Why we can’t delay Privatization

by Nicolas Photiades October 23, 2005

written by Nicolas Photiades

On the eve of World War II, Churchill spoke of there having been enough “jaw, jaw”. Now was the time for “war, war”. He was talking about the failed policy of appeasement with Nazi Germany, but the same rule sentiment could be applied to Lebanon’s need to privatize key economic sectors, a topic on which there has been much “jawing”.

Since the Cedar Revolution and the election of a supposedly more pro-active government, not a lot, apart from the “pre-revolutionary” sale of licences to two mobile phone operators, has been accomplished on this front. Meanwhile, the debt has remains at a cataclysmic level and the basic services provided by the public utilities – electricity, water, telecom et al – have slipped from mediocre to abysmal. And yet, the idea of privatisation, first mooted by the Hoss government in 1998, remains strangely taboo with many staunch opponents – mainly Hizbullah and Amal – who perceive public institutions as vital providers of jobs for a growing population, and other political factions who see utility coffers as a handy source of petty cash.

Others wrongly believe that state companies are too strategic (such as water and electricity generation) to be passed on to the private sector, while others very wrongly believe that, once privatised, public companies will cease to provide revenues to the government. Sadly, there are even those who are against privatisation simply because they don’t understand it.

What is indisputable however is that the proceeds from privatisation, would be extremely valuable in repaying and containing the debt, providing much needed cash in large amounts – $7-10 billion at a conservative estimate – and reduce government control of the economy (in Lebanon’s case this would be a good thing, as few governments over the past 25 years have been able to manage the economy efficiently), allow it to extricate itself from the heavy financial commitments and focus on allocating its scarce resources to more urgent issues that are not the responsibility of the private sector, such as education and social welfare.

Privatisation also would create a competitive environment by giving the private sector a strong chance to compete in specific economic areas. By eradicating subsidies and assistance to mostly loss-making public institutions such as EDL, and by providing all types of institutions access to government distribution channels, the private sector would be able to operate in a fairer environment and be given the opportunity to compete and thrive.

Another hugely important goal of privatisation would be to diversify the shareholding structure of privatised entities and allow the public to subscribe to newly offered shares. By buying privatised shares, the public would be able to participate in their own economy. A privatisation programme is most likely to provide savings alternatives to the public, allowing the development of a local secondary market, which would be principally characterised by liquidity, and increase the market capitalisation of a stagnant and low-turnover Beirut Stock Exchange (BSE). With privatisation, the 400 “ruling” business families in the country would no longer be the sole providers of the bulk of employment and fiscal revenues. The BSE would no more rely on the goodwill of these families to increase the number of listed stocks and market capitalisation, as privatisation stocks would then provide a more interesting alternative.

More specifically a privatisation program would attract foreign (especially Lebanese) capital. The BSE, and consequently, domestic capital markets, would be boosted, while, newly-privatised entities would become more profit oriented and more cost conscious. The workforce would be better-trained and prepared to face competition and management would be of better quality. Opportunities for employment would increase substantially for graduates and jobs would be created for qualified rather than favoured personnel, thus increasing the general quality of the workforce, and attracting qualified Lebanese expatriates. It would guarantee the permanent evolution of the key economic sectors, within a competitive environment, force the modernisation of the legal system and allow for the ready availability of foreign expertise and technology. Corruption will be dealt a serious, if not fatal, blow.

Let’s take water. If the Lebanese government were to privatise the distribution sector in the form of a 40-50 year concession, the effects would be extremely positive. The concessionaire would pour in significant investments to develop the network, create jobs through the hiring of qualified personnel as well as blue-collar workers. It would resort to many financing alternatives on the local and regional markets in its efforts to develop the network, which may include a listing on the BSE and/or issuing bonds and other types of financial securities in the local and regional capital markets. Moreover, such a concession could easily generate $2-3 billion a year in concession management revenues to the government.

However, it will not be easy. Nobody should expect the government to be able to privatise any of its institutions within months of a decision being taken a couple of months and the Lebanese should also all be aware that the window of opportunity to privatise via international public offerings (IPOs) and/or selling large and controlling stakes to international strategic investors shut long ago.

