Consumer Society

High-end watches prove time is money

by Executive Staff
written by Executive Staff

The actor Daniel Craig made one of the most shamelessproduct plugs in the history of cinema when he flashed andthen further name-checked his Omega Seamaster mid-waythrough his debut as the new James Bond in Casino Royale.The Omega has been the standard issue timepiece for thelatter-day Bonds (though in the early films, and in the IanFleming novels on which the 007 film franchise is based,Bond never wore an Omega but rather a Rolex Oyster Perpetualor a Rolex Submariner). Still, whatever the watch, themessage remains the same—nothing bespeaks style and statuslike a wrist thrust from beneath a cuff to flash a majorpiece of high-end Swiss precision.

Watches dominate luxury goods sales

The wannabe Bonds of the world—and in the current globaleconomic climate there are many, both aspirers and oldmoney—are likely to start with the tailored suit and endwith the Aston Martin. But in between they will have toshell out for the watch. Perhaps as a result, within thegreater luxury goods market, the watches and jewelrycategory is surging, particularly in emerging markets suchas Russia, China, India and the Middle East.

“We have witnessed huge growth in the market for luxurytimepieces in the last three years, and it is clearlyshowing in Swiss exports to the region,” says George Becharaof Zenith, the high-end and venerable watchmaker now ownedby LVMH (Louis Vuitton Moet Hennessy) and which arrived inthe Middle East market early in 2004.

Regionally, says Bechara, who is based in the booming UAE,“Dubai is our … biggest market in terms of presence. Thegrowth in Dubai in units between 2005 and 2006 was up 78%,and in terms of turnover it was up 33%.”

Zenith’s parent company, LVMH, is widely considered theindustry leader in the global market for luxury goods. Withscores of brands under its name, LVMH holds a diverseportfolio that ranges from wines and spirits (Moet Chandon,Veuve Clicquot) to high-end fashion (Louis Vuitton, MarcJacobs) to fragrances and cosmetics (Christian Dior,Guerlain) to watches and jewelry (Zenith, Tag Heuer,Chaumet).

In 2000, watches and jewelry contributed only 5% of LVMH’soverall sales. By 2006, however, the category trumped allothers in terms of growth as sales increased 26% on theprevious year. A joint venture between LVMH and De Beers,the largest diamond supplier in the world, has no doubtcontributed to the category’s newfound muscle. Notcoincidentally, De Beers opened its first boutique in Dubailast year.

The market for luxury watches—defined as timepieces thatretail for upwards of $2,000—moved into the Gulf en massearound 2002. That year, Dubai imported some 700,000premium-quality Swiss watches, which at the time was roughlyequivalent to the size of the city’s population.

All major players make it to Dubai ontime

All the major players in the luxury watch market are nowpresent in Dubai—Rolex, Cartier, Chopard, Omega, Cartier,Patek Philippe and the Richemont Group—another global luxurygoods powerhouse, with its regional headquarters in theHazel W. S. Wong-designed Emirates Towers. Richemontincludes IWC, Piaget, Jaeger-LeCoultre, A. Lange & Sohne,Vacheron Constantin, Officine Panerai, and Baume & Mercier.

Dubai’s phenomenal growth is certainly fueling the market.According to a recent—and notably critical—article on Dubaiin the German newspaper Der Spiegel, there were just fourcompanies operating in Dubai 20 years ago. Now there are6,300 from more than 100 countries. The ruling Maktoumfamily expects the local population to grow from two millionto 10 million, and wants 20 million tourists to pass throughDubai every year. Given the potential for triggeringconspicuous consumption, it’s no wonder watchmakers havebeen flooding money into establishing headquarters andboutiques for themselves in Dubai, and then embarking uponan aggressive ad campaign.

“The growth of Dubai [has been] tremendous and crucial inbenefiting Zenith’s business,” says Bechara. “The hugeinvestments that are taking place here, the most importantcompanies setting [up] their regional offices here, the fuelprices, the attraction of tourists throughout the year—allthis brought us good business.”

Regionally speaking, the market for luxury timepiecesremains strongest in Saudi Arabia and the United ArabEmirates, though Kuwait, Qatar, Bahrain and the Levant offersizable room to grow. Rolex still leads the pack in terms ofmarket share (with 15% of the Saudi market alone). But whenit comes to the highest of high-end watches, market successisn’t always a matter of volume. Often it is a matter ofvalue.

Ziad Annan of Rolex in Lebanon says sales figures have beenimpacted by the political situation in the country, whetherthe war with Israel in the summer of 2006 or the oppositiondemonstrations that have, for four months and counting, madea ghost town of Beirut’s central district, where the upscaleRolex boutique is located.

Despite such extenuating circumstances, Annan notes that twonew Rolex timepieces have been particularly successful oflate—a Rolex Rolesor that was fashionable in the 1970s andre-launched last year and a new Rolex GMT Master II. Bothproducts have proven remarkably popular in the Lebanesemarket.

So where will the sector for exquisite watches—and bejeweledmobile phones—go from here? After five years of surginggrowth and breakneck expansion fueled by the outrageous paceof development in Dubai, it seems likely that the majorplayers in the region will turn their attention toconsolidating brand loyalties.

In 2006, says Zenith’s George Bechara, “we had a huge yearin terms of launching new products. This year we are morefocused on strengthening the existing collections, with somenovelties that will give a push to the brand.”

One factor that may contribute favorably to a period ofmarket consolidation is the arrival in the UAE of theauction houses Christie’s and Sotheby’s. Certainly much inkhas been spilled over the sales of international modern andcontemporary art staged by Christie’s in May 2006 andFebruary 2007. But it is worth noting that on Jan. 31,Christie’s held a major auction of jewels and watches in theEmirates Towers Hotel, a sale that trounced the totals ofboth art auctions by raking in $11.8 million. They were nomillion-dollar paintings on the bloc, but a marquise-cutdiamond ring by Van Cleef & Arpels went under the hammer for$1.2 million. The sale also featured watches by PatekPhilippe, Rolex, Cartier, Piaget, Chopard, and a limitededition Corum in 18-carat white gold, 20 jewels, and a whitedial with verses from “The Thousand and One Nights” in blackenameled Arabic script.

