Economics & Policy

Telecom reforms get jammed in the system

by Tarek Zein
written by Tarek Zein

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


No progress

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

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

Calling on the courts

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

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

Lebanese telcos

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

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

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

The rise of Investcom

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

Looking ahead

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

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

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

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Looking Back

A year of setbacks for syria

by Andrew Tabler
written by Andrew Tabler

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

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

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

Unexpected developments

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

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

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

The big bang

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

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

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

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

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

Unrealistic expectations

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

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

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

The fine print

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

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

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Economics & Policy

Telecom sector hopes to pick up in 2006

by Executive Staff
written by Executive Staff

Kamal Shehadi

Managing director of Connexus Consulting

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

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

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

Tony Mouawad

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

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

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

Zakie Karam

Commercial manager at Inconet Data Management (IDM)

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

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

Kamal Shehadi

Managing director of Connexus Consulting

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

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

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Industry

Fadi Abboud: Lebanese association of industrialists

by Executive Staff
written by Executive Staff

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

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

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

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

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

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

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

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

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

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

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

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

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

E Has industry benefited from European Union programs?

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

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

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

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

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

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

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

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

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

E Are industry statistics accurate?

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

E What has actually changed since Syria left?

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

E How much is that corruption costing?

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

E Do companies create a special budget for bribes?

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

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

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

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Society

Joseph Sarkis- Minister of tourism

by Executive Staff
written by Executive Staff

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

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

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

E How have you promoted Lebanon in this difficult period?

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

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

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

E Was there any other good news?

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

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

E How can Lebanon improve its image abroad?

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

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

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

E Are security measures having an impact on tourism?

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

E Did the ministry’s budget grow this year?

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

E Can the private sector help?

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

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

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

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

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

E And to promote it?

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

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

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

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

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

E Is Lebanon perceived as an expensive destination?

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

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

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

E Looking ahead, are you prioritizing any particular niches?

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

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

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

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Real estate

Abdul Hafiz Mansour- CEO, Horizon Management

by Executive Staff
written by Executive Staff

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

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

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

E What are the investments worth?

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

E Is Horizon Management solely responsible for these projects?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

E So, you remain positive about the future?

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

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Society

Getting tourism off the ground

by Executive Staff
written by Executive Staff

Joumana Azzi

Branch manager at Wild Discovery Travel & Tourism

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

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

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

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

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

Philippe Skaff

CEO (MENA) of Grey Worldwide

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

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

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

Ramzi Assily

Resident manager, Movenpick Hotel and Resort, Beirut

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

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

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

Pierre Achkar

President of the Lebanese Hotel Association

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

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

Khalil Malaeb

CEO of K&M Health Tourism International

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

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

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Banking

Freddy Baz : Chief strategic advisor, Banque AUDI

by Executive Staff
written by Executive Staff

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

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

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

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

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

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

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

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

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

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

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

E Well you are ranked first in other areas.

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

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

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

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

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

E Including Syria?

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

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

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

E How soon?

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

E Are there other areas Audi is looking at?

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

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

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

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

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

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

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

E To be more robust regionally?

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

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Economy

Time is ripe for tough reform

by Nicolas Photiades
written by Nicolas Photiades

The assassination of former prime minister Rafik Hariri on Valentine’s Day 2005, highlighted Lebanon’s economic vulnerability to sudden political and security events, as reflected in the significant slow down in economic activity; the massive decrease in GDP growth; and the rise of the proportion of public debt to government revenues. In the last quarter of 2005, after Syria’s withdrawal of its troops, relatively successful legislative elections and the naming of a “national unity” government – the country’s economy was still characterized by an extremely high level of public debt, wide fiscal and external current account deficits, a narrow economic base, and a fragile, arguably explosive, political environment.

At the end of 2004, the international community, as well as all the Lebanese were hopeful that a steady increase in government revenues and a substantial growth in the GDP would gradually reduce the debt burden and help the country outgrow its debt problem with new- found tourism revenues and foreign investment mainly from the Gulf. However, and perhaps with a degree of hindsight, those reading the runes should have predicted the unfolding of a different scenario, one based on the fallout of UN Resolution 1559, the extension of President Emile Lahoud’s mandate and a tightening of Syrian authority in the country.

