Executive Magazine

Bush’s run of bad luck

by Washington Correspondent October 23, 2005

written by Washington Correspondent

“But is he lucky?” Napoleon once asked about a general whose name was put forward for promotion. The French emperor knew the value of luck in war and leadership. It might be fun to speculate what the reply would have been if the officer’s name had been George Bush Jnr, for history is not likely to look back kindly at Bush Jnr’s years in the White House. The war in Iraq, Hurricanes Katrina and Rita, and soaring gas prices are starting to show signs of strain on the president, who must be cursing his own bad run of luck.

Under the Bush administration America experienced its worst terrorist attack, which consequently led to the dual wars in Afghanistan and Iraq. Then, though through no fault of his, the president lost an entire city to a storm that devastated parts of the southern United States, blowing away 400,000 jobs and causing damages worth billions.

In his “war on terror” Bush connected the dotted lines from the ashes of the Twin Towers and the Pentagon to the center of the Iraqi capital, Baghdad. That was after the weapons of mass destruction that Saddam was supposed to posses could not be found. That was when the neo-con sultans of hype changed the discourse from looking for WMD to “fighting the war on terror.”

The current logic for the war is that the United States can “fight the terrorists in Iraq rather than in New York City.” That there were no insurgents roaming the streets of Baghdad, Basra or Mosul blowing up troops, police stations and killing innocent people during before the U.S. invasion has been lost in the shuffle of cards holding truth, fiction, reality and lies.

Until now President George W. Bush has managed to convince a large segment of the American public that invading Iraq was the right thing to do after 9/11. But that is proving harder to do, and his numbers in the polls have dropped. The president currently has a 48% approval rating and an equal 48% disapproval. That is a huge drop from the 80% approval rating he enjoyed immediately after Sept. 11.

But while the Bush administration still believes a military solution in Iraq is possible, along comes a foe far mightier than the terrorists: Mother Nature. If the terrorists took out some buildings, Hurricane Katrina nearly wiped out New Orleans, forcing the evacuation of hundreds of thousands of people, sending them fleeing to the safety of neighboring cities, to the state capital of Baton Rouge or to next-door Houston, Texas. And only weeks later, Rita hits the Texas coast, sending millions onto the highways and roads, creating the largest exodus and traffic jams in US history.

Rebuilding from the damage caused by Katrina is going to cost billions to the American tax payer; one estimate is as high as $2 billion per day, or as the Christian Science Monitor puts it, “about 10 times the amount the United States is spending on military operations in Iraq.”

Now add to that the cost of the war in Iraq, which currently runs at about $196 billion and counting … counting at the rate of some $151,000 per MINUTE, according to costofwar.com.

As comedian Bill Maher only-half joked on his show a few weeks ago while talking about the president’s run of bad luck, said: “On your watch, we’ve lost almost all of our allies, the surplus, four airliners, two Trade Centers, a piece of the Pentagon and the City of New Orleans. Maybe you’re just not lucky! I’m not saying you don’t love this country. I’m just wondering how much worse it could be if you were on the other side. So, yes, God does speak to you, and what he’s saying is, ‘Take a hint.’”

But if there are any hints Bush is taking they’re certainly not from Bill Maher or any other liberal pundit. Bush, analysts say, heeds the advise of his neo-con advisers, particularly Vice President Dick Cheney and Secretary of Defense Donald Rumsfeld.

In almost every recent speech the president has delivered recently, he has said that he has a strategy for Iraq. However, he stops short of telling us what that strategy is.

Right, lets talk economics, seeing that this is a business-oriented magazine. Coming right up on the heels of Katrina is her evil sister Rita, also a category five hurricane. Rita, storm watchers say, will accomplish two things.

First, it is likely to damage the oil refineries on the Gold Coast that were missed by Katrina. Second, it will cause the price of oil to soar even higher than it’s current $3.50 a gallon. Now that is certainly not what Napoleon was looking for in a leader.

October 23, 2005 0 comments

For your information

Time-Consuming, Complicated and Costly

by Executive Contributor October 21, 2005

written by Executive Contributor

Middle Eastern nations continue to discourage investment and thwart small and medium sized businesses with heavy legal burdens and piecemeal reforms, a new World Bank report has revealed.

The Washington-based organization’s annual Doing Business report provides a global ranking of the investment climates in 155 nations based on key business regulations and reforms undertaken.

Entrepreneurs trying to open up or run businesses in the region are challenged by regulatory obstacles every step of the way. In Syria for instance, it takes 63 days, 18 documents, and 47 signatures from the time imported goods arrive at the port until they reach the factory gate. In Oman, it takes seven years to close an insolvent company.

In keeping with its neighbors, Lebanon generally scored poorly across the board, with an investment climate hampered by time consuming red tape, high costs and an inadequate judicial sector.

The report found that the cost to start a new business in Lebanon amounts to 110.6% of annual income per capita – the third highest rate in the region after the Occupied Palestinian Territories and Yemen.

It takes 275 days to obtain a license in the industrial sector to build a warehouse in Lebanon, after Syria (134 days) and Jordan (122 days), although on a much-needed up note, the cost of obtaining licenses in Lebanon are less than the average regional ratio: 214.6% of income per capita, compared to the regional average of 469.7%.

Lebanon’s judicial sector fared the worst in the region with regards to business, requiring over 2 years (721 days) to enforce a contract. Tunisia was the most efficient globally in this sector, requiring only 27 days.

“I am not surprised – these results seem to reflect reality,” Samih Barbir, former chairman and manager of the Investment Development Authority of Lebanon, commented. “But political stability will lead to progress on all these fronts. We’ve been talking about introducing reform measures for the past 10-15 years, but nothing has been done about it. Once you have reached a broad understanding that investments lead to prosperity and growth, and you reach some kind of political stability in this country, then reforms will take place. But before the Mehlis report comes out, we won’t see any of this. And once the report does come out, we need to see what repercussions it will have locally and regionally, before we can start talking about reforms again.”

Up in smoke

Phoenicia Trading Group, the sole agent for Cuban cigars in Lebanon, has launched a media awareness campaign in local newspapers to bring the problem of counterfeited products to the attention of the Lebanese public.

The campaign was organized following a hike in fake Cuban cigars smuggled into the country over the course of the past six months.

“A lot of fake cigars with Cohiba rings were being circulated in the market and mostly used for gifts,” says Walid Saleh, managing director of the Phoenicia Group. “The customers who were receiving these gifts came to our shops to exchange them or complain about their quality. As a company our role is to draw the attention of cigar smokers to what’s happening in the market and guide them, so as to help them get value for their money when they are purchasing the goods.”

An estimated 400,000 fake cigars are being brought into the country annually according to the Regie Libanaise des Tabacs et Tombacs, representing some 10% of total imports, at a value of approximately $500,000.

“It’s not a tremendous problem when you look at the percentage it of the market,” notes a Regie employee, speaking on condition of anonymity. “These products are not [any more of] a health hazard, they contain plain tobacco, but they are feeding off the well-established Cuban brands. More than anything, the latter are the ones that are most affected by this.”

Yet Phoenicia-Beirut begs to differ, arguing that the counterfeiting is hurting the country as a whole.

“Falsified products are not only damaging the image of Havana cigars but also the reputation of Lebanon as a center of commercialization of Cuban cigars for the whole region,” says Saleh. “This is an image that took years to build, through the efforts of Phoenicia Trading and the support of the Regie.”

The bulk of the counterfeited products are being produced in Latin American countries, but a few also come from Europe. Locally printed rings are subsequently added to the cigars, which are then repackaged in nylon or recycled Cuban cigar boxes.

The products are sold door-to-door, but can also be found in shops and restaurants, both of which are liable for prosecution if caught.

Pushing those grades

Marketing US-based higher education to Lebanese students became an executive matter for ambassador Jeffrey Feltman when a tandem of private sector college road shows converged on Beirut last month. Held consecutively at the Moevenpick and the InterContinental Phoenicia Hotels, the two road shows represented 37 US colleges between them, all vying to draw Middle Eastern students to their campuses.

As he praised the virtues of US colleges and the quality of degrees they offer at an opening press conference, Feltman also intimated that American ambassadors worldwide have received a “directive from the State Department to assist in promoting US education to international students”.

While US diplomacy banks on the cultural good will that they expect visiting students to develop towards America despite not really resolved obstacles Middle Eastern youngsters face in obtaining US student visa, American colleges also have a substantial financial interest in attracting international students. “On average, 600,000 foreign students are enrolled every year in US, spending $13 billion annually. International education has become an industry in the United States,” said Tarek Elshayeb, associate director for international student services at Plattsburgh, a college affiliated with the State University of New York.

The colleges self-financed their participation in the road shows, said the managers of US Education Group and Linden Educational Services, the two competing companies which organized the events. Each school participating in her fair had paid $11,500 for going to five Middle Eastern cities, said Linden’s president, Linda Heaney.

Annual costs of undergraduate studies at universities in the Linden fair were predominantly in the medium $20,000 to $40,000 bracket, as the biggest names in the education business usually stage their own shows. “We do small programs for select universities that are very committed to international students,” Heaney said.

