Business

The oil importers’ albatross

by Sami Halabi
written by Sami Halabi

The perception of Lebanon’s oil importing companies as a cartel of money-making executives feeding off the backs of the people is an easy one to buy into, especially in an import-driven economy such as ours. But as any journalist knows, there are at least two sides to every story, if not many more.

“We are always accused of being people that are making fortunes, which is not true,” pleads Dania Nakad, general manager of Wardieh Holdings (Wardieh) — the self-proclaimed largest Lebanese-owned private sector oil company — and the recently appointed vice president of the Association of Petroleum Importing Companies (APIC), the industry’s lobbying body.

“During the war when the country was just a bunch of mafias and there was chaos everywhere you could say that the oil industry was a cartel, because there were two or three importers with control over the few ports,” she says, adding that such is not the case anymore.

Wardieh is probably best known in Lebanon for its gas stations, and the fact that it used to be owned by Exxon-Mobil before the later decided to exit the country. Yet the company does not own most of the stations that brandish their name.

Instead, Wardieh’s main revenues come from the import of petroleum and other oil derivatives ranging from diesel to petrochemicals. It signs supply contracts with gas station owners and finances the underground tankers and station equipment. While this has proved profitable for Wardieh, there have been a few hiccups.

Last year, a Wardieh gas station exploded near Beirut’s Adlieh district killing three and wounding 14 others. Nakad explains that the incident was a result of a panic-stricken owner, looking for his employee, turning on an electricity switch that had been shut off after fumes were detected in a storage area “that should not have been there."

The leaking underground tanker had been identified and subsequently filled with water for safety, but apparently this was not sufficient to prevent the incident. Nakad says that no charges were pressed because it was obvious where the fault was and “a few months later the station was up and running; we are still with them, them with us, but we lost Joseph,” says Nakad, referring to the station’s former owner.

Explosions aside, oil importers also have to take on significant credit with gas stations that pay post-factum while they pay their suppliers and the government in advance. “I have no protection. So what if I have a contract with a station? If he doesn't pay me I can sue him, go to court, spend a million years there and meanwhile he’ll have zeroed in his account and when the court tells him to pay, he’ll say he’s bankrupt, so what have you gained,” says Nakad. “If you want to be really smart you can steal a million dollars tomorrow and just sit in jail for three months! Honestly, this is the case today.”

Closing the pump

At present there are just 12 companies licensed to import oil into Lebanon. More players are not involved due to the large investment needed for storage, transport and infrastructure, coupled with the need for access to land on the seashore suitable for such an operation. 

Wardieh’s total assets, for example, are valued at $100 million, according to Nakad. She describes last year’s turnover as “excellent” and revealed to Executive that the company raked in revenues of “something like $340 million.” That is because oil prices stayed relatively stable throughout 2011. But now that oil prices are dropping again “since April we are witnessing another crash,” similar to that of 2008 when prices plunged from around $147 per barrel to below $50.

But with such revenue-to-asset ratios it’s little wonder that many say oil importers are running a racket. Oil importers have been accused of acting like an oligopoly and fixing prices. These companies bid for petroleum on the international market in groups in order to be able to buy up whole tankers, as opposed to half-tankers or less, thus allowing for better prices. Wardieh currently groups up with Total and IPT to bid for ships in the Lebanese market. Nakad denies that there is price fixing between the three large groups who usually engage in the bidding, but concedes, “In the absence of a government, the absence of a ministry and the absence of a strategy and policy, we do what we can to safeguard our basics.”

“At some stage ministers like to flex their muscles, and that applies to the current and previous ones who say ‘we want to import [gasoline]’. We tell them, ‘please do, we beg you to do it’,” says Nakad. “It would be better for us because then we wouldn't have to have all this expensive equipment, open up letters of credit for millions of dollars, and take the risk in a country where Israel can come tomorrow and bomb our facilities whenever they feel like it. Instead I would just simply go to the [government] refinery every day, as I do today with the gas oil [red diesel], and take my stock and sell it to market.” 

Caught red handed

At present the government only imports ‘red’ diesel — diesel with high parts per million (ppm) of sulfur, at around 500ppm — while the private sector imports ‘green’ diesel, at around 350ppm. Lebanon’s government-owned petroleum refineries have been out of commission since the Civil War, and perhaps that is a boon given the amount of corruption recently uncovered at their existing facilities.

At the beginning of the year, the government offered a one-month subsidy on red diesel, which removed the value added tax for distributors, the savings of which were passed on to end consumer. A report issued earlier this year by the Audit Court, Lebanon’s government spending oversight body, said that during the last days of the subsidy period government-run facilities in Tripoli and Zahrani continued to sell at the subsidized prize, with 101 of 215 licensed distributers of oil products suppling the red diesel on the last day of the subsidy. The distributors then sold the product at non-subsidized prices.

“I told one of the people who bought, ‘tomorrow morning if you are smart you go and take a credit note from all the people you sold to with the higher price because this will not pass and the files will be opened and heads will roll,” says Nakad. “Another calls me and says he made $50,000 [in profits off the deal], I told him go and sell at the lower price because I was sure that their will be a scandal. He thanked me a month later.”