Growth figures disappoint

Real GDP growth fell from a very positive 5% in 2004, a level unseen since the early 1990s, to an expected 1% at best for 2005 as the country’s GDP of the last few years (an average of 2% to 3% for 2001, 2002 and 2003, and 5% in 2004), was almost wiped out. This yo-yoing of growth figures should constitute a message to the Lebanese government that it is now time to genuinely tackle the debt and the economy. For the moment, the debt burden is still one of the largest among rated countries, with the debt to GDP ratio being estimated to exceed 170% by the end of 2005, and interest payments consuming around 55% of fiscal revenues (in both 2004 and 2005). The country’s overall fiscal deficit has remained very high at almost 10% at the end of 2004, and 11.7% estimated at the end of 2005, despite significant efforts to improve the primary fiscal balance of the last decade.

Moreover, the country’s economic base is still narrow and government revenues undiversified. The country still lacks primary resources and its export base is limited, with economic activity concentrated in services, namely banking, trade and tourism. The activities in the service sector account for around 60% of GDP, reflecting a high level of concentration on a handful of economic activities. This concentration coupled with a high dollarization of the economy and bank deposits increase Lebanon’s vulnerability to political and regional shocks. The current account deficit (or the current account balance to GDP ratio), after a period of decline between 2001 and 2004 (especially after Paris II), moved up again to an estimated 19.7% for 2005, compared to 13.1% in 2002, 12.4% in 2003 and 15.0% in 2004, approaching 2001 levels of 20.4%, which were then considered disastrous and a first sign of a country collapse.

More pressure from politics

The political environment remains precarious, with tension with Syria growing as the days pass by. The encouraging “free” elections of June 2005 produced a government of national unity, which is still unproven as regards to urgent economic reforms, although the resilience of this government is proving solid so far, as disputes and tensions between pro and anti-Syrian political factions take place on a daily basis. The government is keen to carry out long-overdue economic and administrative reforms, including privatization, as well as start planning for a debt restructuring program, which will be based on a successful donor conference planned in Beirut towards the end of 2005. However, it is clear that the deterioration of Lebanese/Syrian relations, which have been further exacerbated by the recent UN resolutions forcing Syria to cooperate in the investigation of Hariri’s assassination, should hamper the government’s efforts to initiate such reforms for the time being.

There is also the more delicate internal problem of Hizbullah, which still refuses to give up its arsenal of weapons and integrate into the Lebanese domestic political set up, in line with both the Taif Accord and UN Resolution 1559. This multiplies Lebanon’s political problems and opens two fronts, one external with both Syria and Israel and one domestic with the Hizbollah-Amal coalition. Although it is clear that such problems emanate from decades of civil conflict and its consequences, the country is still facing significant political problems that have been affecting the economy substantially during 2005. It would therefore be worth noting that the longer these problems persist, the more likely economic recovery will become unreachable.

Tempering risk

All these risks remain more or less mitigated by a high level of external liquidity, a large and relatively sophisticated banking sector, and resilient confidence among the Lebanese, which has been reflected in a continuously strong and stable deposit base within the country’s banking sector. Another positive factor is the return of Gulf Arab tourism towards the end of the summer and the resumption of Gulf investment in the country, despite the turbulent political scene.

The high liquidity, estimated to stand at around $9 billion in terms of official foreign currency reserves and $11.4 billion in terms of commercial bank foreign assets reflected the country’s prudent approach within an unstable domestic and regional political context. The foreign currency reserves approached $15 billion prior to Hariri’s assassination, and were instrumental in restoring confidence among depositors of the banking sector and in preventing a devaluation of the Lebanese pound. The current official foreign currency reserves cover more that eight months of imports and exclude around $1.8 billion in Lebanese government eurobonds held by the central bank, which are not considered to be liquid. Although foreign currency reserves declined in the aftermath of Hariri’s death, they partially recovered due to the issuance of several government eurobonds, an easing in the dollarization rate due to regained confidence, and to a resurgence of non-resident deposits in Lebanese commercial banks.

