Society

Shelf space wars

by Joe Ayoub
written by Joe Ayoub

There’s a shift going on in the retail world. Where once manufacturers competed against one another for consumer loyalty, today they face sharp competition  from retailers, the very places that stock their brands.

To give an example, there was a time when rivals such as Pepsi and Coca Cola viewed each other as their main competition, but today on the supermarket shelf the big two often stand beside a brand of soda bearing the retailer’s own label.

In the region we can see the phenomenon in supermarkets such as Monoprix or Spinneys, where consumers can find the retailer’s private label next to similar global brands.

In Europe generic label brands have won high profile recognition, but in the Middle East, retailers often adopt a more low-key approach to their store brands. This can make it hard for consumers to recognize the product’s origin and attributes, compounded further by weak marketing and communications.

At its origins, the private or own-label trend stemmed from the retailer’s desire to offer consumers a cheaper alternative to well-known brands. It wasn’t long, however, before the major brands took notice of the new competition and fought back by lowering their prices. As the gap narrowed, consumers soon reverted back to choosing their original, favorite brands.

For retailers this forced a rethink of the private label strategy. Instead they began to look for areas of dissatisfaction, spotting gaps that major brands were not filling.

Retailers are perfectly placed to understand their consumers’ needs, based on the fact that they interact with them daily and can actively monitor their purchasing habits. As retailers sought to close market gaps, they moved away from offering cheaper alternatives to delivering quality products at a similar price to major brands — and sometimes even higher. 

This represented a more customer-centric strategy on the part of the retailers, while at the same time providing them with a hook to lure customers through their doors; while manufacturers’ brands are available everywhere, private label brands are tied exclusively to one retailer, thus giving customers a reason to shop in a certain place over another. 

Although ‘own brands’ in many cases are helping retailers capture a greater market share than the high profile manufacturers, the initiative still requires several factors to achieve success. First, the retailer needs to have good knowledge of brand portfolio management to enable them to manage their brand alongside the other international brands stocked in store.

Secondly, strategic branding takes a retailer out of his purely retail role into the world of manufacturing, which necessitates an understanding of the manufacturing process, of how to deal directly with manufacturers and an awareness of issues such as supply management and quality control.

From a consumer point of view, the retailer has to create a product that offers added value. Simply sourcing a cheaper product with low quality will have a limited run of success; consumers will soon realize the product is not up to standards and return to their preferred brands. In essence, the retailer needs to think about how to develop a long-lasting consumer relationship through building value into the product at all levels, so that it can stand alone and compete in its relevant category.

The possible pitfalls are many, but can be avoided with the right advice and support that a strategic branding consultancy can provide. It is here that a retailer can receive advice on whether there is a gap in the market which needs filling, which category to enter, how to position the brand and how to construct it. The consultant can advise on a product’s name, logo, packaging and how to connect the private label with its potential target market.

While a private label initiative can reap rewards for retailers, it should be clear that this is not a quick fix solution if a store is doing less than well. However, a retailer that enjoys a good consumer relationship can find that with the right strategic branding advice, launching a private label can increase its brand equity, drive profits and create a new era of a stronger and more direct customer relationship.

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Society

Conquering the mutated face of censorship

by Mark Helou, Zeina Loutfi & Ramsay G. Najjar
written by Mark Helou, Zeina Loutfi & Ramsay G. Najjar

Recently, the satellite providers Nilesat and Arabsat decided on a unilateral basis to block the Al Alam Arabic-speaking Iranian pro-government channel.

Without delving into the underlying causes which triggered it, one cannot but notice the zeal and passion with which a large number of journalists, intellectuals and politicians, often known for their opposition to the Iranian regime, have condemned this action, which they perceived as blind censorship. In fact, this comes as a true illustration of Voltaire’s “I disagree with what you say, but I shall defend to the death your right to say it.” Since the channel had not infringed any of the laws that regulate the media sector, the mechanisms that had led to this coercive situation were nothing but a reflection of the modern face of censorship: economic censorship.

Censorship is indeed a phenomenon as old as civilization itself, which has continuously evolved through a myriad of different forms throughout history, adapting to the changing political and social contexts, yet maintaining the invariable goal of controlling and limiting freedom of expression.

Plato, the very first documented thinker to have advocated censorship, has been criticized for his book ‘Republic,’ in which he called for the censoring of intellectual or artistic works that were deemed “dangerous for the spirit.” Around the same time, Socrates was condemned to kill himself by drinking poison as a punishment for his independence of thought, perceived as a menace by Athenian society.

In the following era, religions soon became the censors of reference on all levels by defining what God liked or disliked. This was followed by a more modern censorship, where raison d’état or ‘national security’ proved to be weapons of choice for promoting many forms of censorship, thus simply replacing God with the State. Another form of censorship, intimidation, strived to maintain citizens in a perpetual state of fear by making them feel constantly watched, thereby forcing them to practice self-censorship, as admirably illustrated by George Orwell’s novel “1984,” where the vigilant eye of Big Brother sees to it that citizens are well-behaving.

The free (re)press

But censorship did not only flourish during antiquity and the middle ages, it also managed to find its way into the Age of Enlightenment. Descartes’ “I think therefore I am,” which signified the emancipation of the individual by free-thinking, thus became an “I think for you,” hammered by all absolutist regimes, and even a “You are what I think,” in the most extreme cases.

As censorship adapts to the changing times, we are now confronted with its newest form — economic censorship, which is all the more dangerous and corrosive, as it can be exercised behind the scenes without any kind of institutional or legal framework to regulate it, with existing frameworks actually becoming tools to serve its purpose. As its name indicates, economic censorship takes advantage of a dominant position to exert financial and economic pressure on content producers, journalists or media outlets to influence the content they disseminate. The measure that was implemented by Nilesat and Arabsat perfectly illustrates this form of censorship, as it resulted from financial pressures being exerted by the funders to reach political objectives.

Economic censorship feeds on media outlets’ increased dependency on external sources of funding: with newspapers and magazines becoming overly dependent on advertising money for survival, they now constantly monitor their content to remain on good terms with their advertisers, which is nothing but another form of economic censorship in disguise. As an example, in 2007, a not-so-flattering book about celebrity fashion designer Karl Lagerfeld and the luxury sector in France was completely ignored by the French press. Since the luxury sector is a heavyweight advertiser in France, this silence was easily attributed to the fear of retaliation, which would have brought many media outlets to their knees.

Another example illustrating the power of economic censorship is the old canard that says that the Jewish lobby controls global media, one we are all familiar with, especially in this part of the world. Without venturing into far-fetched conspiracy theories, it is clear that this perception stems from the long-standing economic censorship practiced by many lobbies and pressure groups, which aims at influencing the content of media channels by using financial levers such as advertisement dollars or boycotting cultural products.

