Comment

Who is Barak Obama?

by Lee Smith
written by Lee Smith

The 47 year-old junior senator from Illinois emerged as a powerful figure after he delivered the keynote address at the 2004 Democratic Convention while he was still a state legislator. A charismatic speaker whose half-African half-American heritage seem to represent the reality of multi-racial America and the future of the Democratic Party, Obama’s current ascendancy appears to reside in the fact that not only did he not approve the Iraq War but he wasn’t even a member of the Senate when the 2003 vote was called. He was elected to the Senate in 2004.

Obama is where the fantasies of the left wing and the center of the Democratic Party seem to converge. The left never wanted the war to begin with and the center wishes it had never happened this way. Obama, the untainted one, is the candidate who allows them to imagine Iraq back into never-never-land. He is not the anti-war choice as much as he is the non-Iraq candidate.

Nonetheless, the Democratic front-runner is still New York Senator Hillary Clinton, whose most obvious liability is that she voted for the war, a mark on her record that Obama has been eager to exploit. Finally, after the latest debate between the Democratic candidates, Clinton struck back, targeting the principles of her opponent’s foreign policy. In the debate, Obama welcomed the opportunity to meet with world leaders hostile to the US, and Clinton later said that this strategy “was irresponsible and frankly naïve.”

Obama, whose inexperience at the national level means he has no foreign policy credentials to speak of, justified his position by favorably comparing his willingness to engage enemies with the ethos of the current White House. “The notion that somehow not talking to countries is punishment to them — and this is the guiding diplomatic principle of this administration — is ridiculous.”

Here Obama is not irresponsible and naïve, but ignorant. The Bush White House does not withhold diplomacy as a form of punishment, but rather contends that engagement with radical states legitimizes and rewards outlaw behavior. The actions, for example, of Syria and Iran offer sufficient evidence to justify the White House’s rationale.

Obama may be the non-Iraq candidate, but he also seems to have been in a deep sleep the last five plus years, snoring through not only 9/11, but everything else the region has revealed about itself since then. In addition to the timeless clichés of Washington foreign policy circles — like the signal importance of the Arab-Israeli crisis and trying to separate Syria from Iran — Obama also subscribes to the innocent realism of the Baker-Hamilton Iraq Study Group report. The junior senator calls for a “comprehensive regional and international diplomatic initiative to help broker an end to the civil war in Iraq.”

The international actors who might make a difference in Iraq — like France, Germany and Russia — have been transparently clear over the last several years they have no interest in tying themselves down in Iraq to suit US strategic goals. As for the significant regional players who could help, they have either distanced themselves from the project or have done everything in their power to subvert it. Saudi Arabia is uncomfortable being the meat squeezed between the ascendant Shia sandwich of Iran and Iraq and has no Iraq policy. And Iran and Syria obviously have no stake in a stable Iraq, or else they would not have nurtured chaos in the land of the two rivers so assiduously over the last four years. Tehran and Damascus want the US out of the Middle East and will understand any invitations to a US-led conference as a ceremony to accept Washington’s terms of surrender.

Elsewhere, Obama’s Iraq policy is being criticized not for its naiveté but rather its cynicism. In an interview with the Associated Press, Obama argued that, “preventing a potential genocide in Iraq isn’t a good enough reason to keep U.S. forces there. If genocide,” said Obama, is “the criteria by which we are making decisions on the deployment of U.S. forces, then by that argument you would have 300,000 troops in the Congo right now … We would be deploying unilaterally and occupying the Sudan, which we haven’t done. Those of us who care about Darfur don’t think it would be a good idea.”

Obama’s all-or-nothing interventionism as an excuse to ignore a potential full-blown civil war may seem amoral to some, but it illustrates an important development in US thinking. In a long essay outlining his foreign policy positions for the July/August Foreign Affairs, “Renewing American Leadership,” Obama writes, “After thousands of lives lost and billions of dollars spent, many Americans may be tempted to turn inward and cede our leadership in world affairs. But this is a mistake we must not make.”

Even if most of the candidates who have virtually talked themselves out of contention the 2008 elections will depend very much on what the electorate thinks about Iraq. And yet as Obama’s AP interview obliquely suggests, the real consequences of Iraq will not be understood for years to come. Obama’s Foreign Affairs essay essentially argues that liberal interventionism is the right idea, even if the Bush team got it wrong. The big question looming in America’s strategic future is: What if liberal interventionism is not the right idea, no matter who’s running the show?

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

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Consumer Society

Hooters, Tooters It’s a bad idea

by Executive Staff
written by Executive Staff

The food franchising industry is doing well in the Middle East. Buying a tried-and-proven formula for a hospitality venture has allowed both small entrepreneurs and powerful investors to roll out restaurants in their markets while cutting down some of their development headaches and harvesting customer recognition from the strength of international brands. Examples range from lowbrow individual franchisees of sandwich and pizza delivery outlets to the full-scale regional multi-US-brand operations of Kuwait Food Corporation (TGIF, KFC, et al).

Although franchisees in the region had their problems with copycatting or brand disputes, the franchise concept has on the whole worked smoother than the nation’s consumer goods wrestling battles between exclusive agencies and overpriced import monopolies in one corner and product fakers and unethical traders in the other.

International food franchising formulas have been repeated by local conceptioneers who brought, for example, Lebanese restaurants like Caspar & Gambini or Crepaway to the Gulf. The process is also working in the opposite direction of bringing concepts from the GCC to the Levant.

