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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Finance

Chained to the debt

by Maya Sioufi
written by Maya Sioufi

The story of how Lebanese commercial banks effectively finance the country through buying government debt has been told so many times that it is  cliché — but even after all these years, it rings no less true.

As of the end of March 2012, the Association of Banks in Lebanon reported that the sovereign had rung up a tab of some $29 billion at the country’s banks, having issued them some $13 billion in Eurobonds (70 percent of the government’s Eurobonds portfolio) and $16 billion in Treasury bills (49 percent of the government’s Treasury bills portfolio). While this figure represents only 20 percent of the banking sector’s total assets, it fails to take into account deposits placed with the central bank, which stood at $50 billion as of the end of March, taking commercial banks’ overall exposure closer to 55 percent of assets.

All this is relative to total Lebanese government debt, which at the end of 2011 stood at some $54 billion; that’s an awful lot for an economy worth just $39 billion, working out to a whooping debt-to-gross-domestic-product ratio in the range of 140 percent. Those new to Lebanese economics should note, however, that this is actually an improvement relative to six years ago, when debt-to-GDP peeked around 180 percent. 

“The debt itself is not a major problem,” says Fadi Osseiran, general manager of BlomInvest Bank. “The point is how much we will increase it every year relative to GDP, that’s the real story.”

The ‘drop’ in the debt-to-GDP ratio is actually due to the increase in GDP. With a weaker economy — the IMF recorded 1.5 percent economic growth in 2011 and forecasts 3 to 4 percent this year on condition of internal reform and external stability, neither of which seems likely — the debt component of the ratio would need to lose some fat for the ratio to continue dropping and alleviate concerns
regarding the bank’s weighty sovereign exposure.

One thing banks are voicing dissatisfaction with are the current rates on Eurobonds and Treasury Bills. “It does not make sense that Lebanon has a ratio of debt to GDP at 137 percent, a credit rating below investment grade and the interest rate on bonds is much better than on investment-grade bonds,” says Osseiran. The average yield on Eurobonds stands at 4.3 percent, and 5.82 percent on a two-year Treasury bill. In what was perhaps a slight correction, yields on Treasury bills were raised by 50 basis points across the board in March of this year, a move cheered by bankers.

In the national interest

“The government should understand that a higher rate will give comfort to banks to buy more government debt,” says Najib Semaan, general manager of First National Bank.

Concerned with their exposure to the sovereign risk, banks are trimming their holdings in government securities, with the gap being filled by the central bank. “All Lebanese banks are reducing their exposure to the government,” says Alain Wanna, deputy general manager and head of Group Financial Markets at Byblos Bank, but he highlights that “banks, rather than investing directly in government securities, are placing deposits with the central bank and the central bank is buying the securities so in the end it is the same.”

Debt score card

 

 

His observation concurs with that of central bank Governor Riad Salameh’s statement at the Arab Economic Forum in May this year, during which he said “the reduction in the banks’ exposure to the government created a gap that we filled as a central bank”. The irony is that the central bank is also the issuer of government debt, meaning that effectively it is buying from itself. The more it does so, the more the debt is monetized and the lines between who owns it and who issues it become blurry.

No place like home

But with low rates in international markets, keeping the dough at home seems like the most suitable option for now. “In this environment in which interest rates abroad are so low, banks will subscribe in the forthcoming issues because they need to grow their interest margins,” says Marwan Barakat, chief economist at Bank Audi.

More debt issuance is on the government’s agenda. Minister of Finance Mohamad Safadi announced in May the government’s intention to raise $2 billion in new foreign-currency-denominated bonds this year for infrastructure projects, which the banks will be expected to line up for yet again.

Being the prominent financiers of the republic’s coffers, however, it would seem that the banking sector ought to be able to twist the government’s arm into implementing structural reforms essential to reduce the borrowing needs of the country.

According to Nassib Ghobril, chief economist at Byblos Bank, “the political class is taking the banking sector for granted,” given that if they sought funding from abroad they would not get the same rates. “Unfortunately the banking sector has not used its leverage to put significant pressure on the authorities. If representatives of the banking sector say we will stop funding altogether until you start implementing reforms and not just talking about them, then things will be different.”

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

 

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Economics & Policy

Executive Insight – Making the most of Lebanon’s resources

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.

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Finance

Forcasts: Lebanon’s new normal

by Nadim Kabbara
written by Nadim Kabbara

Robust economic growth in Lebanon came to a halt last year as domestic political uncertainty and regional turmoil took their toll on key sectors such as trade, tourism and real estate.

