Executive Magazine

For your information

by Executive Editors November 13, 2012

written by Executive Editors

Help for first-time job seekers

The government launched a $2.2 million program to improve the employment prospects of first-time job seekers in the country. The New Entrants to Work (NEW) program will be managed by the National Employment Office under the supervision of the Ministry of Labor, with technical and financial assistance from the World Bank. The NEW program offers first-time job seekers 12 months of on-the-job training in a private firm, along with life skills training, counselling and placement services. Also, employers who hire first-time job seekers will be fully reimbursed for the 12 months of social security contributions that they would have paid to the National Social Security Fund. The program’s stated objectives include breaking initial barriers in the transition from school to work, improving the skills of 1,600 first-time job seekers in a 75-hour comprehensive training program geared to develop job searching and soft skills, and linking the training content with the requirements of the private sector.

Cypriot-Israeli gas deal

Cyprus is looking to alleviate its electricity-pricing problem by securing an agreement to import natural gas from Israel. The Cypriots hope to use the gas to power their electrical generators until their own gas reserves are developed. In talks in early September the two nations also discussed the potential to develop a joint terminal for exporting natural gas. The talks came less than a week after a government committee chaired by Shaul Zemach, director general of Israel’s Energy and Water Ministry, recommended that Israel designate most of its estimated 950 billion cubic meters in anticipated natural gas reserves for export. Cyprus is looking for the delivery of 0.6 to 0.7 billion cubic meters annually, beginning in 2015 and running until 2018 or 2020, depending on when Cyprus can begin to exploit its own recent natural gas discovery. Cyprus currently has the highest electricity charges among European Union member states as it relies entirely upon heavy fuel oil and diesel for power generation. The controversial decision has yet to receive final approval. Talk of a joint terminal builds upon an approach in January 2011 by the Israeli Delek Group to the Cypriot government with a proposal to build a Liquefied Natural Gas plant on the island’s southern coast for the purpose of exporting Israeli and Cypriot natural gas to international markets.

Smoking ban in effect

The law prohibiting smoking in indoor and outdoor public areas such as restaurants, pubs, cafés, offices, schools and hospitals was enacted last month. The Tobacco Control Law 174 also bans all forms of tobacco advertisements such as TV, billboard and magazine advertisements; as well as tobacco firms’ sponsorship of concerts and other events. It also requires larger graphic warnings on cigarette packs. The law was passed in Parliament in August 2011 and came into effect on September 3 this year. Owners of establishments such as restaurants, pubs and hotels had a period of one year to comply before enforcement began. The ban had already gone into effect at indoor public areas such as hospitals, schools and public transportation. Lebanon is the third Arab country, along with the United Arab Emirates and Syria, to ban smoking in public places. The law also bans smoking in the workplace at both public and private institutions, as well as at airports and places of worship. Further, the law imposes penalties ranging between LL1 million ($666) and LL3 million ($2,000) on owners and managers of public establishments if their clients are caught smoking inside, and a fine of LL135,000 ($90)on individuals caught smoking in public spaces. Lebanon has one of the highest adult cigarette consumption rates in the world at 12.4 packs per person per month, compared to 3.7 packs per month in France, 3.5 packs in Jordan and 1.7 packs in Singapore. A study conducted by academics at the American University of Beirut conservatively estimated the direct and indirect cost of smoking on the Lebanese economy at $326.7 million annually.

Tourism spending dips

Total tourist spending in Lebanon dropped by 20 percent during the second quarter of 2012 compared to the first quarter of the year, according to Global Blue, the VAT refund operator for international shoppers [see story page 114]. By a more positive comparison the same statistics show tourist spending increased by 5 percent from the same quarter last year. Deep-pocketed visitors from Saudi Arabia accounted for 17 percent of total tourist spending in the second quarter, followed by visitors from the United Arab Emirates with 12 percent, Kuwait with 9 percent, Syria with 8 percent and Egypt with 7 percent. When broken down by region, Beirut attracted 86 percent of total spending in the second quarter of 2012, followed by the Metn area with 11 percent and the Keserwan region and Baabda with a mere 1 percent each. Fashion and clothing accounted for 75 percent of total spending, followed by watches and jewelry with 10 percent, home and garden products with 4 percent, department stores and souvenirs and gifts with 3 percent each and consumer electronics and household appliances with 1 percent.

