25/07/2005

By Simon Clark**

July 25 (Bloomberg) -- Yasser Arafat smiled for the cameras as he held hands with Enron Corp.'s Middle East chairman, David Haug, and Palestinian-born entrepreneur Said Khoury on June 18, 1999. They were celebrating an agreement to build the first Palestinian power plant, a $150 million, 140-megawatt project that would supply a fifth of the power needed by the 3.6 million residents of Gaza and the West Bank.

A year later, the plant's prospects soured. The Israeli- Palestinian conflict flared up, causing the loss of 4,700 more lives. Then Enron collapsed in 2001 in the second-biggest U.S. bankruptcy. Thanks to Khoury, whose company bought Enron's stake and persuaded engineers from Paris-based Alstom SA to stay and work even amid violence, the Gaza plant opened in 2002, two years late. It's been generating power ever since, though its client, the Palestinian Authority, isn't paying in full.

Khoury's company, Athens-based Consolidated Contractors International Co., known as CCC, has been negotiating political minefields in the Middle East for more than half a century. Khoury, now 82, and his cousin Hasib Sabbagh, 85, founded the construction company in Lebanon when they were young Palestinian engineers in exile. Today, CCC has annual revenue of $1.56 billion and more than 60,000 employees in 35 countries from Kuwait to Kazakhstan.

``They're a Palestinian icon because they're one of the few businesses of Arab-Palestinian origin that succeeded internationally,'' says Kamel Husseini, 39, spokesman for the Palestinian Authority's $1.36 billion investment fund. Khoury's 44-year-old son, Samer, was an Arafat-appointed director of the fund until earlier this year.

Volatile Regions

CCC has built everything from Iraq's Abu Ghraib prison (completed in 1969, a decade before Saddam Hussein became president) to a terminal extension at Washington's Ronald Reagan National Airport. Current projects include the $250 million Azerbaijan section of a 1,770-kilometer (1,100-mile) pipeline to the coast of Turkey for a group led by BP Plc, Europe's largest oil company, and a $720 million Dubai shopping mall slated to be the world's largest.

Even without any national government to promote its interests, the company has thrived in some of the world's most- volatile regions by making contacts with business executives and politicians. Photographs of Said Khoury, CCC's president, with politicians such as Arafat, who died in November; Palestinian Authority President Mahmoud Abbas; the late Lebanese Prime Minister Rafik Hariri; and Kazakh President Nursultan Nazarbayev line the windowsill of Khoury's seventh-floor office at the company's headquarters in Athens.

Carter Ally

Khoury's partner, cousin and brother-in-law, Sabbagh, used his diplomatic skills to help bring Arafat into a dialogue with the U.S. ``Hasib is one of my earliest and strongest allies in pursuing peace in the Middle East,'' former U.S. President Jimmy Carter, 80, said in an e-mail. ``Hasib's integrity and judgment, which made him a successful businessman, also made him a trusted adviser.''

Sabbagh, who suffered a stroke and is no longer active in the business, is a donor to the Carter Center, which promotes respect for human rights and fights global poverty.

Israeli Prime Minister Ariel Sharon's plan to pull settlers and soldiers out of Gaza in August after 38 years has boosted interest in the area -- and in closely held CCC -- among some foreign investors. One is Egyptian-born Jewish entrepreneur Ronald Cohen, 59, founder of Apax Partners Worldwide LLP, Europe's biggest buyout and venture capital firm. Cohen is part of a group including Samer Khoury that's planning a $500 million loan-guarantee fund for Palestinian companies.

`Potential Engine'

``Prosperity for Palestine is in Israel's national interest,'' Cohen says. ``CCC is a huge potential engine to help create that prosperity.'' The Palestine Al Quds Index of 27 Palestinian stocks is up 136 percent this year, partly on optimism about prospects for Gaza and the West Bank's economy.
Khoury, who along with Sabbagh has spent some $80 million in the Palestinian territories since 1990 in donations and investments, says he's not hurrying to increase that amount. CCC's biggest investment, the Palestine Electric Co. plant, has left CCC with liabilities and losses as the Palestinian Authority hasn't paid all of its bills. As of December 31, it owed $33.3 million to Palestine Electric.

