Executive Magazine

The limits of speed and sanity

by Nadim Mehanna September 1, 2012

written by Nadim Mehanna

The illuminated diodes blink up at me from their carbon-fiber dashboard encasement. Mileage. Speed. Performance. To one side sits the power gauge, its range like a prophecy carved in fiery letters: an impossible but unwavering 1,200 horsepower. As I take in the sleekness of the interior, the leather so supple it seems almost alive, the words “fastest production roadster in the world” flit through my head. I’m encased in a $2 million torpedo, and the top is down. Following the success of the 16.4 Super Sport, it didn’t take long for Bugatti to up its ante with a new addition to the Veyron line: an open-top version of the Super that could nevertheless deliver the Grand Sport’s power and speeds. The novelty alone was enough to set the fan forums buzzing — an open-top car capable of 410 kilometers an hour? The idea was like a gauntlet thrown in the face of physics. Tornadoes produce slower wind speeds. Strap a rocket to just about any other vehicle and set it off at 410 clicks and the air drag alone will, quite literally, rip it to pieces.

So why do it? Why tempt fate?

Why put a man on the moon, or a mechanical rover on the surface of Mars, for that matter? Any enterprise that pushes the bounds of the impossible contains its own implicit motivation, framed in the simple but central counter-question: why not?

Why not indeed, I think, and throw the car into first gear. The gas seems to drop to the floor of its own accord and the car is off, the world melting into indistinguishable streaks around it.

You can try to describe the Vitesse’s performance by such things as its horsepower or revolutions per minute, but personally, I find these stale calculations fall short of the car’s gut-wrenching reality. Going from zero to 100 in the space of a few heartbeats is best described, I think, as a kind of out-of-body experience. It’s as if the pure force of the vehicle’s takeoff has ripped the soul from your body and deposited it, confused and blinking, on the track behind you. It takes several seconds for your brain to catch up with the car, and when it does, it may still fail to comprehend the reality into which it’s been thrown. The world is a blur; the asphalt contracts beneath you like a snapped elastic band.

With this much power thrumming under your right foot, it’d be easy to panic — after all, unless you’re a professional Formula One driver, chances are this is the fastest you’ve ever moved at an elevation of four feet from the ground. But perhaps the most incredible and commendable thing about the Vitesse, once you’ve recovered from the initial G-Force of takeoff, is how straightforward the actual driving is. The gears slip smoothly upward, almost as an afterthought. Take your hands off the wheel and the car maintains a perfect, pencil-straight course forward. Turn it, and the vehicle prescribes neat, unflinching arks, its four-wheel traction solid as a rock. At every stage, the Vitesse seems to be working alongside you.

A device of both power and beauty

As with its performance, the Vitesse’s aesthetic does not overwhelm. Beautiful, to be sure: a number of aerodynamic measures carried over from the Super Sport, such as larger front-end air intakes and bottom air vents stretching sideways into the wheel house, transmit Bugatti’s characteristic mastery. Inside, the two-tone leather seats, carbon fiber console and quilted armrests, enhanced by contrasting stitching, do manage to convey a degree of luxury.

Every aspect of the vehicle is gorgeously worked, from its fine carbon weave to the buffed casements of its xenon headlights. But this is no high-shouldered Rolls Royce, no luxury sedan. There is nothing ostentatious in the design of this car, nothing to announce, to the untrained eye at least, its seven-figure price tag.

To see the car for what it truly is, you have to look below the hood (if there was one). The Vitesse’s Veyron W16 cylinder engine is a work of power and art, transferring nearly all the advantages of the Grand Sport in one neat package. With a maximum torque of 1,500 newton-meters, it boasts a maximum output of a staggering 1,200 horsepower (hp), achieved at 6,400 rotations per minute. Translate these figures into raw power and you’re looking at acceleration of zero to 100 kilometers an hour in just 2.6 seconds.

In the inner workings of the Vitesse, Bugatti seems to be hewing to the old Hot Rodder maxim: “More power, more better.”

Ettore Bugatti’s legacy

The car is purring away beneath me now, the world slipping by to reverberations of carbon fiber and steel. At speeds that would leave other roadsters spinning in the dust, the Vitesse seems only to be hitting its stride, rising smoothly through the instant shifts to well above 300 kilometers an hour. She’s topless and telling me, “Do what you want, I can take it!” The noise of the air rushing overhead is a torrential roar.

When you hear the Vitesse coming at you from a distance, the sound is like a stampede of mechanical bulls, reaching you long before the car actually swerves into view. It’s a darker, moodier sound than that of the original 1,000 hp Veyron engine. The 1,200 hp Vitesse engine employs bigger turbos, meaning less torque at low speeds and an extra jolt of power once it really starts to fly. I’m inside that sound now, and the roar pouring down from the corners of the windscreen is at once exhilarating and comforting.

I’ve just begun to relax into the car’s velocity when the radio beside me crackles — the signal to turn back. Regretfully, I release the gas pedal and press the brake. The car responds beautifully, relinquishing its speed with a steady, even pull.

The Vitesse is both beauty and the beast, a machine of aesthetic refinement with a dark side, capable of pushing the boundaries of both speed and sanity.

It could be months or years before Mercedes or Renault rolls out a car that can top the Vitesse in terms of speed. Until they do, Vitesse will remain the undisputed king of the roadsters — and by all indicators, it measures up to that lofty distinction.

NADIM MEHANNA is an automotive engineer and the pioneer of motoring on Middle Eastern television

September 1, 2012 0 comments

Finance

Your social insecurity

by Maya Sioufi September 1, 2012

written by Maya Sioufi

For paying nearly a quarter of each employee’s monthly salary into the National Social Security Fund (NSSF), one would think that private sector businessmen would be ensuring a nice retirement package and healthcare coverage for those working for them. Why then is it so common for retiree savings to run out at 68, and for hospitals to threaten to deny them services? This Executive investigation dives into the inner workings of Lebanon’s social insecurity.

