Lebanon

Agriculture – Organic growing pains

by Executive Staff
written by Executive Staff
 
For almost a decade, global demand for organic products has seen a steady increase. According to UN figures, in 2006 the global organic market stood at nearly $40 billion, making up 2% of food retails. By 2012 it is expected to reach $70 billion. Organic produce is usually 20-50% more expensive than non-organic, yet despite this, since the late 1990s the organic market has achieved exponential growth of about 20-25% a year. The increased demand for organic produce has enabled some local farmers to increase their incomes nine-fold.

In Lebanon, organic farming has seen growth inline with the general global increase; however, the 2006 Summer War dramatically slowed it. According to the Association for Lebanese Organic Agriculture (ALOA), 10% of organic farms in Lebanon were contaminated by cluster bombs and the general follow-on effects of the war, such as lost harvest and incapacity to prepare land for the next season, have only just subsided in 2008. Consumption of organic products has also been hurt through the current political deadlock, the general economic slowdown and a severe lack of awareness and understanding of what ‘organic’ actually means.
 

How to define organic?

In Lebanon, organic processing is mostly focused on the production of foods typically used in Lebanese cuisine, such as olive oil, oregano mix, orange blossom water, and traditional Lebanese jams and recipes. One of the main obstacles to the growth of organic produce is the confusion that reigns among the public over the definition of organic.

People commonly confuse baladi products, which are locally grown, with being organic, and supermarkets in Lebanon often put organic products near diet products, leading many people equating the two.

Souk el-Tayeb, a weekly farmers market in central Beirut, is often thought of as being an organic market. However, Kamal Mouzawak, one of the market’s organizers, is at pains to stress that this is not the case. “People don’t understand what organic means. It is not just ‘clean’. For food it has a certification process.” He went on to state that at Souk el-Tayeb there is a clear separation between the 15 certified organic and the 32 local non-certified producers. Organic produce has to comply with a strict set of rules and regulations and something can only be called organic if it has the required certification.

Organic farming can best be described as a holistic approach that aims at producing food within an environment ecologically balanced between the soil, the plants and the animals, and not simply as replacing synthetic pesticides and fertilizers for organic ones. As much as possible, organic farmers must try and rely on crop rotation, green manure, compost, biological pest control and so on. For a product to be called or certified ‘organic’ the whole cycle must be organic.

 

 
For instance, to make organic apricot jam one cannot just use organic apricots but the other ingredients and even the packaging must be organic. Also for a farm to be organic it must not only ensure that it uses organic techniques but that the land next to the farm is free from contamination and the chemicals it uses are not seeping into the organic farmland.

The significant hurdle to organic production in Lebanon is that the foundations of organic products lay in the concept of its strict rules and regulation that are embodied in the process of certification. Yet, in Lebanon, due to the current political deadlock, the necessary laws have not been passed to ensure that certification is placed within the framework of the law. Lebanon does have two local certifiers, Libancert and IMC, that are re-certified by international organic bodies. But without the requirement of certification being enshrined in law, legally in Lebanon anyone can call themselves organic. Roula Fares, general manager of LibanCert, said that, “many farmers are calling themselves ‘organic’ because they think reducing the amount of pesticides and fertilizers they are using makes them organic.”

Training farmers to understand what an organic approach to agriculture involves has been an essential part of the effort by civil society groups that are eager to see organic farming grow in Lebanon. Rami Zriek, professor of agriculture at AUB and one of the first to help develop the organic sector in Lebanon, said that one of the problems of organic farming in Lebanon was the fact that it was not born by the farmers but parachuted in by well-meaning individuals. The repercussions of this are that many of the farmers are not committed to organic farming beyond an economic rationale, putting organic sector at the mercy of the market.

But problems exist at an even more basic level. As a report by the Ministry of Environment states, the majority of farmers in Lebanon lack basic agricultural training and the high rates of illiteracy among them have also made effective communication and training difficult.

The need for capacity building

Many of the local and international civil society organizations have established workshops and various other training programs to provide training for the more knowledge-intensive methods of organic farming. But Corinne Deek, of the German Heinrich Böll Foundation, said that in reality the only farmers that can move towards organic agriculture are the relatively well educated, ‘elite’ ones. As she said, “Organic farming needs significant capacity building but no one is doing it.”

Others object to this point of view, and particularly Zriek who strongly disagrees with the idea that it is hard to train local farmers into becoming organic growers. His argument is that there is a traditional body of knowledge, passed down from generation to generation, that can still be drawn on to help farmers become organic, and that the report by the Ministry of Agriculture should be taken with a pinch of salt. “Farmers [in Lebanon] are highly trainable and workable. Skills and training are not the limiting factors to organic farming in Lebanon, but marketing [is].”

Organic produce in Lebanon is no doubt still a niche market. According to Rania Touma, president of the ALOA and general manager of Healthy Basket, although there are no exact figures, organic produce accounts for less than 1% of the current market for food produce in Lebanon. Healthy Basket sells much of its produce on the basis of a Community Supported Agriculture (CSA). The CSA aims to create a strong bond between producer and consumer, with the central idea being that the consumers purchase a share of the farmers harvest at the beginning of the season.

At Healthy Basket, 50% of their produce is sold on the basis of CSA in which customers pay a month in advance for four weekly baskets of produce. Zriek, however, thinks that there is problem with this system for Lebanese customers in that, with organic farming, the farmer can only produce a limited array of produce and not all year round, whereas Lebanese customers want all the produce every week.

Zriek added that in Europe and the United States, the CSA concept includes the consumer going to the farms and picking up the produce, helping to establish a bond between the consumer and producer that the industry relies upon, but in Lebanon the tendency is for people to want their goods delivered directly to their door. Healthy Basket overcame these local demands by engaging different farmers in different locations to obtain a wider array of produce and to ensure that, as much as possible, produce is available all year round. In a local twist, the ubiquitous Lebanese scooter service was adapted for the delivery of organic produce to the customer’s door.

