Executive Magazine

MENA stock tips

by Maya Sioufi February 3, 2012

written by Maya Sioufi

Envisioning the start of 2012, investors across the Middle East probably could not have conceived of a more nightmarish scenario if they tried. The European debt crisis, Arab revolutions and election year posturing in the United States are just some of the many monsters ready to jump from the closet and under the bed as they lay awake at night. For advice on how to keep your cash safe from these creatures of havoc, Executive spoke with Tareck Farah, chief executive of MENA Invest, and Amin el-Kholy, head of asset management at Arqaam Capital.

Tareck Farah

Bullish or bearish? “Cash is king,” says Farah as he explains his bearish stance towards the financial markets. He prefers to hold cash, especially in the first six months of 2012. Within developed markets, he prefers to be exposed to the United States where there is at least some confirmation of growth relative to Europe, which faces a “deleveraging process that might take longer than we imagine.” He believes that investor confidence could still go lower as the European crisis deepens. In emerging markets, Farah believes there will be a squeeze in liquidity in the first half of the year but expects this to ease towards the end of the second quarter, and would start picking stocks in these markets then.

Favorite asset classes? While Farah stresses that he would keep a high level of cash in these uncertain times, he likes the corporate credit of solid US and European companies and would stay away from sovereigns and financials. On the equity side, he recommends the US healthcare sector for its defensiveness and likes Medtronic, United Health Corporation, Johnson & Johnson, Élan Corporation and Boeing in the heavy industry sector. He also recommends the US telecommunications sector on the back of the social network boom this year, with major initial public offerings expected, such as the much-hyped Facebook offering. In this space, he highlights Constant Contact, a provider of social media tools.

Thoughts on the MENA region? Farah is not particularly hot on any MENA market, with the only one he would consider investing in – if it falls to lower levels – being Saudi Arabia for its solid growth potential, high global oil prices, significant government spending in 2012 and population growth. His favorite sectors are cement and petrochemical.

Thoughts on Lebanon? Farah would not invest in Lebanon’s financial markets. He is concerned about the exposure of the Lebanese banking sector to Arab countries facing turmoil. On Solidere, he believes it is not expensive at $14 and if it falls further, it becomes a no brainer. As for Lebanon’s debt, he finds it expensive relative to global market conditions and it does not reflect the Lebanese reality. Farah believes rates should be higher given that Lebanon is “not a producing country, has a single B credit rating and 100 percent of its [territorial] frontiers have issues.”

Top pick globally? He stresses on cash as he says, “The intelligent investor would be the one who can better manage his cash.”

Amin el-Kholy

Bullish or bearish? Kholy is neither overly bullish nor bearish. He is selective in these uncertain markets, as he believes that we are now facing a binary scenario. He stresses that in these markets it is essential to be selective and able to react quickly as we get more clarity on the possible scenarios. Kholy is not too concerned about the Arab political situation as “the risk is already out there.” He is more worried about what the new normal will look like once the European debt crisis and the global uncertainties are resolved, and how it will impact the commodity space, emerging markets and the MENA region. He also highlights the geopolitical risk in Iran as a key issue to be resolved before he can be more bullish on the MENA markets.

Favorite asset class? Kholy believes that both fixed income and equities present attractive opportunities. He is particularly interested in solid names in the MENA region, which offer high dividend yields. He likes the Gulf Cooperation Council region, as it enjoys a favorable economic environment.

Thoughts on MENA markets? Kholy would be bullish but selective in trying to find interesting opportunities. The only factor that could impact his stance in the region is geopolitical risk stemming from the Iranian situation. His favorite countries to invest in would be Saudi Arabia and for a slightly contrarian pick, he would recommend the United Arab Emirates. In Saudi Arabia, he would invest in the retail and banking sectors. In the UAE, he would also look into investing in the banking sector.

Top global picks? Kholy likes gold or US dollars, but which depends on the scenario that pans out over the course of the year. In a more favorable scenario in which inflation picks up, he expects gold to be popular again. In a less favorable scenario, he would invest in the US dollar, especially via high-yielding GCC fixed income.

February 3, 2012 0 comments

Economics & Policy

A rush to power

by Joe Dyke February 3, 2012

written by Joe Dyke

If the many announcements coming out of the energy ministry last month translate into reality then the country’s electricity sector is on the verge of major change. In a few short days the government announced the start date for the increasing of the country’s energy capacity, the winners of a number of crucial contracts and even plans to control the price of illegal generators.

But if anybody has learned to be wary of the difference between presentations and performance it is the Lebanese. There are significant obstacles in the path of Energy Minister Gebran Bassil, among them political infighting, lawsuits and even allegations of corruption looming over the ministry’s head.

At present, Lebanon’s consumption of power far outstrips supply. Including generation and imports the country has around 1,500 megawatts (MW) of electricity available, but demand reaches as high as 2,500 MW at peak times, leading to blackouts of over 6 hours a day in some parts of the country. Late last year the government came close to collapse over the $1.2 billion electricity plan, which aims to add 700MW to the country’s grid, with Free Patriotic Movement (FPM) leader Michel Aoun threatening to pull his ministers from the cabinet if Bassil’s plan was not accepted.

This cabinet collapse was averted and in January a government circular announced that the projects — including the redevelopment of Jiyye and Zouk power plants, a new gas pipeline and floating electricity-producing barges — are due to begin in March. Yet the infighting continues, with allegations that the finance ministry is preventing the transfer of the $1.2 billion. Cesar Abu Khalil, advisor to the Minister of Energy and Water, admitted that there have been “unnecessary” delays and confirmed that they are still waiting for the funding to be released.

“Technically no, I cannot confirm they [the funds] have been transferred but they have been allowed for by a law. It can be delayed but it cannot be stopped,” he said. “Sometimes it gets delayed in some administration but inevitably we will get our $1.2 billion.”

Unperturbed, the ministry plans to begin the tenders on the 700MW project in March and has begun announcing the winners of other contracts. One project that has been given the go-ahead despite a cacophony of criticism is the distribution service providers (DSPs). Under the scheme Lebanon is to be divided up into three sections, with one private consortium in each area allocated electricity distribution, maintenance and collection operations for a four-year period, with each contract worth more than $100 million. Last month the contracts were awarded, with Butec due to administer the north, Arabian Construction Company (ACC) dealing with Beirut and Debbas in the south.

Potential conflicts of interest are, however, apparent. Butec’s founder and majority stakeholder, Nizar Younes, ran for the Aoun/Franjieh alliance in the 2005 election in Batroun, alongside the energy minister. Meanwhile the ACC is run by the Qatari Prime Minister Hamad bin Jassim bin Mohammed al-Thani, whose country is known to have close relations with the FPM. Furthermore, while all of the companies are well respected, none have experience as energy distribution units in Lebanon.

One of the losing bidders in the north was E-Aley, a company that has been distributing energy in the country for more than 80 years. Following the decision to overlook them in favor of Butec, deputy general manager Albert Khoury confirmed that they have begun legal proceedings against the ruling. Khoury did not wish to discuss the bidding process for fear of jeopardizing the legal proceedings, but said: “electricity is more about politics in this country than about kilowatts and hertz; this is my conviction and this is how it is being played today.”

