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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Business

Who Lost Out

by Clay Holden
written by Clay Holden

To listen to Jean Riachi tell it, the massive success of Investcom’s recent IPO offering could have been predicted by anyone in possession of even the most basic understanding of the regional investment market. “This was expected,” the chairman of Financial Fund Advisors (FFA) said, adding, “because once the IPO was announced, we received a lot of calls from Gulf customers who told us they were interested. And this level of interest was confirmed by HSBC and Citibank’s [participation] in the issue.” But what neither Riachi, the bookrunners, nor anyone else in Lebanon’s investment community seems to have predicted was the potential for widespread animosity and resentment in the aftermath of the allocation.

Out of their hands

Audi Saradar Investment Bank, the one Lebanese bank that was appointed a distribution agent, was unable to distribute the bulk of Investcom’s virgin shares to its own clients. In the end, Investcom carried out the allocation on a basis far removed from the “pro-rata” custom of distribution used to smooth client egos and guarantee at least a modicum of fairness in what remains a under-regulated industry.

There were red faces all round and, because many of the bank’s clients had broken time deposits to release funds, hastily-prepared explanations were dispatched. “The significant majority of the Bank Audi allocation (approximately 85%) was directed, by the company and the selling shareholder, to certain Gulf investors,” stated a Bank Audi circular to its reportedly 360 clients who had generated a demand of some $1.2 billion. “We regret any inconvenience that the allocation process may have caused you and wish to assure you our continued commitment to our clients.”

Accusations flew: the offering was flawed, hyped as an IPO but in reality it behaved as a private placement; the company was nothing more than a money making front for Syria’s Assad family and its entourage who, in a fit of pique, deemed there should be minimal Lebanese allocation; the IPO was merely an opportunity to turn a fast buck (a doubter only had to point to the extremely mediocre performance of the share price two weeks after the offering – slipping from $15 to $12.5 – to draw that conclusion).

Whatever the rumors and conspiracy theories on the local market (Investcom has denied them all – see page 68), the IPO was the event that propelled the company from relative obscurity into the spotlight of the financial world. From continuous coverage from the Financial Times and Dow Jones, to a successful capping replete with flashy advertisements on international news channels, the IPO was seen as a motif of optimism, growth and prosperity. The offering also set two milestones: first, by being the biggest international share sale by a Middle Eastern company, and second, as being the first to be listed on the newly formed Dubai International Financial Exchange (DIFX). The IPO – which was an international offering to institutional investors outside the United States – offered 59,995,428 GDSs (128,548,569 new shares and 171,428,571 existing ones) at a price of $12.35 per GDS. Each GDS, listed on the London Stock Exchange and the DIFX represents five ordinary shares. Upon issue, the GDSs were evidenced by a single Global Depositary Receipt.

The effect of the malaise

But what of the residual bad feeling? According to Walid Mussalam from the Middle East Capital Group, Investcom’s public debut was “handled in a manner which is unusual for an IPO of this kind, especially in developed markets.” But while Mussalam noted “it’s not unusual to have an allocation to friends and family of 5% or 10%,” the hearsay currently making the rounds among Lebanon’s investment community puts that figure much higher in the case of Investcom’s allocation. Mussalam said that while he personally views the Investcom IPO as being “definitely very good for Lebanon,” he also admitted that the current wave of bad feeling should also be “a lesson for anyone who tries to do this in the future.”

While making clear that he was speaking in broad, theoretical terms – and not talking about Investcom – Nicholas Sawan from Fidus noted that the practice of allocating shares among company favorites can work against the interest of the company itself, as well as against the interest of investors without connections. “It can result in a bad conflict against the idea of what IPOs are supposed to do in the first place,” Sawan said, noting that most companies should be using the opportunity of a public offering to build up a core of committed, outside investors who won’t simply flip the stock after a more-or-less guaranteed first-week profit. Also, if too many of a company’s shares are allocated to those close to the original owners, Sawan said: “What they do is hand pick, and when they hand pick, they are thinking about their short-term interest.”

Even less charitable was an official at a prominent investment house – who requested anonymity so that he could speak frankly about Investcom without damaging the interests of his clients – who said: “They [Investcom] should have been more careful. They blew a real success story with the way they handled their IPO. In fact, I was very happy the way it [the IPO] was handled poorly, that is, outside of Lebanon … If it had been done here, and it had happened like this, all the focus would be on Lebanon, and a lack of transparency.”

And while it’s important to remember that, with no cellular operations in Lebanon, the question of what, if anything, Investcom owes the Lebanese investment community is a fair one to ask, investment experts interviewed by Executive voiced private concerns about whether Investcom’s IPO model would become an acceptable model for privatization in Lebanon. One expert who requested anonymity said: “If this is going to be the norm, some of the clients we have will not be in the market. The bigger the client, the more upset he is when he is not given special treatment. Some clients take it personally … the real big ones are saying: ‘We’re out, we’ll never touch another Lebanese issue again.’”

