MENA Region: Marhaba to the world - Value Partners newsletter, January 2010

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 Via Vespri Siciliani 9 - 20146 Milan - Italy Editor: Tina Guiducci Editorial coordinator: Annalisa Ballabio Registered in Milan. Reg No. 84-01/31/2008 The issue has been closed in December 2009. valuepartners.com newsletter@valuepartners.com Copyright © Value Partners S.p.A. All rights reserved This newsletter is sent by Value Partners S.p.A. If you wish a printed copy or would like to be removed from our mailing list, please write to subscription@valuepartners.com and we will act accordingly Special thanks to Kate Aylott, Camille King and Carolyn Wileman

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. 3

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 development 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

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 Dr. Amina Al Rustamani industry cluster benefits that offer many additional advantages to our business partners. is the Chief Executive Officer of TECOM Business Parks, the Dubai has succeeded in making itself a regional business hub, thanks in part to Free entity of TECOM Investments Trade Zones that have attracted international companies. What does the future hold in designed to function as an store as other countries in the region begin to offer similar incentives? umbrella organisation for The establishment of other free zones in the region is a strong indication that significant all the 11 Business Parks of growth opportunities do remain, and I view this as a very positive sign. It is important to TECOM Investments: Dubai remember that all the Gulf Cooperation Council (GCC) countries are interconnected, and Internet City, Dubai Media positive developments in one country will have positive ramifications on other countries. In City, Dubai Knowledge Village, spite of the increased competition, TECOM Business Parks have a unique value proposition Dubai Studio City, International that stems from their special characteristics as industry specific clusters. This important Media Production Zone, Dubai differentiator is a concept we pioneered and perfected. As a result, we feel confident that Biotechnology and Research Park, we will maintain our status as the premier developer and operator of business parks in the Dubai Outsource Zone, Dubai region, and companies will continue to prefer to call TECOM their home. International Academic City, Energy and Environment Park, Within TECOM Business Parks there seems to be a positive focus on the environment Dubai Healthcare City, and Dubai with the DuBiotech HQ being one of the largest green buildings in the world, and Enpark, Industrial City. Dr. Amina dedicated to environmental technologies. Is such a focus part of a government initiative Al Rustamani is responsible to make Dubai a greener place? for defining and executing Yes, it is. TECOM Investments is a member of Dubai Holding and follows the strategic the strategy of all the Business directives of the Dubai government. It is no secret that the UAE has the world’s Parks so that the objective of highest per capita carbon footprint and the Dubai government is spearheading several establishing a knowledge-based initiatives in its firm commitment to make the emirate a greener place. TECOM’s economy – as mandated by entities such as Enpark and the Sustainable Energy and Environment Division (SEED) the government of Dubai – are in line with this strategy. is effectively realised in the medium and long term. 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. 6

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 concentration 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 percentage 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. 8

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 requirements (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 not disappoint last year: insurance premiums reached an in the Gulf Cooperation Council overall volume of US$ 10.6 billion, showing a massive 28 percent year-on-year growth rate. This compares to world- Alessandro Scarfò, director, MENA insurance practice, wide growth of 3.4 percent in nominal US$ terms, implying Milan office, and Mohamed Wahish, Dubai office stagnation in real terms. This growth rate sounds impressive; however, it is not nearly 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$, premiums, 2008 • UAE, Qatar and Bahrain have recently been pushing regulatory reform. Qatar is perhaps the most interesting case to analyse. The country’s insurance law is quite Bahrain 4.3% obsolete, dating from 1966. Five national players, led by Qatar General and Qatar Qatar 5.3% UAE 47.3% Islamic, dominate the market. Instead of embarking on a slow and painful reform of Oman 5.5% the existing insurance regime, Qatari authorities introduced a parallel regime in Qatar Kuwait Financial Centre (QFC). QFC closely resembles the UK Financial Services Authority 8.6% (FSA): rules, and insurers, incorporated at QFC, can be 100 percent foreign-owned. Most interestingly, companies in the QFC can operate onshore, creating a case of regulatory arbitrage within Qatar. Several international insurers, from AXA to Zurich, already started their operations within QFC. • Takaful, a Sharia compliant variant of insurance, is a system based on the principle of mutual assistance (ta’awun) and voluntary contributions (ta’abarru). Risk is shared Saudi Arabia 29% collectively and voluntarily by a group of participants, while insurance shareholders 100%=US$ 10.6 billion are entitled to a fixed remuneration. The management of the company is supervised Source: Swiss Re. Sigma, Axco, National by a Sharia supervisory board composed by financially knowledgeable Islamic scholars. Regulator, Value Partners analysis 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 increasing 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

