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Comment

Parched policies

by Sami Halabi April 3, 2012
written by Sami Halabi

As Lebanon edged closer to war in the early 1970s, an ambitious project to provide irrigation and drinking water to South Lebanon was launched. At the time what came to be known as the ‘Litani River Project’ (also known to water experts as the Canal 800), was to be the most expansive undertaking to tap Lebanon’s largest — and one of its few — major water storage facilities, the Qaraoun artificial lake. The project aimed to bring potable water to more than 300,000 residents and irrigate 15,000 hectares of farm land in Marjaoun, Bint Jbeil and Yaarin. It never happened.

When war broke out plans were abandoned, only to resurface again a decade ago, and just last month a decision was finally made: the Litani River Project is a go. But whenever Lebanon’s politicians finally agree not to disagree, most often the people end up paying the bill, even if they didn’t get served the drinks. 

At the announcement ceremony chaired by Prime Minister Najib Mikati and Parliamentary Speaker Nabih Berri were swathes of politicians from both sides of the aisle, lending their support to the ‘development of the south’. Amongst them was former PM Fouad Siniora, Future Movement Member of Parliament and Chairman of the Council for Development and Reconstruction (CDR) Nabil al-Jisr, as well as their arch nemesis Energy and Water Minister Gebran Bassil. Rarely, if ever, has their been such consensus in Lebanon; could it be our fractious politicians merely had a change of heart? 

Not likely. As much as the country needs to employ, not to mention develop, its scant water storage infrastructure, going ahead with it now, and in this way, puts politics over policy and does little but allow grandstanders to tout promises, soon to be followed by the distribution of hundreds of millions of dollars to their favorite contractors. In the end they will likely leave us all thirsty, more indebted and sick to our stomachs. 

While the Litani project may have been feasible in the 1970s, since then other projects that use the Qaraoun’s water have been completed and others newly approved. Due to a lack of environmental standards and enforcement, what has also happened is that the lake, and the Litani River that feeds it, have become among Lebanon’s largest sewage dumps. Any water used from it will probably have to be treated for heavy metals that have started to surface, with the cost of such treatment likely making the Litani project financially unfeasible.

Given the lack of alternative sources, the World Bank-funded Awali Project to bring water to Beirut will also draw from the Qaraoun — thanks to a recent cabinet decision. It may also need a treatment that is unaccounted for. Documents and research conducted by Executive all point to the probability that after hundreds of millions of dollars of public money is spent,  the people of Beirut and the South will still have limited access to water because, simply, there will not be enough to go around. That is unless more infrastructure for water collection and storage is built, for which funding and feasibility is questionable at best. It is also important to note that Lebanon’s most productive agriculture region, the Bekaa, is being passed over and the hydroelectric power plants that use the same water could also fizzle out. The entire plan would seem to make no sense, until you remember it is not about people; it’s about politics.

Speaker Berri and his cohorts have been pushing for the Litani project for years to keep their support base in the south happy, Michel Aoun needs to show that his son in law is doing something by bringing water to Beirut and Mount Lebanon, Saad Hariri and Siniora need to use the CDR to contract out projects to their friends, and Mikati, well he’s just the middle-man of Lebanese politics anyway. 

April 3, 2012 0 comments
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Oil in Lebanon: sparring for margins

by Paul Cochrane April 3, 2012
written by Paul Cochrane

There are few sectors of the economy that elicit less sympathy than the oil industry. Thus one has to wonder whether there wasn’t more anger than pity generated last month toward oil-importing companies, truckers and gas stations after their one day strike left those who failed to fill up in time sucking on fumes. The oil industry was crying foul, however, over what it claims are profit margins that are plummeting due to government imposed surcharges and the minimum salary increase. The March 15 protest was the latest engagement of a long running battle with the Ministry of Energy and Water over price structuring. 

To judge whether industry advocates have a case or not, one must understand the basic dynamics of the sector. Every Wednesday the government sets the price for a jerrycan (20 liters of fuel); it is a crucial revenue stream for the country, with tax of 5,500LL ($3.66) and value added tax (VAT) of 2,500LL ($1.66) on every jerrycan ($23.16 as of going to print). For gas station owners, margins used to be 10 percent on a jerrycan, but has been whittled down as oil prices have risen (to $108 a barrel as of going to print) to 4 percent, or 800LL ($0.53), which they claim is not enough to cover infrastructure costs and the newly introduced minimum monthly wage, which went from 500,000LL ($333) to 675,000LL ($450). 

The government did not give in to the strike, saying if it did, prices would rise by $3.33 on every jerrycan. The argument put forward by the Energy Minister, Gebran Bassil, was that the oil sector's demands were “unrealistic and unjust,” he told reporters at a press conference. “How can they claim to be losing money when we see stations opening everywhere and given that Lebanon has the highest number of gas stations per kilometer in the region.”

The minister has a point but he seems to have overlooked the fact that a license freeze on new gas stations was put in place last year, and if new stations are springing up around the country, they have done so illegally, outside the remit of Bassil's own ministry. Indeed, what Bassil did not mention was that out of the 3,250 gas stations in Lebanon, only 1,450 have licenses. Perhaps the ministry itself should start a nationwide process of regulating, even fining, the 1,800 gas stations operating without licenses as part of a project to reform the sector.

Bassil also threw out a figure that the oil importers make $100 million a year. General Labor Confederation Union chief Maroun Khawli went even further by saying the country's 14 oil importers are acting like a cartel and generate $300 million in profits each year. 

However, Bahij Abu Hamzi, the head of Cogico — which owns Levant Oil and Nat Gas — and is the former head of the country’s oil importers syndicate, told me he had no idea where these figures came from. He claimed $1.2 billion in oil is imported each year and profits are 5 percent, or $60 million, which is around LL800 per jerrycan.

While something doesn't totally add up here given discrepancies in the tens of millions of dollars, there appears to be some truth in oil companies not having the high profits commonly assumed, as over the past several years five oil importation companies went bankrupt and the sector is struggling to fund necessary infrastructure upgrades, which has had negative knock-on effects. Safety standards are far from being up to par; there have been reports of oil seeping into the ground water and last year an explosion at a gas station in Beirut left seven dead.

