Executive Magazine

Tablets on the boardroom table

by Jad Hajj March 3, 2012

written by Jad Hajj

With the explosive growth in demand for smartphones and notebook computers in recent years, it is hard to believe that corporate technology users are still finding room in their bags and attachés for yet another device. The rising popularity of tablet computers, though, suggests they are somehow finding a way.

Although corporate demand for tablets is still low relative to consumer demand, it is already significant — and rising rapidly. Global market research firm IDC sees worldwide demand for tablets and other Internet mobile devices rising sharply in coming years, from 41 million units in 2011 to 235 million units in 2016. A significant driver of this growth, according to IDC, are corporations, which are seen doubling their share of tablet purchases to nearly 10 percent of total shipments in 2015, up from about 5 percent in 2010. Apple, for its part, claims that its iPad tablet is being used or tested at 80 percent of Fortune 100 companies. In the Middle East and North Africa, technology-consulting firm Ovum sees growth doubling in 2012 alone, from two million units to four million, and rising to 11 million by 2016. A recent IDC survey found that roughly half of all Internet users said they plan on buying a tablet in the near future.

In hopes of gaining a better idea of what is driving the popularity of tablets in the business world, Booz & Company and Motorola recently undertook a global research effort, interviewing chief information officers (CIOs) from a wide variety of companies. Three factors stood out.

First, much of the interest in tablet computers is due to the ongoing consumerization of corporate information technology (IT), as more and more employees insist on using their favorite devices in the workplace. IT departments are scrambling to put in place new IT infrastructure and policies to run and manage these devices. CIOs have needed to devise programs and processes that support workers who bring personal devices — not just tablets but also smartphones — into the office and use them in their regular work activities. Some companies have even gone so far as to give employees an allowance to buy the devices they prefer.

Mobility is a second factor, as more companies recognize the value in empowering employees to consume content — check e-mail, review PowerPoint presentations, manipulate downloaded sales data — on the go. Very few notebook computers are mobile broadband-enabled (less than 10 percent, according to our estimates), compared to roughly half of tablets. Our CIO interviews suggest that mobile broadband tablets are being strongly considered as alternatives.

Finally, there are the added security benefits that mobile broadband offers over Wi-Fi connectivity, including the ability to erase a tablet’s sensitive data remotely, if necessary. “We need encryption at rest [data physically stored in an encrypted manner], policy enforcement via active sync, remote data wiping, encryption, and associated policies,” a CIO at a global workforce firm told us. “It is all basic stuff, but it needs to be supported out of the box.”

In the coming years, enterprises in the MENA region will be further investing in information and communication technologies (ICT) as they strive to catch up with their counterparts elsewhere. Although enterprises account for as much as 6.5 percent of all mobile SIMs in some European countries, they have not even reached one percent in any country in the MENA region. By some estimates, the size of the MENA enterprise ICT market will almost double over the next five years, from an estimated $14.8 billion in value in 2010 to $26.1 billion in 2015.

The next two to three years will see a very interesting battle for the corporate share of mobile device spending, and CIOs in the region will need to think about what part tablet computers will play in their overall ICT strategy. Cost, of course, will be top of the list. A current major drawback of the iPad is its relatively high price, which is difficult to justify if the device is to be used in conjunction with both smart phones and laptops. Other cheaper tablets have not gained sufficient momentum in the corporate market, but this may change, as developers create more business-oriented apps and companies develop their own.

The extent to which MENA enterprises adopt tablet computers may also depend on other factors that lead to benefits that are harder to quantify but should still be part of a CIO’s calculations for return on investment. Among them:

Structured creation: Tablets’ initial use in enterprises is primarily centered on applications where mobility matters and where content is consumed rather than created. The new frontier of mobile productivity will be driven by what the industry terms “structured creation,” in which users can enter information in standard methods, such as drop-down menus. This results in data sets that can be easily compiled and analyzed, meaning faster processing of data and gathering of insights. In the MENA region, increasing Arabic language support for tablets — along with greater numbers of Arabic-language applications — will drive this kind of structured creation.

Unanticipated productivity gains: Because tablets can significantly increase employees’ connectivity, they will likely result in higher productivity as employees respond to questions faster, review materials more frequently, and plan work activities in advance. An IDC survey shows that 40 percent of UAE organizations have deployed mobile devices to at least 10 percent of their employees for work purposes.

