Business

MENA Forum

by Executive Staff
written by Executive Staff

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

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

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

E Who are the main competitors?

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

E What gave Lebanon its edge?

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

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

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

E What are the aims and objectives of MDF5?

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

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

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

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

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

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

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

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

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

E What is your nightmare scenario?

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

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

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

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

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Society

BSE snapshots

by Thomas Schellen
written by Thomas Schellen

Solidere

Listing date: September 30, 1996

Number of listed shares

Class A 100,000,000

Class B 65,000,000

Opening price

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

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

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

Solidere A $1.8 billion

Solidere B $1.2 billion

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

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

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

Banque Audi Saradar Group

Listing date December 29, 2004 GDR

Number of listed shares

6,198,823 (GDR)

Opening price $23.50 (GDR)

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

$371 million (GDR)

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

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

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

BLOM Bank

Listing date November 2, 2001

Number of listed shares

4,389,601 (GDR)

Opening price $20

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

$292 million (GDR)

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

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

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

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

Byblos Bank

Listing date

May 14, 1998 Common listed shares

September 15, 2003 preferred callable shares

December 23, 2005 Priority listed shares

Number of listed shares

Common listed shares 68,354,909

Preferred callable shares 333,400

Priority listed shares 68,688,309

Opening price

Common listed shares $3.14

Preferred callable shares $100

Priority listed shares $2.50

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

Common shares $161 million

Preferred shares $37 million

Priority listed shares $158 million

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

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

Bank of Beirut

Listing date

April 11, 1997 Common shares

April 08, 2004 Preferred callable class B

December 30, 2005 Preferred shares class C

Number of listed shares

Common listed shares 13,535,945

Preferred callable shares B 3,000,000

Preferred callable shares C 2,920,000

Opening price

Common listed shares $3

Preferred callable shares B $11.56

Preferred callable shares C $11.56

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

Common shares $134 million

Preferred B $36 million

Preferred C $73 million

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

Rasamny-Younis Motor Company (RYMCO)

Listing date February 6, 1998

Number of listed shares

10,000,000

Opening price $3.75

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

$11 million

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

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

BEMO

Listing date January 11, 1999

Number of listed shares

5,333,334

Opening price $3.25

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

$19million (Listed shares)

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

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

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

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

Societe Libanaise Des Ciments Blancs

Listing date January 22, 1996

Number of listed shares

Bearer shares 6,000,000

Nominal shares 3,000,000

Opening price

Bearer $6.875

Nominal $6.875

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

Bearer $7.5 million

Nominal $4.5 million

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

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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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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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Industry

Fadi Abboud: Lebanese association of industrialists

by Executive Staff
written by Executive Staff

EXECUTIVE speaks to Fadi Abboud, head of the Lebanese Association of Industrialists, on the outlook for industry in the absence of government support, sizeable foreign investment and a fair playing field for regional trade.

E Is the cardinal industry question, at this stage in Lebanon’s history, the cost of production or political stability?

We can survive political instability. At this point, our biggest problem is the cost of production and the reluctance of the government to do anything about it. For argument’s sake: you cannot control the bribes at Beirut Port, or at social security, or Electricite du Liban and so on. Well, make things coming to Lebanon a bit more expensive, to subsidize all these things. But don’t say: “We can’t control the cost of production but we won’t take more taxes.” Industrialists are the only Lebanese on this planet saying: “Please, please, please, collect more taxes.” And imagine, they’re refusing, even though the law allows them to do that, because all these people we signed free trade agreements with are cheating, because they are subsidizing their cost of production. Okay, you cannot tell someone not to subsidize, but the principles of the WTO give you the right to fairness. So why don’t we extract some taxes here and there to make it a bit more expensive, so that at least industry here can make a little profit, and increase their exports? There are some companies in Lebanon that do benefit from protection, and they are the ones increasing their exports. But they are companies backed by politicians. For example, you can’t import cement into Lebanon. You cannot import electrical cables. You pay more than 80% tax on wine imports. That’s why our wine industry is increasing its exports by more than 25% a year and controls 80% of the local market. Here, protection is a matter of who owns the factory. It’s got nothing to do with economics.

E For many years, Lebanon’s private sector believed it was its own savior – meaning that the government’s role in supporting industry was non-existent to negative. Do you expect this to also be the case in 2006? Is this situation sustainable?

I hope that it will not be the case. If you look at our government, they believe that in certain sectors they are doing a good job. And it is clearly putting money in their pockets. I acknowledged that the banking sector is important. But why don’t they help our sector like they help the banking sector? Imagine all the facilities and subsidies available for takeovers in the banking sector. Why do we not have the same facilities for takeovers in the industrial sector? Imagine the law on placing a container on a vessel. We have been on a crusade for ten years to get all these complications which cost a lot of money done away with. Exporting should cost next to nothing. You should be able to place a container aboard a vessel for less than $100. I hope that there isn’t a calculated plan to within the next 20 years, help industry wither away. But this situation, if it continues, is not sustainable for industry. If there is a hidden plan based on the notion that industry is simply not good for the country, then it’s working. In Britain, if I wanted to start up a factory, municipalities would be offering things like free rent for six months and half the wages of my employees for the first year. They would be begging me to come and employ people in their town. Here it’s the contrary, and then the municipalities complain and say they want subsidies. And yet they don’t want to create jobs for their people. Prejudice against Lebanese industry is in the roots of society. In this country, people who work with their hands are considered second-class citizens and in the Western world it’s the opposite.

E Subsidized loans have been the largest and most successful public sector support measure over the past few years. Do you see areas where this program has holes or should be expanded?

