Business

Close to the edge?

by Michael Young
written by Michael Young

It’s already evident, barring a miracle, that there will be no “Beirut I”, let alone a “Paris-II”, conference this February to help Lebanon face its increasingly ominous economic tribulations. In fact, amid the political schisms of the past six weeks, so little attention has been paid to the country’s financial situation, that Finance Minister Jihad Azour had to sound the alarm in late January, declaring: “We have succeeded, within our capacities, to limit the damage, even to improve the [economic] situation; but this cannot last indefinitely in this unstable context.”

Yawning divide

Azour was right, but what no official will publicly admit is that there is no common vision in Lebanon today on what type of capitalist culture must guide economic reform. The country is broadly split between a parliamentary majority that tends to subscribe to a liberal, private-sector propelled ideal peddled by the late Rafik Hariri and his successors; and a Hizbullah-dominated camp generally uncomfortable with privatization of public utilities, whose electorate sees little that is advantageous to them in the Hariri scheme. There are surely exceptions to this sweeping characterization, but in shaping future economic policy, the government will have to address, very simply, the yawning Hizbullah-Hariri divide.

This is easier said than done, given that the government today happens to be the primary victim of that divide. Absent a political consensus, there will be no agreement over economic reform. But perhaps most interesting from a cultural perspective is that, for the first time since the end of the war in 1990, the uneasy compromise that Syria imposed on an economic vision for Lebanon – between the business-centered Hariri perspective on the one hand, and the one supported by the Shiite parties, geared toward a poorer, often rural electorate – is seriously fraying. Just as Hizbullah and Amal are today challenging the parliamentary majority on its political ambitions for Lebanon’s future, so too might they choose to lodge a protest at the direction the country is taking economically.

In a more historical perspective, the Hariri vision was always an updated, if flawed, version of the economic model prevailing around the time of independence, whose most eloquent spokesman was the banker and journalist Michel Chiha. Emphasizing free markets and uninhibited exchanges, a fairly small state, and openness to both East and West, Chiha’s paradigm was never seriously challenged in Lebanon, even as the society threw up myriad exceptions to it, and even as the country’s growing complexities imposed an overhaul of such a liberal model.

Precipice of bankruptcy?

Hariri may have reaffirmed what Chiha outlined, but he did not overhaul it. Throughout the postwar years, Hariri’s plans dominated, and in many ways came to define and propel, reconstruction. The late prime minister put most of his chips on promoting free-trade and financial services, which mainly meant revitalization of infrastructure and communications, and led to rapid expansion of the property market. Of far less concern to him was industry, let alone the largest sectoral employer: agriculture.

In exchange for helping advance his own projects, Hariri gave such postwar partners as Hizbullah and Amal wider latitude to integrate their supporters into state institutions – the very institutions he early on tried to circumvent by concentrating power in the prime minister’s office. That’s not to say that both political parties, or their officials, did not benefit from reconstruction, because they did; but rather, that their constituencies were on a very different wavelength than the one Hariri had adjusted to.

That duality, and equilibrium, was sustainable while the Syrians ran Lebanon. However, today, the contradictions between the two outlooks are more evident than ever, and are feeding into a political struggle for power. This may have always been predictable, but the question is whether the country can afford discord on economic basics when the financial situation is so grave. Isn’t this a case of two people wrestling with one another while rolling over into the precipice – a precipice of bankruptcy?

The difficulty is that there seems to be no ready solution to the dilemma. In the present environment, the government can, at best, introduce partial reforms in certain sectors to persuade potential foreign donors that it is serious about its fiscal responsibilities. That means that, at best, the country can buy time while political coalitions decide which vast economic project they can agree on. But time is short, and nothing suggests that Lebanese leaders are aware of just how short.

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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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Finance

Jihad Azour – Minister of Finance

by Executive Staff
written by Executive Staff

Lebanon’s finance minister assesses the impact of this year’s political turbulence on the economy and maps out his plan to balance public finances as the country gears up for another donor conference.

E How badly were the country’s public finances affected by this year’s political upheaval?

It had a negative impact on public finances, although the political upheaval had already started making itself felt on the economy before the assassination of [former premier] Rafik Hariri. His death and the ensuing events exacerbated them. The impact manifested itself in a reduction in revenues due to the reduction in economic activity. The various governments at the time did not take the necessary measures to keep the level of the budget deficit stable, i.e. they did not correct the reduction in revenues with a reduction in expenditures. What I did after I became minister of finance was to stabilize the public finances in a bid to improve the primary balance of the budget, that is to say all the government’s operations outside debt. I improved the collection of revenues and I programmed the expenditures, with an objective of improving the primary surplus. In three months, we were able to improve the primary surplus by 300 billion Lebanese pounds, which represents 1.1% of GDP. The other problem which emerged after the assassination of Hariri was a financing problem. Severe pressure was exerted on our currency and the treasury has problems financing itself, so it had to turn to the central bank. Therefore, interest rates went up and an abnormal situation was created by the fact that the treasury was financing itself through the central bank. I took the decision to pre-fund all the treasury’s needs in order to avoid an increase in interest rates. This created greater confidence in the market as the treasury was again perceived as being liquid enough. It also reduced any pressure on interest rates and the Lebanese pound.

E Which sectors of the economy suffered the most from it and what do you think their chances are of a rapid recovery?

Expectations for tourism were very high this year and this sector was badly hit. Still, we have witnessed a recovery of the sector during the last three months. In fact, economic activity in the last three months has compensated for the first half of the year, which was very difficult for all sectors, mainly tourism, but also other sectors linked to internal consumption. For instance, the balance of payments, which was showing a deficit of $1 billion, recovered substantially during the last few months – we will be almost in a balance by the end of the year. Exports also went up in the third quarter, as did certain other activities. So we have started recovering progressively most of our lost economic opportunities and we are expecting a slight growth of less than 1% for the year. The Lebanese economy demonstrated a tremendous level of resilience this year.

E Did the events of 2005 ultimately serve as a political shock more than an economic shock to the country?

It was a severe political shock that had an economic impact. However, because of the improvements we had in 2003 and 2004, where we witnessed strong improvements in growth, in public finances and in the monetary indicators, we were able in 2005, to overcome one of the strongest earthquakes we have had on the political level in the last 15 years. Had those events not happened, we would have had an excellent 2005, in terms of growth, investments, a reduction in the budget deficit – in all the economic indicators basically.

E Looking forward to 2006, what are the three biggest challenges the ministry intends to face down?

The first one is to seize this window of opportunity that is the donor conference and to transform it into a program of reform, which will stabilize the economy by reducing the level of deficits. This will be achieved by making the economy grow faster. It is a challenge that requires that we convince the Lebanese of the necessity of undergoing a major transformation program, which will aim at meeting the objectives I just mentioned, as well as strengthening social stability in this country. The second challenge is to finalize a new vision for the ministry, which will articulate all of our reform plans, ranging from completing the modernization of the process for customs, to land registry, public finances and debt. We aim at not only completing the reforms but also improving the management practices of the ministry and to increase its level of accountability and good governance. The third challenge is to strengthen partnerships with the private sector, the NGOs and other parts of the community, most notably youth. We have created a joint commission with the private sector to go over all the problems it faces and to address them with clear targets. For instance with regards to exports, our new motto is: “Multiply by two, divide by two.” We want to multiply our exports by two over the next two years, and divide the costs and clearance time by two. We are also working with youth to develop an economic agenda for them, so as to give them the incentive to stay in Lebanon.

E To what extent is this program influenced by Prime Minister Fouad Seniora’s plan from last year, which proposed large spending cuts? Will any of this be exhumed for future use?

Of course it is influenced by it. But you can’t ask people to make additional efforts if you are not doing your homework yourself. We have to make the government more efficient and effective. We have to increase productivity. We have to reduce the waste in spending. And for that purpose, we at the ministry of finance have launched a new initiative with NGOs that are experts in fighting corruption. We are also working with the World Bank on an agenda for good governance. We have to reform the expenditure system in this country, we have to modernize the way the government functions and reduce unnecessary spending, before we can ask people for any additional contributions.

E Does this include promoting e-governance to slim down the bloated bureaucracy and make it more efficient?

Absolutely. For instance this ministry launched three months ago a new service for the taxation process, whereby you can download declarations and send in your declaration electronically. We have also automated all our payments, using modern payment techniques. With regards to customs, we are introducing a new system that will enable all clearance procedures to be done electronically. Additional services, especially e-services, will help people save time and money.

E E-governance also has the added benefit of eliminating the middleman between the citizen and the state, thereby reducing the risks of corruption. Does fighting corruption figure prominently on your agenda or do you view it as a necessary evil for now?

