Economics & Policy

Counting the losses

by Nicolas Photiades
written by Nicolas Photiades

Rafik Hariri was an inevitable figure in Lebanese politics and economics. The man was greatly responsible for driving Lebanon towards the 21st century and gave the country (admittedly via a hefty debt) a world-class infrastructure, including a major airport, a much improved road network and telecommunication system, and a pristine city center. But most importantly, Hariri was a heavyweight local leader of international stature and credibility.

His death has had a significant impact on the country’s banking sector, which is inextricably linked to the country’s other sectors. Most of the large banks have substantial exposure to the tourism industry as well as Solidere and other businesses in the BCD.

Taking a hit

The drop in profitability and cash flow of businesses involved in tourism, including those operating in the BCD, such as hotels, restaurants and shops, will probably see a return to the 1998 to 2002 period, when cash flow was barely enough to service the interest on their debt. Real estate and construction companies may also be affected as residential and commercial projects are stopped, due to the withdrawal of purchase commitments from Gulf Arabs and Lebanese expatriates. Construction companies may see a slow-down in private and public infrastructure projects, and may have to resort to the unpleasant task of bargaining with banks in order to gain more time.

For their part, the banks should be forced at some stage to start reserving against their exposures to the tourist, real estate and construction sectors. A high level of profitability that was supposed to be re-injected into equity would be seriously depleted by forced provisioning or reserving. Lebanese banks need to increase their capital in view of the forthcoming Basel II regulations on bank capital, and must rely on profitability and organic growth to increase their equity levels. They also need to decrease their non-performing loans levels, which are among the highest in the region (the average non-performing loans to loans ratio for Lebanese banks stands at around 20%), and improve the quality of their placements. These latest events are likely to affect most bank counterparties, and will inevitably make it harder for banks to seek out better quality placements.

The financial flexibility of local banks’ is also likely to be affected, if a number of deposits are expected to be withdrawn by Gulf Arabs and Lebanese expatriates in the coming months, as a result of a potentially worsening political environment. Although banks are liquid and are well prepared to cope with any rush on deposits, the end result could very well see balance sheet contractions for some, if not most, banks and a deterioration in deposit funding flexibility. Lebanese banks’ main funding source comes in the form of customer deposits, and a weakening of that source would leave domestic banks with few alternative funding options. Unless the political situation improves radically, such a scenario is very much on the agenda.

Some banks could resort to issuing bonds, notes, certificates of deposits or even preferred shares, but investor appetite for Lebanese paper, even if it comes from banks, should reach an all time low in the current environment. Moreover, these debt and hybrid securities usually command a higher interest (or coupon) rate to be paid by the issuing banks, and the expected decrease in profitability should make it more difficult in terms of servicing these market funds. Another way to maintain a decent level of deposits could be to raise deposit rates, although this too would have a profoundly negative effect on profitability, as well as bring banks back to a pre-Paris II situation, in terms of higher interest rates. Some banks have already raised interest rates, albeit slightly, on deposits in an effort to contain a possible deposit flight. At the moment, every piaster of profit has to be carefully set aside for capital strengthening and provisioning purposes.

How low can you go

But the most direct and significant consequence of the Hariri killing on banks will be the potential drop in the country’s credit rating, which is already very low at B- (Standard & Poor’s rating). Rating agencies give a lot of weight on the political and security environment when rating a sovereign, and the climate that has been brought about by the killing of a major opposition political figure could very well push international rating agencies such as Standard & Poor’s (S&P), Moody’s or Fitch to decide to downgrade Lebanon to the CCC bracket. Although S&P has recently issued an update on Lebanon stating that the central bank’s foreign currency reserves should weather the storm of a short-term political crisis, it is clear that a downgrade would be very much in the cards if the current political turmoil takes too much time (more than three months) and the momentum of the popular “white revolution” gets gradually killed off.

A downgrade in the medium- to long-term would bring about a significant rise in the government’s cost of funds, and will make it more difficult for the monetary authorities to manage the current debt portfolio of the country, which, as we all know, stands at around 200% of GDP (the highest among rated sovereigns). Banks, as a consequence, would find themselves holding lower quality government paper, which would be more difficult to get rid of, and which would penalize their capital adequacy, given the future higher risk weighting on low rated assets, as advised by the Basel II capital accord.

Hariri’s killing has also forced another issue to rear its ugly head again, which is that of the depreciation of the Lebanese pound. As soon as the bomb went off on Valentine’s Day, thousands of depositors had already called their branch managers asking for the conversion of their Lebanese pound deposits into dollars. The closing of the foreign exchange markets immediately after the attack and for three days of mourning prevented an immediate massive purchase of dollars by Lebanese depositors. At the opening on Friday February 18, central bank intervention still amounted to around $500 million in one day, despite reassurances by the monetary authorities and the central bank governor. Intervention slowed down a little bit in the second week after the assassination, but remained abnormal.

Monetary destabilization

It is therefore clear that the central bank would not be able to sustain such a pressure if the crisis takes too long to be solved. A depreciation, to say LL1,600 to LL1,700 to the dollar in the medium- to long-term could very well be an eventuality, as the $12 to $13 billion of foreign currency reserves, would prove to be insufficient in the case of constant assaults on the local currency for a period of more than two to three months. The central bank may indeed decide to call it quits with regards to sustaining the pound in order to preserve what would be left of its foreign currency reserves. A depreciation in the Lebanese pound should affect the banks through their profitability and asset quality, especially considering that they hold significant proportions of their assets in the form of Lebanese pound government debt securities.

Funds promised in the Paris II conference could also be impossible to obtain, as the international community may deem any counterpart other than Hariri to be ineligible to negotiate with on behalf of Lebanon. International donors and lenders may also believe that Lebanon has become too high of a risk, and may therefore decide to cancel their financial pledges towards Lebanon. Although it is worth noting that Kuwait has recently announced that it stands firm in its commitment to release funds pledged during Paris II to Lebanon, in a clear sign of confidence and solidarity.

Uncertain times

Lebanon lost a mover and shaker. With Hariri gone, the financial flexibility that was his leitmotif is in jeopardy. Indeed, few can see any other politician with his stature to raise funds at sovereign levels in most corners of the planet. Although the immediate outlook appears bleak, a smooth solution to the political situation that meets the demands of the domestic and international opinion could open the gates of prosperity for Lebanon. After all, everybody knows that the country’s economic woes have been and are still due to the nightmarish political quagmire that was created immediately after the end of the civil war in 1990.

Trouble Downtown

Solidere, with its strong links to the late Rafik Hariri, should expect a certain period of time in the doldrums, as tourists and investors decide to stir away from Lebanon for the time being, particularly in this current political and security climate. Even Solidere-located restaurants should suffer, as fewer tourists flow in, and locals fear explosions while they are having lunch or dinner. The hotel industry within the area should also be closed for business for a few months, as the damage is being repaired.