Competition in the region

However, organic producers have not managed to convince the hospitality sector to go organic and many Lebanese customers cannot accept that some produce will not be available all year round or are unwilling to pay the extra premium for organic products.

In 2005/06 Healthy Basket had begun to export some of its goods, but strong organic markets in Saudi Arabia, Morocco and Egypt pushed out Lebanese produce. Touma explained that, compared to the rest of the region, in Lebanon production is expensive because there is little subsidy from the government, and during the initial years, organic produce is very costly to develop.

However, Zriek pointed at an essential difference between the regional organic agriculture sectors, saying that “Lebanon is lucky in that its citizens eat the products that are produced here, as opposed to Morocco and Egypt where the best produce is exported to Europe and elsewhere,” resulting in a situation where despite having well-developed organic agriculture and high quality produce most of Egypt’s and Morocco’s citizens eat sub-standard produce. “Exporting high value crops and importing low value is not the philosophy of organic agriculture.”

Organic agriculture as a philosophy has also often been talked about in terms of reducing rural poverty, the vulnerability of rural woman and increasing food security. World Vision, a Christian relief and development organization, began two large organic farming projects in Lebanon at a cost of $14 million. According to the organization, these projects are “a response to the struggling agricultural sector in Lebanon because it creates sustainable job opportunities for struggling Lebanese farmers and improved incomes for their families, as well as for others involved in the harvesting, processing, marketing and sale of high quality organic produce and products.” World Vision claims that around 700 farmers have participated in the projects and 18,000 people have directly benefited from the program. Although many cynics wonder how organic farming, being as knowledge-intensive an industry as it is, can help the poor, Zriek is among those who concur with the World Vision approach and its benefits, and claims that the very ethos to organic farming is poverty alleviation.

He dreams of a day when the whole of Lebanon will be completely organic but warns that this can only ever be realized if the government takes a more active role. “Currently only civil society is putting its mind to achieving this dream and this is not enough.” But in Lebanon, dreams are rarely realized through government. It is through the dynamic and resourceful private and civil society sectors that the country has survived and thrived. If organic agriculture is to prosper in Lebanon and go beyond global trends, then the civil society groups must create a second awakening for Lebanese consumers and convince them of its benefits.

 

 

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Lebanon

Beirut Stock Exchange – Struggling for momentum

by Executive Staff
written by Executive Staff
 
When the Beirut Stock exchange reopened in 1995 there were high hopes that it would regain its position as a center of Middle East trading. The bourse was originally established in 1920, second only in the region to the Cairo and Alexandria exchanges of Egypt. As a consequence of the tumultuous civil war years it was forced to close in 1983, during which time other regional bourses grew strongly, particularly fuelled by oil wealth in the GCC, and they have largely outstripped Beirut’s former reputation. Although the market cap of the BSE grew from $8.3 billion at year-end 2006 to $10.9 billion by year-end 2007, it still lags far behind the likes of Kuwait Stock Exchange with a market cap in excess of $70 billion.

The BSE does have some solidly performing stocks, but is still struggling to gather momentum, with only 11 listed companies. Even at this, Solidere alone represents a large proportion, accounting for 34.7% of market capitalization on December 31, 2007, and 65.1% of market share by value transactions over 2007. However, Fadi Osseiran, chairman of Blominvest Bank that runs the Beirut Blom Index, explained that the banking sector is now beginning to match Solidere, with the two taking a roughly 40-40 split of value transactions. He hastened to add, though, that Solidere’s two listed instruments are still by far the single largest component of the BSE, followed by Bank Audi, something that will not change until there are new listings.
 

Attracting more IPOs

Unfortunately, few see the climate as particularly favorable for initial public offerings (IPOs). In 2005 the Ministry of Finance and the BSE commissioned a study on how to encourage companies to list and identified 50 potential IPOs. Nonetheless, as Dr. Fadi Khalaf, chairman of BSE, explained “those companies that were thinking of listing have postponed their plans due to the current situation.” Any IPO is a trade-off between encouraging investors to buy and raising capital for the listing company. Khalaf believes that in this case “the problem has not so much been a matter of investor confidence, just that when you start an IPO, you don’t want any surprises, related, for instance, to the political deadlock we are experiencing.”

Some believe that more could be done to entice companies to list. Osseiran pointed out that one can use “the stick and the carrot.” Being more stringent on banking regulations by cracking down on banks that lend to companies with insufficient capital, he believes could “force companies to seek capital in other places” — namely an IPO.

However, the main setback of late to growing the BSE’s market cap was the falling-through of the planned privatization of Lebanon’s mobile telecommunications licenses, which were to have been listed on the BSE. Khalaf commented that the BSE “had been hoping the privatization would take place for some time — you need maybe 100 small IPOs to be equivalent of a few billion dollars of privatized market capitalization.” The privatization of the mobile licenses and listing of the new companies had been hoped to raise upwards of $5 billion. As he pointed out, “in stock exchanges all around the world, including developed countries, what has really boosted the exchanges were privatizations.”

Privatization of the BSE itself is also an issue, currently the exchange runs under the auspices of the Ministry of Finance. Finance Minister Jihad Azour is clearly in favor of privatizing the exchange, stating “our objective is to have capital markets that are privately owned and managed.” Plans were under way for its privatization under a draft law that was being considered by parliament, which since it is not currently convening, is unlikely to be passed anytime soon. An independent regulatory body should also come hand in hand with privatization. In the view of Osserian “a regulatory authority is of utmost importance, without it the stock exchange has no father or mother to defend it. Unless you set up a capital markets authority you will not find the driving force for the BSE.”

Biggest regional issuer of bonds

Lebanon certainly retains strengths, especially in terms of financial expertise. In the minister’s eyes, Lebanon “could easily be the regional leader in the fixed-income market.” He cited the fact that it is the biggest regional issuer of sovereign and private debt and that Lebanon’s banks are active market makers who have experience in leading eurobond issues.

