MENA

Dr. Burkhard P. Varnholt – Q&A

by Executive Staff
written by Executive Staff

Zurich-based Bank Sarasin has roughly $80 billion in assets and saw share prices rise almost 20% last year. With branches already in Bahrain, Dubai and Qatar, it will likely open a representative office in Beirut within two years. Executive interviewed Burkhard Varnholt, Sarasin’s Chief Investment Officer, about his bank, the political situation in Lebanon and the regional economy.

E What does Bank Sarasin offer current and potential clients in the region?

Our bank offers dedicated client wealth management services and asset management for private and institutional investors. We have no integrated banking model because we feel it strengthens our franchise as there is no conflict of interest. We one-sidedly look after our client’s assets. We do no brokerage, no securities underwriting, no private equity, no corporate advisory or any other kinds of business often combined with private banking.

E Why is Sarasin thinking about opening an office in Lebanon?

We have shared visions and principles in the way we look at the world and investments. Lebanon has a very old and rich culture of economic heritage. So does our bank, which has been around for a good 160 years. When you bring that cultural heritage to the table, it results in a similar way of looking at the importance of preserving assets across generations. Lebanon being a small country and economy with a large diaspora around the world is obviously much more open, not only in its economy, but also in its society. This is a similarity that we share; Switzerland is also a small but open economy. It changes the way you look at the world and the global economy, it forces you to be more open-minded and more international in your aspirations.

E What affect does the current political and economic situation have on your plan to open an office here in Lebanon?

The political stalemate is one thing, but it is telling that the Lebanese economy, after those various external shocks of 2005, 2006 and this year, has always found its feet. And even this year it is likely to grow at 1.5-3%, which is well below its potential, but is still more than many countries in Western Europe or even the United States. If you look at the Lebanese banking sector, for decades it has been exceptionally strong. The government has always been able to maneuver itself through what in other parts of the world are considered unwieldy positions, with debt-to-GDP ratios far in excess of 160%. It speaks to the strength of the underlying real Lebanese economy and how well it is connected, not only in this part of the world but globally.

E How did Sarasin avoid the impact of the subprime crisis? And what do you look for when analyzing potential investments?

We are very old-fashioned investors. We prefer to buy and hold securities that we understand rather than invest in structured products that we sometimes have to admit we do not understand. This is what allowed us to dodge that bullet. We simply did not understand the structures well enough to invest in them.

E That is saying a lot for someone with a PhD in Economics.

When you see triple-A rated securities promising on average 1% higher returns than government paper and you don’t understand the structure, my intuition would be “Don’t invest. Something has to give.”

E Does this speak to a problem with the rating agencies?

Absolutely. Their business model is built upon credibility. Rating agencies’ capital is entirely the credibility that they have built with investors and that has taken a big beating. It will take more than just a few years to repair that.

E Sarasin’s Chief Executive, Joachim Straehle, suggested that subprime crisis losses would likely reach $400 billion. One hundred twenty billion have been accounted for already. Where might the rest of the losses come from?

That number probably comes from adding up all those securities and then taking a discount factor, a conservative discount factor. If you do that you come up with a number of $400 billion, but it could be $200 billion or it could be more. Nobody really knows. The market could stabilize to where investors would stop selling and hold the paper up until maturity. And if that was the case prices would not continue to decline. The trouble is, it only takes one market participant to try to sell those positions and the rest of the market will have to adjust. So it is a very fragile and delicate equilibrium, which can take different paths from here.

E Switzerland’s leading economic indicators fell to the lowest level in five years in June 2008. How is Sarasin dealing with this and where are they looking next?

I think it was to be expected. The United States leads in many things — they led in the financial market crisis, they led the world into recessionary territory. So, much of the time Europe follows the US and now they are following on the path into economic stagnation. They will also follow on the path to somewhat higher inflation. But this is only natural and has happened consistently in post-war history.

I do take some comfort in the fact that the most recent negative economic indicators from the US were lagging indicators. When you see unemployment go up, you should not be concerned because unemployment always comes last in any economic slowdown or upswing. You should be concerned about the leading indicators and it could be that the US economy has seen the worst for this year and is finding a bottom at this point, whereas unemployment will naturally catch up toward the end of the year.

What is critical to this whole development is the inflation scare, which has really been muting financial markets and investor’s risk appetite. I am not so concerned about oil prices at $140 or $150. What is more damaging is the momentum of oil prices. When oil prices double in less than 12 months, it is not good for investor sentiment. I believe we are more likely to see oil prices at $180 than at $140. So if anything, oil prices will go another $40 higher. That does not necessarily mean that it is the end of the world economy. At some point, moving on towards another $40 higher, people will finally be convinced that high oil prices are real. By that time we will be seeing very strong substitution effects, mostly from increases in fuel efficiency.

Beyond that, the world economy remains in better shape than the current investor sentiment suggests. I take comfort, not so much from any recent batch of statistics, but rather from a firm belief that markets are currently underestimating one of the oldest drivers of any economy: human ingenuity and creativity, the ability to innovate our way out of any crisis. Scientific and technological progress will accelerate dramatically over the next decade and mainly for the better, largely to make the world less fossil fuel and commodity dependent than it is today.

E It sounds as if you do not agree with the commonly espoused theory that speculators are pushing up oil prices.

I think that notion is nonsensical. I have looked at both anecdotal evidence and publicly available statistics about institutional investors’ asset allocation and they all tell me that most institutional investors are bearish on oil prices rather than bullish. They expect prices to correct after the recent parabolic increase, rather than to overshoot. One thing that’s so dangerous with bull markets, like this current oil bull market, is that they tend to surprise investors by lasting longer and leading higher than people think is possible. I look at financial speculators among those and I can’t make sense of the assertion that financial speculators are driving it. I think it is something much more fundamental.

Spare daily available production has declined from about three million barrels a day three years ago to less than a million barrels a day, excluding heavy, high sulfur product. That is very little. If the Middle East sees another heat wave, like it did last year, they would siphon off probably a million barrels a day to power their air conditioning. Gulf states cannot live without air-conditioning. In today’s environment, siphoning off a million barrels a day is not possible because that exceeds global spare capacity. It did not exceed global spare capacity last year. There are many other scenarios like this and investors are complacent about these risks. If they do happen, we will likely see contagious behavior such as cues at gas stations just as we saw under President Carter in the United States and that will be the last leg of this oil bull market.

E Does this relate to other commodities that have seen exceptionally high prices?

Yes, they are all related. Whether you talk about oil, water or food, it is really all the same. The global food crisis is really a crisis about water. The world, of course, does not have too little water — the problem is that 98% of it is too salty so we can’t use it. Three quarters of all fresh water goes to agriculture. It is really the increasing desertification of formally arable land, which is causing the food crisis. If you want to solve this, you have to desalinate water. However, more than 50% of the operating cost of a desalination plant is energy.

That just illustrates how food, water and energy really are three sides of the same problem. I think the next big resource scarcity will be water. We have come to the end of cheap water. Water is vastly underpriced in virtually every rich economy because it is administered by public utilities. It has never been priced properly. The only place where it is expensive is in slums where the poorest pay the most for it. One of the greatest investment booms, where investors will continue to do spectacularly well is by investing in the entire infrastructure around food, water and energy. It is the world’s biggest boom for the next couple of years.

E How is all of this related to the developing world and your Global Village fund?

If you look at the four BRIC countries — Brazil, Russia, India and China — together they will contribute four times as much incremental consumer demand over the next five years as the G8 combined. That number in itself says so much about the change in global economic order and it is here to stay.

