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Society

Secret Affairs: a book by Mark Curtis

by Paul Cochrane March 3, 2011
written by Paul Cochrane

 

 

Britain has played a nefarious role in the Middle East’s history. We all know that London re-drew the region’s borders after World War I as part of a “divide and rule” strategy, but few are aware of Britain’s divisive and often contradictory efforts in the region that have remained a core part of its foreign policy. Instead, the United States and Israel tend to get all the “credit” when it comes to the dark arts of Machiavellian political subterfuge.

In ‘Secret Affairs: Britain’s Collusion with Radical Islam,’ author Mark Curtis uses declassified official documents and leaked reports to lay bare Britain’s policies of destabilization and the political-economic ties Britain developed to ensure energy security and financial co-dependence. What Curtis exposes is as damning to Britain as the WikiLeaks US embassy cables have been to Washington, revealing the decisions made away from public scrutiny and what really makes up official policy.

“It is clear that Britain has an interest in divide and rule in the Middle East. If it sounds conspiratorial, it is there, spelled out in the planning files,” Curtis told Executive.

Shady goings-on

‘Secret Affairs’ is an eye opening read that charts the beginnings of British collaboration with radical Islamic forces, a relationship that began during the occupation of India over 150 years ago, was used extensively post-1945 and continues to this day. Britain worked with Islamist groups, particularly the Muslim Brotherhood, and friendly authoritarian Islamic regimes in Egypt, Syria, Saudi Arabia, Iran, Iraq, Bosnia, Indonesia, Pakistan and Afghanistan to ensure that communism, nationalism, pan-Arabism and anti-Western policies didn’t take hold.

Britain would cultivate relationships on both sides of the political fence, showing a willingness to work with essentially anyone, whether the Mahaz-i-Milli Islam (National Islamic Front of Afghanistan), the Libyan Islamic Fighting Group or the ayatollahs in Iran, to achieve short-term goals, irrespective of the longer-term implications, in order to maintain a balance of power.

“In [my] analysis of British foreign policy, it is not all down to economics,” said Curtis. “The collaboration with Islamist groups in the Middle East has been about power status, to not be relegated to a bit player on the fringes. It has seen those groups as essential allies in a region where Britain has often lacked dependable allies. In a lot of the episodes where Britain collaborated with Islamic groups, it was essentially to do the dirty work that the US couldn’t do due to Congressional oversight and the fear of being found out.”

The dirty deeds include assassination attempts – for example on Egypt’s Gamal Abdel Nasser, Libya’s Muammar al-Qadhafi, and Lebanon’s late Ayatollah Mohammad Fadlallah – military assistance and the dissemination of propaganda tools, such as Korans and Islamic literature. British operatives also orchestrated “false flag” operations, such as the one in Iran in 1953 when mosques and public figures were attacked by agents and paid supporters appearing to be members of the communist Tudeh Party. British intelligence also worked in collaboration with Ayatollah Kashani, the mentor of Ayatollah Khomeini, to stir up sentiment against nationalist Prime Minister Muhammad Mossadiq.

Alongside maintaining its power status and ensuring energy security, Britain also worked to make sure oil-producing countries invested their petro-dollars in London to shore up the city’s global financial position. To do so, Britain needed to maintain its status as a power broker and to curry favor with regimes, regardless of the means. One example of this is the “fabricated invasion” of Kuwait by Iraq in 1958, during which Britain intervened to protect its newly-independent former colony against a threat that they had themselves concocted, as British files explicitly show. “Britain wanted to exaggerate the threat to Kuwait so [Britain] would continue its protection and Kuwait would keep investing revenues in the British banking system,” said Curtis.

Blow back

Such covert operations — all documented in ‘Secret Affairs’— have been just one part of Britain’s foreign policy that has gone against London’s purported democratic ideals. The backing of Islamist forces, and its hidden alliance with two chief state sponsors of radical Islam, Saudi Arabia —which has spent more than $50 billion to spread the Wahhabi brand of Islam around the world and is a major sponsor of Islamist groups — and Pakistan, have also had major negative repercussions.

By preventing independent and secular governments from coming to power in much of the Islamic world, Britain’s policies have nurtured the current socio-political malaise and resulted in what the late Chalmers Johnson famously termed “blow back,” when the very forces the West aided and abetted came back to bite the hand that once fed them. Curtis shows how Britain in the 1990s allowed Islamist groups to operate out of London, which they believed could be used to destabilize governments in, among other places, Syria, Iraq and Libya. This was possible through a ‘covenant of security’ between radical Islamists and the security services.

A former Cabinet Office intelligence analyst explained: “The long-standing British habit of providing refuge and welfare to Islamist extremists is on the unspoken assumption that if we give them a safe haven here they will not attack us on these shores.”

This pact meant Britain could keep tabs on such groups’ memberships and finances, and enabled British intelligence access to groups linked to militancy from Afghanistan to Yemen. Even Al Qaeda had an office, the Advice and Reformation Committee, in London until 1998.

Alongside the US and Saudi Arabia, Britain equipped and bankrolled Islamist groups in Afghanistan, Pakistan and Bosnia that were later involved in the September 11 attacks in the United States, terrorist attacks in Saudi Arabia, and the July 7, 2005 bombings in London. Indeed, as Curtis’s research shows, the history of the ongoing “war on terror” is rooted in covert support for the Afghani Mujahedin in its fight against the Soviets and for the terrorism infrastructure co-established with Pakistan’s notorious Inter Services Intelligence (ISI), which trained fighters for operations in Central Asia, India, Bosnia, the Middle East and elsewhere.

It also goes further back in time, to the British-backed partition of India in 1947, which led to the creation of the Islamic Republic of Pakistan and the current imbroglio in Kashmir. Curtis quotes former Indian Ambassador Narendra Sarila as saying, “Many of the roots of Islamic terrorism sweeping the world today lie buried in the partition of India.”

More than 60 years later, Britain is still using divide and rule as a strategy and is contending with the repercussions of what in many ways its foreign policy has created. “There is still this resort to rely on particular Islamist forces to achieve objectives, whether in Southern Iraq[post-2003], where Britain worked with Islamist forces and now [has] a de-facto working arrangement with the Taliban, in the sense that Britain is reliant on them for an honorable exit from Afghanistan,” said Curtis. In a previous book, Curtis called Britain’s foreign policy a “web of deceit.” In his latest, he has further shown how that web was spun and, crucially, how British foreign policy has anurtured global terrorism and instability.

 

 

March 3, 2011 0 comments
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Society

Executive Insight – S2C

by Salem Osseiran, Zeina Loutfi & Ramsay G. Najjar March 3, 2011
written by Salem Osseiran, Zeina Loutfi & Ramsay G. Najjar

 

 

There has been much commotion in Beirut in recent months over the installation of a network of radars on Lebanon’s roads. Though not a new endeavor in the region, this certainly presents an interesting case study on the unique social features of Middle Eastern society and how governments seek to regulate the behavior of citizens.

Within Lebanon, the presence of these radars has deterred most people from speeding, and a testament to its effectiveness has been the drop in the number of fatalities by almost half, according to the interior ministry. This method of regulation is contingent on a fear of punishment as people are coerced into a change in behavior, begging the question of whether this approach is the most effective method to dissuade society from adopting a certain behavior.

The carrot beats the stick

Governments have always used legislation and regulations to create the boundaries of legally acceptable behavior. If an individual crosses that line, they are punished accordingly.

This relies on two assumptions: First, that the general public will be dissuaded from committing such an act because they are too afraid of the consequences; and second, if the act is committed, they will not be able to get away with it because effective enforcement will ensure that the law is upheld. If the radars were removed, would everyone continue to drive in the same restrained manner? Of course not.

This suggests that attempts to make real changes to behaviour only through fear are futile. Methods that rely on incentives are likely to fail in producing something sustainable. The answer may be in combining such methods with an appreciation and understanding of the damage that negative behavior, such as speeding, causes society. More efforts should thus be targeted at influencing the underlying attitude that leads to this behavior, complementing coercion and reward with persuasion. 

In 2007 the government of New South Wales launched an anti-speeding communication campaign to discourage young drivers from speeding. It suggested that young men who speed had limited sexual prowess, effectively debunking the belief, through ridicule, that speeding attracts the attention of the opposite sex. The campaign succeeded in changing behavior and encouraging young men to slow down, as demonstrated by the figures that showed fatalities caused by young drivers speeding decreased by 45 percent over the following year.

It seems obvious that communicating to the general public with the aim of shaping attitudes and beliefs can produce more sustainable results for governments than a one-sided threat of punishment. Although this approach requires more patience and carefully thought out effort, the change at the attitudinal level is more cost effective for society. For example, problems such as heart disease can be dealt with through medication and surgery, but the costs of such measures on society are greater than efforts aimed at encouraging people to adopt healthier lifestyles.

Shaping behavior through successful persuasive communication demands a nuanced and insightful understanding of local mindsets, norms of interaction and culture. Only through a deep-seated appreciation of cultural idiosyncrasies can one develop effective messages that resonate and identify the delivery channels that strike the right cord with the target audience.