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 Usamah Al-Kurdi has an extensive mobile and, increasingly, fixed line sectors. In the past, almost every sector was closed for record of prominent positions private investment except few. Today we are witnessing the opposite: every sector is now in the country, including serving open except for a short list of areas that are limited to Saudi investment. as Secretary General of the Saudi Council of Chambers What is the vision of the new King Abdullah Economic City? of Commerce & Industry and The economic cities are another indication of the reform that is taking place in Saudi sitting on the Board of Directors Arabia. The King Abdullah Economic City is the first and the biggest one, but it is only one of several prominent Saudi of the six economic cities that are currently being planned. Like in many other countries, so Arabian organisations. He is far development in Saudi Arabia has focused around urban centres but we are promoting currently a member of the Majlis development throughout the whole country, with the introduction of economic cities in A’Shura (Consultative Council), many different areas. The idea is that each city has its own competitive advantage – for Chairman of Alagat International example, the King Abdullah Economic City, which sits just north of Jeddah, provides the Investments Company, and advantage of a major shipping port, not only for Saudi Arabia but for all shipping passing Chairman of Saudi-Italian through the Red Sea. The Jizan City in the South is designed to service the East African Development Company. 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

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 2 The word ‘prosumer’ is a portmanteau formed by successfully in the new convergent world. contracting either the word ‘professional’ or ‘producer’ As in other markets, companies from adjacent industries (especially big players with the word ‘consumer’. It is meant to indicate such as Google and Apple) have been disrupting the traditional media value chain, the segment of proactive bypassing traditional intermediaries and introducing a foray of consumer and business consumers. 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 investments 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 acceleration 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

MENA Region: Marhaba to the world VAS offerings by African mobile Beyond innovative applications, mobile broadband is undoubtedly the next growth op- operators 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 M-payment Africa have already witnessed exponential growth of their mobile data traffic in the last Safaricom (Kenya) M-Pesa service attracted 2.3m users within one year two years. For other operators in the region, we believe that a combination of selective following launch in 2007, and has investment in infrastructure upgrade, e.g. in city centres, attractive pricing and handset now attracted 7m users Used as springboard for new entrants strategy, like affordable smartphones and dongles, will yield similar results. such as Cellpay in Zambia Loyalty programs Furthermore and more practically, African mobile operators have been turning to innova- Vodacom South Africa’s ‘Talking tive methods for increasing efficiencies in low income countries. Network sharing, a con- Points’ loyalty program gives points at each top-up which can be redeemed cept which has been widely popular in Asia and above all India, is now spreading also to for rewards Africa. In Nigeria, for instance, the regulator started urging operators to take advantage MTN South Africa ‘Y’ello Fortune’ enters customers into lottery-like of the opportunity. Meanwhile, operators in Africa have developed other innovations events on purchase of top-up of their own, such as dynamic tariffs and borderless roaming. MTN’s innovative tariff Credit ‘management’ scheme, for example, offers an adjustment in the cost of calls by the hour, depending on Micro-recharge through e-transfer the level of usage. Thus, customers can check the discount available to them at different – Zain ‘Flash’ credit in Gabon Zain Kenya’s ‘Zap’ money transfer times of the day, generating calls when the network would otherwise be little used. Simi- service launched in February, with larly, Zain introduced the famous One Network, a borderless roaming concept, allowing full offering of credit/airtime transfer facilities customers in Kenya, Tanzania and Uganda to use their mobiles in all of these countries without paying roaming charges. UGC ‘Voices of Africa’ community offers sharing of amateur video content There is a long history of ties between Middle Eastern operators and investors, on the captured from a mobile phone with other members one side, and the African telecoms market, on the other. Spotting its potential, operators Micro-blogging platform Twitter like Zain and Etisalat have both entered the African market many years ago. The former offers African users the opportunity to ‘leapfrog’ PC straight to mobile 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 Social communities Advertising-based service myGamma licence opportunities has significantly decreased, creating expectations of a new wave exhibiting huge growth in emerging of consolidation as the next step. The competitive landscape in Africa is made of three markets; South Africa, Kenya among top 10 performing markets broad types of operators: single market players, usually incumbents; small regional South African Mxit service provides players, such as Hits and Millicom which have acquired licences in four to five countries instant messaging and chat services to 11m+ users 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. Consolidation opportunities African subs* in Africa Vodafone 80 MTN * Mobile only; market cap, exchange 70 rates taken on 27 April, except: Econet market cap estimate, Algerie Telecom and Globacom 60 not publicly listed (nonetheless Zain size of bubble is representative 50 of estimated company size) Orange 40 European player 30 Middle East player Local (African) player Globacom Etisalat 20 Orascom Market cap (2Q09E) Consolidation opportunities? Qtel 10 Millicom Algerie Source: Company websites and finan- Telecom Hits Econet cials, press reports, Informa 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 mobile 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 telecoms 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, therefore, 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 example, 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 broadband. Most MENA countries are considering establishing their own national broadband policies in the same vein as those created in other markets. Although broadband penetration 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 broadband 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 5 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 competitive 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