Strong deposits

Another strong sign of liquidity is the strength and stability of commercial bank deposits, which amounted to a little less than $60 billion in October 2005. The country’s banking sector has been capable of solidly financing itself through customer deposits and has not had to rely on market funds, which are more costly. Such customer deposits have been mainly used in the past decade by the banks to subscribe to government debt securities (including Treasury Bills in Lebanese pounds) and have provided the government with a source of steady financing. These customer deposits have historically shown a high degree of resilience to external political shocks and have been supported by a committed Lebanese Diaspora. On that note, Lebanon is traditionally regarded as one of the most important countries in the world in terms of remittances, which is a mitigating factor against potential risks.

Although the economic situation appears to be at risk in the short term due to internal and external political problems, the economic upside in the long term could be significant. Indeed, were the government to succeed in sorting out the political mess and resuming an efficient economic reform program that would include serious privatization and a long-term debt restructuring program, then economic prosperity would be regarded as a real possibility. For the moment, the country’s rating is still one of the lowest in the world at B- (S&P) and B3 (Moody’s), with the government required to undertake a massive effort in reducing debt and improving government finances, as well as for the political environment to ease considerably, if this rating is to reach more acceptable levels.

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Looking Back

Winning ground in the middle east

by Lee Smith
written by Lee Smith

It is perhaps an index of globalization’s totalizing embrace that foreign policy communities around the world have been chuckling over the same one-liner all year long: The war in Iraq is over and Iran has won. Well, there’s no doubt that the Islamic Republic of Iran’s (IRI) long and assiduous cultivation of Shiite networks in Iraq reaped dividends once Iraq’s former president Saddam Hussein, the IRI’s most serious threat, was deposed from power. But in truth, nearly everyone with an interest in the region has a lot to be thankful for this New Year’s Eve. But given the disappointments, betrayals and miseries that have befallen the Middle East over the last century, it’s not clear that even younger Arabs are capable of seeing events except as a variation on catastrophe. Or, to put it another way, if the Israelis are still around, we must still be living in the shadow of the nakba.

The fact is that this really was one of the most momentous years in the history of the modern Middle East and most of the news for residents of the region was good, very good. The only clear losers were the Syrian and Iraqi Baath parties, the US taxpayer and the liberal interventionist wing of the Republican Party, otherwise known as the “neo-cons.” Iraq itself, which is in many ways now Ground Zero of the Middle East, is too tough to call. Obviously, ordinary Iraqi citizens are paying with their lives because, one, the US cannot provide security in regions that are not already secure; and two, some Iraqis and their jihadi cohorts take great pleasure in killing other Iraqis and will keep trying to do so come hell or high water. And yet, there are elections, there is the struggle to build democratic institutions, like a constitution, and there are the Iraqi people themselves, many of whom disagree with their neighbors that Iraq was better off under Saddam Hussein. So, it’s going to be many years before anyone knows whether Iraq was a winner or loser this year, and it’s going to be Iraqis who make the call.

As for the rest of the region’s major players, Executive braved the ever-capricious winds of Middle Eastern politics to bring you our year-end round up in the hope that things won’t change too much before we go to press.

Lebanon: a winner (triple plus)

In a region where the word “martyr” is perhaps a little worse for wear, the assassination of former prime minister Rafik Hariri set off a chain of events that effectively liberated his country, and set Lebanon back on the democratic course it was derailed from for thirty years of war and occupation. But the undisputed heroes of the revolution are the Lebanese people, all of them, including those who never took to the streets and those who some believe stood on the wrong side of the street. Pluralism is no doubt a harder ideal than national unity, but it is also sterner building material. As for all the post-March 14 disenchantment, much of it is legitimate – for instance, is there no room in Lebanese politics for the youth who led the uprising outside of the student cadres of General Michel Aoun’s Free Patriotic Movement? Still, it’s important to put this remarkable year into context.

