The Buzz

This was the cruellest cut

by Faerlie Wilson
written by Faerlie Wilson

In our July issue, Executive devoted a special section to the tourism sector in Lebanon. Like the rest of the country, we eagerly anticipated a record season in 2006: the tourism ministry predicted 1.6 million tourists would enter Lebanon this year, and estimated the value of the sector at around $4.5 billion.


On July 12, these dreams abruptly ground to a halt. The following days saw desperate tourists flee the country en masse; festivals and concerts were cancelled; restaurants, hotels, nightclubs and beach resorts shut their doors. The crucial sector is now on hold: according to industry experts, the future of tourism in Lebanon hinges on the type of settlement reached at the end of the conflict. Anything less than a comprehensive solution will spell its permanent demise; if a lasting settlement is achieved, there is a chance the sector may bounce back stronger than ever.

Overnight catastrophe

“It’s really a catastrophe,” lamented Nada Sardouk, Director-General of Tourism. The industry is suffering from a host of direct and indirect losses, in every corner of the country. Tourist infrastructure was not spared in the Israeli bombardment: the damage done to beaches alone by the disastrous oil slick from Israeli attacks on the power plant at Jiyeh may cost billions to repair. The losses in services are similarly staggering, with occupancy rates down at hotels and restaurants, and businesses like travel agencies and car hire firms largely irrelevant in wartime Lebanon.

According to Pierre Achkar, president of the Lebanese hotel syndicate, 75% of hotels are currently at under 10% occupancy. Although the remaining quarter enjoys better rates, hosting displaced Lebanese and foreign media, these numbers will continue to slide as the displaced seek more permanent, cost-effective accommodation.

Debts called in

Numbers for the restaurant sector are even bleaker. Syndicate President Paul Arif estimates losses at approximately $800 million already. Restaurants in the BCD, which has been reduced to a virtual ghost town, have been especially hard-hit. In addition to the loss of revenues, the restaurant sector faces the costs of paying some 75,000 employees partial or full salaries for July and August.

Moreover, of the thousands of new restaurants that have opened in the past six years, Arif estimates as many as 90% raised debt from the banks: “If the banks don’t set up a contingency plan to drop interest payments, many restaurants will go bankrupt.”

According to Sardouk, the Tourism ministry is already working as a liaison between investors in the sector and parties they’re indebted to, helping to postpone financial dues.

“No one can imagine how many people work in the tourism sector, especially this season,” she explains. “They all have loans out; now they’re making nothing but they still have to pay back.”

The greatest losses, however, are the least tangible: those incurred by the damage to the country’s image as a tourist destination. Sardouk notes that 2006 was supposed to be Lebanon’s “confidence year,” after years of development and campaigning. Instead of challenging Lebanon’s image as a war-torn nation, however, the events of July obviously reaffirmed this perception.

“Look at the evacuations,” ventures Sardouk. “What can we sell to these hundreds of thousands of people who were driven onto boats and treacherous roads, trying to escape the country? People have suffered here.”

Achkar agrees that if the sector is to recover, changing Lebanon’s image from a place where war can break out unexpectedly will be crucial.

“Confidence is related to the political solution,” he argues. “If Hezbollah loses its arms, that would be a final solution. And if we have a final solution, I will be optimistic.”

Arif is more optimistic still. He suggests that with a comprehensive resolution, tourism in Lebanon could start to recover within months – although it may take longer to lure back Europeans, he believes Gulf Arabs would return as soon as Ramadan this fall.

Au revoir or goodbye?

In the meantime, the tourism sector, which we described just last month as Lebanon’s “crown jewel”— a sector that offered so much promise and optimism—has become one of the most striking examples of Lebanon’s collapse. It is too early to assess direct losses to the sector, and a calculation of total costs may be impossible: tourism, after all, depends not only on restaurants, hotels, and attractions, but also on the infrastructure that permits people to travel to them, the integrity of the environment and structures that comprise venues, the people who provide services, and innumerable other factors.

The costs, however, will be nothing short of staggering – early estimates put the number in the billions of dollars. And damage to the morale of the Lebanese and the will of foreigners to visit may be even greater still.

In the absence of a lasting resolution to the war, the future of tourism in Lebanon is very bleak indeed. The past few weeks have shown that war can rise up suddenly at the best of times in Lebanon: as long as this continues to be true, few people will risk investing their time or money in the country. Sardouk spells it out in very stark terms:

“If there isn’t a total and eternal solution, don’t speak anymore of tourism in Lebanon. We should say goodbye to it forever.”

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The Buzz

Not such a simple picture

by Gareth Smith
written by Gareth Smith

Back in January in Beirut, Sadreddine Sadr, the son of Imam Musa Sadr, told me Lebanon could never make peace with itself while “all sects, including my own, look to outside allies for support rather than to fellow Lebanese.”

While many Lebanese have in recent years expected the US, France, or the Saudis to solve Lebanon’s problems, a special and critical attention has focused on the Shia relationship with Iran. So it was refreshing to hear Mr. Sadr – a man fluent in both Farsi and Arabic, and who regards both Iran and Lebanon as home – speak with such candor.

Official position

Iran’s interest in Lebanon is a complex one, with roots in centuries-old relationships across the Shia world and with a modern history of personal, political and military links that shaped Tehran’s reaction to events unfolding after Hizbullah seized two Israeli soldiers on July 12.

Iran’s official position – endorsed on July 28 in a joint statement with Indonesia, Malaysia, Pakistan and Bangladesh – was to call for an immediate ceasefire. Political leaders, including president Mahmoud Ahmadinejad and influential former president Akbar Hashemi Rafsanjani, have accused the United States of trying to “recarve the map” of the Middle East in alliance with Israel. Ali Akbar Velayati, advisor to Supreme Leader Ayatollah Ali Khamenei, told a television roundtable that Hizbullah had foiled a US plan for Israel to occupy Lebanon as far as the Litani river and then introduce NATO forces.

At a popular level, anger at Israel’s onslaught with US support is more muted than in many Arab countries, but it real enough. While some Iranians complain at any official interest in Lebanon when Iran faces domestic problems like unemployment and inflation, genuine sympathy for the plight of the Lebanese goes far wider than political circles and staunch supporters of the Islamic Republic.

“Can you think of another country that would destroy its neighbour like this just because two soldiers are kidnapped?” asked a 45-year-old part-Jewish Tehran professional who has voted only once in Iranian elections. “The Israelis are killing children,” said a younger man in less affluent south Tehran, “And when I look at my own small son, I feel for those who are losing children because of Israel’s crazed political ambitions.”

Few analysts believe Iran’s official line that it is not supplying weapons to Hizbullah, although the more objective have been sceptical of some Israeli claims, suggesting, for example, that the C-802 anti-ship cruise missile that hit an Israeli warship, killing four sailors, was made in China, rather than Iran.

But there has been clear frustration among officials that Iran can do little to support Hizbullah fighters outgunned by Israel’s vastly superior military force.

“The most state-of-the-art weapons are in their hands, with satellite information at their disposal day and night,” said Ayatollah Nasser Makarem-Shirazi, one of the country’s senior clerics, during the second week of fighting. “Anyone who has advanced military aircraft can bomb inhabited areas and massacre defenceless people. But this is neither courage nor initiative in war – it nothing but weakness and abjectness.”

Western suspicion

There is also concern the fighting has increased wider regional instability. “The resistance of a few hundred Hizbullah fighters after two weeks of heavy bombardment is truly impressive, but the situation is still dangerous for Lebanon and the whole region,” said a leading reformist. Sadegh Kharrazi, Iran’s former ambassador to Paris, told me he feared Israel might “once again try and start sectarian conflict, or even civil war, in Lebanon” through their demand that Hizbullah be disarmed.

Aside from its work in the 56-member Organisation of the Islamic Conference, Iran’s diplomatic efforts have seen Akbar Hashemi Rafsanjani, the influential former president, write to Saudi Arabia’s King Abdullah suggesting that “strong Saudi opposition to the brutal attacks of the occupying regime” could help push the US into revising its support for Israel.

Western speculation that Iran authorized Hizbullah’s capture of the Zionist soldiers centred on the July 11 visit of Ali Larijani, Iran’s top security official, to Damascus – even though Mr. Larijani’s visit, far from being secret, was widely reported in the Iranian media before the Hizbullah operation within the next 24 hours.

Tzipi Livni, Israel’s foreign minister, told Newsweek she was “sure” Iran had prior knowledge of the action. Analysts speculated Iran was trying to divert international attention from the stand-off over its nuclear program.

But British Foreign Secretary Margaret Beckett admitted to the Financial Times the west had no evidence of this, and Frank Gardiner, the respected BBC security correspondent, said his western intelligence sources said they had no hard evidence – either from human informants or from intercepted communications – that Iran had instructed Hizbullah to seize the two soldiers.

Whatever the excitement in the right-wing US and Israeli media, seasoned observers in Iran are unimpressed by the Iranian students volunteering for martyrdom operation against Israel. The groups organizing these theatrical sign-ups have never to date reported any of the members carrying out an attack.

