Comment

Nuclear negotiations from fusion to fission

by Gareth Smith
written by Gareth Smith

In the fall of 2004 I went twice to the Supreme Council for National Security in Tehran for long interviews with Hossein Mousavian, a senior negotiator in talks with Britain, France and Germany over Iran’s nuclear program. The transcripts make sharp reading seven years later, for two reasons. Firstly, leading Iranian diplomats or security officials no longer seem to give such access.

Secondly, the interviews recall a diplomatic process during which Iran suspended uranium enrichment as a “goodwill gesture” to help talks with Western powers. The Iranian negotiators were led by Hassan Rouhani, a pragmatic if dour cleric who, as a colleague told me, “understands we’ve suffered too long from ideologies, and that Iran should instead pursue its national interest.”

A whiff of compromise hung in the air. A European diplomat said the Mousavian interviews offered “real insight into the mind of the Iranian negotiators” and another insisted Europe would at some stage relax its demand for Iran to cease enrichment for good.

One point Mousavian made to me was that the Iranians felt domestic pressure from critics of the talks. Hossein Shariatmadari, editor of Kayhan newspaper, argued that Iran should leave the Nuclear Non-Proliferation Treaty (NPT). Ali Larijani, now parliamentary speaker, quipped Iran would be swapping “candy for a pearl” if it took economic aid in return for ending enrichment.

Some Europeans scoffed at the idea the Iranian negotiators were under pressure. One diplomat, who happened to be close to Washington, said this was a tactic cooked up by the Iranian team.

And yet, there were indications, going back to the 2003 offer of a “grand bargain”, that Iran’s leaders were ready for a deal in which they would accept, for a set period, limits on enrichment as well as intrusive inspections by the United Nation’s International Atomic Energy Agency (IAEA).

Such a compromise would give, Iran suggested, the “objective guarantees” the Europeans wanted of Iran’s peaceful intentions while recognizing its right to enrich as an NPT signatory.

Times have changed. Following his 2005 presidential election win, Mahmoud Ahmadinejad raised the nuclear program from state policy into a popular campaign. Enrichment was resumed and expanded, and sanctions have been strengthened. Barack Obama won the United States 2008 election promising “engagement” but, restrained by the US right and Israel, this has amounted to a few cursory meetings.

The latest IAEA report, out in September, finds Iran now has 4,534 kilograms of uranium enriched to around 5 percent (low-enriched uranium,or LEU) and 70.8 kg enriched to 20 percent.

That is far more than Iran had in 2004. It is also more than it had last year when it agreed with Turkey and Brazil to export the bulk of its LEU in return for 20 percent-enriched uranium, which is used for medical treatment, especially of cancer patients. Yet the US torpedoed theTurkey-Brazil deal, and Iran began enriching to 20 percent itself.

And so the show moves on. In August, Fereydun Abbasi-Davani, head of the Atomic Energy Organization, said Iran would no longer consider a fuel swap.

Iran is edging nearer to being able to enrich to 95 percent for a bomb, if it should choose to do so. Yet, the issue is political and not technical: any country that can enrich uranium can make a weapon. As Mousavian said in 2004, “Iran already has the capability… we have the minds.”

This summer Mousavian, now at Princeton University, published a wide-ranging piece, ‘Rules for Successful Engagement with Iran’, examining the state of diplomacy on the New Atlanticist blog. He suggested the Obama administration had continued the Bush policy of “ratcheting up pressure through new sanctions, hinting at a readiness to take military action and supporting covert sabotage of Iran’s nuclear program.” Threats and sanctions, he wrote, limited Iranian officials’ room for maneuver, just as Ahmadinejad’s rhetoric had “increased tremendously the political cost to American politicians of being seen as soft on Iran”.

Mousavian conceded engagement was “risky” for both camps and required “bravery and wisdom in Washington and Tehran”. But, the alternative he wrote was “the same escalation of the confrontation”. He seemed far from optimistic.

GARETH SMYTH has reported from around the Middle East for almost two decades and was formerly the Financial Times correspondent in Tehran

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Comment

Commemoration and conformity

by Peter Speetjens
written by Peter Speetjens

Perhaps, if on another planet, one may have missed the 10-year anniversary of the day when September 11 became “9/11”. Virtually every self-respecting media outlet in the world dedicated time and space to the terrorist attack which, among other things, saw two planes torpedo New York’s Twin Towers. Television channels repeated the explosion again and again last month. Newspapers created special supplements and magazines filled entire issues with stories of the victims, their families, firemen, witnesses and just about anyone remotely connected to the dreadful event. For people not anywhere near the scene when it happened, no problem, there was always the “where were you when” question. The American media in particular went overboard, which is to some extent understandable, given the event took place on American soil. Worldwide, 9/11 also resonated, as it unfolded live on TV for a global audience of hundreds of millions — one reason the late German composer Karlheinz Stockhausen defined 9/11 as “the greatest work of art… ever”.

Still, while the West likes to pat itself on the back for its intrepid free press, the conformity of its coverage was striking. It was, by and large, an emotional affair with few critical questions asked. Only a heartless fool would not feel for the nearly 3,000 victims and their families, or take exception to a moment of silence. But do we need to watch and read the same thing in English, French, Arabic and God knows how many languages? What is more, is the wave of media attention justifiable, considering the millions of people who were killed over the course of history, yet for whom no tears are shed and no flags are waved? Why is there no global wave of compassion for the victims of “the other 9/11” in 1973? On that day, General Augusto Pinochet took power in Chile, with US blessing. Many more than 3,000 people were killed on that 9/11, while some 20,000 were to be shown their graves in the months following and a million forced into exile. Why does the rest of the world not commemorate the 800,000 Tutsis killed in Rwanda during the 100 days of horror, or the 2.5 million people killed by the Khmer Rouge in Cambodia? The book of mass atrocities has many chapters, with much of human history written in blood.

Commemoration, however, is not just about compassion. The ritual in memory of the martyr is also a means to close the ranks and stand as one. It is about reconfirming the collective identity, an act particularly welcome in the US, a country that seems to grow more divided by the day as it goes through one of the worst economic spells in its history.

On such a solemn moment of unity, it is not befitting to raise critical questions. Doing so is to step out of line and out of the group; one essentially declares oneself an outcast. That is what happened to New York Times (NYT) columnist Paul Krugman. In a welcome variation to the general mode of tear jerking, he wrote in a piece called “The Years of Shame” that “fake heroes like Bernie Kerik, Rudy Giuliani, and, yes, George W. Bush raced to cash in on the horror… [while] the attack was used to justify an unrelated war the neocons wanted to fight, for all the wrong reasons. How many of our professional pundits took the easy way out, turning a blind eye to the corruption and lending their support to the hijacking of the atrocity?”

Conservative America crucified Krugman. Former Defense Secretary Donald Rumsfeld, one of the Iraq War’s main architects, tweeted: “After reading Krugman’s repugnant piece on 9/11, I canceled my subscription to the NYT.” Waging a war on false grounds was not the only consequence of 9/11. What about Guantanamo Bay, the Patriot Act and the rendition of terrorism suspects to countries like Egypt, Jordan and Syria? In the name of the victims of 9/11, are these not the questions that should be asked? The media’s, and society’s, widespread abdication from its responsibility to address these controversial issues is no show of reverence for those who were killed, quite the opposite; it dehumanizes them, reducing them to objects fit only to be mourned, rather than remembered as living, feeling, thinking individuals — many of whom, had they survived, may well be asking these questions themselves. 

PETER SPEETJENS is a
Beirut-based journalist

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Finance

Beirut Stock Exchange: Ringing the changes

by Maya Sioufi
written by Maya Sioufi

The Beirut Stock Exchange (BSE) could be considered among the sick children of Middle Eastern bourses. With a tiny market capitalization of $11 billion and an average daily volume of trades of $2 million, it is eclipsed in the shadows of the big boys in the Gulf such as Saudi Arabia, Qatar and Abu Dhabi, with market capitalizations of $324 billion, $122 billion and $67 billion respectively. Admittedly, the BSE, even in the best circumstances, is unlikely to rival the top regional markets, but few would disagree that its full potential has hardly been tapped.

For years, the BSE has been effectively orphaned by the Lebanese government. The Ministry of Finance has left the BSE chairman’s seat vacant for more than two years; the seats of three other board members — two resigned and one deceased — collect dust as well.

In an apparent effort to begin ameliorating the situation, on August 4 the Lebanese parliament approved the capital market and insider trading law, which will provide Lebanon with an independent authority to oversee the exchange and protect investors.

“This law is a quantum leap”, said Riad Salameh, governor of Banque du Liban (BDL), Lebanon’s central bank as it would attract “substantial” investment in Lebanese companies. “It will also allow companies to raise their capital and expand their business without borrowing money”, he added.

The new capital market law does lay out the blueprint for significant changes to the BSE, which, if implemented, could go a long way in helping inject new life into the bourse; however, the timeline and quality of implementation is as yet uncertain, and many feel that reforms need to go beyond the scope of what the law proposes.

What the law entails

Up until now the BSE has been both an exchange and its own regulator, simultaneously — meaning independent oversight has been utterly absent. 

