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Mapping the path forward

Know your clientPartnering with Chinese businesses

Acta est fabulaSuccessful successions

Raised ceilingsQatar’s construction boom

Will you be spending that?Rethinking public spending

Point of ViewPublished by Deloitte & Touche (M.E.)and distributed tothought leadersacross the region.

Spring 2015

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Spring 2015Middle East Point of ViewPublished by Deloitte & Touche (M.E.)

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Deloitte | A Middle East Point of View | Spring 2015 | 3

A word from theeditorial team

The signs were obvious: the widening eyes and slightquiver of the lips; my mother was flustered and at a lossfor words. The culprit? A simple question: “What is yourchild studying at university?”

I was pursuing my M.Phil in Modern Middle EasternStudies at the time and my mother, an ardent believer inprofessions, could not see where the professionalism layin that. Naturally, I resented her comments at the time,but 20 years later, whenever I sit in front of a blank pagetrying desperately to sound coherent, I wish I could justgo into an office or a clinic or a workshop or a lab andbe something, a carpenter or a doctor, or a lawyer or awelder; anything where I know the parameters and canwork within them. Briefly, I wanted to think and work“in the box.”

In truth however, there are no more boxes (see ourDeloitte Review article in the MEPOV Fall 2011 issue.)The economy has changed, business has changed andeven spending has changed. Even the weather ischanging! Nowhere is this better highlighted than in ourfeatured articles in this issue of Middle East Point of View.

In their article on doing business with Chinese clientsWinning with China Inc., James Babb and MadeleineChen Todd specify that “business is business at end ofthe day,” however, “when it comes to dealing with thisculturally and linguistically distinct group of clients, most of whom are relatively new in working within pre-defined international business protocols, it wouldcertainly help to understand the whys and hows of theirdecision-making in order to form mutually beneficialrelationships that are built for success and built to last.”

In his article on finance institutions’ need to diversifytheir income sources Rethinking the future, UmairHameed advises: “With regulators all set to introducenew capital adequacy requirements and interest rates atall-time lows (and projected to potentially dip further),it’s a good juncture for finance companies to consider a re-think of their corporate strategy and businessmodel, both in terms of sources of revenue as well assources of funding.”

Changes are also happening in both, the private and thepublic sectors. Walid Chiniara, highlighting the need forthe succession planning for family businesses in hisarticle Acta est fabula, cautions: “[Family] businesses

enhance the common good by providing employment,acting as a role model, producing required goods andservices, and creating wealth that extends beyond thebusiness family itself. Their contribution to society is sogreat in fact that the prosperity of the Middle East canbe directly correlated with the presence of the familybusiness. For these reasons alone, in today’senvironment, failure of a family business is not anoption, but, with good succession planning, nor is itinevitable.”

David Brazier writes about reduced public sectorspending in his article Virtue borne out of necessity? Hesays: “The scale and speed of the change in the oil pricehas had a clear influence on the fiscal landscape forgovernments across the region. While the level andimmediacy of the impact varies, many have signposted a recasting–or rethinking–of major investment programsin infrastructure.”

The skyline in Qatar is also undergoing majortransformation as highlighted by Bilal Marroush in thearticle Raising the ceiling of expectations. “There is nodoubt” he writes, “that Qatar is taking many stepstoward building a healthy economy with strong bases…The country is undergoing a massive boom on differentfronts and all of this depends heavily on building andsustaining a well-advanced infrastructure supported by a mixed blend of a real estate market be it commercial,residential, public and touristic and a broader vision totransport the country to a different era that is promisingfor its residents and the whole region.”

The Qatari development boom should be aided by newlaws enacted there as well as in Bahrain as explained byNick Witty in his article on the subject Trust me, I’m areal estate developer. “During 2014,” says Witty “boththe Bahraini and Qatari Governments confirmed theirintentions to enact real estate development lawsintended to regulate market practice, therebystrengthening their respective markets and moreimportantly, promoting investor confidence.”

So whether you believe in boxes or not, I am sure youwill find this issue of our magazine very informative inhelping you map the way forward.

ME PoV editorial team


In this issue

Winning with China Inc.Reading the hearts and minds of Chinesemultinationals operating in the Middle East James Babb and Madeleine Chen Todd

Rethinking the futureUmair Hameed

Acta est fabulaWalid S. Chiniara

Virtue borne out of necessity? David Brazier

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Contents


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34

Table of contents

Raising the ceiling of expectations Qatar’s real estate and construction eraBilal Marroush

Trust me, I’m a real estate developer Nick Witty

Fueling growthYou can’t always buy what you needWill Sarni

With a growing number of Chinese multinationalssetting up shop across the Middle East, are we readyto deal with a business partner whose culture is sodifferent to our own?

Deloitte | A Middle East Point of View | Spring 2015 | 7Deloitte | A Middle East Point of View | Spring 2015 | 7

China

China’s insatiable demand for oil is said to be the drivingfactor that kept crude oil prices in triple-digit U.S. dollarfigures for years, which in turn has added an estimatedUS$1 trillion to the GDP of the GCC countries over a 10-year period (2003-2013)1. This surge in wealth hasled to growth opportunities across a broad range ofsectors such as real estate, transportation,telecommunication and financial services, for bothChinese companies and their Middle Easterncounterparts. The aftermath of the global financial crisis, uncertainties in some parts of the region, and

in particular, the recent unexpected sharp dip in oil price have added a new dimension to the increasinglyinterconnected bilateral relationship between two of the most important emerging markets. Governmentsacross the Middle East now have a stronger incentivethan ever before, to leverage new sources ofinvestments in achieving social development andeconomic diversification of their respective countries.Whereas China, armed with US$3.3 trillion in reservesand sluggish growth at home, is eager to turn itsreserves into productive assets overseas.


Of course, business is business at end of the day; hencethe same commercial common sense applies regardlessof where the clients come from. However, when itcomes to dealing with this culturally and linguisticallydistinct group of clients, most of whom are relativelynew in working within pre-defined internationalbusiness protocols, it would certainly help to understandthe whys and hows of their decision-making in order toform mutually beneficial relationships that are built forsuccess and built to last.

Deal lifecycle with a typical Chinese clientIt is important to understand that a typical onboardingand buying process of Chinese clients usually takeslonger–with a more complicated scoping andnegotiating process–than what would usually happenwith a Western company.

Generally speaking, a Western company purchasesservices in a fairly linear and straightforward manner: itstarts with certain needs being identified, then potentialwork processes involved being scoped and agreed uponinternally, followed by this agreement on the scope ofthe work being socialized before being crystalized into a general Request for Proposal (RFP) or Request forInformation (RFI). After providers provide theirresponses, the best or most suitable option is selected to perform the work, with minor alterations based onthe negotiation process.

For Chinese companies, these steps along the buyingprocess are less clearly defined and less linear. Theclients’ needs would usually still be developing wheninitial contact occurred. In order to secure a serviceagreement, potential service providers not only have to prove that they have what the clients need, but alsothat the clients appreciate the benefit they gain frombeing serviced in the first place. Therefore with Chineseclients, the RFP or the whole buying process is usuallyless formal.

Handling rejection

Know yourcustomer- Sales environment- Decision- making hierarchy

Guanxi

Mianzi

Client’s needsidentified

Contractssigned

Gettingpaid

Repeatedprojects

Initial proposalsevolve into a series

of increasinglyspecific proposals

Service provider’sscoping of clients’needs culminating in initial proposal

Making theinitial contact

Relationship building and management

Patience

Client’s needsredefined

Communication: language

Making compromise

Following up:friendship building


In this process, negotiation could potentially take more turns than expected given the double effortsinvolved to: • convince the Chinese clients of their need for services;• define the need in a mutually agreeable manner, thateventually gets crystallized in a written, structured andenforceable contract. Given the competition involved,it could get infinitely more complex with lesser-knowncompetitors trying not only to outperform but toimpose their own version of the agenda on theprocess.

These convolutions might have contributed to thenotoriously lengthy sales process that is popularlyassociated with Chinese clients. While it might be thecase, potential service providers are in fact left withmore leverage in their reserve to influence andimplement what they believe to be the best solution for their clients and for themselves. There is more roomto maneuver when it comes to contract negotiation;oftentimes those who helped define the work neededwill be asked themselves to perform the scope of thework they helped identify. Credit won with particularChinese clients during this lengthy process will also likelygo a long way down the road, leading to faster, easier,and repeated project wins with the same client.

The importance of trust in a relationshipThis distinct process further reinforces the premiumattached to trust and loyalty with this particular group of potential customers, as well as the ability to earn itwith the right partners throughout this process.

Guanxi and MianziGuanxi and Mianzi are two of the most important termsto appreciate when it comes to working with Chineseclients. They operate as a backdrop against whichbusiness interactions operate and flourish.

Contrary to public perception, Guanxi (a.k.a.‘connection’) is not your typical nepotism fraught withbribery and corrupt practices of trading authority with

perks. In a business setting, it refers more to a deep andsustainable relationship that qualifies one as part of theinner circle, i.e. someone with the status of a confidant.Chinese clients value long-term relationships and preferto do business with those they know, those they sense a personal connection with, those they feel comfortableentrusting their money with, those they could count onbeyond the immediate transaction.

As a result of this cultural preference and expectation,Chinese clients are more likely to engage a serviceprovider–repeatedly–if they feel there is Guanxi with the provider, which signifies a mutually acknowledgedrelationship built upon reliability and trust.

Mianzi (a.k.a. ‘face’) could be loosely understood asdignity and pride, which feature significantly in Chineseculture, particularly that pertaining to a public settingsuch as a business/social environment.

Mianzi is of utmost importance to any Chinese clientwith a sense of self-value who wishes to commandrespect in a socio-political-economic setting. It explainsmotivation behind countless seemingly absurd andcounter-intuitive decisions made by rather rationaldignitaries of the Chinese business community.

Chinese clients are more likely toengage a service provider–repeatedly–if they feel there is Guanxi with theprovider, which signifies a mutuallyacknowledged relationship built upon reliability and trust

China


One is often advised to exercise cultural sensitivity andprecaution in situations where Chinese clients’ Mianzimight be at stake. A rule of thumb is always be mindfulof potential acts that would likely be associated withcausing public humiliation on the part of your Chinesecounterpart, such as perceived abruptness when turningdown an invitation to socialize or challenging a seniorexecutive’s idea in front of subordinates.