Economic censorship is all the more dangerous as it is far more subtle than its traditional self, which often relied on primitive and crude tools such as the outright banning of a publication or content. By comparison, economic censorship has forged itself a large palette of mechanisms covered by existing rules and regulations, such as imposing high custom fees to prevent the importation of a book or complicating at will the process of acquiring a filmmaking permit.

In a world where financial considerations have taken priority over other values such as freedom of expression and the right to know, we can rightfully fear that the economic form of censorship might actually be its ultimate stage and the prelude for a ‘formatted thinking’ society. This fear could be further justified by the increased consolidation witnessed in the media and culture sectors, which are now in the grip of a limited number of players.

Usurped by the internet

So has censorship finally won and are we entering an age where our thoughts, ideas and feelings will be dictated by invisible censors?

Fortunately, the answer is a big “No,” as the emergence of the internet has shaken all the foundations on which censorship has been relying throughout its existence. John Gilmore, an internet guru and freedom of speech activist, enunciated what has become known as Gilmore’s Law, which is directly inspired from the way the internet operates as a physical network: “The net interprets censorship as damage and routes around it.”

Just at the point when economic censorship had begun to endanger diversity and freedom of thought, the emergence of this super-medium with its social and file exchange networks, blogs, forums, download sites and chat rooms can be seen as the beginning of the end of all forms of censorship.

Today, it is practically impossible to keep an event under cover, distort the truth, silence a journalist, or ban an artistic work.

Even if one played the devil’s advocate and rightfully agreed that there are indeed certain voices that can constitute a potential threat to social well-being, it is not by silencing these voices that we can protect society. It is rather by immunizing citizens against destructive ideas, a feat that can only be accomplished by the dissemination of knowledge and access to uncensored information. The most likely teenager to say no to drugs is not the one who is unaware of their existence, but the one who is perfectly informed of their detrimental effects. Similarly, the success of mankind in protecting itself against viruses was not due to the elimination of these viruses, but to building an immunity that was acquired, precisely, from contact with these viruses through vaccination. By depriving society from the vaccines that information and knowledge represent, censorship does therefore nothing but expose it to all kinds of diseases and illnesses.

One cannot but feel a mix of bitterness and amusement when witnessing the persistent and desperate efforts of some governments that are still swimming against the tide by trying to maintain the grip of censorship over their citizens. Such futile attempts are bound to fail, and we will hopefully have the chance to witness during our lifetimes the complete demise of censorship in a world where each citizen will be able to think freely, and be heard in all corners of the globe.

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Neighborly negotiations

by Executive Staff
written by Executive Staff

 

The Palestinian gunman, his face screwed up with rage, ran towards us, raising his AK-47 and yelled, “Get your hands up! Get your hands up!”

It was June 2007 and in the north of Lebanon, the Lebanese army and Fatah Al-Islam were in the early stages of a bloody battle at the Nahr Al-Bared Palestinian refugee camp — a confrontation that would last 106 days and leave 168 soldiers, over 200 militants and dozens of civilians dead.

The fighting in the north clearly had unnerved the Palestinian gunman. He was a guard at the entrance of a small military base at Ain Al-Bayda, near Kfar Zabad village in the Bekaa Valley, manned by the Popular Front for the Liberation of Palestine-General Command (PFLP-GC), a Damascus-backed radical faction. The PFLP-GC runs five small bases in Lebanon: Ain Al-Bayda, Wadi Heshmesh just north of the Bekaa village of Qussaya, Jabal Al-Maaysara on a lofty mountain plateau east of Qussaya, Sultan Yaacoub in the western Bekaa, and another at Naameh, 15 kilometers south of Beirut.

The PFLP-GC and Fatah Intifada, another Syrian-supported Palestinian group that also operates small camps north of Rashaya in the western Bekaa, were on high alert during the fighting in Nahr Al-Bared.

My two colleagues and I were forced to sit on the ground, our hands on our heads, for five minutes until the arrival of the guard’s boss, incongruously dressed in a purple shell suit. Calm and polite, he told us: “We are guests in this country and we are here in these bases only to help liberate Palestine.”

That incident occurred more than a year after the National Dialogue, the round-table forum grouping Lebanon’s top leaders, had agreed to shut down the Palestinian bases and ban arms carried by Palestinian militants outside the 12 established refugee camps. Nearly four years after that decision was reached, it has yet to be implemented. The Palestinian bases still exist, surrounded by Lebanese troops who prevent civilians and journalists from accessing them.

The issue of the Palestinian bases may well become salient again in the coming months, given the easing of tensions between Lebanon and Syria since the formation of the new government in Beirut in November, and the visit to Damascus by Prime Minister Saad Hariri in December, 2009.

Although both countries have undertaken the historic step of exchanging formal diplomatic relations with the opening of embassies in Beirut and Damascus, the pace of rapprochement will depend greatly on how Syria reacts to Lebanese requests for assistance in some key — but solvable — areas. The first is the fate of the PFLP-GC and Fatah Intifada bases, the second is a decision to begin the long-neglected delineation and demarcation of the border between the two countries.

It is evident that following the Nahr Al-Bared experience, the army has no taste for forcibly dismantling the Palestinian bases, even though in military terms it would be a much simpler task to shut the isolated rural outposts than weeding out Fatah Al-Islam’s die-hards from the cramped interior of a Palestinian refugee camp.

Furthermore, the PFLP-GC, in particular, is an ally of Hezbollah — these days serving almost as the Lebanese party’s private militia force, which adds an awkward political component to closing the bases.

In January, Abu Musa, the leader of Fatah Intifada, declared that he rejected the disarming of Palestinians outside the refugee camps and that the fate of their weapons was a matter to be decided among Palestinians.

Abu Musa’s rare press conference appears to have been an effort to hinder attempts to close the bases before they had even begun. Importantly, however, Abu Musa would not have made such a bold declaration without the knowledge of his hosts in Damascus. Syria has said that because the bases lie on Lebanese soil, it has no jurisdiction to have them closed. In reality, if Syria instructed the PFLP-GC and Fatah Intifada to dismantle their outposts and return to the refugee camps in Damascus or Beirut, they would do so quickly and with a minimum of fuss.

Damascus bridles against international pressure and tends to dig in its heels when lectured by the West. Whether Syria will show goodwill over the Palestinian bases, remains to be seen. But if it does it would win international praise at almost no tactical cost to itself.

There are indications that the United States will soon develop a more nuanced approach toward Lebanon, beyond the repeated calls for the implementation of Resolution 1701. The new track will focus on the border between Lebanon and Israel, probably in terms of seeking to extend the current calm along the Blue Line. But there will be other indirectly related issues the Americans will likely pursue, such as encouraging Lebanon and Syria to begin mapping and formalizing their joint border and closing down the Palestinian military bases.

How Syria responds to such calls will provide early indicators as to how the Lebanon-Syria relationship will unfold in the months ahead.