Cabinet passes salary raise

The Cabinet approved a draft law for public sector salary increases bringing an end to the months-long dispute that led to strikes by civil servants. Also approved were a series of taxes that would be used to finance the public sector’s pay increase, which is estimated to cost the government more than $1.6 billion annually. Three ministers loyal to President Michel Sleiman opted out of the vote, raising reservations over the methods proposed to finance the raise. The measures adopted include imposing fines on coastal properties that have been illegally developed, a tax on interest rates for bank deposits, a tax on real estate renovation and fees in exchange for construction permits, according to Acting Information Minister Wael Abu Faour. Nearly 200,000 civil servants, Army and security personnel as well as retired government employees are entitled to the salary increases. Ministers are yet to reveal the mechanisms of how to levy the taxes, fines and fees. The draft law received broadsides from both the private sector and civil servants with the former warning of the repercussions on Lebanon’s struggling economy and the latter criticizing the decision to implement the raise in installments over five years.

Investment law shake-up

The Cabinet has received a set of amendments to the investment law, which target certain sub sectors and are intended to increase foreign direct investment. A ministerial committee submitted the amendments to the 10-year-old investment law No. 360, which stipulates a set of criteria that projects must meet in order to benefit from investment incentives and exemptions provided by the Investment Development Authority of Lebanon. The criteria include the size of the investment, the sector and sub-sector of the project, the project’s location, the impact of the project on the environment and on natural resources and the project’s economic and social impact in terms of number of jobs created. The targeted sectors in the law include agriculture, agro-industry, tourism, manufacturing, general technology, information technology, telecommunications and the media. Projects that intend to benefit from the incentives and exemptions must have a minimum investment size, which depends on the location.

November 13, 2012 0 comments

Banking & Finance

For your information

by Executive Editors November 13, 2012

written by Executive Editors

NSSF crackdown yields results

The National Social Security Fund (NSSF) — Lebanon’s largest insurance company and the public provider of social security to the private sector — has been cracking down on evasions, an action that is apparently bearing fruit. Last month the NSSF released a statement saying that its efforts to scrutinize companies that have not registered their employees led to savings and income totaling $27 million for the fund last year, following the close monitoring of 6,233 businesses and 46,541 employees representing 12 percent of total labor force in Lebanon. Some 4,000 previously unregistered employees were enrolled in the fund last year, according to Mohamad Karaki, chairman of the NSSF, while 200 enrollments were revoked for illegally receiving benefits. In an exclusive interview, published in Executive’s September issue, Karaki said that there are now 100 auditors employed at the NSSF, up from as few as 30 the previous year.

Bank penetration 13th highest globally

Lebanon has the 13th highest penetration of commercial bank branches in the world, according to the International Monetary Fund’s (IMF) survey, which assessed branch penetration in 158 countries. With 98 branches per 1,000 square kilometers in 2011, Lebanon had a higher penetration rate than the global average of 76 branches, and more than four times higher than the average rate in upper middle-income countries, which stood at 20, and the Arab countries’ rate of 17. In fact, Lebanon has the highest branch penetration among the Arab countries surveyed. The IMF also reveals that there are 31 branches per 100,000 adults in Lebanon. As for ATMs, there are 130 per 100,000 square kilometers in Lebanon, ranking the country 17th among the 149 countries surveyed, second among the 43 upper middle-income countries and first among the Arab countries.

Qatar rebuilding in Gaza

Qatar has launched a $254 million project to rebuild Gaza, which will necessitate the cooperation of Egypt and Israel to permit the entry of building materials and machinery, currently under a partial blockade. The Qatari ambassador to the Palestinian territories, Mohamad Amadi, said that the cooperation has already been arranged and the project should begin within a few months, kicking off with the construction of a highway along the Mediterranean coastal strip. In other Qatar-related news, Egypt-based Nile Capital, an asset management firm, is launching an education fund along with the eldest son of the prime minister of Qatar, Sheikh Jabr bin Hamad al-Thani. The partnership, called Nile Capital Qatar, intends to raise $250 million to $300 million for the fund, with a first closing of $150 million expected by the first quarter of 2013. Investments will be made in projects in the Gulf Cooperation Council, the Levant and Egypt.

