Banking & Finance

Of royals and rotors: Choppers taking off

by Executive Staff
written by Executive Staff

In the Middle East’s market for executive travel, business jets have a well-established presence. Another segment of privileged transportation, one with underused potential, is the market for helicopters.

Demand drivers for helicopters in the region have traditionally been oil, royals and defense—three components of a flourishing helicopter market that many Arab countries have no shortage of. Additionally, the region has been engulfed by the increased security concerns in the post-9/11 world that have pushed global helicopter sales upwards.

“Helicopter sales are not only increasing in the Middle East but really worldwide, the primary reasons being increased oil prices and the need for security post 9/11,” Dan Pranke, Middle East sales director for American helicopter manufacturer Bell, told Executive.

Nonetheless, sales of helicopters between Dubai and Cairo have been less than they could be, especially in the corporate and VIP markets. Sales managers for some of the industry’s major manufacturers blame restrictive regulations and reluctance of governments to license operators.

Oil boom boosting chopper market

In Arab oil-producing countries, the rise in oil prices from $15 a barrel five years ago to levels of $60 or more has induced oil companies to enhance their exploration and exploitation efforts onshore and offshore, meaning more helicopters needed to transport crews and supplies to digging sites.

The mid-sized workhorse helicopters used in the international oil industry constitute a substantial investment, as illustrated last month by delivery of three 19-passenger Sikorsky helicopters to Brunei Shell Petroleum for its oil service operations. The choppers were said to cost $18.5 million apiece.

GCC countries naturally have a strong role in this market. Companies like Saudi Aramco, the world’s largest oil producing company, operate veritable helicopter fleets to support oil field exploration, drilling and production. In Qatar, Gulf Helicopters, a firm established in 1970 by Qatar Petroleum, has a fleet of 24 helicopters consisting mostly of Bell’s model 412.

Military and security forces worldwide and in the Middle East are prime customers for helicopter manufacturers, accounting for around half of global sales for leading producers. The other half of the market is the civilian sector, including uses in offshore, corporate transportation, medical and emergency services, sightseeing and media, which are served by manufacturers such as Eurocopter, a daughter of Airbus maker EADS, and American firm AgustaWestland, in addition to Bell and Sikorsky.

Although most helicopter sales in the Arab world are military and police-related, industry experts say that there is a rise in commercial and civil helicopter use in recent years and the market is tipped to become more lucrative.

“I see a great deal of potential in the market because unlike Europe, this market is still in its infancy. There will be a couple of drivers for it in the next five years, especially Dubai with the World Islands and Palm Islands projects,” said Pranke, adding that sales in the Europe, Middle East, and Africa region represent about a quarter of Bell’s global sales.

A worldwide demand survey by turbine manufacturer Honeywell and others projected in its latest (2005) edition that the Middle East, Oceania, Asia and Africa will account for 16% of global deliveries of new civilian helicopters between 2006 and 2010.

The United States is the world’s leading market for helicopter sales, followed by Europe. The survey said more than 2,600 civilian helicopter deliveries are expected in the five years from 2006 to 2010. Total deliveries of both civilian and military helicopters are estimated to reach in the neighborhood of 12,000 units during the period from 2006 to 2016, and analysts forecast substantial growth rates that will hike the value of the global helicopter market to $15 billion in 2011, up by about 50% when compared with 2005.

Well over 500 sold civilian units per year is not bad for an industry where a manufacturer like Sikorsky reported 2006 revenues of $3.2 billion from all its activities (they delivered 110 helicopters last year) and Bell last month peddled some 10-year old “pre-owned” units at prices of up to $5.5 million on its web site. They don’t publish retail prices for new machines.

No wonder that new trade fairs for the helicopter buyer are in the Middle East. The Dubai Helishow is a biennial industry show which debuted in 2004. It reported 30% exhibitor growth to 104 participating companies in its December 2006 show.

For Bell, the Dubai Helishow in December was good in terms of contacts and future leads, said a manager for the company while refusing to give any information on unit sales in the Gulf region.

“While we did not sign any deals in the Dubai Helishow, there were numerous conversations and meetings with very senior people in the region that opened or furthered negotiations that will lead to conclusion of deals,” said Mike Cox, vice president of communications at Bell Helicopter.

Another helicopter conference, Heli Mideast 2007, is scheduled to be held in May to address the growing needs for helicopters for emergency and rescue services, firefighting, industrial and private ownership.

Loosening their grip on airspaces

Organizers of the event, the UK-based aviation publisher Shephard’s, say the event will also tackle the issue of governments relaxing their grip of the airspace.

That’s where the issue of the royals comes in. While persons of royal blood in the various countries of the region are excellent customers for expensive flying gear, helicopter manufacturers bemoan the fact that many countries of the region lack regulations that authorize commercial operators.

In Saudi Arabia, people other than the royal family are not allowed to own helicopters. “It’s a security issue because helicopters can land anywhere, so the Saudi government limits the ownership of helicopters to special government agencies,” Pranke said.

“It really comes down to how senior the royal person is and how much clout they have with the relevant police force,” said Andrew Drwiega, publishing director of the Shephard’s Defence Helicopter magazine.

“Rolls-Royce has a 42% share of the civil engine market in the region,” said Martin Brodie, communications director at Rolls Royce, adding that the main engines are for civil airlines like Emirates and Etihad.

Abu Dhabi Aviation, which has a paid-up capital of $110 million and is 30% owned by the emirate’s government, operates a fleet of 38 helicopters and fixed wing aircraft to the private and public sectors, signed a deal in December with AgustaWestland to become its regional spare parts and repairs center. The value of the deal remained under wraps.

AgustaWestland have also sold choppers to the Libyan Red Crescent and the Abu Dhabi police. AgustaWestland said in December its Middle East sales in 2006 increased by 15%. It said sales from the region will contribute around $260 million, or 11.8%, of its $2.2 billion global sales, according to Gulf press.

Helicopters will continue to claim a growing role in corporate transportation in the Middle East. It is entirely predictable that the rapid growth of population centers and the high-speed commercial development of office cities, industrial cities, special trade zones and super-luxury residential towers in emerging regional centers will create demand and outright need for wider VIP and executive travel options by helicopter, given the security, prestige, and time benefits accorded by these super-convenient transportation machines.

Additionally, helicopters can be expected to even start playing a new role in short aerial commutes in association with commercial air travel in an age where the drive to the airport and security check in the terminal sometimes take as long as a flight to a nearby country. Last year, a member company of Korea’s Tongil Group launched a manufacturing project to develop helicopters that will be used in the framework of mass transport.

The Middle Eastern helicopter market may still require some time to develop into a civilian market but manufacturers will not want to miss it. “I think in today’s market any potential market is important for any manufacturer, even if it’s a small number. They are all in competition for the ones out there and also if there are rulers and royals who want to have extras on their rotors,” said Drwiega.

Industry representatives and observers agree that states like Abu Dhabi and Dubai will lead the market opening for commercial operators and private ownership of helicopters in the Middle East. If you have your million-dollar abode on the Palm, the Pearl or the World islands, where will the fun be if you and your neighbors can’t drop in on each other in a stylish chopper.

 

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Banking & Finance

Driving fast for sales: Nissan stays ahead of the chasing pack

by Executive Staff
written by Executive Staff

Nissan cars once again topped the regional sales charts. That the brand was able to do this in Lebanon was down to the energy of local agent Rymco, which achieved its projected annual sales targets despite the destruction wrought by the month-long summer war that wiped out a vitally important tourist season. Rymco’s CEO Abdu Sweidan recalls a challenging year, how he snatched retail victory from the jaws of defeat and explains what drives the Lebanese car buyer.

E How would you describe the major rhythms or trends that drive the Lebanese car market?

Whenever you want to talk about the Lebanese market specifically, you have to identify two major segments: B2C, or business-to-consumers, and B2B—that is business-to-business. The size of these two segments is very interesting. B2C is constant and has been constant for the past 5-6 years. B2B is the segment that varies. If the season is booming, and the country is comfortable, then B2B business grows and takes the total demand for new cars with it. If the tourist industry is slow, and corporate business is down, then demand from car rental companies and fleet operators diminishes, thus reducing the total volume of demand in Lebanon.