Increased retention: Consumer technology is taking over every facet of people’s lives. Employees want access to the newest and best technology at work because they most likely are using something even more cutting-edge at home. Providing employees with new technology to help them become even more productive can boost retention by improving their engagement with the company.

Unexpected creativity from employees: In their push to persuade management to invest in tablets, employees will likely search far and wide for new ways of using them, in order to justify the costs. Those engaged in sales demonstrations have found that the tablets provide a level of interaction not previously possible. Client response is stronger, and salesmen report better results, suggesting that companies will need to be open to evolving applications of the technology.

Competitive advantage: Inevitably, the use of tablets will become standard in virtually every industry. Companies that can devise new applications and uses for tablets may be able to gain real advantage over competitors. Tablets can offer an advantage in industries where it may be important for customers to see that the company is on the cutting edge of technology. CIOs should consider whether there are ways the workforce interacts with customers that could be standardized through the adoption of tablets to improve customer perceptions of the company.

With manufacturers releasing more advanced tablets every month, the increasing use of these devices in the business world is not likely to slow down anytime soon. In the MENA region, senior managers are driving technology purchase decisions much more actively because of their own at-home use of tablets and other devices. CIOs in the MENA region are responding to this interest from senior managers and are seeking to ensure support of the new devices in corporate environments. Understanding how tablets are evolving — and how they are likely to benefit enterprises in the years to come — can help position enterprises and their employees on the leading edge of this technological change.

March 3, 2012 0 comments

Naturally selected

by Maya Sioufi March 3, 2012

written by Maya Sioufi

To say that Internet and social media usage in the Middle East and North Africa is expanding exponentially has become a truism of our time, but like the dinosaurs that failed to adapt as the ice age covered the globe, many companies’ marketing strategies now resemble bewildered cave men soon to be run over on the information highway.

So how fast is the online world changing? Well, the number of Internet users in the Middle East has increased from 3 million in 2000 to around 77 million today, of which 18 million are on Facebook, according to Internet World Stats.

In the past year alone, the number of Facebook users tripled in Algeria, doubled in Egypt and Saudi Arabia, and increased 75 percent in the United Arab Emirates, according to an analysis by Omnicom Media Group (OMG). Advertisers have been among the first species to take note of the sea change in consumer behavior and realize the value of the increasing attention online.

While Internet advertising in the Middle East is still in its infancy, online advertising spend in the Arab region is estimated to reach $266 million by 2013 and $1 billion by 2016, up from $56 million in 2009, according to Zenith Optimedia. Advertising companies, web development companies and small start-ups specialized in digital marketing all want a piece of the growing digital pie.

Ahead of the wave

Lebanon-based Eastline Marketing (ELM) is one of the companies offering digital marketing tools and claims to have grown rapidly from its inception in 2006 to cut itself a 20 percent slice of the domestic market currently, with other clients in Qatar and Saudi Arabia. Its founders, Nemr Badine and Marc Dfouni, both graduates from Canada’s Concordia University, say their headline offering is Sweepz, the only proprietary platform in the region that supports the Arabic language. Through Sweepz, clients of ELM can launch social media promotional campaigns such as contests, quizzes and sweepstakes, which are linked and regularly updated to social networks such as Facebook and Twitter. The company expects this product, which costs $1,000 to $10,000 depending on the project, to represent 30 percent of revenues in 2012.

ELM offers several other services, such as social media marketing (which includes managing the online presence of a customer) and display advertising: the acquisition of media space, planning campaigns and search engine optimization.

ELM’s founders believe that they have now reached an inflection point and in order to grow further they need more capital, and thus are seeking a strategic investor to fuel expansion. Badine and Dfouni estimate their company’s value to be at least $3 million.

“Our objective is to position ourselves as the regional leaders in digital marketing solutions whereby international brands would come to us to market their brands in the region and regional brands would come to us to market their brands both regionally and internationally,” says Badine. ELM is considering several options: venture capitalists (VCs), angel investors and another round of ‘family and friends financing’, though “we are in that spot where we are a bit too large for smaller VCs and too small for larger ones,” remarks Badine.

As the Middle East becomes ever more wired and the number of users who are ‘Facebooking’ and ‘Tweeting’ increase, the prospects for the nascent digital marketing industry seems abundant. ELM has been one of the early movers in this space but their future expansion in a fast changing industry will depend on their securing strategic capital.

