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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Executive Insights

EM Leadership Center

by Tommy Weir
written by Tommy Weir

Enough for now with giving attention solely to the limitations imposed by this financial crisis — instead take a break and concentrate on the coming opportunities. There is an immeasurable potential to grow your business, but it requires a market shift.
This market shift can be summarized by the term ‘peopleization’ — meaning the ‘massive people markets’. Never before in history have there been markets with the size and density of today’s. Three realities define peopleization and they are having a remarkable influence on the future of business.

The world is growing — huge
The current population of the world is nearing seven billion and growing by 135 people per minute. To put this in perspective, note that it took from the beginning of history until the early 1800s for the world’s population to reach one billion. Then, in 1927, more than 125 years later, it passed two billion. In 1987, the world population was five billion; 12 years later, in October 1999, it passed six billion.
Now every 14 years the world will grow by another one billion people. It’s no wonder that so many people are concerned about what this means for our future. You also need to be attentive to what this means for your business.
When we talk about world population, we may be distracted by the magnitude of the number. So, let’s break down what it means for the population to grow by one billion every 14 years. That means the world grows by approximately 71.5 million people each year, or close to 196,000 people per day. In other words, every eight days or so the world’s population increases enough to add a city the size of Beirut.

The world is becoming eastern
Think about this: while the West is sleeping, the entire rest of the world is working — literally and figuratively. The focus of the world is no longer on the West. Success is and will continue to come when you turn to the East. At one point, if you wanted to make it big, you had to succeed in Europe and then it moved to the US. Now if you want to make it big you must succeed in China and India.
The world is now an Asian World. The picture is changing; the developed world is growing at a measly rate of two people per minute and the developing world at an astonishing rate of 151 people per minute.
In terms of economic size, China will soon by-pass Japan and the United States. China is today’s powerhouse. The power of the market shift comes alive when you add together GDP growth and population growth. For example, China is growing at a rate of at least two times that of the US, and they are four times as big. Make this calculation and determine the impact it will have on business.
Asia is becoming the anchor economy of the world. They are the leading global importer; in addition, they are now a leading exporter and trendsetter. They not only dominate the region, they have a controlling interest in the world. This is the location of future business.

The world is urban
In 2007, the world reached the invisible, but momentous milestone of becoming an urban world with more than 52 percent of the world living in densely populated, high- rise cities. And the growth of the urban world is not showing any signs of slowing down as every second two people make the dream-fulfilling journey from the rural world to the urban world.
While the world’s urban population grew very rapidly over the 20th century (from 220 million to 2.8 billion), the next few decades will see an unprecedented scale of urban growth in the developing world. The cities of the emerging markets will comprise 81 percent of the urban footprint and be home to more than five billion people. The cities in the East are exploding compared to the snail’s paced growth of the cities in the developed world.
In order to make the market shift, you need to be able to answer a couple of questions: “What does the market shift mean for my business?” and “How can I make the shift?”
How can you succeed if you are not there?

Tommy Weir, Ph.D., is executive director of the EM Leadership Center, specializing in strategic leadership development for fast-growth and emerging markets.

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Finance

Merrill Lynch – Gary Dugan (Q&A)

by Executive Staff
written by Executive Staff

Currently the managing director and chief investment officer of Merrill Lynch Global Wealth Management in Europe, the Middle East and Africa (EMEA), Gary Dugan has been in the financial business for more than 25 years — previous positions include managing director and global markets strategist at JPMorgan Institutional Investment Management and the Private Bank, and managing director and head of research and investment strategy at Barclays Wealth. Executive had the pleasure of a candid, one-on-one interview with Dugan after his ‘Year Ahead 2009’ presentation in Beirut, to discuss the effects of the global financial crisis on the region’s markets.

E How has the global financial crisis affected your operations in the Middle East? How have your clients been affected?
We found that clients have moved from being quite aggressive risk takers — so they were prepared to buy in emerging markets and local equities — and now they’re much more risk averse. If you look at the kind of marginal investment they are now making, it’s more in cash and gold — very, very safe investments. So I think their whole appetite for risk has changed and dropped quite dramatically. I would say that both the revenues and the scale of the assets that are available there for our business has dropped quite dramatically. But I think people in the past might have wanted to do it themselves, because it just seemed so easy — you went and bought a building one week and the next week you went and made 15 percent. They now realize that it’s not that easy and they need more advice. We’ve never seen so many people come into our presentations, we’ve never had so many phone calls, as people want to talk through what’s going on — they need advice, greater advice then we’ve seen for some time.

E Has the Bank of America acquisition of Merrill Lynch affected your operations?
I can’t comment, sorry.

E Where do you see the greatest opportunities for growth in the MENA region?
I suppose by country, in terms of the robustness of the business, it’s countries like Saudi Arabia and Kuwait in particular. Purely because the economies there have got even greater support from their governments, they’re holding on to their GDP, the local economies are more insulated from the outside world and if they do have internal problems there is sufficient government resources in order to stimulate the economy. I suppose the one disappoint we’re seeing at the moment — but it was coming — is Dubai, because you see this heavy reliance on cash flows from the central bank and from Abu Dhabi, which have a question mark over them. Also, because people have been so heavily leveraged into property, once property collapses they really have no wealth or free cash flow left. So the opportunities are going to be difficult in the future, but there are still some stronger markets that we’re seeing elsewhere in our franchise.