There has been a sharp contrast in the tone of fundamentalist newspapers and more pragmatic officials in Iran, whether conservative or reformist. The hardline Kayhan and Jomhouri-ye Islami have extolled the bravery of the Resistance and demanded that the US remove the Zionist state from the Levant and relocate it to either mainland America or Europe.

But reformists and conservative pragmatists have spoken more of Lebanon’s right to self-defense and the need for negotiations – involving Iran and Syria – over the Middle East conflict. Mr. Kharrazi, who was removed as ambassador to Paris after Mr Ahmadinejad was elected last year, reiterated to me that Iran would support whatever solution in Palestine was backed by the Palestinians, quoting the Farsi proverb Kase-ye dagh-tar az aash (literally ‘the bowl cannot be hotter than the broth’).

But even before violence erupted in July, Tehran was already concerned over US attempts to reshape Lebanon, as was made very clear in a major speech by Ayatollah Khamenei in early June. Iran was never going to accept the US-Israeli agenda of disarming Hizbullah – the only Lebanese group that has ever resisted Israel with any degree of success – outside a wider political process in Lebanon. The Iranian media quickly seized on a Beirut Centre for Research and Information poll finding 87% support for Hizbullah’s retaliatory strikes on northern Israel and 70% support for the group’s capture of the two Israeli soldiers.

Cultural links

Outrage over South Lebanon is particularly vivid for clerics, officials and politicians with personal links to Lebanon. Mohammad Ali Abtahi, vice-president under Mohammad Khatami, was in Lebanon as the representative of state broadcasting for much of the 1990s, and former president Khatami himself has been invited to visit this month by the parliamentary speaker, Nabih Berri.

Religious and cultural links go back many centuries, even beyond the decision of Iran’s Safavid dynasty in the 16th century to convert Iran from Sunni to Shia Islam and to bring the holy men of Jabal Amil from South Lebanon as teachers.

Iran’s religious families are well aware that many of the villages and towns under Israeli attack are ‘holy ground’ as historical centres of Shiism. Meiss al-Jabal had an influential religious school from the 16th century, long before Iran became an Islamic Republic in 1979, before Israel was formed in 1948, and even before the birth of the US in 1776.

But even those with long memories and historical perspective sense that the 2006 Israel-Lebanon war is taking the Middle East into a fresh and volatile phase. For Iran, like the rest of the region, nothing is ever going to be quite the same again.

Gareth Smyth is the Tehran correspondent of the Financial Times. He has asked that his fee for this article be donated to help the suffering in Lebanon.

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Analysis

Bush’s lucky break

by Executive Editors
written by Executive Editors

After three long years of somber and often depressing news from Iraq – where by mid-June, according to Pentagon sources, the American military death count had reached the landmark total of 2,500 – the situation took a dramatic turn with the death of the most wanted man in Iraq, Abu Musab al-Zarqawi.
Zarqawi was believed to be responsible for many attacks against American, coalition and Iraqi forces, as well as for the killing of Iraqi military, security and police recruits. International intelligence agencies suspect Zarqawi was also responsible for the gruesome beheading of several hostages. He was a meticulously savage man intent on igniting a civil war between Iraq’s Sunni and Shiite communities.
The US made it a priority to find Zarqawi and offered a $25 million reward for information leading to his capture. Jordan also had its reasons to want Zarqawi’s head, after he was blamed for bomb attacks in three hotels in Amman last November. While President Bush quickly claimed credit for the death of the Jordanian-born terrorist, Jordanian special forces operating under cover inside Iraq made a key contribution.

Jordanian special forces’ key role
Executive has learned from official Jordanian sources – and confirmed with several US intelligence sources – that a man close to Zarqawi was apprehended by Jordanian special forces and turned over to US authorities.
One American security and terrorism expert who is well-acquainted with the region told Executive that Jordan’s special forces were possibly the best-trained in the Middle East.
It was this arrest by the Jordanians that led the US special forces in Iraq to Zarqawi’s religious advisor. The Americans were able to monitor a cellular phone used by the imam, which in turn led the American and Iraqi forces to the house used by Zarqawi in the town of Baqouba. The rest, as they say, is history.
This time, Bush truly had something to celebrate. The elimination of Zarqawi may have finally absolved President Bush of his premature victory lap three years earlier, when, clad in a fighter pilot’s outfit, the president landed onboard the USS Abraham Lincoln and triumphantly declared the end of all “major combat operations,” standing before a huge banner that read “Mission Accomplished.”
As we were soon to find out, the battle had only just begun. In the three years since, American and coalition forces were to face two different types of insurgents; the first, making up the Sunni resistance, are in fact mostly Iraqis – cashiered soldiers and officers who served in Saddam’s army, along with members of the Baath Party.
American officials and the previous and sitting Iraqi governments have in the past tried to kick-start peace talks with these rebels. The talks, usually held in utmost secret, have mostly sputtered and stopped. But experts believe that at the end of the day, the Iraqis as well as the Americans will have to bring the main branch of Sunnis into the equation and include them in the rebuilding of Iraq.
Zarqawi and his followers are a whole different kettle of fish. They are for the most part foreigners who will have no part in any peaceful future Iraq. These are the people who will fight to the finish.
Immaculate timing
For Bush, the timing of Zarqawi’s death could not have been better. It came as his approval ratings were at an all-time low. The war was not going well, with casualties mounting on a daily basis.
Riding the momentum of this success, President Bush paid a surprise visit to Baghdad. The American president met with Iraqi Prime Minister Nuri al-Maliki, spent a few minutes with some US troops and left before word got out that he was there. In all, the American president spent no more than five hours in Iraq. But for him, every minute spent in Iraq was worth its weight in gold.
As a reminder that Baghdad is still a very dangerous place, Bush’s visit to the Iraqi capital was a far cry from his landing aboard the USS Abraham Lincoln.
Three years after that event, a select few – the Iraqi prime minister and his cabinet, along with some American soldiers – saw a far more somber and down-to-earth Bush. This time there was no fanfare as Bush arrived aboard Air Force One. To avoid anti-aircraft fire the presidential aircraft had to engage in a spiraling maneuver over Baghdad International Airport. Bush was taken in a Black Hawk helicopter to the heavily defended Green Zone compound where the Iraqi government, the US Embassy, and many foreign legations are located.
Zarqawi’s death has helped Bush’s approval ratings, pushing him up to 38%, two full points higher than he was a month ago. And as the November elections approaches, the president needs all the help he can get to keep the Republicans in the majority on Capitol Hill. But breaks like the capture of Zarqawi are rare in an Iraq that continues to be plagued by almost daily terror attacks.

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For your information

Ports in a storm

by Executive Editors
written by Executive Editors

Ports in a storm
A combination of relaxed trade regulations, high transit demand and soaring local consumption has helped Syria’s two ports achieve record levels of cargo traffic and position themselves as potential transshipment hubs for the eastern Mediterranean.
Lattakia and Tartous provide an increasingly vital outlet for the Syrian economy. The former has doubled its productivity and more than tripled its income over the last five years, while Tartous has grown by 115% since 2003, thanks mainly to dry bulk goods being shipped onwards through Syria to Iraq.
“Syria provides the cheapest and quickest route to the Iraqi market,” says Michel Sawaya, assistant manager at Eagle Shipping and Logistics, the Syrian agent for the French CMA-CGM container giant.
“If you go via a Turkish port, then you have to deal with mountains. If you ship through Jordan, then you have to pay Suez Canal costs and also deal with Aqaba, which is very congested. Shipping direct to the Gulf takes at least another 20 days, and even then the port of Umm Qasr in Iraq is also extremely congested.”
Lattakia mainly sees container traffic, destined for a local market with booming demand, while Tartous, some 100 km closer to the Damascene and Iraqi markets, depends on bulk goods such as cement, foodstuffs, animal feed, spare parts and iron. The majority of this is shipped on to Iraq or Jordan.
Major developments are now planned at both ports, aiming to increase capacity, upgrade existing equipment, and deepen berths to allow larger mother vessels to dock.
“We are currently working with the UNDP on a study to enlarge and upgrade the port,” says Suleiman Balouch, general manager of the Lattakia Port General Company (LPGC). “It should be complete by 2007, and then we expect construction to take another 2-3 years.”
In Tartous, a decision is soon expected on a BOT tender for a new container terminal. Of the four companies that bid for the 10-year contract, CMA-CGM and a Filipino firm, International Container Terminal Services (ICTS), have been shortlisted.
The Port of Beirut has also grown thanks to onward shipments, although to a lesser extent than its Syrian counterparts. Transit goods landing in Lebanon must pass through Syria anyway – meaning two sets of paperwork, lengthy security checks at the border and a mountainous drive.
The Syrian port companies also say that their fees are 25% less than in Beirut, a factor which they argue will drive more and more traffic through Lattakia and Tartous in the coming years.

