Feature

Lebanon’s fault line

by Executive Editors
written by Executive Editors

Since the first news of protests emerged from Syria in March, EXECUTIVE has followed the impacts of the upheaval, which have spread across the border into Lebanon. From refugees fleeing the conflict, to protests both supporting and deriding the regime of President Bashar al-Assad, the uprising next door is a Lebanese reality as well

1) A pro-regime demonstrator displays his allegiance outside the Syrian embassy in Beirut by means of rough tattoos depicting Syrian President Bashar al-Assad (L) and his elder brother Bassel, who died in 1994 

2) A candle-light vigil in Martyrs’ Square is held to show solidarity with the people of Syria

 3) Leftist Assembly for Change activist Farah Koubaissy leads an anti-regime rally in downtown Beirut

4) After violent attacks on anti-regime protesters in West Beirut in early August, in which people carrying cameras were actively targeted, pro-Assad demonstrations took on a somewhat more ‘media-friendly’ approach

5) A soldier watches over a small anti-regime protest in downtown Beirut 

6) An anti-regime demonstrator holds a sign, which reads ‘Bashar should Fall’ at a rally in Martyrs’ Square, Beirut 

7) A Syrian family prepares dinner at a refugee station set up in a school in Lebanon’s northern region of Wadi Khaled The family fled from the Syrian border town of Tell Kalakh, where Amnesty International reported “a devastating security operation” in which “scores of men were arbitrarily arrested, tortured and at least nine died in custody”

8) Syrian workers gather in support of their president outside the Syrian embassy in Beirut

9) After being smuggled across the border, Syrian cyber-dissident Rami Nakhle spent some nine months in Lebanon coordinating efforts to disseminate reports and footage taken by activists within Syria. He fled to America after a tip-off that it was no longer safe for him in Beirut and is now a member of the opposition Syrian National Council

10) A Baath Party member who was coordinating a pro-Assad demonstration outside the Syrian embassy in Beirut shows off a lapel pin displaying the president’s image

12) Mohammed Khoder Waloum displays scars he says were caused by Syrian security services during a protest in his hometown, Tell Khalak. He and his family subsequently fled to Lebanon 

13&14) Islamists from Tripoli demonstrate against Assad’s regime outside the Syrian embassy in Beirut. Many supporters of Assad fear instability from Islamist influences should the regime fall 

15) Riot police look on at a pro-Assad demonstration. Security was stepped up after three anti-Assad demonstrators were hospitalized with critical injuries after clashing with Assad supporters in early August

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Feature

The slow crush of attrition

by Executive Editors
written by Executive Editors

Eleven years of gradual economic reform have sputtered to a halt in Syria over the past six months amid nationwide revolts against the regime of President Bashar al-Assad. Gone are the halcyon years of a booming tourism industry, the headway made by the region’s youngest stock exchange and the foreign direct investment that had spiked since 2005 to reach $2.9 billion in 2010. Meanwhile, the expatriate Syrians lured back from corporate jobs in the Gulf and the West to join the fledgling financial sector have, by and large, packed their bags and left as the crackdown on demonstrators escalates. Between 2,600 and 5,400 have been killed, according to varying estimates, as Executive went to print.

The short-lived economic renaissance of sorts steered by Assad and Abdullah Dardari, a London School of Economics graduate and now former deputy prime minister, took a further blow when the United States and the European Union slapped multiple sanctions on prominent members of the Syrian regime and close economic partners in May, and imposed further rounds of sanctions in August and September that included the oil sector .

Tightening the screws

The EU has been selective in what individuals and entities it has targeted for sanctions.

On May 9 and May 23, members of the regime were designated, including President Assad and his maternal cousin, billionaire businessman Rami Makhlouf, whose portfolio includes Cham Holding and mobile operator Syriatel, and who the EU stated was targeted because he “bankrolls the regime allowing violence.” On September 2, the EU listed prominent businessmen and businesses for providing “economic support to the regime”, such as the presidents of the Damascus and Aleppo chambers of industry — respectively, Tarif Akhras, head of the Akhras Group, and Issam Anbouba, president of Issa Anbouba Establishment for agro-industry — as well as Cham Holding and certain subsidiaries, and the state-run Real Estate Bank.