The money pit

The NSSF, Lebanon’s largest insurance provider, more commonly known as the daman, manages $4.7 billion in private sector contributions and offers coverage for approximately 30 percent of the Lebanese population. Other than end-of-service indemnities, the daman also offers healthcare coverage and family allowance payments.

To deliver these services — or attempt to deliver these services — the law stipulates that the NSSF should receive an amount equal to 23.5 percent of every employee’s monthly salary. This cash is then allocated to the NSSF’s three dedicated funds and entirely invested in Lebanese currency through treasury bills and deposits with local commercial banks. Employers carry the lion’s share of the burden, paying 21.5 percent and employees contribute the remaining 2 percent.

Under the umbrella of the Ministry of Labor, the NSSF is a “black hole” says Nassib Ghobril, chief economist of Byblos bank. Of the three funds run by the NSSF, two have been racking up deficits for the last 10 years. The family allowance fund reported an accumulated deficit of $252 million as of the end of last year.

Employers pay cash equal to 6 percent of each employee’s monthly salary into this fund, up to a salary cap of LL1.5 million ($995), meaning for higher salaries the fund payment is fixed at $60. This stash of money pays $40 to each married employee if the spouse is unemployed and $22 for each child until the age of 18, up to a maximum of five children. This means that if an employee is married with an unemployed spouse and just one child, he receives more from the family allowance fund than his employer pays into it.

“This allows for corruption,” says Ibrahim Muhanna, founder of the actuarial firm i.e. Muhanna. “Let’s say you are my sister and you have three children. I can put you down as an employee; tax and contributions to the funds are paid and you get the benefits for the children.”

The healthcare fund, also known as the ‘sickness and maternity fund’, also runs a deficit that stood at $239 million at the end of last year. The employer contributes to this fund an amount equal to 7 percent of each employee’s monthly salary, with contributions also capped at a salary level of LL1.5 million. Unlike the other two funds, the employee also contributes by paying 2 percent of his monthly salary, up to a cap of LL30,000 ($20).

What the fund does is reimburse employees for 90 percent of their hospitalization costs and 80 percent of medication and examination expenses, though payment delays often exceed several months and involve navigating long queues and a quagmire of bureaucracy.

The catch for healthcare providers is that NSSF also sets the rate private hospitals can charge patients using their coverage for certain services — rates that can remain unchanged for decades. This year private hospitals in Lebanon began threatening to stop taking NSSF patients unless the rate for an overnight hospital stay was raised from $20 to $60, citing the burden of mounting medical costs. In response, the NSSF administration has asked the government to raise the salary cap on contributions to the healthcare fund to LL2.5 million ($1660) — or a maximum payment of LL175,000 ($116). Economic associations in Lebanon, however, have publicly opposed raising the cap, based on fears that this would pass the burden onto the employers in a time when the country’s economic growth is contracting.

Daman deficits!

Given that the contributions to the healthcare and family allowance funds are capped to a fixed salary, they fail to take into account the rising cost of living, the increase in medical costs and the rise in wages. With the cost of healthcare equipment and pharmaceuticals on the rise — the 2012 Towers Watson Global Medical Trends Survey estimated global medical costs would jump 10 percent this year after increasing 10 percent in the past three years — and contributions into the healthcare fund stable, the deficit continues to plunge ever deeper into the red.

“The contributions do not have an automatic adjustment mechanism like in the West — for instance, having the ceiling at three times the average salary so the ceiling grows along with the increase in the average salary,” says Muhanna. “In Lebanon, if you want to change the figures, you need the Parliament to change the law.”

The deficits on these two funds started piling up after the contributions rates were slashed in 2001 under the leadership of former Prime Minister Rafik Hariri, with the aim of reducing labor costs. While the contribution rate to the EOSI remained unchanged, the family allowance fund rate was cut from 15 percent of an employee’s salary to 6 percent, and the sickness and maternity fund rate was cut from 15 percent to 9 percent, amounting to a 40 percent cut in contributions to social security. Mohamad Karaki, director general of the NSSF, blames these rate cuts on the deficits incurred by the two funds and wants to see them increased by at least a few percentage points.

Ghobril disagrees, saying that evasion from NSSF registration is very common. “Just like there are people who evade taxes and you don’t fight tax evasion by raising rates — it will scare away more companies from registering,” he says.

Jihad Rizkallah, lawyer at El Meouchi law firm, says it is “a frequent problem” and common practice in Lebanon for employers to declare lower salaries for their employees in order to decrease their NSSF contributions. “But the employee has the right to claim all amount due; this is of public order,” he says. “Even if the employer and the employee agree on not registering with the NSSF, the employee can change his mind and his rights are preserved. The employer needs to pay up.”

While Karaki states that more controllers have been hired in the past year — from some 40 to now 100 staff — to stop evasion from contributions to the NSSF, the impact on the figures are yet to be seen.

Abundant insecurity

The only fund that is running a surplus is the end-of-service-indemnity (EOSI) fund catering to retirees [see story page 50]. With an accumulated surplus standing at $5.2 billion as of the end of 2011, the other two funds borrow from the EOSI to stop their bleeding. The lucrative nature of this fund might well be the reason some politicians have said they want to spin it off from the NSSF and have it privatized, which is delaying the discussions in Parliament on implementing reforms to social security, according to Karaki.

The daman’s mission is to provide private sector workers with society’s basic needs from healthcare to family assistance to catering for retirement. With private hospitals threatening to stop coverage, petty family allowances and with savings left depleted within a few years of retirement, it would seem that the nation’s social security fund actually contributes to a feeling of insecurity more than anything else.

September 1, 2012 0 comments

Last Word

Can the cabinet

by Sami Halabi September 1, 2012

written by Sami Halabi

Imagine how Lebanese parliamentarians feel when they are sworn in for the first time. Their hearts must flutter with joy as they take the oath they will likely not keep. After all, who would refuse to be inducted into a club that allows one to get away with doing practically nothing, get paid for it, with benefits, and do so for the rest of one’s life (and in some cases one’s children)?