Although euro and sovereign bonds have been listed on the stock exchange with a zero commission on trading as instructed by the finance ministry, they are not actually traded. According to Khalaf, “the market between banks is actually liquid, they just don’t choose to trade on the stock exchange, even with the zero commission incentive.”

There is the possibility that a new instrument may list on the exchange by the end of the year, in the form of the Blom Index. Osseiran explained that “initially we only set up the index for bench marking purposes, but this year we went live as a prelude to trading.” The form of the instrument and whether it will actually be traded on the exchange waits to be seen. As he pointed out, “we have not yet finalized the details, whether it will be a fund or a stock.” So while there may not be any new company listings, there is at least the possibility that another instrument will list in the near future.

 

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Banking & Finance

IPO Watch – Sector Surging

by Executive Staff
written by Executive Staff

The GCC is expected to be the home to over 150 new IPOs during the upcoming two years, according to industry reports. Morgan Stanley predicts that Saudi Arabia alone is set to launch at least 110 initial public offerings over the next two years. In parallel, the number of IPOs in the Levant and North Africa region is expected to increase threefold in the same period.

In 2007 the GCC’s compounded value of funds raised through IPOs was $10.5 billion, up by 40% when compared to 2006. The action was split mostly between the UAE, which came in first place raising $5.1 billion, and Saudi Arabia, where $4.81 billion have been raised. Qatar followed as distant third with $389 million, then Oman with $156 million and Bahrain with $69 million. As such, market observers say that Gulf and foreign investors alike continue to see the region’s IPOs market as a “reliable” and a “safe” place to earn high returns with minimal risk.

The month of March supported that sentiment as it witnessed considerable activities in the IPO market when the UAE-based Ajman Bank, a shariah-compliant concern, was over 85 times oversubscribed when it closed its IPO in the first week of March. Newly established Ajman Bank, whose largest single shareholder is the government of Ajman in the northern UAE, offered 55% of its shares to the public in February, for $.27 each, valuing the bank at $272.3 million.

Offering 55% of equity and shariah-compliance as well was the IPO of new UAE insurer, Takaful Al-Emarat Insurance. UAE-based Al-Buhaira Nation

Insurance Co. or Abnic, and Austrian insurance leader, Uniqa Group, announced their upstart joint venture in mid March and said at the same time that the new firm will conduct an IPO from March 23. The firm will operate out of Sharjah and the target for funds to be raised through the IPO was around $22.5 million.

Saudi Arabia saw a generous number of new IPO announcements in March starting with Muhammad Al-Mojil Group (MMG), a construction services firm, which plans to offer 30% of its shares in an IPO scheduled to be launched on May 3, 2008, and close on May 12. Although the company did not disclose the amount it wants to raise, the IPO is expected to generate a lot of interest since the construction sector is a favorite among Saudi citizens. Another hush-hush IPO announcement came from Medina Cement, which plans to sell portions of its shares in IPO. But the company did not reveal the number of shares that would be offered and the amount it wants to raise. Medina Cement was established in 2005 with a capital of $146.9 million, divided into 55 million shares with a par value of $2.67 each.

In the meantime, three Saudi insurance providers, BUPA Arabia for Cooperative Insurance, United Cooperative Assurance Co, and Saudi Reinsurance Co closed their IPOs on March 15th. The $21.3 million IPO of United Cooperative Assurance was covered 12.56 times with demand. Based on high demand for a wave of Saudi insurance IPOs in 2007, analysts had anticipated over subscription but IPO results for BUPA Arabia’s $42.7 million IPO and Saudi Reinsurance Co’s $106.7 million offering were not in by time of writing this report.

The biggest splash in IPO-related excitement for March was supplied by Zain Saudi Arabia, which debuted March 22 on the Tadawul Exchange with a 110% leap in first-day trading, although the market overall was reeling from negative sentiment. The kingdom’s third mobile phone operator completed the subscription period for its $1.86 billion offer of 50% equity in February.

In the Levant region and specifically in Jordan, Amman-based Sabaek for Investments, a financial services firm, invited subscriptions to an IPO between March 16 and March 30. The company announced in early March that it will offer over 26% of its shares to raise around $5 million to finance operating and investment activities.

It is not difficult to understand the rationale of local and international investors’ interest in the region’s IPO market. Local experts say the recent record oil prices highs in the $110 range will improve liquidity even further and local investors have no choice but to find a new home for their cash. This home, experts agree, will be mostly in regional markets.

Executive spoke to several local experts who gave the indication that the continuing economic spiral in financial markets in the United States and some European countries would encourage the launch of share floats in the region and push investors to park their cash into those companies. This pattern is not unrestrainedly beneficial for the region’s economies, but this is the way it must happen. Oil cash inflows must be put back into the land where the oil came from and the emerging economies of the region must now move on to the final phase of becoming fully developed.
 

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Lebanon

Liquified natural gas – In the pipeline

by Executive Staff
written by Executive Staff

In recent years, Lebanon has been promised supplies of liquefied natural gas (LNG) from Egypt. This cheaper source of energy — a pressing need in light of the oil price spike, towering around $10 a barrel — is to be conveyed to Lebanon through the Pan-Arab Pipeline. At the end of February 2008, the ministers of oil and energy of Syria, Lebanon, Jordan, Egypt and Turkey met in Damascus to discuss the nitty-gritty details of this ambitious project.

The venture, which has been in the proverbial pipelines for some years now, will allow natural gas to be transported from Egypt to the Levant and later on possibly to Europe. When completed, it will have a total length of 1,200 km and carry an estimated cost of around $1 billion. In Lebanon, explained Sarkis Hlaiss, general manager of Lebanon Oil Installations, a subsidiary of the Ministry of Energy and Water, “The pipelines, with a $22 million price tag settled in full by the government, cover a distance of 32 kilometers from the Syrian border. Lebanon’s pipeline has been finished for some time now, but we were still waiting for Syria to finalize its portion of the network, estimated at about $200 million, ending in Deir Ammar in Lebanon.”