All change at Cave Kouroum

All change at Cave Kouroum
Cave Koroum, a Kefraya winery that has so far failed to make a significant impact on the local market, has signed a distribution deal with K&M (Khoury & Moallem) which will see its wines join the ranks of other Lebanese producers on the supermarkets shelves. “We are in Spinneys, Bou Khalil, and Aoun, and will soon be in Geant,” said Cave Koroum’s sales manager Ibrahim Serhal.
Sadly, those visiting and departing Lebanon this summer will not find Cave Kouroum on the shelves of the Beirut Duty Free, as the winery has joined a handful of other producers who find the rates charged by PAC, the company that runs Beirut Duty Free, prohibitive. “To be at the airport, we must pay $25,000 a year for wine and $16,000 for arak. We would have had to spend even more on tastings, which can cost as much as $1,500 per week. I decided to allocate the funds elsewhere,” said Serhal.
There were rumors in the Lebanese community that Kouroum’s colorful wine maker Yves Morard had ended his long relationship with the town of Kefraya (he had previously worked at Chateau Kefraya since the early 1980s), but Serhal was at pains to point out that, while he spends most of his time in France, he is still under contract and was working closely with the wine-making team on the ground.


The company is the only Lebanese producer to sell its wines in boxes – the so-called bag in a box concept – but Serhal admitted that in Lebanon, at least, the concept had few takers. “You know the Lebanese consumers. They see it as low quality.” That said, Koroum aims to position its wines in the top drawer. The wines have won a slew of medals in the last six months and Serhal says the winery has great hopes for its new premium reds – Syrah/Cabernet Sauvignon and Syrah/Carignan. Koroum is also looking to increase exports. The wines are already available in Norway, Germany, Switzerland, Belgium and Mexico. According to Serhal, at least half of the winery’s 450,000 bottles are destined for the export market.

Business excellence

Business excellence
The American University of Beirut’s Olayan School of Business, in cooperation with the Reuters Foundation, a nonprofit associated with the Reuters news agency, has announced the launch of an Academy of Business Information. According to George Najjar, Dean of the business school, “the proposed academy is to be part and parcel of the Olayan School. As such, its activities go beyond business journalism to focus on the process of generating, analyzing and using business information.”
Activities of the academy for the next year include a pair of two-day workshops in November and December and a proposed international conference in January on business information in the Middle East. But the main event will be a formal, one-semester program conferring a certificate in Business Information. The first classes toward the certificate will be held in February, 2007.
Coursework for the certificate will consist of five one-week modules, each of which can be taken independently, and which will be taught every other month. Although the syllabus is still in development, each course is likely to consist of a short, intensive session of four 8-hour days, with classes capped at 12-15 people. According to Najjar, “a participant may opt to register for only one module, but then they would obviously not get a certificate.”
The coursework will be based on a syllabus being developed by the Reuters Foundation in cooperation with AUB faculty. According to Jo Weir of the Reuters Foundation, the academy will mark the first time the foundation has participated in a formal program granting a certificate in business reporting. On the other hand, the foundation has been training journalists and businessmen around the globe in business information for years, and has cooperated with AUB since donating a news room to the school in 2001. The news room, along with a dealer’s room (donated later), will form an important base for the practical elements of the new academy.


Although the coursework will be in English, Weir expects that many beneficiaries of the program will work mainly in non-English media, based on the Reuters Foundation’s experience both in the region and around the globe. “The basic principles of journalism remain the same and can be transferred to work in other languages,” she says, “And this is especially true of business reporting.”
Najjar emphasizes that the program will not be intended only for journalists, but will be “intended to serve as a major platform for all three constituencies, namely producers, analysts and users of business information including business journalism. The program is intended to significantly upgrade the quality of business information services available locally and regionally.”

Web alliances

Web alliances
Last month, Franco-Lebanese web marketing firm Ebizproduction finalized a partnership with Weborama, a French industry leader in e-commerce services. Through the agreement, Ebizproduction can now offer its clients access to Weboscope, Weborama’s premier website analysis tool. The partnership is Weborama’s first foray into the Middle Eastern market, and coincides with the company’s euro 20 million worldwide expansion plan.
According to Communications and PR Manager Yann Rotil, Ebizproduction sought out the agreement: “We were looking for the solutions that they were providing,” he explained to Executive. “There was another group we could have partnered with in the United States, but as a French-Lebanese company ourselves, it was easier to use Weborama.”
Weboscope, the service at the center of the agreement, provides detailed website traffic analyses and Return on Investment (ROI) data for online advertising campaigns. By providing precise turnover figures for each investment (such as a banner ad or Google “sponsored link”), Weboscope enables clients to monitor – and potentially increase ­– the effectiveness of e-marketing strategies. Although Ebizproduction and its competitors have been offering more basic site analyses for years, Weboscope provides a far wider range of data than any other service on the domestic market and is the only tool to analyze ROI and effectiveness statistics. Rotil reports that several of Ebizproduction’s high-profile Lebanese and regional clients have wasted no time signing up.
As for the Lebanese e-commerce sector itself, Rotil anticipates it will heat up in the next few years as web marketing companies provide their clients with better solutions (and returns). For Rotil, this means keeping up to speed with European technologies: in addition to the Weborama deal, Ebizproduction is currently in partnership talks with another top French firm.
Rotil sees tremendous potential for online business in the region – as long as red tape doesn’t get in the way. “In North America and Europe,” he explains, “E-commerce has been booming for the past five years. In Lebanon, the industry hasn’t taken off yet, primarily because of the quality of internet connections in the country. Once that problem is addressed, e-commerce will boom here, too.”

IDAL hits the road

IDAL hits the road
The Investment Development Authority of Lebanon (IDAL) was created to provide financial incentives and fiscal exemptions to lure investors to Lebanon. According to Nabil Itani, IDAL chairman and general manager, $800 million has been invested and 3,000 jobs created thanks in part to the Authority, which was formed by Investment Law 360 in 2003. He told this to reporters gathered for lunch at an almost empty Habtoorland following a June press tour of some of the projects that have profited from the new law.
But while the owners of projects visited by journalists during the IDAL press tour were unanimous in praising the fiscal incentives offered, they were less flattering in their assessment of the administrative procedures they have had to negotiate. (In addition to providing financial incentives, IDAL is supposed to be streamlining Lebanon’s laborious investment bureaucracy.)
Pierre Abou Jaber is CEO of VEN Invest Holding, a development group that comprises a number of foreign shareholders and has invested $350 million in Lebanon, $90 million of which is in the Le Gray Hotel project in downtown Beirut. According to him, “We would have expected a little bit more on the administrative and legal side … It took us a couple of years to get the necessary permits. The administrative side needs to be completely restructured. What we lack is transparency. The procedure is not accurate. You have to deal with the municipality. And it depends on the political mood. They’re stuck a little in the past, Ottoman procedures.”
Issam Tannir, part owner of the Grand Hyatt hotel being built in the Solidere area, said, “We have had many administrative problems. It is within IDAL’s remit to help with these problems, but they have not been fully involved in the matter.”
Dr. Nizar Younes, part-owner of the $70 million Hilton hotel under construction in Downtown Beirut, was fuming when the IDAL press group showed up. He had been ordered to stop work the preceding day because, according to an IDAL staffer, changes had been made to the building plan without the permission of the municipality. “There is no state,” Younes complained. “It takes too long to deal with administrative problems. Our administration can’t oversee development of the country.” IDAL staffers wrapped up the interview quickly.
“Maybe work will stop for two months now,” an IDAL employee said. But by lunchtime, the problem had been resolved. IDAL Director Nabil Itani told Executive he had “made some calls,” but with a broad smile declined to reveal exactly who he had called.
One IDAL official said the organization’s inability to streamline administrative procedures was a consequence of the political disputes that have paralyzed Lebanon in recent months. Itani acknowledged the need for administrative “improvements,” but when asked if politics was hindering IDAL’s work responded only, “The issue is not about supporting IDAL, it’s about supporting investors. All politicians support investment.”
Lebanon’s tourism sector has been a principal beneficiary of Investment Law 360. Itani said that 50% of the projects – worth 96% of total IDAL-supported investment expenditure – enjoying financial incentives under the new law were hospitality- and tourism-related.

Football financials

Football financials
As football fever grips the nation, some enterprising financial services firms have cashed in on the flurry of spending generated by the World Cup.
Al-Mawarid Bank (AMB) erected its own stadium tent downtown – with access reserved for customers who were generous with the bank’s MasterCard during the build-up to the tournament.
AMB devised three levels of spending under a special promotion which ran between April 20 and May 20. Customers forking out $100-250 on retail transactions during this period won a seat to watch all first and second round matches on the stadium’s projectors and plasma screens.
Spending $250-500 allowed two people to watch all games except the semi-final and final; access to the semi-final and final is restricted to those who made at least $500 of retail purchases.
“We definitely noticed higher spending on our credit cards during the promotion,” says Rana Karaki, Sales Manager at AMB. “Overall, we’ve given out 2,000 passes to the stadium, which holds about 150-200 people. The first few games were relatively quiet, but since then there’ve been about 150 people every night. We expect the final to be full.”
Société Nationale des Assurances (SNA) has also capitalized on the tournament, launching an online football game featured on their website.


