Monday, May 21, 2012

Sanctions take their toll on Syria’s oil sector

Black smoke is seen from the Homs refinery, which was targeted by rebels in December, 2011

Petroleum Review

The Syrian energy sector is currently reeling from the sanctions imposed by the European Union (EU) and the US in the last quarter of 2011 in response to Damascus’ severe crackdown on protests that began in March last year. Oil production has since slumped by 35% according to the Syrian government, the country lacks storage capacity, there have been attacks on pipelines and the regime is struggling to find buyers for its heavy crude, reports Paul Cochrane in Beirut. 

‘People said the sanctions wouldn’t have any effect, but the impact on the oil sector shows it has,’ said Andrew Tabler, a Next Generation Fellow and Syria expert at the Washington Institute for Near East Policy. The new bilateral sanctions prohibit the purchasing of Syrian oil, blacklisting state-owned firms and banning any new investments in the hydrocarbons sector by international oil companies (IOCs). Syria is not a major oil producer by any means, however, with production estimated at 385,000 b/d before the crisis began. Output had also been declining steadily – by 5% year-on-year until the sector attracted renewed interest following the oil price spike in 2008. A number of E&P projects have been carried out in conjunction with Syrian companies by Russia’s Tatneft, Dove Energy, Loon (now Kulczyk Oil Ventures), Stratic, France’s Maurel & Prom and London-based Gulfsands Petroleum, to name just a few. Energy giants Shell and Total were not amongst those engaged in expanding operations in Syria, but focused instead on the production of Syrian Light crude and marketing refined products for the domestic market.
Last year, Syria exported 145,000 b/d, valued at $4bn by the International Monetary Fund, with the European Union (EU) accounting for 96% of sales and Germany, Italy and France representing more than 70% of exports.
Because of this, the EU sanctions introduced in September 2011 were not fully implemented until 15 November, to allow European countries time to find oil from alternative sources following the disruption to energy supplies during the conflict in Libya. This extended deadline turned out to be largely unnecessary, however, as European countries were easily able to re-source oil from Russia – and later Libya – according to Keily Miller, Research Associate for the Energy Forum at the James A Baker III Institute for Public Policy at Rice University in the US.
In fact, exports effectively stopped the day after the EU sanctions were first announced. ‘IOCs had until mid- November, but there were no tanker shipments after 3 September – even Italy didn’t need this window of time,’ said Martijn Murphy, a Middle East analyst at Wood Mackenzie. ‘For Syria, the sanctions are undoubtedly a big blow.’
Indeed, oil exports accounted for 25% of the government’s revenues, and by December 2011, according to Syrian Oil Minister Sufian Alao, oil production had dropped by 30–35%, with output at 260,000 b/d. While most analysts believe that drop in output to be a realistic figure, others warn that the actual slump could be much worse: ‘The Syrians consume quite a bit domestically and mostly export heavy oil – Soueideh [or Syrian Heavy] – and refine lighter oil from the Euphrates area in the north-east, so there is probably more production offline than they say,’ noted Tabler. Syria’s refining capacity has long been 240,000 b/d.
Meanwhile, Ayham Kamel, a Syria expert at risk consultancy firm Eurasia Group in the Middle East, said that the actual oil output is difficult to quantify given the lack of reliable information coming out of the country. ‘Part of the reason is the government is trying to keep a closed lid on how the sector is doing,’ he commented. ‘From a regime perspective, it [the information] could be used to further weaken it.’
So, while the IOCs pulling out of Syria has significantly affected operations in the country – further compounded by the difficulties state oil companies are facing to ensure the safety of workers – it comes down to the regime’s inability to sell oil internationally that is having the biggest effect, despite the fact that Damascus has signed agreements with Russia, Iran, China, Indonesia and Malaysia to buy its oil.
‘There is a lot of talk about these agreements but they are having a hell of a time trying to sell oil as it is heavy and hard to refine,’ said Tabler. ‘I think the Indians, Chinese and Iranians could refine it, but don’t produce that much [heavy crude], so they would have to have their refineries tuned to take a certain amount, and it is expensive to do so. Damascus tried to sell oil to the Iranians but the tankers have not made it there.’ Unfortunately, it is not just the sanctions posing problems, he added, but issues with insurance, re-insurance and financing have contributed to Syrian oil being taken offline. To try and entice buyers, the Syrians have offered major discounts on oil. However, this has failed to work. ‘No one will sign a long-term agreement as it involves too many risks – even at discount prices – simply because the shipment might not make it if the situation escalates over the next few months,’ said Kamel. ‘Traders will buy spot shipments and that will continue to be the trend until there is stability, as
dealing with Syrian companies right now is more difficult, never mind long-term contracts.’
Another factor potentially making buyers nervous is the fact that the country’s oil sector has been plagued by sabotage, with three cases of bomb attacks on pipelines last year – including one in central-eastern Syria in December, on a pipeline carrying 140,000 b/d. And with Syria’s 6,300-km of gas and oil pipelines, there is a high probability of more attacks on infrastructure in the future.
The closure of the Euro-Arab Mashreq gas pipeline, which runs from Egypt through Jordan and was due to have been completed by the end of 2011, has also had a significant impact on Syria. ‘That pipeline was attacked in Sinai, Egypt, 10 times last year, and because of these attacks no gas is reaching Syria,’ said Murphy.

The exit of Gulfsands 

The company that has been affected the most, overall, by sanctions has been Gulfsands, according to Murphy: ‘For larger IOCs, like Shell and Total, Syria accounted for such a small percentage of production that the effect was fairly negligible.’ Gulfsands has operations in the Gulf of Mexico, Tunisia and Iraq; however, the jewel in the crown of its portfolio was Syria. Having discovered oil in the country in 2007, and reporting profits of $48mn by 2009, the British company was one of the last to stop operations there, having just made a discovery at the Al Khairat-1 field in north-east Syria in early December 2011.
‘Total pulled out in November and Gulfsands did so in December under tremendous pressure from the EU,’ said Miller. ‘If you read Gulfsands’ press releases, they were clearly extremely angry about it.’
An even further blow to Gulfsands recently has been the realisation that its licence to develop block 26 in north-east Syria is expiring in August, and may not be renewed in the current climate. ‘My viewpoint is, at this point, that the priority of the Syrian government is to keep the status quo and minimise the amount of work they have to do with IOCs,’ commented Kamel. ‘There is also significant risk that companies involved with certain figures in the regime will not be given contracts again.’
One such figure is billionaire businessman Rami Makhlouf, who has been sanctioned by the EU and the US for financing the regime. ‘Makhlouf is much weaker now and several pro-Makhlouf figures were removed from power. He has an involvement with Gulfsands, and this could be a negative factor,’ Kamel added. ‘The long-term trajectory, under any scenario, is that the possibility of any new contracts have diminished; it will be difficult to give Gulfsands further contracts as everyone is aware of Makhlouf’s involvement.’ In the meantime, the outlook for Syria’s energy sector looks relatively grim: ‘In the long-term there will be an accelerated reduction in production and reserves as state companies are not likely to have the technology or finances to develop fields, particularly where secondary or tertiary recovery techniques are required, as Syrian crude is becoming heavier and more difficult to exploit,’ noted Murphy. ‘Reserves will not be replaced which will further accelerate decline. It is a bad picture. '

Photo credit: Xinhua/Reuters Photo

Sudan separation fuels oil strife

Petroleum Review

In late January 2012, oil production and exports came to a halt in South Sudan over a transit pricing dispute with its former overlord north Sudan. With no compromise in sight, the newly independent African country is mulling other transport options. But even if production were to resume, it will be months – at least – before its oil sector gets back on its feet, writes Paul Cochrane in Beirut and Mohammed Yusuf in Nairobi.