No, I don’t view it as a necessary evil at all. As I mentioned, we started this commission with experts on corruption to figure out how we can reduce it, how we can improve the level of accountability, as well as governance. In addition to this we are taking immediate measures at the ministry. We have issued circulars internally to remind the civil servants of their duties and to not accept any corruption. If there is any act of corruption, we will take immediate action. However one also needs to take into consideration the fact that fighting corruption requires long-term motivation. It is by changing processes, by automating transactions, by strengthening the control over your employees, by changing laws, that you will make a difference.

E At the end of the day though, the biggest drainage on public finances does not come from small-scale corruption at the level of civil servants, but from the large money swindling operations that politicians engage in, such as what we have seen with Casino du Liban. Do you believe that the passing of a new election law that would change the political map of the country and make politicians more directly accountable to their electorate, could be an efficient measure to reduce corruption at the political level?

Corruption takes place at various levels and comes in many forms. Some are related to small transactions, others are more organized. Therefore, the way to fight corruption is to focus on the types of risks you have. You need to be serious about it, which is why we set up this commission of corruption experts. In principle, any improvements of our institutions are favorable. This reform is very important, as is changing other laws as well, in order to improve the level of accountability. But changing laws is not enough, it’s also a matter of culture. It goes beyond the regulatory framework. People have to put more weight on economic issues when evaluating an MP. They also have to ask their MPs for more accountability. And thirdly, the government needs to provide them with basic services, to prevent people from going to their MPs to ask for personal favors. So it’s a comprehensive change that is required, and the government is working on it.

E We’ve talked about cutting down on public expenditures and waste, let’s look at potential revenues for the government. Will the gas price cap be done away with? And if not, how can the ministry justify letting a potentially major source of state revenue slip away due to political calculations?

Firstly, it is very important for people to know that the government is presently providing approximately $1 billion in subsidies, especially to the energy sector, to compensate for the weak management of EDL and to make up for rising oil prices. The government subsidized gas prices to maintain them at a certain level and lost a lot of revenue due to this. Taxpayers are paying for these subsidies, because at the end of the day, the government has no other resources but fees and taxes. Secondly, we should not look at any one element of these subsidies on its own – it’s all part of a package. The program the government is working on has various pillars. The first pillar is to improve the macro-economic situation by reducing the debt over GDP. For that you have to reduce interest rates and the stock of debt over the reserves and you have to improve your primary balance. There are two ways of going about this: either you reduce your expenditures or you increase your revenues. We are focusing on cutting down expenditures and on increasing revenues by improving the management of the tax system. But the bottom line is that this is a social choice. If we are not able to achieve our objectives only by reducing expenditures, we will be forced to increase taxes. And if we have to do this, our objective is to have a balanced tax burden, not to focus on one type of taxpayer or one type of services. It will broaden in order to reduce the burden on the individual citizen. The second pillar is to liberalize the economy. However, economic privatization is going to be done differently this time. We will not transfer any monopoly from the public to the private sector. It will be done in a participatory manner, giving people the opportunity to invest. And we want these sectors to create jobs. The third pillar is a growth agenda: we need to improve the business environment by modernizing the laws, streamlining the procedures and supporting fast growing sectors, such as IT and tourism where you have value-added.

E Is there no social aspect to the government’s program?

There is. The fourth pillar of our program is strengthening the social safety net. The government is spending more and more money on social services every year. On the other hand, social services are deteriorating and social indicators are going down. To correct this, we have to reform social spending, improve its efficiency and create social safety nets. This will require mapping out where we have vulnerable groups and see how we can help them. We have high levels of leakages. For instance, the government is spending a lot of money on wheat subsidies, but when studying the system more closely, you find that only 15% goes to the farmers. The problem is if you stop giving subsidies, you create social problems. That is why an improvement of social management needs to be undertaken. So to go back to the initial question about gas subsidies, it all falls under the deal that various parts of society need to make. If we agree that we want to improve the stability of our macro-economic situation, to improve growth, to seize the opportunity to get international support, then we all need to share the burden of reform.

E By postponing the donor conference, Seniora suggested that the world is not ready for another round of lending to Lebanon. The list of possible demands is long, but what absolutely must be done before any such conference can be held?

First of all, we need to [engage in] dialogue more over the vision we have in the cabinet, in order to transform it from a vision into a program. We also need to consult with the various stakeholders to develop a national agenda, so that the majority of the Lebanese and the political groups will back the political reforms. The reforms will take at least five years, so this requires commitment. On the other hand, the dialogue with the international community needs to continue. We’ve had a series of meetings with government representatives, we are coordinating regularly with international institutions such as the World Bank and the IMF, and we may have a gathering of experts in Beirut in January to prepare for the February donor conference.

E What lessons will you take from the Paris II round so as to avoid falling into the same pitfalls?

Firstly, we are taking several technical lessons on how to use all this money and conduct the operations in themselves. The second lesson is the great reaction of the market and the economy. After Paris II, even before any payment had arrived in Lebanon, we witnessed a major shift in the economic outlook: interest rates went down, capital inflows became substantial – very important changes were brought about. This is why we must view this opportunity as a turning point in Lebanese political history. It is remarkable how quickly people react to positive news in this country. Thirdly, this must not be viewed as a government program. It must be perceived as an economic agenda for the whole nation, from which everybody will benefit. That is why everybody should fight for making it happen. And last but not least, is the issue of credibility. We have to show that we are credible, as much to ourselves, as to the investors and to the international community. We must show that if we commit to something, we will deliver.

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Society

Karim Fadel- Director, ABC Group

by Executive Staff
written by Executive Staff

Since opening its first store on Martyrs’ Square in 1936, ABC has grown to become a reference point in the Lebanese retail industry. Boasting over 60,000 square meters of shopping space distributed across eight outlets, the group’s malls secure some 7.5 million visits annually, giving ABC an estimated 13% market share of Beirut’s retail industry revenues. Executive spoke to ABC’s director, Karim Fadel, on how the group weathered the storm of 2005, and on lessons learned by the company whilst expanding and evolving to meet the changing needs of customers.

E It’s been two years since ABC Ashrafieh opened. What lessons have been learnt over the course of this period and how, if at all, has the mall been a model for modern Lebanese retail culture?

We’ve learnt a couple of lessons along the way on what constitutes key success factors for a mall. Firstly, a good location is essential. You need to establish yourself in a well-populated and wealthy area in order to create a “catchment zone” of potential. Secondly, the concept of the mall is a key factor: it needs to be well designed. In the case of ABC Ashrafieh, we launched an international design competition and chose a British group, Business Design Partnership, which is specialized in commercial centers to come up with the planning and the design of the mall. Between the design studies and the feasibility studies, this component came up to 7% of the total cost of the project, which was of $120 million. A lot of developers don’t spend enough time and money on the design study, despite the fact that it largely determines the success of the commercial center. ABC Ashrafieh is an innovative mall in many ways. It’s a city mall, which is very much integrated into the neighborhood and respects the surrounding urbanism. It has become an extension of Sassine square: people come to the mall to meet. Furthermore, it takes advantage of the beautiful weather we have in Lebanon by being partly open-air and partly closed. Finally, another important element is to achieve the right balance in the retail mix.

E ABC’s retail mix is one of its noteworthy features: stores range from the exclusive luxury brands to the more mainstream franchise stores. What is the right formula in terms of mixing tenants in malls?

You need to get the performing, competitive retailers, not the ailing ones. We rarely take low-end stores; we go for the most performing, middle to high-end ones, with a good franchise. We are very cautious with our retail mix and consequentially, we might end up turning people down. Also, you need a certain focus: in our case, it is fashion. That’s what we are known for. You won’t find many sports or appliances stores in ABC. Clients come here to buy fashion items and gifts.

E But isn’t the trend in retail the one-stop shop? Don’t customers come to malls to find all that they need under one roof?

I believe that trend is reversing. Today, shops are getting increasingly specialized and the same goes for malls. They are engaging in both horizontal and vertical specialization, that is to say they are offering fewer lines of products and a narrower range of prices. Another trend that is taking place is that of “retailtainment:” mixing retail and entertainment. This is a very important concept for the success of the mall: by adding entertainment services, customers come in more frequently, spend more time on the premises, and thereby more money. At ABC Ashrafieh, we have dedicated 30% of the surface area for entertainment, with some outlets in prime locations and others not.

E What is the occupancy rate of the mall at present?

We have an 85% occupancy rate in terms of surface area. That being said, all our units of 500m2 and less have been rented out. At this point, we only have two large units left. Therefore in terms of units, we have a 99% occupancy rate. We remain a sought-out location for retailers: we’re a niche mall that is well located, with a certain type of clientele and a specialized range of products.

E What is your future strategy? Do you have any new projects in the pipeline?

We’re planning on opening up several cosmetic specialty stores. We also just completed the renovation of our Zahle outlet and our big project for 2006, is the renovation of our mall in Dbayeh.

E What happened to your Dbayeh mall, which used to be your flagship department store? Has it experienced a significant fall in trade due to the numerous shopping centers springing up in Beirut?