“You log on, register and play as many times as you want,” says Rita Bakhos, from SNA’s corporate communications department. “Your score is recorded on the system and on July 9, at the end of the World Cup, we will award prizes to the top scorers.”
Booty includes a Chevrolet Aero, Acer laptops, digital cameras and mobile phones, although the bad news for more grizzled World Cup veterans is that only 15 to 30-year-olds are allowed to enter.
“The idea of this campaign was to tell young people in particular about SNA, promote our new website, and raise awareness that SNA is a part of the Allianz group – which is associated with the football stadium in Frankfurt,” says Bakhos.

Rustic charm

Rustic charm
As boutique hotels move into the mainstream, a trend has emerged at the cutting edge of the Lebanese hospitality industry: ultra-exclusive, niche venues offering five-star quality – at five-star prices – in an intimate setting. The movement is led by restaurants like Ashrafieh’s Metropolitan Club, and in the hotel sector, Bikfaya’s Locana Corsini.
According to Cinzia Corsini Abi Farah, her family’s “guest villa” represents a new concept in Lebanon. It was inspired by the locande of her father’s native Italy – small, family-run country inns where guests could enjoy comfort, warmth and personal attention.
With only eight suites, Locanda Corsini is the smallest luxury outfit in Lebanon. Its appeal relies on attention to the unique tastes of each guest. From deciding which magazines to place in a suite to planning individual excursions, niche hotels can make even boutiques look impersonal. Locanda Corsini even boasts home-cooking: all the food at their rustic Italian restaurant is hand-prepared by Abi Farah’s mother.


Aside from a few initial press releases, the Corsinis have relied exclusively on word-of-mouth marketing, a strategy which has left them almost fully-booked all summer. Abi Farah estimates 60% of their guests are Lebanese, 30% European and North American, and 10% Arab. They are already seeing an increase in the number of people coming from abroad.
Hospitality insiders believe that niche operations offer a promising new direction for the Lebanese tourism sector. With an abundance of picturesque countryside and villages, Lebanon is uniquely equipped to develop these kinds of projects in the region.
Abi Farah isn’t worried about competition, although she knows its coming. Locanda Corsini will retain an edge, she says, because of the extra intimacy that comes from being entirely family-run.

Cut Cristal

Cut Cristal
In late May, MENA Cristal announced that the second edition of its advertising awards would be staged at the Faraya-Mzaar mountain resort from February 28 to March 2, 2007. The MENA Cristal awards, an offshoot of Europe’s prestigious Méribel Festival de la Publicité, were introduced in 2005 to recognize talent and creativity in the Middle East and North Africa’s advertising industry.
MENA Cristal is still in its infancy, but the festival’s association with prestigious Méribel leaves it poised to bypass many of the usual growing pains. Méribel’s sole offspring, the MENA event even gives out the same award – the internationally-recognized Cristal.
The 2007 festival will differ somewhat from its debut in Casablanca on February 24 of this year. The range and number of awards presented will be greater: in Casablanca, besides the “MENA Grand Cristal,” awards were given in two categories; in 2007, there will be six areas of competition.
The single-day event has also been transformed into a four-day festival, equal in length to Méribel. In addition to the awards themselves, the festival will include advertising and marketing forums integrating debates, conferences, workshops and roundtables. The final day is set aside for leisure and tourist activities in Faraya-Mzaar.
Organizers are keen to foster an atmosphere similar to their parent award festival, which is held each winter at the ski resort of Méribel in the French alps. “One of the main reasons we chose Lebanon for 2007 is that we wanted to create the same ambiance as Méribel,” explained Emilie Rohmer, the International Development officer for MENA Cristal. Although Rohmer declined to speculate as to whether the awards might settle permanently in Lebanon, she confirmed that the festival is likely to remain in Mzaar for 2008 if next winter’s experience is positive.

Groupe Méditerranée
merger

Groupe Méditerranée
merger
This summer, a second step is being taken in the reorganization program at Group Méditerranée. The program began by rebranding Banque de la Méditerranée as the snappier BankMed. Now, the Group is consolidating all three of its commercial banks: retail-focused Allied Bank was merged with BankMed in May; Saudi Lebanese Bank is set to follow suit within the month. Mr. Mohammad Hariri, chairman and general manager of Groupe Méditerranée, explained the merger as an effort to streamline the Group’s activities and expand its catalogue of products and services. It will also provide customers with access to a far larger, more convenient network of branches and ATMs. However, the primary aim of the banks’ unification is probably to diversify and increase BankMed’s deposit base, chiefly from Gulf investors.
There are also plans to diversify funding by tapping the international investor community. A Euro Deposit Program of $1 billion and the issuance of 12 series of deposit certificates reflect the Group’s desire to broaden investment and boost its image in the international finance community and capital markets. Furthermore, there are plans to dispose of part of the Group’s real-estate portfolio, bringing in around $100 million and further diversifying and optimizing funding.

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Capitalist Culture

Bear with us

by Michael Young
written by Michael Young

In mid-July, the Group of Eight industrialized countries, and Russia, will be meeting in St. Petersburg, in what Russian President Vladimir Putin will regard as recognition of his nation’s resurgent importance. Not surprisingly, a main agent of that importance is oil and gas, and Putin has proposed that “energy security” be an item on the agenda.
Oil is one very good reason why Russia has been accorded a seat with G8 members, though its economy is smaller than Holland’s. Meanwhile, the country with the second largest economy in the world, China, has been kept at arm’s length. That’s partly because the G8 likes to see itself as a grouping of wealthy democracies, and China, with its blending of capitalism and autocracy, has provoked discomfort in the industrialized club. Oddly, though, that same distaste has little affected their attitude toward Russia, where Putin has gradually suffocated independent voices in the media, in the business sector, and even in non-governmental organizations.

Oil, gas, and a little payback
In the Middle East, however, Russia has shown an admirable propensity to absorb capitalist culture, though paired with a hard-nosed policy little patient with advancing open societies. Not surprisingly, oil and gas form a cornerstone of Russian behavior, as does pleasure in striking back at the Americans and reviving old Soviet-era alliances.
As analyst Ilya Bourtman has written, “Learning from US policymakers who for many years developed relations with both Arab states and Israel and were thus at an advantage when it came to resolving disputes and capitalizing on economic opportunities, Russian officials now similarly avoid any ideological principle that would force their policy to be zero-sum.”
Take Russia’s relationship with Iran. Putin is in a win-win situation as the West seeks to head off the Iranian nuclear program. Months ago, before the United States agreed to participate directly in talks with its European partners, Putin was the go-to man to offer Tehran facilities to enrich uranium outside Iran – seen as preferable to allowing this inside the country. The Ahmadinejad administration said no, but that hardly diminished Russia’s importance as the United States, the United Kingdom and France continued depending on Russia and China to preserve Security Council unanimity. At the same time, Moscow and Beijing retained Iranian goodwill by rejecting sanctions.

Profit before politics
If war were to break out in the coming year, Russia would not complain. Not only is a conflict likely to push Iran closer to Russia, it might generate so much regional blowback that the Bush administration would face years of headaches because of Iranian retaliation. But most significantly, war would push the price of oil up to unheard-of levels, providing a windfall for Russian oil companies.
Oil has also been at the forefront of Russia policy toward Arab states such as Saudi Arabia, Iraq, Syria, and Jordan. It’s the promise of profits that has motivated Moscow, not at all the idea of using economics to democratize the Middle East. For example, the Russians voted in favor of Security Council Resolution 1559 demanding a Syrian withdrawal from Lebanon, but have since opposed sanctions against Damascus for failing to cooperate in the investigation of Rafik Hariri’s assassination. National interest has trumped the pursuit of justice as Moscow sees no reason to alienate Syria today, when Russian companies are involved in developing its gas sector.

It is hard to fault the russians for wanting to make money and throw deeper ideas to the wind


Oil has also played a role in Russia’s robust economic ties with Israel, another sign of how Russia has left ideology by the wayside. Direct bilateral trade stands at close to $1.5 billion, while the two countries have over $1 billion in energy deals. Bourtman writes that Russia provides 88% of Israeli crude oil, and in November 2005, “it was reported that the Blue Stream Natural Gas Pipeline – a $3.4 billion project between Russia and Turkey – would be expanded to Israel through the Eilat-Ashkelon pipeline to allow Russian and Azerbaijani oil and gas to be exported by tanker through the Red Sea to China and through the Suez Canal to Southern Europe.”
It is difficult to fault the Russians for wanting to make money while throwing deeper ideas to the wind. After all, isn’t that what the Americans spent the Cold War hoping they would do? But one still gets a sense that this attitude will only ensure that Middle Eastern despots continue to get a free ride.

