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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ADL‘s chutzpah on genocide

by Peter Speetjens
written by Peter Speetjens

How world politics can have an impact on a local level was nicely demonstrated on October 17 in Boston, where the Somerville Human Rights Committee held a special meeting regarding the Statement on the Armenian Genocide by the Anti-Defamation League (ADL). The ADL, a Jewish advocacy group against anti-Semitism and all forms of hate speech, had declared on August 21 that the “consequences” of events in Turkey between 1915 and 1918 were “tantamount to genocide.”

The carefully worded statement avoids any indication of “intent” on Turkish side, which is a crucial element to be able to legally characterize a mass killing as genocide. The ADL furthermore labeled the recent US Congressional proposal to acknowledge the Armenian genocide as “a counterproductive diversion,” while the organization’s national director, Abe Foxman, met with Turkish Prime Minister Recep Erdogan to express his sorrow over what the proposal has caused for the leadership and people of Turkey.

Foxman called for a joint Turkish-Armenian effort to study the tragic events in Turkey during WWI. By doing so, he fully embraced the Turkish position, which argues that the Armenian genocide was the unfortunate consequence of the chaos of war, while more research is needed to determine the exact causes.

Not only Armenians, but also many Jewish Americans were shocked and outraged by the ADL’s statement. “Foxman talks about scholars who should study this,” one Holocaust survivor told the New York Times. “That, to me, rang exactly like Ahmadinejad saying ‘let’s have a committee to study the Holocaust.’ Give me a break.”

For the past 15 years, the ADL and other Jewish and/or pro-Israel groups have generally sided with Turkey against the recognition of the Armenian genocide. The main reason is that Israel is on good terms with Turkey and does not want to jeopardize its strategic relation, which allows among other activities for the training of Israeli F16s above Anatolia.

But what has the Somerville Human Rights Committee (HCR) to do with all this? Well, the HCR runs the ADL’s “No Place for Hate” program in local schools. Spearheaded by members of the American Armenian community, a growing number of citizens believes that the ADL has now disqualified itself as the right partner to run an anti-bigotry program. A handful of municipalities in and around Boston have already cut ties with the ADL.

Some 30 people attended the Somerville meeting and sat opposite the four committee members led by chairman “Barbara” who started by saying that this was her last day as chairman as she had a new job starting the next day. Seeing the many people, Barbara said, and the fact that the committee has a regular meeting at 7 p.m., Barbara suggested everyone speak for five minutes only

First came an elderly lady who read an emotional letter from a friend who had survived the genocide. Next came a fired-up Irish redhead who claimed she had often questioned the committee’s ties with the ADL, seeing the latter’s pro-Israel stand, and complained her letters were never answered. Third was a young Armenian who questioned the ADL’s moral right to teach “our children” when the ADL is apparently willing to politically compromise on even genocide. He quoted historian Israel Charny, as saying that denial is double killing: “First the physical deed, followed by the destruction of the remembrance of the deed.”

Many more people said similar things, but from the start it was clear that the committee members did not want to deal with the subject. As a master politician, committee member, Sarah, showed how to get a thorny issue off the debating table by simply formalizing it, by trading content for procedure.

Sarah started by saying that the issue was of course a very complicated one, and could not be decided upon in evening. Secondly, the HRC was not the one to decide, but the municipality. The HRC could only advise them. To do so, she suggested everyone to put their grievances on paper and send it by mail, so they could pursue the matter.

Unfortunately, this was no crowd pleaser as people failed to see what more should be written after all that was said and done. What’s more, it had seemed a clear-cut case for some six other municipalities who had cut ties. To calm things down, Barbara was forced to shed a light on the main reason why cutting ties with the ADL was so difficult.

The ADL, she said, was one of the few organizations that donated Somerville HRC an annual grant with which it was able to operate and, as it was nearly 7 p.m.., the HRC really should be starting its regular meeting. “But do send us your letters.”

Outside Tuffts University, where the meeting was held, people gathered to voice their frustration. “Money for justice,” one man said. The Irish redhead, still angry, related how ADL members called her a neo-Nazi for criticizing Israel. At 7:15 p.m., Sarah runs out of the building. She had to cut the meeting short to go to a reception. Her husband is waiting to pick her up.

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A new world economic paradigm?

by Mazen Soueid
written by Mazen Soueid

One comes out of the IMF/World Bank annual meetings in Washington DC realizing how much the world economic landscape has changed over the last several years. The rise of emerging markets, called “third-world countries” only a couple of decades ago, has been nothing short of spectacular. Benefiting from sound macroeconomic management, a supportive external environment and high commodity prices, these countries have managed to move to the center stage of the world economy, amid the failure of the mature or big industrialized countries to face up to their challenges. These challenges have ranged from growing fiscal and trade imbalances in the US, to lagging bold and crucial structural changes in the EU that would, among other things, render its labor markets more flexible and hence, more capable of generating potential growth rates, to finally a Japan that has yet to generate domestically-driven growth and emerge from a decade long suboptimal growth.