Nicholas Blanford is the Beirut-based

correspondent for The Christian Science Monitor

and The Times of London

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Society

Green light for eco cars

by Nadim Mehanna
written by Nadim Mehanna

If there’s breaking news in the automotive world, chances are, you heard it in Geneva, Switzerland. For more than a century the city has played host to one of the world’s preeminent automotive exhibitions — the Geneva Motor Show — which in that time has featured almost every model of internal combustion-powered automobile to enter into mass production, as well as countless prototypes, concept cars and theoretical technologies.

It is the stage on which automotive giants and small-scale developers alike unveil their latest innovations and upcoming models. If you want to see into the future of the automotive industry, Geneva may offer your best glimpse; if the industry is taking a new direction, then the exhibition is your signpost. 

Brain beats brawn

This year, the name of the game was diversification, with established makers diverging from longstanding traditions. The appearance of the Volkswagen Touareg, alongside the Porsche Cayenne, indicates the ambitions of the two members of the Volkswagen Group to make their mark on the sports utility vehicle market; Lexus made a splash with its first supercar, the LFA, currently the second most expensive on the market; and Audi unveiled its long-anticipated RS5.

But the most interesting trends on display at the show were not innovations in bigger, faster, more powerful autos. They were the smart cars, the micro models, and above all, an emphasis on hybrid electric vehicles — cars that favor energy saving and fuel efficiency oversize or muscle.

The history of the hybrid is full of ups and downs. The advantage of hybrid vehicles — those that utilize multiple power sources — has been evident since the outset of auto manufacturing. Many different prototypes have entered the spotlight over the years: fuel cells —  which ultimately proved limited in scope; and hydrogen — much loved by environmentalists for its pure-water exhaust but ultimately unworkable due to the high energy cost of manufacturing the fuel.

In the end, electricity appears to have prevailed. The electric car is not a novel concept; the first prototypes competed with the earliest combustion engine models, before Henry Ford’s Model-T changed motoring forever in 1908.

The hybrid represents the best of both worlds: combustion and electric. Defined generally, hybrid electric vehicles employ a smaller version of the conventional internal combustion engine, supplemented by an electric powertrain. The car’s lithium-ion electric battery can be recharged either by plugging the car directly into an outlet or by a mechanism which traps the vehicle’s kinetic energy and converts it into electricity.

Shifting into efficiency

The car’s engine is the most common source of electricity generation, although increasingly, other forms of energy trapping such as regenerative braking systems are also making headway. An important aspect of hybrid vehicles is their ability to maximize energy use, which has led to the development of lighter, more streamlined bodies and more efficient engine design.

The number of new models and the industry-wide drive to design more energy-efficient vehicles shows that government incentives to reduce carbon emissions, as well as increased dialogue in the public sector on the drawbacks of reliance on fossil fuels, may be generating real results. The Kingdom of Jordan has begun voiding taxes on imported hybrid cars. Meanwhile, the United Arab Emirate’s many taxis are now electro-thermally motorized and the Roads and Transport Authority is encouraging makers to move in the green direction. Even luxury automakers have proved responsive; among the fleet of new hybrids featured at the exposition this year were prototypes from Porsche and Ferrari, neither of which had previously shown much willingness to diverge from their standards of high fossil fuel consumption.

A more electrifying market

The presence of a conceptual model does not necessarily herald an industry-wide turnaround. While it is commendable that manufacturers are willing to delve into the hybrid sector, a concept car is only a theoretical foray until it actually hits the market. But the niche is there, and has been widening over the course of the last 15 years. The first hybrid model, the Toyota Prius, was released in 1997. For the next five years, the world saw one new hybrid a year, sometimes carrying Toyota’s mark, sometimes that of Honda, Toyota’s biggest competitor in the hybrid market. In 2005, four new models were on the market, which grew into 10 in 2009. Projections for 2010 put the number of new hybrid models between 10 and 20.

There has not been a real challenge to the internal combustion engine since the first decades of the Twentieth Century, when early models of cars entirely powered by electricity, benzene and steam were phased out by the domination of fossil-fuels. But every era has its own challenges to meet, and as the dangers of greenhouse gas emissions become increasingly apparent, all sectors of the industry will need to shift their focus to more environmentally-friendly technologies if they are to garner public favor.

That a company like Ferrari should break with all standards of decorum and shed its customary red for a green body paint on its new hybrid is, perhaps, the best visual illustration that the shift has already begun. The beetle green HY-KERS two-seater, slumbering peacefully in the center of the Geneva Motor Show, looked almost ready to wake up.

NADIM MEHANNA is an automotive engineer and the pioneer of motoring on Middle Eastern television since 1992

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Society

The golden city with the Midas touch

by Executive Staff
written by Executive Staff

The first power plant was established in the Emirate of Dubai in 1961 when citizens of the small city-state still lived a life dominated by their desert environ. Half a century later, residents of Dubai consume more electricity per capita than any other person on the planet. But now, with local and global financial crises tapping the breaks on unrestrained development, it may be time to reflect: what exactly has happened to Dubai in the last 50 years?

City of Gold, Dubai by Jim Krane

Jim Krane, the Associated Press’ former Gulf correspondent, attempts to make sense of the phenomena that is Dubai in his new book, “City of Gold: Dubai and the Dream of Capitalism.”

“Dubai is a city of incongruities. The roads are modern but the network is incoherent. The cars are advanced but driving is anarchic. Malls are rife but there is no art museum. The airport is world class, but education is substandard,” he writes. “An optimist would say that’s the essence of an emerging market, the reason Dubai crackles with opportunity. A realist would point to a government that preferred impulsive decisions to level-headed planning.”

Krane gives fascinating accounts of how the ideas for the Burj Al Arab, the Palm and the tallest building in the world, the Burj Khalifa, came to life. The style of the book is journalistic, giving space to both sides of the story and ensuring the people he interviews do most of the talking.

The first half of City of Gold details the rapid rise of Dubai from its early history to the present day and its conception of the capitalist system; the second half of the book attempts to look at Dubai’s darker side of labor abuse, environmental degradation, prostitution and slavery. However, one can gather this book was written with the understanding that certain sections, such as Sheikh Mohammed’s profile, are due great import, while negative airings ought to be minimized. Krane is reluctant to stick his neck out in areas that may get it chopped off. Subsequently, the book does not venture much beyond what is already widely understood about Dubai.

A liberal autocracy

Dubai, as a capitalist bastion run by an autocratic regime, “enjoys broad social freedoms which substitute for its lack of political ones,” writes Krane, but he fails to make the case. Instead, Krane does the unthinkable and quotes British diplomat Anthony Harris: “People don’t want to replace tribal rule. It is my absolute conviction that they are happy with it.” Krane adds that the British government has done more than anyone to keep the Maktoum family in power.

