Comment

That moment unforeseen

by Nicholas Blanford
written by Nicholas Blanford

The world of journalism lost two giants of the trade last month with the deaths of Anthony Shadid, the Middle East correspondent for The New York Times, and Marie Colvin, a veteran war correspondent for Britain’s Sunday Times.

Both died in Syria — Shadid from a fatal asthma attack while heading to the Turkish border after spending several days with the rebel Free Syrian Army, and Colvin from an exploding artillery shell in Homs from where she had been reporting for a week.

Their deaths have provoked once more, among journalists covering conflict zones, deep introspection on how to assess the critical balance between the need to report a story to the outside world and the risks involved in obtaining it. The demands to produce material combined with ever growing numbers of correspondents covering the same story — from newly arrived hopefuls looking for a big break to seasoned veterans — have increased the sense of competition among reporters.

Shadid’s moving memorial at the American University of Beirut attracted a large number of colleagues, many of whom had flown in for the occasion from points across the Middle East, Europe and even the United States. During the lengthy drinks that followed, a leading topic of conversation was the dangers involved in infiltrating Syria to report on conditions on the ground as both Shadid and Colvin had done. More and more journalists are undertaking the perilous trip to sneak across the border to spend a few days with the Free Syrian Army or besieged civilian populations, providing crucial eyewitness accounts to supplement the flow of often unverified cell phone footage or reports offered by so-called ‘citizen journalists’.

Few doubt the importance of the story. After all, the fate of Syria in the coming months has the potential to reshape the geo-political map of the Middle East, and not necessarily to the collective good.

The violence wracking the country and the tragic examples of Shadid and Colvin, among other foreign journalists who have died or been wounded in Syria, is causing many to err on the side of caution. One brave journalist I know who covered the conflicts in Afghanistan, Iraq and the Arab Spring uprisings in North Africa, and has been kidnapped twice, told me that he was stepping aside from the Syria story. Too many close calls and a recent marriage had changed his perspective.

Gathering as much information about the situation on the ground is critical, which is then weighed with the importance of the story and personal factors. A war reporter who is well established, middle-aged and married with children has much more to balance in his or her decisions than an ambitious single 25-year-old just embarking upon a career. But there is also the dreadful burden of peer pressure. When one reporter takes the plunge and survives with a scoop, his competitors feel compelled to do the same or better. Then there is the not-so-subtle pressure from newspaper editors — “I see Smith of the [rival] Daily Standard got into Homs, would you be interested in having a crack at it? No pressure of course, just wanted to check…” An outright refusal could jeopardize one’s career, but accepting the assignment could get you killed.

How does one calculate acceptable risk? There is risk in crossing a road (especially in Beirut), but we all do it. And the more often we cross the road, the more confident we feel and the sense of risk diminishes. That’s when we blithely march across a busy street while sending text messages on a cell phone with barely a sideways glance and end up squashed like a bug on a truck’s radiator. War reporting is similar. The fear factor is highest usually when taking the first step — whether it is following troops into battle, driving down a highway notorious for roadside bomb ambushes or passing through kidnapping territory. Once that Rubicon has been crossed safely, there is a temptation to push on to the next level of risk. But surviving a succession of dire situations can breed complacency, which in turn leads one to take ever greater risks.

Of course, the level of acceptable risk is different for everyone, but the heartbreaking examples of Shadid and Colvin are sobering reminders that the risks are deadly real. No one can plan for all possible contingencies, and even decades of experience offer no shield against that moment unforeseen.

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Business

Still shipping

by Joe Dyke
written by Joe Dyke

In the list of Lebanese businesses, the name sticks out — Henry Heald and Co sounds incongruous. In many ways it is, yet it is believed to be the country’s oldest company.

Henry Heald and Company steamboat and shipping experts was registered in 1837, more than 100 years before the country gained independence. All of Mr Heald’s contemporaries have since closed down, meaning the shipping agents are believed to be the oldest continually registered company in Lebanon. 

Little is known about Heald, an Englishman from Yorkshire, apart from the fact that he had been living in the “Levant”, for several decades before setting up the company at a time when European trade was expanding rapidly. Philip Mansel, author of the book ‘Levant’ which tracks the history of Beirut and other port cities, explains how the Ottoman-led government of Muhammed Ali had opened up to foreigners.  “There was a complete change in attitude. The whole region was opening up because Muhammed Ali’s efficient modern administration arrived in 1831,” he says. “Customs receipts trebled in the 1830s and Heald’s were a part of that.”

In the late 1800s Heald’s nephew, Charles Smith, who had taken over the business, died, leaving it to his partner Earnest Joly, in whose family the business remains to this day and his great-granddaughter Harriet currently occupies the managing director chair. She explains it was the high-society connections of Earnest’s more affluent wife Catherine that enabled the takeover bid. 

“When Earnest and Catherine wanted to buy the rest of the company from Charles Smith, Smith’s sister was a bit of a snob,” Harriet explains. “This branch of our family had been living in Smyrna [now Izmir, Turkey] and Ms. Smith didn’t approve of the people from Smyrna and refused to sell her part of the company. Then Catherine produced a copy of Debrett’s [a magazine for Britain’s elites] showing her as the granddaughter of a Baron and immediately everything was alright and she was quite happy to sell.” Yet Earnest’s woes did not end there. With the company growing, both in Lebanon and other parts of the Middle East, he was taken prisoner by the Turks for a large part of the First World War. 

While many Europeans took the hostility to Westerners as their cue to abandon the Middle East, the Jolys returned to post-war Beirut to rebuild. And the family’s resilience was tested again 60 years later when they struggled to keep the business open throughout the Lebanese Civil War, despite the Beirut port closing for months and the company’s offices being blown up in 1975. Harriet’s dogged father kept operating, often risking personal harm to convince ships to dock.

“All the captains knew him but were frightened because there was a war going on, so they didn’t like coming in to port,” Harriet says. “Usually the condition for coming in was that they would give him a cabin and he would sleep on-board to prove it was safe.”

“Once he had a ship arrive and he took the captain and two visitors out for dinner over toward Jounieh. He sat them with their backs to the window and while they were eating a fire-fight broke out in the distance behind them,” she says. Once the fighting had abated he settled the bill and returned his guests, satiated and unawares to the affray, back to port.

