Executive Magazine

Sprinting from the storm

by Natacha Tannous April 1, 2010

written by Natacha Tannous

Sprinting from the storm - First quarter results mask challenges around the bend

Once a hurricane passes, those left in its wake assess the damage, pick up the pieces and look ahead to how best to get on with life. The first quarter of 2010 was akin to such a moment for the six biggest United Arab Emirate banks, unbattening their hatches as the financial storms of 2009 slowly abated in the distance.

Ostensibly, exposure to poorly performing sectors and bad loans generally did not prevent Emirati banks from posting attractive numbers on first quarter financial statements.

But one must sift through the statistics to be sure whether faults in the findings have not been masked by opaque disclosures of asset quality and a recent UAE central bank circular to reduce provisioning.

The headline of the first quarter

Most UAE banks posted better-than-expected results, leading to improvements in ratings and paving the way for an upward trend in 2010 estimates.

According to profit and loss (P&L) statements, quarter-over-quarter (QoQ) improvements in first quarter net income stemmed from higher operating profits coupled with lower credit costs, which had peaked in the fourth quarter of 2009.

April 1, 2010 0 comments

Business

Going your own way

by Carla Haibi April 1, 2010

written by Carla Haibi

After 18 years of partnership, the agency formally known as Saatchi & Saatchi Levant has split from the Saatchi & Saatchi worldwide network to become M&C Saatchi Middle East and North Africa, under Eli Khoury’s strategic leadership. Through this new partnership with M&C Saatchi, Khoury, chief executive officer of Quantum Group, is adopting a business model that may be a harbinger of a new way to conquer the market: one client at a time, one ad at a time.

Khoury says his drive for growth and continuous learning force him to challenge his status quo with every coming decade. After launching Quantum Group and its components in consultancy, content and communications in 2000, the advent of 2010 was a catalyst for Khoury to reassess his company’s standing and the way it provides services.

Companies need to design strategies in line with new trends in tools and technology if they want to stay on top of the communications game. The inability of big networks to keep pace with the shifting momentum of the industry fueled Khoury’s decision to split from Saatchi & Saatchi. “If you want to offer a client something in communications, you have to walk in knowing what is happening online, offline and everywhere else,” he said. In a transforming industry, Khoury advocated a thorough mastery of the new trends in communication and how to apply them to any agency or network’s core strategies.

“It’s not only about bringing the cyber age into communication,” he said. “You have to really understand it. It has to be part of your first thinking.”

When Khoury first partnered with Saatchi & Saatchi network, as Saatchi & Saatchi Levant, it was still with the brothers Maurice and Charles, who founded the firm in 1970. The brothers later split from the network to start M&C Saatchi in 1995. In the mean time, Saatchi & Saatchi turned into a global network owned by Publicis Group. But then the network’s advertising spirit lost its essence, said Khoury.

Splitting from the pack

With half of the region managed by Saatchi & Saatchi and the Levant area managed by Eli Khoury, under the Quantum Group, the network was much less concerned with the small Middle East market than it was with the larger and more lucrative emerging markets of Brazil, Russia, India and China. After careful examination, Khoury could no longer see the relevance of being bound to a global network.

“Their agenda for the Middle East was something that we could not find our way through,” he said, noting that the agenda was not just about the future plans and strategies, but also about the clients they cater to, as well as allocation of their competencies and talents.

Diverging agendas with the Saatchi & Saatchi network was not the only problem though. The impact of the economic downturn on the mega group trickled down to the regional agencies and then to the clients, due to budget restrictions and lack of investment opportunities. The disagreement was also rooted in the disparity between how the Saatchi & Saatchi network wanted to do business, how it could adapt to the change in the industry, and Khoury’s vision and aspirations. Saatchi & Saatchi worldwide, a network operating in many countries, had an inefficient formula that, according to Khoury, was outdated in today’s changing industry.

While he agreed that larger networks provide a presence worldwide, this presence does not always deliver as it should.

“That big network name doesn’t give you added value,” said Khoury. “The myth of a network agency doing better because it belongs to an enormous machine doesn’t exist.”

In reality, the network’s operating costs were high, its resources, core competencies and talents diluted, and the investment opportunities were limited as a result of the economic downturn. Consequently, agencies in the Middle East were penalized by budget restrictions and their relationships with clients were jeopardized.

“If you look at networks that are owned by mega groups, [they] cannot invest as we speak, [even] if they have an important client they need to cater to,” Khoury explained. “Somebody who lives in a far off land is taking decisions on behalf of the region, whereby [that] region might have its own specific needs, its own specific hunger and investment requirements.”

Another issue was that business coming from the network was limited.

“Some 95 percent of our revenue and of our work is from our agency’s clients, which did not come from the network,” said Khoury.

The network was also squeezing the already limited resources to maximize services for minimum fees, while the revenues and operating costs remained the same. As a result, the network was not accommodating clients properly, and neither could Saatchi & Saatchi Levant, given the nature of the agreement with Saatchi & Saatchi worldwide network.

Additionally, having a fully operating agency in almost every market is no longer optimal, as it erodes both revenues and talents.

“The thickness of your talents working together is nuclear,” said Khoury. “It is like any good paste, you dilute it too much [and] it becomes watery.”

On the other hand, through the strategic partnership with M&C Saatchi, an agency that also has a multinational presence, Khoury claims he is acquiring more flexibility in terms of his core strategies, resource and competency allocation and, more importantly, decreasing operating costs.

A fresh start

Along with a new name and partnership, comes a new business model. With M&C Saatchi, Khoury sees it as more efficient and effective to behave like a consulting group, with a back office — which he calls the “lighthouse” — being the main hub of competencies in Lebanon, and a front office of consultants and talents, acquired as necessary.

Such a centralized business model with an expansion strategy helps his company make use of economies of scale to provide a better service for the client, at a lower cost. It also offers flexibility to service choice clients and concentrate on lucrative markets, while still having the freedom of getting in and out.

The focus will not be on increasing market share or on going after market advertising expenditure, but rather on following target clients.

“We will be driven by the client not the market,” said Khoury.

Similar to supply-chain management, the new business model relies on building a competitive and competent infrastructure and leveraging the logistics, all in synchrony with demand. Hence, new acquisitions, if any, will be to diversify the services, and supply new competencies to the clients.

