Feature

Can Lebanon leave the dark ages?

by Executive Editors
written by Executive Editors

Today the Lebanese pay for electricity four times: when the bill collector comes knocking, when the government has to use money collected from the citizens or borrowed in their name to cover losses in the sector, when they pay for private generation, and when the television fizzles out due to power surges.

The situation has persisted since the end of the civil war, with plans to reform the sector coming and going as quickly as Lebanon’s post-war governments.

As such, it would be easy to dismiss the most recent plan issued by Energy Minster Gebran Bassil and approved by the Council of Ministers, Lebanon’s cabinet, as just another chapter in the long running saga that is Lebanese electricity. But given the relative stability of Lebanon’s political scene of late and the broad nature of the new plan, at least comparatively speaking, this time could be different.

The five-year plan, which was intended to start at the beginning of this year, allocates some $4.87 billion to reforms aimed at halting power rationing by 2014 and bringing the sector into the black by 2015, plus a further $1.68 billion investment for the “long term.” 

At present, between generation and imports Lebanon effectively has 1,500 megawatts (MW) of electrical capacity, while average demand ranges between 2,000 and 2,100 MW, peaking in the summer at 2,450 MW. To accommodate for expected growth in demand, the new plan proposes to increase generation capacity —  which is technically at 1,875 MW but cannot be fully utilized due to technical inefficiencies — by 47 percent to 4,000MW. Demand for electricity between 2008 and 2009 grew by 7 percent, up from 6 percent growth the previous year.

To fund the new plan, the private sector will be asked to put up $2.32 billion to take part in the production and distribution of electricity, while the public sector will retain its infrastructure and control the transmission of electricity from plants to local districts. The rest of the money sought to implement the reforms is to come from the government ($1.55 billion) and international donors ($1 billion). The initial figure does not include the longer-term plans, which are contingent on the private sector shelling out a further $1.2 billion and international donors putting up another $450 million.

“The plan is beautiful, the minister knows where he wants to get,” says Albert Khoury, deputy general manager of E-Aley, an electricity concession that distributes electricity to the district of Aley. “But the devil is in the details.”

Part of Khoury’s reservations stem from the long-standing debate between the energy ministry, the concessionary companies, and Electricite du Liban (EDL), Lebanon’s state-owned electricity provider. The conflict centers on the rate at which the state sells to the concessions and how much the government spends producing electricity, epitomizing just how fiendishly difficult of a task it is to unravel and reshape Lebanon’s medieval electricity sector.

According to Bassil, electricity costs the government $0.17 per kilowatt hour (KWh) to produce and is sold to the concessions — which serve the districts of Bhamdoun, Aley, Zahle and Byblos — at a loss-making rate of $0.05 per KWh. It is then sold onto consumers at around $0.08 per KWh.

Khoury disagrees with the latter figure, protesting that “the government forces us to sell [to consumers]” at between $0.02 per KWh and $0.05 per KWh, which corresponds to the existing tariff structure at EDL, for power consumption of up to 300 KWh monthly.

A World Bank paper that addressed the situation in 2008 stated that “it is unclear how this agreement is regulated and by whom.” What is clear, however, is that the government is losing money to the tune of $20 million per year based on estimated average sales of between 900 to 1000 gigawatt-hours annually, according to the World Bank. This figure is estimated to rise to $40 million per year by 2015 if the situation persists.

“Gebran Bassil is attacking us and he’s misunderstanding the situation,” says Elie Bassil, chairman and managing director of Electricite du Jbeil, the concession in the Byblos district. “They say we’re buying electricity for low prices. Meanwhile, our overhead is increasing. If the cost of energy increases, we’ll be forced to shut down.”

With the government and the World Bank saying one thing, the concessions saying another and no one seeming to know exactly how the whole thing works, the concessionary issue alone would be enough to stymie reform. But it’s just the tip of the iceberg when you consider that last year alone, the government had to pay out $1.5 billion, or around $375 per person, to cover the deficit of the sector.

“Gebran Bassil is attacking us and he’s misunderstanding the situation… If the cost of energy increases, we’ll be forced to shut down.”

Paying the real price

For the electricity sector to even become economically feasible, let alone become an attractive investment to the private sector, supply and demand curves will need to reach equilibrium.

At present the price floor set by the existing tariff structure — which was set when a barrel of oil cost $21 dollars in 1996 and has remained unchanged since — has prevented this from happening. The power to change the tariffs lies with the cabinet, which has been unable to address issue because of political squabbling and the sensitive social implications.

The pre-tax tariff structure for low voltage consumption, the type used by most residential consumers, is divided into six price categories for every 100 KWh consumed per month. The lowest amount charged is $0.02 per KWh and the highest is $13.3 per KWh for consumers who used more than 500KWh a month. Public administrations and “handicraft and agriculture” industries pay $9.33 and $7.67 per KWh, respectively. 

Under both the scenarios envisaged in the current plan, tariffs will start to rise in the third year. Under the first scenario, tariffs will be increased on average by 43 percent to break even in 2015; the second will increase the price of electricity by 54 percent to start making money in 2015. However, both of these scenarios face potential hurdles.

“The amount that is being asked from the private sector will not come, for the simple reason that tariffs will not change for three or four years,” says Hassan Jaber, energy consultant and vice president of The Lebanese Association for Energy Saving and for Environment (ALMEE).

Asking the private sector to enter into an unprofitable industry is in itself a tall order, let alone one whose eventual profitability is contingent on factors such as a sustained period of peace and political stability, donor willingness, streamlined political decision making and a steady supply of hydrocarbons.

However, Minister Bassil believes that as the private sector is only being asked to provide about a third of new power generation, the impact on retail costs will be limited. Within a few years of the plants being built, the government will be able to make up the difference through the planned tariff increases, he claims.

Ziad Hayek, secretary general of the Higher Council for Privatization (HCP), the government body in charge of planning, initiation and implementation of privatization programs says that these agreements should not be thought of as all debt or all equity but rather a combination of the two. This, he believes, might make private sector involvement attractive to a certain degree. 

One electricity expert described EDL’s situation “as if you cut off a man’s legs and then tell him to run”

The specter of EDL

Supposing all the pieces related to additional generation fall into place, the existing electrical framework will still have to be managed by the EDL, which employs “2000 contractual and daily workers, many of whom are political appointees and unqualified workers,” according to the plan. As to which political parties are impeding progress, “you can never be sure,” says the energy minister.

EDL is supposed to have 5,027 full time employees, but today 3,125 of those posts (63 percent) are vacant, and with an average staff age of 52, the organization suffers from an attrition rate of around 8 percent every year due to retirement. One electricity expert who spoke on condition of anonymity described EDL’s situation “as if you cut off a man’s legs and then tell him to run.”

