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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Economics & PolicyEnergy Wars

The most dire of straits

by Paul Cochrane
written by Paul Cochrane

The prospect of a war against Iran has been on the cards for decades. Since 2005, innumerable media reports have proclaimed that war is imminent, and this year will be the year it will happen. Think tanks, war strategists, risk consultancies and the various militaries have all compiled papers on how a conflict in the Gulf could play out. The headline of a 2009 article on the website of the United States Army sums it up: “Future Gulf War: Arab and American Forces against Iranian Capabilities.”

What is fundamentally different now is that there has been a sustained covert war by unknown actors against Iranian nuclear facilities and scientists over the past few years — from scientists killed by car bombs on the streets of Tehran to mysterious “accidents” and cyber attacks at nuclear facilities — and that an economic war has essentially been declared through the heightened sanctions by the US and European Union (EU) in recent months. 

Crucially, the oil sanctions, meant to hit Iran where it hurts given its budgetary reliance on hydrocarbons, have removed a major logistical obstacle to conflict, in that the EU, which imports 4 to 5 percent of its oil from Iran — some 600,000 barrels per day (bpd) — will not have to scramble for alternative energy sources in the advent of war; they are already doing so now.

While the sanctions are to go fully into effect by July, countries are already starting to abide by the decision; Britain, Austria, Poland and Portugal, for instance, cut their imports of Iranian crude to zero in the third quarter of 2011. Iran unilaterally halted exports to France and Britain last month and most international oil companies, with the exception of Asian firms, have also pulled out of Iran to abide by the new sanctions. 

The US has not imported Iranian oil since the overthrow of the Shah in 1979, and its reliance on Middle Eastern oil is the lowest it has been in decades. From 2005 to 2011, the US’ overall oil imports have fallen from 60.3 percent of consumption to 47 percent, while from the Persian Gulf it has dropped by 26.7 percent to 18 percent of total imports by 2011, according to the US’ Energy Information Administration (EIA) figures.

But with the 30km-wide Strait of Hormuz the conduit for more than 20 percent of the world’s oil and 40 percent of traded oil on the markets, it is essential to the global economy that this oil keeps flowing. With almost 17 million bpd passing through the passage in 2011, the Iranians’ threat to block the Strait is taken very seriously. As oil expert Daniel Yergin notes in “The Quest”, his recent bestselling book: “the Strait is the number one choke point for global oil supplies.”

It has been a long-term goal of the US to ensure the Strait remains open, spending an estimated $6.8 trillion (including baseline costs such as training, pensions, long-term debt repayments and military base usage globally connected to the Gulf) between 1976 and 2008 projecting military force in the Persian Gulf, according to research by Princeton’s Energy Policy department, averaging $492 billion annually between 2003 and 2008.

The US imported 663.2 million barrels from Saudi Arabia, Iraq and Kuwait in 2011. Through a rough calculation for 2011 using the five year annual average calculated above — $492 billion divided by 663.2 million barrels per year (b/y) — the US is paying $742 per barrel to ensure that this oil reaches its shores. When taking into consideration the 6.2 billion b/y that passes through the Strait annually, it is costing the “the world’s policeman” $79 a barrel to keep itself and everyone else in Gulf oil. 

The US Department of Defense’s January paper “Sustaining US Global Leadership: Priorities for 21st Century Defense” states, “US policy will emphasize Gulf security, in collaboration with Gulf Cooperation Council countries when appropriate, to prevent Iran’s development of a nuclear weapon capability and counter its destabilizing policies. The United States will do this while standing up for Israel’s security and a comprehensive Middle East peace.” The recent build up of naval activity can therefore be interpreted as the US reasserting its military dominance over the Gulf. But with the oil supplies for the main cheerleaders for confronting Iran — the US, EU and Israel —  largely cushioned  to any disruptions in the Strait (not least due to massive stockpiles in the US and EU), this has, more than ever, helped pave the way for the possibility of war.

