Middle East Point of View - Deloitte of View |Deloitte Touche (M.E.) ... control to the banks. The Middle East takes a ... the 2009 index showed Qatar, ...
On the regions burning issuesPointofView Published by Deloitte & Touche (M.E.)and distributed tothought leadersacross the region.March 2010 A head-in-the-sandapproachME restructuring The reverse side of the coinFraud in the Middle EastThe simple answer is no.Taxation in the Gulf takes a first step Imagine agent 007without M or Q Insights on BusinessIntelligenceMiddle EastMarch 2010Middle East Point of ViewPublished by Deloitte & Touche (M.E.)To email@example.comA word fromOmar FahoumMessage from the CEOI am pleased to be writing to you on theinaugural edition of another new and differentDeloitte publication, the Middle East Point ofView (PoV). Through this publication, we aspire to convey to the reader perspectives on varioustopics as provided by our partners andpractitioners. The thought pieces published in PoV are those of the authors and so are intendedto convey uninhibited and independent views and opinions.There is no doubt that the global businessenvironment has been fundamentally challengedon all fronts in areas such as regulation,environment and sustainability, fiscal reform andcorporate governance. It will be useful andrefreshing to read the views of people who aremost involved and engaged in these sectors.At Deloitte, we are always committed to sharingour knowledge as much as we are committed to the Middle East region. With the launch ofMiddle East Point of View, we hope to honor our commitments. I hope that you find it engaging and informative. Omar FahoumChairman & CEO Deloitte & Touche (M.E.)Point of View | Deloitte & Touche (M.E.) | March 2010 | 3ContentsIn this issueA head-in-the-sand approachChris Ward on restructuring in the Middle EastThe reverse side of the coinSimon Charlton on fraud in the Middle East. O for OptimismJames Babb on the outcome of the Deloitte Middle East CFO SurveyImagine agent 007 without M or Q Hassib Jaber on the Business of IntelligenceValuable lessons learntCynthia Corby on Reconstructing Risk ManagementThe simple answer is noNauman Ahmad answers as taxation in the Gulf takes aquestioning first step 710121518224 | March 2010 | Point of View | Deloitte & Touche (M.E.)Battery life Saba Sindaha on what will matter less in 2010 inthe Telecom Industry Tighten your belt to social responsibilityDeloitte Middle East Corporate ResponsibilityTeam explains why its a mistake for companiesto place their social causes onto the backburnerOne small step for firmsFadi Sidani on Corporate Goverance andSustainable Energy Interview: And the award goes to...Point of View asks Debabrat Mishra, Middle EastConsulting Business Leader at Hewitt, what ittakes to be a Best Employer in todays business world New thought leadership publications from Deloitte2426293236Table of ContentsPoint of View | Deloitte & Touche (M.E.) | March 2010 | 56 | March 2010 | Point of View | Deloitte & Touche (M.E.)In the post-Dubai World era, a fresh look at restructuring is required, which should no longer be forced on companies nor carried out behind closed doors. The region has embraced a process akin to that found in the developed economies and managements should recognize, and be ready to embrace, the new regime. Early action is nevertheless strongly recommended: there is much that companies can, and should, do to arrest a deteriorating situation and avoid passing the initiative and control to the banks. The MiddleEast takes afresh look atrestructuringME RestructuringPoint of View | Deloitte & Touche (M.E.) | March 2010 | 7The appointment of Deloitte UK Partner, Aidan Birkett,as the Chief Restructuring Officer (CRO) of Dubai Worldheralds a new dawn in the way governments andcompanies in the region handle businesses in financialdistress. In a bold move, the Dubai Government hasseized the initiative and set in train a process which iscertainly recognizable to the international bankingcommunity and which is going to become more familiarto banks in the Middle East.The government simultaneously announced a new legal framework based upon internationally accepted standards of transparency and creditorprotection, providing for an automatic moratorium an authorization to debtors to postpone payment which comes into effect when a company signals its intention to put forward proposals to creditors for a voluntary arrangement. And where Dubai hasgone, other countries in the region will follow.The old way of dealing with businesses under financial pressure in the Middle East has been anythingbut transparent, but in the aftermath of the global crisis and in the light of the sheer scale and complexity of the financial issues at Dubai World, a new approach is needed.We can now expect lenders in the region to adopt theirown approach to customers in distress. Banks havealready strengthened their cross-border workout teamsand are taking a more active role in the review of highly-leveraged portfolio businesses. They are taking moreseriously what might hitherto have been regarded asminor breaches of covenants, they are increasing theirfees and the cost of the debt they provide, they arefocusing on de-gearing strategies or even exiting fromrelationships altogether (if they can), and are alsodemanding that businesses be well-advised. All this willlead to an increase in formal restructuring processes.Early Warning SignsNaturally, companies should avoid reaching the stagewhere restructuring processes are forced upon them soas not to lose initiative and control. They should be ableto detect the warning signs.Early warning signs are usually a combination of market factors and management issues. By way of example, trouble is brewing if sales are dependent on discretionary spend, or if it is not possible to pass on cost increases in price rises to customers; there may be changes in legislation, exchange rates (leading to currency exposures) or permanent shifts in customer buying patterns which call for a fundamental rethink of the business model. On the management side, an over-stretched and under-resourced team that does not have reliable and up-to-date financial information represents an accidentwaiting to happen and few administrations in theMiddle East region will have any experience in steering abusiness through a downturn.But for a company heading into turbulent financialwaters, early action is critical and can make thedifference between revival and insolvency. We Detect the Signs, Now What?There are various strategies that companies can adopt in answer to distressing signals. There must be an unswerving focus on cashmanagement and cash preservation; cash is definitelyking in these situations.A thorough and structured review of working capital willusually highlight a number of areas for improvement,whilst attention should also be paid to ensuring theaccuracy and reliability of forecasts, particularly 13-weekrolling cash flow forecasts. Every effort should be made to improve operationalperformance through revenue enhancement, costreduction initiatives, and a review of capital expenditure.All options should be considered, including the sale ofbusinesses or the closure of unviable ones; there shouldbe no sacred cows.Management should also recognize that there are likelyto be gaps and shortcomings in their own team, andthat they will probably need to draft in people andadvisers with experience in operating in distress and in turnarounds. A companys overriding objective must be to implementinternal changes, develop a credible and robust business8 | March 2010 | Point of View | Deloitte & Touche (M.E.)