The lack of business for a few months would definitely affect Solidere’s financial performance, as well as it share price. Already on Monday, February 21, Solidere’s share price had decreased by 15%, well below the $7 mark, only to regain some value the next day. As the largest market capitalization and most liquid stock listed on the Beirut Stock Exchange, Solidere should be the only company in the domestic capital markets to witness fluctuations in its share price, together with government bonds, which should also see frequent changes in their yields.

Such turmoil in the domestic capital markets should be expected as long as the political environment remains tense and a solution to the current crisis elusive. If the country’s fortunes improve in the coming weeks, then we can all expect share prices and bond yields to go up, perhaps even dramatically. Solidere’s Kuwaiti listing should also resume, adding much needed liquidity and investor diversification to the stock. The Kuwaiti listing would also be a first for Lebanon as it is the first Lebanese stock to be listed on a Gulf exchange, signaling the beginning of an era of prosperity for the entire country.

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A penny for your thoughts, Mr. Hariri

by Yasser Akkaoui
written by Yasser Akkaoui

We may never know what was the ultimate goal in the grand plan that killed Hariri. He wanted to created a boutique nation into whose coffers would flow the riches of those who sought out its delights, but where his dream would have taken us, only he knew.

What we do know is that Hariri was a big man who dreamt big and that the driver of these dreams was private enterprise existing in a sound, and free business environment, fed by stability and security and backed up by solid national infrastructure.

When his labors began to bear fruit – as we saw in the 2004 – this environment needed to expand. The economic reality of modern Lebanon had broken out of its political cage, hungry for more.

Those who killed him sought to end his influence but they could not quell his very essence. He had become a phenomenon. He nourished people with an unquenchable entrepreneurial drive and belief in what they could achieve. This was reflected in part by the shock and anger at his passing.

It is because of this, that we can be confident of the future. There is no immediate alternative to Rafik Hariri and there may never be one. However, his mission is done. He had set an example.

We wished for better communication that might have conveyed his dream more eloquently to a nation often bewildered and intimidated by the Hariri factor, but today we are beginning to understand his reticence to share his vision, now that we have seen the depths to which his political enemies will descend.

But that is in the past. The reaction to his death made us realize that we appreciate what he did. We now know that we can go on to get better results and work with the same positive attitude to create a better and more prosperous nation.

We at EXECUTIVE will miss his wry smile and crafty grin when ever we challenged his policies and ideas. He was not fazed. He was confident in his mission and as such he relished the cut and thrust of intelligent debate.

We will miss him even as his legacy lives on.
 

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Economics & Policy

Testing times for business

by Thomas Schellen
written by Thomas Schellen

The Lebanese economy is not only wearing black, it is also awash with red and white, and will be for a while yet and it remains unclear just how long – weeks, months or longer – the disruption of Lebanon’s economic heartbeat will last. This cannot presently be assessed authoritatively in terms of economic impact and the potential loss reaches from hundreds of millions of dollar to possibly billions – but it could also create, if the momentum for change is sustained, an unprecedented momentum of long-term economic growth.

In the immediate aftermath, attention has focused on the monetary situation, the exchange rate, potential pressure on the banking system, and short-term fluctuations in the Solidere share price as well as the cost for repairing damages to the hotels and businesses affected directly by the explosion and the disruption of tourism. In tourism, on top of the large losses that had to be borne by the hotels which were hit physically in the blast (and which by now have scheduled their reopening dates between mid March and beginning of April), the fears over a massive contraction for the first quarter were confirmed by industry leaders and corroborated by reports in Arab media speaking of a two third cancellation rate for airline bookings to Lebanon.

And although the currency scare could be cooled very effectively before the end of last month and the – economically anyhow only of marginal importance – Beirut Stock Exchange quickly appeared to regain its balance, the damaging impact of the Hariri assassination and the associated developments on the Lebanese economy manifested itself in many further ways, including in areas that were not in the first instance considered vulnerable. The most optimistic assessments by government economists thus conceded a 0.5 to 1 percent downward correction in GDP growth expectation for 2005, whereas according to analyst views on the severest end of impact anticipations, most or even all of the year’s projected 5.5 to 6% GDP gain would be eliminated, meaning a damage of well over $1 billion. The estimate that the damage might range below 1% of GDP and thus be limited to less than $200 million would seem overly optimistic in light of the losses already sustained in the first week after the assassination, when business was simply not taking place, and in the second week, when lesser but still significant disruptions occurred.

In the first week, big malls closed for at least three days, and so did most of the retail sector. In the $400 million-a-year supermarket retail trade, hyper- and supermarkets that had not been closed for a single entire day in over six years of operations, shut down for two days, plus the shutdown on February 28. According to the manager of a major supermarket in Achrafieh, the store sustained a 6% contraction of turnover over the same month a year ago.

Of restaurants and flower retailers, who had counted on brisk Valentine’s Day business, the former stood empty and the latter sat on perished or stale merchandise, causing many an average flower shop to incur thousands of dollar in losses in what normally is one of this trade’s most profitable selling periods. Various restaurant owners told Executive that they saw their revenue drop by at least 15% in comparison to February 2004. Managers of small businesses that had to attend to urgent matters did so only with the blinds drawn, to avoid stiff fines for violating the three-day official mourning period.

All this added up and in total, the second half of February saw so many days of no or severely reduced economic activity that its commercial losses alone could shave more than 1% from the annual gross domestic production of goods and services. Many business establishments in the Lebanese economy operate on tight conditions and recurrence of similar disturbances in following months could threaten their existence.

The detriment to doing business was nowhere more visible than in the downtown. In addition to suffering storefront damages like shattered windows on February 14, the area was void of economic activity for four of the following seven days. And just when some restaurants had reported normal occupancy for lunch on February 25, authorities totally blocked streets around parliament for at least until the end of the month. On the last Sunday of February, the entire Beirut Central District, instead of bristling with its normal crowds, was commercially inactive. All public attention was concentrated on Martyrs’ Square where people converged in large numbers at the tomb of Rafik Hariri and at the independence demonstrations by the Martyrs’ statue.

Despite the economic vagaries and the emotional upheaval of the moment, strategizing for the next business is important at this time, indicating that life will and must go on, and as such could be considered quasi therapeutic in the country’s process of regaining its internal footing and finding new direction.

The fact that tourist arrivals were hit substantially hurt the short-term outlook for a wide range of businesses beyond the hotel sector, including establishments in agro-industry. “I deliver to hotels and restaurants who all felt the effects and reduced their orders.” said Mazen Kassem, manager of the company that produces the K-Sun fruit juices. He estimated that the loss of tourism in February reverberated to K-Sun as at least 10% reduction in revenue and while he assessed the company’s outlook for the coming months as mostly contingent on political developments, he saw the coming months as not overly positive for business. “The problem we will face is that in Lebanon, we got used to be dependent on tourism,” he said.