On September 23, a further 15 regime members were added (bringing the total to 43 members of the regime and associated businessmen), as well as five Syrian intelligence and military directorates. A further six entities were added to the ‘banned’ list, including Addounia TV and Syriatel, as its licensing contract “pays 50 percent of its profits to the government.”

The EU moves allow for the freezing of the European assets of the individuals targeted and prohibits their travel to Europe. The latest sanctions also prohibited the selling, buying and export, directly or indirectly, of new Syrian banknotes and coinage printed or minted in the EU, to the Central Bank of Syria, as large amounts of Syrian currency had, until then, been produced in Austria. The September sanctions also prohibited financial loans, credit or joint ventures with listed persons or entities.

The US sanctions, issued May 27 and September 1, focused on military-linked businesses, Syrian hydrocarbon companies and Cham Holding, and prevent American companies from doing business with the figures in question. Sanctions were also renewed against the state-run Commercial Bank of Syria (initially blacklisted by the US in 2004 for financing terrorism), and Syrian-issued MasterCard and Visa cards have been frozen. The US and EU-blacklisted companies and individuals contacted by Executive refused to comment.

Hardly foolproof

“Sanctions are not a silver bullet,” said Andrew Tabler, a Next Generation Fellow at the Washington Institute for Near Eastern Policy (WINEP) and author of recently published “In The Lion’s Den: An Eyewitness Account of Washington’s Battle with Syria.”

“They are more like ways you can find to ratchet up the pressure in very specific ways to try and bring about some breaks in the regime, for instance, in getting elites to move away from [it],” he said.

The economic sanctions are an obvious psychological blow to the regime and its cadres, but do not have the same impact as those on the oil sector, which accounts for an estimated 20 to 30 percent of the country’s gross domestic product.

That said, while the latest sanctions have not directly targeted international trade outside of oil, wariness on the part of international shippers to trade with Syria and a sharp drop in domestic demand has seen cargo shipments at the port of Lattakia plummet, dropping 13 percent since the beginning of the unrest in March on the year before and 36 percent year-on-year in June alone, according to statistics published by the port’s operating authority. Reuters last month quoted shipping sources as saying volumes at the ports of both Lattakia and Tartous have shrunk as much as 40 percent in the first eight months of 2011, relative to last year.

Trade with strategic partner Turkey has also plunged, with Syrian exports to Turkey in June dropping 59.3 percent, to $48 million, from the same period last year, while Turkish exports to Syria declined by 18.1 percent to $113 million, according to Turkish government figures.

Trade with the US, however, has been negligible for years, with 2010 bilateral trade estimated at $928 million, or 2.4 percent of all trade, following the Syria Accountability and Lebanese Sovereignty Restoration Act of 2003 that banned all exports except food and medicine, prohibited American businesses from operating or investing in Syria, blocked transactions on Syrian property and tightened the aviation sanctions first imposed in 1984. However, Syria was able to successfully bypass these earlier sanctions by re-exporting American goods through Jordan, Lebanon and the United Arab Emirates. Where the US has hurt Syria is by limiting the leverage of Syrian banks internationally, and it could deliver a huge blow should it succeed in its efforts to put pressure on Turkey to also impose sanctions.

A bigger blow to Syria is the impact on trade with the EU; the economic bloc is the country’s largest trade partner and aid donor, accounting for 22.5 percent of Syria’s foreign trade in 2010.

But as a trade partner, Syria ranks low down on the major import and export list for the EU, accounting for just 0.2 percent of imports and 0.3 percent of exports in 2010, and ranked 50th of the EU’s trade partners, according to International Monetary Fund (IMF) statistics. Nonetheless, the sanctions have had an effect.