O il has been a bone of contention between northern and southern Sudan for decades, with control of the precious resource a key factor in the devastating civil war that ended back in 2005. Under the peace agreement that followed, oil revenues were to be split evenly between the historically dominant north and the south, but with 75% of the united Sudan’s 500,000 b/d in the landlocked south – and the entire pipeline, refining and export capabilities in the north – the agreement was always precarious.
So, when southern Sudan held a referendum to form a new country – the Republic of South Sudan – in July 2011, the split in oil revenues ended, and negotiations got underway to hammer out transit fees and compensation for the north for the inevitable loss in oil income. However, with no agreement forthcoming amid border disputes and heated rhetoric between the governments in the capital of the south, Juba, and in Khartoum in the north, analysts said it was only a matter of time before the situation reached a tipping point. This came to pass when Khartoum imposed an initial pipeline usage fee of $22.80/b at the beginning of the year (which soon escalated to $32/b; and then $36/b) while Juba wanted to pay the international norm of $1/b or less.
Finally, on 28 January, at an African Union summit in Addis Ababa, South Sudan announced it would be halting all oil production and exports. ‘$1/b is a reasonable rate to transport a barrel, but $36/b is preposterous. What Khartoum didn’t count on was the South shutting down oil production. The question now is will they back down?’ says Eric Reeves, a Sudan researcher and analyst at Smith College in the US. Sudan has been confiscating oil from its neighbour since December of last year, over what it claims to be ‘unpaid transit fees’, while Juba is accusing Khartoum of taking oil worth more than $815mn over a two-month period. South Sudan Oil Minister Stephen Dhieu Dau told Petroleum Review that his government had offered northern Sudan money to help with budgetary issues, on top of paying the standard transportation charges. In the meantime, ‘we have also been paying for the operation costs of the pipeline and the marine terminal,’ he added. Dau claimed Khartoum’s actions showed it had not really recognised the sovereignty of South Sudan: ‘They are still looking down to South Sudan as a national government, just as they used to do – utilising and exploiting the people and resources of South Sudan to build the north.’
Dau also noted that the Khartoum government has been imposing punitive and discriminatory oil movement fees against South Sudan, which he said was a penalty for its secession. A further issue is that Khartoum is demanding $15bn in compensation for the loss of its southern provinces, a bid which (wholly unsurprisingly) Juba has opposed. In talks held under the auspices of the African Union and former South African President Thabo Mbeki, a proposal has been put forward for $5bn to be paid to the north over five years. ‘South Sudan won’t agree to Mbeki’s latest plan and there are lots of other issues, from border demarcation to debt and compensation that makes negotiations on oil even harder,’ noted Marc Mercer, an East Africa specialist at risk consultancy Eurasia Group in London.
‘With the two sides so polarised, with different expectations, and operating on principle rather than pragmatism, it is difficult to negotiate. I don’t hold up much hope for current talks to lead to a quick agreement.’ 

Uncertain futures

Kathelijne Schenkel, an official at the European Coalition on Oil in Sudan (ECOS) said that with no deal, she predicts Khartoum retaliating hard on South Sudan for the current military strife in the northern border states of South Kordofan and Blue Nile, which the north blames on the Southern People’s Liberation Army North (SPLA-N) group. This group used to be part of the military alliance that won independence for South Sudan. The boundary between northern Sudan and South Sudan is not fully demarcated, and both sides have failed to resolve ongoing border disputes, with the oil-rich Abyei
area (part of South Kordofan) being a particular flashpoint. ‘For the north, Abyei it is not strategically important and does not carry the same political or symbolic value as it does for the south. This allows the Sudanese authorities to use the issue as a bargaining chip in negotiations, and this is why the north invaded and took control of Abyei last year,’ said Jean- Baptiste Gallopin, a South Sudan analyst at global consultancy firm Control Risks.
‘The referendum to determine whether Abyei belongs to the north or the south is not likely to take place any time soon, and the status of the district is now only likely to be solved as part of a broader bilateral agreement on key issues such as border delineation and oil,’ he said. Schenkel added that these oil disputes, and the risk of military instability along the new frontier, have made international oil companies (IOCs) reluctant to make extra investments in the region. The dominant operating companies in both northern and South Sudan are currently the China National Petroleum Corporation, Malaysia’s Petronas and India’s Oil and Natural Gas Corporation. In theory, western players could try and grab a piece of this pie – especially given that the US lifted its sanctions on South Sudan’s oil industry back in December 2011, which had been imposed when they were under the control of the northern Sudanese. ‘I think facilitating the entry of western companies was the objective behind the US’ decision to lift sanctions, but from a practical point of view we’ve seen little interest in South Sudan from large new players so far,’ said Gallopin. ‘I think the reasons for that is major uncertainty of the future of bilateral relations, major uncertainty on oil export routes in the coming years and the continued lack of a regulatory environment for the oil sector in South Sudan. The government has yet to pass a petroleum law that was initially drafted two years ago, and there is still no clarity on tax rates and customs rates, so the environment is very unclear from the point of view of investors.’
Juba’s decision to stop production is hitting the country hard, as oil accounts for 98% of government revenues. According to Mercer, South Sudan has just three months of hard currency left and is in desperate need of cash. Indeed, Dau admitted he knew the shutdown would hurt his country but stressed that this was a necessary response to Sudan’s unilateral confiscating of South Sudanese crude oil. ‘We choose from those two [options]: you want us to allow our crude oil to be produced and give to Sudan 100%, or we shut down and all of us get zero?’
To re-start exports, Juba has signed agreements with Kenya and Djibouti for two pipelines, but the move is being seen as unrealistic. ‘I don’t take the agreement with Kenya seriously – it was political positioning on Juba’s part with the north,’ said Mercer. ‘It is unrealistic for pipelines [to go] through Kenya, Uganda or Ethiopia. And the South Sudanese authorities said it would take 11 months to build; but in the current political, security and economic climate this would be near impossible. Is it even
viable, as oil production is declining at a rapid pace, and production fizzling out by 2025?’ According to estimates by ECOS, output will decline to 200,000 b/d by 2016 and even further by 2018, to 160,000 b/d.
In the immediate future, even if there is an agreement between the two sides and oil production starts again, it is expected to take months for exports to re-start, given the composition of the heavy sweet Nile Blend crude. ‘Because the make-up of the oil is very waxy, there will be technical issues with the pipeline because it was shut down,’ said Mercer. ‘Estimates vary from impossible to get up and running to others that say a lot of work will be required, even replacing parts of the pipeline – so this puts oil production restarting from anywhere from one to six months.

