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Special SectionYoung Arab Leaders

Odeh Shehadeh Zaghmouri

by Executive Staff October 26, 2009
written by Executive Staff

Odeh Shehadeh Zaghmouri is the Chief Executive Officer of the Palestinian Company for Distribution and Logistics Services (Wassel Group), a service company which was established in 2005 as a member of the Paltel Group. Its main goal is to provide distribution and logistics services to the Palestinian market, which includes local distribution, shipping and private post and clearance. Zaghmouri is also the current Palestine Country Office Chairman for Young Arab Leaders.

E What originally brought you to YAL and what do you feel are the important needs of the youth of the Arab world?

I studied abroad for many years and saw that a majority of the mentors, role models and opportunities for advancement came not from the government or public sector institutions, but from individuals within the private sector and civil society. They saw this not as charitable work or a nationalistic or religious duty, but as a good business decision. If they increase the capabilities and competencies of society at large, then they not only decrease poverty and unemployment — and avoid the enormous costs to society — but create future clients, future staff and better neighbors.

E What is your role on the Country Office Executive Board, and what is the overall purpose of the board? And what have you brought from your professional experience to your service with YAL?

I serve as the chairman of the Palestine Country Office; our diverse board brings a variety of experience and training. There is also something very unique to the Palestine board: every one of the members, though very successful currently, came from modest backgrounds. Moreover, many of the country office members are the first generation in their families to attend university, to hold professional designations and to be professional managers. We all remember where we came from and how difficult our journey has been, and we have been working to lend a hand to the next generation of Palestinian leaders for the past several decades. We now look forward to serving the youth of the Arab world through sharing the expertise of an organization of like-minded individuals that represent the best that the world has to offer.

E How have you been working to help YAL have a bigger impact in the region?

The members of the YAL Palestine Chapter have a wealth of experience as a result of the unique and difficult situation that Palestine has been forced to live under for the past 61 years. Any initiative that can be named — and many more that cannot be named — have been tried in Palestine and, as a result, we are particularly knowledgeable about what will work and what will not. The occupation has been the worst form of oppression, but we acknowledge that many of the youth in the Arab region face situations that are every bit as difficult as the one in Palestine. If the young leaders of the region can begin working together to broaden the reach of national initiatives from countrywide to region-wide — education, mentorship, etc. — I feel that we, as an organization, could have a much larger impact.

E What particular programs are you involved in?

For the past 30 years I have been involved in various education initiatives, for instance student loan and scholarship funds, micro-financing, mentorships, agricultural and rural development, youth skills development and empowerment, human rights and advocacy for the underprivileged. With the help of the YAL, we have begun to focus some of the initiatives, such as the student loan fund and internship exchange; we intend to bring them into a ‘regional’ context. We have been working on internship programs, micro-finance and small business incubator programs and various education initiatives and outreach programs, as well as a large number of emergency relief efforts — the most recent being the reconstruction of Gaza.

E What do you see YAL’s role in the future being?

I see the YAL taking a leadership role in focusing efforts to improve education in the region — after all, YAL represents potential employers – acting as a catalyst for increased employment, training and internship opportunities. I feel that the YAL can play a very important role in bringing together leaders from the Arab region and the rest of the world, not only through the various forums, but as counterparts in business and services.

October 26, 2009 0 comments
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Companies & Strategies

“Yahoo!” in Arabic

by Executive Staff October 26, 2009
written by Executive Staff

Arabic language content makes up only one percent of the total data on the Internet, but after Yahoo Inc.’s purchase of Maktoob.com, the language spoken by 320 million worldwide may gain a larger slice of the World Wide Web.

On August 25, both parties announced that Yahoo would acquire the Jordanian Internet portal, marking the start of a division that Yahoo will call Yahoo Middle East.

The deal has been a long time in the making, since it has been more than three years since Maktoob co-founders Hussam Khoury and Samih Toukan first sat down with Yahoo’s vice president of emerging markets, Keith Nilsson. At the time acquisition was not on the table, but the synergistic nature of each company’s offerings, coupled with seemingly compatible management personnel, eventually nudged the negotiations in that direction.

“Since I first had a role in Maktoob in 2001, when somebody would ask me what Maktoob was, I’d say it was kind of like the Yahoo of the Middle East. Well, now we actually are the Yahoo of the Middle East,” said Maktoob General Manager Ahmed Nassef, in an interview posted on Maktoob Business.

An Arab portal’s rise

Maktoob began operating in 1999 as the first free Arabic language email service, from which it grew into one of the region’s most popular Internet portals. Today, it is the strongest brand name in the Arab world, according to Toukan.

In fact, Toukan admitted that Yahoo was not the only global Internet player of its size interested in Maktoob. “In the last few years, we’ve been approached by several global players,” he said in an interview with Executive, though he would not reveal the other interested parties.

The acquisition price has yet to be made official, as the deal will not close until mid-October. However, when the deal was announced most estimates ranged between $70 and $80 million. Two weeks later Jordan’s state-run Petra News Agency announced the deal was worth $175 million.

With such a large disparity in the estimates, the final number should prove an interesting indicator of the online Arabic language market, both in terms of Internet users and the potential for advertising growth.

Maktoob co-founder Samih Toukan is amused by the amount of speculation, but remains tight-lipped about the final figure.

“The range is now between $50 and $500,” said Toukan with a laugh. “But we have agreed with Yahoo that we are not going to disclose the amount, so there are a lot of rumors.”

The deal represents the first major stake into the Arab world by an American portal and represents a nod to the growth potential of the industry. That’s understandable, considering that there are 320 million Arabic-speakers the world over, with five percent of Internet users speaking Arabic but only some 1 percent of online data in Arabic. With the number of Middle East Internet users increasing ten fold since 2000, online content available in Arabic has significantly trailed its growth potential.

“Arabs are vastly underserved by today’s Internet offerings,” said Nilsson on Yahoo’s corporate blog.

Maktoob traffic by country (from 01/08/09 to 14/09/09)

Source: Samih Toukan

“We see tremendous opportunity in the emerging markets, mostly because Internet penetration is in its infancy”

Global domain

Yahoo’s strategy toward emerging markets resembles a plan for world domination, but it reflects the potential that Nilsson sees in markets like the Middle East.

“We see tremendous opportunity in the emerging markets, mostly because Internet penetration is in its infancy [and] online ad penetration is extremely low and growing,” said Nilsson. “The criteria we look at to enter a market are… the potential online population, the size of the offline ad market and the potential for that to come online in the future.”

Yahoo already has operations in Southeast Asia, Latin America and the Indian subcontinent. The global portal seeks to take advantage of Maktoob’s 16.5 million unique users from all over the Middle East and North Africa and a plethora of Arabic language content offerings to dominate the region’s market.

“We don’t see any of the major technology players as focused on creating as deep of a local content experience in this region,” said Nilsson, who has also stressed the importance of Maktoob’s knowledge of cultural sensitivity and norms in the region.

What Maktoob brings to the table in content and know-how, Yahoo will bring in users.

“Yahoo has 20 million users in the Arab world and they are all using English services on Yahoo,” said Toukan. “People used to watch CNN, but then when Al Jazeera came, when Al Arabiya came, when you have good content in Arabic, people tend to use that,” said Toukan.

Yahoo will acquire Maktoob’s portal, its content, and a service for market research and consumer analytics under the name Maktoob Research. The deal also includes Maktoob’s offices in the UAE, Jordan, Kuwait, Egypt and Saudi Arabia.

Toukan said that the details of the deal were easy to work out, as it was obvious which parts of Maktoob would fit with the offerings of Yahoo. When the deal closes, Maktoob.com and Maktoob Research will be wholly owned by Yahoo. Ahmed Nassef will continue to manage the Maktoob team at Yahoo, while Toukan will run a new endeavor, the Jabbar Internet Group.

Jabbar will contain the pieces of Maktoob not sold to Yahoo, which include souq.com, an Ebay-like auction site, cashU.com, an online payment system, Tahadi.com, an online games site, Araby.com, the first Arabic search engine, and E-marketing, an Internet advertising network.

Abraaj Capital, the Dubai-based private equity company, purchased 40 percent of Maktoob in 2005 for $5.2 million. It was then sold to the American hedge fund Tiger Global Management in 2007, which will maintain its stake in Jabbar.

E-migration

In addition to content, Yahoo is also interested in the Arab advertising market, which experts predict will undergo a shift to online platforms in the coming months. 

Online advertising spending is expected to grow by 35 to 40 percent in the region this year, according to Madar Research. AT Kearney, a global management consultant, values the pan-Arab media industry at $10 billion. Needless to say, expectations are high.

According to Toukan, with the details of the deal having been ironed out, the success of Yahoo Middle East will be the litmus for other global online names to invest in the region.

“Until now, no major Internet company has had a full service offering in the region,” said Toukan. “Some companies have a sales office, some have joint ventures, but Yahoo will be the first with everything from content to marketing, from sales to engineering.”

Bayt.com

Bayt.com, founded in 2000, is currently the number one job website in the Middle East. With more than 150,000 unique job seekers and 40,000 registered employers using the site, Bayt’s interface is available in English, French and Arabic, while posters may choose which of the three languages they wish to use. The site also just launched mobile capabilities, which allow users to post and update resumes and search for jobs via their mobile phones.

