Business

Crazy in Gemaizeh

by Peter Speetjens
written by Peter Speetjens

Unless you have been in a coma for the past two years, you will know that Gemaizeh has become arguably the most in-demand commercial location in Lebanon. Ten years ago, it was a lower-middle class Christian quarter, patronised by Bohemians and edgy foreigners who liked its authenticity. They could eat for next to nothing at Le Chef, hang out with the backgammon-playing old-timers at the equally distressed Glass Coffee Shop (or qahaweh il a’zez) and listen to stories about how the residents had to walk on the west side of the street to avoid the Murr Tower sniper.

But that all changed in 2000, when the BCD became a cohesive urban whole, rather than the world’s biggest building site and Gemaizeh began to stir. Things became even more exciting when restaurant tsar, Bechara Nammour located his company headquarters at the entrance to Rue Gouraud, Gemaizeh’s main thoroughfare across the road from Saifi Village. The logic was compelling to that those who spend their days predicting the next boom: if the BCD was to flourish as expected and if Saifi was to be a residential jewel, then surely Gemaizeh would feed on the commercial scraps and grow to be big and strong.

Outside candidate

Paul, the Nammour-owned, upmarket bakery opened on the corner under the offices, and not long after, the Glass Coffee Shop lost most of its glass and acquired more wood and a lick of paint, in a bid to woo clients who would actually come in and spend money rather than wait to die.

Still, doubts lingered as to whether there would be a genuine gold rush. Property experts agreed that, while Gemaizeh was indeed close to the BCD, it was just too “off-pitch” to feed off the fortunes of its more glitzy neighbour. Others pointed to Gemaizeh’s infrastructure, or lack thereof, and predicted that as long as there was inadequate parking and decrepit utilities the serious restaurateurs wouldn’t go there. Elsewhere, the boffins reminded us that supply does not create demand and that Rue Monot and the BCD had more than enough restaurants and bars to cater to what they saw as Lebanon’s two distinct wining and dining catchments: the student/hipster party animals, who could let their hair down on Monot and the tourists, family, business element who favoured the BCD’s pristine streets and cafe ambience. Yes indeed, the conventional wisdom was that Gemaizeh was quaint and sure there was room for a few more bars, but it would never really fly.

If only we had all taken options on leases in Gemaizeh. It may have been slow to get going but the smart money is today cashing in. Since 2004, rents for commercial space have doubled, if not tripled and there are some 40 bars and restaurants in the area, as well as a sprinkling of galleries and boutiques. The number is set to rise as investors begin to eye up the lower Rue Pasteur, while others even talk of an expansion potential that will stretch past the EDL building all the way to the Bourj Hammoud Bridge. The area has practically killed Monot and, while, the hill still has its devotees, particularly students and younger revellers, Gouraud, even with its lack of parking has become the area of choice for those with the real spending power and who eschew the pristine atmosphere of the downtown.

The popularity of Gemaizeh has of course turned all commercial property owners into millionaires … or so they would like to believe. Rents have shot up and, while early pioneers, such as Bar Louis, Bread and Torino Express, got in paying an annual rent of around $200 m2/year, today’s prices have soared up to $500 and in some cases $700 m2.

It is difficult to give a standard range of figures for commercial rents in Gemaizeh. Two adjacent bars of roughly the same size can pay a 50% difference in rent, just because one bar is on the corner and is perceived to have greater visibility. But even this is not a hard and fast rule. While a cafe needs lights and windows, as people want “to see and be seen,” certain bars or clubs actually thrive on intimacy.

Too pricy?

“Gemazieh has reached the absolute top in terms of rent,” said Najib Rayess, owner of Bar Louis and Molly Malone’s. “It cannot go higher than this. I don’t think Monot (in its heyday) was ever as high as this. We’re now on the level of downtown Beirut. I think, instead of opening on Rue Gouraud, people will soon try their luck elsewhere.”
 

The problem for new investors is not just the higher rent; they also have to deal with the thorny issue old rent. Gemaizeh is full of properties in which tenants are paying next to nothing, often the equivalent of what others are paying for one or two meters per year.

To get them out, many investors are having to pay a ghlou or financial compensation to sitting tenants, effectively doing the landlord a favor. Rayess had to pay some $20,000 in ghlou to be able to free up and establish a tiny 5m2 snack bar. But he thinks it’s worth it.

As an indication of just how much prices have risen, the owner of Chez Asso pays $300 m2/year for his 12m2, two-seater eatery at the “poor” end of Rue Gouraud, near St Anthony’s Church. Compare that to the $500/year old rent Marwan Saade has paid for the past 30 years for his 30m2, minimarket half way down Gouraud. Despite the boom, Saade is in no hurry to leave. “All the time, People ask me how much money I want to leave,” he said. “But I don’t want to leave. Where will I go?”

Not only is the problem of old tenants placing obstacles in front of growth, the lack of a mature commercial market and the absence of professional brokers has made sourcing property a hit and miss affair with landlords, many of whose grasp of economics is short-sighted, asking outrageous prices conjured up on a whim.

In 2005, the two old brothers who own the run-down Kiameh supermarket, situated in the epicenter of Gouraud were asking for a $65,000 from anyone who wanted to turn their shop into a pub. This year, with a ruthless blend of avarice and knee-jerk business sense, the brothers, who apparently own several other buildings in the street, have reportedly upped the asking price to $150,000 a year.

Another phenomenon is the multiple partner syndrome, one that many “serious owners” see as curbing long-term growth. “You get around 15 friends who all club together and they open a bar or a restaurant,” said one owner. “Because the risk is spread over 15 people, they can afford to pay above the odds and will want to get out as soon as they can, cash their takings and move on. This is not good for business.”

Andreas Boulos, the owner of Torino Express and one of the pioneers of the Gemaizeh revival, agrees. “Because of the higher rents, you see bigger places opening up, which are often run by more than one partner,” said. “This way they can attract customers (i.e. their friends) and spread the risk.”

The150 m2, Cactus, a Mexican-style, bar-restaurant embodies this trend. It is owned by a dozen or so partners, who have paid $60,000, or $400 per m/2, a year. In terms of size and style, Cactus is regarded by many as “Neo-Gemaizeh.” It will not be the last. Recently, the 400 m2 Mandaloun Grill opened on Rue Pasteur, while opposite Torino Express a similar sized French restaurant and Steak House, is expected to open.

Rising rents

Between 2000 and 2004, Monot was the absolute party hotspot. In the late 90s, at the start of the boom, rents were at $200/m2/year and peaked at $500/m2/year. While the bigger, high-end places have moved to the BCD end of the Damascus Road, many of the smaller places moved to Gemaizeh. Will Gemaizeh go down the same way as Monot?

“There are still a lot of places available in Gemazieh,” said Boulos. “It would be great if the area attracted more shops and boutiques, so it would come to life during the day as well. Currently however, everyone is asking nightlife prices, which is just not affordable for a small CD or book shop.”

“If I wanted to open a bar today, with the current prices in Gemaizeh, I would go elsewhere,” he said. “I don’t know where though. It is not that easy to find another area in Beirut. Hamra is always an option, but Hamra is not cheap either and there are still many people who have a problem with crossing to Hamra. So, in that sense Gemaizeh still has potential. In theory, there is enough room for development all the way down to the end of Mar Mikhael and the Bourj Hammoud bridge,” he said.

Rayess thinks Rue Gouraud has more or less reached its peak and expects further developments to take place off the main street and at Rue Pasteur, where rents are still more affordable. Pasteur has already seen some interesting commercial developments in recent years with the opening of several boutiques and interior design shops, such as Mowgli and Zee Gallery. Another anchor is travel agency Wild Discovery, while the opening of the hugely popular Mandaloun Grill should not be underestimated.

A new Monot?

While the residential market has not boomed in the same way (parking is a major issue for house buyers) two major developments will surely contribute to future growth. Local developer Karim Bassil’s next residential Convivium building at the heart of Rue Gouraud can only enhance the street as will the new Hôpital des Soeurs des Rosaire.

“There is one difference with Monot,” Boulos concluded. “There is currently more professionalism in Gemaizeh. In Monot there were a lot of people who wanted to give it a shot, see if they could make a buck. It was mostly them who failed, while the good ones survived. Most entrepreneurs in Gemaizeh have been in the business before. They know what they are doing. So, I think, as long as we can stay professional and keep the place clean, Gemaizeh can keep on rising.”

And to those who doubted, a word of encouragement. Everything is easy with hindsight. It’s just a shame they could see that, as long as the economy moved, Gemaizeh was never going to fail. It had the architecture (Deco cool), location (close to the BCD), access (from everywhere) and, and this is key, it was flat, straight and had sidewalks. Supply may not create demand but a good product has helped take the Lebanese hospitality sector to a new evolutionary level.

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Economics & Policy

Growing pains in the Bekaa Valley

by Peter Speetjens
written by Peter Speetjens

Today’s Bekaa farmers feel alienated by a government that does not prioritize agriculture and are unable to make ends meet. They are demanding the government reconsider its decision to phase out sugar beet subsidies. Meanwhile the owners of the Lebanese Sugar Factory, who claim they stand to lose millions by the decision, also claim they have been let down by a heartless state. The government believes the system to be rotten and corrupt, one that does not help small farmers in the way it should and if it were up to the state, subsidies would be abolished today rather than in three years. EXECUTIVE takes an in-depth look at both sides of this increasingly divisive dispute, one that threatens to pierce the very fabric of Lebanon’s agricultural heart.

The sour state of Lebanese sugar

On October 13, 2005, the Lebanese Sugar Beet Cooperative, the national association of sugar beet growers, planned to lay siege to Beirut. Thousands of farmers from all over the country were ready to seal off the capital with tractors and trucks to demand a return of sugar beet subsidies. In 2000, and again in 2004, the government had decided to pay for just one more year and then abolish the subsidy system in an attempt to cut expenses.

Faced with the farmers’ anger and the prospect of an embarrassing blockade of the capital, the Seniora government quickly promised three more years of sugar beet subsidies. Until now however, nothing has been put on paper and the conditions upon which subsidies can be obtained are not clear. March is the month for planting and farmers are growing nervous, while the owners of the National Sugar Factory, which buys the beet from the farmers, fear subsidies will be based on 2004 figures and will not be sufficient for their operation to be profitable.

