Feature

MTV relaunch set for next year

by Peter Grimsditch
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 11th 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

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For your information

Ineke Botter

by Executive Contributor
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.

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For your information

VAT refunds down

by Executive Contributor
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 3rd 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.

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Economics & Policy

All pumped up

by Faysal Badran
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).
 

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Economics & Policy

Ottoman chic

by Marianne Stigset
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.”
 

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Economics & Policy

Lebanon and syria which needs the other more?

by Andrew Tabler
written by Andrew Tabler

As the border crisis between Lebanon and Syria unfolded over the last two months, the bars of Beirut and the family restaurants of the Old City of Damascus were host to boisterous and often heated conversations on how it was time for each country to “go it alone.” The fallout from the late prime minister Rafik Hariri’s assassination continues and nationalist sentiments are slowly eroding into the economic bedrock that has linked these two countries for centuries. As tensions are likely to continue for the foreseeable future, especially given the impending release of the findings of the UN investigation into Hariri’s death this month, taking a closer look at what each side needs economically from the other is an important first step in understanding the options each country has at its disposal in weathering whatever crises might lie ahead.

Trade

In the first half of 2005, Lebanese exports to Syria totaled $105.7 million, representing 12% of all its exports. Imports of Syrian goods over the same period totaled $90.6 million, representing a mere 2% of all Lebanese imports and 2.6% of overall Syrian exports. Overall, Lebanon relies on Syria for oil products (43%), Mutton (15%), phosphates (8%), fruit and vegetables (6.4%), legumes (3.2%), milk and dairy (3%) and iron products (2.9%). Syria, in turn, relies on Lebanon for paper products (14%), cement (13%), aluminum (6%), marble (5%), sugar (3.2%), juice and water (3%), and alcohol (1.2%).

If economic relations were severed tomorrow, each side could go it alone in terms of import sourcing. However, this would lead to an increase in prices on both sides. Syrian oil and liquefied petroleum gas (LPG) exports to Lebanon are extremely competitive, due to low transport costs and Lebanon’s ability to tap into Syria’s subsidized prices on some products. Lebanon’s paper industry, for example, is one of the region’s best, and sourcing paper products elsewhere from Turkey and Egypt would likely lead to high prices on the Syrian market.

The economic fallout of severing ties would impact not only Syria’s state-owned energy sector, as many Lebanese have speculated, but also Syria’s rapidly growing private sector, which accounts for around 65% of Syrian exports to Lebanon. To offset the losses of a Lebanese boycott, Syrian producers could find larger alternative markets in Turkey, with which Syria has just concluded a free-trade agreement. But as this agreement is phased in over a number of years, while customs on most products between Lebanon and Syria have been abolished, the reorientation of Syrian exports currently going to Lebanon would not be an easy process.

For Lebanon, the impact would be substantial, as Syria was its third largest export market in 2004 (after Iraq and Switzerland), totaling, according to Lebanese customs, some $145 million. Reorienting Lebanese exports would likely be problematic, due to the country’s higher relative production prices that are the result of the Lebanese lira’s current peg to the US dollar and the higher overall skill levels of Lebanese. Currently, Lebanese products are competitive on the Syrian market by virtue of the customs free environment between the two countries, as well as low transport costs. Just how fast exports to Syria could be made up for in the Arab Gulf in the face of stiffer competition from global producers is hard to determine.

Getting to market: Transit

In many ways, the fact that Damascus chose to heighten its “security” restrictions on the Lebanese frontier at the same time that the new “anti-Syrian” government in Beirut was taking shape should not have come as a surprise. It is in the transit of goods that the Lebanese-Syrian economic relationship takes on a much different and largely geographic dimension. With a border to the north and east with Syria, and a southern border with Israel that has been closed since 1948 (except during periods of Israeli occupation), and western coastline facing the Mediterranean, Lebanon is completely dependent on Syria for getting its goods to market overland. Coming to grips with Lebanon’s overland transit issue involves a good deal of crunching of numbers from both Lebanese and Syrian sources. According to the Lebanese Ministry of Economy, overall Lebanese exports (including services) totaled $2.5 billion in 2004. In terms of general trade (i.e. material goods excluding services and tourism) exports, Lebanese customs figures total some $1.747 billion. Of Lebanon’s top 16 export markets, 10 are in the Middle East ($1.339 billion), including Iraq ($255.5 million), Syria ($145.2 million), UAE ($135.3 million), Turkey ($127.3 million), Saudi Arabia ($112.8 million), Kuwait ($67.4 million), Jordan ($62.8 million), Egypt ($39.5 million), Qatar ($30.3 million) and Iran ($21 million).

