Society

The East Moves West

by Paul Cochrane
written by Paul Cochrane

Labeling this region as the “Middle East” or the lesser used “Near East,” is standard practice in the West, but the region can equally be called “West Asia,” the opposite end of a vast landmass that spreads from Vladivostok and Shanghai all the way to the Bosporus and the Suez Canal. This designation makes sense given the area’s historic ties and the ancient Silk Road trading routes.

Today there is a new Silk Road, with flourishing two-way traffic between the rest of Asia and the continent’s eastern end, particularly Gulf Cooperation Council (GCC) countries and Iran. In Geoffrey Kemp’s book “The East Moves West,” he sets out the case for this burgeoning relationship and where it is likely to go. Kemp, an American foreign-affairs think-tank director, adeptly steers the reader through the ties that bind Asia together, from the geo-strategic importance of Central Asia to the big players: China, India, Pakistan, Japan and South Korea, covering economics, energy, politics, military ties and infrastructure projects. 

It is a relationship that is clearly centered on energy supplies, with some 40 percent of China’s oil coming from the GCC, India receiving 45 percent of its oil from the Middle East, and Japan reliant on the region for 90 percent of its oil. Such reliance on the region’s resources has resulted in mutual dependence.

With Eastern economies in ascendancy while the West hobbles along, this relationship is set to flourish, with significant economic and political ramifications. Energy dependence on Iran, for instance, has been crucial in allowing Tehran to survive the economic sanctions imposed by America and Europe to curb its nuclear program.

The big question, as Kemp sees it, is whether Eastern Asia’s role in the region will grow beyond the traditional buyer-seller relationship. Economically, it has started to change over the past five years, with Asian countries inking contracts worth $500 billion for infrastructure projects in the Middle East, while the GCC has invested more than $250 billion in East and South East Asia. Both East and West Asia want more.

Iran and Saudi Arabia have adopted a “look east” approach for market growth, while New Delhi considers the GCC, to quote India’s former commerce minister, “as part and parcel of India’s economic neighborhood.” The statistics only reinforce this. For India, the economic relationship with the GCC is more important than with the European Union, the Association of Southeast Asian Nations and the United States, totaling $86.9 billion (excluding oil) in 2008-2009.

The UAE is India’s jewel in the GCC crown, the country’s second biggest export destination and the Emirates’ largest importer, accounting for a third of its trade in the Middle East. With Indians making up 33 percent of the UAE’s population and 50 percent of its workforce (of which 25 percent are unskilled workers, 50 percent semi-skilled and 25 percent professionals), it’s no wonder the UAE labor minister said in 2007: “God forbid something happens between us and India and they say, ‘Please, we want all our Indians to go home’… our airports would shut down, our streets, construction…”

With the US flailing in Iraq and Afghanistan and its credibility shot in much of Asia, East Asia seems set to be the new player at the table. But so far the Asian nations have largely refrained from the political arena of the region’s western extremity.

As Kemp notes: “How long they can sustain their hands-off approach is questionable if…they get drawn into the messiness of Middle East politics at a time when the US becomes disillusioned by the burdens of hegemony.”

There are a lot of “ifs” in the book, but given all the certainties proclaimed by Washington of late in its future prognosis for the region, Kemp refreshingly gives plenty of room for thought about the potentials of the new Silk Road.

 

 

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Society

Putting the ‘sport‘ back into SUV

by Executive Staff
written by Executive Staff

Ever since the Porsche Cayenne debuted in 2003, it has faced a tough question: how to hold its niche in the luxury SUV market without jeopardizing the character of the Porsche brand.

Most critics and drivers agree that in terms of drivability and comfort, the Cayenne succeeded in meeting the public’s expectations. But seven years later, even though the Cayenne is now one of the company’s top-selling vehicles it still stands out as something of an anomaly in the Porsche family — like the one black sheep in a herd — and the company is looking for ways to bring it deeper into the fold. The new generation of Cayennes that entered the market this summer shows how Porsche plans to streamline this transition.

The bodywork of the Cayenne and Cayenne S Tiptronic, Cayenne Turbo, Cayenne Diesel and Cayenne S Hybrid all show noticeable development and look more in line with the Panamera — Porsche’s first four-door luxury Sedan — than their progenitors in the Cayenne line. The bodywork has taken a more forward-leaning, muscular design, incorporating elements of a sports car into what has otherwise been a utilitarian vehicle. 