Photos by Jihad Samhat

Optimistic outlook : Libyan oil

Petroleum Review

The medium-term outlook for Libya’s oil and gas sector is optimistic, but war damage repairs are needed, write Paul Cochrane in Beirut and Amelia Smith in London.

The new authorities in Libya are bullish about the future of oil production and the role of international oil companies (IOCs) in the rebuilding of the country, now the Gaddafi regime has been destroyed.
However, analysts warn there will be significant delays until war-damaged infrastructure is back online and the new government is able to make concrete decisions about the future of the sector. ‘I don’t think the interim authorities are in a position to sign major agreements in the oil and gas sector or that they need to,’ Dr Hakim Darbouche of the Oxford Institute for Energy Studies recently commented. ‘I don’t think it’s in their interest to do so given that they have pledged to reinstate constitutional order in 2013 and the main focus until then will be on the restoration of pre-conflict production and the reconstruction of infrastructure more generally.’
Indeed, IOCs are expected to renegotiate terms and contracts struck under the former government. A good example is BP, which suspended a $1bn exploration programme in December 2010, but which will be optimistic about its prospects given the UK’s involvement in helping the rebellion succeed against Colonel Gaddafi.
Edward Oakden, Sectors Group Managing Director of the UK Trade and Investment Agency, said at a London conference (‘Libya, The Future 2’*) in November that British and French military support for the revolution would boost opportunities to ‘maximise the commercial return from the enormous reconstruction that’s going to be taking place in Libya’. The UK previously commanded just 2.5% of Libya’s foreign trade, he added, ‘so there is a great deal more that we could be doing’.
However, while military support for the rebels was provided by NATO, it is not a given that members of the coalition will be rewarded with preferential oil contracts or that any of the IOCs present in Libya before the war broke out will lose out. ‘The rebels’ initial pledge to reward NATO coalition members with lucrative contracts seems to have been diluted since the end of hostilities,’ noted Darbouche. ‘If a transparent, competitive system for awarding contracts is put in place in the future – as seems to have been promised by the new authorities – then in theory there shouldn’t be any “losers and gainers”. Decisions would be based on objective criteria and the more competitive and able IOCs would win.’
Oakden warned that much of Libya’s energy infrastructure was dysfunctional and would have to be rebuilt, and that it was ‘important to expect a degree of uncertainty... a lack of clarity over the next year or so... as life starts to go back to normal’. He added that IOCs were ‘warmly welcome’ in Libya and that due to the destruction caused by the Gaddafi regime and the rebellion, help was required across all sectors.
Another speaker at the conference, Tarek Alwan, Managing Director of SOC Libya, a London-based consultancy helping international companies enter the Libyan market, stressed the value of Libya’s 46bn barrels of oil and its 54tn cm of gas. Describing the pre-war state of the country, Alwan explained
that Libya was producing 1.8mn b/d, ‘a considerably good amount of oil’. He went on to point out that approximately 60% to 70% of the country remains unexplored and that concessions could yield major hydrocarbon discoveries.

Production picking up

During the conflict, oil production plummeted, falling by up to 90% and reaching as low as 20,000 b/d in August 2011. Gaddafi’s forces sabotaged two major oil fields and associated infrastructure, while some 40,000 mines were laid in the area of the port city of Brega, according to official figures from the
National Transitional Council (NTC) that is now running Libya. Full estimates of damage to infrastructure have not been fully carried out, but Interim Oil Minister Ali Tarhouni has estimated the war left 10% to 15% of Libya’s oil infrastructure damaged. ‘I haven’t seen any reliable figures yet, but I presume we’re talking billions of dollars if not tens of billions,’ noted Darbouche.
However, it does not appear that the country’s 40 major oil and gas fields experienced any significant long-term damage as both sides were confident that they would control the country post-war.
Indeed, Alwan noted that, as of November 2011, Libya was already ‘surprisingly’ producing 600,000 b/d, while Tarhouni told the press in late November that output would ‘easily exceed 700,000 b/d’ by the end of the year.
Gas exports, too, have been picking up. In the second week of October 2011, natural gas exports restarted through the 9bn cm Greenstream pipeline to Italy. Throughput was expected to be around 2bn cm by the close of 2011, reaching 5.7bn cm in 2012 and surpassing pre-conflict levels by 2013. Some 8bn cm/y of gas is contracted from Libya to Italy, with Italian energy giant Eni as the primary off-taker.

Security concerns

Alwan also stressed the need for a return of IOCs to Libya. ‘We need five or six IOCs to come back... expats are really required at this stage,’ he told Petroleum Review. However, for that to happen, security will need to assured. Guma al-Gamaty, the former UK coordinator for the NTC, had warned at an earlier ‘Libya, The Future’ conference in September that businesses should avoid bringing private security personnel to the country and ‘alienating’ Libyans. IOCs have been demanding the right to have their own private security companies if they are to return, while the Libyan National Oil Corporation already has its own security forces in place.
Furthermore, an oil official in the NTC recently spoke of a plan to establish a 5,000-strong force to protect oil and gas infrastructure.
Via a live video-conference to Tripoli, Sami Zaptia, Managing Director of consultancy Know Libya, told delegates at the London event that the need for security precautions had been exaggerated in the media – a view shared by UK- based private security company Inkerman Group consultant Jamie Painter. He described the security situation as ‘blown out of proportion’, adding ‘there’s no reason at all why you can’t move around quite freely’.
Although warning of the dangers of road travel, lack of emergency services and weaponry being carried by boys as young as 14 years old who were untrained and unsupervised, he told the audience ‘the security situation is certainly one I’d consider going back and doing business in, taking basic safety precautions’.
Nonetheless, security concerns linger, with reports of up to 20,000 surface to air missiles having gone missing during the conflict. ‘Security remains and will remain an issue for as long as militias are controlling the main urban centres in the country,’ said Darbouche. ‘But since the fighting ended, there haven’t been any major security related incidents around the main producing areas in the desert.’

Away from security, Zaptia warned that there was a risk some mature oil fields in Libya where operations had ceased during the rebellion, might not return to production. Meanwhile, energy consultant Wood Mackenzie has forecast a gradual return to the pre- conflict oil production level of 1.6mn b/d by mid-2014, while the interim government has stated that production will reach 1.3mn b/d by 1Q2012 and 1.5mn b/d by 2H2012.
In the medium to long term, a target set by the former Libyan government of output reaching 3.5mn b/d by 2020 could still be on track. ‘If the government in Tripoli maintains that target and puts in place the right policies to achieve it, then I don’t see why it cannot be reached. The reserves are certainly there,’ concluded Darbouche.  puts in place the right policies to achieve it, then I don’t see why it cannot be reached. The reserves are certainly there,’ said Darbouche.ched. The reserves are certainly there,’ concluded Darbouche.