Ejabat.google.com

Global Internet giant Google has a host of services for Arabic language speakers, including an instantaneous translation service and a new user-generated question and answer service called “Ejabat,” where users can post questions and get answers from other Google users. Google also became a member of the Information Technology Association of Jordan as of September 1 this year.

Yamli.com

Though not a purveyor of Arabic content, Yamli.com does offer a unique service. Yamli.com is a search engine featuring a “smart Arabic keyboard.” Users type a transliterated Arabic word in English characters into the search engine and Yamli will search using the Arabic spelling, resulting in English content resulting from all possible transliterations. Effectively, the site takes out the inconsistencies of Arabic transliteration by searching all possibilities based on an Arabic search command. The site launched in October 2008 and is based in Boston.

Naqatube.com

Debuting in August 2009, Naqatube is Saudi Arabia’s answer to Youtube. This video search engine is free of explicit or seditious content and is mostly comprised of religious and children’s material. The creators of the site hope to one day compete with Youtube and offer content in languages other than Arabic to serve the global Muslim community.

Jeeran.com

Founded in Jordan in 2000, Jeeran originally offered simple website creation services for Arabic speakers. In 2005, the site added blogging capabilities and now hosts 140,000 blogs. Jeeran also has a social bookmarking website called “Kabbr,” which is similar to the popular Digg.com, though presently Kabbr has only 7,500 members. Jeeran also contains an expanded social network much like MySpace.

d1g.com

D1g.com features a question and answer service similar to Google’s Ejabat, a news portal, a site dedicated to media downloads for mobile phones, a video sharing site and a women’s site all in Arabic. The site was founded in 2006 and claims three million users. It closed its first round of financing in August. The site’s current executive chairman is a former Yahoo employee.

Ikbis.com

Ikbis, founded in 2005 by Saudi media company TootCorp, is a video and photo-sharing platform. Ikbis also inked a contract with Nokia in 2007 to allow users to upload photos and videos, and organize their Ikbis profiles from their Nokia phones.

October 26, 2009 0 comments
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MicrofinanceSpecial Report

Microcredit reaching out

by Executive Staff October 26, 2009
written by Executive Staff

Banking the unbanked has proved to be an uphill battle for the Middle East and North African (MENA) region with only 15 to 20 percent of eligible clients having at least one bank account, according to the Consultative Group to Assist the Poor (CGAP), the global microfinance policy and research institute housed at the World Bank. The figure is indicative of the fact that a large segment of the region’s population still has no access to financial services and is typically disenfranchised from  modern banking. 

The microfinance industry across the region is estimated to have a potential worth of $5.5 billion, according to most observers. However, at the beginning of 2008, the industry only had a gross loan portfolio of $1.5 billion. The region has also seen heterogeneous growth across different countries with around 80 percent of the market existing in Morocco and Egypt, according to Xavier Reille, director of the CGAP MENA Initiative.

Even so, the industry has seen rapid growth in recent years due to a heightened interest by investors and governments. In Morocco alone, the industry has multiplied its assets by 11 times over the past four years, and currently holds around $750 million of assets in microfinance.

As for the rest of the region, microfinance is still in its infancy despite some 60 million people living on less than $2 a day, according to the International Labor Organization. Nevertheless, promising signs have begun to emerge.

In the past two years, the industry has seen several new players enter the fold and greater interest in microfinance from both the private and public sectors.

A long way to go

While these actions may be encouraging, in order for the industry to truly grow and cover more of the population, it will need to realize that extra $4 billion in potential. Today it seems the reason this has not happened is because most of the microfinance institutions (MFIs) operating in the MENA region are not financial institutions, but non-profit, non-governmental organizations (NGOs). “You cannot ask all the small NGOs to gather 80 percent of the market,” said Reille. “This is not possible, they are not designed to do that.”

The money will have to come from somewhere and since many NGOs working in the industry rely on donor contributions that have been depleted by the effects of the global downturn, the time is nigh for the region’s financial sector to step in.

This has already begun to happen in many countries where banks see the opportunity that the sector offers in terms of investment and corporate social responsibility.

“They hit two birds with one stone,” said Ziad al-Refai, chief executive officer of Tamweelcom, a Jordanian non-profit MFI that currently uses money from banks to fund their operations.

For the most part however, regional banks have been slow to enter the market, despite the fact that it offers a return on investment (ROI) of up to 25 percent with a default rate of around one to two percent. While this may sound like a diamond in the rough at a time when equity markets are still reeling from the downturn, there is a catch.

Reaching much of the unbanked population in the rural and remote areas of the region requires loan officers to physically travel to such places, which in turn substantially increases labor costs.

“The banks failed [to penetrate the market] actually because of the high cost of operations,” said Ahmad Mokhtar, deputy general manager of the Alexandria Business Association, one of the first MFIs in the region which handles a loan portfolio of around $35 million.

There are many like Mokhtar who believe that the sector should maintain its current structure and not be used as a money making machine by banks or financial institutions. “We believe in something else and the word investment is not in our dictionary,” he says.

The global economic downturn’s impact on microfinance, by region

• Crisis’ impact on MENA clients less manifest than in other regions.
• Lower segment of clients not experiencing drastic slowdown yet, less appetite for
expansion and credit from bigger borrowers.
• Securing food expenditure remains priority but less problematic in the MENA than in other regions, especially compared to rest of the African continent.
Source: CGAP Global Opinion Survey, March 2009 (29 answers from Middle East and North Africa) and World Bank website.

Nonetheless, the sector looks to undergo a paradigm shift away from the non-profit model and towards a more commercialized structure. The more developed markets of Egypt and Morocco already have commercialized organizations, as do countries such as Jordan and Lebanon.

“We see signs of things getting more commercial and commercial banks investing in microfinance,” said CGAP’s Reille.

With both the non-profit NGOs and commercial banks looking to get in on the microfinance game, the sector looks set to begin a segmentation between the lower and higher ends of the market. Even with an ROI of 25 percent, the fact that lower end microcredit loans can be lower than $200 means that the eventual return is negligible. So when the banks come into the market in full force, this segment will ostensibly be left to the non-profit organizations.

“The banks will come but they will take the low hanging fruit first and they will focus on the high-end of the market, which is the most profitable,” said Reille.

MENA microfinance highlights

• Growth expected to decline from 6 percent in 2008 to 2.5 percent in 2009.
• Low exposure to currency volatility: 16% of development financial institution loans to MFIs denominated in hard currency.
• Strong balance sheets: MENA MFIs have the highest equity-to-asset ratios of all regions.
• Repayment down for 41% of MFIs surveyed.
• Morocco and Egypt among top 20 fastest growing microfinance markets worldwide.
Source: CGAP Global Opinion Survey, March 2009 (29 answers from Middle East and North Africa) and World Bank website.

Microfinance in the financial crisis

Like all financial sectors, microfinance has been adversely affected by the global economic downturn. That said, in comparison to other markets the MENA region seems to have weathered the crisis well.

“We don’t feel this fake financial crisis in Egypt,” claimed Mokhtar. “On the contrary, now we are spending more.”

That’s not to say that there have been no recent incidents, as Morocco’s market has indeed been suffering. However, it seems that the reasons behind it were not directly related to the crisis, but to a lack of government oversight. Youssef Fawaz, executive director of SANABEL, a regional network of MFIs, explained that Morocco’s MFIs were unknowingly lending to the same clients because a functioning credit bureau did not exist. As such, when the crisis washed ashore in the Maghreb the bottom then fell out of the market, resulting in a great deal of over-indebtedness.

The primary reason the industry has faired well is because the financial segment of the market was, and still is, largely underdeveloped. As a result, the market did not have as much exposure to the credit crunch as Latin America and Asia.

“The MENA was less affected because of NGOs, and the position of the poor was less affected by the crisis. GDP continues to grow in the MENA region,” said Reille. Despite the optimism, the International Monetary Fund’s figures show total sector growth is expected to decline from 6 percent in 2008 to 2.5 percent in 2009. The irony is that because the financial crisis has affected the attractiveness of both public and private equity markets, microfinance has to some extent stood out as a solid and reliable investment in a sea of financial insecurity.

“At the beginning of the financial crisis we thought the banks would stop giving us loans,” said Tamweelcom’s Refai. “What is happening now is most of the banks and investors are looking to invest in microfinance.”

While the supply side may be willing to invest in the asset class, this now seems to have been offset by the demand side of the market. Since overall growth in the region’s economies has decreased, the activity of micro-entrepreneurs’ businesses has also been affected. As such, requests for loans are not being made in order to leverage businesses but just to keep afloat.

“This is not going to bring them out of poverty, it’s just going to keep them where they are,” said Refai. “We are back to square one.”

“The banks will come but they will take the low hanging fruit first and they will focus on the high-end of the market”

Regulating microcredit

Ultimately, the private sector can only do so much to facilitate microfinance growth. What is also needed is for governments to engage the industry. Today most countries in the region do not have laws covering microfinance and governments have been slow to encourage its growth.

This is beginning to change, however, as governments realize microfinance’s importance in fighting poverty. Yemen, Morocco, Sudan and Syria have all passed laws to regulate the industry. Egypt currently has a draft law which not only covers microfinance but covers and consolidates the entire financial sector under one umbrella.

Some laws even allow for financial intermediation and the mobilization of savings for MFIs to function as banks, allowing them to be more flexible with their capital and reach more of the poor.