Iraq’s central bank governor suspended

The Iraqi government has suspended its central bank governor Sinan al-Shabibi for alleged currency manipulation. Shabibi, who took control of the central bank shortly after the 2003 United States-led invasion of Iraq, was in Tokyo for the International Monetary Fund meetings when the suspension charges were put in place. The Iraqi parliament appointed Abdelbasset Turki, the head of the board of supreme audit, as a replacement until further notice. Arrest warrants were issued for 30 people, including Shabibi, who are accused of manipulating Iraq’s dinar against the US dollar in the central bank’s foreign currency sales. To control the evasion of US sanctions by Iran and Syria leading to an increase in demand for dollars from Iraq’s central bank, tighter rules for dollar purchases were implemented. “There was huge pressure on the currency, with the difference between buying and selling increasing in the local market, affecting the mass public,” said Haider al-Abadi, a member of the investigating committee and the chairman of the parliamentary finance committee.

Lebanon to issue $1.5 billion in Eurobonds

Lebanon is raising $1.5 billion in Eurobonds at a yet undetermined interest rate, with the proceeds to be used to refinance its existing maturing holdings of Eurobonds. This issue follows the first issue of 10-year debt in local currency (the previous maximum maturity was seven years for the local debt), which was completed last month. The issue offered an attractive interest rate of 8.24 percent to investors. Lebanon already swapped $2 billion worth of Eurobonds back in May. In April, Lebanon issued $950 million worth of Eurobonds, of which $600 million have a five-year maturity and offer a 5 percent yield and $350 million with a 14-year maturity and 6.4 yield. Currently Lebanon’s gross public debt stands at $54 billion, a hefty 130 percent of gross domestic product.

Remittance costs dip, but still high

With a stalling economy, the Lebanese become more dependent on remittances and are bound to welcome the news that the cost of sending remittances is dropping. According to the World Bank, it cost $22 to send $200 from the United States to Lebanon in the third quarter of the year, down from $28 a year ago. For a $500 transfer, it cost $26, down from $32.5 a year ago. It ranked as the third most expensive country for $200 transfers from the US and eighth most expensive for $500 transfers. The World Bank ranking included 15 countries from Latin and central America, seven countries in East and Southeast Asia, five countries in Africa and Lebanon. The World Bank also indicated that sending $200 from Germany to Lebanon would cost $30, up from $27 in the same period last year, and sending $500 would cost $37, up from $36 (also in the same period last year).

Credit Agricole Suisse aims at expansion

The private bank Credit Agricole Suisse (CAS) is looking to expand its wealth management services in Lebanon, some of the bank’s top brass tell Executive. “We are not going to disclose figures but our idea is to double in three years the assets that we manage directly here,” says Youssef Dib, head of private banking at the Switzerland-based financial group. The bank, which is part of France-based Credit Agricole SA, opened a fully-owned Beirut-based subsidiary in 2006. According to Dib, the Lebanese capital is attractive because it has both an active local investor community and acts as a hub for Lebanon’s global expatriate community. Last month, The Credit Agricole Group, which has suffered from the ongoing European financial crisis, divested from a troubled Greece-based bank called Emporiki, taking a $2.6 billion hit. Ratings downgrades and restructuring needs seen at the parent group in recent years did not degrade the trust of local wealth management clients in CAS or its subsidiary, Credit Agricole Suisse (Liban), according to the latter’s chief executive, Peter Chamlian. “I know the market in the area, I know the business needs, and I think we can achieve a lot especially since we have turned a nice page with the sale of Emporiki,” says Chamlian.

November 13, 2012 0 comments

Editorial

Rotten to the core

by Yasser Akkaoui November 13, 2012

written by Yasser Akkaoui

The bombing near Sassine Square on October 19 that tore apart a neighborhood and hundreds of lives, homes and businesses was a deliberate, savage crime perpetrated by those seeking to destroy stability in Lebanon. The response to this horrific event by members of the country’s March 14 and March 8 political coalitions was cowardly, self serving, and in many cases also deliberately intended to sow sectarian strife.

