VALUE PARTNERS NEWSLETTER - NR.

04 - JANUARY 2010 - POSTE ITALIANE SPA - SPEDIZIONE IN ABBONAMENTO POSTALE - 70% - DCB MILANO

MENA Region: M a r h a b a to the world

N EWSLETTER
Value Partners Newsletter
Published by Value Partners
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Editor: Tina Guiducci
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Registered in Milan. Reg No. 84-01/31/2008
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 NEWSLETTER
Marhaba means “welcome” in Arabic. It’s a word that perfectly reflects not
only the warmth and hospitality of the Arab culture, but also its opening up
to the world. This particular issue of the Value Partners newsletter is entirely
dedicated, in fact, to the Middle East and North Africa (MENA) region, to the
Arab world and to its business environment.

Over the last few decades, economies in the region have been developing
at a very rapid pace, mainly due, at least in the initial growth phase, to oil
exploitation. In the last 10 years, industry and economic diversification from oil
has been pursued as the primary objective, with very significant results across
the region. The recent global financial crisis has been affecting the area in two
main ways: the oil industry, which has seen a reduction in oil prices compared to
the peak values of 2008 – although they are still running at a much higher level
than the break even point – and higher risk sectors like the real estate industry.
MENA Region: Marhaba to the world
It is, however, expected that positive GDP growth will continue in the region, at
January 2010
higher levels than in many other economies. fourth issue

All of the countries in the region have followed their own path when it comes • UAE, the new global professional hub
to opening up to the global economic and cultural paradigm. Now, the moment
has arrived for international players to deepen their analysis and understanding • Business Parks: a success story
of the MENA region and to be a part of this important development. Local for the region
countries and business communities are open to this and are busy creating
• Getting Private Banking basics right
the proper climate for further growth. The region, at the crossroads between
Asia, Europe and Africa, and with commercial relations with the Americas, is • Retail Banking in Egypt: an oasis
increasingly becoming a laboratory for Western and Eastern economies, as well for growth, away from the storm
as for people hoping to find the best model of co-existence.
• The still unfulfilled potential for
insurance in the Gulf Cooperation
Value Partners has been operating in the region for many years. In 2008, we Council
established our presence in the United Arab Emirates (UAE), Oman and, more
recently, Saudi Arabia. In this newsletter, we address topics of relevance for the • Discussing the Saudi Arabian economy
whole area and, specifically, for a number of industrial sectors: from banking
• A young generation is powering
and insurance to telecommunications, media and sports; from luxury goods to
the new media revolution
energy. The articles provide specific case studies of international collaboration
models and also describe the existing business opportunities across the above- • The African mobile market is ripe
mentioned sectors. for M&A

• The case for customer-centricity

Each country in the region is involved in ongoing activities aimed at industry
liberalisation. Regulatory policies are being oriented, for instance, towards a more • Telecoms regulation: new policies to
liberalised and competitive economy. New cities and business communities, stimulate competition and innovation
for local and international companies, are being developed. The multinational
and multicultural presence in the region is increasing, while new initiatives – • Integrating innovation, quality
and value
to be proposed to the global community – are being pioneered. In addition,
several sectors such as education, health care and banking are growing, and • TV production: the latest opportunity
knowledge-based service economies are also leveraging the extensive presence in the region
of a young Arab community rapidly becoming acquainted with new global
technologies. The King Abdullah Economic Cities in Saudi Arabia, Burj Khalifa, • Revolution in the football industry
UAE’s multi-industry Business Parks, The Pearl-Qatar, UAE Media Cities and
• A new oil for the region
Masdar, the zero carbon city in UAE, are all examples of initiatives aimed both
at enriching and developing local economies, and attracting global investment • Luxury goods in the Middle East:
to the region. These models will soon enter the next phase of development and still in fashion?
will be exported to other regions as well.

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 MENA Region: Marhaba to the world

History provides us with many examples of the rise and fall

UAE, the new global professional hub of cities, states or entire civilisations. From this perspective,
the pace of the United Arab Emirates’ (UAE), and specially
Riccardo Monti, executive director, Dubai office Dubai’s, expansion is unprecedented. In the span of just three
decades, this particular one of the seven United Arab Emirates
has transformed itself from a small, inconsequential town of
fishermen and pearl merchants into a world capital. The factors underlying this incredible
success are simple, starting from a strategic geographic position in the Persian Gulf and
an open attitude in terms of both business and social tolerance. And also an enlightened
political leadership that has deftly manoeuvred through recent events with the aim of
strengthening its position in the region, since the Iranian Revolution and the subsequent
embargo, during which Dubai and UAE represented a key offshore location. In more recent
years, the oil boom and the growth of global finance and tourism have further accelerated
the transformation of UAE into a major international hub.

UAE has also used aggressive marketing strategies to its advantage, creating events
and symbols of its growth out of nothing: from the annual horse race with the world’s
biggest purse to the by now famous sail-shaped Burj Al Arab; from an important film
festival to major trade fairs in the fields of IT, defence, construction and electronics. Burj
Khalifa, the world’s tallest building recently inaugurated, will remain a global icon for
UAE for long time to go.

The emirate of Dubai has, of course, established a role and image as the world capital of
construction, ‘a place to go’ for architects and engineers, where the only limit to creating
the most fantastic structures is the creativity and skill of their creators. In the last 4-5
years, it has also ridden high on the latest wave of the real estate boom, becoming an
important centre of finance and the professional and tourist hub of the entire region.
The financial and economic crisis that has crippled the western world has affected these
two areas in Dubai as well, revealing the core of its development as being centred upon
finance and real estate. It has struck rather hard, actually: dozens of mega-projects
cancelled; extreme bailouts of builders and banks; the fall of real estate values; the exodus
of a significant percentage of the tens of thousands of brokers, architects and engineers
who have literally built Dubai, not to mention the hundreds of thousands of blue-collar
workers who once buzzed like bees around the construction sites, 24 hours a day, 7 days
a week. Consequently, Dubai was emptier this past summer than it has been in many
years. In the opening months of 2009, residential real estate prices dropped 42 percent
and hotel occupation fell 16 percent. Nonetheless, the moment has not yet arrived when
one must wonder what remains of the ‘Dubai dream’. There is still a lot left to leverage
on. Dubai is one of the emirates of UAE which considers itself as one single nation as for
the initial vision of Sheikh Zayed. Dubai today has a major airline, Emirates, which serves
all the main international business and tourist routes; banks such as Emirates Bank
International or National Bank of Dubai; huge developers like Emaar; and some of the
world’s leading engineering firms, such as the Al Habtoor Group. Dubai has established
itself even as an important international tourist destination, with approximately 10
million visitors in 2009 despite the downturn. As part of UAE, Dubai has carved out a
niche at the forefront of the highly competitive world of Islamic finance.

Abu Dhabi, in its role as capital of UAE and base for the major business and government
institutions, is also very active in building its position as a regional cultural hub. Saadiyat
Island (Island of Happiness) is being developed to create a cultural district including the
development of a Louvre Museum and of a Guggenheim Museum dedicated to modern
and contemporary art.

In the third millennium, UAE will increasingly become a main hub for advanced third
sector services. Alongside oil, the sheer quantity of professional expertise concentrated
there represents one of UAE’s most important ‘reserves.’ Large-scale growth projects and
investments for the city and the entire region continue to rely upon this concentration of

4
 NEWSLETTER
expertise. They are also increasingly oriented towards a sustainable and harmonious de-
velopment with the other Gulf nations in a context where Qatar, Bahrain, Oman and the
other emirates are gradually becoming more specialised and committed to making their
respective economies more synergistic through the Gulf Cooperation Council (GCC), whose
members are Saudi Arabia, Bahrain, Oman, the United Arab Emirates, Qatar and Kuwait.

If oil reserves in the region were to dry up today (in reality this will not happen for at least
100 years), the countries of the GCC would have, according to conservative estimates,
over US$ 2 trillion (expected to reach 3.8 trillion at the current oil price by 2012) in liquid
financial resources to invest elsewhere. The advanced service sector that revolves around
this massive amount of cash, populated by lawyers, bankers, consultants and architects,
will therefore continue to gravitate largely around the Emirates. UAE is here to stay for a
long time among the world global centres.

Value Partners met with Dr. Amina Al Rustamani, CEO

of TECOM Business Parks to talk about the success story Business Parks: a success story for the region
of business parks in the region.
Interview with Dr. Amina Al Rustamani, CEO,
2009 has been a tough year for the global economy and in TECOM Business Parks
the last few months Dubai has quieted down, in particular
with the crash of the real estate sector. To what extent has
TECOM felt the impact of the crisis?
It goes without saying that the economic downturn has severely impacted on nations
and companies worldwide. No country that is integrated into the global economic
system has been able to escape its effects completely unscathed. For its part, TECOM
Investments is an inherently unique company operating 11 business parks across
industries ranging from information and communication technologies and media to
clean energy, biotechnology, education, healthcare and industrial. Therefore, while we
are not immune to the crisis, the challenges we are currently facing are unique in nature.
We are keenly aware of the fact that our growth as an organisation is strictly linked to
that of our business partners, some of which have scaled down their operations to deal
with the financial turmoil. This has been our most pressing issue in 2009. To combat this,
we have maintained constant communication with our business partners to understand
their changing requirements and determine how we can work with them to better
cope with the current global situation. For example, we recently launched the Business
Sustainability and Support Centre to provide free consultancy services to our business
partners on overcoming the challenges that have arisen due to the economic downturn.

Many hoped that things would pick up for businesses in Dubai post-Ramadan. Are you
beginning to see increased business activity and companies starting to move to Dubai again?
It is still too early to comprehensively gauge the changes in post-Ramadan business
activity and the extent to which companies are once again moving to Dubai. Yet, over
the past several months, there have been some developments that point towards an
improved business sentiment and outlook for the region. The recent acquisition of one of
our business partners, Maktoob.com, by Yahoo!, as well as Intel Capital’s announcement
earlier in the year to invest in three of our business partners are an indication that
international companies, in spite of the current economic climate, view the region’s long-
term prospects favourably.

In your role as CEO of TECOM Business Parks you manage different business zones
covering a broad range of industries. What is the advantage of having business zones
dedicated to specific industries?
Our vision is “investing, creating and realising the future of Dubai,” which aptly encapsulates
our commitment to developing Dubai’s future. One of the areas of primary importance