Elements of trust-buildingPatienceIt is rare for a Chinese client to jump into seriousbusiness discussions when meeting someone for the firsttime, which is particularly the case with the more seniormanagement/C-suite executives. Losing patience, evenin a private setting, would be interpreted as an insultand reflect very negatively on oneself. Clients need tofeel that one cares about their business beforediscussing and entrusting mega-transformationalprojects to that person/company.

CommunicationSuccessful communication starts with listening. Thisapplies universally but particularly rings true for Chineseclients. They tend to have a stronger penchant to co-develop and redefine their specific needs of service andscope of work with potential service providers. It wouldbe unwise, and to some extent disrespectful, to dive inresponding to a particular RFP or RFI without havingtaken into account the clients’ actual situation and realintent.

Handling rejectionGiven the Chinese reluctance to turn down aproposition in an outright manner, many of therejections come in the form of subtle pushback orstalling tactics. One should acknowledge it as what it is–the fact that your proposition does not resonate withthem. However, this does not necessarily mean the endof the negotiation process. The last thing one should do in this scenario is simply walk away. The point tonote is to stay composed–acknowledge the clients’dissatisfaction, reassess flaws in previous propositions,and re-engage the client with alternative or enhancedoptions.

Making compromiseChinese clients appreciate a level of sophistication in deal negotiation. They respect counterparts whounderstand the subtleties and strategic thinking, notunlike a chess player's moves--losing a battle to win the war. One thing to bear in mind is that irreconcilabledifferences for the Chinese are indeed extremely rare.Disagreements, no matter how severe they appear inform, are manageable as long as one is clear about theclient's position and vision; and when situations arise,one is willing to show courtesy and sincerity in a sharedlong-term partnership by making concessions onmatters deemed less crucial.

Following up: continuing friendship buildingFor a business culture heavily influenced by personalrelationships, there are ultimately two scenarios whereChinese clients are willing to pay a premium for services:1) out of absolute necessity (usually a result of

regulatory pressure and/or investigation), and; 2) in anticipation of great future business/friendship

value as a result of mutual collaboration. Following up with continuing friendship building is a genuineinvestment in a long-term relationship; this is whatChinese clients essentially appreciate, and areeventually willing to pay for.

Successful communication starts withlistening. This applies universally butparticularly rings true for Chineseclients.


Dealing effectively with the right partner(s)Chinese companies tend to be complicated entities with dynamic inner checks and balances, as well as anintricate web of stakeholders that need to be managed,to ensure a mutually satisfactory bilateral relationshipthat’s built to last.

Among the myriad stakeholders, it is essential to knowhow to work with at least three types of them: thedecision-maker, the sponsor, and the friendly coachand/or referral contact.

In order to maximize the trust-building impact, oneshould be able to address these three types of partnersappropriately with equal importance. A decision-makeris the ultimate wallet-holder and gatekeeper; hispriorities and preferences should be studied, analyzedand fully taken into consideration when structuring anydeal. The sponsor is the one person with a direct vestedinterest in making the deal a success, as much as theservice provider. His pressure points should be notedand his limits understood; a mutually agreed futurevision and appropriate approach towards realizing thatvision should be fully explored and decided upon. Thecoach/referral contact is the cultural reference point, theeyes and ears of the external service provider; his relativeindependence could serve as an ideal sounding boardfor service providers to retain their sense of objectivityand direction.

In other words, respect the decision-maker, work closelywith the sponsor, and befriend the referral contact.Never neglect any party as they all play indispensableroles in making any project a success.

Lastly, it is prudent to understand all these culturallyrelevant elements in the context of a relationship-building and management process. They serve to

facilitate business interactions throughout the deallifecycle, which help create a lasting and fruitful businesscollaboration for a lifetime. However, it would becounter-productive to overanalyze any specific element.Chinese clients are increasingly more savvy and receptiveof international protocols when it comes to dealing withforeign business partners. They are pragmatic. If there isgenuine business rationale behind a deal, they will doeverything in their power to ensure that it will be asuccess.

by James Babb, partner, Clients & Industries andMadeleine Chen Todd, manager, Chinese servicesdesk, Deloitte Middle East

Endnotes1. HSBC Report: What a globalizing China means for Africa and theMiddle East, 2014

Chinese companies tend to becomplicated entities with dynamic inner checks and balances, as well as an intricate web of stakeholders thatneed to be managed, to ensure amutually satisfactory bilateralrelationship that’s built to last

China


Stricter capital requirements and low interest ratesare impacting the Gulf region’s finance companiesthat are now seeing the need to re-evaluate theircorporate strategy and business model.

Rethinkingthe future

Although the United Arab Emirates financial sector’s net profits grew by 14 percent in 2013 and has had its credit rating raised from negative to stable byMoody’s1–a rating that has been maintained for 2014–there are concerns that new regulations to be issued bythe Central Bank of the UAE (CBUAE) in line withinternational best practices such as Basel III, may end upconstraining the activities of certain types of financialinstitutions.

Some are likely to be impacted more than others…While established banks may have the adequate capitalneeded to meet the revised requirements, financecompanies that are generally independent and primarilyfocus on lending activities, are likely to face somedifficulty in raising the additional capital needed to meetthese requirements. Unlike banks, finance companiesare often limited by their ability to accept retail deposits,which reduces their overall asset base, therebyrestricting their access to “cheap” sources of funding.

Finance companies


A reluctance on the part of some existing shareholdersto inject more capital into a given finance companyfurther exacerbates the capital challenge being faced by these institutions.

Revisiting the funding channelsAs consumer borrowing increases across the region, a number of finance companies have limited capacity to grow their loan books and, with constraints on theirability to accept deposits as mentioned above, they endup leveraging their existing capital. Once the leveragelimits are reached, the finance company then becomescompelled to either maintain its loan book or seekalternative ways to increase its capital base in order to leverage and lend.

A natural option to increase capital is through ashareholder injection. But what about financecompanies whose existing shareholders are unwilling to increase their capital? How do such financecompanies look to raise funds and what should theirstrategy be to overcome this funding imperative?

One possibility is for potential tie ups with banks thathave excess capital available, with a view to provide thebank with an equity stake in the finance company inreturn for additional funding. This also allows theacquiring bank to diversify its overall exposure, at thesame time providing an alternate source of muchneeded capital for the finance company.

This trend is becoming increasingly prevalent in marketssuch as the Kingdom of Saudi Arabia, where regulationslimit direct access to the local market for foreignfinancial institutions. A leading UAE-based Islamic Bank recently acquired an equity stake in a Saudi-basedfinance company with a view to gaining access to theSaudi market while at the same time providing thisparticular finance company with much needed fundingto sustain and grow its business in its home market.

Feeling the pinch of low interest ratesIf one critical aspect of a finance company’s businessmodel is to ensure that it continues to have adequatefunds to lend, then another would be to have sufficientlending activities to build the revenue stream. Withinterest rates close to all-time lows, the return onexisting capital for most financial institutions iscorrespondingly low due to the subsequent reduction in the net interest rate margin. In contrast to establishedbanks that generally offer a broad range of financialproducts from which they earn their income, the financecompanies have been hit much harder, as they havesmaller lending books to begin with and offer only alimited range of products. Some finance companies arealso finding it increasingly difficult to generate adequaterevenues to sustain their existing businesses, let aloneturning a profit.

While the problem appears to be relativelystraightforward, the solution may not be as simple as it requires a fundamental re-evaluation of the financecompany’s existing strategy and business model. Financecompanies need to start evaluating different options tosafeguard future growth and generate enough revenueto sustain their business.

The need to diversify income sourcesFinance companies need to find avenues to diversifytheir income sources away from conventional lending-based activities and towards more fee-based productsand services. In fact, some of the largest banks in the

If one critical aspect of a financecompany’s business model is to ensurethat it continues to have adequatefunds to lend, then another would be tohave sufficient lending activities to buildthe revenue stream


UAE have been proactively diversifying their revenuestreams for some time now and have managed toincreasingly generate more fee-based income alongsidethe conventional lending-based income, in certain casesincreasing their non-interest income steadily by around10 percent per annum while interest income increasedby 2.5 percent year-on-year over the last four years.

While an increasing number of banks have beenproactively seeking ways to diversify their revenuesources and continue to do so, finance companies havegenerally been slow to respond. It is only now that somefinance companies have consciously initiated the processof re-evaluating their corporate strategy and embarkedon journeys to diversify their revenue streams.

One example is a prominent UAE-based financecompany that was seeking to identify different revenue-generating opportunities that it could potentiallyconsider diversifying into with a view to increasing itsfee-based income. At the same time, from the financecompany’s perspective, it was vital to balance thecompeting interests of its stakeholders and avoid anyrisks of cannibalization to its existing product offeringthat the diversification initiative may bring about.

As such, a comprehensive market analysis was conductedand multiple business opportunities identified fordiversification of revenues. Each of these opportunitieswas systematically evaluated to complement, ratherthan cannibalize the company’s existing productoffering, whilst at the same time be relatively easy tointegrate within its existing operating model. A detailedfinancial analysis was also conducted to narrow down a set of four different service offerings which couldpotentially yield gross profits in excess of 30 percentwhile limiting the associated increase in total operatingcosts by just under 5 percent.

Better late than never…With regulators all set to introduce new capitaladequacy requirements and interest rates at all-timelows (and projected to potentially dip further), it’s agood juncture for finance companies to consider a re-think of their corporate strategy and business model,both in terms of sources of revenue as well as sources of funding. A failure to do so may potentially put thefinance company at risk of regulatory noncompliance,associated reputational harm and even a gradualstandstill of operations due to a lack of funding andadequate revenues.

The finance companies that make the right strategicchoices are likely to be well positioned and continue to benefit from the growth opportunities presented in this region.

by Umair Hameed, director, Monitor Deloitte, Middle East

Endnotes1. Financial Stability Report issued by the Central bank of the UAE

in June 2014

The finance companies that make theright strategic choices are likely to bewell positioned and continue to benefitfrom the growth opportunitiespresented in this region

Finance companies

The family business structure has been a key factor in the unprecedented growth in materialprosperity that we have experienced so far in theMiddle East North Africa region. Such businessesenhance the common good by providingemployment, acting as a role model, producingrequired goods and services, and creating wealththat extends beyond the business family itself. Theircontribution to society is so great in fact that theprosperity of the Middle East can be directlycorrelated with the presence of the family business.For these reasons alone, in today’s environment,failure of a family business is not an option, but,with good succession planning, nor is it inevitable.