According to Michael Jeha, managing director of Christie’sDubai, there are 45 to 50 people working on the Dubai marketfor Christie’s. All the watches and jewels to be sold attwice yearly auctions will, for the time being, be sourcedfrom Europe to keep the material fresh. As a result, theauction houses could either edify Dubai-based enthusiasts ofluxury timepieces—or snag competition away from thetraditional watchmakers themselves.

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Jordan-US QIZ could be better

by Riad Al-Khouri
written by Riad Al-Khouri

The Jordanian economy has done pretty well recently, boasting high growth rates, attracting attention from regional investors, and enjoying increasing exports.Regarding the latter, the kingdom chalked up close to $4.1billion in national merchandise exports last year, up by almost 13% on 2005. Traditional Jordanian production such as fertilizers (the country’s second most important good sold abroad) still accounted for almost 8% of exports in 2006, with potash, another mainstay of the old Jordan economy, constituting over 6%. However, other products with a higher value added have become more prominent in the past few years. These include pharmaceuticals, currently the country’s third most important export, with a share of over7% last year, and most notably clothing, which has been number one for much of the present decade. Growing steadily from a very modest share in the late 90s, the clothing industry was responsible in 2006 for just over 30% of totalJordanian merchandise exports, a proportion roughly maintained since 2003, with the value of Jordanian clothing exported last year expanding by 18% compared to a rise of just over 5% in 2005.

So where are all these clothes sold? You’d think that shoppers in Lebanon, Iraq, or the GCC countries, traditional outlets for Jordan’s products, would see Jordanian garments in their local stores, but that is rarely the case.Actually, you would have to go to New York or LA to find most of these clothes. Is that a bizarre situation? Not at all, if you consider the importance of Middle East diplomacy to Jordan’s economy. In fact, Jordan’s success in this business rests on a break it got over a decade ago from its favorite uncle, a person with a red, white and blue top hat called Sam, with so-called Qualifying Industrial Zones(QIZs).

In the Zone

Under the QIZ—blatantly designed to reward Jordan for its pro-American stance and nudge the kingdom even closer toIsrael—a product with 11.7% added value from Jordanian, 7-8%from Israeli, and the balance of 35% from either country, the US or Palestine, enjoys duty-free entry into theAmerican market. For example, if a skirt costing $10 is imported into Jordan from India and dyed in Amman to raiseits value to $11.17, it cannot by such a transformation alone enter the US market free of duty under currentJordanian-American trade rules. However, if that same garment also gets, for example, Israeli zippers worth $0.80and American trim costing $1.53, then the finished product has added the necessary amount of value (in this case stipulated at a minimum of 35%) in the correct proportions to qualify for duty- free entry into the US market.

The roaring success of this arrangement has left the US as the main importer of Jordanian products last year, buying more than 31% of the kingdom’s exports, up from a derisory amount in the mid-90s. For various reasons, clothing has turned out to be the major exported QIZ item, with garments(most of which are produced in QIZs) amounting to almost 91%of Jordanian sales to the US in 2006.

Not that the QIZ deal has done that much for Jordan’s economy: for a start, most of the capital and many of the workers at QIZ factories are not Jordanian—as a lot of profits and wages are sent home outside the kingdom, Jordan gets that much less benefit. The other problem is that UncleSam in December 2004 also “rewarded” Egypt with a QIZ deal; as the Egyptians can more cost-effectively produce garments(and for that matter, other products) wanted by US consumers, Jordan QIZs had better watch out. Under theAmerican policy of “competitive liberalization” grantingQIZs to both neighbors seeks to make them more competitive, which is probably a good thing—if the Jordanians are up to it.

QIZ helps plug trade gap

Meanwhile, QIZ has helped Jordan to strengthen what would otherwise be anemic exports of goods, partially plugging a massive trade gap. In 2005, exports of Jordanian goods covered a mere 41% of the kingdom’s merchandise imports, but higher sales abroad from Jordan’s QIZs last year helped bring up the coverage to a little over 45%. The shortfall is partly made up by better figures in Jordan’s services trade balance, but in the end the kingdom regularly consumes more from abroad than it sells to the outside world, with the gap being made up by foreign largesse.

RIAD AL KHOURI is an economist, and Director MEBA Ltd Amman/Senior Associate BNI Inc New York; He can be contacted at [email protected]

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Consumer Society

Dubai asks the question, Yes, but is it art?

by Executive Staff
written by Executive Staff

Until recently, Dubai seemed content with its reputationas a booming former backwater, flush with oil revenues andripe for investment, but absent of any culture saveconspicuous consumption.

Having firmly established its identity as a tax-freecommercial oasis in a politically volatile region, in 2005,the UAE’s second largest emirate decided to accelerate thediversification of its economy away from oil revenues andattract a new breed of foreign capital—artworks.

Riding the wave of skyrocketing international contemporarysales, and underpinned by an emergent class of buyers fromRussia, China, and India, Dubai would position itself as aglobal hub linking hungry, if undiscerning collectors inburgeoning non-Western markets with their more establishedcounterparts in London and New York.

To this effect, Christie’s Auction House opened regionaloffices in Dubai in 2005, and has held three auctions sincethen in which, according to Michael Jeha, Christie’s Dubaimanaging director, 90% of the lots were sold, even if cynicspoint out that between Christie’s twin inaugural auctionsheld last February, jewelry accounted for almost 60% of the$20.5 million revenue. Meanwhile, Christie’s equallyvenerable competitor Sotheby’s has also announced plans toset up shop in Dubai, and sponsored a local educationinitiative for Emirati collectors, artists and galleryowners.

Ambitious art fair

On March 8, the Dubai International Financial Center(DIFC) sponsored the inaugural DIFC Art Fair, moving theemirate one step closer to its goal of becoming what formerBritish galleriste and fair director John Martin calls “acenter of art commerce.”