Yet virtually every topic Krane approaches needs more fleshing out, and he seems to take the official line as Bible truth. Hard questions are not asked.

Do, or rather can, social freedoms substitute for political ones? Are they interchangeable? What do those living in Dubai think? Krane leaves unexamined the thoughts of Emiratis and long-term residents regarding their transformation from small-scale traders to the capitalist elite. We know Dubai has been an economic success but has it been a social one?  

Dodging tricky questions is what City of Gold does unfortunately well. It is packed with superficial generalizations, dubious conclusions and giant leaps of faith. When it comes to “Arabs,” Krane seems to patricianly revel in stereotypes: “Sheikh Rashid maintained a punishing work ethic in a region known for languor.”

Top 10 books sold in Lebanon in 2009 (Arabic, Engligh and French)

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Economics & Policy

Anchoring success

by Ibrahim El-Husseini, Jake MelvilleSean Wheeler & Satyajeet Thakur
written by Ibrahim El-Husseini, Jake MelvilleSean Wheeler & Satyajeet Thakur

For decades, major energy companies have been at the forefront of the global shipping of hydrocarbons.

However, energy company shipping assets have largely underperformed, and this has generally been accepted as a price worth paying for the strategic interests they provide — i.e. the securing of transportation for their hydrocarbons.

Given the shipping business’s capital-intensive and volatile nature, poor commercial performance can have a material financial impact, which in the long run can lead to management growing disillusioned with its shipping operation, and the consequent scaling back of legitimate strategic interests in shipping.

The case for focusing on commercial performance

Booz & Companys’ analysis reveals that the shipping divisions of international oil companies (IOCs) and national oil companies (NOCs) have comparatively low returns on capital. This is primarily because management often views shipping as a cost center. The lack of emphasis on commercial results also provides little incentive to innovate or improve efficiency from within. 

Unfortunately, this approach does not take into consideration the fact that the shipping industry’s financial dynamics can be unforgiving to halfhearted participants. There are two major sources of value creation (or destruction) in any shipping operation: assets and freight. Both can be extremely volatile, and the impact of incorrect decisions, or even just the wrong timing, can be very material. 

As a result, it is not an option but rather an imperative to focus on maximizing performance in the shipping arena. In doing so, energy company management must address and dispel three main concerns and misconceptions involving the shipping business.

Concern 1: The pursuit of commercial performance diverts management from its core purpose of supporting the strategic aspirations of the parent company.

This need not be the case. Any beliefs to the contrary arise from executives viewing the strategic considerations of their company not as directional aspirations, but as firm mandates. The former approach lays out the boundary conditions that the shipping division must meet, while giving the division flexibility to meet them. The latter approach, lacking in adaptability, would not be responsive to fast-moving markets, whether in oil or shipping.

Concern 2: Energy companies cannot do a good job of commercially managing their shipping interests.

Contrary to popular belief, energy companies should have an easier task and do a better job of managing their commercial performance than would an independent shipping company. The reason for this is the relative abundance of capital within the parent energy company, which affords the best-managed oil divisions the privilege of taking a much more strategic view on market trends and having the financial muscle to make bold, value-enhancing decisions; independent shipping companies, by contrast, may have their hands tied owing to capital constraints. 

Two key components affect the profitability of shipping interests of energy companies. The first is capital decisions, including the timing of acquisitions and sales, decisions related to buying new or used vessels and the selection of shipyards. The second is revenue; making sound freight market decisions and maximizing vessel availability will ensure that companies realize the full revenue potential of their shipping assets. 

Concern 3: The pursuit of commercial performance does not contribute to the achievement of energy companies’ primary strategic goal.

The pursuit of commercial performance can be complementary to the achievement of the strategic goal on several fronts. An energy company with shipping assets that consistently perform well in the market will feel little pressure to abandon its legitimate strategic interests in shipping — which might be the case if the parent company views shipping as a black hole in terms of its capital.

Managing performance

Management can operate shipping divisions efficiently and contribute to the parent company’s strategic goals by taking a systematic approach to addressing challenges in four major areas:  strategy, operations, measurement and organization.

Analytic and dynamic strategy

The first step involves determining the explicit strategic considerations of the shipping division, which will also include institutionalizing implicit strategic considerations.  Once the organization has defined its overall strategy, it should prioritize the timing, setting parameters for what needs to be accomplished and when. Finally, once these strategic goals are clearly defined and set, it is imperative that they be articulated in the mission, vision and values statements of the organization.

Clear and efficient operating model

There are two overarching objectives required to ensure clarity and efficiency of the shipping operating model. The first objective is to put the goals of the enterprise, or parent company, first; thereby driving the results of the parent company, not of the shipping arm. The second objective involves a fair recognition of the performance of the business, the transparency of costs, and returns on shipping assets.

These twin objectives manifest themselves in several operational areas, such as the commercial arrangements between the parent company and the shipping arm for the use of shipping assets, decisions on the operational and office footprint of the shipping division and their associated cost implications, and the overall ship management approach.

Accurate and effective metrics

A performance management system that is closely aligned with a company’s strategy provides leadership with the right level of detail and insight into the organization to manage its performance actively and efficiently. In turn, this drives the right balance of strategic and tactical behaviors across the organization.

A number of key principles can help management guide the business:

* Break down the strategy into measurable components.

* Identify performance indicators for each component.

* Ensure that these indicators form the basis of conversations between the leadership of the shipping division and the parent company.

* Tie the indicators to individual performance appraisals and rewards to create strong and effective consequence management.

Building blocks of the organization

The final challenge for management concerns building an organization that will achieve high performance — fusing together five discrete capabilities:

Organizational structure: The right structure will drive accountability and transparency throughout the organization. 

Process efficiency: Clearly mapped processes and clarity on decision rights for individuals and groups (e.g., committees) help smooth interfaces and increase organizational efficiency. 

Human capabilities: Having the right quantity and quality of people, with a focus on employee development, is a key component of organizational sustainability.

Technology: Having appropriate fit-for-purpose technology platforms to aid the execution of the business improves organizational flexibility and allows responsiveness.

Key interfaces: The shipping company should be organized in a way that provides clarity on the relationships with important constituents of the parent company, particularly those in supply and trading functions, as well as special project coordinators and corporate strategic planning departments.

For too long, shipping divisions have not played a central role in the corporate strategy of many IOCs.  Energy producers need to realize that strong shipping commercial performance can enhance the pursuit of broader strategic goals.

Furthermore, with a systematic approach to managing performance, energy companies can nurture top-quartile performance from their shipping operations while reaping the benefits for the parent corporation.

Continuing to regard these operations as a corollary business is likely to result in a huge missed opportunity that can prove to be severely detrimental in the long run in terms of strategy, finance and impact on people.

