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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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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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Business

Ready For Take-Off

by Anthony Mills
written by Anthony Mills

In the United States today more than a third of all plane tickets are bought on the web, thanks in great part to the fact that 68% of the country’s 328 million inhabitants use the internet – according to www.internetworldstats.com – and that the credit card has become almost as ubiquitous as the wristwatch. In stark contrast, across the Middle East, only 8.2% of roughly 261 million inhabitants use the internet and many people have never seen a credit card. But despite this world of difference, Mitri Kurban, a partner of Lebanon’s Kurban Travel, is convinced that now is the time to launch a Middle East online travel booking agency – appropriately named uflyonline.com.

A revamped concept

Uflyonline – the website – has actually been around for a couple of years. But it has kept a distinctly low profile, operating behind the existing travel agent Kurban Travel. So, although you could buy a ticket online, you had to pick it up from Kurban Travel. “Not the best way of doing it,” agreed Kurban. Only recently, though, did he and his fellow investors decide that the time was ripe to transform uflyonline from an unpublicized website into a fully-fledged, independent company – a move streamlined by a marketing campaign that by the end of the year will have cost almost a quarter of a million dollars (around 70% of total costs).

“Two years ago, we didn’t feel that the market was ready. For two years, we advertised only online. Now, more people in Lebanon and the region are using the internet, technology has advanced, the internet is much faster, and airlines like Emirates, Saudi Arabian Airlines and even MEA are using e-ticketing and the internet more,” Kurban said. “We have opened a real bricks-and-mortar shop to let people know that we exist, that internet booking is a reality, that it’s the best way to book for a journey. The shop is licensed and operated in Lebanon. It’s open 24 hours. The choice is there and prices are very competitive.

“If we don’t move into the business, in this region now, someone else is going to.”

Uflyonline had only been functioning in its new form for five days when Executive spoke to Kurban, but he said sales already indicated the marketing campaign was drawing customers to the site. “We’ve been positively surprised by the appetite of people for this service,” he said. “People have been catching on immediately, jumping on the internet and booking.” In the 48 hours before the interview, Kurban said, uflyonline had sold 10 tickets.

Following international trends

Kurban witnessed firsthand the boom in online booking in the United States when he was living there in the late 1990s, and predicted its spread to Europe. In fact, one of uflyonline’s current owners is a Frenchman who set up an online booking agency in Europe just as the boom was spreading. “He told me: we should try this in the Middle East,” Kurban recalled. “I began seeing how it could be implemented here. I went from Cairo to Dubai to Abu Dhabi to establish the system. It took us almost a year-and-a-half to create alliances and understand the business. And we had to adapt the technology. We dealt with a lot of problems, a lot of bugs. We changed our business plan many times. Finally, we came to the conclusion that we would have to set up a shop in each target city and begin promoting online booking as a real product and give people the choice.”

The company is owned by four partners: Kurban, the French online booking agency owner who suggested the Middle East venture to Kurban and apparently wishes to remain anonymous, Openfares, a Canadian software solutions company active in North and South America and Europe and hoping to expand into the Middle East, and a Saudi silent investor. Together, the four have already invested almost a million dollars.

An inexpensive startup

“That’s actually a very small amount for this type of business,” said Kurban. “The startup budget for my French partner’s Europe venture in 1998 was 12 million euros. Today it would cost him 30, 40 or 50 million euros.

“The reason it has cost us so little here is first, we haven’t done that much yet; second, the cost of advertising and many other costs are much lower; and third, we don’t for the moment have any competition.”

But Kurban said he expected competition to flourish as the concept took hold in the region. “We have noticed that Europe follows the US by three to four years,” he said. “And we follow Europe by three to five years. So the gap between the United States and us is about 10 years. Online travel developed in the United States in 1996. Today, almost a third of European air travelers purchase online. In five or six years from today, online booking may take a 10% share of the Middle East market.

“I don’t think it will ever reach 30% or 40%,” he added, “because of the lack of education, of people speaking the languages. But even 10% of the Middle East online market is a lot of money.”