5

Dr. Amina Al Rustamani
is the Chief Executive Officer
of TECOM Business Parks, the
entity of TECOM Investments
designed to function as an
umbrella organisation for
all the 11 Business Parks of
TECOM Investments: Dubai
Internet City, Dubai Media
City, Dubai Knowledge Village,
Dubai Studio City, International
Media Production Zone, Dubai
Biotechnology and Research Park,
Dubai Outsource Zone, Dubai
International Academic City,
Energy and Environment Park,
Dubai Healthcare City, and Dubai
Industrial City. Dr. Amina
Al Rustamani is responsible
for defining and executing
the strategy of all the Business
Parks so that the objective of
establishing a knowledge-based
economy – as mandated by
the government of Dubai –
is effectively realised in the
medium and long term.
MENA Region: Marhaba to the world
that has been identified as crucial to Dubai’s development is represented by its knowledge-
based industries, and it is on this area that we are primarily focused. Developing business
parks devoted to specific industries empowers us to play a leading role in building the
emirate’s future. For our business partners, the advantage of being located in a business
park that is dedicated to their industry facilitates business-to-business synergies and
networking opportunities, research and development, knowledge and best practices
sharing, improved economies of scale, and better information flow and operations.
For companies considering moving to the Middle East, what are the key financial and
regulatory incentives to set up in one of the Free Trade Zones in Dubai?
Establishing a base in a Dubai Free Zone is a straightforward process and offers a host of
incentives including 100 percent tax free environment, 100 percent foreign ownership,
waiver of custom duties, full currency convertibility, no restrictions on the repatriation of
capital and profits, and no trade barriers or quotas. Consequently, free zones represent
the best destination for foreign companies seeking to expand into the region. At TECOM
Investments we do not view ourselves simply as creators and operators of free zones. Our
vision is directed towards shaping business parks that offer significant value-added services
beyond those expected from regular free zones. Primary among those services is the
industry cluster benefits that offer many additional advantages to our business partners.
Dubai has succeeded in making itself a regional business hub, thanks in part to Free
Trade Zones that have attracted international companies. What does the future hold in
store as other countries in the region begin to offer similar incentives?
The establishment of other free zones in the region is a strong indication that significant
growth opportunities do remain, and I view this as a very positive sign. It is important to
remember that all the Gulf Cooperation Council (GCC) countries are interconnected, and
positive developments in one country will have positive ramifications on other countries. In
spite of the increased competition, TECOM Business Parks have a unique value proposition
that stems from their special characteristics as industry specific clusters. This important
differentiator is a concept we pioneered and perfected. As a result, we feel confident that
we will maintain our status as the premier developer and operator of business parks in the
region, and companies will continue to prefer to call TECOM their home.
Within TECOM Business Parks there seems to be a positive focus on the environment
with the DuBiotech HQ being one of the largest green buildings in the world, and Enpark,
dedicated to environmental technologies. Is such a focus part of a government initiative
to make Dubai a greener place?
Yes, it is. TECOM Investments is a member of Dubai Holding and follows the strategic
directives of the Dubai government. It is no secret that the UAE has the world’s
highest per capita carbon footprint and the Dubai government is spearheading several
initiatives in its firm commitment to make the emirate a greener place. TECOM’s
entities such as Enpark and the Sustainable Energy and Environment Division (SEED)
are in line with this strategy.
Dubai Media City (DMC) has successfully made a name for itself on an international level
as the regional centre for media businesses. What are the key differences between DMC
and Abu Dhabi’s new media zone twofour54?
Dubai Media City and twofour54 are complementary to each other. The media industry
in the region is growing at a significant rate, as evidenced by the growth of not only
Dubai Media City but also TECOM’s other media business parks such as Dubai Studio City,
the Middle East’s first dedicated film production cluster, and the International Media
Production Zone, a business park dedicated to the printing, publishing and packaging
(3P) industries as well as to the graphic media sector. Abu Dhabi’s recent introduction
of a media zone ensures that existing demand can be met while guaranteeing further
growth of the media industry in the region, through the creation of additional resources
and opportunities for collaboration. Of course, the UAE as a whole stands to benefit
substantially from such growth.
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 NEWSLETTER
In your opinion, which industries covered by TECOM present the largest growth
opportunities in Dubai?
I believe the clean energy and healthcare sectors, represented by Enpark and Dubai
Healthcare City, have a very strong growth potential in Dubai and in the region
as a whole. The combination of an ageing population and an increase in the so-
called lifestyle syndromes will drive the growth of the healthcare sector. Many GCC
governments have responded by investing extensively in healthcare infrastructure,
and by creating a regulatory environment that is attractive to private healthcare
providers to enter the market. As a result, the GCC per capita spending on healthcare
is expected to grow at a faster rate than the global average. According to the most
recent estimates, the healthcare market is expected to swell to around US$ 50 billion
by 2020. Similarly, the outlook for the renewable and sustainable energy sector is
equally positive. The fact that the UAE has the highest per capita carbon footprint
in the world translates into considerable opportunities for companies operating in
the clean energy field. Also, by virtue of being located in a very hot environment
where air conditioning requirements can consume upwards 70 percent of power
during peak times, district cooling becomes an ideal alternative, and this sector is
expected to grow exponentially over the next 10 years. The selection of the UAE to
be the headquarters for the International Renewable Energy Agency (IRENA) will also
provide the impetus to drive the clean energy sector forward.

The United Arab Emirates (UAE) has one of the world’s highest con-
centration of millionaires, with 6 percent of households holding Getting Private Banking basics right
investible funds of more than a million dollars. Only Switzerland,
Kuwait and Qatar have a comparable concentration of High Net Roland Topic, Dubai office
Worth (HNW) households. Abu Dhabi has the second highest per-
centage of millionaires in the world, just after New York, and leads
UAE in terms of HNWs, closely followed by Dubai. GDP per capita
rose to a record high US$ 53,300 in 2008, a 16 percent increase over 2007 and more
than double its level in 2003. The country also provides easy access to a fast growing
and large base of millionaires in South Asia and Africa, who have very limited access
to investments.

With these positive numbers, the largest banking sector amongst the Gulf Cooperation
Council (GCC) countries, a large and influential expat population in the country, an open
regime, access to GCC, Asia and Africa and clients with high propensity to invest, UAE is a
very attractive private banking market. The financial crisis has dented trust in the system
and also reduced wealth considerably. However, the main drivers of the private banking
market remain intact and seem to emerge stronger as the economy slowly recovers.

The golden goose has resulted in over 50 banks operating in the country, in fierce
competition, in commoditisation, and in the lowest net interest margins amongst GCC
countries (an average of 2.9 percent in 2008). This margin pressure has led to banks
aggressively competing to raise cheaper deposits, especially from HNW clients.

The private banking proposition in UAE is not comparable to Switzerland or other

advanced European countries, as very few banks offer true private banking services
such as lifestyle services, equity financing, estate planning, family offices, private
equity, discretionary portfolio management, etc. The focus is mostly on commoditised
financial and international investments.

However, the industry is rapidly evolving. While foreign banks offer a broader and
well differentiated private banking practice, local banks are trying to catch up and are
making very aggressive moves to gain a larger share of this market. Interestingly, client

7
 MENA Region: Marhaba to the world

Deposit base in UAE, 2008 needs are changing dramatically with a new generation of private banking clients
emerging. These clients have a different attitude to money and risk, possessing greater
knowledge and demanding advise not only on financial matters but also on their
Emirates NBD 16%
Foreign core businesses. This new generation has developed wealth in a shorter period with
banks 25% National Bank significant exposure to non-oil assets and has a much larger international investment
of Abu Dhabi
12% footprint. The deposit base in UAE is dominated by domestic banks with approximately
75 percent of all deposits shared by local banks. Foreign banks, despite being quite
limited in number, hold a significant share of the market.

UAE enjoys the presence of 28 foreign banking institutions, but a 20 percent corporate
tax rate and other branch license restrictions have resulted in international players
ADCB 9% competing with domestic players on a weaker ground. However, in 2004 the govern-
Other
domestic ment allowed foreign banks to open branches in the Dubai International Financial
banks 16% First Gulf Bank 9% Centre (DIFC) to all services with restriction-free repatriation of profits, zero taxes on
UNB 6% Dubai
income and 100 percent foreign ownership. This move resulted in a significant increase
Islamic in the number of boutique and private banking players opening their onshore centres
Bank 7%
in UAE.
Source: Credit Suisse, Central Bank
The large local banks, such as Emirates NBD, National Bank of Abu Dhabi, ADCB and First
Gulf Bank, are all rapidly expanding their private banking services, wanting to leverage
their large brick and mortar presence, their strong local reputation and Islamic banking
capabilities to consolidate their market share amongst UAE HNWs, even though their
private banking offerings are not comparable to those of full service private banks, like
Credit Suisse, UBS, Sarasin, Mirabaud and Dresdner, or large retail banks, such as ABN,
RBS, Citibank and HSBC.

Key offer points

Citi Its private bank services include real estate, trust and fiduciary, aircraft financing,
art advisory, family advisory, multiple residence, farm advisory and philanthropy.
It offers a broad range of services and manages the entire balance sheet of the
client.
Credit Suisse It offers a large portfolio of conventional products and has a large private
banking practice in UAE. It is active in structuring and distributing Shariah
compliant products such as Sukuks (Islamic bonds), Shariah compliant mandates,
customised investment programmes and establishment of Islamic trusts.
Dresdner Bank Converted its 12 year old representative office to a subsidiary in the Dubai
International Financial Centre (DIFC) to increase its private banking market
share. It focuses on ultra High Net Worth (HNW) clients only. It complemented
its strategy by offering Shariah compliant mutual funds managed by Allianz
Global Investors.
Mirabaud It extensively uses open architecture to offer an optimum product mix to
clients. Partnership with Credit Suisse, Société Générale, Fortis and parent bank
Mirabaud & Cie. It focuses on Ultra HNW clients only.

National Bank It is developing its private banking business aggressively. On-shore, its asset
of Abu Dhabi management group develops local and international funds. Structured products
are designed by its investment banking division which also has capability to
develop tailor made solutions for its ultra HNW clients through its Switzerland
and US subsidiaries.

ADCB It recently deployed an end to end wealth management system from SAGE (Swiss
IT firm), to strengthen its private banking proposition and provide much needed
information and support to its relationship managers and clients.
Dubai Islamic Bank It launched its private banking arm in 2004 and it now positions itself as the
Islamic products market leader. Through its Johara branded accounts, and with
female private banking managers, it offers exclusive accounts for women only. It
is also an active player in structuring innovative Islamic products for its private
banking clients.

In a highly competitive market, where both domestic and foreign players are moving
towards improving their HNW proposition, five essential elements to build a strong
private banking franchise need to be addressed.

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 NEWSLETTER
• Client segmentation In Middle East, private banks need to choose more consciously
the type of clients they pursue and to whom they can offer a superior proposition
(Asian, local, GCC, African, etc.). They need to factor changes in sources of wealth (e.g.
from oil and real estate to equity investments in different industries), geographic re-
quirements (e.g. from predominantly offshore to a combination of GCC and interna- People
tional investments) and level of expected service. Winning banks will be able to carve quality Client
segmentation
a niche in the market and maintain their competitive position.
Essentials
Premium in the UAE
• Product innovation and depth Private banks need to be aware of the diminishing branding private banking
product life cycles, of the increasing commoditisation – thus reduced margins – and market Product
innovation
of the limited product/service portfolio. Promoting open architecture and Islamic and depth
products, offering the right combination of parent bank and partner products, Local
market
extending services beyond financial investments to lifestyle services, building know-how
proposition for full balance sheet management and fiduciary planning are all critical
to increase the customer investment wallet share as well as the relationship length.
In particular, HNW clients appreciate having an aggregate view of their assets (real
estate, financial investments, and even artwork they possess) and liabilities, regardless
where these are held. Systems that give a single window of access to this information
with powerful reporting tools are in high demand. Adding estate planning, family
wealth management and trust management, for example, provides several benefits
to the bank, including a shift from short term to long term mindset for both the client
and the bank. It also cements the client’s relationship with the bank, lasting for over
20 years, instead of 6-7 years without a fiduciary solution. In addition, it allows access
to next generation in the family, provides better knowledge about client assets and
needs, and increases cross-selling opportunities. Last, but not least, it improves brand
perception and trust.

• Local market know-how Players with insufficient understanding of the GCC market will
experience major growth challenges. International banks may have greater expertise
in complex financial products, but they can lack local market knowledge and skills in
creating Shariah compliant products. Also, it is essential to develop an onshore client
servicing model rather than an offshore or a suitcase-based one. The model followed
by most foreign banks is to use their UAE office as a hub for relationship managers
serving Pakistan, India, China, African countries and GCC, which increases profitability
significantly.

• Premium branding Customers are discerning and tend to relate only to premium
brands, like any of their other luxury needs. Branding and positioning therefore are
critical to ensure communication of exclusivity and reliability. International banks are
showing the way: with its Van Gogh Preferred Banking, ABN Amro projects an image
of exclusive service by leveraging the Dutch painter’s name to associate banking with
art and luxury. HSBC Premier, instead, is leveraging its unified global brand, targeting
travelling expats and affluent individuals.

• People quality Private banks need to restore confidence and the trust not only of the
banks as a brand but also of the relationship managers who were in charge of client
relationships. In the high growth period, most banks either hired junior private bankers
or upgraded retail wealth managers to become private bankers and handle sensitive
relationships. This resulted in many cases of mis-selling, incorrect risk profiling and
lost trust. In GCC the main challenge is to find a sufficient number of top quality
people with previous experience in private banking.

In these days of crisis, the UAE private banking market continues to be extremely
attractive. Easy access to overseas markets, a very large local base of millionaires and the
early stage of private banking industry represent an opportunity to already established
and new private banking players. Those who get the basics right will undoubtedly emerge
as winners.