Starving Asia

For Asian countries the situation is far more serious. Three-quarters of the Gulf’s oil exports are destined for the East; the closure of the Strait or a Gulf conflict would effectively starve Asia of energy, which would have serious economic ramifications regionally and globally. How to placate China, Japan, South Korea and India has therefore been a stumbling block in the West’s strategy to isolate Iran. Yet there is more at stake than energy imports. Russia and China were among the nine nations (out of 35) that voted against the International Atomic Energy Agency’s (IAEA) Iran file in November which said the Islamic Republic had carried out activities “relevant to” acquiring a nuclear weapon. While Iranian and Gulf energy supplies were a likely factor behind China’s “no”, Beijing is officially opposed to nuclear proliferation and has adopted a “studied neutrality” on Iran.  China is concerned with US encroachment in what it perceives as its own back yard, according to Kerry Brown, head of the Asia Programme at the Chatham House in London. He adds that there is a deep conviction in China that American policy in the Gulf aims to keep Chinese interests at bay, causing the country to feel increasingly contained. Furthermore, by controlling the Gulf, the US is able to use energy as a bargaining chip with China and other Asian countries. 

“Asian demand is rising exponentially; the US having oversight of the Persian Gulf means an inside track when it comes to the Asian powers, and a prize the US is not going to give up like Britain following the 1958 Suez Crisis; the US has learned its lessons,” said Professor Anoush Ehteshami, head of the School of Government and International Affairs at Durham University in England. “Indicative is the US is buying less oil from Saudi Arabia than in the past 20 to 30 years but the relationship is stronger than ever.” 

Annoying the neighbors

The formidable Russian bear has been vexed and unsettled by some US regional strategies, facing encroachment in Eastern Europe from NATO’s planned deployment of a missile defense system, and in Central Asia from the large US military presence in Afghanistan. While Russia does not rely on Gulf oil and would stand to gain from rising oil prices upon the closure of the Straits, regime change in Tehran would equal the loss of a geo-strategic and non-aligned partner, and open the way for Russia to be circumvented as an energy corridor to the Caspian Sea and Central Asia, home to 48 billion barrels of oil and 449 trillion cubic feet of natural gas, according to statistics from BP. 

Such a scenario would likely raise the hackles of Moscow and Beijing alike. Their grievances would only be compounded by their strategic setbacks in Libya where they curried particular favor with the former Gaddafi regime, and the current risk, especially to Moscow, of the fall of Bashar al Assad. Already the Russians have lost $4.5 billion in weapons contracts in Libya, according to the Moscow-based Center for Analysis of World Arms Trade (CAWAT), while $18.8 billion worth of contracts with Chinese companies are now in jeopardy, according to official Chinese statistics. Furthermore, the Russians could have already lost $13 billion from the effect of a United Nations arms embargo on Iran according to CAWAT, and face billions in losses from cancelled weapons contracts with Syria where it has already invested more than $20 billion in the infrastructure, energy and tourism sectors, according to the global analysis and advisory firm Oxford Analytica. That’s enough to make any bear irate enough to start a fight, and arguably the main reason why there is a lot more at stake than just the flow of oil out of the Gulf being interrupted.

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Comment

Assessing the damage

by Executive Staff
written by Executive Staff

 

The annual meetings of the International Monetary Fund and World Bank offer a relatively informal atmosphere for finance ministers, central bank governors and private sector executives to discuss the previous year and set a direction for the next. In Istanbul last month, the meetings reviewed a year of economic turmoil and vast change in government policies. Representatives from the Middle East recalled that the 2008 annual meetings in Washington occurred in a week when crude oil prices dropped 17 percent, the United Arab Emirates federal government guaranteed bank deposits and intra-bank lending and the Saudi stock exchange dropped to their lowest level in four years.

This year’s affair was far calmer. The broad consensus in Istanbul was that the worst was over and that the Middle East had survived the global crisis better than most of the world. Lebanon and Saudi Arabia were praised by many, including Mohsin Khan, the former regional IMF chief, for their conservative banking policies. “Both countries didn’t allow their banks to hold structured products, and this was a very smart move,” he told me. But whatever the successes they may claim for the past year, representatives in Istanbul acknowledged that major challenges remain, especially over unemployment and poverty.

The region already has relatively high jobless figures. The World Bank projects unemployment will rise by 25 percent in 2009 and 2010 in the Middle East and by 13 percent in North Africa, despite regional growth second only to Asia.

