Comment

Defective democracy

by Norbert Schiller
written by Norbert Schiller

Over the past quarter century, I have witnessed countless presidential and parliamentary elections in the Middle East and North Africa. I cannot remember one that went off without voter intimidation, violence or vote rigging. In fact, every time an election is announced it almost seems as though the country holding it is preparing for war. The military is mobilized and placed on high alert; buildings housing radio and television stations as well as government offices become armed fortresses and a feeling of doom grips the nation.

As a journalist, I have had rough times covering elections in the region. I have been arrested by police on multiple occasions. In one well documented case, during the 2000 parliamentary elections in Egypt, I was beaten up and had all my photographic equipment smashed to pieces. Thugs, or ‘baltaguiya’, hired by Egypt’s ruling National Democratic Party (NDP), accosted me as I was leaving a polling station in the center of Cairo and threw me to the ground, while taking all my equipment from me. If this had happened in a dark alley it would be one thing, but the attack took place in broad daylight right in front of roughly two-dozen armed police there to protect the polling station. After getting up, I called for the policemen’s help. But all I got from the senior officer on the scene was a denial that any such attack had occurred.
Since I moved to the Middle East, there have been seven presidential elections in the United States. Each president that has come to power during this period, except for Obama, has either served the maximum two terms or was defeated after his first four years in office. Over the last 25 years, elections in the US have been free of violence, intimidation and vote rigging. The only major hiccup occurred in 2000, when votes in Florida had to be recounted by hand because of irregularities with the vote counting machines. In the end, the problem was settled in a civil manner by the Supreme Court.
Presidential elections in the US have almost a festive mood about them. They come every four years like clockwork just before Thanksgiving and right in step with the holiday season. When it’s all over there is a period of reconciliation when all Americans — Democrats, Republicans and Independents — unite knowing full well that the system put in place by the founding fathers over 200 years ago, is still alive and well.
In most instances, elections in the Arab world are anything but festive, and elections for the highest office have proven to be nothing but a farce. Of the 22 member nations in the Arab League there are eight monarchies that don’t even pretend to be democratic. When it comes to the appointment of the highest office, they just appoint the next of kin to the throne. Then there are the so-called democracies. Egypt’s Mohammed Hosni Mubarak has been in office for almost 30 years, since Anwar Sadat was assassinated in 1981. The vast majority of Egyptians have known no other head of state. Sure, he has held countless referendums, many of which I covered, but the outcome of these referendums has always been the same. Take the 2005 election, the only time in Egypt’s history that a presidential election was contested by another candidate. In the end, Mubarak took 88.6 percent of the votes and the challenger, Ayman Nour, not only lost the election but was sentenced to five years in jail for supposedly “forging powers of attorney” to secure the formation of the his political party, al-Ghad — a charge he vehemently denies. Last month, he was mysteriously released after serving three years.
In many Arab countries, democracy equals a referendum, a mechanism used by autocratic regimes to appease Western calls for democratic reforms. In reality, a referendum is nothing more than an approval rating, which rarely dips below 90 percent. Besides Egypt, referendums are popular practice in Syria, Tunisia, and Yemen.
Algeria experimented with the democratic process, but when the FIS (Front Islamique du Salut) was set to win a parliamentary majority in 1992, the military stepped in and annulled the election. The military’s action sent the country into chaos and civil war for the better part of the decade, killing an estimated 100,000 people.
Lebanon knows a thing or two about chaos and when elections are held there is always a lingering fear that the country will disintegrate once again into civil war. The next elections are scheduled for June 2009 and since they were announced almost six months ago, it is as if lines are already being drawn. Chances are that nothing major will happen, but if the fragile sectarian balance is altered, nobody knows what may happen.
America’s presidential electoral system is imperfect, but it has been tested for more than 200 years. A valid complaint is how a country with such a diverse population can have only two major political parties. Despite this flaw, with every new administration there is a major change in policy that has worldwide repercussions. Let’s all hope this new administration will repair the damage done by the last and once again shine the light on the democratic process. As one friend so appropriately put it, “not an abomination, rather an Obama nation!”

Norbert schiller is a Dubai-based photo-journalist and writer

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Executive Insights

Value creation within the pale of crisis

by Mahmoud El Ali
written by Mahmoud El Ali

The spillover of the current financial crisis into the main economy is fast raising the specter of a global recession. A natural reaction is for companies to batten down their hatches in anticipation of the coming storm. But natural reactions are not always the ideal ones. Companies that cut investments and headcount in previous recessions have found to their cost that they could not respond to the upturn when better times came.
It is the brave and the leaders who take advantage of temporary downturns to invest, retool and regroup. It is the Warren Buffets, who start buying when the market is down, that will emerge stronger.
In October, research firm Gartner revised its 2009 global IT spending growth forecast from 5.8 percent to 2.3 percent but also maintained that, despite reduced growth, recession in IT spending is unlikely. The research firm noted that the industry has remained fundamentally strong, with replacement cycles in emerging regions and technology shifts, such as renewed interest in cloud computing, helping to sustain the industry through the tough times.
One could argue that delaying IT and networking investment until an upturn is the most logical move in this age of uncertainty, but enterprises could — and should — see this period as an opportunity to pursue IT expansion. Organizations should be searching for higher value solutions to help them drive efficiency now while they prepare for better days. Now is the time to leverage the availability of more cost-effective equipment and support.
If anything, the current financial crisis is helping to usher in the next cycle of networking that research firm IDC calls “flight to value,” a phase when customers re- evaluate their IT and working investments based on a number of factors, including technological pervasiveness, flexibility, sustainability and pricing.