At present, there are more than 100 MFIs operating in the MENA region, covering a client base of some 3.5 million people. With one fifth of the region’s 350 million people living below the poverty line, much will have to be done to leverage the use and application of microfinance in the region. And since all the elements seem to be in place for an industry boom, what remains to be seen is how long it takes the region’s private and public sectors to get hungry for the market.

October 26, 2009 0 comments
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MicrofinanceSpecial Report

Financing cedar seedlings

by Executive Staff October 26, 2009
written by Executive Staff

With the United Nations reporting that almost a third of the Lebanese population is living in poverty, and many more are classified as low-income workers, one thing is certain: Lebanon has a huge poverty problem. Yet one of the most efficient ways to address the issue of poverty, and make some money in the process, has not been high on the list of priorities for Lebanon’s government or its private sector.

Microfinance (MF) is the provisioning of financial services to low-income segments of the population with little or no collateral requirements. These clients would otherwise be shunned by traditional financial institutions and banks. The sector has seen substantial growth in Lebanon in recent years and is expected to continue to expand. Nevertheless, the industry remains under-developed and suffers from a lack of regulation.

The concept of microfinance and microcredit came to Lebanon in the mid-1990s, spearheaded by the United States Agency for International Development (USAID), the US government’s development investment arm. While the agency may have its own political agenda, it did lay the groundwork for an industry that has proved to be both a social good and a sound investment opportunity.

The industry itself, however, remains only partially measured. Some of the only reliable figures come from a report conducted in 2008 by the International Finance Corporation (IFC), the arm of the World Bank that provides investments and advisory services to the private sector in developing countries.

According to the report, as of September 2007 the estimated potential market was some $286.1 million, calculated by multiplying the number of “eligible potential borrowers” multiplied by the average loan size of $1,500. As such, the IFC states that only 11.5 percent of potential demand is being met, leaving 88.5 percent of the market untapped, equal to some $2.2 billion. On the lower end of microfinance, loans can be for as little as $300. The requirement for such a loan is simply a viable business plan to be able to pay the money back.

“The market is still way underdeveloped and more people will need microcredit,” said Anwar Jammal, chairman and chief executive officer of Jammal Trust Bank (JTB), which has provided over 45,000 microfinance loans in Lebanon since 1999.

At present, the number of Lebanese who are “unbanked” remains a statistical anomaly since there has not been a study on the matter since 2000 — there has also not been an official population census in the country since 1932. The study conducted by the World Bank in 2000 estimated that the unbanked numbered around 200,000.

Youssef Fawaz, executive director of Al Majmoua, Lebanon’s first formal microfinance institute, estimates that the number of unbanked in the country is much larger, at some 30 to 40 percent of the population, or 1.2 to 1.6 million people. Since 28.5 percent of Lebanon’s population lives below the poverty line, the inherent needs of the people combined with the potential the market offers, could hardly make for a more opportune time to invest in the sector.

What’s wrong with it?

The explanation for why this sector has not been nourished is multi-faceted and reflects many of the socioeconomic and political realities of Lebanon. To begin with, the bulk of the industry is comprised of only five microfinance institutions (MFIs): Al Majmoua, Ameen, Al Qard Al Hassan, the Makhzoumi Foundation, as well as Emkan, which began operations shortly after the June parliamentary elections.

The funds that these organizations use to do business come either from bank loans that carry market interest rates, or from donors, which carry lower interest rates or no interest at all. The situation has pitted a financial model against a philanthropic model in a battle for existing and potential market share.

At present, Ameen is the only MFI in Lebanon that is registered as a financial institution and receives the majority of its funding from banks, including JTB, which it then divvies up and distributes to its clients. The advantage of adopting the financial model is the access to a large pool of funds other organizations don’t have. That also means their cash flow is based on paying back interest set by banks, which are markedly higher than those of MFIs who operate using grants or soft loans.

“Definitely our job is much more difficult because we have a cost of funding the others don’t have, but our pricing to the end client is very similar,” said Ziad Halabi, general manager of Ameen. He explained that Ameen makes up for this through “having more efficiency.” Ameen offers loans between $400 and $15,000 with loan terms between four months and five years, and charges interest rates averaging 12.5 percent.

Samer Safah, deputy general manager of the Makhzoumi Foundation, claims that because his organization does not have to pay dividends to investors or commercial interest rates, they can provide better services such as offering their “beneficiaries” life insurance with each loan. Makhzoumi is currently the smallest market player and offers a maximum interest rate of 1.2 percent.

“Microfinance was not created to make money, it was created to elevate the poor to a better standard of living,” said Safah. Nevertheless, he concedes that “money makes the world go round and money is going to win.”

This has become more evident lately as the donor money, which organizations like Makhzoumi and Al Majmoua depend on, now looks to be in short supply due to the global economic downturn. The billions of dollars lost by investors worldwide because of greed and lack of financial oversight have left less money available for MFIs.

“The grant money available for MFIs has completely dried up and it’s very difficult to identify any cash outright,” said Fawaz.

Safah agreed, noting that, “If you look at the request for proposals at the embassies, there is nothing that has anything to do with microfinance anymore. It wasn’t like two years ago when it was all about microfinance.”

Without international investors, many MF organizations are now looking towards Lebanon’s banking sector, which is full to the brim with liquidity. Today, Al Majmoua is actively seeking bank loans as a source of funding for the first time since its inception in 1994.

“The grants are not here and we need to finance our growth,” said Fawaz. “If you can’t get it [the money] from grants we need to get it from somewhere else.”

Lebanon’s banks have so far taken little interest in this sector, even when it offers returns of 10 to 15 percent and carries a default rate of 2 percent. The top 20 banks control some 80 percent of the market and their decisions can make the difference.

“The big banks don’t believe in microcredit — we do,” said Jammal.

Of Lebanon’s 50-odd banks, only a handful have adopted microfinance programs.

“The banks are not so interested,” said Mayada Baydas, executive director of Emkan. “If the banks were keen, growth would be much faster and higher.”

The reason that most banks don’t adopt microfinance as a revenue making initiative seems to be the operational model that microfinance necessitates. By nature the industry is labor and management intensive requiring a ‘hands on’ approach and lots of field work to reach such a low default rate. According to Jammal, the overhead costs of a microfinance loan can vary from 5 to 8 percent as opposed to the overhead of a normal loan which is 1.75 to 2.5 percent.

“In the end you have to go and knock on their [debtors] doors to remind them to pay,” said Jammal.

Such practices are not what most banks are accustomed to.

“The operational method is outside the realm of how banks operate and target [clients],” said Baydas.

Labor costs typically make up 80 to 90 percent of the total cost of running an MFI, according to Halabi.

Potential microfinance market gaps in Lebanon

Source: World Bank estimates as of September 2007; IFC survey data, 2007; authors’ estimates.

Microfinance supply in Lebanon, excluding commercial banks

Source: IFC survey data, 2007; for “Others” category: CHF International, 2006, “International

Development Matters,”CHF International, Silver Spring, Maryland, USA ( “Others” category).

The Politics

While there may be a sound business case for microfinance in Lebanon, many of the organizations  in the market also have a political slant. Emkan is funded by the Hariri Foundation and Al Qard Al Hassan is funded by Hezbollah. Baydas did not comment on how much money has been given to her organization by the Hariri Foundation, but said it was “in the several million dollar range.” She also insisted that having a political interest fund Emkan does not restrict it to concentrating on areas where the Hariri family has political interests.

Al Qard Al Hassan — which translates into English as “the good loan” — offers Sharia compliant loans and uses gold or gold jewelry as collateral. The organization, whose main office was destroyed during the 2006 war with Israel, is estimated to have more than 26,000 clients, and even a “martyr’s fund” to support the families of Hezbollah’s militants killed fighting Israel. Al Qard Al Hassan did not respond to repeated requests to comment for this article.

According to Al Majmoua’s Fawaz, Emkan and Al Qard Al Hassan together make up some 50 percent of the market. Since both organizations are funded by political interests other MFIs say they are able to offer interest rates, or the Sharia compliant equivalent, at lower levels to garner revenue.

As a result, many in the industry have complained that the market is being grossly distorted.

“The biggest challenges for us are to deal with the market distortions that we are seeing from the politically oriented funds and political instability,” said Ameen’s Halabi. Emkan currently offers a flat rate of 10 percent which, Baydas admits, is “a couple of points lower” than the rates of Ameen and Al-Majmoua.

However Baydas, who previously managed Ameen, added that her competitors’ “sources of funds have often been quite subsidized from a number of international political donors,” and that they also carry products that are priced lower than those of Emkan.

The entrance of large subsidized funding in the market could prove fatal for non-subsidized funds. According to Fawaz, political funds will necessarily deplete their funds because the interest they charge is unsustainable, and this could eventually push them out of the market.

“The problem is if they can distort the market long enough to put you out of business.” But can they? “If they have the means… yes they can,” he said.

Calculation of potential eligible microfinance borrowers, September 2007

Source: Central Administration for Statistics calculations, 1996; IFC survey data, 2007.

Government support

Not only do Lebanon’s political parties have deep pockets, they also form the government that has done little to encourage growth in the sector. The only form of support has come from the central bank, which has issued a directive allowing local banks to use 5 percent of their required reserves for microfinance initiatives. However, according to one banking executive who spoke off the record, the central bank has been unresponsive to requests to use this liquidity. The central bank did not respond to requests for information on the subject.

