Society

Another go round

by Nadim Mehanna
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.

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Economics & Policy

The dreary dawn of 2012

by Fabio Scacciavillani
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.

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Society

A size of the times

by Michael Karam
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.

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Economics & Policy

A lost cause?

by Youssef Zbib
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.” 

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Society

Fostering homegrown flare

by Ellen Hardy
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.”

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Economics & Policy

Q & A – Zafiris Tzannatos

by Youssef Zbib
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.

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Business

From Jal El Dib to Disney World?

by Ellen Hardy
written by Ellen Hardy

Growing up in Jal El Dib during the civil war, Mayella Zard remembers, “everybody was crying, but I was thinking I was going to become a princess… all my focus was on my costumes and makeup.” Her enterprising parents organized theater shows to occupy and entertain neighborhood children during difficult times, to great success. Even when the war ended, the shows remained a fixture of the local community. When Zard graduated from university with a degree in business auditing and finance, she saw the potential of her childhood pleasures. With just one other staff member, she set out to professionalize the productions and expand their audiences in order to turn a profit. Eleven years later, OM2 has 35 full time staff on its payroll and an international network of freelancers who contribute to the productions, seen by tens of thousands of children in Lebanon and an increasing number across the region.

OM2 produces one or two plays every year, always on a social or educational theme: 2012’s is the environment. Productions are shown at the company’s own theater in Antelias, the Odeon, and also tour the country, visiting schools in more than 40 municipalities. OM2 has also expanded into creating tailor-made productions for corporate clients, and for voluntary associations like the Red Cross. Of the 25 or so theater companies in operation in Lebanon, estimates Zard, OM2 is one of the few producing original productions in Arabic. Her mother, Giselle, writes all the scripts, often in consultation with child psychiatrists. OM2’s large network of craftsmen and creatives is also important in putting together the scenography and costumes possible on each budget.

Building a functioning network of state and private clients took years of hard graft. When OM2 started out, Zard had neither data on her market nor a map of schools in Lebanon, so she did the rounds herself. It might have felt like she was visiting “a thousand schools a year”, but she managed to build relationships with schools and municipalities so that they would commit to the production every year. She also encouraged the wider public, sometimes through a proxy who would sell tickets for a commission. Over the years, OM2 has come to the attention of the government — one of the first productions was held in the presidential palace — and of banks and other large businesses.

International dreams

Zard estimates that OM2 entertains around 100,000 children in Lebanon each year, at 10,000 lira ($6.63) per ticket: a conservative turnover estimate of $663,000, not taking into account adult audiences, supplementary projects and productions overseas; for example, OM2 has put on productions in the Jerash festival in Jordan for the past six years. In recent years OM2 has started branching out into books related to the productions, and will soon be launching an animated TV character, Maryam, who represents OM2’s values in the live theater productions, in books and online. Recent talks have raised the possibility of franchising the company — schools in Qatar are looking to reproduce the experience for their children — making the wartime hobby for a family in Jal El Dib into a region-wide player in the big business of children’s entertainment. 

Zard still retains much of her original enthusiasm for the magic of the theater that made such an impression on her as a child. Asked what she sees ahead for her business, she focuses instantly on the quality and technology of the productions. 

“Disney World is a thing I think about,” she says. “All we need is funds, and not just thousands, millions sometimes.” And not just funds, but as many staff as the business can support. “My mum used to ask me, ‘what do you want for a gift on your birthday?’,” smiles Zard. “I used to say, one extra employee!”

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Finance

Culling the small fish

by Joe Dyke
written by Joe Dyke

As you walk into Hissam Exchange in Hamra the first thing you see is the frame on the wall. Encased behind the glass is a certificate declaring that the business is permitted to trade currencies by the Lebanese government. The family company has been operating in Beirut for nearly a decade, but the room is still barely big enough for four people — working on such a small scale there is little excess.

Yet Hissam’s family business may soon be squeezed out of existence. Under new plans to be introduced by Banque du Liban (BDL), Lebanon’s central bank, even the smallest money changers (classified as Category B) will have to hold at least LL500 million ($330,000) in capital to operate, up from the current LL100 million ($66,000). Larger ones deemed Category A will have to hold LL750 million ($500,000) in capital to continue to operate, up from LL250 million ($166,000). Hissam’s brother Sakar admits that the new rules will almost certainly force them to close down. “If I had $330,000 I would not be here. I would be living up in the mountains with my family,” he jokes.

