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The need for transparency in the Gulf oil markets

by Paul Cochrane
written by Paul Cochrane

While the Middle East makes baby steps towards implementing greater financial transparency, accountability and the rule of law, the region’s best-known commodity — oil — lacks transparency in the way tenders are allocated and, more disturbingly, in actual reserve estimates.

Information on oil, the lynchpin of the Gulf economies and the catalyst for numerous conflicts, coups and much other skulduggery in the Middle East, is being held back from not only the people of the region, but also the very markets that rely on that energy.

The most glaring examples are Iraq and Saudi Arabia.

In Iraq the issue is over the proposed oil law, which would give multinational oil companies such as Conoco, ExxonMobil and Chevron first dibs on developing the country’s oil fields under contracts of up to 30 years.

Iraqi politicians have complained that they don’t know what is going on with oil resources as the formulation of the law is being stage managed by a US consultancy firm. Furthermore, in a recent poll carried out by Custom Strategic Research in Iraq, only 4% of poll respondents felt they have been given “totally adequate” information about the oil law while a further 20% describe information provision as “somewhat adequate,” and 76% as “inadequate”. The poll also indicates that Iraqis are not happy with the sector being developed by foreign companies, with 63% replying they would prefer Iraq’s oil to be developed and produced by Iraqi public sector companies.

The need for greater transparency in allocating oil tenders and the drawing up of the new oil law — the bedrock for future development of the country — is essential for Iraqis to decide on how their oil wealth is to be used.

Of greater concern to the global markets are the oil reserves of Saudi Arabia, the world’s top oil producer and exporter. Future supply projections are largely based on the fact that Saudi Arabia will be producing as much as 20 to 25 million barrels of oil per day (bpd) within the next two to three decades. Yet current production capacity is 11.3 million bpd, around half of that estimate.

Although Saudi Arabia is carrying out several multi-billion dollar projects to raise capacity to 12.5 million bpd by 2009, such an increase is certianly not enough to prove to the world that the kingdom has the reported 261 billion barrels of proven oil reserves. That information, on how much each field contributes to total oil reserves, is treated as a state secret. The problem is compounded by Riyadh not allowing third-party verification of their ability to deliver. Additionally, there is speculation that the kingdom’s three most important fields, which have been producing at high rates for over 50 years and require a staggering 12 million barrels per day of water to be injected to create pressure for extraction, are reaching the end of their shelf life.

Saudi Arabia assures us that it can meet projected targets — which, to its credit, it has always done — but unless national oil company (NOC) Aramco provides more information on reserves, it will be hard to know how long they can effectively meet demand.

Such secrecy among NOCs is somewhat understandable, but not helpful in making future projections in a time of rapid global economic growth or holding NOCs — the dominant energy firms in the region — more accountable to their citizens.

Equally, a lack of transparency is also limiting NOCs’ access to external capital that could help raise capacity and resultantly meet surging world demand. And with the International Energy Agency (IEA) projecting that over the next 30 years some $2.2 trillion in new investments will be needed in the global oil sector to meet surging demand, much of this cash will be destined for the Middle East — but into whose pockets and for what ends?

There is an exception however to the secrecy so predominant in the Gulf: Bahrain. In 2005, Bahrain streamlined its oil operations from three authorities into one, the National Oil and Gas Authority (NOGA), with the head of NOGA, Abdul-Hussain Ali-Mirza, a technocrat, also being the minister of oil and gas affairs. Such an approach has given NOGA greater flexibility in meeting both domestic and international demand, attracting capital, and helping to remove bureaucratic obstacles that hampered growth. All tenders are now put online for companies to bid for.

“Oil and gas has been very secretive in the past but we want to change that as there is nothing to hide,” Ali-Mirza told me earlier this year. “Countries should be transparent and responsible, so we are setting the benchmark.”

With Bahrain relatively low on the global energy supply rankings, Manama has perhaps the least to lose in being transparent (we all know its supplies are running out), but Saudi Arabia and the other Gulf countries would do well to take a leaf out of Bahrain’s book to be more forthcoming in information on tenders and reserve estimates. The arkets demand it, and the people deserve it.

PAUL COCHRANE is a freelance journalist based in Beirut. His work has appeared in Britain’s Petroleum Review and The Independent on Sunday

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Educating Iraq‘s child refugees

by John Dagge
written by John Dagge

Waiting outside the UNHCR Iraqi registration center on the outskirts of Damascus, Khalid, a middle-age Iraqi father of four from Ramadi, points to his family and declares: “We don’t know what the future will bring.” Over the past eight months he has relocated twice between Iraq and Syria. In the moves from one county to another and the daily struggle to make ends meet, his children’s education has fallen by the wayside. “We don’t have a permanent home now, so my children haven’t been able to go to school,” he said. “Without an education, what is their future?”

For a growing Iraqi refugee population — most of whom are living off dwindling savings or remittances from family members abroad — covering the daily necessities of life is an all encompassing concern. As the conflict in their homeland drags on, however, the absence of a formal education among the numerous refugee communities scattered throughout the Middle East looms as a major obstacle to the future development of their country.

“We don’t want a whole generation to miss out on education,” UNHCR regional public information officer Sybella Wilkes said. “These children will be the future of Iraq, so it’s essential they receive an education.”