What the government does have is a fund called the Economic and Social Development Fund, which is mostly funded by the European Commission and has cooperated with Al Majmoua on some microcredit activities in the past. The fund now concentrates on the small to medium-sized enterprise sector and no longer engages in traditional microfinance.

Other than that, it seems nothing has been done. The ministry of social affairs, whose job it is to address the issue of poverty, “has not done much and I don’t know why,” said Makhzoumi’s Safah.

One of the main issues that has not been addressed by any government in Lebanon is to actually pass a law that would allow the industry to be regulated. This would involve setting up a credit bureau and potentially allowing MFIs to perform financial intermediation, the process by which funds are channeled between surplus and deficit. Having this would enable MFIs to act as ‘bankers for the poor.’

But that doesn’t seem to be in the cards anytime soon; today not even a draft law has been completed.

“The government is busy trying to establish a government and their thoughts are very far from establishing microfinance legislation,” said Baydas. MFIs in Lebanon, with the exception of Ameen, are currently regulated by the ministry of interior and not the ministry of finance or the central bank.

“Microfinance is one component of the big plan to eradicate poverty… and unfortunately we don’t have the big plan””

Plan? What plan?

Given the amount of poverty in Lebanon, the time to enact a clear cut policy could hardly be more critical. But while microfinance may be a tool to help eradicate poverty, people in the industry agree that it is not a panacea. In order to adequately address the matter the next government may have to start enacting a wider policy of poverty alleviation that also incorporates microfinance instead of just ignoring the issue.

“Microfinance is one component of the big plan to eradicate poverty,” said Halabi. “And unfortunately, we don’t have the big plan.”

October 26, 2009 0 comments
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Finance

Energy to grow

by Sam Inglis October 26, 2009
written by Sam Inglis

Two recently announced projects aim to upgrade Tunisia’s electricity grid and improve power integration between Europe and Maghreb nations.

According to International Monetary Fund figures, Tunisia’s economy has doubled in size over the past decade, from some $20.1 billion (at current prices) in 1998 to $40.7 billion last year. This increase — much of it prompted by Tunisia’s growing integration with Europe — has placed a significant strain on the nation’s energy infrastructure.

To meet the growing needs of industry, tourism and individual consumers, the African Development Bank (AfDB) last month agreed to a $67 million loan to rehabilitate and restructure the national grid. The bank said current demand growth of five percent each year has led to network “saturation.” This has caused overloads, losses and high-voltage drops “sometimes in excess of 20 percent” — twice the Tunisian Electricity and Gas Network’s (STEG) contractual limit of 10 percent for the low-voltage network, and almost three-times that of the 7 percent limit for the medium-voltage network.

Tunisia’s expanding ties with the European economy has also led to the announcement of a plan to integrate its national grid with Italy’s. The $3 billion project, a joint-venture between STEG and Italy’s electricity transportation company, will see a 200 kilometer long, 1,000 megawatt high-voltage direct current (HVDC) submarine cable link the two Mediterranean nations, via El Hawaria in Tunisia and Partanna in Sicily. A 1,200 megawatt plant will be built in Tunisia as part of the deal, which will provide the country with 400 megawatts of energy, with the rest transmitted through the cable to Italy. The cable flow will also be bidirectional, connecting Tunisia’s grid with the rest of Western Europe’s.

The plan to connect the two countries falls under a wider Euro-Med strategy to integrate the electricity and energy networks of Europe with that of the oil and gas-rich Maghreb countries. Due to its proximity to Algeria and Tunisia, Italy is proving to be the natural linchpin of this strategy, with the existing Transmed gas pipeline linking it to Algeria due to be augmented by the Galsi pipeline next year. When pipelines to Spain are added to the equation, gas capacity between Algeria and Europe will rise to 62 billion cubic meters per year over the next five years.

With supplies of Russian gas proving unreliable due to political squabbling with the Ukraine, it makes sense for Europe to increase its supply of Algerian gas. In regard to off-shoring generation capacity, the Tunisian project may well prove to be a sign of things to come. The $588 billion Desertec project, formally launched in July by a consortium of European and North African companies, foresees using North Africa’s deserts to power Europe’s economies. The scheme, originally a Club of Rome white paper sponsored by Jordan’s Prince Hassan bin Talal, proposes to use concentrated solar plants in the Sahara to produce electricity which is then channeled to Europe via HVDC submarine cables.

Industry figures and energy analysts are currently divided as to whether Desertec offers a viable long-term, low-impact solution to Europe’s energy needs. To begin with, it is estimated that up to 20 HVDC cables will be required, each costing around the same as that of the proposed Tunisia-Italy cable. Furthermore, there is a significant cost element associated with the construction of such cables in terms of the infrastructure required at either end to convert the flow from alternating current to direct current and back again (DC suffers lower degradation over long distances than AC). Given such cost concerns, the Tunisian government will no doubt hope that the expertise it will gain from the El Hawaria project will give it a competitive advantage to host more such cables if, though more likely when, they are required.

Sam Inglis is Executive’s Istanbul-based correspondent

October 26, 2009 0 comments
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Finance

Fortifying the home front

by Sam Inglis October 26, 2009
written by Sam Inglis

The Algerian investment climate has changed significantly this year, with sweeping government reforms curbing imports and benefiting local businesses through encouraging foreign capital inflows.

One of the most significant amendments requires all future investment from abroad to partner with an Algerian shareholder, limiting foreign ownership to a maximum of 49 percent. Foreign direct investment projects must also be approved by the National Board of Investment, while capital increases for partnerships must come from domestic services.

New regulations require foreign traders established since July 28 to have a minimum of 30 percent local participation in their capital. Another piece of legislation obliges all import related payments to be backed up with a letter of credit. Reacting to heavy domestic and foreign criticism due to increasing bureaucracy and associated costs, the Algerian Association of Banks and Financial Establishments has stated that by late August exemptions would be made with regards to imports of half-finished products, as well as those “necessary for national production.”

The government’s objective seems clear: to increase the role of domestic companies in the country’s economic development while reducing imports to help local industry.

In recent years, revenues from  the hydrocarbon sector have resulted in a comfortable current account surplus. However, due to the lower oil prices and growing levels of imports, the trade balance has come under increasing pressure.

During the first half of 2008, exports exceeded imports by a significant $22.21 billion. Lower oil prices have hit export revenues through 2009, while import levels continued to grow. As a result, the nation’s trade surplus stood at $1.44 billion after the first seven months of this year.

The legislative changes have slowed commercial activity, particularly among foreign investors who faced a significant tightening of business opportunities.

Unhappy trading partners

The European Union has also been critical. At the end of June, EU Trade Commissioner Catherine Ashton expressed her disagreement with the 30 percent ruling in a letter to the government, claiming that it was in violation of the ‘Association Agreement’ signed between the EU and Algeria in 2008.

In a reaction to Ashton’s criticism, Hachemi Djaâboub, Algeria’s minister of commerce, said, “Algeria takes its decisions in full sovereignty and no one can assume the right to dictate what it must do.” Nevertheless, the decision in July not to apply the measures in a retroactive manner has helped European concerns.

The 51 percent ruling has also led to anxiety in the Algerian business community since there are few companies with the capability to carry the full financial load, and those that are able, are predominantly public.

In anticipation of these issues, the finance ministry has established a national investment fund worth $2.1 billion. During its official launch, Karim Djoudi, the minister of finance, said its mandate “will cover the financing of investments of public projects and those of the productive sector by local banks rather than resorting to foreign debt.”

Since the need for higher local production levels has been evident for some time, and Algeria has long sought to boost capital and knowledge flows within the country, the new rules bode well for the country’s plans to increase the benefits derived from the activities of foreign companies. And although the swift implementation of the new measures has led to questions over the consistency of the investment climate, it does highlight the government’s long-term commitment to strengthening the domestic economy’s competitiveness.

Sam Inglis is Executive’s Istanbul-based correspondent

October 26, 2009 0 comments
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Finance

Private equity’s local game

by Imad Ghandour October 26, 2009
written by Imad Ghandour

Up until the onset of the current economic downturn, private equity “global masters of the universe” extended their reach far beyond their home countries. American private equity funds first rolled into Europe and then into the Asian Tigers and Japan. Thereafter, PE funds had country funds focused on China and India, and claimed these countries to be like home. Finally, in 2007, David Rubenstein, head of the Carlyle Group, one of the largest global PE players, called Dubai the fourth capital of global private equity, following New York, London, and Hong Kong. This ushered the beginning of a (short-lived) era of globalizing the private equity business in the region.

All the big names in the industry like Blackstone, KKR, TPG, Investcorp and TVM followed the leadership of Carlyle. Only a couple were committed and knowledgeable enough to raise a dedicated regional fund. Some serious players formed regional teams, backed by capital from other existing funds to test the waters and scout the region for deals. Others, like Credit Suisse and 3i, teamed with local managers. And the least committed group increased their attendance at the then-proliferating number of PE conferences in the hope of meeting a representative of that rare breed of deep-pocketed limited partnerships called sovereign wealth funds. 