Nowadays the company has around 15 staff in Lebanon, plus assets in other parts of the Middle East, and operates as a shipping agency, port services firm and recently even as an investigator of illicit insurance claims. Walking through the offices in Gemmayze there are few clues to the company’s unique heritage. Bar the odd ship’s wheel on the wall, you could be in any modern office in the country, with staff tapping away on computers, an impression Harriet admits is deliberate.

“When we are presenting to clients we always mention the history because we think that is kind of nice, but we like to also come across as very much up-to-date and in touch with the latest developments,” she says. “I think a lot of people have a downer on family businesses and think it’s not really the way it should be done.”

Much of the industry had a difficult 2011 as Hassan Qoreitem, head of Beirut port, admits. “It was a tough year not just because of Syria, but because of the situation in the region and in Lebanon as well. The local cargo decreased but we succeeded in increasing shipment cargo through the Port of Beirut.” 

Revenues for the port itself declined 4.79 percent in 2011, according to Blominvest Bank, but there was positive news as the port breached the landmark of handling one million containers for the first time.  Qoreitem describes Heald’s as “one of our most esteemed clients”, but the company has not been immune to the regional downturn. A crucial contract for the company is with NYK Roro to import cars to the Middle East but demand disappeared as uprisings swept the region, with just three shipments in the first six months of 2011. Yet it has slowly picked up in recent months, averaging one a month between August and January. 

Harriet sees room for expansion in the coming years, with freight forwarding and fraudulent claims on medical insurance among new potential areas of growth. She has two step daughters, a niece and a nephew, so the obvious question, therefore, is whether the business will stay in family hands for one more generation?

“It may or it may not,” she says. “No one is going to force someone to do something they don’t want to do, but it is obviously there for family to take over if anyone shows an interest.”

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Stored value in troubled times

by Jihad Yazigi
written by Jihad Yazigi

The unrest gripping Syria may have created havoc on the economy, but there is one industry that has benefitted from the turmoil — the real estate sector.

Within days of the beginning of the protests last March, frantic construction activity began across most of the country’s informal areas. Syrians seized on a relaxation of strict construction rules and a general weakening of state control to rush and build in areas and lands normally out of their reach. The government, facing countrywide protests and with no appetite for causing further discontent by clamping down on small scale developers, kept its eyes closed.

One year later, there are up to half a million new housing units that are believed to have been built, leading to a temporary surge in the price of building materials and labor, and a change in the landscape of many suburban and rural areas. Although in the last few weeks construction activity has largely returned to normal, this temporary boom has shed light on the importance of the real estate sector in the Syrian economy and society.

In a region that, historically, has rarely been stable, that has seen countless invasions and that sits on the crossroads of several trading routes, the attractiveness of investments that can act as stores of value is great — and this obviously applies to real estate as it does with gold. Few Syrian men, for instance, can be considered to have succeeded in life — and for that matter can dream to marry — unless they own at the very least a residence. Thus, beyond its purely economic logic, investment in real estate has a social weight of its own. In recent years, several factors encouraged investment in the sector. They include excess liquidity held by Syrian expatriates and Gulf investors on the back of booming oil prices; limited other investment opportunities — because the Syrian business environment, comparatively to other countries in the region, remains very poor — and negative real interest rates; finally, supply bottlenecks in several segments of the market, including quality commercial properties and upscale housing properties, played a role. Thus, in the mid-2000s, several of the major regional developers, such as Majid Al Futtaim, Emaar and Qatari Diar, announced the launch of a variety of projects across the country, while local investors focused on smaller scale ventures.

In practice, however, only a handful of these landmark projects took off. Emaar’s Eighth Gate commercial development — which will host the Damascus Securities Exchange — located in the upscale Damascus suburb of Yaafour is the only one of significance that has moved ahead. Almost all the others remain burdened by endless bureaucratic and regulatory obstacles as well as legal disputes over land ownership. Indeed, beyond the traditional problems faced by all investors wishing to do business in Syria, many other hurdles hamper a proper expansion of the real estate industry. The lack of sufficient land and of proper zoning in many parts of the country, in particular in the densely populated urban centers, have led to a rise in informal housing, which represents today a staggering 40 percent of all housing units in the country, and to a lack of investment opportunities. Similarly, state control and administration over huge portions of land in city centers, for instance in the Central Business District of Damascus, have rendered any major commercial development in these areas almost impossible. Another impediment is the very low average rental yield of most properties across the country. It is not uncommon, for instance, for a mid-size residential property located in the center of Damascus and worth around $400,000 to be rented out at less than $10,000 per annum, or an average yield of 2.5 percent, very low not only by international standards but also by regional ones.

In the near term, the best hope for the sector lies, ironically, in the unrest gripping Syria. Indeed, nearing two months into 2012, the Syrian Pound lost 14 percent of its value compared to the US dollar — coming on top of a 34 percent decline last year — while the inflation rate has reached double digit levels. Both these factors encourage the role of the sector as a store of value. In the longer-term, however, the broader political dynamics will weigh in much more on the development of the real estate industry, and unless the current stalemate comes to an end quickly, real estate can only resist significant disinvestment, as is happening in the rest of the economy, for so long.

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Business

Avoiding the double-hit

by Iyad Hourani
written by Iyad Hourani

After months of back-and-forth in cabinet over various wage hike proposals, Lebanese employers will finally face the inevitable. Wage Hike Decree (WHD) no. 7424 will have most employers opting for the “survival of the fittest” course in containing rising costs that could, otherwise, heavily impact their books.

The WHD will impose itself on companies’ income statements in two principal ways. The first is in the form of higher cash flows costs, from which there is no real escape. Employers may opt for cost-cutting strategies (such as cutting jobs, enforcing part-time work, putting expansion plans on hold, etc.) but at the end of the day, most companies will feel the impact. The second will appear in the form of higher non-cash accounting provisions within the income statements, such as the end-of-service indemnity provisions. Employers are fully aware that few fair measures for bypassing the higher cash flows exist; the question is can the same be said about the non-cash components, and the answer is yes. 

The aftermath

The recent WHD, effective February 1, raised the minimum wage to LL675,000, rescinding the 2008 cost of living increase of LL200,000. Moreover it imposes salary increases ranging between LL175,000 and LL299,000. 

