Executive Magazine

Business briefing: 11 June 2013

by Executive Staff June 11, 2013

written by Executive Staff

Economics and Policy

Turkish stocks plunged and the lira weakened on Monday as markets were rattled after Prime Minister Tayyip Erdogan railed against speculators and warned street protesters that his patience had limits.

More from Reuters

Israel and Colombia have signed a free trade agreement during a visit by President Juan Manuel Santos, Israel's closest South American ally, the Israeli president's office said.

More from AFP

Commercial bankers in the UAE have asked the central bank to remove a ban on transfers between banks of personal loans to local citizens, a body representing the lending industry said on Monday.

More from Reuters

The recent military gains by the Syrian regime will not have a significant impact on the dwindling Syrian pound which is still trading at over 150 pounds against the U.S. dollar in the black market.

More from The Daily Star

Companies and Business

Investment Corp of Dubai (ICD), the holding company for some of the emirate's best-known companies, has signed an upsized $2.5bn, five-year loan facility.

More from Reuters

Qatar Airways has partnered with a low cost carrier in Kenya to expand its reach into East Africa.

More from Arabian Business

More than 80 percent of the world’s largest yachts are owned by Gulf nationals, with the Abu Dhabi royal family alone holding eight of the top 50.

A weighty responsibility

by Cyrus Salesse June 11, 2013

written by Cyrus Salesse

In February, thieves stole $45 million from thousands of ATMs worldwide in a matter of hours. In New York City alone, 2,904 machines were hacked, yielding $2.4 million. According to Brooklyn’s federal prosecutor, information used to carry out the hack was initially located in India, but the withdrawals were made from ATMs using Visa and MasterCard prepaid debit cards issued by Ras Al Khaimah Bank in the United Arab Emirates and by Bank Muscat in Oman.

Such events point to the risks of our increasingly connected world. The vulnerabilities available to criminals, competitors and disgruntled insiders are increasing. According to the Gartner Group, the financial impact of cyber crime will grow 10 percent per year through 2016. In 2007 and 2008, the cost of cyber crime worldwide was estimated at approximately $8 billion. In addition, cyber criminals have stolen intellectual property with an estimated value of up to $1 trillion from businesses worldwide, according to Interpol.

In a survey by consultant group PricewaterhouseCoopers, 61 percent of respondents indicated that they would stop using a company’s services or products after a security breach.

Certain industries, such as banking and financial services, public utilities and energy, are considered to be high-value targets. But other industries, and even individuals, are under attack as well. Whatever the organization, there may exist a strong motive to target it, including theft of customer data and intellectual property, unauthorized access to financial holdings and reputational damage.

Stories of compromised nuclear, oil, gas or other utilities facilities are in the news almost every day. They highlight the frontlines of the modern, global, electronic battlefield.

When it comes to information security, there appear to be more questions than answers. Discussions about managing the risks of compromised information technology (IT) systems are nowadays relatively common. But regulatory bodies and company boards across all industries have to pay more attention.

There are no real and accurate numbers that represent the magnitude of the threat in the Middle East. But it is as real and perhaps even more grave here as it is in other regions due to the maturity level of executive management.

The awareness and training required to secure a company’s cyber presence is absent from the majority of the senior executives and management teams, including those in the banking sector. Those who are knowledgeable are often the ones who have already suffered an attack.

Even when the problem is addressed by hiring “experts”, management teams often are at the mercy of differing opinions and strategies. Perhaps the best place to start is to try to increase our collective understanding with regards to the potential dangers before figuring out what we can do about it.

The increased use of mobile devices coupled with social media such as Facebook or Twitter has led management teams to realize that they cannot live without sophisticated IT systems. Large reservoirs of data, such as analyses of customer behavior, create a new set of cyber-security issues. So, pragmatically, what are we talking about within the banking and financial services?

While many IT departments within the companies do try their best to create a secure environment with the maximum amount of protection, the fact remains that “attackers” have a totally different mindset and approach to compromising the systems.

The first lesson learned from management teams who have survived a cyber attack is that this is not an issue that one can just delegate. The responsibility of defining how cyber security plays a role in the company rests with senior executives.

The second lesson is that this is not necessarily just a technology-related problem. While technology can be a source for the vulnerability, there is a human element that is just as important.

Lastly, having a false sense of security is very dangerous. A banking institution that separates its banking environment onto a specific network with no connection to the Internet, does potentially a good thing, but this does not guarantee that the network is invulnerable.