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. Ihab Ghattas is Assistant The next few years should also see more emphasis on creating enhanced content and President for Huawei’s Middle media services in the Middle East. As networks transition from communications vehicles East operations. A senior into an infrastructure that sustains all elements of society, regional carriers are looking to telecommunications professional transform their services to offer content and media platforms, on top of their traditional with 30 years experience in pipe offerings. This will lead to a million dollar market for regional businesses who the telecoms industry, Ihab is provide their services over the Internet. User-driven and user-generated content will be responsible for driving the Chinese the prevailing theme and a large number of personalised offerings will enter the market telecommunications group based on the long tail theory. These offerings will be nurtured by the changing character business in the region, besides of the network, where sharp declines in the cost of services will make it possible for developing strategies related ‘niche offerings’ to win. The success story of collaboration between Huawei and Value to marketing, human resources Partners in OmanTel is a good example for such winning approach. and social activities. 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 TV production: the latest opportunity in the region industry has seen tremendous growth and some major progress over the last few years. However, Janice Hughes, director, London office 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

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 Romy Gai was appointed CEO UAE is around the same as Austria, to give a European example. That is quite good and we of the newly named UAE Etisalat definitely have the chance to be better than this. The fundamentals are there. The ultimate Pro League in June 2008 and has goal is to become one of the most relevant leagues in the AFC. We are already ranking 5th been working extensively to ensure after Japan, South Korea, China and immediately after Saudi Arabia. Ahead of Australia, the blueprint for the country’s Indonesia, Iran and all the others in Asia. Over the next three to five years we would like first professional competition people to look at us and say, “Yes, the UAE is one of the best leagues in the AFC.” is followed as closely as possible. Gai has spent almost his entire What else do you expect will happen to improve the quality of the UFL and the other career working in the football Arab Leagues? sector. Having graduated in I would expect more and more renowned international players to move to the Leagues. Economics from the University Clubs will also invest in better stadiums, possibly turning them into full shopping of Turin, Gai started out as a complexes, to enhance the match experience. International sponsors will look at UAE freelance journalist before joining and the Gulf Cooperation Council (GCC) with enhanced business interest towards the Juventus Football Club where, over region. A football World Cup may also be organised in the region up to the final dream of the course of 14 years, he moved a GCC national club winning it or at least being one of the top four. up the ranks to become Chief Sales and Marketing Officer. Over the past 30 years, Middle East and North Africa A new oil for the region (MENA) region’s total energy consumption has grown faster than that of any other region in the world, Alessandro Leona, Milan office, and Koosha Kaveh, Dubai office 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, 4 International Energy Agency and UAE – and resource-poor countries – such as Jordan, Yemen and Lebanon – where and Energy Sector Management energy intensities are comparable to OECD standards, as other countries in the MENA Assistance Program (established by the World Bank and the United region: Algeria, Egypt, Oman, Israel, Morocco, and Tunisia. Nations Development Program) 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

MENA Region: Marhaba to the world The luxury industry is globally going through tumultuous Luxury goods in the Middle East: still in fashion? times as consumers cut spending on premium luxury items, look for better value and become increasingly price Demetrio Di Martino and Varun Sridhar, Dubai office 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 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. 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. 7 French Ecole Supérieure des Arts • The French Fashion University Set up in Dubai by ESMOD7, it recorded the first made in et Techniques de la Mode 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