Nothing if not ambitious, fair organizers expect Dubai’sart market to mimic its rapid commercial growth, and“strategic partner” DIFC reckons the event will become oneof the top five art fairs in the world within three years,rivaling the reigning international triumvirate of Art Baselin Miami, the Armory in New York and Frieze in London.

Given the absence of a thriving gallery scene, anup-and-coming group of local artists and collectors, or arenowned art institute in the deserts of the GCC, the claimmight be dismissed as unrealistic at best and bombastic atworst. But if Dubai has learned anything during its rapidrise to become the Las Vegas of the Arab world, it is how tosell. And once stripped of its cultural pretensions, what isan art fair if not an aesthetically pleasing market?

While, the jury may still be out on both the DIFC fair andDubai’s ability to cut it culturally, its first outing wasnonetheless a good start. The three-day event (andconcurrent global art forum) brought cult galleries togetherwith the marquee names of the art world. Some were drawn bycuriosity, others by the promise of a new class of spender,spawned by a $500 billion oil boom, and others by what werevariously referred to by Ben Floyd the fair’s financedirector as the “incentives,” “bursaries,” and “smallsubsidies” given to a handful of galleries “that we reallywanted on board.”

The 40 exhibitors assembled in the Arena of the MedinatJumeirah resort included Hoxton Square-heavyweight WhiteCube and its slightly less cutting-edge, yet prominentMayfair counterpart Albion; Chelsea mainstay Max Lang andSeoul’s Gallery Hundai. Over $100 million worth of art wasassembled in the chinzy hotel conference center, butgalleries and fair organizers alike declined to reveal thetotal value sold.

“There are different ways to measure success,” Jeha saidwhen asked the total volume of sales. “The attendance andcontent was good, and I know a lot of Indian and Arab artsold, but I don’t know the tallies from western galleries.”

However, based on reports, it seems unlikely thatpetro-dollars, an all-star roster, and a media blitztranslated into bumper sales this time around. “There havebeen a lot of conversations and we’ve sold a few things, butit’s not like the usual levels we see at art fairs like theArmory or Basel where we sell millions,” explained GrahamSteele of White Cube early on the first public day of thefair, who admitted that the customers lacked knowledge.

“They didn’t prepare collectors and there is a lot ofexplaining. People don’t know that this is an iconic DamienHirst,” he says gesturing to an installation of a medicinecabinet stocked with pills. “Or they don’t understand whythis costs £850,000,” he says referring to another signatureHirst butterfly piece hanging nearby. Indeed, none ofHirst’s work—including the most expensive piece at the fair,his “Spot Mini” car owned by British collector CharlesSaatchi and insured for $2 million—sold. White Cube, like Albion, tailored its display toperceived demand, leaving the racy Tracy Emins at home, infavor of more “universal” pieces like a colorful painting ofthe Luis Vuitton symbol.

By Saturday afternoon, 12 of the 30 pieces Albion shippedto Dubai—including eight edition pieces from the Campagnabrothers—chairs covered in a furry orgy of stuffed animalspecies and sold for $18,000 each—had been snapped up, “andnot just by expatriate residents of Dubai,” said stafferMatt Langton, “but by locals too.”

Wide range of interests, but few sales

Elsewhere, interest in a photograph of Yasser Arafat and avideo installation of oil being spilled over a pile of sugarcubes by French-Algerian artist Kader Attia, both selectedbecause they were thought to be “appropriate to the area,”was muted, while at a booth shared by Max Lang, Malca FineArt and Enrico Navara, where pieces ranged from $25,000 to$2 million, reaction was “mixed.”

“We’ve had offers from European, Russian, and Indiancollectors but haven’t closed anything yet,” reported adecidedly unimpressed Lang, adding that Andy Warhol’s iconicdollar sign has had a lot of interest. Navara said localswere remarkably curious about contemporary art, and the“clueless were willing to find out why.” He plans to attendin 2008, and reap the rewards of the education dispensedthis year. Indeed, it was this level of phlegm that was theorder of the day as exhibitors, who forked out between$20,000 to $50,000 for a stand, took the lackluster sales instride. One gallery owner who huffily declared that he had“never lost so much money at a fair” in his career,grudgingly said he would return.

That smaller, regional galleries like Third Line, thefair’s sole Emirati exhibitioner, outperformed theirwestern counterparts (it sold at least half of its 23 works)bodes well for the sustainability of the fair, and theMiddle Eastern art market in general, according to AndréeSfeir Semler, the grand dame of Beirut’s fledgling galleryscene. “Its easy to attract international galleries thefirst year, and maybe the second, but most of them won’texhibit the third year unless the fair offers somethingdifferent from the others,” she explained. “Basel getsstronger every year because it has an identity. They’vestarted nicely here because they have Indian, Persian,Turkish galleries, and we’re from Beirut. And having theinternational galleries attend raises the standard of theevent, but no one is going to come to Dubai to see theWarhols. Regional artists have to draw on their own cultureto make a name from themselves and stop trying to imitatethe west,” she says.

The intersection of globalization and Islam threadedtogether the art on view, including a “Militant Snoopy”action figure wielding a beard and a gun, a $25,000gem-encrusted “Nation of Islam Knuckle Duster” with the wordAllah inscribed in Arabic, and “Diamond Head,” FarhadMoshiri’s glittery gold and black eagle painting, thatfetched $70,000 within two minutes of the fair opening.

John Martin said it is not unusual for new buyers toinitially invest in art from their country of origin, but astheir collection and awareness grow, the focus on aparticular geographic region melts away. “Most of the bigWestern pieces were bought by expats living in Dubai, justas Indian collectors bought most of the Indian work. But asfair gets bigger, Asian collectors will shift towardsWestern art, and vice-versa. We hope to position it as asandbar between the two cultures,” he added.

Most western galleries in attendance were not expecting bigsales, Marin insisted, but came to make connections in anart market with huge potential. Though he expects privatecollectors to be the engine of Dubai’s art market in thefuture, corporations setting up offices in the emirate areanother promising customer-base.

Art is a new staple of investmentportfolios

“Banks invest in contemporary art, not least because youcan hang it on your wall. Banks court wealthy clients, a lotof whom are private collectors, by setting up separate artconsulting branches. Art is becoming a staple of moderninvestment portfolios,” he said.

