Economics & Policy

The long and winding road to beirut

by Joey Ghaleb
written by Joey Ghaleb

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

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

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

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

“National crime”

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

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

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

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

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

No pain, no gain

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

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

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

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

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

No public debate

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

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

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

Window of opportunity

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

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

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

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

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

 

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Economics & Policy

Semaan Bassil

by Executive Staff
written by Executive Staff

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

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

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

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

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

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

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

E Do you see a new environment on the bourse?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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

The unlikely quartet

by Michael Young
written by Michael Young

In November, during the French book fair in Beirut, the magazine L’Orient-Express – previously the monthly supplement of the daily L’Orient-Le Jour – was published as a special 10-year anniversary issue. The idea was the brainchild of the former editor, Samir Kassir, but when he was assassinated last June, it was up to the onetime staff members to prepare the content without the guidance of the irrepressible man who had been the magazine’s vital force.

The regret one felt in knowing Kassir never saw the issue was nothing compared to the disappointing reality of the aftermath of his death. The far-too-constrained national reaction showed how cheaply he had gone, so unacceptable coming from a Lebanese society that had, by the time Kassir was killed by a bomb placed under his car, regained its sovereignty. At the essential moment of newfound emancipation, an avatar of that effort, a writer who had risked his personal safety for years to condemn the order the Lebanese had lately demonstrated against, was virtually forgotten. That’s why the anniversary issue of L’Orient-Express was a bittersweet experience; it pleased the insiders, those who knew Kassir, but it also proved a mere sideshow for the society as a whole. Through that indifference, the Lebanese effectively forgot a part of their post-war self, and not by a long shot the least attractive one.

Four different lives, one Lebanon

It says much about the contradictory nature of Lebanon that four of the prominent deaths recorded in 2005 – those of former premier Rafik Hariri, the providential businessman who rode into the country on a white checkbook; Basil Fuleihan, his protégé and among the best and brightest of the returning wartime generation; Ghazi Kanaan, long the tough cornerstone and cynical broker of Syrian power in Lebanon; and Kassir, the prodigal son, who alighted from Paris and used his talents of writer and polemicist as an antidote to the worst of the new order – offered up a striking image of post-war equilibrium. Each complemented the other in some way, even when they were antagonistic. What ensued was a Levantine compromise, but one, also, destined to shatter amid the false expectation of indefinite steadiness. The greatest irony of all was that the four died as their ambitions were either about to be fulfilled, or had been.

The face of post-war Lebanon

To describe what Rafik Hariri meant for Lebanon after 1990 has been done ad nauseam. In all respects he embodied the energy of reconstruction after the conflict, was the indispensable agent of economic confidence, and, through his death, showed he had the power to play a post-mortem trick on a Syrian regime that had for years used him to advance its interests, while also mistrusting his every move. What made Hariri dangerous was that unlike his foes, he had a striking vision for Lebanon. It was flawed, hubristic, narrow, elitist, unaccountable, and, for all of those reasons, helped generate the crippling debt Lebanon faces today. But a vision there was, and it had a place in the modern world, so unlike the cheerless substitute offered by Syria and Hariri’s foes, where the choice roles were left to intelligence officers, and where the ambient philosophy was essentially the same as practiced by organized crime rings.

Orbiting Hariri

Hariri was the axis of the system in which Fuleihan, Kanaan and Kassir navigated. While Fuleihan was so closely tied to the late prime minister that drawing a boundary between the two seems almost absurd, he was also something distinct: an embodiment of the best that Hariri had managed to attract in the early 1990s: the 30-something university graduate, preferably with a degree from a foreign institution, devoted to the art of making money, and crafted in the best ateliers of urban mobility in London, Paris, or New York. Beirut was awash with such figures in the immediate post-war period (it still is), and while they were naturally drawn to a prime minister who offered them status, they were also often the antithesis of what Hariri himself had been.

Like many a returning Lebanese in those years, Fuleihan was a man of theory, hungering for action, and to achieve that objective he needed to hitch his fortunes to a man of action like Hariri. Fuleihan’s intelligence ensured he would succeed, but countless others, fighting for the limited number of stools in the Hariri set, were either denied entry, or found themselves banished to a mediocre anteroom, far from the inner circle, moving among the sycophants the prime minister was so good at turning to his advantage, but who were otherwise eminently forgettable.