Kurban said he expected the company to spend a lot more over the next few years establishing client bases across the Middle East.

In Lebanon, over the coming year, another $300,000 to $500,000 will be spent, he said. And then come other Arab countries. “If our Lebanon venture is successful, we’re moving into Dubai next, then Abu Dhabi, then probably Kuwait. We’ve seen a huge number of US soldiers using our services in Kuwait.” Kurban said the company expected to spend another $6 million in the region over the next three years.

Regional reach

When uflyonline established its low-key internet presence behind an existing travel agent in Lebanon two years ago, it did the same thing in seven other Arab countries – Bahrain, Egypt, Jordan, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates. And just as it has transformed itself in Lebanon into a fully-fledged independent company, so it hopes to do the same in the other seven countries.

Kurban said he sees the company breaking even within two years. He said he hoped to be doing $10 million worth of business in Lebanon within two years, “comparable to one of Lebanon’s top five travel agents,” or 3% of Lebanon’s roughly $300 million travel agency sector.

Kurban acknowledged that it may not be easy drawing customers in this part of the world away from the traditional face-to-face purchasing they are used to. The website “doesn’t talk,” he noted. But he is convinced that there are enough modern, aeroplane-using internet users in the Middle East to make the system work. And in an effort to retain a reassuring human element, uflyonline has established call centers that are open to queries during regular working hours. Customers are also free to pick up their tickets from uflyonline offices.

In another tacit admission that it will take time for Middle Eastern online bookers to become as automated as their Western counterparts, uflyonline doesn’t oblige customers to pay by credit card. “People are happy to drop in at our office and pay cash. Many don’t trust credit cards,” Kurban observed. Nonetheless, he added, half of the purchases over the past five days had been made by credit card. “For the moment we are educating people in the region,” he said.

Kurban is keen to stress that uflyonline is not a subsidiary of Kurban Travel. It is an entirely separate company. However, his share of the investment is effectively a Kurban Travel investment. “And so we’re trying to do it in a way that hurts Kurban Travel least,” Kurban explained. “That’s why we’re keeping it totally separate, so the customer doesn’t have two choices in the same office.”

Uflyonline currently counts 25 staff, of whom only seven actually work in Lebanon. “Everything else is outsourced to web and technology people, mostly in Canada,” explained Kurban.

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Crossing the rubicon

by Michael Young
written by Michael Young

With Lebanon having crossed the Rubicon of the Mehlis report, it must now prepare for the storm that will follow. In many respects, the country will have to use the upcoming months to define, or redefine, what kind of society it expects to be – whether one imbued with a capitalist culture of openness and free markets, or one racked by fear and diffidence.

The answer is not an easy one, as the Lebanese will have contradictory answers to the three major challenges they can be expected to face: addressing the implications of what the United Nations investigator Detlev Mehlis revealed, and the legal consequences of this; the breadth of economic reform, and the limits of the society’s openness. In his report, Mehlis found compelling evidence to hold Syrian and Lebanese security officials and politicians responsible for former premier Rafik Hariri’s assassination, and described a widespread conspiracy that appeared to reach to the top leaderships in both countries. Whereas Mehlis’ conclusions may invariably lead to a clash with Syria, the dictates of the free market point in an opposite direction, namely to some sort of agreement so that Lebanese exports can travel through the common border, but also so Syrian guarantees of Lebanese security make the investment climate agreeable. The only problem is that intimidation and free markets rarely mix for long: if one party gains the upper hand, mutually beneficial exchanges – of goods, services, and much else – come to a grinding halt in favor of imposition by the stronger party. That’s why the Lebanese were compelled to applaud when months ago Syria was forced to end its border blockade of Lebanon after Iraq imposed a similar blockade on goods entering Syria. In other words, the desire for free markets may have to come accompanied with recognition that turbulence in trade and other exchanges will probably be inevitable in the coming months. This will not mean the government has no role to play in alleviating the consequences; but it does mean that it should probably not be held responsible for a worsening relationship with Syria it will almost certainly have little control over.