This overall increase in workers’ wages is expected to have a major impact on company cash flows in 2012 and on their income statements: cash out-flows will increase as payrolls rise and consequently so will employers’ contributions to the National Social Security Fund (NSSF). Entities that mainly employ low-wage, low-skill workers will be significantly affected as their percentage increase in labor costs will be among the highest. As for their income statements, the financial hit will be a by-product of the increased provisions taken for the NSSF’s end of service indemnity (EOSI).

The NSSF’s EOSI branch is a mandatory program under which an employer pays contributions to the NSSF on behalf of its registered employees (the contribution being 8.5 percent of declared earnings, of which 0.5 percent goes to covering NSSF’s administrative expenses). At the time a worker cashes out his EOSI benefit, the employer may be liable to pay a settlement to the NSSF in the event that net paid contributions (8.0 percent), along with the interest credited, are insufficient to cover the EOSI amount. 

Employers typically keep, what is generally called an ‘EOSI provision’ to cover any possible future settlements payable to the NSSF. Under normal circumstances, this provision witnesses an annual growth due to a myriad of factors: the number of years served by employees, the evolution of declared earnings, worker movements, and so on. 

In addition to affecting employers’ total payroll, the latest WHD is expected to result in significantly higher EOSI provisions, which will further aggravate the impact on income statements in 2012.

Containing the adverse increase of the EOSI provision

Full implementation of International Accounting Standard no. 19 (IAS 19) — one of the International Financial Reporting Standards (IFRS) — can be seen as a readily available solution for employers wishing to mitigate part of the adverse impacts that will inevitably result from the WHD. In fact, fully complying with IAS 19 will likely cancel out most of (if not all) o the expected increase to the EOSI provision. 

Corporations in Lebanon are required to prepare their financial statements in accordance with the IFRS, including IAS 19. However, the majority of employers overlook certain aspects of this standard, in particular those pertaining to long-term, post-employment benefits. Indeed, an alternative accounting practice is commonly used in Lebanon and in the region to determine these provisions (including the EOSI provision); however the inherent inaccuracies of this practice overstate the fair level of such provisions by 20, 30 and sometimes as much as 50 percent. 

The commonly used method effectively calculates the EOSI provision based on the assumptions that the entity will terminate its operation on the balance sheet date and that all its workers will cash out their EOSI rights at that date, which is contrary to what is known as “going-concern”.  

Over the last few years, an increasing number of corporations started determining their provisions, pertaining to post-employment benefits (EOSI provision in particular), in accordance with IAS 19. These are typically multinational or large local companies from different industries. Moreover, several organizations have carried out an assessment of the financial impacts resulting from the potential implementation of IAS 19, since it is likely to be requested by auditors in the coming few years, though many have yet to actually apply the standard. 

IAS 19 in a nutshell

IAS 19 specifies the accounting methods and disclosure requirements for determining the employee benefits costs (cash & non-cash). In particular, it prescribes an adequate and objective approach for estimating employers’ obligations related to post-employment benefits by allocating the cost of such benefits in an orderly manner over the period where employees are expected to acquire them. 

And as such, through the use of actuarial techniques, the EOSI provision would be determined as the present value of accrued rights (at the balance sheet date) expected to be paid sometime in the future.

Company XYZ with 400 Employees

In an effort to elaborate on, and give a tangible sense to, the above, let’s take the case of a mock company (XYZ) which employs 400 workers in Lebanon. 

The line graph on the following page shows the declared earnings distribution (before and after the WHD), as well as the distribution of Years of Contribution to EOSI, for XYZ’s employee population as at February 2012.

The line chart and bar graph represent an EOSI provision based on the accounting method that is commonly used in Lebanon, as does the table. It clearly shows a 26 percent increase to this provision caused by the WHD. It also reveals that by implementing IAS 19, the level of EOSI provision drops back to around its initial level, which tells us that the current accounting method used by most Lebanese entities significantly overstates what would otherwise be the fair level of EOSI provisions; by 32 percent in the case of Company XYZ.

This fictive example also shows that generally, the pace of EOSI provision’s evolution is relatively slower under IAS 19 than under the accounting method commonly used in Lebanon.

Not a crisis

The passing of crises, political turmoil and government regulations, has taught many corporations that long term strategizing in the face of mounting costs is key to sustenance and survival. Lebanese employers should consider the applicability of all available solutions to their situation. 

Although the recent wage hike decree will inevitably strain companies’ finances, avoiding the double hit on their income statements in 2012 is possible if they heed the words of the late American poet Robert Lee Frost that “the best way out of a difficulty, is through it.”

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Aided innuendos

by Jonathan Wright
written by Jonathan Wright

Sooner or later it was bound to come to post-Mubarak Egypt: the disagreement between Egyptians and Americans over whether and on what terms the United States should continue to give the Egyptian government more than $1.5 billion a year in military and economic aid. But few could have predicted the aid debate would rise over a relatively petty dispute regarding American-backed nongovernmental organizations (NGOs) that have been operating in Egypt for years, without licenses perhaps but with the full knowledge and tacit acceptance of the Egyptian authorities. 

The Egyptian judicial authorities are pressing ahead with plans to prosecute more than 40 foreign NGO workers, including Americans who have taken refuge in the US embassy in Cairo. American politicians have threatened to withhold or cut the aid permanently if the charges are not dropped and the Americans allowed to leave the country. The US State Department, more cautiously, says that failure to reach a solution will affect the administration’s ability to help Egypt economically. Even the $3.2 billion in International Monetary Fund assistance Egypt is seeking to support its current account could be at stake. 

So how did it get to this stage, especially when the prime rationale for US aid to Egypt, the 1979 peace treaty with Israel, is not in any serious danger? None of the explanations are fully satisfactory. 

Some speculate that the Supreme Council of the Armed Forces (SCAF), the group of generals who have been running Egypt for the past year, whipped up a xenophobic frenzy to enhance their patriotic credentials and discredit the hardcore revolutionaries who continue to call for their immediate departure. The generals have pledged to hand power to an elected civilian president by the end of June but their commitment to similar promises leaves room for doubt). Besides, they have no obvious interest in jeopardizing the $1.3 billion a year in U.S. military aid, which enables them to free up defense budget money to support their comfortable lifestyles. 