Samir Kassir’s most memorable encounter with Hariri showed another side of post-war Lebanon, and of Hariri himself. In 2000, Kassir had written a now-famous article criticizing, without naming him, the then-head of the General Security service, Jamil Sayyed, and more generally the role played by the army in Lebanese life. Sayyed responded by threatening Kassir and ordering carloads of agents to pursue him for weeks, relentlessly, at times aggressively. One evening, Hariri asked Kassir and the editor of As-Safir, Joseph Samaha, to join him at a swanky Beirut restaurant. The point was not to feed the pair, however, but to have them follow him home in their car, enclosed within the confines of his motorcade. When the General Security agents tried to follow, Hariri’s guards blocked their path, earning Kassir a momentary reprieve.
Hariri was not the first or last politician who shielded Kassir against arguably the most powerful man in Lebanon. But the incident showed something about both men: for Kassir, free expression and provocation were oxygen, and he was willing to go to the line in defending it, though his pen had often been directed against Hariri. For Hariri, Kassir was more than just an enemy of the security services and men he loathed, he was also an expression of what Hariri, sometimes reluctantly, imagined Lebanon to be. The late prime minister did not like criticism, but he was willing to argue with his critics without dispatching goons to exact retribution; and he anyway preferred co-opting others to threatening them. Kassir was never co-opted, but Hariri never held that against him. Indeed, why should he have?

Free men

Kassir, much like Fuleihan, was part of that exiled Lebanese war-time generation that came home after the fighting stopped. Yet where Kassir was a man boisterously of the left, Fuleihan always seemed more the solid burgher, levitating above ideology. That was the façade: anyone who knew both men could recall how Fuleihan was readily a militant in his days at the American University of Beirut, while Kassir, while never abandoning his leftist roots, steadily became more bourgeois as he kicked into his mid-40s. Sometimes opposites, toward the end objective allies, Fuleihan and Kassir distilled the post-war cosmopolitanism of Beirut, the very same that was overpowered by, and somehow coexisted with, the hard, rural stewardship of the fourth man who died in the past year, Ghazi Kanaan.

In the same way he could acknowledge the importance of a freethinker like Kassir, Hariri could just as pragmatically accept the reality of Syrian hegemony over Lebanon, and work with its top administrators. Of all the strange relationships in post-war Lebanon, the bond that existed between Hariri and Kanaan was surely the oddest. Whatever brought together the businessman and the intelligence agent, the visionary and the anti-visionary, the natural co-opter and the unambiguous enforcer?

Many things, in fact: their shared appetite for power, their instinctive grasp of how best to achieve their mutual interests, their successes as men of action, and their dislike of abstraction. At play between Hariri and Kanaan were near perfect market forces, as both regularly resolved their differences by finding an equilibrium between what both were after. Kanaan ran Lebanon like a country estate, and Hariri, technically the lord of the manor, accepted him as the foreman he could not fire. The prime minister’s critics pointed to this as proof that he was an essential prop in the Syrian order; Hariri’s defenders argued that, under the circumstances, smooth collaboration with Kanaan was far better than a confrontation the Lebanese could not win. Perhaps, though one must measure the implications of Hariri’s policy: it did at times let him do what he wanted, but by allowing Syrian interference in every aspect of decision-making, it also institutionalized Lebanon’s sense of dependency. Paradoxically, as many a journalist would admit, Kanaan was little concerned with the excesses of a free Lebanese media. It was revealing that Kassir’s problems were primarily with the post-1998 order set up by President Emile Lahoud. Kanaan rarely directed threats against journalists; Kassir’s difficulties were provoked by the Lebanese over whom Kanaan presided. It was his misfortune to pay the price for the desire of Lebanese security officials to prove themselves to their Syrian superiors. Yet how ironic that before Hariri’s murder, it was much easier to mock the Syrians than it was to attack Lahoud. Syrian rule allowed this latitude to the Lebanese media, and those like Kassir took advantage of this. What he did not realize – his own killing being the warning – was that once the Syrians withdrew, the margin for such expression would disappear.

Staying on good terms with Syria

In understanding Hariri’s relations with Syria, it is important to grasp that he was no revolutionary. A conservative businessman, he preferred stability to the potentially destructive unpredictability that a break with Syria could have led to. Hariri’s ambition at the end was not, as the hagiographists have written, to take Lebanon out of Syria’s orbit; it was to widen his own margin of maneuver inside that orbit. In the weeks before his death, Hariri had made clear to the Syrians he would not take on his electoral lists the more egregious of their supporters, as he had in the past – in effect announcing that he planned to make the parliamentary elections a real contest. But at best, he and other opposition candidates hoped to win around 50 or so seats. This was no coup against Syria; it was an effort to re-impose the equilibrium that Hariri had put to good use in the days before Lahoud and Rustom Ghazali replaced Elias Hrawi and Ghazi Kanaan.