The fate of reforms

If foreign trade suffers from the aftershocks of the Mehlis report, the question of domestic economic reform is a different matter altogether. The difficulties of privatization are well known, and the government will certainly have to face those politicians or parties expected to lose the most from a cutback in the civil service. But instead of letting the ambient tension freeze privatization, the Seniora government (if indeed it remains in office in the coming months) must try to use the momentum created by that tension, so that any effort to derail a bureaucratic cutback can be played up as Lebanon’s missing a chance to be on the same page as foreign aid donors.

That might work if all things remain constant. Otherwise, Prime Minister Fouad Seniora’s ability to pursue reform will be a function of political cohesiveness, or lack thereof. The prospect that Lebanon may enter into a period of confrontation over the presidency, for example, may mean many weeks of costly idleness, where the international community loses interest in Lebanon. A third question the Lebanese will have to answer is how open they want their society to be. This means, particularly, looking at the future of media freedoms. The bomb attack against LBCI anchorwoman May Chidiac came as a shock; it shouldn’t have after the assassination of An Nahar columnist Samir Kassir and the threats directed against other journalists, particularly An Nahar owner Gibran Tueni. Lebanese media have accepted a small measure of self-censorship, particularly on matters Syrian, but overall this has been limited to the commentariat – as many journalists understand, it is less what they say specifically that disturbs the neighbors than the fact that Lebanon has a relatively free media sector in general. A warning to one journalist is a warning to all, and if something must be clarified in the coming months, it’s how extensively journalists will defend this; but also how wide a margin of expression the government will give media outlets.

No turning back

The Mehlis report was a break-off point between Syrian-controlled Lebanon and what now follows. The findings will hardly bring serenity, but they do push us into a new phase where it’s up to the Lebanese to begin defining the system they intend to build. There are no easy answers, and relations with Syria are bound to worsen before they get better. In that time, Lebanon’s government and society should stick to the proven certainties: adhering to an internationally sanctioned legal process in the Hariri assassination, pushing economic reform, and defending an open society.

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What went wrong at investcom’s IPO?

by Executive Staff
written by Executive Staff

Much anticipation surrounded the launch of the IPO of Investcom Holdings in the Middle East. While the Lebanese company did not have any major assets in the GCC or the Levant, it benefited from a high profile due to the political heritage of its main shareholders, as well as its presence at a number of high profile auctions in Europe and Africa.

An initial assessment of the IPO’s success and investor response should have been very positive, underpinned by an eight times oversubscribed offering. Such a response to the offering was not surprising, given the plethora of high-net-worth GCC investors and institutions seeking to benefit from Investcom’s strong economic performance. Coupled with the buoyant equity markets in the region, subscription applications were running out at various receiving banks across the region. Lebanese and regional banks were able to satisfy investor demands, as the lead bookrunners and receiving banks mobilized large numbers of sales agents and private banking officers to ramp up demand for the IPO and funds began flowing into escrow accounts at various receiving banks. Press coverage continued to entice new investors, and the Dubai International Financial Exchange (DIFX) was capitalizing on the hype to boost its own profile as a regional stock exchange, where Investcom would be the first listed company.

It wasn’t until the subscription period came to a close and allocations were complete that investors began to realize that things had not gone according to plan. Then the phones began to ring. Many high-profile GCC investors, who had put tens of millions of dollars into escrow accounts, had received practically no share allocation at all. Outrage erupted, but the underlying reason for the fallout was simple.

What transpired

The share allocation for Investcom’s IPO was completely “discretionary,” following neither the “pro-rata” nor “equal allocation” share offering formula (see box). The ultimate result was that Investcom alienated a large number of GCC investors, who are now up in arms at the results of the offering and are publicly vowing to be more cautious in future business dealings with the company unless satisfactory explanations are provided.