The Audit Court eventually blamed the government, the consumer protection authority and the companies that made millions of dollars of profits but no one has yet been held accountable. “You think the guy at the door or the accountant makes the decision to extend working hours until after midnight,” she asked rhetorically. “When the big ones fall, it's the little ones that take the blame. The issue was cooled off and tucked away, not because there was a guy at the door who made a decision, there were big people behind it and if it gets to the courts they’ll find a scapegoat.” 

No margin for error

Even if things look good for oil companies, margins may not be as lucrative as one is inclined to believe. In 2002, the Lebanese government commissioned the international accounting firm PriceWaterhouseCoopers (PWC) to carry out an assessment of the pricing structure of petroleum in the country. The study suggested a structure whereby the oil importers would make a 5 percent profit margin on the cost of their product. Other elements included in the pricing structure were the government’s excise tax, currently at $2.67 per jerry can (20 liters) of 95-octane gasoline, value added tax (10 percent), insurance, additives and other costs to the consumer.

Since then, however, Nakad says they have had to incur further costs associated with increases in additives, operational expenditure, invested capital and others, such as a war risk premium that was imposed after the 2006 war with Israel, effectively bringing the margin to 3 percent of the cost of product. The three percent figure was also confirmed by another general manager of an oil importing company that spoke on condition of anonymity. “I dare anyone to identify one commercial sector that can do with 3 percent profits. The dikeneh [shopkeeper] next to your house won’t accept a margin of 3 percent,” says Nakad.

Nakad says that APIC commissioned PWC to do another study in 2010 to update the price structure, and the brief was presented to the previous and current Ministers of Energy and Water, who have not responded. That is why gas stations have gone on strike several times since, says Nakad, closing down gasoline supply in the country.

“You think the international names got out of Lebanon because they don't like the country or because of the weather?” she asks. “It’s not rewarding. Put the money in the bank. You get more and it’s secure!” 

A plausible solution for the industry, she says, would be for the government to crack down on the estimated 2,000 unlicensed stations in Lebanon and stop giving out new licenses to stations, which have reached some 5,000 across the nation. “We are not asking for the government to take [the PWC study] and just implement it, but do something in between, make a compromise.”

Nakad admits that if the companies got their way then consumers would bear the brunt of higher prices. “The awkward situation that we are in is that, whatever demand we have, it is going to be reflected on the end users because the government wants to maintain their income from the jerry can,” she says.  “But we are not supposed to be the financier of the cabinet. The government should not rely on gasoline, which is a consumer good, as a source of income because it is places the burden on the backs of the people.”

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Economics & Policy

How prices have hit the moon

by Zak Brophy
written by Zak Brophy

Fuel is expensive. Food is expensive. Rent is expensive. Everything, it would seem, has become expensive. Over recent years trips to the gas station, the supermarket and the landlord have morphed into a recurring nightmare of increasing prices, draining the pockets of the Lebanese. Add to this the sluggish growth in the economy and people are feeling the squeeze.

“Everything has become so expensive recently it is completely crazy,” says Nayla Otrakji. Although she lives in a comfortable middle-class neighborhood in the Beirut district of Ashrafieh and her husband runs a successful engineering company, the rising cost of living is still felt in the home. “The amount we spend on food has increased so much. I have noticed the highest increase in the prices of dairy products,” she says before adding, “Now I make my own labneh and laban.”

Priced from abroad

While dairy products are largely produced locally, many of the inputs needed to stack a bottle of milk on a supermarket shelf (feed for cows, fuel for transport, and even the cows themselves) come from abroad. Lebanon to a large extent is vulnerable to the vagaries of international markets as it imports over half of what it consumes in any given year, and that is not set to change any time soon. As of February this year the balance of trade — the difference between how much Lebanon buys from and sells to the rest of the world — has reached its highest level in recent memory at a $15.9 billion deficit. That means the country’s reliance on international imports is increasing, making Lebanon more susceptible to rising international prices.

In this context, much of the increases in food and drink prices can be understood. The cost of food commodities on the world markets declined substantially from the 1960s till the early 2000s, but then the tide turned and prices surged from 2006 to mid-2008, turning sharply north once again in 2010. Prices have since held relatively steady, according to the United Nations Food and Agriculture Organization. The receipt received at the end of the weekly shopping in Lebanon reflected these rising trends.

There are two main indices measuring inflation in Lebanon, one from the offi- cial Central Administration of Statistics (CAS) and one from the private Consultation and Research Institute (CRI). Yet while they provide good insight into the trends there are discrepancies between the two and many believe they both understate the rates of change. According to CAS, since its base year of December 2007 until April 2012, prices have risen by just 20 percent. The CRI’s base year is 2004 and its accumulative year-on-year inflation rates suggest prices have risen by 28.1 percent from January 2008 to March 2012.

Rima Turk Ariss, Associate Professor of Finance at the Lebanese American University, has led a two-year-long study into inflation measurement in Lebanon and she says that, “people feel there is a gap between the inflation measurements and the reality of the increase in prices. There is cleavage between the two.”

However, in the case of food, Ariss and her colleagues found that the calculations for food and drinks were pretty close to the mark. So the 132 percent increase in sugar and confectionaries between 2004 and 2011 recorded by the CRI may well explain Mrs Otrakji’s complaints that, “My husband and I, we like dark chocolate. It was LL4,500 [$3] and suddenly it has become around LL6,000 [$4] in less than two years.”

