Economics & Policy

Anchoring success

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

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

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

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

The case for focusing on commercial performance

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

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

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

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

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

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

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

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

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

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

Managing performance

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

Analytic and dynamic strategy

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

Clear and efficient operating model

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

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

Accurate and effective metrics

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

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

* Break down the strategy into measurable components.

* Identify performance indicators for each component.

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

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

Building blocks of the organization

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

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

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

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

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

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

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

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

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

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

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Finance

Cash flow in a conflict

by Ahmed Moor
written by Ahmed Moor

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

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

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

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

Byblos Bank

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Bank of Beirut

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

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

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

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

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

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

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

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

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

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

Best practices

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

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

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Economics & Policy

Stage fright

by Executive Staff
written by Executive Staff

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

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

Stumbling start

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

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

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

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

Waiting at the red carpet

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

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

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

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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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Real estate

For your information

by Executive Editors
written by Executive Editors

Construction growth in 2009

During 2009, real estate and construction indicators in Lebanon increased year-on-year, except the number of construction permits, which fell by 10.8 percent. This drop was due to a massive dip in the last month of the year; until November 2009, the number of construction permits was 5.6 percent higher than the same period in 2008, according to Bank Audi. In December, the number dropped 44.4 percent compared to December 2008.

Jordan expands “decent housing”

Beginning in February, the Ministry of Public Works and Housing in Jordan introduced a new scheme which made it easier for citizens to buy property, under the $7 billion “Decent Housing for Decent Living” initiative launched by King Abdulla bin al-Hussein in 2008. The five-year program aims to provide thousands of housing units for low and limited income Jordanians, civil servants, Jordan armed forces personnel and civil and military retirees, according to The Jordan Times. The scheme includes extending the pay-back period for loans from 20 to 30 years and increasing the maximum age of beneficiaries from 60 to 70 years. Beneficiaries’ monthly repayment installments are expected to be worth some 50 percent of their income.  Minister of Public Works and Housing Mohammed Obeidat said that 4,000 units have already been built with 4,000 units expected to be completed in September.

Mega-project mania

Some $1.8 billion worth of new mega-construction projects were launched in Lebanon during 2009, according to Deutsche Messe Dubai branch, organizer of Domotex Middle East, the international trade fair for carpets and floor coverings in the Middle East and North Africa region. Projects launched include high-end residential and commercial developments, as well as new five-star hotels. Angela Schaschen, the company’s managing director, said that the construction boom had been triggered by healthy demand for property. This subsequently increased demand for interior design solutions, which usually makes up between 15 to 20 percent of a project’s total value.

Cityscape rebrands for a global market

On February 8, Dubai’s Cityscape organizers announced that — after a 50 percent drop in visitor numbers at last year’s show — ‘Cityscape Dubai’ had been renamed ‘Cityscape Global,’ in an effort to attract more real estate businesses and partners from around the world. “In 2009 over 25 percent of registered participants came from outside of the UAE… we hope to reach 50-50 distribution over the next two years,” said Rohan Marwaha, managing director of Cityscape. However, analysts told Maktoob business that it was questionable whether Cityscape Global will fare better in October this year.  “To make it global is not a bad concept,” said Chet Riley, an analyst with Nomura Securities, “but [the question] is whether or not people will travel to Dubai. Given what happened with Dubai World and Nakheel…I’m not sure it will work.”

Premium rates for Lebanese office space

Office space in Beirut ranks as the 31st most expensive in the world and 4th most expensive among 10 cities in the Middle East and North African Region, according to 2010 survey issued by Cushman & Wakefield, a global commercial real estate brokerage and consultantancy. In the 2009 rankings, Beirut was the 32nd most expensive in the world and the fourth in the region. Beirut’s prices fall below Warsaw, Copenhagen and Vienna, and are more expensive than Damascus, Istanbul and Vancouver. The survey studied 202 office locations in 63 different countries and evaluated the occupancy costs, which include rent, municipal tax, service charges and value added tax. The study showed that the average cost of office space in Beirut was $516 per square meter in 2009, lower than the global average of $590 per square meter. The average rent in Arab cities is $600 per square meter.