Mohammed Qabbani, head of parliament’s Public Works, Transport, Energy and Water Committee, says he believes the project is not permitted by Lebanese law, which grants powers exclusively to Électricité du Liban (EDL). “It is a completely illegal project. I will be asking the President of the Republic and the Prime Minister to stop [the minister] from continuing his illegal preparations for these service providers,” he said.

However Khalil denies all accusations of wrongdoing or political favoritism, welcoming legal challenges from those who believe there have been nefarious dealings. “There have been many allegations in the media and we don’t respond to these allegations. We waited for justice to issue its verdict and the verdict of justice is our response to all these allegations,” he said. Given the backlog of cases in Lebanon’s courts, justice may be a long time coming.

Punishing success?

E-Aley is not the first company to take the government to court over their plans. Last month the ministry won a case brought by Électricité de Zahle (EDZ) over plans to reduce concessions for independent providers of electricity.

Under the current scheme EDZ, and other firms that have exclusive concession agreements, receives electricity cheaper than cost price. The ministry claims Zahle is provided electricity at LL50 per kilowatt (KW), with others mostly around LL75, while average prices are around LL127. A ruling from the council of ministers in January upheld the decision that the cheapest price going forward will be LL95 per KW, a price Zahle owner Assaad Nakad claims will squeeze him out of business.

“It will be impossible for us to continue our services, and this will lead to the total liquidation of EDZ,” he said. He added that EDZ had been providing a similar service to the distribution service providers for decades. “I really do not understand why they want to destroy such a successful example while they do not know yet the outcome of the DSP project.”

But Khalil points out that these concessions add to the deficit of EDL, which ranges anywhere from $1.2 billion to $2 billion a year depending on oil prices, and are therefore paid for by the Lebanese people. “These concessions are some kind of feudalism, out of the Middle Ages. They try to portray themselves as a success story for Zahle and others,” he said. “If you got a kindergarten kid and put him in these conditions — where he has a fixed cost and a fixed selling price and exclusivity on people with 150 percent in profit — he will be a success story.”

Generating a regulator or regulating generators?

While announcing sweeping changes in almost every part of the industry, the government has remained tight-lipped about one issue; the creation of an independent regulator. Lebanon has been due a financially and politically independent body to organize and control the development of the sector since it was promised as part of Law 462 in 2002.

Roudi Baroudi, Lebanon secretary at the World Energy Council, believes a regulator is the most important step toward increasing confidence in the energy sector. “The regulatory authority would make the market very transparent and honest; it would create competitiveness and a modern platform for private investors to have more of a stake in the industry,” he said. “And finally somebody would be liable for failures; the consumer will be able to pursue companies for mistakes.”

Yet successive energy ministers have proved unwilling to relinquish absolute power in their fiefdoms and the current one appears little different. Khalil claims the minister is open to the idea of a regulator but is waiting on the outcome of an amendment to Law 462, something a cabinet committee formed during the electricity crisis last September promised to create within three months — yet it has still not come to fruition.

“Whenever there will be a need for this body we will work on creating it,” said Khalil, though many in the private sector would claim the need has been clear for more than a decade.

Perhaps the most bizarre of the ministry’s many announcements in January was the ‘directive’ on the price of private generators. Under Lebanese law only EDL is allowed to distribute electricity, but the power cuts that plague the country have led many to rely on illegal private companies, or ‘neighbourhood generators’ as they are more commonly known, to provide them with energy when the lights go out.

The government has long turned a blind eye to such practices but has become concerned by the growth in companies exploiting their monopolies and overcharging customers. So a recent circular announced that the minister was introducing a ‘maximum price’ that generators are allowed to charge at LL400 ($0.26) per hour per five amperes, seemingly ignoring the fact that the industry is outside the law.

Khalil explains that whilst the whole issue is outside the rule of the law they do have tools at their disposal to make the generator owners comply. “Last week two generator companies were shut down by the municipalities; for those who will not abide by this tariff the municipalities, along with EDL, can ask them to remove their cables from EDL installations.”

What Khalil is admitting, in effect, is that the government has begun to regulate an illegal industry. Whilst it may be commendable to face up to the elephant in the room there are serious concerns that without a regulator to ensure best practices, this process is open to abuse. The relationships shared between local officials have the potential to become more important than the service they provide.

“He [Bassil] is indirectly legalizing generators in the villages and streets. Why do it this way?” asked Qabbani. “Create a regulatory body and this body would have the right to give licenses for the production and generation of electricity. What can you deduce when somebody wants to monopolize illegal authority? What could it mean except corruption?”

The bottom line

When all this squabbling is over and done with, the average Lebanese customer cares about two things: whether they have electricity and how much it costs. The minister’s plan of 2010 aims to “gradually increase the (EDL) tariff” as the additional 700MW is introduced onto the grid over the coming years, thus reducing consumers’ reliance on expensive illegal generators. Yet the government has admitted that demand continues to grow by between 100 to 200 MW year-on-year. Therefore the 700MW, spread over three or four years, could only match the increase in consumption, meaning any increase in price will burden the Lebanese consumer without offering a tangible return.

Qabbani questions whether the plans will be able to counteract the growing gap between supply and demand. “They might be able to stabilize the inclination downward but I don’t think they can have any appreciable increase.”

The flurry of announcements suggests that at least something is happening. After years of deadlock, with electricity reform constantly overlooked, any news may be good news. Yet Riad Chedid, professor of electrical engineering at the American University of Beirut, believes for all its announcements the government is facing an uphill battle. “One should not underestimate the difficulties of trying to fix the electricity sector. It is multi-character: technical, political, human resources, financial. This is what the ministry has been doing so far, but you are dealing with 40 or 50 years of neglect.”

February 3, 2012 0 comments

Society

A damn fine dram

by Paul Cochrane February 3, 2012

written by Paul Cochrane

It is one of the oddities of globalization that while Diageo’s Johnnie Walker is the ninth-best selling whisky in the world, and number one in Lebanon, it will not be found in any pub in Scotland. A drinker in need of a dram of Pernod Ricard’s Chivas Regal, also one of Lebanon’s most consumed whisky brands, would equally struggle to find a bottle in whisky’s homeland. But in Lebanon’s maturing drinks market, distributors think it is high time to take whisky consumption to another level, emphasizing value over volume by pushing single malts, whisky from a single distillery, as opposed to the more popular blended varietries.

Ever since drinkers moved away en masse from local spirit arak for Scotch, whisky has been the number one spirit at around 450,000 cases (of 9 liters) imported every year, out-pacing the world’s fastest-growing spirit category, vodka, with 150,000 cases imported last year. But of all those crates of whisky coming into Lebanon every year the bulk are blends, with only 8,000 cases brimming with the more premium whiskies and single malts making up a mere 1,500 cases.

Not surprising given that the most popular brands are made specifically for export. In fact, there are only two Scotch whiskies in the top 10 brands worldwide, Johnnie Walker and Pernod Ricard’s Ballantine’s, according to a 2011 report by Drinks International. Last year’s winner of the “Best Single Malt Whisky” category in the 2011 World Whiskies Awards was not a Scotch, but Japan’s Yamazaki.

Realizing that a bottle of single malt will cost customers at least $30 at retail prices, distributors are looking to make a “personal connection” with customers, according to Gordon Dron, managing director of Europe, Middle East and Africa for William Grant & Sons, manufactuers of Glenfiddich. “We’re not big into mainstream advertizing that’s not really our strategy at all, so it’ll be primarily word of mouth and direct one-to-one connections.”