While it may appear that purchasing specialized consulting, expert services and other security-related items is yet another expense, it is an important precaution. A successful attack could be far more expensive and devastating.

June 11, 2013 0 comments

The Buzz

British far right leader travels to Syria

by Joe Dyke June 11, 2013

written by Joe Dyke

A British far-right leader is in Syria with the government, his party has confirmed. Nick Griffin, leader of the controversial British National Party, traveled to Damascus from Lebanon on Tuesday on what he described on his Twitter feed as a “fact-finding mission”.

A spokesperson for Griffin, who once said Islam was a "wicked, vicious faith," and accused Muslims of trying to conquer Britain, said he was researching Islamic fundamentalists fighting the Syrian government.

On his Twitter feed Griffin said he was in the capital Damascus and that, despite “occasional explosions,” the country was calm.

He accused the British government, which has thrown its weight behind rebels trying to oust Syrian President Bashar al-Assad, of provoking sectarianism.

Occasional explosions in distance but life in capital normal. Traffic busy, shops full of goods. Families out in sun. Why turn stable …

— Nick Griffin MEP (@nickgriffinmep) June 11, 2013

…secular state into Iraq-style hell of secrarian hate?More madness from the people who dragged us to costly war in Iraq & Afghan.

— Nick Griffin MEP (@nickgriffinmep) June 11, 2013

The BNP spokesman confirmed he was traveling with the Syrian government and said he would be visiting other parts of Syria in the coming days.

He said Griffin’s trip was aimed at uncovering the true nature of the Syrian opposition and accused Foreign Secretary William Hague of pushing British people into war.

“Most ordinary working class [British] people don’t want anything to do with conflict in Syria or Iraq or anything. [Foreign secretary William] Hague really is a war-mongerer,” the spokesman said.

He added that Griffin would be researching potential links between jihadist elements amongst the Syrian rebels and the killing of Lee Rigby, a British soldier who was murdered in London last month.

June 11, 2013 0 comments

Economics & Policy Insurance in Lebanon

Playing by the rules

by Thomas Schellen June 10, 2013

written by Thomas Schellen

Whether the title is general manager or chief executive, or the role is niche player or regional rover, the best way to dress for survival as an insurance company in the Middle East is clad in proper corporate governance. According to the International Association of Insurance Supervisors (IAIS), the global umbrella organization for regulatory bodies in the industry (Lebanon is a member), insurance providers should have a corporate governance framework installed, and company managers and boards have a duty to prove their integrity and competency.

The reality for Lebanese and regional insurers is perhaps inching, but certainly not speeding, toward alignment with this paradigm. The majority of local players appear to shy away from the cost of corporate governance. Family-owned insurers, as most are in Lebanon, do not face pressure from their stockholders to scrutinize their directors, audit their figures or publish key ratios. Many insurance executives dislike what disclosures can do to a competitive advantage, but forget that the opportunity cost of not investing into a governance framework can be the real profit killer.

Proper governance firstly protects the stockholders in the company against catastrophic financial surprises, as can happen when employees expose the company to losses from unauthorized, high-risk investments or when senior staff members fall prey to the temptations of embezzlement.

Related article: Insuring the net

Lebanese insurance industry dead in the water

Beirut-based Arabia Insurance, one of the first insurers in the region to embrace corporate governance, was spurred on by an incident of corrupt financial behavior within the organization. But the decision to create an internal audit function and an internal audit committee at the board level was also a great step toward improving overall performance and creating increased trust with all stakeholders, says Chief Executive Fady Shammas.

Corporate governance is not just a question of making sure that no employee can abscond with money that belongs to the company; it is plainly “a better way of running the company,” Shammas says. “There are so many issues at stake, and if you don’t put the right policies and structures and procedures in place, you get lost.”

A lasting foundation

According to the conventional wisdom on corporate governance, its success hinges on the board’s commitment to implement it.

In Arabia Insurance’s case, Shammas says, implementation was a gradual process that spanned several years, during which a risk committee, an investment committee and a remuneration committee were installed. Besides the duties implied in their names, Arabia’s risk committee covers compliance and the remuneration committee covers the board’s nomination.

Board committees represent the icing on the cake of the underlying corporate functions. At Arabia, the risk department was set up with two reporting lines, one to the chief executive officer and the other directly to the risk committee at the board. “From that point on, enterprise risk management started shaping up and this played a huge role when Arabia was rated by [specialized global insurance ratings agency] A.M. Best,” Shammas says.

