Private Equity Opportunities for GCC Family Businesses

This article, written by Curtis partner Peter Stewart and associate M. Adil Qureshi of the firm's Dubai office, was first published in the December 2009 issue of the The Brief magazine. It has been reprinted here with the permission of the publisher. ______________________________________________________________ The slowing of the world economy and the restrictive credit environment has pulled back the curtain on many Gulf Cooperation Council (GCC) family firms, revealing structural weaknesses. However, the challenges posed by the economic crisis are not without opportunity. Indeed, the crisis provides strong impetus to reshape GCC family businesses in ways necessary to ensure firms’ long-term survival and success. For many family firms, private equity can provide an effective framework for accomplishing this goal. As the summer months passed, economists, business people and commentators speculated over the timeline of an economic rebound in the Gulf region. Such discussion looked at a range of economic indicators, including employment, oil demand, budget projections and inflation. In their commentary, one factor – the health of family businesses – seemed to be overlooked. Family Ties Family businesses are a vital part of the economic fabric of the GCC economy. Some estimates indicate family businesses conduct more than 90 per cent of commercial activities and employ more than 70 per cent of the workforce in the GCC. The defaults of the massive Saad Group and Ahmad Hamad Algosaibi and Bros (AHAB) earlier this year made it clear that the family sector would not emerge unscathed from the economic crisis. That controversy marked an end to loose credit practices regionally and exacerbated restrictive credit conditions. The most obvious benefit of private equity investment is liquidity. There has been much talk of the appeal of family firms’ holdings to the many private equity firms operating in the GCC in recent years. Such firms could purchase unproductive units, use sector-specific expertise to retool them and potentially combine them with other units, unlocking synergies. If family firms can make the difficult decisions necessary to part with such business units, private equity could provide them with badly needed cash while making a profitable return. The benefits of private equity, however, may go beyond liquidity. Private equity firms can bring to bear the managerial expertise necessary to reshape family businesses by helping to pare down unproductive business units, boost productivity, raise funds, reform corporate governance, professionalise functions, and institute new systems and processes. These steps can prove crucial to securing the prosperity of the company. If permitted to invest in the company and to influence management, private equity can reshape the business for future growth. There are a number of steps family firms can take to increase the likelihood that private equity firms will invest in their business. The first of these steps is formalising corporate governance in line with international standards. The process of strengthening internal controls, risk management mechanisms, and monitoring and reporting frameworks can reveal weaknesses and valuation affecting issues while instilling enhanced managerial discipline. Additionally, firms can recruit independent non-executive board members and bolster the influence and accountability of their boards by instituting typical board committees with written charters, policies and procedures in line with international standards. Separation of Powers Perhaps the most significant governance step that family firms can take is to separate ownership and management. Top management and the board of directors should coordinate with, but be independent of, the family. Such a measure would typically serve to encourage professionalization of management, avoid succession conflicts, and increase transparency. The improvement of governance and the professionalisation of management prior to a deal should also facilitate the implementation of new systems and processes after a deal. Further, the implementation of standard practices, including accounting practices, will signal to investors the reliability of a firm’s figures and improve the likelihood of a successful transaction and later exit. Lastly, family businesses in the GCC should be flexible and creative in structuring private equity deals. While often majority and controlling stakes cannot legally be sold, GCC family businesses should be open to transferring larger stakes and more control in order to allow private equity investors to realise expected returns. Structures involving hybrid securities, debt, dividends and warrants can be considered. Family firms may also consider allowing private equity investors the chance to exit through partial IPOs. Nasdaq Dubai has recently decreased its minimum offering requirement to 25 per cent in a bid to encourage this behaviour and entice more family businesses to offer shares for public trading. Family firms have an honoured legacy in the Gulf for pioneering industries, exploiting new opportunities, and creating wealth. Today, many of these pioneers stand at a crossroads. Will they respond to current pressures by continuing with old ways of doing business, or by embracing change that will enable them to meet the challenges of an increasingly global economy? For many family firms, private equity investment can be an effective catalyst for change helping to meet those challenges.

