Once more it generated global headlines, but despite the hype about the new Dubai World Central (DWC),Dubai is opting for a measured development of its new airport outside Jebel Ali.

Promising a gargantuan six runways, with passenger terminal capacity almost double that of Heathrow and a cargo zone more than eight times the size of facilities at London's main airport, Dubai is not short of chutzpah.

But although construction of a first runway and terminal has begun and is set for completion by end-2007 it is cargo and charter flights, and executive jets, that will be DWC's initial customers. Fulfilment of ambitions to create the world's largest air transport hub will only follow over coming years and decades, in response to demand.

There is no doubting Dubai's determination to establish itself as one of the largest air transport hubs on the planet a goal proclaimed by the decision to rename the Jebel Ali project DWC. Costs are modestly projected at £17.4bn ($32.5bn).

As usual, in Dubai's real estate driven economy, the airport will be accompanied by a logistics zone, commercial and residential schemes, and golf resort. These developments will apparently diversify the burden of property development away from state-led behemoths Emaar and Nakheel, drivers of the real estate boom. Property companies will be invited to bid on the open market for the right to develop sections of the new city. The Emaar/Nakheel duo will not be excluded, but they will not enjoy the quasi-monopoly role they hold in many of the schemes already under construction.

The parent vehicle for both the airport and surrounding urban schemes is the new DWC parastatal, chaired by Sheikh Saeed Ahmed Bin Saeed Al-Maktoum.The ruling family is thus taking the lead in another megaproject a Dubai hallmark. DWC's boss is already a leading figure as chairman of Emirates Airline and president of Dubai's Department of Civil Aviation. Sheikh Saeed also heads the Dubai Aerospace EnterpriseDubai Aerospace Enterprise body announced by the emirate's government in February as a vehicle for developing aviation industries and services, with day to day operations overseen by managing director Mohammed Al-Zarouni.

The DWC project design has been entrusted to the Beirut based Dar Al-Handasah group.

The trigger for the project is the increasing saturation of Dubai's existing international airport, which has two runways and is building its third terminal, but is almost entirely surrounding by the fast-expanding city. With limited room for the airport to grow further, and access hampered by Dubai's ever-worsening traffic jams, new facilities have been planned for some time at Jebel Ali the hub of earlier phases of Dubai's development, housing the main container port and free zone.

Ruler Sheikh Mohammed Bin Rashid Al-Maktoum has decided that now is the time to shift the focus of development and promote the Jebel Ali site, now renamed DWC, as the principle future centre of air transport expansion. His expert PR teams have worked adroitly to gain the maximum publicity for a facility that, for now, is costing the minimum for state/Al-Maktoum finances to develop.

Work is expected to start soon on the design and construction of a terminal at the new site reserved for Emirates and its offshoot companies, and purpose-built to cater for the double-decker A380 planes that the carrier is acquiring from Airbus to operate its high density long haul routes.

Trade Finance
Islamic Development Bank develops ex-im bank operation
The venerable Islamic Development Bank is to take a major structural step forward by setting up a dedicated trade finance arm, with a new export-import bank to be called the International Islamic Trade Finance Corporation eventually to be capitalised at $3bn, according to the IDB president Dr Ahmed Mohammed Ali.

This will be in addition to the existing Islamic Corporation for the Insurance of Investment and Export Credit.

The IITFC's initial capital is put at $500m, of which $450m has already been raised, Ali said.

The proposal, unveiled at the IDB's 30-31 May 31st annual meeting, held in Kuwait, brings the Jeddah-based institution closer into line with other multilateral development banks (MDBs) that have raised the role of providing short-term trade finance for poorer countries in their remit.

The IDB also plans a $2bn capital increase.

Insiders said hiving off the IDB's trade function was intended to promote the bank's ongoing reform process, sharpening its relations with the private sector. This process has been aided by expert thinking from the IDB Vision 1440 group (referring to the Hegira year, equivalent to 2020 in the Gregorian calendar) led by former Malaysian premier Dr Mahathir Mohammed and former Indonesian president Dr Bahrudeen Habibie.

Despite committing more than $38bn during its lifetime to support over 3,000 projects in its 56 member countries and Muslim communities, the IDB is hardly known for its dynamism. Much of its trade portfolio has gone into funding oil imports thus two crude and products facilities for Bangladesh accounted for some $175m of the $356m project and trade financing announced by the IDB in April.