Thier local distributor Gabriel Bocti have held single malt tasting nights at hotels, while Etablissements Antoine Massoud (EAM) hosted “The Malt Gallery” tasting nights at art galleries throughout last year. There is clearly demand potential, with an EAM auction of a 55-year-old Macallan in a Lalique decanter — one of 420 released — going for $12,500 in November.

“We want to create a culture of single malts; Lebanon has a big spirits market, and whisky is the most consumed category,” said Anthony Massoud, managing director of EAM. “The treatment of malts is like fine wines, with different expectations from each bottle. But people have little knowledge about malts or appreciation, so we want to transfer this culture and history to Lebanon and, very humbly, we are trying to make this a category available to the public. The aim is for sales of malts to go from 1,500 cases a year to 10,000.”

For malts to hit this figure and a single malt culture to develop, it will have to occur through a collective marketing boost by all the major distributors, namely Diageo, Vincenti & Sons (distributor of Label 5 and Glen Moray), Fattal (distributor of Dewar’s), as well as Bocti (distributor for Grant’s). Carlo Vincenti of Vincenti & Sons, for instance, believes this growth can only occur through greater evolution of on-trade sales of premium brands, “as you can’t launch a 16-year-old whisky in a supermarket.”

Global drinks giant Diageo will focus on premium blended scotch, launching Johnnie Walker Double Black (a variant of Black Label), but it also aims to bolster sales of its single malt brands Singleton of Dufftown, Talisker and Glenmorangie, to have a foothold in the category.

Raising a glass to the region

However, Lebanon is just the tip of the ice cube for distributors’ regional ambitions. “Lebanon doesn’t have a big population, but its influence over the whole region is significant,” said Dron. “Because of the relatively liberal [alcohol] policy here it makes this market a good place to connect with consumers.”

Lebanon is clearly key to such regional growth, yet with prises rising briskly, distributors could face a hard time selling premium whiskies in a depressed market, with overall drinks sales in 2011 down on the previous year. But as Massoud emphasized, “it is not about volume, but value. In the malt category price is irrelevant when there is a passion for the taste.”

February 3, 2012 0 comments

Economics & Policy

Cure or curse?

by Zak Brophy February 3, 2012

written by Zak Brophy

There’s nothing like the promise of untold wealth to wash away the winter blues, and as the nation awoke to a new year of crippling debt, power cuts, falling buildings and gloomy economic forecasts, it was in need of some good news. What better palliative then, than the prospect of opening a hydrocarbon jackpot under the Lebanese ocean floor?

In the wake of its neighbors’ success in tapping the Eastern Mediterranean’s resources, Lebanon is finally pushing forward efforts to exploit its share of the seabed in search of the spoils of oil and gas. While politicians may promise immeasurable riches for one and all to share, the sage among the crowd will be observing developments with more than a hint of healthy cynicism. What lies trapped underground offshore is far from assured and a bountiful find could easily turn from a blessing to a curse for the country’s economy and body politic.

The potential stakes

In its first meeting of the year on January 4, the Council of Ministers passed an implementation decree pertaining to Lebanon’s Offshore Petroleum Resources Law (Law 132), which will enable the country to move forward into the exploration stage. The move has been a long time coming and was precipitated by the enviable finds in other areas of the Eastern Mediterranean.

“Of course there is a race to explore and drill because Israel and Cyprus are already ahead of us,” explains the Acting President of the Lebanese Economics Association (LEA) and Associate Professor of Economics at the American University of Beirut (AUB), Jad Chaaban.

Research has long hinted at the potential for hydrocarbons in the region’s waters, with a 2010 report by the United States Geological Survey estimating an average of 1.7 billion barrels of recoverable oil and 3.5 trillion cubic meters of recoverable gas in the Levant Basin Province, a geological formation in the Eastern Mediterranean extending from Syria to the Sinai.

Whilst Lebanon lags behind in terms of exploration and drilling, it has commissioned a number of the rather coarse two-dimensional and more refined three-dimensional seismic surveys from the firms Geco-Prakla, Spectrum Geo and most recently Petroleum Geo-Services (PGS). The findings indicate a number of unexplored potential hydrocarbon hotspots including the Syrian Arc, the Levant Basin Province and the Levant Margin in the 20,000 square kilometers of deep water in Lebanon’s Exclusive Economic Zone (EEZ) — the ocean area the country can claim ownership over with regards to resources from oil to oysters.

Houston-based Nobel Energy has been operating in Israeli waters since 1998 and has tapped into two massive fields in recent years. In 2009, Tamar, a 237 billion cubic meters (BCM) gross natural gas field, was successfully drilled and an additional 453 BCM of natural gas were discovered in the Leviathan field in late 2010 — the world’s largest deep water gas discovery in the last 10 years. With successful drilling in December 2011 into what could amount to 226 BCM of natural gas in the Aphrodite field in Cyprus’ maritime waters, the Eastern Mediterranean has very much aroused the attention of international oil companies (IOCs).

Hype vs. reality

Opposition Member of Parliament (MP) and Head of the Parliamentary Energy and Public Works Committee, Mohammad Qabbani, expresses an optimism shared by many when he says, “There is oil and gas five kilometers south of our borders — do we think God created a wall between us and Palestine? All of this area is rich in the Levantine basis.”

However, successful drills in Israeli and Cypriot waters are no assurance that there is actually any commercially recoverable gas or oil in Lebanese waters. AUB’s Chaaban is skeptical about the hype surrounding the industry and argues, “They are being too optimistic… It is a political statement to say the oil sector will be booming and to talk of all these revenues.”

Even with extensive and promising seismic surveys, and multiple regional discoveries, attempts to quantify what is actually below the Lebanese seas are merely educated guesses at this point. “All a seismic survey tells you is that there are certain subsurface structures but they could be full of water; you have to have drilling going on to find out what is down there,” explains David Aran, founder and owner of London-based Petroleum Development Consultants Limited (PDC).

The bureaucratic botch

Nonetheless, encouraged by the regional finds and goaded on by the fact that it is now years behind neighboring countries’ efforts, Lebanon is finally moving toward drilling the seabed to see what is actually there. The first incremental step came on August 17, 2010 when the Lebanese parliament passed the Offshore Petroleum Resources Law, drafted by the Ministry of Energy and Water (MoEW) with assistance from the Norwegian Agency for Development Cooperation (NORAD).

However, due to the idiosyncrasies of the Lebanese political and legal systems, the law does not actually come into effect until the necessary implementation decrees are passed by the Council of Ministers, Lebanon’s cabinet.

The January 4 edict was one such decree — there are more than two dozen in total — enacting the creation of the Petroleum Administration, a prerequisite for the cabinet to enact the subsequent decrees for managing the sector, known as the Petroleum Activities Regulations (PAR).

The next hurdle to developing Lebanon’s offshore ‘play’ — an industry term describing the activities associated with petroleum development in an area — will be in the formation of the Petroleum Administration. Determining the exact role of this body, who will staff it and its level of independence will have a sizeable impact on the evolution of the sector as a whole. Consensus is far from assured.

As Executive went to press the six members of the Petroleum Administration’s board had not been selected, but the MoEW stated cabinet would appoint the posts by the end of January based on proposals from the Minister of Energy and Water, Gebran Bassil.