I agree with it entirely. We conducted a survey and we found that a big portion of companies that received the subsidized loans increased their exports. For God’s sake don’t stop it. It’s probably the only public money invested the way it should be invested. It should be expanded to cover loans for working capital, specifically if it goes to exports. This project is being run efficiently by the central bank. People are treated equally. And look at the results.

E Is export promotion high enough on the government’s agenda?

As high as it should be? No. Better than it was last year? Yes. The only time I can have the full attention of the minister of finance is when I mention exports. At a dinner a few weeks ago he said: “I want exports within the next five years to reach $4 billion.” But that’s not going to come from the Holy Spirit. We will have to work hard. But it is now more on their agenda than it was with previous governments.

E How about the private sector agenda? Are companies doing enough to promote exports?

This is a country in which 99% of industry is small and medium sized. Not all of us have enough means. Imagine someone producing little kibbeh balls, wanting to go and participate in the ethnic food exhibition on the other side of the world. Can you imagine how much that would cost? Probably close to $40,000. That’s a huge amount for someone manufacturing frozen kibbeh balls. That’s where we come into play, by paying a portion of the costs. They would still have to pay something. Because in Lebanon if people don’t have to pay for something they don’t take it seriously. That way they can go there and see how the Turks are playing with kibbeh balls, how the Israelis are playing with kibbeh balls. We invented the kibbeh balls.

E Is Lebanon’s industry today ready for Euromed and the WTO?

Not fully ready but on the way to being ready. We’re getting a very small percentage of the aid the Europeans are giving. If we compare Lebanon to Tunisia, we see that we are getting maybe one twentieth of what the Tunisians are able to attract. We attract very, very little foreign direct investment (FDI). The only companies to write home about are Nestle, which is Swiss, through the purchase of Sohat and Heineken through the purchase of Almaza. We haven’t attracted enough FDI. That’s because there isn’t a central command to take care of relations with Europe. One ministry does one thing. Another does something else. We ought to have three or four people living in Belgium, making sure they know exactly what’s happening and trying to get all the subsidies and benefits which Lebanon should have. Also, we only remember parts of the agreement we signed with the Europeans. No one seems to remember that we undertook to ensure that our laws are not contradictory to European laws. We have a number of draconian laws. We need more Lebanese to believe in the benefits of being linked to the European market, especially since I think that the future of Lebanese industry lies with Europe.

E Has industry benefited from European Union programs?

There is a lot of finance available through the European Union. We have for example, the Quality Enhancement in Lebanon program worth about 15 million euros. And we have others worth millions more euros. Some of these projects have been channeled through the right channels. And some were not channeled through the right channels, specifically the quality enhancement project. It was given on a silver platter to the ministry of economy and trade. And the ministry of economy and trade is the ‘enemy’ of industry. They are not at all interested in industry.

E Has the creation of the Greater Arab Free Trade Agreement (GAFTA) been beneficial to Lebanon’s industrialists?

Most of the Lebanese media embrace the cliché that the Lebanese industrialists are against free trade. This is not true. Our future lies in free trade. But free trade has to be fair trade. Let’s take the figures. They’re more powerful than words. Since GAFTA came into being, our exports to Egypt have increased by a few percent. They have increased their exports to Lebanon tenfold. Five out of ten attempts to export to Egypt fail. They use every trick in the book, including non-tariff barriers, quality barriers and [other] specifications to prevent Lebanese exports from coming into Egypt. I know of very few instances in which we didn’t allow in Egyptian produce and industrial products. It’s the same in Saudi Arabia and in all Arab countries. All of them have increased their exports to Lebanon at a rate higher than that at which we have increased exports to their countries. There is this notion in Lebanon that we can’t demand free trade from Saudi Arabia if we are going to ask them for a bit of money at the donor conference. I am a very proud person. I do not agree with this theory. Trade diplomacy is as important as diplomacy. We should treat people exactly as they treat us. All Arab countries – with the exception maybe of the UAE – use tricks against Lebanese exports.

E What can the Association of Lebanese Industrialists do to enhance the position of Lebanon at the planned donor conference?

Something really bothers us. No one has asked us for our opinion on the conference or our vision of the future of this country. That gives you an idea of the priorities of the people taking decisions.

E Job creation is one of your main concerns. Can Lebanese manufacturers train young people in promising jobs and provide them with enough work opportunities? Or should this be done by the government?

It should be a joint venture, exactly like what happens in the UK. We should get businesses more involved in the community. One very good example of business in the community is when in England the private sector took over the running of several schools in areas which had the worst results in the UK. Within two or three years they had 90% of students passing their A-levels. This is something we’re working very hard on here. We also need to work more with universities and academia. We have one program taking place right now in which we call on students at university to come up with projects which they will show at UNESCO. But when you look at the Lebanese University, people are not really interested. How many times do you hear the word “unemployment” uttered by someone in power? Very rarely, and then only as a cliché. Are we really declaring war, as France did a few years ago, on unemployment? We are not, and yet we all know what we need to do. Most of our politicians are people who are ready to do anything to stay in power. The public good is not a priority.

E Does Syrian labor in Lebanon present an opportunity or a burden for the economy and employees? Do you support giving Syrians jobs in Lebanon?

In one sense having cheap labor is a brake on the development of industry. You go to a building site and you don’t see a forklift truck. On the other hand, if we didn’t have cheap labor a lot of industries would be unable to continue. You now, it’s impossible to have a Lebanese labor force for the nightshift. They don’t want to work at night. A country like Lebanon, being rebuilt, does need some cheap labor. The Syrians are our brothers. I think they should be welcome in Lebanon. If they create unfair competition that is something that should be looked at. I think they should pay tax, exactly like Lebanese workers, and get the benefits.

E Are industry statistics accurate?