Next to tourism, the real estate sector was eyed with considerable concern in direct consequence of the assassination, as real estate development had provided another boost to last year’s upbeat economic outlook and most buyers had come from the Arabian Gulf. Most pundits in the real estate sector voiced the assessment that investors would take a step back and wait for the situation to stabilize before making new decisions.

A more optimistic view came from Nabil Gebrael, the chairman of real estate brokers Coldwell Banker Lebanon. “My personal belief is that there may be some delays in decisions but not any real impact,” he told Executive. The fundamental selling points in favor of investments in Lebanese real estate had not changed, Gebrael maintained. “You cannot take away why people invest in Lebanon,” he said. “Clients we are dealing with have not slowed down one bit.”

The possibilities of uninterrupted continuation of the real estate trend not withstanding, construction-related enterprises are a sector of Lebanese industry, where manufacturers had to re-calculate business plans. In light of the assassination, leading tile maker Uniceramic made contingency plans for a reduction of 40 % or more in domestic demand over the short to mid-term. “We see a threat to manufacturing and are shifting our attention strongly to exports, due to the impact of the situation,” Uniceramic general manager, Nabil Ghorra, told EXECUTIVE.

Also for his firm, there had been no business for one week after the assassination, Ghorra said and anticipated a double impact on sales of construction supplies from more reticent building activity in the coming months and from possible work outages. Although Uniceramic employees are all Lebanese, the vast majority of construction workers in Lebanon are Syrian, many of whom returned to Syria for at least a while in the aftermath of the Hariri assassination. “They are not working,” Ghorra said, “and if they are not working, I can’t deliver.”

In the long run, however, the Uniceramic manager would not expect a negative business environment and the company is presently going ahead with taking delivery of new machinery, which will increase production capacity at its Chtaura factory by 50% from the end of May.

While the impact of the Hariri assassination on specific sectors of Lebanese industry appears more varied and more significant than would meet the eye, the effect on industry in general “does not differ from the impact on the economic situation in the country as a whole”, said Fadi Abboud, the president of the Association of Lebanese Industrialists. He emphasized the importance to retain the high foreign deposits in the Lebanese banking system, citing the correlation between the Balance of Trade and the Balance of Payments.

Abboud saw many investors as holding off decisions to see further developments of the situation and acknowledged that there is “a lot of pessimism” in the sector, but called for creation of balance. “The role of all economic sectors ought now to be to calm markets down and make sure that Lebanon is still a destination for investments and that the banking sector continues to attract deposits,” he said.

There are aspects to the effects of the assassination of Mr. Hariri on Lebanese industrial sectors that are unrelated to the current politico-economic fallout but nonetheless severe. To the agro-industry as a whole, the death of Rafik Hariri was highly detrimental as far as national and even regional growth prospects for the coming years, said Atef Idriss, director of consulting firm MENA Food Safety Associates and past president of the syndicate of Lebanese food producers.

Idriss pointed to efforts for invigorating intra-regional trade in agricultural and agro-industrial products where Rafik Hariri acted as powerful advocate and region-wide lobbyist. With harmonization of policies, agro-industrialists had hoped to increase intra-Arab trade in this sector from 7% to 20 % over the coming years, but in absence of Hariri’s top-level facilitation this would not be achieved, Idriss opined.

“The area does not have an agro-economic vision that could be translated into more economic activity,” he said. “The late prime minister was aware of the necessity to achieve regional harmonization of different policies regulating agro-industry. I don’t know if we will ever have another politician who is able to help the food industry across the region to meet the requirements of this age.”

This serves well to recall that the impact of the assassination of Rafik Hariri is multi-dimensional and entails the detrimental result of his absence as a leading personality with international connections and the short-term effects of the turbulence and shock over his assassination on the Lebanese productivity as well as the, by all indications even far more consequential, implications for fundamental changes in the political and economic reality in country and region.

The advertising sector faced a dilemma, as many clients considered the ethical wisdom of continuing their campaigns. Events were postponed, said Omar Nasreddine, general manager with advertising agency Grey Worldwide Middle East Network, but the halt was temporary.

Although the events of February 14 were “very unfortunate”, Nasreddine took the view that the long-term implications for the country are highly positive, by taking people to a point where they strengthened their resolve to never return to the bad old times of division and internal warfare. The assassination rekindled the desire to find a mechanism that allows the Lebanese to get fully back on their feet. “In my generation, we are all war children. What the Lebanese people should do today is stick together,” he said, “The same principle applies in business terms. All have an obligation to stand together and then the economy will surge again and advertising will surge with it.”

This view prevails widely across the spectrum of business sectors and communal identities. The current process triggered by the assassination of Lebanon’s former prime minister will result in a cleaner country and cleaner politics, said also Michel Ferneini, owner of the La Posta restaurant in the by economic disruption most affected downtown. His restaurant suffered a very substantial reduction in revenue last month and the cost of the current situation could reach high levels for the entire economy, he said, “but I consider this a very small price to be paid for a better future. Sooner or later, Lebanon will be much better. A free Lebanon with less corruption would give a chance for quick economic growth. I want to do personally all that is in my little power to have a better country.”

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A nose for a bargain

by Executive Contributor
written by Executive Contributor

“In February, get your nose done with a special discount,” ran the ad placed by plastic surgeon Dr. Elie Gharios on his website. With a price of only $700 instead of the regular $900, Gharios had expected a 50% business increase. “Unfortunately,” he said, “business was very slow following the death of [Rafik] Hariri.”

Educated in France, Canada and the United States, Gharios runs three plastic and aesthetic surgery clinics in and around Beirut. He does on average 20 nose jobs, or rhinoplasties as it is officially called, a month.  “Some 80% of the Lebanese have a small bump on their noses,” he said. “That is just genetically determined as such, but most people wish a straighter, more European nose.”

These days, having your nose done is no big deal in Lebanon, where women wear their after-surgery plaster with pride. Yet, plastic surgery is not just for women. An estimated 30% of clients are in fact men. The nose job and other corrective surgeries are big business. Ever since the end of the Lebanese civil war, the number of plastic surgeons increased from but a handful to some 70 today.

The sector matured, as it introduced the marketing and financing methods you find in any sector of the economy. Gharios has offered special group packages for bank employees, for example, and is currently negotiating with a travel agency to create a travel package that, apart from surgery, includes a plane ticket and hotel stay. While it is often virtually impossible to get a mortgage loan in Lebanon, many banks today offer a personal loan for plastic surgery, which allows you to pay for your beautification in installments.