Acta est fabula

Family business


History books are littered with names of people whohave left a legacy, be it good or bad. Whether taken tomean the transfer of one’s values and beliefs or themore materialistic definition of leaving assets, legaciesinvariably aim to benefit one’s family or society as awhole.

Similarly, most business founders aspire to leave a legacyin the form of the continuation of the family name. Theonus rests on the heirs and successors to support andmaintain this legacy. Asking the successors what thisentails, and whether they know what the family nameactually stands for invariably reveals conflictingviewpoints. And as always, there are two sides to every story.

Ask the legatees why they are uncertain about carryingon the family legacy and you will undoubtedly get atleast one of the following answers: our parents take usfor granted, our parents fail to listen to us, or ourparents live in their own bubble.

Ask the founders why such a mismatch in expectationsexists, and inevitably the response will be one of thefollowing: our children do not appreciate the suffering ittook for us to reach this stage, “the West” has pollutedour children’s minds with gadgets and so-called“modernization” or “our children have other priorities1.”

While there is often merit to the arguments of bothsides, part of the role of Family Governance is to help bridge this divergence and encourage betterunderstanding between the generations. Often, theunavoidable generation gap between the founder and successors is blamed, but fundamentally, there are much larger issues at play.

“For the world has changed - and we must change with it”2

Leaving a legacy is more than bequeathing theownership of a family business to one’s successors andexpecting them to carry on the family name. While it isinvariably true that the founder has invested a significantamount of his own time and energy into the business,he has undoubtedly had to make sacrifices along theway, ultimately, to provide his family with a comfortablestandard of living as well as leaving behind a moreintangible legacy. But it is essential that certain “tools”are provided to the successors to enable them toperpetuate this same wealth and legacy, otherwise thelegacy itself becomes a burden, and risks dying shortlybehind its founder.

In this regard, it is important to understand thatsuccession planning and estate planning are not thesame thing. Estate planning is the process ofanticipating and arranging (during one’s own lifetime)the disposal of one’s estate in the event ofincapacitation, or passing. It provides a structure thatdetermines the inheritance that will be received by theheirs and other legatees.

Succession planning, on the other hand, extendsbeyond the distribution of tangible assets and is morethe process of ensuring the orderly transition of themanagement and ownership of a business to the nextgeneration. Essentially, succession planning is the

Leaving a legacy is more thanbequeathing the ownership of a familybusiness to one’s successors andexpecting them to carry on the familyname

handover period from the founder to his successors. A handover period is common practice in manyscenarios, be it the sale of a business, the change ofemployees or the appointment of a new president.

The vendor of a business will normally continue to beinvolved for some months, or years even, after the saleto ensure the smooth transfer and continuity of thebusiness. He invariably retains a sense of pride as well asa financial interest in the future success of the business,and so may provide commercial or operational supportand assistance, as well as passing on existing businessrelationships.

Upon the departure of any member of the personnel in a family business, there will almost certainly need tobe a handover period. Be it the long-serving and loyalfactotum who is leaving, or a highly skilled seniormanager, it is recognized that they both need to handover the know-how they have acquired and therelationships they have built to their successor.

These examples beg the question of why it should beany different upon the departure of the founder, uponthe “gifting” of the business. The right answer is that it should not be any different. Yet, unfortunately, theintrinsic elements of succession planning and thehandover are often systematically ignored whenhanding over the family businesses to the nextgeneration. While inheritance matters are usuallyaccounted for in the form of the distribution of tangibleassets such as company shares, real estate, private jetsand art collections; the management of a business andthe distribution of the intangible assets (experience,leadership, vision, etc.) are left to fate.

This is a cause for concern, particularly whenconsidering the business landscape in the Middle East in which families dominate the business sector with

over 85 percent of privately held businesses beingfamily-owned or controlled. Such families therefore have a significant role to play in relation to the region’seconomies, investment environment and job market.

Demographic trends point towards the fact that in theMiddle East, the first cohort of founders who have so far created successful empires are now approachingretirement age. Succession planning is a criticalchallenge for the region’s business families.

If it is to be successful, the founder must see successionplanning as a priority, to be dealt with alongside (notinstead of) lucrative business deals. It is not somethingto put off until a quieter or more convenient day. Thefounder, used to being indispensable, needs to begin toimplement a strategy to prepare the next generation“champions” to step up to the mark. If successful, thisstrategy should see the founder manage himself out ofthe leadership role into more of a consultant role. Thistransition provides an opportunity for the founder to


Demographic trends point towards the fact that in the Middle East, the first cohort of founders who have so far created successful empires are now approaching retirement age.Succession planning is a criticalchallenge for the region’s businessfamilies.

Family business


impart his tacit knowledge and experience of thebusiness onto the successor and ensure that all parties,himself included as well as other family members,employees, customers, suppliers and stakeholders are at ease.

Just as the founders have invested in their business, it istheir role to invest in its human capital as part of theirduty to the business, its people, the family, and tosociety at large.

“The best time to plant a tree is twenty years ago. Thesecond best time is now”3

The ability of a family business to survive is largely basedon its capacity to produce sustained and high-calibreleadership over time. Founders cannot wait passively forthe future to manifest itself; they must craft the futureby investing time, thought and planning in order toensure the quality and continuity of leadership talent.

While patriarchs grapple with the idea of letting go, they should realize that a new generation of extremelyqualified men and women, these next generation

champions, are ready and able to take the reins. It is the responsibility of a patriarch and of his advisorsto identify and select these champions. Additionally,there is an equally important onus on the chosenchampions to show willingness to take over the businessand its responsibilities and demonstrate that they arecapable of so doing. It is a reciprocal relationship and all parties have a duty to be intimately involved in theprocess.

These next generation champions ought to seethemselves as “works in progress” in terms of theirlearning and development, while the patriarch and therest of the family must provide them, now and in thefuture, with the appropriate support and resources. Achampion with the desire and inclination to take overthe family business must actively seek to evolve andprogress on a personal level in order to have a positiveeffect on the business. Champions must arm themselveswith the required competencies and skills to be crediblewithin the business and beyond and be able todemonstrate their added value.

These key competencies and skills go beyond any formaleducation. A university degree or an MBA, while stilldesirable, is no longer sufficient in isolation if the familylegacy is to live on in the business. The champions needto advance themselves beyond what can be achievedfrom education alone.

The Champions have a responsibility to invest inthemselves to ensure that they have obtained therequisite Education, Training and Development inanticipation of their career within the family business.More importantly, they must continue to invest inthemselves to hone and add to the relevant skills

Just as the founders have invested intheir business, it is their role to invest inits human capital as part of their duty tothe business, its people, the family, andto society at large


Family business

throughout their career. It is the duty of theirpredecessors, the founders, to trust in them, to havefaith in them and consequently to empower andsupport them in these endeavors. For after all, they are the future.

“Men at some time are the masters of their fates: Thefault, dear Brutus, is not in our stars, but in ourselves,that we are underlings”4

The present-day business environment is constantlyevolving. The rapid growth of emerging technologies, a demand for more social responsibility, greaterexpectations from employees, suppliers and stakeholders,not to mention fierce international competition makethe market very different to what it once was.

Founders cannot merely give their successors a templateto follow. They should instead build a framework whichgives them the tools, flexibility and support to enablethem to succeed. Today’s boys and girls, the nextgeneration, are not clones of their successful parent;they are entitled to live their own dreams and to drivetheir own life experiences. We need to recognize thatafter the transition to the next generation, the champion is more than a mere steward, he, or she, has responsibility for the sustainability of the familybusiness, both for the benefit of the rest of the family,but more critically, to society as a whole.

Today the sustainability of the family business is more far-reaching than estate planning or the continuation of the family name as the legacy, it is a moral obligationthat cannot be left to destiny. As such, the table belowhighlights the way forward for each of the playerswithin the business.

by Walid S. Chiniara, partner, Deloitte Private, Middle East

Endnotes1. Based on personal interviews.2. Barack Obama, Inauguration Speech, January 20, 2009.3. Chinese proverb4. William Shakespeare, Julius Caesar, Act I, sc. 2

Acta est fabula: “The play is over” Emperor Augustus’ last words.

Today the sustainability of the familybusiness is more far-reaching thanestate planning or the continuation of the family name as the legacy, it is a moral obligation that cannot be left to destiny

The way forwardFounders/Patriarchs/Matriarchs

1. Recognize that theworld has changed.

2. Trust the nextgeneration champions.

3. Respect and take stockof any differences ofopinion.

Next generationchampions

1. Live your dreams.2. Act as the first

generationentrepreneur.

3. Work relentlessly inpursuit of excellence.

Executives within thebusiness

1. The interests of thefamily you serve alwayscome first.

2. Listen and put reasonbefore emotion.

3. Communicate andalways tell the truth.

The sharper focus on public sector spending acrossthe region–brought about by reduced oil prices–mayprovide the stimulus needed to drive change in majorprocurements and, in the longer-term, supportgovernments in broadening the regional economicbase and securing a range of other benefits.

Virtue borne out of necessity?

The scale and speed of the change in the oil price has had a clear influence on the fiscal landscape forgovernments across the region. While the level andimmediacy of the impact varies, many have signposted a recasting–or rethinking–of major investment programsin infrastructure.

Reducing the capital allocated for essential projectscarries risk. Lack of investment leaves unmet the need

for economic infrastructure to create jobs that would in turn help steer economies away from a reliance onnatural resources. In addition, real and unmet demandin areas of social infrastructure such as housing, healthand education goes unaddressed. Tightening budgetsgenerally across public services has the potential toexacerbate another challenge commonly experienced in the region, that of the effective whole-lifemaintenance of existing public assets.


Funding government projects


Growing public demand for increased demonstrableaccountability for public spending serves to placegovernments and agencies across the region morestrongly in the spotlight as they respond to thesecomplex and often competing pressures.