As for return on their investment, admission officers at the fair emphasized that they were looking at their promotion work as “sowing seeds” without strict recruitment targets for each stop on the trip, but some were avidly goal-oriented. “We want to increase enrollment and I want to find at least five students from Lebanon that would enroll. If we can register 25 students during this entire tour, I will be a happy camper,” said Ashraf Al Zawaideh, assistant director for international admissions at the University of Bridgeport.

Main non-event

The main event in telecommunications last month was the one that did not take place: the switch from the 03 cellular prefix to the new code, 71. Less than two weeks before the changeover on September 18, the ministry of telecommunications told the nation’s phone users that the old numbers would remain valid for the time being.

The reason given by the MoT for reversing its decision to change cellular prefixes now was a sensible assessment that further adjustments in the national phone numbering plan would mandate another switch in landline prefixes, most likely next year. A two-phased switch would have caused extra costs to businesses and individuals, by forcing them to print new business cards, stationery, brochures, and so forth not once but twice.

While the decision gave consumers and companies a reprieve in having to visit the printers and commission their communications agencies for producing new corporate materials, it came a bit late for the communications planning of the parties directly involved, MoT/Ogero and network operators MTC Touch and Alfa. According to industry insiders, they had made bookings for extensive billboard campaigns that could not be cancelled.

Thus, the Lebanese public in mid September was treated to extensive telecommunications advertising of apparently somewhat unplanned nature and cost that media industry sources estimated at some $50 per day and billboard, or about $75,000 a day. The advertising budget for the originally planned campaign to introduce the new cellular prefixes had been signed for to equal parts by the ministry and operators.

Given that expenses for such a measure can run to substantial amounts, local companies weary of having to renew their corporate materials should be able to breathe easier for the moment. While the general manager of a major PR agency in Beirut said one could not provide a general cost figure for changing all of a client’s corporate materials to the new phone numbers, he estimated that just for his own firm of 25 employees, changing everything involved could cost as much as $10,000.

It has been known for years that Lebanon’s six-digit phone numbering is no longer sufficient and as network managers at Ogero confirmed, the system-wide change of the prefixes will have to take place eventually. Compared to the inestimable total cost that the nation’s phone users would have been forced to bear due to the September switch, the sudden cancellation of the public awareness campaign last month was certainly a minor problem. What remains is the question why the decision for a two-phased changeover had been taken in the first place.

And the truth is…

Deja vu was strong in another telecommunications matter last month, that of the old disputes between the previous operators and the Lebanese government.

First, the LibanCell company, former operator of one of Lebanon’s mobile communications network under a Build-Operate-Transfer (BOT) contract, told the public that the international arbitration over the premature termination of these contracts had gone good for the operators and bad for the Lebanese state.

Instead of $1.45 billion demanded by the government for alleged contract violations in 16 cases, the arbiters had ruled in favor of the state in a single point, for a meager award of $1.5 million, or one per 1000, LibanCell claimed in its ad campaign. On top of that, for having been wronged through the early termination of the original contracts and other violations of the agreement through the state, the international arbitration had awarded it compensation amounting to a total of nearly $267 million, LibanCell trumped up.

The dispute originated in 2000/2001 when the ministry of telecommunications had began accusing both BOT operators, LibanCell and French-Lebanese Cellis, of numerous contract violations centering around an alleged act of exceeding subscriber ceilings of 125,000 customers per network. The companies had argued in return that no such ceilings had been agreed upon in their somewhat ambiguous contracts. Especially LibanCell was indignant and tried with large, number-driven ad and PR campaigns at the peak of the confrontation to convince public opinion of its viewpoint.

However, impeded by their high (and government mandated) per minute charges, the companies couldn’t shake off the allegations in the public mind and the confrontation between state and operators brought development of mobile telephony in Lebanon to a screeching halt that impedes communication until today. The BOT contracts were terminated in 2002 but attempts to auction off operator licenses under the label of privatization failed. Network management remained for an extended period with the old companies until the current operators MTC and Faldete were brought in last year.

As LibanCell now played the cards of having been vindicated in arbitration, Beirut rumor mills alleged that the company could have ambitions to come back as network operator when the sector gets fully privatized, while former telecommunications minister Jean-Louis Qordahi hastened to accuse the company of not having paid all its dues owed to the government, which LibanCell angrily refuted.

In the meanwhile, the honeymoon between MoT and the new operators seemed over, as the ministry announced fines against the firms for not doing their job perfectly. The caretaker companies responded in saying that they were fulfilling their obligations and were committed to the welfare of the sector.

What consumers and economy continue to wait for, is an end to tiresome telco affairs, reduction of insanely high mobile phone charges and fulfillment of some long-promised side benefits, such as network upgrades, implementation of new regulatory frameworks, and introduction of a third operator. The state is in charge.

That show goes on

Taking place in early September instead of late spring, the Project Lebanon construction fair run with considerable delay this year, marking the event a victim of the turbulences that rocked the Lebanese exhibition and fairs industry in the aftermath of the assassination of Lebanon’s former prime minister Rafik Hariri.

In its 11^th year, the show appeared slightly smaller than in some previous editions and presence of exhibitors from some countries was down, but other countries were well represented and entries for some 250 exhibitors filled the show catalogue of organizers IFP in a respectable mix, confirming Project Lebanon as stable fixture on the country’s exhibition scene.

Looking out over Beirut from the exhibition grounds, visitors could take heart in seeing construction cranes dotting the downtown silhouette in quite some larger numbers than a few years ago, supporting the notion that the Lebanese real estate market has been more resilient in withstanding the troubles of 2005 than other sectors of the economy.

That did not mean, however, that moods inside the exhibition halls would vibrate. Attendees were treated to some information important to the sector, such as a seminar by insurers Arope on new insurance requirements for construction projects and international examples for such decennial insurance. But a sizeable number of exhibitors on the main floor of Project Lebanon admitted that 2005 had turned out different than hoped for.

Even stalwarts in the domestic construction supplies industry such as paint manufacturers Tinol and tile makers Uniceramic conceded that the market has not been kind until now. “We had a difficult first portion of 1005. The market is going up now but I am not sure if we will be able to make up for losses from the first half in the remainder of the year,” said Chaker Saab, Tinol’s business development manager. Uniceramic on their part had been hurt by the trade problems with Syria, which is the company’s main export market, said general manager, Nabil Ghorra.

Both managers saw better times ahead, albeit under slightly different accents. “I am optimistic for the future,” said Saab. “The boom will come, but I am not sure how long we can wait,” said Ghorra.

One horse race

Revenues were up by around 30% at last month’s 14^th Schtroumpf Beer Festival, according to the restaurant chain’s operations manager, Maroun Daou. But anyone heading to the festival in the hopes of sampling a wide array of beers would have been disappointed. This year, only Almaza, the sponsor, was present at the event, making it rather bizarrely a one-beer, beer festival. At least Almaza was happy. Sales at the event rose by 50% compared to last year, thanks also in part to a LL12,000 drink-all-you-can offer, according to Almaza Brand Manager Naji Nacouzi.

“The beer festival should invite all the other players in the market,” said Nacouzi. “However for two years now Almaza has been sponsoring the festival without the presence of other players. Maybe they don’t like the prominence and visibility of our brand.”

The absence of other beers might be a reflected of the local dominance of Almaza, which was bought by Heineken in 2003. “We used to have a lot of brands. A few years ago we had about eight beers, but now they believe there is no competition anymore. They see only Heineken and Almaza. So they are no longer spending money on such festivals,” said Daou.

Abdou Younes, marketing director of Abi Ramigh Bros., the company that imports Effes, Fosters and Budweiser, said the company ceased participating in the festival two years ago with Budweiser because Schtroumpf only embraced the brand during the festival and shunned it for the rest of the year.

“They don’t contact us until the festival. But outside the festival, they don’t want to put our brand or any other brands on their premises. They only contact us when they need something.,” Younes complained.

In an attempt to chip away at the Almaza/Heineken market share Abi Ramigh Bros. Spends around $375,000 on marketing and while it did not take part in the beer festival, it does sponsor motor sport events.

Storage Space

Filovault, a business to business venture created last year to cater to those companies, institutions and foundations to outsource their records management due to space and resource constraints, hopes to cash in on the growing need for better corporate governance.

“As companies and institutions become more compliant with document retention periods and abide by international standards, their volume of stored documents will tend to swell,” said managing director Nael Zantout. “Since managing archives properly involves a great deal of resources, fire prevention, 24 hour security, software, and manpower, most international companies are looking to outsource this function to a specialized company, which can ensure two key things: safety and availability of files when needed. Loss of files can mean litigation/audit risks”

The archiving business model, already popular in the West and more recently in Egypt and the UAE, rests on the concept that non-core activities such as record keeping /archiving are being outsourced for cost savings and removal of strains on internal resources. Filovault has rehabilitated a warehouse facility just 15 minutes from BCD, employing climate control, security and fire detection and prevention. Filovault also has a strategic software partnership with US based O’Neil, arguably the global leader in the field.

According to Zantout, a large percentage of multinational companies worldwide use outsourcing for their archiving and this process is viewed favorably by auditors and compliance heads as it lessens the risks and costs especially since most accounting and administration documents need to be maintained for ten years or more. Clients who sign up, get a number of bar coded boxes along with a cd-rom to catalogue the contents of each box, enabling file searches at a later point. Filovault allows clients to consult their inventory or order boxes at any time using their online feature.