It has experienced a drop in activity, by some 10%. That is why we will be investing in renovating it, at an estimated cost of $5 million. The renovation work starts next year and is expected to take two years.

E It has been a challenging year for the retail sector, marred by the political instability, the precarious security situation and the subsequent drop in tourism. How badly was business affected in the end?

It wasn’t as bad of a year as what we expected, taking the political situation into account. Sales were pretty steady. Bear in mind that tourism only dropped by 14%, so the impact of the shock was mitigated. We didn’t feel much of a difference. What was noteworthy this year is that the tourists came later, but then they stayed a bit longer. August and September ended up being good months for retail. During Ramadan, our sales went up by 13% from last year in Ashrafieh and Dbayeh. Essentially, the events that affected the country constituted more of a political shock than an economic shock.

E How many days were you forced to close this year and what loss in revenue did this represent? To what extent have ABC’s sales and revenues been affected by the unstable situation?

We only closed for seven to 10 days in the end, which didn’t represent a significant loss in revenue. We had budgeted for a 15% increase at the beginning of this year, as we were expecting more tourists, and at this point, it looks like growth will be flat. By the end of this year, we expect our sales figures to be the same as last years.

E Are a greater chunk of your profits now being lost to increasing security costs?

We are indeed dedicating a larger budget for security purposes. We have increased our security team, with guards now searching people and cars coming into the mall. But this hasn’t represented a major hike in our security spending. We were the first to purchase an advanced mechanism that detects explosives, which was brought in from England, and we also set up a CCTV system. What was the most expensive was the terrorism insurance we got, which is costing us more than $100,000 a year.

E How was the retail industry as a whole affected? Were any sectors hit harder than others?

Retailers working with limited capital and in more of an old-fashioned manner are the ones who are suffering most from this year’s turbulence. You need significant financial strengths to go through these types of shocks. Much of the retail sector is highly indebted, most of which are small “Mom and Pop” shops located in areas with no proper infrastructure for retail. They are the ones who were the worst hit.

E What are your expectations for next year? What is the Lebanese retail industry estimated to be worth presently and what do you believe its potential to be?

Our expectations are that we should not have any expectations, or if we were to have any, to expect the worse. Essentially, we are bullish on trade and conservative on finance. We need to be prepared to go through any storm. As for the Lebanese retail industry as a whole, our studies estimate it to represent approximately 30% of domestic GDP. In comparison to other industrial countries, this is a very high percentage of the economy. Therefore, if Lebanon is to develop economically in the same way as other industrial countries, the weight of the retail sector in the economy might diminish in the long run. But in the short run, if tourism goes up, then the retail sector ought to grow as well. The Lebanese government is working on bringing the country into the WTO. Should they succeed, it will open up the economy and in turn open up the retail market, which could have far-reaching consequences. At present, the Lebanese economy is not that free. Joining the WTO will force the authorities to abolish all distribution laws and exclusivity laws. It will create a greater level playing field, in which the retail sector can develop its potential more freely.

E ABC gets a lot of foreign customers during the holiday seasons. How realistic a claim can Lebanon make to be a regional retail hub? What elements are in place to lend itself as a retail destination?

Everything is in place for us to be a retail hub, the only thing lacking is the vision. Our tourism sector should be booming: the weather is nice, we have beautiful mountains … people from the Gulf like coming here – they can notably buy products from brands here that aren’t available in their country, such as sexy clothes for example. What is lacking is a vision that will stabilize this country and promote investment. But for that, you need to combat the ineffective administrative and judicial systems. All these issues discourage investors from coming here.

E How do you see the retail landscape of the greater Beirut area developing over the next couple of years, especially if the souks open up downtown?

The souks will become Lebanon’s retail hub, both for the tourists as well as for the Lebanese people. It’s a huge project, which is very well designed. It’s what is going to make Solidere live. The souks are destined to be shopping streets which will bring more mainstream people back to the city center.

E Does your group have any plans of taking up space in the souks or in the BCD?

We are studying the possibility of taking the 15,000m2 department store area that has been included in the souks. It would be a perfect place for ABC, not to mention the fact that it would be legitimate for us to be there, as the oldest department store in Lebanon.

E Do you fear that current ABC tenants will desert you for the souks?

No, I don’t. We already have tenants that are also present downtown, and who are planning on taking up space in the souks, and so far there hasn’t been any decrease in sales. We don’t view Solidere as competition at all. At present there is an undersupply in retail space in Beirut, so they are not taking away potential tenants from us.

E What gives ABC a competitive edge in terms of attracting the type of tenants you wish to have? Which retail areas will become less sought after and subsequently have to lower their rents?

As long as you have a good location with a modern infrastructure, tenants will seek you out and rents will continue to go up. It is the areas with old infrastructure that will experience a loss in tenants and falling rent prices. The Dunes center, which is very well located, will continue to do well, as will the city center, which remains one of the most lucrative areas. As for ABC, we will continue to be competitive. We charge $800m2 per year, which is less than downtown, where the rents average at $1000. For what we are offering and considering all the costs we are bearing, this is a very cheap price.

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Society

Reeling in customers in good times and bad

by Marianne Stigset
written by Marianne Stigset

The Lebanese retail sector got off to a promising start in 2005, boosted by the exceptional results of the previous year, which had witnessed record post-war tourism figures, and a favorable psychological climate for shopping brought about by a robust economy.

January registered an 80% growth in year-on-year tourism retail spending, with visitors from Qatar and the UAE racking up their spending by 159% and 169% respectively. The Association of Car Importers in Lebanon reported a 26% jump in sales of commercial and passenger vehicles over the same period in 2004 (1,522 new passenger vehicles and 123 commercial vehicles were sold in January).

Then came the assassination of former prime minister Rafik Hariri on February 14. Demonstrators aside, the BCD became a ghost town, bringing more than one store to the brink of bankruptcy, until the civil war commemorations brought the area back to life again at the beginning of April. High-end stores, of which 40% of sales on average go to tourists (predominantly Arabs), reported initial drops in sales of up to 70%. The majority of car dealers saw their sales almost halved for the months of February, March and April. The market began experiencing a gradual turn in fortunes as the summer months arrived.

Part of this was linked to the fact that tourists steadily began trickling back. By June, the drop in tourism as compared to 2004’s exceptional figures had been reduced to 10%, whereas August and September surpassed 2004’s tourist spending by 2% and 6% respectively. Ramadan saw overall sales activities pick up for a few days, but activity was shorter than usual.

Leading the pick-up in tourism were the Jordanians, who had benefited from an easing of the visa procedures in June, allowing them to purchase their visas directly upon arrival at Beirut’s airport. This resulted in an 82% increase in Jordanian tourists in the June-September period. Spending by Jordanian tourists in Lebanon increased by 48% in July, compared to the previous year, according to Global Refund figures.

A similar increase is expected to be generated by the government’s easing in November of visa requirements for Iraqis as well.

Yet the hike in Jordanian tourists was not enough to make up for the gaping hole left in the retail market by the drop in visitors from the Gulf, who are responsible for the bulk of foreign retail spending in Lebanon. Between January and October, the number of tourists from Saudi Arabia and the UAE both dropped by 41% compared to 2004, whereas the number of Qataris fell by 24% and the number of Kuwaitis by 23%. The four nationalities represent close to 60% of all foreign retail spending in Lebanon.

Filling the void

In a bid to make up for the loss of the big foreign spenders, Lebanese retailers multiplied their discounts and promotional offers while launching large-scale advertising campaigns, which succeeded in improving sales.

Several car dealers notably initiated aggressive sales campaigns of special discounts and deals in May, which were widely advertised in the local media. As a result, sales in May increased almost 75% over April.
Although the offers to cover VAT and pay the car registration fees undoubtedly impacted the bottom line of participating dealers, May, June and July overall saw 5,284 new vehicles sold compared to 5,993 during the same period in 2004 – a more manageable 11% drop-off in sales a year on. By August, most car dealers had roughly gotten back to their status quo.

Inevitably, the shock dealt to the sector impacted the small retail outlets hardest, most of which have limited financial safety nets to deal with sudden and prolonged drops in sales. Most are heading towards negative growth for the year, yet the drops in overall sales and revenues tend to average no more than 15%.

Despite generally benefiting from greater capital reserves, the luxury segment also struggled, suffering from both the loss of high-end tourists, as well as the drop in sales to locals, who were not in the mood to go on lavish shopping sprees amid the prevailing political uncertainty.

The malls and department stores emerged relatively unscathed from the turbulence, with ABC Ashrafieh expecting a flat growth rate for the year and minimal impact on the group’s revenues brought on by the dozen days the mall was forced to close for security reasons. The resilience displayed by the retail sector can be viewed as a testimony to how far it has come since the war.

