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Freedom in flames

by Michael Young
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.  

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Society

Diageo – An industry cheers

by Emma Cosgrove
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.

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Resistance remembered

by Nicholas Blanford
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

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Competing for the long haul

by Peter Grimsditch
written by Peter Grimsditch

The decision by Emirates Airlines to postpone moving its operations to the new Al Maktoum International Airport near Jebel Ali risks letting regional rivals steal a slice of Dubai’s hard-won and lucrative transit business on routes into Asia. According to Tim Clark, the president of Emirates, a “rethink” convinced the airline it was better to stay where it was for another decade. The moving timeframe has been put off from 2018 to 2020 to between 2022 and 2030.

“With a certain amount of investment,” said Clark, “you can get a lot more out of Dubai airport.” It would have been reasonable to add that it is much cheaper to stay put these days than it is to shift house. That “certain amount of investment” will boost passenger handling facilities at Dubai International Airport to 90 million passengers a year. That is still a long way from the staggering Al Maktoum target of an annual 160 million — or the equivalent of a little more than half the entire population of the United States.

Dubai is also an equally long way ahead of the airports at Istanbul and Doha, both of which would like to make further inroads into the growing Asia-bound traffic. Ataturk International Airport, in Istanbul, is the largest airport between Frankfurt and Dubai, and can handle 30 million people. A third airport in Istanbul would cost a minimum of $8 billion to $10 billion and the Turks are as ill-inclined these days as Dubai to splash money around unnecessarily. Istanbul has a second airport, Sabiha Gökçen but without a rapid transit access it is much too far away from the main body of the city to entertain thoughts of a grandiose future. The alternative and cheaper ideas include demolishing some high-rise apartment blocks to allow the addition of a parallel new runway at Ataturk, and a mega upgrade of the air traffic control system to allow planes to land with a gap smaller than the current minimum five miles. This could double the airport’s capacity. Hopefully the speed with which arriving passengers are processed through passport control would also be included in the plans. Qatar, too, is getting a new airport, which will be able to handle 50 million people when it is finished in 2015.

According to the International Air Transport Association (IATA), Middle East carriers are expected to carry just more than 15 percent more passengers in 2010, although few are managing to translate that into profits.  Etihad Airways expects to break even next year, Qatar’s national carrier is too busy adding aircraft to be overly concerned about the bottom line and loss-making enterprises in Dubai is too painful a topic to broach.

Even so, the expansion continues. Qatar Airways will soon launch services to Brazil and Argentina, Etihad will increase its links with Australia and Emirates is stepping up the number of flights to London. That leaves Turkish Airways (THY) in an enviable location. The number of passengers carried rose 25 percent in the first two months of this year and its fleet will be increased by 94 aircraft over the next four years; some 1,600 new air and cabin crew will be hired this year. Ten airlines, including the Polish national carrier LOT and three from the Balkans, are seeking suitable terms to be taken over by THY. It is even increasing the number of football teams with whom it has travel deals. THY signed a contract with English super-club Manchester United to ferry the team for three-and-a-half years and has a similar agreement with FC Barcelona.

In total, THY hopes to carry 31 million passengers in 2010, or more than the entire capacity of Ataturk Airport. This mathematical conundrum is easily solved by including the rest of the country’s airports. Its routes are increasing to both west and east, encouraged by the increasing numbers of countries and cities, such as Japan, the Philippines, South Korea, Hong Kong, Indonesia, Thailand and Malaysia, which no longer require pre-acquired visas from Turkish citizens. All this means more planes, passengers, routes, staff and even profits for THY — in 2009 it made just over $220 million.

Perhaps Emirates thinks it is so far ahead of Turkey and Qatar, the 10-year delay on moving its base holds no hazards. That’s what the hare thought when it left the tortoise looking at the bottom of its paws.

Peter Grimsditch is Executive’s Istanbul correspondent

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Mashreq enmeshed

by Riad Al-Khouri
written by Riad Al-Khouri

 

The economy of the eastern Mediterranean went from being a unified whole under the Ottomans 100 years ago to increasing fragmentation in the Twentieth Century. This trend was especially apparent in 1950 when Lebanon and Syria broke off their customs union, and the latter proceeded to erect higher tariff barriers, eventually being emulated in this respect by Jordan, which also wanted to protect “infant” industries.

This issue was highlighted — and remedies for it sought — in a workshop held last month in Beirut by the United Nations Economic and Social Commission for Western Asia and the World Bank on “Regional Cross-Border Trade Facilitation and Infrastructure for Mashreq Countries.” Addressing the event, Hedi Larbi, director of the World Bank’s Middle East department, noted that “trade exchange within the Arab world is very weak in comparison with other regions of the world,” amounting to only 13 percent, compared to 21 percent in Latin America and almost 35 percent in East Asia.

Trade within sub-regions of the Mashreq is higher than that of the Arab countries taken as a whole, with Lebanon and Jordan in particular being states that do a lot of their trade with each other, and with others in the region. That point was underlined during Jordanian Prime Minister Samir Rifai’s visit to Beirut in March. During the trip, Rifai signed a number of bilateral agreements with Lebanon covering cooperation in industry, agriculture, higher education and scientific research, among others. He also stressed the need to speed up implementing the 2002 accord establishing free trade between the two countries. All this should further boost merchandise trade between the two countries, which stood at $288 million last year, an 18 percent increase over 2008. The two sides also underlined the need to promote the booming Mashreq tourist industry by conducting joint tourism fairs to sell Lebanon and Jordan as one destination.

