Finance

A tougher game

by Thomas Schellen
written by Thomas Schellen

It is no secret that the management of other people’s money — especially of very rich people’s money — can make you a living, yet it is fraught with hazards. Swiss banks are, and have long been, the epitome of wealth management in service to high net-worth customers. But as Executive noted in our latest special report on private banking, the art of Swiss banking has been caught in a process of transformation for a good number of years and the number of private banks with head offices in Geneva, Zurich and Basel has been shrinking since the global financial crisis and is set to contract further. 

But the challenges to private banking, both of the Swiss variety and in all other money hoards where assets under management are inordinately larger than in plain vanilla financial institutions, have much deeper roots than the Great Recession of 2008. These challenges have been growing over the past quarter century due in large part to the expansionary interventions of governments in developed economies.

From the G8’s creation of anti-money laundering pit bull FATF (Financial Action Task Force) to the European Union’s Savings Tax Directives (EUSTDs) and the United States’ famed FATCA invasion of client data bases at so-called FFIs (Foreign Financial Institutions — meaning every entity anywhere that offers financial products with cash redemption value), banking and wealth management in particular have come under pressure to the same degree to which governments of developed countries have awoken to the presence of untapped tax bonanzas in their potential reach.

In yet another dimension of its ongoing systemic change, the Swiss private banking model, which nota bene most Lebanese private banking concepts are aligned or entwined with, is exposed to global shifts in a) the concentrations of wealth from developed to new growth markets, led by China; and in b) the professed wealth cultures and self perceptions of high net worth (HNW) families and individuals.

Limited wealth management in Beirut

In the latter discussion, which is perhaps still faint in comparison with the vigor it deserves, questions on the value of personal hoards and the not physically tangible values of the “one percent” and other top wealth holders have gained in prominence as the world has witnessed the engagement of the Occupy movements and the more cerebral “global wealth tax” debates of 2014 that were spurred on by French economist Thomas Piketty.

As we have found in our special report, Beirut for the foreseeable future is likely to remain a very limited sub-center of wealth management. But this somewhat remote status makes keeping up with the leading trends and pressing questions of private banking, if anything, even more interesting for Lebanon’s private bankers and inquisitive business minds. Executive was fortunate to be able to investigate perspectives of two top Swiss financial institutions in September, in the follow-up to our report.

In one encounter, Kelvin Tay, Swiss banking stalwart UBS’ managing director and regional chief investment officer, Southern Asia and Pacific, provided us with his perspective on Asian potentials and the Middle East’s current lack in attractiveness for investment.

As Tay confirms, the twin guiding stars for today’s private banking industry are regulations and compliance, which makes being a banker in the wealth management systems of this new brave financial universe “a lot tougher” than it used to be.

“It is no longer as exciting or as attractive as it was before. Regulations are a lot stricter and there is a lot more scrutiny on what we do. Still, the wealth management industry is the only sector that is still growing and they are actually hiring,” Tay tells Executive in the rep office that UBS maintains in Beirut’s posh downtown district. 

Tay is a representative of a generation that has been immersed in the transition of private banking since the turn of the millennium — a twofold transition in terms of the rising regulatory regimes and also in terms of the rise of Asia as a wealth market. Having entered the banking sector 10 years ago during a stint at Deutsche Bank in his native Singapore, he decided to make wealth management his career and joined UBS in Asia because of the Swiss institution’s focus on this banking specialty.

It is his first visit to Lebanon and when compared with his home turf of South Asia, investments in the Middle East are clearly neither his expertise nor his mission. When asked if he has a favorite Middle Eastern stock or sector to invest in, Tay explains that his time does not permit him to look at individual stocks. As far as evaluating sectors for investment purposes, he adds, “yes, [we look at] sectors in Asia, Europe and the US but not in the Middle East because we think that Middle East markets are too small.”

His role as investment strategist entails serving clients in South Asia with advice and he also covers UBS clients in Europe, the Middle East and Australia if they want to discuss Asian investments. “I am responsible for the Asian strategy. If a client in Europe wants to talk about Asian strategy, it is my responsibility to go there and talk to them,” he gives as an example.

Negative investor perspective in the MENA

During his Beirut visit at the start of September, Tay met with investors and with officials at Banque du Liban for an exchange of views. “They like to hear from me what I think is going to happen with regard to oil prices and what our [UBS] expectations are for the [Middle East] conflict. Basically I was telling them that we don’t expect the conflict to get any worse, so we don’t expect oil prices to go up sharply.”

In the view of UBS there is a higher chance of the Russia–Ukraine conflict escalating than there is of the Middle East crises escalating. However, this is pretty much the limit of positive notions on the region for the strategist. Investor perspective on the Middle East and North Africa are in Tay’s view “more negative today than they were 12 months ago” and the entire MENA region is in his perception “not likely to be on the radar screens of a lot of international investors right now.”

According to Tay, the lack of growth in MENA markets explains why a bank like UBS has grown its workforce in Asia to nearly 7,400 employees out of its total headcount of 60,000, but according to its second-quarter report for 2014 has posted a mere 153 people in the Middle East and Africa region.

Citing the example of Indonesian growth in the past few years, the Singaporean expert says that the Middle East shares some of the same characteristics with Asian growth economies and could become a larger investment destination if regional unemployment rates were to drop and income levels to rise as was achieved by Indonesia. He is adamant, however, that this will require political stability as a key factor, which he sees as elusive in the Middle East.

As to his own performance goals in the UBS organization, Tay identifies them as “to outperform benchmarks as far as my investment strategies are concerned and make sure to speak to media on a regular basis so that UBS is seen as a thought leader in the media.”

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Business

A credo of success

by Thomas Schellen
written by Thomas Schellen

Beirut native Gilbert Ghostine is a top manager on the move. After 21 years in a career with drinks company Diageo — known for its top selling brands such as Johnny Walker, Smirnoff and Guinness — he is transitioning into his new role as chief executive of Firmenich, a Swiss manufacturer of flavors and fragrances that had $3 billion in annual turnover as of 2013. Curious about his migration, Executive catches up with Ghostine by phone in Singapore as he prepares to walk onto his new job next month.

 

You are moving from the helm of Diageo Asia Pacific to become chief executive of a privately held company in the highly specialized manufacture of flavors and fragrances. Is there a message here for Lebanese graduates?

As you know, there are very few global Lebanese CEOs, and I think the [message] is to inspire the new generation of Lebanese who are starting their career in a global context.

 

Is it correct that your first successes in Beirut helped kickstart your international career?

That’s right. I started by joining the distributer Diageo in Lebanon in a junior marketing position. The best practice that we created for our brand in Lebanon became the global best practice, and this is how I was the first Lebanese to join Diageo.

 

When looking back at the time when Lebanon was your launchpad, what gave you the best advantage?

When you come from a small country like Lebanon, [one advantage is that] you have interpersonal skills, you value relationships and you invest in relationships. The second thing is the family roots, the family connection, which also emphasizes the value of human beings and investing in building relationships with people. Lebanese hospitality also helps; we hosted friends, families and colleagues at home, which helped us to build even stronger bridges with stakeholders who were customers or colleagues in the business.

 

These skills that you are describing are very much on the soft side when compared with MBA degrees and knowledge that one can acquire in a business school. From your experience, how would you differentiate between the importance of things that you can learn in university and the things that you can only learn in life, and perhaps from your culture of origin?

Business schools are important and we have exceptional education in Lebanon. What life brings you is something that gives you an edge in [terms of] soft skills, [i.e.] interpersonal skills. The other dimension is the entrepreneurial mindset that you learn in Lebanon, where it is all about making sure that you break through. [Another critical] fact is that there are a lot of things that you have to do yourself and where you can’t rely on a government. This is an example for the entrepreneurial mindset where you are forced to break through and don’t rely on government subsidies or welfare, which people [in developed economies] rely on.

 

Let me ask you in this context about the many restraints that Lebanon currently faces in terms of economy, security and politics. When young people here look around themselves and see all these problems, is that in your opinion an impediment to their development or do you think that it can be an inspiration to break through?

That’s a great question. I have always believed that your attitude determines your altitude in life and at the end of the day it is all about the mindset. If we look at my generation — I am 54 — we are the war generation. I was 16 when the war started and our upbringing was not an easy one. We had to study by candlelight and had to dodge bullets on the way to university to attend exams. We were even unsure if the university would be open the next day to present [our papers]. We went through hard times but we didn’t give up. I strongly believe that all of us are global citizens now and that there are opportunities for us. Even though there are challenges, volatility, uncertainty and tragedy in the Middle East, these situations will not last forever. The situations will pass and there will be plenty of opportunities for everyone in this part of the world.

 

If I then may jump to the present, how do you plan to exercise the skills you developed in Lebanon and those you have acquired with Diageo in your new position as CEO of Firmenich?

I am very excited about this new opportunity but honestly, this was not an easy decision for me to make. Diageo was my family for the last 21 years, and I am emotionally very attached to the company and grateful for the experience and opportunity they offered me. Now I have been offered this great opportunity to be a global leader of a company that has 120 years of experience. Firmenich has decided to open the job and I will be the first non-family CEO. This will be an opportunity to reinvent myself, by learning a new sector, a new industry, a new business model, but also by bringing in my global expertise in M&A [mergers and acquisitions] and in leading women and men over four continents in another industry.

