Banking & Finance

Insurance Lebanese Inertia

by Executive Staff
written by Executive Staff

Lebanese insurance companies these days marvel that theyhave fared better than feared in the past 18 months, butknow that nearly a year of economic paralysis has not passedthem by. The woes range from corporate clients that reduceor renegotiate their policies to individuals who stop payingtheir premiums because they are leaving the country. Thisbrain drain of the best talent is also affecting insurancecompanies directly, putting strain on their human resources.

Sector results for 2006 were respectable because the firsthalf of last year was a bumper period and the optimistictime immediately after Israel’s summer war against Lebanonalso brought good business for insurers. With the recentseries of bomb attacks against commercial areas aroundBeirut, demand for war and terrorism covers has kept thephones ringing — although many companies looking for theprotection quickly drop their inquiries as soon as the firstshock from a bomb wears off and, more importantly, when thehigh costs for those special covers sink in.

Downsizing insurance covers

Jamil Harb, secretary general of the Lebanese insuranceassociation ACAL told Executive the insurance industry issuffering the same stagnation in the economy in general hasseen since the 34 days of war between Israel and Hezbollahthat began last July 12.

“In figures, there’s been zero growth for the sectorstarting in the middle or end of 2006 until now,” Harb said.“Growth is zero as it is for the whole economy. The wholesituation is blocking the economy. You have no newbusiness.”

The downsizing of insurance covers affects retail andsmall business policies such as clients switching to alesser care class in their hospitalization plan or trying tocut costs on motor insurance by going with third-partyliability insurance instead of all-risk, said FatehBekdache, general manager of Arope Insurance.

“The problem is the lack of confidence. People don’t see theend of the tunnel and have put everything on hold until theend of the summer,” he told Executive.

According to Bekdache all major trade and industrialcompanies have been shopping for terrorism and war coversbut the rates, which are dictated to at least 90% byreinsurance companies abroad, are so steep that only a verylimited number of companies sign up for policies, oftencoming with restrictions that need careful examination ontop of requirements to pay upfront for a substantial period,such as a full year.

Insurance experts said they had not heard of any majorclaims related to damages from the bomb blasts in May andJune. Five of the six blasts that have rocked Beirut and thenearby towns of Aley and Zouk Mosbeh since May 20 mainlydamaged businesses. If the cost of rebuilding after a blastis too high for already cash-strapped shop owners,businesses might be forced to close and cancel theirpolicies, said Ibrahim Muhanna, managing director ofinsurance consulting and ratings firm or Muhanna & Co.

Despite the admitted setbacks the industry will face inlight of the economic stagnation, Bekdache called it tooearly to forecast results for 2007. Much will depend on thesecond half of the year, he said, pointing to the trackrecord of insurance companies who have kept working throughthe thick and thin of last year’s war. Other insurancemanagers agreed, telling Executive that sector companieswill remain profitable and stressing the readiness of theLebanese to return to an optimistic mood on short notice.

The Lebanese insurance sector is something of an anomalyin the Arab world. The small Mediterranean nation is home to55 insurance companies, or nearly 14 for every one millionpeople. That is 10 more per million than in Jordan.

The industry in Lebanon is rife with minimally capitalizedsmall companies controlling slivers of the market, Muhannaexplained. “You have almost 30 companies (out of 55) thathave less than 10 percent of the premiums in the market,” hesaid.

According to data researched by his firm, the insurers inLebanon’s fragmented market are spending more onadministrative costs and client acquisition than otherinsurance companies in the Arab world. The expense topremium ratio for Lebanese insurance companies was 48% in2004 and 47% in 2005, compared to the 32 and 31% Arab marketaverages for the two years. Lebanese insurance companiesalso pay much higher commissions, 19% of premiums in 2004and 21% in 2005. The Arab market average was 6% in 2004 and8% in 2005.

The sector is also the least transparent in the Arabworld, Muhanna argued, pointing to insufficient disclosurerequirements. A very large share of local companies whichthe ratings firm approached with information requests overseveral years did not provide data that met the firm’srequirements for a rating, resulting in the fact that only18% of the 55 companies are rated, compared with 90% in bothJordan and the United Arab Emirates.

ACAL — which has long made it its target to improve theinsurance awareness of Lebanese consumers and lift thesector’s image to new heights — is alert to enter 2007 withnew determination to make the sector more transparent andenhance corporate governance.

In a practical measure of promoting corporate governance,ACAL in May organized a workshop where representatives ofthe Lebanese Transparency Association and the InternationalFinance Corporation discussed the Lebanese Code of CorporateGovernance and the benefits of more transparent businessleadership.

The workshop’s presentations showed that best practices arelinked to structural issues such as proper registration ofshares, board composition, and auditing practices which allcan have positive implications for sourcing funds andfinding investors. The legally driven arguments forcorporate governance were backed by practical examples. “Anycompany is lucky if it goes through the corporate governanceexercise before it is obliged to do so by the authorities,”the general manager of a regional insurance company toldindustry colleagues, adding that improvements in corporategovernance enabled the head office to expose a case ofinternal fraud at a branch office with at least $5 millionin damage to the company.

ACAL takes action

Lebanon’s insurance association has ambitious plans inmore than one direction, which it hopes will strengthen thesector and improve its internal communication andinteraction with the country’s public. Steps in the newdirection were agreed upon last year and included a revisionof ACAL bylaws to establish the position of secretarygeneral, enhance the work of technical committees, andstreamline election procedures.

To ease the collaboration of insurance stakeholders, theassociation is working on projects for arbitrationprocedures and on hammering out a voluntary code of conduct,in addition to seeking an increasingly proactive role inrepresenting insurance interests to ministries and theInsurance Control Commission. For a beefier interaction withthe public, ACAL this summer revamped its website andstarted publishing regular annual reports, flanked by anewsletter.

Although insurance performance in Lebanon made decentprogress in the past decade, aided by a gradual overhaul andrenewal of the relevant legislation, greater progress wasblocked by fragmented interests and extraneous factors.Insurance industry leaders say they don’t want to blamecircumstances and are aware that more can be done.

“We have a clear view on what our sector should provide toLebanon,” ACAL president Elie Nasnas told Executive. Thesector, which has pioneered so many insurance products andservices in the Middle East, wants to initiate solutions athome and, in a spirit of realistic targets, re-establishitself as insurance hub if not for the whole region then atleast for the Levant.

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Lebanon

Retail Sales and bombs don’t mix

by Executive Staff
written by Executive Staff

Since last year’s deadly July War, followed in December bythe opposition’s permanent protest movement, the recentsechaurity problems and the fighting in Nahr al-Bared,Lebanon has been the victim of a “series of unfortunateevents.” One of the many sectors to suffer from the burdenof insecurity is the Lebanese retail market, seemingly adinfinitum condemned to face challenge after challenge. Theposh Beirut Central District (BCD) and the notorious Beirutnightlife have taken a rd blow, as tenants, exclusiveinternational brands and hip eateries alike slowly witheraway, with most balance sheets and performance figures inthe red. Executive looks at the annus horribilis 2006/07from a retailer’s perspective.