E So how do you think markets like Dubai can recover? With the economy of Dubai so dependent on its property sector, what are the key components to help them recover in the future?
Well, you hope that people have learned a lesson — that the kind of one single asset that they were playing, they realize that they need diversification and a more international perspective in the way in which they invest. So we’re hoping that when they come to us they’ll be thinking, “If I’m going to stay in property, maybe I’ll look at London, New York, or other places. Maybe I’ll think about buying bonds to settle offside my very high risk asset in property.” So we’re getting a greater diversification of assets, we’re talking to our clients about more asset classes and more vehicles than we’ve ever done before. We’ve already had a massive pick-up in interest in commodities just from this visit as people see that as the opportunity — not to make huge amounts of money, but to provide some diversification against the risk they still have in their illiquid investments.

E What do you foresee as the most difficult challenges in the next 12 to 18 months?
I think in the immediate term the biggest disappointment will be a sense that 2010 is not going to be that much better. The growth in that year will be around the world only about one to 1.5 percent, whereas people had hoped we’re going to go back to the four and five percent numbers we’d had before. The second thing is — and this is a dramatic shift from where we’ve been for the last 20 to 30 years — so much less inflation around the world, even here in Lebanon you may be talking about inflation rates that get down close to zero — in the developed world, numbers that are negative, and again, whilst Japan has been the one country that has suffered that and struggled with it, we could see the whole world struggling with it. So it means a different environment for the way people live their lives — you have to go and ask for a discount everywhere, you’re going to have businesses that are unfortunately going to have to lay-off more staff to take down their cost base — so it is a very big change that needs to be underway in 2009.

E What strategy will Merrill Lynch be using in 2009 to increase risk and investment appetite amongst their clients?
I think there’s a wholesale change inside the banking industry. Clearly mergers mean companies need to get to know each other again and change is inevitable. I think what we’re going to have to work very hard to do is: one, you’ve got to start to re-invent the investment proposition for clients, because people will be less certain about the future, they’ll be more nervous about the investments they make. So we’re going to have to focus more on, what I call, the safer, traditional investments of bonds, be more prudent and away from investments that were made in the past in things like structured products and derivative instruments. The second thing is — and this will come in two ways in the sense that in the past it was fairly easy to sell something — in the future you’re going to need to do a great deal more work with the clients providing very strong guidance. That to me is much healthier as the clients will be more aware of the risks they take on in certain investments and they are more involved that way.

E Do you think it will be easier now to identify toxic assets or risky investments since the fallout of the global markets?
My secret hope is that… regulation saves the clients themselves. I’ll be honest with you, in my whole career there [were] many times where you advise clients not to do things but unfortunately people get so excited with the tops of markets — like the Dubai property marketing doubling. As we saw back in 2000, people thought technology stocks were going to give 30 percent returns every year for the next 100 years and it didn’t matter what you said to clients, you couldn’t stop them from doing it. I say we’ve got our own role to play in saving humans from their own faults — call it greed or whatever you want — but we’ve got to try and stop these bubbles from forming in the future. It can’t just be done by investment banks, it’s got to be done by heavy regulation.

E So would you say that global investors are in need of a reality check?
A desperate reality check! But as I said, I think there should have been a reality check after the huge losses in the tech bust. Yet, just five years later people were making even bigger mistakes with more money. So I just sense that we’ll get more bubbles in the future and we’ll go through some of the cycles again. I just hope that the next cycle doesn’t take the financial system down as it has done at this stage — this is a very dramatic deterioration and it will take many years to repair.

E Do you think a major mistake made by investors in the past is that they were only thinking on a short-term, profit basis?
I think it was simpler than that. I think what we had over the last 15 years — because of central bank policy and principal in the US — was that any time the markets got into difficulties, they were bailed out. If you were patient enough to wait one or two years, whatever you bought would have gone up to the price you paid and beyond it again. It wasn’t quite the case in the technology sector, but that was the insurance policy you had and then they realized this time around there was no insurance policy. The insurance policy would have had to have been so big that it would have been bigger than this planet, quite honestly. So I think that is the wake-up call, that the huge speculative booms we had are the past and that the insurance policy is no longer there. People require higher return from things but they’re also going to have to be far more patient. The other important point is that in the past, the saving that went on was very, very modest. Around the world, in the future the saving has got to be greater because the available returns are going to be smaller. That’s good news for our industry — we should see more cash inflows — but clients have got to reset what they hoped for.

 

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Levant

Lebanon – Storm brews in cedar seas

by Executive Staff
written by Executive Staff

Knowing that Dubai’s Palm islands have dominated real estate headlines for the last couple of years, developer Noor International Holding has directed its attention to Lebanon with its newly announced 3.3 million square meter “Cedar Island” development off the Lebanese coast. The estimated $7.4 billion development will host residential villas and apartments, commercial space, as well as recreational and touristic elements like gardens, a golf course, a sailing club and a water park. Moreover, the Cedar will be divided into commercial, public and private zones, each having specific components.

Why an island?
Noor International aims to create a comprehensive development, encompassing all elements essential to a community. Dr. Mohammed Saleh, chairman and owner of Noor International Holdings explains, “the problem is that we have not been able to find any piece of land on shore that would enable us to develop such a project.” He says if a piece of land with only 60 percent of the proposed island’s area had been found, they would have created the cedar shaped development on a mountainside or seashore, which would have been much easier. “Our project includes villas, chalets, gardens, a school… and that cannot be done on a 10,000 to 20,000 square meter piece of land on the shore,” he elaborates.
Additionally, the developer’s idea is to attract Lebanese expatriates and immigrants who have long been waiting for such a project in order to come back to Lebanon. “Lebanese expatriates and immigrants cannot be attracted to Lebanon by a small scale project including a couple of villas. A mega-project is needed to induce them to come back to their country and invest in it,” says Saleh. Noor International claims it is already receiving emails from potential buyers the world over interested in the project.
Furthermore, the island aims to create 50,000 jobs during the construction phase and even more jobs upon completion, since thousands of people will be working in the project’s restaurants and facilities.