Perhaps one would understand the position of such investors, given that they were personally and individually approached by Investcom to subscribe to the IPO, and despite putting up a combined amount of more than $100 million, none received a single share in the company.

To make matters worse, upon receipt of notification by Investcom of no allocation of shares, those investors were also notified in writing that Investcom would immediately return the funds transferred by those investors (which had already been in an Investcom escrow account for a week). The refunds, however, didn’t materialize for another week. Assuming an average credit interest rate of 4%, the opportunity cost for those investors exceeded $150,000.

As of the date of the publication of this article, Investcom has not yet publicly responded to such allegations, which have ultimately prompted a group of large GCC investors to prepare an organized action to lodge an official complaint with the Lebanese government. Whether such a move is more of a theatrical ploy to spur a response from Investcom is not clear, but there is no doubt that many high-profile investors in the Gulf are irate.

They were not the only ones affected by the allocation. Most investors were brought in through the receiving banks appointed by the lead bookrunners (HSBC and Citigroup) for the GCC. The receiving banks included Abu Dhabi Commercial Bank, Audi Saradar Investment Bank, Dubai Bank and the Global Investment House in Kuwait. Some investors blamed their receiving bank for not securing the sought allocation. Many of those receiving banks in turn invested heavily in promoting the IPO, only to receive minimal allocation (and consequently a fraction of the placement fees).

While it may be difficult to clearly understand Investcom’s reasoning, this is how they might argue their case: Investcom was undertaking the IPO primarily to raise additional funding for new telecom acquisitions (such as Spacetel Yemen); and provide an opportunity for the founding shareholders to reap the benefits of their work (with the added benefit of reshuffling the shareholder structure of the company).

With the total offering accounting for 25% of the company’s overall share capital, the ultimate post-IPO shareholder/ownership structure would be a serious consideration to Investcom’s management and existing shareholders. With some of the largest GCC-based investors capable of bidding sufficient amounts to acquire a blocking or influential minority stake in the company, Investcom might be justified in attempting to keep the ownership structure in favor of management, and therefore avoiding the risk of a future hostile take-over. In effect, the discretionary allocation ultimately allowed Investcom to maintain an ownership structure for the 25% offered. It was highly fragmented in certain cases, and in the hands of “loyal” investors.

Interest in Investcom was fourfold. It was the first IPO of a Lebanese company outside Lebanon and a high-profile telecom IPO when the telecom craze was at its peak in the Middle East. GCC investors were (and are) swimming in liquidity, and last but not least, by any stretch it was the inaugural IPO of the new Dubai International Financial Exchange.

Whether the disappointment felt by GCC investors in the allocation will deter them from putting money on the table again, or whether Investcom’s experience should be a lesson learned for future IPOs, smaller investors continue to satisfy their appetite for speculative trades given market and liquidity conditions.

Still there is a bottom line. In the finance community, an IPO’s success does not culminate with raising enough funds to cover the offering, but with the performance of the listed shares in the immediate period following the listing. In the case of Investcom, the stock is up less than 10% since listing on the London Stock Exchange, in comparison to post-listing gains of more than 100% on recent Saudi or UAE IPOs.

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Investcom: Lebanon’s Telecom adventurers

by Tarek Zein
written by Tarek Zein

The figures from the Investcom IPO were truly phenomenal, making it the biggest international share sale by a Middle East company. Some 59.9 million Global Depositary Shares (GDS) with a value of $12.35 each were sold, totaling $741 million. Representing 22.6% of the company, the share sale – which was eight times oversubscribed – created a $3.3 billion market capitalization for the company. It may sound similar to many offerings in today’s booming Gulf, but this one was special: it was homegrown in Lebanon, compliments of the Mikati family. But what made Investcom Holding so attractive to investors? How does the company operate and how does it differ from its competitors, the giant Orascom Telecom and the market thirsty MTC Group?

History of the company

Since its conception, Investcom Holding has transformed itself from solely offering telecommunications engineering services to managing one of the largest mobile telecommunications empires in the region with licenses in 10 countries.