Linking the value chain
Such re-evaluation will inevitably take us back to fundamentals, and that is to the basic IT infrastructure, or what could be termed as ‘infostructure.’ That infostructure is the corporate network that today has become the central nervous system for enterprises. However, much has changed in this past decade. The corporate network today links not just its software and hardware, but also its ‘heartware’ — employees, customers, partners, distributors and other stakeholders. By linking the creators of value, the network becomes the company’s own value chain. Indeed, it would not be an exaggeration if we were to say that ‘the network is the company’.

Network value creation
Viewing the corporate network as the company’s central nervous system can create a paradigm shift from the network as a cost center to the network as a mission- critical creator of value. Organizations are discovering the economic advantages of converging their various communications systems into a single network infrastructure. They are deploying IP telephony and increasingly, video over IP on their networks, thus saving on the costs of maintaining two separate network infrastructures. Others are deploying video over IP as a backbone for their security surveillance systems. ‘One network, many services’ has become the new clarion call.

Beyond cost savings
Perilous times such as these invite critical re- examinations of investment portfolios. IT investments will not be excluded. As mentioned earlier, such re-evaluations must include IT not as a cost center but as a creator of business value. It’s not just about cost savings. The ‘flight to value’ should not be confined to acquiring lower-cost alternatives. Rather, this is a good opportunity to look at how much each investment dollar can be stretched. Companies can translate the lower costs they enjoy on a network upgrade into a bigger redundant network. By acquiring additional network switches on the same budget, they can create a redundant network and ensure uninterrupted operations for their business activities.
Another important aspect of IT investments is long-term investment protection, which often relates to the issue of open systems and standards. Most network solutions today are open, but it can be argued that some are more open than others. A network infrastructure that creates interoperability problems with other vendors’ equipment, or one that locks you in with one vendor, cannot be considered open. It is also an investment that may not be fully protected. A truly open network architecture must enable and support other third-party solutions, as well as the development of open-system plug-ins. Investment protection must also include future-proofing your network infrastructure to support new and emerging services. Again, the full support of industry standards, as well as the vendor’s active involvement in the development of those standards, will be critical in protecting your network investments for the long term. These are hard but interesting times for many companies, but for discerning managers this is an excellent opportunity to create new value from your network investments.

Mahmoud El Ali is general manager, Middle East and North Africa for 3Com

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Executive Insights

Dialing into customer-centricity in telecom expansion

by Hilal Halaoui & Adel Belcaid
written by Hilal Halaoui & Adel Belcaid

Over the last few years, Middle Eastern governments have significantly opened up their telecommunications markets and broken up the monopolies of their state-owned, historic operators. Spectrum licenses were awarded at record prices and the new entrants engaged in head-to-head competition with the incumbents. As a result, mobile penetration soared and rapidly exceeded the psychological limit of 100 percent in many markets. In Saudi Arabia, for instance, mobile penetration was hovering around 30 percent in 2003. In 2008, it quadrupled to 120 percent according to Booz & Company analysis. While this spectacular growth brought countless benefits and choices to the end-users, it does mean today that mobile subscriber acquisition in the mainstream market has become a more difficult challenge. Thus, to achieve the growth and returns their shareholders have come to expect, leading Middle Eastern mobile operators have essentially pursued a two-pronged approach: on the one hand, they want to maximize the value capture from their domestic markets and defend their positions; on the other hand, those who can afford to are seeking additional growth in foreign, less penetrated markets.

While international expansion comes with an evident load of challenges that several Middle Eastern players are facing for the first time, maximizing value capture in the domestic market is, perhaps unexpectedly, no less challenging. It requires mobile operators to pursue, also for the first time, smaller niche segments, which typically crave customized value propositions and are usually ill-served by the generic, one-size-fits-all offerings that prevail in the mainstream markets.

