Economics & Policy

Sami Haddad

by Executive Staff
written by Executive Staff

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

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

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

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

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

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

E Where should the cuts in public expenditure be made?

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

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

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

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

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

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

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

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

E Are there other sectors besides telecoms?

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

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

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

E But you can outgrow debt through strong economic growth.

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

E So which sectors would you like to promote?

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

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

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

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

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

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

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

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

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

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Agreeing to disagree

by Yasser Akkaoui
written by Yasser Akkaoui

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

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

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

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

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

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

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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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Special Report

A Multi-Faceted Sector

by Thomas Schellen
written by Thomas Schellen

Lebanon has significant potential in the conferencing business. This area of enterprise is an often underestimated, yet versatile commercial realm with touching on education, networking, and tourism. Even though conferences and exhibitions are regarded as a very dynamic growth segment of international tourism – (commonly labeled MICE – meetings, incentives, conventions and exhibitions – tourism) in reality conferencing covers a wider, multidisciplinary meeting ground where academic, economic, trade, public sector, NGO, and tourism interests converge.

Because man is a relational entity who thrives through interaction, conferences have been integral to human history from before the Nicene Council while some like the Congress of Vienna that decided over the fate of post-Napoleonic Europe, have captured the attention of a whole continent. But as a regular staple of life today, conferences owe much of their intense profile and frequency to the emergence of the knowledge economy and globalization of business, which have led to proliferating demand for meetings and conventions.

In turn, conferences supply economic opportunities to a diverse group of businesses that include airlines, hotels, restaurants, tourism and entertainment companies, but also instructors, speakers, interpreters, technology providers, specialized manufacturers, and an ascending number of conference organizing firms. The world’s leading conferencing organizations have grown in recent years into service enterprises that convene thousands of events per year and the market is still far from saturated, at least in the Middle East.

The Beirut offices of Lexicon are adorned with the paraphernalia of conferencing: lined up along the wall are award plaques that may have gone unclaimed and numerous knickknacks that companies feel so free, or obliged, to distribute during such events.

Managing Partner, Near Zion, has been involved in conference organizing for about 15 years. “Middle Eastern conferencing has been booming since five years,” he says.

Lexicon is a company formed two years ago as joint venture between Zion’s firm Idea Advertising and partner firms in Saudi Arabia and the UAE. The company organizes 10 to 12 regional conferences per year with a target size of 400 to 500 participants per event.

The Al Kissed Wall Alma (AIWA) Group is with some certainty the conference-organizing firm in Beirut with the highest profile for large-scale business meets. Its Arab Economic Forum, formerly the Arab Finance and Investment Conference, was this year – which was not an easy one – in its 11th edition, with over 800 participants. “We started doing conference around 1987 or 88 and launched it as formal activity in 1993. Today we organize on average 13 to 15 events per year,” says Festal About Sake, deputy general manager for the AIWA Group.

Other Lebanese enterprises stage conferences as a sideline of exhibition organizing or business services, examples being exhibitions company Promo air and services provider Beirut World Trade Center (WTC). Again other organizers are specialized in convening conferences only in very specific sectors, such as medical conferences.

As Promo air PR manager Karen Coheir told Executive, most of the company’s events are national level exhibitions. However successful at the local level, these shows do not have an easy time in seeking to draw in international exhibitor participation, and conferences play only a limited role in the context of exhibitions held in Lebanon. Promo air is working on a new exhibition and conference project with media organization Middle East Broadcasters for later in 2005, but for the moment Coheir, does “not see much potential” for the exhibitions and conferences sector in Lebanon due to the difficult circumstances of 2005 to date.

The Beirut WTC, which convened its first conference last autumn, also had to postpone large meetings planned for this year, says general manager Chadi Abou Daher, explaining that in the center’s business model, conferencing is geared towards being a support activity of topical events and business matchmaking but not a main source of revenue, which the WTC intends to draw from real estate it is developing into a business center. 

Booming Regional Business

AIWA and Exicon are among a handful of Beirut-based conference organizers with broader event spectrum and Middle Eastern scope. As they hold only a share of their events in Lebanon, they are less vulnerable to problems affecting the country; at the same time, they are working in a regional business environment where other strong contenders are Gulf-based conference organizers, mostly located in Dubai. They also face a constant influx of new competitors that enter the field each year and often also exit it again very quickly.