Strong ratings by international agencies are important when dealing with regulators, but they are even more important to clients as they consider an insurance provider for a large contract.

Costs of corporate governance and all affiliated systems are not petty change; in Shammas’ estimate, Arabia, as a region-wide operating company, has been spending about $1 million annually on corporate governance since 2000. This factor includes all costs, including fees for committee members and experts, investments into business intelligence software and the depreciation cost of the information technology system, which has full redundancy between Beirut and Dubai.

These investments do not generate short-term payoffs. “You start seeing benefits after a year and onwards,” Shammas says, adding that the cost and benefit curves intersect after sustained investment in corporate governance.

One may not be able to quantify the payoff of the investment in terms of share price stability on the Amman and Saudi stock exchanges, where Arabia trades. But Shammas says that the commitment to corporate governance was generating “positive vibes from many shareholders. It was a very large boost in the relationship and trust. You can feel it.”

New building codes

Insurers will face more stringent corporate governance requirements in the upcoming regulatory frameworks, most notably the European Solvency II regulations. This framework will have far-reaching consequences in the behavior of insurance companies even though, curiously enough, the process of devising Solvency II is to its critics far from an example of smart or proper governance.

Currently stuck in another consultation round of innumerable reviews, Solvency II is now expected to come into force around 2016, after a delay of three years.

With corporate governance becoming a necessity for companies that want to attract investors and business, Lebanese and regional insurance companies will find less and less wiggle room if they don’t align themselves with global standards. In Shammas’ view, only a handful of locally-owned insurers — mainly affiliates of banks but also a few family firms — have so far embarked on this road, but chief executives who do not do so needlessly complicate their own lives. “Although it is not easy at the beginning, when you have to prepare the charters of the board committees, appoint the committee members and establish the whole system, once it is up and running, these committees are a big relief for the CEO.”

June 10, 2013 0 comments

Economics & Policy Insurance in Lebanon

A thankless task

by Thomas Schellen June 10, 2013

written by Thomas Schellen

Insurance often does not have the most sterling of reputations as a career or a mindset — even among insurance professionals. When an up-market British insurance broker last February wrote his version of a valentine — or, more precisely, a sales pitch for insuring your diamond rings on the occasion of Valentine’s Day — he opined depressingly that “insurance is to romance what a bucket of water is to fire.”

When extending the logic of what pillow talk on policies and premiums reserves apparently does to moments of tender romance, it should be incredibly difficult to fall in love with insurance.

This fits broadly with the perception at insurance companies, frequently encountered by Executive, that it is hard to motivate today’s high achievers among university graduates in the Middle East to pursue insurance careers. But to get a better grip on the attitudes of insurance managers toward their profession, Executive asked two successful and outspoken insurance chief executives, Fateh Bekdache of Blom Bank-owned insurer Arope, and Farid Chedid of reinsurer Chedid Re, about the thrills they find in their work.

To tell it straight, both said in independent interviews almost the same things: they feel passionate about insurance, praising the profession for the many ways in which it contributes to the economy. Both highlighted the variety of skills demanded in insurance as reasons for their passion but both also expressed regrets that “there is a misunderstanding in the general public about the insurance sector” (Chedid), and that “it is difficult for insurance people anywhere to have a good reputation” (Bekdache).

Chedid added that as an industry, insurance fails to communicate how vital it is to the economy and create the idea that a career in insurance is as interesting as banking or more so. That appears to be a sentiment felt far beyond offices in Beirut, as global insurance industry apologists project a tremendous need to emphasize the indispensability of insurance.

As an example, a just-published paper by two experts at Zurich Insurance Group opens its discussion of insurance in the Middle East and North Africa (MENA) by asserting that “insurance has the potential to provide vital support to emerging economies. But its advantages often tend to be overlooked.”

Indeed, and not surprising. But wouldn’t one be rather surprised if a report on banking in the MENA region were to enter the subject matter by promising “to shed light on the positive contributions” of banking, “both economically and to society”?

Here to stay

After 10 years of overall rapid growth, the presence of insurance as an enabling and stabilizing force in Arab economies should no longer be news. In stewarding over a projected $4.7 trillion in global premiums (2012 approximation based on a May publication by reinsurer Munich Re), the economic weight of the insurance industry is beyond question.

The growth of premiums in the MENA region from $26 billion in 2007 to $42 billion in 2011, as cited by the Qatar Financial Center’s first MENA Insurance Barometer, makes a strong argument for the expanding importance of insurance in Arab lands, even as 44 percent of the cited 2011 numbers are written in two non-Arab countries, Turkey and Iran.