Things are changing so quickly; most local skeptics haven’t had the time to figure out what’s going on. Last year the parliament wasted its time ruminating over Arabism and other ideological niceties; this year the country’s elected officials took up real matters, including the economy, election laws and security. It is the latter that has been on the minds of most Lebanese, especially since the wave of violence left many dead in its wake and did serious damage to the vital leisure and tourism sector. But insofar as the purpose of that terrorism was to set the nation at arms again against itself again, it failed and the Lebanese succeeded. The UN Mehlis report has delayed action on several important issues – especially national security and international investment, both of them tied to disarming the Palestinians and Hizbullah. Hizbullah had a middling year. It became part of the government – except apparently for those uncomfortable moments when Damascus insulted the government’s prime minister – and may indeed be transitioning from armed gang to political party. Premier Fouad Seniora has the attention of a concerned international community but lacks the support of a strong Maronite partner. If that sectarian power struggle sounds to many like politics as usual in Lebanon, it’s not, or at least it hasn’t been for thirty years. This is the real thing, and it was earned.

Saudi Arabia and the Gulf: winners
(double plus)

One of the Bush administration’s more reasonable, and less noted goals in invading Iraq was to boost that country’s oil-production, a potential capacity, it was hoped, that would give the United States some leverage with which to pressure their long-time allies in Saudi Arabia. You see, over the last many years, the American taxpayer has dished out many billions of dollars to float the US Navy’s Fifth Fleet, which protects the free flow of Gulf oil, which in turn ensures that the Saud family stays rich, fat and happy – and in power. But in the aftermath of 9/11 it became apparent that many in the Saudi elite believed those same US citizens were infidel scum who deserved to die. So, the White House wondered how it could get their nice friends to stop saying such bad things in Saudi schools, mosques and the media. They hit upon the idea that if only they could get more oil to market maybe that would help bring the Saudis to heel. But of course, that would’ve meant that the US actually had to protect Iraqi pipelines, and in Iraq the US is mostly only capable of defending Baghdad’s Green Zone.

Thus, the Saudis’ position as keystone of the global economy went unchallenged, and the Kingdom had a bumper year as oil surged to a whopping $70 a barrel. The Bush administration effectively declared major operations against Saudi Arabia over when US Vice President Dick Cheney rolled out the red carpet for the royal family’s brand new Lebanon hand. Saad Hariri may turn out to be a very good leader of his country someday, but it was his Gulf friends who got a young businessman with no political credentials or experience an audience in Texas. This is how a superpower tells a petro-monarchy: “We are not worthy, we are not worthy … ” And now all Washington can do is hope that with King Abdullah finally and firmly in charge, he’s serious about taking on his own domestic terrorists and that he won’t do it by letting them blow off steam in Iraq or Manhattan.

Other Gulf states are investing in a future where oil is not king. Construction, leisure and tourism projects have made Qatar the fastest-growing state in the Gulf, or the new Dubai, but that’s just until Sheikh Muhammad bin Rashid al Maktoum finishes Dubailand, or Dubai’s new Dubai, an enormous theme park that once completed will double the size of the existing Emirate. Look for the Gulf to keep thriving.

France: winner (double plus)

What a bonne annee for La France, the year it became relevant again in the Middle East! Without a large economy or formidable military, Paris has had trouble projecting power in the region since it was flushed out of Algeria. Two years ago, the Chirac government made a lot of noise about the US war on Iraq, which may have won it accolades throughout the region but distanced Paris too much from the US to have any impact in it. Then came Syria and Lebanon. For a host of reasons, French President Jacques Chirac was furious with the young Syrian president he’d effectively taken under his wing, and intimated to US President George W. Bush in the summer of 2004, that he had a project they might both profit from. France led the way with UN Resolution 1559 and the US, with troops in neighboring Iraq, served as a goonish enforcer and voila! France was back in the game.