According to ALMEE’s Jaber, EDL is in such disarray that it “has 200,000 [electricity] meters missing and they don’t have the money to buy them, which means you have 200,000 users that are paying a standard price.” This and other instances where people steal or underpay for electricity are classified as “non-technical losses” and are estimated to constitute half of the $300 million in EDL’s operational losses each year, according the energy ministry.

Uncollected bills, a much heralded and politicized argument for the decrepit nature of Lebanese electrical infrastructure, account for only 12.5 percent of revenue loss; technical losses constitute around 37.5 percent.

Getting the private sector involved in these areas looks like it will be a tough sell for the government. “In some places we cannot reach more than a 5 percent rate of collection, so how will the private sector come in?” asks Bassil.

What adds insult to injury is that if existing electricity legislation passed in 2002 was applicable, EDL as we know it today would not exist. Law 462 mandates that the company be turned into a corporate entity, which would result in the management having control over day-to-day business functions such as hiring and firing of staff, and eventually be partially sold to the private sector in a period of less than two years. Eight years later, not one part of the law has seen the light.

“If someone wants to hinder the process of corporatization, politically they can because it is mostly related to the employees,” says Bassil, whose plan allocates $15 million to reforming human resources at EDL.

“In some places we cannot reach more than a 5 percent rate of collection, so how will the private sector come in?”

Legal issues

Rather than amending law 462, the new plan calls for setting it aside and creating a new structure for the private sector to participate in during the interim period of the plan’s application.

The new arrangement will adopt the principle of Independent Power Producers (IPP), which, in Lebanon’s case, allows private sector players to bid for contracts to enter into Public Private Partnership (PPP) arrangements with the government.

However, a PPP law will have to be passed before any private production of electricity can take place.

Moreover, legislation covering a law for new power plants, effectively breaking the monopoly of EDL, will also have to be passed either as a law on its own or as a part of the PPP law. A draft PPP law has already been submitted to parliament by Amal MP Ali Hassan Khalil and is currently making the rounds in the halls of government.

Applying Law 462 would mandate the unbundling of the sector into production, transmission and distribution segments, which must be up to 40 percent privatized within two years through an international auction. Notably, the plan does include the corporatization of EDL, which should be completed by the end of the third year of implementation at a cost of $165 million.

Having committed to apply the corporatization part of Law 462, Bassil’s position, and ostensibly that of the cabinet who ratified the minister’s new plan, is that Law 462 will be ignored until after the new electrical regime is in place.

“It is fair to say that the minister is not interested in implementing Law 462 as it is because his concerns center on the creation of a regulator [Electricity Regulatory Authority],” says the HCP’s Hayek, whose permanent members are the ministers of finance, economy and trade, justice and labor — all of whom are part of the same political camp opposed to Bassil’s.

Having a regulator would necessarily take away many of the powers of the minister, who states in the last words of the plan: “Exceptional powers should be  given to the Minister of Energy and Water and the Council of Ministers.” In his previous post as telecom minister, Bassil was constantly at loggerheads with the Telecom Regulatory Authority over prerogatives in the sector, something he says he wants to avoid while the energy plan is being implemented.

“We would be mixed up with two sets of prerogatives and have EDL still working and fixing the price. We need to prepare the ground for the ERA to come in later on and see what it will need in terms of regulation, then we will decide when to launch it,” he says.

Many fear that if sectarian leaders are allowed to enter the distribution market they would increase their influence over their constituents

Regulation or sectarianization

Without a regulatory body to uphold the general rules and regulations of the sector, the country and the private sector risk having any plan annulled or changed when a new minister comes in. The constant shuffling of ministers has long been blamed for the discontinuity of policy and reform in the sector; since the beginning of 2008, Lebanon has had three energy ministers.

“Regulatory authorities allow us to transcend the individualization of power, especially in sectors that involve the provision of services because they should not be politicized,” says Hayek. 

Another area where a regulator could prevent undue influence is in the distribution sector. Many fear that if local and sectarian leaders are allowed to enter the distribution market, as is being proposed under service provision arrangements, then they would have control over power to local populations, in effect increasing their constituents’ dependence on them.

Under the current plan, three scenarios have been proposed for the break up of Lebanon’s energy distribution into 15 zones. Scenarios one and three have non-contiguous parts, which could make any assessment of individual service providers’ performance difficult, according to Hayek.

The break up of the country in the second scenario seems loosely based on the geographical distribution of Lebanon’s major sects. According to a source involved with the negotiations with foreign funders, European Union representatives working in Lebanon on infrastructural reform are “not happy at all” with this scenario and will have reservations when asked for funding if this sort of distribution is adopted.

“The fewer regions there are the better because these regions should not become local fiefdoms,” adds Hayek. “Once you have vested interests in companies managing these regions, and if money comes to the hands of influential people, we will never be able to reform further.”

Bassil rejects the idea that he formed the areas on the basis of a sectarian break-up and says that the only consideration was the current structure at EDL.

He also added that he has 12 other scenarios that could be employed, giving the feeling that the plan is more of a “roadmap,” as Jaber calls it, than a detailed plan.

Some, however, believe that Lebanon’s fractious sectarian nature makes this kind of arrangement a more viable option than global best practice.

Although Chafic Abi Said, an energy consultant and former director of planning and studies at EDL, also disagrees that the plan was to break up distribution along sectarian lines, he says “it ought to be [this way] because people will stop stealing if they know, for instance, that Hezbollah in a certain area is responsible for the electricity.”

“In the Chouf during the war they were paying [the] Jumblatts’ civil ministry and it was running because Jumblatt was taking care of it,” he adds.

“Success requires continuity of policy and working together, and the second one is more important. We will all, the minister included, succeed or fail by the measure of how well we work together”

Need to regulate

Another concern is political interests vying for pieces of the generation portfolio that will be up for grabs. Currently there is little to stop influential politicians and their acolytes from using their favorable positions and economies of scale to offer bids that undercut regular market players.

For instance, Prime Minister Saad Hariri and his allies already control the Sidon dump and garbage collection in the greater Beirut area, making them prime candidates to bid for the waste-to-energy project on offer.

Amal and Hezbollah’s influence in the south and the former’s history with the Litani River Project also put them in a good position for the plan’s private-sector hydropower offering. In fact, the former head of the Litani River Authority, Nasser Nasrallah, became an Amal MP in 2005 shortly after leaving the post, according to a source who spoke to Executive off the record.

“I don’t see a problem once we do a transparent tender for a company to win,” says Minister Bassil. “If it is politically backed or not, it is not my problem. My problem is to get the best price, and if we don’t get the best price I won’t accept to proceed with the IPP.”

