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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Insurance

GCC & Levant – The fog of financial crisis

by Executive Staff
written by Executive Staff

The long-term effects of the global financial crisis have already begun to take hold of the industry as lower demand for oil, resulting from the effects of a global financial crisis, has pulled the rug from under the inflated oil revenues the region was lavishing in only a few months ago — albeit with double-digit inflation. Oil-rich governments do have a certain amount of financial cushion hoarded in their sovereign wealth funds, but individual disposable income will suffer as a result of lower cash flow in the region. Oil-poor nations will also be directly affected by less disposable income in places like the GCC, as their residents will be less able to send remittances to countries such as Lebanon, where remittances constitute around 25% of GDP. The decrease in regional disposable income will prove another substantial hurdle for a regional insurance industry already dealing with low demand and penetration.

For an industry that depends heavily on investment revenues, it comes as no surprise that Return on Investments (ROIs) have suffered greatly as a direct result of the global financial crisis. “Some of the largest players’ 2008 Q3 year-on-year income came down by 70% or more,” said Thomas Schellen, publishing editor at Zawya Dow Jones. Previous statements touting the region’s relative immunity to the effects of the financial crisis have proved to be nothing more than wishful thinking, as the Middle East’s equity markets have tumbled subsequent to the collapse of Lehman Brothers, exacerbating an already unstable market environment. As Executive went to press, the Tadawul, the largest Arab bourse by capitalization ($296 billion), had lost half its value in 2008. Other regional equity markets have followed suit creating a situation where the regional insurance industry will be hard pressed to find lucrative investment opportunities to prop up their recent profit losses in 2009. “The whole investment philosophy is changing […] what we see now is that whatever diversification you do or assets you acquire, everything is going down,” explained Farid Chedid, managing director at Chedid Re.

The bottom line dropping out
The perilous financial environment prevailing today has undoubtedly prompted regional insurers to shift their focus from investment income to technical underwriting, but they will be unable to completely retrench from the investment side of the industry, as “there will be no escape from their [insurer’s] financial dependency [and] this will affect the bottom line of insurers very directly,” Schellen said. Thus, all regional insurance companies can do to shield themselves somewhat from the effects of the global financial crisis is to change their bullish investment strategy to one that mitigates risk and, where possible, pulls out completely. “The average rate of investment income will drop heavily and become very conservative,” said Elie Nasnas, director general of AXA Middle East. According to Michael Bitzer, CEO of Daman, “People will start to reevaluate how they invest for retirement. In the past they were investing in real estate and stock markets here and in their own countries, and now I think that they will be looking for a more stable form of investment and return so this might spur more demand for such products.” Bitzer explained that risky investment products will also make up much less of a proportion of insurers portfolios as customers are less willing to embrace risks under the current financial circumstances.
Furthermore, the exposure of the American Insurance Group (AIG) to subprime losses has tarnished the image of insurance agencies in the public consciousness in the West but has yet to significantly affect the regional insurance environment. “People do not realize that this might affect their local insurer,” Bitzer said. “I think that the majority of our clients are not educated enough to understand that even AIG has a problem and maybe they should check with their own insurer.” Moreover, there is a perceived notion that the losses at AIG have aided many of their competitors in the region. “The troubles at AIG have helped their competitors; there is no doubt about that,” said Chedid. However, if the financial crisis continues to affect AIG the outlook for many regional insurance markets does not look promising, as “there are territories where if, God forbid, AIG falls you will have a crisis, like Lebanon, where their market share is huge and this would become a social problem,” Chedid concluded.
Both AIG and Alico Lebanon (a subsidiary of AIG) declined to be interviewed for this article. However, Osama Abdeen, executive vice president of AIG MEMSA released a statement to Executive saying, “AIG’s insurance companies remain financially healthy and are meeting all policyholder obligations. Insurance is a regulated business. Regulators ensure that each AIG member insurance company has adequate assets to back each policy and meet all policyholder obligations. Policyholders are protected and their policies are safe.”