The Iraq refugee crisis now stands as the greatest mass exodus in the Middle East’s history. More than 4 million Iraqis — one in seven — have been displaced by violence and around 2.4 million have fled their homeland, the vast majority seeking shelter in Jordan and Syria. The UNHCR estimates there are about 500,000 school age children now residing in the neighboring countries of Syria, Jordan, Egypt and Lebanon. Of this group, little more than 50,000 are presently enrolled in school.

“Prior to the war, Iraq had one of the higher literacy and school enrollment rates in the region,” Wilkes said. “Now we are seeing a major gap in the education of the country’s younger generation and the impact of this down the track, as Iraq tries to rebuild cannot really be calculated.”

To combat rising illiteracy among Iraqi refugees, UNHCR recently launched a $129 million appeal with the aim of enrolling an additional 155,000 children in schools throughout the Middle East. Syria, which has absorbed an estimated 1.4 million refugees since 2003, is the main target with the UNHCR hoping to enroll 100,000 children in schools by the end of the year. To date, only 33,000 out of an estimated 300,000 school-aged children are enrolled in Syrian schools. Other targeted countries include Jordan (50,000), Jordan (2,000) and Lebanon (1,500).

The funds will cover the costs of building new schools and upgrading existing facilities, the hiring of more than 4,000 school teachers, as well as buses to transport the children. Specially designed bridging programs will be taught to bring children back up to speed with their studies, along with psychological support services to reintegrate traumatized children back into a school environment.

For many Iraqis, the lapse in a formal education started before they fled their homeland. Due to rising violence, many parents regard sending their children to school as too dangerous and as such are keeping them at home. While Syria has always held that Iraqis have free access to the country’s education system — Jordan recently announced it will open its schools to Iraqi children — a variety of reasons have resulted in a poor take up of the offer. The inherent instability associated with coming to a new country has meant that many parents simply have not had the time to arrange schooling for their children. At the same time, other families are unaware their children are able to receive an education in Syria, while in a growing number of families, children are being put to work and in some cases are a family’s primary income earners.

Red tape barriers exist as well. The drive to register Iraqis living in Syria has been met with much suspicion by Iraqis and many fear it may eventually lead to deportation. As such, unregistered parents have been unwilling to enroll their children in local schools as attendance requires the family to register their details with Syrian authorities.

With many classrooms in Damascus already numbering 50 students, there has also been resistance from Syrian authorities to enroll Iraqi students in the public education sector until additional schools have been built. Iraqi parents enquiring about sending their children to Syrian publics schools have been told that their simply is not enough room for their children. For most families, a private education is too expensive.

The bid to raise the number of school children receiving an education is also more than just about improving literacy rates. It is also about returning a sense of normality to the lives of Iraqis, both children and parents.

“Getting children into schools also helps families readjust,” Wilkes said. “It gives them some sort of routine in their life, it helps restore a sense of normality back into a family’s life, a sense that in many cases has been missing for some years and the absence of which can put great pressure on families.”

JOHN DAGGE is a freelance journalist based in Dimascus

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Hillary could win

by Lee Smith
written by Lee Smith

Hillary Clinton was the clear front-runner for the Democratic Party’s Presidential nomination even before Barack Obama’s series of foreign policy gaffes left voters wondering if the man who said he would bomb Pakistan was ready for the top job.

So, what does matter in a presidential campaign? It is perhaps best to break the race into two different legs: One, the nomination to represent the Democratic or Republican party, and, two, the general election against the other party’s candidate. The first requires tons of campaign money, and the second demands experience in governing.

Money gets a candidate through the ups and downs of a campaign, like a bad showing in a debate or at a primary or caucus; but more importantly it enhances the candidate’s credibility and reflects the level of faith the public has in his or her chances to win the nomination. It is therefore no paradox that even though Clinton is leading the polls, Obama has raised more cash. The fact is that Clinton is her party’s most electable candidate, but she is going to have a hard time winning the nomination from her own party. Democrats really don’t like her.

Sometimes it is hard to know how she is leading given that the rank and file of the party is looking for just about any excuse to not vote for her. Many dislike her because of her support for the Iraq war; and others because she has jumped sides and decided not to support the war any longer. To them, she is too much of a “political animal” who will do anything to get elected. It hardly needs to be said that this is precisely the point — the job of an American politician is to get elected in order to lead, not to stand off on the sidelines with beautiful scruples.

There are scores of well-educated middle-class professional women who condemn Hillary because she didn’t walk away from her husband after his dalliance with Monica Lewinsky was exposed — a truly bizarre rationale for Hillary-hating. Why would an ambitious politician like Clinton walk away from what she effectively made the world’s second-most important job — spinning the man who spins the globe — once she found out what she had already known anyway, that her husband was a philanderer?

And then there are tons of men from ostensibly liberal quarters of academia and the news media who also despise her, for no other reason it seems than that she reminds them of their high-achieving partners, wives and girlfriends. In sum, it is hard not to conclude that Hillary is mostly disliked simply for the fact that she is a woman. That conviction is hardly allayed by the fact that the main reason Democrats don’t like her is that she seems to them too conservative, too Republican; in other words, she is too much like her husband Bill, one of the most popular presidents in recent memory who in retirement is now enjoying the Teflon-status usually reserved for pop-stars and fashion models.