Better than nothing

For all its potential faults, the plan to reform Lebanon’s most outdated sector can be seen as progress of some sort, considering that this is the first time since the Paris III reform initiatives that a real overhaul of the sector has received the official stamp.

The promise of that earlier reform plan has today faded away, with some $3.8 billion in pledges tied up because Lebanon’s policy makers are not on the same page.

The current electricity reform plan will also need the cabinet, parliament, the HCP and the energy ministry to work hand in hand to rid the Lebanese of what is perhaps the greatest impediment to becoming a modern state — the stalled national budget.

Before any investments can be made this year the national budget, which has eluded the government for the past 5 years, will have to be passed by parliament and continue to be passed for the next five years. In what may be a telling sign of things to come, the finance ministry has announced that they will be proposing the 2011 budget this month, even before the last budget has been passed.

“Success requires continuity of policy and working together, and the second one is more important,” says Hayek. “We will all, the minister included, succeed or fail by the measure of how well we work together.”

If they can’t find a way to do that, Lebanon’s electricity deficit will only increase, meaning in the years to come it will be ever more common for the Lebanese to be applying their make up by flashlight and cooking by candlelight. At least they will know who to blame, that is, of course, if they can find them in the dark.

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Editorial

Power over the people

by Yasser Akkaoui
written by Yasser Akkaoui

When Energy Minister Gebran Bassil announced his blueprint for electricity reform, he started his presentation with the phrase “itafaqna,” or “we agreed.” Whenever our so-called leaders use this, something is not quite right. More often than not it hints at conspiracy rather than cooperation. And so, the worrying absence of a mechanism of private sector involvement in the draft proposal and only a hint of the creation of a regulatory body to see that the plan outlives the minister’s term came as no surprise. What was present, however, were clues that Lebanon’s future electricity had been ‘allocated’ along troublingly familiar lines, with proposed regional networks following the county’s traditional power bases.

We were told of plans to implement wind power (presumably in the north), waste power (presumably close to urban areas) and hydroelectric power (presumably in the south). A student of Lebanese politics 101 will tell you how that particular pie will be carved up. There was no mention of solar power, despite Lebanon being blessed with nearly 300 days of sunlight every year, but then again there was probably no political incentive.

 Where does one begin? The obvious conclusion drawn by a reader unfamiliar with the way things work in Lebanon would be that this is a shocking conflict of interest. How can those who determine policy and represent our best interests be allowed to exploit national assets for personal gain at the expense of those they serve? In truth, the notion of separating political and economic interests is too sophisticated for a nation that, despite its outward worldliness, is still a feudal backwater.

Executive may be a voice in the wilderness but we will use it anyway. If the government wants to behave like a government, it must ensure that any PPP, or Public Private Partnership, be conducted with utmost transparency and be listed on the Beirut Stock Exchange, allowing the public the right to a share in a national utility.

The electricity sector must not be allowed to turn into an opaque entity that sells power to the state, which in turn levies crippling taxes and pockets the proceeds, which in turn get mismanaged… in the dark.

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Comment

Sanctions stalk Iran’s free market

by Gareth Smith
written by Gareth Smith

As Iran’s 2005 presidential election approached, a broker active in Tehran’s stock exchange was downbeat. “Pessimists look at the elections and see no new ideas and no new faces,” he told me. “They worry that pressure from outside means tighter rule at home. And that, in turn, means more bad politics, more bad economic policy and no markets.” Five years later, his words appear prophetic. Expanded economic sanctions imposed by the United States and — to a lesser extent — the United Nations have curtailed Western investment in Iran’s economy, strengthening the role of the state. The conservative president Mahmoud Ahmadinejad has presided over a crackdown on the reformist opposition and reversed the sluggish economic liberalization that took place under the previous president, Mohammad Khatami. Strange, then, that the Tehran stock exchange (TSE) should be at record levels, with the most-quoted index, Tepix, reaching 15,361 in the third week of July, above even the bull market that peaked at 13,882 in late 2004. But today’s “boom” at the TSE is very different to 2003 and 2004. In those days, expatriate money was flooding back, feeding rising prices in stocks and real estate. At the same time, private banks were expanding, Western energy companies were signing deals for developing Iran’s oil and gas resources, and Tehran was in talks with the European Union over its nuclear program.

The current rise of stocks in Tehran takes place in an exchange more and more dominated by state, or quasi-state bodies, which have proved adept in exploiting the Ahmadinejad government’s privatization policies. Funded to a greater or lesser degree by oil revenue, the state sector is far better placed to survive sluggish economic growth, currently at 2 percent according to the International Monetary Fund. The retirement fund of the Revolutionary Guards was also involved in the consortium that last year bought a 50 percent plus one share stake in the state-owned Telecommunications Company of Iran (TCI).

“The government and quasi-government bodies have made the TSE far more of a co-operative than a competitive game,” an Iranian economist told me. “As a general rule, in developing or risky economies cash dividends are more prevalent [than retained earnings] and pay-out ratios higher. Buying and selling stocks can help increase an extraordinary income to make up for declining profits from normal businesses. And of course, we should not forget that high oil revenue over recent years, despite the falls since 2008, has built up greater liquidity and that there are a limited number of investment opportunities in Iran.” Isolation cuts both ways, and sanctions make Iranians reluctant to invest abroad.  Government and quasi-government bodies are especially cautious. Another factor in the bourse’s boom, said the economist, was a perception that political unrest after last year’s disputed general election had died down: “The surge in the TSE began around five months ago as people perceived an apparent stability after nearly a year of uncertainty.” The buoyancy of the Tehran stock market has also attracted liquidity from falling markets in the region and elsewhere. Turquoise, an investment firm majority-owned by the London Stock Exchange, offers an Iran equity fund and has described the TSE as “one of the most under-valued emerging markets in the world.”

Traders detest the growing politicization of the Iranian economy. Many Western media outlets described last month’s protests in a Tehran bazaar against tax rises as a potential return to the strikes that helped topple the Shah in 1979. On the other hand, Hussein Shariatmadari, editor of the leading conservative newspaper Kayhan, recently wrote that officials were slow to take action against “a handful of prosperous capitalists” in the bazaar. Shariatmadari has been a strong supporter of Ahmadinejad and is clearly in no mood to pander to advocates of lower taxes or market liberalization.

Across the board, sanctions weaken the private sector. If the US is successful in blocking the insurance of goods being transported in and out of Iran, then the government may well take over the responsibility. 

As the broker said back in 2005, “more bad politics, more bad economic policy, and no markets.”

GARETH SMYTH is the former Tehran correspondent for the Financial Times

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Society

“Those who tell the stories rule society”

by Mark Helou
written by Mark Helou

The above quote from Plato has never rung more true. At a time when perception is stronger than reality, the people who can tell the stories and influence public opinion are now as powerful as the strongest armies in the world. Heads of media conglomerates are feared and even revered by most heads of state and politicians, who are fully aware that they can ‘make or break’ them.