Answering the call
Successfully pursuing niche segments is no small task for most operators in the region. It requires major discontinuities in just about every aspect of their business: strategy, branding, technology, organization structure, human resources, corporate culture… no area is spared! But mobile operators will find comfort in convergence, which comes with just the right toolkit to make them relevant to niche markets, at least from a technology point of view. Indeed, the convergence of media, fixed and mobile communications is making it possible for mobile operators to keep growing through customized value propositions targeting different customer segments. Mobile content is witnessing exponential growth and technology innovations, such as IMS (IP Multimedia System), promise superior and unprecedented user experiences centered around convergence. These game- changing technology developments are disruptive enough to not only bring niches within “business-case-proof” reach of mobile operators, but also to re-invent the mass market game and effectively turn it into a long tail of niches and segments, each with their own needs and wants and each with their own willingness to pay.
This is nothing short of a revolution in the mobile communications space and could mean a vast blue ocean of opportunities for players able to take advantage of them and augers well for the industry as a whole. Indeed, mobile operators stand to reap the benefits of price discrimination, service bundling and content differentiation, and the move away from cut-throat price competition that is characteristic of a mature or declining industry.
To make the most of this technology-driven opportunity and durably rejuvenate their domestic markets, regional mobile operators must first develop strategies aimed to firmly and unequivocally embrace convergence and its ‘customer first’ corollary. Their strategic intent should be to further their customer intimacy and understanding, to leverage the new technology-driven capabilities of convergence to come up with pertinent and multi-platform offerings that customers are willing to pay for. They should aim to provide integrated, end-to-end solutions that grow their shares of the customer wallet and reduce churn by increasing switching costs to customers. Next and foremost, regional mobile operators need to embark in major organization restructurings, moving away from product-centric organization and towards customer-centric structures. They should organize around well-defined customer segments while preserving any scale or scope advantages they might be deriving from their legacy structures.
A notable example of such restructuring is the Saudi Telecom Company (STC), who was among the first industry heavyweights to embark in a major structural transformation sparked by its FORWARD corporate strategy. At the heart of the FORWARD strategy lies the customer, whether an individual, a small business or a large corporation. To execute its ambitious corporate strategy, STC adopted a customer-centric structure that centered around four business units: personal, home, enterprise and wholesale, each of which is focused on a broad segment of the market and has profit and loss responsibility. These market-facing units are all supported by horizontal functions such as network and shared services. Concurrently, and to support the structural transformation and durably instilled in the minds of customers and employees alike, STC conducted a major re-branding exercise that aimed at affirming its new customer-centric direction and signaling to all stake-holders the completion of its 10-year long transformation from a public ministry of the Saudi government to an agile, market-oriented telecom heavyweight.

A corporate lifestyle choice
But customer-centricity does not stop at level one of a mobile operator’s organization structure. On the contrary, it can go far into levels two, three and beyond. Functions such as marketing, sales and customer care can be entirely structured around customer segments with product teams virtually absent. Customer-centricity can also turn into a corporate “lifestyle” as far as organization structure is concerned, with customer-centric inter-BU processes and one-stop-shop windows between downstream and upstream units.
In sum, customer-centricity clearly comes in different shades and shapes and the key organizational question for any mobile operator CEO should be: How customer-centric does my structure need to be? To answer this question, mobile operators need to understand the markets they operate in, including the mass and niche components. They also need to understand their capabilities, existing and envisioned. In the former, they should have a very good understanding of market segmentation and assess the appetite of each segment for service and product customization. In the latter, they should assess their ability to offer integrated solutions and accurately address the customization needs of their target segments. In both, they should strike the right balance between supply and demand and come up with an organizational structure that is tailored with just the right dose of a customer-centricity and realism to implement it.

Hilal halaoui is a principal and ADEL BELCAID an associate at Booz & Company

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Executive Insights

Buoyed by innovation, telecoms are 2009‘s smart investment

by Uwe Neumann
written by Uwe Neumann

The telecoms industry seems well equipped to deal with the crisis. As turnover is primarily generated by innovations, the industry is fairly resistant to fluctuations in business. Therefore, investors who want to protect themselves could be interested in adding telecom companies shares to their portfolio.

This New Year’s Eve, a record-breaking 360 million SMS messages were sent in France. That was over 30 percent more SMS messages than the previous New Year’s Eve. The telecoms operators seem to be barely feeling the effects of the recession. In fact, over the last few months, telecoms shares have demonstrated a relatively strong resistance to the turbulent stock market. While the wider European market suffered a loss in value of almost 30 percent since October 2008, the European telecoms sector fell by a modest 10 percent. Clearly the telecoms industry is not completely immune to the effects of an economic downturn, however, the negative influences will have less of an impact on turnover and margin development than they will in many other sectors. We have come to this conclusion for the following reasons:

Turnover is driven by innovation
There are two main elements that influence turnover when it comes to telecoms companies: client growth and turnover per customer in cellular phone and fixed line/broadband/internet sectors. Both elements have continued to grow over the last 10 years despite economic cycles and despite the fact that they are influenced by sector-specific factors such as regulation, price development, competition and market penetration. We expect these sector-specific influences to remain prevalent in the future as there is currently no firm evidence to suggest that the effect of the recession on income is causing clients to change the way they use their phones or changing the dynamic of customer growth. In fact, turnover will be even more driven by innovations. The success of Apple’s new 3G iPhone shows that clients are prepared to pay more per month for these innovative products than ever before — regardless of the financial crisis and economic downturn. Turnover trends are therefore more likely to be driven by the anticipation and implementation of a technological innovation (broadband and mobile internet) than periods of economic downturn.