Though surgery may be just business, Gharios does not operate on anyone. “Sometimes people come in with a picture from a magazine, saying ‘that’s what I want,’” he explained. “But I don’t work like that. Beauty is about harmony and aesthetic surgery is about re-shaping and re-fining, not about creating something completely new. ”

World Bank initiative

The World Bank and the United Nations Development Program announced February 8, the 18 finalists in the first round of Lebanon’s Development Marketplace competition, in which social entrepreneurs compete for grants to fund their projects. Entitled “Harvesting Youth and Community Ideas for a Better Environment,” the competition – a first in Lebanon – aims to support local creative initiatives to clean up the environment.

“We chose the theme of the environment because it is one of the main areas of concern in Lebanon where you can really do some good,” said Zeina al-Khalil, a World Bank spokeswoman. “Furthermore, it’s one of the three pillars of the World Bank’s 2004-2008 Country Assistance Strategy. Currently, the Bank has no environmental projects in Lebanon – we have projects in community development, infrastructure, education, but no loans targeting the environment.”

Open to youth groups, local communities, NGOs and academic institutions, the competition offers start-up funding of up to $20,000 per project. The organizers expect between five to right of the finalists to walk away with funds for their projects. “There is a pool of $130,000 in total, from which each winner can receive up to $20,000,” said Khalil. “The final amount granted will be based on the amount requested, and also on whether the candidate can leverage additional funds elsewhere.”

The 18 finalists were selected out of a pool of 87 participants by a panel of independent assessors, on the basis of their innovation, impact, sustainability, replicability and the institutional capacity of the bidders. They included: the Regional Cooperative Union in South Lebanon, the Lebanese House for Environment, the Association of Chouf Cedars, the Lebanese Association for the Protection of Natural and Archaeological Sites in the Chouf, the Association of the Friends of Tannourine Cedars, the Association of Rural Development in Aarsal, the Lebanese Scouts Association, the Cultural Charity Association-Al-Doha Secondary School, the Catholic School of Christ the Savior, the Torch of Passion and Unity, the Lebanese Geological  Society, the Animal Encounter, the Baldati Association, A Rocha, Friends of Nature, the Association for Volunteer Services, the Public School of Haqleet and the Scouts of Lebanon-St. Joseph Group.

The winners will be announced later in the spring, at the Innovation Day, where the finalists will display their projects at a public location before an independent panel of jurors.

More good new for Gemaizeh

Want to know where to drink and dine in Gemaizeh or what artist is exhibiting where? Check out www.gemayze.com. To promote one of Beirut’s most popular areas, the website offers a short history of Gemaizeh, articles written about the area, as well as an event list and the contacts information of café’s, restaurants, galleries, shops and even pharmacies.

“The aim of the website is twofold: on the one hand, to promote my Convivium Projects and on the other to promote Gemaizeh, the area I love,” said Kareem Bassil, the man behind the virtual initiative and sole owner of project development company Bassil Real Estate Investments.

Although technically launched in 2004, the focus then was mainly on promoting Bassil’s real estate developments. In recent months however, the site has grown into a portal that is actually worth its name. “I want to make the site more and more appealing,” Bassil said. “As people like to read about people, soon we will introduce the day-to-day adventures of an English lady living in the area.”

Of course, the young entrepreneur is well aware that by promoting the area and its events, the site promotes living in the area and thus, Convivium, which, derived from Latin, loosely means “living with.” There are currently five Convivium projects, which combine contemporary architecture with the traditional building style in the area. The buildings are characterized by the use of tiles and arches, and they are not higher than surrounding buildings to preserve Gemaizeh’s traditional character, which according to Bassil, is one of the last areas representing “old Beirut.”

While Convivium I and II have been built and sold, number III will be finished by the end of the year. Convivium IV is an old townhouse waiting for a buyer, and V is currently being built. It consists of two boutique hotels and three apartment blocks.

“Even considering what happened to [Rafik] Hariri, I remain positive for the future, so Convivium VI has already been planned,” reasoned Bassil. “It appears on the edge of Gemaizeh and downtown, and will consist of 70m2 to 90m2 studios.

Horeca 2005 still on course

From April 5 to April 8, the 12th annual Horeca 2005 trade fair will take place at Beirut International Exhibition and Leisure Center (BIEL). Some 300 exhibitors have agreed to participate in what is the Arab world’s largest trade fair for hospitality industries. “So far,” claimed Joumanna Damous of the fair’s organizers Hospitality Services, “we only had a handful of cancellations, which has surprised us in a positive way.”

The Jdeidet based Hospitality Services have been organizing the annual event since 1994. With offices in Jordan and Kuwait it organizes among other fairs the International Hospitality Forum in Jordan and the Horeca fair in Kuwait. It also publishes the bi-monthly trade magazine Hospitality News and the bi-annual Lebanon Hospitality and Foodservice Directory.  Why an annual fair in Beirut?

“Because Lebanon is market leader in the Middle East,” said Damous. “Taking into account the 9/11 effect, the amount of foreign investments in Lebanon has reached some $850 million in 2004, 80% of which went to the hospitality industry. Total demand on travel and tourism on services reached some $4.1 billion in 2004, some 25% of which was generated by foreign tourists.”

Exhibitors at the fair vary from hotels, supermarkets, schools and universities to pubs, clubs, caterers, and restaurants. Some 85% is Lebanese and 15% foreign, which is double the number last year. Products and services include equipment – everything from fridges and coffee machines to pots and pans – decorations, tabletops and cutlery, uniforms, linens, bedding and technology. Last year, more than 18,000 visitors attended the fair, which was held in late April. “If we would record a 10% increase in visitors this year,” Damous said, “that would be perfect.”

Tapping into Adma

The SABIS International School is still on course to open a third school in Lebanon after signing a contract with Intered (the managing arm of the SABIS School network) and the Beirut-based Abniah general contractor company at the end of last year. The construction of the school is expected to total $8 million. The move comes as part of a greater international strategy, which will see the opening of five new schools in Syria, the UAE and the United States.

The new school in Lebanon, to be called ‘SIS Adma’, will be located on the hills of Adma and is scheduled to open its doors for the 2005-2006 academic year. “We chose Adma because we believe that there is a need for a trilingual international school in that part of Lebanon,” said Victor Saad, VP of operations and development. “The idea of a school became a reality once we were able to find what we believe is an outstanding location for it.”

The purpose-built campus will span 75,000m2 and will be composed of 10 buildings, including educational facilities, a performance hall and sports facilities, such as an Olympic-size swimming pool and a soccer field. It will offer kindergarten, primary and secondary classes, with the capacity to accommodate up to 1,800 students.

An educational system which started in Choueifat, Lebanon in 1886 as an all-girls school, SABIS now counts 27 schools across four continents – Africa, Asia, Europe and the United States – totaling approximately 25,000 students. It is all part of the school’s strategy of catering to “mobile” families. “We have 29 different nationalities at Choueifat, including children of United Nations employees and foreign companies – families that move around,” said Saad.