Just how much of those goods traverse Syria? According to the Syrian Central Bureau of Statistics (which breaks down transit trade by country of origin and country of destination), Lebanese transit trade through Syria in 2004 totaled around $702 million, with $347 million going to the UAE, Qatar, Kuwait, Bahrain, Saudi Arabia, Turkey and Jordan, and $355 million going to “other countries,” including Iraq and Iran. Combining Lebanese figures on exports to Syria ($145.2 million) with Syrian figures on transit trade of Lebanese origin ($702 million) means that around $847 million (around 49%) of all Lebanese general trade (and 33% of overall trade) in 2004 involved goods crossing the Syrian frontier. Another interesting development has come in the area of transit of goods through Lebanon. According to Lebanese customs figures (which are not broken down by country of origin or country of destination, making it difficult to determine directions in the flow of trade), transit of goods totaled a record $355 million in 2004, up from a mere $69 million in 2001 and $185 million in 2003. The reason? Given that transit trade quadrupled starting in July 2003, it seems safe to assume that Lebanese shippers have tapped securely into supplying US-occupied Iraq. In the first six months of 2005, transit totaled around $113 million.

Sanctions busting and smuggling

Figures on “informal” trade between Lebanon and Syria are difficult to come by, with estimates ranging from hundreds of thousands to millions of dollars per year. According to Syrian law, its importers are required to directly import goods from their country of origin using Syrian air and sea ports. The only exception to this rule exercised by Damascus concerns the current US export ban (all goods with 10% US content other than food and medicine) on Syria. Syrian companies seeking US components are then allowed to purchase these goods in other markets. According to Syrian businessmen, Lebanon and Dubai rank as the top two sources for the “re-export” of US goods to Syria, given each country’s higher standards of living and sophisticated markets. While the range of re-exported goods to Syria is as wide as whatever is on offer in the re-export market, Syrian businessmen say they rely on Lebanon largely for high-tech components vital to computers and networking.

Until very recently, goods carried by Lebanese and Syrians across the frontier for “personal” use were substantial. Syria’s military and security presence in Lebanon had one very powerful ancillary benefit: customs procedures on both sides of the border were extremely lax. Furthermore, after Syrian President Bashar al-Assad came to power, historically tight customs procedures were relaxed, leading at first to the construction of several “superstores” in Chtaura where Syrians heading home could stop and purchase anything from food to high tech goods. Business was so brisk over the last few years that Assad’s cousin, Rami Makhlouf, constructed a massive Duty Free in the neutral zone going into Syria, complete with a supermarket, electronic shop, pharmacy, and even a Dunkin Donuts. The Duty Free facility was constructed on the inbound side of the road to Damascus, flying in the face of Duty Free procedures throughout the world that aim at passengers exiting the country.

Exactly how much this trade was worth is unknown, but it was systematic enough that shopkeepers in Damascus openly admitted being supplied with various goods that officially fall under Syria’s import restriction list. This process has become more difficult, however, as shortly after security procedures tightened on the Syrian frontier, Syrian customs reverted back to its old, pre-Bashar self. Today, passengers crossing to Syria are having difficulty even bringing in bottles of Lebanese wine or in some cases water. And many consumer goods previously available in Syrian shops have disappeared.

So in terms of overall informal trade, Syria is much more dependent on Lebanon’s free market for sourcing the goods that are fueling Syria’s growing appetite for globalized products. Import regulations have changed, however, and now products such as Coca Cola, Pepsi and even KFC are available in Damascus via Syrian suppliers and the recent restrictions on the Lebanese border could be the first step towards cutting off Lebanon’s traditional role as Syria’s consumer window to the outside world.