Of course, the positive factors that have helped emerging markets’ upward move as a global economic power were not accidental but rather the combination of well taught policy lessons, policy responses in mature markets, and some luck. The policy lessons were accumulated after a series of currency and debt crises that rocked the emerging markets from Mexico (1994) to Asia (1997) to Russia (1998) to Brazil (1999) to Argentina (2001), leaving policy makers in these countries and other emerging markets with the realization that sound and prudent fiscal and monetary management of the economy are necessary conditions for sustainable high-paced growth. Meanwhile, the collapse of the dotcom bubble in 2001 prompted an unprecedented easing by the Fed, creating one of the cheapest credit cycles, which in turn led to liquidity abundance and hence higher emerging markets asset-prices be it in stocks, bonds or even real estate. The third supporting factor, i.e. the increase in oil and other commodity prices, is a combination of a bit of luck and a reflection of strong global demand.

Two developments over the last couple of years have particularly underlined this shift in economic status and the emergence of a new world economic paradigm. The first was last year, when the big four emerging markets (Brazil, Russia, India and China) contributed all together more than 50% to the global growth rate. In other words, of the 5.4% growth rate that the world achieved in 2006, more than 2.7% were generated in the four large emerging markets. The second development came in this year (2007), as China is set to be the largest single contributor to world GDP growth, beating both the US and the EU. In other words, of the 5.2% world growth rate expected for 2007, China alone is contributing 0.9% while the US and the EU are contributing each less than 0.8%. These are major shifts in the global economic conditions, underlining the facts that the engine of world growth is no longer the US, or even the EU, but rather emerging markets.

The vulnerability bias and not just economic relevance seems to have changed. The US sub-prime mortgage debacle and its consequences on the money and credit markets globally, was indeed the first global credit crisis in a long time that breaks in a mature rather than an emerging market. After a series of emerging market crises in the 90s propagated to world markets, jacking up interest rates and causing jitters in world stocks, the last episode of massive write-offs, tight credit conditions, and volatile stock markets has actually originated in the US market where easy credit conditions over the last several years have encouraged over-lenient lending and speculative investments whose reversals are just starting to materialize. Even more surprising has been the resilience of emerging markets to the global financial distress, as evidenced by their debt and stock markets which continued to rise in value as mature debt and stock markets declined.

Skeptics are very careful about declaring “the end of history” (a term coined by American historian Francis Fukuyama upon the collapse of the Soviet Union) of the world economy, and even highlight emerging market vulnerabilities that would make them unshielded from a severe meltdown of global financial markets. We do not completely disagree with such skeptics, and though we are not ready to declare the end of economic history ourselves, we are surely prepared to recognize the start of a new chapter.
 

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London, ten years later

by Gareth Smith
written by Gareth Smith

When I left England in 1996, I had no e-mail address and no cellular phone, Tony Blair was yet to become prime minister, and Manchester United had just won the English premiership with youngsters Paul Scholes, David Beckham and Gary Neville.

Eleven years on, a Japanese diplomat in Tehran warned me London had become expensive and a British diplomat assured me there was a wider variety of food in supermarkets. Both were right.

Renting a one-bedroom flat in central London can easily be $1600 a month, and my municipality tax is another $200. A pretty average curry is $100 for two, and a Lebanese breakfast in Edgware Road can top $50.

Britain is unquestionably more affluent. The average income is £1800 ($3,600) a month, with living standards rising 2.3% a year since 1996. The over-50s have accumulated more wealth, largely from rising house values, than the combined GDP of the UK, Germany and France.

But the society has changed in more ugly ways as the result of technology, the decline of the family and even the political climate of the ‘war on terror’.

Western society has long considered itself a model for the rest of the world to follow. In the 1990s Francis Fukuyama’s “The End of History” proclaimed the universality of the West after the collapse of Soviet communism. Most English people seem still to believe this. Greater overseas travel has done little to challenge the assumption that other societies are inferior or backward.

Neither has the internet — the world’s virtual rubbish bin — stymied the culture of tourism. As technology has shrunk the world, the mainstream media has slashed its foreign news. Big stories like the Iraq war are reported by journalists good at drama but lacking any real knowledge of the country.

Even the good old BBC has replaced reporters like Mark Tully in India or Charles Wheeler in the US with aspiring celebrities who change countries every other year.

This is beyond the old British Foreign Office practice of moving staff before they “went native”. Today, all change is seen as improvement and the media merely follows the business trend.

Sandwiches and mobile phones sell, and each accounts for around a quarter of the shops on an average English high street. The marketing is aggressive, and even people on low incomes change their mobile every year.

While the variety of handsets and SIM tariffs is bewildering, an old-fashioned land-line is less of a money-spinner and so a low priority for suppliers.

I tried BT, the former state-owned company, who installed the line in my home many years ago. I spent 50 minutes trying BT’s free helpline from a street phone without an answer, and by e-mail could extract only a promise to call two weeks later.

