Special Report

Luxury Automotive  Desert Glamour

by Executive Contributor
written by Executive Contributor

with the GCC achieving record income from ever-rising oil prices, assessed to have amounted to $300 billion in 2006, and the UAE’s per capita income standing at $35,000 the country’s automobile sector is riding the wave, and in terms of growth is now considered to be among the top emerging markets next to China and India. Within the GCC, the UAE automotive sector ranks only second in size behind Saudi Arabia.

As behooves a country flush with money and a culture of conspicuous consumption, luxury cars are taking up a significant share of the overall automotive sector. Of all the cars with a $100,000+ price tag sold worldwide, around 5% go to the Middle East, and the vast majority of those in the GCC. According to international analysts, until 2009 the luxury segment will even rise by over 10% in the region, whereas globally it will decline.

The demand for luxury cars is now so high that many brands have waiting lists of up to one year. Some customers can’t wait that long and pay dealers extra fees to get a car from Europe and ship it to the Gulf. Hotels, many of whom are catering to high-end customers, are now also ordering luxury cars for their fleets. All this is exciting news for luxury car brands.

Since December 2007 Bugatti, owned by Volkswagen, has sold 15 of its $1.2 million 1,001-horsepower Veyron coupes in the UAE alone. Rolls Royce’s sales in the Middle East rose by 36% in 2006, making up 15% of its worldwide sales of around 800 cars.

Porsche celebrates the 5th year in a row of double-digit growth in the Middle East and Africa. Only eight years after opening the Porsche Middle East & Africa office, it became the fifth-largest Porsche subsidiary worldwide, after North America, Germany, the UK and Italy. The German car maker, whose current sales in the Gulf are around 3,800 units, expects a 20% increase. Of its models, the Cayenne SUV alone accounts for 75% of its sales in the GCC. According to Deesch Papke, Managing Director of Porsche Middle East & Africa FZE, “The market demands an extremely rich product mix that is certainly a specialty in our region. We sell more 911 Turbo than Boxster or 911 Coupe. There is a strong demand for very high exclusive equipment.”

The American brand Cadillac can look at a presence in the Middle East that goes back all the way to the 1920s. For a long time it had been the vehicle of choice for royalty, senior government officials and businessmen, thus generating a loyalty on which the brand could build and expand today. From 2001 to 2006, regional sales have doubled and reached 2,449 cars, making up almost 10% of Cadillac’s global sales. Figures to date for 2007 are showing a 35% increase over 2006.

The venerate British car maker, Bentley, has seen a staggering 1,000% growth over the past four years, yet now reached its global production capacity — just under 10,000 per year — and thus will over the next five years actually see its regional sales decline from a peak of 500 cars in 2006. This is part of an overall strategy to maintain exclusivity, yet necessitates a “re-training” of luxury car dealers to stop sneering at the used car market and convince customers that a “pre-owned” Bentley, of which there are 3,000 in the Middle East, might actually be something desirable. A significant target group in the UAE are expats as they are more likely to buy used cars than nationals.

The new kid on the block

In comparison with other brands, Maserati has made its entrance into the UAE market fairly recently, having been present only since 1998. But the local market quickly became important enough for the Italian car maker so that in 2004 it decided to stop managing the brand in the Gulf via intermediaries and in 2006 created a regional office in Dubai to be able to directly take care of the customers’ needs and wishes. In relation to its increase in global production and sales (from 5,500 cars in 2006 and 6,500 in 2007, the target for 2009 is 12,000 cars, the maximum production capacity), the brand’s regional numbers have risen even faster. After selling around 150 cars each year during 2004-05, this year Maserati expects to sell 400 cars, a 40% increase, and plans to raise that number by another 80% in 2008, thus pushing its market share in the luxury car segment from 6.5% to 10%. According to Umberto Cini, the brand’s area manager for Middle East and South Africa, Maserati’s ultimate aim is to “become the credible alternative to the mainstream players in the luxury segment, producing passionate and innovative 2-door and 4-door vehicles, focused on delivering market leading customer service.”

The luxury car sector does not only attract local buyers of vehicles, but also buyers of brands and assembly lines. In March 2007, Aston Martin, best-known as “makers of James Bond’s cars,” was bought off Ford for $925 million by a consortium mainly funded by two Kuwaiti investment houses, The Investment Dar (TID) and Adeem Investment. Initially, this is nothing but a regular investment in a promising brand. Certainly there are no plans in the GCC to produce cars en locale, like others in the region do — Iran, for example, is the world’s 16th-largest car manufacturer — and the local car industry will remain the realm of post-sale maintenance and augmentation. But Gulf participation in luxury brands might influence future design, or at least help brands to better target the wishes and needs of Gulf customers.

Influence on design

Since luxury car owners tend to be the most discerning of buyers, the luxury car brands pay extra-special attention to their potential clients’ wishes. Thus, Mercedes puts an emphasis on making its vehicles resistant against the specific local environmental conditions, such as sand and humidity. General Motors, owner of Cadillac, sent its vice-president for Global Product Design twice to the region in 2007. Phil Horton of BMW avers that “our design department is very interested in following Middle East trends with a view of developing special models, colors and trims.”

All luxury cars have elaborate customization programs, some of which, like Bentley’s Mulliner, go back over a century to the early history of the brand. Maserati introduced specific model versions and offers more than 4 million combinations of options. Mercedes has its Designo range and its performance division, Mercedes-AMG, has opened its own Performance Studio. Most high-end luxury cars are essentially tailor-made.

Competition

Despite so much money chasing a limited supply of luxury cars, there are too many brands represented in the markets to just sit back and wait for customers to sign their checks. Thus salesmen are coming up with their own unique ways to differentiate themselves from “the rest of the pack.” In the luxury segment, all cars are expected to have been built to highest quality standards and fulfill the most rigid international standards in terms of safety, so brands need to go further. In neighboring Saudi Arabia, Bentley is sending buyers on a two-day tour of the home factory in Manchester, where they can see how the cars are built. Umberto Cini of Maserati drives his brand’s strategy to attract buyers through exclusivity, but the Italian car maker has also responded to market demands by producing its first automatic transmission vehicle, the Quattroporte Automatica that saw its debut in early 2007 and will be joined, at the Middle East International Motor Show in Dubai in November, by the brand-new GranTurismo.