A rapidly evolving sector

Lebanon’s retail sector has steadily been building itself up to compete with the region’s reigning shopping destinations since the post-war reconstruction projects took off, rapidly evolving along international retail trends.

Despite being a relatively expensive country with high income disparities resulting in low discretional spending power, the retail sector has benefited from the economic growth and rising living standards that have occurred over the past decade. Lebanon’s gross domestic product grew from $9.1 billion in 1994, to $21.8 billion in 2004, the equivalent of $4,700 per capita, which is the highest among the region’s non-oil-producing countries.

Adding to a relatively strong domestic retail market is Lebanon’s long-standing position as the commercial platform between Europe and the Middle East and the growing tourism industry. Lebanon generates the largest share of tourist spending in the region, having secured the bulk of Arab tourists reluctant to vacation in Western countries following 9/11. This explains why the retail sector represents a major component of the local economy, according to some assessments, as much as 30% of domestic GDP.

Household consumption expenditure has been gradually declining as a percentage of GDP, from 110.5% in 1994, to 82.2% in 2004, indicating the diminishing weight retail will have in the economy. However this is more due to the natural progression of a developing economy rebuilding its sectors after the war, rather than a shrinking retail market. The Beirut retail market today is estimated at $1.5 billion, giving developers a solid incentive to invest in the sector.

Characterized by a high degree of fragmentation, the retail sector of the greater Beirut area has so far been dominated by a large number of small family businesses occupying property that is either owner occupied or held on an uneconomic tenancy. However, as the post-war infrastructure reconstruction projects advance, the sector is gradually becoming more concentrated, with the tendency going towards fewer retail enterprises and larger shopping center areas. Following international retail trends, the one-stop shop phenomenon is rapidly gaining currency, with new malls offering a range of different retail stores, as well as food outlets and entertainment.

Developers tend to focus on three categories of retail venues: large shopping malls or retail areas, such as the upcoming Souks of Beirut; smaller-scale malls, such as the 40,000m2 ABC in Ashrafieh; and the revival of buzzing retail areas, such as Hamra street.

The turbulences of 2005 appear to have had little effect on most retail developers, who are charging full steam ahead with their new projects. Gross leasable area in Beirut increased from 217,200m2 in 2003, to 350,000m2 in 2005, and is expected to reach 600,000m2 by 2010, according to Retail International.

Among the developments which will have the largest impact on the retail landscape is the long-awaited opening of the Souks, expected towards the beginning of 2007. The $100 million shopping area of 100,000m2, will notably include some 200 shops, food outlets, a 15,000m2 department store, a 7,000m2 supermarket and an entertainment complex. It is expected to become the hub of the greater Beirut retail sector, bringing more people and of greater diversity to the hitherto sterile and underemployed city center.

Other major projects in the pipeline which will significantly expand the city’s shopping space area are the 50,000m2 Beirut Mall in Chiyah, scheduled to open its doors in 2006, and the V5 mall, a 52,000m2 shopping area in Verdun expected to be ready by 2008.

Lebanon’s potential as a retail hub

With its modern multi-million dollar malls and souks, and vibrant shopping streets, the Lebanese retail industry has established an infrastructure that meets international standards. Added to this is the presence of most major international distributors and franchises, with new retailers and luxury brands venturing in to the market on an annual basis, such as Salvatore Ferragamo, launched in Lebanon in 2005, through a $150,000 advertising campaign. Lebanon can offer most international brands available in Western markets, and products not found in Gulf markets.

Should the country succeed in regaining a stable political and security environment, the tourism industry would take off again, and pull the retail sector along with it.

However attention needs to be paid to how to improve the annual shopping festival, which witnessed a 69% decrease in tourist attendance between 2002 and 2004. As shown by Dubai, a successful shopping festival can be the source of major retail revenues, as well as contribute to putting the city on the retail map.

Economist Marwan Iskandar has calculated that Lebanon will have the capacity to host two million visitors by the year 2008, who could contribute up to $3 billion to the economy. Such a growth would impact the retail sector tremendously. Furthermore, a revision of the current taxation policy pertaining to cars would greatly assist the car industry – one of the most important retail businesses, with car imports accounting for nearly 10% of all goods coming into the country in 2003. Presently hampered by high import duties, VAT and a car registration, industry insiders estimate that an elimination of the latter would lead to a 30% boost in sales.

With the right political backing and a stable security situation, the odds of Lebanon’s retail sector emerging among the region’s top retail destinations will be worth betting on.

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Society

Highs and lows in retail in 2005

by Executive Staff
written by Executive Staff

Michel Abchee

Chairman and CEO of Admic, (the parent company of BHV, Monoprix and builder of City Mall in Dora)

E How has the retail landscape and shopping habits evolved in Lebanon over the past decade? What does the modern Lebanese shopper demand and how successful have retailers been at responding to this?

When we look at the development greater Beirut has undergone since 1995, we see significant changes. Back then we only had one major department store, which was ABC in Dbayeh, and a number of smaller shopping areas and stores scattered around the greater Beirut area. [Since then] we have subsequently witnessed two major developments: the build-up of the local infrastructure, which was accompanied by the build-up of the retail sector. Along with this development came a change in consumer habits: the one-stop shop gained momentum. Furthermore, the time of the consumer became less available, notably due to the increasing number of women who went into work.

Retailers responded by developing shopping malls, department stores and shopping streets such as the ones you have in Solidere and the upcoming Souks. There is also a greater concentration of retail in the capital now. Stores have followed the move of people from the outskirts of Beirut back into the city, at the expense of areas such as Kaslik.

It is worth stressing however, that this is not a new trend. The need among the consumers was there, but its development was slowed down by the war. Although it is 20 years late, what is happening right now is very positive: the retail sector is catching up with the Lebanese consumer.

Khalil Achkar

Country manager of Global Refund Lebanon

E How was business for Global Refund this year, and how did the drop in tourism affect the retail industry? How was the shift in nationalities choosing to visit Lebanon reflected in overall spending patterns?

Tourism ended up dropping less than expected – from January to October we only witnessed a 13% reduction. The most significant change was in the number of Saudis and visitors from the UAE, which both fell by 41%. Since the Saudis represent the biggest share of foreign spenders in retail, their absence made itself felt. This was compounded by the important decrease in the number of visitors from Kuwait and Egypt as well. While the tourists from Saudi Arabia, Kuwait and the UAE are the three top foreign spenders in Lebanon, the bulk of their retail shopping is with high-end stores, so the luxury segment of retail was more affected by their absence. Mid-range shops that cater to the Egyptians suffered from a drop in revenue due to their absence.

However, overall, sales did not go down by much for retailers and turnover didn’t drop. In part this is due to the fact that shops in Lebanon made more of an effort: they expanded their number of branches and invested more in marketing and promotions. On the tourism side, the number of Jordanian visitors went up by 82% in the June to September period after the authorities eased the visa restrictions for them. Subsequently, spending by Jordanian tourists in Lebanon increased by 48% in July compared to last year. Additionally, the Lebanese expatriates coming from the US, France and the UK spent more than in previous years.

Global Refund was aiming for 30% growth at the beginning of the year. That won’t be possible, but our revenues have been similar to last years. Although tourism dropped, more people are engaging in tax-free shopping, which covered our losses. In order to boost our growth figures for next year, we are implementing an in-store VAT refund system, whereby customers who purchase goods for five million Lebanese pounds or more can get their refund directly from the store.

Walid Saleh

Managing director of Phoenicia Trading Group, (that runs Beirut Duty Free)

E Duty Free shopping at Beirut Rafik Hariri International Airport has been one of the bright spots of the Lebanese retail sector this year. How did sales meet your initial projections and what areas performed best?

How do you intend to capitalize on these in 2006? What is your market share of the Lebanese retail market as a whole?

Overall it wasn’t a bad year, considering the events that took place. Our performance did not meet our initial targets, which were a 15% growth in sales from last year. But sales did increase by 4%, despite the fact that the number of passengers at Beirut airport dropped by 3.3%. The boost in sales came from an increase in spending per customer, which went up by 8% and an increase in our penetration rate: 12.5% more travelers shopped in our Duty Free stores.

We countered the drop in passengers by multiplying our promotional campaigns, as well as by investing more in the training of our staff.

Our cigars and cosmetics departments performed well, although they are traditionally our sales drivers, each representing approximately 25% of total sales. But the electronics department showed good sales figures as well. Both the performance of cosmetics and electronics is linked to the fact that we focused our efforts on boosting sales in these areas. With regards to cosmetics, we increased the size of the store, hired more beauty advisers and we expanded our range of products. We will continue focusing on this area, as well as on the sales of electronic products. Although the latter offers limited profit margins, it is an important area for the Duty Free from an image perspective.
For 2006, we will be increasing our marketing budget by 50%, with a focus on direct marketing. We will continue to improve our services, notably by investing more in the training and development of our staff. The cigar store remains the flagship of Beirut Duty Free and we will promote it through promotional campaigns.