 

Impact on businesses

Rising prices strike not just the consumers but also the nation’s businesses and enterprises.

“In 2010 I was making a plan in my head that if I bring in $30,000 to $37,000 every month to pay all my expenses, salaries, rent, interest, telecoms and fuel, I would be fine. Now if I make $60,000 every month I won’t make anything,” says Barakat Chalhoub, who runs his own customs clearing company, adding that he worries the spiraling cost of running his business is simply unsustainable.

As well as increasing wages in recent years, Chalhoub has taken on some of the increased living expenses for his staff by giving them additional support. “I have three children but now I make plans as if I have 25 children because I am responsible for my staff,” he says. Recently, he has started to pay LL100,000 ($66) to all his staff for their fuel costs and LL150,000 ($100) for their telecoms.

In the CRI statistics transport costs, which consist of the costs of new cars, gasoline prices, tire prices, certain repairs and price of taxis and public transport, have increased 55 percent from 2004 to 2011. The rising cost of transport is intrinsically linked to global fuel prices and therefore, as with food and beverages, the rate of inflation in this sector is predominantly imported. However, Ariss’ study found that Lebanon’s inflation rates within transport costs were less volatile than global trends in fuel prices. The price of a liter of gasoline in Lebanon is now 95 percent of the average daily income of one person within Lebanon, based on the prices of gasoline between April 2 and April 11 2012 according to research by Byblos Bank.

As well as chipping in for their petrol, Chalhoub also supports his staff with the burden of their telephone bills. The Lebanese penchant for a good chinwag, coupled with the unreasonably high cost of telephone credit means that rarely a day passes without hearing someone complain about their phone bill.

However, this sector is perhaps one of the few areas where prices have actually fallen in re- cent years. According to the CRI, tele-coms prices have?fallen by 23 per-cent from 2004 ?to 2011 and Firas Abi?Nassif, advisor to the Minister? of Telecommunications and Post Nicolas Sehnoui, cites a number of achievements during his tenure, such as long-overdue decreases in Internet prices to subscribers by 80 percent and decreased BlackBerry prices by 40 percent.

Yet, despite all of these welcome advance- ments that often go unnoticed, Lebanon still has comparatively high telecoms rates for what are in many cases substandard services. What is more, the room to push prices down is constrained by Lebanon’s huge public debt of some $53 billion dollars, some 140 percent of Gross Domestic Product (GDP) depending on which statistics are used.

The two major telephone providers, mtc and Alfa, are publicly owned and last year raked in some $2 billion for the government’s piggy bank, pretty much covering the servicing of the country’s debt. Further significant drops in telecoms prices would make a serious dent in the country’s coffers if subscriptions do not increase in tandem.

Paying for a pad

One significant cost that is not factored into the nation’s inflation statistics is the cost of property or rent, but this is perhaps where people are feeling the pinch the most. Business owner Chalhoub complains, “For my office’s rent I pay around $15,000 per year, but when I started five years ago it was around $4,000 to $6,000 per year.”

There is no national real estate index in Lebanon so it is unknown exactly to what degree real estate prices have increased in recent years. However, bemoaning the crippling rise in land, property and rent prices, especially in Beirut, has become something of a national pastime. Karim Makarem, director of real estate advisory company Ramco, calculates, “If you bought a flat in 2005 for $300,000 with a yearly average increase of around 25 percent you could be paying at least 3 times that now.” Rents in Lebanon tend to provide a yield of around 3 percent on the property price, so the significant rise in the latter helps explain the predicament Chalhoub now finds himself in.

The balloon in property prices in Leba- non, especially up until 2010, was par- tially fuelled by optimism after the Syrian withdrawal in 2005. Then followed huge inflows of money after the signing of the Doha Agreement to end the civil conflict in May 2008, and investors seeking safe havens in Lebanon’s real estate after the global financial crisis hit, and property prices crashed in the Gulf and later that same year. However, there is also a structural nuance in the Lebanese economy that can go a long way to explaining the inflationary pressures in real estate and all of the non-productive service sectors.

 

Lebanon's economic oddity

Lebanon enjoys huge inflows of capital, such as remittances from expatriate Lebanese and oil money from the Gulf which, along with easy credit from the banks, boost the local money supply. As Lebanon is such a small player on the global stage, both in terms of consumption and production, prices for nearly all things tradable are determined externally, as we saw in the case of food and drinks. However, for any non-tradable goods or services these large inflows of capital drive up prices.

“I used to park for LL500 10 years ago and now I pay LL10,000,” says Abi Nassif from the telecoms ministry. “The workers who come to do maintenance at your place used to be cheaper than most places in the world, now, many services are more expensive than New York City.”

Restaurants and bars are another area of non-tradable goods and services where inflation has been pronounced. While filling the fridge has become expensive, it is fair to say going out for dinner has become an overpriced novelty. “It is now very seldom that we go out to restaurants,” says Otrakja. “It is so expensive now. There is nothing below $30 per person. Only recently you could easily go out for less than $20. If we want togo for a meal we will now only take the family perhaps once every two months.”