Virgin, the all-dancing brand from Richard Branson, offers cable in my area, so I chose broadband, television with Sky Sports and a land-line at a basic of about $80 a month. The land-line was still not working four weeks later, and the broadband has slowed to the pace of Beirut dial-up on a bad day.

The Virgin ‘help line,’ unlike BT’s, is not free, and when I eventually got through, the person answering had an accent that suggested he hadn’t been long in the UK and was probably working for peanuts. He admitted he had received little training and wasn’t sure what could be done.

The business model is clear. Offer tasty bait to hook the customer. Resources go into attracting customers with glossy brochures, TV advertisements and ‘cheap’, introductory offers — rather than delivering a service once the customer has paid up.

The transport system is a similar mess. The cold, damp British weather makes an immediate attraction of cheap air travel to Europe and beyond — once you get through the airport and flight delays. But the rail and bus systems have fragmented into privatized, shabby chaos.

Before you travel, get some cash, and pray you don’t face any complications. Banks have massively cut staff, offering on-line and push-button telephone banking while reducing their branches to high-security kiosks fronted by ATM machines.

At all times be vigilant. The ‘war on terror’ has brought a fear that terrorists may have moved in next door, and I’ve been asked more times about my bag in London than I was in Iraq.

My friends tell me not to worry, that I should get out more, and that I will adjust in time. I dare not tell them how much I miss Tehran.

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Consumer Society

Luxury watches – Buying a classic timepiece

by Michael Karam
written by Michael Karam

What is it about watches that drive people to distraction? Why can something whose function is purely to tell us the time be the object of such obsession and devotion? Maybe it’s because we wear it everyday. Maybe because, to some of us, a watch is more a companion than a timepiece and one of the few ways a man can express himself. Or maybe it’s simply because they are, in many cases, just so damn beautiful.

My first teenage crush was the Rolex but then my brother-in-law had to spoil it by giving me his eminently more sensible steel Rolex Oyster Perpetual Datejust. We are still together. It is over 40 years old and still keeps immaculate time, but I still hanker for a watch — or watches if the truth be told — that will send the pulse racing.

It is a good time to be on the look out for a new watch. While the rest of the $3 billion global luxury watch market has taken a bath in recent years, the GCC, especially KSA and the UAE, are still going strong. They are in the top 15 national importers of Swiss watches (Dubai imported 700,000 units last year) with demand increasing by roughly 15% annually.

36mm used to be enough

The fadmeisters tell us that today’s watch should be BIG. In a previous life, a 36mm diameter watch was more than enough for a man. Today if you’re wearing anything under 40mm, apparently you just aren’t cutting it. The trend was set by über-brand Officine Panerai (most models are 44mm and with a chunky winder protector), whose Italian navy heritage and distinctive lines have helped the brand carve out an intriguing niche in the global watch market. Still, purists believe Officine Panerai to be arriviste among the aristocrats of the luxury watch constellation.

So you have just got your annual bonus and you think, well, you’ve worked hard, the school fees are paid and the mortgage is in good shape and the wife isn’t badgering you to get the apartment painted and you have a decent car and you can afford an annual holiday and your credit card is paid off and … well, basically everything is squared away. (Because let’s face it, throwing down anywhere between $2,000 — entry level for a luxury watch — and $30,000 — in reality the sky’s the limit — on something that tells you the time and is in all likeliness less accurate than a Casio, is something you really gotta justify.)

Now as I said, if you want pinpoint accuracy get a Casio or a Swatch or any other quartz powered watch. Don’t get me wrong, some can cost thousands, but these — sports and diving watches excluded — must be considered jewelry before anything else. If you are going to buy a watch that reflects how you see yourself (and, if we are being honest, how you want other people to see you), it really should be mechanical and by that I mean either automatic (powered by wrist movement) or manually wound (yes, they still make them). A friend recently announced that his next watch must be manual, as he wanted to feel he had a connection with his watch by having to wind it every day. It is this level of deep satisfaction that for many people justifies owning an expensive watch from a historic manufacturer.

Today’s great models

One decent watch should be enough, so here is my selection for what it’s worth. I have chosen what I believe are watches that have proved themselves in terms of brand equity, design build and quality and performance. Many are held up as performance classics — Rolex Submariner, Omega Speedmaster, Breitling Navitimer — design icons — Audemars Piguet’s Royal Oak, Longines Lindbergh, Jeager-LeCoultre Reverso, Tag Heuer Monaco — or simply just stunningly elegant and timeless — Vacheron Constantin Patrimony Contemporaine. I have also earmarked the IWC Da Vinci and the Patek Phillipe Gondolo Calendario for future greatness.

Patek Phillipe, arguably the most prestigious name in watch making, captured the essence of owning a great watch with its “father and son” ad-campaign that suggested a watch was something one handed down the generations. Slightly more tricky to sell is the idea that you can pass along your Swatch or Seiko. Then again, I might just be a very shallow man with too much time on his hands!

Michael Karam is Managing Editor of Executive.

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Lebanon

Beirut‘s airport – Holding pattern

by Executive Staff
written by Executive Staff

Beirut’s Rafic Hariri International Airport (RHIA) is still reeling from last year’s war between Israel and Hizbullah, with passenger numbers down and some $19 million needed for a second radar and upgrade communications and security systems.