Egypt: winner

A lot of people did well this year in umm ad-dunya: The Muslim Brotherhood surprised even themselves with the large number of seats they gained in parliament, and the ordinary Egyptian voter got a sense of what real political choice might look like, both in the country’s first contested presidential race and then the parliamentary elections. And since it is a law of nature that anytime the people fare ok, the regime loses big, Egyptian President Hosni Mubarak had something of an off-year, which might be expected after 24 other untouchable seasons. Oh sure, the president managed to keep Washington off his back by sending mukhabarat chief Omar Suleiman to consult with the PA on security issues, but at home 88 people died in an attack in Sharm el-Sheikh, and the regime showed little in the way of intelligence by rounding up thousands of Bedouins in response. (Self-help hint to Hosni Bey: It only gets better if you are honest about your issues. Now, say “Al-Qaeda.”) Still, many people, probably the majority of registered voters, really did re-elect Mubarak for a fifth term and would have done so even without his aggressive TV commercials. But all those slickly produced music videos were meant for Western audiences anyway, and the campaign wasn’t really about the Pharaoh but his son Gamal, a Western-educated, reform-minded man of the future. Sound familiar?

Jordan: winner

The Hashemites have enjoyed a tremendous financial boom since the onset of the US occupation of Iraq as real estate prices alone have surged some 30% over the last year. Most of that financing has come from money that left Iraq after the fall of Saddam, a trail that will be more closely watched now after 57 people, mostly Jordanians and Palestinians, died in an attack on three hotels engineered by Iraqi colleagues of Abu Musab al-Zarqawi. King Abdullah II replaced his reform-minded prime minister with a former security chief and the diwan’s new mantra is, “political reform plus security,” which means no reform and no matter how much money you bring to town, you’re going to pay dearly if you mess with Jordanian security.

Iran: winner

Compared to the other players in the region, Iran didn’t do as well as many observers suggest. Yes, it consolidated its influence in Iraq, and like the Gulf states it profited greatly from high oil costs. Also, it has managed so far to run circles around the EU 3 (England, France and Germany) that has been “negotiating” with the IRI over its nuclear program. But those talks have taken a few strange turns over the last year, especially after the election of Iran’s tone-deaf new president. Until President Mahmoud Ahmadinejad advocated the destruction of the US and Israel, even the hawks at the Pentagon had no real military option for Iran. Presumably, that is no longer the case, since American officials started to take “death to America” sloganeering pretty seriously after 9/11. And Ahmadinejad’s re-structuring of his foreign service to better suit Iran’s apparent new policy direction has also put a number of Western officials on edge. So the Iranian issue, relegated to the backstage for the last three years, has now moved to front and center and the curtain is rising. In the next few years look for Iran well south of here on the scorecard.

Israel: Winner

It goes without saying that Israel always stands to gain when Arabs lose – but what about when Arabs lose their illusions? If you’ve missed the news from Iraq, Mr. Zarqawi has put paid to the notion of one glorious Arab nation ranged against the outsider. He’s killing Arabs, mostly from a rather largish Muslim sect known as Shiites. As it turns out then, the Middle East is made up of lots of groups, many of whom, especially the smaller communities, will make alliances with others to advance and protect their interests and their lives. In this context, the Zionist imperialist warmongers to the south look less like outsiders and more like a regional minority that’s done well for itself – like Iraq’s Shiites and Kurds. Wow, those Jews win even when Arabs do too!

Ariel Sharon: winner

The Gaza withdrawal earned him international acclaim, including thawing relations with a number of Muslim and Arab states, like Pakistan, Qatar and the UAE. Now Sharon has left Likud to start his own party, Kadima, or Forward. In the last two elections, it was Arabs who elected the prime minister, but it’s unlikely the PA, Hamas, Islamic Jihad or Hizbullah, will have a very large say this time. Sharon has provided Israelis with plenty of security and even if he wanted to withdraw from the West Bank, and he doesn’t, there is no political will in any of the country to do so.