UNRWA in the red

Filippo Grandi, commissioner general of the United Nations Relief and Works Agency for Palestine Refugees in the Near East (UNRWA) told AFP last month that the agency has so far received only $120 million out of the $450 million it appealed for in order to rebuild the Nahr el-Bared Palestinian refugee camp in the North of Lebanon. Much of the camp was damaged or destroyed in fighting between the Lebanese army and the Fatah Al Islam group in 2007. “The money we have right now covers the reconstruction of only three of eight camp sections destroyed,” he told the news service. “We also need relief funds for the basic needs of the camp residents urgently. What we have now will run dry by May or June,” he added. Some 12 to 15 percent of UNRWA’s $600 million budget goes to Lebanon’s 12 Palestinian camps, home to some 400,000 refugees, according to the agency’s figures. In general, UNRWA is $100,000 million short of its budget for 2010, said Grandi.

Egypt’s largest museum

The Egyptian Ministry of Culture’s Supreme Council of Antiquities signed a five-year, $50 million joint venture with Hill International and EHAF Consulting Engineers in February, to offer management services during the construction and design of the $550 million Grand Egyptian Museum, according Emirates Business 24|7. The Museum, due to be completed in 2012, will be the largest Pharaonic museum in the world, and is expected to attract some five million visitors annually. It will encompass a total built up area of 120,000 square meters and include some 100,000 artifacts. It is designed by Heneghan Peng Architects, Ove Arup and Buro Happold, among others. Some $300 million will be financed through loans from Japanese banks, while the rest will be financed by the Supreme Council of Antiquities, donations and international funds.  

Homes but no lift at the Burj Khalifa

The world’s tallest building, the Burj Khalifa, will welcome its first tenants soon, as the owner, Emaar Properties – Dubai’s biggest real estate developer – announced the handover of 900 apartments and the corporate suites will begin in March. Last month the developer began an orientation program for the homeowners of the 144 Armani residencies – the first of the apartments to be handed over – although the interior of the units is still in their final stage. “The handover program can take anywhere from two to six months,” said an Emaar statement. Emaar stated that the Armani hotel is supposed to be launched on March 18. Also last month, power problems forced Burj Khalifa to temporarily shut its observation deck after dozens of visitors were trapped on the 124th floor and weren’t able to go down when smoke started coming out the elevator. The company did not disclose the reason why the observation deck was closed and announced that it was due to “maintenance and upgrade,” reported Maktoob Business. Guests who have already purchased tickets were able to either get a refund or book another date.

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Banking & Finance

Money matters bulletin

by Executive Editors
written by Executive Editors

Regional stock market indices

Regional currency rates

Syria to build oil refinery and Damascus metro

Syria has completed preliminary steps toward implementing an estimated $3.5 billion refinery project. According to the Syrian Arab News Agency, the refinery is a joint venture between Malaysia’s Al Bukhari Group and the governments of Syria, Iran and Venezuela. The plant, located in the Al Farkalas region east of Homs, will have a processing capacity of 140,000 barrels of crude oil per day. The Syrian Minister of Petroleum and Mineral Resources said the ministry planned to produce some 2 billion barrels of oil from 2009 to 2025 and provide around 160 billion cubic meters of clean gas to consumers in the electricity, transport, industry and petroleum sectors. In other news, Damascus is planning to construct a four line metro system. The “green line” will be the first project implemented, at a cost of $1.35 billion, extending from Al Moaddamia area in the Damascus countryside to Al Qaboun. The 16.5km long railway will include 17 stations. The European Investment Bank (EIB) expressed its interest in funding the green line project with a loan of $540 million.