But the changes to this new generation of Cayennes are not just cosmetic — far from it, in fact. The specs for the new Cayenne read like a user’s manual for the Hadron Collider: “Tiptronic S automatic transmission,” “Auto Start Stop,” “recuperation of the on-board network” and “variable overrun cut-off” are but a few of the highfalutin features the Cayenne boasts.

So what does this complex jargon mean when it comes to performance? In industry terms, 23 percent higher fuel efficiency than that of earlier generations of Cayennes. To put it colloquially: more bang for your buck. Like a lot of auto manufacturers these days, Porsche has enrolled itself in a serious weight-loss regime. They’re trimming excess mass wherever it can be found, shifting to lighter-weight materials — carbon fiber in particular — and pioneering intelligent technology to capture energy, conserve expenditure and transfer power to rechargeable sources. That process has shaved the new generation of Cayennes down by almost 200 kilos.

Easy on the gas

Fuel economy is particularly an issue as Europe prepares to begin enforcing stringent CO2 emissions caps and the United States mulls over its own fuel economy standards. Porsche’s response to this is the upcoming Cayenne S. Hybrid, the company’s first fusion gas-electric vehicle. In terms of mechanics, the company had been at pains to draw attention to its Tiptronic 8-Speed Automatic transmission, available in two of the new Cayenne models. The tiptronic transmission operates in generally the same manner as an ordinary automatic transmission, but offers the driver a manual override feature to force-change gears on their own. This gives the driver control over faster acceleration, engine breaking, gear holding going in and out of curves, downshifting before passing or early upshifting for cruising. Veteran Porsche drivers may wonder why the new Cayennes don’t include the dual-clutch transmission of the Carrera and Panamera, which has proven a favorite feature among drivers; the company claims that the dual clutch module does not fit size-wise with the Cayenne’s mechanical make-up.

Tardis effect

The new Cayennes are only slightly larger, but there’s a noticeable difference in space from inside the vehicle. A number of subtle interior adjustments, including a slight tip to the angle of the passenger seats, gives a little more legroom in the already ample interior.

Do the new generations fundamentally redefine the model’s personality? No, probably not. But they do suggest a clear direction that the Cayenne, and Porsche in general, is taking. The new line is increasingly efficient, and has taken notes from other Porsches from both ends of the spectrum, adding subtly to drivability, luxury and power. While priority has clearly been given to a higher standard of fuel economy, it is also clear that Porsche doesn’t want to lose touch with its sports car roots, and is moving forward with a clear vision of a unified image for all its cars, whether they be SUV, sedan or sport.

 

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Society

Cash Stash

by Sam Tarling
written by Sam Tarling

I was born a collector,” says Abdo Ayoub, the man who has put together the world’s largest collection of Lebanese Lira notes. Since 1985 the former Sleep Comfort co-owner has collected more than 500,000 individual banknotes, all issued as legal tender in Lebanon between 1920 and the present day.

As a youngster he hoarded his weekly Tintin newspaper comics before moving onto stamps, filling some 800 albums. Ayoub also holds one of just 23 complete Michelin Guide collections, dating back to 1900 and including an ultra rare edition issued by US military intelligence in 1939. The last full collection sold for 60,000 euros.

Valuing Ayoub’s cash cache would be a mammoth task, but with some of his more rare notes worth more than $15,000 alone, the figure is likely to be staggering.

This decidedly Lebanese collection comes from surprisingly cosmopolitan sources, including archives at the Banque du France, auction houses in London and paper money conventions in Italy and Belgium.

The majority of the collection is carefully catalogued and stashed in neat boxes around Ayoub’s cavernous library. Not content with just one example of each of the lira’s many manifestations, the consummate collector has hundreds of each, preserved sequentially in neat display books. Dusty stacks of notes still lie on the library floor, awaiting their carefully catalogued home.

Although the most recent addition arrived just a month ago, Ayoub says that after 25 years he’s winding down his collecting and looking to sell some 15,000 of his rarest specimens to a bank or museum.

One hole remains, however: a 1920 LL100 note, worth around $100,000 today due to its immense rarity. “I don’t think we’ll ever find that one,” says Ayoub. “It’s already 90 years ago.”

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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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