Middle East: New order

There is something momentous unfolding in the Gulf. The wave of protests and general revolutionary feeling that has swept through the Middle East since December 2010, otherwise known as the Arab Spring, has seen governments ousted in Tunisia, Egypt, Libya and Yemen, while civil unrest has even battered the traditionally stable reputations of financial centres such as Bahrain and Kuwait.

Law firms have been just as affected by the tide of uncertainty as any other business and the dramatic extent of regional turmoil has seen international law firms downsize in their droves across the Middle East. As traditional thinking goes, any degree of change creates opportunities; however, the sheer scale and velocity of the market disruption makes this particular situation uncharted territory. Generally speaking, firms remain optimistic about economic growth across the region’s hotspots and recruiters are already starting to see the market look towards replenishing those areas that were the first to be cut back in 2009 and early 2010. So it seems that the outlook for the main financial centres is one of subdued growth following a few lean years. How are the region’s law firms poised to meet demand?

Down but not out

There is no doubt that the market has been anything but plain sailing over the past year. There have been countless high-profile cases of longstanding stalwarts cutting their losses in the region. Trowers & Hamlins, most notably, shut its doors in Jeddah in May 2011 – only one year after opening – while the firm has seen a number of partner exits across its Middle East offices. Norton Rose has also felt some pain. The firm is yet to find another Saudi Arabia partner following the dissolution of its alliance with Riyadh-based Abdulaziz Al-Assaf in December 2010. It has also suffered a number of top-level exits, including the departure of Middle East head Campbell Steedman, who left for White & Case in August 2011. At the beginning of 2012, Simmons & Simmons announced that it would be forced to make lawyer and support staff redundancies in its Abu Dhabi and Dubai offices.

‘It is certainly true to say that the region has not been isolated from the effects of the 2008 financial crisis and, as with elsewhere in the world, firms have adapted their operations in line with market needs,’ says Nick Watson, head of Simmons & Simmons’ corporate practice in the UAE. ‘As the legal market is maturing in the region, many firms are adopting a strategy of focusing on their core strengths rather than being all things to all people.’

Call it reshuffling or restructuring, ultimately the common trend has been towards the downsizing of international practices. Certainly there is no shame in adapting a model to suit the market – if anything the process should probably have completed years ago.

Hogan Lovells has over 30 lawyers, including seven partners, in its Abu Dhabi and Dubai offices and also operates in Saudi Arabia through an association with Al-Yaqoub Attorneys & Legal Advisers (AYALA). The firm is refreshingly pragmatic about the potential for growth in the region and denies that international firm exits will give rise to new opportunity.

‘A number of firms had to downsize as they grew too quickly during the boom years and ended up with an unsustainable model. The downsizing hasn’t created new opportunities as they simply weren’t there in the first place,’ says Imtiaz Shah, partner and head of corporate in Hogan Lovells’ Dubai office. ‘Dubai is over-lawyered; in a city of only two million people (albeit a financial centre), there is no need for teams of 100-odd lawyers. That may be the right size for the largest firms in Hong Kong, which is a much more substantial centre, but it’s too many here.’

Many firms are starting to come to the realisation that they are too large in the region as they look to refocus their efforts accordingly. Oversupply has been an issue for some time but, as the market starts to correct itself, many firms still remain strong on the ground and there are definitely opportunities for those that are brave enough to take them. Whether or not there is any space for newcomers however is another matter entirely.

Christian Mahood, head of legal for the Middle East at recruitment firm Hudson, believes that with firms on the ground currently facing an ‘adapt or die’ situation, new arrivals are having a particularly difficult time in establishing themselves. ‘There’s a sense that already some of the newest firms have arrived too late to the party,’ he says. ‘Some silver circle entrants are struggling. They thought they could enter and win work off the back of their projects strength but the longevity of some of the client relationships in the market are difficult to penetrate.’

Shane Morton, who has run the Dubai office of global legal recruitment company Taylor Root since 2007, believes that firms are already starting to grow gradually on the back of a few main areas of business growth.

‘Corporate is starting to move forward with more activity across the region and projects are also starting to be activated, or in some cases reactivated, across the region – particularly in Qatar and Abu Dhabi,’ says Morton. ‘Finance is still quiet but is seeing some signs of life and contentious construction is very busy – we also expect to see an increase in litigation as more commercial disputes arise.’

With extensive geography, the trends can differ dramatically from country to country, especially following the Arab Spring.