The IDB has been active helping countries facing higher import bills. Recently trade financing facility include support for Indonesia to import crude from Saudi Aramco and fuel products from Kuwait. Indonesian Energy Minister Purnomo Yusgiantoro said he asked Aramco to ease its payment terms as a result of price-linked cashflow problems experienced by state oil and gas firm PT Pertimina.The IDB and Saudi Development Fund extended $100m to Lebanon's Council for Development and Reconstruction, to fund the import of Saudi products. In February, the IDB signed a $100m loan to back imports from Morocco's Samir (owned by Saudi financier Mohammed Hussein Al-Amoudi's Swedishregistered Corral Group); this brought the IDB's cumulative lending to the Mohammedia-based refiner to $1.3bn.

One source said the new operation would be more streamlined and efficient, expanding the bank's trade finance options. "They have built their trade finance operation from scratch, and spinning it off will make everything clearer," added another specialist, International Financial Consulting president Diana Smallridge in 2004 her company prepared a feasibility study looking at the options for IDB.

Bank opinion seems generally favourable to the concept of the new IDB arm, in particular for its capability to catalyse new trade flows in the bank's region of remit via the IDB's preferred creditor status. "The new export-import bank is an excellent move," commented HSBC Amanah's asset finance advisory group managing director Asad Zafar.ABC Islamic Bank managing director Naveed Khan focused on the IDB's increased ability to leverage additional Islamic commercial bank finance parallelling the B-loan operations developed by the World Bank's International Finance Corporation and other MDBs. "Based on the typical trade finance transactions that we have seen IDB engage in, there isn't a significant financing hole these credit-worthy entities face.

However the participation from other financial institutions is greatly enhanced by virtue of the presence of the IDB," he said.

Big appetite for murabaha
Manama-based Islamic investment bank Gulf Finance House (GFH) has tapped a debut $90m syndicated murabaha facility,which was absorbed by a group of nine non-Islamic banks from Europe, Asia and the Middle East.

This points to the appetite for Islamic deals the facility came into the market with a $50m launch target.

Mandated lead arranger and major underwriter for the one-year renewable facility was Bayerische Hypound Vereinsbank. The participating banks came from Austria (Bawag PSK Bank), Malaysia (Bumiputra-Commerce Bank Bhd and Malayan Banking Bhd) and the UK with two London-based Iranian-owned institutions, Melli Bank and Bank Sepah International. Also participating were National Bank of Dubai, Burgan Bank and Mashreqbank.

The facility provided GFH with short-term funding to meet general contingency requirements, linked to Bahraini capital adequacy rules.

Margins highly lucrative for banks, insurers who stay in
While many banks and risk mitigators have pulled back from the Islamic Republic amid fears of an eventually violent confrontation with the United States and its allies, some specialist banks and private market insurers are choosing to stay in the Iranian market because of the very attractive margins on offer, helped in some cases by their very much lower perception of risk than is apparent among the majority.

As GSN observed in February, banks and insurers have been pulling back from covering business in Iran whose trade and project finance is so substantial that a major international crisis could bring down export credit agencies (ECAs) and other heavily exposed participants (GSN 776/1).

Even if ECAs have not gone off cover which many have done for the sort of longer term project financings that were prevalent only months ago the cost of export credit has risen, with a downgrade for Iran by the Organization for Economic Cooperation and Development's Consensus committee to Category 5 (of seven) from Category 4.

As that astute long-term observer of international markets Bank Markazi Jomhouri Islami deputy governor Dr Mohammad-Jafaar Mojarred put it, "we have had excellent relations with the ECAs, and had been raising $3bn-4bn a year from this source." The Consensus downgrade and loss of cover, "could not be due to the [oil-driven] economic performance of the country, it is for political reasons," Mojarred told GSN.

The shortfalls in longer term international guarantees could be covered by the further use of the Oil Stabilisation Fund to finance longer term investments the subject of heated controversy in financial policy and political circles (not to mention at the International Monetary Fund).

Those institutions that have stayed in the Iranian market are benefiting from much higher margins and huge demand for cover and financing into a major economy. "The returns are around 10 to 12 times as high as a couple of years ago, because there is simply not enough available capacity to go round now," commented one Lloyd's of London political risk underwriter.