Labor

The issue of Syrian labor in Lebanon has been discussed so many times in the Lebanese press that to go into it in depth here would not add anything new. Suffice to say, Lebanon needs cheap, low to medium skilled labor both to carry out the government’s ongoing reconstruction plans, as well as to service private sector businesses and individual homes. As Syrians live right next door, and often have Lebanese family, their availability on the Lebanese market is something that long predates Syria’s 29-year sojourn in Lebanon. Estimates of Syrian laborers in Lebanon vary between 400,000 to 1 million.

The Lebanese state has not made it easy to introduce other foreign laborers to the country, due largely to Lebanon’s lengthy and expensive residency and work permit procedures, which inclusive of insurance total some $1800 per head per year. Such fees have increased in tandem with the Lebanese state’s desperate attempt to deal with its debt problem.

Much less attention has been paid to the role of Lebanese labor in Syria. According to the Syrian-Lebanese Higher Council, some 100,000 Lebanese currently work in Syria. However, this figure is widely believed to be inflated, even by some Syrian government officials. Getting a handle on Lebanese labor in Syria faces the same difficulties in forming good estimates on Syrian labor in Lebanon, as many Lebanese and Syrian families and households overlap. This being said, the utilization of Lebanese expertise was highlighted during a recent crackdown on “illegal” Lebanese labor in Syria. Beginning in July, Syrian police showed up at the door of Syria’s new private sector banks, as well as the country’s two mobile phone companies. All non-Syrians without work papers were duly taken to the Lebanese border and “dropped off.”

According to sources in Syria’s private sector banks, Lebanese play a vital role in the training of Syrians staffing the new banks. Syrians have little experience in banking, following 40 years of a state monopoly over finance. Implementing international bank risk procedures has been a major challenge to the new banks, and deposits are piling up. Private bankers say that Lebanese are vital to training credit managers in several respects. First and foremost, risk procedures vary from bank to bank (or what is called “credit culture”), and Syrian private banks with Lebanese involvement have to learn first hand from their more experienced Lebanese counterparts just what to lend and under what circumstances. Second, of course, Lebanese have the language skills necessary to best explain the institution’s procedures.

Finance

Millions of dollars have been flowing into Syria’s private sector banks following their opening in 2003. Nevertheless, Lebanon remains Syria’s piggy bank, with estimates varying widely from the hundreds of millions into the billions of dollars in deposits. And as Lebanese institutions are involved in the vast majority of Syria’s private banking ventures, the link between Lebanese and Syrian finance seems set to remain enmeshed for the foreseeable future.

Bankers say going it alone would be disastrous to both economies. For example, Lebanese institutions known to have substantial Syrian deposits, including BLOM, BEMO, Audi, and Byblos, are heavily invested in Lebanese Treasury Bills. On the Syrian side, the regulatory environment for private banks is still restrictive, as the Syrian state tries to deal with substantial issues concerning interest rates, exchange rates, and the introduction of liquidity facilities. A majority of Syrian traders still use L/Cs from Lebanese banks to import goods. In the end, bankers says that separating the two systems – something that did not even happen during Lebanon’s civil war – would be virtually impossible.

So which neighbor needs the other more? A run down through the issues above shows that Lebanon and Syria enjoy (or suffer from) a complex, symbiotic economic relationship. In many ways, each side thrives off the weaknesses of the other – perhaps the main conceptual pillar of trade throughout the world. But unlike other countries in the region, Lebanon and Syria’s economies have substantial overlap – especially in the areas of labor and finance – which serve as the mortar keeping this complex system alive. Reform in Syria will help allow the country to stop depending on Lebanon to service basic needs – a fact that Lebanese should take to heart as they consider the implications of their country’s long-term economic future. And it is only in looking to that long-term future, and implementing reform plans to achieve set targets, that Lebanese will be able to carve out an economic independence to match their new political reality.
 

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Real Estate

Getting skills that won’t pay the bills

by Safa Jafari
written by Safa Jafari

Higher education: Youth for the job market or the job market for youth?

A common complaint amongst our youth is the lack of jobs available in their chosen fields of expertise. But are students or educational establishments really responding to demand, or are we opting for career paths based on traditional perceptions of success, status and prosperity?