“The whole system operates solely on barcodes ensuring confidentiality at all times,” said Zantout, who cites a large US multinational as well as top insurance and financial institutions as clients, along with several smaller foundations, law firms and schools. “We guarantee rapid retrieval of documents when needed along with an array of services such as digitization, destruction, and an onsite audit/conference room.”

Life after death

Renowned Italian architect Giancarlo Di Carlo may have passed away on June 4 of this year, but his influence will forever be felt in Beirut, where the real estate project Beirut Village was the last chef d’oevre of his life.

Set around the 2,500 m2 Alliance Garden in Wadi Abu Jamil in the heart of downtown, offering over 27,000 m2 of apartment space, the Beirut Village is the brainchild of Beirut Trade, a combined Emirati Lebanese real estate company. The development consists of two clusters of 6-floor apartment blocks. Di Carlo himself said to be inspired by the traditional architecture of areas such as Gemayzeh and Kantari in introducing the seven red-roofed, low rise buildings, characterized by balconies, large windows and earthy colors. Each of the 92 apartments has its own individual look and the top floors will house 10 luxury penthouses, each with a large terrace and private pool.

It is also further proof of the attraction of Beirut as a location for investment in high-end real estate. Demand for luxury apartments is still strong despite Lebanon’s turbulent year. “We aim for ‘class A clients,’ the top of Lebanese society and Arab investors,” said a Beirut Trade Spokesman.

Sales started on October 1 and construction will begin at the end of this year to be completed by mid 2008. “Solidere is currently asking some $1,300 per square meter of BUA and often offers some discount,” said Raja Makarem of Ramco Real Estate Advisers, “so I think a price of $1,200 is likely. As far as sales are concerned, I don’t think anything in Wadi Abu Jamil is sold for less than $3,500 m/2.”

Last June, an honorary exhibition in Rome on Di Carlo’s life and work already included the Beirut Village as one of masterpieces of the 86-year-old architect, who in 1993 was the winner of the Gold Medal of the Royal Institute of British Architects.

October 21, 2005 0 comments

For your information

In search of greener profits

by Executive Editors October 15, 2005

written by Executive Editors

There was a big ruckus in Selaata a few weeks ago when

local Greenpeace representatives protested against the

Lebanese Chemical Co. The environmental group accuses

the phosphate fertilizer plant of polluting coastal waters with high

levels of toxic waste. The chemical company vehemently denies

the allegation, saying its discarded waste is below internationally

recognized hazardous levels – a claim validated by the assessment

report of a French company they hired. Greenpeace brushed

aside the findings as biased. The ministry of environment publicly

admitted that the factory is polluting and claims to be monitoring

the situation. It’s easy to dismiss the whole irksome episode as typical

antics of extremist groups. But other issues come to play and

industrialists pay heed because it pertains to their lifeline: exports.

The tendency worldwide is to integrate environmental policies

into free trade agreements. Lebanon’s so-called environmental

regulations aren’t strictly enforced, and subsequently

environmental standards aren’t

imposed on incoming goods. But any

Lebanese manufacturer who wants to

export must meet the standards of the

importing country. “Regardless of what

is happening in our own domestic regulatory

system – our export markets are

imposing regulations on us,” says economist

Albert Nasr. “So we have to comply

whether ~e like it or not.”

The bottom line is that access to foreign

markets is at stake. Pressure is already being felt

– Egypt regularly holds back agricultural produce

from Lebanon to test for pesticide residues.

Lebanese apples have been refused entry for this reason.

Commissioned by the Harvard Institute for International

Development, Nasr and fellow economist Ahmed Jachi recently

did a study on the impact of environmental regulations on trade

and competitiveness.

Big firms that export to the EU and US are aware of the issues,

but small and medium-sized enterprises (SMEs) aren’t- and they

constitute more than 95% of the country’s 22,000 industrial firms.

“They mainly export to the Arab countries, where the requirements

are similar to those of Lebanon,” says Nasr. ”They don’t know what

type of standards they should meet.”

Nasr expects that export regulations will soon demand compliancy

for the manufacturing process as well as the final product.

“If ketchup is made with raw materials that have high levels

of pesticide residues, it’s going to show,” says Nasr. “But the manufacturing

process – how you dispose of your waste – the

Germans aren’t going to know about that.” This is where ISO

14000 certification comes in. It’s an assurance that manufacturing

procedures are of minimal damage to the environment.

While it’s a plus to have, ISO 14000 certification isn’t mandatory

to export to foreign markets. Likewise, eco-labeling isn’t obligatory,

but it is beneficial. “Eco-labeling is impo11ant to consumers,”

says Jachi. Especially as today ‘green consumerism’ is widespread

in Europe. “Based on surveys we know that in Germany over one third

of the population is willing to pay a premium for products that

are manufactured with the environment taken into account.”

Local wine manufacturer Wardy understands this well. It is introducing

organic wines, which are made from grapes that haven’t been

treated with chemicals such as pesticides. Producing organic wines

raises costs by 70% to 90%, which will be reflected in prices. But

because there is a huge market for organic products, particularly in

Europe and the US, Wardy expects exports to increase.

“Unfortunately, compliance is very costly,” says Jachi. The

biggest problem facing local manufacturers is that they

are using machinery and equipment that don’t

comply with new standards.

The findings of the study show that if environmental

regulations are implemented the cost

for industries to carry on will be high. “It can

increase costs by as much as 30%,” says

Jachi. The actual cost would be higher, as

lost competitiveness means lost markets.

However, if manufacturers adapt new technology,

increase their efficiency, create new

markets by producing green products, and

make price adjustments to suit, “then the cost of

compliance will drop to less than 5%,” says Jachi.

”We are trying to tell manufacturers that the costs are

not very high once they’ve prepared for it.” Based on feedback

from the study, financing is the main concern of manufacturers.

Interest rates are high and because of the recession local demand is low.

Manufacturers complying with international standards will also

have easier access to partnerships and financing. Foreign companies

will not enter into partnerships with highly polluting industries.

“It’s not feasible and it’s not within their policies,” says Nasr. For

example, in 1994 the International Finance Corporation granted

Cimenterie Nationale a $20 million loan for its expansion plan under

condition that it comply with World Bank environmental regulations.

But it is not enough to wait for industries lo upgrade out of their own

goodwill. Policies and regulations need to be put in place by the government.

The study suggests offering incentives to industrialists who

implement environmentally friendly processes, and imposing ceilings

and taxes on pollution. ‘The monitoring of pollution ought to be scientific

and up to international standards – otherwise there wouldn’t be

an environmental policy that’s worth its name,” says Nasr.

October 15, 2005 0 comments

Business

A swift turnaround

by Thomas Schellen October 3, 2005

written by Thomas Schellen

If the creation of the Audi-Saradar Banking Group was the banking event of 2004, BLC Bank is the bank that has arguably made the most progress in 2005. In economic terms, the role of BLC Bank might be as remarkable or unremarkable as that of any other Lebanese bank of similar size in the sector, in which it ranked 12th by total assets and, with customer deposits of $1.52 billion at year-end 2004, rating highly in what is lately considered the Beta Group of banks (deposits between $500 million and $2 billion). At such a ranking and size, a player is significant enough by the proportions of the domestic economy but would make for not much more than a wallflower in the dancehalls of regional and international finance.

Furthermore, BLC’s growth prospects are not obviously apparent, while, if the truth be told, the fate of BLC Bank is still undecided at time of this writing. Within the next few months, it could be acquired by a foreign bank or by financial investors. It could continue to grow as a stand-alone operator. It might even be merged into a competitor in the banking industry’s consolidation game and become a footnote in another bank’s history, although today that seems less likely an option.

Why then should BLC be the object of this reporter’s admiration? It has achieved good growth and strong improvement of net results between 2003 and 2004, but that is not in itself all that unusual in the sector either historically or in the past year, which the annual Bilanbanques publication just called “a good year” for the industry, with a growth in banking activity of 14.5% when measured by the evolution of total assets. Reporting asset growth of 23%, BLC Bank outperformed the sector but did so very much within the margins of reason. What is remarkable is what BLC is not: with 2004 profits having nearly tripled to $15.9 million from $5.5 million in the previous year (and after having overcome balance sheet losses of $99.8 million in 2002) – it is no longer de-facto bankrupt. The element of fascination with BLC is that it is the story of a turnaround, an achievement that the Lebanese like to consider an inherent Phoenix-like quality within their business culture, that is, in reality more the exception than the rule.

Hard times

The BLC story begins with self-induced misery. After more than four decades of existence as Banque Libanaise pour le Commerce, the institution had at some point slipped into a downward spiral of mismanagement. Doubtful loans abounded on its books, losses mounted year after year, rescue attempts failed, the bank went in vain through a number of lead executives, and morale was beyond redemption. Finally, the central bank stepped in. To avert ultimate disaster, it took over the reigns of the institution in mid-2002, assumed responsibility for its finances and installed a new management team under Shadi Karam, a finance and corporate rescue expert with international experience but little local clout who was chosen by central bank governor Riad Salameh to be chairman and general manager of BLC Bank. As Karam told Executive, when the central bank-appointed management team assumed its responsibilities at BLC Bank, it found a catastrophic situation. “It was a bank with a very high negative net worth. The level of accumulated losses was historical, plus the bank had dramatic structural problems,” Karam said. The bank’s books and inner workings in general must both have been a mess, with what Karam described as “lost files, lost promissory notes; you name it, we had it. Incompetence, internal feuds, absence of documentation, and absence of support systems – every major no no in the banking book had been committed in this bank and that had pretty severe consequences on internal organization, relationship with clients, internal department structure, and the quality of the files.”

