Banking & Finance

Money matters bulletin

by Executive Editors
written by Executive Editors

Regional stock market indices

Regional currency rates

Zubair Corporation allies with Tefirom

Zubair Corporation, an Omani business conglomerate, and Tefirom, a Turkish multi-national business group, signed a strategic alliance on April 13 with aims to develop a portfolio of business opportunities estimated at $500 million, particularly in renewable energy, construction, water management, natural gas and manufacturing sectors. As a result, they announced a co-development of wind-based projects for renewable energy in Turkey and Oman. The alliance was signed after six months of negotiations and would give both parties advantage in market presence, execution tools, know-how and skills across different sectors. The two companies are to create separate joint venture companies for each project and may introduce other partners depending on the merits of the project.

Arab fund will allocate $359 million in loans and grants

The Arab Fund for Economic and Social Development (AFESD), a Kuwait based pan-Arab institute, announced in early April its plans to finance various development projects within the MENA region. AFESD, which consists of 22 member countries, will support Arab infrastructure ventures by providing $359 million to recipient governments and organizations; 95 percent of the allocated amount will go to Morocco, Sudan, Djibouti and Yemen in the form of concessionary loans. The remaining 5 percent will be granted to Egypt, Jordan, and Lebanon, as well as the Arab Thought Forum and the International Center for Biosaline Agriculture. Of the outstanding loans, Morocco will receive the highest amount: $190 million to build a new highway, followed by Sudan, which will receive $104 million to complete the construction of a sugar refinery. Djibouti and Yemen will receive $31 million and $24 million, respectively, to modernize transportation networks and update flood protection infrastructure. Grants are expected to be handed to the Arab Open University in Egypt ($1.7 million) the King Hussein Cancer Foundation in Jordan ($764,000) and civil action societies in Lebanon.

$6 billion for Iraqi railways

Iraq plans to build and renovate six major railway lines in order to restore the country’s infrastructure. The most important line consists of a loop around Baghdad, which will be able to transport 23 million passengers per year and carry 46 million tons of goods. This project will run more than 1,243 kilometers of tracks across the country and cost $6 billion, with expected completion by the end of 2014. The Iraqi government is planning to construct the project in partnership with the private sector on a build-operate-transfer (BOT) basis. Consequently, the authorities must find international investors to finance the project and launch construction. Investors will benefit from the returns for the coming 20 to 50 years. This railway will eventually be linked to the planned Gulf Cooperation Council railway network, slated for completion in 2017, covering 2,000 kilometers from the Kuwait-Iraq border to Oman. 

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Banking & Finance

For your information

by Executive Editors
written by Executive Editors

Bank ratings upgrades

Four of Lebanon’s banks received ratings upgrades from Moody’s Investors Service in April. The agency raised the long-term foreign currency deposit ratings of BLOM Bank, Bank Audi, Byblos Bank and Bank of Beirut from B2 to B1. Byblos Bank’s foreign currency senior and subordinated bond ratings were also raised from B1 to Ba3. The ratings were all deemed stable by the ratings agency. The upgrades are due mostly to the upgrade in Lebanon’s sovereign ratings. Fitch Ratings also followed a sovereign upgrade with bank ratings upgrades in April. Both Byblos Bank and Bank Audi’s long-term issuer default ratings were upgraded from B- to B. Both raters noted that while these upgrades were the result of an improvement in Lebanon’s sovereign rating, they are hampered by the banks’ high exposure to the sovereign and holdings of government paper. Fitch Ratings mentioned that about one half of Lebanese banks’ balance sheets are invested in government debt.

Housing Bank lending to rise

The Housing Bank raised the ceiling on several of the loans it offers this month. The maximum amount obtainable in real estate loans went from $300,000 to $400,000 on loans for building new homes or purchasing existing ones. These loans are usually for a tenor of 20 years. The ceiling on loans for house repairs, carrying a 10-year tenor, was raised from $100,000 to $132,670. Both loans generally carry a grace period of between three months and two years before payments must be made. These raises come at a time when housing prices in Lebanon are also rising. The Housing bank issued $83 million in loans in 2009 and is expected to increase its portfolio by $166 million in 2010.

UAE Central Bank calm over DW exposure

The United Arab Emirates Central Bank issued a circular on April 22 instructing the country’s banks that they need not book provisions for exposure to Dubai World. The memo said: “Banks are not required at the moment to make provisions for loans given to Dubai World.” The central bank also said that it would “provide further guidance to banks concerning the treatment of Dubai World debt in their books.” Some banks have said that they will continue to book provisions despite the circular. The exposure of UAE banks to Dubai World’s debt is estimated to be $15 billion, but the central bank justified their directive by saying that provisions are unnecessary until there are precise figures for exposure and a concrete restructuring plan is in place. Analysts said that forgoing provisions would prevent banks from feeling the full effect of their exposure in their first quarter results.  Non-performing loans in the UAE rose 2.4 percent in March from the previous month.

HSBC joins with Allianz-SNA

HSBC and Allianz-SNA announced a new partnership on April 26 which has led to the launch of HSBC Insurance Services Lebanon (HISL). “We are currently in the process of implementing the new bancassurance retail strategy for HSBC that will be launched through a promotional campaign featuring a special promotional offer for our customers,” said James Gebara, senior manager of personal financial services at HSBC at a press conference. HISL will offer six products including life saving, term life, personal accident, home protection, travel and assistance, as well as foreign maid insurance plans. Xavier Denys, chief executive officer of Allianz SNA, implied at the conference that these six offerings would be the beginning of a wider offering to come.  “We believe that this partnership is only the start of several goals that we would like to achieve in the Bancassurance relation with HISL,” he said.

Halal on credit in Canada

Mastercard launched its first ‘halal-approved’ credit card in North America in April. The iFreedom Plus Mastercard will be offered by Canada’s UM Financial, an Islamic financial Institution based in Toronto. The card has no monthly fee, no transaction fees and no usury, the element of credit transactions forbidden in Islamic Law. The card also includes discounts on Etihad Airways flights. Omar Kalair, president of UM Financial, told the Associated Press that it will be available in the United States by the end of 2010. According to Kalair, only one other sharia-compliant credit card is available in the West and it is offered in the UK. Kalair estimated that there are more than one million Muslims living in Canada. He also mentioned that non-Muslims may choose to apply for the card as well.