“While EU trade sanctions are limited to the oil sector, non-oil trade with Europe has been affected as European companies have been limiting their trade with Syria, and the Syrian government itself is encouraging Syrians not to trade with Europe,” said Nabil Sukkar, a former World Bank economist and head of the Syrian Consulting Bureau for Development and Investment in Damascus.

No investment ban

The EU sanctions have not included an investment ban on European companies doing business in Syria, although this could be the next step. “I think an investment ban is coming. But what impact will it have? The largest investment [by the EU] is in the petroleum sector,” WINEP’s Tabler said.

Italy, whose bilateral trade with Syria was worth $2.69 billion in 2010 and which is Syria’s fourth largest import partner, has managed to delay the enforcement of EU oil sanctions until November. The European Investment Bank has stopped all loans to Syria and EU aid programs totaling $185 million have been slashed by 62 percent. The aid had gone towards funding infrastructure projects and providing expertise to the private sector.

But Sukkar believes such a move by the EU is disingenuous. “The cut in EU aid to Syria, intended originally to support economic liberalization, will strengthen the tendency of the new government to bring back controls. So sanctions will be counterproductive, they will hurt citizens’ livelihoods and will help the reversal of Syria’s liberalization policies,” he said.

For the sanctions to work beyond the oil sector, other revenue streams need to be targeted, said Tabler, hitting more prominent businesses in Damascus and Aleppo, particularly those with ties to Western firms such as the Joud Group, which manufactures and distributes Pepsi under license, and the Attar Group, which handles distribution for multinational pharmaceutical companies and electronic and software companies Sony, IBM and Lexmark, as well as being the country sales agent for Alitalia.

Other businessmen that could be targeted — listed in a report by the US Congressional Research Service but so far not sanctioned by Washington — are Majd Suleiman, head of media conglomerate United Group and son of Bahjat Suleiman, a former General Security Director officer, as well as Firas Tlass, the son of former Defense Minister Mustafa Tlass and head of the MAS Economic Group. Reducing the profit margins of major companies paying taxes to the regime would dent the Syrian treasury.

While Sukkar is against the sanctions, he suggested that such specific targeting would make a mark.

“The impact on specific companies and individuals… will deter others from establishing business relations with establishment figures,” he said. “But the imposed sanctions will not topple the regime and will not cripple the economy. Instead it will create economic and social damage, affecting both government finances and citizens’ livelihoods.”

“We will forget that Europe is on the map”

The Syrian government has, unsurprisingly, played down the impact of the sanctions. At a press conference in Damascus in June, Foreign Minister Walid al-Mu’allem responded to the first round of EU sanctions by saying: “We will forget that Europe is on the map, and we will turn to the east, to the south and all directions that extend a hand to Syria.”

The Syrians have lived up to their word to look elsewhere for alternative trade partners. Over the summer, Syrian officials went on a mission to get trade agreements with Ukraine, Kazakhstan, Belarus and Russia. Grain, for instance, has been purchased from Ukraine; a necessary import as Syria no longer produces enough food for its domestic consumption and agriculture output has not been as high as expected this year due to the ongoing drought in much of the country.

Russia has criticized the EU sanctions, and as of August continued to supply arms to Syria. In early September, Prime Minister Dmitry Medvedev said Russia was “a great friend of Syria” and “a country with which we have numerous economic and political contacts.”

Closer to home, the Arab League at the end of August called for an “end to the spilling of blood and for Syria to follow the way of reason before it is too late,” but has not gone as far as calling for an economic boycott or annulling Syria’s membership in the Greater Arab Free Trade Area. Damascus rejected the league’s statement, as did Beirut, signaling that bilateral trade with Lebanon will continue. Such support from Beirut, Moscow and its allies, albeit limited, does dampen the effectiveness of the US and EU sanctions.

“Syria will be able to mitigate the impact of sanctions through deepening economic ties with Iraq, Iran, Russia and other Asian countries. Also Lebanon will always accommodate Syrian business needs for financial transfers,” said Sukkar.

