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Turkey’s EU report card

by Peter Grimsditch
written by Peter Grimsditch

 

The 104 pages on Turkey’s European Union progress (or lack thereof) from EU Enlargement Commissioner Stefan Füle represent the kind of school report which children would rather not show their parents. Its examination of the 35 “chapters” Ankara needs to reach agreement on to join the EU was a damning indictment of its failure to meet European standards in almost every area.

The document, published in late October, detailed deficiencies in freedom of speech and religion, minority rights, constitutional reform, questionable behavior by the police and an attitude toward women’s equality that talked the talk but failed to halt the rise in honor killings and forced marriages of girls in their early teens, especially in the east and southeast.

Perhaps conscious of the need to throw in a few sentences that could be shown to mum and dad with a smile, many of the most savage sections conclude with the somewhat bizarre observation that “overall some progress is being made.”

The report’s most positive part concerned the economic environment, which Füle’s team acknowledged had vastly improved. But at a time when Greece, Ireland, Portugal and Spain (and maybe soon Italy) are in deep financial and economic trouble, the report could come to no other conclusion. Despite a proud history that includes Euclid and Archimedes, the Greeks have shown they can’t add up — estimating the size of the budget deficit is one of the country’s bigger growth industries. Dublin’s initial insistence that everything was under control now looks like a Guinness-fuelled Irish joke. The governments of Portugal and Spain are paying more to raise money than at any time since the eurozone was founded.

With an economy looking at 11 percent growth this year and a banking sector immune to the catastrophes suffered by reckless American and European banks these past two years, little wonder the Turks can afford to feel superior. Ankara feels justifiably aggrieved that countries like Romania and Bulgaria (where corruption is a national sport) have been positively dragged into the EU club. The truth, of course, is that the major reason for accelerating their entry was to prevent them from falling back into Moscow’s sphere of influence.

For Turkey, failure to resolve the Cyprus issue is blocking talks on 18 of the 35 EU accession chapters, while France has unilaterally stalled another five. There are rumblings that a hint of movement may be imminent on Cyprus. The European Commission is said to have proposed talks on the energy and justice chapters in exchange for Ankara’s opening one of its ports and airspace to Cypriot shipping and aviation by the first week of December. Turkey’s acceptance of the secret deal is allegedly conditional on allowing international flights into Northern Cyprus, as well as direct trade with the self-declared republic. Officially in Turkey, the proposal doesn’t exist. While implementation of such an agreement could be trumpeted as success, the fallout of a failure could hurt the government’s chances in next June’s elections.

What the leadership is very happy to assert, however, is that keeping Turkey out of the EU is Europe’s loss. “As long as we are not a member of the EU, the EU will not become a global actor,” was Prime Minister Recep Tayyip Erdo?an’s assessment of the EU report. To President Abdullah Gül, speaking to the Chatham House think tank in London, membership was not a matter of domestic Turkish politics. Turkey is taking a strategic view, looking 20, 30, even 50 years ahead, he said. Lower down the political food chain, Egemen Bagis, Turkey’s chief negotiator, claimed grandiosely that the EU needs Turkey more than Turkey needs the EU.

With the exception of comments on press freedom (Gül would like more of it, Erdo?an says it is not limitless and Bagis thinks it already exists), much of the reaction from Ankara to the EU report has been in similar-sounding generalizations. The report itself was packed with specific accusations in many areas, citing examples, although it too occasionally threw in unsupported generalities similar to those trotted out by the Turkish political establishment. Füle concluded that “despite overall progress in 2009, we are concerned that Turkey’s accession process is losing its momentum. The key to changing this is primarily with Turkey.” Ah, that word ‘overall’ again. Despite the sugar coating, mum and dad are unlikely to be fooled.

PETER GRIMSDITCH is Executive’s

Istanbul correspondent

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Society

The souk of splendor

by Emma Cosgrove
written by Emma Cosgrove

 

Consumption is keeping Lebanon alive. As a major contributor to gross domestic product, the Lebanese penchant for luxury puts the shine on the country’s numbers, financially precarious as it may be for the individual. At the close of 2010, after years of waiting and false starts, the highlife has found a true home in the revived downtown Beirut. Still, the current conditions, which have the potential to carve Beirut a place among the world’s great retail cities, are not assured. 

With Beirut Souks — Solidere’s consumerist dream — at the center of it all, downtown Beirut rivals, at least in names, the great shopping districts of Paris or New York. The 200-outlet complex began its very soft opening in October of 2009 and has now seen its first full year of operation. Persistent delays and mismanagement of initial space allotment, especially in the Gold Souks section, made for a rocky start, but on the whole, retailers have been keen to move into one of the final puzzle pieces of downtown Beirut’s rebirth.

“Of course the companies were thrilled when we proposed to them the mono-brand boutique concept in Lebanon, especially in Beirut Souks, which is the ideal place to be, in the heart of the city,” said Barkev Atamian, business manager for local luxury watch empire Atamian. His company now dominates an entire corner of the Gold Souks with IWC Schaffhausen, Jaeger-LeCoultre and TAG Heuer mono-brands and a multi-brand boutique containing watches from Breguet, Blancpain, Glashütte Original and Ulysse Nardin.

Despite congratulations from many foreign brands happy to have a centralized home of luxury in a desirable market, the Souks still stand as a disappointment to some.

“To be quite honest the souk is not up to our expectations yet, but we think that there is a future for it,” said Izzat Traboulsi, managing director of Hugo Boss for the Middle East.

The Souks ‘value-added’ features such as a cinema complex and many of its promised dining locations and cafes are conspicuously absent. Solidere’s General Manager and Chief Financial Officer Mounir Douaidy told Executive last September that the northern section of the souks, set to contain a 14-screen cinema and a department store, would be completed by the end of 2011 — one year to go.

“It’s still a mess because there are some missing cafes,” said Traboulsi. “The cafes [that do exist] are on the edge of the souks… we don’t have any cafes as a stop in the middle.”