The approval process
The Cedar Island is in its preliminary stages, since it has not been approved yet by the Lebanese authorities, nor have the location of the island or the construction method been determined. Noor International must submit three studies to the government for approval: an environmental impact assessment, a feasibility study and a site location study. Of four potential locations along the Lebanese coast — Damour, Amchit, Sour and Dbayye — Noor International considers Damour the most viable and will conduct the location study on this area. If not approved, the company will consider other locations.
Official responses should come from the Ministry of Works, the Civil Regulatory Administration, the prime minister, the parliament and the president of the Lebanese Republic. “We expect the process to take around six months or one year at the most,” says Saleh. After receiving the approval, the company estimates the construction work to take around four years. Noor International has already won the blessings of Elie Marouni, the Minister of Tourism and Wael Abou Faour, the Minister of State. Moreover, the developer is currently using the services of the Investment Development Authority of Lebanon (IDAL) in order to facilitate the process and benefit from the package deal that IDAL is providing in terms of tax incentives and fee reductions.

Public response
When the idea was proposed to the public, some people were terrified by its potential environmental and socio- economic impacts, while others embraced the project and held up its potential contribution to the Lebanese tourism sector and the economy in general. Environmentalists claim that the Cedar Island will cause serious water and air pollution, as well as affect the well-being of the Damour community.
Environmental consultant Lama Abdul Samad explains that, “we have a rocky ecosystem, rich with wildlife and marine habitat and dredging will kill everything there. It is too bad because Damour is one of the places on the shoreline” that has not yet been severely damaged by human development, she adds. Additionally, the immediate vicinity of the island’s area is not the only place that will be affected. Sourcing the fill for the island, whether by sea dredging or quarrying the mountains, will further harm Lebanon’s natural heritage.
Skeptics also argue that the construction, which would last for about four years, will cause serious air and noise pollution, since a lot of machinery and equipment will be used. “The air and noise pollution will be catastrophic, heavy machinery will cause traffic jams and the fumes and dust will contaminate the area’s environment,” comments Abdul Samad.
Lebanese environmentalists have started to act as 13 environmental organizations, including Greenpeace Mediterranean, Byblos Ecologia, the Society for the Protection of Nature in Lebanon and others, have formed a joint coalition hoping to keep the project from being constructed. As a first step, the coalition issued a press release stating that it categorically opposes the Cedar Island and warns the Lebanese government of the harmful impacts that the project may have on Lebanon’s environment, as well as the economic and social ramifications on the surrounding communities. Yasmin El Helwe, the oceans campaigner at Greenpeace Mediterranean, explains, “our next step is to have pre-assessment. However, we cannot do that right now because we are not aware of the project’s location or the method of construction.” Greenpeace is also working with their scientific unit at Exeter University in the United Kingdom in order to discover possible environmental impacts.

Project construction
Although the method by which the island would be constructed remains undetermined, Saleh explains that most probably the cedar trunk will be constructed by land reclamation, while the branches will be floating. “The island might be a mix of a floating structure and land reclamation. However it is too early to tell since as soon as we choose the location, we will conduct a topographic study of the surface and determine the best suited method of construction,” notes Saleh. He also emphasizes that the methods will be chosen to minimize the impact of the island on the maritime environment. “If, God forbid, we damage the environment, we will fix it,” says Saleh.
For the construction of the Cedar’s trunk, Saleh says the company has found a way to enable its creation without using sea dredging or quarrying mountains. “I heard that there is a license being issued for constructing a tunnel in the mountain leading to Shtoura [in the Bekaa valley], which would reduce the travelling time from more than an hour to 25 minutes. The idea is to use the rocks that will be taken out of the mountain to construct the island.” Saleh did not specify to whom the license is being issued, but he added that if the tunnel project is not already online, Noor International will propose and execute the idea itself. “One tunnel might not be enough, it is a plus or minus, but here we are trying to find ways to develop our project without hurting the environment. Instead of damaging the sea or the mountains, a point in which environmentalists are 100 percent right, we are developing new infrastructure,” he notes.
Experts claim that a floating island is a bad idea, not because of the construction process, but due to the costly maintenance the island will require. Adel Monsef, project manager at Archirodon, a leading international construction group, explains that, “a floating structure, whatever it is, needs maintenance every year or maximum every two years. In this case, a dry dock has to be built next to the island, which would be very costly. We are on the Mediterranean and we have rough seas, so there will have to be [lots of] maintenance, they are already facing some difficulties in the Palm,” which experiences mild seas compared to what the Cedar would face, Monsef adds.
Conservationists agree that whatever the method of construction, there is no escape from the serious environmental impact it will cause. Even if the branches are floating, the upper layer of the maritime ecosystem is very dependent on sunlight and would die. “The fish might swim out, but there are other elements in the ecosystem that will not survive,” says Abdul Samad. “If it is not going to sustain life, they might as well cover it all than have it slowly die and rot,” she highlights.

The fight continues
As Noor International works on the approval by conducting the required studies, opposing parties are on guard and trying to make their case. Saleh would like the environmentalists to open a line of communication with the company. “We are an environmentally friendly project, we are coming to build and not to destroy,” says Saleh.
Saleh also thinks that the attack on Noor International was premature, since no studies had been made on the possible impacts. He says that only when these come out will environmentalists have the right to oppose the project. Yet the environmentalists believe no study is needed to prove their case. “It is impossible to build such a thing without causing damage to the environment,” concludes El Helwe.

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Finance

National Bank of Abu Dhabi – Michael H. Tomalin

by Executive Staff
written by Executive Staff

The National Bank of Abu Dhabi (NBAD) is the second largest bank in the UAE with assets reaching $45 billion. Executive Magazine recently conducted an exclusive interview with the bank’s CEO of 10 years, Michael H. Tomalin, a senior international wholesale and private banker with more than 30 years experience with Rothschild and Barclays in the UK, Japan, the Middle East, Australia, the Caribbean and the Far East.