According to shipping sources in Beirut, trade with Syria has not been affected and is very much ‘business as usual’. Lebanese banks hold accounts for Syrian officials, including Rami Makhlouf, according to a banking source, although banks agreed, unofficially at a Union of Arab Banks meeting, not to carry out international transactions on behalf of Syrians, or provide alternative names or addresses. Meanwhile, Finance Minister Mohammed al-Safadi said following meetings in Washington and with the IMF in late September that it was not in the interest of Lebanon to be the financial hub of Syria, and that Lebanese banks have taken measures to align with the international sanctions. If upheld, this could also affect foreign remittances on behalf of Syrians.

If ties with Iraq cool, as Baghdad has recently hinted at, and Turkey joins in on the sanctions — Ankara has already intercepted arms shipments — the Assad regime will find itself increasingly isolated. “Syria would be surrounded. And it is not like Jordan has a lot of love for Syria,” said Tabler. Indeed, if Jordan closed its borders, this would have a major effect on Syrian trade with the Hashemite kingdom and Saudi Arabia, Syria’s third largest trade partner. The loss of Iraq as an export destination would be equally devastating, accounting for 30.3 percent of total exports, or $4.6 billion, in 2010.

Sound as a pound?

Syria’s Finance Minister, Mohammad Jleilati, was trying to put on a brave face when he said on the sidelines of a meeting of Arab finance ministers in Abu Dhabi in early September that the economy will grow by 1 percent this year.  A recent IMF report estimates Syria’s economy will contract by 2 percent, while the Institute of International Finance estimated the economy will contract at least 4 percent this year and the fiscal deficit will widen to more than 6 percent of GDP.

But Tabler and other sources Executive spoke with suggest the Syrian economy could shrink as much as 20 percent; tourism revenue (worth more than $8 billion last year) has almost completely vanished, the cities of Homs, Hama, Deir ez Zor and Daraa have been at a virtual economic standstill for months, banks are reporting steep declines in assets and trade is falling off. Syria has seen roughly $2 billion in capital flight this year, and the Central Bank of Syria (CBS) has had to spend at least $2 billion defending the Syria pound (SYP), according to CBS Governor Adib Mayaleh, though the official exchange rate has still slipped slightly, from SYP46 to the dollar in March to SYP48.41 in September.

CBS foreign reserves are officially at $18 billion, although sources peg that number nearer $15 billion, and Mayaleh said Syria has a $5 billion fund created several years ago for the specific purpose of supporting the currency during crises, although he did not make clear whether it was included in the total reserves. Syria also has an estimated 25.8 tons of gold reserves, according to the World Gold Council data, worth roughly $1.4 billion at average world gold prices at the end of last month.

The currency reserves will allow Syria to cover import needs for over 20 months, according to the finance ministry, but that also depends on countries staying friendly with Damascus and remaining willing to trade.  Furthermore, international currency rates could cause Syria more fiscal woes than it is already facing, having lost access to the dollar on the global markets.

“Restrictions on money transfers in dollars, initiated from outside as well as by the CBS, have disrupted trade,” said Sukkar. “There will be further disruptions in trade if the EU imposes restrictions on transfers in euros. Then Syria will have to go to other convertible currencies, such as the [British] pound and the Japanese yen, both of which have been as volatile as the dollar and the euro over the past year.”

How well the central bank handles these challenges will be key to the continued funding of the Syrian regime amid increased economic isolation and the possibility of further sanctions.

A faltering economy and diving business prospects would undoubtedly erode support for the regime among middle class Syrians and the business elite — groups which, to this point, have largely backed the Assad government. But in the war of attrition that sanctions amount to, whether they have the desired effect of shaking the regime’s iron grip on power, or whether they harm everyday Syrians more than anyone else, are still open questions. 

“[It] all depends on agricultural production, oil prices and how much overall economic demand has dropped,” said Tabler. “The real challenge is for the sanctions to hit the regime more than anyone else.”