A recent report by global accounting firm PriceWaterhouseCoopers has proposed that margins should be raised to 2,800LL ($1.85) for 20 liters. This is assuredly too high for the government to accept given how high oil prices already are for the public, and even oil importers acknowledge that this is not the right time to raise it to that level. 

A solution needs to be found that placates both parties, as the oil sector has indicated it will once again lock up the pumps if its demands are not met. But a viable solution is not likely unless there is transparency in what the oil sector's profits — or lack there of — really are. Addressing the prices at the pump is just the start of a much needed refinement of an industry that is as opaque as the oil it sells.

April 3, 2012 0 comments
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Remaking Yemen’s military

by Farea al-Muslimi April 3, 2012
written by Farea al-Muslimi

Few in Yemen can remember the last external war their country’s national army fought. For the record, the last time Yemeni troops aimed their artillery at non-Yemenis was the 1934 war with Saudi Arabia. 

Since then, the army’s weaponry has been turned inwards, supporting successive regimes in the suppression of opposition movements across the country. The military, along with the tribes and religious leaders, make up the troika of power in Yemen, and therefore part of the axis of corruption and misery Yemenis have lived with for a very long time. 

Even after this past year of revolution and all the blood spilled, the majority of Yemen’s military to this day remains under the control of the son of Yemen’s former president Ali Abdullah Saleh, as well as his nephews, half-brother(s) and other close ties.  Statistics on the Yemeni military are rare and hard to find, yet there is some consensus that military spending hovers around 5 percent of the country’s gross domestic product, which in 2011 was roughly $36 billion. In 2009 alone, former President Ali Abdullah Saleh signed a deal to buy $1 billion worth of arms from Russia. The flow of American military assistance also increased in the last decade, topping $150 million in 2010. Seeing Yemen solely from a counter-terrorism perspective, American cash and blessings have found their way onto (and under) Saleh’s table since 2001. In return, the US has enjoyed free access to Yemeni airspace. A US diplomatic cable released by Wikileaks reported that Saleh told General David Petraeus that the Yemeni government would continue telling Yemenis, “The bomb is ours,” effectively giving the American military a free pass to launch drone missile strikes against targets it considered linked to Al Qaeda in the Arabian Peninsula — though often resulting in civilian casualties. 

Since the beginning of Yemen’s uprising in early 2011, one of the biggest demands of the protesters was restructuring the army based on national criteria, and replacing Saleh’s relatives with credible military leaders. During the uprising, Saleh relied on two segments of the army — the Republican Guard, led by his son, and the Central Security Forces (CSF), lead by his nephew — to put down peaceful protests. The CSF contains a counter-terrorism unit that had received American military training and equipment, resources it used to great effect against protesters. 

But armies founded on personal interests rather than national ones have indelible fault lines that splinter under pressure, as was the case in Yemen. The First Armored Division, led by Ali Mohsen al-Ahmar — another of Saleh’s relatives — in March declared its support for the revolution and its intent to protect the squares where protesters had set up camp. This lead to battles between it and the Republican Guard, dividing Sanaa into what seemed two different republics. Yemenis lived in a nightmare for months after, afraid that the clashes would lead to civil war, which at times seemed inevitable. 

Among the core provisions of the Gulf Cooperation Council deal that facilitated Saleh’s exit earlier this year was the restructuring of the army over a transitional period of two years. While little has been done, and the likelihood for meeting the timeframe seems slight, remaking the army has become the next popular grievance to target for the revolutionaries. Opposing them is an established military elite, with few of the elderly commanders inclined to cede power to the new structure. The precariousness of the situation becomes more apparent when one takes into account the several hundred thousand soldiers receiving salaries from the government, but who are not part of the regular army. These are salaries funneled through tribal Sheikhs and military leaders each month via a shady, pseudo-mafioso system, which has built and sustained fiefdoms of armed influence and a complex hierarchy of loyalties. 

Yemen faces a humanitarian crisis, more than half a million internally displaced people, multiple armed conflicts and a near endless stream of other imminent catastrophes. Yet the restructuring of the army is arguably the most complicated and crucial task the country must deal with. The hope is that attempting to do so does not simply make things worse for everyone. And even if, by a miracle, the reconstitution of the army occurs without major mishap, it will take decades for the Yemeni military to reconstruct its relationship and image with the people of Yemen. 

April 3, 2012 0 comments
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The Buzz

Unbinding the books

by Youssef Zbib April 3, 2012
written by Youssef Zbib

A modest two-story residential apartment building in the city of Saida houses a Lebanese publisher far more optimistic than others in the industry these days; that the company is also a software firm and owns no printing presses is indicative of the fundamental transformation underway.

Sitting in his quiet office, surrounded by bound tomes published by some of Lebanon’s most prominent publishing houses, Nabih Barakat, a software engineer at Byblos Microsystems, which operates arabicebook.com (AEB), says that many of the paper volumes around him have already completed their digitalization into PDF files, after receiving the consent of respective publishing establishments. These books are now a part of the company’s growing database that currently holds 2,500 electronic books on offer, a process that began in 2001.

“A large part of our work consists of producing [academic] software, and sales of electronic books make up less than 50 percent of our total sales,” Barakat says, adding that there is a rosy outlook for sales growth of electronic books, given the increasing popularity of electronic reading devices, and online purchases in general. Sales in Arab countries other than Lebanon are still the main market for e-books sold through AEB, says Barakat, explaining that Lebanon accounts for 20 percent, while Saudi Arabia is the main market for AEB’s products.

The perspective of many of Lebanon’s 669 other publishers, (a number provided by the Ministry of Information), is markedly different. The quantity of printed books in Lebanon fell as much as 35 percent last year, according to Nabil Abdel Haq, vice president of the Lebanese Publishers Union (LPU), while Lebanese customs figures showed the total value of printed books, brochures, leaflets and other similar material exported fell from $83 million to $51 million between 2010 and 2011, marking a decrease of some 40 percent.

The unread uprisings

“The problems that are ongoing in Iraq, Syria and Egypt hit our exports to the Arab world,” says Abdel Haq.