E So what has the industry looked like over the past few years?

In 2004, we witnessed a peak in total demand for new cars in Lebanon, hitting the 20,000 unit mark for both consumer and commercial sales. In the years prior to that—2003, 2002, 2001 and 1999—we saw record lows, especially in 2001 and 2002, when annual sales were 14,000 cars in total. But since 1999 we have seen many humps and dips: anyone in an industry like this should be extremely cautious about forecasting or planning for the next year, because when you talk about 20-25% variances in product demand in any industry—if you are trading in shirts and cottons and undershirts, it’s scary enough, what if you are dealing with the car industry where 20-25% variance translates into from 5,000-6,000 cars a year? This is potentially catastrophic.

E Planning and predicting is life or death?

All car dealers have to watch their planning processes, because unlike any other industry, we have to plan our sales and productions one year in advance, and in some instances, two years in advance. And all our quotas have to be filled, we have to buy all the cars that we order irrespective of whether the market can sell them or not. This creates heavy pressure. We have to ask ourselves, ‘Are we going to sell them? Is the country going to be safe enough in three or four or six months or next year to be able to absorb this new model?’ The scariest part is really planning and inventory management, not exceeding the ratios that are acceptable in best business practices, which allow you to have inventory from 2-3 months—but that is highly subject to continuous sales. If you have interruptions, then your inventory piles up month after month.

E Is that what happened in Lebanon in recent years?

In the last two years, we witnessed two major hits: in 2005, we had the assassination of the late Prime Minister Rafik Hariri and the 14 explosions and the six assassinations that followed. From February to November, we were subject to vibrant—in the bad sense, not in the good sense—political instability that affected the sales rotation. So we were all—car dealers, as an industry—we were all affected by a high level of inventories that stockpiled because the sales rotation of the period did not match our forecasts. Again, our cars, our inflow, come to us irrespective of whether the country can absorb them or not. So we have to find markets, and secondary markets. Then of course we had the war in 2006, and all of the instability that followed. If you add the two years together, I can tell you that in the past 24 months, we saw no more than six to seven months of stability and they fell in the first and second quarter of 2006, the only stable period in the last two years.
 

E Did we perform in that period?

Funnily enough, yes. This non-event period saw the best two quarters ever for us here personally, at Rymco, and for the industry in general. The total market demand for the first six months of 2006 was around 10,000 units, so we heading for the 20,000 unit cycle again and heading for a peak.

E Do you normally hit 50% of targeted sales by the first two quarters?

No. We expect to reach 50% from May to July, so we were on track for an even bigger year, because June was big, and July was expected to be bigger as car rental agencies and fleet operators were gearing up for what was supposed to be a superb season, but then we were hit with the war, so all orders stopped, all orders were cancelled, while our inventories were already in. Like all car dealers, we stock inventories during the months of the high season. 50% of our sales happen in the four months of May, June, July, August. This is our big season and we were stripped of a major opportunity to exceed the 20,000 unit mark.
 

E Sales must have slumped to zero?

Correct. July sales were nil. August sales were niller, and September was nil as well. At least it was nil for all the fleet operators, which currently constitute about 45% of the total demand. So today, if you asked me, “Can you please draw me a roadmap of the car industry in Lebanon?” I would tell you, “Very simple. 10-12,000 units a year will be bought, no matter what, by you, by me, by him, by your friend, by your neighbor—this is constant. Business-to-business, however, will buy 8,000 units a year in a good year—in a bad year, it will go down to 2,000, because it is subject to business, not to a buyer’s emotional decision.” So anything above 10-12,000 units total is subject to the political instability and the tourist season in Lebanon. If it’s a good year, sales go up to 20,000, 22,000 maybe; if it’s bad, sales go down to 14,000 to 15,000, as we have seen in 2005 and 2006. Business-to-business has the potential for growth, and it is increasing, but the business-to-consumer market is stable. We don’t have baby boomers here—they are in Dubai, Qatar, the GCC and Europe.
 

E How did you deal with the challenges presented by the war, as a business? Did you close up shop?

No. During the war, we kept our operations up and running, with adjustments. We managed to divert most of our inbound shipments to other markets, though we did have some units stuck in Barcelona and Cyprus. After the war, we had four record months when we made offers. We had to offer extra value to the customer to sell the 2006 models. People were looking for deals, so we figured if deal hunters are on the prowl, let’s provide them with some meat. We performed so well that we found ourselves short—we had to buy 150 units from the Dubai free zone.
 

E How much competition do you face from the used car market? What are your strategies to woo customers into the new car market?

The market for imported used cars has diminished and been replaced by new cars, only because of the availability of financing, auto loan programs that are now available with at least 10-12 banks. And they all offer attractive rates, rates that are more attractive today in 2007 than they were in 2001. Interest rates from 2001 to 2007 have increased by at least 3-4%, but interest rates on auto loans have diminished 20% from 2001 to 2007. This is because the pressure of liquidity on the local and foreign banks here has forced the banks to find outlets for financing, and they discovered that auto loan programs are a secure instrument. So the ability of auto loan financing has migrated sales from the used car business to the new car business.

E Do you have figures?

In 2001, the total market for imported cars, new and used, was around 66% used and 33% new. Today, it’s 50/50. And the trend is continuous cannibalization for the new car against the used car. Safety requirements have become a priority, and cars are now tested for compliance on an annual basis. All this has added to the headache, the extra burden, for any adventure with an imported used car. Consumers now want a car with a 3-4 year warranty, one that is headache-free, worry-free, so they go to a dealer where auto loan finance is available: all of a sudden, your perception of a purchase is no longer the price of a car, it is what you can afford each month. You no longer think of a car as costing $30,000; you think of it costing $550 or $700 a month. The dealer is there, you have a warranty, if anything goes wrong you just go back, etc.

E How have the various car segments fared over the past two years? Which cars are still selling well, and which have taken a hit?

Over the past two years, one of the segments that has not been affected is small, family sedan cars. Typically, this car has a four-cylinder engine, 1.6 to 1.8, it’s economical and worry-free. Cost of ownership is low and repair minimal. This car can last five years without you ever having to worry about anything like the transmission or engine, and it’s priced anywhere between $15-20,000. It is sporty, trendy, and has a brand. The focus today is on the brand; people here are brand-oriented. Because of the high customs paid on these cars, it is the investment that the customers want to capitalize on when they sell the car again. They want to own it for five years, and sell it at 50% of value, and this is what’s happening amongst all major brands in Lebanon.

E 50%? That’s a good return after five years.

Of course it is. The second segment that is also growing is the small SUV. It’s a multi-purpose car. Again, they are usually 4-cylinders and again they are worry-free, again they have brand value and today, most car manufacturers are offering them. We love them here in Lebanon because of the high mountains. They are safer; they are higher up and they cost anywhere between $25-30,000. It’s better than buying a large sedan family car. It is dual purpose. The third segment, which is not surprising, is the luxury segment. The luxury segment in Lebanon has not been affected, even in the troubles of 2005 and 2006.
 

E So what took a hit?

Low priced cars, let’s say, below $10-11,000, with no brand equity—cars that are usually bought for the fleet business. The reduction in demand from the fleet businesses affected the demand for them, not because they are not good cars—but because they are used by the fleet segment and when they see a dip in business, they do not renew the fleet. So, if you are the owner of a large pharmaceutical company, and you need to regularly replace 100 or 200 cars because you need these cars for your sales reps, in a good period you change them every 2.5-3 years. In a bad period, you say, ‘I’m not going to change my fleet.’ This business is subject to the sensitivity of the country.

E But consumers will always buy, right?