 

You mention your M&A experience, does this hint that Firmenich might aim for more inorganic growth by acquisition for its future?

The journey for Firmenich will be a combination of organic and inorganic. The organic growth opportunity is there, but if there are inorganic opportunities I am sure the Firmenich board will be open [to] more alliances or acquisitions.

 

In conventional wisdom, the transition from a family-run business to one with an external CEO and greater board based governance is not an easy one and requires great investments of time and strategic thinking. With this in mind, do you see your affinity with family business from your Lebanese background as a special qualifier for your new role?

You put your finger on the right spot there. I started my career in Lebanon in a family owned company and understand family owned businesses. At the same time, throughout my career with Diageo I have taken the lead on so many alliances and global relationships, like with Moët Hennessy and Grand Marnier and some of the alliances we created in Asia. Working with these family owned companies also gave me greater insight and, for everything that I have felt in the last nine months or a year when I was [holding discussions] with the Firmenich family; I felt very inspired by their values and vision for the company and I am looking to work with them and help continue their legacy.

 

Diageo is a company that appears to be all about brand performance. By contrast, Firmenich is a company whose products many consumers will not be able to cite even though these products are in the ice creams and beverages they enjoy and the perfumes they use.

I think this is where I can bring value and some insight because I have worked on the consumer side of the business for 21 years. Firmenich is a different business model, because it is business to business instead of business to consumer. But the top 20 customers globally for Firmenich are consumer goods companies on either the fragrance side or the flavors side. Bringing this consumer goods company expertise can only help Firmenich better understand this theme and accelerate its growth.

 

The industry of flavors and fragrances has its share of controversies because as consumers we are suspicious of things that sound chemical going into our food. Do you expect to have to deal with many challenges of this sort?

I haven’t started my job yet and so I am not close to these issues and challenges, but I know from Firmenich that they operate at the highest international standards and today hold 1,800 patents, and these patents are approved by the highest authorities. And there are very few companies in the world that have a Nobel Prize, and Firmenich’s head of research won a Nobel Prize some time ago. [Editor’s note: Leopold Ružička won the Nobel Prize for chemistry in 1939.]

 

You said that you are looking to reinvent yourself and also referred to your age during our conversation. Is being in one’s 50s a good time to reinvent oneself?

I say yes. People need to always reinvent themselves.

 

It’s not too late?

It’s never too late. Being in your 50s is today what a few years ago was being in your 40s and 30s. We are still full of energy and full of ideas, and we can take our global experience and make sure other people keep benefiting from it. And the biggest risk that executives have in their career is getting comfortable with their comfort zones, and that is a dilemma that I personally went through: being well paid, working for a great company, having a big job and constant opportunities for promotion, or go to reinvent yourself, learn a new sector and new business models. Some people don’t want to cross this bridge, but I am incredibly excited about this opportunity and am looking forward to starting my new role [on October 1].

 

What was your biggest personal surprise as a Lebanese person going into global business?

What surprised me most was how credible and respected the Lebanese are abroad. We always have this impression that we might not be perceived highly and not be respected. I had actual experiences while living and working in the US [from 2002] of meeting people who found out that I am from Lebanon and who were all full of praise for the Lebanese friends they knew. We have a reputation of being entrepreneurs, hard working, with high ethics, and of being people who, when we make it, invest back into the communities in which we live and operate. That was my biggest surprise, how much credibility we Lebanese have globally.

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Business

Bringing Damascus to Beirut

by Nabila Rahhal
written by Nabila Rahhal

For the past two years, more restaurants highlighting Syrian culture, both in their cuisine and interior decor, have been popping up in Beirut, mainly in Verdun and Hamra. 

Some of these restaurants, such as Sit El Sham in Verdun, are owned by Syrians while others are owned by Lebanese but play up the Syrian concept. One such venue is Verdun’s Ward El Sham, named after a traditional Syrian dessert, which opened a year ago and is owned by Achour Development.

Jean Habis, Ward El Sham’s manager on duty, says the concept was chosen because the owners wanted to “try out the new trend of Syrian cuisine” as a change from Lebanese style restaurants. Though Ward El Sham has modeled its interior after an old Damascene home, Habis believes what distinguishes them from other Syrian themed venues is their traditional Syrian cuisine rather than the decor. While the Lebanese and Syrian cuisines are very similar, Ward El Sham offers Syrian staples such as hara b asabo’, a kind of lentil soup with lightly fried dough, on their daily dish menu and is known for their unique Aleppo kebabs such as fattet kebab, a yoghurt and bread dish with meat.

Souraya, a Syrian woman who settled with her family in Lebanon six months ago, says she visits Ward El Sham on a weekly basis just to enjoy these dishes that remind her of home. “I come here because they have the food items from Damascus which I love but find difficult to cook at home. I can’t find them in other restaurants in Beirut,” she says.

Feeling at home

Bandakji Cafe, a 1,000 square meter parking lot in Hamra which was turned into a cafe in late 2013, has duplicated the setting of the traditional Syrian harrah, or neighborhood, from the calligraphy on the walls to the tiles and even the waiters’ outfits, comprising harem style pants and a traditional skull cap.

Owned by the Petit Café group, the focus in Bandakji Cafe is on the ambiance more than the cuisine. Ahmad Bandakji, the manager at the cafe, says the goal was to attract Syrians residing in Lebanon and make them feel at home. “When the Syrian crisis first began, we decided to create Bandakji to cater to our Syrian brothers in Lebanon, so that they may feel that, at least at Bandakji, nothing has changed and they are at home,” says Bandakji, adding that half of their clientele are Syrians.

“I come here because the design and layout create a bittersweet feeling of nostalgia in me. Also, as there are many Syrians like me, it almost feels like home if I close my eyes,” says Bilal Ghadi, a regular at Bandakji Cafe.

Other venues, such as Set el Hesen in Ain el Mreisseh, took on a wider scope and focused on a Levantine concept, which helped them attract the Iraqi community in Lebanon as well. Taking advantage of the idea that many of the traditions and designs are very similar among countries in the Levant, the venue highlighted those similarities creating a space that everyone can call their own, explains its manager. “We are not Syrian or Lebanese themed, we are from the whole area and our menu reflects that,” he says, explaining that their menu has traditional Damascene dishes such as basha wa asakro as well as Lebanese ones.

A successful strategy

This strategy seems to be working well for Set el Hesen, as the manager says 70 percent of their clientele are foreign — including Syrians, Iraqis and Europeans. The venue’s seaside location could also be a factor in its popularity.

This rise in Syrian themed venues in Lebanon could simply be a well-timed development of the latest trend in the country’s hospitality sector, which is constantly seeking novelty to attract clients of any nationality.

It is more likely, however, that the sector is attempting to increase its client base by attracting those Syrians residing in Lebanon through catering to their culture, thereby gathering more of their community in one place and making them feel at home.

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Business

Raising capital, the human kind

by Thomas Schellen
written by Thomas Schellen

Managing a top flight business school program in Beirut is like enjoying Forrest Gump’s box of chocolates. It’s a life full of surprises where many — but not all — are happy ones. The latest proof in the pudding was the American University of Beirut’s intake of Executive MBA (EMBA) students exactly a year ago.

Recalling an experience that still burns in his memory, Riad Dimechkie, the executive director of the EMBA program at AUB’s Olayan School of Business (OSB), was expecting a class of 22 managers and professionals from around the region to embark on their EMBAs.

They had applied, been vetted and accepted, he explains, “And said they were coming. Then, one week before the start date, [United States President Barack] Obama was planning to bomb Damascus. So we lost half our students in one week.”

In statistical terms over the duration of the AUB EMBA program since its inauguration 10 years ago, the unexpected drop in 2013 enrollment because of the sudden elevation in security risk makes a small but noticeable dent, lowering the average potential class size by about one person for each calendar year, given that OSB statistics say the program had 233 participants and 210 graduates from 16 intakes since 2004, with the 17th intake this summer.

These totals are strikingly diminutive, whether seen by themselves or when compared with top name global providers such as Paris based INSEAD, where almost 200 EMBA students enrolled across three locations in 2013 alone, or, on a yet wider scale, with a 10 year crop of conventional MBA students at Harvard in the United States, where cumulative class size from 2004 to 2013 was 9,022.

But according to Dimechkie, the headcount of OSB’s EMBA enrollment is persistently small because it is supposed to be. “The ideal size for me is about 18 to 20 participants [per class] and the next one [intake 17] is probably going to be around 20,” he says. “We usually have two to three times the number of applicants for every participant that we accept and of those whom we accept, depending on the times, we usually see 90 percent enroll.”

Against the exceptional dip in the 2013 intake numbers, the 90 percent enrollment potentially suggests an affirmative message on the validity of the school’s EMBA program when one considers not only the political and security circumstances but also what the program comprises. A certain rate of cancellations is a given for a program that demands participants to invest upwards of 1,200 hours of hard intellectual and emotional labor over one and a half years, plus 700 hours of class attendance and, in plenty of cases, many weekends spent away from home — and all that on top of often still carrying a workload in a company.