In addition to the lack of patron-enticing entertainment venues among the retail spaces, the mixed price tag of retailers within the complex makes luxury retailers less willing to choose locations in the thick of it. This means that some truly top-end retailers are still looking for a presence outside of the souks on the outlying streets of Foch, Allenby and Park Avenue.

But these streets pose yet another challenge for the retailers who want to keep company with their contemporaries; each building and sometimes each space has a different owner, whose interests and ideas do not necessarily tally with the vision for the area. So, the new challenge with the growing presence of luxury retailers downtown is keeping the area on message.

“If somebody is going to be paid $1,400 per square meter they don’t care if it’s a high end place or a shwarma place,” said Traboulsi.

The cafe culture of Maarad Street is yet to be successfully replicated in Beirut Souks

Although a hefty per-square-meter price tag should keep the falafel stands from downtown for now, a lack of a central unified plan means that at any given moment these top-end retailers could find themselves with a neighbor not of the rarefied company they would usually keep.

Furthermore, rising rent prices in an area with a finite amount of attractively located, ground floor space could jeopardize the future health of Beirut’s luxury center.

“The only issue we are facing now is, since the demand is a little bit big, the prices are tending to go high also. Today [rent] is representing a very big part of the turnover, which is not normal,” said Antoine Eid, chairman and chief executive officer of Joseph Eid & Co. — which owns the Alberta Ferretti, Faconnable and Lanvin Men’s boutiques downtown — to Executive in July.

Eid said that today, rent for a boutique in the Beirut Central District (BCD) represents 7 to 10 percent of revenue. This in itself is a bit too high for comfort and, with rents increasing, Eid is worried.

“We think that this is dangerous because maybe some of the companies will not be able to sustain these rents for a long period of time and it would be a pity to see some of them closing,” he said.

And on top of the geographical and spatial dynamics of downtown, political dynamics, as ever, have their role to play.

Hotel occupancy rates in August dropped from 75 percent in 2009 to 43 percent in 2010. Likewise, rates in September dropped from 62 percent in 2009 to 53 percent in 2010, according to international consulting firm Ernst and Young.

Though Ramadan’s August arrival this year was partly to blame, Traboulsi believes that inflammatory rhetoric from various political leaders and trepidation regarding the uncertainty of reactions to the United Nations’ Special Tribunal for Lebanon (STL) scared away some prime tourist dollars. He estimates that Hugo Boss saw a 10 to 15 percent drop in sales in August and September from last year, when development and tourism trends predicted growth.

It’s not just complicated forces like politics that impact luxury sales; even simple forces like weather can, and have, hindered retail sales this year.

“We got the fall merchandise and we are still having summer. There is no appetite from the clients,” said Traboulsi.

Missing out

The seemingly constant openings and events celebrating fashion in the BCD in 2010 encourage the idea that it is the only place for luxury in Beirut. But this centralization of luxury downtown has taken focus away from other areas of the city and frustrated some established proprietors.

Grace Sehnaoui, brand manager at E and E group which runs TOD’s, Hogan and multi-brand boutique Kamishibai, said when Beirut was beginning to re-establish itself in terms of a luxury retail destination after the civil war, development was haphazard and scattered around the city. With the new centralization of luxury, many of the high-end retailers who appeared early on now find themselves somewhat isolated among the riffraff.

Clever marketing with a gigantic shop-sized travel case ensured Louis Vuitton was one of the more hotly anticipated luxury openings seen in BCD this year

“Outside of [ABC Ashrafieh] it’s quite dead now,” said Traboulsi. “Joseph Eid and Via Spiga had luxury stores [near Sassine], today they don’t function as before because all of the luxury [brands] have moved downtown where it is done in a proper way. Now whenever a premium brand wants to open a shop, the only destination they have is downtown Beirut.”

Sehnaoui’s Kamishibai sits down the block from Joseph Eid near Sassine and is surrounded by a random smattering of salons, cell phone shops and, most frustrating to her, banks.

“When it’s a shopping area it should be a shopping area,” she said. “The banks here have beautiful [locations]. They are huge and on the ground floor because they are the best paying.” 

Luxury brand managers and owners have little hope for the success of any other ground level, open air shopping districts in Beirut, as a coordinated effort to create shopping streets is unlikely. The very fact that there are far more players in the game today than there were five years ago is a testament to Lebanon’s flourishing luxury retail sector.

But the forces threatening sales still dictate success and the concerns of the industry’s leaders suggest that this is no time to sit back and relax. With the resolution of the STL pending, Traboulsi said: “In Lebanon I don’t see any growth [for 2011]; we see it as a stable market for the moment.”

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An Afghan errand

by Adam Pletts
written by Adam Pletts

 

As the attack was radioed in, we upped our pace to such a speed across the rugged terrain that I was thrown across the inside of our armored vehicle. Looking out of the tiny window to my side, all I could make out was a ridge of Afghan mountaintops see-sawing from side to side through a cloud of earth-colored dust. “Demon 26 this is Monkey 6,” the military radio was saying. “We’re still taking indirect, three o’clock at three hundred meters,” to which someone in our vehicle retorted on the internal channel: “Well, if you know where they are then fucking shoot them,” and to my surprise we burst into genuine but bravado-flushed laughter.

We were on our way to make contact with the elders of Saray village, which sits geographically at the top of a valley but temporally much further away, in the throes of something I would only recognize as medieval. Our 27-vehicle convoy was winding its way through the Lal Por District of Nangarhar Province in the far east of Afghanistan. It’s known to American forces and their allies as an insurgent infiltration route from Pakistan to Afghanistan. Once over the border the Taliban make their way north to resupply the insurgency in Kunnar Province, which sustains the heaviest fighting anywhere in Afghanistan other than Helmand and Kandahar.

Lal Por is scarcely populated, apart from along the banks of Kabul River that forms its southern boundary, and there is no tarmac road leading to the village that shares a name with the country’s capital. Until now, the Taliban have enjoyed free reign to pass through the desolate mountain ranges that cover most of the district. 

