Economy & Finance

Tunisia – Market maneuvering

by Executive Staff
written by Executive Staff

Tunisia’s Bourse des Valeurs Mobilieres (BVMT) is expected to remain relatively immune to the international financial crisis in 2009. Mokdadi Hamadi, CEO of UBCI Finance, said that in light of the daily pressure investors apply to stock exchange prices, directors of traded companies should turn to new opportunities, and legally, intervention may take two forms. First, companies could buy back their own stocks, injecting liquidity into the market. This may ease the volatility of securities and reassure shareholders, in conformity with the article 72/73 of the Public Call for Savings.

The article stipulates that “the interventions of a company on its own securities must have the objective, in the interest of its shareholders, of either insuring liquidity in the market of the security concerned, or reducing the excessive fluctuations of its market price.”
Second, an intermediary in the bourse could close a contract of liquidity for a determined period.
At the end of September 2008, the rate of foreign engagement stood at 25% of bourse capitalization. Twenty- two percent of foreign shareholding is estimated to correspond to a stable and sustainable participation, acquired in a partnership framework in order to occupy a strategic position, in companies and also in Tunisian banks. In August, trading on the BVMT saw 3% of foreign holdings ceded so that foreign holding in the stock market capitalization shrank from 28% end July to 25% end August 2008.
Tunisian regulations in exchange matters are considered very well structured at the level of portfolio investment. Khaleb Zribi, managing director of CGF, a subsidiary of GAT, explained that the indicators reflect the good health of the country’s economy, which presents a safe, favorable and secure platform for investing in the BVMT.
Ninety percent of Tunisia’s entrepreneurial fabric consists of undercapitalized small and medium sized enterprises (SMEs) that resort to banking over- indebtedness in order to finance their activities in the short-term and their development projects in the medium and long-term. This not only burdens their financial load, but it also generates a higher rate of questionable debts in the country’s banking system. In the end, competitiveness of Tunisian export products could be affected, which is why the state has set up several instruments aiming to help the financial market by alleviating some of the indebtedness to banks, while at the same time favoring the reinforcement of businesses’ equity capital by opening their capital, Zribi said.
An enterprise traded on the bourse gains both in prestige and in recognition, which generally helps out the business’ image and market position. Introduction to the bourse also facilitates relations with social and administrative partners, as well as in the spheres of banking, finance and commerce. The stock market has generated more dynamism among enterprises and within the financial market, as means for potential growth are explored. Investors, however, are more likely to covet the short-term dividends, to the detriment of stable portfolios that perform in the long-term.
With 100 securities traded on the principal bourse and as many on the alternative market, Tunisia’s market shows signs of attaining the status of a major regional financial market over the next few years. The bourse has a structured and balanced listing system, while the exchange rate of securities listed fluctuates in ranges limited by statistical thresholds, from 3% to a maximum of 6.09%, so falls are always moderate. Also, the trading session has been extended to a duration of five hours and 10 minutes — 9 a.m. to 2:10 p.m. — offering investors new opportunities for arbitrage and positioning. The bourse is also enriched by improving financial establishments and a group of Tunisian enterprises that are growing more structured and better managed, in adherence with wider market norms.

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By Invitation

Why the bailout should sink

by Ziad Ferzly
written by Ziad Ferzly

If you spend your time listening to Henry Paulson, treasury secretary of the United States, and Ben Bernanke, chairman of the US Federal Reserve, you would think that there is no way around the bailout. You get to hear scattered reasons about how if there was no bailout, the entire world would collapse. I am not only talking about the $700 billion, but the $5 trillion that is being spent and pledged via different channels of the US government. A closer look at their actions shows that they have little clue about what they are doing or supposed to do. After the collapse of Bear Stearns, these two men had six months to deal with this disastrous problem, but they seemed to have been caught off-guard when it was Lehman’s turn. Of course, they did not start the whole problem, but they certainly have to deal with it.