The law stipulates that the Petroleum Administration “shall enjoy financial and administrative autonomy with the Minister exercising tutelage authority,” but Cesar Abou Khalil, advisor to Minister Bassil, says, “The funding is already in the budget of 2012, which has an allowance for their salaries and the minister of energy and water allows it from his budget. This is a body inside the Ministry of Energy and Water.”

This raises questions regarding the independence of the Petroleum Administration.

There is also uncertainty over its role in relation to the MoEW. In a presentation by the ministry at the Lebanon Petroleum Exploration Forum 2011 last summer, the authority was labeled as a ‘regulatory body’ (along with the ministry). But, Abou Khalil argues: “It is not a regulatory body. It is purely consultative and is under the minister and nobody else.”

Opposition MP Qabbani responds to this with an excoriating critique of Minister Bassil, claiming he seeks hegemonic control of the industry, going so far as to compare his managerial style to that of Hitler. “The minister wants to control the signature of everything,” says Qabbani. “The minister is going to do his best to make sure he controls the [Petroleum] Administration and we will do our best to make sure that he can’t do that.”

Considering the prospect that this embryonic sector could precipitate a tectonic shift in Lebanon’s economic, political and social landscapes, its governance and institutional frameworks are of primary importance. Abou Khalil claims there is sufficient governance within a three-tier system, whereby the Petroleum Administration makes suggestions to the minister who will then enact them if he is able to, and if not he will send them to the cabinet.

“The Petroleum Administration, the Council of Ministers and the Minister of Energy and Water will all regulate one another,” he reasons. As for the prudence of creating an independent body to regulate the sector he simply asks: “Why do you need a regulatory body?”

Once the Petroleum Administration is appointed by the cabinet, it can begin the process of passing further implementation decrees to move the country into the early stages of the exploration phase, where companies prospect for oil or gas in Lebanese waters. The MoEW has laid down targets to enter into the first licensing round of the tender process within the first quarter of 2012, and to sign the first contracts by the end of the year.

All prospective companies will have to pass through a pre-qualification phase and only consortiums of three or more companies in an unincorporated joint venture can actually bid for tenders. Successful applicants will be granted exploration and production agreements (EPAs), allowing them to explore specific areas, called ‘blocks’, for potential black gold.

Lacking tools for the task

According to the law, the Petroleum Administration’s role in this crucial phase will be to draft invitations for bids, assess the qualifications and capabilities of applicant IOCs and assist the minister in negotiating exploration and production agreements. AUB’s Chaaban, however, frets that the Petroleum Administration will be ill-equipped to fulfill its mandate.

“We definitely won’t have a qualified team to run [the Petroleum Administration]… The ministry will probably end up choosing the companies, which is not a good thing,” he says. “You need an independent authority that has the ability to choose on a technical and sound basis who will get the contracts.”

Not only does Chaaban raise concerns over the potential for the co-opting of the tender process by political and business interests, but he also argues that Lebanon is in a weak position to negotiate good contractual terms with prospective companies.

“I don’t think any rational investor will opt for arrangements that are favorable to the local government,” he says. One of the several justifications Chaaban offers for his skepticism is rooted in what he says is the Lebanese government’s terrible track record in honoring its contractual agreements. He cites the telecommunications debacle in the early 2000s — the last time the networks were up for privatization — when France Telecom was awarded $266 million by an international court that found Lebanon in breach of contract.

Still interested?

“Lebanon’s bad reputation is true,” says Salah Khayat, chief executive officer of the nascent firm Petroleb, the local partner in a consortium that is being put together for a potential bid in Lebanon’s offshore play. But, he adds, “that has a lot to do with who was running the country in the past. There is a huge difference now and things are being done right this time.”

Salah’s uncle Tahseen Khayat is a media magnate who has had an openly caustic relationship with the previous governments of both Rafiq, and later Saad Hariri. Khayat says, however, that this is not reflected in his assessment of the current Lebanese administration. “We are very business orientated, we do not look at any political side of the story… Does my uncle have anything to do with this? We have his full blessing,” he stresses.

Khayat says his own prospective consortium, whose members he declined to name specifically, includes a major company from the Gulf — where his immediate family have decades of experience in the petroleum industries — and three other international players. He argues there has been a high level of global interest in the incipient sector which is confirmed by Sverre Strandenes, executive vice president multi-client for PGS (the company that has conducted the most detailed seismic studies of Lebanon’s seabeds). He says, “There has been good interest [in data on Lebanon’s fields].”

Minister Bassil has also alluded to “serious interest” from Chinese, European, American and Russian firms, while the Iranian news agency Fars has reported that Tehran is seeking greater cooperation with Lebanon in the energy sector, especially regarding exploration.

Negotiating the nitty-gritty

Whilst the IOCs are now analyzing their data, forming their alliances and devising their strategies, they will soon knock on the door for access to Lebanon’s waters. When this happens the government will find itself at the bargaining table with some seasoned and incredibly powerful players. In the coming months the PA and the MoEW will be detailing the mechanisms by which the prospective consortiums and the government will divvy up the spoils of any discoveries using a combination of royalties, concessions and Product Sharing Agreements (PSA) — the method of sharing extracted resources between the government and oil companies.

PDC’s Aran shares Chaaban’s view that Lebanon will have to play smart if it is to seal deals that will ultimately benefit the nation. “PSAs are like any market with a buyer and a seller. Lebanon is a seller so they have got to attract the companies. They will need to have low taxes and low royalties. If you are [the government] sitting in Angola, the Gulf or Khazakstan, somewhere very highly prospective, you are going to say virtually all of the money is going to come to us. Lebanon is in a weaker position,” he argues.

Aran does however also argue that Lebanon has some trump cards it can wield to lure in prospective companies. Perhaps most important is an easily accessible and sizeable market for any future production. As Petroleb’s Khayat explains, “Gas infrastructure is rather expensive. The price of gas is in its transportation.”

Lebanon is itself in dire need of cheaper more efficient fuel supplies for its dysfunctional energy sector, which is almost entirely dependent on fuel imports. In the first ten months of 2011 alone the Ministry of Finance reimbursed Electricité du Liban (EDL) LL2.1 trillion ($1.37 billion) for fuel and gas purchases, marking a 44 percent increase on the same period the previous year. Making matters worse, the finance minister has predicted the total deficit of EDL at $2 billion.

To service this domestic market Lebanon already has the infrastructure in the Beddawi and Zahrani plants to burn natural gas, and for the export of any excess reserves it is connected to the Arab Gas Pipeline (although the viability of this depends on political and security developments in Syria).

Development of the natural gas infrastructure features highly in a 2010 policy paper for the MoEW. The establishment of a Liquified Natural Gas (LNG) terminal, the conversion or building of most power plants to run on natural gas and the construction of a coastal natural gas pipeline running between Beddawi power plant in the north and Zahrani power plant in the south are among the projects planned.

Lebanon’s somewhat colorful history of internal strife and regional conflagrations is always going to sit pretty high on a prospective investor’s risk assessment, which is further compounded by Lebanon and Israel’s disagreement over where the boundaries of their EEZs fall. Add to this a lack of proven reserves and questions over governance, and “there are enough reasons not to invest,” in the words of consultant Aran. In such an environment the attractive markets for future discoveries are a strong bargaining chip. “It’s a sales job. You are in competition for exploration dollars. It’s like selling a house. If you have a small garden you say, yes but it’s a lovely view,” he reasons.