They will not be the only ones. Mahmoud Halawi, head of the Lebanese Money Changers Association (LMCA), estimates that the new regulations might put up to three quarters of their members out of business. “Out of 400 [licensed] money changers, we estimate that up to 300 could close because of feasibility — there is not enough work in Lebanon for this,” he tells Executive.

Halawi claims that the hike is aimed at forcing out smaller companies, but believes it would hurt the industry as a whole. “Even the remaining changers will not benefit because the big exchangers cannot spread out as much as small ones, so in the end we will not be covering the whole market.”

A conspicuous cull

Hissam Exchange and other legitimate businesses may be the victims of a slew of bad press brought on by a minority of exchanges taking part in money laundering activities that eventually caught the eye of international regulators and tarnished the banking sector’s image. 

The continued concern over the lack of regulation on the influx of currency from Syria was exacerbated in December when the United States Department of the Treasury highlighted the role of money changers in its allegations against the Lebanese Canadian Bank (LCB). The US federal government has now filed a suit in Manhattan Federal Court which seeks $480 million in damages from the now sold out LCB and two Beirut money changing businesses, the Hassan Ayash Exchange Co. and Ellissa Holding.

Paul Morcos, founder of the law firm, Justicia Beirut Consult, and an advisor who works closely with the BDL, is in favor of the overall plans but believes the raising of the capital limit has more to do with improving foreign relations than cracking down on fraud. 

“We are facing demands from the international community to enhance the system. Lately many exchange industries have been mentioned in American reports and that’s why the banking authorities are taking these measures; in order to show they are controlling the exchange,” he says. “The capital increase will massively restrict the establishment of exchange and negatively affect exchange business.”

Halawi has been pleading with the BDL to reconsider their plans, urging them to introduce the rules over a period of time, rather than as an instant hike. “After we discovered what the Bank was planning we sought a meeting with them and after several requests they agreed and we explained the reasons for rejecting this law,” he says. “We are asking them to decrease the capital limit and extend the time period so that the exchangers can take the plans into account and have 10 years to fulfill the requirements.” 

He believes the government’s plans will cause Lebanon’s already large illegal money changing market to grow as exchangers seek to protect their livelihoods. “In Lebanon we estimate that there are more than 2,000 unlicensed traders and they are only going to increase [if the bill is passed].” The BDL did not respond to repeated requests for comment.

Not blind to the problem

There are however legitimate concerns about the industry that are also being addressed. A larger exchange dealer also in Hamra, who did not wish to be named, claimed he was glad the regulations were to be introduced as it could help rebuild the confidence of the international community. “We will survive the raise because we are well run. What really affects us is the situation in Syria and the attitude of foreigners to Lebanon. We have stopped accepting Syrian and Iranian currency already but we need more foreigners coming here and changing money.”

The move is the most recent step in the long process of attempting to rein in money laundering in Lebanon, which began with Law 318 regarding commercial banks in 2001. That law defined what constitutes money laundering in the country and established the Special Investigative Commission (SIC) within the BDL to investigate it. 

In the years since, the exchange industry has grown hugely, with larger changers now offering a diverse range of services including FX Trading and share buying, increasing the pressure to impose further regulations. In addition to a rise in capital, the new rules will force money changers to have at least one compliance officer and invest in anti-fraud software. More significantly still, they will be legally obliged to report suspicious transactions. 

Camille Barkho, manager of Amerab Business Solutions — a firm that provides advice to banks and other financial institutions about how to avoid money laundering — believes the idea that money changers are innocent victims in money laundering is ridiculous: “They know… Once they know [about fraud] they might make suggestions to the customer: ‘I cannot do that, but if you want I have a friend with certain commissions who can do it’.”

He adds that there are real concerns about the lack of control over the industry, but admits minimum captial requirements have little to do with the issue. “Let me give you an example: you can go to an exchange dealer, deposit cash in unlimited amounts, then ask for a transfer for a cheque to another country or another bank without you being identified. This is a very clean tool for money launderers.”

Yet regulating the industry will likely be a difficult business, with all the exchange dealers Executive spoke to expressing concern over the lack of information provided by the government. Halawi confirmed that the LMCA is in consultation with the BDL about establishing joint training to help firms understand the new laws and implement the changes.