Getting the word out

The government of Sweden put in place a ‘Vision Zero Initiative’, which sets targets for road safety by 2020. The campaign is a holistic effort that combines infrastructure and regulatory changes with communication efforts aimed at demonstrating government dedication. The main message behind their communication efforts has been to shape attitudes toward road safety by reinforcing a neglected reality, namely that human beings die whilst driving. To deliver this message to as wide an audience as possible, they proceeded to develop a communication campaign that entailed a series of initiatives such as a website, a brochure, a Facebook page, and even a Vision Zero Academy aimed at improving road safety.

Private sector initiatives have also constituted an important source for novel ideas. “The Fun Theory” initiative developed by Volkswagen is an example that tried to change people’s behavior through, simply, fun.

Contestants were asked to submit ideas that would motivate people to change certain behaviors because they would enjoy doing so, not because they were afraid of the consequences. In 2010, the winner proposed “The Speed Camera Lottery”, the goal of which was to get more people to obey the speed limit by giving positive incentives. Instead of having traditional radars only taking pictures of drivers who were speeding, this camera would also take pictures of those within the speed limit and enter them in a lottery funded by the money generated through speeding tickets. Volkswagen subsequently developed a communication campaign around this idea; testing in the first three days following the launch showed a reduction of 22 percent in average speed.

The playwright George Bernard Shaw once said, “The single biggest problem in communication is the illusion that it has taken place.”Governments need to take this to heart. They cannot assume that their policy efforts will achieve sustainable results without coupling them with coherent communication initiatives. 

A persuasive approach does not exclude coercive or incentive-based methods; it merely proposes a means to amplify their effectiveness through the use of communication to shape attitudes.

It is time for all governments to realize that understanding the belief behind the behavior could become the shortest path to changing it.

 

March 3, 2011 0 comments
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Mobile internet dongle
Economics & Policy

State sponsored execution

by Sami Halabi March 3, 2011
written by Sami Halabi

The Lebanese are in the unfortunate position of empathizing with Vladimir and Estragon, the aimless dramatis personae from Samuel Beckett’s legendary “Waiting for Godot,” over their own absurdist Internet tragicomedy. Recently, signs have emerged that the country could be on the cusp of reaching a solution to its telecommunications purgatory. But, with the usual governmental skulduggery abounding, should Lebanon’s Godot actually arrive he may more resemble the Grim Reaper for the country’s private internet providers.

3G in the news

On January 28, Caretaker Minister of Telecommunications Charbel Nahas announced that his ministry was undertaking a project to bring third generation (3G) mobile services to the country over a period of seven months. Third generation 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.

If the project goes as planned, users will be able to transfer data over mobile devices at speeds of up to 21 megabits per second (mbps). When compared to the current average speed of 0.1 mbps using the general packet radio service (GPRS), the upgrade undoubtedly constitutes nothing less than a game changer in the Lebanese Internet arena.

The projects will leapfrog the fixed digital subscriber line (DSL) Internet market, which is still waiting for a fiber-optic backbone to be built.

As part of the plan, the state-owned telecom companies Mobile Interim Company One (MIC1), managed by Orascom Telecom’s Alfa, and Mobile Interim Company Two (MIC2), managed by Zain telecom’s MTC Touch, will build an almost completely new network. Contracts to do so have already been signed with the Swedish company Ericsson to build MIC1’s network for $36.2 million, and with the Chinese Huawei to build MIC2’s network for $25.6 million. Nokia-Siemens will build a $2.7 billion control center.

Almost immediately after the announcement the elation was palpable, with many in the media and business community heralding the upgrade as the beginning of the end of the country’s Internet woes. However, those in the industry’s private sector were less enthralled, fearing that the projects could lead to a complete “nationalization” of the country’s already widely state-owned telecommunications sector — an understandable concern given the private sector’s often contentious past with the government.

Lebanon's internet infrastructure

DSL’s overhang

In 2006, when DSL Internet was being introduced to the market, the telecommunications ministry, then under Marwan Hamade, signed a memorandum of understanding (MoU) with private sector players, known as Data Service Providers (DSP) and Internet Service Providers (ISP), stating that the government intended to compete with them on a level playing field. Data and Internet provision is currently the only area in which the private sector is allowed to participate in the telecommunications sector.

The need for an MoU stemmed from the fact that Lebanon’s telecommunications legislation (Law 431 was passed in 2002) had at that time not yet come into effect due to the fact that the institutions it mandated — the Telecom Regulatory Authority (TRA) and Liban Telecom, a government-owned body with a corporate framework that eventually is supposed to replace the telecommunications ministry — had not yet been appointed by the Council of Ministers, Lebanon’s cabinet.

The MoU was also required because the government, through Ogero, Lebanon’s state-owned fixed-line telecommunications monopoly operator, had an inherent competitive advantage over the private sector. At the time, Ogero owned the infrastructure needed for DSL, particularly at the “central offices” (COs), distribution centers in each neighborhood that are needed to dole out DSL to customers. Even with a legal framework in place to promote the private sector’s participation in the industry, the government broke the agreement and shored up its control.

“Ogero initially started its DSL in 35 ‘central offices’ and let the private sector [use] 34, with the one in Solidere off limits,” says Imad Tarabay, secretary general of the Lebanese Telecom Association (LTA), which represents Lebanon’s private-sector data and Internet providers. “Since then, Ogero expanded from 35 to 171 [COs, which] the DSPs were not allowed [to use].”

Tarabay, who doubles as chairman of Cedarcom, which owns the Mobi wireless service, explains that because Ogero knew in advance when a neighborhood was ready for DSL they would call the subscribers in the area — naturally, they already had their numbers — and offer them DSL before the private sector could have a chance to offer them the service. “They shaved everyone,” he quips, slicing his hand across his desk.

According to the LTA, the result of what they call “unfair practices” caused the DSL environment to become even more lopsided in favor of the government, which they now estimate controls almost 80 percent of the market. Last month, Cedarcom and another DSP, Broadband Plus, filed lawsuits against the telecommunications ministry, stating that the companies had bought and deployed equipment around the country in preparation for DSL’s launch in 2007 but were prevented from operating them by Ogero.

“The Ministry of Telecommunications [MoT] gave permits to Cedarcom to install DSL equipment in 34 exchanges (COs), issued a decision [that it would] link the 34 exchanges to [Cedarcom’s] headquarters and then refrained from linking them for no reason whatsoever,” says Tarabay [see graph]. “This led Cedarcom to have zero DSL clients, while Ogero has an estimated 200,000 and other Data Service Providers (DSPs) have 40,000.”

When asked whether these practices were fair, Mahassen Ajam, commissioner and board member of the TRA, Lebanon’s telecommunications regulator that is legally mandated to promote competition in the market, sympathizes with Tarabay. “No, it’s not fair… the major rules of fair competition were never applied by the ministry.” The telecom ministry did not respond to Executive’s request for comment.

Fiscal fumble

According to official figures, last year the government made more than $2 billion in revenues from the sector with 58 percent of it in the form of taxes on the consumer.

What most people don’t realize is that 20 percent of the revenues that DSPs garner from their operations go to the government under the conditions of their “interim transitory licenses” that are only valid for one year, thus discouraging the DSPs from making long term investments. The DSPs also pay around $66,300 per year for the frequencies they use to transmit their Internet signal. They also pay net income taxes, dividend distribution tax, site rentals, $2,700 per 2.048 mbps of bandwidth (the government pays less than $100) and a $41 dollar installation fee for a DSL line at a customer site. The government pays practically none of these fees [see table; click to enlarge].

Table: public vs. private sectors

In October 2010, Lebanon’s four private DSPs paid $438,638 to the TRA in license fees. That figure is greater than the 25-year license fees for all four operators in Finland, where broadband Internet has been considered a human right. According to LTA, the amount of taxes they pay amounts to 59 percent of their operational revenue, a tax figure similar to that paid by citizens for telecommunications services. At least in this respect it seems the government is treating everyone equally.

The 3G hatchet

Given this fiscal disadvantage, it’s a wonder to many how the private sector keeps its head above water. It has done so ostensibly because it is able to offer value added services to customers on a competitive basis. But now that 3G services are about to hit the market, they are predictably crying foul.

Their fear is that if MIC1 and MIC2 enter the market with such a large fiscal and technical imbalance between them and the licensed service providers, there will be absolutely no way for the existing operators to survive.

Currently, licensed providers offer wireless Internet for prices of around $40 per month to cover their costs and taxation. If you remove taxation, as has happened with MIC1/MIC2, that figure becomes something like $20 per month. What’s more, licensed service providers can presently offer a maximum speed of around 0.5 mbps, which is nothing close to what 3G could bring. Furthermore, MIC1 and MIC2 have an existing subscriber base of more than 2.5 million customers to draw on while the licensed providers have around 80,000. Despite the market’s lopsidedness, introducing 3G without leveling the playing field is exactly what the telecom ministry is planning to do.

“We are in a dominant position, which is very normal given the size we have in the country,” says Marwan Hayek, chief executive officer of Alfa, which manages MIC1 on behalf of the government. “If we had a 100 percent private license, and we were not dependent on the MoT, the same scenario would happen,” he adds, stressing that the private sector maintains the advantage of being able to manipulate prices, while he has no such luxury.

“Failure to ensure fair competition between Alfa and MTC (MIC1 and MIC2) and licensed operators, given all the advantages that Alfa and MTC have, will lead to the eminent annihilation of licensed ISPs/DSPs, meaning the extinction of the private sector operators in the Telecommunication Sector in Lebanon, and in parallel, the creation of three state owned operators, which is contrary to the principles of Law 431,” says Tarabay.