At the École Supérieure des Affaires (ESA), which is situated only a short walk away from the AUB campus in Beirut’s Hamra district, the message is also one of an exuberant rationale for executive education. There is a “huge demand” for EMBAs and other executive education varieties in the Middle East, says Camille Moussa, the director of executive education at the Lebanese–French ESA. “Huge corporate entities [in the Middle East] have told me, ‘We are in desperate need.’ Companies are more and more becoming aware of their need [for executive education] in markets that I have seen and been able to identify.” 

ESA’s EMBA program features classes that are a bit larger — about 40 per cohort versus the 18 to 20 which Dimechkie names as his ideal size — and baseline tuition costs of $28,800 look almost socialist when compared with AUB’s $55,650 (or the six figure tuition at the world’s priciest EMBA programs).

Those differences may go a good way to explain why ESA’s EMBA, according to its marketing manager Cheryl Matar, experienced actually an inverse effect of increased student demand from the regional crisis — she says a growing number of recent applicants came from Syria and were motivated by having to acquire new skills after their economic base at home fell victim to the vicious conflict over the country’s future.

Growth in corporate training

AUB and ESA are both among a small group of tertiary education providers that spearheaded the creation of EMBA programs in the Middle East and North Africa and also were pioneers in proliferating other leadership training and skill transfer programs for corporate and individual managerial clients, which are subsumed under the header of executive education.

Internationally, the main two divisions of executive education are tailored programs and, mostly short-burst, open programs. The former are designed and delivered to organizational clients, such as corporations and institutions, while the latter are offered to all qualified business practitioners as intensive studies that most commonly involve on-campus program attendance between two days and a week but can also mean longer or online programs. Broken down to per day costs, attendance fees for a top shelf open program are commonly well above $1,000 and a week long immersion experience into something like Columbia Business School’s “Emerging Leader Development Program” comes not much cheaper than buying a small new Chevy or Kia at the dealer nearest to the campus.

This entire bracket of advanced education has developed greatly over relatively few years since business schools in the US first started offering MBA degrees for working executives — the EMBA — in the 1980s. Other executive education portfolios advanced from being offered as the last century’s community-oriented sidebar projects to becoming corporate clientele focused programs of core reputational and financial importance for their providers.

Recently, the immense need for executive programs has been penetrating every corner of the global economy, as demonstrated not only by an increasing launch of satellite programs from top providers — for example, INSEAD, which started its own EMBA program in Fontainebleau near Paris in 2003, has since added location offerings in Beijing, Abu Dhabi and Singapore — but also by development of more and more regional and local programs by universities and also commercial providers in Asia, the Middle East, Africa and Latin America.

One explanation for this trend is the depreciation of knowledge in the world’s fast-changing technological, scientific and economic environment. “Your academic degree expires after a few years, and that is why you have to keep educating yourself,” argues Imad Zbib, executive director in charge of OSB’s consulting and executive education activities and a colleague of Dimechkie. This need has been realized also by a growing number of companies both in the Gulf region and the Levant. “The demand for executive education is very high and awareness is increasing a lot,” he tells Executive, adding that a top tier of Arab corporations are becoming clearer and clearer in formulating their training needs and have recently asked for specific new programs on subjects such as innovation, experiential team building and managing corporate change.

Hedging productivity

Besides individual and corporate responses to market needs and competitive pressures, and beyond desires to improve attractiveness and performance of organizations, the growth of executive education seems existentially linked also to the rise of human capital as the knowledge economy’s profit engine.

The appreciation of human capital first entered a new trajectory in the aftermath of World War II when Ted Schultz, an American economist of agrarian upbringing, attributed the fast post-war recovery of European countries to the capital of “knowledge and skill” that working men and women could invest into these ravaged economies.

“Laborers have become capitalists not from a diffusion of the ownership of corporation stocks, as folklore would have it, but from the acquisition of knowledge and skill that have economic value,” Schultz told the American Economic Association in 1960.

Ever since, the human capital element in the economy has been two things: it has been understood as a crucial ingredient for productivity and economic development, and its value has alternatively been sought, affirmed, ideologically struggled over, or denied, perhaps because of the heritage of predatory thinking in business and (economic and corporate) politics.

This debate notwithstanding, the top Lebanese business schools’ experience of seeing growing demand for executive education and the willingness of Arab corporations to invest into replenishment of their human capital and development of their knowledge leaders appears undeniable.

Corroboration of this demand growth experience from an external vantage point comes from an international business school that has a history of interacting with the region. Corporate interest in tailored programs has developed greatly in the years after the Middle East was affected by the global financial crisis with some time delay around 2009, says Hischam El-Agamy, an executive director at IMD, a Swiss business school that is at the top of the Financial Times’ list of providers of open programs.

El-Agamy, who among other duties heads IMD’s outreach to the Middle East and Africa, tells Executive that up until about 10 years ago, regional interest in executive education originated mainly from individuals seeking to advance their personal career opportunities. In his observation, Arab corporate interest in executive programs beginning from the early 2000s was mainly for the purpose of rewarding and retaining top employees. But in the past four to five years he witnessed how companies in the Middle East and North Africa started to pursue investments in their human capital for the sake of their organizational development. 

He says, “For this transformation journey, they wanted three things: first, [to develop] a pool of talent that supported the transformation; second, they wanted specific leaders who can manage this transformation; and third, they wanted to stimulate creation of a competitive culture in their organization, a culture of awarding and accountability, and a sense of urgency.”

No PowerPoint Bulimia

According to ESA’s Moussa, great market potentials for selling training and human capital development programs all around the region have also been found by global media and information firm Thomson Reuters, with which ESA is collaborating to offer training programs in the Middle East and North Africa.

Moreover, Moussa says, ESA has been able to cultivate a domestic niche with trans-Lebanese and trans-regional potential in executive education because of the business school’s ability to meet regulator mandated training needs for employees in the Lebanese financial sector. This gives the impression that, simply put, ESA has developed programs in collaboration with the central bank which the latter then requires of bankers.

“A huge aspect of our executive education is development of the banking sector, where we are very deeply involved in providing qualifications and training for employees,” Moussa explains. This training is required for banking employees by the Lebanese central bank as regulator, and ESA has developed a portfolio of programs in collaboration with the central bank spanning topics from anti-money-laundering to risk. The courses have been lucrative, with delivery of about 2,000 teaching hours per year, he estimates, annually reaching approximately 10 percent of the sector workforce. Including repeat participants, he enthuses, “I would say about 2,000 to 2,500 bankers per year come through the school and it has been like that effectively since 2010.”

Development of such programs, according to Moussa, is very time consuming and a new set of courses on retail banking and credit analysis will be offered from January 2015 after 30 months of development. As these new qualifications come into the market, a new group of bank employees will be mandated to acquire them and be certified, he says, adding that ESA’s engagement with the sector has “created doors of partnerships on customized training with many banks” for the school as well as recent opportunities to provide consulting and eventually programs to regulators outside. “Penetration of the market has been growing well but I am never satisfied, and therefore it is now time to take it to the region,” he tells Executive.

Growing minds

While ESA and OSB appear to have their niches, there have been growing similarities on the practical side as both EMBA programs presently apply a weekend schedule for classes and deliver content in English as the default language. ESA switched to this model four years ago. Practical relevancy of all their education offerings and responsiveness to market demand were other key emphases espoused by the executive education directors at both schools.

In their EMBA programs, ESA and OSB also still attract firstly Lebanese participants, residing in country or abroad. According to ESA’s Matar, 60 percent of EMBA enrollees are local, 30 percent are Lebanese living abroad and 10 percent are foreign nationals, mainly from other countries in the region. According to Dimechkie, the OSB EMBA attracts 75 percent Lebanese, of which over a third live outside the country, 23 percent other Arabs and 2 percent non-Arabs. 

As far as OSB’s executive education, 60 to 70 percent of program delivery takes place outside of Lebanon according to Zbib. This is driven in part by the sizeable training budgets of large organizations in the Gulf Cooperation Council but also by political circumstances. “Many clients used to always come here, but now we are going to them,” he says, adding that regional corporations appreciate the “academic flavor” that the presentation of programs by OSB faculty infuses into the trainings.

Nonetheless, Lebanese companies are an important demand source for executive education according to Salim Chahine, the acting dean of OSB. “I think Lebanese organizations are as aware as large regional organizations about the importance and relevancy of training. They are selective [in choosing providers] but I don’t think they have small training budgets,” he tells Executive.

The somewhat uneven distribution of demand for executive education between regional and local companies alludes, however, to an anomaly in Lebanon’s position in human capital development. In an inaugural report seeking to measure human capital endowment in the world’s countries, the World Economic Forum last year ranked Lebanon overall in the lower middle field, 74th of 122 nations and at a position commensurate with general development indicators for the country. But in one of the ranking’s four pillars — education — Lebanon ranked not only 42 places higher, but it also was by far the one country of all 122 with the highest upward digression in the field of education from its overall rank.