9
 MENA Region: Marhaba to the world

The recent financial crisis has not influenced Egypt’s

Retail Banking in Egypt: an oasis for growth, banking sector in the same way it has affected the
away from the storm European one. This is due to a limited integration with
global financial markets, abundant liquidity and a
Gabor David Friedenthal, principal, MENA banking practice, conservative regulatory environment. Egyptian banks
Rome office, and Sara Fargion, Milan office were basically not exposed to the toxic structured assets
that brought down the Western banks, and the almost
non-existent mortgage market has protected the local
system from a collapse in house prices. The banking sector is thus still growing fast,
with assets up to 54 percent in the last four years, and it provides attractive growth
opportunities, specifically in the retail segment.

Egyptian banks show high levels of liquidity: liquid assets represent over 50 percent of
the total and banks rely almost exclusively on customer deposits to fund their activity.
Egypt has low exposure to retail During the past years, credit growth was weaker than deposit growth: 9 percent credit
compared to region CAGR vs. 13 percent deposit CAGR between 2003 and 2008.
US$ bln
60% Despite the liberalisation of the financial sector – and the recent entry of many global
players – the country continues to be highly under-banked, with only 3,500 branches
50%
30%
and networks located outside the major urban areas. Most local banks are planning to
build more retail divisions. Not only the domestic banks, but also those from across the
40%
Gulf Cooperation Council (GCC) region are looking to seize this opportunity. Globally they
are committing funds to capture the Egyptian retail business opportunity. The Lebanese
30%
Blom Bank and Bank Audi have recently set up offices in Cairo, while the National Bank
10% of Kuwait (NBK) bought Al Watany Bank of Egypt (AWB) in late 2007.
20%

10% Low utilisation rates, an under-penetrated market, strong funding, almost no exposure to
toxic assets and an insignificant exposure to the troubled real estate sector might make
0% -10% the Egyptian banking sector seem too good to be true. Actually, that is not the case.
Saudi Arabia

UAE

Qatar

Oman

Bahrain
Kuwait

Egypt

The sector is in fact influenced by the country’s economic slowdown: GDP growth is
expected to decrease (3.8 percent next year, down from the 7.2 percent attained in 2007-
2008). This downturn is mainly due to external factors: drop in Foreign Direct Investment
Retail Loans (FDI), weaker tourism revenues, lower trade with developed countries and lower Suez
Retail/Total Loans Canal revenues. There is also a risk of higher unemployment due to the return of labour
Source: HC Brokerage, CBE, BMI from foreign markets. Besides that, weaker remittances from the US and the GCC could
cause lower domestic consumption.

This will primarily impact the corporate side, which represents the bulk of lending for
Egypt’s aggregate loan the banks (72 percent), also affecting non-core operations with less trading activities
breakdown and drops in exports. Should macroeconomic conditions persist, a new cycle of Non
Retail 21% Performing Loans would also threaten banks balance sheets.
Services 25%
To react to the potential profitability slowdown, the biggest local private banks are thus
Others 3% planning to capture retail potential as a consequence of reduced opportunities on the
corporate side. They have noticed not only the retail sector growth potential and better
Public profit margin, compared to other lending, but also the fact that it offers opportunities to
sector
7% diversify operations, risk and revenues.

The retail business appears in fact underdeveloped. Retail assets account only for a little
10 percent of Egypt’s total assets. Retail loans, instead, account for 20 percent of total
Trade 14%
loan portfolio and mortgage-related finance represents less than 1 percent of total
sector loans. In addition, only 10 percent out of a population of 81 million have a bank
Industry 30% account and just 4 percent own a credit card.

Source: HC Brokerage, CBE This significant growth potential can be captured through two main channels: on the
and Banks’ financials
one side, by increasing the penetration of existing banking products, especially among

10
 NEWSLETTER
the growing middle class outside of the main urban areas; on the other, by introducing Mortgage is growing exponentially
new banking products that are more customised to the needs of the local consumer. The yet still insignificant stake in loans
growth in population and personal wealth, especially among middle class, which amounts
to around 5 million people, is fuelling the increasing demand for credit cards and auto EGP mln
loans. Nevertheless, most of the remaining population seems too poor to bank. 3500

3000
Egypt’s mortgage market is still in its infancy, with a low GDP penetration of 0.37 percent
3%
in 2008, compared to 9 percent in the United Arab Emirates (UAE) and 25 percent in 2500
Eastern Europe, and less than 1 percent on total loans.
2000

Focusing on mortgages, the government is actually working to introduce better access 1500
to mortgage finance through both banks and specific mortgage lenders. Some of the 1%
government’s reforms implemented so far include reducing property-registration fees 1000

to 3 percent of the transaction, down from 13 percent in 2006, and easier registration 500
procedures. More than 300,000 housing units are expected to be required annually for
the next few years, and demand over the longer term is likely to soar when housing 0 -1%
finance becomes more accessible. Banks have also begun introducing affordable June 06 June 07 June 08 Dec 08 Mar 09
mortgage schemes to cater to middle- and low-income borrowers, since the market for
high income housing is largely saturated. Mortgage Loans
Mortgage/Total Loans
By the end of 2010, the government is also planning to introduce a credit bureau,
Estealam, that should enhance banks’ information used in consumer lending. In a few Source: HC Brokerage, MOI, IDSC
years’ time the Basel II regulation framework will also be introduced.

In the retail-banking sector, Small and Medium Enterprises (SMEs) also appear currently Egypt SME sector breakdown
under-banked. They would offer great potential if banks started working with the entire Wholesale and retail
supply chain of their blue chip corporate. SMEs are the backbone of the Egyptian economy: trade and vehicle
maintenance 61%
they contribute almost 80 percent of GDP (Jordan 50 percent and Lebanon 99 percent)
in different sectors, in particular wholesale and retail trade, vehicle maintenance, and Manufacturing 17%
manufacturing. In addition, Egypt SMEs employ 75 percent (Jordan 60 percent and
Lebanon 82 percent) of the employees.

A number of banks are working towards increasing their penetration in this segment, but
Community,
microfinance solutions remain marginal. Financial institutions are generally reluctant to social and
personal
lend to SMEs because of asymmetric information: it is currently difficult and expensive services 7%
to assess these firms’ risk and organisational position.

The government has been supporting lending to this segment, also asking for SMEs Hotels and
restaurants 5%
increasing in transparency. In addition, in December 2008 the Central Bank of Egypt has Others 4%
Real estate, renting
announced to exempt the 14 percent cash reserve requirement for SMEs loans, in order and business
Health and social services 3%
to encourage local banks in lending to this critical segment.1 works 3%

While controlling the cost of risk, the best way to serve SMEs effectively is to start with Source: Government ministries
working capital financing, focused in particular on the supply side of the major corporate
client. In this way, more than the specific risk, the bank will be able to assess the risk of the
entire supply chain cycle, physiologically lower, and involve a larger number of SMEs in a
reduced time frame. The best products to launch, in this case, would be factoring, payments
and e-invoicing, all relying on worldwide standards and contractual agreements.

Over all, Egypt is far removed from the current financial storm but local corporations 1
SMEs defined as a paid in capital
may suffer from the economic slowdown. That is why more focus should be put on retail between EGP 250,000 and EGP
5 million (€30k-625k) and sales
business and, in particular, on payments, mortgages and SME financing, introducing new between EGP 1-20 million
innovative products and services to the market (e.g. the quoted Supply Chain Finance). (€125k-2,500k)
With such premises and perspectives the oasis can only become greener.

11
 MENA Region: Marhaba to the world

The Gulf Cooperation Council (GCC) insurance markets did

The still unfulfilled potential for insurance
in the Gulf Cooperation Council
Alessandro Scarfò, director, MENA insurance practice,
Milan office, and Mohamed Wahish, Dubai office
not disappoint last year: insurance premiums reached an
overall volume of US$ 10.6 billion, showing a massive 28
percent year-on-year growth rate. This compares to world-
wide growth of 3.4 percent in nominal US$ terms, implying
stagnation in real terms.

This growth rate sounds impressive; however, it is not near-

ly as large as it should be. Insurance penetration – e.g. aggregate insurance premiums
over GDP, a common measure to gauge development of the insurance industry – stands
at 1 percent for the GCC countries. In contrast, the developed insurance markets in the
US and Europe register penetration rates in the range of 5-15 percent. GCC giant Saudi
Insurance penetration Arabia has a particularly low penetration of only 0.6 percent, dwarfed in absolute size
Premiums/GDP, 2008 by its smaller neighbour, the United Arab Emirates (UAE).

Bahrain 2% Insurance classes across the GCC must be evaluated in order to fully understand the root
causes of such a low penetration. Motor is the biggest class, accounting for 31 percent
UAE 2% of 2008 insurance premiums, followed by health and property. Life is particularly weak,
accounting for only 15 percent of total insurance premiums (compared to around 60
Oman 1.1% percent in Europe).

Qatar 0.8% GCC residents seem to buy insurance products only if they have to: it is not by coinci-
dence that mandatory third party motor insurance is the leading class. All other non-
Kuwait 0.6% life insurance classes, health included, are almost 100 percent corporate business. GCC
nationals expect their governments to cover most risks for them: the majority of health
Saudi Arabia 0.6% care is free and provided by the government; home loans are often state-guaranteed,
without the need for building insurance. In addition, the weak uptake of life insurance
is often attributed to potential conflicts with Islamic law: Muslims are not supposed to
Source: Swiss Re. Sigma, Axco, National
Regulator, Value Partners analysis speculate on life’s unfortunate events.

At the same time there are some severe supply-side restrictions: only recently have markets
been opened to foreign competition, and some regulatory regimes still need to be brought
up to world standards. Business is still dominated by local insurers (their market share ranges
from 77 percent in the UAE up to 90 percent in Qatar). Product offerings are mainly of the
plain-vanilla sort, and distribution is mainly in the hands of local agents and brokers.

Nevertheless some major normative and regulatory discontinuities are expected to

Insurance market size provide a strong impetus for growth:
Million US$, premiums, 2008
• UAE, Qatar and Bahrain have recently been pushing regulatory reform. Qatar is
perhaps the most interesting case to analyse. The country’s insurance law is quite
Bahrain 4.3% obsolete, dating from 1966. Five national players, led by Qatar General and Qatar
Qatar 5.3%
UAE 47.3% Islamic, dominate the market. Instead of embarking on a slow and painful reform of
Oman 5.5%
the existing insurance regime, Qatari authorities introduced a parallel regime in Qatar
Kuwait Financial Centre (QFC). QFC closely resembles the UK Financial Services Authority
8.6%
(FSA): rules, and insurers, incorporated at QFC, can be 100 percent foreign-owned.
Most interestingly, companies in the QFC can operate onshore, creating a case of
regulatory arbitrage within Qatar. Several international insurers, from AXA to Zurich,
already started their operations within QFC.

• Takaful, a Sharia compliant variant of insurance, is a system based on the principle

Saudi Arabia 29%
100%=US$ 10.6 billion
Source: Swiss Re. Sigma, Axco, National
Regulator, Value Partners analysis
of mutual assistance (ta’awun) and voluntary contributions (ta’abarru). Risk is shared
collectively and voluntarily by a group of participants, while insurance shareholders
are entitled to a fixed remuneration. The management of the company is supervised
by a Sharia supervisory board composed by financially knowledgeable Islamic scholars.
Although its share of the insurance market is currently low, accounting for around

12
 NEWSLETTER
10 percent of overall premium volumes in the GCC, many insurers – even Western Insurance by line in the GCC
companies – invest in this market by establishing Takaful operations. By adhering Million US$, premiums, 2008
strictly to prevailing social norms, Takaful insurance is expected to overcome the
cultural bias against life insurance products. Others 10%
Motor 31%
• Health insurance has the best growth prospects, as governments are expanding
Life 15%
mandatory insurance for expatriates and, in some cases, even for nationals. GCC
countries have a very significant expatriate population, ranging from around
30 percent in Saudi Arabia to 85 percent in the UAE. Saudi Arabia, for example,
is progressively introducing mandatory health insurance: currently companies
employing more than 50 expats need to provide health insurance. This coverage
MAT
is being extended to all expats (including domestic helpers) until the end of 2009. 9%
Rumoured next steps are Saudi nationals working in private sector companies. If
these changes get implemented, health can easily overtake motor as the biggest
Property, fire 15%
insurance class. Personal
accident/health
20%
At the same time, new approaches to distribution will provide more aggressive, capillary
100%=US$ 10.6 billion
and competent sales channels for insurance products. Trends to watch out for include
B2B2E models, like Worksite Marketing, where employees can buy voluntary insurance
Source: Swiss Re. Sigma, Axco, National
products at the worksite through payroll deduction. Banks will enter the sector as well, Regulators, Value Partners analysis
bundling insurance with financial products.

