Better business in the Gulf

Andrea Chipman is a freelance journalist based in the UK.

After four years of economic expansion, the oil-rich states of the Gulf should continue their record run into the next decade. With a hospitable environment for business families and major investment opportunities, make a leap, says Andrea Chipman

Buoyed by continued strong crude oil prices, Gulf Cooperation Council states have seen average growth rates of more than 6% a year since 2002, compared with average annual growth of 3.7% over the 1990s, according to a recent World Bank report.
 
Moreover, the Gulf nations have recognised the risks of taking their oil wealth for granted, and most have opened their markets to increasing amounts of foreign investment over the past few years, a trend that analysts say is likely to continue in 2007. In the meantime, the region's cultural affinity for family-run companies should make it attractive for foreign family businesses looking to expand beyond the developed markets of Europe and North America.
 
Nevertheless, caveats remain. The World Bank notes that governance and structural reform in the region "has, by and large, not kept pace with worldwide progress". The region ranks in the bottom-fifth worldwide for public sector accountability, it adds. Yet, family firms looking to expand outside the more familiar markets of Europe and North America need to weigh these factors against the clear opportunities the Gulf offers.

With, according to some estimates, more than 95% of businesses in the region controlled by families, the area has long been a hospitable one for local family concerns. More recently, however, surplus amounts of cash from the oil-led economic boom have made the Gulf more attractive to outside investors.

And there are additional factors that are likely to sustain the current period of expansion well into the next decade, those interviewed said. As governments increasingly look to privatise their economies, they are creating opportunities on several levels: major infrastructure projects in turn spawn secondary and tertiary opportunities as new private owners and managers look to contract out services – such as water services and education – that were formerly state-run.

"It's booming; there's a lot of money available to finance anything you have in mind, whether it is industrial, services, buildings or real estate," said Khalid Kanoo, former chairman of the Bahrain Chamber of Commerce and spokesman for the Yusuf Bin Ahmed Kanoo Group, a family-run conglomerate based in Dubai. Kanoo added that since the terrorist attacks of 2001 greater scrutiny and suspicion of Middle Eastern funds in the US has caused much of this money to leave American markets and return home, creating a pool of prospective funds for new projects.

Qatar, Saudi Arabia and United Arab Emirates remain the hot spots, says Tony Bury, chairman and chief executive of the Contax Group, a Middle East consultancy. But the pace of development in the region means most Gulf states remain beacons of growth.
 
The dominance of local family businesses in the region gives foreign family companies a potential advantage over other investors.
 
"In the majority of cases you still need a local partner, legally, to get established," Bury adds. "If you have a family-owned business wanting to work with another family-owned business, there's a meeting of minds."

But businesses looking to make their first leap into this rapidly expanding market shouldn't let the familiar environment cause them to drop their guard, experts say.
 
"Companies need to make sure they have a number of data points on that partner confirming he's real, credit-worthy, good to do business with, ethical and able to be a long-term partner," Bury said. "Second, there needs to be an alignment of core values between your own family business and the family business you are doing business with."

Careful investigation of potential business partners is particularly important given the fact that privatisation and the opening of local markets are still at a relatively early stage. A study by the Boston, Massachusetts–based Family Firm Institute notes that Gulf companies have traditionally been less concerned about competition with foreign firms, with the result that they tend to be weaker, compared with global peers. Many enterprises in the region have invested comparably small amounts in training of staff, and are more likely to be sclerotic, analysts say.

Local consultants, chambers of commerce and even foreign embassies can all be good sources of advice for foreign family businesses evaluating potential local partners, those interviewed said. In some cases, investors might decide to choose the more complicated route of setting up a venture on their own.

Not surprisingly, conditions aren't necessarily comparable across the region. Bahrain's Economic Development Board and its Chamber of Commerce have been particularly active in promoting the state as a place to do business, and many of its companies have reputations for strong management. As a result, the Bahrain investment market – in which family companies employ one of the highest proportions of the workforce of any Gulf state – is the likely market to remain fairly congested, those interviewed say.

Due diligence notwithstanding, investment opportunities in the Gulf are no longer primarily related to the oil industry. While the initial boom in capital expenditure in 2004–2005 was in the energy sector, infrastructure projects had overtaken energy by 2006, Bury said.
 
"There's been this burgeoning expenditure on capital projects, infrastructure and non-infrastructure, with $1 trillion that is either under execution today or will be by 2010," Bury said. "This spawns all sorts of secondary and tertiary projects. For example, there are not enough dentists."

The International Monetary Fund, in its Regional Outlook for the Middle East and Central Asia for September 2006, notes that Gulf Cooperation Council countries' investment plans for 2006–2010 amount to more than $700 billion, including investments in the oil and gas sector, infrastructure and real estate.

Real GDP growth for the region is expected to be 6–7% in 2006, with Kuwait and United Arab Emirates among those that have registered particularly strong growth, the IMF said.

Health and education are expected to be among the biggest growth sectors in 2007, he added. In many cases, Kanoo says, mega-projects that join together a number of smaller family companies are the preferred business model in the region.

In a joint venture this month, Yusuf bin Ahmad Kanoo opened a plastic pellets manufacturing plant in Bahrain with Australia's Compco, a family-owned business. Kanoo also has joint ventures with a number of other European family businesses, including an agreement with UK engineering firm Severn Glocon to supply control valves for the gas flaring business to Saudi Aramco, and an affiliation with Danish shipping company AP Moeller-Maersk. In addition, it is cooperating with US company Koch Glitsch, a designer of mass transfer products for the chemical, petrochemical and pharmaceutical industries and the Indian welding supplies company Advani Oerlikon.

So who is likely to benefit most from the expanding opportunities? Regional experts expect European companies to be more aggressive in the region, with some 250,000 English nationals already working in the region. English speakers will retain an advantage, Kanoo added, given the dominance of English as a second working language in the Gulf. Nevertheless, French and German companies are also showing a strong interest in the emerging service industries.

Indeed, some foreign family businesses are likely to use the Gulf as an incremental step towards the developing markets of Asia, predicts Anuj Chande, international business partner at accounting, tax and business consultancy Grant Thornton in London.

"While European family businesses would traditionally consider India and China as markets to expand into outside of the continent, the Gulf states will move higher up the agenda in the near future," Chande said. "One key advantage that family businesses should consider is the location of the Gulf – it is in much closer proximity to Europe than India or China is." Family businesses that take this advantage into account might have "first mover advantage" against their European counterparts who stick to more traditional markets, Chande added.

At the same time, he noted, for those businesses looking for a spearhead into the buoyant sub-continent, the significant presence of Indian business owners in the Gulf provides attractive opportunities for those looking to make contacts before moving into the Indian market.