(Source: Deloitte)plan and demonstrate that the situation is under control.Prompt and regular communication with lenders isparamount: banks hate surprises, so they need to betold the nature and causes of the problems and be givena working plan of how the company intends to dealwith these. This should win the banks confidence andhelp management keep control.An early dialogue with lenders will enable a greater rangeof re-financing options to be considered, which mightinclude the capitalization of unpaid interest, reschedulingrepayments, debt write-offs, debt-for-equity swaps, theresetting of covenants or new sources of funding.In contrast, leaving things to the last minute beforelending covenants are breached may leave the companyin control, but this is likely to be temporary, since bankswill be wary and will have the upper hand in negotiations.Banks in these circumstances may demand additionalsecurity and higher fees, may place restrictions on, oreven reduce, funding lines and may appoint independentaccountants to undertake a review. These actions areoften the precursor to a restructuring which is forced onthe company.At the other end of the scale, a head-in-the-sandapproach and a failure to act before a covenant breachis a sure sign of a management that is leading theircompany towards insolvency. By Chris Ward, CEO, Deloitte Corporate Finance Limited ME RestructuringPoint of View | Deloitte & Touche (M.E.) | March 2010 | 9On the management side, an over-stretched and under-resourced team that does nothave reliable and up-to-datefinancial information represents an accident waiting to happen and fewadministrations in the MiddleEast region will have anyexperience in steering a business through a downturn.Fraud poses great risks to companies inthe Middle East as they struggle tomaintain or recover their market position.The reverse side of the coin is thatcombating fraud presents these samecompanies with opportunities. The regionshould not ignore the chance to redefineitself as an archetype of transparency andgood governance. FraudA stain on theroad to recovery10 | March 2010 | Point of View | Deloitte & Touche (M.E.)As recent corporate actions and economic activity across the Gulf spark a new wave of international interest and awareness, little doubt remains as to how important the region has become to the global economy: few hadanticipated the extent and the effect of the global downturn on the region or, inversely, the impact thatregional events would have globally. The GulfCooperation Council (GCC) states are recognised as keyeconomic and financial hubs in the region by theinternational business community: the impact of theinternational debt crisis on the region, and vice versa,only reinforces this view. The question that now begs itself is how the economyand the markets in the region continue to weather thestorm and how businesses are responding to the neweconomic realities. The restructuring of debt by majorconglomerates and the flurry of reorganizationalactivities indicate that the focus is certainly on recoveryand long-term stability. What recovering firms should look out for, however, isfraud, which tends to take an upswing in a downturn.An increased exposure to fraud, waste and abuse is oneof the harsh realities of tighter credit and an economicslump. Companies need to respond by adopting moreeffective measures of eradication. A companysintolerance to acts of fraud, bribery and corruption areessential components of corporate recovery, central tolong-term survival and success. As companies adapt to new business realities, theopportunity to embrace enhanced corporategovernance should not be overlooked as theyrestructure and recover, their organizational structureshould enable better governance, transparency andaccountability. It is more and more apparent thatstakeholders are influenced by these factors and in thisclimate it is as important as ever for the regionsreputation to be untainted.Transparency Internationals Corruptions PerceptionIndex (CPI) positively reflects the regions changingattitude towards fraud and initiatives taken by theleadership of several Middle Eastern states to fightcorruption the 2009 index showed Qatar, UAE andOman moving up in their ratings and Saudi Arabiamoving up 17 places in the past year alone. Fraud Risk FactorsThree factors generally characterize fraudulent activity:incentive, opportunity and rationalization. These threefactors are exaggerated in an economic decline, resultingdirectly in an increased exposure to the risk of fraud. In challenging economic times, the capacity forindividuals and corporations to rationalize their actionsoften intensifies. Individuals and organizations alike canbe under additional pressure to perform, which canoften lead to companies cooking the books, orindividuals manipulating results. The need for personalgain, or indeed the avoidance of corporate and/ orpersonal loss can be more acute in a downturn, whichcan often act as the motivation for fraudulent behavior.Companies that are cutting costs may have fewer staffand a reduced level of internal control, which can inturn present additional opportunities for fraud. The true cost of FraudFraud represents a constant drain on companyprofitability. The true cost of a fraud scheme is often notassessed entirely: an employee stealing $500,000 is onlythe tip of the iceberg, a company with a 10 percentprofit margin must sell $5 million to make up for theloss. Then there is the reputational damage to theorganisation, operational losses that may have beenincurred, and the effect of disruption on the businessand waste of valuable management time that need tobe factored in. Unfortunately, many businesses look atthe money spent on fraud prevention as a cost centre,subject to budgetary constraints. However, fraudprevention should be viewed as a profit centre as lossesdue to fraud generally come straight off the bottom line.Companies without preventative measures in placeoften simply cannot survive fraud incidences. By reducing vulnerabilities and limiting impact,companies can go a long way to eliminate the rate ofoccurrence, and the cost of fraud should it occur. Thekey to combating fraud is in identifying risks andvulnerabilities pre-emptively, and having a plan in placeto respond when it happens. Those that adapt to theeconomic conditions and the risks and challenges theybring about have the opportunity to adopt appropriate,effective and sensible solutions. Ultimately, they willhave a better chance at recovery, securing their futureand ensuring that the Middle East is a paradigm oftransparency and good governance. By Simon Charlton, Managing Director, Forensic &Dispute Services, Deloitte Corporate Finance Limited FraudPoint of View | Deloitte & Touche (M.E.) | March 2010 | 11CFOOptimismAnopportunity in12 | March 2010 | Point of View | Deloitte & Touche (M.E.)* The Deloitte CFO Survey is a survey of major corporate users of capital that gauges attitudes toward the general economic outlook, financing valuations, and risk.The 2009 third quarter survey was conducted between July and September 2009. To download a copy of the Deloitte CFO Survey, please visit www.deloitte.com, select any ME location, click on Insights.The only thing that an optimist cannot view as positive is a pessimist. This is certainly what has transpired from theDeloitte Middle East CFO Survey of October 2009*. Whetherthis optimism is warranted is arguable, but one thing is certain,CFOs have an opportunity to position themselves asindispensable assets to their respective organizations.Chief Financial Officers (CFOs) interviewed for theDeloitte Middle East CFO Survey were confident as toimproving business conditions in the near-term. Theywere optimistic about demand for their companysgoods and services, improving operating cash flows and the increasing attractiveness of private equity and M&A opportunities in the next year, underpinned by relatively strong regional GDP growth forecastscompared to other parts of the world for 2010.Whether this rosy outlook is realistic or not, some facts remain: business will continue and it will do so inan increasingly competitive, complex and