Palestinians: winner

The Gaza Strip isn’t much, but it’s a place to start – and more to the point, it’s a place where more than half a century’s worth of previous Palestinian leadership has been managed. And now President Mahmoud Abbas is busy trying to cobble together meaningful political institutions while tackling corruption and crime, noble and daunting tasks for any democratically elected leader. He’s got a lot of help from the international community and everyone’s rooting for him – except for his political rival, Hamas. Understandably, Abu Mazen doesn’t want to touch off a civil war, especially one he might not win, but without monopolizing legitimate violence, there will never be a sovereign Palestinian state, not because the US, Israel or the EU won’t allow it, but simply because it won’t be a state. Maybe he is waiting to see how the Seniora government takes away Hizbullah’s arms and gets them fully into the political process.

Syria: loser

Insofar as the goal of any regime is to ensure its continued existence, Syria didn’t do all that bad for an international pariah state. And just when we thought we’d seen the last of Baath party comedy as former Iraqi minister of information Muhammad Said al-Sahaf ran for the hills when US tanks he said didn’t exist were closing in, the Syrians roll out their own investigation into the Hariri assassination. What’s really a gas is that Damascus’ Westernized leader evidently thinks that a German judge goes about his business like a Syrian one. “Yeah, that’s the ticket – Mehlis built his whole case on Hosam Hosam and now he’s got nothing, nothing I tell you! Ha!” It would be really funny if there weren’t so many lives at stake, not that Syria cares as it’s been throwing its insults at its neighbors for several decades now just to keep its own hindquarters dry. Everyone else in the region is furious with the regime, but few wish its demise. Cairo, Riyadh, Amman cannot bear the idea of the Bush administration feeling its oats – What, us next? So, who knows if the family in Damascus will survive, but in the future, God-willing, Syrian high-school students will be hard pressed to believe that at one time their country was run by vicious, buffoonish adolescents.

The US taxpayer: loser

It is a tribute to Middle Eastern hospitality that so many in the region are eager to distinguish between the American people and the policies of their government. Nonetheless, it is useful to remember that government by and for the people means that Americans are their government and are thus endowed with the right to hire and fire their leaders. It’s actually a really good thing, even when voters re-elect a president for a second term, as they did the current inhabitant of the White House. Of course, the many billion dollars the US has spent to give Iraqis a chance to elect their own leaders, is a much smaller percentage of what WW II took out of the US economy, and the military casualties aren’t even as high as civilian deaths on 9/11. But as domestic support for Iraq is waning, the Bush administration has yet to disclose any real new strategy except: Stay the course! Ok, but for how long and what’s the price, in lives and dollars? The real problem is that the one workable solution that doesn’t entail vacating Iraq would demand not less but more from American taxpayers, like higher tariffs, especially on fossil fuels, and most likely a draft to fill the ranks of a military that was not trained for a mission it nonetheless mostly believes in: bringing democracy to Iraq.

The neo-cons: losers

Misunderstood and largely unloved by both those who do and do not understand them, the neo-conservatives are a boutique school of American policymakers, politicians, journalists and intellectuals who have very little in common except their shared belief that US policy in the Middle East over the last 60 years was in error. Given that the attacks on the World Trade Center left thousands of civilians dead in a major US city, they have a point. Once the administration found no WMD in Iraq, the neo-cons were pressed into service – now, the US was in the Middle East to import democracy. As farfetched as that thesis may sound to some, and as mendacious as it may sound to others, without it much of what transpired in the region this year wouldn’t have happened without that idea. For instance, there is a very powerful current in US policymaking circles that still argues that the US needs Syrian help and if that means giving Bashar al-Assad a free hand in Lebanon so be it. The neo-cons won that fight and some others, too. Still, it’s sheer fantasy to imagine that a group of academics and journalists ran the government of the United States while CEO millionaires like George W. Bush, Dick Cheney and Donald Rumsfeld looked on helplessly. No, the neo-cons deserve some credit and as they are not that powerful they’ll take a lot of blame, some if it in Iraq perhaps.

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