Recovering from the backlash

But even Investcom’s most fervent critics doubt that the sharp pain of being cut out of the IPO will have a long-lasting effect on the company’s ability to do business. “People will go for the rational, not the emotional,” said one. Another critic simply said, “business is business.” Of course, the rub is that few would have cared about transparency and institutional fairness if Investcom weren’t so profitable in the first place.

Citing liquidity in the Gulf region and broad-based interest in the telecom sector as the main drivers behind Investcom’s over-subscription, Riachi suggested Investcom’s aggressive pursuit of profit in risky locales such as Afghanistan was, for the moment, being rewarded with a willingness on the part of investors to come along for the ride. “It [the stock’s current price] might be high for such risk … but the market has an appetite for this risk right now. They [Investcom] know how to take a profit through clever moves. It’s a success story, and the company’s management is quite good.”

Or at least good enough to not need to worry about ruffling feathers. That, finally, may be the lesson of IPO’s in Lebanon, where being able to turn a healthy profit in Syria means never having to say you’re sorry.

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Business

Azmi Mikati defends Investcom’s IPO

by Thomas Schellen
written by Thomas Schellen

E There has been a lot of reaction to the IPO. Many within the sector claim it was nothing more than a private placement disguised as an IPO, designed to drag in small investors to hype the event. Can you comment on this?

There was no need for any hype. We knew very early on that there would be a lot of demand for this offering. We went on a road show in Europe and met a lot of institutional investors over there who liked the story, so it wasn’t over-subscribed through hype; it was over-subscribed because it was a story of growth, a company that has a very strong track record, an excellent management team and a company that is operating in markets with a lot of potential. The fundamentals are there. We are not looking for hype. Anyway, overall demand came from Europe but being a Middle Eastern company with its roots in Lebanon we had demand here too. Far from being a private placement, it was a full public offering in which 60% [of demand] came from Europe but [in the end] we allocated 50% to the Middle East and 50% to Europe.

E So why was there no, or virtually no, Lebanese allocation?

Working with our global coordinators, we allocated mostly to institutional investors – Middle Eastern or Europeans – while a small portion went to individuals, mostly to our employees. We had a lot who requested allocation and they are the ones who deserve the most because they are the ones who have contributed the most to the success of the company. So most of the individual allocation went to those who have worked for the company and who have been with us for a long time.

E So what do you say to the many people, Banque Audi customers in particular, who broke time deposits and who received no allocation at all?

It’s an open market. There is nothing stopping someone buying shares on the open market even if he has not been allocated. These are shares that are tradable in volumes on the LSE and very soon on the DIFX (Dubai International Foreign Exchange). But in terms of allocation, we were way over-subscribed. Tough decisions needed to be taken and we decided to allocate to institutional investors. E But surely if there is a heavy over-subscription, allocation is reduced accordingly and everyone gets something, don’t they?

This might be the way it works in the Middle East but this is not the way it works in Europe. We did an IPO based on international standards. You cannot expect an investor X to come and demand his 10% allocation in the same way investor Y can come in and get his 10% allocation. At the end of the day you want a large investor base and like I said, tough decisions had to be made when we made that allocation in coordination with the global coordinators and this was the outcome. Today if somebody wants shares, let him buy them on the open market. So if I knew what the real problem is [that you are raising] it would be easier for me to discuss it.

E Have you felt any of the negative feedback?

I know a lot of local investors were unhappy because they did not get shares. I can understand their unhappiness, I really wish they could actually have been allocated and I hope they can become shareholders in the future – that they believe in the company and buy shares on the market.

E Roughly 40% of your company’s revenue comes from Syria. Given the international interest in that country, wouldn’t you say that this puts Investcom in a precarious situation should any embargo occur?

I don’t see why. In the countries in which we operate, there is always a level of risk. We operate in emerging markets, but these risks are more than compensated by the growth that these countries offer. So yes, there is risk but this is more than compensated by growth and profitability and investors do understand that. I don’t know if you have seen our prospectus; we have done an offering based on international standards. Everything is disclosed and this is key to us … that we operate in full transparency … and coming back to the first issue, we clearly said that the allocation is discretionary. It is not a proportional allocation and people should understand our position.

E Banque Audi was particularly embarrassed by the share allocation. You have a close relationship with the bank. Can you understand their position?

We had, have, and will continue to have an exceptional relationship with Banque Audi. Banque Audi was a key element in our success. They financed a lot of our operations when other banks were unwilling to take the risk or did not see the potential and Audi was beside us. Audi cares about its customers.

E Given your ties with Syria and the fact that there was no Lebanese allocation, some people are drawing unfavorable conclusions. Can you comment on this?

I don’t get what conclusions they are making. You say there was no Lebanese allocation but most of our employees are Lebanese and most of the non-institutional allocation went to Lebanese. I can’t make any correlation with what you are saying.

E Investcom shares are currently trading at around $13?

Around $13.50 to $14.

E They peaked at $15?

Yes, that is correct.

E What do you say to those people who say the current price is an indication that the offering was an opportunity to turn a fast buck and not a commitment to the long-term growth of Investcom?

