Economics & Policy

For your information

by Executive Editors
written by Executive Editors

Economic growth crashing to 1.3 percent

Lebanon’s real gross domestic product growth for 2011 is expected to be just 1.3 percent, according to the Economist Intelligence Unit’s (EIU) latest country report, down from an estimated 7.5 percent in 2010. The EIU attributes the slowdown to national and regional political instability. The report indicates that the country’s economy is subject to shocks in the service sector, which is heavily reliant on political stability. Private consumption is expected to decline when compared to figures from 2007 to 2010 and businesses are predicted to invest less in the growth of their companies. Political instability stunts the government’s contributions to growth, while also hindering the decision-making process with regard to the state’s budget. EIU’s report also predicts average inflation to climb 5.5 percent in both 2011 and 2012, as the prices of oil and food continues to increase.

Israel still hobbling Palestinian workforce

There was little progress related to the condition of workers in Arab territories occupied by Israel, apart from a few improvements on free movement, says the International Labor Organization’s  (ILO) annual report. It notes that settlements are the main cause of the amputation of Arab land, the limits on access and movement, territorial disintegration and the depletion of natural resources. Unemployment rates in these areas hit 23.7 percent in 2010, while youth unemployment accounted for 39 percent of that total. According to the report, the sustained blockade of Gaza forces the population to survive on humanitarian aid, while the unofficial “tunnel economy” has become the key driver of the surviving economic activity. According to the report, there are restrictions on Palestinians with residency permits in occupied East Jerusalem, while the destruction of homes and annulment of identification cards persists. Furthermore, the Israeli government extended its subsidized agricultural development in the Jordan Valley while water and land is restricted for Palestinians. Realizing the potential of the Palestinian Fund for Employment and Social Protection, according to the report, must be a priority regarding poverty alleviation, the protection of the unemployed and the securing of practical options for Palestinian workers that depend on work within the settlements. It also urges a review of the wage system and methods of resolving the grievances of Palestinian workers against Israeli employers.

Arabs vote for domestic workers’ rights

The International Labor Organization’s (ILO) convention stipulating that domestic workers have the same essential labor rights as those granted to other workers passed easily last month at the 100th annual ILO conference. The convention was adopted with 396 votes for, 16 against and 63 abstentions. Of the estimated 22 million migrant workers in the Middle East, one third are domestic workers — most of whom are women from Asian and African countries, namely Sri Lanka, the Philippines, Bangladesh, Nepal, Indonesia and Ethiopia. Saudi Arabia alone hosts 1.5 million migrant domestic workers, while Lebanon hosts 225,000 and Jordan 77,000. Workers in the these countries are excluded from national labor legislation and social security, and are attached to their patrons through what is called a restraining protection system. Patrons hold their passports and papers, and workers are often not allowed outside the home on their day off. Abstaining delegations included Britain, Malaysia, Singapore and Thailand. Member states will have to present the new labor standards to their national competent authorities for the convention to be ratified.

EMLED’s impact

Relief International’s (RI) three-year local development program Empowering Municipalities through Local Economic Development (EMLED) — or Baladiyat as it’s known locally — came to a close in June. The program operated in conjunction with Beyond Reform & Development and worked with 130 municipalities, 213 local businesses and more than 3,000 citizens. More than 400 jobs in rural Lebanon were created and RI trained approximately 600 municipal officials on local economic development, strategic planning and public private partnerships. RI also trained more than 1,000 people in business, information technology and other skills.

More Lebanese marriages in Cyprus

The Lebanese have been packing for short trips across the water more than ever lately, according to recent figures published by the Cyprus Tourism Organization (CTO). The CTO stated last month that the number of Lebanese arriving to Cyprus increased by 34 percent in 2010 compared to 2009. A total of 20,650 tourists in 2010 came across the water, compared to 15,450 in 2009. Vassilis Theocharides, director of the CTO, stated that a large part of the influx was due to an increasing number of people coming to conduct a civil marriage, which is not possible in Lebanon. “We have noticed a marked increase in incentive trips to Cyprus from the Middle East and India. We also noticed a growing popular trend for ‘marriage tourism’ from Lebanon, where conducting civil marriages in Cyprus is becoming increasingly popular,” he said. The figures also revealed that the average duration of a vacation is 4.2 days, with average spending at $771.75.

Gaza nears 50 percent unemployment

Following Israel’s land, air and sea blockade on the Gaza Strip, unemployment in the besieged area has hit 45.2 percent, according to a United Nations aid agency report released last month. The UN Relief and Works Agency for Palestine Refugees (UNRWA) uncovered that by the second half of 2010 real salaries had decreased 34.5 percent since the blockade began in June 2006. The apparent change in policy by Cairo to partially open the Rafah crossing on the Egypt-Gaza border last month has done little to alleviated the suffering of Gaza’s 1.5 million residents, given that only a pittance of the tens of thousands of Palestinians applying for a permit to enter Egypt have been granted one, and no commercial traffic has been allowed to cross the border in either direction. UNRWA also reported that Gaza’s working-age population grew by 2 percent in the second half of 2010, thus increasing the urgency for job creation. 

Tunisia’s post-revolutionary economic mire

Tunisia’s economic growth rate will hit 1.5 percent in 2011, according to the World Bank’s (WB) “Global Economic Prospects” report released last month. The World Bank’s report indicated that the country’s industrial production dropped by 9 percent during the first quarter of 2011. Moreover, tourist arrivals dropped 45 percent in the first quarter of 2011 compared to the previous year. Making matters worse, Tunisia’s remittance inflows may drop by 2.5 percent during 2011. The report also stated that the interim government took measures to encourage businesses with a $1 billion multi-donor package aimed at helping the economic situation of the country after the revolution. Relatively, however, 1.5 percent growth isn’t bad for a country fresh from a revolution.

Tax-free shopping edges up

Lebanon’s tax-free spending increased 3 percent compared to the same period last year, according to a report on the first five months of 2011 by tax refund service Global Blue. Tax-free spending by United Arab Emirates (UAE) nationals increased 9 percent year-on-year. However, spending by Egyptian and Jordanian visitors dropped 27 percent and 16 percent, respectively, over the covered period. Spending by Saudi Arabian tourists comprised the bulk of the total, constituting one-fifth of all tourist spending, followed by the UAE (12 percent), Kuwait (9 percent) and Syria (8 percent). Of total refunds, 70 percent were in the fashion and clothing sector, while watches accounted for 10 percent and perfume and cosmetics 5 percent. The report also stated that Beirut is still by far the leading city in the country with respect to measurable spending activities, accounting for approximately 85 percent of the total, followed by Metn (11 percent), Keserwan (2 percent) and Baabda (1 percent).