When these game changes begin to bite, GCC insurance markets should start to live up
to their full potential, with penetration levels starting to approach those of Europe and
the US.

With a population of around 28 million people and a GDP of over

US$ 480 billion, the Kingdom of Saudi Arabia is one of the largest Discussing the Saudi Arabian economy
and richest countries in the Middle East and North Africa (MENA)
region. Holding a quarter of the world’s known oil reserves and Interview with Usamah Al-Kurdi,
13 percent of global production, it is the world’s leading producer member of Saudi Arabia’s Parliament
and exporter of oil. In recent years, the Kingdom’s government
has been making concerted efforts to diversify its economy and
minimise its reliance on oil as the sole source of government revenue, at the same time in-
creasing employment opportunities for the growing Saudi population and bringing about
reforms on economic, political and social levels.

Value Partners met with Usamah Al-Kurdi, member of Saudi Arabia’s Parliament and
notable businessman, to discuss the country’s latest changes and how they are likely
to impact Saudi Arabian economy, as well as the government’s plans for the future and
Saudi Arabia’s relations with the international community.

How has Saudi Arabia been affected by the global financial crisis and what measures is
the government taking to aid its recovery?
In my opinion, Saudi Arabia has been affected very little by the economic downturn and
one of the overriding reasons for this is the availability of cash within the country. The
government decided that the best way to counter the effects of the crisis, in fact, was to
disperse a lot of cash into the market. Through a series of contracts for major projects,
the government managed to exceed its planned budget so much so that, among the
G20, Saudi Arabia is number one in terms of the percentage of expenditure increased
to counter the effects of the crisis. As a result, in Saudi Arabia we have not seen bank
failures or escalating unemployment as has been the case in many other countries. We
have been only minimally affected by the current downturn.

13

Usamah Al-Kurdi has an extensive
record of prominent positions
in the country, including serving
as Secretary General of the
Saudi Council of Chambers
of Commerce & Industry and
sitting on the Board of Directors
of several prominent Saudi
Arabian organisations. He is
currently a member of the Majlis
A’Shura (Consultative Council),
Chairman of Alagat International
Investments Company, and
Chairman of Saudi-Italian
Development Company.
MENA Region: Marhaba to the world
In recent years, social, economic and political reforms have all been prominent in the
Saudi government’s agenda. What specific measures have been taken to diversify the
economy?
The process of diversifying Saudi Arabia’s economy has been ongoing since 1975, when
the industrial cities of Jubail and Yanba were created. While Saudi Arabia’s exports are still
mainly oil, they have diversified into other petrochemicals manufactured from natural
sources, including gas and other products. More recently, the effort of diversification took
a major turn when Saudi Arabia decided to bring foreign companies in, to invest in the
gas sector. This led to the arrival of companies from Russia, China, Italy, the Netherlands
and Spain. Aside from the economy, there has also been a lot of reforms in other areas,
including social, educational and even judicial reform. I always say that reform in Saudi
Arabia started in 1993 when the Shura Council or the Saudi Parliament was created. Many
other steps have been taken since then, especially as a result of acquiring membership to
the World Trade Organization (WTO).
Aside from oil and gas, which other sectors have been opened up to private investors?
Another important area that has been opened up for both local and foreign investors is
mining. For many years we have not given the mining sector the attention it deserves,
but now there are a lot of mining investments taking place, both by the government and
the private sector in phosphates, iron ore and aluminium. Much has also been invested
in infrastructure. For example, 3,500 km of new railroad routes are currently being built,
as well as their associated services. Water desalination and power generation and even
higher education are also areas that are being expanded and receiving private sector
investments. The telecommunication sector has also opened up to competition in both
mobile and, increasingly, fixed line sectors. In the past, almost every sector was closed for
private investment except few. Today we are witnessing the opposite: every sector is now
open except for a short list of areas that are limited to Saudi investment.
What is the vision of the new King Abdullah Economic City?
The economic cities are another indication of the reform that is taking place in Saudi
Arabia. The King Abdullah Economic City is the first and the biggest one, but it is only one
of the six economic cities that are currently being planned. Like in many other countries, so
far development in Saudi Arabia has focused around urban centres but we are promoting
development throughout the whole country, with the introduction of economic cities in
many different areas. The idea is that each city has its own competitive advantage – for
example, the King Abdullah Economic City, which sits just north of Jeddah, provides the
advantage of a major shipping port, not only for Saudi Arabia but for all shipping passing
through the Red Sea. The Jizan City in the South is designed to service the East African
coast, while the Hail Economic City is basically a logistics centre because of its location in
the centre of the country. As a result, each city has its own economic twist.
How has the Saudi Arabia economic landscape changed for foreign companies and what
incentives are being offered?
When Saudi Arabia became a member of the WTO, it had to lower its legal regime for
foreign companies doing business in Saudi Arabia. This led to a dramatic improvement
in the business environment for foreign companies, including two key incentives which
still exist today. Firstly, there are tax incentives, following the reduction of tax rates from
45 percent to 20 percent. Secondly, the law was changed so that foreigners can now own
100 percent of businesses in Saudi Arabia. In my opinion, these two steps have made doing
business in the country much easier for foreign companies and my understanding is that
further incentives are being planned for investors in the upcoming economic cities.
This year marks a big event for Saudi Arabia with the first woman being appointed to a
ministerial level position. How easy is it for women to do business in Saudi Arabia?
The issue of women’s empowerment has become a very serious business in Saudi Ara-
bia. Two signs confirm this: one is the creation of the National Committee for Women in
Business and the follow-on from that, which is that every chamber in Saudi Arabia has
14
 NEWSLETTER
its own support organisation for business women. The other one is what is referred to as
Resolution 120. This resolution was issued by the government about three years ago and
it addresses the role of women within society. We have seen women’s roles dramatically
improving in Saudi Arabia both socially and economically and many women have been
appointed to significant government positions, including the first woman nominated
director of a TV channel in September.

Can you give us an update on whether Saudi TV will be corporatised and on any other
development in the liberalisation of the media sector?
There was an attempt to corporatise Saudi TV but it was then abandoned. It was chosen,
instead, to expand the available network. For example, the Saudi Arabian government
TV used to have just one channel whereas now we have five. Similarly, we used to have
only one radio station and now there are seven or eight. One important event in the
liberalisation of the sector was when licenses were awarded for two privately owned radio
stations. In addition, the government announced, in September, a request for interested
parties to submit their qualifications for a further six private radio stations. I also know
that the Ministry of Information and Culture is looking into licensing a few additional
newspapers in the country, so reform is certainly touching on the media sector. ART, the
biggest regional Pay-TV satellite operator, and Rotana, leading media content providers,
are also based in Saudi Arabia.

What would you recommend as a first step for foreign companies who are looking to set
up operations in Saudi Arabia?
Companies interested in Saudi Arabia should do their homework and investigate whether
or not the sector they are working in will be of interest to Saudi Arabia. The second thing
they should do is visit some of the websites that talk about Saudi Arabia: a particularly
useful one to check is the General Investment Authority of Saudi Arabia (www.sagia.gov.
sa). What my company, Alagat, does is actually providing a ‘hand held’ service for investors
who want to come to Saudi Arabia, helping them achieve their goals in the country.

The media industry in the Middle East and North Africa

(MENA) region has undergone the same rapid and disruptive A young generation is powering
process of convergence that much of the world has been the new media revolution
experiencing in recent years. In a region where 60 percent of
its nearly 300 million population is under the age of 25, media Santino Saguto, managing partner, Dubai office
and technology are increasingly important sectors and the
new technologies – that the digital age brings with it – are as
popular here as in any other part of the world. However, with one of the fastest growing
broadband penetration rates in the world, the impact of convergence on local media
players is heightened as they are forced to significantly review their traditional business
models to keep up with changes in consumer behaviour.

As the MENA media industry makes the transition from analogue to digital, there is a
critical need to develop a sustainable business model to monetise digital content. As
traditional platforms (including print, primarily, and TV) continue to lose their appeal to
new media platforms for content delivery, there are two main business models to take
into account: paid-for content (subscription driven) and advertising-driven content. It
has historically been difficult to monetise subscription-led content in the MENA region,
largely due to the wide availability of almost 600 Free-to-Air (FTA) TV channels. The
problem in the region is further intensified by the abundance of piracy across all platforms
which takes the form of illegal decoders (dream boxes), pirate DVDs and, as in many other
countries, illegal downloads encouraged by the chronic absence of key legal download
sites such as iTunes. Meanwhile, monetising digital content through advertising remains
tough. On the traditional TV platform, advertising is thought to be severely undervalued

15

2
The word ‘prosumer’ is
a portmanteau formed by
contracting either the word
‘professional’ or ‘producer’
with the word ‘consumer’.
It is meant to indicate
the segment of proactive
consumers.
MENA Region: Marhaba to the world
due to the lack of effective audience measurement systems in the region. However, the
recently announced launch of phase one of a peoplemeter TV audience measurement
initiative in the United Arab Emirates (UAE), as well as an established system in Lebanon
and a much discussed similar concept in Saudi Arabia, means that TV content could be
on the way to discovering its true value. In the new convergent world, consumers are
increasingly moving towards new platforms for content but advertisers have yet to catch
up, with most of the region’s ad spend still concentrated in traditional media. Advertisers
will have to start shifting their spend online, as well as finding new innovative ways of
exploiting the opportunities offered by the digital age, if content is to be monetised
successfully in the new convergent world.
As in other markets, companies from adjacent industries (especially big players
such as Google and Apple) have been disrupting the traditional media value chain,
bypassing traditional intermediaries and introducing a foray of consumer and business
applications directly to end-users. The rapid growth of user-generated content and
social networking sites has led to further disintermediation allowing ‘prosumers’2 to
distribute and exchange content directly. However, in the MENA region, the recent
growth in mobile broadband, that has been brought about in part by this concept of
disintermediation, represents a significant untapped opportunity for mobile operators
and content players alike. The challenge for media players will be to transform
themselves (e.g. new skill sets, digital marketing, superior distribution, new channels,
etc.) to tap into the opportunities presented by these new media channels. Telecoms
meanwhile, currently holding the lion share of the media-telco value chain, will have to
strike a balance between relinquishing some control to new players and avoiding being
cornered into the dumb pipe scenario.
Local content across traditional and digital platforms in the MENA region remains in high
demand but supply is low due to the lack of effective monetisation models. The regional
independent production industry remains largely underdeveloped and too fragmented
to drive successful commercial models in the industry. Although a few regional media
companies have developed rich online media propositions, almost all the top websites
viewed in the region are of European or US origin and, even today, less than 1 percent of
web pages are in Arabic. Indeed, even the region’s most popular Arabic website, Maktoob,
has recently been acquired by US giant Yahoo!. However, this is likely to lead to a dramatic
increase of popular Arabic content on the web, considering that all Yahoo!’s services will
be translated into Arabic and many new Arabic services will be created. Recognising the
need for a concerted effort, regional governments and regulators are proactively taking
steps, both at macro (media free zones) and micro levels (local regulation quotas), to help
boost the production of local content in the new convergent world.
Local media and telco firms have recognised that, while business models remain unclear
in the evolving industry landscape, there is a need to remain flexible and work together. In
recent months, there has been a flurry of collaborative activity in the form of partnerships
and joint ventures between media and telco companies which have led to new convergent
services (bringing content to mobile users, IPTV propositions, online VOD sites, etc.) which
have enjoyed varying degrees of success. Although the products of these partnerships have
not yet led to the availability of quality content on the same level as some of the more
mature markets, there is no doubt that some of the local online VOD propositions have the
potential to replicate the success of similar initiatives in the Western world, such as Hulu.
Meanwhile, telco operators, mobile TV offerings are rapidly catching up with Western
markets, with new content deals being announced nearly every week.
The period of discontinuity caused by the transition from analogue to digital has created
significant challenges for industry participants (such as declining revenues and margins
with soaring investments) making it difficult to leave broadband infrastructure invest-
ments in the hands of market forces. In contrast to the cautiousness traditionally showed
by industry players regarding governments measures, media and telco operators in the
16
 NEWSLETTER
region are starting to perceive intervention in a positive light. They see governing bodies
as having an increasingly important role to play in protecting and promoting the media
industry, to help create a healthy environment in which sustainable business models can
exist, as well as defending the interests of consumers. In particular, governments have
the responsibility to ensure that adequate funding is available for the development of
ubiquitous and affordable broadband connectivity in order to further stimulate content
production and distribution.