The power of the media today is such that it can even make or break the image of a whole country. With the proliferation of 24-hour news, satellite TV, social media and the Internet, influencing people’s perceptions of a country has never been easier. Inhabitants of the “global village” are continuously subjected to a stream of movie and TV productions that also contribute to forming numerous stereotypes and images, which they end up perceiving as reality.

 

This is not to say that motion pictures and television are the only, or the most influential media channels, but they are often the channels most able to transcend linguistic, ethnic, social, and cultural barriers. Whether you are watching a Charlie Chaplin or a Steven Spielberg movie in English, Spanish, or Chinese, chances are, you are going to understand the messages behind it and sub-consciously pick up and form what you believe are your own ideas and perceptions.

How a country is perceived by investors and visitors can make the difference between economic prosperity and stagnation – especially for a state such as Lebanon, which is eager to attract investment and rebuild its tourism industry as an economic backbone.

A nationwide thinking process around this issue is all the more relevant today, as Lebanon is at the threshold of an extremely promising touristic season, confirming the country’s potential as a destination of choice for tourists of all nationalities. Its image should thus be optimized to take full advantage of this potential. 

Sadly, the media – especially Hollywood – continues to portray Lebanon as a land of war and violence, perpetuating an image of the country as being unsafe, dominated by extremists, or a haven for terrorists. There are many examples of Hollywood movies such as Syriana, Spy Game, Naked Gun and, more recently, From Paris with Love, in which silver screen stars use Beirut as a metaphor to express a state of mayhem and anarchy. While we might think that this is only done in the context of a movie, and will not have any lasting effect, emphasizing again and again that same message will ultimately affect global opinions of Lebanon, especially in the many without first-hand knowledge.

Shorthand for destruction

The same applies for other media outlets such as TV and newspapers, where Beirut has been constantly used as shorthand for destruction and anarchy. Whether there is intentional malice behind it or not, this further confirms the fact that Beirut remains a byword for chaos. This originated with the stream of horrific images that came out of Beirut during the Lebanese Civil War. Among the first conflicts in the era of 24-hour news and live broadcasting, and also involving foreign deaths and hostages, the 15-year conflict seems to have burned an indelible mark on the city’s reputation.

The fact that Beirut was a sophisticated westernized city in the eyes of the international community made its rapid descent into mayhem all the more striking, rendering it a sensationalist example of a ‘good thing gone bad.’

The interest that the international media had in Lebanon during the war years was such that the terminology “Lebanonization” or “Libanization” even became part of the media and political analysts’ lexicon. Such terms even made it into dictionaries as synonyms for the breakdown of a country into various religious communities.

Believing the hype

But the media can not only break a country’s image; it can also help build it to the extent where the line between fiction and reality often becomes a blur. 

Take the case of the United States: While Hollywood and the US media in general have often portrayed Lebanese and Arabs as violent, backward, and blood-thirsty terrorists, they were able to create an image of the regular American as the quintessential hero in the waiting, always willing to sacrifice himself to save the world. Movies like Armageddon and Independence Day are only a couple of the scores of films that have helped build the image of America, among its citizens at least, as “the land of the free and the home of the brave.”

Westerns also succeeded in the acrobatic task of portraying the settlers of the new world as the “good guys” while their Indian victims were confirmed as all-time villains, and series like “Sex and the City” have established the image of New York as glamorous and romantic, downplaying its darker side.

What the media has effectively done is to entrench the feeling among Americans that they have a responsibility to lead the world, that they are the guardians of humanity. In that sense a cliché becomes a stereotype, and a stereotype becomes a reality for many.

One thing we can learn from Hollywood is that the only way for us to amend Lebanon’s image is by using the same medium that got us here in the first place: the power and reach of the mass media.

Changing scene

So far, there have been a number of sporadic and ad-hoc efforts, some spearheaded by the government and the Ministry of Tourism, and others that came spontaneously or as a result of a particular media’s interest in Lebanon, such as the New York Times article that ranked Lebanon as the number one destination to visit in 2009, the article in Paris Match focusing on Lebanon’s  joie de vivre, or the report on CNN highlighting the fact that Beirut has become a “top city to party in.”

That said, a concerted national effort to develop a clear and holistic communication strategy to rebuild Lebanon’s image is still lacking.

We have to decide how we want Lebanon to be perceived and which key attributes we want communicate. Do we want Lebanon to be seen as a place for those looking to party all night long and enjoy the naughtier side of the country? Do we want Lebanon to be seen as a perfect getaway for family relaxation and for those looking to enjoy its mountains and beaches? Do we want Lebanon to be positioned as a place filled with history, focusing on our archeological heritage, or do we want to position Lebanon as a hub for business and investments instead?

Media campaigns should focus on communicating Lebanon’s positioning and edge, as should politicians and civil servants abroad in all their meetings and conferences.

Seeing how the movies can help build a country’s image, the government must support the local film industry; several home-grown offerings have already started shifting the public perception of Lebanon away from that of a bombed-out haven for terror and fundamentalism.

But more importantly, we as Lebanese citizens should take advantage of the current emergence of new media channels and the drastic decrease in production costs that have come about thanks to the omnipresence of digital technologies.

The global media and communication scene has reached a new stage where anyone can make themselves heard across the globe, and where creating and disseminating impactful content has become accessible to each one of us.

As such, changing existing perceptions or creating new ones becomes only a matter of creativity, a creativity that each Lebanese citizen can exercise in order for us to help successfully build the image that truly reflects the history, values and uniqueness of our country.

 

 

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Society

“War Games”

by Executive Staff
written by Executive Staff

Aid is big business. The wealthy donor governments that belong to the Organization of Economic Cooperation and Development together give around $120 billion annually. In addition to the United Nations, there are a growing number of both international and local non-governmental organizations (NGOs) competing for a piece of this sizeable pie — but very little popular debate over how they spend it.

In her new book “War Games,” Linda Polman seeks to redress this omission through a savage critique of the aid industry. The veteran Dutch journalist accuses aid organizations of continuing the cycle of violence in the countries they are supposed to be assisting, as aid is appropriated by various militias in conflict zones and used to further their own, often bloody, ends.

In Rwanda, for example, Polman claims that the Hutu extremists would not have been able to murder up to a million Tutsis, based from their UN camps in what is now the Democratic Republic of Congo, without the humanitarian benefits they received as refugees. “Without humanitarian aid, the Hutus’ war would almost certainly have grounded to a halt fairly quickly,” she states.