It is an interesting fact of American politics that no US Senator has been elected president since John F. Kennedy. Everyone since then has either been elected from the Vice Presidency or from the post of Governor. In part this habit speaks to the general distaste ordinary Americans have for Washington insiders, but it also indicates that voters demand a high-level of competence from their leaders. It is not enough to have a name, a pretty face and good hair — they have to have run something first, like a state.

Bill Clinton not only managed a state, he also grasped the essential lesson of American politics after the Reagan revolution — the liberal status quo is unelectable because Americans say they want centrists. What’s curious is that from a centrist position a president can get away with almost any liberal initiative imaginable. Consider George W. Bush, a Republican, whose war in Iraq to bring democracy to the Middle East is an idea derived from the concept of liberal interventionism, even if almost every American liberal is against Bush’s application of it in Baghdad.

Liberals, the Democratic party’s base, seem to have forgotten Clinton’s example. Either that or they are afraid to lead. Clinton, a woman who exercised her political instincts at a very high level while she inhabited the White House alongside her husband, is not afraid to win and she knows how to govern. She will win the nomination because at some point Democrats will have to recognize the race is not between Clinton and the ideal liberal candidate who will represent all their best hopes and dreams and undo the Bush legacy, but between the Democratic candidate and the Republican one.

Right now it looks as if Hillary’s opponent is shaping up to be former mayor Rudolph Giuliani, best known for his courage under fire during the 9/11 attacks. Never mind that both Clinton and Giuliani are New Yorkers and thus represent a Northeastern city that generates more suspicion than Washington; voters on the extreme right and left sides of the ideological spectrum will be shut out next fall. Both candidates are aggressive on national security issues, Giuliani a bit more so, and both are liberal on social issues, like abortion. If Democratic voters can recognize the new political reality in time — a consolidation of the center thanks to Reagan, Bill Clinton and 9/11 — Hillary might just become the first woman leader of the free world.

LEE SMITH is a Hudson Institute visiting fellow and reporter on Middle East affairs

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Banking & Finance

Bank Merger – Poised for expansion

by Executive Staff
written by Executive Staff

After putting it on the market earlier this year, the Qatar Investment Authority (QIA) in early August completed the sale of BLC Bank, its Lebanese banking asset to Fransbank who won a two-round competition to buy BLC Bank with a $153 million bid, $9 million better than what others had put on the table. QIA retained ownership of BLC assets with relevance for the Gulf financial industry. In an interview with Executive, Fransabank chairman Adnan Kassar said that BLC Bank was one of the oldest in the country with a wide client base and deep roots within the Lebanese business community. 

He also hinted that tactically, “the acquisition has advanced our ranking in respect to total deposits from fifth to fourth, and further deepened the gap percentage of other indicators that distance us from other immediate competitors.”

According to BLC Bank chairman Shadi Karam, Fransabank can make the leap to becoming Lebanon’s fourth largest bank by consolidating the balance sheets of the two banks while maintaining their separate brands. Fransabank now owns around $7.33 billion in assets and $6.13 billion in deposits.

Fransabank’s purchase in line with expansion

Local economist Elie Yachoui said that Fransabank might want to restructure BLC Bank and sell it on with a profit at a later stage. He did not see a great value in having a higher spot on the pecking order. “Whether fourth or fifth, it’s all the same,” he told Executive.

When QIA bought BLC Bank in 2005 for $236 million, the bank had been restructured under central bank stewardship from an ill-managed, muddled, loss-making, even shady, bank into an ambitious, forward looking entity. QIA did not divulge its reasons for selling at an undisclosed profit (the lower transaction value reflected the fact that the sale did not include BLC Bank France and its offices in the GCC) but analysts see the move tied to Lebanon’s economic paralysis.

A prominent economist with ties to the banking sector compared the acquisition price for BLC with that for Bank Saradar. BLC Bank fetched almost as much as Bank Audi paid for Saradar a few years ago but Audi got more value for its investment (through Bank Saradar’s high-end client base and asset structure which offered greater potential), he opined on condition of anonymity.

Of course Fransabank sees it differently. Referring to BLC Bank by its older name, Banque Libanaise pour le Commerce, Fransabank’s statement to Executive conveyed that the step is entwined within an expansion strategy that rotates “around two main fully synchronized axes”: an axis of international and regional expansion and a local axis.

The statement pointed to international expansion plans with focus on “selective, potential world markets,” including the existing presence in three foreign countries — France, Algeria, and Sudan — and prospective presence in Syria and Libya (rep office) this year and in Belarus, Iraq, and Turkey next year.

Fransabank said its local expansion strategy, which entailed four smaller takeovers of banks before the BLC Bank deal, was a mix of organic growth and acquisitions with strategic value for blending horizontal and vertical growth. The synergies between Fransabank and BLC Bank would extend to retail as well as to corporate (including small and medium businesses), capital markets, private and investment banking, and asset management.