Others blame Planning and International Cooperation Minister Fayza Aboul Naga, the only cabinet minister to have survived from the Mubarak era, who touts that the revolution last year was an American conspiracy to weaken Egypt. Bizarrely, Aboul Naga would in that case be acting alone against the interests and in defiance of the wishes of the generals, although she is reputed to have retained her cabinet position because she has one or more influential patrons on the military council. Another theory is that mysterious relics of the Mubarak regime, trying to provoke conflict of any kind, have promoted the investigation of NGOs from within the system. That begs the question of why SCAF and the government cannot counteract the influence of such forces.

The dispute over the NGOs, which include the foreign-assistance affiliates of the two big American political parties, has revealed the internal Egyptian debate over how a democratically elected government should deal with Israel, and whether it should accept aid from the US at all. The Muslim Brotherhood, holding almost 50 percent of the seats in the recently elected parliament and bound to dominate the next government, is keeping its options open. If the US cuts the aid, Egypt would have to reconsider the peace treaty with Israel, a Brotherhood spokesman said. But the corollary of that is that if the aid continues the peace treaty is safe — some comfort for the US and Israel, for whom the peace treaty is central to their regional policy. That’s also very much in line with SCAF's thinking; Wikileaks documents show that the generals see the aid money as the price Washington pays for peace with Israel. 

American army generals also want the aid to continue; they value the right to fly warplanes over Egypt at will, preferential treatment for US warships passing the Suez Canal and the cozy relationship with their Egyptian counterparts. 

The best-placed candidates in Egyptian presidential elections in May are also happy to take American money, if the terms are right. Islamist candidate Abdel Moneim Aboul Fotouh, for example, dismissed the NGO dispute as hot air and political theater. “There’s no patriotic body that rejects financial support and cooperation with others in the interests of the country,” he said in an interview. 

So everyone may get their way except the Egyptian people who overwhelmingly favor ending the special, and sometimes humiliating, relationship with Washington.

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Anthony Shadid

by Nadim Houry
written by Nadim Houry

Anthony made reporting look so easy. His writing was always fluid, transforming even the scariest of situations into the perfect setting for a good anecdote. I first met him in Tyre during the hot days of the July 2006 war when the Israeli air force was pounding southern Lebanon. Most journalists and NGO-types had gathered in one hotel in the city. It was hot, humid, and frankly a bit miserable. I was new to the journalists’ scene and it felt intimidating. Each evening, war photographers would trade stories on the day’s horrors dropping passing references to Grozny, Bosnia and Iraq.  

Anthony was different. Despite winning the Pulitzer Prize for his work on Iraq (he would go on to win a second one in 2010), he was approachable, modest and available to help others. He worked hard — was often the first out the door during that 2006 summer — but somehow never bragged about it. 

What set him apart was not just his beautiful prose or his attention to detail. It was his ability to get people to open up, to share with him intimate parts of their world. Iraqis, Tahrir square activists, southern Lebanese, Benghazi residents, all told him their stories, and he did a superb job relaying their fears, hopes and dreams. Steve Fainaru, a reporter who worked with him in Iraq was right when he called Anthony’s dispatches “poetry on deadline.” 

In an age of “embedded” journalists acting as scribes to invading armies, Anthony embedded himself in the societies he wrote about. He often reminded me of those mid-century anthropologists who spent months and sometimes years observing a society and striving to understand its unspoken rules. At his commemoration last month in Beirut, his brother said that even as a child, Anthony’s favorite past time on family vacations was to go discover. We should deem ourselves lucky that he shared his discoveries with us in writing.  

A few months ago, I met Anthony for coffee after he had returned from a particularly difficult and dangerous trip to Homs. He said it was one of the scariest trips he had ever made — a tall order for someone who had been shot in Ramallah and kidnapped in Libya. I teased him saying that with two Pulitzer prizes under his belt, maybe it was time to leave the running around the frontlines to others and write punditry. He smiled. He wanted to spend more time with his family, he said, but he loved reporting and there was so much going on in the region. That urge to go discover was still tugging at him.  

He died last month from an apparent asthma attack while trying to cross back to Turkey after reporting from northern Syria. Like so many great explorers before him, it was just one trip too many.

Anthony, you will be missed.

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Where outsiders fight

by Farea al-Muslimi
written by Farea al-Muslimi

Pessimists think of Yemen as the new Afghanistan or Somalia, while the optimists’ tend to see it as the new Egypt, or better yet, Tunisia. Situated somewhere between the two, there is also an opinion of growing prominence that recognizes in the new Yemen an awful lot of Lebanon. Most notably, Yemen, like Lebanon, is a proxy field for the region’s hottest “cold war”, between the Middle East’s two titans of theocracy: The Kingdom of Saudi Arabia (KSA) and the Islamic Republic of Iran. This in itself is not new, but the new political landscape shaping Yemen has upped its significance for both sides.

Shortly after the Iranian revolution in 1979 the competition between KSA and Iran began in earnest for influence in, and over, Yemen. The regional rivals set about inciting strife between Yemen’s two main sects, Shafai Sunnis and Zaidi Shias, who had previously enjoyed a largely moderate and tolerant coexistence with each other.  

In the 1980s, Saudi Arabia began funding what they called “The Scientific Institutions” which taught their Sunni students an extremist and intolerant brand of Salafi Islam, in an effort to marginalize Zaidi influence in Yemen. Recently ousted President Ali Abdullah Saleh was also very adept at manipulating Saudi fears of Iranian influence to extract bundles of cash from the KSA’s monarchs, even to the point of empowering Iran’s allies in Yemen whenever the Saudi cash would wane. 

Sectarian tension was inflamed in the last decade through six wars — between 2004 and 2009 — in the Saada governorate between the Yemeni army and the Al Houthi group, led by Abdulmalik al-Houthi, a prominent Zaidi figure. Thought the causes of the conflicts were largely political, the sixth war had a massively negative impact on Zaidi-Shafai relations. KSA forces entered the affray on the side of the Yemeni army after several incidents along the border between Saudi troops and Houthi fighters. The Houthis called the Saudis invaders and the Saudis claimed Iran had manipulated the Houthis to instigate the border classes.  What is more, local and regional media expounded vitriol according to their allegiance to either KSA or Iran.