Zaitoun and Abou Zaki agree that the outlook for conferencing in the Middle East is bullish. Abou Zaki anticipates that the boom in the Gulf’s oil-based economies will create further increases in the number of business conventions and the sector will reach maturity in five to ten years.

A similar view comes from a leading supplier in the Gulf. IIR ME is a Dubai-based company and member of the IIR Group from the UK that orchestrates about 150 conferences per year, along with eight exhibitions and some 250 training seminars, according to senior sales manager, Owen Mills. Without agreeing to disclose information on the business growth rate and strategy of IIR ME, the Gulf region “is currently a buoyant market for conferences and exhibitions due to the substantial growth the region is experiencing and the high oil price,” Mills tells Executive.

The growing competition in the field requires conference organizers to develop specializations and niches. To carve out its market as organizer of conferences in the Middle East, Exicon has chosen a topical focus, said Zaitoun. “We take care of scientific issues presented at our conferences so that we can set ourselves apart. We don’t decide on a paper based on what it will cost us,” he says. Abstracts of papers to be brought before a conference are evaluated by a science committee and, with the exception of one speaker in the opening panel, presenters at Exicon conferences are not drawn from the ranks of conference sponsors. 

For AIWA Group, its competitive edge in entering the activity came as a natural outflow of its original enterprise as publisher of a region wide business publication, Al Iktissad Wal Aamal, and several smaller magazines. “Our expansion into conferences was leverage of our position in AIWA. We know the economy; we know what is happening. We are not into training and self-improvement conferences, we are into high-profile conferences that promote countries and industries.” 

Avenues of Profitability

Due to the links between conferences and delivery of information and knowledge, it is not uncommon for conference organizing firms to have roots in publishing or public relations. The defining characteristic for professional organizers, however, is that they are not staking their fortune on the message or content of the event as much as on the quality they achieve in organizing it. Different to educational institutions, governments and NGOs, they are in the conferencing business to make money.

Conference organizers can employ several avenues in staging events profitably but in all their business models, professional handling of the event is the alpha and omega. One route to realizing profits as professional conference organizers lies in conducting third party conferences, delivering expertise in managing the event to a client who sets the agenda and defines the target audience and is responsible for the financing and marketing of the conference. This type of service has growing demand from corporations and institutional clients who realize that their investment into a conference warrants hiring a professional organizer for the sake of maximizing the return.

However, while this detached role can bring good revenue to the conferencing firm, an organizer’s market position and reputation is built more often through proprietary events, which the firm designs and conducts. In developing a conference from scratch, the organizing company needs to master content, marketing and organization of the project. It carries the risk of investing in untested events and has to attract a business audience before it can hope to reap profits from them.

Outside of the training seminars side of the conferencing business, where participant fees are a key revenue source, most conference organizers derive their revenue predominantly from corporate involvement. Participant fees may cover basic costs for the organizers, but the “big money is from sponsors,” says Zaitoun.

Companies that sponsor a conference will have a number of direct marketing and promotion benefits, and Exicon offers sponsorship packages at a major conference that range from $20,000 to $100,000 for the exclusive top slot. If an event is successful, it may attract nine or ten sponsors in total, which provides a good result to the organizer, so Zaitoun.

According to Abou Zaki, rates for sponsorship packages at the AEF range from $30,000 to $100,000. Such amounts push the borders of what leading Lebanese corporate sponsors, such as major local banks, are willing to invest into a single business event even if a side exhibition is included. However, in Gulf markets, deals are tending higher and at some events, organizers are said to have been selling sponsorship packages for as much as $300,000. In the local Lebanese market, typical convention sponsorship rates rarely top $50,000 and often are closer to $20,000, depending on the type of event. 

Depending on from which angle one approaches the economy of conferencing, one gains a different image of the expenditures and gains involved. But from all approaches, conferences represent a considerable investment that comes with a high pressure to deliver results.

On the corporate side, not only are sponsorship involvements costly, also a company that sends top employees to attend a conference faces an expenditure per participant that can easily exceed $10,000 for upper management, estimates Abou Zaki, when a total is calculated for direct travel, accommodations and related expenses, investment of productive time, and per diem allowance for an executive.

Conferencing from a Tourism Perspective

While the benefits of a conference for participating corporations and individuals can arrive in diverse forms, the industry that reaps income most directly from conference activities is the hospitality industry. 