During the month-long conflict RHIA was hit by 24 air strikes to the runways and three fuel tanks, costing the airport an estimated $8 million in damages. In the year since, Lebanon has struggled to get back on its feet amid political instability and a deteriorating security situation that has seen tourist numbers plunge.

According to the Lebanese Ministry of Tourism, the number of visitors dropped from 630,804 between January and June in 2006, to 412,041 in the same period this year. Passenger traffic for September this year was higher than last at 317,142 compared to 215,185, but significantly down from September 2005’s 355,959 passengers.

The airport has resultantly seen a 20-25% drop in passengers compared to last year, with only half of the six-million-passengers-a-year facility being used, the East wing.

“We see empty aircraft sometimes,” said Hamdi Chaouk, Director General of the Civil Aviation Authority (CAA), the country’s aviation operator and regulator. “Most passengers, if not all, are Lebanese,” he added.

Chaouk also said that the airport’s shops, cafes and restaurants — many recent additions to the facility — had felt the brunt of the downturn. “They are not doing very well,” he conceded.

Political instability is not only affecting the airport’s earnings, it has impacted on the CAA’s 20-year plan to upgrade RHIA, turn the inactive Iaat airport in the Bekaa valley into a cargo and charter hub, and turn Rayak airport in the center of the country into a training and private jet facility.

Waiting for stability

“All ideas are on hold until the government is stable again, as all this requires stability, so there is no investment,” said Chaouk, adding that RHIA is to be expanded to handle 16 million passengers by 2035. “More expansion, more development as time goes by,” he said. “The airport is just waiting for more passengers, but every six months something seems to happen.”

In the immediate term however, RHIA is struggling to raise an estimated $19 million that is needed to acquire a second radar, security equipment and communications technology.

“Only one radar in Lebanon is used for approach to the Beirut airport,” said Amin Jaber, maintenance director for Radar Navigation Aids and of Technology Systems at the Director General of Civil Aviation (DGCA), a recently established autonomous civil aviation regulator that will eventually compliment the CAA, which is slated for privatization.

“This radar’s location is not giving us proper coverage of Lebanese air space, there are gaps, and there is no back-up radar in case of failure. This is very important for us to rectify. For this reason, we need a second radar in another place, at the top of a mountain at Baysour,” he added.

The current radar, manufactured by Raytheon, is over 10 years old and covers a radius of 250 miles. Jaber said this radar also needs to be upgraded, to a Mode-S Secondary Surveillance Radar.

The second radar, which has been put up for tender and is slated to cost $3.5 million, will overlap areas of the existing radar. “With two radars we can cover most of the Lebanese airspace, so we can provide this information to the [planned upgrades of the] airports at Iaat and Rayak,” said Jaber.

“We are also looking to exchange radar information with our neighbors, such as Syria and Cyprus, who we are working closely with us for this to happen soon,” he added. However, discussions with Syria are being hampered by the strained diplomatic relations between Beirut and Damascus following Syria’s withdrawal from Lebanon in 2005.

With security systems getting more advanced, Beirut needs to upgrade its current systems in line with IAA, European Union, and US regulations, said Chaouk. He added that international security organizations, “from the US to the UK, to Italy and Germany,” have toured and audited the airport following the war to check security, particularly in regard to the possibility of arms being smuggled in to supply Hizbullah.

“No airport in the world has been audited so much,” said Chaouk. “All reports show RHIA is a secure, safe airport. Since the July conflict, we have not faced any security threat and hope it doesn’t happen,” he added. However, the airport was forced to close for a day in February when opposition political parties organized a nationwide strike, shutting down main roads and the entrance to the airport.

Jaber said some $15 million is needed to upgrade the security systems.

“We need more security systems — new CCTV equipment, extra cameras, and recording technology — it was analog, now moving to digital. We also need to upgrade some X-ray machines and mobile systems,” he said.

The Council for Development and Reconstruction is to carry out a study through consultancy firm Dar Al Handasah to decide on what security equipment needs to be upgraded and replaced.

“If we can’t get [funding for] the equipment in one package, we will do it in phases,” he said. Funding is being impeded by the $8 million outlay that was required to fix the airport following the war last year in addition to a lack of public funds due to Lebanon’s chronic debt, estimated at over $41 billion.

Internal communications systems also need to be improved, estimated to cost some $500,000, and there is a need for baggage reconciliation systems at the airport to be improved in line with European authorities minimal standards.

Meanwhile, the US government earlier in the year overturned a ruling that banned American aircraft from flying to Beirut, which was put in place in the early 1980s following a spate of hijackings. However, no American commercial airliners have resumed services as the move was attributed to allowing US military planes to land to supply equipment to Lebanon’s armed forces during its 106-day fight against Islamist militants in the north of the country.