Nizar al-Laz, a sales executive from the publishing house All Prints Distribution and Publishing (APDP), notes that: “Every year we participate in 15 book fairs, but [in 2011] we could not participate in book fairs that took place in Egypt, Tunisia or Bahrain… The shipment we sent to be displayed at the Cairo book fair was returned and we didn’t even understand why, so eventually we didn’t participate.”

The Arab uprisings also turned the public’s attention away from reading as they followed televised news coverage, according to Bassam Shbaro, owner of Arab Scientific Publishers (ASP). “People were preoccupied with these events because they felt that they affect their lives,” he says.

Long-term threat online

While publishers currently face difficulties due to their decreasing ability to market their products in an Arab world in turmoil, in the long term the adoption of online and digital means to access information — rather than paper mediums — is a trend that looks to permanently change the publishing landscape.

Shbaro did not hesitate to point the finger at online piracy as the main threat to his business, complaining specifically about the illegal trafficking of the Arabic translation of the “Da Vinci Code,” which is the copyright of ASP.

“The availability of pirated books in Arabic through websites such as Google is the real problem,” Shbaro complained. “If you search for Arabic books online you will find [thousands] of pirated electronic copies that are available for free, including our own. These websites don’t do anything about it because they benefit from advertising, and readers of course will not hesitate to download a free a copy if it is made available to them,” says Shbaro, adding that he has discussed this point several times with representatives from Google. Google failed to comment on Shbaro’s allegations despite promises to follow up on the matter from Maha Abouelenein, Google’s head of communications for the Middle East and North Africa.

Illegal physical reproductions of novels are also chipping away at sales. “We have sued several publishers in Lebanon, Syria and Egypt over piracy-related charges but [the legal framework] to prevent piracy in the Arab world is useless and there’s nothing much we can do about it,” Laz says cynically. “At the end of the day, all readers care about is getting a copy of the book for the cheapest price possible.”

The e-challenge

The online challenges facing traditional Lebanese publishing can only grow with increasing Internet access across the region. Along with piracy, competition will likely be felt from the increase of options available for readers of online Arabic that result from a cooperation plan, started in October 2011, between the Qatar Computing Research Institute (QCRI), part of the Qatar Foundation, and Wikimedia Foundation.

The cooperation aims to increase the number of articles in Arabic while guaranteeing high quality translations by using actual translators provided by QCRI, rather than relying on translation software, according to Barry Newstead, chief global development officer of Wikimedia Foundation, which manages the popular online user generated reference Wikipedia. While any improvement in the quality and accessibility of information will ideally benefit readers, publishers realize that sooner or later they have to play according to the rules set by electronic media.

One form of adaptation to this new reality is offering readers electronic books. While AEB in Saida may be among the forerunners, several Lebanese publishers Executive interviewed declared they have also started digitizing their publications, or are seriously considering the option — lest tomorrow see them turn the last page on their businesses.

April 3, 2012 0 comments
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Economics & Policy

A poisoned chalice

by Zak Brophy April 3, 2012
written by Zak Brophy

In the midst of the incessant torrent of winter rains this year, it is hard to imagine that the country’s water resources are a serious cause for concern; but they are. A history of decaying infrastructure, poor management, rising demand and fetid politics has taken its toll. Lebanon is now blighted by seasonal rationing on domestic supply, farmers irrigating with raw sewage and roughly half of all the water entering the water network being lost in transmission and distribution. What is more, the cost of inaction in the water sector is estimated at $433 million every year. 

In an average year demand outstrips supply by around 100 million cubic meters (MCM) and that rises to around 300MCM in a dry year; approximately enough water to fill New York’s Empire State Building three times over. These are big quantities that demand big solutions. As the aquifers, rivers, lakes and reservoirs are replenishing during the winter, building a stock to feed the coming dry months, the government is pressing ahead with a number of strategies and projects that aim, in the long term, to plug the gap and keep the nation’s households, farms and industries watered. Huge quantities of money are involved and the implications, most notably for public health, cannot be understated.

Two costly solutions, one source

Since the beginning of the year two major water infrastructure projects have been officially unveiled that will fundamentally shift the state of play in the sector. The Canal 800 and the Greater Beirut Water Supply Project (GBWSP), also known as the Awali project, will feed expansive water networks to South Lebanon and Beirut, respectively. In reality the designs for both projects date back to the pre-civil war era but the plans inked on paper are now set to become a reality. However, as the politicians tout the vote-winning promise of an abundance of water for the faucets and farmsteads of Beirut and the South, concerns abound regarding the safety of the water we are being promised. May Jurdi, chairperson of the American University of Beirut environmental health department, warns, “You are building a problem. The issue is the quality. You don’t build on a problem, you need to solve the problem first.”   

What’s more, once hundreds of millions of dollars have been spent and the concrete and pipes are set in place, there are doubts that there will actually be enough water to fulfill the lofty promises now being made. In the words of a senior consultant working with the government on water management, speaking on condition of anonymity because they were not permitted to speak to the press, “As usual, politicians are over-evaluating volumes of water and over-allocating it.” 

The Canal 800 is slated to draw 110 MCM every year, from the Qaraoun reservoir in the Southern Bekaa, to the south of the country. The lions share of this water, 90MCM/yr, is intended for the irrigation of around 14,700 hectares of farmland, including the areas in and around Marjaoun, Bint Jbeil and Yaarin and the remaining 20MCM is destined for the household taps of some 100 southern villages. The first phase of this project alone carries a price tag of $330 million; $162 million in loans from the Arab Fund for Economic and Social Development and the Kuwait Fund for Arab Economic Growth, $38 million from Lebanon’s Council for Development and Reconstruction (CDR), the government body in charge of implementing infrastructure projects and $130 million dollars is yet to be secured.

As for the GBWSP, it will be drawing water in the opposite direction, from the Qaraoun Reservoir and Awali River south of the capital to the homes of 1.2 million people in Baabda, Aley, parts of the Metn and Southern Beirut, areas of Greater Beirut and Mount Lebanon region. Shifting such large quantities of water across such expansive tracts of the country is no cheap feat and the total financing requirements are estimated at $370 million. The bulk of the cash will once again come from foreigners, this time in the form of a $200 million loan from the World Bank signed last month. The government will stump up $30 million for land acquisition and the Beirut and Mount Lebanon Water Authority will cover the remaining $140 million. Whilst the two schemes are funded, planned and ultimately implemented independently of one another, they are also intrinsically linked at their source: the Qaraoun Reservoir, from which the Canal 800 is totally supplied and the GBWSP partially. 