While Kassar was quoted by the local media as saying that the acquisition of BLC Bank reflects Fransabank’s confidence in Lebanon’s economy and investment atmosphere, sector analysts maintain that the local market continues to offer less growth potential to Lebanese banks than cross-border expansion.

The takeover will not have a negative impact on BLC’s human resources. “There will not be a reduction of staff, but a reduction of operating expenses,” Karam was quoted by the Zawya Dow Jones newswire.

According to Kassar’s statement to Executive, Fransabank does not need to raise additional capital after the acquisition of BLC Bank. “We have financed our local and international expansion from our bank’s resources. Our capital adequacy ratio is in full compliance with the pertinent local and international requirements,” he said.

Neither does Fransabank have imminent plans for going to the Beirut bourse, where BLC Bank is listed. “We believe that listing Fransabank’s shares on the Beirut Stock Exchange is an important manner that necessitates careful consideration of market conditions and sentiments, and securing added value to shareholders’ investment,” Kassar’s statement read.

In Fransabank’s view, there is no room for considering a flotation of its stock because of Lebanon’s political crisis and its severe economical implications, including uncertainty and anxiety created by the power contest.

Kassar, a former minister of economy, had a final word to say about the quagmire: “We hope that the diverse political parties will advance the interest of the country over their own individual narrow interests and revert back to dialogue, as the only venue to reach an equitable political solution and put an end to the current seemingly endless political crisis, consequently allowing the economy to resume its development and growth.”

Inshallah.

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Why do people fall for scams?

by Matthias S Klein
written by Matthias S Klein

A few weeks ago, a friend, who works in finance, told me a story. A Lebanese banker had come to see him and, very excitedly, told him about a great deal he was about to close. An Indonesian banker had approached the Lebanese via e-mail seeking help with a transaction, in which the Indonesian had converted a huge amount of gold into cash through a Dutch bank and now wanted to deposit that money — hundreds of millions of dollars — in a Lebanese bank. As proof, the Indonesian sent certificates that had the kind of flowery design many associate with South-East Asia. The Lebanese banker was very excited and had already started to plan where and how he and his partners would invest all this money.

Sound familiar? Of course, it was a scam. The e-mail was written in bad English, the certificates looked spurious, the Dutch bank had never heard of the Indonesian and yet, the Lebanese banker refused to believe that he had been had. The last thing my friend heard was that the Indonesian had flown to Beirut, where he stayed for two weeks — all paid for by the Lebanese banker and his associates — and then left, never to be heard from again. In retrospect, the Lebanese got off lightly with an airline ticket and a hotel bill. Usually, the victims of these scams have to advance money to the scammers to “facilitate the process” or “pay fees.”

And while only a small percentage of recipients of scam e-mails answer them, it is enough to yield substantial incomes for their senders, most of whom live in West Africa, South-East Asia and increasingly Eastern Europe. Since scams and fraud operate on many levels and through various means — e-mail, postal mail, fax, phone, business websites, and even online dating sites — reliable statistics are hard to come by but according to a BBC report from November 2006, in the UK alone, those “advance fee” scams have cost the economy around £150 million a year.

In another incident, Lebanese businessmen were offered a lucrative transaction with the Central Bank of Nigeria. They flew to Abuja, went to the bank, and met its governor. Only after their return to Beirut did they learn that, on the day of their meeting in Nigeria, the bank’s real governor had been attending a conference in the US and that the person they met in the governor’s office had been an impostor, probably a bank employee who had taken advantage of his boss’ absence to advance his criminal activities.

Most of us are well-aware of e-mail scams and the chances are that we have received e-mails entitled “I need your assistance” or “Great opportunity”. They usually claim that a bank clerk or lawyer has found himself responsible for a large sum of money belonging to a client who has met an untimely death and he now would like to transfer the money abroad but, alas, such is the law of his country that he needs a foreign partner to do so. If the recipient of the e-mail is gullible enough to answer, soon he or she will be asked to wire money to the new “partner” in order to facilitate matters. Needless to say, that money will then disappear and the “partner” no longer answers any e-mails.

Another version of this scam — called “419” or “Nigerian” referring to the article of the Nigerian Criminal Code dealing with fraud — is that the alleged author of the e-mail is a relative of a famous person who has recently died — often an ousted or murdered African head of state. A famous version purports to come from none other than Suha Arafat, the widow of the late Yasir Arafat, whose author asks to help “her” to transfer money from a bank in the Middle East to Europe.

Although these scams are most prevalent in Europe and North America, the Middle East is also fertile ground for finding greedy and gullible. But why do seemingly bright and streetwise people fall for them?

The anti-scam group Fraudwatchers say that it is a combination of lack of expertise and willingness to believe that leads people to fall for scams. As they state on their website “when a scammer who claims to be a barrister, banker or diplomat confidently presents what appear to be genuinely legal documents and arguments, it can be very convincing.” In addition, the scenarios presented — which almost always promise a large amount of money — are the kind that people want to believe and be in on.

Once a “mark” bites, the scammer starts a course of emotional manipulation, pulling the victim in further. He will use various psychological tools to extort money: the promise of a disproportionately high reward for a relatively small outlay, the feigning of personal distress, the pretense of authoritative documents, the offer of a special deal that, if not snatched, will quickly go to someone else. All have been proven emotionally hard to back out of.