ADCO’s oilfield expansion

The Abu Dhabi Company for Onshore Oil Operations (ADCO), the United Arab Emirates’ biggest oil supplier, awarded a $683 million contract to state-owned National Petroleum Construction Company (NPCC) in order to expand the Bab oilfield’s  production. The field holds more than 500 million barrels of proven oil reserves and has a current production capacity of 300,000 barrels per day (bpd). The contract is to be executed in 30 months and aims to increase the company’s production capacity by 14 percent to 1.8 million bpd in 2017, from a current 1.4 million bpd. The deal is part of ADCO’s plan to award some $1.8 billion worth of engineering procurement and construction contracts in 2010. In 2009 ADCO also signed $3.5 billion worth of deals to develop its Shah, Asab and Sahil oilfields.

Qatar’s 2009 deflation and strong growth

Qatar is expected to realize high economic growth rates in 2010 as the government expands its spending on infrastructure, with inflation remaining subdued. Qatar had experienced a deflation (decline in prices) rate of 4.9 percent in 2009, after registering a record inflation of 15 percent in 2008. This deflation is mainly due to falling real estate prices caused by an oversupply of housing units, resulting in the drop of rental prices by 12 percent. Government action in controlling rising food prices is also another factor behind the deflation; prices for food, beverages and tobacco rose only 1.3 percent in 2009, compared to a 20 percent surge in 2008.

The government forecasts low inflation throughout 2010, within a range of 2 to 5 percent. Real economic growth in the fiscal year 2009 was estimated at 9 percent, and may reach 18.5 percent this year. This seems reasonable since the government’s planned infrastructure spending boost will last for the two coming years. Qatar’s banking loans volume is also expected to rise between 15 and 20 percent in 2010 and 2011. Qatar’s Prime Minister Sheikh Hamad bin Jassim al-Thani said liquidity in Qatar’s banking system was “very reassuring” and there was nearly no unemployment among nationals.

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Banking & Finance

François Bassil

by Executive Editors
written by Executive Editors

Francois S. Bassil is chairman and general manager of Byblos Bank. Given how Lebanese banks survived the financial crisis virtually unscathed, Executive presented Bassil with some questions about the Lebanese banking sector and his expectations for the country’s financial future.

  • What are your expectations for the Lebanese banking sector in 2010?

One of the key priorities for this year will be to increasingly focus on risk management. The credit crisis has revealed glaring gaps in risk management, as banks around the world learned to their peril, that the underestimation of liquidity created severe systemic risk. Commercial banks in Lebanon have a fiduciary responsibility to conserve capital, safeguard deposits and minimize depositors’ risk.

The crisis has clearly reflected the fact that the size of financial institutions is not the most relevant criteria; some of the largest global commercial and investment banks aggressively expanded their balance sheets at the expense of proper risk management, with ensuing disastrous results.

The larger Lebanese banks are likely to increasingly focus on risk management, internal audit, corporate governance and transparency, rather than on the aggressive expansion of their balance sheets. 

Another trend is the cautious resumption of regional expansion. The global crisis led banks to take a “wait-and-see” approach by consolidating their positions and assessing their exposure in the markets where they were already present. This applied to operational expansion as well as to credit portfolios, as banks generally favored liquidity over expanding their balance sheets during that period. But with global and regional conditions stabilizing, and with Lebanese banks emerging largely unscathed from the crisis, banks continued to lend abroad. However, most of them followed a more cautious approach, while resuming their operational expansion in existing markets.

  • In 2008, you told Executive that Lebanon had missed several opportunities to improve the investment climate and the business environment in the country, especially in the arena of reducing the public debt. Do you still believe that this is true?

The Lebanese economy has proven that it can compete regionally, but the country has wasted too much time and too many opportunities to implement much needed reforms that would support the economy’s competitiveness and its private sector. It is very important to keep in mind that Lebanon needs to continuously improve its investment climate and business environment, as Arab economies are fiercely competing among each other to attract capital, tourists, foreign direct investment, multi-nationals, technology and talent. A basic condition for the economy to attract capital, tourists and multinationals is long-term political stability and security. Further, the implementation of reforms to improve the business environment and the investment climate would be of great support.