The greater and more effective use of the private sectorin the design, delivery and, potentially, financing ofpublic sector projects and associated services is adeclared key long-term objective for many governmentsacross the region. In Saudi Arabia for example, theKingdom’s privatization strategy that dates back nearlytwo decades, envisages a broad spectrum of options to execute the transfer, ownership or management ofpublic enterprises, projects and services. Its imperative is reinforced in the rolling National Development Plansand also in sector-specific plans and strategies, eachwith their own nuances and objectives. The NationalTransportation Strategy for example, recognizes thatwhile the provision and financing of the roads networkwill be a public sector responsibility, reducinggovernment involvement in tasks that can be moreeffectively delivered by the private sector andrationalizing existing pricing and cost recovery schemesare important objectives. Many such strategies acrossthe region seek to promote the engagement of theprivate sector without the ultimate loss of control of the assets by the public sector.

Different approaches to implementation have beenadopted. Jordan, Kuwait and Egypt for example haveestablished dedicated units to foster partnerships withthe private sector. There are no established parallelbodies in some jurisdictions such as any of the Emirates.The overall approach in Saudi Arabia, which also has nocentral partnership body, has been to empower theagencies and ministries within different sectors to adoptand advance the privatization imperative at a pace andon a route that were largely self-determined. Theeffectiveness of this approach has depended largely onthe drive and appetite of individual organizations (andoften, in reality, the individuals within them) and accessto the required skills and capacity. In many cases theconstraints, real or imagined, of the standingprocurement regulations have acted as an impedimentto accessing the expertise required to innovate. Furtherhurdles to clear have been establishing effective tariff orrevenue structures that are clear, equitable and, critically,bankable and achieving this in an environment withoften opaque subsidy arrangements.

The resulting picture is mixed. The maturity and appetitefor the use of non-traditional contracting modelsamongst commissioning clients is variable betweensectors within individual countries and also between the same sectors across different geographies. A directconsequence of this variability is a lack of consistentmaturity in the available providers, funders and directinvestors. These issues become self-perpetuating as thelack of credible local expertise and resources, and theresultant perception of “offshoring” government assetsand services, can create a further and real disincentive to the use of different procurement models.

A number of major transport projects, such as thepassenger line between the Holy Cities of Makkah andMadinah and the proposed cross-Kingdom freightlandbridge in Saudi Arabia and the Mafraq-Ghweifathighway in Abu Dhabi were considered for privatefinance, adopting models proven in many other areas ofthe world, but were ultimately funded by governments.In sectors such as water, while private funding ofprojects has been used relatively extensively historically,

In an environment of stronggovernment revenues, the headlinepressures to consider alternativedelivery and financing models forinfrastructure projects and services is reduced


there has been some backing away from this approachover the recent past in some jurisdictions.

In an environment of strong government revenues, theheadline pressures to consider alternative delivery andfinancing models for infrastructure projects and servicesis reduced. The original impetus for Public PrivatePartnerships (PPP/P3) and other similar models oftenreflected fiscal pressures on governments (the UnitedKingdom’s original Private Finance Initiative (PFI) fromwhich many of the current models have evolved, forexample, was driven by a wish to reduce the country’sshort term public sector borrowing requirement.) Thiscan serve, however, to obscure the broader benefits thatalternative approaches, appropriately configured anddelivered, can achieve. In the regional context it isthrough some of this wider set of benefits that perhapsthe most valuable and sustainable advantages ofalternative procurement models with a greater privatesector role could be seen.

Some of the advantages are well rehearsed, at least in theory, and include increasing the certainty of project timetables and cost outturns and providing theopportunity for maximizing the socio-economic benefitsof the investment. These benefits are both at project-specific level, through economic multipliers, and also at the macro level, through improving the efficiency of national economies and enhancing theircompetitiveness. Commissioning agencies can use thegreater sophistication of alternative models to contracton a basis that best reflects the value that they placeacross the spectrum of their objectives. These includethe level of local value retention and the employment of nationals.

The cost of capital for governments will continue toremain lower than it is for private investors or funders.This, however, should be only one element of thefinancial consideration. A properly considered Value forMoney assessment of a PPP or privately funded schemeconsiders cost holistically and on a risk adjusted basis.This reflects the greater opportunity for innovation andintegration efficiencies provided through contractsbased on performance outputs compared toprescriptive, input-based specifications. Critically, it also

reflects the quantification of the risk that is transferredaway from government–a cost otherwise borne bygovernment but often not reflected. As manygovernments move their focus from building new assetsto maintaining them, the locking-in of a responsibleprivate partner provides not only risk transfer but alsothe further benefit of certainty of operatingperformance and predictability of cost.

The direction of travel for many governments across theregion is for the greater and more strategic engagementof the private sector in services and asset provision. Toachieve this requires upfront investment, to build theskills and capacity of government’s own teams and alsoto build the confidence and capacity of the supplymarket at a local level.

Governments across the region are not necessarilyfacing the same financial imperatives faced by the likesof the United Kingdom at the outset of its PFI program.It may be, however, that the greater focus on publicspending brought by the changed regional fiscalenvironment will provide the kickstart that is needed to accelerate the progress towards better use of theprivate sector. In making this small enabling investment,governments will realize wider and more sustainedadvantage than could be achieved through a “businessas usual” approach.

by David Brazier, director, Infrastructure & CapitalProjects, Deloitte Corporate Finance Limited (regulatedby the Dubai International Financial Center)

Funding government projects

The direction of travel for manygovernments across the region is for the greater and more strategicengagement of the private sector in services and asset provision

Raising the ceilingof expectations Qatar’s real estate and construction era

Qatar

Qatar is one of the world’s fastest growingeconomies. Once dependent on fishing and pearlhunting, the country has recently assumed a veryadvanced position among the leading internationaleconomies with the highest per capita in the worldat over US$94,744. Also, Qatar has known one ofthe fastest demographic growths in the world withthe population quadrupling in the last 13 years.Projections show Qatar could easily increase from a population of 2.3 million in 2014 to 2.8 million by 2020. The drastic transition and expecteddevelopment have cast certain needs to develop thereal estate sector ushering in a new construction era.


Real estate surpasses energyDuring the last decades, development in real estateinfrastructure projects – residential, commercial andindustrial – has been a major pillar in the country’seconomic development through facilitating themovement of goods, services and people. But thecountry has been careful not to impact negatively on its heritage and traditions, and has kept Qatar’s historypresent on the margins. A visitor to Qatar is encouragedto visit the Pearl, Katara and Souq Waqif, mega projectsthat have been launched in the past couple of years andwhich are great examples of how the real estatedevelopment is heavily inspired by the culture of Qatar.

Winning the right to host the FIFA World Cup in 2022and the implementation of the Qatar National Vision2030 plan have greatly unleashed the potential in thecountry over the next decades and as such investmentsare expected to intensify and boost real estatedevelopment. This was also the major drive for thegovernment’s investment in a diverse range of sectorsincluding healthcare, education, tourism and financialservices to ensure that recent gains can be sustainedover the long-term. The Qatari government is consciousthat the surge in investment in the real estate sector toaccommodate the fast growing population and theexpected number of visitors during the World Cupchampionship should provide long-term returns.

Accordingly of paramount importance is having a futurevision and the parallel investments in world-classinstitutions, such as Qatar foundation, which isbecoming a hub for popular universities that wouldeventually attract students from the region and abroad.There is also an increasing focus on building medicalcenters that are considered unique in specialization andexperience, notwithstanding the fancy and spectaculardesigns of museums, malls and other touristic sites.

Revenues from natural resources are used to fund thereal estate sector, which in turn will be one of the pillarsin supporting all the other sectors. This will help indiversifying the economy and reducing reliance onnatural resources–that would in turn protect the countryfrom adverse market instabilities, creating jobs andopportunities for the next generation and supportinglong-term wealth and viable development. TheInternational Monetary Fund (IMF) projected thatgrowth in Qatar’s non-hydrocarbon sector will rangebetween 9-10 percent over the medium-term, while thehydrocarbon sector is projected to grow between 1.1-3.5 percent within the same period.

Despite the great efforts that are being deployed toenhance this sector, there are still certain challenges thatthe government is closely monitoring. The shortfall ofresidential units is one of the top concerns sincebridging the supply/demand gap would require muchtime and might therefore affect availability for thecoming couple of years. This would lead to increasingpressure on rental costs and, in turn, possibleinflationary repercussions. The Qatar Central Bank’s(QCB) quarterly update of 2014 real estate price index(REPI) confirms that the country’s real estate marketprices are on the uptick. QCB’s REPI has reached arecord 253.8 points in September 2014, up 42.1percent compared to 178.6 points a year ago. While theoverall index grew by 42.1 percent year-on-year, marketreports suggest the land prices have significantlyincreased over the past several months.

Winning the right to host the FIFAWorld Cup in 2022 and theimplementation of the Qatar NationalVision 2030 plan have greatlyunleashed the potential in the countryover the next decades and as suchinvestments are expected to intensifyand boost real estate development


Qatar

The construction flurryThe growth of the real estate sector has driven aconstruction boom in the country. Qatar’s capital city,Doha, is undergoing the fast-paced construction ofmodern towers for leisure, residential and commercialuse, with ancient and restored edifices also forming partof the country’s inner structure. The noise of heavy-equipment is becoming very familiar to the residents.Arguably, Qatar might be accommodating a recordnumber of construction machines and equipment ascompared to the spatial area of the country. Almost allprojects are undertaken from scratch on new andreclaimed land. Such projects include Westbay, PearlQatar, Lusail City and the new airport. With plentifulfinancial resources available, the country is investingheavily in new technologies and alluring architecturalinnovations.

One certainly cannot write about mega-projects withoutthrowing a glance at the numbers to well illustrate theenormous scale of development. The government hascommitted to spending a significant amount to get thecountry ready for the prestigious World Cuptournament, to be invested in a blend of state-of-the-artstadia, hotels, infrastructure and other amenities. InApril 2014, Hamad International Airport opened. Withsix times as much capacity as the old airport, it iscurrently able to cater for around 25 million passengers,a figure that is expected to double upon completion ofphase two. Another huge project is Lusail City; with adevelopment cost of US$18billion, the city will measurearound 38 square kilometers and would house up to200,000 people. This–in addition to other projects(Mushaireb City, Doha Metro, Energy City and manyothers)–is nothing but a great inspiration for a brighterfuture for the country.

