LONDON, 5 November 2006 — High oil prices in recent years have delivered enormous economic advantages to the six Gulf Cooperation Council (GCC) countries, and even at $60 a barrel the region will be left with huge budget surpluses.
While all six GCC countries are implementing large-scale oil and gas projects, all six have booming real estate markets, and all six governments are spending huge sums on a variety of utilities projects, roads schemes, airport and tourism developments, little has been heard so far from the governments of the GCC about using the massive flow of funds generated by the oil boom to deliver internal economic reform.
If the GCC countries are going to successfully and sustainably diversify their economies away from oil and gas they must follow the example of other 600 emerging markets such as India and China who are grappling with substantial legal and regulatory reforms in order to sustain their recent dramatic growth.
The view from the ground is that reform is crucial in order to stimulate a genuine broadening of the regional economy away from the oil and gas industry; as well as to develop a well-established private sector and to create a cadre of well-educated nationals who are employable outside government. Above all, there is the need for a fundamental restructuring of the legal system, by bringing in up-to-date commercial laws and reforming the courts system in order to encourage the conditions in which a modern diversified market economy can flourish and consistent future growth can be maintained.
While the six states’ company and commercial laws have undeniably underpinned local business and foreign investment with great success over the last few decades, there is now widespread recognition by the local and international business community, as well as by some governments themselves, that those laws require extensive modernization.
Companies today demand ease of access to markets and the ability to acquire and realize assets in an efficient and sophisticated manner. Capital markets need to be well regulated and transparent to international standards. High levels of corporate governance are expected.
The Gulf’s governments have been slow to recognize that regional and multinational companies must be able to own land, to employ staff, to grant security and to raise funds in the GCC on the same terms as they are able to do so elsewhere in the world. If they cannot, investors will look to other emerging markets who have already implemented legal reforms with a view to attracting overseas investment.
In most GCC states the commercial courts system is archaic, bureaucratic and unreliable. The ability of local or foreign investors to enforce their contractual rights smoothly and efficiently is an economic essential, but one which arguably is absent throughout the region.
By way of example, the UAE’s commercial companies law dates from 1984. The rules set out in this law governing the establishment of new companies, together with the procedures imposed by the UAE’s commercial registration authorities, have today given rise to a situation where the International Finance Corporation (IFC) calculates that it now takes 63 days to set up a business in the UAE. This is more than three times the OECD average, and while the UAE’s federal government has long promised a revised and modernized commercial companies law, its introduction has been much delayed.
In September, Moody’s announced it had placed a number of long-term ratings for the six Gulf countries under review for upgrade as a result of the sustained rise in oil prices over the last few years and the relatively judicious use of the resultant income by the GCC’s governments. However, any review of this kind will also consider underlying structural weaknesses. The strength of each country’s legislative system and its mid- to long-term effect on that country’s economy will increasingly come under close international scrutiny.
Indeed, according to the IFC in its Annual “Doing Business” report, Saudi Arabia, the UAE, Kuwait and Oman are all becoming increasingly more difficult countries in which to invest, at a time when BRIC countries are making radical reforms in order to facilitate investment.
As the legal systems of the GCC countries fall further and further behind those of other emerging markets, the chance to build on the benefits of the current oil boom risks being squandered.
The development of a suite of modern, comprehensive and attractive commercial laws, backed up by a transparent, independent and effective judiciary, will require major investment.
The money needed to bring in expertise and to push through these essential reforms is not lacking, but timing and political will are more problematic. Flippantly, one could argue that it is relatively quick and easy to launch a golfing resort or to pick up a stake in a swanky New York hotel. But if future generations of the GCC are to benefit from the vast windfalls that their governments are now enjoying, it is critical that less glamorous and more enduring reforms also receive attention.
After all, high oil prices can tumble, property prices can crash, and the value of a portfolio of securities can slide.
And when one or more of these unfortunate events take place, as surely one day they will, the GCC countries will need to ensure that they can remain well placed to maintain their economic advantage by making reforms now.
This golden opportunity to restructure their legal system must be seized in order to retain investors’ interest and to assure local businesses and international investors of a firm economic foundation well into the future.
— Edward Rose is a partner in UK law firm Trowers & Hamlins