E What strategies will UAE banks be using in 2009? How will they differ from previous strategies?
Obviously global markets are more tricky and I think that the strategies in 2009 are going to be more focused on good housekeeping and also more at home than abroad. There’s going to be a lot more concentration on getting it right inside the UAE. It will be less expansionist and mostly internalized.

E Will banks be more prudent with lending and provisions? Seeing as many banks grew very quickly in the UAE, it seems that increasing loans may not be a good idea.
I’d be careful about how you express that because the UAE was growing very fast and the banks were supporting the growth of the UAE. So, I don’t think banks were imprudent in terms of developing the UAE. The job of the banks in the country is to support the economy and to mobilize deposits on the one hand and apply them to projects on the other. They also financed people and businesses so the economy could grow. The economy was growing and what was happening was that the banks were following and supporting the growth in the economy.
Now clearly, the economy is growing at a slower pace. Because the economy is growing at a slower pace banking and business will grow at a slower pace. The growth of the whole banking system of the UAE is going to slowdown from the very high numbers that we saw — which were again, a reflection of the very high growth rates that we saw in the UAE — to a more modest number, somewhere probably around 10 percent rather than 30 or 40 percent.

E Undoubtedly, the real estate bubble has burst in the UAE. How has the downturn in the property market affected your operations?
I would say we are less exposed than most. We think that there has been a correction in property prices, but there is some good value emerging. The basic story of the UAE is a very strong story. The UAE economy is in a very strong position. We’ve seen property corrections like this elsewhere in the world and my expectation is that we will bounce of out it in due course — it may take a bit of time, but we will bounce out of it. As far as this bank is concerned, we’re very comfortable and relaxed about our property exposure as a whole.

E Will you be tightening your lending conditions for property developers this year?
We will continue to lend to projects that we think make sense. We’ve always been a prudent bank. The country will still continue to grow. Buildings will have to be built. Projects will have to be completed, there’s a big infrastructural spread planned for this part of the world — in Abu Dhabi in particular — and we’ll have to play our part in that. The issue for the banks is not so much the credit quality issue, but the actual liquidity issue. The problem for the banks is that there is not enough liquidity in the overall banking market for the banks to grow very fast. The reason why the liquidity is tighter than it was is that there has been a very substantial withdrawal of liquidity by foreigners. So foreign managers, foreign banks, foreign hedge fund managers and others came in anticipation of a possible re-valuation of the dirham and the continuation of markets moving in a very positive direction. The global downturn has meant that a lot of that foreign money that came in has actually gone out and of course, the UAE is a free and open market. That money going out has left a hole that needs to be filled.
The central bank, Ministry of Finance and others have begun filling the hole but the hole is still large. So the difficulty is that with international lenders basically strapped for cash in terms of lending themselves, and international investors having taken money out of the economy, the problem for the UAE banking system is actually a shortage of liquidity.

E Recently, the government of Abu Dhabi announced it would inject $1 billion into your bank and provide similar amounts to four other banks in Abu Dhabi. This injection was not like the prior injections in Dubai banks.
The first $13.6 billion injection was made by the government of the UAE, not the government of Dubai. The UAE government injected $13.6 billion in two tranches into the whole banking system, and we benefited from that along with Ras Al Khaimah banks, Sharjah banks and Dubai banks. They all benefited from that more or less in relation to their size.
So it was the federal government of the UAE that injected this money into the banking system. This money was a deposit, as you rightly say, I think it was a five and a seven year deposit. The borrowers have the option of turning it into Tier 2 capital by accepting convertibility in favor of subordination. In other words, if the banks are willing to offer a conversion option into equity, the lender — the federal government — is prepared to subordinate its claim and that would make it Tier 2 capital.
Most banks, as far as I know, have not gone and accepted that option because the terms of the conversion are quite tough. The conversion terms are the lower of book or market, so most people have chosen not to take that conversion. We have not accepted it, for instance, and I doubt that any or many banks will.
Now quite separate from that, the government of Abu Dhabi chose to invest $4.3 billion in Tier 1 capital into its own banks. Indirectly, it is actually the owner because 70 percent of the stock [of several Abu Dhabi banks] is owned by the Abu Dhabi Investment Council, which is a trustee on behalf of the government of Abu Dhabi and similarly for the other banks. So this is actually the owner investing in its own bank, effectively. This investment was made via Tier 1 capital by way of a perpetual instrument, so it’s a deeply subordinated perpetual instrument, which is in fact Tier 1 capital for the Abu Dhabi banks. Tier 1 capital is obviously very different from Tier 2 capital and it is obviously very different from a deposit.
So what we got from the federal government was a deposit, which will be repaid at the end of its life and it will rank alongside any other deposit. Tier 2 capital is subordinated but termed, in other words it becomes repayable at some point in the future. Tier 1 capital, like equity, is permanent capital — it’s there forever. So the Tier 1 capital that the government of Abu Dhabi put into the Abu Dhabi banks is treated for capital adequacy purposes just like equity, it’s permanent capital. The primary purpose of it was to boost capital adequacy ratios because it actually increased the capital adequacy ratios of the Abu Dhabi banks by two, three, or four percent depending on the original size of the capital. So the Abu Dhabi banks had a substantial boost in their capital ratios. As a secondary effect, it also improves liquidity because obviously the $1 billion that is placed with us is extra cash that we have.