The government in Sanaa has long accused the Houthis of being Iranian-funded and armed; it has never produced any evidence of this. While it is undeniable that the Houthis have been well supported in Iranian media coverage Houthi spokesman Houhsi Muhamemd al-Emad denied in a recent interview with a Yemeni newspaper that Iranian support extended to financial assistance. He added that Saudi interference in Yemen should also be condemned. KSA has been paying monthly salaries to hundreds of Yemeni tribal sheikhs and other prominent figures via a “The Special Committee”, which the KSA itself formed, and which many Yemenis regard as simply a vehicle to buy loyalty. 

With the beginning of the Yemeni uprisings early 2011, the Houthis surprised all sides and joined the protests in the streets, peacefully standing side-by-side with their historical enemies: the Salafis and Muslim Brotherhood in Yemen. Such a move by the Houthis was considered pragmatic and welcomed by many other Yemenis, especially given the Houthis’ cache of arms. Within months, however, violence broke out anew between minority Wahhabi Salafis and Houthis in Saada, which by then was fully Houthi controlled, and more recently at the Dar Al Hadith religious school in Saada (among those set up by KSA in the 1980s). The violence has also spread to the neighboring Haja governorate.

Now, with Iranian influence taking a battering in Syria, the Yemeni arena looks more promising for them. Saudi Arabia’s influence in Yemen is also in retreat for two reasons: Firstly, Saudi Arabia has stuck by the old, traditional elites and political actors whose power at home has been rocked by the uprisings. Secondly, the Houthis and Iran are establishing partnerships with leftist and liberals who are wary of the power the Sunni Islamists will have in the country post-Saleh. These relationships have been publicized during the many conferences and workshops Iran has held with Yemeni actors inside and outside the country. 

Thus, while the proxy war between Iran and KSA in the Levant may seem to have swung toward the advantage of the latter, on the KSA’s own southern doorstep the “cold war” pendulum seems to be swinging the other way.

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Economics & Policy

The bribes between the bricks

by Zak Brophy
written by Zak Brophy

"Of course, there is no bribery in Lebanon, there is no bribery in this office,” quipped the official at the finance ministry’s Directorate of Cadaster and Real Estate (DCRE), where property owners in Beirut register their deeds. The wry smile and wink before adding, “no seriously, we have no comment,” belied the accusations of endemic corruption among the laws and bureaucracy that fashion the nation’s construction sector. 

As the villages, towns and cities metamorphose to fashion the future residential, commercial and industrial face of Lebanon, exorbitant amounts of money are being made. The construction sector has grown immensely over the years and today comprises some 15 percent of the Lebanese economy, double what it did in 2003, with yearly volumes peaking at $9.5 billion in 2010. Deciding what is built, for whom it is built and where it is built has a profound impact on the country’s social, environmental and physical fabric, and is also clearly near the center of its economic heart — precisely why Executive, in this following report, offers a closer inspection of the charges of institutional corruption, political patronage and irresponsible practices plaguing Lebanese real estate.  

The letter of the law

Construction in Lebanon is regulated by a plethora of laws, with the first Urban Planning Code passed in 1962 stating that “integrating the master plan and guidelines for cities and villages within the comprehensive plan for territory arrangement is mandatory.” Whilst this legal development endeavored, with very limited success, to realize a grand strategy for the nation’s territory, a decree passed in 1983 further outlined an urban planning code to map and implement designs and systems for urban areas. Within this plan construction is managed by a system of building permits, which are governed by the official Building Code.  

Article 25 of the urban planning code stipulates: “The construction, conversion, restoration and renewal of buildings of different types, are subject to the provisions of the Building Code. The building permit may only be granted if the works planned to take place are in conformity with the rules specified in the Building Code.” 

Obtaining such a permit from the local municipality is the first hurdle any developer must cross once they have purchased their property. Gripes of corruption and bribery at this stage are commonplace. “Everyone has to go through the ‘proper channels’,” said a developer we will call ‘Hani’, as he spoke on condition of anonymity to protect his business. “Nobody gets away without paying. It is big money. On big projects you are talking tens of thousands of dollars.” The accusations of widespread bribery within the real estate and construction sector are supported by a poll conducted in 2002 by Beirut-based research firm Information International which showed that 28.6 percent of respondents paid bribes within the sector, even when they had fully abided by the law, and 42.5 percent said they had not met the legal requirements but paid bribes to complete a transaction.

The system under the table

The rationale behind paying is two-fold. Firstly, developers know that if they don’t grease the right palms their application could get passed from pillar to post within the bureaucracy, leaving their project to stall. “A law was passed that limited the time they could take to return your file. Which is two months at the latest, but it is never enforced because even after that time they can always find something that needs to be changed and then you will resubmit again and then another two months and so on,” said Hani. Time is money, he reasoned, and as there is no escaping the inevitable requests for bribes, it is a price worth paying.

The second motive to pay bribes is to secure a lower price on the building permit itself, which is linked to the average value of land in the area. Hani explained: “There is no fixed amount of money for a square meter in a street. It is between X and Y, and the range is very big. They say they will give you the higher rate so you pay them a little under the table and they charge the lower fee. This is a very common practice.” 

An engineer, who also insisted on speaking anonymously, reinforced this assertion saying, “This board [that appraises average street value] is the head of the municipality, the head of the engineering department and a third person. You bribe these people and you will receive a discount on this assessment” — something he said happens with “every single permit”.

Bilal Hamad is the president of the municipal council of Beirut and presides over this committee. He resolutely denies that there is any scope for corruption in the process. “No way [is there bribing]. This is completely wrong. We put the price on the land based on our estimate of that sector in which the land is, depending on the zoning,” he said. “We try to play it as logically as possible.” 

Hamad admits that the prices within different sectors are not available to the public and any final valuation from the committee is based on “market prices” — however notoriously variable they might be from one block to the next. 

Once a developer has run the bureaucratic gauntlet within their municipality and purchased a building permit they can move on with their construction. However, as the diggers are put to work and the concrete set in its mold, complaints of further underhanded practices persist. 