Yes. The Lebanese consumer will spend more—not in absolute terms—but if the value of the car has a monthly payment issue. Take a $10,000 car or a $15,000 car: the difference is 30% if you pay cash, but if you are financing, it might cost you only $40 to $50 more a month. So you rationalize it, saying, “For $50 a month extra, let me drive this sexy car that I really want, and not the one I can afford—I’ll cut costs elsewhere.” As I mentioned earlier, today we buy what we can afford to pay on a monthly basis. So we have to develop those segments—family sedans, SUVs and the luxury cars—and work on a strategy to encourage growth in these areas. But you need to have the right product and fortunately, at Rymco, we do. We are well-positioned within every growth segment in the Lebanese market, which is good news. Not only is it enough to be well-positioned, we must be fairly positioned, so we evaluate what our competition is doing in these segments, and what our products offer against the competition in value and in price. In all these segments, we have discovered that we are very well positioned.

We have become more of a financial engineering firm than a trading company. In Europe, the biggest departments are financing and insurance. As an industry, we are still a long way off in Lebanon—we have too many family-run firms. We are the only one listed on the BSE; we have a board of directors, we have shareholders, and we have huge leverage with our financial institutions. We are well integrated, and they know where the money is going.

E Who is your primary market for financing programs?

We are targeting the $1,200 salary bracket because we know that banks will not give a loan unless the salary is three times the monthly payment. But we also know that he might be under financial pressure elsewhere, he might be financing a fridge, so we have to be creative in helping him pay. If we aren’t, he will go elsewhere, so we tailor a program to ease the burden with an annual balloon payment or multi-balloon payments or accelerating or decelerating payment schedules. I can confirm that 47% of Lebanese households live on between $800 and $1200 a month, not including remittances. Banks don’t care about remittances, they look at what you actually earn, so we have to get the buyer ready for marriage—we have to get him hooked up with a bank.

E But how are you convincing people to splash out on a new car in such times of uncertainty?

Leasing is our new weapon. It targets the medium-luxury, $40K-50K car buyer who has either left the country, or can leave and doesn’t want to commit. Without leasing, we would not have sold so many cars in the post-war period of 2006. In the first three days, our phone lines were jammed with people inquiring about leasing. In the past, leasing never really caught on here because the proper structure wasn’t in place. Even our partners were skeptical at first, but when they saw the response, they got on board. Right now, we have three more banks that want to join us in leasing, because leasers are the customers they want.
 

E How does Lebanon fit into the regional automotive dynamic?

Lebanon is the trendsetter. Cars that do well here do well in the rest of the Middle East. Our disadvantage is our market. The region sells 1.2 million news cars and our most optimistic forecast for 2007 is 20,000 units. That is if all the segments, B2C and B2B are performing, and we have a good tourist season and so on. But as I said, we are a brand volcano. Manufacturers are cautious, because they want their models to work here. Many tourists from the rest of the region rent cars here, and they might like them and want to buy them. Some brands are not launched in Lebanon for that same reason—manufacturers are scared of having an unpopular car on our market.
 

E Lebanon is more of a trendsetter than Dubai?

Yes, of course. Dubai is a consumer bully; here, we are a brand bully. Lebanese consumers are cruel—they can reward and they can destroy.

 

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Editorial

The last dance

by Yasser Akkaoui
written by Yasser Akkaoui

Last month saw the cream of the world’s leaders, businesspeople, economists and experts meet at the World Economic Forum in Davos to discuss today’s most pressing issues. And they are plentiful as they are urgent: poverty, climate change, trade barriers, famine and disease, to name a few.

But as the world works together against malaria, the digital divide and melting polar ice caps, the Middle East continues to be mired in its own set of anxieties – anxieties compounded by the vaulting ambition of President George W. Bush, whose presidency has been garnished with equal dollops of steely determination and colossal hubris.

Back in 2005, the Middle East’s leaders put impressive store in the issues that plague our planet, but the conflicts America’s influence in the Middle East has directly and indirectly fomented, have not only put real developmental issues (à la those discussed at Davos) on hold, they have stripped an entire region of its focus. It is as if the whole notion of development has fallen off the region’s agenda. We are lagging behind in our global priorities, and this will inevitably be reflected in our societies.

Nowhere has this been more evident that in Lebanon over the past month. While world and industry leaders held dialogues at the Swiss resort, laying the groundwork for progress and cooperation, in the streets of Beirut, old wounds were opened amid senseless violence.

So even as Fuad Seniora returned from Paris with $7.6 billion, there was only muted applause. We are all well aware that if the funds are used for a quick fix, with no meaningful attempt to ease internal pressure and seek to remove Lebanon from the regional political dynamic, it will only be a matter of time before another Lebanese delegation takes the begging bowl to Paris.

If that happens, there may be no one left to tango with.
 

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Lebanon

Stormy weather ahead for BMed as potential investors circle

by Thomas Schellen
written by Thomas Schellen

The skies between the Levant and London got a little cloudier at the start of the year, as airline BMed admitted it had suffered such substantial losses in 2005 and 2006 that its main stakeholders refused to pump more cash into the operation.

According to the Times of London, BMed reported profits of $10 million in the financial year ending on March 31, 2005. Indeed, the carrier (formerly British Mediterranean Airlines) boasted impressive annual growth rates through 2004, before taking an initial blow from increased fuel costs. But profits were hit hardest last year by Israel’s war.

Jokes in Beirut suggested that the airline should appoint certain anti-government Lebanese politicians as marketing agents, because every inflammatory statement and call for protests led to a spike in bookings on BMed flights from Beirut to the calmer shores of the Thames. Nonetheless, UK media projected 12-month losses of BMed by to reach or even exceed $40 million by end of March 2007. With Beirut as BMed’s signatory destination, it appears that instability in Lebanon over 2005 and 2006 and, above all, Israel’s 2-month blockade of civilian flights to Rafik Hariri International dealt a severe blow to the airline.

BMed flew its maiden flight to Beirut in 1994 and celebrated its tenth anniversary in the Lebanese capital. While the carrier has developed routes to central Asia— Baku, Tehran, Bishkek, and Yerevan are among its destinations—and recently Africa, its Middle Eastern routes have always been its bread-and-butter.

Conversely, BMed has been an economic lifeline for Near Eastern travelers who have business in the City. The carrier offered the highest frequency of daily flights between Heathrow and Beirut (eight flights per week before last summer), Damascus and Amman. BMed was the one carrier that gave Levantine travelers an alternative to the respectable national carriers MEA and Royal Jordanian, the not-to-everyone’s-taste Syrian Air, or cumbersome indirect flights.

Partnership approach

BMed adopted an approach of complete partnership with the United Kingdom’s big carrier, British Air as its business model. Using the same livery, uniforms, and booking system as BA, the BMed identity was downplayed until it was indistinguishable from BA’s to many passengers; the carrier’s destinations were limited to those ceded by its larger cousin—in Egypt, for instance, Alexandria became a BMed destination, but BA-serviced Cairo was no-fly zone for the airline.

BMed’s chairman and a major shareholder was Lord Hesketh, former Conservative Whip in the House of Lords. Privately-held and run with the tight-lipped approach of a firm that had no stock market obligations—and adhering to the Arab habit of keeping private ownership out of the public eye—BMed managers refused to discuss shareholding structure with the media. The standard line only stated that BMed was owned by British citizens of Middle Eastern origin.

When a UK newspaper revealed in early January that BMed was facing troubles, it also reported that the airline’s main shareholder was an investment trust for the family of Syrian-born financier and philanthropist Wafic Said, whose name is associated with the Said Business School at Oxford University and the Karim Ridda Said Foundation, which sponsors the education of young Middle Easterners.

As news of the investment negotiations became public, BMed management issued a statement confirming that the Mikati family of Lebanon—which appears to be in an excellent financial state after its sale of telecoms holding Investcom—was riding into town as the primary contender.

A subsidiary of Mikati-owned M1 Group was in talks to become the new main shareholder in BMed, confirmed the airline’s CEO, David Richardson, in a statement.

