Economics & Policy

A new alliance?

by Sami Halabi
written by Sami Halabi

 

The battle over privatization in Lebanon has trodden the same well-worn path for decades; the left decrys the idea as a nepotistic sell out and the right lauds the concept as the only way to reform the country’s decrepit public services. But, for now, the two sides may have found a compromise in the form of a draft public-private partnership (PPP) law.

The idea was first proposed and approved by the cabinet in 2007. But Lebanon was in the midst of a political hurricane which swept away any sense of due process, leading parliament and its speaker to simply ignore the law.

Today, the country has both a functioning cabinet and parliament and the issue of PPPs is back on the table. Chatter over the prospect of passing PPP legislation recommenced when the Finance Ministry issued the current budget proposal in April. That same month, Amal Member of Parliament Ali Hassan Khalil proposed a version of a PPP law to parliament, aimed mainly at infrastructure projects.

“The PPP law was seen as a compromise between the two political camps after value added tax was dropped from the budget,” says Dany Haddad, lead researcher at the Lebanese Transparency Association, Transparency International’s local chapter.

The Finance Ministry and the parliamentary majority have long advocated privatization of key sectors in accordance with Paris III reforms, while the opposition has either been reticent to agree or voiced all-out rejection of any of privatization. 

In July, the Higher Council for Privatization (HCP), the government body in charge of planning, initiation and implementation of privatization programs drafted a new version as the issue picked up steam.

“PPP is not privatization and PPP is not privatization-lite,” says Ziad Hayek, secretary general of the HCP, which has been in operation since 2000 but has is yet to oversee any form of privatization, due primarily to wrangling between political camps over the issue. As such, PPP legislation could well prove to be a boon for the HCP, which would act as the effective regulator of all PPPs.

According to Hayek, under the new law the government will not actually sell anything to the private sector; rather, the private sector will own and operate an asset such as a power generation plant and sell its products to the government for a price. Where the private sector is providing a front-end service — as with the private firm that manages the Jeita Grotto — the draft law says that the private sector may collect on behalf of the government. That, however, does not mean that the private sector can set prices. The government may also reserve the right to buy back capital assets over time.

“The government has responsibility but has authority as well. It is not that the private sector is now sitting by licking its chops and waiting to make a killing,” insists Hayek, adding that the state will maintain full control over pricing of services to the public. “The responsibility to maintain the public good is still with the government. The private sector is not dealing with the consumer, it’s dealing with the government.”

Now fund and regulate it

One of the greatest fears associated with private sector engagement in Lebanon is nepotism, and PPP is no exception.

“The legislation does not even mention conflict of interest,” says the LTA’s Haddad, whose organization has long advocated conflict of interest legislation. The latest draft law currently places the authority for overseeing the tendering process in the hands of the HCP and only alludes to “the principles of transparency and equality among competitors.”

The only other safeguard that exists against conflicts of interest is the Privatization Law 228, passed in 2000 as an adjunct to the PPP law. It states that for a period of two years, members of the HCP, monitoring bodies under it and legal persons who provide assistance to it are “not allowed to be associated directly or indirectly, in Lebanon or abroad, with any kind of work in the private institutions participating in the privatization operations, or with any of the privatized institutions.” In addition, they are not allowed to acquire “directly or indirectly” any shares in the concerned companies unless they do so through the stock exchange. But that will not stop public officials — such as MPs who own companies — from bidding on projects that ministers from their own political party are tasked with overseeing. This is already happening now, according to Haddad.

“This is a framework law and you cannot include everything in a framework law. If you find a way to do that, let me know,” Hayek quips in response. “You have to look at whether that person is in a decision making position for that project. If he is not, then he is a citizen.”

The HCP comprises the prime minister and the ministers of finance, economy and trade, justice and labor — all of whom, at the moment, are members of Prime Minister Saad Hariri’s political coalition. If a PPP project concerns a ministry that is not already part of the Council, then that minister also joins.

Then a “PPP unit” will be formed under the auspices of the HCP with representatives from each of the concerned ministries preparing tender specifications and dividing the risks of a project between the ministry and the private partner.

Since many of the projects ripe for PPPs are in sectors controlled by the opposition’s political camp, such as energy, tourism and health, it is likely that PPP units will be bipartisan.

“We have removed the decision from a minister who… will bring in his people and fix them up,” says Hayek. “Is someone going to bribe six ministers, six director generals and keep those involved quiet and happy? I’m not saying it’s impossible, but it’s improbable and much more difficult.”

That pesky procurement

Another notable omission from the proposed PPP legislation is a streamlined procurement procedure, which is currently in the works at the Office of the Minister of State for Administrative Reform (OSMAR). That draft law intends to bring Lebanon in line with international procurement procedures, replacing the present law that dates back to 1963. Hayek says that he asked OSMAR not to include PPP in the law and they agreed but have since come under pressure to include it.

“The reason [for not including PPP under the new law] is that doing so puts the authority back under the minister in question,” says Hayek. “When a ministry does such a contract, either the provider is desperate or they are from the minister’s own people, who will agree on how to fix it afterwards. There is always some type of conflict.” OSMAR did not respond to repeated requests for comment.

After over three years in the pipeline, passing a PPP law now seems to have become a priority. At a press conference in July, MP Robert Ghanem, who chairs the parliament’s Administration and Justice Committee, which is tasked with pushing legislation to the floor, said that the PPP law was fifth on his priority list, behind a law to allow the private sector to produce electricity.

That may not be much of a signal, however, given that neither of the two laws parliament passed since July were in the top five on Ghanem’s list. But perhaps this time, if a sufficient spirit of partnership prevails in parliament, it could translate into a partnership for the people.

 

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Finance

It pays to shop around

by Paul Cochrane
written by Paul Cochrane

 

With more than 60 of them jostling for market share, one would expect Lebanese banks to use every trick in the book to lure in customers — including attractive interest rates. Curiously, however, the banks don’t advertise their rates. Instead, offers are made on services, specialized cards, mortgages and loans — the more usual fare that banks provide globally, rather than getting clients into the bank by touting high interest rates.