changingenvironment, and the CFO role has never been as critical for the survival of the company. The CFO, in this context, is forced toward the forefront of theirorganization, both, as an administrator of change from a governance perspective and by serving as ananalyst and strategist in interpreting the changingexternal environment. Every cloud has a silver lining ... (the CFO as Steward)With scandals and cases of fund mismanagementtainting the financial world the CFO can look forward to a stronger organization from a corporate governanceperspective. Raising funds on the international marketswill increasingly require stricter regulations and directorsand senior management will be increasingly heldaccountable (liable even) for their companiesoperations. The CFO will be empowered to ensure thatproper company policy and procedures are in place andcomplied with rather than acquiescing to anyindividuals whims (such as the CEO).Gone are the days of the lone CEO making deals withhis trusted ten-key calculator as his advisor, and sendingback email instructions to the office for his CFO to takecare of the paperwork. If the CEO were the LoneRanger, hed better make room for Tonto his CFO to ride with, and guide him.The fast and the furious ... (the CFO as Strategist)The external business environment is changing atbreakneck speed, giving the CFO an opportunity to bechief navigator in the company if it is to survive and charta successful course. Firms in the Middle Eastern regionhave traditionally underutilized the CFO as mere financialcontroller. Their focus has been on producing timelymonthly accounts rather than producing prospectiveinformation and metrics that would flag risk issuesappropriately. Challenges in the external environment arealso emanating from so many different directions bethey regulatory, technological, competitive or financial that an organization can no longer afford to have theirCFO sitting in the back office producing information thatis, essentially, out of date in this environment. The CFO needs to spend considerable time analyzing andinterpreting these changes and their impact on theorganization before the changes occur. Without thisactivity the organization becomes reacting rather thanproactive, leaving itself vulnerable to market dynamics maybe even getting acquired by another company guidedby a more forward-thinking and instrumental CFO.To operate the space shuttle you need astronautsnot taxi drivers... (the CFO as Operator)As the CFO take on more progressive roles within theirorganizations, technology must be leveraged in financialreporting to free up their time. The challenge here lies inhiring competent staff, able to deal with thesophisticated technology. Despite all of the advances inEnterprise Resource Planning (ERP) systems and financialreporting packages, many large organizations stillproduce much of their information based on manualdata entry into spreadsheets (and sometimes in parallelto an existing ERP system!) But firms can no longer compete with errant andunsystematic information. The CFO needs to ensure thatthey have the necessary skilled resources to produceinformation systematically and efficiently because thereis little choice left in this regard. If the CFO is not freedup to spend more of their time on forward-lookingissues and their organizations do not respond to thedemand for reliable information, they will miss out onmany opportunities and will no longer be in a positionto compete.When an Ostrich faces danger it hides its head inthe sand ... (the CFO as Catalyst)Companies in todays business environment cannothide from known risks and dangers and should payclose attention to their stakeholders expectations.Examples abound of organizations that have failed tomanage stakeholder interest that has resulted in investor mistrust, loss of credibility as well as the loss ofoverall brand value. As focal points of a companyscorporate governance and information centers, CFOshave a leading role to play in managing timelystakeholder communications for the organization andpromoting transparency.Whether CFOs are justified in their optimistic outlook forbusiness activity in the near-term is moot. What iscertain is that the CFO are fast becoming indispensableto their organizations, and from that perspective, theycan have a rosy outlook on their immediate future at least. By James Babb, Clients and Markets Director, CFOProgram Leader, Deloitte Middle EastME CFO SurveyPoint of View | Deloitte & Touche (M.E.) | March 2010 | 13 uncertain times14 | March 2010 | Point of View | Deloitte & Touche (M.E.)Never has the adage knowledge ispower been truer than in todays business environment. With a worldeconomy bedridden with the flu, we areall after information that helps us take the right decisions. The Businessof Intelligence Business of IntelligencePoint of View | Deloitte & Touche (M.E.) | March 2010 | 15The world financial crisis has business leaderswondering how to come out the other end ready todash into the revival period. But to get from point A topoint B, businesses need to know where they are atnow. So it is essential to define properly the state ofpoint A: what do these leaders need to know now tohelp them reach their destination? They would alsoneed the insight to rightly assess what point B wouldbe like.To that end, how good the information that is beingreceived and distributed throughout the organization isand if it really reflects the current state of affairs is vitalfor decision-making. There is a well-defined frameworkthat includes processes, governance and technologythat enables business managers and leaders to achievea panoramic view of their business and conduct thenecessary analysis to make informed decisions:Business Intelligence.Business IntelligenceBusiness Intelligence (BI) is currently the buzz word around the Middle East region as it is around most of the globe. The term BI refers to a framework of processes, people, data and technology that supports extraction, analysis and presentation of information (dashboard) that helps decision-making at multiple levels within the organization.A dashboard should, at the very least, allow the user to access the relevant information, be able to drill down, identify variances, translate to action and provide insight. More importantly, it should have a user-friendly interface. The figure below shows a high-level organizationalstructure with the type of information required at eachlevel. The basis for a BI solution is a business strategy, coupledwith a business plan, which are communicatedthroughout the organization. Based on this strategy, theperformance of each functional area is defined as wellas that of each individual.As the figure below shows, there are typically threeorganizational layers that are both, producers andconsumers of data. The dashboard at the executive levelallows the leadership to have a consolidated view offinancial and operational metrics with the ability to drilldown. The middle management will be more focusedon dashboards that revolve mainly around the functionalareas they oversee. Finally, there are tactical dailymetrics that should guide team activities andcorresponding priorities. Imagine agent 007 without M orQ and the support system(including the slick car) that keepsproviding him with data.16 | March 2010 | Point of View | Deloitte & Touche (M.E.)(Source: Deloitte)ApproachAs in any enterprise initiative, BI implementations do notdiffer much in terms of the sequence of phases wherebyone goes through vision/plan, design, build, test, anddeploy. However, there are several elements that arespecific to the successful implementation of BI solutions. 1. Having a clear business strategy sets the tone for theBI solution particularly the Key PerformanceIndicators (KPIs) required. In fact, the BI strategyought to be based on the business strategy.2. Consider process, data and organization in additionto technology as you embark on a BI implementationplan to assess readiness. 