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Lebanon

Banking sector – Invading Algeria

by Executive Staff
written by Executive Staff

President Bouteflika’s 2005 Charter for Peace and National Reconciliation closed a chapter of Algeria’s tumultuous past and focused instead on solid economic development program and reforms. This has been dovetailed by record oil prices steering the North African nation into a period of exceptional prosperity. Given such a favorable context, it is not surprising that a growing number of financial institutions, including Lebanese banks, see opportunities in Algeria.

“By restoring security, stability, credit worthiness, economic growth, and convertibility on current accounts, Algeria elicits all the features of a business environment that is predictable, safe and attractive for the expansion of foreign direct investment (FDI),” said Joe Dakkak, general manager of Fransabank El Djazaïr.

The African nation is currently running substantial trade surpluses and building up record foreign currency reserves, close to $100 billion. According to Nassib Ghobril, head economist of Byblos Bank which is currently applying for a license in Algeria, the nation has undergone major economic changes, shifting gradually from a state to a private sector economy. “Soaring oil prices have also allowed to replace foreign debt with current account surpluses while public finances improved significantly.”

Among the larger economies in Africa, Algeria’s gross domestic product is estimated at $116 billion, with a growth rate of 4.5% for 2007, picking up from 2.7% in 2006 after a 5.3% growth rate in 2005. “The 2006 lower growth rate was principally due to a drop in total hydrocarbon output related to infrastructural problems, which were resolved since,” said Ghobril.

Privatizing the banking sector

According to the World Bank, Algeria falls into the lower-middle income country classification, with a per capita GDP of $3,400 dollars for 2006. Most growth witnessed recently has occurred in the fields of construction and services, which exhibited growth rates of 5% and 7% for 2006. In 2003, public debt constituted 44% of GDP, a figure brought down to 17% of GDP in 2007. “In 2006, Algeria has prepaid its exterior debt of $12 billion with revenues from the oil sector, while Russia agreed to erase its Soviet-era debt,” said Ghobril. At the same time, the restrictive monetary policy of the Bank of Algeria, has kept inflation under control at the respective moderate rates of 1.5% in 2005 and 2.5% in 2006. “It is expected that inflation will remain moderate and under control in the coming years,” emphasized Dakkak.

Elie Azar, marketing manager at the Lebanese Canadian Bank, which owns 60% of Trust Algeria (paid-up capital of $35 million), underlined that Algeria’s sheer size and its lack of basic products and services, fuels the appetite of Lebanese bankers, while Dakkak said that, while the country has freed itself of the centralized planned economy, public banks are not yet a driving force in economic development and the financial system. This leaves room for private sector banks to grab a share of the market.

The IMF and the World Bank have both been very vocal about the necessary measures to propel Algeria’s financial sector into the 21st century. The African country has been strongly encouraged to privatize several public banks, in order to transfer know-how to the sector, help curb restructuring costs as well as position Algerian institutions regionally. Algeria seems to be listening closely as state owned bank Crédit Populaire d’Algérie (CPA) is the country’s first financial institution to be put up for sale. “The bidding process is starting very soon, most probably in the next few months, with 51% of the company going on the bidding block,” said Ghobril.

According to the Oxford Business Group, cash transactions predominate in the African country where only 15% of the population utilize ATM cards while the number of branches for banks stands at one per 30,000 people.

Dakkak believes, however, that the government and Central Bank alike have made significant efforts to modernize the banking sector and the payment system. “Today, 19 banks are accounted for in Algeria, six of them public, one semi-public, and 12 foreign private banks of which one is American, four French and seven Arab,” said Fransabank El Djazaïr’s GM. Société Générale, BNP Paribas, Arab Bank, City Bank, Natexis, Al Salam, Deutsche Bank, Calyon (a Crédit Agricole corporate and an investment banking subsidiary), have all set up shop in the capital Algiers. They will also be joined by the Export Development Bank of Iran that has announced it will open a branch in Algeria very soon, as reported by the Byblos Country Risk Weekly Bulletin. The largest three state-owned banks are Banque Extérieure d’Algérie, Banque Nationale d’Algérie and CPA. By the end of 2007, the private banking sector will account for only 6% of total deposits amounting to $56 billion and 7% of total outstanding loans, currently at $26 billion, from $23 billion in 2004. Today, 90% of the banking sector is dominated by state banks, while local private banks are mostly family-owned.

The size of banks varies significantly. While state-owned banks boast as many as 200 branches, private banks feature limited networks with branch numbers varying between one and 21 branches as in the case of Société Générale, according to Azar. “The banking sector remains quite underdeveloped, most activity residing in import-export payment operations. Percentages of customers using banking services are also very low. We are, however, slowly introducing private retail banking services,” he explained. In Ghobril’s opinion, one reason state banks remain powerful and are the heaviest of all local players is that they tend to lend to mammoth-like state-owned companies. “This situation results in a high level of non-performing loans (NPLs), which has recently forced the government to inject $150 million to state banks in a recapitalization effort.”