If the investment deal were completed, M1, founded by brothers Najib and Taha Mikati, would infuse close to $60 million in new capital into BMed. As an intermediary step during the negotiations, the Mikatis provided the airline with bridge financing of up to $7.5 million to cover immediate needs.

According to a statement on the talks, the M1 Group has business interests that include “property, telecoms, oil and gas, and aviation.” The aviation interest currently stands for a recent shareholding participation in a four-year-old Geneva-based airline called FlyBaboo that offers short-hop service in Europe.

The M1 subsidiary for aviation is M1 Travel Ltd, run by a younger-generation Mikati, Maher. In a previous executive role, he tried managing several of the Mikatis’ information technology ventures in Beirut, including software company IdealSoft and an embryonic cable television company that fell victim to the failure of Lebanese lawmakers to regulate the piracy-dominated cable services market.

Talks continuing

However, as the talks for restructuring BMed progressed through January, M1 Travel lost the exclusivity of the negotiations and may no longer be the frontrunner for buying into BMed. In late January, BMed, true to its secretive style and without naming the new contenders, said it was now negotiating with three interested parties, including M1.

Media reports in London alleged one of two new aspirants is bmi (formerly British Midland) the second largest full-service airline in the UK and a member of the Star Alliance. Bmi, which has also reported a decline in passenger numbers in recent years, serves European and long-haul destinations but has no overlap with BMed’s route network; like BMed, bmi may need new concepts to stay in the air.

A partnership with another airline might make better sense for BMed than working with investors, who cannot provide the same operational synergies as a carrier with potential to develop network relations.

However, a partnership with a BA competitor would raise questions over the future of BMed and BA’s tight relationship. In any case, BMed will need to decide if the franchisee business approach—with its inherently limited freedom—is the best way to continue its development, which includes plans for fleet expansion.

Should BMed opt for the M1 partnership after all, it will be required to prove to the UK’s Civil Aviation Authority that the company is still majority-owned and controlled by British citizens, in order to maintain its international traffic rights as a British airline. Fortunately, several members of the Mikati family hold British passports, so this is unlikely to become a major issue.

The good news for the Near Eastern business community is that those convenient seats to London will hopefully still be available in the future. It remains to be seen whether under different ownership, BMed would put as much emphasis on the Lebanese market as in its first decade.

However, that question will largely hinge on the ability of the Lebanese to settle their internal affairs: the main issue pending is whether Beirut can pull back from the brink and reassert itself as a business and tourism center, or whether it will revert to an image of senseless chaos. The path the country chooses will play a much larger role in determining the appeal of ‘destination Lebanon’ to airlines and passengers than the identity of the next owner of BMed.

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Lebanon

Ad agencies enter fray in Beirut Campaigns spark debate

by Executive Staff
written by Executive Staff

Traditionally advertisement serves as a communication tool to brand and promote a product, yet in recent years its role is less and less restricted to the corporate world. Today, numerous non-governmental organizations, politicians, military, religious groups and even artists have discovered the power of TV ads and billboards to promote their cause. It is the so-called “information society” that rules and Lebanon is no exception, certainly not in the turbulent times it is currently going through. Most creative work for non-profits.

For both ad agencies and the public, it is an absolute blessing that they can also apply their creative energies in the non-profit sector. As they are less restricted, they often produce their best work. Take a recent campaign for Amnesty International in Switzerland. Under the slogan “It is not happening here, but it is happening now” we see images of human suffering and injustice, superimposed on images of Swiss daily life. In Lebanon, arguably the most visible and well-known non-corporate campaign are the “I Love Life” billboards and balloons we see everywhere. Designed by Saatchi & Saatchi in simple red and white centered on a heart, its message is a simple one. “As Lebanon and the region are increasingly caught up in a culture of violence,” said Ibrahim Eid, one of the campaign’s organizers, “we wanted to emphasize a culture of love and life. We wanted to offer people a window of hope: there’s more to life than politics.”

Notwithstanding its seemingly universal message, the campaign was politicized from the start by members of the opposition who claimed the I Love Life campaign was an attempt by March 14 to stigmatize Hizbullah and the downtown demos. Eid admitted that all of the campaign’s organizers are individuals who met “in the spirit of March 14, 2005,” yet most of them were not affiliated to a political party. “We truly wanted this to be a logo for all Lebanese,” he said. “The message was born out of a deep conviction that Lebanon’s only hope lies within civil society, not in politics.”

The I Love Life campaign was sponsored by a number of individuals, companies and trade associations, including the Chamber of Commerce and Bankers Association, while ad agencies and printers did not demand their usual fees. Still, no matter how much Eid and others emphasized I Love Life was apolitical, within no time the opposition launched a counter campaign.

This time there was no doubt whatsoever that the campaign had a political edge, as it was signed, “the opposition.” The design and main slogan were almost identical but added were the words “with colors,” “with dignity” and “without debts.” On the internet circuit, I Love Life spoofs appeared, “I love Aishti” and “I Love Capitalism” being just a few of the new takes.

Opposition chimes in

The trouble with the opposition’s campaign was that it bore too close a resemblance to the original. The public merely assumed that it was a new take on the same theme, churned out by the same people. An altogether more interesting non-profit campaign was created by H&C Leo Burnett for 05AMAM—Arabic for “forward”— and is an abbreviation of al-mujtama al-madani (civil society). 05AMAM also fell within the spirit of the March 14 movement and was also non-political. Its aim was to reflect the main issue underlying the political divide, which according to those within 05AMAM, is sectarianism. At the end 2006, H&C Leo Burnett created a series of billboard ads that have become something of a cult hit on the internet. The images show, among other things, a Lebanese car number plate with “Shi’ite,” a building for sale to “Druze only,” and a parking lot “for Maronites only.” A number of doctor signs show not only name and specialization, but also their religious background, while another ad shows business cards that state nothing but name and sect. With each of the images the accompanying tag line was, “Stop sectarianism, before it stops us.”

“With an eye on the crisis, we wanted to do something, yet nothing political, but rather something that would spark debate,” said Bechara Mouzannar, regional executive creative director at H&C Leo Burnett. “So, we came up with the ‘Stop sectarianism’ campaign for 05AMAM. At first, we faced some difficulties getting it approved by the censors, as it took them some time to realize the campaign was not meant to insult or upset people, but to make them reflect.”

In an advertising world which generally opts for the beautiful and glamorous, the campaign was unusually edgy and gritty. Surprisingly, there was only one incident. “It was a misunderstanding,” said Mouzannar. “The images should be seen in relation to each other. Unfortunately, in this particular case there was only one image in the area, and some people took it as an insult.”

Overall however, the campaign was an enormous success, not just within Lebanon, but around the world. For many a foreign newspaper, the ad campaign became the peg for a news or feature story on Lebanon’s complicated sectarian society. As in the case of I Love Life, the anti-sectarianism campaign was paid for by sponsors, while ad agencies, printers and billboard companies waived their usual fees.

The Lebanese Broadcasting Corporation (LBC) liked the campaign so much they sent a letter to all agencies to produce a TV ad, for which LBC would offer the studio, equipment and free air time. H&C Leo Burnett created two clips. The first shows a series of cars, each with a “sectarian number plate,” after which the camera slowly zooms in on a broken car with a Lebanese number plate. The slogan, freely translated from Arabic: “Drive the sectarian way and this is where you’ll end up.” The second was a critique of the state’s employment practices, which place maintaining the sectarian balance over qualification. Ad a powerful indictment of sectarianism

Elsewhere, Grey International produced a film on the same theme, showing people from around the world in front of their flag, stating their nationality. It ends a number of Lebanese, who instead state their sect in front of the Lebanese flag. Finally, the private sector had its say with “I Love You in Winter.” Sponsored by Aishti, ABC, Banque Mediterranee, Banque Audi-Saradar, the Phoenicia InterContinental Hotel, Virgin Megastore and MEA, the campaign encouraged the Lebanese (and any tourists that happened to be here) to shop like hell during the festive season. A similar campaign, by more or less the same group of companies, was launched in the summer of 2005 following the assassination of Rafic Hariri and the string of bomb attacks that followed.

