Feature

Withering fields of green

by Executive Editors
written by Executive Editors

Mohamad Ajami’s 65 beehives overlook the pastoral idyll of the Litani River Valley, with Jebel El Sheikh looming in the distance and Beaufort Castle laying to the right. Last year Ajami’s business was flourishing; he had a bumper honey harvest, generating 650 kilos. He was optimistic that this year would be even better, purchasing extra hives and equipment in anticipation of producing one ton of honey. At $25 for a 900-gram jar, Ajami should have netted more than $25,000.

But three months ago he started realizing all was not well. The winds had been continuously blowing from the east, dry, desert winds instead of the westerly winds that provide the right moisture and dew for flora to thrive, and for the bees to pollinate and produce nectar. Ajami also noticed that the bees were not breeding, meaning he could not artificially swarm them and build up the number of colonies to allow him to have more hives.

“That was when I realized something wasn’t right,” he said. “And while the summer flowers did come, there were no forager bees in the hives. Something did not encourage them to generate honey, something — beyond my understanding — that is beyond normal events.”

When it came to harvesting, Ajami’s suspicions turned out to be even more warranted than he had thought: “I only generated 50 kilos. It was not a harvest, it is solely for family consumption this year,” he said.

Ajami’s experience is not an exception; beekeepers throughout Lebanon have had a bad season, with rough estimates — in lieu of official statistics — of a 50 percent decline in production from an annual average of 200 tons. For Wadih Yazbek, a beekeeper and equipment distributor in Beirut, hardware sales are down 60 to 70 percent, indicative of the overall decline in the honey sector. “Beekeepers aren’t needing the extra hives and secondly, with not a lot of honey, keepers are not keen on purchasing new extractors or filters,” said Yazbek.

It is not just honey production that has been affected by the unusual weather patterns Lebanon has witnessed over the past year. Abnormal precipitation in the winter and spring — on average the same quantity but occurring over half the number of days — and a heat wave in prime harvesting time has also hit other agricultural sectors.

“We’ve had a lot of problems this year, particularly with grapes, olives, vegetables, apples and potatoes”

Leaner times

The United States Department of Agriculture’s (USDA) Foreign Agriculture Service estimates Lebanon will produce 100,000 tons of wheat this year, a 23 percent drop from the 130,000 tons grown in 2009. Green leafed vegetables have been frazzled by the sun, and fruits are ripening earlier than usual. “We’ve had a lot of problems this year, particularly with grapes, olives, vegetables, apples and potatoes,” said Elia Choueiri, head of the department of plant protection at the Agriculture Ministry’s Lebanese Agricultural Research Institute (LARI) at the Tal Amara Station in the Bekaa valley.

In some areas the olive harvest is down between 30 and 50 percent, particularly in areas where olives trees were not irrigated or had supplemental irrigation. At two major vineyards in the Bekaa some 70 percent of the grapes were lost, while vineyards at higher elevations have also been affected, particularly white grapes.

“The heat wave had an impact on the physiological status of the vine: a rapid increase of alcohol content because of the increased sugar content in grapes over a very short period,” said Carlos Adem, president of the Syndicate of Wines and Spirits. “In general, the year 2010 will not be one of the great vintages, like 2003 for example.”

In the north, trees have brought forth fruit but not enough leaves, due to it not getting cold enough over the winter. Japanese plums are down 40 percent and forest fires have also wrought damage.

“Each plant has a life cycle, but they are flowering before time, so the life-cycle is shorter. It’s because of climatic change,” said Roula Faris, Middle East representative of the Research Institute of Organic Agriculture. “Leafed vegetables and herbs have flowered early due to the temperature, and they are unmarketable.”

While the Bekaa has had temperatures this summer of up to 45 degrees, in the country’s mountainous regions — where a significant amount of produce is grown, whether fruit trees or in greenhouses — temperatures have soared to unprecedented levels.

“For the first time in Lebanon, even the mountains are hotter than the coast,” revealed Faris. On top of all this, phytoplasma diseases have affected stone fruits such as peaches and almonds, killing more than 100,000 trees within three years. LARI’s Choueiri said: “We have tested over 100 insects to find the pathogen, but don’t know what kind of insect is spreading the disease… Also, due to the hot weather, the activity of these insects is higher, and we’ve seen large infections of peach trees in the south and the Bekaa. The diffusion is getting higher year after year.”