The tuition fees for the SABIS schools vary, even within countries. The Choueifat fees, for example, are higher than those of Khoura. “The fees are based on different criteria, most important of which is providing a top quality education to a wider sector of students,” Saad commented. The tuition fees for Adma have tentatively been set to range from $3,600 for the nursery to $4,000 for the upper secondary classes.

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On the scene

by Marianne Stigset
written by Marianne Stigset

According to Pierre Achkar, the owner of the Monroe Hotel and president of the Lebanese Hotel Owners Syndicate, the bomb that killed former prime minister, Rafik Hariri, cost of the hotel district more than $60 million. But, it was the sight of panic-stricken guests fleeing to the airport (in some case not even waiting to pack) that sent a shiver down the spine.

That said, there were some losses that could not be replaced at Lebanon’s own Ground Zero. The St. George’s club lost five employees in the attack, and had an additional 15 employees wounded, five seriously.

The loss of life aside, it was everyone’s nightmare. “Beyond the external damage, you also have the water pipes, the gas pipes, the fire system, a whole number of things – assessing all of this is a big project which takes time,” commented the manager of the Monroe Hotel, who assessed the total costs incurred by the physical damages to the hotel at over $1 million.

Elsewhere, hotel executives who had worked hard to drum up trade on the back of Lebanon’s tourist revival were not impressed. It had become almost personal. “I just got back from Egypt, where I had worked hard to shore up business guests, and I was happy because all these groups had booked with us,” seethed Nada Ghawi, spokeswoman for the InterContinental Le Vendôme, which had an 80% occupancy rate prior to the incident, commented. “Now they have all cancelled. This whole thing makes me so angry.”

The majority of the hotels are likely to have to bear the brunt of the costs themselves because they have not taken the premium insurance policy that protects businesses against acts of political violence and terrorism.

“To my knowledge, the only hotel that is covered is the Phoenicia, which is protected by InterContinental’s global coverage,” said Fateh Bekdache, general manager at Arope Insurance. “It is very rare for hotels to have [this level of insurance] in Lebanon – the policy is too expensive for them, especially in such a tight market.”

Others pinned their hopes on assistance from the government. “Our hotel needs to be entirely renovated, just like it had to be after the civil war,” said Joseph Hanna, the auditor of the Beverly Residence Hotel. “Our insurance has told us it doesn’t cover such incidents. The government should consider us victims, as we were after the war, and reimburse us, so we can restart our businesses again.”

In the meantime, staff members were being put on annual leave. “Security, housekeeping, and engineering are being kept, but the rest of staff has been put on annual leave,” said the hotel manager of the Monroe Hotel. “Keeping them here would only depress them.”

Equally affected were the shops and restaurants surrounding site of the explosion. Within hours of the blast, Rafik Khazen, the owner representative of Awtar restaurant on the ground floor of the Monroe Hotel, was already overseeing the clearing up of his heavily damaged venue. “All the windows are broken, the ceiling is damaged, as is our kitchen,” he said, standing amid the debris. “We’re looking at a minimum of $20,000 to $25,000 in damages here. It makes me feel bad when I see this, because we are a popular restaurant. Now we won’t be opening for weeks.”

Down the road, the employees of the Bassoul Heneine car dealership were also hard at work, with the firm intention of re-opening fast. “We’re working every day from eight to eight, Monday through Sunday to rebuild the shop so we can re-open as soon as possible,” said Henri Nawar, a sales manager. “The store was badly damaged: all the windows were broken, the ceiling, the lighting, the fixtures, the phone lines. The cars were also scratched up and had windows broken.”

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Lifestyle

Wine Advertorial

by Michael Karam
written by Michael Karam

Welcome to the first ever Vintage Executive Wine Club. Every month it will be my pleasure to review five wines supplied by Vintage, Lebanon’s leading vintners, from their outlet in Saifi Village. From the comfort of the pages of EXECUTIVE, we will take on a journey of wine, grapes, famous (and not so famous) winemaking families and regions, explain what makes them so special and how you can get the best out of them. 

The wines are selected by the very capable Wadih Riachi, manager of Vintage, whose knowledge of the wines in his shop makes buying and visiting the Vintage shop an education in itself.

This month Wadih has selected three reds, all with a strong Cabernet Sauvignon presence: Michel Lynch 2000 (Bordeaux), Torres Gran Coronas Reserva 2000 (Penèdes, Spain) and one from Lebanon’s very own Domaine Wardy (Lebanon).

Cabernet Sauvignon is probably the most famous red grape on the planet. Typically giving aromas and flavours of blackcurrants, peppers, chocolate and spices, it is planted almost everywhere in the wine growing world, but is most associated with the wines of Bordeaux, in which it is almost universally present and where it has thrived since the 18th century.

The Michel Lynch 2000 is an elegant blend of Cabernet Sauvignon, Merlot and Cabernet Franc (two other hugely important Bordeaux grapes), in the best tradition of the Medoc region of Bordeaux, where the lynch family has been making wine since the 17th century. The wine is firm in the mouth with supple tannins and gives notes of berries and sweet spices. I found it needed at least an hour or two to “open up,” so decanting is advised if one wants to appreciate the understated elegance of this wine.

The Torres family of Penèdes in North-East Spain is one of the powerhouses of the modern wine sector and the Gran Coronas is one of their most consistent performers, made as it is with 85% cabernet and backed up with 15% local Tempranillo, Spain’s most famous grape, giving it a dryer, measured feel in the mouth, while losing none of the Cabernet’s traditional characteristics.

In Lebanon, the Cabernet Sauvignon has replaced the Cinsault as the backbone of the modern Lebanese wine industry. Domaine Wardy’s monovarietal is a fine example of how the grape has taken in the Bekaa With its intense fruits, the wine is big in the mouth and keen to express the formidable terroir from when it came. Salim Wardy has done a fine job with this and his two other ‘mono’ blends and above all represent excellent value.   

For the whites, Wadih has gone for Chardonnays, one from the historic Burgundy vineyards of Joseph Drouhin in Beune and the other from the mighty Frescobaldi holdings in Tuscany in central Italy. The Chardonnay may have become a cliché among today’s white wine drinkers, but this should not detract from its popularity, versatility, consistency and quality. It is a grape that ranks among the most important and widely planted on Earth and, in France, makes some of the finest Burgundies and Champagnes.

Beune, in the Côte d’Or region of Burgundy, is home to Joseph Drouhin, whose ancestors have been producing wines for centuries. The Macon-Villages 2002, comes from an AC (appellation contrôlée) of the same name and is known for its Chardonnay. It is a medium bodied white, fruity with hints of flowers and like most of the whites from the region is drinking well now.

Frescobaldi is one of the most powerful vineyard-owning families in Tuscany, of which Pomino, situated at 650 meters, is a DOGC (denominazione din original controllata e garantita) the highest category of Italian wines. It is no wonder then that the Fescobaldi’s Pomino Bianco 2002, a blend of Chardonnay and Pinot Blanc is one of its best whites. I concur with Wadih: it is indeed long and elegant and bristling with Tuscan spirit. On the nose it is awash with flowers, peaches and pears. It is a wine to savor and is also drinking very well now. 