Economics is supposed to make sense, but many people seem happy to suspend reason in order to believe things that are obviously not true. Thinking that signing a 30- year loan to a very expensive house that you cannot afford will make you rich is ridiculous. That did happen for a few years. Bubbles do grow, but what bubbles do best is burst. One cannot increase income without increasing output, and signing loan papers does not qualify as output. Now, the big banks are getting bailouts and other financial institutions are trying to become banks to qualify for a bailout. The car makers are next in line. Bad businesses are supposed to restructure, and possibly fail. Banks that lose tens of billions of dollars should not get more money. The stronger, better managed banks will take over the failing ones; life will go on. Of course, we will experience extremely difficult times, but the emerging banks will be more stable and better run. Now what you get are people who had nothing to do with the problem having to support those who squandered their money and investors’ money. So, instead of being allowed to fail, like governments do with any normal business, these unhealthy institutions are being artificially propped up.
What is the lesson for the people who lived within their means, saved and bought only what they can afford when the government tries to bail out those who bought houses they clearly could not afford, then refinanced their homes, taking money out to spend on vacations, new cars and flat screen TVs? They are suckers. They could have lived a very fancy life for many years, and then walk away from their mortgage obligations as most with negative home equity are doing. What is the lesson for the banks that did not engage in this mortgage madness when they see the government bailing out the banks who bet big using obscene amounts of leverage? The lesson is that they are stupid because they should have taken more risk, made totally reckless loans, paid their executives millions of dollars a year for a few years, and have the taxpayers foot the bill for their excesses.
But what about systemic risk? Isn’t it too great, you ask?! Well, what do you expect bankers to say when they go to the government asking for money: “Please pay my bonus and help me keep my job”? No. They say, “If you do not help us, the entire system will collapse.” Well, guess what, the system is collapsing. I am happy that my many banker friends get to keep their jobs for now, but I am talking about the entire economy here, not the fortunes of a few bankers. The failure of major banks would have had a drastic effect on the economy but in the end, it would have been less drastic than the outcome we are going to see. And the recovery, ultimately, would have been quicker than it will now be.
Major economies around the world have entered into a recession at the same time. This is really a unique time in history — a very difficult time for countries, companies and families. That said, this is also a time of great opportunities for those investors who are able to properly analyze what is going on, and decide where, how, when, and how much to invest in different assets.

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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Real estate

$20 billion in undeveloped land at Lebanese banks

by Abdallah Hayek
written by Abdallah Hayek

Should a chicken incubate her eggs for forty years, one would expect her to hatch no less than a golden goose. Similarly, the Central Bank of Lebanon is sitting on $1.2 billion worth of properties, some of which have been in its nest since the 1960 — that’s equal to 18% of Lebanon’s gold reserves in value. In fact, private banks, religious organizations and local municipalities own an estimated $20 billion worth of properties, all cumulatively earning the country a big, fat return. The current financial crisis is stalemating lending institutions, making liquidity a precious commodity to have. Lebanon needs a cash injection to not only avert an impending crisis that has threatened the very existence of major economies and even countries, but also to service a mounting national debt that has reached an alarming $48 billion in a country with a GDP of $25 billion.

The proven skill and leadership of Central Bank Governor Riad Salameh are again called on to have some of these properties become the engines of development and growth, instead of them remaining idle reminders of ineptitude and red tape. Salameh has demonstrated his masterful abilities as a financial wizard and leader, building a financial firewall for the country’s economic structure and engineering regulations which major governments are trying to emulate, even at the eleventh hour. Salameh might well again be the one throwing a new lifeline into Lebanon’s economy.
What are we talking about? If we leave religious endowments (waqf) alone for a minute, the Central Bank and other private lending institutions have accumulated over the years properties they acquired as security against bad loans. Private banks have established real estate departments to promote these properties to the private sector, but that effort has remained mired by inefficiency and an inability to move these properties in the proper cycle of dynamic reinvestment. Using announcements in local newspapers, the Central Bank occasionally auctions out select properties through a closed bidding process. Currently, no such bids are available as they await the appointment of the new central bank board, which takes decisions on these matters.
The interesting thing is that the banking sector is not highly leveraged against these properties — i.e. it did not dish out loans exceeding 60% of the original value of the land. Today’s real estate prices have risen significantly and the opportunity for high returns is more than likely. Yet, in order to move these properties, the central bank would direct private banking institutions to considerably discount these properties, sometimes up to 80% of their current market values. Banks would still turn a good profit and would simultaneously take a monkey off their backs, since these properties cost dollars to manage despite their sitting idle and returning no profits.
Governor Salameh is asked to extend his ingenuity in economics and finance by inviting the public sector, banking sector, private investors, NGOs and professionals over to a roundtable discussion on an applicable plan to promote such properties. The process needs to be transparent and make use of the latest global marketing tools while providing an easy roadmap for Lebanese expatriates to invest in their homeland.
Lebanese investors and expatriates are an excellent target for such mass properties. In order to be able to bid, a website must provide preliminary information about the area, plot number, location and available shares distribution. Some of these properties are located in remote areas such as valleys and rough terrain, but the market still needs such properties for special-purpose projects like agriculture.
The amount of cash liberated by this procedure could play a major role in Lebanon’s national stability and economic prosperity if we just consider the numerous employment opportunities that this will create for thousands of families. We can literally dig ourselves out of this mess.

Abdallah Hayek is the chairman of Hayek Group, Beirut.

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Economy & Finance

Turkey – Running from fire to fire

by Executive Staff
written by Executive Staff

If it takes brief visits to both extremes to plot a middle course, then 2008 provided Turkey with an opportunity to write the manual for the rest of the world. Still riding high from a decisive election victory in the previous year, the ruling Justice and development Party (AKP) was faced with decimation when the Constitutional Court was called to rule on accusations the party had been indulging in practices that breached the sacred separation of state and Islam.

