MTV relaunch set for next year

by Peter Grimsditch September 9, 2005

written by Peter Grimsditch

For the youngsters appearing on Mini-Studio, an entertainment TV show being broadcast in the late afternoon, it was their chance for a few minutes of fame. But the children’s bid for stardom on the MTV program came to an abrupt halt. Security forces burst into the company’s premises in the RML building in Sassine, Achrafieh, and ordered a technician to pull the plug on the young people’s ambitions. The staff was evicted, leaving even personal belongings behind, and the five floors belonging to the station were sealed. That was on September 4, 2002, a couple of months before MTV’s 11^th anniversary.

Since Parliament lifted the broadcasting ban in the middle of last month, the enfant terrible of television is set for a multi-million dollar comeback. MTV plans to reappear on the airwaves in the first few months of 2006 although a precise date has not yet been set.

The 2002 raid included simultaneous swoops on 19 mostly unmanned relay stations, needed to extend coverage to the entire country, as well as the unfinished Studiovision premises in Naccache that will house the reborn MTV. At the time Naccache was solely a program production center belonging to an allied, but separate, company.

Outspoken and out of a job

MTV’s crime had been an alleged breach of Article 68 of the law covering broadcasts at election time. The provision stipulates that broadcasts during an electoral period will not favor one particular candidate. In June of that year, MTV’s founder, Gabriel El-Murr, had been elected to Parliament after a bitterly disputed contest with his niece, Mirna El-Murr, for a Metn seat. To this day, MTV emphatically denies the charge of broadcasting bias, saying that Mirna had refused invitations to appear on the station to put her point of view.

Closure left the 453 people on the payroll in September 2002 without a job. In the ensuing uncertainty about the probable length of the ban, they hung around waiting for a reopening. The law stipulated a three-month ban for any station showing bias but the interpretation in MTV’s case rested on a single word. The relevant clause speaks of a tam (complete) closure. While MTV took this to mean shutting down the whole station, as opposed to pulling the plug on the offending program, the authorities interpreted it as meaning “indefinite”.

At first lawyers tried to get the ban lifted through the judicial system and the Publications Court. When that appeared doomed to failure, the company’s energies were poured into two parallel tracks. Campaigning for the return of the license switched from the judicial system to lobbying politicians while commercially developing Studiovision to produce programs, commercials and video clips for external customers.

Alwaleed steps in to help

Some of the 453 people were absorbed into program production at the Naccache business and MTV’s key executives were also retained. But most of the original staff stayed months without a job before eventually finding work on other stations, either in Lebanon or abroad.

The Naccache premises turned into a hive of industry making programs for many of Arabic language television’s major players. Among the clients were New TV, Al Hurrah, MBC, Orbit and the Hizbollah station Al Manar. Another important source of revenue was the four channels of Rotana, which are owned by the Saudi billionaire Prince Alwaleed bin Talal, who also holds a 10 percent stake in the company. Rather than let this lucrative business drop, Studiovision is in the process of constructing a second building in Naccache, bringing the total investment to around $60 million, and plans a third for some time in 2007. The second building is due for completion by the end of the year, provide, according to MTV, “we don’t meet any major snags”. In any case, at the time of the closure MTV was planning to move from Achrafieh to the first building in Naccache, which has seven floors underground as well as the half dozen above ground overlooking the Mediterranean.

Seeing the financial light

and bigger audiences

In the tight and tough world of a Lebanese media business fighting for a slice of the declining total advertising revenue, MTV says that it had built up by 2002 a 26 percent market share of the gross $60 million available. Commission paid to external advertising sales forces, the regie, swallows up more than a third of that. The audience figures, too, were encouraging. Published figures had most frequently placed MTV as number two behind LBC. MTV claims these statistics are suspect and that often it was the leader of the pack. The station says it may not have had household name hosts like Marcel Ghanem, but the content of political talk shows run by presenters such as Paula Yacoubian, Ziad Njeim and Eli Nacouzi attracted as much attention.

It was the political content that had first brought MTV into conflict with the authorities. The station started broadcasting in November 1991 but news and politics were not introduced until two-and-a-half years later. The official MTV line is that it was not confrontational and did not display overt opposition to the regime. Nevertheless it was controversial in taking decisions to interview General Michel Aoun in Paris in 1997 at a time when contact with him was considered illegal. It also the first TV station, through the medium of its talk shows, to broadcast calls for the release from prison of Lebanese Forces leader Samir Geagea. However, it was the departure of the Israelis from Lebanese soil in May 2000 that encouraged MTV to raise the tempo and the profile of its political coverage and its opposition to the Syrian presence in Lebanon. While that brought increased interest and larger audiences, it also led to a series of unofficial visits by people carrying warnings that it was getting out of line. MTV was the only TV station to air graphic footage showing the violence used to put down the pro-Aoun and Geagea demonstrations of August 9, 2001. It also regularly conducted TV polls that were thinly disguised encouragement to calls for the departure of the Syrians. The closure move. However, came after Gabriel El-Murr’s election to Parliament. Murr is a shareholder and not an executive director of the station.

Breakthrough in quest

for reactivating the license

If Gabriel El-Murr’s removal from Parliament only three months (his victory was deemed to have been illegal) after his election and closure of the station were the lowest points in MTV’s history, the recent upward turn also started with an horrific event. The change of political climate brought about by the assassination of former Prime Minister Rafic Hariri on February 14 and the subsequent anti-Syria demonstrations convinced MTV’s directors that obtaining permission to reopen the airwaves was only a matter of time. But, as the chairman, Michel Gabriel El-Murr, remarked, “constructing is harder than destructing”. Well before the August 16 parliamentary decision that restored the station (and changed the closure period for infringing the law on election coverage from three months to three days), MTV had set up two task forces. The first lobbied political figures while the second concentrated on technical issues of financing, programming and staffing.

International advisers were brought in to help with studies on strategy, finance, advertising and communication. Separate studies on technical and artistic needs identified what was missing, alongside suggestions on how to plug the gaps.

There is already a complete programming grid for the reopening and some programs have been commissioned. The hunt for staff is in full swing and the reception at Naccache is sometimes under siege from young hopefuls trying to break into the glamour of television. Around 4,500 people have sent in their CVs and many of the former staff are also making contact. The new staff level is projected at around 550, or 100 more than when MTV was closed down. This is mainly because the terrestrial and satellite stations will be two separate legal entities and need more people. The stated prime reason for two services is that audiences at home and abroad have different requirements and therefore need different services. While this is valid, MTV also accepts that separation provides an insurance that any future attack on the terrestrial station would not automatically close its sister satellite service. In September 2002, the satellite service was closed down as well because it was an integral part of the same company.

All day, all night

and mostly home-made

Most TV stations make their money on adverts aired during the three hours of evening prime time, although MTV sees it as extending these days until one or two in the morning. The new 24-hour program schedule will consist completely of domestically made programs for prime time and around 75 percent for the rest of the schedule. Although making programs is expensive, so too now is buying them. The increase in the number of satellite broadcasters worldwide has increased the competition to buy programs and consequently upped the prices being asked, especially for those intended to be aired on satellite stations. It’s still a reasonable commercial proposition for terrestrial stations to buy films, sitcoms and dramas. The prices are lower because the potential viewing audience is relatively small and the programs can be sold to many countries.

On the advertising front, MTV hopes to regain its market share in two years and says the big spenders are already lining up to buy time on the terrestrial channel. The gross advertising income for the last full financial year of operations, 2001-2, was $13 million. That total was amassed by an in-house company, thus reducing the commission expenses of working through a regie.

Politically the station plans to be as forthright as ever. The subjects for airing will not change although the methods may be more “sophisticated”. “MTV won’t follow any single particular political group,” said Michael Gabriel Murr. “The opposition it used to represent is now split between loyalists and opposition now. In any case, MTV is for all the Lebanese. There is mutual respect between us and Aoun and we have a lot in common with him. We have no hatred for (President Emile) Lahoud or anyone else.”

In search of millions

from ‘suitable investors’

The company has no official figure on the amount of money the closure has cost but calculates that it runs into tens of millions of dollars. It is also exploring ways to receive compensation for at least some of its losses. “We want indemnities from the government,” said Michel Gabriel El-Murr. “We are annoyed that after international adjudications for Cellis and LibanCell, they are ready to pay, whereas for local matters they aren’t.” As Executive went to press, the RML building in Achrafieh was still sealed and there was no way of knowing how much of the equipment could be salvaged. In any case it is three more years out of date.

Nor is MTV revealing at present how much money it is seeking from investors. Industry analysts put a figure of around $60-70 million a year to run two stations, with pure news channels like Al-Jazeera somewhat less at $40-50 million. The Gabriel El-Murr family controls more than 65 percent of MTV and the relaunched terrestrial station will be 100 percent Lebanese owned. The satellite company doesn’t yet exist yet and the identity of the shareholders has not been decided. “The big challenge is to gather the necessary number of shareholders and partners and funds,” said Michel Gabriel El-Murr. “It is not only about money; it is about meeting the ambitions and aspirations and sharing the same principles and values with the MTV.” But even like-minded investors don’t get a say on the station’s content. “It’s a tough challenge but MTV specializes in difficult situations,” added El-Murr.