That our politicians would so immediately manipulate the tragedy, pain and suffering of others to fit their own agenda is as clear a sign as there can be that they are rotten to the core.

There is a conspiracy in Lebanon, and they are all a part of it.

Politicians on all sides, during the previous reign of March 14 and the current March 8 administration, set new definitions for the abuse of authority, seeking self-enrichment, power and the furthering of divisive agendas at the nation’s expense.

This country needs new leaders, and there are few better places to look for this new breed than among Lebanon’s entrepreneurs — young people who are inspired, aware and motivated, whose commitment to Lebanon has them trying to build their businesses at home despite the failures of the system and the sins of our leaders and, recognizing these obstacles and the odds against them, they have still managed to push forward their ideas and see them realized.

And that is why, with all that has happened this past month, we at Executive have chosen now to celebrate this country’s entrepreneurs — they are our hope for a better future.

November 13, 2012 0 comments

The Buzz

Morning briefing: 13 Nov 2012

by Executive Staff November 13, 2012

written by Executive Staff

Economics

Gold slipped in thin trade on Tuesday after the euro dropped to a two-month low against the US dollar and uncertainty about another tranche of financial aid for Greece to help pay off its debt kept investors cautious.

More from The Daily Star

Companies

Shares in Dubai-listed Air Arabia have risen to a seven-month high after the carrier posted quarterly earnings that beat analysts' estimates.

More from Arabian Business

Boeing and Qatar Airways have celebrated the delivery of the airline's first Boeing 787 Dreamliner. The airplane, the first of 30 787s ordered by the Doha-based airline, is also the first to be delivered to an airline in the Middle East.

Laid to rest

by Sam Tarling November 12, 2012

written by Sam Tarling

A casket is carried at the funeral of two supporters of Salafi Sheikh Ahmed al-Assir on November 12, 2012. The pair were killed along with a bystander during clashes with Hezbollah in the city of Sidon the previous day over the removal of posters commemorating the Shia festival of Ashura.

Relatives mourn over the coffins inside Sidon’s Martyrs’ Mosque [Photo: Executive/Sam Tarling]

An armed supporter of Assir stands guard outside the Mosque [Photo: Executive/Sam Tarling]

The body of one of the men is carried to the street to be taken to be buried [Photo: Executive/Sam Tarling]

The dead men were carried by hand for over three kilometers to the burial site beside the Hariri Mosque on Sidon’s northern fringe [Photo: Executive/Sam Tarling]

Assir and singer Fadel Shaker were flanked by armed guards during the procession [Photo: Executive/Sam Tarling]

Nervous of snipers, one of Assir's bodyguards scans the rooftops [Photo: Executive/Sam Tarling]

Assir (c) himself led the march, with his supporters chanting slogans denouncing Hezbollah and Amal leader Nabih Berri [Photo: Executive/Sam Tarling]

At the roundabout facing the Hariri Mosque, the first body was laid to rest [Photo: Executive/Sam Tarling]

People wept as the bodies were placed into the ground [Photo: Executive/Sam Tarling]

The second body was held above a crush of mourners as it was passed to the grave site [Photo: Executive/Sam Tarling]

In early November 2012, two Salafis were killed in clashes with Hezbollah in the city of Sidon the previous day over the removal of posters commemorating the Shia festival of Ashura. On the 12th of the month, leading Salafis took to the streets for their funeral.

November 12, 2012 0 comments

The Buzz

Morning briefing: 12 Nov 2012

by Executive Staff November 12, 2012

written by Executive Staff

The global oil market is in a good shape and Saudi Arabia is happy with the current oil price, Saudi Oil Minister Ali al-Naimi said on Sunday, expressing satisfaction over a Gulf Arab effort which kept prices in check.

More from Arabian Business

The UAE economy is showing impressive resilience with Dubai recording a steady improvement from a negative to two per cent growth in 2011 and a projected 3.4 per cent growth in 2012 and even a higher growth rate in 2013, the International Monetary Fund, or IMF, said on Sunday.

More from Arabian Business

The Middle East tourism market lagged behind other parts of the world in the first eight months of this year. According to new figures released by United Nations World Tourism Organisation, the region saw a one percent fall in tourist numbers between January and August.

