The Gulf in recovery
When the full scale of the problems facing property and logistics conglomerate Dubai World were revealed to the world late last year, it caused ripples around the globe. Not only because the announcement that the company would need to delay repayments of its US$26bn was made just before the Eid al-Adha religious holiday, but also because most had settled into the assumption that the worst of the financial crisis had passed. Dealflow was starting to return, banks had reopened their hitherto closed loan books and capital markets across the world were again starting to show signs of life.
The British press, not known to miss an opportunity for hyperbole or the dissemination of spurious innuendo, was quick to seize the moment. It foretold the imminent collapse of Dubai, the dissolution of the UAE and by extension the passing into oblivion of the Gulf region as a whole, along with other entities such as the entire UK banking industry, for instance.
Thankfully, little if anything the UK press writes comes to pass. Despite experiencing a period of severe discomfort, Dubai World was successfully able to restructure its debts and avoid collapse. The Gulf states have powered on – taken the whole incident in their stride as a mere blip (albeit a necessary one: it yielded the introduction of an insolvency code to deal with any disputes arising out of the company’s restructuring) in their development trajectories.
But that the press – and quite a few others – posit a link between Dubai’s troubles and that of its Gulf neighbours is also of some import. It serves as evidence that misconceptions about the region still exist. Dubai may be the region’s most high-profile celebrity, may have been used as a stepping-off point for investors and capital bound for elsewhere in the region, but the days of it being used in this fashion are surely numbered not because of its recent difficulties, but because other Gulf states have been quietly, conscientiously building their profiles.
Abu Dhabi, with its abundance of natural resources and comparative fiscal prudence remains a mainstay, while further afield Oman, Bahrain, Kuwait and Saudi Arabia are all garnering their fare share of interest, especially among law firms who seem to be as good a barometer as any of actual and potential investment levels of any given location.
ALB reports from the Gulf on what the region’s recent rejuvenation means for lawyers there.
NEXT: Testing times for international firms in the Middle East
The Gulf challenge: testing times for international firms in the Middle East
To say that the last 12 months have been challenging for law firms operating in the Middle East would be an understatement. And arguably, it has been the region’s growing cache of international firms who have been more acutely affected to the discomforts of their clients than any other.
“A great number of the international law firms have suffered visibly over the last year or so because of the way they entered the market,” said one partner at a UK international firm. “Some of these firms have seen the gravy train they rode into town stop running. Others entered on the premise that they would service the many developers and construction companies in the region… but when these clients go bust or severely downgrade their commitments in places like Dubai, it’s quite clear what is going to happen.”
The empirical data offers the most vivid illustration of what did happen. By ALB’s count more than 300 lawyers have been either laid off or repatriated back to their firms’ headquarters; over 1,000 support staff have been shown the door and over 20 international firm offices have been closed— and these are just reported cases. According to lawyers on the ground these numbers “would increase by around 50%” if stealth layoffs and office closures were taken into account.
“Some firms have ‘closed’ offices on the sly,” says another lawyer. “Or what they have done is left the shingle on the door, sent key partners back home and moved their associates and junior lawyers in with a good, mid-sized local law firm.”
The images of abandoned luxury cars gathering the desert’s dust in the long-term parking facility at Dubai’s International airport, and elsewhere, serve as a prescient reminder of just how badly many law firms suffered through the crisis.
But although countless lawyers have been laid off and many offices have been closed, scores more remain behind, open for business and ready to take the expansion of their Middle East practices to the next level.
“The Middle East is unlike any other legal market in the world and there will always be hardships,” said Andrew Rae, a partner in the Abu Dhabi office of Trowers & Hamlins. “The key to operating here is to ride the ups and down, to keep chipping away. The danger is trying to replicate what you do in other parts of the world in the Middle East without adapting it to the region.”
Paul Sandosham, head of WongPartnership LLP’s Middle East practice believes it is important to build a presence in the Gulf step by step, rather than adopting the big-bang approach. “It may have been said a thousand times before, but in order to build a strong presence in the Middle East, you need to invest time to understand and develop the market, and you need to do it step by step with a long-term vision. It is unrealistic to establish numerous offices at the same time and expect to see benefits right away. As in any other market, this can be a risky strategy.”
WongPartnership became the first Asian firm to establish a meaningful presence in the region after it opened an office in Qatar in 2007. At that time, the firm had a small presence, backed by its Middle East Practice based in Singapore. A year later, the Firm opened a second Middle East office in Abu Dhabi and increased its headcount. This is in alignment with the Firm’s CHIME (China-India-Middle East) strategy which started in 2004 with the opening of the Firm’s first overseas office in China.
Trowers’ growth in the region has also been incremental. The firm opened its first Gulf office in Oman in 1980 and it was not until 11 years later that it opened its second office, in Dubai.
Both lawyers agree that leveraging a brand that one has created in the US or UK in the Middle East has the possibility of yielding similarly disappointing results. “The majority of international law firms that have struggled here have done so because they have not invested in educating the marketplace sufficiently,” Rae said. “An international brand alone won’t get you much here – simply coming here with a brand and people is not the recipe for success.”