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Banking & Finance

Lebanese capital markets

by Executive Editors
written by Executive Editors

BLOM Stock Index (BSI)

Weighted effective yield of eurobonds

Exchange update

Activity on the Beirut Stock Exchange (BSE) continued its downward trend during the period between May 16 and June 17, 2011, as local and foreign investors remained cautious amid the delay in the formation of a new cabinet. This was aggravated by the adverse political developments in the region. The BLOM Stock Index (BSI), a gauge of Lebanon’s equity activity, hit its lowest level in two years at 1,357 points on June 8, before bouncing back over the next two days in the positive political climate surrounding the formation of a new government. Nevertheless, the trend was reversed on June 13, as investors were skeptical about the nature of the cabinet.

The BSI retreated on a monthly basis by 2.49 percent to reach 1,362 points by June 17, 2011, its year-to-date performance trending downwards at -7.7 percent. Cross trades of Solidere and BLOM listed stocks lifted the daily average volume per month to 306,829 shares, with a value of $3.22 million, compared to 213,320 shares worth $1.19 million during the prior period. On the regional front, the BSI outperformed the MSCI Emerging index, which declined by a monthly 3.25 percent to 1,107, while the S&P Pan Arab Composite LargeMidCap index fell by 2.26 percent to 115 points.

Banking stocks captured the bulk of trades during the aforementioned period, accounting for 54 percent of the total value traded. BLOM’s Global Depositary Receipts (GDR) and common stocks retreated from their previous close on May 13 by 5 percent and 3.4 percent, respectively, to settle at $8.93 and $8.50 on June 17. Byblos’  common stock also lost 4.37 percent, falling to $1.75. As for BEMO Bank, its common stock slid by 0.36 percent to close at $2.76, while its preferred stock 2006 dropped by 8.3 percent to close at $100.

Regarding Bank Audi, its GDR rose 2.4 percent to $7.69, while its common stock remained flat at $7. It is worth highlighting that Bank Audi converted 4,893,576 shares of “Audi Listed” to “Audi GDR” on May 19. With respect to Bank of Beirut, its common and preferred “D” stocks advanced, with the former rising 0.53 percent to $19.1 and the latter adding 4.27 percent to $26.38. Also of note, on May 23 BLC Bank listed 133,333 additional new shares on the BSE.

The performance of the real estate stock, Solidere, was strongly affected by the unstable local and regional political situation. As a result, Solidere A and B stocks lost 5.6 percent and 5 percent, respectively, from their previous close on May 13 to settle at $17.80 and $17.70.

Manufacturing stocks, on the other hand, closed on a positive note, as Holcim, Ciment Blancs “B” and Ciment Blancs “N” advanced 0.86 percent, 1.66 percent and 34.78 percent, respectively, to $17.6, $3.07 and $1.55.

Bond bulletin

With respect to debt instruments, the Lebanese Eurobond market maintained its uptrend between May 16 and June 17, 2011, as investor confidence in the Lebanese fixed-income market increased following the successful rollover of $1 billion worth of bonds in May 2011. Demand was mainly observed on the medium and long-term bonds, pushing the BLOM Bond Index (BBI) up 0.38 percent to 109.84 points. Consequently, the weighted yield on holding Eurobonds fell by 30 basis points (bps) to 5.20 percent, and the spread against the United States benchmark yield widened by 20bps to 389bps. Lebanon’s five-year credit default swap was trading between 328bps and 353bps on June 17, 2011, compared to Dubai’s 325bps to 345bps and Saudi Arabia’s 103bps to 107bps.

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Banking & Finance

Tamer Rashad

by Executive Editors
written by Executive Editors

The very wealthy are generally understood to be natural stakeholders in luxury. With Capgemini and Merrill Lynch presenting their 15th World Wealth Report last month, Executive sat down with Tamer Rashad, head of Middle East at Merrill Lynch Wealth Management, to inquire about the luxury and ‘passion’ investments of high net worth individuals (HNWIs).

  • The World Wealth Report analyzes buying and investments related to luxury as a specific area covered separately from financial investments. What distinguishes the Middle East from other world regions in these investments of passion?

Let me start by defining and describing what’s included in investments of passion. We have luxury collectibles, like automobiles, boats, jets, etcetera. We have art across different categories. We have jewelry, gems and watches, as well as other collectibles, such as coins, wine, antiques, etc. Then there is sports investment, which is basically investing in sports teams, sailing, racehorses, etcetera. There are other investments which we fit under miscellaneous [passion investments].

  • As it analyzes the relative allocations of funds to these categories, what does the 2011 report say about the preferences of regional HNWIs?

If you look at how high net worth individuals around the world invest in these categories, you’ll find that luxury collectibles [account for] about 29 percent globally. In the Middle East, it’s the same (29 percent). Art at a global level is 22 percent, while Middle Eastern investors put in only 17 percent; very similar to North America, which is 18 percent, while investment in art in Latin America, with 28 percent, is significantly higher.

If you look specifically at jewelry, watches and gems, the Middle East seems to invest the most across the whole world in these assets, with 29 percent. The global average is about 22 percent. Europe has the lowest, 17 percent. And in terms of other collectibles — coins, wine, antiques and so forth — you will find that the Middle East is the lowest region, at only 8 percent; in Japan it’s 18 percent and North America 16 percent. The other key factor is when it comes to sports investment. The Middle East has the highest percentage, with 13 percent relative to the global average of 8 percent.

  • Last year’s report said that “other collectibles were favored by HNWIs in the Middle East, second only to art, because of their potential to return financial gain.” Did you observe that Middle Eastern collectors differ from other HNWIs in having a higher attention to the value-storage and resale potential of the collectibles?

Well, I think that individuals invested in investments of passion are seeking return, but they are also investing in things that they personally care about. But there is also a cultural influence in this. For example, you find with sports investment, the highest in the world is in the Middle East, while wine investment in the Middle East is the lowest in the world, for obvious reasons.

  • Do you see a level of correlation between the number of high net worth individuals and their increases in wealth and the luxury market?

Absolutely. The report is important for people who operate in wealth management but also for anyone in a sector or industry that serves high net worth individuals or ultra high net worth individuals.

  • Is advising on investment in luxury pretty much the same game as advising on financial investment?

It varies from one client to another but we look at the overall financial situation of the individual. There is wealth preservation, wealth creation, wealth transformation from generation to generation, and that’s all in consideration of investment for passion as a component of the bigger picture and the overall asset allocation.