The MENA region is uniquely positioned to not only capitalise on these trends in media
convergence, but also to take proactive measures to anticipate the future shape of the
media industry. There is a great opportunity for local industry players to learn from the
mistakes and success stories of TMT operators in international markets. With a concerted
effort from players at all levels of the value chain, the Arab media and telecom industry
could unlock a vast amount of value in the new digital age by leveraging on the accelera-
tion of technology and the uptake of new media for the younger generation.

Today Africa still represents one of the last pockets of growth for
the mobile industry in the world. With mobile penetration still The African mobile market is ripe for M&A
around 35 percent on average and broadband at just 2 percent,
the enormous continent of over 1 billion people holds massive Emmanuel Durou, Dubai office
potential for growth. In recent years, the introduction of more
affordable handsets, as well as the liberalisation of telecoms
markets and the issuing of licences to new operators, which has led to more competitive 3
Average Revenue per User
pricing, have all contributed to the growth of the African mobile market. Indeed, a study
by the World Resources Institute shows that spending on mobile phones is the fastest
area of growth as incomes in the developing world rise – even faster than spending
on energy or water. Among these markets, Africa is the region with the fastest rate
of subscriber growth. Nevertheless, Africa is not only about volume, and ARPU3 levels
tend to hold up when compared to other developing markets, in particular to Asia. On
average, ARPU in Africa – at US$ 12 in 2008 – is low compared, for instance, to the Gulf
region. However, selected countries such as Gabon and some North African markets have
relatively high ARPUs – Gabon shows a monthly ARPU of over US$ 30 – and the whole of
Africa is in any case high when compared to many Asian markets like India or China.

Over the next few years, we believe that a few trends will shape the mobile usage and
marketplace in Africa. As mobile handsets will continue to be the main source of access
to communications and information for the majority of the population, mobile operators
will have further opportunities to create innovative mobile services for trading, money-
exchange, health, etc. In particular, mobile internet access, supported by the recent
investments in infrastructure, e.g. new undersea cables on the East coast, will be the
common way to access the Internet. A concerted effort of equipment vendors (affordable
yet user-friendly browsing interfaces), operators (investment in 3G or 2G upgrade) and
regulators (release of lower frequencies for affordable mobile broadband deployment) will
be needed to tap into this opportunity. In addition, the competitive landscape in Africa will
be reshaped with three to four operators dominating the market through an acceleration
of the consolidation of smaller regional – e.g. Millicom or Hits – or local players.

Forget Japan, South Korea or Italy, today Africa is the cradle of the rare breed of truly
successful mobile value-added services, from mobile payment to mobile search or micro-
blogging. African operators and end-users are known as some of the most innovative in the
world, in terms of value-added services, and we believe this trend is set to last. Operators
have introduced many successful schemes in countries across Africa with an impressive
take-up. Probably the most touted of all, Safaricom’s M-Pesa service in Kenya, remains to
this date the most successful example of mobile payment services in the world.

17

VAS offerings by African mobile
operators
M-payment
Safaricom (Kenya) M-Pesa service
attracted 2.3m users within one year
following launch in 2007, and has
now attracted 7m users
Used as springboard for new entrants
such as Cellpay in Zambia
Loyalty programs
Vodacom South Africa’s ‘Talking
Points’ loyalty program gives points at
each top-up which can be redeemed
for rewards
MTN South Africa ‘Y’ello Fortune’
enters customers into lottery-like
events on purchase of top-up
Credit ‘management’
Micro-recharge through e-transfer
– Zain ‘Flash’ credit in Gabon
Zain Kenya’s ‘Zap’ money transfer
service launched in February, with
full offering of credit/airtime transfer
facilities
UGC
‘Voices of Africa’ community offers
sharing of amateur video content
captured from a mobile phone with
other members
Micro-blogging platform Twitter
offers African users the opportunity
to ‘leapfrog’ PC straight to mobile
Social communities
Advertising-based service myGamma
exhibiting huge growth in emerging
markets; South Africa, Kenya among
top 10 performing markets
South African Mxit service provides
instant messaging and chat services
to 11m+ users
Consolidation opportunities
in Africa
* Mobile only; market cap, exchange
rates taken on 27 April, except:
Econet market cap estimate,
Algerie Telecom and Globacom
not publicly listed (nonetheless
size of bubble is representative
of estimated company size)
European player
Middle East player
Local (African) player
Market cap (2Q09E)
Consolidation opportunities?
Source: Company websites and finan-
cials, press reports, Informa
MENA Region: Marhaba to the world
Beyond innovative applications, mobile broadband is undoubtedly the next growth op-
portunity for mobile operators in Africa. With significant investments and completion
of internet infrastructure upgrades, the next step for mobile operators is to fill the gap
of a limited fixed access infrastructure in the continent. Operators like MTN in South
Africa have already witnessed exponential growth of their mobile data traffic in the last
two years. For other operators in the region, we believe that a combination of selective
investment in infrastructure upgrade, e.g. in city centres, attractive pricing and handset
strategy, like affordable smartphones and dongles, will yield similar results.
Furthermore and more practically, African mobile operators have been turning to innova-
tive methods for increasing efficiencies in low income countries. Network sharing, a con-
cept which has been widely popular in Asia and above all India, is now spreading also to
Africa. In Nigeria, for instance, the regulator started urging operators to take advantage
of the opportunity. Meanwhile, operators in Africa have developed other innovations
of their own, such as dynamic tariffs and borderless roaming. MTN’s innovative tariff
scheme, for example, offers an adjustment in the cost of calls by the hour, depending on
the level of usage. Thus, customers can check the discount available to them at different
times of the day, generating calls when the network would otherwise be little used. Simi-
larly, Zain introduced the famous One Network, a borderless roaming concept, allowing
customers in Kenya, Tanzania and Uganda to use their mobiles in all of these countries
without paying roaming charges.
There is a long history of ties between Middle Eastern operators and investors, on the
one side, and the African telecoms market, on the other. Spotting its potential, operators
like Zain and Etisalat have both entered the African market many years ago. The former
via its acquisition of Celtel, the latter through a combination of new licences, individual
acquisitions and Atlantique Telecom covering West Africa. Today, the number of new
licence opportunities has significantly decreased, creating expectations of a new wave
of consolidation as the next step. The competitive landscape in Africa is made of three
broad types of operators: single market players, usually incumbents; small regional
players, such as Hits and Millicom which have acquired licences in four to five countries
in the region; large players with an extensive footprint, such as Orange and Vodafone.
Within the third category of operators, a new wave of consolidation can thus be foreseen
as the most likely scenario for the region.
African subs*
Vodafone
80
MTN
70
60
Zain
50
Orange
40
30
Globacom Etisalat
20 Orascom
Qtel
10 Millicom
Algerie
Telecom Hits Econet
0 5 10 15 20
-10 Number of countries in which present
18
 NEWSLETTER
The smaller regional players have already started thinking about alternative strategies
and selectively disposing of some assets, e.g. Millicom. More notably, in recent weeks
rumours have grown rife around two potential major M&A deals: the prospective sale
of Zain Africa – or a stake in Zain – and the share-swap deal between Bharti and MTN.
On the Zain front, there has been much confusion over the possible sale of a 46 percent
stake to an Indo-Malaysian consortium for a reported US$ 13.7 billion, which is yet
to be confirmed, after a series of talks with Vivendi and rumours with the Abu Dhabi
Investment Authority. Similarly, talks between Bharti and MTN began in May and since
then have been extended twice, most recently to an end of September deadline, with no
sign of resolution. In any case, there are signs that the M&A trends in the African mobile
market are set to continue and a further consolidation for three to four players in Africa,
including Etisalat, is to be expected.

The evolution of the telecoms industry in the Middle East and North
Africa (MENA), recently accelerated through widespread deregulation, The case for customer-centricity
is increasing competition among players and creating a market where
the customer will become more and more powerful. In such a fast- Zoran Vasiljev, principal, Dubai office
growing market, the priority for telecoms operators until now has
been to secure a broad subscriber base. Recently, however, there has
been a change in their focus. Leaders of the region’s telecommunication companies are
becoming increasingly concerned with the concept of customer-centricity.

This new awareness can be considered as a strategic response by telecoms operators

to the fierce competition they are currently facing. The telecommunication market is
reaching its first saturation point – fixed and mobile penetration is approaching 100
percent in many countries – and this means that differentiation will become a key
weapon for operators as they compete for business. Operators are recognising that
focusing on customer satisfaction could be more important than simply trying to expand
their subscriber base or market share.

This changed perception means that some operators are starting to voice their desire to
become customer-centric. They may not yet be aware of the full implications of putting
customers at the heart of their business, but surely they are showing an instinctive
understanding of the need to do so.

Many in the region have launched initiatives aimed at putting the customer first.
However, while slogans such as “Our goal is your satisfaction” or “Unlike our competitors
we value our customers and it shows” abound, as yet few companies are achieving their
customer-centric aspirations.

Unfortunately, many still misunderstand the fundamentals of customer-centricity,

believing it to be a mere tactic to improve profitability. Others, instead, make the mistake
of narrowing down customer-centricity to one of its best-known components: the
Customer Relationship Management (CRM). CRM is not an end in itself. It is rather a
two-way communication gateway between a company and its customers. This gateway
allows a company to listen to and understand its customers’ needs and expectations,
gather meaningful data and insights from and about them, and finally define and trigger
internal actions to meet a single goal: customer satisfaction.

Businesses which make market share the priority and shareholders the primary
beneficiaries of profits will find it difficult to accommodate a customer-centric vision, as
the creed of customer-centricity runs counter to this widespread approach. The experience
across many industries shows that putting customers at the heart of business is the surest
route to winning market share and generating the very profits that shareholders demand.

19
 MENA Region: Marhaba to the world

In companies where customer-centricity is embedded in the corporate culture,

employees make customers their priority and are motivated to make the business
successful. Satisfied customers and motivated employees naturally deliver business
growth, maximum profits, a strong brand and, with this, a clear competitive advantage.
By contrast, companies that persist in putting profits at the heart of their strategy can
easily find themselves caught in the classic spiral of drastic cost cutting, strict working
conditions for employees and frequent reorganisations – all of which eventually damage
the company’s image and performance in the market place.

Developing and running a customer-centric organisation is not a case of simply investing

in the best and most expensive CRM system. However, the CRM system and the associated
Customer Information File (CIF) applications are an essential tool for achieving the
goal. They are the medium of dialogue between the company and its customers. Most
important, though, is what the company does with the data relating to and from its
customers.

In a customer-centric organisation, the customer-centricity goal is completely integrated

within the corporate culture, engaging the entire social pyramid from employees to top
management. Customer is the most commonly heard term within the organisation:

• What does the customer want? (not What do we want?)

• What is the customer telling us? (not What do we want to tell the customer?)
• How can we drive the customer to adopt the best product for her/him? (Not How can
we make the customer adopt our best product?)
• How can we gain the customer’s confidence? (not How can we secure his/her loyalty?)

A well-functioning CRM (or CIF) system supports the goal of customer-centricity. It needs
to be leveraged throughout the organisation to meet both customer expectations and
company objectives. Customer-facing streams, such as marketing, sales and customer
services, need to cooperate in analysing data collected through CRM, defining and
executing appropriate actions to satisfy the customer. Each stream’s goal should be linked
to the overall objective of delivering customer satisfaction, rather than to individual
financial or operational goals as typically in a profit-centric organisation.

Customer-centricity is hence the best approach for any telecoms company seeking
to develop steady business growth, maximise profits and establish a strong brand.
Companies that put profits first will miss the target: customer satisfaction.