No, because there isn’t a civil state of information. When it comes to exports, you’ve got the statistics of the chamber of commerce, you’ve got the statistics of customs. We have a figure but it includes non-industrial and non-agricultural products: for example, re-exports, scrap, gold, and precious stones. The statistics are not accurate. And the reason is simple: they don’t want them to be accurate, because when you don’t have accurate figures you can juggle statistics and make them suit whatever position you want to adopt.

E What has actually changed since Syria left?

It’s mind-boggling. We hear that the Syrians were responsible for two billion dollars worth of corruption a year. I do not know of a single place in Lebanon, a single administration, where I pay less money. So I ask: where is the money that the Syrians are no longer taking? What has changed? Has anything changed at Beirut Port when you’re exporting? Has anything changed with the quarries, at the ministry of labor, or the ministry of public works? I don’t see anywhere where we’re paying fewer bribes. On the contrary, we’re paying more bribes. People were hiding behind the Syrians, saying they were the source of all Lebanon’s ills. I’m talking pure economics. The situation when it comes to corruption is as bad as when the Syrians were here. I could give you hundreds of examples of the day-to-day corruption we’re still living with.

E How much is that corruption costing?

To be able to collect a bribe you make something that should take five minutes take five hours and make it terribly complicated. I would say that the Lebanese economy’s efficiency could improve by more than a third if we stopped the bribery. Imagine the two years it takes to get all the permits necessary to start a factory. About 25 different administrations have a say in it.

E Do companies create a special budget for bribes?

Yes. Indeed. If you look at my accounts or any other accounts you will find by my estimate of 3% to 5% of turnover.

E How concerned are you about the prospect of sanctions on Syria?

If it happens, we will lose the Syrian market which represents just under 10% of exports. But for some companies Syria represents 50% of exports. We hate to even think about this. It should not happen in any way or form. Economics should interfere with politics.

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Society

Joseph Sarkis- Minister of tourism

by Executive Staff
written by Executive Staff

Joseph Sarkis was appointed minister of tourism in the new cabinet. Here, he talks to Executive about this year’s downturn, the balance between security and tourism, and his hopes for public-private sector cooperation in promoting Lebanon as a major tourist destination.

E To what extent has the tourist sector suffered this year?

It is obvious that the security and political situation has had an impact on tourism in 2005. However, if we look at statistics up to the end of October and compare incoming visitors with the same period in 2004 – which was an exceptional year – we see a decrease of only 13.5%. This is not a dramatic drop if you consider what happened during the early months of this year. In 2004, we had a total of around 1.3 million visitors. This year we are already at 970,000 and still have two months to reduce the gap. Although the total will be lower than last year, it will not be much less, which means that people who come to Lebanon as tourists or businessmen have persevered with the situation and realize that there are political differences everywhere in the world, not just here. This was especially true for the Gulf tourists, though with the Europeans the decline was more marked.

E How have you promoted Lebanon in this difficult period?

I have tried, as minister of tourism, to maintain Lebanon’s name as a destination and its presence in the market. We succeeded in that goal without forcing it through any major promotion or advertising, as we know the situation is not ready for the launch of a big campaign. So we have used these last months, since I came to office, to prepare our infrastructure and programs to be ready for a better period.

E So it’s been a case of watching and waiting?

Yes, but also taking part in seminars and conferences in the Middle East and all over the world. In September I personally attended a conference in Amman for the Middle East section of the World Tourist Organization (WTO), which had all the other ministers of tourism from the region. I am happy to report that we succeeded in our bid to host next year’s meeting in Lebanon, which is very good news for us. We have almost finalized dates with the WTO’s secretary-general, who will attend, and the conference should take place in April 2006. It will be a great event for us. We are now working on a special program to demonstrate Lebanon’s unique potential amongst Middle Eastern countries.

E Was there any other good news?

Just a few weeks ago, on November 25, the WTO held its general meeting in Senegal. Lebanon was re-elected as a member of the general board, along with two other Arab countries. Again, this is a positive thing for us.
E Has international support for Lebanon’s tourist industry been more noticeable since you came to office in summer?

Yes, it has been noticeable. Tourist authorities all over the world are showing support for Lebanon, and the international community understands our post-war potential. We’re grateful to them, especially to the WTO. Since being in office, I have also received ambassadors from all major western and Arab states, who came on protocol visits but who told me that they are backing Lebanon and are willing to help. It was encouraging to hear that.

E How can Lebanon improve its image abroad?

Our target is to show the good face of Lebanon, not just the bombings and assassinations. We need to show that ours is a peaceful country. I explained many times that the bombings in Lebanon this year are different from all those which took place in other countries. Here, it is a targeted political issue and not the kind of extremist terrorism we see elsewhere. Tourists in Lebanon were not targeted. So I made an effort with the media, two or three months ago, and told them that they should be messengers for Lebanon, that they should not exaggerate in showing bombs and blood. Take the example of London or Sharm el-Sheikh: when the attacks happened there, we did not see TV images of people dying or suffering. And I think the media here have taken this into consideration and will help our image.

E Do you think Lebanon is regarded as a ‘safe’ destination?

Somebody asked me the other day which country I thought was the safest in the world. It was hard to answer because there is danger everywhere now, not only in the Middle East, and not only from terrorism but also natural disasters. Of course this doesn’t mean that we lie down and accept problems, but what is happening in Lebanon has happened elsewhere and will happen in other countries too.

E Are security measures having an impact on tourism?

This is an important point and will actually be the main theme of next year’s WTO meeting. How can we take strong security measures without restricting the flow of incoming tourists trade? Every country, not just Lebanon, must try to find a middle road between these two issues.

E Did the ministry’s budget grow this year?