For people who do not care so much for the pecuniary component, the less obvious and more intriguing aspects of insurance can be its contributions to society, which run deep and wide.

Just to give two pointers from the United States, the most detailed information on historic buildings that an urban conservationist in the US can find today is priceless fire insurance maps that go back some 150 years. And millions of people aching for social acceptance in the US and Europe have been guided towards excessive dieting cultures because ideal weight charts of limited medical value were compiled in the 1940s by American insurer, Metropolitan Life.

Further still, if you search for the contribution of Versicherung (the German word for insurance) to culture and literature, you get front-page returns on the role that working in a semi-public labor insurance company played in the life of author Franz Kafka, a giant of 20th century writing.

While Kafka’s experience with his workplace has been portrayed as ambiguous by literary critics, insurance as an economic discipline has proven unambiguously to be cornerstone of the success of a titan in another field, global investments. Berkshire Hathaway, a manufacturing company turned insurance group, is inseparable from the story of self-made mega-investor, Warren Buffet.

Always a tough sell

With so much historical evidence of economic and social enrichment attributable to insurance, it is perhaps yet the discipline of kitchen psychology that must explain why so many insurance professionals face uphill battles to explain the good of their industry.

One can surmise, for example, that insurance requires the client’s trust of the provider as a psychological base and precondition for investing money into a policy — but in order to get the client interested in buying a policy, the insurer has to highlight risks from fire to theft and diseases to accidents.

Views will vary on the possible implications of using clients’ fears to make them buy policies and needing their trust to sell to them, but the fact that insurance is sold, not bought, is one of three problems of the insurance industry, according to Chedid.

Chedid also cited another problem: over-promising. It is an unequivocal detriment to a provider’s credibility if insurance sellers create expectations that every claim will be covered without the least examination or hesitation, he said. “As soon as you start paying without questions, without implementing conditions, everything becomes uninsurable, because costs will escalate tremendously. As an industry, we are here to resolve bad news, and it is unfortunate that the expectations are sometimes different from the reality. The insurance industry is in many instances responsible for this. If you tell your clients ‘I will pay you whatever happens’, you raise expectations to levels you cannot fulfill and this is where the problem lies.”

The insurers’ third problem is by design; the core function of traditional insurance activity is to swing into financial action when people are confronted with communal or personal disasters. As Bekdache put it, there is always “a bad note” in this interaction.

In the long-term outlook, however, insurance is set to expand on preventive roles ranging from disaster prevention to health promotion. As it is destined to serve ever more complex needs of societies and safeguard assets all around, risk management is moving insurance forward and away from its primary concentration on financial disaster response.

Apart from this meta-trend, the economic projections of insurance are providing today’s career seekers with certain hints: Munich Re, the world’s largest reinsurer, said in a study last month that global life insurance markets will grow by almost two thirds in the remainder of the decade and reach 3.1 trillion euros by 2020, and that property and casualty (non-life) markets will have about 50 percent growth from today’s global premiums to 1.85 trillion euros in the same year. The MENA region is not cited as one of the top drivers of this growth, but since insurance expansion is shifting generally into emerging markets, a decade of Arab insurance looks inescapable, in good time.

June 10, 2013 0 comments

The Buzz

Business briefing: 10 June 2013

by Executive Staff June 10, 2013

written by Executive Staff

Economics and Policy

Iraqi Prime Minister Nouri al-Maliki visited the Kurdistan region on Sunday for the first time in more than two years, in a symbolic step towards resolving a long-running dispute over oil and land that has strained Iraq's unity to the limit.

More from Reuters

UAE markets continued their strong performance last month with Abu Dhabi up 9 per cent and Dubai up 11 per cent.

More from The National

Central Bank Governor Riad Salameh said Lebanese banks were complying with all the international sanctions against any state or party labeled by the West as terrorist states or organizations.

More from Reuters

Qatar Petroleum (QP) has signed contract extensions worth a total of $466.9 million to continue using two drilling rigs owned by Gulf Drilling International Ltd (GDI).

More from Gulf Business

Viber Media, the Cyprus-based company which runs an internet-based communications application, is examining ways to circumvent a ban on its services in three Middle Eastern countries by making changes to its software.

Cough it up, Lebanon

by Sami Halabi June 10, 2013

written by Sami Halabi

Every year Lebanon loses the population of a small village, about 3,500 people, not to emigration but to needless death from smoking-related diseases.