 

The (not so) great lake

Built in 1959, the man-made Qaraoun Reservoir sits at the foot of the eastern slopes of the Mount Lebanon range in the southern Bekaa, collecting water from the Litani River before it snakes east on its ineluctable descent to the Mediterranean Sea. It is, in the words of Veronique Kaspard, professor of environmental and isotopic geochemistry at the Lebanese University, the “dustbin” of the Litani, Lebanon’s longest and most polluted river. For this reason there a number of specialists in the field who are deeply concerned about the prudence of taking 150MCM/yr of its water to the homes and fields of southern Lebanon and Beirut.      

Ismael Makki, agriculture and environment manager at the CDR, challenges these doubts, arguing that conventional treatment plants will suffice in cleansing the water from Qaraoun. “The water contains some contamination but it remains within the treatable limits, by conventional treatment,” he says.   

However, the government water consultant, a high-ranking source at the Litani River Authority (the body responsible for the management of the Litani River Basin), and Kaspard, were adamant in their rebuttal. Among the many pollutants found in the river and the reservoir are the recent findings of trace metals that are of greatest concern. As the LRA source explains, “There is a different kind of contamination and the concern is with trace metals. They are approaching the permissible levels but they only appeared in the past few years.”

Makki acknowledges that the trace metals have given cause for concern and points out that the World Bank sent a team of its specialists to conduct an independent examination. “This has been reviewed several times, and not just by the CDR, but by the World Bank itself, which appointed a committee to review the water quality and quantity for the greater Beirut project. This issue has been addressed from a highly technical point of view,” he argues. Whilst the World Bank report did conclude that the levels of trace metals were within the permissible limits, its findings are not enough to assuage the worries of everyone. 

Professor Kaspard explains that the mushroom in industrial and agricultural activity in the Litani River basin is creating a “pollution history” from which the outcomes cannot yet be known. “If you are at the appropriate time you can measure high trace metals, if you are not you will measure low. It is not steady. This is why we are now doing proper scientific work on the whole system,” she says. An environmental and social impact assessment for the Awali-Beirut Water Conveyor Project presented to the CDR in August 2010 suggests Kaspard is within reason to fear that the current situation will deteriorate before it improves, stating, “The possibility of a lower water quality both for the Awali and lake Qaraoun sources should not be ruled out.”

A 2010 USAID report on the management of the Litani River Basin further warns that the recent detections of trace metals, “renders water unsuitable for drinking and requires advanced treatment processes to deal with these types of contaminants.” 

 

What we’ll be drinking

The same report outlines many of the adverse health affects that can result from prolonged exposure to these trace metals, and it doesn’t make for comfortable reading. The three metals whose ascendancy is most pronounced in the basin are cadmium, manganese and barium, which are associated with a plethora of ailments including bone and cardiovascular disease, toxicity of the nervous system, swelling of the brain and liver and kidney damage. The USAID study report levels of cadmium more than double the national standard level and that manganese levels were increasing, with a mean level of 0.04 milligrams per liter (mg/l) encroaching upon the maximum standard limit of 0.05mg/l; moreover, 30 percent of the sample sites exceeded this limit level. 

AUB’s Jurdi warns, “Trace metals have a cumulative affect in the body so the signs may not appear for some time. It may take 10 or 15 years, but it is a risk. Especially depending on the treatment process we are implementing.”

The main cause for the deterioration in the quality of the Litani River’s water is the dumping of untreated industrial effluent and excessive use of agricultural fertilizers and pesticides, including smuggled and unlicensed varieties. With unknown quantities of unknown pollutants — including recent findings of complex chemicals from pharmaceutical industries — contaminating the river and its tributaries, Kaspard argues there is little hope of being able to successfully treat the tainted concoction once it has been drawn from the Qaraoun, as is currently planned.

“There are different qualities of pollution from the different industries and they can all converge with unknown outcomes,” he says. “They cannot be treated from the same plants because they require different treatments.” 

As the Litani River is being sullied there is a general consensus on the need to better manage and regulate the basin before the toxins enter the system. The CDR’s Makki says, “If you have pollution and you have a project of this size and with the potential benefit for so many people, you have to stop the pollution and not cancel the project.” However, that requires financing, institutional organization and coherent policies that are currently lacking, not to mention enforcement by the Internal Security Forces. “There are regulations to control discharge but very, very few have the monitoring capacity or capability,” says Nadim Farjallah, senior expert in land, water and environment at engineering firm SETS explains. “They barely have enough personnel to collect fees. The monitoring of quality… there is nobody to control it. That is a major problem.”

Soggy laws, vaporous implementation 

The ubiquitous disparities in Lebanon between laws on paper and laws in practice are a major cause of this problem. Law 221, May 2000, was meant to restructure the water sector in Lebanon, but as Abdo Tayar, advisor to the minister of energy and water, Gebran Bassil, concedes, its incomplete implementation means wastewater management remains a major problem; “Now no one is really responsible for wastewater,” he says. “It is fragmented between the CDR who is doing projects, the municipalities who are running some and the ministry is doing some others, so there is a big grey zone.”

If the scientists’ fears — that toxic contaminants such as trace metals could continue to rise — manifest, then the conventional treatment options currently slated will not suffice in protecting hundreds of thousands of Lebanon’s inhabitants from a noxious nectar coming through their taps. The LRA source warns that the economic feasibility of the projects will be severely impacted if expensive treatment methods have to be employed such as selective ion removal or reverse osmosis. “It will end up being more expensive than bottled water,” he says. A recent study from the University of Texas at Arlington found that the construction specifications for an advanced treatment technique often used to remove trace metals, called reverse osmosis, would cost an additional $2,240,000, and that is before maintenance and monitoring. The plant in question is smaller than the proposed Ourdanyne plant for the GBWSP, and treatment costs do decrease with size, but it gives an indication of the hidden stings that may arise if and when it is determined that the advanced treatment techniques are required.   