IRAHIM El-HUSSEINI and JAKE MELVILLE are partners, SEAN WHEELER a principal and SATYAJEET THAKUR a senior associate at Booz & Company

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Finance

Cash flow in a conflict

by Ahmed Moor
written by Ahmed Moor

When disaster strikes, survival is often earned by those who have planned ahead. For businesses, this means developing contingency plans for worst-case scenarios associated with their operating environments, which can differ depending on locale: in Los Angeles there is the threat of earthquakes, while in Taiwan they face typhoons. In Lebanon the most sizable systemic risk is, perhaps, war.  

The Israeli onslaught in the summer of 2006, which killed more than 1,200 Lebanese and wrought some $3.6 billion in damage, served notice that major violent confrontations can, and do, erupt without prior notice. With tensions escalating recently between the region’s belligerents — particularly Israel and Iran — the threat of renewed conflict is real, and a fact that every responsible business should take into consideration. Banque du Liban (BDL), Lebanon’s central bank, recognized this as far back as August 2009 when it sought to reinforce disaster preparedness by issuing “Basic Decision No. 10227,” which stated that “all banks operating in Lebanon must prepare a business continuity plan” within the year.

The document goes on to say that every business continuity plan must include “preventative and prudential” detection, rescue and business resumption procedures. BDL outlined 12 principles for creating a compliant plan. The first four  can be classified as threat and resource identification; the next set of steps relates to preparation and the final two steps are testing the plan and then continuously updating it as necessary. 

As a case study, Executive spoke to two Lebanese banks to learn about their experience during the 2006 bombardment and how they have since adapted their contingency plans. Both Byblos Bank and Bank of Beirut said that they were already largely compliant with BDL’s guidelines when Basic Decision No. 10227 was issued. 

Byblos Bank

Founded in 1950, Byblos Bank operates in 11 countries in the Middle East, Europe, and Africa. With total assets at approximately $20.5 billion and 1,800 employees, the retail and corporate bank is one of the largest in Lebanon.   

During the 2006 Israeli bombardment of Lebanon, Byblos Bank encountered a variety of difficulties but managed to remain operational for the entire period.

The strikes on Lebanon were unanticipated, so operations in 2006 were without a formal business continuity team. Management found that many employees could not access branches where they worked, so they were reassigned to locations closer to home.

Philippe Saleh, head of corporate risk management at Byblos Bank said, “There are a lot of uncertainties which may happen… we had all these uncertainties, which we had to deal with on a relatively ad hoc basis.”

Concern about the bodily safety of employees was compounded by concern about fuel shortages for the banks’ generators to remain functional, though the 34-day conflict ended before supplies were exhausted. Significantly, the bank did not have to resort to disaster recovery systems. 

One of the biggest challenges faced during the war was coordinating amongst different groups of employees as many were unreachable, and were unwilling or unable to venture from one branch to another when critical communication lines went down. For the same reason, gaining access to branches to secure funds in case of looting or destruction was problematic. 

 Members of the public struggled to withdraw funds from automated teller machines (ATMs), many of which were in dangerous areas and therefore not restocked until the conflict ended.

 After the 2006 war, the bank created a business continuity committee responsible for coordinating all aspects of the business as a disaster situation evolves.

Now if a situation were to occur, information such as telecommunications availability, core systems and human resources management will be centralized and recommendations forwarded to the continuity committee.

After 2006, Byblos Bank minimized cash in ATMs in areas deemed to be ‘strike-prone,’ while cash in other locations was increased. Should another war break out, branches identified as non-essential will be temporarily closed,  permitting the bank to relocate essential resources, such as fuel, to larger branches that are more accessible, while minimizing the amount of danger to which employees are exposed. 

Byblos Bank also maintains a remote operational command center and a backup server in Lebanon, with a disaster recovery site in Syria.

Byblos’ Saleh explained, “If there are any disasters in our core system, or where our core system is located, we can switch to a disaster recovery site in order to resume our business.”

The business continuity team catalogued all people and equipment vital to the running of the company, so that if they do need to relocate to a remote operations center, all of the required tools are available. Additionally, the bank’s hard assets — such as equipment, hardware and furniture — are insured.  

Banque du Liban’s 12 principles for business continuity in the event of war or major disaster
 
Threat and resource identification:
• Risk classification
• Bank activity classification
• Activity selection under disaster and post-disaster operation modes
• Resource classification and provision under disaster and post-disaster operation modes
Preparation:
• Alternate site location
• Selecting implementation staff and determining their duties
• Training plan operation staff
• Data transfer
• Security procedures
• Plan implementation procedures
Ongoing:
• Regular renewal of continuity plans
• Rigorous testing of continuity plans

In the event that the business continuity committee can’t reach the company headquarters, other sites have been identified for coordination. Three different communications systems have been made available to the committee members, and key employees have had virtual private network (VPN) facilities installed on their laptops to permit them to work remotely. VPNs act like a protected layer of internet access on top of an existing network, enabling the user to access secure information without risking infiltration.

Finally, core operations personnel will be relocated to Cyprus should a conflict erupt. Subsidiaries outside Lebanon rely on them, so they will be evacuated either by air or sea at the first sign of conflict. 

The bank carries out risk assessments when opening new branches, but that factor alone does not determine where new ones will be opened. For instance, Byblos recently opened a new branch in the southern town of Bint Jbail, which was heavily bombed by the Israelis.

“Where the business is, where the people are, we are going to open,” said Saleh.

Bank of Beirut

Established in 1963, Bank of Beirut, has roughly $10.5 billion in assets and operates in six countries, among them Oman and Cyprus, providing retail and commercial banking services. The bank faced numerous challenges in 2006. While a contingency plan was in place at the time, management was surprised at the scale of fear and panic amongst bank employees charged with securing the business. Understandably, many were reluctant to venture out during the bombardment.

A second major challenge was maintaining communications during the war. Network connectivity took a major hit, and the bank’s management experienced problems communicating with employees at different branches.

These two challenges demonstrated that the existing contingency plan needed to be upgraded.  Despite the difficulties faced during that period, a number of branches in South Lebanon remained open and the bank maintained operations.

 After 2006, the general business continuity management outlook changed to focus on enabling employees to work in secure environments and reduce the amount of time spent away from home. One of the first steps taken was to create a larger, better-equipped contingency site.