For all the furor around Lebanon’s current smoking ban, little is said about the simple policy instrument that has proven the most effective in reducing tobacco consumption and raising government revenue around the world: higher tobacco taxes. When you ask a Lebanese politician why our state does not apply this instrument and each year fails to raise excise taxes on tobacco, the immutable answer is smuggling. At first it seems a logical retort, and there is an historical precedence to back it up.

Lebanon once increased tobacco taxes as a proportion to pack price from the current 51 percent to 113 percent in 1999. Back then, the revenues of the Regie Libanaise du Tabac et Tombacs (Regie), Lebanon’s tobacco monopoly under the Ministry of Finance, fell by around half. The tax increase was rescinded when an “unstoppable” increase in smuggling jeopardized the Regie’s ability to pay subsidies to farmers who held onto land that was on the frontline of the war with Israel.

The “patriotic” argument for tobacco subsidies appears slim if one notes a recent Gallup survey whereby 88 percent of Lebanese would support dropping these subsidies in favor of a more equitable social safety net. More importantly, it is questionable if the Regie, which maintains a barter agreement with “Big Tobacco”, actually saw revenue drop because of smuggling when taxes rose.

Related article: Smoking ban struggling in Lebanon

What likely happened was that Big Tobacco intentionally lowered imports in response to the hike in tobacco taxes. Subsequently, the Regie, being close to tobacco firms, blamed smuggling as the sole cause of its troubles and succeeded in lobbying the government to overturn the tax rise. What’s more, Big Tobacco has a long and documented history of battling tobacco taxes in Lebanon as well as encouraging illicit trade.

It is telling that tobacco taxes have not risen since 1999 despite all the evidence that it would benefit everyone but those with vested interests. According to a recent study from the American University of Beirut, raising the average price of a packet of imported cigarettes from LL2,500 ($1.67) to LL8,250 ($5.47) would bring down consumption by 22 percent, even if smuggling increased by 200 percent. Indeed, the government as a whole would have gained 55 percent more revenue — $188 million for 2012 sales — from tobacco excise taxes by raising average prices to just LL4,750 ($3.21). This drop in consumption would result in 770 fewer Lebanese citizens dying from smoking-related diseases per year.

Given that cancer treatment makes up anywhere from 60 to 80 percent of the Ministry of Health’s annual spending, the effect it would have on its ability to address other public health issues cannot be understated.

The notion that nothing can be done about smuggling should also be stubbed out. Part of the tobacco tax revenue stream could easily be allocated to combat smuggling through better information and identification systems of tobacco products — unique barcodes, invisible ink, radio frequency identification and high-tech tax stamps.

In fact, smuggling has much more to do with corruption — whether it be petty bribes at borders or political involvement in illicit trade — than with prices. Egypt and Morocco are countries that faced similar problems of smuggling and corruption and also have tobacco monopolies. They increased taxation on tobacco with good success, witnessing substantial falls in consumption, rises in government revenue and positive public health outcomes.

In addition to the number of lives saved and money to be made, there is an added urgency to introduce higher tobacco taxes because the relevance of the indoor smoking ban introduced last year is waning. According to the Tobacco Free Initiative, a civil society organization, less than 50 percent of bars and restaurants were applying the smoking ban last month, down from 90 percent at the end of last year. Consumption is also on the rise, as state revenue from tobacco excise taxes in 2012 increased by a whopping 26 percent year-on-year from higher imports.

But, just like a cancer, Big Tobacco’s unfaithful arguments against tobacco smuggling still permeate the Lebanese body politic. Unless we start to treat it now, that cancer will eventually kill any policy reform, and many more Lebanese.

Sami Halabi is a Masters of Public Policy candidate at the University of Edinburgh currently on placement at the International Labour Organization

June 10, 2013 0 comments

Finance

Flying to the bank

by Nabila Rahhal June 8, 2013

written by Nabila Rahhal

Just in time for the peak travel season, Banque Libano Francaise (BLF) yesterday launched a cobranded credit card in an exclusive partnership with Air France-KLM. The European airline group is the first to partner with a local Lebanese bank, with clients automatically getting air miles when they use the card. BLF said they perceived the group’s decision as a show of confidence both in the bank and the Lebanese economy.