The drama of a rescue operation is of course always the more captivating to the audience when the salvage effort begins under the most adverse of circumstances. But if in the case of BLC the emergency decision and takeover through the central bank would not already seem proof enough of the bank’s dismal state at the start of the century, the 2004 annual report still hints of the depth of the morass that had existed. Apart from communicating that BLC Bank’s ratio of non-performing loans had improved from a devastating 89% in 2003 to a still intimidating 66% in 2004, the report includes items talking of financial losses brought forward from previous years, settlement of debts by former senior executives of the bank, and contingent liabilities related to pending law suits. Equally telling of the contrast between past and present is that the annual report describes as recent the creation of such crucial entities as a management control department, an operations risk management function at the risk management department, as well as the issuance of an internal manual on ethics and compliance. On an informal level, seasoned employees at the bank’s headquarters confirmed that the atmosphere at the institution has incomparably improved over the state of affairs under previous managements.

Karam claimed that there was no single decisive factor in achieving the turnaround of BLC Bank, but qualities instrumental in pursuing the recovery spanned from creativity to massive determination, qualities that gave BLC an edge over other banks. “We developed new elements like micro-credit, mobile banking, advanced scoring systems, automation, and e-banking,” he beamed. In this innovative vein, BLC established a specialized credit section with the objective of providing loans to the small business segment of the economy as well as extending micro-finance services (with European help) to micro-entrepreneurs. The bank rolled out a mobile branch and engineered new products, the latest of them being a regional first, retail loan backing through a loss-of-income insurance, which was designed early this year in collaboration with Libano-Suisse Insurance. Structure implementation was another major part of the process. Installation of procedures and two dozens of internal manuals was a major achievement, Karam said. “Respect for procedures was something that was totally inexistent in the bank, and we think that procedures are really of primary importance.”

The determination to succeed on the other hand, took expression in BLC management’s ploughing its recovery furrow while ignoring the opinions of industry observers. In the bank’s policies and behavior, the determination led to what Karam called the “extensive and almost brutal fashion in which we worked on recovering most of the debts we had in the market. We were extremely aggressive in our recovery, so people took us seriously.”

In record time

This kind of ruthless credibility aided BLC in cleaning up its loan files at, under the circumstances, considerable speed, with a significant positive effect on its 2004 bottom line gains also through write-backs of earlier loan provisions. The studious provisioning could be a boon also in coming years due to further write-back potentials, said Karam, who was, however, fastidious on getting this detail across without allowing any speculation that the bank might have over-provisioned. “The balance sheet is very clean. We did not expect to be as efficient in recoveries. The efficiency of our recovery activity is demonstrating that the provisioning level of the bank was more than adequate. Because we are very good at recovery, we are having so many write-backs, not because we provisioned more than we should have,” he said.

The final element in restoring the institution was a complete image overhaul. It entailed streamlining the worn name of Banque Libanaise pour le Commerce into the new BLC Bank with a distinct logo as well as moving to a new head office and the construction of a new branch in Chtaura. The image recovery also benefits from the presentation savvy-ness that Karam exhibits in his dealings with the public and media. He is among the most colorful representatives of the banking profession that one can meet in Lebanon, with a communication repertoire that includes skilled use of the underdog motive as well as lessons on selling a story rather than a product and making this story attractive, which he confessed to have learned from a stint of working in haute couture many years ago.

An issue worth adamancy to Karam was emphasizing that the telling of the BLC story as a turnaround came after – not before and definitely not instead of – the breakthrough accomplishments in rescuing the bank. As the BLC rescue team also worked without allegiances to any special interests, this is where BLC could serve as a lecture on the Lebanese economy’s recovery potential, he suggested, if government decision makers were approaching the mission of fiscal rescue by “doing small steps, like we did with BLC. I think the BLC model is perfectly applicable and will be able to change the image of the country and raise [sovereign] ratings. Take small steps, and then have something to talk about.”

This turnaround expert has a point. Instead of promises and declarations that have been over-used and replayed to the point of inducing instant coma, decision makers on the larger political framework for economic recovery could quite possibly find a useful cue in the elemental recipe to achieve first and talk after the fact.

Onwards and upwards

But be that as it may, and as chances for political action on the fiscal front might best not be discussed until opportunity sparks higher, the matter at hand for BLC right now is to move forward. After completing three years of stewardship, the central bank could now sell BLC with a handsome reward for its efforts of putting up nearly $150 million in capital for the institution. According to Karam, the World Bank’s International Finance Corporation this summer undertook an evaluation of BLC and its subsidiaries – of which BLC France with branch offices in the Gulf is the main item – and recently delivered “extremely positive” findings to the central bank regarding both the bank’s valuation and its quality.

If and when the central bank would sell BLC Bank and by which mechanism, is not in his knowledge, Karam said, but it would be likely to depend on the format of offers and interested investors. “The sale of the bank is in the books, because the central bank doesn’t have the vocation to own a commercial bank. We have been hurt by insufficient levels of quality in the past and we are looking for a quality investor with the means to put the price.”

An auction or direct sale would both be possibilities, and theoretically, the central bank could even maximize its revenues from the sale by gradually releasing BLC shares, which are listed on the BSE. In Karam’s view, a merger with another Lebanese bank might be an option but he would favor a merger with a bank of equal, not larger size. But BLC might be very attractive to a financial company seeking to diversify into a commercial bank he opined, because the bank has now installed a complete structure and well-oiled middle management. As the bank’s machine moreover is geared well towards consolidation, “BLC could be a platform to acquire other small banks,” he said.

It is clear that the recent growth of the bank arose not as part of the current management’s mission but rather as a kind of side effect to the high velocity achieved in the bank’s recovery efforts. To take best advantage of its good story and current momentum of growth, BLC bank very soon needs either to find a suitor or receive a handsome capital injection. “We are at a point where staying with the central bank is bad for us,” Karam admitted, “so we either sell or the central bank changes its perspective totally and approves our expansion business plan, which would mean moving forward on different fronts, the Lebanese front and cross-border.” BLC Bank is a ready-for-sale package. But how to trust a sales package? On the ride down from the Olympus of the BLC executive offices, several head-office employees enter the elevator. One young lady tells her colleague, “I am acting as a banker, a BLC banker.” The moment is too good to miss for this reporter. “What is a BLC banker?” “Always happy,” she replied.

October 3, 2005 0 comments

Economics & Policy

Corruption: How bad was it?

by Peter Speetjens October 1, 2005

written by Peter Speetjens

Since the Syrian retreat last April and the euphoria of the Cedar Revolution a month earlier, more and more examples of how public money was squandered, stolen or simply squirreled away have come to light, strengthening the case for privatization and even leading to calls for a formal audit of the handling of public finances over the last 15 years.

We always knew it was going on. A 1995 World Bank study among Lebanese expatriates concluded that “there is a perception that corruption has become institutionalized in networks of protection, beyond the law, for self-dealing, bribes and the bartering of favors and influence.” A 2001 report by the UN Center for International Crime Prevention stated that 43% of Lebanese companies “frequently” paid bribes and 40% “sometimes” did, while Lebanon ranked 97 out of 145 countries on the 2004 annual corruption index issued by Transparency International. Now, those who move and shake in the new Lebanon want answers.

Exposing the extent of it

But we never really knew how much was going on and what it was costing us. Now, Lebanese businessman and outspoken critic of corruption, Joe Faddoul, has taken it upon himself to reveal all. According to Faddoul, there is no use talking about solutions to tackling the national debt without looking at the main cause, which he sees as corruption. In recent months, the founder of the software company Istisharat, has gained something of a reputation as a whistle blower, following a presentation to the French Senate and the publication of an extensive list citing the main money drains. “The total of direct and indirect levies from racketeering,” Faddoul estimated, “amounts to a total of $26 billion for the post-war period since 1992. Add interest and you can pay off the national debt.”

The case for an investigation is compelling and Faddoul does not mince his words in describing the old “system,” in which the Syrian regime granted its Lebanese surrogates crumbs of power and money by appointing them as MPs or ministers. “In return, the appointees covered Syrian racketeering practices and certain political positions. This post-war system of racketeering, shared between Syrian and Lebanese officials, drained the country of an estimated $2 billion a year.” According to Faddoul, one of the most telling and blatant examples took place in the largely government owned Casino du Liban, where every morning, employees from the ministry of finance would collect the previous night’s takings as is their job. They did not however empty the slot machines, which were emptied by other state officials. No one knows exactly how much money was diverted, but Faddoul estimates a siphoning off of $50 million a year. The practice stopped as soon as the last Syrian soldier left Lebanese soil. “Before Hariri’s death,” said Faddoul, “the price of a casino share stood at $146. Despite the political turmoil in recent months, the insecurity and consequently the decline in tourist arrivals, the share price has since risen and by August stood at $345.”