By mid-July of last year the exceptional 2006 forecast of1.6 million tourists had slowly melted down as “precisionbombs” targeted Beirut’s suburbs and Lebanon’s southernregions. According to Marwan Mikhael, advisor to theminister of economy, the 6% growth figure predicted insteadmorphed into a gloomy -1% mark by the end of 2006. The levelof exports — up by 50% before the war — averaged 20% by theend of that year. Dovetailing the morose situation, yearlytourism figures fell by 6.8% in 2006, and even 17% comparedto 2004. “Imports, which are good indicators for sluggishdemand, only increased by 0.6%,” says Mikhael. Anotherlinchpin of retail economy, the CPI (consumer price index)increased by 7%.

Beirut Central District’s woes

The Beirut Central District, a Lebanese economic landmark,came timidly to life after the end of the war. Yet scores ofstores remained empty, with shoppers choosing to stick tosurroundings closer to home. “I believe however, that theBCD troubles have their roots in Solidere’s approach of along time ago. Since its inception, the BCD always had anextremely high turnover rate, with an average 70 businessesclosing down against 80 setting up shop in the area,” saysRaja Makarem of Ramco Real Estate Consultants. After thewar, the lethargic state of downtown affairs could also beattributed to its clientele demographic, as it is composedmainly of Arab tourists, who literally vanished while localsmigrated to areas such as Gemayzeh.

On the retail level, Nadim Matraji, owner of Gant stores,agrees that the situation resulting from the war is dour,confirming a 70% drop in activity, with the number of clientvisits falling to 50%. “Nonetheless, we were able to keepour loyal customers,” he adds. As for the Italian franchiseBenetton, its launch in Lebanon coincided exactly with thebeginning of the conflict. “The war and the blockade forcedus to close our stores for a month. As a result, themerchandise came in too late and the Back-to-School seasonwas simply cancelled, as the store’s middle and upper classclientele were fleeing the country,” says Walid Matta, thecompany’s GM. Dora Jurdy (Georgio Armani) relays a similaraccount: “During the course of the conflict, our stores wereclosed for a month, leading to a 70% fall in turnover, sincewe rely heavily on the Arab tourists.” At Paul & Shark salesplummeted by 70% with clients too scared to visit theoutlets, according to the company’s Grace Assaf. JamilDargham at Omega, estimates that his turnover decreased by50% after the war, the luxury brand’s Gulf clientele havingbecome an oddity. At Eden Park, owner Mazen Mussalimexplains that he was able to recover some of the 90% drop ofthe July and August sales figures, thanks to a client basemostly made up of Lebanese.

As if the July War had not been enough to curb dwindlingprofit margins, a few months later it was followed bymassive protests held in the BCD area. Paul Ariss, presidentof the Restaurants Syndicate, paints a gloomy picture ofthis period. “Up to 30 downtown eateries had closed downpermanently, 40 were waiting for better times to come, 15were opened only for lunch and another 15 for lunch anddinner.” According to Ariss, Solidere acknowledged the trendand lowered costs by 10-20%, while private real estate owners negotiated new paymentterms with tenants. As a result of downtown’s lockdown,expansion was noticeable in some areas such as Gemayzeh,Hamra, Verdun and Kaslik. “At the time, activity in Verdunprobably increased by 30 to 40% with Gemayzeh and the ABCMall in Ashrafieh having a greater share of the cake,” hesays.

The reshuffling of the business and shopping scene alsotranslated into the real estate sector with demand forretail space in downtown Beirut near its nadir. However, theoffice rental segment escaped the misfortunes befalling therest of downtown. “There is a shortage in office spaceavailable for rent, which makes meeting the demand ofinternational companies, mostly American and European aswell as NGOs, very difficult,” underlines Raja Makarem. Withsales prices remaining at $4,000 per square meter, he pointstoward the migration taking place in Beirut. Businesses moveaway from the BCD into other areas, namely Kaslik, Verdunand Hamra. “Many businesses, which had opted for await-and-see approach during the demonstrations, have nowdecided to permanently close their businesses even if thismeans loosing on investments they’d made. I guess that’s thegeneral feeling now,” says Makarem. The realtor alsobelieves that rental estimates are currently very difficultto assess in the BCD area, as demand is simply non-existent.

On the other hand, in other areas the demand for rentalspace remains surprisingly healthy. Ramco confirms at leastone weekly request for the Hamra area, mainly asked for byfranchises. “One has to keep in mind that, whatever thecountry’s general situation, Hamra remains a major businessdistrict, holding within its grounds four universities, morethan 200 businesses and many hospitals with thousands ofpeople flocking in every day,” says Ramco’s GuillaumeBoudisseau. Restaurants such as Tabkha, Noodles, and BuffaloSteak House have also decided to open soon in the area whererental prices reach as much as $650 per square meter.According to the real estate company, Verdun is also quitein demand, a trend slowed down, however, by the limitedsupply for prime outlets. “Franchises usually require groundlevel outlets, which explains why so many underground orfirst floors stores remain empty,” underlines Baudisseau.The real estate sector’s progress comes as a surprise giventhe current political and security problems. The Lebanesenewspaper L’Orient Le Jour even reported a 30% spike inproperty prices. “The trend can be attributed to the obvioustrust the Lebanese hold in their economy,” says Makarem.

Some retailers better off than others

Still, retailers’ accounts sway between desperation, hopeand fatigue. For Virgin’s marketing manager Joanne Karkour,2006 was the year of great hopes as 1.6 million touristswere expected to visit the land of the cedars. Whendemonstrators congregated in the heart of Beirut, theneighboring Opera store — the company’s flagship outletlocated in the BCD — had to close down for over two weeks.The fall in sales at that store was at least twice higherthan in other points-of-sale. “Compared to 2004, last year’ssales figures at Opera store plummeted by nearly 50%, whilein 2007 sales fell by an average of 55% compared to 2006,”says the executive. Another significant indicator, footfallfigures at the Opera store — which represent under normalcircumstances twice the ABC overall store’s — reached a mere30% in 2006. This indicator can be put in perspective whencompared to the size of the Opera store, which covers asurface of 3,500 square meters and, at normal times, has atotal sales share that is twice that of the ABC and CityMalls cumulated. “Thus, it is difficult for ABC and CityMall to cover the sale loss of the Opera store althoughtheir turnover was quite satisfactory last December,”Karkour explains.

For Matraji the recent events have translated into salestaking a 50% nose dive, as people avoid wandering away fromtheir places of residence. “The security-related events have put a hold on any future plans. We hadto postpone one big project as well as the introduction oftwo new brands,” complains the manager. According to Matta,Benetton’s Saida and Tripoli outlets have taken the hardestblow, principally in the southern city where the store islocated close to the Taamir area, which had seen unrest inrecent months. The GM acknowledges that although 50% ofcompany’s targets have not been met, two new stores arestill underway.

At Georgio Armani, the season that had started on thebright side was brutally brought to an end with the Nahral-Bared fighting and the bombs — the Emporio Armani storeis located on the street where the Verdun bombing occurred—, leading to a 90% loss in activity. “We had to reducemerchandising by half to adjust to the situation, as well asabandon the marketing campaign we had scheduled,” saysJurdy. Assaf indicates that Paul & Shark sales have beenplummeting by 60%. At Omega the recent events have inducedan 80% decrease in sales. Robert Sayegh, owner of the ABCMall’s Mont Blanc store, reckons a 50% decline in sales,accelerated by the recent bomb targeting a parking lotadjoining the mall.