The meeting lasted about 20 minutes and did little more than establish that the villagers seemed genuinely concerned about the Taliban presence. The lieutenant in charge promised them a well, but whether they’ll take him up on this is another matter. Like so many in isolated rural locations across Afghanistan, the villagers of Saray are stuck between the wrath of the Taliban and the suspicion of coalition military forces.

As the discussion came to a close and the group broke from the cover of a small line of trees where they had been taking shade, I couldn’t help but wonder whether such risk and expense had been worth it just to offer a well which may not be needed. But then I suspect the intention was every bit as much to send a message to the Taliban that they can’t move with impunity in the region.

Lal Por was one of many districts across Afghanistan where the Taliban did their best to disrupt the parliamentary elections last September, bombarding Afghan Police and United States military patrols with mortars from the hills north of its sleepy village capital.

The bombardment that I was caught in was the furthest south that the Taliban have attacked in this district since those elections but it was hardly a surprise; as two platoons, together with a mine-clearing unit, a quick reaction force and an Afghan army unit, we hardly looked subtle making our way up a valley into “coalition virgin territory.” The going was so tough that two vehicles were lost to mechanical failure, forcing lengthy pauses in the open valley as if to advertise our presence.

Intentional or not, the advert drew Taliban attention. Although some 25 mortars were fired at the convoy, together with heavy machine gun fire, none met their target.

In contrast, there were at least two confirmed hits on the Taliban before the arrival of air support prompted an effective disappearing act. The US officer in command told me he believed there were at least two Taliban killed in action and more wounded.

That’s certainly a message, but not necessarily the one the convoy was hoping to deliver. 

ADAM PLETTS is a freelance

journalist currently embedded

with coalition forces in Afghanistan.

 

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Society

Boutique bouquet

by Emma Cosgrove
written by Emma Cosgrove

 

Despite many new brands entering the Beirut market for the first time this year, a large number of existing shops have chosen to use the revival of downtown Beirut and the inauguration of the Souks to open up new stores and increase their brand exposure — a potentially pricey risk in such a small market.

“The idea of mono-brand outlets is relatively new here in Beirut and I think it reflects an increased interest by big-name brands in Lebanon and in the Middle East in general,” Stefano Macaluso, vice president of luxury watchmakers Girard-Perregaux, told Executive in July. “At a time when luxury watchmakers were tallying losses in Europe and the United States, sales soared in this region.”

Top-end retail executives seem to agree that having multiple points of sale even in a small country like Lebanon gives customers the most complete experience with the brand, making a more lasting imprint and, ultimately, financial sense.

“We find that whenever we open our stores nearby a place we already have distribution, the total distribution grows because you can see what the line [offers] much more,” said Jerome Griffith, chief executive officer of Tumi.

New strategy, new players

While the influx of mono-brand stores has not led to the abandoning of the very popular multi-brand stores, such as Aishti and Boutique 1, the trend has begun a wave of new fashion relationships between brands and local partners that defy the traditional requirements of exclusivity.

Luxury watch-makers, such as Jaeger-LeCoultre (above), flooded to downtown Beirut in 2010

“[Exclusivity is] like protectionism,” Griffith said. “It’s not really good for overall business. You think it is, because at a fundamental level it makes sense that if I’m the only one that has a brand, then I’m the only one that sells it, but actually you don’t really gain a brand’s potential until that brand is seen multiple times, because a customer has to recognize [it].”

According to Izzat Traboulsi, managing director of Hugo Boss for the Middle East, the relationship between local or regional partners and the brands themselves has changed quite significantly since the mono-brand invasion.

Brands tend to maintain their own mono-brand points of sale and then work with a different local partner to open a direct franchise location, as opposed to hiring a company as an exclusive representative or independent agent of the brand, as is the case with Hugo Boss. 

“Today the regional partners are already there. The set-up is already there. Today, lots of the emerging brands do it directly,” he said.

The shrugging-off of exclusivity is not yet universal, but should pave the way for more mono-brand stores to come.

As George Kern, chief executive officer of IWC Schaffhausen said, “There is no other way to express the brand [than] in a boutique. You cannot do it with a shelf.”

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Iran smiles through sanctions

by Gareth Smith
written by Gareth Smith

 

As 2010 began, there was global speculation as to the future of the Islamic Republic of Iran. Mass demonstrations after the disputed 2009 presidential election raised hopes among opponents of the Ahmadinejad regime that a new revolution beckoned, and any momentum in the Obama administration for engagement over Tehran’s nuclear program was thwarted by outrage at the suppression of Iran’s opposition ‘Green Movement’. When 2011 opens, the resilience of the Iranian authorities — both in overcoming domestic unrest and in coping with a new wave of American, European, Asian and United Nations sanctions — may create a better atmosphere for engagement.

The challenge — reaching a compromise over Iran’s nuclear program — has barely changed in seven or eight years. Tehran’s bottom line is its “right” to nuclear technology, especially as a signatory of the Nuclear Non-Proliferation Treaty. But the world powers insist is that Iran accepts a limit on its uranium enrichment and allows intrusive inspections by the UN’s International Atomic Energy Agency. As is often the case, the devil is in the details, but without the will to reach an agreement, no details are discussed.

During the 2003 to 2006 talks between Iran and the European Union — a time I was based in Tehran — it was clear that some on the Western side recognized that Iran would have some level of domestic enrichment, and that the European Union demand for suspension was temporary.

It was just as clear that there were those on the Iranian side ready for limits on enrichment in return for recognition of Iran’s “rights.” According to what I was told by two regime insiders, a majority of the leadership accepted this, at least until late 2006. Throughout those years, Iran’s leaders were trying to understand the United States’ motivation, and this remained true when President Barack Obama was elected. Was Washington serious in wanting an agreement?

And here’s the problem — as Djavad Salehi-Isfahani, economics professor at Virginia Polytechnic Institute and State University, has pointed out, for the US “all policy making [over Iran]… is evaluated through the lens of regime change.” By this he means the assumption of policy-makers — and it’s true of “Iran experts” and journalists as well — is that the “problem” with Iran is its “regime.” Every aspect of Iran is seen this way, feeding a sense that the Islamic Republic is on the verge of collapse. This has long encouraged a view of the Iranian economy as a basket case.

