In Bahrain, a symbol at the heart of revolt

Until a few months ago, the twin towers of the Bahrain Financial Harbour development -- clad in green glass and shaped like over-sized toy sea-horses -- were symbols of the island state's role as a regional financial hub.

Today the towers have taken on a different significance: concrete expressions of the way business and politics so often merge in the Gulf and, as a result, targets in the unrest that has roiled Bahrain and the wider Middle East since the beginning of the year.
Built by Gulf Finance House, a listed investment company run by Bahraini businessman Esam Janahi, the towers have also come to embody the ruling al-Khalifa family's fight to preserve its power and protect the vast wealth of the country's economic elite.
Land in the Gulf Arab region is largely controlled by a small number of ruling families who use it as a kind of currency, doling out plots to favoured families and developers to forge political relationships and make money. For it to work, the system depends on businessmen like Janahi, merchants who ostensibly operate independently from the state but whose success rests, at least in part, on political connections.
Janahi, whose net worth local bankers estimate was several hundred million dollars before the global financial crisis, used his close ties to the al-Khalifas to build the centrepiece of the Bahrain Financial Harbour. He could then point to the development as a model to help secure further land deals from rulers and governments across the Middle East and as far away as India, convincing investors to put up billions of dollars for property projects, most of which have never been built.
GFH was far from the only firm to turn sand into money. The basic game plan was played out dozens of times by various companies across the Gulf in the past decade or so. But Janahi and his firm were among the biggest.
Janahi did not respond to a request for an interview for this story, but a GFH spokeswoman answered questions by email. Reuters also interviewed almost a dozen bankers who work or have worked in the Gulf region, most of whom have direct knowledge of GFH transactions.
Our investigation shows the company charged investors huge markups on land deals and took out enormous up-front fees. Such fees are legal in the Gulf but western bankers say they would be highly unusual in Europe or the United States, where the industry collects big payouts only when a project is successfully built and sold.
Documents obtained by Reuters show that GFH, which has teetered on the brink of collapse for several months, also sometimes shifted investor money from one project to plug holes in another.
The documents also suggest that GFH's property projects were hurt by blurred lines between the personal interests of Janahi and GFH itself. Investments and payments seemed to move back and forth between the two with very little scrutiny.
Investors in GFH have been left with huge losses -- USD 1.07 billion in 2009 and 2010 -- and plenty of questions about whether the company's myriad projects were ever going to be built in the first place.
In Bahrain, where the ruling family has been involved in several property developments over the past decade, it's become a symbol to ordinary people -- especially the poor Shiite majority -- angry about a system that shuts them out and widens already gaping inequalities.
When thousands of anti-government demonstrators failed to win tangible concessions from the government earlier this year, a small group singled out the BFH towers, blocking the main road outside the building (which also houses Reuters' Bahrain bureau) and waving one-dinar notes to highlight how cheaply they said the country's prime minister had acquired the building.
"We're expanding our protests and we came here because this building symbolises (the inequalities of) the whole economy," one protester told Reuters outside BFH in March, the pavement around him littered with stones and makeshift barricades after hours-long tear gas battles with security forces.

The boom

Esam Janahi was relatively unknown before he founded GFH, way back in the pre-oil boom era of 1999. Armed with a degree in business administration from Hull University in the United Kingdom and an uncanny ability to navigate the Gulf's political and business elites, he quickly began pulling off deals, each one seemingly bigger than the last.
Blessed with boyish looks and what many who have met him describe as real charm, Janahi won financial backing from around the region, including from a clutch of private investors in Kuwait, the Royal Guards of Oman pension fund and the Saudi-based Islamic Development Bank.
The oil boom that began in late 2002 kicked off a six-year economic expansion that transformed the region. In Bahrain, which sits just off Saudi Arabia's east coast and is connected to its much bigger neighbour by a 25 km (16 mile) causeway, new skyscrapers shot up and several sq km of land were reclaimed and added to its northern shore.
The new land was designed to host projects built by private firms such as GFH. It also turned into a source of revenue for the ruling al-Khalifa family.
Like other Gulf rulers, the al-Khalifas control most of their country's land. Documents from Bahrain's business registry show that using a complicated series of companies, the royal family partnered with private-sector developers in several projects.
The Bahrain Financial Harbour was one such project. A copy of a property deed -- obtained by Bahrain's main Shi'ite opposition group Wefaq and handed to reporters in March -- shows that the Ministry of Finance transferred the land on which GFH built its towers to the Bahrain Financial Harbour Company in 2003. Bankers with knowledge of the deal say Prime Minister Sheikh Khalifa bin Salman al-Khalifa, who has governed Bahrain since independence four decades ago, granted the land in return for a 50% stake in the project. The other 50% was owned by GFH.
The prime minister's stake was held through an investment vehicle called Emar Bahrain, according to bankers with direct knowledge of the matter. There are no commercial registry entries for Emar Bahrain, but the business registry shows the chairman of Bahrain Financial Harbour Company is Sheikh Rashid Khalifa Hamad al-Khalifa, a high-ranking official in Bahrain's interior ministry, who is married to the prime minister's daughter.
A second document obtained by the opposition and passed to reporters shows how Prime Minister al-Khalifa may have personally benefited from the deal. In 2005, according to the sales contract, Emar Bahrain transferred a parcel of land to the prime minister for one Bahraini dinar, or less than USD 3. The prime minister's office has told the Bahrain News Agency all transactions were legal and that the company received land elsewhere in return as compensation.
Even before the Financial Harbour deal, Janahi had close connections to Bahrain's rulers. "He had a diplomatic passport," said someone who has done business with Janahi and has intimate knowledge of GFH. "He was a member of the shura council" -- Bahrain's upper house of parliament whose 40 members are appointed by the king. The development deal cemented those ties, and helped open more doors around the Middle East.
In response to questions, GFH said it had 10 successful years before the financial crisis hit investment firms around the globe. It says it was the first firm to partner with governments in the region on real estate and infrastructure projects.
"Indeed, Esam Janahi and other Executive Management members do hold valuable relationships with regional governments which were a direct result of spearheading GFH," the company said in an email. It went on to point out the "impressive track record that GFH showed in creating opportunities and unlocking value in emerging markets".