That’s a thought that reflects the program being aired on the satellite channel at the time of the closure – Tlob w Tmana (“Ask for something and wish for something”).

Peter Grimsditch is Middle East correspondent of the London Daily Express and former editor of The Daily Star

September 9, 2005 0 comments

For your information

Ineke Botter

by Executive Contributor September 9, 2005

written by Executive Contributor

With the mass migration of almost one million 03 mobile numbers to the 71 prefix set for the night of September 17, Ineke Botter, Managing Director and CEO of Alfa, would have every right in the world to be a bit nervous. After all, the switchover involves several private and governmental entities, not to mention the Lebanese public itself who is not necessarily given to listening to patient lessons on the need to reformat the country’s collective digital phonebook. The thing is that Botter is not particularly nervous – at least not outwardly. In fact, while the four week lead up to the switchover will undoubtedly involve her in a blizzard of PR and outreach efforts, she’s as focused as ever on the big picture: Revamping the mobile network, offering expanded services and, hopefully, expanding the customer base so overall rates might eventually come down.

Executive: Lebanon is set to see the mobile code 03 change to 71 in mid September. What is Alfa doing to inform a potentially confused public about the switch?

Ineke Botter: We are doing a lot now. We started with a kick off interview on LBC…. and the Ministry of Telecommunications (MoT) will organize a press conference shortly. We are talking to each and every paper and magazine, and we will have a billboard campaign with Alfa, MTC, Ogero and MoT along highways – around 1,500 in all. We will also have a number of inserts in magazines etc. When the mobile code 03 is transferred to 71 on the night of September 17 and into September 18, if you make a call nationally to 03 then you have to change to 71. If it is an international incoming call however, then it will be forwarded automatically to 71 forever – although the caller will get a message to dial 71 next time. So we are doing a lot of “pretty” work and a lot of work after the 18th of September. The reason why we are doing all this is it has already incurred a lot of work for ourselves for over a year now – lately we have a project team of about twenty people and endless suppliers involved all making sure that this is a seamless enterprise at least from a technical point of view. So one month before, we want to make sure that people understand how [the changeover] will function so we don’t get any overload in customer care with questions that are basically crystal clear if we explain them over time. The other aspect here is that we are trying to make people aware that they really need to do something. This means that [customers] have to change in their mobiles the codes from 03 to 71. Once it is done it will not happen again, so it’s a one-off. The final issue I want to mention is that people will most probably have to print new business cards and stationary, so the public cost is so big that we found it necessary to inform people well beforehand.

Executive: Is there a number now for how much the switchover may cost consumers?

IB: There is no estimation of the cost… Although there is international benchmarking, it is very dependent on the local situation because, for example, printing costs are a lot lower here than in Europe… definitely though [the cost to consumers] will be in the millions.

Executive: Is one month of publicity really enough time? Why didn’t alfa start earlier?

IB: Well the MoT is the owner. Of course, the mobile operators are the first ones involved in this project. We are very willing to do whatever is necessary to inform the public, but you have to recognize that in May, for example, there were other items on the agenda, the elections. So the changeover was not the top priority, and I think people have to understand. It is quieter now though so I think people will understand.

Executive: Why was this step necessary in the first place?

IB: The fixed line network uses 01 and 02 and then all of a sudden 03 is mobile and then you have 04 and 05 etc [local numbers]. So to have a numbering plan in place, the MoT decided that this needed to be harmonized. The first step was that they restudied the fixed line network so you have to dial an area code and then the number. Now, 03 will be put aside and used later in the fixed line network. The other reason was that, at the moment, [the MoT] had to introduce a new number block for one million new numbers… So we released 70 [in June] which you now have and you will have 71 and if the market ever grows to 100% [penetration] you might have 72.

Executive: What is your biggest concern about the switchover?

IB: Well it is not a big concern, but there will be some outages in some systems because they have to migrate. This is just a fact of life that we have to do. One of the things that will be affected is the Intelligent Network for prepaid subscribers. In any event, we are now determining with suppliers at which hour we will be doing something, and we will send out this schedule to customers. My expectation is this will be a very small issue. And we will compensate if there is some loss.

Executive: Is the introduction of new numbers –the 70 prefix – helping to bring down Lebanon’s notoriously high mobile rates?

IB: The MoT decides on the prices, not us. After 14 months here, I have said this a million times: it is not us. Each and every new service or tariff change we need to ask approval. We do have the expertise in house to act as a consultant to the government to say ‘if you lower the prices by XYZ then we can predict to you the following customer take up.

Executive: You can show them this. Have you shown them?

IB: Sure….but you have to look at the other side of the coin, which means what is the investment per subscriber and how can I recoup that investment. You have to study your addressable markets, then you have to see what the revenue stream is for the government… all while investing for these additional customers. So these calculations are not on the back of an envelope. You can say, for example, ok we estimate the market growth at 30%, which means for the government that the investment will be so much. And that investment needs to paid from the revenue stream which, at the moment, goes straight to the state budget.

Executive: So even if the government wanted to drop mobile prices tomorrow and expand the customer base, the network itself is just not ready for this?

IB: First of all this network is old, so the first calculations that you have to do is to see how you have to replace network elements – we have to replace quite a bit of the network, for the existing customer. Second, you have to look at services you want to offer to your current customer base. If we want to go to the 2.5 generation G – the EDGE technology – at the moment a lot of the network cannot support it. Then, the third thing is that we want to have a bigger uptake of new customers so we would need to build out to cater to this [lower level] market segment…. My top priority is the replacement of network elements, while doing this we can also add capacity itself.

Executive: It has been more than a year since Alfa came to Lebanon, how has business been thus far?

IB: The first year after the take-over has been a challenging time starting with the ramping up of the number of personnel. As you might remember, we lost 57% of the employees when we arrived and had to start recruiting at great speed, then of course, all recruits had to be trained on the job, which was and is a great task and achievement for everyone involved. Then, there was the rebranding from Cellis to alfa which involved over 50 people. That said, from a management and operational point of view, I’m quite happy. We have increased subscribers by 15% and also increased our roaming partners by 13%. Now, what we urgently need is investment in replacing equipment and expanding the network, as I said, to cater to the continuous growth of subscribers. Also, alfa wants to take the next step in launching more data services, again, a project that needs time and substantial money but will support the development of the economy. To a certain extent, I compare Lebanon to the Netherlands where I’m from: both are trading companies really… and traders need the newest business tools to make sure they are on the cutting edge.

September 9, 2005 0 comments

For your information

VAT refunds down

by Executive Contributor September 9, 2005

written by Executive Contributor

Global Refund, the company responsible for repaying VAT to non-resident shoppers, has registered a 16% drop in overall tourist retail spending since former premier Rafik Hariri’s assassination on February 14th, with a 22% decrease in VAT refund claims.

Among the Arab tourists, who represent the biggest spenders visiting Lebanon, purchases dropped by as much as 43% for the Syrians, 30% for the Egyptians and 23% for the Saudis between February-July of 2004 and the equivalent period in 2005.

The largest drop in tourists has been among the Saudis and the Emiratis, both showing a decrease of 48% between July 2004 and July 2005. Overall, Lebanon witnessed a 26% drop in tourism from the Arab world and a 17% drop in the total number of tourists.

Considering the fact that the Saudis consistently feature among the top spenders in the country, the impact on the retail market, and especially the luxury segment of it, has made itself felt.

“It directly affects the sales of luxury products,” says Khalil Achkar, Global Refund’s country manager for Lebanon. “For a lot of retailers, 40% on average of their total sales go to tourists, of which the Saudis form the majority. A drop like the one we’ve witnessed over the course of the last few months can mean a 20% decrease in revenue.”

Most affected by the drop in tourist spending are the fashion and clothing retailers, which sell the most to Lebanon’s visitors – close to 70% of the VAT refunds requested between February and July of this year were for clothing items, with watches and jewels trailing in the back with some 12%.

However on an up note, the average amount spent purchasing by tourists claiming VAT refunds increased between 2004 and 2005 by 4%, from $749 to $775. In 2004, 50,000 visitors – some 5% of Lebanon’s tourism – claimed re-imbursement, collecting on average $50 from one of the tax-free shopping desks at the country’s main border crossings.

Appetite for investment

Syrian investors last month showed an insatiable appetite for buying into the capital of Bank Audi Syria (BAS). During a 10-day subscription period open exclusively to Syrian nationals, demand for the 25% publicly offered equity participation exceeded supply almost tenfold.

What the bank called an initial public offering to raise approximately $11.7 million (SYP 625 million) towards its start-up capital of $46.7 million (SYP 2.5 billion) was oversubscribed by more than $103 million, representing coverage of 988%.

The offering was the second tranche of inviting Syrian investors into the equity of BAS, which under the country’s law has to be to 51% in the hands of Syrian shareholders. Prior to the offering, Syrian founding investors into the new bank already held a 26% stake in BAS, which obtained a banking license from the country’s council of ministers in early June and intends to commence operations later this summer.