Casting a glance several years down the line beyond the exploration phase lie perhaps the greatest uncertainties and potential for ruin. Whilst the fate of any drilling expeditions cannot be realistically foretold, the prospect of a massive hydrocarbon windfall is very real. Based on a price of $120 per barrel, independent energy consultant and Secretary General of the World Energy Council’s (WEC) Lebanon Member Committee, Roudi Baroudi, predicted in a 2008 study that Lebanon could expect to enjoy a bounty of LL211 trillion, ($140 billion dollars) over a 20-year period from its offshore oil and gas reserves.

Oil’s curse

For a country with a national debt of more than $50 billion — exceeding 130 percent of gross domestic product — and a near complete reliance on fuel imports to meet its energy needs, the discovery of oil or gas might sound like a panacea. The pitfalls of transitioning into a resource dependant economy, however, are significant.

The major worry is that Lebanon may catch a variant of what is called ‘The Dutch Disease’, which, broadly speaking, is the decline of other economic sectors — usually manufacturing and agriculture — associated with the increased exploitation of natural resources. The basic premise is that increased resource revenue will inflate the value of the local currency and make other exports less competitive, while at the same time economic emphasis in that one area will undermine development in other sectors.

“The economy will be geared towards one sector which will absorb all the resources and expertise and the attention of policy makers, which would make investments in industry and agriculture even less than now,” says economist Chaaban.

Nigeria is among the textbook examples of a resource boom gone wrong: narrow economic focus on oil exploitation through the later half of the last century led to a steep decline in agriculture and other economic sectors, such that today the country’s GDP is actually in the range of what it was in the 1960s. So while there has been little net gain in overall national wealth, what has happened is wealth and wealth generation have become highly concentrated in and around the oil industry, leaving the vast majority of the country much worse off than they were before the resource boom.

Securing the piggy bank

Abou Khalil at the MoEW says the ministry has incorporated the creation of a sovereign wealth fund (SWF) into the Offshore Petroleum Resources Law so as to counter the threat of Dutch Disease, fiscal profligacy and political manipulation of the revenue.

In a January 23 meeting with the Association of Banks in Lebanon, Prime Minister Najib Mikati announced that the revenues from the fund will go towards reducing the public debt-to-GDP ratio to 60 percent — it currently exceeds 130 percent — before fulfilling any other expenditures. While the stipulation for an SWF is welcomed across the board as a necessary measure, the politicians are in no hurry to realize its creation.

“It isn’t a very imminent question… I strongly believe we have time,” says Abou Khalil, and in a rare note of agreement opposition MP Qabbani states: “There won’t be any funds for the coming six or seven years, why fight over [the SWF] if there won’t be any funds in that time.”

Their aversion to tackling the thorny questions over the nature of the SWF and its management is understandable due to the political wrangling that is bound to ensue. Deciding where such a potentially handsome hoard of cash will reside and under whose purview will certainly set a cat amongst the pigeons in the circus of Lebanese politicians. So, to get the current Offshore Petroleum Resources Law passed, the issue has essentially been kicked into the long grass.

Some argue, however, that the creation of the SWF is a pressing concern that should not be avoided. Energy consultant, Baroudi, says, “The most important [decree] is to pass a law to create the sovereign wealth fund. This should not wait. It is not important just to explore and produce but you need to protect the wealth.”

Ashby Monk, a visiting research associate at the University of Oxford School of Geography and the Environment and co-director of the Oxford SWF project, is a global authority on SWFs. He concedes that while it is not necessary to have people “twiddling their thumbs” at the SWF now, “You would want the legal framework set up before hand. That is an ideal. The earlier you articulate the regulatory framework, where it is going to be housed, etcetera, the better.”

An SWF is also not a cure-all for potential abuses derived from hydrocarbon revenues, as there are ample examples globally of mismanaged SWFs. In compiling a SWF scoreboard for his book, ‘Sovereign Wealth Funds: Threat or Salvation?’, Edwin Truman found that around 57 percent of the funds had guidelines integrating the use of their earnings, but only around a quarter consistently followed them.

The prospective future

Even in the most optimistic assessments, Lebanon will not be reaping the fruits of its labor in the hydrocarbon sector for two to three years, and in reality it is more likely to be five to 10 (assuming there are actually commercially viable fields to be drilled).

The allure of the petrodollars may be a dizzying prospect, but its capacity to further empower corruption in the nation’s politics and blight other sectors of the economy are grave threats that cannot be ignored. As the nation careens ahead on its hydrocarbon adventures there is an urgency to ensure that the ship is setting sail on course. There will be no second chance.

February 3, 2012 0 comments

Society

Another go round

by Nadim Mehanna February 3, 2012

written by Nadim Mehanna

Recent years have seen big brand car manufacturers suffering fits of nostalgia, digging through their archives for earlier success stories deserving of a second life. These highly popular updated classics might well have taken inspiration from Porsche, who has had consistent success for nearly five decades with the famous 911 model, born in Zuffenhausen in 1963. Today, just one year shy of its 50th anniversary, Porsche has launched another all-new 911 Carrera. More distinctive, elegant and powerful than ever, it has also made moves toward environmental friendliness, proving that the marriage between vintage style and contemporary technology is a durable one.

Completely redesigned, the 2012 Carrera is wider, longer and flatter than previous versions, and has an ideal height-to-width ratio that sketches its sportier, more athletic curves. Weight reduction was a priority in its development, with doors, luggage and engine compartment lids made of aluminum, highlighting the Porsche’s ‘Intelligent Performance’, merging high functionality with reduced emissions and better fuel efficiency. It has the world’s first seven-speed manual transmission for a passenger car, with the dual clutch automated-manual Porsche Doppelkupplungsgetriebe gearbox, better known as the PDK, coming as standard.

But the 2012 911 is only the latest in a string of strong historical reissues from various brands, many of which, unlike the 911, have spent time out of production.

With over 21 million vehicles manufactured, the VW Beetle holds the record for the longest production run of a single car. It has weathered the storms of a world war, coal and material shortages, and weak buying power throughout its history – its secret? Good performance in all climatic conditions and on any type of terrain, and a global supply of replacement parts. The Beetle made its comeback in the early 1990s with a modernized design of the classic model that won several awards, such as “Design of the Century Award” from the Industrial Designers of America.

Another globally recognized car, born in 1959, is the classic Morris Mini-Minor with its 848 cc engine and 4-speed manual gearbox. With its distinctive profile, strong performance and mass-market appeal, Mini quickly developed into an icon that enjoyed worldwide popularity. By March 1965, one million vehicles had been produced. In 1994, BMW Group acquired Mini, and by 2001 the new version was on the roads: larger and heavier, it had shifted from a city car to a compact car but was still true to the iconic design. Very different from the Mini, the Chevrolet Camaro is one of the most popular sport coupés in the automotive industry – muscular, aggressive, powerful and loud. Born in 1967, it was famed for being beautiful, practical and affordable, with a performance that could rival European Gran Turismos. The first Camaro was powered by a 3.2 liter V6 engine that produced 155 horsepower (hp), with the option of a 5.4 liter V8 engine that delivered 275 hp. Production of the classic sport coupe was steady for 36 years until the discontinuation of the fourth generation in 2002. Eight years later, the all-new Chevrolet Camaro made its comeback with a modern design, and more engine power (standard Direct Injection 3.6L V6 engine, 323 hp, SS version’s 6.2L V8 engine, 462 hp).