“A $4 million project would cost around $100,000 in bribes from start to finish from building permits, occupancy permits and then electricity and so on,” said Mona Halak, an architect and a member of the Association for Protecting Natural Sites and Old Buildings in Lebanon (APSAD). “Every single issue in construction has a department and every one has its cost. It’s an industry within the municipality.”

One man’s burden is another man’s gain, and there are offices of people who make a healthy living navigating the inner machinations of the bureaucracy, making sure the right papers are signed and the money-packed envelopes placed in the right drawers. 

“I have someone who knows all the people and I pay them to go and do it for me,” said Hani. “This is very common. There are offices specifically for this purpose. I’ll be paying those offices around five to ten thousand dollars [per project] for this service.” 

When asked whether bribery and corruption with regards to construction were common practice within the Beirut municipality, Hamad said he would not comment on the specifics because, he claimed, the responsibility lay within the concerned departments of the municipality and he was not privy to the details. 

“I come from a world of ethics and I am trying to do as much as possible to raise the level of ethical awareness in the municipality,” said Hamad. “We are trying to review the structure to reduce the time between application for the permit and the issuance, and also any possible violation of laws and regulations.” 

When challenged on whether there were any specific policies or oversight mechanisms being employed, he declined to comment.

As the construction phase on a building nears completion and the cranes come to rest the developer has to reenter the bureaucratic melee, but this time at a department within the ministry of finance. To obtain the property deeds the final construction has to be appraised at the DCRE’s Afraaz inshaat, roughly translated as the ‘building registry’, upon which one percent will be paid on the total value. With the deeds in hand the developer can sell the building or apartments within it, but with a sale comes a transfer of title, which carries a cost of 5.25 percent. So once again there is an appraisal and once again the developers will pay bribes to get a favorable price.  

“The government is screwed here,” said Hani. “Lets say you buy an apartment for $1 million and pay 5.25 percent — you are paying $52,000; if you register it for $600,000 you are paying $31,500. So the government gets around half of what it should get. As for the person registering it, they take a healthy cut. How much? It depends, there really is no science in that calculation.” Officials at the registry refused to comment on the accusation.

The developers’ law

Assem Salam, former president of the Order of Architects and Engineers, lamented the failings of the state in managing urban development: “All of these permits are to the law but the problem is that the law and all the regulations are wrong, because these laws were outlined not in the interest of the community, not after a study of the socio-economic areas, not after a study of the welfare of the communities, but they are a result of the pressure from landowners and speculators for the maximum coefficient of land use irrespective of the damage it creates on the community.”  

On June 20, 2009, decree 2366 was passed in which the government adopted a comprehensive plan for development in Lebanon, albeit with a delayed implementation of four years. The fact that there is no ministry of planning, or any other body which coordinates between ministries, lends credence to Salam’s assertion that the laws and the governing institutions are kept purposefully weak so as to allow the property developers and speculators free rein. 

“The Building Code is constantly being changed in favor of the developers because it is really controlled by… the main developers who are the ones who determine what is in this law,” said Architect Mona Halak. “They have a committee where they come together and meet and decide what needs changing to accommodate what they need in the coming years. It is a secret club, but everybody knows about it.” 

She cited a recent amendment whereby areas such as lifts, stairwells and secondary walls were taken out of the calculations measuring the construction area, thereby increasing the potential exploitation factor (how much floor space can be built on any piece of land) on buildings by up to 30 percent. That is to say a building that would have previously been permitted to have 5,000 square meters (sqm) could be increased to 8,000 sqm.    

“There is no urban planning policy in this country,” said Muhammad Fawaz, the former director general of urban planning. “There is talk of urban planning but there is no actual implementation on the ground… The government has no role in the speculation that happens. There are no property policies. They have no desire to interfere in this sector.” 

The octogenarian still writes and campaigns on this issue and at his office in southern Beirut he brandished the most recent building law passed in December 2004. “This was made by the developers… this is their law,” he said.

Salam claimed the “devilish arrangement between the Council of Ministers [Lebanon’s Cabinet], the politicians and the speculators,” is enabled by the fact that the responsibility for the establishment of land use and urban plans does not lie with the municipalities, but ultimately with the Council of Ministers, which, “is a political body subject to political desiderates, and to influence by the speculators on a higher level.”

Architect Halak explained that even within these laws, corners can, and regularly are, cut due to both professional incompetence and legal loopholes. For example, every tower that is built requires a traffic impact assessment to see how the increased car load from the development will affect the local infrastructure and road network.

“People buy traffic impact studies, they are just photocopied because no one really reads them,” she said. “They don’t care what is in the report; they just want to see it is there.” 

This flagrant disregard for the sound development of Lebanon’s shared urban areas may be disconcerting, but when the same practice is done with the soil reports the implications have the potential to be far more serious, or even fatal in the event of building collapse. Halak maintains that these documents, which say whether the soil in a certain plot can support a particular structure, are similarly bought as slightly doctored copies of recent reports. Policing these and similarly shady building practices is the responsibility of the Internal Security Forces [ISF], tasked with monitoring the implementation of the building permits. Considering that the ISF regularly fails to even direct traffic properly, it can be of no surprise that they have little inclination or capability to monitor technical building practices. 

View from the street

Construction is about more than just steel and concrete — it is about creating the spaces where people live. Proper regulations and their implementation ought to ensure that this development leaves people with places they can afford to live in, is sustainable with the natural environment and contributes to the physical and social wellbeing within the communities we all share. What the corruption endemic in Lebanon’s real estate sector does is erode all of those things, lowering the quality of life for those who reside in this country.

Indeed, we would do well to take heed of a quote from a bygone era: “First we shape our buildings and then they shape us.”

This article is part of a ongoing series covering corruption in different sectors carried out with the support of the Lebanese Transparency Association.

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Finance

Prying open privacy

by Joe Dyke
written by Joe Dyke

Financial wherewithal was not a quality Lebanese poet Khalil Gibran naturally inherited; his father was a gambling addict who was imprisoned for embezzlement. But given his penchant for priceless wisdom, perhaps the Lebanese banking system would be sage to heed of one of Gibran’s most famous sayings: “If you reveal your secrets to the wind you should not blame the wind for revealing them to the trees.” 

