Sunday, December 6, 2009

A rollercoaster ride: the UAE 38 years on

As the United Arab Emirates - a federation of seven Gulf sheikhdoms - marks its 38th birthday, has the Dubai debt crisis tarnished one of the Arab world's more notable success stories?

The UAE has survived for the better part of four decades. That in itself is an achievement.

When the federation was born on 2 December 1971, there was a good deal of uncertainty about its future.

The British decision to withdraw from the Gulf - announced a few years earlier - had made the rulers of the sheikhdoms distinctly nervous.

They reportedly told the British they were ready to pay for their troops to stay - an offer the government in London declined.

Pearls to petroleum

The Gulf had been a British lake for 150 years.

Britain had protected the local rulers from their more powerful neighbours, Iran, Iraq and Saudi Arabia.

Now they had to fend for themselves.

Ruler of Abu Dhabi Sheikh Shakbut bin Sultan [l] and members of the London Chamber of commerce
Britain once shielded Gulf leaders from their more powerful neighbours

Most observers would say the UAE's survival as a federation and its rapid progress towards modernisation have been remarkable.

Sheikhdoms which, before the age of oil, had relied on pearling and fishing now have glittering schools, hospitals, airports, hotels and high-rise apartment blocks.

The hardship, disease and illiteracy of a couple of generations ago are now a distant memory.

But the UAE's success has come at a price.

From the start, the federation has been dependent on the huge oil wealth of Abu Dhabi - and a large army of imported workers, mostly from South Asia.

The UAE was held together by the personality and largesse of the ruler of Abu Dhabi, Sheikh Zayed Al Nahyan - who was UAE president for more than 30 years.

Dubai, under Sheikh Rashid Al Maktoum, lacked Abu Dhabi's oil riches and so built itself up as a thriving trading centre.

Breakneck speed

Sheikhs Zayed and Rashid were very different characters - the one a bedouin chief, the other a merchant prince - but they were exceptionally able.
Sheikh Zayed al-Nayan
The first president of the UAE, Sheikh Zayed Al Nahyan, died in 2004

There was always a certain tension between conservative Abu Dhabi and brash, go-ahead Dubai - but despite the stresses and strains, the federation survived.

Sheikh Rashid died in 1990; Sheikh Zayed in 2004.

Under their successors, the problems became harder to manage.

Dubai's breakneck rush to modernity accelerated. It borrowed extensively as it embarked on a property boom designed to draw in business people, investors and tourists from all over the world.

"One could admire the material achievements," says Ivor Lucas, a former British diplomat with long experience of the Gulf, "and still feel this bubble was going to burst."

Dubai became heavily dependent on foreign labour and expertise.

Of a population of close to two million, over 80% are expatriates.

For many young Arabs and young Asians, Dubai was a dream world - a place where they could fulfil their ambitions and live the high life.

But others worried that, in becoming an international playground, it had lost its soul - "all lagoon estates and Russian hookers", as the author Robert Lacey remarked.

Over the last year, the dream turned sour under the impact of the global financial crisis.

Property prices slumped. Hundreds of building projects were put on hold.

Thousands of foreign workers were laid off - white-collar professionals as well as construction workers.

Even so, nothing had prepared the outside world for the magnitude of Dubai's debt crisis.

Hence there was widespread shock when, at the end of November, the state-owned conglomerate Dubai World announced it was freezing repayment of debts of almost $60bn.

Swallowing pride

The big question now is whether Abu Dhabi will bail out its spendthrift neighbour.
Fishermen in Bahrain search their oysters for pearls
Pearls were the region's main export until oil was found

"Abu Dhabi," writes Roula Khalaf of the Financial Times, "is caught in a trap."

Though worried by the impact of the debt crisis on the UAE's economy and reputation, it "has insisted it will not be rushed into action".

The old tensions and rivalries between the two emirates have not disappeared.

Many experts think Abu Dhabi's help will come at a price.

The Maktoum family - long used to promoting Dubai as a glittering role model - may have to change their ways and lose some of their much-cherished autonomy.

That will mean swallowing their pride.

For 38 years, the UAE has survived as the only federated state in the Arab world.

Its continuing survival is not in serious doubt.

But 2009 may be remembered as a turning-point in its rollercoaster ride to modernity.


Population: 4,764,000
Gross Domestic Product: $199bn (£119bn)
GDP per head: $44,276 (£26,683)
Oil: Eighth largest world producer, 2.79 million barrels per day
Source: IMF

Middle East press unfazed on Dubai debt

Papers in the Middle East appear not to be shocked by the announcement by Dubai World that it is to reschedule part of its debts.

Commentators feel there was some inevitability about the move, which they view as the result of Dubai's fast-paced economic growth, particularly in the construction industry. Some express fears for the Gulf's financial system but predict that Dubai's economy can be saved by a return to moderation.

It is also seen as a reminder that the global financial crisis is not yet over and there is a perception that it has been highlighted by the UK media as UK banks have both borrowed from and lent to banks in the Gulf.


There is no doubt that the financial shock is great but, at the end of the day, it was expected for reasons that exceed the financial issue ... It [Dubai's crisis] could be linked, mainly, to the crisis of the model, the fact that it reached the saturation stage and the inability of the market to absorb the huge excess in the growth of the construction sector. (2)


Dubai represents a unique example in the Arab world, whether in government administration that has nothing to do with bureaucracy or the kind of life that has become a favourite for Westerners who settled in Dubai ... However, the experiment cannot pass without mistakes, which is normal in emerging economies. (2)


Dubai's financial crisis brings the international credit crunch back to the forefront. It confirms that the news of the revival of this economy is confusing and worrying, that the crisis is not over yet and that the healing stage is still far away. (2)


The crisis may be relatively minimized by the clear interference of the UAE Central Bank ... Let's not ignore the fact that the investment boom witnessed in Dubai in recent years has helped to provide hundreds of thousands of job opportunities for experts and workers in the region, particularly in the construction sector, which was the biggest source of the boom and also the greatest source of the crisis. (2)


What you can sense every day in the foreign and Arab media is the level of gloating over the issue of Dubai's debts, even though these debts are owned by companies in Dubai which are owned by the government, not by the government itself ... I can understand the British media campaign against Dubai as some of Dubai's debts are owed to UK banks. (2)


[Dubai] chose the fast track and took the lift ... Dubai will return to its normal state if it goes back to economic moderation. (1)


There is no doubt that the Dubai crisis will affect the Arab Gulf countries due to the huge investment link between them. This will put investment companies in a difficult position in terms of considering new investments outside their countries. (1)


Dubai's problem ... could lead to a loss of confidence in Gulf banks that are involved in financing Dubai's companies, not to mention international banks, especially in Europe ... The UK, Greece and the Baltic states are in the vanguard of countries that got loans and which are most likely to be affected by the new crisis. (1)

How Islamic finance missed heavenly chance

Amid the confusion and consternation of the global financial crisis, Islamic banking had a gilt-edged chance to step into the breach.
Islamic bank branch in UK
Islamic banks have spread around the world

It is hard to remember amid screaming headlines proclaiming record bonuses for the bankers of Wall Street and the City.

But just over a year ago, the conventional financial system was on its knees.

"When Western banking collapsed, one sector should have escaped unscathed: Islamic banking," says Mohammad Saeed Rahman, chairman of a US-based think tank, the Institute for Halal Investing.

But from Mecca to Malaysia, the world's Islamic bankers were paralysed and failed to take advantage of the opportunity.

And now Dubai's debt problems have soured the sector's image, with property developer Nakheel asking for the trading of some of its Islamic bonds to be suspended.

So what happened?

Another way

Lehman Brothers was first to collapse - destroyed by murky, missold mortgage products originating in the trailer parks of North America, an appetite for excessive risk and over-leverage.

Dealing in interest, liquor, pork, gambling or pornography are prohibited under Sharia law
Islam forbids all forms of economic activity which it deems morally or socially harmful
Individuals must spend their wealth judiciously and not hoard it, keep it idle or squander it
Muslims have a duty to contribute a percentage of their wealth to deprived and poor sections of Muslim society

Lehmans was the first to fall, in a domino snake that might have brought down the whole free-market financial system.

Governments across the world fell over themselves to avert such a scenario.

They signed up their electorates to decades of deficits and spending cuts, all to bail out the bankers who were caught with their pants down and hands in the till.

In return for the lifeline that taxpayers threw the financial elite, the Cristal-swigging, Armani-clad banking classes temporarily sported sackcloth and ashes - in a strictly metaphorical sense, that is.

At that time, the world needed another hero. A way of doing business that was free from rampant speculation, free from excessive risk and was banking back-to-basics - taking deposits from savers and lending to borrowers for a profit.

Arising from the glittering new cities of the East, primarily Dubai and Singapore, was the champion of Islamic banking.