But while Iran has failed, like many oil exporters, to finance enough productive investment, it has — for a developing country — been relatively successful in reducing poverty and building an infrastructure. Most Iran-watchers see the Ahmadinejad government’s plan to phase out in 2011 the subsidy of everyday items — from bread to gasoline and electricity — merely as a potential cause of more unrest that can hasten the demise of the Islamic Republic, or at least lead it to abandon the nuclear program.  The International Monetary Fund, however, backs the plan, applauding “a dual purpose” of generating more revenue and curbing waste. The fund recognizes that subsidies, at $100 billion annually, absorb resources that could go into investment. “There is something to be said for a populist president doing price reforms,” notes Salehi-Isfahani.

“Sanctions that bite,” to quote US Secretary of State Hillary Clinton, are the West’s means of choice to squeeze Iran. But the main losers are young Iranians, who are paying the cost through unemployment, as Salehi-Isfahani argues in a recent paper published jointly by the Dubai School of Government and the Kennedy School at Harvard.  Iran’s opposition argues that sanctions strengthen the government; if they are right, sanctions may make nuclear compromise more elusive. Furthermore, should the Ahmadinejad administration’s subsidy gamble be successful, it may achieve a better economic performance.

Although removing subsidies will increase prices, Iran has leeway: inflation fell from nearly 30 percent in late 2008 to 9.2 percent in the Iranian month of Mehr (23 September to 22 October). And while economic growth has been only 1.6 percent this year, the IMF projects 3 percent in 2011, only 0.2 percent behind the United Arab Emirates. Improving inflation, success over subsidies, maintaining the nuclear program and enhancing the country’s standing across the Islamic world would add up to a very happy 2011 for Iran’s leadership.

GARETH SMYTH is the former Tehran

correspondent for the Financial Times

 

 

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Society

Cultural capital

by Rayya Salem
written by Rayya Salem

 

Tourism Minister Fadi Abboud said in October that he expected 2010 to have been another bumper year for Lebanese tourism, predicting that revenues from the industry will hit nearly $8 billion by the end of the year, compared to $7.2 billion in 2009. After 2009’s record-setting revenues, expectations and hype were running on overdrive this year, and not without good reason: the first nine months of 2010 mark another record for Lebanon’s tourism industry, despite the slowdown during the normally booming month of August due to Ramadan.

According to the Ministry of Tourism, the number of tourists totaled some 1.694 million from January to September, compared to 1.439 million during the first nine months of 2009, a 17.8 percent increase. The World Travel and Tourism Council (WTTC) expects the real growth rate of the industry to be 11.3 percent by the end of 2010; last year, Lebanon’s tourism sector was the fastest growing of 165 countries. In terms of contribution to gross domestic product, travel and tourism’s share is expected to be 13.3 percent, compared to the 9.3 predicted in 2009. In December, the ministry said they expected a total of some 2.2 million visitors to arrive by the end of this year.

The distribution of visitors by region remained unchanged; about 42 percent came from Arab countries and nearly 25 percent came from Europe, followed by visitors from Asia and the Americas.

Since the opening of Beirut Souks and numerous high-end international boutiques this year (see retail section on page 196), retail and tourism are now, more than ever, mutually beneficial business generators. Global Blue, the organization that counts value added tax refunds, released figures showing the Beirut area attracted 82 percent of total spending by tourists in Lebanon, mostly on clothing and watches, with 23 percent of total tourist spending coming from Saudi Arabian wallets. It seems there was also an increase in visitors from Syria, as spending by Syrian tourists increased 40 percent in the first 10 months of the year.

The number of airport passengers, which includes departures and transits, increased 11.6 percent year-on-year in the first 10 months, according to figures from Rafiq Hariri International Airport.

Occupancy

Though occupancy rates averaged 68 percent in the first nine months of 2010, down 3 percent yearly, the average room rate in Beirut was $262, up six percent from last year, according to financial auditor Ernst & Young. The average revenue per available room (REVPAR) in Lebanon rose 11 percent this year to $136 by end of August 2010, according to Deloitte Middle East, the regional wing of the international accounting and consulting firm.

Tourists from Arab countries made up some 34% of all visitors to Lebanon

Minister Fadi Abboud told Executive in August that “the average stay is about nine days and the average [amount] spent is about $3,500,” adding that the country is unsuitable for “fish and chips” tourists with $500 a week or less to spend.

In addition to contributing a significant chunk to Lebanon’s GDP, tourism is a major employer, with 553,000 jobs — 38 percent of the workforce — directly or indirectly affiliated with the industry, according to the WTTC.  Meanwhile, bank loans to the sector reached $858 million by July 2010, an increase of 11.5 percent from a year ago, Marwan Barakat, head of research at Bank Audi, told The Financial Times.

Easy prey

Abboud claimed that efforts have been made to reform the industry and provide more rigid regulations to ensure that tourists are not subjected to price gouging.

Still, the same complaints about inconsistencies abound. For example, if an individual tourist comes from Europe they don’t have to pay for a visa, but if a tour group comes, each has to pay. Many tourists report being ripped off by fortune-seeking drivers, especially as they make their way from the airport to their hotels.  Meter-less taxis leave the tourist with no option but to pay whatever the driver demands, in many cases.

Tax-free tourist spending by nationality, 2010 (Jan-Sept) - Beirut, Lebanon

Similar complaints are heard about restaurants, salons and other service-oriented businesses, prompting the ministry to try and clamp down on the practice, though its efforts have been stunted by limited manpower and money. Experts agree there should also be basic information desks or even maps distributed to help tourists who wander Beirut by foot.