But do people of the region want restaurants that openly offend conservatives? Would they accept franchise outlets that express an alien culture in highly intrusive manner? The issue arose newly this summer over marketing announcements by a Kuwaiti businessman who wanted to land a Hooters restaurant — trademark: only busty waitresses willing to wear tight orange shorts and dress totally down on top need apply — not in Kuwait but in Dubai.

The man’s announcement immediately drew disbelief and some consternation from readers and commentators. A Kuwaiti columnist suggested that Hooters should “keep their breasts in the West.” Officials in Dubai said there was no record of an application to register the venture there and that they would follow “very closely” any moves to establish the restaurant in the emirate.

Not always welcome

Bringing those international brands into your hometown is not everyone’s cup of tea. In pre-enlightened Syria, state representatives once forced eaters to abandon the Colonel’s coleslaw apparently because of a (later reversed) official aversion to Kentuckian chicken commercialism.

However, most failed franchise operations in developed countries as well as the Middle East arguably did not go down because of protests by gender activists or anxious culture guardians. They faltered because their concepts didn’t vie with customers — in Beirut alone, the list is quite long and includes donut makers, ice cream and frozen yogurt, and regional and international fried chicken vendors.

The apparently wishful-more-than-wistful Hooters impresario, a man by the name Jamal Shaheen, gave interviews in June, during which he said that he was looking for a location where he could open a first outlet in Dubai by the end of 2007 and add further outlets in the following year, also in the emirate. He did not elaborate on his investment into becoming a franchisee or if he had a motive other than money for wanting to set up the restaurant.

After his news sparked contrarian opinions, he was no longer available to answer interview requests on the economics of the projects. According to the information on the company’s website in the US, the firm charges a franchise fee of $75,000 per location; typical costs furthermore include an initial investment of between $800,000 and $1.5 million per restaurant.

Given Dubai’s spiraling rent and other costs, an outlet there is unlikely to require an initial investment at the low end of range cited by Hooters. And by the way, the plan to set up in Dubai was already Shaheen’s secondary roll-out plan. He wanted first to launch in Beirut but dropped the idea because of the difficult development outlook.

The reality test of trying if this particular skimpy waitress scheme will be allowed in Lebanon thus fell flat, although it might have caused less of a controversy here. Teasing attires and self-commercialization of women and men in Lebanon are nothing new.

Whereas regional online discussions on the restaurant project revealed many similarities to accusations and justifications that make the pros and cons in debates on sexist business ventures in the US, the wire to trip the attempt of letting Hooters loose in an Arab market may well be that the regional cultural paradigm enforces a public set of norms also when those norms come with a past of having been breached for centuries or millennia in the off.

Announcing raucous plans for a restaurant in open digression of the norms held up publicly in the region may have greatly impaired any chances that such a venture ever might have had in Dubai and any city of the region. Tooting about Hooters appears to have been a bad idea.

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Editorial

This is Beirut!

by Yasser Akkaoui
written by Yasser Akkaoui

It’s Saturday night at White, the rooftop bar on the edge of the beleaguered Beirut Central District. The affluent 30-something crowd, many of whom live and work in the GCC, dance to the beat pulsating from the huge speakers. At the refrain “This is Beirut! Not Dubai!

” they cheer loudly. They are on holiday and nothing is going to stop the fun.
 

The tourists have stayed away and the political storm clouds may be gathering. The country threatens to be torn apart by internal divisions but the vitality of the Lebanese remains undimmed. The country simmers on the hot plate of chaos but we can still get on down.

It’s a well worn cliché, but on paper Lebanon should never work. And yet in the midst of all the turmoil, the key sectors still perform. Property development marches on, luxury cars still roll out of the showrooms, banks still show healthy balance sheets, the port of Beirut is ranked in the world’s top 100 and the nightlife still throbs to Lebanon’s uniquely sweaty beat. Lebanon is a country that should not make sense, and yet, in its own weird way, it works.

Dubai, on the other hand, totally makes sense. It is organized and stable, its mega-developments tower into the azure Gulf sky. Dubai is wealth central, a Las-Vegas-eque pleasure dome predicated on a master plan and fuelled by blue chip entertainment, premiere sporting events, vibrant capital market and a real estate revolution with global ripples. All that glitters is gold and its there for the taking. The state-owned enterprises led the way — especially in real estate and private equity — and showed the obedient citizenry how it’s done.

In Lebanon, the opposite is true. It is shambolic, divisive and anarchic, but its hunger to work, to trade, to sell and to build is unstoppable. Whenever and wherever there is an opportunity the Lebanese entrepreneur will take it. Lebanon is a nation driven by its private sector initiative and strong merchant class. With this glorious and indomitable DNA, how can we not celebrate Beirut?

From Beirut,

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Lebanon

Automotive – Wheels and deals

by Executive Staff
written by Executive Staff

The Association of Car Importers in Lebanon (ACIL) has reported that total registered new cars are down by 20%, selling 7,909 cars in the first six months compared to the same period in 2006 whose sales reached 9,780. June’s drop alone was over 50% compared with June 2006, which has weighed down the average considerably. Mid-May through September is the car industry’s high season when dealers make nearly half of their yearly sales and, despite everything, July has shown promise of an upswing.

The car market is a traditionally important economic measure of consumer confidence. As the second largest investment for the average person, car sales can show how the economy is affecting individual lives. The industry has been hit by a number of factors — political uncertainty, a flaccid tourist season (the revenues from which would normally contribute 11% to Lebanon’s GDP) and a strengthening euro — all of which will contribute to what is expected to be a year of zero economic growth. The good news is that it’s a buyer’s market.