The Global Village fund tries to capitalize on some of our strongest convictions, which we have held for many years. The world economic order is changing faster than many people would ever have thought possible. Investors can no longer apply the 1980s asset allocation model of allocating funds according to regions or statistics that are biased towards developed economies, simply because they never bothered with emerging economies. It is about the strong belief that in an increasingly interconnected world, which looks more and more like a village than one fragmented by nation states, investors are well advised to take thematic investment tilts, such as the food energy and water theme, which cut across countries.

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MENA

Dollar burns

by Executive Staff
written by Executive Staff

The first decade of the 21st century will be remembered for its soaring inflation, with TV images from around the globe of people queuing for bread or demonstrating violently against high food prices. In the MENA region, inflation originates from both external and internal factors. While external factors are similar across the region — and essentially imported from the West — internal factors vary between oil producing and non-oil producing nations.

Economists agree that the weak dollar is one of the main reasons fueling MENA inflation; its effect, however, varies from one country to another.

Lebanon’s heavily dollarized economy is obviously adversely affected by the ailing greenback, but its neighbor Jordan is suffering as well. According to Dr. Rasha Manna, head of research at Jordinvest, the Jordanian dinar’s dollar peg and the rising exchange rates have reflected on the country’s debt, estimated at about 70% of GDP. “We have been significantly affected by the weakening dollar due to our particular debt structure of which 30% remains in dollars while, the rest is comprised of various international currencies. Our debt burden is estimated to have increased by 4% in 2007 due to the depreciation of the dollar against the euro,”she said. The current debt structure in Jordan is primarily divided up into Euro (up to 23%),Yen (18%), and the Kuwaiti dinar (14%), with the latter appreciating since Kuwait abandoned its dollar peg. Approximately 10% of Jordan’s debt is held in British pounds.

With the Hashemite currency’s peg to the weak dollar, imports to Jordan are becoming more expensive. Only 5% of Jordan’s imports originate in the US. And while dollar-denominated imports by far exceed this figure — one has to add the 20% of imports made up by oil — the 30% of imports which come from the EU and 40% from Japan are burning holes into the kingdom’s bourses.

In the UAE, SHUAA’s chief economist and strategist Dr. Mahdi Mattar estimates inflation from imports may account for 3% of the total 11% national inflation level.

Among other external factors contributing to inflation are higher commodity prices, especially food. Many countries in the region rely on imports of essential food items such as wheat, rice or sugar. “The demand for food is certainly fueled by the growing needs of large economies such as India and China,” underlined Dr. Louis Hobeika, professor of economics at the American University in Beirut. The high Euro is partly to blame for high inflation in Lebanon, which imports many of its products from Europe. “Lebanese traders have also been used to work for decades with European countries, and it is somewhat difficult for them to adjust their purchasing behavior as they also tend to feel that US products are not much cheaper when transport expenses are taken into consideration,” he adds. This state of affair equally reflects on the UAE markets, where growth in global prices has risen considerably, according to Mattar.

Fuel for rising costs

In Egypt, inflation is taking a cost-push form that relies mostly on internal factors, such as decreasing government subsidies, according to economist Dr. Heba Nasser, Vice President of Cairo University.

Oil prices, which have reached unprecedented levels of $140 a barrel, have strained economies around the world. The MENA region has been affected differently by higher oil prices, as many countries throughout the region boast large natural reserves of ‘black gold’. “Oil producing countries also experience inflation, but high energy prices allow them to subsidize their industries heavily and offset any potential negative effect of the trend, which is therefore less felt by the population,” said Hobeika, who estimates the contribution of oil to price increases in Lebanon to at least 25% of total inflation levels.

The lifting of fuel subsidies in Jordan has been absorbed with difficulty. “The government had been progressively phasing out oil subsidies for some time, before it abolished them completely in February 2008,” Manna reckoned. A recent study by the Jordanian Ministry of Industry and Trade found that fuel prices accounted for only 10% of total production cost in about 90% of Jordanian plants. This figure varies evidently from one industry to another, a typical counter example being cement industries where 40% of expenses can be attributed to oil.

On the local level, internal factors ingrained in the economy are also conducive to higher inflation levels. Hobeika believes that Lebanon’s monopolistic economy weighs heavily on its current health. “Exclusive agencies, which restrict imports of certain brands to a few players, are something of a common sight in our country and consequently hike up inflation,” he underlined, while also pointing out that Lebanon needs to cancel exclusivity contracts in order to join the WTO.

Towering real estate

In the UAE and Jordan, elevated real estate prices have projected inflation to new levels. “The supply bottleneck witnessed in the UAE is one of the main contributors to high inflation,” said Mattar. He said within 18 months, the Dubai real estate sector will stabilize at new levels as new real estate projects are placed on the market for sale, while in Abu Dhabi the supply of residential and office spaces will grow tremendously by 2010. However, he added “the rent caps imposed by the UAE government might be detrimental to the real estate sector as it might discourage or slow investments on the long run.”

In Jordan, housing prices have also increased significantly, growing by some 300% over the past two to three years. The introduction in 2010 of a new rental law will allow for new contracts to undergo yearly appraisals, which will also further exacerbate inflation, of which housing expenses account for about 26%. Dr. Sabra acknowledged that the price of land and real estate development has definitely fueled inflationary trends in Egypt, where official figures reached 12.5 % in May 2008. “Our situation is somehow comparable to Jordan, the only major difference residing in the fact that our wages are much lower than in the Hashemite kingdom,” she added.

Mattar emphasized that high oil prices have certainly generated unprecedented wealth and an excess of liquidity and placed inflationary pressures on Gulf economies.

So how can regional countries cure inflation? Hobeika believes that the global nature of inflation renders the problem quite difficult to solve in light of external factors, which have a trickle-down effect on local economies. “We are faced with two choices on the global level, either increasing supply or lowering demand in sectors contributing to price spikes,” the Lebanese economist admitted. When this is applied to the oil market, increasing supply beyond a certain level may be a daunting, if not impossible, task for oil-producing countries. On the other hand, lowering demand by investing in new technologies might be a viable solution. “One has to keep in mind that if the world economy was in better shape, instead of being plagued down by successive crises — such as the subprime and the more recent Freddie Mac and Fannie Mae debacles — the price of oil would have certainly reached higher levels,” Hobeika said.

When it comes to food shortages, Hobeika believes that much can be done in this regard with the possibility of doubling production levels through improving management of agricultural land and proper irrigation, dovetailed with a sound development of rural areas. “Demand for food items can’t be realistically expected to drop and the new billionaires of this world should maybe start investing in the agro-industrial sector,” he added. He also estimated that raising wages without increasing productivity will only contribute further to inflation.

On the national level, each country in the region has different weapons at its disposal to combat inflation. In Lebanon among the solutions envisioned are moving away from the dollar peg and liberalizing the sector by issuing new regulations and removing exclusive agencies. Encouraging people to invest in Lebanon would allow to increase productivity and reduce the long-term impact of inflation by improving growth levels, and it can be accomplished by improving the political environment and privatizing the economy. “While dollarization was used in the eighties as a powerful tool to master inflation, now it undoubtedly contributes to it. In the next few years, we should maybe envision a system based on a flexible exchange rate. But this, however, needs to be underlined by a restrictive fiscal policy,” said Hobeika. 

Measures adopted by the Jordanian government include decreasing interest rates by less than what the U.S. Federal Reserve recommends. “Local interest rates were lowered by 75 basis points instead of the 325 basis points that is imposed in the USA,” Manna explained. She identified other measures, such as increasing foreign currency reserves, which also, in her opinion, need to be more diversified, as well as controlling fiscal spending. She pointed out that, “An appraisal of the dinar against the dollar could be also feasible. However, lowering inflation without slowing growth is a tricky problem.”

