime and close economic partners in May, and imposed further rounds of sanctions in August and September that included the oil sector.

Tightening the screws

The EU has been selective in what individuals and entities it has targeted for sanctions.

On May 9 and May 23, members of the regime were designated, including President Assad and his maternal cousin, billionaire businessman Rami Makhlouf, whose portfolio includes Cham Holding and mobile operator Syriatel, and who the EU stated was targeted because he “bankrolls the regime allowing violence.” On September 2, the EU listed prominent businessmen and businesses for providing “economic support to the regime”, such as the presidents of the Damascus and Aleppo chambers of industry — respectively, Tarif Akhras, head of the Akhras Group, and Issam Anbouba, president of Issa Anbouba Establishment for agro-industry — as well as Cham Holding and certain subsidiaries, and the state-run Real Estate Bank.

On September 23, a further 15 regime members were added (bringing the total to 43 members of the regime and associated businessmen), as well as five Syrian intelligence and military directorates. A further six entities were added to the ‘banned’ list, including Addounia TV and Syriatel, as its licensing contract “pays 50 percent of its profits to the government.”

The EU moves allow for the freezing of the European assets of the individuals targeted and prohibits their travel to Europe. The latest sanctions also prohibited the selling, buying and export, directly or indirectly, of new Syrian banknotes and coinage printed or minted in the EU, to the Central Bank of Syria, as large amounts of Syrian currency had, until then, been produced in Austria. The September sanctions also prohibited financial loans, credit or joint ventures with listed persons or entities.

The US sanctions, issued May 27 and September 1, focused on military-linked businesses, Syrian hydrocarbon companies and Cham Holding, and prevent American companies from doing business with the figures in question. Sanctions were also renewed against the state-run Commercial Bank of Syria (initially blacklisted by the US in 2004 for financing terrorism), and Syrian-issued MasterCard and Visa cards have been frozen. The US and EU-blacklisted companies and individuals contacted by Executive refused to comment.

Hardly foolproof

“Sanctions are not a silver bullet,” said Andrew Tabler, a Next Generation Fellow at the Washington Institute for Near Eastern Policy (WINEP) and author of recently published “In The Lion’s Den: An Eyewitness Account of Washington’s Battle with Syria.”

“They are more like ways you can find to ratchet up the pressure in very specific ways to try and bring about some breaks in the regime, for instance, in getting elites to move away from [it],” he said.

The economic sanctions are an obvious psychological blow to the regime and its cadres, but do not have the same impact as those on the oil sector, which accounts for an estimated 20 to 30 percent of the country’s gross domestic product.

That said, while the latest sanctions have not directly targeted international trade outside of oil, wariness on the part of international shippers to trade with Syria and a sharp drop in domestic demand has seen cargo shipments at the port of Lattakia plummet, dropping 13 percent since the beginning of the unrest in March on the year before and 36 percent year-on-year in June alone, according to statistics published by the port’s operating authority. Reuters last month quoted shipping sources as saying volumes at the ports of both Lattakia and Tartous have shrunk as much as 40 percent in the first eight months of 2011, relative to last year.

Trade with strategic partner Turkey has also plunged, with Syrian exports to Turkey in June dropping 59.3 percent, to $48 million, from the same period last year, while Turkish exports to Syria declined by 18.1 percent to $113 million, according to Turkish government figures.

Trade with the US, however, has been negligible for years, with 2010 bilateral trade estimated at $928 million, or 2.4 percent of all trade, following the Syria Accountability and Lebanese Sovereignty Restoration Act of 2003 that banned all exports except food and medicine, prohibited American businesses from operating or investing in Syria, blocked transactions on Syrian property and tightened the aviation sanctions first imposed in 1984. However, Syria was able to successfully bypass these earlier sanctions by re-exporting American goods through Jordan, Lebanon and the United Arab Emirates. Where the US has hurt Syria is by limiting the leverage of Syrian banks internationally, and it could deliver a huge blow should it succeed in its efforts to put pressure on Turkey to also impose sanctions.

A bigger blow to Syria is the impact on trade with the EU; the economic bloc is the country’s largest trade partner and aid donor, accounting for 22.5 percent of Syria’s foreign trade in 2010.

But as a trade partner, Syria ranks low down on the major import and export list for the EU, accounting for just 0.2 percent of imports and 0.3 percent of exports in 2010, and ranked 50th of the EU’s trade partners, according to International Monetary Fund (IMF) statistics. Nonetheless, the sanctions have had an effect.

“While EU trade sanctions are limited to the oil sector, non-oil trade with Europe has been affected as European companies have been limiting their trade with Syria, and the Syrian government itself is encouraging Syrians not to trade with Europe,” said Nabil Sukkar, a former World Bank economist and head of the Syrian Consulting Bureau for Development and Investment in Damascus.