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Cover story

Beirut’s architects

by Executive Editors
written by Executive Editors

The big news in the BCD this spring was the announcement of two mega-building projects.
In April, the privately owned Abu Dhabi Investment House (ADIH) revealed that it had snapped up seven parcels of land just south of the vacant space that is Martyrs’ Square for Beirut Gate, a $600-million mixed-use residential and commercial project.


The project’s footprint covers 21,447 m2 and, when finished, will consist of 178,500 m2 of built-up area. Preliminary plans include seven different deluxe buildings. When ADIH announced the launch of the project, its first in Lebanon, Beirut Gate was the largest development project on record in the Beirut Central District (BCD). But only for a month.
In May, Kuwait-based Levant Holding announced it would begin financing Phoenician Village, a high-density, four-tower complex – including “intelligent” office space, apartments, retail outlets, hotels and entertainment facilities – as soon as it raised the $410.8 million in start-up capital. Levant Holding – which was set up by the Al-Sayyer Group and Aldhow Investment, a subsidiary of Al-Sayyer – reportedly paid $1,750 per m2 for the 20,000 m2 plot of land nine months earlier. According to Salah al-Mayyal, the company’s managing director, the value of the land has already risen 30% since then.
Redrafting the skyline
The Phoenician Village will have a built-up area of 205,753 m2. The four towers northeast of Martyrs’ Square will reach a maximum height of 160 meters. At the moment, Phoenician Village is the largest project in Solidere’s ongoing urban renewal of the BCD.
These are just two of the latest and most audacious instances of Gulf money flooding into Beirut’s real-estate sector. If Beirut Gate and Phoenician Village mean anything beyond the complete (though still entirely hypothetical) redrafting of the Beirut skyline and city center, they are further evidence that the Lebanese capital is in the midst of a real-estate boom.


Since its inception twelve years ago, Solidere has placed a premium on architectural quality for its own developments and insisted on a high level of design for other developments within its territorial borders. Controversially, Solidere has drafted lists of architects that developers must choose from for projects on specific, high-profile plots of land.
Jean Nouvel is working on the luxury Landmark project to be built on Riad al-Solh Square; Stephen Holl on the Beirut Marina, Michael Graves on the Dib and Town Towers, Rafael Moneo on the souks project, and Arata Isozaki on Beirut Gardens (next to the Virgin Megastore). Elsewhere, Zaha Hadid is reportedly designing the headquarters of the Al-Mawarid Bank, Christian de Portzamparc is on board as the chief architect on Beirut Gate, and Norman Foster is said to be at the top of the wish list for Phoenician Village. All three have won the Pritzker Prize, the architectural equivalent of a Nobel.
The idea that architecture (or an architect) can bring added value to real-estate projects is catching on for developers working outside the BCD, particularly in such neighborhoods as Gemaizeh, Clemenceau, Sursock and Abdel Wahab al-Inglizi, where land prices are soaring and numerous high-ticket residential buildings are going up based on plans by well-known local and international architects. This can only be good news for architects in Lebanon, especially those who remember the days when the real-estate market tanked in the late 1990s, after a promising start in 1993 courtesy of the Hariri boom years.
According to Sany Jamal, who heads up the architecture section of the Order of Engineers and Architects, there are now 5,000 architects in Lebanon among the order’s 25,000 to 30,000 members. By all accounts, they are busier than ever.

Enfant terrible at work
“I’m not looking for work. We are over-flooded with work,” says Bernard Khoury, who at 37 is widely considered the boldest, most daring and rambunctious of Beirut’s architectural elite – and with a mouth to match his designs, its resident enfant terrible as well.
He earned his spurs with such projects as the BO18 nightclub in Karatina and the restaurants Centrale and Yabbani in Ashrafieh – all conceptually-driven rehabilitation projects done on tight budgets.
That said, when Khoury first returned to Lebanon after studying at the Rhode Island School of Design and Harvard University’s Graduate School of Design, he had sixteen contracts between 1993 and 1996 that never resulted in a single finished building. By his own colorful description, he has eight “cadavers” in Solidere alone, projects that never managed to get beyond the initial design phase, either because Solidere dropped them or because investors pulled out. On a few occasions, Khoury himself walked away.


About a year ago, however, Khoury restructured his office, creating Bernard Khoury Architects/DW5, a union that allows him to draw on the expertise of a loose, ever-evolving collective in a studio workshop-like set-up. Khoury has completed 10 buildings since 2000. His web site lists 24 projects in progress, nine of which started in 2006.
“We never build one hundred percent. A good percentage of what we design never makes it to construction. But outside the parameters of Solidere we’ve had a pretty good rate lately. It’s on the way up,” says Khoury. “There is a whole sector that did not knock on my door until recently.”


Working on relatively small-scale, high-end residential buildings with such developers as Karim Bassil (of Convivium I through VII fame) and newcomer Marc Doumit, Khoury now finds himself in a new market niche – apartments that diverge sharply from the well-thumbed recipe of the typical Beiruti family residence.

“A few projectw we were not expecting”
Naji Assi, one of a core team of nine architects in the associated firm of Elie-Pierre Sabbag Architects, says that he too feels the heat of the current real-estate market. “We feel it. We have a few projects now that we were not expecting.” This year the firm has three new projects to design in downtown Beirut, including two residential buildings at 4,500 m2 and 10,000 m2, respectively.


There is evidence that the real-estate market is recovering quickly. One of the firm’s clients, for example, put a major project on hold after the assassination of former Prime Minister Rafik Hariri in 2005 and the country’s ensuing political instability. At the start of this year, however, “he finalized the contracts, bought the land, and now we are in the design phase,” explains Assi, 37.
Nabil Gholam of NG Architecture & Planning describes the current real-estate boom as a seller’s market for architects. “We’ve been here for 12 years,” he says. “[Early on] we worked a lot and developed several hundred concept designs and projects, but with all the upheaval in Lebanon, very few got built. Right now, seven or ten or nine are all coming up at the same time. So all of the sudden, they will be out there in the next couple of years.”
Those projects include three in Saifi Village (one being developed by Solidere itself, one by a private client, and one, well into construction, by the Dubai Islamic Bank); a residential building, Foch 94, that sold out just as excavation began; a small office building, Foch 126; a residential develpment with high-ceiling lofts conceived of as “urban villas” and known as Garden View; and the most high-ticket of Beirut’s high-ticket projects, Platinum Tower, for which Gholam collaborated with Spanish architect Ricardo Bofil. According to Solidere, Gholam, 43, is one of three architects who have been retained along with Christian de Portzamparc to tackle different portions of the Beirut Gate project.

Is that a yardstick in your portfolio?
The 1,000 m2 apartments in Platinum, says Gholam, “start at about $7.5 million. And this remains the very beacon of excellence. Platinum remains the yardstick, which is quite interesting for us, because when you have the yardstick in your portfolio, it attracts a lot of developers.”
Gholam is now being commissioned for projects approaching Platinum’s caliber outside of Solidere entirely – in Ashrafieh, near Sassine, and in Clemenceau, near the Ecole Superieure des Affairs, both with the Middle East Capital Group (MECG). Gholam says he’s seen prices in Ashrafieh rise from $2,000-$2,500 per m2 to $3,000-$3,500 per m2 in just the past year.
“There is more work,” he adds, “and paradoxically there is less competition because the developers are fighting over who they perceive to be the good people. Demand increases but the supply doesn’t. I know from my colleagues and friends that the good guys are busy.”


Still, Gholam suggests that a hot market is also by definition a tough market. “Besides Dar al-Handasah and Khatib & Alami and Erga and the big offices [all corporate firms specializing in engineering and consulting as opposed to boutique architecture offices like Gholam’s], the smaller ones are having a hard time structuring themselves, hiring more people and actually working. At the time the boom came, we were already 30 to 35 people and used to working in an organized structure.” NG Architecture & Planning now employs between 40 and 45 staff and has opened a second office in Barcelona, with a third in Istanbul on the way. “I would have hated for the boom to come eight years ago when we were five,” he explains, “because we would have turned out messy work.”