Completing the Saatchi circle

Quantum Group’s communication services are now referred to as M&C Saatchi MENA, with a minority stake going to M&C Saatchi. The MENA agency also features Brand Central, Fusion Digital and Vertical Media, regional brands that offer expertise for offline and online communications and brand building tasks, servicing clients with a wider range of interests.

Geographically, there will be no more limitations as to which clients Quantum with M&C Saatchi can access, in the Near East, Middle East, North Africa, and beyond if need be. Without the restrictions set by alliances with mega-networks, Khoury can also cater to any client anywhere without worrying about having an office in that specific location, with the specific competencies that will deliver a quality service.

“If our client is a multinational and wants us to be in five different countries, we will be in five different countries at the same time,” he said.

Having established a firm regional standing in media and communications, Khoury endeavors to thrive on continuous growth and push industry standards higher every decade. The value of his group has been its propensity to push the red lines, acting unconventionally while addressing the effects of new media on the industry, and incorporating new tools into core strategies that better serve the client.

In spite of the current industry changes, Khoury believes that when delivering a message, the principles will always be the same. The template, through which that message is delivered, however, is in flux.

In the process of globalization and the extension of the worldwide network, Khoury felt advertising work lost its zest.

“It’s becoming so mechanical that it is not even interesting anymore,” he said.

With little added value from the global network, the split was a natural progression, with the criteria for choosing the best new partner for Quantum tied to increasing their coverage and the thirst for learning new skills.

“We are aiming at a competency relationship rather than just a network membership,” he said. Nostalgic for the 1980s and 1990s, and the era of “true-spirited advertising”, Khoury saw in M&C Saatchi a shared passion. Just like in most industries, enthusiasm and dedication were most likely to be found in smaller agencies where creative people still thrive on making ads, rather than expanding.

“M&C Saatchi is an independent network, but it’s not a machine. It’s about Soho, it’s about Charlotte Street. We did our lengthy turn to go back to Saatchi, from Saatchi & Saatchi to M&C Saatchi. Basically, you can call us Saatchi. This is where it all started, and, it seems, where it had to end, or to start again.”

April 1, 2010 0 comments

Real Estate

Hilton on ice

by Rayya Salem April 1, 2010

written by Rayya Salem

Lucas William, tapped to be the director of operations at the Hilton Beirut, is not talking about the elephant in the room. Indeed, most of the affiliated parties are keeping mum about the eight-storey, 158-room hotel in Minet a-Hosn that stands ready but is suspiciously closed. The hotel’s awkward silence in the midst of a buzzing touristic hotspot has lead many a curious mind to speculate what went wrong.

Davis Langdon Lebanon (DLL), the hotel owner’s representative during the construction phase, which ended in January of 2007, abruptly left the Hilton party when its contract was up. A spokesperson from the group declined to comment, instead referring queries to the “sole owner,” Nadhmi Auchi, chairman of General Mediterranean Holdings (GMH) — an expansive holding conglomerate made up of 120 companies in 28 countries, with more than 11,000 employees and assets worth over $4 billion. However, the Iraqi-born businessman — most well known in Lebanon for his Dbayeh landmark, Le Royal Hotel, and its Watergate theme park – also shied away from an interview with Executive after originally accepting the proposal in early July. However, Nizar Younes — the original owner of the central district land behind Beirut Souks and president and founder of Butec engineering firm, which constructed the Hilton — and the commissioned architect, Younes’ daughter, Hala Younes of Atelier d’Etudes techniques et d’Architecture Beyrouth (AETA), responded to interview requests regarding the five-star hotel’s nearly three-year delay and the tangle of legal disputes.

In 2005, Nizar says Auchi was brought in as a partner in a holding company Nizar had started, called Sharikat Al Ikarat Wal Abniat (SIWA), which owned the Hilton property in full. As construction of the $70 million hotel project neared the halfway point, Nizar says he needed extra capital. He and his brother Issam retained a 49 percent share of SIWA (29 percent and 20 percent respectively), and sold 51 percent to Auchi, making him the majority stakeholder.

Auchi heralded his new stake in SIWA in GMH’s 2005 chairman’s statement, which read: “Through subsidiaries we own controlling interest in the Beirut Hilton, located in the center of the city, which is in the final stages of construction and is expected to be ready by the end of 2006.”

Nizar claims that Auchi has the master key and is leaving the Hilton locked up until he can purge the Hilton’s management, obtain full ownership and have his Le Royal team manage the hotel instead.

On July 12, the International Court of Arbitration in Paris, under the International Chamber of Commerce, ruled that Auchi must pay compensatory damages for delaying the hotel’s opening, “which was estimated by the court for the whole period to be… around $40 million dollars,” said Nizar.

In 2007 Nizar says he sold Auchi his 29 percent share, but has yet to be paid in full, with this dispute now the subject of a pending legal battle in Lebanon in the Jdeideh Court of Arbitration.

Issam Younes has held on to his 20 percent share, despite several takeover attempts by Auchi. AETA’s Hala Younes says that her firm’s role in the project has dragged on for roughly 10 years, starting from the original contract signed with Hilton in 2000, to court arbitration in Lebanon with Auchi over lack of payment. AETA finally received full payment in 2009.

Hala claims that the GMH chairman was in agreement with the original layout for interior design, but later didn’t pay in full, claiming that the result deviated too much from the original agreement.

Refuting the rumors

Among the more persistent rumors regarding why the Hilton has remained closed is that it failed to meet Hilton’s construction standards. However, on Feb 21, 2007, Hilton International headquarters sent a letter of approval to the architect’s Verdun office, confirming that the hotel’s physical structure, surfaced in acid-etched glass to protect it from the sea climate and featuring custom-made interior design, was up to par. According to Hala Younes, Solidere signed the occupation permit in January 2008, verifying that the building meets legal standards. The hotel still doesn’t have a legal permit to operate, however, as SIWA has not signed it.

If, or when, the new Hilton Beirut does open, the Lebanese can be thankful that its delay was down to simple, old fashioned business wrangling, rather than an omen of imminent war like its ill-fated predecessor; the original Hilton was due to open one day before the start of the Lebanese Civil War in 1975.