Lebanon still ranks 108th globally and 12th in the region on the Ease of Doing Business [survey], and comes in 89th globally and in 9th in the [Middle East and North Africa] region on the Index of Economic Freedom. This is why the Lebanese banking sector urges authorities to place financial and economic issues as their priority and let political decisions serve these priorities. Further, the economy’s competitiveness can be boosted significantly by reducing the fiscal deficit and the public debt, which are still very high, despite the decline of the size of the debt relative to the size of the economy. Therefore, liberalizing the telecommunications sector and the introduction of competition, privatizing the mobile phone licenses, as well as restructuring Electricité du Liban [Lebanon’s state owned electricity company] are measures that would definitely help reduce the fiscal deficit and the public debt, as well as reduce the cost of doing business, and would help create jobs and attract investments.

  • How important is debt reduction for Lebanon’s fiscal health?

The fiscal deficit reached $2.6 billion in the first 11 months of 2009, equivalent to 25 percent of total budget and treasury expenditures. Debt servicing increased by 13 percent year-on-year to $3.4 billion, accounting for 33.2 percent of total expenditures and for 44.2 percent of budgetary spending. It absorbed 44.4 percent of overall revenues and 47 percent of budgetary receipts. As a result, Lebanon’s gross public debt reached $50.5 billion at the end of November 2009, constituting an increase of 7.3 percent from the end of 2008. The public debt-to-[gross domestic product] ratio declined from 180 percent of GDP at the end of 2006 to about 151 percent of GDP at the end of 2009 – still one of the highest such ratios in the world. But this decline is deceiving, as it was caused by the growth in the GDP rather than by any decline in the nominal size of the debt. So the public finance vulnerabilities remain and need to be addressed by effectively reducing the government’s borrowing needs.

Ratings agencies upgraded the country’s sovereign ratings in 2009, when many sovereigns in emerging markets were being downgraded. That was because Lebanon’s public finances had, ov-er recent years,  shown themselves to be remarkably resistant to serious political and economic shocks.

However, this is hardly comforting, as the rating agencies have converged to warn that the authorities need to implement structural reforms to reduce the fiscal deficit and the public debt. This is another way to say that the authorities have successfully managed the public debt but have failed so far to reduce its size. A decline in the government’s borrowing needs would encourage rating agencies to upgrade Lebanon’s ratings. In turn, this would help reduce interest rates on future government borrowing. When this happens, interest rates in the economy would start to decline substantially, therefore reducing the cost of funds on banks and businesses. So reducing the fiscal deficit is very important, as it constitutes the first step toward reducing interest rates and the cost of funds for the private sector in Lebanon.

  • What will your goals be for 2010 and how will global operating conditions differ from those of 2009?

The primary objective of Byblos Bank has always been and will always be to maintain the confidence of our depositors, clients, shareholders and other stakeholders. The New Year has started with steps in this direction. Indeed, Byblos Bank’s board of directors recently approved a $250 million capital increase to be implemented before the end of June. In parallel, the International Finance Corporation (IFC) [the private sector arm of the World Bank], agreed to invest $100 million in Byblos Bank and will have an 8 percent stake. The capital increase and IFC’s participation fall within Byblos Bank’s strategy of gradual expansion in emerging markets. Byblos Bank’s objective is to diversify its assets and sources of income by expanding in selective emerging markets with strong economic growth and low levels of bank penetration. It aims to have a minimum of 40 percent of its assets and income from international activities in the coming few years.

Currently, the Byblos Bank Group operates in Lebanon, Syria, Iraq, the United Arab Emirates, Sudan, Nigeria and Armenia, as well as in Belgium, France, the United Kingdom and Cyprus, and has one of the largest corresponding banking networks in the sector.

The substantial participation of the IFC in the bank’s capital demonstrates that Lebanese institutions with sound and conservative management, and with a clear vision, remain attractive to international institutional investors.

It is the largest investment by the IFC in the Lebanese economy and one of the largest IFC investments in the Arab banking sector. It also reflects the increased focus of investors on transparency, governance, risk management and internal controls, in addition to high solvency and profitability ratios.

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