Executive Magazine

Prosperity’s anticipation

by Executive Staff May 28, 2008

written by Executive Staff

Downtown Beirut has become so desolate and empty that one almost expects to find tumbleweeds rolling in between vacant restaurant tables. But a walk through the Central Business District can feel even more surreal, because while streets look barren, construction sites are working at full steam. Hundreds of cranes, concrete structures, excavation craters and trucks careening through an empty city center can make Lebanon look slightly schizophrenic. However, while puzzling at first sight, the high activity of Lebanon’s real estate industry is not (just) rooted in the country’s notorious resilience — it makes outright economic sense.

After a war whose destructive effects that cost the country billions of dollars, five months without a president, a parliament that has not met since November 2007 and an opposition sit-in that has paralyzed part of the capital’s business center, one could expect real estate investors to be looking for greener pastures. But the political limbo and uncertainty plaguing Lebanon are part of the very reason why right now is the time to invest in the Lebanese market. According to the annual Global Property Guide report, published in a Byblos Bank newsletter in March 2008, real estate purchase and rent prices of upscale properties in Lebanon are lower than in five other countries in the MENA region: Amman, Tunis, Marrakech, Tel Aviv and Dubai. The average monthly rent in Beirut, according to the same report, is $1,154 compared to the regional average of $1,740. But Lebanon’s real estate upsurge, as much as its prices, have to be put into context.

No comparison

Comparing the Lebanese market with that of Dubai, for example, where the average rent is $3,140 per month, does not make much sense — Dubai is a case of its own, witnessing economic activity of a speed and volume practically unprecedented in the region. Yet while Lebanon’s prices are only half of those in Dubai, the risk of a regional war and the internal political instability did not translate into a drop. Quite to the contrary. “I think we are seeing the highest prices that this country has seen in many years,” said Nabil Sawabini, CEO of Mena Capital, which focuses on real estate development and private equity fund management. In Cairo, for example, the average purchase price per square meter is $406, while in Beirut it is $1,237. Another reason for the increase in real estate activity is yet one more thing that used to cause a lot of complaints in Lebanon — the brain drain. While the Lebanese are being hired abroad, especially in the wealthy Gulf countries where there are better-paid opportunities, these expatriates are earning enough to buy a residence in the home country.

“Eighty percent of the sales we have seen over the past 18 months have come principally from Lebanese expatriates,” said Sawabini. With Mena Capital currently building three projects with a total of 90 residential units ranging from $4,000 to $8,000 per square meter, Sawabini says that probably 65% of them have been sold already. “We have more demand than supply, at least at the upper end of the market. You have many more well-off Lebanese, especially in the Gulf or overseas, who are looking to buy. We didn’t have that before. Remittances are approaching $6 billion a year, so the brain drain turned out to be positive in that sense.” And foreigners, while not coming to Lebanon for holidays, are still purchasing properties here. “As far as buyers from the Gulf are concerned, I don’t think they represent more than 20% of the market now. However, if things were to quiet down, I think that could easily be reversed and the Gulf influx would be very considerable. That is when I think we would see a tremendous boom.”

Even before this expected boom, the Lebanese real estate market has seen a surge, and if statistics are not easily available, personal experiences are revealing. “For two years until [last] December I had sold nothing,” said Karim Bassil, chairman of BREI, a real estate developer. Among other projects, he had started to build a boutique hotel in the upcoming area of Gemmayzeh. “I thought it was quite sexy to have a boutique hotel in that area, high ceilings, 40 to 50 rooms. But I just didn’t manage to sell it.” With interest rates eating up his financing, Bassil decided to transform the would-be hotel into a residential building. And it worked, as within six to seven months he sold 70% of the units. The percentage, he explains, could be still higher, but he chose not to sell the upper floors, expecting even higher prices: “I left them for later.”

In Lebanon, land is a prized commodity, if for nothing else but because it is scarce. When coupled with the oil boom in the region and the liquidity of the economy, Lebanon is a very good investment. Another reason for the rise in real estate is that construction materials are usually priced in euro. With the euro rising against the dollar, any delay in construction would just translate into higher costs — even if the building is a hotel that will be faced with very low occupancy rates.

The hotels under construction in downtown Beirut, for example, are about to be completed with no occupancy in sight, as tourism figures are dropping steadily. In this area, managed by Solidere, much of what is being built had been planned before the 2006 War. According to Pierre Achkar, head of the Lebanese Hotel Association, the last time the association got the request to issue a hotel license was in the first half of 2006.

Hotels sitting pretty

Nevertheless, not a single hotel has sold its project to another group. According to Achkar, this is “because until now, real estate is doing well in Lebanon. In general, part of the hotel business is the operation, and the other part is the real estate of the hotel. Let’s take Habtoor [which has closed its 5-star hotel in Beirut], for example. Maybe they are losing some money in the operation, but as far as real estate goes, they have made a great investment.” And this is not only because the price of the land has gone up, by 40% to 60% last year alone, according to Sawabini. “Take steel prices, for example. When Habtoor started the construction, steel was around $400 per ton. Now it is $1,150,” explained Achkar.

For real estate developers, residential buildings are at risk only while the construction is going on. Once the residential units are delivered, the risk is transferred from the developer to the final owner. But when it comes to building anything that requires future management, the prospect of a war can be discouraging, especially because insurance against war has a very high premium.

According to Jean Hleiss, general manager of ADIR Insurance, war insurance is uncommon, even in Lebanon. The reason is mainly the price. “The actual war premium is around 1% of the total value of the property, while the average insurance issued against SRCC (strike, riot and civil commotion) is between 0.18% and 0.3%.” In the case of war, the premium rises even further. “During the last war with Israel, for instance, some clients asked to be insured and the premium raised to maybe five times what is being charged now,” he pointed out. But even with the media reminding everyone of the prospect of another war, none of the people interviewed for this article seemed to believe there will be a conflict. On the contrary – the general perception is that things will get better, and real estate prices will soar.