Faith in finance

"Technically, Islamic banks should have sidestepped the falling grand piano," says the Institute for Halal Investing's Mr Rahman.

"The industry was not allowed exposure to CDOs, derivative products and the kind of intra-financial counterparty risk that crippled the conventional banks.

It couldn't play the sub-prime mortgage game, was backed by real money in the form of petro-dollars and manufacturing export receipts. It was simple, straightforward banking."

The two main principles of Islamic banking are an avoidance of interest and an avoidance of uncertainty.

Islamic economics is a well-documented system, practiced by the Prophet Mohammed, a merchant, and his companions. The core of the Islamic economic system is an avoidance of usury.

Islam is not anti-moneymaking. In fact, the Thatcherite dogma of self-reliance and entrepreneurship is championed in the Islamic sacred book, the Koran.

What is discouraged is making money from money.

Risk-sharing and trading is the central tenet of Islamic economics.

The financial institution goes into partnership with the borrower and both share from the profits of the venture. It is very similar in approach to private equity.

Principle and practice

The other prohibition is an avoidance of uncertainty or gambling. If Islamic economics had been at the centre of the global financial system, the type of speculation that has led to the emergence of bubbles and then runs on stock would not have occurred.

Finally, the need to have all lending fully covered by cash deposits, and the risk management that this would entail, would have never seen the emergence of sub-prime lending.

Staff at Salaam Insurance. Picture: Bhasker Solanki
Salaam Insurance offers Europe's first Sharia-compliant car insurance

Conceivably, such a system, based on ethics and principles of fairness, could have created a "third way" between control-style and free-market economics.

However, principle is a long way from practice, and Islamic bankers are no more and no less greedy than conventional bankers.

The modern Islamic banking industry is very much in its infancy, with a history of less than 40 years.

But in an attempt to compete with the conventional finance industry - its fees, its bonuses - much of the modern Islamic finance industry has aped the practice of the conventional.

Sharia opportunities

Arguably, the modern Islamic finance industry and its cohorts of scholars, who give the official religious seal of appeal to the products of finance firms, have been set up to circumvent the principles of Sharia law.

Scholars and bankers have become more and more sophisticated in finding ways to get around the prohibition of interest and of uncertainty - and create a shadow of the conventional finance system.

The Islamic banks and the Islamic bonds they issue will default, and are doing so as we speak

"Both share the same material goals and adopt the same institutional structures, with the result that the products promoted by the Islamic finance industry are often indistinguishable from those of interest-based institutions," says Tarek El Diwany, an analyst for London-based Sharia finance consultancy, Zest Advisory.

He explains that a serious and nimble response to these concerns is often hindered by a lack of intellectual honesty within the Islamic finance industry itself.

Platforms are rarely provided to scholars who wish to take one step back and question some of the fundamental concepts that are being applied.

Few questions are raised regarding the validity of Islamic debt financing, limited liability structures, speculative methods of market trading or the nature of the monetary system.

Such matters are given little attention in the headlong rush to copy interest-based methodologies.

Money trap

This has resulted in a number of embarrassing paradoxes.

For example, while some Islamic investment managers attempt to develop Sharia-compliant short-selling techniques, several Western authorities are banning the practice, on account of the instability that it causes.

The missed opportunity for Islamic finance is that in the "sunshine years" when all assets seemed to be heading northwards, the industry morphed into a soft version of the conventional industry and became vulnerable to the same systemic failures.

The Islamic banks and the Islamic bonds they issue will default, and are doing so as we speak.

The banks, and the governments that finance them, have fallen into the trap of creating money and then making money from it and will suffer from boom and bust.

For Islamic finance to step into the mainstream and offer a third way, there will have to be a reconsideration of the objectives, institutional frameworks and contractual methodologies of the modern Islamic banking and finance industry.

This effort must encompass the full range of technical and scholarly opinion, and it must have sincere political support.

Soberingly, "Christian" banking started off prohibiting usury and evolved into the Wall Street and City we know today. Islamic finance must try to avoid doing the same before the process becomes irreversible.

Flattening, not falling?

Guess what. The recession might have (almost) ended in the summer after all.

Cranes at building siteThe ONS said this morning that construction output rose by 2% in the third quarter of this year. Why does this matter? It matters because in calculating what had happened to the whole economy in those three months, our official statistical body had reckoned that construction output had fallen, by 1.1%.

Other things equal, that would mean that the 0.4% decline in GDP announced in October, which has already been revised up to 0.3%, would be revised up again on 22 December - to a decline of just 0.1%.

Statistically speaking, a decline of 0.1% is really no decline at all. It's also not far off what many independent economists were expecting when that first estimate came out on 23 October - and caused such a shock.

Does this mean the "sceptics" are right and the ONS was wrong? Well, hardly. Until we see the third version of the GDP figures in a few weeks' time, we don't even know whether the numbers will be revised upwards that far.

But those who doubted the first set of numbers will feel that history is moving their way.

It's always possible that there will be other "new news" about the third quarter that pushes the figures the other way - but there's no sign of anything yet, and looking at the figures to be released between now and 22 December, it looks fairly unlikely. (Theoretically, both the index of production and retail sales numbers for November could include revisions of previous months which affect GDP, but there's no reason to think they will.)

Yet, even if the economy did flatten out from August onwards, there is little sign that it is storming ahead. Quite the reverse.

The news we have had so far of the start of the fourth quarter has not been that great: the CIPS/Markit surveys for manufacturing and services both came in lower than expected in November.

True, the data still point to some modest growth in output in the last three months of the year. The Treasury will be especially gutted if the economy fails to expand now: if there were going to be any measurable impact of the temporary cut in VAT, you would have expected to see it in these three months, as consumers buy now before prices go back up.

It will be a happy Christmas for the government if the GDP figures do get revised up in a few weeks' time. But as 1,700 soon-to-be ex-steel workers in Teesside can attest, it's not time to celebrate just yet.

What is Dubai and who runs it?

The glittering city in the desert has gone from the pinnacle of the world economic boom to the brink of bankruptcy. Christopher Davidson of Durham University explains some of the background.

The inability of the government of Dubai to refinance the massive debts incurred by its largest state-owned company, Dubai World, has sent shockwaves throughout the world prompting many observers to ask not only how severe the economic crisis is, but also what exactly is Dubai and who is in control of it?

Although frequently described as a city state or even as a country in its own right, Dubai is a constituent member of the federation of United Arab Emirates along with six other emirates.

Only one of these, Abu Dhabi, possesses substantial oil reserves, and as such it has dominated most areas of federal politics - including foreign affairs and defence - since the UAE was formed following Britain's withdrawal from the Persian Gulf in 1971.


Dubai, however, has always maintained an air of autonomy within the federation as a result of its long history as a successful free port. When the UAE constitution was drafted this relative independence was taken into account as each emirate was allowed to retain control over its own natural resources and economic development path.

Gradually Dubai did allow itself to integrate more fully into the UAE, finally handing over its militia - the Dubai Defence Force - in 1996.

But this move was interpreted at the time as a means of transferring costly services to the federal government so as to allow Dubai to pursue its economic ambitions.

With little oil, Dubai's only hope of maintaining a distinct identity from Abu Dhabi was to diversify at a fast pace, building up various non-oil sectors such as luxury tourism and real estate.


On paper it was succeeding, as by 2008 over 95% of its GDP was made up by such sectors.

But with the onset of the credit crunch much of this success began to come undone as foreign direct investment and appetite for these activities faded.

Dubai had also badly overextended itself with most of its mega projects - including giant manmade islands - being financed by large debts.

Dubai skyline
Dubai World has fuelled the emirate's rapid economic growth of recent years

With most of these needing to be refinanced in the near future, the emirate's government spent most of 2009 trying to attract international creditors but was largely unsuccessful.

With Abu Dhabi providing some limited financial assistance, both in February 2009 and earlier this week, Dubai managed to keep afloat.

But with Abu Dhabi's clear unwillingness to completely bail out Dubai, much attention has been placed on the relationship between the two emirates, especially since the recent default.

If Abu Dhabi does not provide more help, then the government of Dubai will soon be bankrupt.


Although the ruler of Dubai, Sheikh Mohammed bin Rashid Al Maktoum, recently told journalists to "shut up" and stop referring to Dubai and Abu Dhabi as being separate, and although the Al Maktoum family is of the same tribe as Abu Dhabi's ruling Al Nahyan family - the Bani Yas - the two dynasties nonetheless have a long history of rivalry.
Dubai construction workers
Dubai's boom was built by hundreds of thousands of migrant labourers

In 1833, Dubai broke away from Abu Dhabi and had to rely on British protection.

Even in the 1940s, there was armed conflict between the two neighbours.

More recently, there has been intense competition, including each establishing its own 'national airline' despite obvious overlaps.

As such, further assistance from Abu Dhabi is far from guaranteed.