Following the Damascus meeting, Syria’s minister of oil and mineral resources Sufyan Allaw announced at a press conference that Syria had reached an agreement with Egypt to start supplying gas via the pipeline starting March 21, 2008, after completing necessary final tests.

In Lebanon, during the initial phase the network will be connected to the Deir Ammar station, which currently meets approximately a quarter of the country’s energy demand. However, Hlaiss added that both the Deir Ammar and the Zahrani power stations boast dual gas-oil and natural gas capacity, one being a replica of the other. The power stations had initially been destined to operate on LNG, with the possibility of temporarily switching to oil, during the cleaning of the turbines.
 

Expanding the gas network

Of course the opposite occurred: power stations are essentially running on gas-oil, which now is not only much more expensive than LNG but also dramatically decreases the life span of turbines, according to a government source. Now that the LNG pipeline is coming, “We are toying with the idea to further expand the current gas network while connecting it to the Zahrani power station,” Hlaiss said.

The pipeline, capable of carrying some 7 billion cubic meters of gas per year, starts in Port Said, on the Suez Canal, and then

Off-shore oil in Lebanon?

In recent months, the topic of possible oil fields off the Lebanese coast has come up in newspaper headlines. But because of the sensitivity of the topic, few facts are known. Speaking to Executive, a Lebanese government source said that up to 25 square kilometers of underwater surface have been surveyed in order to locate oil-bearing deposits, adding that “while preliminary results are excellent, one has to bear in mind that even when geological conditions are at their best, there is only a 15% chance for actual oil deposits.”

According to the source, the possible oil deposits are located at a distance of 32 kilometers away from the Lebanese shore, territorial waters stretching to 80 kilometers.

But for the time being, little more than the initial survey can be done. The exploratory drilling process, which is the only means to confirm the existence of oil deposits, would cost about $300 to $400 million and requires the participation of foreign oil companies. But as the source pointed out, “This participation can only be secured through a bidding process, after the promulgation of oil laws by the parliament, which has been closed for some time.”

runs north through the Aqaba and the Al-Rehab power station in Jordan, before ending in the Syrian city of Homs. The Lebanese government has agreed to buy some 0.6 billion cubic meters per year from Egypt but retains the option to increase the gas input to four times that amount if necessary, according to Hlaiss.

Egypt is also providing 1.7 billion cubic meters of LNG per year to Israel through the Arish-Ashkelon submarine gas pipeline, which was built and operated by the East Mediterranean Gas Company.
 

“Gas is an excellent source of energy, one beyond comparison with fuel, especially from an environmental perspective. Replacing fuel by gas for electricity production will allow the government to cut oil costs yearly by $200 million at the least, in light of the soaring international oil prices,” the manager pointed out. The government is also considering building another power station, in order to increase electrical production. However, the Memorandum of Understanding, which would ensure the transportation of gas from Egypt to Lebanon, remains to be finalized.

Beyond supplying the Levant with LNG, from Syria the Pan-

Arab gas pipeline will further extend to Europe. Originally, slain former prime minister Rafik Hariri, one of the pipelines architects, had envisioned linking Egypt to Europe with Lebanon acting as a platform for the gas pipeline network, a project which was abandoned at a later stage under pressure from other Arab countries. Today, it will be Syria that is the switchboard.

Still years away 

However, sending LNG from Syria to Europe is still years away, as the pipeline going north to Turkish node in Kilis is yet to be put together. “Building of the Homs-Kilis pipeline section will only start in 2009, as the Syrian government is still going through the bidding process,” Hlaiss said.

Addressing rumors that Syria may block the transfer of liquid natural gas to Lebanon, to put political pressure on the Lebanese government in light of the tense relations between the two countries, Hlaiss is sanguine. “I do not believe it is in Syria’s best interest to block or stall the pipeline completion. I highly doubt they will resort to such an alternative.”

 

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Banking & Finance

HSBC – Middle East strategy

by Executive Staff
written by Executive Staff

In early March 2008, HSBC announced that its UAE brokerage arm, HSBC Middle East Securities (HMES), had received a license from the Emirates Securities and Commodities Authority (ESCA) to operate as a broker on the UAE’s bourses and that it would start trading within the same month.

Executive met with Keith Bradley, HSBC’s Regional Head of Commercial Banking, and Charles P. Hall, CEO of the bank’s Lebanon Head Office, to talk about this new step and the HSBC’s strategy.
 

E What value-added does this license as a broker in the UAE bring to HSBC?

Bradley: It gives us presence and allows us to offer a range of services. There is a surge of investment in the GCC and so far trading had to be done through third parties, so we decided to eliminate the middleman and go directly onto the floor.

E Why the UAE? Why not Kuwait or Oman or Saudi Arabia?

Bradley: Most of the business is done in Abu Dhabi and Dubai. Of course, should large volumes develop elsewhere, say in Kuwait, then sometime in the future we might also think of other bourses.

E What do you think of Abu Dhabi having its own Securities Market now? Does the UAE need another one?

Bradley: One of the strengths of the Gulf is innovation. Also there is a keenness for competition, and this in turn will fuel innovation and enhance quality. I did my degree in history, and studied the renaissance period in Italy, where many city states competed with each other and in so doing created a tremendously innovative culture. Today, I see something similar in the Gulf.

E With the advent of the WTO regionally, banks are consolidating and preparing themselves for fierce competition. How do you foresee HSBC’s strategy after lifting foreign bank restrictions and you can be as aggressive as you want to be?

Bradley: Of course, we would like to open faster, and thus after WTO we’ll accelerate development.

Hall: Lebanon is at the forefront of liberalization. Next we want to go into insurance and once we do, we’ll be a major player.

E What type of banking are you looking to develop — corporate, private, retail?

Bradley: We are very committed to a variety of business streams. Corporate and private banking is now so intertwined that it is hard to see them as entirely separate sectors.

E With the liquidity and opportunities in the region, there’s also risk from political developments. How do you perceive the risk and how do you protect yourself? 