Non-Syrian shareholding in BAS comes to 47 % from Audi-Saradar Group member companies Bank Audi, Audi-Saradar Investment Bank (ASIB) and Lebanon Invest. The remaining 2% are held by Saudi investor Sheikh Abdallah Abdel Aziz Al Rajhi.

Executives at Audi Saradar Group commented elatedly on having achieved the hitherto largest oversubscription of any investment in Syria to date and Marwan Ghandour, chairman of ASIB, called it an “eye-opening experience” for ASIB to manage the public offering. “I hope that we will continue to provide additional investment banking products as the market potential is clearly impressive,” he said.

Finance experts in Beirut evaluated the huge interest of the Syrian private sector in the Lebanese-Syrian banking venture as proof that investors in the neighboring country sense a lack of attractive investment opportunities in their economy and have no qualms about dealing with Lebanese business and banking partners. “It shows that there is a lot of liquidity in Syria and that money has no borders, no feelings,” said Jean Riachi, chairman of Financial Funds Advisors (FFA).

Meanwhile in another development in capital formation of a new Syrian-Lebanese joint venture bank, Bank Byblos and the OPEC Fund for International Development signed an agreement under which the fund assumed a $3 million equity stake in Byblos Bank Syria (BBS).

Summertime blues

Despite upbeat reports in the local media, leading players in Lebanon’s hospitality sector admits the season – plagued as it has been by bombs and stay away Gulf Arabs – has been a disappointment with no upturn in sight.

According to Paul Ariss, President of the Union of Restaurant, Café and Nightclub Owners, between February 14 and April 9 – when Bahia Hariri, attempted amid much fanfare and price-slashing to revitalize the Central District – business in Downtown Beirut was down 100%. Between April 9 and August 19 – the day Ariss spoke to EXECUTIVE – general turnover in the Downtown area was down 30% compared to last year. Over the same period, across Beirut as a whole, business had been down 30%-40%, he went on. Outside Beirut, especially in the mountain resorts, the damage was even worse – “dramatic,” he said. Was it down more than 50%? “Oh yes,” he responded.

“We have had very few tourists in June and July,” he explained. “A few Arabs and other foreigners came in August, but nothing compared to last year.”

On the hotel occupancy front, a similarly bleak picture emerges. The period from 14 February until 15 July, was “very bad,” lamented Pierre Achkar, President of the Lebanese Hotel Association. “The first two months were very, very, very bad.” The occupancy rates of hotels outside Beirut were less than 10%. In Beirut the figures lay between 18% and 22% over the same period, compared to 71% occupancy on 14 February. When a modicum of normailty returned to Beirut and a few tourists did emerge, hotel occupancy in Beirut for April and May rose to between 32% and 35% – still uncomfortably low compared to the 70% of last year. Since the June legislative elections, occupancy rates have fluctuated between 45% and 60%. When EXECUTIVE spoke to Achkar on 19 August, he said Beirut occupancy was running at between 75%-80%. “Last year, everywhere was 105% full,” he said.

Coral beach

Bids in the auctioning off, by the Central Bank, of the Sheraton Coral Beach hotel have been flooding in, according to a government official closely involved with the process. The auction has been running for several weeks now and closes on 10 September.

The hotel was repossessed by the Central Bank as collateral when Banque al-Madina collapsed and over a billion dollars of depositors’ money disappeared. It was owned by Taha Qoleilat, a businessman who was Banque al-Madina’s biggest depositor and was implicated in the scandal. The resale is designed to provide liquidity with which Bank al-Madina depositors who have lost their money can be repaid.

One real estate consultant claimed that Starwood Hotels & Resorts, a Sheraton management branch, was considering whether or not it wanted to stay on after the sale. He estimated the hotel’s value at around $35 million. “It has a beach complex that makes two or three million dollars over two-and-a-half months a year,” he noted.

Acting Sheraton Coral Beach Manager Talal Jundi said it was up to the eventual buyers to decide if they wanted to retain Starwood Hotels & Resorts as managers of the hotel. He said he expected the hotel to fetch more than $30 million, and possibly $50 million.

“The hotel is likely to appeal to Saudis, Emirates, Kuwaitis who like hotels,” the real estate consultant said.

Asked if he thought the hotel was a good buy, The consultant answered: “I don’t see why not except that it’s a little bit limited. It’s an old design. It was refurbished about five years ago. When you do that, there are always compromises compared to when you build. It’s a seventies design so it’s not as good as say the Four Seasons. Is it a good buy if you can get it for $20 million? Yes.”

Aviation hazard or political spite

According to Parliament’s Public Works Committee, planes landing at Beirut Airport could in theory crash into the newly completed, 122-meter Metropolitan Tower in Sin al-Fil.

A member of the committee who asked not to be identified said the danger was outlined in letters signed by the General Director of the Civil Aviation Authority and the General Director of City Planning. He argued that according to civil aviation guidelines no building in a plane’s runway approach path can be higher than 150 meters – including ground elevation. Natural ground elevation at the Metropolitan Tower site is 98 meters, he said. This implies that the Metropolitan Tower shouldn’t be taller than 42 meters.

In a letter to the Lebanese media, the Habtoor Group, which owns the Metropolitan Tower, says that an extension to Lebanese Law No. 402/95 allows hotels to increase built-up-area skyward in exchange for added payment on the value of the land. The company says it was granted permission to construct more floors on 16 December 2002, under addendum 90247 of the law, by the Council of Ministers then presided over by slain former Prime Minister Rafiq Hariri, and with the accord of the Higher Council for Construction and Redevelopment and of the then tourism minister. Habtoor says it paid the municipality the additional sum of $2,200,000, in line with Law No. 402/95, to be allowed to construct more floors.

The letter also notes that in the years of al-Habtoor’s presence in the Sin al-Fil area, neither the company nor residents of the region have observed any aeroplanes flying over. Ominously, the letter warns that if investors who are helping Lebanon negotiate its economic woes are subjected to this kind of pressure, they may decide to pull out.

“I am not prejudiced against the Metropolitan Tower,” the Public Works Committee member said. “But the license given them to build was unlawful.”

He said the only solution was to make modifications to the airport’s Eastern runway, 3-21, something currently being examined by the International Civil Aviation Organization (ICAO).

A more cynical interpretation was offered by a Lebanese MP on condition of anonymity. “I understand that the underlying politics of this is the continuing joust between the Hariri group and the anti-Hariri group. I don’t see how this building can be a hazard to an aeroplane,” he said.

America moves to Baabda

The US embassy says it is moving from Awkar to Baabda for security reasons. Construction will cost around $111 million and once begun will take between 28 and 36 months to complete.

“It was one of the only places we could find with enough space for the construction project,” said a US embassy source. “We have this new committee back in Washington [which] made new requirements for safety standards in buildings. We needed more space in order to meet those requirements.”

One Lebanon-based real estate consultant predicted that real estate prices in the “fairly shabby bit of Baabda” to which the embassy is moving would increase as a consequence while the move away from Awkar would probably have a deflationary effect on that area.

“The Baabda area to which it is moving is awful, really very lower middle class,” he said. “The shops and petrol stations and cafes reflect it. The move can only have a positive effect on the new area mainly because the Lebanese like living near Western embassies. It makes them feel good.”

He said the cost of the new plot was probably something approaching $20 million. “They’re picking up a very large site relatively cheaply,” he said. “It has multiple access routes, entry and exit options, several different ways of getting into Beirut on the Damascus road, and is quite close to the presidential area. It’s an easy place to get to and is neither Christian nor Muslim.

Raja Makarem, managing partner of RAMCO real estate advisers was more circumspect. “Nobody really knows how prices will be affected. It’s difficult to say,” he opined. “The move will definitely add confidence to the area but it’s not necessarily really going to affect the prices.” He said prices in Baabda over the last few years had been seesawing. “Sometimes there was big demand, sometimes major stagnation.” Meanwhile prices in Beirut have risen at least 20% since the beginning of the year, he said.

Destination Armenia

Having spent nearly a century seemingly dormant under the Cold War blanket of Soviet rule, Armenia in recent years has become an increasingly popular destination for tourists and investors the world over, including many Lebanese. “Interest for Armenia has been steadily growing every year,” said Emma Bedrossian of Nakhal Tours, “but this year it has been overwhelming.”

A trend illustrated by the fact that national carrier, Armavia’s weekly direct flight between Beirut and the Armenian capital Yerevan is completely overbooked. To avoid long waiting lists, people should book about one month ahead. A second Armavia weekly flight to and from Yerevan is being added to cope with demand.

According to figures of the Armenian Embassy in Lebanon, the number of foreign visitors to Armenia increased from 31,904 in 1998 to more than 250,000 in 2004. “In the first six months of this year we saw again a 30% increase,” said Areg Hovhannissian, the Armenian ambassador to Lebanon. Most visitors stem from the EU, followed by the United States and Russia. About 10%, or some 30,000 people, originate from the Middle East, up to half of whom are Lebanese.