The plant runs on diesel fuel imported from Israel that costs the Palestinian Authority about $4 million each month. ``They always pay the Israelis for the diesel,'' says Walid Salman, 52, managing director of Palestine Electric and head of CCC's Palestinian operations. ``With us, it's been different.''

Power Problems

The authority also hasn't built an electricity grid that can take all of the plant's output, so it's running at half capacity, and it still hasn't extended a $20 million credit line agreed to in 1999.

``I've been asked to boost generating capacity and add a desalination unit, but I'm taking it easy,'' says Khoury, who's chairman of Palestine Electric. Shares of the company, 42 percent owned by CCC, trade on the Palestine Securities Exchange in the West Bank city of Nablus. They've risen 32 percent this year to $1.95, underperforming the Al Quds index.

The Khourys also say the authority needs to take a longer- term view of its finances, despite the difficulties it faces every day. Samer Khoury says he stepped down this year as a director of the Palestine Investment Fund, whose chairman is Finance Minister Salam Fayyad, after disagreeing with a decision in March to sell stakes in the privately held Algerian and Tunisian units of Cairo-based mobile phone company Orascom Telecom Holding SAE.

`Begging for Money'

Since the sale, shares of the publicly traded parent company, Orascom, have risen 34 percent. ``Now we are going around, Dr. Fayyad is going around, begging for money from Europe,'' Khoury says. Fayyad didn't return calls seeking comment for this story. The fund's directors haven't decided how to use the money, which will likely be invested in Gaza and the West Bank, spokesman Husseini says.

The authority spent $1.7 billion in 2004, more than double its revenue. Israeli security blockades triggered by the resumption of fighting, known as the intifada, in September 2000 stifled the Palestinian economy and made it tough for the authority to collect revenue.

Per-capita income in Gaza and the West Bank shrank 37 percent from 1999 to 2004, according to the World Bank. Annual gross domestic product was about $3.3 billion in 2004. Two-thirds of Gaza's population of 1.4 million live in poverty and a third are unemployed, the World Bank says. Violence has subsided since Abbas, 70, was elected president of the Palestinian Authority in January.

`Massive Pressure'

``The government has been under massive pressure,'' Palestinian Energy and Water Minister Azzam Shawwa says. ``The security situation and the failure of the economy have made it very difficult for people to pay electric bills and for us to collect them.'' Collections barely cover the cost of the Israeli diesel fuel for the plant, he says.

About 8,500 Israeli settlers are evacuating 25 percent of Gaza, which is about as big as the New York boroughs of Manhattan and Brooklyn combined. Gaza borders Israel to the north and east, the Mediterranean Sea to the west and Egypt to the south. Even if the Israeli withdrawal from Gaza takes place without bloodshed, Khoury says, Israel may not give the Palestinians access to the resources and markets they need to build their economy.

CCC owns a 10 percent stake in a gas field off the coast of Gaza and an option to raise that holding to 30 percent. Gas from the field is supposed to be fueling the power plant instead of the more costly diesel, but Israel's defense ministry has yet to give permission for a pipeline, says Tim Forbes, 58, head of Middle Eastern operations at U.K.-based gas producer BG Group Plc, which discovered the Gaza field in 2000.

Gaza Gas

``We'll have to wait and see when we get out of Gaza and how we get out,'' says Shlomo Dror, an Israeli Defense Ministry spokesman. The cost of the diesel makes Palestine Electric's power more expensive than that of state-owned power monopoly Israel Electric Corp., the other supplier to Gaza and the West Bank.

Said Khoury, a former director of the Palestine National Fund, which invested money for the Palestine Liberation Organization, has donated money to institutions such as Nablus University and invested in building projects that include Bethlehem's Solomon Pools Convention Center. The CCC patriarch says he'll continue to support ventures that will help the peaceful formation of a Palestinian state.

``If they just wanted to make money, they would keep away from Gaza because, right now, there's a boom in their main market in the Persian Gulf,'' says Idan Ofer, chairman of Tel Aviv-based Israel Corp., a holding company that has $5.3 billion of investments ranging from chemical companies to shipping.