3. Follow a phased approach with multiple releases ofthe solution. In other words, divide your scope tomanageable projects and deliver each element in thescope based on an established prioritization rule.4. Think big. There is nothing wrong with that.However, establish an approach and timeline that are pragmatic.Regional ConsiderationsA significant portion of economic activity in the MiddleEast is done by family-owned businesses whether in thetraditional family-oriented governance structure or aformal holding company structure. The issue ofsuccession in a family business is usually a challengingprocess that requires, amongst other things, a clearvisibility of the current financial and operational state ofthe company to help in the planning and division ofownership among multiple siblings. In addition, with theincrease of globalization, a competitive environment isforcing this type of business to reflect upon their currentstate and decide on business consolidation and/ordivestiture to remain lean and competitive. For all ofthese scenarios, a clear framework consisting of abusiness strategy, a business plan and a reportingmechanism is of the essence to facilitate action.Additionally, the pursuit of capital to finance rapidgrowth that has instigated the proliferation of new stock exchanges and trading activity in the Middle Eastis aimed at both local and global investors. Armed withmetrics that are based on international standards andrecognized throughout the investment world, MiddleEastern companies make themselves more attractive to investors. Similarly, in the current tight credit environment, thesubscription of loans to financial institutions will becompetitive, demanding a data a little stronger than ausual business case. The strength of the portfolio willdepend heavily on the extracted, analyzed, andconsolidated data.Finally, time and again we hear executives complainingabout the time (and sometimes the pain) involved inextracting data and converting it to meaningfulactionable metrics. A proper BI solution will ease thistime consumption and pain to allow executives, middle managers, and team members to focus on value creation.The Qs and Ms of BIThe right information, given to the right user, at theright time is essential to leading a successful mission.Imagine agent 007 without M or Q and the supportsystem (including the slick car) that keeps providing himwith data. The set of metrics established for the development of aBI solution should feed back into the individualperformance system that each employee is evaluatedagainst, top down. Once this is established, you willhave an integrated enterprise performance system. Infact, you may even wish to have your BI dashboard tolook just like the one in 007s car. By Hassib Jaber, Consulting Partner, TechnologyIntegration and Enterprise Applications, Deloitte Middle EastBusiness of IntelligencePoint of View | Deloitte & Touche (M.E.) | March 2010 | 17Back toBasics: 18 | March 2010 | Point of View | Deloitte & Touche (M.E.)ReconstructingRisk ManagementLesson 1: Know Your CustomerMany financial institutions and contractors in the Gulfregion have been guilty of entering into contractualagreements based on the customers name andreputation alone, without consideration of the basicfundamental risk management philosophies: lookinginto the financial viability of the project and thecollateral associated with that customer. This lapse may lead to significant construction and/orfinancial problems and risks as the project progresses.These problems range from changes in the scope ordesign of the project to problems of receivablescollection, via claims issues - all financially costly andtime-consuming for the contractor.It is therefore crucial to understand the customer, theirneeds, their technical understanding of the projectlifecycle, the viability of the actual project and theirfinancial resources for the project. These are all basic,albeit lengthy, requirements that contractors shouldaddress. But faced with double digit yield margins,contractors in the region sometimes chose expediencyover diligence, with dire consequences.Lesson 2: Negotiate Performance BondsPerformance bonds are typically issued in favor of theproject owner for the full duration of the contract.Normally, a margin would be held by the issuing bank ascollateral against the bond, with the size of this margindepending on the relationship between the contractorand the bank. These performance bonds are not releaseduntil the project is completed and free from defects. Such practices incur additional costs for the contractorand put pressure on their cash flows if the margins heldby the bank are significant. The performance bond canalso tie up financing facilities when the release of thebond is unnecessarily delayed at the completion of the project. From skyrocketing prices ofconstruction materials and laborto the suspension, or outrightcancelation of projects due to lackof financing, constructioncompanies in the Gulf,particularly in Dubai, havenavigated their fair share ofturbulent waters. One thing theycan learn from their experiencesis the importance of prudent riskmanagement. This article focuseson only a few, albeit critical,elements of a complete riskmanagement plan.Construction RiskPoint of View | Deloitte & Touche (M.E.) | March 2010 | 19While performance bond specifics could be negotiatedat the commencement of the contract, traditionally ondemand bonds for the period of the contract is thestandard industry practice in the region.In western markets, for example, the level ofperformance bond usually decreases as the projectdevelops. Certain milestones in the construction cyclemay trigger both the release of margins held and theshare of performance bond required for the remaininglife of the project, thus reducing the burden on thecontractor. This is eminently sensible and manages the risks from both, the contractor and the employers perspective.If the contracting industry in the Gulf wants to changethis accepted practice, contractors will need to standtogether to drive this change and reduce the risks thatthey get exposed to. Lesson 3: Manage Cash Flow If the recent credit crisis has taught us anything, it is thatcash flow management in any business is crucial. Forcontractors, accurately forecasting costs to completion,the timing of these costs, and receiving timely progresspayments (net of retentions and any advance payments) is critical to their success for healthy cashflow management. Policies and procedures regarding charges on overduereceivables and the contractors ability to suspend workon unpaid contracts are becoming more commonplaceas contractors have been forced to face the brunt ofproject funding instead of the developers. Contractorsneed to be stricter in implementing their rights underthe International Federation of Consulting Engineers(FIDIC) to suspend work where payments are notforthcoming and should implement tighter controlsaround project cash flows. It is obviously important thatthis is done professionally and with the appropriatebalanced sensitivity to their employer relationships.Lesson 4: Keep Proper Documentation To date, construction work in the UAE has beencharacterized by fast-track construction beginningconstruction with incomplete designs, which are thencompleted as the project advances. As a result, variationorders and claims are common, although the process toresolve them is often slow and drawn-out. In a marketwhere variations can sometimes form 40% or more ofthe final contract value, contractors are burdened withcash flow constraints and financing costs for thesevariations and claims until a final agreement is reached,with significant consequences on their financialreporting periods given the uncertainty they face untilthe final settlements are agreed.For the majority of contractors, portions