Doing business in the Middle East

There's far more than oil in the Middle East, the region is changing and new opportunities abound

Let’s get one thing straight: doing business in the Middle East is not about enhancing profit margins or improving your skills base.

Unlike emerging markets in Asia and Eastern Europe, this region does not have a ready supply of well-trained, hard-working people – nor are employees cheap – so if outsourcing’s your game you’d better look elsewhere. The reason? In oil-rich states around the Gulf coast government handouts and a ‘not what you know but who you know’ business ethic have removed incentives to work hard or take risks as an entrepreneur.

Of course, in a region as vast as this the opportunities will vary from place to place. In North Africa and Israel, where oil is missing, you are more likely to come across technical knowledge and cost savings.

The Middle East is home to seven top oil-producing nations who have become incalculably wealthy by punting their natural resources. This is great in principle, but it restricts what UK businesses can do there, and over-reliance on one export is stirring up problems down the line.

State perks have resulted in the distortion of oil-rich economies by encouraging population booms, while massive unemployment, a stifled work ethic and production skewed towards a finite commodity have all added to the mix.

Kuwaiti males, for instance, get huge cash sums at 21 and are furnished with yet more for getting married and having children. The country enjoys big oil reserves and a relatively tiny population, so wealth is assured regardless of effort.

The average Saudi national is just 21 years old, and nearly two thirds of the population is yet to reach that age. The unemployment rate is somewhere between 20% and 30%, while immigrant labour accounts for 88% of the private sector workforce – the jobs pay too little to tempt most nationals.

It’s almost as if the oil boom has made normal business rules irrelevant. Extreme wealth has rubbed out the need to gain qualifications or make shrewd business decisions.

But attitudes are changing and countries have resolved to diversify economies and improve education and training opportunities in order to head off future problems.

A spurt of development contracts is the result. Westerners who have entered markets in the Gulf coast states describe a business environment that is frenetic, surreal and unlike any other in the world.

Even though parts of the region are extraordinarily wealthy, many of the opportunities are more regularly associated with countries in the third world. Schooling, infrastructure projects and communications all present openings for foreign firms.

David Lloyd of the Middle East Association says education and training is a buzz industry in the Middle East, because of the growing emphasis on technical skills over religion in formal study.

“All the Gulf Cooperation Council states have mature economies, but of course everything is relative,” he says. “If you compare them to new knowledge economies in India, China and Western Europe, they’ve got a long way to go because they rely on immigrant labour from grass roots right through to senior management.

“You’ve got foreign workers filling jobs, in spite of a relatively low indigenous population. GCC universities teach Koranic studies and that means many graduates who enter the labour market can’t find the jobs they expect.”

High rates of immigrant labour and relatively low levels of relevant training makes hiring staff unattractive on the whole, but the fact that demand for training facilities is increasing presents opportunities in itself.

You may be surprised to learn that the British education system is much admired in the Middle East, and that companies from over here are already offering training courses covering the whole spectrum of occupations.

Matt Drinkwater, a Middle East specialist at research group FreshMinds, describes the potential for this service as “absolutely huge”, arguing that vocational learning has gained much ground in recent years.

“The Anglo-Saxon education system has an incredibly good reputation over there and United Arab Emirates is looking to establish alliances with foreign universities and is encouraging new learning facilities from abroad,” he says. “In Egypt there’s a big drive to set up training, especially in vocational industries.”

Construction is booming too – albeit less universally than education – and nowhere encapsulates progress more comprehensively than Dubai in the UAE, a country that is home to some of the Middle East’s more eccentric projects.

John Pragnell, managing director of Camtec, a manufacturer of hi-tech applications, has just come back from his second trip to the region; which took in Dubai, Abu Dhabi and Oman.

Reach for the sky

Pragnell, like others before him, was surprised by the frantic growth of the area. Dubai in particular is growing vertically at a rate of knots, with a legion of new hotels, shopping malls and, wait for it, man-made islands sprouting in the architectural equivalent of the blink of an eye.

“Dubai itself hasn’t got much oil, so it’s trying to become the Florida of the Middle East,” he explains. “They’re throwing up the tallest buildings in the world, the biggest shopping mall – complete with an indoor ski slope, whole new islands and underwater hotels.

“They’re building a Formula One track because they want to take it away from Bahrain. They decided to build a marina because they think it’s posh, and of course they need a new airport to bring all the extra visitors in.”

He describes Abu Dhabi as the ‘parent’ to Dubai’s ‘petulant child’. It is also developing quickly, but there is a sense that it is trying to be sensible about it.

Saudi Arabia, the world’s primary oil tap, produces more than nine million barrels of oil every day, and it has plans to up production to 12 million to accommodate increasing demand from gas guzzling bases in Asia and the US.

It is also developing its huge natural mineral deposits and is constructing a vast railway network, linking Jiddah in the West to Riyadh and existing routes from Riyadh to Ad Damman in the East. There will be a spur line to Al Jubayl and beyond towards the border where deposits are located.

Across the Middle East there is growing demand for tourism services, while oil wealth has brought on a penchant for luxury consumer goods. In varying degrees the region also offers potential contracts in mining, food processing, clothing, cosmetics and furniture; to name but a few.

“They are all interested in tourism, even Saudi Arabia,” says Drinkwater, “although they are more interested in internal travel at the moment. And they are all very keen on using the knowledge economy to leapfrog industrialisation.”

Security misconceptions

Places like Saudi Arabia, Libya, Iran and Iraq have huge potential because they require so much infrastructure work (Iraq’s economy grew by more than 50% last year because of rebuilding works). But the level of opportunity must be weighed against the risks, whether political or economic.