We don’t compare ourselves to the domestic market in terms of performance – we only consider it with regards to prices, so as to set ours at 20% to 25% less. But we are not in direct competition with local retailers. The competition takes place between the airports. We view Dubai airport as the benchmark, and compared to them, we are quite competitive, especially with regards to our cigar sales.

Ronald Khabbaz

Vice-president of Khabbaz stores

E What should be done by both the private and public sectors for Lebanon to sell itself as a retail destination?

There are a number of things the government could do to promote Lebanon as a retail destination and assist local retailers in developing. Firstly, the authorities need to invest more in advertising overseas. Foreigners need to be informed about what this country has to offer.

Additionally, more should be done to encourage Lebanese expatriates to come back to the country. Promotions ought to be done, with discounts on airfares and hotels to bring them over, and the same could be done with travel agents, so as to have more cruise ships coming in to Beirut. The current government strategy for tourism lacks focus.

Secondly, the government needs to reduce the red tape, which can be stifling for retailers trying to expand. To cite a specific example, Khabbaz children’s wear is expanding quite aggressively abroad. We face obstacles when it comes to re-exporting our garments (which we manufacture overseas) from Beirut to the UAE. We have to unpack and re-assemble garments from containers on the spot down at the Port of Beirut where custom procedures are cumbersome and outdated. The government’s focus should be on facilitating procedures for goods destined for re-export from Beirut.

Finally, although I don’t know how much the government can do to ensure this, we need stability. During the stable years we had between 2002 to 2004, retail projects were mushrooming throughout the country … [and] there will be plenty of new and bigger malls in the coming years, as well as new brands that are waiting for the internal situation to stabilize so they can enter Lebanon. Once you get the stability, you get tourists, and the retail sector can continue to develop.
 

Nagy Hneine

General manager at Bassoul Heneine (BMW)

E How realistic is it that the government will reassess their policy of taxation, duties and fees on cars? What would the benefits be of reforming this policy and how would you recommend that this be done?

I certainly do hope they are working on changing it, as it makes no sense as it stands. The car registration fee should be eliminated altogether. It doesn’t exist in Europe, and there is no reason why we should have it. Scrapping it or reducing it significantly would bring in more revenues for the government as more people would buy cars, it would enable people to change cars more frequently and it would permit car rental companies to hold more cars. Should the car registration fee be lifted, we would immediately see a 30% to 40% increase in car sales.

This in turn will be beneficial to the environment. All new cars imported into Lebanon need to have a catalytic converter that limits engine pollutant emissions. With an increase in the sales of new cars, there would be a reduction in the number of used cars, which are the source of most of the traffic pollution that afflicts this country.

In Cyprus, they sell approximately 25,000 new cars a year. In Lebanon, we are only averaging some 18,000, whereas the market potential is of 35,000. The taxation policy is causing tremendous losses in revenue.

With regards to customs duties, I don’t expect a downright elimination of them, but reducing them from 50% to 15% to 20% for all cars would already make a big difference. For instance, if you buy a BMW in Lebanon today for 30 million Lebanese pounds, you end up paying an additional 50% of its value in customs, then 10% VAT and a 7% registration fee. We are hoping that through the Euro-Med association, Lebanon will eventually eliminate its customs duties and only have a VAT of 15%, as in Europe.

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Economics & Policy

Mohamed shabib – General manager, MTC Touch

by Executive Staff
written by Executive Staff

Executive talks to Mohamed Shabib, general manager of MTC Touch, one of the two cellular phone management companies, on the state and development of Lebanon’s mobile telecom sector.

E Following a year of challenges, do you see the Lebanese telecommunications industry as being in a better or worse position today than 12 months ago?

We are definitely very hopeful that changes are underway. In 2005, we didn’t have the opportunity to realize everything we wanted to do with the government. However, for next year we hope things will change for the better in terms of new services, network enhancement, expansions and the development of current services.

E Given the turbulent events of 2005, how difficult was it for you to maintain your planned trajectory for the year?

As you know this network is owned by the government so any expenditure needs to be approved by the government. Due to the events of 2005 – which we understand were beyond anyone’s control – and the changes in the Lebanese political arena, which shifted the telecom sector down a notch in terms of priorities, our getting the approval for our 2005 program was affected. Now there is a new government and talk of privatization, we are working with the government to see this process go through.

E Do you consider prospects for the final installation of the Telecommunications Regulatory Authority realistic in the short term, and what will the agency’s commencement of operations mean for the activities of MTC?

It has to be realistic. If the government wants to privatize they need to regulate and without a regulator it’s not going to work. They need to put a regulatory framework in place because privatization means competition and without regulation there will be no competition; there will be a war. So we have to go the way of other countries and have a proper regulatory body.

E And how will that affect MTC?

Well, we are looking forward to being part of privatization, to own the private services and offer the best we can to the market once we have a free hand, within the regulatory framework that the government will install.

E When you hear that the ministry of telecommunications (MoT) approved paying compensation to France Telecom, do you think that the country has fully overcome what Marwan Hamadeh has described as a debacle of the days when Lebanon’s governments were under Syrian tutelage?

We were not part of that period, so I would rather not comment on this. It could happen anywhere. Today, we believe that the government is serious about privatization. It won’t take place overnight, but if the process begins in 2006, we will be very happy.

E Were lapses such as the announcement and then recall of the switch away from ‘03’ numbers this autumn signs of structural problems in telecom decision making in Lebanon?

The new numbering plan was put in place to help expand the market from its initial bloc of 1 million ‘03’ numbers for both operators. There had to be a way to expand on this and the government proposed this scheme. Technically it is very simple but we wanted to give businesses time to adjust and tell other networks of our changes. However, during the build-up and preparation when we had the marketing campaign for the public, there was a political decision to postpone the process due to a belief that the switch might affect the previous records and in turn affect the investigation into the assassination of [ex-premier Rafik] Hariri.

E It was just bad luck then?

Not bad luck, just a decision. In my opinion if we had gone ahead with the number migration it would have not affected any records. As a technical person I can say this. The records are there and can always be cross-referenced with the new numbers. However I think the government wanted to be more conservative and delay the process.

E Did the abandoning of the switch result in financial damages for MTC?

The loss was in the preparation efforts and there was a certain loss of capital, but as you know, any capital comes from the government’s pocket not ours. But it’s not going to go to waste because we are simply on hold. Sooner or later they will have to switch.

E When MTC stepped into the management role at Mobile Intermediary Companies MIC2, or today MTC Touch, group general manger Saad Barrak told Executive that he would have preferred a direct role as a licensed operator over being a management company. Given that the past 18 months were not always smooth sailing for mobile networks, seen in technical problems at various points, are you in hindsight happier to have been “only the manager” over that period?

Our ambition in the Lebanese market is still to be an operator. At the time we were offered the management contract we were happy. We felt it was a way to prove ourselves. Had we been an operator or license owners from the start, the events of 2005 would not have altered our ambitions for the Lebanese market.

E So MTC still harbors strong ambitions to become a full-scale operator in Lebanon and acquire the necessary licenses?

Absolutely, Lebanon is very important to us.

E What value would you put on those licenses today?

I can’t share that information with you. There are a lot of factors involved. There is due diligence required and I am sure the government is doing its part in assessing the value.

E Higher than in 2000, when the government had an offer of $1.2 billion?

I really can’t comment.

E Does MTC have ambitions in the internet market?

If the license would be available to us, we will think about it. We do have a wide spectrum of services in Bahrain, where we have an ISP service, we have an international service license, we have an international facilities license and a value added service license. We have seven or eight licenses that are operational. To have the same in Lebanon would be great but let’s concentrate on the mobile business licenses.

E Does MTC have ambitions for rolling out 3G or UMTS [Universal Mobile Telecom Services] in Lebanon or other countries?

Absolutely. We have started with 3G in Bahrain and in Kuwait and Jordan we are gradually going in that direction. We are starting with Edge in Kuwait and Jordan and Iraq as well.

E When will it happen in Lebanon?

It is up to the government. With 3G, you are talking about a different band of the spectrum, frequency-wise. If that frequency is available to be licensed, then the government will have to take the necessary steps to offer it.

E How big a role in the MTC picture does the Lebanese operation currently play?

Like I said, we are managers, but as an operator it would be very important to us. We are in Kuwait and Jordan and Bahrain and there is a lot of traffic between Lebanon and those countries and we can provide a good service at attractive rates.

E If you were successful in gaining an operator license, how soon could you change the pricing structure, and what per-minute rates for pre- and post-paid would you want to offer?