Finally there was the Dodge Challenger, the quintessential muscle car: bold, stylish, handsome and powerful, with its legendary V8 426 Hemi engine that yielded a mighty 425 hp. But because of rapidly rising insurance premiums and gas shortages, and the oil crisis following the 1973 war in the Middle East, demand for muscle cars decreased and production of the Dodge Challenger ended in 1974. The year 2008, however, saw the Challenger’s comeback. Styled like the original 1970 to 1974 generation, the new muscle car was taller, bulkier, heavier, and packed with luxury features as well as new technologies. Powered by a 6.1 liter 425-hp Hemi V8 engine, it did zero to 100 kilometers per hour in 5.1 seconds.

Whatever the story behind the model, these remakes allow their manufacturers to tap into a valuable market that spans brand loyalty and adds a contemporary spin, allowing them to sell an updated idea at premium prices. Be it a facelift or something more, the remakes will probably keep on coming for yet another ride.

February 3, 2012 0 comments

Economics & Policy

The dreary dawn of 2012

by Fabio Scacciavillani February 3, 2012

written by Fabio Scacciavillani

More than four years after a wave of delinquencies on subprime mortgages in the United States triggered the gravest financial crisis of modern times, the global economy is still reeling from the fallout, with no end in sight. At the beginning of 2011, hopes of a gradual strengthening of the macroeconomic outlook were nurtured by exceptional policy measures, central bank interest rates in major developed economies being either virtually at zero or slightly above, and the balance sheets of the US Federal Reserve, the European Central Bank (ECB) and the Bank of England expanding massively to flood the banking system with liquidity.

Yet, one after the other, the economies of all major developed countries stalled in early 2011 following disruptions in the global supply chain from the earthquake and tsunami in Japan, the Fed announcing the end of its second round of ‘quantitative easing’ in the US and the jump in energy prices following the Arab uprisings. Even emerging markets, which had been tightening their monetary policies to counter inflationary pressure, suffered the consequences on their growth rates.

Contrary to their rosy expectations, financial market professionals have come to realize that the emergency fiscal and monetary measures had only temporary effects. The rhetoric of the “soft patch” gave way to the reality of an epochal fiscal crisis on both sides of the Atlantic, and Japan. Stock markets wobbled and after weeks of heightened volatility started a declining trend, which is still firmly in place entering 2012. Concerted efforts by policy makers to bring the situation under control, within the framework of the G20, have so far shown only ephemeral results. Deeper cooperation to reach a long-lasting solution has been elusive.

A growing transatlantic divergence has materialized in recent months and seems to have widened at the turn of the new year. The US economy was gaining traction in the fourth quarter and is entering 2012 on an upbeat note. Gross domestic product growth is expected to be above 2 percent, with monthly private sector job growth having averaged 155,000 over the past five quarters (though some of this has been seasonal and temporary employment). By contrast the Euro area is on the brink of a recession, due to government austerity measures and a credit crunch triggered by anxious banks saddled with suspect sovereign debt and loan provisioning. In the emerging world, Latin America is doing marginally better (for instance Brazil and Colombia), but Eastern Europe is looking very sick, with Hungary in default and mired in a deep political crisis. Asia is somewhere in the middle, but appears to be following more the track of Europe than the Americas; China may be the exception, though economic data there shows progressive weakening, while Japan does seem to have rolled over anew – the much touted ‘reconstruction effort’ recovery is feebler than expected.

In the Gulf, balanced public finances and sovereign backing of the banking system have so far mitigated much of the impact of the second phase of the Great Recession — indeed, thanks to higher energy prices the net effect has been positive. Governments have maintained a steady course, reiterating the objective of developing a diversified economy and broadening employment for the large young cohorts entering the labor market.

Looking ahead, the illusion of a quick fix has given way to the awareness that overcoming the Great Recession will probably take several years: the major mature economies need to undergo a painful process to purge their financial system of toxic assets and reduce the unsustainable level of leverage in their banking system. At the same time fiscal excesses have to be reined in.

Crucially, prospects for 2012 have little to do with economics and a lot to do with politics. In particular the two largest economies, the US and China, will undergo a defining moment almost at the same time. In the US the November presidential and Congressional elections will be the dominant factor driving major fiscal policy decisions.

In China, presumably in October, the 18th Congress of the Communist Party, held every five years, will pick a new Central Committee that in turn will “elect” a new Politburo of about 25 members. For the first time in 20 years, President Hu Jintao and the Prime Minister Wen Jiabao will not be part of it. And when, in 2013, they retire from active politics, the process will have produced the most radical change of leadership in a decade. Combined with the appointment of a new chief executive in Hong Kong and the presidential elections in Russia, the repercussions for Asia could hardly be more momentous.

Earlier in the year France will hold the presidential elections, which might considerably change the equation in the balance of power within the European Union. A new Socialist president will be less inclined to step in sync with German Chancellor Angela Merkel’s European stewardship. And the EU will indeed be the major focus because of the delicate battle still underway to redefine the governance of the Eurozone and the EU in general. The Latin profligacy will confront German (and Nordic) austerity in a showdown involving the rewriting of the fundamental treaties and the mandate of the ECB. The process will be neither quick nor painless as the dozens of “summits” held so far on the topic demonstrate.

While the political and electoral dust settles, the prevailing baseline scenario is another year of mild global slowdown, with hopes of a potential positive surprise from the US. Nevertheless, financial markets will remain in high alert mode due to two tail events that, although highly remote, would have such a devastating impact as to push the world economy into a worse recession than 1929. One is the breakup of the euro – which nobody wants but could be set in motion by a snowball effect originating from the default of a major bank – while the other, less talked about, is a collapse of the real estate market in China and/or the explosion of the local government debt, which on the current trajectory is unsustainable. In truth the gravity-defying real estate prices in China have constituted a major concern for years if not decades. But this observation might not be of much comfort: it was also the case for the housing bubble in the developed world before 2007.

February 3, 2012 0 comments

Society

A size of the times

by Michael Karam February 3, 2012

written by Michael Karam

There was a time when a young man was given a watch on his 21st birthday, something half decent and Swiss, and that was, basically, that. He would remove the Timex or Seiko that got him through school, put on his grown-up watch and enter the real world.

Our man would wear it on all occasions, and if it were not waterproof, he would simply take it off before swimming. It would have been around 34-36mm in diameter. His next watch might be a gift on his 50th birthday, when his wife would have bought him something out of the top drawer – a Patek Philippe Calatrava in white gold, perhaps.

That was then. Now all bets are off and watches have become very big business. They no longer just tell the time; they can also telegraph who we like to think we are. Just pick up any copy of the International Herald Tribune and you will see just how much ad space is devoted to luxury (and not-so-luxury) timepieces. Indeed, so powerful is the luxury watch advertising dollar that the global broadsheets run annual, or in some cases biannual, supplements charting the latest industry trends.

The latest figures available, in 2010, show the Swiss watch industry exported 26.1 million finished watches with a value of SF15.1 billion ($15.9 billion), a growth of 20.4 percent and 22.7 percent in exports and revenues, respectively, compared to 2009. Figures for the first half of 2011 should exceed those for the same period in 2010.