If that comes to pass, the fate of more than 950 highly skilled employees working with the licensed providers will be put into question, according to the LTA. “What is the government asking us to do? To shut down and open businesses in another country,” asks Tarabay rhetorically.

Alfa’s Hayek believes that the situation is not so dire. “Even within the 3G deployment, [private sector companies] will have a role to play because, if you listen to the minister, he wants them to [be] a distribution VNO [Virtual Network Operator] type of business,” he says. A VNO can take many different forms but is basically an arrangement between the owners of a telecom asset and a company whereby it performs services, ranging from complete resale with separate branding to merely offering a back office service such as billing. An MVNO (Mobile Virtual Network Operator) refers to such an arrangement in the mobile telecom market.

“In terms of the ‘dream’ of offering an MVNO, whether they offer it or not it doesn’t mean we will let go of our rights, nor does it mean that the MVNO fixes the [fiscal] imbalance between Alfa/MTC and the Data Operators,” responds Tarabay.

“There are over seven levels of MVNO and we have been dialoguing with the TRA and MoT for over a year, whether as a company or the Lebanese Telecom Association. We have never received any feedback. Negotiating and discussing an MVNO is a process that can take months and there has not even been a draft to [outline] the guidelines,” he adds.

In theory, the licensed providers could opt to build their own networks with their interim licenses and compete with MIC1 and MIC2. This would cost them tens of millions of dollars, however, and be very risky from an operational continuity point of view given their temporary licenses. In the end, they would still have to get the telecom ministry’s approval to install networks that would compete with the state’s new 3G offering, which it plans to spend $80.3 million to build.

Bearing in mind the government’s recent history of boxing out the private sector from the market, that scenario seems highly unlikely. “I hear their concerns; I wish I could do something to help [the private sector] on the regulatory front or the licensing scheme because definitely they have the right to get a long- term license,” says Hayek. “We cannot help them. I wish I could but it’s not in our hands.”

To regulate or not to regulate?

To steer clear of any such conflict, the logical thing to do would be to place all market players on equal footing and allow them to compete against each other to drive the market forward and push prices down. The framework for such a state of affairs already exists in Law 431, whereby it assumes that all service operators will be licensed and regulated by the TRA in order to ensure fair competition.

The law, however, is rife with loopholes; when certain operators are not licensed their operations can only be regulated by the government through the MoT, and not by the TRA. Not surprisingly, the unlicensed parties in this case are the state-owned MIC1 and MIC2.

Both MIC1 and MIC2 were created in the early-2000s by the government, when Lebanon’s mobile telecommunications were tipped for privatization, with the intention of being sold within a period not exceeding six months. Since then they have existed as unlicensed privately registered companies owned by the government.

With 3G capabilities, Smartphones will be able to provide what others in Lebanon cannot: speed

“Before MIC1/MIC2 have the ability to do the 3G projects they need some type of license, because even though they are owned by the government they are privately held companies, they are SALs, they are registered and they are, at the end of the day, operators because they are invoicing,” says a legal expert in public law who supports the private sector’s position, speaking on condition of anonymity.

According to Minister Nahas, it is not necessary for MIC1 and MIC2 to be subject to the same licensing conditions as private operators.

“It is said that the matter requires a license, in spite of the fact that the state does not need a license and does not give licenses to itself. It is legitimate in and of itself,” he said at a June 28, 2010 press conference. “The funds are part of the revenues of private companies making investments to develop operations, just as Middle East Airlines [majority owned by the Central Bank] makes investments, keeping in mind that it is state-owned.”

However, the Lebanese Civil Aviation Authority, Lebanon’s civil aviation regulator, licenses Middle East Airlines to operate in the Lebanese market, albeit also in a monopolistic manner.

Law 431 lays out the conditions for any new project to be conducted under Article 19, which dictates that a license is to be issued by the cabinet according to terms of reference prepared by the TRA for “new categories of licenses for providing public telecommunications services.”

Chart: ownership of DSLAMs

The law also states that the TRA is to issue licenses for “Internet services,” and “data services,” both of which apply to the 3G projects. The issue of licenses is particularly divisive for several reasons; licensed operators are subject to TRA regulations, meaning that the MoT would exercise less control over these entities. This also means that these entities must conform to TRA regulations that pass from the TRA to the telecom ministry and are then forwarded to the Majlis Shura, or the State Council, Lebanon’s highest judicial authority. There they are ratified and enacted into law upon publication in the Official Gazette.

Another reason that licensing is crucial in Lebanon is because the TRA specifies the spectrum a provider can use to offer a service. Spectrum is a specific range of frequencies, measured in hertz, that all telecommunications services — including radio, TV and Internet — need to use to transmit signals.

Hence, if MIC1 or MIC2 are granted spectrum, which they have been, by law they should be licensed and the process should be conducted by the TRA. Indeed, the last time these two companies required spectrum to expand their mobile networks and add capacity for more subscribers in 2008, the TRA allocated it to them. At the time, the cabinet approved the expansion and it was published in the Official Gazette, which confirmed that the TRA was the sole entity empowered to grant spectrum. Then, in December 2009, under the current minister’s tenure, they were again granted spectrum by the TRA.

In these cases, however, the TRA decided to grant the frequencies without licenses. “We granted frequencies because, at the end of the day, the TRA would like to see the mobile networks developing,” says Ajam. “We didn’t go into the legal aspect of being licensed or not. Now we have the same situation with 3G,” she says, adding that if they receive a request from either the minister, MIC1 or MIC2, they will follow the same course. “We will not take a stand against the interests of the country. You have to split things between the country’s needs and the needs of market dynamics.”

Who is significant?

Another way the TRA could impose fair market competition in the upcoming 3G market is by applying the already legal “Significant Market Power” (SMP) regulation, which is designed to enforce a competitive playing field between large corporations in a particular industry.

MIC1 and MIC2 would certainly qualify as such in the 3G Internet market. The regulation protects against cross-subsidizing services, such as using a voice market to leverage data customers, a likely practice if 3G is given solely to MIC1 or MIC2. Again, however, the issue comes full circle. “You can use it when someone is licensed, [but] the MoT is not and neither is MIC1 or MIC2. So the legal approach is very tough,” says the TRA’s Ajam. To issue its own licenses the TRA needs a “licensing regulation,” which it has forwarded to the ministry to send to the State Council. A resolution has yet to occur and the regulation is now collecting dust. “To go [directly] to the State Council there needs to be a conflict and the ministry is not issuing its own licenses, hence there is not conflict,” says Ajam. “If they do give their own licenses then we will go to the State Council and wait for its decision.”

The minister’s missing policy

The minister can legally maintain that he has the right to uphold the regulations he chooses because he is also empowered by the law to set the “general rules for the regulation of telecommunications services in Lebanon,” according to Law 431.

The minister prior to Nahas, Gebran Bassil, who is from the same party, actually published a policy paper setting “General Rules for Regulating the Telecom Market,” whereby he advocated issuing long-term licenses to existing service providers, as well as to MIC1 and MIC2, in addition to introducing 3G. As such, the current situation is difficult to frame as being purely politically motivated.

Despite previously stating that he would issue his own policy, Minister Nahas has since reneged and removed the policy paper from the ministry’s website. Last December his advisor told Executive that the only policies the minister would call for would be lower pricing and an end to the state monopoly over telecommunications.

“The policy of the ministry is not a matter of paper, it is a matter of practice,” said Nahas in November at a press conference.

In any case, the TRA can hardly afford to anger the minister. Their budget comes from the treasury and has to have the minister’s approval before they can receive it. This year the staff at the TRA went four months without receiving pay because the ministry did not approve their budget.

Taking care of business

It is worth noting that the contracts signed by the telecommunications ministry were done so when the cabinet was in “caretaker mode,” after he and others resigned from the cabinet on January 12. The legal debate over ministers’ powers while they are “caretakers” is an open one.

“Administrative law is in essence not a written law. The principles of administrative law are prescribed by the practice and by the decisions of the State Council,” says the legal expert. “Caretaker status is a restrictively interpreted concept which talks about making sure that the usual basic everyday business carries on. When the minister is either empowered by the Council of Ministers or parliament to do something prior to entry into the caretaker period it would be normal for the minister to go on with the process of doing so.”

The lawyer agreed that the minister had the right to start the tendering process but deemed that the issuance of purchase orders and signing of contracts were beyond the purview of caretaker ministers.

Alfa’s Hayek confirmed that the negotiations with vendors occurred subsequent to the government’s collapse but shifted the burden of proof as to whether this action is legal away from his company. “We don’t really question the legality of such actions or steps taken by the government because it’s their worry, not ours,” he said. Still, Minister Nahas believes the contracts are “100 percent legal.”

“Construction and equipment are among the ministry’s normal tasks, in addition to the fact that this operation began before the government’s resignation,” he said on January 28. “It is incumbent on the telecommunications minister to not stop natural work that is part of two private companies’ operations, especially if they are state-owned. It is not permissible for public ownership to be an obstacle to the people’s service.”