The lack of publicity is due to clients’ ability to negotiate interest rates based on their financial clout, the competition between banks and the possibility that a bank might change its rates at anytime. “The market is very competitive and banks don’t want to commit to or disclose rates. This is the number one weapon in market share building,” said Freddie Baz, chief financial officer at Bank Audi. “It is about credibility, so if I put interest rates on the door of the branch or in the newspaper — like many European banks do — I am committed to those rates and cannot increase or decrease. The market is very mature when you reach those levels of disclosure.”

Rates hit a new low

Competition is so cut throat that many banks resort to “mystery shopper” techniques, dropping in on other banks posing as potential clients to gauge the interest rates on offer. For actual potential clients, finding out the different interest rates offered requires physically contacting each and every bank.

The most recently released central bank data, from June, puts the weighted average on deposits of Lebanese lira at 5.83 percent, the lowest it has been in 30 years. Interest rates for checking and current accounts have always been much lower, sitting in the low single digits for the past decade, and at 1.24 percent as of June.

Interest on United States dollars has never been historically as high as on the lira, due to government loans being in lira and the perceived safety of the greenback, but has correspondingly dropped from over 4 percent in 2008 when the crisis kicked in, to an all time low of 2.74 percent as of June. Indeed, deposits in dollars have fallen to the lowest level in a decade, to 62.5 percent of total deposits, while the increase in lira deposits accounted for 80 percent of growth this year, according to Bank Audi data.

Banks, however, can offer a rate of their choice: it’s a free market. A rate may be agreed upon with a bank manager, duly paid after a month, but could then drop — without notice to the client — the month after, as the bank alters its interest rates. Other banks may keep that rate for a fixed period of time. In general, the higher the deposit and the less readily accessible an account — blocked versus non-blocked — the greater the interest rate paid out.

As of August the average interest paid was 4 percent for LL5 million ($3,325) to LL10 million ($6,651) at banks sampled by Executive’s secret shopper (see chart).

Few banks offer an attractive interest rate on a non-blocked, readily accessible lira account, with Société Générale de Banque au Liban (SGBL) offering one of the highest at 5 percent. However, with the account costing $12 a month, it is only viable over a certain amount or else the interest earned is offset by paying off the user fee.

With interest rates at the lowest they have been in decades and banks not keen to attract further Lebanese lira deposits, rates offered at the banks are typically less than the rate set by the central bank. They are also correlated with the amount of money a bank has tied up with the state as treasury bonds and the like; the higher the amount loaned to the government, typically the higher the interest rate offered to a client. This is not a fixed rule, as banks also want to raise deposits for lending purposes other than to the government, but is a general guideline.

Preferential rates

At over LL10 million, rates rise, although not always in line with a bank’s lending to the government. For instance, Byblos Bank is a major lender to the government, yet it only offers 3.5 percent on amounts above LL10 million.

BankMed, another leading lender to the state, offers 5 percent on the same amount, while the Bank of Beirut and the Arab Countries (BBAC), which is not a major government lender, offers 4.75 on deposits up to LL30 million.

Fransabank, which holds considerably less of the government debt than Bank Audi, Byblos Bank or BLOM Bank, offers 5.85 percent on deposits ranging from LL1 million to LL10 million.

Over the LL15 million mark ($9,976), rates in certain cases average the central bank’s average rate of deposit, at approximately 6 percent.

Ultimately, it pays to read the small print and do the leg work to get the best rates.

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Real Estate

Tradition in trouble

by Rayya Salem
written by Rayya Salem

It is the sleepy, forgotten neighborhood of overdeveloped East Beirut where, until recently, Achrafieh, Saifi and Gemmayze have been having all the fun and attracting all the attention. But in the last two years, since the party music emanating from Gemmayze pubs began to be matched by the disapproving cries of residents and government officials, the traditional quarter of Mar Mikhael has been soaking up the commercial overflow as bar owners, artists and entrepreneurs have headed a little further down Rue Gouraud. The area’s unspoiled charm and cheap prices have proved a tempting combination for Beirut’s young guns.

But where the young guns go, the big guns are sure to follow. Real estate developers insist that demand can only keeping rising in this strategic area, situated in the Rmeil district between Gemmayze and Bourj Hammoud, that hasn’t seen new construction for some 40 years.

According to developer Pierre Moise, Mar Mikhael’s old world feel is part of the reason why Lebanese expatriates, upscale yuppies and Europeans are drawn to it as a living quarter. They are the target buyers for the gleaming new residential towers and mid-rises planned — and currently in the excavation stage — along the main Armenia Street and its side streets.  

As young Lebanese are quickly being priced out of the market in the Achrafieh and are showing less interested in living in Gemmayze, more and more are happy to settle down in what Moise and others say is Beirut’s new Soho. Developers attribute increased demand for this enclave to its relatively strong infrastructure, particularly the two-way streets that provide direct access to Charles Helou — the main highway — and twice the parking spaces of Gemmayze.

“The key shift in the market now is that developers are choosing to build more small apartments, ranging from 80 square meters to 150 square meters, because young professionals are really the ones most interested in living here, and many just want a ‘pied-á-terre’ near Beirut,” Moise said.

Due to old rental laws — which often hold rents at rates decades old and leave landlords out of pocket — many owners of old structures are happy to sell to developers who will demolish traditional, low-rise houses and build high. Indeed, as private developers have little oversight from the Beirut municipality or the Director General of Urban Planning (DGU), they are building high and charging even higher, making the rapid development a cause both for concern and speculation. 

According to Serge Yazigi, head of Majal Urban Observatory at Académie Libanaise des Beaux Arts of Balamand University, Mar Mikhael is “one of the few, if not the only street of this length in Beirut that benefited from planning… you have a certain alignment, you used to have buildings of the same height, you have 10 to 12 stairways that lead to courtyards and gardens and also heritage buildings.

“From Sahet al Debbas to just before Bourj Hammoud, the whole neighborhood has architectural features that you don’t find anywhere else in Beirut.”

However, the area’s historic character, social and commercial fabric could all vanish as land prices creep up, changing the area’s demographics and spatial networks.

Rising residential developments

The case of Al Mawarid Real Estate’s 22-story Skyline tower neatly illustrates this point. According to General Manager Rania Akhras, the company was “convinced that Mar Mikhael was going to be the next Gemmayze. We thought bringing in someone as modern as Bernard Khoury [as the architect] would make it [the Skyline] a landmark.”