It was open once, back in 1995-1998, when emerging markets were booming as a consequence of privatisation in the former Soviet Bloc and phenomenal growth in Asian and South American saw significant demand for emerging markets privatisation stock. Initial public offerings IPOs for state companies in emerging economies in Asia, South America, Eastern Europe and even Africa were all snatched up and oversubscribed by a diversity of international investors, who were then open to Lebanese privatisation stocks. However, Lebanon was unable to provide the supply and in 1998 the emerging market bubble burst. Today, such a scenario for Lebanese privatisation IPOs would be almost impossible.

In a much more risk-conscious investor world, Lebanon’s risk level and its subsequent low rating (B- by Standard & Poor’s, one of the world’s leading rating agencies) are too badly perceived, making Lebanese privatisation not particularly attractive to international strategic investors as they would be reluctant to commit financial and human resources to a country where political and economic instability is rife. Success however, particularly in today’s more challenging global environment, would mean Lebanon could finally take its place amongst the world’s reforming and advancing economies.

Lebanon is a late comer in the global privatisation process. A significant number of countries have already started, and in some cases completed, their own privatisation process. Each of these countries has carried out its privatisation programme for different purposes, although the end result and objective has always been more or less similar. Many governments, including some socialist ones, have privatised their state-owned and controlled institutions to improve the quality and cost of service to the individual consumer, reduce the financial and human resources burden imposed by the control and ownership of large public institutions, and use the proceeds of the sale to alleviate the debt burden, reduce the budget deficit, or to finance vital infrastructure and social projects.

Recent studies have shown that, in every country to have undergone a privatisation programme, private firms have outperformed public firms and that privatisation itself has increased the operating efficiency of the divested firms. Privatisation has indeed led to the effective restructuring of public enterprises, when the rights to both cash flow and control have passed from the government into private hands. Studies carried out in the UK, Chile, Malaysia and Mexico (all countries to have been strong advocates of privatisation) showed that net welfare gains have been recorded in more than 90% of recently privatised firms.

Post-privatisation Performance: Key Results from 61 Companies in 18 Countries
*Indicator*	*Average Change*
Profitability	+45%
Efficiency	+11%
Investment	+44%
Output	+27%
Employment	+2,346 (+6%)
Dividend Payout	+97%
Board Turnover	46%

Source: The World Bank

The World Bank study (which was carried out in 18 countries, including six developing and twelve industrialised), as depicted in the table above, has shown that it tested for the results most governments expect: increased profitability, increased operating efficiency, increased capital investment spending, and increased output. Employment actually increased after privatisation, by an average of 6%, rising in almost two-thirds of the firms sampled.

Privatisation would allow Lebanon’s economic and social structure to change significantly in a positive way. It would not only help significantly towards repaying debt and re-establishing monetary equilibrium, but it would more importantly have long-term growth effects by transforming a struggling economy to a performing one in a matter of a few years. Time for cogitation is over, let’s get on with it.

Nicolas Photiades is a chronic sex addict and bond trader
BOX 1

Privatisation 101

As a general concept, privatisation is simply the process of transferring productive operations and assets from the control and the hands of government or the public to the hands of the private sector. Privatisation is mot merely the sale of a public institution to a private bidder offering the highest price. It also includes processes, such as the contracting out of specific public services to the private sector, the leasing of a publicly owned product or company, or the financing by the private sector of vital infrastructure projects, which the government is unable to finance on its own. Privatisation can also come in the form of liquidation of public property or can include the concept of mass privatisation, i.e. the sale of all institutions and services under state control.

The privatisation process varies from country to country, depending on the prevailing general political, economic, commercial and social atmosphere. Indeed, the privatisation path heavily depends on the goals set by a particular government, the individual circumstances facing the specific institution to be privatised, as well as the economic, political and social environment of the country in question. Privatisation should not be regarded as an alternative to government and an obstacle to government growth, but as the best possible way to create new kinds of market relations and to provide results, which are at least comparable and, most desirably, superior to conventional public programmes. The privatisation concept should never be regarded as traditional opposition to state intervention and expenditure, but more a process, which arises out of necessity.

An important aim of privatisation is to change the distribution of power within a society, and hence diminish the control of the economy by the government, as well as by government-appointed managers and executives. Employees of state-owned institutions, which are targeted for privatisation, would surely regard legitimately that the process is likely to threaten them directly. The aim, albeit a Utopian one, is to show that they can only benefit in the long-term, either by realising that private management is more likely to improve their personal welfare than an antiquated public system, or by being relocated elsewhere in a more efficient and performing private sector. This particular private sector can be created out of privatisation, such as the establishment of satellite companies, which would depend on the business flow provided by a newly privatised entity.