“The role of an exchange should be to bring buyers and sellers together and not to be a regulator, and so the role of the BSE [has been] a failure,” said Jean Riachi, chairman of FFA Private Bank.

The long-awaited capital market law, which had idled on the shelf since it was first introduced in the Lebanese Parliament five years ago, calls for the establishment of an independent regulatory body called the “The National Council for Financial Markets in Lebanon” — headed by the governor of BDL and consisting of seven members, with five drawn from the private sector.  The law also requires theBSE to be privatized but it does not state how this should be done. The Arab Federation of Exchanges (AFE) has suggested privatizing the exchange by selling part of it to brokers with an equal distribution of shares amongst them, granting veto power to the government to protect investor interests and selling a specified amount to the public with a limit of 5 percent ownership per shareholder.

Ziad Abou Jamra, deputy general manager at Fidus, believes the law would “serve as a milestone in enhancing the overall performance of the BSE.”  The problem, however, is: “You never know when it will be implemented, as with any law in Lebanon,” said Fadi Khalaf, secretary general of the AFE and former head of the BSE.

The lack of liquidity

Investors had regularly complained that the BSE simply lacked the liquidity to make it attractive — even before popular uprisings swept through the Middle East and North Africa this year. Since the regional unrest began, the volumes have only become thinner, while the BSE also lost $2 billion in market cap between January and September.

According to a senior private banker the Lebanese equity market is cheap and offers attractive dividend yields but the illiquidity could leave the exchange dormant and unattractive. Georges Khoury, general manager of Libano-Française Finance and head of private banking at Banque Libano-Française, similarly argues that Lebanese equities are cheap but the thin volumes and Lebanon’s inherent political instability scare away investment in the BSE.

The scant listings on Lebanon’s exchange contribute to the lack of liquidity. There are currently 11 companies with securities listed on the BSE, of which three (Solidere, Bank Audi and BLOM Bank) account for almost 75 percent of the exchange’s market capitalization. There is little diversification among sectors either, as the exchange consists of six banks, two industrial companies, one real estate company, one automotive company and one fund. Though Lebanon has a relatively small economy, Khalaf says there are some 50 companies sizeable enough to raise equity on the exchange, but which avoid doing so.

Khalaf said, however, that the new law should be a catalyst for greater liquidity in the capital markets, given that the head for both the central bank and the capital market regulator is the same person; he explained that the central bank governor is the most influential person in Lebanon’s banking sector and can encourage the sector to inject liquidity into the capital markets and motivate companies to list.

Other challenges the BSE faces, however, go beyond the scope of the new law and may yet leave the exchange hobbled.

Entrepreneurs and family affairs

Several factors contribute to the limited options on the BSE menu, among them being that the majority of Lebanese companies are family-owned enterprises (FOEs) and prefer not to have foreign investors own a stake in their company. It is also a transparency issue. Listing implies corporate taxes and transparency; according to Khalaf, companies in Lebanon often keep “several books” and thus prefer not to list.

Khaled Zeidan, general manager at MedSecurities, a BankMed subsidiary, said the mentality of family businesses in Lebanon needs to change in order for the businesses to survive. As new generations rise up through a company, the distribution of its capital becomes more and more diffuse.

“You need to institutionalize or it is over for everyone,”said Zeidan.

According to Ammar Bakheet, head of asset management at Audi, FOEs need to be educated about the long-term benefits of listing; in order to expand, at some point they will need to access the equity markets and go beyond bank financing.

A viable BSE would also help venture capitalists, who on the one hand seek out entrepreneurial start-ups to invest in, and on the other hand need to exit these investments; in developed economies, listing on equity markets is a lucrative exit strategy. Take Berytech for example: this Lebanese business incubator created a fund in 2008 with $6 million of capital to invest in start-ups. With a lifespan of seven years, the fund has not yet exited any of its investments, and as Nicolas Rouhana, managing director at Berytech, explains, the exit strategies for investments is one of their main challenges. He says the fund’s current exit strategies include the company being acquired by the entrepreneurs themselves, by larger funds or by multinationals looking to buy the technology or the product. The BSE is not considered a viable option. 

The banks vs. the bourse?

Long seen as the backbone of the Lebanese economy, the country’s banking sector is 10 times the size of the capital market. This has lead to mixed opinions regarding the banks’ impact on the market’s development. AFE’s Khalaf believes that the banking sector and the capital markets are in competition, as it is in the banks’ interest to provide loans to companies: loans generate more income for banks than advising companies on listing on the exchange.

A study undertaken in May 2010 by the French consulting firm Arche and sponsored by the French Ministry of Finance noted that banks in Lebanon are acting more as credit issuers and less as market intermediaries, given that “their operating income is heavily geared toward interest income.” The study also stressed that “capital markets will never develop without strong and active intermediaries.” Arche experts recommended that the BDL push investment banks to act more as intermediaries with the use of incentives or penalties.

A financial expert disagreed, saying she believes that in the long run the whole financial system, including banks, would benefit from strong capital markets, as the extra liquidity would go through the system. A stronger capital market would also require more activity from the advising arm of the bank. BLF’s Khoury concurred, saying the strength of the banking sector is not the main issue affecting the development of the exchange. He stressed that the main roadblocks were the lack of liquidity and the lack of diversification of the bourse.

Beyond the law

It is clear that the new capital market law, in and of itself, will not make the BSE an exchange ripe for hungry investors; policymakers will need to do more.

Saeb el-Zein, managing partner at Spinnaker Middle East and board member of the BSE, recommended the privatization and listing on the exchange of the various telecommunication, electricity and water companies owned by the government, a suggestion that AFE’s Khalaf strongly adheres to aswell. Zein also suggested encouraging the development of private pension funds — supported via various tax incentives — that would commit to investing in local capital markets and obliging the social security fund to invest up to 20 percent of its assets in Lebanese stocks.

Khalaf said he suggested to Lebanon’s Ministry of Finance a tax exemption of a limited number of years for companies that list, but the ministry turned down his proposal as it reduces revenues. Zeidan suggested that incentives ought to be given to local banks that buy securities on the BSE in order to increase institutional participation in the exchange.

Jacques Sarraf, chairman of Malia Group conglomerate, recommended creating a system to encourage small companies to merge, which will create larger companies better suited for listing on the exchange.

Khalaf, however, warned against relying too heavily on incentives to boost the exchange. He points out that when Egypt introduced tax exemptions on the profits of listed companies, the number of listed companies increased significantly but there was little trading. Owners would list a stake to benefit from the tax exemption but they would not trade; listed companies on the Egyptian exchange went from 627 in 1991 to 1,070 by the end of June 2001, but the majority of the trading was concentrated in 30 companies.

Investors are also concerned about the lack of transparency, which is crucial in building confidence in an exchange. Stock exchanges usually encourage good corporate governance by issuing listing and disclosure standards and by monitoring compliance with these standards, but this is not applied in Lebanon.

According to Badri Meouchi, executive director at the Lebanese Transparency Association, the BSE does not have corporate governance guidelines; it only has requirements for listing.

In order for proper corporate governance to be implemented, several articles in the Lebanese code of commerce need to be amended, such as separating the role of general manager from chairman, protecting minority shareholders rights (such as allowing them to elect board members) and not requiring board members to have shares in the company.

The BSE’s ills have not gone unnoticed, and the government’s passage of the new capital market law could provide some useful medicine. However, much remains to be done before the bourse is given a clear bill of health and given the chance to reach its full potential.

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Finance

Fadi Khalaf – Arab Federation of Exchanges

by Maya Sioufi
written by Maya Sioufi

Lebanon’s capital market is entering a new era, at least in legislative terms, with parliament’s approval of the long awaited capital market law in August 2011. In a next step, an independent regulatory authority with oversight of the Beirut Stock Exchange (BSE) is to be created and headed by the central bank governor, the indomitable Riad Salameh. Fadi Khalaf, secretary general of the Union of Arab Stock Exchanges and former BSE chairman, talks to Executive about the new law, imbalances in Lebanon’s financial markets and the BSE’s new prospects and challenges.

The BSE has not had a president since you left in August 2009. Do you know of any plans to have a new president?

I am not aware of any plans regarding the election of the next president. This is government politics. There are over 50 vacant positions in the Lebanese government and this is just one of them. It is the government’s decision to find a new president. When I left in August 2009, I never thought that we would be in September 2011 and still without a president, but some posts in Lebanon stay vacant for three to four years.

What are the most important issues that the BSE faces?

We don’t have enough companies listed. Most of the companies in Lebanon are family owned and they avoid listing because they don’t want foreign investors to own a stake in their company. Listing implies fiscal taxes and transparency, and in Lebanon, companies have several books. If companies list and don’t disclose their entire income, their stock price will be hit. If they disclose their income, then they have to pay taxes. So some companies will avoid listing.

There is also a lack of liquidity. The BSE is not a priority for the government. It has always been secondary. The government wants to encourage the BSE but it needs the liquidity to cover the government expenses and the government deficit. If there remains excess liquidity, then it will see if it will be directed to the exchange. If the banking sector needs liquidity, then the government needs to keep it there. Many exchanges in the world have enjoyed a strong boost due to the privatization of state owned enterprises, which also gives incentive for other companies to list. We have not had this in Lebanon. Take the privatization of the telecom sector for instance, if a strategic investor wants to pay a good price and not be listed, the government accepts. So the BSE was never a priority.