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Armed Defense Against Piracy

On 5 January 2010, a delegation from the Ukraine departed for Oman to meet and escort home 24 Ukrainian sailors that had been taken captive aboard their ship, the Ariana, by Somali pirates. After over eight months of captivity, and after the payment of a USD 2.8 million ransom, the mariners were released on 10 December 2009, setting course for the port of Salalah in Oman.

This latest chapter in the story of the Ariana highlights the continuing problem of piracy in the Gulf of Aden and the potential threat it poses to shipping in and out of Oman.

As more shipments are threatened, operators, shippers and crews are considering ways to protect their personnel and cargo at sea. While a few nations have put military personnel or private security forces aboard their flagged vessels, serious legal issues arise from the arming of merchant mariners. Indeed, the vast majority of shipping organizations strongly discourage such a practice. The United Nations’ maritime branch, the International Maritime Organization (IMO), strongly discourages the carrying and use of firearms by seafarers for personal protection or for the protection of a ship.

Legal problems arise because ships are subject to a host of different legal regimes including international regulations during every voyage. Flag states, coastal states and port states all may have conflicting rules about firearms, ranging from an unfettered right to carry weapons, to a complete ban, to a regulatory system of more or less complexity. Violation of coastal or port state laws may subject a seafarer to criminal sanctions, including a long prison sentence, even though his possession of arms is perfectly legal under the law of the ship’s flag or at sea. It is difficult not only to comply with these conflicting laws but also to understand the content of all of the national laws that might apply.
Legal problems relating to the carriage of firearms pale in comparison to the problems raised by their use. Key questions include:

• What nation would have jurisdiction to resolve the question of whether or not a seafarer was criminally or civilly liable for the consequences of using weapons?


• What legal regime will govern the question of whether or not the use of deadly force was justified in the circumstances?


• What if the flag state, coastal state and port state all have differing views regarding the circumstances in which lethal force was used?
  

A mariner cannot be expected to know and correctly apply rules about the use of deadly force under all the legal regimes that might apply in the varying situations that arise in shipping, especially under the stress of an approach by a vessel that may (or may not) be operated by pirates. The possibility exists that a seafarer may find himself in prison far from home for using lethal force that was permitted by the state of his citizenship or the flag of his vessel.

On the other side of the coin, prosecution and incarceration of pirates might be impaired by giving pirates the opportunity to plead self-defense if crew aboard the vessel being attacked shot first.

Further, the safety of seafarers is compromised by the presence of weapons. Seafarers are civilians and, as such, often lack the special training and skills necessary for the safe use of firearms. A ship is not terra firma: the risk of accidents on a rocking surface in a heaving sea is great. An accidental or purposeful shot could ignite a flammable cargo or trigger an explosion of other dangerous goods.

There is the further danger of the presence of weapons in the sometimes tense environment on board a ship. Short or nonexistent shore leave may fray seafarers’ nerves and lead to irrational or dangerous conduct.

Other practical problems arise from the use of private security forces at sea. In particular, command authority is a central issue. In the heat of an attack, there can be only one final decision maker. The vast majority of maritime organizations disapprove of the use of private armed guards because of the same risks of escalation, the lack of clarity on rules of engagement, and the difficulties in accrediting and exercising due diligence responsibilities in overseeing such entities and policing their activities. There is a radical difference between supervising contracting third parties on land and doing so at sea.

The law currently governing such activities in the Sultanate of Oman – the Sultani Decree No. 34/73 – does not contemplate explicitly the arming of seamen for protective purposes or the use of private security forces at sea. Under Title Two, Part One of the law, liability for acts of the crew or for acts arising out of contracts entered into by the owner shall be borne personally by the owner, although such liability may be limited by contract in certain cases. The law also sets out the responsibilities of the master, the person responsible for commanding the merchant vessel, while at sea as well as rules relating to insurance. Such rules and responsibilities must be taken into account when considering the use of arms and/or private security forces.