Each market needs to be studied before you decide on rates. We agree they need to be reduced. By how much depends on how quickly you can roll out the new equipment that can cater for anticipated extra demand at lower rates. For example, let us say your half a million subscribers would talk an average of 100 minutes per month each at the present rate. If you reduced the rates by half, your expectations will be that these people will increase their usage to 180 or even 220 minutes. This extra demand would require additional capacity on the network and it won’t happen over night, so if we take the license today, we will have to study what we will need to cater to the extra demand, which might take six months to a year and we would gradually reduce the rates to a reasonable level comparable to the rest of the region. Jordan charges a fraction of what is charged in Lebanon.

E Orascom Telecom Holdings (OTH) recently announced a 125% increase in subscriber numbers in a year-on-year comparison between September 30, 2005, and September 30, 2005. OTH also achieved a 75% improvement of net profits in the first three quarters of 2005. The OTH subscriber numbers grew strongly in markets such as Pakistan, Algeria and Iraq. How do you assess the potential of Middle East telecom markets for further growth in 2006; which markets does MTC see as the most promising; and do you regard OTH as your main competitor in the Middle East?

We are competing with every operator in the region. Orascom and MTC are not in any one country together except Iraq. They have IRAQNA and we have MTC Atheer. At this level in Iraq we are not really competing. We are just trying to provide a service because the market is still available to everyone, so whoever satisfies the market first will start the real competition. Egypt still has potential. The penetration rate for the two operators is only 10%. Saudi Arabia is another. They are looking for a third operator. But Egypt is probably the most promising market.

E As the managing entity on behalf of the MoT, you have a fixed income from providing your services. That presumably reduces your worries over government decisions affecting telecoms in Lebanon. It certainly curbs your ability to set prices and policies. After 18 months of experience, does this situation also affect your motivation or slow your ability for growing MTC Touch subscriber numbers and introducing or improving services? 

Like I said, we are dependent on the government. It is frustrating but as a manager our job is to make sure the service is running properly and we have certain service thresholds that we want to maintain.

E That is fair enough, but how has your relationship been with the public who by and large probably don’t understand your mission and expected you to ride into town on a white horse and improve the service and make it cheaper?

Initially people looked to us to reduce the rates but between then and now they know we don’t have this control. All rate changes and additional services have to come from the government.

E How strong do you assess your chances in acquiring the license for the network when it comes to a bidding war? Are you afraid of political interference in a bidding scenario?

I am confident that the government will handle the bidding in a professional manner and give it to whoever can give the best offer. Regardless of what happens in [the privatization process of] 2006, we have a contract that we intend to respect and do our part until it expires in 2008. If nothing else happens, at least we have that.

E Did the World Summit on Information Societies (WSIS) in Tunisia last week change anything in setting guidelines and working parameters for operators such as MTC or the ICT industry at large?

As deputy chairman of the ITU Arab regional working party on private sector issues, I’m pleased with the outcome of the Tunisia WSIS, which addressed crucial issues such as the exchange of information on internet governance, financing issues for developing countries and the creation of a Digital Solidarity Fund. I believe the benefits from the Tunisia WSIS are very valuable in bridging the information gap between developing and developed countries.

E MTC Touch is heavily involved in corporate social responsibility activities. How and why is this important to the company?

Ever since MTC was awarded the management contract in June 2004, we have participated in a variety of events ranging from industry-related activities to social and cultural ones. To support the telecom industry in Lebanon, we sponsored Saitech, the Sidon Exhibition for Information Technology, back in August and we are also participating in Termium 2005, the main information and communication technology exhibition in Lebanon, which we consider to be an ideal environment for the brand. Our projects for 2006, include the sponsoring of the World Bank’s “2006 Mediterranean Development Forum.” But MTC Touch is also keen on expanding outside the corporate arena. Our commitment to the community we live in is a key component of our mission statement and an integral part of our company’s development.

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Economics & Policy

Telecom reforms get jammed in the system

by Tarek Zein
written by Tarek Zein

Another year has passed, yet it seems that time is at a standstill for the Lebanese telecom industry. To date, there has been no privatization, the Telecommunications Regulatory Authority (TRA) is yet to appear, as is a third mobile operator, broadband internet access, and the reduction in call costs. It even seems that due to some developments within the sector – such as the sudden abandonment of the new numbering plan – time has been regressing rather than advancing. The Lebanese government should take a close look at the calendar and realize that 1997 – the industry’s golden year – is long gone and that 2006 is upon us. It is time for the decision makers to recognize that most Arab countries are reaping the full benefits of competition and liberalization within the telecom industry, while Lebanon is constantly being tagged as having one of the most expensive call rates in the world.


No progress

Apart from the fact that eight mobile phones played a central role in the assassination of former prime minister Rafik Hariri – according to the UN report released by German investigator Detlev Mehlis, who charged Rambo-look-alike police officers with raiding the premises of the two mobile phone operators to collect important cellular call logs – 2005 was surely one of the slowest years for the local telecom industry. There were however some events of note, especially an advertisement circulating towards the end of October in several Lebanese newspapers. The text-only advertisement read: “As part of the reform initiatives to establish a merit-based, transparent and objective recruitment system for senior positions in the Lebanese public sector, the government of Lebanon – ministry of telecommunication – is inviting Lebanese professionals to apply for full-time positions at TRA.” This advertisement, which was published along with two other similar ones for senior position openings at the Electricite du Liban and the Civil Aviation Authority, clearly implied that the previous recruitment system was neither transparent nor objective – a necessary step to frankly transform any corrupt system. It continued: “The telecommunication regulatory authority will be overseeing one of the most important sectors in Lebanon … This sector is looked at as the milestone of the knowledge-based economy which has become a major factor in development and critical to Lebanon’s comparative advantage.”

Such a statement cannot be closer to the truth, however, after years of observing the ups and downs (especially downs) of the telecom market, local experts have become extremely skeptical about any potential for a positive change and prefer to wait and see before crying victory. How right they are: Lebanon’s comparative advantage has significantly dropped and keeps on dropping while politicians constantly state that DSL is to be introduced “soon” and that communication costs are to fall “soon.” In any case, the deadline for applying to the positions within the TRA was November 30, and its results, if positive, will be released before the end of the year, and if negative, will no doubt dissipate into thin air.

Calling on the courts

2005 was the year that telecom companies used the courts to demand their rights from the Lebanese government. LibanCell and Cellis – two names that were considered long gone after the two mobile operators’ BOT contracts were prematurely cut off by the Lebanese government in 2003 – came back in force in 2005. A series of events dating back from 2000, when the government began criticizing both companies of exceeding the amount of allowed subscribers stipulated in the BOT contracts and demanded that both companies pay a hefty $300 million fine in compensation – was at last solved by the Paris-based International Court of Arbitration. The court voted in favor of both companies and refuted the government’s claim to any fine. Its verdict, which cannot be appealed, even went further by demanding that the government pay Cellis $166 million and LibanCell $265 million. To this date the government has paid Cellis – majority owned by France Telecom – $96 million as an amicable out-of-court settlement and is looking to follow suite with LibanCell by placing $125 million on the table. However, LibanCell has so far refused to nudge and instead launched a large awareness campaign maintaining their right to the $265 million sum – a strategy that is regarded by some as LibanCell’s joker card for re-entering the Lebanese mobile sector as an operator.

2005 saw another ruling against the Lebanese government, this time from the other side of the Atlantic Ocean, from a Michigan court. A US telecommunications company, American Telecom Company, owned by Lebanese immigrant Issam Beydoun, sued the Lebanese government in July 2004, after being disqualified from a bid to manage one of Lebanon’s mobile networks. The company stated that the disqualification took place even though its $3.99 million per month bid for management of the mobile networks was lower than that of Fal Dete (Alfa’s) $4.2 million and MTC (MTC Touch’s) $4.25 million. In the beginning of 2005, the court ordered the Lebanese government to pay American Telecom Company $420 million by default because it said Lebanon failed to respond to the suit. A couple of months after the ruling, the case was suddenly thrown out of court for reasons of “technicality,” clearing the Lebanese government from any of these charges.

Lebanese telcos

Even though events in the local telecom industry were scarce, the same cannot be said of telecom companies owned by Lebanese nationals – namely Mikati-owned Investcom and Hariri-owned Oger Telecom.

Oger Telecom, which according to some reports is seeking avenues for listing 20% of its shares on the newly established Dubai International Financial Exchange (DIFX), has made one major move this year. In mid-November, the company was able to acquire a 55% stake of Turk Telecom – the world’s 13th largest fixed-line operator – by joining hands with Telecom Italia and BT Teleconsult. The enormous $6.55 billion acquisition has increased Oger Telecom’s number of fixed and mobile lines under its management to more than 27 million spread over four countries. It is important to note that Oger Telecom’s bid was 15% higher than the Russian runner-up.