One needs to look no further than the growing number ofart investment funds for evidence of the growing appetitefor art as an investment vehicle. While the trend is by nomeans new, venture capital funds and financial institutionshave only recently begun to turn their gaze outwards toemerging markets. The question is whether the Middle Eastwill be next, and if Dubai will be able to assume a role asthe “third leg”—a title one gallery owner bestowed on HongKong—of the contemporary art market.

Much like Dubai itself, it is difficult to disengage thehype surrounding the fair from the reality, but Tim Harrisonof HSBC does not think the emirate’s potential as an artmarket has been inflated.

“If you look at the fair next to Christie’s successfulsales and the Louvre (to be built in Abu Dhabi), we areseeing a notable move towards investment in art,” Harrisonsays.

“There is a lot of art being produced in the Arab world,which will find more obvious channels for sale in theregion, and we have Indian collectors coming through. Dubaiis well positioned to be a trading hub for South-Asian,Middle Eastern, and Indian art.”

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Iran‘s home-grown auto market

by Gareth Smith
written by Gareth Smith

It’s an ill wind that blows someone some good. Tehran’s infamous traffic congestion may clog its roads and the lungs of its 12 million inhabitants, but it means big business forIran’s car makers.

Total production of new vehicles reached nearly 1 million for the Iranian year ending March 20, according to Ali RezaTahmasbi, the minister of industries and mines, makingIran’s output higher than Australia and three times that ofIndonesia.

The sector accounts for about 4% of GDP and 500,000 jobs, giving it a pressing importance for Iran’s rulers, while facing an unemployment rate officially at 11% and the prospect of further international sanctions over the country’s controversial nuclear and missile programs.

The strength of Iran’s car industry results not from a vibrant competitiveness geared to a tough world market, but rather from a mixture of high import tariffs, state ownership and petrol subsidized to the knock-down pump price of around 9 cents a liter (rising to 11 cents in May).

The government is keen for Iran to become a regional if nota world-wide auto manufacturer, and so Saipa and IranKhodro, the main domestic companies, are expanding business through exports, setting up overseas production lines and enticing foreign partners into joint ventures at home.

Renault returned to Iran in March after a 20-year absence, investing $150 million in a 51-49% partnership with Saipaand Khodro to make the Tondar-90, a version of the Logan, as mall family car first made by Renault’s Romanian subsidiaryDacia.

The car will have 60% local parts, rising in time to 80%,and Renault and its partners aim to make 300,000 units over three years. As the car went on pre-sale in March, with three models ranging from 82 million rials ($8,870) to 108million rials, Khodro claimed to be registering 22 buyers every minute. Business at the Khodro’s Tehran sales offices was certainly brisk, with customers relying more on memories of Renault’s past reputation in Iran than any detailed information on the new car.

The move is a clear challenge to Peugeot—the biggest foreign car manufacturer in Iran, assembling 400,000 cars a year in partnership with Khodro—and Renault has also decided to produce 15,000 Meganes, another small family car, in 2008, rather than importing the model from Turkey.

Renault’s decision raised eyebrows in Washington, where officials are trying to discourage international investment in Iran. But such was the French company’s commitment to the deal, first signed in principle in 2004, that it agreed to the Iranian demand that 20% of the 300,000 cars could be sold for export.

For the Iranians, such deals bring access to European technology, helping Iran in its aim to boost its non-oil exports.

Parviz Davoudi, Iran’s first vice-president, inaugurated a factory in Syria in March as a $60 million joint venture with Al-Sultan to make the Samands, Khodro’s budget family car, which will be re-branded as the Sham. Target production is 10,000 a year, a useful boost for the Samand, Iran’s only entirely indigenous model since production stopped in 2005of the Paykan, the model famously based on the UK’s HillmanHunter.

Iran also signed three auto making contracts valued at more than $1 billion with Russia and China during the Iranian calendar year ending March 20. Khodro agreed to export 6,000 Samand cars to Russia every year and to produce 30,000 inChina. Iran Khodro Diesel is to assemble 12,000 of a version of the Gazelle van, made by the Russian GAZ (GorkovskyAvtomobilny Zavod) company, beginning with importedCompletely Built-up Units (CBU) and gradually switching to50% of parts from domestic production.

Although the basic strength of the Iranian manufacturers remains a protected home market, there has been some easingof restrictions on imports.

Iran did lower slightly tariffs on imported vehicles in2006-7, allowing an increase from 10,000 to 26,000 andleading top-range manufacturers such as BMW and Mercedes-Benz to step up their limited efforts.

And domestic manufacturers have also brought in some models from their overseas partners Renault, Citroen and Hyundai.Khodro plans to add the Peugeot 407 to its sales line-up in2007-8, and will import a total of 2,000 Peugeots, with each priced at 300-400 million rials ($32,500-$43,500).

In another sign of improved fortunes for importers, Hyundai signed a contract to supply 13,450 CBUs worth about $227million to Iranian government agencies and official taxi operators, a move that came as a blow to Kerman Motors, which manufactures Hyundai models.

The relaxation of restrictions seems to have resulted from widespread public, media and even parliamentary criticism ofthe quality of Iranian-made cars.

But there is no sign of any serious challenge to the basic development model based on restricting imports. Parliamentdecided in February to keep a hefty 90% tariff in place for the coming year, ending March 2008.

Hence the cars clogging Tehran’s streets will likely for the foreseeable future, continue to be Iranian-made, even ifsome of the parts and a growing part of the technology that makes them are imported.

GARETH SMYTH is the Financial Times Tehran correspondent

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Executive Tools

Why equity capital is good for you

by Nagy Rizk
written by Nagy Rizk

You are owner of a small or medium (Lebanese)enterprise (SME) and you are facing one or more of the following situations:

• What you sell (products or services) have high potential but you have limited resources to grow (both human and financial);

• You are doing fine, but cannot afford the extra efforts needed;

• You have used all your capacity to raise debt and you are looking for alternative financing options;

• You need to open to new distribution channels on the local or regional/international market;

• You need to build a solid infrastructure to maintain and protect your edge;

• You want to grow but are concerned with the risk implications.