In 2007, banks’ assets ratio to GDP will reach 47%, a figure that is considered to be relatively low. The NPL of public owned banks for 2005 were 38.2%, which accounted for 8% of GDP while it remained at 5.8% of total loans for private institutions. “The capital adequacy ratio for private banks was 23.7% for 2005 rising from 21% in 2004. It decreased in the case of state owned banks from 14% in 2004 to 12% in 2005,” Ghobril pointed out. Public banks are also weighing down on the whole banking sector, as return on assets (ROA) and return on equity (ROE) exhibited levels at 0.4% and 8% in 2005 respectively. On the other hand, private banks showed an ROA of 2.2% and ROE of 25.4%.

Many hurdles to jump

One major drawback to any banking sector progress lies again in the lack of branch networks. The collapse of several private banks between 2002 and 2004, with the media-blitz Khalifa scandal on everyone’s mind, has greatly undermined public confidence in private sector banks and led to the closure of private banks or their merger with state-owned institutions. The slow penetration of the banking sector is also due to a governmental decision dating back to August 2004 which banned public companies from dealing with private banks. “It is, however, our belief that the ban will be removed very soon, along with the privatization of CPA; this process should accelerate market penetration of private banks,” so Dakkak.

According to Ghobril, the $60 billion infrastructure project undertaken by the Algerian government is one way the local banking sector might benefit. “However, another reason lies in the market’s reality where private sector lending to individuals and companies is growing, the economy flourishing, and the middle class expanding.” The size of the country population estimated at around 35 million is thus reason enough for attracting the attention of the Lebanese banking sector.

In Dakkak’s opinion, economic reforms implemented by Algeria in recent years have brought vigor and consistency to banks in relation with allocation of budgetary resources and management. “It has made it possible to devise incentive and supportive instruments to benefit private initiative conducive to the emergence of a new class of entrepreneurs. The pursuit of reforms will concentrate henceforth on the modernization of the financial and banking sector, enabling it to play a strong role in financing the economy,” he added.

The government has been working on improving governance and transparency within the financial sector. On this, Azar said, “Part of this endeavor aims at modernizing the banking sector, especially through telecommunication with the introduction of basic universal banking practices such as an electronic payment system and ATMs.”

One downside to the banking sector remaining under scrutiny is the tight grip the Central Bank has on the FX market which means that banks are faced with a surplus of cash and an increasing difficulty in re-using it. This state of affairs leads to a more active involvement of private sector banks in the extension of credit facilities to the fast developing private sector. “Imports are free and exports are encouraged by public authorities in a move to reduce the dependence of the Algerian economy on the hydrocarbon sector. Thus, FX transactions are allowed, although the regulations in this regard remain constraining. The development of private banks can be jeopardized by the lack of access to money markets (due to the Aug. 2004 directive) as the huge liquidity concentrated with the public bank is unproductive,” Dakkak stated. Structural problems will hence remain an obstacle to the emergence of a dynamic banking sector.

For Fransabank El Djazaïr’s GM, the over-estimation of the Algerian risk can no more be justified by political factors, safety arguments or economic and financial data. In this context, the government’s continuous efforts to diversify the economy by attracting foreign and domestic investment outside the energy sector, should have even more success in reducing high unemployment and improving living standards.

Ghobril nonetheless underlines that security will remain a growing concern along with the evolution of the political situation in light of the constitutional amendment that will allow president Bouteflika to run for a third term. “As long as oil prices run high, public finances remain sound, infrastructure projects are multiplied, leading to a rise in living standards, the outlook will be positive. Algeria needs to pursue reforms, liberalize capital accounts, improve the ease of doing business and attract FDI to the non hydrocarbon sector.”

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Regional chess

by Executive Staff
written by Executive Staff

There are two schools of thought regarding President George W. Bush’s Middle East peace extravaganza held last month on the shores of the Chesapeake Bay in Maryland, which brought together for the first time 16 Arab countries and Israel in a non-violent environment.

One group believes it was a waste of time, pure theatrics by an administration desperate to leave something more substantial for the history books than the wars in Afghanistan and Iraq. Critics of Bush’s foreign policy were quick to denounce the Annapolis antics as just a mega-photo opportunity and a publicity seeking stunt meant to take focus off the economy, a US dollar at its weakest point in decades, a hurting real estate market going south as a result of the sub-prime scandal and gas prices going through the roof.

Then there are the optimists, the president’s supporters and those who believed a miracle could be accomplish in Maryland when previous attempts have failed in the Holy Land, where miracles traditionally are given greater odds.

Bush’s intent was to jump-start the comatose peace negotiations between Palestinians and Israelis with the expectation of reaching an agreement for a two-state solution before the end of his mandate, now just a year away. For the president, it was somewhat of a shot in the dark. Palestinian and Israeli leaders walked away from the peace conference promising the US president they would “push for peace.” In political parlance that is the equivalent of saying “the check is in the mail.”

But something unexpected did come out of Annapolis. The first thing is the highly significant return of Russia to the Middle East peace negotiations. According to sources close to President Vladimir Putin, Russia was instrumental in convincing the Syrians to participate in the Annapolis meeting. Putin personally telephoned Syrian President Bashar al-Assad urging him to participate in the Annapolis conference. This was confirmed by a high-ranking European diplomat in Washington.