For Mattar, inflation in the UAE could be fought by increasing reserve requirements in order to reduce the national money supply. “This has been already implemented by the government in Saudi Arabia that has moved up reserve requirements of banks from 7% to 9%, and then from 9% to 12 % again last April, after they had remained unchanged for over 23 years,” he added. The UAE has also tackled the international food crisis by buying farms in Pakistan, although such measures aim essentially at securing sources of food and do not actually fight inflation, according to Mattar. He estimated that in order to reign in inflation the UAE will eventually also need to move away from the dollar peg.

Nasser said Egypt needs to encourage industry to increase productivity to fight inflation. Such encouragement must be done while simultaneously attempting to curb demand by modifying people’s purchasing behavior; this effort is currently being undertaken by the local media as well as NGOs. “This effort, when dovetailed with the establishment of a consumer protection authority, can be efficient on the long run,” she noted.

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Editorial

Gross misconduct!

by Yasser Akkaoui
written by Yasser Akkaoui

Lebanon is once again faced with playing the role of a hugely talented country suffocated by a narrow political agenda. The new government has made little attempt to hide the fact that it sees itself as a caretaker entity for a little over nine months, a period during which the various factions that were chosen to make up this carefully calibrated political beast will be setting up their stalls in anticipation of the 2009 elections. The service-based ministries in particular have been distributed tactically, not to contribute to the national good, but to secure votes in marginal districts where a bit of road paving can do wonders. Can there be any greater form of gross misconduct?

As for the new ministers, well, they will probably not be burning with a raging desire to fulfill their mandates and it is unlikely that they will lose any sleep over the long list of obligations and shortcomings that apply, not just to their own, but to every ministry in Lebanon. It is also unlikely that they will be transparent in communicating what needs to be done, for in doing so they run the risk of being judged if and when they fall short.

In the competitive arena of today’s Middle East, Lebanon can no longer get away with being an eccentricity. It has run out of excuses. It is no longer the sunshine state with European glamour and a knack for handling money. The region might crave its talent but it no longer craves its services. Only the cobweb-ridden cliché remains. Lebanon is now an outsider in a region that knows the rules and plays by them. The results are clear for all to see.

The Lebanese government has nine months. During that time it should, at the very least, lay down the foundations for growth. It should help the private sector plant deeper roots, it should identify areas of a creaking public sector that are ripe for privatization, and it should address the rampant inflation and derive ways to cope with rising fuel costs. It should encourage its best and brightest to believe in the future, to believe that it is better to be part of prosperous nation that is itself part of a broader and equally prosperous Middle East rather than a country rife with sectarian suspicion.

We of course will be monitoring events closely.

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By Invitation

Private equity slow but secure through first half of 2008

by Imad Ghandour
written by Imad Ghandour

The first half of 2008 was a non-event for private equity with very little to cheer about, except for those skillful exits that everyone seems to have mustered. No great fund announcements to be heard of — the largest new fund announced was Gulf Capital Fund II at $500 million, and the largest fund closing was NBD Sana Capital, also valued at the $500 million mark.

And there were no billion dollar deals: the largest deal closed was Intaj Capital’s purchase of a majority stake at an announced $188 million transaction size. As a matter of fact, only 12 investments were made across MENA in first half of 2008, down from 33 during the same period in 2007.

But there are many happy investors reaping the fruit of their patience: 12 announced exits in the first half, including the maestro exit of Egyptian Fertilizers Company at $2.5 billion in one year and the $432 million IPO of Depa.

In a low after a long high
There need not be any worries however, private equity is not going into mass liquidation stage. It is merely a pause after a three year sprint.

Since 2005, the private equity industry was doubling in size every year. Based on the Gulf Venture Capital Association’s report, the annual growth in funds under management has been increasing by 70% annually, and investments have been increasing by 129%.

The beginning of 2008 was a pause for reflection amidst gigantic events, in the GCC and beyond. Very close to home, the political tension around the Gulf reminded everyone how exposed the GCC economies are to political risk as one missile crossing the Gulf may turn the prospects of the GCC upside down. Witness the performance of the stock markets in the first half of this year, which declined by 11%, as a barometer for investors’ sentiment.

Inflation is another worry. At a macroeconomic level it is a threat to growth, as governments are challenged to balance growth and fiscal expansion with spiraling inflation. At the micro level, mounting inflation is putting pressure on companies’ earnings as salaries, raw material, and services are rising unchecked. For example, the air transport sector was particularly hit, and budget airlines (many are backed by private equity funds) are scaling back their operations. As a consequence of an anti-inflationary policy, revaluation of GCC currencies may further negatively impact companies that earn revenue in foreign currencies like tourism, transportation, exports, and oil services.

Farther afield, but with gigantic rippling effect, the credit crunch is casting an ever growing darker shadow on global economic prospects. The crisis within the US and European banking system has now shifted slowly but surely into the real economy. Higher interest rates to leverage deals coupled with dimmer economic prospects have ground the private equity deal making machine to a halt. Mega deals, an almost a daily event in 2006 and 2007, are a rare and shy species nowadays. The attractiveness of private equity as a viable investment class (at a global level) has been put in doubt.

Foundation still standing strong
Yet the fundamentals that led to the rapid rise of private equity back in 2005 are even stronger. Economic prospects have actually improved as oil prices doubled since last year. The impact of the dramatic rise in oil revenue will be felt in the real economy in one or two years as governments start spending the additional oil windfall and national oil companies’ budgets balloon even further. (For example, Aramco is the second biggest spender in Saudi Arabia after the government with a budget exceeding $35 billion). All this will translate into liquidity ready to be employed in newly established PE funds and brisk earning growth.

Inflation is not expected to run out of control because governments have moved it to the top of their agenda given its social and political implications. However, global and local factors will keep inflation at high levels in the short term. With the economic system back to relative stability under new inflation parameters, earnings are expected to rise faster than inflation. Recent research from UBS analyzing the inflationary period after 1973 confirms this conclusion.

The recent exits reassure investors that private equity is not a one-way street, and that hefty returns await them. With most exits achieving spectacular returns exceeding 30%, private equity is earning its designation as an alternative investment class. The MSCI Arabian market index, on the other hand, has only increased by 11% over the last 18 months!
The music will go on… except if someone decides to wage another holy war.

Imad Ghandour is the Chairman of Information & Statistics Committee —Gulf Venture Capital Association

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Banking & Finance

IPO Watch – Mining capital

by Executive Staff
written by Executive Staff

Commodities have driven the early summer buzz in international markets, from heated debates over new potential oil price highs and China’s expansion in international mining to merger games at the top of the global mining industry. The mining theme also dominated the month of July in the Middle East through the $2.47 billion initial public offering of the Saudi Arabian Mining Company, better known as Maaden.

Reaching the primary market more than two years after the Saudi government first announced its intentions to sell a 50% stake in the company, the Maaden IPO was 2.4 times covered by subscription demand. The amount sought in the offering was the same as in media reports in early 2007 and the allocation of shares was tilted heavily in favor of retail buyers, making the IPO appear as an example of wealth redistribution from Saudi authorities to the citizens and residents eligible for subscribing.

The Maaden flotation was the region’s largest mining IPO ever and the Arab world’s third-largest privatization by IPO, after the $5 billion sale of DP World in the UAE and the 2003 privatization of Saudi Telecom which netted the Saudi government $2.7 billion.