Beyond the government and the ruling family there will also be a broader impact of the crisis in Dubai.

Thousands of migrant workers, mostly from South Asia, are already stranded in the emirate, and there are likely to be more over the coming weeks as more companies cease their operations or face cutbacks.

These men will have difficulty returning home.

Similarly many other expatriates, some of them Westerners, will also lose their jobs, and the many foreigners who invested in the emirate's much vaunted real estate sector may see substantial losses on the properties they purchased as investments, retirement homes, or holiday villas.

What spoiled the party in Dubai?

This time last year, Dubai was making headlines for entirely different reasons.

It was the opening party of the Atlantis hotel, the star attraction of the city's man-made palm-shaped island. Organisers spent millions on the fireworks and even more on the celebrities.

As the sky exploded overhead, broadcast live around the globe, it was Dubai's message to the world that it had arrived.

But as Dubai's elite sipped their champagne, the financial crisis was already beginning to take its toll in the West. For Dubai, this was the last night of extravagance before the credit crunch came knocking.

And so, 12 months on, the headlines are very different. But who spoiled the party, and how?

Perfect storm

Living in Dubai, as I have for the last two years, it seems everyone has a different theory.

"Now they've acknowledged the debt, they can actually do something about it"
Dubai businessman

Some say it was the perfect storm: a property bubble waiting to burst, with prices rising by the day, fuelled by rampant speculation.

Built on and bought with borrowed money.

No-one asked how, or even if, you could afford to pay it back. Caught up in the euphoria, credit checks and responsible lending could wait. Local media confidently predicted the Middle East was immune.

"Dubai Safe from the Storm" read one headline. Just how wrong it proved to be.

Others suggest the problem was and still is, a lack of transparency.

Mixed messages

Government and business dealings here are done behind closed doors.

Appointments to influential government or corporate positions are more about connections than qualifications.

And with few official statistics to reassure investors, rumour and speculation has filled in the gaps instead.

That's been one of Dubai's biggest problems.

The city took a battering from the international media but rather than fighting back with facts, Dubai opted instead to send the PR machine into overdrive.

'Dubai bounces back' screamed the local newspapers, right next to their foreign counterparts offering the altogether more sobering 'Goodbye Dubai'. With such mixed messages it's no wonder local and international investors have found Dubai so difficult.

So just how worried are people here by the announcement from Dubai World?

On the face of it, not very. It changes little for people's day-to-day lives. Given that it's currently the holiday of Eid, Dubai's notoriously congested roads are calm and quiet.

That is, perhaps, why the government chose this week to make the announcement.

It gives residents and businesses here time to digest the news and work out what it means.

The global impact hasn't gone unnoticed, but look around at the number of people enjoying the sunshine on the beach, and it seems those worries can wait.

Worst has passed?

There's also still the feeling that the worst has now passed.

For those who survived the summer, marked by widescale job losses and falling property prices, there is of course relief.

Those that do remain are willing Dubai to succeed, because for many, the thought that the Dubai dream might be over, is too difficult to bear.

In Dubai's financial community however, the reaction has been altogether more muted.

Partly because many businesses are closed for the holidays, but partly because they knew much of this already.

It was no secret that Dubai was heavily in debt, nor that it was struggling to pay back the money. This week's request to delay the repayment, was simply official confirmation of what was already on the cards.

And to some, the idea that Dubai is 'coming clean' about its debts in this way is a big step forward.

"Now they've acknowledged the debt, they can actually do something about it," says one local businessman.

"Before they were in denial, this is what everyone needed to hear."

Abu Dhabi

But the remaining unanswered question is whether neighbouring Abu Dhabi will come to the rescue.

The oil-rich emirate certainly has the cash but it's already bailed out Dubai to the tune of $10bn. It might be wondering where that money went.

Much has been made of the relations between the two city states, both here and abroad. They share much in common, not least the family connection of the two rulers.

But Dubai is the wild child of the two.

It stole the headlines, racked up the debts and has now come cap in hand for a bail-out. It seems it's not quite ready to forgive and forget.

Without real evidence, speculation is already mounting here about its possible motives.

Abu Dhabi could be forcing Dubai to sweat it out.

To put its own affairs in order before throwing more cash at the problem. Altogether more troubling would be that Abu Dhabi needs the cash itself.

Those scenarios are likely to mean short-term pain for Dubai, and in particular its international reputation. But in the longer term it puts Dubai on a more solid footing.

Last year's party was all about telling the world that Dubai had been born.

Now, by putting its financial affairs in order, it's about telling the world that its finally grown up.


The emirate's flag bearer in global investments
Has a central role in the direction of Dubai's economy
Assets include DP World, which caused a storm when trying to take over six US ports
Property arm Nakheel built the Palm Island and The World developments

Dubai under scrutiny after debt payment delay

Dubai's financial health has come under scrutiny after a major, government-owned investment company asked for a six-month delay on repaying its debts.

Dubai World, which has total debts of $59bn (£35bn), is asking creditors if it can postpone its forthcoming payments until May next year.

Dubai World has also appointed global accountancy group Deloitte to help with its financial restructuring.

The company has been hit hard by the global credit crunch and recession.

It was due to repay $3.5bn of its debts next month.

"Put simply, everyone in the markets thought that, in the end, the federal government in Abu Dhabi would stand by all of Dubai's bad bets. Apparently, they won't."

The request for a delay in repayments led to major credit ratings agencies downgrading a number of state-backed companies.

Following six years of rapid growth, the Dubai economy has slumped since the second half of 2008.

This has led to Dubai property prices falling sharply.


The Dubai government said in a statement that the request to delay debt repayments also applied to property developer Nakheel, a Dubai World subsidiary.

"It's shocking because for the past few months the news coming out has given investors comfort that Dubai would most probably be able to meet its debt obligations," said analyst Shakeel Sarwar, of SICO Investment Bank.

Dubai is one of the seven self-governing emirates or states that make up the United Arab Emirates.

Analysts say the Dubai government has paid the price for a flamboyant economic model centred on foreign capital and giant construction projects.

Questions are now being raised about Dubai's ability to repay its debts, said the BBC's Middle East correspondent Jeremy Howell.

Some have speculated it is likely to turn to the more economically conservative Abu Dhabi emirate to bail it out.

Global credit rating agency Standard & Poor's, which rules on a company's or government's ability to repay its debts, said the announcement "may be considered a [debt] default".

Our correspondent said: "Standard & Poor's and Moodys immediately downgraded all six state-backed corporations in Dubai, downgrading some to junk status."

Junk is the term commonly used to describe bonds that are rated below investment grade by ratings agencies.

The Dubai World announcement was made on the eve of the Eid al-Adha Muslim festival, which will see many government agencies and companies close in Dubai until 6 December.

Dubai World debt 'not guaranteed' by government

The Dubai government has said it will not guarantee the debt of Dubai World, which caused global panic because it cannot pay back creditors immediately.

The statement came after stock markets in Dubai and Abu Dhabi saw sharp falls.

"[Creditors] think Dubai World is part of the government, which is not correct," said finance minister Abdulrahman al-Saleh.

Abu Dhabi's main stock market lost a record 8.3%, while Dubai dropped 7.3% - the most in a year.

"Creditors need to take part of the responsibility for their decision to lend to the companies," Mr al-Saleh told Dubai Television.

The central bank of the United Arab Emirates (UAE) has said it is setting up a facility to provide banks with extra liquidity, as it seeks to battle perceptions that Dubai cannot support its own companies.

Mr al-Saleh's statement caused some surprise in Dubai as people who invested in Dubai World effectively did so on the assumption that the government would guarantee them, BBC Middle East business reporter Ben Thompson said.

There is a very grey area between business and government in Dubai, he added.

Dubai World said it was hoping a restructuring plan would cover $26bn (£15.8bn) of debt.

In a company statement, Dubai World said the proposed restructuring process will only include its main property firms, but leave other companies, which it described as "on a stable financial footing", untouched.

'West exaggerates'

On the Dubai bourse, construction and financial stocks slumped nearly 10%. The debt-ridden Dubai World fell 15%.

Ben Thompson
By Ben Thompson, Middle East business reporter, Dubai

When it came the fall was hard and fast. After the Eid holiday, this was the first opportunity investors here had to make their feelings known. And that they did.

Foreign investors, it seems, were the ones pulling out their money. Locals were choosing to sit out the storm.

But whilst the falls were severe, it wasn't the bloodbath that had been expected. Some analysts had predicted that a 10% fall was all but inevitable.

And so there is some comfort that the losses weren't as steep, but there's still unease. The biggest concern here is what this does to Dubai's international reputation. Investors have left. Will they ever come back?

Dubai's property developer, Nakheel, asked for the trading of some of its Islamic bonds to be suspended.

"This was expected because markets have panicked over exaggerated reports in the Western media," Hamam al-Shamaa from Al-Fajr Securities said.