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Banking & Finance

For your information

by Executive Editors
written by Executive Editors

Capital inflows to MENA to slump

Net capital inflows to the Middle East and North Africa (MENA) region are forecast to drop 28 percent in 2011, from $80.6 billion in 2010 to $60.3 billion, according to an Institute of International Finance (IIF) report entitled “Capital Flows to Emerging Market Economies” issued earlier last month. Meanwhile, net capital outflows from the region are expected to rise to $221.5 billion for 2011 against the backdrop of political turmoil, a 74.55 percent increase from $126.9 billion in outflows a year earlier. The report said foreign direct investment (FDI) in the MENA region would rise by $8.2 billion this year, which would compensate for portfolio investment losses and the drop in inflows from banks and private creditors. While account surpluses have more than doubled for the United Arab Emirates and Saudi Arabia, buoyed by increases in oil prices, the report highlighted that some countries have suffered from large capital outflows and account deterioration, namely Egypt. Estimates for the country’s total outflows reached $16 billion, largely due to a slump in tourism activity, an $8 billion drop in reserves and a sharp fall in FDI. For Lebanon, the IIF projected the current account deficit to widen from 15.9 percent of gross domestic product in 2010 to 17.7 percent for 2011, and net private capital inflows to decline by 49.35 percent in 2011 to $3.9 billion, compared to $7.7 billion a year earlier, due to the country’s political situation.

BDL regulates money dealers

In an effort to deter money laundering and terrorism financing, Banque du Liban (BDL), Lebanon’s central bank, issued a set of circulars to regulate the operations of money dealers in the country. The directive includes mandatory training courses on anti- money laundering and terrorism financing for all persons involved in the direct or indirect management of money dealer institutions. The circular also prohibits them from opening accounts at any bank at which their partners, owners, shareholders, managers and members of the board of directors hold personal accounts and from depositing cash directly into their clients’ accounts or accepting to represent third parties. It also requires that money dealers notify the Banking Control Commission (BCC) of any bank with which they work. The circular also stipulates that money dealers appoint a compliance officer and exchange bureaus an internal auditor to make sure their operations are aligned with the regulations of BDL, BCC, and Lebanese central bank’s Special Investigation Commission (SIC). One of the circulars sets a minimum capital of 5 billion Lebanese lira [$3,333,333] for money dealing institutions, adding that the latter’s accounting transactions must segregate shipment of cash and precious metals from those of other operations. Per the new regulations, money exchange institutions and banks that ship bank notes or precious metals between Lebanon and abroad must notify the BCC and BDL’s Directorate of the Financial Markets of the detailed number and volume of such shipments through monthly financial statements. And lastly, money dealers will be required to send monthly, quarterly, semi-annual and annual financial statements to the BCC and BDL’s Directorate of Financial Markets.

Cost of sending remittances to Lebanon drops

According to figures released by the World Bank, the cost of sending remittances to Lebanon dropped in the first quarter of 2011. A $200 transfer from the United States to Lebanon costs $25.10 in nominal terms, almost 12.6 percent of the total amount, a decline from 13.2 percent for the same period the year before. Likewise, the cost of sending $500 amounts to $27.70, 5.53 percent of the transfer and a decrease from 5.74 percent for the first quarter of 2010. The survey was conducted on 24 countries, among which 11 were in South and Central America, seven in East and Southeast Asia, three in the Caribbean and two in Africa. Lebanon ranked as the most expensive destination for $200, and sixth for $500 US transfers. Including a transaction fee and an exchange rate margin, the cost represents the average charges for transferring money through commercial banks and money transfer operators, which amounted to 17.2 percent and 6.2 percent for the first three months of 2011. On a side note, the World Bank also revised 2010 expatriates’ remittance inflows to Lebanon upwards to $8.4 billion, compared to an $8.2 billion forecast in November 2010.

Lebanon’s NACB bank freezes Libyan assets

In compliance with United Nations Security Council resolutions 1970 and 1973, Lebanon’s North African Commercial Bank (NACB) froze an undisclosed amount of assets belonging to the Libyan regime in June. Both resolutions mandate that member states freeze any economic or financial resources owned or controlled by the Libyan regime, whether directly or indirectly. A spokesman for NACB, which is 99.54 percent owned by the Tripoli-based Libyan Foreign Bank and formerly known as The Arab Libyan Tunisian Bank, dismissed news reports that the bank had ceased its commercial activities since February 2011.  Further tightening the financial sanctions on the Libyan government, the United States Department of the Treasury (DoT) released a statement on June 21 blacklisting and prohibiting U.S. transactions with nine companies controlled or owned by Muammar Qadhafi’s regime, including NACB, the Arab Turkish Bank and Tunisia-based North African International Bank. The DoT exempted other financial institutions based in foreign countries and overseen by the Libyan government from these sanctions, provided their operations do not benefit the Qadhafi regime, or any Libyan entities and individuals who have previously had their assets frozen.

And the rich get richer

The worth and number of global high net worth individuals (HNWI) have surpassed 2008 pre-crisis levels, growing by 8.3 and 9.7 percent in 2010 respectively, according to Merrill Lynch and Capgemini’s 2011 “World Wealth report”. The number of HNWIs in the Middle East reached 40,0000 in 2010, an annual increase of 10.4 percent, while the region’s wealth was estimated at $1.7 trillion, up by 12.5 percent from a year earlier. At 32 percent, fixed-income assets made up the bulk of total financial assets held by Middle Eastern HNWIs, followed by equities at 28 percent, real estate at 18 percent, cash and deposits at 16 percent and alternative investments at 6 percent.  The report also shed light on ‘passion’ investments — such as art, luxury collectibles, jewelry, jems and watches. The majority of Middle Eastern HNWIs biggest ‘passion’ appears to be luxury collectibles, which stood at 29 percent of their total investments of passion in 2010; their allocation to jewelry, gems and watches was reduced from 35 percent in 2009 to 29 percent in 2010. Meanwhile, art and sports investments took away 17 percent and 13 percent of Middle Eastern HNWI wealth dedicated to passion in 2010, respectively.

On a local level, the report said the key drivers of HNWI wealth in Lebanon for 2010 included a real gross domestic product growth of 7.2 percent, an increase in real private and government consumption, a continuous rise in property prices, large capital inflows, rapid de-dollarization and containment of inflation at around 4.5 percent. The main inhibitor to growth in Lebanese wealth in 2010, according to the report, was the country’s fiscal policy as its government debt, which stood at 148 percent of gross domestic product by end of 2009, was still among the highest in the world. The report showed that globally, HNWIs’ greatest concern was the impact of the economy while some 69 percent of HNWIs were concerned that future generations would not adequately manage their inheritance.

BDL foreign reserves see slight dip

In its May 2011 balance sheet, Banque du Liban (BDL), Lebanon’s central bank, recorded a 0.74 percent decline in its foreign currency reserves for the second half of the month, a depreciation of $224.15 million to $29.95 billion, down from $30.18 billion for the first two weeks of May 2011. This would be the first time BDL’s foreign reserves slip below the $30 billion mark since March 2010, a decrease mainly attributed to weakened investor sentiment in Lebanon amid political instability in the country and the neighboring region. Meanwhile, BDL’s gold reserves appreciated by a bi-weekly total of 1.61 percent to $14.18 billion for the second half of May 2011, following the surge in prices of precious metals.