The second major July offering was that of UAE-based engineering contractor Drake & Scull International. Its $332.7 million IPO was oversubscribed more than 101 times, making it the public offering with the highest demand relative to the offering size in the year to date and the second highest in the past 12 months. The company, which is specialized in mechanical, engineering and plumbing contracting, floated 55% of its capital by issuing over 1.1 billion shares. It said proceeds from the IPO will be used for expansion of its business and acquisition of companies that match its expertise.

Jordan saw two smaller primary offerings which closed in July, the $7 million IPO of Al Israa for Islamic Finance and Investment and the $4.9 million IPO of Amwaj Properties. The offerings by the two firms, whose business focuses are explained by their names, reported subscription coverage of 3.3 and 15.3 times, respectively.

Meanwhile in North Africa, International Investment Bank said that the IPO of Artes, the exclusive distributor of Renault, Nissan and Dacia in Tunisia, was 11 times oversubscribed. Although retail investors are the largest recipients in these IPOs, international investors are increasing their participation and subscriptions in IPOs as more of the GCC countries allow foreign ownership.

In a quick look back to the first half of 2008, the number of IPOs in the past six months in the MENA region has reached 23 deals with a combined value of around $9 billion, according to Zawya’s IPO Monitor. Comparing this to the BRIC countries for example, one will find that Russia has closed one IPO this year so far with a mere value of $470 million. In China around $6 billion were raised in IPOs in the first half, down a whopping 60% on the same period last year. Brazil floats raised $4.6 billion, a decline of 54%. In India, primary issues were down 11% when compared to the same period last year, raising a just $4.5 billion.

Looking forward, July saw several new IPO announcements. Most noteworthy is that of the Saudi-based Arab Supply and Trading Corporation or Astra, which will float 30% of its shares to raise around $825 million. Astra is offering 22,235,294 shares to the public from July 26 to August 4. Also in Saudi Arabia, Methanol Chemicals Co., or Chemanol, plans to sell 50% of its shares in an IPO in August. The company is seeking to raise $300 million by offering 60.3 million shares through the IPO which will run from August 11 to August 20. The Jeddah-based Knowledge Economic City said it will float 30% of its shares on Saudi Stock Exchange in late 2008 and has already appointed NCB Capital and Swicorp as Joint Financial Advisors.

Out of Tunisia came what is touted as the largest IPO in the country, that of Poulina Group Holding (PGH), which is floating 10% of its capital via a capital increase. The company is seeking to raise around $85.6 million by floating more than 16.6 million shares on the Tunis Stock Exchange. The company’s principal activities are in the poultry, agribusiness and service sectors. The IPO will be launched from July 24 until August 6.

Back in the GCC, the newly-established Oman Merchant Bank (OMB) announced that it will offer 40% of its capital to the public by year end. OMB has a capital of $130 million and it did not disclose the amount it seeks to raise. In the Levant, Amman-based International Cards Company (ICC) said it will offer 39% or 7 million shares to the public on July 27. The credit card issuer seeks to raise around $41.9 million.

The flood of IPOs of young companies does not only demonstrate the success of the region’s equity markets but it also shows the industrious nature of the region’s entrepreneurial players and their will to make their countries a more prosperous and successful place to live and work. Much of the liquidity generated from high oil prices is now being invested in the region and much less is going abroad. Local business leaders have finally seen the benefits of investing in oneself or in one’s country and this enlightenment, analysts say, will only lead to even more prosperous times and many more mega IPOs.

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By Invitation

Doha cracks open the books for a free press

by Richard J. Roth
written by Richard J. Roth

Across the years some have argued that the most important factor needed to ensure that people are free — politically, intellectually and creatively free, to be entrepreneurs, inventors and discoverers — is education. Others have said it is journalism. Those of us in journalism education have a double responsibility and a double opportunity.

Right now we at Northwestern University have that double opportunity in Doha’s Education City, to which we were invited by the Qatar Foundation for Education, Science and Community Development.

When we accepted the Qatar Foundation’s invitation to bring Northwestern University’s Medill School of Journalism to the Region, there were more than a few skeptics. They told us that an American journalism school could not practice here what it preaches there, reminding us that the media here are owned or licensed by governments, that women are often abused here and gay people persecuted, that rich men here often keep prostitutes in secret suites and that the royal family might “suggest” the grades we give family members. I was shocked by those notions, mostly because I had hoped that once I left the United States those things would be behind me; in the US radio and television is licensed by the government, there are special shelters established for all the abused women, gays have always been persecuted, even the governor of New York had high- priced prostitutes at his disposal and it is not unheard of in the US for a faculty member to hear from some poobah trying to influence grades, especially for a student athlete.

Still, I know things here will be different, even difficult. I am not naïve. I have been heartened, however, by what I have heard and seen: I heard with my own ears Qatar’s First Lady, Sheikha Mozah Bint Nazzer Al-Missned, chairperson of the Foundation, say that a free press is the best assurance of the kind of civil society that she dreams of for Qatar and all the Middle East. I heard Abdulla bin Ali Al-Thani, the Foundation’s vice president for education, say he believes bringing Northwestern and its brand of journalism here “will promote a maturing of our society into one where everyone can have a voice and everyone is accountable. A vibrant, healthy media scene will bring about greater transparency and accountability, and these are hallmarks of successful, participative societies. They are not qualities for which our region is well known internationally, but they are essential to the implementation of Her Highness’ vision of releasing and developing human potential for the common good.” Privately, Dr. Abdulla assured me that if Her Highness Sheikha Mozah did not want genuine journalism here she surely would not have invited the best US journalism school.

That’s what they say. But here’s also what they’ve done: written freedom of the press into the constitution; created the Arab Foundation for Democracy with a $10 million endowment from the emir to encourage the development of a civil society and freedom of the press; created the Doha Debates to promote free speech; launched Al Jazeera television and now they’re advertising for a staff for the Doha Centre for Media Freedom, which will have a strategic alliance with Reporters Without Borders.

That said, we have our work cut out for us. Despite what the emir and the sheikha have done in Qatar, the local press still seems like it’s from another era, with grip-and-grin pictures of the emir on the front page daily, though I must say that in just one year I have seen improvements. We are mindful, though, that with just 20 students in our first class of undergraduates, it will be a while before Northwestern has here the impact it has long had in the US. (Let me say, to plant an idea, that of the 20 or so students we hope to enroll each year, not all will be Qataris, though the Qataris who meet our admissions standards will have their tuition paid by the Qatar government. Students with other passports will need some financial support.)

But to achieve our goals outside the US we won’t wait just for those 20 youngsters we enroll each year to get into newsrooms, first as interns and then as cub reporters. In cooperation with the Qatar Foundation, we intend also to offer here the kind of executive education we are known for in the States, and maybe some “continuing education” for working journalists not yet at the executive level. Many media executives from the Middle East and North Africa already know us through our Media Management Center and the IREX (International Research and Exchange Board) programs we have on the Northwestern University campus in Evanston, Illinois. We want to bring those programs here. Also, through Northwestern’s Kellogg School of Management and the Qatar Foundation we are considering more general executive management and marketing programs for those who aren’t necessarily in the media. The details are still being worked out, but Northwestern University — and especially those of us on the University’s Doha campus — feel the responsibility to use our research and our faculty to help improve leadership capabilities, develop strategies for growth through innovation and do everything else our double responsibility and double opportunity mandate of us.