IDAL

In August, Abboud said the country had some $4 billion invested in the tourism industry. Some of this cash was steered by the Investment Development Authority in Lebanon (IDAL), a public investment promotion agency that aims to attract and facilitate investment in tourism and other core industries. One of the incentive programs IDAL offers investors — the ‘package deal contract’ — provides exemptions and tax reductions on investments that meet certain criteria, such as being more than $15 million (if in Beirut) or employing a workforce exceeding 200 people. To encourage investment projects in more rural areas such as Baalbek, the necessary investment is only $1 million to qualify for the package deal.

In 2010, IDAL gave four Beirut hotel projects package deals. Together, they represent more than $350 million in investment, mostly from Lebanese and Saudi Arabian investors.

However, Hawlo Tleiss, executive vice president of IDAL, says some administrational issues still exist. “It [Law 360, formed in 2001] is supposed to be a one-stop shop for investors, but in Lebanon, politically, it’s difficult to get the authority of the tourism [and other ministries]” to give investors the ‘package deal’ incentive.

The biggest obstacle to tourism investment remains security. Compared to other fields like industry and technology, tourism is more sensitive to even the suggestion of security upheavals and thus is more risky for investors. But security issues can’t blanket Lebanon’s true potential, and the world is catching on.

“Only last week we were in The New York Times, The Times of London, and the American Express travel magazine,” Minister Abboud told Executive in August. “In the last six months, Lebanon was probably mentioned in every decent publication in the world.”

In addition to accolades from magazines like Britain’s Tatler, which targets upscale consumers, the Lonely Planet travel guide rated Beirut third on its 2010 list of “The 10 greatest comeback cities,” behind Berlin and Ayacucho, Peru. The guide describes the city as a “world-famous cultural center,” favored by “fashionistas and partygoers.”

By mid-2012, the Phoenicia will have a whole new look due to major refurbishment that started this year, including the Eau de Vie restaurant

However, the party spirit of 2010 may have been dampened by a dent in spending, as some believe that the waves of the financial crisis have finally washed upon Lebanon’s shores.

The usual summer round of concerts, music festivals and international DJs saw a drop in attendance, despite being heavily promoted. The Virgin ticketing office reported total sales of around 400,000 tickets for major musical events and concerts last year, but 30 to 40 percent less in 2010 even though there were more events, according to Abdo Housseiny, partner and general manager. Housseiny said shows were only promoted in Lebanese media, missing out on potential visitors that he believes would come based on the summer schedule.

Industry issues & concerns

In contrast to previous years, efforts were made in 2010 to promote a more mature tourism sector. To spread tourism over 365 days a year and not depend on summer and holiday periods, more attention was focused on niches such as health tourism, eco-tourism and religious tourism. Several exhibitions and conferences were held to attract and diversify investment, with view to spreading the seeds over the whole country and not just Beirut, where 77 percent of tourists currently stay.

But Lebanon may be losing out in a regional marketing race, as neighbors — mainly Turkey, Jordan, Syria and Egypt — are spending heavily to promote themselves as destinations and are building up their tourism sectors at a faster rate.

“Istanbul and Cairo have done tremendous promotional work… but they are targeting more the economy market versus the luxury market, so we haven’t lost anything in the luxury market,” said Georg Weinlaender, general manager of the Phoenicia hotel.

Meanwhile, tourists from Turkey tripled when visa requirements were lifted this year, according to the ministry. The Phoenicia recently witnessed this phenomenon first-hand when a visiting group representing one of the largest beverage producers in Turkey was so numerous they had to split between three other hotels.

Number of hotels in Lebanon 2010

Corporate clients are big business for the nation’s premier hotels but Weinlaender said he fears inadequate conference facilities are restricting this market from its full potential.

Although the Beirut International Exhibition and Leisure Center (BIEL) has been busy with the increase in international congresses and exhibitions Beirut saw in 2010, Weinlaender said the city needs a bigger venue if the city is to keep pace as it moves up the meetings, incentives conferences and exhibitions (MICE) ladder.

“A convention center usually has to take up to 12,000 to 15,000 people,” says Weinlaender, but BIEL’s main conference center has a capacity to seat 9,000.

Although larger “city-wide congresses” have taken place —  such as the International Medical Congress organized out of the United States, which took place at the Phoenicia, Habtoor and other hotels — to attract more MICE business, Beirut needs a bigger meeting facility.

Operators and hotels

The lack of specific guidelines regulating the sector means that anyone can set up shop as a tour operator, leaving tourists facing wildly differing prices and levels of service. Unlike other countries, tour operators are also left in the cold in regards to foreign competition. 

“Hotels do not protect the local tour operator, while in other countries they do,” said Sandro Saadé, chief executive officer of Wild Discovery. “For example, if we call a hotel in Egypt, they refuse to work directly with us. We have to come through a local tour agent, and thus they [local firms] are protected by law.”

As only 3 percent of tourism emanates from tour packages, there is room for tour operators to have a larger role in attracting the new tourists. The ministry says it is keen on bringing in increased numbers from Germany, the United Kingdom and Russia specifically.

Though the positive spin on glitz and glamour is helpful to counteract the war-torn image of the past, Beirut’s expensive reputation is a double-edged sword. While there are three-star hotels outside the capital, there are not many in the city center.

“We can’t force tourists to go out of Beirut because we have to fill the hotels,” says Saadé. “Hotels outside of Beirut have to have a value-added and change their positioning. If they want to wait for tourists to come it won’t happen.”

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Banking the Holocaust

by Peter Speetjens
written by Peter Speetjens

 

Victims turned into villains on November 9 when the United States Federal Bureau of Investigation (FBI) announced it had arrested 17 people accused of issuing false claims and documents to obtain pensions and hardship allowances from the Conference on Jewish Material Claims against Germany, better known as the Jewish Claims Conference (JCC).

There are strong suspicions the $42.5 million fraud case is only the tip of the iceberg. Especially in the last two decades, the JCC has come under fierce criticism for greed, mismanagement and a lack of transparency, even within Israel and the Jewish establishment. Founded in 1951, the JCC represents Jewish victims of Nazi persecution and their heirs in negotiating for compensation and restitution from the German government “to secure… a small measure of justice.”