With no way to appraise the performance, or even the voting record of members of Parliament, the public has little means of knowing what the people they elect are doing. As a result, legislators have the prerogative to fit themselves into one of three categories: those that choose to be active members of this supposed pillar of Lebanon’s government, easily identifiable by the committees they head; a second group simply speaks to the press about anything and everything other than what they theoretically should be doing, producing legislation to fit the times and circumstances. And there is a third group that do not bother turning up for committee meetings or even the general assembly, unless they are called upon to make up the numbers against a vote of no confidence. This final group has the privilege of hosting the so-called zaims (or sectarian leaders) of Lebanon’s broken assembly.

On top of it all stands Speaker Nabih Berri who, for almost 22 years, has used the pedestal of Parliament as the starting point to spread his influence and patronage throughout the institution and, as a result, the state apparatus. One need look no further than the last crisis over Électricité du Liban’s contract workers to see how his power can enter into people’s homes through their light bulbs and the rotting food in the fridge.

And yet people are still bedazzled by how Parliament writes and passes laws that have little to no bearing on reality, while also failing to pass those that do. The laws needed either simply don’t get passed (such as the national budget), get watered down so as to become inapplicable (such as a law protecting women against domestic violence), have no place in a globalized economy (such as the laws regulating electronic transactions) or get shoved in a drawer until Berri feels like bringing them to the floor (like a food safety law or a new traffic law). And even when laws do get passed (such as a law allowing maritime oil and gas exploration, or those concerning telecoms, electricity and water), their implementation is bequeathed to a fractious cabinet and its ministers who run the country like they are playing a perpetual game of musical chairs.

Herein lies the crux of the problem. Because the executive branch is appointed through sectarian horse-trading between eight major parties that can barely agree on anything, it becomes the body of government which is the most prone to collapse and the least able to make decisions. In turn, this has also allowed Parliament to become flippant about drafting laws, writing them up as generalities and relying on cabinet to issue the infamous implementation decrees. Thus, entrusting this non-elected body with the power to apply or not to apply the law results in an arbitrary legal bottleneck to enforcement and drafting of legislation, not to mention the preclusion of citizens from the decision-making process.

So why do we need a cabinet? The short and evident answer is that we don’t. A move to a presidential system that reforms the executive into an administrative body of technocrats would serve the interests of the country infinitely better than it does today. It would even maintain the sectarian “balance” some backward members of society seem intent on keeping through Parliament and the constitutionally mandated senate that has never been formed. But perhaps the most important result of such a move would be that it places accountability back where it should be in a democracy, with those the people elected.

SAMI HALABI is a Masters of Public Policy candidate at the University of Edinburgh and former managing editor of Executive

September 1, 2012 0 comments

Finance

The retirement pain

by Maya Sioufi September 1, 2012

written by Maya Sioufi

When planning retirement in Lebanon, a key question one needs to ask is “Do I have enough money in my savings account for my old age?” And if not, then “do my children have enough money to pay for my old age?” If answers to both questions are a “no”, then you can still opt for renting a taxi license upon retirement to secure a source of income for the grey haired years.

Lebanon does not provide a public pension scheme — meaning regular payments upon retirement and for the rest of one’s life — to the private sector, guaranteeing instead an end-of-service indemnity (EOSI) paying retirees a lump sum at the age of 64, or earlier if demanded, with reduced benefits for those with less than 20 years labor under their belts. The amount paid is linked to the last monthly salary and the number of years toiled; if one enters the labor at age 21 and exits at 64 while remaining with the same employer throughout — a not too frequent path — then a maximum of 55 months salary is handed over at retirement. That’s equivalent to roughly four and half years spending at the same constant rate, after which the capital is depleted.

Currently the National Social Security Fund (NSSF), Lebanon’s public provider of social security for the private sector, requires from employers a monthly contribution equal to 21.5 percent of each employee’s monthly salary. Of this, 8.5 percent goes to the EOSI fund, which had tallied a surplus of $5.2 billion as of the end of last year. After taking 0.5 percent for administration expenses, the Daman — as the NSSF is commonly called — then keeps in its coffers 8 percent set aside for workers’ old age.

To work out the end of service indemnity, a complex formula needs to be applied to the last monthly salary. If requested upon retirement at the age of 64, an employee’s final salary is multiplied by 20 for the first 20 years toiled then by 1.5 times the remaining years in labor. If requested prior to completing 20 years of work, a punitive rate is then applied (see box).

What it means

Assume an employee named Karim starts work at the age of 24 with a starting salary of $1,000, receives a 5 percent raise annually until retiring at age 64; his last monthly salary would be $6,700 (see graph). The NSSF would then have to pay him a lump sum of $325,000 upon retirement. The total contributions by the employer to the Daman, however, stand at only $116,000, with the remaining $209,000* the responsibility of the employer to cough up. (Ouch.)

Now let’s theoretically assume that instead of contributing the 8 percent to the NSSF, the employer adopts a retirement savings plan with a local insurer for Karim and guarantees that he will pay him the same amount as the Daman upon retirement. Reinvested at a conservative 4.5 percent rate (a typical rate at which a conservative local insurance firm would reinvest today) the plan would dish out $260,000 instead of just the $116,000 raked up in the drawers of the NSSF. This means that the employer would have to top up the EOSI payment by just $65,000 upon retirement to guarantee the employee the same indemnity as the NSSF. That’s a difference of $145,000 and that’s just for one employee.

With slightly more than 50,000 private companies registered at the Daman employing an average of 8 employees per company, employers would be saving a mind boggling $58 billion based on these simplistic assumptions. That is if this calculation was always applicable, however, which it is not.

It gets a bit more complicated if one requests the EOSI payment before retirement. Let’s assume that after working for 15 years, Karim quits his job and requests his indemnity. He would then receive $17,000, whereas the total contributions by his employer to the NSSF would have reached $23,000, leaving the Daman with a tidy $6,000 in its coffers. So for the first 20 years of work during which the punitive rates are applied, the employer will not be requested to contribute additional cash when an employee quits, but will be fattening the NSSF’s wallet instead.