BOX 2

What is ripe for privatisation (in order of in order of priority and doability)

Fixed telecom

EDL

Water and waste water (concession)

Rail (concession)

Gas

Oil refineries

Ports and airports (some through concessions)

Intra companies (including Casino and Finance Bank)

MEA and BLC Bank (BDL companies)

Grain Silo

Concession of Container Terminals of ports

National Deposit Insurance Corporation

Concession to manage the pension fund system

Regie des Tabacs (and sort out a real social problem in the form of child labor)

Racetrack and stadia

Prisons

Other specialised banks (including development bank dormant licences)

Public hospitals (concession or full privatisation)

Technical and vocational schools (concession or full sale)

Management of archaeological sites (set up a national heritage company)

Municipal services (solid waste collection, slaughterhouse, etc.)

October 23, 2005 0 comments

Special Section

Frenzy On The Floors

by Thomas Schellen October 23, 2005

written by Thomas Schellen

On several days last month, airlines had no seats left to sell on flights from Saudi Arabia to the Sharjah and Dubai airports. The surprise shortage was caused neither by recreational nor religious travel but by an unprecedented wave of investment tourism. From September 20 and during the first week of autumn, Saudi investors were queuing up outside of banks in the United Arab Emirates hoping to get a slice of the Initial Public Offering of Dana Gas, the largest IPO in the UAE to date.

With $560 million in shares available for subscription, the Dana Gas offering represented but 34.33 % of the new company’s capital. After five days, less than half of the subscription period, analysts speculated that over-subscription could already have reached between 150 and 200 times, or the wealth of a not to poor nation.

To be listed on the Abu Dhabi Securities Market, Dana Gas is the region’s first publicly traded private sector gas company, with ambitious plans for developing energy-related activities throughout the Middle East. That, however, does not necessarily explain the frenzied excitement that befell would-be investors during this IPO and is reminiscent of the great 19^th century land grabs during the westward settlement of the US.

Neither does the company’s short-term business concept, the backbone of which is delivery of Iranian gas to the GCC via a new pipeline, necessarily induce market-romantic attachment. The explanation offered by Gulf-based analysts for the astonishing mesmerism of this venture was that the company’s IPO came with an inbuilt guarantee of quick returns. Fitting into what a Beirut banker intuited as free market version of facilitating re-distribution of wealth in Gulf societies, the governmental and government-near founding shareholders of Dana Gas provided a third of the company’s stock to the public far below fair value per share in the last flotation before a new company law goes into effect in the UAE.

In a larger context, the great Dana Gas race for a – most likely tiny – piece of the new company’s floatation worth serves to illustrate the intensity of the Arab investment and financial markets boom that is washing across the region. Powered unilaterally by the oil price in such immediate manner that every cent of petroleum price increase per barrel in international markets gets mirrored by a rise of the Gulf’s financial market indexes, this economic upsurge bears an odd mark of desperate liquidity – monetary wealth in huge need of finding investment outlets. In its wake, news of financial bloom comes from all over the Arab Gulf and many Eastern Mediterranean markets.

The Saudi stock market, the region’s largest, was up by over 83% since the start of the year when its TASI share index rose above 15,000 points towards the end of last month. The main worry, and not necessarily a small one, in the Saudi monetary arena seems to be how to control excesses of irrepressible growth and fight the danger of deceitful financial schemes.

The index at the Kuwait Stock Exchange, considered by regional experts one of the best in terms of activities, supervision and regulation, climbed from 6,000 to 10,000 points within the past 12 months. In the UAE, the rise was yet more pronounced, as the exchanges there reported increases of over 100 % in 2005. In total, the cumulative market capitalization of bourses in the Gulf Cooperation Council countries was estimated as nearly doubling this year, to above $1 trillion.

As icing on the Gulf’s financial markets development cake, the new Dubai International Financial Exchange (DIFX) at the Dubai International Finance Center started trading on the last Monday of September. Hailing DIFX as a market tailored to international standards and needs, officials said that they expect 10 to 15 IPOs cumulatively worth about $2 billion to take place at DIFX between today and the end of next year. The exchange is expected to compete with international financial trading places rather than with regional stock markets.

