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Liberty on the line

by Sami Halabi
written by Sami Halabi

As most of us head to our beaches and balconies in the hopes of catching a summer breeze and perhaps a much-deserved siesta, our Parliament seems to be bucking the trend, having apparently awoken from its years-long slumber.

The country’s legislative branch, a collection of 128 sectarian officials representing a flawed and arcane electoral process, has been unusually busy of late. The 69-odd draft laws recently thrown at the foot of its door have been picked up by the corresponding committees and subcommittees, which comprise one of our most inefficient branches of government.

With so much work to do, one would think that Parliament would be a bustling hub of deputies and their staff scurrying from one office to another at all hours of night and day. But last April, as an experiment, I decided to knock on the office doors of each of the members of the subcommittee mulling a piece of legislation I was reporting on. Not one of the MPs was present in their offices after lunch, nor were there any staff on hand to receive me.

Eventually, a lonely lingering soldier on guard asked me what I was doing rushing back and forth through the building. After explaining myself he just laughed and said “god help you.”

Considering such utter disinterest in keeping functional working hours, or at least having some staff to do so, it’s a marvel how quickly laws are being put before parliament. This discrepancy would appear to be down to one of two things: either lawmakers have been too indifferent to take a look at proposed legislation, or they have been relying on their respective party’s policy buffs and intend to rubber stamp whatever their party tells them is best — neither of which is going to produce the reform we need. 

Take the recent information and communications technology (ICT) law that, thankfully, has been put off for another month. The law, like most of those pending ratification, was intended to bring Lebanon into step with minimum international standards, in this instance relating to payments and accountability in electronic transactions. Instead, the administration and justice committee which oversees proposed legislation, used the opportunity to push a law to the floor that would stem our already limited freedom of expression, by calling for the formation of an authority — subject to a sectarian appointment system for executives — that would have the power to carry out unwarranted searches of any and all electronic information through a “specialized judicial police.”

The fear is that this authority will function as little more than an electronic Stasi, and perhaps unsurprisingly, concerned civil society and private sector actors were not contacted before the law was presented. If they had been, they would have certainly reminded our public officials that government does not just exist to take away people’s freedoms without offering them something in return. It’s no coincidence that the laws being pushed through are of the ‘take’ and not ‘give’ nature. Currently, long awaited and necessary legislation covering freedom of information and whistleblower protection still lies in a drawer somewhere in the quiet halls of Parliament. Taking people’s freedoms away rather than granting them seems to be the priority, before lunch of course.     

The ICT law is but one example of the constant and ongoing attempts to curtail the rights that we Lebanese have come to enjoy, in many cases only because governments have either been absent or uninterested in lawmaking. But since the nature of being a public official is to be held accountable by the public, we should not be content with merely electing a Parliament. Perhaps we have become so accustomed to a government in crisis that we have lost sight of the goal of institution building and our inalienable right to question our officials, rather than allowing them to hold closed invitation-only sessions to mull legislation and hide behind layers of opaque sectarian bureaucracy. That age-old habit needs to come to an end.

And now that we have a semi-functioning parliament we cannot, and should not, simply bask in the sun while they run rampant over our rights. Government is not a one-way street, and at this point more ‘give’ and less ‘take’ is in order. The beach may have to wait.  

SAMI HAlabi is deputy editor of Executive Magazine

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Editorial

Auditing the state

by Yasser Akkaoui
written by Yasser Akkaoui

It is often said that Lebanon makes no sense. It is the kind of line that we like to throw out when the chaos overflows, but in reality there is no mystery or enigma to Lebanon. It is a crude entity; a mini-state controlled by local chiefs whose grip — either religious or geographic — more often than not defines national allegiances.

The government is a shell. To get things done in Lebanon, you don’t go to your member of Parliament or the ministry; you go to your chief, who milks the public sector in his area and then has the gall to complain that government isn’t doing enough. But in reality, there is no desire to see a strong government; this would mean a level of accountability and this would not work for the chiefs.

And yet we have economic growth. Lebanon has a private sector that has learned to adapt to, and in many ways circumvent, the national drain game.  It creates jobs and fills the state coffers, because, at the highest level at least, it pays its taxes and it seeks to operate according to best practice. The private sector employs 20,000 in the banking industry and thousands more in finance, insurance, real estate, retail, hospitality and tourism. It even owns the vast majority of the Lebanese debt. The private sector is the keel that keeps the country afloat in an ocean that would have sank the government’s ship years ago.

So you would you think that the private sector would have some pretty hefty leverage in this seedy system that is Lebanon. But strangely enough it doesn’t, or to put it better, it hasn’t exploited it… yet.

The voice of the private sector, as an entity that wields so much influence, should make its presence felt and object to the economic injustices – the corruption, the waste, the lack of transparency – that happen every day and which are so ingrained they are considered the norm. Quite simply the private sector has an obligation, a moral duty, to audit the ethical behavior of the state in the same way a company is answerable to its shareholders.