The difficulty in obtaining cover is strongly tied to the inability of American insurance markets to cover the risks, as a result of US sanctions. "Those players left in the market can make a return of at least Libor plus 6%," said the underwriter: "It is not a good risk, but you can incorporate it into a good book." Many insured deals involve state obligors, imports going through Eurasian states and oil swaps, and carry a maximum tenor of 12 months.

The London-based, Financial Services Authority-regulated subsidiaries of Iranian state banks report booming business, with a huge letter of credit flow. Bank Sepah International reports that in Q4 2005 confirmed l/cs were priced at about 2% over Libor, whereas it is now around 4%. Other banks are charging a lot more 8% was a common number GSN heard.

Exporters told GSN they were suffering from lack of l/c availability and inflated prices. One UK exporter into the oil industry reported that his local agent was arranging finance himself, to maintain business.

One route into Iran, private banks in Tehran told GSN, could be to use leasing and other operations that are being run through Iranian operations based in Dubai (GSN 782/12). One senior Tehran-based private sector banker suggested running goods into Dubai on short terms, for them to be re-exported to their Iranian end-users on five-year leasing terms. Local banks such as fast growing private sector enterprises EN Bank and Parsian Bank have been developing these operations.

Tehran is looking at a range of routes around its potential problems if the nuclear crisis escalates further.

Officials in Tehran expect bankers in centres such as London,Germany and France to lobby their governments against financial sector sanctions. In the West, it is expected that some form of 'smart sanctions' will be passed if President Mahmoud Ahmedinejad does not back down. The extent of Iran's isolation from current top-level Western thinking is that officials in Tehran seem genuinely to believe it will not happen to them.

Deutsche launches brokerage
One month after opening its first bank branch in the Kingdom, Deutsche Bank has launched its brokerage on the Saudi Stock Exchange (Tadawul). "Deutsche Bank's initial trade marks the first time a broker from outside the region has become a full member of the [GCC region's] largest stock exchange," head of global markets Middle East and North Africa Ricardo Honegger said in a statement.Saudi Arabian Monetary Agency (Sama) has granted Deutsche a licence to offer a full range of investment banking,asset management and wealth-management services.

Honegger said Deutsche was looking to launch equity finance, mutual fund, corporate advisory and money market businesses.

It has won a mandate from the powerful King Faisal Foundation to advise on an initial public offering (IPO) for its Al-Khozama real estate holding company, and recently issued a $1bn murabaha facility for Sabic.

Bourse regulator the Capital Markets Authority (CMA) is licensing an increasing number of brokerage firms and investment banks, to increase liquidity and levels of expertise in the market. Riyadh observers say the pace has quickened in the last month as the authorities have responded to the Tadawul crash that cut more than half of the market's capitalisation since late February and finally cost respected regulator Jammaz Al-Suhaimi his job (GSN 782/12).Regional institutions count among the newcomers:Lebanon's Audi Saradar Group has a license to establish an investment banking unit, as has Egypt's EFG-Hermes Saudi Arabia.

National Bank of Kuwait in early May opened a Jeddah branch.

Omani brokerage National Securities Companyis looking to establish a Saudi venture. The authorities have also granted licences to HSBC, BNP Paribas and Credit Suisse, and plan to authorise the entry of Japan's Nomura.

Development Bank launch: the state's still at it
The Saudi government intends to remain a big player in the market, despite the inflow of foreign firms.

Reuters in mid May reported that plans to launch the new Development Bank in the next year via a mega IPO delayed due to the market downturn was causing concern in the local banking industry.

Development Bank could prove a powerful tool in mobilising longer term infrastructure financing, but it is also likely to attract significant retail and corporation business away from other local institutions. Banks fear this will be accentuated by the scale of the planned IPO, which will be priced to tempt millions of small Saudi investors back into the market after the traumas of recent months.Reuters quoted a senior manager at Al-Rajhi Bank as saying, "the IPO will give Development Bank a huge popularity boost... The size of the capital will allow a rapid expansion of its branch network. It will have a huge impact on the current retail banking landscape."

The government has mooted plans to float 70% of Development Bank's SR15bn ($4bn) capital almost the combined paid-up capital of the top two local banks, National Commercial Bank and Al-Rajhi. However, the authorities are reviewing their launch plans, Public Investment Fund (PIF) and General Pension Organisation (GPO) sources told Reuters.

