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by Executive Contributor
written by Executive Contributor

The Lebanese flag carrier MEA became embroiled in an embarrassing row over monies owed by the state to German construction firm, Walter Bau AG. A scheduled MEA flight from Istanbul to Beirut could not depart because representatives of the German firm had gained a court order impounding the plane to enforce payment of $7 million owed Walter Bau for highway construction contracts from the late 1990s.

The measure drew sharp criticism from MEA chairman Mohammed Hout who was quoted in newspapers as saying that MEA was a private sector company and not party to the dispute. MEA, one airplane short, had to ferry its stranded passengers via Athens back to Beirut.

The conflict between the German company and the Lebanese state appears to date back to 1997, when Walter Bau had been awarded a contract related to the creation of a proposed toll-based superhighway network under a Build-Operate-Transfer scheme. However, the entire project was shelved by the council of ministers, contracts were cancelled and Walter Bau soon after closed its Lebanon representative office.

The company sought recompense not unlike other international companies that claimed to have been wronged in financial dealings with Lebanon, including another German construction concern, Hochtief AG, which demanded compensation for higher costs it incurred in the rehabilitation and expansion of Beirut airport because of delays and design changes.

Walter Bau’s claim to $7 million was affirmed in arbitration and not contested by the Lebanese government, which just somehow did not get around to settling the amounts. It was only after the seizure of the MEA plane that Lebanese officials insisted that payment of the owed amount had already been authorized.  

MEA on its part would seek from Walter Bau yet to be specified compensation for damages caused by the impounding, Hout was quoted in the Beirut press. Interestingly though, the highly discourteous initiative to impound the Lebanese plane in Istanbul had not originated from Walter Bau itself.

Having fallen onto hard times, the once third-largest construction company in Germany had declared insolvency in early 2005. Much of the firm’s assets had been taken over by Austrian construction company, Strabag, while Walter Bau AG was left with debts of 3.3 billion euro owed to about 20,000 lenders and suppliers. The man who had used the bone breaker method to get Lebanon to meet its obligation was the insolvency administrator charged with satisfying the rights of Walter Bau employees and creditors. 

Banks go shopping

Lebanese banks indeed have their eyes peeled for regional buys. Market leader BLOM Bank last month advanced by a great step towards establishing its foothold in Egypt when it found consent for acquiring Misr Romanian Bank, a joint venture bank owned by Egyptian and Romanian financial institutions.

The kick-off in realizing the acquisition was the decision by Egypt’s state-owned Bank Misr to sell its 33.26% stake in Misr Romanian to BLOM Bank early in October. With a declared goal of buying Misr Romanian Bank in its entirety, BLOM reportedly has the right to withdraw from the purchase agreement if it fails to obtain at least 67% of the Egyptian bank’s shares. However, as the Romanian shareholders with their 49% stake in Misr Romanian have signaled their readiness to sell, according to BLOM general manager Saad Azhari, BLOM should be able to see the transaction, estimated at $100 million, through.  

Misr Romanian Bank had assets of $641 million at the end of the first quarter of 2005. While BLOM Bank was carrying out its due diligence for evaluating the bank in September, expansion-minded First Gulf Bank from Abu Dhabi also showed interest in Misr Romanian but later withdrew from the race.

In the meanwhile, Fransabank also seems to have thrown its heart over the fence in cross border growth. The bank announced in late October that it would be a partner in Capital Bank Sudan, a new Islamic banking venture that would start operations in early 2006, with a focus on investment banking. Fransabank, which also is working on expansion into Syria and Algeria, would own 20% of Capital Bank Sudan.

Third bank on a roll during October was Byblos, which opened a month-long subscription period for a massive rights issue that would double the bank’s share capital from $164.8 million to $329.6 million. The issue, which is open only to existing shareholders, aims to enhance Byblos’ position in achieving readiness for Basel II regulations and provide the group with funds for capital injections into various international subsidiaries, including the Algerian bank Al-Rayan, where Byblos was awaiting approval by Algerian authorities for acquiring a stake of 51%.

Beetroot gets stay of execution

Lebanon’s selective agricultural subsidies have little to do with economic policy and more to do with an antiquated view of crucial food sources, and crude political lobbying. Take beetroot for example. In 1959, a Government decree provided for the subsidization of wheat (for bread) and beetroot (for sugar) because the two were perceived as staples.

“Back then, the notion of food security was not the same as it is today,” said the ministry official, who asked not to be named because he requires permission from the Minister of Economy & Trade to talk to journalists. “The decree was designed to ensure that there was always enough bread and sugar.”

In 2001, the Government abruptly stopped the subsidies, which had reached the staggering sum of $40 million a year for 7,000 hectares of beetroot production, in an effort to cut state spending.  

In 2004, following political and social pressure, the Government agreed to subsidize beetroot production, at $3,000 per hectare for one year only. But then this year, the official said, the Government wanted to again discontinue the subsidies but was forced to eventually bow out again to political and social pressure and agreed to subsidize beetroot production from 2005-2007, reducing the total by roughly 30% each year, in a gradual phase-out. Thus, in 2006, instead of paying $3,000 per hectare, the Government will pay only $2,000, the following year $1,000, and the following year nothing at all.

The official noted that some grape growers had been asking for subsidies, but so far to no avail. “It’s not really fair,” said Salim Wardy, owner of wine producers Domaine Wardy.  “But since the Government’s policy is to stop subsidization completely in two to three years, what’s the point of trying to get them to subsidize grapes? Vines take several years to come to full fruition and only reach full production capacity in around six. If there is no long-term Government commitment to subsidies, they are of no interest to anyone.”

“I support subsidies,” noted economist Kamal Hamdan, “but a clear definition of the beneficiaries and eligibility criteria is needed so that the subsidies really do benefit the have-nots. On the ground I doubt this is happening.”

No Tamiflu for bird flu

AUB Professor of Agriculture and bird flu specialist Dr. Elie Barbour has told EXECUTIVE that Lebanon is ill–prepared for a probable outbreak of bird flu, while the director-general of Lebanon’s Ministry of Public Health, Dr. Walid Ammar, has said preparations for a human pandemic are far from perfect. It could cost the government around $10 million dollars in medicals bills. The cost to the economy and human lives would be higher.

“The Lebanese way of handling things is spontaneous,” Barbour said. “They don’t plan ahead of time. The Ministry of Agriculture doesn’t have a system of cooperation with the Ministry of Health or with the Ministry of Interior – so that the Army can play a certain role. The public sector is talking, not working.”

Barbour said a strain of H9 N2 bird flu – not the kind currently making headlines – was discovered in Lebanon last year after coming from China. “We got it here. This means that the wild bird route that passes over Lebanon has all the potential to pass on the very virulent H5 N1 bird flu strain,” he warned. “I think there is a very big chance it will happen.”

If it does, the financial damage to the poultry sector will be enormous.  Poultry sales in Lebanon are already down 50% – despite the fact that there have been no confirmed bird flu cases here. In the event of an outbreak, the cost of culling Lebanon’s roughly 60 million broiler chickens would be about $150 million, he said.

An employee in Lebanon of Roche, distributors of Tamiflu, an anti-viral drug that can treat the flu, said in mid-October that there was no Tamiflu in Lebanon but that an order had been put in and that the drug was expected by the end of October.

Meanwhile, Public Health Ministry Director-General Dr. Walid Ammar, said that although Lebanon was prepared for possible bird-to-human transmission of the virus, the country was not fully prepared for a mutation allowing human-to-human spread.

He said the Government had put in a request for enough medication to cover 10% of the population. “In rich countries they have enough for 20%-25% of the population,” he noted.

Diamonds in the rough

Lebanon’s profitable diamond industry was lent greater credibility recently when the Ministry of Economy and Trade announced its accession to the Kimberley Process Certification Scheme (KPCS), an agreement which controls world trade in rough diamonds.

The KPCS was drawn up in 2002 to prevent conflict diamonds, illegally sold by rebel groups to finance military operations, from entering the legitimate trade. It already imposes strict certification of origin rules on its 45 member countries, which account for 99.8% of global rough diamond production.

Similar import, export and transit regulations now apply to Lebanon’s rough diamond market, and, more importantly, allow it to legally trade rough diamonds with other KPCS countries – something it was previously banned from doing.

“This will raise Lebanon’s international status in the diamond trade,” said Antoine Mghanni, President of the Lebanese Jewellery Syndicate. “It allows us to compete more evenly with Dubai, the only other Arab country to be a KPCS member.”

Although the jewellery industry is Lebanon’s number one export sector, worth some $500m annually, the cutting of rough diamonds is only small-scale. There are currently only a handful of diamond polishers in Lebanon, but the KPCS will allow Lebanese traders, especially those in Antwerp, to start operations in Lebanon.

Yet despite the good news, black clouds hung over Lebanon’s membership.  In early August this year, an NGO called Global Witness complained that Lebanon was importing diamonds from the Republic of Congo (ROC), a country expelled from Kimberley last July for allegedly channeling conflict stones. According to the NGO, Lebanese customs data for February and March showed that $156m of rough diamonds were imported from the ROC. Although no customs official was currently available for comment, the ministry of economy says that the customs data on the Congo imports were overvalued due to a “technical error”, which has now been rectified.

But the affair cast doubt on Lebanon’s credibility. “By trading with a country removed for being in blatant violation of the scheme, Lebanon makes a mockery of the Kimberley Process,” said Corinna Gilfillan of Global Witness.

The hope is that by allowing legal trade with other KPCS countries, such trafficking can be curbed. It now looks as if the local jewellery industry – at least the legitimate one – is set to sparkle some more.

Pirates a go go!

Even by the Middle East’s generally poor standards, Lebanon is notorious for its piracy levels. According to the International Intellectual Property Association (IIPA), the country scores badly on all fronts with an average piracy rate of well over 70%. In Sabra street you pick up a copied film or CD for LL1,000, while in Hamra you enter a shop to choose a pirated computer program game from the catalogue for a mere LL 10,000. According to the IAA, cable piracy is particularly high at a level of over 80%.