April 1, 2010 0 comments

Comment

Freedom in flames

by Michael Young April 1, 2010

written by Michael Young

Recently, I happened to be involved in a public debate about the possibility of Lebanon soon introducing a smoking ban, along the lines of similar interdictions in Syria and Turkey. What most irritated anti-smoking activists was my proposal to allow for choice in certain types of facilities, with the market determining behavior. The outrage said a great deal about the mood driving a smoking ban law in Lebanon, and outside.

The proposal was fairly benign. A ban could be made complete in most places, including ministries and private offices, but remain optional in restaurants, cafés, and bars. The reality of a ban, however, would allow owners of leisure establishments to declare them smoke-free environments, even brand them as such, without clients being able to dispute this. In turn, other establishments could allow smoking. The market would arrive at some equilibrium, with both sides satisfied.

Rejection of these kinds of proposals generally revolves around three arguments. First, that the freedom of choice, as the National Tobacco Control Program put it in a letter sent in retort to my argument, “ends where my nose begins.” Tobacco kills, the writer reminded us, and exposing people to second-hand smoke endangers them: “Tobacco remains the leading cause of preventable deaths in the world, as well as in Lebanon, and hence should always be considered a public health priority.”

A second common argument is that if restaurant, bar, and café owners were offered a choice, they would opt to allow smoking and, therefore, everything would remain the same. The third argument is more philosophical, though it is closely related to the first. Smokers and non-smokers don’t have the same freedom to choose. Because smokers harm others, their freedom to smoke is immoral. Consequently, anti-smoking activists are justified in imposing a total ban on smoking, except for outdoor facilities where the risk is less.

In many respects these arguments miss the point, when they are not contradictory. Preventing individuals from absorbing second-hand tobacco smoke is defensible. But in what way does labeling establishments as smoking or non-smoking prevent this? If I hate cigarette smoke, I can go to a non-smoking restaurant or bar; if I want to smoke, I can go to a place that allows smoking. Restaurant and bar owners who don’t want people to smoke will be armed with an official ban allowing them to convert their facilities. Given the number of people who reacted with vehemence to my proposal, their clientele will be large.

Which leads us to the second argument. Giving establishments a choice to be smoking or non-smoking might not preserve the status quo at all. As the author of the National Tobacco Control Program admitted, in glaring contradiction with his or her defense of the status quo argument: “The idea that businesses will suffer with a 100 percent ban is a myth. While not a single independent study has proved a smoking ban produced negative results for the economy, numerous studies in countries such as Italy, Ireland and Canada have shown that business on average remains the same or even increases with such smoking bans.”

Precisely, and the same argument can be made for a partial ban. The reason is that there is high demand for non-smoking facilities, and owners of restaurants and bars will cater for this. With time, I predict the number of non-smoking facilities will rise. Why? Because non-smokers will gradually impose their will on smokers by refusing to go out with them to smoking establishments. After all, it’s easier to forego a cigarette than to forsake a friendship. The market will respond accordingly, but choice also means that smokers will still be able to find places to light up.

At the heart of the discussion is the purported moralism of the anti-smoking crusaders. The matter of choice disturbs them because, ultimately, there should be no choice on immoral action. You have no freedom to kill me, they insist, and they are right. But many things kill. Alcohol kills a tremendous number of people per year, as does coronary heart disease due to eating certain types of foods. Do you legislate all behavior that poses health risks? By creating spaces for those on both sides of the smoking divide, the market imposes a more sensible outcome.

April 1, 2010 0 comments

Society

Diageo – An industry cheers

by Emma Cosgrove April 1, 2010

written by Emma Cosgrove

Despite a global decline in alcohol sales, the Middle East is still supporting a healthy appetite for Scotch whiskey, according to the 2009 preliminary sales results of Diageo, the global alcoholic drinks provider. Diageo, which owns and produces Smirnoff, Guinness, Johnnie Walker, Captain Morgan and Jose Cuervo, managed to turn a profit in this year of economic turmoil, according to their figures released on August 31. As Western markets continue to suffer from the effects of the downturn, the Middle East and other emerging markets are taking the lead in terms of growth in the industry.

“Johnnie Walker is the biggest Scotch whiskey in this part of the world,” said Gilbert Ghostine, Diageo’s Asia Pacific president. Ghostine also stated that the Middle East is just one of the emerging markets that Diageo will be concentrating on in the future.

Gilbert Ghostine is Diageo
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April 1, 2010 0 comments

Comment

Resistance remembered

by Nicholas Blanford April 1, 2010

written by Nicholas Blanford

The story of the Lebanese resistance has long followed the Hezbollah narrative — unsurprising, given the party’s martial exploits of the early 1990s, when it came to dominate the effort to force Israeli troops from the country.

But last month, there was a poignant ceremony held in South Lebanon that briefly recalled another facet of military resistance against Israel’s occupation of the south, in the early 1980s, led by the remarkable, yet largely forgotten, Mohammed Saad. Born in 1956, the son of a poor grocer in Marakeh, Saad was a disciple of Imam Musa Sadr, the charismatic Iranian-born cleric who helped mobilize Lebanon’s Shia community in the 1960s and 1970s.

In the wake of Israel’s invasion of Lebanon in 1982, a resistance movement began in the villages around Tyre, an area that became known as the “arc of resistance.” Although Saad was the leader of the Amal resistance, he little looked the part of an influential military commander. He had narrow shoulders, a skinny physique and was described by one contemporary as “child-like” in stature. With his thick mane of wavy black hair, thin moustache and a scraggly tuft of beard on his chin, his appearance more resembled an American beat poet from the 1960s than a charismatic guerrilla commander. As hit-and-run attacks began to extract a mounting toll on the Israeli occupiers, they lashed back with punitive raids against the villages of the area. Resistance became a community effort. When Israeli columns were seen approaching a village, the warning was broadcast from the mosque, allowing resistance fighters to escape to their hideouts while women blocked the roads with burning tires and hurled stones and saucepans of boiling oil at the Israeli soldiers.