of the costmanagement tracking systems and documentationrequirements of the project have, for numerous reasons,been neglected or under-resourced until actuallyneeded, when the information is hastily pulled together retroactively.Many financial institutionsand contractors in the Gulfregion have been guilty ofentering into contractualagreements based on thecustomers name andreputation alone20 | March 2010 | Point of View | Deloitte & Touche (M.E.)Such documentation is key to identifying variations andclaims, measuring the extent of the variation/claim, andproviding evidence of the issue to the contract owner.The quality of the information available from thecontractor can significantly aid in the prevention of adispute, by providing timely and well-documentedinformation about the issue for the stakeholders toconsider. Where a dispute is inevitable, such informationcaptures accurate details that can be easily supportedwith evidence to enable a speedy resolution.Given the magnitude of contract variations noted, bynot addressing this issue in any robust risk managementplan, a contractor is inevitably delayingsettlement/payment of variations/claims through notbeing able to demonstrate clearly how the issue aroseand its full scope. Retroactively producing theinformation provides the basis for challenges against theauthenticity of the claim due to the potential lack ofvalid information, and unduly delays resolution.Contractors need to better manage this process andchange the standard practice to one where the value ofthe variation is certified as they progress, rather thanleaving it until the end of the contract.This necessary change in practice will ensure thatcontractors get paid for the costs they incur and that thecontract owners appreciate the costs of the changesthey request, which can often be fundamental (andcostly) design changes.Lesson 5: Learn the LessonAs many Dubai-based contractors look to new marketsas a result of the Dubai property slump, the abovelessons become even more important to learn.Expanding into new jurisdictions offers manyopportunities to the contractor but also potentiallyincreases their risk as project owners or developers aremore likely to be unknown to them. A proper understanding of the customers financialstability and the project viability is critical before jumpingonboard with the contract. Similarly, a thoroughunderstanding of local laws, regulations and normalbusiness practices is also advantageous, and has led tomany contractors seeking some form of partnershipwith an established provider in the new target market. Back to BasicsThe inherent risks faced by construction firms in the Gulfregion over the past 3-4 years demonstrate howimportant a risk management plan is to a contractor. Inthe current economic environment, it is important to getback to the basics of risk management, by focusing onunderstanding the project owners requirements andresources, cost management tracking systems and cashflow management and thereby focusing on the finebalance between risk and reward. Heres to implementing the valuable lessons learnt. By Cynthia Corby, Audit Partner, Construction Industry Leader, Deloitte UAEConstruction RiskPoint of View | Deloitte & Touche (M.E.) | March 2010 | 2122 | March 2010 | Point of View | Deloitte & Touche (M.E.)Taxatio takes th TaxationPoint of View | Deloitte & Touche (M.E.) | March 2010 | 23Governments in the Gulf States have been astir with theintroduction of new tax laws in the last few years,leading to a welcome and sharp reduction in the taxrate: from 55% in some countries, such as Kuwait, to aslow as 10% in others, such as Qatar. A decision by SaudiArabia to replace its decades-old law with a moremodern tax law sparked a tax rates competition in theregion. Following in Saudi Arabias footsteps, Kuwaitintroduced its own law, reducing its tax rate to 15%.Oman followed suit and reduced its rate to 12% andfinally Qatar, which had been reviewing its tax laws forquite some time finally ratified them and reduced theirtaxes to 10%.Needless to say, this is a step in the right direction, butthe authorities should not be resting on their laurels justyet. There is still progress to be made.The present tax laws seem to have establishedfundamental principles, but they lack the sophisticationthat modern economies and businesses demand andseem more suited for an industrial economy. They donot address complex issues such as the taxation offinancial institutions involved in derivatives transactions,for example, selling Islamic products or an insurancecompany or a private equity concern. A tax advisor findshimself in a unique situation of having to apply the basictax law to very intricate matters. The one size fits allconcept can hurt businesses and the economies of theGulf countries. A conscious effort is required by the taxauthorities to develop specific legislation for suchsituations and products.But past experience tells us that once a law is enacted, subsequent amendments are rare. In other countries, developed and developing, there are regular amendments to the tax laws through regular finance bills. These bills adapt the tax laws to serve the needs of the governments of the day and to upgrade the tax laws.This is what is required in the Gulf states. We must keepthe momentum established over the last few years andnot lose the focus on modernizing the taxation system. Governments also use taxation to enhance fiscal policy.Increasing taxation in certain areas or providing taxincentives in other industries has always been animportant tool to governments. In the Gulf, perhaps dueto the large revenues derived from oil, taxation has notreally been used as a policy-making tool. This is an areathat should be developed in the foreseeable future.Further refinement of the laws is required, especially asregards transfer pricing legislation. This is an area onwhich there has been a lot of international focus overthe past few decades, but surprisingly not in the Gulf.Whilst various authorities in the region had set up theirown internal rules in the past, specific legislation basedon internationally accepted practices has been lacking.More work needs to be done in this field in the region inorder to provide the certainty as to the tax position thatforeign investors in an increasingly interconnected worldare seeking and expecting.So whilst new tax legislation is a step in the rightdirection, a lot more needs to be done to make the taxlaws more sophisticated (though not complicated). Acontinual evaluation and revision of the tax laws in theregion is therefore necessary in todays globalisedbusiness environment. By Nauman Ahmed, Partner in Charge, Tax, Deloitte Middle Easton in the Gulf he first remedyThe replacing of decades-old lawsby modern principles is a positivestep. But is it enough? The simpleanswer is no.In a challenging business environment,customer service, network quality and costprice will be the key drivers which operatorswill have to focus on to reduce subscriberturnover and increase market share in analready highly-penetrated market. On theother hand, cost reduction, value-addedservices and innovative tariff plans will helpoperators meet their targets.MiddleEastTelecomBraving The Windof Change24 | March 2010 | Point of View | Deloitte & Touche (M.E.)The Wind of Change has been blowing through thetelecom sector in the Middle East in recent years,especially in the Gulf, a region characterised by some ofthe highest rates of penetration in mobile telephony inthe world (10.58 million subscribers in the UAE alone). The need to keep spendingTelecom companies in the Middle East continue toincrease Capital Expenditure, investing heavily ininfrastructure to improve network quality and offer morevalue-added services to customers witness thepartnership with India's Tata Communications and fiveGCC telecoms companies in Bahrain, Oman, Qatar, theUAE and Saudi Arabia