Life insurance ascends

Life premiums in Lebanon’s insurance sector increased by 11.3 percent from 2008 to 2009, according to the annual survey conducted by Al Bayan magazine. The value of total life premiums went from $290.5 million in 2008 to $323.4 million in 2009, with 15 of Lebanon’s 35 life insurance companies posting double-digit growth and three companies showing triple-digit growth. American Life Insurance Company (ALICO) continues to hold the largest percentage of market share, though this margin has been dropping in recent years. ALICO posted $69.6 million in life insurance premiums representing a 21.5 percent market share, down from 26.7 percent in 2008 and 2007, and 34 percent in 2006. In second place, Allianz-SNA posted $49 million in premiums in 2009. Bancassurance and AROPE followed with $34.8 million and $33.2 million respectively, and LIA showed $27.6 million in life premiums. These five insurers represent 66.2 percent of the market. The survey also noted that the top 10 life insurers in Lebanon are all affiliated with commercial banks. Al Bayan’s survey conducted through an exclusive agreement with the municipalities in which premiums are extrapolated from the tax the companies are required to pay on each policy to municipalities. While this method of calculation is imperfect, there currently is no other independent tool for collecting insurance premium data.

Byblos in the Democratic Republic of Congo

Byblos Bank announced that it has acquired Solidaire Banque Internationale in the Democratic Republic of the Congo (DRC) in April, becoming the first Lebanese bank to expand its network into the country. The private Congolese bank has been renamed Byblos Bank DR Congo and offers corporate and commercial services, trade finance, consumer banking and investment services. Byblos said that the acquisition is in line with its strategy of expanding into emerging markets, the goal of which is to have a minimum of 40 percent of Byblos Bank Group’s assets and income coming from locations outside of Lebanon. Walid Kazan, assistant general manager and head of the international network division at the bank told Executive that Byblos chose to move into the market due to its relationships with Belgian traders in the DRC, which was formerly a Belgian colony. Byblos has a correspondent bank in Brussels as part of Byblos Bank Europe, as well as operations in Syria, Sudan, Iraq, the United Arab Emirates, Nigeria, France, the United Kingdom and Cyprus.

Tehran’s big bond offer

One of Iran’s state banks is reportedly planning to issue $270 million in bonds,  the Islamic Republic News Agency (IRNA) reported on April 4. The Central Bank of Iran has given the Export Development Bank of Iran permission to issue bonds with one, two and three-year maturities, according to the report. These new bonds come at a time when the United States and the United Nations are threatening the country with new sanctions. Iran is also attempting to modernize its investment capital markets. “The government is now offering broader incentives to foreign investors with fewer regulatory strings attached. [Foreign companies] will be exempt from paying tax and will no longer be subjected to excessive regulation,” said Ali Saleh Abadi, director of Iran’s Securities and Exchange Organization, in an interview with Press TV. Earlier this month, an Iranian official announced that the government would privatize more than 500 state firms in an effort to raise $12.5 billion, but it is still unclear whether these entities will indeed go to private buyers, or be transferred within the Iranian public sector. Though Iran’s lack of integration with the global financial system protected it from the global financial crisis, the country still requires foreign capital to develop its oil industry, according to analysts. However, Iran’s thoroughly publicized intentions to continue its nuclear program have left foreign investors wary.

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Feature

Logistics Superbowl

by Executive Editors
written by Executive Editors

It has been called the “logistics Super Bowl” and compared to reversing a faucet or shoving a basketball though a narrow pipe. But despite the amusing turns of phrase, the United States military is orchestrating a massive effort to get out of Iraq. It’s turning out to be a daunting task for military officials, and a huge opportunity for logistics firms in the region.

Striking the set

Among US President Barak Obama’s first actions after taking office in 2009 was to order the American troop presence in Iraq to be reduced from 142,000 to 50,000 by August 2010, with a complete exit by December 2011, giving a tough deadline for what General William Webster called the largest military operation “since the buildup for World War II.”

There is no consensus on how much “stuff” the US Army has in Iraq, and differing reports from high-ranking officials indicate that the military itself is unsure. On April 2, Webster stated that 2.8 million pieces of equipment would be moved over the course of the operation; the same day, Ashton Carter, US undersecretary of defense for acquisition, technology and logistics, put that number at 3.4 million items. Other reports have suggested a total of 1.5 million pieces of equipment, ranging from radios and coffee makers to M-16 rifles, body armor, bulldozers and combat vehicles. The only thing that is agreed upon, it seems, is that the amount of work involved will be staggering.

As such, the US is gearing up to spend tens of billions of dollars on the movement, repair and redeployment of what Webster estimated to be $54 billion worth of the army’s effects. 

“We have six years’ worth of stuff that we’ve gathered here,” said General Ray Odierno, US commander in Iraq, at a “rehearsal of concept” drill held at Camp Arifjan in Kuwait in December 2009.

At that drill, military officials reported that between May and December of 2009, the US military orchestrated the exit of 76,000 pieces of equipment from Iraq, which, by April 2010, had skyrocketed to 2.2 million items, according to Carter. All this is now piling up at Camp Arifjan, as will the windfall to come.

Arifjan and logistics hub Joint Base Balad, 64 kilometers north of Baghdad, are constant hives of activity. Countless combat vehicles roll onto carrier planes while rows of Humvees sport a litany of defects, listed on their sides in chalk.

In these bases, the equipment is sorted, repaired if possible, and shipped either back the US, Afghanistan, or other regional commands. Equipment damaged beyond repair is scrapped, or destroyed to preserve the confidentiality of proprietary technology.

Most of the material can be transported by trucks and rail, some provided by contractors and some by the US Army, but some big-ticket items present unique challenges.