According to Farid Homsi, general manager of Impex Trading, the local agent of Chevrolet, Cadillac and Hummer, statistics show that over 70% of Lebanese buyers of new cars now choose from the $10,000 to $16,000 segment. He says that this change in consumer preferences is partly due to increasing petrol prices forcing most to search for more efficient and affordable cars. Not surprisingly, given the retail pinch, the mid-level luxury segment from $40,000-$50,000 has been most affected. The recession-proof luxury and SUV segment has remained unaffected by the dip.

Commericial sales are down

Another factor that has hit the car industry is the drop of commercial sales of cars for business fleets and car rental companies which account for 30 to 35% of overall sales. “We knew they were going to suffer,” said Abdo Sweidan, chief operating officer at Rasamny-Younis Motor Co. (Rymco), which represents Nissan. Most dealers expected corporate fleets would not be replaced this year and the same for car rental companies that would reuse the same cars. Despite this, year-to-date figures in June showed that 634 commercial cars — vans and the like — have been sold, compared to 726 for the same time last year.

“We are crisis managers more than marketing managers,” explains Bazerji. In his experience, “all cars which have a selling price of at least $35,000 are more heavily affected by the currency exchange.” Maserati has been negatively impacted by the rising euro forcing his company to improvise and find solutions.

For most dealerships of European cars — which make up nearly a third of the market — management have found ways to soften the blow of currency fluctuations relating to the euro. Christian Nehme, commercial manager at Kattaneh, representative for Audi and Volkswagen, said that his company has received its stock through their regional office in Dubai to hedge against the rising currency.

Luxury still sells

“High-end luxury buyers are unpredictable,” said Charles Tarazi, brand manager and partner at Porsche. While sales deliveries are down around 10% for Porsche, the ultra luxury segment priced around $190,000, such as GR3RS, the Cayenne Turbo SUV, and the 911 Turbo, are not only selling but even carrying with them a waiting list running until February 2008. What most impacted Porsche has been the used models which range in price between $30,000 to $80,000 and make up at least 40% of sales.

Other European brands have steadily lost ground from 47% of the market share three years ago to 29% today. Most brands are down for the first half-year compared with that of last year, except for Porsche — propped up by the best selling Cayenne — and the competitive Skoda both showing healthy sales. Peugeot remains the top selling European brand selling 607 units and making up 7% of the European market.

The combination of the trend toward compact and efficient cars in the last two years and the exchange rate for the yen has had a positive impact on Japanese models. This year, Japanese models captured almost 47% of the market share with Nissan and Toyota taking the lead. Nissan’s Tilda takes the lead as Rymco’s most popular model. Korean brands have also continued to increase their market share to just over 16%.

The impact of the weakening dollar has also helped to push American cars according to Homsi. American brands have a market share of 7%. Compact cars such as the Chevrolet Aveo have been his company’s most popular. Going up the scale, the Cadillac’s compact model BLS has been aimed at the younger clientele as well as Hummer’s H3 which is smaller and more compact, Homsi said. Known for their gas-guzzling engines and large bodies, American manufacturers have shifted to greater fuel efficiency and compact sizes.

Deals are to be had during these times as car dealers are forced to find creative ways to attract customers. “Buyers right now are very prudent, they want to wait and see,” said Nabil Bazerji, managing directory of GA Bazerji and Sons, representative for Maserati, Lancia and Suzuki. “We are advertising to motivate the market and improvising to reduce the price burden,” he continued. While many in the industry cite consumer tastes changing to affordability, Bazerji maintains that “Lebanese are still trendy, they focus on the brands and then look for affordable models of the brands they want.”

The car industry is capital intensive with high overhead. With import duties beginning at 20% for the first $13,000 of a car invoice and then 50% for the value over that, not to mention the 10% VAT, dealers must make a considerable investment to import their stock. The industry has lobbied for the duty to be replaced by a flat rate similar to those used in Europe and Dubai, according to Homsi, adding that sales would be higher if the duty was lifted. These fees are paid before the cars are sold on the market forcing dealers to recoup them in the sticker price and leaving little wiggle room for negotiations on prices. Taxes, registration and insurance tack on several thousand dollars to the price of a car.

Creative financing

Rymco came up with a campaign to remedy this whereby the sticker price was inclusive of all fees leaving off those last minute “surprises” like the 7% registration fee. Additionally, they provided a financial package with no down payment and free insurance for a year. “We had to think outside the box,” said Sweidan, adding that the campaign was so successful in the spring that their inventory vanished in less than a month. While most dealers are reporting decreasing sales, Rymco was able to report growth of 30% according to Sweidan. “The summer campaign has also been successful, I wish that I had ordered more cars,” he said. The success of their campaign is also due in part to their aggressive advertising campaign from newspaper advertisements to SMS messages, leaving only very few unaware of the offer.

Other dealers have followed suit by providing financing programs up to five years to lower the monthly payment as well as financing packages that include all fees and taxes to ease the financial burden as well as aftersales services, filling in the void between consumers’ wants and their financial means. Low interest rates have also helped to financing packages. Attractive leasing options are also gained much ground for consumers who are wary of long-term commitments.

Sweidan said the two most important lessons for Rymco in the last year after the Summer War and this year’s continued economic uncertainty has been that “there is never no market, there are always segments within the market that have growth potential. Once you have identified them, focus all of your resources on the target segment you want to attract and find a match between consumer wants and their means.”