No water anyway

In any case, farmers and residents may not need to fear the contents of their water tanks for the simple reason that they may be empty. In meeting minutes obtained by Executive from a session of the council of ministers on October 2011, the Ministry of Energy and Water warned that “executing the Canal 800 will affect the amount of water intended for delivery into Beirut [via the GBWSP]… During certain years it may be impossible to deliver any amount of water into Beirut. “This portent echoes the concerns of the water consultant and the source within the LRA, with the former saying, “Add one plus one plus one… sometimes you’re going to run out.”

The CDR’s Maki is adamant that the numbers have been checked and all the projects will receive the water they have been allocated. “There is no problem in that regard,” he reassures. 

Following a complaint by 51 residents of greater Beirut in November 2010, led by Fathi Chatila, a hydrologist and long time detractor of the GBWSP, the World Bank commissioned a study by the Water Institute at the University of North Carolina (UNCWI) to assess the quantitative, qualitative and financial feasibility of the scheme.

In conclusion, the report found the conveyor would receive enough water so long as, “The Canal 800 irrigation project will not begin to withdraw water until 2021 and will not reach maximum value until about a decade later.” An assertion supported by Makki. However, in the cabinet minutes leaked to Executive the CDR stated that the Canal 800 will go into service in 2017 and not 2021, hence undermining the UNCWI assessment. 

Another lynchpin in this matrix is the planned construction of the Bisri Dam between the Chouf and Sidon. Makki explains that for the coming 10 or 12 years the GBWSP can draw from existing sources, but as it enters the second phase and the water flows increase from 250,000 CM/day to 700,000 CM/day, “Then we will need the Bisri Dam. This will constitute the main source of this project.”  

This assessment is supported by the Minister Bassil, who stated in a press conference that the Bisri Dam was an “inseparable and integrated” part of the project and that building the conveyor infrastructure without building the dam would result in “an investment that is useless, resulting in paying a lot of money for a little bit of water.”   

However, this runs in contradiction to the assessment of the World Bank, the very body the ministry is pinning its hopes on to finance the majority of the Bisri dam. It stated in its response to Chatila’s complaint that, “the Bisri Dam is not a component of the GBSWP nor is it relevant to, or necessary for, the achievement of the objectives of the GBWSP.” 

In the minutes from the October 11 council of ministers meeting, the Ministry Of Energy and Water claimed the World Bank had committed to a $125 million loan to break the back of the estimated $260 million price tag on the dam. However, the most concrete commitment that Executive could elicit from the bank’s sector manager for water Ato Brown was that the bank would not commit to financing “until an evidence based approach is finalized.” 

The divergence in opinion between Lebanese government officials and the check writers at the World Bank over the interconnectivity between the GBWSP and the Bisri Dam suggests it is perhaps a bit early to take it as a given that the bankers will sign on the dotted line.

Another dry debate

In conclusion the LRA source stated that the concurrent development of the Canal 800 and GBWSP — in addition to the existing Canal 900 that irrigates some 2000 hectares in the southern Bekaa — will push the reserves of the Qaraoun and the Litani river to the limit and in many years will simply fall short: “The problem will be in the scarce years. [The annual reserves of the Qaraoun] will not reach the 300MCM which is a maximum, but this is only every three to four years. In the good years we should be able to cover all of the projects.” 

The government consultant agrees with this analysis and expands: “These projects will not reach their objectives. They won’t reach their internal rates of return. They won’t reach the number of hectares they are meant to serve, and they won’t provide the benefits they are meant to provide.” 

The same advisor complained that the decisions to implement these major developments have been driven more by political calculations than any technical and holistic reasoning of how best to manage the nation’s water resources. He argues that the Canal 800 project has been given the green light in a deal cut between speaker of the parliament Nabbi Berri and prime minister Najib Mikati, securing a vote-winning development in the heartlands of Berri’s constituencies in the south.  

He continues that the logic of drawing such large quantities of water from the Litani to the south, primarily for agriculture, does not make sense as the real agricultural backbone of the country is the Bekaa, which also happens to be the region that suffers from the greatest water deficit. “They are taking the water out of the Bekaa to other river basins around. So what happens to the people of the Bekaa?” he asks.

The CDR’s Makki denies out of hand that there has been any political interference, assuring that there is a long history behind the projects and they are part of a much larger development strategy in the water sector.

However, Abdo Tayar, one of the key advisors on this strategy at the Ministry of Energy and Water, says: “I am distancing the ministry from this [the Canal 800]. We do not have visibility on this.” That one of the biggest developments in the water sector for decades is not being pursued under the direction of the Ministry of Energy and Water (MoEW) is perhaps indicative of how politics are overriding policy. 

Lebanon can ill afford to idle over the development of its water resources. By the same token the direction and implementation of this evolution must not be misjudged. Avoiding tough questions and waxing over painful truths may enable the grand gestures of politicians in the short term. But, the possibility of swathes of the country being exposed to pernicious toxins and hundreds of millions of dollars being squandered on unsustainable projects is reason enough to drag the debate out of the meeting rooms of technocrats, bankers and contractors, and into the living room of every household in the country.

 

April 3, 2012 0 comments
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Business

Blockbuster financing

by Maya Sioufi April 3, 2012
written by Maya Sioufi

It seems like a sweet payoff to invest in films these days. Take for example the the hit comedy “The Hangover”, which cost $35 million to produce and earned $242 million, or the whopping $200 million the film “Paranormal Activities” brought in, costing only $15,000 to produce. Not all movies are that lucky however, and investing in a movie is risky business, as many Hollywood films — 60 percent or more according to industry experts — are a flop, or more commonly known in the industry as “box office bombs.” 

Lebanon’s FFA Private bank, undaunted by stage fright, has recently joined the ranks of Hollywood financial backers by investing in the three-dimensional animated movie “The Prophet” based on Khalil Gibran’s best-selling book. 

“It is a risky business, but it is also highly lucrative if you know what you are doing and if you hit the right movie,” says Julien Khabbaz, head of investment banking at FFA.

With a $12 million budget, the Prophet is expected to hit the big screens by the end of the year. It will be produced by Salma Hayek’s production company, Ventanarosa Productions, led by Roger Allers, director of the highest-ever grossing two-dimensional animated movie, “The Lion King”, which took in nearly $1 billion worldwide. 