Are we dreaming? Maybe. But until this happens we cannot say we have a state.

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Israel spins its ship storm

by Stephanie Dotzer
written by Stephanie Dotzer

Anything we can do for you?” the Israeli intelligence officer inquired after 10 minutes of interrogation. Mohamed Vall, an Al Jazeera correspondent who had been on board the Mavi Marmara, was among the VIP detainees the Israelis were handling with care. His hands were cuffed in the front, unlike most activists whose wrists were bound behind their backs; and unlike others, he was allowed the luxury of using the toilet.

Were Mohamed not a friend of mine, I still would have no clue what actually happened after Israeli commandos stormed the Gaza-bound flotilla and cut communications with the outside world. Western media wouldn’t tell me. Sure, I read the newspapers and zapped from CNN to BBC and back again, but it felt like I’d heard it all many times before. The flotilla-part is new, the rest is a ritual: Israeli spokespeople say what they always say — “Any other country in the world would do the same!” — while journalists and politicians engage their conditioned reflex: if they’re Arab, they get carried away with emotions; if they’re Western, they get caught up in their own precautions and end up saying nothing.

While the world has gotten used to the killing of Palestinian civilians, a deadly raid on an aid ship with passengers from 40 different countries is much harder to ignore. But, by and large, the Western world managed quite well. Granted, the story made the headlines and even Israel’s best friends — such as the United States and Germany — showed an unusual degree of indignation that the attack occurred in international waters.

Nonetheless, Arab commentators who tried to transform the tragedy into triumph, arguing that the world is finally waking up to Israeli crimes, don’t seem to have read much of the Western press.

Contrary to what many analysts claim, Israel has not lost the public relations war. It can still rely on thousands of loyal journalists to steer the international debate into side streets before it ever gets to the point. For, if there is one thing more blockaded than Gaza, it’s human common sense when it comes to Middle Eastern politics.  How else can you explain that most international media got stuck in a dead-end debate over who had what weapons and who was provoking whom? If fully armed soldiers storm your vessel at 4 a.m., would you assume they’ve come to join morning prayer? Instead of focusing on the fundamentals (like if the blockade itself is illegal under international law, then an attempt to enforce it on a third party cannot be particularly lawful), many Western journalists concluded that “the facts are unclear” and all one can safely state is the need for an “impartial investigation.”

To quote the above mentioned Mohamed Vall: “You got the GPS parameters, you got 600 eye-witnesses, what else do you need?”  Eyewitnesses? Heck yes. But where are they? In most mainstream media (with noteworthy exceptions such as The Guardian), eyewitness accounts were scarce. The German press largely ignored even their own members of Parliament who had joined the flotilla, arguing that, if they were on that ship, they were obviously biased and anti-Israel. Instead of listening to passengers, many journalists bought the idea that they were either radical Islamists or crazy leftists “being used by Islamists.” The Western logic seems to be: if it’s a bunch of hippies with dreadlocks doing yoga on the deck, ok, let them reach Gaza. If they wear beards and pray five times a day, then it suddenly seems much more acceptable to stop them from… well, from bringing cement and medicine to a besieged population.

More and more people are not falling for the spin and are managing to think for themselves. But the closer the Western public comes to seeing what’s happening in Gaza, the quicker opinion-makers reassert that “Israel’s fears must be acknowledged” and that “a country that is so isolated urgently needs its friends.”

Israel doesn’t need sheepish friends. It needs to take advice from its critics — and listen to Mohamed’s answer to the question asked by his Israeli interrogators. Sadly, the right reply only came to his mind long after his deportation: “Anything you can do for me? Oh yes, you can. Lift the siege, stop mocking the world, consider Arab lives as precious as Jewish lives… and then, ahlan wa sahlan, live happily ever after.”

STEPHANIE DÖTZER has worked for Al Jazeera English and Germany’s ARD news network. She now freelances in the Middle East

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Flotilla fallout docks in Ankara

by Peter Grimsditch
written by Peter Grimsditch

The peripheral effects of the Mavi Marmara affair 100 kilometers off the Israeli coast on the last day of May have begun to remove some of the initial political glory that fell on Turkey.

Israeli commandos killed nine people when they stormed the former Bosphorus ferry to stop it from continuing to Gaza to deliver a cargo of humanitarian supplies. The nine victims were shot a total of 30 times and five were killed by gunshot wounds to the head, according to the Turkish council of forensic medicine. Ibrahim Bilgen, 60, was shot four times in the temple, chest, hip and back. Fulkan Dogan, a 19-year-old American of Turkish extraction, was shot five times from less that 45 centimeters in the face, in the back of the head, twice in the leg and once in the back. Five of the victims were shot either in the back of the head or in the back. 

 Ankara, justifiably angered by this disproportionate display of force, poured a tirade of vitriol upon Israel and appeared as a new and active champion of the Palestinian cause, which prompted outpourings of support for the government of Turkish Prime Minister Recep Tayyip Erdogan. While domestic political gains still abound, the fallout in various international arenas is spreading.