Monday, May 07, 2012

Tragedy to transformation

Special report on rent in Lebanon for Executive magazine
New legislation is set to remake rental markets in the wake of building collapse

        The rubble of the building in Fassouh, Beirut that collapsed in January

The notorious ‘old rent’ law that has pitted landlords against tenants for more than half a century may, after two decades of legislative delays, be seeing its last days. If the draft of the new rent law passes in Parliament this month, landlords and real estate developers will be lighting up the sky with fireworks. The prospect of reclaiming properties in the coming years — meaning land to be bought and sold — entails billions of dollars in potential earnings amid a renewed construction frenzy in land-scarce Beirut. But for tenants, a less certain future awaits, hinging on a planned government fund to financially assist economically disadvantaged tenants pay gradually higher and higher rents, and the actualization of public housing projects to re-house the dispossessed.

The lingering law

The ‘old rent’ law is one of the more bizarre laws still in existence. Enacted after World War II to prevent socio-economic deprivation and protect tenants from greedy landlords, the law resulted in the saying, “the tenant is an owner”, as it gave many rights to the renter. Under the law, all rental contracts would be extended — against the will of the landlord — until a new one was enacted, meaning rents were fixed at the originally agreed upon rate despite inflation and changes in market dynamics.

If that was not bad enough for the landlord, getting the tenant out is nearly impossible without significant financial compensation, which ranges from 25 to 50 percent of the value of the property (not the land) and decided upon by a judge based on the financial situation of the tenant in relation to the landlord.
Furthermore, there are only two ways to ask a tenant to leave if no contractual mistakes have been made [see page 24]: if the purpose is to destroy the building, or if the landlord (or his family) wants to live in the apartment for which they have to prove a need to do so. “You can't lay a trap to kick out the tenant. The law provides a very powerful status and protection for tenants. The only way is by default [on contractual obligations] or to pay them to move out,” said Nader Obeid, a partner at law firm Alem and Associates.

Rent law number 160 materialized after the Civil War in 1992. Crucially it liberalized the rent market allowing for new contracts, with the landlord able to raise rent after three years, yet it made minimal difference to landlords with tenants paying old rents. These rents were adjusted in line with the depreciation of the Lebanese lira in the early 1990s and a government-mandated minimum wage increase, although not to market rates. For instance, according to research by The Monthly, a residential rent agreement from 1970 estimated at LL1,000 per year would come out to LL390,000 ($260) at today’s prices.
Since 1996, Rent Act 160 has been extended 12 times, with the last extension, law number 171 dated August 29, 2011, having expired at the end of March this year. If the new draft law does not pass, a 13th extension will have to be enacted.

Problematic numbers

While the old rent issue could have been a marginal one if the number of tenants was relatively low, according to the advocacy group named the Committee for the Rights of Tenants (CRT), some 170,000 of Beirut’s 210,000 tenants pay old rent rates. But just as no one is exactly sure how many people there are in Lebanon (the last national census was in 1932), the number of properties on old rents — and the number of people living in them — is not exact either.
“The differences in the estimates of how many people are on old rents is a weapon in the fight between the pro and against camps for restructuring the law,” said Obeid.

According to Ministry of Finance statistics published by Executive in 2010, there are 139,719 properties rented before 1992 throughout Lebanon, with 58,341 in Beirut. In February, online publication NOW Lebanon challenged these statistics, stating that the Finance Ministry did not have a breakdown between old and new rents, while the Central Administration of Statistics (CAS) also said they had never carried out any research, and information released in 2004 only distinguished between residential renters and owners. [However, CAS’s statistics in general are out-of-date and unreliable, notably claiming there are only 3.5 million people in Lebanon when other estimates put the figure at well over 4 million, if not closer to 5 million.

According to Joseph Zoghaib, head of the Association of Landlords in Lebanon, based on taxation records and copies of rent laws submitted by municipalities to the Finance Ministry, there are 81,000 tenants on old contracts and an estimated 40,000 to 50,000 on new contracts. As to the number of landlords affected, Zoghaib estimates it at anywhere between 15,000 to 20,000. Whatever the statistics are as to the number of tenants on old rent, clearly tens of thousands of Lebanese will be affected if the new law passes; at the same time thousands of landlords have been financially out of pocket due to receiving such low rents. [The Committee for the Rights of Tenants could not be reached for comment.]

No money for maintenance

Zoghaib likens the old rent law to a cancer as it has deprived landlords of return on initial investment in constructing buildings and meant there have been insufficient funds for proper maintenance of properties.

“Rent control is a cancer on Lebanon's economy, the standard of living, and should be aggressively treated,” he said. “Most landlords have lost hope that the issue will ever be resolved.”

Zoghaib has plenty of accounts about the trials and tribulations of being a landlord with tenants on old rent, with some forced to become doormen in the buildings they own to get access to the National Social Security Fund. According to Zoghaib; one landlord is so fed up he is considering a class action suit against the Lebanese government in the United States to pressure Beirut to overturn the law or face having the state's assets frozen in the US.

Anger runs deep among the association's members over what Zoghaib calls an “unjust law”, while in TV talk-shows addressing the issue over the past year heated words have been spoken between those ‘pro-landlord’ and those ‘pro-tenant’.

“Landlords have been suffering for 70 years. Before, when we talked of our plight, we were laughed at, but the second generation are freedom fighters,” said Zoghaib. “The silent majority think they are not affected by the old rent issue, but they are. For every $1 the renter saves, the Lebanese public is paying thousands of times more when it comes to higher rent and higher real estate prices, and it has caused huge revenue losses to municipalities and the government.”

Indeed, it would make for an excellent research paper to estimate the financial losses incurred by old rents on the Lebanese economy and how this factored into current real estate prices. The existence of old and new rent contracts has certainly wreaked havoc on trying to effectively analyze the real estate market, while it has contributed to Lebanon having an average price-to-rent ratio (how  long monthly rent would have to be paid to cover the selling price of the property) of 22 years, compared to 11 to 16 years in peer countries (see charts on below). Lebanon also has much lower gross rental yields than elsewhere, at 4.65 percent, whereas it is more than 6 percent in Egypt, Morocco and the United Arab Emirates, according to the global residential property investor portal Global Property Guide in 2011.

“There is a gap between rent and real estate prices. It is between 3.4 percent to 4.5 percent gross rental yield versus the price, while it should be 6 percent, 8 percent or even 10 percent,” said Ayman Sanyoura, general manager of ProServices, a property services and management company in Beirut.

The shortage of properties available for rent on post-1992 contracts has also driven up prices, while the existence of the old and new rent contracts has often caused confusion between tenants and landlords as to their rights. “People are still unconsciously living under the old law,” said Obeid.

Furthermore, the lack of funds for maintenance has led to the loss of heritage buildings throughout the country, with buildings in such a dilapidated state that it is cheaper to tear them down — once the tenants have been compensated to move — than renovate.

“We are fighting for the law to be changed to be more fair as far as owners are concerned. It is not possible that a 200 meter square apartment is rented for $200 a year,” said Mona Halak, an architect and member of the Association for Protecting Natural Sites and Old Buildings in Lebanon (APSAD). “For heritage buildings, the owner should have the right to charge more. When we ask an owner of a heritage building ‘why are you tearing it down?’, he says ‘I get $300 a year, so why keep it?’”