March 3, 2012 0 comments

Economics & Policy Technology

Q & A – Hamadoun Touré

by Thomas Schellen March 3, 2012

written by Thomas Schellen

The United Nation’s International Telecommunications Union (ITU) partners with governments to define the global rules that underlie the development of the information society. It has also assumed a growing role in seeking to employ information and communications technology in reaching the UN’s Millennium Development Goals. Executive sat down with the ITU’s Secretary General Hamadoun Touré after his February visit to Beirut to discuss the ICT policy in Lebanon and the wider region.

You have referred to broadband Internet access as an essential infrastructure for participation in today’s economy. In the case of Lebanon, how do you assess the importance of broadband in the country’s participation in the global economy?

As I said [during my visit], Lebanon had a fixed broadband penetration rate of about 4.7 percent at the end of 2010, which is the highest in the non-GCC countries of the Arab region. Lebanon also has a relatively extensive fixed telephone network at about 20 percent fixed-line penetration, which is again the highest penetration in fixed-lines in the Arab region. It has been estimated that by end of 2010, 20 percent of households in Lebanon had a high-speed DSL broadband connection and therefore, Lebanon will have to prioritize increasing the number of households with internet access if it is to reach the global target put in place last October by the [ITU’s] Broadband Commission for Digital Development, which is that by 2015 40 percent of all households in developing countries will have broadband internet access at home.

How about pricing of broadband and mobile access?

Lebanon is providing relatively affordable fixed broadband penetration; according to our price basket that we published last year, entry level Internet broadband access was at 3.5 percent of average monthly income at the end of 2010, which is below the five percent target identified by the broadband commission… One must say that Lebanon has been late to introduce 3G mobile Internet penetration. Operators launched 3G only in 2011 and that was late; due to the nature of the annual contracts they have, mobile operators will not upgrade the networks through long-term investments.

Do you have figures showing the correlation between broadband penetration and ease of access and economic growth?

There are publications by the World Bank and other agencies showing that each 1 percent of broadband penetration translates into 1.38 percentage of growth in gross domestic product. You could also argue the contrary that each seven percent of GDP translates into 10 percent penetration of broadband; we will never be able to say which one is the cause and which one is the effect.

A concern in Lebanon is the political indecisiveness that could delay a new board for the Telecommunications Regulatory Authority (TRA). Would in your view a non-functional TRA affect the development of telecommunications in Lebanon?

Can you imagine a game without a referee? It could be chaos; and therefore you need a referee that is not only fair but also balanced and neutral and ensures that players play a fair game. You need rules and regulations — light-touch regulations, as we always advocate, but they have to be in place. To have authority, the referee should come before the game starts. Otherwise he could be ignored. Continuity in this area [of regulatory authority] is very important.

Do you see that the political upheavals of the Arab Spring have been affecting the operating environment, from the ITU perspective?

We as ITU are assuming that today, except for one country — Syria — the Arab Spring is over and that we need to talk about economic development issues in order to start creating jobs for the people who are the most in need of them. This is why we are organizing the Connect Arab Summit in Doha for March 5 to 7 to which His Highness the Emir has invited all the heads of state and governments in the Arab region and to which I am inviting all the Arab private sector and the international private sector as well. We want to bring all the stakeholders together and talk about not only investments in infrastructure but also in content development because the region has so many things in common and could develop heavily upon common Arab heritage, Arabic language, and Arab culture.

March 3, 2012 0 comments

Economics & Policy Technology

The apper class

by Thomas Schellen March 3, 2012

written by Thomas Schellen

Times always seem fortuitous for those companies in information and communications technology (ICT) that focus on the newest and fastest growing demand. This is even truer when other outlooks in the economy are, to say it nicely, as subdued as is the case today. So it come as no surprise that the handful of Lebanese companies which specialize in the emerging business of developing applications for mobile devices are buzzing with aspirations.

By the reckoning of the members in this new Lebanese branch of the global ICT industry, the field of developers in Lebanon today comprises about five companies that are focused exclusively on mobile app consulting and development. Approaching the market with innovative names such as FOO Solutions, Eurisko Mobility and Apps2U the larger of these companies employ between 15 and 25 professionals apiece and have on average produced 20 to 30 mobile apps in the past three years or less.

A second group of Lebanon-based companies with supply-side mobile app business interests include developers that produce apps as a value-added service to their existing ICT business or are expanding from their existing business into the apps space. A third group of companies are startups and young companies that are product centric, meaning they are in the business of developing games or financial payment solutions and use the mobile as one of their channels to engage customers. These companies, however, do not seek to address third party demand from companies that are looking to have apps developed by specialist services firms.