Bradley: We’re committed to the region and we’re committed to Lebanon. During the 2006 War in Lebanon the bank stayed open. Even during the Lebanese Civil War we did not close. Like every other financial institution, we have a Business Recovery Plan and a Business Continuity Plan. Because we operate in emerging markets, we have experience with political risk and backup sites.

E Looking at your Lebanon profile, would you say that HSBC is for wealthy people?

Bradley: There is a differentiation of services. Local banks have more branches, larger geographical penetration, and thus are better set up for low-end retail. For historical and risk reasons we do not have the market share. Also, we are not allowed to invest in government eurobonds, and so we cannot subsidize lending. Our split is about 25% corporate and 75% personal banking.
 

Hall: We are very specific in targeting customers. For example, we provide them with an Internet cash-supporting system, where customers who go regional can monitor cash-flow and everything else from abroad.

E Do you have any plans to limit your presence in Lebanon?

Bradley: HSBC is very committed to the Middle East. At the Group level, the Middle East will be a key market for the next ten years. For the first time, accumulated wealth is invested locally. The main developments are in the private sector, and HSBC is traditionally a private sector bank … And at HSBC, we have the best footprint in the region, having been present and involved in the Middle East for over half a century – in Lebanon since 1946 – and thus know the region and have long-lasting and deep relationships.

Hall: I can categorically reassure you that HSBC is staying in Lebanon. Indeed, we are opening a new branch. We are the biggest player in motor finance and one of the biggest in housing.

 

 

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By Invitation

Uncodified knowledge: The Middle East‘s unique innovation opportunity

by Fabrice Saporito
written by Fabrice Saporito

For many years, the developed world had a near monopoly on technical innovation. European, US and Japanese companies conducted high-end R&D in their home markets and then sold the results at home or adapted them for other developed markets. But over the last few decades, the number of companies with innovation centers outside their home market has grown, from 45% in 1975 to more than 65% in recent years, according to a Booz Allen Hamilton study.

Over time, these emerging markets have succeeded mostly by developing particular niches — wide screen television in South Korea, for example, or distributed computing in India. Now, the Middle East is at a stage of development where it too might become a home to innovation. But in a world awash in advanced expertise, which niches remain unclaimed? The answer is a kind of innovation that’s not so easy to put into a box and ship, or to attach to an email. It is a kind of innovation Middle Eastern companies are uniquely suited to developing: uncodified innovation.

Unlike the innovation that is now developed in markets such as India and China, which focuses almost entirely on technical improvements to products and processes, in fields as diverse as the automotive or chemical sectors, uncodified innovation is the kind of innovation that happens as services and products are adapted to the needs and preferences of a new set of customers.
 

Cracking the Code

The growth of globally distributed innovation occurred because companies have grown increasingly good at codifying knowledge. Once codified, each piece of the knowledge that made up a product could be sent to the place where the most cost-effective advances on that product might be made. This reduced the redundancy within the system and in essence avoided the need to replicate R&D centers in each market.

A similar opportunity exists now for uncodified knowledge. In other words, instead of just shipping information about a new product and adapting it to the needs of the market almost as an afterthought, one could ship critical cultural understandings about multiple markets to a single innovation centre. Such a center could ease the cultural adaptation process and indeed the entire customer service experience, whatever the origin of the ultimate customer: essentially, to use a software term, to act as a kind of middleware that translates service offerings between cultures, to help insure, for example, that a hotel chain meets the hospitality needs of its Muslim customers, or that entertainment products are designed to appeal to a Middle Eastern audience.

The Middle East at the Innovation Crossroads

The Middle East is uniquely positioned to take up this challenge. Like the successful Silk Road economy of the 12th to 14th centuries, the new Middle East economy is ideally positioned between West and East. Indeed, it might even be said to be both eastern and western, since places like the UAE are now home to people from a wide range of nationalities, motivated by a set of economic incentives no other economy can provide.

In addition, the demand for new products adapted to the unique cultural and environmental traits of the Middle East is pushing many companies to innovate their products and services. For example, the decision of Time Warner to open a studio in the UAE to develop films and video games in English and Arabic is opening up a new market that was previously untapped.

Whether that means developing video games that respect Islamic cultural values, or developing new financial products to meet the demands of Islamic customers, the core activity involved is creating services that begin by understanding the needs of the customer, not the capabilities of the technology. And that particular process of customer-centered innovation is something the new Middle East could leverage to develop products and services for consumers elsewhere in the world who also have specific cultural sensitivities but are now grossly underserved by one-size-fits all services.

Creating a truly international innovation centre

Although this kind of innovation began with the need to adapt services to Muslim consumers and the specific challenges of developing a world-class business center in just a few short years, the ultimate function of becoming a center for uncodified innovation will be to provide better service to many different peoples all over the world. In this too, the new Middle East will have an advantage, in that it can leverage its identity as a uniquely cosmopolitan region, testing service solutions on local sub-markets and ultimately exporting these to other markets.

Tapping into the unique characteristics of this emerging international innovation lab to create a truly global innovation center will require companies to both apply discipline and yet be flexible. As with any R&D, there is a process of sensing, accessing, and melding knowledge, but the key difference here will be that the essential intellectual capital being created will be not be technology or a technical process, but a knowledge of the people for whom the product or service is designed — knowledge about the customers themselves, whoever and wherever they may be.

Fabrice Saporito is a principal at Booz allen Hamilton,

 

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By Invitation

Orient‘s budding markets beckon equity industry

by Rend Stephan, Ahmed Youssef & Albert Khoury
written by Rend Stephan, Ahmed Youssef & Albert Khoury
 
The private equity (PE) industry in the MENA region (i.e., the Middle East and North Africa) has witnessed significant change over the past five years, evolving from infancy stage to a multi-billion dollar growth market.

In 2003, the MENA private equity market was embryonic, with only 20 firms managing less than $3 billion in capital. In the five years since then the industry has mushroomed to more than 80 firms, with more than ten-fold growth in committed or announced funds. Furthermore, the private equity industry in the MENA region now accounts for a considerable portion of total mergers and acquisition (M&A) activity.