The jury is still out on the trite question of whether Turkey has killed off its chance of joining the European Union through currying favor with its eastern — and Muslim — neighbors. Politicians involved in the EU application deny any such policy shift. Indeed, friendly commentators in the United States and Europe point out that Turkey’s close relations with states like Syria and Iran make it a more attractive proposition for the EU.  It can boldly go for talks where few European politicians dare to venture.

Be that as it may, there are a number of areas where Turkey stands to lose out because of its public spat with Israel. Not least is in its campaign against the Kurdish Workers Party (PKK), in which some 50 members of the Turkish armed forces have been killed since March. One of the most useful tools in spotting PKK bases in Northern Iraq is the Unmanned Aerial Vehicle (UAV), or, more popularly, the drone. Six Israeli-made Heron UAVs stationed near the Iraq border have been providing surveillance data on PKK bases. The Israeli technicians present in Turkey to troubleshoot and give training are said to have pulled out two weeks after the battle of Mavi Marmara.

The Turks put a brave face on the withdrawal. Defense Minister Vecdi Gonul said Turkish personnel had been trained in Israel and would take over the task of operating the Herons. Other Turks say this is easier said than done.

But all may not be lost. In a triumph of pragmatism over principle, there is an unofficial agreement in Ankara that any decision to freeze military deals with Israel should be delegated to the defense ministry. Thus on June 22, as at a suspected PKK bombing of a military bus killed least five people in Istanbul, a Turkish delegation arrived in Tel Aviv to view the latest Heron tests and to take delivery of another four.

Meanwhile, Erdogan has claimed that “foreign elements” have been involved as a “subcontractor” in the escalation of PKK attacks on the Turkish army. It was left to acolytes lower down the line, speaking on convenient condition of anonymity, to point the finger at Israel. For good measure, there have been equally unlikely accusations that Israel was also behind the attack on a Turkish naval base at Iskenderun. This leaves a choice between believing that Israel is conspiring with the PKK to engineer attacks on the Turkish army, or it is cooperating with that same army to launch attacks on PKK bases. Turkey, like much of the Middle East, is replete with conspiracy theories.

Deteriorating relations with Israel could have another ill effect on Ankara. Israeli lobbies in the US have for decades taken up the cudgel on Turkey’s behalf to beat down attempts by the Armenian community to have the US Congress officially recognize the wholesale slaughter of 1915. Mike Spence, a Republican representative for Indiana, said if Turkey continued to become more antagonistic to Israel, he would reconsider his opposition to a resolution designating the events as genocide.

This has far-reaching financial implications. Congressional recognition of the genocide would make it possible for Armenian groups to sue for damages and seize Turkish assets in the US. The headline-grabbing flotilla unleashed a tide of events which could lead anywhere. Victory doesn’t appear to be one of the ports of call.

PETER GRIMSDITCH is Executive’s

Istanbul correspondent

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Bill’s American dream

by Riad Al-Khouri
written by Riad Al-Khouri

What do former American President Bill Clinton and the new Miss USA Rima Fakih have in common? Jokes about Clinton’s notorious womanizing aside, rather a lot, actually: Rima is a perfect example of Bill’s answer to America’s economic woes. 

Speaking in April about fiscal responsibility, Clinton said immigration was a key to United States central government budget deficit reduction, which in turn was vital for America’s future. He was quoted on the website of The Atlantic magazine as saying, “We [the US] need more immigrants. We need to reverse the age ratio. I see that as part of fiscal responsibility.”

Coming from the US president who will perhaps best be remembered for putting a long deficitary American federal budget into surplus, this is serious stuff. Expounding on his theme, he added that “the great virtue of this country, the thing we have over China and India, is that we have somebody from everywhere here, and they do well. This country still works for immigrants.”

He should have added that immigrants also work for their new country. Typically fleeing trouble spots or poverty pockets, of which there are more than a few in the modern Arab world, migrants from the Middle East tend to be hard working and — on the whole — economically successful. Only a short hop from my vantage point of Ann Arbor, Michigan, places like Rima Fakih’s hometown of Dearborn show the inspiring impacts of Arab immigration to the US.

The bustle of places like Dearborn allows Clinton to conclude that: “The changes we make will be less draconian if we get more people into the system. I don’t think there’s any alternative than to increase immigration. I don’t see any kind of way out of this [deficit] unless that’s part of the strategy.”

This brings us back to Ms Fakih. With his eye for the ladies, one wonders what Bill makes of Rima personally, but there is no doubt that he approves of what she represents: a young and successful migrant to America. Born in Lebanon but raised in the US, Rima Fakih is fairly typical of newly arrived Arab-Americans: from a modest background and flourishing in their new homeland in ways difficult to imagine had they never come to the US. These emigrants have been arriving in force from the Arab world for over a century, and they and their descendants are to be found in most communities around the US.