“The message, globally, is that, yes, there are signs of recovery, but it [the situation] hasn’t settled deeply,” said Shamshad Akhtar, the World Bank vice-president for the Middle East and North Africa (MENA). “We already had 20 million people unemployed [in MENA], and we have new entrants to the labor force [due to high population growth], so we have a problem.” The IMF’s Regional Economic Outlook, launched in Dubai on October 11, projects regional growth will fall from 5.4 percent in 2008 to 2 percent in 2009, before rebounding to 4.2 percent in 2010. A particular danger is that a disproportionate number of people, especially in Egypt and Morocco, live just above the $2-per-day income threshold for poverty, meaning the region cannot afford complacency over joblessness. This has been the major factor behind the World Bank’s increased lending in MENA from $1.8 billion in 2008 and 2009 to over $3 billion in 2009 to 2010. “Demand is steep,” said Akhtar. “Our clients need [to finance] reforms – and not just at the macro-level. Countries want to strengthen their financial structures, they want more microfinance. They want affordable mortgages and pension reform. They want to restructure social safety nets.”

The World Bank’s 2009: Economic Developments and Prospects, launched in Istanbul, drew attention to the opportunity presented by the economic crisis for governments to “ease infrastructure bottlenecks and restructure ineffective — yet expensive — subsidies programs.”

Iran is the clearest case, with around 30 percent of GDP going into subsidies. Egypt’s food and energy subsidies are around 30 percent of government spending and 10 percent of GDP, while in Morocco 90 percent of subsidies go to groups other than the poor.

At the macro-management level, the annual meetings generally endorsed the region’s approach to the economic crisis, although there was also a clear sense that governments had much left to assess in their performance.

The region’s monetary reaction to the crisis was “unprecedented,” especially in guarantees to banks, explained Khan, now senior fellow at the Peterson Institute for International Economics in Washington. “Back in 2007, there was a lot of worry about the inflation rate. There was talk of reining in monetary expansion, the revaluation of exchange rates…that has changed.”

Governments, much like in developed countries, have lowered interest rates as inflationary pressures have eased. Although inflation is considered a danger in Egypt — where the IMF projects a rise to 16.2 percent in 2009 from 11.7 percent in 2008 — representatives at Istanbul agreed it would not become a regional issue in the near future. Their greater fear is that the global economic recovery could falter and depress the price of oil.

In the Gulf Cooperation Council, fiscal policies — especially with the vast reserves of Abu Dhabi and Saudi Arabia — have been at the forefront of the response to the downturn. But many in Istanbul pointed out that fiscal stimuli have been less innovative than monetary changes, as several state infrastructure projects in the Gulf are already in the pipeline.

The shadow of politics, as ever, loomed over discussion at the annual meetings of the regional outlook. Both Saudi Arabia and the UAE moved quickly to squash a poorly-sourced story in The Independent that secret meetings were underway to abandon the dollar as the currency in which oil contracts are made.

But their anger at the report reflected a sense that the region can ill afford any further disruption — and that any serious sharpening of tensions, especially over Iran, could quickly upset a mood of cautious optimism.

GARETH SMYTH has reported from the Middle East since 1992, mainly for The Financial Times

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Banking & Finance

Financial quotes of the month

by Executive Editors
written by Executive Editors

“Looking at the present situation in the Eurozone area one has to be more optimistic than one would have been six or seven months ago.”

Mario Draghi, European Central Bank president

“There will be no more ‘Kodak moments’ — after 133 years, the company has run its course.”

Don Strickland, a former Kodak vice-president

“Our wish and hope is [that] we can stabilize this oil price and keep it at a level around $100.”

Ali al-Naimi, Saudi Arabia’s oil minister

 “We want to be number one.”

Sheikh Mohammed bin Rashid al-Maktoum, ruler of Dubai and prime minister of the UAE

“This battlefield is not limited by borders; it is fought behind the scenes. You can’t see it and blood isn’t spilled, but there is a battle in new and developing worlds.”

Dan Meridor, Israel’s minister of intelligence and atomic energy, following the hacking of the websites of the Tel Aviv Stock Exchange and El Al airline

“We expect to increase revenues from the region this year… There are very few places in the world today [where] I can … [readily] write a big cheque and this is one of them.”

John Vitalo, Barclays’ chief executive officer for the MENA region

“Right now, the US Congress is considering legislation that could fatally damage the free and open Internet.”