Akhras says that as the plot, situated in a corner off the main Armenia Street, was unoccupied and not surrounded by buildings of architectural significance, there was little incentive to keep with the quarter’s architectural heritage. They took the opportunity to combine four plots to increase the exploitation factor.

“I hope that some of the other buildings are preserved because it’s a very nice area. But the building code and plot size forces us to build high,” she says.

On the main street where the old Vendome Cinema and adjacent building have been demolished, Philippe Tabet of Har Properties has teamed up with Fahd Hariri to build Aya, a $30 million residential tower, constructed in what Tabet calls the architectural style of old Yemeni buildings. A source at the Rachid & Karam Architects, commissioned for the project, calls it “ultra modern.”

Ironically, when the developers first acquired the site, a rush of businesspeople approached them, wanting to rent the old cinema and turn it into a restaurant or nightclub, but instead they acquired the surrounding plots and paid the eight (mostly commercial) tenants a total of $900,000 to pack their bags and make way.

Har Properties boast of Aya’s strategic, in-demand location, describing Mar Mikhael as “a place where arched doorways, romantic stairways and sepia shutters recall the true essence of Beirut.” Others argue that it is precisely this charm that the 20-story-high contemporary tower will destroy, saying it has no place in the neighborhood.

“I’m really quite sad that the Vendome [cinema] has become a tower,” says Nayla Kunig, a local developer. “I think the young and intelligent Fahd Hariri, who is a designer, should have thought more in terms of urban landscape. How does [Aya tower] look in this urban landscape which is [mostly] low houses?”

Kunig says she’s not an investor. In fact, she’s a member of the National Heritage Foundation founded by Mona Hraoui, which aims to preserve traditional Lebanese architecture. But she’s also the developer behind the East Village residential project, located one block away from Electricite du Liban, which she describes as “contemporary but friendly.”

“I’m absolutely convinced that you either restore an old house or do something modern. But you can’t do pseudo Lebanese work,” says Kunig. The East Village’s 12 flats have all been sold except the top floor, mainly to young Lebanese to maintain the “social fabric” of the quarter.

Developer Pierre Moise is also concerned with maintaining a certain social demographic. His approach is quite blunt: “I sold only to Christians,” he says, claiming that maintaining the sectarian makeup of the area is part of preserving the culture. Moise is renovating a three story building that dates from 1955 called “1099,” tucked into Alexander Flemming Street in the heart of the design district. He’s adding four more floors and converting the existing underground space into a parking garage.

Enter the speculators

Har Properties’ Tabet insists he is also being very choosy when it comes to buyers for Aya, although his ire is turned against speculators. “I don’t want to encourage speculation. The speculator is dangerous. If the market turns around and the price goes down, the speculator can’t continue his payments.”

 When developer Kunig and her financial partner bought their land more than three years ago, prices were still “reasonable” for the almost 1,000 meter square plot. They agreed to pay the private owner $1.2 million, but lengthy negotiations with the municipality over issuing their permit drove the total cost to $1.7 million, mainly for tax purposes. This would suggest that the municipality is contributing to price inflation, and thus promoting speculation.

“Now the land on the main road of Mar Mikhael is $4,000 per square meter,” says Kunig. “I would like things to be lived in by the people who have to live in this part of the city, and not some funky millionaire from somewhere else. I refuse to sell to speculators who just follow the hype and have to have a place in a trendy neighborhood that they visit once a year.”

In stark contrast to the other developer’s Executive spoke to, Akhras boasts that there have already been two buyers who have resold their apartments in the Skyline for a higher price, illuminating the speculative nature of Beirut’s real estate market.

Most developers agree that the price of land took off after the Doha agreement gave the property market a confidence boost in the summer of 2008. Christian Baz of Baz Real Estate says the price of land in Mar Mikhael varies depending in to which zone the plot falls, but the value of property has risen across the board since 2008 in tandem with rising prices in Achrafieh. The firm has three 400-meter plots they are selling: one in zone three priced at $5,500 per square meter, and two in zone six priced at $3,000 per square meter and $2,500 per square meter, respectively.

Sustainable living

Mar Mikhael’s mokhtar (municipal representative) Beshara Gholam is happy to see the area becoming akin to Gemmayze, and says the rapid development is a good thing.

“You have owners who are getting the opportunity of a lifetime when developers come pay them big money to buy their land to build a tower,” he says. “And then with all this increased activity, there is more employment.”

But others don’t share his happy sentiments. Yazigi of the Majal Urban Observatory points out that the unique Lebanese heritage of the area is in danger if plots can be combined to build towers of any height in such a relatively unspoiled area — though there is currently a law under study to prevent this type of plot merger. He suggests preserving the whole quarter to promote long-term sustainable economic development, saying that while it’s normal to have evolution, it should happen gradually.

“We must keep residents in their location, to keep the same quality of life and commercial activities,” he says.

The larger picture of what’s happening is what Yazigi calls “Solidere’s gentrification process,” whereby their development in downtown Beirut is indirectly increasing prices in surrounding areas. At this rate, he says, the next generation won’t be able to live in central Beirut or within this ever-expanding radius because of such rapid luxury development that keeps pushing prices up.

“This is what happens when the private sector is shown a totally open door and there is no coordination with other groups,” Yazigi claims.

For example, he says about 40 percent of the original residents of Monot left the neighborhood during its golden nightlife period when prices escalated, and when the commercial district was suddenly abandoned, the quarter was left with its social fabric in ruins.

“We are not against the private developers,” says Yazigi. “We are criticizing the fact that the state doesn’t accompany this dynamic, or put mitigation measures, and try to re-orient the private sector.”

Whether this happens, and the rapid remaking of Mar Mikhael becomes an evolution for the area merging its historic charm with contemporary demographic demands, is a question only time can answer.

If the long-term health and sustainability of the urban environment are of any concern, other neighborhoods in Beirut that have faced a similar assault from the forces of development are no examples to emulate. 