 

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Finance

Qatar clamps down on runaway fees

by Executive Staff
written by Executive Staff

Qatar central bank

As a foil to Dubai, where runaway fees and commissions are en vogue, Qatar’s central bank has begun efforts to cap bank commissions and fees, according to local newspaper Asharq’s February 22 report. The new rule will cover 30 different commissions deducted from personal accounts for banking services. The crackdown will also include the requirement of full disclosure of all fees and commissions both to the banks’ customers and the country’s central bank.

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Lebanon

Real Estate – Home sweet home

by Executive Staff
written by Executive Staff

Slump? What slump? If you listen to some of the pundits, one would be forgiven for thinking that the Beirut real-estate sector had forgotten the country is on the edge of the abyss. High-end developers still claim they are achieving $2,000/m2, that’s $500,000 for a “modest” new 250m2 apartment, albeit in sought-after Ashrafieh.

But for the average Lebanese, housing has become unaffordable. In the last three years, property prices in Beirut rose by around 50%, according to some figures. Despite the current unstable political climate, prices are not decreasing. In fact they are set to increase even more due to the rising cost of building material such as steel and cement and the weakness of the dollar against other currencies. Any rise in VAT will also be reflected in the price and the steady emigration of foreign laborers has resulted in the increase of labor prices. Another factor is that those Lebanese who can afford to buy are, securing property before foreign buyers return and drive up prices further.

Prime locations in Ashrafieh have in fact reached an unprecedented $4,500-5,000 per square meter, according to Patrick Geammal, chairman and managing director of Ascot, a real estate brokerage firm. “We have never seen the kinds of prices we have been seeing in the last 30 days,” he explains, speaking in mid-July, a period which saw Lebanon gripped by political crisis, bombs, assassination and battle. Yet despite this, municipal Beirut is experiencing a property boom, with tell-tale holes in the ground springing up everywhere.

Ashrafieh has been helped by the evolution of the Beirut Central District. Geammal says that prices now radiate outward from the BCD and now encompass the genteel Christian quarter Ashrafieh. Ten years ago, when the BCD was one vast construction site, the most desirable areas were in West Beirut — Verdun, Ramlet al-Baida and Ras Beirut — where commercial potential drove residential demand.

Ashrafieh was almost Suburbia. “In this part of town, that was not the case,” remembers Geammal. “The only people investing there were Ashrafieh residents themselves.” Today, hotels, restaurants, boutiques and shopping malls have seen it well and truly become part of Beirut’s metropolitan heartbeat and prices have hit the stratosphere, rivaling Verdun and Ras Beirut.

However, even with this spike in prices, Geammal believes that some Lebanese still find Beirut something of a bargain compared to other capitals. “A million dollars for Lebanese working here is a lot when you consider the salaries but for those living abroad, a million dollars for a 500-square-meter apartment, especially in a prime location, is nothing. Lebanon is still relatively cheap compared to prices in London or Paris.”

Not all are bullish

Raja Makarem, managing partner of Ramco, real estate advisors, is not so bullish. He believes that something has had to give during Lebanon’s worst political crisis since the end of the civil war. He says that projects for apartments larger than 600m2 have been halted and very few apartments larger than 400m2 or more (the $1 million-plus category) are selling. “The Gulf customers have stopped coming and the Lebanese living abroad have stopped buying large apartments.”

Any movement in the market, says Makarem, is being financed by Lebanese working in the Gulf who maintain their families in Lebanon. Makarem believes that this bracket has given the impression that real estate is on the up and further states it is this perception that kept asking prices artificially high as property owners hold out the price they want and not what is determined by the market. To back up his theory he says that new smaller-size projects have begun to slow down in the past six to eight weeks and interest could wane further.

But how does all this affect ‘regular’ or first time home buyers? With most of the construction focus on the high-end of the spectrum aimed at foreign buyers with foreign salaries, affordable (for Lebanese) new apartments are scarce and much sought after, driving up prices by as much as 25%, putting the “low-end” market out of the reach of most Lebanese.

In this climate, buyers are gradually accepting that one does not need a home the size of a football stadium to live comfortably. Lebanese who have lived abroad and have been forced to live in small apartments in London or Paris have realized that they don’t need to have a huge apartment to live well.

Changing mindsets

“The mentality has changed in Lebanon that yes, I can live in a 100 square meter apartment,” said Geammal. You also have the Lebanese and Gulf Arabs that only spend their holidays here and are willing to live in smaller quarters. “Think about when you are on vacation and how you and your family were able to stay in a hotel room and were still happy — it’s the same mentality,” adds Geammal. “You have to understand that many of these smaller apartments are bought by the same type of people as the larger apartments but with different mentalities.”

However, in Geammal’s view, the current market is not as skewed as it appears. “Imagine that there is a launching of 1,000 flats,” he says. “I sincerely believe that between the 3 million Lebanese living here and the 10 million living abroad, a thousand of them are successful enough to put half-a-million or so aside to buy an apartment. This isn’t like Dubai where they throw 100,000 flats on the market to see how they sell. In Lebanon, if no one buys there is no problem because if they don’t sell today they will sell tomorrow. If you are the owner of a $1 million flat, you can take a loan for $100,000 and it will not change your life. You don’t need to sell your property to make do.”