Your bank/friends/colleagues have recommended you to bring in investors in order to move forward. But the search is hard. You have checked around and some (distant)connection is offering to bring in investors on board to check out your business:

• But you have either to make the trip to meet with them, probably in the Gulf nowadays (taking expenses from more urgent or relevant items) or stay on hold, waiting for their next visit to Lebanon.

• The timing may be wrong: Lebanese SMEs could be a hard sell with the current market conditions on uncertainty and instability. Buyers assume you are desperate and ask for a bargain. You are tempted to wait.

• But the feeling of urgency is clear: unless you move immediately, you may lose a unique opportunity. The market is growing and you do not want to miss the train.

• You do not know what to expect and how to deal with the“mighty investor.” A savior, a foe or just a partner? You are in for a long ride: long wait, long process, and uncertain outcome.

You are also concerned about loss of control of your business to the new investor, the reporting constraints, and the loss of independence. You are already missing your comfortable space, not having to report to anyone. Why would you want to bring in strangers?

Many questions are crossing and clashing into your mind.You are tempted to put things on hold, then to do something,then to wait and see. You are turning in circles. You wish you could have a clearer picture; you wish you could makethe wise choices at low cost; you wish you could be lucky and find the perfect fit.

You have a very heavy responsibility: You want to take your company to the next phase, efficiently and cost effectively. But the tasks ahead are too tedious and tricky.

Private equity funds for development are the pools of capital invested by private equity firms. The fund obtains capital commitments from certain qualified investors such as financial institutions and wealthy individuals to invest a specified amount in the equity of existing businesses.Private equity funds buy in equity against stakes in the business. They check out the business, they evaluate the business during the due diligence exercise, draw a road map on how to invest in the business, set the development objectives, and how to exit within a limited period. Along the way they make sure their investment is well-treated and they get returns that live up to the promises.

The Lebanese market may not be too familiar with equity capital funding for historical and structural reasons. But recently, there have been many success stories and positive experiences of value-creation and mutually beneficial partnerships. Of course, there have also been reports of some horror stories and bad experiences.

So, should you consider equity funding for your business?Is equity funding right for you?

10 good reasons to consider equity capital funding:

1- Risk sharing is a good tradeoff

Loans for business—especially the subsidized ones currently offered on the Lebanese market—are very attractive. You probably have used your limit. And when you take a loan, no one shares the risk with you. You have to pay it all back yourself, whatever the circumstances. You are on your own, dealing with risks of uncertainty, instability, and market downturn. The equity capital investor is aware of all the painful realities of the business life. He has integrated them in his analysis andvaluation. He is sharing the risks with you. And he will be doing his best to minimize and mitigate them. It is good to have a partner.

2- Dealing with the professionals always pays off

You are dealing with professionals all the way: their valuation of your company is rational, documented and integrating all the relevant factors. Negotiations are clear and streamlined. You will not be wasting time and resources dealing with amateurs or unsophisticated potential partners.The professional equity fund managers have very clearly defined rules and organizational structure. You are pretty safe.

3- Clearly defined process

Whenever you reach an agreement, all the important issues will be addressed and clarified. Many scenarios will be anticipated. No improvisation or rule-bending along the way.No bad surprises around the corner.

4- You are not losing control of your business

Your new partners want you to succeed. They want you to continue doing what you are best at doing. When necessary, they are willing to bring in the missing skills for a healthy growth. They would not mind minimizing their intervention. They are not into micro-management (unless necessary). They invest in people and your ability to deliver.

5- Credibility for your business

When the professional equity investors get in, they examine your business. If they like it, they let you know it. They see a potential for growth and value creation. They show faith in you. They give you a validation stamp.Credibility is fundamental to accelerate your entry into anew market, reduce your sales cycle, recruit new talents, and negotiate better funding terms and business deals. Youhave already won a solid vote. Your business is bankable.

6- Articulated strategy for your business

Professional equity investors look at your business, ask questions, and articulate all the necessary details including strategy for positioning, development, and growth.They share with you their vision, perspective, and experience. Your equity partner sees the value in your business and its potential, and gives you a fair assessment, and like the other board members will look at the big picture and thinking outside the box. You see the road ahead clearly. You know where you are going and how far and how fast you should get there. Motivation and clear objectives are good drivers.

7- Monetization of your business

You used to run the business, and whenever you needed loans or funds, you would have to offer personal guarantees or start a painful seduction dance to prove the value of your business. Once an equity fund has invested in your business, it is an easier sell to convince the market at large of the starting valuation. More leverage possibilities for the business or for your own shares for a second round.Well done.

8- One Agenda, clear objectives

The equity fund will get on board with the clear objective of creating value—aggressively if possible—build an attractive item, sell it out, make profits, and move on. The equity fund investor does not target to take over your business or to run it indefinitely. The rules of the game are clearly defined from the beginning. No change in the agenda along the way. No need to watch your back. You can focus on your business.

9- Your business is on the map

The equity capital professionals have come on board. They have created value. Time for them to move out. They offer their shares to potential buyers (insiders or outsiders).The buyers take notice of your value, your competitive edge, and your potential in their own portfolio. You are more visible. And that is good for business.

10- Bottom line

If every thing goes right on track, if you succeed in attracting a professional equity investor to your business, you will benefit from a very good learning experience, get help creating value for your business, and build a more sustainable business. Your future has improved, significantly.

If you feel you can make the cut and get an equity investor to take notice, prepare yourself thoroughly.Increasingly, many players are will be looking for opportunities on the Lebanese equity market. They say there is a lot of untapped value and high potential.

Having said all that, there will be situations where you will not need equity financing: If your business has very low risk, is not facing challenges for growth and survival or if you do not need to sell out for cash, then you do not need to share your benefits with outsiders with limited potential for added value. Just keep on doing what you have been doing, the good old-fashioned way.