Margins are likely to remain fairly stable
One of the main concerns for investors is margin development, which pessimists believe will suffer during the financial crisis and economic downturn due to increasing financing costs for investments and rising operating costs. However, we believe that the cost structure of telecoms companies is more flexible than people think. For example, a decline in customer growth leads to a reduction in marketing and acquisition costs. Less money is spent on mobile phone subsidies, which frees up operating margins to some extent. Over the last two years, many companies have also implemented cost reduction programs which will really start to pay off in 2009. Future investments can be delayed without risking a negative impact on daily business. Last but by no means least, we must mention baseline effects that no longer have an impact on operating margins due to the declining effects of administered tariff reductions — this includes tariff reductions resulting from roaming or termination fees, for example. Companies, therefore, have a sufficient safety net to absorb losses in turnover and keep their margins stable.

Steady cash flow and sound balance sheets
The aforementioned factors indicate that telecoms companies can keep cash flow generated by their operations at a fairly steady level. Based on current estimates for turnover, margins and cash flow between 2008 and 2011, the return forecast remains fairly stable even though growth in turnover seems to be fairly sluggish for the sector as a whole. Taking into account the low level of debt typically accrued by the telecoms industry in the past, the risk of refinancing is relatively minor. On average, the earnings before interest and taxes (EBIT) generated by the European telecoms industry cover its current interest expense more than five times over. These attributes are a major attraction to investors during a recession, which suggests that the industry will continue to outperform the market. Careful investors should therefore incorporate telecoms shares into their portfolio during the 2009 investment year.

Uwe Neumann is an equity analyst at Credit Suisse

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Executive Insights

Carbon offsets – the moral and necessary future of business

by Armen Vartanian
written by Armen Vartanian

The good news about global warming is that we are still talking about it, despite the current difficult economic circumstances. The downturn’s local consequences are being felt by everyone, so it is heartening that we are maintaining a dialogue on long-term issues. The bad news is that climate change is happening and mankind’s continued contributions are now proven. If unchecked, climate change will continue to grow into a problem that will eclipse today’s financial woes.
Here are some examples of the pending financial costs we will face as the earth’s environment alters: the economic and social impact of 150 million refugees from higher sea levels and lost farmland; greater heating and cooling costs to deal with more extreme temperatures (new highs and lows); rebuilding or relocation of entire regions due to weather and fire events, and crop prices volatility as ecosystems adapt to new weather patterns. These costs will reduce future cash flows to society and therefore they represent a liability for corporations today. Therefore, reducing your company’s impact on global warming and reducing this future liability is a value-creating endeavor.

The growth of green
Companies worldwide reduce their contribution to climate change for many reasons, including complying with a corporate mandate, saving money by using less power, pleasing and retaining employees, improving corporate brand image and also doing ‘the right thing’ in joining the fight against climate change. From Morocco to Iran, there are many examples in the Middle East and North Africa (MENA) region of companies taking action on carbon emissions. Green building standards are being adopted in the UAE, Qatar and Bahrain. Abu Dhabi’s ambitious $15 billion dollar Masdar initiative, with its various funds and programs and a 50,000 resident carbon-neutral city, is a shining example of visionary green thinking that will generate value. Sabban Properties intends to make its $274 million Sabban Towers the first carbon neutral development in the MENA. Renewable energy projects, including wind and solar, are in advanced stages in Morocco, Jordan, Egypt, and Turkey. Startup recyclers are recovering value from significant construction wastes around the region.
An innovative and cheap way for an organization to reduce its carbon footprint with minimal effort is through the purchase of carbon offsets. Carbon offsets are essentially contracts that commit a third-party project company, usually in low-cost environments, to reduce carbon emissions on the purchaser’s behalf. For example, one offset project in Ethiopia replaces villagers’ kerosene-burning stoves with lower-emission butane stoves.
In order to attain ‘carbon neutrality,’ a person must measure their organization’s carbon footprint and purchase enough offsets to reduce the client’s emissions to zero, making them ‘carbon neutral.’ Then they must work to reduce their footprint so that the following year the number of carbon offsets needed to reduce their emissions to zero is lower than the previous. Eventually, the number of third-party carbon offsets needed to remain carbon neutral will be minimal and the outcome is significant reductions in carbon emissions.