Polman also touches on the issue of bribes, the morally questionable kickbacks that aid organizations often have to offer local militias in order to be able to safely deliver aid in some of the most lawless places in the world. It’s something the people involved want to keep a lid on: “Aid organizations and donors usually prefer to keep silent about the aid to war-torn countries that is extorted or stolen, and there’s no collaborative attempt to quantify the damage,” says Polman.  

Polman argues that ignoring politics when delivering aid is murderous. “Humanitarian crises are almost always political crises, or crises for which only a political solution exists. When donors, militias and armies…play politics with… aid, NGOs cannot afford to be apolitical.”

“War Games” offers a strong argument for aid organizations to engage with their context. But simultaneously, it also unknowingly provides a counter argument as to why aid organizations should be wary of dabbling in politics. What if they get it wrong, or misunderstand a complex situation, as Polman does several times?

For example, in criticizing UNRWA, the UN agency responsible for Palestinian refugees, for supposedly allowing the creation of militant breeding grounds by providing shelter and services to the civilians displaced by the creation of

Israel, she makes the following statement: “When Sabra and Shatila… were attacked by Phalangist militia units in 1982, half the world was incensed, saying the militia had massacred innocent people, while the other half believed the attack was justified because the camps were in fact military bases.” If Polman had done even the most basic research she would know that the armed members of the Palestinian Liberation Organization had left the camp and that the massacre was carried out on an unarmed civilian population. Polman also makes no mention of the Israeli Army’s collaboration in the massacre.

So, what if aid organizations get it wrong politically? Polman argues convincingly that by not engaging they are getting it wrong anyway. The question is not whether we should simply do nothing at all — rather, donors and NGOs need to ask themselves where the balance lies between the positive effects of aid and its exploitation by warring parties. At what point do humanitarian principals cease to be ethical?

Despite the many faults of this book, Polman delivers a stirring polemic that does ask important questions about the aid industry today. Whether aid organizations will seriously take on the debate raised by “War Games” is yet to be seen.  

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Society

Crisis-proof style

by Emma Cosgrove
written by Emma Cosgrove

What does luxury powerhouse Louis Vuitton do as designers step away from haute couture and multi-national brands file for bankruptcy? They throw a party – several in fact.

Still basking in the golden glow of their World Cup triumph – providing the trunk from which the cup itself traveled from Paris to Johannesburg  – the legendry fashion house finally opened its long-awaited Beirut store with a string of soirees and press events. The ostentatious branded trunk facade that covered the Beirut Souqs store whilst it was being prepared came off with a fanfare, perfectly illustrating the statements of brazen confidence from Vuitton’s chief executive officer Yves Carcelle.

“We were the only brand which published double digit growth 2009 worldwide, so yes there was a crisis but we didn’t feel it. We rather have the feeling that each time there is a crisis, that reinforces our market share because people in these periods tend to turn to objects of real value,” said Carcelle at the July 15 opening of the Allenby Street boutique. The Beirut store marks Vuitton’s 453rd store worldwide with regional outlets in Bahrain, Qatar, Abu Dhabi, Riyadh and Jeddah. In addition to the traditional Louis Vuitton luggage, bags and shoes, the brand will also produce a city guide for Beirut, as they do for all of their stores, with restaurants, hotels and activities fitting the brand, which should be available in October. Joseph Ghosn, editor in chief of several Conde Nast Paris websites and a native of Lebanon will be heading the effort.

Vuitton is one of the headlining brands of luxury conglomerate Louis Vuitton Moet Hennessy (LVMH). In 2009 LVMH profits dropped 13 percent, causing group Chairman Bernard Renault to announce that “bling went out of fashion with the crisis.” But Vuitton seems to be one of the few brands not affected by the bling backlash.

Though Louis Vuitton has been growing strongly, the brand’s behavior is congruent with current trends in the luxury fashion world, which is squarely looking east.

In October 2009, Vuitton became one of the first luxury brands to open a store in Ulaanbaatar, Mongolia. The brand is also choosing to upgrade its flagship stores in London and Paris, even in these lean times.

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Society

Carving a slice

by Executive Staff
written by Executive Staff

There are few markets more obstinate to penetration than the automotive industry. To compete with the giants of East and West — Korea and Japan on one side, Europe and the United States on the other — you need either a massive resource base to fund your start-up operations or a full nelson on regional sales, and preferably both, as is the case for government-run manufacturers such as China’s Zhongxing.

So when a new, independent automaker of limited size crops up in a region already thick with competition, take-off is going to be a measured and gradual process.

This has been the story for Britain-based McLaren Automotive, which has worked for two decades to extricate itself from the larger milieu and gain traction as a truly independent manufacturer. From its debut in 1989 to the release of its last road car, the Mercedes-Benz SLR McLaren, the high-performance automaker has always preferred to partner with better-entrenched, more fully equipped brands in the production of its vehicles. Its first car — the McLaren F1, celebrated for almost a decade and a half as the world’s fastest road vehicle — flowed naturally from the McLaren Group’s experience in Formula 1 racing in terms of design and dynamics, but was powered by an engine designed and built by BMW. Later models were built with and distributed by Mercedes-Benz.

The McLaren MP4-12C, set for launch in early summer 2011, breaks this trend. At last the world has access — albeit extremely limited access, as only 1,000 cars are to be released in the first year of production — to a road vehicle that is solely and completely the work of the company that brought the world the F1. Enthusiasts seem unanimous in their predictions that the MP4 will compete with the best in its segment, including the Lamborghini Gallardo, Audi R8, Mercedes-Benz SLS, and most notably, the Ferrari 458 Italia.

At first, this fact seems antithetical. The massive overhead costs of design, testing and development that go into producing a supercar mean that, as often as not, sales of the finished product barely compensate for the resources poured into its manufacture. On some occasions, a supercar costs a company more than it reaps in benefits. So how is it that a micro-manufacturer like McLaren can hope to build its own supercar from scratch, relying exclusively on their own facilities and team, and still profit enough to carry out their stated aim of expanding operations in the future?

The answer: they’re not building it from scratch. The MP4 draws not only inspiration, but much of its technology from its F1 predecessor, including brake steer — a technology which applies the brake to the inside rear wheel during sharp turns, tightening the radius — and a seven speed ‘seamless shift’ dual clutch gearbox. It is a highly scientific car, with every ounce of weight accounted for, in accordance with the company’s oft-repeated motto “everything for a purpose,” and uses a chassis molded from a single piece of carbon fiber, reducing weight without sacrificing strength.

Even the new developments in the vehicle were designed, tested and retested before McLaren fastened a single rivet: a virtual vehicle was built and tested in McLaren’s F1 simulator, which was readjusted for the MP4’s own parameters.

