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What lies beneath

by Paul Cochrane
written by Paul Cochrane

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

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

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

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

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

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

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

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

PAUL COCHRANE is the Middle East correspondent for International News Services

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Yes is a four-letter word

by Peter Grimsditch
written by Peter Grimsditch

Campaigning for this month’s referendum on constitutional reform in Turkey has not only aroused the expected political passions, but also reduced an Istanbul bride to tears on her wedding day.

If the proposals are approved, Parliament for the first time will be involved in appointing members of the Constitutional Court. Three of the 17 members would be elected by a parliamentary majority, effectively allowing the ruling Justice and Development Party (AKP) to select candidates.

The AKP sees the Constitutional Court as an elitist, undemocratic hangover from the days of military coups. The party’s spokesmen say that reforms will modernize the judicial system and bring the country into line with European Union recommendations. Anything that helps Turkey’s tortuous accession to the EU must be a good thing, they argue. Well, not quite, according to referendum opponents, who come from almost every quarter except the AKP.

Kemal K?l?çdaro?lu, leader of the Republican People’s Party (CHP), argues that a two-thirds majority should be mandated since this would broaden the parliamentary views required to elect a member of the court. He is also concerned that the opportunity has been missed to remove the Minister of Justice from the Supreme Board of Judges and Prosecutors, which would emphasize the separation of powers between politicians and the judiciary.

But more important than any high-flown political philosophy is one of few things shared by both the AKP and the CHP — deep mutual mistrust. The AKP could correctly point to the use of the Constitutional Court by the opposition as a tool to stymie moves that it doesn’t like but is unable to stop through democratic parliamentary means, such as the election of President Abdullah Gül. The opposition, meanwhile, suspects the AKP of having ulterior motives.

The AKP controls parliament and the presidency, leaving only the Constitutional Court free from its direct influence. In 2008, the court considered imposing a five-year exclusion from politics of Prime Minister Recep Tayyip Erdo?an, Gül and around 70 AKP members of parliament for Islamic activity incompatible with the constitution. The verdict was little more than a finger-wagging but it increased the AKP’s mistrust of the court, whose membership it now wants to broaden.

Voters are split down the middle. An opinion poll last month said 50.9 percent are opposed to the reforms, with 49.1 percent in favor — a marginal increase in the ‘anti’ vote from a poll conducted in July.

The referendum will be a harbinger for next year’s parliamentary polls, so winning has a huge secondary significance. But, according to Hurriyet Daily News, that clearly was not on the mind of Fatma Ormanc? last month. Despite being head of the AKP’s Women’s Branch in Beykoz, a district of Istanbul, Ormanc? was on a day off from politics when local mayor Yücel Çelikbilek performed her son’s wedding ceremony.

Çelikbilek, also an AKP supporter, received the traditional three replies of “evet” (yes) from the bride and groom, before adding: “I expect you to say ‘yes’ on September 12, too.” The bride’s father squared up to the mayor to complain about turning his daughter’s wedding into a political meeting. At one point, wedding guests intervened to keep the dispute from escalating into a fight. Even Ormanc? was not happy with the mayor’s political ad lib (she was also furious with the behavior of her son’s new father-in-law.)

The near-brawl in Beykoz followed a more peaceful nuptial political stunt 24 hours earlier in the distinctly secular confines of Izmir on the Aegean coast. Ediz Tat?, son of a local CHP mayor, and his bride, Vildan Sever, opted to say ‘I accept’ instead of the ‘evet’ increasingly visible on AKP supporters’ baseball caps.

Deniz Baykal, former head of the CHP and a fierce advocate of a ‘no’ vote, praised the couple’s refusal to say ‘yes’, even to each other.

A lawyer said the ceremony was binding as no law dictates brides and grooms must use the word “evet”. ?lkhan Elçin was quoted in Hurriyet as saying: “Marriage depends on being in front of a registrar, signing the book and expressing that you want to marry in an open way that everyone can understand.”

Marriages may be agreed to in an “open way that everyone can understand,” but that’s more than can be said for the upcoming referendum.

PETER GRIMSDITCH is Executive’s

Istanbul correspondent

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India opens up to Iran

by Gareth Smith
written by Gareth Smith

As President Barack Obama struggles for direction in Afghanistan, the prospect of reconciliation between the United States-backed government of Hamid Karzai and Taliban members has concentrated minds not just in Pakistan, which backs the idea, but also in Tehran and New Delhi. Iran’s deputy foreign minister, visiting New Delhi in early August said the two countries’ views on Afghanistan were “close.”

India is skeptical over Tehran’s desire to phase out US-led Western troops, but both countries want a stable, strong government in Kabul that can contain the Taliban. Iran and India have been wary of Sunni militants in Afghanistan since the US and its Saudi and Pakistani allies fostered a “holy war” against Soviet secularism in the 1980s. But Iranian ministerial visits to India in July and August focused not just on cooperation over Afghanistan, but on also improving economic links.

Iran and India have complimentary energy interests: India, which hopes for a sustained 8 to 10 percent growth despite meager energy resources, has long eyed Iran’s substantial oil and gas reserves — each the world’s second largest. It already imports around 14 percent of its crude from Iran, worth $11 billion annually. Such signs of trade and partnership go down like a lead balloon in Washington, which is pushing for greater isolation of Iran over its nuclear program. Back in 2006, Washington warned it would end nuclear co-operation with India if New Delhi did not vote in the International Atomic Energy Agency to refer Iran to the United Nations Security Council.  Since then, India has reluctantly followed the US lead, despite domestic criticism. Pressure from Washington has intensified under Obama, but so has Indian disquiet.