The AKP had pushed through parliament a measure to allow female university students to wear headscarves, a measure that infuriated the staunchly secularist establishment (including the army). Had the most severe penalty been imposed in the event of conviction, President Abdullah Gul, Prime Minister Recep Tayyip Erdogan and around 70 of the deputies would have been banned from politics, not only bringing down the government but also destroying the party.
In the event, a heavy touch of realpolitik set in with accommodation and compromise all around. The AKP was given a mild slap over the wrist, Gul, Erdogan and their supporters in parliament kept their jobs and the army appeared to take a course signaling its appreciation of stability.
Attributing motives is a sport that serves only to keep the chattering classes alert and is rarely based on evidence. Even so, it seems both the Constitutional Court and the army viewed that the presence of the strongest political and economic stability for decades, not to mention a booming economy, gave the AKP the right to continue. In a gesture that screamed reconciliation, the army even forewent its annual purge of officers suspected of Islamist leanings.

On the mind of business
The alternative — new elections bringing the inward- looking and fractious opposition parties back into play — was viewed with alarm by the business community. The Istanbul Stock Exchange (ISE) dipped sharply and the national currency came under pressure. Both setbacks were instantly reversed when the AKP was allowed to carry on ruling and that in itself is a measure of how much Turkey has come to rely on its steady, pro-business guiding hand.
Even if one immense threat was removed, a series of lesser, though still significant, worries kept the government on its toes. Fierce clashes with the Kurdish PKK separatists based in Iraq perpetually grabbed the headlines, especially when Turkish soldiers crossed the border almost certainly with the tacit support of Washington. Negotiations to join the European Union are becoming a sick national joke, with popular support for the application declining in proportion to the lack of progress. The target for inflation, set at 4% at the beginning of the year, was abandoned by its author, the Central Bank of Turkey, and revised upward to 7.5%. Even the new and higher number is optimistic since the final tally is likely to be around 10-11%.
Unemployment rose by nearly half a percent to 9.8% and then — finally — there descended the fallout from the international credit crunch. By the end of the year the ISE followed the freefall of the rest of the world and the lira went in the same direction, losing around 30% of its value within a matter of weeks, plunging from around 1.18 to the US dollar to a low of 1.70. Foreign direct investment went in the same direction, leaving Erdogan with an interesting balancing act going through to 2009.
Negotiations with the IMF to re-institute a standby loan to help bridge the current account deficit and provide extra foreign currency liquidity to the banks brought to the surface diametrically opposing views. The IMF said the growth target for 2009 should be slashed to 2% to allow consolidation and a cut in inflation, even at the risk of higher unemployment. Erdogan, doubtless with an eye on the municipal elections in March of next year, was unimpressed and pondered the possibilities of solving the problem in a different way — a temporary currency swap with the US or even a separate deal with the World Bank. In any event he presided over a cut in interest rates, preferring attempted stimulation of the economy to a counter- inflationary move of raising them.
Yet even with the prospect of a devalued currency making exports cheaper, the horizon is still cloudy. With Turkey’s major markets in Europe officially in recession, the price of exports becomes a little academic. The number juggling game that will dominate 2009 — not only for Turkey of course — may make the AKP’s Constitutional Court problems of 2008 appear a trifling affair.

Peter Grimsditch is Executive’s Turkey correspondent

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Banking

Qatar – Liquidity’s breakwater

by Executive Staff
written by Executive Staff

In 2008, vibrancy in almost every sector in Qatar’s economy drove the banking sector to flourish. Luckily, the strength of the Qatari banking sector has prevailed amid the unceasing global financial crisis and the country continues to bask in the fruits of its economic boom. Volatility in the Doha Securities Market caused major declines but, fortunately, thanks to its continued economic diversification strategy, real economic growth is expected to rise. This growth should go from an approximate 11.8% in 2008 to 13.4% in 2009, “as new liquefied natural gas and petrochemicals projects come on stream, easing to a still strong 8.8% in 2010,” according to Zawya. The IMF projected that as gas exports begin to surge, real GDP growth will soar from the 16.8% in 2008 to 21.4% in 2009. Even though inflation continues to be the one of the country’s biggest obstacles, “the domestic growth story is one that the nascent Qatar Financial Centre hopes will be enough to keep a steady stream of bankers turning to Doha as an economic refuge in troubled times,” said Simeon Kerr of the Financial Times. Abdulla bin Saud Al Thani, governor of the Qatari central bank, boasted that Qatar possesses “very sold banks, highly capitalized, highly liquid and nothing needs to be done by the central bank. Unlike their GCC counterparts — namely the UAE, Kuwait, and Saudi Arabia — there has been no need for the government to inject liquidity into the domestic banks.”