The implications of this nuance in Leba- non’s economy go beyond having to pay through the roof just to have a plumber fix a leaky pipe or to enjoy a romantic dinner with your loved one. The rising prices for real estate and locally sourced services raise the costs of production, eroding the competitiveness of productive sectors such as manufacturing, technology and agriculture. In 2002, agriculture and industry made up around 17 percent of GDP — 5.7 percent and 11.5 percent, respectively. In 2010, the latest figures available, they made up less than 12 percent collectively. Conversely, trade and services made up around 54 percent in 2002 and in 2010 comprised 61 percent of total GDP.

As sure as night follows day, where money goes people follow. With the huge inflows of capital into the non-tradable goods and services sector this is also where Lebanon’s workforce is being directed. However, Abi Nassif, both an engineer and economist by training with extensive experience in finance, warns, “People are flocking into these very low skilled kinds of jobs in which we can be out competed by cheap foreign labor in any case. So this only adds to unemployment.” Alternatively, scores of talented Lebanese youth flee to economies that offer them real potential from where they send back a chunk of their earnings to the homeland. The vicious cycle is completed once again.

Pricey education

With a state education system that many complain is ill equipped to educate, those who can send their children to a private school do. However, the fees for these centers of learning often amount to several thousand dollars a year per student, and they are also on the up.

“My three children go to one of the best schools in Lebanon, Notre Dame de Jamhour. They recently increased the school fees by $1,000 [on average],” says housewife Nayla Otrakgi. “It has become $4,500 [on average]. When we began it was around $2,000, then $3000, then $3,500 and now $1,000 extra in one go.” The school confirmed to Executive that it had indeed raised fees by “eight to 10 percent” on average this academic year. Another leading private school, International College, increased fees by 9 percent from 2008 to 2009, 7 percent from 2009 to 2010, 8 percent from 2010 to 2011 and 8.9 percent from 2011 to 2012. That is an accumulative increase of 37.2 percent over a four-year period.

 

Purchasing power

While the rising cost of living in Lebanon is patently clear to everyone in the country, what is less discernible is how this translates into the individuals’ purchasing power. That is to say how the rising prices relate to levels of income. “As for the change in the purchasing power of the consumer, it is not really captured by the inflation rates as they are currently computed,” says economist Ariss.
However, while certain strata of society may be riding above the tide of surging living costs many Lebanese are struggling to keep afloat. Simon Neaime, professor and chair at the American University of Beirut’s Department of Economics, says “We don’t know by how much exactly but purchasing power is decreasing, and it fair to say the middle class is getting wiped out. The middle classes in the 70s and 80s used to be about 60 percent of the population and now I think it is little more than 20 percent of the population.”

It is also uncertain who bears the majority of the burden from rising prices, the consumer or the producer. There is still no producer price index for Lebanon to measure changes in production costs, although CAS say they have the methodology in place but just need a political commitment to collect the data.

Chalhoub complains that while his costs are rising, business is not following suit. “As costs have risen I am struggling to bring in even the same revenues as before,” he says. With the International Monetary Fund predicting growth this year at a modest 3 to 4 percent—an assumption based on “strong domestic policies and an improved regional environment,” neither of which have been forthcoming this year—his qualms are likely shared by many more of Lebanon’s entrepreneurs.

And while it is not exactly clear on whose shoulders the greatest burden of rising costs falls, it is fair to say that no one escapes unscathed. The seemingly inexorable rise in prices, coupled with a frail economy offers no break anytime soon for homeowner or businessman alike.

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Business

Schooled in success

by Sami Halabi
written by Sami Halabi

There was a time during the civil war when the Lebanese American University (LAU) did not know if it would have enough money to pay its staff at the end of every month, according to its president Joseph Jabbra. That is hardly the case today.

For the past several years the university has been increasing its revenue base by some five to six percent every year (see table) and has not had a deficit for the past eight years, according to Jabbra. According to its president, the university’s assets are valued at $602 million between its Beirut and Byblos campuses.

Since LAU is a non-profit institution it spends exactly what it brings in. Thus in any given year, tuition makes up anywhere from 70 to 80 percent of the university’s revenues. However, unlike many other schools, tuition hikes have tailed behind increases in the university’s turnover (see table). The result is that LAU, traditionally seen as Lebanon’s most expensive university, now actually charges less on average than its main competitor, the American University of Beirut (AUB).

The difference, according to Jabbra, has come from a strategic decision to steer revenue growth away from higher fees and to concentrate on the fundraising element, something the university has had some success with. In 2005 the university set out to raise $40 million in five years. “People said you could not raise any money,” said Jabbra. Over a period of four years LAU had managed to raise some $67.1 million and is now in the “quiet phase” of their next five-year funding spree, which aims to raise another $50 million to support capital spending plans of $240 million over the same period, according to Jabbra. The president’s target for the university’s endowment in the next four years is $500 million. What is also worthy of note is that this increase in revenue comes at a time when the university is also expanding its operations and programs.

Acquiring a medical program

In 2009 the university started its medical program after acquiring the Rizk Hospital, something that took a considerable amount of back and forth between the board and the president’s office.

“When we wanted to establish the medical school the board said ‘you will not have a hospital.’ They didn't want the hospital to become an albatross on the neck of the institution,” said Jabbra. Eventually, he says, the board acquiesced after affiliation agreements with other hospitals fell through and on condition that they would have control over the finances. Jabbra revealed to Executive that the university acquired the hospital, now called University Medical Center-Rizk Hospital, for a previously undisclosed amount of $47.5 million through Medical Care Holding, in which LAU has a controlling stake. He also revealed that the university is planning to put up another $47.5 million to meet its expansion plans for the hospital after it completes a restructuring of the facilities.