Fermenting through a firefight
 
For the Bekaa Valley-based Chateau Kefraya winery, the 2006 Israeli bombardment of Lebanon couldn’t have come at a worse time. According to Emile Majdalani, commercial director at Chateau Kefraya, “The situation in 2006 was quite critical…the continuity of the business was at risk. If you are not there for a full year, especially in the export markets…it’s a big catastrophe.” That’s because the winery’s harvest period begins in August and ends in October.
Every year, the harvest yields approximately 2 million bottles of Lebanese wine, which is both consumed domestically and exported. The Chateau Kefraya management saved most of the harvest by continuing to work during the bombardment. Of course, employees in the vineyards could not venture out, but the rest of the team prepared for the eventual cessation of hostilities so that they could move the product right away.
The season was saved due to the preparations made during the attacks, but the Kefraya Nouveau, which is made from the season’s first grapes, could not be produced in time, as the attacks ended three or four days too late for that vintage. Luckily, only 500 to 1,000 cases of Nouveau are produced every year, so the bottom line impact was not pronounced. The company is sensitive to harvest risk however, as all the grapes used for Kefraya wines are grown and harvested from the Kefraya vineyards; for quality control purposes, the company does not buy any grapes.
The war did affect the export markets as the port was closed for a month and a half after the bombardment began. Many roads were bombed as well, and at one point, the company resorted to hiring a ship in Sidon to transport thousands of cases of wine to Beirut as the main highway between the cities was impassable. Transporting wine in this way took a full day, but the goal was to continue to operate regardless.
Majdalani credits employee perseverance for the successful 2006 season, as the company benefits from years of experience operating under duress in Lebanon, noting that: “Chateau Kefraya began to be commercialized during the [civil] war, so we are used to these situations.”

The larger site includes more space for employees who wish to spend nights there to minimize travel, and more equipment to replicate branch working conditions. In addition, diverse satellite equipment and telecommunications connections  were added, allowing phone and internet access in remote areas, or where infrastructure had been destroyed.

Bank of Beirut management made a request to BDL to move data to recovery sites abroad.  However, due to banking secrecy restrictions imposed by the Banking Control Commission, all client data must remain in Lebanese territory and the request was denied. Consequently, all critical core-business data servers are situated in Lebanon, but non-client related tasks like email services have been backed up in other countries.

Once a disaster is acknowledged, the business continuity committee takes control. At this stage, the core business and operations personnel have already been identified. Existing documents outline the steps to be taken by each group of employees. However, as Fadi Shalhoub, head of information security and secretary for the business continuity committee at Bank of Beirut, said “We have written procedures but they are flexible to the point where if something [unanticipated] happens…we can take the necessary action.”

One other change the bank made after 2006 was to decentralize operations. This means that foreign subsidiaries can continue to operate independently of management in Lebanon in the event of a crisis.

Conflict risk does not dictate where the bank does business in the future, as Bank of Beirut has plans to open more branches in South Lebanon.

Best practices

Based on the practices of these two banks, and on the guidelines set by BDL, businesses across Lebanon can adopt the following principles to ensure business continuity under difficult circumstances. First, a business continuity committee or similar authority must be tasked with taking control once a disaster begins to unfold. That committee should identify crucial personnel and clearly outline their responsibilities in the event of a disaster. Furthermore, a clear chain-of-command must be identified, with contingencies in place if key managers cannot be reached. Next, secondary and tertiary communications equipment must be in place to ensure that all vital parties can maintain communication at all times. Additionally, the business must have plans for resuming operations after an event; the sooner, the better. Finally, a certain amount of secrecy is important for creating a viable business continuity plan. As both banks demonstrated, information about backup locations, technology, and step-by-step procedures should remain private.  

Despite all this, things may still go wrong. As Saleh notes “Nobody will tell you that we are going to face or mitigate the risk by 100 percent.”

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Economics & Policy

Stage fright

by Executive Staff
written by Executive Staff

The Oscar-winner question for the regional outlook on initial public offerings (IPOs) is not whether the Middle East and North African primary markets are stuck in a first quarter hurt locker, as much as whether the rest of 2010 will lift performances up and away or prompt regional investors to dispatch avatars to international markets.

The numbers for March IPOs and the entire first quarter are quickly told. Three offerings were open for subscription from March 22 to 28, all three for Saudi insurance companies, and the amount sought from subscribers equals to just more than $100 million. The three firms — Solidarity Saudi Takaful (seeking $59.2 million), Amana for Cooperative ($34.1 million), and Wataniya Cooperative Insurance ($8 million) — had, as Executive went to print, not released information on the demand commanded by their offerings in the first half of the subscription period.

Stumbling start

With neither IPO miracles nor rights issues having presented themselves in the MENA in recent weeks, the region’s total value of initiated and traded new share offerings in the first quarter of 2009 was a humble $178 million — 98 percent of which came from the Saudi listings of Herfy Food Services and Alsorayai Trading Industrial Group.

IPOs that closed in the first quarter but where the stocks have yet to commence trading are the $144 million issuance of real estate firm Mazaya Qatar, and an insurance issue in Tunisia by Assurances Salim, worth $7.1 million. Whereas Mazaya Qatar had difficulties achieving full coverage of the subscription offer, Assurances Salim reported very high demand at 28.5x subscription coverage.

For the first quarter of 2010, the count of newly listed companies on regional bourses is five — one Jordanian and four Saudi — and their price performances since flotation have ranged from 17 percent to 254 percent versus the issue prices, according to Zawya.

Jordanian transport company Ubuor Logistic Services, which had a small over-subscription, advanced 73 percent from the issue price in March trading, whereas Herfy and Alsorayai gained 15.2 percent and 17.4 percent, respectively, since their debuts in February.

Waiting at the red carpet

For April 2010, the only confirmed new subscription dates are for Tunis Re, from April 5 to 16, and for a Saudi appliances maker Al Hassan Ghazi Ibrahim Shaker Co at the end of the month. The Tunisian reinsurance firm will offer shares worth $9.9 million. It appears it won’t be until late May that regional primary markets will see their next exciting premiere, with the $272 million IPO of Saudi city creation firm, KEC Madinah.   

With such pickings, investors with strong and urgent cash dispositions may have to look east, where Asian markets promise to drive the IPO production this year. The seasonal blockbuster opening on April 1 — more a heavyweight period drama than high-octane thriller —  is the $11 billion IPO conversion of ageing Japanese life insurer Dai-Ichi, from a mutual insurance to a listed company.   

Stage fright should not be the issue for Middle Eastern performers, after the corporate players had time to adapt to the rules of the securities game in several strong IPO years up until August 2008. However, market volatility and uncertainty over governance standards — the saga of lost hoards of gold at Damas jewelers has seen a new installment in March on Nasdaq Dubai — are among the reasons why resurgence of Oscar worthy IPO performances might hit the MENA bourses a season or two later than the occasional chief economist of a regional exchange would wish.      

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Finance

Counting the cost of war

by Ahmed Moor
written by Ahmed Moor

For as long as insurance has existed, companies, states and individuals have purchased policies to protect against war. Britain and France have long provided war insurance to companies, and America passed the War Risk Insurance Act in 1914 to provide marine insurance during World War I.

Unfortunately, war risk has not disappeared and new types of man-made risk have yielded the development of related insurance products, such as terrorism insurance. 