On one occasion, the Israelis learned that Saad was in Kfar Sir and surrounded the village with troops. Saad ran into a house and without saying a word to the startled family climbed into a pair of pajamas he saw lying on a bed. When Israeli soldiers banged at the front door, Saad himself opened it, dressed in the pajamas. The soldiers said they were looking for Mohammed Saad. The wily Saad turned to the family inside and said “Mother, they’re looking for someone called Mohammed Saad?”

“Never heard of him,” the mother replied, and the soldiers left. At the beginning of 1985, the Israelis began a phased retreat to a strip of territory along the border. Their withdrawal was marked by a brutal “iron fist” campaign against the villages of the south, marked by random executions, bulldozing of houses and mass arrests.

On March 2, 1985, Israel staged one of their biggest raids against Marakeh, but Saad and Khalil Jerardi, a top lieutenant, had already escaped. Two days later, Saad and Jerardi were holding a meeting on the first floor office of the Husseiniyah religious center in Marakeh when a bomb — planted by the Israelis during the earlier raid — ripped through the building, killing both men and 10 others.

Three months later, the Israelis had pulled back from the villages around Tyre to the border strip they would occupy for another 15 years. By then, Amal was embroiled in a savage war against the Palestinians. The “war of the camps” would sputter on for three years, sapping Amal of a number of its best military commanders and fighters. With Amal having lost some of its resistance impetus after Saad’s death, and sidetracked by the camps war, Hezbollah was able to expand its influence in the deep south, slowly transplanting its rival as the dominant Shia voice in the area.

To commemorate the 25th anniversary of Saad’s assassination, hundreds of people from Marakeh and the surrounding villages gathered on March 7 at Marakeh’s sports ground. Tough-looking men with stubbly haircuts, thick beards and rough calloused hands, and women clad in colorful headscarves, others in full-length black shadors, gathered beneath walls adorned with giant pictures of Saad and other deceased Amal resistance men whose names today are familiar only to the southerners.

A sheikh delivered a eulogy, calling Saad and his comrades “symbols of justice against murderers and killers.”

But this was very much a local affair; there was no representation from the senior ranks of Amal. Instead, the remarkable exploits of the resourceful Saad live on only in the memories of aging southerners, and in the few blurred and faded photographs of Amal “martyrs” tacked to street lights and walls in the villages of the former arc of resistance.

NICHOLAS BLANFORD is the Beirut-based correspondent for The Christian Science Monitor and The Times of London

April 1, 2010 0 comments

Economics & Policy

Regional equity markets

by Executive Editors March 27, 2010

written by Executive Editors

Beirut SE (One month)

Current year high: 1,200.49 Current year low: 705.56

> Review period: Closed: Feb19 – 1,099.12 Period change: 2.7%

BLOM Bank and developer Solidere’s two share classes drove the index gains, with improvements of 5.9%, 4% and 5%, respectively. On the downside of index movement, banks BEMO and BLC gave up 12.2% and 9.6%. Banks BLOM and Byblos reported full-year 2009 results to have improved 16.5% and 20% from 2008. Bank of Beirut posted a 15% profit improvement. Egyptian analyst house HC tipped BLOM and Byblos as buy opportunities and saw Bank Audi as a solid hold.

Amman SE (One month)

Current year high: 2,968.77 Current year low: 2,396.28

> Review period: Closed: Feb 21 – 2,446.71 Period change: -3.1%

ASE traders might be hoping to strike solid desert rock and gain footing for a rebound. On Feb 18, the index fell to 2423.80; its lowest reading in over five years, according to local media. This was compounded by an even steeper fall toward the end of the month. No sector ended the review period with growth; insurance was best, at .025% percent down. Industry and services dropped 3.7% and 3.4%, respectively. Gainers came from the smaller stocks. Of the five firms with market cap of more than $1 billion, the strongest were Jordan Telecom and lender HBTF with gains of 0.9% and 0.3%.

Abu Dhabi SM (One month)

Current year high: 3,239.74 Current year low: 2,311.11

> Review period: Closed: Feb 21 – 2,754.68 Period change: 4.6%

With the media birds of prey circling over Dubai, the ADX weathered more winds of challenge, but recorded a black zero in performance when compared with the last session in 2009. Adding 8.4% and 7.7%, the consumer goods and telecoms indices led the advancers, while the real estate index, down 2.5%, was the single losing sector. Etisalat, the only ADX firm with more than $10 billion in market cap, climbed 7.7%, and Abu Dhabi Commercial Bank, up 24.3%, was the big cap stock with the best performance. It was a bad month for driving instructors: Emirates Driving Co plunged 18.7%.

Dubai FM (One month)

Current year high: 2,373.37 Current year low: 1,490.02

> Review period: Closed: Feb 21 – 1,623.93 Period change: 2.1%

Another dismal month for the region’s most troubled performer for the year to date, down by 10% in 2010. Volatility topped 23% and the P/E ratio was a mere 9.15x. Real estate and utilities sub-indices ended the period lower. With the exception of a high-flying materials index, transport and banking were the cheeriest sectors. Negative news got the most press and a new oil find, trumpeted out as good news for the emirate, was met with skepticism. It seems the vultures with trust issues outnumber the noble falcons circling the Burj Khalifa.

Kuwait SE (One month)

Current year high: 8,371.10 Current year low: 6,391.50

> Review period: Closed: Feb 21 – 7,418.90 Period change: 5.6%

February’s trading supplied almost all of the KSE’s gains since the start of 2010. Real estate was flat. Insurance was the only sector to dip into the red during the review period. Up by over 9% each, food and banking indices represented the sectors that flavored the month positively. KSE heavy Zain Group said farewell to its visionary CEO, Saad al-Barrak, then announced a very profitable sales plan for its African assets. The latter move fueled a 44.4% share price gain for the stock in the review period.

Saudi Arabia SE (One month)

Current year high: 6,568.47 Current year low: 4,130.01

> Review period: Closed: Feb 21 – 6,479.15 Period change: 3.6%

The Tadawul index of the SSE closed the review period up 5.8% on 12 months ago. The upside outlier was agriculture, at plus 5.3%. The investment sector fared worst at -1.2%. Weqaya Takaful, a firm that started trading last June, dropped 22%. Kingdom Holding was the top advancer, appreciating 55.6%. Insurance debutants, Buruj Cooperative and Gulf General, put in shooting star performances gaining 258% and 150%, respectively, when compared with their February trading starts.