Trouble at the port

Faddoul continues that like the Casino du Liban, certain areas of the Beirut Port were no-go areas for Lebanese custom officials, as they stood under the direct control of the Syrian intelligence and much of the customs tariffs paid on imports were diverted towards Damascus. In 2001, the Dubai Port Authority (DPA) canceled its 20-year Furnish, Operate and Own (FOO) contract regarding the port terminals signed in 1998, officially due to disagreements over compensation for contractors at the port. Many insiders however, whispered that the DPA was just not able to operate in a Beirut harbor, infected as it was by corruption. It would be too simple however, to only blame Syria for these shadowy practices. Lebanese were only too happy to enter into these joint ventures, as is illustrated by the example of incoming international phone traffic which should officially pass through the Ministry of Telecommunications. According to Faddoul, however, three illegal operators were established to handle roughly half of all incoming international calls: one in the Bekaa Valley (allegedly run by the brother of an ex-minister), one in Beirut’s southern suburbs and a third in the Keserwan region (owned by a former minister). Normally it would take a hefty investment for an operator to install a network, but not so in Lebanon. The illegal operators simply subscribe to a few hundred government-owned lines. “This just shows you the level of complicity between the government, the illegal operators and their sponsors,” said Faddoul. In 2002, the former minister of telecommunications, Jean Louis Qordahi, announced that an estimated 30 million minutes a month ran through the illegal companies, which with an average price of $0.70 cents a minute amounts to a loss of $262 million a year. The illegal phone traffic is typical of the general pattern of racketeering, in which part of Lebanon’s political and economic elite shared cuts, spills and kickbacks.

Lights on, no-one home

No doubt, one of the heaviest burdens on Lebanon’s national treasury is Electricite du Liban (EDL), which makes an estimated loss of $500 million a year. Referring to a report written by the head of the Electricity Authority, Faddoul estimated that 30% of produced electricity is stolen through illegal connections, while 15% is lost due to technical shortcomings. Only 50% is billed, of which only half of that is actually collected. In effect, only 25% of Lebanon’s electricity is paid for.

However, this is not EDL’s only problem. According to Faddoul, it was common practice for ministers and state officials to take commission on any construction or maintenance contract that needed their signature. As always, “profits” were shared with “associates and protectors.” Former minister of electricity, the late Elie Hobeika, is said to have taken a 10% cut on any EDL transaction and is understood to have set up a special office complete with a secretary to run this lucrative side business.

His successor, Mohammad Abdul Hamid Beydoun, continued this proud tradition, before being sacked for not sharing the spoils.

And then there is EDL’s fuel purchasing policy. For the import of oil and gas, a government permit is needed, which has been issued to five companies that all belong to high-profile politicians and that effectively operate as a cartel. Like anyone in Lebanon, EDL is forced to buy its fuel for a fixed (read inflated) price. The practice is so lucrative that the electricity plants of Badawi and Zahrani, which at the cost of some $800 million were transformed to operate on gas, still to this day burn fuel oil. With an estimated loss of $4 billion to $5 billion over the last decade, the EDL is arguably one of the least profitable companies in the world.

Bloated bureaucracy

And then we come to the bloated and inefficient public sector. Until its restructuring in 2002, Lebanon’s national airline MEA lost $80 million a year, employing 4,000 staff. (For an airline with nine planes the international norm is less than 20% of this number). “After the war, there was a deliberate policy to employ as many ex-militiamen into state service as possible,” said Reinoud Leenders, a former senior analyst for the International Crisis Group. “The number of civil servants increased after the war by some 50,000, while the state’s contribution to GDP remained at some 7%. Not surprisingly, a 1997 government report concluded that 60,000 employees could be made redundant without affecting productivity.” Regarding clientalism, Leenders dug out a depressing litany of abuse. “Reading a list of contractors in state-financed road construction is like reading an inventory of Lebanon’s political elites, their associates and relatives.” According to Leenders, one of the most notorious examples concerned a road construction contract in South Lebanon, where a Syrian company was awarded a contract to build highways, even though the price of $4 million per kilometer was four times the price of a similar stretch of road in California.

Where to now?

The Syrian withdrawal has no doubt had a positive influence on Lebanon’s financial health (one only has to look at the Casino du Liban’s share price), but her role in the ethical deterioration of a nation must not overshadow the complicity of the Lebanese themselves, especially the public figures whose shady business dealings are common knowledge, accepted and in some cases even applauded by those who admire such behavior. Nonetheless, Joe Faddoul remains positive about the future. “The time that ministers and politicians could abuse their positions is over. It is now an open system of checks and balances, so they can not get away with things that easily any longer,” he said, adding: “Look, I just collected the bits and pieces, which were already out in the public domain, be it in a very fragmented manner. I hope others will pursue the case from here.”

As a matter of procedure Executive contacted the public bodies mentioned in this article, but in every case they were unavailable for comment.

October 1, 2005 0 comments

Business

After the Generals

by Michael Young October 1, 2005

written by Michael Young

In early September, the daily Al-Anwar, citing “financial circles,” wrote that investigators looking into the accounts of the four generals arrested on the recommendation of United Nations investigator Detlev Mehlis, had found that, together, they held some half a billion dollars in liquidity. Nor was this necessarily everything they own. Very soon afterwards, the Lebanese began calculating what that came out to in monthly, weekly and daily revenues, and generally agreed the generals had lived well. The money incident provokes sundry thoughts related to Lebanon’s embrace of a capitalist culture, one characterized by free minds and free markets. More importantly, it prompts a warning: in acting against its financial abusers, the state should not go too far in limiting freedom.

Most people hardly blinked as investigators pushed aside Lebanon’s banking secrecy laws to delve into the generals’ accounts. The debate over financial transparency has been a sustained one in recent years, as international financial actors, particularly the United States government, have sought to do away with banking secrecy, mainly to curb crime, terrorist transactions and the stashing away of illicit money. Lebanon has resisted this for pragmatic reasons, believing that concealment encourages more depositors to use Lebanese banks. The free marketers have elevated defending banking secrecy to a matter of principle, arguing that complete financial transparency allows the routine invasion of privacy.

The Mehlis precedent is interesting, because it’s unclear what message it sends to the banking system: supporters of intrusive financial policies will say the matter of the four generals proved that banking secrecy only protects money illegally earned, so that the system must be overhauled and cracked wide open. Defenders say that because the investigators were (and presumably will again be) able to access the accounts of criminals on an ad hoc basis as happened in the generals’ case, there is little impetus to so fundamentally change a system where most depositors are not crooks. The balance will probably tilt decisively in the way of the opponents of secrecy, however, since that’s the direction in which the world’s financial community is firmly going; and Lebanon, as the Mehlis investigation has underlined, is in no position to stand up to an international consensus.

The disappointed can yet take heart, however, if their interest is in a more open system of political and economic freedoms. The Mehlis report will lead to a fundamental revamping of the security apparatus, probably for the better. Corruption will continue, but the Syrian departure and the breakdown of the previously institutionalized system of theft, of which the intelligence chiefs were a central motor, will mean change, particularly if the security services prevent crime rather than promote it.
Lining their pockets

And yet one pauses to reflect on what remarkable entrepreneurial capitalists the four generals must have been, if the figures for their fortunes are true. They must have been devoted to the art of making money; inveterate middlemen, fixers, whose daily duty, when it didn’t involve intimidating and spending the fruit of their labors, centered on planning and implementing business bonanzas where their cut was in inverse proportion to effort. If this magazine gave out prizes on the basis of profit margins, the four would surely merit taking the podium together amid the applause of their fellow inmates.

But when the kudos dissipates, the state will have to decide how far it intends to go to regulate the purged economic environment. Naturally, there will be those who will present the authorities with a formidable laundry list of reform demands that, while their rationale may be justifiable, will likely lead to institutional overkill and stifle investment. There is no doubt the post-Syria state must set the foundations of an equitable free market, free of monopolies and oligopolies, but as Prime Minister Fouad Siniora surely knows better than most, getting the state too involved in economic life merely means increasing costs all around.

The problem with economic reform and the return or introduction of the rule of law is that the state creates providential hopes it can rarely satisfy. The legitimate view today is that the state, thanks to the four generals and countless others – many still in power – is in urgent need of radical, state-induced shock therapy. The state does have a role to play, but mainly to ensure the private sector stays honest and free. After all, what the generals really embodied was the perversity of the state’s hijacking of the economy.

October 1, 2005 0 comments

Real Estate

Neglecting the plight of the world’s poor

by Safa Jafari October 1, 2005

written by Safa Jafari

Five years after setting Millennium Development Goals (MDGs) at the United Nations, world leaders gathered last month to assess their progress in achieving them at the World Summit in New York. If any indicators were needed to this end, the UN Human Development Report 2005 (HDR 2005) has arrived in the nick of time to show that a change in policy and politics is needed if countries are indeed to meet their goals by 2015. These changes include countries putting less emphasis on military forces, expenditure and conflict resolution; and more emphasis on international aid, trade and security. At the moment, the chances of countries meeting the set millennium goals are minimal. This reminder could not be any timelier for an unstable Lebanon.