How ‘on’ are offsets?
Opponents to the purchase of carbon offsets claim that they create a feeling of a clean conscience without actually changing the buyer’s behavior. We disagree. By following the process described above, a company can reduce their future liability from carbon emissions by contributing to offset solutions that are already set up. Then, at the same time, the company would be committing to reducing their carbon footprint through internal reductions — thus guaranteeing behavior change. Due to the global nature of climate change, purchasing carbon offsets from elsewhere in the world and reducing emissions locally have the same net effect on this worldwide problem.
The rationality of this argument, when translated to the context of the UAE, for example, would be as follows: an individual in the UAE can purchase carbon offsets worth $400 and reduce his carbon footprint to zero. If that same individual were to purchase and install solar panels on his home to offset his carbon emissions from automobile use and air travel, the system would cost him more than $10,000 and would last for around 10 years, costing him on average, $1,000 per year to achieve carbon neutrality instead of $400 with offsets. And the same thing goes for companies. The average company in the UAE can bring their headquarters, including flights, to carbon neutral for less than $35,000 per year.
The only question is, what are you waiting for? Reducing your carbon footprint is relatively inexpensive, easy to do with local specialists and just might help you sleep better at night.

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Comment

An empty coup

by Peter Grimsditch
written by Peter Grimsditch

Obama orders arrest of three four-star generals. Air Force and Marine chiefs accused of trying to overthrow the administration.” If these headlines were splashed across the front pages of the American press, worries in the United States about healthcare, stimulus packages and budget deficits would pale into afterthoughts. Yet life in Turkey continues as normal, at least for the moment, despite last month’s arrests of 49 former and active military officers. Those held include two former commanders of naval operations, two admirals, three vice-generals and one vice-admiral, as well as two rear admirals and two brigadier generals still on active duty.

On the surface, the arrests are an extension of the round-up over the past two years of nearly 300 people who are alleged to have been plotting to overthrow the government of the Justice and Development Party (AKP). The bizarre schemes in the latest charges included planning for a mosque to be bombed and a Turkish fighter jet to be shot down, so the armed forces could step in to rescue the country from chaos, conveniently deposing a democratically elected government perceived by some to be hell-bent on turning Turkey into an Islamic state.

The latest skirmish between the AKP and the military prompted President Abdullah Gul to arrange a meeting between Prime Minister Recep Tayyip Erdogan and armed forces chief General Ilker Basbug. After three hours of talks, Gul’s office said that any “current problems would be solved within the framework of the constitution.”

So, no joy for those fearing (or others hoping for) a military coup. In fact, the prospect is highly unlikely since the whole world has changed since the military last flexed its muscles that way in 1980. Turkey is no longer the last outpost before the start of the evil Soviet empire, and there is less incentive for foreign states to sanction military coups. The current charges stem from 2003 and a war game codenamed Sledgehammer, which included steps to unseat the Erdogan government by creating chaos in the country with the help of terrorist attacks, according to press reports. The AKP says it was for real; the army says it was part of a normal exercise.

Erdogan has distanced himself from the arrests by saying that the judiciary is in charge of the investigation and technically he is correct.

What may be just as intriguing as the alleged plot is the role in its revelation played by the Taraf newspaper, which has revealed many of the stories about the equally alleged coup attempt. The paper is only two years old, and its inception coincided with widespread arrests in relation to the “Ergenekon conspiracy” case, in which well over 200 people are still under arrest for conspiracy to overthrow the government. Taraf claims to have received material from military officers who are opposed to the plots. The fledgling daily has scooped its better-established rivals with lurid tales. The inherent conflict between the AKP and self-styled staunch secularists is rife with conjecture but not replete with facts. Each time the AKP uses its legitimate powers of patronage to appoint supporters into various establishment jobs, it risks the charge of adding yet another brick to the Islamist state it is supposedly building. There is never a mention that the secularists had been appointing their own favorites for more half a century before the AKP came into power in 2002.  Predecessors of the AKP presided over rampant inflation — some lottery prizes are still advertised as offering prize money of trillions of liras — and wholesale corruption. The AKP has reduced inflation to single digits, expanded the economy at a rate never seen in modern Turkey’s history and stabilized the currency.

Some financial analysts warn the very public spat between the army and the government will destroy all these economic gains. One report said the lira would quickly lose 8 percent. More sanguine (and cynical) observers recall the results of the so-called ‘e-coup’ in April 2007, when the army warned the AKP not to pose a threat to secularism, and the attempt to close down the party in 2008. In both cases the markets and the currency quickly recovered.

There is no particular reason to believe that this trial of strength will have any different consequence, and a military coup in Turkey these days is as likely as Obama arresting four-star generals.

