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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Consumer Society

Micro machines

by Executive Editors
written by Executive Editors

The Anthony Bonja Fortress watch has a look to match its name. With a thick steel casing held together by six hefty screws and a weighty leather strap, it’s the kind of timepiece you would want on your wrist when facing down an angry bear or a brutish boss. It exudes an aura of solid self-confidence in a way only $5,000 concentrated in four square centimeters of stainless steel can. But inside, there is an entirely different matter at hand — or in this case, on hand.

As a mechanical watch, the Fortress is powered by a system of gears and springs so delicate and so precise that their dimensions and alignment must be measured to the micrometer. It’s this balance of aesthetic sophistication and technical precision that makes a luxury watch, but Anthony Bonja, like the dozens of Middle Eastern brands offering luxury watch lines, is only responsible for half of the equation.

The company is a jeweler, not a watchmaker. The mechanical aspects of its watches — called the “movements” or “ébauches” — are purchased outside of the region, the fruit of a niche market of specialized producers. 

“To the best of my knowledge, all manufacturing of movements used by Arab luxury watch brands occurs outside of the Middle East,” said Susan Maroua, public relations manager at Tabbah Jewelry. “This structure isn’t unique to the Middle East either — it’s the norm for most of the industry.” Companies that produce their own in-house movements — like Rolex, Zenith and Jaeger LaCoultre — and sell to other private groups “are exceptions,” according to Maroua.

Step by step

The majority of the watch making industry is structured ‘horizontally,’ according to the Fédération de l’Industrie Horlogère Suisse (FH) — the association of Swiss watch makers — meaning that any given watch passes through several companies or technicians, each of whom is responsible for a different step in its development, before it reaches the showroom.

“As a luxury jewelry line, we work in participation with a number of specialists to produce our watches,” explained Stephan de Palmas, regional director for Van Cleef & Arpels in the Middle East. “Our company will develop a concept and send its specifications to one of the manufacturers we work with – Jaeger LaCoultre, for example – which will produce and send us the disassembled movement. The movement is then sent to another specialized technician who adds complications [mechanics that run off the movement] that will, say, cause a couple to meet and kiss on a tiny bridge every twelfth hour, or show the cycles of the moon.”

“Finally, when the watch’s mechanical aspects are fully assembled, it returns to our workshops to be decorated and jeweled, and from there goes to our retailers to be sold,” he said.

Regional markets

On the receiving end, Middle Eastern states are among the top importers of luxury watch movements globally. According to the FH, the United Arab Emirates is the 9th largest importer in the world, with Saudi Arabia, Lebanon and Bahrain not far behind.  Taken on a per-capita basis, the Middle East accounts for nearly as many watch sales as some of the world’s largest markets in Japan, Europe or the United States, and the region’s segment seems to be growing.

Middle Eastern markets, along with heavyweights China and India, played a major role in pulling the luxury watch industry out of its 2009 slump, and international retailers are increasing their regional foothold as a result.

“Dior is up this year 6 percent,” said Jacob Hrayki, regional manager for Dior. “I believe retailers are in a more confident position this year, investing better in their stocks and mainly in their strategic brands.”

FH estimates that Swiss watchmakers exported some 2.1 million watches and 35,000 movements, worth a combined $1 billion, to the Middle East in 2009. That constituted a decrease of 22 percent from 2008 sales, which is a testament to the difficulty the industry faced that year. However, sales have picked up sharply in the first months of 2010, with regional sales of Swiss watches and movements increasing by nearly 40 percent in January and February.

As Swiss as cheese with holes in it

Although Japan, Russia and Germany produce and export a portion of the markets’ movements for use in luxury watches, Switzerland is still the industry’s silverback gorilla.

The alpine state exported $12.3 billion worth of watch related products in 2009, while its closest competitor, Hong Kong, achieved sales of only $5.6 billion.

Much of the country’s own industry is dominated by a single company, ETA SA, a wholly owned subsidiary of The Swatch Group, which supplies the movements used by the majority of mid-range luxury watch brands made in the Middle East.