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Finance

Return of the Egyptian giant

by Emma Cosgrove
written by Emma Cosgrove

EFG-Hermes is looking once again to control a Lebanese bank, but this time, it appears it may be successful. The largest publically traded investment bank in the Arab world announced on August 17 that it has entered into an agreement to buy a 65 percent stake in Lebanon’s Credit Libanais for $542 million, with a further call option to purchase another 25 percent at the same share price within the next two years.

EFG-Hermes was able to use its own cash reserves to buy the bank from Capital Investment Holding, a Bahraini holding company with a Lebanese arm. The group has been holding onto a large stash of cash totaling close to $1 billion since it sold its stake in Bank Audi in January.

“The transaction is expected to be earnings accretive from the first full year of the acquisition before any synergy assumptions,” said EFG-Hermes in a press release.

Credit Libanais has branches in Cyprus and Bahrain as well as a representative office in Canada. It is the local network and retail and commercial banking services that made the bank attractive to EFG-Hermes, which is choosing to acquire its way to becoming a universal bank. 

EFG-Hermes was formerly a major stakeholder in Lebanon’s Bank Audi, holding 28 percent of the bank until January 18. The Egyptian giant sold its stake to a group of unidentified investors for $913 million when it became clear that further acquisition was unlikely, and control of the bank was unwelcome.

“In less than a year after the profitable disposal of its stake in Bank Audi, EFG-Hermes has secured a sizeable commercial bank at attractive terms and re-enters the Lebanese banking market… [The] acquisition will transform EFG-Hermes and facilitate the expedient roll-out of our regional commercial banking strategy delivering significant benefits for our shareholders,” said, Mona Zulficar, EFG-Hermes’ chairperson of the board of directors.

EFG-Hermes posted an 83.2 percent year-on-year rise in profits at the end of June, growing net profits to $101.9 million, according to Zawya. Shares of EFG-Hermes gained 2.4 percent on the announcement of the sale to reach $4.91.

According to Credit Libanais, final decisions as to changes among the board of directors at the Lebanese alpha bank are still being negotiated but EFG-Hermes will be represented on the bank’s board. EFG-Hermes has made it clear that the management of Credit Libanais will remain the same.

The deal is now awaiting approval from Banque du Liban, Lebanon’s Central Bank, which could take months. Credit Libanais was reportedly valued at $834 million for the acquisition.

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Comment

Summer of the stifling state

by Michael Young
written by Michael Young

The possibility that several Gulf states, as well as India, might suspend BlackBerry services unless certain security conditions are implemented is the latest sign of the tension between modern technology and the impositions of the state. In July, the United Arab Emirates and Saudi Arabia sought to come to an agreement with BlackBerry’s Canadian manufacturer, Research in Motion (RIM), to impose an oversight mechanism allowing their security agencies to read the device’s encrypted messages. This would affect BlackBerry’s messenger service, which permits users to communicate in real time between themselves, as well as email services. RIM refused and the Emirati and Saudi authorities announced dates for the suspension of BlackBerry.

The governments’ calculations were that their threats would put pressure on RIM’s share value, forcing the company to comply. In early August, however, the Saudis reversed course, announcing that they would allow messenger services to continue, driving RIM’s share value up. Rumor has it that the manufacturers agreed to locate one of their servers in the kingdom, making it easier for the authorities to access data, though both RIM and the government has remained tight-lipped on the issue.  However, both the Indian and Emirati authorities continue to demand some access to BlackBerry’s internet services. The Indian security agencies argue that BlackBerries were used in the Mumbai attack of November 2008, while the group of assassins (purportedly Israeli agents) who killed Hamas operative Mahmoud al-Mabhouh in Dubai earlier this year were also thought to have used Blackberries or a similar device. However, the security argument is not particularly convincing. While there is no doubt that modern technology can facilitate terrorist attacks, preventing this might throw the baby out with the bathwater.

 Take the Mumbai episode. Those who carried out the rampage in the Indian port city also used cellular telephones. Yet no state, certainly not India, can readily tap into all cellular communications. And while BlackBerry messages are encrypted, in the confusion of a terrorist attack it is not always easier to intercept mobile phone conversations. The fact is, it is often the quality of policing and speed of reaction that defines the outcome of terrorist actions. Even in the planning stage there are infinite ways for terrorists to circumvent surveillance.

To place an entire population under the government’s eye is extremely illiberal, inconvenient and not necessarily guaranteed of success. Technology in the hands of committed groups generally remains a step ahead of sluggish countermeasures by states.

There is also the matter of image. It is part of the UAE’s brand that places like Dubai and Abu Dhabi are business-friendly. The business community has been willing to accept restrictions on certain aspects of life in exchange for an environment that is generally efficient and safe. But they may not be willing to relinquish their privacy for the sake of safety and security, particularly in their business affairs. If they feel the authorities can tap into their private communications and influence key aspects of their work, for example bids or strategies against competitors, suddenly the Emirates becomes less attractive.

Conditions imposed on RIM, particularly among the Gulf states, seems, at least publicly, to be prompted mainly by discomfort that technology is offering people more ways to avoid the state’s prying eye. What is new in the BlackBerry standoff is that the demands on RIM bring two systems into conflict: Western democracy which, for all the inroads into people’s private lives it has allowed in recent years, still defends the right to privacy in law, against systems with a more elastic view of privacy. RIM is being asked to undermine the confidentiality of its clients, thereby breaking its contract with BlackBerry owners, because certain foreign governments cannot do that themselves. This is different to blocking or scrutinizing the Internet, which numerous governments do because they control servers inside their own country. Economic power will be a major factor in determining the outcome of this tussle.

If India can get its way with RIM, it will have a significant impact on what Arab states, with less market weight, decide to do. Ironically, the free market may end up curbing freedom. There may be a point where RIM’s share price, pushed down by recalcitrant governments demanding an end to encrypted messaging, force the company to surrender. This would be bad news, because there is more at stake than just terrorism; not everything we do is the state’s to see. 

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Finance

Goodbye to great rates

by Paul Cochrane
written by Paul Cochrane

 

The high interest historically paid out by Lebanese banks on deposits in Lebanese lira (LL) made the country an attractive location for stashing cash. At its peak, near the end of the civil war in February 1988, the average rate on lira deposits was 20.55 percent, according to data from Banque du Liban (BDL), Lebanon’s central bank. Such double-digit interest was the norm when Lebanon needed as much capital as possible to reconstruct the country. Come the Paris II donor conference in November 2002, lira interest rates dropped below 10 percent, never to return to such highs, as perceived risk was lower. They’ve been more or less in a gradual decline ever since, hitting a three-decade low in June this year when the weighted average interest rate on deposits hit 5.83 percent, according to data provide by BDL.