Losses? What losses?
The unwillingness to divulge information to the public and press about profits and losses during a global financial meltdown is suspicious, as well as indicative, of a general industry slowdown and a loss of profit growth. “Numerous companies in the GCC have put off their announcements of their 3rd quarter results as far back as they can, to as much as 45 days, rather than 10 or 20 days” said Schellen. “This is an indicator that they are not really happy about what they will have to say.”
The lack of transparency in an industry that operates using reserves from their clients to attain ROIs seems contradictory to the interests of the industry as a whole. “The success of the insurance industry is linked to its transparency,” Chedid said. “There is definitely a need for better regulation and automatically more access to information.”
Countries like Qatar, Jordan and the UAE increased their transparency rating in 2008 according to Transparency International (TI), the global organization that monitors transparency and corruption. This, however, is not indicative of wider regional reform and the effects of the sector’s opaqueness are being felt in the regional insurance industry.
“One indicator is that there are laggards currently in announcing quarterly results,” said Schellen. “It took a lot of convincing in order for companies to tell us their breakdown figures in terms of the real benchmarks, like how much revenue comes from underwriting and how much comes from investment. In some countries, like the UAE, they won’t do it by line of business; they will give us technical results but will not announce them for each line of business,” he explained. In Lebanon this trend is proving to be a huge impediment to the growth of the local market, as current legislation is deemed inadequate and government is uncooperative in providing information to local insurers.
“Legislation only goes so far as to require companies to publish their financial statements,” said Nasnas. “We used to compile a report for the Lebanese market, but this year we still have not gotten the consolidated figures from the Ministry of Economics for us to carry on in making the report. Many reinsurers and insurers, both regional and international, as well as many international groups are asking for the figures from Lebanon for 2007 and we don’t have them.”
With the need for growth potential as high as ever, one can only hope that governments increase their efforts to increase transparency in the region for the good of the insurance industry and us all.

Propping up the industry
In times of crisis, the need to stay ahead of the competition is even more pertinent to a company’s operations and the insurance industry is no different. “Modernization is a necessity for local companies to be able to survive if we have an economic downturn in the region,” said Chedid.
To stay ahead, many regional organizations are making blanket investments in the modernization of business sectors and processes. One of the main areas in which the regional insurance industry is undergoing an overhaul is in the IT sector.
“Any company that wants to be significant has to beef up their IT and bring it up to global standards — this started in 2008 and will definitely continue in 2009,” Bitzer asserted. “Companies are focusing more on this, especially regional companies, because when you are of a certain size you cannot operate without a very efficient IT system,” added Nasnas.
Another area of the industry where companies are suffering is in the lack of adequate human resources for regional markets to accommodate the needs of the regional insurance industry, which is “an issue weighing heavily on the back of insurance companies in the region,” according to Schellen. Today, except for Lebanon, Egypt and Jordan, most of the insurance staffing is imported from outside the region. Furthermore, within the region itself local talent is being uprooted from countries in the region where insurance penetration and expertise is concentrated to the more lucrative areas in the region, inevitably causing a brain drain on many local markets. “In Lebanon we had a huge HR problem in 2008 because all the people we train get great offers from the Gulf and leave,” Nasnas said. Also, within the Gulf states many traditional staffers from the Indian subcontinent are moving back to their home countries, now that the opportunity cost of returning has decreased as a result of the emerging nature of these economies. The void created further exacerbates the human resource shortage in countries like Lebanon. “There is a need to replace [the workers from South Asia] and they are doing it with highly qualified human resources that mostly come from Lebanon,” Nasnas said.
At the end of the day, however, it is growth which will accommodate for any pitfalls in the insurance industry. The implications of lower oil prices will have their ramifications on growth capabilities across the region in 2009. However, the nature of the regional insurance environment has the ‘wiggle-room’, as well as the willpower to endure the effects of a global financial crisis and come out on the other end looking better off than when this whole mess began.

 

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The Buzz

Surviving the downturn with intelligent branding

by Joe Ayoub
written by Joe Ayoub

With the global financial downturn impacting on all markets, everyday business challenges have become compounded by reduced customer spending power, budget constraints and more cautious investor confidence. Companies may be turning to downsizing, or outsourcing to meet these challenges yet their biggest asset — their brand — cannot be approached in the same way. True, they can choose to stop spending on their brand, but in a time of crisis, there is actually no better time to leverage their brand assets to produce greater value.

Not just a name

First, it is important to understand what exactly is a brand. With branding still a fledgling topic in terms of awareness among local businesses, many mistakenly believe it means having a strong name in the market. Companies in Lebanon often think, “I have a famous name and it is selling well so this is a brand.” But often it’s selling because there is no real competition, or the product or service is cheap. When a serious competitor appears, they lose market share. In fact, a brand is a total experience: it’s the name plus the logo plus the brand promise and the delivery of that promise — brand equals trust.

Winners and losers

Competition can quickly sort the winning brands from the losers, but a crisis is another force to reckon with. In an economic downturn, consumer spending falls and purchasing shifts away from those brands which lack a strong bond with their customers. Many Gulf real estate developers have already learned this lesson, having spent lavishly on logos and communications but overlooking the need to bond with consumers. Thus, at the first sign of economic pressure, they began to suffer as investors sold their shares.