These institutions and General Organization of Social Insurance will each hold 10% stakes. A PIF source said:"I don't think we will finalise the business plan, get the management team and the flotation ready before the end of this year... the first quarter [of 2007] seems as an optimistic target."

Dubai's global airport in rhetoric and reality
As with other new Dubai projects, the Dubai World Central scheme's public launch has been supported by a promotional barrage. Official press statements have sought to suggest that in just 18 months the emirate will build the world's largest airport, with six parallel runways, each 4.5km long, with 800-metre deparation zones between them and three terminals. "By the end of 2007, the new Dubai World Central Airport and its six runways will be the world's largest passenger and cargo hub capable of handling 120m passengers almost double London Heathrow's current handling capacity. It will also have the capacity to handle 12m tons of cargo annually, compared to Heathrow's current 1.3m tons," the government announced.

The reality is rather more prosaically realistic, project sources in Dubai confirmed. The first runway, new cargo units and some temporary terminal facilities for charter flight and executive jet passengers, are now under construction and should be ready by end-2007, easing the immediate capacity pressure on the existing main airport. Meanwhile, they told GSN, land to accommodate the other five runways and prestige main terminals will be set aside. Subsequently, in response to evolving demand, these extra facilities will be gradually developed.

Questions have been asked about the environmental impact and sustainability of some prestige projects in Dubai, notably the offshore islands and peninsulas of the coastal real estate projects such as the palms.

There have been claims that in some cases environmental impact assessments (EIAs) have only been carried out once construction is under way and it is too late to take account of their findings. Obvious questions are raised by the development of such extensive new urban areas in a zone where water is in short supply (see GSN View).

However, project sources are insistent that DWC consultant Dar Al-Handasah has already carried out an EIA.

Moreover, they point out that the surrounding urban development which is supposed to eventually include "hundreds" of office blocks and homes for 250,000 people will only grow up over a lengthy period of time. In what is almost certainly a first for the region, the initial plans include a local light rail network. This will connect to the metro system already being built for Dubai. But although the process may be more measured than the early announcements have suggested, it will still broadly keep pace with Dubai's headlong pace of development. Tendering has already begun for the first phases of the logistics zone to accommodate warehouses,freight-forwarding firms and other such operations and for housing and office schemes. The authorities would like to see an estate of 2,500 homes for freehold sale, to be sited by the golf courses, about 6km from the airport, ready by 2010. It will be another hard sell.

Sabic, Dubai deals show the Islamic way
Western banks are taking an ever bigger role in Islamic financing transactions, underlined by Deutsche Bank's early May announcement that it would arrange a $1bn murabaha facility for Saudi petrochemicals giant Sabic's "expansion projects and future investments". The German bank is expanding quickly in the Kingdom (see below). Meanwhile, Barclays Capital recently co-managed a $3.5bn sukuk (Islamic bond) issued by Dubai's Ports, Customs and Free Zones Corporation. The issuers brought Barclays Capital into the deal to help place the issue internationally, while Dubai Islamic Bank distributed the bond in the Middle East. Elsewhere, Citigroup recently created the first sukuk bond index with Dow Jones to track the price of these instruments.

North Africa incursion for Sabic
Saudi Arabian Basic Industries Corporation is looking to North Africa as a focus for its ambitious international expansion plans. Sabic has emerged as Algerian state company Sonatrach's preferred partner for a number of planned petrochemicals schemes, and has particularly pleased Algiers by showing interest in the planned 15m t/yr Tiaret refinery, on Algeria's under-developed High Plateaux. Sabic is bidding against western majors such as ExxonMobil and Total, but may have a political push from the top President Abdelaziz Bouteflika (a former advisor to the leaderships of Qatar and the UAE) is strongly advocating more GCC investment.

Financial bids for eight schemes are expected in mid-summer. Meanwhile Sabic chairman Mohammed Bin Hamad Al-Mady on 29 May visited one of the Maghreb region's less fashionable spots, Mauritania, where he met the current head of state, Military Council for Justice and Democracy chairman Colonel Ely Ould Mohammed Vall, at the Presidential Palace in Nouakchott. Mauritanian news agency AMI quoted Al-Mady as saying that Sabic "aspires to set up an investment opportunity here in Mauritania in view of its natural resources, particularly iron ore, and the big role the potential presence of petrol and gas might play in establishing industries with added value."

© Gulf States Newsletter 2006