E On February 9, Standard Chartered announced that the UAE needs to inject an additional $27.2 billion into the banking sector in order to bring the advances to deposit ratio below 100 percent and to boost liquidity conditions. What’s your take on this? Is this a necessary step?
It comes back to the earlier point I made — one must distinguish between capital and liquidity. As far as capital is concerned, the Abu Dhabi banks are in a very strong position. As far as liquidity is concerned, because of the withdrawal of foreign money earlier, there is a shortage. Around $54 billion that came into the economy was withdrawn from the economy. That’s more or less 20 percent of the deposit base of the banking system. Now of that 20 percent, the federal government have replaced about $13 billion.
So yes, arguably, another $27 billion of liquidity is required to rebalance the market as a whole. But that’s not the same as capital. The system doesn’t need an extra $27 billion of capital, the system as a whole needs extra liquidity. The issue is liquidity, not capital. The capitalization of banks in the UAE, generally, is very strong. Banks in the UAE are very strong banks, they have very strong capital positions, there is nothing wrong with their capital positions. The difficulty for the UAE, is because — nothing to do with the UAE by the way — we are part of the global marketplace, foreign moneys that came into this market were withdrawn. This is not because people disliked the UAE at all, but because the world situation became very bad and people were forced to bring back money to meet claims that they themselves had on their own banks or funds. Now what the Standard Chartered economist is saying — and he’s right — is that there is a shortage of liquidity in the UAE banking system, it’s obvious. That’s clearly the case and that shortage of liquidity ultimately needs to be covered.

E What new regulations should be put in place to help the UAE banking sector weather the effects of the financial slowdown? What lessons can be learned from what has happened?
I don’t think we need any new regulations. Perhaps, first of all, we need to accept that what has happened is a function of global market forces. In terms of going forward, we need to find ways of closing the liquidity gap so that banks can go about their jobs and support the ongoing growth of the UAE. I would say the lessons to be learned are that we need to grow our balance sheets inline with our growth in deposits. In other words, the business of the bank cannot grow faster than the business of the deposit base behind it. We can’t have one growing at a different pace than the other. So we’ve had this enormous withdrawal of money. The banks either have to slow their lending down enormously to rebalance it or there has to be new liquidity coming in. The problem with slowing the lending down so much is that it could actually have negative effects on the economy as a whole and that’s what the authorities are trying to resolve. You’ve got to try to find that balance. The alternative for the banks is simply to bring their loan book down to meet their deposit position, but the effect of slowing a car down from 130 to 50 kilometers per hour in the space of 300 meters is you often have an accident. So, it’s better to do it in a very gradual way. On the one hand we have to find more liquidity, on the other hand banks should be more careful about expanding their loan books going forward.

E In the fourth quarter of 2008, your profits decreased by 34 percent year-on-year due to high provisioning. What can you tell us about this?
The provisioning we made in the fourth quarter was largely voluntary, these were collective provisions that we made. There are two spins you can put on our numbers. Spin number one is: operating profits are up 48 percent, the results are brilliant. This is a very, very strong bank with a very, very strong set of results. So the headline that we had for our press release is ‘NBAD record results buck the global trend.’ [We had been seeing] banks around the world with their profits going down catastrophically like UBS, Royal Bank of Scotland, Citibank, Merrill Lynch, Goldman Sachs, Deutsche Bank, you name it. Very strong banks that we see as our peers going from big profits to losses, if in the context of that we increase our net profits by 21 percent, it’s fantastic. But it’s actually even better than 21 percent because our operating profit was up 48 percent.
Because our operating profit was up so much we chose — we weren’t forced — to make an extra collective provision against things that might go wrong in 2009. They may not necessarily go wrong in 2009, [but] they might. We’re being precautionary and prepared. Much of that collective provision was taken in the fourth quarter, so actually our fourth quarter profits were up 16 percent, they were not down 34 percent. But the analysts say they’re down 34 percent — the reason why they’re down 34 percent is because we took this huge lump of collective provision, which was made in the fourth quarter.
So, it depends from which end of the telescope you look at it. You could say — which is the way I like to look at it — the bank did so well, it could afford to make a massive collective provision against the future and still increase its earnings year-on-year by 21 percent. We may bring all this back to account next year. We are as cushioned as we can be for a tough 2009. I think the spin the press has put on our results isn’t right. How many banks in the world actually had their profits up 16 percent? I think virtually no one. Because our profits were up 16 percent, we were able to take an extra load of general provisions.

E In your opinion, what is the key element that will provide a competitive advantage to banks in order to brave the economic slowdown and make them stand out from crowd?
I think very strong risk policies, both credit risk, market risk and operational risk. Risk policies in the sense that prudent extension of credit, market policies, very careful management of balance sheets, operational policies, making sure that everything you do operationally is perfect. That’s why I use the phrase ‘good housekeeping,’ I think that’s what banks should be concentrating on in 2009. The banks that do those things well are the banks that will be in a stronger position in 2010.