Some of the industry appears to have started preparing, and Barkho has noticed an increased concern among Lebanese money changers. He claims that until two months ago Amerab had never received any work from the industry, but now money exchangers have been approaching them two to three times per week as companies struggle to comprehend the new regulations. 

First pennies on the dollar

The international pressure to act is so great that these changes may prove to be the first of many. There has also been chatter in the financial world that the government is planning to table an amendment to strengthen Law 318 later this year, with increased powers for the SIC and tougher penalties for offenders among the possible proposals. Under the current laws the SIC is only allowed to point out where institutions are failing to comply with the legislation but can do little to punish them for doing so. 

Morcos says he believes plans may be afoot to take the regulations beyond money exchangers and into other sectors. “There was a plan to control professional bodies in this regard but there are certain handicaps in trying to control non-financial bodies,” he says. “You have to be delicate not to put any handicaps on their operations, especially in terms of professional secrecy.”

Yet, as ever, there is a big difference between writing laws and implementing them. While the government appears keen to improve the laws on money laundering, whether it has the will or means to effectively enforce them remains in question. 

“We have driving laws but still when you go out and drive in Lebanon it is crazy,” Barkho says. “The Lebanese can have very well written policies on anti-money laundering but if they are not implemented, they are nothing.”

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Business

Healthy returns in an ailing society

by Rayya Salem
written by Rayya Salem

Despite billions of petrodollars spent on healthcare in Saudi Arabia, the kingdom’s targets for healthcare service have not been met in recent years. With the government’s push to include more private investment in the field, and Saudi Arabia’s burgeoning demand for medical services in a country that has high rates of diabetes and other ‘lifestyle’ diseases, the kingdom may have the potential to offer the highest returns in the Gulf Cooperation Council to those who can build and operate cost-effective hospitals and medical networks. Thus, models are now emerging in this market — traditionally seen as almost impenetrable — that many are suggesting will offer substantial returns for investors without skimping on quality healthcare.

“Any successful [private healthcare] project which is looking to expand across the GCC should consider a joint venture approach with an experienced partner on the ground,” wrote Mohammed al-Qahtany, chief executive officer, Al Aman Investment of Kuwait, in a 2009 report by Ithmar Capital titled ‘Meeting the GCC Healthcare Challenge 2050’. “This ensures both local support and at the same time enables the project to benefit from the accumulated experience of the organization as a whole. Joint ventures have a successful track record, and this is the way to move forward.” It seems some major investors took notice. 

The doctor strikes a deal

Dr. Sultan Bahabri founded and served as CEO of the 894-bed King Faisal Specialist Hospital in Riyadh; now as chairman of the Riyadh-based Ebram Investments, he has formed a joint venture with the new Beirut-based Rizk Red House Healthcare (RRHH) to develop a chain of 10 specialty hospitals throughout different cities in Saudi Arabia over the next eight to 10 years. The $1.35 billion project was announced in December 2011 after Red House chairman Mazen Beaini, and Bahabri, decided on a strategic vision that would require exceptional medical operating experience. Beaini then looked to Sami Rizk, the former general manager of Ashrafieh’s Rizk Hospital, as the man for the job, and RRHH was formed as a partnership. It is not hard to see why the trio has come together. 

The Saudi government has long planned to transition healthcare from the public to private sector. However, it has been slow to do so and continues to buoy the majority of the industry, as most estimates put government expenditure at more than two-thirds of total healthcare spending. As part of a plan to increase the profile of healthcare in the country, the government announced that an extra-budgetary spending of $18 billion will be allocated to healthcare and social services under a five year plan, begun last May. As part of the initiative, 120 healthcare centers and hospitals will be built and four expanded. 

To reach the target of 3.5 hospital beds per 1000 people by 2014, the kingdom will need to add more than 41,600 beds to its total of 55,000, as of last year. But so far the private sector has been hesitant to make bold moves, as the nature of the capital-intensive industry requires many years before significant returns are seen. 

Bahabri points out that returns for healthcare providers are around 6 to 8 percent worldwide, “but in our region it is about 10 to 12 percent.” In the last three years, he says, some private groups have seen returns of 22 to 25 percent, mainly because governments started to buy those services, a trend that will likely continue. Globally, revenue streams are differentiated according to each medical specialty. For example, diagnostic centers tend to provide exceptionally high returns compared to other domains. “Some specialties make [profit] after three years of operation; [for] some it takes eight years to make money back,” says Rizk.