The lessons learned from the current crisis are many, and I will not attempt to list them here. But first and foremost, investors and financial institutions have realized that identifying, assessing and managing risk is a local business. An army of consultants and investment bankers are no substitute for the “nose” of a seasoned local analyzing risks within the local legal, financial, economic and social context of the deal. The era of an Emirati banker investing in a deal in Poland has ended — at least until the pains of the recent crisis fade from our memory.

MENA funds raised or announced by Western PE players

Source: The Gulf Venture Capital Association

The true picture of a typical regional deal is an imperfect puzzle you need to assemble piece by piece, and the pieces will rarely all fit together. Practice prevails over law in many instances, and conflict resolution, through courts or otherwise, is a pain you try to avoid. Governments will publicize their intention to facilitate investments, but many laws and regulatory practices remain prohibitive. Take, for instance, an Egyptian law from the 1950s prohibiting corporations from extending for more than two years installments for capital goods, or a Saudi practice requiring all shareholders to notarize any amendment to the articles of association independent of the shareholders’ vote. Insightful financial due diligence is more an investigative and intelligence-gathering inquiry about the company and its owners from informal sources than a mechanical auditor-style exercise undertaken by the big four accounting firms.

This necessitates having teams that are street smart as much as they are suit smart. Understanding the local context is a prerequisite for successful negotiation, deal structuring and post-acquisition change. Teams who understand the region, speak its language and are plugged into the social networks have a natural advantage in assessing risk over imported talent. Risks as commanplace as crossing at a red light in Beirut or Cairo are digested differently by the local citizen than by foreign bankers!

The crisis has scaled back the global ambition of large PE players and may have (temporarily) de-globalized the industry. For now at least, successful local PE houses will hold the keys for private equity investing in this still-thriving region, and will see limited competition from the “global masters of the universe” sitting in London or New York.

Imad Ghandour is executive director at Gulf Capital

October 26, 2009 0 comments
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Finance

The Art of doing business in Lebanon

by Executive Staff October 26, 2009
written by Executive Staff

Since 2004, the World Bank and International Finance Corporation have issued an annual report on regulatory reforms aimed at facilitating business. Issued on September 9, 2009, the latest Doing Business Report (DBR) ranked Lebanon a humble 108th from a total of 183 countries worldwide. Last year, Lebanon found itself ranked 101st.

The index is headed by Singapore, New Zealand and Hong Kong, while Saudi Arabia (KSA) at 13 is the region’s top performer in the Middle East and North Africa region, followed by Bahrain (20) and the United Arab Emirates (33). The region as a whole however proved remarkably active in terms of easing business procedures: 89 percent of the countries in the Middle East and North Africa (MENA) implemented at least one improvement. Only the regions of Eastern Europe and Central Asia, at 96 percent, improved more.

The DBR ranks 183 economies based on 10 indicators of business regulation concerned with such variables as the time and cost it takes to meet government requirements to start up a business, operating and closing a firm, trading across borders and paying taxes. The index does not reflect indicators such as macroeconomic policy, security, labor skills, strength of the financial system or financial market regulations. Nor does it include corruption.

Regional rankings from the World Bank’s Doing Business Report

Source: World Bank

Globally, Lebanon was ranked just ahead of Greece and Guatemala, and right behind such countries as Sri Lanka and Ethiopia. Among the 19 MENA countries, Lebanon ranked 12th, behind Jordan and Egypt, and ahead of Syria. The country ranked relatively high in terms of starting a business, which takes only 9 days compared to an average of 20.7 days in the MENA region and 5.7 days in the Organization for Economic Cooperation and Development (OECD) countries.

However, it takes a disappointing 211 days to obtain a construction permit to build a warehouse, compared to an average of 159.3 days in the MENA region and 157 days in OECD states. Also, Lebanon was ranked 111th globally and 14th within the MENA region in terms of registering property. It takes eight procedures and 25 days to register a property in Lebanon, compared to an average of 6.1 procedures and 36.1 days in the MENA region and to 4.7 procedures and 25 days in OECD countries.

On the other hand, Lebanon proved relatively tax-friendly: ranked 34th globally, and ninth within the MENA region. It takes a Lebanese firm on average 180 hours per year to prepare, file and pay its taxes compared to 204.2 hours in the MENA region, and 194.1 hours in the OECD countries. Also, tax payments represent only 6.1 percent of company profits, compared to 12.6 percent in the MENA region, and 16.1 percent in the OECD countries.

While it is relatively easy to export from Lebanon, it requires some time and effort to import goods. It takes five procedures and 26 days to export goods, compared to an average of 6.4 procedures and 22.5 days in the MENA region, and 4.3 procedures and 10.5 days in OECD countries. The cost of exporting a container is $1,002, which is comparable to the MENA and OECD average. Importing goods however takes no less than 35 days, compared to 25.9 days in the region and 11 days in the OECD countries.

October 26, 2009 0 comments
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Finance

For your information

by Executive Staff October 26, 2009
written by Executive Staff

Limited FDI in Lebanon for 2009

Foreign direct investment (FDI) in Lebanon remains relatively low despite a successful summer season and increasing bank deposits, according to the Investment Development Authority of Lebanon (IDAL), the Lebanese government institution that encourages development in the country.

Speaking to The Daily Star, Nabil Itani, IDAL chairman, predicted that FDI in Lebanon during 2009 will not exceed $128 million, attributing the figure to a drop in the price of oil and the corresponding lack of investment appetite from Gulf investors. “Total investments, including real-estate projects, are not expected to exceed $2.9 billion although we had a good summer season,” Itani told the newspaper.

Zain sells $13.7 billion stake

A group of Indian and Malaysian investors have successfully bid for a 46 percent stake in the regional telecom giant Zain. The share has been on offer for some time and there had been widespread speculation that it would be bought by Saudi Telecom (STC) or Etisilat telecom. Both companies denied they were seeking the stake on offer.

The group consists of the three Indian companies Vivasi, Bharat Sanchar Nigam and Mahanagar Telephone Nigam, as well as Indonesian business magnate Mokhtar al-Bukhari. The group will acquire an estimated 20 percent stake previously held by the Kuwaiti Kharafi Group, along with the shares of other smaller shareholders. The group will acquire the shares at a price of $6.97 per share, for a total value of around $13.7 billion dollars. The Vivasi group has said it will not sell-off Zain’s African assets. Zain operates in 24 countries in the Middle East and Africa.

Private Equity markets slow

A study conducted by the auditing firm Deloitte Abor Square Associates, a London-based investment consultancy, predicts a short-term decrease in activity in the regional private equity markets, but also forecasts long-term sustainability. The research compiled for the study was conducted between the summer of 2008 and the spring of 2009. The study, based on data compiled from more than 200 general partners (GPs) from various emerging markets, said that 83 percent of general partners in the Middle East and North Africa expect entry multiples to continue to decrease over the current year. Decreasing public market valuations, the global downturn and a drop in the amount of completed deals were identified as the principal drivers of this phenomenon.

Istithmar’s freeze

Dubai’s sovereign wealth fund Istithmar World, the investment arm of the government-owned Dubai World, has reportedly stated that it will halt investments as it undertakes a restructuring initiative. The fund owns several high profile companies, such as the luxury retailer Barneys — which has also been slated for sale by analysts and competing funds. Dubai World holds more than $59 billion in liabilities and is trying to persuade creditors and banks to restructure around $12 billion worth of debt. The total amount of public debt held by the emirate remains unclear due to a lack of transparency, though EFG-Hermes estimates Dubai’s total current debt at $84.7 billion.

Lebanon defense spending shoots up

Lebanon is expected to increase defense spending by 22 percent this year in light of the security incidents of the past few years, according to the Stockholm International Peace Research Institute. Total spending on defense is expected to increase to some $1.47 billion. The increase is consistent with the total increase in spending over the period from 1999 to 2008, with the largest increase registered in the 2007 budget following the July 2006 war with Israel. Figures from 2008 showed that defense spending reached a total of 5.1 percent of gross domestic product, placing Lebanon in a fifth place tie with Yemen globally in terms of military burden.

In terms of budget allocation, it is projected that the amount allotted to the Lebanese Army will increase by 20 percent to $905 million, accounting for 8.3 percent of the government’s total expenditure. Around 64 percent of the rise in the army’s budget will go to boosting salaries and wages in line with the recent increase in the national minimum wage. Lebanon currently receives the bulk of its military hardware from foreign donors.

IMF allots Lebanon funds

Lebanon received $298 million in foreign currency reserves last month under a new program established by the International Monetary Fund. The funding is part of the Special Drawing Rights (SDRs) program of the IMF which allots SDRs to member countries according to their existing quotas, which are based on their share of the global economy.

Lebanon had a total of $4.39 million in SDRs allocated to it before the decision was made. Now that the decision has been taken, Lebanon is ranked 90th and 15th in terms of cumulative SDRs globally and in the Middle East North Africa region, respectively. Lebanon’s foreign currency reserves totaled $22 billion at the beginning of August, with assets held in foreign currencies coming in at $25 billion at the start of September.

Saudis top tourist spending in Lebanon for first 8 months of 2009

Tourists from Saudi Arabia accounted for 21 percent of overall tourist spending in Lebanon for the first eight months of 2009, reported Global Refund, the value added tax refund operator. Saudi spending was followed by Kuwaiti, with 13 percent, Emirati at 12 percent, Syrian with 7 percent and Jordanian with 6 percent. 81 percent of the total spending went to Beirut, 14 percent to the Metn area, 3 percent to the Keserwan region and 1 percent to Baabda. A majority of total spending, 67 percent, was on fashion and clothing. Watches followed with 11 percent, followed by perfume, cosmetics and home and garden items with 5 percent each.

