Economics & PolicyMonaco

Bechara el-Khoury & Mustapha el-Solh

by Maya Sioufi
written by Maya Sioufi
The relationship between the principality of Monaco and Lebanon started developing from the independence of Lebanon under the rule of Bechara el-Khoury, Lebanon’s first president and Riad el-Solh, Lebanon’s first prime minister. Today, Lebanon’s consul in Monaco is Mustapha el-Solh, the great grand nephew of the first prime minister and Monaco’s consul in Lebanon is Bechara el-Khoury, the grandson of the first president. Executive sat with both consuls to discuss this enduring relationship between the two countries.
Bechara el-Khoury 

How would you describe the relationship between Lebanon and Monaco?

There has always been a consul of Monaco in Lebanon, ever since my grandfather was president, as we are riverains de la Méditerranée. The relationship has always been very good and now we couldn’t have it better. Mustapha el-Solh is very well connected and I am not badly connected either [laughs]. The access is easy. That is what is the most important in bilateral relationships. 

How many Monégasques are there in Lebanon? 

Three: Eric Bessone (director of sales and marketing middle east at Monaco’s Société des Bains de Mer), the wife of my father, and myself. My brothers and sisters also have the nationality but they live in Paris and so does prominenet Lebanese businessman Toufic Abou Khater. Those are all the Lebanese with a Monegasque nationality. 

What are the ongoing projects between Lebanon and Monaco? 

Monaco is cooperating to finance projects in Lebanon such as sea cleaning, planting cedars and a few health programs for the United Nations Relief and Works Agency (UNRWA). There is a non-governmental organization (NGO) called Les Amis du Liban, which distributes 250,000 to 300,000 euros ($320,000 to 380,000) per year to different sectors of activity. When Prince Albert II came two years ago on a state visit to Lebanon to see President Sleiman, we organized training for the Lebanese fire brigade to go to Monaco and be trained to deal with fires in towers, because they had no previous training and we have more and more towers. This program is still ongoing. We also have a Maronite priest who stays at the Monaco cathedral on a revolving three-year loan. We are always working on projects to improve the relationship between Monaco, Lebanon and the Middle East. 

Do you also represent the Middle East? 

My job is not just for Lebanon. It is also for the area because Prince Albert II knows I have relationships across the Middle East. Whenever he goes to the region, he takes me with him. We can attract a lot of Arab tourists to Monaco. There is potential for the Middle East clientele to come and develop projects in Monaco. 

Where are the investment opportunities in Monaco?

They are in real estate primarily. Also there is a law in Monaco which allows you to have worldwide revenues come in with no taxes and go out to pay your worldwide employees with no taxes, making it attractive for companies to set up an office in Monaco. That is why all the big ship owners are based in Monaco today. This is important because it is an enormous facility. Also there is no personal income tax in Monaco and a small corporate tax. 

What can Lebanon learn from success story of Monaco? 

Lebanon needs to attract more tourism. One of the strengths of Monaco is that every single day there is an event and there are conventions. Lebanon needs to do that too. Also, Monaco was promoting heavily the healthcare industry. This could be done in Lebanon. For instance,  Monaco has fantastic heart surgery unit. We have very good doctors so we [could] have more specialized centers. 

If you had to choose to live in either Lebanon or Monaco, where would you choose? 

Obviously, I was born in Lebanon and I carry a very famous name, but for my own personal choice I would live every day in Monaco. 

Mustapha El Solh 

As consul of Lebanon in Monaco, what does your role entail? 

The Lebanese consulate in Monaco is an honorary one and has existed since 1996.  We represent the interests of Lebanon across all sectors and we look after the interests of all the Lebanese residents in Monaco. We conduct all consular administrative services, such as passport renewals and visa issuance, and we organize many events throughout the year to promote Lebanon in Monaco. Last year, I organized the official trip of Prince Albert II to Lebanon with an economic delegation of 80 people during which many bilateral agreements were signed.  For example, four Lebanese TV stations signed distribution agreements with the local TV cable operator to transmit locally in Monaco. 

And as president of the Association of Consuls Honoraires de Monaco, what does your role entail? 

The Prince and the government of Monaco look highly to the consular corps for reinforcing the bilateral relationship between Monaco and the rest of the world; there are more than 80 consuls accredited in Monaco. In 2009, I was elected by all consuls in Monaco to become president for a five-year mandate. My main role in this post is to promote the consular function and most importantly to represent the interest of the consular corps during all the official events in Monaco.  

How strong is the current relationship between Lebanon and Monaco and how can it be further developed?

The relationship between the two countries is exceptional. In the past 20 years, there have been numerous agreements and exchange programs. On the economic side, companies have signed trade agreements allowing exchange of services and products (mainly in jewelry, insurance, shipping, etcetera). Major environmental agreements were executed between the two countries.  Bank Audi, Lebanon’s largest bank, opened a branch in Monaco two years ago.  A representative office for Monaco’s largest tourism and service company, the Société des Baines de Mer (SBM), opened in Beirut in 2010 and since then many cultural events have taken place in Beirut coming from Monaco.  

Do you have figures on how many Lebanese live in Monaco and how many visit Monaco per year?

There are more than 300 Lebanese living in Monaco and Lebanon features among the top 20 countries to visit Monaco. 

What can Lebanon learn from Monaco’s success story?

Up until the early 1970s, Lebanon used to be the success story of the whole Mediterranean basin. Whether for its touristic or financial infrastructure, Lebanon excelled in attracting visitors. Unfortunately, the civil war and the recent political turmoil impacted negatively Lebanon’s potential. On the other hand, Monaco always prioritized offering its residents and visitors a great experience and the principality has developed a sophisticated financial infrastructure with an absolutely secure environment. It manages the country as a large corporation and its general interest is to service a profitable and satisfactory business model. It also offers rich cultural programs including ballet, theatre, museums and art exhibitions. I strongly believe that once the political stability is regained in Lebanon, it would offer equivalent conditions and would become a key destination for people to reside throughout the year, as well as visit to discover the richness of our ‘patrie’.

How many years have you been living in Monaco? What do you like best about living in Monaco that you can’t find in Lebanon?

I have been in Monaco for 18 years and have been greatly welcomed by its society and people. The special thing about Monaco is that it is a cosmopolitan city but also maintains certain traditional and conservative habits. With time, Monaco grows on you due to the warmth and care of its citizens.

If you had to choose between living in Lebanon and Monaco, which country would you live in?

I left Lebanon almost 30 years ago and I have lived across many continents and cities. Lebanon has and will always be home. Monaco is a great place to live, it offers my family the best conditions and continues to be a second stable home.

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Economics & PolicyMonaco

The East floats into town

by Maya Sioufi
written by Maya Sioufi

It is early May and the famous Place du Casino — wherein lies one of the world’s oldest gambling houses, the renowned Monte Carlo Casino — is overflowing with tourists. 

Californias, 911s  and Continental GTs line the casino entrance for tourists to gawk over and take the cliché Monte Carlo postcard shot beside overpriced luxurious wheels with the Monte Carlo casino behind: the ultimate photo of lavishness. 

The European sovereign debt crisis engulfing the principality’s neighbors does not seem to have reached Monaco, but the faces flocking to these alluring two square kilometers do seem to have changed, with Asian and Eastern Europeans tourists replacing Western European and American ones. 

A look at the recent financial results of the Société de Bains de Mer (SBM), Monaco’s biggest employer and the company behind some of the principality’s most prestigious assets, does not paint the same rosy picture as the Place du Casino. 