Ultimately it’s all about the allure of property, particularly to those living in this part of the world. For most Lebanese investment is about owning things — things you can show and things that you can touch. Property represents a secure commodity in which to invest their savings, as opposed to currencies, which are subject to market fluctuations, as evidenced by the recent decline of the dollar. For Lebanese, it’s about having a piece of land and being able to pass it on to future generations. “Cash has no value for us; if I had $10 million in real estate, I would be richer than if I had $50 million in cash,” argues Geammal. “If you wanted to take a loan from the bank, they wouldn’t ask how much you are worth but the value of your properties.” The old adage, “money in the bank,” just doesn’t cut it around here, it seems.

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Is it all about Iran’s energy?

by Paul Cochrane
written by Paul Cochrane

As the rumors of a strike on Iran continue, with US saber rattling an almost weekly occurrence — lately over Hizbullah agents in Iraq, and al-Qaeda allegedly using Iran as a staging ground — a question begs to be asked, is this as much about energy as Tehran’s nuclear ambitions?

Iran is sitting on huge oil and gas reserves that have not been utilized to their full potential. The country’s gas reserves are of major importance to the development of the global economy, particularly liquefied natural gas (LNG), with global consumption surging by over 30% in the five years to 2005.

Qatar’s North field and Iran’s South Pars field is the largest known gas field in the world, with estimated gas reserves of 1,300 trillion cubic feet (TCF) or 221 billion barrels of oil and gas equivalent (boe).

Major energy companies are champing at the bit to access this veritable gold mine, but the US sanctions on the Islamic Republic — which threaten to punish foreign firms that do business in Iran under the Iran-Libya Sanctions Act of 1996 — has prevented the development of the South Par’s estimated 500 TCF (85 billion boe) of natural gas.

The majors have resultantly concentrated on Qatar, which overtook Indonesia last year as the biggest exporter of LNG, exporting 31.09 billion cubic meters (bcm) or 15% of global LNG exports. But with global demand for LNG rising — demand is expected to nearly double in the next three to four years — Iran remains the untapped diamond.

“The fact is we will need Iranian energy sooner or later, perhaps sooner,” said Ian Moncrieff, vice president, Oil and Gas Practice, at American consultancy firm Kline & Company.

So the question is, will the global thirst for Iranian gas necessitate war by the US or rapprochement?

A thaw in relations could — and arguably should — occur, spurred on by the majors, as occurred in Central Asia in the 1990s. Furthermore, the world has become increasingly dependent on the energy flowing out of the Gulf.

Last year, Bahrain, Iran, Iraq, Kuwait, Qatar, Saudi Arabia and the UAE produced about 28% of the world’s oil, while holding 55% (728 billion barrels) of the world’s crude oil reserves and 41% of total proven gas reserves (2,509 TCF). OECD gross oil imports from the Gulf countries averaged about 10.4 million barrels per day (bpd) during 2006, accounting for 31% of the OECD’s total net oil imports.

A strike on Iran would cause a serious upset in accessing this energy, as in such a scenario the Straits of Hormuz could be closed or partially blocked. With some 17 million bpd exported via the Straits, roughly one-fifth of the world’s oil supplies, even a slight disruption to the flow of energy would have a serious impact on energy prices — the price of a barrel of oil would not just spike, it would rocket into the triple digits.

The Gulf countries are very aware of the dangers that the reliance on the Straits presents, with two pipelines on the drawing board that could pump as much as 6.5 million bpd, around 40% of the daily exports through the Straits. These pipelines will not be finished for several years however, and the possibility of pumping oil and gas by pipeline to the Mediterranean is equally years off, due to the billions of dollars needed to overhaul as well as build pipelines across Iraq and through Syria, another geopolitical wild card.

The global need to access the Gulf’s energy resources could conceivably prevent a strike on Iran. Then again, US Energy Secretary Sam Bodman said last year that the United States would be in “good shape” if Gulf exports were affected due to America’s emergency stockpile of almost 700 million barrels of crude oil. It would be the rest of the world that would not be in such good shape however, and with Washington increasingly isolated over its adventurism in Iraq, an attack on Iran and the knock-on consequences on energy supplies could leave the US without many friends. These factors are no doubt being given due consideration on Capitol Hill and at the Pentagon.

What will equally be considered is that Qatar will supply the US and UK with some 40% of their LNG needs, but only by 2010, and that LNG projects in Iran are only likely to swing into action by 2013 — plenty of time to tackle the Islamic Republic and still come out trumps, unless Iraqi resistance style developments occur in Iran of course.

Just as the invasions of Afghanistan and Iraq were about securing energy resources as well as waging the “war on terror” and nipping the supposed threat of WMDs in the bud, America’s posturing over Iran is as much about accessing energy as countering the threat of Iran’s nuclear aspirations.

How Washington handles this crisis is of grave importance not only to the region but to the rest of the world, who desperately rely on the Gulf’s oil and gas to keep their economies ticking along.
 

PAUL COCHRANE is a freelance journalist based in Beirut. His work has appeared in Britain’s Petroleum Review

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Corporate conscience

by Thomas Schellen
written by Thomas Schellen

Last month, the United Nations and the World Bank released global performance reports on private sector immersion and country level achievements in the crucial areas of social responsibility and governance.

The UN corporate citizenship initiative for joint efforts with the private sector business community goes by the name of Global Compact. According to the organization’s first worldwide annual report and survey (published last month), participation has widened to over 4,000 entities in 116 countries, including more than 3,000 corporate participants.

The largest increases in participation were recorded in Europe and Asia, whereas MENA response rates accounted for only 2% of the total. The Compact mentioned Egypt as the country where it found the strongest resonance in the region and a local network has been crafted. Jordan and the UAE were listed as countries where networks are under formation; even more limited presence exists in Syria, Lebanon, Qatar, and Kuwait as well as Tunisia and Morocco.