Rima Fakih - Miss USA

The contribution of these Arab-Americans to the US economy has traditionally not been easily quantified in dollar terms or labor market participation. That is partly because so many of them change their names and turn their backs on their roots. Not so Rima Fakih: though she will represent the US in this summer’s Miss Universe competition, she has shown pride in her Arab heritage. Yet even if she doesn’t win the world crown, her camera-friendly credentials are assured and she will doubtless go on to parlay the Miss USA title into serious money. That way, Clinton’s beneficent fiscal loop happily closes, with migrants such as Fakih working their way up and enriching the American system. Young and successful, they pay more in taxes and don’t rely on state benefits.

On another level, Fakih underlines the positive moral and cultural importance of Arab Americans living in US society. OK, she’s easy on the eyes, and she and her successful immigrant community cheer up the American economy, but this sort of prominence is also playing another crucial role. Fakih has come as an antidote to the “Islamist terrorist” xenophobia that is unfortunately commonplace in the US press, both before and after 9/11. Long prior to the destruction of the Twin Towers in September 2001, this kind of sentiment was — and remains — widespread in America. And though Fakih has not been immune to the conspiratorial accusations of the right-wing media, the general praise of the mainstream — despite the minor pole-dancing distracter — has done well to marginalize her critics and better the image of Arab Americans.

Hopefully, the new Miss America’s rise will help a little to clear the air in that respect, even as Bill Clinton’s thinking on the economic role of immigrants reminds us of their strong positive contribution. 

RIAD AL-KHOURI is a senior economist at the William Davidson Institute of the University of Michigan in Ann Arbor 

 

 

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Wanton democracy

by Peter Speetjens
written by Peter Speetjens

Words are like colors. They come and go with the seasons. Not so very long ago, words like “democratization” and “a new Middle East” were all the fashion in Washington and many a journalist, the trendy type, jumped on the bandwagon arguing that the Iraq war was about just that: democracy.

But the tune changed even under George Bush and today the “D-word” has largely fallen out of fashion. While it can still be used in criticizing such countries as Iran or Syria, it is generally avoided in reference to the rest of the region. Hence, we heard next to nothing about the democratic turns for the worse in Egypt and Jordan, which with Saudi Arabia, form America’s triangle of “moderate” Arab allies.

Despite a flood of promises not to, the Egyptian parliament on May 11 routinely and for the zillionth time extended the state of emergency that has continuously been in place since 1981, the year when Egypt’s former President Anwar Sadat was killed and his successor Hosni Mubarak took over.

While emergency rule per definition is a temporary solution to an extraordinary situation, a whole generation of Egyptians has come to accept as normal the suspension of their universal human rights. Members of Mubarak’s National Democratic Party (NDP), which has dominated Egypt’s political landscape since 1952, argue that the extra powers are needed to counter terrorism and drug trafficking. This hardly seems the ruling party’s only goal however. What’s more, the goal hardly justifies the means.  According to human rights advocates, many thousands of Egyptians spend their lives behind bars without charges and without a fair trial. Torture is widespread. Meanwhile, basic human rights such as the freedom of association and expression have been severely reduced. Censorship is everywhere.  It is no secret that the state’s extraordinary mandate has come in handy in the run-up to elections, when the NDP’s political opponents, especially members of the Muslim Brotherhood are arrested and locked up. Most of them are released once the elections are over, yet not everyone is that lucky.

When a civilian court in 2006 dismissed all charges against Khairat al-Shatir, the Brotherhood’s deputy supreme guide, and 15 other party members, Mubarak transferred their cases to a military tribunal, which in 2008 sentenced them to up to 10 years in jail. Naturally, the military court is no public affair, while the current emergency laws do not include the right to appeal.

Meanwhile, the ailing 82-year-old Mubarak continues to pave the way for his son Gamal to take over the presidential crown, while his second son, Alaa, keeps an eye on the family’s growing business empire.

The democratic barometer of Jordan does not peak much higher. Egypt’s eastern neighbor in May finally presented the long awaited new election law. King Abdullah II dissolved parliament late last year and parliamentary elections are set to take place by the end of this year.

While Jordan’s king publicly called for fair and free elections, he appointed Rajai Muasher, openly an opponent of political liberalization and reform, to take charge of formulating the new election law.

The end result is flawed, to say the least, and has been severely criticized by international human rights organizations. The main criticism concerns the fact that, while about half of Jordan’s population lives in Greater Amman, the new law has downsized constituencies and increased the number of seats in the lower house of Parliament to 120, which are spread all across the country. The obvious aim is to keep the “power of the people” firmly in the hands of the “true” Jordanian tribes, while Jordan’s capital remains underrepresented and with it the majority of Jordanians of Palestinian descent, as well as urban-based Islamic parties.

The color of the day is, therefore, not the “D-word” but “status quo,” and how to keep it no matter what. Having just returned from a trip to Egypt, the image that sticks in my mind as an epitome of the country’s politics is that of 40 elderly men protesting at the Ministry of Health against a cut in their benefits. They were faced by at least twice as many policemen in black, while around the corner two trucks filled with more uniforms awaited.