Till next month, enjoy!

Michael Karam’s Wines of Lebanon will be published this spring by Saqi Books of London. He is a contributor to the Award winning Wine Report and Jancis Robinson’s Oxford Wine Companion.

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Money Matters

by Executive Contributor
written by Executive Contributor

Economy and Finance

Riyadh Bank Posts 26% Growth in 2004 Profits

Riyadh Bank, the second largest Saudi bank, released its 2004 figures featuring a growth of 26% in net income to $533.3 million compared to $424.5 million in 2003. The bank attributed this rise in profits primarily to its increase in capital reaching $1.3 billion through distributing one free share for every four shares owned and $4.8 of annual profits per share. It is to note that Riyadh bank, 29%-owned by the government, has witnessed since 1997 a fast growth in profits due to the strategies and plans undertaken by the bank to develop its services and adapt to all the economic developments on both national and international scales.

NBK Records Net Profits of $515m in 2004

The National Bank of Kuwait (NBK), the country’s largest bank and the top-rated Arab bank, posted net profits of $515 million during 2004, compared to $412 million in 2003. NBK’s CEO explained that the growth in profits was achieved amid a strategy of diversification in the sources of income and prudent risk management besides taking advantage of growth opportunities presented by an improving operating environment. The bank’s total assets reached $19 billion at end 2004, while shareholders’ equity amounted to $2 billion. In turn, NBK’s return on equity (RoE) and return on assets (RoA) stood at 29.9% and 2.73% respectively, among the highest worldwide.

Country Profile: UAE

International rating agency, Moody’s Investors Service, upgraded the United Arab Emirates’ sovereign long-term foreign currency debt ratings to A1. The agency also raised the sovereign’s short-term foreign currency ceiling one grade to Prime-1 and currency issuer rating to A1 from A2. The outlook on these revised ratings was given as stable. The agency cited that the main reason behind this upgrade was UAE’s stellar economic performance in recent years in addition to the continued domestic political stability. Moody’s mentioned in its positive commentary that nominal GDP growth has averaged 11% since 1999 and consumer price inflation has remained very low. To a large extent, economic expansion has been driven by the oil sector, which generates about one third of GDP. However, the non-oil sector has also registered strong growth. The agency concluded that both the fiscal and current account positions remain in significant surplus.

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Special Report

Q&A: Eli Khoury

by Executive Contributor
written by Executive Contributor

The CEO of Saatchi & Saatchi Levant discusses the political and economic factors impeding the growth of the advertising industry in Lebanon.

Economic recession, political instability and the advertising industry do not make for happy bedfellows. A $100 million industry during the war, the advertising business has steadily shrunk in subsequent years, despite all indicators pointing to the potential for growth. As the best and the brightest among Lebanon’s young advertising professionals turn their eyes toward the Gulf, Eli Khoury maintains that Beirut still boasts more assets than its competitor to the East. Executive finds out what the long-standing head of Saatchi & Saatchi Levant views as his industry’s main challenges and some of the remedies he recommends for the ailing patient.

What do you see as the key challenges facing the advertising industry both at the local and at the regional level?

The future of the industry both regionally and locally is linked to politics. In Lebanon, the current political situation is having a major impact on the industry’s development. It already has had an impact, and it will have even more of an impact should the situation deteriorate. If the situation changes, it ought to have a positive effect. And the same goes for the Middle East – the clash of civilizations, the war in Iraq, the Israeli-Palestinian conflict, terrorism… all of this has direct implications on the business. So how the industry will fare in 2005 and beyond really depends on how the political situation evolves.

In what way has politics in Lebanon affected the business?

Firstly, let’s look at the state of the media in this country. A healthy media is a media that works for its buck. The others will survive regardless, because they are politically funded. Of course we all know who is subsidizing this. Because this industry thrives on competition and freedom of speech, a media, which is in the pockets of the politicians, is not beneficial to it. Nor is the audio-visual law, which was passed. The whole purpose of introducing that law was to prevent regional media from moving to Beirut. And of course there was the whole MTV incident. So these are the issues on the media side. On the advertisers and audience side, i.e. our clients and our clients’ clients, there is the problem of poor purchasing power, which makes advertisers stingier and exclusively sales oriented. To give you an idea, the size of the industry during the war was around $100 million.

And now?

For the year 2004, I doubt the total revenue of the industry was worth much more than $60 to $65 million. And this despite the fact that post-war economic predictions estimated the advertising industry’s potential at up to $300 million. So the impact the political situation has had on the economy has directly affected our industry – advertising is after all frequently considered a luxury, which is the first to go during cut-backs. And the manner in which the politicians have minimized all competition within the media in the country, has had an impact on us. As a result, both the media and the advertising industries are suffering.

Is Dubai then becoming a more attractive location for the advertising industry in the region?

Dubai is trying to take our place, but if you look at its human resources, it’s purely based on expatriates, so this endeavor is economically unfeasible.

Why would an expatriate haven not result in an area bustling with creativity that could compete with Beirut?

Creativity has soul, it comes from within a society. You cannot import different talents and put them in a basket and tell them to be creative. Furthermore, from a financial perspective, there are significant differences between Beirut and Dubai. Having spoken to TV stations that operate in both cities, I have discovered that the difference in operating costs between the two is tremendous. There is a difference between having to import ten talents from abroad and pay them hefty, and having to import your entire staff, down to the person who makes coffee. In Beirut, the basic HR infrastructure is already there, and then you can get fancy when it comes to above-the-line positions. In Dubai, you need to hire your entire staff from abroad and provide them with a house, a car, etc. For an operation such as my own, the difference in operating costs would be at least 180-200%.

Could you not justify the higher expenditures required to set up shop in Dubai with the greater market size the Gulf has to offer?

Dubai is the center for a lot of the business in the Gulf, which allows it to be somewhat of a regional player. But if you look at the advertising industry in Dubai today, it is merely composed of sales ads. I don’t know what the size of this business is, but I doubt it is enough to sustain an entire industry. There is no creativity involved, so the revenue generated will be minimal. The industry there gets by because it is also servicing Saudi Arabia and surrounding Gulf countries, which Beirut does as well. There isn’t much Dubai can offer that Beirut cannot. The difference lies in the fact that in Dubai, they don’t have the political problems that we have here, and there are more economic incentives offered. In Lebanon, that local market is tired.

What is the share of local clients vs. international clients in Saatchi’s Lebanon portfolio?