“The hospital was controlled by one person and was French-based,” says Jabbra. “First we had to make it controlled by systems, and second, make sure that the doctors, nurses and staff were introduced to English, so taught them free of charge.” Plans include a new radiology center and a new operating theatre.

revenues


Gaining recognition

Another program that has recently reached fruition is having the university accredited by an American education board, something that cost them almost $1.5 million.

“The raison d’etre was not: because AUB has it we have to have it,” he says. “If it makes us a better competitor to AUB then so be it. But you can’t improve unless you have someone telling you what you are doing here is wrong, or what you are doing is absolutely terrific.”    

Even with accreditation now in tow, LAU has not yet reached the research capacity of its main competitor, which claims it produces more research in terms of publications and papers than any other institution in the Arab world. Jabbra acknowledges that LAU has a ways to go but explains the reason behind it is somewhat historical. “For a long time we were a college. The main function of a college was to teach,” he says. LAU changed from a college to a university in 1994 when it started offering graduate degrees. Before that decision LAU was known as the Beirut University College.

To address this the university started to transition its teaching load for assistant professors and above in 2005, from four courses per semester to three courses per semester. “Doing research takes time, training faculty takes time. It costs money as you need to give faculty release time,” Jabbra says.

tuition
Higher education shortfalls

Another area where LAU falls behind its main competitor is number of graduate students they maintain. At present 9.3 percent of LAU’s student body is comprised of graduate students, while AUB’s comes in at 24.4 percent. Jabbra says that he advises most parents to tell their children to get their undergrad in Lebanon and go abroad for a graduate degree. “Not everyone can travel, because it costs a lot of money,” Jabbra says. He also denies that the university is ignoring its graduate program, insisting that it focuses on a selected few areas such as its doctorate program in pharmacy, the only such program outside the United States that is accredited by the Chicago-based Accreditation Council for Pharmacy Education.

LAU’s recent rise has not been without indecent however. In the past several years, two physical altercations caused by political and sectarian tensions have occurred, with the latest in the last academic year as tensions in the country rose over the ongoing unrest in Syria. LAU’s response was to provide counseling to the students instead of showing them the door, and 18 out of 19 students were eventually re-admitted. “It happened again and we did the same thing. We said to the Shia students, we are going to place you with Sunni communities, and we said to the Sunnis we will put you with Shia communities,” Jabbra says. 

Looking ahead

Next year, Jabbra estimates that the university’s budget will hit $138 million, a rise of some 23 percent. That would be more than double the trend in recent years; this ambitious target could well be achieved, as long as Lebanon can coast through the conflict next door.

However, whether he expects incidents on LAU campus to occur with more frequency as the situation in Syria escalates, Jabbra gives an answer that seems to be on the lips of most businesses in Lebanon today: “I don't know.”

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Finance

INSEAD’s Professor Theo Vermaele

by Executive Staff
written by Executive Staff

Professor Theo Vermaelen, the Schroders Chaired Professor of International Finance and Asset Management at the INSEAD business school discusses with Executive how the ‘small people’ caused the 2008 financial crises, Facebook’s IPO flop and Lebanon’s conservative stance on derivatives trading on the sidelines of a recent conference titled ‘Challenges of the New World Economy: Are we in a Post Globalization Era?, at the Phoenicia in Beirut.

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Real estate

For your information

by Executive Editors
written by Executive Editors

Political tensions, market volatility hit Solidere

It has been a roller coaster ride for Solidere so far this year, mostly due to a shaky security situation in Lebanon, but also because of a sector-wide drop in sales. The property developer’s A and B shares dropped of 3.1 percent and 4.19 percent, respectively, in the third week of May on the Beirut Stock Exchange after violent clashes across the country. However, share prices climbed back up to $12.5 and $12.34 by the end of trading on May 25. As Executive went to press at the end of May, the developer’s global depository receipts listed on the London Stock Exchange were down 29.6 percent since anti-government protests began in Syria last spring. Many local analysts predict that if Solidere shares remain in free fall, major shareholders Bank Audi and BankMed would initiate a buyback scheme to boost prices, as they have done in the past.

Construction down, again

According to figures released by the Order of Engineers in Beirut and Tripoli, construction in the first four months of this year is down 10.5 percent from the same time last year. The most significant drop was in April, which saw a 26.5 percent dip in the number of new building permits over the same period in 2011. The Order of Engineers attributed much of the decline to the worsening situation in Syria and its effect on Lebanon. These figures follow a general downward trend over the last year for the entire sector. A Citi Research report, MENA Construction Project Tracker, showed in April a regional drop of 30 percent in the number of new projects awarded across the Middle East and North Africa.

Cityscape award goes to Abu Dhabi’s Sorouh

Sorouh Real Estate Company won the 2012 Cityscape Abu Dhabi award for the best mixed-use project in the region for its Sun & Sky Towers development in Abu Dhabi. Sorouh Chief Operating Officer Gurjit Singh said the development had attracted “over 900 families” after the award announcement. The Sky Tower stands at 74 floors, and the Sun Tower is 65 floors, making them the tallest buildings in Abu Dhabi. The company broke ground on the towers in 2007 and the first tenants were able to move in last year.