The German carmakers can, of course, count on their reputation for flawless engineering and ultimate reliability and are often building their image on these “Teutonic” qualities. Thus BMW, which in 2007 is selling 15,000 units throughout the Middle East and has just passed the 100,000-car-mark since opening a dedicated regional office in 1994, points out its superior technology and counts on “an ever increasing appetite for the highest level of technology safety and innovation.” Mercedes invites regional representatives to its car clinics and conducts hot weather testing for its models in the Middle East.

Cadillac, whose marketing manager, Melanie Maddux, acknowledges that “generally, European products are perceived as higher quality than other offerings in the market,” nevertheless avers that her brand has been using the distinctly American attitude that “the competitiveness of the segment benefits consumers who are able to find [a] better and better product.” And Maddux thinks that Cadillac “stacks up extremely well.”

Going Green?

One aspect of global car culture that has yet to make real inroads into the UAE and Middle East market is that of “greener” cars. With petrol being cheap and incomes high, there is no economic reason for local drivers to concern themselves with fuel efficiency and hybrid engines. However, local governments are increasingly taking environmental concerns into consideration. Dubai’s ruler has mandated that all new government buildings in the emirate “go green” and the overall government strategy aims for sustainable development, environmental protection and greener infrastructure. The emirate is also investigating hybrid public transport systems and Abu Dhabi is introducing cleaner diesel fuel. In June 2007 Dubai’s TECOM Investments launched enpark, a green energy and environment park project, which not only includes businesses, residences, and retail space based on sustainable development and clean energy, but also mandates that its inner area may only be accessed by cars that run on natural fuel. With projects like this, TECOM hopes to attract hybrid or biofuel cars to the UAE, for which, according to enpark’s director Ali Bin Towaih, there is already a market.

Although luxury cars are more associated with large engines and high outputs of power, and with it emissions, some of the high-end brands are actually leaders in green technology and see raising customer awareness for environmentally-friendly cars as part of their corporate social responsibility.

there is no economic reason for local drivers to concern

themselves with fuel efficiency

Porsche proudly points out that the world’s first hybrid car was developed and produced in 1900 by the company’s ancestor, Ferdinand Porsche and that today all its engines are able to run on a certain share of ethanol, the best-selling Cayenne up to 25%. BMW is looking forward to introduce its own technologies, like Efficient Dynamics, to the regional customers, waiting for an increase in customer awareness. Cadillac will present its Chevrolet Tahoe hybrid at the 9th Middle East International Motor Show in Dubai that will have a focus on energy diversity.

With the rapid increase in luxury cars, the UAE is now also facing a new problem, which so far was only known from news stories about Eastern Europe or movies like “Gone in 60 Seconds”: luxury car theft. In September 2007 the Abu Dhabi Police arrested a gang that had specialized in stealing luxury cars, especially 4x4s. The thieves were tech-savvy — being able to overcome the burglar alarms and then decoding the operation switches — and worked for foreign “buyers”. It remains to be seen if this problem becomes more serious. One thing is for certain: it will not deter potential buyers from getting the latest Porsche, Benz, or Bentley. Only now the brands might make sure to add Low-Jack to the basic options.

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Special Report

Tobacco industry  Sparking up

by Executive Contributor
written by Executive Contributor

As Europe and the United States slap higher taxes on tobacco products and ban smoking in public places, the Arab World keeps on sparking up, boasting some of the highest per capita tobacco consumption rates in the world.

Tobacco manufacturers and advertising companies are only too happy to keep this multi-billion dollar business from being stubbed out, with international players focusing increasingly on the developing world due to declines in smoking incidence in the West and the barrage of court settlements the industry has had to pay out in recent years, particularly in the US.

Indeed, of the 1.1 billion smokers in the world, 800 million live in developing countries, with the World Health Organization (WHO) predicting that by the mid-2020s 85% of all smokers will come from the world’s poorer countries.

And while smoking declines in the developed nations, there is not a corresponding drop off in the global production of cigarettes or the number of smokers. According to the Food and Agricultural Organization (FAO) of the UN, world tobacco production is projected to reach over 7.1 million tons of tobacco leaf by 2010, up from 5.9 million tons in 1999. The number of smokers is expected to grow from the current 1.1 billion to around 1.3 billion in 2010, according to the report. This is an increase of about 1.5% annually.

Such growth is reflected in the Middle East, where the majority of national tobacco markets record between 1-3% annual growth rates. According to the WHO, tobacco consumption in the Middle East grew by 24.3% between 1990 and 1997, whereas consumption in Africa over the same period grew some 3.6%.

“The industry is focusing on this region as it is an emerging one. If you ask someone at Proctor and Gamble, they will say the same,” said a former marketing manager for a leading international tobacco company, who wished to remain anonymous.

The main markets the industry is concentrating on are Egypt, the region’s most populated country, Algeria, Saudi Arabia and Iraq.

“Iraq is a huge emerging market. Companies are dumping cigarettes there left, right and center,” said the source. “It’s now on CEOs’ lists for top brand sales.”

International firms also have their eyes on the Middle East for its booming population, with some 50% of the region under 25 years old. Although international firms do not deliberately market to minors, it is nonetheless a positive indicator for the industry of future market growth.

Regulations on the horizon

Despite the region still puffing away, regulations on advertising and smoking are coming to the Middle East, via countries signing up to the WHO’s Framework Convention on Tobacco Control (FCTC), established in 1995. The FCTC provides guidelines for countries to “impose restrictions on tobacco advertising, sponsorship and promotion; establish new packaging and labeling of tobacco products; establish clean indoor air controls; and strengthen legislation to clamp down on tobacco smuggling.”

Western governments have been at the forefront of implementing FCTC guidelines, but as countries sign up, controls are likely to gradually be implemented globally.

Incidence of smoking and annual growth

“The tobacco industry has changed dramatically in the past decade,” said Nadine Antun, corporate affairs executive for Philip Morris International’s (PMI) Lebanon branch. “The legislation in the US and UK will cascade down to everywhere else, it will just take time and will be to varying degrees.”