For Elias Abou Samra, manager of a regional real estate fund at Morgan Stanley, “one has to keep in mind that all the developments in Beirut, combined, do not match the investments being thrown in one of Dubai’s new cities, or Bahrain’s reclaimed land projects.” But the small size can, in fact, be an advantage in the real estate market. “We need to put things into a regional perspective to understand how the tiny supply in Lebanon is creating a huge demand. It is a totally different game from that in the Gulf, where large scale and volume are creating the demand.” The current surge in property prices may also be due to the fact that they were low in the first place. For Lina R. Sadek, Corporate Affairs Director of Al Habtoor Leighton Group, the price increase may be just the result of the basic law of demand and supply: “When there is a slump in property prices, people will step in to buy up land and property because the prices are low, and this will in turn drive prices up.”

Monaco of the east

Lebanon, like sort of like Monaco of the Middle East, a small country coveted for its nature and lifestyle, has very limited land with unlimited appeal. Working in Saudi Arabia, Abou Samra knows the fascination Lebanon exerts over oil-rich investors. “Arab investors know the Lebanese market very well. Unlike Western investors, they are happy to take the risks of war and conflict in Lebanon. Even those who invested before the civil war in the 1960s and early 70s ended up covering their losses and making huge profits in the late 90s and until today. I’ve heard one of the biggest Kuwaiti investors say he is willing to wait a hundred years [to sell his Lebanese land] because he knows prices will catch up with the rest of the region sooner or later.”

As far as economic indicators go, Lebanon’s situation could be much worse. According to an IMF report from April 2008, Lebanon’s “economic performance in 2007 was significantly better than expected, despite the difficult political conditions. Given a very strong fourth quarter, the authorities now estimate real GDP growth at 4%.”

Considering that Lebanon’s economy had zero growth in 2006 – an initial 6% growth completely wiped out by the war, this might be a reason to celebrate. Moody’s Investors Service also had a positive outlook, and in March 2008 raised Lebanon’s rating from negative to stable.

“If you compare prices in Lebanon to prices in the region, even in the immediate vicinity, whether it be Syria, Jordan, Egypt and not to mention Dubai and Qatar, the prices here have become reasonably inexpensive, which has never been the case – Lebanon has always been more expensive than its neighbors”, said Sawabini. But would that not be a indication that Lebanon is really not in good shape? Sawabini chose to put it differently: “[That indicates] that the prices have gone up very, very rapidly in neighboring countries relative to Lebanon. So, if things were to quiet down and we have stability, then you would see the boom that we are expecting. Prices would move much, much higher than they are now”.

Mounir Doueidy, general manager of Solidere, agreed, saying “When you compare prices between Beirut and elsewhere, given the big disparity in quality, Beirut is very cheap. So it is very logical for people to come and invest here, because they believe that it is the time to buy now before prices start going up.” In the first quarter of 2006, Solidere’s sales “went through the sky,” totaling $1.1 billion. “Then came the July War, and subsequent to that the sit-in, and sales stopped, selling land completely stopped.” From mid-2007, however, sales experienced a “revival”. With around 50% of Solidere still up for sale, Doueidy believes that waiting for a political solution to the current Lebanese impasse does not make much economic sense. He argued that if investors assume that a solution will happen in the medium term, “let’s say another year, it makes sense for them to buy the land today because it takes a year or two before you can come up with the concept, preliminary design etc. If they wait a year or two, then it may be too late because prices will have gone up.” Without giving a percentage, he illustrates how much prices have increased, even during this time of uncertainty: “In 2007, for example, we were selling the built up square meter for about $1,600. This year we are not selling below $2,000.”

May 28, 2008 0 comments

Editorial

Big Momma and her kids

by Yasser Akkaoui May 28, 2008

written by Yasser Akkaoui

My good friend Mishaal from Dubai told me the other day that he thought of Lebanon as, and I quote him, a “big momma.”

He elaborated: “She just can’t stop having kids, and when they are grown up she sends them out into the world to work so that every month they wire her money so she can live. This is like Lebanon, which cannot stop sending its sons and daughters out into the world and which would not be able to survive without the money they send home.”

He has, of course, got a point. It is a not an inaccurate rule of thumb — as far as rules of thumbs go — that Lebanon’s GDP is made up of one third banking, one third remittances and one third “the rest,” (i.e. tourism, industry, agriculture, retail etc.). It’s not the most balanced economic model but then again, no one ever said that Lebanon was the most balanced country (although in many ways it is, but that topic is for another debate).

Such then is our destiny. And given that our destiny is predicated upon travel and hard work, it is not an outrageous assumption that Lebanon’s foreign alliances should include those with whom we trade and those that welcome our workforce. It should not be considered outlandish, using this logic, that Lebanon should want to be a friend of the US, a country with a GDP of $14.5 trillion ($14,500 billion). Neither Brazil nor Russia, nor even the emerging giant India has hit $1 trillion, so it stands to reason that Lebanon, a nation that relies on 30% of its income from abroad, should want to work with Uncle Sam.

The same goes for the states of the GCC, especially the UAE and Saudi Arabia, which have absorbed roughly 1 million Lebanese into their workforce. They rely on the Lebanese, fellow Arabs, for their own brand of know-how and entrepreneurial talent and, in these days of petrodollar-fuelled investment, we rely on them.

And yet there are those who would criticize these decisions and argue that we throw in our lot with nations — and let’s not be afraid to name them — such as Syria and Iran, who have a combined GDP of $330 billion and employ practically no Lebanese, both of which offer no value-added to the general economy and whose governments annoy those countries that do.

One thing is for certain: Big Momma wouldn’t be impressed.

She has a household to run and hungry mouths to feed.

That’s all she should care about.

May 28, 2008 0 comments

MENA

Elegance by the billions

by Executive Staff May 18, 2008

written by Executive Staff

For most, the word ‘exotic’ conjures up images of tropical islands adorned with sandy beaches and coconut trees. The dictionary defines it as “alien: being or from or characteristic of another place or part of the world” or “strikingly strange or unusual.” Besides qualifying foreign cuisines or pristine beaches, the word ‘exotic’ is increasingly used in the world of financial investments.

In their search for the perfect asset classes that might beat market interests by a comfortable margin and diversify risks, financiers around the world have started looking into ‘exotic’ assets whether wine, art, coins, photography or antiquities, around which they develop structured products.