On the venue side of conferencing, Lebanon spots a multi-purpose hall, BIEL, that can host exhibitions and conferences, but the main suppliers of conference facilities are top-end hotels with dedicated capacities to this segment of business travel. Their conference and banquet facilities are important assets for hotels such as the Phoenicia, the Habtoor Grand Hotel and Metropolitan Palace, the Le Royal in Dbayeh, the Crowne Plaza, the Moevenpick, the two Rotana hotels, the Marriott, the Commodore, the Rivera, the Radisson, and others.

With their state-of-the art convention halls, especially the Phoenicia InterContinental and the new Habtoor property are catering to the high-end of the conferences market, where the Phoenicia over the past six years played a pioneering role in establishing Beirut as conferencing destination. “We are a corporate hotel and stopped having a low season because of conferences where we had growth every single year since opening,” says Maha Bourachi, director of sales at the Phoenicia InterContinental.

Booked usually during the off season for recreational tourism, international conferences, of which the Phoenicia hosts about 30 to 40 events per year with more than 100 participants each, provide hotels with both banqueting and guest accommodation business. Another advantage for the venue is that although the pre-run periods for conferences are getting shorter due to reduction in the time needed for communications and planning of events, conference bookings are fixed much farther ahead than vacations.

Between the banqueting packages, which commonly include the use of the meeting hall with purchase of meals and coffee breaks, and accommodations in connection with international conferences, the vibrancy of its convention business can determine the profitability of a major hotel. During the main conferencing season, accommodations business for out-of-town participants supplies 30 to 40 % of the Phoenicia InterContinental’s total occupancy rate, according to Bourachi, and still 10 to 15 percent for smaller houses like the LeVendome of the same chain where conference rooms are limited to fit the needs of board meetings and smaller corporate gatherings.

To put the abstract calculations into a concrete example, after staging Omaintec, a conference for operations and maintenance, at the Habtoor Grand Hotel in June, Exicon settled a bill of $200,000 with the venue, according to Zaitoun.

However, conference, under the venue’s revenue perspective, is not like conference. Doctors for example are less liberal than bankers and business leaders with their money when attending a conference, Bourachi notes. For a hotel, it is an art to assess the most rewarding conferences and associate with events that bring good results.

Global and Regional Projections

Given the fact that conferencing is an open domain where countless companies and institutions prepare and stage events internally and where services comprise the main economic activity, global turnover and contribution to GDP of the conferencing realm may be only vaguely measurable. For the tourism side, a 2003 study by the World Tourism Organization gave an indicator by showing that outbound MICE travel from Europe amounted to about 20 million trips of at least one overnight stay abroad, which is one third of business travel and 6% of all outbound trips from Europe in 2000. Nearly half of those trips, 9.7 million were in attendance of a conference or convention, and 42 % were in attending an exhibition.

There is no question, overall, that successful conference organizing is a lucrative business line. Only last month, the world’s largest publicly traded conference and publishing group, UK-based T&F Informa, acquired the previously privately held IIR Group of training and events organizers for $1.4 billion. T&F Informa, shaped only one year ago through the merger of Taylor & Francis publishers and the Informa group, organizes about 2,800 events per year and has an affiliate company in the UAE, IBC Gulf. The IIR Group, of which IIR ME is a member, is a training and conferences enterprises with a network of 45 companies that claims to have a total attendance of over 650,000 at its events annually.

How much the conferencing business contributes to the national economies of Middle Eastern host countries can only be an educated guess, since industry insiders are not aware of any statistical evaluation of the sector or analysis of distribution of shares in MICE tourism between different countries in the region. “There are neither published figures on the total size of the commercial conference market in the region, nor are there figures on the importance of this market to the national economies of the GCC,” said Mills, and Lebanese organizers made equivalent remarks for the Levant. 

This does not allow ranking of Middle Eastern conference destinations by numbers but the consensus of organizers and hospitality experts in Lebanon is that Dubai and Beirut are heading the list in terms of activities and attractiveness, with Beirut having more of a natural disposition and Dubai making the stronger efforts. Some countries are very active in pushing the development of their conferencing capacities, and destinations such as Doha, Bahrain, Abu Dhabi, and Cairo are expanding their appeal in this regard. While Amman is also doing increasing business as a conference location, sector experts say that the city’s convention hosting is turning into a niche role for events focusing on Iraq.