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Finance

UAE – Sovereigns of solvency

by Executive Staff
written by Executive Staff

As the dust from the global economic storm beings to settle in the UAE, banks are hesitantly wading into 2009. This year, the operating environment for banks is undoubtedly challenging. Experts say that since the estimated — but not official — $55 billion exit of foreign currency last year, a major liquidity hole has been created in the banking sector. When the global financial crisis shook the core of the UAE economy, what was once scarce liquidity had become almost non-existent. Thanks to the affluent sovereign that is the UAE federal government, the banking sector has been provided with liquidity assistance via cash injections totaling $13.6 billion. At present, the central bank claims Emirati banks have only absorbed two-thirds of this liquidity fix, with a third shot expected to take place sometime in the first quarter of this year.
While bankers, analysts and financial houses scream in unison for liquidity in the market, the governor of the central bank, Sultan Nasser Bin Al Suwaidi, claims that the liquidity situation in the UAE is “much better” and the emergency fund is “not being needed to a great extent.” It seems as though the federal government of the UAE is in dire need of a reality check.
In the first week of February, the Abu Dhabi government announced its plan to feed $4.4 billion of capital into five of its banks, with the National Bank of Abu Dhabi (NBAD), First Gulf Bank (FGB) and Abu Dhabi Commercial Bank (ADCB) each receiving some $1.1 billion, while Union National Bank (UNB) and Abu Dhabi Islamic Bank (ADIB) each took in $544.5 million. This cash boost from the government of Abu Dhabi differs from the UAE federal government’s injection to all banks in the Emirates, as it is a capital injection and not a liquidity injection; the former inherently increases the latter, with the added benefit of improving Tier 1 ratios. Now, with Abu Dhabi banks looking significantly more capitalized than their Dubai peers, sentiment on the ground is negative and tense — to say the least — and could leave Dubai banks searching for the panic button sooner rather than later. Fitch Ratings contends that this capital injection into Abu Dhabi’s top five banks “leaves other banks in the UAE looking potentially more vulnerable in the event of a significant domestic downturn.”

What’s love got to do with it?
Raj Madha, director of equity research at EFG-Hermes in Dubai, believes that with this recent capital injection by the Abu Dhabi government, the UAE is witnessing an expanding “gap between Abu Dhabi capital and Dubai capital.” What’s more, he exhorts, is that there could “be pressure for Dubai to find some way of increasing the capital of Dubai banks. If they can’t, then obviously the solvency advantages of the Abu Dhabi banks may be a significant advantage for them.” John Tofarides, an analyst in the financial institutions group at Moody’s Middle East in Dubai, considers the recent capital boost skewed as it “creates uneven competition as Abu Dhabi banks can borrow at a lower cost. After this move, deposits in Dubai and other Emirati banks pay as much at two percent higher on similar maturities.”
According to Robert Thursfield, a director in Fitch Ratings’ financial institutions team in Dubai, the nature of the new capital “looks like a financing plan to enable Abu Dhabi projects to continue as planned, although it could also be a cushion for potential future problems in loan books, in particular real estate related exposures.” Whatever the motive, evidently Abu Dhabi has made a clear statement that its number one priority is, well… itself.
Bankers and analysts alike are expecting similar action to be taken by the Dubai government in the near future, but as of yet no one is quite sure how the Dubai sovereign will play its cards. Thursfield asserts that banks preserving capital means they are trying to “effectively cushion future risks and defaults. If you’ve got a bigger cushion to absorb losses and problems, then you look stronger than if you’ve got a weaker, smaller cushion, which is effectively where we are now. The Abu Dhabi banks have got a much bigger cushion.”
Logically, to even out the disparity between the banking sectors of the two competing emirates, a comparable action would be necessary. Fitch notes that the “required injection for four [Dubai banks: Emirates NBD, Mashreqbank, Commercial Bank of Dubai and Dubai Islamic Bank] would likely be of similar magnitude given that the equity of the five Abu Dhabi banks at 30 September 2008 was about [$14.2 billion] compared to about [$14.4 billion] for the four Dubai banks.” Clearly, “Abu Dhabi is in a much better position than Dubai,” propounds Thursfield, “and any support it gives to Dubai and other emirates is going to come with greater strings attached.” Naturally, he says, Abu Dhabi “will stand by Dubai if they get into significant trouble”. While Thursfield is confident in Abu Dhabi’s potential backing of its neighbors, others are more skeptical as this recent move has sparked fears throughout the Emirates. Time will tell what the federal and/or individual sovereigns have in store for the fate of Dubai’s banking sector and entire economy.

The 2009 decline
The fourth quarter 2008 performance of most banks in the Emirates “remained satisfactory” notes Fitch, with a few exceptions. ADCB reported a net loss of $70.8 million, Emirates NBD reported a net profit loss of seven percent from 2007 and Union National Bank’s net profit came in at $18 million. The ratings agency claims, “the main banks that have reported headline figures to date all remain profitable for the full year, although [fourth quarter 2008] figures show a significant decline in net income compared to the previous three quarters in 2008.” With an extremely strenuous year ahead, “2008 levels of net income [are] unlikely to be repeated,” says Fitch, while liquidity and real estate exposure remain top concerns for UAE banks.
Popular consensus throughout the Emirates voices the need for solving the country’s liquidity problems. Without liquidity, the banking sector is not the only industry at risk — tourism, finance, labor and real estate sectors are all facing major losses and will continue to do so as long as liquidity is hard to come by.
With the inevitable burst of the property bubble, every bank in the UAE — to some extent — is vulnerable to the real estate sector. A chief concern for the UAE economy “is that there are direct as well as interlinked exposures to the property market that are not easy to accurately quantify, given current disclosures,” Tofarides indicates. Madha feels that in relation to property sector regulation, the Ministry of Finance “could do more to lower counterparty risk.”
Madha echoes that the UAE has not yet witnessed a harmonized liquidity situation. Pointing to the current deposit rates, which he says are a “reasonable guide to understanding where the banks are in terms of liquidity,” banks like ADCB and Emirates NBD possessing deposit rates of around seven and 5.5 percent respectively, are “de facto proof that the liquidity situation is not yet stabilized.”
It must be kept in mind that this liquidity crisis is also largely related to the implementation failures of Basel II. Apparently, authorities are now looking to apply Basel III in order to strengthen the financial system and hopefully help avoid any unforeseen crises in the future. Dr. Nasser H. Saidi, chief economist at the Dubai International Financial Centre Authority (DIFCA), told a panel at the Economic and Islamic Finance Outlook for the UAE that, “The scope for regulation… should be strengthened. We should develop early warning indicators. We need [the] Basel III framework in 2009 and key factors such as risk management, liquidity management, CAR [capital adequacy ratios] need to be incorporated in the new guidelines.” New regulations should be welcomed with open arms in an economy facing such major downturns.