Another, often overlooked, factor is that in the West and MENA alike there is a high level of ignorance of the financial protocol in foreign and exotic lands allied to an equally high diet of news about money-laundering war lords, blood diamonds, and uncontrolled business environments. Thus, a story where the daughter of a killed dictator or the lawyer of a European expat killed in an accident is trying to transfer large amounts of money out of the respective country might sound quite plausible. You have been warned.

MATTHIAS S. KLEIN is EXECUTIVE’s Deputy Managing Editor

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Race for the Arctic

by Peter Speetjens
written by Peter Speetjens

The times they are changing, and they are changing fast. At the turn of the 20th century Frederick Cook and Robert Peary had to spend weeks on end in sledges and lost many a toe to frostbite in their race to become the first to reach the North Pole. It now seems likely that by the end of the 21st century one will simply be able to call a travel agency and book a cruise across the Arctic.

Research shows that the northern ice cap in summer is some 20% smaller than it was 30 years ago and, if this trend is to continue, there may be no ice at all by 2075, much to the chagrin of the Arctic’s polar bears. Having to live with longer summers and less ice, the white giants already face great difficulties in catching their beloved seals and have turned to cannibalism and infanticide to survive. In fact, life has become so bad, that Ursus Maritimus is on the brink of extinction.

With the arguable exception of planet White House, it is widely accepted that the melting of the Arctic is to a large extent due to global warming. Yet where the common man mainly sees problems, his leaders see but opportunities!

Sure, they too feel sorry for the polar bears, but within the bigger picture the melting ice is a true blessing in disguise, as the Arctic sea is extremely rich in fish and, according to a study by the US Geological Survey (USGS), could be home to an estimated 25% of the world’s untapped oil and gas reserves. Not to mention gold, diamonds, metal ore and other minerals!

Some 100 years after Cook and Peary’s dash to glory at the North Pole, the Arctic’s five neighboring countries — Russia, Canada, Norway, Denmark and the US — have entered a race to be the first to lay their hands on the riches underneath. Denmark is of course not directly linked to the Arctic, but in a previous round of the great land grabbing game, the tiny kingdom planted its flag on Greenland and declared its sovereignty over 2 million square kilometers of ice and snow, as well as a few thousands of Inuit hunting whales.

The problem with the Arctic is that, unlike the Antarctic, it is not governed by an international treaty. The Arctic is essentially open sea, which belong to all the world’s nations. However, according to the United Nations Convention on the Law of the Sea, nations can claim a 200-mile economic zone and, in addition, lay claim to part of the continental shelf. The extent to which they can do so is determined by a set of formulas dependent on the seafloor.

As a consequence, each of the five competitors has teams of scientists studying the nature of the ocean floor. Russia is currently leading the pack. It claims that the ocean floor is an extension of the Eurasian continental shelf. As soon as the United Nations established the “Commission on the Limits of the Continental Shelf” to deal with the world’s seabed grabbing game, Moscow immediately claimed about half the Arctic. Never a fan of international treaties, Washington refuses to acknowledge the international body.

What’s more, Russia last month sent the Akademik Fyodorov, the country’s research flagship, accompanied by a nuclear-powered icebreaker and eight helicopters into the Arctic sea. The ship’s scientists sent a miniature submarine to the seabed, some 2,500 meters below the ice, to deposit a titanium capsule with a Russian flag in it.

Canada, another major contender, currently ranks second. It aims to expand its territory by up to one third. Not in the possession of major icebreakers, it recently announced to acquire eight military patrol boats that are able to penetrate ice up to one meter thick. Denmark comes third and is at loggerheads with Canada over an icy rock called “Hans Island”.

Both countries have planted their flags on the isle and even sent warships to assert their claims. The United States currently rank fourth and has promised to announce its Arctic claim soon. In fifth place comes Norway, which has so far been the most silent of the lot.

Man is blessed with the faculty of reason, so we were taught at school, yet the older one gets, the more one is convinced that is the greatest myth ever invented. To start a race for fossil fuels in the Arctic, as its ice is melting due to the burning of fossil fuels, must be the ultimate illustration of man really being a greedy, short-sighted opportunist. As sea levels are rising and deserts expanding, keep in mind that Cook and Peary, despite their claims, actually never made it to the North Pole.

PETER SPEETJENS is a Dutch writer and freelance consultant

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Losing hearts and minds

by Nicholas Blanford
written by Nicholas Blanford

Is the government losing to Hizbullah in the battle of hearts and minds over reconstruction from last year’s devastating month-long war? Although much has been achieved in the past 12 months, the government, crippled by political crises may have also fallen victim to its own innovative plan to help rebuild the country. In the aftermath of the war, the government opted for a direct investment scheme allowing donors to adopt and supervise the spending of their funds on projects of their choice, thus bypassing the cumbersome — and often corrupt — bureaucracy of the state. It was a novel scheme and has allowed wealthy Gulf states to charge ahead with rebuilding war-shattered villages and towns in the south, earning gratitude from the residents who have named some main streets after Gulf rulers and hung banners thanking them for their support.