Beirut Property Fair

The annual three-day Beirut International Property Fair took place at the Conference Center of Hilton Beirut Habtoor Grand Hotel at the end of May. The event featured talks on attracting foreign investors to Lebanon, social media marketing strategies, investment in green technologies, and construction site safety. A general theme of smaller, more affordable apartments highlighted this year’s conference as Lebanese property developers slowly adjust to the realities of a general downturn in the local real estate market. Beirut-based investment firm MENA Capital used the event to launch its new 10,000-square-meter Bella Casa gated community in Beirut (see page 88).

UAE property agency welcomes criticism

Emirates-based property agency Better Homes is attempting to take the lead in a transparency drive for the sector, by creating an online rating system where customers can rank the performance of individual real estate agents directly on its website. The idea is to enable prospective buyers, and those who have already purchased property, a chance to rate and discuss their experiences in a public forum. “Honest and open customer reviews will enable new customers to find the best agents,” Ryan Mahoney, chief executive of Better Homes, told the Abu Dhabi-based newspaper The National shortly after the rating system was launched last month.

Palm Jumeirah courts young buyers

Emirates property developer Nakheel will soon expand its residential offerings on the Palm Jumeirah after it said financing had been secured for 192 studio apartments. The new development, Palm Views, “will appeal to young, vibrant individuals and couples who want a prestigious address at a price they can afford,” Nakheel chairman Ali Rashid Lootah said at a press conference. Studio apartments are 150 square meters, and start at AED1 million ($272,000). Palm Views will be split into two towers, each with 96 residential units. Construction is slated to begin by the end of this year, with first delivery expected in the first quarter of 2014. Palm Views will follow a regional trend that has new developments moving away from the higher end of the market to focus on first-time buyers.

Awards handed out at Cityscape Qatar 2012

Cityscape Qatar 2012 awards were announced on the last weekend of May. Notables included Best Sustainable Development Award, which went to Msheireb Properties for its Msheireb Downtown Doha project, and the Residential Project Award, given to Qatar-based United Development Company for its offering, The Pearl Qatar, which won for Mixed-Use Project. Other winners included Hamad Medical Corporation, Barwa Real Estate, and Qatar National Hotels Company. A number of large deals were also announced at Cityscape Qatar, and Barwa Real Estate Group used the conference to officially launch its Lusail Golf Residential Development. “The number of agreements signed at the event are themselves a testament to the leading role Barwa continues to play in Qatar’s development,” Barwa’s chief executive officer Abdulla Abdulaziz Al Subaie told reporters after the launch.

Bahrain property sold ‘at a loss’

According to a report by international real estate consultancy CBRE, Bahrain’s residential property market has taken a serious beating since anti-government protests began there last year. The report noted that: “Several middle-income housing projects have been launched in Bahrain in the last three months, and sales have reportedly been brisk to date.” But things are so bad that “that some of these projects are effectively being sold at a loss, or at best, cost price, in order to stimulate the market and raise the profile of the ongoing master-planned projects of which they are merely [at] a very early phase,” the report said. CBRE offered little hope for the immediate future as Bahrain’s public image remains tarnished by a brutal government crackdown on dissidents in the Gulf country.

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Economics & Policy

The devil’s details

by Malek Takieddine
written by Malek Takieddine

In its drive to become an oil and/or gas producing country, Lebanon currently faces the challenges of establishing and implementing a sound regulatory framework and an effective Petroleum Administration, the sector’s (supposedly) independent regulatory body.

Some of the most crucial aspects of the required system include creating farsighted mechanisms that will first prevent the occurrence of a number of problems that are commonly encountered in hydrocarbon producing provinces, and second, equip the Lebanese government with sufficient powers to address such problems swiftly and efficiently as they arise throughout the development of the upstream oil and/or gas industry in the country.

National vs. IOC interests

Arguably one of the worst oversights that can be committed by the early drafters of oil and gas legislation is the assumption that International Oil Companies (IOCs) would be always seeking to diligently explore their acreages in search of hydrocarbons, and that once they have found oil and/or gas, they would be eager to exploit it effectively and quickly.

Experience around the world shows that not long after licenses are granted or discoveries are made, some areas are often left to lay fallow and national governments discover that they do not have adequate powers to impose work obligations on the IOCs. As a prominent observer of the United Kingdom offshore licensing regime once noted, “the idea that licensees might make significant discoveries but then not develop them does not appear to have occurred to those who first drafted the offshore licensing arrangements in 1964/1965”.

In the UK, for example, rigorous state action was needed to address this problem and the government had to undergo the complexities of enforcing a “voluntary” scheme in order to rectify the situation of fallow areas and discoveries. The result was a shy governmental process that raised some concerns about the legality of such measures.

The efforts undertaken so far by the Lebanese government in drafting the offshore hydrocarbon legal framework suggests that the country is slowly making steady progress in the right direction. It is imperative to continue along this positive trajectory by appointing a Petroleum Administration that can play an effective role in monitoring, at a close distance, the petroleum operations to be undertaken by the IOCs.

Foresight needed

It can be also predicted that, in light of the current position of the Lebanese economy, the mere discovery of commercial oil and/or gas reserves would  understandably be interpreted as a promising sign of future wealth, regardless of the quantities that would actually be produced.