Land of no law

Executive has learned that several members of the private sector are preparing to file lawsuits against the MoT in response to the announcement of the 3G projects. This move follows letters sent to both Caretaker Prime Minister Saad Hariri and Prime Minister Designate Najib Mikati, asking them to remedy the situation.

As far as the ministry is concerned, however, there is little to worry over, as Minister Nahas has stated, Law 431 serves as little more than a recommendation.

“Law 431 makes its application dependent on the fulfillment of its conditions,” said Nahas last year. “This law is still inapplicable because its conditions are not completely fulfilled. This matter is clearly stipulated in one of the law’s clauses.” Indeed there are several clauses that refer to the applicability of the law, starting with Article 51, which states that previous legal and regulatory provisions remain effective until law goes into effect. Article 52 states that “technicalities regarding the implementation of the present Act [Law 431] shall, if needed, be determined by the Council of Ministers upon the proposal of the competent Minister.”

By default the minister has the power to assess what is needed. According to the legal expert, since the TRA was appointed by the Council of Ministers upon the request of a minister preceding Nahas, its functions and prerogatives are applicable. That would mean that the TRA can legally issue regulations, such as the licensing regulation that the minister is keeping from reaching the State Council. Ironically, he is empowered to do so by the very law that he deems inapplicable.

“We respect the point of view of the minister, however the TRA has been appointed in March 2007 as a direct application of Law 431, so this means that Law 431 is in effect,” says the TRA’s Ajam. “We will defend the TRA, the TRA’s role and the law and we will continue to assume our responsibilities as defined in Law 431.”

Uncertain future

Whether the issue ever gets to the State Council is uncertain. Until then the 3G project is moving forward, as are the cases against the ministry and efforts to assemble a new cabinet that may see the present minister stay or go. Whatever the result, the contentious disputes over the basic structure of the telecommunications market is putting into serious doubt on the future of the country’s Internet reform.

“One hand cannot clap by itself,” says Ajam, recounting an old Arabic proverb. “We need all the concerned parties, especially the decision makers, to be involved in this, otherwise no one will succeed — not us, not the private sector and not the country.”

 

Clarification: The figure $438,628 quoted above as license fees paid by the DSPs in 2010 includes the fees for licenses paid to the TRA and the telecom ministry, including revenue sharing and import permits. The TRA charges a one-time license fee of $20,000 to DSPs along with a $1,000 yearly renewal fee per service provider per year. (Added 12:33 pm, June 3, 2011)

March 3, 2011 0 comments
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Real Estate

Q&A – Ali Rashed Lootah

by Thomas Schellen March 3, 2011
written by Thomas Schellen

 

 

Nakheel, the master developer of Dubai’s trademark Palm Islands and many other ambitious projects, has recently restarted a portion of its developments after a difficult period of two years. Fully owned by the state of Dubai via parent company Dubai World, Nakheel had to restructure and refinance. The restructuring is near completion, with separation of the company from Dubai World planned before the end of this quarter. Nakheel Chairman Ali Rashed Lootah agreed to elaborate on the scope and pace of the company’s turnaround in an exclusive interview with Executive.

In the past few months, Nakheel has announced the resumption of work on several developments. What is the rationale behind this?

As a real estate company, we are committed to deliver what we have promised to [our] investors. After the approval of our restructuring and the approval of our business plan by the authorities, we had to go ahead and implement it. That is the rationale behind it.

In restarting your projects, how much could you restore the confidence of your investors and of the market?

We have different partners. From the side of our contractors, who are partners with us, I am sure there is trust in Nakheel. We are paying them ahead of time and the most important thing, you know, is to pay people.

In all of the projects that we have re-launched, most of the contractors are back. I can tell you that 90 percent of our contractors have not changed. We offered them a lot of incentives, we gave them additional advance payments to bring them back to the sites, but for the 10 percent with their own problems we had to find alternative contractors to complete the projects and enable us to deliver to our investors. We had, to my recollection, only two cases where a contractor could not go back. By now we have about a 9,000-person labor force on site.

Did the large number of contracting relationships and the involvement of numerous developers and sub-developers cause extra pressures or increase your cost in restarting the projects?

Let me say one important thing: without the support of the government we would not have been able to restart. The government gave us financial support, legal support, all the support we need. That enabled us to meet all our requirements. We don’t have any financial issues. The government is committed and we are meeting all our obligations. But some of the sub-developers are having some issues and don’t want to meet their commitments. We are trying to accommodate them as much as possible, giving them different scenarios, different payment plans, but they have to be committed to their contracts. There is give and take, but up to a certain extent.

You said previously that Nakheel is preparing to become a stand-alone entity by the end of this quarter. What is the reason for this revision of your corporate structure?

It is public knowledge that we will be separated from Dubai World. The reason is that Nakheel on its own is a real estate entity and I think, simply speaking, that the best way to manage Nakheel is to have it totally separated, financially and practically.

Will the restructuring affect ownership in any way?

There will be no change in ownership through this restructuring and the shareholders won’t be changed.

The board of directors will be chaired by you?

Yes, and the board will remain as it is.

Nakheel is so big in the real estate sector of Dubai that people tend to blame you for everything, from a leaking faucet to a swimming pool that has not been maintained or a parking lot that is not clean. How do you deal with this?

I take this always in a positive way. If we are talking about our clients, to me the customer is always right. We have to make them happy. People will not complain unless there is some ground for the complaint. They might exaggerate the complaint but there cannot be groundless complaint. Some people have suffered in the previous three years because of the stand still situation and they think things will change overnight. That is not possible. But the feedback we are getting includes a lot of communication from our customers where they thank us and recognize that there are changes.

What has Nakheel done to mitigate risks for investors going forward, such as global risk, local risk or internal controls risk?

The global risk was not about Nakheel; it stemmed from what you can call the global incident. I think the solution we are offering the people is really an excellent solution. Nakheel, or the government, had the choice of declaring [our company’s] bankruptcy. We didn’t choose to go that way.

How do you view opinions that the underlying risk existed before the crisis and should have been managed differently?

In a free economy you cannot control anything.

But when we look back at 2006 — 2007, many research reports on the real estate outlook for Dubai were published and all of them were positive, to the point that they sounded like they were trying more to please than to assess…

I will disagree and agree with you. If the Lehman Brothers case didn’t happen we might still be going at the same rate as before. The Lehman Brothers crisis triggered the global economic crisis and if the United States government dealt with it in a different way we might still have the same abnormal growth. Dubai was cheaper and still is cheaper than any destination, so people were willing to take this so-called risk, if you want to call it that.

Dubai is certainly more competitive today than during the final bubble period before the global crisis…

Yes. It was crazy and it was a good thing that there was a cleaning up. Only the serious people will stay.

People who purchased villas and homes in Nakheel developments before the crisis included both individual buyers and large-scale investors who bought properties for financial gain or even speculation. How do you differentiate in treating the two groups?

To individual investors who bought homes we are giving alternative solutions. We are giving them alternative properties.

How many buyers have accepted the proposal for shifting to a different property than they originally signed their contracts for?

We have actually managed so far to relocate about 50percent. About 50 percent of the people in what we call long-term projects have accepted to be relocated into short-term projects. I think we mitigated over4.5 billion dirhams ($1.22 billion).

Do you see yourself as setting an example for the whole real estate sector in Dubai in your practice of mitigating and relocating people?

I don’t know about that. I cannot speak about [other developers]. But if we can manage to relocate such a big number, people are happy, and keep in mind it was done in less than one year. The restructuring started in early April [of 2010] and that is a short period for 4.5 billion dirhams in transactions.

What is your vision for 2015 – 2020?

I think we can say the worst is over. We have achieved the business plan and are doing much better than what is envisioned in that plan. I am confident to say that.

In the portfolio of your long-term projects, you cancelled some, such as the Trump Tower.

I probably said canceled in the last brief but it is, in the current market situation, not logical to go and develop more real estate.

So the reason was not the cost of any individual project but the market?

The market for sure. We have to be realistic and see the market.

Do you expect that projects like Trump Tower or Tiger Woods Golf Course could be implemented five or 10 years from now?

I doubt it. 

So you were appointed because you have the strength…

…Of saying ‘No’. I am going after people to collect money(laughing). But believe me, I’m not after the individual investor. I am really very sympathetic toward the individual investor and I am sometimes even harsh on my people because I always put myself in the poor investor’s place. But [the individual buyers] have to also accept that they could have faced a worse scenario. The government really did a good job by keeping the commitment of Nakheel. At the end of the day, the reputation of Dubai is at stake.

And the reputation and credibility of Dubai…

…That’s our capital. I feel there is a positive feeling in the city. I think there were a lot of speculators in the city and they have runaway. As I said, Dubai is here to stay. If you exclude the real estate, other sectors in the economy are really growing.

There was talk of some new developments?

We will be developing retail business on the Palm and the Dragon Mart; we are planning to drastically increase the size of the mall, more than doubling it. On the Palm, a mall is needed. We will be tendering all these projects in the second half of the year.

What are the biggest challenges you see in the coming 18months for the real estate market in Dubai?

I think the big challenge is to cope with the existing oversupply and encourage more people to move to Dubai. I think this is happening by having the real estate value reduced by 50 percent. That is really encouraging a lot of people to move. I don’t really know the size of the oversupply — nobody can really have a figure — but the good thing is that there are no new projects.