According to Maya Matalani of Aishti, special discounts were offered and special events were organized, while MEA offered 23 free tickets. Anyone buying for more than LL 30,000 worth of products had the chance to win an air ticket. “The last two weeks of December were very good,” said Matalani. “People really did go out, although in downtown it depended a lot on where you were located. The area closer to Riad el Solh Square, where the demos were, did not do as well as other areas.”

And “I Love Life”? The billboard campaign has already expanded. After the New Year’s party, a new website is imminent. It will include news, a blog, forums, an article archive and plenty of interactivity. I Love Life downloads will also be available, with visitors encouraged to propose their own activities within the virtual community. Will the opposition respond? We will have to see. But as an I Love Life spokesman pointed out, “What better subject is there to debate?”
 

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Banking & Finance

Beirut prepares for more Islamic banking

by Executive Staff
written by Executive Staff

Lebanon is a potentially lucrative market for Islamic banking in view of its diversified community, according to many Lebanese bankers. However, the country still notes a shortage of Islamic financial operations vis-à-vis growing conventional transactions.

“In Lebanon, Islamic banking is still new and requires awareness and a marketing campaign,” said Mutasim Mahmassani, general manager of Bank Al Baraka Lebanon, adding that he expects a fast growth for Islamic financial operations in Lebanon.

Four Islamic banks are currently licensed to operate in Lebanon: Al Baraka Bank, Arab Finance House, Lebanese-Islamic Bank, a unit of Credit Libanais, and BLOM Development Bank, a unit of BLOM Bank. All four focus mostly on retail banking and concentrate on consumer finance.

Al Baraka Bank has been in the market since 1992; Arab Finance House, or AFH, since 2003; Lebanese Islamic Bank opened in 2005 and effectively became operational in 2006; and BLOM Development Bank in 2006.

“We are holding conferences and forums to inform people about Islamic banking,” AFH General Manager Fouad Matraji said.

Bankers from three of the country’s four Islamic banks agree that Lebanon is still an infant market for this banking specialization, but they all say it is developing and will play an important role in Lebanon’s financial market.

This is not an easy task in a country where the commercial banking sector plays a massive role in the economy and regularly achieves growth even when other sectors are lagging. Total assets of commercial banks increased 7.6% year-on-year to $74.3 billion at the end of October 2006, which is almost three-and-a-half times the national GDP.

Very few assets in Lebanon

With less than $250 million in assets, the two larger sharia-compliant banks make up a tiny fraction of Lebanon’s banking sector. The total assets of Al Baraka Lebanon stand at $130 million, Mahmassani said.

According to Matraji, the total assets of AFH are $100 million. He said that the bank achieves a yearly profit of 7% to 8% and he expects a return on equity between 12% and 14% in 2007.

Islamic banks are expansion-minded in Lebanon and Al Baraka and AFH both have capital increases in the works.

In a recent general meeting of Al Baraka, shareholders agreed on a capital increase by 150% to $50 million from $20 million.

Mahmassani said that the capital increase will help the bank develop its expansion plan, which includes setting up new branches and expanding its activities, including devising investment funds.

According to Matraji, Arab Finance House is currently the largest Islamic bank in Lebanon in terms of capital. “Our capital is $60 million and expected to become $100 million in 2007,” he said.

Khodr Temsah, general manager of Lebanese Islamic Bank, said that the bank will soon increase its capital by 150% to $50 million from $20 million to fund its expansion.

Mahmassani declined to estimate the market share of Al Baraka in Lebanon, saying there are no official statistics. “The market share of Al Baraka is relatively low with respect to the overall banking market, but we expect to occupy 50% of the Islamic banking market share in 2007,” he said.

Matraji expects Arab Finance House to occupy between 15% and 20% of the country’s Islamic banking market; however, he said it is still early to speculate on total market share.

The size of global sharia-compliant assets is estimated today at up to $400 billion, whereas the potential market for Islamic financial services is believed to be closer to $4 trillion, meaning that Islamic finance currently has only a 10% market share among the Muslim community globally and still a long way to go, according to a report by Standard & Poor’s in October.

Coming from behind

There are around 800 branches of commercial banks in Lebanon compared to only 8 branches of Islamic banks.

Al Baraka, which is a unit of the region-wide Al Baraka Group with headquarters in Bahrain, has six branches across Lebanon. AFH has two branches in Beirut and Lebanese Islamic Bank has one branch. All three banks are planning to open new branches in 2007.

The Islamic banks have an ally in Lebanon’s central bank, whose governor Riad Salameh said, during the launch of a new certification program for Islamic banking professionals in October, that the Islamic finance industry “is not restricted to Muslim countries and could benefit from Western and Middle Eastern experience as well.”

The central bank initiated the Islamic finance qualification program in collaboration with British and French-backed institutions in order to streamline in the competencies of employees in the Islamic finance industry, Salameh said.

Islamic banks in Lebanon have already led several development initiatives in producing new sharia-compliant products that found their way into other regional markets. With further development of specialized competencies in the sector, banks said they could use Lebanon as basis for new cross-border expansion, despite the size limitations of the local market.

Complement instead of compete

AFH said it might open up a sharia-compliant bank in Syria by the end of 2007, with a capital of $100 million. A major shareholder in the new Syrian bank will be Qatar Islamic Bank, which also owns 70% of AFH.

Mahmassani said he cannot compare Al Baraka Lebanon to other Al Baraka banks in Arab countries, because these banks are present in Islamic countries and target Muslims. “Their characteristics and the general performance are different, Islamic banking laws have been in effect there for years,” he said.

He added that he doesn’t look at other Islamic banks in the local market as competitors, “but we complement each other to develop and further promote Islamic banking in Lebanon.”

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Lebanon

Paris III comes and goes with massive aid pledged

by Executive Staff
written by Executive Staff

As far as allegories to dance movements go, the Paris III conference was a grand ballet. President Jacques Chirac pirouetted as leading man and the 37 assembled nations and multilateral institutions performed their numbers for the guests of the hour, namely the Lebanese delegation of Prime Minister Fuad Seniora and his cabinet confidantes. By the evening of Jan. 25, the meeting had it all: grants, project-tied aid for social, educational, and infrastructure projects, and soft loans at advantageous conditions.

Ranging in size from $1 million donations by Latin American, Eastern European, Asian, and Arab countries to a $1.1 billion commitment by Saudi Arabia, the total result of the aid meet was amazingly close to the $8 billion need estimate that government economists in Beirut had circulated several months ago when the Paris III preparations were starting to take shape.

The commitments flowed with ease and elegance. Speakers from countries around the world followed one another in short succession and presentations were astoundingly succinct. There even was a bit of amicable cultural alignment when the host asked for French timing on the lunch break but seemed happy enough to go with the Middle Eastern late break instead.

Details hazy

The details of some interest rates, disbursement conditions, and repayment schedules were admittedly hazy during the conference itself (and not available in detail when Executive went to print) but with total international pledges of $7.6 billion and a paper full of Lebanese commitments to fiscal improvements, privatization, social measures and overall reforms, satisfaction ruled all around. Conference participants assured the media in the closing press conference that they were fully aware of the political problems faced by Lebanon and the deplorable street fighting that had erupted in Beirut on the actual of the Paris III, but reiterated their confidence that the country would achieve new internal calm.

In this regard, the convening of Paris III was a success in itself. In late December, there were enough reasons for local and international experts to seriously question the likelihood of the conference even happening. The confrontational positions of the opposition—Hizbullah, Amal, Michel Aoun’s Free Patriotic Movement and their allies—and the March 14 forces of Saad Hariri’s Future Movement, Walid Jumblatt, and assembled Christian groups on the other side, displayed the kind of intransigence that required doubt over the mutual will for communication in the two camps. The likely outcome of such mental conflicts and spiritual warfare is physical escalation, as happened in the conference week. But the key conference parties, comprising the French host, the Europeans, the United States, the Arab League and most Arab countries, stayed committed.