Varying degrees of implementation seems to be the region’s current catch phrase. Despite all Arab countries (bar Iraq) being signatories to the FCTC, there is minimal standardization across the region — few countries have health warnings on packets, advertising is still allowed (with the exception of certain ‘black’ markets, such as Jordan and Syria) and there is negligible public awareness about the hazards of smoking.

Even in countries that have banned smoking in public places and sales to minors, such as in Jordan, there is minimal enforcement.

“Sellers could be fined, but who is going to fine them?” queried Samer Fakhouri, vice chairman and general manager of Jordan’s International Tobacco and Cigarettes Company (ITC). Cracking down on violators of the ban on advertising and promotion is equally problematic. “The laws are still far more strict than implementation. For instance, smoking is not allowed in public areas but is in fact widespread,” he added.

Such problems are not limited to the Levant. The Emirates are now having a second go at banning smoking in public, after an attempt in 2005 fizzled out. This time the government has imposed the ban gradually, starting off in shopping malls, then fining people after an initial 90-day grace period and eventually, prohibiting smoking in all work places, schools, and food courts.

even in countries that have

banned smoking in public places and sales to minors, such as in jordan, there is minimal

enforcement

Other countries still have a long way to go. In Syria, where the tobacco market is controlled by a state monopoly, the General Organization of Tobacco (GOT), tobacco advertising has been banned for the past five years, but only international brands, which make up a tenth of the market, are required to have health warnings on packets.

In Lebanon, no tobacco regulations are in place, although a draft law to implement FCTC guidelines was drawn up last year. But due to no parliamentary sessions being held because of the current political standoff, the law has yet to be passed. Once inked, the law would restrict sales to minors, ban advertising and implement restrictions on smoking in public places.

“We support any limits or bans, the only thing we believe is right to maintain is communication to consumers at point of sale. It is a product that causes harm and should have a health warning,” said Antun.

“But a law has to be implemented and controlled, or what’s the point? It’s up to the government to enforce, and we will comply,” she added.

Such regulatory changes are forcing cigarette companies to alter their marketing strategies. “The type of adverts will change, but advertising budgets haven’t been slashed,” said the former tobacco company employee. “Compared to six or seven years ago, the budgets have gone from, say, sports to direct marketing, which is the future of most advertising.”

As if to protect their backs years down the line from massive payouts to chronically ill ex-smokers, as has happened in the US, major players have placed self-imposed restrictions on advertising.

“Philip Morris is allowed to advertise on TV here, but we don’t,” said Antun. “We make sure that for magazines the readership is 75% adult, and adverts are restricted to inside the publication.”

Nonetheless, the majors might not get away scot-free in the future. Earlier this year Saudi Arabia’s Ministry of Health opened a lawsuit against the representatives of 14 tobacco-producing companies that operate in the kingdom. The ministry is demanding compensation of $2.6 billion for financial losses incurred treating smokers in the past, and wants a further $133 million a year from tobacco companies for medical treatment. The outcome of the case, which is still pending, could set a benchmark for the region.

A smoldering market

To what degree imposed or self-imposed restrictions impact on cigarette sales is hard to tell, say insiders. “If tomorrow we don’t have billboards outside, I don’t know how much it would affect sales. It might, but if it does, so be it,” said Antun.

Nevertheless, hikes in taxation are actively discouraged by tobacco companies as a means of curbing smoking. “By increasing taxes you are not undercutting smokers but losing revenues and affecting producers as smuggling will increase,” said Fakhouri. Equally, countries like Syria are unwilling to raise the cost of tobacco. “We have no intention to increase the price, otherwise we would pay in profits,” said Faisal Sammak, director of GOT.

Tobacco companies’ market share

Counterfeit and smuggled cigarettes are a major problem for the industry, not so much in Lebanon, but particularly in Jordan, Syria, Iran and the Emirates. Countries that neighbor Iraq are particularly affected due to rampant smuggling, while British American Tobacco (BAT) estimates that the illegal market grows some 40% a year in the Emirates.

The unnamed source said some companies are actively encouraging smuggling to boost sales, naming French-Spanish tobacco company Altadis as involved in the illicit trade, shipping excess quantities to Jordan and Iraq that are then sold on elsewhere.

“We have no intention to increase the price, otherwise we would pay in profits”

“Some companies will do anything to get their sales, but BAT, PMI and Japan Tobacco International (JTI) are at the forefront of doing business in a responsible manner,” he added.

Ultimately, smoking incidence is likely to decrease in the region as health awareness improves and regulations are implemented. But this still doesn’t mean the end for the tobacco industry. “If fewer people smoke in five years, you can still compete between companies and still expand. That’s where competition comes in,” said PMI’s Antun.

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Banking & Finance

IPO Watch – New trends coming

by Executive Staff
written by Executive Staff

The next big thing in initial public offerings for the Middle East will sell a slice of the world for give or take $4 billion in November. The slice amounts to 20% and the world is DP World, the UAE’s flagship global company with its fingers in harbors in almost all continents.

The flotation of DP World will gobble up about the same amount as all IPOs in the Middle East did in the second quarter of 2007. It ascertains that the region’s 2007 primary market will stand head and shoulder above the $8 billion that were raised in 2006.

Apart from being the largest beast in the short history of Arab IPO times, the DP World offer will be set apart from garden-variety offerings where the flat-rate subscription price represents an outsized discount to the company’s fair value.

Instead, institutional investors will be asked to bid for shares in mid-November and this book building will determine the IPO price within a — at time of this writing not yet announced — range. Retail investors can subscribe to the offering in early November and will have to pay the price set through the book building process.

As further mark of distinction (and new governmental strategy), DP World will debut on the Dubai International Financial Exchange (DIFX) as the first state-backed company of its size to populate the fledgling bourse and hopefully set a paradigm for liveliness more than two years after the launch of DIFX with overoptimistic short-term forecasts.

In a new batch of insurance IPOs, Al Saqr Insurance put 42% of its equity on offer on the Saudi Stock Exchange at the regulator-mandated par value of $2.67 per share and total offering size of $22.5 million, while fellow sector companies Trade Union Insurance and Arabia Cooperative launched offerings for $28.1 million and $21.4 million. Subscription for all three companies has been scheduled to close November 3.