No image comes to mind regarding Jordan. The Hashemite Kingdom generally forbids demonstrations.

PETER SPEETJENS is a Beirut-based journalist

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Beware the black swan

by Natacha Tannous
written by Natacha Tannous

Forecast to reach an altitude of $55.4 billion by year’s end, the precarious flight of Lebanon’s arrears is ruffling far too few feathers among our policy makers. Instead, they’re counting on economic growth to dilute the debt by reducing the debt-to-GDP ratio, which differing sources currently place around 150 percent. In the words of Finance Minister Raya el-Hassan: “Don’t use economic textbooks to understand the Lebanese model.”

Is Lebanon somehow serendipitously always right on the money? Is the country some sort of economic maverick with a secret recipe for success?

True, Lebanon has never defaulted on its debt, but staking so much on our economic exceptionality to see us through can only help hasten the arrival of our ‘black swan’ — that unpredictable and improbable high-impact event left unaccounted for in the economic models, which could sink us into a debt deathtrap.

Prudence therefore calls for effectively managing the surging debt burden; we need to reduce the debt inventory and avoid renewing bonds at maturity while containing inflation amid excessive liquidity.  Our archaic infrastructure cannot maintain current growth rates indefinitely and only the gullible would believe the cyclical reduction in Lebanese bond yields are sustainable.

Financing long-term growth requires structural reforms. We must improve infrastructure and promptly implement, among other things, an energy policy to tackle the national power company’s $1.4 billion yearly losses; we must realize the potential of our natural resources and human capital, and create new initiatives in education. The government must quit beating around the cedar tree and properly address these issues to build a healthy economy.

In a modern country it is unacceptable that the 2010 budget, if endorsed by Parliament, will be the first budget passed in five years. And as it stands, this budget projects a $4 billion deficit, meaning debt issuance is unlikely to slow anytime soon. Central Bank Governor Riad Salameh admits he is “concerned about the growing deficit and we are incessantly calling for reforms to decrease [it].”

How though, is not clear-cut; in terms of expenditure, the quality and transparency of public spending must improve and the chronic leakages that plague the system need to be stemmed. On the revenue side, wages in Lebanon total approximately $20 billion; with direct income tax rate of 10 percent, government should be collecting some $2 billion annually, not the current $780 million. Closing the loopholes on tax dodgers will take time to implement; in the meantime, additional revenues could be mobilized through a 2 percent increase in value added tax, though this would likely spur social upheaval. Government officials have sung about privatization, public-private partnership (PPP) and securitization answering our debt woes, but none of these options can fully fix the problem.

In regard to privatization, between the telecom operators and the low value of the national airline, utilities companies, ports and airports, the government would be lucky to collect $10 billion and not sell at distressed prices, while it would also lose the revenue of telecom tariffs – currently a de facto form of taxation that earned government $1.36 billion last year. Privatization could help pay down the volatile part of the Lebanese debt — Eurobonds held by non-Lebanese — but it is no long-term solution. PPPs could help improve infrastructure without increasing the public debt, but require an autonomous capacity for the private sector to finance itself, and this is not self-evident. Such partnerships are complex, and potentially unsustainable. Ultimately, PPPs will not solve Lebanon’s debt bind.

Securitization is not the answer either, as future revenue streams from such a scheme must be proven viable before implementation. The fact is, the Lebanese market isn’t mature enough for it and the International Monetary Fund does not consider securitization proceeds as debt reduction, but rather an alternative type of debt. So as the government toys with wishful thinking on ways to balance the books and stalls on progress in substantive structural reform, our debt continues to take flight.

As long as the economic forecast stays bright and shiny, the country should be able to glide through debt refinancing by issuing more sovereign paper. The problem is the improbable — that black-winged bird which swoops down on us from above while we were gazing at how high we’d climbed. When our economic model begins its plummet toward reality, we will only have ourselves to blame.

NATACHA TANNOUS is EXECUTIVE’s financial correspondent

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Economics & Policy

Traditional airlines are caught in no man’s land

by Dward Clayton
written by Dward Clayton

Two trends in the Middle East airline industry have dominated headlines in the last decade. The first is the launch of premium carriers — such as Emirates Airlines, Qatar Airways, and Etihad Airways — which have taken luxury to new levels to appeal to an international jet set. The second is the rise of low-cost carriers (LCCs) — such as Fly Dubai, NAS, SAMA, Air Arabia, Bahrain Air and Al Jazeera — which have used a no-frills approach to make flying affordable to a larger group of people.

 

As carriers at each end of the spectrum gain more and more market share, they are putting pressure on the players left in the middle: traditional, full-service airlines that are caught up in the impossible task of trying to be all things to all people. They rely on a single product to serve both premium business passengers and budget travelers: The same seats, meals, flight attendants, reservations staff, check-in processes, and loyalty programs are expected to do double duty for those seeking a top-level experience as well as those on a $10-a-day vacation.