Lebanon’s agricultural subsidies for tobacco, wheat and sugar beet have been a thorn in the country’s side for many years. Sugar beet subsidies were introduced by the government of President Fouad Chehab in 1958. The idea was for the state to pay a minimum price for sugar beet and impose import tariffs in an attempt to encourage the domestic production of sugar. The same year, a consortium of 10 businessmen established the National Sugar Factory (NSF) in Majdal Anjar to process beet into sugar. The NSF was one of the first factories in the Bekaa valley and one of the first attempts to industrialize Lebanese agriculture.

According to Antoine Khoury, Director General of the Sugar Beet and Wheat Office at the Ministry of Economy, which is responsible for execution of the subsidy system, the aim was to “secure a strategic level of self sufficiency in terms of food supplies and legally protect poor farmers making a livelihood.”

On a national level, it appeared to be a perfect ménage trios between the government the factory and the farmer all working for the national good. Sugar however, is a global commodity with a long and violent history, which unfortunately can not be separated from events on a domestic level (see box). Global production of sugar increased, Europe and America protected their markets and prices plummeted.

In 1958, Lebanese farmers planted a modest 1,600 dunum with sugar beet, which gradually increased to over 30,000 dunum by the early 1970s, yielding 190,000 tons of sugar beet, which in term could produce 22,000 tons of sugar. With the outbreak of hostilities in 1975, production was interrupted, but quickly picked up again to reach an average annual yield of some 70,000 tons of sugar beet, making around 6,000 tons of sugar. However by 1985, civil war had virtually destroyed the state and production stopped.

From hashish to sugar beet

After Lebanon’s civil war ended in 1990, President Elias Hrawi, himself a land owner and a powerful voice within the Lebanese Sugar Beet Cooperative took the initiative to reintroduce subsidies. Hrawi’s argument was that the initiative would encourage farmers to move away from growing hashish, the cultivation of which had exploded during the war. In fact, according to the United Nations program for Integrated Rural Development in Baalbek and Hermel, by 1990, some 30,000 to 40,000 hectares were planted with the illicit crop, representing annual revenues of some $80 million for farmers and $500 million for the global drug market. After the war, political pressure, especially from the United States, saw cultivation vanish by 1994.

“It’s a lie that sugar beet subsidies were reintroduced to replace hashish production,” said Khoury. “Just look at the map. Hashish was grown in the Baalbek-Hermel region. Over 75% of sugar beet however, is grown in the south and mid Bekaa. Sugar beet needs a lot of water which the north just doesn’t have. The real reason to re-introduce the subsidy system was to please the electorate of certain politicians, as so often in Lebanon, even if such a system is illogical and harmful to the country.”

In 1992, the government introduced an average price of $80 per ton of sugar beet and agreed to pay the factory for the sugar refining process. Domestic production was protected from cheaper imports by forcing the country’s sugar importers to buy Lebanese sugar for $500 per ton. Lebanon’s total needs are some 100,000 tons per year, while by 2000 only 40,000 tons of sugar was produced locally.

The elaborate safety system made sugar beet a highly desirable crop within no time. Everyone wanted sugar beet. In 1992, some 10,000 dunum were planted with the sweet beet. By 2000, the planting had extended to 70,000 dunum, while total production of sugar beet had increased from 40,000 tons to 360,000 tons. As a consequence, the cost for the Lebanese government increased from some $3 million to almost $30 million.

“To realize to what imbalances the system produced by the late 1990s, it important to point out that most farmers in the Bekaa rent the land,” explained Khoury. “A consequence of the run on sugar beet was that the price of land soared from $40 to $50 per dunum to $200 per dunum by 2000. As 1.5 dunum produces about 1 ton of sugar, by 2000, the rent cost more than the import cost of 1 ton of the best quality sugar, which at that time stood at some $250.”

“As a comparison,” Khoury added, “in France, you pay between $200 and $250 per hectare. In the United States, you pay between $45 and $75 per hectare and in Romania you buy a hectare for $200.”

Not only did the government pay the farmers, it also paid the factory to produce the sugar. “It cost on average $300 to produce 1 ton of sugar in Lebanon while, it cost $250 per ton to import,” said Khoury. “By 2000, it was cheaper for the government to import sugar and distribute it for free, than to maintain the subsidy system. You should thereby realize that most subsidy money did not go to the small farmers as was intended, but went into the pockets of the factory and the 20 to 40 families that could afford to rent and plant land and exploit the subsidies."

Donor requests

At the 1998, Paris I donor conference, Lebanon was given $500 million in soft loans to offer the Hariri government some financial breathing space, in which it could tackle the ever increasing national debt. The government was expected to, among other measures, privatize the telecommunications and electricity sectors, as well as cut down on public spending, which included abolishing agricultural subsidies.

In 2000, the Cabinet decided to stop sugar beet subsidies, while maintaining the ones on tobacco and wheat, worth an annual $65 million and $15 million respectively. As a compensatory gesture, it offered to pay for one more year to all farmers who had already rented land and planted sugar beet. The sugar factory however, received no compensation. “By law we have an obligation to the Lebanese farmer,” said Khoury, “not to the factory.” Every year since 2001, Bekaa farmers, MPs, the sugar cooperation and factory called for the subsidy system to be reintroduced. Under pressure, the government in 2004 again agreed to pay for one more year. As the decision was taken quite late, only a limited area was planted producing over 52,000 tons of sugar beet, for which the government paid some $70 per ton, a total of $3.7 million. Farmers were not obliged to sell it to the factory, but could sell it on the free market, for example as animal fodder.

“The farmers actually made more money doing this as the price for fodder was much higher than what the factory was willing to offer,” explained Khoury, adding, “I realize Lebanese agriculture is suffering, as it is suffering all over the world. I’m not saying we should not help farmers, but we should consider changing the method, so that a crop is grown that has a market, so that small farmers are helped. That however, requires a sound agricultural policy, something Lebanon hasn’t had ever since the country became independent.”
 

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Business

Left Redundant

by Peter Speetjens
written by Peter Speetjens

The owners of the Lebanese Sugar Factory in Majdal Anjar claim to have lost millions of dollars due to the government decision to abolish the sugar beet subsidy system and have sued the state to obtain compensation.

Ahmed Ajami has worked as a guard at the National Sugar Factory since 1975. Today there is not much left to guard. Apart from a brief spell in 2004, the factory has been closed since 2001. A large heap of white stones, which used to be boiled to distract the calcium needed to refine sugar beet, is the only sign of what life use to be like. “During the sugar beet season, the factory employed over 250 people, mostly from Majdal Anjar, like me,” he sighed. “Of course we are all anxious about the government’s final word on sugar beet. It is our livelihood that’s at stake.”

Situated just outside the border town of Majdal Anjar, the Lebanese Sugar Factory was established in 1958. Through the years, its initial capacity of some 350 tons of sugar beet per day was gradually upgraded. The factory closed in 1985, when the government was no longer able to pay subsidies. The factory reopened in 1992 after the civil war.

”My father was one of the factory’s founding members,” said Raif Kassem. “It was the first factory in the Bekaa valley. By 1985, we were already going back and forth between the United States and Lebanon, but when the factory closed, we decided to permanently base ourselves in Los Angeles.”

Kassem started a business, enjoyed the American way of life, and had no intention of coming back. Then in 1991 he got a phone call from President Hrawi. “He asked me to come back to Lebanon to reopen the factory,” he said. “Later, the Ministers of Agriculture and Economy also contacted me and they all insisted I should come back to reopen the factory, and so I did.”

According to Kassem, the aim of reintroducing sugar beet subsidies was threefold: to replace the farming of illicit crops, to plant a crop that is good for crop rotation and to create employment. However the factory was far too small for modern needs. Kassem claims to have invested some $12 million in new equipment, everything from sorting machines to cooking pans, which he imported from Germany. The factory’s capacity was increased from some 1,700 tons in 1991 to some 2,500 tons of sugar beet per day in 2000. “The cost of processing sugar beet depends first of all on the quantity of beet involved,” he explained. “The bigger the quantity, the lower the price. Given a quantity of 180,000 tons of sugar beet with 16% sugar content per beet, the cost of producing 1 ton of white sugar is $330. Given a quantity of 300,000 tons, the cost will decrease to $275. About one third of that amount is fuel related, as it takes 62 liters of fuel oil to refine 1 ton of sugar beet.”

The government would receive the factory’s invoice and pay for the cost, plus the operator’s fee. According to Antoine Khoury, Director General of the Office of Sugar Beet and Wheat at the Ministry of Economy the government paid the factory $70 million between 1992 and 2000. “Some people accuse us of making lots of money,” Kassem continued, “but the opposite is true. Over the years, we were only able to earn back some $6 million on our investment of $12 million. As a result, we are in a terrible financial situation. In fact, because of the losses at the factory all our other businesses are suffering.”

After trying in vain to convince the government of its dire financial situation, the Kassem family has sued the government in two separate trials, one to reinstall the subsidy system, the other to obtain compensation for the $6 million loss it suffered. “The subsidy system was introduced by law,” Kassem argued, “which means that legally you cannot change that by a simple decree, as the government did in 2000. It needs a parliamentary vote. Secondly, we came back on the request of the government in the mutual understanding that we would be able to make a living. Now, if the government wants to change the system, fine, but give us a period of say 3 years, so we can adapt and earn back our money.”

This appears to be what the Seniora government had in mind when it suggested keeping subsidies in place for another three years, when it capitulated in the face the farmers’ threat to blockade Beirut last October. However, according Kassem’s son Amer, this will not be sufficient to successfully keep the factory operating.

“It is still not clear what the government intends to do,” he said. “It seems they want to take 2004 as starting point, when only a limited amount of some 50,000 tons of sugar beet were produced, and then reduce the subsidies by 30% per year. However, the factory needs a minimum of 200,000 tons to be profitable.”

As a compromise, some have suggested to cut all agricultural subsidies by 10% to 15%, instead of getting rid of just one. For political reasons however, the annual $65 million that goes to tobacco farmers in the south seems untouchable.