The Mine Resistant Ambush Protected (MRAP) vehicle for example, weighs 265.35 metric tons. A US Department of Defense (DoD) statement in February said that there are 8,500 MRAPs on the ground in Iraq, all of which must eventually be transported to Kuwait.

Inevitably, cost-benefit analysis has led to the conclusion that some items will be left behind.

For example, ‘non-tactical’ sports utility vehicles, which were purchased for $30,000 several years ago, are worth about $5,000 today. The shipping cost of each vehicle is around $10,000, so the US Army has decided that these will remain in Iraq.

The Headliner

Logistics contractors operating in combat zones provide a wide range of services from building bases to staffing cafeterias and transporting essentials such as food and water.

At Joint Base Balad, the largest in Iraq and a logistics hub for the withdrawal operation, contractors help the soldiers to catalogue and handle cargo coming through the base. Trucks containing incoming cargo, and buses full of personnel are often driven by contractors and protected by Army escorts.

The biggest civilian player in the “Operation Iraqi Freedom” logistics game has been KBR, based in Houston, Texas, formerly a subsidiary of Haliburton, where former US Vice President Dick Cheney was chairman of the board from 1995 to 2000.

As of March 29, KBR was operating in 61 permanent locations in Iraq and rotating through another 105. In Afghanistan, the contractor services 63 locations full-time and rotates through 34 more. The company also has a permanent presence in eight locations in Kuwait. So far, KBR has closed some 50 bases in Iraq.

KBR’s dominance over the US military logistical support throughout the war in Iraq was due to the Logistics Civil Augmentation Program (LOGCAP), the largest logistics contract awarded by America’s DoD. The program allows the US military to expedite contingency contracting through indefinite-quantity/indefinite-delivery contracts, meaning that KBR was required to carry out any task order made by the US military for as long as the contract stood.

The LOGCAP III contract, of which KBR was the sole provider, encompassed supplying housing, food and fuel for the US troops in multiple locations, involving the transport of all necessary materials and the building of all structures. LOGCAP III was awarded in 2001, before the attacks of September 11, 2001, and before the war in Iraq began.

Negotiated without the knowledge that KBR would soon be the largest logistics contractor in an active warzone, the contract included a ‘cost-plus’ structure with a one percent profit margin.

In other words, individual tasks within the contract are ordered, the cost estimated by the contractor, debated with military personnel and agreed upon. The contractor then fronts the cost of the action and is reimbursed with a 1 percent profit with the option of a 2 percent bonus, at the US government’s discretion.

“They low-balled LOGCAP III so much. Before 9/11 they never thought it would be such a huge contract and they shaved it to the bone,” said Doug Brooks, president of the Washington-based IPOA, a trade organization whose members include several logistics companies currently operating in Iraq. “Their idea at time was that it would be a $6 billion contract for the life of the contract and it would give them all this capacity that they could use for everything else.”

The contract ended up totaling $30 billion, but with such a low profit margin, it was no great moneymaker for KBR. “This is why Haliburton got rid of them. KBR wasn’t earning any money,” said Brooks.

Due to the eventual size of the contract and controversy over its sole-provider nature, the successor contract — LOGCAP IV — has been awarded to three different American companies: Fluor Corp, DynCorp International and KBR.

Under this new arrangement, the three contractors compete for every task order commissioned. US lawmakers and officials welcomed the competition as an improvement to the single-provider LOGCAP system.

“They low-balled LOGCAP III so much. Before 9/11 they never thought it would be such a huge contract and they shaved it to the bone”

Supporting players

KBR is just one of many logistics contractors working on DoD contracts. Though most of them are American, Kuwait’s Agility has played a sizeable role in the US conflict in Iraq.

The largest logistics firm in the Gulf, Agility has held three major contracts with the US government, some since the beginning of the conflict in 2003. But recent legal disputes between the company and the US Department of Justice (DOJ) have put a question mark over the company’s future relationship with one of its largest clients.

In November 2010, the DOJ indicted two of Agility’s subsidiaries, US-based Agility Defense and Government Services Holdings Inc. and Kuwait-based Agility Defense and Government Services KSC, for allegedly overcharging an unreported amount on $8.5 billion worth of contracts in Iraq, Kuwait and Jordan. Disputes over violations of legal process led to a second indictment from the DOJ and the company is still fighting the validity of the claim.

A source close to the case who spoke on the condition of anonymity told Executive in January that Agility had spent more than $33 million in legal fees. He also said that John Negroponte, former US ambassador to the UN, and several four star generals on Agility’s board were helping Agility with the case.

Agility will continue to service its standing contracts until their expiration, but is forbidden from bidding on new contracts until the legal issues are resolved. One of Agility’s major contracts still in effect is Heavy Lift VI, a $1.5 billion contract to transport military supplies and personnel, which it won part of in June 2005 with the final option period expiring this July. Agility, formerly the Public Warehousing Company, was awarded the Subsistence Prime Vendor (SPV) contract by the US Defense Logistics Agency in June of 2005.

The $14 billion contract procured storage and transport of food to US bases in the region. With the final option period expiring in December 2010, and Agility forbidden to bid on any new contracts, the SPV has been awarded to another regional firm, Anham LLC of Dubai, for an amount that could total $6.4 billion. The value of the SPV contract is decreasing with the continual exit of troops from Iraq and, eventually, Kuwait.

Agility will remain a major player in the region as it still holds both commercial and other government contracts which keep it engaged in Iraq, Kuwait and Afghanistan, but its future role in US military operations remains uncertain. But the source close to the case said that Agility’s “bread and butter is still the defense and government business, not the commercial business.”

The source said that if the legal disputes are not resolved, Agility would most likely consider selling its defense and government services arm.

SIGIR has found $340 million in suspicious payments, mostly involving contractors and vendors

At the sharp end

But even giants like KBR and Agility do not have the inherent capability to perform all of the tasks they are given, which is where local and regional companies play an integral role. When a large contractor is ordered to build a base, parts of the effort such as supplying water or serving food, are subcontracted to another, often local, provider. In fact, $21 billion of KBR’s $30 billion LOGCAP III contract went to subcontractors, according to a May 2009 report from the US Congress’s General Accountability Office.