Richard J. Roth is a professor and the senior associate dean responsible for the journalism program at Northwestern University’s first international campus in Doha, Qatar

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Levant

Restaurants – Beirut’s whet appetite

by Executive Staff
written by Executive Staff

The resilience of the Lebanese has become legendary, and each war confirms that by the end of it people will sweep off the rubble and return to business as usual. Even tourists seem to believe as much. On the other hand, even though tourists keep on returning, the Lebanese themselves are leaving their homeland for more stable countries. And Lebanese entrepreneurs are not only selling their knowledge abroad, they are investing there as well.

Through the ordeal of the past 18 months, where blockaded downtown Beirut became a ghost town, some businesses stayed open, confirming the Lebanese resilience and entrepreneurial spirit. However, even for the bold ones patience may have a limit.

One would be forgiven for having felt rather schizophrenic on May 22. On that day downtown Beirut metamorphosed from what seemed like a sad refugee camp with more tents than refugees into a booming area where tourists and locals shopped, shared coffee tables and smoked narghiles — all in less than 24 hours. “When they took the tents down I went one evening there and saw the terrace full, the inside of the restaurant full, all the old customers, you know, my heart grew,” said Sami Hochar, general manager of Catertainment, the company that owns Lina’s Sandwiches.

Cooking on a roller coaster
A staple of Lebanese creativity that went as far as Paris, Lina’s had reason to celebrate the end of the 18-month occupation of downtown Beirut. Throughout those months, the downtown branch had accumulated losses of about $50,000, a sum it will take the restaurant another six months to recover. The July War with Israel is classified by Hochar as “a catastrophe — we had 300 customers a week”.

But after those thirty days of war, downtown quickly recovered and by September 2006 the number of clients had climbed back to 2,500 per week. But this was not to last. By December 2006, that number dropped to 750 customers a week.

Of course, the problems downtown had started even before the 2006 War, with the assassination of ex-Prime Minister Rafik Hariri. “If you compare recent numbers with 2004, it has never been as good again. At that time we used to get around 5,000 customers a week,” Hochar said.

When he saw the tents downtown, Hochar thought the occupation was going to last “one month, six weeks at most. I never imagined that any Lebanese party would accept such situation where the economy of the country was in danger, families were in danger, losing their jobs, their money. I thought nobody would ever accept such a thing.”

That disbelief was shared by Jean Claude Ghosn, managing partner of Ghia Holding, owner of Duo. Hope, or miscalculation, was one of the things that kept his restaurant open. “We kept Duo open because we didn’t know downtown was going to be closed for eighteen months. Everyone was saying it was going to be one month, two, maximum three months,” Ghosn averred. Known for being full for lunch on a daily basis, over the 18 months of paralysis Duo accumulated a loss of about $900,000. The holding company had already closed another restaurant in downtown, two months after the tents came. “We were losing a lot of money with Al Bakawat, as it was not on the main road and customers had to cross checkpoints to access the restaurant,” Ghosn explained. With that closure alone, 32 employees lost their jobs. In Duo, with some effort Ghosn managed to keep most of the staff, having to let go only 15 out of 45. But, he said, “the remaining got a lower salary, because they worked fewer hours.”

Success abroad was another reason that Duo could not close. With a Duo restaurant already operating in Dubai and two other opening soon in Qatar and Riyadh, Ghosn could not close the flagship of his franchise. “We cannot open there and close here, it is not fair,” he said.

La Posta, an Italian restaurant that shares the same street with Duo, was equally damaged.

“With the occupation of downtown by protesters, our turnover fell suddenly by 80% and 95% compared to 2004”, said General Manager Michel Ferneini. “In other words, in the last period of the occupation the monthly turnover was what we used to make in a single weekend in 2004.”

Empty seats
Deprived of foreigners, the restaurants were also empty of Lebanese. “Tourists? Not even ‘tourists’ from Verdun or Achrafieh used to come,” Ferneini pointed out. “In the last period our guests were mainly people working in the downtown area.” At Duo, the 400 covers a day became 25 during downtown’s occupation, “counting the staff and ourselves”, according to Ghosn.

Hochar, who refused to close his bar in Gemmayzeh during the 2006 War, knows the problem well. “We stayed open, we refused to close. We had two or three people at the bar — I was one of them.” The problem with downtown, as opposed to the war with Israel, was the length. With a deadlock that did not seem to have an end, restaurants did not even need to fire — workers started to leave on their own accord.

“We did not fire anyone. Some were relocated, and some left to other countries,” said Hochar. “In the last three years we did not fire a single employee,” Ferneini concurred. “Some of them travelled abroad, and not because they were afraid of losing their job but because they lacked confidence in the country.”

The drop in the quality of the service is noticeable. For Maya Bekhazi, a young entrepreneur who owns Tartuffo and is a partner in at least four different restaurants, including the landmark Beirut Cellar, “the biggest problem we have now is the export of our human resources.” Sharp and meticulous, Bekhazi has been hired as consultant by a big hotel chain, and she knows the importance of highly trained staff: “It’s been very tough to replace people. We always bring new personnel, we train them, and then they find offers outside.” Ferneini agrees. “Finding new collaborators is a hard task. There is a huge demand while the offer in all positions is rare, largely unprofessional and unqualified,” he said.

Bekhazi acknowledges that the salaries offered abroad are higher, often three times as much, but the Lebanese wished they could come back even for lower pay. “I always get calls from Lebanese who used to work for us wanting to come back, even for less money. The only thing they want is stability. They are young and ambitious, they want to set up families, they want to save some money, that is their concern,” she said.

Sometimes, these employees end up working for a company founded or created by a Lebanese — but located outside Lebanon. La Posta, Duo and Lina’s are all opening branches or franchises abroad, even as far as India. Inside the country, the owners make sure they keep strategies to swerve the odds. “We are trying to make sure our eggs are not all in one single basket”, explained Maroun Daou, operations director of Ghia Holding.

The basket, in Ghia Holding’s case, is the Green Line, or the imaginary border that has been dividing Beirut into East and West since the time of the Civil War. “If you think about it, all our restaurants are on the Green Line, from Abdel Wahab to Paladar to Shah to Duo, all on the separation line. I am not afraid of being in downtown, but I prefer to stay outside, like ABC, Achrafieh, in the mountains, maybe even in Dbayyeh in the future, to diversify as much as possible”, said Ghosn. Lina’s, which is diversifying its locations as well, is opening a branch in Saida, even though it will not be able to sell alcohol.

Beirut’s downtown has already shown it is probably as resilient as the Lebanese. On the first Saturday after the tent city was removed, Lina’s clients went from 100 to 700. Duo will register a profit of $40,000 in June. La Posta also expects the first year of profit-earning after three years of losses. But all entrepreneurs seem rather cautious about the situation. “Again we are surviving, we are reopening, and this is due to the Lebanese individual, not the government or the parties,” Hochar said. “But then, how long will it last? The kids are leaving, smart people are leaving, big companies are leaving. I always give the example of my children. One of them left already and the second will leave next year.”

Yet hope is staying. “We are hopeful,” Ghosn averred. “We don’t believe much anymore, but we don’t have another choice.” Maya Bekhazi shared what seems to be, in a rather Lebanese way, a paradoxically optimistic cynicism: “I can’t afford to be very realistic, let’s put it this way — I just have to be very positive, because if I want to measure the risk I will just stop all my business in Lebanon.”

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Levant

Technology – Cedar triumph in cyberspace

by Executive Staff
written by Executive Staff

The world’s most popular internet applications, including Yahoo, Google, Facebook and YouTube, share several interesting characteristics. Nearly all were developed by students enrolled in American universities and nearly all were aided by an American venture capital injection to successfully enter the market. Lebanese-born Elie Khoury and Jad Jounan have followed more or less the same path, yet with one major difference: they developed their Woopra program in Lebanon. Against all odds, some may argue, as the Land of the Cedars can hardly be described as an IT incubator.