Meanwhile, the world market may come to the rescue of Lebanese sugar. The Lebanese government’s main argument is that producing sugar is too expensive compared to world market prices, but ever since the WTO’s decision regarding the European sugar regime (see box II), the price of sugar has been steadily rising.

“It’s not just the WTO decision,” said Kassem junior. “The price of sugar is connected with the price of oil. Every time the price of oil increases, Brazil increases its production of ethanol (alcohol made out of sugar that is used as fuel), with as a consequence that the world supply of sugar goes down and prices rise. Currently the price of sugar is about $420, which is not too far a cry from the $500 which the government charges sugar importers to buy Lebanese sugar. But then again, look at at it another way. Is $15 to $20 million a year too high a price to pay to keep the Bekaa valley alive?”

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Business

Sowing the seeds for disaster

by Peter Speetjens
written by Peter Speetjens

Bekaa farmers and Lebanon’s Sugar Beet Cooperation argue that Lebanese agriculture cannot survive without government support. Like most farmers around the world, they oppose today’s belief in free trade and insist that the wealth of agriculture cannot be measured in terms of price of profit alone.

“If there is no support for sugar beet while the growing of hashish remains banned, agriculture in the Bekaa valley will collapse completely,” said farmer Ayoub Kazoun, from Qab Elias, a small town south of Chtaura. “It’s already happening. There are families living here in Qab Elias, who cannot pay for heating or electricity and banks are confiscating homes left and right. The situation is disastrous.”

Kazoun used to grow sugar beet, but now plants mainly potatoes and animal feed. Unlike most Bekaa farmers, who lost tens of thousands dollars last summer due to the Syrian border closure, Kazoun escaped financial disaster, as he grows his potatoes exclusively for a French firm. Still, he hopes for a return of sugar beet subsidies.

Kazoun admits the main reason for reintroducing state subsidies on sugar beet was not, as many people claim, to offer an alternative to illicit crops, even though the production of hashish, to a limited extent, had entered the mid-Bekaa by the end of the war.

“In the early 1990s,” he said, “the state of Lebanese agriculture was in very bad shape for a number of reasons. We had just come out of the war and our farming methods were outdated. The world market was way ahead. What’s more, due to the fixed exchange rate between dollar and Lebanese pound, our crops were, and still are, too expensive to export. So, Lebanese farmers were in need of support.”

So, sugar beet was reintroduced because it is a labor intensive crop, which does not face direct competition from neighboring countries. However in reality sugar beet must deal with intense competition from the world market (see Box II).

The crop’s seasonal cycle involves preparing the land and planting in March. In early summer, the fields need weeding and by the end of August it’s time to harvest. For weeding and harvesting, seasonal Syrian workers, mainly women, are hired for some LL10,000 a day. Other costs include water – beet is a thirsty crop – and pesticides. “By 2000, it cost me some $300 to $350 per dunum to grow sugar beet, almost $200 of which was to rent the land,” said Kazoun. As one hectare produces some 5,000 to 7,000 tons of sugar beet, this was still a profitable venture. “As the subsidy depended on the total weight of sugar beet and the amount of sugar per beet, the government paid after the harvest,. So, we got paid LL120,000 ($80) per ton with a 15% sugar content. For every percentage more or less, the price would increase or decrease with LL 8,000 to LL 13,000, depending on the year.”

Although the government only paid at the end of the year, every spring the Sugar Beet Cooperation would give the farmer a certificate stating how much sugar beet he or she had planted. As the certificate guaranteed a more or less fixed income, a farmer could walk into any bank or shop to get a loan or buy a car on credit.

For many years, it was these certificates and the end-of-year-cash-handouts that made the Bekaa tick. “In the first few years we would not reach a sugar content of more than 13%,” said Kazoun. “In the beginning everyone tried to produce the biggest possible beet. Of course, they only got bigger because they were full of water. What we didn’t realize was that smaller beet, with less water, actually contained more sugar. It was only by 1996 and 1997 that we reached 15%. Last year, 10% of my beet had a sugar content of 19%.”

Corruption and bad practice

With practice, farmers got better, yet it was not long before the sector faced allegations of malpractice. It was alleged that laboratory workers were persuaded to fix sugar content results and that the weight of a truck load of sugar beet could be upped with a little cash incentive.

“It’s a myth,” said Kazoun. “Look, a farmer, and especially an Arab one, does not like to admit it was his fault when his beets have a sugar content of only 13%, so he’ll blame the lab and factory. Now, of course at times there were favors given here and there, like anywhere else in the country, but nothing out of order. Don’t forget there were employees of the Ministry of Economy present every day to check data regarding weight, quantity and sugar content.”

One of the most important problems farmers faced was the fact that the factory had a limited capacity of some 1,600 tons of beets a day in 1992 (although it was increased to 2500 tons by 2000). Farmers could only bring a limited quantity of sugar beet every day, a situation that takes on critical importance when fresh beets begin to lose both weight and sugar as soon as they are harvested (sugar ferments when exposed to the sun). Time was money for the farmers and in the rush to get to the factory many heated scenes ensued.

Kazoun believes that the whole system should be better organized with modern storage and cooling facilities. He also feels that proper irrigation should be introduced. Today, water is still mainly pumped from wells. This is costly as it uses fuel oil and badly affects ground water levels. In 2000, when over 7,000 hectares were planted with sugar beet, the pumping even led to water shortages.

“If subsidy system is better organized, I’m convinced that the government can pay 30% less in subsidies, while the farmers make the same,” says Kazoun. “The problem is, that the government only looks at price and profit. Last year, it claimed that selling sugar beet for animal fodder was better than selling it to the factory to produce sugar. What they didn’t say, is that as a consequence the price for hay decreased.”

According to Kazoun, another misconception surrounds wheat, which the government also wants to stop subsidizing. This may sense from an economic point of view, as it is cheaper to import, but the farmer will point to the fact that wheat is a winter crop and so, unlike a summer crop such as sugar beet, cannot easily be replaced by another. “If the land is not used in winter,” said Kazoun, “it will affect soil fertility, which will lead to an increase in the use of pesticides the next summer.”

Mohamed Mais, Director of the Sugar Beet Cooperation, could not agree more. “Price cannot be the only factor in determining what to grow,” he said. “There are socio-political factors involved as well. American farmers cannot grow cotton without state support. Europe cannot grow anything without aid. The same is true for the Bekaa. If price is the only factor to take into consideration, what are you going to do with all the farmers? How can they live?”

Last summer was particularly bad after the Syrian border blockade. “Summer is traditionally top season for farmers,” said Mais. “In July and August, they produce among other things some 2000 tons of potatoes a day, some 100 to 200 tons of onions, and some 500 tons of other vegetables. As Syria closed its borders, most of that just rotted away.”

Both Kazoun and Mais believe that if the subsidies were to disappear, there would be no alternative for farmers than to return to growing hashish. And, if price and profit are the only factors to take into consideration, why not? Hashish is easier to grow, does not need water, and is much more lucrative.
 

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Business

MENA Forum

by Executive Staff
written by Executive Staff

The 5th Middle East and North Africa Development Forum will take place in Beirut from April 6-9. Led by Middle East and North Africa think tanks in partnership with the World Bank Group and the United Nations Development Program (UNDP), the event will be dedicated to making reform work in the MENA region. EXECUTIVE talked to World Bank representative for MDF Chantal Dejou, MDF head of Secretariat, Hana Salah and Oussama Safa General Director of the Lebanese Center for Policy Studies (LCPS), the MDF’s local partner, about the aims and expectations of the conference.

E Lebanon recently won the bid to host the 5th Middle East North Africa Development Forum (MDF). How intense was the competition?

CD: As this is the 5th edition of MDF, we as organizers have past experience. The LCPS, as a leading partner, has taken part in the dialogue and in the organization of the MDF. The competition was intense and fierce among the regional local partners, but Lebanon was chosen because we felt there was a sense of momentum and historical change in the country during 2005.

E Who are the main competitors?

OS: Well to be honest, the challenges were more with internal competition rather than external competition.

E What gave Lebanon its edge?

CD: 2005 was a good example of the dynamics that affected Lebanon. The demonstrations and the involvement of the youth in particular were of interest to the MENA region. In addition, Lebanon is a country that offers high quality services. It is cosmopolitan, has connections with the rest of the world and offers wide media coverage.

E The bidding team needed the support of the private sector. How difficult or easy was it to generate interest in the turbulent year that was 2005?

OS: It was a double edged sword. On the one hand, there was uncertainty and on the other, it demonstrated belief in Lebanon. The Lebanese private sector has proved a very high level of maturity in seizing the opportunity and the need to develop such an event in Lebanon, especially in the hard times we are going through today. None of the first batch of sponsors, and they include, and I have a list here, Banque de la Mediterranee, Byblos Bank, Bank Audi, Team Holding Group, MTC Lebanon, the Central Bank, Middle East Airlines, Blom Bank, Averda Servus and Fidus, agreed to lend their support to this event for commercial reasons. They simply wanted to show their commitment to the country in an event that conveyed to the world what Lebanon is all about. Others are following their lead. Lebanon has everything it takes to become a tiger economy, whether it is in terms of infrastructure or the human element. The private sector found in this forum the opportunity to show the region and the rest of the world Lebanon’s willingness embrace change.

E What are the aims and objectives of MDF5?

CD: In the MENA region, change is needed. But what is most important is how to make it happen. The way forward is through the empowerment of the agents of change, from the government and the Parliament. The MDF is the point of departure for fostering networks, community participation, and a process for building coalitions. One essential feature of this forum is that the MDF should be a dialogue led by the forces of change in the region itself. We also want to make sure that new types of participants, those perhaps who are not normally included in the debate, like mayors and municipality officials, are also included.

E Why specifically did you choose the theme The Political Economy of Reform?

CD: Within it are the crucial themes of governance in all its forms, private sector development to support of SMEs (small and medium enterprises), and trade reforms. We will also be addressing gender and the role of women in promoting development; the role of youth and the role of local governments and lastly the role played by NGO’s at a local level to promote project development.

E Key note speakers are an increasing must have in today’s conference circuit? Who is being courted for MDF5?