Iraq signs Diyala oil deal

The Iraqi government has granted permission for investment in the Al Mansoriya gas field in Diyala province, 57 kilometers northeast of Baghdad. The announcement comes three years earlier than anticipated, and is expected to provide additional electricity to meet burgeoning local demand. The director of the legal affairs department at Iraq’s oil ministry has also stated that a contract will soon be signed with a Japanese consortium, including Nippon Oil and Inpex, to develop the Nassiriya oil field. Total oil exports averaged 1.895 million barrels of crude oil per day during the first eight months of the year. Iraq opened its first bidding round to international investors in July. However, the bid was widely regarded as a flop with most international players put off by what they considered unfavorable terms.

Air Arabia’s Egyptian venture

The Sharjah-based low-cost carrier, Air Arabia, has announced that it will enter into a joint venture with the Egyptian travel and hospitality group Travco to launch a new budget airline with a start-up capital base of $50 million. The airline will be based in Egypt and consist of a fleet of Airbus A320s, similar to those currently in use by Air Arabia. The airline will also be managed by Air Arabia and serve the markets of Europe, the Middle East and Africa. Air Arabia has seen an increase of around 10 percent in its net profit totaling $24.5 million in the second quarter, with total revenue of $124.7 million, compared to $22.3 million in net profit in the second quarter of 2008.

October 26, 2009 0 comments
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Nuclear AspirationsSpecial Report

A Nuclear Arab World

by Executive Staff October 26, 2009
written by Executive Staff
  • The great nuclear rat race

The nuclear energy option largely disappeared from the public eye following the 1986 Chernobyl disaster, yet today it is firmly back on the negotiating table. Countries around the globe are reconsidering nuclear energy as a viable alternative to the use of fossil fuels, especially for power generation and water desalination, and the Middle East and North Africa (MENA) region is no exception.

From Morocco to Iran, governments are interested in developing nuclear energy for civilian use, and nearly all have signed research or cooperation agreements with the world’s leading nuclear nations, including France, Russia and the United States. The consensus is that the region’s first nuclear power plant is not a matter of if, but when.

The United Arab Emirates and Kuwait seem the most likely location for the region’s first nuclear plant outside Israel. On May 20, US President Barack Obama approved a nuclear agreement with the UAE, which currently awaits approval by the US Congress. On September 8, Reuters reported that awarding the region’s first nuclear contract was a “matter of days,” though it is more likely that the UAE authorities will wait for the US congress’ approval (or disapproval), due in mid-October (see box on the UAE’s nuclear ambitions in this section for more details).

Meanwhile, French Minister of Economy Christine Lagarde announced on June 21 that France and Kuwait were in talks over a strategic nuclear partnership. Shortly after French President Nicolas Sarkozy’s first visit to Kuwait in March, Kuwaiti Prime Minister Sheikh Jaber Moubarak al-Hamad al-Sabah had already hinted Kuwait might buy a stake in the nuclear energy giant Areva, which is largely owned by the French state.

The UAE and Kuwait are not alone in their wish to add a nuclear component to their energy mix, as Jordan and Egypt are keen to become the next nuclear agents in the Levant. In North Africa, Algeria has long held nuclear ambitions and has signed cooperation agreements with both France and the US. Morocco and Tunisia signed similar agreements with France, but actual construction in these parts of the MENA region seems unlikely in the near future, due to terrorism and Western consideration of Israel’s strategic superiority.

The MENA region’s nuclear ambitions are not unique and are part of a global atomic resurgence. Some 34 nuclear power plants are currently under construction around the world, the majority located in Asia. The United Kingdom has pledged to build 15 new nuclear power plants to meet future electricity demands, while the nuclear option is again a topic that sparks heated debate in the rest of Europe. The same is true for the US, where former President George W. Bush vowed to expand the nation’s nuclear fleet, while President Obama so far seems reluctant to do so.

This nuclear revival of sorts cannot be seen separately from the current global context of diminishing hydrocarbon reserves, rising prices of fossil fuels, as well as the wish to reduce CO2 emissions and halt global warming. Advocates of the nuclear power industry claim it omits no CO2, is relatively cheap and safe to operate, while waste can be stored safely.

Yet opponents argue that the nuclear industry, aided by a powerful public relations campaign, portray things far too favorably. A nuclear power plant may be cheap to operate but is extremely costly to build, while waste storage, treatment and the decommissioning of future nuclear plants will create a financial burden for generations to come. In addition, so they claim, nuclear energy can hardly be called “clean,” as nuclear waste remains toxic for thousands of years.

Facts & figures

According to the International Atomic Energy Agency (IAEA), there were 438 nuclear power plants worldwide by the end of 2008, which supplied 15 percent of global demand for energy. France and the US are the world’s leading nuclear states. The average life span of a nuclear plant is some 40 years, which today can be extended to 60 years. Some 75 percent of the world’s nuclear reactors are more than 20 years old.

With 59 nuclear power plants, France’s nuclear fleet produces nearly 70 percent of the country’s electricity, while the US’s more than 100 reactors generate 20 percent of the country’s annual electricity demand. Both countries are also home to the world’s main nuclear constructors and operators, including General Electric, Westinghouse, Bechtel, Areva and Électrité de France (EDF).

During the first half of 2007, the price of uranium soared to a record high of $120 per pound, which caused a boom in uranium exploration. The price has since fallen, and as Executive went to print stood at $45 per pound. Annual global production remained stable in recent years at some 40,000 tons. Estimated global demand, however, is some 67,000 tons. The difference is largely met by uranium from military stockpiles and reprocessing of nuclear fuel. According to the IAEA, the annual discharge of nuclear fuel is some 10,000 tons. It considers the current waste treatment and storage programs in countries such as France, Finland, Sweden and the US as the most developed.

  • The UAE goes nuclear

Gulf countries are the most likely to go nuclear in the coming years, with the UAE the first among them. The Arab world’s first nuclear power plant is set to appear on Emirati shores, albeit not before 2020. US congressmen are likely to raise concerns about nuclear proliferation with regard to President Obama’s nuclear deal with the UAE. However, the first “123 agreement” — a section of the US atomic energy law which establishes an agreement for cooperation as a prerequisite for nuclear deals between the US and any other nation — with an Arab state is widely expected to pass.

The UAE nuclear deal has a potential worth of some $41 billion, as the US will supply the emirates with nuclear fuel and materials, and help develop the country’s infrastructure. US lawmakers are aware that rejecting the deal would simply force the UAE to buy nuclear technology from somewhere else, for example French, British or Japanese firms.

Another provision to the “123 agreement” stipulates that in order to come to nuclear cooperation with the US, countries must first sign an agreement that promotes the use of nuclear energy, yet discourages nuclear enrichment to avoid proliferation.

By signing such an agreement, the UAE has essentially agreed to import rather than to produce nuclear fuel for its future reactors. It also committed to not enriching uranium or reprocessing spent nuclear fuel, which could be used to produce nuclear weapons. Also, both American and international inspectors will be allowed into the UAE to see if the country lives up to its side of the bargain.

Yousef Otaiba, the UAE’s ambassador to the US, applauded the agreement as “the gold standard of nuclear cooperation agreements, which sets a new standard in ensuring the highest standards of safety, security and nonproliferation.” The deal had been left on President Obama’s desk by his predecessor, George W. Bush, who signed it just five days before leaving office.

The UAE is serious about its nuclear ambitions. As early as April 2008, the Emirati authorities unveiled the White Paper, a blueprint for the country’s nuclear future, which emphasizes that nuclear power should be acquired in order to meet the country’s ever growing demand for electricity. According to official figures, the annual peak demand for electricity is set to increase from 15.5 gigawatts today to 40 gigawatts by 2020.

The document furthermore claims that gas reserves are insufficient, while other fossil fuels are too expensive to meet the rising demand for power. Coal is of course cheaper, yet has a poor environmental record. Solar power and wind energy are viable options for the future, yet for now aren’t productive enough to meet the current needs, much less the steep yearly rise in electricity demand of nearly 10 percent. Compared to these alternatives, the document concludes, nuclear power has emerged as “a proven, environmentally promising, and commercially competitive option.”

Bureaucratic chain-reaction

The UAE went on to draft a nuclear energy law and has now established the Emirates Nuclear Energy Corporation (ENEC), which is tasked with implementing and overseeing the country’s nuclear program. The law allows foreign companies to sign joint-venture contracts with the Emirati government to construct and operate nuclear power plants — a structure similar to the one the Emirates have in place for the production of drinking water and electricity. It is expected that the UAE will award the contract to build the country’s first nuclear power plant before the end of the year, and possibly before the end of October, 2009.

On April 2, 2009, The Wall Street Journal reported that US firms General Electric and Westinghouse are among the companies battling for lucrative nuclear contracts. If the 123 Agreement with the UAE is passed by the US Congress as expected, it could generate enormous goodwill in the emirates toward American firms. Still, the awarding of the enormous contract is by no means a done deal.