The story began in 1984, during the height of the Lebanese civil war, when Taha Mikati, scion of a respectable Sunni family from Tripoli, founded the Investcom Group to provide telecommunications engineering services in Lebanon via Inteltec (the group had been offering similar services since 1982, before the company was officially founded as a corporate entity). After entering into the field of radio communications and the operation of private satellite terminals, Investcom constructed, implemented and launched Lebanon’s first Advanced Mobile Phone System (AMPS) mobile network in 1991. It was the first such privately owned and operated network in the Middle East. The network gave the group its first real exposure to the management and operation of mobile telephony. However, the AMPS network provides for analog cellulars operating in the 800 MHz band, compared to GSM, which usually operates in the 900 and 1800 MHz band. Considered a first generation technology – it was susceptible to static and interference and lacked adequate voice quality, privacy and service requirements – the rudimentary network was quickly replaced worldwide by the more advanced and popular digital service.

Investcom followed suite and in 1994, the company acquired its first GSM license when it won – along with France Telecom – a BOT contract put forward by the Hariri government, allowing it to operate the France Telecom Mobile Liban (FTML) network – more commonly known as Cellis. FTML, a joint venture between France Telecom Mobile International (66.7%) and the Mikati Group (33.3%), was Investcom’s first venture into the GSM field and its springboard for successful expansion within the region. Through the operation of this state-of-the-art network – which recorded unparalleled growth levels – Investcom was able to amass the expertise required to become a major regional player, especially since France Telecom was able to transfer its years of know-how on through constant vocational and technical training. During this period, Investcom also began weaving tight-knit relationships with strategic firms such as Ericsson, Siemens and Nexans – all of which now play important roles in the company’s expansion strategy.

Diversification has been key

While Investcom did stumble and lose its 350,000 subscriber-strong FTML network due to tedious Lebanese political infighting – especially between President Emile Lahoud and the late premier Rafik Hariri – the company was able to plant enough seeds in other countries and secure enough financing from Lebanese banks to minimize the impact of the loss.

As early as 1996, Investcom had moved into Ghana, a country with a population of over 21 million that coincidentally, also boasts a powerful Lebanese community. This move not only showcased the company’s intent to expand but also highlighted its strategy to enter under-developed markets. In 2000, Investcom took over a license in Benin and in 2001 it was able to enter the cellular markets of Liberia, Syria and Yemen. By the time the Lebanese government revoked the BOT contract awarded to the FTML joint venture, Investcom already had a solid presence in five countries with a total population of some 70 million. And by the time Investcom offered its GDS shares, it was also operating in Guinea Bissau (2004), Cyprus (2004) and Sudan (2005) – effectively increasing the population it covers to 107 million. Additionally, the company has recently won licenses in Guinea (2005) and Afghanistan (2005) where it still is in the process of installing the necessary infrastructure before officially launching operations. Investcom Holding currently boasts a total subscriber base of some 3.3 million customers in countries with low mobile penetration rates and even lower fixed line penetration rates.

Reviewing strategy

The numbers are impressive, but questions remain over the company’s decision to operate in such poor markets. With the exception of Cyprus, with its population of 700,000 and a GDP per capita of $22,000, all of Investcom’s operations are located in under-developed economies (see box). Yet under-developed economies have come to mean one thing to Investcom: emerging economies with under-penetrated cellular markets and high growth rates. And Investcom truly believes that it has enough expertise to turn these highly under-penetrated markets into profitable operations, no doubt a talent acquired from operating the first GSM network in the Middle East.

Fixed-line telephone penetration in most of the countries Investcom operates in is below 10% – with the exception of 13.6% in Syria and 60.6% in Cyprus – while mobile telephony penetration is below 15% – with the exception of 109% in Cyprus.