Some 80% of Lebanese traveling to Armenia is of Armenian descent, but according to Nakhal Tours, interest among other Lebanese is growing. Armenia is only a two-hour-flight away, offers a European culture, as well as cool mountain air, and last but not least in time of economic distress, Armenia is considerably cheaper than the Western Europe.

However, it is not only tourists traveling to Armenia. With an annual economic growth rate of 8% to 12%, Armenia is booming, and the Lebanese would not be Lebanese if they did not see some business opportunities there. “Last year,” said Hovhannissian, ”late Prime Minister Hariri visited Armenia for the 3^rd time and signed a protocol calling for the establishment of free trade zones between Lebanon and Armenia.”

That plan has not been executed yet, but that has not stopped Lebanese entrepreneurs of taking their chances. Most notably, businessman Pierre Fattouche has opened a mobile phone company, while according to Hovhannissian, at least one anonymous Lebanese bank is close to opening its first branch in Yerevan.

September 9, 2005 0 comments

Business

Software success story

by Thomas Schellen September 1, 2005

written by Thomas Schellen

Lebanon-based information technology firm Software Design Consulting Group (SDCG) is a rare success story in the country’s landscape of IT developers and implementers with a combined domestic and regional approach. Bucking trends of decline suffered by the Lebanese IT industry, in 2004 the firm realized a 16% growth of business and is rallying even stronger this year, projecting a near 50% increase in results based on its performance from January to mid-August. The company’s field of activity is software development and the implementation of Enterprise Resource Planning (ERP) solutions for corporate customers at the upper end of the small and medium enterprise market. ERP is an umbrella term for software that assists businesses in optimizing the integrative management of all facets of their activities, including planning, manufacturing, sales and marketing. Within SDCG’s concentration in this market, its core products are an accountancy and inventory system dubbed Dolphin and a modular ERP package, Visual Dolphin, a particularly successful specialized variant of which is tailored for the advertising industry.

Setting up in Saudi

A large contribution to SDCG’s recent growth came from the development of its business in Saudi Arabia, said founder and general manager, Michel Nseir. “Starting from early last year, we focused and put a lot of emphasis on Saudi Arabia, and in less than one year, our sales in Saudi Arabia could reach 70% of what we turn over in the Lebanese market today. We estimate that by 2006, our revenues from the Saudi market will be twice those of the Lebanese market. We have very high hopes in the Saudi market and the results are very positive.”

Lebanon, where SDCG started 20 years ago with Nseir taking up programming for local companies, last year accounted for about 55% of the firm’s sales, according to SDCG data. Since the company ventured into regional markets in the mid-nineties, exports were an existential part of its growth and jumped from about 20% in 2001 to nearly 40% in 2002. The leap in the export share was fueled by good sales in the Gulf region but was also in part attributable to an 18% contraction in SDCG’s business in the difficult Lebanese market in 2002. Nseir, who has for years been very outspoken in addressing IT industry issues as a board member of Lebanon’s Professional Computer Association, leaves no doubts in his critical assessment of the operating conditions for IT companies here. “I am seeing a very black picture for Lebanon in this sector, and even for the near future, I do not see any hope regarding the development of this technology at the level of software development, at the level of the IT consumer, or at the level of communication,” he said.

In the IT entrepreneur’s perception, the present situation represents a marked downturn from vibrant days in the 1990s. Until about four years ago, people in the Lebanese business community typically were enthusiastic and companies were forward looking and ambitious in acquiring the best and most futuristic products, Nseir said, but enthusiasm for IT in the business community has waned and been replaced by an attitude of making do with what one has. What makes the situation extra hard to bear for Nseir is that Lebanon’s information and communications technology adaptation a decade ago had been ahead of other countries in the area. As other countries began catching up in the late 1990s, competition toughened between Lebanon, Jordan and Gulf countries from around 2000 as far as implementing IT and attracting IT enterprises. But today, Lebanon is lagging behind many other Middle Eastern countries in most aspects of IT, such as computer and internet usage and all aspects of communications technology. The Gulf catches up

“Lebanon didn’t evolve while in the Gulf, things progressed much faster. That affects our market in software development in Lebanon,” Nseir lamented. “We feel not just a slowdown. The budgets have shrunk to an extreme and so has the customer awareness. Companies have other priorities today. Regarding telecommunications, people have become fed up and we are going backwards while other countries are going forward. That is really bad.” Conversely to its gloomy assessment of Lebanon’s IT evolution, SDCG nonetheless maintained a strong emphasis on serving the Lebanese market, treating it as a testing ground for its products before exporting them. This includes offering products and implementation to local customers at promotional prices. The SDCG commitment to its domestic customers has resulted in a gradual resurgence of its sales here over the past three years to a market position that is today “doubly good,” Nseir said. “That is on one hand because we are achieving normal growth and on the other because the competition is no longer as efficient as before. It is losing ground and disappearing slowly.”

As he tells the story, the ranks of local software firms that SDCG used to compete with in Lebanon have contracted from more than 20 companies in 2002, to no more than five serious contenders today. This is in addition to foreign companies that remain present in the market. The latter, however, are priced in another league than local firms and their marketing interests are directed primarily towards winning the larger tenders for IT solutions, a market segment where little has been happening in recent years. Despite having devised special prices for the Lebanese market, SDCG’s Dolphin and Virtual Dolphin suites were continually higher priced than products of the local competition, Nseir said, attributing his company’s strengthened position in the home market to the fact that mid-sized corporate customers here had no alternative to choosing SDCG due to the fact that they needed a supplier and service provider that was reliable over the long term and thus could not be sure of other software developers and implementers in that respect.

SDCG claims to have a clear market leadership with a share of 30% in the Lebanese market for ERP products, up from 18 % some years ago. In its specialized segment, the high end of the mid-sized market, the company declares to hold an absolute majority share of the market with 50%. For 2005, the company’s cash flow estimations show that it anticipates its revenue in Lebanon to increase by at least 40% and grow far beyond the levels it achieved before the local IT market weakened so dramatically after mid-2001.

Lebanon’s mid-sized corporate market as Nseir defines it is comprised of firms with a turnover of between $1 million at the lower end and $30 million at the upper end. In terms of IT needs, this represents a client size of four users at the low end and 30 to 40 concurrent users in the segment that SDCG targets above all others. The company targets clients at the lower end of the mid-sized market but not the small business segment where it concedes that its basic solution packages, selling at $3,000 to $4,000, are priced above what most small businesses require. Taking it regional

From the outset of developing its exports, SDCG had been aspiring to both regional and international expansion. It opened its first office abroad in Dubai in 1998, when the emirate was just beginning to attract tech companies. Today the UAE market for IT solutions continues to be important to SDCG but while being large, booming and highly interesting on one side, Nseir characterizes it also as being marked by extremely heavy competition. One feature of this competition is that due to the UAE’s high share of foreign employees and mid-level managers in particular, market conditions in Dubai involve a cultural element. This cultural element influences purchasing decisions, where many IT buyers in companies are predisposed towards suppliers from their own cultural and national background, which somewhat limits the market for SDCG to firms with some affiliation to Lebanon, Nseir said. The answer to the challenge was to penetrate a market niche where SDCG had almost no competitor. This proved to be the development of the Visual Dolphin Advert suite tailored to the needs of advertising agencies. It is a market whose large regional players, usually subsidiaries of global advertising conglomerates, are headquartered in Dubai and centrally purchase software for their MENA networks. This is the niche that SDCG dominates. “The top six advertising agencies are our customers today. There are opportunities to sell ERP packages in Dubai, but this business would not have been enough for Software Design to thrive there without the specialized packages for advertising agencies,” Nseir said. An existential factor in the growth of SDCG was focus in concentrating on the mid-sized market, a narrow product range and a few target countries. “Focus is nothing that we learned lately, in the right meaning of the word. In our way of understanding the term, we limited the products to a few and limited the territories and focused on getting many customers from a limited number of territories rather than getting one customer in each country,” Nseir explained. Another part of the business recipe was that the firm practiced vertical integration by developing its own products and augmenting that through offering implementation and customization of its products. This helped SDCG in succeeding where less vertically integrated competitors run aground in difficult periods and according to Nseir, the firm’s revenue today arises to about 40% from the development of software, 40% from implementation, and 20% from customization. Cash flow management and an emphasis on marketing rounded off the instruments that allowed SDCG to expand in the Lebanese market under adverse conditions and confirm its presence in Gulf countries. Europe on the horizon

For the future, SDCG aspires to gain a foothold in some European markets, looking primarily at central Europe.

As the company experienced its latest surge in business growth, it increased staff from 39 at the end of last year to 55 today, and plans are for the headcount to reach 60 by end of 2005. As part of its human resources development plan, SDCG has recently also adopted a theme of training fresh graduates in search of grooming the firm’s next generation of developers. “It is actually very new for us that we are investing a lot in beginners and preparing a new generation who will be in charge of our offices in the future. Our HR strategy is to develop new skills in Lebanon and prepare [trainees] for sending them to the Gulf countries after two to three years,” Nseir said.