In the Middle East, the traditional airlines at risk are often national flag carriers. For instance, Wataniya and Al Jazeera are fighting to capture share from Kuwait Air; NAS and SAMA have begun competing with Saudia; and Egypt Air will come under pressure this year as Air Arabia Egypt launches its operations.

The weakening and even failure of a national airline has an impact far beyond its own operations. The citizens of a country that loses its national airline often lose many of their options for air travel, unless other carriers can profitably provide connectivity. National airlines act as global ambassadors to the customers they carry and a struggling national carrier can damage a nation’s reputation.

If traditional carriers are to succeed in the future, they will need to understand how to compete in an evolving industry.

Sizing up the competition

Premium carriers are the first threat to traditional carriers: In an effort to become global players, government-backed Gulf Cooperation Council luxury carriers are investing in new planes, expanding their networks, and intensifying their operations at a dizzying rate.

Gulf carriers Emirates Airlines, Qatar Airways and Etihad Airways are ranked among global leaders for high quality of service and expansive global networks: Qatar Airways is one of six airlines in the world with a five-star Skytrax rating; Emirates was nominated “Airline of the Year” twice; and Etihad has consistently ranked at par with Emirates and is considered a leading premier airline.

These three carriers have penetrated every major market in the world and grabbed market share from incumbents.

Government support has allowed these airlines to rapidly expand their fleets, forecasting their anticipated growth: The three combined have about 535 planned aircraft deliveries by 2015, and Dubai’s ruler Sheikh Mohammed bin Rashid Al Maktoum said in a recent interview with CNN that Emirates would order further aircraft at Britain’s Farnborough Airshow later this month.

Filling these planes will require Gulf carriers to gain market share from competitors. In the short term, they will primarily target Europe-to-Asia routes, which will set the stage for fierce global competition. Airlines that can offer outstanding service, efficient operations, and superb reliability — rather than sheer market presence — will enjoy the upper hand.

At the other end of the market, LCCs are making inroads with low prices and high efficiency. Nine LCCs launched in the Middle East between 2003 and 2010, with their market share increasing rapidly from 1.6 percent in 2005 to 7.1 percent in 2009. These airlines generally offer short flights, averaging 1,100 kilometers and 1.5 hours, with a turnaround time of about 25 minutes. LCCs’ low prices have led to increases in demand, but have also eroded airlines’ yields. 

Not everyone wants to travel on a no-frills low-cost carrier, and so it is doubtful that they could survive simply by providing a cheap alternative for existing passengers. The beauty of the low-cost carrier model is that it has attracted new passengers, creating its own market.

Meanwhile, traditional carriers cannot make up the loss of passengers to low-cost carriers by creating new markets for travel. Rather, they rely on filling their aircraft with more connecting passengers, who are less profitable and ensure traditional carriers remain shackled to their costly connecting hubs and all the associated costs, such as baggage sorting and transfer lounges.

Getting out of no man’s land

The expense of maintaining the illusion of limitless service for full-price ticket holders makes it nearly impossible for traditional carriers to compete with LCCs’ low costs. And because there is a real limit to the service they can afford to offer, they also can’t extract the same price premium that high-end carriers enjoy.

 

Worse still, as traditional carriers’ profits evaporate, so does their ability to invest in the next generation of aircraft and systems, which might go some way to helping them out of their misery by providing lower running costs as well as a better experience for passengers.

Operating profit margins of network carriers have plummeted. Most large Middle Eastern airlines are simply not in a position to transform themselves into low-cost carriers or premium hub carriers.

National flag carriers, in particular, have a responsibility to act in the best interests of their countries, rather than merely considering what is best for their balance sheets.

But there are five steps that can help flag carriers to develop a new operating model that integrates some of the best elements of premium airlines, low-cost carriers, multiple-brand airlines, and multiple hub airlines.

1. Unmask the real network: point-to-point flying. Traditional carriers typically carry both connecting and point-to-point traffic. Although point-to-point traffic generally has better yields, traditional carriers configure their business for connecting passengers — for example, by building their schedule around their connections. More emphasis on larger point-to-point routes — such as intercity trunk routes, holiday destinations, and small regional services — would improve their competitive positioning.

2. Take pressure off the hub. A traditional hub-and-spoke network allows an airline to connect the largest number of cities with fewest flights, but suffers from two limitations: People generally end up going out of their way to travel via the hub, and arrivals and departures at the hub are arranged to maximize the number of connections, which leads to costly peaks in demand for ground services and severe congestion.

The solution is to use multiple hubs, which often reduces both problems by putting connections through the most convenient hub and reducing the distance of journeys.  Also, by better allocating the main connections between two hubs, peaks at each can be reduced, easing pressure on both of them.

3. Give customers only what they want. Premium airlines are masters at understanding what services their customers are willing to pay more for. Often national carriers can tailor their services to exploit cultural or behavioral idiosyncrasies in their passenger base that will increase loyalty.