Grace Sehnaoui, owner of international brand franchisesTod’s, Vilbrequin and Hogan, estimates turnover to havecollapsed to 25%. “People are afraid to visit the BCD whereour stores are located, although the area remains much saferthan any other thanks to heightened security measures,” shestates. The Nahr al-Bared battle and the bombings, inaddition to the effects of the war, have forced her torenegotiate quantities, a situation that might hinder thefranchise agreement on the long run.

Sehnaoui is a typical example of Lebanese resilience. “Asthe stores closed down for a month during the war, we movedour merchandise out to the storage house, and then literallyfollowed our clientele from one safe area to the other suchas Broummana, Faraya and Jounieh. That was a huge headachein terms of coordination! However, we had to mark down ourmerchandise to be able to sell it, which somewhat affectedsomewhat our image.”

On the other side of town, Eden Park sales shrank to 20%during the month of May and 50% in June. “This drop mightalso be attributed to the proximity of our store to the ABCAshrafieh Mall next to which a bomb went off,” saysMussalem. At ABC Mall, apparent target of the recent bombingspree going around Lebanon, damages were repaired rapidly,with stores going back to normal the next day. “We’ve notwitnessed any tenant migration. Quite the contrary — newstores such as Lee Wrangler, Style Express, and Starbucksare still scheduled to open,” says Tania Ezzedine. TheLebanese company, which is also expanding in Amman, iscurrently renovating its Dbayeh flagship store. “We’re notpostponing any local investment and did not loose hope inour homeland,” she concludes.

The Demonstration effect

Like in any other crisis, one man’s misery can makeanother’s fortune: during the demonstrations, shopping areasaround the country benefited from the deadlock, luring informer downtown clients who shunned away from the cloggedcity district. “Ashrafieh was the most popular destinationamong malls while the Hamra area also improved much,” saysRamco’s Raja Makarem. Real estate agent Raymond Barakatcorroborated this assessment. According to him, in Kaslikdemand for rental space picked up by 40 to 50% during thedemonstrations, as Kisrwan and Metn rode the wave with a 20%increase. Unfazed, Makarem pointed out, however, that demandin Kaslik predated the demonstrations, and was actuallybolstered by the regional presence of the Azadea Dahergroup.

In Verdun, Mazen Kharazallah, manager of 730 and 732shopping malls with over 100 stores, estimated the spike incirculation to have reached 90%, with peak activityoccurring mainly on the weekends. “At least two people wereinquiring about vacancies. As for tenants, their activityhad improved by as much as 65%.” As one might expect, agrowing demand combined with limited supply usually drivesprices up. According to Barakat, this was best illustratedin Kaslik where prices increased by 25%, as well as the Metnregion where the snowball effect reached 20%. In Beirut,Hamra also recorded rents moving up by 20%. “Prices inVerdun, already quite high, did not really increase asdemand was satisfied by empty outlets available for rent,”says Makarem.

Although shop owners seemed to be fleeing the BCD enmasse, the migration was not permanent. Makarem believesthat the trend can be reversed: many businesses formerlylocated in the BCD have spent an average $1000/square meteron renovation costs and were not really prepared to forgotheir leases. “However, since the Nahr al-Bared events, most of them are not willing to wait anylonger.”

On the larger retail and service industry scale,consequences of the downtown lockdown were experienceddifferently. The big winners were undoubtedly restaurantsand cafe chains, which could swiftly adapt to the migratingtrend. Whether in Verdun or at the ABC Mall, eateries werebustling with activity. Georges Helou, manager at Casper andGambini’s, confirmed rumors of the chain’s BCD venue closingdown, and in May announced the opening of a branch inVerdun. “We still enjoyed similar levels of visits for moststores. The City Mall venue and the whole mall sector onaverage were doing much better with turnover boosted by 25%since the last demonstrations, but I would not go as far asimplying a definite relation between the two events,”explains Helou.

Alain Maroun, manager at Pain Quotidien, witnessed asimilar growth in sales as new faces flocked to the smallVerdun café. “With a 70-80% spike in activity, we didextremely well during the week,” he says.

Lina’s, another chain famous for its ‘sandwicherie’culture, modified its strategy, following clients where theycould be found. According to Sami Hochar, Lina’s GM, salesat the BCD venue fell by 75% when demonstrations started,stabilizing later at a mere 45%. On the other hand, itsAshrafieh café boasted a 50% increase in sales, the one inHamra 28%, and the Dbayeh branch 7%. The newly-opened Verdunand Kaslik venues were also performing extremely well.“However, customer purchase behavior has been affected bythe prevailing situation with ticket prices per personloosing up to10% of their initial value,” indicates Hochar.

On the retail side, chain owners adopted a more negativestance as the sector showed contradictory results from onemarket segment and region to the other. Dany Hani, managerand owner of Maria Pino, underscored the negative impact ofwar and demonstrations causing activity to abate by anaverage of 50%. “Gulf tourists, who constitute 30 to 40% ofour client base, have avoided shopping in Lebanon. Toreverse the local trend, we have expanded of late in variousmarkets such as Riyadh, Kuwait, Jordan, Dubai, and the USA.”

Karim Saadeh, operation manager at Mario Bruni, said thatsales at its BCD outlet have dropped by 75% during thedemonstrations, while Kaslik witnessed an increase of 21%,and the Verdun store even reached 45%. In addition, thecompany beefed up its presence abroad, with stores incountries such as Jordan, KSA, Egypt, Syria, and Romania.

On the clothing retail level, the Azadea group, withinternational brands such as ZARA, Bershka, Pull & Bear,Oysho, Massimo Dutti, Mango, Promod, Pimkie, Extyn, MaxMara, Marella, Pennyblack and Columbus Café, admitted thatturnover had been affected by the permanent protests andblockade, its sales figures improving conversely in certainareas such as Verdun and Kaslik. “The number of foreignershas decreased tremendously but no major change has beenobserved in the purchase behavior of the local customers atthe time,” agreed Said Daher, the company’s general manager.

On the regional level however, the prevailing situationvaried significantly. In Kaslik, businesses seemed tooperate on the brighter side of life, as Bedik Sarsonian ofZinnia could attest to a 10% improvement in turnover. “Wehad our clientele in Verdun and the unstable situation hadnot really affected their purchase behavior, but we had topostpone opening our BCD store,” he says. CK Jeans storemanager Marwan Salameh pointed out that business improved byup 20% with customers increasingly avoiding Beirut. DarineMoradian of Legend announced a 10% raise in sales, a figuremirrored by Lina Chidiac for Virile.

At the ABC Mall in Ashrafieh, Jean Mansour of Houdoumexplained the 50% drop in sales. “Although the overall mallactivity improved significantly at the time, this did notmean that people were buying,” he said with a derisivesmile. Liberto store manager Evy Bassim agreed, estimating adecrease in turnover of 30%.

The situation in Hamra seemed even bleaker, although thebusy streets were jammed with cars until late hours. GhassanHabayla, the store manager at Saint Michel, estimated hisdecrease in sales to have reached 60%. Hussam Dana, ElDorado’s store manager, explained that he had to rescheduleopening hours and close at 9:30 p.m. instead of midnight.

In Verdun, testimonials conflicted as some stores sawtheir turnover follow a rising trend while others complainedof deteriorating profit margins. Youssef Kaaki, manager atJack & Jones, estimated increase in sales to 30%. Luxurygoods, however, seemed to take the hardest hit. Samer Rifai,manager at Amore, had to face activity dropping by up to100%. Lina Kabbara of Oilily, a children luxury brand,shares his grievances, which emphasize the harsh realitiesof a negative business environment resulting from thepolitical upheavals.