CD: We will have a high level of participants not only from government ministers, but also opinion makers from the civil society and key figures from the private sector. I do believe in the peer pressure actors in the region. Fuad Seniora, the prime minister of Lebanon has been invited to open the first session and a number of ministers across the region have been invited, as well as leading figures in the Middle East such as Amr Moussa from the Arab League.

E MDF5 offers many organizational challenges? Can you tell us something about the numbers involved – delegates etc – and who are your strategic partners in the execution of the conference?

CD: We are expecting between 500 and 600 people with a high level of guests and participants. Organization is heavy but we have a have the LCPS on our side as our conference planner; the secretariat of the MDF is posted for the MDF partners at the World Bank and that is why we are working as a team. We also have an associate partner here in Lebanon, which is the Lebanese Transparency Association. Now we are entering into the intensive phase of organizational process. Also MDF partners across the region are working on their selected themes for the past two years.

E What impact will the success of MDF have on the image of Lebanon?

OS: I cannot quantify it but I can qualify it. I think MDF5 is going to be the event of 2006.

E What is your nightmare scenario?

OS: We are optimistic, and we have chosen not to discuss this issue (laughs). Lebanon has a long history of enduring the knocks and bouncing back. It takes a lot to throw us off our stride and short of a full blown regional conflagration I cannot see the conference being postponed or cancelled. In fact last year the Arab Economic Forum was held in the wake of the Hariri assassination and we responded by dedicating the event to his name. We are confident of success. We have to be.

E What systems do you have in place to ensure the results of the studies and discussions at the forum are implemented?

OS: In fact, speaking as a partner, not just as an organizer, we and the other partners (UNDP and Lebanese Transparency Association) will be taking advantage of MDF to first build local and regional support for our follow up and plans for our research agendas. Second, we will use the impact of MDF as much as possible to disseminate and at the same time, solicit feedback on what we have done. I think this will be the beginning of new work. For us for example, we are going to work on declaring a regional network of professionals.

CD: There is one important thing in the guidelines which are agreed upon together by the MDF partners, it is that there should be an action plan and a proposal from what we have learned across the region for supporting reforms and how we are going to promote it in the years to come. It is also important to have donors to support and implement the action plans. In fact there are international actors (Italy, Spain and Sweden) that are very interested in supporting such action plans. Things that happen here will have a real impact on the future.
 

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Society

BSE snapshots

by Thomas Schellen
written by Thomas Schellen

Solidere

Listing date: September 30, 1996

Number of listed shares

Class A 100,000,000

Class B 65,000,000

Opening price

Solidere A (Ten to one stock split on 06/01/1997) $113.5

Solidere B (Ten to one stock split on 06/01/1997) $116

Market capitalization (as of 31/12/05, source BSE)

Solidere A $1.8 billion

Solidere B $1.2 billion

Solidere was incorporated in 1994 as company for the development and reconstruction of the Beirut Central District (BCD). The firm’s capital was formed land and cash. Property owners in the downtown received share allocations based on judicial appraisals, the A Shares. Investors subscribing to the Solidere Initial Public Offering received B Shares. Initial restrictions differentiating the share types were later removed and A and B shares have traded in very similar ranges in recent years. Solidere shares are listed on the Beirut Stock Exchange and, since March 2005, on the Kuwait Stock Exchange.

Work on the BCD progressed at a rapid pace between 1994 and 1998, but slowed down significantly in a period that lasted until around 2003. In 2004 and 2005, the company started to pursue a revised strategy that stretched much of the original 10 to 12-year development plan into a 20-year plan. Solidere is in many ways synonymous with the economic fortunes of Lebanon and the share set the trends and dominated the volume of trading on the Beirut Stock Exchange since its reopening in 1996. The company, and its shares, saw an early period of good demand and active trading that lasted about two years. With heightened regional security worries and a domestic recession, the shares retreated in a following period and slumped to below 50% of their $10 (after share split) issue value. In early 2004, share prices embarked on a solid recovery, aided by an ingenious incentive program for shareholder-developers of real estate in the BCD. By mid 2005, and supported by the oil-driven liquidity surge of regional investors and by strong upsides of both Lebanese shares and properties, Solidere shares were serious buy recommendations for local, regional, and international investors, and traded above $24 at time of this writing in late January of 2006.

Lebanon’s late Prime Minister Rafik Hariri was the leading force behind the establishment of Solidere and his family controls over 7% in Solidere shares, while the total number of shareholders approaches 35,000. Hariri was associated widely with the ups and downs of Solidere and when he was assassinated in February 2005, share prices dropped abruptly but recovered again quickly. In 2005, the company posted net profits of $51.06 million for the first nine months of the year, more than double its profits a year earlier. In January 2006, the company announced a property deal with an Abu Dhabi-based investment firm, which intends to develop a project with a total foot-print area of 229,871 square feet and a built-up area of almost 1.9 million square feet.

Banque Audi Saradar Group

Listing date December 29, 2004 GDR

Number of listed shares

6,198,823 (GDR)

Opening price $23.50 (GDR)

Market capitalization (as of 31/12/05, source BSE)

$371 million (GDR)

Audi Saradar was formed in June 2004, through a merger-acquisition agreement between Banque Audi and Banque Saradar. Joining in the largest banking sector consolidation event in Lebanon’s history, the group combined the retail and general market position of Banque Audi with the private banking and investment banking capacities of Banque Saradar and confirmed the group’s position as one of the top Lebanese banks with regional capacities.

The corporate envelope of Audi Saradar Group in Lebanon entails Bank Audi, Audi Saradar Private Bank (ASPB), Audi Saradar Investment Bank (ASIB), Libano-Arabe Insurance (90.75% stake via ASIB), and other entities. Internationally, the group includes three fully owned subsidiaries, Bank Audi (Suisse), Bank Audi (Jordan), and Bank Audi Saradar (France), along with a (direct and indirect) 47% stake in Bank Audi Syria, a joint venture with Syrian investors and a 2% stakeholding by Saudi investor Abdullah Abdulaziz Al Rajhi. Major shareholders in Audi Saradar Group include the Deutsche Bank Group, the Audi family, the Saradar Holding, Kuwaiti and UAE-based investors. In January of 2006, Audi Saradar announced a capital increase from $900 million to $1.5 billion. As part of the increase, Egyptian investment firm EFG-Hermes Holding acquired a 20% stake in Audi Saradar by obtaining 75% of 10 million new shares issued at $60 per share, for $450 million.

With total assets of $10.9 billion at the end of September 2005, Audi-Saradar reported a net profit of $74 million for the first nine months of 2005, compared to $48.08 million in the same period of 2004. In 2004, the bank closed another $100 million preferred share issue, in addition to a $60 million capital increase, related to the issuance of new common shares dedicated to the shareholders of Banque Saradar sal, following the merger acquisition with the bank in June 2004 Audi’s GDRs, which had traded below $25 in January of 2005, gained strongly throughout last year and surged amazingly with the start of 2006 from $59.85 at the end of 2005 to more than $90 in late January of 2006. Audi Saradar has initiated processes to acquire a bank in Egypt and open an operation in Saudi Arabia and is also reported to have plans to enter the Iraqi market.

BLOM Bank

Listing date November 2, 2001

Number of listed shares

4,389,601 (GDR)

Opening price $20

Market capitalization (as of 31/12/05, source BSE)

$292 million (GDR)

BLOM Bank has been the leader in the Lebanese banking sector for many years in terms of assets and profits. The group’s domestic network includes the investment banking subsidiary Blominvest Bank and insurance firm Arope. Internationally, BLOM operates subsidiaries Banque Banorient in Switzerland, Banque Banoarabe in France, and Banque du Syrie et d’Outre-Mer in Syria, incorporated in 2004.

BLOM Bank holds a 39% stake in the Syrian joint venture bank, in addition to which the International Finance Corporation holds 10% and Syrian investors own 51%. After receiving approval by Egyptian regulatory authorities in late 2005, BLOM Bank acquired 96.77% of the shares in Misr Romanian Bank, a bank with a small network in Egypt and an operation in Romania.

In January of 2006, BLOM Bank announced that it had changed the name of Misr Romanian Bank to BLOM Bank Egypt and intended to buy the bank’s remaining shares circulating in the market. Major shareholders in BLOM Bank include the Bank of New York and several Lebanese and Syrian families. Trading below $30 at the start of 2005, the price of BLOM GDR appreciated to $66.50 at the end of 2005 and climbed to the high $90s in late January of 2006, under predictions that further gains are likely. The acquisition of Misr Romanian Bank, along with a planned capital increase and further expansion projects made BLOM Bank increasingly attractive to investors. Unconfirmed reports from late last year said that BLOM Bank intends to also list shares on the Dubai International Financial Exchange (DIFX).

With assets standing at $11.3 billion at the end of September 2005 and customer deposits of $9.4 billion, BLOM Bank reported a net profit of $90.2 million for the first three quarters of last year, an increase of 28.5% compared to the same period of 2004. BLOM also increased its capital fund to $811.66 million, up 12.42%, in addition to which it undertook a $100 million preferred shares issue on October 25.

Byblos Bank

Listing date

May 14, 1998 Common listed shares

September 15, 2003 preferred callable shares

December 23, 2005 Priority listed shares

Number of listed shares

Common listed shares 68,354,909

Preferred callable shares 333,400

Priority listed shares 68,688,309

Opening price

Common listed shares $3.14

Preferred callable shares $100

Priority listed shares $2.50

Market capitalization (as of 31/12/05, source BSE)

Common shares $161 million

Preferred shares $37 million

Priority listed shares $158 million

Byblos Bank Group is the third largest bank in Lebanon where the bank succeeded over the past ten years to achieve growth through a combination of acquisitions of smaller Lebanese banks and local operations of existing international banks ABN Amro and ING Barings. The bank pioneered numerous retail products and is a leader in several consumer lending products.