“By the time we began production of our first prototypes, the car was already 60 percent complete,” Ian Gorsuch, regional director for the Middle East, Africa and Asia Pacific, told Executive at a recent media roundtable in Beirut: “We cut our costs down dramatically by simulating the car before we ever physically built it.”

From its earliest beginnings, McLaren has been a piecemeal innovator. It has been a producer of parts, some of which ended up in road cars, others in racecars, and some which found their way into the late Mars Orbiter (after the Orbiter’s unfortunate crash, those pieces now dot the surface of the red planet, while McLaren insists that their technology had nothing to do with the crash). Finally it has come up with enough parts to assemble a complete vehicle.

It’s still a modest step — in the Middle East, the company will limit its distribution to dealers in Saudi Arabia and the United Arab Emirates, restricting its operations in Lebanon to a single service station — but for a maker just stepping out in its own shoes, even modest steps are important ones.

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Society

Q&A – Stefano Macaluso

by Executive Staff
written by Executive Staff

Girard-Perregaux is one of the first of a number of high-end watchmakers to open monobrand outlets in the Beirut Souks. Executive sat down with Girard-Perregaux Vice President Stefano Macaluso recently to talk shop, the economy and the Lebanese market.

E  Monobrand outlets are a new phenomenon in Beirut’s high-end luxury market, and yet we’ve see a number of them cropping up already in the Beirut Souks. Any thoughts on what could be causing this trend?

The idea of monobrand outlets is, as you say, relatively new here in Beirut, and I think it reflects an increased interest by big-name brands in Lebanon and in the Middle East in general. At a time when luxury watchmakers were tallying losses in Europe and the United States, sales soared in this region. Even in Dubai, which suffered its own imploding economic bubble, we had our best year ever for top-end, extremely complicated pieces in 2009.

I think the Middle East continues to hold a lot of potential. Middle Eastern countries will not be affected like European countries, which resorted to big cuts in social investment.

The situation is still complicated in the United States and in Europe, but we are also reacting there, though a little behind our developments in this region, and will shortly be opening a monobrand boutique on Madison Avenue in New York. So the next stage for the brand, even if the market has slowed, is expansion.

E  How long have you had a foothold in Beirut?

Our first contact was [just over] a year ago, after I was invited by Ziad Annan [of A&S Chronora] to discover the location. I fell in love with the city immediately and saw great potential for growth, because as I’ve said, Lebanon was booming even in the face of global recession. With a strong regional partner and a good business climate, it seemed an opportune moment to open our own boutique.

We consider the location [in the Souks] to be very good, even if it is currently under construction. Compared with other sites in the Middle East in particular, I appreciate the architectural approach, as opposed to say that of Dubai, Abu Dhabi or Kuwait, which tend to opt for a more aggressive supermall approach. The Souk is a good compromise between the traditional market, with visibility for every brand, and the sophistication of modern architecture. In all, it feels like a more human approach to commercial development.

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Economics & Policy

Frozen in the past

by Caroline Anning
written by Caroline Anning

There are so many things we need here,” says Seera Hablas, surveying the small, run-down village of Zouq Al Habalssa from the vantage point of the overgrown hillside, on which she keeps the hives of her beekeeping business. “We need the government to acknowledge that this part of Lebanon exists and needs attention — it’s as if the state only sees it as a place for martyrs and terrorists.”

Akkar, Lebanon’s northernmost province, with a population close to 300,000 people, has the air of a land forgotten. Covering nearly 800 square kilometers, it provides a large portion of the Lebanese Armed Forces’ recruits and militant Salafist networks are known to be active in the area, but for the most part this primarily agricultural governorate simply doesn’t feature on the mental maps of most Lebanese. Tourists don’t visit, investors don’t invest, and the government is conspicuously absent. As former Member of Parliament for Akkar Karim Rassi tells Executive: “Akkar is only around 100 kilometers from Beirut, but it’s like going back a few centuries.”

Zouq Al Habalssa is typical: infrastructure is crumbling, jobs are in short supply and education and healthcare provision is weak. Women are expected to stay at home, and the men — when they can find work — are mostly employed in the army; if not, says Hablas, they usually have to leave for Tripoli, Beirut, or further afield. Akkar, with its dated and uncompetitive agricultural economy, has little to offer them.

Out of sight, out of mind

“It’s difficult to work out exactly what Akkar’s problems are, because there is a real lack of accurate, up-to-date data on the region,” says Fawaz Hamidi, director of the Business Incubation Association in Tripoli (BIAT), a local non-profit business support organization, particularly because the province only became a governorate in 2004 after previously being subsumed under the North Lebanon governorate.

However, some things are broadly known: According to data from the United Nations and local non-governmental organization Mada, Akkar has the largest share of individuals living below the poverty line in Lebanon at 64 percent, with 23 percent living in extreme poverty.

It also has the lowest average individual income, with 16.6 percent of households earning less than $40 a month, compared to a national average of 4.5 percent. With approximately 80 percent of residents living in rural areas, Akkar has the lowest rate of urbanization in Lebanon, and it also has the largest average family size, with families averaging 6.1 members compared to a national average of 4.8.

Human capital is weak due to one of the country’s worst school systems, resulting in a poorly trained workforce and Lebanon’s highest levels of illiteracy.

In addition, despite being rich in water resources, a 2008 report by Mada noted that mismanagement in Akkar has led to a situation in which only 53.8 percent of houses in the governorate are connected to the public water supply — compared to a national average of 85.5 percent — and 20.9 percent have no running water whatsoever. 

 

Currently, 98 percent of the economy is comprised of microenterprises, primarily family-run agricultural businesses. All of this — coupled with Akkar’s limited infrastructure — has put off the private sector from investing in the region, exacerbating the already-major problem of access to capital, says Hamidi.

“There is no culture of equity funding, and micro loans are still expensive in Lebanon,” he says. “The banks don’t like to give small loans.”

According to a report conducted in 2008 by the International Finance Corporation, the advisory arm of the World Bank, only 11.5 percent of potential micro loan demand in Lebanon is being met.

The roots of Akkar’s troubles lie in its geography and history. With its relatively homogenous sectarian makeup (primarily Sunni, with a small Christian minority) and location well out of Israel’s line of fire, Akkar was not directly affected by the civil war, but the district’s remoteness, proximity to Syria and the long-term presence of the Syrian army led to it being economically and socially cut off from the rest of Lebanon.

While it escaped the war, it also missed out on the benefits of reconstruction, and concerted economic development has been virtually nonexistent in Akkar until recently. Residents have traditionally relied on Syrian markets for cheaper goods and services and, until its destruction in 2007, the Nahr al-Bared Palestinian refugee camp also served as an economic hub for the region, acting as a tax-free zone where local people could procure smuggled goods at knockdown prices.