For FOO founding partner and CEO Elie Nasr, a crucial value gain since the company’s formation in early 2009 was the acquisition of skills. “Part of the process [is] where clients invest and the company benefits from delivering the project but also from the learning involved in producing the app,” he said.

Eurisko’s co-founder and CEO Zack Morad told Executive that the company has become a regionally known entity in less than 18 months of operations. “We started marketing our services in late 2010 with all cold calling,” he said. “In the first six weeks of 2012, there was almost no cold calling. Now, a lot of people call us.”

Up-sizing

The growth rates for the relatively small, in terms of employment numbers, have been impressive. FOO and Eurisko expanded from founding teams of two and four entrepreneurs in 2009 /10 to teams each numbering just under 20 professionals at the end of 2011. For 2012, each of the two competitors looks to reach team sizes of 30. Like the other mobile app developers in Lebanon, FOO and Eurisko have been financed from own funding resources of the founding entrepreneurs and their business partners, not by small and medium enterprise investment funds, venture capital groups, or private equity firms. Morad and Nasr also both said that they are entering a phase where their respective companies are looking for injections of capital. The company has grown organically until now and is bent on reinvesting its earnings, Morad said, “We are not taking anything out of the business. We will always be investing and growing because we see the big picture and we want to grow and help grow the market.”

Going viral

Similarly to Eurisko and FOO, the headcount at Apps2U is advancing toward 20 specialists. What is different in the genesis of Apps2U is that this enterprise grew out of the business of parent company MT2. This firm, although having worked for many years with relatively low profile, is well established in regional ICT. Its corporate DNA is rooted in telecommunications and MT2 acts as a content and services provider in partnership with network operators and audiovisual media across Arab markets. “We are a telecom company and we are offering all kind of mobile app services to all kind of customers in the region, not only in Lebanon. MT2 has connections with over 30 operators,” Apps2U managing partner Mario Hachem told Executive. The content formulas of MT2 include highly profitable features such as subscription-based delivery of Islamic content – e.g. guides to the proper observances during Ramadan and hajj – via SMS to mobile phone users across regional markets from Saudi Arabia to Iraq under revenue sharing agreements with network operators.

This business sparked the formation and growth of Apps2U, said Hachem, who is also chief technical officer at MT2. “For the last three years, operators have been asking for apps and for the last three years our team has been increasing in numbers and experience,” he said.

Scheduled to be turned into a standalone company under ownership by the current MT2 investors, Apps2U plans to increase team size from 16 developers to between 25 and 30 before the year’s end. The growth is in part for adding new technical expertise, as the firm wants to build skills in developing apps on the Microsoft 8, Facebook, and SmartTV platforms. As it has been expanding into the mobile app sector, the latest addition to the interactive portfolio of MT2 and Apps2U in February 2012 was a dedicated television channel on Nilesat where Blackberry users in the Middle East can flash their chat messages on the TV screen while communicating within the Blackberry community as well as with users of different smartphones.

Also sporting a strong business profile in providing value-added services to telecommunications operators is Inmobiles. Established in Beirut as startup in 2003, the firm has grown to a current team size of 80 by delivering products to telecoms operators or the banking sector, but until now never to end users, Inmobiles CEO Charbel Litany told Executive. The company made its first foray into the provision of an app to end users just at the end of 2011. It did so with a big splash, as the “whozcalling” app went viral in the space of weeks.

According to Litany, the roll out of the free app and its success nicely links to a strategy to convince network operators of a value proposition involving operator-owned app stores to push into the space currently controlled by device manufacturers. “I am trying to push value-added services on the device side and have network operators change from the network side to the device side. With the huge growth of the smartphone market, we have decided to test the market with one of the free products,” he said.

The company has so for not been monetizing its successful app in favor of using it as “proof of concept” in demonstrating to regional telecom operators that they can generate their own revenue with their app stores. This notwithstanding Inmobiles’ first free app appealed equally to regional and global users.

Market potentials

Corresponding to the limitations on assessing the value of enterprises on the supply side of mobile apps, searching into the demand side value for Lebanon’s mobile app developers does not provide a picture with clear and sharp contours.

According to Fadi Sabbagha, the chief executive of Born Interactive, local market potentials for mobile apps are limited by the small budgets that most Lebanese companies allocate to digital. For his firm, apps are not a standalone business but a natural extension of its communications services on a basis of client demand. What’s more, most of the business is in the region, not in Lebanon.