To date, Germany has paid some $60 billion, which the JCC administered and distributed not only among victims and heirs, as was originally intended, but also among a long list of Jewish organizations that deal with Holocaust victim care, commemoration and education. Many of these organizations are represented on the JCC Board of Directors. Following the FBI statement, the JCC went into spin mode with adverts and interviews to portray itself as a victim, which was the language adopted by most media and even the US prosecutor.

Yet, six of the accused actually worked for the JCC, including Semen Domnitser, who since 1999 headed two of its funds. He was jailed, but immediately freed on $250,000 bail pending trial. The actual victim is of course the German taxpayer.  Writing in Israeli daily Haaretz, Anschel Pfeffer defined the JCC as “the richest, most powerful and least answerable old-boys’ network in the Jewish world” and feared the scandal was unlikely to be a case of “a few bad apples.”

According to a former JCC director, the organization has amassed more than $1 billion in liquid assets, while the Jewish Chronicle criticized the $437,811 salary one JCC official received in 2004. Isi Leibler, a former chairman of the World Jewish Congress, accused the JCC of incompetence and cover-ups and called for an independent review board. Likewise, the Movement for Quality Government, an Israeli anti-corruption platform, calls for the JCC to be placed under supervision. The JCC’s creative accounting methods seem to have started after the fall of the Berlin Wall, when the organization saw a whole new world of options and possibilities to seek compensation for Jewish victims and their heirs living in countries of the former Soviet Union. The $42.5 million fraud mainly deals with such cases.

One case in particular has created bad blood both within and outside the Jewish community. In 1990, when the new democratic government of East Germany introduced a law to restitute property nationalized by the former communist regime, the JCC — even before the reunification of East and West Germany — ensured that this included the restitution of Jewish-opened property sold after 1933 or confiscated by the Nazis. What’s more, the JCC became the legal successor to all Jewish property that went unclaimed by the end of 1992, whereby it had the privilege to file “broad claims” in which such minor details as the property’s actual location and the owners’ names could be filled in at a later stage. German weekly Der Spiegel reported that some 240,000 claims were filed in East Berlin alone. In some cases, there were 10 claims for one property and in nearly all cases the JCC was one of the claimants. According to the JCC, the “real estate” fund brought in some $2.3 billion. The JCC is currently negotiating with other Eastern European countries over a similar settlement. Finally, the JCC administers the $1.5 billion of the curious Swiss Banks Settlement account, which some people have called the biggest case of legal blackmail in the history of mankind.

While the $42.5 million scandal may have opened the lid for more investigations concerning the JCC, some more fundamental questions come to mind. For example, if a Jewish victim of Nazi persecution is entitled to claim property he was forced to sell before fleeing in 1938, should a gypsy or homosexual holocaust survivor not be able to do the same? And, last but not least, what does this all mean for a Palestinian farmer who lost everything in 1948?

PETER SPEETJENS

is a Beirut-based journalist

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A house of ineptitude

by Executive Staff
written by Executive Staff

 

As the first decade of this century draws to a close, Lebanese public policy is face down in a stagnant swamp. Of more than 60 draft laws put before parliament since it was elected more than a year and a half ago, it has passed only two.

Despite this, headlines in 2010 heralded Lebanon’s renaissance, with storied statistics glorifying the banks and real estate developers for propping up the country’s soaring gross domestic product. But if times are so good, then why has it become so common to see people digging through trash bins for recyclables to sell? Why can so few wage-earning Beirutis afford a home in the city?  

It is because Lebanon’s economic growth has produced few new jobs and wealth accumulation has been limited to the already affluent, who also frequently happen to be members of parliament, ministers and their associated entourages with major stakes in banks and real estate companies. While a handful of MPs seem genuinely concerned for the nation’s welfare, most elected officials show little initiative to operate more than a semblance of a state — one functional enough for them to protect their interests, but not so functional as to provide the Lebanese with services independent of their patronage.

Even the exclusionary growth Lebanon has been experiencing is unsustainable, however, with global organizations — such as the International Monetary Fund — and prominent Lebanese economists sounding warnings. The intensity of wealth concentration in Lebanon is starving the wider free market of capital, while government deadlock on infrastructure reforms is hobbling our productive sectors: industry lacks reliable electricity, our archaic telecommunications network stunts the service sector and entrepreneurial innovation, while agriculture needs a clean, secure water supply. The sprinting GDP growth is slowing and without new investments in infrastructure to carry it, the economy will run out of road.  

A positive note over the past year is that an understanding seems to be building in government that something needs to be done; the Council of Ministers, Lebanon’s cabinet, approved an electricity reform plan and a blueprint to overhaul the water sector is in the works, as is a new fiber-optic network. On paper at least, these plans show promise.

The problem is the different branches of government are not performing their most basic functions: parliamentarians are not passing legislation and thus cabinet’s reform plans have not been made law; reams of legislation that was passed in years gone by remain unimplemented by the ministries, and the judiciary has been impotent in holding ministers to accountable for this.

The current excuse MPs, cabinet and the courts have for not doing their job is the confrontation between the government and the opposition over the United Nations’ Special Tribunal for Lebanon (STL), which has degraded political dialogue in the country to imbecilic chest thumping. The STL, however, for everything else it is, is also a scapegoat. The intransigence of Lebanon’s political and sectarian chiefs preceded the STL and will most likely survive its passing.

It is not the STL stopping the implementation of widely beneficial, desperately needed socio-economic reforms — our so-called leaders are doing that.

 

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Economics & Policy

Q&A with Raya Hassan

by Sami Halabi
written by Sami Halabi

 

Raya Hassan is Lebanon’s finance minister. Saddled with a debt  around one-and-a-half times the size of the country’s economic output, a gaping deficit and a lack of infrastructure, she is tasked with making a method out of the madness. In an exclusive interview Hassan sat down with Executive to discuss everything from her ministry’s performance to the economic priorities of the government.