The Americans’ biggest competitor is a conglomerate of French firms led by global energy giant Areva. With worldwide sales of more than $17 billion, the company does everything from uranium mining to nuclear waste recycling. The French bid is strengthened by the presence of companies such as Suez and Total, which are already active in power generation and desalination in the UAE. While General Electric has teamed up with Japanese firm Hitachi, Westinghouse is in a partnership with the Korean firms Korea Electric Power, Samsung and Hyundai.

With construction of a nuclear power plant requiring an estimated five years of planning to study potential sites and suitability, and another five years of actual building, it is unlikely that the first nuclear plant in the UAE and the region will see the light before 2020.

Nuclear haves and have-nots

The US Global Nuclear Energy Partnership (GNEP) was launched by former Secretary of Energy Samuel Bodman in February 2006. The GNEP is an international partnership that seeks to promote the use of safe nuclear power, yet simultaneously close the circle of nuclear fuel producers to reduce the risk of proliferation.

The goals of GNEP are to reduce American dependency on foreign energy, promote the use of nuclear energy and the recycling of nuclear fuel around the world, and reduce the risk of nuclear weapons proliferation. The partnership currently has 21 member states. Within the MENA region, Jordan, Morocco and Oman have signed the GNEP’s statement of principles.

The idea is that countries that are currently able to enrich uranium will produce nuclear fuel that will be supplied to so called “user nations,” while waste would be taken back for treatment and possibly storage. Opponents of the GNEP claim it threatens to divide the world into nuclear haves and have-nots.

Steve Kidd, head of strategy & research at the World Nuclear Association, said in Nuclear Engineering International magazine that the GNEP may be perceived as “somewhat discriminatory and potentially anti-competitive.”

“By maintaining a market stranglehold on, for example, enrichment facilities, it can be argued that the market will be uncompetitive and lead to excessive profits being achieved by those who are favored,” he said.

South Africa is one of 17 countries invited to join the GNEP, yet it has so far refused to sign.

“Exporting uranium only to get it back refined, instead of enriching it in South Africa, would be in conflict with our national policy,” said South African Energy Minister Buyelwa Sonjica at a UN atomic agency meeting, according to Agence France-Press.

  • Making the case for a nuclear Gulf

Although some international media outlets and Western government officials have regarded the Arab world’s nuclear ambitions with suspicion, there is a strong economic rationale for developing nuclear energy for civilian purposes, especially power generation, argues Giacomo Luciani, director of the Gulf Research Center Foundation in Geneva. According to him, the GCC and Abu Dhabi in particular make a very strong case.

Nuclear aspirations in the Arab world have long been perceived within a security context, with the US and some European countries wary that nuclear ambitions are merely a thinly-veiled excuse to obtain an atomic bomb. In the past, attempts to obtain nuclear arms were in response to Israel’s nuclear arsenal. Today, it is Iran’s attempt to generate nuclear power, and allegedly to produce nuclear weapons, along with the Islamic Republic’s bombastic rhetoric that has made it Israel’s main foe.

Israel still sees every nuclear development in the region in a security context, and has proven in the past that it does not shy away from military action to eliminate the perceived “threat.” Many people thus fear Iran may appear next on the Israeli radar.

Spurring the bandwagon

According to the Gulf Research Center’s Luciani, the Iranian push for nuclear energy may also function as a catalyst for nuclear power aspirations in the region, though it is hardly the sole and most important reason for Arab states to embrace the nuclear option.

“If they’d wish to acquire a nuclear weapon, surely easier alternatives would be open to [Middle East and North African states],” he said. “The West’s denial to allow them access to nuclear technology may have been justified as long as hydrocarbons were abundant and cheap. But since the turn of the century, conditions have changed.”

The principle reason for countries in the MENA region, including the GCC, to develop a nuclear industry should be understood in terms of power generation for electricity and desalination. The region’s population is growing fast, and so is the annual electricity use. The UAE in the 1990s had an annual growth demand rate of 9 percent, which only slightly decreased to 8.6 percent between 2000 and 2007. Saudi Arabia and Iran face an annual growth rate of 6.1 percent and 7.1 percent, respectively.

Currently, power generation in the GCC is based almost completely on the use of crude oil and oil derivatives. Gas is predominantly used in Qatar, one of the few countries that has expressed no desire to develop the nuclear option. Dubai and Oman import gas from Qatar, yet it is unlikely that the tiny state can, or wants, to supply the entire Arab peninsula with gas. In fact, it has a ban on new gas exports until 2013.

The problem, according to Luciani, is that there is no longer an excess of oil in places like Abu Dhabi and Saudi Arabia. This excess had been used in power generation, with most GCC countries introducing  economic diversification schemes and investing in refineries to turn crude into light oil.

“As the amount of excess oil decreased, and prices increased, it [made] it more profitable to export oil than to use it for power generation,” Luciani said. “It may seem paradoxical but the GCC countries are facing an energy crunch, related mainly to power generation.”

According to him, nuclear  energy should be part of a wider energy package, which includes energy conservation and renewable energy. Yet, unless a nuclear component is added, Luciani said the consequences are “less oil and gas [and] more CO2 emissions for the world.”

In addition, he argues, most GCC countries, and especially the UAE, have the financial wherewithal and generally operate within the global, integrated economy, which means they allow for foreign partnerships, partly rely on foreign staff and respect international treaties. Finally — unlike Saudi Arabia for example — the UAE is also much less likely to be associated with terrorism.

Global uranium production, by country, in 2006

Source: IAEA

All arrows point to Abu Dhabi

Luciani believes the situation is altogether different for countries in the Levant and North Africa, as they generally do not possess the same gas-oil reserves, and have a different energy consumption pattern in terms of power generation. “They have the consumption pattern of developing countries, meaning much lower energy consumption per unit of value added,” he said.

Also, power generation in the Levant and North Africa is largely dependent on gas and, with the arguable exception of Libya, most countries lack the financial means to build a nuclear infrastructure. Gas-fired plants remain easier and cheaper to build.

“I think Egypt and Algeria are less willing to cooperate within the global system, while Jordan has a good electricity network, but lacks the finances and it will not be easy to find willing investors,” Luciani said. “I think Abu Dhabi simply presents the clearest case. It is characterized by a high consumption pattern, a rapid increase in demand, it has the finances, is willing to cooperate and, let’s not forget, [it has a] a non-seismic physical environment and plenty of empty space.”

Global use of nuclear power

Source: IAEA

  • The nuclear era: renaissance or relapse?

The advocates of nuclear energy like to speak of a “nuclear renaissance.” First introduced by the advertising firm Hill & Knowlton in a 2006 awareness campaign for the US Nuclear Energy Institute (NEI), the term cleverly triggers images of the return to a once glorious era, which has gained traction in the media. In response, opponents of nuclear energy have since introduced the term “nuclear relapse.”

While almost absent in the MENA region, the public debate on nuclear energy in the West has always been a heated one. Following the 1986 Chernobyl disaster in the Ukraine, the struggle for public opinion seemed won once and for all by the anti-nuclear movement, yet in the last five years or so the nuclear option has returned to the public eye. The debate focuses on two main points: nuclear energy is relatively clean and cheap — or not?

The nuclear feud

Executive spoke with two advocates, one from either side of the divide: Ian Hore-Lacy, director of public communications of the World Nuclear Association (WNA) in London, a platform representing the international nuclear industry, and Peer de Rijk, director of WISE, which is an international anti-nuclear association based in Amsterdam.

“The main reason for a country to opt for nuclear energy is to provide energy security,” said Hore-Lacy. “One doesn’t need a lot of uranium to run a nuclear plant and so you are less dependent on external suppliers than is the case with fossil fuels. Take Great Britain, as that is the country where I currently reside. Britain is running out of North Sea oil. Gas will be used as a temporary replacement, yet you don’t want to see [Russian Prime Minister and former President Vladimir] Putin turn off the tap in winter, which he threatened to do.”

According to figures by the WNA, a 1,000 megawatt nuclear power plant, which produces enough electricity for a city of 800,000 inhabitants, needs to be fed 300 tons of uranium or 27 tons of nuclear fuel (or processed uranium) annually. A similar-sized coal-fired plant would require 3 million tons of coal annually.

“I would not say nuclear energy is clean,” Hore-Lacy continued. “Every industry produces waste. The nuclear industry does so too. However, it does not produce CO2, and very little waste in the mining process. It does produce nuclear waste, yet after 50 years only 0.1% remains highly toxic. The bulk of nuclear waste is low-level toxic waste. Now, this should not be underestimated, yet with a proper taxing system you can fund future waste treatment, storage and decommissioning.”

Peer De Rijk of WISE does not agree with the notion that nuclear energy is relatively clean. “Firstly, if you look at the cycle of nuclear power generation, from mining uranium to storing nuclear waste, a considerable amount of CO2 is produced. A nuclear power plant produces less CO2 than a plant burning oil or coal, but about the same as a gas-fuelled plant. Secondly, the industry produces nuclear waste that remains highly toxic for thousands of years and, so far, no one knows what to do with it.”

According to De Rijk, all countries that produce nuclear waste have so far opted for temporary storage while awaiting a permanent solution. Most countries bury it in bunkers or mines.

In addition to nuclear energy being “clean,” advocates like to point out that the nuclear option is also relatively cheap. “I would not call it cheap, but it is price competitive compared to conventionally generated electricity, except perhaps in oil and gas producing countries,” Hore-Lacy said.