From what you are saying, now is the time to buy in Dubai.

For sure.  We are also really working hard to bring our service charges down. That will also make Dubai more affordable. We are in negotiations with all our services’ providers.

Do you have a target figure in percentage reduction of service charges?

I am squeezing my people every day. They come with a proposal and I reject it. I keep challenging them because I always put myself in the investors’ shoes. People will be happy if you reduce [service charges] by 10 or 20 percent, but I want people to be even happier

Have you stepped up the Emiratization of Nakheel’s staff?

The percentage [of Emirati employees] is higher because if we have redundancies we release expatriates whom we don’t need. We are identifying the good ones whom we have to keep. Practically speaking, I am dealing with Nakheel in the same way in which I would be dealing with my private business; when it comes to business, you keep only the people you need. 

 

March 3, 2011 0 comments
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Finance

Riad Salameh speaks to Executive

by Emma Cosgrove March 2, 2011
written by Emma Cosgrove

With praise from international media raining in for his steadiness at Lebanon’s financial helm, Executive sat down with Central Bank Governor Riad Salameh to discuss the current and future state of Lebanese Banks.

E  As a foil to the rest of the world, Lebanese banks have actually struggled to find profitable uses for their excess liquidity, especially in local currency. Do you believe that the banks have enough tools to keep this liquidity from becoming a burden?

Well, as you know, the amounts that came to the banking sector after the collapse of Lehman [Brothers], and between September 2008 and July 2009, were very large amounts compared to the size of deposits already existing in the banking sector. Plus they were mostly converted into Lebanese pounds. It is normal that the banking sector can’t find immediate use for such amounts when they total around $16 billion. The credit market in Lebanon usually increases by $2 billion to $3 billion a year.

So the central bank issued 5-year certificates of deposit (CDs) in Lebanese pounds in order to mop up some of that liquidity, and the

Ministry of Finance also issued more treasury bills in Lebanese pounds than needed, in order to keep discipline, prevent bubbles, speculation and inflation. And this money will be gradually used again in the economy in Lebanon.

Therefore, we have to face the positive aspect of not having been touched by the crisis and embrace the confidence in our system, and we thought that it was an opportunity for Lebanon to receive and keep all these funds, as there will be a need for them in the future, whether to finance the public sector or the private sector.

E  Why did the central bank stop issuing five-year CDs?

We have issued circulars to enhance credit in Lebanese pounds and we have given incentives to lend for housing without placing price ceilings, so you can now see the banks competing to lend money at rates that are around 5 percent for medium-term [loans].

We have also given incentives for the financing of new projects, not only those covered by the previous circulars, which means that any project besides industry, tourism, agriculture, or technology that is launched between now and June 2010, and we’re going to extend it until June 2011, will be able to be funded with low rates of interest. We have also launched student loans and  environmental loans using those same incentives.

Given this package, we thought that we had to leave some liquidity in the hands of the banks in order to motivate them to lend according to these circulars. As we look forward, we can have good growth in 2010 if the credit activity is maintained and intelligently directed. So, the markets started to find a certain equilibrium despite the fact that we stopped these CDs.

We still had conversions from dollars to Lebanese pounds. We still had a balance of payments that showed a positive balance of $6 billion by the end of October, which is a record for any year in Lebanon for the first 10 months. Therefore, we thought that we can now afford now some gradual decrease in rates.

Nonetheless, if we see that our management of the liquidity in the market requires us to reenter by selling CDs, we will do that, and we have announced that we might come back with 7-year and 10-year maturities.

The idea is to acquaint the market with longer maturities in Lebanese pound denominated papers, and that the government later on can also issue bonds for 7-year and 10-year maturities in Lebanese pounds.

By extending the maturities on debt we will have less pressure on the refinancing of that debt on a yearly basis, and that will help maintain a more acceptable structure of interest rates.

E  As interest rates decline, do you expect the dollarization of deposits to remain around 66 percent?

We think the market is keeping that ratio. This is one of the equilibriums that we are starting to see. And today we have approximately $27 billion in liquid foreign currency on our balance sheet at the central bank, which is also a historical high. This means that out of the capital inflows coming to the country, 66 percent remain in dollars, while the rest are converted to Lebanese pounds. We find that it’s up to the market to define the equilibrium, but I believe we have seen the markets at this level for the past three or four months.

E  Both the prime minister and the finance minister have stated that they are keen to implement Paris III initiatives that include raising taxes on interest earned in local banks from 5 to 7 percent. Do you think this will actually happen in this government’s term?

The tax on the interest on deposits is not, I think, a priority for the time being, especially in that this tax was envisaged before the international crisis. And even though it is presented as a law to be voted, there is an understanding that this cannot be implemented before we have stability in the banking sector worldwide and in the region.

The tax approach is also not the priority, as I understand, because the priority is going to be given to more growth in the economy and to fix activities that are creating large deficits for the government, like Electricite du Liban.

Anyway, the government is presently discussing the economic program that they want to present to the Parliament or at least a declaration on that, and we will wait to see what will be approved. But I know that growth is the priority and for that, everything is going to be done to facilitate growth.

E  You’ve been successful in swapping the short-term debt for long-term debt with more maturity. How do you see Lebanon coming out of its debt situation?

Our priorities really are to reduce the yearly deficit because the present stock of debt that is in the market is perfectly sustainable, due to the high liquidity that we have and also to the increased confidence in the financials of the country. As you can see, the credit default swap that is quoted internationally for Lebanon for the past five years has declined to reach 2.3 percent, at certain times it was at 7 and even at 10 percent. So there is demand on the Lebanese paper, and interest rates in the secondary market have substantially decreased.

The future expectations of inflation are going to diminish the real value of that debt, which is stated today at around $48 billion. And the present value or the real value of that debt will look less important in the next four or five years, as the purchasing power of currency is going to be depleted worldwide. So what the market requires are signals showing that the deficit is declining, and for that purpose we hope that the originators of this big deficit be addressed in the reform program of the government. The most important sector to reform is the energy sector in general and electricity in particular.

We have to wait for the government declaration in order to see if the program of privatization is going to be implemented fully or partially and in what ways.

E  In light of the likelihood of the dollar decreasing in value, is the central bank changing the ratio of its foreign currency reserves?

No. We have the same ratios because we intervene in US dollars, so by departing too much from our structure of reserve in the dollar, we will incur risks on the Forex markets, dollar vis-à-vis euro or sterling or yen, which is not good for a central bank.

We cannot be speculators on the exchange markets, but we have created a model that preserves the real values of our reserves and don’t forget; the central bank, on its balance sheet, has a large stock of gold that represents around 30 percent of that balance sheet today. So the country is well hedged against any future development in terms of inflation internationally or a weaker dollar if this trend continues.

E  Is the devaluation of the dollar going to help us get to a higher balance of payments now that our exports are going to be more attractive?

You know, the dollar is decreasing in value against all of the currencies and most economic activity, whether in terms of production or services, is dollarized. This gives a competitive advantage to the country. And we have seen that in the correlation between the growth in the economy in Lebanon and the decline in value of the dollar. Of course we are talking about the economy in general. We are not talking about savings and the purchasing power of savings but this is an issue that concerns the people, the owners of capital, not the central bank. At the central bank, we have a diversified portfolio in terms of currency. We have a large stock of gold. But our transactions will remain related to the US dollar as long as the markets are dealing in that currency. If the markets change to another currency, then we will change as well.

E  To what extent are banks in Lebanon compliant with Basel II?

They are fully compliant to the criteria of Basel II; the solvency ratio in the country is around 12 percent. As you know, most banks worldwide are struggling to get to 8 percent, which is the norm. And this 12 percent is by applying all the criteria of Basel II. We are also working on the governance issue and on the risk and transparency issues along with the banks. We issued circulars in that regard and we have created, at the central bank, a unit for good governance that is going to work in the field to make sure that good governance is implemented, and we will start by a strict analysis of the composition of the board of directors and their prerogatives in the bank’s management.

The group is within the central bank so effectively it will give its recommendation to the governor. The governor will present it to the central board and there will be a decision that has enforcing powers. This is a follow-up activity, nonetheless there is also the banking control commission that is empowered and has the teams that are in the field working to see how our circulars are being implemented in the banking sector.

E  The sentiment at the Union of Arab Banks conference in November was that Basel II is insufficient to prevent a crisis like we are seeing right now from happening again. Do you agree with that?

The crisis happened after Basel II had been approved, so Basel II is not enough to prevent a crisis. Here, we added to Basel II the liquidity factor that did not exist before. So in Lebanon, the banks have to constitute a liquidity of 30 percent on their balance sheets, 15 percent as a reserve requirement with the central bank and 15 percent on their own books. The fact that we have low leverage and high liquidity has helped the sector refrain from going into adventurous credit, and Basel II is more on the capital side than on the liquidity side. So it has to be developed more. Anyway, Basel II is just guidance because the major countries did not even implement it, like the United States or India. There is no better protection for a bank than its management because they know what is really happening in the bank, and for a banking sector, the local central bank should be aware and prudent, to moderate leveraging in the sector.