Once 20 years of labor are completed, the formula to calculate the lump sum payments becomes much more lucrative for the employee and punitive for the employer, as the reduced rates are no longer applied and the NSSF pays back more than the accumulated contributions. In Karim’s case, at the age of 45, his indemnity payment jumps by $17,000 in one year. Thus, employers might be happy to see their workers quit before the 20 years are completed.

Also, when the reduced rates are applied, the private insurance retirement plan generates higher returns, implying that had the employee gone for private insurance instead of the Daman — which he legally is not allowed to do — he would have secured a higher indemnity for the first 20 years of labor. It would also mean that had the employer invested the 8 percent with private insurance instead of the NSSF — which he is also legally prohibited from — and had he paid back to the employee the amount the Daman pays, he would have made money: up to $25,000 in Karim’s case for two decades work.

A flawed system

This simplistic case aims to reflect the inefficiencies of the EOSIs provided by the Daman from both the employers’ and employees’ perspective.

Retirement of Lebanese citizens is exclusively funded by corporate Lebanon as neither the employee nor the government participates in the EOSI. And it is not just a tax rate of 21.5 percent of employees’ monthly salary, as there is the additional stack of cash that employers have to cough up as a one-time payment if their workers are loyal for several decades.

As for employees in the private sector, if Karim relied solely on Lebanon’s public sector for social security he would find himself penniless within a couple of years of retirement, after which he would have to either reenter the labor force or beg for money for the rest of his life.

The punitive indemnity rate explained

If an employee works between one and five years, his end-of-service indemnity (EOSI) payment from the National Social Security Fund (NSSF) will be 50 percent of his last salary times the number of years he worked. If this employee worked between 6 and 10 years, his EOSI for the first five years will be calculated the same; the number of years he works more than five will then be multiplied by 65 percent times his last monthly salary. The rate between 11 and 15 years of work is 75 percent of the employee’s last monthly salary, and between 16 and 20 years it is 85 percent.

*Correction 23.10.2012: the figure is an overstatement as the employer is not held accountable for the half months benefit for every year of contribution beyond 20 years.

September 1, 2012 0 comments

Editorial

Business in brutal times

by Yasser Akkaoui September 1, 2012

written by Yasser Akkaoui

Among the less discussed symptoms of the collapsing Syrian state is the realigned trade balance with Lebanon. Before, everything from gasoline to eggs was sourced cheaply in Syria and sold lucratively in Lebanon, an equation amounting to a multi-billion-dollar trade deficit for Lebanon. Today, the balance of payments is much more even. In Syria, shortages and hobbled transportation networks are fuelling inflation and reversing the flow of goods.

Another reason goods are moving the other way is the collapsing Syrian economic model. Subsidies, along with price and currency controls, have effectively vanished in much of the country as Syria is whipped from a centralized, state-controlled economy to a vicious, smuggling-based, no-holds-barred chaos form of ‘free’ market capitalism.

Indeed, the centralized state authority is evaporating en masse, with the Kurds in the east asserting more autonomy, and sectarian fiefdoms forming where once there were mixed neighbors under one government. This is far from unique to Syria — look at the Bekaa tribes uniting last month to violently fend off Lebanese security forces’ efforts at cannabis eradication. Iraq has long been divided into a Kurdish north, Sunni west and Shia south and in Jordan the atmosphere is far more charged with tribal sentiments than any time in recent history.

This general trend toward state fragmentation seems only to be accelerating, and is perhaps a natural historical consequence of the contours of these countries being defined by colonialist powers — powers that, more or less, took a ruler to a map and drew lines on it without the least regard for local demographics, precedents or relationships. As the strongmen who held this patchwork together are deposed, the fabric is unraveling and the interim period before a new one can be woven together will likely be turbulent.

For business and commerce, this means adapting to a new paradigm, and unfortunately Syria may be the harbinger of where the region is headed — the predatory, ruthless economics of war.

September 1, 2012 0 comments

Finance

Q&A – Mohamad Karaki

by Maya Sioufi September 1, 2012

written by Maya Sioufi

The National Social Security Fund (NSSF) is Lebanon’s main social security program and the country’s largest insurance provider, covering approximately 30 percent of the population. Famed for its endless queues, appalling delayed payments and highly underdeveloped services — requests for this interview were required to be sent by fax machine — ‘daman’, as it is commonly known in Lebanon, provides healthcare, family allowance and end-of-service indemnity (EOSI) to 1.3 million Lebanese citizens. To discuss the issues faced by the daman, Executive sat with Mohamad Karaki, the NSSF’s director general.

E On my way to meet with you, I heard a man on the radio complaining that the NSSF was closed at 10:30 am today and he could not get his payment….

That cannot be true. Employees of the NSSF have the same working hours as government employees [8:00 am to 2:00 pm]. But you know, it is Ramadan now and today it is Friday so they might leave earlier for Friday prayers.

E A government draft bill called for reforming the NSSF back in 2004 and it has not been signed yet. What is delaying the implementation of this law?

From a practical point of view, we can agree over two to three sessions on the key points in the draft law and in a month it would be over. The bigger issue, however, and the one which is taking a political dimension, is whether the EOSI fund gets spun off and managed by an independent company with a separate management or whether it remains under the umbrella of the NSSF. This is the issue that keeps on delaying the implementation of the new law. Many people in the government, for no economic or practical reason, want to have an independent company running the EOSI fund. I disagree. Their arguments are that the NSSF has issues and can’t manage itself. If the government can’t improve the NSSF then where will it find the right people to run this independent company? Also, it would be duplicating jobs.

E Why do they want to put the EOSI into a separate company? Because it is the only fund among the three funds of the NSSF that is not in a deficit?

Many people are saying that is the reason they want their hands on the funds of EOSI. I am just saying EOSI needs to be in its natural place, which is within the NSSF.