Safe as houses

The first important consideration for those looking to launch in the region or consolidate their offering is location. Dubai, the reigning financial hub since the establishment of a free trade zone around the Jebel Ali port in 1979 (if not before that), has long been the favourite destination of law firms looking to establish a base in the Gulf. Prior to the 2008 recession, it was starting to lose ground to self-proclaimed Islamic finance capital Bahrain, as well as suffering from the increasing competition posed by the new pretenders to the financial centre throne, Qatar and Abu Dhabi. More recently, that trend has reversed as businesses flock to the region’s more stable centres.

Siraj Ahmed is a partner at Islamic finance specialist Agha & Co, the Dubai affiliate of US firm Pillsbury Winthrop Shaw Pittman. The firm’s broad regional reach saw name partner Oliver Agha recently advise a major steel mill complex in the Kingdom of Saudi Arabia in an $100m engineering procurement and construction contract with a European manufacturing company.

‘The Middle East has recently been characterised as a very unstable geographic area, with civil wars and revolutions negatively impacting jobs, tourism and foreign investment. So one of the major catalysts driving Middle East investment is safety and security,’ says Ahmed. ‘For example, Bahrain has experienced a significant negative impact on its economy due to political unrest. Foreign companies reportedly began to move their operations out of Bahrain and to neighbouring Gulf states in response to political instability, and such movements have generally been to Dubai’s benefit.’

Some of the richer governments moved quickly to stem the potential for unrest. Saudi Arabia announced a social welfare package worth $37bn, including public sector pay rises and new jobs, followed by a subsequent $93bn in additional spending, according to a report by the Wharton School at the University of Pennsylvania. Qatar provided an $8bn package of public sector rises, while Abu Dhabi announced a $2bn housing loan programme followed by a subsequent $93bn in additional spending at the beginning of 2011. The measures helped those countries to muffle protests and maintain their stable international profile in the face of increasing global scrutiny, but significantly Dubai’s profile never wavered.

There are clear reasons why Dubai was the biggest beneficiary of the flight to security in the region. Galadari & Associates is one of the UAE’s leading domestic firms, with offices in Dubai and Abu Dhabi, and has an inside track on the country’s appeal.

‘Dubai has always been a magnet for people in the region looking for opportunities and to better their career prospects. The Arab Spring saw a spike in that trend, which only confirmed the role Dubai plays in the Gulf, the political stability it offers and its attractiveness for international investment,’ says Rosanna Chopra, business development director at Galadari & Associates. ‘The appeal that Dubai offers goes beyond the availability of better job opportunities. The infrastructure is also very appealing, and not just in terms of the tangible, visible developments such as transport, hospitals and education but also the intangible such as the legal, banking and commercial codes of practice, the tax-free incentives, the flexibility to create laws and modify the existing ones to promote growth.’

There is no doubt that the so-called ‘flight to Dubai’ effect has been a major driver of business over the past 18 months but the other would-be financial hubs have also positioned themselves well, with the obvious exception of Bahrain, which is still experiencing unrest.

Boasting a longstanding reputation in the Middle East, SNR Denton is one of a handful of international firms that remain committed to maintaining their strong presence on the ground. In fact it is one of the largest foreign law firms in the region, with over 150 Arabic and international lawyers and offices in Abu Dhabi, Doha, Dubai, Manama and Muscat – as well as associate offices in Amman, Beirut, Kuwait City and Riyadh.

‘Dubai remains the leading financial centre in the Middle East. While Bahrain was a strong financial centre until its recent unrest, obviously there has been a significant downsizing in activities there recently and Dubai has been the greatest beneficiary of this,’ says Michael Kerr, SNR Denton’s UAE managing partner. ‘However, other Gulf centres are growing as strong centres of commercial activity, in particular Abu Dhabi and Doha, in infrastructure expansion and hospitality and cultural developments.’

As Kerr suggests, despite Dubai’s status as the safe hub of the region, the threats posed by the financial opportunities available in the up-and-coming financial centres do remain, driven by the unique needs of each of their domestic economies and infrastructure requirements.

‘Abu Dhabi is developing its own financial centre in the Maryah Island (formerly Sowwah Square) development, which has seen significant take up from regional and international financial institutions,’ explains Nick Watson, head of Simmons & Simmons’ corporate department in the UAE. ‘Bahrain, which is a well-established financial centre, remains recognised as a centre for Islamic finance. The Qatar Financial Centre (QFC) has placed emphasis on becoming a hub in the region for funds, while Saudi Arabia is the largest economy in the region and Riyadh is the key financial centre for this market – regional and international banks are well established in Saudi and Riyadh is developing its own financial district on a significant scale.’