to construct a new cable systeminto the Gulf that will connect the region directly toother cities and business hubs via Tata's Global Network.But the sector has not been immune to the currentglobal credit crisis, which may impact growth insubscriber numbers, profitability and the working capitalof the operators. Operators continue to focus on costoptimisation and driving efficiencies to manage theirgrowth and profitability expectations. In order toachieve growth, large regional operators are seeking toexpand beyond their domestic markets by acquiringsmaller companies across their borders. Countries suchas Iraq and Iran, represent growth markets, in contrastto the already mature markets in the Gulf. Telecom regulators are also opening up and controllingnew avenues for operators such as live TV broadcastingthrough an advanced network to mobile users.ChallengesNumber portability and Voice Over Internet Protocol(VOIP) are key areas that will affect telecom operators inthe near future. In the first instance, number portabilitywill require further significant investment from operatorsand will facilitate users switching from one operator to another. As regards to VOIP, a significant portion ofoperators revenue depends on international calls. Theintroduction of VOIP will have an impact on revenuesand profitability. The smartphone effectThe smartphone will continue to reset what customerswant from their mobile phones: voice quality andbattery life will matter less as customers increasinglychoose their phone according to the suite ofapplications it offers. The business model for smartphones is likely to diversifysignificantly in 2010. Sales of smartphones around theworld are projected to continue rising in 2010,accounting for 27% of total phone sales worldwide.Smartphone sales in UAE are also expected tosignificantly increase over the coming years.OutlookDespite key challenges imposed by heavy stateregulation, the sector continues to be extremelycompetitive. Customers will eventually benefit fromlower tariffs and bundled offers are likely to continueincreasing in the near future. Revenue from data servicesand the Internet will continue to rise for local operatorswith a drop in the share of fixed line revenues to total revenues.If the demand for the mobile broadband remains strong,and it is expected to be particularly strong in the MiddleEast and Africa, mobile operators will have to investheavily in increasing their capacity, raking up a bill in thetens of billions of dollars. In countries with already highlevels of mobile broadband penetration operators mayhave to invest in additional spectrum. By Saba Sindaha, Telecommunications, Media andTechnology (TMT) industry leader, Regional ManagingPartner, Deloitte UAEME TelecomPoint of View | Deloitte & Touche (M.E.) | March 2010 | 25The idea that companies should contribute to the socialand economic environment they work in has long beenin practice. These philanthropic activities were seenmostly as an organizations license to operate. In current market difficulties, some companies may betempted to tighten their belt as regards to socialresponsibility, though this may not prove to be the bestoption as research shows that paying close attention tocorporate social responsibility may even be profitable.It Pays to be GoodAs focus shifts towards the social and environmentalfootprints of businesses, social purpose is playing anincreasingly important role in a brands success. Thosecorporations wishing to grow and succeed in the newmarket realities have to respond to the needs of, notonly their immediate, but also the global society.And with good reason. Results from a 2009 globalstudy by Edelman, the international public relations firm,showed that nearly 70% of the 6,000 peopleinterviewed globally remained loyal to brands that had asocial purpose, continuing to spend on their productsdespite the recession. Two-thirds of interviewees said they would switch to abrand of similar quality that supported a good cause.The same number agreed they would rather have aproduct that supported the livelihood of local producersthan a designer brand. Over 80% of the people interviewed will changeconsumer habits if it makes for a better world; most ofthose are looking to companies and brands that maketheir task of making a difference, easier to achieve.In essence, people expect companies to support localeconomies and foster good causes and will give themtheir business if they do. In other words, it pays to be good. Today, the issues at the forefront of every concernedglobal citizen are equality, accountability, theenvironment and education.These issues should be at the cornerstone of everybusiness leaders mind.DiversityCultural and gender diversity are keys to success in anincreasingly mobile and global economy.Understanding, embracing, and capitalizing ondifferences are critical to an organizations ability to hireand retain the diversity of skills and capabilities neededto effectively create teams that deliver excellence.In the past decade, the Middle East region hasexperienced a 7.7 % rise in the number of women in thelabor force, the highest change compared to any otherregion in the world. This is a step in the right direction,but it is not enough as women still only make up 33.3%In economically recessive times, manycompanies in the Middle East may placetheir philanthropic and social causesonto the backburner as they try tobalance their finances. This is a mistake.CorporateResponsibility inthe 21st century26 | March 2010 | Point of View | Deloitte & Touche (M.E.)of the workforce in Arab countries, significantly less thanany other region (ILO, 2008). EthicsThe well-being and future prospects of an organizationdepend on a solid reputation for objectivity,professionalism and integrity. A vital asset of anycompany is its ethics, whence its people strive to do notonly what is legal, but what is right. As the globalmarket crisis touches the Middle East region and forcesdifficult decisions in many areas, including staffreductions, it is more critical than ever that companiesdo not sacrifice their values, culture or principles.The planetClimate change is one of the most pressing challengesthe world faces today. It is both an environmentalproblem and a social one, with significant effects on thelives of billions of people. Businesses around the worldare recognizing the role they can play in slowing climatechange by altering their patterns of using energy andnatural resources. Companies also have opportunities toshape effective public policies for curbing emissions ofgreenhouse gases and for stimulating the invention andcommercialization of low-carbon technologies. EducationOver the past decade MENA governments spent anaverage of 5.3 % of GDP on education the largestshare in the world and this has significantlystrengthened the supply, quality and profile of the laborforce. Leading firms in the region should continue toinvest in education and skills building, investments thatboth, protect and develop an organizations mostimportant asset: its people. Mobilizing the intellectualcapital of any organization makes the greatest socialimpact and advances key business goals. To thrive as a professional and citizen in the 21st-centuryeconomy requires new skills and capabilities: namelyleadership, ethics, problem solving, financial literacy,technology and global awareness, and others. Our global, interconnected, 24x7 world places newdemands on the workforce. Ethical leaders who are both empathetic and judiciousare in demand; technology is the primary enabler ofinteractions and productivity; workplaces and teams arecross-cultural and global; and organizations require asteady stream of creativity and innovation. A commitment to corporate responsibility is one of thethings that make an organization a leader in businessaround the world. Human dignity, cultural diversity,ethical behavior, the advancement