Other investors include Financière Pinault, the holding company owned by Hayek’s husband François Pinault. Brothers Haytham and Naël Nasr of Mygroup Lebanon are also investing in the movie and brought the opportunity to the FFA. Given FFA chairman Jean Riachi’s personal friendship with François Pinault, “the trust was immediate,” says Khabbaz. 

By committing 30 percent of the budget entirely with equity, FFA is the largest stakeholder in the movie. The bank sees the movie doubling its investment in the next three years by generating at least $24 million, with a more optimistic scenario forecasting $36 million or more in revenues. With a minimum ticket of $50,000, FFA’s investors expect to receive returns in perpetuity — think DVD sales — with the majority of the profits anticipated in the first 18 months after the movie’s release. 

The film, which will be produced in Los Angeles, does not benefit from any tax breaks, and with no distribution deal secured and no pre-sales completed, this is a high-risk investment. When asked if they are hedging against the movie bombing, Khabbaz replies: “there is no real hedge against flops — people will either go watch the movie and like it, or they won’t.” FFA is betting on a renowned script based on a book that sold more than 100 million copies worldwide, and a solid production team.

While it is not FFA’s first venture into the movie industry, it is the highest profile one. Its previous venture came to naught when the bank had to recently pull out of investing in “Mary Mother of Christ” starring Al Pacino, as conditions set forth by FFA to the producers were not fulfilled in a timely manner. Its only other international movie endeavor was for a French movie “Cloclo”, in which it invested 10 percent of the €20 million ($26.5 million) budget. FFA has also invested a small amount in a Lebanese movie called “39 Seconds” by Nibal Arakji, due to be released in a few months.

In the volatile markets today, turning to alternatives such as movie investments is becoming more appetizing. FFA did look at investing in movies through funds in order to mitigate the risk, but in the end found little demand in the region for a movie fund. “When you tell clients ‘lets invest in a fund that is doing several movies’, you lose the excitement, it is very personal as an investment,” says Khabbaz.

When asked whether FFA intends to invest more in the movie industry going forward, he replies “definitely.”

April 3, 2012 0 comments
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Finance

From Beirut to billions

by Maya Sioufi April 3, 2012
written by Maya Sioufi

From his office in Paris overlooking the Seine, 47-year-old Fady Michel Abouchalache, Chief Executive Officer of Quilvest group with $18 billion in assets under management, is proud to show off his latest art piece, a framed limited edition Hermes scarf with a large cedar specially produced for Lebanon.

Abouchalache spent his first 18 years in Lebanon, before emigrating to the United States where he earned a suma cum laude (the highest praise) graduate degree from the Wharton School of Business, an affiliate of the University of Pennsylvania, and a Masters in public administration from Harvard. Then, with experience as a senior manager at consulting firm Bain and Company and as a banker in the merger and acquisition department of Tucker Anthony, Abouchalache decided to leave behind the land of Uncle Sam’s financial sophistication to take a shot at evolving the financial markets in the underdeveloped Middle East. 

In 1998, along with two partners Fadi Majdalani and Sami Khoury, Abouchalache co-founded Beirut-based Delta Capital with the aim of pioneering private equity (PE) in the Middle East. At that time, there were only a few PE players in the region. Abouchalache and his partners faced several challenges, from highly volatile economies to the dot-com burst in capital markets, leading them to end their foray in the region’s PE market. 

“Our experience at that time was that the Middle East was not ready for PE,” says Abouchalache. Failing to be an initiator of PE in the region, Abouchalache headed back west, but this time a little closer to home, on the hunt for a career at a European based private equity firm. In 2001 his quest landed him a job at the Paris office of Quilvest, a global wealth manager and private equity investor whose history dates back more than a century. 

Abouchalache eventually became CEO of the group and of its private equity arm, Quilvest Private Equity. Under his leadership, the group’s assets under management grew from $5 billion to $18 billion, while Quilvest Private Equity, which has been around for 40 years, grew its assets from $400 million to $4 billion, with the aim of reaching $7 billion in the next five years. The PE’s 17 funds are all in the money with an average 15 to 20 percent annual return. 

“We don’t have one product that lost money in the past 11 years despite the crisis,” says Abouchalache with a smile. Now he has turned his sights back to the region. With his Middle Eastern background, he has helped Quilvest secure 20 percent of its funding from Middle East investors. The group started developing their focus on clients from the Middle East eight years ago, with a strong focus on Saudi Arabia and the United Arab Emirates.

Though personally active in the region through, among other things, his membership on the board of Endeavor in Lebanon — a nonprofit organization dedicated to supporting high impact entrepreneurs in emerging markets — Abouchalache has not invested in private equity in the Middle East. 

“We have not closed the doors, we are very opportunistic but it is not our highest priority market at this point as it needs another five to 10 years of maturity,” he says, pointing to the shallow capital markets, political instability, a shaky legal framework for PE, and a lack of relative experience in the ranks of managers. 

When asked whether the Arab revolutions will change the landscape in the Middle East and create opportunities for entrepreneurs and small and medium enterprises, the central point of Quilvest’s investments, Abouchalache says “it is too early to tell,” and so for now he will continue to prudently tip-toe into the region while focusing on other regions that present more lucrative opportunities. 

Abouchalache expects Africa to be “the new kid on the block” in the PE industry. In the region, Turkey is the most interesting market, “by far ahead of the pack.” For Lebanon, his recommendations came as no great surprise: Abouchalache said he believes Lebanon could be an amazing incubator for start-ups and small companies, where they could reach a certain size and then develop abroad to eventually reduce their local exposure; but, he sees little potential in terms of big-ticket investments.  

The interview ends on a note of cautious optimism: Abouchalache says the first three months of the year have been promising for Quilvest, but while the performance of their portfolio of companies is pointing towards a recovery, the state of the world, financially and politically, leads even him to warn: “God knows whether this is sustainable or not.” 