SBM is the main economic actor of the principality and its assets include fours hotels, among which are the famous Hotel de Paris and Hermitage hotel, five casinos, including the Monte Carlo Casino, 33 restaurants and bars, three spas and the legendary Jimmy’z night club, a celebrity hotspot. Being 70 percent owned by the state of Monaco and the ruling Grimaldi family, with the remaining stake listed on the Paris stock exchange, “the SBM and the state are almost one” says Bechara el-Khoury, consul of Monaco in Lebanon. 

As the financial crisis hit the pockets of tourists, the profits of the SBM reversed from 31 million euros ($39 million) in fiscal year 2006/2007 (ended March 31) to a 22 million euros ($28 million) loss for the fiscal year 2010/2011. Its stock price got hacked too, down some 50 percent from the start of the financial crisis. Year to date, it is down 10 percent (as of May 18). In response, the company reshuffled its management in November 2011, appointing a new chief executive who replaced the former CEO of nine years, creating a deputy CEO position and adopting a new strategy. 

Attracting new customers

Sitting at the cozy yet refined Bar American in the Hotel de Paris, Axel Hoppenot, marketing director at the SBM, talks through the new strategy, which aims to identify how to develop revenues and readdress the cost structure. He reveals that they have witnessed a pickup in activity so far this year. 

While the European sovereign debt crisis is still weighing on their results, Hoppenot is confident that the “engines of growth from the new markets will help the company overcome this difficult period.” He confirmed that there has been a focus on attracting new markets to Monaco, most notably focusing on Russia, Eastern Europe, Asia and the Middle East. 

To cater to the Middle East, the SBM opened a representative office in Beirut at the end of 2010, headed by Eric Bessone, from which the company aims to cover the region. According to Bessone, the role of the Beirut office is to present offers of leisure, business, and well-being from the 50 institutions of the Monégasque company. 

Currently, the Middle East accounts for approximately eight percent of their total hotel revenues and can reach up to 10 to 12 percent in the summer. The Middle Eastern clientele has increased in the past couple of years, adding some two to three percentage points, according to Hoppenot. He does, however, warn that this year will not be as solid due to Ramadan falling in the middle of summer. 

Bringing Monaco to Lebanon

The interest in the Middle East was most striking with the opening of Saadiyat Monte Carlo Beach Club in Abu Dhabi last year, SBM’s first venture outside of Monaco. 

“Today it is more complex to set up a business in European capitals as the entry cost is much higher, and because of quality control we can only set up in prime locations” says Hoppenot. “Abu Dhabi is, in the Middle East, one of our most important markets.” 

When asked if SBM was considering more investments in the region, Hoppenot stated that for now, given the economically challenging times, SBM is focusing on consolidating their current assets in order to ameliorate the quality of service. 

As for Lebanon, SBM has been focusing on bringing the glamour of Monaco closer to home. The aim is to “get closer to our guests and help organize ‘tailor made’ stays in Monte Carlo”, says Bessone. In 2011, SBM organized the exchange of DJs between Monte Carlo’s Jimmy’z and Beirut’s famed Sky Bar. This successful exchange will take place again this year. 

It also brought the Les Ballets de Monte Carlo’s “Cendrillon” to the Casino du Liban in November. This year, it organized the exchange of chefs between La Posta’s Maroun Chedid and Blue Bay’s Marcel Ravin, with two events occurring in April and May. 

“Many Lebanese love to visit Monaco and these events make them feel like they are in Monaco,” says Bessone, “at least for a night, until they visit again.”

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Economics & PolicyMonaco

Monaco’s book balancer

by Maya Sioufi
written by Maya Sioufi

The principality of Monaco, renowned for its glamour, its “beautiful people”, its Grand Prix and its luxurious yachts, also boasts the highest gross national income per capita in the world — some $197,460, according to 2010 World Bank estimates. To better understand the dynamics behind this economic model, Executive travels to the city state in Southern France to sit with Italian Marco Piccinini, Monaco’s Minister of Finance and Economy, at his offices atop the famous Rock, Monaco’s old town. 

Initially, however, Piccinini seems more interested in hearing about Middle Eastern politics, as he spends the first 15 minutes asking questions about the Middle East. “Sorry if I am the one interviewing you” he says jokingly. Married to a Tunisian with whom he has one child, he is curious to understand the dynamics of the region.

When the tiny principality recently revealed its 2012 budget, it forecast balanced books for the year ahead, an envious feat for European neighbors struggling to restrain raging deficits. With 833 million euros ($1.06 billion) in both revenues and expenditures, it will be a turnaround on previous years. 

“We have experienced some budget deficit after the crisis, but already this year we are essentially ‘budget balanced’ and we will be back to a surplus in one to two years, maximum” says Piccinini. Unlike some of his European counterparts, raising taxes is not on his agenda. Piccinini says the aims are “cutting costs, investing in areas with better returns, moving resources from what brings nothing to what brings more.” 

Trying to be modest

Monaco boasts a mild taxation system. Famed for charging no personal income tax, it has attracted many “tax refugees” to its appealing shores. It also offers a mild corporate tax system, charging corporations a 33.3 percent tax rate if more than 25 percent of their revenues are generated from outside of the principality; otherwise, the rate is zero. 

“People ask me, ‘is your model with mild taxation sustainable?’ It can happen, because we never deviated for political or ideological reasons from our three pillars” says Piccinini. The three pillars of the economic and social model of Monaco are to have zero sovereign debt, to run a reserve fund covering four years of budget expenditures and to have a balanced budget with a possible budget surplus. “Our aim is to try to have a surplus which can be put away for difficult days,” he adds. 

But while Monaco’s relatively low tax environment becomes more appealing for businesses to come and set up shop, Piccinini stresses that the principality is not trying to compete with other tax havens. “We see ourselves more as a gateway to Europe for non-European investors. Taxes can be one of the elements but not the only element,” he says. 

Even with its hefty banking sector (deposits in Monaco’s banks total some 19 times the size of its economy), Piccinini says Monaco has no aspirations of being a global financial hub akin to London or New York. “Let’s be humble. We cannot pretend to reproduce, in less than two square kilometers, what other financial hubs have produced; banking has been developing very well but we don’t want to become a financial hub which may be exposed to the uncertainties of this business.” The deposits in Monegasque banks in those two-square kilometers amount to a 78.4 billion euros ($100 billion) as of end 2010, the most recent consolidated figures available. That’s equivalent to 65 percent of the total deposits held in Lebanese banks. “It is the size of a small to medium sized bank. Our goal is not to increase assets under management. We want to remain a reasonably sized banking platform,” says Piccinini. 

Attracting the MENA region

The minister also eludes to Lebanese and Middle Eastern financiers beginning to wet their feet in the Monegasque financial fodder. Lebanon’s Audi Bank set up a branch in Monaco in January 2010 and Qatar recently acquired KBL, a Luxembourg-based bank with a branch in the principality. And the Middle East’s venture into the principality does not end at the banking sector. “We have Middle Eastern people from many businesses here. The tourism, banking, shipping and industry sectors are all pillars of Monaco’s economy and in many of these areas, Middle East nationals are very active. The Prince dedicates every year an official visit to the Middle East,” says Piccinini. As for investment, he says that Middle Eastern clients are mainly interested in investing in Monaco’s real estate sectors, in incorporating family offices in the principality and in having a base in Monaco, which becomes their gateway to Europe.  