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Feature

Draining the autocrat

by Executive Editors
written by Executive Editors

As Damascus struggles to repress widespread protests across the country, now in their seventh month, it will also have to contend with a comprehensive sanctions package from the United States and the European Union on Syria’s oil sector.

The sanctions prohibit purchases of what until now has been Syria’s 145,000 barrels per day (bpd) export regime, with the International Monetary Fund valuing these oil receipts at $4 billion annually, amounting to some 25 percent of total government revenue. Sanctions also ban all new investment into the country’s hydrocarbon sector.

The EU represents 96 percent of the export market for Syria, with Germany, Italy and France alone accounting for more than 70 percent. But the sanctions will not be enforced immediately, as the EU vote on September 2 stipulated an implementation date of November 15 — a compromise deal with a coalition of members, chief among them Italy, under domestic pressure from refiners that had been affected by the disruption in oil supply from Libya this year.

While Europeans have been outspoken in their criticism of President Bashar al-Assad’s brazen repression of dissent, for many the sanctions come as a surprise. Because of a tight supply market, especially in the Mediterranean, as well as longstanding European involvement in the Syrian energy sector by super-majors Shell and Total (and a litany of newcomers), the official line in Brussels was that US-style sanctions would hurt the people, rather than the regime. However, persistent lobbying by representatives of the Syrian opposition in exile, who made a simple yet compelling case advocating a ban on imports, may have had the desired effect. Anti-regime lobbyists noted that the Assad regime may be in too precarious a position to maneuver the levers of power and bureaucracy required in finding new markets for its relatively unattractive oil, much less respond to a multitude of disruptions across the entire supply chain.

A minnow in the ocean

Syria does not have a significant oil industry to wield as a political tool with the West. Historically, relations with the West have been fraught with tension over Syria’s antagonism toward Israel, its involvement in Lebanese politics and its alleged support for the insurgency in Iraq. But while the country may punch above its weight ideologically, it is considered a minnow in the global oil arena and has few resources from either a technical or market perspective to weather a sustained and serious embargo from the West.

Syria’s oil output in 2010 was estimated to be 385,000 barrels per day, which represented a victory for the sector as the first time in a decade that the country was able to buck a year-on-year decline (often at rates as high as 5 percent) that had many analysts writing Syria off as an exporter by 2020. Syria benefitted, however, from the flurry of global exploration and production activity that was spurred by the dramatic rise in the price of oil from $35 in 2000 to $147 in the summer of 2008. The newfound incentives saw companies aggressively pursuing opportunities using technologies that had until then been deemed uneconomical.

President Assad and former deputy prime minister for economic affairs Abdullah Dardari responded to the changes in the market by embracing western firms and instituting a series of laws that made the Syrian play (the country’s market and resource opportunities) “the best of any country in the Middle East”, according to Ken Judge, an official with Gulfsands Petroleum, whose main production assets are in Syria.

Super-majors Shell and Total, producers of the country’s premium Syrian Light grade, declined to expand operations in the country, focusing instead on marketing refined products to the rapidly growing Syrian demand and using the country as a platform for entry into the post-Saddam Iraq. A litany of independents, however, entered the trade and began an aggressive drilling campaign, particularly in the heart of the country, but also in the northeast Deir ez Zor region. Companies such as Dove Energy, Loon, Stratic and France’s Maurel & Prom invested millions of dollars in the play, encouraged by a global market that was rewarding risk and a Syrian market that had already paid off for at least one independent, United Kingdom-based Gulfsands. The company discovered oil in 2007 and by 2009 was posting impressive production gains, with profits jumping some 160 percent from $18 million in 2008 to $48 million in 2009.