What Hariri didn’t grasp was that, for his enemies, this would anyway be misunderstood as a bid to overturn the Syrian order. They feared Hariri’s triumph because he would have easily won the round. Instead, he got too close to the sun, and paid the ultimate price. Yet it was not so much the game that was too big for Hariri; it was Hariri who unwittingly proved too big for the game. For a supremely self-assured man, this descent into momentary modesty proofed fatal, as it did for Fuleihan.

If we are to believe what we hear about Kanaan, in his final days he was unhappy that everything he had built up in Lebanon had collapsed. It’s difficult to imagine a hardy survivor of the Baathist order devoting any time to nostalgia. It’s equally difficult to lend credence to official Syrian reports that Kanaan killed himself in response to a hostile campaign in the Lebanese media. No such campaign was waged, and Kanaan was not someone to let words get him down. In fact, if anything was likely to have killed him, or caused him to kill himself, it was that he posed a mortal threat to the worried Syrian regime he served. His adeptness highlighted its incompetence. At the threshold of his crowning moment, when he could have for the first time imagined exercising absolute power, Kanaan may have fallen victim to his prospective success.

As for Kassir, he was on a cloud after the Syrian withdrawal in April. On the eve of his death he was described as being his usual confident self when discussing political changes. He was very far away from imagining that his murder was already in the final stages of preparation. Kassir had won and his years of effort had paid off. Afterwards, it was clear that his was the accomplishment not of money or power, but of ideas. In being the first to die after Syria’s pullout, Kassir proved how essential his weapon was in destabilizing the enemies of free expression.

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Real Estate

BCD property prices stay on the rise

by Peter Grimsditch
written by Peter Grimsditch

Despite the political turmoil of 2005, Lebanon’s real estate sector saw activity and prices remain relatively stable. Solidere sold more land than ever before and both Gulf Arabs and Lebanese nationals continued to invest in hot properties. The Beirut Central District remained (and still remains) the axis around which everything else revolves, and experts predict the short term can only get better.

According to the Lebanese Order of Architects and Engineers, the number of construction permits and overall construction experienced a dip compared to 2004 levels. By November 1, 2005, 9482 permits had been granted for a total construction area of 5,839,354m2, while for the whole of 2004, 11,258 permits were granted for a total area of 7,719,348m2.

About half of all permits were issued in Mount Lebanon (4,657), followed by south Lebanon (1888), Nabatiyeh (930), Beirut (913), the Bekaa (799), and the north (295). In terms of space in square meters, Mount Lebanon led the way (3,116,845m2), followed by Beirut (968,601m2), south Lebanon (648,742m2), the north (422,876m2), the Bekaa (375,687m2) and Nabatiyeh (297,603m2).

All things considered, Solidere performed remarkably well in 2005. While much of Beirut and Lebanon appeared to adopt a wait-and-see attitude, Solidere sold some 300,000m2 of land in the downtown, more than ever before. The price per square meter of built up area (BUA) in the Beirut Central District (BCD) increased from some $1,000 in 2000 to $1,200 last year and some $1,400 today. The price is even higher along the seafront, where hardly a vacant plot of land remains. An equally luxurious fourth complex, as well as a handful of luxury hotels (including the Hyatt and Hilton) will, next year join the high-end residential Platinum, Beirut and Marina Towers. Worth some $1.5 billion in investments, the area overlooking the marina has already been dubbed Beirut’s “Goldern Strip.” Investors who wish to develop along the downtown seafront will have to wait until 2007, for the completion of the land reclamation project known as Solidere II. However, assuming that the political and economic situation in Lebanon remains stable, they will have to reckon with m2 of BUA.

Solidere cleans up

Solidere declared over the first nine months of 2005, a profit of $51.1 million, while its increased liquidity allowed the company to reduce debts from $234 million by the end of 2004, to $130 million by the end of 2005. Shareholders were able to cash a 32% profit per share, compared to a 2% profit over the same period last year. The share price rose to $14 at the end of 2005, while experts, some say rather optimistically, predict shares to hit $20 in the near future.