Shippers seeking to protect their crews and cargo should be aware that the current law may face amendment. A new maritime law for the Sultanate is said to be under development. It is hoped that this law will shed more light on questions relating to protections against piracy.

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Omani Courts: Case Summary

Oman's Law of Commercial Agencies states that the Oman Courts will not hear any case as regards an agency agreement which has not been registered with Oman's Ministry of Commerce and Industry. An Omani agent relied on this provision in 2005 when its foreign principal sought payment for goods shipped to the agent. The Primary Court found in favour of the agent, but the Supreme Court ultimately ruled in the principal's favour, saying it would be unjust enrichment if the agent could avoid paying for the goods it had received from the principal. In other words, the Supreme Court was not willing to allow the agent to get goods free of charge on the pretext that the agency agreement was unregistered. The agent was ordered to pay the principal for the goods in question.

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Funding the Capital Requirements for Companies in Oman

Payment in Kind

It is legally permissible to make a contribution in-kind to the share capital of a locally organized company. The contribution can be a non-cash input, such as goods, commodities, services, machinery and property rights, whose value can be determined. A debt owed to a shareholder that is represented by a negotiable instrument also can be used for capitalising a company. A contribution of property rights will be deemed to include a guarantee of a marketable title to the property. The value of a contribution in-kind must be confirmed by one or more Government appraisers who are legally obliged to submit their reports within thirty days of an application being made by the shareholders. If the appraiser finds the value to be less than the valuation initially made by the shareholders of the company, then the contributing shareholder must pay the difference. If the General Meeting rejects a proposed contribution in-kind, then the corresponding shares may be subscribed for in cash, or the company may reduce its capital to the extent of the rejected contribution provided that the capital does not fall below the minimum stipulated by the law. The resolutions relating to contribution in-kind must be passed by shareholders representing at least two-thirds of the capital with the abstention of the subscriber seeking to pay capital in-kind. The subscriber must transfer the ownership of the evaluated contribution in-kind to the company soon after the approval of the shareholders. Given the high borrowing rates prevailing in the market, entrepreneurs may feel encouraged to offer non-cash contributions to the capital of start-up businesses over borrowed monies. However, as the evaluation of an in-kind contribution must precede the incorporation of a company, there are potential pitfalls of which shareholders should be aware. Valuation formalities can be time-consuming, and an appraiser’s disagreement with a value estimation could lead to delay in getting the business up and running. Another potential issue relates to obstacles to successfully importing the in-kind contribution. Foreign shareholders wishing to contribute in-kind will have to rely on the local partner or a third party to assist with the importation of equipment or machinery until the company is registered. This extra layer of complexity can result in customs clearance and security issues. Any third party who is not the owner or registered agent or user will have to establish his interest in the equipment for customs clearance. Lastly, issues may arise if the business plan is shelved before the company is registered but after the contribution has been imported. Consequently, a business-specific cost benefit analysis should be undertaken in order to ensure the advisability of making a contribution in-kind.

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Oman Petrochemical Producers Targeted by Protectionism

In early December 2009, members of the Gulf Petroleum & Chemicals Association (GPCA) will convene in Dubai for the organization’s Fourth Annual GPCA Forum. Recent dumping accusations made by Asian and European petrochemical producers against GCC companies likely will rank highly among topics for discussion.

China, India and the E.U. each have complained of dumping by GCC producers in recent months, in some cases leveling tariffs on GCC products. “Dumping” is the term used when a producer sells its product on the international market at a price lower than either the cost of production or the price on the local market.

In June, China launched an anti-dumping investigation into Saudi methanol exports, placing a provisional tariff on Saudi methanol. In August, India levied tariffs on exports of poly-propylene from Oman and Saudi Arabia ranging between one and eight times production costs. In September, the EU launched an anti-dumping investigation against the UAE and Iran relating to exports of poly-propylene tripthalate, the substance used to make plastic bottles.

With the exception of Iran, all of the countries involved in these claims are members of the World Trade Organization (WTO). The WTO allows member states to take action against dumping when it causes material injury to the competing domestic industry. Prior to taking such action, members are required to show that dumping is taking place, calculate how much lower the export price is compared to the exporter’s home market price, and show that the dumping causes or threatens to cause harm.