of education andculture, the sustainable use of natural resources andrespect for the environment are pillars that no businessstrategist can, nor should, ignore. By Deloitte Middle East Corporate Responsibility TeamCorporate ResponsibilityPoint of View | Deloitte & Touche (M.E.) | March 2010 | 2728 | March 2010 | Point of View | Deloitte & Touche (M.E.)SustainabilityPoint of View | Deloitte & Touche (M.E.) | March 2010 | 29Governments, consumers, and employees arerapidly realizing the importance ofsustainability. As such, companies need to take notice and realize that sustainability is not merely a fad but rather, a businessimperative. Businesses in the Middle East have multiple windows of opportunity tobecome more sustainable. Those wishing tosurvive in the new global economic era need to recognize that embracing sustainability is a strategic decision that will require a majortransformation in the mindset and thepractices of an organization.Sustainability,a growingbusinessimperative Following a downturn in sustainability initiatives frommany organizations due to the economic downturn, the issue of climate change is fashionable once again, especially following the United NationsFramework Convention on Climate Change (UNFCCC) held in Copenhagen.New climate policy will have a direct impact onbusinesses. But despite the challenges imposed by suchpolicies, including raising the cost of energy, imposingnew production process requirements and changingcompetitive dynamics, companies can also benefit fromthe increasing global focus on sustainability issues suchas carbon (greenhouse gas emissions), energy efficienttechnology, and water use. Many leading companies have begun seeing improvedvalue by broadening the definition of the sustainableenterprise and by executing green practices to deliverpositive returns. They have embarked on an enterprise-wide transformation in an effort to improve financial,environmental, and social performance. And in manycases they have succeeded, improving financialperformance, enhancing brand and increasingshareholder value. General Electric CompanyGeneral Electric (GE), for example, has proved thatcommitment to sustainability can directly promoteprofits and innovation. Sustainability is a full-timecommitment to GE, integral to their business strategyand with the same goals, strategies and accountabilitiesthat drive any other part of their business. Despite the financial downturn, GE has continued toinvest in technology and innovation in the areas of cleanenergy, healthcare, and infrastructure across the world,particularly in emerging markets. For instance, of the $6 billion that the company invests in research anddevelopment each year, $4 billion is allocated to solvingthe problems of affordable healthcare and clean energy.Through the resulting products and innovations, alongwith GEs leadership in education reform, they are able to play a crucial role in helping to solve global problems.(i)Beyond NumbersIn recent years, the definition of business success hasexpanded from how much money an enterprise makesto how it makes its money. Companies today face awide range of expectations from a variety ofstakeholders. These include employees, consumers,regulators and the public, all of whom demand to beheard and/or involved in company activities anddecisions. Stakeholders expect businesses not only togenerate revenue, but to have a positive effect onsociety and minimize adverse effects stemming fromtheir operations. First and foremost, they want to beable to trust the company and ensure that its operationsare reliable.Whilst great effort goes into ensuring compliance withrules, standards, and codes of conduct, manycompanies increasingly see the benefits of alsomanaging social, environmental, and economic impactsin a structured manner. This helps them to manage riskmore efficiently, strengthen corporate reputation andbrand, and build trust among stakeholders. A companysability to successfully manage social, environmental andeconomic issues today is indicative of its ability to thrivein the future.Coca-ColaCoca-Cola is a good example of how a 21st century business is increasingly working with stakeholders tounderstand their views and incorporate them intostrategic decision-making processes. Coca-Colasstakeholder research has helped to refine their futurestrategy on social and environmental issues. Coca-Colascustomers respond to growing consumer interest insustainability issues, and the company is workingcollaboratively with them on environmental issues,including energy efficient/HFC-free refrigerationequipment, sustainable packaging and recycling, andefficient transportation.(ii)Sustainability in the Middle EastAlthough the Middle East region faces the same climatechange challenges as the rest of the world, its energyand waste-intensive lifestyle due to increasingurbanization and the rapid growth of its cities is notsustainable and will not support, in the longer term, thecreation of sustainable economies in the region. Manyorganizations in the Middle East have taken steps30 | March 2010 | Point of View | Deloitte & Touche (M.E.)Many organizations in theMiddle East have taken stepstowards sustainability but thesesteps remain fragmented andlack sustained focus.towards sustainability but these steps remainfragmented and lack sustained focus. It is not untilsustainability becomes an integral part of anorganization reflected in its mission, vision and values,with a demonstrated commitment to implementation that true sustainable results will start to materialize. MasdarAbu Dhabi has taken the lead by setting the example forthe UAE, the Middle East and the rest of the world withthe creation of the Abu Dhabi Future Energy Company(Masdar). Masdar has embarked on this journey withMasdar City a self-sustaining, zero carbon city beingbuilt in the middle of the desert and is also makingworldwide investments in clean technology and energysolutions. Additionally, Masdar has established theMasdar Institute of Science and Technology, a highereducation and research institute and incubator for aSustainability Center of Excellence. Initiatives such asMasdar emphasize that some governments at least, aretaking sustainability seriously and that it is here to stay. One small step for firmsBecoming a fully sustainable enterprise is a long-termendeavor. Companies are not expected to transformovernight and drastically change their modes ofoperation, but efforts can start on a small scale.Implementing greening initiatives to motivate andeducate employees to become more ecologicallyresponsible, and communication about futuresustainability efforts to company stakeholders can be agreat start and do not require large investment. Casestudies have shown that sustainability, approached theright way, can be a significant driver of enterprise andeconomic value. Starting early will give the company ahead start and a competitive advantage. Companiestrailing behind will find themselves playing catch-up,losing competitive advantage, and fighting againsteroding brand value. By Fadi Sidani, Partner in Charge, Enterprise RiskServices, Deloitte Middle East(i) GE 2008 Global Citizenship Report(ii) Coca-Cola Enterprises 2008 Corporate Responsibility andSustainability ReportPoint of View | Deloitte & Touche (M.E.) | March 2010 | 31SustainabilityHewitt Associates launchedthe first study of its scopeand breadth on BestEmployers in Middle East,setting new standards forbusiness practices in theregion. Point of View askedDebabrat Mishra, MiddleEast Consulting BusinessLeader at Hewitt, what ittakes to be a best employerin todays business world.Becom East B Interview32 | March 2010 | Point of View | Deloitte & Touche (M.E.)PoV: What are the goals behind your BestEmployers studies and who are they aimed at? The Hewitt Best Employers in Middle East researchproject had the aim of honoring organizations that areoutstanding places