Monaco seeks to remain “attractive as an overall destination by being an interesting hub for the [European] region and also a place where one can enjoy life,” says Piccinini. “That’s the attractiveness of Monaco”.

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Economics & Policy

Searching for a sense of perspective

by Thomas Schellen
written by Thomas Schellen

Indices, indexes, rankings and ratings. Never have there been more measures competing for attention than today. At the end of May, two ranking reports with relevance to Arab markets were released within two days of each other. The International Finance Corporation released its Doing Business in the Arab World 2012 (DBAW 2012) report and the Swiss-based global business school IMD released its 2012 World Competitiveness Yearbook (WCY).

The DBAW report tells us, in a nutshell, that Saudi Arabia has the best framework of business regulations for domestic companies in the Middle East and North Africa (MENA) — ranked first among 20 Arab countries and 12th worldwide — and that Morocco was the country which made the greatest progress in improving its business environment in 2010/11, on a regional and global scope.

The WCY tells us that Qatar is the most competitive Arab economy — ranked 10th in IMD’s global review of 59 countries by 329 measurements — and that the United Arab Emirates was the country that made the greatest progress globally in competitiveness in 2011, advancing from 28th place to 16th.

The two reports are presumably a boon for the corporate executive who wants to choose a new market or manufacturing location. The IFC measures the level of development that regulatory frameworks have reached in 183 countries and the WCY exhaustively examines 59 countries for competitiveness on the basis of business and government efficiency, business performance and infrastructure. That is, of course, if the said executive has enough time on his hands to pore over hundreds of pages and evaluate the information that is provided.

DBAW is not a slim specimen of the report genre at 123 pages, and the WCY feeds nicely into the assumption that smart people will never stop reading, at over 300 pages (that’s excluding the expanded, detailed country profiles). Also for consideration is the Global Competitiveness Report 2011/12 by the World Economic Forum (WEF), another popular global reference and home of the Global Competitiveness Index (GCI). Covering 142 economies, it is a tome burgeoning with lists after lists, sub-rankings upon sub-rankings, filling nearly 550 pages. Thankfully there are electronic versions.

rankings

Curious details
A curio about the WCY is that the 15 most competitive economies in its ranking collectively represent just more than eight percent of the world population and do so only because of the United States, the WCY’s second most competitive economy, contributes some 55 percent of this headcount. Moreover, the top 15 in the WCY are not at all countries driven to improve their comparative economic edges by population expansion; Malaysia, number 14 in the list, stands in as number 75 in global population growth and all other 14 highly competitive countries are on record for comparatively low population growth.

Another note to ponder about the leading competitiveness reports is that both their producers, although each collaborates with research partners around the world, are based in Switzerland (ranked third by WCY and first by WEF). After banking services and those time measurement complications, the reports appear to form another market where Swiss qualities seem strong enough to inculcate oversized or even monopolistic positions.

Of course competitiveness reports are just one type of ranking report that have gone viral with the information age. Measurability is the undercarriage of management; convergence of global markets and production locations puts corporations and large organizations, whether in economy, public sector or civil society in an absolute need for comparative reports. This need has been answered by an army of knowledge economy producers, whose reports rank everything from financial centers to human happiness in comparative reports and handy lists.

rankings
Limited criteria, skewed results
In step with technological and scientific progress, the methodologies of global research reports have evolved to ever more sophisticated models. However, even the reports produced by top-tier institutions such as the IFC and leading academic entities such as IMD often disclose rankings or developments that smack of distortions or otherwise can startle the reader.

For example, a category of the DBAW 2012 report ranks countries for the ease with which businesses can access electricity. Lebanon is ranked in seventh place of 20 Arab countries and in one of the top 50 places worldwide for that particular category. Anyone who has ever done business in Lebanon or ridden in an elevator in the country knows of the annoying frequency of power cuts. The DBAW criteria, focusing on the time, cost and number of interactions required to get an electricity connection, do not mention reliability of electricity supply. But what good is knowing that it takes only a short time to get a warehouse connected to the grid when the grid operator cannot deliver the power?   

In the WCY, the UAE acheived an improvement of 26 positions, from 34th to eighth, in a particular bracket of the business efficiency sub-category. Strong gains in a single year may be possible, but this particularly large leap upward was reported in the “attitudes and values” bracket. Attitudes change over time, the assumption goes usually, not overnight. 

One will find room for questions in every index and rankings report, whether its subject is a single index based on measuring one performance area, a composite index collating several pillars into one ranking and offering the sub-rankings for better understanding, or a meta-index that consolidates other research reports under a captivating header such as Transparency International’s Corruption Perceptions Index.

Besides having to digest and present more data than is comprehensible over a morning coffee, flaw factors in rankings include methodological omissions and at least three other components that one should be aware of: biases, data uncertainty and simplifications. The sources where one might look for these flaw-factors are business leaders, governments and media. 

Surveys of business leaders and decision makers are a standard component of many rankings reports, for example the competitiveness reports by both IMD and WEF. Business leaders are usually opinionated and often biased. How common is it to meet a manufacturer or trader who will tell you that his competitor’s products are a better deal than his own, or that his own country of production is not a great location to manufacture his product?

Margins of error in rankings are not the first topic discussed by the providers of rankings who have themselves an incentive to appear as reliable and authoritative as possible. However, producers of the reports are well aware of the bias issue, which a researcher on the WEF’s report called “the halo effect”.   

Secondly, not all data should be taken as equal. When governments produce projections of next year’s gross domestic product (GDP), any experienced business leader will assume that not all estimates will hit the bull’s eye.

Population estimates for a large country are very difficult or even impossible to verify, with all sorts of potential digressions in subsequent calculations. Plus, while we like to think of our governments as being honest, data supplied by government institutions and close affiliates to competitiveness researchers may, just may, in extremely rare cases, be a little bit more polished than they should be [think Greece pre-financial crisis].

But the biggest nightmare is the media. Take any rankings report and the media will redact its detailed and complex findings into something akin to a list of test results on the wall of classroom in third grade. Where the researchers explain that their report shows small actual changes resulting in a country’s rise in the percentiles of a ranking for a complex area such as labor market efficiency but that the change is not indicative of much at all, the media will scream that ‘Country X’ gained 20 ranks and is now top of the heap.

Stripping away the sensationalism, the rankings report in the knowledge economy is the business leaders’ Hamlet experience — to trust or not to trust, that is the question. According to Hisham el-Agamy, an Executive Director at IMD in charge of the Middle East Africa, Southeast Asia and Southeast Europe, governments and business investors use a competitiveness report as a “map to understand the country” but “any serious institution which wants to invest in a country does not only consider a single ranking.”

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Finance

Mounting fees

by Maya Sioufi
written by Maya Sioufi

While it is still too early to assess the wider repercussions of the government- mandated wage increase this year, it is already irking Lebanese banks, coming at a time when banks are also compelled to increase spending to comply with mounting regulations both locally and internationally.

As one of the largest private sector employers, with roughly 21,000 employees as of the end of 2011, the salary increases, applied to all bank employees across all brackets, are “significant money,” says Nassib Ghobril, chief economist at Byblos Bank. As of February 1, the government has raised the minimum wage by 35 percent to LL 675,000 ($450) while increasing salaries by an average of LL 299,000 ($200) for income brackets above LL 675,000.

“As competition for talent in the region was increasing in previous years, we had to raise salaries and so we had already experienced a significant cost increase in the whole sector, ” says Walid Raphael, chairman of Banque Libano-Française. “Now, along with a reduction in growth of the economy, we are imposed with an increase in the cost of human capital. This has a major impact on the sector.”