Banks across the country posted robust growth after the third quarter of 2008, showing the stability of Qatari banks in light of the international debacle. According to a recent report by Global Investment House (GIH), the combined profits of the listed Qatari banks increased by 34.3% during the first nine months from QR6.0 billion ($1.7 billion) to QR8.1 billion ($2.2 billion). The sector’s major market capitalization heavyweights, Qatar National Bank and Qatar Islamic Bank, achieved substantial growth of 62% and 45.7%, respectively, in their net profit by the end of the third quarter. As the largest bank in the country, Qatar National Bank (QNB) posted the highest year-on-year profit growth of 62% for the first nine months of 2008. The Commercial Bank of Qatar also witnessed strong year-on-year growth, reporting 54.8% by the end of the third quarter. Overall, most banks reported healthy growth levels.

Forecasts
Seeing as the banking sector is viewed as a financial safe haven in the Gulf, Qatar hopes bankers and investors will continue to flock to the country to help it achieve financial supremacy against oil-poor Bahrain and the emirate of Dubai. Even better are the forthcoming multi- billion dollar projects from various sectors, which would undoubtedly be good for the banking sector. GIH firmly believes that, “the banking sector would be one of the major beneficiaries of these projects and regional diversification programs.” In recent years, the small country has widely focused on ameliorating its quality of assets, which according to GIH, “resulted in substantial improvement in the quality of their loan portfolio.” GIH considered that “going forward, quality of the loan book is likely to remain sound, however, steep growth in loan books needs to be watched with caution.” With the central bank’s focus on confidence building, investors’ confidence in both the banking sector and the stock market is likely to be restored. What’s more is the brawny performance of Qatari banks in the third quarter of 2008 — during the global financial mayhem — which supports most positive outlooks and predictions for the growth of the country’s booming economy and banking sector.

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Economics & Policy

IMF cautions against complacency

by Abigail Fielding-Smith
written by Abigail Fielding-Smith

 

On October 8 the International Monetary Fund issued the final report of its annual consultation with Lebanon. The report sounds out the resilient position of Lebanon throughout the global financial crisis but cautioned that “underlying vulnerabilities remain large.” After commending Lebanon for weathering the crisis due to “buoyant activity in construction, tourism, commerce and financial services,” the IMF released a preliminary estimate of 9 percent growth for 2009 with “at least 8 percent this year.”

The fund attributed the increase in government revenues to the reintroduction of gasoline excises but recognized that increasing fuel prices have also increased inflation in the country this year. Figures show that the cost of living had increased by 4 percent in the year-to-September but many economists doubt the accuracy of this, fearing that the actual level may be significantly higher.

“Little headway has been made on critical structural reforms, including addressing the loss-making electricity sector, raising the value added tax (VAT) rate, eliminating extra-budgetary funds, and overhauling the budget process,” the IMF added. In conclusion, the fund stated: “Despite the economy’s impressive resilience to the crisis, Lebanon continues to suffer from high underlying vulnerabilities. Domestic stability rests on the fragile political system split along confessional lines, and the country lies at the crossroads of regional tensions. The government’s debt remains among the highest in the world, and almost half of it is denominated in foreign currency. The large banking system depends on short-term deposit inflows from nonresidents to roll over its large exposure to the sovereign.”

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Private Equity

Lebanon – Kabab-ji‘s stars and stripes

by Executive Staff
written by Executive Staff

The popular Lebanese food chain Kabab-ji is a success story of entrepreneurial knack, making the restaurant an attractive target for private equity investment. The restaurant recently received growth capital from a financing round led by MENA Capital with several co- investing limited partners. The deal is the first of its kind, with a Lebanese business reaching out to a Lebanese private equity shop to finance growth outside of the Middle East’s own burgeoning economies to a Western consumer market.