Do banks encourage companies to list?

Capital markets and the banking sector are usually complementary but [in Lebanon] they are in competition. Investors put their money either in a bank or in the capital markets. When companies need funds, they either take it as debt from banks or equity from capital markets. Since the banking sector is 10 times the size of the capital markets, it has a much stronger influence and it will not encourage companies to list since it is not in their interest.

For example, I had once convinced a very large Lebanese company to list on the exchange and sent them the necessary [documents]. Two to three months later, the CEO tells me that his banker, who is also a shareholder in the company, advised him against listing and provided him with a loan to cover his financing despite the fact that his bank has a brokerage firm and its duty is to convince companies to list.

How about the fees that banks would receive from advising companies to list on an exchange?

Banks earn more fees by providing companies with loans as it provides them with regular payments of interest, whereas listing on the exchange only generates a one off fee. When a company’s debt to capital ratio reaches a certain limit, then the banks might advise them on considering the capital markets. The exchange is just a tool. It is living on the crumbs of the banking sector.

Will there be more interest in the stock exchange following the capital markets law signed in August?

Yes there will be more interest. The governor of the central bank will head the capital markets authority and he has the most influence in the banking sector. This is a good step for the exchange. He can direct the banking sector to inject liquidity into the capital markets. He can also influence the banking sector into encouraging companies to list. In the exceptional case of Lebanon, the banking sector’s market capitalization is around $120 billion whereas the exchange is a mere $11 billion so if the banking sector is not convinced, the only other way to boost the exchange is through privatization of the telecom industry and it does not look like that will happen anytime soon.

When do you think the law will be implemented?

I am not sure if it will be implemented by the end of the year. No one knows how long it will take in Lebanon.

How about the initiative to privatize the stock exchange?

It gives the exchange independence from politics. The private sector is the driving force in Lebanon. Privatizing the exchange will give it a boost but it is not the key factor; if companies are not convinced of listing, privatizing… it is not going to change anything.

One issue that needs to be addressed regarding privatization is how to implement it. The law says the stock exchange should be privatized but it doesn’t say how. It says that after the formation of the capital markets authority, the exchange has one year to have the legislation in place to become a [registered] company as opposed to a public institution and one year after that to be become private.

What initiative could be put in place to increase liquidity? Would it help for example to provide incentives to local banks to buy stocks on the BSE?

What is the point of going to the supermarket with plenty of money in your pocket if there is not much on the shelf for you to buy?

How about incentivizing companies to list? Should the government encourage mergers?

When I was head of the BSE, we did a study on the Lebanese market and we found that there were 50 companies sizeable enough to list on the exchange and they were not listing. Mergers mean putting family businesses together. It is a problem on a whole different level. It could help but it is not enough. Besides, we shouldn’t want the exchange to live on incentives only.

What can the Beirut Stock Exchange do to improve?

It cannot do much… The evolution of the exchange has already taken place in the past ten years with the implementation of measures such as an increase in the type of instruments that can list (stocks, bonds, preferred shares, GDRs,  etcetera) ,a move from fixed pricing to continuous pricing, a reduction of the taxes on dividends and an update of the trading system. All these steps helped increase the volume of shares traded from $200,000 per day in 2000 to 8 to 10 million dollars per day today.

The exchange has done what it can do. The rest remains in the hands of the other players of the Lebanese economy. Unfortunately, the correct step they are taking with the capital markets law is happening during a time when the biggest Arab bourses are complaining of low volumes, so the timing is not great, but at least the exchange will be ready for the next wave of investment in the Middle East.

 

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Economics & Policy

Electricity: Crumbling Behind the Country

by Sami Halabi
written by Sami Halabi

Officially charged with powering the nation, Electricité du Liban (EDL) is today perhaps the epitome of Lebanon’s political ineptitude, and one that nearly pulled the plug on the fledgling cabinet last month.

EDL started with promise in the mid-1960s when architect Pierre Neema modeled headquarters in East Beirut’s Mar Mikhael district in a ‘Brazilesque’ architectural style, symbolizing the progressiveness of the sector and the hope that it would host a catalyst of economic growth for decades to come. Today, illusions have dissipated, and the building, with its few working elevators, its dusty façade and its aging workforce, is nothing less than the embodiment of the dilapidated electricity sector in a country where power cuts are the norm and not the exception.

At present, the sector’s output capacity is roughly half it needs to meet current peak consumption demand, and by 2016 will be less than a third of what it needs to be. Supply, transmission, distribution and collection will also have to be improved to counteract the 40 percent annual financial losses the electricity sector accumulates, according to the energy ministry. Those are comprised of 15 percent technical losses due to outdated networks and supply lines, 20 percent in non-technical losses attributed to such things as theft of electricity, as well as another 5 percent from the much-politicized issue of unpaid bills that make headlines every time a collector gets a thumping from neighborhood thugs. The magnitude of the problem notwithstanding, the government has done little to nothing in order to develop the sector since the civil war. Instead, it has spent approximately $16 billion on subsidies, maintenance and the construction of a few insufficient power plants. According to Bank Audi, in the past three years alone the government has spent an average of $1.5 billion on covering the deficit of EDL, mostly as a result of a lack of natural gas supplies and high oil prices. EDL cannot adjust its prices — which are set according to an oil price of just $21 — without a cabinet decision.  Losses to the economy due to blackouts and related electricity woes are estimated at around $2.5 billion every year, or about 6 percent of gross domestic product. This year alone the government has already paid out almost $684 million from the public purse to EDL, according to figures released by the finance ministry last month.

To add insult to injury, the combination of these factors has resulted in another political debacle that has gripped the nation and delayed the affairs of parliament — all for a stopgap solution to the country’s most precarious public policy predicament.

The general’s plan

In August, Member of Parliament and Free Patriotic Movement(FPM) leader Michel Aoun submitted a one-page law to Parliament asking the government to budget $1.18 billion for the production, transmission and distribution of 700 megawatts (MW) of electricity capacity to augment the current output capacity of 1500MW, as well as the funding of required consultants, over a period of four years.

The proposal immediately set off political fireworks amongst both the opposition and the parliamentary majority, who decried the proposal as too limited in scope and/or oversight, thus putting it in Lebanon’s overstuffed inbox: the cabinet. But it was when Aoun’s bloc threatened to resign that things became particularly heated and the ‘one color cabinet’ became somewhat kaleidoscopic.

Of course, an additional 700MW is just the tip of the iceberg when it comes to addressing Lebanon’s electrical shortfall. Back in 2009, when FPM Minister of Energy Gebran Bassil unveiled his five-year strategy for the sector, Lebanon’s average consumption stood between 2000MW and 2100MW, peaking at somewhere around 2450MW in the summer months. According to the energy ministry, demand growth in 2009 was around 7 percent annually, or 170MW at peak consumption. Last month, the minister said that demand grows around 200MW to 300MW per year. Do that math and peak consumption today should stand at around 2900MW, meaning the difference between the capacity to be added (700MW) and what is still needed will be roughly same. Factor in another four years before production comes online and it becomes a small drop in the bucket. “It’s not about the [additional] 700MW; it’s about the 5000MW [projected to be needed after 2015],” says Albert Khoury, deputy general manager of the Electrical Utility of Aley, a concession that distributes electricity to the district of Aley. According to Cesar Abu Khalil, advisor to the Minister of Energy and Water, the reason this plan was proposed was because it could be the most easily implemented. It was the only one ready to go to tender, as the pre-qualification standards and conditions had already been completed, and the $1.8 billion budget had already been agreed upon by the previous cabinet and included as part of the draft budget for 2011, even before the five-year strategy was passed.

Although not mentioned in the proposed legislation —something opposition MPs were quick to note — Abou Khalil explained that the project is in line with the original five-year strategy approved in 2010. According to the energy ministry, the total budget for the project came to $850.4 million for installing Combined Cycle Gas Turbines (CCGT), $247 million for the transportation of power, $38.5 million for distribution and $40 million for consulting. Abou Khalil also stated that these figures are “estimates,” and do not necessarily reflect the money that will actually be spent because tenders have not yet occurred. “The accurate numbers will be released and everybody will know [them] when the tenders are done and the contracts won.” Contrary to what had been reported in the Lebanese press, another power plant in a new location will not actually be built, says Abou Khalil. The additional 700 MW will come from an additional CCGT “set”, the term in the power industry for a subunit of a CCGT power plant, at the Deir Ammar power station, generating between 400MW and 450MW and reciprocating engines in Jiyeh and Zouk. The project will also include the rehabilitation and the addition of power units in Zouk, Jiyeh and Deir Ammar to get to the final 700MW.

Deal or bust

While those 700MW may be able to at least account for some of the shortfall, the political fiasco over the project can be seen as a sign of things to come on the road to 24-hour power, which will not be reached for another four or five years even if everything goes as planned.

All other cabinet items were delayed and sessions put off due to the ruckus between Aoun’s 10-member bloc, which insisted the measure be passed as it is, and MP and chairman of the Progressive Socialist Party Walid Jumblatt’s bloc. This prompted mediation efforts from Prime Minister Najib Mikati’s ministers, as well as others from the Amal Movement and Hezbollah.