More from Arabian Business

Companies

Dubai-based Emirates Airline posted a net profit of $464m for the first six months of its current fiscal year ending September 30, a rise of 104% compared to the same period a year ago.

Morning briefing: 9 Nov 2012

by Executive Staff November 9, 2012

written by Executive Staff

Economics

Brent crude futures steadied above $107 on Friday and were poised to end the week with a marginal gain, their first in four, but prices are likely to remain under pressure as the outlook for the global economy, and fuel demand, remains weak.

More from Arabian Business

Lebanese Energy and Water Minister Gebran Bassil said Thursday he expects companies to be invited to start bidding for oil and gas excavation licenses before the end of this year, should everything go according to plan.

“The executive decrees concerning oil and gas exploration are supposed to be issued soon. We should have done this work before, but as they say ‘it’s better late than never,’” Bassil said.

More from The Daily Star

Royal Dutch Shell, RWE and TransGlobe Energy have won concessions in Egypt’s first licensing round since the 2011 revolution in a sign that international oil firms are undeterred by a payment backlog of billions of dollars.

More from The Daily Star

Air traffic management and safety are key priorities for Middle East aviation officials as the region looks to build on its rapid growth over the past decade, Tony Tyler, director general and CEO of the International Air Transport Association (IATA), has said.

More from Arabian Business

The former governor of Iraq's central bank who was removed from his job amid allegations of financial impropriety has vowed to clear his name.

More from The Daily Star

Companies

Abu Dhabi's Aabar Investments, the top shareholder in Italian bank UniCredit, has lost its chief financial officer and another top executive, sources familiar with the matter said.

More from Arabian Business

The search for the UAE’s most outstanding businesses, entrepreneurs and business leaders has finally ended with the announcement of the winners of the inaugural Gulf Capital SMEinfo Awards.

More from The Daily Star

Qatar National Bank (QNB) Group announced that it has successfully issued a $1 billion bond under its Euro Medium Term Note (EMTN) Program in the international capital markets.

A slippery second step

by Joe Dyke November 9, 2012

written by Joe Dyke

And as if from nowhere, there was a breakthrough.

Ten months after the Council of Ministers, Lebanon’s cabinet, demanded the establishment of a Petroleum Administration (PA), and nine months after the Energy Minister promised to do so, on Wednesday the six-member body was finally established. Many of those watching from the sidelines were beginning to abandon hope that a deal would ever be struck.

As the year has gone on, Lebanon’s inability to form the crucial committee — which will negotiate with international oil companies and eventually issue licenses for drilling — has allowed its neighbors Israel and Cyprus to pull further ahead in the rush to explore offshore oil and gas. Now, finally, the country can take the next steps in its bid to tap the huge potential wealth off its coast.

Pulling the wool over everyone’s eyes

Yet while having a committee is undoubtedly better than not, there are many questions to be asked about the one that emerged, foremost among which is the speed at which the decision was made. Wednesday's cabinet meeting focused on the current standoff with unions over wages, but with a few minutes remaining the PA was brought up. Reports allege that it was confirmed with little debate.

Member of Parliament Ghazi Youssef, an energy expert from the opposition Future Movement, said the eventual decision was pushed through too fast for proper regulation, and even charged that Prime Minister Najib Mikati was not given time to scrutinize the six-member list.

“I think the process is flawed, the minister (of Energy Gebran Bassil) wanted to push it through without any oversight,” he said. “I have heard that even the prime minister was not given the list of nominees before having to make the decision.”

The appointments are for six years, during which time Lebanon could begin to reap the benefits of its offshore resources. The body will play a crucial role in getting the best deal for Lebanon for its offshore gas, which Roudi Baroudi, an independent energy consultant and Secretary General of the World Energy Council’s (WEC) Lebanon Member Committee, has estimated could be worth up to $100 million per day.

And yet there are already concerns whether the six men selected are up to the job. Baroudi said that while he welcomed the PA he was concerned that the members were too inexperienced in the field. “You can see that of the people on the list, not all of them have anything to do with oil and gas. I have heard the names and some of them are very young,” he said.

Wissam Zahabi, head of Economic and Financial Affairs on the committee, is well respected but, in his early forties, has relatively little experience in the kind of deal making that will be required in the coming year, while other members have less than a decade in the industry.