Warning on Wikipedia’s home page on January 18 when it shut down the site to protest proposed piracy bills in the United States

“If the content industry would like to take advantage of our popularity, we are happy to enter into a dialogue. We have some good ideas.”

On Megaupload’s homepage, one of the Internet’s largest file sharing sites, after the arrest of seven individuals including founder Kim Schmitz

“We are confident that the privatization of the stock exchange will be of a great benefit to Kuwait’s economy, investors and the listed companies.”

Abdullah al-Gabandi, head of the exchange privatization committee at Kuwait’s Capital Markets Authority

“We will have a partial managed float, allow the rate to be determined by the market and intervene when necessary.”

Adib Mayaleh, governor of Syria’s central bank
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Banking & Finance

For your information

by Executive Editors
written by Executive Editors

RBS closing Middle East M&A arm

Royal Bank of Scotland, majority owned by the government of the United Kingdom, is in talks to sell its Middle East merger and acquisition business as part of a global restructuring at the bank. RBS did not give a timeframe for the sale or details on the possible buyers. RBS is currently working on four M&A deals in the Middle East, which include the sale of 50 percent of Saudi Arabia-based Aujan Industries to Coca-Cola for $980 million, and aims to close these deals in 2012. The exit by RBS from the region follows moves by other investment banks such as France’s Credit Agricole, which closed its regional offices for Middle East M&A and relocated the business to Paris. Lloyds Banking group, another UK bank, is in talks to close down its operations in the United Arab Emirates. Several European investment banks struggling to cope with the European sovereign debt crisis are looking to exit non-core businesses such as those in the Gulf region.

Kuwait privatizes bourse

Kuwait has hired British multinational bank HSBC to help with the privatization of its stock exchange, the third largest by market capitalization in the Gulf Cooperation Council, after Saudi Arabia and Qatar. The privatization plan, outlined in the new Capital Markets Authority (CMA) law, calls for an initial public offering of 50 percent of the stock exchange to Kuwaiti citizens and an auction of the remaining 50 percent to listed companies, with a maximum ownership per listed company of 5 percent. Currently the Dubai Financial Market is the only publicly traded exchange in the GCC. The CMA law in Kuwait was established in March 2011, more than 30 years after the formation of the Kuwait Stock Exchange, and it is the first stock market regulator in the country. “This will make Kuwait one of the first countries in the region to privatize its exchange and we are confident that the privatization will be of great benefit to the Kuwaiti economy, investors and the listed companies,” said Abdullah al-Gabandi, head of the exchange privatization committee at the CMA.

News Corp invests in Dubai’s media

News Corp, which is at the center of a phone hacking scandal in the United Kingdom, wants to boost its presence in the Middle East media industry. It is acquiring a minority stake in Dubai-based MOBY Group, the largest media company in Afghanistan and owned by the Mohseni family. Under the terms of the deal, News Corp gives up its 50 percent ownership of Broadcast Middle East, a Farsi-language television company owned by both News Corp and MOBY. In exchange, News Corp receives a minority stake in MOBY. No financial details were provided. News Corp already has a solid presence in Middle East media through its 15 percent stake in Rotana Media Group, majority-owned by Saudi billionaire Prince alWaleed bin Talal.  “Merging our Farsi joint venture into MOBY allows us to expand our activities with what is surely one of the most dynamic and exciting media businesses in emerging markets anywhere,” said James Murdoch, deputy chief operating officer at News Corp.

Knickers in a twist

Kuwaiti retailer Alshaya, one of the largest retail companies in the Middle East, invested in struggling United Kingdom lingerie company La Senza by acquiring 60 of its domestic stores as well as the brand in the UK, from KPMG the administrator of the now bankrupt chain. The remaining 84 stores and 18 concessions were shut down. La Senza was owned by private equity firm Lion Capital, which acquired it in 2006 from Theo Paphitis, famous for his BBC business investment show “Dragons’ Den”. Alshaya, which operates several British retail brands such as Debenhams, Mothercare and Next, intends to invest $156 million in the business. It already works closely with Limited Brands, the United States-based owners of the lingerie brand through franchise agreements for the Victoria’s Secret, Bath & Body Works and La Senza brands. The stores in the Middle East will not face closures as Limited brands confirmed that “our businesses in other territories, including the Middle East, is [sic] not impacted in anyway and it is very much business as usual.”