4. Remember that less is more. LCCs’ ruthless cost-cutting highlights just how much excess costs most airlines carry.

Traditional airlines can mimic LCCs’ use of as few aircraft types as possible, reduced turnaround times and higher utilization, their simplified and automated ground services and their flexible labor arrangements.

5. Share the pain. Many small or mid-sized airlines cannot generate the scale or cost benefits of large airlines; such carriers can save as much as 5 to 10 percent of their total costs by merging with a similar-sized airline.

There is no question that traditional carriers are squeezed by new competitive circumstances, as well as industry changes that have been difficult for everyone. But with the right strategy, they can find their way out of no man’s land.

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Economics & Policy

Bold reform – the gordian knot of prudent public finance

by Fabio Scacciavillani
written by Fabio Scacciavillani

On the whole, the Middle East seems to have been quite resilient to the global financial crisis thus far. Both the energy commodities exporters and the countries that do not enjoy large oil reserves have mostly been able to maintain healthy annual growth rates, even though they suffered the inevitable setbacks, especially during the most acute phase of the credit market meltdown.

For the Gulf Cooperation Council countries, the performance was driven mainly by the public spending capacity accumulated during the years of climbing energy commodity prices, which has allowed governments to maintain an unabated flow of funds into infrastructure investments. But for the Middle Eastern countries that do not enjoy substantial commodity resources, the resilience came from a structural shift in economic policy.

In particular in the Levant (Egypt, Jordan, Syria and Lebanon), the economy was able to withstand the impact of the global crisis thanks to the long lasting effects of the structural reforms enacted during the past decade (and in some cases even earlier), plus the improvement of the security situation, notably in Lebanon.

Economic liberalization spurs enormous gains in efficiency and productivity when the dynamics of free markets spring powerfully back to life. Sectors dominated by inefficient public management or widespread red tape are swiped by performance gains and innovation. The results are often stunning: double digit growth, stronger exports, strong capital inflows, creation of small companies, improved services and so on.

This notable feat, however, cannot hide the fact that the effect of the reforms have been considerable for certain segments of the general population, but have rarely translated into a broad based improvement in living standards, especially for the lowest income brackets. The pattern we often observe in the Middle East has a familiar tinge, as it tracks the experience of many places where economic freedom sprouted after decades of repression, including Eastern Europe, China, India and parts of South-East Asia. The most blatant example was the so-called Russian oligarchs, who made exorbitant fortunes acquiring the crown jewels of the Soviet Union’s state-owned enterprises during the dismantling of the Soviet’s control and command system, benefiting from opaque procedures brought in by hasty privatization. 

The failure of the ‘trickle down’

But even where the excesses that characterized Boris Yeltsin’s time as the Russian premier were largely avoided, the process of liberalization tended to favor those with better connections to decision makers, family ties, the right professional skills (finance or engineering above all) and plenty of money, or simply those who happened to be in the right place at the right time.

The consequence is often that income disparities fuel resentment from those excluded or left at the margins. A middle class fails to emerge and actually, when buoyant growth leads to price increases, notably in real estate, the living standards of the salaried might even decline. Adding to the plight, with faster growth infrastructure becomes obsolete and overwhelmed, environmental problems are exacerbated, chaotic urbanization creates congestion and, at times, social tensions, while social services struggle to adjust.

The reaction to these woes is often a political backlash against the reforms and the reformists – in Eastern Europe and India, for example, governments that had pushed for liberalization ended up losing elections – but even where elections are not held resentment and cynicism can mount.

Hard to handle

Obviously, the authorities are not completely blind to these dynamics and effectively redistribute in some form the larger revenues resulting from additional tax collection and privatization receipts. Egypt doubled civil servant wages between 2005 and 2009, while Jordan and Syria also doubled public sector wages and pension outlays over the same period. Sometimes the tax windfall is channeled into less laudable areas; the doubling of defense expenditure in Jordan over the last five years, for example, is hardly justified by intensified security threats.

The redistribution of economic benefits through public expenditures, whether justified or not, carries two risks. On the one hand, expenditures and entitlements are politically difficult to undo, especially if exceptional economic growth is taken for granted – when it inevitably slows, governments are suddenly saddled by unsustainable deficits. Also, public expenditure tends to favor certain groups, resulting in patronage, dependency and complacency toward mismanagement of funds.

More generally, redistributive public policies represent a quick fix that might work in the short run but fail to address the key issue: why doesn’t the economic liberalization extend to the lower segments of the population through private sector mechanisms?

The reason, in my view, lies in the fact that liberalizing economic reforms are relatively easier to engineer, if only because extensive literature and widespread international experience outlines the practical steps to take. But liberalization is just the first step to extend opportunities and welfare.

The second, most critical and difficult task is to create a level playing field for all, not just for the privileged or canny few. A level playing field requires independent institutions that prevent special interests exerting an undue influence on the decision making process, assuming a dominant position in key sectors or hijacking resources for their own use. In short, it requires the establishment of an adequate system of economic governance hinging on three planks.