States of play

Among the financial centres looking to distinguish themselves, the consensus is that Abu Dhabi stands out as the most threatening to Dubai, due to its close proximity and its ability to learn from its mistakes. The state is a particularly valuable source of instructions for SNR Denton. Among its recent high-profile deals, Neil Cuthbert, senior partner of the firm’s Middle East practice, led a team that acted for Emirates Steel on the $1bn Phase III expansion of a steel plant in Abu Dhabi. The deal showcased the firm’s strong finance skills as it involved multi-sourced financing, including Islamic, conventional and export credit agency (ECA) tranches.

‘In Abu Dhabi, after an unpredicted suspension of its planned major projects, the Abu Dhabi government recently confirmed development plans,’ says Kerr. ‘While these plans are somewhat scaled down from earlier announcements, they are nonetheless large – with a total value believed unofficially to be in the region of $30bn.’

The UAE boasts oil reserves of 97.8 billion barrels according to the CIA World Factbook, which puts it seventh in the world by proven reserves. Its strong dependence on oil revenues continues to see the state try to strengthen other sectors of the economy and that, coupled with its attempts to stem the types of civil unrest seen elsewhere, is seeing investment thrive.

‘The emphasis remains on infrastructure,’ says Kerr. ‘The plans include extensive residential development, expansion of the road networks and a focus on healthcare projects, particularly the landmark Abu Dhabi Cleveland Clinic on Maryah Island.
In transport, the Midfield terminal at Abu Dhabi International Airport has been given the go-ahead and the UAE federal rail system (Etihad Rail) is expected to go to tendering shortly.’

Obviously, oil-rich Abu Dhabi is a very liquid economy and its attempts to diversify are seeing it establish Maryah Island, a 114-hectare mixed-use residential, retail, leisure, hotel and commercial development that has been designated as the capital’s central business district. So far, it has eschewed doing anything too different from Dubai and will essentially offer the same facilities as the Dubai International Finance Centre (DIFC), establishing as a free trade zone with its own laws and regulations. However, that seems set to change – indeed isn’t it time that one of the regional financial centres had the ambition to do something different?

‘Six or seven years ago, there was a question as to whether Bahrain, Dubai or Qatar would emerge as the regional financial hub, but that’s no longer the case,’ says Hogan Lovells’ Shah. ‘Dubai is ten years ahead of most of the other Gulf states in terms of infrastructure and it is more appealing to international corporations as it is much easier to do business. Qatar and Abu Dhabi are instead looking to other sectors that are complementary to Dubai as a financial hub.’

Insuring growth

Through the development of the QFC, Qatar may have initially set out to follow the model outlined by Dubai, but the burst of confidence provided by the award of the 2022 World Cup has encouraged the country to finally try another approach.

In 2006, Eversheds became one of the first international law firms to be awarded an operating licence to launch in the QFC. The firm’s profile in the country is evidenced through its role advising Qatar General Electricity and Water Corporation on the implementation of strategies to meet Qatar’s medium-term electricity and water demands. Energy and infrastructure partner Tim Armsby, who joined the firm in February 2012 from Trowers & Hamlins, is acting alongside senior associate Suzannah Newboult to lead that team.

The firm’s prominence in the region has gifted its managing partner for the Middle East, Chris Jobson, with a valuable perspective on the country’s attempt to stand out from the crowd.

‘Doha has traditionally been viewed as a unique standalone market – it has not usually acted as a springboard into the regional market,’ he says. ‘It will be interesting to see how that view develops given the increasing geopolitical and economic prominence of the state of Qatar and its ever-developing legal and financial market.’

Already, the country is looking to distinguish itself through providing a broad sector focus to widen its regional appeal. Richard McLerie is a UAE-based consultant at specialist legal recruitment company JLegal and is witnessing first hand the business messages being sent out by the local legal markets.

‘Both Maryah Island in Abu Dhabi and the QFC have continued to build upon their emerging financial markets tag and are now fully established,’ he says. ‘Interestingly, following the recent downturn, the QFC has successfully rebranded itself as a specialist centre for reinsurance, captives and asset management-focused work.’