Kabab-ji has a history of product freshness since its owner and CEO Toufic Khoueiri first started the chain in 1993. Its reputation has since allowed it to expand to franchises throughout the Middle East with locations in Bahrain, Jordan, Kuwait, Qatar, Saudi Arabia, Sudan, and the UAE, making it the preeminent Lebanese food chain. With its menu of fresh and health-oriented cuisines, the franchise is looking to expand to the US market where there is a high demand for good quality food at reasonable prices. While Kabab-ji’s management recognized and believed in the potentials, the deal was dependent on MENA Capital’s own judgment and decision to work with the business in expanding and operating in a new and quite different market.
According to Ziad Maalouf, MENA Capital’s senior vice president, the firm chose to finance the deal because “the increasing acceptance of ethnic foods in the US is creating long-term market opportunities for concepts such as Kabab-ji.” Maalouf acknowledged the fierce competition in the US’ traditional fast-food sector and the domination of mega-chains that are not only recognized in the States but the world over, but also pointed out that “a clear leader has yet to emerge in the small ethnic segments such as Lebanese/Mediterranean food.”
The idea certainly holds promise. With the restaurant set to open in the heart of Washington, DC, it can expect instant popularity from a crowd of young professionals and others who are already spending their evenings at Tapas Bars, and Ethiopian and Indian restaurants. Once the establishment is open for business, Americans can benefit from authentic shish taouk, kibbeh and labneh complemented by fresh hummus, fattoush, and wara’ ainab. If the meals are matched with traditional Lebanese drinks, other producers in Lebanon might seize the opportunity to market araq to match desserts in the summer, or one of many Bekaa- produced vintages throughout the year. According to Maalouf, “consumers of Lebanese/Mediterranean and other less mainstream ethnic foods have often scarified on issues such as comfortable surroundings and excellent service in exchange for the ability to try something new and exotic.” Thus, he believes that, “Kabab-ji’s focus on quality, freshness, and tasteful food should position the company well to become the leading brand in the fast- casual segment of this cuisine.”

The meat of the deal
MENA Capital structured the deal as a joint-venture between Khoueiri and the MENA Capital Private Equity Fund I with capital commitments of $50 million. According to Maalouf, “Kabab-ji will bring the name, know-how, management, and vast experience in the field, while the Fund and the other investors will provide capital, financial oversight and assist in the business strategy.” The deal’s strategy is longer than some with an exit foreseen in five to seven years via an initial public offering or a strategic sale to an industry leader in the US. MENA Capital estimates a very lucrative finishing position for the deal with an exit that will yield an internalized rate of return of over 35%. Although the make- up of MENA Capital’s limited partners is unclear, the deal indicates that other possibilities for Lebanese firms looking for private equity to finance growth outside of the region are viable and MENA Capital has expressed a willingness to “assist the company’s growth until the time is ripe for exit,” according to Maalouf. Ideally, Kabab-ji could achieve initial success and attract more funding from MENA Capital if there are viable opportunities to expand once in the US.

Family over franchise
Although private equity helped Kabab-ji’s plans to expand into the US market, not all financing has to come through fund managers and return-seeking investors. Indeed, the strong cohesion of the family model found in the Middle East retains its roots in the US as well and Lebanese Taverna, a popular Washington, DC restaurant chain, has been a showcase for how to harness the traditional business model of Lebanese firms and achieve success in the US market without outside capital. Lebanese Taverna started as a single restaurant in 1979 after Tanios Abi- Najm moved his family from Lebanon to the US in 1976. According to his son and co-founder Dany Abi-Najm, the idea behind the restaurant was “taking a chance and working as a family, pooling all our resources” to help get the business going. The Abi-Najm family started the first restaurant with family financing and co-signed loans. What began as a single restaurant supported by an idea has grown into 11 branches throughout the metropolitan DC area after the family self-financed several expansions by reinvesting profits and using personal savings as capital.

Opportunities for others
Maalouf wants to replicate the strategy and is confident that “there are many opportunities for Lebanese companies to expand in the US market, especially companies in the food and hospitality sectors.” He prefaced this with the caution that doing business in the US is very different from Lebanon, and requires more complex arrangements, believing that any US expansion “should be carried out with the help and guidance of professional investment firms like MENA Capital that can assist in not only analyzing the viability of the investment with regard to its potential risks and rewards, but also in structuring the complex legal and capital aspect of the transaction, securing strategic partners, if needed, and helping introduce the concept to the US market through strategic planning and brand positioning.”

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Consumer Society

Lebanon – Sunning grapes

by Michael Karam
written by Michael Karam

The $27 million, 6.5 million bottle, Lebanese wine industry is, after nearly half a decade of treading water, entering an exciting new phase of evolution. The change is coming from a group of boutique producers making low quantities of high-quality wines from a wider range of Lebanese terroir.