He added that many foreign investors were withdrawing from the market and that Tuesday would probably be a similar day.

European markets were all lower. The UK's FTSE 100 closed down 1.05%, Germany's Dax also fell 1.05% and France's Cac 40 slid 0.99%. US shares were similarly muted with the Dow Jones barely changed, opening down 0.1% to 10,298.81 points.

Banks fell more sharply in the UK. RBS was down 4.45% while Lloyds was even worse hit - falling by 5.89%.

While shares in the Middle East dropped sharply, Asian shares rebounded on Monday on hopes the Dubai debt crisis would not spread to other financial markets after the UAE's central bank said it would support banks when necessary.

Bank assistance

On Sunday, the UAE central bank said it was setting up a facility to provide banks with extra liquidity.

The liquidity will be available to all UAE banks as well as foreign banks operating in the Emirates.

The bank added that the banking system in the UAE was more sound and liquid than a year ago.

That came after Wednesday's announcement from Dubai World asking for a suspension on its debt repayments, which sent world stock markets tumbling.

Meanwhile, neighbouring Abu Dhabi has said it will "pick and choose" how to assist Dubai.

"We will look at Dubai's commitments and approach them on a case-by-case basis," an Abu Dhabi government official said on Saturday.

"It does not mean that Abu Dhabi will underwrite all of their debts," he added.

Paying the price

The BBC's economics editor Stephanie Flanders said the situation in Dubai had alerted investors to the idea that you can lose money on government bonds - even if they appear to have implicit guarantees.

The repercussions of Dubai's debt problems are already making it more expensive for countries with large deficits to sell their debt.

"There are lots of other governments out there who don't have rich neighbours with oil to bail them out, who may have trouble in the next few months or years," she commented.

"Greece and Latvia are paying more for their debt, thanks to Dubai."

Greece's finance minister George Papconstantinou told the BBC that he understood international concern about the country's credibility but said that was down to the actions of the previous government.

He said that the Socialist government, which was elected 50 days ago, has a plan in place to reduce the deficit and that by "2010 you will be seeing a reduction".

Dubai backed by UAE president as markets fall again

The president of the United Arab Emirates has moved to try to reassure the shaken nerves of investors.

Sheikh Khalifa bin Zayed al-Nahayan issued a statement saying the UAE economy was in good condition.

He also praised Dubai's leader, saying he managed daily "achievements". The Sheikh's comments come after almost a week of market turmoil.

It was sparked when Dubai World, Dubai's highest-profile company, said it would reschedule part of its debts.

Verbal support

The UAE president said the Gulf region would not slip due to what he called the global financial crisis.

The emirate's flag bearer in global investments
Has a central role in the direction of Dubai's economy
Assets include DP World, which caused a storm when trying to take over six US ports
Property arm Nakheel built The Palm Islands and The World developments

How Islamic finance missed heavenly chance

Sheikh Khalifa paid tribue to the ruler of Dubai - who is also his UAE vice president, prime minister and defence minister - saying Sheikh Mohammed bin Rashid al-Maktoum and his cabinet "face every morning challenges, but plan and remove all obstacles to score achievements".

But his supportive remarks appeared to do little to soothe nerves in the region. Markets across the UAE fell sharply for the second day in a row. Shares in Dubai fell by 5.61% and Abu Dhabi fell by 3.57%. Qatar's main index closed down 8.27%.

Those markets though have had less time to react to the news last Wednesday of Dubai World's debt standstill. They were closed for the Eid holiday last week.

Major Western markets have had longer to process its impact and the major European indexes closed more than 2% higher on Tuesday.

Nothing concrete

Last night, in its first statement since the crisis began last Wednesday, Dubai World unveiled something of its plan for restructuring $26bn (£15.8bn) of its borrowings.

Although thin on detail, the firm said that it "intends to adopt a policy of regular communication and will provide further updates as the process develops".

At the heart of the plans to reshape the business is its highest-profile arm, Nakheel, the property company that built the stand-out offshore Palm Island and The World developments.

The company's former director of development, Sunil Gomes, told the BBC that Nakheel took on too much, too soon.

"When any company goes through the growth that something like Nakheel has done, you end up with a lot of people who probably don't have the necessary experience for the jobs they took on."

Hassaim Arabi, chief executive at Gulfmena Alternative Investments said the restructuring statement was good news.

"It shows they are still committed to their payments and it removes all fears that this is a complete default," he said.

On Sunday, the central bank of the UAE stepped in and announced a facility to provide banks with extra liquidity.

The liquidity will be available to all UAE banks as well as foreign banks operating in the Emirates.

On Monday, Dubai's government distanced itself from Dubai World's problems saying that it would not guarantee the company's debt.

"[Creditors] think Dubai World is part of the government, which is not correct," said finance minister Abdulrahman al-Saleh.

West Bank settlers reject Netanyahu plea for support

Jewish settlers have rejected an attempt by the Israeli PM Benjamin Netanyahu to defuse tensions over a pause in building in the West Bank.

They vowed to continue a civil disobedience campaign stopping inspectors from entering settlements, now in its third day.

Speaking on Israeli radio, settlers described the meeting with PM as "difficult and emotionally charged".

The settlers have scheduled a mass demonstration next week in Jerusalem.

The Palestinians have refused to resume peace talks with Israel unless it completely halts all settlement construction, and has complained that the suspension does not go far enough.

Mr Netanyahu declared last week that Israel would restrict residential building in the West Bank for 10 months, but settlers vowed to defy the policy.

Settlers protesting at Kedumim in West Bank
Settlers have vowed to ignore the building work suspension

There has so far been no violence as inspectors tried to enter settlements to enforce the policy this week, but 13 people have been arrested.

At a two-hour meeting with settler leaders on Wednesday in Tel Aviv, Mr Netanyahu promised that building work could resume after the 10-month lull.

"You may demonstrate, protest and express your opinions, but it cannot be that you will not abide by decisions which have been made according to law," he said.

"Nothing came out of the meeting," settler leader Pinhas Walerstein told AFP, adding that he did not believe building would resume in 10 months' time.

Another leader, Danny Dayan, told Israel radio the settlers would continue to oppose the building restrictions.

Earlier, Defence Minister Ehud Barak eased rules on the procedure for granting permission for minor repairs and improvements to existing houses.

The Israeli state also said in a submission to the High Court of Justice that its ability to remove outposts - settlements illegal even under Israeli law - might be reduced because of the resources required to enforce the building curbs.

Palestinians say the new building restrictions do not go far enough, particularly because they do not include East Jerusalem.

About half a million Israelis live in the West Bank and East Jerusalem, which Israel has occupied since 1967 and the Palestinians claim for a future state.

The settlements are illegal under international law.

Climate of fear among Dubai's property investors

Dubai doesn't have the oil and gas wealth of its neighbours, so it borrowed heavily to expand aggressively into tourism and real estate

A week after concerns about debt problems at one of Dubai's biggest firms sent ripples around the financial world, Malcolm Borthwick, editor of the BBC's Middle East Business Report asks British ex-pats and Emiratis about the lasting impact of this turbulent period.

Property company Nakheel made Dubai famous with its daring and ambitious man-made islands.

The company's slogan is "Where vision inspires humanity" and its projects have captured the imagination of investors around the world.

Some of them aimed to make a quick buck selling off-plan properties at a profit before they were completed. Others just wanted to live or retire in the sun.

Three palm shaped islands are planned, one of which is up and running, and The World, a cluster of islands kilometres out at sea.

Nakheel is also the company at the heart of Dubai World - the group whose request last week for more time to pay off its massive debts sent investors around the world running for cover.

Delayed properties

Unfortunately expats are having to move to other countries or back home to find work
British-born Dubai resident

I went to the Palm Jebel Ali, the second in Nakheel's palm trilogy, with one investor who has bought a villa there.

It is a vast manmade palm-shaped island, stretching kilometres out to sea, but the cranes stand idle and we couldn't see any construction work going on.

She was due to move in this year, but now doesn't know when it will be ready.

She is part of a group of 600 homeowners who are unhappy about the delays in the delivery and registration of their properties.

Climate of fear

Dubai's ruler, Sheikh Mohammed bin Rashid Al Maktoum
Dubai's ruler says the Emirate is misunderstood

There is a climate of fear among property investors here, where property prices have fallen 50% from their peak.

Some talk of being intimidated or even threatened by developers after airing their grievances and many won't talk to the press.

The British investor I spoke to didn't want to be identified for fear of reprisals or being forced to leave the country.

"The decision for Nakheel to ask for more time to pay their debt will have an impact on us," she said.

"We thought we were coming out of recession and the market was coming back. But because of what has happened in the last week, people are going to start selling their investments.

"I know people who are going down to the stock market and just want to take their money out."