Another two IPOs announced for the second week of November in Saudi Arabia, for educational firm Al Khaleej Training and for manufacturing firm Middle East Specialized Cables, have been approved for issue sizes of 30% each without providing details.

As recent stock market trends seemed encouraging enough, Jordan rounds off the scene with two short-notice IPOs in the under $10 million range, by Model Restaurants Co. ($8.84 million, until November 10) and Damac Jordan for Real Estate Development ($1.76 million, until November 11).

Moroccan plastics and soda producer SNEP had announced an IPO subscription offer worth up to $131.5 million for a two-day period ended October 23 but results had not been publicized by time of this writing.

Several firms joined the fray for investor interest in October; most notably Oman’s Galfar Engineering which made its entrance into the public trading square at the predicted pace and gained more than 80% in the first three days of trading.

In Jordan, the Professional Company for Real Estate Investment and Housing started trading on the Amman Stock Exchange at JOD 1.05 ($1.48) and ended its first week with a 20% gain, at JOD 1.26. Over in Casablanca, insurers Atlanta rode up 73% in 10 days between its flotation and October 26.

Shedding some light on the greater primary markets picture, a tally by international consulting firm Ernst & Young made the region’s IPO spring and early summer appear respectable but not overwhelming in global context. After a slow first quarter, the region’s primary market activity leapt in the second quarter of 2007.

Ernst & Young’s global count found the second quarter of 2007 having 531 IPOs worth a combined $88 billion worldwide. The US market recorded $15.7 billion in IPO funds gathered during the quarter. However, emerging markets contributed exceedingly to the total, led by the BRIC (Brazil, Russia, India, China) countries with $35 billion. Within BRIC, Chinese IPOs gobbled up $15.5 billion and Russians, $11.7 billion.

In relation to these numbers, the Middle East primary market activity in the second quarter of 2007 amounted to 4.4% of global capital raising through IPOs, and was equal to 11.1% of the IPO funds raised in the BRIC countries. However, by the region’s own benchmarks, the performance is impressive and latest announcements foretell much to come, with expectations focused on privatization of successful state-owned companies.

By end of October, Emirates Airlines revealed itself as the next contender for a multi-billion dollar IPO in the UAE and the general manager of the Saudi Stock Exchange told the Zawya Dow Jones news service that the bourse wants to go public as the second exchange in the region.

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By Invitation

Harnessing broadband – promise and potential

by Hana Habayeb, Chady Smayra & Jad Hajj
written by Hana Habayeb, Chady Smayra & Jad Hajj

Over the past decade, the MENA region has come a long way in terms of telecommunications sector advancement.

Between 2000 and 2005, sector revenues grew at an impressive CAGR of 16%, compared to 8% for OECD countries, largely driven by mobile sector growth. Often achieving penetration rates of well over 100%, local mobile markets have enabled phenomenal growth for operators and their global expansion.

However, the data sector is not advancing at the same pace. Only 15% of the MENA region’s population are internet users. The vast majority of this minority are constrained by the limitations of low-speed and intermittent dial-up. Broadband adoption remains abysmally low, reaching at most 6%.

Figures for 2006 show that the region’s 1.7 million broadband subscribers represented less than 1% of the world’s total broadband subscriber base of 250 million.

Why then, have populations exhibiting such appetite for mobile adoption remained so far behind their equals in broadband penetration?

The classical arguments are low affordability, capacity and coverage constraints, low awareness and accessibility, and limited online content and applications. But uniformly applying these arguments to the MENA region is neither possible, nor practical for understanding the dynamics of broadband penetration.

Affordability

In a number of countries, market forces are at work. There are several operators to choose from, and prices are below those in highly competitive European and Asian markets. So why the low take-up rate?

The annual cost of a basic broadband connection in Egypt, Jordan, Morocco, Bahrain, Algeria and Palestine, for example, is lower than, or on par with international standards. That said, adjusting for income levels, clear divergences are observed. Barring Bahrain, the annual cost of a connection is well over 10% of GDP per capita, reaching 35% in Palestine. Market forces alone cannot address such a deep-rooted affordability problem. Instead, it should be addressed through government initiatives, PC subsidies, community broadband centers, and other such affordability-related programs. While many countries are taking these steps, it is a long, slow drive to encourage adoption.

In other MENA countries, with the annual cost of a broadband connection at well over $500, price is a problem symptomatic of other issues.

The main culprit, unsurprisingly, is a lack of competition. In many Gulf markets, retail internet provisioning remains uncompetitive, explaining the high monopoly and duopoly prices. In these and other countries, the real bottleneck is the undelivered promise of competition higher up the telecom value chain. Service providers do not, or cannot, own alternative infrastructure. They are prevented from owning their own gateways, and must get access to the internet backbone, typically through a monopoly operator.

Capacity and coverage

The problem is further exacerbated by capacity and coverage constraints. Even in countries witnessing very high investment per capita in telecoms, there is a serious broadband access investment gap. Long local loops necessitate immediate investment in less densely populated areas, if broadband is to be provided over traditional networks. Within the next five years, new applications, and increasing user sophistication will outstrip the last-mile capacity of most current networks.

Another concern is international connectivity. While mobile operators can, for the most part, operate independently of one another, this is impossible for internet service providers. International connectivity can represent more than 80% of internet connection costs for service providers. The problem is twofold: first, international liberalization is in its infancy, restricting international bandwidth and capacity; second, the lack of regional co-operation for peering and local traffic aggregation has forced ISPs to accept high connection prices. The region has only two Internet Exchange Points, and several plans to build a region-wide backbone have yet to materialize, forcing operators to pay high international transit charges, when traffic could otherwise be handled locally.

Awareness and accessibility

Aside from market and access considerations, there is the issue of awareness. Understanding how critical computer literacy and appreciation of the internet’s potential is for broadband uptake, countries such as Egypt and Jordan have launched concerted awareness building and broadband utilization programs, partnering with NGOs, schools and universities.

But exclusively top-down provisioning programs have met with limited success when unaccompanied by grassroots utilization initiatives. The objectives should not be limited to education about how to use the internet, but perhaps more importantly, about what it can offer. Unfortunately, the direct impact of such programs is difficult to assess, and educational initiatives frequently require years of concerted effort before tangible benefits are reaped.