Behind this growth are a number of MENA-based private equity firms, which can be segmented into the following categories:

• Pure-play firms, both regional — such as Abraaj Capital, Amwal Al-Khaleej, and Citadel Capital — and international — such as Carlyle Group — focus solely on private equity and are typically wholly-owned by their general partners to ensure high alignment of incentives.

• Institution-linked firms — such as EFG Hermes Private Equity, NBK Capital Equity Partners, and Shuaa Partners — typically affiliated with regional banks or large conglomerates, can leverage their institutional relationships for fundraising, sourcing deals, issuing debt, and exiting.

• State-backed firms — such as Dubai International Capital — are owned by or linked to regional governments and possess strong networks, often at the government-to-government level, that enable them to source investment opportunities, particularly in regulated sectors.

First-movers such as Abraaj Capital, Amwal Al-Khaleej, and Citadel Capital have made a large number of investments over the last three years and several successful exits to date. First movers have built substantial knowledge, networks, capabilities, and reputations that have well-positioned them to raise greater amounts of capital and have a good view as to where it can be efficiently deployed.

Challenges of MENA private equity

While overall trends bode well for an industry clearly poised for growth, the MENA PE market remains underdeveloped in comparison to other developed and developing markets.

First, compared with other economies, the MENA region’s private equity market is small relative to its gross domestic product (GDP), with the size of the industry in MENA at less than 0.5% of GDP versus 2-3% for developed economies. This indicates significant untapped potential should the necessary investment enablers evolve to facilitate greater PE activity.

Second, PE market growth has been largely driven by a few mega-deals, with limited growth in the number of transactions over the last three years and an increase in deal size, with media transaction size increasing from around $10 million in 2005 to $30-50 million by 2007. The slow growth of transactions could indicate potential pent-up demand or simply difficulty in deal sourcing.

Third, deal sourcing remains highly proprietary, built on closed social and business networks beyond the few privatization or secondary buyout transactions. Many MENA private equity firms who are backed by high-net-worth individuals as their limited partners often source the bulk of their opportunities through their LPs, giving them a competitive advantage over their peer firms.

Finally, and reflecting the industry’s early stage of development, most PE firms have largely focused on “low-hanging fruit” deals — arbitrage, pre-initial public offerings (IPOs), and capital-restructuring plays — as opposed to more complex value creation plays, such as Greenfield investments, roll-ups, and turnarounds. While simple plays have generated returns in excess of 50% to date, this is typical of any young market dominated by first-movers who quickly exploit market inefficiencies.
 

Future outlook for MENA private equity

In order to capture market opportunities, MENA private equity firms will have to capitalize on three major industry trends expected to dominate this sector over the next five years:

First — Continued market growth: Significant investment opportunities in a number of sectors in the MENA region will create many opportunities for MENA private equity firms. This is particularly true in high-growth, capital-constrained markets where private equity can fill funding gaps that exist in the market. In addition, many geographic markets continue to remain “virgin territory” for the private equity industry and are now undergoing significant structural transformations, including trade liberalization, privatization, and capital markets modernization.

Second — Separation of leaders from laggards: The second trend we anticipate is that there will be more differentiation between top quality firms and other “me too” firms. Given the capital excesses and pressures to invest/exit, there may also be some level of consolidation over the coming years. Some less performing firms may end up positioning themselves as co-investors on deals led by top-tier firms, while others will try to compensate through alternative investment classes.

Third — Increased prevalence of more complex value creation plays: In line with the previous trend, top performing PE firms are likely to increase their use of more complex value creation plays, relative to simple plays that depend most on market inefficiencies. This trend is inline with developed markets where leverage and exit multiples play less of a role than operational enhancement in creating value.

Conclusions

Clearly, the MENA private equity industry has made considerable progress over the past five years. However, much territory remains uncharted with significant potential. As firms consume the remaining “low hanging fruit” there will be an increased focus on more complex (and lucrative) value creation plays, such as roll-ups and Greenfield investments, which require greater expertise.

It will, however, continue to be quite competitive and each PE firm will need to carefully think about where and how to play to add value. Each PE firm will need to have its own unique strategy in order to become more differentiated as the MENA PE industry matures.

 

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Financial Indicators

Global economic data

by Executive Staff
written by Executive Staff

GDP

Source: OECD

In terms of total GDP, the United States is, by far, the largest member country. Japan is the second largest economy followed, at some distance, by the four large EU members — Germany, United Kingdom, France and Italy. The next four largest are Spain, Mexico, Canada and Korea. These rankings have not changed significantly over the period shown.

Per capita GDP for the OECD as a whole was close to $30,000 per head in 2005. Five OECD countries had per capita GDP in excess of $36,000  — Luxembourg, Norway, United States, Ireland and Iceland. Half of the 30 OECD members had per capita GDP between $28,000 and $36,000, while 10 countries had per capita GDP below $28,000. Turkey, Mexico and Poland had the lowest per capita GDP. Note that both GDP and PPPs contain statistical errors, and differences between countries in per capita GDP of 5% or less are not significant.

Also note that in the tables, the OECD total excludes the Czech Republic, Hungary, Poland and the Slovak Republic.

Education

Source: OECD

In 2003, taking into account both public and private sources of funds, OECD countries as a whole spent 6.3% of their collective GDP on their educational institutions. The highest spending on educational institutions can be observed in Denmark, Iceland, Korea and the United States, with more than 7% of GDP. Seven out of 29 OECD countries for which data are available, however, spend less than 5% of GDP on educational institutions.

In all the countries, public and private expenditure on education increased by 5% or more between 1995 and 2003 in real terms. However, the increase in spending on education between 1995 and 2003 tended to fall behind the growth in national income in eight of the 21 OECD countries. Most notable differences are observed in Austria, Canada, Ireland, Norway and Spain where the proportion of GDP spent on education decreased by 0.4 or more in percentage points between 1995 and 2003.