Nearly 15 years after the establishment of the first in-

Telecoms regulation: new policies to stimulate dependent regulator in the region (in Jordan), Middle
competition and innovation East and North Africa (MENA) region has come a long
way in the liberalisation and opening up of the tele-
Leila Hamadeh, Dubai office coms market to competition. The last remaining mo-
bile monopoly in the Gulf Cooperation Council (GCC)
was broken up with the launch of Vodafone services in
Qatar earlier this year, while further market liberalisation is underway in a number of
markets, including Syria and Oman. However, market liberalisation is not always syn-
onymous with competition. As many regulators in the region are starting to ‘take the
pulse’ of the telecoms sector through market reviews (some upcoming, others already
underway), the competitive landscape still varies widely from country to country. As
governments elsewhere in the world are promoting massive capital outlay in the tel-
ecoms market, e.g. broadband policies, MENA regulators now need to take important
policy decisions to accelerate the sector growth.

20
 NEWSLETTER
Inspired by the European Commission framework developed in the 90s, some regulators
in the region are increasingly considering similar market reviews of the telecoms sector
in their respective countries. While regulatory authorities in Jordan and Bahrain launched
their own reviews a few years ago, Oman recently triggered the process through public
consultation and Qatar has announced that a similar review will be launched in 2010. On
paper, assessing the evolution of the telecoms market through a formal tried and tested
framework seems to be a good idea. In practice, regulators need to avoid some key pit-
falls. First of all developing a complex and lengthy process could, ultimately, represent a
burden for regulatory authorities who are already struggling with constrained resources.
In addition, they should avoid using a framework that is not adequately adapted to the
current state of the MENA region, which is much more developed in the mobile sector
than the EU in the 90s. Another risk might also be underestimating the length of time
required to move from the market review stage to the actual design and implementation
of the appropriate ex-ante wholesale tools. For example, in Bahrain it took five years to
move from the launch of the Significant Market Power (SMP) consultation to the actual
introduction of Local Loop Unbundling (LLU).

EU, late 90s Middle East and Africa, today Competition policy,
EU as best practice?
Mobile - Mobile in early stage - 100%+ mobile penetration in GCC
penetration - High mobile rates - Broadband wireless available
- Mobile only narrowband - Fixed mobile substitution: <10%
- of voice users are fixed

Fixed network - Fixed lines in every household - NGA in new developments

expansion - Limited new unprofitable lines in - New lines in many other areas likely
- rural areas, but compensated by USOa - to be unprofitable
- Roll-out of DSLAMsb in central offices - DSL roll-out would provide broad-
- band to a limited % of households

Entry barriers - Main barrier is getting access to end - Main entry barrier is limited a
Universal Service Obligation
in the wireline - users (last mile) - profitability due to unbalanced tariffs b
Digital Subscriber Loop Access
segment - Limited alternatives to DSLc except - Access to end user can be achieved Multiplexer
- in cable countries - with WiMAX and 3.5G c
Digital Subscriber Loop

Indeed, the 18 telecom markets defined by the EU should not be taken at face value for
the MENA region and, while it provides good initial guidance for the area, it is essential
that it is used with caution.

For years, the fixed market liberalisation has been less of a priority for governments in
the region. This is largely due to the focus on the mobile sector: high mobile penetration
rates, high level of fixed/mobile substitution that occurs in most countries and, there-
fore, the fact that investors have been turned off by the high investments required to roll
out an alternative fixed infrastructure compared to low potential returns. Indeed in most
countries the awarding of the second fixed licence has been generally chaotic. For exam-
ple, in Egypt it has been postponed several times. The award of the fixed licence in Qatar
has also been delayed, and negotiations have only just concluded for Nawras in Oman.

In most countries the set of wholesale tools in the fixed market has been limited to the
simplest (Carrier Selection/Carrier Preselection). Recently we have seen a push towards
further ex-ante tools, primarily LLU, driven either by national agendas or a push from the
World Trade Organization (WTO) agreements. Kuwait and Egypt have implemented par-
tial LLU, Jordan and Bahrain are both in the process of rolling it out and the Telecommu-
nications Regulatory Authority (TRA) in the United Arab Emirates (UAE) has signalled its
intention to develop an LLU framework. However, launching is just the first step. It takes
years to develop a fit-for-purpose LLU product, as demonstrated in Europe. For example,
the underperforming LLU product in the UK was one of the root causes of the creation of
BT Openreach. In all likelihood, the process of creating competition in the fixed broadband
sector through LLU-based operators in the MENA region will be a long and bumpy road. In
the meantime, alternative wireless technologies such as WiMAX and mobile broadband, a
big success for Saudi Arabian operator Mobily, will act as adequate substitutes.

21
 MENA Region: Marhaba to the world

Another key trend, which might just be starting in the region, is the concept of network
separation. Following the somewhat successful developments in the UK, Sweden, New
Zealand and Singapore, amongst others, network separation has begun to be taken into
consideration in the MENA region as well. The process, though, is still facing major dis-
ruption with potential issues on implementation. The concept was proposed in the UAE
through a royal decree announced in December 2008, but encountered strong resistance
from Etisalat. Eventually, the proposition was watered down by offering LLU as an inter-
mediate solution.

These potential changes in fixed regulation are being driven almost entirely by broad-
band. Most MENA countries are considering establishing their own national broadband
policies in the same vein as those created in other markets. Although broadband pen-
etration is very high in smaller areas – e.g. Qatar, Bahrain and the UAE – the MENA region,
and particularly the GCC, is still suffering from a lack of ubiquitous, affordable broad-
band access.

Local governments, nevertheless, are making an effort to move forward on the broadband
front. The Bahraini regulator has announced the aim of implementing a policy of universal
access for telecommunications as part of the government’s Economic Vision 2030.

Price and speed of broadband Broadband access prices (monthly price 4Mbps line with min. 10GB usage allowance, (US$)
access by country 350
300
250
ME region 200
150
100
50
0
UK

ITALY

JAPAN

FRANCE

USA

SINGAPORE

GERMANY

SPAIN

SAUDI ARABIA

JORDAN

OMAN

UAE

KUWAIT
Connection speed (Mbps)

15

10

10

0
JAPAN

GERMANY

FRANCE

USA

SINGAPORE

ITALY

UK

SPAIN

KUWAIT

JORDAN

OMAN

SAUDI ARABIA

UAE

INDIA

In Bahrain TRA is aiming to ensure that both residents and businesses in the country
have access to affordable telecoms with particular emphasis on the availability of com-
petitive high-speed broadband services.

However, on the mobile side, the number of opportunities for new licences is limited.
Syria’s third licence is expected for 2010, though discussions on the subject have been in
progress for some time. In Iran, on the other hand, the ongoing saga on the third licence
(awarded to and then taken back from Etisalat) should hopefully come to an end soon.

Mobile Virtual Network Operators (MVNOs) have started to appear in the region, and are
showing some early signs of success. The first to launch in the Middle East have been
Friendi and Majan – under the brand name Renna – in Oman, which were launched in
April and May 2009 respectively. Friendi said that it expects MVNOs to acquire a low single
digit market share in Oman, rising to 10-20 percent after a few years. In Jordan, the TRA
issued MVNO regulations in 2008. Friendi has also obtained a licence to provide MVNO

22
 NEWSLETTER
services in Jordan but so far it has been unable to reach a wholesale agreement with a
Mobile Network Operator (MNO) in that country. MVNOs appear as a win-win alternative
for both regulators and operators. They give the impression of further opening up of the
market to competition, while remaining manageable entities for operators and acting as
a more desirable compromise than third entrants. In a region where mobile distribution is
relatively independent from mobile operators – except through joint shareholdings –, we
expect retailers such as i2 or Axiom to start moving into this sector too.

Spectrum planning presents a final key challenge for MENA telecoms regulators. In
several markets there is still much to do on the optimisation of spectrum bands for
appropriate usage with many opportunities for unlocking value. There is a key role for
regulators to play in promoting spectrum planning on several levels. More than 50
percent of the most valuable spectrum in MENA, e.g. in the 2 GHz bands, is currently
used by private users and public services, such as the military or police. These users
should eventually be transitioned out and these bands released for commercial services.
In parallel, while less touted than in Europe and in the US, the analogue TV switch-over,
and consequently digital dividend, will free up additional valuable spectrum in the lower
UHF bands, promoting affordable development of new services and in particular mobile
broadband, possibly at a regional level. Finally, one key challenge faced by many countries
in the Middle East is the refarming of mobile spectrum (900/1800 MHz) to free up
some frequencies for new services or operators. Spectrum refarming is now mandatory
in some European countries and has proven economically efficient in markets where
implemented, including Australia and Finland.

Telecoms regulation in MENA still has to face major challenges in the years ahead. On
paper, governments and regulators in the region have successfully managed to open up
the market to competition at an accelerated pace over the past few years. However, the
post liberalisation phase in many countries of the area might well be the moment of
truth. We can only hope that the region will now open itself enough for true competition
to develop, bringing innovation, affordability and overall consumer welfare.

The telecommunications industry in the Middle East

and Africa has seen a multitude of change, an influx Integrating innovation, quality and value
of new technologies driven to cater to new customer
needs and the emergence of new business models in Ihab Ghattas, Assistant President for the Middle East region,
the past five years. The global economic downturn has Huawei Technologies
meant that the major players in telecommunications
have had to come up with innovative strategies to seize
new opportunities to ensure the ongoing success of the industry in general. Huawei has
recognized this fact early enough to focus on new technologies and innovative solutions
to meet the operators expectations. With such approach, Huawei managed to secure a
good footprint in the region by serving most, if not all the operators in the area.

While other industries seem to be experiencing a slump across the board, the regional
telecommunications sector is still maintaining steady, and – in some cases – accelerated
growth. Successful telcos will need to continue to provide greater connectivity and bridge
the digital gap in the industry. While companies were previously focusing on capitalising
on the rise in demand for broadband, they now need to zone in on high-speed, always-on,
low-cost, anywhere connectivity to ensure the social and lifestyle changes in consumers
are continuously catered for.

This rise in this type of connectivity will see the continued emergence of new concepts
like cloud computing, from which telcos will see enormous potential for growth. The

23

Ihab Ghattas is Assistant
President for Huawei’s Middle
East operations. A senior
telecommunications professional
with 30 years experience in
the telecoms industry, Ihab is
responsible for driving the Chinese
telecommunications group
business in the region, besides
developing strategies related
to marketing, human resources
and social activities.
TV production: the latest opportunity in the region
Janice Hughes, director, London office
MENA Region: Marhaba to the world
ability to offer end-users access to sophisticated information services without having
to purchase costly hardware and software solutions will break the boundaries between
‘have’ and ‘have-not’ information societies. This has led Huawei to further develop its re-
lation with the operators in the region creating a stronger bond and partnership with its
customers. The benefit of such change works for both sides, better and more customised
solutions for the operators creating more business for Huawei.
I believe the industry will see a shift in attitudes and business models to adopt new voice
services, in order to cater to the increased demand in lower Average Revenue per User
(ARPU) across the region. As voice remains the most natural, efficient and convenient way
to acquire information, telcos need to explore how to present voice as a new channel for
communication, such as with the Web. Obviously such changes have and will continue
to put pressure on the operators’ buying behaviours. While the top quality products
remain the focus of the industry, Huawei has responded by offering simpler and more
cost effective solutions allowing operators to better control their CAPEX and OPEX.
The next few years should also see more emphasis on creating enhanced content and
media services in the Middle East. As networks transition from communications vehicles
into an infrastructure that sustains all elements of society, regional carriers are looking to
transform their services to offer content and media platforms, on top of their traditional
pipe offerings. This will lead to a million dollar market for regional businesses who
provide their services over the Internet. User-driven and user-generated content will be
the prevailing theme and a large number of personalised offerings will enter the market
based on the long tail theory. These offerings will be nurtured by the changing character
of the network, where sharp declines in the cost of services will make it possible for
‘niche offerings’ to win. The success story of collaboration between Huawei and Value
Partners in OmanTel is a good example for such winning approach.
During these tougher economic times, innovation and transformation is an everlasting
topic. The business models we all had seen in the past will no longer lead to the same
success as before. This will apply to all the players in the industry. If we think of the operators
of the future, for example, they will have to tap into other parts of the value chain, actively
taking part in ownership of contents and applications creating more value to the end-user.
Alternatively operators will become a pipe provider gaining the least success in the value
chain. On the other hand vendors will have to come up with total solutions and not only
platforms and technology boxes. Successful vendors will have to present to their customers,
the operators, a solution that can generate revenue once it is put in place. Companies in
general will have to go through internal transformation that will suit the new era. Huawei
has applied such transformation internally; recruiting local staff, encouraging our Chinese
staff to adapt to the local culture of different countries, changing our internal process,
working together with our partners will create a truly connected world where people can
have equal access to communications. Huawei’s success in emerging markets is driven
in large part by our substantial investments and ability to quickly respond to customers’
requirements with solutions that integrate innovation, quality, and value.
The Middle East and North Africa (MENA) media
industry has seen tremendous growth and some
major progress over the last few years. However,
with a current value of around US$ 8.7 billion (which
is low for a region whose population is more than
half that of Western Europe), the sector is generally
thought to be underweight, with massive potential for further growth. Advertising is
spread throughout the 17 countries of the Arabic-speaking Middle East, as well as through
pan-Arab media such as satellite TV and a few regional newspapers that make up about
24
 NEWSLETTER
half of total spend. This fragmentation of advertising spend, the lack of effective audience
measurement systems and the widespread piracy have led so far to an advertising industry
that is thought to be severely inhibited.