In the meantime, man has become less stuffy, and watches are one of the few accessories that allow him to express himself. When he heads to the beach, today’s chap might consult his collection and choose a watch designed not only to function at depths that would crush a human skull but also deliver just the right dose of bling needed to cavort around the pool bar.

We no longer feel silly wearing watches designed for fighter pilots, members of the Special Forces or astronauts. Indeed Jaeger LeCoultre, that most sober of Swiss watchmakers, has produced a special edition Master Compressor for both the United States Navy Seals and Chelsea football club, while Omega has been hugely successful in associating its long-serving Seamaster to the James Bond franchise. The message is clear, simple and unambiguous: even if you are an insurance claims adjuster, you can wear a sense of adventure on your wrist. And in this revolution, size suddenly matters.

What was considered more than acceptable 20 years ago would now be considered weedy. Panerai, the Italian, Swiss-made brand, led the way in the oversized watch segment in the late 1990s. Rolex, who for so long set a 40mm limit on its classic sports watches, have bowed to popular demand with the classic Explorer and Explorer II, which were stubbornly set at 36mm and 40mm, respectively, for decades. In the last two years they have morphed to 39mm and 42mm. Omega’s Planet Ocean measures in at 45.5mm, while Graham has an SAS watch abandoning all sobriety, which, if you include the lever, has a staggering 60mm diameter.

Even Jaeger LeCoultre’s Reverso, arguably one of the most famous watches in the world and one designed to be understated, comes in a ‘jumbo’ version, the Grande Reverso 976 (I am reliably assured by salesmen in Beirut that the classic man’s model is now being sold as a ladies’ watch, as is the 34mm Rolex Air King).

Tastes, however, are changing. Like the oak revolution in wine, the size novelty is waning and discerning consumers are eyeing watches that speak more to them than the public. In these uncertain economic times, a bit of taste can do no harm.

February 3, 2012 0 comments

Economics & Policy

A lost cause?

by Youssef Zbib February 3, 2012

written by Youssef Zbib

The talk of labor nationalization in the Gulf Cooperation Council — ‘Saudization’, ‘Emiratization’, ‘Qatarization’, etcetera — has dominated national policies and development plans for the past 20 years. Qatar’s national vision for 2030, for example, explicitly mentions “increased and diversified participation of Qataris in the workforce” as a goal for human development.

Qataris have not taken to the streets to demand more jobs, but the protests that have shaken Bahrain and sporadically erupted in the Eastern Province of Saudi Arabia were, at least partially, an expression of economic grievances, specifically high rates of unemployment among the youth of both countries.

To stave off the rumblings of potential uprisings, oil-rich regimes of the GCC have a two-pronged approach: defuse popular resentment by injecting enormous sums of money in the form of benefits and salary increases for the public sector, while brutally cracking down on dissent. In February 2011, Saudi King Abdullah bin Abdul Aziz ordered $37 billion as cash handouts and benefits, followed by a royal decree to double the monthly salary for all of the kingdom’s public sector employees for the month of March of the same year. More recently, an immense sum of $184 billion was also planned for expenditure in the 2012 budget plan.

The Kuwaiti government has embarked on a similar spending extravaganza by committing to give every family free food rations until the end of March 2013 in addition to a sum of $3,500, even though Kuwait has not witnessed near the same scale of public outcry as in Bahrain or even Saudi Arabia.

While it is too early to judge the efficiency of the planned public expenditure in creating jobs in Saudi Arabia, economists have long warned that the ‘munificence’ of GCC rulers will keep their populations reliant on state subsidies and an inflated public sector, making them less likely to seek ‘real’ jobs in the private sector — an outcome which contradicts the stated aims of labor nationalization policies.

A closer look at these policies reveals that they face many obstacles, and even a certain amount of reluctance on the part of some GCC governments to pursue them.

Doomed by oil

The windfall created by the oil boom, which lasted from 1973 until the early 1980s, resulted in the creation of a large number of jobs that attracted foreigners who were more skilled than nationals, or simply willing to work for less. A study titled “Local Workers in the GCC countries, assets or liabilities?” published in 2000 estimated that 25 percent of the 20 million migrant workers in the world in the 1980s were located in Gulf countries, while more recently expatriates make up at least 50 percent of the total workforce in the six GCC states, according to the latest national labor statistics (see table).

This has proven detrimental to the local labor force: as low-cost foreign labor continues to skew the salary scale, it has become more difficult for nationals to find a job in the private sector that meets their expectations, according to Zafiris Tzannatos, senior advisor for the Arab States at the International Labour Organization (ILO) [see story page 54].

The public sector, by contrast, is largely staffed by locals, but inflated salaries and flexible working hours have done nothing to change the work culture of Gulf Arabs or prepare them to compete in the private sector job market.

“People in Kuwait still prefer a job in the public sector because they get paid more, work for shorter hours and can’t get fired,” said Yassine al-Farsi of the Kuwait Trade Union Federation, speaking on the margins of a workshop recently organized by the ILO in Beirut.

According to a study published by the Brookings Doha Center (BDC) in December 2011, employment in the public sector makes up 83 percent and 85 percent of the total employment of Qatari and Emirati nationals, respectively. The predominance of youth in the public sector is another indication that it continues to be the favorite destination for young job seekers. According to the same study, 60 percent of Emiratis between the ages of 25 and 34 are employed in the public administration and defense sectors, while the same proportion rises to 68 percent for those between the ages of 20 and 24.

The situation is similar in Kuwait, according to a 2010 survey published in 2011 by Silatech, a para-governmental Qatari foundation that aims to promote employment. The report shows 83 percent of the surveyed Kuwaitis preferred working for the government as opposed to the private sector.

Young people’s unwillingness or inability to compete in the private sector contributes to high unemployment rates among young people in the Gulf, according to Tzannatos, who suggested that the public sector cannot absorb such large numbers of new job seekers. Young job seekers may have lukewarm feelings towards the private sector, and the feeling seems mutual among their would-be employers. The problem is also partly due to the fact that the private sector, sensitive to demands of productivity and competitiveness, cannot afford the same incentives as its public counterpart, according to the BDC 2011 report.

More than a lack of skills

A highly competitive private sector needs employees with high-level skills that job seeking nationals might not necessarily have, as reported in several employer surveys.

To accommodate, official nationalization schemes have sought to overhaul educational infrastructure in order to equip job seekers with suitable qualifications for the job market.

The presence of Western-style education is significant in Qatar and the UAE; both countries host local branches of leading Western institutions of higher education, otherwise known as ‘satellite universities’. Abu Dhabi is home to satellite campuses of the Sorbonne, New York Film Academy and New York University, while Qatar’s Education City and Dubai’s Knowledge Village hold prominent institutions such as branches of Texas A&M and Georgetown University.

But this endeavor is still flawed, according to the BDC 2011 report, as the majority of graduates plunge into the job market without having a clear understanding of the available job opportunities or the skills they need to acquire. The study advised governments and educational institutions in Qatar and the UAE to “increase young people’s employability, build their soft skills and effectively advise them of their employment rights,” going as far as recommending the introduction of “mandatory” internship programs at the high school and university levels.

But in certain instances, the limits of nationalization processes might be more a matter of lack of commitment on the part of certain governments than a failure to devise the most suitable practices, as not all GCC governments seem to be pursuing nationalization policies with the same enthusiasm.