Peter Grimsditch is Executive Magazine’s Istanbul-based correspondent

 

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Executive Insights

Successful development of small and medium-sized enterprises

by Ziad Ferzly
written by Ziad Ferzly

The majority of enterprises around the world are small and medium-sized enterprises (SMEs). According to the European Union, a small enterprise has a headcount of less than 50, and less than $12.5 million in turnover. A medium- sized enterprise has 50 to 249 employees, and a turnover below $62 million. There is a lot of attention given by international organizations, government agencies and donor institutions to the development of SMEs. SMEs are the backbone of economies, especially since they easily constitute more than 90 percent of the businesses in a given country. In fact, small businesses alone tend to make up more than 90 percent of all businesses and they typically come to mind when SMEs are mentioned. SME development ends up being the main component of economic development. SME development programs should typically focus on:

Better business environment: Policy makers should take the interests and input of SMEs into account when changing existing policies, rules, and regulations, or when setting new ones. Cutting red tape and streamlining processes are crucial to helping all companies grow. Starting a business, closing a business, hiring employees, letting them go, and enforcing contracts are just some aspects of the business environment that need to be evaluated and improved.
Improved access to finance: Capital is the lifeblood of a company. Small businesses are usually at a disadvantage when it comes to accessing finance to operate and grow. Creating and strengthening a variety of financing mechanisms (e.g. loan guarantees) are important to providing SMEs with required capital. Governments can make much longer-term investments than private investors, and can reap rewards in different forms, from higher employment and taxes to capital returns and productivity.
Greater access to services: SMEs typically need services and resources that they cannot afford or cannot pursue on their own. Providing business skills and entrepreneurship training, improving access to new markets, encouraging import substitution and enhancing coordination between companies in one economic sector are a few examples of SME assistance that can be offered.
Those who are planning, funding, and running SME development programs, and other types of programs too, should realize that many factors affect the success of their efforts. They include:
Commitment to success: The various players who are in charge of the SME development programs need to be committed to these programs, their stated goals, and their success. While this seems self- evident and intuitive, many programs do not really succeed because the people in charge do not care enough about the results.
Backing for the right time: Institutions need to back or support programs for the necessary length of time. So, if a program needs six years to achieve its goals and become sustainable, funding should not be cut after four years.
Knowledge and expertise: The people managing SME programs must know how development works. Consultants and employees should also have experience working with SMEs in a region, and expertise in the sectors targeted for assistance, as well as the functional help being offered.
Market-driven approach: It is important to listen to SMEs and understand what they need rather than come with a predetermined view of what they require. A short survey can shed light on what SMEs want. If SMEs are not willing to even partially pay for certain services, even when they can afford them, then those services are probably not needed.
Tailored programs: While “what” should be included in a SME development program at a very high level can be similar between two countries, “how” to proceed and “who” should drive can certainly vary from one country to the next. A tailored program will yield better results than one that is pre- packaged and imported from another country.
Overall coordination: Typically, there are many programs running at the same time in a country or a region. To avoid overlap, it is important to understand what other programs are doing to properly coordinate between them. That way, the SME program can have maximum effectiveness.
Flexibility: Finally, the programs need to be flexible and respond to changing needs as they arise. The implementation phase can reveal issues that were not apparent at program inception. The ability to respond to new data or changing conditions is important to the overall success of these programs.
Setting policies with SMEs in mind and having programs targeting their development and growth is good for the entire economy, and can benefit larger and more capable companies. Large companies benefit from a vibrant SME sector that can provide them with needed products and services. At the end of the day, SME development is critical to overall economic development.

ZIAD FERZLY is managing director at Cedarwood Advisors, which provides strategic, financial, and investment management services to companies, investment firms, institutions and governments around the globe.

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Finance

Solidere – equity research guide

by Marwan Salem
written by Marwan Salem

Solidere is a Lebanese real estate development company established in 1994 and listed on the Beirut Stock Exchange. Solidere is a single purpose company exclusively responsible for the reconstruction and the development of the Beirut Central District.
The company is also engaged in real estate development outside of Lebanon through its associate Solidere International. In 2006, Solidere management obtained shareholder approval to venture into urban planning and real estate development outside Lebanon, in an effort to expand master development activities overseas. As a result, Solidere founded Solidere International (SI), becoming managing shareholder with 37.2 percent ownership.
Solidere’s long-term strategic objective is to diversify its revenue mix to compensate for the erosion of its finite land bank in Beirut City Center. Therefore, since 2007, Solidere has embarked on a bold expansion plan with a view to securing new revenue streams. The core aspects of Solidere’s long-term strategic objective encompasses the following:
• International growth strategy with SI
• Increasing rental income up to $100 million
• Increasing revenues generated from consulting services
We have performed an estimation of land and property prices per square meter of built-up area (BUA), based on management data and independently collected recent land sales figures. In order to be on the conservative side, we have adjusted the data. The resulting estimated net asset value per share is $48.55.
Solidere’s recognized revenues in 2007 amounted to $310 million resulting mainly from land sales, most of which came from contracts signed in previous years. Total revenues grew by 33 percent, eight percent and 12 percent in 2005, 2006 and 2007 respectively to reach $310 million by the end of 2007. This increase in total revenues was primarily driven by a surge in land sales. We believe this trend can be sustainably driven by the projected revenues from land sales, expected to increase drastically with the near completion of the infrastructure in the reclaimed area (1.4 million square meters of BUA) and the depletion of the traditional area (0.45 million square meters of BUA). Solidere’s total revenues are expected to steadily increase from $310 million in 2007 to $630 million by end 2012.
Solidere is expected to record an increasing net income, which is projected to reach $237 million in 2009 and $435 million in 2011. The resulting compounded average growth rate (CAGR) of net income from end 2007 until end 2012 should be equal to 16.8 percent.
Solidere has adequate cash reserves. The company’s cash position at end 2004 stood at $116 million, rising to $328 million at end 2007. Its accounts and notes receivables grew in parallel from $211 million at end 2004 to $319 million during the same period. All in all, the company has increased its liquid assets/total assets ratio from 16 percent by end 2004, up to 27 percent by end 2007, implying a good liquidity position.
We have decided to pursue a DCF valuation for Solidere (standalone) and have assumed the NPV of Solidere’s share in SI to be equal to its book value.
We believe this methodology properly reflects the fair value of Solidere as it is too early to envisage accurate future cash flows for SI due to its nascent status and the unstable regional real estate scene.
Our fair value estimate, derived from the discounted cash flow of solidere standalone projections, in addition to the book value of SI, amounts to $29 per share, resulting in an important upside potential. It is worthwhile to note that any positive outcome from Solidere International would have an important impact on the Solidere share price.