Also outside the directly oil-driven Arab markets, Middle Eastern equity markets are gaining financially and growing in importance for their national development. Egypt’s Cairo and Alexandria Stock Exchange (CASE) has become a strong tool in the renewed economic reform program and privatization drive of prime minister Ahmed Nazif, with banking and industrial IPOs and sell-offs of government-held shares lined up for implementation. The supervisory authorities for the bourse on the Nile, which is the region’s largest by number of listed companies, have very recently introduced new mechanisms for margin trading and same-day trading, said reports by a new regional news service, APD.

The Amman Stock Exchange, where almost 200 stocks are trading, has reached a market capitalization of over $36 billion, up from $5 billion in 2000, Jordan’s King Abdullah II told the economic club of New York last month. Thus, market cap in Amman equates today roughly one-and-a-half times the country’s GDP.

But although excess liquidity conditions characterized the Amman bourse, few companies had taken it upon themselves to go after IPOs, commented Jordanian economic expert, Henry Azzam, in the Jordan Times. He enthused nonetheless that family-owned firms in the desert kingdom were slowly climbing on the stock market wagon and starting to look at IPO possibilities.

While still above Lebanese circumstances, this sounds closer to home than hearing of Gulf IPOs by the dozens, or of new financial funds set up for investing in Arab IPOs. For the local market has in vain been waiting to hear of any flotation for the past few years and even just now, the first IPO by a notable Lebanon-anchored firm is aiming for launch in the region. News from the second half of September said that Investcom, the telecommunications company and core enterprise of the Mikati group, would issue Global Depository Shares in London and on the new DIFX.

This should perhaps not surprise, since the Lebanese equity market over years was the sick child of the economy. Starved by lack of nutrition which the government’s financing needs channeled through T-Bill auctions and Eurobond issues to the market’s more vivacious brethren in fixed-income, the stock market was weak and moreover stumbled badly every time when it was hit by a whiff of regional instability. From 1998 until the first half of last year, this meant that the market was at best, sluggish. At worst periods, the kid patient was comatose.

However, the picture has strengthened in 2005 into one of market improvement and hope for better fundamentals. “We got a very good year,” said Tarek Farah, head of the financial markets division at Financial Funds Advisors (FFA). “The prices of most things listed went up. Besides Solidere, these were mostly banking shares,” said Tarek Ahdab, assistant general manager of Beirut financial firm, Arab Finance House (AFC).

The shares of real estate and development firm Solidere and banking stocks have rallied over the past 12 months, and in case of Solidere, risen from the pits. But a few years ago, Solidere shares seemed unable to separate themselves from the sticky $5 (plus or minus a few dimes) mark, half its issuing price and a mere shadow of its recognized potential.

Only when the company last year devised an enticing scheme for allowing investors to gain benefits from handing in shares when purchasing plots for development, it started breathing new life into the stock. In February’s traumatic days many feared that the trust in Solidere would take a huge blow with the death by heinous murder of its spiritual parent, Rafik Hariri, but the worries were disproved almost instantly, and Solidere continued appreciating.

In the final days of last month, Solidere A and B traded around $13. The GDRs of banks Audi and Blom traded in the mid $40s. The bank GDRs had closed 2004 at $24.24 for Bank Audi and $26.67 for Blom Bank, while Solidere had finished last year just above $8.

Market analysts gave a whole range of reasons for the performance of Solidere, quoting stronger revenue, good management, successful cost reduction, implementation of the important Souqs of Beirut commercial project, and also pointed out that the share is today the cheapest in the region when compared to other stock within the same industry.

Interestingly, they did not much link the increases to the co-listing of Solidere on the Kuwait Stock Exchange, which had been implemented earlier this year, referring to inconvenient trading mechanisms for the share as barriers that thus far limited the effectiveness of the initiative.

This is not to say that Gulf demand was unimportant in the improvements of the leading Lebanese share values. The demand was crucial but it manifested itself in Lebanon. “We saw a lot of foreign demand for shares from Gulf and other foreigners,” said Ahdab in observations that were repeated by other analysts for both share and bond market demand from abroad.