Yet, once the initial joy of the first few barrels fades away, the Lebanese government must be well prepared to monitor the efficiency of its production and to make sure that its licensees are conducting their operations using the best practicable standards and methods to ensure acceptable recovery levels out of each reservoir.

The technical expertise and skills of the licensees (the operators) usually play a crucial role in determining the levels of recovery (i.e. how much oil and/or gas could be practicably produced).

For instance, a 70 percent oil recovery from an oil reservoir is considered to be a high percentage as it is almost impossible to extract entire reserves of any particular reservoir due to the constant reduction of pressure and the interference of other factors, such as oil density and depth of the reservoir, amongst others.

Countries such as Saudi Arabia are constantly aiming to increase their investments in enhanced recovery technologies, as they recognize how vital this is in order to boost recovery rates at their reservoirs from around 50 percent to 70 percent.

Once again, the Lebanese regulator must ensure that the government’s powers under any exploration and production agreement offer useful mechanisms for pushing the licensees towards more efficient recoveries, that is to say better stewardship.

In due course the government must put in place adequate mechanisms whereby field activities would be surveyed (preferably on a yearly basis) to determine the performance of each licensee (operator).

A process to deal with underperforming fields must also be decided. Such a process could, for example, include an initial consultation exercise between the government and the licensee (operator) to study possible ways to enhance stewardship. A set of targets could thereafter be agreed in conjunction with a clear and firm set of sanctions.

Failure to address certain crucial issues in the initial text of petroleum regulations and agreements could have disastrous consequences on the national interest and result in huge resources being lost or at least deferred. 

Effective revenue management

In addition to operational efficiency, an important matter that Lebanon must consider is the efficient management of its hydrocarbon revenues. Hydrocarbon resources are known to inject considerable financial revenues into state accounts. These revenues would usually have two main characteristics: one, they are likely to constitute a large percentage of the total yearly revenues of the state; and two, they are temporary. As a result, several unfavorable consequences could be noticed in the national economy:

(i) Inflation due to the sudden increase in money supply.

(ii) An occurrence of the Dutch Disease, meaning the depreciation of the productive sectors as they becomes less competitive due to the oil-related increases in exchange rates.

(iii) An unstable budget balance due to the volatility of oil prices.

(iv) A decrease in income when the resources of the province begin to decline.

As part of the economic strategies that governments undertake to surmount the above challenges, national oil funds are often created by governments to accumulate and manage part of, or the entirety of, the state’s oil and gas revenues. In total, close to 20 petroleum-producing countries are known to have established national oil funds.

The specific purposes of such funds varies between countries; for instance, Norway’s aim is to use its fund to stabilize of the economy and to secure a steady income for future generations, even after the resources dry-up. Russia, however, does not give priority to saving for future generations and the purpose of its oil fund is, according to Vasily Astrov, an economist at the Vienna Institute for International Economic Studies: “reduce the vulnerability of the state budget to the volatility of world oil prices,” and to sterilize “the impact of oil-related foreign exchange inflows on the money supply and inflation.”

To Lebanon’s credit, the Lebanese Offshore Hydrocarbon Resources Law provides a clear provision that state hydrocarbon proceeds shall be injected into a sovereign fund.

The strategy shall be to keep the capital and part of the proceeds in an “investment fund for future generations”, while using the remaining funds to “guarantee the rights of the state and avoid serious, short or long-term negative economic consequences”.

In theory this is an excellent provision, however, the practical benefits thereof shall be largely affected by the seriousness of the special law that needs to be enacted by the Lebanese parliament to define the management structure of the sovereign wealth fund, and its investment principles, not to mention the effective implementation of such law. A close eye should be kept at how the Lebanese authorities will perform in the coming years in this respect.

Worthless oil and gas?

Indeed, some critics may argue that Lebanon’s oil and gas resources would be worthless to the country if they are badly managed and exploited. As the coming decades will show, the true worth of these ‘valuable’ resources will come down to the ability of the Lebanese authorities to manage this industry with high technical capabilities, foresight and transparency.

MALEK TAKIEDDINE is a legal consultant in the oil and gas sector and managing director at Al Jad legal firm

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Economics & Policy

For your information

by Executive Editors
written by Executive Editors

NSSF raises coverage costs

The National Social Security Fund (NSSF) has increased its rate to cover an overnight stay in private hospitals from LL30,000 to LL90,000. The move came after private hospitals threatened to stop taking NSSF patients because the rate was too low in the face of increasing costs of care. This increase in coverage will be met with a rise in the ceiling of employees’ monthly contributions to the sickness and maternity category from LL30,000 ($20) to LL50,000 ($33). In this category, employers pay 2 percent from an employees’ salary, but this was previously capped at LL30,000 for salaries over LL1.5 million ($1,000). Under the new agreement the maximum contribution has been increased to LL50,000 by raising the salary cap to LL2.5 million ($1,666). The NSSF suffers from serious problems relating to underfunding and understaffing, with 45 percent of its positions vacant and the average age of employees exceeding 51 years old. According to the fund, the government’s accumulated obligations at the end of 2011 amounted to LL829 billion ($550 million), while they only received some LL120 billion ($80 million) from the state’s coffers that same year.