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Comment

No outcry, just a whimper

by Gareth Smith
written by Gareth Smith

Protests in the Islamic world were hardly a surprise whenthe Queen of England, Elizabeth II, last month awarded aknighthood to the controversial author Salman Rushdie. BothSunni Pakistan and Shia Iran summoned the British ambassadorfor a diplomatic dressing down.

In Tehran, Fars News Agency reproduced the religiousruling of February 14, 1989, from the late Imam RuhollahKhomeini authorizing the killing of the novelist as anapostate. But the overall reaction in Iran was surprisinglymild, with nothing of the popular outcry seen in Pakistanand no repeat of the embassy attacks last year after theDanish cartoons of the prophet Muhammad.

Times have changed since 1989, when Iran was at theforefront of radical Islam just ten years after the 1979Revolution brought down the Shah, regarded by Washington asimpregnable until toppled by a mass movement headed byAyatollah Khomeini.

The big difference is the rise of Wahhabi Sunni Islam inthe 1990s, including the emergence of al-Qaeda. This has notonly driven a deep wedge between Sunnism and Shiism buttaken the edge of Shia militancy.

Iranian president Mahmoud Ahmadinejad has tried his bestsince his 2005 election victory to return to the radicalismof the Iranian Revolution’s early years. But he isstruggling to undo all the compromises, at home and abroad,made in the 1990s under presidents Akbar Hashemi Rafsanjaniand Mohammad Khatami. Iran will assert its “rights,”especially on the nuclear program, and defend its friends,including Hizbollah, but fewer and fewer Iranian politicianssee themselves as in a war of existence with the West.

Hence, despite Ahmadinejad’s call for the Zionist state ofIsrael to be removed “from the page of history” (a quotationfrom Imam Khomeini) and his vilification by the US andIsraeli PR machines, he has achieved little other thanimprove his popularity rating across the Islamic world.

Just six months after Ahmadinejad was elected president,his reformist predecessor Khatami put his finger on theproblem in an interview with IRNA news agency where hewarned of “deviating and inflexible currents” in Islam.

Khatami did not name names, but few doubted he wascriticizing his successor. The nub of his argument was thefollowing: “I advise the radicals who are upset [Osama] binLaden is so well known in the world that no matter what youdo and how radical you become, you will be at the end of thequeue that bin Laden heads.”

Iraq has brought all this home. While some in the USadministration have been spinning the media that Iran issending arms westward, the reality is that the bulk of armsflow has been the other way round since US forces failed tosecure the Iraqi army’s weapons in the 2003 invasion.

The vast expansion of al-Qaeda’s violence in Iraq since2003 has alarmed Iran as a state based on Shia Islam withmainly Sunni countries to its west and east. As Ali Allawiargues in his recent book, “The Occupation of Iraq,” thepolitical situation in Iraq has driven a sizeable proportionand perhaps a majority of Sunni Arabs towards some kind ofpolitical Wahhabism.

Wahhabis have long attacked, as a violation of monotheism,the Shias’ veneration of long-dead Imams — those the Shiabelieve to have been the legitimate successors to theProphet Muhammad. And last month’s destruction of theminarets of the al-Askari shrine in Samarra, just the latestattack on Shia holy places in Iraq, showed the visceralhatred felt by Sunni extremists for Shia religiouspractices.

Iran itself has been largely spared the atrocities carriedout by al-Qaeda groups in Iraq, but long ago 1994 a militantSunni group based in Pakistan and possibly linked toal-Qaeda was suspected of the bombing of the shrine of theseventh Shia Imam, Reza, in Mashhad, killing 26 people.

In April, Iran was alarmed by an interview on the US-government’s Voice of America with Abdul-Malek Rigi, leaderof Jundullah, a militant group based in Iran’s Baluchistanprovince that ABC News reported was being secretlyencouraged by American in its bloody attacks on Iranianofficials and civilians.

All this leaves Iran ever more wary of Sunni radicalismand hesitant about putting itself at the head of any pan-Islamic militancy through issues like the Rushdie affair.

A former Iranian official once told me Tehran’s fear ofal-Qaeda meant it had no desire to distract its attention.“Al-Qaeda is like a dangerous snake,” he said. “If you seeit attacking someone who says he is your enemy, you will notattract the snake’s attention so it attacks you. With thissnake, there are no effective half measures. Either you killit or leave it free, as wounding it will make it angry andmore dangerous.”

Gareth Smyth is the Iran correspondent for the Financial Times

 

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Consumer Society

UAE – Multimedia boating

by Executive Staff
written by Executive Staff

Dubai’s history has long been associated with the sea. Todaymore than ever, the city rekindles with its marine past.Driven by sustained regional economic growth and oilabundance, prestigious waterside developments such as thethree Palm developments, the World project, the Dubai Marinacomplex to name only a few, sprout from the desert sands.One company has taken close notice to the trend: the KnotikaMarine Mall (KMM) is a new concept in the marine industryoffering a wide range of products and services.

The mall is headquarters to more than 30 companies with acumulated 70% regional market share. “The Knotika Holdingcompany aims at filling the gap between suppliers andpotential buyers by providing products and services as wellas complementary activities such as learning centers as wellas media and events organization arms, all in relation withthe sea” says Wael Joujou, the company’s CEO.

The activities include a publishing house, a TV station, asea school, a marine store as well as the Knotika ExpressServices. The latter activity offers simple solutions forboat aficionados by combining financial services, insurance,transport and registration in one single package. “Thismakes the purchase process a much easier and enjoyableexperience,” Joujou points out. KMM showcases a wideselection of boats and manufacturers from all fivecontinents, promoting an efficient buying process from theneed identification to the last minute detail.

The young GM explains how boat owners have to undergo anumber of unavoidable steps, all requiring complementaryservices that are rarely provided by one single seller.Knotika intervenes at the beginning of the process byoffering first a wide selection of vessels, then helpingidentify customer needs, providing financial and insuranceservices as well as securing transportation or import forthe boat when needed. The company lends potential customersits technical expertise in screening and hiring crews,locating berths, ship maintenance and charter. “We aim tomake all those services come in one place at a guaranteedcompetitive rate. We also give customers insight into a hugeindustry and support their buying process, acquiring theirtrust by pointing them in the right direction,” underlinesJoujou.

Waterfront property developments boost boatsales

With the recent boom in waterfront property constructionin Dubai and a growing network of marinas expanding acrossthe Gulf area, the marine industry is receiving a tremendousboost, on which Knotika is capitalizing. “The UAE is still apremature market with tremendous potential, where theyachting industry takes at the moment the shape of a hockeystick curve,” says the company executive. He explains thatfor the time being supply remains higher than demand, themajor industry hurdle residing in the limited availabilityof marinas and berth. “The trend is supposed to reverse froma two to a ten year period with suppliers witnessing agrowth of 20 times their present turnover,” he adds.

“Although sales have progressed, the sector is stillunderdeveloped and clients have not been able yet to keep upwith supply,” says Joujou. On the other hand suppliers areincreasingly offering improved products and greaterselections as well as trying to educate buyers. New localentities are joining the industry race with internationalcompanies planning local production bases in the UAE wherelabor costs, land availability, low customs andtransportation fares can make prices more competitive by a20 to 40 % margin.