This year is not shaping up to look much different as challenges translate into weaker bank profitability: slower capital inflows will moderate asset funding, softer trade and loan activity will impact fee generation, and regional unrest will drive loan loss provisions in subsidiaries that were meant to be the engine for growth.

This subdued level of profitability for Lebanese banks could represent a ‘new normal’ in the near term. Management teams are prudently placing their expansion plans on hold in order to preserve balance-sheet quality in the face of slower economic activity, heightened political uncertainty and an increase in regulatory capital.

This new normal contrasts with previous years during which the banking sector nearly doubled its profits, from $850 million in 2006 to $1.6 billion in 2010. This was possible by sidestepping the global financial crisis, attracting significant financial inflows and stockpiling record reserves at Banque du Liban (BDL), Lebanon’s central bank, all of which boosted Lebanon’s reputation back to the forefront of regional financial centers.

However, slower profit growth could influence the lending behavior of commercial banks, as well as their participation in government debt auctions and their redeployment of capital aimed at maximizing shareholder returns. It is unlikely, though, that there will be a material shift away from the existing business model, which has worked well for years.

The public sector will continue to finance its fiscal deficits with more debt, outside of enacting much needed reforms. BDL will continue to influence deposit rates to ensure that Lebanon attracts financial inflows, and will seek to reduce its intervention at treasury auctions. And banks will continue to participate at government auctions, at the very least maintaining their concentrated sovereign exposure.

Ultimately, the banking sector needs an avenue in which to continuously invest its excess liquidity; with a near-zero international benchmark rate in the interbank market, moderate private-sector demand and regional turmoil seen impacting asset quality in related subsidiaries, they don’t have many options left on the table.

With several headwinds on the horizon, the case between the banking sector, the Ministry of Finance and BDL is likely to be strengthened further as each major party shares a responsibility to maintain a healthy economy and a resilient banking sector. We have seen a concerted effort earlier this year on shorter-term local currency treasuries, which were auctioned at higher rates to ensure bank subscription, following the International Monetary Fund’s recommendations, but these higher rates were not enough to make up for the reduction in profit growth.

With tighter bank regulations, slower banking deposits, higher provisions caused by regional unrest, and cautious management focused on preserving asset quality, profitability for the banking sector could remain lackluster for now.

Although investors may have over-penalized the banks, judging by their very weak stock market performance on account of turmoil in Syria and Egypt, they will need to contend with a lower growth profile and less appetizing dividend payouts once visibility improves and their growth plans are back on track.

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

A Passion for Adventure

by Executive Staff
written by Executive Staff

The story of Kuwait-based telecommunications operator Zain is a corporate lesson worthy of attention. The company grew by leaps and bounds for seven years, until in  2009 it became an Arab model in profit building, branding and positioning in the top tier of telecoms operators worldwide. “A Passion for Adventure” narrates this story from the perspective of Saad al-Barrak, who led the Zain team during that time.

A fluid read, the book will be most rewarding for anyone fascinated with telecommunications in this region and for students — in a wide sense of the word — of the Arab management experience.

Parts of the book that convey details on the acquisition of African network Celtel and on the creation of the Zain identity out of boringly named predecessor Mobile Telecommunications Company (MTC) were page turners. It is information of record that MTC paid $3.36 billion for Celtel and that South African rival network MTN, feeling duped at being bested by MTC, tried to have the agreement revoked in the courts. But the narration on how MTC reevaluated their too-low bid and turned the table in their favor by making an unsolicited higher offer in the last minute, is fresh and certainly worth reading.

Some parts of Barrak’s rendition of the Zain story — such as recollections of how this or that capable individual joined the team — might appeal more to the people who were part of the journey. Where the narration covers Iraq’s invasion of Kuwait and in a few other places in his book, the author cites sources for context that feel like alien additions sourced from a newspaper archive, rather than organic parts that belong.

More interesting to read was an earlier part of the tale in which Barrak recalls how he felt and responded when he was offered a position far beyond his experience and imagination by his first employer, International Turnkey Systems (ITS), a Kuwaiti ICT vendor and systems integrator for banks and other corporate clients. His recollection of how he was supported by the owners of ITS, whose company was bleeding money for needless expenses, offers worthwhile insights into Arab corporate culture.   

From his testimony about the rise of Zain, it is evident that Saad al Barrak is a fortunate man. He started his career in leadership at a moment of opportunity and his decisions of expansion, branding and community building came at the right moments, benefiting from an age when all circumstances favored an operator combining a rich war chest with a daring growth ambition.

Barrak’s perception of Zain’s acheivements was poignantly illustrated when he told Executive, “It was Zain that got all these people inspired to move and become international companies and as Zain has stopped, everybody else has stopped, right? That shows the leadership and pioneering and inspirational role that Zain played in the region.”

