World Business and Economic Analysis
World Business and Economic Analysis
DUBAI—In the 10 years since RAK Ceramics opened a $40 million tile manufacturing plant in Iran, the United Arab Emirates-based firm has racked up millions of dollars in losses in the Persian country, fired hundreds of employees and all but extinguished its kilns.
But this summer Iran struck a nuclear deal with the U.S. and other foreign powers. Now with sanctions on Tehran expected to ease, RAK Ceramics is looking to boost output of the kitchen and bathroom tiles it sells in Iran and the wider region. Executives for one of the world’s largest manufacturers of tiles and sanitary ware by capacity are now betting the long wait on Iran is about to pay off.
“We were a patient investor,” says Abdallah Massaad, RAK Ceramics’ chief executive.
RAK Ceramics is one of a handful of Arab-owned firms positioning themselves to profit from a post-sanctions neighbor, even as frosty relations between Iran and most of the Gulf Cooperation Council—Saudi Arabia, Bahrain, the U.A.E., Oman, Qatar and Kuwait—show few signs of thawing.
The week after the U.A.E. joined Saudi Arabian-led airstrikes in April against Iranian-backed Houthi rebels in Yemen, U.A.E.-owned Etihad Airways launched a daily commercial service to Tehran. Dubai-owned FlyDubai has launched seven new routes to Iran this year after a bilateral aviation agreement was signed in January between the U.A.E. and Iran.
Dubai’s Jumeirah Group, operator of the ultra-luxury Burj Al Arab hotel, is searching for properties in Iran. Officials at DP World, one of the world’s biggest shipping-container handlers, recently visited the Persian state to see the country’s ports and railway infrastructure can be used to transport goods faster between China and Europe.
“I am not a politician, I am a businessman,” said Sultan Ahmed Bin Sulayem, chairman of Dubai government-owned DP World, and one of the most prominent Emirati businessmen. “What I look for is if there is an opportunity for our customers.”
The forays by Gulf businesses, though still in their infancy, could further complicate political alliances across the Middle East by deepening commercial ties between Iran and some of its less-hostile neighboring states. Such developments could begin to shift the region’s center of economic gravity from Saudi Arabia, the world’s biggest oil producer, to Iran, home to an educated and burgeoning middle class.
As executives from the Gulf are eyeing Iran for business opportunities, their governments are locking horns elsewhere in the region. Saudi Arabian warplanes, supported by the U.A.E., Bahrain, Qatar and Kuwait, continue to bombard Iran-backed Houthi militants in Yemen. The tiny Gulf island of Bahrain in July pulled its ambassador from Iran in protest at alleged Iranian meddling in its affairs. Gulf-backed rebels also face off against the Iranian-supported government of President Bashar Al Assad in Syria.
The foreign ministers of the GCC in August publicly backed the nuclear agreement between Iran and world powers in meetings with U.S. Secretary of State John Kerry. But some, such as the U.A.E.’s minister of state for foreign affairs, Anwar Gargash, have also voiced concern that the deal will embolden Iran.
The U.A.E., particularly the port of Dubai, has long been an important trade conduit for Iran in the region. Iran’s imports from the Gulf region amounted to around $35 billion last year, the bulk of which were exports from the U.A.E. that were imported via Dubai, according to figures from the Washington-based Institute of International Finance. Globally, the U.A.E. is one of Iran’s largest trade partners alongside India and China.
Bank of America Merrill Lynch predicts that with the removal of sanctions Iran’s annual import totals could soar to $200 billion from $80 billion in 2014. The U.A.E. is among those countries best positioned to benefit from the trade flows, analysts at the bank said in a note to clients.
Like the U.A.E., Oman, which has the closest political relationship with Iran of all the Gulf States, is making headway to strengthen its economic ties. Ahead of the nuclear agreement between Iran and world powers, Iranian President Hassan Rouhani visited Oman in March and signed a 25-year deal to sell $60 billion worth of natural gas to the Arab state.
Access to cheap energy in Iran, as well as raw materials and labor, means the country is in a sweet spot for production of ceramics, said Mr. Massaad, the RAK chief executive. In production of ceramics, Iran ranks fourth globally after China, Brazil and India in terms of capacity, a fact that spurred RAK Ceramics to acquire a 420,000-square-meter (about 104 acres) tract of land in Isfahan, Iran, (about 270 miles south of Iran) and build a plant in 2005, he said.
But one year later, sanctions were imposed on Iran, and RAK Ceramics cut annual production from nine million square meters of tiles to six million. As financial sanctions tightened, manufacturing fell further and the company cut its roughly 480-strong Iranian workforce to around 70.
For the past six months, the facility has produced nothing and sales have come to a virtual standstill. In the first quarter, RAK reported an overall profit but noted losses of 15.4 million U.A.E. dirhams ($4 million) related to hyperinflation in Iran and Sudan. RAK decided to sell its operation in the African country earlier this year.
After years of talks, the U.S. and other foreign governments struck a deal in July that will limit parts of Iran’s nuclear program in exchange for lifting international sanctions. The agreement still must survive a U.S. congressional vote, among other political hurdles.
Now Mr. Massaad is preparing a staff team to go back to Iran. But the tile maker isn’t going to get ahead of politics and will wait for sanctions to unwind before committing more investment. If sanctions ease, RAK plans to use Iran to export to Russia, Central Asia and Europe.
“We were in a dilemma,” Mr. Massaad said. “[But] we have an asset which is fully equipped, fully invested. We don’t need to wait years to find land. We can produce in very short term in a market that will boom.”
Write to Rory Jones at This email address is being protected from spambots. You need JavaScript enabled to view it. and Nicolas Parasie at This email address is being protected from spambots. You need JavaScript enabled to view it.