Both Khoury and Jounan graduated from the Lebanese American University in Byblos in 2007 with a degree in Computer Science and Computer Engineering, respectively. They spent many hours in class, but they spent many more nights working late on Woopra, a live tracking and analytics service that aims to send market leader Google Analytics into oblivion.

“When we felt the application was ready to be launched,” Khoury said, “we made the strategic decision to seek a partner who could help us with financing, marketing and the general business structure.” That partner became John Pozadzides, mainly because of his experience as director and vice president of the multinationals SAVVIS and Cable & Wireless.

It was said in Lebanon that the entrepreneurs had sold their brainchild for $5 million, yet Khoury rapidly dismissed that as a rumor. “We will not be selling Woopra at this early stage,” he said. “We are still the owners. I cannot enter into too many details at this moment, as the program has only just been launched. All I can say is that we have a very decent amount of funds, compared to other start-up projects like Facebook or YouTube.”

First splash on the web
Woopra was first presented at the 2008 Dallas WordCamp event in March. The program immediately received rave reviews and, according to Khoury, tens of thousands of bloggers and webmasters have since signed up. Now there are numerous tracking and analytics programs that, with a delay of several hours, offer data such as the number of visits to a website and the average time spent on it.

Woopra however, offers far more detail, allowing the user to see the exact path a visitor follows after entering a site. What’s more, the program does so in real time, offers a direct chat option and, perhaps most importantly, is extremely user-friendly.

Khoury built his first website in 2003 at a time when a program called Hit Counters was quite common. “I then started learning about other tracking and analytics services and discovered success measuring methods other than just ‘number of hits per day’,” Khoury explained. “By 2005, I realized that everything on the web was moving toward socializing and social networking. Everything, except my analytics services. Google Analytics still only offers numbers and statistics. That wasn’t enough for me. I wanted to know more about who is viewing what on my ‘virtual property’. Who’s stumbling on it? How did they know about it? Was it possible to get in contact with them and perhaps even guide them?”

Having the idea is one thing. Realizing the idea is something else. Developing Woopra was a painstaking process that required passion, patience, and long hours of work, while friends went out enjoying themselves.

Programming for the high- speed millionaire

The common, if somewhat cliché, image of the self-made millionaire has long been that of the newspaper boy becoming a media mogul. As we have entered the digital era, however, that has increasingly been replaced by the young whiz kid who, working from a student dorm or garage, launched the next big thing in computer or Internet technology.
No doubt the best known IT entrepreneur is Bill Gates, who set up Microsoft in 1975 as a 20-year-old. He did so with his then 22-year-old friend Paul Allen. Today both rank among the world’s richest men. Many more aspiring entrepreneurs followed in their footsteps, nearly all of them students.
Stanford University students Jerry Yang and David Filo in 1994 founded the Internet search engine Yahoo. Within a year of its launch the site had received a million visits and the founders became aware of its commercial potential. In 1995 Sequoia Capital injected two rounds of venture capital, while Yahoo in 1996 launched a public offering of shares bringing in over $33 million. In 2008, the site attracted some 1.5 billion visitors, prompting Microsoft to offer $44.6 billion to buy the company, yet the bid was kindly turned down.
Today in their thirties, Larry Page and Sergey Brin were Stanford University students when they developed the search engine Google in the mid-1990s. Having secured an initial $1 million from family, friends and some investors, they launched Google from a garage in September 1998. The first public offering of shares in 2004 brought in nearly $1.7 billion, which gave the firm a market capitalization of over $23 billion.
Facebook was developed by Harvard University student Mark Zuckerberg. While it was originally meant as an online “who’s who” at Harvard, Zuckerberg soon realized that the site’s potential reached far beyond campus life. Some $40 million worth of cash injections by venture capital firms in 2004 allowed the site to grow into the worldwide phenomenon it is today. Microsoft in 2007 bought a tiny stake in the company for $246 million. Following the acquisition of MySpace by Rupert Murdoch’s NewsCorp, the air was heavy with rumors that Facebook would be sold in 2008 for no less than $8 billion. The deal has yet to materialize.
The online-auction site eBay was founded in California in 1995 by the then 28-year-old French computer programmer Pierre Omidvar. The site received its first $5 million capital injection from Benchmark Capital in 1997 and one year later the first public offering of eBay shares took place. In March 2008, Forbes Magazine considered Omidvar to be the 120th-richest person in the world. Last but not least, as an example of how fast things can go: YouTube was established by three young students in 2005 and bought by Google a year later for $1.6 billion.

“We opened an office in Byblos in 2007,” said Khoury. “That’s basically where I lived for a year. For months we worked non-stop, often more than 15 hours per day. Sometimes, we would finish work at 5am and join our friends for breakfast when they came back from a night out in Batroun. It didn’t really bother us, but I must admit our social life was totally screwed up.”

While Lebanon takes pride in that fact that two of its sons have developed a program that managed to make heads turn in America’s high-tech-heaven, many Lebanese feel it is a shame that the program could not have been further developed and commercialized in Lebanon. The questions arise: Could the university have done more? Or could Lebanon have done more?

“I don’t think it is the task of a university to offer support for a project like Woopra,” said Khoury. “The main role of the LAU was teaching us the basics, discipline and methodology. A couple of teachers really supported us, especially my supervisor Dr. Munjid Musallem. What Lebanese universities lack is the ability to make entrepreneurs. They always prepare you to work in a company. Our universities are generally producing employees, instead of creating long term inspirational projects.”

Khoury admitted that Lebanon does not have a great IT climate, but he said Lebanon is perhaps the best country on earth to develop web-based software. “We have the worst internet connection in the Middle East, which is terrible, yet this helped us to tackle the worst case scenarios and debug our code easier,” he said. “This is not a compliment. It is a shame really, that at times we had to use a dial-up modem because all the alternatives were down for days. We had major problems rolling updates. It used to take 4 to 6 hours to roll an update, while in the US it takes less than five minutes. The government has promised the ADSL lines for 3 years, yet we are still not able to set up an ADSL account in Byblos.”

Lebanon’s internet lag
The complaints about Lebanon’s digital capacities are well known and have been around for quite some time. Although the country in 1996 was among the first Arab countries to introduce the internet, a decade later it ranked among the least developed internet nations in the world. In fact, according to a 2006 EU-funded research report, in terms of international bandwidth per capita Lebanon ranked just above countries such as Ivory Coast, Syria and Iraq, while it had lost the race with countries such as Egypt and Jordan.

Due to the country’s limited and outdated infrastructure, as well as the high cost of telecom supplies and the lack of a proper regulatory environment, Lebanon was not an attractive destination for potential investors, concluded the EU consultancy team. Apart from the introduction of a handful of ADSL lines — mainly in Beirut, and much later than initially announced — not much has changed since.

Dr. Munjid Musallem, a PhD graduate from Texas University who has taught a number of IT courses at LAU Byblos since 1994, shed further light on the activities of Khoury and Jounan. He recalled Khoury first coming into his office in 2004, when he decided to shift from computer engineering to computer science.

“Throughout his first semester, Elie told me about his ideas that would later shape up to become Woopra,” said Musallem. “Woopra was Elie’s brainchild and his primary obsession. No one could have stopped him from pursuing his Woopra. Side discussions about Woopra were regular and, naturally, it was the subject of Elie’s final graduation capstone project.”