Saudi Arabia’s health ministry still owns and operates more than 60 percent of hospital beds in the kingdom, but even so, a recent report by management consultants Booz & Co noted that: “many private companies are either majority owned by the government or have government officials on their board in the GCC — private investors will be wary of going head-to-head with such companies.” 

Another reason private sector investment has not surged is because regulation is nascent, with the government announcing in 2010 that it would set up an authority to track private facilities.

Lifting the lid

In March of 2011, King Abdullah issued a number of royal decrees to encourage foreign private investment in healthcare, in which the cap on loans to private hospitals rose from SR50 million ($13.3 million) to SR200 million ($53.3 million).

In fact, though both Ebram and Red House had been doing their own independent research on the Saudi healthcare market, it was not until King Abdullah’s initiatives were announced that the two got in touch. “As a Lebanese company headquartered in Beirut, we were motivated because of the foreign investment incentive,” said Beaini. “Now we have access to government authorities and groups like [Saudi] social security which has billions to invest.”

Mandatory healthcare insurance, which has been an obligation for the private sector since 2009, “will ultimately apply to all Saudi national employees as well,” according to a report on the Saudi healthcare industry by the National Commercial Bank, one of the country’s largest lenders. As of today, an estimated 20 to 30 percent of Saudis have voluntary health insurance according to Bahabri.

As such, the joint venture plans to construct hospitals in cities like Riyadh, Jeddah, Khobar and other areas outside major population centers. “Al Kharj, close to Riyadh, doesn’t even have one [civilian] hospital. All these areas already have infrastructure so we don’t need to build,” says Beaini, who insists that people should not have to come to Riyadh and Jeddah for quality care. Already, real estate consultants Colliers International have completed a feasibility study for the first hospital in Riyadh in November 2011 and will decide with Ebram what the specialty will be in each area where hospitals are planned.

Getting the money

The joint venture between Ebram and RRHH has adopted a fund-like procedure modeled on private equity but with the option to use other structures to raise 70 percent of the $1.35 billion cost not covered by government loans. Thirty percent of the $1.35 billion cost will be covered by soft loans that can be paid back with interest over 20 years, with a plan to go public down the line.

Till now, the joint venture has raised the seed capital, which covers 55 percent of required equity, and will officially launch a road show in the second quarter of this year to raise the rest of the money, mostly from international healthcare funds and operators. “We prefer institutional investors since we have worked with them before in our other projects,” says Bahabri, adding that they may approach investment banks as well. Funds will start to be deployed by the first half of this year.

So far, international healthcare operators have shown eagerness to invest, and cover the remaining equity in exchange for long-term (20 to 30 year) contracts as facility operators. “We have European, Canadian, Indian, all the big players in the healthcare sector,” says Beaini. “We have [even] been approached by Spanish contractors trying to get into partnership. If they have a proven track record in healthcare, this could be an added value for us.” 

Since most Saudis who seek care abroad end up in Germany, Britain, Thailand and India, it would make sense that potential operators will be found there, according to Booz & Co. Treatment in oncology, neurology, orthopedics and cardiology centers are most sought by Saudi patients abroad, the firm adds. 

Costs and returns

The time is ripe for such a healthcare venture in the KSA market, according to Bahabri, given the supply shortfall and the interest that will be drawn from the financial sector due to the innate financial setup. He says, “In KSA, we have a very healthy market for Initial Public Offerings (IPOs). We have [around] 20 health insurance companies listed and only one listed healthcare company on stock exchange [Al Mouwasat Medical Services], which is the opposite of the global reality,” where listed healthcare providers outnumber insurance companies. The planned IPO could pave the way for a more mature healthcare market. “The authorities are… encouraging us and other healthcare companies to go public because it’s low-risk and it suits pension funds and other funds that would like long-term sustainable income,” says Bahabri. The potential already exists due to rising rates of diseases like diabetes and the onset of an ageing population, as well as the penetration of supportive industries like health insurance. 

While $300 million has been marked for land acquisition (locations of the first hospital will be chosen in the coming few months), about $1 billion will be spent on design and construction (each hospital may have up to four surrounding speciality centers); equipment will most likely be leased.