Lebanon’s financial sector has long relied on the country’s banking secrecy laws, some of the toughest in the Middle East, and the country has, for decades, encouraged the powerful and affluent from across the region to use it as a safe house for capital. Yet, despite Gibran’s warning, word has gotten out and awoken some altogether more powerful beasts, with Western countries claiming Lebanon’s secrecy laws help their citizens avoid tax. Recent events, both in Lebanon and internationally, suggest those countries will look the other way no more and Lebanon’s secretive system is under threat.

Near the beginning of 2011 it emerged that the United States Department of the Treasury had designated Lebanese Canadian Bank as a money laundering concern, claiming it was acting as a washing machine for Hezbollah cash. To prevent a catastrophic collapse in confidence in the sector, Bank du Liban (BDL), Lebanon’s central bank, intervened, eventually facilitating LCB — minus the suspect accounts — being bought out by Société Générale de Banque au Liban. The LCB crisis proved seminal for the industry, with a December article in The New York Times alleging pervasive cooperation between LCB and Hezbollah in laundering money, bringing the crisis back into the international consciousness.

While the banking sector tried hard to regain confidence some of the mud stuck, and it has struggled to regain its international reputation. A compliance officer of a major Lebanese bank, talking on condition of anonymity because he was not officially permitted to speak to the press, admitted it signalled change in the industry.

“After the LCB it has become much more important for banks to have the backing of the international community. It has made all the Lebanese banks more concerned,” he said.

Fighting the FATCA

The crisis in confidence comes amid increasingly tough attitudes towards banking secrecy globally. In particular, the US has indicated that it going to go tough on those countries that act as havens for tax avoidance through the new Foreign Account Tax Compliance Act (FATCA).

Under the law, which comes into force in July 2013, non-US banking institutions will have to provide transaction details of all customers with American citizenship and a balance of more than $50,000 in their accounts, to the US Internal Revenue Service (IRS) annually. If they fail to do so they will have to pay 30 percent of the interest, dividend and investment payments due to those clients to the IRS. More worryingly for the banks, they could be deemed ‘non-compliant,’ making it difficult for US institutions to continue working with them, or for them to continue to trade in dollars — the same issue that saw the closure of LCB. 

The compliance officer, however, admits that there may still be loopholes. If a client, for example, spreads his money between banks he can avoid hitting the limit. “If you have $45,000 in our bank and $45,000 in five others it is not reportable,” he said.

Camille Barkho, manager of money laundering advice firm Amerab Business Solutions, explains that the law transforms the role of banks, particularly in a secretive financial system like Lebanon. “Let’s say I am a Lebanese-American, at any time my account hits the threshold the banks I work with are obliged every January to report directly to the IRS every transaction I have made,” he says. “FATCA changes the rules so that foreign banks have to take part in identifying US citizens, assessing who is eligible to be investigated and reporting it to the IRS.”

This is clearly incompatible with the banking secrecy rules in the country, based around the 1956 law which was amended in 2001 in the form of Law 318. Within that legal framework banking secrecy can only be terminated in a small number of circumstances, including if a client files for bankruptcy, becomes subject to legal proceedings or dies.

For this reason the Lebanese central bank initially sought to preserve banking secrecy by urging banks to just pay the fees on their clients accounts to the IRS.  

“Our recommendation to the banks is going to be to go for the 30 percent option because the other option is legally difficult,” he said. “It would involve the IRS auditing their banks, which is not in line with Lebanese laws and would also create much litigation, which, reputation wise, is not recommendable.”

However it appears attitudes have softened in the past year, with banks coming to the conclusion that they can no longer fight the tide of pressure from the US Treasury. Asked if his bank would abide by the FATCA law, the compliance officer said: “We are forced to. We live in a world where the US is the dominant force and the dollar is the global currency, we can’t just ignore that.”

He admitted that this could mean an end to banking secrecy, for Americans at least.

Outside the law?

However, the current legal framework in Lebanon may prevent banks from complying with FATCA even if they want to. Lebanese anti-money laundering legislation revolves around Law 318, which explicitly does not mention tax avoidance. The most common way to lift banking secrecy currently is through raising suspicion under Law 318; therefore, for the banks to supply the IRS with the information without a waiver from the customer could be a breach of the law.

Barkhro says he believes that for any Lebanese institution to comply with FATCA it would require Law 318 to be amended to include tax avoidance. Paul Morcos, founder of the law firm, Justicia Beirut Consult, and an adviser who works closely with the BDL, is less certain but said that an amendment has been discussed by the central bank. The BDL did not respond to repeated requests for confirmation.

But if reforms are needed, perhaps somebody should tell the parliamentarians. The head of the parliamentary finance and budget committee, Member of Parliament Ibrahim Kanaan, admitted he was not familiar with the intricacies of the FATCA law and said he hoped the BDL could deal with the issue without needing to change the law.

“Money laundering is an issue that is of concern to us and the central bank and the government,” he said. “It should be dealt with by different measures but these measures could be decisions taken, initiatives to control the cash flow, to try to see any way regulations could be more effective. I don’t know if it needs an amendment to the law.”

The downside of any such change to the law would be the effect it could have on remittances. In February, the World Bank estimated that money sent from the Diaspora had remained constant at around $7.6 billion in 2011, despite overall financial inflows falling 18 percent. In an economy with a gross domestic product of around $40 billion, that equates to around 20 percent of the country’s economy.

Adding tax evasion in foreign countries to the items recognized under Law 318 would mean that all remittances would have to have been taxed before they entered the country. If, for example, a dual British-Lebanese citizen brings money into Lebanon without paying tax in the UK and puts it in a Lebanese bank, currently there is no legislation under which he can be prosecuted. If the amendment were passed then these accounts would be open to scrutiny under Law 318, not just for Americans but all remittances.

“You have diaspora who transfer their money to Lebanon and the source of money might be considered tax evasion in American law, especially in the US where they have to pay high taxation rates,” said Morcos. “It is not in the interests of the Lebanese economy to classify tax evasion as a money laundering crime. It could prevent Lebanon from benefiting from huge amounts of transfers coming from abroad; it would have a very negative effect.”