However, if it is up to Fadi Makki, Director General at the Ministry of Economy (MoE), the “Beirut Spring” does not just refer to Lebanon’s political arena, but also to an economic clean sweep of the country. During the summer months, the ministry stepped up its efforts to crack down on piracy and counterfeited goods. “In some 50 to 70 raids all over the country,” said Makki, “up to 8,000 products were seized and destroyed.”

CDs, DVDs, computer programs and especially a lot of counterfeited fashion brands, such as Versace shirts and D&G bags were confiscated and destroyed. According to Makki, some 80% of pirated goods are imported, while only 20% is produced locally. “So our main battle lies at the border,” he said.

Sponsored by the international Brands Producers Group (BDG), last May a special telephone hotline, “1739” was introduced, so people can report any suspected forms of piracy. “We have hardly any manpower to perform inspections and raids,” said Makki, “so we rely heavily on incoming calls.”

 According to him, the idea that piracy hurts a country is slowly but surely gaining ground in Lebanon. “Most people argue that Lebanon’s terrible piracy record stands in the way of entering the WTO, which is true,” said Makki. “But there are a number of important reasons why we should fight piracy. It reduces tax revenues, discourages foreign investment, and perhaps most importantly, it is bad for the local industry. As soon as people realize that locally produced goods just cannot compete with cheap pirated brands – and so cracking down on piracy is good for Lebanon – I’m sure more and more calls will come in.”

EDF helps people help themselves

Its board of trustees may read as a “who is who” of the Lebanese business community, the Entrepeneurial Development Foundation (EDF) is a non-profit organization that promotes entrepeneurship among Lebanon’s poor and underprivileged, especially in the country’s rural areas. Established in 1999, the EDF offers training to improve knowledge and skills on how to start up and manage a business, as well as soft loans to graduates able to come up with a sound business plan.

“Traditionally, micro-credit programs do not offer leans worth more than $2,000, while we go up to $10,000,” said EDF’s chairman Nabil Sawabini, who is also CEO of the MENA Capital, an investment group specialized in private equities and real estate development. “What’s more, we offer not 1 year, but 3 to 4 years to pay back the loan and an effective interest rate of not 24% to 36%, but 15% per annum. So, we are not a micro-credit program in the strict sense of the word.”

Call it as you like, the EDF’s business approach of aid and the notion of helping people help themselves has so far proven extremely successful. Since April 2000, the EDF has trained 865 people and helped to establish 62 businesses, 60 of which are still operating. Some $300,000 has been disbursed, while over $100,000 is pending regarding files in process. “Less than 0,5% of the loans did not return,” said Sawabini.

Still, the EDF’s biggest challenge is funding. “We offer 8 training programs a year, of which we recently managed to reduce the cost to some $8,000,” said Sawabini. ”Our administrative costs are some 20-22% of the annual budget, which is not much, as many NGO’s go up to 35%, but that money has to come from somewhere.’

So far, the funding mainly came from international agencies such as Mercycorps, regional businesses and the trustees’ own pockets. Since the start of this year however, the EDF came up with a very original solution. “All Lebanese banks have to keep a minimal reserve at the Central Bank, an amount over which no interest is paid,” Sawabini explained. “We’ve agreed with one bank and the Central Bank that a portion of this can be used for our program.” 

The experiment started successfully with one bank early this year and will be continued with a second bank in the near future, which enabled the EDF to more than double its annual budget. “And if all things work out,” Sawabini concluded, “it will allow us to double the budget every year over the next few years, as existing bank will increase their contribution and others will be added.”

Argent comes to town

Despite continuing, often violent, political turmoil in Lebanon, and the absence, for the moment, of any clear move in the direction of telecom sector privatization, the New Zealand-based telecoms company Argent Networks, providers of billing and customer service solutions for fixed line, wireless, broadband and next generation telecommunications companies, are, in $250,000 move, setting up a regional Middle East and Africa office in Beirut, as they seek to create a foothold in the region.

“We’re looking to get a piece of the action here,” explained Argent Regional Manager Ziad Basha. “Lebanon has a good pool of technical resources which need support.”

The company has also opened a small representative office in Dubai.

Argent has just signed a deal with an Iraqi telecoms company and with Lebanese companies running operators in Africa, is in final negotiations over two other contracts, and expects to sign a few more in the coming months.

Basha said Argent hoped to acquire a 20%-25% share of the regional billing market – its core business – over the next few years.

He said competition would come mainly from similar companies in Dubai.

Telecoms observers and analysts are cautiously supportive of the move. “The telecoms sector in Lebanon and the region has huge growth potential,” said telecoms consultant Kamal Shehadi. “We’re closer to the start of the process of privatization because the Government has made it clear that’s what it wants to do, and I don’t see any opposition. But let’s be clear. This is not something that will happen at the push of a button.”

“I think it’s the right move,” said Notre Dame University Economics and Finance Professor and telecoms specialist Louis Hobeika. “It’s a good thing to be here when the situation improves. I believe it’s the right timing. You need to be here in advance. The telecoms situation here is going to pick up when tariffs are lowered and the regulatory authority is set up. But all of this has been delayed.

“I think it’s more the right time for the region than for Lebanon,” he went on. “The sector will grow fast in the region, especially in developing sectors.”

 Of Argent’s Iraq venture, he said: “Iraq has lots of problems. Not now, but when things do quiet down, it will be a good investment.”

Lebanon, too, is not free of problems acknowledged Basha. “There are problems with the political situation, with plans to liberalize and privatize the sector,” he said. But he added: “I still think it’s the right time to set up the office. And remember, we’re concentrating on the region as a whole.”

Basha said the Beirut office should be functional in early November. 

Forget Fast Food, Go Slow!
As McDonalds is to many people the ultimate symbol of globalization, it
comes perhaps as no surprise that it is the food sector that launched a
counter offensive under the name of Slow Food. Founded in 1986 in Italy,
Slow Food is an international non-profit organization in defense of
bio-diversity and “eco-gastronomy.” Among other activities, it records plant
species and animal breeds at the edge of extinction, as well as protects
outstanding food products and traditional production methods.
Recently, the first Lebanese item, the Darfiyeh cheese, was added onto the
Slow Food list of authentic food of outstanding quality. Ripened for six
months in salted goatskin, the cheese stems from the northern areas of
Mount Lebanon. The problem for the Darfiyeh, as for any other local
specialties in Lebanon or the rest of the world, is that it is extremely
difficult to compete with mass produced cheeses.
“Of course the recognition is important,” Kamal Mouzawak, Slow Food’s
representative in Lebanon and one of the founding father’s of the weekly
ecologically sound “Souk al Tayeb” in Saifi. “It is the recognition of
tradition and quality. But that’s only the beginning. With the help of Slow
Food we will bring in sponsors to preserve the cheese and bring it onto the
market. For example, by bringing in some experts in the field of marketing.
Most people do not know this cheese.”
The Rene Mouawad Foundation has started a program to help the farmers to
increase production of the cheese, as well as aid some 200 goat herders who
supply the milk.
If it’s up to Mouzawak, the Darfiyeh Cheese will not be Lebanon’s last Slow
Food listing. He has already proposed a special Chouf labneh and Baalbek
cheese which is ripened in terracotta jars. Bon appetitit!

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Cover story

Are We Safe ?

by Anthony Mills
written by Anthony Mills

If the recent spate of air crashes – Athens, Venezuela, Indonesia, Tunisia – were not enough to make us jumpy at the thought of boarding a plane, one only has to remember the brutal imprint left on out collective consciousness by the December 2003 Benin air crash in which at least 140 people – 80 of them Lebanese – lost their lives when a Beirut-bound, chartered Boeing 727 hit a building on takeoff and fell into the sea. The plane was reportedly overloaded and the pilot forced to take at the insistence of an overzealous Lebanese passenger (who, unfairly it might be added, survived the crash). Air safety, stories of badly run airlines and even more badly maintained planes have never been more in the news. However, while one aviation expert claims that safety regulations at Beirut airport are still shockingly lax, the director general of the civil aviation authority declares Lebanon to have clamped down on rogue operators.

There has never been a crash at Beirut International Airport (which receives 80 and 130 planes land a day and serves around 3.5 million passengers annually) although the country is no stranger to aviation mishaps. On 30 September 1975, a Malev (Hungarian Airlines) passenger plane en route from Budapest to Beirut ploughed into the sea six miles off Beirut, killing all 50 passengers and 10 crewmembers (the cause of the crash was never officially determined and remains shrouded in mystery. Speculators suggest the plane was shot down, by either an Israeli or Syrian fighter jet because it was believed to be carrying arms for Palestinians fighters.), while on 13 May, 1977, a Polish carrier, en route from Warsaw came down in Aramoun, 8 km southeast of Beirut, killing all nine people on board.

None of the planes involved were Lebanese. Reassuring? Maybe, but in an exclusive interview with EXECUTIVE, a certified aviation inspector who has worked extensively with Lebanese carriers, has, on condition of anonymity, revealed that there exist serious question marks about the safety of many of Lebanon’s private and charter aircraft because the country lacks the qualified manpower to carry out sufficient, effective inspections. Elsewhere, some inspectors have allegedly been intimidated, pressured or bribed into providing positive inspection results and granting new or reinstating suspended Air Operating Certificates (OACs).

“Safety is not measured by the number of accidents you have,” he said, “but by how often you come close to an accident. Just because we haven’t had any accidents doesn’t mean we are safe. We’ve been lucky so far. The problem lies with those aircraft registered here in Lebanon. Our controls are not done properly. I have worked with a couple of Lebanese airlines. It was a mess. They get their certificates and then nothing is done. No one is doing the oversights, no one is doing the audits. Firstly, there isn’t the manpower and secondly they don’t know how to do it.”