The reasons for opposition to the matter were unclear but revolved around funding the plan from the treasury rather than from international donors offering lower interest rates. It was eventually agreed that this issue would be discussed at a later stage and the debate then turned to the amendment of the existing electricity law, oversight from the cabinet and the creation of the legally mandated regulator, the Electricity Regulatory Authority (ERA).

As the gloves came off, the divisions in cabinet were clear, with reports of the prime minister slamming the table and screaming at the energy minister, levying counter threats that he too would leave the cabinet for good if there was no settlement. “You taught us to sit on the table and say ‘either you give us what we want, or we go.’ Now, I am using the same thing with you, Gebran: Either you go for the proposal, or I go,” Mikati was reported to have said, according to An Nahar newspaper.  Obviously he did not go, and a compromise was reached. When the premier emerged from the secret session he announced that the law had been approved, with amendments. One change was to the allocation of money, which it was determined would be spent over four years — $247 million in 2011, $305million in 2012, $277 million in 2013 and $252 million in 2014. The prime minister also announced an agreement over a regulatory authority to supervise the sector within three months and the appointment of a new board of directors of EDL within two months.

Regulation or removal of authority

But it was not all celebrations and champagne bottles for the energy minister and his party, as the hangover is sure to come. In theory, there is a law that was passed in 2002 that sets out how the sector ought to be restructured and regulated. Law 462, or the electricity law, is meant to replace the existing legal structure that grants EDL a monopoly over production, transmission and distribution of electricity. The law proposes that the sector be unbundled — separated into generation, transmission and distribution functions — and possibly partially privatized so that the private sector would be allowed to generate and distribute electricity to then sell to the government.

Overseeing all of this would be the ERA, which would set standards, give out licenses for production and distribution and set price ceilings and perform tenders. At least that was the rosy picture.

The reality is that since then there has not been one minister or cabinet that sought to introduce the regulator to the sector, as was supposed to happen. Nor were the implementation decrees issued, which should have taken place three months after the law was published in the Official Gazette almost a decade ago.

“We started drafting it in 1996 and it came out in 2002,” says Roudi Baroudi, an independent energy consultant and secretary general of the World Energy Council’s (WEC) Lebanon Member Committee, who worked on drafting the original law. “We should have had an electricity regulator since 2002. The implementation decrees were ready, the [cabinet] appointments were ready.”

While it may be global best practice, the issue of a sector regulator flares tempers amongst politicians. After Lebanon’s Taef agreement, which ended the civil war, most executive powers were transferred to the individual ministers under Article 66, effectively giving them a legal basis to choose to implement or not implement laws. 

In his previous post as telecommunications minister, Bassil was involved in a bureaucratic dogfight with the Telecommunications Regulatory Authority over the jurisdictions of each of their mandates. The issue ended up in Lebanon’s supreme court on several occasions. Eventually, the ministry won out and today the TRA is little more than an advisory body to the ministry and practices very few of its legal functions.

The apparent root of the problem in both the telecom and electricity laws is the way they were written, granting the minister the right to set the ‘general policy’ of the sector.

“The difficulty that we have faced in the Lebanese public administration has been: What is general policy?” says Ziad Hayek, secretary general of the Higher Council for Privatization. Abou Khalil adds that there is no specific political ideology held by the minister opposing the formation of the regulator (which PM Mikati announced should be established three months after an agreement on the 700MW law was reached, per the proposal of Bassil) but “under the present constitution, the minister is the head of his ministry and we cannot create any other body that can shackle him or prevent him from exercising his prerogatives.” Khalil called the time limit for establishing a regulator, “not a deadline [but] an encouragement”. 

Mohamad Alem, managing partner of Alem & Associates law firm, who specializes in public sector dispute resolution, said that if, after a period of three months, the minister does not propose the names of those persons who would head the ERA, the premier basically has two options: he either assigns the power to appoint the board of the ERA to the cabinet or removes the minister. Either option would be cataclysmic for the cabinet. Minister Bassil is one of the foremost, if not the foremost, minister of the FPM and the bloc controls a third of the cabinet; thus, the loss of one more minister would bring the whole apparatus crumbling down once again. The press office of the Council of Ministers could not be reached for further clarification.

Amending the law

Generally, there is an agreement amongst most political circles that Law 462 will need to be amended. One of the agreements made at the September 7 cabinet session was that a committee comprised of PM Mikati, as well as the ministers of finance, health, justice, public works and transport, social affairs, energy and economy and trade would look at the introduction of amendments to Law 462.

According to Hayek there are two major areas where amendments are needed: one is the ERA, the second is the corporatization of EDL. When asked by Executive what the amendments he sought to impose were, Minister Bassil refused to comment in detail, saying only that the proposals were related to distribution, production, the ERA and alternative energy. Abou Khalil also declined to comment but did say that the discussions would begin with the proposed amendments already sent to the previous cabinet by Bassil.

With the issue of the 700MW law out of the cabinet, it is now in the hands of a much less amicable body. As Executive went to print, the bill was making its rounds at the joint parliamentary committees before hitting the general assembly.  In the first session there was a heated debate between opposition MPs headed by former Premier Fouad Siniora, who reportedly gave a presentation outlining the opposition’s position (namely that there is no mention of international concessionary loans in the law and no mention of the ERA) and then left the room without hearing Bassil’s response.

Already, the ministry’s arch-nemesis, opposition MP Mohammed Kabbani, is threatening further action against the ministry. Kabbani told Executive that if the ERA is not appointed within three months he will demand a vote of no confidence against the energy minister in parliament.

No end in sight

What all this means for the consumer is that they should not expect to be relieved of paying for electricity once to the government, twice to private generators, third in the form of a subsidy and fourth, whenever power surges destroy appliances. The political morass that has obstructed the implementation of any electrical progress for decades has not been cleared. Even if the current project is implemented, there will be no impact for four years; all the while the country’s aging infrastructure continues to deteriorate. In short, “there is no conspiracy,” says Khoury. “There is just rotten politics.”

Distributing a problem

Asked whether he would block the cabinet’s electricity bill in parliament, MP Mohammed Kabbani insisted that, if it reached parliament in the form agreed by the cabinet, he would not. However, he is not particularly happy with the overall five-year strategy, which he would seek to “improve and protect”, as its initiatives make their way through the budget process necessitating parliamentary approval.

Part of the five-year strategy is to restructure how electricity is distributed throughout the country. The Distribution Service Provider (DSP) project, carried out under the auspices of EDL, will split Lebanon into three areas where electricity distribution, maintenance and collection operations will be allocated to three contract winners over a four-year period. The DSP is a turnkey project where planning, design, asset management, construction of distribution facilities, meter reading, bill collection and project management are integrated, according to the energy ministry. The project is budgeted in the five-year plan at an estimated $361 million and scheduled to take place between 2011 and 2014, with an additional $50 million budgeted for the upgrade and rehabilitation of the system in 2015.

The tender for the project, which was not announced by the ministry’s media office and only mentioned in passing by the minister last month, has already been completed amongst seven principal bidders: the Arabian Construction Company (ACC), ACE, Batco, Butec, Caporal & Moretti, Debbas and Mercury. Each company has entered into a joint venture with a local partner, such as Khatib & Alami and ACC, as well as E-Aley and Batco.

According to Kabbani, however, the project is “definitely illegal… was it done in a way that allows for oversight? It was a tabkha,” or a cooked up deal.
According to Kabbani, the project involves public funds that will be spent without approval from the parliament, in contravention to the public accounting law, while there is nothing in the contracts that assures the government’s revenue will be protected.

He says because the companies are contractually obligated to install, manage and collect payments from consumers, but do not actually get paid a fee directly from the government, they will have to borrow the money from banks to fund their operations. However, to make back their investments Kabbani says that they will take a percentage of the money they collect from consumers, which should go to the government. That percentage is not yet approved by parliament and forms the crux of his objection. Kabbani, however, admitted that he had not seen the tender.

“There are already contractors for collection at EDL. I have always witnessed MP Kabbani emitting his opinion according to his political stance, not technical stance,” says Cesar Abu Khalil, advisor to the Minister of Energy and Water. “I reiterate for him to read the tender books, and the project, before emitting political opinions on a technical matter.”

According to the energy ministry, payment to service providers will be made up of a direct, set payment from EDL’s budget, and another sum determined by the amount of money saved by allowing the DSP to perform functions, such as installation of meters and collection of bills that EDL would normally do or contract out. “Each component [is] based on unit prices adjusted by key performance indicators which were well-defined during the bidding process and able to be accurately calculated during the implementation process,” the ministry says. The five-year strategy also reiterates this point, stating “the recovery of capital and cost of financing will be paid from improved collection.”
“Our remuneration is dependent on how well we perform or on how badly we perform, [with] huge penalties [if] we do not,” says Albert Khoury, deputy general manager of the Electrical Utility of Aley, a concession that distributes electricity to the district of Aley and who is the local partner on the Butco bid. “We need to have results.” In any case, the final call on the legality of the matter will be decided both by the Minister of Finance and the Audit Court before the contracts can be awarded.