What are the UN Millennium Development Goals?
At the September 2000 UN summit, world leaders agreed to a set of time-tabled, measurable goals and targets for combating poverty, hunger, disease, illiteracy, environmental degradation and discrimination against women. The summit’s Millennium Declaration also outlined a range of commitments in human rights, good governance and democracy.

Placed at the heart of the global agenda, the MDGs represent the most comprehensive and detailed set of human development goals ever adopted; a framework for the entire UN system to work coherently together towards a common end. The goals set fell under eight broad categories:

1. The eradication of extreme hunger and poverty and halving the number of people living on less than $1 a day whilst halving malnutrition

2. Achieving universal primary education; promoting gender equality and empowering women

3. Eliminating gender disparity in primary and secondary schooling, preferably by 2005 and no later than 2015

4. Reducing child mortality and cutting the under-five death rate by two-thirds

5. Improving maternal health and reducing the maternal mortality rate by three-quarters

6. Combating HIV/AIDS, malaria and other diseases

7. Ensuring environmental stability and cutting by half the proportion of people without sustainable access to safe drinking water and sanitation

8. Developing a global partnership for development and reforming aid and trade with special treatment for the poorest countries.

The Human Development Report 2005: a timely reminder

The Human Development Report 2005, entitled International cooperation at a crossroads: aid, trade and security in an unequal world was released on September 7 to present the case that “if the world’s governments continue with business as usual, 2005 will be the year in which the pledge of the Millennium Declaration is broken. If they act now to deliver on their pledges to the world’s poorest people, they can make 2005 the start of a decade for development, helping countries to get back on track for achieving the Millennium Development Goals by 2015 and forging a new, more equitable pattern of globalization.”

The report for this year provides a range of indicators summing up the status of human development five years after the 2000 MDG declaration. Using country-level trend data, the HDR 2005 estimates the human cost gaps in 2015 between Millennium Goal targets and predicted outcomes if current global trends continue. According to the report, the target for reducing child mortality will be missed, with the margin equivalent to more than 4.4 million avoidable deaths in 2015. Over the next 10 years the cumulative gap between the target and the current trends adds more than 41 million children who will die before their fifth birthday from that most curable of all diseases: poverty. This is an outcome that is difficult to square with the Millennium Declaration’s pledge to protect the world’s children. In addition, the gap between the MDG target for halving poverty and projected outcomes is equivalent to an additional 380 million people in developing countries living on less than $1 a day by 2015. Other gaps were also highlighted in the report, such as that for education (according to the HDR studies, the MDG target of universal primary education will be missed on current trends, with 47 million children in developing countries still out of school in 2015).

The HDR 2005 also traces development performance trends and points to countries that have achieved, are on track to, are lagging, remain stagnant, or have reversed away from the Millennium Development Goals. Highlighting existing inequalities amongst and within countries, the HDR 2005 calls for social justice brought about through better international cooperation; particularly on three fronts: aid, trade, and security. Through presenting case studies and figures, the HDR 2005 contends that current public policy favors the developed world and only through better international cooperation in these three fields can human development be hastened.

The report contends that aid contributes to human development by reducing financing constraints, increasing economic growth, improving the provision of basic services, extending social insurance, supporting reconstruction and meeting global health challenges, while international cooperation in trade contributes to human development through developing an active industrial and technology policy. As for the “human development costs of conflict,” added security will hasten economic growth, create opportunities in education, improve public health and reduce displacement, insecurity and crime.

The case of Lebanon: performing against the trend

Since the HDR 2005 was issued, Lebanon has dropped a notch down to 81st out of 177 countries. It could be argued that the drop merely indicates that some other countries have performed better and have developed at a higher rate, thus leaping over Lebanon on their way up the HDI scale, but this still means that Lebanon is not doing enough. While speaking at the UN on September 16, President Emile Lahoud argued that Lebanon was on its way to realizing its own millennium goals, having created, since the declaration, two institutions: the EU-funded Economic and Social Fund for Development, and the World Bank and Lebanese government-sponsored Community Development Project. However, despite these efforts, without security, Lebanon faces a constant challenge in any development effort. This was highlighted at a press conference in Beirut the day after the release of the report when Finance Minister Jihad Azour supported UNDP resident representative Mona Hammam’s statement that aid, trade and security were the “three major impediments that prevented any developing country (including Lebanon) from achieving any kind of political, economical and social improvement.” Minister Azour also drew attention to the issue of security by stating that “development and security are closely related and both set the base for democracy … We, the Lebanese people especially, are aware of how interlinked those two components truly are.” After all, it is Lebanon’s fractured security sector that has contributed to the killing of “a national development symbol, Rafik Hariri.”

According to a report published this year by the Department for International Development (DFID), entitled: Why we need to work more effectively in fragile states, the definition of a “fragile state” is one that “cannot or will not deliver what citizens need to live decent, secure lives … As such, they significantly reduce the likelihood of the world meeting the Millennium Development Goals by 2015.” Although the report does not include Lebanon in its list of 46 fragile states, focusing more on Afghanistan, Sierra Leone and Liberia, by DFID’s definition, Lebanon is a “fragile state.” The Lebanese state at the moment faces a very likely accusation of disability – if not unwillingness – in providing for its people; particularly when it comes to the debate on “secure lives.”

The data for Lebanon included in the HDR 2005 was measured in 2003, two years before the Hariri killing. It was a year of growth, but more in terms of economic growth than human development. Military expenditure remains relatively high and priority to primary health and education remains low. At present, we remain unsure of what course the indicators will take in the short term. The country awaits stability in all sense of the word: political, social, economic and psychological. Once Lebanon has a stable government and functional governance, one hopes that ministers and MPs alike will begin to yield to the peoples’ daily needs. In the meantime, red flags such as the Human Development Report 2005, serve as handy reminders of what is still at stake: while we engage in creating, evaluating and watching internal politics in Lebanon, every day, the Lebanese people continue to ask for a decent life.

October 1, 2005 0 comments

Editorial

Sovereign Deficit

by Yasser Akkaoui October 1, 2005

written by Yasser Akkaoui

Once again it appears that Lebanese history is being written with the blood of our fellow journalists. May Chidiac was marked for death not for who she is, but for what she represents: the free spirit that quenches the thirst of those of us who rejoice in the diversity, openness and enlightenment that is present – if not always apparent – in our unique society. A week before the atrocity in Ghadir, Messrs Siniora, Salameh, Azour and Haddad and their entourage (on whom I imposed myself) took the begging bowl to New York and Washington. They were reminded that sovereignty doesn’t just only apply to borders and armies, but that it also applies to economic principles.

Governor Salameh tells us that our currency is only 25% sovereign at best, while minister Azour reminds us that 50% of the “sovereign” debt is external. And yet they seek more foreign money for the national collection tin. But how can we ask for additional sovereign debt when our nation is still not totally sovereign, and when all it would take is one container-load of arms to cross our porous border to erase the word completely. This comes at a time when our top officials deny we are living in crisis and see no reason for a national troop deployment, consigning our soldiers to the role of Les Gendarmes de St Tropez.

Before doing so, maybe we should remind ourselves of the $500 million found in the bank accounts of the four security chiefs – those supposedly entrusted with protecting our sovereignty – representing just under 2% of the national overdraft and ask, if this much was squirreled away by our second rank public “servants,” how much more is there sloshing around in numbered vaults in Lebanon and elsewhere, belonging to our “leaders” who, while complaining about unwelcome foreign help, have feathered their nests – or rather, castles and penthouses –with the proceeds from prostituting our sovereignty.

The funds that have been uncovered and those funds that are waiting to be found, should remind us that there will be no sovereignty as long as there are those traitors – for that is what they are – who use the state coffers as petty cash. Before we ask for more money, let us recover what else is out there.

October 1, 2005 0 comments

The Buzz

Tarek Ayntrazi

by Executive Staff October 1, 2005

written by Executive Staff

In August 2005, Tarek Ayntrazi, the Starcom Group’s Middle East chief executive, left the media-buying arm of Leo Burnett after 15 years with the company, to head up Future TV (FTV), taking over from Nadim Munla, now an economic advisor within the Future Movement. Not only was the new position a challenge in the sense that Ayntrazi was moving to another branch of the media equation, he had been handed the reins of a TV station that had been pushed to the forefront of the struggle for a new, independent Lebanon. In this exclusive interview with Executive’s editor, Michael Karam, Ayntrazi talks of his ambition to consolidate the financial fortunes of Future TV and the inherent challenges that go with preserving the station’s core values of responsible broadcasting to Lebanon and the region.

E Your previous employers called the time of your leaving a “transitional period.” Was it a good time to get out?

Absolutely, it was a good time. On reflection, I should have made a move a bit earlier. Still, I am very excited about the move. I have always said to family and friends that my next job would be running a television station and there are not that many around, so it is lucky I like Future. I feel that it is important to like it as a viewer … its political and social values and standards. In that way, I couldn’t see myself running a Saudi station. There were a couple of channels I liked and both of them offered me a job. I took this one.

E What was the other channel?

I’d prefer not to say.

E How did you get the job exactly?
What made them certain you were the right man?