The cost of competition

As the global financial crisis set in, Lebanon was once again an attractive depositors’ haven, with $55 billion flowing into the country from 2007 to the first half of 2010, according to Bank Audi data. Such an abundance of liquidity, combined with the lower rates offered internationally and the heightened confidence in the Lebanese financial system meant interest rates had to tumble. As a result, the Central Bank and the Ministry of Finance were in a position to demand lower returns on treasury bills (TBs) and certificates of deposit (CDs). 

But this represented a challenge for the banks in managing their spreads, particularly when the three-year and five-year TBs and CDs in lira matured, as it would no longer be advantageous to pay out high interest to clients when the banks themselves were no longer receiving such returns.

“On government paper for lira, [interest] was 11.25 percent for [the last] five years, but now it is 6.18 percent, so a huge drop in just a year and a half,” said Walid Raphael, general manager of Banque Libano-Francaise. “If you look at the three-year paper — what most banks are holding with the government — it was at 9.3 percent and is now just below 6 percent, so a 3.30 percent drop. It is the banks that are bearing this reduction in interest. If the market was really efficient the banks would not pay more than they are getting on TBs but much less, yet this is not the case.”

Earlier this year, the Association of Banks in Lebanon decided that the rates banks offered should be lowered, as paying out their current interest was no longer sustainable. But in a free market it is the prerogative of banks as to what rate they offer, even if this costs the institution to do so. “If you are getting 5.3 percent on three-year local treasury bills, why are you paying depositors 5.5 percent?” said Freddie Baz, chief financial officer at Bank Audi. “It is because of idiotic competition to attract clients. Banks are shooting themselves in the foot.”

The banks have to tread carefully though, as a rapid reduction in interest rates on the lira could trigger conversions back to US dollars and threaten the currency’s stability. As Baz remarked, the Lebanese “are not mentally prepared for this,” as depositors have become used to the high rates on the lira. He does, however, advocate a drop of 1 percent on lira interest in 2011.

Decline prompts diversity

Najib Semaan, assistant general manager at the Bank of Beirut, considers the lower interest rates as a boon for the government, the economy and the banks.  “Banks are happy to see rates go lower in foreign currency and the lira. Why? Because it will give a boost to the lending on the retail and corporate side, and servicing the debt of the republic will cost less,” he said. “But while it is beneficial to the government to have lower interest rates, I insist we reach a level acceptable to the government and the banks.”

The decline in the interest rates has clearly affected bank’s strategies, placing a greater emphasis on services to attract and retain clients; before it was a case of shopping for the best interest rate on offer. That said, interest rates are still a primary tool to expand the depositor base, hence some rates on offer are on par and even above the returns banks get on TBs and CDs.

For instance, Bank of Beirut is offering an account to new clients that pays 7.20 percent over 15 months. “We want to diversify and increase our client base, and have cross selling, such as to small investors,” said Semaan. “We are not accepting deposits over LL 60 million as we want to diversify and have longer term maturities. The interest rate is a welcome gift to new clientele because otherwise, on a small amount, whatever you pay doesn’t make sense.”

Such a rate is increasingly rare, and overall interest rates are likely to drop in years to come. This could prompt a change in mindset among Lebanese that have lived off the high interest.

“We are coming to normal times, not the extraordinary times of high interest and premiums, which could not last forever,” said Baz. “This could trigger a quicker development of the domestic capital markets as people will be forced to look at other alternatives. Today it is a rentier economy; if I can still get 6 to 8 percent interest, why should I understand the stock market?”

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Finance

Q&A with Muwaffak Bibi

by Emma Cosgrove
written by Emma Cosgrove

If Muwaffak Bibi is in charge of your money, then you’re sitting on at least $25 million. The regional head of Citi Private Bank recently sat down with Executive to discuss where he would put that tidy sum and how the demands of high net-worth investor’s are evolving.

E  What kind of presence does Citi have in Beirut?

We have had a presence since the 1950s and are mostly focused on corporate banking and investment banking. We cater to governments, to banks and to large multi-nationals and large corporations. We cover private banking also and we work very closely with the branch here, but we cover it mostly from offshore centers.

E  How are high net-worth individuals (HNWIs) faring in the region?

This region in particular created a lot of excess wealth in the last 40 years as the oil boom started, and that has been reflected within the GCC but also [throughout the Middle East].

I would say that the growth in high net-worth individuals has been more significant in certain years than others. There is a new report by [Capgemini Worldwide], who consolidates all this information, and they showed a growth in 2009 of about 7 percent in high net-worth individuals in the Middle East versus in Asia, which was higher at 15 or 16 percent. So it fluctuates, but the most important thing is that the growth continues and it is sustainable because [it is tied] to oil wealth.

Our business is to be the window for investors globally. There is always excess liquidity that needs to be deployed in the international market, depending on where those opportunities are, and we would like to present ourselves as the bridge to those international opportunities.

E  Are HNWIs increasingly choosing to be single-banked as opposed to multi-banked?

Not really. Our experience with HNWIs is that the usual average is four to five banks. Some might have more, some might have less, but I really find it very unusual [for HNWIs] to have only one bank. 

E  Why so many?

To get different ideas from different thinking. Usually they would like to deal with a Swiss [bank], to deal with an American [bank], to deal with a UK bank, so it is very typical that you have four or five banks in a portfolio.

E  What sort of client base have you found in Beirut?

We have a large client base in Beirut as well as in the region. And obviously these days in Beirut there are a lot of the regional visitors coming in so we also meet a lot of our clients from the region in Beirut. People get bored on holiday and they want to think of ways to make money, so we’re there.

E  How has the relationship between the HNWIs and the banks changed in the last two years?

I would say that given the depth of the crisis which all the financial institutions have gone through, and the decline that happened in different asset classes across the world — and I stress the word “across” because everywhere there was an impact, the magnitude differed, but everywhere there was an impact –– I would say a lot of the trust between clients and financial institutions has been impacted and I think we are now in the healing phase.