In the first three months of this year, staff expenses at Alpha banks — the 12 banks with deposits in excess of $2 billion that account for 85 percent of the banking sector’s deposits — were up by 12 percent year-on-year to total $293 million, according to research firm Bankdata Financial Services. By comparison profits totaled $370 million during the period.

While the banking sector has strong fundamentals — it is still witnessing growth in assets and deposits albeit at a slower rate — its declining growth in profitability is making it more difficult to swallow the additional costs, a pain felt more vigorously by the smaller banks than the larger ones. “For the big banks which have large enough profits, they can manage, for the smaller ones, it is more difficult,” says Fadi Osseiran, general manager of BlomInvest Bank.

The regulation burden
The increase in salaries has been accompanied with an increase in costs for complying with additional international and domestic regulations — more software and staff needed. Those new regulations include Basel III and the United State’s Foreign Accounts Tax Compliance Act, while domestically Lebanon’s central bank has introduced new regulation aimed at curbing money laundering.

While the actual cost of compliance has yet to be calculated, the smaller banks are in a less favorable position to absorb the shock — as reflected by the drop in profits of the total banking sector relative to the Alpha banks. The sector’s growth in profits dropped by three percent in 2011 but the Alpha banks’ profits were up one percent, highlighting the struggle of the smaller banks. “Given that competition is increasing and that the larger banks are better prepared to face competition, I think the smaller ones will be impacted the most,” says Ghobril.

To pull through in more difficult times, consolidation may have to be considered. “We have been hoping that consolidation would eventually happen and it did not,” says Raphael, who added that he expects this to change. “We need the right people with the right skills, we need to train them so it is becoming a big burden for smaller banks.” 

Jean Riachi, chairman of FFA Private Bank, believes that as competition  gets tougher, smaller banks will have to merge with larger ones and he expects this to take place “in the future.”

As Byblos’ Ghobril says: “When you have a growing pie, there is enough for everyone but when the pie stops growing, then definitely the better prepared players are ready to adjust to this environment.”

 
 
This article was published as part of a special report in Executive's June 2012 issue

 

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Economics & Policy

Prosperity needs peace

by Sarah Lynch
written by Sarah Lynch

On May 23 and 24, approximately 23 million Egyptian voters — accounting for about 46 percent of the electorate — flocked to polling stations across the country to choose their nation’s next president, or as it turned out, the two contenders in a June 16/17 runoff between Mohamed Morsi and Ahmed Shafiq. The monumental election, seen as the first free and fair process ever for most Egyptians to determine their country’s leader, was hoped to bring final closure on thirty years of authoritarian rule under Hosni Mubarak.

Mubarak, once touted as modern Egypt’s pharaoh and blamed for the country’s corruption-induced economic hardships, was deposed as president in February 2011 and sentenced to incarceration for the rest of his life on June 2. He was held responsible for the death of protesters in the Tahrir uprising that led to his resignation.

The biggest challenge that the country faces now is building a positive path to the future; to a large degree this is an economic challenge. Jobs, not speeches, are needed by the millions of Egyptian voters who came from poverty-stricken towns along dirt-lined alleyways to cast their ballots.

While the country lies in wait for freedom from corrupt politics and for equitable business, a new trust and buy-in by the people with the ability to move the Egyptian economy forward is an issue of great importance, along with the creation of accountable institutions and empowering policies. In canvassing views of business leaders and economists on the outlook for Egypt’s economy after the elections, the consensus was that the economic outlook after elections is bright and the economic players are willing and eager — as long as there is political stability.

“It’s been a wait-and-see game since the early days of the revolution,” said Cesare Rouchdy, regional director of marketing for the Four Seasons hotels in Egypt. “The main culprits are safety, stability and security. If these three elements exist, there will be a resurgence of economy and what goes with it. But as long as we don’t have these three S’s it will be difficult.”

Signs of this economic resurgence have so far kept well out of sight, at least in the important tourism sector, while the country was gearing up to its second round of elections. At the end of May, two Four Seasons hotels in Cairo were operating at 20 to 30 percent occupancy, while two other hotels in Alexandria and Sharm El Sheikh were running at 35 to 45 percent, substantially below normal rates for the spring season. “Right now, we should be running at close to 70 percent,” said Rouchdy, adding his voice to a chorus of cautious optimism about the nation’s economic future. “We’re optimistic but not singing from the rooftops yet. There are many ‘if’s’ that come into play.”

Tentative markets

The picture in investments and financial markets is quite the similar mixture of hope and concern over the unknowns of a politically turbulent period. “There is minimal participation in the market from local, retail and foreign investors,” said Amr Reda of Pharos Securities Brokerage, one of the top five brokerage firms on the Egyptian Stock Exchange (EGX) and a unit in Cairo-based investment bank Pharos Holding for Financial Investments.

Financial markets had borne the immediate impact of the political upheavals since January 26, 2011 as the EGX shuttered its doors for almost eight weeks and recorded intense volatility in the following months. The Egyptian bourse then hit a six-week low after official results of the first round of elections were announced at the end of May, reflecting ongoing concern about the possibility of further unrest as the polarized runoff will pit the Muslim Brotherhood’s Morsi against Mubarak’s last prime minister, Shafiq.

According to Reda and other analysts, the reticence of investors in the period between the election rounds is rooted in their concerns about the unpredictability of who will lead the country and what their policies will be. This uncertainty is stoked further by the fact that the powers of the president and parliament — now dominated by the Muslim Brotherhood’s Freedom and Justice Party and the conservative Salafi Al Nour Party — remain undefined because the constitution is still unwritten. Moreover, the future role of the military council that has governed since Mubarak’s ousting also remains unclear.

Reflecting the weak institutional maturity and intense emotionality of the current situation, there is even a perception in the market that regardless of who wins, a backlash is expected from the other candidate’s support base, said Hany Genena, head of research at Pharos Securities.

The hope for faster resurgence of business is certainly nurtured by financial intermediaries who had to contend with a year of investor fears — in the first five months of 2012, average daily turnover on EGX was $80.5 million, according to financial information provider Zawya, almost $5 million lower than average daily trading in full-year 2011 and less than half of the average traded value of $161 million in 2010.  Genena said he had noticed pent-up demand from domestic investors for the past six months and has also seen such demand also from overseas investors based in the Gulf Cooperation Council countries, South Africa, Russia, the United States and Europe. “[The economy] will not just recover. It will fly,” Genena enthused, but added that this is dependent on no major changes in government or economic policy that could negatively affect business.

While the International Monetary Fund answered an interview request on their view of Egypt’s future with a “press line” statement on “constructive discussions”, slightly more reassuring sentiments could be obtained from other international organizations. “The market is expectant but is inclined to be positive on Egypt. However, the business environment has to be streamlined and the investment climate improved,” said George T. Abed, senior counselor and director for the Middle East and North Africa at the Institute of International Finance (IIF) in Washington.

When will recovery begin?

In the assessment of Egypt’s private sector players, the tides will turn to the better before the year is out but not in the first three months of the new presidency. “We don’t see investments coming in the third quarter. Quarter four is a maybe,” said Abu-Bakr Makhlouf, head of investor relations at the Egyptian Resorts Company, a developer of resort cities that is listed on the EGX.

His was one more voice demanding investment opportunities in the fundamentally sound Egyptian market has piled up, with the outcome of presidential elections the deciding factor that will determine the strength and speed of new investments flows.