As for the products in demand in the UAE market, fishingboats are a big hit. “There is a potential market for sailboats … which combine a sport activity with yachting. In thecoming decade, we expect sail boats market share to increaseup to 50% while the remaining market is dominated bymotorboats. For now I would say actual sail boat marketshare is 5%,” Joujou reckons. In the CEO’s viewpoint,smaller boats can act as catalysts, appealing to the “newrich” executives with no real boating experience. Ideally,this activity will be practiced in the new WaterfrontProjects marinas and sheltered bays under development.

As the KMM pilot project proves to be a success, thecompany is expanding in the next few years, reaching the farshores of Jeddah, Qatar, Bahrain, Abu Dhabi, Kuwait andOman. A franchising option is also currently underway, withtwo contracts expected to be signed at the end of 2007.

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Editorial

The New Middle East

by Yasser Akkaoui
written by Yasser Akkaoui

With the announcement of the creation of SolidereInternational, Lebanese entrepreneurship can once again holdits head high. Again, it has proved its credentials anddemonstrated that it can grow well beyond its borders evenwhen it is burdened by internal crises and politicalinstability. For international investors know that Lebanesebusiness acumen is resilient and operates outside mainstreamMiddle East rhythms and their commitment to investment inLebanese ventures has remained undimmed.

Solidere International is part of a more vibrant, robust andforward looking Middle East, a Middle East fuelled not byconflict and hate, but by a dynamic corporate vision and thehunger to compete at the highest level, to create newcorporate entities and deliver wealth, prestige, innovationand prosperity. Nowhere has this new spirit been moreevident, nowhere has demonstrated more the maturity and thediversity of the region or highlighted its remarkablecorporate development better than the Dubai InternationalFinance Center (DIFC), the Qatar Financial Center and thesoon-to-be built King Abdullah Financial District.

All are responding to a new wave of private equityinvestors, who are forging ahead in a regional bid todiversify what was a vulnerable, one sided, oil-basedregional economy. These hubs are responding to a newappetite. With wise public sector support and clearlydemarcated policy, they can complement one another and evenoffer opportunities for other similar hubs to spring upacross the GCC and across the Middle East.

And finally, into this new zeitgeist comes a new andexciting player, the Arab woman executive. More and more, weencounter senior team members and team leaders, not tomention CEOs, CTOs and CFOs, who are Arab women and who areexcelling in their position. And let’s not forget those Arabwomen who have made it as entrepreneurs, who have shed theapron for the two-piece and are taking their companies tothe forefront of regional and even global business.

They have all cut their teeth in a male-dominated world, inthis most male-dominated culture. They have shown thehighest level of professionalism, impressive business savvyand the desire to succeed in an environment in which toooften the male ego has been the driving force. They havecome in and shown us that a level head, an efficientattitude, determination and an analytical mind are more thana match for the often testosterone-fuelled bluster of theirmale colleagues.

Not only do we accept them, respect them and learn fromthem, they also make us rich!

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Financial Indicators

Global economic data

by Executive Staff
written by Executive Staff

Journalists killed on duty 1992-2007

The Committee to Protect Journalists applies strict journalistic standards when investigating a death. It considers a case “confirmed” only if it is reasonably certain that a journalist was killed in direct reprisal for his or her work; in crossfire; or while carrying out a dangerous assignment. It does not include journalists who are killed in accidents – such as car or plane crashes – unless the crash was caused by hostile action (for example, if a plane were shot down or a car crashed trying to avoid gunfire).

It includes only confirmed cases in our database and in the statistical analysis above. If the motives are unclear, but it is possible that a journalist was killed because of his or her work, the Committee to Protect Journalists classifies the case as “unconfirmed” and continues to investigate to determine the motive for the murder. 

*Adds up to more than 100 percent because more than one category applies in some cases.

**CPJ considers justice fully served when both the perpetrators and masterminds are convicted. If perpetrators are convicted, but the intellectual authors are not, CPJ classifies the case as partial justice.

Older workers

Persons aged 55-64 in employment as % of the population of same age group

OECD countries must get more people into employment if they are to boost living standards and maintain welfare services. That is the message from the OECD Jobs Strategy 2006. Some population groups merit particular policy attention. For instance, only 65% of women of working age are employed in the OECD, versus 87% of prime-age men. Meanwhile, premature retirement and barriers to getting a job affect older people that wish to work. In several countries, including Italy, less than a third of 55 to 64 year olds were in employment in 2005, compared with over 60% in the US and Japan, and nearly 85% in Iceland. The Jobs Strategy sees four pillars to effective employment policymaking:

A: Setting appropriate macroeconomic policy

B: Removing impediments to labor-market participation and job-search

C: Tackling obstacles to labor demand

D: Facilitating the development of labor-force skills and competencies

Healthcare spending

Public and private spending, per capital

Healthcare spending has grown faster than GDP in every OECD country except Finland between 1990 and 2004. It accounted for 7% of GDP on average across OECD countries in 1990, but reached 8.9% in 2004. Spending is projected to increase as a share of GDP due to costly new medical technologies and population ageing. The public share of health spending – 73% on average in 2004 – has fallen in some countries, but has risen in others. This includes the US – 40% to 45% in 1990-2004 – where, despite a dominant private sector, US public spending per capita in health remains higher than in most other OECD countries.

Some workers will inevitably be in jobs for which they are overqualified, but the rate of overqualification is higher among foreign-born populations. In Italy and Greece, immigrant overqualification is particularly high compared with native populations. Immigrant overqualification is also relatively high in Norway and Sweden, though this reflects refugees rather than economic migrants. While the native/ foreign gap in overqualification rates is narrower in the UK and US, these countries have respectively the fifth and seventh highest overqualification rates for native-born workers of the 21 countries in

Youth and traffic fatalities

OECD countries

Proportion of youth in the population: 10%

Proportion of youth in driver fatalities: 27%

Traffic crashes are the single greatest killer of 15 to 24 year-olds in OECD countries. These drivers pose a greater risk than other drivers to themselves, their passengers and other road users. The problem also imposes great social and economic costs on individuals, families and societies. In the US alone, government estimates put crashes involving 15 to 20 year-old drivers at $40.8 billion in 2002. Some 8,500 young drivers of passenger vehicles were killed in OECD countries in 2004. Death rates for 18 to 24 year-old drivers are more than double those of older drivers. Moreover, death rates for young men are consistently higher than those of young women, often by a factor of three. In other words, even where overall road safety is improving, young driver risk is not.

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Financial Indicators

Regional equity markets

by Executive Staff
written by Executive Staff

Beirut SE: Blom  (1 month)

Current Year High: 1,550.85       Current Year Low: 1,168.36

 What some analysts camouflaged as “the events in North Lebanon” in the last third of May wiped out modest gains, which the BLOM index had made in the first part of the month. But owing to its resilience and apparent long breath of many investors, the index closed at 1,223.01 points on May 24, within half a point of its close on April 30. The mid-month top mark was 1,248.81 points on May 17. Solidere accounted for the bulk of trading volume in the nervous fourth week of the month but held its ground, all things considered. Main banking stocks Audi and BLOM also fared respectably, with Audi trading above $63 and BLOM at $70 and higher throughout the month. Byblos Bank confirmed that it bought 6.6% of Jordan Ahli Bank.