It is worth mentioning that with such a large-scale ofconstruction projects, numerous challenges stand out.Economic development and protection of theenvironment are two concerns, neither of which shouldbe sacrificed for the sake of the other. Developmentpatterns can, and often do, have negative effects on thenatural environment yet the country is activelyconsidering the impact of this matter by seekingalternatives that would have the least damage possible.

This goes from equipment selection, technology thatwould help in reducing the power consumption inaddition to proper water treatment and otherenvironmentally friendly tools.

Other challenges can be summarized by the ability to secure raw material, such as steel, reinforcement,aggregate and cement, those are major concerns,especially with adverse price escalation that may furtherdrive inflation. Another significant element is manpower.Qatar’s construction market will require a considerablework force, and the lengthy process of recruitmentcoupled with the availability of the right skills mightpose some delays in project completion dates.

The transformationThere is no doubt that Qatar is taking many stepstoward building a healthy economy with strong bases;expatriates and nationals have a common interest tosucceed and are determined to work hand in hand for a better future. The country is undergoing a massiveboom on different fronts and all of this depends heavily on building and sustaining a well-advancedinfrastructure supported by a mixed blend of a realestate market be it commercial, residential, public andtouristic and a broader vision to transport the country to a different era that is promising for its residents andthe whole region.

by Bilal Marroush, principal, Audit, Deloitte Middle East

There is no doubt that Qatar is takingmany steps toward building a healthyeconomy with strong bases; expatriatesand nationals have a common interestto succeed and are determined to workhand in hand for a better future


Trust me, I’m a realestate developerIt is widely accepted amongst real estate professionalsthat the Middle Eastern property markets are less thantransparent and have typically been administered undercontract law as opposed to any real estate specificlegislation. That is, until now.


Real estate

During 2014 both the Bahraini and Qatari Governmentsconfirmed their intentions to enact real estatedevelopment laws intended to regulate market practice,thereby strengthening their respective markets and moreimportantly, promoting investor confidence.

In Bahrain, Law 28 of 2014 was enacted with effectfrom 7 August 2014 and requires developers to complywith the provisions of the Law by 7 February 2015.Meanwhile Qatar’s Real Estate Development Law waspublished in the Official Gazette on 7 April 2014 andcame into effect on 7 October that same year.

Both pieces of legislation bear similarities anddifferences that are reviewed in further detail below.

ApplicationLaw 28 applies to real estate development and the sale of units which, in theory if not in practice, requiresanyone building a single unit for subsequent disposal

to be registered and comply with the Law. Conversely in Qatar, Law 6 of 2014 specifically defines real estatedevelopment as “the construction of multi-storeybuildings or complexes for residential or commercialpurposes for the off-plan sale of units” and affects notonly developers but contractors and vendors.

Licensing developersBoth countries require the developer to obtain a licensebefore commencing works, although both havedifferent requirements that need to be fulfilled to securelicensing. For example, in Bahrain the developer mustdemonstrate a right to develop the land and deposit 20 percent of the estimated project value with anescrow agent. There are no such requirements in Qatar,however, the Qatar legislation permits companiesincorporated outside of Qatar to obtain developmentlicenses albeit their activities are limited to the 18Investment Zones, where non-Qatari nationals are ableto own real estate.


Strata titleThe Bahrain legislation makes no reference to theestablishment of strata title whereas in Qatar thedeveloper is required to request consent from theMinistry of Economy and Commerce to create strata title for their project before units can be sold off-plan,including the submission of architectural andengineering drawings with the collaboration of theMinistry of the Municipality and Urban Planning, whichis more akin to the licensing requirements in Bahrainreferred to above. There are also other requirementsthat need to be met in Qatar including theestablishment of an escrow account, the submission of construction milestones, cash flow forecasts and the approval by the Real Estate Department of theMinistry of Justice of any promotional or sales collateral.

RegistrationIn Bahrain a real estate register is to be created to record the identity of developers and their projects andregistration is a pre-requisite to being able to commenceconstruction. Under the new regulations sub-developersand purchasers will be able to register their interestsagainst the main developer/owner’s title with the Surveyand Land Registration Bureau. In Qatar the Real EstateDepartment of the Ministry of Justice is to beresponsible for maintaining an interim register, recordingdetails of strata title and issuing preliminary title deeds,which will be converted to final deeds on completion of the development, for each off-plan unit, providingdetails of the transaction including interested partiessuch as mortgagees.

EscrowIn both jurisdictions the developer is required to set up a separate escrow account for each project and pay inall monies including off-plan deposits, stage paymentsand financing and the monies are only to be expendedon costs relating to the specific project. As mentionedabove, in Bahrain, the developer is required to seed theescrow account with 20 percent of the total value of the project; there is no such requirement in Qatar.

Whereas monies held within the escrow account cannotbe accessed in Qatar until 20 percent of the structurehas been completed and thereafter the release offurther sums is directly linked to constructionmilestones, conversely in Bahrain while it is envisagedthat the intention was to link fund releases to theprogress of the construction this is not referred toexplicitly and as such, the intention remains unknown.

In both countries the funds are to be held on behalf of the depositors and are protected from any othercreditors, although it is not clear whether there is anyhierarchy or ranking where monies are to be returned to depositors.

On completion of the development, Bahraini developersare required to retain 5 percent of the total value of theproject in the escrow account for a period of one year,whereas in Qatar the requirement is 10 percent but theperiod is unspecified, which merely makes reference tothe retained sums being used to rectify defects.

Development delays and breachesFollowing the issuance of a Developer’s License, parties in both countries are required to commencedevelopment within six months, failing which in Bahrainthe license may be revoked, whereas in Qatar failurecarries a fine of QR200,000 (c.US$55,000.)

In terms of the delivery of units, in Bahrain if thehandover of a unit is delayed more than 30 days pastthe agreed delivery date, the purchaser can give thedeveloper 90 days’ notice to handover, failing whichthey can ask the Ministerial Committee to terminate thesales agreement and pay damages if there are sufficientgrounds. The penalty in Qatar is somewhat harsher andthe failure to deliver units on an agreed date without

In both Qatar and Bahrain the funds areto be held on behalf of the depositorsand are protected from any othercreditors, although it is not clearwhether there is any hierarchy orranking where monies are to bereturned to depositors


Real estate

reasonable justification or where they do not meet the agreed technical specifications, can lead to amaximum 12-month jail term and/or a QR50,000 fine (c. US$13,700.)

Failure of purchasers is not dealt with in the Qatari Law and as such it is assumed that unless they are able to negotiate a release from the Sale and PurchaseAgreement (SPA) by the developer, then they will simplylose their deposit and any stage payments they havemade. Where the unit is mortgaged, the beneficialinterest remains with the Lender who would no doubtpursue the borrower along the normal channels.Bahraini legislation provides that, in the event of failureby the purchaser to complete, the developer can give 90 days’ notice requiring completion following whichthey can request the Committee to invalidate the sale and they are then able to offer the unit for resale. At this juncture the developer can retain up to 10 percentof the purchase price returning the balance, if any, tothe purchaser.

ConclusionBoth Governments have identified the need to introducelegislation that offers much greater protection to endusers than the basic contract law contained within theSPAs. It is hoped this will bolster confidence in the off-plan sales markets in the future. Notwithstanding theforegoing, while significant inroads have been madeinto the drafting of the legislation there remain majorgaps and areas which need to be covered, as such, thelaws as currently drafted should perhaps be consideredas first drafts which can be improved upon over time.

Well thought out and relevant legal infrastructurerelative to a particular industry is essential in order tocreate confidence and the requisite level of activity. In many ways this is even more important in the case of the real estate industry, as this will often touchindividuals and affect the daily lives and wellbeing of many people.

The Middle East real estate markets continue to evolveboth physically as well as from a legal perspective and it is encouraging that certain countries are proactivelymoving towards the creation of robust legal systems,specifically Bahrain and Qatar.

Whilst it is inevitable that all eventualities will not becovered in the initial legislation, over time it is expectedthat subsequent changes and additions will beimplemented as appropriate.

Fundamentally the confidence of developers, buyers,investors and other stakeholders can lead to thedevelopment of a truly international investor audiencewhich, like many other developed countries will attractassociated taxes, that in turn will further benefit thecountry in question.

by Nick Witty, director, Real Estate Advisory, DeloitteCorporate Finance Limited (regulated by the DubaiInternational Financial Center)

Bahrain Qatar

Registration of developers

Developer to be registered

Available to non-national developers

Yes

No

Yes

Yes

Strata Title

Creation of strata title required No Yes

Real estate register

Developments to be registered Yes Yes

Escrow account

Escrow account required

20% estimated project value to be deposited in Escrow

Retention on project completion

Retention period

Yes

Yes

5%

1 year

Yes

No

10%

Unspecified

Breaches and delays

Developer required to start within 6 months of license

Revocation of license in default

Fine

Yes

Yes

No

Yes

No

QR200k

Handover of units

Delay more than 30 days - 90 days to complete and fine

Past agreed date or does not meet technical specification

Yes

No

No

QR50k and 1year jail term


For a company that needs water for manufacturing,in its supply chain, or even for product use, a lack ofaccess to water may jeopardize its growth. The riskspoint to a need to align water stewardship andbusiness growth strategies, and to go beyond anefficiency focus.

Fueling growthYou can’t always buy what you need


No water, no beverage.Whether you are a global beverage company expandingin new markets in Africa or a manufacturer operating inthe United States (in particular, in areas affected by thecurrent drought in the American southwest), if you donot have access to water–or other critical resources–youwill struggle to meet your business growth targets.

A major beverage company, for example, experiencedwater shortages at two of its facilities in Ghana over thepast five years that affected its ability to produce andship products. According to the company, the estimatedimpact to the business in lost sales due to theseproduction stoppages was in excess of £2 million.1

Deloitte Review

Water stewardship vs. water management“Water stewardship” has become a common termto denote an economically, environmentally, andsocially responsible water strategy. The phrase refersto the adoption of values and practices that aim tosafeguard long-term availability of clean water forall stakeholders in a watershed, prompted byrecognition of water as an externality with apotentially material business risk.

The value of water stewardship in managing waterrisks and how to structure a water stewardshipstrategy have been presented in the literature.2 Interms of the maturity model presented in this article,water stewardship corresponds to stages 3 and 4,with stage 4 being a “license-to-grow” strategy.