The new market reality is that consumers are not only spending less, they are  re-examining every single purchasing decision. One global trend also emerging in Lebanon is for strong brands to reach out to consumers in a way that takes advantage of the economic climate but avoids diluting the brand value. These brands are opening new stores, often referred to as outlets, where customers have access to discounted luxury goods. This drives sales for the known brand but by using an alternative name for the outlet, it avoids diminishing the perception of the brand.

This trend is a prime example of well-positioned brands creating value by driving demand. What all successful brands require is a deep understanding of brand mechanics, how their brands influence customer behavior and choice. Understanding the process of brand value creation is vital not only to drive demand but also to improve decision-making and budget spending.

Digging for value

A successful brand strategy consists of determining the brand essence — which is what the brand stands for — and the brand promise, which is what the customer expects to be delivered when they buy the product or service. The branding process starts with an internal brand audit. Working with the company’s management, the audit sets out to discover the core strengths and fundamentals of the brand, what makes it unique and how it reached its current status. Once this is identified, strategies are devised around the brand foundations.

The corporate strategy starts with a vision, a mission, a set of beliefs and the corporate attitude or personality of the company. Once these are set they should first be shared and believed by all employees working in the company so they can deliver in their daily work.

But branding doesn’t stop there; brand management is essential for it to be effective. If you have a car, you change the oil, maintain and clean it so that it always performs. A brand is the same; you manage its image, its performance, and you keep on improving the service or product formula, so that it consistently delivers on its promise.

Sending the right message

All of these are essential before a company should think about advertising. Companies suffering from ineffective advertising shouldn’t blame the ad agency but look internally and see if they have a clear message, brand promise, employee and customer satisfaction. Only once these are really well covered should they consider advertising.

So, in times of crisis, instead of focusing purely on where and how to cut costs, companies should use the period of uncertainty to look at their brand value and strategy, look internally and question everything they have been doing: At the brand level, are your customer touch points well structured? Are your employees motivated and happy? Do they believe in your brand and your company? Then look outward at the customer: are they having a positive experience with your brand? What should you improve?

With companies increasingly focused on the bottom line, the good news is that branding drives up the brand value; the more positive a connection with customers, the more customers will remain attached to the brand and be prepared to spend money on it. Many companies may be looking to outside investors to inject funds into their business, and with a good brand strategy, they can sell at a premium. Even for companies not looking for outside investment, branding done correctly is one way to ensure that once the crisis eases, not only will they still be standing but they will also be among the first to reap the rewards. 

JOE AYOUB is CEO of BrandCell

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Society

Lebanon – Aging potential

by Brooke Anderson
written by Brooke Anderson

A mid a global recession and a decline in wine consumption worldwide, Lebanese are raising their glasses as the country’s $25 million wine sector continues to grow at a steady pace. But experts say that despite Lebanon’s ideal climate for viticulture and a high level of expertise, the sector is still not living up to its potential.

 

World wine consumption dropped by 0.8 percent last year, according to the International Organization of Vine and Wine. But New World wine consumption has increased, and so has Lebanon’s, rising by 1.5 percent during the same period. 

“I think people are searching for a new taste. The wine consumer is always looking for a new product, and Lebanon is benefiting,” says Lebanese restaurant consultant Nagi Morkos. “Worldwide, there is a trend toward ethnic wine and food.”

With domestic consumption still relatively low, the country has relied on exports for most of its profits. Between 2002 and 2003, Lebanese wine exports doubled, and today they continue to increase. According to figures from the Lebanese customs, official wine exports totaled $13.1 million, up from $9.8 million in 2006. The United Kingdom, the biggest importer, bought $4.6 million worth of wine in 2008, compared with $2.6 million in 2006.

Even with the ongoing global recession, some vineyards are opening up to new markets, compensating for a drop in sales to their established buyers.

“We can’t say we’re not affected by the crisis,” says Emile Majdalani, marketing director at Kefraya, one of the country’s top producers. “But our brand is well established and we’re always working on long-term business plans. We’ve never opened so many markets as we have this year — a total of six new countries.”

Kefraya is now exporting to Australia, Benin, Cyprus, Nigeria, Mexico, Poland and Togo.

“We felt the crisis in certain countries, mainly the United States, Russia and Western Europe,” says Majdalani. “But our main markets are more or less compensated. We’ll close the year with no decrease in exports.”

As for wine sales in Lebanon, which has been relatively unscathed by the global financial crisis, he says business is booming, up 15 percent from last year.