At the same time, a regional shift towards utilizing associated gas production, by either bringing it to market or by re-injecting it into aging oil fields, allowed the state-owned Syrian Petroleum Company — which controls the sector through independent production and joint ventures with foreign producers — to gradually arrest declining output. Through its marketing arm Sytrol, the method allowed for a 15-year export plan that would offset the gradual decline of its premium Syrian Light blend with substantial growth of its primary export blend, Soueideh (also known as Syrian Heavy), which would allow the country to maintain current export levels until 2025. Syrian Heavy is a low quality and technically challenging oil to process, sold at a discount to benchmark Dated Brent. It can only be processed by a minority of refineries in the world, which are generally concentrated in Europe and the US, as well as in Syria. As has been a pattern in the region, the government invested its inflated revenues from increased crude output into manufacturing and heavy industry.  This boosted domestic demand for refined oil to the point where, by the mid-2000s, it outstripped domestic supply. Syria was left increasingly reliant on imports of refined oil it purchased with precious foreign currency when, had the country instead prioritized expenditure on its own refining capacity in the last decade, it could theoretically be supplying to its own market. Syria’s refining capacity had long stood at 240,000 barrels per day which, outstripped by domestic energy consumption, forced Damascus to begin an import regime that now stands at approximately two to three cargos a month to meet its gasoil and liquefied petroleum gas (LPG) needs. It buys these cargos at market value, which it then sells domestically at deeply subsidized prices. According to the US Energy Information Administration, the practice cost the government $3 billion in 2010, but will likely remain in place as the government seeks to retain popular support.

Both ends of the sanctions

Syria’s proven reserves have generally remained around 2.5 billion barrels, the lowest of any Middle Eastern oil exporter, and accounting for just 0.2 percent of the world total.

In 2010, BP estimated the country’s reserve-to-production (R/P) ratio — the amount of time it would take to exhaust oil at current production levels — to be 18 years. It is indicative of the diminutive size of Syria’s export stream, in global terms, that their top buyer, Italy, has imported an average of 41,500 barrels per day this year, which is less than 3 percent of their total import mix.  Its major buyer, Eni, is confident that they can source supply elsewhere.

Similarly, although major US investment had been halted in 2004, the latest sanctions formally and entirely cut the cord with Syria’s oil sector. Though the vast majority of Syria’s domestically refined crude is consumed in-country, the US had been taking in 9,300 barrels per day of refined Syrian petroleum products, contributing to the $400 million in payments to Damascus in 2010, according to US trade data. The US was Syria’s largest single purchaser of refined petroleum products, yet accounted for less than 0.004 percent of America’s 2.6 million barrels per day of total imports of petroleum products. By contrast, Libyan oil reserves of light sweet crude, highly sought after by European refiners, stood at 46 billion barrels with a R/P ratio of 78 years at 2010 production levels. The loss of Libya’s 1.4 million barrels per day on the market compelled Saudi Arabia to increase output and US President Barack Obama to authorize a rare 30 million barrel sale from America’s strategic reserves. The loss of Syrian supply would be unlikely to engender such moves.

Although Assad did get somewhat of a reprieve with the November 15 implementation date, the regime is expected to have difficulty finding new markets to keep up its export schedule. Kate Dourian, Platt’s Middle East bureau chief, believes that “countries will voluntarily stop working with Syria.” Indeed, both Danish Maersk Oil and French giant Total voluntarily cancelled scheduled deals in September, with Maersk spokesman Michael Christian Storgaard attributing the stoppage to “US sanctions”. Traders Vitol and Trafigura, on the other hand, continued with planned sales of one cargo of gasoline each, to Syria’s state-owned Sytrol in August.

Though Vitol and Trafigura, both based in non-EU Switzerland, would not be required to comply by the EU standards, an email from Vitol’s press office to Executive stated that the company “has been and will remain in full compliance with all local and international sanctions legislation relating to Syria.” Dourian believes that the “reputational risk” involved with the Syrian market is not worth it for Western traders — who have no infrastructure or long-term deals at stake with the country — to continue their dealings with Damascus even ahead of the November 15 deadline.  Heavies such as Shell, who are still dealing with Damascus, are under pressure from grassroots campaigns by Syrian activists and non-governmental organizations.