Water stewardship can be contrasted with thenarrower concept of water management, whichdeals specifically with addressing water scarcity’simmediate direct business costs through moreefficient water use. Unlike water management,water stewardship goes beyond the unit cost ofwater to consider how competition for water mightaffect business continuity, brand value, and sociallicense to operate. Water stewardship alsoemphasizes effective resource sharing alongsideefficient resource use. While water managementaims primarily to manage risk to a company’s directoperations, water stewardship also seeks to engagestakeholders across the value chain (supply chainand in the product use phase) in managing theircollective risk, as well as to address the concerns of stakeholders within the watershed.


It couldn’t buy the water it needed.This challenge is not unique to beverage companies. Forany company that needs water for manufacturing, in itssupply chain, or even for product use, lack of access towater (for the company or its customers) heightens therisk of business disruption and may jeopardize its growthstrategy.

This points to a key question: how do companies withambitious global growth strategies secure the waterthey need to fuel business growth in a world wheresimply paying more for water will not work?The answer resides in why and how companies aligntheir water stewardship strategies to support theirbusiness growth strategies. This alignment is built upontwo key actions. First, companies that synchronize waterstewardship strategy with growth strategy can benefitfrom considering and quantifying water’s full businessvalue, moving beyond the price of water to take into

account water’s various impacts on operations, valuechain, brand, and growth prospects. Second, companiesthat depend on water would also benefit fromproactively leading collective action initiatives withstakeholders across their value chain within thewatersheds in which they operate. Actions in these twoareas go well beyond most companies’ current thinkingon water management, which focuses primarily onwater efficiency and reuse and recycling within theiroperations.

Scarcity: both a constraint and an opportunityCompetition for water is growing more intense, as thesteadily increasing world population and theindustrialization of emerging markets put the world’sfinite water supply under greater strain. This increasedcompetition for water, coupled with droughts and theimpacts of climate change, effectively drives increasedwater scarcity, as there is less water per person–and perorganization–available to meet growing needs.

A large body of literature has explored the idea thatscarcity acts as a constraint to business. In particular,considerable attention in publishing and practice hasbeen paid to generating growth alternatives underconditions of scarcity and making choices from a set ofsuch alternatives. For example, strategic raw materialsourcing often factors into this decision-makingprocess.3 Under conditions where demand for certainfactors of supply cannot be fulfilled, growth prospectsmay be severely curtailed. That is, if a company can’talways buy what it needs, its growth trajectory will slow,stall, or fail.

For any company that needs water formanufacturing, in its supply chain, oreven for product use, lack of access towater (for the company or its customers)heightens the risk of business disruptionand may jeopardize its growth strategy


In a world where all resources were abundant, allpotentially valuable growth alternatives could bepursued. But scarcity imposes constraints on the growthchoices available to leaders, as they may lack confidencein the availability of needed resources in sufficientquantity or quality. Without such confidence, even themost promising growth agenda cannot be executed.

However, from a strategy perspective, there can also bea positive side to scarcity. The same attribute that canlimit a resource’s ability to fuel growth can also grantcompetitive advantage to companies that gain ameasure of control over access to such resources.Controlling access to relatively scarce resources–thosethat are also valuable and difficult to imitate orreplace–can help confer such advantage.4

A key challenge for companies where water is anessential resource requirement is that their ability todirectly “control” access to water as a resource is verylimited. This is because water is fundamentally a sharedresource to which ownership cannot easily be assigned.Public policy, regulations, and stakeholder influence (forexample, the presence or absence of “social license-to-operate”) all impact a company’s ability to access waterand, as a result, limit its ability to “control” access towater.

A recent paper by World Wide Fund for Nature (WWF)articulates the unique qualities of water as a sharedresource: “Water is a highly complex public resourcewith multiple socially defined functions and values. Itseffective management requires the continualreconciliation of trade-offs between private interests andcollective well-being, not to mention fulfillment of afundamental human right.”5 In reconciling these trade-offs between multiple interests, corporations often findthat they must negotiate solutions that allow for andconsider water’s disparate functions for variousstakeholders.6

Current thinking and actions: stuck in watermanagementRecent reports from two organizations provide insightinto how companies view and manage water-relatedrisks and, in general, how far they need to go to achievealignment between their water stewardship strategiesand business growth strategies.

The CDP Water Program (www.cdp.net) provides a wideview of how companies across a range of industrysectors perceive water risks and opportunities. The mostrecent report, from 2013, is based upon the waterdisclosures of 184 Global 500 corporations. Based uponthe results of the 2013 water disclosure survey, thereport indicates that “over 90 percent of thesecompanies now have water management plans in place,and responding companies report more than 1,300actions, targets, and goals to reduce their impact onwater resources, and thus their exposure to waterrisks.”7

From a strategy perspective, there canalso be a positive side to scarcity. Thesame attribute that can limit aresource’s ability to fuel growth can also grant competitive advantage tocompanies that gain a measure ofcontrol over access to such resources

Deloitte Review

Source: Carbon Disclosure Project, “Moving beyond business as usual: a need for a step change in water risk management,” CDP Global Water Report 2013. Reprinted with permission.

Figure 1. Proportion of respondents setting concrete targets or goals by type (percent of respondents), 2013

Directoperations

63%

Communityengagement

6%

Supplychain

4%

Watershedmanagement

3%

Transparency1%

Publicpolicy

0%


Seventy percent of the responding companies haveidentified water as a “substantive business risk.” Forsome respondents, anticipated financial impacts are ashigh as US$1billion, and 64 percent of the reported risksare expected to materialize now or within the next fiveyears. In other words, water risk is current and nearterm.However, according to CDP, despite the vast majority ofcompanies reporting that water represents a substantivebusiness risk, most companies are primarily focused onmanaging water within their own operations. They arenot engaging with their entire value chain and other keystakeholders.

Commenting on the results of the 2013 water disclosuresurvey, CDP noted that “water stewardship activities arenotably lacking, potentially exposing their company andinvestors to risks that could be mitigated” (figure 1). Thereason for this concern is that, in most cases, the largestportion of a company’s water footprint–and, hence, itswater-related risk–is in its supply chain or in howconsumers and customers use the company’s products.As a result, a company cannot effectively manage waterrisk or appropriately account for water access in itsgrowth strategy if it is only focused on its ownoperations.

CDP added that “the majority of respondents (63percent) to the 2013 questionnaire set concrete targetsand goals for their direct operations and, in general,many of these are focused on reducing water use orincreasing water recycling/reuse. Companies thatcontinue with such a narrow focus could be missingpotential opportunities and overlooking serious risks.”8

A recent report by VOX Global and the Pacific Institutealso provides information on how companies view waterrisk, how they are managing these risks, and theircurrent thinking about the potential impacts on businessgrowth. Consistent with the 2013 CDP Global 500report, the VOX Global/Pacific Institute report states that“water challenges are not just a future concern, but acurrent problem that already affects many businesses.”9

A key challenge for companies wherewater is an essential resourcerequirement is that their ability todirectly “control” access to water as a resource is very limited


According to this report, 79 percent of respondingcompanies claim that they currently face waterchallenges, while 84 percent believe they will face waterchallenges in the next five years. Survey respondentsalso made the connection between these challengesand their bottom line: nearly 60 percent of respondingcompanies indicated that water is poised to negativelyaffect business growth and profitability within five years,while more than 80 percent say it will affect theirdecision on where to locate facilities over that timeperiod.

However, there is an apparent disconnect between thewidespread recognition of current and increasing waterrisk and the respondents’ anticipated actions to addressthe issue. Many respondents do not plan to increase the breadth and scale of their water risk managementpractices. According to the report, “nearly 70 percent of responding companies said their current level ofinvestment in water management is sufficient.” Thisattitude is inconsistent with the respondents’ belief thatwater challenges “will significantly worsen in the nextfive years.”10 The report points to “a failure toadequately evaluate the true cost of water” as onepotential reason for this disconnect, and further states:“Though survey respondents noted the importance ofintegrating water into their business strategy, it may bepremature to assume that all have done so.”

The reports from CDP and VOX/Pacific Institute suggestthat:• The companies responding to their surveysacknowledge that water is a current and projectedbusiness risk that is projected to worsen.

• Most companies are primarily focused on watermanagement–that is, on water efficiency andreuse/recycling within their direct operations asopposed to their value chain.

• Most believe they have a “sufficient” level ofinvestment in “water management.”

• Companies do not appear to have adequatelyevaluated the business value of water or potentialbusiness value at risk from water risks.

• There is apparently little to no connection betweenwater risk, stewardship strategies, and businessgrowth strategies.

Aligning water strategy with growth strategy:what is missing in the corporate agenda?Drawing on the observations in the CDP and theVOX/Pacific Institute reports, we have identified twomajor actions required to align water strategy withbusiness growth strategy: expanding collective actionand quantifying the business value of water.

Expanding collective actionOne way to overcome the “tragedy of the commons” is through collective action by informed stakeholderswhose aim is to sustainably manage a commonresource, even if, in some cases, they sacrifice short-terminterests to obtain a long-term benefit. To take thebroadest view, the “collective” needed to sustainablymanage water encompasses everyone; after all, we allneed it to live and to support the health of ourecosystems. More narrowly, the importance ofstakeholder action and opinion is amplified in regionswhere water is scarce. Local populations in such areasare acutely sensitive to the uses–or misuses–to whichthe area’s water supply is put. Moreover, the actions

One way to overcome the “tragedy of the commons” is through collectiveaction by informed stakeholders whose aim is to sustainably manage a common resource, even if, in somecases, they sacrifice short-term intereststo obtain a long-term benefit

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of others within the watersheds in which a companyoperates can have a direct impact on the business’saccess to water. Add to this the intense scrutiny thatwater is beginning to receive from investors, regulatoryagencies, governments, nongovernmentalorganizations, and other parties–scrutiny that is nowenabled and accelerated through social medianetworks–and the need for collective action becomesevident. Only by engaging with other stakeholders onwater-related issues, and working with them tosafeguard water’s long-term availability, can a companythat depends on water protect its long-term growthprospects.