The Middle East has long been prone to war and terrorism risk. As a consequence, the Arab War Risks Insurance Syndicate (AWRIS) was created in 1980 by a group of Middle Eastern insurance and reinsurance companies. The syndicate boasts a broad membership of 170 companies from 19 Arab countries; 21 board members hail from Lebanon alone. AWRIS collected a net premium of $21.7 million in 2008 and held $41.2 million in reserves in 2008. Total assets under management are approximately $1.22 billion. Providing war and terrorism risk coverage is difficult as the occurrence probabilities are difficult to predict, while the associated liabilities are generally enormous, which is why a syndicate or government-backed agency is usually required. 

 

The carnage calculation
 
 
The below rationale and equation is taken from one insurance underwriter’s presentation to an industry group. It serves as a stark demonstration of the difficulties associated with developing a formula to price terrorism risk.
For each state “Q” of the Al-Qaeda terrorist network, there is a “Markov Feedback Policy“ involving “C,”a series of counter-terrorism actions. In a democracy with checks and balances on police and security services, these actions must be commensurate with the threat, i.e. dependent on Q, so C = C[Q].
Defining Qk to be the state at time k: the controlled Markov Chain model is
defined by the transition probability matrix T[i,j]: P {Qk+1 = i | Qk=j; C[Qk]}.

 

There are two primary types of insurance: property insurance and life insurance. At present, there is insurance available to protect both property and lives in the event of war or terrorism. In the Middle East, the AWRIS provides specialized war policies covering marine and aviation operations and property, sabotage and terrorism, personal accident (war-related), political risks and special risks. 

 

Weighing up the risk

Property war insurance is primarily purchased by shipping companies and airlines. One type of insurance available is war liability, which covers people and goods in the craft. Another predominant type is hull insurance, which provides compensation for the craft based on its appraised value. Life war insurance is provided on an individual basis by a number of life insurance companies around the globe. The risk contracts can vary anywhere from one day to years depending on the period of an individual’s engagement in a war or terrorism prone area. 

Pricing war risk insurance and reinsurance is dependent upon the ability of the insurer or reinsurer to accurately gauge the probability of an event. Historical experience can help insurance and reinsurance companies build realistic financial models for these risks. In the case of AWRIS, member companies cede risks and premiums to the syndicate whose rates are determined by a governing technical committee.

Importantly, the syndicate includes a provision for individual governments to subsidize the cost of coverage by paying a portion of insurance company premiums to the syndicate. The goal would be to reduce the cost of war risk and terrorism risk insurance to the end consumer.

Human conflict and conflict-generated losses are a fact of life. Because of the unpredictable nature of conflict, whether it be war or terrorism, this type of insurance will always be difficult to price. Furthermore, because of the high liability associated, many successful war and terrorism risk insurance and reinsurance schemes require government backing. It appears that the private market is still working to provide a solution independently of the public sector. 

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Economics & Policy

A momentous task

by Sami Halabi
written by Sami Halabi

Raya Hassan has been Lebanon’s Minister of Finance since the government was sworn in, in November 2009. Before becoming a minister, she worked in the office of the prime minister on both Paris II and Paris III donor conferences, and served as an advisor to the minister of economics and trade with the United Nations Development Program. As part of her ministerial duties she has been tasked with drafting a budget for a country that has been without one since 2005. On condition that figures relating to the budget would not be discussed, Hassan agreed to an exclusive interview with Executive to discuss issues related to the budget, the public debt and the finance ministry’s strategy going forward.

E The government’s debt strategy so far has been to trade short-term debt for long-term debt; this increases the debt service and moves the burden onto future generations, as well as exposing ourselves to currency fluctuations. Can you address these concerns?

When we are formulating our debt strategy we think of several factors. One is extending the maturity curve in order to smoothen [it]. Because we have maturities that go up and down, we try to smoothen it as much as possible so that we don’t have one big maturity of spending at a particular year and time; and we try to extend it as much as possible.

We extended for several reasons. While it’s true you pay more, you are getting a comfort zone. Plus, when we go abroad for Eurobond [subscription] we are able to get longer maturities for better prices than we can do here…there we issue at 10 and 15 [years]. We used to issue Eurobonds at 8, 9, 10 percent; now we have the luxury to refinance this debt at much lower coupons than we were able to five years ago. We want to make sure [the debt] is not only [held] purely by Lebanese banks, because this is too much exposure for them. It’s not a good thing for either of us.

E  The decision to stop issuing treasury bills [TBs] was met by “anger and confusion,” to quote one banking executive, and has seemingly been overturned, since you will begin issuing again in April. This has sparked accusations that the finance ministry has caved under pressure from creditors. Can you respond to this claim and explain the strategy of halting and re-issuance of T-bills? 

Frankly, I didn’t speak to any bank. It coincided with me on [a] Monday deciding on how much to take from the auction for the TBs. I told [my staff], ‘please get me how much is now in the treasury account.’ It turned out to be 6,500 [billion LL or $4.3 billion] on a net basis. I [then] said ‘I think we are going overboard with the surplus reserve that we want to have in terms of the treasury account. Therefore let’s maybe think about stopping the auction at least for a short period.’

I picked up the phone and called the [central bank] governor and decided, with him — meaning he did not say, ‘No don’t do it,’ he said, ‘Fine, if you exit from the market maybe I will try to go in myself with very short CDs [certificates of deposit] issuance and let’s do it.’ Before I sent the letter specifying exactly how long I was going to be out of the market, it just happened, probably from a procedural point of view, that he issued a statement which went out to Reuters that said: ‘The Ministry of Finance is going out of the market indefinitely.’ That was not the case. I said that we will make sure that we go out for a short period and I sent, subsequently, a letter that said we were going to go out for one month.

I could have stayed [in the market]. That was another option; but then I could not take anything at all. I had to weigh my options: either let the auction happen and not take anything, which would have signaled a bad thing, or say that we were not going to do an auction for one month, knowing that, if there was going to be any need by the market, the central bank could come in and [supply] it.

It’s good to have a reserve, obviously, and the approach I am adopting is to have in my treasury account, three months worth of future maturities, whether Eurobonds or T-bills. The 6,500 billion [Lebanese lira] was beyond that, so I said, ‘let’s not go overboard with this because this costs money as well.’

Having this buffer has its price but we would rather have the buffer, rather than not having it at all and finding ourselves in any kind of situation [where] we are not able to honor our debt obligations. But once it went over the threshold we had [set] for ourselves, we said let’s not increase it.

E  You said previously you were going to decrease it to a figure of 4800 billion LL.

Something to that measure.

E  Many economists say that, considering this surplus comes from debt, which keeps the level of total stock of public debt higher, this is not congruent with Ministry of Finance’s and the Prime Minister’s stated principle that “we don’t want to increase the debt.” How does it make economic sense to horde borrowed money to pay back interest on debt?