September 1, 2005 0 comments

Business

Getting a piece of the action

by Lana Asfour September 1, 2005

written by Lana Asfour

The climate is not the only thing linking London to Beirut these days. On an unusually hot and humid August afternoon in Stockwell, broadcast service provider Ken Suckling explains the surprising portability of a large satellite dish that sits on top of a van, more technically known as a flyaway terminal. Operations manager Kate Ivens is on hand to translate Suckling’s expertise into layman’s terms, while engineer Adam Simmons has no such qualms and launches into an intricate explanation of the input, conversion and transmission process.

The Beirut Media Center (BMC) was founded by Suckling and international television journalist Brent Sadler in 2001. While based in Beirut, it is supported and partnered by Suckling’s London-based Satellite News Gathering (SNG) Broadcast Services, which provides technical support from its office and warehouse in Stockwell. The BMC provides satellite transmission and production equipment for independent and national networks and broadcasters all over Europe, the Middle East and North America, including the BBC, CNN, Sky, Deutsche Wella, Al Jazeera and Al Arabia. It has a fixed link studio in downtown Beirut. Located behind the ESCWA building, the studio offers a permanent live background of the Prime Minister’s palace, downtown Beirut and the sea. It also provides portable flyaway satellite uplink facilities, so that breaking news, and cultural, business and sporting events in the Middle East can be covered and transmitted all over the world.

Turning Beirut into a media hub

The establishment of the BMC heralds a new era in which Beirut is becoming a center for journalism and broadcasting in the Middle East. It was established in January 2001, after SNG was subcontracted by CNN to help cover the Israeli withdrawal from southern Lebanon in 2000. At the same time, then prime minister, the late Rafik Hariri, liberalized the licensing laws for broadcasting and satellite transmission in Lebanon. Sadler, reporting for CNN, got together with Suckling and formed the company. “We saw an opportunity and went with it,” said Suckling. “There were no obstacles after the initial transition period during which the liberalization laws came into effect.” The company was quickly up and running, making use of its partner SNG’s contacts, technical support and predominantly European client list.

The partnership between Sadler and Suckling works effectively. They have known each other since 1992, when Suckling was providing satellite services for CNN in Somalia. Sadler is the BMC’s chairman and a 50% shareholder. As a well known television reporter, he is very much the company’s face. Suckling, on the other hand, is the technology and business expert who has been in the news gathering business since the 1980s.

Before 2001, Cairo was, and remains, a principal regional center for broadcasting, where several international television networks and broadcasters (including CNN) base their regional headquarters. During the 1990s, Egypt had an advantage over Lebanon because there were more flights to and from the country granting easier access to the rest of the Middle East. In Lebanon there remain difficulties for broadcasters and journalists wanting to travel to Israel and the Palestinian territories. But Hariri’s liberalization of transmission regulations made an enormous difference. What also tipped the balance in Beirut’s favour was Hariri’s launching of an “open skies” policy, which ended restrictions on aircraft capacity and limitations on the frequency of flights to and from Beirut, thus permitting more frequent and easier transportation of satellite broadcasting equipment. Finally, Cairo’s licensing laws can be restrictive. It can be difficult to get transmission licences from the government, and the marketplace is inevitably controlled by this to some degree. So once Hariri’s reforms had been implemented, some movement towards Beirut was inevitable. The BMC was the first transmission services company to open up in Beirut, and was rapidly followed by Sawatel and the Beirut Broadcast Service Centre (BBSC). Television stations LBC, Future TV and Orbit also offer transmission facilities. While it is not the largest, the BMC remains one of the busiest. Its success depends on many of the same qualities that allowed SNG, out of which it was formed, to thrive. These qualities include the company’s small size, which permits immediate reaction to world events, and its highly skilled engineers for the operation and maintenance of expensive and easily damaged equipment. “It is an expensive service to provide, with high entry and maintenance costs,” said Suckling. Well-trained engineers are paramount, and the BMC can draw upon SNG’s technical back-up facilities.

While it is difficult to predict the company’s annual turnover, Suckling estimated it at US$300,000. “Because most of our revenue comes from Western clients it depends on how much interest there is in the Middle East,” he said. “We can double our turnover with a war in Afghanistan or Iraq. But we’re the first people to suffer if Western economies become tight, or if advertising revenues, which pay for air time, are reduced.” It is not that there would be less news, but the ways in which news is transmitted would suffer – there would be fewer live crosses, for instance, and more taped news. The BMC’s reputation has certainly been consolidated this year. Since Hariri’s assassination in February, the demonstrations, elections and bombings have reawakened international interest in Lebanon. For Suckling, these events have proved that the decision to create the BMC was correct: “Beirut is a sensible place to be based if you can’t function out of Cairo.” He also believes that providing transmission services permits Lebanon to have a more prominent voice on the world stage. “There’s now a studio for people to go to in Beirut and it’s easy for international broadcasters to contact and hear the opinions of local politicians, experts and analysts.”

What lies ahead

As for the future of the company, Suckling and Sadler are planning to expand the BMC’s editorial department, which was established in 2003 and has grown rapidly. The BMC’s permanent journalists, Anthony Mills and Christina Foerch, complement the company’s transmission services, and use the downtown studio and production facilities to transmit their stories. This journalism department is building a solid reputation for providing a European view on regional events. Mills and Foerch are fluent in English, French and German and present stories to Deutsche Wella, ZDV, Arte, Sky, CNN and Al-Arabia, among other stations. “Our experiment with the journalists has been a success and we are looking to expand the journalistic side regionally,” Suckling said. He believes that Beirut will continue to operate as a centre for news gathering in the region. However, he wishes the company to remain small which, up to now, has proved to be a winning formula. “We don’t want to apply ourselves to a vast number of clients,” he said. “We have a core of quality clients and we provide a good service to them.”

September 1, 2005 0 comments

Business

State of mind

by Michael Young September 1, 2005

written by Michael Young

As Lebanon picks itself up after months of enduring post-traumatic stress syndrome in the wake of Rafik Hariri’s murder, the Syrian withdrawal, and subsequent bombings and assassinations (a syndrome that will, in all probability, resume in the aftermath of the Mehlis report’s release), little has been said about revamping the country’s political-economic culture.

Yet few things seemed more useful when, in mid-August, Walid Jumblatt announced he would consider withdrawing his ministers from Fouad Siniora’s government when it came time to address privatization. There were several ways to interpret his shot across the Hariri yacht’s bow: Jumblatt was upping the ante to ensure he would profit from privatization; he was warning his Hariri camp allies that he was no potted plant on national policy; he sought to show that as a ‘socialist,’ he had little sympathy for the capitalism favored by the prime minister.

One might add that Jumblatt was also perhaps reinforcing his uneasy alliance with the Hizbullah-Amal coalition, whose political clients would likely be hardest hit by the large-scale privatization of public utilities. Politics aside, the dilemmas of privatization illustrate a more fundamental problem of the post-war state: do politicians want it to be large or small? And how does the answer fit in with the society’s traditional tendency to frame public affairs in terms of patron-client relationships? The answer seems obvious: because political life is shaped by patronage, politicians are more than happy to capitalize on whatever they can extract from the public teat. In other words, don’t expect Lebanon’s leaders to return to a perhaps imaginary time when the state was regarded as a necessary evil, tolerated by the communities, occasionally aggressive in its efforts to re-impose central authority, but always destined to slink back to irrelevance, even as the market filled the vacuum.

Underlying tensions

Certainly Lebanon is still devoted to the market, and the state is often perceived as much as a nuisance as it is considered a life raft by the prickly Lebanese. However, there are two philosophies confronting each other today as the country seeks a new center of gravity: the first, aspiring to a market-driven, largely privatized state, which would lose much of its social and economic sway – a vision the Hariri camp prefers, as do most Christian political groups; the second, a more mixed system, where the state plays a dominant role, but where the market is allowed to remain free, though it must open up to new participants. This is the view of Hizbullah and Amal, and to a lesser extent Jumblatt. The dividing line between the different political forces is historical access to the market: those who favor a strong market are already well-entrenched in it; those who do not, are not.

Which vision will prevail? The answer may come not from Lebanon but from Iraq, where a revolution of sorts occurred in August when a new constitution was proposed dividing the country along religious and ethnic lines. In one stroke, the Iraqis may have sounded the death knell for the overbearing, centralized Arab state sitting atop multi-communal and multi-ethnic societies. There are a few in the region, and they will be looking at Iraq with alarm, as they see that almost half a century of using despotism to suffocate centrifugal tendencies in their societies may be coming to an end.

Ironically, Lebanon, long considered the embodiment of the worst qualities of communal society, may be the most apt to resist the message coming from Iraq; unlike other Arab countries, the Lebanese long ago accepted their cleavages and sought to manage communal relations by accepting a weak state amid strong communities. That said, the communities, particularly the Sunni and Shiite communities, are in the process of inheriting the post-Syria order, so unless they can manage their competition, Lebanon may yet pass through a period of turbulence.