Amman SE  (1 month)

Current Year High: 6,920.89       Current Year Low: 5,267.27

The Amman Stock Exchange trailed its peers with a drop from 5,992.10 points on May 1 to 5,753.89 points on May 27, a 4% weakening. Although government officials and several companies used the World Economic Forum to announce investment initiatives, the ASE was listless because of the troubles in Palestine and Lebanon. Among the announced deals, Jordan Phosphate Mines teamed up with Bahrain’s Venture Capital Bank for a new $65 million chemicals complex. Kuwait Finance House-Bahrain will establish a new investment bank in Jordan with $50 million capital while Bank of Jordan got its license for Syria. According to an ASE publication, first-quarter earnings for 95 listed companies were up 50.4% from a year earlier and the banking sector reaped 65% of the total earnings.

Abu Dhabi SM  (1 month)

Current Year High: 3,833.94       Current Year Low: 2,839.16

The Abu Dhabi Securities Market shot up almost 600 points, or some 20%, between May 1 and May 27. This rally has lasted for two months and made the ADSM the top gainer among GCC bourses for the year to date. On May 27, the ADSM jumped 4.4% and closed at 3634.93 points, an eight-month high. Energy, real estate, and banking stocks had the most pizzazz with Taqa and Aabar Petroleum among the stocks in demand. The two energy stocks went up 33% and 37%, respectively, in May but were still outdone by real estate stocks Aldar and Sorouh, which climbed 45% and 53%. Fujairah National Insurance made its debut. At the end of the month, ADSM and the Bahrain Stock Exchange signed a memorandum of understanding.  

Dubai FM  (1 month)

Current Year High: 4,985.39       Current Year Low: 3,658.13

The Dubai Financial Market’s general index rose from 3,670.47 points on May 1 to 4,480.80 points on May 27. The gain of more than 20% mirrored that of the ADSM this month, but due to the DFM, ended the reporting period only 6.9% up for the year to date. Dubai saw the UAE’s second largest initial public offering for 2007, from real estate firm Deyaar. Retail investors pushed demand up to over $12 billion, or 14 times the $880 million share offering. Good performers on the DFM included Dubai Islamic Bank (up 31%), and the DFM stock (up 20%) in May. Emaar Properties  closed at AED12.35 on May 27. The UAE market regulator noted approvingly that for the first time, all listed companies met their results reporting deadlines for the first quarter.

Kuwait SE  (1 month)

Current Year High: 11,403.40     Current Year Low: 9,164.30

The Kuwait Stock Exchange ranked second among GCC bourses in 2007 index performance at the end of May, with a 13.27% increase for the year to date. Achieving its climb more steadily than the meteoric Abu Dhabi exchange, the KSE index moved from 10,776.40 points on May 1 to 11.403.40 points on May 27 – its highest stand since end of February 2006. Shares of MTC were in the limelight with rumors of strategic share buying by regional investors. The company formally denied that there was any buying or selling of strategic stakes in MTC or its African subsidiary, Celtel. Kuwait Finance House saw good demand and its shares went up 30% in May. In macro news, Kuwait stirred up the GCC by announcing its switch from a dollar peg to a basket of currencies, which was read as nay to the intended GCC currency union.  

Saudi Arabia SE  (1 month)

Current Year High: 13,509.09     Current Year Low: 6,916.85

The Saudi Stock Exchange remained volatile compared to its peers. From 7,574.48 points on May 1, the TASI moved lower in the first week and closed at 7,667.92 points on May 27. Sabic made headlines by purchasing the plastics business of US manufacturer GE for $11.6 billion. Saudi Kayan Petrochemicals, a Sabic affiliate, was the biggest IPO catch last month with a SR6.75 billion offering that was subscribed almost five times over. A bundle of five insurance firms offered between 31% and 40% of their capital and met good demand. The cement sector was the strongest gainer in the third week of May, after producers hiked their prices. Although the government mandated revocation of the price increases after a week, the companies’ outlook remains good. Agriculture was the most volatile sector in May.

Muscat SM  (1 month)

Current Year High: 5,956.46       Current Year Low: 4,657.16

The Muscat Securities Market showed further bullish sentiments in May and climbed from 5,807.53 points on May 1 to 6,092.65 points on May 27, giving the MSM a 6.7% gain since the start of 2007. BankMuscat continued to push for negotiations over an acquisition offer it made for Alliance Housing Bank (AHB), a bank with market capitalization of $205 million. The AHB board rejected the offer by BankMuscat, Oman’s largest bank with $2.95 billion market cap, citing other regional suitors. BankMuscat offered a 34% premium on the share price of AHB as of early May and the stock has since gone up by about one third. Oman United Insurance Company and privately owned Al Ahlia Insurance, however, called off a merger plan.

Bahrain SE  (1 month)

Current Year High: 2,298.67       Current Year Low: 1,996.68

The Bahrain Stock Exchange was the fourth GCC bourse with a steep ascent during the merry month of May. In a 9% gain, its index rose from 2106.70 points on April 30 to 2,298.67 points on May 27 – making good for losses in the first four months of the year and ending the month on a high note. The kingdom had its share in the month’s primary market glee through the successful initial public offering of Seef Properties, which met strong subscription demand from institutional investors. After announcing management changes and expansion plans, shares in Batelco moved up in May but the Bahraini operator denied rumors that it was talking with an international sector firm over selling it a 20% stake.

Doha SM: Qatar  (1 month)

Current Year High: 8,276.65       Current Year Low: 5,825.80

Continuing on its upward path from April, the Doha Securities Market took May in stride with an 18% gain from 6571.13 points at the start of the month to 7,749.37 points on May 27. With the concentration of gains in the second half of the month, the market’s main movers included Barwa Real Estate, Nakilat, Industries Qatar, and banking shares, including Doha, Rayyan, and International Islamic banks which all advanced by margins of more than 20%. Some investors cashed in on gains with profit taking at the end of the month.  Barwa Real Estate made news with a $1.1 billion Egyptian land purchase for a new super-sized residential project in New Cairo. Qatar Islamic Bank said it will set up a sharia-compliant subsidiary in London.

Tunis SE  (1 month)

Current Year High: 2,712.33       Current Year Low: 1,861.15

 After a third consecutive month of moving sideways, the Tunindex closed at 2,568.90 points on May 25, down 30 points from its close on April 30. This made the small Tunisian bourse the month’s most unspectacular performer among the three North African exchanges but kept it up by 9.68% when compared with the start of the year. Market cap leader SFBT saw its stock drop by 4% to TD79.98, while Banque de Tunisie lost 3% and Tunisair share prices weakened by 7% between May 1 and May 25.

Casablanca SE All Shares  (1 month)

Current Year High: 12,723.23     Current Year Low: 6,563.27

The Casablanca All Shares Index started the month with a week of gains to a pinnacle of 12,723.23 points on May 8 but then selling set in and the index shed 14% in a week’s trading that saw it briefly dip below 11,000 points on May 15. To the end of the month, the index picked up another 500 points and closed at 11,464.60 on May 25. Despite its downward fluctuation, the Moroccan bourse is still the best performer, index-wise, in North Africa for the year to date, with a gain of 19.4% from the start of 2007. Maroc Telecom dropped 10% and leading bank Attijariwafa Bank shed 18% of its market value in the middle of the month in the downtrend that showed across several sectors before the bourse’s slight recovery in the fourth week of May. Local brokers described the market’s dip as expectable profit taking. 