The inspector’s concerns were echoed, albeit in a more general fashion, by a former Lebanese pilot, who when asked if he thought Lebanon’s small private charter airlines were safe, said: “As a retired pilot, I have two fears: dying in a car crash and dying in a charter plane. I fly MEA. I trust them.” He has a point. Air crash statistics bear out the suggestion that flying with an obscure charter company is likely to be far more dangerous than hopping on a “recognized” carrier.

One of the problems with Lebanon’s aviation sector, critics say, is that the Directorate-General of Civil Aviation (DGCA) is still run by the Government, which has blocked any additional inspector recruitment, citing lack of funds. The International Civil Aviation Organization (ICAO) – whose inspectors are now working at Beirut Airport – suggested after an audit a couple of years ago that the country’s civil aviation authority be fully independent.

“In Lebanon politicians interfere in the issue,” the expert charged. “I know of a case in which a minister was using a private Lebanese airplane which didn’t have a valid license after the DGCA issued a report. It then received a phone call from the minister saying: if you touch this plane, you touch me.

“The company I worked with was the same. We’d do an inspection. There’d be a problem. The certificate would be taken away. Then a couple of months later there would be a call from a minister and the certificate would be reinstated. I think issues like this are why the ICAO recommended that the DGCA be fully independent.”

Low salaries offer little incentive to work professionally and, in some instances, make offers of bribes hard to turn down, he said. “When you see them making $700 or $800 a month, with all that work, then you can expect some of them to get bribed,” he said. He said he had heard of inspectors being bribed and on one occasion, when he grounded an aircraft, had been offered a bribe himself. “It was about $15,000,” he said, “to cover up the report.” Another inspector had confided in him that he had been intimidated after he had grounded an aircraft. “They put quite a bit of pressure on him,” he said. “That’s how it works here – political pressure, intimidation and bribery.”

The same problem, the inspector said, bedevils the AOC acquirement process. “It’s the same issue. People with backup can get their certificate with minimum requirements. People working by the book find it difficult to get their certificate because they have to meet all the requirements.”

Lebanon’s Civil Aviation Authority Director-General for the past three years, Dr. Hamdi Chaouk, strongly denied the suggestion that the DGCA was being pressured to cover up inspections or reinstate certificates.

“No way on earth,” he stated, although he acknowledged that early in his tenure at least one attempt had been made to influence a DGCA decision.

“In the beginning, about two years ago, they tried it once, at least to ring me, to ask if our rules were flexible. I said: ‘ No way.’ And this has never happened since then. No one has even dared to approach the matter from the safety side at all. Otherwise I would not be in my job. You would not see me here. You would not see me here one day if I had to change anything as far as licenses or inspections of aircraft – anything to do with safety.”

He conceded that in other domains political pressure might play a role. “For the reallocation of people I can be flexible and political pressure may have a certain influence because I have to live with the real world,” he said.

“But when it comes to safety and security,” he reiterated, “there are no compromises whatsoever. I challenge anyone to suggest that I have ever compromised on this issue.”

Asked if it was possible that inspectors were being pressured or bribed without his knowledge, he responded: “Truthfully, when I first came to this job, I heard that some of the inspectors were influenced by the operators themselves. They were put under pressure financially or were offered assistance, like tickets for their families. They could overlook certain things.”

It was precisely this revelation, in 2003, Chaouk explained, which prompted him to totally overhaul the flight safety department and bring in ICAO staff. “They are well-paid. They cannot be influenced politically. They cannot be influenced socially.” Chaouk said that ICAO staff is now present for every aircraft inspection conducted at Beirut Airport. As a consequence, he added, the possibility of a cover-up was “almost zero.”

For its part, the ICAO’s headquarters in Canada did not immediately respond to Executive’s request for a comment on the matter, while an ICAO staff member working in Lebanon said he could only speak to EXECUTIVE with the permission of Dr. Chaouk, who declined to grant it.

Dr. Chaouk said that the assistance of ICAO staff working at Beirut Airport, two $1.2 million ICAO programs funded by the Lebanese government, and a two-year-old law giving him greater powers to suspend AOCs had made Beirut Airport tougher on air safety than any other airport in the region.

He admitted that his efforts to tighten the screws had created political friction. “Have they caused political problems? Yes. I have stopped the aircrafts of many influential people. Sometimes it does cause problems,” he said.

And yes the DGCA is not yet fully independent, although giant strides in that direction have been made, he conceded. The law, he explained, has been approved by parliament. However, one final approval is needed by the Council of Ministers. “But because of what has been happening in the country, they are waiting for the right moment.”

Dr. Chaouk also acknowledged that he was in need of additional qualified manpower. “If we don’t do that, we’re going to come up short in that domain and we won’t be able to implement everything.” But the manpower shortage will not ease until the DGCA is fully autonomous and the embargo on new talent is lifted. “Under the current law we are not allowed to recruit, among other reasons for financial reasons. It’s a problem. The new law will solve it. We’ll be able to advertise.”

Chaouk conceded the ICAO presence had compensated for the Lebanese manpower shortfall so that aircraft safety and the inspection process were no longer being jeopardized. Meanwhile, Chaouk stressed, no one should doubt his department’s commitment to air safety.

“We prevent unsatisfactory aircraft from even flying over Lebanon,” he noted. “We are known to be the toughest in the Middle East. We even have a list of aircraft [Tupolev and Antonov] that we don’t allow to land here anymore. We inspected so many of them in the past and they all failed. Many European countries still let these aircraft land.”

As part of the Lebanese civil aviation restructuring program, Chaouk will soon publish a blacklist (see box) of countries and airlines that are banned from flying to Lebanon and claims that with the help of the ICAO staff currently in Lebanon, the DGCA has checked “almost every” aircraft using Beirut Airport.

“We may be seen as extreme. But this is the only way to clean up the whole market,” the he declared.

In an indication of the stringency of DGCA supervision, he said, over the last two years, the DGCA has granted AOCs to a total of only five out of 25 Lebanese charter applicants – menajet; Flying Carpet; ASAS; Executive Aircraft Services; and BERYTOS airlines. He said another five charter airlines were currently applying for AOCs.

“We inspect the charter aircraft currently operating,” he went on. “We are continually monitoring. Whenever there is any problem, we immediately stop the aircraft or airline from operating,”

And what the DGCA giveth, it also taketh away. Chaouk said that as many as 12 Lebanese AOCs had been suspended over the last two years – again an indication of how serious his department is about ensuring aircraft airworthiness. About half have since been reinstated.

The DCGA has also withdrawn, over the last two years, more than 10 AOCs belonging to foreign companies. None has been reinstated. Some of those banned, such as Egypt’s Lotus Air, have since had accidents.

Chaouk’s efforts appear to be paying off: “Beirut Airport has been audited by the ICAO and by European institutions. I have been told by Great Britain that they have audited a lot of countries in the Middle East and Beirut scores the highest grades in safety and security.” He has also won praise from Lebanese air industry insiders.

The inspector who warned about the safety issues at Beirut Airport and Dr. Chaouk do agree on one thing – Lebanon’s Middle East Airlines (MEA) and newly-established Lebanese charter airline menajet are as safe as any airline in the world, in great part because their aircraft must pass regular French aviation inspections.

In fact, MEA has a French AOC and its only crashes had nothing to do with safety. Back on 1 February 1963 an MEA Vickers Viscount 754D collided in midair over Ankara, Turkey, with a Turkish air force Douglas C-47. All 17 occupants of the planes were killed, as well as 87 people on the ground. Then on 1 January 1976, a bomb exploded on an MEA Boeing 727 over northeast Saudi Arabia, killing all 81 passengers and crew.

(BOX)

Almost two years the Benin crash, the  Directorate-General of Civil Aviation (DGCA) is about to publish its aviation blacklists. There are in fact three lists: one of airlines, one of countries, and one of brands. They were drawn up following a DGCA survey, carried out in conjunction with International Civil Aviation Organisation (ICAO) staff working at Beirut Airport, of almost all aircraft using the airport.

The airlines affected have been banned either for technical reasons, or because they have not been audited by the ICAO or are not an ICAO-contracting state.

“I am about to publish the list, like the rest of the world,” Chaouk, said. “I didn’t want to publish it before because I didn’t want to get into diplomatic questions, but safety cannot be compromised.” He said, admitting that he nonetheless expected diplomatic problems between Lebanon and some of the countries blacklisted.

Asked if the Lebanese Government – which has ties to a number of the countries listed, and still holds sway over the DGCA – was likely to bring pressure to bear on him, he said: “Even bilateral agreements state that each country has sovereignty over its security…it’s not because Lebanon has diplomatic relations with certain countries that I have to accept any planes landing here, because, believe me, when something happens here it’s going to affect the economy of the whole country, not to mention create diplomatic, political and financial consequences.”

“We are known as the toughest in the Middle East,” he said. “We are the only country in the Middle East and maybe world-wide to draw up a blacklist by country.”

Of the decision to ban the Russian aircraft brands Antonov and Tupolev, Chaouk said: “We inspected so many of them and more than 90% failed.

The countries whose airlines are banned from Beirut Airport are: Afghanistan; Antigua & Barbados; Benin [site of the December 2003 Beirut-bound chartered Boeing 727 crash]; the Democratic Republic of Congo; Ecuador; Gambia; Guinea; Grenada; Micronesia; Saint Vincent & The Grenadines; Swaziland; Sierra Leone; Somalia; Saint Lucia; Equatorial Guinea; Togo; Aruba; Angola; Liberia; the Virgin Islands; the Cayman Islands; the Solomon Islands.

The airlines on a provisional list are: Africa Lines-Central African Republic; Air Memphis-Egypt; Air Van Airlines-Armenia; Central Air Express-Democratic Republic of Congo; ICTTPW-Libya; International Air Tours Limited-Nigeria; Johnsons Air Limited-Ghana; Silverback Cargo Freighters-Rwanda; South Airlines-Ukraine.

Dr. Chaouk said this list would grow.