Beyond awareness, operators in the region must recognize their responsibility in making broadband accessible to the mass market. Broadband services’ complex installation and maintenance requirements are outpacing customers’ knowledge. As broadband use expands, fewer new customers will be technologically adept. Consequently, customers can no longer be relied on to facilitate installation and troubleshoot problems on their own. If broadband use is to extend beyond tech-savvy early adopters to the mainstream public, higher levels of customer service backed by responsive customer call centers will be required.

Online content and applications

The lack of local content and applications locks the final piece of the puzzle. Mobile technologies are primarily about communication with an existing network, external content is for the most part superfluous. Conversely, the internet is content and applications. With less than 3% of pages on the web in Arabic, it is no surprise that the internet has a limited value proposition for potential local users. Appeal is further curtailed by laws restricting certain applications such as VoIP, a major driver for broadband uptake.

Online content and applications are a major driver of consumer demand for broadband services, which in turn attracts necessary investment into more sophisticated infrastructure and services. Incubator and funding programs are needed to facilitate the development of attractive local content and applications, which will unlock significant economic value to developers.

Increasing broadband penetration by 2% in one year will boost telecom sector revenues in the MENA region by a minimum of 8% (at least $2 billion). This value can be captured and the success of regional mobile markets can be emulated. To this end, it is imperative that concerted policy, regulatory and market initiatives are undertaken to address the multiple roots of the MENA region’s broadband penetration deficiency, to achieve broadband’s true potential.

Issues to be addressed for more widespread broadband adoption in the MENA region:

• Affordability

• Capacity and coverage

• Awareness and accessibility

• Online content and applications

Hana Habayeb is a senior consultant,
Chady Smayra and Jad Hajj are associates
at Booz Allen Hamilton.

 

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Capitalist Culture

Liberty – and its interpretation

by Michael Young
written by Michael Young

Over the past years, Capitalist Culture has been a regular feature of Executive, so what better occasion than this 100th anniversary issue to look back at the column, and more particularly at the themes it has tried to raise in looking at Lebanon and the Middle East.

A persistent aim of Capitalist Culture has been to address those issues somehow fitting into a broader context of free markets and free minds. The assumption has been that capitalism in its cultural manifestations encourages, or should encourage, openness, the free exchange of ideas, minimal state-imposed restrictions, an embrace of globalization, and, in some absolute way, the pursuit of human liberty. The column has always considered in an implicit way that the state is, at best, a necessary evil — an often clumsy barrier to naturally free flows in the human marketplace.

Has the column been successful in getting the message across up to now? Readers will have to answer that question. However, Capitalist Culture has benefited from the gargantuan transformations in Lebanon and the Middle East in the last five years — from the Bush administration’s decision to invade Iraq as of 2003, to the 2005 Independence Intifada in Lebanon, to the summer 2006 war between Hizbullah and Israel and its aftermath. Each of these events, and the countless ones in between have, in some fashion had an impact on the issue of liberty, state power, the forcible imposition of a democracy agenda, and much more.

The war in Iraq, following on from the 9/11 attacks of 2001, unleashed one particular global debate that has yet to subside: Was imposing democracy on other peoples the optimal way to bring about open societies in the Middle East — societies that would not send young men on missions of mass murder half way across the globe?

The answer was no way as clear-cut as the question, but suddenly the matter of liberty in the region became of paramount interest. The fiasco in Iraq did not simplify matters. From a war against terrorism, the conflict became a war for democracy, before metamorphosing, today, into a war to contain Iranian power. The centrality of freedom had not lasted very long, but in many ways it very much remains at the core of the Middle East’s woes, as does the suffocating hold of states over the region’s peoples.

Capitalist Culture also addressed, as best it could, Lebanon’s effort to break away from Syrian hegemony in 2005 and afterward. The uncertain results of that endeavor were best summarized in the piece on the late Samir Kassir, whose assassination in June 2005 was the first bloody sign that “independence” would come with a heavy price tag. And Lebanon’s peculiar confessional system has been a frequent theme of articles on Lebanon — the argument being that, for all its faults, the system, by making the religious communities and their leaders more powerful than the state, has in some way also protected pluralism. Why? Because no one side or person can impose its writ on the others, and the state is in no position to control everybody, therefore each community, even faction, is able to survive amid a general balance of forces in the country.

Where Lebanon has been less impressive, however, has been in allowing its divisions to deny the full flourishing of a capitalist culture. What openness can there really be when the society is all rifts and cracks? What kind of prosperity can ensue when political groups are willing to punish the society at large merely to score points against other political groups? Why is it that liberty in the country — such an essential aspect of the Lebanese template — is so often ignored when it advantages the other side?

The guiding libertarian principle of freedom being something one must pursue as long as it does not encroach on the freedoms of others is violated daily in Lebanon. If anything, freedom is often deployed at the expense of others, creating a society far more divided than it need be.

In the coming years in the Middle East, a great deal of trauma is likely to be felt, but the essential demands of capitalist culture will remain at the center of the region’s reality. The overbearing nature of state authority over its citizens, the lack of freedom, of intellectual liberty and artistry, of opportunity, the persistent mistrust of globalization — globalization that is increasingly leaving the Middle East far behind in its wake — are all issues that will handicap the region in ways far more fundamental than the usual and appalling problems one hears about: the Palestinian-Israeli conflict, Iran’s nuclear project, or the killings in Iraq.

The reason is simple: Everything boils down to the issue of liberty and its interpretation. One might applaud the expansion of markets when they affect economic relations; but if they don’t expand human freedom and facilitate human relations, some form of deep failure is bound to ensue.

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Comment

The Damascene dilemma

by Claude Salhani
written by Claude Salhani

Strike Damascus, bomb Tehran,” say the hawks in Washington. “No,” argue others. “Open negotiations with Damascus, bring Syria out of the cold, into the fold, and help distance Damascus from its ‘really evil’ ally, Iran.”

To strike, or not to strike? That is the question, if one may paraphrase the Bard and adapt his poetry to fit 21st century geopolitics. But what the heck is the answer? There seems nary a viable reply that may please the court, or in this case, the White House, let alone a divided American electorate in what will be a crucial election year.