One thing they and everyone else will have to agree on however, is what role will be left for the state. Iraq can create paradoxical aftershocks: while the message may be that fragmentation is acceptable, the Lebanese, or some of them, may conclude this will make the state pie smaller, so they will insist on revamping the present confessional system while ensuring Lebanon remains united. Others may find inspiration in Iraq and ask to divide the country, though there is little to divide. Either way, the communities will have to express a clearer sense of what the state means to them, an effort they have perhaps understandably, avoided doing until now.

September 1, 2005 0 comments

Economics & Policy

Sami Haddad

by Executive Staff September 1, 2005

written by Executive Staff

Following an exceptionally tortuous government formation process, Prime Minister Fouad Siniora unveiled a 24-member cabinet on July 19. Among the new faces on the political scene was Sami Haddad, brought in from the International Finance Corporation (IFC) – the World Bank’s private sector arm – to head the ministry of economy and trade. Armed with 24 years of experience in promoting private sector investment in developing countries, Haddad will have ample opportunity to put his arsenal to good use in his battle to restructure the flailing Lebanese economy, further weakened by six months of political upheaval, and to overcome the strong, political resistance to any mention of privatization. Executive met with the new minister soon after his nomination to discuss his plans to spur economic growth, rebalance public finances, privatize and improve the local investment climate.

E The assassination of former prime minister Rafik Hariri dealt a heavy blow to the economy, which has struggling ever since. How would you assess the current state of the country’s economic and financial sectors?

There is no question that the assassination of [former] prime minister Hariri dealt a blow to the country in its entirety: the political system, the people, the economy. To confine myself to the latter, the cost has been extremely high. We don’t have an accurate number for the costs yet, but there is no question that when it comes to the state of the public finances and debt, the situation has worsened. Furthermore, there has been a massive economic slowdown, investors have not been keen to invest, people have been rightly worried about the political situation and more importantly the security situation, and to make matters worse, we seemed to have missed the tourist season. Just look around: you don’t see a lot of people from the Gulf. We are hoping that we in the cabinet will be able to quickly take measures to turn things around. It will be a combination of transactions, i.e. financial transactions, laws and regulations, and a psychological boost. The latter has already taken place to a certain extent: since the formation of the government, the pressure on the Lebanese pound has reversed, the central bank is buying dollars, foreign reserves are increasing – people have more confidence in the Lebanese pound.

E Looking at the chronic imbalance of Lebanon’s public finances, one of the biggest drains on the treasury’s coffers is the servicing of the country’s massive debt. What measures do you see the government taking in the battle to reduce it?

My ministry doesn’t own a lot of public sector assets and it is not, in terms of size, a major player in this. The three ministries that will play a key role in handling the debt will be the finance ministry, telecommunications – which is the largest generator of revenues after fiscal revenues in Lebanon – and power and water, which is the largest drain on the government’s finances.

This level of debt and debt servicing is obviously completely unsustainable. We cannot use almost two-thirds of our fiscal revenues to service debt. No country can sustain this. What needs to be done? We stipulated this very clearly in the Ministerial Declaration, which refers to two key documents: the promises made in Paris II which have not been fulfilled, namely privatization, and the budget law that then finance minister Fouad Siniora presented prior to resigning from the last Hariri government. We need to reduce expenditures as much as possible, knowing that the biggest drain is the electricity sector. What will happen with regards to fiscal revenues, taxes, is a big question mark. You are faced with the dilemma of needing to balance the budget, and thereby increasing taxes, but in so doing, you slow down growth. So ideally, if you can reduce public expenditures further, and avoid raising taxes, or raising them as little as possible, that would be the best outcome.

E Where should the cuts in public expenditure be made?

There are a lot of areas where money is going down the drain. You have subsidies that could be reduced or eliminated. I discovered today to my shock, that the government here is legally obliged to buy wheat. I am a buyer of wheat! We subsidize the wheat, we buy it from the farmers, we store it in silos, and then we sell it. I can’t tell you how powerful the agricultural lobby is here. But the biggest drain is the power sector, in terms of size. Unfortunately, there is no rapid solution to this problem – it has to be a sustained effort through better collection, better technology, privatization of Electricité du Liban’s management, privatization of distribution … Lebanon also spends a lot on social sectors, on health and education. But unfortunately, the figures show that the spending does not hit the right targets. For instance, you have schools in certain areas that are completely underutilized, whereas you have other areas with a lack of schools. A lot of effort can be done to redirect, streamline and make better use of our social spending, without increasing or reducing it.

E Is privatization going to figure prominently on your agenda for rebalancing Lebanon’s deficits?

Privatization is a crucial pillar in this whole public sector restructuring. It’s a necessity – we have no choice. The best way to reduce the principal debt outstanding is to cancel it through privatization proceeds.

E But according to our calculations, privatization could bring in a maximum of $10 billion – that is if everything is sold. Lebanon’s debt at this point, according to economist Toufic Gaspard’s estimates, is close to $50 billion. Is privatization enough?

Anything is better than nothing. Whether our debt now stands at $50 billion I don’t know – my figures say $40 billion, it depends on how you calculate it. But even if you bring in $10 billion, it will make a difference. I am going to be a very vigorous proponent of privatization for three reasons. Firstly, for 24 years of my professional life I worked for the IFC. It’s an investment bank: we make loans, we invest and we have made fantastic returns on some of them. My point with this is that generally speaking, the private sector is much more efficient than the public sector. Secondly, we need to sell because we have no choice. Thirdly, it all depends on how you privatize – it must be done with transparency – and what you privatize. If you are selling an actual monopoly or oligopoly, people will legitimately say why are we giving this group the chance to make all the money? The answer is, if it’s a monopoly or oligopoly, you can regulate it, you can tax it, you will try not to sell more than a certain percentage to one group, with the rest going to the general public. Thereby, you don’t give the group the whole thing, and secondly, you help develop our moribund stock market. If these two mobile phone companies for instance were private and were quoted, [think of] the amount of wealth they could generate! They would also become internally regulated, as they would have thousands of shareholders.

Obviously, privatization is easier said than done. We will have to surmount political opposition, which require an open dialogue. But we have a favorable environment. Despite living in a turbulent region, over which we have little control, we have something we should take advantage of: the enormous capital surpluses that are being generated in the GCC countries. If some of it could trickle down to Lebanon, we will be fine. And this is why we need to privatize now. Time is of the essence.

E Which are the sectors you would want to privatize first?

The telecom sector is the obvious one, due to the size of its proceeds. All countries including centrally planned economies have opted for licenses. We have gone into management contracts – it’s unbelievable! Even Syria and Yemen have gone in a more liberal direction. Lebanon’s policy in telecoms over the course of the last four to five years has been an unmitigated disaster. As a result, today the cost of telecom services are very high, the quality is lousy and the penetration rate is unbelievably low. This sector is a key sector because it generates a lot of money. Privatization will make it more efficient, costs will go down, the public will be happier. And if you could also achieve large public shareholding it would be good.

E Are there other sectors besides telecoms?

Other sectors will not generate as much money, but you have some companies that are owned by the central bank, such as MEA for instance. They are doing very well, and the central bank has done a terrific job. That being said, nowhere in the world do you have a central bank which owns an airline. It’s unhealthy, for good reason. Let it be privatized, let it be owned by a strategic group – be it Lebanese or non-Lebanese – and let it be quoted on the stock market. Another area to look at is Beirut airport, which is a fantastic airport, but it is being significantly underutilized. Yes, MEA is doing well. But it can do much better. We have nine aircraft, we could have 20. And there are other things. In infrastructure you have opportunities. Just look at the port of Beirut, I think it is being privately managed, but its assets could be privatized too. In the old days, there were two port companies quoted on the Beirut stock market. The port was in good health! But while everybody else is moving forward, we are moving backward. We have a military airport in Akkar. We could privatize it on a build-operate-transfer basis. The infrastructure around it is fantastic, the airport apparently is very good, so make it into a cargo airport. Will this generate billions of dollars? No. But all these assets will no longer lie idle. They will generate some money, bring in investments, create jobs, especially outside greater Beirut, and it will tell the rest of the world and the Lebanese public that this government means business.

E Lebanon’s credit rating is very low. One of the main criteria in the rating methodology is economic development, which is an area under your ministry. What are your plans in terms of developing the Lebanese economy?

The main reason for why the credit rating is so low is due to the deficit, the debt service, and all these key indicators – debt to GDP, debt service to fiscal revenues and so on.

E But you can outgrow debt through strong economic growth.

We should do both. We should decrease debt, we should be fiscally more tight, but we should obviously work on economic development. The results will not be seen in a matter of months. But economic development for me has to be private sector led. There is a very strong lobby in this country for traditional sectors, i.e. agriculture and industry. I think we should develop both of them, but we cannot do so by protecting this very small market. We have an interest in opening our markets – I don’t want to close the Lebanese market, the economy to serve the interest of a few people. We are not going to compete in steel making with countries such as Russia or the Ukraine. We simply don’t have a comparative advantage in many areas. Land here is expensive – it is limited, we are a very densely populated country. Energy is very expensive, in part because we messed up policy-wise, but even if we hadn’t, we are not an energy producing country, so energy here will always be more expensive than that of our neighbors who produce oil and gas. The human capital here is mostly highly educated, white-collar workers. It’s worth noting that in these traditional sectors of industry and agriculture, you have a very significant non-Lebanese labor force. This isn’t bad in itself, but people who come crying about the loss of employment in these sectors need to remember that most of these people aren’t Lebanese. So yes to agriculture and industry, but it has to be high value-added, in areas where we have a comparative advantage, and that is in our brain power.