 

March 2, 2011 0 comments
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Finance

Embracing evolution

by Peter Daou March 1, 2011
written by Peter Daou

In an economy such as the United Arab Emirates, where the government has significant stakes in several of the largest banks, it is hard to isolate successes and attribute them fairly. Still, the success of UAE banks at surviving what have been trying times earns them at least part of the financial accolades of the emirates in 2010; the orderly restructuring of nearly $25 billion of debt was a major achievement on the part of the UAE banking sector and September’s announcement that all 90 of Dubai World’s (DW) creditors had agreed to a restructuring agreement sent positive waves across financial markets. 

“Common sense prevailed, and it was therefore an achievement to get all the banks to agree to the restructuring terms, which reflects the pragmatic structure of the agreement,” says Jeremy Parrish, chief executive officer of Standard Chartered UAE. Emirati banks also withstood exposure to a still-ailing real estate sector and what Parrish describes as “very tight liquidity” in 2010.

Return to liquidity

After the DW debt rescheduling, liquidity was scarce for Dubai’s banks. But in the second half of 2010, banks and sovereign authorities were able to tap into international capital markets. Dubai’s Department of Finance raised $1.25 billion in 5-year and 10-year bonds in September. Emirates NBD raised $221 million in August through securities backed by auto loans, a first in the Middle East, and then followed through in November by raising $410 million in 5-year multi-currency notes. At the same time, banks have actively sought out solutions and new strategies to mitigate the dismal financial and credit conditions.

 EFG Hermes banking analyst Murad Ansari points out that UAE banks, namely in Dubai, offered competitive returns on deposits and organized road shows to raise deposits.

This national increase resulted in an improvement in the loans-to-deposits (LTD) ratio, which slipped into positive territory again at the end of October and is another indicator bankers view as an achievement in a country that has historically been highly leveraged.

Michael Tomalin, CEO of National Bank of Abu Dhabi (NBAD) attributes the decline in the LTD ratio to proceeds from corporate bond issuances and to the attractiveness of interest rates on dirham deposits, especially given the fixed exchange-rate regime.  Tomalin adds that “some of the banks in the country — not NBAD, but other banks in the region — have been quite aggressive at going out into international markets and raising institutional deposits through programs offering relatively high rates of interest in dollars.”

Banks have been actively adopting strategies to align themselves to a new operating environment. Many are focusing on growth sectors such as trade finance, tourism and project finance for infrastructure. Standard Chartered is targeting small and medium-sized enterprises to mitigate exposure to large real estate developers, while Emirates National Bank of Dubai and NBAD are also focusing on their fee-based business.

“We are a local bank that has connections and access, can guide, help and advise on how best to structure a project and so on,” says Tomalin.  “Our international lending activities are directed to advance our client who wants to invest abroad, or an overseas client who wants to sell something, so we support him in that sale.” Tomalin adds that while interest income relative to fee-based income is currently at a ratio of 70:30, he would like to see it at 60:40.

Taking on the big boys

The local banks’ new strategies mean pitting themselves against international banks who have historically dominated the lucrative fee-based businesses such as investment banking and corporate finance. Tomalin admits that local banks have to be smart and realistic in that regard.

“We have to ask ourselves, if we want to compete with Goldman Sachs, Barclay’s or Deutsche Bank, etc, how are we effectively going to compete with these people? They are huge, we are a little bank,” says Tomalin. “Our point of differentiation is that we are a bank in the Arab world. We are here in Abu Dhabi. That makes us different.”

Emirates interbank offered rates

At the same time, expanding deposit bases may prove to be expensive, especially when many banks are rushing to cut their LTD ratio and add more lending capacity. According to Tomalin, “some banks… have been paying very high rates of interest for deposits to get their ratios sorted out. We haven’t been paying this sort of interest [at NBAD] but other banks have.”

Nonetheless, banks may be able to attract deposits through other means than interest rates. Sanjoy Sen, Citibank’s Middle East Consumer Bank Head, believes that customers are increasingly sensitive to the reputation, brand name, financial stability and strength of their bank. “Banks that are in a comfortable liquidity position will not necessarily need to pay high rates for mobilizing retail deposits,” says Sen.

In parallel, fears of rising competition for deposits between international and local banks appear unfounded. “There is an increase in competition between banks but it is a level playing field and all players have equal opportunities to get a ‘share of the wallet,’” says Sen. Parrish adds that “there has always been a healthy competition between international and local banks, but we do not see any shift in the paradigm.”  

On the other hand, the sought-after deposits have already begun to affect profitability. Banks usually seek to attract retail deposits first because they are cheaper compared to their corporate counterparts, which are more interest rate sensitive. But retail deposits are notoriously harder to attract, and given the pressing need to raise long-term debt in order to finance maturing obligations and increase lending, some banks have been aggressive, at the expense of their operating margins.

What make matters even more complicated are speculative capital inflows. Although hedge funds are happy to park their money in high-interest dirham deposits, banks are all too familiar with the 2008 scenario and will not lend against hot money, thus creating an added cost.

As a result, and despite discernible improvements in the ability of UAE banks to counter credit and economic crises, the list of concerns continues to cloud what many bankers view as the emirates’ strong fundamentals.

Tight liquidity is a major concern at banks looking to refinance and lend. Widening credit default swap spreads and expectations of a stable emirates interbank offered rate spread do not support an increase in liquidity. There seems to be a general consensus among bankers and analysts that a continued orderly restructuring and refinancing of large corporates without massive and surprising provisions will go a long way in re-establishing confidence in financial markets and especially banks.

Analysts are carefully tracking developments in asset quality, especially at Dubai banks whose non-performing loan ratios are among the highest in the country, given their tilt toward the embattled real estate sector. Still, the shift to the resilient sectors of the economy such as tourism, trade finance and government, should improve overall asset quality at UAE banks.

 However, fear of additional provisioning and general weakness across some of the largest sectors in the economy, especially in Dubai, may shift the focus of banks more toward stabilizing their balance sheet and liquidity ratios than toward taking on additional risk, unless on a highly selective basis.

At the same time, a 98 percent national LTD ratio, which goes even higher by the central bank’s loans to stable deposits, does not provide much leeway for banks to grow their loan books in 2011. But there is room for measured growth, according to Parrish, who says: “The drop in the LTD ratio is not a signal for the flood gates to open, but we will see a measured increase in loans after what so far has been a flat growth in the last 18 months.”

The general mood of investors and analysts covering UAE banks remains largely skeptical, with several exceptions in the banks and some economic sectors. Nevertheless, the rush of positive news, including airport and port traffic in the second half of 2010, has boosted confidence at the business and consumer levels, generating strong support for the belief that today’s concerns, such as asset quality deterioration and profitability, may form the achievements of 2011.

March 1, 2011 0 comments
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Banking & Finance

Regional equity markets

by Executive Editors February 28, 2011
written by Executive Editors

Beirut SE  

Current year high: 1,180.99    Current year low: 939.02

>  Review period: Closed Jan 26 at 1,024.00 Points                  Period Change: 5.3%
The Beirut Stock Exchange had a positive entry into 2011 and the MSCI Lebanon index rose to a 6-month high on January 11. Volatility appeared as the nation and BSE were exposed to the newest twist in the power bickering of Lebanese politics. During the Jan 12 to 26 period, shares of real estate firm Solidere fluctuated between $18 and $20. Bankers affirmed there was no flight of money. In terms of the BSE’s reaction, the uproar over a new PM on the Jan 25 “day of rage” was but a tantrum.

Amman SE  

Current year high: 2,648.36                Current year low: 2,223.30

> Review period: Closed Jan 26 at 2,424.62 Points                  Period Change: 1.2%

The first significant uptrend in several months for the Amman Stock Exchange benchmark index — 125 points, or 5.3% between Dec 19, 2010 and Jan 17, 2011 — fizzled out with the eruption of political protest in Tunisia. The index dropped 2.2% in the following week but there was nary an immolation of Jordanian stock prices by the Jan 26 close. Industrial stocks were involved in driving the market higher and the industrial index was the best performer in the review period, closing Jan 26 up 3.85% on the month. The banking sector index lagged slightly behind the benchmark.

Abu Dhabi SM   Current year high: 2,931.67                Current year low: 2,471.70

> Review period: Closed Jan 26 at 2,668.66 Points               Period Change: -1.9%

Amid broadly negative sentiment affecting most sectors on the Abu Dhabi Securities Exchange, real estate and construction were the sectors that dragged the benchmark index even lower. The industrial index was the upward outlier. The newsmaker among listed companies was developer Aldar, which embarked on a long expected restructuring, including placement of a $760 million convertible bond, a $2.9 billion impairment charge, and a $3 billion transfer of infrastructure assets. The stock subsequently slumped to its lowest quotations ever, beneath the AED 2 mark ($0.54).

Dubai FM   Current year high: 1,880.62                Current year low: 1,461.80

> Review period: Closed Jan 26 at 1,627.97 Points               Period Change: -0.2%

Index movements on the Dubai Financial Market lacked clear direction at the start of 2011. Among sector indices, telecommunications and transportation closed the review period on positive notes banking, investment, real estate and insurance sector indices were bearish. Down 12.1% year-to-date at Jan 26 close, the utilities sector was the DFM’s underperformer. District cooling firm Tabreed fell 9% and Emaar Properties gave up 3.4%. Gainers included telecoms operator Du, up 9.4%, contractor Drake and Skull, up 7.7%, and multi-sector investment company Dubai Investments, up 5.4%.