Understanding water’s value, not just its priceAs long as water is essentially free, few businessstakeholders will likely see a reason to invest inprotecting this resource. When water costs money, onthe other hand, businesses begin to pay more attentionboth to its price and to strategies for keeping it low. Infact, one reason that more businesses are starting tofactor water into their business strategies is that physicalwater scarcity is driving changes in water pricing and inregulations around the allocation of water. Examplesinclude the overall upward trend in water prices, whichhave increased by 6 to 7 percent in the United Statesover the past year;11 the implementation of tieredpricing (that is, usage-based pricing) in places such asDenver, Colorado;12 and the enactment of allocationframeworks in certain areas of California that, in theevent of extreme scarcity, give priority to certain sectorsin the allocation of available water.13

Factoring water costs into growth projections, however,is only a first step. This is because, in many or even mostinstances, the actual business value of water exceeds itsmarket cost. Whereas the cost of water includes onlythe direct and indirect costs of provisioning water, thevalue of water is derived from its uses and affected byfactors such as quality and the reliability of supply.Water’s full value to a company can be calculated as itsfull economic cost plus the financial impact of actualand potential fluctuations in water quantity and quality,regulatory risks, and reputational risks (see sidebar,“Valuing water”).

Valuing waterThere are several key principles in understanding theeconomic value of water and the costs associatedwith provisioning water. A few definitions areprovided below.15

• Full supply cost: the full supply cost of waterincludes the cost of supplying water to a userwithout considering the cost of the externalities(“side effects”) resulting from the use of that wateror the opportunity costs of foregoing alternativeuses of that water. Full supply costs consist ofoperation and maintenance costs plus capital costs.

• Full economic cost: full economic cost includes thesum of the full supply cost and the opportunitycosts associated with the alternative use of thesame water resource and the economicexternalities imposed upon others due to theconsumption of water by a specific user.

• Intrinsic value: intrinsic value includes “thestewardship, bequest, and pure existence value” of water.16


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A recent report by the World Business Council forSustainable Development provides examples of howseveral companies are beginning to consider the valueof water, and discusses the main concepts andtechniques associated with water valuation.14

Companies could benefit from calculating, to the extentpossible, the current and potential business value at riskfrom water risks. This calculation should quantify theimpact of physical, regulatory, and reputational risksrelated to water across the value chain. The calculationof revenue at risk from current and potential businessdisruption (“no water, no beverage”) provides a clearerview of the value of water than current or projectedwater costs. It is important to develop a quantitativeunderstanding of the value of water within the contextof what is required to sustain operations as well asfuture growth. The impact of water risks on businesscontinuity across the value chain provides more insight

on the value of water to a business operation than thecurrent or projected cost of water. By understanding the value of water in this way, leaders can address long-term water-related risks and make informeddecisions about the investments necessary to supportfuture business growth.

A maturity model for water stewardshipWhat do businesses for which water is critical to growthactually do when faced with water scarcity? Based onresearch including the CDP water disclosure reports of2011, 2012, and 2013 and the VOX/Pacific Institutereport referenced above, coupled with our experiencewith multinational companies across a range of industrysectors (such as consumer products, oil and gas, andmanufacturing), we have identified four stages ofmaturity in how companies link business growth towater availability, as shown in figure 2.

Figure 2. Water strategy maturity model

Water cost consideredPursues internal initiatives

Water value consideredPursues collective action

Actual or perceived water scarcity is not acknowledged as a salient issue

All resources are treated equally

Cash flows are heavily weighted

Current market price of water governs decisions

Efficiency strategy

Recognizes water scarcity as a driver of cost

Costs of acquisition and use of water are considered

Profitability risks are heavily weighted

Focuses on water conservation—efficiency

Targets and goals set for internal water efficiency

Risk strategy

Risks of water scarcity are managed at the facility or business-unit level, but not consistently at the enterprise level

Stakeholder engagement is pursued to improve access to water, in some cases on an ad hoc basis

May calculate the full cost of water or use a “shadow price”

May participate in public policy formulation

Ad hoc investment in technology innovation at the facility level

“Social license-to- operate” risks are heavily weighted

License-to-grow strategy

Internalizes externalities (e.g., water and ecosystems)—considers these external issues

Recognizes the need to manage water scarcity as a platform for growth

Where relevant, develops products or business models that take into account scarcity, and product/service offerings address water scarcity

Consistently quantifies value of water, not just its cost or full cost

Proactively engages with stakeholder and leads water-focused initiatives and collective action programs—more than just participating

Participates in water-related policy development

Invests in and accelerates technology innovation at the corporate level

“Social license-to-grow” mindset regarding water issues

No strategy

urity modetategy martser taWe 2. riguF

Pursues internal initiativesedrater cost consideW

lurity mode

Pursues collective actionater value consideW

Pursues collective actionedrater value conside


The maturity model can be summarized as follows:• Stage 1 (no strategy): no stakeholder engagement;limited water efficiency investments; no alignment ofwater strategy with business growth strategy

• Stage 2 (efficiency strategy): rocused on waterefficiency (water price drives actions); no stakeholderengagement; no quantification of the value of water

• Stage 3 (risk strategy): risk focus; targets set forwater efficiency/reuse; pursues stakeholderengagement focused on managing social license-to-operate; limited understanding of the value of wateras a driver for investment decisions to support growth;limited alignment of water strategy with businessgrowth strategy

• Stage 4 (license-to-grow strategy): growth focus;mature efficiency/reuse initiatives; leads stakeholderengagement initiatives focused on securing long-termaccess to water; quantifies the value of water (andbusiness value at risk) to drive CAPEX/OPEXinvestments; water strategy well aligned with business growth strategy

Companies at the “no strategy” level essentially behave as if water scarcity did not exist–scarcity is not recognized as a salient issue. They do not seek tomanage either their access to water or their own use of it, and they are neutral to or accepting of the need to pay for the water they need to operate. Price volatilityand compliance with resource-related regulations (ifany) are viewed as a normal cost of doing businessrather than as a potentially value-creating or potentiallyhigh-risk activity. Water is treated as simply a rawmaterial whose market cost is factored into growthchoices such as geographic expansion or product-lineextensions. It is viewed as a commodity and anexternality–the economic term for a “side effect” of a business’s operation.

As might be surmised, this approach is sustainable onlyfor resources whose current and future abundance arebeyond question.

Stage 2, the “efficiency strategy” stage, represents mostcompanies’ first step toward viewing water as aplatform for growth. The defining attribute of stage 2 isa focus on increasing water efficiency within the fourwalls of one’s own business–in effect, managing one’sown operations to reduce the business’s dependency onwater. The main activities we have observed amongcompanies in stage 2 firms are concerned withimprovements in efficiency, cost savings, reuse, andrecycling. To some degree, these companies recognizethat the market price of water is an imperfect reflectionof its value. They monitor cost fluctuations as localizedsupply ebbs and flows, and they make trade-offsbetween paying more for water and seeking tominimize its use.

As discussed previously, evidence suggests that many, ifnot most, companies presently operate at stage 2 withrespect to water.

In stage 3, the “risk strategy” stage, companies begin to seek to engage with stakeholders across their valuechain–that is, outside their own organizations–with afocus on mitigating water scarcity risks and reducing the potential for water scarcity to impose constraints ontheir business. For stage 3 firms, how and when to useproductive scarce resources such as water is an explicitpart of management mindsets and priorities; leaders

Factoring water costs into growthprojections, however, is only a first step.This is because, in many or even mostinstances, the actual business value ofwater exceeds its market cost.

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actively accommodate water scarcity in their business’scurrent and future activities. These companies recognizenot only local but systemic water scarcity; they act as iffuture availability is uncertain and their “social license-to-operate” may be jeopardized. Their work with otherstakeholders is consistent with both sustainability andbusiness strategy. However, efforts are oftencoordinated at the business-unit or regional levelwithout an enterprise-wide strategy in place, andstakeholder engagement is pursued mainly with thegoal of improving immediate access to water.

In stage 4, the “license-to-grow” stage, companies alsoseek to engage with external stakeholders–but with afocus not just on mitigating water scarcity risks but alsoon paving the way for future long-term growth. Thedistinguishing attributes of companies at this stage arethe quantification of the value of water to their currentand projected business across their value chain, andtheir leadership of collective action programs tosafeguard long-term water availability.

Stage 4 companies embed the tactics used in stages 2and 3 into their operations, but they go beyond theseresponses to proactively address scarcity in their ownand their stakeholders’ future activities (across theirvalue chain). In practical terms, these companies haveboth adjusted their business model and expanded firmboundaries to engage relevant players across their value

chain on water availability and quality issues. They alsoembrace innovative collective action as a strategy toaddress the management of scarce resources. Mostimportantly, they recognize that the way they managecritical scarce resources will be either an area ofsignificant vulnerability or a means to achieve acompetitive advantage, and therefore they makeresource strategy an integral part of their businessgrowth strategy.

A “license-to-grow” modelConsidering water as a scarce resource necessary forgrowth brings into sharp focus the particular issuesorganizations must face when operational or economiclogic is insufficient to support business growth.According to resource-based theory, firms can eitherretain their current business model or alter it toaccommodate more or less reliance on scarce resources.Where water scarcity is concerned, we have observedthat firms generally follow the trajectory described bythe maturity model. They change their business modelsto go from addressing the issue at an “own company”level, to addressing it at a stakeholder level with a focuson risk, to addressing it at a stakeholder level with afocus on growth.

The motives of companies that have chosen to makesignificant business model changes and that lookbeyond their own boundaries to manage critical scarceresources draw from precepts of both business andsustainability strategy. While sustainability experts wouldcall these firms good stewards of a scarce resource,business strategy experts would call these firms strategicmanagers of scarce productive resources.

As water scarcity (driven by increased competition forfinite resources and extreme drought) mounts in areassuch as Texas and California in the United States, regionssuch as Africa, and countries such as China, companiesare faced with multiple constraints and intensifying risks

It is important to define an enterprise-level strategy around the scarceresource to help align resource-relateddecisions across the entireorganization


that impact their business continuity and growthstrategies. “Shared value” initiatives and othermechanisms are emerging as firms in these areas workto align their strategic growth agenda with this realityand the agendas of other stakeholders that have avested interest in access to water.

In general, companies in the food and beverageindustries have been leaders in expanding their activitiesbeyond their own four walls to both reduce theconstraints imposed by water scarcity (a risk focus) andenable future growth fueled in part by water (a license-to-grow focus.) Among the collaborative actions theypursue are efforts with suppliers, distributors, and otherstakeholders to reduce water stress within specificwatersheds.