Promoted by the UN, multilateral agencies such as the World Bank, and a sea of civil society and academic organizations, concepts such as corporate social responsibility (CSR) are today entrenched in the vocabulary of industrial decision makers.

Where do the MENA business communities stand today in realizing corporate governance, environmental policies, and CSR?

When they started promoting Corporate Social Responsibility in countries of the region, organizations such as the UNDP found that companies in the Middle East often respond to social sponsorship requests and commit resources to their communities.

However, an important qualifier in declaring charitable activities to be CSR is treating it strategically, meaning that companies do not merely respond to needs from the community and answer to appeals for aid, but incorporate this activity into their core giving it comparable importance to their investor relations and production.

Compared to the Western business world, some of the largest Middle Eastern companies have incorporated CSR references into their identity but without the immediacy and weight of their multinational peers. Sabic, the Saudi petrochemicals producer, hints at CR content with a homepage button labeled “our commitments” that shows social action examples from 2004. Regional telcos MobiNil and MTC reference their commitment but also present only dated material.

The sites of Lebanon’s Banque Audi and Saudi bank Al-Rajhi are void of CSR statements or related news. The homepage of Emaar Properties is exclusively loaded with sales and marketing, one has to dig deep into the “About Us” section to find some board room basics as corporate governance info; Solidere presents a citizenship angle with its Garden of Forgiveness, although its relevant information is limited to a 41-month-old CEO speech.

What these leading Arab companies and most others in the region do have in common is that they hint at their corporate responsibility awareness but apparently still place CSR several notches below the strategic presence of corporate citizenship in developed and leading forward-thinking markets.

Also on national parameters, benchmarks such as the World Bank’s Worldwide Governance Indicators (WGI) support the view that Arab countries have much catching up to do in the overall global competitive environment.

This, however, must be seen in the context of an overall timid progress of governance issues worldwide where the IMF has made it a point to note that it has not been able to detect a uniform worldwide uptrend in governance since it started gauging national governance factors in 1996.

But good things take time and more than that. While the seven-year-old Global Compact expounds that in an ideal world all companies would comply with its principles, the current corporate membership is but a very hopeful drop in a huge bucket, even when postulating an impact bonus for the significant presence of F-500 companies.

One thing not to forget in regional CSR issues is that the primary measure for this responsibility is the relationship between the company and its workforce. In this aspect, the region is impacted by increasing challenges, evidenced through labor disputes that express wage inequalities and growing social pressures on many employees which are accompanying the eminent boom in corporate activity in the GCC.

In Lebanon, conversely, labor rights are presently extra reason for concern because of economic hardships that forced companies to cut expenses but also saw some bosses take advantage of the high competition for jobs in the tight market and unjustifiably beat down the salaries of existing or new employees.

Taking stock of CSR in the Middle East today goes to restate that good things are notoriously difficult to achieve — even if they reflect the ultimate common sense, such as the reality that there is no such thing as pure self-interest, corporate or otherwise.

THOMAS SCHELLEN is the business editor for Zawya Dow Jones in Beirut

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Saudi Arabia‘s rising need for private sector healthcare

by Ziad Fares
written by Ziad Fares

Over the coming years, Saudi Arabia is likely to experience a sharp increase in its healthcare needs. Most observers believe that population growth, a slowly aging society, and the conditions that affluence often exacerbates, such as obesity, diabetes, and cardiovascular diseases, as well as cancer, will create a tremendous new demand for healthcare services.

“Saudi Arabia’s healthcare system is ripe for investment opportunities,” according to a senior associate at Booz Allen Hamilton. “The growing affluence of Saudi Arabia and the GCC region as a whole will mean that the healthcare systems of these nations will need both money and expertise from outside sources in order to cope with an aging, yet well-to-do population.”

At present, the Saudi Arabian government funds most of the demand for healthcare capital and operating expenditures. However, analysts believe that government alone will struggle to continue to meet this demand. They have concluded that the only way to ensure that Saudi nationals’ health needs will be met without adversely affecting economic progress is to increase private sector participation in the health care system. The Saudi government has recognized this situation, and has identified healthcare as one of the key sectors targeted in its wide-ranging privatization program.

Today, the Ministry of Health (MOH) is working to prepare the sector for this essential but difficult transition. As a first step, the MOH has studied the best practices of the countries with the most successful healthcare systems and drafted plans that adapt these practices to the unique needs and circumstances of Saudi Arabia. The underlying goals have already been established:
 

 Create a stronger institutional setup and effective regulatory framework to promote private sector investment in healthcare, including the production and distribution of pharmaceutical and medical supplies,

 Develop a business environment that will make Saudi Arabia a more attractive destination for private healthcare providers, and

 Attract investors and other partners to the Middle East’s largest market for healthcare

The takeaway for healthcare providers and suppliers is clear: the Middle East’s largest market of healthcare consumers will become increasingly open to private investment.

Growth unsustainable without increased private sector participation

By the year 2020, the population of Saudi Arabia is expected to reach 30 million. Over the next decade, health expenditures are expected to increase dramatically, even faster than the rate of population growth. Demand for hospital beds is likely to grow from 51,000 to 70,000, demand for physicians is likely to rise from 40,000 to 54,000 — and the number of hospitals is likely to rise from 364 to 502. There are several reasons MOH planners see such a sharp rise in health needs:

 Saudis will become older. The percentage of the population over 60 is rising, and is expected to more than double by 2020. By 2020, the number of old people is expected to grow from approximately 1 million (4% of the population) to roughly 2.5 million (7 % of the population). At the same time, as incomes increase, Saudis are likely to spend an increasing amount of money on healthcare treatments, such as leading-edge therapies.