A February 2010 census of contractor support for Iraq and Afghanistan performed by the office of the assistant deputy undersecretary of defense showed that there were some 100,000 contracted civilian employees working in Iraq, 6 percent of which were providing logistics or maintenance services. Of these, 20,200, were Iraqi and 52,000 originated from a country other than the US or Iraq. Just less that 28,000 were American. In Afghanistan the local contingent is even higher, constituting 80,800 of the total 107,300 contractors working there. These numbers still represent a 13 percent decrease in contractors in Iraq since the last quarter of 2009.

Stage Managers

According to a 2010 Deloitte study entitled “Performance Based Logistics in Aerospace and Defense,” yearly DoD spending on logistics more than tripled from 2001 to 2009, reaching $5 billion last year. The study predicts this amount will surge to $7.4 billion by 2013. The value of individual contracts has also been rising steadily, increasing from an average of $26.4 million from 2000 to 2002, to $59.5 million from 2007 to 2009. By 2013, Deloitte predicts that the average size of a performance-based logistics contract will be $85.8 million.

Even a simple contract such as upgrading suspension units on the MRAP, which struggled on the tough Afghanistan terrain, earned American arms firm BAE Systems & Armaments, an $82 million contract: a drop in the ocean, considering the billions to be spent in the coming months.

Government oversight and contractor supervision is not a new task for the US, but the sheer size of the contractor workforce and the number of contracts going out has overwhelmed the government’s ability to keep track of them all.

Before contracts are awarded, they go through several layers of planning by military commanders in the field as well as several secretaries in the defense department and the Defense Contract Management Agency (DCMA). After contracts are awarded, they are governed by on-sight supervisors, auditors, the DCMA and the Defense Contract Audit Agency (DCAA) and, in the case of Iraq, the Special Inspector General for Iraq Reconstruction (SIGIR). As of January, SIGIR had found $340 million in suspicious payments and transactions, mostly involving contractors and vendors. The DCAA has doubled its number of auditors dedicated to LOGCAP in the last year from 55 to 110. Oversight is slowly improving, but KBR Vice President of Operations Douglas Horn told the Senate Wartime Contracting Commission in March that too many cooks in the kitchen are making for more confusion on the ground.

“The structure and discipline of the contracting system is often at odds with the realities of the warzone operational environment,” said Horn, adding that contractors were often left unable to act while waiting for government policy to manifest into contracted services. But with current trends set to continue, the management and oversight of contractors is going to have to be sorted. And, if Afghanistan turns into anything like Iraq, contractors are going to be playing a starring role.

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Feature

Band-aid budget

by Executive Editors
written by Executive Editors

Late is better than never, or so the saying goes. Thus, despite whatever flaws the 2010 budget proposal may contain, that Lebanon’s Finance Minister Raya Hassan was able to bring it to the table at all on April 15 — two and a half months past the constitutionally mandated final deadline — should be seen as a positive sign. Should it also pass parliament and be enacted, it would be the first to do so since the budget of 2005, which has been the template for government spending for the last five years.

The finance ministry has described the budget proposal as “ambitious and expansive,” which in some senses, it is. It lays out significant increases in investment expenditure equivalent to 6.1 percent of gross domestic product, according to the finance ministry — though GDP calculations remain more a matter of ‘ball parking’ than precise measurement (see box). There is also a proposed jump in social spending of 24 percent, compared to the 2009 draft budget.

The bulk of the $805 million increase in investment — which the finance ministry points out is a 148 percent increase on the figure proposed in 2009  — will be focused on “the sectors of electricity, road maintenance, and water construction.” However, as 2009 budget spending was never enacted, “it is quite misleading to say that expenditures on projects [will] increase by some 150 percent,” said Marwan Iskandar, economist and managing director of MI Associates.

If the amount proposed in this year’s budget is actually invested, it could relieve some of the stress on Lebanon’s decrepit electricity infrastructure in the medium to long term. Some $255 million dollars will be allocated to building new power plants to produce 700 megawatts (MW), which is intended to cover the deficit between the approximately 1600 MW currently produced and the some 2300 MW the country requires. This constitutes the start of a four-year investment proposal by the finance ministry to spend $1.17 billion on the production and distribution of electricity.

Investments aside, the government will still have to foot the existing electricity bill, which the proposal estimates will cost $1.57 billion, a rise of 27.3 percent on 2009. And since the government does not hedge against future fuel costs — which comprise 94 percent of proposed expenditure on electricity — any future oil prices increases will inflate the burden. The draft budget also lacks any mention of reforming the electricity sector, through switching power generation from fuel oil to the cheaper gas alternative or performing a much needed efficiency overhaul. This is salient in light of the fact that Lebanon currently loses some $1 million for every megawatt produced.

Damn that debt

The largest burden the government continues to shoulder is the public debt, currently at some $51 billion and counting. However, the strategy of swapping short-term debt for long-term debt has worked in the finance ministry’s favor, as debt servicing is slated to be just 1.8 percent higher than 2009, going from $4.27 billion to $4.34 billion (see graph). Members of the ruling parliamentary majority have lauded the achievement; one MP even called it a “miracle.” That said, the sharp decline of debt-to-GDP ratio seen in previous years is slowing to a plateau. Debt-to-GDP ratio dropped from 180 percent in 2006 to 147.98 percent in 2009; this year’s proposed budget has this wavering slightly to 147.47 percent.

Hassan’s ministry stated to the press that the goal was, “maintaining the level of public debt-to-GDP, provided that the growth in public debt does not exceed the actual growth of the economy, while trying to avoid falling into the trap of a primary deficit.”

The fear is very real given that the 14.4 percent proposed rise in expenditure, some $1.87 billion, will push total spending to $13.46 billion. The move has cut the primary surplus — which excludes interest payments on the debt — from $872 million to $18 million. Under the budget proposal, this would increase the actual deficit to $4 billion, or 10.74 percent of GDP, which is estimated at $37.4 billion.