There was persistent talk throughout the summer of US strikes on Syria and Iran. In fact, it’s been more than just talk. According to some people very much in the know, the question of “what to do with Iran and Syria” has, as of a few months ago entered the stage of some very serious military planning.

Cynics will counter argue that the military are always working on plans to invade some place or other. It’s part of what they do in the military. Matter of fact, the Pentagon probably has, somewhere on their top secret shelves, plans on how to invade Liechtenstein, Andorra and Monaco. They also possibly have plans on how to invade Canada and Mexico, although judging by the numbers of Mexicans in the US the Mexican invasion has already begun.

But where Iran and Syria are concerned this time, it seems to go beyond the usual planning. Military tacticians and civilian analysts have been burning the midnight oil laying out strategies of how best to tackle those two countries. Mostly, they look at Iraq and say to themselves, “We cannot have another Iraq on our hands.” To be sure, neither does anyone else. Washington wants quick, clean, short wars, much like the first Gulf War. But again, if Iraq is an example of what’s in store if a similar scenario is to unfold elsewhere, say in Iran or Syria. No country would want that and least of all, Israel.

Both Syria and Iran are accused by the United States of supporting terrorism and of trying to acquire weapons of mass destruction. Syria has been on the US radar for a while now, accused of facilitating insurgents on their way to and from Iraq to fight US and coalition forces.

Strangely enough, those in favor of a strike on Damascus are actually more royalist than royalty. They tend to fall in two schools of thought. The first are the neoconservatives; a tight-knit cabal, close to Vice President Dick Cheney. At times they tend to be more pro-Israeli than the Israelis themselves. And as this administration’s time is ticking away, they would like to see Iran and Syria brought to heel, because they believe the next administration will not have what it takes to confront either country. And a nuclear-armed Iran and/or Syria will forever change the military equation in the neighborhood.

If and when Iran gets the bomb, analysts worry that other countries — Saudi Arabia, Egypt and possibly even Turkey — would want to follow suit, therefore initiating a new arms race, this one perhaps being far more dangerous than the previous one which brought about the Cold War. With tempers being the way they are in the Middle East, there might be nothing cold about the next war.

The second group urging the US to act against Syria can be found among a certain branch of what can best be described as neo-Libano-conservative. They are closely allied to the vision shared by the vice president, and remain at the same time in close agreement with Israel. Or, perhaps one should say more in sync with the Israeli lobby? They see the only way for Lebanon to attain true political independence is through a change of regime in Damascus.

As politics makes for strange bedfellows, Bashar’s best friend, so to speak, may well be the Israelis. Because when you come right down to it, Israel remains strongly opposed to striking Damascus. OK, let me rephrase that, seeing that Israel just carried out a strike deep inside Syria. Israel remains opposed to a change of regime in Syria, especially if what follows is uncertainty. Everyone in the Middle East immediately thinks of Iraq whenever anyone says regime change. And they shudder at the very thought.

As the saying goes, it’s better to deal with the devil you know than … well, you know the rest.

Where Syria is concerned, so long as certain red lines are not crossed — such as Damascus trying to acquire weapons of mass destruction — Israel would rather deal with the government of President Bashar al-Assad than with an unknown entity, particularly if that entity turns out to be the Muslim Brotherhood, the only other organized Syrian group besides the Ba’th Party.

But Iran is a different ballgame altogether. Where Tehran is concerned the US and the European Union are quite adamant in preventing the Islamic Republic from reaching militarized nuclear capability. In Iran’s case, it probably will not be a matter of “to strike or not to strike,” but rather when.

 

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No menial task in Jordan

by Riad Al-Khouri
written by Riad Al-Khouri

There is little doubt that reform over the past 15 years is helping Jordan to grow. The Jordanian economy has done especially well recently: Jordan’s real gross domestic product grew by 6.4% in 2006, while foreign and internal indebtedness fell last year to 73% of GDP, from 84% in 2005, and the deficit in the government’s budget represented 4.4% of gross domestic product in 2006, from 5.3% the year before. Prospects for 2007 are also good; and, barring regional conflagration, the outlook for next year is bright as well.

Growth nevertheless hides variations in economic performance. For example, cutting unemployment is a main goal of reform. However, at 14% in 2006 and around the same level today, joblessness is still high, and has been in double-digits for the past two decades.

That was not always the case: in the mid-70s and early 80s, due to public sector expansion, strong economic growth, and demand for Jordanian workers in regional markets, Jordan saw little unemployment. Such prosperity did not last long, however, and joblessness rose in the mid-80s because of slow growth of the regional labor market and the gradual return of Jordanian expatriates from the Gulf.

Additionally, high population growth began to have an impact on joblessness. Jordan’s population rose 10-fold in the past 50 years, to close to over 5.5 million today, because of immigration and high fertility coupled with low mortality. This increases the need for employment creation: the economy has to provide over 60,000 new jobs per annum for the next five years and 70,000 annually in the decade after to absorb new entrants into the labor market and prevent further unemployment, which today stands at around 170,000.

Although Jordan has achieved higher economic growth and attracted foreign investment, this has not helped create enough jobs for Jordanians. There is some evidence that the impact of growth on job-creation has lessened due partly to computers and other mechanization, though there is scant research on this topic and firm data is unavailable.

This requires new solutions to the joblessness problem, with the government trying some innovative training and helping to nudge locals into work previously done by non-Jordanians. Of these, there are more than a few in the kingdom: according to official figures, the number of guest workers in Jordan now stands at 314,000, and there are around 100,000 foreigners working in the country illegally.

About 72% of guest workers in Jordan are Arab, mainly from Egypt. Because of the proximity of the two countries and their affinities, large numbers of Egyptians come to Jordan, many in search of employment. More than 216,000 Egyptians work in the kingdom, representing 69% of the non-Jordanian workforce, but many are also in the country in other capacities, some of them illegal.

The state now seems to be doing something about this: to regularize the status of guest workers from Egypt, Amman this April suspended entry of Egyptian workers into the country offering a grace period to those already there to rectify their status under new work permits or switch to vocations in which they are entitled to employment. During that time, Jordan issued 77,000 work permits to Egyptians, before the ban on workers from Egypt entering the country ended at the beginning of July. Egyptians then wishing to work in Jordan had to hold professional certificates under a new labor accord between Amman and Cairo.