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Feature

The New Lira

by Michael Karam
written by Michael Karam

Have you ever been annoyed when your old LL100,000 note wont fit snugly into your wallet? But are you also put off by the toy money appearance of Lebanon’s new look paper money? If the answer to both questions is yes, it is worth reminding you that the latter is a solution to the former and part of Lebanon’s drive to be in monetary harmony with Europe and the US.

Abdo Ayoub, Lebanon’s leading bank note collector (or notaphilist) and author of Lebanon: paper money and coins, stands up and pulls out his wallet. He folds a crisp new LL50,000 and slips it inside. “You see? It fits,” he explains flashing the wallet from side to side like a conjurer.  “Wallets are smaller because notes are smaller. Our notes are now too big, so we have to be in step with today’s trends.”

So for all of you who thought this was example of legendary Lebanese wastage – another case of “it isn’t broke and yet we are still fixing it with money we can’t afford” – it is in fact one of the rare instances when the public sector (in this case the central bank) is actually doing its job.

So sadly no conspiracy theory. “It was the natural time to print new money and it offered the central bank a window of opportunity to make new, user-friendly notes. They are not changing all at once but waiting till each note runs out of stock before they print new ones,” explains Ayoub.

The first three new notes appeared in June (LL5,000) and mid-July (LL50,000 and LL100,000). It is totally dependent on what is in circulation and what is demanded by the central bank. “There is no need to renew for the sake of it,” explains Ayoub, who cites the LL1,000 as a case in point. “It will probably only appear in 2007 as there are possibly as much as 200 million old notes still in their packet.” This extraordinary surplus is a hangover from the heady days of inflation when the government went bonkers and printed 960 million LL1,000 notes. “It was too much for one country,” says Ayoub. “It means that everyone can have in his pocket 250,000 in single notes. It will take time to use up. They are of a highest quality because they were printed by Thomas de la Rue, arguably the best quality notes in the world.”

Ayoub is sitting in his vast library cum office at his home in Bhannes. On the floor are notes and coins and bits of old notes. Albums full of series of Lebanese banks notes line the shelves, a testament to his hobby and passion of the past 15 years.  He claims he has always been a habitual collector. “If you don’t leave your country during war, you need something to do.”

Back to the new money. “We needed a model. It was either the Euro or the [US] Dollar. There are 400 million people using the Euro. That is a lot of people. Money is used less and credit cards more. Therefore the money that is used should be more practical. Governor Salameh is a cosmopolitan man and he must have spotted this trend.” According to Ayoub, the Central Bank did consider making its new notes according to the same dimensions as the Dollar with all denominations the same size. “It just wasn’t practical, especially for old people who might get confused or make mistakes.”

So they went with the Euro model. The new notes have been shrunk to a similar, but not exact, size to the Euro, what Ayoub calls “the same spirit of the euro”. The idea was to correspond Lebanon’s six notes to the closet Euro denomination. Thus the LL1,000 (the only note that will receive a totally new design) is sized according to the current  5 euro; the LL5,000 with the 10 euro; the LL10,000 with the 20 euro, the LL20,000 with the 50 euro, the LL50,000 with the 100 euro and the LL100,000 with the 200 euro. There is no Lebanese equivalent to the either 500 euro note or the 1 and 2 euro coins. “The cost was negligible,” explains Ayoub. “We are constantly reprinting, so it would just be [the cost of] the design, which is not much if you divide it by the number of notes.”

So why does a government decide to renew it’s money? According to Ayoub, the lifespan of a particular design is about 15 years. Since 1920 till today Lebanon has had six different designs, the longest lasting being the 1964-to 88, which depicted Lebanon’s, historical and tourist sights and which was virtually worthless by wartime inflation. “It is now considered among the most beautiful series in the world, but you would need 1000 of these,” he opens an album of LL1 notes, “to buy a manouche today.”

In, 1988 the LL1,000 (printed again in 1991 and 1992) was introduced as was the single-issue LL500. Further inflation made the LL1,000 increasingly cumbersome (remember having to pay for dinner with big wads of bills?) and so between 1993 and 1994 the LL5,000, LL10,000, LL20,000, LL50,000 and LL100,000 notes appeared.

“That series is now roughly ten years old. These new notes are not strictly a new design, but they should be around until 2020, although who knows, we might have a new governor who decides to change everything and say ‘I don’t like this’ and he can do it because provided he does it at the right time, it doesn’t cost anything.”

And the paper is better too by all accounts. “With the first new notes, we were coming out of war and we did not have the money to spend like we did before, when we would go to Thomas de la Rue & Co in London or Banque de France,” remembers Ayoub. “In 1992, it was a case of just do it they put out the tender and got the cheapest price from the Canadian printer B.A.Banknote.”

This time the government has gone to German company Giesecke & Devrient (LL1,000, LL5,000 and the LL10,000 and the Austrian Œbs (LL20,000, LL50,000 and LL100,000). And how long will the notes last in circulation last? “The cheapest notes, say from India or Pakistan, last about six months in circulation while the best can survive for around ten years,” explains Ayoub. “In my opinion, ours will probably last somewhere in between.”

Ayoub wanders off and comes back with a ultraviolet light. It puts a new LL50,000 note under its beams. It lights up like a Christmas tree. “You see we have a lot more security features. Printing has become more advanced. A new printer costs $10 million.”

According to Ayoub, both old and new notes will be in circulation for the next two of three years and even when the old are withdrawn, the central bank is still obliged to exchange it. “You can take any more from any period, even this,” he says holding up a LL250 note, “and they will give you a coin.” He pulls an album off the shelf and flick through the pages. “In fact you can do more. You can do this.” He opens an album and shows me a beautiful 250 lira note from (year?)XXXX.  “If you take it to the central bank they will give you a coin but to collectors it is worth $10-12,000.”

Lebanon: paper money and coins is available from XXXX

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State department

Those crazy days of summer

by Washington Correspondent
written by Washington Correspondent

As the center of the universe, politically speaking of course, the pace in Washington never abates, despite the harsh summer heat beating down on the banks of the Potomac. Now, not only Democrats, but former government officials, mothers and rock stars are going after President Bush’s Mideast politics.
 
Paul Craig Roberts, who served as assistant secretary of the Treasury in the Reagan administration, wrote in Counterpunch an article assailing the president. Roberts blames Bush for making America less safe by attacking Iraq. “Now,” he writes, “the White House moron proposes to start another war by attacking Iran.”

Indeed, there have been several media reports alleging that Vice President Dick Cheney has ordered the U.S. Strategic Command to prepare plans to strike Iran with tactical nuclear weapons if Iran does not renege on its nuclear policy, or if the U.S. is the target of another major terrorist attack.

Roberts claims that Bush’s policy is leaving the United States without allies, or practically none. “Likudnik Israel is Bush’s last remaining ally, or egger-on, in his war against “Islamic terrorism.”

 Meanwhile, as the president is spending a “working vacation” on his ranch in Crawford, Texas, he continues to refuse to meet with Cindy Sheenan, a young mother of a slain U.S. soldier in Iraq. The woman who remains encamped in a ditch near the presidential ranch, in temperatures close to 45 degrees Centigrade, has become the focus of the international media. Cindy Sheehan has a simple question for Bush: What noble cause is being served by all this suffering and destruction? But Bush is adamant; he will not talk to Sheenan. As Roberts points out, the president “(is) using his vacation time at the Crawford ranch to talk war with Israeli television. In a recent interview with Israeli TV, Bush said regarding Iran: “All options are on the table.”

Roberts blames the Democratic Party, which he says has “completely collapsed as an opposition party,” which is why Bush “can ignore the American public.” The only thing holding back Bush from declaring total war on everything and everyone he dislikes is “the lack of U.S. troops.

 “Gentle reader,” writes the former Reagan associate, “do you realize the danger of having a president so disconnected from reality that he plots to attack Iran — a country three times the size of Iraq — when he lacks sufficient forces to occupy Baghdad and to protect the road from Baghdad to the airport?”

Roberts continues: “The Bush administration is insane. If the American people do not decapitate it by demanding Bush’s impeachment, the Bush administration will bring about Armageddon. This may please some Christian evangelicals conned by Rapture predictions, but World War III will please no one else.”
 
Them are fighting words…
 
And if that was not enough trouble for the president, here comes the Rolling Stones, that eternal rock band, with their new album. How does that concern the president, you may ask? Ah.
 
“A Bigger Bang” due to be released Sept. 6, includes a song called “My Sweet Neo Con,” in which the British band chides Washington’s foreign policy gurus, accusing them of getting it all wrong on Iraq. Makes you wonder that despite decades of drugs and alcohol abuse, the Stones somehow still managed to have kept a few grey cells in good working order.
 
The controversial track seems to target Bush and Cheney in particular, as well as the group of neo-conservative advisers and architects of the Iraq war.
 
But Jagger, the Stones’ lead singer, denies his new song is directed at the president. “It is not really aimed at anyone,” Jagger said on a TV show. “It’s not aimed, personally aimed, at President Bush. It wouldn’t be called Sweet Neo Con if it was,” he added.
 
In fact, the song makes no mention of Bush or Iraq, though it does mention Halliburton, the Texas-based corporation previously run by Cheney.
 
“How come you’re so wrong? My sweet neo-con, where’s the money gone, in the Pentagon,” goes one line from the song.
 
“It’s liberty for all, democracy’s our style, unless you are against us, then it’s prison without trial,” goes another line.
 
“You call yourself a Christian, I call you a hypocrite,” Jagger rebukes members of the Bush administration in the title track to his new album. He admits his song is critical of the Bush administration, but waves it off as “so what!”
 
“Lots of people are critical,” of the administration, Jagger said. A representative of the British rock band said the group had no further comment about the song. The Rolling Stones U.S. tour kicked off in Boston Aug. 21. It will no doubt be controversial as Sir Mick and the Stones tour the heartland.