“Exotic asset classes, such as art and fine wine, need to be approached with caution due to the specialist nature of these assets and the risk they present to naïve investors from fraud and sharp practitioners,” underlined Duncan Hughes, of Arch Fund. “However, one of the chief attractions offered by such asset classes resides in the low correlation they tend to have with mainstream asset classes, thereby contributing significantly to effective portfolio diversification,” he added.

For Maneli Keykavoussi, Head of Middle Eastern markets at The Fine Art Fund, art has recently emerged as a new asset class. Moving out from the rarified world of luxury, it has entered the investment field. “Art shows generally a low correlation with equity and money markets as well as a negative correlation with bonds,” she explained. The art fund boasts an RIR of 59.68% cash on cash return and 36% on assets sold.

Strength from eccentricity

Arch Fund specializes in a number of portfolios that are primarily invested in different alternative markets such as private equity, private finance, and sustainable opportunities like alternative energy. “Our funds have generated strong positive returns, they’ve performed very well relatively to recent market performances,” Hughes added.

The Fine Art Fund is a private equity fund tailored to sophisticated investors. “It is a closed ended fund, in its fourth year since inception,” says Keykavoussi. Hughes asserted that “While both retail and institutional classes exist for most of exotic funds many may remain relatively illiquid. We offer, however, daily liquidity into all of our funds for retail size investors. Our minimum investments amounts vary greatly as we prefer to adopt here at Arch Fund a flexible approach. Our funds are structured in a way that allows

investments to be traded like regular shares on an exchange.” Investors can hence buy one single share if they wish to, which makes the fund accessible to most. While Hughes advises that not more than 15% of a person’s total assets be invested exotics funds, Maneli advocates to bring down this figure to 5%.

So how are exotic funds invested? Approaches adopted by financial companies seem to differ substantially from one fund to the other. The London-based The Fine Art Fund features four equity funds invested in old masters as well as in contemporary artists. Arch’s wine fund is invested in the finest French Bordeaux wines in order to ensure liquidity in the underlying asset class. The company, which has $1.55 billion of asset under management, has allocated $10 million to investing in wine.

Exotic funds appear to be more and more attractive in a world where rarity is strongly sought. “Since the subprime crisis, investors have been looking more seriously at alternative investments including exotics ones. More individuals are increasingly willing to be exposed to such asset classes. In addition, investors in Asia have a greater propensity to invest in ‘real’ assets (as opposed to financial instruments), which implies that in such a region, exotic asses are actually considered more mainstream,” Hughes pointed out.

The growth of the art scene around the world is another factor fueling the expansion of exotic assets. “As an example, the value of Indian art has literally been propelled in a few years only, with turnover growing from $20 million to $400 million. The large demand for art is mainly driven by scarcity of resources and institutional collectors,” Keykavoussi said.

A touch risqué

Beauty and luxury have their price. According to Hughes, exotic assets fall in the higher risk category due to the relatively new segment they offer. He underlined that while many exotic funds have fared well, a number of funds have struggled and ultimately disappeared from the financial market, their downfall resulting in the loss of their clients’ investments. However, he added that “A well-run portfolio of exotic assets provides, however, a valuable diversification vehicle for any investment portfolio.” Due to the specialized savoir faire required in managing such funds, exotics come with higher fees.

The emergence of indices such as the The Liv-ex 100 Index, the fine wine industry’s leading benchmark, heralds a new era, where fine spirits, antics and art will be also featured in investment vehicles. With the region witnessing unprecedented riches, the market for exotic assets will surely experience an upward trend.

May 18, 2008 0 comments

MENA

The vault’s ballast

by Executive Staff May 18, 2008

written by Executive Staff

Last month, the IMF announced it would be putting for sale progressively on the market some 12.97 million ounces of gold. Although gold has lost the allure it held during the reign of the Bretton Woods agreement, it still features on the balance sheet of central banks throughout the Middle East.

Gold played a vital role in the international monetary system until the collapse of the Bretton Woods structure of fixed exchange rates in 1973. Currencies started to be linked to a basket of currencies instead of gold, which reduced the importance of the precious metal as a mean of exchange.

Nonetheless, gold remains a central asset in the reserve holdings of central banks in a number of countries. The IMF is one of the largest official holders of gold in the world with 103.4 million ounces, equivalent to 3,217 metric tons of gold, that by the time this issue went to print amounted to almost $100 billion. According to analysts, the news of the IMF decision to put some of its gold for sale will certainly affect the bullion market on the shorter and longer run.

Everybody’s precious metal

Gold holdings vary significantly in the region. According to a March 2008 report by the World Gold Council, Lebanon comes first in the region’s classification of major gold holders, with 286 tons representing 39.5% of its total foreign reserves, calculated by the council using the end of January 2008 gold price of $923.25 per troy ounce, followed by Algeria with 173.6 tons, Libya with 143.8 tons, Saudi Arabia at 143 tons and Kuwait with 79 tons, closely followed by Egypt at 75 tons.

“In the eighties, the ounce of gold witnessed a rally and reached about $850, which currently equals about $2,200 if adjusted to inflation, before it plummeted to 330$ in 1985/86,” explained Lebanese economist Ghazi Wazni. “Throughout the 1970s and early 80s gold was considered a safe haven, especially when inflation showed double digit figures. To this day, gold is an asset that is not undermined by inflation,” he said.

But is this enough to account for the central banks holding on to the precious metal?

One of the many answers to this question can be found in any “Business 101” book. Diversification has always been dubbed by financiers as one of the keys to a sound financial approach. According to the World Gold Council gold may also be used to hedge risks and limit volatility in spite of its price variation.

Another factor playing in the decision to retain gold is that the price of the precious metal follows the law of supply and demand while the values of currencies and government securities are also linked to government’s economic approaches and the variations in central banks’ monetary policies. “The price of gold therefore behaves in a completely different way from the prices of currencies and exchange rates,” states the World Gold Council Report.

A dependable asset

By being able to maintain its value in terms of real purchasing power in the long run, gold tends to be particularly well suited to contribute to central bank reserves, especially in contrast with paper currencies, which depreciate over the long term.