Will such a focused interventionist policy towards Egyptian migrants into Jordan succeed? Industrialists and farm owners in the kingdom say that replacing foreign labor with Jordanians should be gradual as there already is a shortage of cleaners, porters, and farm workers, most of these jobs filled by Egyptians. It is difficult to switch labor quickly, and the country’s industrialists have urged the government to be flexible in implementing the agreement with Egypt until enough Jordanians of appropriate categories become available. Farm owners in Jordan who employ Egyptians have noted bad experiences in the past with locals who could not tolerate the work environment or commit to working hours on farms. Jordanians shun work in the agricultural sector due to tough conditions; on the other hand, thousands of agricultural work permits annually go to Egyptians working in the kingdom.

It is obviously too early to tell whether stricter control on migrants will help resolve the country’s unemployment, but the key factor, of course, will be whether Jordanians can be convinced to do the menial jobs currently held by Egyptians and others. In any case, global forces mean that Jordan’s borders must stay open to migration — into and out — and that will inevitably make the task of state intervention tougher.

 

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Lebanon’s bumper crop

by Nicholas Blanford
written by Nicholas Blanford

You will find broad smiles on the faces of farmers in the northern Bekaa this autumn after they successfully brought in the largest hashish harvest since the end of the 1975-1990 civil war.

The grinding political crisis between the government and the opposition as well as the additional security commitments of an overstretched Lebanese army encouraged the farmers to return to old ways this year to supplement their meager income from legitimate crops by growing hashish which they process into cannabis resin and sell to local dealers for a hefty profit.

The Internal Security Forces (ISF) estimates that some 6,500 hectares (16,000 acres) of drug crops — mainly hashish with a small amount of opium poppies — were planted this year in remoter stretches of the northern Bekaa. Farmers normally can sell the cannabis resin for about $1,000 a kilo although they expect the price to drop to about $600 to $700 this year due to the glut.

One farmer, Ali, said his eight dunam field of hashish plants with their distinctive spiky saw-toothed leaves will produce about 15 kilograms of cannabis for which he expects to earn $10,000. With one crop planted in March and harvested in July followed by another harvested at the end of October, Ali expects to make about $20,000 this year from hashish. That’s a considerable sum for this area and for almost no work at all.

“All I have to do is throw the seeds on the ground, add a little water and that’s it,” Ali said, sniffing the hop-like scent of a knee-high hashish plant. “I would be crazy not to grow hashish.” That is a common sentiment among the farmers living in the dusty villages flanking the northern Bekaa, most of whom anticipate growing more hashish the longer the political crisis lasts. “The worse the security situation is in Lebanon, the more we can grow,” Ali said.

The cannabis sativa plant has been planted for centuries in the Bekaa Valley, but cultivation reached its apex during the lawless 1980s when it generated a local economy worth at least $500 million a year, turning simple farmers into multi-millionaire drug barons.

With the end of the war, the government, in cooperation with the United Nations Development Program, launched an initiative to replace the hashish and poppies with legitimate crops. The UNDP estimated that some $300 million was required for its rural development program which included improving the infrastructure, building new schools and clinics, extensive irrigation projects to harness the waters of Mount Lebanon along the western edge of the valley and terracing the hillsides. Lebanon was removed from the US government’s list of major drug producing countries in 1997, but, between 1994, when the project was launched, and 2001, only $17 million of the $300 million was received. The project fizzled out a year later as the farmers began growing hashish again.

The UNDP continues to try and implement new programs to steer farmers away from hashish, but it’s slow progress. One pilot project about to be launched is a year-long assessment of the viability of growing industrial hemp, a similar product to hashish but without the narcotic properties. The fibers from industrial hemp are used to make bank notes, rope, paper, animal feed, building materials and clothes worn by eco-fashionable Europeans. Hemp oil is used to make a wide range of cosmetic products.

Still, the allure of easy cash from growing hashish is hard to beat, and farmers are prepared to turn violent to protect their crops. Each August, the ISF, accompanied by troops, raids the hashish fields, ploughing them with locally-hired tractors under the glaring eyes of aggrieved farmers.

This year was different, however. The owners of tractors were warned that if they allowed themselves to be hired by the ISF to destroy hashish crops, they would find their houses burned down. The ISF also faced its own security problem with the army unable to provide the same level of security as in past years. The army was stretched to breaking point with security commitments in the southern border zone, along the Syrian frontier, policing Beirut and not least battling Fatah al-Islam militants in the Nahr al-Bared camp throughout the summer.

When an ISF drug squad team stormed hashish fields near Boudai, supported by only 10 soldiers, they came under fire from machine guns and rocket propelled grenades from nearby woods and houses. With RPG rounds exploding in the air above them and bullets cracking by, the team leader decided discretion was the better part of valor and beat a hasty retreat. The ISF was concerned that another attempt to eradicate the crops could provoke civil unrest which inevitably would become politicized with the government and the ISF on one side and Hizbullah (which disapproves of drug cultivation but turns a blind eye) supporting the farmers on the other.

The hashish harvest was all but over by the end of October, and in November the farmers will be busy processing the dried hashish leaves into the dark brown bricks of cannabis so beloved by generations of university students. The ISF is hoping that it will be able to seize the finished product in the farmers’ workshops before it is sold to local dealers and either exported or sold on the domestic market. If the raids fail, expect to see the northern Bekaa awash with green hashish next year.

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Calling a spade a spade

by John Dagge
written by John Dagge

Australians go to the polls to elect a new Prime Minister on November 24 and — if the polls are to be believed — the country’s second longest serving Prime Minister, John Winston Howard, is a dead politician walking. His opponent, the Mandarin-speaking leader of the Labor Party, Kevin Rudd, is the country’s most popular opposition leader in the past 35 years. “Arrogant” and “untrustworthy” are words emerging from political focus groups to describe the man who won control of both houses of parliament in the last election by promising to keep interest rates low. They rose and a highly mortgaged public is now demanding its pound of flesh. The introduction of new workplace laws, effectively doing away with collective bargaining and lowering wages in the process, has also angered working class Australians. The Iraq debacle — and Howard’s unwillingness to withdraw troops — burns in the background.