Look, it’s not additional debt. This is pre-funding; I am not borrowing. At the end of the year, I will not be borrowing more as a result of this approach. I’m just borrowing sooner. I’m rolling over sooner. I am borrowing so I can meet my dues. I was going to do it anyway. I am not increasing my debt, I am just rolling over an existing debt to refinance the existing debt, but I am doing it sooner than the maturity. So it’s not increasing debt.

I have to increase debt because I have a deficit. At the end of the year [I] will have to borrow more. As long as there is a deficit, the stock of debt will increase, but this particular measure is pre-funding. You need to use it anyway. You need to go out of the market and refinance but you do it three months in advance rather than doing it at the date of maturity, because you want to make sure that in this volatile environment, you don’t run out of cash to pay whatever maturity might  come.

E  Do you have a projection plan under the current public debt strategy to begin paying off the principal on the public debt any time soon?

Maybe [we can] if we switch some of the project financing support that we got under Paris III. We have around $800 million [pledged] from the French, from the Americans, from the World Bank; [but] these are all linked to conditions. Plus, if we go ahead with privatization, the proceeds will go toward reducing our debt stock.

We are also betting on growth, which should be the anchor of any debt reduction strategy. Growth raises additional revenues and hopefully goes toward reducing the primary surplus and eating out of our debt stock. It has to be a multi-faceted approach.

E  One of the biggest costs we have is Électricité du Liban (EDL) fuel costs. Currently this is financed through letters of credit, but do you have a fuel cost hedging strategy to predict fuel costs?

No, frankly we have not done it. It could be something that needs to be explored but today you have structural problems that you need to address irrespective of hedging against an increase in fuel prices. We don’t even have cost recovery; we are not at this stage. Therefore, EDL itself needs to be corporatized according to the law. There should be, eventually, the unbundling of the sector.

 You need to tackle the generation [which] is a problem by itself. And, you need to tackle the distribution end, plus you need to reduce all your technical and non-technical losses. There is a whole restructuring [process] that needs to be done on EDL. One of [the elements] is to at least achieve a full cost recovery of the electricity and therefore we need to review the tariff structure. The tariff structure now is low by any international standards. It does not cover primary costs, let alone losses.

When I see my budget, in terms of the primary expenditures, its one-third salaries, one-third servicing, and one-third EDL. So there is not much you can do if you don’t solve the debt problem and you don’t solve your electricity problem — you cannot release the additional funds that you need for the government to really spend on the areas that you need to spend on like health, security and education. The structure of our budget is so rigid that there is very little room for improvement at this point.

E  Do you think that all the other ministers understand this rigidity when you have conversations in the cabinet sessions?     

We are trying to explain to them if possible. Some people don’t have this macro [economic] view of the inter-linkages between the different elements of the budget. We are trying to make the case that we are not happy with any VAT [value added tax] increases. God willing, we will not reach VAT increases.

But the situation that we are in right now necessitates that any increase in expenditures will have to be matched by an increase in revenue. Otherwise, if that does not happen we will accumulate a primary deficit. If we accumulate a primary deficit, our debt will start increasing at an increasing rate and we are back to square zero; pre-Paris II.

It’s a no brainer. We are not fans of any additional taxes, but if we are going to have to really address the structural problems and we don’t want to go to concessional funding [soft loans] or the private sector, then the only way is to try to raise additional revenues.

E  Many entities have been off-budget line items in the past, such as the capital spending for the Council for the South and the Displaced fund, and capital spending is still not included for other entities such as the Council for Development and Reconstruction (CDR). As such, some economists have stated that up to 20 percent of spending goes to these non-budget line items, which are outside of the budget and only annexed later. Are these items and those like them going to be included in the next budget since it is, after all, public spending?

Yes, you are going to see them, definitely. You are going to see the actual expenditures and at the same time you are going to see them within the budget. You cannot incorporate all of these extra budgetary [items] that we call “treasury expenses” within the budget structure because, for example, for the treasury advances you don’t know it in advance. You cannot predict it, so you put it as an allocation within the budget. But in the budget book we are going to list them. We are going to say, ‘these are the budget allocations and these are the treasury expenditures’ and its going to be very transparent. The intention is at no point in time to say we have expenses that we don’t want to show. On the contrary, I want to show the bigger picture of how much our expenditures are.

E  Do you agree that these entities constitute around 20 percent of spending?

It might be even more.

E  Why are items like The Regie [Libanaise de Tabacs et Tombacs] and Ogero’s lump sum payments not broken down to in the budget proposals of years past? 

These are the annexed budgets and these are also within the budget. The Minister of Telecom for instance, says he wants a certain amount of investment, gives us his budget and says, ‘I will transfer whatever surplus I have. After I let out my expenditure and I collect whatever revenues, I will send you the surplus that I have in my budget.’ All the annexed budgets are like this [including] the national lottery. They are given a budget and any surplus is transferred.

E  So there is no key performance indicator (KPI) based criteria you use with these entities to ascertain their budgets then?

No. But this is what we are trying to do through the performance-based budget, which has already started in the Ministry of Education. This should pave the way for eventually using KPIs and performance indicators to start assessing the efficiency and effectiveness of all of these expenditures. This is part of the reform processes.

E  A lot of the money due to the government, in the form of our direct taxes from the National Social Security Fund, municipality tax and income tax, is being evaded and double book-keeping is rampant, causing much waste of government revenue. Since taxes make up the bulk of government revenue, what has been done to curb this problem and are there any tangible results? 

We are not involved with the municipality tax or the NSSF. Income tax is another story as is the VAT. You also have property taxes and things of the sort. I have to admit that there is evasion, everybody knows that. The banks pay 40 percent of total income taxes, so it’s concentrated.

E  And they only constitute around 20,000 workers?

No, here I am talking about corporate [income tax]. Small grocery shops, the self-employed, doctors’ offices and things of the sort [evade taxes]. But there has been a lot of improvement. If you study the trend of the revenues you can see — other than the growth factor — that collection has been improving every year.

Obviously, there is still a lot to be done. How to do it? We are now trying to implement a twinning arrangement called a risk compliance audit. Rather than the inspector wanting to study every file and every company — which throughout his entire life he will never be able to do — we are saying that we can set up certain risk criteria and based upon this, we will study this group of people every year. It will not be done to all [companies]. As a result, based on that criteria, [we will study] the most important portfolios that poses a risk of evasion.

E  The Central Bank is, by definition, the “lender of last resort” and it now holds around 15 percent of the public debt. Usually this is explained by saying that the Banque du Liban (BDL) is practicing its monetary policy. Can you explain why this amount has become so substantial if this is the case, and why aren’t they taking measures to decrease the burden on the government?

They should. Eventually, the BDL holdings of TBs should go down. It’s true that it is part of the monetary tools that they use. But I think eventually they should reduce the exposure and the TB holdings of the government.

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