“From mining uranium to storing nuclear waste, a considerable amount of co2 is produced”

Nuclear numbers

In terms of the costs of operation a 1,000 megawatt plant (about enough to power 250,000 homes) requires a staff of around 400 people, while fluctuations in the price of uranium hardly affect the price of electricity. Even if the price of uranium were to rise from $100 to $1,000 per kilogram, the consumer would only pay a few cents more for electricity, given that so little uranium is need to produce electricity.

The price of electricity per kilowatt hour is mainly determined by the cost of constructing a nuclear power plant, and the cost of nuclear storage and decommissioning. A nuclear power plant can be operated safely for a period of 40 to 60 years, after which the plant needs to be decommissioned and the site decontaminated. So far it has proven to be very difficult to produce an accurate estimate of both construction and decommissioning costs.

For example, the latest generation nuclear plants that are currently being built in France and Finland are so far much more expensive than initially budgeted.

“There have been some problems in building the third generation of nuclear power plants, yet let’s not forget that these are the first of a kind,” said Hore-Lacy. “Constructing a prototype often brings along extra unforeseen costs, yet I’m confident that the construction costs will stabilize, and decrease, once the defaults are ironed out.”

Fission fails in the free markets

Again De Rijk did not agree. “In the case of the Finnish nuclear plant, Areva offered the plant for a very cheap price. Having not sold anything for 20 years, they were desperate to sell a plant. It offered the plant for $3.5 billion, while it now costs $5.2 billion. As Areva is largely a state-owned firm, it is the French tax-payer who pays the difference. If Areva were not a state firm, it would have gone bankrupt ages ago.”

“In a truly free market that does not offer a form of direct or indirect state subsidies, a nuclear power plant is simply not economically viable,” De Rijk continued. “That’s the reason the nuclear industry is so keen on participating in the international conference on climate change in Copenhagen in December. By arguing it helps reducing CO2 emissions, it hopes to receive major subsidies. If it manages to achieve that, a major battle will be won in its favor.”

Regarding the cost of waste storage and decommissioning, Hore-Lacy referred to the tax systems currently in place in countries such as the US, Sweden and Finland, which he thinks work perfectly well. “In the US, electricity costs about 1.8 cents per kilowatt hour, 0.1 cents of which are reserved for waste storage, and 0.1 cents for decommissioning,” he said. “In countries like Sweden and Finland, it’s about 21 cents respectively. The money is collected in a fund, which in the US amounts to some $32 billion and to which every year about $1 billion is added, half of which in levies, half of which in interest.”

De Rijk questioned if these amounts will be sufficient for long term storage. He was strengthened in his opinion by a 2008 report issued by the US Energy Department, which concluded that even if no new reactors are built, getting rid of the country’s existing nuclear waste dump will cost $96.2 billion, far more than was initially budgeted, and may require a major expansion of the planned Yucca Mountain nuclear waste dump in Nevada. In March, US Energy Secretary Steven Chu told a Senate hearing that “the Yucca Mountain site no longer was viewed as an option for storing reactor waste.”

According to De Rijk, it is even harder to estimate the cost of decommissioning, as so far hardly any nuclear plants have been dismantled and decontaminated. Yet one may argue that the signs have so far not been positive. In June 2009, the US Nuclear Regulatory Commission (NRC) requested the operators of 18 nuclear power plants in the US to present detailed plans about how they aim to fund the decommissioning process. The NRC hinted that several among them may need to adjust their plans, following last year’s collapse of stock markets, which has reduced the value of decommissioning funds.

The situation seems even worse in the UK. While the British government estimated three years ago it would cost some $164 billion over a period of 100 years to decommission the country’s outdated nuclear plants, today it estimates the bill at no less than $230 billion.

With the conflicting opinions and enormous amounts of money involved, one thing is certain: The debate on nuclear energy has only just started or, to be precise, restarted.

“Following Chernobyl, we thought the battle had been won,” said De Rijk. “Yet the nuclear industry has used the years of silence well to reorganize itself and improve its image. So far, using climate change as an incentive to promote nuclear has proved a powerful communication tool.”

Known recoverable resources* of Uranium 2007

*Reasonably assured resources plus inferred resources,
Source: OECD, NEA & IAEA
  • Jordan to exploit uranium reserves

The other country in the region likely to acquire nuclear power in the near future is Jordan. In August 2007, the Hashimite kingdom first announced its intention to develop a nuclear power plant in order to decrease its dependence on fossil fuels. The plan was unveiled by then Minister of Higher Education Khalid Touqan, a nuclear engineer who currently presides over the Jordan Atomic Energy Council (JAEC). Jordan aims to generate 30 percent of its total energy needs with nuclear power by 2030. While Jordan is hardly the richest member of the MENA region, it possesses one important asset over most other countries: up to 140,000 tons of uranium that could provide the Jordanian treasury with some $1.5 billion annually. In addition, part of Jordan’s enormous phosphate resources can be used to obtain uranium.

“We have signed an agreement with Areva, which has started exploration and a feasibility study,” said the JAEC’s International Cooperation Commissioner Kamal al- Araj. “Mining is expected to begin in 2012.”

The agreement includes two important conditions: Areva will provide Jordan with nuclear fuel services in the future and give Jordan priority treatment, as soon as the country decides to construct a nuclear plant. Jordan has also signed a nuclear cooperation agreement with France and other countries, and joined the Global Nuclear Energy Partnership (GNEP), a US initiative to expand nuclear energy use worldwide while reducing the threat of nuclear weapons proliferation. In September the JAEC signed a $12 million agreement with Belgian firm Tractebel Engineering to assess the projected site of the country’s first nuclear power plant in Aqaba. The company will carry out a two-year survey to assess geological stability, geophysics, soil characteristics and risk management at a site some 12 kilometers inland from Jordan’s Red Sea coast.

Why Aqaba?

There are several reasons for building a plant near Jordan’s southernmost city. First of all, a nuclear plant needs millions of gallons of cooling water. Secondly, Aqaba and the surrounding area consist of solid rock and, thirdly, the plant could help the much talked about “Red Dead Canal” project become a reality, as a great deal of energy is needed to pump Red Sea water over the mountains to reach the shrinking Dead Sea.

“The plant will be constructed inland at some 12 kilometers from the shore, while the seawater used for cooling purposes will not be returned to the sea,” Araj said, countering possible environmental concerns. To understand Jordan’s nuclear ambitions one should know that the country currently imports more than 95 percent of its energy needs. In the past, Saddam Hussein’s Iraq supplied the kingdom with oil for a discount price. After the American-led invasion of Iraq that policy came to an end and today Jordan receives its oil with a smaller discount from Saudi Arabia. Furthermore, Egypt supplies Jordan with gas to produce some 2,200 megawatts of electricity annually.

“We need a stable power source to produce electricity and desalinize an increasing amount of water,”  Araj explained. “In principle, we are looking at a 1,000 megawatt or 1,200 megawatt nuclear power plant, as 1,600 megawatt is just too big for out network. On the other hand, we are interested in regional cooperation, so any potential surplus could be supplied to neighboring countries.” Araj dismisses concerns about the immense cost of constructing a nuclear power plant, and the cost of nuclear waste treatment and storage.

“No one exactly knows the cost of building a nuclear power plant yet,” he said. “But even if it costs some $7 billion [the current price of the latest nuclear power plant Areva is building in Finland], we should be able to produce electricity for some seven or eight cents per kilowatt hour.” Regarding the issue of nuclear waste, and well aware of the politically charged nature of this subject, Araj said: “In principle most waste will go back to the supplier country, be it France, Russia or any other country. We may have to pay for that, but we prefer that option.” Finally, Araj pointed to the importance of the 2010 Copenhagen conference on climate change in December, which could see the nuclear industry awarded with significant subsidies.

“Nuclear energy is an alternative to burning fossil fuel and should be considered as a renewable energy in the fight against global warming,” said Araj. “Of course, in the long run nuclear fusion is the only real solution, but that may take another 50 years or so.” 

Nuclear incidents

The world’s worst nuclear accidents are the 1979 Three Mile Island incident and the 1986 Chernobyl disaster. Just 12 days after the release of the Hollywood film, The China Syndrome, in which a journalist discovers a fictional nuclear meltdown, the real life Three Mile Island meltdown in Pennsylvania shocked the American nuclear industry and the world. The incident produced a cloud of radioactive gasses over America’s densely populated East Coast.

Seven years later, the Chernobyl disaster in the Ukraine occurred. Following a massive power failure, one nuclear reactor broke down, releasing a radioactive cloud that reached the UK and Sweden. It is regarded as the worst nuclear accident in history, which led most European governments to install a freeze on the construction of new nuclear plants. Former Soviet and Western scientists estimated some 60 percent of the contamination was received by former Soviet republics.

It is not known how many people died due to the disaster. A conservative report by the IAEA and World Health Organization in 2005 concluded that 56 people had died directly because of the accident, and some 4,000 people among the some 600,000 directly exposed died of cancer related illnesses.

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Since its first edition emerged on the newsstands in 1999, Executive Magazine has been dedicated to providing its readers with the most up-to-date local and regional business news. Executive is a monthly business magazine that offers readers in-depth analyses on the Lebanese world of commerce, covering all the major sectors – from banking, finance, and insurance to technology, tourism, hospitality, media, and retail.

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