Speak to his supports and you will be told that Howard is a man of vision and conviction, never backing away from making the tough decisions — a “man of steel” says fellow admirer George W Bush. A leader who calls a spade a spade and speaks for ‘ordinary’ Australians (whoever they are) and defends Australian values (whatever they are).

A quick glance at the record, however, shows that Howard has always been a pure political animal — one that has never known a career outside of politics. If he ever called a spade a spade, he always made sure he had plausible deniability. He introduced “core” and “non-core” election promises into the country’s political lexicon, the latter (and frequently the former) being pledges that he felt no obligation to keep. Symbolism and the mean stoking of nationalism have been used with great success throughout his career. Everything was up for negotiation — witness his conversion on climate change, finally declaring the science valid when he could no longer ignore it was hurting him in the polls.

Likewise, the 68-year-old’s recent pledge to hold a national referendum to insert a statement of reconciliation into the constitution’s preamble towards Australia’s Aboriginal community smacks of election opportunism. His moment of clarity regarding the government’s recognition of the country’s first inhabitants comes after 11 years spent ignoring their plight and trying to erase some of the most violent acts of white settlement from the history books (dropping the “black armband view of history”). So shameless is Howard’s latest initiative that even he was forced to admit “some will no doubt want to portray my remarks tonight as a form of Damascus Road conversion” during its announcement.

The most important Australian value, according to Howard, is mateship, which he defines as the “unconditional acceptance, mutual and self respect, sharing whatever is available no matter how meagre, a concept based on trust and selflessness and absolute interdependence.” Howard’s sharing of Australia’s long economic boom is evidenced by the fact that the gap between the country’s rich and poor has never been wider. Howard’s Australia is one where 20% of the richest households own 61% of the wealth ($1.7 million per household), while the poorest 20% own around 1% ($27,000 per household). After a decade of robust economic growth, low income households have gained an extra $24-a-week increase in income, while high income households have enjoyed more than five times that with a $139 increase. His latest round of industrial relations reform has lead to a $106 per week decrease in the wages of low skilled workers and a widening of the gap between men’s and women’s wages. At the same time, corporate salaries have never been higher. Over his term, Howard has worked tirelessly to introduce a two-tier health and education system. Rampant greed and materialism — qualities once scorned by the nation — are now praised as evidence of a strong entrepreneurial sprit.

Likewise, Howard’s “unconditional acceptance” was amply displayed in his treatment of asylum seekers, who he imprisoned in detention camps located in the desert or surrounding Pacific islands. The 2001 election was won by appealing to the basest elements of the Australian (or any) psyche: us against them. While framing the debate in terms of border security — postulating that al-Qaeda operatives might float over in leaking ships disguised as refugees — the ugly reality was that he was re-elected by adopting the policies of Pauline Hanson’s racist One Nation party. Howard started his career by working to halt Asian immigration and will end it by frothing at the mouth regarding the country’s Muslim community.

Howard will lose the election. His legacy is a cynical, meaner and more materialistic Australia.

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Our role in climate change

by Rana Hanna
written by Rana Hanna

The awarding of the Nobel Peace Prize this October to former US Vice President Al Gore and the Intergovernmental Panel on Climate Change (IPCC) has sent an unprecedented message to the world: the future is green.

The IPCC had caused alarm bells to ring loudly at the United Nations earlier this year when it announced that global warming was “most likely” i.e. over 90%, caused by human development and carbon dioxide emissions. Al Gore, for his part, had sent a chilling message about the consequences of climate change in his movie An Inconvenient Truth, for which he also won an Oscar.

In layman’s terms, global warming is all about carbon emissions that cause heat to remain trapped in the atmosphere, which in turn melts ice caps and glaciers causing epic flooding in some areas and intense drought in others. Taken to extremes (that is, if all the ice melts), whole coastal cities could disappear, as could many species of flora and fauna. There would also be less water and more disease. Scientists predict that within the next 100 years, average temperatures may rise anywhere between 1-6 degrees.

Scared? Here’s the good news: part of this process is, it seems, reversible and many European countries have apparently taken initiatives to combat global warming including banning certain ‘greenhouse gases’ and launching mega awareness campaigns.

The vast majority of the world’s population however, are not fully aware of the dangers of global warming and even if they were, would no doubt be unsure what to do about it. Whilst it is true that individuals in themselves contribute very little to endangering the planet (industry and airlines are the biggest polluters) a concerted, unified effort by us little people would consolidate results and make a difference.

How many Lebanese — or Arabs in general — recycle? How many use water efficiently, switching off lights that are not being used, and perhaps most importantly, are not reliant on their cars to drive 100 meters? Some people in the United States and Australia have gone as far as to disconnect their homes from the electricity grid and forego toilet paper! They are even blogging about it.

However, the solution to global warming can only come from governments who will make a unified, concerted effort to work together to reduce carbon emissions. Unfortunately, the two biggest polluters in the world, the US and China, refuse to enact legislation that combats global warming and it seems that the Lebanese state (although relatively minor in its contribution) has adopted the same line.

After the oil spill during last summer’s war with Israel, the government did very little to foster awareness of environmentalism, while a move to ban mazoot in cars and vans has all but been reversed since it came into effect a few years ago. A report from the Lebanese Ministry of the Environment on Global Warming drawn up in 1999 with the UNDP (United Nations Development Program) clearly says that the Lebanese government, although committed to combating climate change, had ‘other things’ to worry about. Meanwhile, Sukleen, the company charged with keeping Lebanon clean, does place recycling bins on major streets and is happy to provide them for corporate recycling but the main initiative has to come from the consumer.

So, should we panic? It is important to keep a cool head in a (rapidly) heating situation. There is other scientific research that acts as a counterweight to the IPCC’s research and that claims that global warming is a cyclical phenomenon that will phase itself out, and yet other researchers suggest that global warming is a natural occurrence without which we would still be living in the ice age.

But if you do decide to ignore global warming then I should put you in touch with my four-year old who is exhibiting extreme calm in the face of a melting Earth and is already making plans to move to another planet.

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