I don’t know if I can answer that [laughs]. I think Future wants to get programming closer to the advertisers’ and the viewers’ needs and demands rather than being a media that comes up with programs it thinks people will like. So, we are trying to bridge the gap, to get closer to the Arab consumer, the Arab youth in particular and advertisers outside Lebanon. My 15 years working in the Gulf was an important factor.

E A more commercial approach?

No, not a more commercial approach. We want to adapt to the viewers’ needs and demands and a natural consequence of that is if you are more in tune with what people want to see, then ratings go up and then you get more ads. One leads to the other. If you adopt a purely commercial strategy, there are more shortcuts to get an audience, such as sensationalism, which is not part of this station’s policy, strategy or culture. This is a station that will never offend social or religious values. Even in its politics, it has always looked at the point of intersection rather than a point of conflict. We try to bridge the gap. Some may call this boring. Some may say we should stand out, but I feel that the right thing to do is to act in the best interests of the community and youth.

E So responsible broadcasting with an eye on the bottom line?

Absolutely.

E Adopting this approach, how easy is it to take on the competition. Are they more ruthless in getting viewers?

Our job is more challenging and more difficult when you have to work within boundaries. We believe this is the right thing to do for the owners and the viewers.

E You mentioned reaching out to the community. Which community?

Future has a core audience base in Lebanon and with satellite Arab viewers in the Gulf region. Our main target is Saudi Arabia as an economic heavyweight, and also for its religious and social demographic. Then there are the other Gulf markets, such as Kuwait and the UAE. Yet we will not alienate Egypt or the Levant area. We are very strong in Lebanon and in Syria, where many areas get us without a satellite. We are strong in Jordan, as reflected by the Superstar voting and the fact that a Jordanian won; also in North Africa where we have distribution plans.

E You have outlined the broad strategy. Can you tell us specifically what we can expect on Future in the coming months?

As you know Future Television went through a crisis with the assassination of former prime minister Rafik Hariri. We had to respond politically to this and rise to the events and this meant less entertainment programs from our regular schedule. However, I believe we were the catalyst in driving events. We were part of shaping the future rather than covering events that shaped the future. We set the agenda. Now we are back to our original mission and we are planning a big relaunch for Ramadan, for which we have a rich grid. Ramadan is a landmark in every year. It represents 25% of annual ad budgets and is very competitive. We all try to get the latest drama series from Syria or the Gulf. We have a bloc of eight hours of new programming from the iftar till the early hours. We have signed the two top Egyptian dramas this year – one with Yusra and the other with Yehia Fakhrani – the top Syrian productions and one of the best comedies to come out of the Gulf, a Kuwaiti production. Ramadan is the trigger, the point for us to re-enter the market. Ah yes, and we will start the 3rd season of Superstar. Future will come back to the viewers and the advertisers.

E Was Future blown off course this year?

Future had a choice. It could have gone for 40 days of mourning with classical music and the Koran or say: “Yes we are sad. Yes we are angry. Yes we are serious and we are not going to remain silent anymore.” So we rose to the challenge. At the end of the day we have a responsibility to the community more so than the advertiser and you have to lead or at least stand next to your community facing the social, economic and political challenges. So we took a pioneering role and before long the political establishment was dancing to the tunes of what was being shown on Future Television. At least this is what people said at the time. This is not my observation.

E Is the new season a move to leave that behind?

The station will never let go of its political and social responsibility.

E Have you been appointed general manager with a view towards increasing ad revenue?

One could be a hypocrite and say no, but we want to increase market share. So building on my strong understanding of Arab viewers and being a TV buyer for 15 years and having lived in the Gulf and knowing what the young generation is looking for, I am sure I can bring programming closer to this.

E Competition among Arab Sat TV

stations has been increasing. Where do you see the growth potential of FTV, where are the best markets and what are the types of programs that hold most promise (survivor stuff, talkies, quiz games, own soaps, or political coverage)?

It’s a combination of so many things. Each segment of the day requires a different formula: early morning, morning, noon, afternoon, prime time, late night. We are a general entertainment channel. We are not news. We are not movies. We must meet the needs for every segment of the day.

E The Lebanese market is minimal, and the terrestrial channels are well sated. How important is Lebanon for FTV, what are your programming essentials here, and how will the terrestrial channel differ from the sat channel in coming months?

The Lebanese channel has more of a focus on local politics and local news. It has more of a Lebanese flavor with no GCC programming.

E What is the weighing of your resources and revenues between the terrestrial and the satellite channel, and how is it going to change?

It is difficult to assess as there are a lot of shared resources, but the emphasis is on the satellite channel because this is where we generate 70% to 80% of our income. It’s as simple as that.

E The genesis of FTV is inextricably linked to the station’s founder, Rafik Hariri. It was widely considered a media where the views of Hariri and the Mustaqbal movement were receiving priority coverage. Over the past seven months, FTV very understandably emphasized the life and death of Hariri by allocating large theme blocks to related issues. How is the dissemination of the Hariri message and preservation of his personal legacy going to remain a priority in FTV programming and to what extent?

By continuing to be socially responsible and by continuing to promote tolerance, openness and acceptance of others and by rejecting any cause that encourages confessionalism, which other stations continue to hammer in their news coverage. We see this day in, day out, especially during elections, which helped wipe out the achievements of the March 14 movement by their coverage. So tolerance, acceptance and liberal thinking were key. We [prioritized] this when he was alive and we continue to do this after his death. I believe Sheikh Saad and everyone within the Hariri political movement is committed to this.

E So not him but his values?

This is how you pay tribute to someone’s legacy. E You are poacher turned gamekeeper. Coming into this position with experience in media buying on behalf of advertisers, do you see the media industry, and the TV industry in particular, as mature partners to advertisers in terms of the transparency of the dissemination of data and information?

The biggest challenge, and maybe these are harsh words, but the biggest crime against television stations is the lack of transparent and reliable research data. The TV audience data available in Lebanon is shameful. I will not make any further comment on this because there is currently a court case against the people who have been providing the data for the past seven or eight years but in reality, in the absence of this data, we are all operating in the dark. I think that a certain program is good because my family and my friends like it. As fragmentation increases … did you know there are now over 200 satellite channels in the Arab world – it gets harder. We used to have our own data and fund it. We were not ignorant but every year every agency was put under pressure to skew the data one way or the other and every time you used data that was not in conformity with someone’s demands all hell would break loose.

E So what is being done?

There is a project underway to revamp the TV audience measurement system and another project in the Gulf led by the GCC Association of Advertisers. We believe that advertisers and media owners have no interest in biasing the data in one way or another. Advertisers want to know where they should spend their money and TV owners want to know the real value of their programming in the eyes of the viewers. All the others have a vested interest: the media sales rep will skew the data to where his financial commitment is higher with no consideration to the media owner or the advertiser. We are happy the advertisers have established their own association and we are fully supportive, knowing they will work in their best interests. Research should move away from the media sales reps, because they have no interest in getting transparent data.

E Between advertiser interests, the political legacy of FTV, and the overall political and social operating environment for Arab TV stations, what is your vision for a mature FTV network – journalistically, entertainment-wise, and commercially?

Look, 60% of the Arab world is under 30. These people are disoriented by the violent times and often conservative times in which they live. I want to reach out to the Arab youth. I want to offer them entertainment and responsible broadcasting.

E You yourself are young. Is that a handicap?

[Laughs] I am 39. Is that young? If so maybe, it is part of this station’s strategy to reach out to the youth. It has not been an issue. It has in fact been a plus.

October 1, 2005 0 comments

Special Report

The print matter

by Thomas Schellen September 21, 2005

written by Thomas Schellen

It may have been an unreported milestone in the history of Middle Eastern printing: last year the Arab region’s first web offset printing press celebrated its 40^th anniversary. A young technology back then, web offset machinery revolutionized the printing of newspapers by facilitating the huge print runs that have given readers their 100-page Sunday editions and publishers the incentive to produce larger circulations. The first such printing press to operate in the Middle East was brought to Beirut in 1964 by the Mroue family, publishers of The Daily Star newspaper and formerly also of the Arab daily, Al Hayat.

While it is worth remembering that Lebanon was the first country to operate a web offset machine in the Middle East, it is less of an advertisement for the country’s print industry that this machine is still running today, largely because the operating company sees no point in replacing it with a new model. Although the press, by modern print technology standards an outright antique, is used nightly in the production of four daily newspapers, these print runs are insufficient to occupy the machine to more than 50%, according to the head of the operating company Print Technology, Malek Mroue. Replacing it with a new machine or even running regular three-month cycles of preventive maintenance by the book would represent financial layouts irrecoverable in the ailing domestic market for newsprint.

Lebanon’s enterprises working in the classic domains of volume in printing books, magazines and newspapers – or what the German pioneers of Gutenberg fame dubbed the “black art” – constitute a highly qualified industry that is capable of turning out world-class quality products. But the country is no longer the navel of Arab printing.

Book printing began in Lebanon far back in the 18^th century through a monastic print shop for religious tractates and for a very long time, the country was the printing hub for the region. Until deep into the 20^th century and with very few alternatives, books printed in Lebanon were ruling regional markets from North Africa to the Arabian Gulf. Still in the 1970s and 1980s, Lebanon’s printing industry was in full bloom, producing schoolbooks and educational materials for numerous Arab countries, delivering copies of the Holy Koran in enormous quantities to Saudi Arabia, and also churning out publications ordered by Palestinian organizations.