In comparison, fixed-line and mobile penetration rates stands at 56% and 95% in Western Europe. And it is these low-penetration rates that Investcom is seeking since the growth of its business largely depends on the continued development of the mobile telecommunications market it operates in. All of its markets recorded high year-on-year mobile growth rates, ranging from 124% in Liberia to 30.8% in Benin during 2003/2004 (the more developed Cyprus recorded a 19.3% increase, still much higher than the increases in Western Europe). And to the advantage of Investcom, studies suggest that in a typical developing country, a rise of ten mobile phones per 100 people boosts GDP growth by 0.6%, thus creating a much favorable domino effect.

Moreover, the company seems to have well understood the dynamics and the shortfalls of operating in these mostly cash-based economies, explaining why it has focused selling its services via the easily accessible pre-paid cards instead of the more binding post-paid subscriptions – a rate which currently stands at over 83% of its total customer base, compared to 80% in 2004, 69% in 2003 and 65% in 2002. And such a focus – as volatile as it might be – seems to be paying off since Investcom’s number of subscribers increased from 1.9 million during the first half of 2004 to the current 3.3 million – representing an impressive 72% growth – while directly competing in its markets against famed rivals such as Norway-based Telenor (which has management control of One Touch in Ghana), Luxembourg-based Millicom (Ghana), Hong-Kong based Hutchison Telecom (Ghana), UAE-based Etisalat (through Telecel-Benin), Kuwait-based MTC (through Celtel in Sudan) and Cytamobile-Vodafone (Cyprus). Even more impressive, Investcom was able to increase its consolidated revenues from $408 million in 2003 to $633 million in 2004 – a 55% growth.

The shortfalls

“We operate in eight countries and have two more licenses under our belt. We have increased our customer base by 72% and our revenues by 55% in one year and we operate in high growth markets,” you might expect a PR manager at the firm to say. However, nice as it might sound, there is one major soft spot in this chef d’oeuvre.

Investcom’s revenues originate from three different sources: mobile telephony, international (through its Monaco-based Mednet) and fixed-line telephony and other services such as the provision of engineering and consulting services to third parties. Standing at $551 million in 2004, mobile telephony alone represented a large 87.2% of the company’s consolidated revenues, compared to 83% in 2003 and 73% in 2002. And out of the total of $551 million, Syria and Ghana contributed the largest amount to Investcom’s gross operating revenues from mobile telephony, standing at 53% and 22% for 2004 respectively.

Additionally, out of the total customer base of 3.3 million in June 2005, 70% (or 2,317,453) were located in these two countries alone. These unbalanced ratios showcase the company’s current weaknesses to external factors, such as international sanctions or a complete change in government that seems to be looming, especially in Syria.

Another negative scenario could emerge from a deteriorating relationship with powerful economic personalities. Analysts say that no foreign company can operate in Syria, without the consent of Rami Makhlouf, the first cousin of Bashar al-Assad and an unforgiving businessman. One example of this occurred– which could occur in any country with an autocratic government – when Orascom Telecom was suddenly kicked out from SyriaTel over a brawl for management control after being awarded a BOT contract. “The court ordered to revoke the registration of the 720,000 SyriaTel shares from the name of Orascom Telecom and to re-register them in the name of Rami Makhlouf,” said a statement from SyriaTel. “The court further ordered Orascom Telecom to pay Makhlouf compensation of 1.062 billion Syrian pounds,” (about $20 million) continued the statement issued in 2002. If Investcom’s operation in Syria or Ghana is adversely affected one way or the other, then the company’s total operating revenue could take a hard, and potentially fatal, blow.
To avoid this, Investcom is currently working quickly to spread the contribution from its mobile telephony operations over four main countries – Syria, Ghana, Sudan and Yemen, and to a lesser extent Afghanistan. By focusing on these five main countries, which have a total population of 124.6 million, Investcom hopes to reduce the contribution of Syria and Ghana to around 50% during the next two years – to make it less vulnerable to these external factors.
This is expected to easily take place since Investcom just acquired an additional 40% interest in Spacetel Yemen from Al Bashair Telecom, increasing its shareholding to 82.8%, which will effectively allow Investcom to consolidate revenues from Spacetel Yemen in its accounts (Investcom was previously operating under a management contract). Additionally, with its operations in Sudan just off the ground, Investcom is expecting to see revenues from this country grow considerably in the coming months.