It terms of volume, local business represents barely 30% of my portfolio. And seeing how money is scarce here, you usually can’t get fancy with many of these projects. The clients are more interested in pushing the product rather than building the brand, at the cost of creativity. There are no big expectations – people just want to address their urgent needs. What worries me with this trend is the impact it has on the new, young ambitious talents that are entering the industry. At Saatchi we try to push for creativity as much as possible, even at our own expense sometimes, regardless of what the client is willing to pay, partly to give these people the opportunity to use their talent to the fullest.  

Is the brain drain among the young Lebanese advertising professionals significant?

Yes it is. They are leaving Lebanon for Dubai, where the pay is better, and there are less hassles. It may not be fulfilling professionally, as the requirements there are low, but the pay makes up for that. Yet I don’t mind this so much, as long as we keep the manufacturing brains. I can export HR, as long as I produce here. The challenge I face in my company is that in order to keep the brains here in Beirut, I need to pay them the same salaries as I would in Dubai. Otherwise I end up with a team of graduates, and one senior manager. This incidentally, is what you will find in a lot of advertising agencies in Beirut. Middle and senior management has been wiped out. In Saatchi, we prefer having more chiefs than Indians. But this requires paying high salaries.

Has branding awareness among Lebanese companies improved?

Let’s face it – they don’t have time for such a luxury. They need to focus on the bottom line, on breaking even. The economic times are not propitious to educate people about branding. Some companies have the money to delve into it, but you also need to create a momentum. If the market is about this, everybody wants to be a part of it. We can’t blame the Lebanese companies – they are probably more ready for this and more apt at it than most in the region, but there are other concerns that need to take priority for now.

There is a tendency here to view advertising as an expense rather than an investment. Is this a concern for you?

To consider the cost of advertising as either a CAPEX (capital expenditure) or an OPEX (operational expenditure) depends on what you are advertising and the nature of the advertising job. Any brand investment is a CAPEX. Any sales investment is an OPEX. Most people don’t want to invest right now – they want to keep advertising within operating expenses, and minimal operating expenses at that. Above the line, mass media, brand awareness campaign is a CAPEX that people can’t give priority to at present.

So it is a question of economic necessity rather than a question of understanding on the part of the advertisers?

It is in part a question of understanding, but it is important to note that you will only see a difference once the accounting principles here change. Of course I will benefit from advertisers understanding that what I do for them is an investment. But the real change will come the day advertisers can, in accounting terms, present their balance sheets to the authorities and say that advertising is part of their capital expenditures. This is the trend in the West, especially in the United States. So clients here need to understand advertising as an investment, but the government and other organizations involved, such as the trade lobby groups, need to create a new accounting principle for the country. Therefore, addressing this issue has a conceptual facet to it, as well as an economic and a legislative one.

The advertising industry is characterized by global consolidation. Recently 5the regional tv industry was impacted by the rapprochement of Choueiry Group and Ara Group How do you view the impact of this development on the industry?

In absolute terms one should be against it, but when examining the situation one cannot help but think that it will be beneficial to the industry for now. It will help stabilize it, and establish some rules of competition. Having this market be dominated by a semi-monopoly provides for a good balance until it picks up.

Do you expect business for the advertising industry to be picking up?

Only if and when the political system changes in this country will the advertising industry grow. Otherwise, you are facing further deterioration. The primary engine of economic growth according to George Soros is mood, it is trust. And I really believe in this. If you feel confident in the future, then you will operate well.

You talk a lot about the need for political and economic change, but the advertising industry in Lebanon has been marred by internal conflicts and feuds. Is it fair to place the entire blame for the current situation of the industry on the political system?

Yes it is. The problems you have in this sector are identical to those you have in any other sector – look at the banking industry, the publishing industry…. It’s a plague that has hit all of our houses. Why? Because there is less money to go around, and therefore competition gets nasty. It’s question of survival. The wrongdoings that have marred the advertising industry are a result of a shrinking market. Granted, the ruthlessness may be accentuated when it comes to the advertising industry here in Lebanon, because we are more visible. But at the end of the day this problem has less to do with the industry than with the country.

Are the Lebanese chapter of the International Advertising Association (IAA) and the local industry syndicate making any difference for the industry?

They are nice social clubs. If you are looking to meet new people, or even a husband or a wife, they would be good places to go to. But they have neither made an impact for the industry here, nor have they shown any willingness to do so.

What has come of the project to establish a body to monitor and establish accurate data on the advertising industry in Lebanon?

We would love to get some accurate figures on the industry, but we don’t seem to be any nearer to getting these than we have been in the past. This is one of the reasons why I labeled local syndicate and the IAA as social clubs. We have a lot of dreams: we dream of an advertising ethics code, we dream of data that provides us with the information we require on the market, we dream of having published figures. Will it happen? Frankly, I don’t know. I won’t be getting involved in this until I see a change in the political system.

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Special Report

Q&A: Eli Khoury

by Executive Editors
written by Executive Editors

Economic recession, political instability and the advertising industry do not make for happy bedfellows. A $100 million industry during the war, the advertising business has steadily shrunk in subsequent years, despite all indicators pointing to the potential for growth. As the best and the brightest among Lebanon’s young advertising professionals turn their eyes toward the Gulf, Eli Khoury maintains that Beirut still boasts more assets than its competitor to the East. Executive finds out what the long-standing head of Saatchi & Saatchi Levant views as his industry’s main challenges and some of the remedies he recommends for the ailing patient.

What do you see as the key challenges facing the advertising industry both at the local and at the regional level?

The future of the industry both regionally and locally is linked to politics. In Lebanon, the current political situation is having a major impact on the industry’s development. It already has had an impact, and it will have even more of an impact should the situation deteriorate. If the situation changes, it ought to have a positive effect. And the same goes for the Middle East – the clash of civilizations, the war in Iraq, the Israeli-Palestinian conflict, terrorism… all of this has direct implications on the business. So how the industry will fare in 2005 and beyond really depends on how the political situation evolves.

In what way has politics in Lebanon affected the business?

Firstly, let’s look at the state of the media in this country. A healthy media is a media that works for its buck. The others will survive regardless, because they are politically funded. Of course we all know who is subsidizing this. Because this industry thrives on competition and freedom of speech, a media, which is in the pockets of the politicians, is not beneficial to it. Nor is the audio-visual law, which was passed. The whole purpose of introducing that law was to prevent regional media from moving to Beirut. And of course there was the whole MTV incident. So these are the issues on the media side. On the advertisers and audience side, i.e. our clients and our clients’ clients, there is the problem of poor purchasing power, which makes advertisers stingier and exclusively sales oriented. To give you an idea, the size of the industry during the war was around $100 million.

And now?

For the year 2004, I doubt the total revenue of the industry was worth much more than $60 to $65 million. And this despite the fact that post-war economic predictions estimated the advertising industry’s potential at up to $300 million. So the impact the political situation has had on the economy has directly affected our industry – advertising is after all frequently considered a luxury, which is the first to go during cut-backs. And the manner in which the politicians have minimized all competition within the media in the country, has had an impact on us. As a result, both the media and the advertising industries are suffering.