No investment ban

The EU sanctions have not included an investment ban on European companies doing business in Syria, although this could be the next step. “I think an investment ban is coming. But what impact will it have? The largest investment [by the EU] is in the petroleum sector,” WINEP’s Tabler said.

Italy, whose bilateral trade with Syria was worth $2.69 billion in 2010 and which is Syria’s fourth largest import partner, has managed to delay the enforcement of EU oil sanctions until November. The European Investment Bank has stopped all loans to Syria and EU aid programs totaling $185 million have been slashed by 62 percent. The aid had gone towards funding infrastructure projects and providing expertise to the private sector.

But Sukkar believes such a move by the EU is disingenuous. “The cut in EU aid to Syria, intended originally to support economic liberalization, will strengthen the tendency of the new government to bring back controls. So sanctions will be counterproductive, they will hurt citizens’ livelihoods and will help the reversal of Syria’s liberalization policies,” he said.

For the sanctions to work beyond the oil sector, other revenue streams need to be targeted, said Tabler, hitting more prominent businesses in Damascus and Aleppo, particularly those with ties to Western firms such as the Joud Group, which manufactures and distributes Pepsi under license, and the Attar Group, which handles distribution for multinational pharmaceutical companies and electronic and software companies Sony, IBM and Lexmark, as well as being the country sales agent for Alitalia.

Other businessmen that could be targeted — listed in a report by the US Congressional Research Service but so far not sanctioned by Washington — are Majd Suleiman, head of media conglomerate United Group and son of Bahjat Suleiman, a former General Security Director officer, as well as Firas Tlass, the son of former Defense Minister Mustafa Tlass and head of the MAS Economic Group. Reducing the profit margins of major companies paying taxes to the regime would dent the Syrian treasury.

While Sukkar is against the sanctions, he suggested that such specific targeting would make a mark.

“The impact on specific companies and individuals… will deter others from establishing business relations with establishment figures,” he said. “But the imposed sanctions will not topple the regime and will not cripple the economy. Instead it will create economic and social damage, affecting both government finances and citizens’ livelihoods.”

“We will forget that Europe is on the map”

The Syrian government has, unsurprisingly, played down the impact of the sanctions. At a press conference in Damascus in June, Foreign Minister Walid al-Mu’allem responded to the first round of EU sanctions by saying: “We will forget that Europe is on the map, and we will turn to the east, to the south and all directions that extend a hand to Syria.”

The Syrians have lived up to their word to look elsewhere for alternative trade partners. Over the summer, Syrian officials went on a mission to get trade agreements with Ukraine, Kazakhstan, Belarus and Russia. Grain, for instance, has been purchased from Ukraine; a necessary import as Syria no longer produces enough food for its domestic consumption and agriculture output has not been as high as expected this year due to the ongoing drought in much of the country.

Russia has criticized the EU sanctions, and as of August continued to supply arms to Syria. In early September, Prime Minister Dmitry Medvedev said Russia was “a great friend of Syria” and “a country with which we have numerous economic and political contacts.”

Closer to home, the Arab League at the end of August called for an “end to the spilling of blood and for Syria to follow the way of reason before it is too late,” but has not gone as far as calling for an economic boycott or annulling Syria’s membership in the Greater Arab Free Trade Area. Damascus rejected the league’s statement, as did Beirut, signaling that bilateral trade with Lebanon will continue. Such support from Beirut, Moscow and its allies, albeit limited, does dampen the effectiveness of the US and EU sanctions.

“Syria will be able to mitigate the impact of sanctions through deepening economic ties with Iraq, Iran, Russia and other Asian countries. Also Lebanon will always accommodate Syrian business needs for financial transfers,” said Sukkar.

According to shipping sources in Beirut, trade with Syria has not been affected and is very much ‘business as usual’. Lebanese banks hold accounts for Syrian officials, including Rami Makhlouf, according to a banking source, although banks agreed, unofficially at a Union of Arab Banks meeting, not to carry out international transactions on behalf of Syrians, or provide alternative names or addresses. Meanwhile, Finance Minister Mohammed al-Safadi said following meetings in Washington and with the IMF in late September that it was not in the interest of Lebanon to be the financial hub of Syria, and that Lebanese banks have taken measures to align with the international sanctions. If upheld, this could also affect foreign remittances on behalf of Syrians.