Returning home

Businessman Ashraf Abdul Hadi
One can call it a conniving propaganda which has targeted Dubai
Emirati businessman Ashraf Abdul Hadi

Outside the English Pub on Dubai's Creek there is an old red phone box. Inside, is a crowd of punters, most of whom have come to watch English football on television.

"I don't think it will have much difference on people who live here," said Wayne Smith from Sheffield in the north of England.

"It may cause some problems on the big projects, but everything seems all right as far as we can see with the naked eye. Dubai's a great place to live."

His partner remembers a few years ago when three times as many people were arriving in Dubai as were leaving. But earlier this year this trend reversed, she said.

"People who are living here know what's happening.

"There have been a lot of redundancies and there are certainly not as many people on the roads. Unfortunately expats are having to move to other countries or back home to find work."

'Media attacks'

But many Emiratis here feel the press has been overly eager to attack Dubai.

"One can call it a conniving propaganda which has targeted Dubai," said local businessman Ashraf Abdul Hadi who runs runs the Bin Hadi Group, a real estate and trading company.

"They didn't draw a line between the government of Dubai and private companies. When you go for debts on private companies you always go for rescheduling payments. The media takes it as an opportunity to attack Dubai."

Many investors believed that either Dubai or the Federal Government of Abu Dhabi would step in to pay off Dubai World's debt.

But as markets panicked and investors digested the shock news, the Government of Dubai sought to distance itself from underwriting Dubai World's debt saying that it was private and not sovereign debt - even though it is a government-backed company.

This has been a public relations disaster for Dubai on a big scale. Dubai's ruler feels the Emirate is misunderstood and investors feel they have been mislead.

But to write off Dubai would be premature. It is a gateway to the Middle East for many international companies and its infrastructure is years ahead of its neighbours.

No Bin Laden information in years, says Gates

The US has had no reliable information on the whereabouts of al-Qaeda leader Osama Bin Laden in years, US Defence Secretary Robert Gates has admitted.

Mr Gates told ABC News in remarks broadcast on Sunday: "Well, we don't know for a fact where Osama Bin Laden is. If we did, we'd go get him."

A Taliban detainee in Pakistan told the BBC last week that he had information Bin Laden was in Afghanistan this year.

However, Mr Gates said he could not confirm that information.

When asked by ABC's This Week programme when the US last had any good intelligence on the whereabouts of the al-Qaeda leader, Mr Gates said: "I think it's been years."

He could not confirm the details of the Taliban detainee, who claimed to have met Osama Bin Laden numerous times before 9/11.

The detainee said that in January or February he met a trusted contact who had seen Bin Laden about 15 to 20 days earlier in Afghanistan.

Bin Laden had previously been thought to be on the Pakistan side of the border with Afghanistan.

But the detainee said that militants were avoiding Pakistani territory because of the risk of US drone attacks.

The detainee said Bin Laden was well.

'Safe havens'

Mr Gates' comments came after US President Barack Obama announced a decision this week to send 30,000 more US troops to Afghanistan.

He recalled that the US was fighting there in response to the 9/11 attacks against America by al-Qaeda, and had made the decision to invade "only after the Taliban refused to turn over Osama Bin Laden".

Mr Obama said al-Qaeda leaders had escaped into Pakistan in 2001 and 2002 and had been able to "retain their safe-havens along the border".

A recent US Senate report prepared by the Foreign Relations Committee Democratic staff concluded that Bin Laden had been "within our grasp" in Afghanistan in late 2001.

But it said that at the time, calls for US reinforcements had been rejected, allowing the al-Qaeda leader to "walk unmolested" into Pakistan's unregulated tribal areas.

Last week, UK Prime Minister Gordon Brown called on Pakistan to do more to find Mr Bin Laden.

"We've got to ask ourselves why, eight years after September the 11th, nobody has been able to spot or detain or get close to Osama bin Laden, nobody's been able to get close to [Ayman al-] Zawahiri, the number two in al-Qaeda," he said.

Pakistani Prime Minister Yousuf Raza Gilani responded by saying he did not think Bin Laden was in Pakistan, and that his country had yet to be given any "credible or actionable information" by the US on Bin Laden.

Timbuktu's ancient salt caravans under threat

With a long, gurgling groan, Lakhmar fell awkwardly to his knees in the roasting hot sand outside the town of Timbuktu.

For the past six years he has been making the same gruelling trek across the Sahara desert to the salt mines of Taoudenni in northern Mali.

But each journey is becoming more of a struggle.

Lakhmar, a 10-year-old male camel with a metal ring in his flaring right nostril, left it to his owner, Boujima Handak, to explain their predicament.

Whenever I see a lorry take the salt I am very upset
Halis al-Hassane

"It's getting more difficult because the rains aren't coming, the oases are drying up and the camels get tired and thirsty and can't continue," he said, unloading a grey-brown, 50kg slab of crystallised salt, the size of an ironing board, from Lakhmar's back.

Camel caravans have been plying their trade between Taoudenni and Timbuktu for centuries.

It is a rite of passage for young, blue-turbaned nomads from the local Tuareg community.

Ancient lake

The miners themselves work for six months at a time, in one of the planet's hottest and most forbidding environments.

They use homemade wooden clubs to carve the blocks of salt from the dried-up bed of an ancient lake.

But today a changing climate, and the arrival of modern technology, is threatening the future of one of the world's oldest and most resilient trading traditions.

Towards dusk, a muffled roar escaped from a mud-walled compound on the dusty outskirts of Timbuktu.

Inside, Sheik Ould Bekay was issuing orders to half a dozen men who had nearly finished loading a flat-bed truck with provisions for the trip to Taoudenni.

Mr Bekay used to do the same journey in a caravan of more than 200 camels.

It took 45 days to make the round-trip; by truck he can do it in 10 days - provided his gearbox does not fail again.

"I don't want to use a truck but my camels just couldn't cope any more carrying 200 kilos of salt and with not enough rain," he said.

Four years ago, he sold all but a handful of his camels and bought a truck.

Many of his colleagues have followed suit.

Unfair competition?

The trucks have now taken over more than half of the trade, and because they can carry so much more their profits have soared, enabling Mr Bekay to build himself a two-storey stone and mud house.

n Timbuktu's salt market the blocks (occasionally stained brown with camel's blood from the long journey) are sawn down into smaller chunks to be sold locally or sent onwards whole by truck or camel to southern Mali and beyond.

The salt trade used to be a buyer's market - with the miners forced to wait for months at a time for the next camel convoy to arrive.

But the arrival of lorries has changed the balance of power and the salt miners are now charging more.

Prices have doubled in the past two years.

"Whenever I see a lorry take the salt I am very upset," said Halis al-Hassane, who has run camel caravans for the past decade.

He acknowledges that "we really have no choice because every year the drought is becoming more difficult."

But he worries about the impact it will have on the region's nomadic culture.

"For Tuareg, the salt caravan is not something just for money, it is tradition," he explained.

"If in your life you do not do it once or twice you are not considered Tuareg. So for me [the trucks mean] the end of Tuareg culture. I am not saying the camels will disappear, because some Tuareg will always stay in the desert and travel for other reasons, but I'm very worried that in three to five years all the salt caravans will be by truck."

Water - another global 'crisis'?

If you look at the numbers, it is hard to see how many East African communities made it through the long drought of 2005 and 2006.

Among people who study human development, it is a widely-held view that each person needs about 20 litres of water each day for the basics - to drink, cook and wash sufficiently to avoid disease transmission.

Yet at the height of the East African drought, people were getting by on less than five litres a day - in some cases, less than one litre a day, enough for just three glasses of drinking water and nothing left over.

The scarcity at the heart of the global water crisis is rooted in power, poverty and inequality
UNDP, 2006

Some people, perhaps incredibly from a western vantage point, are hardy enough to survive in these conditions; but it is not a recipe for a society that is healthy and developing enough to break out of poverty.

"Obviously there are many drivers of human development," says the UN's Andrew Hudson.

"But water is the most important."

At the United Nations Development Programme (UNDP), where Dr Hudson works as principal technical advisor to the water governance programme, he calculated the contribution that various factors make to the Human Development Index, a measure of how societies are doing socially and economically.

"It was striking. I looked at access to energy, spending on health, spending on education - and by far the strongest driver of the HDI on a global scale was access to water and sanitation."

Different lives

Two key questions arise, then.


How availability, use and needs are changing across the world

Why do some communities have so little access to water? And how will the current picture change in a world where the human population is growing, where societies are urbanising and industrialising, and where climate change may alter the raw availability of water significantly?

The UNDP is unequivocal about the first question.

"The availability of water is a concern for some countries," says the report.

"But the scarcity at the heart of the global water crisis is rooted in power, poverty and inequality, not in physical availability."

Statistics on water consumption appear to back the UN's case.

Japan and Cambodia experience about the same average rainfall - about 160cm per year.