Muscat SM (One month)

Current year high: 6,798.17 Current year low: 4,575.99

> Review period: Closed: Feb 21 – 6,798.17 Period change: 4.1%

While not in the least likely to be a psychologically significant barrier, the Feb 21 close marked a new 12-month high for the MSM and the benchmark index’s strongest reading since November 2008. The MSM is the best performing GCC stock exchange for the year to date; its gain of 6.74% put it almost one percentage point ahead of the Saudi Stock Exchange The industrial index was the MSM’s lead performer in February, whereas the banking index trailed the general index for most of the period, closing about half a percentage point below the benchmark.

Bahrain SE (One month)

Current year high: 1,681.28 Current year low: 1,413.28

> Review period: Close: Feb 21 – 1,513.45 Period change: 2.4%

Not a traditional contender in the Winter Olympics, the BSE seemed to try for some downhill-uphill action around the first week of the Vancouver Games before regaining a solid percent of index values. Of sector indices, insurance, banking, and services outperformed the general index last month; investments stalled and industry tanked. Top gainer of the period was Bahrain Kuwait Insurance, up 20%. Arab Banking Co. dived 23.2% in the review period. Gulf Finance House, the Sharia-compliant financial firm, reported a 2009 net loss of $728 million, mostly from non-cash provisions.

Doha SM (One month)

Current year high: 7,624.45 Current year low: 4,230.19

> Review period: Closed: Feb 21 – 6,950.58 Period change: 5.98%

February saw redemption from the fall of January for the QSE index but still a drop of -0.1%, year to date. All sector indices were positive in February, with banking and industry gaining 7% and 6%, respectively. Services and insurance trailed slightly with gains of 3.3% and 3%, respectively. Market cap leader Ezdan Real Estate edged up just under 1% and Industries Qatar climbed 4.9%. Market watchers expect Qatar will be a good bet going forward, in anticipation of solid economic growth.

Tunis SE (One month)

Current year high: 4,743.05 Current year low: 3,059.18

> Review period: Closed: Feb 19 – 4,681.53 Period change: 0.8%

Compared with December and January’s relentless ascent, the Tunindex checked its pace in February but remained the region’s best climber. The exchange’s three top gaining companies this month made for an eclectic manufacturing mix — Electrostar, an assembler and distributor of household electric and electronic goods, rose 24.7%; tire maker STIP advanced 21.7%. Third in the group with 21.1% was cement maker Ciments de Bizerte, which, until Feb 3, had been on a prolonged slide from its trading debut last October.

Casablanca SE (One month)

Current year high: 11,729.86 Current year low: 9,99.756

> Review period: Closed: Feb 19 – 11,053.55 Period change: 1.1%

Market cap leader Maroc Telecom traded sideways during the review period, ending on a slight downward bias. Leading bank Attijariwafa maintained an overall positive trajectory, climbing 5.2%. The exchange’s price to earnings reached 18.6x, making it the most expensive equities market among the Middle East and North African markets tracked on these pages. The Damascus Stock Exchange, which celebrates its first birthday in March and is not currently part of this markets roundup, reported a still higher P/E ratio of 21.2x.

Egypt CASE (One month)

Current year high: 7,249.55 Current year low: 3,517.33

> Review period: Closed: Feb 21 – 6,708.45 Period change: -0.7%

Egypt sees itself soaring with 2010 economic growth well above 5%, but the EGX 30 fell into a glide in the second part of February. EGX volatility of 22.2% was higher than other bourses in the region. The top double-digit gains were mainly seen by manufacturers, including chemicals and steel producers. Telecom Egypt and Orascom Telecom Holding, the bourse’s number two and three by market cap ended the period 6.8% and 8.1% higher, respectively. Top dog Orascom Construction Industries lost 6.2%.

March 27, 2010 0 comments

Economics & Policy

Telecoms Trapped in inertia

by Executive Editors March 27, 2010

written by Executive Editors

Shame is a word used to describe the painful feeling arising from the consciousness of something dishonorable, improper or ridiculous. All of which seem to apply to Lebanon’s telecommunications sector — once the beacon of Middle Eastern telecommunications.

To get an idea of how far Lebanese telecommunications has fallen, a small case study can be considered. In January 1995, Lebanon was at the forefront of the regional telecom industry, with some 512,000 mobile subscribers and 612,000 land-line subscribers. At this time the United Arab Emirates had just introduced mobile telephony and had 737,000 fixed service subscribers, according to the International Telecommunications Union (ITU), the United Nations agency for telecommunications which works with governments and the private sector to promote best market practices. Last month, Etisalat, the UAE state-owned mobile telecom company announced that it had reached 100 million subscribers across the 18 countries in which it operates. Lebanon has just reached around 2.4 million subscribers, around half of the population. Fixed line penetration totaled only 750,000 in March 2009 according to the World Bank.

Riad Bahsoun, telecom expert at the ITU, said Lebanon might reach 100 percent market penetration in second-generation mobile telephony in 2014. That is just four years before the end of Global System for Mobile’s (GSM) generation lifecycle, the measure by which a technology can exist as relevant in a market. In other words, it will take Lebanon another four years to fully adopt what is, even now, relatively obsolete technology, and even that limited progress is nowhere near certain.

Bahsoun, previously identified by the media as a contender for telecom minister, estimates that because best practices have not been followed in Lebanon since 1994, some 12,000 potential jobs have been lost and between $10 billion to $12 billion in revenue squandered. Last year Etisalat made $8.4 billion in revenues and reached a mobile penetration rate of over 200 percent in the UAE alone.

“We lost money, we lost chances, we lost jobs and we lost our dignity,” said Bahsoun.

According to the finance ministry, $1.36 billion was transferred to the treasury from the telecom sector’s surplus last year

What now?

Whatever the opportunities lost, one thing is for sure: the wholly government-owned and controlled sector has been making a pretty penny off its current pricing structure, which by far exceeds prices offered in neighboring countries.

According to Lebanon’s finance ministry, $1.36 billion was transferred to the national treasury from the telecom sector’s surplus last year, which exceeds the figure of $1.27 in revenues announced to the press by the telecom minister Charbel Nahas in February. The prices of bandwidth in Lebanon are also amongst the highest in the world, with one megabit per second (Mbps) of dedicated bandwidth costing consumers and businesses $1,350 per Mbps per month.