Beirut University

Ofer, 49, and Samer Khoury, one of Said's three sons, are co- chairmen of the Middle East Strategy Group at the Washington- based Aspen Institute, a nonprofit research organization that's looking at ways to boost Gaza's economy.

A Greek Orthodox Christian, Said Khoury was born in Safad, then in northern Palestine, in 1923. His father was a wealthy landowner who held fishing rights for the Sea of Galilee. Sabbagh, a Catholic, was born in the nearby town of Tiberias in 1920.

The cousins both studied civil engineering at the American University of Beirut, which would become a big source of CCC employees. After graduating in 1941, Sabbagh returned to Palestine, setting up a construction company in Haifa in 1945. His first job was to build 100 apartments for Jewish veterans who had fought in the British Army in World War II.

`Lost Everything'

Khoury returned to Safad after graduating in 1946 to start his own building company. Then, in May 1948, Safad became part of Israel as Britain's mandate to rule Palestine ended and the former colonial power withdrew its troops.

The Khoury and Sabbagh families fled to Lebanon, where the two cousins regrouped and teamed with different partners to work on projects such as an airport in Tripoli, Lebanon, in 1950. A year later, they won a contract to build a yard to store oil pipes in Homs, Syria, for Iraq Petroleum Co., which was constructing a pipeline across the Syrian desert.

``One of my main concerns at that time was to make good money so my father, who had lost everything in Palestine, would feel nothing had changed,'' Khoury recalls. ``I wanted to boost his morale.'' His father died in Beirut in 1956 at age 57.

The main contractor on the Iraq Petroleum pipeline was San Francisco-based Bechtel Group Inc., the world's biggest construction company. That connection proved to be the making of CCC. In 1952, Bechtel was picked to build an oil refinery in Aden, now part of Yemen, on the southern tip of the Arabian Peninsula.

Following Bechtel

The client was London-based Anglo-Iranian Oil Co., now known as BP. Bechtel asked Khoury, then 29, and Sabbagh, then 32, along as subcontractors to help build the refinery. The pair had just formally founded CCC in Lebanon with fellow Palestinian Kamel Abdul Rahman and would follow Bechtel as subcontractors on pipelines, oil fields and residential buildings to Kuwait, Libya and Saudi Arabia.

``After Aden, there was sort of an understanding that wherever Bechtel went in the Middle East, and sometimes before they went there, we would go too,'' says Khoury, whose desk is covered by financial reports and an edition of Al-Hayat, a London- based Arabic newspaper.

Khoury moved to Kuwait from Aden in 1957 to lead the company's expansion in the Persian Gulf. Today, CCC works on projects with companies such as Paris-based Technip SA, Europe's largest oil and gas services company, and Japanese engineering firms Chiyoda Corp. and JGC Corp., as well as Bechtel.

Palestinian Employees

As CCC expanded around the Middle East, the company tapped into the scattered Palestinian community for employees. ``It was natural to join CCC,'' says Mahmoud Zeibak, 66, who was born in Jaffa, near Tel Aviv, and is CCC's Athens-based head of marketing.

CCC sent Zeibak to Aden 13 days after he graduated from the American University of Beirut in June 1963. ``The founders have always been very supportive, down to earth and gave a lot of freedom.'' Today, about four-fifths of CCC's 8,000 permanent engineering and management staff members are Palestinians, Lebanese or Jordanians, Samer Khoury says.

The founders also established relationships across the Arab world so their company could expand in spite of the area's volatility. In Saudi Arabia, for example, they formed a joint- venture company called Consolidated Contractors Co. with Prince Talal bin AbdulAziz, a brother of the Saudi king and father of billionaire investor Prince Alwaleed bin Talal, 48. In 1976, CCC helped build a $950 million commercial harbor at Jubail on Saudi Arabia's western coast.

Friends and Foes

CCC's path hasn't been a smooth one. The company left Aden in 1966 as a civil war escalated. In 1969, Sabbagh quit Libya, where CCC had built oil plants and pipelines for companies such as Los Angeles-based Occidental Petroleum Corp., after Muammar Qaddafi staged a coup against King Idris.