There was a schism that was created in that trust. I think people are coming back to see where the blame is. Is it really the banks to be blamed or is it the system? Of course, we think it is a bigger issue than just blaming the banks — not that the banks didn’t have a role to play.

Our clients… are coming back with more demand for information. [They are] looking at banks and saying “I want to know exactly what I am investing in.” [They are looking for] maybe a little more simplicity: a lot of fixed income and lot of direct equity investments are being proposed rather than funds per se.

But, bit by bit the appetite is coming back. Given that the interest rate environment of close to zero percent does not excite people to [keep] money as cash, everyone is looking at other alternatives. But they want to know exactly what those alternatives are and to be careful about who’s behind them.

E  Are investors more interested in real assets as opposed to investment products and funds?

It depends on the client. We have seen clients buying more gold. We have seen clients being interested in real estate — that’s another important aspect if you are talking about inflationary fear, which we are not worried about immediately. But, if there are inflationary fears, real estate is a good hedge against that.

E  Where is real estate still a viable investment?

The United Kingdom is a very common area that our investors look at [for real estate], particularly central London. We’ve done many deals there. The United States is now coming up in terms of opportunity because we think that commercial real estate has come down dramatically and continues to do so as we are talking. I think we’re starting to come up with ideas as to how to capture that for investors.

E  Is it worrying that everyone seems to be turning their attention to UK real estate?

I don’t think so. There is no doubt that there has been an adjustment. If you took a property in Mayfair [an exclusive neighborhood in London] in 2006 or 2007 at the peak [of the crisis] and then looked at it in June of 2009 you probably had a 15 to 20 percent decline in value, but the surprising thing is between June 2009 and September or October, we saw the yields pick up dramatically because money started flowing in.

We think the reason our clients like London in particular is [because] it is very foreign-investor-friendly; the tax laws are very straight forward and more importantly, you have a lease structure of long-term leases of 15 and 20 years. For a lot of our investors this is like buying a bond with an underlying coupon with an appreciation in the capital value because London is limited — you don’t see cranes, you don’t see more buildings, there are a lot of building controls.

E  How do you perceive Citi’s US government bailout and what is the status of repayment?

We looked at that as something that was fortunate for us. I always say it: if we were a bank that was incorporated in Iceland, we would not be sitting together now and having this discussion. We would have disappeared.

The government stepped in and supported us with the TARP money, [along with] 10 other institutions, because that was a very, very difficult and challenging time. We are fortunate and grateful to the taxpayers for the US support we got.

I am very pleased to say that we have paid back the TARP money as of the end of December and more importantly, the government had 27 percent ownership as common stock in Citi as of April and they have designated Morgan Stanley as an independent party to sell off their shareholding.

Their entry point is $3.25. The sale continues as we talk and we expect that by the end of the year the government will have sold for profit — which is good for the taxpayers — their share in Citi. But we are very, very grateful that we got that support.

E  Do you feel that there is increasing competition in this region among banks competing for market share in private banking?

There is no doubt in my mind that during the past four or five years, even before the crisis, that a lot of institutions discovered the Middle East. And without naming institutions, without being derogatory, putting [signs] up and saying “I have opened a private bank for the Middle East” doesn’t mean you have a private bank.

Going and opening an office in the DIFC and saying “now we have Middle East representation” does not mean you are present in the Middle East. It takes a lot of years. We have had footprints for 50 years in the Middle East and it didn’t come easy. It came with a lot of work.

I’m not trying to be arrogant. I respect competition and I think it makes the best out of any institution. But, I can tell you, a lot of them are here for a very short period and they are going to disappear. It takes a lot of commitment and effort to stick around.

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A new venture for capital

by Sami Halabi
written by Sami Halabi

When it comes to political stability, you either drink the Kool-Aid or you don’t,” says Tarek Sadi, managing partner of Middle East Venture Partners (MEVP), using an American adage for wholeheartedly believing in something, as he sips a Nespresso in his office overlooking Martyr’s square. “We drank the Kool-Aid and we are investing in it,” he adds, as his partner Walid Hanna nods in agreement.

The pair and a third partner, Rani Saad, set up operations in Beirut in January when they decided it was time to brave the Lebanese venture capital (VC) market and invest in the county’s virtually nascent asset class.  

The idea was the brainchild of Hanna, who previously headed up Dubai International Capital’s Arab Business Angels Network. As the word ‘venture’ became less attractive to a market at a standstill, the imperative to move to greener and, previously, riskier pastures became all the more evident.

“It was very clear that the opportunities — what I do, and what I enjoy in venture capital — were not going to be found in the Gulf and that the real opportunity was in the Levant,” Hanna says. Hanna then convinced Sadi and Saad, who now advises the fund, to leave the ailing emirate and set sail for Lebanon.

That was a little more than a year ago. Today the company has already closed its first fund, the Middle East Venture Fund, at $10 million, and has targeted a treasure chest of $20 million. The partners are hoping to announce their first investments this month, following the approval of their investment committee.

Almost a Greenfield

The hope amongst many is that if MEVP meets its target and invests in its first company within nine months of setting up shop, the company will have set the stage for the revitalization of Lebanon’s relatively dormant VC space. Prior to MEVP entering the market, just three VC funds had operated in the country: the Berytech Fund, the Building Block Fund (BBF) and Byblos VC, Byblos Bank’s VC arm. Byblos VC never really got off the ground and no longer exists.

The BBF, which declined to comment for this article, has been inactive for over a year and recently fired its management over quarrels with its investors, leaving Berytech as the only functioning fund on the market. But even this is relatively small — Berytech Fund currently has only $6 million compared to BBF’s reported $16 million, which sits idly by, waiting to be invested. Nonetheless, the fund is in the process of closing its fourth investment, which had yet to be officially announced as Executive went to print.

Berytech Fund’s managing partner and part shareholder Sami Beydoun said he welcomed the competition that MEVP would bring to the market and does not view the company as a threat to his effective monopoly.

“It’s all about creating the ecosystem,” he says. “If you are a single jeweler on a street you are not going to get a lot of business but if others open up next to you they will spur on more activity, which is a good thing for everyone.” 