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Real Estate

Slipping Through Our Fingers

by Safa Jafari
written by Safa Jafari

This year marks the beginning of the International Water for Life Decade, from 2005 to 2015. The United Nations, through the United Nations Environment Program (UNEP) and the World Health Organization, have designated the next ten years, beginning last March 22, 2005, to focusing global attention on what should be obvious: water for life, and aims, not just to highlight the magnitude of the world’s water problem, but also to bring all ‘stakeholders’ together to apply workable solutions.

Clean water is described by the UNICEF’s executive director, Carol Bellamy as “an inviolable right, not a privilege.” It is the basis of all life and is recognized as a humanitarian issue and a human right, the misallocation of which becomes a breach of legal norms.

According to UNICEF, two buckets – 20 liters – of safe water a day is the bare minimum a child needs to live. This is enough for drinking and eating, washing and basic sanitation. But around 4,000 children die every day due to lack of access to an adequate supply of clean water.

If that were not enough, each year more than 1 billion of the world’s people have little choice but to resort to using potentially harmful sources of water. About four out of every 10 people in the world do not have access to even a simple pit latrine and nearly two in 10 have no source of safe drinking water, thwarting progress towards achieving the UN’s Millennium Development Goals (MDGs) discussed in last month’s issue. Within these MDGs there is a specific target: to cut in half by 2015, the number of people without sustainable access to safe drinking water and basic sanitation. However, the UN Millennium Project Task Force on Water and Sanitation, recently added that integrated development and management of water resources are crucial to the success or failure of all the MDGs, as water is central to the livelihood systems, particularly those of the world’s poor.

Looking to Lebanon

Lebanon was the first Arab country to host celebrations marking the United Nations’ World Environment Day on June 5, 2003. The theme selected was the aptly titled ‘Water – Two Billion People are Dying for It!’ The agenda of the day, as specified on the UNEP’s website was, “to give a human face to environmental issues, empower people to become active agents of sustainable and equitable development, promote the understanding that communities are pivotal to changing attitudes toward environmental issues, and advocate partnership among nations to allow people to enjoy a safer and more prosperous future.” But the promotion of sustainable development entails more than just the engagement of communities. These cannot be ‘active agents’ so long as better awareness of the problems is not coupled by effective means to tackle them, i.e. a healthy interplay between grass-roots action, accountable policy, and effective infrastructure. To what extent are these three present in Lebanon? Let’s put it another way: the story of water in Lebanon is that of a culture of mismanagement that has led to shortages and contamination.

Mismanaging resources

Ironically, Lebanon has a wealth of water resources in its numerous rivers, its underground aquifers, and has generous winter rains. But the country faces a perennial water shortage. It could theoretically meet all its own needs as well as export hundreds of millions of cubic meters to its more arid neighbors. Most households suffer regular water cuts however, and irregular access to fresh drinking water.

About half of the 2,600 million cubic meters of accessible surface and groundwater is wasted every year as it is left to flow into the Mediterranean. Estimates of Lebanon’s annual water demand vary from 1.1 billion, in a study by Parsons, to 1.4 billion cubic meters, in one by ESCWA. A USAID funded study by Development Alternatives in 2001 estimated that Lebanon uses 75% of its annual water supply for irrigation. Domestic use accounts for 165 million cubic meters (mcm) and industrial use 130 mcm, according to Parsons. However, the Parsons study concluded that real domestic demand for water is over 300 mcm. For many Beirutis, water is rationed – or is not available at all – during summer. Many Lebanese have to fill water bottles at public fountains or buy water from trucks. Demand for water is expected to rise to 2.5 billion cubic meters by 2015, and perhaps as much as 4.0 billion cubic meters by 2025, according to ESCWA.

Donors have spent over $600 million since the end of the civil war on renovating the antiquated water supply networks, but a USAID-funded study estimates that more than half of the distribution systems still need to be overhauled. Irrigation systems are in equally bad shape. They use mostly inefficient flood methods and reach less than half of the potential agricultural areas. USAID has funded almost $6 million in potable water and irrigation projects in the past decade, while Japanese, French and other governments have also funded different water projects whilst calling for the privatization of the water sector, the renovation of potable water networks and better water pricing schemes.

Geo-political issues

To make matters worse, there have been disputes with Israel over the Lebanese government’s access to the Wazzani tributary from the Hasbani River. However, talk of building dams is still underway and Arab donors have pledged over $150 million to fund the first phase of the Litani River Project in South Lebanon. Long overdue plans for water projects are hoped to provide drinking water, irrigation and electricity.

But all that shines is not fresh water. Estimates of pollution in Lebanon’s waters vary and statistics are minimal, out of date, or faulty. One study estimated Lebanon’s deposits of raw sewage to equal 38,095 cubic meters per day. Another study stated the figure was as high as 500,000 cubic meters of untreated sewage. Sadly, both studies agree on two facts: sewage is untreated and deposited into Lebanon’s waters. Out of Beirut alone, there are 15 discharge points of raw sewage and a further 23 points along the Lebanese coast we bathe in. And raw sewage is only part of what is being deposited in our waters. Research carried out by Greenpeace in October 1997 showed the presence of “a high rate of heavy metal and organic bacteria in Lebanese waters.”

A study published last September in the Daily Star newspaper and another published last July in the Environment and Development magazine – showed that the Litani River has a high average discharge rate of 770 mcm. Domestic wastewater is the largest pollutant in the upper basin of the Litani. And although about 50 percent of the population is connected to a sewer system, there are no wastewater treatment plants there yet. The Litani’s Qaraoun Dam, completed in 1956, holds some 220 mcm and approximately 70% of the damn is polluted water. The levels of pollution vary from season to season but there are no ongoing tests being conducted on the dam. The tests that have taken place indicate high pollution in certain areas and some conclude that the upstream Litani River is microbiologically unsuitable for domestic use or bathing. Several of the Litani’s tributaries are highly polluted due to contaminated discharge, not excluding solid waste. Most industrial facilities within the Litani area do not treat their wastewater before directly discharging it into the Litani or its tributaries. Also, the overuse and misuse of agrochemicals by farmers and farm run-off is another source of contamination.

The World Health Organization measures the level of fecal coliform bacteria found in water to determine the level of its pollution. It is not recommended to swim in an area containing more than one hundred colonies of fecal coliform bacteria per one hundred millimeters of water. Prolonged contact with contaminated seawater can lead to several health problems, most notably various forms of skin disease, as well as diarrhea and vomiting. Studies carried out by Environment and Development magazine on September 14 showed that the level of fecal coliform bacteria found at one of Beirut’s most luxurious resorts and private beaches was drastically above international standards at 620 colonies per 100 millimeters of water. This is no surprise considering that waste from slaughterhouses is freely tossed or flooded into nearby rivers.

Promoting sanitation

Incidentally, November 19 is World Toilet Day, an event that has been celebrated annually since 2001 on the same day. The goal of World Toilet Day is to educate people on sanitation issues and promote better toilets around the world. The president of the World Toilet Organization, Jack Sim, was quoted by Reuters as stating that 2.6 billion people, or 40% of the human population, do not have access to proper sanitation. Ironically, to celebrate this day, countries such as Japan and others in the EU entered into a competition to design the most luxurious and exquisite toilet, while our part of the world continues to search for ways to dispose of waste without putting human lives at risk.
What we must understand here is that we are all stakeholders in this as we eat and drink, swim and bathe, and allow our children to play on formerly flooded riversides that emit odors indicative of the bacteria they hold. In addition to health and hygiene, the nation’s economic development is at stake. Tourism is at risk as beaches and running water are declared unsuitable for human use, and Lebanese employees are naturally less productive if they end up often taking leave due to some mysterious ‘stomach virus.’

During the war much of the information about Lebanon’s sewage system was misplaced, lost or destroyed. Water losses exceed 50% in many areas. Much of the country’s irrigation system dates from before the civil war, and cracks in canals, evaporation, and the illegal use of canal water accounts for irrigation efficiency of only 30% to 40%. It is also estimated that about 40% of the population uses cesspools, which consist of porous pits that receive wastewater from the toilets, showers, wash basins or other sanitary fixtures, with no proper service for sludge removal, so they are subject to overflow or contamination of groundwater. Naturally, contamination finds its way to our potable water system through leaks from damaged networks, clogged wells, or flooding rivers. Due to lack of regulation, the Beirut River for example, has become a dump for garbage and sewage and according to Greenpeace Lebanon, if nothing significant is done before the rainy season starts, the river and underground reservoirs will be entirely polluted.

Numerous governmental decrees have established standards for the proper disposal of pollutants. There are guidelines and “environmental limit values” set by various ministries. And there are decrees for the management of healthcare and hospital waste. The problem, however, lies in two facts: there is no system of accountability for those who breach the law, and there is no centralized, regular and uninterrupted monitoring of pollution in Lebanon to date.

The people of Lebanon know the country suffers shortages and contamination of its waters; the funds have come to Lebanon, particularly to help solve the water problem, and our policy makers are well aware of the situation. Where does the problem then lie? The problem lies in the management of those three ingredients: the people, the funds and policy. The people need to change their environmentally harmful behavior. New and healthy infrastructure must be created to support the widening water network in the country. And an effective policy must be implemented whereby misconduct is monitored and reduced.
 

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Economics & Policy

Protecting the integrity of Banks

by Thomas Schellen
written by Thomas Schellen

The UN investigation into the assassination of former premier Rafik Hariri has impacted the financial scene. The work of German prosecutor Detlev Mehlis and his team to uncover suspects behind the murder created a stir when a request for banking secrecy laws to be lifted from the accounts of certain individuals key to the enquiry was leaked to the press and found to contain the name of Elias Murr who was not considered a suspect.

Banking industry members said they were dismayed at the negative publicity created by the “propaganda” surrounding the leak and the erroneous inclusion of Murr’s name. “Every day banks get letters about suspicious transactions but they deal with them with discretion. This brouhaha about the investigation into those bank accounts is bad,” said one manager.