Liquidity of gold assets is another factor that pushes some central banks into hiding it deep in their large vaults. “Nonetheless, in Lebanon, gold is considered a sterile asset. Half of our gold holdings are sitting abroad in American and Swiss vaults, which incurs an expense for the Lebanese central bank,” said economist Marwan Iskandar who believes that gold needs to be well managed and fructified to be considered an actual real asset on the central bank’s balance sheets. But Lebanese laws limit the central bank’s margin of maneuvering when it comes to gold, as any operations involving the precious metal require a parliamentary vote. “If the central bank had the freedom to properly manage its gold stock and the possibility to mortgage it out, this could translate in significant revenues of about $100 millions yearly,” added Wazni.

Often described as a non-income-earning asset, gold can, however, generate substantial profits if it is lent on the gold market. “Speculations on the price of gold have certainly affected to a large extent current prices, which are also linked to an increase in productions cost in South Africa due to the surge in fuel prices,” Wazni pointed out. The economist underlined that speculation might account for 70% of the current high price of gold.

Damaging events such as wars, an unstable regional context, an unexpected surge in inflation, or a generalized economic crisis — all of which prevail today — have certainly pushed investors toward gold as an asset class.

Regardless of market trends, the IMF’s Executive Board has recognized that its own holdings of gold give a “fundamental strength” to its balance sheet. The same might just apply to central banks.

May 18, 2008 0 comments

Information & Communication Technology Special Report

Global economic data

by Executive Staff May 18, 2008

written by Executive Staff

Ratio of the inactive elderly population aged 65 and over to the labour force

The percentage of the population that is 65 years or older is rising in all OECD countries and is expected to continue doing so. The number of inactive elderly as a ratio of the number in the total labor force is also increasing throughout OECD countries. These trends have a number of implications for government and private spending on pensions and health care and, more generally, for economic growth and welfare. The youngest populations (low shares of population aged 65 or over) are either in countries with high birth rates such as Mexico, Iceland and Turkey or in countries with high immigration, such as Australia, Canada and New Zealand. All these countries will, however, experience significant ageing over the next 50 years. The dependency ratio (i.e. the ratio of inactive elderly to the total labor force) is projected to be above 50% in Finland, Italy and Japan by 2020. This means that, for each elderly inactive person, there will be fewer than two persons in the labor force. The lowest dependency ratios by 2020, under 30%, are projected for Iceland, Mexico and Turkey. All countries will experience a further sharp increase in the dependency ratio over the period 2020 to 2050.

Life insurance premiums in USD millions

While Executive examined the Middle East and North Africa’s insurance sector in its special report, OECD data indicates disparity within the industry between advanced and industrialized countries. Life insurance premiums are hitting higher levels in the West, with aggregate US premiums hitting $607 million, the UK with $231 million, and Japan, with $257 million. Among the lowest aggregate life insurance premiums is Iceland, with $44 million and Turkey, with $774 million. These figures are perhaps buoyed by the culture of security as nations reach higher levels of prosperity but continue to face natural and man-made risks. In the US, UK, and Japan, life insurance plans are widely available and marketed, making the market apparent to the cautious consumer.

Technology balance of payments, USD millions

OECD countries are currently suffering amidst a dearth in in-country technology development, forcing many of them to import their technology from abroad. While the majority of Europe continues to rely of overseas technology development, as well as from Europe’s own France, Germany, and Luxembourg, Japan, the US, and the UK reported balance of payments surplus in their technology industries, reaching over twelve million dollars in Japan, about 15 million dollars in the UK, and nearly 33 million in the US, largely because of the government’s policy of fostering and encouraging talent, including Asia scientists who continue to form the backbone of the country’s industry. For Europe to overcome this lack of in-continent development, the European Union must create policies focused on talent acquisition and a competitive sector vis-à-vis foreign rivals.

Direct investment flows as percentage of GDP

Advanced economies in the OECD are attracting, for the most part, sustainable levels of direct investment flows, including foreign direct investment levels, which are broadly on par with foreign outflows. Among the ‘most invested’ countries are Belgium, with inflows hitting 39.2% of gross domestic product (GDP) and outflows reaching 33.6% of GDP. Hungary, which has a surplus in direct investment flows, has outflows accounting for 27.5% of GDP while its inflows only reach 21.4%. While most countries probably want to become net exporters of investment, many in the OECD are still open for foreign investment to help their businesses expand and their economies grow. The giant economies of OECD members, including Germany, the US, and the UK are maintaining lower levels of investment flows, perhaps paled by the countries’ significantly large GDPs or because investors looking for the ‘hot’ investments have found themselves turning to the developing world, which many are increasingly betting on in light of the subprime crisis in the US and the UK.

May 18, 2008 0 comments

Information & Communication Technology Special Report

Policing property in the digital world

by Executive Staff May 18, 2008

written by Executive Staff

With the mass black market of pirated materials ranging from software, music, cable television and movies so prevalent in most countries of the Middle East, governments and industry associations are working hard to combat this rampant problem.

In this region, software piracy is the norm rather than the exception with rates in most countries above 50%, while the global average hovers around 35%.

Protecting intellectual capital

With IT being an engine for economic growth through high paying jobs, assisting other sectors, and increasing tax revenues, protecting the integrity of software development and application is key. Business Software Alliance (BSA) and International Data Corporation’s (IDC) Global Software Piracy Study estimated that the IT sector supports 1.1 million businesses and generates $900 billion annually in tax revenues. With expected growth in IT between 2004 and 2009 set at 33%, that percentage could increase as much as 45% if software piracy decreases 10 points.

This prompted Muhammad bin Ibrahim al-Tuwaijri, the Arab League’s assistant secretary general for economic affairs, to declare piracy of all forms an ‘epidemic’ costing the Arab World upwards of $50 billion a year.

As a result, “Arab World Protect 2008: The First Arab Consumer and Brand Protection Forum” will be held in Jeddah in October to raise awareness of the economic ramifications and safety risks posed by piracy as well as to develop strategies to combat the problem.

Business Software Alliance (BSA), the foremost

organization dedicated to promoting a safe and legal digital world, has started partnering with many local stakeholders in the region to assist governments to combat this problem.

At one time, Lebanon was one of the Top 10 countries in terms of piracy and remains on the US Trade Representative’s Priority Watch List of worst case offenders, despite BSA’s recent calls for Lebanon to be removed. While intellectual property rights exist in Lebanese law, which conformed to most international standards, law enforcement and government agencies were unable to tackle the problem.