“If an Internet Service Provider (ISP) is located in Kuwait, Qatar, Bahrain, the UAE or Saudi Arabia, the cost [of dedicated bandwidth] is $100 per Mbps per month,” said George Jaber, director of business development and partnerships in the Middle East North Africa at TATA communications.

But it is not just government ownership that impedes the telecommunications sector from achieving rates of growth similar to neighboring countries. All decisions related to pricing and revenue sharing are decided upon by the 30 member Cabinet, comprising Lebanon’s fractious political elements, while the sector’s governance structure has facilitated political interference, allowed the public sector to maintain its grapple-hold, and made decision making a long and tiresome affair.

Thus, it’s little surprise that Abdulmenaim Youssef, the head of Lebanon’s incumbent public operator, Ogero, also heads the Directorate of Operations and Maintenance at the Ministry of Telecommunications (MOT), whose job it is to oversee Ogero’s operations. Youssef has held both positions for half a decade and cannot be removed from either without a cabinet decision.

The current Telecom Minister, Charbel Nahas, was handpicked by the opposition leader Michel Aoun in a long, drawn-out battle that held up the cabinet’s formation for five months. No one from the ministry, including both director generals and the minister, responded to

Executive’s repeated requests to comment.

“Ogero has the capacity today to offer more than two megabits per second. [They could offer] up to 4 Mbps, but they cannot do it because they do not have the tariff structure,” said Gaby Deek, president of the Professional Computer Association of Lebanon (PCA), a non-profit ICT association. The tariff structure cannot be put in place until agreed by the cabinet.

The issue becomes even more egregious when one considers that “half of government revenue from telecom last year was taxes,” according to Deek, who is also a member of the Lebanese Broadband Stakeholders Group, a local lobby group that pushes for broadband in Lebanon. Nahas has repeatedly stated that he seeks to separate commercial activities from taxes in the sector, but ultimately it is not his decision alone.

Change price, change structure

The only recent respite for the sector came in February 2009 when the cabinet decreased longstanding tariffs on mobile communications to levels that are still well outside of regional norms.

A recent World Bank report found that “these price reductions combined with MOT investments into mobile networks, together with the new management fee structure (which creates incentives to expand the subscriber base) have resulted in renewed marketing efforts by the managers of the two mobile service providers, a shift from pre-paid to post-paid subscribers, and recent increases in mobile penetration, yet there was no improvement in the quality of service to the consumers who are still suffering poor quality of service.”

The report also stated that a 10 percent increase in broadband penetration would result in gross domestic product growth between 1.2 percent and 1.5 percent “on a recurring basis.”

The “new management fee structure” the World Bank refers to was an agreement between the Lebanese government and the country’s two mobile operators, Alfa and mtc touch, who currently manage the mobile networks. The yearly one-time renewable contracts had accorded Alfa $6.75 per subscriber and mtc $6.66 per subscriber, in tandem with an aggressive expansion plan implemented by the operators and the ministry. As Executive went to print, the expansion was still underway and a second phase “is being discussed with the MOT to increase capacity up to 1.7 million customers,” for each operator, said Claude Bassil, general manager of mtc touch.

The MOT implemented a revenue sharing agreement with the operators for a period of six months, starting February 1, whereby each firm receives a monthly fee of $2.5 million plus 8.5 percent of revenues generated by the networks. The contracts can be renewed twice for a period of three months at a time.

“Since it is a revenue sharing model, the more revenues the MOT gets, the more revenues mtc touch gets,” said Bassil. “It is, however, more challenging than the previous model because then there was latent demand which we were capturing. But now we have to maximize revenues and increase ARPU [average revenue per user], which has never been easy anywhere in the world.”

Bassil’s company has repeatedly stated that it seeks to acquire a mobile license to own and operate their network, but this has not come to pass and Lebanon’s finance minister has stated to the media that privatization would not occur this year and was only a possibility in 2011.

“Until the privatization process is activated, we will do our best to continue managing MIC2 [the official name of mtc’s network],” said Bassil, who claims his company constitutes 57 percent of the mobile market. “Like any reasonable contract, the current management agreement allows for any party to request an adjustment or a review of certain conditions in case of major changes.”

Even though both mobile operators have expressed their continuing “commitment” to the Lebanese market, one can only wonder how long the operators will have the appetite to stay in a market while not being able to own their operations and set their own prices.

A new plan, sort of…

On the surface, not all the news coming out of the sector is disheartening. In late January, Minister Nahas presented a plan to raise the legal bandwidth in Lebanon from 2 Gigabits per second (Gbps) to 120 Gbps, a dramatic increase of Internet capacity in Lebanon. Lebanon’s total bandwidth is unknown due to the presence of grey and black market participants that make up “40 to 60 percent of the market,” according to Habib Torbey, head of the Lebanese Telecommunications Association (LTA).

All of this will come at a cost. Nahas has stated that he and the finance ministry have agreed to spend $166 million on the expansion plan and include the figure in the next budget, which has yet to be approved by the Cabinet or by Parliament. Lebanon is also expecting to finally connect itself to the International Middle East Western Europe 3 (IMEWE3) network by May, according to the minster. A submarine cable extending from Tripoli to Alexandria, Egypt, would link Lebanon to the network and effectively allow the country to stop relying on Cyprus for an international Internet connection via the CADMOS cable.

Despite media reports stating that Lebanon’s bandwidth will increase to 30 Gbps upon connection, documents obtained by Executive show that the actual capacity of the cable is 300 Gbps upon connection and can increase to 3,840 Gbps. An official from one of the companies investing in the cable, who spoke on condition of anonymity, said that Ogero had invested some $45 million in the cable. The official also said that because Lebanon will only be connected via one of the three fiber pairs — a subdivision of a fiber optic cable — the initial capacity Lebanon will have access to is 120 Gbps, which can be upgraded later to 1.2 terabits per second.

Many in the country are welcoming the addition to Lebanon’s infrastructure, yet it is still “not enough to meet current demand, especially if we intend to have real broadband,” said Mahassen Ajam, commissioner of Lebanon’s Telecommunications Regulatory Authority (TRA).