April 3, 2012 0 comments
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Society

Pimp my Rolls

by Nadim Mehanna April 3, 2012
written by Nadim Mehanna

It is a truth universally acknowledged in the luxury goods market since the 2009 recession; people have become blasé about bling, and those who do spend on big name brands are looking for the narrative beyond the label. While customers cough up for coffee from Brazilian rainforests and rugs hand-knitted in Nepal, the canniest luxury brands are letting people build their own stories into high-end products. New figures released by Rolls-Royce in January prove the success of this strategy: last year 56 percent of customers who bought the carmaker’s latest Ghost model worldwide employed their ‘bespoke personalization’ service, a particular form of customization that is far removed from a paint job. In the Middle East, the proportion of Phantom cars sold with bespoke content rose from 75 percent in 2005 to 99 percent last year.

These numbers point to a new truth, exemplified by brands like Rolls, that top-drawer customers no longer buy from the showroom. Rolls has always had a customization service, but new trends are making those extra options an essential part of any Rolls purchase, rather than the whims of a few super-rich. 

It is all about control — Rolls’ website even features a standalone ‘configurator’ where color schemes and add-ons can be tried out virtually, from picnic tables and lambs’ wool foot mats to champagne sets and humidors, and from privacy glass to up to 44,000 different shades of paint. There is also the separate website 21stcenturylegends.com that shows videos of extraordinary stories about extraordinary motor cars. The message is unequivocal: these cars are unique, handcrafted, exceptional legends, and you, the customer, can write your own. Rolls’ new Phantom Coupé, the third newest model from Rolls since the BMW Group became custodians of the marque in 1998, has partly been driving the surge in Middle Eastern business, and will surely be a darling of 2012. At a stately five and a half meters long and two meters wide, the Phantom Coupé has all the Rolls-Royce trademarks: long bonnet, short front, long rear overhangs and large-diameter wheels, but with a more dynamic and rising profile. The inside is equipped with polished woods and hand-dyed leather, rear-hinged doors, picnic boot and fiber-optic-cable-studded rear cabin roof, giving the impression of a star-filled night sky. All this glamour conceals a 6.75-liter V12 engine that features advanced direct fuel injection with variable valve lift and timing. With 453 horsepower and maximum torque of 720 newton-meters at 3,500 rpm, the 2,590 kg Phantom Coupé offers an agile, fast, refined drive, accelerating from zero to 100 km/h in 5.8 seconds and reaching a limited top speed of 250 km/h. 

Whatever you choose to do to your Rolls, customization is no barrier to reselling it at a very respectable price — David Beckham’s black Phantom Drophead, which he bought in 2008, is now reportedly on the market in Los Angeles for $390,000. Wooden decking, 24-inch alloys and a black Spirit of Ecstasy make this car unique regardless of who owned it previously. For his part, Beckham will be back for another Rolls, and like 84 per cent of buyers in the North American market, he will be making sure it stands out as his own.

Customization is big business, not merely surface fripperies. Rolls confirmed earlier in January that its biggest sales ever were in 2011, up 23 percent in the Middle East. The new Phantom Coupé, with a suggested retail price of around $400,000 (excluding the additional Lebanese taxes and registration fees), has found a way to appeal to those customers for whom simply owning a Rolls isn’t enough — they need one they feel they have designed themselves. In case you needed any more proof, Rolls-Royce is expanding its United Kingdom manufacturing plant to keep up with worldwide demand, doubling its staff headcount on the bespoke program by the end of 2011. 

April 3, 2012 0 comments
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Finance

No longer happy to lend

by Maya Sioufi April 3, 2012
written by Maya Sioufi

The Lebanese government would be broke if it were not for the country’s banks. For decades the banks have lent to the sovereign to help make up the vast difference between money it spends and money it takes in. Of late, however, bankers have been increasingly vocal that they are no longer happy to lend money to a government that has shown no sign that it will ever be able to to pay the money back. 

“Banks can’t continue indefinitely financing the deficit and the high level of public expenditure without concrete reforms,” says Nassib Ghobril, chief economist at Byblos Bank. “Some banks have been very clear in that they are willing to renew maturing issues but not to subscribe to totally new issues.”

As of September 2011, Lebanon’s debt stood at $54.37 billion, according to the latest figures from the Ministry of Finance (MoF). Holding 50 percent Lebanon’s outstanding Treasury bills and 70 percent of its outstanding Eurobonds, the tab owed to local Lebanese banks amounted to $29.4 billion at the end of 2011, according to the Association of Banks in Lebanon. 

Given that the government has, for the sixth year running, failed to pass a national budget, while also recently upping spending through, among other things, implementing a wage increase package for most public sector workers without any offsetting revenue gain, there is little hope for a short-term reduction in the deficit or debt. Quite the opposite actually: with more than $12 billion in debt maturing this year — $2.35 billion in Eurobonds and LL15 trillion ($10 billion) in treasury bills — the MoF has stated it aims to raise $5 billion in Eurobonds and T-bills to cover the 2012 public deficit and the maturing debt.  

Tied to a stone

The exposure to the public debt is restricting the banks’ rating and constitutes a burden on their balance sheets,” says Ghobril. In short, lower credit ratings mean higher borrowing cost for the banks, but their credit ratings are effectively capped by those of the Lebanese government, given how much of the banks’ balance sheets are made up of Lebanese government debt.  

Nadim Kabbara, head of research at FFA Private Bank, concurs: “Most of the debt is held locally by commercial banks and the central bank and as such both the government and banks are joined at the hip.” In Moody’s December report on Lebanese banks, in which it downgraded the outlook on the sector from stable to negative, it stated that Lebanese banks’ “credit risk profile will continue to be closely linked to that of the Lebanese government.” 

With an estimated debt-to-gross domestic product ratio of 137 percent, Lebanon has one of the highest debt ratios in the world, which makes the banks’ exposure to this debt increasingly unsettling. 

“We had several moments in our recent history where we could have put in place reforms; clearly for political reasons those reforms have stalled,” says Khaled Zeidan, general manager at MedSecurities, a BankMed subsidiary.

Biting at the yields

Zeidan added, however, that rather than refusing new debt issues altogether,  “I expect banks will try to negotiate higher yields for the new bond issues with the Ministry of Finance.”

The average yield on a Eurobond in early March stood at 4.33 percent; yields on T-bills offered higher returns, with two-year T-bills returning 5.4 percent and five-year T-bills returning 6.2 percent. The International Monetary Fund recently published a report in which it argued for increased interest rates on T-bills that have a less than seven-year maturity, to compensate for the country’s higher risk and make them more attractive for local banks. Towards the end of last month yields began moving in that direction, with the yields on one-year, two-year and three-year T-bills increasing some 50 basis points in the weekly T-bill auction on March 22. 