Cairo SE: Hermes  (1 month)

Current Year High: 68,274.93     Current Year Low: 41,965.37

The Hermes index for the Cairo & Alexandria Exchanges was 9.39% up for the year on May 27. Entering the month at 65,582.80 points, the index climbed to 68,274.93 points on May 27. Analysts were less ebullient about CASE than about the GCC markets last month but said that telecom and banking shares did reasonably well, the latter with expectations that several regional banks will compete to buy a significant stake in Al Watany Bank. Piraeus Bank Egypt launched a $53 million rights issue. Sodic, the real estate investment company that signed an urban development contract for Sodic land with Lebanon’s Solidere, had to acknowledge that merger talks with another company failed. Sodic’s stock dropped 13% in May.

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Special Report

Public Private Partnership can boost ME economic development

by Executive Staff
written by Executive Staff

Growth in the MENA region is enticing strategic partnerships between governments and private companies to create infrastructure critical to support and sustain growth.

A Public Private Partnership (PPP) provides a mechanism for the forging of the strengths of the private and public sectors to deliver more economical, higher quality services to the community.

Nizar El Hachem, Principal – Head of Investment Banking at Injazat Capital Limited (ICL), the first regional bank to have submitted a proposal for a $3 billion dollar PPP deal in the region – tells us more.

Provide us with a broader understanding of the PPP concept.

A PPP involves a government engaging the private sector to design, construct, finance and operate infrastructure traditionally developed by governments. In return, the private operator is rewarded with revenue generated from tariffs levied on users of the infrastructure, periodic service payments from a government, or a combination of both. Typically such an agreement spans 25-30 years.

Is it true to say that the current development of the GCC region provides the perfect platform for PPP arrangements?

The region is experiencing significant economic growth that is expected to continue well into the future, this combined with the fact that GCC countries have some of the highest population growth rates in the world provide private enterprises compelling incentive to invest in the area through a PPP. Likewise, governments in the region are looking for innovative solutions to ease the financial burden of providing quality services across all sectors particularly health, transportation and education.

What are the key principles of a PPP?

A PPP allows each of the parties involved to concentrate on activities that best suit their respective skills. The government ministry will focus on developing policies based on service needs and requirements, whilst the private sector consortium goal is to deliver the services at the most efficient cost and provide mechanisms for risk transfer.

Why should governments consider PPPs?

The current strain on infrastructure as a result of the development across the region is placing increased pressure on governments to renew, maintain and operate existing infrastructure and to build new infrastructure. The ramifications for governments with budgets insufficient to meet levels of consumer demand for quality infrastructure in each sector are significant.

The decision to enter into a PPP arrangement is driven by two major criteria:

1. Will the quality of service provided by the private sector continue to meet/ exceed government and the general public’s expectations?

2. Will the service provision provide value for money for both the government and the general public?

For the government, value for money will be achieved if the provision of services under private sector management results in cost savings and improves service quality to the general public.

The key benefits include:

  • Improvement in the quality and quantity of public services and public access to improved services now, not when a government’s spending programs permit
  • Deliver greater value for money compared with that of an equivalent asset procured conventionally through government
  • Transferring the risk of performance of the asset to the private sector
  • Reduction of government debt and freeing up of public capital to spend on other government services
  • Bringing in innovation and enhancing best practices resulting in reduced cost, shorter delivery times and improvements in the construction and facility management processes
  • Enhanced investment decisions based on symmetrical information
  • Decreasing the tax burden on citizens who do not need to pay higher taxes to finance infrastructure development
  • Supporting the reform efforts of the public sector 

What are the key success factors for the structuring and execution of a PPP?

The key structural considerations for a government and the private sector are represented in the diagram below.

In addition to these structural considerations, there are five requirements key to the successful execution of the PPP:

  • Political support
  • Public support
  • Enabling legislation
  • Expertise
  • Project prioritization

A real challenge considering the nature of the PPP investments appears to be the financing of projects. What size of investment is called for and what type of financiers are attracted?

Typically, PPP projects require large investments  – for example, the recent proposal submitted by ICL in the healthcare sector approximated $3 billion. Fortunately, a number of sources of financing are available to the private sector. Equity and debt financing, government to government debt or government funding in the form of aids and grants are potential sources of financing that may be utilized.

Financing requirements will differ by sector and region and may be capital intensive. A valid regional concern for lead managers in the Middle East is the prominence of Islamic banking. Islamic banking accounts for some $15 billion in sukuks, $500 billion in Islamic assets and $350 billion in Islamic funds. Further, the sophistication of Islamic financing tools are driving complex financing schemes that are attracting an increasing number of institutional and individual investors. It is evident that expertise and networks of the lead manager in both the sector and the region can be crucial to securing project funding and ICL has a clear advantage in the MENA through the provision of its sharia-compliant financial services and well established network with financial institutions.

The sector and region in which a PPP is conducted will also dictate the type of investors attracted to participate. In the emerging market for PPP projects in the Middle East, partners and shareholders of ICL have displayed a strong appetite to participate in investing and financing activities. In addition, international organizations are breaking ground in showing a willingness to co-finance PPPs through grants. ICL was successful in securing the support of international organizations such as the OECD in their recent proposal.

Who are the key stakeholders and how do they contribute to a successful PPP project?

A diverse consortium of stakeholders collaborates to reach the common objective of a PPP project. The government ministry holding the infrastructure that is the focus of the PPP provides:

  • Objectives of the PPP in consideration of community expectations
  • Education of the public on the benefits of the PPP
  • Legal and regulatory environments suitable to PPPs

Lenders, equity investors and consultants provide the funding required to obtain private sector involvement in the PPP to provide an off-balance sheet transaction.

Design, engineering and construction contractors bring the skills and experience in infrastructure development and construction.

Project managers manage and monitor the performance of the project to PPP objectives and operators and managers bring the skills and experience in operating in the sector.

Special purpose vehicles, formed by the private sector participants for the delivery of the PPP project oversee the delivery of the PPP project.

Insurers, legal and financial advisors provide administrative, legal and financial support to the PPP.

Finally, consultants provide the link between the government ministry and private sector financiers.

In the recent $3 billion PPP proposal, what was ICL’s role?

The role of ICL entails guiding a PPP from inception through the inception, structuring, fundraising, and finally management stages.

The attractiveness of ICL in the recent $3 billion proposal submitted in the North Africa region was promoted through its broad corporate advisory experience and the strategic networks relevant to each stage.

At the inception stage ICL performs the necessary market research to collect information relating to the PPP from the government and other relevant sources, as well as and identifying and resolving critical strategic issues.

In the structuring stage ICL utilizes its experience in financial modeling, valuation and funding options appraisal to develop an appropriate deal structure, manages the tender process and identifies consortium partners.

At the fundraising stage, ICL sets the investment terms and fund raising process, ensures the optimal financial management of the transaction and provides treasury management to the PPP.

In the management stage, ICL monitors and measures performance of the PPP to ensure key strategic objectives.

The success of PPPs has spread internationally with application to a diverse number of projects. What particular sectors are taking advantage of PPPs?

Sectors where PPP has been applied in the United Kingdom, Europe, Australia and Canada include:

  • Aviation
  • Road and rail transportation
  • Health
  • Energy
  • Water

How does ICL foresee the future of PPP in the region?