Most market watchers also left no doubt that a spillover of the huge GCC liquidities seeking for investment channels was partly or largely responsible for the fire in the BSE and that the share price differential to the Gulf would rule its short-term outlook. “I am very positive on the Lebanese market. It is still rising compared to GCC countries and Price to Earnings ratios are still low,” said Farah who predicted that the BSE would be 15 to 20 % higher within a year.

The share price evolution and outlook for the BSE is indeed not bad when compared to the past. In 2004, the number of listed instruments on the exchange rose from 14 to 19. From December 31, 2004 until August 31 of this year, the market capitalization at the BSE improved from $2.33 billion to $3.33 billion. As for technical improvements, the general manager of BlomInvest bank, Fadi Osseiran, told Executive exclusively in an interview at the end of September that the BSE is zooming in on implementation of option trading. (see page???)

However, on the crucial issues of growth in the number of listed companies and structural development of the equity market, voices of caution and critics are also asking to be heard. “We had a remarkable year in performance of financial markets. [But] for the foreseeable future, I don’t see a lot of potential IPOs in the local market, because mentality and structure are not helping companies to be floated,” said Toufic Aouad, assistant general manager at Audi Saradar Private Bank.

Narrow ownership concepts by a large portion of the family-minded business community have been consistently named as factors creating reluctance of companies to explore equity finance options and flotation. The absence of an independent supervisory entity for financial markets and lacking measures to curb insider trading and abuses of the system are further long-standing points of concern for the promoters of better financial markets in Lebanon.

While a number of analysts and traders quietly also attribute a measure of inactivity to the Beirut Stock Exchange’s performance as institution, particular critics berate it rather sharply. “The BSE are really amateurs in managing a stock exchange. The BSE committee is working under an expired mandate and they do not understand the potential of the market,” argued Ma’an Barazy, CEO of local financial research firm Data and Investment Consult, faulting the bourse and authorities among other things for not making more efforts in marketing the benefits of going public to potential IPO candidates and for not lowering entry costs at the BSE.

One development condition that enthusiasts and skeptics of Lebanese equity market potential see in unison as necessary is completion of the political reform and renewal process. In this respect, optimism has been gaining. Where previously the political components required for stability and development had been lacking, the past months have brought radical change, opined Toni Choueiri, a banker of many years and founder of a new financial firm, Amwal Invest.

“We are betting that circumstances would change. After the international conference for the support of Lebanon takes place, the markets will widen and improve – provided that this conference takes place,” said Choueiri, who obtained a central bank license for his company earlier this year. However, as the past months of alternating great political expectations and disappointments did not yet generate a stable plateau for the envisioned economic take-off, he had to postpone the start of his firm’s operations, he conceded, also with an eye to finding additional capital for the startup.

Delays in the rebuilding of Lebanon’s political superstructure thus come with warning signs of slowing the growth chances of financial markets, with the ultimate danger of missing much of the current search of Arab liquidity for investment opportunities if political infighting were to rule the country indefinitely.

This would be most unfortunate, as the present is a rare opportunity for Lebanon’s financial market growth. “Today is the right time for Lebanon to seek excess liquidity from the Arab World, for two reasons. Firstly, we are at the onset of new growth in the economy, and secondly, because Arab markets become more interlaced, financially or economically,” said investment banker Karim Salameh, who just entered in a new venture of providing investment banking advisory and transaction guidance services as CEO of Ahli Investment Group, established last month with Al-Ahli International Bank, a Lebanese bank owned in its majority by the Jordanian National Bank.

Salameh is confident that Jordanian and other Arab investors could be enticed to partake in Lebanese real estate as well as private equity. An expert on real estate investments and real estate funds, Salameh emphasized that real estate as long-term driver of the Lebanese economy has passed a correction phase and values are currently very good in relation to real estate prices in the Arab World and Europe.

In this context, Lebanon’s real estate sector also has yet untapped power to contribute to the BSE. “It does not make sense for a country that relies heavily on real estate investments not to have real estate companies other than Solidere on the stock market,” Salameh said. “The BSE should encourage real estate companies to be listed in order to draw foreign investors into Lebanese real estate, particularly institutional investors.”

Market cap has still a long way to go in Lebanon. As so many opportunities beckon, curing the structural problems of equity markets today appears as realistic chance for enhancing this market’s ability to reflect economic renewal and in turn induce greater speed of economic development.