At the same time, an expected price collapse of Syrian oil after the sanctions take effect may make Syria’s crude attractive to buyers in the east, who tend to be less influenced by Western politics in the oil industry. A number of logistical obstacles, however, would have to be overcome. Syria’s shipping capacity is designed for Mediterranean markets and short trips. Loading ports in Baniyas and Tartous are limited to Aframax class tankers, with a capacity around 600,000 barrels. They can technically make the journey to Asian and Indian markets but would do so at a higher cost per mile than larger tankers, which would offset the discounted prices. China and Russia my be tilted towards buying from Syria by political considerations but India, the closest east-of-Suez destination that would potentially accept Syrian Heavy, traditionally favors political neutrality in its oil dealings in the Middle East.

Additionally, the premiums paid for the financial instruments necessary to secure these deals and guarantee tanker costs, have also been rising. According to the UK-based Worldscale guide for tanker rates, Syria pays around $18,000 per day to ship a full Aframax load to the EU, but a Reuters report in March of this year noted that rates had gone up by 26.5 percent, concurrent with the first round of EU sanctions. The price hike is due to the risks perceived by traders in handling the cargo and is likely to rise further as sanctions drag on.

China, with recent acquisitions through its state-owned China National Petroleum Corporation, does have a 35 percent interest in Syria Shell Petroleum Development, but this represents less than 10,000 barrels per day of the company’s 2.8 million daily production.

Russia, however, has long standing plans to build a major naval facility in Tartous.  Ambitions of a blue water base in the Mediterranean are , according to IHS Jane’s analyst David Hardwell, “as old as the hills”.  This isn’t necessarily dependent on Assad; an opposition visit to Moscow late last month no doubt included assurances as to the viability of the project in a post-Assad Syria.

The extent of Russia’s, China’s, and perhaps India’s willingness to step up and support the regime in the face of increasingly unified and diverse pressure on the country is unclear.

Although indications from Moscow and Beijing are that they will not stand for another Libyan style intervention, both countries would need to go out of their way to serve as substitute markets for Syrian oil in the medium term. Russia, for example, is invariably the largest, or second largest (running neck and neck with Saudi Arabia) net oil exporter, and imported just 1,000 barrels per day in 2010, according to BP. Though a price collapse of Syrian Heavy after the November 15 moratorium on EU imports is certain, China’s heavy refineries are already enjoying a decidedly buyer’s market, which has seen sharp discounts in heavy oil for east-of-Suez deliveries.

Structurally, it is potentially much easier to thwart Syrian efforts to sidestep the embargo than augment them. Organization of Petroleum Exporters (OPEC) powerhouse Saudi Arabia, who in August withdrew its ambassador to Damascus to protest the regime’s crackdown, demonstrated its willingness to dip into its spare production capacity, in response to supply disruptions from Libya, by increasing output by 300,000 barrels per day in June. 

This was accompanied by a statement from its Oil Minister at the time Ali Naimi indicating that any disruption to global oil production from the unrest in Libya, or any other producing country, would be met by swift action from Riyadh. Furthermore, although less likely in the short term, Barack Obama reserves the right to penalize any company with US interests that does business within the Syrian oil sector. Washington has successfully wielded a similar threat in discouraging many international oil companies from doing business with Iran.

Even if the Syrian government does get its oil to market, the earnings derived may be diverted into ensuring that the imports of LPG and Gasoils remain on track to keep the country functioning.

A September 23 report from Reuters quoted unnamed traders as saying that Damascus was making overtures on the international market to swap crude oil in return for refined product that the country needs to meet consumption.

The same report went on to detail the difficulties that Syria was facing in concluding contracts, even ahead of the November 15 deadline, primarily because the financial instruments necessary to facilitate such deals — such as insuring shipments and payments — have also been impacted by the sanctions. The report concluded that Damascus would likely eventually find a willing partner to finance the operations, but that its premiums to underwrite the risk would be extraordinarily high.