Working without a system
Raed Abillama of Raed Abillama Architects is particularly wary of the too much too soon phenomenon. His firm of 13 is deliberately less than prolific. “One of the risks of building in Lebanon is the lack of a system. Architects don’t have a lot of protection. You can lose control of a project and damage your name. It’s a profession that takes a very long time. And if you spend two years on a project you have reservations about, that’s a lot of wasted time, even if you get paid. If you don’t have a set-up you can trust, then you can end up with only half-projects. You need to have the control to do better architecture and push the projects further.”
Like Bernard Khoury, Abillama has found a niche in the non-conventional residential market, working on villas outside of Beirut and designing smaller-scale apartments within the city that break up the monotony of the typical four-bedroom luxury flat.
“It’s important that the client is there to trust you, to take the risk,” he says. “Partnerships need to be done with time, more experience, and a longer relationship. This is the struggle of a young architect,” laughs Abillama, 36. “The more money there is but the less system there is, the less creative you can be because it’s too much of a risk.”
So is the current real-estate boom, in the end, actually good for the quality of design and the professional and ethical standards of architecture as a profession, or is it only good for potential returns to developers on ever more speculative investments?
Says Khoury, “We’re beginning to see developers who understand that the architecture can be an added value. There were very few who operated like that before. Now you have a few developers in town who understand that if there is something in their project that is attractive, it will sell above the market value. It will sell quicker and better. I’ve experienced this,” he adds. “Clients are eager for something that is going to bring them pleasure.”
Adds Gholam, “A fresher awareness is emerging now. You get a sense that things are moving forward. Not least, people are looking again at modernity as an alternative to the good old, fake old, traditional, conservative – whatever you want to call it – pastiche. We are seeing … more than three times the appreciation for our modern projects … than there used to be before, when you almost had to beg to convince a client that things didn’t need to have capitals and arches and so on.”
When there is movement in the market, he adds, “Things are bound to evolve because they get shaken about. There are more projects, there are more clients, and some of the clients have several projects. If anything, a fast market is a definite way to improve standards if only by practicing your trade, whereas in a slow market we’re all sitting there trying to fire people and unable to do so and spending a lot of time and money on one job.”
And, of course, there is the issue of money. Because architects, in theory at least, are paid based on a percentage – loosely understood to be 7% – of the total cost of a given project (not including the cost of land), bigger budgets should mean larger fees. As a rule, architects are loathe to disclose how they calculate their fees, much less put actual numbers to what they earn annually, but they generally insist that they are not necessarily making a lot more money now than they were a few years ago. What they have gained, if not hard cash, is a greater semblance of security that comes through steadier work.

Headaches and growing pains
The Order of Engineers and Architects has a standard contract that all architects and developers must sign before they obtain a building permit for a given project. The problem is that high-profile commissions from international investors often require a second contract that essentially cancels out the first. “This is not always to the benefit of the architect,” says Khoury, who adds that a 7% fee is at this point highly unlikely on a multi-million dollar project. The fee is usually less. (On projects costing less than $1 million, however, the fee is usually more).
Sany Jamal of the order’s architecture section says they can protect architects only in so far as they act within the bounds of Lebanese law. Thanks to a hot real-estate market and conflicting or variously-interpreted contracts, the order often has to step in and arbitrate, trying to resolve disputes before they escalate into full-scale conflicts that have to be settled in court. International architects, though much in demand in the BCD, can end up bewildered, bouncing off of Lebanon’s archaic and often protectionist building and urban planning legislation.
Other headaches of the current boom include the rising prices of concrete and steel and higher fees demanded by contractors and consultants, who each take their share of the architects’ fee. Then there is the higher overhead cost of running an office and paying staff, and the scarcity of young architects looking for work. “It’s very hard to find architects in town now,” says Abillama. “A lot get sucked into the Gulf.”
And then there is, well, dumb developer syndrome. A senior figure in Solidere recently said of the investors who are now flooding their money into the BCD: “They’ll tell you they’re developers and city-makers but they’re not. They’re moneymakers. They’re like sheep. They know their mates want apartments and they know retail is sharp. But they are not at all adventurous.”

“People are looking again at modernity as an alternative to the good old, traditional pastiche”


“In boom times, there are more discriminate clients and less discriminate clients,” says Gholam. “There are better-equipped consultants and worse-equipped consultants. The risk you face is clients working with people who will not deliver what they promise, or us meeting clients who technically are not very practiced. We meet several clients who have never built a building before but they’ve heard that that’s what’s happening. They have a lot of cash so they think, build a building.”
For developers unfamiliar with Lebanon, anything outside the BCD “looks like the wild west,” says Gholam, leaving much of the rest of the city to veteran developers like Jamil Ibrahim and Rabah Jaber, along with the likes of the plucky yet undeniably innovative Karim Bassil.

“the day i’d say the boom is sustainable is the day we get a call to do something outside of beirut”

Uneven development
All this makes for uneven development. Beirut’s current real-estate boom is being fueled almost exclusively by high-end residential projects. This prices out all but the very rich. In terms of middle and lower-class dwellings, the market remains stagnant. “It’s not a fluid market,” says Abillama. “[Already existing] apartments take a long time to sell on the market, to change hands. There is a lack of liquidity. There are not a lot of people who can actually afford to buy new apartments. Salaries are not high enough.”
But that still leaves the market centered in a tiny area of an already small country. “Other regions in Lebanon need development,” says Naji Assi. “Not just from the aid of UN development groups but on a competitive basis. The classic example is Tripoli, which is enduring a lack of projects on the scale of the city, and a lack of interest on the part of investors and developers. The day I’d say the boom is [sustainable] is the day we get a call to do something outside of Beirut, in the Bekaa, in the South,” or maybe even in Tripoli.

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Economics & Policy

A real future for Beirut’s financial center potential

by Nicolas Photiades
written by Nicolas Photiades

During the 1960s and 1970s, Beirut was globally acknowledged as the banking center of the Middle East. Lebanese banks flourished and built up strong franchises by picking up petro-dollar deposits from Gulf investors – particularly after the 1973 oil crisis. Foreign banks increasingly chose Beirut as a regional hub.

Beirut, with its cosmopolitan outlook, was considered a democracy with significant potential; it was located only a few hours’ flight from Europe and had embraced European and Western culture. The city was politically neutral in a turbulent region, had a growing economy based on trade and intermediation with Gulf countries, and had sophisticated (for the time) banking regulations and one of the few banking secrecy regimes in a world in which any country (apart from the US) was in danger of falling into communism, extreme socialism and state economic control.

The days of Lebanese excellence

Lebanon was also very well equipped in terms of telecommunications and infrastructure, having both an airport and a sea port that were included in the list of the world’s main transport hubs. These were the days of Lebanese excellence, when MEA was “airline of the year,” TMA was “cargo airline of the year” and Georgina Rizk was Miss Universe. Singapore publicly stated that it hoped to become Asia’s Lebanon by the end of the 1970s.

MEA is no longer airline of the year (but is heading in the right direction), TMA is bankrupt, the economy is burdened with the highest debt-to-GDP ratio in the world, a third of the educated population has long since departed for greener pastures, and democracy has never looked more fragile. Infrastructure has been “updated” at great cost but is still inefficient. Our current Miss Lebanons never seem to progress beyond the first round of the Miss Universe pageant.

Major Western banks which had been present in Lebanon for decades have left the country, finding it too risky and too small a market. These include ABN Amro and ING Barings, which both sold out to Byblos Bank, Crédit Lyonnais, which sold to CreditBank, and Crédit Agricole, which sold its 51% stake in Banque Libano-Francaise to local and regional investors.

In 2006, there are five major Western banks still present in Lebanon: HSBC, BNPI (or BNP-Paribas), Société Générale, Citibank and Standard Chartered. Other western banks such as Banca di Roma have representative offices. Among the surviving Western banks, Société Générale has already reduced its stake in its Lebanese subsidiary.

Too much risk for too little return

Lebanon has a low credit rating (B- by Standard & Poor’s), which implies that foreign banks have to capitalize their Lebanese outfit heavily in order to cover the significant risk it carries on its balance sheet. Given the low return from lending to the Lebanese private sector and the high level of doubtful loans in proportion to the outstanding loan portfolio, Western banks have long decided to reallocate the high level of capital they used to invest in Lebanon to other less risky, more diversified and higher-yielding economies. Since the Basel II regulations, which require banks to allocate capital commensurately with the risk they carry on their balance sheet, have to be implemented in Western Europe and the US by January 2007, it is understandable that Western banks with large operations in Lebanon are leaving. For them, staying in Lebanon would be too expensive in terms of capitalization and make little economic sense, especially as most Western banks are feeling increasingly out of touch with the economic and business culture of Lebanon and the Middle East.

This difference in culture has created a gap in the Lebanese domestic market which is gradually being filled by Arab and Gulf banks. The latter are showing an increased interest in Lebanon, particularly since 9/11 and the rise in oil prices. With much greater wealth at their disposal, Gulf investors and banks have been concentrating on markets closer to home, where the general and business culture is similar to their own. Moreover, Lebanese risk is well understood by Arab investors and bankers, who have more trust in the Lebanese economy for its solid track record in meeting obligations. Although Arab banks are putting more weight on fundamentals in their investment decisions, they continue to believe that Lebanon offers a potential (particularly human) worth developing and trusting.

While Western banks take a pragmatic view of the markets they believe they should get into, and rely on fundamental analyses to make their final decisions, Arab banks rely more on trust and track record, as well as on the belief that their natural markets should be the neighboring non-oil Arab countries. What Lebanon is experiencing at the current moment is not dissimilar to what happened in the last decade between Western and Eastern Europe. German, Swiss and Austrian banks thought that central Europe was a natural market for them given cultural affinities and geographical proximity. Likewise, Greek banks considered the Balkans (Bulgaria, Macedonia, Albania and Romania) to be their natural back garden, with the Greek banks purchasing many newly privatized state-owned banks.