Less is more
The trend began at the turn of the new century, with the establishment of a clutch of micro-wineries, each producing 20-50,000 bottles. Genuine garagistes wanting to make wine from ancestral plots started small, often using plastic fermentation tanks and the most rudimentary equipment, calling on family and friends to help pick grapes at harvest. Crucially, they were not all from the Bekaa Valley, the traditional wine growing area. These wines offered variety.
Today, by and large they are thriving. Château Belle-Vue in Bhamdoun is currently doing brisk trade selling all its 24,000 bottles to online club members, of which 60% live abroad, mostly in the UK, the US, Dubai and Turkey. Owner Naji Boutros, a former Merrill Lynch executive, and his American wife Jill can now boast a wine listed in the Sotheby’s Wine Encyclopedia and a fistful of international plaudits. Jezzine’s Karam Winery, the only winery in south Lebanon — with a production of 50,000 bottles — can be found on MEA, Lebanon’s national carrier, as well as some of the best restaurants in Beirut and the Washington, DC, area. In 2006, it was featured in Decanter.
The Maronite Church, employing a French winemaker, is also getting in on the act, producing high-quality wines from eight monasteries throughout Lebanon. Finally, Domaine Kanafar in the Western Bekaa has just produced 3,000 of what will eventually be 50,000 bottles by 2010 and up to 200,000 bottles thereafter, from grapes grown on its own 15-hectare vineyard. At the moment, though, things are a bit rough and ready. “We are literally operating out of a garage,” said one of the partners cheerily.
Elsewhere, the celebrated Nissan CEO, Carlos Ghosn, is rumored to be involved in Wines of Lebanon, a new winery, which will eventually be based in Batroun, where three other producers — Batroun Mountains, Edde and Aurora wineries — are already established.
But the age of the Lebanese boutique winery finally arrived on a biting but sunny day in Paris on November 12, when at Le Georges V Hotel wines from two wineries owned by the Syrian-Lebanese company Johnny R. Saadé Holding were unveiled to the wine press. The first was the Syrian Bargylus, whose grapes are grown on 20 hectares of land at Jebel al-Ansariyeh on the outskirts of the port city of Lattakia and which produced its first harvest in 2006. The second was Lebanese Château Marsyas, which picked its first grapes one year later in 2007.
One doesn’t launch ordinary wines at the Georges V, nor does one get the backing of Stephane Derenoncourt, one of France’s most respected wine makers, if the product is not up to scratch. The approval from some of France’s most respected palates was unanimous and one sensed that Lebanese wine had moved into a new, sunnier place.

A post-war revival
The Lebanese wine sector flourished in the mid-1990s. Long established arak producers such as Ghantous Abou Raad, Touma, Le Brun, as well as a few determined entrepreneurs were inspired by a newly-whetted global appetite for wines from what was known in the trade as the New World — Australia, California, South Africa, Chile, New Zealand and Argentina — and saw an opportunity to position post-war Lebanon among these exciting new producers.
Lebanese wine was not unknown. The buccaneering Serge Hochar had planted the Lebanese flag on the wine map in the late 1970s, while Chateau Ksara, Lebanon’s oldest producer and relative newcomer Chateau Kefraya had established strong local brands with a loyal following, even during the 1975-1990 Civil War. But the 1990s saw new names and new labels. Domain Wardy, Clos St Thomas, Heritage, Fakra, Massaya (a bold Franco-Lebanese joint venture) and Cave Kouroum joined the established triumvirate. A new, sexier, more robust sector was born.

Souring times
Then things hit a bit of a trough. Massaya walked out on the Union Vinicole du Liban, Lebanon’s cheerful but notoriously ineffective grouping of wine producers, citing a lack of vision in the marketing of Lebanese wine. The OIV (Organisation Internationale de la Vigne et Vin) decided not to hold its 2005 congress in Beirut for security reasons and plans for a National Wine Institute were shuffled from ministry to ministry. The institute, if it ever becomes a reality, will be responsible for all areas of grape growing and wine production — viticulture, viniculture, legal issues, commercial concerns, quality control and analysis — as well as the eventual creation of a system similar to, and inspired by, the French appellation d’origine controlle; it would protect and guarantee the name and quality of Lebanese wine. Sadly, individual ministries with their own agenda often delayed or refused to sign-off on what is clearly an initiative designed to enhance and guarantee the quality and reputation of Lebanon’s most high-profile export.
Yes, Lebanese wine was a solid product with an equally solid fan base abroad, especially in the UK, where the groundwork laid down by Château Musar had given it an almost mythical appeal. And yes, both Châteaux Kefraya and Ksara were, and still are, steaming ahead and massaging their respective bottom lines by dominating the shelves of the local market and the wine lists of Lebanese restaurants all over the world.
But Lebanon should have been producing the world’s sexiest wine. High quality, scarcity and a great storyline should have seen to that. Yet, it appears a serious lack of vision, organization and negligible government support meant that the sector was punching well below its weight.

We will always have Paris
But back to Paris and the rarefied setting of Le Georges V. For the record, Bargylus and Chateau Marsyas will eventually produce 300,000 bottles between them — 50,000 from Bargylus and 250,000 from Marsyas — although current production is still only 20,000 and 50,000, respectively, 75% of which has been earmarked for export, primarily to France and the fiercely competitive UK market. The company has invested $15 million in the Château Marsyas winery and $4 million at Bargylus. A further $10 million has also been allocated to an on-site wine museum and hotel in Lebanon.