Yet this spirit of co-operation was not always there; just as economic arguments restricted trade in goods among the countries of the Mashreq in the past 60 years, other considerations also played a role in stifling services industries. A case in point of such restrictions was the imposition of visa requirements on Lebanese travel to Jordan in the late 1970s, a step promptly followed by a quid pro quo retaliation from Beirut mandating visas for Jordanians wishing to enter Lebanon. This led to a drop in tourists heading from Amman to Beirut and vice versa, as well as diminished transport between the two countries. One result of such measures was that during the 1980s and 1990s there was a decline to only a few flights per week between the two countries, which was logical in view of falling tourist traffic. In 2005 that changed with abolition of visa restrictions for Lebanese and Jordanians in each other’s countries.

Royal Jordanian today thus has no fewer than 28 flights per week between Amman and Beirut, with Middle East Airlines also running more than one daily flight between the two capitals. Likely a result of the cancellation of visa requirements, the number of Jordanian visitors to Lebanon in 2009 was a huge 225,000, a big increase over the figures five years earlier and an example of how removing restrictions can enhance business across borders. These and similar points were made by the Jordanian premier during his latest visit to Lebanon.

At the Beirut Chamber of Commerce and Industry, Rifai outlined trade and investment prospects in the kingdom in preparation for a visit by members of the Lebanese private sector to Jordan in April. He also reviewed Jordan’s vision to build strategic relationships in the region through joint projects in the field of transport, especially railroads. That, of course, would also involve Syria, but Damascus is on board in efforts to remove obstacles to the smooth flow of goods, individuals and investments between the Mashreq countries to gradually lead toward their integration.

 

RIAD AL-KHOURI is a senior economist at the William Davidson Institute at the University of Michigan in Ann Arbor, and dean of the business school at the Lebanese French University in Erbil, Iraq

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Subsidy showdown

by Gareth Smith
written by Gareth Smith

Iranian strategists have long wondered about an Islamic version of the Chinese model, which has achieved a 7 to 8 percent annual growth rate over 20 years, through easing state economic control under the Communist party’s political monopoly.

The crackdown on the reformist opposition since last year’s disputed presidential election — in which Mahmoud Ahmadinejad won a 63 percent landslide — will increase the attraction of China’s example. Iran may now be better placed for serious economic reform, with the aim of reaching the 8 percent growth envisaged by Tehran’s 2010-15 economic plan, rather than the paltry 2.2 percent forecast for 2010 by the World Bank.

Oil revenue in Iran has long pitted short-term consumption against the investment needed to finance growth. Hence, the problem with elections is that Iranians believe their country is much richer than it is and will vote for those who offer them their cut.

A friend in Tehran, now in prison, used to ask people how much they thought was their “share” of the oil wealth. The usual reply was in thousands of dollars, and he delighted in pricking the bubble by saying it was about $500 per year per adult.

Economist Djavad Salehi-Isfahani put the point differently last year, when he calculated the hypothetical per-person income of Iran’s oil and gas reserves of around 300 billion barrels, and oil-equivalent barrels, could be invested in a long-term trust fund offering 3 percent. This was at the top of the market, and yet the annual yield was $430 per person, declining over time as the population rose.

Such figures bear scant relation to the growing popular belief in Iran that oil wealth should improve people’s short-term lot. Ahmadinejad stormed to power in the 2005 presidential election promising not just a return to the egalitarianism of the 1979 Islamic Revolution, but to “put the oil money on the people’s sofreh” — the carpet or cloth on which poorer Iranians sit to eat lunch.

Yet in one of the most remarkable turnarounds in recent Iranian politics, Ahmadinejad subsequently came up with the first serious government plan to tackle the most damaging consequence of Iranians’ belief in their own wealth — the state’s annual commitment of between $50 billion and $100 billion to subsidize gasoline, electricity, bread and medicines.

Ahmadinejad’s scheme to phase out subsidies over five years and replace them with benefits targeted at the poor has put him at loggerheads with parliamentary deputies, conservative and reformist, who are loath to allow the president any discretionary spending. As much as half of the savings would be allocated to the “needy,” a difficult term to define even in economies far more developed and transparent than Iran. But after wrangling between the president and parliament, the Guardian Council, Iran’s constitutional watchdog, ruled in January there should be a new government body to receive and spend the saved money — putting it at least a step away from the president’s direct control.

In truth, many of Ahmadinejad’s opponents, inside and outside the country, are less interested in the reform plan’s potential success than in its potential to make the president unpopular. Removing subsidies could well stoke inflation and make millions of Iranians worse off in the short term. Without a broad political consensus, it is hard to see how such shock therapy could be initiated without the government falling prey to the kind of opportunistic political opposition that has stymied attempts to reform subsidies since the 1990s.

Conservatives around Ahmadinejad, supported by the supreme leader Ayatollah Ali Khamenei, now seek change. And why not? Shortly after Ahmadinejad’s 2005 election win, the reformist commentator Saeed Leylaz cited the dictum that China should adopt effective policies, whether “capitalist” or not. “The cat is finally catching mice,” Leylaz wrote, “and its color no longer matters.”

True, Ahmadinejad has shown little capacity to emulate the more subtle aspects of Chinese capitalism; privatizations have merely transferred assets to quasi-state-owned bodies. But if savings from universal subsidies can fund productive investment, then the longer-term benefits for the economy could include job creation and higher living standards. And those who had carry through the change might then benefit politically, and perhaps even be ready for more competitive elections.

GARETH SMYTH is the former Tehran correspondent for The Financial Times

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Economics & Policy

Regional equity markets

by Executive Editors
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%.   

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Economics & Policy

Telecoms Trapped in inertia

by Executive Editors
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”

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Economics & Policy

For your information

by Executive Editors
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.

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Real estate

A time-line of towering prices

by Karim Makarem
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.

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