In the last six years, Lebanon has consistently been the non-oil-producing Arab country to attract the highest level of Gulf investment. Apart from cultural affinities, the reasons for Lebanon’s attractiveness include a well-regulated banking system, a solid track record for banks and for central bank support to banks in difficulties, and an educated, multi-cultural and experienced workforce. Lebanon is one of the few countries in the Arab region with highly educated youth as well as professionals with long experience working in Western banking and financial centers such as London, New York, Paris, and Geneva. The fact that a significant number of Lebanese bankers contributed to the development of the Gulf banking sectors a few decades ago has contributed to the credibility of the Lebanese banking sector and its workforce.

Attracting Gulf Arab investment

The purchase of Lebanese banks by Gulf banks cannot be considered a recent trend. Gulf banks have been keen on the Lebanese market and its banking system since the early 1990s, particularly since Rafik Hariri became prime minister towards the end of 1992. The emergence of a dual Saudi-Lebanese national as the head of a government that had developed a major reconstruction program could not have been a better trigger for Gulf investments in Lebanon. It began with Gulf banks subscribing to Lebanese Treasury bills, followed by the opening of branches or subsidiaries of some Gulf banks, such as the National Bank of Kuwait, and culminated in the purchase of Crédit Libanais by the bin Mahfouz family (who owned National Commercial Bank in Saudi Arabia and part of Jordan’s second largest bank, the Housing Bank), and of Banque Libanaise pour le Commerce (BLC Bank) by the Qatar Central Bank.

The latter is the most significant both in terms of size and operational importance. The purchaser is not a private banking institution but a central bank, which clearly has plans to develop its acquisition into a major investment vehicle and a banking product development and processing center. By purchasing a local bank, Gulf investors can shift part of their rising wealth into Lebanon more efficiently and hope to attract a greater number of qualified employees to work on banking product development and the processing and settlement of transactions carried out in the Gulf.

Buying banks in Lebanon is an attractive proposition for many Gulf banks. Not only do they expand regionally and strengthen their control in a neighboring and easy-to-access market, they also benefit from the Lebanese workforce, which has a solid track record in the management of offshore banking. Lebanese bank professionals, of whom plenty are still around (or have taught their successors the job), have already carried out processing, back-office and settlement work, as well as classical banking activities on behalf of Western banks. The switch from Western to Gulf banks is a natural one, and the development of Gulf banking and finance should have led the Lebanese to expect this change sooner or later.

Gulf banks can easily afford to take on the risk of having subsidiaries in Lebanon. The rising wealth of Gulf investors due to the rise in oil prices and the transfer of billions of dollars of funds back from places like the US have led Gulf banks to realize that investments in risky and undercapitalized countries like Lebanon can have a beneficial effect and ultimately reduce risk. By investing in one of the most educated and professional banking workforces in the region, to handle the processing of, say, retail products such as credit cards, Gulf banks cannot go wrong.

Opportunities in wealth management

Apart from the processing of retail banking products and back-office activity (in a similar vein to India), Gulf banks are pinpointing Lebanon and Beirut as a future center for wealth and fund management. Lebanese fund managers enjoy a good worldwide reputation and have a strong track record in advising high net worth Gulf individuals. Over time, Lebanese wealth management advisors have grown significantly in numbers and sophistication and have become more demanding in terms of where they will live. They are keen to live in Beirut, where they are closer to their families, where the weather is kinder and the culture is familiar. Through a subsidiary in Beirut, a Gulf bank would be able to benefit more efficiently from the expertise of Lebanese wealth managers, while combining business with pleasure.

The tourism potential of Lebanon is also linked to the interest of Gulf banks in Beirut. Gulf banks would be able to develop tourism-linked projects for their own holiday-makers and benefit from a strong Lebanese project-financing expertise as compared to regional standards. Lebanon’s banks have always suffered from being too many and too sophisticated for their own marketplace. The arrival of Gulf banks should be seen as a factor adding significant dynamism to the local economy.

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Economics & Policy

Lebanon must heed world bank warnings

by Faysal Badran
written by Faysal Badran

While some of the indications of summer tourist activity in Lebanon are encouraging, we must never forget that our economy is structurally weak. The tourist season this summer could well be a stellar one, with some estimates reaching 1.6 million visitors. This is welcome news in view of the political quagmire and overall insecurity plaguing Lebanon since late 2004. It proves that, in spite of everything, Lebanon can still attract tourists and their money.

No signs of political progress

What is worrying at this stage is that there are no signs of political consensus on the reform package. We warned a few months ago that an over-politicization of the debate in Lebanon would deemphasize the need for economic revival. But with every World Bank or IMF warning, hope returns that international institutions will impose some sort of discipline on the economic front. Though many may see any intervention as a loss of sovereignty, it is clear that without direct international pressure and sponsorship of the reform program, political gridlock will continue.

The fact that there was a tacit agreement to calm down political wrangling during the summer season is damning evidence that politics suffocates trade. As one London-based analyst put it, “what the country needs is a cabinet made up exclusively of economy, reform and finance experts.”

While this may be an exaggeration, it reveals the frustration of the outside world. The latest warnings from the World Bank came on two fronts, and if the politicians had not been mired in territorial feuds, they might have taken note. The first was a clear and oft-repeated cry for reform on the fiscal front. It highlighted the astronomical debt-to-GDP ratio of Lebanon (nearly twice GDP) and the lack of movement to correct this imbalance. It also expressed a concern (which almost went unnoticed) on health care financing. But the warning was clear: Lebanon must overcome its political divisions and implement economic reforms if it is to make the most of a surge in international support. “There is tremendous international goodwill for Lebanon, but there is no time to lose,” said Omar Razzaz, World Bank country manager for Lebanon, in a recent interview with Reuters.

Intervention: Lebanon’s only hope?

The World Bank is worried that the political process has lost focus, and that there is little discussion on the economy. Despite all the legitimate qualms one may have about post-World Bank and IMF intervention scenarios, such a move may be Lebanon’s only hope. The country has been unable to place these issues at the top of the agenda: with the exception of Seniora and his entourage, how many of the current crop of political leaders even have an economic program? I have not heard a single mention in the so-called “national dialogue” of the urgency of getting our fiscal house in order. The disconnect between the political leadership and the people’s concerns is worse than ever, as unemployment, economic emigration, and vast inefficiencies in the public sector have not been topics in the “dialogue.”

The fact that the World Bank is linking future aid to reform should be reassuring, because the political will for reform is simply not there. Only a handful of cabinet ministers stand fully behind the reform plan and have spelled out what the World Bank refers to as “making trade-offs between short-term pain and long-term gain.” There is no way that the country’s economic health and finances can be purged without pain, and this pain must be absorbed by all. Although some political currents claim otherwise, and have demonstrated against reform in the streets of Beirut, its inevitability needs to be understood. Hastening economic reform has nothing to do with resisting Israel and little to do with safeguarding a particular sect or attacking the poor, no matter what the opposition’s political spin might say. It has to do with the economic survival of Lebanon, so naturally it ought to be a consensus issue.

The second warning shot from the World Bank said that the financial activities of several public institutions in Lebanon are still not transparent, and these entities pose a significant fiduciary risk to the government. These remarks came in an executive summary of the Country Financial Accountability Assessment (CFAA). This is perhaps the clearest appraisal yet of the decaying state of affairs in the country’s public sector. It addresses the entrenched corruption that is eating away at the country’s ability to reach its full potential to attract and maintain business spending, and thus create jobs.

Can we truly expect the current political system to generate change? Are the current players, many of whom are actually partners in corruption, capable of carrying out reform? Rhetorical questions, to be sure. The only hope may be that economic urgency will gradually sweep the political system off its feet and create a new political order driven primarily by economic priorities, in a triumph of the practical imperative over tribal politics.

Carrot and stick

Why the insistence on more intervention, if only verbal, from the international community? Evidence from several countries seems to suggest that the drive toward reform is often held back by the structural imbalances and even more often by corruption and poor governance. In Turkey, reform – though slow to come about – was accelerated by pressure from the World Bank and the IMF. It is essentially the carrot and stick concept: in order to achieve reform and restructure the state apparatus, the country must feel “boxed in.”

In Lebanon, given the rigidity of the public sector and political obstacles to change from within, World Bank rumblings may force the banks, the lenders of choice to the Treasury, to be principal agents of change. As the banks look to rebalance their risk profiles in line with Basel II, perhaps they can press the political players to engage in true economic dialogue.

What is clear is that the intensification of pressure from the World Bank and the conditions that will surround Beirut I will force the reform mechanism into action. Because the debt is held locally for the most part, the reform program must be a pure product of internal discussions forged from a series of concessions made by all sides. While we hope for more pressure to force us into action, our debt, unlike some examples in Latin America, is not held by foreign institutions and there is a natural limit to the level of pressure that world bodies can exert.