Paris III was set up and implemented along a formula similar to the one used to rally international powers to Lebanon’s support in the Paris II conference. That conference benefited from the friendship between Lebanon’s then prime minister, the late Rafik Hariri, and President Chirac, whose term in office ends this spring. In closing the Paris III press conference, Chirac paid tribute to Hariri as a “man of peace” and “the cause and author of Paris I and II.” It was Rafik Hariri who had traveled to the capitals of the West and the Arab world in preparation for Paris II, and Seniora has now retraced his footsteps.

But was Paris III the final chance to tango with international aid givers in exchange for reforms?

What makes this question inevitable is the fact that Lebanon’s government has failed in its obligations to live up to the privatization and reform promises made in November 2002. Paris II was hailed as a big success at the time, one that would not be followed by another conference of the same cut.

The disarmingly simple argument presented by Seniora in asking funds at Paris III was that this will cost money now, but it will cost more if the problem is left to be addressed later. That is correct, but only when adding that, in the end, it will be three times as expensive if a solution cannot be found now.

Many concerns about Paris III

Some economists cautioned that Paris III could go the way of Paris II with only half of the promised funds making it to Beirut and financial support getting lost in the inefficiencies of implementation. However, predicting an automatic repeat of this pattern is unproductive, and the lesson of Paris II should be to eliminate the reasons which international donors cited for cutting the funds.

Other concerns are technical. Besides following the process of Paris II, a number of the reforms proposed by Seniora’s team for Paris III were adopted from the plans that have been around since the start of the millennium. While the fiscal and macroeconomic logic of handing the phone networks over to the private sector and getting rid of Electricite du Liban as fast as possible is as valid today as it was five or six years ago, the lack of new ideas and concrete development concepts for economically underprivileged areas are grounds enough to call for further deliberations. Also, the proposed fiscal measures and debt reduction mechanisms made some competent analysts comment that things are not as simple as they appear in the Lebanese government’s paper.

But the main issue of 2007 is political consensus. It was not achieved in 2003, and it seems out of sight today. To stay in step with the dance, the biggest question forcing itself on the evaluation of Paris III is how can people tango when they are locked in political fights? It takes two, but conditions in Beirut leave no doubt that a whole dance-athon of serial political tangos would be needed to create the kind of agreement needed for implementation and probably expansion of the reform platform and a new start in Lebanon.

Seniora and his cabinet members have said often enough they want to invite all groups in the national spectrum to present their proposals for upgrading the reform project that is Lebanon 2007—but could Seniora and the many heads of opposition interests ever see eye to eye (or, to stay with the dance motif, dance in step)?

The reaction from Lebanon immediately following the conference was ambiguous. Some was exuberant, some cautious, some undecided and some simply mistrustful of the government’s reasons for holding the event in the first place.

In its more tangible way, the Beirut Stock Exchange gave off mixed reactions. The BLOM shares index climbed above 1,200 points for the first time in more than a month, as Solidere shares appreciated by 4.4% and moved close to $17 with some of the strongest trading volume in the stock since before the start of anti-government demonstrations in the Beirut central district.

Banking sector sticks its neck out again

Brokers and investment advisors for local financial firms were quick to say that Solidere’s momentary gains were related to the good numbers from Paris, but by the following Monday, the mini-surge abated as quickly as it began. Furthermore, in the banking sector, shares of Byblos, Audi, and BLOM dropped between 1 and 2.5% on January 26. That and the following trading day suggested no new wave of investor enthusiasm.

For the banking sector, the danger of a failure in Lebanon’s recovery looms large because exposure of commercial banks to government debt is still immense. Thus it is no wonder that, as ABL chairman Francois Bassil confirmed to Executive, the banking industry is willing to play an active role in the reform process through financing infrastructure reconstruction and by finding investors for government projects.

However, as Bassil also made clear, banks would not agree to providing funds to the state through zero-coupon treasury bills again as they did after the Paris II conference, following a request from the Lebanese government. Bassil conceded that the banking sector will be affected if fiscal reform is not accomplished, because it is a main lender to the government.

The challenge of Paris III is assuring that this conference, in which a vast range of international and Arab governments showed massive support for Lebanon and—there can be no uncertainty about this—its current cabinet will be part of a formula for national benefit. Cash and projects are necessary for Lebanon’s future, but they alone will not suffice.

The violent demos of Jan. 23 and the all out street fighting of Jan. 25, both the result of weeks of worsening relations among the divided Lebanese political factions and religious communities, illuminated with stellar intensity one fact already known by the Lebanese people: that pushing divisions, emphasizing differences, and maximizing irreconcilable demands into shapes of belligerent political positions is a poison that can kill Lebanon.

It is a fundamental rule that when governments or religions fail to practice good governance, people suffer and prosperity declines. Where the Cold War between the East and West was a precarious balance that could function on the military basis of Mutually Assured Destruction (MAD, as it were), the closeness of coexistence among Lebanon’s familial, tribal, religious, and political communities does not allow for a balance of destructive potentials. Instead, it requires a balance based on finding commonalities and emphasizing shared denominators, of which many potent ones can be found—given that the searching parties are willing.

Huge need for understanding

It is said the there is a huge need in this world to repair not only the relations between nations and religions but also between spiritual values and principles on the one hand and governments on the other hand. That means new openness must be cultivated between religious communities and within them, among their leaders and members.

Lebanon is a case study for this mandate of the 21st century. The capacity for peaceful coexistence among the Lebanese is a proven reality. Whatever their political side and religious background, the opposition and the March 14 leaders have said and shown that they disavow the use of violence for gaining the upper hand.

But still the danger remains that the forces unleashed in their power struggles may break out of their control, with momentous consequences. Political and religious leaders barreling down the road of political confrontation and vitriolic propaganda against one another in Lebanon’s tight mosaic of communities, to the point of more open violence will inevitably lead to Mutually Assured Self-Destruction.

On the side of hope, Paris III added to an already astounding level of financial commitment to Lebanon’s future that now reaches beyond $10 billion. The total includes the more than $900 million pledged in the emergency recovery conference at the end of last August in Stockholm and additional funding worth $1.5 billion provided by Saudi Arabia and Kuwait, as well as funding that Hizbullah provided in emergency relief from its sources.

Also not to be forgotten are the donations that Lebanese overseas communities and individuals wired to the aid account of the Ministry of Finance in Beirut, and projects such as the distribution of medicine and milk and the rebuilding of homes and communal centers, which are financed and carried out by civil society, NGO aid initiatives and local businesses, often without much ado.

These are massive signs of trust in Lebanon, and the business community has every reason to be emboldened by its will to succeed in private sector initiatives as by the outcome of Paris III.

Equitable economic development is a clear priority in reducing the potential for further unrest; thus, good business sense and private sector initiative are crucial for the equation that will return Lebanon to a path of growth, provided that the political parties and religious communities and their leaders are willing to dance.

To be successful, this collaboration has to involve all parties, not by the status quo-return of saying “no victor, no vanquished,” but by discovering the ultimate value of a dance that many can share. Nay to the need for tango. The Lebanese dance, after all, is the dabke.

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Comment

Days of decision for damascus

by Andrew Tabler
written by Andrew Tabler

Few Syria observers ventured a guess at the New Year as to what the coming 365 days may hold for the country. The region’s topsy-turvy politics is the primary reason, but so is a trait unique to Syria: its seeming inability to set targets and meet them. The final date of the June 2005 Baath Party conference (where a “great leap forward” was promised to take place) was officially set only a week before the meeting began. To date just one of the conference’s edicts—proclaiming Syria a “social-market” economy—has made it onto paper.

It’s election year in Syria, however, and some events penciled into the country’s agenda for 2007 are noteworthy. Sometime before July 10, President Bashar al-Assad is expected to win a (still officially unscheduled) referendum on a second seven-year term in office. In parliamentary elections slated for the second half of April, the ruling Baath Party, which leads the National Progressive Front (a coalition of nine parties), is all but certain to capture its constitutionally mandated two-thirds majority in the Peoples’ Assembly.