Indeed, outside of the technology sector where the Berytech Fund focuses its investments, the market for MEVP is wide open. The firm has already looked at some 40 companies and has narrowed the field down to five. If they occur, MEVP’s initial investments will range between $500,000 and $2 million for a period of three to five years and carry a management fee of 2.5 percent, as well as a target gross internal rate of return of 35 percent.

The high-risk-high-return dynamic at the firm is “the nature of the beast,” according to Maurice al-Haddad, financial analyst at MEVP.

“The growth capital that we inject comes at a very crucial point in the company’s history: the first three to five years. These companies experience their highest growth period’s year-on-year during that period so when we exit them, they are moving faster towards their peak and thus valuations are high and we get these high returns.”

Regional view

While MEVP’s investment targets may be Lebanese for the most part, the target markets of the companies they intend to invest in are not. “We look at businesses that have at least a regional, if not global, offering and Lebanon is a great test bed for that,” says Sadi.

“We wouldn’t invest in a company whose market is just Lebanon because it’s too risky,” adds Hanna.

The target market strategy is understandable considering the multiples that the firm is looking to achieve. According to Hanna, for companies to be shortlisted for possible investment, they must be expected to grow to the point where the firm gets back five to 10 times their original investment. In order to achieve this ambitious aim, the company says it is willing to allocate the resources required to take a “hands on” approach during the investment phase and help organizations structure their financial models before investing. 

“It takes much longer here to get to a point of investment than in other places because the entrepreneurs aren’t prepared and the semantics are different,” says Sadi. “We bit the bullet and we are willing to take the risk of the operation until we get our return,” he adds, while insisting that such an approach should be viewed as preferential treatment for favored investment opportunities rather than their standard modus operandi.

That notwithstanding, the firm also minimizes its risk by targeting mainly minority stakes in companies. “We invest in people primarily; so we don’t want to run or manage those companies,” adds Sadi.

MEVP insists that whatever risks it takes during the investment process, it has also taken wide ranging measures to cover its back before plunging into contracts in the murky waters of Lebanon’s infamous legal structures.

The firm’s “bulletproof” shareholder agreements, as Hanna describes them, include several clauses including the right of first refusal, a put option and preemption, and a veto on hiring senior management. For anything else that the law doesn’t cover, “we can always negotiate a shareholder agreement that makes up for all the missing parts of the law,” says Hanna.

Even though the fund has a Lebanese tinge, it took the decision to register in the Cayman Islands because “it’s a tax haven and we want to be tax efficient,” Hanna says, referring to the 10 percent capital gains tax on funds in Lebanon. That has also allowed the fund more leeway to set carried interest of 20 percent, distributed on an exit to the employees.

“Obviously a managing director gets more than others,” says Hanna without divulging the distribution of the carry over at the firm.

Feeding frenzy

Despite the added diversity MEVP may bring to the market in the long term, in the short term the firm is looking to consolidate its position by eyeing up the competition. According to Hanna, since BBF is currently in the doldrums, MEVP has launched a bid to take over management of the fund. If that occurs, it will have around $26 million between its own investors and those of BBF’s to exercise in the market — in effect quadrupling the amount of active capital in the market space.

In addition, the company is also open to syndicated investments, partnering up with other funds to make investments.

What’s more, having already closed its first $10 million, MEVP is looking to close another $10 million in the next three to six months. In order to do so, it is looking to draw on its current investor base comprised of “two of the leading five Lebanese commercial banks, three large Lebanese conglomerates, and six individuals who are mostly Lebanese with a couple of Saudis,” says Hanna. 

Both Hanna and Sadi insist that this institutional investor base is what sets them apart from the other VC funds that have operated in the Lebanese market. For instance, Hanna points to the fact that the Berytech Fund is backed by a large enterprise of several firms, which means “they do not have to cover their immediate salaries with management fees because they have the back-up.”

The Berytech Fund is indeed supported by 19 shareholders who include “prominent Lebanese banks, large national corporations, Fortune 500 multinational companies, local NGOs, a university and individuals,” according to its website.

Berytech Fund’s Moubayed, however, disagrees with Hanna and Sadi’s premise, arguing that the fund is a separate operational entity from Berytech — the large entrepreneurship, health and technology incubator which is supported by the European Union — but has a contract with the firm to manage the fund.

“The fund is an institution. It is neither more nor less ‘institutional’ [because of its investor base],” Moubayed insists.

A starry outlook

However “institutional” the firm may be, MEVP has been given a mandate to exercise between $10 and $20 million over three years, starting June 30. If the fund lives up to the promise of its potential, the Lebanese VC may finally emerge from the dark ages into an investment renaissance.

“Today the stars are aligned; the country is growing, the government is behind entrepreneurs, as are the corporates and the academics,” says Sadi.

But whether or not the hoped for renaissance occurs will largely depend on the market and if it takes to the kind of investment that VC entails. In the end, as Sadi concedes, “the more people who get involved the more real it becomes.” 

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Where to draw the line

by Nicholas Blanford
written by Nicholas Blanford

Last month’s deadly border clash between Lebanese and Israeli troops raises a question about the curious manner in which the Blue Line — the term given to the United Nations boundary that follows the original 1923 border between Lebanon and Palestine — was delineated a decade ago. 

Other than the original 1923 border agreement, subsequently reconfirmed as the 1949 Armistice Line, the main source of data to define the line was the last border survey carried out by the Israel-Lebanon Mixed Armistice Commission (ILMAC) in 1949-1950. The appendices contained a list of coordinates, sketches and large-scale maps, which were used by the UN to help mark out the boundary after the Israeli withdrawal from South Lebanon in 2000. The process hit controversy when the UN agreed to a series of compromises that deviated the Blue Line away from the path of the original border to satisfy Israeli security interests.