“These people” refers to Arab telecommunications operators like Saudi Arabia’s STC and the United Arab Emirates’ Etisalat, which indeed embarked on international expansions after the Kuwaiti operator. 

There is no payback chapter tearing into the details of Zain’s partial dismantlement, only a very positive interpretation of the process that saw the company’s top international assets sold to Indian operator Bharti in mid 2010. People looking for angry testimonials or hard forensic analysis of that part of the Zain story will not be satisfied. 

The inner core of Barrak’s tale, however, is not the growth and wane of Zain but his view on management, epitomized in his sentence: “The best of plans and strategies are the ones extracted from the hearts and minds of your people, or inculcated in the hearts and minds of your people.”

In narrating these views, he states his case for “preaching a new business and economic ideology… which is part and parcel of our universal, open philosophy — an all-encompassing philosophy considering the universe as our homeland and humanity as our tribe.”

Readers may regard this new business ideology to represent an incremental enhancement of management concepts rather than a total reinvention of the art of management. But it is in any case a notable Arab contribution and perspective on leadership. There cannot be arguing that such contributions deserve to be heard. As Barrak said, “We need inspiring examples from our region and this is what we tried to do in Zain.”

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Society

The Formula One family car

by Yasser Akkaoui
written by Yasser Akkaoui

Ferrari has been on something of a new trajectory in recent years, and to get the word out on how things have been shaping up for the automaker, Executive was invited on an all-expenses-paid, one-day trip to the Modena province of Italy to sit with company officials, tour the Ferrari factory and test drive the new 2012 California model.

The company’s course of late could be seen as an assault on the turf of rival Porsche. In the 1990s, the German luxury carmaker made strategic decision to position itself as the manufacturer of the racecar one can also drive to the grocery store and pick up the kids with — magnificent engineering and performance potential paired with practical, everyday sensibilities.

First launched at the 2008 Paris Motor Show, Ferrari’s California was an offering of a similar genre, aiming to attract customers who might otherwise have been looking at a Porsche 911 Turbo, a Mercedes SL or even the Bentley GT. The four-seat, eight cylinder California was intended not only for those dazzled by the Ferrari brand, the curving lines of beauty and Formula One racing capabilities, but also those who want to throw their gym bag in the front and look good with the soft-top down on their commute to the office; the sort of versatility Porsche has made its hallmark.

If you’d fallen for the California in 2009, however, you might hardly think a square inch of her has aged in the 2012 model. Indeed, Ferrari has kept the appearance of the California almost exactly the same, instead focusing the evolutionary process on the DNA of the automobile, honing the mechanism inside the machine. The new model is 30 percent more fuel efficient, which helps to rebalance the environmentalist’s guilt-pleasure ratio when flying down the highway with 40 more horsepower and 30 less kilograms. That improved weight-to-power ratio has also trimmed 0.2 seconds off of the zero-to-100-kilometers-per-hour acceleration time — in the 2012 California, one can go from a dead stop at the lights to the highway speed in 3.8 seconds, bringing it equal to the Porsche 911 Turbo in the race to accumulate speeding tickets most rapidly.

Among the many other less apparent improvements are the software upgrades, new pistons and manifolds. A new body structure redistributes impact and shock absorption, improving one’s chances of walking away if, by chance, one were to blink or sneeze while rocketing towards the sound barrier and miss that hairpin turn. And while one’s insurance broker would likely have to cover the cost of removing your California from the crater in someone’s living room wall, for almost everything else, call Ferrari, as the company’s complimentary seven-year maintenance program will have you covered.

Why Executive was of particular interest to Ferrari is that the company sees Lebanon as a mature market and a trend setter for the region — cultivating a cool and sophisticated market positioned in fashion-conscious and notoriously fickle Beirut pays off in big money sales in Abu Dhabi, Dubai and Doha. And Ferrari’s strategy seems to be working. Not only did 70 percent of their new customers last year migrate from Porsche, Mercedes and Bentley, according to company officials, but of the 3,000 California’s manufactured last year, some 450 were sold in the Middle East and South Africa, with the United Arab Emirates being the top customer. Interestingly, the company has no part in the operations of Abu Dhabi’s Ferrari World theme park on Yas Island, but rather offers up its name and branding for the Emirate to use for the modest compensation of $40 million annually.     

Perhaps the most endearing aspect of the California is that Ferrari has made the design so enduring. When you pull up to the stoplight, no one watching could guess whether you bought it yesterday or four years ago; you’ve opted out of the race to catch up with the latest model. Rather, with Ferrari’s California there is a sense of elegant timelessness, and in that lies the making of an icon.

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