CCC moved its headquarters to Athens from Beirut after civil war broke out there in 1975. In Kuwait, in August 1990, Khoury's two younger sons, Samer and Wael, fled the invading army of Iraq's Saddam Hussein by driving 110 miles across the desert in a white Chevrolet Caprice. ``We kept going until we saw Saudi Arabian flags,'' Samer Khoury recalls. The Kuwait home they'd lived in for most of their lives became a military headquarters for the Iraqi army.

The Khoury brothers all studied engineering at California State University, Chico, and are the company's three executive vice presidents. Tawfic, 49, is in charge of financial and legal affairs from Athens, while Samer, also based in Athens, travels around the Middle East to oversee operations. Wael, 44, whose London office features a landscape of Safad, heads strategic development and is responsible for finding new markets.

Less-Profitable Contracts

The trio boosted CCC's revenue by 13 percent in 2004, with three-quarters coming from the Middle East and former Soviet states like Kazakhstan. About 14 percent of sales were from the U.S., and the balance was from Africa and the Caribbean. Profit fell 17 percent last year to $55.5 million as the company took on less-profitable contracts for buildings and roads.

Said Khoury, who owns 60 percent of CCC, and Hasib Sabbagh, who owns the rest, took a $37.5 million dividend in 2004, leaving $462 million of shareholder equity in the company. Abdul Rahman, CCC's third founder, sold his stake to his partners before he died in 1980.

Sabbagh, who has used a wheelchair since his stroke in 2002 and can barely speak, is CCC's honorary chairman. His older son, Suheil, 43, is director of human resources, and his younger son, Samir, 42, is manager of business development and also owns two restaurants in Athens.

Important Go-Between

Suheil Sabbagh supports the arrangement whereby Khoury's sons have executive posts, though he expects it to change. ``Gradually, we'll have to make the transition to being owners rather than managers,'' he says. Said Khoury says the company may sell shares if the number of family members with stakes significantly expands. He gave no timetable.

In addition to his business dealings, Sabbagh worked for the Palestinian cause and became an important go-between for Arafat and the U.S. government, says Richard Murphy, 75, assistant U.S. secretary of state for Near East affairs from 1983 to 1989.

On December 13, 1988, Arafat gave a speech at the United Nations General Assembly in Geneva in which he rejected the use of terrorism and accepted the 1947 UN resolution that called for the creation of two states: Israel and Palestine. The U.S. government had refused to talk to Arafat until he publicly acknowledged Israel's right to exist.

`Talked Firmly'

``Arafat felt he had satisfied the criteria, but we said he had to be absolutely clear, without saying one thing at the beginning of the speech and another at the end,'' Murphy says. Murphy asked Sabbagh for help. ``I called Hasib, who was with Arafat, and I explained our position,'' he says. ``Hasib then went and talked firmly to Arafat.''

The next day, Arafat made a statement that was acceptable to the U.S. government, which opened a dialogue with the PLO 48 hours later, Murphy says. ``I credit Hasib with being the intermediary, giving an honest and full communication and seeking no glory or gain for himself,'' he says.

Sabbagh's son Suheil confirms his father's role. ``He told Arafat, `You have to give a little to gain a little,''' Suheil Sabbagh says.

The steps toward peace gave CCC's founders the chance to return to the land of their birth. Their initial moves were cautious. ``We didn't want to compete directly with the local Palestinian companies, so our goal at first was to be a source of help,'' Khoury says. After Arafat and former Israeli Prime Minister Yitzhak Rabin shook hands on the White House lawn in September 1993, CCC funded a $10 million program in Gaza to train engineers.

Palestinian Investments

Starting in the late 1990s, the Khourys began making business investments as well. In addition to the power plant, Acwa Services Ltd., a U.K.-based unit of CCC, built a $2 million water purification plant in Gaza, which sells drinking water at dispensers in gas stations. That same year, CCC won a role in the $65 million construction of Gaza City's seaport. The violence halted the project, though CCC would bid again to help build the port, Samer Khoury says.

Still, some Palestinians criticize the Khourys for remaining in exile. ``Instead of living in Athens, they should be living in Palestine,'' says Munib Masri, 71, who lives in Nablus and chairs investment company Palestine Development & Investment Ltd.