So far this year, LARI has recorded a further 40,000 trees in the south affected by the phytoplasma which, curiously, on a regional basis is only affecting Lebanon and Iran.

If the government subsidizes wheat it will come at a heavy cost. The alternative is potential rioting if bread prices spike

Give them bread

The extent of losses in the agricultural sector will not be fully known until harvesting is finished and all the data is collated. While early indications imply it has been a bad year, it has not been a total disaster, with some regions affected far more than others.

Lebanon has not experienced the drought that neighboring Syria has gone through over the past five years, which has hit agricultural output hard and affected the livelihoods of more than one million people. But the reduced yields have coincided with poor crops globally, particularly in fire-ravaged Russia, which has driven up global wheat prices, and the disastrous flooding in Pakistan, which has reduced rice cultivation [see story on page 32].

As global food prices are on an upward curve, Lebanon is sure to be affected. The country imports some 70 percent of the food it consumes, according to the United Nations’ Food and Agricultural Organization (FAO). Indeed, with wheat production in Lebanon down 42 percent, the government banned exports at the beginning of August, preventing a ship loaded with 4,000 tons of grain at the Beirut port from setting sail.

Lebanon imports some 400,000 tons of wheat per year, and the government went to the international markets to purchase an immediate 50,000 tons last month, either for strategic reserves or to regulate domestic wheat and flour prices.

“With wheat prices at today’s level, around $320 for a ton, flour should be around $450 per ton or more but the ceiling for bread prices was set [by the government] at a maximum of $320 for a ton of bread,” said Arslan Sinno of Dora Flour Mills and president of the Syndicate of Agrifood Traders. “Someone must pay the difference, certainly not the millers, nor the bakers, so either the consumer by liberalizing the price of bread — which may increase the pack price from LL 1500 ($1) to maybe LL1800 ($1.20) or LL2000 ($1.33) — or the state by subsidizing the wheat by about $200 per ton.”

If the government subsidizes wheat it will come at a heavy cost to the state’s coffers. The alternative is higher costs for the Lebanese populace and potential rioting if bread prices do spike, as happened in Beirut in January 2008, when rumors spread that prices were to rise.

Agriculture could generate $3.5 billion if there was sufficient infrastructure investment

The new agricultural plan

The agricultural sector as a whole in Lebanon is underinvested, which has only compounded the losses caused by the topsy-turvy weather this year. According to the Lebanese Farmers Syndicate, agriculture generated some $1.5 billion in gross revenues in 2009, but could generate $3.5 billion if there was sufficient infrastructure investment.

According to research at the American University of Beirut (AUB),  some 50 percent of rural families rely on agro-food production. AUB also said that around 20 to 25 percent of the country’s workforce is employed in agriculture, although the Ministry of Agriculture puts this figure at nine percent. Either way, climatic change clearly poses a threat to agriculture’s potential and therefore to the income generation of a good swathe of the populace.

This importance finally seems to be coming to the forefront in politics, with Agriculture Minister Hussein Hajj Hassan releasing a four-year plan to address the sector’s core problems.

“As of this year, the agriculture ministry has started to be more active,” said LARI’s Choueiri, adding that LARI has taken on a further 70 staff to improve research. “If you compared 10 years ago to today, our work has improved incredibly.”

Implementing reforms requires data, which is currently sorely lacking; the last census on the agricultural sector was in 1988. FAO is carrying out a new census for the whole country, slated for release in October. “We’ve a horizontal project for synergy between all the ministries for efficiently developing the agricultural sector to help realize its potential,” said Ali Moumen, FAO’s representative in Lebanon.

LARI and the Ministry of Agriculture have implemented a strategy to boost and retain production levels. “We are working on new varieties that support dry climatic conditions, such as introducing new apple varieties at an altitude of 700 meters instead of the old varieties of the Bekaa,” said Choueiri.

Farmers are being given codes for identification purposes in the event of disease, nurseries are being monitored, workshops are being held on growing techniques and pesticide use, and a forecast service by LARI kicked off this year that sends text messages to farmers about disease and climatic change.