Family roots
The project, the latest venture for a family that has interests in real estate development, tourism and finance, is being run by Johnny Saadé’s sons Karim and Sandro. “My father wanted to buy a wine property in Bordeaux, but decided to go back to his roots and make wine in Syria,” said Karim, explaining that Bargylus was the name given to the Alawite Mountains in Greco-Roman culture. “We want to create a high-quality wine and we want to avoid certain practices such as buying grapes from other producers. We want to cultivate our own grapes. Wine is part of our family history.”
Sandro Saadé admitted that the project had faced many challenges. “To establish our Syrian operation, we needed a governmental decree,” he explained. “Other problems were in the size of plots that were very small, which made the process longer, as well as more expensive as local landowners increased prices when they heard we were interested in buying land. It took us three to four years to produce the first vintage. Unlike in Lebanon we had to start from scratch in Syria.”
Other problems stemmed from an inherent lack of wine culture. “Workers did not understand that they could not throw cigarettes on the land and there are no proper laboratories to analyze the wine,” Sandro said. “We are creating a wine culture in Syria and Lebanon, a culture that, through projects like the museum, will celebrate and promote our wine heritage.”
Derenoncourt, who is consultant for both wineries, concurred. “This project is very important,” he said in Paris. “I visited both sites in Lebanon and Syria with the Saadé brothers and fell in love. We discussed the projects and saw that we were faced with two options: either to create a mass [market] wine by irrigating the land or adapting the vines to the terroir over time and allowing nature to work. We chose the latter and have been able to make a good wine with very young vines.”

Michael Karam is the author of ‘Wines of Lebanon’, winner of the 2005 Gourmand Award for best New World Wine book

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By Invitation

The public and private spheres – partners in prosperity

by Rabih Abouchakra
written by Rabih Abouchakra

Water, transportation, energy and telecommunications infrastructures are essential building blocks of a nation. Infrastructure plays a vital role in supporting a high standard of living and facilitating trade, thereby extending a country’s global reach. But some governments are not equipped to make the necessary investments. Thus, many government organizations are tapping the private sector’s capital, technology and expertise in financing, developing, and managing public sector infrastructure projects.

These public-private partnerships (PPPs) can benefit all involved. Governments meet obligations without debt, the public receives better services, and the private sector is presented with a wider market. Further, when coupled with the right policies and institutional environment, PPPs can become catalysts for economic growth. The opportunity to drive such growth is particularly rich in the Middle East and North Africa (MENA) region, where many governments are under pressure to develop infrastructure with limited resources.

Relaxing budgetary constraints
The idea of private investment in public infrastructure may seem incongruous. After all, the need for affordable water and electricity and the protection of public interests have historically made infrastructure a natural fit for public-sector management. But governments face a number of challenges in delivering such services: public pressure for lower prices causes services to lose money; mismanagement and corruption result in budget shortfalls; available funds, technology and human resources don’t keep pace with change.
Private sector partners, which can offer funding and other resources, may provide the remedy. Partnerships generally fall into one of four major categories: leases and contracts, concessions (e.g. rehabilitate, lease/rent and transfer), greenfields (e.g. build, operate and transfer), and divestitures (e.g. partial privatization). “Greenfield” agreements, which focus on new facilities, are the most common PPPs because they offer the best opportunities for governments to divest risk and for investors to earn a significant return.

Sectors and geographies
A necessary service to which the public has an inherent right is considered a ‘public good’, but projects with a greater degree of public good tend to have lower returns, inspiring less interest from investors.
Fresh water, for example, must be affordable to the public. Its low ROI makes it unattractive to the private sector. Transportation infrastructure projects are also a public good; however, with a dependable cash flow, they attract a larger percentage of private dollars. Energy, broken into subsectors, creates numerous possible ventures. Telecommunications has a high rate of return. Investments track these patterns: The greatest number of PPP projects are undertaken in the energy sector, but the greatest amount of investment occurs in the telecom sector.
In terms of regional distribution, the largest share of PPP arrangements is still found in OECD countries, followed by East Asia and Latin America. Despite the fact that PPP agreements remain in their infancy in the Middle East, with more reformed regulatory systems and opening up of economies, PPP investments are expected to increase in number and value.

Fueling economic growth
PPPs can free up government resources and fuel growth if certain factors are in place. The first one is the right number of PPP contracts. The more launched, the higher the rate of gross domestic product (GDP) growth. The second is the right value of PPP projects. Higher-value projects inject financial resources into the economy and help decrease government expenses. Third is the right type of PPP contracts. The extensiveness of the PPP contract has the greatest influence on economic growth; as private- sector involvement increases, so does the quality of the project and the knowledge transfer.
PPP projects can bring many improvements. Countries with a large number of such projects generally enjoy better infrastructure, resulting in a higher standard of living and elevated levels of productivity. PPPs foster service expansion, as private partners invest more resources in customer service to generate more profits. PPPs operate with greater efficiency, as investors introduce practices that reduce waste and improve revenue collection. Private investors also have the capital to invest in specialized training, resources and technology. Finally, PPPs can distribute risk in the ways most advantageous to all parties.