The group’s portfolio of domestic subsidiaries includes Byblos Invest Bank and insurance sector firms Adonis Insurance and Reinsurance Company (ADIR) and Adonis Brokerage House. In ADIR, Byblos controls 64% and collaborates with French Group, Natexis Assurances Banque Populaire, which holds a 34% stake. The international presence of the group is rooted in Belgium-based Byblos Bank Europe, a 99.95% subsidiary. Since 2003, the Byblos Group has actively pursued regional expansion, establishing new subsidiary banks in Sudan and Syria and initiating the acquisition of Al Rayan Bank in Algeria. Khartoum-based Byblos Bank Africa, in which Byblos holds 65%, is a joint venture with the OPEC Fund for International Development and the Saudi Arabian Islamic Corporation for the Development of the Private Sector, which hold 20% and 10%, respectively. The group’s stake in Byblos Bank Syria amounts to 41.5%, in addition to which the OPEC Fund holds 7.5% and Syrian investors own the remaining 51%. Byblos Bank Syria assumed full operations in December of 2005. Byblos Bank announced in late January that its net profits for 2005 increased by 28.5% over 2004 and reached $69 million on strong growth of its international business and its fee-based income. Total assets for 2005 reached $7.6 billion with an increase of 8.5% when compared to the bank’s $7 billion in assets at the end of 2004. Customer deposits grew by 2.8%, to $5.6 billion and customer loans advanced by 10.8%, to $1.5 billion. In a step to boost liquidity of its shares, Byblos Bank announced, after an extraordinary general assembly in January 2006, that it would list all its shares on the exchange by mid February. The bank also plans a capital increase in the range of $300 million to $450 million. Byblos common listed shares, which had traded below $1.50 in early 2005, closed at $2.36 at the end of December 2005. On the last Friday of January, the share closed at $3.85. In late January, Byblos preferred callable share and priority share were trading at $103 and $3.42, respectively.

Bank of Beirut

Listing date

April 11, 1997 Common shares

April 08, 2004 Preferred callable class B

December 30, 2005 Preferred shares class C

Number of listed shares

Common listed shares 13,535,945

Preferred callable shares B 3,000,000

Preferred callable shares C 2,920,000

Opening price

Common listed shares $3

Preferred callable shares B $11.56

Preferred callable shares C $11.56

Market capitalization (as of 31/12/05, source BSE)

Common shares $134 million

Preferred B $36 million

Preferred C $73 million

Bank of Beirut was one of Lebanon’s fastest growing banks in the period from 1990 until 2005. The bank pursued an active expansion strategy and was a leader in development of funds products listed on the bourse. Its network of subsidiaries includes an insurance brokerage in Lebanon, a unit in Cyprus, and a UK subsidiary. Shareholders in Bank of Beirut include UAE-based Emirates Bank International, with an 8.73% stake. The bank has a representative office in Nigeria and has plans for expansion. Bank of Beirut recorded a net profit of $16.31 million in the first nine months of 2005, an increase of 11% compared to the same period of 2004. Bank of Beirut’s investment funds in Lebanese and US dollar denominated currencies recorded impressive growth in the past two years. For the first six months of 2005, Bank of Beirut announced consolidated net income of $11.2 million, up 6.1% when compared with the same period in 2004. Net interest income increased by 2.1% to $33.3 million and net commission earnings rose by 33.1% to $10.1 million. Net profits on financial operations grew by 4.4% to $44.6 million. Total assets reached $3.95 billion, and customer deposits totaled $2.7 billion. Bank of Beirut common shares, which had traded below $8 in the first half of 2005, closed at $9.90 at the end of December 2005. On the last Friday of January, the share closed at $10.95. Preferred B and C shares traded at $12.10 and $25, respectively, in late January.

Rasamny-Younis Motor Company (RYMCO)

Listing date February 6, 1998

Number of listed shares

10,000,000

Opening price $3.75

Market capitalization (as of 31/12/05, source BSE)

$11 million

Founded in 1957, RYMCO is the first and only car dealing company listed on the BSE. The company, which is the distributor of Nissan, Infiniti and GMC vehicles in Lebanon, claims to control 17% of the Lebanese market share.

According to reports, the Kuwait-based Kharafi Group owns a stake of 12.80% in RYMCO and Lebanese investment bank Middle East Capital Group (MECG) owns 4.17%. In the first quarter of 2005, RYMCO’s showed a 70 to 60% year-on-year drop in net profits to $120,343. In spring 2005, MECG successfully closed a $20 million offering of automobile-backed receivable securities for RYMCO, the largest such transaction in Lebanon and one of the largest in the region. The shares in RYMCO traded at $1.10 on the last Friday of January.

BEMO

Listing date January 11, 1999

Number of listed shares

5,333,334

Opening price $3.25

Market capitalization (as of 31/12/05, source BSE)

$19million (Listed shares)

BEMO ( Banque Européenne pour le Moyen-Orient) is a niche bank with strong capacities in corporate and private banking.

Although its asset volume of less than $1 billion places it outside of the Lebanese banking sector’s top segment by size, BEMO is considered one the country’s more innovative banks. The bank’s profit curve has been very positive in recent years, moving from net profits of $650,000 in 2003 to over $1 million in 2004 and surging even stronger in 2005, with net profits reported at $2.1 million in the first half of the year. BEMO has an investment banking subsidiary, BESC Investment Bank.

In 2003, BEMO entered a partnership with Saudi Arabia’s Banque Saudi Fransi, which took a 10% stake in the Lebanese bank. The two banks collaborated in setting up a new private sector bank in Syria, Banque BEMO Saudi Fransi, in which BEMO holds a stake of 22% while Banque Saudi Fransi holds 25%.

Due to the small number of circulating shares, the volume of trading on BEMO stock on the BSE is relatively small. BEMO’s shares surged to the $6 trading range in late January 2006 after closing 2005 at $3.50. As in the case of other shares on the BSE, BEMO benefited from the rush on Lebanese equities and stocks from Gulf investors.

Societe Libanaise Des Ciments Blancs

Listing date January 22, 1996

Number of listed shares

Bearer shares 6,000,000

Nominal shares 3,000,000

Opening price

Bearer $6.875

Nominal $6.875

Market capitalization (as of 31/12/05, source BSE)

Bearer $7.5 million

Nominal $4.5 million

Société Libanaise des Ciments Blancs saw its business drop as a result of the recession. The company did manage to post a $2.73 million in net profits for the first-six months of 2004, up from a net loss of $1.2 million in the same period the previous year. In 2004 sales were up by 55% to $43 million, while cost of goods sold (including distribution fees) increased significantly by 76% year-on-year to $21 million. In turn, total assets stood at $316 million, growing 4% on a yearly basis. The company did not publicly disclose its revenues or profits in 2005. At the time of writing, Ciments Blancs Bearer and Nominal shares are currently traded at $1.64 and $1.50 respectively.
 

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Real Estate

Building Lebanon: NGOS do their bit

by Safa Jafari
written by Safa Jafari

As Lebanon wraps up an extraordinary year of tragedy and hope, the world’s international bodies continue to execute their projects for the development and well being of Lebanon and its people. Executive looks at the achievements of some of Lebanon’s major NGOs in Lebanon as well as their plans and expectations for 2006.

Greenpeace

During an active 2005, Greenpeace launched its “Peaceful Energy” campaign with a boat tour from Europe to the Mediterranean, stopping in Beirut. Debates were opened in 16 countries about the importance of tackling climate change and the need to switch to renewable sources of energy, such as the sun.

In 2006, Greenpeace Lebanon will run three campaigns in parallel around the Mediterranean, promoting investment in renewable energy. Greenpeace is also currently working on an Arab world media project, which should transform the office in Lebanon into an environmental media resource in the Middle East and Arab countries.

United Nations Children’s Fund (UNICEF)

UNICEF aims to contribute to the national objectives of reducing the rates of infant mortality and mortality of children under five, with a special emphasis on the overall physical, cognitive, emotional and psychosocial development of young children within its childcare and development program.
 

The UNICEF’s learning program assists national efforts towards increasing enrolment, improving the quality of education, and decreasing school dropout rates. It played a key role in bringing the issue of increasing the age for free and compulsory education to parliamentary hearings in 2002. This year, UNICEF launched in partnership with the private sector the Adopt-A-School project that provides basic services as well as equipment, training and guidance to poor public schools.

In 2006, UNICEF wants to increase the number of schools in most deprived areas in Lebanon and shall be working on knowledge transfer and capacity building for teachers and administrators through orientation provided by leading private schools in Lebanon.

A program that continues from the year 2005 through to 2006, is the youth empowerment and protection program, which contributes to providing youth with skills and knowledge for the future. This program covers projects and studies on: national youth policy, situational assessment on children deprived of family care in Lebanon, children in need of protection from violence, exploitation and abuse in Lebanon, mine risk education, young offenders in Lebanon and HIV/AIDS programs.

United Nations Development Program (UNDP)

The UNDP Lebanon office works jointly with the Lebanese government within a Country Cooperation Framework (CCF), which outlines a joint national work plan for five to six years. The three main pillars are governance (including public sector reform; institutional development and e-government; fiscal reform; institutional development; and strengthening the structure of parliament), poverty reduction (including the re-integration of the displaced; post-conflict socio-economic rehabilitation of south Lebanon; and regional development in Akkar) and environmental and natural resource management. In its initiatives, UNDP integrates advocacy and the promotion of a national development dialogue; gender and development; youth participation; partnerships and resource mobilization; and management and support.

UNDP has recently started working alongside the Lebanese government on its Lebanese-driven National Commission on Electoral Law Reform. It has also been working on a project called Towards a National Dialogue on Corruption, which targets Lebanese administration and the judiciary and economy with the objective of strengthening transparency and accountability in public institutions in Lebanon. It is in the last stages of the launching of the National e-Strategy for Lebanon project, which aims to outline the roadmap required for a national e-society covering IT, infrastructure, institutional and legal frameworks and human resources. In 2006, the organization will also be finalizing its project supporting the judicial documentation and research center at the ministry of justice.

United Nations Economic and Social Commission for Western Asia (ESCWA)

With an objective to promote economic cooperation and regional integration through advocacy, research and advisory services, ESCWA in Lebanon published a study, External Debt Management in the ESCWA region in 2005.

ESCWA’s operational activities include the pilot project for post-conflict reconstruction in south Lebanon, in addition to a project on employment creation through the development of micro and small agro-industries in south Lebanon.