E So which sectors would you like to promote?

At the end of the day – and I know this is going to sound somewhat philosophical – the objective is the well being of the people. This means you need to focus on employment-generating activities. If I open a cement plan, it will require at a minimum $200,000 in investments, which will only create 200 jobs at most! With a $200,000 investment in the service industry, you employ many more people. We have traditionally been a country that provides services, there is nothing wrong with this. We have and we should continue to export more education, health and financial services, where there is still a lot to be done, and then there is the whole knowledge economy – IT has generated so much wealth. This is where we can compete. These service sectors are going to create the largest amount of Lebanese jobs that will cater to the large number of young people who can’t find jobs.

E What kind of incentives should the government provide to promote these industries?

I think the government needs to shrink, it needs to get off the people’s backs, become a regulator, a facilitator. It needs to provide a much better investment climate, which we are going to look specifically in to. The investment climate here is good, but could be much better: the bureaucracy is very heavy with regards to any transaction, the ease with which to open or close a business is not good enough, the courts aren’t working efficiently enough … improving the business climate doesn’t always require new laws, just improving the regulations. We will be working together with the World Bank to do an assessment of the investment climate. The Lebanese tend to think they are the best in the region, but unfortunately we are not. In some cases we are even the worse.

E Where do you stand on international trade agreements? Will Lebanon enter the WTO under your watch?

I will push very vigorously for Lebanon to enter the WTO. Things are at a fairly advanced stage, with laws already before the council of ministers or with parliament, dealing with issues such as intellectual property rights. We are also having discussions with our trading partners on certain trade barriers, import licenses and high duties. My attitude is a liberal one. I appreciate the lobby groups and their political strength, but we are going to have a dialogue on this and it is going to be a tense one. Some people think we automatically stand to lose from economic globalization. No, Lebanon stands to win.

E If we were to join the WTO there will be human costs in the short-run. How do you plan on mitigating the impact it will have on employment?

There will be some costs, but I don’t think they will be very heavy. We definitely have to mitigate them. The hope is, by entering the WTO, we will be able to spur private sector investment, which will create more employment and thereby absorb those who will have lost their jobs. You would hope that sectors that will suffer from our WTO membership will gradually move over to other sectors. That being said, the trade barrier reductions will be gradual – there is an adjustment period. Also, we must look at some of the sectors that will be affected, heavy industries such as cement and steel only employ a very small number of people. And as with some agricultural sub-sectors who are most likely to suffer, a lot of their labor force is not Lebanese. Our task will be to provide technical assistance to agricultural sectors who want to move into producing products with higher value-added.

E You sound like you are not a great believer in government intervention to reduce unemployment levels. Will spurred economic growth take care of the problem?

A government can take short-term measures to tackle unemployment by providing public sector jobs. We will not do this, because we cannot afford it and these public sector jobs are not the best, nor is this [facilitating] sustainable economic growth. The answer lies with the private sector, which will come back very quickly if you have the right business environment and an improved security environment.

September 1, 2005 0 comments

Comment

Agreeing to disagree

by Yasser Akkaoui September 1, 2005

written by Yasser Akkaoui

Given that, in theory at least, with our new political order we are now in a position to pick our own high-ranking civil servants and also given that the people the new government picks for the top non-security jobs like EDL, the NSSF, Casino du Liban et al, will be scrutinized for their suitability (or lack of), it seems a fair assumption that the selection process would be a transparent and thoroughly reported affair; an opportunity for the government to show a genuine policy of “out with the old and in with the new.”

Not a bit of it. Phones calls placed earlier last month to several journalists drew a blank. Not only did they not know who was slated for what job, but they were not even sure what jobs, apart from the obvious, were up for grabs. All agreed it had all the hallmarks of a stalling game.

Syria may have packed its bags, but transparency remains on a par with the freemasons when it comes to telling the rest of us what is going on. Not only is this worrying in the immediate sense (it hardly shows that the government and no doubt the presidency, can sort out what are obvious and urgent priorities) but it also demonstrates that there is no level of accountability to the nation at large. We don’t count.

So what conclusions can one draw? If there is no consensus, perhaps, and one is going on a limb here, maybe the consensus is disagreement, a tactic to maintain the status quo, one that has seen, for example EDL, under the steady guidance of Kamal Hayek, continue to hemorrhage cash and demonstrate to the rest of the world that our inventory control, maintenance and bill collecting process puts us in the same league as the worst African nations. It remains a cash cow for politicians who see it as their very own pension fund.

The same can be said for the woefully under-exploited casino and the murky machinations of the NSSF, areas crucial to tourism and public administration and which desperately need the hand of a clean, talented technocrat whose tenure will be judged by his performance (especially his ability to reform) and not by his skill at managing his department like a blue chip share portfolio. No wonder then that it appears that transparency and results are obviously not high on the agenda and that the depressing conclusion is that nothing appears to have changed within Lebanon’s turgid political process.

This is how we see it. Please prove us wrong.

September 1, 2005 0 comments

Economics & Policy

All pumped up

by Faysal Badran September 1, 2005

written by Faysal Badran

Back in April 2004, we discussed oil in these pages, making the judgment that at nearly $50 per barrel, oil was getting into treacherously elevated price territory. The frenzy that ensued carried prices well beyond that to what they stand at above $65 per barrel today. The world financial media has been mesmerized by the price of oil, especially since oil is so closely correlated to politics in the region. Economic pundits have been going out on a limb in making spectacular estimates for what is likely to happen to the world economy due to oil, and others, like investment house Goldman Sachs, predicts oil reaching $100 a barrel. What eventually happens to crude oil is obviously tough to predict, but there are certain signs that point to a top in the price of oil fairly soon. While the developed world grapples with the effects of oil, one thing is certain, the stratospheric rise of oil from near $10 a barrel in 1998 to where it is now has had a huge impact on the region. The Arabian Gulf economies, still reeling from the 1991 Gulf War were able to replenish their coffers and a boom of sorts is developing in a large part thanks directly to oil. To get a feel for the windfall, one simply needs to reckon that Saudi Arabia’s budgets had an embedded oil price assumption closer to $30. With oil nearly double that, they have witnessed a massive liquidity-driven inflation in asset prices, from real estate to equities, and a rise in its natural corollary, public spending. In a sense, the rise in oil, in my opinion has served to neutralize social tensions and economic imbalances in the Gulf. Think of it as petrol peace. In Europe and the US, although oil has had a negative impact on consumer sentiment, it has not translated into doom, as oil, adjusted for inflation is still nearly 30% below its historic peaks.

That is the rear view picture of what oil has done. For a closer look on what’s to come, I think one has to view oil from the perspective of yet another bubble. We have a bubble in housing, a bubble in most commodities, and a lingering stock bubble. Add crude oil to the list, here’s why.

Going up

Controversial Texas oil analyst Matt Simmons recently announced that oil could very well reach $100 a barrel. He is quoted as saying: “We could be at $100 by this winter. We have the biggest risk we have ever had of demand exceeding supply. We are now just about to face up to the biggest crisis we have ever had.” When looking for a bubble always watch out for superlatives such as “ever.” But before scenes from the movie Mad Max start permeating your every waking thought, and before you run out to the garage to make sure grandpa’s shotgun is still there, take a deep breath. The really amazing thing is that no one seems to have learnt the lessons from the previous bubble, but rather appear to be jumping in to the current phenomena, hoping to make back the losses they incurred from the previous one. Perhaps they believe the old axioms ‘lightning never strikes twice’ and, ‘this time it is for real.’ One reason why bubbles form is that many good arguments can be made for ‘why this time things are different.’ Generally speaking, as a whole, the public is not crazy. The media sells people on the best or worst case scenarios. For the last 70 or more years, people have heard reports from so-called specialists about how there is only so much oil in the world and eventually it has to run out. Yet if you look at the predictions the specialists have made about when the last drop of oil will be pumped out of the ground, you notice that every couple of years the date gets extended out a few more years. Technology has always provided man with the solutions to his self-created problems. And technology will continue to do so. Better refining techniques, offshore drilling, etc. have all been designed to overcome oil supply problems. Certainly oil can still run up a little more, making it more tempting with each advance to want to get in on all the fun. That is the hook. Besides, it takes a long time for all really big fools of the ‘greater fool theory’ to hop on the trend. Keep in mind that crude oil rose 16% in the first three weeks of August alone. At $3, $3.25 or $4 a gallon, people will cut back.