We are fighting to keep our present budget. As you know, Lebanon has a difficult financial and economic situation and we still have an extremely low budget of about $8 million. Between a third and a half of this covers salaries and fixed costs, which leaves the rest for projects and promotion, which are obviously very expensive. So it is a small budget, as is the case with most ministries.

E Can the private sector help?

Of course, and I am trying to develop an excellent relationship between the private and public sectors – this is in both our interests.

E Concretely, what is the ministry doing to foster this cooperation?

We are finalizing the structure of a kind of tourist board, which could be named Destination Lebanon. It will be headed by the minister of tourism and will have representatives from private sector syndicates, like hotels, as well as other companies with an interest in raising visitor numbers, like Solidere. The board will have twelve to fourteen members and its job will be to promote Lebanon all over the world, as well as play an advisory role to the ministry of finance. It will have independent authority and its own budget. We are now completing a legal draft, which I can then show to the private sector, with the hope that the board will be created before the end of the year.

E Traditionally, Lebanon has attracted mostly Arab visitors. But which other markets have potential?

There is one large and easily accessible market – the Lebanese Diaspora. Lebanon only has around 4 million people, but at least another 10 million live abroad. I want to target the 2nd and 3rd generation emigrants who still feel Lebanese and retain links with this country. We need to send a message to them, tell them that Lebanon is their country of origin and encourage them to visit – something I recently told to a meeting of Lebanese émigré businessmen on Curacao, near Venezuela. I think this whole market has huge untapped potential.

E And to promote it?

We still think that satellite television is the best way to do an international promotion. Channels available abroad like LBCI or Future TV often make a film or a campaign about Lebanon, but this is not enough. We need to go to international media like CNN to get our message across. But as I said, now is clearly not the optimal time to spend money on launching a major promotion.

E In late August, Jordanians could obtain a visa at Beirut’s airport for the first time. How did this affect arrivals?

Very positively, and I worked personally on this. Because of the changes, 17,000 Jordanians arrived in September, which is a huge number. In fact September was the only month with year-on-year growth in arrivals. We also relaxed restrictions for Iraqis, and most probably the same will happen for Turkish visitors too.

E Does the Iraqi market have potential? What about security issues?

In Jordan, there are about 800,000 Iraqis, who have been largely responsible for an economic boom there. We also want to capture this market and are targeting the many rich Iraqis who like to travel. Next year there will be direct flights to Erbil, in the north, and also to Baghdad, so we hope to increase numbers. Security must be weighed up, but a key point is that we have no land border with Iraq. And I think the new security chiefs are aware that we have to find a workable balance between restrictions on entry and the health of the tourist trade. Of course, people are also worried that some visitors might stay in Lebanon and work illegally, which is why we should take care.

E Is Lebanon perceived as an expensive destination?

I always try to put pressure on all parts of the tourist trade, not only travel companies but also hotels and restaurants, to avoid giving the impression that Lebanon is an expensive country. If that happens, then we will pay the price. In the ministry we fix rates according to the grade of hotel or restaurant and we always bear in mind that prices must be reasonable. This is a constant concern, but having traveled so often I do not think it is true that Lebanon is expensive, especially when you consider the level of service we offer.

E Speaking of hotel grading, is there a need for an updated classification system?

Yes, definitely. We are tied to old legislation. But we are actually working on this with the private sector, which submitted a very good draft proposal to us. A specific team at the ministry, as well as our legal department, is tackling the issue, although putting it into force takes time. We would need to cancel the old law in parliament and pass the new one, but we hope to submit the new legislation for approval very soon.

E Looking ahead, are you prioritizing any particular niches?

I feel that developing eco-tourism and mountain tourism is important. More and more travelers want to get away from luxury, expensive hotels in the city and instead go to more scenic surroundings. Lebanon must take advantage of being the only country in the Middle East with ski resorts. We already have the support of NGOs and international organizations who are willing to help – for instance, two months ago we released a new information package to promote sites outside of Beirut, and were helped by SRI and USAID.

E Lastly, how dependent is 2006 recovery on political stability?

Of course, it is dependent on it. But every country has political instability, and I think we need to differentiate between political problems and bombs, which are far more damaging to tourism. I am now optimistic that Lebanon will not go back to a period of war or violence, and that the worst is behind us. But, equally, we have to give all this some time to settle.

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Real estate

Abdul Hafiz Mansour- CEO, Horizon Management

by Executive Staff
written by Executive Staff

Executive talks to Abdul Hafiz Mansour, CEO of Horizon Management, the real estate company, established in 2003, to oversee and develop the Hariri Group’s real estate portfolio, about projects in Lebanon and abroad.

E What are the most important projects Horizon has been working on so far?

We have been working on three projects to date. First of all, there’s the project codenamed V5, which will be one of the three most important shopping destinations in Beirut. It will be built on the site of the former Karmel St. Joseph School opposite Dunes in Verdun. While the fragmentation of ownership in Lebanon and the strength of the country’s property law often make it difficult to develop such a large area, we did not face any of those problems. Secondly, there is the Raouche Hotel, which is a 270-room, high-end luxury hotel, which will be built next to the Coral Gas Station in Raouche, one of the last available plots of land on that side of the Beirut seafront. Thirdly, there is the project codenamed V2, which will be built next to the Bristol Hotel, on a 7,000m2 plot of land. This project consists of two high-end residential towers with apartments of some 540m2 each, next to a suites hotel with one, two and three-room luxury apartments. There will be a small retail component that will not exceed 10% of the overall project. We have several other projects in the pipeline, but I prefer not to talk about things prematurely.

E What are the investments worth?