Syria, long shunned by the Bush administration for its policies in Iraq and Lebanon and considered by Washington to be counter-productive to peace efforts, remains a key player to any future negotiated settlement of the larger Middle East crisis.

Russia’s renewed interest in bringing about a peaceful settlement to the Arab-Israeli dispute injects a new momentum in a process that has been dragging for decades. Putin has already convened a follow-up summit in Moscow scheduled for January.

Saudi Arabia and other Arab states are suddenly eager to shift the peace talks into high gear. After decades of refusing so much as to even mention the name of Israel, there seems to be a new impetus, spearheaded by the Saudis, to get the ball rolling.

Why this sudden sense of urgency after years of procrastination? Because the Saudis, much like the Russians, have seen what sort of damage home-grown terrorists can cause to the economy.

Another result of Annapolis is a meeting of the minds of two leaders on opposing ends of the political spectrum: Russia’s Putin and King Abdullah of Saudi Arabia.

Just like Russian pressure on Damascus convinced Assad to send his deputy foreign minister to Annapolis, similarly, the Saudi king’s political clout brought a total of 16 Arab countries — including Syria — face-to-face with Israeli leaders at the conference.

What motivated those two politically opposed leaders to act in unison with the European Union, the United States and Israel? The fact that they all share a common enemy — Islamist terrorism.

Moscow and Riyadh, much like Washington, London, Paris, Madrid, Istanbul and other cities that have experienced firsthand attacks by Islamist terrorists, also agree on a fundamental focus point of the Middle East conflict. They say that until the Palestinians have their own state, the continued unrest in the Middle East will provide extremist Islamists a perfect recruiting poster for their cause.

The Russians, much like the Saudis, and indeed the United States, have seen the results of homegrown terrorism and it was not pretty. Ironically, the Islamists, contrary to what they were hoping for, ended up acting as a unifying force by bringing together the United States and Russia, two former Cold War warriors. At the same time, they succeeded in pushing the vast majority of the Arab World into the same camp with the Western-Russian alliance — and Israel — who now agree they have a new common enemy — the extremists within Islam.

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Special Section

Luxury Automotive – Directing the best

by Executive Staff
written by Executive Staff

What is your brand’s overall strategy for the Middle East?

Our strategy is to be the leading luxury passenger car and SUV brand in the Middle East and Levant.

How does the Middle East market respond?

We are one of the oldest luxury brands in the region with ties to many of our authorized distributors for over 50 years. The Mercedes-Benz brand has always represented quality and innovation and will continue to do so which is why we continue to be the leading German luxury automotive brand in the Middle East and Levant.

How has Mercedes-Benz responded to market demands?

Our customers are important and we always listen to them. For example, it was a customer who suggested that we should build a special version of our Mercedes SLR McLaren to celebrate the 50th anniversary of the Mille Miglia victory by Stirling Moss. We responded by introducing the limited edition ‘722’ version that had its world media premiere in Dubai at the beginning of this year.

What percent of your brand’s overall sales go to the Middle East and how many units are sold?

The Middle East and Levant, excluding Iran, Iraq and Egypt, account for approximately 1% of the company’s turnover, of which approximately 90% is achieved in the countries of the GCC. Within the GCC, the UAE and Saudi Arabia account for over half of the total 2006 volumes and around 60% of GCC sales.

In 2006, the Mercedes Car Group (Mercedes-Benz passenger cars, Maybach and SLR McLaren), sold a record 15,675 vehicles, a12.8% increase over the previous year’s figure of 13,898.

Are you growing in the Middle East?

Sales of Mercedes passenger cars continue to grow every year because we constantly introduce a range of innovative new products and also ensure we offer the best available sales and after sales service.

The Middle East is one of DaimlerChrysler’s largest markets particularly for Maybach and SLR. Basically, Mercedes-Benz sales in the Middle East and Levant form an inverted pyramid, unlike almost any other market region, whereby the S-Class forms the base with a share of Mercedes-Benz sales of more than 30% and the B-Class the tip. The total market for smaller vehicles is significant, particularly for fleet and rental, and especially in those markets with a high expatriate component, but generally the region remains disproportionately that of a “large car” market.

In light of increased liquidity in the Gulf, has your brand responded specifically?

Middle East customers like to have special versions of their vehicles. At Mercedes-Benz our Designo range allows them to choose their own interior design. In addition, our performance vehicle arm, Mercedes-AMG, has opened its own Performance Studio that can meet the individual requirements of any customer.

What are the difficulties faced by Mercedes-Benz in the Middle East market?

Vehicles have to be equipped to cope with the environmental conditions pertinent to the region generating heat, dust and humidity and, in some areas, rough roads. It is worth mentioning that only cars from authorized distributors meet the homologation requirements defined to deal with these conditions. In terms of customer comfort, customers are no different to those in other countries.
 
On a local level, how are you competing against others?

We position ourselves as the premium luxury automotive brand. We maintain that position by annually outselling the competition.