From one resilient war-torn country to another

Last year saw a major increase in exports to Iraq, after five years of decline following the US-led invasion in 2003. In 2008, Iraq imported $158,000 worth of Lebanese wine, up from $88,000 in 2006.

“The Iraqi market fluctuates,” says Ramzi Ghosn, winemaker and co-owner of Massaya winery in the Bekaa Valley. “It could be an index of stability in Iraq, according to wine sales.”

Like Kefraya, Massaya is always looking at new markets and trying not to rely too heavily on its established ones.

Lebanese wine is a $25 million industry, large by Middle East standards but small compared with major wine-producing countries such as France, Italy and the US. Since 2005, the number of vineyards in Lebanon has doubled — from 15 to 30. Still, that’s small compared to neighboring Cyprus, whose vineyards number 60, and which attracts an international crowd to its annual wine festival in August.

Observers have pointed to Lebanon’s shift over the past several years from a whisky and arak society to a wine culture, and attribute this to the country’s relative stability over the past couple of years. An example of this is the opening of the first commercial winery in South Lebanon in 2003.

At Karam Winery in Jezzine, founder Habib Karam is basking in the relatively newfound popularity of Lebanese wine.

“Today, if you are a wine importer in America or the UK, it’s your responsibility to have Lebanese wine. Otherwise your list won’t be complete,” says Karam, who exports 50 percent of the 55,000 bottles he produces annually. “We are becoming like Chile and South Africa. Lebanese wines are in demand.”

At Nabise, a boutique winery in Mount Lebanon near Aley, which opened in 1999, the husband and wife co-owners Nazih and Mai Metni proudly note that their vineyard is in an area slowly recovering from sectarian conflict. Since they started a decade ago demand has steadily increased, although this year they admit they have been affected by the recession, as 70 percent of their exports go to the US. But Mai Metni is confident wine is a sustainable export, particularly as there has been a steady increase in foreign demand for their wine ever since they opened. “I’d like to see a hundred wineries open in Lebanon. We need exports for our economy to grow. What else are we going to export? Oil?”

New grapes for an expanding palate

But as demand grows, vineyards continue to open. In April, the Saade Group, a Beirut-based family business that primarily works in real estate and tourism, unveiled their new wine, Marsyas. In November, they will introduce their new Syrian wine Bargylus in the coastal province of Latakkia. Both wineries use their own grapes and are being bottled according to international standards. This is the first time that a company opens a winery in both Lebanon and Syria, another sign of Lebanon’s increased stability.

“Wine is good for Lebanon’s reputation,” says Sandro Saade of Saade Group. “The downside is that there needs to be more regulations that ensure quality.”

For now, most of Lebanon’s commercial wineries buy the majority of their grapes from farmers instead of using those grown at their vineyards.

“Lebanon’s wineries should start investing more in their own vineyards,” says Saade. “All of the wineries have done a good job so far. But we can take the wine-making sector to the next level.”

Despite the competition between Lebanon’s various wineries, Saade hopes to see more cooperation between them.

“What is a pity is that nobody is coordinating,” he says. “In Lebanon, we have everything on our side, and we’re not exploiting it. We need a common vision for the country.”

Unfortunately, right now, he says, “There’s a lack of strategic thinking in Lebanon for everything, including wine. There’s no Lebanese flag on Lebanese wine.”

But this lack of national unity might not be entirely the fault of Lebanon’s wineries.

In the summer of 2006, a National Institute of Wine was slated for opening but has been put on hold ever since the July 2006 war. The purpose of the institute, which would be a partnership between the ministry of agriculture and the private sector’s Union Viticole du Liban (UVL) would be to study wine and enforce regulations to protect the quality of Lebanese wine.

But as the project continues to get delayed, so wanes the momentum to get it started.

The UVL, which is supposed to represent all of Lebanon’s wine producers has only managed to attract 11 wineries, at least two of which have left the union over the past two years. They cite the group’s lack of vision and unity.

 Growing the fruits of success

However, despite the challenges facing Lebanon’s wine industry the ministry of agriculture sees it as a success story. “The wine industry is better than others in Lebanon. There’s competition,” says Mariam Eid, head of the agro-industry department at the ministry of agriculture. “You can’t compare it with olive oil, where they still use out-of-date technology. Wine has an important future in Lebanon. I hope the institute will open soon.”