Organic agriculture, although very much in its nascence, is also improving, with the number of hectares rising from 250 to 2,465, and organic farmers increasing from 17 to 331 since 2000. “Organic agriculture can reduce global warming as there is lower water usage, it increases biodiversity and improves soil fertility,” said Faris.

Improvements in the sector will certainly help offset climatic change, but for the immediate year ahead, much will depend on future temperatures and whether precipitation is better spread and rainwater retained.

“If this year there is again hot weather over the winter period, it will be a big problem for apples, pears and cherries,” said Choueiri.

While the proactive approach of the ministry may offer room for cautious optimism — though very much weather dependent — many agriculturalists will be feeling the sting this winter.

For beekeeper Mohamad Ajami, the income he planned to live off has disappeared.

“I am really concerned about saving the bees for a harvest next year. Adding insult to injury, my whole land was burned as it was so dry and someone must have flicked a lit cigarette,” he said. “My focus was this line of work, but I’ll have to do something else to survive the rest of the year.”

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Editorial

The smartest solution of them all

by Yasser Akkaoui
written by Yasser Akkaoui

Now that work restrictions on Lebanon’s estimated 400,000 Palestinians have been eased, though this is still a small step and should not be seen as an end to the plight of Lebanon’s Palestinian Diaspora, maybe it is time to explore what should be done with the roughly 150,000 Palestinians in Lebanon under the age of 18.

The only passport they have to escape the misery of the camps is proper healthcare and, more importantly, a decent education. But the Lebanese should not have to shoulder such an initiative alone – we were not a signatory of the Sykes Picot Agreement which, nearly a century ago, laid the foundations for the region’s current woes.

No, the world’s wealthy nations must do at least as much to ameliorate the problem as they have done to cause it, and play their part in molding the Palestinian youth into genuine global citizens. They could create 50 schools in Lebanon with around 3,000 students in each establishment. These would sharpen students’ minds 12 months of the year with sciences and arts of an authority unavailable to them through the United Nations classrooms, and empower their personalities to graduate as a generation of Palestinians who would throw off the label of global pariahs. As highly developed human beings, they would have all the necessary tools to be offered the opportunity to attend universities in London, Paris, Berlin, New York, etc.

Given the wealth of human capital this would instill, it is not inconceivable that the Lebanese would want to employ their knowledge and skills to Lebanon’s advantage; education could perhaps even be the untried key to opening doors back to Palestine. If not, then at least they can take their equity abroad.

It would be nothing short of a program for dignity, one that would cut the cycle of decades-old violence that has seen children without hope reach for the gun rather than the laptop, as they realize they are condemned to a life without pride and self-worth in the refugee camps of Lebanon.

It would also be affordable. Building schools and providing an education is relatively cheap and would produce some very high returns. Education for Palestinians is an initiative that the entire world can get behind and, once started, it might stimulate similar donations from wealthy Palestinians from within the wider diaspora. The world would be creating a cycle of prosperity rather than a cycle of misery. In the age of corporate social responsibility, the battle against carbon emissions and the era of smart solutions, surely this is the smartest solution of them all, and one that could eventually put an end to over half a century of misery.

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Economics & Policy

Executive Insight Booz & co.

by Ahmed Youssef
written by Ahmed Youssef

Despite the financial downturn of the last few years, there is still plenty of money in the world looking for a home to call its own. Perhaps understandably, many investors are cautious about stashing that cash in the Middle East. But to ignore the region altogether could mean missing out on prime investment opportunities. 

Investors’ fears may be soothed by a better understanding of the current state of private equity in the region, where the last decade saw breakneck growth followed by near whiplash-inducing collapse. A recent study by Booz & Company and INSEAD shows that up until 2000, only eight funds existed in the Middle East, with an average $37 million under management. But the region’s economic development and liberalization created opportunities and encouraged the Gulf’s sovereign wealth funds and wealthy families to look for investments closer to home.

By 2004, the region had 26 funds. The subsequent increase in the price of oil between 2004 and 2008 stimulated capital formation, quadrupling the number of funds to more than 100. The amount of money raised jumped from less than $500 million in 2004 to about $10 billion in 2008.

That heady growth obscured some critical weaknesses in the Middle East’s nascent private equity market — weaknesses that were exposed once the global economic downturn put a halt to new fund creation in the first half of 2008.