“This is when the private sector stepped in because it was their products that were being stolen,” explained Aly Harakeh, license compliance manager for Microsoft and official spokesperson of BSA in Lebanon.

In 1999, the private sector engaged officials and law enforcement by lending their expertise and training on identifying originals from counterfeits. Since that time piracy rates in Lebanon have decreased from 98% to 73% today. Also, in March 2006 Lebanon enacted a Cyber Crime and Intellectual Property Rights Bureau (CCIPRB) under the supervision of the Ministry of Interior, with 33 members. Mandated to crack down on copyright infringers, the task force began to conduct spot checks and market sweeps to catch businesses dealing in the distribution of unlicensed intellectual property —

Harakeh explained, “Since the bureau took over the task, it became more effective. They did a number of raids and went to areas that were considered to be inaccessible,” confiscating volumes of illegitimate intellectual property.

A measure of success in enforcement

In early 2007, BSA and the bureau publicly destroyed about 150,000 CDs and DVDs loaded with pirated software, music, games and music, while the investigations and crackdowns are continuing to happen. Law enforcement is also taking intellectual property rights infringement more seriously and handing down stiffer penalties on those convicted.

BSA is working to sensitize the public sector towards the importance of finding a balance between enforcement and awareness. As Harakeh pointed out, “awareness in itself would give enforcement some weight and show the seriousness of the situation. It would also help Lebanon to position itself as a nation synonymous with innovation and creativity.”

Harakeh also believes that intellectual property rights enforcement would also help to draw more investment both foreign as well as local as investors and businesses see that their work will be protected.

Across the region governments are beginning to take intellectual property rights seriously with the help of the private sector. Industry associations such as BSA, and even the Arab League, are stepping in to help enforcement of policies and setting up task forces that are now in place to curb the problem. In Saudi Arabia, an unnamed firm was sued by BSA for $1.3 million in March 2008, and the government canceled that company’s commercial registration with threats of more raids and lawsuits to come in the kingdom.

Anti-piracy raids have also hit computer resellers throughout the region with a reseller in Oman facing six months in jail and ordered to pay Microsoft $5,200 in compensation for selling PCs loaded with unlicensed Windows XP and Microsoft Office 2007.

At the regional level, piracy started to decrease in 2005 to 57% but rose again in 2006 to 60%. Generally, high-piracy rates are associated with the high growth areas of which the Middle East is a part. With one-third of PC shipments going to emerging markets, they are only buying around 10% of software exports, according to IDC. However, piracy is dropping also in part by the influx of branded laptops with preloaded legitimate software, which continue to gain in market share relative to desktop systems assembled locally without any legitimate software.

To understand better what this means, IDC has calculated the costs throughout the supply and distribution chains. According to its report for BSA, for every $1.00 in software sold, there is at least another $1.25 in services sold to design, install, customize and support that software. That software and those additional services then drive approximately another $1.00 of channel revenue, with most of this additional service — or channel revenue — going to firms which operate locally. In countries with piracy rates of more than 80%, for every $1 spent on PC hardware, less than $0.07 is spent on legitimate software.

Unfortunately, the continuing growth of internet penetration, especially in emerging markets and mostly among consumers and small businesses, and the increased availability of pirated software, particularly over the internet and from peer-to-peer (P2P) networks, is pushing piracy rates higher still. According to the IDC, already more than 60% of all internet traffic crossing the web is driven by P2P downloading, and almost two-thirds of that is from emerging markets.

This could make ensuring intellectual property rights and fighting piracy even more difficult to battle.

May 18, 2008 0 comments

Information & Communication Technology Special Report

The evil computers do

by Executive Staff May 18, 2008

written by Executive Staff

A few years ago there was a trend of irresponsible hackers, usually teenagers, releasing worms and viruses on the internet just for the fun and excitement of it — they were also known as “ethical” hackers.

But now there is a new breed of cybercriminals — highly tech savvy, sophisticated full-time professionals in a full-blown, global black market involved in cybercrimes like identity thefts, bank and e-commerce fraud, theft or manipulation of data or services via hacking. On the other end of cybercrime spectrum are cyberstalking, harassment, child predation, extortion, blackmail, stock market manipulation, complex corporate espionage and planning or carrying out terrorist activities.

Cybercrime is a criminal activity in which a computer or network (mostly internet) is an essential part of the crime. The computer or device may be the agent of crime, the facilitator of crime, or the target of crime. With tens of millions of online users around the globe the ratio of cybercrimes have surpassed their equivalents in real world. Recent research showed that in Britain alone, a new cybercrime is being registered every 10 seconds. Interestingly, 90% of cybercrimes stay unreported — either due to the victim’s unawareness or the absence of reporting mechanisms in most developing countries.

Cybercriminals use different methods to strike, which are called crimeware programmes, like keystroke loggers, viruses, rootkits or Trojan horses. Software flaws or vulnerabilities in computer systems or networks provide the foothold for the attacker. For example, criminals controlling a website may take advantage of vulnerability in a web browser to place a Trojan horse on the victim’s computer when the victim is visiting that malicious website. They can also be delivered to a victim through an email message where it masquerades as an image or joke.

After it is installed, the Trojan horse lurks silently on the infected machine, invisibly carrying out its misdeeds, such as downloading spyware, while the victim continues with their normal activities, oblivious to the cyber assault.

Top 12 spam relaying countries

The cost of “free” software

Most often, spyware is installed unknowingly with some other software. For example, if one installs a “free” music or file sharing service or downloads a screensaver, it may install spyware. Then the spyware covertly monitors the activity on the computer, gathering personal information, such as usernames, passwords, account numbers, files and even driver’s license or social security numbers. Some spyware focuses on monitoring a person’s internet behavior like emails one writes or received Instant Messaging (IM) conversations. After gathering this information, it then transmits it to another computer, usually for advertising purposes.

A Bot — short for ‘robot’ — is another sophisticated crimeware. They perform automated tasks on behalf of their masters (cybercriminals) like sending spam emails or blasting certain websites off the internet as a result of coordinated “denial-of-service” attacks.

Since a bot-infected computer obeys its master, the victim machines are called Zombies. Bots spread themselves across the internet by searching vulnerable, unprotected computers to infect. When they infect an exposed computer, they quickly report back to their master. Their goal is to stay hidden until they are awoken by their master to perform a task.