E  The ministry’s strategy to reduce the debt-to-GDP ratio appears to have been successful, but we only have potentially unreliable national accounts figures for 2008 to go on. As such, how can we accurately assess the progress made in the last two years, or even make projections?

For 2010 we brought an expert from INSEE [French National Institute for Statistics and Economic Studies] to help us project a growth rate for 2010. On the basis of the 2008 data we extrapolated, we can then determine what the 2010 GDP would be. We also use that same base for a projection for 2011 and 2012. Of course, the projections in terms of real growth rates are reviewed each year based on the projected activities in the economy. It is not based on real surveys for the economy but it is as close as we can get in the absence of work that is [now] being done by the Central Administration for Statistics (CAS).

E  For the first time you have projected a decrease in the amount of debt servicing, but the principal continues to grow. With telecom privatization being discounted for a few years to come and other Paris III reforms tied up in parliament, how will you reduce the principal on the debt now that our rate of borrowing is getting better?

In terms of reduction in the stock of debt, I don’t think there is any action in the foreseeable future… because as you said there are no plans for imminent privatization of the telecom sector [which would create capital with which to make repayments]. Of course [the stock of debt] is important, but for us I think what is more important is how to reduce the flow and ensure that the debt is not increasing at an increasing rate. That is why we look at growth as an anchor for controlling debt-to-GDP and at ensuring that we have a primary surplus in the budget in order to ensure that, at least, as the years progress we have a restriction on the increase of the debt stock in a sort of controlled manner. It’s the best we can do, as the primary surplus creates a cushion to any increase in the stock of debt.

E  But that primary surplus comes from the lack of infrastructure spending. We are going to have a problem with growth if we don’t catch up with infrastructure, so the primary surplus is not necessarily a blessing.

It’s a mixed blessing because even though the debt increase is going to be controlled, on the other side you are not going to have all the capital expenditures that would unleash the full potential of the Lebanese economy. The 8 percent growth rate that we project for 2010 is very good. However, in order to ensure the sustainability of this growth rate and to ensure that it is being translated developmentally on the ground, it is important for us to address the structural deficiencies in the economy. If the 2010 budget is ratified, all of these capital expenditures hopefully will be released and we will start to see some benefits coming out of it.

E  You have said that the current growth has not translated into jobs on the ground. Now that political tension is rising and there is a lag in policy making, have we lost this growth cycle?

There has not been as much job creation as we would have liked [and] I think the golden opportunity that we had in 2010 is now starting to fade away. What is good is that even with all the political upheavals we are still seeing some positive developments. I am a bit surprised frankly. However, 2010 would have been a golden opportunity to really capitalize on these positive developments and move forward in order to capture these good indicators and consolidate them. [The longer] this political environment persists, the less we will be able to do in the short term.

E  You seem to have abandoned a value-added tax (VAT) increase again for 2011 and are now saying you would re-examine exemptions. What is the current VAT strategy?

It’s not just [about] VAT. Our tax policy [aims to be] equitable, distributed and efficient. When I first took office this is what I [did] in terms of the assessment of the current tax structure. What we have concluded out of this study is that the tax policy is equitable, believe it or not, efficient and reflects the structure of the Lebanese economy. This economy is based on consumption and mostly on imports and not exports.

Now, if we are going to increase unproductive expenditures this is something that I will fight. But if the parliament approves and ratifies current expenditures that would put a dent on the primary surplus or the budget deficit then I will have no choice except to increase revenues.

E  By imposing new taxes?

New taxes, of course, because we are adamant that the budget deficit should be controlled and it should not increase, and we need to have a primary surplus, and we need to reduce the debt-to-GDP ratio. If there is going to be an uncontrollable increase in expenditures, the Ministry of Finance has no choice but to increase revenues. Growth will take care of some of it, but we have to look at other options.

 

E  You say that the tax structure reflects the Lebanese economy, but the economy is changing with real estate constituting an ever-greater proportion of GDP and the productive sector becoming less important. You have suggested an increase of 5 to 7 percent on the registration tax for properties over $500,000 and now say that you want a re-evaluation tax, but there are other real estate taxes that are much easier to apply.

I did suggest a tax on vacant real estate… because [vacant properties] are not taxed today. That is what I proposed in the 2010 budget but it was not approved within the parliamentary committee. For the 2011 budget I proposed a ‘quasi-capital gains tax’ [on real estate]. It’s not a capital gains tax per se because to be able to impose a capital gains tax you would have to have a complete database of the real value of real estate, and we don’t have that today. But in the absence of a complete valuation database, I am saying that we have to impose a 1 percent tax on revenue emanating from the sale of properties.

E  How much do you expect that to take in?

Some 200 to 300 billion [LL] ($133 million to $200 million). But this is not an optimal solution. What we are hoping to do is make this a transitory solution until either the valuation exercise is complete or we take a decision, and this will be discussed by the Council of Ministers. There is going to be a cut off point as of, say January 1, 2011, and afterwards we will capture the real value of the property, start to recognize any future transactions, and try to impose a capital gains tax.

E  Many of the MPs, if not most of them, have interests in real estate and some of the ministers as well. Is this the main problem with imposing real estate taxes?

[Sigh,] Look, we passed a 2 percent increase in the registration tax. There is [a possibility of] the tax on vacant property. There were going to be three tax measures that were going to be imposed on real estate. However, I think the concern was that in the advent of this slowdown in the economy, especially in the last two months, there is a fear that all three measures would really impact the real estate sector very hard. Whether we like it or not, the real estate sector is part of the growth pillar. I think this is where they are coming from. The fact that we passed at least one, and the fact that we are still going to discuss the 1 percent on revenue, I think would be fair for the time being.

E  In terms of salaries and related payments (the second largest expenditure item) the salary scale is not changing, the organizational structures proposed by the Office of the Minister of State for Administrative Reform (OMSAR) are not being implemented, the public bodies remain bloated bodies of patronage and the United Nations Development Programme (UNDP) is doing a lot of the work that the public sector should be doing…

Not a lot of the work; the policy work.