For one, most fund managers had limited experience and track records. Private-equity firms did not have to get deeply involved in their investee companies as much of the money made during this period resulted from rapid arbitrage opportunities — holding periods were very short, in many instances under a year. Furthermore, significant gaps existed in the region’s legal and regulatory frameworks; in many countries, laws related to issues such as bankruptcy or the delisting of companies were still either nonexistent or, conversely, too rigid. Several Middle Eastern countries are addressing these gaps and some reforms have been made, but still there is room for improvement.

A shorter leap of faith

Now that the euphoria is over, many potential investors are seizing on these shortcomings as reason to think twice about committing funds, but they should be viewing the consolidation of businesses and industries through a different lens — as growing pains in a private equity market that is still immature by almost any standard. Investors looking to make a play in the region will still need to make a leap of faith, but that leap isn’t as wide or unnerving as it once was thanks to a number of factors lining up in the region’s favor.

First, the Middle East is still a region of increasing wealth and a growing population that needs new and better services. Health care service providers, retailers and consumer finance companies are among those sitting in the sweet spot, especially for private equity firms. Another huge opportunity looms in the region’s infrastructure development. The richest countries are investing billions in large-scale projects and private money will be needed to supplement the public spending and support the creation of enabling industries, such as materials and equipment, construction services and financing.

Furthermore, the family-owned businesses that account for roughly 40 percent of the region’s non-oil economy are more open to working with outside firms. Money was so abundant before that there was no need for equity financing to fund their businesses, many of which spread themselves too thin over multiple sectors. With access to capital now drying up, they are looking to shed non-core operations or introduce strategic investors to help manage them because they lack the requisite talent and capital.

Finally, there is bound to be less competition for these emerging opportunities. Most funds were established in 2007 and 2008, when investors were concerned about missing the ride and were not exercising due diligence. Investors have since wised-up, and they are going to be short on patience when those funds fail to show results over the next two years, accelerating their demise.

Do the due diligence

Investors looking to take advantage of these opportunities can and should equip themselves to better manage this transition. Part of the challenge will be resetting expectations, both for liquidity and returns; they will also need to understand and manage their limited partnership agreements. Exits will take longer, more debt may be required, and returns will need to be risk-adjusted for market opacity and regulatory changes.

The absence of market and industry information will necessarily shift investors’ focus to the strength or weakness of the management team. Questions investors should be asking during due diligence include: How much experience does the team have of operating in the region? What are their credentials in the industry of focus? How strong are its governance policies? Does its network and capabilities align with its investment philosophy? The answers to these questions will help investors gain enough confidence to take the leap of faith with a given team or seek out a more suitable partner.

Certainly, the easy money is gone in the Middle East private equity market — or it soon will be. But the sector is maturing rapidly, and its coming of age will spell plenty of opportunities for those who do their homework. Realizing attractive returns in this market will not depend on timing or external market factors but on recognizing fundamental risk-adjusted value.

 

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Economics & Policy

Still waiting

by Nour Samaha
written by Nour Samaha

Everyone here works without a permit,” said Mohammed Khalife. “Being legal and having a work permit is the strange thing, not the other way around.”

Khalife, a 26-year-old Palestinian refugee who lives in Beirut’s Shatila refugee camp and works outside the camp in construction, explained that the majority of his peers also work illegally outside the camp, as getting the work permit is near impossible.

“This doesn’t happen anywhere else in the world,” said a Palestinian doctor who lives and works in the Beddawi camp near Tripoli, and wished to remain anonymous. “All Palestinian parents want to see their children as engineers or doctors, and why not?” The problem is Lebanon’s employment laws. “I can only work inside the camp,” he said. “For the past 60 years, the majority of Palestinians who are working outside of the camps are doing so without permits, whether it be in agriculture, car mechanics, teaching, engineering, anything.”

August 2010 legislation

The Lebanese government passed a new law last month that ostensibly improves the work situation for Palestinians. Politicians and media outlets around the world lauded August 17 2010 as historic for Palestinian rights in Lebanon. Article 4 in the new legislation was widely considered groundbreaking, as it stated that the law’s beneficiaries — Palestinian refugees registered with the Lebanese authorities and United Nations Relief and Works Agency (UNRWA) —“will be given work permits from the Labor Ministry to be used exclusively to work in the private sector.” Furthermore, the law states that “beneficiaries of this law are exempt from paying fees for their work permits, paying taxes, and conditions of reciprocity normally exacted on foreign workers.”