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Editorial

Of puppets and cardsharks

by Yasser Akkaoui
written by Yasser Akkaoui

The indictment is here. Just 18 days after a government formed seemingly overnight, the day has come with timing that can only be described as… convenient. Not only has this government formed itself and sat for nice photos, it suddenly has a policy statement as well — the largest hurdle between it and legitimacy. Excellent timing indeed.

When it was first announced that a new government had been formed, there was a collective sigh of relief. And now more than two weeks later, only the village idiot cannot see what is happening. Do we know what this government means?

The Lebanese people are so busy with the trials of daily life, perhaps they haven’t the time to take stock of the forces gathering around us. The myriad items of basic domestic governance that the months without a government have left undone is so immense that the tonnage of requests for bare necessities and pending paperwork could match that of the Saida dump. But, by focusing on these not unimportant but secondary problems, we are ignoring the lasting meaning of this government.

There is one country designing our present circumstances and it is not Lebanon. Yet again we find ourselves a card in the hand of another player when we should be a player in our own right.

 This month Executive lays down a challenge for our new leaders and it is not grandiose or idealistic. We ask for the fundamentals. The request is so basic that to ask for it encroaches on our dignity but still, we have to ask because our politicians in recent, or not so recent, history do not deem it their job to put us on equal footing with the rest of the world.

This new government and the easterly winds which fill its sails will ensure that foreign direct investment dries up — they will send the risk of investing in Lebanon so high that anyone considering it will run, not walk, in the other direction.

So, if we are to be left in the dark as to our future, our prosperity and even our safety, the least you could do is turn on the goddamn lights.

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Comment

Rerouting Pakistan away from America

by Gareth Smith
written by Gareth Smith

In using a press conference last month to suggest that Iran had information the United States wanted to destroy Pakistan’s nuclear program, Iranian president Mahmoud Ahmadinejad stirred a pot of complex geopolitics.

Ahmadinejad enjoys playing to the public gallery, in this case Pakistan, where popular feeling that Washington has a cavalier approach to the country’s sovereignty was heightened by the US killing Osama bin Laden near Abbottabad in May. What may have been more on the Iranian president’s mind was criticism in Pakistan of its government stalling, under US pressure, over a pipeline for natural gas from Iran’s South Pars field. Pakistan badly needs the gas to end power cuts and keep its industries running.

“It sounds unbelievable that any government can afford to neglect such an important project or take it so casually,” wrote Shamim Rizvi last month in Islamabad magazine, The Voice. The ‘peace pipeline’ was first mooted in the 1990s with the original proposal including both Pakistan and India. While India froze participation, ostensibly over pricing, but more so to placate Washington’s drive to isolate Tehran, Pakistan in 2009 signed on the dotted line. Iran committed to supplying 7.7 billion cubic meters of gas annually for 25 years beginning in 2014 — a huge contribution to Pakistan’s energy needs.

Pakistan has failed to clarify when it will build its part of the pipeline. Iran has said its leg has reached just 80 kilometers from the border.

Rolling power blackouts are rife in Pakistan. In Baluchistan province, which borders Iran, electricity outages reach 10 hours per day in Quetta, the provincial capital, and up to 20 hours in rural areas often dependent on irrigation run on electricity. Coastal areas — including Gwadar, where China is building a large naval base — receive Iranian electricity, and there are discussions on expanding the supply. Last month a joint Iran-Pakistan power company announced a $100 million project for wind turbines in Pakistan’s Sindh province.

Bilateral trade has reached $1 billion annually, and Iran is part-funding health centers and a large halal slaughterhouse in Lahore. Aside from energy and promises to buy more Pakistani rice, meat and fruit, Iran is offering a road link to help Pakistan export to Turkey and central Asia. The five central Asian republics — Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan — are rich in natural resources, home to 62 million people and have a combined gross domestic product of more than $200 billion. Yet Pakistani exporters are trying to reach them through costly air freight or by road through the chaos of Afghanistan.

With the US winding down in Afghanistan, its regional role is waning as that of China grows. Nawaz Sharif, Pakistan’s main opposition leader, said last month that people were “fed up” with power cuts and demanded Chinese companies be rushed in to develop hydro-electric dams. Beijing has already invested heavily in Iran’s energy sector.

Iran has often tiptoed around Pakistan-India relations, but tilted to Islamabad in November when Ayatollah Ali Khamenei, the supreme leader, provoked a demarche from New Delhi after remarks calling for Hajj pilgrims to support the “struggle” in Kashmir, where Pakistan-backed militants contest Indian rule. Tehran had been riled by US President Barack Obama’s visit to India the previous month and his apparent support for India having a permanent seat on the UN security council.

But Iran has no desire to jeopardize relations with India, and the two sides are seeking a route for payments for Iranian oil after the European Union in May blocked payments through Germany, a channel devised after India’s Central Bank, again under US pressure, ruled out using the Asian Clearing Union. India in 2010 imported 17 percent of Iran’s oil exports for around $12 billion, and suspension of this trade would upset both sides. India is also building roads in Iran and Afghanistan to create a trade link from Chabahar port, in Iran’s Sistan-Baluchestan province, into Afghanistan and central Asia.

Slowly but surely these economic ties are strengthening, whether the US likes it or not. Washington’s disapproval provides fertile ground for Ahmadinejad and others to argue the Great Satan simply wants to block development of the countries it mistrusts.

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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Economics & Policy

Redialing discord?

by Sami Halabi
written by Sami Halabi

To describe Lebanon’s telecommunications sector as politicized would be an understatement on par with saying the summer of 2006 was eventful, or that Hezbollah and Israel enjoy a good game of tag from time to time. Since its heyday atop the pyramid of Arab telecommunication industries in the early to mid-1990s, the sector has become little more than a wounded lamb at the mercy of the packs of hyenas roaming Lebanon’s political plains. Today the sector has the dubious distinction of having the slowest average Internet speed in the world and the highest prices for those same services in the Middle East.

“We are lacking so many basic things and the entire root cause of our despair is the governance of the sector,” said Riad Bahsoun, telecom expert at the International Telecommunications Union (ITU) –– the arm of the United Nations that deals with information communications technology. “It’s the domination of politics over performance. It’s the subjection of intelligence to force and collective interests to individual will. This is called tyranny and despotic governance.”

This high-handedness was on full display in May, when the lack of reform and the hyper-politicized decision-making in the sector culminated in an embarrassing encounter between Charbel Nahas, then the telecom minister allied with the March 8 coalition, and hundreds of members of the security forces, who prevented the minister’s team from entering one of the ministry’s buildings in the Adlieh district to dismantle a non-commercial cellular network that had been operating in parallel to the country’s two commercial operators.