But whereas the average Japanese person can use nearly 400 litres per day, the average Cambodian must make do with about one-tenth of that.

The picture is improving to some extent.

Across the world, 1.6bn more people have access to clean drinking water than in 1990.

But population growth and climatic changes could change the picture.

In some regions, "the scarcity at the heart of the global water crisis" could become one of physical availability, especially in places where consumption is already unsustainably high.

"There are several rivers that don't reach the sea any more," says Mark Smith, head of the water programme at the International Union for the Conservation of Nature (IUCN).

"The Yellow River is one, the Murray-Darling (in Australia) is nearly another - they have to dredge the mouth of the river every year to make sure it doesn't dry up.

"The Aral Sea and Lake Chad have shrunk because the rivers that feed them have been largely dried out; and you can see it on a smaller scale as well, where streams that are important for small communities in Tanzania may go dry for half the year, largely because people are taking more and more water for irrigating crops."

Wet and dry

Last year the Intergovernmental Panel on Climate Change (IPCC) took an in-depth look at how the raw availability of water might alter in the future as climatic patterns change.

Its projections are derived from computer models of the Earth's hugely complex climate system, and as such are far from being firm forecasts.

A warmer climate overall means a wetter climate; warmer air can hold more moisture.

But weather patterns are likely to shift, meaning that water will be deposited in different places with a different pattern in time.

"In general we see drying in the sub-tropics and mid-latitudes, from southern Europe across to Kazakhstan and from North Africa to Iran," recounts Martin Parry, who as co-chair of the IPCC's working group on climate impacts oversaw the water report's compilation.

"And the drying extends westwards into Central America. And there are equivalents in the southern hemisphere - southern Africa, Australia."

In some populated parts of North Africa and Central Asia, he says, people may struggle simply to get enough to drink.

Other areas, meanwhile, are projected to receive more rain - considerably more, in some cases.

The question then is whether societies can make use of it.

"If you look at India, Bangladesh and Burma, there are indications of an increase in water availability," says Professor Parry.

"But when you look in more detail you see that monsoonal precipitation will become more intense - there'll be a heavier downpour but over fewer days - so you might just end up with more runoff, which could actually mean less availability of water to the community."

Thirsty work

A changing climate is only one of the factors likely to affect the amount of water at each person's disposal in future.

A more populated world - and there could be another 2.5 billion people on the planet by 2050 - is likely to be a thirstier world.

Those extra people will need feeding; and as agriculture accounts for about 70% of water use around the world, extra consumption for growing food is likely to reduce the amount available for those basic needs of drinking, cooking and washing.

Industry can also take water that would otherwise have ended up in peoples' mouths.

On the other hand, as a society industrialises it tends to become less reliant on farming - which could, in principle, reduce its local demand.

It is a tremendously complex picture; and forecasting its impacts makes simple climate modelling look a trivial task by comparison.

Researchers at the University of Kassel in Germany, led by Martina Floerke, have attempted it.

Their projections suggest that some regions are likely to see drastic declines in the amount of water available for personal use - and for intriguing reasons.

"The principal cause of decreasing water stress (where it occurs) is the greater availability of water due to increased annual precipitation related to climate change," they conclude.

"The principal cause of increasing water stress is growing water withdrawals, and the most important factor for this increase is the growth of domestic water use stimulated by income growth."

The modelling suggests that by the 2050s, as many as six billion people could face water scarcity (defined as less than 1,000 cubic metres per person per year), depending, most importantly, on how societies develop - a significant increase on previous estimates.

Ideas pipeline

The irony is that the richer societies are the ones most likely to be able to adapt to these changes - perhaps relatively easily.

A century ago, a 500km-long pipeline was built to bring water from the Western Australian coast to the parched inland goldfields around Kalgoorlie; the economics of gold made it viable.

Now that the coastal capital Perth is drying out, there is talk of building an even longer pipeline to bring water from the north of the state.

The state recently acquired a desalination plant - an effective, but expensive, way of increasing the raw supply of clean water. A number of Middle Eastern countries are doing the same; it is even being contemplated near London.

Rivers can be diverted huge distances, as China is contemplating. Spain and Cyprus can take water deliveries by ship.

But can all societies afford such measures?

In any case, is adaptation possible to some of the really big projected changes, such as the rapid shrinking of Himalayan glaciers which may lose four-fifths of their area by 2030, removing what is effectively a huge natural reservoir storing water for more than a billion people?

"In principle you could do it, if you're equipped to do the engineering," says Mark Smith.

"But societies are going to have to get much better at deciding how they're going to use their water.

"And very often, in developing countries where institutions are not well established, decisions are made in a very ad-hoc way - someone says 'yes let's use this much for irrigation' but you're already using that much for a sugar mill, and before you know it you've allocated more than you actually have."

Two years ago I stood in a forest clearing in the west of the Amazon basin talking to researchers studying the deforestation and fires that are an increasing plague in the region.

They told me that some villages around there were experiencing water shortages.

How can that happen, I asked incredulously, in the middle of the Amazon rainforest, in one of the most luxuriously verdant places on Earth?

What had brought the shortages was a combination of increased human settlement, deforestation, and a drying of some streams, possibly related to climate change.

If even the Amazon can feel these pressures, it is difficult not to think that the same picture will be played out in much starker and possibly much messier colours in parts of the world that are already feeling the heat of dwindling supplies and growing needs.

Delays block China's giant water scheme

A multi-billion-dollar project to divert water from southern China to the arid north is already four years behind schedule.

The news comes as parts of northern and central China struggle to cope with severe drought.

Officials recently admitted that water would not flow along the project's central route - a total of three are planned - until 2014.

But there appears to be a difference of opinion about what is actually causing the delay.

One official said it was because of environmental concerns, another said it was taking longer than expected to resettle affected farmers.

This is not the final answer because the water being transferred is simply not enough.
Ma Jun, Chinese water expert

Whatever the reason, the entire scheme is unlikely to solve northern China's dire water shortage, even when it is finished.

To solve that problem, experts say the region must conserve what little water it has.

Environmental problems

China first started considering building the South-to-North Water Diversion Project in the 1950s.

The need is obvious. An area along three major rivers in northern China has 35% of the country's population, but only 7% of its water resources.

A recent severe drought is a reminder of just how dry some parts of China can be.

Nearly four million people are short of water. Livestock and crops are also under threat.

It is problems like this that prompted numerous studies into the water diversion scheme, which finally gained the go-ahead in 2001.

The $62bn (£42bn) project includes eastern, central and western routes that will divert water from China's Yangtze River to the parched north.

Some parts of the eastern and central routes have already been completed, although work has yet to start on the western route.

China has shown in the past that it is unafraid to tackle massive engineering projects, such as the Three Gorges Dam. This scheme is no different.

Engineers will have to tunnel under the Yellow River in two places to send the water north.

The recently announced delay has occurred on the central route, which is nearly 1,300km (800 miles) long and stretches from Hubei Province to Beijing.

One project official, Wang Fangyu, told a conference that environmental concerns were holding up the scheme.

The main problem appears to involve the Danjiangkou Reservoir, which is being enlarged as part of the central water route.

The reservoir's dam is also being heightened.

Mr Wang said enlarging the reservoir would have a "profound" influence on the area's natural environment, according to a report of the conference in the Yangtze Business News.

He said the extended dam would prevent flooding downstream from the reservoir on the Han River, a tributary of the Yangtze.

But he also told the conference: "When the project is finished, the Han River's ability to clean itself will be reduced.

There is no doubt that China is facing a major challenge in managing its scarce water resources to sustain economic growth in the years ahead
David Dollar, head of the World Bank in China

"This means that in the lower reaches of the river in Hubei we will need to build even more pollution treatment facilities."

This is why the central route is being delayed by four years, said Mr Wang.

But the minister in charge of the diversion project, Zheng Jiyao, recently denied that environmental problems were the cause of the delay.

He blamed it on the need to relocate 300,000 people to make way for the reservoir's expansion.

This is proving a challenge because the area is already densely populated and there is little land for migrants.


There are other controversies too - not least whether the western route is even viable.

It will be built on the Qinghai-Tibet Plateau, and there is a debate about what impact this will have on the local environment.

And there is a bigger problem.

Experts say the billions of tonnes of water that will be sent north will still not satisfy northern China's water demands, even when the project is completely finished.

Chinese water expert Ma Jun said: "It is an emergency project because certain cities in the north are seeing dire water shortages.

"But in the long term this is not the final answer because the water being transferred is simply not enough."

Mr Ma said that water supplies in the north cannot expand any further and so the government needs to encourage water conservation if it is to find a permanent solution.

"There is huge potential, but it hasn't yet been fully tapped," added the author of China's Water Crisis.

A recent World Bank report made a similar call for improved water conservation, and recommended increasing its price to reflect its scarcity.