Sharing the chocolates

While the directors, homepages and marketing materials not only of AUB, ESA and IMD but of every executive education provider from large to small and from super-pricey to almost affordable trumpeted the superb benefits that their programs provide, and while all business school executives in our conversations emphasized with conviction that their programs are practice driven, hands on, custom tailored and deeply invested in aligning the local culture and specific Middle Eastern virtues and values with the content and delivery of programs, some questions remain.

The high potential in the Lebanese executive education sector can be confirmed from the way in which the OSB and ESA programs have not only attracted participants and found loyal corporate clients. However, other than being presented with participant testimonials and anecdotes, no probing could produce answers to the most interesting questions such as what quantifiable positive impacts companies see that buy a tailored program or dispatch employees to enroll in an EMBA degree.

The answers are probably as elusive as the quest to uncover how the human capital development and the distribution of wealth can move globally from a recently highly documented dichotomy to a more amenable symbiosis or something approaching mutual prosperity development.

But it is refreshing to know that OSB’s Dimechkie recommends his visitors to read Matthew Stewart, an American business author who wrote in one piece for The Atlantic, “The impression I formed of the MBA experience was that it involved taking two years out of your life and going deeply into debt, all for the sake of learning how to keep a straight face while using phrases like ‘out-of-the-box thinking’, ‘win-win situation’, and ‘core competencies.’”

When eating a box of chocolates, be ready for surprises and dare to stay humble.

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Finance

The sideways stumble

by Thomas Schellen
written by Thomas Schellen

The MENA’s benchmark indices kept a steady direction in the 37th week of the year, generally continuing the trend of the previous week. The region’s largest market, Riyadh’s Tadawul, continued to move sideways at an elevated level reached by a six week rally between July 21 and the start of September.

The bourses of Oman, Abu Dhabi, Qatar and Kuwait advanced this week at paces ranging from 0.9 to 0.5 percent. Bahrain Bourse dropped a tad but the shrinkage was less than in the two previous weeks, allowing the arrow to shift from down to flat.

Index performance, week 37

In North Africa, the Tunindex’s slide of three weeks actually accelerated a bit but the MASI rose for the third consecutive week, advancing the Casablanca Exchange to the highest index reading in two years. It is worth recalling, however, that the Moroccan exchange is still over 3,000 index points from peaks reached in early 2011.

In the Lebanese market, Bank Audi stock made another sweep of the action as a total of 19.8 million shares in the bank changed hands on two consecutive trading days, at or near the $6 share price at which the bank had earlier put its share value when announcing a $43 million capital increase. On September 9, when 17 million shares in Audi were traded, the stock closed 2.9 percent lower. The market’s BLOM Index did not benefit from the week’s massively increased turnover, which also included trades in about one million Byblos Bank shares.

The only indices in the MENA to swing from black to red in week 37 were the DFM general index and the EGX 30. As the only directional change in Gulf Cooperation Council securities markets, the weekly drop in the DFM was almost as pronounced as the rise of the previous week had been.

One contributor to the DFM’s volatility of sorts was the primary markets effect, by which an initial public offering draws money and commonly sucks part of it out of the nearest secondary market. Shares in Emaar Properties, whose IPO of subsidiary Emaar Malls Group is progressing with an offering range of DHS 2.5 to DHS 2.9 per share, dropped slightly in the latter part of week 37 as the stock moved beyond the date at which share owners could claim priority allocation of EMG shares in the IPO.

According to the data for the flotation, the addition of EMG to the DFM at the end of September will heighten DFM market cap by somewhere in the neighborhood of 10 percent. A planned cash-out from the IPO is estimated at $1.4 billion that will be handed to shareholders in Emaar Properties, notably including the government of Dubai.

A second stock that was traded with vigor on the DFM in week 37 was the market’s apparently still largest fount of rumors, construction conglomerate Arabtec. Investors sold and bought Arabtec shares in week 37 and on the following Sunday, based on switching tales that negotiations between the two largest shareholders had stalled (selling frenzy) or were near a successful completion (buying sprees).

On September 10, when negotiations were rumored to have collapsed, the stock tanked to its limit down of 10% and closed at 9.1 percent down. It deserves to be noted that Arabtec has added a phone number for its investor relations team at the top of its homepage, with the reassuring message that the company is thus “closer to you than ever.”

The other directional change of a MENA market in week 37, in Egypt, was seen by local analysts as driven by profit taking after the Egyptian market had rallied to six-year highs on September 7–8. Major corporate names, from developer Sodic and Telecom Egypt to manufacturer Ezz Steel and financial group EFG Hermes, came under selling pressure at the end of the week. While analysts said that some investors may have sought liquidity in preparation for an upcoming EGP 1 billion rights issue by SODIC, the weekly drop in the EGX 30 was not likely due to a drainage effect from the cash absorption by the Suez Canal investment certificates. While the bonds continued to sell like hot cakes to the point of achieving $5.5 billion turnover in the six days to September 11, a report in the Al Ahram daily said that 90 percent of buying came from individual savers and people who chose to purchase a certificate out of patriotic sentiment, making it unlikely that liquidity from the Egyptian Exchange was lapping into canal bonds. In the portion of the offering that was slurped up by institutional investors, insurance companies participated with at least $312 million, according to media reports.

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Economics & Policy

Calling out corruption

by Jeremy Arbid
written by Jeremy Arbid

In late July, Lebanon’s Internal Security Forces (ISF) quietly issued a statement calling on citizens to report violations of fraud, nepotism and corruption by security force personnel, as part of its attempt to stop illicit activity by officers from within its own ranks.

The complaint system is part of an overall effort to build community trust in the ISF. Corruption is rampant in Lebanon’s public sector, and the new system is but one of several new initiatives in the country aimed at pointing out the misdeeds of civil servants and changing the way Lebanese perceive the notion of corruption. But despite these programs’ laudable stated goals, whether or not they can be effective — or are themselves properly transparent — remains in deep doubt.

No anonymity allowed

[pullquote]None of the options allow reporters to file their complaint confidentially[/pullquote]

For the ISF’s part, a lack of public trust hinders the force’s ability to serve the interests of its constituents. A poll published in August 2014 by the Lebanese Association for Democratic Elections found that only 36 percent of the nearly 10,000 poll respondents said they had full trust in security forces. Meanwhile, a national opinion poll conducted by the Norwegian Fafo Institute for Applied International Studies in May 2013 interviewing 900 Lebanese also found that only 36 percent had a ‘great deal of confidence’ in the police. Neither survey differentiated between the ISF and municipal police forces. “The result is a culture very cynical of the state’s capacity — a culture of apathy and lack of trust in state institutions,” says Nadim Houry, deputy director of the MENA region for international NGO Human Rights Watch (HRW), adding that from the state’s perspective, outreach by the institutions can work toward addressing this culture.

Leadership at the ISF seems to agree. The force’s recent initiatives have attempted to change perceived images of the ISF, starting with a rehabilitation earlier this year of its most notorious police station, Makhfar Hbeish, located in the Ras Beirut district.

But in its recent statement, the ISF shifted blame from the institution, saying, “Some have promised to recruit people in exchange for money or benefits,” indicating that the problem of corruption is not only an internal issue but extends into Lebanese society, where desperate families press for their son or daughter to be selected for ISF recruitment.

The ISF statement quickly clarified that its recruitment process was based on merit and follows “certain conditions, standards and most of all, qualifications,” requesting victims to come forward and report scammers.

To report such a violation, the newly implemented complaint system provides victims with three reporting options — an online portal, in-person complaint or via the postal service. But none of the options allow reporters to file their complaint confidentially. In order to access the online portal, for example, individuals must register their profile, providing full identification — including family name, date of birth, telephone number and address — hardly reassuring for a victim fearful of possible reprisal.

[pullquote]The likelihood that victims will be willing to come forward seems low, given that they’ll have to submit all their identifying information[/pullquote]

A 2013 report by HRW recommended to Lebanon’s Ministry of Interior the establishment of “a centralized and accessible system for receiving and processing complaints [against the] Internal Security Forces.” It’s too early to comment on the effectiveness of the ISF’s new complaint system, says Houry, because “it’s not clear how the complaint mechanism will work in practice. We haven’t yet seen the sort of public reporting — statistics coming out to look at trends — which would be an important metric.”

The likelihood that victims will be willing to come forward seems low, given that they’ll have to submit all their identifying information. When asked how the ISF ensures the privacy of a victim, who may fear retribution from the offending police officer, Lieutenant Colonel Joseph Moussallem, head of public relations for the ISF insisted, “If he is afraid he can give [the complaint] through private associations like KAFA [the NGO has a social and legal counseling center] or other human rights associations.”

The ISF’s new system is a step in the right direction, says Houry, but transparency in reporting and accountability of offenders cannot be overemphasized. “At least on the leadership level they’re talking a better game. This is a positive step but it falls short from what is truly needed, which is true accountability — that there should be consequences for bad actions and clear communication about it — issuing once a month the number of complaints and how the complaints were handled.”

“There’s also a broader issue of oversight. Internal oversight mechanisms are not enough. You need more effective oversight by the judiciary — an external body ensuring respect for Lebanese laws, including the penal code,” Houry adds.