 

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Economics & Policy

High Hopes and Higher Hurdles

by Sami Halabi
written by Sami Halabi

Recent history would show that perhaps the only thing slower than Lebanon’s Internet speed is the process the politicians have undertaken to bring about faster Internet speeds. But just as web pages do, eventually, load onto laptop screens in Beirut, it may be that Lebanon’s online evolution from the Stone Age to the modern day will not take another millennia.

Former Minister of Telecommunications Charbel Nahas promised as much when he announced on January 28 of this year that third generation Internet services (3G) “will be available to the Lebanese in all areas within seven months” — alas, such was not to pass, though the country’s telecommunications sector has not been entirely devoid of new life.

The light at the end of the tunnel

3G technology is a means of incorporating high speed Internet with mobile devices such as “smart phones,” but subscribers will also be able to attach a simple device called a “dongle” to their computers and use the service the same way they currently use other wireless Internet products on the market such as the pervasive Mobi and Wise Box. The speed promised by Nahas, who is now the country’s labor minister, was to average 7 megabits per second (mbps) and reach speeds “up to” 21 mbps. That would be a speed 27 times faster than those currently available via a digital subscriber line (DSL) (the current fastest possible Internet connection in the country), 70 times faster than those available using the general packet radio service (GPRS) and 500 times faster than those available to ordinary cell phone subscribers, according to Nahas.

Of course, the August 28 kick-off date has come and gone, but work on the 3G network has been underway, and by September 20 the first round of testing was launched by two state-owned Mobile Interim Companies — MIC1 and MIC2 — managed by Alfa and MTC Touch, respectively.

New prices, same story

Another promise put forth was from the current Telecommunications Minister Nicolas Sehnaoui for a new list of speeds, prices and download/upload caps. Under his plan, speeds would increase between four and eight times their present snail’s pace. Such a measure requires approval from the cabinet, which was confirmed in the official gazette on September 15.

The decree details the new pricing and capacity structures for consumers and data service providers (DSPs) looking to increase their services, and was due to come into effect on October 1.

The reason such an advance in conventional and 3G Internet use has become possible at this point is because an undersea Internet cable dubbed the India-Middle East-Western Europe 3 (IMEWE3) has finally been opened up, after having originally been scheduled to go online in March 2010. 

The IMEWE3 cable has a total capacity, for the many countries connected, of 3.84 terabytes per second. Lebanon’s allocation is 120 gigabits per second (gbps), with the potential to be upgraded to some 300 gbps, a game changer for Lebanon, whose legal bandwidth transmitted over the Cadmos cable was around 2 gbps before the IMEWE3 opened up. The problem with the cable was, perhaps predictably, political in nature.

As Executive reported in July, Abdulmenaim Youssef, the head of Lebanon’s fixed line operator, Ogero, refused to hand over the administration of the cable to Minister Nahas. Coincidentally, Youssef also occupies the post in the ministry that is supposed to oversee Ogero. Youssef, who in the past was close to the current opposition and is now believed by many to be supported by the Premier Najib Mikati, is in charge of doling out the needed international capacity to companies like service providers MIC1, MIC2, the DSPs and the Internet service providers (ISPs). This is done by distributing E1s, or bandwidth packages equal to 2 mbps, to those who request them.

The government recently decreased the price of an E1 from $2,700 to $420, ostensibly to facilitate the expected consumption increase. As Executive went to print, 10 gbps of extra capacity had already been opened up through the IMEWE3 cable, according to Firas Abi-Nassif, advisor to the telecommunications ministry.

According to Habib Torbey, head of the Lebanese Telecom Association (LTA), president of GlobalCom Data Services and owner of Internet provider IDM, “The 10 gbps is needed for the initial phase [of the fixed Internet upgrade], but directly afterwards there should be 20 gbps ready [for use].” He added that the government has promised to increase the bandwidth to 100 gbps by the end of the year.

“We have signed all requests for E1s from private sector companies,” said Abi Nasif, when asked if the providers had received their requested capacity. “Once the minister signs, the execution is in the hands of Ogero. If this does not take place, kul hadis illu hadis,” an Arabic expression that roughly translates as a veiled threat that there will be consequences. Youssef did not respond to Executive’s request for comment. But at press time, several ISPs had confirmed that they still had not received their requested E1 lines.

Torbey also stated that the minister’s office had informed him that private DSPs will be allowed access to more of Ogero’s central offices (COs), distribution centers in each neighborhood that are needed to dole out DSL to customers. In 2006, when DSL Internet was being introduced to the market, the telecommunications ministry signed a memorandum of understanding with private sector players stating that the government intended to compete with them on a level playing field. Ogero, under Youssef, opened up the initial 35 COs to the private sector but later rescinded that privilege and eventually blocked them from entering any of the 171 total COs that were created. Ogero capitalized on their market position and scooped up the lion’s share of potential customers around the country, leaving the private sector unable to compete.

If progress is not achieved in the current environment, the minister could technically ask the cabinet to remove Youssef from one or both of his posts. The fact that he is both head of Ogero and head of Ogero oversight, as far as the telecommunications minister’s party leader Michel Aoun is concerned, is already illegal. With a cabinet that, at least until recently, was described as ‘one color’, putting pressure on Youssef may be much more feasible than at any time since Youssef was held in jail for several months on charges of wasting public funds and illegally using official telephone lines in 2004, though he was eventually cleared and released.

Aoun has already hinted that Prime Minister Najib Mikati is protecting government officials who are violating regulations. Aoun and Mikati recently came to loggerheads over the electricity file currently before cabinet, and there has been speculation that if Youssef does not implement the planned expansion of the network, then Aoun’s party, the Free Patriotic Movement, will lobby the cabinet to have Youssef removed.

Faulty framework

Even if everything goes according to plan, come October 1 there are other potential roadblocks in the way of an efficient telecommunications network. According to studies carried out by private sector operator Cedarcom, the majority of subscribers will choose either plan two (1 mbps with a 10 GB cap) or plan three (2 mbps with a 20 GB cap). But even if the bandwidth becomes available, there are doubts about Lebanon’s infrastructure.

“The situation of our ground networks is very catastrophic,” said Riad Bahsoun, an expert at the International Telecommunications Union, the United Nations agency for information and communications technology. “In its present state the [local] network cannot cope with any expansion.”

The government currently does not have a standard and functional quality of service system to monitor if breaks and outages are occurring on a regular basis and where. While a new fiber optic network is being built around the country — and will take at least another year to become functional — the present outdated network relies on a mix of fiber, coaxial cables (made for voice, not data) and old copper wires.

Indeed, last year saw several outages that cut off entire swathes of the country from the Internet access for days. “There will be more and more cases where people ask for the 6 mbps and they cannot get it,” said Imad Tarabay, chief executive of Cedarcom, which distributes the Mobi wireless service, and secretary general of the LTA, which represents the country’s private sector Internet providers.

Even so, Abi-Nassif, who specializes in Internet traffic engineering, said the network will be “fine”, although he admitted “things will not be 100 percent smooth on October 1.” 

Bahsoun, however, called the much-publicized plans to upgrade an effet d’annonce, a French term for an announcement made for effect whose veracity is in doubt.

“The media was sold the issue of the Internet [upgrade] under Sehnaoui but all he did was apply the things that have been around since [former telecom minister] Gebran Bassil,” he said. “But it is good that he went forward and did it.”

Private sector exclusion

So with faster and cheaper fixed Internet a possibility this October, or some time thereafter, the option of mobile Internet is still on the table. The ministry has not yet set pricing for the service, but according to Abi-Nassif it will be announced on October 20 when the minister will unveil the coverage areas, details and dates. He said that the process of covering the country would take roughly a year and the rollout would be gradual.

As Executive reported last March, Cedarcom was planning to bring forward a lawsuit against the telecom ministry at the Shura Council, Lebanon’s highest court, seeking to halt the 3G project, not because they are against it in principle, said Tarabay, but because it would effectively neutralize the private sector and nationalize the telecommunications industry. That lawsuit has since been submitted and is being considered by the Shura Council.

The thrust of the allegation is that MIC1 and MIC2 have been granted neither the licenses nor the frequencies required to legally provide 3G service — yet they are proceeding with plans to do so anyway — while private sector players are being disallowed from entering the 3G market because they do not have licenses to do so. The initiation of a wholly public sector 3G service would almost immediately price the private sector out of the market because of the large fiscal imbalance between the two in terms of taxation and operating costs.

Tarabay said that as part of the legal proceedings both Cedarcom and the ministry were asked to present their operating licenses to Shura Council. Accordingly, Cedarcom did so, while the ministry did not present the licenses of Alfa and MTC within the timeframe allotted. A copy of the Shura Council decision obtained by Executive indeed declared that the decision to launch 3G by the ministry was not in line with legal standards for a number of reasons: that the decision was taken during a caretaker government, that it is the job of the TRA and the cabinet to issue the licenses, and even that the decision contradicts the principles of fair competition. The decree furthered that the 3G projects should be halted for a period of a month and the ministry given 15 days — starting September 15 — to renege on its decision to proceed.

When Executive asked Abi-Nassif to confirm this information he said he was not aware of the issue but would transfer this and all other legal questions to the person in charge. Several days later, he called back to say that the ministry would “rather not” comment on legal issues at the time.

Despite the Shura Council ruling the minister has claimed on his Facebook page that he will proceed with the plans, because, “no one can stand in the way of change and reform [and] the minister will show the weakness of those trying to slow down this project”.