“Members of a committee of this nature have to have 25 years experience or more to be able to negotiate with the heads of International Oil Companies (IOCs) like Shell and get a good deal,” Baroudi added.

Sectarianism strikes again

Part of the issue is Lebanon’s sectarian system, which demands that senior positions are shared out on the basis of religious affiliation. Of the six members, there are three Christians (Greek Catholic, Maronite, and Greek Orthodox) and three Muslims (Sunni, Shiite and Druze).

Then there is the inevitable political wrangling as politicians seek influence over the multi-billion dollar industry. Parliamentary speaker Nabih Berri is alleged to have orchestrated the deal that finally broke the stalemate, but all major political groupings will seek influence over the related deals.

This process, as Dany Haddad from the Lebanese Transparency Association points out, can lead to the square pegs being jammed into round holes.

“I don’t believe that there was an opening online for them to submit their CV and then be judged on their merits. It is not selected on merit, it is selected on denomination,” he said. “The entire procedure should be changed — there must be an authority that elects those people, they should be selected by experts, not politicians.”

Others are less concerned. Mohammed Qabbani, head of parliament's Public Works, Transport, Energy and Water Committee, said the decision was to be welcomed.

“I think it is a positive step towards taking the executive path concerning oil and gas exploration,” he said. “Until now we have been talking about laws and degrees on paper, now this is the first executive step which will lead to the start of giving licenses.”

Qabbani denied that there had not been sufficient scrutiny of the process, saying each member had been selected from a three-person shortlist. “The names have been known for some time; there are no surprises in there.”

Whatever the merits of the committee, they will have to hit the ground running, as the next year will be pivotal. If the proposed schedule is kept in the next two to three months, the PA will finalize the decrees to be issued by the government. After that IOCs will be given six months to prepare and present their cases. This will be followed by four months of negotiation, culminating, theoretically, in agreements in around a year’s time.

In this period, the potential for infighting between Lebanon’s notoriously bickering politicians is huge. Indeed, international energy giants seeking to negotiate a better deal may find it in their interests to play rival political groupings off against each other.

Baroudi stressed that the two main political groupings — the opposition March 14 and the ruling March 8 — must seek unity or else the country would end up negotiating a bad deal. “The most important thing is a complete understanding between March 14 and 8 and then the second most important thing is the rule of law,” he said. “I hope this is not a political football because this could help all Lebanese across the country.”

Who’s on the Petroleum Administration?

Executive Magazine asked the Ministry of Energy for full CVs of the members, but as of time of publication had not received any such documents.

Wissam Chbat

Born: 1973

Religion: Maronite

Years of experience: 15

Role: Head of Geology and Geophysics

Previous employer: Petroleum Adviser to the Minister of Energy.

Bio: Been heavily involved in the bidding process after being appointed an advisor by Energy Minister Gebran Bassil. Well-known and respected in the field, though close to the minister.

Gaby Daaboul

Born: 1968

Religion: Greek Orthodox

Years of experience: 18

Role: Head of Strategic Planning

Previous employer: Legal advisor at Safadi Foundation

Bio: Closely linked to the Minister of Finance Mohammed Safadi, he has been heavily involved with the development of Lebanon’s offshore oil and gas. Has received training in Norway on the project.

Nasser Hoteit

Born: 1959

Religion: Shiite

Years of experience: 29

Role: Head of Technical and Engineering

Previous employer: Total oil company

Bio: Previously a well-respected expert with the global energy giant Total, Hoteit is not believed to have been heavily involved in the search for offshore resources until now.

Asim Abu Ibrahim

Born: 1976

Religion: Druze

Years of experience: 13

Role: Head of quality control, health, safety and the environment

Previous employer: Abou Ibrahim Riad Trading Est.

Bio: Ibrahim is less well-known in energy circles and, having completed his studies in 2001, is younger than other members of the board. He previously work for Bureau Veritas – which produces diversified solutions for major oil companies.

Walid Nasser

Religion: Greek Catholic

Role: Head of Strategic Planning section

Previous employer: UNDP

Bio: Like other board members, Nasser is under the age of 40 but is well-respected due to his experience with the United Nations.