Including the price of land, which is worth between $3500 and $4500 per square meter, the V5 project is a $200 million project, while the Raouche Hotel is worth some $85 million. I cannot yet give any financial details regarding the V2 project.

E Is Horizon Management solely responsible for these projects?

For the V5 project and Raouche Hotel we work with our partner, United Real Estate Company, which is part of the Kipco Group, one of the largest investment companies listed on the Kuwait Stock Exchange. Regarding the V2 project, we are developing this property on our own.

E Can you tell us a bit more about the main characteristics of the V5 shopping mall?

The V5 will stand on a plot of land of about 18,000m2, which is one of the largest plots of land in Beirut still available for development. The V5 has a more than 140,000m2 construction area, which includes the underground parking areas. The marketable area will be about 50,000m2, which will comprise retail and entertainment areas. We are still working on the tenant mix, but our aim is to create a destination area for the whole family.

E We’ve been hearing reports about the construction of the V5 mall for quite a while now. Why has it taken so long for the project to materialize?

In December 2004, parliament passed a new building code, which needed certain interpretive and regulatory government decrees to be put into effect. Normally that would not take more than a few months, but due to the extraordinary events of this year, the cabinet only approved those decrees much later, by the end of November, and they are not yet published as I speak to you today. So, we were delayed by some seven months, as our final concept has to conform to the new code. This was not a problem just for us, but for all development projects in the country. Now we can proceed in developing our concept and apply for all the necessary building permits.

E Without becoming too technical, could you give an example of how the new code affected building plans?

It is mainly regarding basements and superstructures in relation to the exploitable and non-exploitable areas. It will also clarify how to calculate the exploitable area with respect to land where you have differences in levels around the site.

E Lebanon’s retail climate has changed considerably over the last few years. Do you really think there is room for another mall? And how will this affect the market?

According to every estimate and study made on the issue, Lebanon still falls behind most countries in terms of available shopping space per capita. So yes, I do think there is room for growth. We think V5 will form a healthy triangle with the Souqs in downtown Beirut and ABC in Ashrafieh, each with its own character and catchment area. For V5, the catchment area is not only the immediate surroundings in Verdun, which is a densely populated, high-income area, but extends to the whole area from Ras Beirut to Corniche Al Mazraa. It will be the first shopping center facing the incoming traffic from the southern axis to Beirut. We are very confident of the suitability of the location for the mall. To be successful each mall should have its own character and its own specific attractions and magnets. And we will avail such distinctions to the V5 mall.

E What about the City Mall at Dora, the Metropolitan Mall and BHV/Monoprix in southern Beirut?

We don’t consider the City Mall a direct competitor, as we believe that the City Mall shall mainly serve the Metn area. Same is true for the Metropolitan Mall, which aims at hotel guests and residents from the region. BHV/Monoprix is a department store and hypermarket and does not have all the components of a mall. In this respect, the V5 will be filling a shopping gap in the catchment area we mentioned before.

E When the V5 and, in the future, V2 projects, are completed, what will be the consequences for Verdun and Hamra as retail areas?

V5 and V2 will complement and lift Verdun as a major retail area and hopefully increase the character of Verdun as a high street shopping area running from V5 to Concorde Square. Now, Hamra has of course considerably changed over the years, from a high-end to more mid-end retail area. In that sense, Verdun and Hamra do not directly compete and they could actually very well complement each other. Don’t forget that it is only a 5-minute walk from Concorde, and the future V2, to Hamra.

E Tourism saw a significant decrease this year. Are you confident tourists will return in the near future? And to what extent is that important for the success of the V5 mall?

These days, shopping is an integral part of tourism. Look at the Gulf nationals who come here. No matter how many malls there are in Dubai and Riyadh, they still go shopping here. Shopping has become an attraction in itself, so of course it is important to us. I think the current situation is but a transition phase. Given political stability, tourists will return in increasing numbers. The signs are there. The end of last summer was already better than the beginning. Look at the funds flowing into real estate investments that have been made this year.

Now, tourism forms an increasingly important part of the Lebanese economy. The bulk of tourists are not the kind who come for a few days to see the country’s main sites, but rather frequent visitors to the country, including those who have residence here and usually stay for two or three months a year.

E Dubai has developed very fast over the last few years. Are you not afraid of Dubai’s competition?

Dubai is a fact. It is good to have a success story in the region. Lebanon has been unfortunate in the recent past as it suffered from the Arab-Israeli conflict, but we have survived and we have the resources to create new opportunities and a new position for the country. Competition is only a good thing. It makes one work harder and be more creative. So, in that sense the success of Dubai will only help Lebanon.

E So, you remain positive about the future?

We are. We will no doubt miss the guidance of His Excellency, our late prime minister Rafik Hariri, who was an illuminated leader, who in a very short period brought developments to the country that astonished the world. I am confident that his successors will capitalize on his legacy and continue forward. Lebanon still has a lot of potential and untapped opportunities. I firmly believe that the Lebanese will be able to position Lebanon in the right spot regionally and internationally.

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Society

Getting tourism off the ground

by Executive Staff
written by Executive Staff

Joumana Azzi

Branch manager at Wild Discovery Travel & Tourism

E How many Lebanese are taking holidays abroad on an annual basis and how has this figure evolved over the last few years? What characterizes the outbound Lebanese tourist market? Is the trend of package tours catching on?

While we do not have exact figures on the number of Lebanese taking holidays abroad on an annual basis, the market for outbound holidays as a whole has been increasing substantially over the last few years, with many people going away three to four times a year.

The statistics on airport passenger traffic clearly indicate that there has been a substantial increase in departures over the years up until the first month of 2005. The year 2005 witnessed a decrease not only in the incoming flow of passengers, but also in the outbound tourism market due to the events Lebanon went through. However, despite the unstable situation, Wild Discovery increased its business volume in 2005, compared to 2004.