Prime Minister Fouad Seniora encouraged the Gulf state sponsorship of southern Shiite villages in a perhaps vain attempt to break the region’s reliance on the social and economic support of Hizbullah’s charitable institutions. But the loyalties of the residents by and large remain committed to Hizbullah for two principle reasons. First, the Shiites of southern Lebanon are remarkably resilient and have an enormous capacity to withstand hardship and adversity. Second, the increased political and sectarian polarization in Lebanon over the past year has strengthened the “bunker mentality” of the Lebanese — the instinct to retreat into the protection of the community when under threat. Given that Hizbullah is the paramount representative of Lebanon’s Shiite community and probably the most powerful political entity in Lebanon, there is little inclination among Shiites to drop their support for the organization.

Furthermore, the direct sponsorship scheme was not confined to Sunni Gulf supporters of the government. Iran is a highly visible donor state — the emblem of its reconstruction organization is a familiar sight in South Lebanon. According to the Los Angels Times, Iran has spent $155 million on reconstructing schools, mosques and churches, health clinics, electricity projects and bridges. The Iranian organization’s most visible enterprise is the enormous construction of new and improved roads throughout southern Lebanon. The daily said the Iranians have completed work on 504 roads and is working on another 76. The scale of the road building has raised eyebrows, particularly the four-lane highway that is replacing a rarely used and potholed minor road cutting through the mountains between the Litani river and Jezzine. It is widely known that Hizbullah has turned the area into part of its post-war military front line, and nervous Druze and Christian politicians believe that the Iran-funded road building is less an altruistic boon for the sparsely populated area, but a scheme to improve communications links between Shiite Nabatieh and the Shiite villages of the Western Bekaa.

Unlike other Gulf countries, Iran has declined to put a ceiling on its total funds for Lebanon’s reconstruction. It is assumed that hundreds of millions of dollars have also been channeled to Hizbullah’s social and charitable organizations. In a speech marking the first anniversary of the ceasefire that ended the war, Sayyed Hassan Nasrallah said that Hizbullah had spent $380 million to provide alternative accommodation for more than 28,000 families and financial assistance to businesses, agriculture and fisheries. Hizbullah apparently is planning to hand out another $4,000 per family who lost their homes on top of the $12,000 and $10,000 cash payments given in the wake of the war.

The upshot of the direct investment scheme is that most Lebanese in the south only see foreign countries helping them instead of the state. Southern Lebanon traditionally is a neglected area of the country, ignored by successive Beirut-centric governments. Therefore, many southerners believe that the government’s low profile in the war-battered district indicates the usual lack of interest by the state.

Indeed, the battle for hearts and minds between the government and Hizbullah has also moved to Beirut’s southern suburbs. According to government figures released in June 2007, some 87% of the housing units damaged or destroyed during the war have been processed with recipients receiving $52 million of a total $116 million due. However, in Beirut’s southern suburbs only 28% of homeowners eligible for compensation have been processed. That has spurred Hizbullah to charge that the government is deliberately foot-dragging on payments to an area of strong support for the party. Hizbullah has formed an institution called Al Waad to take charge of the reconstruction of the southern suburbs. It has just begun breaking ground in the neighborhood after the sites were cleared of rubble. The argument has been made that the government resented paying compensation in Beirut’s southern suburbs knowing that homeowners would hand over the money to Al Waad to fund the district’s reconstruction and about 70% have done so. That would be tantamount to the cash-strapped government providing funds to a Hizbullah project for which the Shiite party will gain the ultimate plaudits once the new suburbs are completed.

NICHOLAS BLANFORD is a Beirut-based correspondent and author of  “Killing Mr Lebanon – The Assassination of Rafik Hariri and its Impact on the Middle East” 

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Capitalist Culture

Rule of law – and the election

by Michael Young
written by Michael Young

One aspect of any form of capitalist culture — a culture of openness, cosmopolitanism, free minds and free markets — is the rule of law. With September 25 set as the date for parliament to meet and elect a new president, the rule of law, as embodied in Lebanon’s supreme legal document, the Constitution, is again under pressure.

The Lebanese never learn, it seems. Remember that the political crisis that Lebanon is still going through today, and which led to the assassination of the former prime minister, Rafik Hariri, in February 2004, began as a constitutional crisis. Syria decided that Emile Lahoud should have his presidential mandate extended by three years, and an amendment to this effect was forced through parliament. The episode prompted action at the United Nations, where the Security Council passed Resolution 1559 demanding that Syrian withdraw from Lebanon. The rest, as they say, is history — history that may soon repeat itself.

The reason is that many prominent Lebanese are now discussing amending Article 49 of the constitution yet again, this time to allow senior state employees such as the army commander, General Michel Suleiman, or the Central Bank governor, Riad Salameh, to stand for office. In an interview with Al-Safir in mid-August, the Maronite patriarch, Nasrallah Sfeir, acknowledged, albeit conditionally, that he would not oppose an amendment if it could help save Lebanon. He added, for good measure, “If the army commander can save the country, then welcome to him.”

Regardless of the merits of Suleiman or Salameh; regardless, too, of the intentions of the patriarch, who was a beacon of respect for the rule of law and the constitution during the years of Syrian hegemony, the fact is that amending the constitution to adapt to political circumstances is in an of itself a terrible mistake. Apparently, the lesson of 2004 has been lost.