However, that partnership is slated to end in the very near future. In 2003 ETA announced that it would end all sales of movements to makers not allied with the Swatch group by 2006, prompting a panic among smaller makers and driving sales as makers rushed to build up their reserves in anticipation of the closure.

“There was no innovation, no new development, and when I pushed them to start new production, everybody started shouting,” Nicolas Hayek, the chief executive officer of Swatch, said at the time. “I said I was not going to deliver any more of my movements unless they try to do their own production. Otherwise the Swiss watch industry… will go down.”

Following protests by smaller makers, the company was investigated by the Swiss Competition Commission and found guilty of abusing its dominant market position.

During the settlement period, ETA agreed to push its export closure date back to the end of 2010 while engaging in a slower “phasing out” of its movements from the market. By the end of this year, however, Middle Eastern jewelers along with other makers around the world will need to look for new sources to furnish their machinations.

The alpine state exported $12.3 billion worth of watch related products in 2009, while its closest competition, Hong Kong, achieved sales of only $5.6 billion

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Editorial

Leave us alone

by Yasser Akkaoui
written by Yasser Akkaoui

Even the piecemeal tax increases contained in the Lebanese Ministry of Finance’s 2010 budget proposal are insulting. The private sector and the expatriate community — the two entities that keep the Lebanese economy alive and the government afloat — can’t help but feel that they’re being forced to give more blood to the leeches of the state and still receive nothing in return.

For example, in some countries taxes on cigarettes help cover healthcare costs. In Lebanon, taxes are what the Ministry of Finance, through the Regie Libanaise du Tabac et Tombacs, uses to pay tobacco farmers for their crop, at times registering up to a 500 percent loss. This is insane.

Such complaints are not just the moaning of the wealthy. This is a reaction to the crude policies of a government that, under pressure from donor nations to get its fiscal house in order, will further burden those who already carry it, instead of attempting to lighten the load through measures that are simple common sense.

Lebanon is neither a classic laissez-faire economy that lets businesses run wild and free — it is too corrupt for that — nor is it a typical welfare state which provides education, healthcare and housing for its citizens. Quite simply, it falls between the two stools and instead of seeking to remedy the failings in its national infrastructure and behave like a mature government, it takes the easy route and taxes those whose economic health is predicated on unfettered economic activity. 

For years now, Lebanon has prided itself on its fiscal wisdom, boasting that it is this prudence that has kept it from ‘pulling’ an Argentina or a Greece. But that our politicians even talk in those comparisons — that yes, we are looking over the cliff, but no, where others have fallen we will keep our balance — is a testament to their fiscal ineptitude.

The private sector cannot be held responsible for this colossal waste. Should government one day become transparent and accountable, and show it has spent the money we already gave wisely and efficiently, then we could talk about, perhaps, paying more into government coffers.    

But that day is a long way off. Until then, quite simply, the private sector should be left well alone. We, the private sector, have kept Lebanon afloat for over 50 years. Let us work; let us employ; let us create; let us spur consumption.

Let us be.

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Real Estate

Development disorder

by Nada Nohra
written by Nada Nohra

It has been 20 years since the end of the war, but we still haven’t seriously started reconstructing the country,” said Serge Yazigi, head of the Majal urban observatory, part of the urban planning institute of Académie Libanaise des Beaux-Arts at Balamand University.

Beirut may be in the midst of a construction boom, but the lack of a coherent, concerted vision of how Lebanon’s capital should look,  function and grow leaves urban planners like Yazigi shaking their heads in dismay.

Cities the world over face the challenge of rapidly urbanizing populations, particularly in developing countries, which often lack a strategy or effective policy to direct their growth down a sustainable path. In the case of Beirut, this problem has been compounded by an almost unmatched exposure to devastating conflict.

Low standards of living in the city’s numerous “informal settlements,” rocketing property prices, the absence of public transport, traffic congestion, environmental degradation and rampant construction are all serious challenges facing Beirut.

Yet thus far, no government body has shown the muscle to impose an urban plan to address these issues and ensure the city’s sustainable growth.