The draft law

What galvanized the government into action to address the old rent issue was the collapse of a building in the Fassouh district of Beirut in January that left 27 dead and 12 injured. While there were tenants paying new rents, the majority of the occupants had been on old rent contracts, which opponents of the old law cite as a reason for the building's tragic collapse due to lack of funds for maintenance. “It is sad to say it took 27 dead people to shock the government to draft this new law,” said Zoghaib.

The new law was drafted by the Parliament’s Administration and Justice Committee, chaired by West Bekaa Member of Parliament Robert Ghanem. A copy of the draft law in the form submitted to the committee was obtained by Executive, despite Ghanem’s office attempting to withhold it from the media. In its current form, the draft law seeks to find a solution by having tenants on old rent pay gradually higher rents over a six year period. Through government-appointed experts that report to a judicial committee, properties will be evaluated and an amount agreed upon by both the landlord and tenant. Then each year for the first four years the tenant will pay a 15 percent increase in rent, then 20 percent per year for the fifth and sixth years. After this time, the property can be rented at free market prices, but the tenant has the right, if they notify the landlord three months before the period ends, to stay on for a further three years, although at market rates agreed upon between both parties.
If a landlord wants to reclaim the property for family usage during the six-year extension period, then he has to pay compensation to the tenant equivalent to four years rent after four years of rental increases. To tear down a building, the same principle will be applied but on the value of the total six years of increased rent. In either of the above situations, if a property is considered ‘luxurious’, compensation will be reduced by half.

This proposed solution means that the compensation landlords pay out to tenants would be significantly less than the 25 to 50 percent of the value of a property under the old law, which is clearly to the advantage of landlords keen to reclaim their properties. The big question if this law passes is whether tenants will be able to pay the higher rent.

According to Zoghaib, out of the 81,000 tenants he claims pay old rent, 13,000 are economically disadvantaged (again the Committee for the Rights of Tenants were not available for comment). To alleviate the pressure, a government fund is to be established for tenants with a household income that does not exceed three times the minimum wage of LL675,000 ($450) to cover the difference in rent for nine years. By that time, the plan would be for the Public Corporation of Housing to have built apartment blocks that evicted tenants could live in under a ‘lease-to-own’ agreement (which cabinet approved last month) with no age stipulation, meaning elderly tenants could be part of the scheme. However, while the draft law is still being hammered out at committee sessions, there have been no announcements as to how the housing scheme will be financed, what land will be available for construction or where, and how willing private banks are to be a part of the scheme. What is more, Lebanon has been without an official budget since 2005.

While government sources suggest the bill will pass in May, the socio-economic repercussions could force politicians to oppose it. “Nobody wants to lose the next elections [in 2013] for passing this law,” said Sanyoura. Indeed, it is such a contentious issue that Ghanem said at a committee meeting in early April that he had received an anonymous letter threatening to kill him, his wife and his children if the bill passes.

Billions to be made?

If the bill remains relatively intact after numerous rounds of amendments and reformulations, and then passes into law, it will have a profound impact on the real estate market.

“Definitely there are both positive and negative repercussions from the eventual introduction of a large [amount] of stock to the market,” said Karim Makarem, director of Ramco, a real estate advisory firm. “If landlords are looking to sell or to rent, a substantial amount comes online, not to mention that the former tenants who vacate will need to be housed. So there are many new possibilities as well for developers.” One  possible knock-on effect would be more supply than demand, which would lower real estate prices. For that reason, Sanyoura suggested it is “a good time to consider implementing this law as we're not in a boom market.”

With buildings being vacated and renovated, and others being torn down for new projects, Zoghaib opines that $50 billion could be pumped into the economy in the coming years. A back of the envelope calculation of 30,000 buildings being re-developed at an average of $500,000, would generate $15 billion and potentially billions more in associated services.

A further boom could occur if another stuck-in-a-time warp law is overturned: the pre-1992 law concerning commercial rents, which is similar to the residential law in fixing rents, but to remove a tenant requires the landlord to compensate for the “loss of footfall” to the premises. “We'll have a party when the [new rent] law passes and the next day move onto proposing a commercial rents bill,” said Zoghaib.

Landlord vs. Tenant

Special report on rent in Lebanon for Executive magazine
A tongue-in-cheek guide to holding on to your property or ditch dodgy renters

Say you’re one of those unlucky landlords whose tenants have an “old rent” contract, meaning they inked their deal before existing laws were passed in 1992. Annual rent can be as low as $100, or if you were slightly luckier, around $250 — the cost of a decent bottle of champagne. So while such low rents can keep your tenants sipping bubbly, paying for nice trips abroad or having the disposable income to buy their kids a BMW, you are left scraping the bottom of the barrel. So, as a landlord, what do you do if one day you see your tenant’s 18-year old son drive by you in a convertible with a bottle of Moet on the way to the airport, and you've had enough?

You can: 

1. Prove (or frame) the tenant has reneged on the contract by removing windows, doors or making major renovations without your expressed approval.

2. Get your video camera out and fix it to their door to prove that no one has been in the house for a whole year. You may need to buy some extra film.

3. When your tenant comes around to pay his measly fee, don't give them a receipt and claim they have not paid rent for 6 consecutive months.

4. Keep coming around to the house and telling the tenant there are cracks in the outside walls and you hear the building groaning, hoping they will up and leave.

5. If you have the financial wherewithal or a real estate developer that will ‘loan you the money’ to buy your property, you may find yourself buying your apartment again by forking out 25 to 50 percent of the total value of the property (not the land), generally settled out of court. Of course, a little sweetener to the ‘registered experts’ can make that financial medicine go down a little easier.

6. If your tenant is in the business of anything other than ‘residential activity’ you can claim the red lighting is proof of business activity and claim the residential contract has been breached.

Now, if you are that tenant indulging in the bubbly and luxury cars, and want to stay put, consider the following:

1. Remember “the tenant is the owner” and you are in the right. So whatever that whiney landowner says is of no consequence as long as you follow your original contract to the ‘T’ for tenant.

2. If he takes out a legal case against you, stall. Tell the judge you have no money for a lawyer so the courts can take another half-year to appoint one.

3. If your landlord is trying to buy you out and appoints an ‘expert’ to appraise your apartment all of a sudden, somehow, no one is ever home during his working hours. Beware however, if you are caught unaware opening the door adorned in a towel (or a more risqué form of dress) it is a crime not to let the expert in, even if he does look like a peeping Tom.

4. After you have succeeded in stalling for three to five years you can then go to the First Court of Appeals whereby you will pull at the judge’s heartstrings (and perhaps his ‘public’ purse) with stories of your kids first footsteps in the corner of your lounge and where your dying mother expressed her final wishes that you stay in the neighborhood to water her favorite plant that has grown up the side of the walls.