Sometimes the victim comes to know through their internet service provider that his machine is sending spam emails to other internet users. Sometimes bots work in a network of infected machines called a “botnet” that is controlled by a command and control server. Sometimes, botnets stretch all over the globe with thousands of Zombies at the disposal of a master.

Then there is the online con game — Phising. It uses spam emails, sometimes up to millions of messages which appear to originate from a well-known and trusted company. The emails have a business-like language and request the user’s personal information. Sometimes they even direct the recipients to fake websites that appear to be authentic. Then, again, keystroke loggers or Trojans are inserted into victim’s machine. And the next time the victim visits the website of his bank or enters credit card information it is captured and passed on to cybercriminals.

Internet-related crime should be reported to appropriate law enforcement investigative authorities at local, federal or international level depending on the scope of the crime. And one should protect one’s personal information and computer by installing security software with the latest patches and updates.

May 18, 2008 0 comments

Information & Communication Technology Special Report

Marwan Juma – Q&A

by Executive Staff May 18, 2008

written by Executive Staff

E What is Jordan’s overall information technology strategy?

At its inception back in 1999, int@j’s efforts were directed to devise a comprehensive framework for the ICT sector of Jordan in response to a challenge put forward by his Majesty King Abdullah II in 1999 for the private and public sector to prioritize the development of the IT sector. The outcome was the REACH initiative (Jordan’s ICT blueprint) that was devised by int@j and supported by the Ministry of ICT and non-governmental donors (AMIR-USAID). The REACH Initiative focused on modernizing Jordan’s regulatory framework, enabling environment, advancement programs and human resources.

During 2007, Jordan’s ICT sector accomplished a gigantic step toward a better and more prosperous future by launching the National ICT Strategy (2007–2011) to produce a comprehensive and market-driven ICT strategy that benefits the country as a whole. Similar to the 1999 REACH initiative, the National ICT Strategy (NIS) was blessed with His Majesty King Abdullah II’s endorsement and support. The Ministry of ICT and other non-governmental donors such as the USAID-funded SABEQ played critical roles in the development of this strategy.

With the creation of Jordan’s NIS, int@j led the sector and key stakeholders towards an ambitious future for the ICT industry. Throughout the implementation of its five-year strategy, Jordan envisages the creation of 35,000 ICT jobs, increased revenues of $3 billion, and 50% internet usage rate amongst Jordanians.

E Speaking of NIS, what is its implementation methodology and what have you achieved so far in the past few months?

The National ICT Strategy is written in the form of an actions-oriented strategic and tactical plan, with int@j being commissioned to publish quarterly reports that describe progress achieved, hurdles faced, and the means that will be implemented to overcome them.

In order to achieve its strategic objectives, NIS was divided into four pillars: regulation and investment, labor issues and education, research and development and connectivity. Our pillars have been actively at work to realize the strategy’s vision and objectives, and here I’d like to thank our volunteers for their relentless efforts and contributions.

Among the significant achievements that our pillars have accomplished so far are: identifying companies that offer quality certification services thus assisting Jordanian ICT firms to upgrade their businesses and quality assurance processes for increased efficiency, quality, and certifications thereof; successfully advocating the extension of income tax exemption of export services to the year 2015; creating opportunities for internships for women in the ICT sector through HM Queen Rania’s Initiative on Empowering Women; establishing relationships and cooperation between the private sector and the universities to assist in building more ICT relevant curricula; and creating opportunities for private sector organizations to embrace and participate in classrooms thus building a base of prepared graduates for ICT roles.

Furthermore, the strategy has initiated critical steps toward amending existing legislation to ensure the adequate protection of intellectual property rights, such as: beginning dialog on the issues of increasing internship opportunities and starting to offer incentives for companies that work with universities; establishing cooperation with the TRC to promote market competition through numerous new regulations such as an initial high-level offer of unbundled local loop services to increase competitiveness among all providers; maintaining ongoing dialog regarding appropriate pricing and service models accompanied by increased cooperation; developing an action plan to articulate the costs and mechanisms for providing each student with a computer for them to use.

Progress towards the National Strategy will be gradual. Implementation of the strategy requires dedication and commitment from all stakeholders, including industry, government, the higher education sector and int@j.

E How big is the Jordanian ICT sector? How much did it grow in the past years?

We have come a long way. It seems like yesterday when, back in 1999, a small group was called for a meeting with His Majesty King Abdullah to discuss establishing an IT industry that harnesses our most precious resources, our human resources. Back then, our total industry turnover was less than $300 million, employment across the sector was below 1250, our telecom infrastructure was seriously lagging behind and investments were close to zero.

At first it seemed like an insurmountable task, yet realizing we had the country’s leadership behind us we took advantage of a once-in-a-lifetime opportunity and embarked on a journey that redefined our lives, gave hope and opportunity to the youth of our nation, and equally important, proved that private sector leading initiatives with full government backing is truly the only way forward. As a result of His Majesty’s vision, the government’s support, and our collective efforts, total ICT turnover is now close to $2 billion with exports over $200 million, and employment around 15,000. The ICT sector represented around 12% of GDP, back in the year 2000, $250 million; today it stands at $1.8 billion. This sector has grown 50% year after year for the past years. Yet, this is not enough.

E As we speak, int@j will soon celebrate its eighth anniversary. How do you think these past years went and what is its initiative for 2008?

The Information Technology Association of Jordan (int@j) has grown from 21 members in 2000 to over 110 today. Membership is open to all companies operating in Jordan in the fields of software development, support, application, telecommunications, value added assembly, and distribution of ICT products and services. It is also open for suppliers and users to these industries, universities, and others supporting ICT training and promotion. Int@j’s members range from the largest software developers to smaller start-up companies.

While in fact a lot has been accomplished, we believe a lot more can and should be done, particularly in the areas of academia and industry cooperation, sector capacity building and bridging the digital divide to ensure all Jordanians have an equal opportunity to share in and contribute towards transforming Jordan into a true knowledge based economy.