But what are the risks? Is the area as dangerous as the media lead us to believe? Among British companies working out there the overwhelming response to this question is ‘no’ – with the exception of Iraq.

Israel has an extraordinary level of security at bars, hotels and airports, according to Luke Ahern, head of research at stockbrokers Corporate Synergy. Ahern travelled to Israel twice in 2004 to oversee the flotation of a Tel Aviv company on the UK’s Alternative Investment Market (AIM). He was impressed with the skills of local employees and the work ethic, but also the lack of political tensions.

“It’s surprising to see Arabs and Jews living side-by-side. The real problems are 50 miles away from the capital – there are flare-ups but history tells us these come and go. Meanwhile the whole area is becoming more commercial.”

Iran harbours some hostility towards the West, especially over its controversial nuclear programme, but Lloyd expects the antagonism to fizzle out over time. He says the Ayatollah regime is losing favour and liberal elements are now gaining ground. Libya has opened up in recent years and rejected its nuclear programme, so is benefiting from the increased trade and opportunities for tourism that improved relations with the West is bringing.

And when it comes to Iraq, Lloyd is equally optimistic. “Some British companies are trading with Iraq at a distance, others are just waiting for things to settle down. The question is whether you believe things are going to settle.

“All is not lost – a lot of the insecurity is localised and given time to train the Iraqi security forces, tame insurgents and withdraw coalition forces, Iraq will begin to come together.”

Other parts are more benign and people with experience of the area, particularly of parts of the southern half of the Arabian Peninsula, say they feel perfectly comfortable being out on the streets without a guide or escort.

Speaking about Saudi Arabia, a spokesperson for UK Trade and Investment told GB that security fears and one- sided commercial laws are the biggest misconception among people not familiar with the Middle East.

Cultural Evolution

Like politics, business culture varies from country to country within the region. It even varies within countries, but as a rule partnerships between businesses are based on a high level of trust, or even friendship, so prepare to put in some social hours.

In rich oil producing nations, this notion is taken to extremes with some business owners dealing only with family members or friends. This can be a drag initially, but if you access their inner circle you can be confident of repeat contracts.

That’s the experience of Graham Yemm, managing director of Solutions 4 Training: “You should establish a relationship first,” he says. “Always accept a drink. They will always be very courteous and polite, because ‘face’ matters out there almost to the same extent as China and Taiwan.”

According to UKTI: “Building effective relationships is an essential element of doing business in the Gulf, and taking time to choose the right partner usually determines how successful your business venture will be.”

So the trust element works both ways here and it’s good to know who you are dealing with. Arabs are formidable traders and drive a hard bargain, so be prepared to negotiate. If looking for an agent to sell your product in the region, do not be dazzled by the first offer put on the table, and never sign anything until you understand exactly what it means.

Pragnell is careful to avoid being drawn in by seemingly tempting offers. He has created a term sheet for potential distributors, which stipulates that he will not give up exclusive rights to sell his product.

“It depends who you talk to, but some solicitors believe if you send the wrong email the recipient can become your exclusive agent legally. If you try to get rid of them you have to pay compensation,” he warns.

Another potential pitfall is the widespread requirement for foreigners to find a local ‘sponsor’ if they want to set up shop. Essentially, sponsors are rich locals who invest in the business for a 51% stake.

Weirdly, businesses need not fear being crowded by the sponsor, or that they will take over; most leave the business alone after investing. The worry is that they can, and often do, pull their money out on a whim.

Throw into the mix Sharia law, devout Islamic belief and the lower status of women and the unprepared business could have a nasty culture shock. It must be said that most countries in the Middle East are finding ways to accommodate the burgeoning culture of commerce within their religious frameworks, but as with all ventures in foreign lands it pays to have a reliable team of advisers.

The best place to start is a trade mission or conference where you will be able to get first hand experience or expert advice on the cheap. Good organisations to call upon include the Middle East Association, UK Trade and Investment or the Arab-British Chamber of Commerce.

A brief guide to the UAE

The UAE and Dubai in particular is becoming increasingly attractive for UK companies contemplating a foray overseas. David Sayers of Mazars takes a look at the tax landscape:

“In recent years the UAE has taken big steps to encourage investment, not least due to significant infrastructure and a zero tax rate. With no income tax, capital gains tax or withholding tax, what are the downsides?

One common issue that entrepreneurs come up against is the fact that local company law dictates that there must be a local shareholder holding at least 51% of the share capital.

One of the attractions in investing in the UAE Free Trade Zones, however, is that 100% direct foreign ownership is permitted, so the local shareholder requirement is avoided. In addition to this, the zones give a guarantee of no corporate tax for 15 years, which is then renewable for a further 15 years.

Investors also have complete freedom to repatriate capital and income and their employees will pay no personal income tax. Investors in the Free Trade Zone can also benefit from full exemption from import duties with very few currency restrictions and very little bureaucratic red tape.

One issue for a UK business investing in a low tax area such as Dubai, is that it will need to make sure that transactions with any Dubai entity are carried out at arm’s length. As Dubai is treated as a tax haven by the UK Revenue, an outward corporate investor will need to make sure that they do not fall foul of the UK controlled foreign company (CFC) regulations.

In essence, it is an attractive place to do business, particularly in the Free Trade Zones, and providing there is sufficient substance of operations in the Emirate, it can offer significant tax incentives for UK outbound investment. Attracting expat employees is also not too difficult with the zero tax regimes.”

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