However, the real spread in mobile telephony contribution will occur by penetrating further markets. There is speculation that Investcom Holding is seriously looking to acquire the third mobile license in Saudi Arabia scheduled to be awarded in 2006 – a country which fits the Investcom profile of having a low-penetration rate and high growth potential. But Saudi Arabia, with its GDP per capita of $12,000 and population of 26 million, might prove to be too tough a target to acquire for the time being.

Etisalat, which won the second mobile phone license in Saudi Arabia in August of last year, had to pay a hefty $3.25 billion with the help of six heavyweight Saudi partners to overcome the tough competition coming from Spain’s Telefonica, Kuwait’s MTC, South Africa’s MTN Group, Egypt’s Orascom Telecom and Italy’s Telecom Italia Mobile.

In comparison, Investcom’s most expensive license fee was Sudan’s, at 150 million euro, while Afghanistan’s license cost a sizeable $40.1 million. Guinea’s cost 30 million euro, Ghana’s $22.5, Cyprus’s $28.5 million, Benin’s $9.6 million and 2.2 million euro for Guinea-Bissau. Investcom operates in Syria under a 15-year BOT contract that requires it to share its revenues incrementally throughout the years, from 30% during the first three years to 50% during last nine years.

Another possible operating environment said to attract Investcom’s attention is Iraq – a country that not only fits the company’s profile, but is also undergoing many security challenges that could put the big international telecom players’ bids on hold. Investcom, on the other hand, is known not to blanche at security issues and merely sees them as a 10% increase in operation costs.

Regional competition and the future

So is Investcom picking up the scraps of the major regional telecom players such as Orascom Telecom and the MTC Group, or is it emerging as a serious player?

In terms of its subscriber base, Investcom – with its 3.3 million customers – still trails behind MTC and Orascom. The MTC Group boasts a subscriber base of some 10.55 million customers in 18 countries – 6.55 million customers in 13 sub-Saharan countries were added in March 2005 when the group acquired Celtel and its various operations – while Orascom Telecom has a proportionate subscriber base of 14.8 million in six countries. This represents a current subscriber base one-third the size of the MTC Group and one fourth of Orascom Telecom.

Additionally, both companies enjoy enviable features that Investcom evidently lacks: strong financial backing and a good distribution of revenues. The MTC Group, with its sound financial support, is looking at exceeding 20 million subscribers by 2011, and is currently on the fast track of achieving this goal, while Orascom Telecom benefits from a comfortable spread in its revenue distribution (40% from Algeria, 25.3% from Pakistan, 15% from Egypt; 12% from Iraq, 5.4% from Tunisia and 0.8% from Bangladesh). Both companies are also located in strategic countries with high growth potential.

However, comparing the financials of all three companies through their services, to quote business portal Zawya.com, gives a clearer insight. For the year ending December 2004, Investcom Holding had a total of $824 million in assets – a fifth of that of Orascom Telecom and nearly one third of the MTC Group. Additionally, Investcom’s gross revenue for the same period reached $632 million – a third of Orascom and over half of that of the MTC Group. Operating profit was recorded at $219.6 million – more than half of the MTC Group and one third of Orascom. Finally, Investcom achieved a net profit of $148 million – over one third of that of the MTC Group and surprisingly, nearly half (44%) of Orascom Telecom. It is important to note that Investcom’s net profits for the first half of 2005 grew to $100.6 million from $73.7 million in the same period of 2004.

In any case, the recently successful IPO has equipped the company with enough ammunition to acquire other similar telecom licenses in Investcom-friendly markets, which in turn will allow it to better withstand the competition. As of October 24, 2005, Investcom’s market capitalization is $3.67 billion. It has caught the eye and faith of many, who are eagerly waiting to see what the Mikatis have up their well-tailored sleeve.
 

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