Road to recovery
A recently published report by the Abu Dhabi Council for Economic Development articulated the need for an entire UAE stimulus package. Even with the liquidity boosts from the federal government, the council believes that “while such measures have succeeded in offsetting liquidity shortages and ensuring continuance of normal bank lending operations, more should be done by Abu Dhabi or the UAE as a whole in order to enable the banking sector to fully recover and resume its role in supporting the domestic economy,” the report states. “This can be done through the country’s massive financial reserves.”
Other preventative measures include managing liquidity and general risk management practices. Tofarides believes that banks should “design contingent strategies for liquidity stresses and asset quality stresses to see how sensitive they are and how they can respond to such events.” This year, Madha hopes that banks will be limiting their total size of exposure “and to make absolutely sure that where [they have] exposures, those are guaranteed in some shape or form by the state — better still, in contracts where the state has waived sovereign immunity.”
Highlighting the majority’s perspective, Tofarides points out that the primary concern is to manage liquidity. On February 9, Standard Chartered bank announced that the UAE needs to pump an additional $27.2 billion into the banking sector in order to bring down the advances to deposit ratio below 100 percent and to help boost liquidity issues in the market. Experts don’t seem to have any problem with this figure and at this point, the more liquidity, the merrier.
Another top concern, Tofarides says, is for banks to “maintain their profitability and build up a higher capital cushion, account for additional provisions, or be given direct support from the government if needed.” Madha would like to see “a continued drive to ensure there is an open, visible market in financial services and we need to have transparency in the quality of loans.” Banks should also be lowering their visible risk and increasing their transparency levels, adds Madha. Tofarides echoes the necessity for transparency and honesty. “As one of my senior managers used to say, the bottom line is ‘banking is people and people is trust’. Not safeguarding a trust relationship between banks and the corporate world would harm business development with longer-term implications,” he says. In a deteriorating situation like in the UAE, transparency and cash are king.

Forecasts
Madha claims that 2009 “is the year where every bank will argue why they are lower risk than they seem. As an outsider, we can’t definitively say whether the banks are correct or are even being honest in their assessment, but we will test all these hypotheses by the end of the year and find out which banks have been honest about their risk profile.”
Regarding banking strategy in 2009, Tofarides trusts that it is no longer a growth strategy. He believes that banks will take up “a consolidation and a liquidity directed managed strategy. Prudence dictates that banks’ loan growth should go in tandem with their availability to raise funds, manage their liquidity, manage their existing loan commitments, etc.”
As Thursfield puts it, “profitability will be low in 2009, delinquencies will rise, margins may decline, funding costs may continue to be high — it’ll be a much more challenging environment.” With the looming “lack of liquidity, lack of confidence and soaring negative sentiment that affects banks’ ability to lend,” says Tofarides, “people’s willingness to take up risks and invest” is sinking.
Tofarides foresees “very limited growth” for banks in 2009, “from about zero to five percent growth,” with some banks possibly reporting negative growth in the long run, “unless they are given more money like in the case of the Abu Dhabi banks.” This opinion seems unanimous throughout the banking sector, with experts like Madha hoping “to see recapitalization of Dubai banks to the same extent of the Abu Dhabi banks.”
This is definitely the year for conservative policies and prudent moves. The developments of the coming months may be the key to overcoming the long-term negative effects of the global financial crisis.

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Capitalist Culture

Rule of law – Mr. Lebanon’s redress

by Michael Young
written by Michael Young

What does political murder have to do with capitalist culture? Quite a bit actually, in that the rule of law is better able to protect the free minds and free markets underpinning a liberal system worth its salt. This month, the special tribunal for Lebanon, which will address the assassination of former Prime Minister Rafiq Hariri, and dozens of others since February 2005, will begin operating in The Hague. However, it is obvious, and disturbing, to see how little agreement there is over what this may mean for the rule of law in Lebanon down the road.
It’s been almost four years since the investigation and trial process began. The politics of the case have been discussed and fought over, but relatively little attention has been paid, domestically or internationally, to its legal ramifications, and what the tribunal’s creation means for the general course of justice in Lebanon. The answer may not be as straightforward as some assume. The boilerplate view is that the Lebanese judiciary can only gain from the tribunal, and many would like that to be true. However, is there as clear a link here as the tribunal’s supporters suppose?
In arguing against the likelihood that the tribunal will radically change Lebanon’s judicial system, one might raise several doubts. First is the timing of the court case in The Hague. By most accounts, there will be no accusation presented this year, so that at the soonest the tribunal will bring suspects into the dock five years after the first assassinations in Lebanon. That may be standard procedure in such trials, but it doesn’t diminish the fact that the sails have been largely emptied since the heady days of 2005 when the United Nations investigation began, and when many Lebanese naively believed that justice would be swift.
A second doubt is technical. How will the impact of the special tribunal filter down through Lebanon’s judiciary to improve legal practices across the board? The real value of the tribunal, some point out, was that it was created mostly outside the debilitating confines of the Lebanese legal system, so that even if one seeks to implement the tribunal’s lessons, it will be very difficult to do so in practice. Rather than turning the punishment of political crimes into a rule, the doubters argue, the tribunal is an exception that cannot and will not soon be repeated. The dog will bark, and the flawed caravan of Lebanon’s judiciary will pass.
A third doubt is raised from the fact that the Hariri assassination has been so polarizing nationally, that there can never be any agreement over how to implement its results domestically. As the reflection of political divisions, Lebanon’s judiciary will swallow the good word coming from The Hague, mash it up and spit it out, with nothing to show for it.
All these criticisms are in some ways defensible. The relationship between the special tribunal for Lebanon and a more open legal system that defends free minds and markets is a tenuous one. The investigation of Hariri’s killing was indeed an exception in a country ravaged by political assassinations in the past three decades, none of which were ever solved. However, the Lebanese judiciary did participate in the tribunal’s formation, and Lebanese judges will be on the bench. There is also the fact that the impact of the tribunal will always be more moral in its repercussions than measurable in clear-cut tangible terms.
And how might one assess the moral impact of the Lebanon tribunal? For one thing, if the trial process is a success, it may encourage many more young Lebanese to join the judiciary, and many more lawyers to apply for judgeships — two persistent problems in recent years. It may also help alter the way that the police and judges investigate crimes in the future, reinforcing their professional pride. Already, those Lebanese who have collaborated with the UN investigation are in a position to benefit from their experiences and now train younger recruits.
Moral consequences are difficult to quantify, but in some ways their impact may be more powerful because of that. Nowhere is this more obvious than in markets, where moral choices, though not necessarily optimal in market terms, can have a fundamental impact on economic behavior. The notion of trust, to offer one example, is not easily quantifiable but can be the backbone of profitable exchange relationships. By the same token, a justice system that has as its model the successful prosecution of those behind the assassinations in Lebanon, may induce future investigators to ignore the negative consequences of searching out the truth, and persist in uncovering wrongdoing.
Much will depend, however, on what happens in the Hariri trial. The rule of law could be severely crippled if the tribunal loses momentum, or if the prosecution fails to reach a convincing endgame. Alas, many people in Lebanon will not regret that if it happens.