Foremost is a judicial system that carries justice without particular regard for the powerful and enforces property rights without being prone to external influences. Second are public bodies which are impartial and do not shy away from tough decisions, even when they upset the government or anyone in a prominent position. Third, since institutions are not abstract entities but result from the actions of men, it must be assured that those who perform public duties are shielded from political pressure and must not be penalized when they disappoint the rulers. Other policy actions ought to complement the governance framework, such as sound regulation, appropriate labor market laws, credible monetary and financial supervisory authorities, consumer protection and a business environment open to foreign investments.

In essence, the journey toward full economic freedom requires impartial institutions whose decisions cannot be subjected to the interests of individual or groups, however prominent they might happen to be. In the absence of these basic rules, reforms risk a dire destiny. They will end up substituting an old oligarchy with a new one, though not necessarily a better one.

 

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Economics & Policy

Savvy is the MENA private equity investor

by Executive Staff
written by Executive Staff

Using the world’s de-facto barometer of investment danger, credit default swaps (CDS), many fast growing Middle Eastern and North African economies including Saudi Arabia, Egypt, Abu Dhabi, Bahrain and Qatar are perceived as less risky investment destinations than heavily indebted, slower growing European states.

For much of the month of May — even after the announcement of a 750 billion euro debt stabilization package for the European Union — the cost of a five-year Saudi CDS was lower than a French or British CDS of similar maturity, while Egyptian CDS prices remained below those of Greece, Portugal, Spain and Italy. Even the Middle East’s most indebted state, Dubai, was cheaper to insure against non-payment than Europe’s most indebted state, Greece. If May’s CDS prices are a guide, it’s better to be locked into a currency union with Abu Dhabi than with Germany, the traditional model of financial probity, transparency and geo-political safety.

It goes against stereotypes, but the MENA region’s relatively low and improving risk profile is real, and its appeal as an underpenetrated market for private equity is immense. Regional opportunity is largely the product of more than a decade of legal and financial reform, particularly in the Gulf States. Since 1998 all six members of the Gulf Cooperation Council have passed capital markets laws, deregulated and privatized industry and opened up domestic investment to foreigners.

Today, the GCC economic engine is transforming both the Gulf and its MENA neighbors through rising levels of private equity investment. Private equity has accelerated regional consolidation in fertilizers, logistics, banks, travel, the internet and high-end retail.  As MENA private equity expands, it is improving balance sheet discipline and corporate governance, strengthening financial markets, sowing seeds for new industries and diversifying economies that remain overly dependent on hydrocarbons.

A youthful market

Less than a decade old, with years of expansion ahead of it, the local private equity industry has no reliable performance indexes. But the returns of the region’s best private equity teams have been stellar — with internal rates of return of 30 percent or more, frequently achieved after only two or three years of investment and largely unleveraged by debt. Unlike Asia, a region that cannot accommodate the huge numbers of private equity investors looking to invest there, access to top teams — once identified — remains relatively easy in MENA markets.

Growth, at least at the moment, also comes cheaper in the MENA region. The MSCI Arabian Markets Index, for example, has a price-earnings to growth (PEG) ratio of 0.9. That is lower than the PEG ratio for China’s CSI 300 Index and India’s BSE Sensex 30 Index by 18 percent and 44 percent respectively. GCC corporate earnings growth is better than in Latin America, another emerging market where increased popularity has made access to top teams difficult.

This is a particularly propitious time for regional private equity investors for other reasons. The financial crisis of 2008-2009, and the spectacular regional failures and scandals it provoked at MENA’s most overleveraged and least transparent companies, has led to a transformation of attitudes at the family groups that dominate MENA’s still fragmented and overwhelmingly local businesses. Traditionally reluctant to sell equity to outsiders, many owners now welcome deals when they are packaged with private equity expertise that can focus and streamline diverse local business lines into disciplined platforms for regional expansion.

A safe bet

Stagnant regional bank loan growth after the collapse of Lehman Brothers has also increased the appeal of private equity financing, while decreasing its competition. Long-term private equity financing for expansion is all the more coveted, given that the overwhelming majority of regional bank loans mature in three years or less, meeting working capital needs but little else.

Although this stands in contrast to more developed economies, the most successful investments in the MENA region tend to be minority investments. With significant amounts of debt leverage largely absent from Middle East private equity deals, taking a large minority stake often allows entry at a bargain price, since it shifts the incumbent owner’s focus from current valuation to future value creation. The best local private equity teams have often paid less than 10 times historic earnings, versus listed rivals selling for twice that. In this way, well-negotiated minority stakes provide effective leverage when the investment is finally exited.

United by common language and tradition, the MENA region is a young and increasingly dynamic block with a population of more than 210 million, an economy that is already worth $1.6 trillion, and an annual growth rate that should clock in at 5 percent this year and continue for the foreseeable future. Buoyed by the budget and trade surpluses of conservatively managed Gulf States, this is one emerging market that smart money should not ignore.

 

 

 

 

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