Nagy Rizk Fund Manager The Building Block Equity fund [email protected]

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Gulf airlines: Ego-trips or essential?

by Alex Warren
written by Alex Warren

Is an industry, aviation has always attracted the wealthy.Tycoons rarely resist the chance to have their own airline, as Howard Hughes, Aristotle Onassis or Richard Branson are enough to prove, whilst virtually every country in the world proudly flies a national flag carrier, even if it makes a loss in doing so.

Little surprise, then, to observe the billions of dollars being poured by Gulf states into the expansion of airline sand airports. Thanks largely to this investment, the MiddleEast is now easily the fastest growing region in the world in terms of air traffic, which in 2006 rose by 16% compared to a global average of 5.1%.

But aren’t there just too many fish swimming in too small a pond? Despite the small size of the domestic market in theGulf, there are now at least eight airlines operating fromKuwait, the UAE, Bahrain, Qatar and Oman alone, with more set to arrive.

Older players like Emirates continue to expand, marketing themselves ever more aggressively in new markets like the US or the far East. Meanwhile, the original stakeholders ofGulf Air—the governments of Abu Dhabi, Bahrain, Qatar andOman—have gradually pulled out of the partnership to create new airlines.

Abu Dhabi launched its own carrier, Etihad, in 2005, whilstDoha has spent extravagantly on expanding Qatar Airways in the past few years. Low-cost carriers have also entered the market, and with great success. After its launch in 2003,Sharjah-based Air Arabia chalked up a $27.5 million profit in 2006 and offered a $700 million IPO last month. Jazeera Airways, a privately-owned Kuwaiti airline which began flying no-frills flights in 2005, already goes to 20destinations and says it also wants to list stocks.

Even more new airlines are on the way, including a fourthUAE carrier, the delayed RAK Airways, which will operate from the northern emirate of Ras al-Khaimah. Across the border, meanwhile, Saudi Arabia has said it will issue licenses for two low-cost domestic carriers in theKingdom.

On the surface of it, the preponderance of upstarts in such a tiny geographical area would seem to be nothing but an ego-trip, a publicity stunt designed to get names on the map and planes around the world. Yet whilst an element of that might be hard to deny, this lavish expense on aviation forms part of a longer-term, and fairly sensible, economic strategy for many of these countries.

Thus far, the growth of all these airlines can be attributed to a number of contributory factors. Most important is the wider economic boom in the region: the massive influx of immigrants to the Gulf, whether middle-managers from Europe or legions of construction workers from the subcontinent, has filled hundreds of thousands of plane seats, whilst long-haul tourism is developing quickly in places like Dubai and Oman.

Second, most airlines rely heavily on the so-called hub and spoke model for their business, bringing passengers in from a large number of cities around the world, connecting the mat the airport and then flying them out to their final destination. In some cases, like Qatar and Abu Dhabi, these kind of transit passengers make up more than 70% of total traffic.

With that in mind, it helps greatly that the Gulf lies between large centers of population with underdeveloped international airlines, namely Iran, the Indian subcontinent and Africa, as well as being a natural halfway point betweenEurope and the Far East.

The airlines can also benefit from airport investments whose size and cost seem to make no commercial sense. Over $40billion is earmarked for airports in the Gulf over the next10 years, with Dubai building what will be the largest airport in the world and Abu Dhabi, Qatar, Oman and Kuwait all spending combined billions on new infrastructure to support aviation growth.

Lastly, many suspect that these airlines are given an unfair leg-up from their government patrons. Some European carrier shave queried whether the Gulf airlines receive hidden subsidies, have access to cheap rates of borrowing or benefit from a privileged position at their hub airports—which are also owned by the state.

Whatever the case, though, this is missing the point. Even if they’re doing well now, these airlines don’t really need to make money in the short-term. Qatar Airways, for instance, doesn’t even expect to turn over a profit until2012. Instead, they should be seen as elements of a wider investment plan—which includes tourism, ports, media and finance—to sustain Gulf economies once the oil and gas dry up.

Many argue that everything epitomized by the Gulf boom is built on hydrocarbons and hyperbole. That may be true. But for now, there is more than enough money being spent to ensure that by the time economic growth slows down, the new arrivals become fewer and energy resources dwindle, these carriers will have been able to establish a global marketshare that will both sustain their businesses and, more importantly, keep bringing people into and through theGulf.

Perhaps not all of them will manage to be successful in the long-term, but there is at least some justification—apart from national pride—for so many apparently nonsensical airlines in such a small area.

ALEX WARREN is a freelance journalist based in Dubai

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Capitalist Culture

The battle for downtown: Solidere symbolizes much

by Michael Young
written by Michael Young

Little has excited the Lebanese in recent months, thoughmuch has contributed to their anxiety. However, it was onenews item in February that seemed to hit public moralehardest. From an initial figure of around 250 establishmentsin the downtown area, we learned that around 80 had closeddue to the ongoing sit-in by opposition supporters. A 30%closure rate in three months is ominous by any standard.

A few years ago, I was chatting with the late SamirKassir, when he remarked about an odd habit he had noticedin the Solidere area, particularly its mostly emptynorthernmost quadrant: drivers stopped at red lights, thoughthere was little traffic, and even fewer pedestrians, tomandate such discipline. Why were Lebanese who would havebarreled through red lights in any another part of Beirut solaw-abiding?

Kassir wasn’t sure, but he was toying with the idea thatdrivers were somehow intimidated by Solidere’s modernity.Here was an area of town that imposed esteem, he speculated,that commanded respect.

Was that the case? Maybe it was, maybe it wasn’t, but onething is certain: very few Lebanese fail these days tomention the deep resentment they feel at what has happenedto the downtown area; and the vast majority of them reactnot from a political standpoint, but from the standpoint ofpeople proud of a part of town that had symbolized Lebanon’sbest qualities and its genuine emergence from civil warafter 1990.