By the 1990s, however, a mega-printing company in Saudi Arabia had stepped into the printing of Islamic scriptures and Gulf financiers began investing in building high-capacity print houses in other GCC countries. National print industries got powered up in Jordan and in North Africa and more recently Syria’s private sector has invested millions of dollar into modern presses at a level that makes representatives of leading international equipment manufacturers say that printers there are now better equipped with the latest technology than their colleagues here.

Thus, while other print locations in the Middle East are gaining a profile and some are booming with international aspirations, local suppliers and operators largely dismiss the idea that Lebanon could ever return to its former position as a leader in Middle Eastern printing.

Yet how much of a function the Lebanese print industry could assume or which areas it could develop, is a tough question to address. It is actually extremely difficult to gauge the size and role of the Lebanese printing industry in both its regional and domestic dimensions, because even the most basic data on performance, capacities and markets are lacking.

The print industry association, the Lebanese Graphic Arts Syndicate, has been in existence for six decades and numbers 180 member companies but cannot provide information on their performance, because none is available, the syndicate’s manager, Rania El Haji, told Executive. Neither does the syndicate have data on the activities and results of hundreds of print enterprises that are not members of the industry organization.

Executive requested data and comments on the syndicate’s assessment of the state of the print industry in Lebanon from its president, Joseph Sader, but questions faxed to him and numerous calls went unanswered. According to El Haji, the syndicate is in the process of having a market research firm conduct a survey of sector activities and expects to have relevant data available within one month but said: “it is a very hard question, because printers do not report what they do and who they work for.”

She attributed the reasons for this habit of numbers obfuscation to the fact that many print shops are not licensed or insufficiently so, and thus operate in the shadow economy by not registering workers and not reporting taxes. The syndicate is growing in membership, but can only accept fully licensed companies and on occasion has to dismiss some for failing to pay their membership dues, she said. Some industry managers, however, offered the view to Executive that the syndicate has been less than fully proactive outside the realm of social gatherings.

Industry insiders queried for this report estimated the turnover of the sector to be somewhere upward of $100 million annually, while not exceeding $200 million. In the absence of surveyed results from companies, a comparatively concise indicator on the print industry as far as international output is concerned, can be found in the export statistics of Lebanese customs. According to these data, exports of printed matter (mainly books, newspapers and pictures as categorized under the respective customs number) in the years 2001 to 2004 were worth on average $34.2 million per year.

As sample export ratios provided to Executive by a few major printing companies were in the 20% to 30% range and reached 50% for the most export-wise productive firms, a very rough ‘guesstimate’ would support annual turnover in the mid-$100 millions as not an unreasonable assumption for annual sector performance, which makes printing almost certainly contribute less than 1% to GDP.

On the import side, the customs statistics reveal that printed matter entering Lebanon between 2001 and 2004 was valued on average at $39 million per year, making the country a net importer of published material by worth. Only in 2002, exports at $50.7 million were significantly above average and also exceeded imports. Industry managers pointed out that around that period, large orders came in for printing schoolbooks for Libya. Another significant export opportunity arose from a large volume of orders from UNICEF for printing schoolbooks for Iraq.

The various obstacles preventing the better economic performance of printing companies include the difficult economic environment along with other market-related problems, namely the high cost of electricity, the difficulty of customers to obtain bank finance for publishing projects from corporate brochures to books, and a grueling collection process under the prevalent payment morale where exasperated operators have to spend undue time and efforts in collecting receivables.

Two operational handicaps with their own magnitude are the ever-troublesome regional security situation and the domestic legal environment, the latter constituting an area with its own inner inconsistencies. As Lebanon compared to other Arab countries enjoys greater legal assurances for the freedom of expression, this greater freedom makes printing in Lebanon a good proposition for publishers in surrounding countries. In the opinion of some print industry experts, this publishing freedom is today the country’s strongest comparative advantage over other locations.

On the other hand, the prevalent politico-clientilistic culture of seeking to control divergent viewpoints counteracts the legal framework of the freedom of speech. It hampers publications. In the realm of newspaper and periodicals production, existing legislation is even detrimental to the development of both publishing and print enterprises. Arcane restrictions on the publication of foreign media has deprived the country of opportunities to produce for instance, small (and lucrative) partial print runs of Arab newspapers based in Saudi Arabia and the Gulf for their readers vacationing in Lebanon.

Other barriers include fragmentation in the industry, which is characterized by low cooperation. In the newspaper industry, the major dailies in the country handle their print runs on their own presses, although consolidation and outsourcing would make much more sense in economic terms. But due to political reasons, vanity of ownership issues and fears of having their real circulation numbers leaked, the major publishers have reportedly long refused to consider solutions where a high-capacity web offset printing company with advanced equipment could come into play.

Also among printers specialized in books and magazines, all too many companies seem glued to an operating mentality that emphasizes single ownership and the primitive segmentation of the market – however, without tapping into the positive potentials of family management and developing niches. This parochial mindset is so deeply entrenched that a major Lebanese print personality would decline to discuss any aspect of the business with a publication that does not print at his enterprise.

However, this isn’t the entire picture. The organically grown expertise and entrenched quality of the Lebanese print industry are acknowledged by international experts. On the cost side, too, Lebanon is not without edge over competing locations. According to Georges Chemaly, general manager of the printers Chemaly & Chemaly, the labor cost for a qualified operator in Lebanon carries about a 40% advantage over an Eastern European location such as Bulgaria.

Operating a $12 million facility whose break even point is a monthly turnover of $350,000 to $400,000, Chemaly’s firm achieves half of its orders from European, Gulf and African markets, demonstrating that Lebanese printers today can profitably act on the international scene. The service and flexibility of printers here is better than in Dubai, Chemaly claimed, and the strong customer relationship angle of a family-run print house can be used as an asset that super-sized ventures cannot offer.

Nonetheless, Dubai must be acknowledged as the Middle Eastern print industry location that Lebanon cannot measure up against. Alongside the opulence in investments and planning that is now customary in this boom emirate, Dubai has ambitions to enhance its printing activities for regional and global customers, including establishing print factories that are geared entirely towards exporting to Europe and international markets. A new, typically enormous free zone for media enterprises, the international Media Production Zone, has gained location commitments from several multi-million dollar print industry start-ups and the zone aims to attract 70 printing companies with a size of $13 million to $18 million each. Dubai also wants to establish the world’s largest printing company with a $2.1 billion investment, reports have claimed.

In determining the future growth chances of Lebanon’s diminutive printing industry, even the best imaginable evolution of domestic demand will hold printers within clear borders, due to the inescapable scale limitations of the domestic market. Modern printing is a very capital-intensive proposition, and huge printing plants such as the $40 million web offset presses installed over the past few years at the UAE newspaper, Gulf News, would seem wholly inappropriate in Lebanon under financing and market-size perspectives.

The potentials of GCC markets are beyond comparison to that of Lebanon’s. In the past two years alone, publishing activities in the UAE increased at an estimated annual growth rate of 20%. Advertising spending in the GCC countries has topped $2 billion in the first half of 2005, and 55% of that flowed into print media.

International suppliers of high quality printing machines to Lebanon nonetheless see continued potential in this market, and can support this with reports of sales that are – albeit much smaller than in the Gulf – by local standards very respectable.

The firms dominating the field are the German manufacturers Heidelberg Druckmaschinen and MAN Roland. Heidelberg sold equipment valued at 6 million euro in Lebanon in its business year that ended in March 2004. MAN Roland is represented in the entire Levant and most Gulf countries by Dynagraph, a Beirut-headquartered firm that claims a regional turnover in the 50 million euro range and which just completed moving into a new head office building here.

In the opinion of these suppliers, Lebanon has quite a future in the printing industry, if increasing specializations such as packaging print are taken into consideration. “In the long term, there is a relocation of printing from Europe to the Middle East. What the Far East once was [in attracting print jobs from Europe], the Middle East will become more and more,” said Christoph Fischer, the MAN Roland delegate for the Middle East and North Africa stationed at Dynagraph. He quoted shorter transport distances and greater cultural proximity as reasons why Middle Eastern locations, including Lebanon, could gain increasing ground with European customers.

One field where the entire Middle East is significantly underpowered in regards to printing is however training. Not a single vocational college or technical university in the region is specialized in this field. The Lebanese Graphic Arts Syndicate is aware of this, and Haji told Executive that it has an old dream to establish training facilities on a regional scale and “wants to revive training by creating an institute in Lebanon that would closely follow technological progress and form professional and competent employees.”

It seems that the Lebanese company Dynagraph and its international partners couldn’t agree more. In kick starting the creation of advanced training capacities for the Levant, Dynagraph and MAN Roland just spent 2.5 million euro on creating a Beirut training facility for the Levant, replicating a similar investment they had undertaken in Dubai. The centerpiece of the training workshop is a brand spanking new five-color plus lacquering offset press where employees of clients and trainees can be introduced into the latest secrets of the multi-colored art.

While acknowledging that such a facility cannot substitute a technical university, they are sending out a positive sign of their confidence in the development and future of the industry here. Actions speak louder than words.

September 21, 2005 0 comments