5. Never park your new Hummer in front of the house, even if it’s late at night and you’ve hit the bubbly particularly hard. Compensation for getting you out will vary according to your financial standing. If you are ‘poor’ you can get the higher amount of 50 percent of the value of your rental. The old Renault 12 will do well at the courthouse, especially pushed the final 100 meters by your wheezing grandfather.

6. If all fails don't panic, the snails pace of the Lebanese judiciary kept one case going for 47 years.

Landlords get the keys back

The 1992 Rent Act put the landlord back in the driver’s seat of many of those luxury SUVs seen around town. For starters, any rental contract that expired between January 1, 1987 and December 31, 1991 is subject to a series of multiples, while anything after that date, the tenant is no longer the “owner”. Contracts usually last for three years, after which the landlord has free reign to up your rent or turf you out. So what do you do if your part of this class of renters and like your five-meter ceilings?

1. You are basically out of luck. But if you know a notary, the judge and a few bad boys you may be able to stay for a year or two.

2. If your three-year contract is up, you will have to go to court. See above stalling methods for reference but keep in mind that you will need to butter up the right people and if you lose the case, you might end up paying for that slimy landlord’s lawyer. In the meantime, do not pay rent and save up for that penthouse on the Corniche, the eventuality of a basement abode, or maybe a tent in the park.

3. Make sure that you agree on things that cannot be delivered by your landlord: cue contractual obligation for helipad written in small letters your landlord couldn't see with his bifocals. If you can prove that the landlord did not deliver on the contract, you can stay, rent free.

Underhanded tenant turfing

If your tenant is proving difficult, the legal route is not always the quickest road to liberate your property of that noisy ragtag occupant.

You might consider:
1. That there are many plugs, many wires and many pipes that no one really keeps tabs on. They can come undone, burst or just disappear at anytime. Just saying.

2. If your unruly inhabitant has any acute fears, say arachnophobia, then a trip to the pet store for a few rather hairy tarantulas will do well crawling over the balcony. Rabid canines have also been known to raise a few hairs and eyelids, especially if they can bark into the night or enjoy romantic moments with the tenant’s ankles.

3. By this time you will have noticed the affinity the resident of your own property has with his auto. Small notes written with newspaper clippings attached to destroyed windshields have been known to prove useful, as does spray-painting the car a lurid color. Just be sure to stock up on the turpentine to clean away the evidence from your fingernails.

No need for contracts

More often than not a gentlemen’s agreement is the best way to do a deal. Such is the case with rents too. If no contract between the tenant and the owner exists, it is the person living in the house who has the upper hand. So if you are looking to sell off that old part of your family heritage and think you pulled a fast one by not inking a contract or paying municipality fees: think again.

1. In order to tear down any building, permits from the municipality are required. But if someone is living in your house and paying the bills, the receipts are proof of tenancy and the fact that you don't have a contractual right to boot out anyone since, simply there is no contract. Tenants without contracts should note that buddying up to the electricity guy with the green slips can mean the difference between a bed and the street.

2. If your tenant has not been paying rent and knows they are on the better side of the law, the best course of action for a landlord, when there is no ink on paper, is simply to come around during working hours when no one is around and change the locks on the door. When the renter comes out of the building confused and looking for a crowbar you can remind them that you hold the key to their furniture, not to mention to the flat screen TV as well.
Things of course are rarely this vindictive or unruly. Most contracts are clear and the tenant/landlord relationship can be managed with a little cunning and a lot of reason when it comes to upping the rent every few years. Even if a new rental law comes into play, the basic legal procedures will hardly change. Thus, it may be preferable to leave the antics to these pages and proceed to the next page to find out what is being cooked up for the country’s rental market.

The perils of pipedreams

Commentary - Executive magazine
Plans to move Middle Eastern gas to Europe stuck in the tube
Serious plumbing problems have arisen in the last year for the region’s multibillion-dollar pipeline plans. For starters, the Euro Arab Mashreq Gas Pipeline, also known as the Arab Gas Pipeline (AGP), has been attacked 14 times over the past year in Egypt’s Sinai Peninsula, ending exports to Jordan, Syria and Lebanon, as well as to Israel via an offshoot pipeline. At the tail end of the 1,200 kilometer pipeline, the uprising in Syria has postponed the completion of the AGP's final leg to Kilis in Turkey.

Meanwhile, the recent European Union (EU) sanctions on Iran have spelled the end of the viability of the much feted Nabucco gas pipeline that was to take gas from the AGP, Iran and the Caspian region, via Turkey, to Europe. The root of such pipeline problems is that usual suspect: politics. The AGP was attacked in the Sinai, according to statements by the Egyptian Ansar Al Jihad group, as part of a campaign against “the corrupt (Egyptian) regime and its Jewish and American backers.”

Indeed, last year’s revelations about the preferential pricing of Egyptian gas have shown the shadowy political bends of the pipeline. When the AGP was launched in 2003, the Egyptian Natural Gas company described it as facilitating “the dawn of Arab integration”, but recently revelations have shown how it was used to sweeten Egyptian ties with Amman and Tel Aviv, with Washington’s blessing.

In 2005, Cairo had inked a long-term deal with Tel Aviv to sell gas at anywhere from $0.70 to $4 per million British thermal units (BTU), depending on which media sources one consults, well below the global average of $6 to $7. Jordan’s special price arrangement with Cairo was $3 per million BTU. The pipeline attacks have cost Egypt needed export revenues, likely the reason they pulled the plug on the Israeli contract last month. Now the Israelis will continue to shell out an additional $4 billion to source gas elsewhere while Jordan's energy bill will be an extra $2.4 billion this year to offset the loss of as much as 25 percent of the kingdom's energy supplies.

Significantly, the pipeline shutdown has highlighted the AGP’s over-dependence on Egyptian gas, something energy observers have pointed to for years. On paper, Egyptian gas was to flow through Jordan to Syria and Lebanon, with Syria pumping in its own gas for export on to Turkey and ostensibly to Europe. The problem is Egypt's domestic energy consumption is rising fast, as is Jordan's and Syria's; even if the pipeline is completed, there will likely not be enough Egyptian or Syrian gas flowing through the AGP to meet even the Levant's needs, let alone leave extra to sell on to Turkey or Europe.

For the AGP to be viable if or when it re-starts, more gas must be sourced — perhaps from Iraq or Qatar to supply the AGP in Syria, or from Iran and the Caspian region which can connect to the AGP via the Nabucco network in Turkey. Iraqi instability, however, means completion of that part of the pipeline network is years away, while the Nabucco pipeline is no closer to realization than when it was announced in 2002.

Financing Nabucco has been a major obstacle, which is forecasted to cost as much as $25 billion. But what may be the death knell was the EU's decision to follow Washington in slapping sanctions on Iran earlier in the year, ending all energy exports from Iran to the EU. Nabucco is only commercially viable if it can draw on Iran’s reserves — the world's second largest — as Azerbaijan and the Caspian states cannot provide enough gas for Europe, Turkey, the AGP and other export commitments.

What is supremely ironic about the EU's decision is that Nabucco was supposed to loosen Russia’s grip on the EU's gas imports — currently at some 34.2 percent — given Moscow’s propensity to turn off the taps to enforce its will, as it did during a price dispute with the Ukraine during the icy winter of 2009.