E  When does this stop and the transfer of capacity happen and we start cutting the edges?

I agree with you fully but the underlying factor is the political will to do it. This is not just up to the Ministry of Finance or OMSAR. We believe that the public sector could be much more productive. We think the public sector is bloated and needs to be reformed: the laws, the regulations and the capacities. However, that would mean that maybe we need to do some retrenchment in the numbers and need to look at the salary scales and look at training and this is a huge political decision. I think, and I discussed this with the Prime Minister, that the time is opportune to look at the salary scales and review them because the last time we reviewed them was more than 10 years ago. But, the review of the salary scale cannot be done independently…

E  It has to be changed along with the organizational structures of public administrations. But at the same time you are proposing to increase the number of security services significantly and this will mean more salaries and pensions. Frankly, the security services cannot fight Israel or fight battles in the streets. What is the point?

[Laughs] But, ok. You need them not just to maintain security within Lebanon but also you need them for traffic control, for ensuring the proper functioning of the state. For the army, we are trying, as much as we can, to get grants from abroad. This is a priority. Listen, if you don’t have security, you don’t have an economy.

E  But it is a political decision for them to come into Bourj Abi Haidar when there is a clash. This has nothing to do with if there are 20 or 100 troops.

But you are talking about the sovereignty of the state and the prestige of the state; you can’t have that if you don’t have a strong army and a strong internal security force that would allow you not to depend on non-Lebanese or non-official sources.

E You have already advanced the money for the fiber-optic broadband cables plan to the telecom industry to get the ball rolling. First of all, how much has been advanced and how did you do it without parliamentary approval?

It’s a treasury advance. And we are always attacked for treasury advances [by] the Ministry of Energy and the Ministry of Telecoms… We advanced the Ministry of Telecom around 100 billion [LL] [$66.7 million] to start the fiber-optic plan in the absence of a telecom sectoral plan. Now the fiber optics is a given and we have to do it, but how does this fall into an overall plan? We still don’t know.

This [issue] is the most detrimental in terms of the competitiveness of the Lebanese economy. We have been waiting now for more than a year, we have not even discussed any potential sectoral plan. Nothing. Not even a discussion. The TRA [Telecom Regulatory Authority] is crying. The whole economy is crying. This is where I think we are at our weakest. There should be something done very quickly. We could take years to come up with the perfect plan but that time is costing us huge amounts of economic growth. It’s going to be a huge detriment to the economy.

E  What is your forecast for 2011?

Well, that depends on what will happen in the next short period. If this political impasse persists then I think we are going to be seeing a tangible slowdown. In the last couple of months we have seen somewhat of a slowdown but this has been compensated by the very high growth we witnessed in the first six months of the year. If this persists then I’m going to be really concerned about the state of the economy in 2011.

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Finance

Executive insight – Standard Chartered

by Nicole Purin
written by Nicole Purin

 

The Islamic finance market is currently undergoing structural transformation. Arguably, the most significant legislative development in 2010 for the industry was the publication of the Sharia-compliant Tahawwut (hedging) Master Agreement (TMA).

The TMA is the first standardized cross-jurisdictional document of its kind for privately negotiated Islamic hedging products. It has been developed by the International Swaps and Derivatives Association (ISDA), together with the International Islamic Financial Market (IIFM), under the approval of the IIFM Sharia Advisor Panel and in consultation with market participants (such as the Dubai International Financial Center authority and Standard Chartered Saadiq).

The completion of this document has been regarded as monumental for the Islamic hedging sector. The global crisis highlighted the importance of more robust risk management processes and standardization of Islamic hedging documentation in the context of Islamic derivatives. ISDA and IIFM worked closely with the Sharia scholar community to ensure that the structure and content of the document would meet approvals across the board; such consensus was finally secured after protracted negotiations.

The Tahawwut Master Agreement

The TMA is modeled on the 2002 ISDA Master Agreement which is used by market participants to document conventional derivative transactions, but unlike the conventional master agreement, the TMA is limited to Islamic hedging products such as profit rate and currency swaps.

The document complies with the requirements of Sharia Law and accordingly the form eliminates interest and stipulates that trades may not be entered for gambling purposes (but solely for the purposes of hedging). In addition, no settlement based on valuation or without tangible assets is allowed. It is essentially a framework agreement where Islamic structures such as murabahas (a sale and deferred payment arrangement used to provide trade or acquisition finance) and wa’ads (unilateral promises) are documented, which includes completed and future transactions. Fundamentally, the agreement creates the hedging mechanism by separating various legs of the underlying hedged transactions for the purposes of Sharia compliance.

Make or break

Industry participants have claimed that the TMA is a highly innovative document that achieves standardization without compromising on Islamic principles. Afaq Khan, chief executive officer of Standard Chartered Saadiq, stressed that the TMA will allow Islamic banks to offer end-to-end solutions to their customers and will allow better treasury-risk management tools for Islamic financial institutions to competitively manage market risks. However, to this date, the TMA remains untested in the market.

Firstly, it appears that in some Muslim countries market participants would rather conform to locally established hedging techniques. Secondly, from a technical perspective, the close-out netting mechanism — close-out netting allows parties to aggregate their exposures and reduce them down to a single payment following a default or other termination event by a counterparty — in the TMA faces practical limitations as it can only be enforced on counterparties in jurisdictions where netting is part of the national insolvency law, such as common-law based legal regimes.

Will change come in 2011?

Overall, in spite of all the industry’s efforts, it is unclear at this point in time whether the agreement will become widely used in the market. One must not forget that when the 2002 ISDA Master Agreement was launched, key market players were reluctant to use it and they preferred to rely on the 1992 form. Eventually, the 2002 version superseded the 1992 form.

Change is a perpetual characteristic in the current business environment and in spite of the Islamic industry’s adherence to existing practices, the benefits of market standardization outweigh any potential risks. In the spirit of standardization and innovation, the adoption of this document by market participants would be a positive development and there is a strong consensus in the market that 2011 might be the break-through year for the TMA.

 

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