If ties with Iraq cool, as Baghdad has recently hinted at, and Turkey joins in on the sanctions — Ankara has already intercepted arms shipments — the Assad regime will find itself increasingly isolated. “Syria would be surrounded. And it is not like Jordan has a lot of love for Syria,” said Tabler. Indeed, if Jordan closed its borders, this would have a major effect on Syrian trade with the Hashemite kingdom and Saudi Arabia, Syria’s third largest trade partner. The loss of Iraq as an export destination would be equally devastating, accounting for 30.3 percent of total exports, or $4.6 billion, in 2010.

If protests against President Assad continue, Syrians will have to “tighten their
belts”, according to Syrian Central bank Governor Adib Mayaleh

Sound as a pound?

Syria’s Finance Minister, Mohammad Jleilati, was trying to put on a brave face when he said on the sidelines of a meeting of Arab finance ministers in Abu Dhabi in early September that the economy will grow by 1 percent this year. A recent IMF report estimates Syria’s economy will contract by 2 percent, while the Institute of International Finance estimated the economy will contract at least 4 percent this year and the fiscal deficit will widen to more than 6 percent of GDP.

But Tabler and other sources Executive spoke with suggest the Syrian economy could shrink as much as 20 percent; tourism revenue (worth more than $8 billion last year) has almost completely vanished, the cities of Homs, Hama, Deir ez Zor and Daraa have been at a virtual economic standstill for months, banks are reporting steep declines in assets and trade is falling off. Syria has seen roughly $2 billion in capital flight this year, and the Central Bank of Syria (CBS) has had to spend at least $2 billion defending the Syria pound (SYP), according to CBS Governor Adib Mayaleh, though the official exchange rate has still slipped slightly, from SYP46 to the dollar in March to SYP48.41 in September.

CBS foreign reserves are officially at $18 billion, although sources peg that number nearer $15 billion, and Mayaleh said Syria has a $5 billion fund created several years ago for the specific purpose of supporting the currency during crises, although he did not make clear whether it was included in the total reserves. Syria also has an estimated 25.8 tons of gold reserves, according to the World Gold Council data, worth roughly $1.4 billion at average world gold prices at the end of last month.

The currency reserves will allow Syria to cover import needs for over 20 months, according to the finance ministry, but that also depends on countries staying friendly with Damascus and remaining willing to trade. Furthermore, international currency rates could cause Syria more fiscal woes than it is already facing, having lost access to the dollar on the global markets.

“Restrictions on money transfers in dollars, initiated from outside as well as by the CBS, have disrupted trade,” said Sukkar. “There will be further disruptions in trade if the EU imposes restrictions on transfers in euros. Then Syria will have to go to other convertible currencies, such as the [British] pound and the Japanese yen, both of which have been as volatile as the dollar and the euro over the past year.”

How well the central bank handles these challenges will be key to the continued funding of the Syrian regime amid increased economic isolation and the possibility of further sanctions.

A faltering economy and diving business prospects would undoubtedly erode support for the regime among middle class Syrians and the business elite — groups which, to this point, have largely backed the Assad government. But in the war of attrition that sanctions amount to, whether they have the desired effect of shaking the regime’s iron grip on power, or whether they harm everyday Syrians more than anyone else, are still open questions.

“[It] all depends on agricultural production, oil prices and how much overall economic demand has dropped,” said Tabler. “The real challenge is for the sanctions to hit the regime more than anyone else.”

MAJOR TRADE PARTNERS 2010
Imports	Value	Percent overall trade
European Union	$4.85 bn	18.7
Saudi Arabia	$2.94	11.3
China	$2.8 bn	10.7
Turkey	$2.1 bn	8.1
UAE	$1.38 bn	5.5
Russia	$1.214 bn	4.7
Iran	$1.06 bn	4.1
South Korea	$1.02 bn	3.9
Lebanon	$989 mn	3.8
Egypt	$973 mn	3.7
Export	Value	Percent overall trade
Iraq	$4.6 bn	30.3
European Union	$4.43 bn	29
Lebanon	$1.5 bn	10.1
Saudi Arabia	$769 mn	5
Turkey	$632 mn	4.1
Kuwait	$504 mn	3.3
UAE	$435 mn	2.9
USA	$419 mn	2.8
Jordan	$351 mn	2.3
Libya	$328.4 mn	2.2
Top 10 Trade Partners (export and import)
European Union	$9.32 bn	22.5
Iraq	$5.49 bn	13.3
Saudi Arabia	$3.7 bn	9
China	$2.74 bn	6.9
Turkey	$2.7 bn	6.6
Lebanon	$2.52 bn	6.1
UAE	$1.88 bn	4.6
Egypt	$1.25 bn	3.1
Russia	$1.24 bn	3
South Korea	$1.11 bn	2.7
Overall Total	$41.36 bn	100
Source: IMF, EU