Other people see the future of Lebanon’s wine industry in “enotourism.” Over the past year, Lebanon’s producers have stepped up their efforts to attract tourists to their vineyards, although it appears to be without coordination. The Saade Group is planning a hotel and wine museum in the Bekaa Valley, both slated to open in 2011. Kefraya says it is also opening a wine museum, which it expects to open next year. Carlos Adem, owner and founder of Chateau Faqra, a boutique winery in Kfardebian, is building a small hotel near his vineyard, which he plans to open next year.

This appears to fit well with a recent initiative by the Ministry of Tourism to promote rural Lebanon.

“Wine tourism is a part of agro-tourism in Lebanon,” says Nada Sardouk Ghandour, general director of the Ministry of Tourism. “When people see the wine label, they also see the name of the village.”

The home front first, then the world

But with all of the recent international recognition of Lebanese wine, it’s the Lebanese themselves who might be the ones preventing their local wines from receiving the domestic praise it deserves.

“In Lebanon there’s a snobbish attitude that everything imported is better,” says Ghosn of Massaya. “For them, it’s not always about pleasure. It’s about having French wine at the table so they can say, ‘I drink French wine.’”

Carlos Khachan, a Lebanese wine expert who leads tours of Lebanon’s vineyards with his group Club Grappe, agrees. He believes that if the Lebanese themselves have confidence in their own country’s products, non-Lebanese will follow suit.

“[The late industry minister] Pierre Gemayal told people to buy national products. If you love your country, you should consume its products,” Khachan says. “Why not apply that to wine?”

If Lebanon is to succeed in attracting more domestic consumption it will have to do so soon as tariffs on foreign wine have been decreasing, making the domestic market even more competitive. Several years ago, tax on foreign wine in Lebanon was 70 percent, but it is now only 40 percent.

“They keep on reducing taxation. In two years, there will be no duties [on foreign wine coming into Lebanon],” predicts Adem. “Lebanon will face more international competition. But this will make us produce more high-quality wine. With taxes getting lower on imported wine, we’ll have no choice.”

Still, to really get Lebanese wine on the map, it will take more than good quality, but also good name recognition. Michael Karam, author of the book “The Wines of Lebanon” agrees that “Lebanon will never make a genuine impact on the international wine market unless it embarks upon a proper generic campaign. By that I mean selling Lebanon — not Musar or Kefraya or Ksara or Massaya — as a wine producer.”

If Lebanon does not address this soon, he believes Lebanese wine “will remain nothing more than an ethnic curiosity, living on the reputation of Chateau Musar, which only appeals to a few devotees and does not represent the new generation of Lebanese wine. We are being left behind.”

He notes that even Brazil, which is not known as a wine-producing country, has a national wine campaign.

“We need to take on the world with our six million bottles, but if we don’t act soon we will have missed the boat,” says Karam.

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Editorial

The silver lining of crisis

by Yasser Akkaoui
written by Yasser Akkaoui

It’s that time of year again, but this time the party hats and horns are being distributed with a bit more caution than in previous years. Depending on who you listen to, the world is sinking into an economic crisis that could match the great depression that followed the Wall Street crash of 1929.

Certainly as I sit here in Dubai, writing this last editorial for 2008, the buzzword is restructuring. Every company is doing it in preparation for a 2009 that is yielding little in terms of economic and financial outlook. This was an economic crisis that began in America and it is the ripples of this crisis that are now beginning to lap the shores of the Arabian Gulf. Whether it becomes a tidal wave remains to be seen but cautious businessmen and financiers are battening down the hatches nonetheless.

This current restructuring will be accompanied by the inevitable layoffs that will see the departure of many skilled people from countries — Lebanon, Jordan and India — with a tradition of exporting human talent, depriving those economies of much needed remittances.

The potential upside to this rather dark development is that they will no doubt eventually be deployed to areas of fresh opportunity, such as Iraq, a nation that Executive has earmarked for considerable growth in 2009. It is a country rich with oil, minerals, agriculture and an educated workforce. It is high risk, but high-risk means high reward. As companies in the Gulf try to speculate by how much revenues will drop in 2009 – 10%, 20% or even 50% — such opportunities cannot be scoffed at.

Executive knows a bit about crises. It knows that publishing is not just about the good times when the ad revenues come in thick and fast. We stood by our readers during the 2006 Lebanon war and now we do not flinch in standing by our loyal subscribers across the Levant, the Gulf, Sudan and the Maghreb in this latest test of will and character.

Executive reiterates its commitment to the private sector, be it, banking, real estate development or trade and encourages the tireless pursuit of sustainable development. It is in these areas that we will channel our own energy; for the passion of those with the vision to achieve new goals will outlast even the gloomiest economic downturn.

Yasser Akkaoui Editor-in- chief

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