According to the Lebanese conference organizers and hospitality experts, Beirut has clear advantages and selling points as regional conferencing location in its traditional attractiveness to Gulf companies, good distance to Europe and Gulf, developed skill base in services such as translations, PR and hospitality, and its overall points of attractions as tourism destination. The latter include nightlife lures, which conference organizers insist play some but not a major role in drawing businessmen to conferences. Weak points are the lack of a convention center of international format, under-powered public sector support, image issues, and the country’s vulnerability to instability and pressures.

There was not the slightest disagreement among the sector specialists Executive talked to that 2005 has to be dismissed as a year where conferencing here could not perform as expected. The Phoenicia InterContinental had been actively promoting itself as conference destination to more and more markets, including European countries, and the hotel had been making inroads in those markets as upscale location for conventions.

“Meetings were materializing,” Bourachi says, “and then four years of work evaporated.” Nonetheless, she continues to expect a full rebound of the business. “We are still optimistic for the rest of 2005, and for 2006, we expect the golden year that we had expected for 2005,” she says.   

“Aside from the political issues, I think the conference business will boom in Lebanon,” says Zaitoun. “But I don’t see how you can take the political issues away.”                     

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Special Section

Burning Desire For Cigars

by Executive Contributor
written by Executive Contributor

Consider this. The cigar shop at Beirut International Airport sells the largest volume (100,000 boxes per year) at arguably the best value anywhere in the world, while its VIP cigar lounge has won a Frontier Award (the “Oscar” of the global duty free industry) in the Special Concept of the Year category.

Lebanon imports some 5 million cigars a year (roughly equivalent to 5% of Cuba’s annual export production) while the market is registering healthy annual growth of around 10%. This puts Lebanon firmly in the world’s top 10 cigar consuming nations alongside Germany, France and Spain. It is not surprising therefore, that Phoenicia Trading, the company that imports Cuban cigars into Lebanon, is keen to nurture this national obsession. 

This culture has not come easily. Robust marketing has been key in increasing awareness and developing tastes. “Our marketing strategy is mainly focused in the on trade market,” said Walid Saleh XXXX of Phoenicia Trading. “We make regular, often monthly promotions, cross promotions, continuous advertising and panels, motivation certificates for loyal customers, sponsorship agreements at important events, associations and live demonstrations.” Saleh also explained that Phoenicia Trading is also involved in brand building through alliances (it has teamed up with drinks giant Diageo) to sell cigars via complementary drink brands.

Retailing has also matured. During the war, cigars were sold in kiosks, other non-specialist stores and at duty free shop at the airport. It was not until 1994 that the first specialist store, La Casa Del Habano, opened. Since then others have followed, elevating cigars and cigar accessories – humidors, lighters cutters and the like – into a higher retail consciousness.  The smoker has also evolved. According to Saleh, “cigar smoking began as a trend, a status symbol, but now it has developed into a genuine culture. The customer knows exactly what he wants and cigars are becoming increasingly offered as gifts.”

Most, though not all the best cigars come from Cuba, which exports some 125 million cigars a year, saving another 100 million for the domestic market. Cuba is considered the finest tobacco-growing land in the world due to the nature of its soil and its climate, which produces a quality of leaf not found anywhere else. It is the long process through which the Cuban cigar undergoes before it gets to the consumer – seeding, farming, harvesting, fermentation, manufacturing, quality control, boxing and ageing – that allows them to charge top dollar and which puts them on a higher quality plane than cigars made in the Dominican Republic and Honduras (so potent a brand is Cuba that those cigar manufacturers that moved to other islands have lost their mystique and market share).

For the record, the trend today among Lebanese smokers is for medium ring gauge cigars, a move away from the bigger ring gauge that once defined the taste of the local smoker. The most popular brands are, in order, Romeo Y Julieta, Partagas, Hoyo De Monterrey, Cohiba, Montecristo, while the most preferred sizes are, again in order of popularity, Robustos, Petit Coronas, Coronas, Churchills, and Corona Gordas. (Double Coronas, which require longer – up to three hours to smoke – come in 8th place.).

Smoking a cigar is closely associated with having made it. It is the totem of celebration. It is also a luxury good, the finest of which stand alongside the best caviar, watches, clothes, and wine. Women are gradually learning to enjoy delights of cigars, especially the smaller models. Perhaps therefore it is fitting to leave the final word with actress Demi Moore, who claims to be partial to a puff. “A cigar is like a fine wine,” she said recently. “There’s a quality, a workmanship, a passion that goes into the smoking of a fine cigar.” Who would disagree with her?

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