It should be noted that growth in GDP masks the fact that there was a significant increase in real terms in spending on educational institutions in almost all of the OECD countries from 1995 to 2003. In addition, the size of the school age population shapes the demand for education and training, and national levels of teachers’ salaries also affect the share of expenditure on education.

Quality of life

On average, across the countries for which data are available, around 7.7% of teenagers were neither in school nor at work in 2004. Differences across countries are large: in Denmark, Germany, Iceland, Luxembourg, Netherlands, Norway and Poland less than 4% were in this situation while the shares exceeded 10% in Portugal, Spain, the United Kingdom, Mexico and Turkey.

For the OECD as a whole, there has been a decline in the percentages of teenagers who are neither employed nor education, but the decline has been most marked for females. The fact that young people, and particularly females, spend more time in education than they did a decade ago has contributed to this.

Several features of the labor markets and training systems affect the ease of transition from school to work. OECD reviews of youths’ transition from school to work have identified Nordic and English-speaking countries as those where this process is smoother than in countries in Continental and Southern Europe countries.

Access to household computer

Source: OECD

Penetration rates are highest in Iceland, Denmark, Japan, Sweden, Korea, the Netherlands, Luxembourg, Norway and the United Kingdom where 70% or more of households had access to a home computer by 2005. On the other hand, shares in Turkey, Mexico, the Czech Republic and Greece were below 40%. Between 2001 and 2005, the percentages of households with access to a home computer increased particularly sharply in Japan, the United Kingdom and Germany.

The picture with regard to internet access is similar. In Korea, Iceland, the Netherlands, Denmark, Switzerland and Sweden, more than 70% of households had Internet access by 2005. In Turkey, Mexico and the Czech Republic, on the other hand, only about one-fifth or less had internet access by 2005.

Data on internet access by household composition — with or without dependent children — are available for most OECD countries. In general, they show that households with children were more likely to have internet access at home in 2004.

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Banking & Finance

Money Matters by BLOMINVEST Bank

by Executive Staff
written by Executive Staff

Regional stock market indices

Regional currency rates

Qatar Buys Back its Stakes at Credit Suisse

According to Qatar’s Prime Minister, the natural gas rich country is buying back its shares at Credit Suisse and is planning on spending $15 billion this year to purchase shares in European and US banking institutions. The purchase deal that is still going on has not yet reached the 3% threshold at which the Swiss Stock Exchange regulations stipulate the disclosure of the acquirer’s name. The Qatari Investment Council, an emerging GCC sovereign wealth fund, has also revealed plans to set up funds in Finland and Malaysia, similar to the one that was established in Indonesia last month, at $1 billion each.

Libya Plans on Creating Energy City at $3.8 Billion

The Gulf Finance House of Bahrain signed a $3.8 billion deal, this month, with Tripoli’s Economic & Social Development Fund to create an energy business district. The project that will be built on a 528-acre site in Sabrath (west of Tripoli) will be known as ‘Energy City Libya’. Energy City will provide a full range of facilities to local and international oil and gas companies within a mixed commercial, residential and hospitality services. In addition to reviving the country’s infrastructure, the Libyan government is hoping to attract foreign direct investment into the country, especially from Gulf nations.

IMF Forecasts 5.7% Growth of the Tunisian Economy

The International Monetary Fund (IMF) has projected a 5.7% growth for the Tunisian economy from 6.3% in 2007. The main driving force of this decline has been the low demand from Europe for Tunisian exports as a result of the increase in oil prices and commodities. However, the IMF has predicted a cushioning of the slow economic growth with the revival of foreign direct investment into Tunisia. The Tunisian government is aiming at supporting the economy by introducing banking reforms and liberalizing trade practices. The IMF is expecting budget deficit and inflation to hover around 3% of GDP and 4% respectively. However, the 3% budget deficit seems underestimated given the government’s subsidy for fuel and essential commodities.

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Cover story

More than chrome

by Executive Staff
written by Executive Staff

All over the world, the iconic American motorcycle, Harley Davidson, is a passionate affair. Having, over the past two decades, changed its image from the machine for lawless bikers and heavy metal rock stars to a “statement of freedom and uniqueness” by well-respected individuals. Harley Davidson has matured and the company now also draws its clients from middle-aged professionals in the middle-to-upper management echelons. Steeped in history and tradition, in the Middle East, Harley Davidson has had several high-profile devotees, first and foremost the late King Hussein of Jordan, famous for his rides in the desert, his son now continuing the tradition.

No other motorcycle in the world gets the same devotion as a Harley Davidson. For enthusiasts, it is more than a muscle machine decked out in chrome. “Harley Davidson has a story — it’s the spirit, the people, and the way of living,” explained Marwan Tarraf, general manager of Bikers Inc., the Harley Davidson dealership in Lebanon.

Saudi Harley rider Abdelmenem Addas, owner of a Heritage Classic, banker, teacher and activity officer for HOG (Harley Owners Group) Saudi Arabia, described the culture of Harley Davidson by saying that firstly it represents the idea of “American freedom” — of traveling down an open road with the wind in your hair — and second, there is the idea of brotherhood and team spirit. Many of the region’s riders have either lived or studied in the US where they were first introduced to the Harley culture, or are expatriates living in the Gulf.

No lawlessness here

However, the region’s riders are far removed from lawlessness. Addas insisted, “We obey the strict traffic rules such as wearing helmets, signaling, and keeping space between bikes.”

Performance-wise, Harley cannot compare to other motorcycles on the market — but what it can offer is a unique experience. Its special V-engine, which gives the motorcycle its signature look and sound, also provides a feeling specific to the brand. “I bought one five years ago and loved the feeling,” said Karam Attallah, general manager of Lebanon’s Gefinor Finance and owner of a ‘04 Road King Classic.

Harley Davidson is also a marketing phenomenon with apparel and accessories designed for biking and casual wear. In addition, the logo can be found on items ranging from mobile phones to limited edition Ford Trucks. In recent years, the spirit of Harley Davidson has been used to sell everything. It’s based on the idea of community, Tarraf explained, “When you buy a Harley, something changes in your life. You then belong to a specific interest group that wants to share this with other people.”