The year 2008 will present additional and new challenges in accomplishing more and more of the strategy’s objectives and targets. The list of tasks is long and tedious, but by continuing to work together in harmony and dedication I am more than confident in that we will celebrate yet another successful year next anniversary. Int@j is poised to undergo a number of fundamental changes which will substantially boost the association’s value proposition and offerings to its members and stakeholders. This year will witness a new influx of member services that foster networking, create business opportunities, and support our members in strengthening their organizations’ capacities and capabilities. We also plan to establish int@j as the ICT sector’s official and most trusted information hub, advocate vividly on behalf of the sector, and engage in a rich menu of services that are designed to meet our members’ needs and expectations from their association.

This year’s most celebrated accomplishment will be the fourth Jordan ICT Forum, scheduled December 2008. Once again, this event will showcase the capabilities and strengths of our growing industry in a format that is appropriate for our sector. In addition to valuable networking opportunities with regional and global industry leaders, the informative panel discussions and keynote speakers will offer ample information about global ICT trends and developments.

May 18, 2008 0 comments

Information & Communication Technology Special Report

The partnership for Lebanon

by Executive Staff May 18, 2008

written by Executive Staff

The lack of a modern ICT infrastructure in Lebanon has hindered internet capabilities, causing massive inefficiencies for individuals and businesses. Unlike its neighbors, Lebanon still lacks broadband leaving many sectors without the ability to transfer files electronically. This inefficiency increases costs.

By conservative estimations Lebanon’s IT sector grew 12-13% year-on-year, according to Gabriel Deek, president of Professional Computer Association (PCA). He believes that if Lebanon had better ICT infrastructure that growth could reach 20-30%. Cisco, with its partners, has stepped in to help Lebanon get back on track and create a network that in the end will give individuals and businesses cheaper and better access to the internet.

The Partnership for Lebanon began as a crisis intervention by US-based firms Cisco, GHAFARI, Intel, Microsoft and Occidental Petroleum following the 2006 War.

“The Partnership for Lebanon came about following the war in 2006 and it was mainly to see how the private sector in the US could come in and do some sort of assessment and see how it could use its resources to help revive Lebanon,” explained George Akiki, program director for Cisco Systems in the Partnership for Lebanon. “We came in and started collecting money from our employees, CEOs, and friends and gave donations and grants to local NGOs and organizations on the ground, mainly in the south, that were doing restructuring efforts,” he said.

After that, the collaborative effort created a framework that ended up being the Partnership for Lebanon. The initial activities centered on reconstruction efforts mainly in the South, which became the first work stream (response and relief) of five, including connecting communities through online centers, workforce training, job creation and ICT infrastructure. This framework came about in January 2007 and in general comprises socio-economic efforts to put the country on the path of economic growth.

“The main focus is to establish public-private partnerships (PPPs) to work on replicable models and initiatives for whenever we disengage we want the local community to be on a path of sustainability for whatever initiative we started,” Akiki explained.

The Partnership focused on the most pressing need for businesses in Lebanon – ICT infrastructure. “ICT infrastructure is critical and we engaged initially with some tactical moves. The Internet Exchange Forum and the International Internet gateway came about as initiatives– the country had a “small pipe” coming in for internet, in layman’s terms,” said Akiki. The upgrade required higher technology routers, which Cisco donated to Ogero, the state-run fixed-line telecommunications provider and they are currently being implemented as part of a larger project.

The Partnership worked on the Beirut Internet Exchange (Beirut IX) to keep local ISPs in the country. The presence of an Internet Exchange Point (IXP) redirects the traffic into Lebanon instead of sending it on expensive international leased lines. By having traffic move through local bandwidth, end users will connect faster to the local web-server, while lowering the costs for ISPs. “The Internet Exchange Point allows us to save money and time. The Exchange Point is more important when transferring video or other large files – speed becomes even more of an issue.”

The Partnership is also assisting the Telecommunications Regulatory Authority (TRA) and officials on the national broadband strategy initiative, which focuses on the whole infrastructure of the country with the vision that five or ten years down the road everyone has access to high bandwidth to help businesses compete regionally and globally. “We have gathered experts that we have globally that have done it in other countries and advising on regulatory policy and the business case of what it would take to do this. We have an advisor with an investment banking background who has worked for two or three months to develop a model on the business case. We have also advised on the network architecture for the fiber optic core then later expanded to wireless, DSL, and other technology,” explained Akiki.

The Partnership presented its full report to the TRA in January of this year at a stake holder’s workshop on how to go about bringing broadband to the country and all of the issues surrounding it. The workshop included professional leaders across many sectors, from broadcasting to hospital administrators who presented their views on how broadband would improve their work. The TRA has taken about 80% of the Partnership’s recommendations into their plan for issuing licenses next year, according to Akiki.

“We see our role not as a traditional consultant as someone who simply delivers a report. We are here to see what it would take to put a real program in place and make it happen,” said Akiki. The next step for the Partnership is to get more parties involved at the public, private and NGO levels.

Akiki concluded, “What we are trying to do is set the priority where ICT is at the top. In every funding discussion and priority set in any department it should be at the top.”

May 18, 2008 0 comments

Information & Communication Technology Special Report

Tuning a market competitive

by Executive Staff May 18, 2008

written by Executive Staff

Since the departure of state-run telecom monopolies around the year 2002, telecom regulators have sprung up with the intention to establish an authority that is independent of political and business interests and to promote a pro-competitive environment.

“As far as we are concerned as a regulator, we are attempting to create an environment which allows technology and advances in technology to be fully utilized and quality services to consumers for the lowest cost and choice,” explained Alan Horne, director general of the Telecommunications Regulatory Authority (TRA) in Bahrain and president of the Arab Regulators Network (ARNET).

The newest regulator in the region is the TRA in Lebanon that began operations in 2007. For Dr. Kamal Shehadi, its chairman and CEO, “ICT promises to be the engine for growth, prosperity and job creation for the Lebanese economy over the next few years.”

With ICT impacting virtually every sector operating in Lebanon, proper infrastructure is a must to keep up with the development taking place throughout the region.

“Lebanon has a competitive advantage because we are rich with human resources,” said Shehadi, continuing, “Imagine Lebanon with the infrastructure to support the financial services industry, the creative industries, and many others — we would be far ahead of other countries in the region since the Lebanese can be the most competitive in these industries if given the chance.”

Shehadi explained that the ICT revolution has not happened yet as a result of having a monopolistic sector that was subject to political compromises or division of the spoils.