As such, when it becomes time for the cabinet to price the service for the public, it may technically be pricing a service that is illegal.

Compromise or cop out?

There may be a compromise solution to the public-versus-private sector dispute over 3G, however. According to Abi-Nassif, ISPs could serve as mobile virtual network operators (MVNO), an industry term for a company in agreement with the owners of a telecom asset that performs services ranging from complete resale with separate branding to merely offering a back office service such as billing. Abi-Nassif confirmed that this was the ministry’s “orientation” at the moment but did not confirm that this was the final policy.

The LTA’s Torbey confirmed that he was in talks with the ministry on this very subject. “If the government gives me an MVNO that would be enough for me,” he said. But he will not accept to be “just a reseller,” seeking instead to be a “real added value service provider.”

“At the end of the day we started Internet in this country, we know more than anyone what our customers want. Why would they put restrictions on us and say ‘you can install this but not that?’ It’s not right,” said Torbey. “We shall see what we will do if they don’t let us [install what we want]. That’s why there are negotiations.”

Even if an MVNO is agreed upon it would not necessarily solve the problem. If 3G is launched in its full capacity before the MVNO, then the same thing that happened with DSL — public sector control of market share —could happen again, leaving the private sector out to dry.

“We are pressuring the ministry so that we start at the same time as Alfa and MTC. Otherwise there will be a conflict,” Torbey said. “There are people on the other side who are pushing in the opposite direction, saying ‘why should you give the ISPs the right to sell on 3G? We as MTC and Alfa want to sell on our own.’ There is a conflict of interest for sure,” he concluded, while saying that he will accept no less than to be allowed to have an MVNO that gives them “everything but infrastructure.”

 

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Economics & Policy

Executive Insight – Stronger but not immune

by Fabio Scacciavillani
written by Fabio Scacciavillani

After months of burying their heads in the sand, markets and policy makers are waking up to the reality of a double dip in many mature economies. The logic of the recovery was quite simple: the massive bank bailouts, the fiscal stimulus and the monetary injections were supposed to provide temporary support to avoid depression while the deeper underlying causes of the crisis were addressed and resolved.

The reality has been utterly disappointing. As soon as a timid recovery materialized in mid-2009, world leaders, financers and central bankers patted each other on the back, hailing the “green shoots of growth” in a self-congratulatory ritual. Hence difficult but unavoidable decisions were postponed day after day while the stock market was inflated by the liquidity injected by the United States Federal Reserve and, to a lesser extent, the European Central Bank.

Once the ‘quantitative easing’ programs expired, stock markets lost steam, and by the second quarter of 2011 all major economies were close to stagnation.

Faced with evidence of declining economic activity, most media and analysts started to drum up the “soft patch” rhetoric, suggesting the slowdown was a mere pause in the global recovery. Yet by the summer, with the intensification of the fiscal crisis in Spain and Italy, the smoke and mirrors were wiped away, revealing a chronic lack of leadership and policy direction, laid bare by the squabbles over the debt ceiling in the US. Investors were forced to realize there was no long-term plan to tackle the crisis.

Belatedly, the reality of an impending double-dip recession has sunk in, although the extent and the duration are still being debated. But it will not be a matter of a few months given that there is no catalyst for growth in sight. Nor are current policies going to rectify the situation in the short-term. It is unlikely that the structural reforms that are key to boosting long-term growth prospects — including revamping fiscal systems, European Union governance, financial regulations and welfare programs —  will be enacted before the end of the year. In the meantime risks of a large sovereign default or other disruptions loom.

Buoyed by barrels

So far the Gulf Cooperation Council (GCC) has emerged relatively unscathed from the global economic crisis, not withstanding the effects of the Arab uprisings this year. But how long can this last? The resilience results from healthy growth in the emerging markets — above all in China —  which has maintained high oil prices and international trade. If the recession deepens, we could experience a situation similar to that in early 2009 when the oil price plunged below $50 a barrel.  

GCC states remain obviously reliant on oil revenues, which account for close to 78 percent of total exports. Saudi Arabia in particular has embarked on a program of increased social spending to defuse political tensions. Standard Chartered estimates that Saudi Arabia will incur budget deficits if the oil price falls below $106 per barrel.

Break-even oil prices have increased in the rest of the GCC, although they are still below current market prices. The UAE and Kuwait need oil prices at $80 per barrel to balance their budgets, while Qatar based its $6.1 billion surplus budget projections for 2011 on an oil price assumption of $55 per barrel. Oman’s 2011 budget was drafted with a slightly higher figure, at $58, and while higher spending has been incurred the high average oil prices of $106 so far in 2011 gives them a fairly comfortable cushion. 

Even the International Monetary Fund in its latest World Economic Outlook, issued in late September, underscores that growth in the MENA oil exporters will be almost 5 percent in 2011, gliding to almost 4 percent in 2012. The IMF mentions downside risks from political unrest and a deeper fall in commodity prices (in the baseline scenario oil prices are expected to fall by only 3 percent on average in 2012), but overall the picture is rather positive, especially if compared to mature economies.

If the global picture were to deteriorate, there are two elements to keep in mind. The lessons from 2009 have been internalized: commitment to public spending kept the economies going then and will again act as an anchor of stability in 2011/12.

Actually, governments would be wise to reiterate their commitment to expenditure on infrastructure now, without waiting for the situation to worsen. This will reinforce confidence, thereby sustaining credit, private investment, consumption and the job market.

Lessons learnt

There is an even more important factor compared to 2009: financial markets have improved markedly. High-grade credit from the GCC has been buoyant, with Abu Dhabi and Qatar outperforming most sovereign benchmarks from emerging markets. International portfolio managers have developed a more insightful knowledge of the region, whereas in 2008 there was hardly any significant fixed income market.

During 2011 regional bonds withstood the bouts of global volatility, in contrast to 2009 after the Nakheel default. Traders for example recall that Qatar sold $7 billion in bonds in November 2009, subscribed mainly by investors in the United States and the United Kingdom, and as a result of the turmoil ensuing the Dubai World debt moratorium, some portfolio managers sold them on the belief that the Emirate was part of the UAE.

The notable progress made in the past two years in creating a fixed income market and some central banking facilities has paid off: liquidity is improving dramatically, with several benchmark issues now gettingt he attention of large funds with the analytical resources to assess the economic situation professionally and not hysterically. Crucially, GCC paper finds better acceptance in the repurchase (repo) market with low haircuts. This is of the utmost importance because in crises heightened risk aversion affects dramatically those securities that do not provide liquidity and that cannot be used as collateral in repo operations.

The Lehman bankruptcy was essentially a run on the international repo market and hit the GCC banking system because short-term financing became difficult. If such an extreme event were to take place again the lines of defense are stronger. Additionally, commercial banks have painstakingly cleaned their balance sheet of non-performing loans, while name lending after the Algosaibi-Saad affair is being replaced, albeit sluggishly, by careful assessment of balance sheets and business plans.

Not everything is rosy: corporate governance remains patchy, macroeconomic statistics in some areas are far below emerging market standards (in the UAE especially) and stock markets remain extremely fragmented and illiquid. Sovereign bonds from the region are not included in emerging market indices; hence the GCC bonds are an off-index choice for most international funds. This means they are the first to be dumped by investors whose portfolios track broader indices.

In conclusion, thanks to solid fundamentals and an improved financial landscape, the GCC can reasonably withstand another mild recession lasting two or even three quarters, but the ripple effects of a deeper downturn or a traumatic sovereign default would be felt on Gulf shores. Accumulated wealth is a strong bulwark, not total protection.

 

 

 

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Society

The end is nigh for the age of rage

by Jeff Neumann
written by Jeff Neumann

Lebanon has among the slowest broadband Internet speeds in the world. This has been well documented, and as Executive went to press the country was ranked 169 out of 170 by broadband monitor Ookala — putting Lebanon ahead of only Iran, while trailing directly behind Mali, Bolivia and Sudan. And not only are Lebanese Internet connections painfully slow, they are also prohibitively expensive.

The grand rollout of the upgraded broadband digital subscriber lines (DSL) in Lebanon is set to take effect on October 1, according to comments made by Telecommunications Minister Nicolas Sehnaoui to reporters in late September. With the assumption that the plan will be realized and broadband speeds will move beyond a crawl Executive found out what the increase in bandwidth could mean for businesses here.

The hold up

Because of the extortionate cost of a decent Internet connection in Lebanon today — by all accounts the most expensive broadband in the Middle East — running a web-based business can be extremely frustrating and logistically problematic. And one does not have to look far to find the source of such frustration. Tom Shepherd, an analyst for telecommunications market research firm TeleGeography says, “On the subject of affordable access to newly increased bandwidth, the overriding factors are local infrastructure and local commercial agreements, often dictated by political decisions, [which is] particularly true in Lebanon.”

Lebanon has had the proper fiber-optic network to handle upgraded Internet speeds in place for years, but government bickering has kept the additional bandwidth unavailable. This inaction has caused “puzzlement” among members of the telecommunications industry and the government, Shepherd says. Most current broadband subscribers would likely use a somewhat less innocuous adjective to describe their feelings about the holdup.