The wait-for-the-election-results fever extends into the top tier of Egypt’s services companies. “I think everyone is looking at what will happen after the election, and if there is some political stability the economy has a chance to start improving again,” said Yves Gauthier, the chief executive of mobile phone operator Mobinil, adding that he sees the operator as improving this year after a boycott campaign in 2011 and “on a good path to deliver acceptable results.”

Taking diverse voices of international institutions, local private sector and financial players, and professional advisors into account, the common denominator for Egypt under its next president is a buildup of expectations held in check until Cairo’s current political sandstorms settle. Development of the private sector depends on the agenda and economic vision of the winner in the presidential race, said Magda Kandil, executive director of the Egyptian Center for Economic Studies.

While details of economic plans are unclear, candidate Mohammed Morsi backed by the Brotherhood espouses free-market policies and believes the private sector should generate jobs and growth. “[The Brotherhood's] umbrella of support is for job creation and employment opportunities and helping the poor by empowering them with education and jobs,” Kandil said. His rival Shafiq also supports growth of the private sector: “Shafiq’s approach is probably going to be about order and stability and [based on the philosophy that] if the macro economy works, well this will ultimately trickle down to the bottom,” she said.

Whoever wins, Egypt’s new president will face a slew of challenges. A big one will be delivery of vision, several experts emphasized. According to the IIF’s Abed:  “The new leadership needs to articulate a clear vision for Egypt’s economic future and institute market reforms to encourage private sector-led investment, both domestic and foreign.”

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Finance

A chat with Riad Salameh

by Maya Sioufi
written by Maya Sioufi

This year has been shaping up to be even more bumpy than the last for Lebanon, riddled with domestic unrest, an ongoing conflict in neighboring Syria and global economic uncertainties. The banking sector, accustomed to dealing with turbulent events, has to grapple yet again with grueling headwinds. For more clarity on the events shaping the sector, Executive sat down for a chat with Riad Salameh, the governor of Banque du Liban (BDL), Lebanon’s central bank.
 

The growth rate of profits in the banking sector dropped significantly in 2011 and continues to drop this year, as reported in the first quarter. What is your interpretation on the recent performance of the sector?

We don’t consider the growth of profits in the banking sector as an indicator for the healthy situation of the sector. We want the banks to make profits and distribute dividends but we don’t want banks to operate like start-up companies. The race to make more profits was not to the advantage of the banking sector worldwide. What’s happening today in the financial community is a result of an obsession with always delivering a growth in profits at the expense of the quality of the banks’ balance sheets.

To maintain the sector’s healthy balance sheets, we are keeping a prudent approach by forbidding banks to go into risky investments and demanding banks take appropriate provisions given the situation they are facing, especially due to the turmoil in the Arab world and also due to what is happening around the Mediterranean [with the European sovereign debt crisis]. We are confident that the banks are healthy in Lebanon because we have run stress tests and they have put aside general provisions for the worst-case scenarios.

What would further deterioration in Syria mean for the banking sector? Would you recommend they exit from the country?

We require the banks  to have the proper capital allocated and the proper provisions taken ahead of time. That’s one of the reasons why you don’t have the same growth in profits [as witnessed in previous years]. The decision to work in Syria or not is a commercial decision that the banks themselves have to take. Banks operating in Syria and banks here [in Lebanon] operating with Syrians have decreased their operations by 40 percent in the past 15 months. Their total credit exposure stood at $4.8 billion 15 months ago and is down to $2.7 billion today.
 
Do you think Lebanese banks with Syrian affiliates are exposing themselves to reputational risk by having individuals sanctioned by the United States and the European Union as shareholders? [Rami Makhlouf has a stake in Bank Byblos Syria, and Ahmad Nabil Mohammad Rafic Al Kuzbari in Banque Libano-Française's Bank Al Sharq]

It is a legal issue and it is the will of the owners of these shares whether they want to sell them or not. Being a shareholder in a bank, especially since this participation occurred before these personalities were listed on the Office of Foreign Asset Control (OFAC) or other sanctions list, is something you cannot do anything about because you have to rely on existing laws that govern the economic activity and they differ from one country to another. They should not be elected as board members or, if they are board members, they should be asked to leave the board. I believe none of the [Lebanese] banks operating in Syria has on its board anyone listed on the OFAC list or any other sanctions list.

How rigorously have moneychangers been regulated since the Lebanese Canadian Bank (LCB) case? For instance, were the changers that were allegedly connected to drug dealer Ayman Joumaa and Lebanese Canadian Bank thoroughly investigated, such as Hassan Ayash Exchange and Elissa Holding?

On these special issues, we have done our investigation and we have sent files to the General Prosecutor so that they can be investigated according to Lebanese laws. We understand that the General Prosecutor has asked for evidence from the US and so far we haven’t received an answer on these requests because the operations that are considered to be criminal did not take place in Lebanon. They allegedly took place with car dealers in the US and with the sale of cars in Africa. What we have here in Lebanon is funds coming in and out without transactions linked to them. So having this evidence is very important to be able to legally continue the investigation. We issued a circular to not allow exchange houses to conduct third-party operations as banks do. We have strengthened measures by making banks responsible in case such operations went through them. We also requested capital increases and imposed training on exchange houses.

Do you think there is a need for more rigorous enforcement of the Consumer Protection Law as well as greater transparency from the banking sector over loans and other banking fees?

The central bank has created a department to follow up on these issues in terms of proposing circulars and we believe further laws will be welcome. I believe one of the most important issues for us in the coming years is to concentrate on transparency that banks should have with customers, which would touch on real fees, real costs of opening an account and concentrate on the improvement of the quality of people serving customers.

How much will it cost the banks to comply with the upcoming Foreign Account Tax Compliance Act (FATCA)regulation? What will the impact be on banking secrecy in Lebanon? What if other countries follow?

FATCA is not a major issue for the banks in Lebanon. The central bank will ask the banks to respect the FATCA law to preserve their correspondent bank relationships and not to expose these banks to questions from the Internal Revenue Service (IRS) or penalties from the IRS. The central bank will make sure that the banking secrecy law will not be hurt and will take a position to cover implementation of FATCA without breaching our banking secrecy by involving the Special Investigation Committee (SIC) in this issue. If there are questions or reports to be sent concerning people under FATCA law, it can be done through the SIC. It will create some costs for the banks as they will have to produce software and some compliance initiatives but given the small number of accounts of that sort, it won’t be very costly for the banks.

You have recently said that the banking sector has reduced its exposure to the government debt and that the central bank is filling the gap. The banks’ deposits with the central bank are increasing though, and so in the end the exposure has not changed?

We are not concerned with the banking sector’s exposure to government debt because their liquidity is ample and when the situation is normal by Lebanese standards, from a political and security standpoint, we are seeing surpluses on the auctions of treasury bills and on Eurobond offerings with issues oversubscribed by two to three times. Confidence is there, and our objective is to keep interest rates stable in periods of instability. The exposure to the central bank is different from the exposure [of commercial banks] to the government because when banks place their deposits with the central bank, if the deposits are in Lebanese pounds, the central bank is the institution that issues the national currency so there is no risk; if it is in foreign currency, it is being deposited with the central bank outside of Lebanon or with correspondent banks so the liquidity is present and not being used.

You are requesting from banks to raise capital above the requirement of Basel III. Why so? Isn’t this an additional burden on the banks that already face an economically challenging situation?