E As of the end of last year, the sickness & maternity fund and the family allowance fund reported an accumulated deficit of $239 million and $252 million respectively. What needs to be done to stop these deficits from increasing?

Unfortunately in 2001, the contributions to the NSSF were brought down by 40 percent in one go [contributions to the NSSF were reduced from 38.5 percent to 23.5 percent by lowering the contributions to the family allowance fund from 15 percent to 6 percent and to the sickness and maternity fund from 15 percent to 9 percent]. The only solution is to increase the contributions or the ceiling of the contributions.

E But how much would you want to see the contributions increased?

I am not asking for an increase to 2001 levels but a few percentage points. The raise in the minimum wage this year will bring in new revenues for the NSSF and then we will see how much contributions need to be increased.

E How are the funds of the NSSF invested and is there a way of raising the returns?

The funds of the NSSF stand at $5 billion as of the end of 2011; 70 percent of the funds are invested in treasury bills and the remaining 30 percent are placed in deposits with local commercial banks. As the sickness and maternity and family allowance funds are in deficit, the funds being invested now are from the EOSI fund. There is a committee charged with preparing how to invest these funds. There is no article in the current law allowing diversification, even within currencies. There was no political agreement in the 11 years I have been running the NSSF to diversify in other currencies, as we have to invest everything in Lebanese pounds. With the current law being discussed in parliament, it should open the possibility to invest in other currencies.

We are proposing several investment options both domestically and abroad. The [government officials] are trying to limit the options and are suggesting equities in Lebanese and foreign listed companies and investments in Lebanon’s real estate sector. We wanted to go further and have equities in all companies in Lebanon [and not just the listed ones]. Investing in other currencies is the least we can expect as the NSSF pays all contributions in Lebanese pounds but medical costs are in foreign currencies.

E I hear that evasion of contributions is common in Lebanon. What are you doing to better control evasion from the contributions and alleviate the deficits of the funds?

We have controllers who check evasion from contributions. Now we have 100 controllers, whereas a year and a half ago we had just 30 to 40 controllers, so there will be better controlling going forward. One of the main issues that the NSSF faces is the lack of human resources. We should have 2051 employees and we have 1112 so we are working at 50 percent capacity.

E What is the 2051 figure based on?

When the organization was founded, the law stated that the NSSF should have 2051 employees so we have 939 missing employees. The NSSF used to have its independence when it came to hiring of employees, until 2004 when the hiring process was put under the Civil Service Council. Now every time we need to hire employees, we need the approval of the government that will ask the council to conduct exams and this is delaying our hiring process. We have recently received approval for the hiring of employees and exams are starting in a month.

E Isn’t the lack of electronic services also one of the main issues of the NSSF?

Now we have 35 offices with 1,000 PCs linked online throughout the country. So from a technological point of view, we are among the most up-to-date companies in Lebanon.

E But you don’t offer any services online and you don’t even have an NSSF domain email?

Let me explain. The first step was to train our employees and explain PCs to them. The second step and the most important one is to link hospitals, doctors, pharmacies and all providers of services electronically to the NSSF and start electronic services. I am happy to tell you that the administration recently approved putting in place a department dedicated to electronically linking all services with the NSSF. We will start by linking pharmacies then move on to hospitals and doctors. We hope that by the end of the year we would have started to provide electronic services and that by the end of 2013, we will be providing services such as online registration and providing certificates on employee headcounts online. We also have a new website which we are working on internally and it will be made public within five to six months, allowing people to enjoy services online.

E How about the board of directors that has expired in 2006?

There are no elections yet planned for the board and the current board members are still here and different committees meet on Tuesdays and Thursdays. We need new blood in the organization but unfortunately the current problems in the country are not allowing for elections.

E Do you think the government should provide a private pension plan with tax incentives?

In my opinion, what is missing in Lebanon is an unemployment fund so that if the citizen finds himself without a job, he does not end up on the street without an income. If the NSSF is given the human resources necessary and with the required improvements in place, it can provide all social services to the country. These plans need approval by the government and I am waiting for their approval. I want to improve the NSSF to provide better services to the population. The biggest problem for now is the lack of human resources.

September 1, 2012 0 comments

Feature

Lebanese in Kurdistan

by Joe Dyke September 1, 2012

written by Joe Dyke

As you wait for your bags at the airport in Erbil, the capital of the northern region of Iraq, a large sign reads “Welcome to Kurdistan”. But the sponsor’s name plastered below is not the Kurdish Regional Government or a local firm, but Lebanon’s own Byblos Bank.

In the decade since the invasion of Iraq, no region has grown as much as the semi-autonomous Kurdish region. And the province has paved the way into the Iraqi market for many Lebanese, with more than 6,000 currently working there according to the Lebanon-Kurdistan Friendship Association. The Kurdistan Board of Investment estimates there is more than $760 million in Lebanese capital invested in the region, the second largest of any Arab country behind only Kuwait.

Banking on business

In the banking sector Byblos itself first opened a branch in Erbil in 2007 and now has expanded beyond Kurdistan to establish branches in Baghdad and Basra, while the Intercontinental Bank of Lebanon and Bank of Beirut and the Arab Countries (BBAC) are also well established.

These success stories are leading other banks to take the plunge, with Credit Libanais, Banque Libano-Francaise (BLF) and BankMed all heading to Erbil in the next year. Maurice Iskandar, head of the International Division at BLF, believes it is the perfect time to invest.

“We consider the Iraqi market as a vast and growing one… Iraq remains a primary destination for Lebanese exports and investments, having been for many years the most important export destination for Lebanese products,” he said. “It is in many ways a strategic location and a natural market for our expansion.”

Yet there are issues over the potential growth of the industry in Kurdistan — the region is already home to 14 state-owned banks and 30 private ones, while personal banking remains in its infancy. In this climate, new investors may find it difficult to develop a decent market share.