According to Musallem, Jad Jounan joined Khoury at a latter stage, but he proved to be instrumental. While Khoury was the designer with all the innovative concepts and direction, Jounan had a deep understanding of software system architectural design. “Jad clearly stood out when he presented the tradeoffs of client-server versus multi-tier and peer-to-peer design, which is very important in the software architectures to which Woopra subscribes,” Musallem said. “In short, I consider myself the lucky teacher of two software gurus.”

Regarding the role of the university in developing Woopra, Musallem believes that the LAU played its role in terms of technical preparation. Turning a concept into a product however, is not the task of a university, but requires an entrepreneurial effort. “The same happened with Google, Yahoo, Mosaic (the predecessor of Netscape) and many other products,” he said.

He agreed that it is a pity Woopra will not be entirely developed in Lebanon. “But realistically, some critical technologies do not take off until US-based organizations give it their blessing and join in,” he continued. “There is much more technical expertise, vision, and entrepreneurial support in the USA than in any other place. The Database industry (Oracle, SQL-Server, DB2) is almost entirely located in the US, even though many innovative database ideas have been emerging in Europe for a very long time.”

It seems however, that Khoury and Jounan have not forgotten their roots and Woopra may not entirely depart from Lebanese soil. In fact, the high-tech duo aims to start part of the development operation in Byblos, which would provide much-needed jobs and offer an opportunity for other young students to gain practical experience.

“Our business plan has not been finalized,” Khoury said. “We have a couple of drafts that we are trying to merge but we cannot reveal any further details for marketing and business reasons. At this stage, Jad and I will continue development to keep Woopra ahead of the competition, while moving back and forth between Lebanon and the US.”

Even if Woopra is not developed in Lebanon, at least by developing the program Khoury and Jounan have shown that despite some 18 months of political bickering, riots, internal warfare and a lousy IT infrastructure, Lebanon is still somehow able to produce creative minds with the will to succeed.

In that sense, Woopra is not just a welcome story of success, but also one of hope.

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Procurement practice enhancements for Arab competitiveness

by Fabrice Saporito
written by Fabrice Saporito

Not long ago, many global companies considered the GCC and broader Middle Eastern market to be somewhat un-charted territory. Despite its plentiful capital and business opportunities, the Gulf region was perceived as being a place where breaking into the inner circle of personal networks and friendships was the only way to tap into the region’s wealth.

This old reputation is changing now among foreign businesspeople who have experience with the ins and outs of the region. Most major GCC and Middle Eastern companies long ago replaced informal controls better suited for small family businesses with modern forms of corporate governance. However, the perception of the GCC and the broader Middle East as a fast-dealing market lingers in the mind of the broader global business community. Such concerns may even add more friction to many deals, by raising the level of due diligence potential foreign partners and investors demand.

One major step local companies can take to mitigate these concerns is to enhance transparency by improving procurement controls. Since most business-related malpractices stem from the awarding of contracts to private institutions, a tighter procurement system can go a long way toward reassuring suppliers, customers and investors that a company is a trusted partner.

A more transparent procurement system encourages stakeholders — customers, investors, employees and suppliers — to see the company as a modern enterprise run according to world-class, professional standards. As other companies in fast-growing emerging markets have found when they make similar improvements, strict procurement systems enhance outsiders’ perception of the company as an enterprise of integrity. This higher level of trust can serve the purpose of multiplying opportunities by reducing the potential partner’s need to conduct extensive due diligence.

Three keys to greater best procurement practices
In our experience with many private and public companies in the Gulf and Middle Eastern region, we have found that developing the higher level of transparency that international business requires of corporate procurement systems demands tightening three different practices: first, contracting processes and buying goods and services; second, supply chain governance; thirdly, improving the control and audit functions. Fortunately, other companies have dealt with these issues before, and have found that three corresponding steps can dramatically increase transparency:

1. Differentiate sourcing from procurement. Technically, sourcing is a matter of planning needs and identifying potential vendors, then negotiating an agreement for supplying the goods. Procurement, on the other hand, is mostly about concluding and fulfilling the transaction previously agreed to in the sourcing stage. A failure to plan often leads to some Gulf and Middle Eastern organizations rushing into the buying stage early and forcing buyers to make a spot purchase at precisely the moment when scrutiny of the product must be given first priority. In other words, most tenders that go out on the markets are already pre-assigned to the suppliers that have the most influence with the company.

2. Watch every purchase throughout the purchase cycle. In many Gulf and broader Middle Eastern organizations, tender boards are set up to be in charge of company purchases. However, tender boards typically engage in the purchase process only at the point of negotiations and award. This means that their role is often limited and their options narrowed by stipulations previously included in the tender. A better way to control purchasing is to create governance throughout the procurement process, beginning with demand definition and ending at the point of product or service delivery. This requires process standardization, more clearly defined authority roles throughout the process and the automation of as many steps as possible to keep the entire transaction under very tight controls.

3. Build auditing capabilities, as establishing boundaries around a process will not guarantee best procurement practices. The recent scandals at Siemens in Germany show that even in a company with world-class processes and systems, malpractice can take place. Yet while it is impossible to eliminate the potential for illicit self-dealing without shutting down a business altogether, auditing and controlling the purchasing system on a regular basis while continuously rotating teams and individuals can significantly reduce the chance of a developing malpractices.

The decision to follow such best practices can have a significant impact on an organization. The most evident, of course, is the impact on the bottom line where the organization and its shareholders have more money flowing in and staying in. Quality tends to increase as well, since suppliers’ choices are based on the vendors’ merits and abilities to support the objective of the company, not on the relationship with the owner or the vendor’s managing director. Even companies with good auditing practices can profit from improving this system: transparent practices create more confidence in the system, thus attracting more vendors and increase competition in the region. Finally, such practices allow GCC and broader Middle Eastern organizations to think strategically, reduce the level of waste and increase their overall efficiency.

Staying competitive
Economic competitiveness of a country is a function of the ability of its public and private sectors to deliver superior returns on their investments. This means that applying best practices is the only way to move forward for a country: competitiveness at the micro level (at the level of the firm) directly impacts competitiveness at the macro level (country level).

Corporations and public enterprises alike normally deliver such returns only when they have the ability to formulate very clear competitive strategies. They also must have the ability to execute such plans. In this networked era this means that strategy is not simply the province of sales and marketing or research and development, it is a broad organizational responsibility. Seamless execution requires the organization to ensure that companies can clearly articulate the role of each institutional or enterprise function.

In addition, good procurement controls can be quite helpful in building a capacity for strategy execution — and not just as a way to keep an eye on the cash register. At Zara, the trendy global clothing store, the role of procurement goes far beyond the simple purchase order. Procurement work includes an assessment of the supply base to ensure that selected suppliers have the capabilities to fulfill the overall strategic objectives of Zara.

In an endless balancing act between cost, quality, and speed, Zara’s procurement department takes the lead in ensuring that the company maximizes its long-term interests. Thanks to careful calibration by procurement, Zara is able to deliver up to 28 new collections a year, ensuring that the supply of cloth and new garments come on time and its new collections are distributed around the world in a seamlessly, while retaining the kind of transparency distribution partners and Western investors demand.

The wrap-up
Increasingly, the GCC and broader Middle East economy is becoming part of the wide world of global business. Cross-border mergers, for instance, have grown from six in 1997 to more than 250 in June 2008. 

This growth in openness to the outside world has led to many changes in how GCC and Middle Eastern companies are run. Many Gulf companies have already replaced old informal habits of corporate management — more suited for a cozier era when business was mostly an extension of long-time family relationships — with a number of practices borrowed from the West.