Waiting to exhale

All the cutting back of petroleum use will result in an increase supply of gasoline, which will have the direct result of lower prices at the pump. The laws of supply and demand may be slow; however, Alfred Marshall’s microeconomic laws do work well. Simply speaking, if it gets too expensive, people won’t buy it. When no one buys a vendor’s product, the vendor must reduce prices in order to get rid of his inventory. Besides, if that doesn’t work, the US can always start a war in the Gulf to fix the problem. Don’t get sucked in to this black bubble. The money will be made on the downside, not the upside. For those of you technically inclined, note how for the last three years, the futures contracts had stayed at a discount to the spot market until recently. As of early August, it seems everyone expects oil to keep flying and the forward contracts have gone a premium to the spot. To the chartist in me, oil looks very risky at its current levels and it seems to have discounted a lot of possible doom scenarios (Iran being one of them). Predictions? Oil will likely hit $45 a barrel before you see it at $75 (let alone Goldman Sachs’ $100).

September 1, 2005 0 comments

Economics & Policy

Ottoman chic

by Marianne Stigset September 1, 2005

written by Marianne Stigset

Lebanon’s architectural heritage has had a rough 50 years. Ever since the economic boom of the 1950s, which spurred real estate growth, launching the era of concrete modern high-rises at the expense of turn-of-the-century old buildings, the latter have been dwindling. Those that withstood the civil war were subsequently threatened with demolishment, as owners without the financial means to restore them, realized they could make more profit selling them to real estate developers who would build modern apartment blocks. Activists did mobilize in the mid-1990s with the Association for Protecting Natural Sites and Old Buildings in Lebanon at their helm, drawing up a list of over 1,000 classified houses (Solidere managed to save 290 buildings from the pre-war era). Yet today “old” buildings represent a mere 2.5% of the real estate market. “In the mind of the Lebanese, any old building could be torn down and resurrected into a block of flats,” real estate consultant Michael Dunn, chairman of Michael Dunn & Co, said. “Everything has a financial value rather than an aesthetic value.”

Perpetuating the craze for modern real estate are the luxury high-rises mushrooming along the capital’s seafront, which for wealthy real estate buyers, be they Lebanese or from the Gulf, have become the investment of choice.

“Villas in the mountains are somewhat passé here,” said Dunn. “The current trend is to put your money downtown and buy a $5 million, 800m2 apartment in Marina Tower.”

Alternative urban trends

Yet on the sidelines, another trend has been burgeoning for the last few years. It is one which has transformed Gemaizeh from a gritty, genteel, lower-middle class area, into a hip and upscale one, much in the same way gentrification metamorphosed the meatpacking district in New York or the industrial area of Shoreditch in East London. The trend is driven by demand for more authentic, less commercialized and more affordable properties. “It is a process of gentrification,” said architect and AUB professor Rana Samara Jubayli. “The trend usually starts among the up and coming artists and students, who get there first, make the areas trendy, and then the rest of the population tends to follow, and this affects the market. Gemaizeh is a prime example of this. It is very much ‘in’ now.” Although the initial interest in old houses stemmed in part from those on tight budgets seeking lower rents, this has gradually evolved into the trademark of an upscale, fashionable lifestyle. “As in the rest of the world, you will have yuppies and young professionals looking for these types of residences,” Jubayli said. “They wish to live downtown, close to work, the commercial areas and where the nightlife is. It’s a lifestyle choice, a design requirement, more than a question of affordability. It’s a statement.” These new aficionados join a core group of faithful followers, who have long shown a preference for arched windows, high ceilings, mosaic floors and iron railings. They are mainly eccentric Lebanese aesthetes and Western expatriates. “The Europeans adore these types of houses. They understand the value of cultural heritage,” said real estate developer and entrepreneur Karim Bassil.

Emotional ties to the land

While Europeans rarely purchase property while living in Lebanon, and the young Lebanese moving into areas characterized by their preserved architectural heritage generally can’t afford to, Lebanese expatriates on the other hand, are increasingly investing money into old property.

“There’s a second trend happening at the non-urban level which is clientele driven – it’s people renovating their old family houses,” Jubayli noted. “I have been commissioned to restore traditional old Lebanese houses in Beit Mery and Marjeyoun for instance. “A lot of these people are either expatriates or people who are coming back and they actually attach more value to these houses because of the emotional or cultural connotations it has to them. They also have the finances to restore them properly, whereas the local population generally has lost the sense of value of these houses, due to financial restrictions. Conservation issues are not really a priority when you don’t have food on the table.” The majority of the old houses available on the market are found outside the greater Beirut area, either in the mountains or in the south. Those who buy generally hire an architect or an interior designer to renovate them.

The stunning old summer residence of the British ambassador in Abay was sold last December for an estimated $700,000 to a Lebanese doctor living in Beirut who will use it as a secondary home. He intends to invest in renovating it, installing central heating, air conditioning and other modern amenities.

Unlike in Europe and the United States, there are few developers who will speculate in buying, restoring and reselling what they hope will be seen as a jewel. This is partly due to the fact that renovation is fraught with financial and administrate pitfalls. Furthermore, the choice in the style of renovation remains highly individualized. Developers prefer not to second-guess the taste of the potential buyer and instead wait until a property is bought so they can work alongside the buyer restoring to his tastes and without burdening themselves with owning the property and then trying to unload it on a fickle market.

A restricted and exclusive market

Good properties are at a premium. Adding to the scarcity is the fact that most of the old buildings that are left are frozen out of the real estate market either due to inheritance issues or old tenants. The latter, benefiting from the antiquated rental laws which lock in rates, have little incentive to move out of a residence on which they pay the same rent today as what was agreed upon five decades ago. “It’s a very small market – there are very few buildings left to develop,” Bassil said. “Most of them at this point are in the mountains, like in Deir el-Qamar and Douma. Their scarcity is pushing the prices up further. The few houses that are put on the market are usually sold at very high prices and they tend to have a lot of problems.” The expensive renovation work which follows the purchase of an old residence contributes to the further squeezing out of a sizeable chunk of real estate buyers. “If you buy an old house on two floors of some 500m2, which usually will cost you about $500,000, you are looking at a minimum of $75,000 to $100,000 in additional restoration costs,” said Dunn. “Buying a house and restoring it is much more expensive than starting from scratch or buying a modern one,” Bassil added. “If you want to restore it so as to live comfortably in it, the overall price generally increases by 30% to 40%. In general terms, the cost of restoration lies in the $700 to $800/m2 realm, or $400 to $500/m2 if you keep it very basic. I just restored an old house in Dbayye for an emir, who wanted maximum comfort, that came to $1,200/m2.” “Many of these houses are not structurally sound, so you may have to do a structural re-enforcement, which is a huge financial burden,” Jubayli said. “Once that has been taken care of, you go into the architectural finishes. Are you going to keep the special integrity of the place? The finishes are directly related to the intentions people have for the building and the financing they are willing to put into it. You re-do the tiles, you re-do the bathrooms, you may put in a kitchen. It really varies.” Adding to the financial burden is the difficulty in setting a fixed budget for the renovation. “You can’t really budget for restoration,” said Jubayli. “There are so many surprises that come up along the way, so many hidden expenses that a lot of compromises need to be done.” If the client chooses to engage in restoration or reconstruction proper, finding the right material and workmanship adds another challenge to the process, and can easily bump up the final renovation bill by some 50%. Jubayli describes how for the renovation of a 600m2 house in Marjeyoun, the cost of which came up to $100,000, most of the material had to be sent down from Beirut and a 90-year-old tiler had to be brought in – the only person available who still had the know-how to adequately restore the old tiles.

If the client chooses to change the spatial partitioning of the house, or make any additions to it, he must apply for a restoration permit. This step can easily bring the renovation process to a lengthy standstill. One architect living in an old Gemaizeh villa is still waiting for the local municipality to grant him a permit to construct two bathrooms in his house, one year after he applied for it.

A niche for developers

Nonetheless, if the market for selling old houses remains a client-driven and restricted one, there is a niche for developing the rental market in old houses and buildings. The concept is not a new one – the Sursock Cochrane family has been making a substantial profit renting out old apartments in Gemaizeh for over three decades. But new developers are slowly moving in.

Bassil features among the successful ones. With his project management company Bassil Real Estate Investment, he is investing in renovating old buildings in the Gemaizeh area, as well as building new ones, in accordance with the local architectural style.

“I buy old buildings and restore them – I would never tear down an old building,” he said. “When I build modern ones, it is always from scratch, on empty land. In areas such as Gemaizeh, I respect the local architecture by never constructing buildings taller than five floors for instance. Instead of building 16,000m2, I am building 8,000m2 buildings.” Among his five ongoing and completed projects is a rehabilitated turn of the century house, which has been made into four apartment rentals. According to the developer, his apartments are going like hotcakes, at rather handsome prices – a 200m2 apartment will be rented out for around $2000 to $3000 per month. And as the neighborhood’s unique architectural character is preserved, it increases its overall value, bearing promises of even greater returns in the future.

“It’s more profitable to restore a building and start renting it out already within a year, rather than demolish it,” said Bassil. “Lady Cochrane is the perfect example of how it should be done. It is thanks to her that Gemaizeh is what it is today – she succeeded in preserving its identity, its charm, by not demolishing any of the buildings she owns and rents out. With the preservation of the cultural heritage of the area as a whole, it becomes more profitable – rents keep increasing.”

September 1, 2005 0 comments