Submarine cables coming to and from Lebanon

The confrontation apparently came about when Abdulmenaim Youssef, who is allied with the opposition March 14 coalition and heads Lebanon’s incumbent fixed-line public operator OGERO, requested that the head of the Internal Security Forces (ISF), Ashraf Rifi, who is also allied with the opposition, guard OGERO’s property from the ministry’s prying eyes.

OGERO was created in 1972 and controls the country’s fixed-line services as well as its current Internet infrastructure. It acts under the “supervision of the telecom ministry”. However, it is also financially and administratively independent, in accordance with the law that created it, and answers to the directorate general of operations and maintenance at the ministry, which has also been headed by Youssef since 2007.

Immediately after the Adlieh incident, the political mudslinging began. The convoluted arrangement over who had authority to see, dismantle, own and operate the network descended into quarrelsome disputes over the constitutionality of the move, the civilian rule of the security forces, wiretapping, illegal phone lines and so on, until the issue finally faded into the background. Lebanon emerged from the fracas minus one favorably regarded and technocratic interior minister (Ziad Baroud, who resigned following the incident) and no further along the path to reform.

Legal arguments aside, the cellular phone network Nahas was attempting to confiscate from OGERO was given to the Lebanese government as a gift in 2007 by the Chinese government, through the multinational telecommunications company Huawei. At the time, Lebanon was preparing to liberalize the telecommunications market and introduce Liban Telecom, a legally mandated government-owned body with a corporate framework that would eventually replace OGERO and take on most of its assets. The gift provided the Chinese with an opportunity to enter the market as it was opening up and to prove that its companies were capable of running a high quality network. At the time, the technicalities of the donation were negotiated by OGERO under Youssef’s purview was director general of the company.

According to ITU’s Bahsoun, when questions were raised about whether the network should be monitored by the Telecom Regulatory Authority(TRA), Youssef said that it would be used solely for testing purposes and hence, as a non-commercial network, it would be overseen by himself and not the TRA. Youssef did not respond to repeated requests for comment.

The gift, however, did not arrive until 2009, when the current Energy Minister Gebran Bassil was heading up the telecommunications ministry and plans to set up Liban Telecom had effectively been scrapped due to political wrangling. By this time a row had erupted regarding a new wiretapping law that would take authority over such issues away from the Information Branch of the ISF and split it between the ministries of justice, telecommunications and the interior. In 2007, after the network had been pledged, the interior minster put in a request to the Council of Ministers, Lebanon’s cabinet, to allow the Information Branch to use the network for intelligence purposes. The permission was denied.

“In my opinion this was rejected in turn by the Information Branch,” said Bahsoun, though he stressed that he could not confirm such information. “The Information Branch probably decided to [use it] anyway without formal legal coverage,” he added.

Whether or not the network was used for intelligence purposes will likely be an ongoing source of bickering among Lebanon’s politicians, but the capabilities for such an operation were certainly there. The network was widely reported to have a capacity of 50,000 lines that could have been employed outside the two existing cellular networks. Speaking to the Lebanese Broadcasting Corporation last month, opposition Future Movement Member of Parliament Ghazi Youssef said the network contains a total of only 15operational lines.

 

“They say that the OGERO equipment is made up of 62 base stations [part of the cell phone network which handles communications between phones and the network] in addition to the core; the intelligence system that manages all of this is there,” said Imad Tarabay, secretary general of the Lebanese Telecom Association (LTA), which represents Lebanon’s private-sector data and Internet providers.

According to Bahsoun, a staunch opponent of Minister Nahas, this equipment was consolidated at some point at building in Adliyeh and this allowed for a more powerful network which he suspects played a part in uncovering some of the Israeli spy networks in the country over the past several years.

“If this network is operating 15 lines, why does it need 400 people to protect it?” he asked rhetorically, referring to the reported number of security forces present at the building when Minister Nahas tried to enter. “The truth is that the Information Branch could not accept in any way the minister of telecommunications or a team apart from theirs to inspect the equipment.”

3G connection

What ultimately emerged from the fiasco is that even if the minister was attempting to lift the lid on any alleged wrongdoing, he was also trying to speed up the implementation of the contentious 3G mobile Internet projects that he launched last January after the cabinet had collapsed, in conjunction with mobile operators Alfa and mtc.

As Executive reported in March, there have been numerous unanswered questions over the legality of the 3G project, due to the fact that it was launched while a caretaker government was in place, and neither the legally required licenses nor frequencies from the TRA and the cabinet have been granted to the companies that will conduct it. Moreover, the prospect of a faster, better service being provided by the public sector, without private sector access to the market, has fueled a campaign against the plan, spearheaded by Tarabay, chief executive of the private sector company Cedar comand distributor of the Mobi wireless Internet service. Tarabay co-owns the company with the son of opposition MP and former Telecommunications Minister Marwan Hamade, and contends that Nahas is attempting to nationalize the telecommunications sector.

He says he has prepared legal files against the telecommunications ministry and is prepared to submit them to the Shura council, Lebanon’s highest court. This comes after an unsuccessful attempt at arbitration through the TRA that, perhaps predictably, did not take action against the ministry it depends on for financing; the TRA spent several months this year without the money to pay its employees.  The TRA also did not respond to repeated requests for an interview.

Most of the controversy surrounding the legality of 3G stems from two contentious issues. The first is telecom Law 431, which states that licenses and frequencies must come from the cabinet and the TRA respectively. Second is unfair competition as a result of exorbitant tax discrepancies between public and private service providers, which would likely come about if the project moves forward.

With regards to Law 431, former Telecommunications Minister Nahas’s response has always been the law is not applicable, ostensibly because it has not yet been implemented in its entirety. His position got a boost last month when he announced that he had seen a Shura council decision stating that the law had been “suspended” because of Article 51, which states that “all applicable[previous] legal or regulatory provisions remain effective until the enforcement” of the law itself. Translation: the law and all the institutions created under its jurisdiction, such as the TRA and Liban Telecom, would also be technically suspended. As Executive went to print the ruling had not yet been made public.

“Law 431 is applicable and being implemented,” insisted Imad Hoballah, acting chairman of the TRA, at a press conference intended to respond to the minister’s statements last month. Hoballah went on to describe the licenses and frequencies that the TRA had given out over its four-year term, though he admitted that these had been handed out before the Shura council decision. Previously, the Shura council has ruled against the ministry and in favor of the TRA but there is speculation this ruling could be particularly pernicious for the TRA.

“We respect the decisions of the Shura council and we will follow them,” Hoballah said, insisting that the decision does not negate the entire law. Asked what the TRA would do if the telecommunications ministry issued 3G frequencies that the regulatory agency is legally mandated to allocate, he declined to comment, saying only that if the telecommunications ministry decides to go ahead without allowing the private sector to participate, “no one can stand in its way.”