Yet many who have advocated granting Palestinians labor rights quickly pointed out that in reality the new law changes little.

“The problem actually lies in Article 4,” said Sari Hanafi, professor of sociology at the American University of Beirut (AUB) and the author and editor of several books regarding the Palestinian Diaspora. “It is written clearly that the Palestinians have a right to work, but only according to the current regulations of the Ministry of Labor. This means the Minister of Labor will continue to dictate which professions they can work in and which ones they cannot.”

He added that there are still some 30 professions they are banned from.

 

Walid Jumblatt, leader of the Progressive Socialist Party and the member of Parliament who introduced the initial version of the legislation in June, called the change “a very small step on a very long road.”

“It is a partial achievement of a whole struggle to give the Palestinians full dignity in life, property, living conditions,” he told Executive, confirming that the syndicated professions, such as medicine and engineering, are still prohibited.

The law, therefore, does not help the doctor from Beddawi. 

“Within the Palestinian General Union of Doctors, there are around 350 people registered, ranging from specialists, to general practitioners, to pharmacists — these professionals can be useful in Lebanon,” the doctor said, adding that Lebanon is short of nurses and other professionals in fields where Palestinians have the potential to fill the gap, if they were able to join syndicates.

“In Tripoli alone, the majority of the hospitals are full of Palestinian nurses,” he said. “They are there because there are not enough Lebanese nationals to fill the positions, but yet they have to work without permits because they cannot be part of the syndicates.”

Lost in the law

The status of Palestinian refugees has never been officially defined by law in Lebanon, leaving them in a state of legal limbo. As a result, they were categorized as ‘foreigners’, (someone not of Lebanese origin,) within the labor law, and subsequently within the labor market. Articles in both the Labor Law and the Social Security Law stipulated that for a foreigner to work in Lebanon and gain access to the National Social Security Fund (NSSF), he or she must fulfill the principle of reciprocity, meaning that a foreigner’s right to obtain a work permit and be employed in Lebanon is dependant on Lebanese nationals being able to do the same in that foreigner’s country. As Palestinians have no official state to offer reciprocal rights, the law prevented them from legal employment in any of the 72 professional categories the Lebanese government uses to subdivide the country’s labor market —which effectively cover all but the most menial labor.

In addition, a large number of professions such as engineering, medicine, dentistry, veterinary sciences, chartered accounting and nutrition  are governed by syndicates in Lebanon that issue licenses to members, and the laws stipulates that foreigners must have a license to practice that particular profession in their own country before they can practice in Lebanon. Again, being officially stateless, Palestinians were automatically barred from these professions in Lebanon, even if they were born and raised in this country.

In 2005, then-Minister of Labor Trad Hamadeh issued a ministerial decision opening up non-syndicated professions to Palestinians born on Lebanese territory who were registered with the Ministry of Interior.

While this was initially seen as a breakthrough for Palestinian refugee labor rights, the reality was that the ministry itself issued exceptions to the decree for many professional categories, effectively limiting the newly available jobs to clerical work and unskilled labor.

The August 2010 legislation for some was seen less as a move toward granting Palestinian refugees labor rights and more as shifting the 2005 decree from a ministerial decision to legislation.

“Since 2005, the number of work permits [for Palestinians] has not been increasing, so the new law has now replicated a decree that has failed for the last five years,” said Hanafi.

“This law is a tiny, tiny step forward, but also a major step back in terms of the Palestinian-Lebanese relationship,” he said. “It shows the Palestinians that we can fool the world and make fun of you and issue a law that has no practical impact on your everyday life —I’m not exaggerating, this law has no impact on the life of the Palestinians; on the contrary it adds a new bureaucratic layer to the issue.”

Opposing voices

Christian political parties from both the government and opposition camps resisted Jumblatt’s bill in its original form — which included much more profound changes to the labor laws — and were the major factor behind it being watered down to the version that eventually came to a vote. They argued that giving rights to Palestinians could be the first step toward tawteen (naturalization). The opposition’s Michel Aoun, leader of the Free Patriotic Movement, said last month that the Lebanese needed to work against the “US-Israeli conspiracy” to naturalize the Palestinians.