Investcom on the other hand made a splash in London and Dubai when its early-October Initial Public Offering (IPO) raised a total $741 million, at the top end of expectations, making it the biggest international share sale by a Middle Eastern company. Each of the 59.9 million Global Depositary Shares, listed on the London Stock Exchange (LSE) and the DIFX, were offered at a price of $12.35, initially valuing the company at $3.3 billion. The market capitalization of Investcom as of December 2, stood at $3.67 billion. But it was in Lebanon again that the negative effect was felt: a large number of would-be investors had released other investment engagements to purchase Investcom’s shares, but in vain due to stringent share allocation arrangements. Audi Saradar Investment bank, a distribution agent for the company’s IPO, had to release a statement to 360 clients who generated a $1.2 billion demand to apologize for the inconvenience.

The rise of Investcom

Investcom’s operations are currently focused in five sub-Saharan African countries, Syria, Yemen and Sudan, and soon Guinea and Afghanistan. It now has its shares listed on the LSE and DIFX and is registered in Dubai, making it Lebanon’s sole telecom adventure in 2005. The company has been able to transform itself from solely offering telecommunications engineering services to managing one of the largest mobile telecommunications empires in the region by acquiring licenses in 10 countries with a total population of some 147 million people. The company, owned and managed by the powerful Mikati family, clocked a total subscriber base of over four million customers for the third quarter of 2005 – an impressive 18% increase compared to the same figure from the second quarter of the year. However, the customer base of Investcom is rather volatile, especially since over 83% of the company’s customer base uses Investcom’s services via the easily accessible pre-paid cards rather than the more binding post-paid subscriptions. Additionally, Investcom’s current revenue stream makes it a very easy target of any political instability, especially in Syria. The company’s revenues originate from three different sources: mobile telephony, international (through its Monaco-based Med Net) and fixed-line telephony and other services such as the provision of engineering and consulting services to third parties. Standing at $551 million in 2004, mobile telephony alone represented a large 87.2% of the company’s consolidated revenues, compared to 83% in 2003, and 73% in 2002. And out of the total of $551 million, Syria and Ghana contributed the largest amount to Investcom’s gross operating revenues from mobile telephony, standing at 53% and 22% for 2004 respectively. These unbalanced ratios are currently considered a major soft point for the company, but management promises that the revenue stream will balance out in 2006, as soon as revenues from Sudan and Afghanistan kick in. These results were first seen when third quarter financials were released, showcasing an increase in revenues from $441.5 million for the third quarter of 2004, to $645.9 million for the same period in 2005.

Looking ahead

With a donor conference around the corner, the authorities need to project their true intentions for reform to raise much needed cash. And the shortest route to persuade the international community that the Lebanese government is willing to reform is by reactivating the dusty privatization process. It would be expected that the profitable telecom sector would be one of the first sectors to go, after a much-heated public debate. But it would be rather shallow to assume that privatization of the telecom sector would take place so soon, especially since such a statement has been abused over and over again.

In terms of broadband, Ogero showcased the DSL service for the first time during Termium, raising the eyebrows of many. It is expected that DSL will be available towards mid-2006, but again, such a statement has been abused over and over again.

In terms of pricing, with the expected set up of the TRA and the introduction of a third mobile operator, prices will decrease substantially to the advantage of Lebanese consumers. However, such a statement has been abused over and over again. It is wiser to wait and see.

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Looking Back

A year of setbacks for syria

by Andrew Tabler
written by Andrew Tabler

2005 was a year Syria would probably much rather forget. If the assassination of former Lebanese premier Rafik Hariri was a political earthquake in Lebanon, its aftershocks were felt strongest in Damascus.

It was a hard pill to swallow for most Syrians. The Syrian military, which had lost thousands of troops during its 29-year-long sojourn in Lebanon, withdrew with its tail between its legs. While the “Lebanon project” was now most definitely over, the “victory,” many Syrians hoped, would be in the area of domestic reform. Some even talked of a “Jasmine Revolution,” taking place in Syria, and planted the aromatic flower as a harbinger of things to come.

These expectations were largely unfulfilled. True, some economic reforms continued, and more private banks opened their doors. But the much anticipated “great leap forward” to be announced at the June Baath Party conference never materialized. The blockade placed on Lebanon satisfied Syrians’ egos a bit, but as the investigation into Hariri’s death crept nearer to Damascus, Syrian activists were arrested and interior minister, Ghazi Kanaan, committed suicide in his Damascus office. A fog now hovers over the Syrian capital that will be hard for anyone, including the international community, to penetrate.

Unexpected developments

The year had started out with high hopes. State planning commission chief, Abdullah Dardari appeared to be finally getting to grips with Syria’s much beleaguered reform process. All eyes focused on his preparation of Syria’s “National Indicative Plan” – a new name for the country’s notoriously statist five-year plan. Instead of planning for Syria’s annual shoe production or dumping state investment into dirty cement plants along Syria’s beautiful coastline, Dardari focused his efforts on outlining development areas where the private sector could invest, and it was claimed, turn a profit. While work was going on behind the scenes, with substantial United Nations and European Union assistance, Dardari spoke to the local and international media of his preparations.

Finally, it seemed, someone within the government understood the importance of making a case to the people.

But a closer look indicated that Dardari had his work cut out. Syria’s private banks, which celebrated their first anniversary in January, were slow to release their first year results. Most had taken in massive deposits far beyond their management’s expectations. The problem, however, was that Syria’s regulatory environment, which the government had supposedly spent years modifying to “prepare” for the sector’s profitable operation, remained so restrictive that the banks could not invest their deposits. Stamp fees, hard currency restrictions – and perhaps most importantly – a lack of central bank liquidity facilities, meant that the lion’s share of private bank deposits, given normal inflations, actually gained a negative return. When the banks’ results finally were released a few months later, all reported substantial losses. The jewel of Syrian reform suddenly lost its luster.

The big bang

Hariri’s assassination eclipsed everything. As news trickled out of Beirut about the explosion, Syrians openly expressed deep sadness about the murder. As a Sunni Muslim, Hariri symbolized a modern political partner who understood secularism, as well as the desire of Syria to obtain a taste of globalization through Beirut. The reconstruction of the downtown was held up as a model for the renovation of Syria’s own city center, and it was expected that Hariri’s people would be involved in one way or another.

Long before UN prosecutor Detlev Mehlis began his investigation into Hariri’s death, and so many connections between Syria and the assassination came to light, few noticed that behind the scenes, Hariri and the Syrian leadership had already fallen out completely over the September 2004 presidential extension of Emile Lahoud’s mandate. Most Syrians argued, along with their leadership, that Syria could not have possibly had any interest in Hariri’s murder. After all, Syria was in charge of Lebanese security, and it was Damascus’ job under the Taif Accord to keep the peace. Most Syrians pointed their fingers towards Islamic terrorism in the region, Israel, and even the United States.

When the protests demanding Syria’s withdrawal from Lebanon erupted, Syrians began to take things personally. Average Syrians understood that their western neighbor was frustrated by the Syrian military and intelligence services remaining in Lebanon. But many asked why Lebanese were physically attacking Syrians? After all, they argued, what did they have to do with decisions of the notoriously authoritarian Syrian regime? Many noted that the harshest words came from Lebanon’s Christian and Druze communities –two minorities whose status Syria “protected” against pressures from Lebanon’s sizeable (and possibly majority) Shiite Muslim population.

These sentiments took on a larger meaning when the United States recalled its ambassador from Damascus two days after Hariri’s assassination. While Washington, as well as Paris, did not openly blame the Syrian regime for the murder, its actions indicated where they were aiming. Counter demonstrations in Damascus that included posters denouncing foreign interference in Syria’s domestic affairs and “bloody democracy” indicated that the regime, as well as the Syrian people, knew that something was coming.

All eyes then turned back to reform. After months of uncertainty, the leadership finally announced that the Conference of the Regional Command of the Baath Party would be held in June. Reformers in the government, scrambling for a space to continue their activities, pointed to Assad’s speech before parliament in March and his statements about “significant progress soon” and “a great leap forward” as an indication that reform would now kick into high gear. Rumors circulated that the dreaded emergency law, enacted when the Baath took power in 1963, would be abolished, that independent political parties outside the “National Front” would be permitted, and that the leadership would drop socialist tenets from its ideology and openly declare Syria a market economy.

Unrealistic expectations

When the conference finally took place, most Syrians were again disappointed. Hoards of international journalists descended on Damascus to report on the expected changes with great assistance by Syria’s notoriously strict Ministry of Information. On the first day of the conference, however, it was announced that the conference would be closed to the media, except for Assad’s opening speech. Instead, news trickled out through press conferences held by Expatriates Minister Bouthaina Shaaban – a confidant of Assad and member of the ruling Alawite sect. Each press conference, which gave very little information, was rife with promises that “everything would be explained on the last day.” When the last day came, the results were disappointing. The emergency law would stay in place, but would be reviewed. A new political parties law would be enacted soon, but it would contain restrictions and an extensive approval process. And finally, Syria was dubbed a “Social Market Economy” – the Chinese model long held up by Damascus as the key to stability and growth.