Lebanon is connected to the India-Middle East-Western Europe (IMEWE) submarine cable that runs from mainland Europe to Cyprus, and on to Tripoli. The IMEWE cable has designated levels of bandwidth assigned to each country it is connected to, as Shepherd explains: “Of IMEWE’s overall design capacity of 3.84 Tbps [terabytes per second], 120 Gbps [gigabits per second] is allocated to Lebanon.” And Lebanon is connected to more than just the IMEWE cable.

“Increased bandwidth is also coming via other cables — potentially a larger capacity increase than the IMEWE launch,” Shepherd says, with upgrades planned for the Cadmos submarine cable that also links Lebanon and Cyprus, in addition to upgrades on the Berytar cable running between Syria and Lebanon. Clearly, and unsurprisingly, the main culprit in the failure to bring Lebanon’s connectivity up to date is not infrastructure, but rather government wrangling and bureaucracy.

Average consumers aside, perhaps the biggest beneficiary oft he upgrade will be web developers, who today find themselves constantly behind on the latest technology, trends and software. Put simply, their business is wholly dependent on connectivity. Nagib AbdelNour, head of business development at Koein, a Lebanon-based web and software development company, says that for his developers it is difficult to even download new software that is essential to keep the company current in a highly competitive market, putting the company at a distinct disadvantage to regional rivals.

One such technology currently unavailable in Lebanon is cloud computing, or the sharing of information and software over an online network. “[We’re] left out of new products, like applications. You can’t use them here,” AbdelNour says. “Cloud computing is the future of computing. It could take four years for  Lebanon to get into serious cloud computing. That’s a long time in this business. Everyone is moving to cloud computing, and for this you need a good and cheap connection.”

On a consumer level, cloud computing is used to store and share photos, music and other media through services offered by Apple, Amazon and many others. But being years behind on this technology ensures that local developers cannot stay as competitive. AbdelNour says that while the initial upgrade will be “good for today,” he warns that it is far behind other countries in the region, and as others progress Lebanon will “not be ready for tomorrow.”

Another missed opportunity for Lebanon is the global information technology (IT) outsourcing market. “All of the big corporations are outsourcing to Egypt and Dubai,” AbdelNour says. He notes that many Lebanese can speak at least three languages and that the country should, under normal circumstances, be well positioned to attract large-scale IT outsourcing contracts from some of the tech world’s biggest players. But without a fully functional, modern fiber-optics network, “you will never see them in Lebanon.”

While the revolution in Egypt has stifled economic growth and investment, the country remains a perennial favorite atop the National Outsourcing Association’s ‘Offshore Destination of the Year’, and is shortlisted for this year’s award in November. Last year alone Egypt generated over $1 billion in IT outsourcing revenues from overseas contracts, and revenue predictions for the coming years are even greater.

But even as frustrations with bureaucracy and inaction have reached fever pitch, the positive aspects of better bandwidth are countless. As businesses and consumers spend more time online, advertising rates will increase, too. According to a recent study by Omnicom Media Group, online advertising in the Levant and GCC this year should take up some 9 percent of a roughly $2 billion regional advertising market. Lebanon’s share of that can only grow with time as the means and technology catch up.

Mobile broadband is set to take off as well. TeleGeography’s Shepherd points to the vast experience that the management behind Alfa and MTCTouch — Orascom Telecom and Zain Group, respectively — have with mobile broadband networks around the world as reason to be hopeful that up-to-date technology could be quickly and efficiently implemented. “Mobile broadband —using the new upgraded Internet capacity — will of course also be very important as a means of Internet access, as in many countries around the world where cellular has often overtaken fixed access as the primary method of getting online,” he says.

Security concerns

With increased bandwidth will also come the need for better online security. According to Ziad Badaoui, product manager for security systems at BMB Group, a Beirut-based IT consulting firm that partners with Cisco, McAfee and other global online security companies, “Across the years, security threats have evolved from traditional computer viruses, which were commonly detected by legacy antivirus applications, to sophisticated, blended threats with one major target: steal as much data as possible.” Large-scale data  theft is a terrifying thought for any business owner.

According to BMB Group’s Product Manager for Security, KarimAbillama, as “businesses are moving into ‘always on’ reliable connections, allowing them to host E-services, web-based and mail services in their data centers,” the multitude of security threats will only grow. “Although this [always on] approach allows organizations such as banks, telcos [telecommunications operators] and universities to offer reliable services such as e-banking, e-portals, e-learning, outlook web access and CRM [customer relationship management], security risks from both the public accessibility of those services and the variety of threat vectors targeted at them make enterprises realize that security is a big concern.”

Abillama points to a variety of constantly evolving threats, such as denial of service (DoS) attacks and distributed denial of service (DDoS) attacks, whereby a website is overwhelmed with a flood of data that can bring a company’s online operations to a halt. These attacks are also used to steal vital information from businesses.

Consultants at BMB Group also tackle the problem of inefficient and, in turn, costly Internet usage in the workplace.

“Solutions include enterprise class cache engines that will enhance the Internet browsing experience, lower the Internet overhead fees and offer better and faster response,” Badaoui says. “These caching solutions are usually bundled with traffic shaping solutions that help IT administrators prioritize bandwidth per service or user. Packet shaping tools ensure the availability of Internet bandwidth whenever needed, as well as fairly distributing the available bandwidth among users.”

Global markets

At an e-commerce event during Beirut’s Social Media Week in September, Louise Doumet, the co-founder of Lebanese online fashion retailer Lebelik.com, told attendees that she was surprised to notice people from all over the world were suddenly buying from her. As she put it, marketing online through Facebook and other social media brought in “clients [we] never even thought of,” through friends and acquaintances sharing links and pictures, commenting on purchases and passing it on through their personal networks.

At most, one third of the audience at the e-commerce event said they had purchased something online in Lebanon. Better and cheaper connectivity will increase this, opening up countless opportunities for businesses. Running a web-based retail business keeps overhead costs far lower than, say, a traditional storefront with high rents and costly maintenance.

The unlimited potential for small and medium-sized enterprises to thrive in a modern online environment could also spur a new generation of entrepreneurs. “Today’s social, economic and political pressures have driven the corporate environment in a continuous quest for cost reductions. Businesses must increase their responsiveness to change and continue to minimize operating costs,” says Sandra Salame, senior consultant at BMB Group. “New paradigms, such as software as a service and cloud computing are emerging; in the near future, many organizations will, for example, save cost by renting e-mail, backup and security.”

And the future benefits to citizens are endless; “Applying those trends to industries like healthcare, we would see the emergence of tele-health, doctors and medical staff collaborating together, reaching remote locations, smart connected medical devices that would relay information in real time,” Salame says.

Jawad Abbassi, founder and general manager of Arab Advisors, an Amman-based media consultancy firm, calls high speed Internet in Lebanon “essential, like water.” He says that Lebanon “cannot have a vibrant e-commerce or online banking sector without reliable broadband,” and wryly adds, “We’re really just stating the obvious.”

Hurdles to come

In the near term for Lebanon, “average fixed broadband speeds will double or triple,” says TeleGeography’s Shepherd, adding that “Ogero has also piloted direct fiber access [fiber-to-the-home] for end-users in Beirut, which is expected to eventually offer speeds of at least 25 Mbps [megabits per second] and hopefully higher.”

It remains to be seen just how quickly that will come into effect. “The speeds in different areas of the country also depend on how complete Ogero’s fiber-optic transmission network is. Ogero began the roll-ou tof a nationwide next generation [Internet protocol] backbone in 2010 to support the spread of high-speed services,” he adds.

In the long term, the significant increase in bandwidth will bring with it new consumer demands — such as the ability to stream high quality videos, share large media files and open up many new opportunities. It will eventually make Lebanon a far more attractive destination for multinational corporations.

TeleGeography’s research shows that the cost of an Internet connection in Lebanon on average has not changed between 2008 and 2011 “for low and high usage customers,” Shepherd says.

The telecommunications ministry’s new table of rates indicates an 80 percent drop in cost, and there is a cap on how much Internet service providers can charge consumers. With faster broadband Internet, companies can conduct video teleconferences with clients or other branches overseas. Online banking will become quicker and more prevalent. The list of knock-on effects for businesses here is infinite.

While there are many reasons to be hopeful, do not count on your Internet connection becoming lightning fast overnight, either. Shepherd says, “In South Africa too, recent new international cable launches have taken a longer time than predicted to filter down to the end-user in terms of cheaper and faster broadband, largely due to complexities in the competitive domestic wholesale bandwidth provider market.”

The many variables and complexities at play here should keep things interesting, to say the least.

 

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Society

Your life on the line

by James Reddick
written by James Reddick

The concept of identity theft has long been a theme of the science fiction world. Jack Finney’s 1954 classic novel, Invasion of the Body Snatchers (later adapted into film no less than four times), is driven by uncertainty over who is a clone ­— duplicated by an amorphous extra-terrestrial race — and who remains human.

While the consequences are certainly more mundane, and the means more temporal, online identity theft is presenting a similar real-world scenario that has the potential to affect anybody with Internet access.

Take, for example, the case of Fafi Merhi, who has now had parts of her profile “cloned” on Facebook twice. In both instances, Merhi says,the perpetrator created an account under a different name from hers while using all of her pictures. She or he then attempted to add her friends, and then afterwards their friends, on a few occasions (that she was told about) sending messages to contacts with ambiguous come-ons such as “Let’s get to know each other”.