Theoretically, pipeline networks linking the Middle East, the Caspian region and Europe would make for glorious dividends for all involved. Political shenanigans, however, will likely keep these networks pipedreams, especially given that the crucial link — Syria — looks to be spinning down the tube for some time to come.

Wednesday, May 02, 2012

Disruptive influences – at work in Iraq

Money Laundering Bulletin

Ongoing instability, both physical and political, may have blighted attempts to give effect to money laundering and terrorist financing regulations in Iraq but the central bank is determined to push ahead. In a rare interview, Khalid Shiltagh, director general of the country's financial intelligence unit, discussed the proceeds of crime challenges in one of the world's most dangerous jurisdictions; he spoke to Paul Cochrane in Beirut.

Physical risk

Some of the problems Khalid Shiltagh faces are matters of basic security. The Central Bank of Iraq (CBI) in Baghdad lies outside the secure Green Zone. While carrying out the normal functions of a central bank in a war-torn country is clearly difficult, it becomes far more so when the headquarters is put out of action. A suspected arson attack seriously damaged the building in 2008, and in June, 2010, the CBI was stormed by militants wearing army uniforms in an apparent robbery attempt. Coordinated bomb attacks and the fire-fight with Iraqi security personnel left 26 Iraqis dead and dozens wounded.
For the CBI's fledgling Financial Intelligence Unit (FIU), which is was established under the 2004 Anti-Money Laundering Act, promulgated by the then ruling US-led Coalition Provisional Authority, the attacks were a major setback.
The CBI is currently dispersed in four different locations, which presents some logistical challenges and effects coordination. Our present location is in an old building with one floor for the AML office, but it is not good enough to set up AML and CTF software,” said Mr Shiltagh. “This is temporary as the CBI building is to be finished by the end of 2012 and all departments will gather again. We will probably be one of the first to move in.”

FATF arrives

In the meantime, Mr Shiltagh and his team of around 40 staff are preparing for May's mutual evaluation report (MER) by the Financial Action Task Force's (FATF) regional body, the Middle East North Africa-FATF (MENA-FATF). The security situation means that CBI staff have had to travel to Jordan, Lebanon and Turkey for training. Although the investment in skills is a positive and necessary step, the continuing physical threat has impacted on supervision as well as due diligence and compliance training at 22 private banks, seven Islamic banks and the country's dominant seven state-run banks, which control more than 90% of Iraq's banking assets. Furthermore, there are no effective communication lines between banks and the CBI.
Banks are facing numerous challenges given the lack of proper and effective supervision, and the need for coordination. We are working to educate the banks and get them more involved while building up our capacity for banking supervision,” said Mr Shiltagh. “On the AML side there has been progress, relatively speaking. We want to penalize non-compliance, which is extremely important for a more stable Iraq to attract foreign investors and institutions. Obviously we have serious challenges to tackle, taken in a background of political bickering and a fragile security situation, which is abused by people for selfish financial gains. We are looking forward to the expertise of the MER (team) to (help us) step up to the challenges.”
Iraq's financial regulators are used to receiving external assistance. Since 2012, the CBI has been provided with US$1.7 billion out of a stand-by International Monetary Fund (IMF) facility of US$3.8 billion to help balance its books and carry out macro-economic policies, on condition that the CBI implements a raft of regulations, including new AML controls. So far, the CBI has only completed half of the required legislative changes.

A prediction

The lack of regulatory progress (coupled with operational challenges) is likely to result in Iraq failing the MENA-FATF's MER, said Mark Dempsey, a former regional director for the Financial Services Volunteer Corps (FSVC), which has worked closely with the CBI for the past three and a half years.
The MER will fail Iraq. Regulations are not up to speed and staff are not properly trained. There are regulations for the five most common AML cases, but not the procedures to deal with them. Financial education at all levels is missing but, encouragingly, the talent is there. People are hard working and eager to learn. A strategic and carefully considered approach to training needs to applied,” said Mr Dempsey.

Monetary Control

One factor hindering the effectiveness of the country's AML office is government squabbling over the role of the central bank, which has managed to retain a degree of independence through the IMF's backing.
The AML office is seriously understaffed and it should have a director general– he is called that but not officially as he's not been given the governmental appointment,” said a source familiar with the CBI, who wished to remain anonymous. “A big reason for this is that appointments are blocked by parliament. It is in (Prime Minister Nouri) al-Maliki's interest to control the CBI.”
Indicative of political meddling was the arrest of Hussein al-Uzri, the president and chairman of state-owned Trade Bank of Iraq, for alleged financial irregularities in 2011. Mr al-Uzri, who fled to Beirut and then to London, claims he is innocent and was arrested because he wanted to carry out due diligence on a US$6 billion deal with a South Korean company while the government wanted the deal to be waved through. “It was a manufactured, trumped up arrest,” said the source. “Think what that signals to foreign investors? It is not dissimilar to what happens in Russia.”

Corruption – it's pervasive

Indeed, corruption is an endemic problem, with Iraq ranking 175 out of 182 in Transparency International's Corruption Perception's Index 2011. And as the US State Department notes in its 2011 International Narcotics Control Strategy Report (INCSR), “bank fraud, corruption and organized crime are major challenges which are exacerbated by weak financial controls in the banking sector and weak links to the international law enforcement community.” Such corruption goes all the way to the CBI, according to the source. “Corruption is rife, and in banking supervision, if a bank wants a certain credit rating, it is easy to pay off the supervisor,” said the source.

Under banked so cash-intensive

In addition to questions over AML, the banking ratio is low. According to US government figures, there are 853 bank branches for a population of more than 30 million. To achieve the same bank branch-per-capita ratio of neighbouring Jordan, Iraq would need more than 3,000 branches.
As a result, Iraq is a cash-based society and alternative remittances systems (hawala)  proliferate. While the INCSR notes that “hawala networks, both licensed and unlicensed, are widely used for legitimate and illegitimate purposes,” Mr Shiltagh said that hawaladars have to be registered and a multi-stage regulatory process has been put in place. “The CBI governor has ordered a review of hawaladars' foreign currency options as a monetary tool to meet demand for currencies by the private sector,” he said. “There have been a few abuses here and there, some teething problems, but the sector is well regulated now although it still needs to be better regulated.”

Making money

Smuggling of goods to and from neighbouring Iran, Turkey, Jordan and Syria is rampant with bulk cash smuggling a further concern; stories abound of counterfeiting and forgeries, particularly of the Iraqi Dinar (IQD)10,000 bank note (US$8.51) and US$100 bills. Government sources told the Iraqi press in 2011 that an estimated IQD 7 billion (US$6 million) in forged IQD 10,000 notes came into Iraq from Iran last year, but the CBI claimed, in February, that counterfeiting is within international norms and not as serious a problem as has been portrayed.
The CBI have a large number of staff to identity counterfeits, in fact more staff doing that – a few hundred - than at the AML office. It is like a garment factory in China with all these women checking cash,” said the source.
Smuggling of US dollars is another matter, likely to remain an ongoing concern given the recent US and European Union sanctions against the Iranian and Syrian banking sectors, which has spurred on demand for the greenback in these countries.
Terrorist financing is a further task for the CBI to tackle. The Interior Ministry reported 293 people were killed in terrorist attacks in January, and on February 24, coordinated bomb attacks killed more than 60 people across the country; Al Qaeda in Iraq claimed responsibility. Iraq has yet to become a party to the UN Convention for the Suppression of the Financing of Terrorism.
The CBI and its AML office face multiple challenges, not least from the government, but much more needs to be done to strengthen Iraq's AML/CTF regime and wider regulatory framework if a broad range of international investors are to be attracted back.