Other experts have pointed out that, in any case, a request for information on accounts and financial transactions of any suspect would have to be investigated under clearly defined procedures before banking secrecy could legally be lifted from an account.

Fuelling speculation

Some media pundits took the incident as an excuse to regurgitate speculation over hidden agendas behind the UN investigation. Having apologized to Murr, Mehlis will have bigger fish to fry, but the controversy over the request has served to highlight once again the importance of banking secrecy to Lebanon. As such, it is actually a reminder that this country has nothing to be afraid of when it comes to discussing the matters of security of transfers, data protection, and combating money laundering.

This can be best illustrated by the work and international involvement of the country’s financial intelligence unit charged with fighting abuses of the financial system through organized crime, corrupt officials, terrorists, and crooks. This Special Investigation Commission (SIC) under the chairmanship of central bank governor Riad Salameh hosted in September, a meeting of the recently formed Middle East and North Africa Financial Action Task Force (MENA FATF), during which new important measures for the regional fight against money laundering were adopted. In its Beirut meeting, MENA FATF (an affiliate body of the original FATF founded by the G-7 nations in 1989) passed resolutions that install greater supervision of the Middle East’s hawala system of funds movement, cash couriers, and charitable organizations from the perspective of Anti-Money-Laundering (AML) measures, said SIC secretary, Mohammed Baasiri.

Working groups for training and mutual evaluation also produced important papers, including a regional schedule for mutual evaluations among the participating countries under which Lebanon will be inspected in 2007, “because we are going in alphabetical order,” said Baasiri who also currently heads MENA FATF.

These measures and new initiatives will have no detrimental effects on banking secrecy and financial markets in Lebanon, Baasiri told Executive. “Banking secrecy is intact,” he said, noting that by law he could not provide any information on the financial investigation aspects of the inquiry into the Hariri assassination suspects. Instead, he emphasized that stricter money laundering procedures have helped the country gain international recognition in addition to keeping foreign deposits in the banking system. “After Lebanon was taken off the list, it has witnessed a remarkable increase in deposits. I can also tell you that Lebanon enjoys an excellent reputation in terms of fighting money laundering and terrorism finance,” he said.

As for the efficiency of the SIC on the ground, the commission last year received 199 individual cases based on local suspicious transaction reports and inquiries from abroad. Of this initial count, the SIC passed on 71 cases to the relevant authorities for further measures. With 46 cases still pending, 82 were not passed on, said the SIC’s annual report, presumably because they were unsubstantiated. The total number of reported suspicious incidents last year was down from 2003, when 272 cases had been brought to the commission’s attention.

Anonymous cases described in the report as examples for money laundering typologies uncovered in Lebanon were small size by comparison to such investigations in international financial centers, confirming Baasiri’s contention that the Middle East plays no significant part in the problematic area of money laundering. However, 20 of last year’s 199 cases in Lebanon were related to terrorism and terrorism finance suspicions, and five to embezzlement of public funds, while almost half of the cases were not classified. Of the terrorism cases, 17 involving 47 suspects were based on requests from the UN or the US.

Another aspect of the SIC’s work in Lebanon is the supervision of alignment with AML standards through financial market participants. Undertaken by the commission’s compliance unit, this unit’s work contributed in 2004 to an intensification of the guidelines for requirements for external audits of banks and financial institutions in producing their AML reports. The unit inspected 24 banks, 24 financial institutions, and 24 insurance companies as well as 43 money dealers as to their compliance and issued several reprimands to firms that failed to follow through on corrective measures.

Those that complied

Due to the composition of the country’s financial sector and operator numbers in the different categories, compliance supervision was highest for finance firms (83%), followed by banks and insurers (38 and 44%, respectively) and lastly, money dealers (11%). Behind such dry numbers, what the work of the Mehlis investigation, the SIC and financial intelligence units elsewhere underlines is that money in the 21st century’s global economy is more than ever the track to follow when chasing the bad and the ugly. And pausing for a moment of pondering the flipside of this coin, it is also an important track in pushing for the best.

Since the early 1990s until the dot com crash, discussions on the future of economics abounded with ideas about the abstraction of money through modern payment systems. Some of the more extreme concepts proposed that “virtual money” would soon rule the internet-based economy. Lately, virtual money has found its home, not in online purchases but as a part of the online games experience.

But it is in the real world where money becomes more and more an abstract expression of trust. Safeguarding the numbers that reflect our economic achievements, is a job that requires the skills and integrity of governments and central banks.

This is the funny thing about dealing with money today: all those numbers that define the financial world represent value without allowing a single touch. If money is the tangible physical means that binds the economy into a coherent system, electronic money is this system’s metaphysics. As this invisible force has assumed more and more of the functions that make the system work, the mission of managing money becomes inseparable from the tasks of weeding out the bad and strengthening the good.
 

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Economics & Policy

What Lebanon can Learn from the Turkish Experience

by Faysal Badran
written by Faysal Badran

The end game for developing countries, in this day and age, is the ability to attract and maintain capital investment. The catalyst to this inflow is, broadly speaking, a mix of infrastructure rehabilitation and reform. There are numerous trajectories in the developed world, but in many instances reform is slow, and the corollary of sustainable economic growth suffers. Most developing countries, dragged down by decades, sometimes centuries, of corruption and inefficiencies built into the system, see their economic fortunes stutter. Key to shifting gears into higher growth, higher employment, and better overall development has been countries’ ability and willingness to embark on reforms and business promotion.

Turkey’s turn

In this respect, Lebanon may have quite a few lessons to learn from Turkey. As Turkey has made headway into strengthening and revitalizing its public sector and improving its efficiency, it has become, within the span of three decades, a regional economic powerhouse that is close to joining Europe. This has reshaped its image. Obviously, integrating with Europe is not a Lebanese objective, but the mechanisms of change and reform to enter are ones that are applicable to a lot of countries.

Turkey is at a crossroads. After hitting the most severe crisis of its recent history over 2000 to 2001, the economy bounced back and is now among one of the fastest growing economies in the Organization for Economic Cooperation and Development (OECD). A new institutional framework for monetary and fiscal policies, as well as for product, labor and financial markets, infrastructure, industries, and agricultural support, has opened a window of opportunity to escape from the triple evils of low confidence, weak governance and high informality, which underpinned the boom and bust cycle of the past – so as to embark upon on a path of growth. Success will depend on fully implementing and completing the new policy framework, but at least the path has been laid down.

Following the crisis of 2000-2001 which saw multiple currency collapses coupled with a run on Turkish bonds, the effort to reform, based on EU convergence criteria as well as strong pressure from the IMF, has led to a purge of sorts on the political landscape, and has led to an overall effort to overhaul the macroeconomic platform of the government. While Turkey still suffers from many “growing pains,” it has set itself in an international straight jacket of change. This would be an ideal situation for Lebanon. Since organic change remains highly doubtful with ongoing political bickering and the eternal sectarian debate, international economic pressure or other incentives would be highly beneficial. High unemployment and poverty are typically mirror images of the same sequence of symptom and cause. The experience of the past decade in developing economies has demonstrated that the high priority of economic reform and privatization of inefficient public entities is key to long-term efficiency and job creation. Yet this effort, which initially leads to job cuts, is frustrated by the absence of alternative job-creating mechanisms, which creates a vicious circle that does not augur well for the future. What is needed is a private sector framework with public sector support and participation to inculcate a culture of venture capital as an effective means for job creation, accelerated growth, and enhanced innovation and competitiveness in emerging economies. Turkey has been able to promote a private venture culture, which has not only offset some contraction-related aspects of tighter fiscal policy, but has also increased multinational interest in Turkey and has seen the GDP of Turkey rise dramatically over the last five years.

Taking up the mantle

An area of which Lebanon would do well to emulate Turkey, is in gathering and building political consensus on the economic and fiscal imperatives. For now, much of the politics in Lebanon revolves around feudal/tribal issues, and while the fiscal time bomb is ticking away, there is little effort, bar those of the prime minister and his cabinet, to ring the budgetary and macroeconomic alarm bell. Much like in Lebanon, the level and growth rate of public debt became the primary source of macroeconomic vulnerability in Turkey following the 2001 crisis, which saw a public net debt to GNP ratio of around 90% while raising concerns in domestic and international markets about its sustainability. The debt stock’s short maturity and the large share of foreign-currency linked securities implied particularly high rates of rollover on domestic and international markets, increasing the vulnerability to interest rate and currency rate shocks. Although Turkey has made remarkable progress in restoring debt sustainability with high primary surpluses, lower borrowing costs, currency appreciation and high growth – which all helped reduce the public net debt to GNP ratio to about 70% at the end of 2003 – risk factors remain, albeit to a lesser extent.

Turkey, in its drive to enter an economic order and deliver the EU criteria, has forced itself into drastic reform on the way the public sector operates, and while it did resort to privatization, it is not clear that privatization alone will do the trick in Lebanon as many pundits seem to think.

Proceeding with caution

Privatization, without the fostering of private venture capital is tantamount to a fire sale of state assets, and Lebanon would do well to emulate Turkey’s efforts to promote the incubation of many private businesses, offering tax breaks and facilitating their access to capital markets. So, while Turkey did lower the burden of the public sector through reform and privatization, it also nurtured private enterprise, and created an environment of trust for Turkish nationals wishing to set up shop in Turkey.

Please don’t write in to point out the differences between Turkey and Lebanon; they are obvious. Turkey is bigger, more industrialized and more ethnically homogenous, but in a lot of ways, its transition into a more liberal, more vibrant and more globalization-friendly place is replicable in many emerging countries including Lebanon.

Perhaps the most delicate but relevant aspect of modern Turkey, in my opinion, is the secular nature of its system. Turkey has made a clear separation between state and religion, and while Islamists have made significant headway into the political arena, the overall functioning of the state is unperturbed by religion. We could learn a lot from this experience, for to become a genuinely open system and to integrate the international community; a transparent and strong civil society needs to flourish. There is no alternative. Turkey and its youth, much like in Lebanon, is clearly immersed in Western culture, but the difference is, Lebanon’s elite is cosmopolitan but its political system and its corresponding social fabric remains archaic and racist to a large extent. Yes, the make up of Turkish society is truly homogenous, with Muslims representing 99% of the population, but the society is quite secular and the political lines are drawn based on ideas and platforms.