It’s still the economy, stupid

Economic and fiscal improvement – or at least a change in trajectory – may be painful in the short term, but they are the only antidote to mayhem in the country. The fundamental basis of the late Rafik Hariri’s vision was that, like Bill Clinton, he believed that “it’s the economy, stupid.” As the economy moves forward it will ease political and sectarian tensions and lessen the risk of civil unrest.

Without Beirut I, there is little hope beyond a good tourist season this summer. The autumn will be a tough one for Lebanon, when once again we will rely on expatriate remittances to help us dodge a full-blown economic depression.

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Business

Coming in from the freez

by Michael Karam
written by Michael Karam

This month will see the launch of Château Ka, the latest recruit to the steadily growing roster of local wineries. Ka is the brainchild of Akram Kassatly, chairman of Kassatly Chtaura, the company that at various stages in its life has brought concentrated syrups, preserves and fruit juices to generations of Lebanese. His first wines will include 15,000 bottles of Blanc de Blancs, 15,000 rosés and 60,000 reds – called Source de Rouge. There are also plans for a “Château” level wine.

Six years of innovation

The wine initiative is the culmination of six dizzying years of successful innovation for Kassatly. In 2000, the company spotted the commercial potential in alcoholic ready-to-drink-beverages (RTDs) and within a year launched the multi-flavored Buzz, Lebanon’s own vodka-based RTD to rival Smirnoff Ice. Buzz was followed up a year later by Freez, a non-alcoholic RTD, which has become so successful in the GCC that it makes up nearly 70% of the company’s $15 million revenues. With Château Ka, Kassatly now has three high-profile brands.

The company spends around $500,000 a year, mainly on billboards, advertising Buzz and Freez. The aim is to gently push the Kassatly name into the background. “This way we can build our brands and make them more attractive to potential buyers,” explains Nayef Kassatly, Akram’s son and Kassatly’s Vice President.

So is the foray into wine merely another well-spotted opportunity, given the wine sector’s elevated profile in recent years? Nayef disagrees and explains that the move is rooted in a solid commitment. “Wine runs deep in my father’s veins. He always wanted to make wine. He studied enology in Dijon in the 60s.”

In fact, the building that houses the factory in Makse, just outside Chtaura, was originally a winery (the original concrete vats are still in place) but the war put those plans on hold. “We had made our first wine but a militia raided us, removed the caps from the vats and the wine leaked out. We were a family making alcohol in the Bekaa. It was a difficult period for us, so we went back to producing concentrated syrups.”

Bottling jallab

In 1982 the company began the first of its marketing brainwaves by putting jallab, until then a drink that could only be bought from street vendors, into bottles. This was followed up in 1983 by the production of a crème liqueur similar to Bailey’s Irish Cream. “We were taking the basis of an established international drink and giving a local name and a local brand,” says Nayef, who joined the company in 1994 and helped start the juice line as well as consolidate jams and pickles.

And that was how things chugged along until 1999, when Akram awakened his dormant dream of producing wine. “My father got his hands on a bottling machine from a bankrupt winery in Switzerland,” recalls Nayef. “I was sent with some technicians to dismantle it and ship it back to Lebanon.”

It was then that the wine dream was again sidetracked. “While in Switzerland, I learned that Smirnoff was launching Smirnoff Ice. I thought, ‘we should be doing this,’ and realized that we could use the bottling plant to make carbonated drinks, as it was originally used to produce sparkling wines.”

Marketing Buzz

In June 2001, Kassatly bottled its first run of 25,000 cases of Buzz. With Smirnoff launching in Lebanon at the same time, Buzz was able to hitch a ride on the coattails of a global brand while offering a competitive alternative with a wider range of flavors. “It gave us it a good image,” explains Nayef. “We were able to undercut the local market by 20%. We could not go any lower, as that would have given a negative perception to the brand. You know what the Lebanese are like. If it’s too cheap, they aren’t interested.”

Buzz buzzed, and in 2002, the company upped production to 50,000 cases. But Kassatly still wasn’t getting the most out of its plant. Then came the masterstroke. “I was sitting with my Saudi associate,” says Nayef. “I asked if he would take a non-alcoholic Buzz, and he said, ‘Sure, why not?’ He wanted to call it Buzz non-alcoholic, but I wanted it to be a different product and I came up with Freez. We made two flavors, lemon and grenadine and I gave him I gave him 2,000 cases (48,000 bottles) as a trial batch. I put them on the lorry and they vanished.”

Today the company sells 40 million bottles. At least 75% or $11 million worth of both Freez and Buzz are exported. Freez has found a huge following, not only in Saudi Arabia, but also in the UAE, Kuwait, Qatar, Bahrain, Jordan and Syria, while Buzz has a loyal customer base in Syria, Jordan and Iraq.

The key to Freez’s success is that it lets the youth and young adults of the conservative Gulf States enjoy the image of being seen drinking an RDT while remaining true to their Islamic principles. “We are currently launching a limited edition Freez,” says Nayef, plonking a matte silver bottle on his desk. “We added volume and put it in a funky bottle. It has a sporty look, almost like a scuba tank. Red Bull was doing it and charging a premium. I felt we could too.”

Kassatly has not ignored Buzz. It recently launched Buzz Strong, which now accounts for 50% of Buzz sales, and this summer will launch the beefy Buzz Extra Strong (10% alcohol). According to Nayef Kassatly, Buzz is the king of the off-trade but cannot get a look-in at the bars, nightclubs and beaches. “We just don’t have the budgets the big distributors have to pay establishments a pouring fee. A supplier will pay a club to put its brand of whisky into a whisky and coke, for example, as well as telling them to take their RTDs and give them exclusivity. What we’ve learned is that people drink Buzz at home before going out and then buy one or two drinks at the bar.”

Building the winery

So we come full circle and back once again to wine. “The money was coming and it was time to reinvest,” says Nayef. The winery, set in the grounds of the Kassatly factory in Makse, took only six months to build at a cost of $1.5 million. Running costs will stretch to a further $500,000 annually.

Grapes were particularly expensive in the first year. Akram found that as a new producer he just couldn’t waltz in and place an order for 300 tons of premium grapes. “We were forced to pay top dollar, as much as $0.80 per kilo.” Within three years, Chateau Ka will harvest its own grapes. The company has planted 60 hectares just outside Baalbek.

At our next meeting, Nayef has begun introducing his wines to a few of Beirut’s most popular restaurants. He is confident that Kassatly’s established distribution network will be a considerable asset in introducing the wines into the local market. “But you know what is good about showing someone your wines? No one wants to talk about price in the same way they do with other products. It’s different.”

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Economics & Policy

Crude Reality

by Faysal Badran
written by Faysal Badran

As tensions between Iran and the US have subsided somewhat, it may be time to revisit the crude oil market that monopolized so many headlines in recent weeks. While we rejected outright the claim that $100-a-barrel oil was around the corner, the geopolitical risk pushed oil briefly up to the mid-70s per barrel. Things have cooled down and in our view may cool down further.

Even at the height of the Iran news, oil was showing technical signs of fatigue in its advance. This was confirmed by a retrenchment, not only in the price of oil, but of other commodities closely linked to oil such as copper and silver, which have dropped by nearly 25%.

This exhaustion of the oil and commodity trend demonstrates first, that oil speculators had gotten ahead of themselves, and second, that the global economy is slowing down.

Passing the oil debate peak

At the peak of the oil debate, speculators had rushed into the crude oil market. Most of the hedge funds involved were unequivocally positive on the black gold, a reliable sign of an imminent pullback.

There have also been signs of slowing in the two main engines of world growth: the US housing market and China and other emerging markets. The big drop in emerging markets clearly showed that their breakneck momentum had waned, and the correspondingly high levels of demand for oil were soon to fade. As the world economy slows down, oil will continue to correct downward.

It is also estimated that about $5 to $7 of the current oil price comes from a geopolitical risk premium. Since a full-blown conflict involving Iran no longer appears likely, thanks to that country’s new readiness to talk, this premium will probably be wiped out in fairly short order.

Checking the charts

As a technical analyst, I view charts as my guide. Let’s look at the chart of oil to get a feel for where things have been and where they may be heading.

Since 2003, oil has been in an upwardly sloping channel that contained prices in an almost textbook manner. Intensified demand pressures and political issues led to two attempts to break the upper boundary of the channel as the mainstream media speculated about $100-a-barrel oil. These two attemps failed, resulting in what is termed “false breaks,” and oil has resumed its orderly upward course.

The latest attempt on the chart to run away to the upside featured excessive positive sentiment (nearly 94% of market players saw nothing but upside), demonstrating just how crowded the oil trade was. Again, the market returned to the channel, and the technical view is that oil should be poised for more losses, down toward the $55-a-barrel area.

This is still a much higher price than the oil market saw throughout the last decade, so energy issues will remain on the forefront of the global debate. But a cooling-off in oil prices is welcome news, especially for struggling economies such as ours! This is not the time to bet against oil, since the overall trend is still up. But it does seem that predictions of oil-based Armageddon were at the very least premature.

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