The complaints raised by China, India, and the E.U. accuse GCC countries of subsidizing natural gas, a crucial input in the production of plastics and other petrochemicals. The low price of feedstock is said to reduce the prices of goods produced in the region to unfairly low levels compared with the international market.

In an interview with Abu Dhabi’s The National, the GPCA rebutted the subsidy allegation, emphasizing that the natural gas used in the production of petrochemicals is a by-product of crude oil production. In the words of the organization’s secretary general Dr. Abdulwahab Al Saadoun, “It is not a subsidy, because there is no cost incurred.”

According to the GPCA, Asian and European claims of dumping mask growing protectionism. In an October 2009 statement, the organization stated “the GCC industry and our governments will not accept the application of anti-dumping regulations against exports of petrochemicals and chemicals from the Gulf. We have seen a surge in protectionist actions brought by countries to block imports. These cases are baseless and violate international rules.”

A surge of protectionism would come as no surprise to the GPCA. The global financial crisis has affected the petrochemical industry worldwide, restricting credit, causing economic contraction and substantial declines in demand for petrochemical products. According to the GPCA, GCC producers have been the least affected by the crisis, making them ripe targets for protectionist policies. “During downturns,” Dr. Al Saadoun remarked in an interview with Arabian Oil & Gas, “there are moves toward protectionism and this is a key challenge we want to address through the collective efforts of all the members.”

Unless settled by the governments of the involved countries, the WTO Dispute Settlement Body may hear disputes between WTO members. History provides some indication as to how the WTO may rule on any cases brought before it. At the time of Saudi Arabia’s accession to the organization in 2006, Saudi negotiators successfully persuaded WTO member states that the country’s low domestic costs of feedstock were justified when compared against the additional costs associated with export. Experts believe that the WTO’s acceptance of this position will undercut European or Asian anti-dumping measures in any hearing before the WTO.

While the anti-dumping duties can exact a cost on regional producers during the time it takes to resolve these disputes, there may be an unexpected benefit for the members of the GPCA. As a result of these challenges, Dr. Al Saadoun has pledged that the “GPCA will strengthen coordination with GCC governments to ensure that exports of petrochemicals and chemicals from the Gulf region are not restricted by antidumping regulations and other trade restrictions.” To that end, the young organization has established an advocacy committee that will create a mechanism to alert its members about anti-dumping cases.

As a result of the anti-dumping challenges, GCC producers seem to have gained a new advocate eager to meet its aims of speaking on behalf of the industry and developing a range of tools and resources available to all of the region’s producers.

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What Fund Offering Terms Should Omani Institutional Investors Negotiate? (Hedge Funds)

Institutional investors’ appetite for hedge fund investments has grown substantially in the last decade, propelled by the promise of reduced volatility and risk coupled with capital preservation and the delivery of positive returns under all market conditions. As a result of mushrooming investor appetite, the number of hedge funds increased to more than 8,000, with approximately US$1.9 trillion in assets under management, by the end of 2007. However, since then the industry has undergone a massive contraction, with assets under management shrinking to an estimated US$1.4 trillion by the end of 2008, and below US$1 trillion by the current date. This contraction was caused by weaknesses in risk management and due diligence processes amplified by the adverse effects of substantial leverage, liquidity and counterparty risks in the global recession. In this article we briefly examine certain key terms that Omani institutional investors (e.g., pension and other government funds, private financial institutions and banks) should consider negotiating for in relation to their investments in hedge funds.