Informal settlements

Some of the first informal settlements sprang up in Beirut in the late 1940s as Palestinians fled Israeli aggression, with new ones forming over the years as people sought to escape rural poverty, Israeli invasions and civil war. Over time, areas around the capital that had at first acted as temporary sanctuaries for refugees became their permanent residences.

Today these areas host low-income urbanites who, decades ago, built homes there illegally and therefore do not pay taxes.

A recent study by Mona Fawaz, assistant professor in the graduate programs of urban planning and urban design at the American University of Beirut, said that the Hayy El Selloum area, located in the southern suburbs of Beirut, is the largest informal settlement in the city with a population of 100,000 people. Other informal settlements around Beirut include Zatriyyeh, Rouwaysat, Ouzaai and Al Raml Al Ali. The most recent numbers from the United Nations Human Settlements Program (UN-Habitat) stated that in 2005, 53.1 percent of Lebanon’s urban population lived in slums or informal settlements.

Fawaz said inflation in the real estate market has effectively made it impossible for people living in informal settlements to move to other parts of the city, making these ever more densely populated. The need for people to reside near their workplace has also prevented many from moving to other areas, due to the lack of adequate public transport.

“These people have nowhere else to go so they are adding floors. What you are ending up with is a complete deterioration of these neighborhoods that are so congested they are impossible to live in,” said Fawaz.

Many informal settlements, due to their illegality, do not receive basic services from the government. Nancy Hilal, urban planner at UN-Habitat said that these communities often form their own committees through which they raise money to build local sewage systems and other necessary services. Out of 12 settlements in a UN study, only two officially received electricity from the national power company — others receive it through a variety of means such as private generators and political influence to divert the electrical grid. 

The government has done little or nothing to upgrade living standards in these areas or help residents move to better locations.

The one attempt it did make after the Civil War was the establishment of Elyssar, a public agency for the planning and development of the south western suburbs of Beirut: home to some 500,000 inhabitants living in informal settlements, according to a UN-Habitat.

The project was supposed to include more than 10,000 affordable housing units, 1,000 shops, some 100,000 square meters of light manufacturing, parks, warehousing and workshop centers, as well as basic infrastructure.

“It was the first time the government got involved in urban planning,” said Hilal. “However… planning is very political. This is why it is not being implemented.”

Elie Sawma, president of the Building Promoters Federation of Lebanon, said that his organization was pushing the government to reactivate the Elyssar project, which would decrease pressure in the real estate market by boosting supply. Sawma added that the price per square meter would be between $2,000 and $2,500 — lower than other areas in Beirut but significantly higher than the informal settlements, which would most likely defeat their purpose.

High prices on middle incomes

Middle class Beirutis are feeling the heat of the city’s red-hot real estate market, as local, expat and foreign demand causes prices to balloon. By law, foreigners are allowed to own only 10 percent of any one district in Beirut. A recent Al Iktissad Wal Aamal study showed that foreigners owned 6.52 percent of the capital, including properties purchased by Lebanese on behalf of foreigners, or properties purchased by local companies that are foreign-owned.

Inflation has hit all market segments with prices on lower-end properties in Beirut having risen some 120 percent on average since 2005, and 150 percent on higher-end homes, according to Ramco real estate advisors.

Urban planners Executive spoke with said the Lebanese authorities should help to control prices and encourage affordable housing in a city filled with ever-more high-rise luxury towers.

“We should keep it as a free market but some limitations need to be put in, like forbidding speculation or a jump in prices,” said Majal’s Yazigi, noting that these initiatives should be part of a specific urban plan which governs the construction and expansion of the city.

“Each country deals with the increases in prices in different ways, but all developed countries in Europe have a policy which fights the increase in land prices,” said Mohamed Fawaz, head of the Directorate General of Urbanism (DGU) between 1974 and 1993.

Public transport

Increased urbanization, a lack of public transport and among the highest per capita car-ownership rates in the world, are escalating Beirut’s traffic congestion, parking shortages and pollution from car emissions.