Improving procurement processes is another such step in the long-time quest of GCC and broader Middle Eastern companies to take their place among the world’s great enterprises. Following best practices for procurement allows public and private institutions to be more credible trading partners as they increase their M&A activities, make their home market a less risky destination for foreign capital in search for growth, and ultimately enhance the micro and macro-competitiveness of the region as a whole.

Fabrice Saporito is a Principal at Booz Allen Hamilton

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Fixing the fuse on Lebanon’s power woes

by Albert Khoury
written by Albert Khoury

For any economy that can grow despite unnerving political uncertainties, for politicians who have stood firm despite large protests and for a people who faced death, destruction and hardship while defiantly sticking to their homes and lands, for all what the Lebanese have been put through, it is quite perplexing how we have not been able to solve our electricity problem, with power cuts part of our daily routine.

A couple of months ago, even Beirut became part of the axis of darkness, joining all other areas in suffering hours of warming fridges, idle AC units and candle-lit TV rooms. Getting round-the-clock power, just like Addis Ababa, Ramallah, Rome or Paris became an illusive dream for most of us.

When a number of people died protesting the power cuts in Beirut’s southern suburb Chiah on January 27, 2008, the only official response that was given to their families, friends and neighbors was that the state-owned Electricité du Liban (EDL) will publish on a regular basis the timing of the power cuts nationally (a promise that has not been kept). Do we not deserve more than a power cuts schedule?

According to various studies, in Lebanon today self generation is 38% of total demand. This capacity is generated by small units that are both polluting and very expensive or the capacity is effectively suppressed.

Private sector to the rescue
For most people, counting on the public sector to try to pull us out of this mess is no longer an option. For most politicians at least, there is now a realization that the private sector should be part of the solution.
Law 462 was a first step in getting the private sector involved. Passed on September 2, 2002, this law calls for the creation of a regulatory authority — similar to the very successful authority presently shaping the telecoms field — to set guidelines for granting licenses, permits and to try to unbundle EDL in into generation, transmission and distribution entities.

Problems in distribution
Distribution is the most politically charged problem facing the national electrical utility. According to a report published in 2006 by CRA, an international consultancy firm based in Boston, as much as 39% of the energy produced by EDL remains uncollected.

As far as we know, science has not yet proven any link between paying EDL’s invoices and religious or political affiliation. We firmly believe that the collection problem is solely due to lack of managerial capacity on the part of EDL. All three privately operating distribution utilities — Aley, Zahle and Jbeil — have diverse customer bases spanning the political and religious spectrum, and have regular collection averages of about 98%.
We believe that blaming any ethnic or political group for the woes in distribution is both misleading and highly unproductive.

Of the remaining 69% that is finally collected, the total amount is not even sufficient to cover the price of fuel used for generation in the first place, let alone pay for the operating expenses or debt repayment by EDL. According to government sources, the average kwh sold by EDL stands around 7.6 c/kwh as best case scenario. (In Aley, the average rate comes to 4.2 c/kwh.) The present cost of generation for EDL according to Kamal Hayek, chairman of the EDL, exceeds 20 c/kwh.
To generate at a cost of over 20 c/kwh and sell only 69% of quantities produced at a fraction of the price is a recipe for disaster.
Fortunately, a solution is presently being devised by EDL, the Ministry of Energy, the Higher Council of Privatization and CRA to invest in modern metering systems to help reduce the losses.

Over and above this effort, the government needs to take the courageous decision to adjust the tariff that it charges to large customers who can afford to pay higher prices. The reality of things is that the government cannot afford to charge the same price for power generated when the oil price was at $30/barrel that it charges when the price becomes $150/barrel. A change in tariff, we believe, is both necessary and inevitable.

Generation challenges
In terms of generation, we see a different type of problem. Today, Lebanon has a net capacity of 1,645 MW, according to figures compiled by our research team. On July 26, 2007, peak demand reached 2,275 MW. Generation capacity should be equal to peak demand.

Thus, we need an extra capacity of over 700 MW. According to the World Bank, by 2015 Lebanon needs an additional capacity of 1,500 MW.
The capacity available today is dangerously undiversified, with 95% of the generation based on heavy fuel oil (i.e. Jieh, Zouk) or gas oil (i.e. Beddawi, Zahrani). The cost of generation that is dependent on these types of fuels highly correlates to the price of the raw material, where the variable cost of energy is dominant in the cost structure. By contrast, nuclear energy or renewables require very high capital expenditure, but running costs are usually not volatile.

Even if we had enough money to pay for proper maintenance and operation and for the fuel for all our power plants, we would still urgently need additional capacity adapted to the available sources or fuels.

Solutions needed
We need to devise and enact plans to get gas to the Zahrani and Sour power plants, invest in renewable energy via the rehabilitation of existing hydro capacity and encouraging investments in new ones and, finally, prepare for the establishment of new capacity in Salaata, Chekka or wherever possible.

Most of these plans are not feasible for a number of years, especially if the government decides to get the extra capacity using clean coal technology, a source of energy that will help in diversifying our production capacity and lower our overall cost.

Today, the government would save large sums of money, and provide additional capacity, if it acts to make sure that we finally get Egyptian gas running to Lebanon’s Beddawi power plant thus saving us millions of dollars of unnecessary expenses every year. Also, plans to give another brown field license for a power plant next to Beddawi should be encouraged by the government, and the process should be speeded up. (Studies are presently being undertaken by the IFC, the private arm of the World Bank.)

Short-term generation projects, which are also very sustainable in the long term, should be supported by the government. That would make a very important first step in getting the private sector on board.

These projects are the results of an MOU which was signed with the government in November 2007 to add a total of 240 MW to the national grid. Of the four MOUs signed, our ISO 9001 certified company, a private distribution utility established in 1924 and based in Aley, signed the understanding to add 60 MW of additional capacity.

Electrical utility of Aley
We have finished our plans for the new power station some months ago, and it will be based on the most efficient technology to be used with heavy fuel oil, the cheapest type of petroleum product after natural gas. This technology will help save the government anywhere from $20 million per year (when compared to Jieh power plant) to $100 million (when compared to the Baalbek power plant).

Other advantages of the projects include:
• Short term delivery (by early 2010 with government support)
• Proximity to transmission grid
• Proximity to Beirut and Mount Lebanon (over half of national demand)
• Situated in an industrial area
• Could act as replacement capacity if existing power plants decommissioned as planned
• Meets World Bank and local environmental standards
• Provides base load, round the clock production with availability exceeding 95%
• 100% privately financed, without any debt carried by the government
• Privately built, operated and maintained with performance results guaranteed to the government via internationally recognized standardized contracts

We have been in negotiations with relevant ministries and are hopeful that, finally, the private sector will be allowed to share the responsibility with the government and provide the solutions for the crippled industry sooner than we’ve learned to expect. Also, we have received a lot of interest from private parties to support our efforts in the project.

Another interesting project is the one prepared by Lebanon Wind Power, a company founded by Robert Debbas, an established businessman with an outstanding reputation and Cesar Nahas, an authority in promoting wind farms throughout the world.
The company has developed plans for a 60 MW wind farm in northern Lebanon. Such a project will not only add much needed clean and sustainable capacity to the national grid, but could well be one of the most productive farms in the area.

In conclusion
The private sector can solve the problem that has crippled our country for over three decades. We can solve it faster and cheaper and are willing to bet our own money on results and not just on promises.

The government has been quite supportive, but this is not enough. Laws should be enacted quickly in order to give the private sector the assurances it needs to invest the large sums of money required. Once this is done, and the private sector takes its share of responsibility, then and only then can we see the light at the end of the tunnel.

Albert Khoury is the deputy general manager at the Electrical Utility of Aley

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