“It is an important step for the economy and the banking sector in Lebanon knowing that is the fifth country worldwide chosen by Air France-KLM for a cobranded card,” said Raya Nahas, Deputy General Manager at BLF. “It shows faith in the banking sector as such an international company of course did its due diligence before associating its name with a local bank…It will push the economy to be more electronic in payment,” Nahas said, adding that BLF was the first bank to launch credit cards in Lebanon thirty years ago.

BLF initiated talks for a cobranded card with Air France in 2003 but at that time they were merging with KLM and had to deal with merging their fidelity programs as well and so the issue was dropped. In 2011, Air France-KLM again started searching in the Lebanese market for a partner. They selected five big banks in Lebanon and started a long and competitive process which culminated in three banks being shortlisted and finally with BLF winning the bid. “I believe the reason Air France- KLM chose Lebanon as a country for this partnership is that they studied the market and know that Lebanese people are frequent flyers and also because the Lebanese banks are a pillar in the economy and are doing well, despite the current economic turmoil,” said Nahas.

She explained that the added value of a partnership with a European group of airlines was access to the group’s Flying Blue Program. “The program has, in addition to the airline partners, many major hotel partners such as Hilton, Marriot, Accor and Starwoods. They also have car rental company partners and commercial centers so, by simply using your card in day-to-day spending, you are accumulating access to all those opportunities.”

There are two different categories of the card, Visa Signature and Visa Platinum – Visa Platinum being the most prestigious with added benefits such as access to all VIP lounges. Both cards are available as debit cards and charge cards and in Euros as well as dollars. “We tried to broaden our selection and are offering the card first to our clientele and to those already members in Flying Blue. On the other hand, the card will be a nice incentive to those Lebanese who need a push to travel and would benefit from using the cards,” says Nahas.

June 8, 2013 0 comments

Comment

Piecing together Turkey’s fractured opposition

by Nizar Ghanem June 7, 2013

written by Nizar Ghanem

Walking up and down Gezi Park, you see them everywhere: young, beautiful and rebelling. They are the new Turkish middle-class —demanding more individual rights, less government intervention in local politics and the right to public space.

It is now common knowledge that the government crackdown on a protest at the park was the spark that lit a gas field of anger. The demonstrations raging from Taksim to Besiktas and the protesters barricading streets and chanting slogans against authoritarianism are a testament to a new generation that has come to claim their right to be heard. Yet the extent to which these protests will transform Turkish society remains unclear.

The protests were initially against the Justice and Development Party’s (AKP) urban transformation projects in the Taksim area, which have already claimed many historical treasures in the Beyoglu area including old theaters and cafes.

What started as a small sit-in developed quickly due to lingering frustrations, largely over increasing authoritarian trends in the country. Among the causes of the discontent is Prime Minister Recep Tayyip Erdogan’s push for a new constitution that would give the presidency more power over parliament. This would enable Erdogan to avoid constitutional limits on his term as prime minister by instead running for president.

Related article: Turkey's redeeming value

Furthermore, the AKP is perceived to have drifted away from liberalism. The attempt to criminalize adultery in 2004, in addition to recently banning the sale of alcohol from 10:00 pm to 6:00 a.m, are cited by opposition members as evidence of Islamist tendencies. Meanwhile, the state’s repression of the media is striking. Turkey has the highest number of jailed journalists in the world, with Kurdish journalists among the most frequently targeted.

Economically, too, the neo-liberal policies Erdogan’s governments have pursued have increased anger in some sections of the population. Despite the economic growth of recent years, Turkey has stubbornly high income inequality. Gentrification policies are moving thousands from poor neighborhoods to government construction projects outside the main metropolitan areas, seriously changing the social fabric of the country.

Not yet a revolution

But while hostilities towards Erdogan and the ruling elite exist, the extent to which the protesters are calling for fundamental change varies. Those on the streets are a temporary coalition brought together from a mosaic of groups: ultra-nationalists, leftists, unionists, Kurdish groups and gay rights activists.

The core of the initial movement, a group of activists in a platform called Mustereklerimiz, (“Our commons” in Turkish), is part of the Taksim Platform — a civil initiative to protect Gezi Park from being turned into a shopping center. Mustereklerimiz, a predominantly middle-class mixture of students, artists and neo-leftists, has been campaigning against the government’s decision to destroy one of the last green spaces in Istanbul for the past four months.

But as protests have grown rapidly in recent days, Mustereklerimiz has been joined by a series of other groups — many of whom it has little in common with. The ultranationalist groups and the traditional communist left share similar authoritarian streaks with the AKP. A fascination with a strong state and a top-down approach contrasts with the horizontal organization of Mustereklerimiz.