“Fundamentally, the TRA has eight months left,” contended Antoine Boustani, an advisor to Minister Nahas, speaking to Executive last month. Boustani’s position, like that of Nahas, is that because the law that created the TRA is not fully implemented, “it’s already obsolete”.

“We don’t decide to implement the law; the Council of Ministers decides. We are moving forward on the basis of the authority of the ministry. When they say they want to implement the law [in full] we are ready,” he said, denying that the ministry officially seeks to shut down the TRA.

“I’m not stopping until I get my rights,” Tarabay snapped back defiantly, adding that he will file court cases against the ministry but is waiting to see the Shura council decision to “fine tune” his lawsuit in line with the status of Law 431. 

But according to Boustani, Tarabay will soon have little to complain about. Last month he told Executive that the ministry plans on leveling the playing field between the private sector and public sector by decreasing the taxes on the former by “50 to 55 percent.” Asked whether the private sector will be allowed to enter the market, he said “byiswa” — an Arabic word suggesting that something on this front could happen and would be a positive — though he couldn’t confirm or deny it. “We will ask for it [in thecabinet]; we don’t have a problem,” he said, adding that such a request “isliberalization, not privatization.” 

He also said that a long-awaited policy statement that waspromised by the minister one year after he took office would soon be issued.The issue has become a major talking point for opponents of Nahas, includingthe TRA, who say that he has no policy and works according to his own whims.Nahas’s response has always been that the ministry’s policy is a matter of“practice not paper.”

Of course, Boustani is not an advisor to the newly appointedTelecommunications Minister Nicholas Sehnaoui, but the latter is widely seen asNahas’s protégé and has already stated that he will follow the same course asthe previous minister. If he adopts Nahas’s purported policy — which Boustaniconfirms is “almost done” — and makes it public, it would mean that the sectorwill have a general set of rules mandated by the ministry under Law 431 for thefirst time since former Minister Gebran Bassil was in office from 2008-09. Thiswould be significant, as it would provide an indication of the minister’sintentions vis-à-vis the many contentious issues in the sector.

Money to make

Bickering aside, the ministry has been pressing on with the3G project, as have both Alfa and mtc. The attempted takeover of the telecomequipment by Charbel Nahas in May can be seen as part of this aggressive pushby the ministry to make the 3G project a fact on the ground as quickly aspossible, before legal issues potentially complicate such plans.

According to Bahsoun and Tarabay, the equipment at Adlieh can technically be upgraded and used as part of the 3G rollout currently being undertaken by Huawei and mtc. Huawei won the contract to build the new network for Mobile Interim Company 2, the state-owned cellular telecom company managed by mtc. The Chinese company’s winning bid was valued at $25.6 million (not including a $2.7 million control center that will be built by Nokia), $10.6 million less than their counterpart Ericsson, who won the 3G contract at Mobile Interim Company 1, the state-owned cellular telecom company managed by Alfa. Both Bahsoun and Tarabay estimate the value of the third network’s equipment, once upgraded, to be around $10 million, (thus making up the difference between the two bids).

Both Alfa and mtc stand to benefit greatly from the 3G project, on top of the revenues they already garner from the talkative Lebanese who pay 58 percent in taxes on all telephone services. Zain’s mtc, for instance, has increased their net earnings from $22.1 million in 2008 to $46.1million under their current management contracts. In January, under the caretaker government, Minister Nahas renewed their contracts for a year.

“We extended 12 months when the minister thought that if these two companies are going to go into the 3G project they need security. They said they need more than two to three months to do such things,” said Boustani.

India-Middle East-Western Europe III

So with the two companies locked in a yearly contract, the Shura council ostensibly on the ministry’s side with respect to Law 431, the TRA hobbled and toothless and Tarabay’s cases needing some time to come to fruition, there seems to be little stopping the 3G project from materializing sometime around the end of the summer. Except for one hitch.

In 2007 Lebanon entered an international consortium to construct a submarine fiber-optic cable from Europe to India —

called the India-Middle East-Western Europe 3 (IMEWE3). Lebanon has already invested some $53 million into the construction of the underwater sea cable to carry traffic and unclog the international bottleneck Lebanon has long suffered.

“Capacity has to be met at all levels,” said Ghassan Hasbani, chief executive of the International Operations group of Saudi Telecom Company (STC), which is part of the consortium and is using the cable. “If you have a high speed local connection network and clogged capacity on your international gateway, then access to international content becomes very slow. These have to come together and the more connectivity there is in the country the better the prospects of lower pricing, of routing for traffic, and the better accessibility you have to the rest of the Internet globally.”

According to a source from the consortium, who asked for anonymity because he was not authorized to speak to the press, the contract between Lebanon and the consortium was signed by “OGERO Telecom”, which is not the official name of OGERO. At the time, the creation of Liban Telecom seemed imminent due to political consensus under the Saniora government and then Telecommunications Minister Marwan Hamade. Director General Youssef and the minister were ensconced on the same side of the political fence, enabling them to lay the groundwork for their political camp’s control of the sector. By December of last year the cable was ready to go and all other member countries of the consortium had started to use it. But by then the political stars of the telecommunications ministry were anything but aligned.

Engineers at Alfa have already confirmed that the 3G project will need IMEWE3 to function. Currently Lebanon’s international connection is through the Cadmos cable connecting the country to Cyprus, through which Boustani admitted a bottleneck would occur if there was a large amount of traffic as would be the case if 3G were introduced. The Cadmos cable also leaves Lebanon at the mercy of Cyprus for international bandwidth.  This is ominous as trouble has been brewing between the two countries over a maritime economic zone agreement between Cyprus and Israel.

Official data is not available, but most estimates are that Lebanon is currently using 2.5 gigabits (Gb) of legal bandwidth. However, Boustani says that the Cadmos cable has 40 Gb available for use after its recent upgrade. IMEWE3 has an initial 30 Gb and can be updated to 1.4 terabits. Thus, according to Hoballah, Lebanon is currently blocking 97 percent of its international bandwidth.

In order to activate the IMEWE3 cable it is necessary to log onto the consortium’s system with a secret code, which according to a consortium source is something only Youssef has the details of.  Again Youssef did not respond to repeated requests for comment.

“We paid a total of some $53 million and we are not using[it] because one person [Youssef] says ‘I don’t want to’ and the collective interest becomes subject to one person,” said the ITU’s Bahsoun.

According to Boustani, the ministry sent a commencement order to OGERO to oversee the project and has since asked for the ownership of the IMEWE3 to be transferred back to the ministry; this is what Youssef has refused to do. “There were some people who were supporting him politically. It used to be former Prime Minister Fouad Saniora but I don’t think today that Saniora will cover him. We hope that this government will lift this political cover so we can work,” he said.