• MFN Clause: The most-favoured-nation clause generally guarantees the institutional investor treatment no less favourable than that accorded, in the past or future, to any other investor in the fund. Any such preferential treatment must be disclosed to the institutional investor, together with the option to elect to receive such treatment itself.
• Fees: Management fees should be calculated as a per annum percentage of the fund’s net asset value, and performance fees should be subject to a high water mark. In addition, any early redemption fees should be payable only during the applicable lock-up period, and no placement, organizational or other fees should be chargeable to the institutional investor’s account unless otherwise agreed and disclosed on an item-by-item basis. The calculation of all fees should be confirmed by an independent audit to provide transparency to the institutional investor, and all fees should be commercially reasonable.
• Change of Control, Key Person and Strategy Disclosure: Notice of any change in control of the fund manager, any variations in its key persons’ involvement in the investment activities of the fund and any material change to the fund’s overall investment objective should be promptly given to the institutional investor and trigger a right of withdrawal from the fund, without application of any early redemption fees.
• Redemption Intervals and Notices; Gating: Hedge funds generally allow periodic redemptions of fund interests (e.g., monthly, quarterly, semi-annually), subject to substantial prior notice from the redeeming investor and the potential imposition of a gate (i.e., a limitation on the total amount of redemptions permitted on a given redemption date, usually set at 10% of fund net asset value). Institutional investors should negotiate preferential redemption terms (e.g., in the form of shorter notice periods and diminished gating thresholds) to guarantee sufficient liquidity of their investments.
• Compulsory Redemptions: The right of the fund to compulsorily redeem an institutional investor’s fund interest should be limited to cases in which an independent counsel’s opinion confirms potentially adverse legal or regulatory consequences to the fund should the institutional investor continue to hold its fund interest.
• In-kind Distributions: An institutional investor should ensure its right to receive all redemption amounts and other distributions from the fund in cash, unless it specifically agrees to receive in-kind distributions, in which case it should request the right to establish a liquidating trust to receive the in-kind distributions.
• Transparency: An institutional investor should ensure the right to receive monthly capital account statements and regular risk profile reports, together with quarterly (unaudited) and annual (audited) capital account statements.
• Transferability of Fund Interest: An institutional investor should seek a carve-out to any transfer restrictions imposed on its fund interest to permit transfers to its affiliates (e.g., when the institutional investor is undergoing a reorganization) without requiring the fund’s consent.
• Valuation: The fund’s asset valuation procedures should be fully disclosed, including any methods used to value hard-to-value assets. As a general matter, illiquid or special situation assets should be valued by an independent valuator and not at the fund manager’s discretion.
• Alternative Investment Vehicle: Where the fund elects to establish an alternative investment vehicle to pursue a particular investment opportunity, the institutional investor should have the right to “opt out” of the vehicle upon prior notice.
• Soft Dollars: The fund manager should confirm to an institutional investor that any “soft dollar” credits derived from brokerage transactions effected for its capital account will only be used to obtain investment research and brokerage services for the benefit of its account.
• Liability: An institutional investor should ensure that its liability for the fund’s debts and obligations is limited to the investor’s contributed capital and that, following its withdrawal from the fund, it will have no further liability.
• Privileges and Immunities: Certain institutional investors may, under Omani laws, benefit from immunity from certain domestic and international laws which would otherwise be applicable to them. No provision of any fund document should prejudice such immunity unless deliberately waived by the institutional investor.
• Forum Selection: Omani courts should have exclusive jurisdiction in respect of any legal action brought against an institutional investor relating to its investment in the fund.
• Fund and Manager Representations: Each of the fund and its manager should represent to the investor that no action is being threatened against them and that any information provided to the investor is true and complete and no material fact has been omitted.
• Controlling Nature of Side Letter: An institutional investor entering into a side letter arrangement with the fund should ensure that, as a contractual matter, where any inconsistency or contradiction between the fund’s agreements and the provisions of the side letter arises, the side letter will control in all respects.

Investing in hedge funds continues to present an attractive option for institutional investors which offers a broad range of investment strategies and considerable portfolio diversification opportunities within a flexible and sophisticated structure. Nonetheless, the liquidity and operating failures experienced by many hedge funds during the financial crisis have highlighted inherent weaknesses within industry practice which investors must guard against going forward. It is crucial therefore, for Omani institutional investors to seek preferential side letter terms such as those described above before investing to minimize investment risk, ensure high levels of transparency and better align the fund’s investment strategy with the investor’s investment objectives and portfolio diversification and regulatory requirements.