According to a study by Ramco Real Estate Advisers, some 4.5 million square meters have been bought by Gulf Arabs since 2001, which represents a total of 270 transactions at an average of 17,000m2 each. About 900,000m2 were sold in 2005, which illustrates the fact that Arab investors so far remain positive about the future of Lebanon. For the first time ever, Kuwaiti nationals bought more land than Saudis.

The sale of land is not only meant for the construction of towering residential projects and hotels, but also smaller luxury villas, roughly within the geographical triangle of Beirut, Bhamdoun and Faqra. Due to the increasing anti-Muslim climate in Europe, Lebanon’s winter capitals of Faraya and Faqra witnessed an increased construction of chalets, villas and even a palace, as Arab nationals rather ski there, than in Gstaad.

Arab nationals remain among the main buyers of high-end real estate in Lebanon, yet it seems Lebanese expatriates increasingly buy and invest, especially since the retreat of the Syrian army last April. The high-end seafront residential properties are predominantly bought by Gulf Arabs, (60% to 70%), while more inland, in areas such as Saifi and Wadi Abou Jamil, about 70% of clients are Lebanese. And sales are booming. Many apartments are sold even before the foundations are laid. Marina Towers and Park View claim to have sold all their apartments, while Beirut Tower claims to have 80% sold and Garden View, 60%.

Looking elsewhere

While the BCD area remains the natural center of gravity for Lebanese real estate, other major investments continued to take place along the coast, in Ain Mreisseh, Raouche, Ramlet el Baida and at the Corniche. Also, several major developments saw the light in the narrow strip between downtown Beirut and Ashrafieh, most notably the Sursock Towers, the landmark high-rise building with 500m2 of luxury apartments at Tabaris, designed by Pierre Khoury Architects.
The ongoing gentrification of Beirut with the downtown area as its center continues in other areas beyond Ashrafieh, such as Zoqat al Blatt, Kantari and the upper end of Zoqat al Blatt, where investors have bought large apartment blocks. Outside Beirut, no major developments have taken place, with the exception of Yarzeh, Baabda and to a lesser extent Hazmieh and Naccache.

Following the success of the 37,000m2 ABC mall in Ashrafieh in 2004, 2005 saw the opening of the giant City Mall at Dora and the smaller Metropolitan Mall in Sin el Fil. The City Mall measures no less than 200,000m2, of which 75,000m2 are meant for retail, including a hypermarket and department store. The Metropolitan Mall, part of the Habtoor group, offers another 14,000m2 of retail space on the market. It remains to be seen how both will perform, especially the latter in the largely untested Sin el Fil.

After a six-year delay due to political bickering, 2005 also witnessed the go ahead for the $120 million Souqs project in the BCD. Due to be completed by 2007, the Souqs will offer another 60,000m2 of retail space on the market. While the rent in ABC and City Mall lies at around $800m2, the price per square meter in the Souqs is expected to be around $1,000.

Verdun will soon witness another retail development with the announcement that the V5 shopping mall will be open for business in 2008, adding a further 50,000m2 of retail and leisure space when it is completed (see interview with Horizon CEO Abdul Hafiz Mansour on page 180). While there is a widespread consensus among project developers and real estate experts that Lebanon does not yet offer enough retail space per capita, it remains to be seen if malls are the answer and if all available retail space can be made profitable. One thing is certain, with the increased competition, especially after 2007 to 2008, rents in certain areas and malls will come down.

Office works

The market for office space remains Lebanon’s least significant. Following the success of office buildings such as the Nahar building and Atrium, a few new state-of-the-art office buildings have been nearly completed in the BCD, including Two Park Avenue. Prices are hitting $300m2 per year and there is demand for modern buildings. The same cannot be said about first generation offices built by Solidere in the heart of the city. Occupancy rates are at about 65%, due to a combination of factors, most notably their small size and limited parking space. Rents there are much lower at some $150m2 to $250m2. Rents in Hamra or Ras Beirut too are much lower starting at $50m2 going up to $175m2. Popular among business and embassies is also Rue Charles Malek between Tabaris and the improving Sin el Fil.

The new Monot?

While six years ago you could barely get a coffee in Gemaizeh, today people jam the streets especially on the weekend to visit the dozens of café’s, clubs and restaurants offering anything from Cuban cocktails to sushi. While Gemaizeh has seen rents triple – hitting $500m2 per year – Rue Monot, which held sway for much of the previous eight years has seen prices tumble from $500m2 per year to some $250m2 to $300m2 per year. With the increased popularity of the area however, problems with noise and parking have increased and the character of the area has changed from slightly alternative to more and more mainstream. Some say the first generation bar owners and clientele are already looking elsewhere. The next cool area? The word on the street is that the savvy operators will move to Hamra with its flat, pedestrian sidewalks. Watch this space.