On the government’s side, Amin Gemayel, leader of the Kataeb party, said the legislation proposed by Jumblatt to give Palestinians civil rights “will lead directly to their naturalization.” Even the Maronite Bishops Council stated that addressing these humanitarian issues would lead to the permanent resettlement of Palestinians in Lebanon.

“Our main position is that we are not at all against giving basic and human rights to Palestinians, but as a Lebanese state we cannot afford to pay for that, both economically and politically,” said Albert Kostanian, a key member in the political bureau of the Kataeb party. “Economically it would be like relieving the international community of responsibility, especially with regards to going back to Palestine.”

He added: “We feel that this new law has opened 90 percent of the labor market for the Palestinians, and the areas in which they will strongly compete with the Lebanese are still closed, so we feel that [the new law] is quite clear, and that it should not be extended anymore.”

Hanafi called these “unfounded arguments,” noting that if worries about naturalization were the actual concern, then the new laws could be made conditional on the Palestinians eventual return to Palestine.

“First, it is a class issue — economic exploitation — the Lebanese are happy for Palestinians to work for cheap labor,” he said. “Secondly, it is a moral issue; this is a racist society, and there are right wing parties who have a racist agenda against the Palestinians.”

The National Social Security Fund

One point of contention that was rectified within the new legislation was that of the National Social Security Fund (NSSF). According to a report published earlier this year by the Lebanese-Palestinian Dialogue Committee, “Palestinian refugees who obtain work permits are required to make payments to the Lebanese social security system. They are, however, not entitled to receive social security services, as this would require reciprocity according to the Lebanese law.”  Coupled with the fact that “many employers in Lebanon are resistant to make additional social security payments for Palestinian refugees and generally prefer to employ Palestinians illegally,” both employer and employee had little incentive to follow the legal channels, according to the report. 

Article 5 in the new legislation addressed the issue of social benefits, calling for a separate account within the NSSF purely for Palestinian employees, yet specifically stating: “Those included in the provisions of this law do not benefit from contributions to the sickness, maternity and family allowance funds.”

Kostanian said it was necessary to separate the Lebanese fund from the Palestinian one: “The first draft referred to familial aid, but this we felt was already being taken care of by UNRWA, and should therefore stay with UNRWA.”

Employed but illegal

While Palestinians are technically prevented from working in syndicated professions, many are in fact working in these jobs within Lebanese companies, but when doing so illegally, they have little in the way of job security, health benefits, paid sick leave, end of service benefits or paid holidays.

According to a study presented earlier this year by Sawsan Abdulrahim, assistant professor in the department of health promotion and community health at AUB, exclusionary policies have not been successful in barring Palestinians from participating in the Lebanese workforce, and that generally, Palestinians who are employed receive lower wage returns on their education and occupation in comparison to the Lebanese. Lebanese men with a secondary education receive on average a wage of 3,670 LL ($2.45) per hour, while Palestinian men with the same education receive an average of 3,030 LL ($2.02) per hour.

A 2006 study by FAFO, a Norwegian non-governmental organization, found that only 11 percent of Palestinian workers had written contracts, and the average hourly wage was 2,600 LL ($1.73). It found that 44 percent of Palestinians working in Lebanon made less than $2,400 a year, compared to 6 percent of Lebanese. Unemployment among Palestinian refugees, according to the International Labor Organization (ILO) data present in 2007, is around 10 percent.

This number can be misleading, however, as it counts only those who are actively looking for a job but are unable to find one.

Once “discouraged workers” are taken into account — meaning people who want a job but are not actively seeking out work because they do not think they would find any — the Palestinian refugee unemployment rate jumps to 25 percent.

Nearly twice as many women are unemployed as men and 43 percent of all the unemployed were under 25 years old.

Those Palestinians that are working often have to resort to tweaking the truth to get their jobs; FAFO found that Palestinian professionals, for example, often practice under the term ‘judicial consultant’ within a Lebanese law firm, or Lebanese doctors sign medicine prescriptions written by Palestinian doctors.