The requirement of Basel III is 7 percent tier-one capital (measure of a bank’s capital adequacy) and the sector is already compliant. We went over that level and we think it is important for Lebanon to be at higher level so that banks can remain well-accepted worldwide. We set a target of 12 percent by 2015. Between 2015 and 2019, we might demand higher tier one capital. It is not the end of the exercise. We want banks to strengthen their capital and have quality capital. We are also pushing so that the credit will not be affected. We don’t want to see them improve the ratio by decreasing their credit.

How much additional capital will banks have to raise?

It depends on the expansion of their balance sheets, but at present the figure would stand at around $2.5 billion, which they can secure from their profits. We recommend to banks not to distribute more than 25 percent of their profits as dividends. They have other measures they can use such issuing new shares or issuing preferred shares, which would go into the two percent tier-two capital (additional capital of lower financial strength than tier-one). 

With additional costs from wage increases to compliance with regulations and a challenging economic environment, smaller banks are being impacted more severely than larger ones. Do you expect consolidation in the sector? Would you favor it?

We don’t have any merger in view. Our position remains the same. It is up to banks to decide if they want to merge. We are encouraging mergers between big banks and medium or small banks or among medium banks or among small banks, but we reject any attempt of a merger among the first 11 banks.

This article was published as part of a special report in Executive's June 2012 issue

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Economics & Policy

A bridge to the future

by Thomas Schellen
written by Thomas Schellen

In one of the more unexpected twists of the Egyptian migration to a fairer economy, collaboration of commercial and state interests in public-private partnerships (PPPs) could resurface before the end of this year to develop crucial and sorely lacking infrastructure.

“If everything goes as we are planning, we will be tendering out one to two projects by the end of this year and another two to three projects in the first and second quarters of next year,” says Atter Hannoura, the director of Egypt’s PPP Central Unit at the Ministry of Finance.

Even though it was maligned before the revolution as a lackey of the old regime, the unit has been preparing a portfolio of new projects while the country rethought its politics. Hannoura would not put a number to the cumulative value of projects in the PPP pipeline because most are at the stage where pre-feasibility studies have yet to commence.

However, two projects are already further along in preparations: a $500 million wastewater treatment plant that will process 1.2 million cubic meters per day (cbm/d), and its 37-kilometer access road with two Nile crossings, which will cost around $400 million.

The PPP pipeline

This is quite a step up from Egypt’s first PPP project, a 250 cbm/d wastewater plant of worth EGP 800 million ($132.5 million) capital expenditure and EGP 2.6 billion ($430.7 million) transaction value, which the unit had tendered successfully shortly before the 2011 uprising. In the longer outlook of a few years, the prospects for Egyptian infrastructure PPPs could be much larger still, Hannoura enthuses, “The infrastructure gap in Egypt is big and I believe that no less than 30 to 40 percent of infrastructure projects could be tendered out to PPPs with combined values of over $100 billion in the next five or six years.”

This outlook is supported by Abraham Akkawi, partner and head of infrastructure and PPP advisory services in the Middle East and North Africa at global consultancy Ernst & Young. “I am optimistic. PPPs in Egypt will come back in six months if there is no move to the extreme right or left [in the political power],” he tells Executive.

Economic and social infrastructure developments rank at the top of Egypt’s investment needs today and have since long before the Tahrir uprising for democracy. The World Bank’s International Finance Corporation and other multilateral development banks (MDBs) see PPPs as the golden road to match development needs and investor supply in emerging countries. When the Egyptian government under Hosni Mubarak started the PPP Central Unit in June 2006 and the regime-aligned parliament adopted a PPP law in 2009, the initiative was praised as pioneering example for the Middle East by MDBs and international providers of consulting services, which, coincidentally, provide advisories required for structuring a PPP project.

However, the first project timelines which the PPP Central Unit internationally advertised with deliveries for 2009 to 2012 proved overambitious, as the global financial crisis cast its dark shadows over Egypt and all investment-seeking emerging markets. With the spread of the ‘Arab Spring’ to Cairo at the end of January 2011, many thought that the uncertainty in the political system would block Egypt’s ability to attract private investors to the complex, long-term deals that are the essence of PPPs. Whether structured as a concession for reaping operational revenues from end users or a contract where the government is the off-taker and paying partner of fees to the operator of the PPP project, PPPs must be designed for duration and contractual reliability.

Surviving the spring

As Hannoura admits, the Arab Spring “was winter for us”, but he emphasizes in the same breath that the bidders in maturing or early-stage tenders last year said they were committing themselves in up to 95 percent of the projects and only asked the unit “to extend deadlines.”

The four projects worked on by the unit at the time comprised two early-phase projects and two, more mature, hospital PPP projects with capital expenditures of up to EGP 1.3 billion ($215 million) and transaction values of up to EGP 3.1 billion ($515.5 million) each.

Not extending the deadlines would have been bad business for the Egyptian state as bidders would either have pulled out of the process or added massive risk premiums. “In this case we will be receiving costly bids from which we will suffer for the next 20 or 25 years of the concession period. [Thus] when the bidders asked for a three-month extension, we gave them six months extension,” Hannoura says; positive responses from four bidding consortia allowed the hospital tenders to be closed this spring.

The unit, however, had to cope with three needs: it had to keep alive the few PPP projects that were in various stages of preparation or tendering, it had to demonstrate to banks and bidders that Egypt was still a “mega market” for PPPs, and it had to convince political stakeholders in Egypt that PPP was the answer to their problems.

Success in closing the hospital tenders was good proof of life and sent the message of the PPP process’ survival straight to the private sector, but the more serious hurdles had to be taken on the political and administrative sides.

According to Hannoura, the previous way of handling PPPs was to prepare everything centrally and just hand the final documents for signature to the involved line ministries. The method was flawed by not engaging the ministries — which had to manage the projects under their authority — to feel ownership or perhaps even understand the projects.

The second big hurdle was Egypt’s parliament. The PPP law had been passed against the votes of the then minority opposition and their response was to critique the law sharply. The minority of 2009 is now the parliamentary majority of 2012. “They had been defeated on this law, they were very much against the law and said publicly that this was one of the laws that had been created to serve the interests of businessmen,” Hannoura says.

Countering that allegation by pointing out that the PPP law had to be transparent and up to international standards would not be enough to sway the Islamic parties. However, the chief advocate of PPP in Egypt launched a charm offensive by telling the new political majority that he was in favor of amending the PPP law. This offer led to a discussion on the concept’s merits with the concerned parliamentarians. Discussions on amendments to the law are a work in progress but in Hannoura’s opinion it is already a success: “The party issued a statement that the PPP law would remain in force with some minor amendments,” he says. “In my opinion, this was a 180-degree change and it was a success.”

As he adds that public-private partnerships are in full concert with an Islamic economy, he radiates the hands-on confidence of someone who is convinced of what he does. But this does not mean his job is a sinecure. The PPP Central Unit is “very short on cash” he declares and could urgently use between $8 million to $9 million as it is working to get its projects ready for tendering. This money would help fund advanced capacity building at the Central PPP Unit and its satellite units at line ministries ($1.5 million to $2 million) and to run an awareness campaign ($1 million). But the biggest chunk of cash on Hannoura’s wish list is for $5 million to $6 million to pay “transaction advisors”. Presumably it will be difficult to ready projects for tendering on credit.   

Having funds for public information would also befit the unit’s website, which is still frozen with its most recent news as of the end of last month dating from May 25 — but alas, 2010, and opening with “President Mohamed Hosni…” Yet weightier concerns arise from the question if large-ticket PPPs will really give Egypt all they are hoped to deliver.