BankMed, which is unusually due to open branches both in Erbil and Baghdad simultaneously rather than using the former as a springboard for the latter, said they were hoping their strong position in neighboring Turkey, where their affiliate T-Bank has 27 branches, will help differentiate them from their rivals. “Our presence in Turkey, in particular, is a definite plus for our customers in Iraq given the significant trade flow between the two countries,” a spokesperson for BankMed said.

Too many fish in the pond?

While banking is undoubtedly still growing, there are other areas where the relatively small market may already have become overpopulated. Toufic Tasso was among the first to realize the potential for top quality private higher education in Kurdistan. The Lebanese-French University was eventually established in 2007, the first private institution of its kind in Erbil.

Yet five years on and the university is still to turn a profit, while Tasso, the university’s president, admits that the market has become heavily competitive. Ten rival private universities have set up, while the regional government has continued to subsidize growing public universities. The 800 students being taught per year is below capacity by almost 200.

“I would say for the time being (the market) is definitely saturated,” Tasso said. “It is not necessarily saturated in terms of quality offer, but it’s not a market that is now in dire need for new universities.”

He points out that the culture of private education, so prevalent elsewhere in the Middle East, is not dominant in Kurdistan, highlighting tuition fees as an example. “It’s a totally different market than, let’s say, the Lebanese and Emirati models where people are used to private education in most cases — they know that they have to pay a price and that is adjustable with time.”

“Here we have lots of trouble changing the tuition fees every year to adjust for inflation. For them, when they start those are the fees whether it’s a two year program or a four year program, whether inflation is weighing on their costs or improving their revenues.”

Servicing up services

It may be that services, an area where the Lebanese have traditionally excelled, offers the best opportunity for new investors to the market. Erbil itself is barren of much of the luxuries that are so prevalent both in Beirut and the Gulf, as economist Riad Khouri pointed out. “If we were in Erbil and we wanted a nice Lebanese lunch, there is no nice restaurant. Let’s say we wanted to go and buy a certain book or DVD, the shops don’t exist. If you want to go to a club in the evening, they are not there,” he said.

The regional government certainly plans for this to change, aiming to increase tourism exponentially in the coming years. Some 1.7 million tourists visited the Kurdistan region in 2011, the majority of whom were from other parts of Iraq. The regional government hopes this figure will rise as high as 2.5 million, necessitating growth in the hotel market.

Erbil’s Rotana Hotel became the city’s first 5-star hotel when it opened in 2010, with much of the capital behind the project Lebanese. The development, which cost $55 million, was the result of a partnership between the Lebanese group Malia and the Italian company DIVA. Malia chief Jacques Sarraf has targeted the Kurdish market heavily, holding several major assets, of which the Rotana is the most prized.

Thomas Touma, the hotel’s Lebanese manager, said the hotel had benefited from its pioneer status. “We have been profitable since we opened, the profit has grown month by month, but we started with a profit,” he said, declining to give more detailed financial numbers. “We are seeing double digit increase on occupancy rate due to increased demand and short supply,” he added.

Touma admits that the market is going to get a lot tougher in the coming years as “five or six” 5-star hotels, none of which are Lebanese-owned, are due to open. However, he is hopeful that instead of undermining Rotana’s profits, the rivals will help spur the market.

“There is a new five star hotel open next to us — they opened and we did not see any drop in our occupancy or restaurant returns,” said Touma. “This is due to the fact that demand is increasing on a daily basis.” The statistics seem to suggest he may be right, with the Kurdistan region’s investment board announcing in July that tourism in the first six months of the year was up 75 percent on the same period in 2011.

The Rotana’s success appears to be pushing others into the market. In July, Lebanese real estate company Zardman announced the launch of a 200,000 square meter project in Erbil, which will include 269 luxury apartments, a medical center, a hotel and high-end shopping and entertainment centers (slated for completion in 2015).

Looking ahead

Yet, there is one issue that continues to dog the region, and that is consistent allegations of corruption. There is a widespread perception that the duopoly of the two main political parties — the Kurdish Democratic Party (KDP) and the Patriotic Union of Kurdistan (PUK) — has organized the system to make it work for them. Diplomatic cables released by WikiLeaks showed that the United States believed corruption in the Kurdistan region was “pervasive”, and could hinder foreign investment in the oil-rich area. While few people were willing to talk on the record about the issue, Touma hinted that bureaucracy can slow down a project significantly. “Being a new country under development there are still a lot of procedures, a lot of laws that have not been communicated well,” he said. But Lebanese-French University’s Tasso denies that the only way to succeed in the region is through greasing palms.

Investing in Kurdistan is undoubtedly a great opportunity for Lebanese businesspeople, yet there are pitfalls to be wary of. And while the service sector is undoubtedly in its infancy and the potential for growth is there, whether Kurdistan has enough attractions to become the regional business and tourism hub the government wants it to be remains to be seen.

September 1, 2012 0 comments

Real estate

For your information

by Executive Editors August 7, 2012

written by Executive Editors

More ups and downs for Bahrain

Despite simmering unrest and a tarnished image over alleged human rights abuses, the number of real estate transactions in Bahrain rose 59 percent in the first half of this year, according to Survey and Land Registration Bureau statistics obtained by Al Watan newspaper. The vast majority of those transactions were made by Bahrainis, but 10.1 percent did come from overseas buyers. In total, these transactions were worth $842 million. But all is not well for the sector. Prime rents in the capital city Manama dropped 16 percent in the first quarter, making it by far the worst performing city in the world over that time period. The closest city was Hong Kong, which saw a 4.1 percent drop in rents.

Lebanon’s real estate sector: only slightly more transparent

AIn its bi-annual global real estate sector report, the 2012 Real Estate Transparency Index, international real estate firm Jones Lang LaSalle ranked Lebanon fifth in the Middle East and North Africa and 66 out of 97 countries worldwide in terms of transparency. And while Lebanon has moved up in its global ranking this year, the sector is still only considered to be “semi-transparent”. According to the report, one of the biggest reasons for Lebanon’s ascent was the “newly formed Real Estate Association of Lebanon, [which implemented] other improvements in transparency by better regulating the previously chaotic brokerage industry.”