Even if Assad can keep some of the oil revenue flowing to prop up his embattle regime, this lifeline will be thin. 

“It is potentially much easier to thwart Syrian efforts to sidestep the embargo than augment them”

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Deference versus diversity in the Gulf

by Paul Cochrane
written by Paul Cochrane

Gulf Cooperation Council (GCC) countries have long struggled with implementing nationalization employment policies (NEPs) to bring more GCC citizens into the workplace, offset reliance on expatriate labor and diversify their oil-dependent economies. The track record has been mixed — fairly good at getting citizens into the government sector but pretty hopeless at the private sector level.

In the United Arab Emirates and Saudi Arabia, nationals account for around 80 percent of the public sector workforce, in Kuwait around 90 percent and in Qatar 94 percent, although some of these statistics are questionable. In 2009 for instance, Sheikh Mohammed bin-Rashid, vice presidentof the UAE, admitted that Emiratization levels “did not exceed 54 percent in ministries and 25 percent in federal authorities.”

In the private sector, Emiratis account for less than 1 percent of the workforce of the UAE, in Kuwait and Qatar around 5 percent and in Saudi Arabia 13.3 percent, according to government statistics.

While NEPs have been in place for decades, most GCC governments appear to be working hard to ensure such policies do not succeed outside the public sector. The most effective way they have done so is by raising public sector salaries to ridiculous levels. Last year, the UAE gave federal government employees a 70 percent wage increase. In September, Qatar announced it would raise government employees’ wages by 60 percent and give military officers a 120 percent salary, pension and benefits hike. What incentive does this give to young Emiratis and Qataris to become, say, entrepreneurs or scientists when a cushy job for life can be had with the government?

Instead such moves create greater dependency on the state, a useful weapon to defuse political opposition and give the impression of greater distribution of oil wealth among nationals. Yet such ruler-subject dependency is not sustainable. It is creating divisiveness between nationals and expatriates, causing social malaise and stifling the potential of the Gulf people.

Such policies also throw into question the motivation behind spending billions of dollars on educational facilities and programs if citizens’ only incentive to study is to get into the public sector. Take Qatar’s Vision 2030 and the National Development Strategy 2011-2016, which mapped out the development of both a knowledge-based and free economy. One of the lofty aims of the multi-billion dollar, state-endowed Qatar Foundation is to make these plans a reality, but this is dependent on young Qataris entering the private sector and not opting to join the military and civil service instead. (Women, on the other hand, account for 77 percent of Qatar University’s student body, which bodes well for the future.)

So how is diversification going to occur and nationalization targets be met against such seemingly great odds? Is the answer to give passports to foreign professionals and experts, as has happened with 11 players on the Qatar national football team? (When I asked one Qatari if his countrymen were proud of their team after Qatar won the bid to host the 2022 World Cup, he replied: “What team?”)

While the UAE and Qatar are scoring own goals against their private sector NEPs, Saudi Arabia is taking its Saudi-ization policy more seriously, introducing this year the Nitaqat plan to find employment for 1.12 million Saudis by 2014. But through its complex quota categories — 205 of them in all — even the labor ministry has admitted that up to 40 percent of private companies will fail to employ enough Saudis and could “cease to exist.”

There appears to be no easy way of encouraging NEPs in the private sector, either beset by onerous requirements or countered by the government placating subjects through high-paying state jobs. A balance needs to be found. The hard truth, though, is that the GCC countries need to accept that introducing viable NEPs that put the private sector ahead or on par with the public sector as an attractive employment option for nationals will eventually bring about a different relationship between the state and the people. It would mean greater governmental accountability; a step that could be viewed by the rulers as one too far. But the status quo cannot continue forever, as major socio-political problems inevitably crash the party. Leaders of certain other Arab countries have recently learnt this the hard way.

PAUL COCHRANE is the Middle East
correspondent for International News Services

 

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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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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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