“North Lebanon has always been poor, but the South was also poor and it suffered so much from security threats, so it got the most attention,” says Sateh Arnaout, an advisor to the Council of Ministers on regional development, on leave from the World Bank. “That was reasonable, because if you’re in a country with limited resources you have to make difficult decisions about where to channel those resources, and clearly the South needed it most.”

Wake up call

However, several factors have coincided in recent years to bring Akkar to the attention of policymakers, non-governmental organizations and international donors. The Syrian army’s 2005 withdrawal from Lebanon drew the region back into the government’s sphere of influence to some extent, and after the 2006 war, says Arnaout, “attention started shifting to the other neglected regions, which is really all the ones that border Syria.” 

 

A 2008 report by the United Nation’s International Poverty Center highlighted that Akkar is now the poorest region in the country, quashing the previous assumption that the South was the sick man of Lebanon and redirecting the government’s attention northwards.

“Economic development in North Lebanon is now one of the government’s main priorities, as it realizes that prosperity in this area will contribute towards peace and stability in all of Lebanon,” Arnaout adds. Peace and stability in Akkar became a prime concern for both Lebanon and the Islamist-fearing West after the 2007 Nahr al-Bared conflict; an international Salafist group battled the Lebanese army for three months at the camp, located 16 kilometers to the north of Tripoli on the Akkar coastline, leaving some 450 soldiers, civilians and militants dead and hundreds more wounded.

The crisis resulted in the complete destruction of the camp, forcing some 30,000 refugees to flee their homes and damaging the economy and infrastructure of the surrounding area. The general consensus is that, to some extent, the poverty and isolation of the region contributed to the outbreak of the conflict, driving home the problems that can arise from leaving a large, remote region to fester.

As a result, the last few years have seen tens of millions of donor dollars and the usual footmen of economic development — engineers, development experts, sociologists and the like — file in to Akkar. The United Nations has a number of programs in the region, as does Relief International and several other major non-governmental organizations (NGOs) such as Oxfam, as well as well-established local organizations such as the Safadi Foundation.

Failing farms

Akkar’s economy is mostly agricultural, so this sector has been the focus of much of the development work. The existing system of small, family-run farms doesn’t work, says BIAT’s Hamidi, because “by the third generation the farmers have lost the know-how, they’re out of touch with international developments.”

Elias Wehbe, an agricultural engineer working with the Safadi Foundation, agrees: “Akkar has more potential than any other region, especially in agriculture, but [the farmers] don’t have any scientific knowledge,” he says, adding that until now the Bekaa has been seen as Lebanon’s breadbasket. European countries won’t take much of Lebanon’s produce because it doesn’t meet international standards, and the local press is full of scares about the toxicity levels of locally-produced goods, from strawberries to parsley.

“Farmers don’t understand about the fertilizers they’re using, and nothing is industrialized. There’s still so much still to be done in agriculture,” concludes Vanessa Campos Yakan, a spokesperson for the Safadi Foundation.

The work on improving the agricultural sector covers all areas, from identifying potential new products — with mushrooms and kiwis among the appetizing foodstuffs of the future — to conducting soil testing and vaccinating livestock. Unlike other aspects of development work in Akkar, this is one area where organizations tend to coordinate their projects.

Safadi, for example, has partnered with the United Nations Development Program (UNDP) on agricultural projects in Akkar: the UNDP provides the equipment and the Safadi Foundation contributes two engineers.

According to Abdallah Muhieddine, the UNDP’s area manager for North Lebanon, one of the most successful programs has been to offer farmers weather station data every two weeks to help them optimize their production methods. “One farmer reduced the cost of his fertilizers from $1,500 to $250 because of this weather prediction project,” he reveals. 

The UNDP also works with Lebanese Agricultural Research Institute (LARI), a government body, to test soil and water in Akkar in order to improve the quality of the produce and bring it up to international standards.

After years of absence, “the Ministry of Agriculture is much more active now through LARI,” says Wehbe. In addition to these broad-based programs, a number of NGOs fund individual agricultural ventures with small grants. Relief International, which is funded by the United States Agency for International Development (USAID), provided part of the finances for Seera Hablas to revive her father’s beekeeping businesses in Zouq Al Habalssa, which had languished after all her brothers left to join the army. The venture has provided a vital source of income in a village where unemployment, especially among women, is very high, says Hablas.

Time for variety

Although agriculture is at the heart of Akkar’s spluttering economy, BIAT’S Hamidi believes that it can be only part of the solution to the region’s problems. “The key issue for Akkar is to diversify its economy… we can’t rely on agriculture alone, there needs to be two or three sectors to spread the risk,” he says.

With tourists pouring into Lebanon at rates not seen since before the Civil War, Hamidi suggests that Akkar should be looking to take advantage of the annual international influx, setting up eco-tourism lodges and nature trails to show off the region’s unspoiled natural beauty.

Some local residents are already getting in on the act. Tony Antoun used to own a dairy production business in Akkar, and expanded his successful enterprise to Baghdad. But in 2004, after the US-led invasion, Antoun was kidnapped on suspicion of being an American spy. He had to pay $500,000, everything he had, to secure his release.

“When I came back to Lebanon, I had nothing,” he says. “I was really in debt and had to sell my business. I thought the best thing to do would be to open a small business with low costs.”

He came up with the idea of opening a tannour, a traditional Lebanese bakery, calling it Hadbe w Nar (grain and fire) — “because when you have nothing, that’s all you need to get something started again.”

Inside the bakery, women knead the dough and press it against the baking hot walls of the oven pit with a practiced flourish, creating warm, deliciously crispy bread in a matter of moments. Over endless glasses of hot sage tea, Antoun talks about his plans to open a restaurant in the style of a traditional Lebanese house, as well as a number of reasonably priced holiday chalets in his picturesque location in the hills of Qobayat. 

“Relief International gave me a $6,000 grant, and arranged for access to a $65,000 loan from Kafalat [a Lebanese organization providing loan guarantees to small and medium-size enterprises], which will pay for the restaurant,” he says. “The money for the chalets will have to come from elsewhere, but there’s amazing potential for tourism here: the hospitality of people [here] is the closest to the traditional Lebanese hospitality. But there’s no interest from the government or others; no one thinks to go to Akkar when they come to Lebanon. We need to promote our region.”

With outsiders staying away, the low-income levels in Akkar mean that the local market is limited: “The only problem here is customers,” explains Antoun. “There’s no lifeblood in the region. I only make around $1,000 a month here; in Beirut I would make that in a day.”

Essential investments

Creating a viable, diverse local market needs more than soil testing and bakery funding; serious work is needed to upgrade infrastructure and stem the tide of the fleeing workforce.