One objection concerned a curious anomaly beside the kibbutz of Misgav Am. Long ago Israelis had pushed the border fence some 500 meters into Lebanon beside Misgav Am, and over the years the settlement had expanded onto Lebanese soil.  When it came time to delineate the Blue Line, the ILMAC map coordinates of the border provided by Lebanon cut through Misgav Am, leaving part of the kibbutz inside Lebanon. But ILMAC’s written description of the boundary recorded that it should run “to the west” of Misgav Am. In 1950, the written description may well have corresponded to the coordinates. But in 2000, the border identified by the ILMAC report had inched deeper into Lebanon, matching the creeping westward expansion of the kibbutz. The UN opted for the written description over the coordinates (thus sparing the evacuation of a few houses in Misgav Am) even though it clearly deviated the Blue Line away from the international boundary.

Another disputed area was a four-kilometer stretch of the border southeast of Metullah to the Hasbani River. The UN placed the Blue Line 100 meters north of the 1923 border. They appeared to have misread the 1923 boundary agreement, a point the cartographic team leader acknowledged to me in an interview in July 2000. The result, however, was that Israel was not required to pull back another 100 meters along this stretch of the frontier, allowing it to keep intact a military outpost and spare Israeli farmers from losing some apple trees.

More significantly, minor deviations spared the Israelis from having to pull back their forward outposts on the mountain peaks of the Shebaa Farms. If the Blue Line had followed the Lebanon-Syria border in this area, it would have shaved off the northern edges of three Israeli outposts, requiring the Israelis to dismantle the positions. Instead, the Blue Line loops around each IDF compound by a few dozen meters. The most bizarre deviation is at Addaisseh, the scene of the August 3 border clash. Here, the line runs for a few hundred meters just north of the main border road inside Lebanon, along which runs the fence. In other words, when Lebanese motorists drive between the villages of Addaisseh and Kfar Kila, for a part of their journey they are actually driving on the Israeli side of the Blue Line. The UN had blindly followed the ILMAC coordinates at this spot even though it was contrary to the description of the 1923 boundary, which states that the border runs on the southern side of the road. It seems, however, to have been a genuine mistake. One cartographer who worked on the Blue Line delineation blamed the anomaly on the short amount of time available to draw up the line, the inability to survey the ground (it was still under Israeli occupation at the time) and the relatively small (1:50,000) scale of the Blue Line base map.

As for the Addaisseh incident, the initial question in the wake of the deadly firefight which left two Lebanese soldiers, a Lebanese journalist and an Israeli officer dead was on which side of the Blue Line lay the tree that the Israeli soldiers wanted to prune. The UN confirmed that the tree was on the Israeli side. But what no one has mentioned publicly, either through ignorance or discretion, is that even the Lebanese soldiers shooting at the Israelis were on the Israeli side of the Blue Line, thanks to the idiosyncrasies of the delineation process 10 years earlier.

NICHOLAS BLANFORD is the Beirut-based correspondent for The Christian Science Monitor and The Times of London

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What lies beneath

by Paul Cochrane
written by Paul Cochrane

The Middle East and North Africa (MENA) region is fortunate to be able to tap the majority of its oil onshore and in shallow coastal waters. That’s meant a minimal need for deepwater drilling and its associated risks, exemplified by the disastrous BP oil spill in the Gulf of Mexico that saw some five million barrels of crude spew out of the Macondo well over the course of three months.

But with oil fields maturing in North Africa, oil companies are exploring for black gold at ever-deeper depths in the Mediterranean Sea. In Libya, for example, the colossal Gulf of Sirte basin extends to depths 2,000 meters below sea level — that’s some 500 meters deeper than the Macondo well. Deepwater drilling is already underway in the territorial waters of Tunisia, Libya and Egypt.

Yet it was only when the tarnished British oil company BP announced in the wake of the Gulf of Mexico spill that it is to start exploration off the Libyan coast that Mediterranean states and environmental groups took note of the potential dangers, calling for a moratorium on deepwater drilling. Italy has been the most vocal in calling for a unified strategy for the Mediterranean, what with the Sirte basin only some 500 kilometers from its territory. The Italian foreign minister suggested deepwater drilling should be referred to the Union for the Mediterranean, but this body of European Union and littoral states has essentially been a white elephant thus far, initially beset by problems within the EU and stymied by the Israeli-Arab conflict. The need for a common front on deepwater drilling is a pressing one. An oil spill in the Mediterranean would be a disaster on par if not more calamitous than in the Gulf of Mexico, given the size of the sea and the 21 countries it borders. As the recent BP spill has shown, oil companies and governments are not prepared for when accidents occur.

Libya, according to the United Nations, does not yet have a national contingency plan for an oil spill, while Italian budget cuts have hampered the country’s response effectiveness. The rest of the Med is equally ill-equipped to cope with a major oil spill. With so many countries involved a unified front is unlikely, but pressure could be brought to bear on oil companies with deepwater drilling operations to hold off until the BP spill in the Gulf of Mexico has been fully investigated, as the United States and Norway have done. Indeed, BP appears to have caved to pressure, delaying the launch of deepwater operations in Libya.

But deepwater drilling is also in the cards for the Red Sea, and over in the Persian Gulf more than 1,600 offshore wells — albeit in much shallower waters — have been drilled in the past decade, according to Energyfiles. A consolidated stance on offshore drilling for the whole MENA region is clearly needed, which could be spearheaded by the Arab League and then developed in coordination with the EU and other neighbors.

While many want deepwater drilling banned outright, as long as the planet relies on oil-powered economies, we arguably have little choice but to take the oil wherever it may be found. Indeed, over the past 15 years, deepwater drilling has sourced some 60 billion barrels of oil, according to Deutsche Bank, and will account for 10 percent of global oil production between 2008 and 2015. 

Deepwater drilling should be viewed in light of the pros and cons. Sure, income is generated, but an oil spill would cost billions to clean up and have untold costs on the fishing industry and the Mediterranean’s top earner, tourism. Ten percent of global oil production coming from deepwater drilling is significant, but alternative energies could offset this, such as the solar power projects underway in Morocco.

Countries embarking on offshore drilling, particularly in deep waters, need to weigh up these upsides and downsides. In any event, energy producing states and oil companies should set up a multi-billion dollar contingency fund for any potential spill in the MENA region. With so much money being made off energy, protecting the environment should be considered an operational cost.  This makes even more sense when you consider that demands on MENA oil production are set to increase to offset lost output in the oil-drenched Gulf of Mexico.

PAUL COCHRANE is the Middle East correspondent for International News Services

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