Due to be released ahead of each of Syria’s polls are results of a different type: the last two reports by Belgian investigator Serge Brammertz into the murder of the late Lebanese Prime Minster Rafik Hariri. While the investigation’s recent releases note Syria’s compliance with the probe, they also cite “converging evidence” pointing toward Damascus. Whatever Brammertz has up his sleeve remains to be seen, but the announcements provide the opportunity to meddle in Syria’s internal affairs. The big question remains, however, is how the regime and its opponents will play it.

During Syria’s last parliamentary elections in 2003, big Syrian businessmen running for office spent millions of Syrian pounds (now capped at 3 million) on massive outdoor advertising campaigns. The electioneering raised eyebrows at the time not because of its scale (in one Damascus neighborhood, candidates’ advertising outnumbered photos of the president by as much as 30 to 1), but because hopeful candidates bothered to campaign at all. The days under Hafez al-Assad where candidates were pre-selected have given way to a sort of popularity contest where businessmen from powerful families can enter the political realm.

Once in office, representatives are expected to work with the government of Prime Minister Naji al-Otari to draft legislation to overhaul the country’s ailing economy. After passing laws in 2006 to approve the Five-Year Plan and the country’s first stock market, private insurance companies, Islamic banks and private foreign exchange houses, parliament is expected to issue laws this year on mortgage finance, leasing, public sector reform and the issuance of treasury bills.

All of this seems like inside political baseball, and not the kind of thing that might be affected by international pressures bearing down on Syria. But a December report in Time magazine, citing leaked Bush administration documents, claims that Washington has something in store for the assembly poll. It will launch an “election monitoring” program in Syria ahead of the elections together with elements of the exiled opposition National Salvation Front, involving “Internet accessible materials” that can be printed and distributed, as well as a “voter education” campaign. The article even claimed Washington plans to fund at least one candidate for parliament. Those accused of involvement in the scheme have denied the report’s authenticity. Such pressures, however, combined with a dramatic announcement by Brammertz in his next report on March 15, is likely to set off regime paranoia (already running high) ahead of the poll.

The presidential referendum that constitutionally must take place sometime before Bashar al-Assad’s first term ends next July seems much more susceptible to international pressure. Once the new parliament approves Assad as a candidate, Syrians are offered the choice of yea or nay. 97.29% voted the former seven years ago. A mere three weeks before Assad’s term ends, Brammertz is scheduled to release his final conclusions on June 15 before handing the Hariri case over to an international tribunal. If the Belgian fingers senior members of the regime as suspects, and calls them to trial, it is hard to predict what would happen. Syrian referendums are not free and fair, but they are rare moments of mass gathering in Syria—and therefore laden with nationalist sentiment.

Will Assad use the referendum to rally the Syrian people against the Israeli-American “conspiracy” behind the investigation? Or will former Vice President and now National Salvation Front leader Abdel Halim Khaddam use the probe’s results to rally citizens around the flag? If a report in the pan-Arab daily al-Hayat last month that the Syrian leadership has decided to reschedule the referendum for late May is any indication, Assad isn’t taking any chances. Another report in the Israeli daily Ha’aretz leaking a “track two” peace plan with Israel initiated by Assad himself shows the inscrutable president may go for broke. Hold onto your seats folks!

ANDREW TABLER is a Syrian-based journalist and political commentator 

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Lebanon

Shifting trade winds Blowing Lebanon’s way

by Thomas Schellen
written by Thomas Schellen

Lebanese trade patterns are in for further changes in 2007, but it’s not armed conflict that will force alternative trade routes on the country’s many importing merchants and exporting manufacturers. Change will come because of world market realities.

Overall, according to the numbers currently available from Lebanese customs, the nation’s exports last year developed handsomely despite war, blockades and overall strains on GDP. In the first 11 months of 2006, the official statistics counted an export value of nearly $2.1 billion, driven by industrial exports and 24.7% better than in the same period a year earlier.

Lebanon’s outbound trade remained concentrated within the region, with four out of the five top destinations Middle Eastern countries. Saudi Arabia and the United Arab Emirates in the Gulf, and Syria and Iraq in the Levant together received 27.9% of Lebanon’s exports, or $579 million in goods. Switzerland, the Lebanese destination for jewelry and precious metals, was the big exception to the regional rule and returned to first place among export destinations with $431 million in goods sold or 20.8% of total exports.

Imports showed more of an impact from the summer war and remained below $8.5 billion but the ratio of exports to imports climbed to a record of 24.4%, more than double of what it had been five years ago and almost five percentage points better than in the first 11 months of 2005.

The two countries that improved their position as sources of Lebanese imports last year were the United States and China. In the first 11 months of 2006, the US was the main source of Lebanese imports, accounting for $894 million or 10.5% of total imports. After France, which sold $699 million in goods to Lebanon, China was the third supplier with $674 million, ahead of stalwart trade partners such as Italy ($622 million) and Germany ($600 million).

According to Salim Zeenni, the chairman of the American Lebanese Chamber of Commerce (AmCham), the inbound trade from the US doubled in 2006. Citing US trade statistics for the first nine months, he told Executive that Lebanese imports from the US increased by “exactly 107%” over the period.

That would mesh nicely with a new agreement that Lebanon and the US signed in December, with the optimistic-sounding name of Trade and Investment Framework Agreement, short TIFA. The abbreviation even contains the same letters as the coveted FTA, Free Trade Agreement, for which some countries have given very much to reach.

TIFA not an FTA

But the TIFA is much closer to a letter of good will than a true real-life FTA. The US State Department describes TIFA as a non-binding “consultative mechanism” of the US for discussing issues of trade and investment with another country, stating clearly that TIFAs are usually signed with nations that are, well, “in the beginning stages of opening up their economies to international trade and investment, either because they were traditionally isolated or had closed economies.”

The reason that Lebanon’s US imports soared in 2006 was purely commercial rather than linked to any negotiations, confirmed Sami Haddad, Lebanon’s minister for economy and trade. He said the increases in Lebanese imports from the US in 2006 included purchase deals for refined mineral oils as well as machinery and food stuff or the usual frontrunners, cars and cigarettes.

So in search for answers to the shifting of trade winds, one has to look to the euro, which appreciated again in 2006 and pushed the cost of deals with European traders up. Since the dollar is predicted by some international finance houses to weaken further this year, potentially causing the euro to cost more than $1.35 by the end of 2007, Lebanese importers in search of the cheapest supplies will, by necessity, seek out US prices, not to mention that they are likely to see further new offers of unbeatable prices from China.

If Lebanon wants to strengthen its trade with the US at this time, it should first seek to demonstrate its resolve to join the World Trade Organization, Zeenni said.

US diplomatic sources familiar with Lebanon’s economy agreed, on the condition that they not be named. “The WTO will help Lebanon promote itself because all international investors will be more encouraged to come and invest in Lebanon. If Lebanon is not part of the WTO, then there will be a problem,” said one US official.

“Sometimes because of political problems, there is no consistent, continuous push for WTO membership. We should do better homework because the world is giving us a chance,” Zeenni said.

Jordan, which signed an FTA with the US in 2001, is often cited as the example for the benefits of privileged trade relations with the US The country’s exports to US markets multiplied from $301 million in 1999 to $1.9 billion in 2005. Foreign Direct Investment increased by almost 500% and close to more than 45,000 jobs were created due to expansion of trade with the US.

However, it has to be noted that much of the boom in Jordanian exports to the US is in products manufactured in so-called qualifying industrial zones (QIZs.) The QIZ manufacturers can supply US customers free of tariffs and quotas if they meet requirements for joint Jordanian and Israeli value added.

A similar agreement has been implemented in Egypt but is out of the question for Lebanon, which is in an official state of war with Israel. But an FTA with the US also faces other hurdles.

One of the main barriers to joining the WTO and ultimately an FTA with the US are Lebanon’s high import tariffs and a protectionist policy that make it difficult for foreign companies to enter freely or to start a new business here, Zeenni said.