Wissam al-Zahabi

Born: 1970

Religion: Sunni

Years of experience: 17

Role: Head of Economic and Financial Affairs

Previous employer: Policy Specialist at UNDP and energy adviser at the presidency of the Council of Ministers.

Bio: Like Wissam Chbat, Zahabi is well-known in the Lebanese energy sector. He advised the previous Prime Minister Saad Hariri and was kept on by his successor Najib Mikati.

November 9, 2012 0 comments

The Buzz

Morning briefing: 8 Nov 2012

by Executive Staff November 8, 2012

written by Executive Staff

Economics

A new Turkish state oil and gas company is negotiating with Iraq's semi-autonomous Kurdistan region to take stakes in several exploration blocks – a development that would signal dramatic headway for the Kurds in their quest for oil sector autonomy.

More from Arabian Business

Bahrain's government plans to cut its budget spending by almost 6 percent in 2013 as it seeks to curb its deficit, a draft budget released by the finance ministry shows.

More from Arabian Business

Companies

Emirates Airline would order at least 100 Boeing 777 wide-body jets if the Chicago-based manufacturer upgraded the design of the aircraft, the Dubai-based carrier’s president has said.

Damas: The golden boys

by Thomas Schellen November 7, 2012

written by Thomas Schellen

Damas is the leading jewelry chain in the United Arab Emirates and a luxury venture that claims to have a 17 percent share of the domestic market. The roots of its founding family in the precious business go back more than a century. Today the company is owned by regional investors. Fortified with a recent business restructuring and a clear strategy of concentration on its core market, namely the Gulf Cooperation Council countries, it is positioning itself for growth, specifically in Saudi Arabia, but also seeks to further expand its standing in the UAE, chief executive Anan Fakhreddin told Executive.

“When the restructuring started two years ago, we put the first priority on our core markets. Our core markets definition today is the GCC. These are the markets where Damas started and where we have a very strong understanding of consumer trends and preferences,” Fakhreddin said.

Organizational and marketing initiatives in the recent past included new partnerships with international jewelry brands, investments in quality assurance, including collaboration with UAE authorities for training customs officers on purity of gold, and the hiring of a Bollywood celebrity for a marketing campaign for the Diwali Hindu festival. The festival, which this year falls in November, is a huge jewelry buying occasion for the Asian customer segment in the UAE and stores can get so crowded with customers that one can hardly move, explained a Damas spokesperson.

The outcome of the 2012 business year for Damas is going to be determined to a large part by the last two months of the year, Fakhreddin said, due to the role of the Diwali and overall contribution of the year-end holiday season to sales.

So far, so normal. But the corporate narrative of this jewelry house in 2012 is more than some lore of doing business in gold and precious stones. It is a cautionary tale that a corporate centenarian can make a pretty bundle of mistakes, that mature individual age and folly are not mutually exclusive, and most importantly, the most recent chapter of its story is that a turnaround is possible at over 100 years old.

A Shaky start

About five years ago, the successful family group Damas, which since 2005 included a minority stake holding by two regional private-equity players, was preparing for its future. At the time, a business prophecy was making the rounds among the family-owned enterprises in the Gulf region. This prophecy, with many good success stories and references from developed economies, said that the future was for them to become listed companies.

The UAE stock markets were not even 10 years old for the Dubai and Abu Dhabi bourses and the youngest, then known as Dubai International Financial Exchange (DIFX), was still in its diapers, full of promise. Many who appeared as wise consultants advised the business families of Dubai and anywhere in the Arab region that it would be a boon for the national economy and a far-sighted decision for any large and ambitious family enterprise to undertake an initial public offering.

The Abdullahs (Tawfique, Tawhid, and Tamjid), three brothers whose grandfather had laid the foundations for the Damas Group, decided to go for an IPO. The company picked the highly-touted DIFX (today Nasdaq Dubai) and embarked on its flotation. Smack in the middle of 2008.