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Real Estate

A positive wrap up for real estate in 2005

by Executive Staff
written by Executive Staff

Vincent Najarian

General manager of C.A.R.E. real estate consultants

E The real estate market, especially the high-end residential market, has appeared to ride out the crisis of 2005. Can you explain this and what is your forecast for 2006?

“We remained positive throughout 2005, and are very upbeat about 2006. The signs are good. Only one week after the death of [former premier Rafik] Hariri we bought two major plots of land for some of our clients, which brings the total number of projects we manage and promote in downtown Beirut to 17. What’s more, Solidere booked record sales this year and saw its price per share increase to $14. I think there are several reasons why Beirut remained attractive for investors. First of all, the risk factor these days is equal in a lot of places. Just look at what happened in London and more recently in Amman. Or take Riyadh, which with its many checkpoints almost looks like Beirut in the 1970s. Secondly, ever since 9/11, our Arab clientele feels less and less at ease in the USA and Europe, a sentiment which has only grown worse with the increasingly anti-Arab, anti-Muslim climate in Europe. Look at the Paris riots recently. People are just not comfortable wearing a scarf or going to the mosque, which in Beirut is of course no problem whatsoever. Thirdly, with the high oil price there is a lot of cash in the region, which is increasingly invested in Arab countries, rather than in the USA or Europe. Finally, other than Europe, Lebanon has always been a service oriented industry, in which Arabic is the language. One should note however, that the money flowing into Lebanon is but peanuts compared to what is currently invested in the Gulf, especially in Dubai. The recently signed contract to construct Palm Island, which is one out of many, is worth about $4 billion. Yet, in my opinion, Dubai is not really a competitor to Beirut. Apart from the high-end seafront developments, such as the islands that are sold to a highly affluent international clientele, 70% of the towers being constructed on the coast are actually meant for a Pakistani/ Indian clientele. Believe me, it is mainly an Indian dream to own a house in Dubai. Most Arabs see Dubai as a weekend destination, a stopover, not as a place to settle down. For that, they would rather come to Beirut.”

Rachad Dernaika

CEO of RED for property development

E How do you see the difference between the high-end real estate developments in Dubai and Beirut? Is Beirut the next Dubai?

“Dubai has experienced an unprecedented volume of towers being built in the last several years and it’s anticipated that it will continue to do so at the same pace for the foreseeable future. As long as demand surpasses supply, Dubai knows theoretically no limit in the number of towers it can build, due to the simple fact that Dubai has ample land. Beirut on the other hand has limited land space and as such will never be able to supply an abundant number of high rise buildings.

Therefore, once the political situation in Lebanon stabilizes, this limited availability of land should drive all real estate related prices quite high up, especially seeing the increased demand and limited supply. Even during the past turbulent year, we have continued to see an aggressive interest in real estate, both in plots of land and high-end finished products. This, we believe, is due to the long term confidence in the future of the country. What’s more, the rare readily available high-end apartments coupled with the fact that such products take five or six years to materialize, will be another contributing factor to driving prices higher up in the near future. From a price point of view, we see Beirut real estate booming like in Singapore or Tokyo, rather than Beirut.”

 

Raja Makarem

General manager of Ramco Real Estate Advisers

E What was your overall impression of 2005?

“Following the death of Hariri, it was as if people held their breath for a moment and waited for things to come. Consequently, the sector experienced a brief lull. However, the situation went back to normal remarkably quickly, while prices never collapsed. Certainly after the withdrawal of Syria, the mood was extremely upbeat. Not only did Arab nationals continue to invest, but also, and increasingly so, members from the Lebanese Diaspora. More or less the same developments took place after that awful speech by [Syrian President] Bashar al-Assad last November. For a moment, I was shocked and I thought this is going to be a big blow to the sector, but the very next day I signed two major contracts for my clients. The bulk of the business, both in terms of numbers of transactions and value, was situated in and around Beirut. I’d say about 90%. In fact, areas outside Beirut, such as Aley, and Bhamdoun, experienced a slight stagnation. So far, Saudi and Emirati nationals were always the most active on the Lebanese market, but this year for the first time Kuwaitis bought more, some 225,000m2 out of a total of 900,000 m2 in 2005. The general consensus in Lebanon and abroad seems to be that things will only get better in 2006 and in the near future.”