The schisms are noticeable at protests — with a battle of slogans common. Nationalist groups lift banners saying “we are [Turkey’s first post-independence president] Kemal Ataturk’s soldiers”, while progressives respond with “we are soldiers for no one”. In fact clashes between demonstrators have erupted numerous times in recent days — including when a Kurdish demonstrator raised a flag of jailed Kurdish leader Abdullah Öcalan.

On the issue of Kurds, the lack of wider Kurdish support has also somewhat undermined the movement. The recent rapprochement between AKP and Öcalan has somewhat neutralized the Kurds — historically the strongest opposition block to the ruling party. So while there have been individual Kurds backing the protests, Kurdish political leaders have chosen not to do so. The Taksim movement has to attract the Kurds in, but by doing that it runs the risk of losing the nationalist forces that form a big part of the movement.

So far, demonstrations in Turkey do not yet constitute a revolution and should not be seen through the lens of the “Arab Spring”. The Arab revolutions were a social upheaval that brought sectors of Arab poor — albeit briefly — to the forefront of their societies. They were more radical uprisings that demanded the reformulation of political institutions, whereas Turkish protestors demand the downfall of the current government but not the modus operandi. Although severely challenged, the AKP still holds enough of a national consensus to rule, and is unlikely to step down anytime soon.

Can these disparate groups develop into a consolidated political force? If these various ‘oppositions’ are able to agree on a platform they could be successful in staging an alternative. But so far, these demonstrations are less about fundamental change and more about restating democratic rights. Those on the streets are telling those in power that democracy cannot be reduced to the ballot box only – that democracy is weak and fragile when it lacks a strong independent media, local participatory governance and strong checks on the executive.

Whether these groups can form a common position and grow to become a bigger movement is yet to be seen. Erdogan’s image has been hurt and his political standing has been shaken, but at least for the time being he remains the only option in town.

June 7, 2013 0 comments

Real Estate

Invested development

by Peter Speetjens June 7, 2013

written by Peter Speetjens

A house is more than just a home. It is also an investment vehicle that, if things go well, can produce handsome earnings. With real estate producing double digit returns in recent years, especially in Beirut, it should not come as a surprise that Lebanon’s banks and investment firms are increasingly in on the action.

Dozens of projects have been realized despite the fact that Banque du Liban (BDL), Lebanon’s central bank, explicitly prohibits banks from developing real estate unless it concerns offices, branches or housing units for staff. The most common way around BDL’s legal hurdles seems to be the creation or acquisition of a separate subsidiary dedicated to property development.

Blominvest Bank in 2010, for example, established its real estate unit “to originate, structure and manage projects” on behalf of its clients. In a similar fashion, Mawarid Bank owns Al Mawarid Real Estate (AMRE), while the Saradar Group owns Conseil et Gestion Immobilière (CGI).

On paper, a bank and its real estate subsidiary are different legal entities keeping entirely separate books. In practical terms, however, the latter profits from the services and contacts the bank has to offer. So, the bank may help raise capital through its private banking unit, offer attractive loans and interest rates and direct its home-seeking clients towards its subsidiary’s projects. It is a strategic alliance that, in a healthy market, can prove mutually beneficial.

Fait accompli

“The 2008 financial crisis especially hit the United States banks because of their indirect exposure to real estate through subprime housing loans,” said Lara Kanj, head of Blominvest’s real estate unit, which, among other projects, is responsible for Zeitoun 1589 outside Tripoli. “What we are talking about here is not a balance sheet exposure for Blominvest. It is purely advisory and alternative asset management. Therefore, should the real estate market suffer a significant downturn, no impact would be felt by the bank apart from an opportunity cost of lower fees generation.”

AMRE, the property development arm of Al Mawarid Bank, entered the Beirut property market in 2005 with Shams Beirut, a four tower project in Mazraa. Currently, AMRE is developing six projects, five of which are situated in Beirut. Signed for by Lebanese architect Bernard Khoury, AMRE’s Skyline is a 24-story residential structure overlooking the Beirut Port and the Mar Mikhael neighborhood. Khoury also designed the Paramount building, a residential tower on the south side of Ashrafieh. AMRE is set to build two more projects in central Beirut’s Wadi Abu Jamil area.

Founded in 1998 by Banque Saradar, CGI is also specialized in real estate investments and project development in greater Beirut. The firm used to be affiliated with Bank Audi following the 2004 merger between Banque Saradar and Bank Audi. Today, its corporate identity is slightly different, as Marius Saradar Holding acquired 81 percent of CGI in 2011 while Audi Saradar Private Bank maintained a 19 percent stake.