These are not the type of investors we are looking for. I am not looking for flippers, in and out to make a quick buck. I am looking for investors who believe in the company, its strategy, management team and want to make more than a buck over a week or a month, but want to see growth in the long term. These are the sort of people we want as our shareholders.

E Moving on to your operations, how confident are you about developing under-developed markets such as Guinea Bissau, which has a population of 1.5 million and a GDP per capita of some $180?

Guinea Bissau is a good example. We started our operations in August 2004, and in less than a year we were EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization) and net income was positive on a month-to-month basis by July of this year. Countries like that are small but with high potential. They are highly under penetrated and we have the expertise to make them profitable and have them contribute to the net income of our business.

E Do you really believe that such markets will make you more competitive?

What do you mean by more competitive?

E Well these, as you say are underdeveloped markets. Where is the competition to develop your edge?

This is the nature of our business. Look at the contribution to the country, its population and its economy. There is a direct correlation between the direction telecom penetration rate and GDP growth. It is obvious we are contributing to regional development. It’s a way to have people talk to each other. So direct economic impact is profitable for us as a group. In Ghana we are up against three international players Hutchinson, Millicom and Telenor and yet we have held our position as the market leader with a 67% market share. So you can’t say it’s easy prey.

E You currently operate in 10 countries?

We operate in eight countries and we have two new licenses so within the next six months we will [be in ten].

E The word on the street is that you are eyeing up Saudi Arabia. Can you comment on this?

Well, we are looking for non-organic growth. We want to put our feet in countries with a relatively low penetration rate that have growth potential as well as countries that have a compelling competitive environment. If this profile is met, then we would be very interested.

E So does that mean you are looking at Saudi Arabia?

If you look at the profile of Saudi Arabia, it does meet these criteria.

E Currently over 70% of your revenues originate from only two of your markets, namely Syria and Ghana. How will your revenue distribution change in the next two years?

Sudan, Yemen and to a lesser extent Afghanistan will become the bulk contributors along with Ghana and Syria. The latter two will be then contributing around 50%, so there will be more of a spread.

E How challenging will Afghanistan be?

If you look at Afghanistan it fits our market criteria.

E You are really starting from scratch.

Totally. It has a population of 30 million, lots of growth potential and we believe it’s a great opportunity and we are looking forward to starting there.

E What about security?

Security is a concern in a few of the countries we operate in, but it is still manageable and we will deal with it like all the multinationals that operate in these environments.

E As Investcom Group, you started operations in Lebanon in 1982 under Inteltec. What sort of telecommunications engineering services did you offer and most importantly to whom? How successful was it?

As a corporate entity Investcom was founded in 1984. The group began its telecom adventure back in 1982. The partners lived in Abu Dhabi but moved back to Lebanon. They found the telecom situation very bad due to the war. We started selling and installing satellite phones designed for ships on office buildings as a sideline. We installed about 50 phones but they were very expensive, about $50,000 each with calls costing $10 per minute. Eventually we installed the first cellular network in the 1990s and we moved on from there.

E All of your operations are centralized via Beirut, how does this affect your operations across the board and do you have one similar strategy for all the countries you operate in?

We are headquartered in Lebanon but all our operations have their own structure and their own team and whenever there are value-added opportunities that can be created, then those functions are centralized in Lebanon.

E Can you tell us about Mednet, your international telecommunications operator based in Monaco? Is it successful, how does it operate and who does it serve?

Sure. Mednet is the international arm of the Investcom group and what Mednet does is it aggregates and carries traffic from the operations where we have the licenses to the outside world and at the same time it carries the traffic of other international carriers such as France Telecom, Telecom Italia, AT&T and BT into the markets where we have our own networks. It’s a long distance carrier based out of Monaco and contributing positively to the overall income of the group. It’s very successful.

E Finally, how will the IPO proceeds be used?

For non-organic growth. If we wanted just to go for organic growth we have a balance sheet that is very strong and under-leveraged and positive cash flow coming from our operations, so we wouldn’t have needed the IPO. The proceeds will be used to go after opportunities that fit the criteria we have discussed.
 

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Real Estate

Slipping Through Our Fingers

by Safa Jafari
written by Safa Jafari

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

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

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

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

Looking to Lebanon

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

Mismanaging resources

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

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

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

Geo-political issues

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

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

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

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

Promoting sanitation

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

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

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

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

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Economics & Policy

Protecting the integrity of Banks

by Thomas Schellen
written by Thomas Schellen

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

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

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

Fuelling speculation

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

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

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

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

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

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

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

Those that complied

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

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

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

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

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Economics & Policy

What Lebanon can Learn from the Turkish Experience

by Faysal Badran
written by Faysal Badran

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

Turkey’s turn

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

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

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

Taking up the mantle

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

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

Proceeding with caution

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

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

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

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

Getting with the program

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

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

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

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

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Heaven via hell

by Yasser Akkaoui
written by Yasser Akkaoui

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

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

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

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

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

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

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

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Economics & Policy

Andy Kemp talks oil

by Thomas Schellen
written by Thomas Schellen

 

 

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

E Why did you leave the pool?

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

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

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

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

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

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

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

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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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