First, when the document becomes a utensil to be transformed at will to satisfy parochial political objectives, it loses its inviolability. The repeated amendments applied to the constitution and to civil service regulations until 2005 discredited national institutions to no end. This may have been part of the Syrian strategy, in order to make clear who was in charge, but the practical result of this was that the state lost all credibility.

A second reason to avoid an amendment now specifically in the case of senior state employees is that there was a reason for imposing a condition that demanded a two-year hiatus between working for the state in a senior position and applying for the presidency. It was, quite simply, to ensure that high-level civil servants would not, while in office, use their positions to promote an electoral agenda. One might criticize this as not being inclusive enough, since government ministers are allowed to be presidential candidates. Still, Article 49 is a worthy step forward in the constitution, and merits being strengthened, not watered down.

Absence of the rule of law

In many respects the rule of law is at the very heart of most of Lebanon’s woes, and yet the Lebanese don’t seem to realize it — or rather they realize it, but are so overwhelmed by its absence that the problem is almost invisible by its omnipresence. Corruption, a dilapidated judiciary, the suffocating hand of political patronage, the picking and choosing of state authority, the existence of armed groups even more powerful than the army, are all examples of the things that the Lebanese cannot stomach, at least when they pay the price for such behavior. All are related in one way or another to the unwillingness of certain groups, all political affiliations included, to let the law constrain their actions.

That much is well known. However, the question that will be posed starting this month, as Lebanon enters the presidential election period ending in late November, is whether the country can gradually reimpose a liberal order based on the rule of law after a 32-year interval characterized by war and foreign intervention and domination. Lebanon may have gotten rid of Syrian soldiers two years ago, but the Lebanese are nowhere near building a state that can stand on its own. This is due in part to the continuation of Syrian efforts to return, but the majority, too, has been slow in introducing the kind of reforms that would encourage the Lebanese to have faith in a new political order.

Any amendment of the constitution should be rejected, not mainly for political reasons, but for existential ones. Lebanon will not survive as a liberal beacon in the Middle East if its constitution and system of governance continue to victims of political circumstance. A new president may come or not come, but what must be ingrained is a sense that things will no longer be as they were before. The constitution, like the law, is there to protect and be protected. It’s time to confirm that message once and for all as Lebanon prepares to take what is perhaps its most important step in the last three decades.

Michael Young

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By Invitation

A Passing Summer Cloud?

by Imad Ghandour
written by Imad Ghandour

Loans will go bad, deals will be canceled, fortunes will be lost, and the sudden end of cheap financing is wreaking havoc on the buyout market, reported Fortune magazine.

Just open the Wall Street Journal or CNBC, and you will hear these same headlines repeated everyday. The news about the financial meltdown is all over the media, with the death toll rising by the day. First it was the sub-prime lenders, then prime mortgage lenders, then hedge funds, then investment banks. Even some money market funds, the safest of the safest, are witnessing a rush of withdrawals.

The private equity party, in its latest round in the US and Europe, was a classic bubble waiting to burst. The combination of low interest rates, depressed stock prices, and rising corporate profits created ideal conditions for private equity firms to flourish. With the abundant supply of debt and highly leveraged acquisitions, even modest improvements in the company’s profits generated huge returns for the private equity firms and their investors. With huge returns being logged in, investors piled hundreds of billions — $404 billion in 2006 according to Private Equity Intelligence — into private equity funds. Fund managers, with ever larger funds to deploy, were paying huge premiums to snap up deals.

In 2002, when markets did not recover from the 2000 hangover, buyout prices averaged just four times cash flow (defined as earnings before interest, taxes, depreciation, and amortization, or EBITDA). But by early this year the average buyout price was clocking in at 15 times cash flow. In a typical deal a private equity shop would borrow more than 80+% of the purchase price, and the rest it would put up in cash. In some deals, even that cash was supplied by the banks through an innovative scheme called “bridge equity,” where banks were putting up part of the equity, in addition to 80+% of the debt!

Risk?!

Lenders thought acquired companies will never default. Hedge funds bought junk bonds on the margin with a lot of debt. Junk bonds were priced at historical low levels with sometimes 2-3% spread over 10-year treasury. And private equity players piled as much debt as possible on the acquired companies’ balance sheets with no buffer for a downturn. The motto of the party was: “Buy it if you can finance it.”

What about us?

There is a structural difference between us and them. Of the 25 transactions announced or closed by MENA funds within the region in 2007, no more than five were leveraged, and only one was leveraged to the levels mentioned above. Unleveraged transactions are unthinkable outside the region, but are the norm here. Returns are not derived from financial engineering, but from relentless economic growth that will keep on humming as long as the price of oil is above $50 per barrel. The liquidity crunch grounding the global financial system is watched with amazement by the bankers in the region, who are flooded with liquidity and have minimal exposure to mortgage lending.

Nevertheless, the psychological effect will be global and will touch MENA. Now that the global case is tainted, private equity players will work harder to raise funds and finance transactions.