The QFC has been actively positioning itself to increase the amount of insurance work done on its shores, viewing the region’s infrastructure investments and increasing populations and incomes as heralding a boom in insurable assets across the Gulf. According to the QFC Authority (QFCA), there will be $140bn spent on infrastructure until 2015, making captive insurance an increasingly attractive tool in the region. To make itself a more attractive base for captives, the QFC is permitting 100% foreign ownership of financial services firms – significantly, captive insurance companies also benefit from tax exempt status within its walls.

Despite the fanfare, the country’s reinvention remains a long-term plan. Firms are certainly aware that the move is coming but for now at least, infrastructure remains the key draw for law firms in Qatar.

Secure foundations?

Lalive in Qatar was the very first European law firm to be incorporated and licensed by the QFCA on 31 August 2006. Since then it has witnessed law firms flood into the small country, lured by the safe and secure investment opportunities provided by the prosperous state (in 2010/11 Qatar’s $102,943 GDP per capita figure was the highest in the world according to the International Monetary Fund), and particularly by the expected infrastructure boom driven by the twin demands of the country’s diversification programme and the decision to award it the 2022 World Cup.

‘More and more firms are opening an office in Qatar,’ says Georges Racine, projects and corporate partner and a director of Lalive in Qatar. ‘It remains to be seen whether the market can accommodate all of them, despite the FIFA World Cup 2022 and the expected construction and infrastructure boom.’

Firms continue to pile into the market. Herbert Smith arrived in Doha at the end of 2011; K&L Gates launched its Qatar base in September 2011; Baker & McKenzie set up shop in May 2011; while Allen & Overy, McGrigors and Clifford Chance opened at the beginning of 2011.

‘We hear from embassies and other representatives that others are looking at the market, but the latter is not geared for just any type of firm,’ adds Racine. ‘You need faith, stamina, hard work and skills. Qatari clients can be sophisticated and demanding.’

Racine should know. Lalive in Qatar is heavily involved in the country’s infrastructure scene and has advised on some of Qatar’s most high-profile projects. Most notably, he advised Qatar General Electricity and Water Corporation (Kahramaa) on the $3bn development basis of a gas-fired power plant and water producing facility at Ras Laffan Industrial City in Qatar. The deal was done on a BOOT (build-own-operate-transfer) basis in 2007/08, which demonstrates the firm’s market experience.

Despite Racine’s words of caution, he remains upbeat about the market’s potential. ‘There is certainly lots happening on the construction and infrastructure front already, but there is much more to come,’ he says. ‘Several projects are only at the initial tender phase.’

It would be inaccurate to suggest that Qatar’s infrastructure boom is an isolated story in the region. Across the Middle East, oil money is being invested in projects designed to help cope with growing, and increasingly demanding, populations.

As the largest economy in the region, oil giant Saudi Arabia is the jewel in the crown for most law firms. Following a smattering of unrest linked to the region’s pro-democracy movement, the government has realised that it needs to encourage private participation in its extensive infrastructure programme.

Clyde & Co is one of the Middle East’s longstanding international monoliths, with offices throughout the Gulf, including Abu Dhabi, Dubai and Doha as well as an associated office in Riyadh, making it well placed to comment on regional trends.

‘The Kingdom of Saudi Arabia remains a strong target market for a number of our regional clients, mainly in relation to the infrastructure sector, but sectors such as telecommunications and IT are also experiencing significant levels of interest,’ says Mark Blanksby, projects and construction partner in Clyde & Co’s Dubai office. As a case in point, corporate partners Phil O’Riordan and Abdulaziz Al-Bosaily (managing partner of Clyde & Co’s associate Riyadh office) recently advised Arabian Company for Water & Power Development (ACWA Holding) on the SAR433m (£71m) sale of 50% of its piping and coatings divisions in Saudi Arabia to Indian company Welspun. Of course it is not just the more politically stable countries that are being keenly watched. Eagle-eyed clients are already looking towards the opportunities presented by the more risky regional markets as plans to combat political dissent materialise.

Hedge your bets

Kuwait is a particularly interesting case in point. Seen as a high-income economy by the World Bank, and a traditionally stable society following the end of the Iraq war, protests initiated in February 2011 eventually spiralled into the resignation of the prime minister and his cabinet ten months later. Despite recent turmoil, the country’s inherently stable regime ticks all the right boxes with clients and its long-planned programme of infrastructure projects is expected to be sped through as part of its commitment to change.

UAE-based regional heavyweight Al Tamimi & Company launched its Kuwait office in 2009 with the hire of former DLA Piper Kuwait head Alex Saleh, bringing its total number of offices in the Middle East to ten (including five in the UAE) and providing it with an unrivalled coverage of the region. The firm predicts that Kuwait is set to boom.