Challenging public perception

The issue goes even deeper according to some. “Corruption is embedded in the Lebanese culture,” says Amer Khayyat, secretary general of the Arab Anti-Corruption Organization based in Beirut. “The only thing political leaders care about is preserving a weak central government. When the people find their representative in this mood, they couldn’t care less,” he adds. 

[pullquote]”Internal oversight mechanisms are not enough. You need more effective oversight by the judiciary — an external body ensuring respect for Lebanese laws, including the penal code”[/pullquote]

Bribery and nepotism are among Lebanon’s most serious corruption challenges, writes Transparency International in an overview of corruption in Lebanon published in late 2012. The international organization gave Lebanon a score of 28/100 in its 2013 Corruption Perceptions Index, indicating a highly corrupt public sector. Its 2014 report, expected later this year, will rank Lebanon probably in a similar standing, but a slew of newly introduced initiatives aim to change this perception by giving citizens a mechanism for reporting and filing complaints.

One way corruption manifests in Lebanon is through the well trodden system of informal personal connections used both as a job seeking function as well as a method to expedite the processing of documents and administerial procedures. The informal currency of wasta — roughly translated, ‘influence’ — forms a system of connections and affiliations to public officials or to influential politicians. “At least 20 percent of students say that they resort to political connections and 73 percent think that political connections are important to find jobs,” concludes a 2013 report polling 300 students conducted by the Lebanese Center for Policy Studies. An Enterprise Survey conducted by the World Bank in 2009 found that of the 382 manufacturing firms polled, 66.5 percent cited corruption as a major constraint to business operations while 20.6 percent reported at least one incidence of bribe payment request to facilitate or accelerate government administrative procedures, such as obtaining construction permits or electricity and water connections.

Changing this culture is the aim of initiatives such as the Lebanese Advocacy and Legal Advice Center (LALAC), launched by the Lebanese Transparency Association (LTA), and Sakker El Dekkene, a newcomer to the campaign against corruption in the country. “There’s a need [for] holding the administration accountable for its lack of transparency, good governance, for all the corruption and bribery,” explains Abdo Medlej, president of Sakker El Dekkene.

Close the shop

[pullquote]“The best way is to engage people in this fight. Until now people have not participated in the fight against corruption”[/pullquote]

Sakker El Dekkene — the name roughly translates as ‘close the shop’ — solicits reports of bribery, compiling each case to paint a larger picture of the negative impact corruption has on Lebanese society. Their aim is to empower individuals in a collective effort targeting the way citizens, government employees, the business community and politicians perceive the notion of corruption.

There’s a lack of public trust in government administrations, Medlej explains, that has disincentivized citizens from pointing out the misdeeds of civil servants. It’s a reason he says why the culture surrounding corruption has reached a point of complacency within Lebanese society. “The best way is to engage people in this fight. Until now people have not participated in the fight against corruption,” Medlej says.

Sakker El Dekkene has achieved eye popping numbers since the campaign’s inception in May 2014. As of mid-August, the initiative had reported over LL 902,600,000 ($598,940) in paid bribes to public administrations; the Ministry of Interior led in the number of reported cases with 307 valued at LL 83,350,500 ($55,310), while the Ministry of Finance led in total value of reported bribes at LL 313,405,650 ($207,970).

Medlej and the NGO’s operations manager, Jihad Nammour, explain that when a victim of a bribe reports a case through the initiative’s multiple reporting mechanisms — the website, smartphone applications, a call center hotline — the individual’s voice is heard. “When you report a bribe it’s like you’re voting. You’re saying this administration is bad,” Medlej says.

The method is simple: collect data while creating awareness through education, use this data to put pressure on administrations, then work with the administration to modify the system and procedures. “We’ve already established contact, of course we cannot give details, but something has already started with municipalities, with the ministries, and with other public administrations. You can always find good people,” Medlej indicates.

This is all part of their plan to change the way Lebanese think about the physical act of bribery — how it has sunk into the common routines of citizens’ daily lives — and to consider the effects of corruption both on a micro- and macroeconomic scale. “What we’re working on is changing the system and the whole culture. [Replacing] the one that thinks that ‘corruption is okay, that it gets things done. That it’s not a problem,’ with ‘no it’s not okay, it get’s things done for me now, but it has very bad effects for others,’” Medlej explains.

[pullquote]“What we’re working on is changing the system and the whole culture”[/pullquote]

In doing so, both Medlej and Nammour believe their initiative gives incentive to all Lebanese — from citizens to civil servants, businessmen to politicians — to tackle the issue of corruption at the societal level. The business community, they argue, has a vested interest in the initiative because corruption distorts the market, inflating prices and raising overheads — “Everyone has incentives in tackling the issue of corruption,” Medlej points out.

While the initiative has received seed funding from various donors, including the British Embassy, Medlej and Nammour insisted that the NGO’s finances were none of the public’s business. “There are a lot of people in Lebanon that believe that if there is a foreign donor behind initiatives it’s not a local one and it’s something that should be rejected,” Nammour explains.

“It’s not relevant now,” Medlej says, adding, “It’s not something that we’re hiding, we’ll have a very clear communication when we have the board [of directors in place].”

While the initiative does have foreign funding, there are also many Lebanese donors, Medlej and Nammour insist, who have been the real driving force behind the founding of the NGO and its progress to date.

“The basic infrastructure that was done was funded, but all the other remaining things are done by volunteers and people who believe in the [initiative],” Medlej says.

The spirit that the NGO has encouraged is underlined, Medlej and Nammour say, by the sheer effort of volunteers in supporting the organization. Much of the office equipment is donated. Web development and IT support is free. Volunteers staff the main office and the hotline center. The initiative, Medlej insists, wouldn’t have launched and wouldn’t be operating today if not for the support “from Lebanese donations, from Lebanese companies or individuals.”

“We want to keep this whole spirit,” Nammour explains while discussing the importance of volunteers and collaboration with the business community. “They’re also responsible, they have a social responsibility and they can [serve] this by working with us, giving us three hours per week. That’s what the companies are doing, so this is the point that is really important for us.”

Working the other way

[pullquote]Similar to Sakker El Dekkene, the LALAC program will release information about its funding only when the organization is fully comfortable to do so[/pullquote]

Where Sakker El Dekkene builds individual reports into a symbiotic collectivity, efforts at the LTA aim to build momentum for broader support on a case-by-case basis, working toward passing laws that will allow access to government information and protection of individuals who expose administration misdeeds.

LALAC is a mechanism for citizens to report corrupt actions, reporting violations committed by government or private company employees with emphasis on empowering victims and witnesses to take action against corruption by providing free legal advice and guidance.

Similar to Sakker El Dekkene, the LALAC program will release information about its funding only when the organization is fully comfortable to do so. It is concerning that an NGO advocating on behalf of transparency, for a law to access information from the public sector, is not willing to release its financial information until they’re ready to do so. When asked to comment on this point, Rachel Walsh, LALAC’s project manager, would only tell Executive that the funding period is for two years, with donations from the European Union, the Lebanon Renaissance Foundation and the Center for International Private Enterprise — itself funding LALAC through a grant from the Middle East Partnership Initiative, a US State Department program. “We will release information about the funding amount as part of our communication approach at a later time in an official statement,” adds Walsh.

But the efficacy of the LALAC program is in question. Data from early July indicates that only 263 calls were received through its hotline since the program’s inception in late 2013, and just 120 cases have lawyers willing to represent the victim or witness. This follows intense SMS campaigns encouraging victims of petty corruption to report violators. “We were hoping to receive more than 263 phone calls at first, but we were really disappointed that people were not encouraged enough to report,” says LALAC’s legal advisor Carole Sabty.

This is generally predicated on a fear that a citizen reporting a case is not protected and that reporting will have a negative impact. Many hotline callers do not wish to pursue violators, even when reassured by staff of confidentiality. “Everyone says, ‘We wish we could do something, but if we act or present a claim, our case will not be solved.’ People are afraid,” Sabty says.

“It’s a mix of apathy and fear. Because [marginalized social groups] want to minimize their interaction with the state, they can easily be hurt and not have recourse,” explains HRW’s Houry, adding that “it’s not just fear but apathy and a sense of ‘this is how the system works.’ Their impression is that the system doesn’t work or it’s corrupt so they might as well circumvent the system [through bribery].”

A cleaner future

The fear of retribution in reporting acts of illicit activity by civil servants is one of the driving issues allowing corruption to run rampant and limiting transparency in Lebanon’s public sector.

[pullquote]“You have to have political will to fight corruption. But there is no political will [in Lebanon]”[/pullquote]

Complementing the LALAC program, the LTA is working to assuage this fear through public awareness campaigns and by advocating for two legal measures to tackle corruption and protect those who report violators. The first is a draft law aimed at accessing government information. Many countries refer to this law as the Freedom of Information Act (FOIA) allowing access by the public, including civil society and media, to access data held by the government. As the LTA’s executive director Ronald Barakat puts it, “This law is needed to inquire for, and receive access to, specific information” — a necessary tool to promote openness and transparency binding government institutions into publishing data. More than 90 countries around the world have some form of this law.