Theory: Knowledge for knowledge’s sake vs. knowledge for gaining skills

The 18th and 19th centuries in both France and Germany witnessed the most significant changes in the university system. In France, the Napoleonic university model overthrew universal knowledge and the independence of college education, and bestowed upon colleges the task of preparing students with skills necessary for the development of the new nation. In contrast, the German Humboldtian model (founded by Wilhelm von Humboldt) distinguished philosophy (which included science and humanities) and encouraged general knowledge and the freedom of choosing topics of interest.

Perhaps in a bid to fuse the two approaches, in 1995, UNESCO emphasized the goal of higher education as gaining individual knowledge and skill building in catering to society’s needs. To achieve the latter, higher education systems were expected to: a) provide the right to education, b) provide and develop specialized knowledge, c) encourage excellence among graduates and, d) collaborate with the job market, itself a dynamic entity.

Worldwide, this kind of collaboration has been carried out through interaction with the needs of the job market; considering continued education programs; developing structural partnerships with business institutions; and finally, in applying international dimensions to higher education systems.

The reality: misfit between majors and jobs

In Lebanon, little has been done to study the relationship between higher education and the job market. Studies have been limited and rarely rely on field surveys. These studies indicate however, that while the job market attempts to foster careers to promote its development, vocational training remains marginal compared to general training and suffers from low revenue and weak programs and qualifications in all educational sectors.

In a series of recent studies conducted by the Lebanese Association for Educational Studies, 60% of Lebanese graduates interviewed (particularly those from the fields of health, medical science as well as education) indicated a significant congruence (or relevance) between their college training and the jobs they obtained after. The remaining 40% indicated partial or very little congruence (particularly those from fields like sociology, political science, history, philosophy, physics, international management and electronics). When asked about what they believe helps a graduate get (or not get) a job, 70.2% stated qualifications as a key factor; 52.2% mentioned ‘wasta’ or influential connections in society; and 38.8% stated economic capital as a prerequisite. But while there are many factors affecting the employment rate, none were related to the phenomenon of supply outweighing demand, or in other words, a labor force out of step with the demands of the job market. It has been found that within the 20 to 25 age bracket, unemployment is higher for those who are more educated: 27% for those with university degrees and 14.8% for those with a secondary school diploma. Yet, almost 33% of employers reported a shortage in the number of employees needed, while 21% of them complained about the unavailability of qualified and skilled laborers. It is clear that the unemployed youth of Lebanon are unaware of potential job opportunities and thus, their knowledge and skills do not correspond to the needs of the Lebanese job market.

A 2000 study on unemployment by Riyad Tabbara shows that until 1998, the problem of unemployment had not reached the dire situation it has today. Only since 1999, did it rise dramatically, reaching 15% (21.3% for those aged 15 to 24, and above 5.2% for those aged above 25). The unemployment rate estimated for 2000 (25.4%) was four times that of 1970, when there were, according to 1999 estimates, as many as one million foreign workers.

The only comprehensive study to date was conducted in 2000 by Najib Issa for the National Employment Institute at the Ministry of Labor, UNDP, ILO and ESCWA. This study highlighted causes of unemployment in Lebanon, given its past and present circumstances. Its findings indicated a growing incongruence between the supply and demand for specialized labor. The study pinpointed the increasing social demand for higher education in areas that are perceived to bring prestige and financial success – medicine, engineering and to a certain degree law – but which are not demanded by today’s job market. In a study on Job Conditions and Opportunities in the Lebanese Labor Market, when asked about work satisfaction, Lebanese graduates rated a job according to its salary, rather than other criteria such as the nature of the company, the job description, working hours, fringe benefits etc. This crude calculation results in an oversupply in some professions, leading to less opportunities and meager salaries.

A hard life

It is no secret that the cost of living in Lebanon is one of the highest in the Middle East. Yet the average annual income remains at around $4,500 compared to $26,977 in the US. Other nations with similar economic woes have tried to respond to the needs of the people by either providing subsidies, easing taxes to stimulate economic growth, raising the minimum wage level, or regulating adjustments to the cost of living which would allow companies to compensate workers for any significant increases in the cost of living. In Lebanon, the government’s solution has been to raise taxes, forcing fresh graduates to seek out only the most lucrative jobs, leave the country, or remain unemployed.