Regional energy investments soar

Results of a study released last month indicate that new investment in the energy sector is on the rise this year. This is welcome news for a Middle East and North Africa, which has long struggled with meeting its energy needs. The report by Ventures Middle East, in which energy-stricken Lebanon receives barely a mention, points to 97 new water and power projects across the Middle East that have started or will start construction this year, with a total value of $32.7 billion. The top beneficiaries are the United Arab Emirates, Saudi Arabia and Kuwait. The UAE has 10 new water and power projects on tap to begin construction by year’s end, worth a total of $1.5 billion — namely the $740 million Noor 1 solar energy plant and the second phase of the $580 million Emal Power Plant. Saudi Arabia has 15 new power projects worth $8.8 billion, led by the $1.2 billion Shuaiba 2 Power Plant and the $2 billion Al Qurayyah Independent Power Plant. Kuwait is set to build $4.2 billion worth of new water and power plants, spread over 19 different projects. The largest of the group will be the $2.7 billion Al Zour North Independent Water and Power Plant.

BoA: Saudi Arabia to lead regional construction boom

A new Bank of America-Merrill Lynch report predicts that Saudi Arabia will lead a new 15-year construction boom across the Middle East and North Africa, led by spending on regional infrastructure projects. The report states that the construction sector will benefit from “reforms to raise productivity of the non-oil sector”, led by the kingdom. The study also predicts that investments in construction across the MENA will total $4.3 trillion by 2020, which would be an increase of nearly 80 percent over current spending this year.

Dubai property sizes shrinking

Long known for outlandish, and extremely large property sizes, Dubai is seeing more transactions in smaller properties during the first half of this year. Figures released in mid-July by the Dubai government’s Land Department show that the average size of residential properties purchased in the emirate shrank by nearly half in 2012 to date. And while the total number of all real estate transactions rose by 24.5 percent over the same time last year, to 12,521, the size and value of those properties has dropped by 44.8 percent. In the first half of 2011, the average size of purchases was 533 square meters. Today’s average size is 294 sqm.

Mubarak-era tax law coming soon to Egypt

Egypt is pushing ahead with a controversial law that was originally passed under deposed leader Hosni Mubarak, Egyptian daily Al Ahram reported in late July. The country’s new finance minister, Momtaz el-Said told the paper that a new real estate tax law would go into effect in January of next year, but with amendments to some of the most widely criticized portions of the original draft of the law. Said remarked that the amended law will exempt citizens’ homes from the tax, and that 25 percent of funds collected by the government would go toward developing poorer areas across Egypt. He estimated that the new tax would bring in $330 million annually for the state.

Mubarak-era tax law coming soon to Egypt

Saudis hopeful with new mortgage law

In June, Executive reported on a newly approved draft mortgage law in Saudi Arabia, a first for the kingdom, meant “to ensure the fairness of the transaction and the safety of the financial system.” In late July Arab News reported that experts across the kingdom expect the law to modernize the sector and attract more foreign investment. “After the implementation of mortgage law, we expect the Saudi market to witness an increase in the amount of foreign investment to 70 percent,” Aziza Mansour, chairman of real estate developer, Aziza Mansour, told the paper. He added, “Many real estate companies have been looking to invest in the Saudi real estate market. However, new Emirati, Japanese, and Korean companies would join the Saudi real estate market very soon. I believe that Makkah is the most demanded residential area where a Korean company will start the building of five residential projects very soon.”

August 7, 2012 0 comments

Banking & Finance

Business from the start

by Executive Editors August 7, 2012

written by Executive Editors

“Entrepreneurs in Lebanon are not mature enough and not trained well enough to become investment ready, but once they are investment ready, they could find money here, in Jordan or anywhere in the world if their business model makes sense and has potential and scalability.”

Walid Hanna, chief executive of Middle East Venture Partners

“It is a risky environment and startups are even riskier. It might not be the right timing today to finance startups but we are definitely thinking of helping within the right environment and with the right product.”

Ibrahim Salibi, head of commercial and corporate banking at Bank Audi

“A lot of entrepreneurs know very little about raising funds. They don’t know what their options are and they get massively ripped off by people.”

“Lebanese are entrepreneurs in their souls. You would very frequently hear young men and women discussing dreams and projects of opening restaurants, fashion boutiques, etc. Provided the infrastructure is there, startups will pop up like mushrooms.”

Stephane Abi Chaker, head of investment banking at Blom Bank

“Banks are doing a great job in protecting money and assets of people but a very poor job in terms of building infrastructure that people can innovate on top of. The obvious one is online payment gateways.”

“Some young entrepreneurs don’t have the maturity or experience of what it means to safeguard shareholder value. Their primary concern is sweat equity and how much they get in upside rather than focusing on how they will make their business flourish and grow.”

Khaled Zeidan, general manager of MedSecurites, a BankMed subsidiary

“From the venture capitalist’s perspective, he knows that startups are risky and in Lebanon riskier than elsewhere so if he were to adopt a pure finance perspective, he would propose a very low valuation. And as Lebanese, we all have a good opinion of ourselves and high valuations [from entrepreneurs] can be expected. What ends up happening is that both give. Question is do they give enough?”

Michel Nehme, chief executive of Cedrus Ventures

August 7, 2012 0 comments

Banking & Finance

For your information

by Executive Editors August 7, 2012

written by Executive Editors

And then there were 8…

Lebanese banks lost ground in The Banker magazine’s latest survey of the top 1,000 commercial banks in the world. Eight Lebanese banks made the list, down from nine last year, and none feature among the top 25 banks in the Middle East. The criteria for the ranking is the banks’ tier one capital, the core capital of a bank and a measure of its financial strength, held at the end of 2011. Bank Audi, while regressing by 33 notches, was the top Lebanese bank in the ranking, securing 288th place. It was followed by Blom Bank, down 44 notches to 411th place, and Byblos Bank, down 22 notches to 460th place. Bank of Beirut registered the largest drop, sliding 120 spots to 753rd place. The other four banks in the ranking were Fransabank (down seven places to 616), Banque Libano-Française (down two spots to 674), BankMed (down 22 spots to 681) and Crédit Libanais (down 15 spots to 874).