Saudi Arabia seemed to have stepped up its drive to limit the domination of expatriates in the labor market with the introduction of the ‘Nitaqat Plan’ in 2011, whereby firms that fail to ‘Saudize’ their workforce face restrictions on hiring expatriates.

Other governments, however, have adopted approaches that are much more favorable to the private sector. Both Bahrain and Oman have taken the road towards removing obstacles to private investment, both foreign and local, in the hopes that job creation will follow, according to Marc Valeri, a lecturer on the political economy of the Middle East at the University of Exeter.

A long way to go

“All the GCC governments — except Qatar, and probably also the UAE — face, in one way or another, the same dilemma: the private sector, especially the leading business families, is a key ally of the regimes, and they need their support; the problem is that the [labor] nationalization policies are contradictory to the interests of these business actors,” Valeri adds. Bahrain’s economic vision for the year 2030, as formulated by the kingdom’s Economic Development Board in 2005, makes no mention of limiting the influx of expatriate laborers. Instead, it promises to increase employment among Bahrainis by shifting to “an economy driven by a thriving private sector — where productive enterprises, engaged in high-value-added activities, offer attractive career opportunities to suitably skilled Bahrainis.”

The fact that expatriates make up 74 percent of Bahrian’s workforce and 54 percent of the total population according to the official census of 2010 — in addition to the unreported number of naturalized foreigners who work in the ranks of the security and military forces — throws into question the premise that economic diversification is taking place to the benefit of Bahrainis.

The governments of Bahrain and the rest of the GCC still have a long way to go to reform the labor market, while preserving the balance between a productive private sector and their people’s welfare. This raises a legitimate question about the extent to which the benefit of the people figures on the official agenda of labor nationalization.

“The fact that most cabinet members are involved directly or indirectly in business explains… why the jobs’ nationalization policies cannot be maintained as such in the long term,” says Valeri. “These decision-making people had to avoid questions being asked about the nation’s general interests they are supposed to promote like the Bahrainization or Omanization policies, and the particular interests they have defended as businessmen.”

February 3, 2012 0 comments

Society

Fostering homegrown flare

by Ellen Hardy February 3, 2012

written by Ellen Hardy

To the untutored eye, the minimalist Starch boutique looks much like any other high fashion store. Its rails are stocked with avant-garde designs from up-and-coming names – accessories by Dina Khalifé, urban fashion from Mira Hayek and designs by Marc Dibeh, previously known for his ‘Love the Bird’ lamp that subtly incorporates a detachable sex toy. But there is a key difference between Starch and the innumerable gleaming multi-brand boutiques mushrooming all over downtown Beirut. Uniquely, Starch stocks exclusively Lebanese designers; what’s more, it is a non-profit foundation dedicated to their advancement.

Once a year since 2008, Starch has scouted four to six young Lebanese designers and given them a crash course in creating and marketing their collections, which are then sold exclusively at the Starch boutique. Members also participate in international exchanges, such as the recent seminar organized by Starch at the American University of Beirut, ‘London Meets Beirut’, with representatives of the international design magazine Wallpaper*, the London College of Fashion and the global designers platform Not Just a Label. Starch, like an increasing number of artistic foundations, was devised to help Lebanese talent leapfrog over the handicaps of setting up shop in Beirut.

Tala Hajjar co-founded Starch with fashion designer Rabih Kayrouz when they became tired of seeing design graduates struggle to realize their ambitions. Hajjar, who was Kayrouz’s public relations and marketing manager for three years, explains that in fashion college, “You learn how to cut patterns, to design, everything related to the technical side of designing, but never really the business aspect.” This is a global problem, but in Lebanon specifically, “You don’t learn art and design from a young age… so you’re already starting off a few steps behind many other designers worldwide,” she says. The tastes of the local market, too, have a stultifying effect on bright young fashion minds. “You drive down the highway and every billboard left and right is just another bling dress… you make much more money [doing made-to-measure] and your eye has got so used to [it] you will lose your identity and your creativity,” says Hajjar. Finally, financial and visa restrictions on travel mean that Lebanese designers’ influences and experiences are limited and they can be seen as provincial. Even those designers who stick to their guns suffer inequalities in production and delivery, which make multi-brand stores unwilling to take local pieces.

Thus, Starch aims to provide some much-needed business and creative support and an international forum for exchange and networking – an education that has helped launch such success stories as Krikor Jabotian and Lara Khoury. It is a trend reflected in long-established foundations like Ashkal Alwan, the Lebanese Association for Plastic Arts, and brand new ones like The Creative Space, which offers haute couture training to young people from diverse backgrounds.

The financial potential of homegrown fashion and design is significant, in a time of global crisis for luxury industries, and with sustained foreign interest in Lebanese designers. Whereas people might once have asked, “Why am I paying $300 for a young designer’s top,” says Hajjar, now “people are actually spending this money… everyone’s after that exclusive piece that has a romantic story behind it.”

For now, it is nonprofits rather than businesses or the government that are investing in Lebanon’s talent pool. Starch’s boutique space is a donation from Solidere, but Hajjar is a solo full-time volunteer and the foundation is not yet officially registered. As of this year, Starch designers will have to invest a percentage of the profit made on their collections back into the foundation.

Hajjar is now focused on funding to grow her team and find a permanent location, saying: “Now I can go up to anyone with my grant proposal and say this is what we’ve done in the last four years, as opposed to this is what we aspire to do.”

February 3, 2012 0 comments

Economics & Policy

Q & A – Zafiris Tzannatos

by Youssef Zbib February 3, 2012

written by Youssef Zbib

The nationalization of the private sector is at the center of the Gulf Cooperation Council governments’ employment policies. Executive asked Zafiris Tzannatos, advisor for the Arab states at the International Labour Organization (ILO), to discuss this endeavor.

E Is the private sector in the GCC creating enough jobs?

Employment in the private sector in the GCC countries has been expanding much faster than the increase in the national labor force for many decades. In the mid 1970s there were 50 percent more national workers than migrant workers (1.7 million versus 1.1 million). Now there are no more than 6 million national workers compared to nearly 14 million migrant workers. This means that the number of migrant workers – mostly in the private sector – increased by 14 times in the last 35 years.

E Is the problem in the GCC one specifically of youth unemployment?

The problem in the GCC is not confined to youth unemployment though it registers as such because older workers are gradually absorbed into the public sector.

E What are the socioeconomic risks of having a population that is reliant on foreign labor?

The proven outcome by now, has to do with the lack of diversification, as the economy is locked into a low productivity/low wage equilibrium.

On the social side, given their expectation to get a job in the public sector, nationals under-invest in their education. Also, opportunities for women to work depend more crucially on education than for men. In some GCC countries, for every male university student there are three females.

E Is it important to tie the nationalization of the labor force with economic diversification?

Nationalization of labor is very important both for economic diversification and… changing the course of the economy from a rentier state to one based on legitimate profit seeking. For example, it may not be an exaggeration to say that if GCC countries had capital intensive techniques and knowledge-based economies, productivity and wages would increase, thus making jobs in the private sector more appealing to nationals.

E How successful have investments in education been?

Why should nationals spend time and effort to learn English or get accustomed to work in complex environments when jobs in the public sector are guaranteed as a right deriving from citizenry rather than from merit and hard work? The problem here lies more on the demand for education by nationals than on the supply of education – schools and universities. In this case offering a high quality education may resemble offering a luxurious meal to someone who already had his dinner.

February 3, 2012 0 comments