 Anticipating the latest US sanctions targeting gasoline supplies to Iran, the Indian private sector group Reliance Industries ended sales last year. But this summer New Delhi resumed talks with Tehran over the ambitious “peace pipeline.”  This project had been bantered about for the past decade, though India had dragged its feet under US pressure, pricing disagreements and worries over the transit route through Pakistan. In March the project morphed into an Iranian-Pakistani pipeline scheduled to pump at least 7.7 billion cubic meters (bcm) of gas each year from 2015 to 2040. Renewed talks to extend the pipeline to India show New Delhi is still hungry for what Iran claims would be 55 bcm of natural gas annually.

In return, Iran wants Indian investment in its vast but undeveloped South Pars gas field, and has targeted the state-owned Oil and Natural Gas Corporation Videsh (OVL) and the privately owned Hinduja group. Short of capital thanks to Western sanctions, Tehran needs some $200 billion to increase gas production from 0.6 bcm per day to 1 bcm by 2014. In August Iran stressed its desire to boost bilateral trade between the two countries from its current $15 billion, emphasizing India’s role in developing Chabahar port in Iran’s Sistan-Baluchestan province, which New Delhi sees as a major trade route that bypasses Pakistan into Afghanistan and central Asia. Iran seeks to raise the port’s annual capacity from two million to 12 million tons.

Chabahar is probably now the litmus test of Indian-Iranian relations, as Tehran may link Indian participation to wider co-operation. New Delhi has already helped finance a highway from Chabahar to Milak, on the Afghan border, where there is a crossing to Zaranj, in Afghanistan, to which India has laid a 213-km road from Dilaram, a major Afghan transport hub.

India is keen to develop the potential of this route. There is even speculation over an undersea gas pipeline to India, bypassing Pakistan, to supply Iranian and Turkmen gas.  Fresh Indian investment into Iran may irritate the US, but New Delhi cannot ignore new trade patterns in central Asia that are giving China access to Siberian timber, Mongolian iron ore, Kazakh oil, Turkmen natural gas and Afghan copper through roads, railways, pipelines and the Pakistani deep-sea port of Gwadar.

Gwadar, constructed with Chinese assistance and just 72 kilometers from the Iranian border, gives Beijing an economic edge over India and a military vantage point to monitor the US navy in the Persian Gulf and the Indian navy in the Arabian Sea.

Without access to Iranian and Turkmen gas, India will be short of energy. Hence New Delhi has reiterated its support for diplomacy over Tehran’s nuclear program. How all this squares with tighter US sanctions — much less US or Israeli air-strikes — remains to be seen.

GARETH SMYTH is the former Tehran correspondent for the Financial Times

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Society

Risk it

by Emma Cosgrove
written by Emma Cosgrove

Beirut has the unique ability to bend, shape and mold brand identity to fit its flamboyant clientele. When Hermes opened it doors in Beirut Souks, the brand’s tradition and timelessness suggested that it might not be as susceptible to the same affection for flash to which so many fall prey. But, once again, the city proved that few are immune to its call to opulent arms.

Never mind that the abounding platform stilettos sunk straight into the grassy sod laid especially for the opening on Hermes’s corner of Marfaa Street. Never mind that the generator powering the crane swinging an angelic dancer above the crowd was so loud that it drowned out the music played for the spectacle. And never mind that the restricted entrance and exit, due to Prime Minster Hariri’s presence, meant that the tree-enclosed soiree was packed like a can of extremely expensive sardines.

The July 30 opening of the Hermes boutique was an example of brazen one-upmanship that we all should have expected.

But the sheer scale of it all, the extravagance, the excess, and the obvious staggering cost begs the question: what happens after the party? When the guests have gone and Hermes’s executives go home to Paris, who will be minding the store and what happens if the worst comes around to downtown Beirut again?

Why would Hermes, and all the other luxury brands invading downtown of late, take the risk of having to close a store if Lebanon’s cancerous instability comes out of remission?

They do it because the risk is not their’s to take.

Most of Beirut’s monobrand luxury boutiques are franchises, Hermes included. This means the location, and entire inventory of the store, is financed by the local franchise partner. Every item is bought and paid for before it hits the floor, which is why many developing markets, often being franchise-heavy, feature products at a significant mark-up.

So if any of downtown’s gleaming luxury palaces were forced to close their doors, it is local companies who would lose, with the brand escaping conflict with nothing more than a PR scratch. This is not to say that the embarrassment and public relations snafu of closing a store means nothing to an industry whose value is rooted in image. Luxury brands care what happens to their products, and especially their name.

On the day of the opening, Hermes International Chief Executive Officer Patrick Thomas told Executive that he chose Galop SAL as Hermes’s franchise partner out of many interested parties for its “long term” vision and singular focus. Michele Garzouzi, Galop’s president, said that she was not interested in offering, as many regional luxury franchises do, a smattering of trendy items and iconic pieces. She offered the full line and it nearly sold out in the first weekend.

And though her savvy buying strategy and dedication to Hermes — Galop’s only luxury brand — is proof of her long-term thinking, she has no contingency plan for Hermes’s fate if a conflict should crop up.

“You cannot plan for it really,” said Garzouzi. “When you have such an unstable situation you can’t really have a ‘Plan B’.”

Garzouzi is not alone in knocking on wood and hoping for the best; everyone hopes Lebanon will have no need for contingencies. But frankly, we should all stop being so grateful that these luxury titans are opening in our tailor-made shopping havens. We’re spending the money and taking all the risk, so bring on the absurdly extravagant parties downtown — we’ve earned them.

 

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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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