A second legal measure pursued by the LTA is the protection of whistleblowers, those individuals who expose misconduct, alleged dishonesty or illegal activity occurring in an organization, government or private. In 2011, the European Court of Human Rights ruled that whistleblowing is protected as freedom of expression, but only a handful of countries have adopted some form of protection for whistleblowers with even fewer providing comprehensive measures for protection.

A recent press release announced the launching of a social media campaign by the LTA calling for the passage of a law to protect whistleblowers. The law is currently languishing in the parliament, under review by a subcommittee established under the Administration and Justice Committee in 2013 by MP Ghassan Moukheiber.

But at the end of the day, individuals at critical junctures — parliamentarians, ministers, judges and lawyers — have no incentive to promote anti-corruption measures because many currently consider themselves above the law. “You have to have political will to fight corruption. But there is no political will [in Lebanon],” explains Khayyat.

Until legal frameworks are passed to confront institutional corruption by high-level officials and politicians, Lebanon can only look to the ISF to police itself and initiatives like LALAC and Sakker El Dekkene to collect information and raise awareness. One hopes they will be enough.

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Leaders

Laying the foundation

by Executive Editors
written by Executive Editors

It is possible to have too much of a good thing. Take Lebanon’s banking sector: with assets of nearly 400 percent of GDP, it is both the backbone of the economy and the preferred financier of state debt. But unfortunately, it also may be holding the rest of the country’s financial sector back by smothering demand for equity with cheap debt offerings, a general consequence of an outsized banking sector.

Whether or not this is true in Lebanon’s case — anecdotal evidence suggests it is at least in part — the country would doubtless gain from a rebalancing of the financial sector. Larger capital markets would go hand in hand with better financing options for companies which today rely on debt, and help diversify the country’s economy away from its almost singular reliance on banking.

This would be good for everyone involved, even banks. As our special report (see the full report here) details, bankers and financial advisors are pursuing several strategies to reel in capital — one of which is to offer well heeled clients specialized investment and wealth management options. Having access to a slew of financial products cooked up here in Lebanon would put local bankers at an advantage over outside competitors, at least initially. And more generally, deeper markets and a more sophisticated financial sector will lift all boats, bankers included.

If Lebanon is to promote its financial sector, the first and most obvious obstacle is its lack of trustworthy institutions. In this, Lebanese authorities have made a good start: the Capital Markets Authority was established in 2011, paving the way for better securities trading and thus hopefully more wealth creation by publicly listed companies and financial advisories.

But key parts of the CMA remain unimplemented due to the government’s incompetence. For instance, the sanctions committee — which has statutory authority to impose both administrative and monetary punishments for those who misbehave — is not yet functional because members have not been nominated and approved by the cabinet. Without a functioning sanctions committee, the CMA is toothless, relying instead on other regulators to enforce compliance.

A similar situation exists with the separate but equally essential capital markets court, set up by the same law as the CMA to resolve disputes involving financial instruments, hear cases of insider trading and other crimes, and consider appeals of CMA decisions. These holes in Lebanon’s regulatory structure must be swiftly and properly filled.

But another concern deals with the narrowness of the CMA’s remit. Some bankers have complained to Executive that current financial regulations put them at a disadvantage. So called ‘briefcase bankers’ fly into Beirut, close deals and fly out — sometimes with a literal briefcase filled with cash — all without needing to comply with the same rigorous standards that apply to Beirut based financial advisors. This must stop. The CMA’s authority should be expanded to put an end to the activities of these vultures once and for all. Otherwise, not only will Beirut be at a disadvantage when it comes to attracting financial firms, but the Lebanese who trust these outsiders with their cash will be exposed to unnecessary risk.

Such regulatory moves are not, alas, a panacea for Beirut’s financial sector — for true vibrance to take hold, many more steps will be necessary. They are, however, the necessary preconditions for any scale of growth. If Lebanon wants to make good on its stated ambition to diversify the financial sector as a conduit for economic growth, it must power up the CMA. Now.

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Economics & Policy

A strategy on hold

by Matt Nash
written by Matt Nash

The uncertainty surrounding Lebanon’s first offshore licensing round is complicating the Lebanese Petroleum Administration’s (LPA) efforts to answer questions as to what potential subsea hydrocarbons the country has. While all of Lebanon’s offshore has been spanned by 2-dimensional seismic surveying and 70 percent has been covered by 3-dimensional seismic, the LPA wants to collect even more data to better identify potential resources. 

The strategy, according to Wissam Chbat — head of geology and geophysics for the LPA — is twofold. More data would give international oil companies a better idea of where to drill once exploration and production sharing contracts are awarded — theoretically shortening the time between awarding contracts and exploration drilling and reducing exploration and investment risk — and additional information could strengthen the government’s negotiating position so the state gets a higher take when negotiating contracts. 

Electromagnetic surveying

One of the companies the LPA was in talks with to conduct extra surveying, however, has not been able to drum up interest among international oil companies to finance the project. The LPA had tapped EMGS, headquartered in Norway, to conduct electromagnetic surveying of Lebanon’s near coastal waters as well as other areas further out to sea. Electromagnetic surveying is superior to seismic in areas where a thick layer of salt, which covers much of Lebanon’s offshore, is either thin or nonexistent, Chbat says.

At an oil and gas conference in late May, Chbat announced that a contract with EMGS was imminent. Since then, however, the company has not been able to secure project funding from international oil companies prequalified to bid in Lebanon’s offshore licensing round. The close of the licensing round has most recently been delayed “from August 14, 2014, to a maximum period of six months from the date of the adoption of the two decrees related to block delineation, and the tender protocol and the model exploration and production agreement [EPA],” according to the LPA’s website. 

Jon Nicholls, EMGS’ vice president of strategic accounts, tells Executive that electromagnetic surveying is useful in tandem with seismic results in distinguishing between a potential oil and/or gas deposit and seawater trapped in what looks like it could be a potential oil and/or gas deposit. Drilling an exploration well costs tens of millions of dollars, so if a company has seismic results suggesting five potential locations of oil and/or gas deposits, it saves time and money to know three of them are filled with water. Electromagnetic surveying in Lebanon’s waters, however, is not around the corner.

[pullquote]“Oil companies are spectacularly good about hiding their strategies”[/pullquote]

“There’s no interest at the moment from the operators to pay for it,” Nicholls explains. According to Chbat, the government would pay nothing for the survey as funding it would be the responsibility of EMGS and the oil companies. In industry terms, this is called a multi-client survey, meaning many companies pay to conduct the survey, securing access to its results. Nicholls confirms the arrangement with Lebanon is on a multi-client basis, but notes multi-client funding arrangements vary and the state may or may not contribute. He refuses to disclose whether or not the Lebanese government would chip in. 

“We’re in a kind of holding position at the moment,” Nicholls says. Asked if companies are losing interest in Lebanon, Nicholls refuses to speculate. “Oil companies are spectacularly good about hiding their strategies,” he says. “There has not been a negative response, but neither has there been a queue of people standing outside our door.” 

The LPA’s Chbat says another company — which he did not name — is facing similar problems. This second company would do core sampling of the seabed to again give better data about the potential location of hydrocarbon resources. Among other things, core sampling can help give an indication of seabed temperatures. “We [currently] have no information on temperatures, and that’s important for oil and gas,” Chbat explains. “All these temperatures will help us, on paper, draw a gradient of temperature and we can estimate the temperature in the reservoir.”

Again, however, this project is on hold for a lack of interest in funding it among pre-qualified oil and gas companies. “The company conducting the coring, by its nature, they would like to secure the funds. Again, they say they have the same problem as EMGS, no interest now. They won’t invest themselves, won’t put their own money down,” Chbat says.

Repeated delays

Chbat tells Executive that the LPA signed a contract with ION Geophysical, a US based surveying company, in 2013. The company — which specializes in ocean bottom seismic surveying — would be able to look even deeper into the seabed than the current data offers.

ION’s surveying “can be as deep as 25–30 kilometers under the seabed,” Chbat tells Executive. Existing seismic surveys do not give clear data below 10 kilometers, he explains. This extra information can help identify the basement of possible oil and/or gas deposits and give an idea of the thickness of sediments, “how thick are layers that could contain oil or gas,” Chbat says. 

MAP derisking1

The company was supposed to send a surveying ship to Lebanese waters in late 2013, Chbat says, but cancelled because of the possibility, at that time, of a US strike on Syria — which never happened. “The insurance wouldn’t cover it. They stopped the ship from coming,” Chbat says. The next available ship, he says, will not be able to reach Lebanese waters “before the end of this year or early next year.” Chbat notes, however, that the LPA will likely renegotiate the scope of ION’s work when the company can send a ship. “We’ve conducted additional seismic since we signed the contract” and therefore do not want the same surveying as last year, he explains. ION did not respond to repeated calls and emails requesting comment. 

Asked what he thinks this means for the future of Lebanon’s nascent oil and gas sector, Chbat is upbeat. “It’s not a time-bound thing,” he says of additional data collection. While the LPA wanted additional data prior to the close of the first licensing round to be in a stronger negotiating position when signing contracts, Chbat argues that all of Lebanon’s offshore blocks will likely not be offered at once, meaning that additional data could be useful in future licensing rounds if not acquired before the first one closes. Nor does he think repeated delays will push companies away from Lebanon for good.