Marwan Salem is head of research & advisory and Raya Freyha is financial analyst at FFA Private Bank

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Executive Insights

Drive Communication

by Paul Boulos
written by Paul Boulos

How a country is perceived on the world stage by its own people or by other nations is crucial to its survival and success in the new globalized model. Nation branding and country positioning is an untapped concept in Lebanon and what it has to offer. While the notion of nation branding is not new on an international scale, on a regional scale it represents a hidden opportunity for Lebanon. Whether based on individual national objectives of trade, investment, travel and tourism, or through NGOs, positioning a country’s brand is more important than ever for small countries like Lebanon.
As a brand, so far Lebanon has been most successful at manufacturing human talent. This talent has demonstrated that it is cultured, competent and cost efficient. It mainly resides in the diaspora, a large pool of potential that has not yet been linked back to the ‘mother brand.’

Arab nation brands
Some Arab localities have made serious attempts to style their countries as brands, according to the national agenda of their governments and international interests. Examples of this include Dubai, Doha, Abu Dhabi and Manama. Dubai was sought after for its transit and service qualities; Doha as an international sports and education destination; Abu Dhabi for its culture and Manama as a smart business choice.
We have seen other attempts via one-off campaigns by the ministries of tourism in places like Turkey and Egypt. Yet such campaigns fell short of promoting their country brand under one unifying umbrella. India, China and Australia could serve as good examples of exploiting nation branding by building one unifying brand.

What does it take?
Today, the world we live in has no geographic boundaries when it comes to conducting business, especially when it comes to communication. If we are to shift our mindset and think of Lebanon as a ‘creative nation’ brand, we must first define the key performance indicators. Second, we must identify the industries that are considered ‘creative’ and see what it takes to execute them.
Thinking of Lebanon as a creative nation brand, we must be able to define our brand promise: For what do we stand? What is our cutting edge offering? What is the content that we will offer on the international market? How we will deliver it? What is our target market? Who are our customers and what do we know about them?

The ‘attention age’
Welcome to the ‘attention age’, where before delivering a message in a cluttered environment, countries must rise to the challenge of grabbing attention. Then, they must deliver a promise, live up to it and earn the respect and trust of investors, consumers, media and other nations.
The information age is over. We have officially entered the attention age, whereby attention is won and credibility through creative talent is the only sustainer. Lebanon is an ideal platform for a creative nation brand, as more and more products and businesses export ideas instead of tangible commodities. If we are to think of Lebanon as a cultural product, then this could be a start. The demand for creative products and industries is growing as consumers are more into cultural exchange and social media. In fact, consumers today are using creative products and selling them in order to connect with specific dreams and lifestyles.

Lebanon’s success in creative sectors
Lebanon has made some interesting breakthroughs in various sectors, which could easily be labeled as creative industries or creative sectors driven by talent. Examples of this include advertising, architecture, design, arts, media, film, music, tourism and gastronomy. All these creative industries have as their nucleus the work, ideas, energy and creativity of a small team. Positioning Lebanon as a creative nation brand takes much more than designing just a nice logo with an appealing tag line. It takes having the human talent, the energy, the will and a common vision. The biggest problem with branding a nation like Lebanon is there are many different organizations that operate in a sporadic and slow manner. They do not liaise with other entities such as the ministries of tourism, trade or export organizations. Essentially, everyone does their own thing. It’s nearly impossible to get everything together and host it all under the country’s umbrella. Thus comes the need to define a common vision as to what Lebanon should stand for as a creative brand.