It is important to note that all these calculations are predicated on real GDP growth of 4.5 percent and an inflation rate of 3.7 percent.

Making the money to spend

According to the finance ministry the highest grossing tax measure last year was value added tax (VAT), generating $2.73 billion in revenue. VAT revenue is estimated to rise 8.7 percent this year, indicating an expected increase in domestic consumption.

While a possible increase in VAT had been the topic of debate earlier this year, none was suggested in the budget proposal. Instead, Minister Hassan opted to raise taxes on real estate registration from 5 to 7 percent on properties worth more than $500,000.

Elie Sawma, president of the building promoters federation of Lebanon, told Executive: “Our position is that the ceiling should be raised from $500,000 to $1 million because there is not one [decent] apartment in Beirut that is less than $1 million.”

He added that the minister should also consider raising taxes on non-Lebanese buyers by 3 percent, from the current 5.8 percent, as a “corrective” measure. The tax had previously been 17 percent until the real estate industry succeeded in lobbying former Prime Minister Rafiq Hariri to lower it.

Iskandar, however, said he believes there were more “equitable” options the government could have opted for.

“In particular, a tax on profits of real estate trading whereby you can introduce a tax of 25 percent on profits achieved in the first year, falling to 20 percent [the next year,] until by the fifth year there will be no tax,” said Iskandar, adding that such a measure would decrease speculation and drive down “prices of already completed apartments to a point where young people could secure decent housing.”

Real estate’s breakneck growth in recent years should make the increased taxation proposed in the budget relatively uncontroversial when it comes up for parliamentary debate, if only to tap the brakes on a bubble potentially speeding toward bursting point.

There are though, as Iskandar points out, other factors to consider: “This is something that lacks equitable treatment amongst the Lebanese [as] many of the politicians are themselves involved in [real estate].”

“The ceiling should be raised from $500,000 to $1 million because there is not one [decent] apartment in Beirut that is less than $1 million”

Breaking the bank

Minister Hassan also proposed a 2 percent tax hike on bank deposit interest, raising the tariff from 5 percent to 7 percent, which Iskandar estimates will bring in $100 million in additional revenues. Nassib Ghobril, head economist at Byblos Bank, called the deposit tax “totally unnecessary.”

Ghobril said that a 2 percent hike in the deposit tax would bring the government negligibly more revenues at a time when inflows are already increasing naturally due to solid economic growth. According to Ghobril, tax revenues increased by 25 percent and overall revenues increased by 20 percent in 2009.

“But what we are seeing is an increase in expenditures,” he said. “Last year we saw an increase in expenditure of about 14 percent overall. So the problem is not on the revenue side, it is on the expenditure side.”

Though Ghobril said he doesn’t believe that a 2 percent bump will be a deterrent to non-resident deposits, he remarked that “it certainly does not help,” especially when the growth rate of deposits has decreased in the first three months of 2010. What is more important, according to Ghobril, is that the tax hike casts Lebanon in a poor light in terms of its international financial image — a prized and sheltered possession, despite the debt.

An often-suggested and little-employed solution to the lack of discretionary revenue is financing projects through public-private partnership (PPP). It seems like this option is on the minds of many in the finance ministry, as Hassan mentioned it while proposing her budget and the Higher Council for Privatization President Ziad Hayek sent a statement to the press through the finance ministry detailing the difference between a PPP and complete privatization. Still, while PPPs may allow some necessary projects to begin, they would not solve Lebanon’s systemic financial problems.

Tardy to the party

No matter what is in the current budget proposal, it is for the year 2010, of which four months have already passed. This budget still has the constitutional process to pass, meaning it needs cabinet approval, then parliamentary approval, and at both levels it is subject to alterations. MI Associate’s Iskandar estimates that, in the best of all possible worlds, the budget might come into effect in July.

As Executive went to print, the cabinet had yet to approve the proposed budget. In parliament it will also have to face the finance committee, chaired by MP Ibrahim Kaanan, an ardent critic of Lebanon’s current taxation system and a member of the Free Patriotic Movement, rivals to Minister Hassan’s political camp.

So as Simon Neaime, professor and chairperson of the economics department at the American University of Beirut, said: “This is the best that can be done given the current circumstances, [but] overall the budget is only trying to pass time. It’s not tackling the real problems.”

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Finance

Low interest loans to continue in Lebanon

by Executive Staff
written by Executive Staff

Lebanese Lira notes Banque du Liban

The interest rate subsidies granted by the central bank to 60 percent of lending sectors in July and September of 2009 have been extended until June 2011. The original circulars lowered the reserve requirements, which Lebanese banks were previously required to keep at the central bank at zero percent interest, allowing banks to lend in Lebanese lira at more attractive rates. The loans subsequently offered brought lira lending rates down from above 9 percent to around 5 percent. The extension will allow banks to maintain these rates on loans processed until June 2011. These interest rate subsidies covered mostly personal loans for cars, homes and education and are an addition to the interest rate subsidies put in effect in 1997, which benefit the industrial, tourism, agriculture and technology sectors of the economy. At end-June 2009, the 1997 interest rate subsidies had resulted in $2.55 billion in new 2009 lending.

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Economics & Policy

Better corporate governance is crucial to regional growth

by John Martin
written by John Martin

John Martin St Valery is a partner at NxD-global

Over the last 10 years, corporate governance in the MiddleEast has progressed from being a relatively non-existent business practice tobecoming widely accepted as fundamental for attracting foreign investmentinflows and deepening the region’s financial markets.

 It was onlyafter the global financial crisis that Gulf Cooperation Council governmentsstarted to take corporate governance more seriously. We saw new regulations andcodes come into effect, each outlining principles that would bring domestic corporategovernance practices in line with international standards.

The Organization for Economic Co-operation and DevelopmentJournal reports that today only three countries out of 17 surveyed in theMiddle East and North Africa region do not have any corporate governance codesin place. While this is certainly a step in the right direction, theimplementation and enforcement of the codes remain questionable.