In 2005, ESCWA launched the Lebanese chapter of the Arab Integrated Water Resources Network (AWARENET) and advised the ministry of environment on strengthening the link between the national Environment Action Plan and the office of the prime minister. A presentation was made on Agenda 21 and the role of local authorities in implementing various projects for sustainable development.

Another study was issued titled, The Situation of the Handicrafts Industry: Needs and Challenges in Lebanon and Selected Arab Countries, and a sub-regional workshop was held in Chikka in Lebanon on Training Researchers in Local Community Development. ESCWA also advised the National Commission for Women on reporting on the Convention on Elimination of all Forms of Discrimination Against Women, in addition to its initiatives on technology, employment and poverty alleviation.

United Nations Educational, Scientific and Cultural Organization (UNESCO)

Due to UNESCO’s key role in capacity building for education sectors and eradicating illiteracy worldwide, the United Nations General Assembly asked UNESCO to take on the role as coordinator for the United Nations Literacy Decade project (2003-2012), addressing deprived populations under the banner: Literacy for All: Voice for All, Learning for All.

The University Students for Literacy program emerged at the Arab Regional Conference on Higher Education as a means of extending the role of the university in community development. In Lebanon, the University of Balamand’s Faculty of Health Sciences, started collaborating with UNESCO on the concept of each university student giving at least one person an opportunity to acquire literacy.

The UNESCO office in Beirut has been working on three major projects: the establishment and institutionalization of comprehensive, decentralized Educational Decision Support Systems in Arab States; Focusing Resources for Effective School Health to enhance the quality and equity of education in the region; and HIV/AIDS preventive education.

In addition to its usual series of conferences, workshops, training courses and events; UNESCO in Lebanon has also started implementing a regional project on Multi-Purpose Community Learning Centers.” This project, to be implemented in Lebanon, Syria, the Palestinian refugee camps, Egypt, Sudan, Morocco and Yemen, aims to promote human development; develop networks for education; build capacities; as well as act as a center for culture, education and information provision.

United Nations Population Fund (UNFPA)

With the goal of supporting the Lebanese government in meeting its population and development goals over the period of 2002 to 2006, UNFPA works to bridge regional gaps in access to basic social services; reform the education and health sectors; develop initiatives targeting youth; support the empowerment of women; protect the environment; collaborate with non-governmental organizations, the media and the private sector; foster aid coordination; and build national capacity in the management of social development initiatives.

UNFPA is the executing agency for the Integration of Population and Development in Planning and Programming. In the sub-programming area of Reproductive Health, UNFPA is working on the, integration of quality reproductive health services into primary health care. Here, essential services such as family planning, antenatal/postnatal care, adolescent reproductive health counseling, and the prevention and management of reproductive tract infections, including sexually transmitted diseases and HIV – will be included in 50 selected centers, in addition to the 150 centers supported under the previous program in all six governorates. Efforts will be made to reinforce women’s participation in decision-making about their fertility behavior, with emphasis on improving counseling services, education, communication activities and increasing male involvement.

United Nations Relief and Works Agency (UNRWA)

An organization that faces high demand yet relies exclusively on voluntary funding, UNRWA remains Lebanon’s sole agency for a large population that suffers unstable and unsanitary living conditions: the Palestinian refugees. UNRWA’s general director, Richard Cook, however, informed Executive of promising developments. During the last 12 months, UNRWA conducted classroom improvement, life-quality and infrastructure projects. The European Commission funded UNRWA to execute a major infrastructure rehabilitation project, completed by the end of 2005, in five camps: Bourj al Shemali, Rashidieh, Mieh Mieh, Beddawi and Wavel. Funding is being sought for the rehabilitation of the remaining camps in 2006.

Last year also witnessed positive interaction with a cooperative Lebanese government. UNRWA started its five-year Medium Term Plan (2005-2009), which was devised “to restore the living conditions of Palestinian refugees to acceptable international standards and set them on the road to self reliance and sustainable human development.” An UNRWA university scholarship fund benefited 35 students in 2005.

A multi-million dollar educational project will be launched in the year 2006, providing more schools and better educational facilities. UNRWA will also cater to the training and needs of teachers, children with special needs, and school dropouts. Other projects include the Siblin Training Centre for the provision of job opportunities for young refugees. Upcoming projects include work on the Al-Bass Camp water supply and drainage system, as well as the rehabilitation of 144 shelters all over Lebanon. UNRWA continues to provide its core services of relief while fundraising for individual projects and medium term plans.

United States Agency for International Development (USAID)

In its work in Lebanon, USAID is currently working within its 2003-2005 strategy, which has been extended to 2007 for implementation and focuses on three strategic objectives:

1. Economic Opportunity: which focuses on strengthening: agribusiness and light agro-industry, information and communication technology and rural tourism. The program also supports the government for membership in the World Trade Organization and helps survivors of landmines and their families lead productive lives.

2. Through its governance objective, USAID works on building the capacity of local municipalities in managing resources efficiently and transparently, increasing the responsiveness of Parliament, as well as supporting civil society.

3. On the environmental level, USAID’s program focuses on increasing the use of appropriate environmental management practices, supporting waste management and improving participatory approaches in water management. Through its strategy over 2003 to 2007, USAID Lebanon will focus on expanding economic opportunities and investment through rural/urban integration in the major economic sectors as well as in “growth poles.” It will be accelerating economic reform by working on policy, legislation, and intellectual property rights to encourage trade and foreign investment.

It will strengthen foundations for governance by improving municipal services to Lebanese citizens; tackling issues such as transparency and accountability in government and privatization and e-government. Rural development and public-private partnerships are a priority within the Global Development Alliance.

USAID Lebanon projects are identified under 14 categories: irrigation, agricultural roads, potable water, community centers, health centers, sewage networks, schools, access roads, income generation, environment awareness, environment protection practices, reforestation, waste management and training.

World Bank

During the year 2005, the World Bank sponsored several initiatives in Lebanon, including the Managing Procurement and Logistics of HIV/AIDS Drugs and Related Supplies; Quality and Public/Private Partnership for Health Services, and opening a library for the South Lebanese Society for the Blind.

The portfolio in Lebanon for the International Bank for Reconstruction and Development (part of the World Bank Group) consists of seven projects for a total commitment amount of $321.82 million. They include projects on revenue enhancement and fiscal management technical assistance; education development; the first municipal infrastructure project; the community development project; the Baalbeck water and wastewater project; the urban transport development project, and the project for cultural heritage and urban development.

The International Finance Corporation continues to fund infrastructure enterprises. The Multilateral Investment Guarantee Agency has received in the past decade more than 20 international applications for investment in Lebanon in the finance, infrastructure, telecommunications, and tourism sectors. It is performing a needs assessment for the Investment Development Authority of Lebanon.

The World Bank is working on a new initiative that empowers Lebanese youth to voice their views on governance issues. Shaping the Future is the theme of the Lebanon Development Marketplace competition and grant program for the year 2006; addressing pressing social, economic and political concerns of Lebanon’s youth.

The Bank’s Country Assistance Strategy for Lebanon (2005-2008) includes the following themes: elections and a youth parliament, accountability and transparency on a national level and local level, empowerment in political parties, empowerment in student councils, the anti-corruption network, Diaspora-to-homeland links, publications and media outreach.
 

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Economics & Policy

Lebanon’s Fragile Strength

by Faysal Badran
written by Faysal Badran

As we keep hammering in many articles, the end game for a country like Lebanon is to attract and keep foreign investors. The thinking goes that foreign investment in the private sector will serve to offset the debt-laden public sector and help fuel economic growth. As eloquently put by our economics minister, economic growth needs an increase in job creation. This is a national interest issue. What is puzzling, when one watches the political landscape, besides the ineptitude of most politicians and their thirst for individual enrichment, is how little they are focusing on the need to get this economy going.

Back in the Hariri days, despite all what has been said and done, there was a clear emphasis on getting the economic engine running. The best testimonial to the good work done by Hariri is in fact the current behavior of all asset markets in Lebanon. Many pundits and critics often speculated that Hariri held the country together, and while this is being revealed from a political perspective now, from an economic point of view, it is now clear that he had developed a deep conviction among investors that this country is for real.

The risk now, is that the resilience we spoke of in the December issue, ie the continuing flow of capital, will be jeopardized by political wrangling. What is astounding, is that part of the body politic is fiercely opposing the internationalization of the Lebanese question, while what the Lebanese economy needs, is exactly that.

After 30 years of total Syrian tutelage – and I use the word generously – Lebanon is now in a position to bid for its sovereignty. This, from an economic perspective has profoundly positive implications. It has placed Lebanon on the map in terms of the global money game. Sound simplistic? Not really.

Internationalization

The missing link that is stopping Lebanon’s economic acceleration is its adherence to an international agenda. If one looks at Turkey for instance, it is clear that once there is a genuine sponsorship of economic and fiscal steps by the international community, there are certain rules and guidelines that must be respected. Turkey could not have achieved the economic growth and embarked on the path of development economic integration, without the backing of the World Bank and the IMF.

Lebanon is no different in many respects. How do we expect the international economic and financial entities to back us, without delivering on the most basic framework that governs international relations? Many political talking heads reject in a vociferous manner for instance, privatization. How can any fiscal balance be restored if privatization is not backed and implemented? More pressing yet, is how Lebanon can reap the benefits of strong Sovereign debt ratings by Moodys and Standard & Poors, without achieving full sovereignty. All these hot issues reveal what a critical crossroads Lebanon is at. On one hand, we have seen a fairly stable, albeit anemic economy, with strong advances in major shares thanks to regional interest, and hot real estate transactions, and on the other a deep division inside the political panorama as to how much “internationalization” there should be.