 “We are losing a tremendous amount of time to go from one place to another. [The congestion] is decreasing our attractiveness to tourists and affecting our health,” said Yazigi.

According to a study by advertising agency Pikasso, 65.2 percent of households in Beirut own a car and use it as their most frequent mode of transport. 

Mohamed Fawaz said that since the first meeting of Metropolis (World Association of the Major Metropolises) in 1985 – in which he took part as the head of the DGU – it is a commonly accepted fact that private cars cannot solve transportation and traffic issues in cities.

“However, this ‘conviction’ has not yet reached Lebanon,” he said.

Transportation means currently available include taxis, shared taxis, buses, or private minivans. Beirut needs 700 buses to provide efficient public transportation, said Mohamed Fawaz.

“Our city hasn’t provided a quarter of that number,” he remarked.

The World Bank initiated a $204 million “Urban Transport Development Project” at the start of 2009 to help provide Beirut with traffic management, parking improvement programs and training for police.

Though this program has improved traffic circulation and increased available parking, authorities have yet to set out a comprehensive public transport strategy, which Fawaz said should incorporate rail trams.

Mona Fawaz also related the lack of public transport to the housing situation, as high real estate prices force out lower-income earners, concentrating them in low-rent areas, which curbs the city’s natural growth.

“Public transportation and networks should be created in order to allow for this city to grow, for those who cannot afford municipal Beirut to be able to live somewhere where they can commute using a public network,” she said.

Do we have a plan?

In July 2009, the government approved the “National Physical Master Plan for the Lebanese Territory” —  a study concluded in 2005 by the Council of Development and Reconstruction (CDR), the DGU and L’Institut d’aménagement et d’urbanisme de d’Île-de-France.

Experts laud the plan as a step toward achieving sustainable planning; the problem is that it does not include specific instruments for implementation.

“The planning instruments and the related institutional setup are almost non-existent in Lebanon and the cooperation between the institutions that are involved in planning is absent,” said Dania Rifai, Habitat program manager at UN-Habitat. “[Therefore urban] planning is restricted to construction permits.”

Role of DGU

Lebanon’s urban planning law dates back to 1983 (Law number 69), which gives the public authorities (the DGU) the power to regulate the built environment and infrastructure in Lebanon. The DGU was also given the authority to set population densities in different areas, forbid construction that might negatively affect the surrounding area, protect the environment and order the acquisition of land for public purposes, among other things. 

“However all its decisions have no value unless they are approved by the cabinet, and that is the disaster here in Lebanon,” said former DGU head Mohamed Fawaz. Consequently, the DGU’s powers are have been limited by political impasse.

The DGU was meant to have an active role in post-2006 war reconstruction, with the power to intervene in planning and preserve historic areas in line with social values. “However, financial limitations and political entanglements came in the way of their ability to play an effective role in the process,” said Mona Fawaz in her UN report ‘The Reconstruction of Lebanon after 2006.’

The DGU also offers technical assistance to municipalities that lack urban planning departments. The only municipalities with urban planning departments are Beirut and Tripoli, according to Mohammed Fawaz.

Municipalities are also involved in the urban planning process, since the head of the municipality must sign all construction licenses – except in Beirut, where the governor signs them.

Mohamed Fawaz pointed out, however, that license approval at the municipal level usually focuses exclusively on whether building specifications abide by the law, but do not consider criteria such as how sympathetic the project will be to its surroundings.

Often it is simply beyond the municipalities’ capacity to use anything but strictly legal criteria to assess license applications, as most lack the human, technical and financial resources.

Survival mode

The DGU is not playing the essential role it should be in ensuring sustainable development in Lebanon, and other government agencies lack adequate resources. 

Yazigi pointed out that urban planning in Beirut is still in “survival mode.”

“Instead of trying to anticipate the problems to come, all our energy is lost on solving as much of the current ones as we can — we need to identify a vision and reinforce the state power in order to implement [it],” he said. “If there had been a plan [since the civil war ended], we could have preserved more heritage and more identity. We could have enhanced tourism, investment attractiveness and… inhabitants’ quality of life.”

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