October 23, 2005 0 comments

Feature

Shake-up in the judiciary

by Executive Staff October 23, 2005

written by Executive Staff

While the Mehlis UN Commission inquiring into the assassination of former Premier Rafik Hariri has been grabbing the headlines for these past few months, the rest of the judiciary has been quietly setting out on the path to reassert its prized independence, free of the political pressures that have made its life difficult for decades.

Files on the alleged misdeeds of around 20 judges out of a total of around 500 are currently being studied to see whether there is a case for removing them from their jobs. Although Justice Minister Charles Rizk is emphatic that the judges’ ruling body, the Higher Judicial Council, is in sole charge of running its own house, he hopes that any judges found to be either “indiscreet or incompetent” will be questioned and their cases acted upon within the next three to six months.

In theory, the all-consuming inquiry into the February 14 bomb blast that claimed 20 lives has put significant but less high profile matters on hold. “In no way at all,” said Rizk. “The Hariri investigation is under the charge of a Lebanese investigative judge as well as the UN commission. The judiciary carries out its job independently of the minister and there is no reason why I should become involved. I am just the political authority, an extension of the government.”

That extension included receiving members of the Higher Judicial Council within two weeks of his taking up office. “They sat with me and took the decision to clean their own system. I am not involved in their activities and I should not be,” said Rizk. “Members of the council said they were hoping that with this government and me as minister there would be an end to the [political] pressures that prevented them from implementing Article 95 and getting rid of incompetent judges.” Article 95 of the law stipulates the circumstances in which the council may dismiss judges.

Forced or voluntarily,

the guilty have to go

Shielding the judiciary from political pressure is precisely what Rizk sees as his main role at the ministry. “By the council’s own admission, there was traditional pressure from political circles that prevented them from cleaning themselves of these ‘gentlemen’,” added Rizk. “Now those pressures have been lifted. The council has already taken decisions to ask the Judicial Inspectorate to send them the files on about 20 judges. They will examine them and take the proper decision.”

For Rizk that “proper decision” means that the guilty have to go. “It might also be that the judges [under suspicion] might be bright enough to resign before any formal decision is made to exclude them from the courts,” he said.

The priority is to purge the system of its bad apples rather than to arraign them on appropriate charges, according to the minister. “The prime task is to get rid of them,” he said, “whether they go of their own volition or whether they are excluded.” But punishment isn’t totally out of the picture. “OK, there is a difference here but we have to keep in mind the objective – cleansing the judiciary,” said Rizk. “The High Judiciary Council’s role is to make sure the judiciary is always kept in good condition. If some people have done things that deserve another form of action that can also be dealt with by the inspectorate.”

Politicians tampering

with the law

Of the 10 members of the Higher Judiciary Council, three are ex officio, and the others are either elected by their peers or appointed by the government after consultation with the judiciary. “These are the people that implement Article 95,” said Rizk.

“The Higher Council knows who the [suspect judges] are. I hope the current process will be a quick one but not precipitate. We don’t want any unfairness. I’m not pushing the council – it’s independent of me – but I would say that consideration of the files should take three to six months before decisions are made.”

The change in environment that allows actions unthinkable until this year is attributable to several factors and, in any case, some of the most flagrant abuses of the legal system in past years have had little to do with the judiciary, whose task is to administer the law not to make it. The 24-hour change in planning laws that allowed the construction of the multi-story Cap sur Ville development half way up the mountain between Sin El Fil and Broummana was not the judiciary’s fault.

“That was very unhappy but it had nothing to do with the law,” said Rizk. “That had to do with the way Parliament and politicians play with the law but it is an old case and I doubt it would happen again. I am a lawyer myself and so I am very familiar with the systems in both Lebanon and France [Rizk has a French Ph D in law]. The legal system in Lebanon does not have to envy that of any other country. What we should envy is the way it is applied elsewhere.”

‘Corrupt judges are

a worldwide problem’

It was also scarcely the fault of the judiciary that in December 1997 an amnesty law on drugs offences was passed – and given a deadline that was backdated two years to suit the particular needs of an influential politician facing serious charges. Although there are stories in legal circles of some cases where judgments appeared to fly in the face of the facts, almost none came to public light because of the threats and pressures on the judiciary to try to influence judgments. Ironically the actual court system seems to have been sometimes spared such threats because some potential cases were never referred to them.