“Relationships are important for conducting business here and you need to invest time to create, manage and cultivate them, even if there is an existing relationship with that client elsewhere in the world. Again, it is a part of the long-term vision.” adds Sandosham. “When you work with a client who is entering a new market, no matter how experienced or seasoned the client may be, they look to their lawyers to bring them a suitable level of comfort about their interests here,” he said.
Costs
Last time ALB delivered its annual report from the Middle East, the issue of legal costs was roundly mentioned as one of the most contentious issues. Low-balling was widespread and the competition to win mandates from new clients was so intense that it was not uncommon to see new market entrants quote fees so low that many wondered how they were making any money. This time around, nothing much has changed, according to lawyers ALB spoke to. “Low-balling continues to be commonplace,” says Trowers’ Rae. “But it is getting to a stage now where it is unsustainable and will ultimately change the legal market. Firms are losing money and it creates unrealistic expectations regarding pricing in the market place.”
This is concomitant with a rise in competitive tendering processes for most of the region’s bigger projects. “Most work of a certain size is put out to tender nowadays,” said Sandosham. “The process is more sophisticated now and clients make their decisions not only based on hourly rates, but also on how flexible firms can be to offer alternative fee arrangements (AFAs).”
Amidst calls for greater billing flexibility, a number of new trends in private-practice/in-house relations are emerging, one of the most intriguing of which is the notion of the regional outside counsel (ROC). This is where a law firm or a network of law firms assumes responsibility for the entire legal affairs of a company, in a specified number of practice areas across a specified number of jurisdictions. “You effectively act as an arm of a company’s legal department in a region where the company does not have the time or resources of its own to devote,” said Nasser El Kassawneh, managing partner of Kassawneh & Associates, which is currently serving as Middle East ROC for Microsoft and Philip Morris.
But while this system appears to make good sense for in-house lawyers, it is just as beneficial for the law firms involved. “In our role as regional outside counsel we can get really involved in the client’s business, know the stats, their business models, strategy, know-how,” he said. “Being this close to a client’s business is extremely important and will help us serve our other clients as well.”
In-house during the crisis
The latter, according to Justin Connor, chairman and founder of the Dubai Corporate Counsel Group, is something that is influenced by the high amount of internal and external pressure that the region’s in-house lawyers are under at the moment.“As the financial crisis has increased the pressure on law firms to generate fees, it has also placed pressure on in-house legal departments to reduce costs,” said Connor. “In-house lawyers have had to become more competitive regarding the provision of their services – they are having to deliver more to their companies with access to vastly depleted funds and resources.”
At the same time, Connor said, there is more scrutiny of the position of in-house counsel and its functions. “People are giving the position more attention than they ever have in the past,” Connor said. “The financial crisis here has caused many executives to stop for a moment, go back and pick up the documents and contracts they may have signed throughout the year and actually read them, and the first place they’re going to is their company’s legal department.”
The result is that the importance of in-house lawyers may actually increase as a result. “The crisis has only served to emphasise the importance of in-house lawyers, especially over the long term and that is extremely satisfying.”
NEXT: Bridging the Gulf divide
Bridging the Gulf divide
By Rashida Yosufzai
Allen & Overy launches in Doha. Denton Wilde Sapte debuts in Bahrain. DLA pairs up with a Turkish firm and Lovells goes to Jeddah. If these recent headlines signal that a shift is happening in the legal market, then international law firms are clearly onto something.
The status that Dubai once enjoyed as the Middle East’s regional financial hub is slowly wearing down, giving new opportunity to regions that were once overlooked in the quest to capitalise on the Emirate’s free-flowing investment strategy. The Dubai World bankruptcy only emphasised the importance of having more than one base in the Gulf further.
While Bahrain and Qatar are emerging as the next jurisdictions of choice, the relatively smaller GCC states of Oman and Kuwait are also proving to be a source of infrastructure and energy work. In the push towards economic development their governments are offering tenders and contracts to law firms on major power projects. One example was 2009’s US$1bn Salalah Independent Water and Power Project (IWPP) in Oman, which mandated roles for Denton Wilde Sapte, Shearman & Sterling and local firm SASLO.
Claire Grainger, the head of infrastructure at Dubai-based firm Agha & Shamsi (left), broadens the list of emerging markets further. “There seems to be a significant move towards not only Bahrain and Oman but also Egypt, Sudan, Yemen, Iran and Iraq,” says Grainger. “This is being encouraged by respective governments recognising the need to put in place key infrastructure projects to meet population demand … and legal advice as to the best way to procure the relevant schemes.”
Claire Grainger, the head of infrastructure at Dubai-based firm Agha & Shamsi (left), broadens the list of emerging markets further. “There seems to be a significant move towards not only Bahrain and Oman but also Egypt, Sudan, Yemen, Iran and Iraq,” says Grainger. “This is being encouraged by respective governments recognising the need to put in place key infrastructure projects to meet population demand … and legal advice as to the best way to procure the relevant schemes.”Given the population demands for infrastructure and energy, it’s clear why some law firms are investing in their projects practices. “Projects will be one of the practice areas that will experience the most significant demand in the near future, particularly with government currently assessing their infrastructure needs for power, energy, water, sewage treatment, road, rail, air travel and so on,” says Grainger.