According to Byblos Bank, at least 45 percent of households in Lebanon have at least one family member abroad who sends home some form of remittance. Some send more than others, but Nassib Ghobril, head of research and analysis at the bank, estimated that on average Lebanese emigrants are worth about $1,400 per capita every year to their home country.

The compliance manager admits that the changes would “certainly” have negative consequence for trade: “It is going to affect the business but it’s is not easy to know the full impact yet.” 

These difficulties with estimating the effect are even more pronounced as the $7.6 billion does not include the remittances that are brought into the country in cash. According to Morcos, Barkho and the compliance officer, if Lebanon wanted to comply with FATCA and change its laws accordingly, effectively cash deposits would have to be justified by the depositor to see if they are taxable — thus ending the days of ‘no questions’ over where cash comes from, and the consequent attractiveness of the Lebanese banking sector.  

The government and the banking sector are caught in a bind. If they carry out the reforms, they risk undercutting the remittances that keep the economy alive, if they fail to do so, they risk irking the international community and undermining confidence in the sector.

The Secretary-General of the Association of Banks in Lebanon (ABL) Makram Sader admits they are concerned about the effect FATCA could have on the sector, but denies that Lebanon's secretive system is more susceptible than any other country’s. “We are as concerned as any other bank in Asia, Europe or emerging [economies],” he said. 

The third way?

Karlheinz Moll, founder of the German firm SPIROCO Consulting, which focuses on FATCA, equates Lebanon’s two potential paths to being a choice between the two tax-havens of Switzerland and Singapore. Switzerland has announced concessions to its banking secrecy laws in recent years in an attempt to tame the anger of the international community, while Singapore has remained hostile to any reform of its banking system.

“Switzerland is in very strong dialogue with the US Treasury and the IRS and I expect they will reach an agreement [on FATCA] at some point, whereas Singapore is not yet actively approaching them,” he says.

There may yet be a way to square the circle. The most recent draft of the FATCA law, released in early February, contained a surprise for many bankers. Previously the assumption had been that the only agreements that would be signed were between the IRS and individual banks. However, the new draft contained a direct agreement with five European countries: France, Germany, Italy, Spain and Britain. The deal commits both sides to helping each other target tax evasion, but requires the US to work with these states to find their tax-dodging nationals in the US as well. 

Given that Lebanon does not have any sort of global income tax, however, the country may not have equal bargaining power with the IRS, though Moll believes that if Lebanon approaches the IRS with other countries in the region, it could achieve a similar agreement. 

“They will have to go to the IRS to get a deal. This is what the European governments are doing: they are going government to government,” he said. “Everyone in the region should sit together and say ‘let’s write to the IRS and enter a bilateral agreement that banks don’t need a contract and full disclosure, but we will supply you with some information’.”

Moll also pointed out that the Organization for Economic Cooperation and Development-led initiative TRACE aims to make information exchange agreements the standard method of fighting tax evasion, and thinks Lebanon could benefit from this: “You can get a special agreement but you have to approach the IRS. You have to go to them as they are not going to come to you.” Executive queried BDL officials regarding whether they were considering such agreements, but they failed to comment.

If such a deal is not stuck, the omens are not good. Without the correct planning the Lebanese banking system faces an unenviable choice: between opening up and potentially scaring away remittances that fuel the economy, or staying secretive but risking American censure. Whatever changes the government makes, the decision will be weighty, and the financial sector and remittances are too important to the economy to get it wrong.

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Finance

Lebanese capital markets

by Marwan Mikhael
written by Marwan Mikhael
The healthy financial results released by top Lebanese banks at the end of January 2012 offset investors’ worries over the regional security situation and its implications on Lebanon. Hence, the BLOM Stock index (BSI), Lebanon’s equity gauge, moved in whipsaws between a lower band of 1,163 and its highest band of 1,184 points before ending the five-week period in green. The BSI rose 1 percent to settle at 1,183 points, widening its year-to-date performance to 0.57 percent.

 Trading activity on the Beirut Stock Exchange (BSE) was subdued between January 16 and February 17, as the daily average volume of trades per month decreased to 196,470 shares worth $1.45 million, as opposed to 237,574 stocks valued $1.42 million recorded in the preceding four-week period. On a regional comparative scale, the Lebanese equity benchmark index underperformed the S&P Pan Arab Composite Large Mid Cap index that rose 5.7 percent from its previous close on January 13. Moreover, the BSI failed to outperform the MSCI Emerging market index that grew 5.8 percent to 1,049 points. 

With respect to stock activity, the financial sector grasped the lion’s share of trades on the BSE accounting for 71 percent of the total value traded while real estate stocks represented the remaining 29 percent. The BLOM Bank GDR stock rallied during the past five-week period, rising 5.2 percent to $7.68. On the other hand, Audi stocks witnessed a mixed performance as its GDR and listed stocks advanced by a respective 6.5 percent and 5.2 percent to $6.35 and $6.01, while its preferred stock class “E” slightly fell by 0.1 percent to $100.4. Byblos stocks closed all in green; its common stock advanced by 1.86 percent to a two-week high of $1.64 whereas its preferred stocks 2008 and 2009 rose by 0.49 percent each to align at $102. It is worth highlighting that the top three banks in Lebanon, Audi, BLOM and Byblos, reported a respective net profit of $364 million, $331 million and $179 million for the year 2011. 

On the other side, Bank of Beirut and BEMO common stocks retreated by 0.52 percent and 6.4 percent to settle at $19.3 and $2.2 respectively. BLC Bank listed during last week of January 400,000 new Class A preferred shares and 550,000 Class B preferred shares on the BSE.

 
Lebanese Eurobond prices remained high and stable with limited offers during the past five weeks as investors waited for the new possible swap for the bonds maturing in 2012. The BLOM Bond Index (BBI) remained almost flat, adding a slight 0.1% from its previous close on January 13 to hit a level of 111.1 points. This cut the portfolio’s weighted effective yield by 8 basis points (bps) to 4.70% and the spread against the US benchmark yield by 11bps to 396bps. Five-year issues of Lebanon’s credit default swaps (a proxy for a country’s default risk) stood at 480-500bps compared to 465-495bps on January 13. On a comparative scale, Saudi Arabia and Dubai credit default swaps reached 132-141bps and 398-411bps respectively.
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