“Interest from companies might change. Some new players may come, some old players may leave, [but] we will always find someone to develop our resources,” he says, noting, however, “the delay in the bid round will affect competitiveness, resulting in less favorable commercial conditions for the state and deminishing Lebanon’s regional presence and position in the regional gas market.” 

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Money magnet
FinanceWealth management

Money magnets

by Livia Murray
written by Livia Murray

This article is part of an Executive special report on wealth management and private banking. Read more stories published here, or pick up September’s issue at newsstands in Lebanon.

 

“Get on a plane from Middle Eastern Airlines (MEA) from Geneva to Beirut, and see how many bankers you have on that plane going and coming,” says Philippe Sednaoui, chief executive officer of Audi Private Bank, which is active in several countries spanning the Middle East and Europe.

Despite their alleged occupational predilection for sharp suits and bland ties, one will be hard pressed to assess on sight how many private bankers sit on flight MEA 213 on any given day of the week. But Sednaoui, whose work obliges him to regularly make the trek between Audi Private Bank’s two main business hubs in Beirut and Geneva, has a point. The Swiss financial capital is one of MEA’s best and longest served destinations in Europe. Business must be crisp, and Sednaoui might not be talking just about the flight when he says, “It’s nonstop.”

What is good for our national airline could still be a worrying indicator for those Lebanese financial institutions that vie for the profitable business of managing the wealth of the country’s citizens. Despite the obviously well lined pockets of a certain strata of the Lebanese population, much of this wealth is managed abroad. No Lebanese bank that Executive spoke with reported assets under management (AuM) in Lebanon of more than several billion dollars — in the low single digits.

“The [wealth management] market is not in the hands of the Lebanese,” says Sednaoui. “Lebanese money is at Pictet, Lombard, Credit Suisse, HSBC. It’s everywhere. I used to have [a wealth management role at] Barclays in Switzerland, and I saw it first hand. You would be surprised.”

Sednaoui says that AuM at Audi Private Bank, the largest Lebanese wealth management operation according to Bankdata’s Dany Baz, stood at $9.8 billion at the end of June 2014. However, the bigger part of that amount, close to $6 billion, is booked in the Geneva office, with Lebanon coming in second at just over $3 billion in AuM.

These are merely crumbs when compared to Lebanese wealth, which by all accounts is actually an unknown quantity. That is to say that wealth managers are not able to say either how many Lebanese billionaires there are or how much of the private national wealth is concentrated in the hands of the top one, two or three percent.

Popular lists of the world’s super-rich are entertaining to read but provide only a very poor approximation if one wants to assess the numbers of our billionaires and multi-millionaires. The six wealthiest people in Lebanon — or at least the ones that made it on the Forbes 2014 list of the world’s richest people — had a combined net worth of $13.5 billion. But as Executive has observed in encounters with some of our industry tycoons and enterprise builders, the Forbes list and comparable reports on high net worth individuals (HNWIs) have many holes when it comes to Lebanese billionaires.

All this means simply that there is a lot of Lebanese wealth that is not quantified in any official statistics. But it is clear that a great amount of this wealth will not be found in either the vaults or the fee earning asset management books of local banks. Sednaoui estimates that in addition to just over $140 billion in bank deposits, there is another roughly $120 billion of Lebanese offshore private assets inside the coffers of foreign banks, excluding the diaspora’s.

That is a lot of stored wealth for a small economy with a GDP of some $44 billion. It is difficult to pinpoint exactly how much of a missed opportunity this represents for wealth management businesses, but there is clearly untapped potential for Beirut based wealth managers to increase their AuM. To be fair to the handful of well known billionaires — Forbes lists only members of two families, the Hariris and the Mikatis — someone with this high net worth would have their own private offices and team managing their wealth, so it is not so much these ultra high net worth individuals’ money that is a missed opportunity for the banks. Rather, it is those of more ‘modest’ fortunes that the banks are seeking to target — which according to FFA Private Bank’s Chairman and CEO Jean Riachi start as low as $1 million.

Barriers to return

The problem, for once, may not be the Lebanese state and its greed and notorious dysfunctionality. While in many other countries wealthy individuals keep their assets in foreign banks for tax purposes, the reason for Lebanon’s exodus of wealth is historical. The story told by most bankers is that many wealthy Lebanese individuals, fleeing the war in the mid-70s, leaving behind property and land, took the tangible assets they could and placed their money in foreign banks. And since then, wealth managers in Lebanon have never been able to reclaim that money to their businesses.

Other barriers to wealth management in Lebanon are not linked the country’s troubled past. Instead, they have been produced by the ease with which local banks could attract wealthy clients through the most pedestrian of offerings: bank accounts. High interest rates on deposits in the country triggered the reflex for wealthy individuals to keep their money in local accounts. For comparison, “interest in Switzerland is a quarter percent. In Lebanon it is 4 percent,” says Sednaoui.

Banks could afford paying these deposit rates because of their vibrant business in Lebanese sovereign instruments where T-bills with tenure of three or five years still offer upwards of 6.5 percent interest. And the earnings potential was even starker two decades ago, according to Georges Abboud, head of the private banking department at Blominvest. Reminiscing how T-bills came with double-digit interest rates, he muses, “By doing nothing, you were making [a] decent return. No need to have an advisor … Since some people were very comfortable with the Lebanese risk, and by doing nothing they were making very decent returns.”

However, wealth managers across the board note that HNWIs have been steadily developing a greater appetite for a more diversified roster of assets, particularly in international capital markets.

“When people realized that interest rates have come down… they realized that they have to diversify from cash interest rate returns to other asset classes,” says Abboud. Roula Habis, managing partner at Optimum Invest, explains that HNWIs are beginning to understand riskier long-term investments, rather than keeping their money in deposits or money markets (see “Feeling our presence“).

Additionally, ongoing international regulations in the wake of the financial crisis have also put more pressure on wealth management businesses across the globe, with Lebanon being no exception. Habis explains that while she welcomes the regulations, internally it places more of a burden as they have to increase their payroll and hire a compliance officer, legal officer and anti-money-laundering compliance officer, with the increased costs placing a strain on revenue, especially for the smaller firms.

For larger regional banks, however, this presents itself as an opportunity. Sednaoui explains that because of these regulations, “many [international] banks are disengaging from non-core markets,” such as the US, the EU and Japan, and “do not want to be dragged into emerging markets and the underdeveloped world, because of terrorism, because of sanctions, because of reputational risk,” he says. “So we think there is room … Many big banks are retracting and it’s opening up an opportunity for regional players.”

Reeling them in

Besides the appetite for wealth management among HNWIs in Lebanon, which will most likely increase organically over time, wealth managers have taken several moves to consolidate their businesses — both in attracting and retaining customers as well as in cutting their losses and boosting their revenues.

On one hand, this involves cultivating specialized knowledge and providing clients with opportunities they cannot seek elsewhere. “The added value is the non-listed part. The added value is accessing these projects that maybe banks x, y and z or this person wouldn’t know about,” explains Optimum’s Habis. She says the tailoring of wealth management, which can reach as far as creating a fund for real estate in an attractive African market, can provide HNWIs the opportunity for portfolio diversification that will keep them loyal. “The idea is going out of the box and finding ideas for these wealthy people that will go out of the classic fixed income and bonds that the country used to deal with for the past few years and every other financial institution,” she elaborates.

 And then there is the service. Habis explains that trust and attentiveness are very important factors that play into their relationship with the client. “Remember that for most Lebanese people, it’s mainly knowing people, trusting the people,” she says. Coddling HNWIs is certainly an international practice, but this might be even more the case with Lebanese wealthy individuals who are still getting used to the wealth management business. “It’s all about the service,” says Riachi. “This is why you retain your clients. It’s the same instruments everywhere, the same securities. So what matters is the quality of the people, the integrity, their professionalism, the quality of the back office … This is what makes a difference.”

Not to be forgotten, of course, is the good old fashioned strategy of consolidating the business to maximize profits. Audi Private Bank went through a restructuring in 2012, headed by Sednaoui who was also appointed that year, to consolidate their private banking business and unite a group of entities that existed under the Audi Group which previously acted more independently.

“Each entity had its own life, own marketing, business development, research, with some level of cooperation. But it wasn’t homogenous. So today, a banker wherever he’s based can offer his client the full array of products subject to local jurisdiction,” says Sednaoui. They also closed down a few branches they saw as superfluous, including one as far as Gibraltar. According to Sednaoui, these efforts have paid off in the relatively limited time since the restructuring, as Audi Private Bank has grown on average 15–17 percent in terms of annual net profits since 2012.

Despite the many billions of dollars that local wealth managers and their competitors from foreign private banks say are held by Lebanese HNWIs, the wealth management business in Lebanon today continues to face several obstacles. Some are historically pegged to the nature of the country with the outflow of Lebanese wealth; others are the same ones faced by wealth management globally such as keeping business profitable in light of tightened restrictions. Still a small sector catering to a select few, wealth managers in Lebanon will have to prove the worth of their business to a small and skeptical HNWI community.