Since medical equipment and technology must be imported, traditionally it has been a tricky piece of the pie for new private players who seek to provide healthcare in the GCC. But Bahabri says he has a plan to bypass those expenses: “We are going to change the rules of the game in a very conservative industry. If we are not going to be innovative, we will not be in it. You don’t have to own your CT-scan anymore. You don’t even have to lease it. You can share revenue with the provider and that would improve your margins.”

By comparison, each 300-bed hospital will cost around SR500 million ($133.3 million) as compared to the $70 million cost of the 300-bed Jeddah East Hospital under construction, a project of the Saudi Ministry of Health. “In the United States $450,000 to $500,000 is the standard cost per bed when developing a hospital, including construction, equipment and land,” says Rizk. “We are spending $450,000 per bed [including construction, equipment and land] but we are financing it differently.” 

Operations strategies

Unlike other development schemes, when building hospitals it is crucial that the operator and contractor are in sync from the design phase so as to coordinate patient flow based on what kind of specialty the hospital will serve, according to Rizk. 

Ebram Medical, which is legally designed as a public company, will have a board and audit committee, and will operate the hospitals but will form strategic alliances with international operators, hinting that Asian models from Thailand, Malaysia and India are preferred over Western operators due to cost-efficiency. “The challenge is not to build, it is how to operate… the investment part is easy, it is the operations and services that are hard,” says Bahabri.

Using a more sophisticated version of a cost-effective model already in place in the region, the group plans to bring in American doctors for 15 days every 3 months and schedule operations during the strategic interval. But costs will have to be kept close to the standards of the kingdom. “Today, open heart surgery in KSA is around 40,000 Saudi Riyals ($10,600) as opposed to $40,000 in [the] US,” cited Bahabri.

In 2010, KSA was already exhibiting higher prices in private hospitals as both the inpatient and outpatient visits are estimated to have increased by 5 percent and 8 percent that year, respectively, according to the National Commercial Bank’s report on Saudi Health Care published in July 2011. 

Issues and concerns

“Our strategy is ‘what not to do,’” says Bahabri. Certainly, it is not to imitate models of medical pinnacles like the Mayo Clinic in Minnesota, but instead to focus on delivery of a specific area of medicine and only provide post-hospital care in later phases after secondary care is established. Hospitals would be run like a network with “specific disease-based centers” surrounding them, according to Bahabri, which will collaborate with other research centers.

“For each disease you need a hospital, which has been the trend in last 10 years, and each facility will have a different strategy,” he says.

In addition to high expectations from demanding healthcare recipients and the cost of importing medical equipment, Saudi Arabia faces a shortage of local talent in terms of medical staff and will need to attract foreigners to fill the gap.

Though more than 100 nationalities work as physicians in KSA, Saudi doctors are preferred, according to Bahabri, who also points out that Philipino nurses are on their radar, as they have a well-established and respected history in the kingdom. To integrate the pool of medical experts, the hospitals will have their own training programs. In parallel, the government is trying to increase the number of Saudi physicians. In December 2010, Saudi Arabia‘s Education Minister announced plans to build medical colleges and hospitals at all 24 government universities in the country.

There is competition from other well-established players that have expanded in recent years, like Magrabi Hospitals and Centers, and Saudi German Hospitals Group, though no new major players have emerged in last 10 years and Bahabri says the joint venture’s focus on disease-based centers will differentiate its market.

Gulfward bound

RRHH — a Lebanese company based in Beirut — aspires to distribute their know-how in management, operations, design and construction, with a focus on the GCC across the Middle East and North Africa.

 Though there were 68 hospitals in the United Arab Emirates in January 2011, bed demand will more than double to about 165,000 and treatment demand will rise by 240 percent by 2015, according to a January 2011 report by the Italian Trade Commission. Healthcare costs in the Emirates could multiply by a factor of five to $60 billion. So far, however, billions of healthcare dollars are being spent outside the country, a major loss of revenue. The most recent figures from the Abu Dhabi Chamber of Commerce notes that UAE residents spent $2 billion on treatment abroad in 2009, though the government has a stated policy of encouraging private investment in order to supply its domestic medical needs. 

Centers for diabetes are particularly in short supply, with the International Diabetes Foundation noting that the GCC spends $5.5 billion a year on prevention and treatment of diabetes, accounting for 14 percent of its total health expenditure.