As far as she knows, the culprit had no financial motivation, and was most likely a “friend” or “friend of a friend”, since they would have had to have access to her photographs and list of contacts. When a tech-savvy friend gained access to the impostor’s affiliated email address, Merhi disconcertingly discovered that it was [email protected].

“I don’t know what satisfaction they could get out of this. Honestly, I felt sorry for this person,” she says. Sympathy aside, the consequences of cloning can be dire, especially since reporting security breaches on Facebook is a notoriously slow process. Merhi’s first clone account was up for six months before it was taken down, despite repeated complaints submitted through Facebook’s online security form.

“Consider if Fafi was working in a government position,”says Michael Chaftari, CEO of newly launched Beirut-based social media monitoring company Fetch. “Someone could seriously damage her reputation.”

‘Social engineering’

While online risks are typically associated with malicious software, predators more and more target users’ anticipated behavior. This, says Chaftari, is known as “social engineering”, a cynical approach to information gathering that manipulates a user’s proclivity to trust. This can come in elaborate forms, from pop-up windows that pretend to be a trusted site asking for a user name and password, to rummaging through garbage bins in search of clues about passwords, social security details and other sensitive information.

In the case of Facebook, fake accounts are the most common channels for social engineering. If a beautiful, scantily clad woman with no mutual friends invites you on Facebook, it is best to resist the temptation. Same goes for shirtless men, or any stranger for that matter.

With faster speeds in Lebanon an eventual reality, the nature of Internet usage is bound to change. Online shopping, for example, will no doubt increase, as companies are finally able to adapt to the 21st century. But as the usefulness of the Internet in Lebanon increases, the need for vigilance will rise accordingly as sensitive information will be more frequently submitted online.

“Your online presence is no longer limited to communication,” Chaftari says. “People are using the Internet for more serious things.” While Facebook remains a largely light-hearted social platform, it can be the gateway for predators to access more sensitive information.

With this in mind, Executive enlisted the help of Victor Sawma, chief technology officer and partner at NetDesignPlus and a lecturer at Notre Dame University in Lebanon, to dissect the risks of Facebook to the everyday user and to explain what he or she can do to protect themselves.

What are the potential security risks of using Facebook?

Connecting people is the goal and soul that drives this giant social network. But with each of Facebook’s innovative new methods to communicate — such as the ‘Places’ application, which is essentially an opt-in online tracking device — come new risks to users’ security. That in mind, Facebook is constantly trying to create a balance between the two; these efforts have increased lately with the release of Google+, which was advertised as an antidote to Facebook’s security “minuses”, a key feature for users to make the migration to a new platform. Facebook’s response was a rash of  security upgrades, such as more finely tuned privacy controls and increased default security settings.

From a security perspective, Facebook is prone to the following issues:

Identity integrity: This is directly related to when somebody else tries to pretend to be you or even to be your business and abuse your social relations. This is very common lately on Facebook, especially at the personal level. But it is also possible in some cases to see this taking place at the business level by somebody creating a business page for a competitor through a fake account for the sole purpose of harming the image of that business.

Personal/business privacy: This is related to information being leaked to other parties, whether directly or indirectly. It is not necessary for Facebook users to write about something for other people to know about it. The existence of a relationship, along with photos and status updates, are more than enough, in the majority of the cases, to allow other people to learn about information that you did not intend to tell them about.

Trust-relay issues: Facebook users are expected to trust applications  — additional programs that exist within the structure of Facebook —  by giving them access to personal, and sometimes sensitive, information. The majority of users do not realize how harmful this can be. For example, why would an application need access to publish on your wall if, at the same time, it claims that it will not tell anybody anything without your previous consent? The majority of users do not question why a certain application is requesting permission to certain information. They trust that application simply because it comes from Facebook.

What can users do to protect themselves?

The only protection that Facebook users can have is awareness. They have to learn what permissions are about, how the social network (called the social graph) of Facebook works, and so on. But is not an easy task, even for security experts. We end up, in many cases, uncovering potential risks that can rise from certain permissions or activities. As a start, Facebook users must consider giving permissions at the minimum level needed. They must also remember that giving an application permission once means that this application will gain access to the information that it needs (name, email, gender, friends list, etc.) and will still have that information even if that permission was denied later on. The majority of applications, if not all, save the information that it needs once permission is granted.

Is there any defense against cloning?

Any person (real or virtual) who knows or has access to your information can attempt to clone your profile. Who can access sufficient information to do so convincingly depends on your own privacy settings. Recent updates to Facebook’s privacy functions now mean that users have more control than ever over who can access their content; almost every facet of a Facebook user’s online presence can be designated as visible to either just their friends, friends of friends or be left completely unrestricted, visible to (and thus able to be ‘cloned’ by) anyone. Facebook also allows users to narrow this down further by creating specific lists of friends who are able to access their ‘wall’, profile updates and photographs. Users are also now able to embargo ‘tags’ in friends’ photos and restrict who can see any tags that they do choose to accept.

Where does Facebook go from here?

Facebook is currently undergoing dramatic changes at the security level, in general, and privacy and access control level in particular. A re-engineered news feed now allows users to better control what is being written about them by friends, family and other parties. Users are also now being asked about certain sensitive posts before Facebook posts them within their News Feed. Sawma believes this process will continue in the few coming months as Google+ pushes more and more into the social network market share.

 

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Comment

Increasingly called to arms

by Nicholas Blanford
written by Nicholas Blanford

The challenge facing Syria’s opposition protestors seems greater today than at any other time during the six months of demonstrations against the regime of Syrian President Bashar al-Assad.

Despite more than 2,600 people dead, according to United Nations figures, the imposition of sanctions against the Syrian leadership and an international outcry, an undaunted Assad has redoubled his efforts to crush the uprising by brute force.

This durability is causing dismay among opposition protestors who, for all their bravery in facing tanks and snipers on a near daily basis, have yet to gain the necessary momentum to topple the regime. Increasingly, there is talk in opposition circles of the inevitability of resorting to weapons to confront the regime. Reports are mounting of attacks against Syrian security forces and of arms being smuggled into Syria. The prices of black market weapons in Lebanon continue to climb, as they have done since mid-March when the uprising began in Syria. Although some of the demand is domestic, most of it is driven by the crisis in Syria. At this stage, it appears that the arms buying is being conducted on an individual basis, with Lebanese intermediaries purchasing illegal weapons, and legal shotguns, and selling them to Syrian contacts. The bulk of the opposition says it isdesperate to keep the demonstrations peaceful. Yet they admit that there could come a breaking point when protestors will no longer endure being gunned down in the streets each day and will choose instead to shoot back.

“The regime is going to do more killing, so the only way we can win is to have neutral observers, and lots of them, in Syria to monitor what’s happening,” said Ahmad, an activist from the port city of Banias who escaped to Lebanon last month. “We don’t want to go for the option of an armed struggle against the regime. But if the international community does not step in, we are afraid that it will lead to civil war.”

Resorting to weapons not only risks plunging Syria into civil war, it would also play neatly into the hands of the Assad regime. The Syrian leadership has consistently said it is fighting “armed terrorist gangs”, a claim that presently few believe. But such accusations would be harder to refute if the opposition takes up arms. Furthermore, the Syrian army — the elite units at least — and the intelligence services still back Assad, which means the regime is well positioned to confront an armed struggle.

The Syrian opposition, which remains critically divided with no single unifying figurehead nor effective, overarching organizational body that can speak for the opposition at large, cannot expect anytime soon an international intervention in Syria, similar to the NATO-led campaign to oust Colonel Muammar al-Qadhafi.

Syria, after all, is not Libya. Unlike the isolated North African country and its eccentric ruler (who was scorned by his fellow Arab leaders), Syria lies in the heart of the Middle East and wields influence — of a potentially malevolent nature — throughout the region. Syria’s Arab neighbors, and Israel, are wary of the Assad regime exporting mayhem and instability in the admittedly unlikely event that the international community chooses to intervene militarily in support of the opposition.

Instead of an overt military intervention, it is perhaps likely that interested parties — the United States, Iran, Saudi Arabia and Turkey  — will intercede to play a more active role in shaping the future of the country. Iran will probably continue to support the Assad regime for the time being, even as it sends outfeelers to some elements in the opposition to explore the possibility of whether any post-Assad administration in Damascus will continue to abide by the three-decade Iran-Syria alliance. Among the signs to watch out for are defections by senior Alawite military officers, some of whom may prove susceptible to under-the-table offers of cash and immunity from prosecution if they were to abandon the Assad regime and side with the opposition.

Another indicator would be the emergence of more organized transfers of weapons and communications equipment to the opposition, suggesting that the revolution has found financial sponsorship. Social media tools such as Facebook and Twitter may help promote a revolution and win international sympathy, but they are not enough to defeat a regime that shows no hesitation in using brute force to ensure its own survival.

NICHOLAS BLANFORD is the Beirut-based correspondent for The Christian Science Monitor and The Times of London. His book “Warriors of God: Inside Hezbollah’s Three-Decade Struggle Against Israel” will be published by Random House this month

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