Public perception of the motorcycle also plays into it. “It is how people perceive you that makes you want to own one,” said Ahdi al-Hunaif, rider and author of the Kuwait Chopper blog, “how everyone warms up to you on the streets, how kids wave to you at a traffic light, how old men ask you questions and give you the thumbs up.”

Money — as in, having it — also plays a role. “Harleys are not cheap,” explained Tarraf, “so buyers tend to be upper-middle class. There are people who own five bikes and never ride and then there are others who save for years and ride their bikes everyday.”

While the average Lebanese rider is around 35 years old, global statistics indicate that Harleys are mainly popular with the over-45 crowd, with incomes hitting $80,000 and above. However, with so many statistics, the reality is extremely varied. As Tarraf related, “We have a rider who used to sell fish in California and came back. He went to hajj, prays five times a day, his wife wears a veil and he has a Harley that he loves. He lives in the south, has to drive over two hours for a one-hour ride and rides back. Now he meets with a guy like Karam, and their lives are so totally different, but they share a passion for Harleys.”

On the low end, a new Harley costs around $15,000, and prices then can climb up to $60,000, although the average price is about $20,000. The two top selling models are Soft Tails — such as the Fat Boy, popular for city riding — and Road Kings — the larger touring class made for road trips and traveling.

“Usually, people who don’t know much about Harleys come and ask about the Fat Boy. But once they get to know Harleys better, they begin to want to buy a bike that suits their usage,” said Tarraf.

Another popular category is the Sportster family, which are smaller motorcycles that some who have touring motorcycles buy as a second bike. A recent addition is the V-Rod, a speed bike, created with a Porsche-designed engine for greater performance.

Customization

Customization and modification allow the rider to become the true owner of the motorcycle. Almost everyone customizes his bike. “You can buy a motorcycle and make it look like you,” said Tarraf. “That’s where Harley succeeded most; they give you a motorcycle that has the possibility of being a work of art.”

It is also a domain where a lot of revenue is generated. Customizations can double the price of the bike, if not more. Changing the handlebars, adding accessories, paint jobs — anything up to the engine can be changed. Added al-Hunaif, “It is about showing off your latest creations, making people see what type of a person you are, because in reality, each bike shows a piece of that person.”

Dealerships in the region

The dealership is an integral part of the Harley experience offering, alongside service and customization, a social forum to interact with others who share the same passion. They also provide the safety training needed to operate the bike.

Over the years, regional dealerships changed considerably. “I’ve been riding for 15 years. I remember I used to go to a Harley dealership in the States where you’d find this bearded guy with feathers all around, very rude — he wouldn’t even talk to you — and now you go to a Harley dealership and you see a younger generation managing and people that are so nice, who answer all of your questions and try to help you out. You don’t see the old guys anymore. Harley had to clean up their image; there is a new trend because they want to sell to non-traditional Harley riders and get a wider clientele.”

In Lebanon, Harley Davidson has a long history. According to Tarraf, the first Harleys were brought to Lebanon in the 1950s, imported from abroad. Ten years later, the Lebanese police began buying the motorcycle for its force. A formal dealership was set up in 1977 only to be closed after importation difficulties resulting from the civil war. In the 1990s, after the civil war, the police began selling their stock sparking an interest that led to the reopening of the dealership in 1995. However, it closed again in 2000 and in the ensuing years, few Harleys were imported. This, in turn, prompted Tarraf to obtain the dealership license, opening his doors to old-time riders and new clients in 2007.

Originally, he expected to sell only 20 motorcycles. Demand far outpaced expectations and by early 2008 he had sold around 70 bikes — not bad for a tiny country in the midst of turbulence.

The first dealership in the UAE was established in 1989, operating out of a hangar at the Abu Dhabi International Airport. It expanded to Dubai in 1992 and since then has been established in both emirates. Sales are just under 500 bikes per year. “There isn’t a model which we don’t sell,” said Marcel Bode, general manager of Harley Davidson of the UAE. For him, it is the influx of expatriates that is growing the market, something that can be observed when looking at other GCC markets as well.

Dealerships have appeared in other Gulf states since the late 1990s, and can also be found in Egypt and Morocco.

HOG chapters

Owning a Harley makes you a part of a global club. The Harley Owners Group (HOG) was established by the company in 1983 in response to a growing need to provide a forum for riders where they can interact with other riders and organize rallies to show off their bikes. The forum went international in 1991, established through local dealerships. Belonging to a HOG chapter means that one is part of a global network of riders and has access to other chapters’ rallies. “If you are a HOG and you meet another HOG from Idaho, there’s always something to talk about,” explained Tarraf.

In the region, HOG chapters are quite active. The first Middle East HOG Rally was held in Muscat in 1999 drawing over 200 bikes. The next one saw an increase to 300 and sparked a competition with Dubai. The Middle East HOG Rally continues as an annual tradition, to which rallies throughout the region have been added.

Saudi Arabia’s HOG chapter has nearly 1,200 total members, according to Addas, activity officer for the group. Nearly 70% of its members are expatriates from the US, France, Switzerland and Germany. Even with the strict social regulations, in places such as Jeddah wives and girlfriends are able to ride on the backs of bikes. The group is very active and has been used to promote tourism in the country. Last year, a ride from Jeddah and continuing up to the Durrat al-Aroos beach resort, 60 km north of the city, was supported by Mecca’s governor, Prince Khaled al-Faisal, Jeddah’s governor, Prince Mishaal ibn Majed, the General Presidency of Youth Welfare’s Saudi Motor Sport Committee and the Jeddah Chamber of Commerce and Industry, and given a police escort. And, exemplifying that the brand has come a long way from its early days as the bike of choice for motorcycle gangs and outlaws, Harleys could even be used to promote peace and understanding in the region. One day, so Addas hopes, he will be able to organize a ride from Mecca to Medina and then ending in Jerusalem, if he could secure the authority needed. “I think it would send a message to the world that we want peace.”

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