The finance ministry could not confirm, however, either the cost of the expansion plan or that it did indeed include the IMEWE3 connection, as a spokesperson at the ministry said Ogero is given a lump sum each year to spend at its discretion. Moreover, several experts have contested the proposed timeframe for connecting Lebanon to the cable on technical grounds.

Despite repeated requests to the press office at the telecom ministry for details on the expansion plan, none were forthcoming.

“They haven’t given us a single detail [either] which shows you that something is not right,” said Torbey who is also president of GlobalCom Data Services, which owns Inconet Data Management (IDM), one of Lebanon’s largest ISPs. “If we are not up to speed with the details, then that means that there is not much in terms of details.”

According to the PCA’s Deek, the expansion plan is comprised of 23 projects. Contacted directly by Executive, Imad Maatouk, a department head at the general directorate of construction and equipment at the telecom ministry, would not confirm how many projects comprised the expansion plan, but stated that the ministry was still “studying” the plan. Maatouk also explained that the ministry was still in the process of issuing the tender book and added that “the minister is an economist, so surely his budgeting will be based on things that are very clear.”

Nonetheless, the lack of information has led some to cry foul.

“Because of the inaccuracy of the design it plans to use, the telecom ministry will spend a minimum of $166 million on this project, while it can build a more advanced network for a maximum of $40 million,” said Bahsoun, who is also a member of the International Telecom Council of Lebanon (ITCL), a group of Lebanese nationals in the diaspora who are high-level telecom executives and lobby for best practices.

The cost of the project is also much higher than the $64 million scheme proposed by the last Telecom Minister, Gebran Bassil, in March 2009.

Youssef — the head of Ogero and the MOT’s directorate of operations and maintenance — and Minister Bassil (Michel Aoun’s Son-in-law) were at loggerheads over implementation of the $64 million project.

An intelligence briefing document from the office of the former telecom minister, dated August 27, 2009, obtained by Executive, states: “The project is opposed…by Dr. Youssef, but this everyone knows [sic].” The document also states that, “The managers who are in charge of implementation, Naji Andraos and Aurore Feghali are apparently deliberately delaying the implementation for political reasons.”

Notably, the $64 million plan did not include details regarding the technology, or cost, of the “access layer,” the final crucial link between the telecom infrastructure and the user. Similarly, the structure of the access layer in the current $166 million plan had yet to be finalized, according to Maatouk.

Regardless of what form the access layer will take, the gap in proposed spending is still significant and unexplained. “It makes a big different because up to three-fourths of the cost of the initial $64 million of what was being proposed was related to digging; now it is $166 million and no one knows why,” said Bahsoun.

He explained that in 2002 the ITU presented the Telecom Ministry with an national backbone plan that did not apply the traditional method of creating several “rings” on the national and metropolitan levels, but instead went from the customer to existing infrastructure while allowing a redundancy buffer to ensure continuous service.

“This is what specialists call the cost of ignorance and this explains the large gap between the two budgets for the same project,” said Bahsoun. “As we all know, ignorance indeed is very costly.”

Without proper information, no one knows for sure when Lebanon’s telecom troubles will start to clear. The only thing that is certain is that the longer the current situation persists, the more opportunities the country misses.

“You cannot imagine after the crash of Dubai, how many companies contacted us to evaluate the possibility of switching their headquarters to Beirut,” said Torbey. “The single obstacle that prevented them from doing so was the poor performance and high prices of telecom connections.”

Total bandwidth is unknown due to the presence of grey & black market participants that make up “40 to 60 percent of the market”

March 27, 2010 0 comments

Economics & Policy

For your information

by Executive Editors March 27, 2010

written by Executive Editors

The cost of Lebanon’s short ciruits

Electricity shortages in Lebanon cause the economy to lose a total of $5.75 billion every year, according to energy minister Gebran Bassil. The minister also announced that lower fuel oil prices meant the total losses of Lebanon’s state-owned electricity provider, Electricité du Liban (EDL), fell to $1 billion last year, from $1.86 billion in 2008. The minister said that EDL currently employs only 1,930 of the 3,097 full time staff it needs to operate effectively, and is losing 120 to 150 people yearly because of the legal retirement age. Government officials have stated that the average age of an EDL employee stands at around 58 years. Bassil also bemoaned the amount of investment made in the sector by the current and previous governments.“We have only invested $1.5 billion in the electricity sector over the past 18 years while many Arab countries spend this amount every year to upgrade their power stations,” he said, according to press reports. A recent International Monetary Fund working paper has stated that if electricity constraints were reduced to the world average, Lebanon’s economy would grow by 1 percent.

Central bank sitting on a mountain of gold

The World Gold Council (WGC), the global private information association for gold, has stated that Lebanon has the highest reserves of gold in all the Middle East and North Africa. At the end of 2009, Lebanon was registered as having $9.2 billion of gold reserves, making it the world’s 15th largest holder of gold. Lebanon’s reserves also made up 1.1 percent of the world’s total gold reserves at the end of last year, according to the WGC. Banque du Liban, Lebanon’s central bank, uses the gold reserves as a security against unexpected financial fluctuations and as an instrument to stave off any depreciation of the Lebanese lira. The Lebanese government has the official right to liquidate the gold, but most observers agree that the current policy of not selling the gold will continue. The gold reserves at the end of 2009 were equal to around 18 percent of the public debt, according to the finance ministry’s debt estimate, and some 28 percent of gross domestic product at the end of September 2009, as per the WGC.

Poland-Israel arms deal

Israel’s Rafael Advanced Defense Systems has inked a deal with Poland’s Bumar Group to provide manpower and resources for Israeli weapons manufacturing. The deal, said to be worth some $400 million, will result in the joint production of Spike missiles for drones and helicopter gunships. According to Poland’s defense minister Bogdan Klich, the Polish military will also acquire eight Aerostar Unmanned Aerial Vehicles (UAVs) from Israel’s Aeronautics for around $32 million. The UAV, or drone, has long been a key tool in the military arsenals of both the United States and Israel and is used extensively in Afghanistan, Pakistan and during the 2008/2009 Israeli attack on the Gaza strip. During the period between 1995 and 2009 more than 200 military activities, including joint training and information exchanges, were conducted between the Polish and Israeli armed forces, according to the Polish defense ministry cited in the French language monthly Le Monde Diplomatique.