On the heels of the conference, Abdullah Dardari was appointed deputy prime minister for economic affairs. This was taken as a sign that reforms would now kick into a higher gear, and that Assad was serious about making the most of whatever momentum had been built up during the conference. However, reform issues were again eclipsed by events in Lebanon.

In June, Syria placed a “security procedure” on all of its borders with Lebanon that essentially functioned as a trade blockade. Most Syrians saw the move as a sweet response to what they considered insulting statements by some Lebanese politicians and media figures, most notably An Nahar editor, Gebran Tueni. But such satisfaction was short-lived. In August and September, Mehlis began to question “witnesses” from the Syrian intelligence about Hariri’s assassination and the Lebanese press began to cite sources close to the investigation that a number of Syrian officials would be named as suspects in Mehlis’ first report on October 19. Then on October 12, two events took place that showed the Syrian people, as well as the international community, just how out of hand things had become at the top of the Syrian regime. Interior Minister Ghazi Kanaan, the former chief of Syria’s presence in Lebanon and a member of Assad’s ruling Alawite sect, was killed in what officials called a suicide. That same day, Assad gave his first full television interview in English to CNN. Assad said that anyone implicated in Hariri’s assassination would be considered a traitor. No one missed the connection.

The fine print

When Mehlis released his report, most Syrians were surprised to find that Kanaan was not implicated in the murder. Instead, the penultimate electronic copy leaked to British newspapers showed that Mehlis was aiming higher, specifically to Asef Shawkat, Assad’s brother-in-law and the head of Syrian military intelligence. In the protests that followed, few Syrians missed the point that the international community, led by the US, the UK and France, were attempting to “crack the regime.” While most Syrians indeed hope for democratic change, they knew full well that the Mehlis investigation itself would not be enough to bring the house down. Sanctions are on the way, and everyone knows it. While Syrians have been under US sanctions since 1979 and have become quite skillful at circumventing them, it remains to be seen how the international community will develop “smart sanctions” that target the regime and not the Syrian people as a whole. As the fog thickens around the regime, Syrians are again rallying around their leaders, not because they love their rulers or understand them, but instead because they are being placed in the same corner with nowhere to run.

Andrew Tabler is a fellow of the Institute of Current World Affairs based in Damascus and Beirut. He also serves as a consulting editor for Syria Today magazine.

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Economics & Policy

Telecom sector hopes to pick up in 2006

by Executive Staff
written by Executive Staff

Kamal Shehadi

Managing director of Connexus Consulting

E Now that the Telecom Regulatory Authority (TRA) is being put on track with the search for a capable team, how long do you expect it to take until the agency can be fully operational and what should its first actions be?
Secondly, is it possible to draw a bottom-line comparison of how much the Lebanese state gained in revenue from taking control of the mobile networks and how much this decision cost the state, and what the net financial balance of the whole dealing was from the date of cancellation of the BOT contracts until 2005, when the original contracts would have expired?

I have full confidence that the Telecommunications Regulatory Authority will operate in early 2006, in a transparent and professional manner. The TRA will be very instrumental in formulating a clear strategy for the telecom sector if the government lets it perform its job freely without any limitations and assuming it is given the budget it needs to start implementing its goals. TRA’s first step would be to conduct a study of the telecom market and then prepare the licenses for the two mobile operators. Its second step would be the licensing of Liban Telecom which provides services to about half a million fixed line subscribers. The new telecom company will offer a 40% partnership to telecom operators while additional blocks of shares may be privatized through an initial public offering. The third step would entail providing licenses for operators to provide broadband connectivity, which is needed to boost the economy in general and the IT industry in particular. Last but not least, international rates must be lowered to align with international benchmarks and new service providers may be licensed to offer international connectivity for voice or data, with the former requiring the approval of the council of ministers. The TRA will be obliged to follow best international practices. It has a legal obligation to work in consultation with stakeholders and in a transparent manner. If it does not and there is no reason to think that it won’t – then it would have failed in its mission. There is a lot of confusion over how much revenues are generated from the state’s control of the two mobile networks. First, it should be recognized that the telecom sector and mobiles in particular – are overtaxed. Of the $900 million in gross revenues (approximately) expected in 2005, as direct revenues from the two mobile operators, about $200 million are from the value-added tax and the airtime tax (the 6 cents per minute), which are due to the treasury in any case. Another $40 million is from international calls, which is paid back to the ministry which still has exclusivity over international calls; about $100 million is paid to the two network operators in terms of management fees and incentive bonuses; and another $40 million has to be deducted to cover capital expenditures. The ministry of telecommunication’s net revenues from the sector in 2005, are expected to be around $520 million from the two mobile networks. However, in order to compare the revenues from the management contract with the revenues from BOT, one would need to factor in the following: 1) that there has been a growth in subscribers of 10% in 2004 and 23% in 2005, which could have even been greater had it not been for the artificial constraint on new numbers that was in place between 2000 and 2003; and 2) that the cost of severing the two mobile BOT contracts has been, to this day, about US$220 million (US$180 million for the recovery of the two networks and another US$40 million for the employees‚ golden handshakes), but that we still do not know the full impact of the arbitration decisions, which will be at a minimum US$200 million if the disputes are resolved amicably in line with the agreement between the ministry and France Telecom and a lot more if there is no amicable resolution.

In addition to the financial cost, the economic cost should be taken into account. The dispute with the mobile operators has led to significant delays in the sector. Lebanon was once a regional leader in mobile telecommunications and now it is no longer. Lebanon’s mobile market today offers fewer choices than almost any other market in the region (save, perhaps, Syria). Thirdly, mobile prices in Lebanon remain the highest in the region, thereby taxing Lebanese consumers. Finally, investments in mobile telecommunications have dried up. For example, no more than $40 million has been invested in mobile telecoms in Lebanon in the last 18 months whereas anywhere between $80 million to $100 million should have been invested annually in the last three years.

Tony Mouawad

President of Telesupport International, part of the
International Technology Group and one of the first call centers established in Lebanon

E The February 2005 initiative to promote Lebanon as a call center hub was stalled by the subsequent political events. Could the call center industry still be developed here and what would have to be done to support it and promote Lebanon as a location of regional/international call centers?

The main goal that the Lebanese government has to embark on is to improve and promote the image of Lebanon abroad, as Lebanon is still associated with war. At a current local rate of $17,000/E1 – a high speed digital link which represents 2mb/s (two megabytes per second), the international companies will find it very expensive to set up call centers and we need to implement many rules and regulations to attract more international companies. The first thing to do is to decrease the rate on E1s to a reasonable level, which is below $1,000 as in Jordan. The second thing is to promote Lebanon as a safe tourist destination to show that it is stable and has prospered in the past 15 years, a fact many countries are not aware of until now. Lebanon has the backbones for establishing international call centers. It is trilingual in English, French and Arabic and has high literacy rates and skilled labor. In this context, Lebanon is stationed as the leading country in the region to host international call centers of the Middle East. The establishment of international call centers could boost the economy by generating a mere $30 million per year through job creation if it is implemented on a small scale because we have the basic components for developing this sector and that is the human resources. But the prospects would be ten times higher if Lebanon can develop this sector before other neighboring countries do it.

Zakie Karam

Commercial manager at Inconet Data Management (IDM)

E Broadband connectivity has been promised for 2006. What are the main benefits for corporate Lebanon if the technology arrives with such huge delays when compared to other countries?

While other countries like Jordan are taking advantage of the technological, business and education opportunities of the broadband era by introducing their broadband services at 512 kb/s (kilobytes per second) or 1024 kb/s (1mb/s) for $48 per month, Lebanon is still lagging behind with internet speeds of 256k at double the cost. Broadband connectivity will be implemented in 2006. DSLAM (Digital Subscriber Line Access Multiplexer), which is a mechanism at a phone company’s central location that links many customer DSL (digital subscriber line) connections to a single high-speed ATM (Asynchronous Transfer Mode) line, will be soon entrenched. Lebanon is setting broadband connectivity at a soaring price of $17,000 per month for an E1 connection. The government has recently acquired around 180 E1s to add them to the existing 45 E1s to have a total of 225 E1s that are going to be available in 2006.

Kamal Shehadi

Managing director of Connexus Consulting

E Broadband connectivity has been promised for 2006. What are the main benefits for corporate Lebanon if the technology arrives with such huge delays compared to other countries?

If prices are lowered from $17,000 per month to $3,000 per month for an international E1, the government can still generate revenues of $10 million per year. This will allow broadband connectivity of 512kb/s to 1 mb/s when in other countries in the region such as Jordan, Egypt, and Morocco, this has been on offer for a number of years. But even at $3,000 per month for an E1, international connectivity is still very expensive and will not unleash the full potential of information technology in Lebanon. The proposed lowering of prices is a necessity but it should be seen only as a first step.

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