This situation is however likely to change. Audience measurement systems are currently
being implemented. In addition, measures are being taken by governments across the
Middle East to fight piracy, and the Pay-TV market is becoming more commercially viable.
Driven by consolidation through the recently announced merger of the major players Orbit
and Showtime, the Pay-TV market is expected to double almost to 4 million households by
2014. Advertising in particular is forecast to grow at an annual rate of 8 percent between
2009 and 2013, making it one of the fastest growing regions in the world, close to China
and India. Even in the first half of 2009, during the difficult economic times that the world
has been facing, advertising in the MENA region grew 11 percent from 2008.

Many governments across the Middle East have a great desire to create a strong media
industry in the region. Many countries have established free zones designed to encourage
media companies to set up operations there – the well-known Dubai Media City and Dubai
Studio City or others such as Jordan Media City and EMPC in Egypt. There are other similar
zones planned and 14 are expected to be launched by the end of 2010. Most recently, Abu
Dhabi’s new zone twofour54 has been established as part of the United Arab Emirates
(UAE) government plan to position Abu Dhabi as the region’s cultural hub.

In the hope of stimulating the local TV industry, public and private media companies in
the area have been targeting established international companies for partnerships, in the
hope of bringing their brand names, expertise and content into the region. In the last two
years, major international TV companies have entered the MENA market. In addition to
these big names, news channels such as France 24, Euronews and Deutsche Welle are also
starting to broadcast Arabic contents.

Local partner New channel

Fox International Channels Rotana Fox Movies

Fox Series

National Geographic Abu Dhabi Media Company National Geographic Abu Dhabi

MTV Networks International MTV Arabia

Arab Media Group
Nickelodeon Arabia

BBC Worldwide N/A BBC Arabic

Chinese Central Television N/A CCTV Arabic

European production companies have been getting in on the action as well. Endemol is
the most notable example, having entered the market in November 2007 and boasting
a whole raft of successes nine months later, including at least 10 entertainment series
commissioned to date, a co-production for the animated TV series The 99 and plans to
expand into the scripted genre in the region.

With nearly 600 Free-to-Air (FTA) satellite channels, the broadcasting market is largely over-
penetrated. Many channels are run for reasons that are not purely commercial, such as
vanity or political motivation. The result is that the quality of content of most channels in
the MENA region is considered to be of a fairly low standard, and the overall commissioning
spend on original content comes mostly from only a handful of pan-Arab broadcasters. A
few key shows on these major channels perform very well, demonstrating that there is
clearly a demand (as well as under-supply) for high quality Arabic programming, which
audiences rate over foreign content shows.

25
 MENA Region: Marhaba to the world

Both entertainment and drama are popular genres in the Middle East. While the
entertainment format hits have largely been dominated by foreign formats adapted to
the local market, such as Star Academy, Who Wants To Be A Millionaire, and Deal or No
Deal, some local dramas have been very successful. Examples include:

• MBC hit Bab Al-Hara A Ramadan series watched by millions across the Arab world.
It started in 2006 and has just launched its fourth series, with a fifth confirmed for
broadcast in Ramadan 2010.
• Turkish drama Nour Dubbed into Arabic, it gained 85 million viewers in its season
finale, demonstrating that foreign productions with closer links to Arabic culture than
Western programming can be very popular – it has even been greenlit for a feature
film version.
American
films are
Saudi Arabia case study: 8th out
of the
Most popular TV genres 10 most
popular
types of
content

Source: Value Partners analysis

LOCAL NEWS

TURKISH SERIES

ARABIC REALITY SERIES

ARABIC FOOTBALL

ARABIC MEDICAL & NUTRITION

ARABIC DRAMA SERIES

ARABIC COMEDY

AMERICAN FILMS

ARABIC GAMESHOWS

ARABIC FILMS
The TV production market in the Middle East is quite fragmented, made up of many players
across the MENA region. While Egypt has traditionally been the key production hub for the
region, Syria has increased production activity in recent years, particularly in drama series,
thanks to generous government subsidies for production houses and a strong local talent
base. Today the focus is partially shifting to the UAE, instead, where many production
companies have set up either primary or secondary offices, with Dubai Studio City and
twofour54 offering (or on the verge of offering) advanced production facilities. However,
production in the UAE still remains expensive, if compared to the rest of the region, and
some of the big shows have been funded by players other than broadcasters.

This kind of alternative funding provides a substantial opportunity for the production
sector, particularly in a market where advertising is now relatively low and GDP is
relatively high. For example, The Hydra Executives, a US$ 5 million apprentice-style reality
show, was initially funded by the star of the show, property tycoon Suleiman Al-Fahim.
Now, it is aired on four different channels in the region and has been sold internationally
in Turkey and Sweden, as well as reportedly being in talks with a US network. Similarly,
some regional governments have deep pockets and a willingness to stimulate the media
sector, making them another potential source of funding. For example, twofour54 has
a creative content fund which it has used to commission the children’s show Driver
Dan’s Story Train, a co-production with UK prodco 3LineMedia that will air on CBeebies
in the UK and will be adapted using Arabic writers, to create a version catering to the
Arab world. Talent show Million’s Poet has also the financial backing of the Abu Dhabi
Authority for Culture and Heritage, part of the local government.

In addition to the immediate production opportunities, other sectors of the media

industry in the MENA region are also advancing, presenting some interesting brand
extension opportunities. An example could be the online gaming, which has recently
made its first appearance in MENA, with Abu Dhabi Media Company (ADMC) announcing
a joint venture with US gaming company Gazillion Entertainment to create the region’s
first Massively Multiplayer Online Game (MMOG). Aiming to develop the path towards
creating contents in Arabic for the Arabic gaming market, this looks set to be one of the
fastest growing media sectors.

26
 NEWSLETTER
For international TV production companies, the Middle East could be the next big market
to crack. As local governments increase their interest in stimulating the production sector
and private companies recover from the global economic crisis, the media industry in the
region will go from strength to strength. It could well be the next big win in MENA, for
local and international companies alike.

Value Partners met with Romy Gai, CEO of the UAE Football
League (UFL), to hear his point of view on how the UAE football Revolution in the football industry
industry is evolving and what the role of UFL might be.
Interview with Romy Gai, CEO, UAE Football League
When the Asian Football Confederation (AFC) released its
Strategy for the Development of Professional Football in Asia last
year, the proposal demanded that, by October 2008, any football federation intending
to compete in the Asian Champions League would be expected to have a professional
league. It also stipulated that each of the leagues’ clubs would be commercial entities.
Nations who failed to meet the criteria would be dismissed, it said. In the Gulf region,
top-ranked UAE, Saudi Arabia and Qatar Leagues were the only ones allowed to join the
Champions League competition, UAE and Saudi with four clubs and Qatar with two.
None of the other emirates were allowed to join the competition.

Which were the main challenges for you after joining the UFL?
The main challenge has been to open up the UFL and UAE Football systems to a more
international environment and spirit. For almost 30 years since its foundation in 1971,
UFL had been limited to the local Arab UAE community. The challenges were to attract
to the stadium UAE expat communities, which represent more than 80 percent of UAE
population, besides having UFL visible to the international community. In less than one
year we have achieved major results including luring top international players.

Which were your first achievements as for UFL organisation?

One of the most important things we introduced is a completely new venue management
system for the whole league. We know that the weakest part of the federation in the past
has been organising match day activities. We have built a venue management team with
international UEFA experience. We are applying more or less the same concept that is used
in the European Champions League, and that is very challenging because it was a concept
that was never used for a national league. We have simplified it a little, but we are using
exactly the same model: same way of organising meetings, same way of organising the
police, stewards and first aid, same way of organising how we accredit the media.

Which was your next task?

Next task was to raise money on behalf of the Pro League’s 12 clubs. European Leagues
are able to raise hundreds of million Euros per year with the best in class being the English
Premier League, collecting almost US$ 2 billion per year just for TV and new media rights,
not including sponsorships, merchandising or stadium tickets. UAE Pro League had never
collected any money until last year. We have raised so far AED 600 million through
sponsorship and TV rights. Etisalat phone operators paid AED 250 million to become
title sponsors of the league for the next five years, while Abu Dhabi Sports Channel and
Dubai Sports Channel agreed to pay AED 350 million for the exclusive rights to broadcast
the matches. We have the title sponsor, but we can have up to four partners and two
suppliers, one of which will be the official ball.

Do you believe that football industry can move from Free-To-Air TV to Pay-TV also in UAE
and in the Middle East and North Africa (MENA) region overall?
By looking at equivalent international models, I think it is essential to move from an
amateur sports approach to a truly professional one. A virtuous cycle of creating quality

27

Romy Gai was appointed CEO
of the newly named UAE Etisalat
Pro League in June 2008 and has
been working extensively to ensure
the blueprint for the country’s
first professional competition
is followed as closely as possible.
Gai has spent almost his entire
career working in the football
sector. Having graduated in
Economics from the University
of Turin, Gai started out as a
freelance journalist before joining
Juventus Football Club where, over
the course of 14 years, he moved
up the ranks to become Chief Sales
and Marketing Officer.
A new oil for the region
Alessandro Leona, Milan office, and Koosha Kaveh, Dubai office
4
International Energy Agency
and Energy Sector Management
Assistance Program (established
by the World Bank and the United
Nations Development Program)
MENA Region: Marhaba to the world
and industry value needs to be created. Paying for TV is not much different than paying
at the stadium as it is a different fan experience at even higher value. Clubs would then
get additional income to attract the best international players and increase quality
and value viewership. In Europe, it has taken about 10-15 years to bring this cycle at
a steady state. The same can happen in UAE and the whole region. This is indeed a
unique opportunity for all industry stakeholders and international interested parties. A
multiplatform viewing pattern is currently being developed with additional platforms,
beyond traditional analogue/terrestrial/satellite, for DTT, IPTV, mobile TV on 3G and
DVB-H and online streaming in the future.
What is your next challenge going ahead and what do you see as your ultimate goal?
Among other aspects, we need to keep improving the quality of the game, which is not so
bad. I have spent the past few months watching as many archived matches as possible, as
well as attending each of the 12 clubs’ pre-season exhibition matches. The ranking of the
UAE is around the same as Austria, to give a European example. That is quite good and we
definitely have the chance to be better than this. The fundamentals are there. The ultimate
goal is to become one of the most relevant leagues in the AFC. We are already ranking 5th
after Japan, South Korea, China and immediately after Saudi Arabia. Ahead of Australia,
Indonesia, Iran and all the others in Asia. Over the next three to five years we would like
people to look at us and say, “Yes, the UAE is one of the best leagues in the AFC.”
What else do you expect will happen to improve the quality of the UFL and the other
Arab Leagues?
I would expect more and more renowned international players to move to the Leagues.
Clubs will also invest in better stadiums, possibly turning them into full shopping
complexes, to enhance the match experience. International sponsors will look at UAE
and the Gulf Cooperation Council (GCC) with enhanced business interest towards the
region. A football World Cup may also be organised in the region up to the final dream of
a GCC national club winning it or at least being one of the top four.
Over the past 30 years, Middle East and North Africa
(MENA) region’s total energy consumption has grown
faster than that of any other region in the world,
because of energy intensive industry expansion,
growing population and energy subsidies. According to
IEA and ESMAP4, energy intensity in MENA has grown
faster than GDP in the last 15 years, resulting in a 14 percent increase in energy intensity,
whereas most OECD (Organization for Economic Co-operation and Development)
countries have experienced steady declines in the same period. This is true for both
resource-rich countries – like Bahrain, Iran, Iraq, Kuwait, Libya, Qatar, Saudi Arabia, Syria,
and UAE – and resource-poor countries – such as Jordan, Yemen and Lebanon – where
energy intensities are comparable to OECD standards, as other countries in the MENA
region: Algeria, Egypt, Oman, Israel, Morocco, and Tunisia.
Moreover, energy consumption is the most significant source of pollution and, in terms
of particulate matter (PM10) concentrations, MENA represents the second most polluted
region in the world – after South Asia – and the highest CO2 producer per dollar of output.
The energy sector in the MENA region is historically based on subsidies, whose costs have
become extremely high and no longer sustainable (e.g. they represented, on average, 7
percent of 2006 GDP and one fifth of government annual spending). MENA countries
have a great opportunity: rapidly catching up with western standard technologies, to
finance the accelerated expansion of their economies, through resources coming from
28
 NEWSLETTER
a widespread adoption of energy efficiency schemes. Energy efficiency is an area where
little effort has been dedicated so far, but it will certainly attract, in the short term, the
attention of government agencies, consumers, industrial players, technology providers
and investors5.