 But wealth will not always bring health. As most countries have learned, affluence is not an unmitigated benefit to health. Today, the average Saudi national is overweight. The average Body Mass Index (BMI) of Saudi nationals 15 years and older is 30 kg/m2, far above the global average of 23. A score greater than 25 is considered overweight. Such personal choices are likely to continue to translate into expensive and chronic conditions.

 And the costs of treatment will continue to rise. Paying for care of such chronic conditions is difficult now and is likely to grow worse.

Past experience at MOH suggests that the long-run trend is toward rapidly increasing expense for healthcare. Between 1999 and 2005, government saw a 7.2% annual compounded annual growth in its healthcare budget. The Kingdom spent $13 billion on healthcare in 2005, and this spending is expected to grow to over $20 billion by 2016.

A blueprint for change

Currently, the government dominates the healthcare sector in Saudi Arabia. Private sector spending for health care in Saudi Arabia accounts for 25% of the total. Increased private sector participation in healthcare is generally accepted as essential to achieve the Kingdom’s objective to increase the efficacy of the Saudi healthcare system while reducing the burden on government spending. Present plans call for a transition of the Kingdom to a mixed healthcare system, in which government participation is limited largely to healthcare coverage of the poor and military, with a variety of private healthcare options available to everyone else.

The plan for this transition calls for the following main changes in the current MOH healthcare system:

1. MOH will concentrate its healthcare provision activities on preventive and curative primary care

2. A new government entity will be established, the General Organization for Hospitals, separate from MOH, and all MOH hospitals assets will be transferred to this new organization to prepare the ground for increased public private partnerships in healthcare provision

3. A National Health Fund will be established under the Ministry of Finance, also separate from MOH, to fund directly healthcare services provided to patients

All these changes are likely to create vast new opportunities for international healthcare companies and other healthcare providers. Over the coming decade, a variety of opportunities are likely to open up in virtually every aspect of the Saudi healthcare sector, including tertiary care, secondary care, ambulatory care and testing centers, generic pharmaceutical, medical devices manufacturing, insurance, e-Health and education.

Conclusion

The fully nationalized system that served an earlier era well is no longer suited for the complex, dynamic country that Saudi Arabia is now becoming. For both economic and public health reasons, the government is committed to a course of change that will in the end create a system that is more responsive to the health needs of Saudi consumers.

“A market-driven healthcare system means competing groups providing the best care possible,” adds a senior associate of Booz Allen Hamilton. “In order to cope with the future needs of the country, Saudi Arabia is finding that it must make substantial changes to the way it conducts healthcare.”

This transition to a market-driven healthcare system will not only be good news for Saudis and the Saudi economy. For international healthcare providers and investors, the coming liberalization of the sector will mean increased access to the largest healthcare market in the Middle East, and an exciting opportunity to help millions of Saudis live longer, healthier lives.

Ziad Fares is a Senior Associate at Booz Allen Hamilton. He is a member of the Global Health team at Booz Allen and is currently responsible for growing the health practice, leading engagements and consulting teams in various countries in the GCC and MENA regions.

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Overcoming the debt trap in Lebanon: from a rent-based to a productive economy

by Georges Corm
written by Georges Corm

Any proper understanding of the debt phenomenon in Lebanon requires a short historical review of how this huge amount of debt could have piled up. It is to be noted here that the Lebanese public debt stood at the equivalent amount of $2 billion at the end of 1992, representing approximately 50% of GDP at that time. By the end of 2006, this debt stood at the equivalent of $40.5 billion representing 200% of GDP. During this period of 14 years, the total fiscal deficit of the state and the public sector (without debt service, but including all reconstruction expenditures and expenses outside the budget) did not exceed the equivalent of $4.7 billion.

This means that the cumulated annual amount of debt service during the period 1993-2006 reached the astronomic figure of $31.4 billion, while the capital of the debt at the end of 1992 ($2 billion) plus the fiscal overall primary deficit ($4.7 billion) during this period did not exceed $6.7 billion (2 + 4.7). The cumulated amount of debt service was higher than the total of all other budget expenditures during the period and represented 87% of the cumulated overall Treasury fiscal deficit including debt service for the period 1993-2006 ($36.9 billion).

The main factor leading to such a staggering figure is the level of interest rates on the T-bills issued in domestic currency between 1993 and 1998. Rates have reached levels of more than 35% in 1995 and of more than 20% in certain years between 1993 and 1998. Real interest rates have been almost above 10% of the local CPI throughout the period from 1994 to 2002. Although the level of yields on domestic T-bills declined substantially in 1999 from 18.6% to 14.4%, it is only after 2002 that it was reduced again to below 10%. In fact, the average annual interest rate paid on the capital of the debt was 14.6% during the period 1993-2006, a very high average compared to the level of international interest rates and to the domestic CPI.

It will be very important to be explicit in the future why interest rates increased so dramatically in Lebanon during the 1990s. After all, during this decade interest rates were declining worldwide, domestic inflation was coming down substantially, there was a surplus in the balance of payments and the Central Bank was piling up foreign exchange reserves without being indebted to the domestic banking system, as is the case today. If the average annual interest rate on the public debt in Lebanon had been set at 5% above LIBOR during the period 1993-2006, the cumulated debt service would have reached only $16 billion, compared to the $31.4 billion effectively paid by the Treasury. In fact, in this case, we can estimate the overcharge of interest rates to the Treasury at $15 billion. A calculation of such overcharge, in case of an average interest rate on the public debt during the same period at the level of 3.5% above LIBOR, shows that the amount of debt service during the period would not have exceeded $11.2 billion; in this case the public debt today would be standing at $19.7 billion only, i.e. at less than 100% of GDP instead of 200% as is currently the case.