The outbound tourism market in Lebanon is mainly characterized by the diversity of the destinations that are chosen by the clients. The main destinations that are most frequently requested by the Lebanese are Egypt, Turkey, France, Italy, Greece and Cyprus. But Wild Discovery is seeing an increasing number of individuals going to the Far East, South America, Spain, Vienna, Prague, as well as very exotic destinations such as the Maldives, Mauritius and others, especially newlyweds going on their honeymoon.

The trend of package holiday solutions has caught on. It is attracting mainly clients wishing to buy a fully organized product, taking advantage of the knowledge and the expertise of the operators and most of all, the price advantage when you book a package compared to when you book individual and separate services. Obviously the size of the tour operator, his knowledge and his professionalism are key to a successful holiday experience.
 

Philippe Skaff

CEO (MENA) of Grey Worldwide

E To what extent was Lebanon’s image affected by the events of 2005? How did the media contribute to this? What approach should both the public and private sector take in 2006, to improve the perception of Lebanon abroad?

Although Lebanon’s image has been hurt this year, I think the effect was disproportionate to what actually happened. Like anywhere, the media always jump on bad news, and whilst they don’t necessarily exaggerate events, they take them very much out of context so that one bomb seems to imply total chaos. The loss of [ex-premier Rafik] Hariri, who was a very charismatic and appealing figure for the West, has also harmed Lebanon’s image there and almost left us orphaned.

To improve people’s perception of Lebanon, I think we have to prioritize both tourism and protection of the environment – the two go hand in hand. I would leave aside superficial things like shopping and instead concentrate on our cultural and historic riches. Lebanon has a unique and diverse atmosphere, which you can feel as soon as you step off the plane; it’s somewhere you come back to again and again, unlike some places where you can virtually tick off like a checklist. It’s like the difference between a poem and a story – you can read a story from beginning to end, but a poem has a certain ‘feel’ to it which can be rediscovered a thousand times. Every foreigner I meet who comes here on business says that Lebanon is the best-kept secret of the Middle East, which suggests that its image abroad is worse than the reality. But it’s impossible to run a promotional campaign on CNN, or wherever, at the same time as there are bombs on the news.

Ramzi Assily

Resident manager, Movenpick Hotel and Resort, Beirut

E What contribution can tourist resorts make to the Lebanese economy? What are your expectations for 2006, and over the long term? What can be done to better define and improve nationwide quality standards for resorts and hotels?

Tourist resorts already make an important contribution to the economy, especially with the local community and Lebanese expatriates who return from abroad during the summer. Resorts are definitely an upcoming trend now. We’ve seen more opening both to the north and south of Beirut, and they’ve proved that a six-month season between May and October can be very lucrative. And once one operation makes money, others will follow – like any trend in Lebanon. I don’t know exactly what’s in the pipeline, but one or two more new resorts will probably open next year, and the existing ones will expand. Our own operation is slightly different, as we are only open to hotel guests and owners of our cabanas, but next year we should maintain the same trend evident since we started. Obviously this last summer was not as good as 2004, but if the political situation stabilizes then we’re optimistic for a strong year.

In terms of standards, quality clearly starts right from day one and the size of the initial investment. But my personal opinion is that we need a better system of classifying hotels, ideally with foreign consultants brought in to help judge star ratings. And although Lebanese staff are sought after in the whole region, our training colleges need to find a better mix of management and technical skills. At the moment, there are only the two extremes.

Pierre Achkar

President of the Lebanese Hotel Association

E How many hotel rooms will Lebanon offer by the end of 2006? Is this capacity appropriate for Lebanon’s needs? What are the requirements for healthy and sustained growth in the hotel industry in 2006? What can the public sector do to better supervise and assist hotels?

We have around 16,700 hotel rooms at the moment. Another 3,000 rooms are under construction and although I don’t know exactly how many will open in 2006, we usually expect 500 to 600 new rooms annually. Next year should be no different. Often it is old hotels being renovated, which are sometimes not included on the figures for new rooms. There is no shortage of rooms, although occupancy rates have been down this year thanks to the political situation. Since 2001, we’ve seen growth of 30% per year, and expected 2005 to be the best ever. But for the first three months, Beirut was virtually closed and all our plans were cancelled. Things picked up during the summer and in fact, given all the uncertainty, it has actually not been a bad year. For healthy growth in 2006, though, the absolute first priority is political stability. As soon as we have that, we need a major promotion to improve Lebanon’s image abroad. In terms of public sector help, although legislation does need to be updated, it is not a prerequisite for growth in the hotel industry. More important is to unify the public and private sector in promoting the country, as professionals in the private sector know better than the government what should be done, and how to do it. I also believe that the national tourism council should be reactivated and funded jointly by both private and public sectors – this kind of co-operation is important for the health of the industry.

Khalil Malaeb

CEO of K&M Health Tourism International

E Why do visitors come to Lebanon for medical treatment? How healthy are the future prospects for developing this niche? Can we expect any major developments in 2006?

Our medical tradition is very important – we have 140 years of experience and this helps create trust with patients. Our doctors are often foreign born or educated, and a very high percentage of them practice a specialty or a sub-specialty. Plus, the cost of care here is about 40% to 50% cheaper than in Europe, with exactly the same quality, and Lebanon is the only country in the Middle East to have 80 hospitals accredited internationally. Compared to Arab countries, the cost of care here is similar but the standards are higher, whilst the market for Arabs taking medical treatment abroad is lucrative – it’s now worth $4.5 billion. As for the future outlook, developing medical tourism is not a one-year process. We’ve clearly been set back by the death of Hariri, who took a personal interest in promoting this niche. One major goal is to access the European market, especially those countries like the UK with long waiting lists. We also want to further promote Lebanon as a plastic surgery destination. For these kind of operations, many people now travel to South Africa because costs are perhaps 50% less there than in Europe. But we can offer even better value – and of course with the same level of excellence. In addition, we’re currently in negotiations with a re-insurance company to actually offer insurance during medical operations – something, which is usually wavered. It will apply to certain hospitals and should come into force in early 2006. Given that Lebanon will be the only Arab country to offer this kind of insurance, it’s another sign of confidence in our medical care.