But economic growth will keep top and bottom lines growing at a healthy pace, creating opportunities and seducing investors. Shareholders will continue with the trend of opening up their capital for private equity or any form of intelligent capital. Governments will move unabated with their privatization programs. Bankers will pause, add 50 bps to any transaction they are pricing, and move on. And those mammoth international competitors setting up in the region probably will cut their losses and close shop.

But one lesson should be learned. Risk will show up its ugly face, it is only a matter of time. Price it right, mitigate it when possible, and manage it on continuous basis.

Imad Ghandour is Head of Strategy & Research (Gulf Capital) and Board Member of the Gulf Venture Capital Association

 

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Banking & Finance

IPO Watch – Galfar goes public

by Executive Staff
written by Executive Staff

August’s star attraction in the regional primary market was a construction and engineering group from Oman. Galfar Engineering and Contracting started receiving subscriptions for its month-long public offering on August 12 and its IPO was the largest for the month both in absolute value — $156 million with 100 million shares offered — and even more so in relation to its home market, where the measure is the biggest new equity item in a good while.

Analysts from GCC-based finance firms valued the offering highly. Based on the performance of peers in the construction industry, two finance houses — Gulf Investment Services and Fincorp — estimated the stock’s upside potential at 47-49% over the subscription price, despite its significant issue premium. Included in the offering price of 602 Baizas ($0.165) per share is an issue premium of 500 Baizas, which will provide the company with working capital and funding for expansion.

The Galfar IPO is expected to be oversubscribed by significant margins when it closes on September 10. Subscription rates for other recent IPOs ranged from no oversubscription to more than 10 times the offered amounts.

Another ongoing subscription at time of this writing is for a Kuwaiti logistics firm. A startup company with equity participation from several big names in Kuwaiti trade, Amanah Warehousing Company invited subscriptions for 60% of its capital in a $111.7 million IPO between August 20 and September 17. Amanah’s IPO has a small issue premium and is open only to Kuwaiti investors.

Smaller public offerings ongoing at the turn of August to September are a $19.5 million capital raising effort by Syria’s Al-Aqeelah Takaful Insurance and a $4.2 million effort by a Jordanian construction supplies manufacturer, which was freshly established in June of this year.

In the business of IPO fundraising in the first eight months of 2007, two regional investment banks accounted for major chunks of lead managing in terms of value. Saudi Arabia’s Samba Financial Group and Dubai-based Shuaa Capital reported to have managed amounts of $2.77 billion and $1.6 billion, according to data gathered by business information provider, Zawya. This strong performance was based on the fact that the two firms succeeded in capturing the largest individual deals in GCC markets, including the Kayan Petrochemicals and Kingdom Holding IPOs in case of Samba and the Air Arabia flotation for Shuaa.

In terms of deal numbers, however, the National Commercial Bank and the Banque Saudi Fransi, both headquartered in Riyadh, accounted for just over half of the 23 flotation measures handled by the top ten lead managers up until end of August, with seven (NCB) and five (Saudi Fransi) completed mandates. The top 10 lead managing firms attracted a total of $6.5 billion in IPO business.

IPOs lag behind 2006

By Zawya’s count, some 45 companies this year so far debuted on MENA equity markets through IPOs or equivalent measures. The Saudi primary market with 20 IPOs was the most active, followed by Jordan with eight new entrants on the Amman Stock Exchange.

In year-on-year trends, 2007 IPO numbers appear to lag behind 2006 as exemplified in the case of Saudi Arabia’s Tadawul exchange. According to the 2006 annual report of the Saudi Capital Market Authority (CMA), the kingdom’s wave of going public peaked in 2006 with 62 public offerings for shares worth close to $7.5 billion in total.

As far as initial trading for newly listed stocks went, August was surprisingly strong, defying analysts’ views that the wide gaps between subscription prices and first-day performances are on the way out at least for this month — which turned out to be overall quite atypical in more than one way for a supposedly uneventful vacation time. Of five stocks with trading debuts between August 10 and August 27, the least reported share price gain to August 27 was just over 80% by newly privatized Moroccan real estate firm CGI.

These gains, however, are peanuts when measured against the explosive gains of three Saudi insurance companies. Allied Cooperative Insurance made a first-day show of jumping 997.5% on August 27. That, however, is still nothing compared to the incredible acrobatics of Alahi Takaful Company and Saudi Indian Company for Cooperative Insurance. Alahi, which debuted on August 19, made a one-day gain of 9.94% on August 27 to SR 213 per share.

The same day was Saudi Indian’s second day of trading. Incidentally, it was not a strong day for the Tadawul All Shares Index; it weakened by about 0.4% — but Saudi Indian advanced by 9.96% to a close of SR 132.50. Mind you, the rules for flotation of insurers in Saudi Arabia’s opening of this sector to private operators after a long wait stipulated that the issue price for any insurance stock is at a par value of SR 10 — so Allied Cooperative and Saudi Indian enter the region’s stock market annals with share price gains of more than 120 times and more than 200 times in their first two days and two weeks of trading, respectively.

For Saudi investors, this may be a good moment to note in their agendas that one more insurance company IPO is in the pipeline for the third quarter of 2007. Others, who are barred from buying on Tadawul because they are not legal residents of Saudi Arabia, may observe this highly localized insurance IPO bubble in bewilderment.

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