Building for the future

While it is globally undisputed and well proven that infrastructure is a crucial accelerator of economic growth and that Egypt has huge needs for the roads, railroads, recycling plants, ports, hospitals, schools and universities which Hannoura has on his list of projects to tender as PPPs, “We had a lot of mega projects and we learned nothing from them,” says Hisham el-Agamy, an executive director at the Swiss management school, IMD, and an Egyptian expatriate. He acknowledges the need for PPPs but in his view, something else is needed much more.

“What is really important for me as the son of a farmer coming from a small village is that we need jobs, real jobs,” Agamy says. “We have to understand what it means to create [small and medium-sized enterprises] and how to create the right atmosphere and dynamic for SMEs to grow and work on added-value products, not just commodities and low-cost products. Real jobs can only be created through SMEs and we have to be serious about that.”

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Finance

A chat with ABL’s Torbey

by Maya Sioufi
written by Maya Sioufi

The growth in profitability of Lebanon’s banks continues to be stunted by slower economic progress not only in Lebanon but also globally, as well as turmoil in neighboring Syria and increased international regulation. Executive sat down with Dr Joseph Torbey, the president of the Association of Banks in Lebanon (ABL) to discuss these issues in the banking sector. 


With growth in the profitability of the Lebanese banking sector slowing, what are your expectations for profits in the sector going forward?

I expect profits to be at the same level as last year. There is drop in the growth of profits because the economy is moving slowly and the environment is politically challenging but the banking sector is still in good shape. I expect 8 percent growth in the deposit base this year and, so far, we are in line with this expectation.

With a slowing domestic economy, is competition among local banks increasing? Should smaller banks consolidate to survive?

For the top 11 banks in Lebanon, the central bank has a policy which does not allow them to merge among each other, as banks should not be “too big to fail” because if they fail, they can threaten the stability of the [economic] system. There is always the possibility for larger banks to acquire smaller and medium sized banks. I don’t expect any [merger or acquisition] operation this year but it is always a possibility.

When it comes to Syria, different banks are adopting different measures. As president of the ABL, what is your recommendation for the banking sector in terms of dealing with Syria?

We are following all international rules [and regulations] and we are not taking risks to evade these rules.

How about the Foreign Account Tax Compliance Act (FATCA)? What impact will this new law have on the banking sector?

The number of Lebanese with a double citizenship is not big and so not many customers will be impacted, but it will be a big burden on banks because they need systems and software. Many banks will avoid American customers because it is really a big cost to banks to operate a system dedicated to giving specific treatment to US citizens different from treatment of all the customers of the bank. We will be asking our American customers to cooperate with the US government and disclose what is being asked of them. Our decision as a sector is to cooperate with FATCA.

Several bankers have also voiced their concern on the exposure of the sector to the government debt. Should banks reduce their funding to the sovereign?

The sovereign risk is under control and there is an improvement in the ratio of public debt-to-gross domestic product. We don’t have a big worry over it. We are putting pressure on the government to implement reforms but reform is not an action taken in one day. It is a behavior and some reforms need the participation of the Parliament and a proper political environment. The government is under geo-strategic pressure now, more than the pressure to perform economic and financial reform, but in the end, the government will be obliged to implement reforms.

Regarding the wage increases imposed by the government, how significant has been the impact on the banking sector?

The banking sector has more than 21,000 employees so our costs are really high. I don’t have actual figures. The banking sector was successful in absorbing the shock of the increase but other economic sectors have difficulty in complying with the wage increase as it comes at a difficult time when the economy is slowing, the regional situation is bad and the international situation is not in good shape either.

With the cost of doing business increasing, where will the opportunities for growth of the banking sector come from going forward?

A big number of banks are operating worldwide and they are following their customers, financing them in Europe, Africa and Latin America. Our expansion is not based only on opening branches and subsidiaries abroad but also in following customers.

This article was published as part of a special report in Executive's June 2012 issue

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Economics & Policy

The monster beneath us

by Thomas Schellen
written by Thomas Schellen

A monster stirred under Lebanon last month. Not everyone felt it, but across the country came various reports on May 11 of buildings wobbling briefly like twigs in a breeze. The earthquake, measuring 5.5 on the Richter Scale, was only a reminder, however, for the people in Saida, Beirut and Tripoli, that the greatest potential threat they face is not civil strife, war or revolution, but rather it is a monster sleeping beneath the sea not 20 kilometers from Lebanon’s population centers. Unknown until 2004, the monster’s existence has been proven with sonar by an Italian expedition and its potential wrath was mapped one year ago by scientists of the American University of Beirut (AUB).

The geological surveyors dryly called the monster “Mount Lebanon Thrust”. The term describes a reverse fault system, a type of crack in the earth’s crust that has the reputation to cause particularly destructive earthquakes. This discovery raises the seismic hazard level for Lebanon’s coastal region from moderate to high according to recognized international standards, with a substantial tsunami hazard thrown in for good measure. The Mount Lebanon Thrust “runs from near Saida in the south to slightly below Tripoli in the north and it is only about 15 to 20 kilometers away from the coastline. We also found out that this fault system is not vertical. It is oblique and it connects with the Yammouneh fault line, like a V,” explained Mohammed Harajli, professor of civil engineering at AUB, who was part of the team that  published the study on Lebanon’s increased seismic hazard risk in 2011. [See map]

Scientists had been studying fault lines in Lebanon for a long time and considered the Yammouneh fault, named after a village nestled between the Lebanon and Anti-Lebanon mountain ranges, to be the country’s most active among several seismic faults, all located inland. None of these faults is anywhere near as extensive as the Mount Lebanon Thrust. According to Harajli, the newly discovered system’s length and location means that the entire area from the coast to the Bekaa plains is situated above a major fault and “very vulnerable to earthquakes.”

“We therefore reassessed the earthquake hazards and came up with new parameters especially for the coastal areas where the capital investments are the heaviest,” he said. While the magnitude, or overall energy, of earthquakes is measured on the well-known Richter scale, the devastation that a tremor can cause depends on many factors, including depth of the epicenter, soil structure and population density in the most directly affected areas.

These factors influence the earthquake’s intensity, or locally experienced impact. One method to gauge earthquake intensity is peak ground acceleration (PGA), or the speed with which the ground moves vertically and/or horizontally. This movement (often measured in g-forces or meters per second) is a crucial consideration in designing buildings so as to withstand an earthquake. The 2011 reassessment of earthquake hazards in Lebanon was significant, enough to raise the hackles of the international reinsurance companies that have a vested interest in assessing the economic risks associated with an earthquake.

 

Lebanon earthquake map

“What worries me is that according to the study by AUB, you have more or less an increase [in PGA] from 1.5 meters per second to three. This means a lot,” said Italian earthquake risk consultant Marco Stupazzini, who works for global reinsurance firm, Munich Re. “Lebanon needs to review the design standards that we are using. That is a matter of the building code but this may not be enough. We may have to assess certain buildings, for example hotels, which host larger numbers of people, and you have to make these buildings perform better.” Although the region is not nearly as vulnerable as the Pacific Ring of Fire that includes Japan, New Zealand, Chile, and the US state of California, earthquakes are anything but a new or rare threat in the Mediterranean. In fact, Italy has suffered from two earthquakes that struck the Emilia-Romagna region this past month.  More than 20 have been killed and priceless historic buildings have been destroyed.

Shared shakedown, varying responses

Italy, Turkey, and Lebanon are three Mediterranean countries whose histories abound with earthquakes. Each has its own seismic story as the fault systems in the three countries represent collision zones between different pieces of the global tectonic puzzle underlying our so-called “terra firma”. But there is also a distinctly non-geological difference between earthquake risks that people are exposed to in each of the three countries.