The current regional dynamics, particularly the accelerated economic and population growth, continue to place a significant burden on the existing infrastructure, highlighting the need for the heavy investment in infrastructure in order to support growth and secure a sustainable future. Governments and key financial institutions in the area are becoming increasingly aware of the necessary role the private sector must play in providing the resources required to develop the region and provide citizens with world class standards of living.

The current focus on PPPs as a viable solution to the growing burden on infrastructure in the region is evidenced by the exposure it has received in dedicated summits and through the attention of government bodies region wide. The stage has been set for PPPs and ICL believes the sophistication of the current financial markets is adequate to facilitate private sector involvement in the region.

All indications make it clear that the future delivery of traditionally government funded services and infrastructure lies in strategic alliances with the private sector.

Structuring a successful PPP project

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Feature

Money Matters by BLOMINVEST Bank

by Executive Staff
written by Executive Staff

Regional stock market indices

Regional currency rates

Emaar Economic City and Saudi Oger sign $132 million contract

Saudi Arabia’s Emaar Economic City (EEC), responsible for the development of King Abdullah Economic City (KAEC), signed a SR494 million ($131.7 million) construction deal with Saudi Oger. Under this contract, Saudi Oger will build four residential towers in the KAEC on the Red Sea north of Jeddah. The towers, comprising 616 apartments, are expected to be completed in 16 months and include outdoor swimming pools, round the clock security and maintenance as well as spacious lobbies. ECC was established in 2006 in an aim to develop the KAEC. The city will be constituted of six components including the Industrial District and the Financial Island. Saudi Oger was established in 1978 in Saudi Arabia as a construction company by the former Lebanese Prime Minister Rafik Hariri. The company currently employs a staff of 27,000.

Egyptian CIB Q1-2007 Profits Up 35%

Egyptian Commercial International Bank (CIB) reported net profits of EGP254 million ($44.8 million) in Q1-2007, up 35% year-on-year. This increase is mainly attributed to 30.9% year-on-year increase in operating profits, driven by a 51.6% increase in net fees and commissions. The bank’s total assets reached $6.6 billion in Q1-2007, up 20.3% year-on-year. The bank’s loans rose 29.7% to 3.6 billion, while its customer deposits increased 22.3% to $5.6 billion for the same period.

IMF: GCC Countries’ GDP at $749.7 billion in 2007

The International Monetary Fund (IMF) issued its Regional Economic Outlook: Middle East and Central Asia, in which was stated that the nominal GDP of the Gulf Cooperation Council (GCC) countries, namely Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE), is expected at $746.9 billion in 2007, up from $718 billion in 2006. However, real GDP growth rate for the GCC countries is expected to drop slightly from 6.0% in 2006 to 5.6% in 2007. This drop is mainly attributed to the decline in both oil prices as well as output of most of the GCC member countries. As such, only Saudi Arabia will witness an expected rise in its real GDP growth rate to 4.8% in 2007 from 4.6% in 2006. As for Oman, the report expects that it will maintain a stable real GDP growth rate of 6.0%, only slightly different than the 5.9% recorded last year. Kuwait’s real GDP growth rate will drop from 5.0% to 3.5%; while Bahrain, Qatar and the UAE will witness growth rates of 6.9%, 8.0% and 8.2%, down from 7.7%, 8.8% and 9.7% respectively. In terms of nominal GDP values, Saudi Arabia’s GDP will rise from $348.6 billion in 2006 to $354.9 million in 2007. Oman’s GDP will be at $38.3 billion, up from $36 billion; while Kuwait’s GDP will register $95.4 billion, down from $96.1 billion.

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North Africa

Tunisia: Banking on it

by Executive Staff
written by Executive Staff

The May visit by IMF Deputy Managing Director Murilo Portugal saw him deliver a combination of praise for efforts to strengthen Tunisia’s banking sector, with warnings regarding the continuing worry over non-performing loan (NPL) levels in the system. Banking sector reform was highlighted as a priority in the 11th Presidential Plan, which started this year and will conclude in 2011.

The Central Bank, Banque Centrale de Tunisie (BCT), is working to implement Basel II requirements across the banking system and driving up standards of transparency and governance, as well as tackling the high levels of NPLs.

As Portugal from the IMF stated: “I share with the authorities the view that strengthening the financial sector is a priority. In particular, efforts are underway to reduce the level of NPLs. I am encouraged by the progress in the implementation of most of the recommendations of the Financial Sector Assessment Program conducted in collaboration with the IMF and the World Bank.”

In a report in March, the IMF highlighted lowering the NPL ratio and ensuring better provisioning for them as a “key priority.”

The banking system in Tunisia is well-developed by regional standards and geographically extensive. Institutions present include clearing banks, development banks, merchant banks and offshore banks, and specialist financial establishments such as factoring companies, debt collection agencies and leasing companies. Tunisians have a choice of 20 commercial banks, eight offshore banks and two investment banks, and more than 900 banks give population coverage of around one bank for every 11,000 people.

BCT is currently working to ensure the banks adhere to international standards for debt and reserves. As part of this drive, the Basel Committee’s capital adequacy recommendation of a minimum risk-weighted capital/asset ratio of 8% has been made a requirement for the banks.

Next year, Tunisia joins the World Trade Organization (WTO), meaning that banks will be required to adhere to international norms, which could prove costly in the short term but will help them manage risk and reduce costs.

The authorities have also moved to bring down the level of NPLs, which have hamstrung the development of Tunisia’s financial sector, and improve provisioning. Tax legislation has been altered to incentivise banks to meet the BCT’s 70% provisioning objective by 2009, which the IMF has said “must be considered a minimum.” Meanwhile, public-private organisations known as Sociétés de Recouvrement de Créances (debt recovery agencies) have been founded to purchase non- and under-performing debts from commercial banks. However, in March, the IMF reported that “Up to now the amount recovered on the loans transferred (TND 1.3 billion [$1  billion]) has been modest.”

There have also been changes in procedures for realizing real estate collateral, and the rules regarding the writing off of bad debt have been made clearer, while a new NPL bureau will provide data on total NPLs by debtor and the classification attributed according to prudential regulations.

Contentious issue

NPLs have long been an issue for Tunisia. In 1993, they totalled 34% of credit. While the ratio dropped to 18.8% in 1999, it has since risen to 20.9%. The reason for the malaise is attributable to high levels of lending to the tourism sector in the 1980s, fueling a boom in construction outstripping demand. The thinner margins that resulted caused a glut of defaults. Another area that received a lot of funding was agriculture. Both sectors are mainstays of the Tunisian economy, and vulnerable to geopolitical problems in the former and climatic factors in the latter – the terrorist attacks and droughts of recent years have not helped.

NPLs are a particular problem in the state-owned banks, which average over 20%, while most private banks have ratios below 10%, some close to zero. Provisioning is also higher in the private sector, at 82%, while the national average is 57%.

Consumers are being encouraged by BCT and the government to rein in their personal debts, not allowing them to exceed 40% of their gross salaries, and the bank is keen to limit lending on consumer goods (excluding houses and cars) to three years.

The IMF reports both praised the Tunisian authorities’ efforts to reform the banking sector and highlighted areas in which serious improvements are still needed, notably NPLs. In this area, as in others, progress is being made, albeit from a weak situation. If targets are met, Tunisia should be on the way to meeting international banking norms.

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