What will also need to occur is the negotiation of an agreement with a European operator to purchase capacity in order to transfer information from Marseille, France (where the cable ends), so that traffic to and from the rest of the world via Europe can come into the cable. The going price for such traffic is about $2 per megabit per second (Mbps) per month, which means that 10Gb of capacity would cost some $20,000 per month. Given that the cellular network alone generates some $3 million each day in Lebanon, this is a relatively trifling sum.

If Lebanon wants full redundancy, in case the European side is cut, they can also negotiate the same contract in India, at the cable’s other pole. Such negotiations take about a month to complete but again this would need to go through Youssef’s office at the ministry as long as he maintains control of the post of director general. Nonetheless, Boustani says the ministry is in direct contact with France Telecom discussing such an agreement.  

Since it was Youssef who negotiated and carried out theIMEWE3 project with the consortium, when the telecommunications minister contacted its management committee to try and wrest control of the cable, the consortium became predictably confused. In the end they decided to take a “hands off” approach, according to the source. Of course the fog of Lebanese laws, their seemingly inconsistent application, and the autonomy of public institutions, especially OGERO, has not helped.

“Youssef sent a letter to the consortium telling them not to hand [it] over to the minister, and he does not have the right to do so,” said Boustani.  He would not comment on whether the ministry would take legal action as a result.

Even if the consortium is convinced to transfer control, the procedure stipulates that when OGERO hands control of the cable over to the ministry it initially does so through the Directorate of Operations and Maintenance, whose head stamps the handover and transfers the asset to the minister’s office. As Youssef himself holds that post, there seems to be scant chance of that happening.

According to Boustani, at the meeting of Arab telecommunications ministers held in Beirut last month the ministry received important political backing that he thinks will see the IMEWE3 handover soon, although this could not be independently verified.  This would not solve Lebanon’s Internet woes outright, however. “Even if IMEWE3 is activated, what use will it have if the ministry of telecommunications sells the international E1 line [2 Mbps] to [private sector] service providers for $3,000, while costs on them is less than $30?” asked Tarabay.

“The Internet cost to the consumer will remain high,” he said, unless the price of E1 falls and Internet Service Providers (ISPs) have access to the bandwidth. Lowering prices requires a decree to be issued by the cabinet because the sector is still not liberalized as per Law 431. Bandwidth will then need to be handed out by the ministry under the directorate general of operations and maintenance — again Youssef’s office.

But while Youssef may be a major roadblock to better Internet, other projects will also need to be completed to see the sector reach an acceptable global standard. According to Jean Gebran, projects director at Consolidated Engineering and Trading Company (CET), the Court of Accounts, the government’s public sector auditor, gave final approval in May to a project to construct the telecommunications ministry’s $40 million fiber-optic backbone throughout the country. CET and Alcatel will carry out the project, which has already begun in the South and the Bekaa valley. It is expected to take 16 to 24 months to complete, according to Gebran.

Furthermore, the ‘last mile’ connection from the fiber to homes will also need to be completed. But in the short-term, even without these projects, 3G service can technically run and allow speeds in the range of 21Mbps, compared to the current average of 0.1, even if this may kill private sector participation in the sector.

Time for action

With a new cabinet and a new minster that are both technically on the same side, there is some renewed hope amongst those in the sector that the coming period will be less fraught with conflict. A government of a single color may be more willing to see off some of the old opposition guard (starting with Youssef), but who they choose as a replacement is entirely another matter, and what the market will look like after any reshuffle of institutions, laws and people may just end up resulting in the same stagnation that has plagued the industry for over 15 years.

“It is very difficult if you ride a donkey to reach a high summit, even if you choose the direction,” said Bahsoun, referring to Lebanon’s telecom policy decision makers. “It’s impossible to reach it if you let the donkey choose the way. However, if you carry the donkey you will die. We are still carrying donkeys and paying for their food.”

But today one side of the political divide can no longer blame the other for obstructing policy implementation. “You don’t have two sides anymore so you don’t have anyone to delay,” said Boustani. Thus, there are no more excuses.

 

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Society

Is that a no. 9?

by Paul Cochrane
written by Paul Cochrane

Demand for cigars is so strong that the sector is inundated with counterfeits. An estimated two thirds of cigars smoked in Lebanon are “fake”, with a Honduran, Dominican or Nicaraguan stogie attempting to pass itself off as the crème de la crème of smokes, the Cuban cigar.  It is not easy to notice the difference until one sparks up, as the counterfeiters are pros, switching the paper ring around the cigar for a Cuban brand and using real or counterfeit boxes.

The situation has become such a concern to the legitimate sector that leading distributor, La Casa del Habano, owned by Phoenicia Trading, spent $50,000 this year on a billboard and media awareness campaign to inform consumers about fake cigars, particularly the Cohiba brand.

“The Cohiba Behike is the most expensive and the most popular right now,” said Wael Zeidan, executive manager at Phoenicia Trading. “We classify consumers of fakes into two segments — one, a consumer that knows it is a fake Cuban but smokes it to show off and doesn’t care. The second is a beginner that is easily bluffed, so we focus on him.”

To ensure that fake Cubans are not being put in boxes as the container empties — a classic scam to bump the price of a $2 cigar up to, say, $30 — Phoenicia has undercover employees that go in to check for fakes at its 300 wholesale customers. They are also opening a new outlet to better distribute Cubans from its current five stores.

While Honduras and the Dominican Republic do produce high quality cigars, primarily for the American market due to the trade embargo with Cuba since 1962, such brands are more expensive in Lebanon than Cuban cigars. Hence the fake Cubans are lower quality and normally machine made. One to watch out for is the Cohiba Siglo no.9, as real Cohibas only go up to size six. “It’s so big, it’s crazy,” said Zeidan.

Cohiba is the number one brand around the world, and in Lebanon this is no exception. Top sellers are the Robusto size (50-54 ring gauge), which is ideal for a half hour to one-hour smoke. Cigarillos — the small, lean cigar just a centimeter longer than a cigarette — are also becoming more popular, with Phoenicia Trading bringing out its own brand, Phoenicio.

“Demand for cigarillos is starting to grow, and women are increasingly smoking cigarillos,” said Zeidan. As cigars have a somewhat “old man” reputation, every month Phoenicia holds a breakfast cigar event for women in Ashrafieh, and has introduced cigarettes into Casa del Habano “to get youngsters into the shop and to find out about cigars,” said Zeidan. Pushing sales further are the cigar lounges at some of the capital’s leading hotels. At Le Gray, cigar nights are coupled with tastings of single malt whiskeys. And awareness of cigars is rising, said Paul Atallah, wine and bar manager at Le Gray.