This is not the place to discuss the opposition’smotivations in suffocating the downtown area. However, itmakes sense to ask why an action directed against thegovernment has ended up punishing the private sector. Partof the reason—and there are numerous examples of oppositionprotesters arguing precisely this line—is that thegovernment and Solidere have been regarded as synonymous byprotesters. Certainly, the company’s close and ongoingassociation with the state; certainly, too, the hazy barrierbetween what belongs to Solidere and what belongs to theHariri family, have helped reinforce this conviction.However, that doesn’t make it any less fallacious. Inturning Solidere into a hostage to politics, the oppositionhas, intentionally or not, widened its dispute so that it isnow one directed against the Lebanese economy, and moreparticularly against the better outgrowths of free-marketcapitalism.

Downtown once again a battlezone

It doesn’t take much to capture the symbolism of themoment—on either side of the political spectrum. For themajority, a part of town that for a long time embodiedLebanon’s ability to transgress war, has again become afront line in a domestic crisis. Where the late Rafik Haririsought, perhaps excessively, to banish war from the downtownarea (recall that a war memorial planned for the city centerwas, instead, trucked off to the Defense Ministry inYarzeh), those contesting Hariri’s legacy have never broughtLebanon closer to civil war. To borrow from sociologistSamir Khalaf, the reclaimed heart of Beirut may soon be incardiac arrest.

The narrative of the other side is no less evocative, andunconditional. Hariri’s Beirut, because of its exclusivity,was never a valid Lebanese symbol. It was perhaps a symbolof the bourgeoisie and entrepreneurial skill, but one whoseimpact most Lebanese never felt. Far from being therepresentation of a Beirut at peace, it personified acallous, unjust city. How could there be true harmony andserenity if a part of the population was not invited topartake of its postwar pleasures?

Whatever one thinks of either argument, neither reallyaddresses the much more mundane matter that cities are, inone way or another, reclaimed by businesses. Ideas count fora great deal, urban policies and politics the same, butultimately it is money that keeps cities going, and anability to use that money to develop. And neither narrative,as it has played out today, is satisfactorily keeping themoney circulating, even if the Hariri vision was always muchfriendlier to businesses.

Those who saw the Solidere area as the symbol of aresurrected Beirut never paused to wonder whether it wasalso an island that had merely kept Lebanon’s divisionsoutside its boundaries. Why does this matter? Because noprosperous free market can last if it is built on shakyfoundations nationally. If Lebanon is to thrive, then itsdifferent political forces will have to agree to a commonvision for the country’s economic future. The Lebanese arenot there yet. The downtown area may have epitomized postwarpeace, but not everyone bought into this, and that’s afailing that can be put at the door of the policymakers.

On the other side, the opposition seems to have little senseof the advantages of the free market, which doesn’tdifferentiate between political forces. If Solidere loses,so does Lebanon’s economy, and so do all Lebanese. Povertyand unemployment play no favorites. That’s why both sideshave a duty: the opposition should end to its protests inthe downtown area; and the government should oversee aprocess leading to a national consensus on Lebanon’ssocial-economic priorities, by spreading that concernoutside the boundaries of a contested Solidere.

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Lebanon: Privatization and its fiscal implications

by Mounir Rached
written by Mounir Rached

The Lebanese government has proudly outlined itsprivatization program in the recovery paper presented toParis III donors, underscoring its crucial role in promotinggrowth, reducing public debt and fiscal deficits. The focusis on the most profitable privatization, the mobile sector,while electricity, the most destitute, is deferred to anundetermined future date.

Contrary to the general perception, these so-calleddinosaurs—or the non-financial public enterprise sector, togive it the boffin name—actually make money for thegovernment in the form of revenues from no-tax revenuetransfers to the treasury and VAT. Income transfers totaledLL8.2 trillion ($5.5 billion) during 2000-2006, mostly fromthe telecom sector. VAT contributions are not separatelycalculated but, at 10% since 2002, should have added sizableamounts to government coffers. EDL contribution has beenlimited only to VAT, due to its perennial losses.

During the same period, government expenditure, in the formof transfers to PES, to EDL in particular, amounted to LL3.5trillion ($2.3 billion). Even without taking VAT intoaccount, the net receipts accruing to the treasury during2000-2006 reached $ 3.2 billion ($5.5 less $2.3 billion).Thus, PES has had a mitigating effect on public finances.

This is not to say that this state of affairs should beapplauded, as the sector has been plagued by a combinationof poor quality, high operating costs and slowing growth,prompting consumers and businesses to call for its drasticreform. EDL alone has been suffering losses close to 40% ofits power generation and MEA (which is much better managed)has yet to make recurrent profits.

High revenues from PES, 28% of the total in 2006, are due tothe high rates (over pricing/taxing). Mobile telephonecompanies charge $0.13 per minute, compared to internationalrates of $0.4-0.5, while EDL’s rates are also high byinternational standards. Public sector privatization wouldlead to a restructuring of revenues in favor of tax receiptsand both would be expected to rise with a growing economy.

A third lump sum source of income would accrue from sale ofexisting PES assets and from licensing. The prime candidatesare telecommunications, electricity and Middle EastAirlines. Licensing, particularly the telecom sector, isexpected to generate most receipts. (The net worth of MTCTouch and Alfa, the two government-owned mobile companies,are not believed to exceed $100 million, as most of theirassets date back to 1994. EDL and Ogero have yet to beaudited, and MEA is burdened with debt.)

According to government sources, mobile licensing couldbring in $2.5-$3.5 billion per license. Two additionallicenses should bring in the same amount. Such high feeswill only be recuperated through high service charges—mobile or kilowatt use—and this will probably have astifling instead of rejuvenating impact on the economy.

An internationally competitive price should guide thedetermination of licensing value. The overriding objectiveof the privatization drive should not be to extract thehighest possible revenue (from sale of assets and licensing)in order to reduce public debt, but rather to provide themost efficient and competitive service to contribute togrowth and eventually enhance government revenue.

A simple proportional adjustment, for instance, in mobilelicensing proceeds, to reflect a reduction in its servicecharge to an international level (to 4 cents from 13 centsat present) could bring down a license value by severalfolds to few hundred million dollars—and rates would stillbe higher than what many countries, determined to providecompetitive service, charge. Furthermore, a priority inprivatization should be to concurrently address the leastprofitable enterprises. Sinking more funds in EDL beforeprivatization could defeat the purpose of reform.