Attracting PPPs
While infrastructure PPPs can offer win-win-win results for the public, private, and community arenas, they carry a fair amount of risk for their investors due to their large, lengthy and capital-intensive natures. PPPs are often funded in foreign currency, particularly in developing countries that lack liquid financial markets, yet revenues are collected in local currency, which may be less valuable in global currency markets. They also present a commercial risk triggered by tariff restrictions. Costs to enter into a PPP agreement are typically high, and it is often difficult to form an exit strategy — for instance, selling a bridge is not always an easy prospect.
For these reasons, private firms are naturally selective of the environments in which they invest their capital. Their modes of entry and their investment choices in general are a representation of their ‘risk-return’ tolerance and affect their willingness to commit resources (physical, financial and intangible know-how). In general, investors will enter into countries with large markets and low political and economic risks.
If a government wants to help determine how potential investors answer those three questions, it must:
• Minimize economic and political risks: The government can attract more PPPs to its market by minimizing risks to the private investor where possible. Governments with well- established and enforced policies against corruption, combined with low business transaction costs, a transparent legislative system and exchange rate and monetary stability are far more attractive to the private sector, particularly for projects that require a sizeable investment of capital and knowledge.
• Optimize private-sector commitments to maximize the PPP’s positive effect on the economy: The government needs to promote contractual agreements that encourage the private sector to invest more money, transfer more expertise, and increase accessibility and product choice.
• Secure a sound regulatory system to maximize resource commitment and transfer of know-how: Competitive markets yield benefits for consumers and government alike, but the government must also establish policies that encourage competition.

The groundwork for global development
PPPs can positively influence a nation’s GDP. However, they are not magic bullets. Their influence on economic growth is entirely dependent on the number and value of PPPs in the country, the type of PPP contract, and the policy and institutional environment. With the right circumstances in place, PPPs can prove to be a win-win-win partnership (public, private, and community arenas):
• The government meets its obligations without debt on its balance sheet, reduces its deficit, and lays the foundation for economic development.
• The public receives services that are often more reliable and of a higher level of quality than services provided solely by the public sector.
• The private sector finds a new and wider market in which to expand and invest its finances in a stable, long-term cash flow.

Rabih Abouchakra is a partner and Mona Hammami a principal at Booz & Company

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Tourism

Maghreb – Traveling tides may trickle

by Executive Staff
written by Executive Staff

One axis of economic development in the Maghreb is the fast growing tourism sector, which Morocco and Tunisia have made a top priority. Algeria, which can afford to fall back on its oil and gas industry, is looking to develop its tourism sector, although the country’s perpetual security problems will make it more of an “adventure” destination than a getaway. Since 2006, Algeria has pushed through legislative reforms to facilitate foreign and local investment in the tourism sector and reports indicate that the country is particularly interested in developing cultural tourism.

Tourism in the Maghreb, while briefly faltering after September 11, 2001, recovered and then rapidly advanced to record levels in Tunisia and Morocco. But many analysts worry that a decline in tourist arrivals to the region is imminent. Tourism contributes nearly $3 billion a year to Morocco’s economy and the Tourism Ministry is implementing a plan, ‘Morocco 2010’, to increase the number of tourist arrivals to 10 million by 2010. Growth levels have been encouraging, but there was some stagnation in the crucial summer period of 2008. According to the Tourism Ministry’s Observatory of Tourism Statistics, tourism receipts had not evolved in the period of January – August 2008 ($4.76 billion) compared to the same period of 2007 ($4.8 billion). However, the number of tourist arrivals to the kingdom was up 2% for the same period. A period of stagnation or even decline in tourist arrivals to the kingdom could easily come about in 2009, as Europeans cut back on spending in response to the financial crisis and Morocco may be forced to revisit or delay some of the objectives of its 2010 plan.

Tunisia
Tunisia’s tourism action plan looks further ahead to 2016 and aims to improve the marketing of the country to European markets. A new round of contracts with leading tour operators is being counted on to reverse a regression in the flow of tourists to the country, as are improvements in hotel capacity. Mega-projects such as Tunis Sports City and Mediterranean Gate City, scheduled to reach completion in the coming years, will also boost arrivals. Tunisia is also looking to expand interregional tourism, and held Tunisian tourism week in the Libyan capital Tripoli in January of 2008.
Economic liberalization in Morocco and Tunisia is ushering in an era of unprecedented closeness between these countries and their Western European neighbors to the north. Closer relations mean a boost to sectors like tourism, which has been increasingly dynamic over the past several years. The global economic downturn could expose the flipside of this closeness if the Maghreb’s economic dependence on Europe is not met with the support that was promised when Western markets seemed invincible.

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