Oiling an open door?

The CBI governor is a man of integrity and with respect to monetary policy has achieved necessary stability for Iraq. However, more strategic thinking needs to be done at the CBI with respect to institutional reform and consistent training of staff. The AML department, if it is going to be meaningful in its efforts, needs a structured and coherent approach to its formation and staff training. AML round-tables are merely lip service and are not addressing the real deficiencies,” said the source. "Why is there this lip service? The Iraqis feel there is no pressure on them as with the US out of Iraq, American leverage is much less and they are not listened to as much as before. Also, Iraq is not overly concerned that foreign investors have not come in, as, being an oil-based economy (energy accounts for almost 95% of state revenues), international oil companies will pay to get in.”

Stakes in the sand - Gulf states plot a new financial integrity

Money Laundering Bulletin

Gulf states have responded to the global economic downturn, increasing international regulation and the “Arab Spring” by establishing new public authorities or extending existing mandates to curb financial crime. There is some notable progress, reports Paul Cochrane, but enforcement continues to lag.

When the recession hit the Gulf Cooperation Council (GCC) countries (Saudi Arabia, Bahrain, Qatar, the United Arab Emirates, Kuwait and Oman) in late 2008 it signalled the end of a decade of rampant economic growth. With governments closely tied to flailing real estate developers and other major sectoral players, accountability and auditing took on a renewed focus as economies contracted. At around the same time, regulators in the United States, Britain and elsewhere bolstered their focus on corruption abroad, and GCC states had to improve the regulatory environment to retain and attract foreign direct investment.
The ruling families dictated that oversight of public expenditure should no longer be left to trusted advisors in the royal circle, instead public watchdogs would be given a role in monitoring both the public and private sectors. Pressure in this direction increased as uprisings swept North Africa and the Middle East in 2011, accompanied by calls for an end to corruption and nepotism and demands for greater political freedom.
Now more than ever governments are keen to tout anti-corruption campaigns to show that the state has the public interest in mind and is cleaning itself up,” said Nicholas Bortman, Head of Middle East Practice at the Dubai office of GPW, a corporate investigations and business intelligence firm. “But anti-corruption as a slogan is used for political leverage across the region. In Kuwait, virtually every candidate was campaigning (in the lead up to the February parliamentary elections) on a platform of anti-corruption.”
Existing public auditing bodies, like the UAE's State Audit Institution (SAI), set up five years after the country's independence in 1971, and Saudi Arabia's General Auditing Bureau (GAB), which was established in 1990, have started to raise their profile: earlier this year, SAI reported that some GBP171.5 million in misappropriated public funds, forgery, fraud and bribery cases were reported in 2010.
Saudi Arabia's GAB meanwhile came under fire from the Consultative Assembly, or Shura Council, for failing to do its job. The assembly highlighted alleged wastage of USD$29 billion in public money in 2010, while last year it noted that public projects worth USD$8.2 billion were not carried out in fiscal year 2008-2009 despite allocation of requisite funds to the relevant government departments. On the plus side, criticism of corruption is no longer taboo in the kingdom – a Saudi TV comedy show even hit out at the issue. In 2011, against the backdrop of toppling Arab leaders in North Africa, the King ordered the establishment of the National Authority for Combating Corruption in 2011.
The wealthy emirate of Qatar, too, is making progress. Buoyed by liquefied natural gas (LNG) revenues and new property development, in November last year it enacted the Administrative Control and Transparency Authority, which is chaired by the Deputy Prime Minister and accountable only to the Emir. The state aspires to be one of the 10 most transparent countries on earth.
In Bahrain, meanwhile, an anti-corruption drive spearheaded by the Crown Prince was set back by the 2011 uprising and its suppression by Saudi-led GCC troops. “The pendulum of influence of power has swung back to the prime minister's camp, the old guard that controls Bahraini businesses, and the Crown Prince's campaign has been sidelined. A reason for that is the (anti-corruption) campaign was in part a political strategy to wrest key institutions from the prime minister,” said Bortman.

The need to name and shame

Generally, the lack of track record makes it hard to assess how well many GCC watchdogs are working but observers believe the integrity initiatives to be more than public relations:
I genuinely think it is more than lip-service, and we see that in the faces of the people we are training and the organizations we work with. Regulators also genuinely want to make progress, even if they are doing it at their own pace,” said Helen Langton, Managing Director of International Compliance Training Middle East (ICT Middle East), a provider of professional training in the field of compliance and anti-money laundering. “A lot still needs to be done further and it won't be sorted out overnight. While codes and regulations have been in place for years, it is only over the last two or three years that issues have merited more disclosure, transparency and cooperation between public and private bodies. I think the watchdogs' effectiveness is too early to call.”
Another source, who works in risk management and wished to remain anonymous, remarked that the authorities' success against financial mispractice have been uneven: “At the mid-level there's been more success as we've seen fairly senior people prosecuted or taken out of the system and make an example of without stepping in the political minefield of going for high level figures or those close to the royal family. There has been a level of success at that stratum of civil society. At the higher level we've not seen a lot of success as either foreigners take the brunt and get chucked out of the country, or figures are quietly moved aside to dampen public outcry or scrutiny.”
In the wake of the financial crisis in Dubai (which hit the trading emirates especially hard), the SAI opened cases against company executives and high level players, such as the former head of the Dubai International Financial Centre (DIFC), Dr Omar bin Sulaiman, who was arrested on charges of embezzling USD$14 million in public funds under the guise of “performance bonuses.” Bin Sulaiman was released in 2010 after paying the amount that was embezzled due to a amendment to UAE law in late 2009, which provides for prison terms of up to 20 years on conviction of misappropriated public funds unless the money is repaid.
Public sanction, however, is not common in the GCC. “In the UK, if a company is found to fail best practices, they get named, shamed and heavily fined to encourage better practice,” said a regional AML specialist, who did not want to be named. “But a lot of what goes on in the Middle East is not transparent. The regulator will have words (with a violator) or fine them, but does that get disclosed and disseminated widely? No.”
Our aim over the next five years is to build our own in-house capacity for prevention and on the detection side, so fraud control frameworks, anti-corruption, an advisory role for the government and improved IT,” said Khalid Hamid, Executive Director of SAI. The institution also wants to expand beyond its current complement of 200, of whom 120 are in auditing and investigations. “We are going through an organizational programme to follow international auditing standards and we will get more staff in, so hopefully we'll grow,” Hamid said.