The Gulf financial markets now have similar standards forcorporate governance throughout, but the extent to which they are fullyimplemented varies greatly in each country. The underlying issue here is one ofcompliance. Only the United Arab Emirates and Saudi Arabia regulate theircorporate governance codes, while other countries operate on a “comply orexplain” basis.

It’s all in the implementation

Managing the regulatory pendulum in emerging markets isnever going to be easy. Widely accepted international practices must be adaptedto suit our domestic markets before the buy-in of regulators, complianceauthorities, business leaders and special interest groups can be achieved. Thisexplains the varying degrees to which the regulatory pendulum swings, with thedirection and angle subject to market, sector or even stakeholder conditions.

For example, most of the corporate governance codes from thevarious GCC financial market authorities stipulate that board composition mustcomprise a majority of board members who are non-executive directors, and thatat least one third of the board members must be independent directors.

In countries where this regulation is enforced, certainsectors or companies are exempt from the provision. In the less regulatedmarkets, the principles of the code are considered when evaluating the qualityof a company’s corporate governance. Companies are encouraged to follow theprovision unless they have good reasons not to and disclose those under the“comply or explain” principle.

These varying levels of enforcement lead us to questionwhether corporate governance guidelines are being adhered to. Is the correctquota of independent or non-executive directors being filled? Are listed boardssplitting the role of chairman and chief executive officer as they are advisedto do and, more importantly, do they understand the benefits of full complianceto their businesses or the wider economy?

The presence of independent representatives on the board,capable of challenging the decisions of management, is widely considered as ameans of protecting the interests of shareholders and, where appropriate, otherstakeholders.

These codes exist for the betterment of individualbusinesses and to improve the overall competitiveness of the regional economy.I would agree with Nasser Saidi, executive director of Hawkamah Institute forCorporate Governance, that the issue here is not one of achieving consensus oncodes and standards. Rather it is an issue of implementation, or lack thereof.The GCC countries need to move more quickly on enforcing these standards. Weneed heavier handed regulatory compliance to affect change.

Good corporate governance is a crucial part ofprivate-sector-led economic growth in the Middle East and it needs to berecognized as a public policy concern. The international competitiveness of theMiddle East economies must rest on a base of firms that do not suffer from costof capital disadvantages, and that adapt sound management and corporategovernance practices to domestic circumstances.

 

 

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Last Word

Web of truth

by Michael Young
written by Michael Young

In mid-April, people surfing the Internet were able to witness a gruesome wartime killing. Swedish website Wikileaks posted a graphic videotape of an American Apache helicopter gunning down several men in a Baghdad neighborhood. The story received more than 2 million YouTube views in two days.

The Americans mistook the cameras held by Reuters photographer Namir Noor-Eldeen and his driver, Saeed Chmagh, for weapons and opened fire on the group, believing them to be insurgents. Following the initial assault the Apache also fired on a minivan picking up the wounded, in which two children were sitting. Twelve  people were killed and the children were injured.

The principle of Wikileaks, founded in 2006, is to place leaked information online without comment, but to also have the website team verify that material is correct and, in some cases, prepare after-the-fact reports on stories. Wikileaks is funded by private donors and rejects state or corporate funding.  

An article on Wikileaks appeared in Foreign Policy magazine recently, under the heading, “Is this the future of journalism?” The author, Jonathan Stray, wrote that the “diffuse, international nature of the organization has protected Wikileaks from the fate of other organizations that seek to expose wrongdoing by powerful interests. It prints no paper, but instead stores its articles online in Sweden, where journalists are required by law not to reveal sources. Its domain name… is registered in California, where the American Civil Liberties Union and the Electronic Frontier Foundation intervened when an aggrieved Swiss bank tried shut the site down.”

Is Wikileaks journalism’s future? Stray doesn’t quite say, but he suggests that the website offers a new model for freer media. “Wikileaks’ disregard for gag orders and their unabashed advocacy makes full-throated praise for the organization rare,” he writes. “Yet no journalist I’ve spoken to will speak ill of Wikileaks in private: Every reporter understands that Wikileaks is the thin end of the wedge. If they can’t run a dangerous story, no one can.”

Perhaps Stray is right. But we should place Wikileaks in a broader context of media expansion in the past decade. Unmediated media have thrived in recent years, starting with blogs, but also including Twitter, YouTube, and SMS messages used to disseminate information that governments censor. Wikileaks is a fresh facet of this trend, but, conceptually, it is not a radical departure from YouTube.

Where Wikileaks is interesting is that although it shuns mediation — whether in its funding or dissemination — in many respects it is more reliant on mediation than other new-style media. The United States helicopter attack was made available by someone who had access to a classified videotape, which the Pentagon had refused to release to mainstream outlets under the Freedom of Information Act. Wikileaks is dependent on the agenda of whistleblowers, and unlike more traditional news outlets, its method of posting with minimal comment means it has less latitude to cover itself against manipulation by leakers.

But where Stray’s question is relevant is in terms of the market. The trend in media toward unmediated posting is a phenomenon that is here to stay, because the market, bolstered by new technology, has created a demand for news that stays unfiltered by large institutions, no matter how liberal they might be. If people can read and express unedited views, that erodes the gatekeeper role of traditional media. But it also erodes the capacity of the state and embarrassed institutions to shape how stories come out.  

When Daniel Ellsberg leaked the Pentagon Papers to The New York Times in 1971, he and the newspaper bore the brunt of government wrath and legal retribution. The US government lost. Today, it is even harder, both legally and politically, for governments to silence Wikileaks. 

Anonymous whistleblowers can hide behind such sites, which use the complexity of markets, access to multiple protective legislations and innovative technologies to stay one step ahead of cumbersome bureaucracies trying to conceal inconvenient truths. That doesn’t mean that leaked information isn’t sometimes tendentious, but it does mean that secrets can reach the marketplace before anyone can press a delete button. Malfeasance or brutality may be reduced as a consequence.       