“With the establishment of the TRA we are moving away from both of those problems. We are moving to a competitive environment where you have choice, better price-quality ratios, and leading edge technology. With the powers to license being transferred to the TRA, it also means that the investor is no longer subject to political considerations that may change from one government to another,” he said.

A regulator’s quick start

In its seven-month history, the TRA has recruited and trained around 40 professionals and has focused on developing the basic building blocks for a rule-based environment. They have developed regulations and policies on conduct such as relations between service providers and interconnection, competition, consumer affairs, and quality of service. The TRA has also issued the national frequency table that assigns the spectrum — the highway of broadband and wireless technology.

The single most important issue on which the young regulatory authority has focused has been the sale of the two mobile licenses and preparing the tender documents, technical conditions, auction rules, and issuing the licenses for new service providers. It also created a public website containing all public information about the sale of the mobile licenses.

To ease the process for firms involved in bidding for the license — to do their due diligence as well as remain fully transparent — the TRA and the Higher Council for Privatization has developed an all-virtual data room where all documents relating to the privatization and licensing of the two mobile operators can be found. The site gives bidders access to more than 40,000 pages of documentation and allows the communication of the same information to all bidders simultaneously to re-enforce transparency.

Though one of the smallest markets in the region, Bahrain’s TRA is moving forward for a third mobile license to further stimulate the market. As Horne sees it, “Generally, two operators are seen as being a duopoly and deemed anti-competitive.”

He went on to explain, “As regulators, we have to create an environment where there is low barrier entry… There has been a tendency in the mobile sector to limit the number of players but I think progressively that requirement will be lessened, especially if there are established two or three very good players, then really there is no good argument why the regulator shouldn’t open to anybody who wishes to enter the market place,” because, he remarks, with the original players already firmly established, it only makes sense that if another party can enter and push further growth in the market, “then they should be able to do it.”

Jordan, who has the most telecom licenses in the region at four, is focusing on internet and connectivity. Dr. Ahmad Hiasat, Chairman of the Board of Commissioners and CEO of the Telecommunications Regulatory Commission (TRC) of Jordan, explained, “We consider the year 2008 to be a new turning point in the telecom market as it is expected to considerably reshape it for the coming few years.”

“Since the total liberalization of the Jordanian telecom market in 2005, a considerable snowball pattern of growth has taken place and has turned the ICT sector into a market worth $1.8 billion by the end of 2006. Several foreign and local investors have found a rich, stable, consistent, and transparent telecom environment in which new technologies and services are under great demand,” he remarked, adding that “We expect that this market will keep growing to be one of the largest markets in the region.”

The fixed market witnessed an important change after announcing frequencies bids to provide fixed broadband wireless access (FBWA). This initiative will allow the entry of radio-based services such as WiFi and WiMAX which could include ‘hotspot’ services. Five companies have won the offered frequencies bids, one of which has already begun providing FBWA services using WiMAX in the capital Amman. As Hiasat explained, “This healthy competition environment will eventually result in national coverage with high quality, fast wireless data communications, such as internet service at lower prices.”

There are currently 17 ISPs operating in Jordan with a user penetration rate of 14.5% as of the third quarter of 2007. In the last two years, the ADSL prices have decreased by 27%.

“We consider the current prices of internet to be considerably high compared to western countries, which when combined with the high prices of computers, results in limitations in user penetration and knowledge transfer. We aim to have a 50% broadband internet access penetration rate by 2011,” Hiasat said.

Lebanon is also focusing on connectivity by regularizing the data service provider (DSP) and internet service provider (ISP) licenses. Under the previous regulation, DSPs and ISPs were renewed every year leaving little incentive to invest in infrastructure. The new licenses will be issued for 10-15 years to give providers the stability they need and plan ahead.

Stability for investment

“That’s the reason they haven’t invested very much in the last few years,” Shehadi explained. “If you have a license that has to be renewed year after year with no certainty that it will be renewed, you aren’t going to invest. So we are moving to a 10-15 year license and expanding the scope of services they can offer. We will also be providing for a more rational approach to taxing this sector and seriously reconsidering the revenue-sharing arrangements that exist today. All of these issues have been holding back the development of telecommunications and we hope to unshackle the private sector.”

The TRA will also auction off two national broadband licenses in the second half of 2008, with July being the target month. The National Broadband Licenses will allow the service provider to build an international gateway and high-speed core and metro networks throughout Lebanon. The NBLs will also provide fiber to the end-users (both residential and business). Liban Telecom, the company to be established in 2008 to corporatize the Ministry of Telecommunications’ operations, will also have a National Broadband License. The TRA will encourage not only the sharing of infrastructure between these licensees, but it will require that Liban Telecom provide equal and open access to the existing infrastructure to lower the cost of deployment of new networks, allowing the provision of services to the broadest spectrum of the Lebanese population at the lowest and most competitive prices. Shehadi added that the NBLs will provide the “highways for prosperity” and the competitiveness of the Lebanese economy for the years to come.

In Bahrain, technology was categorized and regulated by type. “We have not always been technology-neutral. We have licensed GSM, broadband and now WiMax — these are all technologies with specific licenses,” explained Horne. “What we see the trend as being, and what our stated objective is, to move towards a unified license where any licensed operator can use any technology they wish.”

While the spectrum will still be regulated, the TRA’s aim is to make it as available as possible. “That is the step we can take to help in convergence and mobility,” added Horne

“What is required now is to have device manufacturers such as Intel, Nokia and others produce devices which can connect to multiple networks,” Horne averred. “The focus should be on choice on the part of the operators, in the technologies they employ, as well as for the consumer.” Ultimately, he is for the lowest cost whether that is through the operators or connectivity technology services. “Something we would hope to see in the future in handsets is least cost routing — so the first route is the least cost.”

As a region, ARNET is tackling a recommendation on roaming regulations to be finalized before the June 2008 ICT ministers meeting. So far, no intrastate regulations have been agreed upon, leaving telecoms to determine how roaming is charged.

“Mobile operators want self-regulation but the question is — is it good enough and have they proven themselves?” Horne asked.

“If not then certain regulations should be introduced to bring down the cost of roaming.”

May 18, 2008 0 comments