One beverage company, for instance, has an enterprise-level water strategy that is focused on collective actionwithin its supply chain. It sets stringent water efficiencytargets and seeks to engage with other water users inwatersheds where drought and competing demands forwater could limit brewery operations. According to KimMarotta, the company’s director of sustainability, “Thelong-term drought in the United States was a catalystfor change.”17 The company sets aggressive waterefficiency goals and views the resulting cost savings ascapital to reinvest in its business: since 2008, its waterand energy efficiency initiatives have yielded anestimated US$17million in savings.

The company also engages directly with local farmersand ranchers to bring them leading practices in watermanagement, including technologies to improve waterefficiency and to enable “precision agriculture.” SaysMarotta: “We recognized that three of our breweries–inCalifornia, Texas, and Colorado–were in areas that werewater stressed. And since more than 90 percent of thewater we use comes from the agricultural supply chain,it makes sense to work together to make thosewatersheds sustainable for the long term.” For instance,

as part of its National Water Quality Initiative–fundedlargely by the U.S. Department of Agriculture’s NaturalResources Conservation Service–the company workswith farmers and ranchers in Texas to plant native prairiegrass in areas where runoff would otherwise deplete thesoil of water. It also maintains close relationships with itsagricultural suppliers, collaborating with its barleysuppliers in Idaho, Colorado, Wyoming, and Montana todevelop and implement water-efficient farming practicesthat, says Marotta, improve yields as well as conservewater. All of these collective action activities are drivenby the recognition that the company’s growth strategyis tied to the availability of water to support itsagricultural input.18

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The motives of companies that havechosen to make significant businessmodel changes and that look beyondtheir own boundaries to manage criticalscarce resources draw from precepts of both business and sustainabilitystrategy. While sustainability expertswould call these firms good stewards of a scarce resource, business strategyexperts would call these firms strategicmanagers of scarce productiveresources


Managing water scarcity and driving growth:what are the critical business decisions?The maturity categories outlined above suggest thatleaders make two important types of decisions, implicitlyor explicitly, as they consider their growth strategies inlight of water constraints. First, they decide whether the company’s current business model can remain as itis or whether it needs modification. And second, theydetermine whether and how far their efforts to managescarcity will extend beyond their company’sboundaries—whether its approach to managing acritical scarce resource is focused on company-centric,internal management of the resource or alsoincorporates engagement with a range of stakeholdersacross the value chain.

To effectively manage a scarce resource such as water,management must evaluate a number of factors whenplanning a growth strategy. It is vital to understand thecurrent and projected degree of scarcity of a company’scritical business inputs. Under various competitive orsociopolitical scenarios (such as during the oil shocks ofthe 1970s), the availability of a given resource mayfluctuate significantly. With respect to water, given thecomplexity of mapping stakeholder positions andaccurately assessing value, cost, and price, companiesmay find it useful to create measurement tools or todevelop parameters or dashboards for monitoring waterscarcity and evaluating its impacts on an ongoing basis.Several water scarcity tools (such as the WWF WaterRisk Filter and the World Resources Institute Aqueduct)and collective action tools (such as the CEO WaterMandate Water Action Hub) are publicly available for

corporate use. Companies can integrate these tools intobusiness growth strategies instead of having them solelyreside in their sustainability function.

It is also essential to examine who makes and influenceskey resource-related decisions. Note that sometimesdifferent players within the same company havedifferent levels of reliance on a scarce resource– and thushave objectives that may differ from each other’s as wellas from the company’s as a whole. In such cases, it isimportant to define an enterprise-level strategy aroundthe scarce resource to help align resource-relateddecisions across the entire organization.

Companies whose operations and growth depend onwater should also be aware of where they fall along thestages of maturity described above: the extent to whichwater scarcity may drive changes to the company’sbusiness model, and the extent to which the companyengages beyond its core business operations to workwith external stakeholders to manage critical waterscarcity. Understanding where a company sits on thematurity model can help frame the steps needed toaddress water risk and to align its water strategy with itsbusiness growth strategy. For instance, a company thatrecognizes that it is operating at an efficiency strategy(stage 2) level, but whose future growth prospectsdepend heavily on access to water, can plan to move toa risk strategy (stage 3) level through relatively modestinvestments in stakeholder engagement, perhaps pilotedin one or several business units. Or it could seek toleapfrog to the license-to-grow level (stage 4) throughmore dramatic changes, such as by leadingcollaborations at the corporate level with other waterusers in watersheds coupled with a quantification of thevalue of water to support its business growth strategy.

Most importantly, these companies should considermoving to a strategy that includes proactive collectiveaction with stakeholders to secure resources for all,making decisions based on the resource’s value ratherthan its market price. This license-to-grow strategy(stage 4) goes beyond a “social license-to-operate” risk mitigation mindset.

To effectively manage a scarceresource such as water, managementmust evaluate a number of factorswhen planning a growth strategy


For companies looking to leverage their water strategyto drive business growth, we recommend asking thefollowing questions as they relate to the value chain:

• What or who do water prices depend upon?• How likely are prices to fluctuate and why?• What are the water scarcity risks common to all users?• What water scarcity-related risks are particular toone’s own company?

• How severe are these risks to the way the companydoes business today?

• How severe are these risks to prospects for futuregrowth?

• What is the value of water to the company’s businessand growth strategy?

• Where will engagement with stakeholders increasethe overall value of this resource to the firm (includingincreases in value driven by risk and cost reductions)?

You can’t always buy what you need, but with anunderstanding of the business value of water and anenterprise-wide strategy to engage with stakeholders,you may be able to secure a long-term supply of thewater you need to support business growth.

Reprinted from Deloitte Review, issue #15: 2014

by Will Sarni, director and practice leader, EnterpriseWater Strategy, with Deloitte Consulting LLP.

Endnotes1. CDP, “Moving beyond business as usual: A need for a step

change in water risk management,” CDP Global Water Report2013, https://www.cdp.net/CDPResults/CDP-Global-Water-Report-2013.pdf

2. William Sarni, Corporate Water Strategies, (Earthscan, 2011);William Sarni, “Getting ahead of the ‘ripple effect,’ DeloitteReview 12, January 2013; N. Hepworth and S. Orr, “Corporatewater stewardship: New paradigms in private sector waterengagement,” Water Security: Principles, Perspectives andPractices, (London: Earthscan Publications, (in press))

3. A. J. Cohen and R. Siu, “Sustainable growth: Taking a deep diveinto water,” Goldman, Sachs & Co., May 8, 2013; J. B. Barney,“Strategic factor markets: Expectations, luck, and businessstrategy,” Management Science 32, no. 10 (1986): pp. 1231–1241

4. WWF, “Water stewardship brief: Perspectives on business risksand responses to water challenges,” 2013, http://wwf.panda.org/?210092/Water-Stewardship–Perspectives-on-business-risk-and-responses–to-water-challenges

5. Hepworth and Orr, “Corporate water stewardship”6. CDP, “Moving beyond business as usual”7. Ibid8. Peter Schulte et al., “Bridging concern with action: Are US

companies prepared for looming water challenges?,” VOXGlobal and Pacific Institute, April 2014, http://voxglobal.com/managing-water-risk-study/

9. Ibid10. Brett Walton, “The price of water 2013: Up nearly 7 percent in

last year in 30 major US cities; 25 percent rise since 2010,” Circleof Blue, June 5, 2013, http://www.circleofblue.org/waternews/2013/world/the-price-of-water-2013-up-nearly-7-percent-in-last-year-in-30-major-u-s-cities-25-percent-rise-since-2010/

11. Denver Water, “2014 water rates,” http://www.denverwater.org/BillingRates/RatesCharges/2014Rates/

12. California Department of Water Resources, “Water allocation,use, and regulation in California,” http://www.waterplan.water.ca.gov/docs/cwpu2009/0310final/v4c01a06_cwp2009.pdf

13. World Business Council for Sustainable Development, “Businessguide to water valuation: An introduction to concepts andtechniques,” September 2013, http://www.wbcsd.org/Pages/EDocument/EDocumentDetails.aspx?ID=15801

14. Peter Rogers, Ramesh Bhatia, and Annette Huber, “Water as asocial and economic good: How to put principle into practice,”Global Water Partnership Technical Advisory Committee, August1998, http://dlc.dlib.indiana.edu/dlc/bitstream/handle/10535/4989/TAC2.PDF?sequence=1

15. Ibid16. Kim Marotta (MillerCoors director of sustainability), interview

with the author, March 28, 201417. Ibid

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You can’t always buy what you need,but with an understanding of thebusiness value of water and anenterprise-wide strategy to engage with stakeholders, you may be able tosecure a long-term supply of the wateryou need to support business growth

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DeloitteDeloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited byguarantee, and its network of member firms, each of which is a legally separate and independent entity.Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte ToucheTohmatsu Limited and its member firms.

Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanningmultiple industries. With a globally connected network of member firms in more than 150 countries,Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they needto address their most complex business challenges. Deloitte has in the region of 200,000 professionals, allcommitted to becoming the standard of excellence.

Deloitte's professionals are unified by a collaborative culture that fosters integrity, outstanding value to markets and clients, commitment to each other, and strength from cultural diversity. They enjoy anenvironment of continuous learning, challenging experiences, and enriching career opportunities. Deloitte'sprofessionals are dedicated to strengthening corporate responsibility, building public trust, and making apositive impact in their communities.

About Deloitte & Touche (M.E.)Deloitte & Touche (M.E.) is a member firm of Deloitte Touche Tohmatsu Limited (DTTL) and is the first Arabprofessional services firm established in the Middle East region with uninterrupted presence since 1926.

Deloitte is among the region’s leading professional services firms, providing audit, tax, consulting, andfinancial advisory services through 26 offices in 15 countries with around 3,000 partners, directors andstaff. It is a Tier 1 Tax advisor in the GCC region since 2010 (according to the International Tax ReviewWorld Tax Rankings). It has received numerous awards in the last few years which include Best Employer inthe Middle East, best consulting firm, and the Middle East Training & Development Excellence Award by theInstitute of Chartered Accountants in England and Wales (ICAEW).

© Deloitte & Touche (M.E.). All rights reserved.

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