Demand to change Lebanon’s laws

It is a long-standing demand by foreign manufacturers and particularly by the US that Lebanon needs to improve and amend some of its laws regulating investment and trade as well as speed up legal and administrative procedures. The problem highlighted specifically in this context is Lebanon’s poor record of enforcing intellectual property rights.

Pirated material accounts for 75% of all software and music sales in Lebanon, while illegal cable TV connections comprise almost 100% of all connections in the country, said the International Intellectual Property Alliance (IIPA), putting a figure of more than $25 million in 2005 as trade losses that American companies incurred as a result of piracy in Lebanon.

Lebanon is a signatory to the Paris Convention for the protection of industrial property, the Madrid Agreement for the repression of false or deception indications of source on goods and the Nice Agreement concerning the international classification of goods and services for purposes of the registration of marks.

A new copyright law, No. 75/99, entered into force in 1999, which extended copyright protection to computer software, video software as well as all audiovisual works in addition to protection of literary and artistic works.

The Ministry of Economy says the law provides stronger penalties for violators and better compensation for victims of infringement. Lebanon also approved a patent law in 2000, but nonetheless IPR infringement rates here have remained above 70% while other countries in the region succeeded in significantly lowering their piracy rates that were of similar severity a decade ago.

Because of its high infringement rate, Lebanon in recent years almost lost its membership to the US’s Generalized System of Preferences, GSP, under which Lebanese companies can export to the US with nearly no custom duties.

Around 60 American companies have a direct presence in Lebanon in addition to some 300 agents of American companies, but if Lebanon were to modernize its laws and stabilize its political scene, many more investors would come, American officials have suggested, putting a decidedly optimistic spin on the outlook for bilateral economic relations.

The question is if Lebanon will gain much in outbound trade from being on the good side of Washington. Lebanese exports to the US, which consist mainly of foodstuffs and jewelry, amounted to $70 million for the first ten months in 2006, about 1.5% below 2005 levels, according to US statistics. The Lebanese customs statistics showed an even lower number, describing exports to the US in the first eleven months of 2006 as $48 million, or just 2.3% of all exports.

Even though it signed a TIFA with the US, Lebanon does not have a declared policy aim to prioritize the improvement of trade relations, Haddad said. He added that the US is the world’s number one market, and, “We are very interested in increasing our exports and establishing the best relations possible.”

Growth of exports is a very good thing. However, as the US State Department said, a TIFA in some cases can lead to an FTA, and as Lebanese officials and AmCham agree, reaching an FTA with the US will take time. A whole lot of time. Without holding its breath for such a marvel, Lebanon’s private sector can continue to develop their market powers and capabilities that allowed them to increase exports in recent years, while working and perhaps saying a prayer or two that the national conditions will improve to become conducive for smart industrial activities economically, politically, and security-wise.

 

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Banking & Finance

European – Lebanese partnership on tap

by Executive Staff
written by Executive Staff

New seeds for economic growth were engineered last month in Beirut when the European Investment Bank and Byblos Bank Group announced that their collaboration had progressed another step towards establishing an investment company, which will take private equity stakes in small and medium enterprises in Lebanon and three other Middle Eastern countries—Syria, Jordan and Egypt.

The joint venture of Byblos and the EIB’s Facility for Euro-Mediterranean Investment and Partnership (FEMIP) involves EIB capital participation of up to 7.5 million euros ($9.8 million) in the private equity firm which plans to formally commence operations in the middle of this year.

According to Byblos Bank, the investment company by name of Byblos Ventures will initially work with a capital of $20 million, but the partners have made provisions to be able to expand this amount to up to $50 million if the project sprouts with full vigor.

Private equity projects taking off Private equity projects are a hot issue in the Middle East. A new lobby group for this financial method said last month that private equity funds in the GCC countries last year attracted investor interest to the tune of raising $10 billion in 2006, an almost 76% increase in new funding over 2005. As recently as three years ago, private equity funds in the GCC had to get by on managing only a handful of billions in investments, but this volume has grown to $18 billion last year and is poised to increase by further leaps and bounds, said the Gulf Venture Capital Association in January.

In this part of the region, Byblos Ventures is the third recent private equity project announced in Lebanon and the second that is funded in part by the EIB.

The first launch party happened last spring when Capital Trust and EIB teamed up for the EuroMena Fund, aiming at investments in companies in the Levant and North Africa that are ready to make the step from national to regional players and require funding for expansion. EuroMena was promoted at the time as EuroMena 1, to be followed by EuroMena 2. However, the fund’s growth seems to have been more cautious in its early phase as its managers told Executive at the Byblos Ventures press conference that they have so far entered into two participations ranging in size “between $3 and $15 million.”

The third new private equity fund that just started approaching hopeful investors is the Building Block Fund, which centers on companies with a Lebanese angle and new enterprises with emphasis on technology and services companies. It is a brainchild of Bader Lebanon, an initiative of young business personalities, and aims at raising a capital of $20 million, half of that before the end of March.

Bullish on Lebanon

Speaking to media at the signing of the partnership agreement with Byblos, EIB vice president Philippe de Fontaine Vive was all praise and cheer for Lebanon. The work on creating the private equity project with Byblos Bank Group took 18 months but was “not at all” delayed by the conflict between Israel and Hizbullah last summer and recent internal political disputes between Lebanon’s cabinet and opposition groups, de Fontaine Vive told Executive. “Lebanon will recover with Paris III and we have full optimism that this is the time to invest in Lebanon,” he said.

Byblos Ventures is based on a two-year-old ongoing technical collaboration for which Byblos, according to de Fontaine Vive, volunteered as the only Lebanese bank at that time. An earlier fruit of the collaboration was a $60 million global loan agreement, signed in February 2006.

Under a complex structure for creation and management of Byblos Ventures, the Lebanese banking group will take responsibility for supplying 50% of the capital in the new firm while FEMIP is committed to a 25% stake. Both will adjust their actual dollar contributions in the equity of Byblos Ventures to reflect the percentage stakes agreed upon. This would set the practical ceiling for the project at closer to $40 million, based on a statement by de Fontaine Vive that the capital participation authorized by EIB is capped at 7.5 million euros.

According to Paul Chucrallah, assistant general manager for Byblos Invest Bank in charge of managing Byblos Ventures, the structure to establish and manage Byblos Ventures will entail the creation of another new subsidiary in Byblos Group, which will be named Byblos Management and run Byblos Ventures on the legal basis of minimal stake holding.

As a time-limited project, Byblos Ventures has an investment horizon of ten years, maximum twelve years, divided into two stages of activity. These stages—that can partly overlap—are an investment phase of three to five years and an exit phase for the remainder of the project’s lifespan.

Expanding Byblos Management’s mandate

Byblos Management, however, could pursue projects beyond this first private equity undertaking, Chucrallah told Executive. He characterized the transfer of knowledge and the development of advanced professional skills as benefits from the collaboration between the Lebanese bank and the EIB that are even more important than their financial cooperation.

Based on this knowledge transfer and skill development, Byblos Ventures will be able to participate in the equity of traditionally family-owned firms in the region on an unprecedented level and function as accelerator for the growth of invested companies, Chucrallah said.

In other practical manners, investments into individual companies will vary between $1-2 million in size and no single investment will exceed 10% of Byblos Ventures’ equity base. Per sector, investments will be limited to 40% of the investment company’s equity, and its private equity participations are intended to focus 50% on Lebanon but this rule is flexible.

Byblos Ventures is geared to help in the development of companies by contributing both funding and expertise and Chucrallah said the project team could start engineering equity participations even before the formal launch later this year. No one could have appeared happier about this than an exuberant Joseph Raidy, the chairman of Beirut-based Raidy Printing Group.

“Byblos Ventures will help industrialists in two ways, through bringing money and through improving the structure of companies, because these are very professional people,” Raidy told Executive, adding that his company will be perhaps the first to benefit from the equity participation. He called the arrival of Byblos Ventures, “a great step for Lebanon.”

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