Qatar goes nutty

Al Rifai International Holding, a Lebanese based manufacturer of nuts, has sold a 15 percent stake at an undisclosed amount to Qatar First Investment Bank (QFIB), a Doha based Islamic investment bank established in 2009. Al Rifai sells nuts, kernels and Middle Eastern delicacies throughout the Middle East and Europe and its sales in 2011 grew by 50 percent. QFIB’s move is its first into the food and beverage industry and it provides the bank with access to new international locations. “From the outset, our strategy was to focus on sectors that benefit from key drivers of economic change,” said Emad Mansour, CEO of QFIB as he expects the fast growing global savory snack market to reach $85.4 billion in 2012.  “The partnership will also allow us access to multiple sources of funding and risk mitigation tools, thus helping our group implement and further develop its growth and improvement plans,” said Mohammad Rifai, CEO of Al Rifai. The holding previously raised $15 million in September 2010 through a private placement led by MedSecurities, a subsidiary of BankMed.

Lebanon’s risky debt

The cost of protecting against default on Lebanon’s debt rose further in 2011 as spreads on the country’s five-year credit default swaps widened by 150 basis points (bps) last year, compared to only 28 bps in 2010, and ended at 447.5 bps according to CMA Datavision, a CDS and bond-pricing firm. The widening of the spreads in 2011 mainly occurred in the first two quarters of 2011 due to the turbulent political situation in Lebanon and revolutions that shook the Arab world. The spread performed better in the fourth quarter relative to the rest of the year as it only widened by 17.8bps. The worst performing countries in this quarter were Greece, with spreads widening by 57 percent, followed by Slovenia at 46 percent, and Egypt at 35 percent.

A binary battle at the bourse

Unidentified pro-Palestinian hackers attacked the websites of the Tel Aviv stock exchange and El Al Israel Airlines, as well as the marketing websites of three banks (First International Bank of Israel and two subsidiary banks, Massad and Otzar Hahayal). Stock trading and flights were unaffected. The hacker group, which goes by the name “Nightmare”, warned of an impending attack the night before the hacking through an email to Ynet, a popular Israeli news website. Ynet reported that the email was sent by OxOman identifying himself as a Saudi hacker who has also exposed the numbers of thousands of Israeli credit cards in recent weeks. In retaliation, Israeli hackers calling themselves IDF team, named after the Israeli Defense Forces, attacked the website of the stock exchanges of Saudi Arabia and Abu Dhabi. Both exchanges, however, denied the claims that their sites had been attacked, with Abu Dhabi blaming the slowdown of its exchange on technical faults. “If the lame attacks from Saudi Arabia will continue, we will move to the next level which will disable these sites longer term,” the IDF-Team wrote. “You have been warned.”

Lebanese dynasties among the region’s billionaires

The  Lebanese Hariri and Hayek families made it to Arabian Business’ list of top Arab 50 billionaires. Saad Hariri, former prime minister of Lebanon, was ranked 28th richest Arab, down one spot from 2010, with an estimated fortune of $3.8 billion, up from $3.7 billion in 2010. His older brother Bahaa is ranked 32nd, up seven places from last year with an estimated wealth of $3.35 billion, up from $3 billion in 2010. His younger brother Ayman also made the list, ranked 36th, up from 44th place in 2010, with an estimated fortune of $3.15 billion, up from $2.4 billion last year. The two other Lebanese on the Arab rich list, Nick and Nayla Hayek, are newcomers to the list and amassed fortunes running Swatch group, the world’s largest manufacturer of watches. They ranked 38th place with a fortune estimated at $3.1 billion.

Kafalat loans down 3 percent in 2011

Kafalat loans, extended by commercial banks to small and medium enterprises and supported by the Lebanese government, decreased by 2.6 percent in 2011 to reach $165 million. The number of loan guarantees amounted to 1,272 in 2011, down from 1,404 in 2010, while the average loan size increased to $129 in 2011 from $120 in 2010. The agriculture sector received the most Kafalat loans as it had 41 percent of the total guarantees. It is followed closely by the industrial sector at 38 percent. Tourism received 17 percent of the total Kafalat loans.