The report gives a grim account of the various water problems facing some parts of China, which for years have suffered from shortages, pollution and flooding.

"There is no doubt that China is facing a major challenge in managing its scarce water resources to sustain economic growth in the years ahead," said David Dollar, head of the World Bank in China.

Even if everything goes according to plan, China's south-north diversion project will only solve some of those problems.

Why water, oil and coal do mix ?

The vast cooling towers in Didcot dominate the Oxfordshire landscape as they belch out plumes into a clear sky.

It evokes an image of cigarette smoke on an industrial scale.

But the association is misleading. As the Department for Environment, Food and Rural Affairs (Defra) says: "While existing coal plants are a contributing factor to climate change, the damaging emissions are invisible."

"People associate cooling towers with pollution," bemoans Steve Waygood, regulation manager at Npower. But what you see is water vapour, he explains.

"Water is fundamental to the energy process, by creating steam," says Mr Waygood, a chemist who has worked for the firm for more than two decades.

Cooling towers help remove heat into the atmosphere.

Producing energy, whether in coal or gas stations, needs water. Water is also used in refining oil and gas and for running nuclear power stations.

Nevertheless, people often forget how essential it is, he explains.


The cooling towers - totalling six - are deceptive in size.

Only when you are standing next to them, looking skyward, does their true scale become apparent. At 300ft in diameter and more than 370ft high, they appear even larger than anticipated.

Water spraying into a shallow pool, below the tower, creates a constant rushing sound.

Climbing up an outside staircase to the entrance is enough to make anyone feel quite dizzy, as the top of the towers looms overhead.

"There is always a wind around the towers," says station chemist Tom Cracknell, urging us to hold on tight to the railing as we are buffeted by the air.

As we step inside one of the Didcot A towers, temporarily taken out of service, there is an eerie calmness.

You expect to find activity inside, but it's quite the opposite.

There are no moving parts or motors or fans, simply a central walkway with boards on either side.

Thick mist prevents us from seeing beyond a few metres. Only Mr Cracknell's high-visibility jacket proves his presence.


The water used by Npower, explains Mr Waygood, comes from the same source that everyone else uses locally: the river Thames.

What is different is the scale.

Didcot B took 11 million cubic metres from the river in 2007, and returned about 5.5 million cubic metres of that after using it for cooling.

Meanwhile, Didcot A used 24 million cubic metres, while returning 17 million cubic metres to the river.

This comes on top of more than one million cubic metres of Thames-treated mains water needed to top up the boiler water circuits.

"This works out at 3,000 to 3,500 cubic metres a day in town mains water," says Mr Waygood. "To put this into perspective, an individual is estimated to use 160 litres daily."

Mr Waygood looks quizzical and does a quick mental calculation: "We use in a day what 50 people use in a year [in mains water]".

Access to water

A trip to the pump house, about a mile up the road from Npower's plant, shows where the water comes in.

It is hard to grasp that this small building, set adjacent to a pretty riverbank, is so crucial in ensuring that hundreds of homes have reliable access to electricity.

There is a low hum as a device draws water from the river, but nothing grandiose to see.

As we arrive, technicians Dave Belcher and Alan Hawkins are checking one of the pumps.

"River availability is a key issue. It has natural changes in flow during the year," says Mr Waygood.

"We know that there will be times when we won't be able to take enough to allow for all the units at Didcot A and B to run."


While Npower attempts to return as much water as possible to the river, without access to it, energy production would be impossible.

The dependency goes both ways. Just as water is essential to produce energy, it takes a lot of energy to treat and distribute water.

Philippe Rohner, an investment manager at Swiss investment firm Pictet, known for its water fund, puts it bluntly: "You can't talk about energy or water in isolation."

But there is a significant difference in the amount different types of energy require.

Debates about the environmental impact of energy often concentrate on greenhouse gas emissions. But factoring in water usage can paint quite a different picture.

Nuclear energy, for example, requires access to vast amounts of water.

Price impact

A report by JP Morgan, entitled Watching Water, said there was increasing anecdotal evidence about the material impact of water on the power industry.

Claudia Kruse, an analyst at JP Morgan, said one of the main challenges for firms, including in the power generation industry, was reliability of water supplies.

"The impact of climate change on water quality and availability should not be underestimated," she said.

This point was underlined in 2003, when France, which relies heavily on nuclear energy, had exceptionally high temperatures and low river levels. Energy firm EDF had to close a quarter of its 58 nuclear power plants, the JP Morgan report said.

The average electricity price soared by 1,300% and the firm lost 300m euros by having to import power.

So low water levels could mean yet higher energy prices.

Uncertainty about our future energy supplies persists. But one thing is clear - access to water and how much it costs will be a crucial part of the debate.

Peace in the pipeline

"Water wars are coming!" the newspaper headlines scream.

It seems obvious; rivalries over water have been the source of disputes since humans settled down to cultivate food.

Even our language reflects these ancient roots: "rivalry" comes from the Latin rivalis, or "one using the same river as another".

As the number of international river basins and impact of water scarcity has grown, so do the warnings that countries will take up arms to ensure access to water.

In 1995, for example, World Bank Vice President Ismail Serageldin famously claimed that "the wars of the next century will be about water," a sentiment echoed regularly ever since.

These apocalyptic warnings fly in the face of history.

No nations have gone to war specifically over water resources for thousands of years; the only documented case of war with such a specific cause was between the city states of Lagash and Umma on the Tigris River 4,500 years ago.

International water disputes - even among fierce enemies - are generally resolved peacefully, even as conflicts erupt over other issues.

Today, more than ever, it is time to stop propagating threats of 'water wars' and aggressively pursue a water peacemaking strategy

Why? Because water is so important that nations cannot afford to fight over it.

Instead, water fuels greater interdependence.

By coming together to manage their shared water resources jointly, countries can build trust and help prevent conflict.

By crying "water wars," doomsayers ignore a promising way to help prevent war: co-operative water resources management.

Local issues

Of course, people compete - sometimes violently - for water, which is not only essential to life on Earth, but also increasingly scarce.

Developing countries, often located in arid and semi-arid regions experiencing high rates of population growth, are especially threatened by water scarcity.

These countries often lack the human, institutional, and technical capacity needed to manage water scarcity and its associated economic, agricultural, health, and political challenges.

Within a nation, users - farmers, hydroelectric dams, recreational users, environmentalists - are often at odds, and the probability of a mutually acceptable solution falls as the number of stakeholders rises.

History is littered with violent examples of internal disputes with water as major factor.

Just as Californian farmers bombed pipelines moving water from Owens Valley to Los Angeles in the early 1900s, Chinese farmers in Shandong clashed with police in 2000 to protest against government plans to divert irrigation water to cities and industries.

But these conflicts usually break out within nations. International rivers are a different story.

The world's 263 international river basins cover 45.3% of the Earth's land surface, host about 40% of the world's population, and account for approximately 60% of global river flow.

And the number of internationally-shared basins is growing, largely as a result of political changes like the break up of the Soviet Union, as well as improved mapping technology.

As many as 17 countries share one river basin, the Danube.

Home goal

Contrary to received wisdom, evidence indicates this interdependence does not lead to war.

Researchers at Oregon State University compiled a dataset of every reported interaction (conflictive or co-operative) between two or more nations that was driven by water in the last half-century.

The crux of water disputes is still little more than opening a diversion gate or garbage floating downstream

They found that the rate of co-operation overwhelms the incidence of acute conflict.

In the last 50 years, only 37 disputes involved violence, and 30 of those occurred between Israel and one of its neighbours.

Outside the Middle East, researchers found only five violent events, while 157 treaties were negotiated and signed.

The total number of water-related events between nations also favours co-operation: the 1,228 co-operative events dwarf the 507 conflict-related events, despite the often fiery rhetoric of politicians, which is in reality aimed more often at their own constituencies than at the enemy.

Simply put, water is a greater pathway to peace than conflict in the world's international river basins.

International co-operation around water has a long and successful history; some of the world's most vociferous enemies have negotiated water agreements, and the institutions they have created are resilient, even when relations are strained.

The Mekong Committee, for example, established by Cambodia, Laos, Thailand and Vietnam in 1957, exchanged data and information on the river basin throughout the Vietnam War.

Israel and Jordan have held secret "picnic table" talks to manage the Jordan River since 1953, even though they were officially at war from 1948 until the 1994 treaty.

The Indus River Commission survived two major wars between India and Pakistan.

And all 10 Nile Basin riparian countries are currently involved in senior government-level negotiations to develop the basin co-operatively, despite the verbal battles conducted in the media.

Southern African countries signed river basin agreements while the region was embroiled in a series of wars in the 1970s and 1980s, including the "people's war" in South Africa and civil wars in Mozambique and Angola.