Lebanese companies may reap great benefits due to their long history of accredited medical institutions relative to the GCC, says Rizk: “The GCC respects Lebanese know-how in healthcare, we are renowned for it.”

Citing the potential of healthcare tourism in Jordan and Tunisia, Rizk stresses that the strategy must be patient-centered in the new healthcare era, where the type of design prioritizes cost-efficiency. As for markets in short supply of modern medical services, RRHH aims to expand beyond the conservative model of sticking to construction, design, and equipment placement, with plans to develop a strong network of services, management, healthcare tourism, maintenance, facilities management, biomedical engineering and talent management. 

“Our quality is because of the culture and this is what we will export,” says Rizk.

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Real Estate

Big is getting bigger

by Rayya Salem
written by Rayya Salem

Increased competition in the retail sector has ushered in a new era, whereby malls have become the major players, as exhibited by the increased demand for space and rising rental prices. But there is little doubt that upcoming malls will irrevocably change the rules of the game in terms of operations, services, rents and fees. The price of doing business is definitely on the up. 

“The cost of construction [has] reached peak levels, leading shop rents to the highest point ever and newcomers [malls] are modifying their prices,” said Michel Abchee, chief executive officer and chairman of ADMIC, the builder of City Mall in Dora and parent company of retailers BHV and Monoprix. 

Already, Beirut is home to the third most expensive retail rents among 13 cities in the Middle East, according to a September 2011 survey by property consultants Cushman & Wakefield. Beirut’s retail stood out as the only city in the region where retail rents in general increased, while the report zoned in on ABC Ashrafieh’s retail rents, which increased by 33.3 percent over the year ending June 2011. But it was a report released in the second quarter of 2011 by Ramco Real Estate Advisors (RREA) that exposed the trend of steady rises in mall rents, while pointing out that surrounding retail areas outside of the mall had stabilized. 

Considering the added pressure of new supply and the impact of a seemingly impending wage hike, local retailers will have to play it smart if they are to compete with large retail groups and international stores.

In with the new

Despite several established retail areas, some believe that supply is still limited. According to RREA, 95 percent of retail space in Hamra, Verdun, Ashrafieh and Gemmayze was occupied, as of July 2011. New mall operators will likely look to fill much-needed supply in areas outside the capital. Hazmieh will be home to Lebanon’s largest mall as Dubai-based mall developer, Majid Al Futtaim Properties, will deliver 60,000 square meters (sqm) of Gross Leasable Area (GLA) when the Beirut City Center opens this year, which will include more than 200 shops. 

Acres Development, a subsidiary of the retail group Azadea, will deliver its third installation of the Le Mall brand with a new mall in Dbayeh, which they intend to open in August. Although the Dbayeh building offers 25,000 sqm of GLA, more than double that of the existing Sin El Fil location, it is already sold out of retail space “even for a stand,” according to a representative at Acres. The mall is aiming for high foot traffic by the inclusion of attractions such as an eight-screen movie complex, along with two floors of food and beverage outlets. It has also been successful in luring new entrants to the Lebanese market. Several European and American brands have taken up the largest swaths of retail space; international apparel giants Decathalon and The Gap have both booked sizable space at 3,000 sqm and 900 sqm respectively. 

Go big or go home

Although tourism fell 23.6 percent last year compared to record numbers in 2010, according to the tourism ministry, tax-free purchases by tourists actually grew by 10 percent for the year, according to Global Blue, the reimbursement firm, although that was lower than the 21 percent growth recorded in 2010. However, if tourism numbers continue to fall and the retail market is flooded with more malls, it will likely force retailers to improve their services, and offer better prices. More than ever, increasing competition will push out low performers to make room for newer or international brands. “At renewal time, some [tenants] are asked to leave because there’s a waiting list… and malls want to improve their tenant mix,” said Abchee. 

According to the owners and managers of the Verdun 730 and 732 retail buildings, Aliamad Group, ground floor retail space always has a waiting list of around 10 companies with rents starting at around $700 per square meter. While each mall caters to a different category of shopper in various geographical areas, whether retail rents will stabilize across the board as new supply enters the market is something that only time can tell. But according to Abchee one thing is certain: “Those who are not client-oriented will fade out and lose their market share.”

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