to work as The Best Employers inMiddle East. The study was also focused on understanding theemployee practices of the best in order to create thedefinitive benchmark for all work practices in the Middle East. It was envisaged that the study findings wouldencourage all stakeholders (governments, industrygroups, organizations, etc.) in their endeavors to makethe Middle East an even better place to work byproviding them with much needed data and insight.PoV: The 2009 Best Employers in Middle East is the first ever by Hewitt. What prompted you to do it? Will there be others? As a consulting firm specializing in People, we felt theabsence of an underlying yardstick which synthesizestalent management imperatives into a commonlanguage of the regions very own Benchmark for People Practices. It is in this regard that we decided tolaunch the regions very first Best Employers Study astudy which seeks to find and recognize those who havebuilt the best; a research which provides the definitivelast word in people practices and benchmarks; aninitiative that enables organizations to understand whatit takes to be the best in such a complex talentlandscape; and a mission that aligns us all towardsmaking the Middle East a better place to work. The 2009 Best Employers in Middle East was theinaugural study. We plan to conduct this study on aregular basis so that organizations can have access tothe latest benchmarks. Talent Managementming A Middle est Employer Point of View | Deloitte & Touche (M.E.) | March 2010 | 33PoV: Why is participation in such a studyimportant for businesses in the Middle East?Participating in the Best Employers study providesorganizations two distinct benefits. Firstly, they canbenchmark their people practices and identify how they stack up with the very best, not only regionally, but globally as well since we conduct this study on aworld-wide scale. Secondly, if they do figure amongst the best employers, they can use it todifferentiate themselves in the competitive talent market. Both these aspects are extremely beneficial fororganizations in attracting and retaining talent. PoV: What are the participation criteria of such a survey? Which companies qualify to be a part of it?We use minimum eligibility criteria of 100+ employees inthe workforce and organizational existence for at leastone year. Besides these criteria there is no other filterused and participation in the study is free and open toall organizations, irrespective of industry. PoV: What is the screening and accreditationprocess and how is it conducted? The Study was divided into six sequential phases,namely: Registration, Data Collection, Data Collationand Random Audits, Judging and Results Announcement.Registration:Organizations which met the minimum eligibility criteriaacross all sectors were invited to participate in the study.Over 250 organizations across the Hospitality,Manufacturing, Banking and Financial Services, RealEstate and Infrastructure, Retail, Telecom andGovernment Services sectors registered their interest to participate.Data Collection:Each participating organization completed threediagnostic tools developed by Hewitt the EmployeeOpinion Survey (EOS), People Practices Inventory (PPI)and CEO Questionnaire.The representative employee base registered for thestudy crossed the 150,000 mark, making the HewittBest Employers in Middle East Study the largestemployee research project ever undertaken in Middle East.Data Collation and Random Audits:Hewitt in parallel collated all information received fromparticipants in order to prepare the materials required byjudges in reviewing and making their decision. Hewittalso conducted random audits of up to 20% of theparticipating organizations in order to verify the accuracyof the data provided by them. A few organizations weredisqualified from the study wherein their submitted datadid not match with the results from the random audits.Hewitt did not determine the list of Best Employers. The judges considered awealth of data that gave them a 360-degree view ofeach organization's employeeperspectives, leadershipperspectives, and HRpractices; without knowingwhich data belonged to which company. Interview34 | March 2010 | Point of View | Deloitte & Touche (M.E.)Judging:Hewitt empanelled five respected representatives fromthe industry, government bodies and large organizationsto convene on the Judging Day in order to decide onthe list of Hewitt Best Employers in Middle East. Hewitt did not determine the list of Best Employers.Hewitts role was to provide clean data and preliminary analysis from the study for their discussionsand deliberations. The judges considered a wealth of data that gave thema 360-degree view of each organization's employeeperspectives, leadership perspectives, and HR practices; without knowing which data belonged to which company. PoV: What are the selection criteria? How does acompany become a Middle East Best Employer? The 2009 Best Employers Study identified various traitsthat were common across the best organizations. These are: aligned People Practices high Employee Engagement Scores the 2009 BestEmployers in ME average engagement score is 80% better career development opportunities better benefits delivering the Employment Promise better investments in People Development better Performance Management better employee recognition - employees feel more valuedAny organization that offers most of these options canfeel comfortable about being on the right path tobecoming a Best Employer.PoV: Hewitt is, essentially, a Human Resources consultancy working with a largenumber of companies worldwide. How do youmaintain objectivity?Being in the People Consulting business, we have to beobjective in our research. Organizations globally entrustus with their most sensitive data, such as payroll andbenefits, on a regular basis. This credibility also helps.The Best Employer Study is always handled by anindependent team. The study is also free for participants and does not have any sponsors orcommercial contributors. This allows us to stay focused on the main objective ofthe research and ensure that it is accurate and unbiased.We use an independent judging panel that selects thelist on a blind basis for that same reason. Talent ManagementPoint of View | Deloitte & Touche (M.E.) | March 2010 | 35New thought leadership publications from Deloitte.The Deloitte Middle EastFirst CFO Survey3rd Quarter 20092009 Deloitte ToucheTohmatsuCorporate ResponsibilityReportManaging talent in aturbulent economy: Where are you on therecovery curve? CFO Survey Corporate ResponsibilityTalentThe right combinationRethinking businessoperating models ininsuranceGlobal powers of retailing 2010Energy Predictions 2010InsuranceBanking and SecuritiesOutlook 2010Banking RetailingEnergy36 | March 2010 | Point of View | Deloitte & Touche (M.E.)PoV provides you with a selection of Deloittes mostrecent publications accessible on Deloitte.comHere Today. WhereTomorrow?Taking action in uncertain timesConsulting Sustainability Economy 2010Global economic outlook1st quarter 2010The risk intelligentapproach to corporate responsibility& sustainabilityPrivate EquityMENA Private EquityConfidence SurveyAutomotive IndustryA new era: Acceleratingtoward 2020 An automotive industrytransformedDeloitte PublicationsPoint of View | Deloitte & Touche (M.E.) | March 2010 | 37Back from the brink:Now the greattransformationPublic Sector GCC Construction TMTTelecommunication, Technology, & Media Predictions 2010GCC powers ofconstruction 2009:An expert diagnosisDeloitte in the Middle East38 | March 2010 | Point of View | Deloitte & Touche (M.E.)ME Representative OfficeRegional office Gefinor Center, Block D Clemenceau StreetMail: P.O.Box 113-5144Beirut, LebanonPhone: +961 (0) 1 748 444Fax: +961 (0) 1 748 999ME ConsultingRegional office Arabia House131 Phoenicia StreetMail: P.O. 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