Making much-needed jobs more rewarding

A rational solution would be for the government to make not only more jobs available, but also to make more jobs available in underdeveloped sectors that could pay a salary in line with a reasonable standard of living. Principal economic sectors such as industry, agriculture, construction and tourism could be further revived through better planning, infrastructure, subsidizing services and bank credits. With enough labor supply, these sectors could revive the economy to rates similar to or higher than those prior to the civil war.

Jobs in demand

Lebanon’s productive capacity depends on its agricultural sector and medium and light industries. For example, about 30% of total land is cultivated arable or utilized forest. Several multinational donors are financing agricultural and livestock projects but the agricultural sector suffers from labor shortages.

There is much to be done. The International Finance Corporation, an arm of the World Bank, allocated a credit line of $45 million to small- and medium-sized enterprises in Lebanon to be disbursed through local banks in 1993, but the country was not prepared to efficiently grow with its main industries. Today, Arab investment in the real estate sector may decrease according to the sector’s productivity, which is highly dependent on labor. The damage to industrial, transportation and communications infrastructure alone by the civil war has been estimated at US$ 25 billion. Similarly, income from tourism has not been as high as in the past, though it is slowly gaining ground. Construction and the repair of electricity stations, the telecommunications network and sewage facilities remain pending. Full recovery has yet to be achieved and our graduates should be encouraged to work in such specific pillars of economic growth and sustainability.

An example of an ongoing growth-oriented employment scheme is the USAID Strategic Objective, which aims, among other things, at creating full time employment for rural Lebanese by targeting three key productive growth-oriented sectors that comprise 35% of Lebanon’s GDP: agro-industry, information and communications technology, and tourism. For those already trained in the ‘wrong’ field and as one way to bridge the gap between training and the job market, vocational training can be utilized as a solution to help jobless graduates adjust their skills to suit the job market. The general budget the government has allocated to education makes up 12.96% of the total budget involved in developing Lebanon. With this, the country can reconstruct the private and public educational and vocational systems, making professions more flexible and graduates more mobile, and increasing employment possibilities. However, molding education and training to better suit the job market does not necessarily only imply a return to agriculture, and a simplification of technical training and computer studies in Lebanon is a case in point. A 2003 study by ESCWA pointed out that “computer literacy and the development of computer skills in Lebanon, with the exception of a few private schools (or ‘islands of excellence’), continues to suffer from a lack of qualified teachers, the limitation of time allocated to computer studies, shortages of equipment and lack of effective government support.”

A similar situation exists in universities as to the availability of computers. In 1999, only two universities had a student/computer ratio of 20:1, while at other universities and colleges, the ratio exceeded 100:1. The consequences of this are that university students are unable to follow rapid developments in subjects including science, humanities and medicine. This is also a particular problem for business and accountancy graduates. In short, the education system produces a highly educated workforce that lacks the skills needed in the new economy.

Government: key but not the sole player

Given the nature of the Lebanese economy, the government has not faced up to the responsibility in job creation, leaving it to the private sector. The United Nations Department of Economic and Social Affairs, Division for Social Policy and Development has stated that there is thus far “no government policy for job creation for youth in Lebanon.” A first step would be for the government to provide data on the current cause of unemployment. Tariq Haq, employment development and strategies officer at the regional office for Arab States of the International Labor Organization in Beirut, told the Daily Star last month that “there’s a perception that if governments officially say there’s a 30% unemployment rate it will fuel unrest … This information should be publicly released for policy development.”

To date, education projects sponsored by international bodies in Lebanon have worked on promoting access to education, rather than the efficiency and quality of education. Several recruitment consultancy firms have been established in the private sector but the jobs on offer will continue to be limited so long as only high-paying jobs are in demand, while a partnership for a more beneficial education system has yet to be achieved amongst the government, higher education bodies, civil society, the private sector and the students themselves. As ESCWA asserts, the education system in Lebanon has been slow to adapt to the needs of the current labor market and suffers from significant problems that have affected the full utilization of human resources. A clear manifestation of this situation is the inability of graduates to find suitable local employment opportunities. So long as the educational and training systems in Lebanon are out of step with the needs of the job market, graduate unemployment will continue to rise. A major task therefore faces three key players: the government, which must employ candidates based on specialized qualifications, and provide incentives for jobs that are useful to the economy; higher education institutions, which must re-evaluate the curricula with an emphasis on the development of skills, as well as making our youth aware of actual options and possibilities available in the market. Finally, our informed graduates are left with a choice, essentially a reworking of the John Kennedy ‘question’ in which they should ask if they want to ‘work for their country, or wait for their country to work for them.’
 