“Some 80 percent of people know what they’re smoking. The rest, it’s just to show off that they are cigar smokers while swallowing the smoke,” he said. “But the culture has changed, and we’re seeing more people go for [brands] Partagas and Hoyo instead of Cohiba; this shows a change in awareness.” Most of the hotel’s cigar aficionados are guests from out of town but it is increasingly attracting non-guests to come to enjoy a cigar, sip an Armagnac and relax.

The economic downturn in the country has affected sales but the 400 percent rise in people smoking cigars since 1980 has provided a loyal customer base. “People get used to smoking cigars, and they continue to buy them,” said Zeidan. Indeed, big spenders are still out there. On a recent Saturday at La Casa del Habano in downtown, a customer bought a whopping five boxes of Cohibas as well as several packs of cigarillos.

 

 

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Economics & Policy

Executive Insight – Booz & Co

by Bahjat el-Darwiche
written by Bahjat el-Darwiche

Developing a vibrant and innovative information and communication technology (ICT) sector would provide the Middle East and North Africa (MENA) region with a propitious opportunity to increase productivity and boost its national economies. However, the region’s innovation sector does not yet offer sufficient support to unlock entrepreneurs’ ideas and investors’ capital. It will take a concerted, collaborative effort from governments and the private sector to stimulate digital innovation and ensure that it is engrained in MENA countries’ future growth.

Why is ICT innovation important to the MENA region? Around the world, the ICT sector has transformed societies and economies over the past decade via a steady stream of innovative new products and technologies. These innovations have changed the way we interact with each other. They have helped entire sectors — such as transportation and utilities — to operate more efficiently and at lower costs. ICT has also spurred widespread modernization across national economies. The impact ICT has had in a relatively short period has been remarkable; the European Union, for example, credits the ICT’s multiplier effect with contributing 40 percent to Europe’s productivity gains over the last 10 years. 

Governments — both in developed and emerging markets — have recognized the potential of ICT and prioritized ICT innovation on their national agendas. Recent examples include the European Union’s Digital Agenda, Malaysia’s ICT Strategic Roadmap, Germany’s ICT 2020 Research for Innovation and the United States’ Strategy for American Innovation. These programs all strive to establish national environments conducive to the promotion of ICT innovation at all levels, through a comprehensive and well-coordinated agenda of government policies.

Poor performance

To date, the MENA region as a whole has shied away from promoting innovation. In 2007, the Arab world spent an average of 0.3 percent of its total gross domestic product (GDP) on overall research and development(R&D), compared to an average of 2.3 percent by countries within the Organization for Economic Cooperation and Development (OECD). In the last 13 years the MENA region filed a total of 3,224 patents, compared to some 1.7 million patents for Japan alone.

In terms of entrepreneurship, the MENA region also lags behind its global peers. According to recent World Bank data that measures the number of new firms created per 1,000 people, the five MENA countries included in the survey (Algeria, Jordan, Oman, Morocco and Egypt) averaged just 0.9startups. That figure trails by a significant margin countries such as France (3.08), Finland (3.37), Singapore (7.4) and the United Kingdom (8.05).

Software piracy has also had a deleterious effect on innovation in the MENA region; in 2009, software piracy accounted for more than $1.4 billion in losses, further reducing the attractiveness of the ICT sector for entrepreneurs. As a result, ICT generates approximately 2 percent of GDP in the MENA region. That number is far higher in truly innovative countries.  In Korea, for example, ICT accounts for around 8 percent of GDP.

If the MENA region were to address these issues, it would have an opportunity to become a significant global contributor to ICT innovation. Jordan, for example, has emerged over a relatively short period of time as a regional powerhouse in ICT innovation, mainly because of sound government policies and strong partnerships between the public and private sectors.

The country’s ICT sector now includes hardware, software, consulting, programming and installation, employs more than 11,000 people and can tap into a steady flow of more than 6,000 information technology graduates per year. Jordan’s King Abdullah II Fund for Development (KAFD) has established Oasis 500, an ICT seed capital fund for innovative startups.

This growth has attracted the attention of major international ICT companies. Intel Capital has invested in two Jordan-based ICT startups — Jeeran, a web-community platform, and ShooFee TV, which aggregates Arab satellite television listings and entertainment content.

To build an innovation environment geared to support the development of a local ICT sector, governments must play a leading role. They have an array of options at their disposal to help stimulate digital innovation, including the implementation of policies and regulations to support and protect entrepreneurs, the creation of and support for funding incentives, the development of an advanced, competitive and high-speed ICT infrastructure and finally, the promotion and development of young talent.

Working together

Governments, however, cannot alone provide the solution to creating a digitally innovative society. The private sector has a pivotal role to play, especially with regards to providing capital to entrepreneurs. To date, the MENA region has largely shied away from investing in innovation or entrepreneurship ventures in favor of lower-risk opportunities such as real estate or the stock market, where exit strategies are easier.

Without funding, neither innovators nor entrepreneurs in ICT can develop new products or commercialize their ideas. According to the Global Entrepreneurship Monitor 2009 MENA report, family members provided the funding for nearly 80 percent of all projects launched by entrepreneurs in seven MENA countries.

That same study revealed that approximately only 10 percent of entrepreneurs tapped into government programs for their funding. While government-subsidized programs are picking up across the MENA region, these funds are not enough to foster a globally competitive platform for innovation.

The private sector needs to step in and bridge the gap and provide funding to entrepreneurs. This will require accelerating the development of the region’s network of venture capital (VC) firms and angel investors. VC firms and angel investors are a critical component of any innovative economy because they provide entrepreneurs with access to “smart capital” — funding along with access to a pool of experts who can direct the growth of promising young companies. The VCs that set up shop early on will gain access to the most attractive investments at the lowest prices. An example of a successful investment is Jordan’s Maktoob, which was acquired by Yahoo in 2009 for an unofficial amount of $85 million.

The worldwide growth of ICT — and its impact on economies and societies — is showing little sign of slowing down. In recent months, the multi-billion-dollar valuations of ICT firms such as Facebook, Skype and Groupon send a strong signal that this sector will continue to generate value, even in the face of a potential bubble. Developing markets, such as China, Russia and Latin American countries, have also witnessed similar growth and high valuations for ICT companies, indicating that the industry is not constrained by geography.

We forecast that the MENA region’s ICT market will grow to reach approximately $120 billion within just four years; a sharp gain from its$90 billion level today. That 33 percent surge in business by 2015 presents entrepreneurs and investors with a significant opportunity.

The path to ICT innovation in the MENA region might take some time and it will  be smoother in some countries than in others — especially when it comes to finding the right balance between government and private sector involvement.

However, governments and the private sector can work together to clear major hurdles like funding, infrastructure, policy and talent development. That in turn would allow the MENA region to realize its potential as an incubator for digital innovation for years to come.

BAHJAT EL-DARWICHE and RAMEZ SHEHADI are partners at Booz & Company

 

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