Italy has a long-established natural catastrophe response system. Turkey pushed through a national catastrophe response framework, including an insurance pool, with emergency legislation within weeks after the 1999 Marmara earthquake killed 13,000. Lebanon has a draft law on disaster response, a building code that needs updating to meet the new hazard levels, and no catastrophe insurance pool, not to mention monitoring shortfalls and widespread corruption in real estate licensing.

“We are preparing the establishment of a disaster management unit. A law to that respect is now being discussed in Parliament.” said the chairman of the Parliament’s committee on Public Works, Water, and Energy, Mohammed Kabbani. As to the concept of a national catastrophe insurance pool, Kabbani said no initiative in that direction exists of yet.

Emergency response legislation and disaster recovery planning are essential in creating a system of preparedness that can reduce the loss of lives in a major earthquake. The absence of a law as a starting point of a coordinated national effort is worrying, and it is no help that the Nejmeh Square area of Beirut has a Bermuda Triangle reputation when it comes to draft laws — they tend to vanish.

Getting concerned? Consider this: Building quality in Lebanon is in itself tending toward a game of hazard. After the famous collapse of a single decrepit apartment building in the Beirut neighborhood of Fassouh in January of this year, the media quoted Kabbani as saying that 20,000 buildings in Beirut are not safe and could crumble like the one in Fassouh that crushed 27 persons to death.

“I did not say 20,000,” Kabbani clarified his assessment to Executive. “I said 20 percent and this is not only in the capital. It is in all of Lebanon.” Based on an estimated population of four million and assumed average household size of five persons, the prospect of one in five buildings being unsafe, means simply that hundreds of thousands of dwellings are prone to become death traps for their inhabitants if the Mount Lebanon Thrust ever gives us another earthquake of magnitude 7.5 on the Richter scale.

Tremors releasing this amount of energy have been observed in 551 and 1202 AD. The frequency of such highly destructive quakes is not high and the likelihood has not increased through the discovery of the Mount Lebanon Thrust, but experts Stupazzini and Harajli equally emphasized that such an event can occur at any time.

 

Depends on where you live

Starting to wonder if your home is safe? There is some good news. Since 2004, building codes in Lebanon have been upgraded and engineering standards of new, high-end residential structures are more likely than not to include a reasonable measure of earthquake-proofing.

According to AUB’s Harajli, the reconstruction and development of parts of Beirut, notably the downtown and the pricier areas of West and East Beirut, have been carried out in compliance with engineering standards for earthquakes, at least up to the standards that were incorporated in the 2004 building code and which were calculated for the moderate hazard level known at the time.

Solidere, moreover, responded to the recent higher risk assessment by raising the seismic building standard requirements for buildings in the downtown by 50 percent, more than the 25 percent increase recommended by the AUB study, Harajli said.

So if you paid more than $2,000 or $3,000 for every square meter of your newly-built abode in the past five years, your potential earthquake experience may be limited to seeing the chandelier swing and cleaning up the shards of a Ming-dynasty vase or two. However, if your children go to school in Lebanon, or if you attend the prayers on Friday or church on Sunday, consider this: “We have been given the recommendation that public buildings and buildings with a lot of traffic should be strengthened.” Kabbani said. “This includes of course schools and hospitals and buildings where lots of people congregate, such as malls and mosques and churches. We are recommending for something to be done in that respect.”  The MP’s comment fits seamlessly with what Harajli told Executive. “There is a committee on public safety and it has recommended strengthening schools against earthquakes. We are recommending that certain buildings which are critical should be strengthened and prepared, [beginning with] public buildings which will accommodate people in the aftermath of an earthquake. But this costs money and the politicians are more concerned about their own interests,” he said.

“Incorporating earthquake resistant design into a new building is much cheaper than making an existing building earthquake proof,” added Harajli. In his estimate, earthquake engineering in a new construction adds about 5 percent to total building cost or, when calculated from the cost of the skeleton, increases cost by 10 or 15 percent.

Literally unstable

Making an existing building more resistant to earthquakes is possible if tenants of a building commission an engineer to strengthen the structure, Harajli said, but the costs can easily run into the hundreds of thousands of dollar for an apartment building with 20 or 30 units.

What is perhaps more worrying is that even if buildings are up to scratch they may not be spared from the effects liquefaction, the process by which solid ground that is not made of bedrock is transformed during an earthquake into a substance that acts like falling water. According to Stupazzini there is a major risk of this in Lebanon. Harajli adds that several parts of Beirut have clay and sand foundations that could cause liquefaction, including parts of Ashrafieh, and at present no detailed studies on this exist.  But with awareness lacking and in the absence of legal pressures or financial incentives, landlords and residents of old substandard buildings are extremely unlikely to pursue such steps — in other words, ignoring the potential for disaster until it is possibly too late.  “We hope that over the next 20, 50, or 100 years we will not be struck by an earthquake so that these buildings will become very old and be replaced,” Harajli mused, with a note of strain in his voice but added, “We are now forming the Lebanese Association for Earthquake Hazard Mitigation and we hope that we can get a minor earthquake that will bring the politicians to their senses,” as people are more prone to take action if they feel they are in danger.

Aiming to conduct research and raise awareness for making Lebanon safer for earthquakes, the new civil society organization will have a full plate to work with. In the meantime, there are plenty of issues waiting. Geological surveys of soil conditions in densely populated areas where the new seismic map shows increased hazard levels would be in order, and so would be measures to better protect economically vital infrastructure, like the Beirut Port, against the risk of a tsunami. Policy makers would be prudent to concern themselves with urgently updating the building codes, initiating tighter quality supervision of materials actually used in building construction, and institute disaster recovery preparations and, perhaps, a national catastrophe insurance pool.

MP Kabbani recognized these needs with a truly political statement in his discussion with Executive: “We are working slowly and we should work harder and quicker in finding solutions for these problems and I hope that our discussion will be an incentive for me to push harder,“ said Kabbani. “But I am sorry to say that in Lebanon, nobody cares and therefore almost nothing is being done.”

 

Turkish Catastrophe Insurance Pool

A model that Lebanon could emulate in mitigating earthquake impacts and enhancing preparedness is the Turkish Catastrophe Insurance Pool (TCIP), recommended by European reinsurance experts in April at a seminar for Lebanese insurance companies in Beirut. TCIP provides a national safeguard to help home owners and tenants of buildings restore their basic living environment if they become earthquake victims.

TCIP was created under a national disaster response law passed within one year after Turkey suffered a horrific earthquake in the city of Izmit in August 1999 that cost 13,000 lives and damaged 120,000 homes beyond repair. The pool is designed to cover all private residences located within the jurisdiction of municipalities.

Publicly owned and managed by an insurance company on rotational basis, TCIP is a mandatory insurance scheme with low premiums and indemnities that currently have a ceiling of 150,000 Turkish Lira ($83,000) per insured home. Premiums are determined by construction type and location of a house on a national earthquake risk map. The average annual cost of premiums per insured home was the equivalent of $52 and the average coverage was just under $30,000, the TCIP 2010 annual report said.

The reach of the TCIP climbed to 3.3 million homes in 2010, representing 27 percent of all homes that fall under the mandate. The key purpose of TCIP is to support the continued functioning and resilience of society in case of catastrophe. A core benefit of the program is that it entails awareness building and training for public officials and the general public.

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