In essence, there is a clear disconnect between what is occurring on the economic (and financial) front, and the political mood. Take for instance the mega deal announced by Audi Saradar Group to raise its capital by $600 million coupled with a large Egyptian group’s 20% stake in the bank. On that same day, the political news was horrendous. This dichotomy shows that most politicians are not aware of the economic opportunity that lies ahead for Lebanon, and that as the political bickering continues, players with fundamental belief in Lebanon are pouring money into the country’s private sector. It is the epitome of Lebanon’s contradictions, that an Egyptian investment bank is showing more faith in the country than many of its politicians. What needs to happen politically is clear to all. Lebanon is on the doorstep of normality with the international community, it needs to address its internal incongruence with one thing in mind: prosperity. This cannot be achieved by challenging the world, upon which it is entirely reliant to get its fiscal and economic house in order. This is also clear evidence that outside money is chasing Lebanese assets. Bank shares are soaring; finally joining their regional brethrens. Solidere, the epitome of Hariri’s reformist thrust, is witnessing unprecedented flows from all sorts of investors. This represents a positive factor going forward, but it also, perversely, is a source of vulnerability. These moves in asset markets are a clear vote of confidence, but if the political scene is not calmed, it may all go to waste. Simply put, once investors have put their money in a country they believe in, the onus is on the politicians to encourage them to continue, creating a virtuous circle. It is a fair bet that that most of the investors in Lebanon feel that the internal issues will be resolved, and more importantly that true reform is on the way. The money that has come in will now be in a “show me” mode, requiring immediate action from the policy makers. If the political gridlock results in excessive delays in reform, and by that we mean privatization, then investors will be as quick to bail out as they were to hand their money over to the Lebanese private sector.

Lebanon is a country operating well below its economic potential. Its pluralistic fabric is a source of strength, in a fairly dogmatic and monolithic regional environment and it has magnificent kinetic forces: high literacy, high profile and wealthy Diaspora willing to invest, and a stellar role in helping reshape the whole Arab world. These attributes should be protected and harnessed in order to reach potential.

In many ways, Lebanon can be a standard bearer for change in the region. Prosperity is the best glue to keep together often diverging views of national identity and foreign allegiances. It is clear that change is inevitable both in Lebanon and in Syria, and we are clearly on a path which will better the economic performance of both, but in order to lubricate the process and defend the gains achieved, we must focus on the economic agenda, and let it drive the political one, not the other way around. However, one worries that the drive to privatize for instance will be portrayed as“internationalization” and stall, because without privatizations and reform of the public sector, the flare up in Lebanese assets and the relative stability of the economy will go down the drain. Lebanon is now in a position with a lot to lose, and therefore those who claim to protect it must bear that in mind.
 

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Economics & Policy

The long and winding road to beirut

by Joey Ghaleb
written by Joey Ghaleb

Between the first round of investigations by the Mehlis Commission and the killing of MP Gebran Tueni, the “Beirut I” donor conference briefly became news.

National interest peaked in September 2005, a week before the Annual Meetings in New York of the World Bank and the International Monetary Fund (IMF), when Prime Minister Seniora, surrounded by foreign ministers from several countries, talked about a “Made in Lebanon” government reform plan.

That was then. Today the plan is in tatters as Lebanon hurtles towards dangerous political polarization. It has been said before, but it should be said again and again: Lebanon can not ignore its horrendous economic situation and put reforms on hold indefinitely.

After the Paris II Conference, the late economy minister, Dr. Basil Fuleihan warned that Lebanon has a history of missed opportunities. He has sadly gone and his call has gone unheeded. Only now are we beginning to appreciate the special attention Lebanon received on that day in November 2002.

“National crime”

If one accepts that Paris II was a unique event for such a small nation of 3.5 million citizens, Beirut I must be seen as an equally rare opportunity and in my opinion it was a once-in-a-generation opportunity. Riad Salameh, governor of the Central Bank, is reported to have gone as far as saying that to miss [a donor conference] would be a “national crime.”

When the Lebanese team prepared for Paris II, it had its work cut out convincing world leaders that Lebanon had turned a new page and was ready for genuine reform. The United States, the IMF, and the EU weren’t buying it, the government’s plan remained embargoed until the last minute and was never actually endorsed by IMF. What was achieved at Paris II was down to the efforts of the late Prime Minister Rafik Hariri’s personal initiative and international connections that stretched from Malaysia to France.

In September the donors were more forgiving. Unlike the period preceding Paris II, when the government signaled its intention to hold another donor conference, the international community and international organizations couldn’t signal their support fast enough for a Lebanon they saw as finally being on the up. The message was loud and clear: “Tell us what you want, present a credible plan, and we are ready to help.” The international community was so convinced that Lebanon had turned a page that the government was no longer required to indulge in the painful rounds of lobbying it did in 2002. The only remaining question was whether Lebanon was ready to introduce reform and understandably a credible, national plan was requested by the international community.

Donors had learned their lessons too. Unlike Paris II when an upfront assistance package was offered, any aid from Beirut I would be conditional to meeting milestones in the reform plan, limiting donor risk if the government failed to deliver. This only added to the government’s determination to show political will, and a national consensus backing reforms by developing an economic reform plan was built. The idea was it would be debated in Parliament – instead of some cabal of technocrats – to galvanize national support and strengthen the ability to deliver on the commitments afterwards. There was no stopping the Lebanese government now. A competent team including senior officials from the ministries of finance and economy, the Central Bank and the prime minister’s office began preparing what was known as the “Beirut Paper.”

This plan included introducing structural fiscal reforms such as tax increases and the elimination of inefficient state programs, privatizing state-owned enterprises, trimming the public sector, modernizing and liberalizing the domestic economy, and committing to the integration of Lebanon into the global economy. The World Bank and the IMF were kept abreast of developments and a deadline was set for late October 2005 with the conference penciled in for late November.

No pain, no gain

The effectiveness of the reforms was judged by the ability of the government to meet through various instruments certain fiscal thresholds and multiple scenarios were projected. On its end, the ministry of economy and trade tasked an intra-ministerial working group, including all line ministries, to develop the social pillar of the Beirut Paper, as a decision, and it was a commendable one at the time, was taken to depart from previous plans whereby only fiscal and monetary chapters were covered, opting instead for a comprehensive socio-economic plan.

The government recognized it could no longer ignore social policy and more specifically the need to mitigate the potential negative impacts of reform measures on the poorest segments of society. Sadly, the initiative of developing an extensive social reform agenda, which was endorsed by the World Bank and welcomed by the public, was later deemed unattainable in the allotted time. As a result a more realistic downscaled approach was adopted.

And so the preparations for Beirut I went on into the last quarter of 2005, but there were often delays brought about by political upheaval. And then came the doubts. Observers began to wonder if, even with the apparent support by the international community, the government could deliver what were seen as painful reforms, especially when in November, flying in the face of economic sense, it bowed to political pressure to subsidize the price of fuel.

The ghosts of Paris II returned to haunt. Could we really now expect major reforms, including painful tax hikes to be approved a priori by Parliament when the country had just witnessed the government buckle so easily during the fuel debate? Would any national debate of the reform plan lead to one retreat after another, effectively emptying the Beirut Paper of all its reformist identity?

But still, the international community continued to show support for Lebanon and the nation waited for the publication of the Beirut Paper and the setting of a date for Beirut I. But the process dragged and the momentum slowed. By October, the government, which had not publicly divulged the main recommendations of the Beirut Paper, had to accept that the Melhis Report had stolen its thunder.

No public debate

After originally planning for late November, December 15 was set as the new date for the conference but Melhis’s second installment pushed it back into January 2006. The government put a positive spin on the delay, arguing that it would buy it more time to firm up its plan and engage a wider spectrum of stakeholders. In any case, it would be foolish to rush things, do a botch job and lose international support. Then MP Gebran Tueni was assassinated on December 12 and a new political crisis crash-landed on Seniora’s in-tray. Donor conference? What donor conference?

So there we have it. Was it all bad luck or did the government commit cardinal errors? It may have been hesitant or delayed for political reasons a proper debate over economic reforms but the media and civil society are also partly to blame as they had a role in mobilizing public opinion, and did not apply enough pressure on decision-makers and politicians. Why wasn’t there been any debate and discussion about the donor conference? Had they forgotten that the national debt had surpassed $37 billion? With the exception of some half-hearted attempts to discuss economic issues, often with a socio-popular twist, when was the last time a forum or a televised debate properly addressed economic reform? The ministers of finance and economy had tried to ring the alarm bell but their public interventions and press conferences were obviously not considered newsworthy as they were barely covered.

But the nagging feeling is that the government doesn’t have the stomach to push through the Beirut Paper. Does it really think it can hold a donor conference in such a volatile national atmosphere, be it in February or March? The security situation is troubling but what is equally worrying is the real risk of international support fading away. The international community has sometimes shown more enthusiasm for Beirut I than the Lebanese themselves and foreign diplomats have not missed an opportunity to remind us that the proper time to hold this event is now. That message was repeated over and over since day one but we should not fool ourselves thinking that interest in Lebanon will last forever and that the international community will wait indefinitely for the government to give the green light for them to start pouring billions of dollars in financial and technical assistance.

Window of opportunity

Obviously, the postponement was not a decision the government wanted. But credibility is a fickle mistress. Already we are hearing whispers from many circles that Lebanese officials are not serious. Why are they not acting? We have a window of opportunity where the whole world, including previously reluctant parties, is offering its full support, requesting in return only that we introduce and implement reforms Lebanon itself recognizes as of paramount importance. As they say in America, it’s a no-brainer. The urgency is not internationally-imposed, but domestically-driven. The ills of the economy are home made and maybe insurmountable if we are left to our own devices.

The reply of some pundits and policy-makers, using real politic logic, is that the issue of launching the debate on the Beirut Paper is essentially a matter of proper timing and, they claim, forcing the economic agenda during turbulent political times may undermine the economic reform efforts and destabilize the climate further, hence the delay. In short, necessity pushed the government to gamble – and lose – on a risky date.

But, by the same logic, others argue, equally compellingly, that the government is guilty of a major miscalculation. Should it not have predicted – in the midst of the Mehlis investigation – that its plans would be upstaged by more dramatic political events? In not doing so, it has rallied the international community only to tell them to stand down. Patience is being tested and it is a commodity in limited supply. If the holding of a donor conference was indeed a strategic must, as foreseen in the New York last September, could the government not have set a viable timetable – say for Spring 2006 – rather than embark upon a series of cancellations?

Sadly, the political crisis in Lebanon looks like it might actually derail the efforts of reform and silence the voices of change by politicizing any economic agenda irrespective of its content and objectives. The alternative is probably a Plan B, whereby the ministry of finance adopts a “shock and awe” tactic in the shape of presenting for approval, and without any further delay, before the Council of Ministers a bold, reformist 2006 budget proposal – as it is expected to be, – while the prime minister goes public with the Beirut Paper and schedules the conference for the earliest date, putting the ball in the court of the general public, thus cornering the non-reformists and forcing politicians to face their national responsibilities. They have nothing to lose.