Michael Young

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Comment

Near death of a star

by Paul Cochrane
written by Paul Cochrane

In late January I was asked to look into the closure of the Daily Star, Lebanon’s only English language daily. But discussions to financially prop up the paper were going on behind closed doors, so without a shareholder to quote, the story, as they say, was dead in the water. It also looked as if ‘the DS’ could be as well, and that this commentary might have been a eulogy of sorts.

On January 14, the DS was ordered to cease operations following a court order requested by Standard Chartered Bank over a loan of some $700,000. The presses were at a stand still, staff were on leave until further notice and the website frozen on the date the plug was pulled. It took until February 2 for the paper to raise the cash to get back on the newsstands.
To the hacks, editorial staff and interns that have spent time at the Gemmayze offices — of which I am one — the closure was but another episode in the drama of the DS.
As the old hands can readily recall, the newspaper has had many ups and downs, from the deal with the International Herald Tribune (IHT) that gave the DS a much needed boost in the early 2000s, to the unification of the Lebanon and regional editions, to the downsizing of the paper’s staff in 2005, when it shrank from occupying two floors of Marine Tower to only one. Then there was the ill-fated plan to gain a bigger slice of the regional market by moving to Dubai — I was even asked if I would be willing to make the move, it was supposedly that certain — and the loss of the IHT alliance in 2006.
Older staff still working at the paper were pragmatic following the shutdown, feeling the causes would be rectified as so many times before when the paper was in dire straits. Former staff were somewhat nostalgic — they certainly let each other know about the closure –— but were equally not surprised when recalling the financial constraints and lack of dynamism and morale in the newsroom itself.
The discontinuation of the DS did not bring about any schadenfreude though, but rather hand-wringing. For despite all of the paper’s shortcomings — notably reduced pagination and a heavier reliance over the years on the wire services and intern writers to churn out content — readers bemoaned the loss.
There was talk of what news options were left to English-speakers in Lebanon and for readers abroad interested in this perpetually problematic country. For Lebanon is extremely limited when it comes to daily news coverage in English, confined to a handful of mostly partisan websites, such as nowlebanon.com, which is linked to March 14, naharnet.com, equally pro-March 14, and almanar.com.lb, linked to Hizbullah.
Although no details were forthcoming about the re-financing of the DS, the fact that it is not openly sponsored by any political group and regularly has Lebanon’s two opposing camps breathing down its neck, makes the Star’s position in Beirut a much needed one.
Sure there is a need for less wire copy and more original content, as well as an overhaul of the opinion page, which more often than not reflects the ideas of those outside the region than in it — running counter to what anecdotal evidence suggests, that people want another perspective on Middle Eastern issues than what the Western mainstream media offers. The website also needs to be seriously revamped in keeping with the shifts in the media environment.
But these constraints appear to be acknowledged by the DS, as stated in a ‘We’re back’ announcement: ‘Expect to see some changes in format and style over the coming months as this newspaper tries to revitalize.’ That has, however, been heard before, so let’s hope some real change is afoot to boost readership and not lose the DS, again.
Media coverage of Lebanon aside, the loss of the DS would have deprived the world of a journalistic incubator for the numerous reporters, editorial staff, photographers and graphic designers that have passed through the Star since it was re-launched in 1996. From my time there and before, former DS staff have gone on to work for Britain’s Financial Times, The Economist, The Guardian, The Independent, and for Reuters; The Los Angeles Times, The Washington Post, The New York Times, Christian Science Monitor, Newsweek and Time; Germany’s Frankfurter Allgemeine Zeitung; Belgium’s De Standaard; Canada’s Globe and Mail; the UAE’s The National and The Gulf Times; Australia’s The Age; and on television with Al Arabiya, Al Jazeera, Future, and ABC.
The aforementioned are clearly some of the biggest names in global media, and a fact the Star’s management can take pride in. It is also another reason why it’s good to have the Daily Star back in print.

PAUL COCHRANE is a Beirut-based journalist. He worked at The Daily Star from 2002 until 2005.

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