Value Partners Group São Paulo Value Team Rua Padre João Manuel 755 IT Consulting & Solutions Milan 1º e 2º andares Via Vespri Siciliani 9 cjs. 11, 12 e 21 Milan 20146 Milan - Italy Cerqueria Cesar Viale Cassala 14 A Tel. +39 02 485 481 CEP 01411-001 20143 Milan - Italy Fax +39 02 485 48 720 São Paulo - Brazil Tel. +39 02 489851 Tel. +55 11 306 809 99 Fax +39 02 4898 5999 Value Partners Fax +55 11 308 141 38 Management Consulting Rome Rio de Janeiro Via Della Grande Muraglia 284 Milan Rua da Candelária 60 00144 Rome - Italy Via Vespri Siciliani 9 10º andar Tel. +39 06 526 131 20146 Milan - Italy Centro - CEP 20091-020 Fax +39 06 526 133 14 Tel. +39 02 485 481 Rio de Janeiro - Brazil Fax +39 02 485 48 720 Tel. +55 21 2213 9191 Turin Fax +55 21 2213 9190 Corso Svizzera 185 Rome 10149 Turin - Italy Via di Porta Pinciana 1 Buenos Aires Tel. +39 011 772 241 00187 Rome - Italy Alicia Moreau de Justo 550 Fax +39 011 771 644 6 Tel. +39 06 697 6481 4° Piso Fax +39 06 697 648 51 C1107AAL Buenos Aires Munich Argentina Maximilianstrasse 35 a London Tel. +54 11 4314 4222 80539 Munich - Germany Greencoat House Fax +54 11 4314 6111 Tel. +49 (0) 89 24218 445 Francis Street Fax +49 (0) 89 24218 200 SW1P 1DH London Mumbai United Kingdom 8th ﬂoor, ”C” Block Helsinki Tel. +44 (0) 20 7630 1400 Devchand House Vilhonkatu 6 A Fax +44 (0) 20 7630 7011 Shiv Sagar Estate, 00100 Helsinki - Finland Dr. Annie Besant Road Tel. +358 9 4780 1300 Munich 400 018 Worli, Mumbai Fax +358 9 4780 1301 Maximilianstrasse 35 a India 80539 Munich - Germany Tel. +91 22 66119 700 Istanbul Tel. +49 (0) 89 24218 445 Fax +91 22 66119 988 Meydan Sok. Spring Giz Plaza Fax +49 (0) 89 24218 200 Floor: 3 No: 26 Maslak Beijing 34398 Istanbul - Turkey Helsinki Tel. +90 212 276 98 86 Tower A, Suite 1702 Vilhonkatu 6 A Vantone Centre Fax +90 212 276 98 82 00100 Helsinki - Finland Jia 6 Chaoyangmenwai Av. Tel. +358 9 4780 1300 100020 Beijing São Paulo Fax +358 9 4780 1301 People’s Republic of China Avenida Brigadeiro Tel. +86 10 5907 0616 Faria Lima Istanbul Fax +86 10 5907 0383 201 (12º andar) Meydan Sok. Spring Giz Plaza 05426-100 São Paulo Floor: 3 No: 26 Maslak Hong Kong Brazil 34398 Istanbul - Turkey 1806, Vickwood Plaza Tel. +55 11 3817 2200 Tel. +90 212 276 98 86 199 Des Voeux Road Central Fax +55 11 3817 2210 Fax +90 212 276 98 82 Sheung Wan - Hong Kong Tel. +852 2103 1000 Rio de Janeiro Dubai Fax +852 2805 1310 Rua da Candelária 60 Business Central Towers 10º andar Suite 1304 A Singapore Centro - CEP 20091-020 P.O. Box 503025 - DMC 9 7 Temasek Boulevard Rio de Janeiro - Brazil Sheikh Zayed Road Suntec Tower One #26-04 Tel. +55 21 2213 9191 Dubai Media City 038987 Singapore Fax +55 21 2213 9190 United Arab Emirates Tel. +65 6820 3388 Tel. +971 4 4335628 Fax +65 6820 3389 Fax +971 4 4380223 If you would like to discuss any of the issues raised, please contact your nearest Value Partners ofﬁce or write to newsletter@valuepartners.com

MENA Region: Marhaba to the world - Value Partners newsletter, January 2010

by Value Partners on Feb 22, 2010

Accessibility

Categories

Tags

Upload Details

Usage Rights

1 Embed 1

Statistics

MENA Region: Marhaba to the world - Value Partners newsletter, January 2010 — Document Transcript