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Economics & Policy

Guaranteed Returns

by Faysal Badran
written by Faysal Badran

Investors with a lower risk appetite or a shorter investment time horizon generally prefer to seek out an investment arrangement that provides a degree of certainty over capital, while seeking returns related to the performance of some of the world’s stock markets. Capital protected funds, also called guaranteed funds, are created to fill this need and have been offered at various times by Lebanon’s leading banks. A typical capital protected fund will promise to return at least 95%, and often 100% of an investor’s capital, while also paying out any gain on the given stock index during the fund’s life, normally between three and seven years. You hear it all the time: “The sort of investment I’d like is high yield, low risk, and completely liquid.” I’d like that too. Everyone would like that. In a perfect world. But in this world, that’s not how it works at all. The higher the yield you want, the more risk you have to take. Which means the more chance you have of losing money. And perhaps the only way of moderating this equation is to lock up your money for a longish period of time. So, no liquidity.

Hedge funds anyone?

How about something that has a record of around 20% per year, guarantees you all your money back after five or six years no matter what happens, and allows you to get out whenever you want. Does this come close to that perfect world?

Well, reasonably close. High yield: probably, but not certainly. Low risk: absolutely. Completely liquid: nearly. This is the new breed of capital guaranteed hedge funds. How do they work? Well, let’s say you have a sum, say a minimum of $25,000 (ok, it’s not a perfect world because that’s on average what you need to start with) and you want it to grow over the medium term.

A large chunk of this money the fund managers will put into something absolutely secure, that will grow to your original amount after the agreed investment period, in most cases a highly rated zero coupon bond, which is issued at a deep discount and is redeemed at par. A major bank guarantees this amount with at least two AAs in their risk rating. If the investment bombs badly, you will get all your principal back at the end of the investment term, guaranteed. The chances of a bank like that failing in the interim? About the same as Western civilization being annihilated by an asteroid, a new version of bubonic plague or a nuclear winter. Then again, with the degree of involvement of large financial companies in high risk these days … who knows? Anyway, that’s the capital guaranteed part. You get the return of your principal. Now, what about the return on your principal? How does that work?

Well, the company that runs the fund does not directly manage your money itself. It selects a number of hedge funds and managed futures houses and …

“Wait, wait, wait!” you scream. “Aren’t they risky?”

Yes, they can be, when they don’t tell anyone what they’re doing. But the only hedge funds and managed futures houses that will be selected by a capital company are those that state their trading discipline and allow the company to run their track record through their risk control system.

In other words they will only deal with hedge funds and managed futures houses that are not loose cannons. They choose a number of these, typically at least four and less than ten, and give them each a percentage of their pooled investment sum, a bit of your money included (you can’t get into any of these funds yourself for less than $1 million), which the hedge fund or managed futures house invests according to their stated trading rules.

How does this help? Well, three ways. Firstly, if a fund forgets about its trading rules or simply performs badly, the fund company can dismiss them, re-adjusting the weightings of the other funds, or straight out replace them. Secondly, each particular hedge fund or managed futures house is a specialist in a particular kind of trading or a particular sector. Between them, they cover a wide range, but without diluting expertise. Thirdly, because they are all doing different things, their monthly performance does not correlate strongly with each other. Which means the volatility of the overall performance is low.

The Sharpe ratio

Low volatility is good. It equates with low risk. In investing, a gentle, undulating hill walk is better than shimmying up and abseiling down saw-toothed peaks.

A measure of the quality of return is the Sharpe ratio. Divide: (the return minus the return you would have got in the risk-free interest of a T-bill) by (the standard deviation of the volatility). World stocks are currently at about 0.9. World bonds are currently about 0.7. Capital protected high yield low volatility investments typically have a Sharpe ratio in the area of 1.5 to 2.9. Which means more return for less risk.