Nation brand assessment measures
The Anholt nation brands index offers a systematic approach to measuring nations’ brand equities in an index that he sets for national assets, characteristics and competencies. These include exports, people, governance, tourism, culture and heritage, immigration and investment.
In essence, countries are a lot like humans. Therefore it is important to consider the emotional attributes of these nations as they are perceived by others in the world. Despite all the chaos that Lebanon is witnessing and the instability that surrounds it, we have no excuse not to think in this untapped strategic and essential direction. As chaotic as our nation is, we have a trilingual culture, competency and cost efficiency. Hence, we stand a real chance to succeed in the emerging new world order where geographic boundaries no longer apply. As for the present and the future, Lebanon as a creative brand must focus all its efforts on harboring, developing and retaining its own creative talent.

PAUL BOULOS is business development director — Middle East & North Africa, at Drive Communication

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Finance

IPO Watch – Hints of a thaw

by Executive Staff
written by Executive Staff

Given the ongoing weakness in regional equity markets right now, it’s no surprise that the IPO market is still on the ropes. Many financial analysts from Ernest & Young, UBS, Gulf Capital, Global Invest and others maintain that 2009 will experience slow growth in IPO opportunities, and equity capital markets desks from Dubai to Saudi Arabia are sitting on their hands.

But some market observers are optimistic about the ice jam breaking for IPOs in the near-term, especially sometime in the second half of 2009. “The IPO window is closed for the moment due to prevailing market sentiments,” Ali Khan, executive director of capital markets at Arqaam Capital says. “However, six or nine months is a long time in capital markets, especially these days… once there is a better understanding of pricing trends, stock markets may rally well before house prices actually reach bottom, as investors will take a 12 to 18 month view ahead,” he adds.
The region’s IPO market is nowhere near recovery, but it looks like investors will have several offerings to choose from in the coming months. Saudi Arabia’s Mawarid Holding has appointed Saudi Hollandi Capital as lead manager for the planned IPO of its unit, Meed Trading Company. Although the company did not provide the details of the offering, the IPO is expected to be launched by the end of the 2009 after regulatory approvals. Meed Trading, which operates more than 200 retail outlets across the kingdom, “will be restructured prior to the IPO to make it a majority stake holder in seven other subsidiaries of the Mawarid Group,” the company said in a statement.
Also in Saudi Arabia, Abdul Mohsen Al Hokair Tourism & Development Group, announced plans for an IPO to raise funds to develop tourism projects on the Saudi coast and further develop plans to construct over 30 hotels across the Arab world. The company did not provide details as to the size of the offering and possible launch date, but Abdul Mohsen Al Hokair, the group’s chairman, said the launching is very much dependent “on the performance of the local stock market.”
In the region’s most battered economy due to the global financial crisis, one announcement came out of Dubai. Private charter Silver Air, said it will launch an IPO as part of its strategy to raise capital to expand its fleet with three additional Boeing aircraft. “This acquisition would be funded by an IPO in two to three years time with a listing in Dubai,” Steffen Harpoth, chief executive of Silver Air, told the press.
Meanwhile, the IPO of Etihad Atheeb Telecommunication or Atheeb, Saudi Arabia’s second fixed-line operator, was 3.5 times covered with subscriptions totaling more than $282 million. Atheeb launched its IPO in early February and the float was closely watched by market observers to assess investors’ appetite for IPOs. The company expects to list on the local stock market before mid-March and will begin its commercial operations by mid-2009.

Syrian markets
In the Levant, the Damascus Securities Exchange gave the go ahead to Bank Audi Syria and the United Group for Publishing, Advertising and Marketing, to list their shares. Bank Audi Syria is a subsidiary of Lebanon’s Bank Audi. Bank Audi Syria’s capital stood at $54.3 million at the end of 2007, according to available data. While Damascus-based United Group’s capital stood at $6.51 million at the end of last September.
Some analysts believe that individual and institutional investors remain in defensive mode, and in light of the current economic fundamentals and overall valuations, investors are more likely to buy shares in undervalued companies than in an IPO. “Investors’ reluctance regarding IPOs is understandable,” Samer Shaheene, senior analyst at Bloomberg says. “Many have been stung by stock market declines and a risk-tolerance level for IPOs is on the low end,” he adds. This has forced companies to seek out new sources of capital, where possible.
However, precedence shows that investors will always seek and find good investment opportunities in any market conditions. “When there is a period of lower-than-normal IPO issuance, bounce back is possible,” Jad Hawali, analyst at Zawya.com says. “The bounce back can happen without a solid overall equity market simply because there is pent-up demand for capital by private companies,” he added.
According to available data from Zawya.com, there are close to 60 IPOs planned for 2009 so far. Although there are alternative means to raising capital, the IPO is a favorite course for regional investors. Given the swiftness with which investors and companies respond to changing financial and economic conditions, this scenario may be what will play out at the end of the first quarter.

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