Kuwait SE   Current year high: 7,575.00                Current year low: 6,319.70

> Review period: Closed Jan 26 at 6976 Points                     Period Change: 0.3%

Movement on the Kuwait Stock Exchange in January stayed loyal to the same point range that had been the theme of the last quarter in 2010, dallying in the 6,900s and not breaking into 7,000 territory but not softening to 6,800 either. Except for the banking sector, which outperformed the benchmark index performance by six percentage points, the domestic sub-indices remained range bound. The index for non-Kuwaiti share values slipped 4.8% during the review period.

Saudi Arabia SE  

Current year high: 6,929.40                Current year low: 5,760.33

> Review period: Closed Jan 26 at 6,697.80 Points   Period Change: 1.2%

Based on a 360-point gain in December, the TASI ascended to an eight-month high on Jan 16 before profit taking in the latter part of the review period curtailed its January gains. Industrial investment was the top gaining sector index at 7.6%. Transport and agriculture stocks saw sector index drops of 4% and 3.8%. At the top, supermarket retailer Othaim climbed 16.5%. Heavy-weight Sabic retreated from a 28-month high after 27% year-on-year improved Q4 profits that narrowly undercut forecasts.

Muscat SM  

Current year high: 7,027.32                Current year low: 6,058.11

> Review period: Closed Jan 26 at 6,943.10 Points   Period Change: 2.8%

Enjoying five closes above 7,000 points, the Muscat Securities Market’s H2, 2010 rally with a cherry on top lasted until January 17, a day that apparently nudged investors across the GCC to think about profit taking. All three sector indices on the Omani bourse closed the review period higher, with the services and insurance index showing the best gains at 9%. Banking and industrial indices added 2.8% and 1.7%, respectively. Incompatible liquids were a happy, if most likely not interconnected, theme as Maha Oil and National Mineral Water each gained more than 18%.

Bahrain SE  

Current year high: 1,605.98                Current year low: 1,361.19

> Review period: Closed Jan 26 at 1,460.67 Points   Period Change: 2.0%

The benchmark index of the BSE recorded notable gains near the end of the review period, propelling the market to the number three spot in the GCC, after Qatar and Oman. Sector indices for investment, services and industry moved north; banking, insurance and hotels headed south. At the extreme points of individual share price movements, Ahli United Bank advanced 12.7%. Bahrain Islamic Bank, announcing Q4 losses, fell 23.3%. The bourse listed a $530 million Bahraini sovereign bond on Jan 20, expanding the number of listed bonds and sukuk to 12.

Doha SM   Current year high: 9,242.63                Current year low: 6,558.45

> Review period: Closed Jan 26 at 9020.24 Points    Period Change: 3.9%

True to the form of recent months, the Qatari market was again the Gulf’s best gainer in January 2011. But even on the World Cup-delighted QSE, where economic prospects were buoyed last month through government reconfirmations of immense infrastructure investment intentions, days of profit taking emerged in mid-January. First, however, the QSE benchmark rallied to highs unseen since the maelstrom of the 2008 crisis. All sectors followed the benchmark trend of rise and retreat. Only banking, up 4.7% by Jan 26, closed the review period higher than the general index.

Tunis SE   Current year high: 5,681.39                Current year low: 4,534.88

> Review period: Closed Jan 26 at 4,552.80 Points   Period Change: -12.7%

From sideways trading in December, the Tunis Stock Exchange crashed in January, losing 665 points in only one week of trading to Jan 14 before the TSE shuttered its gates and remained closed for the remainder of the review period to avoid being fully submerged in political chaos and panic selling. Prices dropped for nearly all stocks that were traded during the period, without indication of any sector or industry being at the center of selling. The upheaval set the TSE back to index levels last seen in January 2010 with a wholly indeterminate outlook.   

Casablanca SE  

Current year high: 13,397.47              Current year low: 10,846.39

> Review period: Closed Jan 26 at 13,183.91 Points             Period Change: 4.4%

The MASI index started 2011 with a 740-point rise to a new historic market peak on Jan 12. This turned into a 3% slide in the wake of the unexpected crisis in Tunisia but investor sentiment stabilized toward the end of the review period; the Moroccan bourse was the period’s best performer in North Africa. Market cap leader Maroc Telecom climbed 6%. Ennakl Automobiles, the Tunisian car distributor cross-listed in Tunis and Casablanca, dropped only slightly on the CSE but bled much more on the TSE.

Egypt CASE  

Current year high: 7,603.04                Current year low: 5,647.00

> Review period: Closed Jan 26 at 6310.44 Points    Period Change: -11.64%

Crash and bang but no boom was the tenor on the Egyptian Exchange, whose indices were driven down sharply during the morning of Jan 26 after violent demonstrations the day before stoked investor fears of national political instability. The benchmark EGX 30 index dropped 6% that day but the wider EGX 70 and EGX 100 indices fell about 10% each. Banking, financial, and real estate sector indices were all heavily involved in the January drops as were food and leisure.

February 28, 2011 0 comments
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Feature

Hard Numbers

by Executive Editors February 21, 2011
written by Executive Editors

In a much publicized and internationally heralded move in August 2010, the Lebanese government passed “right to work” legislation for the country’s Palestinian refugee population. For those who thought that this would usher in a new era for the refugees and alleviate the poverty of the Palestinian community, nearing its 62nd year in exile in Lebanon, the unfortunate reality is that little has changed.

While Lebanon’s economy has made gains in recent years (recent incidents notwithstanding), it is glaringly apparent that little, if any of this has reached what remains one of the country’s most disenfranchised communities. Lebanon’s 12 official Palestinian refugee camps are still mired in destitution: in south Beirut’s Shatila Camp sewage runs through the alleys, secondary school drop-outs and unemployed men in their 20s idle in the market and only a minority of homes have access to natural sunlight.

While clearly visible to the eye, the poverty that dominates the economic situation of Lebanon’s Palestinian refugees — estimated  by various organizations at anywhere between 260,000 and 400,000 — has been largely difficult to quantify due to a shortage of reliable data. In late December, the American University of Beirut (AUB) released a report called “Socio-Economic Survey of Palestinian Refugees in Lebanon,” commissioned by the United Nations Relief and Works Agency (UNRWA) and funded by the European Commission, which claims to be the most comprehensive survey of the population in the past decade. The last major benchmark study on the subject was carried out by the Norwegian foundation FAFO, using data collected in 1999.

The AUB report offers a rare statistical quantification of the socio-economic realities and hardships of Palestinians in Lebanon.

Dire poverty

The survey found that 66.4 percent of Palestinians in Lebanon live under the poverty line of  spending $6 per day – deemed enough money to cover basic food and non-food items. Of these, 6.6 percent fell under the extreme poverty line, spending less than $2.17 per day, enough to cover food items alone.

Unlike previous surveys, the AUB report measured spending rather than income as a measure of poverty, which authors of the report argue is more accurate. From these statistics, the study estimates that approximately 160,000 Palestinian refugees live in poverty.

Inside the refugee camps — which are often isolated from urban areas and job opportunities — three out of four residents live below the poverty line, compared to one in two Palestinians who live in gatherings outside of the official camps. Remaining Palestinians not living below the poverty line are by no means affluent: the report mentions that no individual surveyed reported a monthly expenditure of more than $600.

The average monthly expenditure was revealed to be $170; those living in informal gatherings spent an average of $200 per month while those living in camps spent only $150. Little change then, from data collected in 1999 by FAFO, which found that 44 percent of Palestinian refugees in Lebanon made less than $2,400 per year, or $200 per month.

No jobs to go around

The most obvious contributing factor to the poverty facing Palestinian refugees in Lebanon is that most of them do not have jobs. The AUB report shows that only 37 percent of the working age (15 to 64 years old) Palestinian refugee population is employed. The study’s authors assert that widespread discrimination on the part of many Lebanese employers makes finding jobs difficult.

“If a secretary [applies for a job] with a CV that says Shatila Camp [under] residence, they will not employ her,” says Sari Hanafi, an associate professor at AUB and one of the contributors to the report.

Of Palestinians who do have jobs, very few have contracts — prerequisites for obtaining elusive work permits that give the employee legal standing and rights. This leads many Palestinians to work illegally, exposing them to labor abuses.

“Those who are interested in employing Palestinians are exploiters,” says Hanafi. “A few days ago I found three Palestinians working with a construction company. I got the details and found  they work without work permits and they work for half the price that their Lebanese colleagues can get from this company.”

Legal issues remain the largest issue facing Palestinians who want to work, and so far the lauded “right to work” legislation of August 2010 has done little to help the employment situation facing Palestinians.

“[It had] zero impact. I am not exaggerating,” says Hanafi.

As evidence, Hanafi points to the fact that, in the past six months, the Lebanese Ministry of Labor has granted only three work permits to Palestinians. In 2009, 99 permits were issued to Palestinians. Foreign workers from other countries — primarily domestic workers from Asia and Africa, along with non-Lebanese Arabs — were issued a total of nearly 150,000 permits in 2009.

“The Ministry of Labor is supposed to take some implementing measures. Those measures have not been taken yet,” says Salvatore Lombardo, director of UNRWA in Lebanon, adding that the country’s current political crisis is “likely to delay even further the implementation measures.”