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Banking

Freddy Baz : Chief strategic advisor, Banque AUDI

by Executive Staff
written by Executive Staff

In a broad ranging interview, Banque Audi’s chief strategic advisor, Dr. Freddie Baz, discusses the economy, regional ambitions and why he is fed up with Audi being referred to as the No. 2 Lebanese bank.

E In the latest Banque Audi report, you state that Lebanon was a “no growth environment in 2005,” but that it was able to “avoid a recessionary trap.” How were we able to do this and what if any role did the banks play?

What we wanted to highlight is that we are not in a bad situation but we are witnessing a coincidental stagnation after the high growth of 2004, in which we saw 6% real growth as reported by the IMF and the central bank among others. But after the dramatic events we witnessed in February, it was normal that the real sectors would take a hit in terms of overall confidence and its impact on aggregate demand for investment and consumption. So no surprises there, but paradoxically, while there was this stagnation, the financial sector witnessed a very interesting improvement. Sure, the impact of the assassination hit all areas of the financial sector: stocks, bonds currencies, especially currencies, when we saw great pressure on the lira, but after the demonstrations and the flag waving and the demands for Syrian withdrawal and the UN resolutions, most markets adjusted, showing a high appetite for Lebanese paper. Stocks and bonds have improved significantly and banks’ stocks have increased by 100%. Solidere shares hit $5 but bounced back to $13.5; spreads on Eurobonds decreased after some initial widenings, and the FX markets recovered by May, allowing the central bank to recoup one third of the dollars it used to defend the lira. So we are witnessing a disconnection between the real sector and the financial sector of the economy in which the investors and consumers are in a wait-and-see mode; which is normal. It would have been worrying if the financial sector had been equally stagnant. We are in a two-speed economy. There is a traditional time lag of 18 months in these scenarios. We can look forward to a better 2006, and definitely a better 2007, in terms of real growth and GDP.

E The share of T-bills and Lebanese sovereign debt in the portfolios of Lebanese banks remained high in 2005. Will Lebanese banks ever break out of their lending cycle to the government and embark on a fully-fledged retail and corporate banking culture?

You ask the question as if the banks only lend to the public sector and not the private sector. Let me tell you that the consolidated lending portfolio to the private sector is almost equal to the GDP. This is the highest exposure in the emerging markets. The South East Asian Banks in the late 1990s were never exposed like us. They were at 65% to 80% of GDP. We are at 100% of GDP in terms of consolidated private sector loans. We are not under-lending. This is a misconception. Because of our funding which is three times GDP we are obliged to use it for alternative uses, we just can’t lend it all to the private sector. That would make our private sector be lending three-times the GDP, which is unacceptable by any standards. For us to increase our private sector loan exposure the economy should grow. We believe the actual size of the economy, which is measured by GDP, is not a reflection of its potential size which we believe to be higher by a minimum of 40%. If we assume the actual GDP to be around $20 billion, the potential GDP would be close to $30 billion, probably $28 billion. If the environment is there to narrow the gap between actual and potential GDP, then, while our level of exposure will remain the same, that is “1 x GDP,” there will be room for an additional $8 billion of lending to the private sector.

E But surely we have a chicken and the egg scenario. What comes first, the funding or the growth?

I see your point, but in Lebanon auto financing ratios are very high, so we have to start seeing investors putting their own money first and then we will lend. Together we will trigger GDP growth rates. So it is up to the investors to show their own commitment by putting their own funds on the table and we will support them. However, I want to stress that Banque Audi has been active in its corporate lending in 2005.

E Are there any sectors with potential that you are watching with interest?

We are not a development bank. We are a private bank. We do not look at sectors of activity with a high leverage on growth, but we lend our money where we believe there is wealth, where risk is limited in the nature of the business and more importantly where there is a contribution of the company to the generation of wealth in Lebanon and the GDP. When we lend to the private sector, we lend to medium to big enterprises which in the case of Lebanon, the top 100 companies probably generate 75% of GDP. This lending is more secured than to smaller companies and while they should not be neglected, they will not get a higher share of lending than their contribution to the generation of wealth in the country.

E Banque Audi is still ranked No. 2 in terms of assets and deposits. Is the bank satisfied with its performance this year?

You say No. 2. Yes it is true in terms of absolute figures, but what does a differential of $200 million on a basis of $11 billion [of assets]? It’s not even 2% and this is the difference between the top two banks, which is how I like to refer to us.

E Well you are ranked first in other areas.

Of course, we are first in terms of lending to the private sector. We have to highlight it and show our commitment to the domestic economy. Our job is not just to collect deposits and buy securities. We are first in terms of footings. We are first in loans. We are first in Tier One capital and this is as important as total capital. Rating agencies base their calculations on Tier One capital.

E Then what are the areas you would want to address in 2006? What are the plans for revenue diversification and regional expansion? Which areas of banking appear most promising?