In reality, only reaching a fiscal surplus will reduce debt.Privatization proceeds alone won’t cover cumulative publicfinance deficits—estimated at $11.8 billion—through 2011(see Executive March 2007). Proper accounting stipulatesthat privatization receipts be classified as a fiscalfinancing item, making the that law stipulates theirallocation to debt reduction redundant. The governmentshould focus on improving its public finances throughrecurrent receipts and continued streamlining ofexpenditure, and by seeking to raise the grant element andfiscal support of donors’ pledges. To use privatization as atool to reduce debt and fiscal deficits is a misguidedapproach to reform.

DR. MOUNIR RACHED is a senior IMF economist, and a founding member of the Lebanese Economic Association. The views in this article are those of the author and don’t represent those of the IMF

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Editorial

The new realpolitik

by Yasser Akkaoui
written by Yasser Akkaoui

And so to another Arab summit. There was a time when the Arab street would shrug and say “so what?” The most we hoped for was that our leaders would not embarrass us, especially those who used the occasion to showboat and who would leave any feelings of national duty—assuming they had any in the first place—at home.

2002 changed all that. Saudi Arabia, already beginning to feel they had a new, more robust role to play in the region, put forward a peace plan that gave a patina of credibility to an occasion whose high point used to be the arrival of President Khadafy’s female bodyguards. The plan was rejected by the Israelis but five years on, we detect a political change in the wind and the initiative, while not embraced, has not been rejected out of hand.

There are reasons for this. There is Iraq; Saudi Arabia has a new king and new wealth through oil, capital markets and real estate. Because of the terrible outcome of the Iraq war and the American need for regional chums, the Saudis today are closer to the Americans and no doubt feel that the way forward in regaining Arab prestige and dignity, not to mention being taken more seriously by the international community, is through leveraging economic success and consolidating alliances. It is the new regional realpolitik.

That the Arabs are re-submitting a peace plan also restores another important dynamic: Arabs are reclaiming ownership of Arab issues. Palestine is an Arab problem not an Iranian problem and Saudi Arabia, along with the other gulf powerhouses, Qatar, UAE and Kuwait and Jordan can make a difference. They are credible nations that have made economic growth a priority.

And finally we have Syria, the current enfant terrible of the region and a country on whom the international jury is still out. Should the world cozy-up to Damascus or watch the regime wither on the bow? Here Saudi Arabia can also help. As we pointed out in our last issue, Saudi businessmen are already investing in Syria; the next step should be to warn Damascus of the dangers of isolation and the price it may have to pay for its outrageous insolence in Lebanon. It should also remind the regime that the international community will not tolerate its bull-headed belligerence forever.

But can Syria ever be a positive force for good in the region under the current regime?

Sadly, as history has demonstrated, it has yet to prove it can.

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Formerly a haven of small-town trust, UAE sees rise in crime

by Norbert Schiller
written by Norbert Schiller

I recently stepped out of my apartment in Sharjah and absentmindedly forgot to lock the door behind me. I have always lived in places where doors lock automatically. I wasn’t gone for very long, but long enough for someone to enter and rifle through all the drawers and take any money that was lying loose. Fortunately, the burglar only got away a bunch of spare change left on a table and both my children’s wallets

We live in a big complex—33 floors with over 100apartments—lived in by relatively well-to-do, conservative expatriate families from the Arab world and Indian sub-continent. I thought the building was secure, but what surprised me the most was that someone would risk being caught in a country that comes down hard on crime. I’m sure that after serving the sentence, the perpetrator (if he were a foreigner) would never be let back into the country again—a serious consideration when so many guest workers are dependent on the Emirates for their livelihood.

Twenty years ago, when I lived here before, there was virtually no crime. There were times where I would be in a rush to get to the bank before it closed and I would unconsciously leave the car doors unlocked with thousands of dollars worth of camera equipment lying on the back seat.Back then, the cops were everywhere. They were bored—it was a time when a small dent on the side of your car would warrant a fine—and we had to be on the lookout. Now, with so many cars on the roads, police have their hands full with real traffic problems. Gone are the days of cruising for dents, or burglars for that matter.

Part of the problem is that the UAE, and in particularDubai, is growing at such an alarming rate that the locals represent less than 20% of the population. Background checks on cheap immigrant workers—from Pakistan, India, andBangladesh—are not as thorough as before. Once inside, if a person then wants to quit his job, it’s harder to keep track of them. They can just disappear, blending into the migrant population. Then there is the criminal element—the pimps, the drug dealers and the human traffickers. Crime breeds crime.

Near my home, they recently opened a Carrefour mega-market. To get there, I need to cross a few streets, one of which is a busy highway. In order to make it safe for pedestrians, an underpass was built; a very good idea in a country where so many pedestrians are lost to traffic accidents each year. However, I was shocked to see women with babies at either end of the pedestrian underpass—In the years before, I had never seen a single beggar. Begging is against the law and punishable by prison and deportation.And then if you think about it, why would anyone have a need to beg in a country that is so prosperous with a foolproof system? Emiratis are looked after, while foreigners are hereto work and therefore have a sponsor that looks after them.

Like Beirut and Cairo, the beggars are not begging for their own well-being; rather they are taken advantage of to make money for small time gangs that protect them in return for a cut of the proceeds. It appears the underworld is moving in.

The bottom line is that as Dubai and all the otherEmirates grow, the small-town feel that once made living here so attractive is all but disappearing; now suddenly, the Emirates are beginning to suffer from the big time problems that plague large cities around the world. Now the talk at dinner parties never drifts too far from the subject of crime—not the lack of it, as was the case in the ’80s.And even though the authorities do not publish figures, it is obvious that crime is on the rise. Everyone seems to have a horror story to tell, from gang rape to petty theft. Even the locals have been arrested and convicted of crimes, ranging from theft to murder. Dubai, it seems, offers more than just tourism and duty free shopping.

Maybe I protest too much. Maybe I’m just getting old. Yes, the UAE is still one of the safest places on earth to live.But my question is—for how much longer?

NORBERT SCHILLER is a photo editor and photographer at large with United Press International (UPI)

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