Incestuous debt

In many ways the local banks are locked into continuing to lend to the government: having lent so much already, they can ill afford to even contemplate a sovereign default and thus are, in a sense, forced to step in to cover the budget shortfall if no one else will.

An alternative to local banks would be for international investors to fill the gap, but that is easier said than done. In August of last year, at the height of the Arab revolutions and the European debt crisis, Lebanon issued a $1.2 billion Eurobond, which saw international investors come in for 21 percent of the subscription, raising questions on whether they would be willing to subscribe again this year. 

“I don’t believe that foreign institutional investors today have sovereign Lebanese credit on their radar as yields on Lebanese debt are either similar or lower than other regional and emerging market sovereign issues,” says Zeidan. Marwan Abou Khalil, head of capital markets at BLOMINVEST Bank, expects that the international investor community would require the implementation of debt reforms as a main condition of any subscription. 

Looking ahead

After several years of double-digit deposit growth, local banks still managed to realize an 8 percent in 2011. While some $118 billion in deposits will keep Lebanon’s banks afloat on abundant liquidity, the prospects for more growth this year are quite dim as neighboring Syria remains in turmoil and the global economy fragile.  With slower deposit growth, interest spreads, the main source of banks’ income, need to widen to maintain the net income of banks. Raising their exposure to the sovereign debt without a risk-adjusted compensation will only squeeze banks’ balance sheets further, thus they are likely to demand better returns on money they lend the government. Higher yields would also provide banks with more leeway to increase rates on deposits. 

From the government’s perspective, higher yields entail higher debt payments, meaning the government is spending more money it has not yet figured out a way to earn, thus it will be reluctant to up its own cost of borrowing. 

Both sides have too much to lose to let the confrontation elevate to the level where the government is unable to pay its bills, but that does not mean there will not be some tense negotiations and brinkmanship, as the details of how it all plays out are of fundamental importance to everyone. 

April 3, 2012 0 comments
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Finance

Fixed income’s online shine

by Henri Chaoul March 27, 2012
written by Henri Chaoul

Over the course of the last decade, electronics have transformed the global markets: virtually all the world’s exchanges are electronic. Access to liquidity and the ability to execute in nanoseconds is routine. The electronic revolution in securities issues has led to greater efficiency, liquidity, price discovery, quicker execution, and productivity for all players: broker-dealers, institutions, and individual investors.

Notably absent from participation in this transformation has been the fixed income market, but that is changing. Driven by regulation, technology, and the need to compete, fixed income markets are catching up – if not soon to surpassing – the electronic capability seen in equities and purely fixed income asset classes.

The regulatory requirements mandated both in the Basel and Dodd-Frank regimes that lay out rules for the financial industry necessitate greater connectivity, transparency and access among fixed income players. Owing to regulation, upcoming trends will include a move from proprietary to agency-based execution, where an individual or a firm is authorized to executive on behalf of the principal, and a further tightening of spreads – all of which harbor well for a centralized connected solution.

In addition, from the competitive standpoint, the previous advantages reaped from bond market opacity are disappearing, meaning that the market is moving to become more efficient. Internet-based technology unavailable only a decade ago enables this efficiency, transparency, and connectivity. And, precisely because the bond markets are delayed entrants into technology, the technologies that are available and which are being deployed are already the most advanced.

Bonds behind the curve

One of the reasons the bond market has lagged behind is a resulting structural issues related to trading. Part of the problem resides in the sheer size of the market and the number of instruments available. In equities, a company has one stock available for trading. In the bond market, a company has different issues, released at different times, under different terms. This creates an illiquid market that is, by definition, ‘hard to trade’. Sourcing liquidity is not only difficult but has to be solicited and, until recently, the only way to find the other side of a trade was to make a number of bilateral phone calls.

Secondly, the way bonds are traded are simply not as easily understood by investors as equities and foreign currencies. But as investors increasingly see a need to diversify (evidenced by the decline in volumes in the equity markets), especially in light of today’s global market uncertainty, bonds become a “must have” in any portfolio. In addition, investors who are now holding large amounts of cash are trying to figure out what to do with it. One answer is bonds. For example, Americans invested $131 billion into taxable bond mutual funds through November 2011, with a concomitant net outflow of $115 billion from stock mutual funds.

What’s more, banks are no longer the sole liquidity providers, which has traditionally been the case. The result is a more liquid and competitive market. The buy side is getting bigger and trader intent will matter less in such an environment. What now matters is the desire to access liquidity and to execute.

The variables and trends in today’s environment call for a more sophisticated approach and technology meets this need, facilitates it, and drives it. The critical gap of the lack of a centralized, connected, and transparent market for interested parties worldwide to meet and transact is now being met. Such a centralized approach will generate maximum liquidity in one place without displacing current relationships but, rather, expanding on them and making them more efficient in time, access to liquidity, prices, and execution. People will not be displaced, but phones will be.

Delivering a centralized platform via technology to traders worldwide, regardless of type or motivation, will connect local market players to the entire universe of instruments available for trading. Local investors in Beirut, Riyadh or Dubai will be able to access any instrument, anywhere. And investors outside local markets will be able to transact in local issues. Interested parties will meet, regardless of time, location, or language.

Demographic issues are also pushing the equation. In the United States, the baby boomers are nearing retirement and are moving into bonds. In European securities, the desire for certainty mandates a move to more predictable asset classes. Younger traders, used to a world of Facebook and EBay, simply work through computers and mobile devices rather than phones, and will demand equivalency in their professional environment. The transformation is upon us.

 

HENRI CHAOUL is general manager of the Lebanon-based Master Capital Group

March 27, 2012 0 comments
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Since its first edition emerged on the newsstands in 1999, Executive Magazine has been dedicated to providing its readers with the most up-to-date local and regional business news. Executive is a monthly business magazine that offers readers in-depth analyses on the Lebanese world of commerce, covering all the major sectors – from banking, finance, and insurance to technology, tourism, hospitality, media, and retail.

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