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Economics & Policy

For your information

by Executive Editors
written by Executive Editors

Fishing for phonelines

Lebanon’s telecom sector is set for a tumultuous month as the operating contracts of both mobile network operators Alfa and mtc are set to expire. Last month Prime Minister Najib Mikati confirmed to the press that a decision to renew the management contracts of Alfa, owned by Orascom Telecom, and mtc, owned by the Kuwaiti telecom company Zain, was anything but assured. Speaking at a press conference after meeting with the telecommunications minister, Mikati said that a decision to renew the contracts which were to expire on January 31 had not been taken and that the government was considering three options: renew the contracts with the same companies, adopt contracts with other companies or bring the sector back into the government’s fold. A new tender, however, would take between three and six months, during which time the existing contracts would be renewed, the premier said. Mikati also announced that a $47 million project to increase the number of available landlines by some 7,000 lines would need another two years to be implemented.

Beyond puppy fat

New studies released last month show a worrying trend among the Lebanese who seem to be piling on the pounds as the years progress. Research from a three-year collaborative study conducted by the National Center for Scientific Research, the American University of Beirut, Saint Joseph University and Universite Saint-Esprit de Kaslik, showed that obesity among children and adults has almost doubled over the past 15 years, thus increasing the risk of diseases such as diabetes and cardiovascular disorders, according to researchers. “Research has shown that diet in the first two years of a child’s life sets the stage for chronic diseases and other health problems later on in life,” said Professor Nahla Hwalla, lead researcher and the dean of the Faculty of Agricultural and Food Sciences at AUB. According to the new set of data, which was collected in 2009, one in six children younger than 10 years old are now obese, while only one in 10 children under 10 was obese in 1997.

World Bank and IMF diverge in their gloom

Leading global economic bodies were seen to take a divergent stance on Lebanon’s economic prospects last month when the World Bank posited an estimation of last year’s growth twice that of its sister organization, the International Monetary Fund. According to the World Bank, Lebanon’s gross domestic product should have grown by 3 percent last year, while the IMF maintained a 1.5 percent estimation, a figure also touted by government officials. In the Middle East as a whole, growth in 2011 was weighed down by the effect of the unrest across the region, while higher oil prices buoyed the growth of oil exporting countries, which added $200 billion in revenues on 2010. Flows of foreign direct investment across the region, and mostly in the countries of the Gulf Cooperation Council, were seen to have fallen by nearly 40 percent. Going forward the Bank added that the Middle East and North Africa is “highly exposed to an exacerbation of the European crisis, with strong and broad links through trade, tourism arrivals, migrant remittances, and to a lesser degree, finance.” The net effect of oil was also seen to be one of the factors weighing down growth this year with GDP impacts ranging between -0.8 and -1.2 percent for oil importers and -0.2 and -0.6 percent for oil exporters.

Inflation flummox

Figures released by different economic institutions last month point to a common theme, that prices are still on the rise. But just how much prices have risen continues to be a matter where no consensus can be reached. According to official figures from the Central Administration for Statistics, the Consumer Price Index (CPI), the major indicator of inflation, rose just 3.1 percent over the course of 2011. The main drivers of the rise were prices of food and non-alcoholic beverages, which rose 5.8 percent and constitute one fifth of the weight of the total consumer basket used to compile the index. The only item that saw a fall in prices was transportation, dropping 2.6 percent. Many economists have criticized the government’s figures, which are relative to December 2007 baseline prices. Conversely, the privately owned Consultation and Research Institute which has been monitoring prices since the 1970s, said the CPI had risen 4.6 percent because of a rise in prices in every item except for housing.

Tourist numbers tumble

Figures released by the tourism ministry last month indicate that the country received nearly a quarter less visitors in 2011 than 2010, with 1.7 million and 2.2 million arrivals in those years, respectively. The figure represents the first decline since 2005 and 2006 when the assassination of former Prime Minister Rafiq Hariri and a 34-day war with Israel, respectively, tarnished the industry. Arab visitors constituted 35.1 percent of all those coming to Lebanon while 29.3 percent came from Europe and another 14.8 percent from Asia. The nationalities that visited Lebanon most were Jordanians and Germans, both constituting 7.8 percent of total visitors.