Resolving the debt trap

During the last few years, the government was able to continue to refinance its huge debt due to two positive factors. The first one is the decline in interest rates since 1999 which contained increases in the annual debt service. In addition, the Treasury receipts were substantially strengthened both by the implementation of VAT and the cancellation of the two cellular phone companies’ BOT allowing the Treasury to cash 100% of their profits. However, in spite of these positive developments, the vicious circle was not broken and the ever-increasing amount of debt is still the biggest obstacle to a return to full economic health.

In fact, to reduce the level of indebtedness, the rate of growth of government receipts should have surpassed the interest rate paid by the Treasury on the public debt. This is why what is needed to get Lebanon out of the debt trap is a combination of an extremely high rate of growth, more interest rate reduction and a well designed and properly timed privatization program.

It should be noted, however, that due to the present level of Treasury indebtedness ($41.5 billion), whatever privatization receipts could be generated, they will not be able to substantially reduce this level. One can anticipate at best an amount of $6 to $8 billion in case the Lebanese government nomenklatura could agree on implementing a privatization program. This amount could stop the debt increase for maybe two years, but no more. In addition, to be effective, this program should be properly planned and implemented. There should be an adequate timing whereby privatization receipts would be an additional element in creating a positive dynamic to get out at once of the debt trap.

To this effect, what is important for Lebanon is to change its economic mentality and for its public and private sector decision makers to realize how much the economic and human potential of the country is remaining untapped. This, in my view, is largely due to the rigidity that has affected the economic vision of Lebanon as being able to grow and develop exclusively through the banking and the real estate sector, in addition to tourism. In fact, reconstruction policies in the 1990s have reproduced and aggravated the vision of Lebanon being ideally and exclusively suited to be a financial and commercial entrepôt for the region. It contributed to strengthen the wrong belief that the economy could only prosper if based on intermediation between supposedly underdeveloped Arab economies and Western or other more developed economies.

Keeping the brains here

In this respect, it should be noted that the reconstruction planners did not take into account all the changes that have affected not only the Arab region, but also the international economy. They also did not realize that the old regional role of Lebanon was over and that globalization and the electronic revolution were rendering intermediaries irrelevant. They did not realize that globalization requires a shift to high value added products and services in high demand in the world economy. Neither did they grasp the fact that the success in exporting such products and services requires any country to keep its best human resources at home instead of exporting them to other countries. Although many successful economic models could have inspired the Lebanese economic policy, like Malta, Ireland, Cyprus, Singapore and other larger economies like Taiwan or South Korea, the weight of the past seems to have been a fundamental obstacle to understand the urgent need for a change.

Creating artificial rent revenues in the country by increasing interest rates to the levels mentioned above was a high cost substitute to the lack of job creation and local economic dynamism outside the real estate sector. The traditional Lebanese wisdom about human resources is still based on the belief that it is more beneficial to the Lebanese economy to export brains than to devote efforts to keep them at home by creating locally new high value added activities securing enough employment opportunities for these brains. The regular remittance flow is viewed as an essential element of poverty alleviation and balance of payment equilibrium. It is not considered to be an economic waste, given the fact that the local economy supports the costs of educating and training these dynamic human resources, while countries receiving this educated manpower are getting the full economic benefits. The “brain exporting country” receives only a residual part of the revenues produced by these brains abroad through the flow of remittances.

This is why the quality and sophistication of economic thinking in Lebanon should be seriously addressed to get out of the debt trap. Now that the era of “crazy” interest rates is over, it is high time to look seriously at the comparative advantages that Lebanon enjoys in many fields. If properly used, these advantages will allow the country to compete successfully in the global market for high value added activities. Lebanon could become a very dynamic exporter of biological agricultural products, high-quality seeds, and plant-based medicine given its famous biodiversity and the existence of many plants with medicinal value. It could also much more develop its software productive capacities; it could attract sub-contracting of off-shored services activities in accounting, financial analysis, medical and biological research. It could also go into producing solar energy equipment in high demand worldwide, as well as into producing equipment for used-water recycling or solid waste treatment. It is only through sustained continuous high growth generated by a substantial increase in Lebanese exports of high value added goods and services that the country could break the vicious circle of ever increasing indebtedness.

There are, however, other actions to be taken simultaneously to get out of the debt trap, mainly reforming our dual monetary system whereby the US dollar and Lebanese pound coexist as legal means of payment. Reforming the tax system, as well as the public debt management, are two other key issues to get out of the debt trap. The part of the public debt, in the hand of Lebanese institutional holders, should also be progressively rescheduled through voluntary agreements between the state, the Association of Banks and the Bank of Lebanon. In fact, to be sustainable, the annual debt service burden should not exceed the level of 25% or 30% of public expenditures against more than 50% on average during 1993-2006.

But all this suppose a change of economic mentality and the adoption of a different reform program than the one developed with the help of international financial institutions. In the mean time, one should hope that the political situation will remain in control and will not spoil any chance of future reform of the Lebanese economy in a new direction.

GEORGES CORM is a former minister of finance and a professor at St. Joseph University in Beirut

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