Said Khoury says he bought a plot in East Jerusalem in 1998 to build a house on, and he promised Arafat to move CCC's headquarters to Jerusalem when a Palestinian state was formed. The next generation sees things differently.

`Office in Jerusalem'

``Our headquarters should stay in Athens because Greece is part of the European Union and more international,'' Samer Khoury says. ``We should open an office in Jerusalem.''

Palestine Electric is the company's largest investment in the territories so far. In 1999, Khoury paid about $5.5 million for a 9 percent stake in the company. Enron's Haug says his company agreed to buy a 33 percent stake in the company after Mohammed Rachid, Arafat's economic adviser, flew to meet him in his Houston office in February of that year.

Overseas Private Investment Corp., a U.S. government-owned agency that provides U.S. businesses with financing, set up the meeting, Haug says. ``The pitch was that the U.S., Israel and Palestinians all wanted this plant,'' he says.

The U.S. company's connections helped get building materials to the plant from Israel, Said Khoury says. ``Whenever we had problems, Enron would contact the American administration and they would instruct their ambassador in Israel to help,'' Khoury says. Haug confirmed the role.

Enron Connection

CCC bought Enron's stake and assumed $14 million of liabilities through its U.S. unit -- Danbury, Connecticut-based Morganti Group Inc. -- in 2003, after Enron's collapse. ``Without the Khourys, there is no way the plant would have been developed, financed and built,'' says Haug, 48, now a managing director at Houston-based Arctas Capital Group LP, which advises on and invests in energy projects.

CCC also guaranteed 25 percent of a $90 million loan to the power plant from Arab Bank Plc. Said Khoury is a director of the Amman, Jordan-based lender, which was founded by a Palestinian banker in 1930. Palestine Electric reported sales of $27.8 million and a profit of $9.4 million in 2004. It received $16.7 million of cash from the Palestinian Authority last year.

Using the U.S. unit to buy Enron's stake kept the plant eligible for insurance from Washington-based OPIC, Samer Khoury says. OPIC provided $48 million of political risk insurance to Morganti in 2004. That may be useful. Alstom, which installed the plant's turbines, filed more than $30 million of force majeure claims against Palestine Electric because of the violence.

`Rough Time'

Palestine Electric -- and CCC -- may benefit from the Israeli pullout. Demand for electricity will rise with economic growth, and the Palestinian Authority may get the freedom of movement and $40 million of grants to complete Gaza's electricity grid, Palestinian Energy and Water Minister Shawwa says. Improving relations between Israel and the Palestinians may also speed negotiations to develop the Gaza gas field, Shawwa, 42, says.

``We have been through a rough time, and I hope this situation will change when we have more control over the area,'' Shawwa says of the unpaid bills.

Some investors share the minister's optimism. ``I'm very positive about the economy,'' says Palestine Development's Masri, whose assets include hotels, poultry farms and stakes in Palestine Electric and Palestine Telecommunications Co., the best performer in the Al Quds index. ``Withdrawal from Gaza is a step in the right direction, but Gaza has to be linked to the West Bank; otherwise, it will become a ghetto. People, capital and goods need to move freely,'' Masri says.

Israeli Approval

Hasib Sabbagh is more cautious. In an interview at his Athens villa, he nodded his head when asked whether the withdrawal is a positive step for relations between Israelis and Palestinians. He shook his head when asked whether it was enough to secure a lasting peace.

Prospects for the plant would immediately improve if Gaza's gas field started pumping, because using gas instead of diesel would cut the price of electricity by two-thirds. The chances of getting Israeli approval depend on the political situation, which may be getting better. ``This is under discussion,'' says Dror, the Israeli Defense Ministry spokesman. ``We still don't have an answer. I can't tell you how things are going to be after the withdrawal.''

Even if that happens, the Khourys aren't expecting that the Palestinian Authority will suddenly become a model partner. ``They should live up to their obligations,'' Wael Khoury says. The Khourys aren't expecting to see big profits from Gaza anytime soon.

*http://quote.bloomberg.com, July 25, 2005.

**To contact the reporter on this story:
Simon Clark in London sclark4@bloomberg.net.