Now that most of the wars and the apartheid era have ended, water management forms one of the foundations for co-operation in the region, producing one of the first protocols signed within the Southern African Development Community (SADC).

In North America, regional water shortages have strained relationships between the US and its neighbours - Canada to the north and Mexico to the south.

However, long-standing water-sharing agreements govern these disputes, keeping them civil and preventing them from erupting into violent conflict.

Gate keepers

Today, more than ever, it is time to stop propagating threats of "water wars" and aggressively pursue a water peacemaking strategy.

Why? Well, water war warnings force the military and other security groups to take over negotiations and push out development partners, like aid agencies and international financial institutions.

Water management, on the other hand, offers an avenue for peaceful dialogue between nations, even when combatants are fighting over other issues.

Water co-operation forges people-to-people or expert-to-expert connections, as demonstrated by the trans-boundary water and sanitation projects that Friends of the Earth Middle East conducts in Israel, Jordan, and Palestine.

Water management is, by definition, conflict management.

For all the 21st Century technical wizardry - dynamic modelling, remote sensing, geographic information systems, desalination, biotechnology, or demand management - and the new-found concern with globalisation and privatisation, the crux of water disputes is still little more than opening a diversion gate or garbage floating downstream.

Life force

Obviously, there are no guarantees that the future will look like the past; water and conflict are undergoing slow but steady changes.

An unprecedented number of people lack access to a safe, stable supply of water.

The water supply is shifting to less traditional sources such as deep fossil aquifers and wastewater reclamation.

Conflict, too, is becoming less traditional, driven increasingly by internal or local pressures or, more subtly, by poverty and instability.

These changes suggest that tomorrow's water disputes may look very different from today's.

But no matter what the future holds, we do not need violent conflict to prove water is a matter of life and death.

China's Accession to the WTO

LONG Yongtu is well known in China for his work as the chief negotiator on China's entry into the World Trade Organization (WTO), helping to finally ensure its success in 2001, after 15 years of negotiations.

It was not an urgent task for China to enter into WTO until the policies of reform and opening-up were carried out. China's foreign trade volume rapidly increased from US $20.6 billion in 1978 to US $73.85 billion in 1986, 85 percent of which were made with the contracting parties of General Agreement on Tariffs and Trade (GATT). Therefore, China was in need for an unconditional most favored nation treatment as well as an equitable trading environment. In July 1986, China notified the GATT of its wish to resume its status as a GATT contracting party (China was one of the 23 original signatories of GATT in 1948).

However, China was reluctant to acknowledge the market economy that was taking hold in the country when the WTO audited its economic system. The negotiations didn't resume until Deng Xiaoping proposed the idea of a socialist market economy system, which helped to finalize the audit by the end of 1992.

The path did not smooth out immediately. It took another seven years to reach an agreement between China and the U.S., due to the tough stance that the United States took and precarious Sino-U.S. diplomatic relations.

China finally officially became the 143rd member of the WTO in December 2001.

Long Yongtu believes that China has developed a better understanding of common international practices; these can be seen in the many positive profound changes that have taken place in its trade relations.

Entering into the WTO is a win-win situation for China and the world. The process of WTO entry negotiations helped to accelerate China's opening-up process. China's development is vital to the world, offering a vast market with infinite opportunities.

There's No Place Like Home

Being one of the three major engines of the economic growth in China, exports are suffering a setback in the global financial crisis. Most export-oriented enterprises are facing sluggish sales and overcapacity. This situation has forced them to look for alternatives, and many are discovering a huge and previously neglected domestic market.

Export-oriented Manufacturers Turning Inward

"The current crisis urges us to shift from overseas to domestic markets," says Wang Xiaohai, a member of Beijing Jinyi Bushe Garment Export Co., Ltd.'s export sales staff. The period from the end of last year to the beginning of this year was the most difficult time ever in his work life: foreign purchasers forced down prices, leaving narrow profit margins. Then the number of export orders dropped 40 percent due to the decrease in demand. Moreover, in order to save costs, foreign firms no longer take responsibility for certain kinds of business procedures, and pass them on to the export companies while setting stricter standards on product quality and compensation. "So we are planning to promote the brand that was sold abroad on the domestic market," Wang Xiaohai announced.

A number of export-driven companies have begun to try their luck at home. Yan Shibo, domestic sales manager for Beijing Rikon Electric Appliances Co., Ltd., confirms that his company has adjusted its marketing strategy, devoting more energy to sales within China. The company's preparation includes the translation of product information, better supervision of regional sales agents and franchises, and improvement of after-sale service. These timely strategic adjustments have brought Rikon a handsome monthly turnover so far this year: RMB 600,000 to 800,000 and on the increase.

In response to the downturn, some companies are expanding into emerging markets in Africa and South America. However, they are also longing for further relief from developing home markets. "Though we stood the test of the crisis, we need to give equal attention to both overseas and domestic markets in the future," comments Lin Min, executive deputy general manager of Beijing Best Power Technology Development Co., Ltd. "Numerous companies grew rapidly by concentrating on foreign trade. That makes them vulnerable to any little change in the global economy." Lin continues, "Experience tells us no company can grow into a multinational without a solid base in their domestic market."

Turning to domestic consumers is by no means a makeshift arrangement to counter the present depression. On the contrary, it is crucial to any enterprise's upgrade and transformation. Yi Xianrong, director of the Finance Development Research Office under the Finance Institute of the Chinese Academy of Social Sciences, advises that China's foreign trade enterprises should turn to developing original brand manufacturing (OBM) and products with higher added value. "Most export-oriented manufacturers in China now revolve around OEM, or original equipment manufacture. Any business transformation is restricted by the external environment and their own capabilities. Tapping into the domestic market, on the other hand, can help move a company from being production-oriented to being market-oriented," explains Yi Xianrong.

Risks of the Domestic Market

The domestic market is an unknown territory for export-oriented businesses. Some don't dare to step into it because they are so accustomed to a routine of "attend fairs, receive orders and ship products."

According to Zhang Jiankang, president of Beijing Jiading Carpet Company, operation in a domestic market is totally different from foreign trade. "Take our company for example. The production line, operation mode and core team are export-oriented. In foreign trade, the key to obtaining more orders is to take the upper hand in negotiation, especially on the issue of price. The processes of manufacturing and exporting are rather systematic. While in the domestic market it is much more complicated. We have to take market demand and customer preferences into consideration, not to mention knotty problems such as brand promotion and fierce market competition."

Zhao Yongdong, general manager of Beijing Shangpin Houseware Co., Ltd., feels the same way: "Foreign trade companies lack marketing channels and staff familiar with the domestic market. What's worse, we don't have an original brand, which is a requirement to enter supermarkets and franchised stores in China. Even if we did, our products are designed to meet the needs of overseas customers and are not suitable for home markets.

The challenges don't stop there. The long settlement period is a problem that has always plagued these companies. Lin Min of Best Power Company worries about this issue: most domestic retailers often settle the account only after the goods are sold, meaning the money does not reach companies for more than 90 days. It is just one disaster after another for cash-strapped foreign trade companies. Such problems do not exist in overseas markets, where retailers settle for goods on receipt from the company.

Helping Hands

Nevertheless, there is a glimpse of hope. "There are hundreds of millions of households in China. If one household spends RMB 200 a year on housewares, that means a market of 100 billion yuan," says Zhao Yongdong of Shangpin Houseware Company.

Over the past few months, the Beijing Municipal Commission of Commerce has organized four grand fairs for export-oriented companies, during which 351 export-oriented manufacturers contracted with 1,499 retailers, registering a gross turnover of RMB 30.6336 million. The yoghurt machine produced by Rikon Company fortified that company's daily sales with hundreds of thousands of yuan, while the water purifier produced by Best Power Company made its debut with an RMB three million contract with Carrefour. Apart from the grand fairs in Beijing, others like the First Guangdong Foreign-funded Enterprises Commodities Fair and the 105th China Export Commodities Fair (Canton Fair) all help export-oriented companies build bridges to the domestic market.

As a matter of fact, e-commerce – the new business mode that stands for economy and time-saving – is gradually being deployed by export-oriented companies expanding their domestic presence. With the help of websites that engage in B2B and B2C transactions, plus a more aggressive advertising campaign on the portals, the Shangpin Houseware Company has seen an increase in business volume. "Customers place their orders online and the money is wired directly to us, while we use the information to schedule and manage our production precisely to order," said Zhao Yongdong. "Though e-business doesn't seem so different from the traditional mode, it does bring in more customers from home; that the transaction is achieved and monitored through a third party platform secures any dealings with consumers."

To open the door to the domestic market for export-oriented companies, Vice Minister of Commerce Jiang Zengwei believes that dealers can still count on their experience in foreign trade to produce commodities that suit the domestic market. Meanwhile, they are also advised to develop their own brands especially for Chinese consumers, expand their channels, and transform potential need to concrete demand.