Bank robberies in Lebanon

“Which bank is next?” has become the joke of the day among the inner circles of the Lebanese finance industry. In just the past two months, five robberies have taken place and a total of eight since the beginning of the year. On June 14, Federal Bank’s Damour branch was robbed and four masked gunmen took off with LL100 million according to Voice of Lebanon radio. On June 20, Bank Audi’s Verdun branch was the target of an attempted robbery, prevented by the security guards. On June 26, Banque Libano-Française was the prey as $40,000, and LL64 million were snatched from their Dbayyeh branch, according to the National News Agency (NNA). On July 3, it was Société Générale de Banque au Liban’s turn as two gunmen robbed the Kfar Shima branch of around $50,000 and LL40 million, and left behind two injured customers according to NNA. On July 10, Bank Byblos’ Choueifat branch was the target with the amount stolen undisclosed and two people injured during the robbery, according to the NNA.

Lobby group calling on financial institutions to divest from Lebanon

United States-based United Against Nuclear Iran (UANI), an advocacy organization, is calling on financial institutions to divest their holdings in Lebanon’s sovereign debt market and for credit rating agencies to re-rate the country’s debt to “no rating” following their three-month-long investigation, which according to UANI, revealed the existence of a money laundering scheme involving Lebanon’s central bank, Iran, Syria and Hezbollah. According to their press release, Lebanon has employed a state-sponsored money-laundering scheme to “wash” Iranian and Hezbollah illicit monies, in order to artificially and fraudulently support Lebanese debt securities. Some institutions such as Erste-Sparinvest, Aktia, and Ameriprise Financial, have already divested their holdings following UANI’s efforts. Lebanon’s central bank governor recently denied charges that money was being smuggled from Syria to Lebanon and added that Syrian deposits in Lebanese banks were actually decreasing. Also in response to the accusation, Hezbollah said in a statement: “These accusations are pure lies and come within the context of a suspicious US campaign to smear the image of Hezbollah through fabrications and false allegations.” [see page 12]

Egypt raises $1.1 billion in debt

Egypt raised $1.1 billion through the issuance of treasury bills as yields on the domestic debt dropped due to efforts by the central bank of Egypt (CBE). The bulk of the debt issuance ($660 million) was done through the sale of nine-month treasury bills at an average yield of 15.67 percent. Another $155 million of three-month securities sold at an average yield of 14.24 percent. Back in June, the CBE reduced banks’ reserve requirement ratio in local currency to 10 percent from 12 percent, its second move this year as it lowered the rate by two percent in March as well. To increase liquidity in the financial system, the CBE also started selling 28-day repurchase agreements (repo) — form of short-term borrowing — on July 10 in addition to the seven-day repos it introduced in March of last year.

HSBC accused of financing Iran and Saudi-based radicals

A United States Senate subcommittee led an investigation into British bank HSBC and concluded that the institution was lenient with its anti-money laundering control. It accused HSBC of several abuses, among which was the transfer of $7 billion into the US from HSBC Mexico with the funds originating from the sale of illegal drug sales. It also charged the bank of avoiding to “block transactions involving terrorists, drug lords, and rogue regimes,” and gave the example of two HSBC affiliates that sent nearly 25,000 transactions, worth $19.4 billion, through their US affiliate accounts over a period of seven years without disclosing the links of these transactions to Iran. The subcommittee also found that the bank was providing US dollar financing as well as banking services to banks in Saudi Arabia and Bangladesh tied to terrorist organizations. It also attacked the bank’s regulator, the Office of the Comptroller of the Currency, for failing to take action against these abuses. The head of compliance, David Bagley, has resigned following these accusations. “HSBC has fallen short of our own expectations and the expectations of our regulators,” said Bagley.

Iran to introduce three-tiered exchange rate for different imports

As Iran battles with sanctions from the West, the Islamic republic is introducing a three-tiered exchange rate system for the purchase of different classes of imports. For the purchase of “basic goods” such as meat, medicine and sugar, the government is allocating between $24 billion and $30 billion at the official exchange rate of 12,260 rials to the US dollar — a drop in value of nearly half over the past year — though there is a limited amount of dollars available at this rate and the unofficial rate trades at higher levels. The Iranian government makes it more expensive to purchase “capital and intermediate goods” as the rate becomes 15,000 rials to the dollar and even more expensive for luxury products as these will have to be purchased using dollars bought at free market rates. US-based lobby group United Against Nuclear Iran is launching an Iran Currency Tracker, in order to monitor the value of the country’s currency and the impact of international sanctions on the rial.

On the Qatari calendar: Valentino, Harrods hotel and Shard Tower

Fashion designer Valentino, the inauguration of the Shard Tower in London and Harrods hotels in several cities were all on Qatar’s agenda last month. Qatari investment firm, Mayhoola for Investments, is snapping up Valentino Fashion Group (VFG) from Red & Black Lux, a unit of European private equity firm Permira, for an undisclosed amount. VFG operates more than 700 boutiques in more than 90 countries. Qatar Holding, owners of London-based luxury department store Harrods, are planning to venture into the hotel business using the name of Harrods. They intend to open Harrods hotels in several cities including London, Paris and New York with a preference to construct on sites already owned by Qatar Holding or its affiliates, such as Chelsea Barracks in London or Costa Smeralda in Sardinia, according to a statement by Qatar Holding. Sticking to London-based news, Qatari-financed Shard Tower, Western Europe’s tallest tower, was officially inaugurated in the presence of Prince Andrew, Boris Johnson, the prime minister of Qatar, Sheikh Hamad bin Jassim bin Jaber al-Thani and Irvine Sellar, developer of the skyscraper, who said London “owes a debt” to Qatar.

August 7, 2012 0 comments