What happened then lends itself to the perception that no financial thriller writer could have imagined a worse time and place for any company to go public than June/July 2008 on the DIFX. Damas announced that its IPO successfully raised $270 million by floating 28 percent of its capital at $1 a share, valuing the enterprise at close to $970 million. It did not announce that one of the Abdullahs — Tawhid, who was chief executive of Damas — had done a circular investment pact with several investment companies in Dubai, including a unit of Dubai Holding, by which he lent them cash used to buy 100 million shares in the IPO. In 2009, the loan was reportedly converted into an investment that seems to imply that Damas had effectively bought itself and all it got out of it was a huge, non-performing loan, according to a report in Abu Dhabi-based newspaper, The National.

Moreover, the Abdullah brothers had run Damas with a piggy bank approach, taking out cash and borrowing gold at will and with no control, to the tune of hundreds of millions of dollars. The feudal approach to corporate governance might have perhaps been manageable in better times, but with the global economic crisis, the burst of the Dubai economic bubble and many soured investment gambles by the Abdullahs, it all came out. The Abdullahs were obligated to resign and banned by the financial authority from managerial roles, for 10 years, at any company based at the Dubai International Financial Center (DIFC).

Left behind was an orphaned company with hundreds of scattered stores (in a July 2008 Reuters news item on the Damas IPO it said the company operations entailed 438 stores in 18 countries) and a big financial problem. Deals were struck and a formula for repayment of their obligations to creditors including Damas was agreed upon with the Abdullahs. As often with grim fairy tales, many gaps in the narrative of this corporate crash were left for interested readers to fill with their own assumptions.

The turnaround of Damas entailed a restructuring under Fakhreddin’s captaincy that commenced in 2010 and a buyout by regional investors in the spring of last year. The new parents, Mannai Corporation of Doha, Qatar, and EFG Hermes, the Egyptian investment bank, paid 45 cents on the dollar for each share in Damas and took control of 85 percent in the company, according to stock market reports.

Mannai Corp, owning a 66 percent controlling stake in Damas, says on its website that it is Qatar’s largest trade and services conglomerate; it is affiliated with the ruling al Thani family. The other 15 percent in Damas remained with the Abdullahs.

Future expansion

Fakhreddin said he could not discuss the owners’ plans for the jewelry company but told Executive that “they have been investing in terms of assets, resources, and support and are investing very generously on the brand. The Damas brand will see a lot of growth in the coming years because of this takeover and the level of attention and support that we are getting from the new owners.”

Importantly, the new shareholders’ investment decision was long-term, he said. “It is not a turnaround project where you buy something, fix it, and sell it.”

Besides sorting out the financial obligations of the mismanaged enterprise, the restructuring of Damas entailed structural changes of operations that had been convoluted with less-than-strategic investment decisions and movements into new markets. The GCC was always the center of Damas’ retailing strength but this was “unfortunately sometimes overlooked” and the weeding of overseas operations was needed, Fakhreddin said. “Today we follow the strategy that makes sure that investments are placed in core markets. Until we are satisfied with penetration levels in those markets, I don’t think we will look at expansions in any other markets.”

In line with this business plan, Damas appears to be not aggressively approaching the market in India where it has a joint venture (JV) managed by the JV partner. It has bought out its partner in Saudi Arabia, on the other hand, and is planning to attack this market vigorously. According to Fakhreddin the past 18 months since the full acquisition in Saudi Arabia saw growth but the main task achieved was refocusing the organization on serving the high-end and middle-class luxury segments.

The Damas chief executive expects the “real success story” will commence in 2013 when the expansion plan of stores in Saudi Arabia kicks off. The company understands well the currently very fragmented Saudi jewelry market because of many similarities to the Arab segment in the Dubai and Abu Dhabi markets. Fakhreddin said, “Potential for market share in Saudi, one of the top jewelry markets in the world, is still open for growth.”

Performance of Damas in financial terms has been stable in the past three years on the side of gross revenues. As the company de-listed from Nasdaq Dubai this summer (and is switching its financial year to the calendar year in 2012), Fakhreddin said that the company has more or less completed the restructuring and has only “to sort out files in some non-core markets where we have business relationships that we want to realign.”

That should be achieved in the first quarter of 2013, he added, and then they want to grow much more than in the past four or five years, in which things had been “a little static because of the global recession and our issues. We are planning lots of improvement in terms of brand, [the] look and feel of the shops, [and] customer service. Much of that will be tackled in 2013.”

November 7, 2012 0 comments