Syria’s stable economic outlook

The impact of the global economic downturn on the Syrian economy has been “relatively limited,” according to a report released last month by the International Monetary Fund. “Overall real gross domestic product growth is estimated to have decelerated in 2009 by 1 percentage point to about 4 percent. This reflected a slight increase in oil production and a decline in non-oil real growth by 1.5 percentage points to about 4.5 percent over the course of the year. Lower growth in manufacturing, construction and services was partially offset by a moderate recovery in agriculture,” the report stated. Unemployment was seen to have risen to 11 percent in 2009, according to the IMF, after hovering around 8 to 10 percent over the past four years. Conversely, inflation registered at just 2.5 percent in 2009, on the back of falling commodity prices, after reaching levels of around 14 percent in 2008, according to the IMF’s analysis. The fund also estimated that the fiscal deficit widened by 2.5 percent of gross domestic product to 5.5 percent, but that this “was appropriate to mitigate the impact of the global crisis,” cautioning that “fiscal consolidation is necessary going forward.”

Lebanon B.O.P. $7.9 billion in 2009

According to figures released last month by the Banque du Liban, Lebanon’s central bank, the country achieved its highest ever balance of payments (BOP) surplus in 2009, boosted by several economic factors.

Lebanon registered a total BOP surplus of $7.9 billion last year. This was more than double the amount registered in 2008 as capital inflows reached $20.66 billion over the course of 2009 — an increase of 26.6 percent relative to 2008 — according to Bank Audi. Non-resident deposits in Lebanese banks hit $5.1 billion according to Audi, while remittances dropped marginally from $7.18 billion in 2008 to $7 billion in 2009, as per World Bank estimates. The relatively high BOP surplus is also a result of an increase in the net foreign assets of the central bank, reaching $8.69 billion in 2009, offsetting a decline of $794 million in net foreign assets held by banks and financial institutions over the covered period. The balance of trade deficit had reached $11.8 billion in the first 11 months of 2009, according to the Association of Banks in Lebanon.

Lebanon hungry for US goods

A report from the United States Department of Commerce released in February said that Lebanon has a favorable climate for investment, but that bureaucracy and political instability still present barriers. In its Country Commercial Guide for Lebanon, the commerce department noted that Lebanon was the 64th largest market for US exports in 2009, up four spots from 2008, and that in the first nine months of 2009 Lebanon imported $1.1 billion in US goods. The most imported US goods in Lebanon last year were vehicles ($521 million), mineral fuel and oil ($99 million) and machinery ($79 million), as well as electrical appliances and cereals ($26 million each). The report also predicted that the US share of the Lebanese auto market reached 16 percent in 2009. It noted that Lebanon has one of the best educational systems in the region, citing the number of students enrolled in universities inside and outside of the country. Information and communication technology pharmaceuticals, and insurance were identified as having the best business prospects by the US department.

News Corp buys into Rotana

A high-profile deal between Rupert Murdoc’s media conglomerate News Corp and Saudi billionaire Prince Alwaleed bin Talal was signed in late February. The deal will see News Corp, which already includes media giants such as The Wall Street Journal and the right-wing American news channel Fox News, acquire a 9.1 percent stake in Rotana Media Group for $70 million. The deal carries an option for News Corp to increase its share to 18.2 percent in the 18 months after the deal. Rotana already distributes Fox’s channels to the Arab world and has some of the most popular Arab pop stars on its books. Alwaleed’s investments, in particular his stake in Citigroup, took a battering during the financial crisis. Nonetheless, through Kingdom Holding (KH), Alwaleed already owns a 5.7 percent stake in News Corp, according to a statement KH made last year.

March 27, 2010 0 comments

Real estate

A time-line of towering prices

by Karim Makarem March 27, 2010

written by Karim Makarem

Recent real estate reports issued by both Lebanese and foreign publications have given, what we at Ramco consider, inaccurate data concerning residential property prices in Beirut. We therefore feel it is our responsibility to correct this misinformation with accurate data of our own on the evolution of prices of new apartments since 2005. In summary, our research department has found that over the last five years, prices have increased some 120 percent on the lower end and, on average, 150 percent at the higher end of price ranges.

Other major developments can be measured along the following timeline:

2005 & 2006

Despite the degradation of the political and security situation in the country, which saw numerous assassinations and a major war in the summer of 2006, the real estate market in Lebanon showed remarkable resilience. While demand may have seesawed during this time as a result of these events, the number of development projects increased, as did prices, which rose by about 20 percent each year.

2007

This period witnessed the most dynamic time for the market, partly spurred by a burgeoning demand from expatriate Lebanese. The price of construction during the period also increased. In conclusion, prices shot up some 30 to 40 percent. The value of a square meter surpassed, for the first time, the symbolic ceiling of $2,000 on the first floor in Clemenceau, Furn el-Hayek and Koreytem. Downtown stock was being sold at no less than $3,500 per square meter.

2008 & 2009

Within the context of a global economic crisis, the market in Beirut seemed mostly unaffected. The market witnessed a relative stability in prices after continued increases since 2005, compared to other regional capitals that at this time witnessed drops of as much as 50 percent in value. In Beirut, developers stood fast and did not succumb to panic, which saw prices rise by 10 percent to 20 percent in the first half of 2008 and remained stable throughout the rest of the year. At the start of 2009 prices rose again by 10 percent.

2010 (year to mid-February)

Since the end of 2009, the market has seen renewed activity. New stock prices have risen by 5 to 10 percent. The primary reason for this is the increase in the price of the buildable area. The result is that the up-market areas of Beirut no longer list anything at less than $3,000 to $3,500 per square meter.

The gap between these prices and that of the prices of stock in downtown has never been so small. Developers seem to have no qualms about asking for $5,000 per square meter in Verdun, Sursock and Georges Haimary Street. Although the luxury stock made up of large areas is proving difficult to shift, product that is tailored more to actual demand, such as apartments of 150 to 250 square meters, are witnessing a continued increase in prices.

Beirut property prices,February 2010

Karim Makarem is director at Ramco real estate advisors.

March 27, 2010 0 comments