“They are living in this country, and they don’t really have a choice,” said Nawal el-Ali, coordinator for the Najdeh Association’s Right to Work campaign. “If the Palestinians are not working, how are they going to live? As thieves? Or terrorists? Is this what Lebanon wants?”

According to Salvatore Lombardo, director of UNRWA affairs, labor rights for the Palestinians are just as beneficial for the Lebanese as they are for the refugees: “Palestinian refugees contribute to the Lebanese economy through active engagement in the labor force and economic consumption,” he said. “In numbers, they also represent a relatively small group occupying sectors of the economy where they compete with other foreigners or with a minimum Lebanese workforce.”

He added that the difference between Palestinians and other foreign workers is that Palestinians spend their income inside the country, and remittances they receive from abroad are also spent in Lebanon.

Hanafi also pointed out that should Palestinian professionals be allowed to work legally, their impact would be minimal, given the fact that they are already participating in the labor market — changing the labor law would mostly legalize them in positions they already occupy.

Educated for what?

Abdel Hafiz Ghozlan, 19, born and raised in Shatila refugee camp, has just finished high school and is applying to university. He says he has already faced discrimination due to his nationality: Having applied for a kitchen job with a large international fast food chain in Beirut, the manager rejected his application, telling him that the position was reserved for “Lebanese nationals only.”

“I want a degree because I hope that by the time I graduate, the law will have changed and I’ll be able to get a job,” said Ghozlan, making him one of the determined few to continue with his education. FAFO’s 2006 study found that 74 percent of the Palestinian labor force in Lebanon has less than a secondary education, and only 5.5 percent have a university education, in comparison to 20 percent of Lebanese. Only one in 10 Palestinians aged 10 years and older have completed secondary education; just one in 20 have completed anything higher.

“Few children dream of becoming unskilled laborers,” said UNRWA’s Lombardo. “Sadly, Palestinian refugees who hold university degrees often find themselves doing just that because they have been denied the right to work… When parents and children see this unjust reality, it crushes all belief in education for them and leads students to learn skilled labor at an early age.”

Indeed, FAFO’s report noted that 40 percent of Palestinian students who drop out of school early do so due to “de-motivation.”

“This lack of motivation stems from the daily struggle of camp life,” said Lombardo. “Dire poverty leads to child labor and early marriage. Those who remain in school face overcrowded classrooms, small shelters with big families and endless questions as to prospects for their future.”

Wissam al-Hassan, an 18-year-old butcher from Shatila who left school after the third grade, said those who do pursue higher education often end up as the examples of its futility. “They study, they graduate from school and university, and then what? They sit and do nothing,” he said. “Knowing that we can work here with our rights would push people to stay in school.”

What happens tomorrow?

With the passing of the new legislation, the Kataeb’s Kostanian says the Palestinians now have to fulfill their end of the bargain.

“We feel that the next step is the Palestinian duty towards Lebanon,” he said, specifically referring to the issue of arms within the camps. Improved Palestinian living standards, said Kostanian, go hand-in-hand with the security of the Lebanese state.

“We need to regulate security within the camps and really enforce the Lebanese laws by allowing the army to deploy peacefully in the camps,” he said. “This will be better for the Palestinians as well.”

Jumblatt, on the other hand, says the next move involves shuffling further along the road of Palestinian civil rights and tackling the issue of ownership and land.

“The next step will be the right to property; these people, even those who are refugees on our land, have a right to have a minimum level of belonging,” he said. “We allow foreigners unlimited access of land to buy under the pretext of enhancing investment; why can’t we give Palestinians the same right to inherit a house, for example?”

For AUB’s Hanafi, the issues lay within the attitudes of the Lebanese society, as currently the Palestinians face an uphill struggle against discrimination. Rectifying the situation involves an increased amount of pressure on political parties across the board, coupled with campaigns backed by civil society movements.

“If things remain the way they are, it will make the Palestinian community hostile towards the host country and its legal framework,” warned Hanafi. “This is not good. The Lebanese need to see how to integrate and not discriminate.” Many young Palestinians, however, see little cause for hope.

“Living in these conditions shatters your dreams,” said Khalife, the construction worker from Shatila. “There is nothing to look forward to, and no one has the opportunity to leave the camp. This country kills you.”

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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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