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Tendering in Oman: Practical Issues

Foreign companies wishing to tender in Oman need to understand a wide range of matters such as legal procedures, applicable government policies, the procurement guidelines, approvals required, and the implications of policy and law changes.

In this article, we highlight some issues which may impact on tendering in Oman.

• The Tender Board: Article 3 of the Tender Law provides that contracts for the supply or execution of works or transport or offers of services, consultancy studies, technical works, and purchase and lease of real estate shall be through public tenders. Certain types of contracts such as security and defence units do not go through the Tender Board; rather, these are carried out through other ministries.


• Registration: Before a foreign company may submit a bid to the Tender Board, it must register with the Tender Board. The criteria for registration depends on whether the project is for construction, supply, consultancy, or training.


• Local Representation: It is not necessary for the foreign company to have a local presence in Oman at the time of bid submission. Article 23 of the Tender Law provides that foreign companies, however, must form a local entity within 30 working days of winning the bid. Some quasigovernmental entities require foreign companies to submit their tenders through a local Omani agent, but there is no such requirement with the Tender Board.


• Standard Government Contract: Companies should be aware that the contract entered into with the government is the Omani Standard Forms and Conditions, which is based on the FIDIC standard form.


• Applicable Laws: In addition to the Tender Law, companies also should be aware of other relevant laws such as the Law of Engineering Consultancy Offices and the Foreign Capital Investment Law.


• International Treaties: The U.S.-Oman FTA and the GCC-Singapore FTA each include a dedicated chapter on government procurement.


• Oil and Gas Projects: There are additional requirements for companies wishing to bid on oil and gas projects. For example, some tenders require Oman Society for Petroleum Services (OPAL) certification.

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Use of Post-Dated Cheques in Commercial Transactions

Post-dated cheques are often used in Oman in business transactions to make payments in series, such as in construction contracts or rental agreements or car purchases or to discharge any large indebtedness. The use of this common instrument in Oman can sometimes result in problems for both the recipient of the cheques and the entity bound to make the payment by cheque (the “drawee”).

For example, the recipient of the cheque may seek to obtain payment under the cheque and find that there is a hold on the cheque or lack of funds in the account. In such an instance the bearer of the cheque has the option of lodging a criminal complaint with the Royal Oman Police (ROP). The ROP will conduct an investigation, and if appropriate refer the matter to the public prosecutor. Thereafter, the matter would be handled by the criminal courts of Oman.

There are two major circumstances in which the failure of a cheque will not suffice to form the basis of a criminal case in Oman. First, the failure of the cheque must be the result of bad faith in order for a criminal case to result. If the failure of the cheque is the result of a good faith claim regarding the payment, for example, if the drawee puts a hold on the cheque because the product or service provided is deficient or not delivered, this failure will either mean the file is closed before it reaches the courts, or else it could lead to the collapse of the criminal case.

Second, if the cheque was issued as a method for guaranteeing payment, and not as the actual basis for making the payment, then the failure of the cheque cannot form the basis of a criminal case. Post-dated cheques issued for guaranteeing payment often have the words “guarantee” written on them. If such cheques bounce, the drawer will have difficulties as Omani law says that these cheques were not intended as the primary mode of payment.

Those receiving payments by post-dated cheque should make sure the cheque does not include the words “guarantee” if the cheque is the intended method of payment and any underlying settlement agreement should make it clear that the post-dated cheques in question are the primary, intended mode of payment. In addition, if a cheque fails, the bearer of the cheque should be sure to lodge the complaint with the ROP within three months.

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Engineering Consultancy Partners

The Engineering Consultancy Law, Royal Decree 120 of 1994, requires foreign companies to engage a local Omani engineer partner in order to execute engineering work in Oman. The Engineering Consultancy Law specifies the requirements that apply to the Omani engineer partner, including the required education, experience, and reputation.

One issue facing foreign engineering companies in evaluating Omani engineer partner candidates is whether the Omani engineer must be educated and experienced in any particular engineering discipline. For example, if the company plans to engage in civil engineering work in Oman, must the Omani engineer partner be educated and experienced in civil engineering as well, or is another engineering discipline acceptable?