So isn’t the present minister himself under pressure? “Do you know any minister in England who is not under pressure?” countered Rizk. “Everybody is under pressure but it depends on how you conceive of your responsibilities. To me maybe it is easier because I am not indebted to anyone and also I think that Lebanon is in such dire straits today that we need to devote ourselves body and soul for our country.”

Some lawyers maintain that the judicial system was sound and functioned well until the early 1990s. Rizk disagrees. “Corrupt judges are a worldwide problem, not a Lebanese specialty,” he said. “I’m not sure that the Lebanese judiciary was ideally pure before 1990. There were problems that have always been there, as everywhere, but now we have to get in and solve them or get rid of them.”

Problem with arbitration

is finding an arbiter

Since the legal system and its application also underpins contracts and most commercial dealings, any deficiencies have an inevitable consequence of denting confidence, especially that of foreign companies wanting to do business in Lebanon. Major contracts generally stipulate not only what language the contract shall be written in (to prevent ambiguities that may arise from a translation) but also under what state’s laws the contracts will be enforceable. They frequently also state that in case of dispute where independent arbitration is sought both parties will use the services of a particular arbitration court. This is why the Cellis/France Telecom argument with the government over accusations that it had breached its Build-Operate-Transfer contract was referred to a hearing in Paris.

“It’s not a matter of [bad] law in Lebanon,” said Rizk. “The problem is in the implementation. There is also a problem of procrastination and the subsequent length of time cases take to get heard.” The downside of a resort to arbitration is that it is expensive but it does have the virtue of being swift. However, when it comes to arbitration cases, “the difficulty arises in choosing the person who will be the arbiter.”

‘Judiciary’s problems are

like those of the country’

The calls for legal reform have been loud and long these past few years but mainly falling on deaf ears. Even now there is no magic quick fix on the horizon designed to produce a rapid restoration of business confidence in the law. “You cannot separate the judiciary from the whole political pattern of the country,” said Rizk. “A lack of confidence is not just a problem of the judiciary. It is a reverberation of the lack of confidence in the country as a whole because of the very precarious security situation. Events [such as the bomb attack on LBC presenter May Chidiac’s car] shake the confidence in the entire country,” he added.

So since there isn’t an instant panacea to provide legal comfort, how long is it going to take before the business community, Lebanese and foreign, feel comfortable? “Re-establishing a stable political atmosphere is not an event but a long process,” said Rizk. “And it is not only local events but also those in the entire region that are important for confidence in business and every other aspect of life.” Whatever the level of resilience in Lebanon, repeated and regular explosions since the massive blast of February propel the country backwards each time it seems to be making modest progress. “A series of explosion on the public transport system in London didn’t shatter Britain because it is basically a stable country,” Rizk observed.

Even the politicians

‘are getting better’

Although total independence of the judiciary by any yardstick was an unreasonable expectation as long as Syria exercised tight control over the country, the lack of a physical Syrian presence in Lebanon since April has been replaced by a period of violent instability not seen since the days of the war. Even so, there are some faint bright spots.

“We have more awareness now and the possibility of another 24-hour change in the planning laws has disappeared,” said Rizk. “We also have a better way of transferring that awareness and public opinion into parliamentary control.”

So does an analysis that says the legal system is fine and just needs implementing also apply to political life? “I think we have better politicians,” said Rizk. “Look at the commission on the electoral law. Its members are very honest people who are working very hard to establish a good electoral law.” While producing a law that is perceived by the majority of the population as equitable will be to achieve what has eluded Parliament for decades, its own application will be felt only in years to come when there are new elections. Yet Rizk sees it as having wider and more immediate significance. It will help create an environment that “will be conducive to improvements in other directions.”

He also sees even the Mehlis inquiry as having beneficial spin-off effects. “Indirectly it has shaken up the whole legal, security and judiciary apparatus,” he said. “The inquiry has shown how modern criminal investigations should be undertaken using new technology. It has established a model that will have positive reverberations on the Lebanese judiciary. The shake-up will also have a very longstanding, very positive consequence on Lebanese society as a whole.”

October 23, 2005 0 comments

State department

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

Drawbacks to doing business in the Middle east

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.”

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

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

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