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Consumer Society

In the Name of God and Country

by Executive Editors
written by Executive Editors

In February of this year Joseph Andrew Stack, a 53-year-old software engineer, flew a single-engine plane into an office building in Texas. To the shock of many in the Middle East, the White House released a statement in reaction to the attack that said the attack was not terrorism, but an isolated act.

The declaration that this was not a terrorist incident left many in this region bitterly wondering if the White House would have released the same statement if Stack was an Arab and/or a Muslim.

That terrorism is perpetrated by “others,” or often specifically Arabs and Muslims, is an idea commonly held in the West. In America — the leader of the ‘War on Terror’ for the past nine years — this is especially true.

As Michael Fellman, professor of history emeritus at Simon Fraser University, argues in his new book ‘In the Name of God and Country’ — “Americans prefer to see terrorism as external to the ‘American way.’” But as Fellman deftly illustrates, this is far from the historical truth.

In this lively book, Fellman shows how terrorism has in fact been “intrinsic to the formation of modern American society.” To articulate this argument, he takes five cases of terrorism that occurred in 19th century America. Through these cases Fellman develops a convincing argument that terrorism “colored many of the powerful and contradictory qualities of American state formation during its most crucial phase.”

Fellman states in the book that “from the beginning of the American state (and before), terrorism has pervaded American war making, social transformation and political development, obliterating many conventional fine distinctions of morality, including those between combatants and noncombatants.”

In the first example, Fellman takes the abolitionist and terrorist John Brown. A white American, John Brown had “the perfect combination of Christian holy manliness, American revolutionary zeal and abolitionist righteousness.”

The author illustrates how, in his fight against slavery, Brown committed outrageous acts of violence against noncombatants and innocents that caused deep concern even within his own family. But his ghastly acts for his noble cause appeared to work as he spread fear throughout the white pro-slavery South.

While Fellman focuses on terrorism within US history, lessons are also learnt about the nature of terrorism in general. He makes two general distinctions of terrorism, one revolutionary and the other reactionary, engaged in by both non-state and state actors. It is these two types of terrorism that can become locked in a vicious circle.

“Terrorism provokes terrorism in a cyclical and reciprocal manner — the War on Terror as a concept is falsely one-sided.” These sort of carefully thought out conclusions will no doubt win Fellman few friends in mainstream America. Nor will his uncovering of historical lessons that show how “terrorism can best be understood as a shared process that includes ‘us’ not merely as innocent victims but as participants, even if we did not initiate combat.”

Fellman will likely be brushed aside as an apologist for terrorists despite his clear condemnation of terrorism throughout the book. The typical knee jerk reaction to terrorist acts — to condemn rather than seek to understand — means that such a response to a book that attempts to engage the moral complexities of terrorism is to be expected.

This type of reaction, however, is one of the main warnings running through the heart of ‘In the Name of God and Country.’ To successfully combat terrorism, reactionary counterterrorism is not the solution. But as Fellman shows so well, history is sometimes a tragically broken record.

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Consumer Society

Back on the road

by Executive Editors
written by Executive Editors

The last time Executive covered the Lebanon Motor Show, we called it a “regular fixture of the Beirut Exhibition Center.” That was 2004. For the next six years, spates of semi-annual violence kept the show in a state of hibernation… until now. This year, the show made a resurgence, and by some estimates, 2010 was its biggest year yet.

“It’s true that today, things are still a bit tense,” said Samir Homsi, president of the Lebanese Auto Association. “But most of the dealers are quite excited to do something for their country, for Lebanon. They have shown courage, and the result has been a huge success.”

The show was held at the Beirut International Exhibition and Leisure Center from April 8 to 18. Glamour, technological innovation, muscle-bound super cars and more ecologically friendly models all found a place during the 10 days of displays, with the biggest names in the business showcasing     their latest offerings.

Heavy-duty equipment, motorcycle, off-road vehicle and emergency vehicle dealerships also took part.

Although official statistics were not available as Executive went to print, Promofair SAL, which organized the event with the Lebanese Association of Car Importers, estimates that between 100,000 and 150,000 people attended the event over the course of its 10-day span.

The event featured models from 30 dealers from the Auto International Association group, as well as close to 80 others from outside of the group. The last auto show received roughly equal attendance but only drew half the number of dealers.

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Consumer Society

Simulating sophistication

by Executive Editors
written by Executive Editors

The term “genuine replica,” a favored parlance of counterfeit luxury watchmakers and their advertisers, seems oxymoronic, if not cynical, at first. After all, touting your watch as a “genuine fake” is akin to bragging about a high ‘F’ on an exam — congratulations, you still failed. But it does highlight a disturbing new trend in the counterfeit watch industry: the appearance of a ‘second-tier’ of better crafted, better mechanized replicas that sometimes fool even the experts themselves.

Good times for bad business

While luxury watch makers wilted beneath the heat of the global financial crisis, enduring their worst period since Japanese quartz watches flooded the market in the 1970s, business for their cut-price counterparts boomed.

A 2009 report by the group Business Action to Stop Counterfeiting and Piracy (BASCAP), in conjunction with the International Chamber of Commerce (ICC), estimated that the global market for all counterfeit goods was worth upwards of $200 billion, with some sources putting the figure even higher.

Countries in the Middle East are no exception, with annual counterfeit trade (all goods) in the region reaching $24.8 billion according to Havocwatch, a non-profit watchdog group that monitors counterfeiting. Profit for illicit markets comes not only at the expense of other legitimate watchmakers, but also impinges on society as a whole through the loss of tax revenues and the cost of counter-piracy policing efforts.

Counterfeit luxury watches are about as old as watch making itself, harking back to a time when counterfeiters would inscribe the names of well-known craftsmen on hand-made pocket watches. The problem has grown exponentially in the past several decades due to, among other factors, the easy availability of reliable movements — the internal mechanism of a watch.

Though a strong alliance of corporations and transnational monitors — including the World Trade Organization (WTO), the World Intellectual Property Organization (WIPO), the International Chamber of Commerce, Interpol and local governments — stepped up their campaigns against illicit goods in recent years, counterfeiters seem to be staying ahead of the game.