How much return? Capital guaranteed hedge funds are closed-end funds. The guarantor has to know how much they’re guaranteeing. The capital protected high yield low volatility investment has a subscription period, which closes. From then on, no-one else can join. The thing continues for its stated period, normally five or six years. Then at the end it pays out the initial capital plus accumulated gains.

Each capital guaranteed hedge fund is therefore a one-off. Eight or nine of them come along a year. But they don’t have a track record until they’ve actually started. Which means you can’t ask what the performance is with a view to getting in. Once they have a performance, you can’t get in.

What you can do, however, is look at the pro-forma back testing. Each of the hedge funds or managed futures has its track record. The way they trade is the way they trade: being part of a capital guaranteed hedge funds/low volatility investment does not alter it. Therefore it is perfectly valid to look at the prior performance of the hedge funds and managed futures chosen by a capital guaranteed hedge funds/low volatility investment in their particular percentage combination and see how they have done collectively in the past. And typically these are in the area of 20%. Some are over 30% per annum. Personally, I wouldn’t mind if one I have only did 12%; I know my money would double in six years.

What about the trading? Well, people have since 1995, been getting used to stock market returns of 20% a year, and mutual funds that go up and up. This, however, is a very rare phenomenon, unparalleled since, well … 1924 to 1929. The stock markets won’t go up forever, even if we’d like them to. The alternative to stocks is bonds or cash. But bond prices can go down too, and cash performs about as spectacularly as a guinea-pig. If you buy stocks, you are long in the market. Performance is defined in upwardness; if stocks go up, you gain, but if they go down, you lose money. Mutual funds are long, geared to markets going up. In fact, they are not allowed to go to cash (except a few percent). In a real bear market, they are waiting to be slaughtered – all they can do is choose the stocks that will perform least badly.

Getting out in emergencies

Hedge funds, on the other hand, are allowed to be short on the market if that’s what they feel is warranted. This means they can sell stocks or stock indexes short and gain as markets fall. Participating in a hedge fund gives you insurance in the time of the bear.

Normally, however, they are not making one-way bets. They are doing things like using their expertise to exploit mergers and takeovers, or finding distressed companies that will see better times. Or, they are finding pairs of companies that do exactly the same thing in the same country, working out which is the better bet, buying shares in it and selling short an equal value of shares in the other company – this way it doesn’t matter whether the market goes up, or whether the market goes down, as long as the preferred company outperforms the other. There are in fact many, many strategies; the point is that they are more sophisticated than being straight and long the market, and enacted by specialists. And it’s not just stocks: managed futures houses work in commodities, metals, energy and currencies.

What you are doing by going into a capital guaranteed hedge funds/low volatility investment is buying a basket of such funds for a fixed period. It’s a way of investing that is suitable for any set of conditions in the market, an all-terrain vehicle rather than a temperamental sports car that needs a clear track.

Liquidity and charges? There are low front end charges, typically 2% to 3%. Performance above is expressed net of management fees. There may be a one year period of lock-in, or no lock-in. There is a decreasing back-end fee, a maximum of 4% in the first year, if you get out early. For most, after the first year you can get out free, or for 1% to 2%. When you get out, you will get your capital plus the gain in the fund if there has been a gain. If there’s a loss, the full capital guarantee is only extended at the end of the agreed term. But then, how many investments apart from guinea pigs and T-bills have a guarantee written under them?

Choosing the right fund

These funds are one-offs. Once they’re closed, they’re closed, so there’s little point naming particular ones. Each deserves careful scrutiny (some are better than others). A good financial adviser will be able to let you know his or her current recommendations. But bear in mind that the explosion in the number of hedge funds, which now are approaching 8000 worldwide has meant that their quality and returns have suffered, due to roguish traders setting up very aggressive structures, and this means hedge funds are not what they used to be. Also, with global markets so closely correlated, commodities, currencies, bonds and stocks have at this juncture huge risks embedded in them. But if your time horizon allows, and you have some risk capital available, then capital guaranteed hedge funds can smooth your overall portfolio returns.
 

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Business

Software success story

by Thomas Schellen
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.
 

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Business

Getting a piece of the action

by Lana Asfour
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.”
 

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