In all likelihood, the small budgets in Lebanon are directly correlated to the small size of the Lebanese market which translates into small revenue potentials, he told Executive, noting that hype over mobile apps here is paired with restrictions on budgets whereas in regional markets he observed, “a bit less hype but clients are more comfortable with budgets.“

While acknowledging that apps are still on the slow burner in the Lebanese market, Ralph Khattar, CEO of 2010 startup Virtual, added that the launch of every app developed for a major Lebanese company provides a boost to the business.

“Each time a company launches an app, they are promoting it, and each time is advertising [app development]. There are a lot of companies that need an app and we can have a good market share. Twenty percent is a good number,” he said.

Reality tests

Responses from the firms that have ordered apps give a clue that the experience is a bit more differentiated. Some high-profile companies which had apps developed for them in the past two years gave Executive overall positive and satisfied feedback but added that things could still get better.

According to Jihad Murr, the Chief Operating Officer of television station MTV, the station’s strongly advertised app is not yet highly used but among the most downloaded Arab applications on all platforms.

“For Lebanon, it is too early to make money from mobile apps but I think mobile apps and related revenue streams in the future will be a big part of the income for our media. We wanted to be the first in this market,” Murr said. MTV’s mobile app is linked to the station’s website, which has 70,000 unique visitors per day.

According to Eurisko Mobility, which developed the app for MTV, the station’s app has been downloaded over 300,000 times. The company embarked on the mobile app project with the intent to monetize it through revenues streams from paying advertisers, he added. The ad activity has been scheduled to start in March and MTV will also seek to obtain revenue from in-app sales of specific programs. Both projects are in progress but have advanced slower than planned. “We were late in monetizing it. We are starting now but I expected to start six months ago,” Murr said.

Similarly, business development director Michel Aji at restaurateur Roadster Diner enthused about the company’s mobile app in general but could convey no positive message about harvesting financial rewards from the year-old gadget.

The app was the number one among the free-to-download apps for the Lebanese market in the first two weeks of its launch in the first quarter of 2011 and had reached 15,000 downloads by mid February 2012, Aji said. The company serves in the range of 200,000 monthly visitors across its 12 eateries in Lebanon.

“On return on investment on this particular application, there is no reliable data,” he conceded, pointing to the Lebanese issue of unreliable data connectivity as a reason why the app does not facilitate online ordering.

No cheap feat

Costs of commissioning a mobile app are certainly an issue in the small local market. Companies that ask a Lebanese provider to custom develop a mobile app for them look at a cost of “at least $5,000”, Sabbagha said. This appears to be a consensus figure in the industry. The ceiling of possible cost for an app is not really defined, and Hachem said it can reach “$100,000 per platform”.

For entrepreneur Bahi Ghubril the cost of having a high-end app developed for several thousands of dollars per mobile platform is certainly a barrier. Ghubril is CEO of Zawarib, a mapping company with a declared mission to make Beirut easier to navigate. But although maps and mobiles make a natural fit and location-based services are among the reliable performers in application stores, the value proposition in Lebanon is not strong enough for his company to go it alone in commissioning an app.

“People consider apps to be a sign of success but users expect everything in apps and online to be free; at the same time it costs a lot of money to develop a strong app that would have good interactivity and a good search function for Zawarib while the market for this in Lebanon is very small,” he said, adding that the proposition of developing an app could be interesting in a partnership with online portals but not as a branding tool or mere image project.

Competitive edge or just edge?

The developers agree that infrastructure problems and high cost of connectivity are barriers to the industry’s growth in Lebanon. However, the better-late-than-never rollout of 3G services by the mobile phone operators Alfa and MTC Touch since last November has resulted in some 400,000 users who by February 2012 have taken to the services.

The outlook seems to be moderately positive also on the structural side of telecoms as latest annual management contracts between the government and the two network operators, which went into effect at the beginning of last month, contain two, albeit somewhat vague, management objectives of positive relevance to mobile applications developers: network operators are each to enable at least one Mobile Internet Service Provider by deadline of May 31 and to establish a mobile applications platform by 2013 “that hosts and offers mobile applications to subscribers”, with the added stipulation that four fifths of the applications have to be sourced from Lebanese developers. The two propulsion factors for competitiveness of Lebanese developers are the high quality of the human capital and its low cost in Lebanon. “Beirut has a highly-educated human resources pool, highly motivated, highly creative, and very cost efficient,” Morad said.