“CGI has developed, financed and managed seven projects since its inception and is one of the largest real estate companies in Beirut, involved in luxury residential real estate properties,” said CGI General Manager Aboudi Farkouh. “The company is currently developing two of the five tallest towers in Beirut. To date, CGI has raised a total of around $170 million in equity, with a total expected sales value exceeding $600 million and a total built up area exceeding 200,000 square meters [sqm].”

Completed projects include Ashrafieh 784, Hugo 43 and the Airport Mall (land and concept). Abdel Wahab 618, Gemmayzeh Village, Urban Dreams and Marfaa 1474 are ongoing. The projects are located in central Beirut and the Ashrafieh district. “Ashrafieh 784 and Hugo 43 have been fully sold,” said Farkouh. “Abdel Wahab 618 and Gemmayzeh Village projects have sold over 50 percent of their total sellable areas, while the Urban Dreams project will start to sell in the coming months.”

Lebanese investment firms, such as FFA Private Bank and MENA Capital, are also known to manage real estate funds. Founded in 2004 and regulated by BDL, MENA Capital is involved with private equity fund management and property development. The company has so far executed five projects in Beirut, including Sky Gate in Ashrafieh, the Hochar Tower on the Corniche and the Ibrahim Sursock Residences adjacent to the Sursock Museum.

Founded in 1994, FFA Private Bank is arguably Lebanon’s largest private and investment bank. “In terms of real estate, we do everything from recognizing the opportunity to invest and developing the concept, to executing the actual project and sales,” said Head of Sales and Marketing Mireille Korab Abi Nasr, who is also a board member of Lebanon’s real estate syndicate.

So far, FFA Real Estate has nine projects in different stages of development. Following the completion of Foch 94 and Marfa in downtown Beirut, Badaro Gardens and Uptown Badaro were launched. Both projects were sold out in less than six months. Amchit Bay, a gated community of beachfront villas and chalets with a sales price of some $6,000 per sqm, did even better. Launched in October 2012, it was sold within a month.

The firm is currently working on launching two projects at some distance to greater Beirut, Ahlam and Naas Springs. The first project near Faqra measures over 1 million sqm and lies at an altitude of 1,400 meters. At its heart is a nine-hole golf course and country club, as well as a number of residential and retail units. Situated in Bikfaya, Naas Springs is a health and residential resort covering an area of 133,000 sqm of mainly pine trees. The gated community will include a wellness center, restaurant and some 38 residential units.

Finally, Capstone Investment Group is a holding group modeled as a private equity firm, with one exception: it is not registered and regulated by BDL. “When you solely do property development, there is no need to register at BDL — a difficult and very lengthy procedure,” said Chief Executive Ziad Maalouf, who had co-founded MENA Capital before establishing Capstone.

“Raising capital in public is only allowed by registered financial institutions, according to the rules and regulations of BDL,” he continued. “As we are not allowed to do that, we raise capital in private. For each project we create a new legal entity with its own investors and bank leverage. The board of directors of each firm is chosen from the participating investors.”
In addition to a potential return on investment, investors enjoy a discount if they decide to buy an apartment in the project they partly own. Founded in 2010, Capstone has so far launched three projects. Trabaud 1804 is a 23-story high-end residential tower on Ashrafieh’s Trabaud Street, 80 percent of which has been sold. Half of the 12-story L’Heritage de Abdel Wahab has been sold, while Capstone is set to launch 237 Sursock, a 30-story glass tower in the Sursock area.

No diminution of will

Taking stock of these project portfolios, it is unmistakable that irrespective of the strict central bank regulations and legal restraints on property development activities by banks, some of Lebanon’s financial powerhouses have exerted great influence on the real estate sector. They have done so in real terms of luxury towers that have crowded into the old quarters of Beirut and in funneling investments through the specialized subsidiaries they have set up with their financial expertise.

All of these “financial” developers admitted to Executive that the market, due to the current economic and political climate, has taken a downward turn and that profit margins are not what they used to be. Still, the banker-developers emphasize there is demand among high-net worth Lebanese individuals looking for niche, quality products. So far, the formula of stirring banking and investment advisory expertise into Lebanon’s property development imbroglio has worked for them. Yet, seeing the overwhelming number of high-end towers, chalets and apartments being built, one may wonder: just for how long will it last?

June 7, 2013 0 comments