Bernard Khoury

Architect

E Seeing the construction frenzy in Beirut in recent years, what is your opinion about the state of architecture in Lebanon today?

“Beirut is of course a very ugly city, however interesting it may be in its complexity. One interesting aspect is that it’s an almost entirely privately developed city. There is hardly any state intervention. We have a very thick and complex building code, yet one which only restricts you not to construct more than you are allowed and which lacks any vision of how the city should look like. In that sense, Lebanese developers and architects bear a great responsibility and it is about time they take it, for we have examples of great architecture from the 1920s until the 1980s, but the last 25 years have been catastrophic.

“Architecture should be an intelligent response to a certain urban complexity and it should be attractive, attractive, attractive. It seems however, most architects prefer not to think, but just apply the recipe. They seem stuck in postmodernism, which was thrown overboard all over the world except here, and so all we see is the typical straight-lined high rise. I’m convinced that the conventional construction concepts most developers use will not last. The future belongs to those who develop concepts more adequate to the times we live in. If someone buys a house, you have to give him a dream, as it’s the investment of a lifetime. And I want to stress that this is not incompatible with financial success, on the contrary. Great designs sell. It is a challenge for developers and architects to come up with daring solutions, within technical, financial and legal limitations. Take balconies. The law allows you to spend 20% of the total space on balconies and yet all we see are these tiny extensions, which are essentially just there to collect dust. But this is not Alaska or Dubai. This is the Mediterranean. We can live outside nine months a year, so why not work with large open staircases and balconies?

“In downtown, Solidere has set its own standards, which in itself is a good thing. However, to me, the result is rather disappointing. It’s all beige and yellow, with one red disaster in the middle called “Caracalla.” Now, Solidere claims to only work with internationally renowned architects, but that’s only partly true. Firstly, they are hardly renowned and secondly, they only sign for the concept, after which local people take over. So, the result is hardly their signature. Take Ricardo Bofil. Pronounce his name anywhere in Europe and you get slapped in the face. He is the Richard Kleiderman of modern architecture. Unfortunately people here think that’s the same as being Amadeus Mozart.”

Michael Dunn

Chairman, Michael Dunn & Co.

E “Seeing the many shopping malls that have been built in recent years, do you think we have reached the limit or is there still room for growth? And what will be the consequence for a traditional high street such as Hamra?

“Given political and economic stability, and a further increase from 2004 tourist arrivals, I think there is still room for more well constructed and well situated shopping malls. Compared to international standards, Lebanon still does not have enough available retail space per square meter, per inhabitant. I particularly have a lot of respect for the ABC mall, and I think the Souqs will do well. Even though so far only the south wing will be constructed, it will definitely be the finishing touch to downtown Beirut as a shopping destination. A shopping area such as Hamra or Verdun for that matter, can compete and complement the newly constructed shopping malls. They will just have to make themselves more attractive for visitors. In Hamra, that means first and foremost that the municipality gets its act together and does something about the horrendous traffic and parking problems. As long as those are not solved, Hamra will never pick up. It seems to me however, that no one cares and that they think that everything will get back to the good old glory days by itself. I truly do not understand that.”

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Society

Karim Fadel- Director, ABC Group

by Executive Staff
written by Executive Staff

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Society

Reeling in customers in good times and bad

by Marianne Stigset
written by Marianne Stigset

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

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

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

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

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

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

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

Filling the void

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

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

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

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

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

A rapidly evolving sector

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

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

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

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

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

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

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

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

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

Lebanon’s potential as a retail hub

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

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

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

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

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

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Society

Highs and lows in retail in 2005

by Executive Staff
written by Executive Staff

Michel Abchee

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

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

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

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

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

Khalil Achkar

Country manager of Global Refund Lebanon

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

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

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

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

Walid Saleh

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

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

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

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

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

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

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

Ronald Khabbaz

Vice-president of Khabbaz stores

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

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

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

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

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

Nagy Hneine

General manager at Bassoul Heneine (BMW)

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

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

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

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

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

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Economics & Policy

Mohamed shabib – General manager, MTC Touch

by Executive Staff
written by Executive Staff

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

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

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

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

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

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

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

E And how will that affect MTC?

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

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

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

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

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

E It was just bad luck then?

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

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

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

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

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

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

Absolutely, Lebanon is very important to us.

E What value would you put on those licenses today?

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

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

I really can’t comment.

E Does MTC have ambitions in the internet market?

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

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

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

E When will it happen in Lebanon?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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