From Inmobiles, whose Charbel Litany said the company has seen zero attrition in its headcount since starting operations in 2003, to Virtual whose Ralph Khattar referred to the country’s leading universities as ready sources of talent, the developers describe Lebanon’s rich human capital as a core strengths that the industry can build on. This comes with the downside of losing staff to players abroad. As Nasr said, “the problem is not migration to competitors in Lebanon but people going overseas.” For FOO, a loss of four staff members who went abroad to join companies or pursue further education represented 70 percent of employee turnover since the company started.

As all mobile app developers in Beirut are aware of the threat of losing high-value talent to multinational firms, each company said that it is investing substantially in employee loyalty and retention, offering profit sharing or stock grants to its existential talents.

As every developer Executive talked to also has aspirations to grow its business internationally, foreign competition is an issue to consider. According to the Lebanese providers, India, the world’s leading country in ICT outsourcing, is not the biggest competition, because, as Nasr argued, Indian supply comes with a price-value caveat under which high-quality apps will be just as expensive as those produced here.

The GCC countries are also not on the radar as big competitors because of their low availability of native human resources and high costs of production in the knowledge economies. This leaves countries closer to Lebanon as main sources of competition in developing mobile apps under similar price and quality matrixes. One serious contender is Egypt, which was one of the rising stars in the outsourcing globe, before running into disruptions of economic reliability in 2011. Other countries with competitive potential vis-à-vis Lebanon are Jordan and, according to Nasr, Palestine.

Mobile applications developers represent the third wave of potential knowledge economy progress via ICT made in Lebanon. It serves to recall here that the first two waves — the introduction of mobile telephony in 1994/95 and the new economy take-off in 1999/2000 — also saw the country start out at the forefront of ICT adoption and native entrepreneurship. Both times, the natural competitive advantages of Lebanese innovativeness and richness in human capital were eroded, at least in part, by systemic, political inabilities to support the economic competitiveness of Lebanese ICT firms.

Business Models in Mobile apps

The business models underlying the development and delivery of mobile apps by serial app developers come in three main categories:

First — the free to download, which is still the largest group. When such an app is ordered by a client, the app developer produces a customized product according to demand specifications that include interactive features and the number of operating systems and platforms that the app needs to run on. These apps can function as enterprise tools within a company (for example as catalogues for the sales team), as marketing, branding, and customer relations tools toward a company’s end customers, or as instruments enhancing the company’s corporate social responsibility portfolio. As the developer produces the “free” app for a corporate client, he is paid like any other software consulting and developing company. In many cases, developers also produce free apps at their own cost and push them into the markets to build reputation or to generate advertising or sponsorship revenue streams.

Second — user paid and individually priced apps which can be downloaded for a onetime fee. This bazaar or mall-like business model has been pioneered by Apple’s App Store and benefits both the developer, who in case of the App Store reaps 70 percent of revenue, and the platform, which takes the rest. This model has proven to work well for popular apps as users pay fees that in many cases amount to less than one dollar for each download. If an app goes viral through peer-to-peer recommendations by users or effective marketing schemes, the monthly revenue streams can scale into very handsome sums and high profit margins. Apps in the ultra-long tail of available products, however, until now are not likely to generate enough income to recover development costs. The owners of leading platforms and application stores — currently the device makers (with Apple on top) and Google — are beneficiaries of concentration in consumer capital, but network operators and other players are not going to leave this attractive market place un-staked in the rising mobile technology economy, or mobitech.

Third — apps that rely on recurrent revenue streams from users. Under this model, a basic app is often offered for download at no cost. However, the free download acts as teaser. To succeed, the app needs to convey attractiveness and inspire loyal and habitual usage. Customers are either asked to pay for the continuous use of the app after the initial free usage period, or are offered premium services for which they pay either time-based, recurrent subscription fees or per-item charges. This in-app purchase model unlocks income streams for content providers and network operators.

March 3, 2012 0 comments

Comment

Stored value in troubled times

by Jihad Yazigi March 3, 2012

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.

March 3, 2012 0 comments

Business

Avoiding the double-hit

by Iyad Hourani March 3, 2012

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.”

March 3, 2012 0 comments

Comment

Aided innuendos

by Jonathan Wright March 3, 2012

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.

March 3, 2012 0 comments

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Anthony Shadid

by Nadim Houry March 3, 2012

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.

March 3, 2012 0 comments

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Where outsiders fight

by Farea al-Muslimi March 3, 2012

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.

March 3, 2012 0 comments

Economics & Policy

The bribes between the bricks

by Zak Brophy March 3, 2012

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.

March 3, 2012 0 comments