Turkey has reoriented its priorities towards business and growth areas, and has continued to shrink the public sector. While this has caused some dislocations, it has been the pillar of the revival of Turkey. More importantly, and in order to continue receiving aid and easy access to the global debt market, Turkey has forced itself into a long introspection of its economic raison d’etre, something badly needed in Lebanon. Turkey has understood that in order to prosper, it must comply with a path of reform set out by the IMF, OECD and World Bank. There is simply no other way, and rather than dump its state assets in an ad hoc way, it has gradually improved their operating efficacy before privatizing.

Getting with the program

Turkey has grasped and implemented the notion that there is no debt solution without reform, and Lebanon should get in that frame of mind. Any thought of debt relief by the international community is ludicrous in Lebanon, because most of the debt is held by Lebanese banks. So there is no short cut. Turkey also realized that there is no sense in maintaining a large government when instead, it could rely on private business to be the engine of growth. It attracted strong minded and educated Turks back into Turkey to create businesses and jobs. We, in Lebanon, because of the rot in our system due to corruption and sleaze politics, are hardly an ad for Lebanese wanting to create businesses here.

Surely, we have a lot to learn from Turkey. Built on the weak remnants of the Ottoman Empire, this country has placed itself in a position of strength, built important alliances, and promoted a culture of change and sustainable development. Lebanon would do well to copy, in spirit, the approach of Turkey in prioritizing the economy over politics, in promoting private enterprise, and in embracing globalization by acting in the national interest in forging a strong working relationship with the industrialized world and its institutions.
Turkey has come a long way from its depiction of a dictatorship with little economic hope simply by adhering to the global economic textbook and by strengthening its institutions. Turkey has quadrupled its revenues from tourism in ten years as well as becoming one of the top Mediterranean destinations by assisting tourist projects and emphasizing a clean tourism environment.

In its bid to enter the European process, Turkey has had to make many tough concessions in order to fit in. When we hear of Saudi Arabia entering the WTO, one wonders how ready is Lebanon? As Turkey integrates an economic bloc, it has had to shape up.

We can only hope that Lebanon, driven by a desire to enter any kind of economic entity, will make significant changes to its modus vivendi, both economically and politically. It would therefore be beneficial to shoot for a similar path to Turkey, especially by realizing that deep structural and institutional change is the only way out. A strong banking sector, a piece meal tourism plan, and lip service to demands for change will not cut it this time around.
 

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Heaven via hell

by Yasser Akkaoui
written by Yasser Akkaoui

They say the people know best. It is possibly why we have the concept of democracy.

When the extension of the presidential mandate was bullied through parliament and the UN passed Resolution 1559, the word on the street was that things did not look bright for Mr. Hariri. The Syrians will get him, people whispered. And they had a point. The people had seen it all before. We even hinted at it in our February 2005 editorial, two weeks earlier. So when it came, the shock and horror was coated with déjà vu.

One month later, it was the same gut feeling that pushed 1.3 million people onto the streets. Enough was enough. We knew it was time for Damascus to go and the people told it to.

Then, in the run up to the release of the UN Mehlis report, came the same whispers, this time predictions of a “suicide” or “accident” in Syria; for there would have to be a fall guy. And so it came to pass. Ghazi Kanaan was, as the people said, “suicided.”

And when Herr Mehlis showed us what he found, it merely confirmed what we already knew, a knowledge accrued over years of witnessing first hand the activities of what one interviewee in the report described as “Murder Inc.”

And economically we can see our own destiny. We can see a gleaming world of skyscrapers and prosperity. The word is out and the Lebanese trading genes are limbering up for the biggest boom in years. The real estate investment in Solidere and elsewhere in Beirut and other tourism and retail projects all herald what is most certainly likely to be a bonanza, one that will free the nation from the shackles of mediocrity, sell off state burdens and fly the flag of private enterprise. If there is one force that shapes the Lebanese instinct, it is that which drives it to trade, to deal, to sell and to build. It is a force that even when knocked down, will rebuild because it knows nothing else.

We know who we are and we know where we live. We trust our own instincts. We should go by them.

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Economics & Policy

Andy Kemp talks oil

by Thomas Schellen
written by Thomas Schellen

 

 

Levant Oil, incorporated in Lebanon, has been trading, importing and storing oil derivatives since it opened a storage terminal in Jiyeh in 2001. This year, the company is launching a chain of “LEO” gas stations across Lebanon. The Levant Oil Group comprises three companies: Levant Oil International, which started up in February 2005, and specializes in general oil trading and business development; Levant Oil, which specializes in storage and distribution within Lebanon; and LEO, which started up a few months ago and specializes in lubricant blending and station development. Andy Kemp heads Levant Oil International’s import operations. He has also worked for Shell Oil, Goldman Sachs and Salomon Smith Barney. Executive asked him about Levant Oil’s new chain of service stations and Lebanon’s oil sector in general.

E What is the rationale behind opening the new service station chain now?

I think it’s an effort to provide a more integrated, stable company system. If you import into Lebanon you are to some extent restricted as to how much market share you have, and to some extent to wholesalers and intermediaries and so on. So if you have your own chain you have a slightly more stable system. Levant Oil is also an attempt to build a brand and one of the most important ways to build a brand is to have retail networks.

 

E How important are the plans to build the LEO station network in the revenue projections at Levant Oil?

It will help stabilize your revenues by having your fixed off-take systems. But it’s a bit of a double-edged sword of course, because when we live in a posted-price environment here, there are times when it’s actually a disadvantage because you are obliged to be supplying your own terminals, your own retail network when realistically you don’t want to do that. So it’s a double-edged sword. On the one hand you have a consistency of off-take and you have some margin income that’s fixed from that off-take. But at the same time it’s an obligation. So my own personal view is that it’s part of the brand-building exercise. It’s part of an integration exercise. There is some value in it but you have to be particularly cautious and not make it too large.

E How much of your income do you plan to derive from secondary business, i.e. sales of side items, car washes, mechanical or maintenance services?

I’m a firm believer in that. The retail network is extremely well established. There are far too many retail stations. Everybody has too much choice. There seems to be quite an obsession with having retail networks. It’s fairly expensive to set up a new petrol station. There are an enormous number of them here. I’m a little surprised at how many retail stations there are. It can’t be particularly efficient, and people are building new ones. Perhaps it’s a characteristic of local business. So I think you have to go into some kind of added value element. You compare it to ones in the UK. They have supermarkets and they have just about everything in them that you can imagine. There has to be some extra value to having a retail station.

E Consumers have been shielded from strong oil price increases over the past year by a government cap on prices at the pump. How does this affect the margins of traders?

It doesn’t, because inside the government formula are a bunch of add-ons. In fact, you net back to an element of price which reflects the international market. What varies seems to be the amount of tax that is taken by the government. They have had the chance, in the last few months, to raise retail prices slightly and perhaps should have taken that opportunity when the time was there. But to us it doesn’t make an enormous amount of difference. It does, of course, if there’s no money left for tax, which has been the case lately.

E Would an end to government caps on fuel prices affect the consumption of your products?

I think so. I think there is an elasticity of demand here. I think it’s probably more pronounced in this country than in stronger Western economies. You’ll have an effect on demand with higher prices, that’s for sure.

E As traders, you import oil derivatives. Where do you get your best deals these days?

Most come from places like Italy, Greece, France, Romania, sometimes from other locations, but the bulk comes from those kinds of areas. There are only a certain number of refineries in Europe and that’s where the refineries are situated.

E Where can you make profits in the import and distribution of oil derivatives?

There are margins, obviously, between the importation price and wholesale prices. There are margins in the wholesale chain. The system that’s executed here does provide some protections for the importers, but with the market movements that you’ve seen lately it’s not a great deal of protection. If you get it wrong, you get it very wildly wrong.

E Is the quality of oil derivates imported to Lebanon better today than five or ten years ago?

Yes. For the most part, the qualities imported here are pretty similar to European norms. Some of the specifications like for example, gasoline have been improved; diesel’s been improved again in Europe. We’re not like them at the moment. But mainly it’s pretty similar. In Europe in particular the sulphur specifications are tighter. Diesels, for example, are now more commonly 10 parts per million (ppm) diesel in Europe. We are largely importing 50 ppm but we can import much much higher levels of sulphur in the diesel if we wish. So, there are some improvements going on but in the main it’s pretty good diesel and pretty good gasoline that’s being imported here for the moment. Where there are probably large differences is with the power stations. There are power stations on gas oil, which is a form of diesel and has a very high sulphur specification. When you compare it with 50 ppm, and you’re talking about half a percent, it’s more like 5,000 ppm. That is an anomaly.

E Are the current industry structures good for the consumer or could you envision improvements through more competition, new regulations, or other changes?

It’s a very strange system here in Lebanon. A large number of oil terminals – I think I once counted up 24 oil terminals – are all lots of little oil terminals distributed up the coast. So ships will come and go to three locations, which is not a particularly economic thing to do. The feudal system in Lebanon is really the way things work and the system as it stands at the moment is a workable system. The infrastructure here though is a little bit anomalous. Government oil storage installations are severely underutilized. Look at Zahrani for example. A terminal in Europe is expected to turn over more than one times its capacity in a month. Here in Lebanon I’d be surprised if the turnover in the private storage locations for the imports of gasoline and diesel is much over 0.3 [of their capactiy] a month and that’s really underutilizing the terminal capacity. In addition, the valuation of assets is too high. If you compare it to other examples internationally these are not assets that would be valued at the rates they are here. Partially it’s done on land costs, partially on cash flow for margins. There are so many people who have invested money over the years at times when the situation was different. They have legacies. They have asset investments that they have to maintain at value. That’s the barrier now to a more efficient infrastructure here in the country, these legacies.