The Engineering Consultancy Law does not specify the answer to this question, but the Ministry of Commerce and Industry (MOCI), which is responsible for reviewing and approving engineering licenses, has clarified the matter in informal statements. Specifically, MOCI requires the Omani engineer partner to be educated and experienced in an engineering discipline that is related to the type of engineering work to be completed in Oman. For example, an architectural engineer in Oman cannot fulfill the local partner requirement for an engineering consultancy that plans to engage in petroleum engineering work because architecture and petroleum are not sufficiently related.

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GCC Interconnection Grid

The vision of an interconnected power system for the states of the Gulf Cooperation Council (GCC) is nearly as old as the 27-year old organization itself. The introduction of the concept in 1982 has, in recent years, proven extraordinarily prescient. Today, the GCC Interconnection project is nearing completion just as electricity demand projections appear set to take off.

The countries of the GCC have experienced increases in demand driven by population growth, urbanization and industrialization. According to some sources, demand for electricity in Oman has been growing at 6-7% per year. Demand growth is forecasted at 15% annually until 2020

The GCC Interconnection Grid is a crucial element of the GCC’s plans to meet the growth in demand. The linking up of electricity systems between Gulf states will reduce long term investment costs for generation by reducing required levels of reserves, adding efficiencies and creating opportunities in energy trading.

Phase I of the interconnection was completed in July 2009, linking Bahrain, Saudi Arabia, Qatar and Kuwait in what is referred to as the GCC North Grid. Phase II of the plan, also complete, involves the internal connection of the electricity grids in the UAE and Oman, known as the GCC South Grid. Phase III will bring the project to completion with the linking of the North and South grids. The final of the three phases of the USD 1.407 billion interconnection project is scheduled for completion in 2011.

According to GCC Interconnection Authority (GCCIA), the body responsible for constructing, operating and maintaining the interconnection, each GCCIA member state will be capable of importing up to the value of its interconnection size. In Oman’s case, potential imports amount to 400MW. As a result, operational reserves in the region are expected to fall.

Additionally, lower operating and management costs to consumers will be achieved by using energy from the most economic generation unit available for dispatch in the interconnected system.

Further, available spinning reserves will be shared to cover emergency conditions and provide emergency support to any system experiencing a blackout.

The benefits of interconnection, however, could stretch far beyond cost savings. If all goes according to plan, the Interconnection Grid will enable the export of power to the Mediterranean basin and to Europe.

Legal Framework for Interconnection
Just as crucial as the technology behind the GCC Interconnection Grid are the legal arrangements making interconnection possible. In the words of GCCIA spokesman Hassan Al-Asaad, “legal agreements are the basis for the entire project – without them there we have no interconnection.”

The members of the GCC Water & Ministerial Committee have undertaken to sign the General Agreement of Power Interconnection Grid with the GCCIA. The General Agreement lays out the fundamental agreement between member states with regard to use of the interconnection. The General Agreement includes provisions relating to connection fees, rights of interconnection, performance, defaults, termination, and governing law, as well as the regulatory principles committed to by the parties.

Regulation of use of the interconnection will initially be carried out by the GCCIA Board. At a later stage, authority will be transferred to a Regulatory & Advisory Committee that will ensure compliance with regulatory principles and performance standards. Finally, when member states take the step of forming a regional energy regulator, permanent authority will vest in that body.

In addition to the General Agreement, state utilities must enter into a Power Exchange and Trading Agreement (PETA) which sets out the terms on which the parties may connect and have access to the grid and the terms by which parties may schedule transfers of power. The PETA is made up of three separate components:

1. the Trading Agreement, which sets out the terms on which the parties may use the interconnection for scheduling transfers of power;
   
   
2. the Interconnection and Use of System Agreement, which sets out the terms on which the parties will connect and have access to the interconnection; and
   
   
3. the Transmission Code which sets out the technical rules that govern connection and access to the grid.

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