I believe we have the best revenue diversification, not only among our direct peers but in the whole industry and this did not happen overnight. It is the result of a huge restructuring launched in 1995, diversifying our business lines to diversify our assets and sources of income to improve our immunity against any reversal trends. We launched retail banking and private banking capital market activities. To do so, we triggered the consolidation process in the Lebanese banking sector. We closed five acquisitions. We improved our human capital. Today 52% of our staff are university graduates, 15% are MBAs and we have 15 PhDs. We launched the first GDR in the region, the first five-year private euro bonds in the region in 1995, and 1997; a ten-year subordinated note issue, a ten-year euro CD issue and four preferred share issues. In the last four years, we have witnessed an average growth rate in our assets and earnings of 30% per year. So our restructuring allowed us to consolidate our market positioning and to ensure a higher asset and profit growth rate than our direct peers. More importantly, if you look to the breakdown of our income, over different businesses we have a much better balanced breakdown today than any of our peers whereby non-interest income is 45% of total income. This is our immunity against reversal trends and it comes from private banking, bancassurance, and capital market activities. In the last four years, our trading floor has seen a turnover of $4.5 billion. We are the most important market maker on Lebanese stocks and bonds.

E Moving onto regional expansion, how were Banque Audi’s plans for a Syrian banking operation developing in the last quarter of 2005? What is the outlook for 2006, given the uncertain political situation in that country? And what are Banque Audi’s ambitions for the Egyptian market?

Firstly, I would like to give a brief preamble because our activities are not just restricted to those two markets. Our internal restructuring, which translated into high asset growth rates, led Banque Audi to a size today of $11 billion in terms of assets. This is $880 million in equity, $15 billion of footings and we represent 55% of Lebanon’s GDP and when you reach such an important size in the local market you have to go beyond boundaries because you have become too big for your country. We wanted to continue this growth by developing new markets rather than new business lines. First, we went into Jordan where we were granted a license for ten branches. Seven are operational and in 2006, they will all be operational. It doesn’t mean we can’t open more in future. What is of interest is that after 14 months in Jordan, we could build $300 million of assets, which is higher than the size of many operating banks in Jordan who have been there years longer than us, in some cases ten years. We had a good business plan that we will duplicate for all the other markets in which we want to expand.

E Including Syria?

In Syria we launched our operation in September [2004], but there was some delay because we were the first to apply … [and] we decided within the course of the application to double our capital and it took us back to the beginning of the process. We have four branches that are almost ready and we want to build a substantial network in Syria with 30 branches within a short period. It’s too early to give you figures but all I can say is that we are very optimistic. Now, given the [political] concern you expressed, we have not felt it on the ground. It is as if the business community is disconnected from politics. It does not mean that they are not part of the country but life does not stop. Sanctions we believe will not target the Syrians as a whole. We believe there is an immunity concerning business but any unforeseen dramatic developments will have a limited impact on the overall turnover and not diminish overall opportunities. Anyway, the stories of substantial Syrian withdrawals from Lebanese banks are not very accurate and we certainly did not witness this phenomenon at Banque Audi.

E Moving to Egypt, Banque Audi is understood to be one of six potential buyers for the Cairo and Far East Bank. The Egyptian central bank has given the go-ahead for Audi to conduct due diligence on this bank. What are Audi’s ambitions for the Egyptian market?

Before [answering] that I would like to add that three months ago we have been granted a fully-fledged license for Iraq, among the eight licenses that have been granted so far and we have a plan to open in Iraq in the north.

E How soon?

Definitely in 2006. Now in Egypt it is true that so far, we have not succeeded with an acquisition, but I would like to remind you that Audi put in a bid on the Egyptian American Bank in 2003, but it didn’t materialize because there was a new law that made medium-sized banks very expensive in Egypt and consequently they have not become very interesting for us. Today we are looking for platforms to grow organically in Egypt and Cairo and Far East Bank is one that we are looking at but there are three or four others too. We will try to close what is the best deal for Audi, not necessarily Cairo and Far East Bank but that is the bank that is in the news.

E Are there other areas Audi is looking at?

We are looking at certain North African countries as well as niche roles we can play in the Gulf markets, especially in corporate finance and private banking where [Lebanese bankers] have strengths. We have limitations and this is the only area where we can compete. To try to be competitive in retail or commercial banking [within the GCC] is impossible.

E How important is trust in the sector for international confidence in Lebanon as a receiver of financial aid especially with a donor conference looming?

It is an important asset but whenever the donors meet it has nothing to do with the private companies in this country. But as long as you have strong and well-established financial institutions, it will improve the overall perception of the country. A country with a solid financial sector has more of a reason to ask for assistance but it is not directly related; we are talking about public versus private. We have a banking sector that endured two decades of war and a time when we had two governments but one central bank – the central bank was never divided.

E How important is any national reform program to the banking sector?

Anything, which will improve the overall efficiency of the economy, is welcomed by the banking sector because at the end of the day we are organically linked to the economy. Reform – economic, financial, and political – by definition improves the overall efficiency of the economy. Privatization will improve efficiency. Look at how deteriorated the service [of cellphones] is nowadays. Such a weak level of quality although [the cellphone sector] is managed by two private companies. They are not motivated.

E With Basel II looming can we see an eventual consolidation of the banking sector?

Not at the level of big banks because we are over capitalized. But it will affect a certain number of middle sized or small banks but this is a positive trend because we need to further consolidate. As far as I am concerned, we have not yet really witnessed real consolidation in Lebanon although the number of banks has dropped by around 25 or thereabouts. Real consolidation is not lobsters eating shrimps; it is lobsters eating lobsters, more mega mergers between the big banks to be able to compete with big international banks in a post [peace] settlement era. I think within the top 10 banks there is a potential for three mega mergers.

E To be more robust regionally?

Of course! You have banks like NTB, Arab Bank or NBK from Kuwait with equity amounting to the consolidated equity of the Lebanese banking sector.

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