Energy subsidies are surely one of the first areas to address. Currently, most MENA
countries subsidise electricity and all countries do the same with hydrocarbon products,
as a way to redistribute oil profits. Some industries strongly rely on subsidies for their
existence, hence reducing overall value for their country. Little effort is being made by
consumers to reduce energy wastes, since energy prices in some MENA countries do not
even reflect marginal generation costs.

In order to cut off electricity subsidies without causing social problems, an organised 5
To further deepen the topic,
set of actions could be thought through. First of all, a differentiation of tariff schemes please refer to Infrastructures and
by income (having poor segments adhere to a social tariff), by hour group (peak vs. off new energies: from planning to
peak), and by service continuity (e.g. special premium tariff for uninterruptible supply). realization (www.valuepartners.
com), Value Partner’s contribution
Some of the tariff incentives should be directed to energy efficiency investments both to the 9th Italian Energy Summit,
in industrial sectors (e.g. frequency drives for motors, high efficiency plants, efficient organised in Milan in September
cooling equipment or thermal insulation) and in residential (e.g. compact fluorescent 2009 by Il Sole 24Ore.
lamps, A class appliances or insulation). In this latter area, some of the results of the 6
Energy efficiency program in
MED-ENEC6 program can already be appreciated. In addition, energy waste should be the construction sector in the
penalised by introducing progressive tariff schemes – based on total consumption per Mediterranean, a co-operation
between European Union Energy
point of delivery – or by banning inefficient products like incandescent lamps. Last but Initiative ‘after Kyoto’ and
not least, renewable self generation should be promoted through feed-in tariff schemes Mediterranean area countries.
for photovoltaic, mini wind turbine and trigeneration.

Instead of subsidising running costs, some of the incentives could be directed to energy
efficiency investments that would in turn reduce social costs – e.g. housing insulation,
lighting efficiency, better appliances –, increase GDP thanks to lower production costs,
develop a new industry, and reduce pollution. An example is Masdar, the zero carbon city,
situated in the Abu Dhabi emirate, which will become the new Silicon Valley for clean,
green and alternative energy, besides providing useful ideas to other regions in the world.

With the aim of promoting investments in energy efficiency, most countries have created
Energy Service Companies (ESCOs), which diagnose energy consumption and suggest
possible counter measures. Some of these companies only require a change of behaviour
in energy usage to reduce waste. Others require upfront investments, such as co-
generation, motor frequency drives or photovoltaic roofs, which the ESCO can facilitate
having access to external funding. In return, the energy saving repays the upfront
investment and, in the long run, becomes an advantage that the end-client keeps.

Another area of intervention in the MENA region relates to system efficiency. Transmission
losses in the area account for an average 14 percent, against OECD standards of 7-8
percent (distribution alone weighing an average 10 percent): considering an overall
installed capacity of 130 GW, reducing losses to an affordable 10 percent would free up 7
GW of capacity, with overall savings of US$ 2-3 billion and 50 million tons of avoided CO2.
Moreover, the power generation park in the MENA region is strongly relying on fossil fuels,
and therefore poses ageing problems and pays little attention to emissions and generation
efficiency.

All these measures have to be introduced in an orderly manner, taking into consideration
structural differences country by country and applying a framework of analysing,
planning, enabling, communicating, deploying and monitoring. In such an effort, a strong
role will be played by national energy agencies, research institutes, investors, engineers
and consultants, working in close contact with governments for issuing energy plans,
laws and decrees, and scouting for fundings, investors and R&D programs, to recruit and
train future generations of energy efficiency specialists.

29

Luxury goods in the Middle East: still in fashion?
Demetrio Di Martino and Varun Sridhar, Dubai office
companies have invested heavily in these areas expecting that short-term downturn and
long-term saturation in their domestic markets will be counter balanced by the growth in
the developing ones, especially those of the Middle East, China and India.
7
French Ecole Supérieure des Arts
et Techniques de la Mode
MENA Region: Marhaba to the world
The luxury industry is globally going through tumultuous
times as consumers cut spending on premium luxury
items, look for better value and become increasingly price
conscious. As European fashion retailers feel the brunt
of the crisis on their bottom line, emerging markets are
perceived as an opportunity to buck the retail trend. Many
As a whole, the Middle East market for luxury fashion clothing and accessories is not
mature yet, and opportunities for establishing a sizeable business generating profits do
exist. The region has the potential to gain momentum and return to double digit growth
with United Arab Emirates (UAE) leading demand for premium luxury, followed by Qatar,
Bahrain, Kuwait and Saudi Arabia, which represent promising opportunities for the
middle term. While luxury brands have outlets across the key cities of the region, Dubai is
clearly the focal point for premium luxury in the Gulf Cooperation Council (GCC). The ‘city
of gold’ has established itself as the region’s fashion capital and is the main destination
for luxury brands, designers and retailers that have set up their operations in the area, as
well as for a great number of consumers looking for premium luxury goods.
Fashion consumers and buyers in the region, who earlier used to travel to the catwalks
of Europe and America to purchase the latest and best, now procure it locally from UAE.
Fashion weeks, focused events and a large footprint of luxury stores have significantly
changed the paradigm, with the best brands and latest collections available in large,
advanced and aesthetically appealing malls. Expensive tastes for designer clothes and
luxury items, the presence of a large number of ultra rich consumers, a fast growing
middle-income consumer segment, a cosmopolitan city catering to a mix of nationalities
and last years’ boom in Dubai’s economy collectively led to the opening of more premium
luxury brand stores than in many western shopping capitals. Demand has been driven
not only by the UAE’s 4.5 million affluent population, but also by the large number of
millionaires living in other Gulf countries and by the 12 million tourists visiting UAE every
year, attracted by shopping festivals and other luxury, cultural or sports events.
Dubai government and other stakeholders in the premium goods industry have
undertaken many initiatives to develop the luxury market in the country and emerge as
the focal point for fashion in the region. To be mentioned among the others:
• The Fashion Avenue in the Dubai Mall The world’s largest retail complex opened a
sprawling 440,000 square feet premium area dedicated to haute couture and latest
fashion. It hosts over 70 signature and flagship stores – like Jimmy Choo, Jean Paul
Gaultier, Burberry, Ermenegildo Zegna, Chanel – and contains a state-of-the-art
fashion catwalk. The stores size varies from 5,100 to 9,000 square feet, making them
the region’s largest outlets for luxury brands.
• The Dubai Fashion Week Its 6th edition in October 2009 was a success despite prevailing
sentiment in the region and saw top global and local designers presenting their
collections. It is the region’s flagship fashion trade happening and has evolved to
become the primary benchmark for fashion trends and deals in the area.
• The Bride Show Dubai The annual event, focused on the bridal market in the region,
defied the financial crisis and slowdown in luxury good sales as brides-to-be and their
families kept the cash registers ringing for most of the high-end luxury brands and
designers.
• The French Fashion University Set up in Dubai by ESMOD7, it recorded the first made in
UAE fashion designers graduates in 2009.
• The establishment of strong local outlet brands as a key element for the distribution of
global fashion labels The Salam Stores, a home grown boutique store with shops in
UAE, Oman and Qatar, housing top international brands like Armani, D&G, Just Cavalli,
Versace Jeans Couture, Red Valentino; the Chalhoub Group, the leading distributor
30
 NEWSLETTER
of luxury brands in the region, covering over 14 countries and managing a portfolio
of over 280 luxury brands sold in more than 300 retail outlets; the Lebanon-based
Azadea Group, which operates more than 45 international franchisees in Eastern
Europe and GCC and launched a large concept store in Dubai Festival City showcasing
brands such as Massimo Dutti and Oysho.

Abu Dhabi is also seeking to promote itself as a fashion destination in the region by
hosting Fashion Expo Arabia and Shoe & Leather Fair Middle East in tandem. The latter
event, with over 500 companies attending, with brands and designers from Brazil,
France, UK, Germany, has witnessed this year the largest Italian footwear delegation in
the region with more than 50 footwear manufacturers and designers presenting their
products and creations.

Despite all, these are testing times for premium luxury brands in the region. The sharp
decline in demand, fuelled by the recent downturn combined with previous exponential
growth in retail outlets, resulted in many top brands rethinking their expansion plans and
future strategy for the Middle East. Main issues emerging for the region CEOs regard the
need for rightsizing the distribution in Dubai, as well as defining the optimum strategy
to build a substantial business in the area successfully.

The gold rush in Dubai led to distribution overcapacity. As a consequence, some

rationalisation should be expected across the sector. The fundamental drivers of business,
however, remain solid and, in the long term, both UAE and the region will hold steady
and offer interesting opportunities. The number of stores opened in Dubai by a single
brand, or by all companies collectively, has resulted in redundant capillarity for the sector
as a whole. It will be crucial to rethink the distribution network both in terms of number
of stores and of locations: with the advent of premium spaces dedicated to luxury across
the region, in fact, some malls are no longer considered luxury.

Innovation in terms of new retail store formats – such as souks and other themed
concepts – has to be considered to allow brands to differentiate their distribution model,
yet keeping cost-structure flexible. Multibrand luxury outlets and shop-in-shop concepts
can also provide an option to increase capillarity while retaining a premium experience.
At the same time, interesting expansion opportunities emerge in the rest of the region.
Saudi Arabia is the largest and most immediate one. A large population base with a
high number of affluent individuals and families, growing wealth and a market slowly,
but surely, opening up: the country is an opportunity which will reward early starters.
Qatar has bucked the recent crisis, growing, on the contrary, significantly. Fundamentals
indicate that the growth is long term, thus presenting a large and untapped market.
Kuwait is also an attractive, albeit a little smaller, market. Some large brands have already
established their presence in these countries. For new entrants, instead, it is critical to
define an effective distribution plan. A suitable market entry strategy for those players
would be to leverage UAE as a commercial hub and, eventually, re-export into other Arab
markets, relying on local partners and existing distributors. In countries like Saudi Arabia
identifying new distributors might be essential to succeed, considering the structure and
dynamics of this market are quite different from other Arab countries.

For a long period, people from the Middle East have been known for their lavish adventures
and shopping trips to fashion capitals around the world, but with the establishment of
UAE as a fashion hub the trend is reversing. The latest and the best in the premium luxury
world is now accessible directly in the region and provides a much better experience. The
UAE market, though competitive, is still a very attractive destination for premium luxury
brands due to its unique geographical position. Successful players will be able to emerge
from the current difficult phase by optimising or renewing their distribution model in
the UAE, innovating on their retail offering and expanding effectively into the attractive
markets of Saudi Arabia, Qatar and Kuwait. Soon the Middle East will resume its growth
and increase its importance in the global luxury and fashion market.

31
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