Has the Middle East/GCC market influenced design?

Car clinics for future designs include representatives from the region. The Middle East plays a significant role in hot weather testing for all our Mercedes-Benz models. 

What is your best-selling model?

For some years, the S-Class has been and continues to be the region’s favorite luxury sedan. As I said, the region remains a “large car market”. Last year, the new S-Class continued its tremendous success with 6,272 units sold compared to 3,937 in 2005.

Does Mercedes-Benz have a CSR commitment to alternative energy? Does this issue and ecological awareness play any role in your Middle East operations, or do you think that at this time it is a “lost cause” in the region?

We do not believe the Middle East and Levant is a lost cause. The governments of Dubai and Abu Dhabi are aware of the problems and are moving to make a difference with Dubai investigating the introduction of hybrid public transport and Abu Dhabi set to introduce cleaner diesel fuel.

DaimlerChrysler revealed its agenda for the future at the recent Frankfurt Motor Show with a display of 19 new models, among them seven hybrids and the trailblazing F700 research vehicle that uses the innovative DiesOtto engine which combines the best elements of both diesel and petrol engines.

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Clear view on billboards

by Paul Cochrane
written by Paul Cochrane

Earlier this year, Sao Paolo’s conservative mayor Gilberto Kassab made a radical decision when he introduced a Clean City Law that banned all public advertising in the metropolis, saying it constituted as “visual pollution.” All 15,000 billboards, outdoor video screens and ads on buses were removed.

The advertising industry threw up their arms in horror but the public will prevailed, with more than 70% of Paulistas approving, according to surveys, and some $8 million in fines issued to cleanse Sao Paulo’s urban landscape.

In Lebanon, such a development seems otherworldly. Take a drive north from Beirut to the Casino du Liban and you are bombarded with images of scantily clad ladies, scantily clad men, bottles of booze, tinned meat, watches, political propaganda, and so on.

Billboards obscure signposts and traffic dividers, in places, have adverts every five meters — it is serious overkill. Indeed, one of the reasons billboards are banned on highways in much of the world is because ads are a distraction, especially if you are a male with wandering eyes and an gargantuan image of a woman’s bursting cleavage heaves into view; just enough of a distraction to ram into the car in front.

It would arguably be all right if this plethora of billboards were confined to urban areas, but billboards pop out of the Lebanese landscape in the most wonderful spots — instead of an unimpaired view of a valley stretching into the distance you get to see a hair replacement ad. Nice.

It was not ever thus. In the early 1990s the billboard epidemic was similar to what it is today, with hoardings mushrooming all over the place as the country struggled to get back on its feet.

Then the government decided to tear down all the billboards and establish regulations that stipulate where billboards could be placed and the distance between each hoarding. There was a brief respite for the visually weary, and a few years later the practice started again, with a vengeance.

Although billboard companies are now individually abiding by the law by erecting hoardings 100 meters apart, the problem is that a firm will place their billboard in-between a rival’s, and have the next ad 100 meters on, meaning billboards are every 25 or 50 meters.

“There has been a total misapplication of the law and a major laissez faire by companies, sometimes municipalities, who have profited from the income,” said Danny Richa, president of the International Advertising Association’s Lebanon chapter. “This is in addition to a lot of political figures who profited from free adverts for the elections and gave backing and blessing to some companies to break the law.”

Herein lies the conundrum for the sector and the state. Billboards are a major income earner for cash-strapped municipalities, but the more billboards there are the less effective advertising becomes and the less money there is to be made by municipalities.

Richa said that in the first year after the regulations were enacted a company would need to advertise on just 200 billboards to get a result, with the average price of a 3×4 meter billboard $100 a week. Today, to get the same reach a company would need to advertise on 1,000 billboards, paying an average of $20-25 a week per hoarding.

“It’s costing billboard companies more to place these ads, maintain them, and bill post them, and the advertisers are getting less efficiency,” said Richa.

So what is to be done? Outdoor marketing is estimated at some $14 million a year (not including wall ads), an important income earner, and billboards do serve a purpose as a form of visual entertainment when stuck in traffic, as people increasingly are. Equally, outdoor adverts have proven to be morale boosters, such as after the July War when numerous companies lifted people’s spirits through witty billboard campaigns — something the international media picked up on and reported.

Part of the problem though is that alternative forms of advertising have not taken off in Lebanon, such as direct marketing or internet advertising, as mass advertising is cheap and effective in terms of geography and reaching the country’s small populace.

Going Sao Paulo’s route is therefore not an option for the foreseeable future. What is called for is tighter regulations, such as applied by Beirut’s municipality, which permits fewer billboards but charges higher prices.

“We have reached a point were we’d like the billboard owners to get together and immediately start to apply the law again by removing the excess, because if they don’t we will be obliged to lobby the government and could find a situation where all billboards are removed: the good, the bad, and the ugly,” said Richa.

The less draconian solution is to implement regulations area by area, fining violators and entitling companies that play by the book the visibility they are paying for. As for the countryside, let’s be able to see the valley without the billboards.

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