E There have been many allegations of cartel structures in Lebanon’s energy industry. Do such structures exist in the private sector importation and distribution business or only in other parts of the energy sector?

Perhaps what you’re referring to is for example the pool system with importation for the private sector, which is effectively cooperation between groups for imports. But there is actually a logic to this. It’s back to the feudal structure. It partly works because people can combine to import these cargos themselves so if you want to call it a cartel you probably could, but it’s not for anti-consumer purposes. Quite the reverse. It actually allows people to bring in bigger shipments that are more economic to bring in. For example, all the people in the pool, which we’re not a member of – we came and we left – will provide a sealed tender for their importation and the best price wins, so effectively it’s not really a cartel in that sense. It’s actually for the consumer benefit because they will get the best prices for the importations that way. By cooperating, they can bring in 30,000 ton cargos when some terminals will only take a few thousand.

E Why did you leave the pool?

We preferred to have our own flexibility. The pool works for the people in it due to their locations. We’re probably a number too many. We have the capacity to bring in our own 30,000 ton ships without the pool. The problem for us was that we would end up taking small pieces off a number of different ships that came in. It’s not particularly economic. If you say that a ship will cost you about $20,000 to $25,000 each port it goes to, if you’re going for just a few thousand tons or for 30,000 tons it makes quite a substantial difference to your economics.

E Where do you expect our energy costs to go over the long term, and how do you plan your business strategy in response to potential ‘energy wars’ or consistent high costs?

If there was an energy war I think we would be in particularly good shape because we have a terminal that has a reasonable size to it. We have the capacity to bring in ships ourselves. We have an efficient system. We have a relatively low cost base. We don’t have historical debts. It would just crush margins in the short run and I don’t fear for that. I would have thought that the government would need to consider – and I obviously don’t want to say anything that would upset the consumer – reflecting the new reality of world oil prices some time and to do it gradually so that people can absorb it and adjust to it. They really need to not avoid the situation that’s out there. They need to deal with it.

E How much of your revenue do you reinvest in environmental safety measures?

The oil terminal is currently being ISO-approved. It has the requisite systems on it, to, for example, stop evaporation losses and cooling systems to minimize any kind of airborne losses. Our terminal is well looked after in that respect and the ISO qualifications should endorse that.

E What effect does the ongoing instability in Lebanon have on your strategy and projections?

On a general level I think that the Lebanese have a business spirit that stands them in extremely good stead. Effectively, the issues that we see around us can prevent investment and the creation of a more organizational structure. We have a lot of individual small companies that are ruled as fiefdoms. At some point Lebanon needs to evolve to where companies actually run themselves. And those structures could, with the Lebanese spirit, become very powerful in the region. The factors that we’ve seen lately don’t help the Lebanese situation of development and growth, despite the fact that it is well placed to do so. And it’s missing out on the growth that you see in Amman and other places nearby.

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Economics & Policy

Open for trading: The DIFX takes off

by Nicolas Photiades
written by Nicolas Photiades

Since the fateful events of 9/11 in New York, the phenomenon of investment repatriation by Gulf Arabs has accelerated significantly. Indeed, since 2002, Saudi investors are believed to have withdrawn more than $300 billion of investments from the US, while other Gulf countries are also said to have reeled-in roughly the same amount, if not more.

The record high price of oil has also contributed significantly towards this new prosperity and high level of liquidity in the Middle East. However, this liquidity has flooded a region that has been stagnating for the last decade in terms of investments, and has not been matched by a similar number of placement opportunities … until now that is.

Three years ago the return of Arab money prompted the launch of plans for a regional, modern and efficient financial exchange in Dubai. The result, rather predictably, is the Dubai International Financial Exchange (DIFX), which opened for business in September 2005, and which now gives international investors full access to Middle East companies.

It is part of the legally autonomous Dubai International Financial Centre (DIFC), a 110-acre “mini state,” which was also inaugurated in September, and which has, with the help of British and Australian regulators, established the Dubai Financial Services Authority (DFSA), a special capital markets authority to regulate the exchange and ensure it complies with international regulatory standards whilst supervising all capital market transactions that go through the DIFX. All successful exchanges traditionally set up a rigorously run capital markets authority to supervise capital markets transactions, and it is up to the DFSA to ensure that transparency is kept high at all times, and only suitable companies that fulfill investors’ needs get their securities listed on the exchange.

Taking it international

Thus the DIFX is unique, even by world standards, as it is a new financial exchange with a primarily international outlook. Most are usually set up as national exchanges, which become tied to the domestic economy for long periods of time. Some national exchanges, such as those in London or New York, have gradually developed into international exchanges, welcoming companies wishing to be listed from all over the world. However, the process is usually slow and it is clear that with the significant amount of liquidity available in the Gulf region, the DIFC felt it had no time to waste in making the DIFX into both a regional and international exchange from the beginning. While the old Dubai Stock Exchange has been kept operational by the Dubai government, the DIFX has been created and set up separately to cater for regional companies and to complement markets in the rest of the Middle East.

Until now, the various local exchanges of the Middle East have had limited success, as they all operate along national lines, with their potential being highly dependent on the way their national economies develop and prosper (the Beirut Stock Exchange (BSE) for example, doesn’t even have a capital markets authority in place). The exchanges stand out by their lack of attractiveness, given the dire state of their domestic economies, and a consequent lack of liquidity in secondary markets.

Another issue is that Middle Eastern equity markets have, for very long periods, been closed to foreigners, and have been operating under different rules from those established in other regions. While international investors have been limited in what regional securities they can buy and how they can buy them (settlements, currency, etc.), regional investors have been restricted as to where they can buy securities emanating from different parts of their own region. Most of the exchanges in the Gulf have, until now, been dependent on demand from oil-rich institutions and individuals, while exchanges in Lebanon, Egypt, Jordan and other non-oil Arab countries, have been relying on retail investors with traditionally limited capabilities.

Today, investors throughout the Middle East, particularly the cash-rich nations of the Gulf, are keen to diversify their investment interests beyond oil-related stocks and local real estate companies. Such desires for diversification and strong demand for securities issued regionally can only be met by international exchanges such as the DIFX. The latter is aiming to trade in US dollars and to place no limits on foreign ownership. The minimum listing requirements are expected to attract companies from throughout the region, as well as companies from Africa (demand from South African mining companies has been registered), Turkey, India and China (which interestingly are starting to use the DIFX option, even though they can use the Hong Kong and Singapore markets). According to the exchange’s officials, Egyptian and Lebanese companies have also shown interest in the DIFX, with the latest example being a potential listing of the recently much publicized and significantly over-subscribed IPO (Initial Public Offering) of Investcom, a telecommunications company owned and controlled by the Lebanese Mikati family (see pages 48 to 70).

The DIFX is ambitious. It is aiming for at least 15 IPOs and as many secondary listings in the next 18 months. This is more than just mere hype, as the recent IPOs that have already taken place and which got listed on the DIFX, such as ADDAR Real Estate ($225 million), the Saudi consumer dairy company Almarai, and the Saudi Dairy and Foodstuff Company (SADAFCO), were heavily over-subscribed. ADDAR was impressively 450 times covered, while Almarai and SADAFCO were respectively 3.5 times and 6.5 times oversubscribed. This severe over-subscription is a reflection of the heavy demand for too few investment opportunities, and the future looks bright for this new exchange, which is relying on its light but solid regulations and international outlook to attract companies from Asian and African markets.

Pre-placing IPOs

Demand for newly issued regional securities is such that even the usual process of underwriting is often unnecessary. The high demand emanating from Gulf individual and institutional investors, as well as from Islamic banks – which are the fastest growing type of financial institution in the world (annual growth in both profits and assets is estimated to range between 10% to 15%) and which focus solely on placing cheap funding into non-interest paying assets such as shares – is such that all IPOs are pre-placed before the official date of their issue.

The DIFX is also looking to see listings across sectors, despite initial concerns that securities issued by the oil and gas sector would dominate. Currently, the DIFX includes companies with market capitalizations ranging from $100 million to $1.5 billion, reflecting the accessibility of this exchange. All kinds of securities are expected to be listed, including traditional equities, bonds, sukuks (Islamic bonds) and even Global Depositary Receipts, particularly those issued by Indian companies. Expansion of the exchange over time should add derivatives to this diversified pot of securities, as the high accessibility of capital through the DIFX is recognized in the medium-term.

The DIFX is also the first vehicle through which demand for capital would be optimized. No wonder Chinese, Indian and South African companies are feeling the necessity to launch their IPOs through this exchange, which finally offers our own Lebanese companies a real opportunity to go global, diversify funding and revenues, and gain substantially in terms of reputation. The massive success of the Investcom IPO (through both London and the DIFX) and the significant over-subscription (believed to have exceeded 10 times) is proof of the strong demand for Lebanese shares and securities that awaits any visionary Lebanon-based company in need of capital boosting.

With the Lebanese government planning to resume a much-awaited and overdue privatization program, the launch of the DIFX could not have been timelier. Before the opening of the DIFX, it was not clear whether Lebanese privatization would have been successful. However, the recent IPOs of Gulf companies, as well as Investcom, have proved many skeptics wrong, including this writer.

Although strategic institutional investors are still needed in the privatization of Lebanese public institutions (particularly the utilities such as EDL and water), the Lebanese government now has the added comfort of raising capital and urgent cash out of listing on the DIFX. Sadly, this could be bad news for the BSE, as Gulf and Lebanese investors find it more practical and transparent to buy Lebanese privatization shares directly through the DIFX.

Although some issues of corporate governance and interference from the DIFC’s top bosses remain, it is obvious that the creation of the DIFC and the DIFX is the step that will propel the Arab financial world forward into the 21st century. With such a tool paving the way for an explosion in Arab capital markets and consequent regional prosperity, it would be a shame if all of it were to collapse due to weak corporate governance and control freak behavior.

 

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