“I regret to say that the commerce of counterfeit watches has taken on a new dimension,” says Marc Frisanco, deputy director of intellectual property for the Richemont Group, one of the world’s biggest luxury goods groups. “It’s become more global, more active and its intermediaries have grown more powerful. And this applies to all levels — whether in production, marketing or distribution.”

This makes bustling commercial hubs like Dubai or Abu Dhabi, with simplified customs procedures and huge quantities of imports, particularly susceptible to counterfeit goods. The Fondation de la Haute Horlogerie (FHH) lists the United Arab Emirates, along with the Benelux countries, Singapore and Panama, among the favorite destinations for counterfeiting rings, due more to ease of transit than to regional demand.

Another complicating factor in the fight against counterfeits is the ease with which they proliferate on the Internet, says Frisanco. One site calling itself Hot-Replica.com — a comprehensive, professional-looking webpage — promises free shipping, postal insurance and even secure payment through Paypal, the global Internet payment module. All it takes is $49.99 charged to a credit card and the new fake will appear in a week’s time on your doorstep — with its enclosed warranty.

Profit for illicit markets comes not only at the expense of other legitimate watchmakers, but also impinges on society as a whole

Real fakes

As the counterfeit watch industry increases its global reach, it grows ever more sophisticated. Last year, the FHH launched a comprehensive study of the industry in order to educate the public and crack down on piracy.

The study’s findings describe how new high-end replicas come into being: “Counterfeiters work within well-established networks,” the report reads. “They order the various components that will make up the counterfeit watches (movement, case, strap, dial) from specialist suppliers who use modern, high-tech machines.”

“As soon as the parts are delivered, the counterfeiters add inscriptions, either in their own workshops or through an unscrupulous third party,” it continues.

The use of reliable movements — some replica dealers even claim to employ the same movement systems as the luxury dealers themselves — is an unsettling trend, as are the many stories of high-quality counterfeits passing unnoticed under the eyes of experts.

Yet there are certain qualities that cannot be replicated. No counterfeit, even at the higher end of the price spectrum, can afford the material costs of a genuine luxury watch. Instead, they rely on substitution — stainless steel for silver, synthetic gems for real jewels, and mineral glass for sapphire.

Killing time?

Data compiled in the UAE gives a telling example of the damage counterfeiting can cause to local economies, regional watchmakers and retailers alike. According to an impact study by the Brand Owner’s Protection Group, a group of global brand owners and legal consultants, effective action against counterfeiting would increase non-oil based production in the UAE by 5.95 percent, tax revenues by 3.78 percent and employment levels by 1.85 percent.

Yet the extent of the damage is still debated, even among watchmakers themselves. “While we’re absolutely behind the effort to combat counterfeiting, we don’t consider it a competitive market,” says Jacob Hrayki, regional manager of Dior. “A customer who purchases a counterfeit is not the same customer who purchases a genuine Dior watch. It’s a completely different demographic.”

But by being complacent about protecting their “true brand experience,” luxury watch makers run the risk of their top lines falling victim to what counterfeiters capitalize on stealing —  the brand’s association with a particular lifestyle.

“It is an established fact that counterfeiting can turn customers away from the original product,” said the FHH report. “A brand earns its reputation through continued efforts in production and good relations between the manufacturer and its customers…. When a poor quality imitation appears on the market, customers inevitably lose faith in the original and its brand.”

If apprehended and charged in Lebanon, counterfeiters face fines between $3,000 and $33,000 and up to 36 months in prison

The good, the bad and the professionals

Lebanon is party to international laws and conventions, including the Paris and Berne Conventions, which set out the parameters of counterfeiting. If apprehended and charged in Lebanon, counterfeiters face fines between $3,000 and $33,000 and up to 36 months in prison, according to data provided by Saba&Company, a Middle Eastern intellectual property law firm.

Within the government, an Information Technology and Intellectual Property Rights Law Enforcement Office was established in 2006 as a new section under the jurisdiction of the Internal Security Forces, supervised by the General Prosecutors office. In coordination with customs authorities, this branch is responsible for intercepting counterfeit products within Lebanon and at the border, in addition to prosecuting smugglers.

Yet part of the difficulty authorities and industries face in cracking down on counterfeiters stems from a lack of coherent policy or enforcement at a transnational level. Though Interpol, the WTO, the ICC and countless business alliances have developed a sophisticated system of information sharing, national efforts are generally restricted to their own localities.

Wolf Meier-Ewert, legal affairs officer at the WTO, elaborates: “There is a consensus among developed countries as to what necessary measures to take,” he said, “but other countries — generally, those in which counterfeiting industries have a significant presence — have blocked the measures. They argue that international legislation could target them should their own local enforcement fail to meet its standards.”

Thus cracking down on the copycats remains confined to the purview of state law enforcement agencies; as Richemont’s Frisanco puts it: “Repression is local but counterfeiting is global.” 

With as strong a nation as China producing over 60 percent of the world’s counterfeit goods, according to the FHH, international efforts have little chance of making headway if individual states decide not to cooperate.

The public is its own best defense

That puts the ball squarely in the court of the consumer. “The best way for a customer to ensure that the watch they purchase is genuine is to buy it on-site from a certified retailer,” says Dior’s Hryaki. “Purchasing off the Internet is risky and we discourage our customers from it, but as long as you’re purchasing directly from a high-end shop, there shouldn’t be much to worry about.”

Even so, it never hurts to be vigilant. Here are a few tips to spotting a fake, according to criteria laid out by the Federation of Swiss Watchmakers. High-end replicas generally exhibit a slight looseness of parts, and their casings, made of glass instead of crystal, can be easily scratched.

Though heavier than low-end fakes, these models will still be more light-weight than a genuine luxury watch. And, while they may employ reliable parts, they do not function at anything close to the mechanical precision of a genuine luxury watch.

Is imitation the sincerest form of flattery? Perhaps, but it’s a hard sell to make in terms of the counterfeit watch industry, where the desired end is not appreciation but profit.

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