‘There has been a strong focus on building Kuwait from within, especially as the government is moving forward with its large public private partnership (PPP) infrastructure projects, so there has been a greater focus on familiarising foreign entities on investment and conducting business in Kuwait,’ says Philip Kotsis, banking and finance partner in Al Tamimi’s Kuwait City office. ‘Furthermore, due to the implementation of the Capital Markets Authority regulations, a great deal of work is coming in relating to educating and advising local and foreign companies on the new regulatory scheme. We are also seeing less reliance on European or American laws as clients are increasingly seeking the utilisation of local laws to govern their agreements and transactions.’

Of the trends, the country’s infrastructure development is the most immediately attractive to investors. Al Ruwayeh & Partners (ASAR) is the leading law firm in Kuwait and one of the leading law firms in the Gulf region, through its office in Bahrain and associate offices with Stephenson Harwood. Its track record in domestic projects is second to none and Ibrahim Sattout, corporate and banking partner, is currently leading the team advising the government of Kuwait on the procurement of an investor for the development, construction and operation of a power generation and seawater desalination plant at Az-Zour North. The project is particularly notable for being the first integrated water and power plant project (IWPP) tendered in Kuwait under new laws established by the state to permit PPP structures and support increased private sector participation in infrastructure development.

‘The anticipated infrastructure work is building up gradually, especially with respect to public infrastructure projects being rolled out by the Partnership Technical Bureau (PTB), which is the institution at the helm of the Kuwait PPP program,’ says Sam Habbas, finance partner at ASAR. ‘Although relatively new to the PPP regime, Kuwait has embraced the concept as evidenced by the diverse pipeline of projects that have either commenced or are actively being considered by the PTB.’

Bahrain is another traditionally stable country that has lost its safe haven status recently but firms are convinced that the market will soon get back on track.

Qays H. Zu’bi Attorneys & Legal Consultants is one of the leading domestic firms in Bahrain under the leadership of high-profile managing partner Qays Zu’bi, who was resident partner in White & Case’s Bahrain office prior to establishing the firm in 2001. Zu’bi has recently been involved in such landmark projects as the financing of the Muharraq Sewage Treatment Plant.

‘Our firm has had been involved in the vast majority of the major energy and infrastructure projects in Bahrain in the last decade and has all the competence to continue doing so in future,’ says Zu’bi. ‘Given the financial and political situation in Bahrain, infrastructure work has not materialised as we would have anticipated over the past few months. We are hopeful that this pause won’t last too long as further work is anticipated around the country.’

New hierarchy

The consensus is that work has not been shelved but rather delayed and, even before those big projects start to materialise, there are already other opportunities emerging.

Clyde & Co made up six partners across its Middle East offices in its latest round of promotions on 1 May, showing its commitment to growth in the region.

‘My sense of what is happening is that rather than firms downsizing, expansion plans have been scaled back and a number of firms are focusing on consolidating existing operations around key geographic markets and sectors,’ says Blanksby. ‘However, some firms, Clyde & Co included, are seeing growth and are capitalising on the release of good lawyers into the market and are actively recruiting. For example, we have had six lateral partner hires join us in the last two years and they have come from the likes of DLA, Simmons & Simmons and Trowers & Hamlins.’ The firm’s specialist emerging market credentials are also seeing it look more closely at Iraq and Libya.

It’s not just foreign firms that are having all the luck. Indigenous firms such as Al Tamimi are also seeing opportunities open up.

‘Al Tamimi is a firm that has continued to provide international law firms and multinational clients with a bridge to access the Middle East. We are seeing an increase in our international client base and realising that these clients see the true value in working with a firm that understands the local and regional markets and who has full access to local, federal and regional governments,’ says Husam Hourani, managing partner of Al Tamimi.

‘We have built a global brand and a reputation as the leading firm practising in local law in the Middle East,’ he adds.

At the end of 2011, the firm advised The Coca-Cola Company as lead counsel on its $980m acquisition of a 50% stake in Saudi Arabia-based Aujan Industries, a cross-border transaction that covered ten countries across the Middle East and that represented the
largest single investment by a multinational company in the Middle East in the consumer goods sector. It seems then, that the strongest Middle East player has successfully replicated the foreign law firm model. Who will be the next firms to follow suit? As Middle East firms become increasingly sophisticated and relationships with other emerging markets in Africa and Asia continue to strengthen, there is no doubt that international firms will be forced to raise their game to remain relevant.