“We need major investments in railways, roads, telecommunications, electricity; none of this is happening,” says Hamidi. Some moves are being made to improve infrastructure — the UNDP, for example, has installed solar panels on the roofs of schools and hospitals in Akkar — but so far the work has been largely tokenistic. And, Hamidi argues, the famous “Lebanese entrepreneurship” that people speak of just isn’t a reality on the ground, especially in places like Akkar. The poor quality of education in the area, particularly in the government-run schools, means that many people are not qualified for jobs even when they are available.

“I go to the villages in Akkar, and all I see is guys smoking arguileh [water pipe] by the side of the road all day,” sighs former MP Rassi.

“One guy in my village is 37, jobless, retired from the army. Because he gets his retainer from the army he doesn’t feel the need to do anything. He just keeps his minimal salary, doesn’t work and waits to die.”

Some NGO workers also complain of a growing culture of entitlement in Akkar. Both the UNDP and Relief International have programs that try to strengthen municipal councils, with the aim of creating bodies that can actually spur economic development in their areas and respond to the needs of the local population. Unlike the organizations associated with local heavyweights — such as the Safadi, Mouwad, Fares and Hariri foundations, who are around for the long term and whose operations are both philanthropically and politically motivated — groups such as Relief International have a greater interest in building up sustainable local institutions that can take over their development work.

Akkar exists under the yoke of the client-patron political system, which is found across Lebanon but is particularly prevalent in rural, disenfranchised areas. A few major families dominate politics in the area, including the Fares and Frangieh clans.

“The linkage between the local and national level is individual,” says the UNDP’s Muhieddine. “It comes from the local leaders in society who have a personal relationship with the MP,” he explains. “The local leaders’ power is boosted by the services provided by their patron in the national government, while the national MP benefits because of all of the local guy’s village votes for him. This is not a situation conducive to economic development — it leads to stagnation and maintaining the status quo.”

As such, both the UNDP and Relief International are working to strengthen the municipalities, which are currently, for the most part, not fit for purpose.

“We aim to strengthen the social networking between local people and the municipal authorities by building knowledge and skills regarding local economic development, better engagement and participatory approaches,” explains Vrinda Dar, chief of party for Relief International. “Economic development can neither happen nor be sustained just by injecting money.” 

However, an injection of money seems to be exactly what people are looking for. Dar says she found “most municipalities” initially negative to the scheme, which only offers limited USAID funding and focuses on capacity building and facilitating public-private partnerships.

“Some people, when they don’t see the money, they don’t want any part of it. So I don’t bother with them,” says the UNDP’s Muhieddine. “I’m not here to solve all the villages’ problems. I provide ideas, experience, tools, access and a road map to development. What’s the point of coming in, building something, cutting the ribbon in a nice ceremony and then what? They just wait for the next donor.”

Achieving independence

Eventually, Akkar will need to be weaned off its donor dependency if it is to develop fully, and the state and private sector will have to take over. After its long absence, the renewed interest of the central government (see box on p.67) in the governorate is promising, but with its huge debt burden it does not have the funds to act on its own.

And after years of neglect, the problems facing Akkar are great; both human capital and basic infrastructure, the building blocks of economic development, are lacking. It will take a prolonged, concerted effort and investment from the government, donors and the people themselves to pull Akkar out of the past and into a prosperous future.

 

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Economics & Policy

Chasing the dragon

by Thomas Schellen
written by Thomas Schellen

With monster-sized bank offerings and strong growth in primary markets activity,  the global landscape of initial public offerings made a strong showing in the first seven months of 2010. However, in Arab markets, the picture included pea-sized volumes, vastly overestimated listing numbers and IPOs that went into hiding.  

Keeping count of initial public offerings in the Middle East and North Africa during the first half of 2010 was a simple task, with the total raising of funds in the $1.2 billion range from 16 IPOs with completed subscription by June 30. The tally for standard entries into the sphere of public trading across the MENA is mouse-like next to the 800-pound gorilla in the 2010 global IPO market, China.

Saudi Arabia was the stage for seven offerings across the MENA, followed by four in Tunisia (which included one with a double listing in Morocco), two in Syria, and one each in Egypt and Qatar. Four of these stocks, including Mazaya Qatar Real Estate, which closed its subscription at the end of January, have yet to start trading.  

No starker contrast could be imagined to the Far East. Roaring with new issues to the tunes of $22.6 billion and $8.9 billion, the Shenzhen and Shanghai stock exchanges in the Middle Kingdom led the world IPO action in the first half of 2010, according to a report by the World Federation of Exchanges. That was before the IPO of Agricultural Bank of China (AgBank) raised $19.23 billion in July in a dual offering on the Shanghai and Hong Kong bourses.

The biggest offering in an Arab stock market so far was the 1.02 billion riyal ($272 million) measure by Saudi Arabia’s Knowledge Economic City Co. in May. It attracted almost 2 million investors and subscription demand reached $469 million, said lead manager NCB Capital. At the time of writing, the stock has yet to commence trading on the Saudi Stock Exchange.

The average offering size for MENA IPOs in the first half of 2010 was in the vicinity of $75 million. Regional investors did not limit themselves to the region’s primary market opportunities; China’s AgBank IPO, for example, was rather attractive to GCC money. With subscription to 6.8 billion shares or a stake of over 22 percent, the Qatar Investment Authority is being cited as the largest single holder of AgBank shares issued in Hong Kong. The Kuwait Investment Authority also was a massive subscriber, picking up 1.95 billion shares. The AgBank price per share on July 22 closed near $0.42, confirming that alone the Qatari investment in this Chinese IPO is worth over two times all initial public offerings on MENA exchanges for the year to date.

Including one Middle Eastern IPO in July, of the Saudi Al Jouf Cement Co., the cumulative value of 17 MENA IPOs in the first seven months of this year is $1.38 billion, more than $500 million short when compared with the region’s 11 IPOs in the same period last year, according to Zawya.com data.

The value disparity is mainly on account of the April 2009 Vodafone Qatar issue, which pushed the average offering size in the first six months of 2009 from about $94 million up to over $170 million.  

However, the demand for IPOs in the region has otherwise shown definite upsides in year-on-year comparison. For the offerings in 2010 to date, average subscription demand has exceeded more than nine times the capital offered, which indicates a resurging investor interest when compared with the paltry appetite of four times demand in the first half of 2009.

Investors also saw improved returns on primary market subscriptions when reviewing the performance of IPO stocks in relation to market indices across the Gulf Cooperation Council. While stock market indices provide depressed numbers for the first half in general and individually for the time since floatation of the 2010 IPO stocks, the performance of the new stocks was solid, and overwhelmingly positive for the parameters of first-day, first-month and total time since trading debuts.   

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