With the stagnation of the process, Hanafi says, “the main factor [contributing to unemployment] is really related to the lack of a legal framework allowing Palestinians to get jobs in the private sector.”

Rather than a step toward more equal rights, the report says “the amended law constitutes an institutionalization of discrimination.”

While in theory it would make it easier for Palestinians to obtain work permits, the law did little to help Palestinian professionals trying to enter liberal professions, many of which are syndicated and reserved for Lebanese nations. For unskilled jobs, permits are not as helpful as it might seem, given the reluctance of employers to issue Palestinians contracts and thereby give up the current low labor costs and freedom from worker protection regulations. 

The fear of tawtin — the naturalization of Palestinians — upsetting Lebanon’s delicate sectarian balance has made many Lebanese hesitant toward granting further rights to Palestinians. In a narrow Lebanese job market already saturated by low-wage workers from other Arab countries and further afield, some fear that additional working rights would worsen the situation for Lebanese job seekers.

“A very important conclusion of the study is that [Palestinian refugees] do not represent a threat to Lebanese nationals in terms of job searches,” says Lombardo, taking into account that Palestinians primarily compete with non-Lebanese Arabs and other unskilled foreign laborers for jobs. The sheer number of Palestinians in Lebanon would put the community in a position to be a strong positive economic force in the country, if only they were better integrated into the economy through proper employment.

School’s out forever

The inability to keep students in school is a driving factor behind the undereducated Palestinian workforce. While elementary and preparatory schools that Palestinian children go to enjoy high attendance numbers, enrollment rates crash to 51 percent for secondary school. However, this is an improvement from FAFO’s 2006 study, which found that 74 percent of the Palestinian labor force in Lebanon had less than a secondary education.

Post-graduate opportunities are bleak throughout the Palestinian community: “When these kids see their older brother unemployed after a few years in private university, they have no incentive to go to school,” says AUB’s Hanafi.

For Lebanon’s Palestinians, the path to a brighter economic picture is largely out of their own hands. Their high levels of unemployment and poverty will likely continue as long as there are no serious efforts to integrate the refugees into their host country’s economy. With the country’s politicians currently handling their own problems, it could be some time before a helping hand is given to the Palestinians.

February 21, 2011 0 comments
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Editorial

Willfully ignorant of the imminent

by Yasser Akkaoui February 21, 2011
written by Yasser Akkaoui

In the first month of 2011 a storm of popular rage swept across the Arab world. Protests from Morocco to Yemen have brought millions out into the streets to demonstrate against the once-feared powers that be, toppling one long-time titan of autocracy in Tunisia and leaving another clinging to power in Egypt as January ends.

One must remember that Tunisia and Egypt were the North African darlings of international investors looking for high returns in developing markets. Both had been regarded as stable macroeconomic environments right up until their collapse, with proven track records of strong growth and stellar potential. Who could have foreseen these revolts?

Economists and the like have a nice term for an event of such radical departure from the expected: a ‘black swan’ – a freak of nature, unforeseeable, unavoidable and of devastating consequence.

But were the events of the last month really so unexpected? We have known for years that wealth has failed to trickle down in Egypt and Tunisia, that corruption is rampant, that education has failed to match the needs of the economy and that brutal police repression has stymied legitimate protest.

The soaring Tunisian stock exchange led business and political leaders to assume the social economy was also thriving, and that Egypt’s long years of political stability and growing middle class were signs that all was well on the banks of the Nile.

Perhaps it is human nature for greed to settle us softly into irresponsible complacency, where we take for granted the status quo will remain and we blind ourselves from the fires growing around us. Perhaps, then, many ‘black swans’ are not unforeseeable at all –– rather, we ignore obvious threats because wanton disregard seems to make sense when profits are easy. But then the crash comes, and again we claim we’ve been wronged by wicked fate.

In the cases of Tunisia and Egypt, we were simply focused on the wrong indicators. Gross domestic product growth and stock market performance do not tell the health of a nation; to assess the stability of any society you must assess the level of satisfaction of its people.

In the future, analysts will have to revise the indicators they use to assess a country’s risk and investment potential if they want to avoid looking like the archetypal jilted lover, always claiming they never saw it coming.

February 21, 2011 0 comments
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Economics & Policy

Accession in Atrophy

by Executive Editors February 21, 2011
written by Executive Editors

Arab attitudes toward the World Trade Organization (WTO) are mixed: at one extreme is Libyan leader Muammar al-Qaddafi, who opened the latest Africa-European Union summit at the end of November by branding the WTO, and other international trade organizations,  as “terrorists.” “We call for the elimination of the WTO, because it does not serve our interests,” Qaddafi said. “It wants us to open our borders to foreign goods to kill our industries.”

Though most of the region does not share this point of view, there is a palpable indifference to the organization throughout. The Arab world is greatly underrepresented in the WTO, with only 12 out of 22 Arab League members having joined, a much weaker representation than in other regions.

Interest in the WTO among Arab states is growing, however: from the initial nine that were founding members of the WTO, three have acceded in the years following while eight more are currently in the process of doing so. The accession of Arab countries has tended to take longer than that of states in most other parts of the world. Jordan’s accession, which came in 2000, took around six years, longer than its peers who joined in 1999 or 2000. Saudi Arabia, which acceded in 2005, took more than 12 years to negotiate membership, having started under the WTO’s predecessor, the General Agreement on Tariffs and Trade (GATT). As for Arab countries now seeking to join the WTO, they tend to resemble the Saudis more than the Omanis, who took just five years.

Syria should do a Turkey

Syria, the latest to begin negotiations, is a good example of the difficulties faced by some states in the Middle East and North Africa region; it was forced to wait for a full nine years before its application to join was even acknowledged. The start of Syria’s accession process a few months ago was good news for those seeking more liberalization, as moves to join the WTO have already prompted discussions of sorely needed Syrian domestic policy reform.

With 14 percent of Syrians living in poverty and 20 percent unemployment, the country’s Deputy Prime Minister for Economic Affairs Abdullah Dardari acknowledged in late 2010 that the “challenges facing us are formidable.” Syrian economist Nabil Sukkar concurred in January when he stressed to Executive the need to meet the endlessly growing demand for jobs, calling the task “enormous.”

So is WTO membership an effective tool to help solve Syrian economic problems?

Whatever the details of the recipe for reform, which include changes in the foreign trade regime, most observers agree that “business as usual” is not an option. Paul Salem, director of the Carnegie Middle East Center in Beirut, said recently that the Syrians should follow the example of Turkey, now on its way to becoming an economic power, but which 30 years ago “resembled [the] Syria of today.” Turkey’s blossoming was partly achieved through massive exports to new markets, due in large part to its WTO membership and to bilateral trade deals, which in turn interacted positively with economic reform and restructuring at home.

A tall ladder to climb

However, for Syria and other Arab countries, finally joining the WTO may take some time and involve much effort. Ever since the organization was officially launched in 1995 as the successor to GATT, the average accession process has lengthened over time. The average since the WTO was founded is 8.5 years, but that number has steadily risen since the first batch of entrants in the late 1990s, which typically required only two years.

Such delays are not purely political. Lebanon’s accession, which was initiated over a decade ago, is hampered by problems related to intellectual property rights (IPR) and other economic issues, more than a decade after the country applied for membership. Granted, such a delay for Beirut has much to do with its political situation, as it does in Syria, although officially the only issues on the table relate to economics. 

The danger now in Syria or in other Arab states is that those who oppose opening up to global markets could plead the existence of political obstacles, in an effort to derail economic change and delay WTO accession. To help counter this mentality, more training and technical assistance could be sought, as has happened in Jordan, Yemen and other Arab states, to enhance trade-analytical capabilities.

In this vein, Syria could also use accession negotiations as leverage for more aid from state donors. For example, if the United States or EU grumble that Syria’s IPR situation leaves something to be desired, Damascus could counter with a demand for technical assistance from the West for training and public information campaigns.

Faced with the daunting process of accession, the countries of the region should seek all the foreign technical assistance they can get, as well as learn from the experience of other Arab states that have already joined or are in the process of doing so. Tamam el-Ghul, a former Jordanian WTO negotiator and ex-minister, recently described the admission process as “complex,” requiring extensive technical expertise.

Accession also calls for a change in public attitudes, but the media in this respect have not been helpful, with many economic journalists still unfamiliar with the WTO and incapable of enlightening people about trade. In this regard, a linguistic dilemma arises: Arabic is not an official WTO language, as it is at the United Nations and many other international organizations. That is not a merely superficial problem, as adopting Arabic as a working language could have far-reaching positive implications. The buzz at WTO headquarters in Geneva suggests that the issue could start to be taken more seriously from 2012, as more Arab members join the organization. One WTO official, speaking off the record, told Executive: “For Arabic to become an official language, financial backing from rich Arab states would be needed.” Translation is already a huge expense at the WTO, but it is clear that Colonel Qaddafi and other WTO naysayers could profit from more clarity in understanding the benefits of accession.

February 21, 2011 0 comments
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Since its first edition emerged on the newsstands in 1999, Executive Magazine has been dedicated to providing its readers with the most up-to-date local and regional business news. Executive is a monthly business magazine that offers readers in-depth analyses on the Lebanese world of commerce, covering all the major sectors – from banking, finance, and insurance to technology, tourism, hospitality, media, and retail.

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