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13/05/2015
| Chris Wright
Private sector investment in central and eastern Europe is crucial if the region’s infrastructure needs are going to be met. But the private sector’s most popular vehicle for such investment, the PPP, has serious flaws
The EBRD has issued a familiar call for private sector funding to help bridge the CEE region’s vast infrastructure gap but an IMF official has warned about the dangers of the public-private partnership model that is seen as the main hope of attracting private investments.
Sir Suma Chakrabarti, president of the EBRD, said on Wednesday that the CEE region expects $500bn a year of infrastructure needs, but that “this cannot be achieved without the strong participation of the private sector. Currently most infrastructure is funded by public budgets — in our region, 70% — and that’s not financially sustainable.”
But Azim Sadikov, resident representative in Georgia for the IMF, counselled that 55% of all PPPs are renegotiated, on average every two years, and that although complete contract cancellations are rare, the renegotiation usually favours private sector operators. He said 62% of renegotiations lead to an increase in tariffs, 69% to a decrease in private sector investment obligations, and 31% to a reduction in the concession fees paid to the government.
“The risks of PPPs are real,” he said. “They materialise, they happen.” He said countries considering PPP models “need to be advised this is likely going to happen”.
While not against PPPs — he suggested several measures around planning, project selection, management, oversight and transparency to avoid the need for renegotiation — he added that improvements in the efficiency of public infrastructure spending “could outweigh the benefits of PPPs. That should remain the focus of governments: improving traditional public investment.”
“Cash-strapped governments could be tempted to use PPPs to bypass fiscal risks,” he said. “When PPPs are good, they offer efficiency gains and value for money. But when they are done for the wrong reasons, they can lead to very high fiscal risks.”
Indeed, there is a sense that if anything, private sector involvement may have stalled. An EBRD policy note prepared for the G20 found that the total value of PPP projects in emerging markets that reached financial close in 2013, at $44.3bn, “is not higher than the levels seen in the late 1990s, and there is no noticeable steady upward rise in financial levels from the private sector.” It said the number of deals reaching financial close “seems to have levelled off at around 50% on a global basis”.
Nevertheless, private sector involvement will continue to be seen as crucial for the region’s infrastructure needs. Natasha Khanjenkova, managing director for Turkey and Central Asia at the EBRD, said an expectation to renegotiate was key. “I would argue that one of the risks is for a government to come in with a very rigid approach and believe they have a 20 or 30 year contract that cannot be changed,” she told Emerging Markets. “Because these are such complex projects, it is important to have upfront an understanding that changes may need to be made.”
Cavit Dagdas, undersecretary of the Turkish Treasury and the EBRD governor for Turkey, added that renegotiations may be a consequence of a project producing better than expected revenues, and argued the more important issue was a clear and early mutual understanding of risk. “If you can measure the risks, you can manage them,” he said.
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Not one to waste a good crisis, Kazakhstan’s premier, Karim Massimov, wants to speed up structural reforms and rebalance the economy by lessening the dependence on hydrocarbons.
Kazakhstan is implementing a slew of reforms plucked from the most forward-thinking governments around the world as it seeks to diversify its decelerating, commodities-heavy economy.
Yet even that may not be enough to prevent growth from slowing to a crawl this year — a direct result of the recession bedeviling its largest trading partner, Russia.
In its latest Regional Economic Prosp-ects outlook, issued on Thursday, the ERBD tipped growth in Kazakhstan to come in at just 1.5% this year and 2% in 2016, down from 4.3% in 2014, hit by lower oil prices, an influx of cheap imports from recession-hit Russia and the “spillovers of negative investment sentiment from the Russia/Ukraine crisis”. The threat of higher non-performing loan ratios at leading Kazakh lenders would return, the development bank warned, along with heightened social unrest.
Yet Central Asia’s largest economy and its premier Karim Massimov see the challenges of a sharply flagging economy as an opportunity to push through greater reform, reckons the EBRD Kazakhstan country director, Janet Heckman. “The prime minister has a saying: ‘Never waste a good crisis’,” she said. “He believes it’s easy for an energy-rich country to avoid necessary structural reforms when oil prices are high — and that diversifying an economy is that much harder when oil prices drop and regional growth declines.”
If Massimov is indeed looking for that sort of challenge, he’s in luck. The Kazakh economy remains overly dependent on oil and commodities, having embraced reform only in fits and starts since Nursultan Nazarbayev became president in 1991.
Yet since becoming premier for the second time in April 2014, Massimov has introduced a 30% capital rebate on all foreign investments of more than five years, and scrapped visas for short-term visitors from 10 countries including the UK, Japan and Germany. In July, that programme is set to be expanded to include the US and all western European countries.
BORROWING GOOD IDEAS
In a move reminiscent of China’s special economic zones, the country has streamlined the process through which foreign investors acquire land, secure construction permits and build factories, while pushing ahead with accession plans to join the OECD and the World Trade Organisation.
Kazakhstan appears content to pick and choose best-practice reforms from around the world. It has eased the process of registering a car and placed a moratorium on SMEs being investigated by the police. “Most important to the country’s international standing is enshrining the rule of law into the constitution,” said Heckman
Investor-friendly arbitration courts modeled on those in Singapore and the United Arab Emirates are planned for the near future. Finally a Kt1tr ($5.4bn) stimulus package introduced November 2014 will be used to support SMEs, pay for road and rail upgrades and finance new airports in Astana and Almaty.
“Kazakhstan is borrowing from everyone, looking at global best practices and employing best-practice indicators, while the civil service is being shaken up by bringing in foreign-educated Kazakhs, a process seen as critical to dealing with corruption,” Heckman said.
Source :Emerging Market
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