The model

During GFH's busiest years -- between 2006, when the Financial Harbour towers neared completion, and 2008, just before the Gulf's real estate crash -- the company used the towers as a signature project to negotiate more land deals with heads of state and governments elsewhere in the region.
"It's not something that was openly advertised, but they would brag about how they were getting the land for next-to- nothing, and about how they were making huge sums of money," said a Gulf-based banker who had a business relationship with GFH and spoke on condition of anonymity.
The model was simple. "You basically go and cut a deal with your buddies in Morocco, or Egypt, Tunisia, Syria," said a senior investment banker in Bahrain. Having paid very little for a parcel of land "they (GFH) would go over to investors and mark it up by something like 40%, in some cases even more, and sell it." Other bankers and two senior company insiders confirmed such a markup was typical at the company.
GFH was not alone in this practice. Bahrain-based investment bankers say it was common practice for Bahraini investment firms to add huge mark-ups to the value of a plot of land or company they had bought cheaply before selling it on to investors. Companies in Dubai, Abu Dhabi, Qatar and elsewhere did the same thing.
"The returns could reach up to 200%," said an investment banker who worked at a Bahraini investment firm affiliated with Esam Janahi, and who also asked to remain anonymous.
The mark-ups meant investors initially owned something worth less than what they had paid for it, an anomaly that most hardly noticed as long as property values kept rising.
It was also common practice for GFH to book massive up-front fees on the money they raised from investors. In some cases, real estate projects were split into several phases so that fees could be collected each time investor money was rolled over into the next phase, according to Bahraini bankers.
Such an arrangement is highly unusual outside the Gulf, according to people who work in the industry in Europe and the United States. Management fees charged by private equity houses and asset managers in other parts of the world are typically modest.
GFH does not dispute that it charged fees at the start of its projects. "GFH's business model did utilise upfront fees in addition to management and success fees, as did many institutions," it said in its statement to Reuters.

Problems

Local bankers estimate GFH raised a total of USD 5 billion between 2002 and today: much of that money is still locked up in unfinished projects.
One such project, on about 1,750 acres of land outside Mumbai, India, was unveiled in late 2007. It is unclear what GFH paid for the land, but it seemed to have no problem selling the project -- a massive business and residential complex targeting international companies -- to private individuals around the Gulf.
An internal GFH document seen by Reuters and verified by four former insiders shows that by September 2009, GFH and Abu Dhabi Investment House (ADIH), a company run by Janahi's brother Rashad, had jointly raised USD 1.1 billion for the project. After up-front fees and commissions had been taken out, only about 25% of that money reached the Mumbai project, according to the document.
Additional documents seen by Reuters show other GFH projects had similar fees deducted. In July 2008, for example, GFH said that its second-quarter earnings had come mostly from fees on real estate projects, in particular a project in Libya.
An investor in that project, known as Energy City Libya, told Reuters two months ago that he had completely written off his investment as no visible progress had been made and he no longer expected the project to be completed. Progress has been slow in Mumbai as well.
GFH says it is committed to completing all of its projects and that it has signed an agreement with a new partner to complete the land acquisition in Mumbai and begin work.