Dr. Joey Ghaleb was formerly the chief economist and senior advisor to the minister of economy and trade. He wrote this commentary exclusively for EXECUTIVE.

 

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Economics & Policy

Semaan Bassil

by Executive Staff
written by Executive Staff

The Byblos Bank Group, Lebanon’s third largest financial group, started the year 2006 with decisions to list all its shares and increase its capital by a massive amount, right on the heels of a $164.8 million rights issue by which the bank doubled its share capital to $329.6 million in the last quarter of 2005. EXECUTIVE inquired with Semaan Bassil, vice-chairman and general manager, about the latest strategy moves of Byblos Bank, whose new joint venture subsidiary in Syria also started full operations last month.

E After increasing its capital not long ago, Byblos Bank is preparing for a full listing of its shares on the Beirut Stock Exchange and is also considering a further capital increase. Could you outline the development of Byblos Bank’s new relationship to investors and the Lebanese stock market?

In the past, Byblos was mainly focusing on building its business in Lebanon and the region and it didn’t approach institutional investors with a lot of PR. That was because we sensed up until recently that nobody was interested in Lebanon and there was little trading.

Then a number of things started happening concerning Byblos and the market. First, there was more optimism in Lebanon after the new government declared all the reforms and started preparing a new page in the country’s history and because of the changes that are happening.

On our part, after feeling the need to expand our markets further, we said it is a good time to strengthen our capital and also to make Byblos better known among institutional investors. Thus we held two road shows in the past three months, in Europe and the United States, before doing our capital increase – I am talking here about the previous capital increase which we already closed, not the one that we might have in the near future. Several institutional investors looked at Byblos and saw that Byblos has a good story. They saw regional expansion built upon a strong local franchise, plus they saw that our P/E ratios were very low compared to other banks listed. The foreign institutional investors, who didn’t know Byblos before because we were not advertising our bank, really discovered Byblos and three to four institutional investors took between 1% and 2.5% each.

E How did this influence the performance of Byblos shares in context of the overall market development?

At that time our share was trading at $1.5, and even less. After the road shows, a lot of interest emerged from the Gulf and from Lebanon, and the ball began to roll. The price of Byblos started to go up, as did that of the other banks. All the banking shares are being traded actively by Gulf investors and also by Lebanese. But because Byblos started from a very low base, it went up very rapidly.

E Do you see a new environment on the bourse?

Up to perhaps the last quarter of last year, daily average trading on the Beirut Stock Exchange used to be around $1 to 1.5 million. Then suddenly in the last quarter of 2005, daily volumes reached $15 million, and today, it reached $40 million.

E Is this what led you to list all your shares on the BSE?

Until now, we had only one third of our shares listed. The main reason why we are listing all our shares is because there is an appetite, which had not been the case before. We said, since there is an appetite on Byblos shares today, why don’t we list all the shares to create more liquidity and satisfy all this appetite?

E Has everything been set for the measure, including the date?

Because there is already demand on our shares and we want to satisfy this demand, the step is imminent. What we are waiting for now is approval from the Central Bank and the BSE. This is an administrative issue and we expect the listing within two to three weeks, in early February. The date is just an administrative matter.

E As the second step after the full listing, you would look at a new capital increase. How would this increase differ from the one you did last year?

The reason why we did not list our last capital increase in any exchange was that it was an increase through a rights issue for the current shareholders. It was not open to the public unless some shareholders decided to not subscribe and sold their rights. The future capital increase that we may do will take different options into consideration, as the bank wants to make sure that we list where we can achieve more liquidity and more exposure of the bank to international investors.

This is always under the point of view where the investor feels more comfortable. We are moving from being inwards and only looking at our business to becoming closer to the investors in our shares.

E Do your have your eyes set only on the BSE or would you also consider listing in other markets, such as the DIFX or a European exchange?

It is not limited; it could be on one, two or three exchanges, depending on where it adds more value to the investor. We could list in London, Dubai, other Arab markets, whatever decision we take will be to see added value to the investor. What we want is to increase liquidity and facilitate trading to local and international investors, this is our concern.

E Is it correct that you are considering a range of $300 to $400 million for your capital increase?

The range which we are considering is actually between $300 and $450 million. But this will become final after we finish our due diligence internally, because we want to make sure that any capital increase is bringing added value to the bank.

E In parallel to your own capital increase, Lebanon’s two other large listed banking groups, Audi Saradar and BLOM, have also been involved in major steps for raising their capital above the $ 1 billion mark. Are you three a new breed in the Lebanese banking sector?

The reason why I think that these banks are differentiating themselves is that they have been going international. Because what do they actually need the capital for? It is to buy banks or strengthen the capital of banks that they have already set up overseas.

E Do you see a growing gap between the three and the rest of the financial industry in Lebanon?

Yes, because this is already evident in the market shares. The number one has perhaps over 16% in market share and the second one is not far behind. Then it drops to 10-11% which is our share, and then it goes lower. There is increasing concentration, because larger banks are becoming larger because of their aggressive strategy by buying banks locally or going outside.

E Would you identify further differentiation marks that allow these banks to expand on several levels at once, other than sheer size?

The reason why they can do that is not only that they have the capital but also that they have the system and the people. Capital, as you know, is very easy to bring. Two factors are involved. Banks first have to be open-minded to open their capital, because to open the capital dilutes existing shareholding, and that requires a level of maturity. Secondly, you have to have the system and people, to deploy the capital in an effective way. Some banks have been investing in system and people and can deliver this readiness to open up and the capability to deploy the funds.

E Are there any potential downsides affiliated with this trend and with raising capital by such large margins as we are seeing?

The challenge for Audi, BLOM, and us in increasing our capital is to be able to maximize the adequate return on this investment in an acceptable period. When you increase your capital, you dilute your shareholding, so the P/E ratio will go up. The challenge is how quickly the banks will be able to deploy the capital and get returns. The more the banks are ready in terms of system and people, the quicker they will be able to convert this capital into adequate returns.

E How about the issue of competitiveness? Does it increase the challenge if the three banks expand into larger markets and thereby might venture into territories that bigger regional banks in the GCC might be interested in?

I am going to places where the spoilt GCC banks will not go. By spoilt I mean that most GCC banks either do not pay interest on their deposits or have easy funds from government agencies. They are self-sufficient with siphoning profits in the easy way of doing money. These banks are not going to go into markets where we are going, like Sudan, like Syria, or like Algeria. I don’t think that banks in the Gulf are ready to go into these markets yet, because they are not used to these difficult markets.

E What are the longer-term perspectives on this issue of increasing competition?

In the longer term, this is a challenge for banks like us. Today, we have been in Sudan for three years. If we stop developing in Sudan and sit on our laurels, this is definitely a wrong strategy. Sooner or later an Arab or even a local bank will come and start driving the rates down. That’s why the bank is expanding the network and is not limiting itself only to lending to international corporations but trying to learn the market and with time go into the middle market and even consumer banking. It is the strategy of Byblos to go into such markets to build home bases, not only to set up one bank branch which was the traditional way for Lebanese banks which have set up their European subsidiaries which mainly were following the Lebanese clients.

E It seems that Sudan has already started attracting a measure of interest from Gulf investors, in areas such as real estate. Couldn’t that also extend to finance?

I can tell you that today there are five new banks that open up in Sudan but four out of the five are not banking groups. They are only private investors who believe that by having a lot of money and setting up banks, they can make a lot of money. Of course, this is going to affect prices and create competition. But it is our advantage that as a bank, we run the bank in Sudan and provide all the back office from Beirut, because we have the organization.

E Markets in Algeria also have shown a recent development due to the country’s growth in oil and gas revenues. Were you lucky in choosing Algeria?

We must be always lucky. When we chose Sudan, we were told we were lucky. When we choose Algeria, we are told we are being lucky. I think it is having a vision and be forward looking.

E Do you expect financial markets in Algeria to pick up in the near future?

We should be careful because Algeria has for years been talking about privatization and has been accumulating large foreign reserves. Algeria has a huge potential but the issue is that they are slow. They don’t have yet a real financial market or stock market and 80% of the economy is state-owned. It is the right moment to start looking into this market but it is going to take time and that’s why we are there for the long term.

E The slowness of processes in Algeria also seemed to have some bearing on the completion of your acquisition of Rayan Bank. Is the licensing issue progressing slower than hoped for?

Yes, but that helped us in a way because in the meanwhile we used our time and efforts to start operating in Syria, where we are now fully operational since December and, besides the head office, acquired one branch location in Damascus. Thus I think the situation in Algeria is positive in the sense that the opportunity is still there because things are slow and because we are not just sitting there and waiting for the license.

E To return once again to the capital increase, do you have a dream composition of the shareholding structure in Byblos bank after going fully public and increasing capital?

In any market, you need a little bit of everything. You need the institutional investor, you need the individual investor; you also need speculators, because these three forces make the market. We would like to have a combination of investor profiles; it will be great if we have most as medium term investors, in order for them to give us sufficient time to prove to them that we can give added value. That’s why we sometimes try to focus on these investor profiles when we do road shows. We believe in the story we tell them, we believe in the management they see, that the company can add value over the next three, four, five years.

E Could you already provide us with any numbers regarding your results in 2005?

I would say the results for 2005 are very encouraging. We are very conservative in that we don’t like to make too much publicity in advance but I think shareholders this year will be very much satisfied. Just to confirm the result of our expansion, I can tell you that in 2004 the international operation represented 4% of total profits. In 2005, it represented 14%. What I am trying to say is that the growth in our business and the profitability levels will mainly come from outside Lebanon and then would pick up in Lebanon when the reform would happen and provide more lending opportunities.

E Would you set any ceiling to the share of international profits in the revenue structure of Byblos Bank? Would it worry you, for instance, if the international profit share would hit 40 or 50%?

No, if I can reach 40 or 50 [%], I will be very happy – because I am entering into markets that are new and I want to be the leader in those markets.
 

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