Investment – through either hiring specialist lawyers or forming strategic alliances – can boost a firm’s chances of winning long-term public contracts. For example, the criteria for the legal contract for the Salalah project were relevant experience on similar projects and whether the firms had a branch or local alliance.
Regulation
In Oman, foreign lawyers are allowed to advise on local law and can also appear before the courts if they have Arabic language skills. The legal market is also less crowded compared to the UAE – there are only a handful of law firms with branches. That presents a good chance for others looking to establish a base.
It’s a much less simple process in Kuwait. Like in its neighbour Saudi Arabia, foreign law firms must form an association with domestic firms in order to practice. But this has not diminished the hopes of some, and has proven to be mutually beneficial for both domestic and international firms alike. For example, Kuwaiti firm Jamal & Jamal has a threefold network with firms in the Middle East: Bahraini firm Rashid Al-Jar and Associates and Qatari firm IOLC. For a firm like Salans, which formed a cooperation agreement with Jamal & Jamal, that certainly helps to kill two (in fact three) birds with one stone.
The governments of the smaller Gulf nations have been a key part of the source for legal work. Grainger says that even in the economic downturn, the Egyptian government ploughed on with its New Cairo Wastewater Treatment Plant public-private-partnership (PPP). And in Oman, the government plans to invest over US$2bn in water projects.
Meanwhile, the Kuwaiti government announced last year a US$5.2bn stimulus package to boost bank lending. One of those investment banks to receive the government assistance was Global Investment House, which earlier in 2009 had to restructure US$1.7bn in debts. Kuwaiti firm Al Sarraf & Al Ruwayeh (ASAR) advised the company from conducting due diligence to drafting financial documentation.
No shift
Alliances and formal agreements are expansion methods in lieu of forming physical presences on the ground. Some firms in the region have found it sufficient to act on a fly-in-fly-out basis, focusing their Gulf practice on UAE. Grainger says that it is still an attractive destination for law firms. “A lot of legal firms are still setting up their main offices in the UAE and using these offices to branch out into the other areas of the greater MENA region,” she says.
Agha & Shamsi co-founder Oliver Agha says that his firm is looking to branch outside of the UAE. “We are considering opening branch offices in some of these other MENA regions, or extending our network of affiliate offices with reputable locally established legal consultancies, as is appropriate,” he says.
NEXT: ALB speaks to Citi’s country legal counsel for the Middle East, Tarek Mogharbel
In-house spotlight: Business as usual
ALB speaks to Citi’s country legal counsel for the Middle East, Tarek Mogharbel
Slashed budgets for external legal spend, shrinking legal departments and calls to handle more work in-house are pressures that are common to most, if not all in-house lawyers across the region over the last 12 months. For corporate counsel in the Middle East however, these age-old issues have been exacerbated by the two themes somewhat unique to the region: the very real possibility of economic and regulatory uncertainty.
But as Citi’s country legal counsel for the United Arab Emirates, Tarek Mogharbel told ALB, while the last 18 months have presented a stern test to the region’s growing cache of in-house lawyers, they have also been some of the most exciting of their careers. “We can see changes occurring before our eyes and mostly these are changes for the better,” he said. “In this regard, it has been a very exciting experience and many have been forced to ride a very steep learning curve.”
It has also been one of the busiest times, especially for those in the banking & finance industry, and Citi is no exception. The fact that the bank has one of the most diversified offerings of any international financial institutions in the Gulf has helped Mogharbel and his team work through the crisis.
“The UAE is big business for Citi and we have developed very quickly over the last few years,” he said.”
But Mogharbel does note that the complexion of the work being handled by his legal team has changed somewhat since the crisis hit the region.
“While it is business as usual for us, in a crisis you will always have an upturn in litigation and we are currently close to top of this cycle at the moment,” he said. “But the interesting thing to note is that the work generated by our business units plus the work that comes in on a transaction-to-transaction basis didn’t really slow down all that much either.”
In the Gulf, Mogharbel says that the bank usually looks to outsource most of its litigation and disputes work out to local law firms, while it may also look to engage outside counsel on other matters.
“Here in Dubai, we have an informal panel of about three of four local law firms.”
Mogharbel says that while recent moves to elucidate the UAE’s legal frameworks are undoubtedly a step in the right direction, there is still much more that needs to be done. “The changes that have been happening are extremely positive, but in a short space of time one cannot expect to change everything,” he said. “The task for regulators at the moment is to focus on long-term legal development in parallel with short-term crisis control. “
Meanwhile, the task for in-house lawyers, in his opinion, is to remain positive. “See the positive side in things, ride the ups and downs and learn from them,” he said. “The events here offer a once in a lifetime event for in-house lawyers and this is something that can’t be learned but has to be experienced.” ALB
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