Minimum wage up… finally

After months of political wrangling a decision to raise the minimum wage and salaries across the country was taken by the cabinet. According to two decrees issued by the cabinet, the minimum wage will rise from LL500,000 ($331.67) to LL675,000 ($447.76). Salaries between LL500,000 and LL1 million ($663.34) will receive a salary increase of LL200,000 ($132.67), while wages ranging between LL1 million and LL1.5 million ($995.02) will rise by a maximum of LL250,000 ($166.67). Salaries more than LL1.5 million can rise by up to LL299,000 ($198.34). Pay raises will be dependent on any other rises granted since the last correction of wages in 2008. The move comes after the finance minister reneged on his promise not to approve the measure until a long standing draft law on competition was passed. The labor minister has also refused to sign a third cabinet decree to increase transportation and education allowances because, he claims, it was technically illegal.

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Feature

Syria’s rebel army

by Executive Staff
written by Executive Staff

Outnumbered, outgunned and isolated, the defected soldiers of the ‘Free Syrian Army’ are still managing to hound the forces of Syrian President Bashar al-Assad. From one desperate day to the next, these rebels claim to protect demonstrations and conduct skirmishes on government forces, while living in constant fear for the safety of themselves and their families.

1) Defecting Syrian soldiers gathered under the umbrella of the Free Syrian Army (FSA) are contributing to a growing armed resistance to the regime in Damascus.

2) The rebels live a furtive existence, holed up in abandoned farm houses, hidden away in the Syrian countryside.

3) The body of a demonstrator, freshly killed by security forces in the town of Qusayr, is cleaned by FSA members and sympathetic locals. The FSA have tried to assert their role as armed protection for civilian demonstrators against attacks from government forces.

4&5) Despite reports of a dramatic rise in arms smuggling into Syria, the FSA soldiers outside the village of Qusayr said that most of their weapons were bought from sympathetic soldiers still serving in the regular Syrian army. 

6) A defected security agent tells his story to a journalist in a safe house outside of Homs. So far, defections from the ranks of the security forces have been limited, but this deserter said that if a ‘safe zone’ was arranged, those “without blood on their hands” would flee in droves.

7) An FSA soldier stands guard on a misty night outside a countryside hideout.

8) The next morning, FSA fighters modify a pickup truck in order to mount it with a heavy machine gun, in a similar fashion as those widely used by the rebel fighters in Libya last year. Similar to Libyan rebels, the FSA are calling for a NATO imposed ‘no-fly’ zone.

9) However, with international intervention looking unlikely, the FSA seem set for an uphill struggle as they continue to launch operations from farmyard hideouts such as these.

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Editorial

Last chance to turn the tide

by Yasser Akkaoui
written by Yasser Akkaoui

Assuming that the optimists are correct, our country could see some $140 billion stream into the economy from oil and gas revenues in the next 20-odd years. When 3.5 times your current GDP comes knocking, you’d better listen, and listen close. 

It’s no exaggeration to say that the fate of our nation, its people and its economic wellbeing could rest on whether this precious resource is used for good or for ill. Already, our economy is skewed toward sectors that cannot create the jobs we need to sustain our competitiveness, which at the moment is sorely lacking, in no short measure due to endemic corruption, security or any sort of policy framework. 

From our waters to our lands to our mountains, the nation’s history is tainted with examples of how we have exploited our resources for the benefit of vested interests over public good. Without the proper mechanisms and safeguards to ensure that the money from any oil or gas wealth comes back as working capital and not as ‘miscellaneous expenses’, we will probably be better off without it.

Unless that money goes towards diversifying the economy so it produces, not just GDP, but jobs at both the top and bottom of the salary scales and across sectors, then we should not be optimistic about the panacea touted by our political patrons. As things stand we have only one exportable asset: our people and their entrepreneurial drive.

The gap that exists today between those that consume and drive GDP, and those that do not, will not be bridged by our current political and administrative setup. We should not think for a moment that those who have plundered the nation and enervated the prospects of our people will change tack now that our seas may offer fresh bounty.

If we play this right the nation could be offered an opportunity to finally stem the all too common beeline from the graduation party to the airport.  If we get it wrong we can kiss goodbye to our greatest selling point: Our talented youth.

So before we embark upon this journey to explore our seas for what could be our last scarce resource, we must be certain that it will be used to give those that never had the chance their opportunity to succeed.

A Sovereign Wealth Fund in a country that is not sovereign, cannot pass a budget and funds itself with money it doesn’t have, is not something we should look forward to at this point. 

Money alone will not solve structural problems.

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