Spending in uncertainty

The Lebanese are continuing to spend, with private consumption for the first quarter of 2012 up on the same period in 2011. Investment spending is also up but at a markedly lower pace. Total spending, measured by the aggregation of cleared checks, point of sale and ATM transactions, edged up by 3.1 percent year-on-year in the first quarter of 2012, reaching $19.2 billion. This compares to the 1.5 percent increase in spending registered in the same period in 2011. The total cash withdrawals from ATMs by Lebanese residents increased by 7.9 percent annually, while point of sale purchases increased by 24.6 percent on a yearly basis. The figures show the Lebanese are continuing to increase expenditures despite the fragile economic and political environment that has prevailed, locally and regionally, since early 2011. The investment component was up at a comparatively lower pace due to uncertainty over the Lebanese and Syrian security situation. Imports of investment products went up a mere 2.3 percent year-on-year in the first quarter of 2012.

Logistical failure

Lebanon has crossed the finish line in 96th place in a global survey on logistics, slipping from its place at number 33 in the same survey in 2010.  The World Bank’s Logistics Performance Index (LPI) assesses the logistics gap among 155 countries and reflects perceptions of the logistics environment of trading partner countries. Lebanon also fell from 4th place to 26th from 2010 to 2012 among the upper-middle income countries category. The results are based on a survey of operators across the world who give feedback on the logistics of “friendliness” of the countries in which they work. It assesses customs procedures, logistics costs, infrastructure quality, the ability to track and trace shipments and timeliness in reaching destinations.

Upping industry, outing taxes

The Ministry of Industry has signed a deal with the American University of Beirut (AUB), the National Council for Scientific Research and the Lebanese Industrial Research Achievements program (ILRA) to improve the quality of industrial research in Lebanon. It is hoped the agreement will contribute to helping Lebanon generate industrial high value-added products for the economy while enabling AUB students to conduct academic research relevant to industry. Elsewhere, the Ministry of Industry said that a long sought-after law to reduce taxes on industrial exports by 50 percent was approved by the cabinet but was awaiting ratification from Parliament. Industrial exports amounted to $527.1 million in the first two months of 2012, up 10.6 percent from the same period in 2011. The sector as a whole constitutes 7 percent of gross domestic product according to the most recent figures. In 2002 the sector constituted around 11.5 percent of GDP.

MEA profits crash

The nation’s flag carrier Middle East Airlines (MEA) announced a 55.9 percent drop in operating profits between 2010 and 2011. It is not possible to verify the actual financial statement of MEA as it does not publish a detailed balance sheet or income statement, but the company’s chairman Mohammad Hout said the operating profits had dropped from $90.6 million in 2010 to $40 million in 2011. He blamed rising fuel prices, increases in wages and turmoil in the Arab region. Lebanon entered into the top bracket of the open skies policy in 2002, which liberalized aviation and increased competition in and out of the country, but Hout has complained that not all countries in the region are abiding by the agreement’s rules. The ex-head of Lebanon’s civil aviation authority, Hamdi Shawk, claims the Minister of Transport and Public Works, Ghazi Aridi, and MEA are retreating from the policy of liberalization. Neither the minister nor MEA responded to Executive’s repeated requests for comment. The company is more than 99 percent owned by Lebanon’s central bank and previously mooted plans to partly privatize the carrier by listing on the Beirut Stock Exchange appear to have been shelved.

Electrified employees

The government-owned electricity provider Electricite du Liban (EDL) was wracked by open-ended strikes, protests and sit-ins by part-time and contract workers last month. As workers protested against the cabinet’s failure to endorse their full-time employment draft law. The workers have been pushing for permanent employment with full benefits, voicing fears that they will lose their work to service providers. The EDL employees association claims that there are only 1,700 full-time employees at the company while it needs more than 5,000. The Minister of Energy and Water, Gebran Bassil, told reporters that “the company cannot contain more [permanent employees] than it can bear.”

Gray days ahead

Lebanese youth have a more downbeat view of their economic prospects than their Arab counterparts, according to a new report. The ASDA’A Burston-Marsteller 2012 Arab youth survey indicated that 63 percent of Lebanese youth are very concerned about the rising cost of living, 63 percent are worried about the economy and 60 percent are worried about unemployment. While the same proportion of Arab youth are concerned about the rising cost of living, only 48 percent are worried about the economy, and 44 percent are worried about unemployment. More than half of the respondents said that they had fewer opportunities than they did 12 months earlier. The survey covered the United Arab Emirates, Oman, Qatar, Bahrain, Saudi Arabia, Kuwait, Egypt, Jordan, Lebanon, Iraq, Tunisia and Libya.

Typically below potential

Lebanon’s projected real gross domestic product growth (GDP) of 3 percent in 2012 is well below the economy’s potential, according to the International Monetary Fund (IMF). It identified the implementation of strong domestic policies as essential to stimulating confidence, which requires good fiscal discipline to reduce the debt-to-GDP ratio downwards from its current standing somewhere around 140 percent. The IMF identified the need for reforms in infrastructure, as well as improvements in the business climate to help create a dynamic economy and boost job creation. This comes on the heels of a UN study that highlights that the labor-intensive productive sectors have been marginalized in Lebanon, contributing to lower productivity, higher unemployment and the exodus of much of the nation’s young talent.

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