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Business

Strength in numbers

by Nabila Rahhal
written by Nabila Rahhal

By the end of 2016, Lebanon will have eight new hospitality venue clusters. These are large spaces with many outlets rented out to different tenants by the projects’ developers, who own and manage the entire space.

This seemingly sudden surge in such projects raises some questions concerning the reasons behind their boom, how they work, the merits and disadvantages of being tenants in hospitality clusters and — since four of the projects under development are in Dbayeh, north of Beirut — how much can one area hold?

Restaurant Clusters: The past, the present and the future 

Beirut’s first model of such a cluster was the string of bars on Uruguay Street, all in a single building project developed by Venture Hospitality, a hospitality concepts development and consulting company, and rented out to various figures in the nightlife business back in 2011.

Recalling this experience, Marwan Ayoub, one of the two partners at Venture Hospitality, says, “The idea for the Uruguay Street development was born out of our 10 year experience in the field, especially when we saw the problems that developed when many bars were found in residential areas and without the right infrastructure or master plan, such as in Gemmayze, Monot or Hamra. Eventually, if it is not well organized, everyone on the street is suffering.”

Venture Hospitality did not end up developing the whole street though, as the series of pubs which opened within the last year were in other buildings that had separate owners who were not part of the company’s initial project with Solidere, which is in charge of the overall development of Beirut’s downtown. This factor somewhat decreased the control they had over the street’s growth.

Other hospitality clusters

Yet Ayoub sees the experience they got from Uruguay Street — bringing together different profiles from the hospitality sector, each with their PR, all in one place and with the right infrastructure — as very successful on both the market and financial levels.

Therefore, as business developers and investors, Ayoub and his business partner Rabih Saba decided to duplicate this experience but have the whole operation under their management and ownership in order to maintain full influence over their projects, thereby preserving and maintaining value. The duo is developing hospitality clusters in Dbayeh, Hazmieh and Ashrafieh.

Other developers were also eyeing the potential in Venture Hospitality’s experience on Uruguay Street. 

Soon after, toward the end of 2012, two restaurant clusters, Blueberry Square and Junction 5, opened adjacent to each other on the Dbayeh highway facing ABC and Le Mall. Though the two clusters had strong restaurants in their mix, including Couqley, Goûtons Voir and Shakespeare and Co., their design and layout — which resembled a shopping mall and had mainly indoor seating — discouraged consumers from visiting them frequently.

Sud Square, which opened in 2013 in Mar Mikhael, was a more successful example of a mini cluster of restaurants as it focused on outdoor seating and a piazza feel to attract a steady stream of diners. This emphasis on greenery and a pleasant landscape is something that the new developments will be bringing in. “We Lebanese lack heavily in green open spaces which is why we integrated this aspect into Mar Mikhael’s Enab and will be doing so on a larger scale in our Dbayeh project,” says Ramzi Moghabghab, operations manager at Enab and Dunya restaurants.

Aside from Venture Hospitality’s projects, which are set to open by mid-2015 for Dbayeh and Hazmieh and by early 2016 for Ashrafieh, other projects are set to open in the coming years. Enab’s Zahi Rizkallah is planning a 3,000 square meter restaurant cluster centered around a large Enab outlet in Dbayeh in early 2015. Clé’s Ussama Makarem is planning a beach resort cluster with a pool, bungalows and a street for pubs with a seaside view in Dbayeh. The Courtyard, a pub cluster which is situated next to Hamra Street’s Alleyway, looks almost complete. And Alain Hadife, best known for his wedding planning company, Caractère, is planning a hospitality project in Naccache.

How it works

[pullquote]“In nightlife you need multiple bars in the same area to create a destination which people enjoy, and so we all benefit from each other”[/pullquote]

Developers of hospitality clusters take on the design and construction of their space, incorporating such elements as accommodation for parking, electromechanical infrastructure and security, before studying the local market and deciding on the appropriate tenant mix for it, much in the same way a retail mall is developed. As such, in Hazmieh, a residential area, Ayoub decided to focus on diners and family restaurants with few pubs, while in Dbayeh, which he calls a more mature market, the focus is on pubs and nightlife venues not typical to the area.

Aside from the monthly rental fee, some developers charge their tenants a percentage on sales with a monthly minimum guarantee. Others, such as Moghabghab, prefer to take a monthly rental fee instead of a percentage on sales which he says might come with other conditions and dilute their profit. According to Ayoub, Venture Hospitality typically takes 10 to 14 percent on sales, depending on the concept, and an annual fee of up to $800 per square meter.

“In this way the tenant is benefiting from economy of scale [a proportionate saving in cost gained by an increased level of production] to pay partial rent for this prime land and location,” explains Ayoub. 

Finding the right Tenants

Tenants are usually approached to be part of a project either because of their proven track record in the hospitality market through the brands they created or because they have a solid background in the field and a strong new concept the developers believe will bring added value to the project.

Some, like the developers of the Enab hospitality cluster in Dbayeh, make sure that the other venues in the project compliment theirs and don’t compete with it by offering the same cuisine or concept. Enab’s cluster already has Sud as a confirmed tenant and is considering adding a sushi restaurant to the project.

From the tenants’ point of view, there are many advantages to being part of a hospitality cluster. “In nightlife you need multiple bars in the same area to create a destination which people enjoy, and so we all benefit from each other,” says Toni Rizk, an owner of several pubs on Uruguay Street who also plans to rent a venue in Venture Hospitality’s Dbayeh project. He added that this economics of proximity is an essential factor in nightlife, especially in bars and pubs. 

To Makarem, who is looking to open Clé in Venture Hospitality’s Dbayeh project and is also a recent tenant on Uruguay Street, being part of a cluster ensures that his mind is relatively at peace. “We in the [Lebanese] food and beverage sector look for specifications in our venues which are different than other sectors and from other countries such as proper infrastructure in terms of water and electricity. This is an advantage of being a tenant in a cluster because you don’t have to think of such issues; you are just renting a space in this cluster and the developers provide you with all services, including security and valet,” says Makarem. 

Although Rizk believes that the expenses in such a project can be high compared to independent venues, both he and Makarem agree that being in a place managed by one entity allows for a more organized experience than being on a street that grows organically. “Independent tenants tend to think individualistically … which leads to problems for all of us and might even push consumers away. In a project, there is someone making sure there won’t be chaos,” says Rizk. 

Other advantages of being in a freshly developed project include benefitting from new and modern infrastructure as opposed to being on an old street where tenants would encounter problems, explains Rizk. 

Independent bars

Though it might seem that the hospitality clusters would be eating into the market share of standalone venues and other independent bar streets, Makarem believes that it would depend on the strength of the place to offer something unique which would draw the consumer to them instead of the cluster, giving the example of Momo’s in the Souks which has retained its client base. “The good outlets which are run very well will always have their own identity being single. A single identity, which makes a place a destination by itself, has to be very strong, but clusters will pose a threat to the little bars with no defined identity,” says Makarem.

More projects in Dbayeh

[pullquote]In times of political instability, people prefer to stick to areas in their proximity, a situation in which these projects are taking full advantage[/pullquote]

In such hospitality clusters, developers need to acquire large pieces of land that can accommodate a series of venues in a relaxed setting, explaining why most of these clusters are planned for areas outside of heavily congested Beirut. “It is easier to find large undeveloped property out of Beirut as it is becoming nearly impossible to find land in Beirut and if you do, it’s usually very expensive,” says Makarem. 

This, however, raises the question of competition among the various clusters set to launch in Dbayeh, especially throwing in the mix Beit Misk’s Souk Misk, which is not far from Dbayeh and the Waterfront City, planning its own series of hospitality outlets. 

The developers Executive spoke to do not seem worried about this and believe Dbayeh can accommodate them all, especially since it is seen as the center of the Metn–Keserwan area. “The country can handle this competition and volume of clusters in Dbayeh, especially if external turmoil stabilizes,” says Makarem. 

While the outlets in ABC and Le Mall are ideal for daytime meetings for those in the region, residents of Dbayeh and its surroundings seem tired of heading to Beirut for a night out. Enab’s Moghabghab says they will consider it a success if they get a mere 10 percent of ABC’s clientele to frequent their project. Both Makarem and Moghabghab say the strong demand on their Beirut outlets — Clé and Enab respectively — from the Metn area residents was what prompted them to bring their venues to Dbayeh.

Ayoub explains this by saying that in times of political instability, people prefer to stick to areas in their proximity, a situation in which these projects are taking full advantage. Should the country stabilize, Ayoub sees it working to their advantage as tourists would tend to stick to Beirut’s attractions while locals would branch out.

Developers Executive spoke to admit that Dbayeh is indeed a mature market in terms of its café outlets but believe it needs both a wider choice and more refined offerings for both day and night. Therefore each of the clusters in the area is differentiating itself through its unique tenant mix with Makarem focusing on the seasonal beach atmosphere, Ayoub on the bars and nightlife, and Moghabghab highlighting cafés in a relaxed setting as opposed to the crowded street cafés currently in Dbayeh.

Only time will tell if the bets these projects placed will pay off, but Ayoub, for one, concludes: “Develop it right and the people will come, but develop it wrong, and even if it is the middle of Beirut, they will not come.”

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