Is Dubai then becoming a more attractive location for the advertising industry in the region?

Dubai is trying to take our place, but if you look at its human resources, it’s purely based on expatriates, so this endeavor is economically unfeasible.

Why would an expatriate haven not result in an area bustling with creativity that could compete with Beirut?

Creativity has soul, it comes from within a society. You cannot import different talents and put them in a basket and tell them to be creative. Furthermore, from a financial perspective, there are significant differences between Beirut and Dubai. Having spoken to TV stations that operate in both cities, I have discovered that the difference in operating costs between the two is tremendous. There is a difference between having to import ten talents from abroad and pay them hefty, and having to import your entire staff, down to the person who makes coffee. In Beirut, the basic HR infrastructure is already there, and then you can get fancy when it comes to above-the-line positions. In Dubai, you need to hire your entire staff from abroad and provide them with a house, a car, etc. For an operation such as my own, the difference in operating costs would be at least 180-200%.

Could you not justify the higher expenditures required to set up shop in Dubai with the greater market size the Gulf has to offer?

Dubai is the center for a lot of the business in the Gulf, which allows it to be somewhat of a regional player. But if you look at the advertising industry in Dubai today, it is merely composed of sales ads. I don’t know what the size of this business is, but I doubt it is enough to sustain an entire industry. There is no creativity involved, so the revenue generated will be minimal. The industry there gets by because it is also servicing Saudi Arabia and surrounding Gulf countries, which Beirut does as well. There isn’t much Dubai can offer that Beirut cannot. The difference lies in the fact that in Dubai, they don’t have the political problems that we have here, and there are more economic incentives offered. In Lebanon, that local market is tired.

What is the share of local clients vs. international clients in Saatchi’s Lebanon portfolio?

It terms of volume, local business represents barely 30% of my portfolio. And seeing how money is scarce here, you usually can’t get fancy with many of these projects. The clients are more interested in pushing the product rather than building the brand, at the cost of creativity. There are no big expectations – people just want to address their urgent needs. What worries me with this trend is the impact it has on the new, young ambitious talents that are entering the industry. At Saatchi we try to push for creativity as much as possible, even at our own expense sometimes, regardless of what the client is willing to pay, partly to give these people the opportunity to use their talent to the fullest.  

Is the brain drain among the young Lebanese advertising professionals significant?

Yes it is. They are leaving Lebanon for Dubai, where the pay is better, and there are less hassles. It may not be fulfilling professionally, as the requirements there are low, but the pay makes up for that. Yet I don’t mind this so much, as long as we keep the manufacturing brains. I can export HR, as long as I produce here. The challenge I face in my company is that in order to keep the brains here in Beirut, I need to pay them the same salaries as I would in Dubai. Otherwise I end up with a team of graduates, and one senior manager. This incidentally, is what you will find in a lot of advertising agencies in Beirut. Middle and senior management has been wiped out. In Saatchi, we prefer having more chiefs than Indians. But this requires paying high salaries.

Has branding awareness among Lebanese companies improved?

Let’s face it – they don’t have time for such a luxury. They need to focus on the bottom line, on breaking even. The economic times are not propitious to educate people about branding. Some companies have the money to delve into it, but you also need to create a momentum. If the market is about this, everybody wants to be a part of it. We can’t blame the Lebanese companies – they are probably more ready for this and more apt at it than most in the region, but there are other concerns that need to take priority for now.

There is a tendency here to view advertising as an expense rather than an investment. Is this a concern for you?

To consider the cost of advertising as either a CAPEX (capital expenditure) or an OPEX (operational expenditure) depends on what you are advertising and the nature of the advertising job. Any brand investment is a CAPEX. Any sales investment is an OPEX. Most people don’t want to invest right now – they want to keep advertising within operating expenses, and minimal operating expenses at that. Above the line, mass media, brand awareness campaign is a CAPEX that people can’t give priority to at present.

So it is a question of economic necessity rather than a question of understanding on the part of the advertisers?

It is in part a question of understanding, but it is important to note that you will only see a difference once the accounting principles here change. Of course I will benefit from advertisers understanding that what I do for them is an investment. But the real change will come the day advertisers can, in accounting terms, present their balance sheets to the authorities and say that advertising is part of their capital expenditures. This is the trend in the West, especially in the United States. So clients here need to understand advertising as an investment, but the government and other organizations involved, such as the trade lobby groups, need to create a new accounting principle for the country. Therefore, addressing this issue has a conceptual facet to it, as well as an economic and a legislative one.

The advertising industry is characterized by global consolidation. Recently 5the regional tv industry was impacted by the rapprochement of Choueiry Group and Ara Group How do you view the impact of this development on the industry?

In absolute terms one should be against it, but when examining the situation one cannot help but think that it will be beneficial to the industry for now. It will help stabilize it, and establish some rules of competition. Having this market be dominated by a semi-monopoly provides for a good balance until it picks up.

Do you expect business for the advertising industry to be picking up?

Only if and when the political system changes in this country will the advertising industry grow. Otherwise, you are facing further deterioration. The primary engine of economic growth according to George Soros is mood, it is trust. And I really believe in this. If you feel confident in the future, then you will operate well.

You talk a lot about the need for political and economic change, but the advertising industry in Lebanon has been marred by internal conflicts and feuds. Is it fair to place the entire blame for the current situation of the industry on the political system?

Yes it is. The problems you have in this sector are identical to those you have in any other sector – look at the banking industry, the publishing industry…. It’s a plague that has hit all of our houses. Why? Because there is less money to go around, and therefore competition gets nasty. It’s question of survival. The wrongdoings that have marred the advertising industry are a result of a shrinking market. Granted, the ruthlessness may be accentuated when it comes to the advertising industry here in Lebanon, because we are more visible. But at the end of the day this problem has less to do with the industry than with the country.

Are the Lebanese chapter of the International Advertising Association (IAA) and the local industry syndicate making any difference for the industry?

They are nice social clubs. If you are looking to meet new people, or even a husband or a wife, they would be good places to go to. But they have neither made an impact for the industry here, nor have they shown any willingness to do so.

What has come of the project to establish a body to monitor and establish accurate data on the advertising industry in Lebanon?

We would love to get some accurate figures on the industry, but we don’t seem to be any nearer to getting these than we have been in the past. This is one of the reasons why I labeled local syndicate and the IAA as social clubs. We have a lot of dreams: we dream of an advertising ethics code, we dream of data that provides us with the information we require on the market, we dream of having published figures. Will it happen? Frankly, I don’t know. I won’t be getting involved in this until I see a change in the political system.

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Special Report

Reality TV hits the jackpot

by Marianne Stigset
written by Marianne Stigset

Love it or hate it, reality TV is here to stay. Arab media has jumped on the bandwagon that has revolutionized the global television industry, and is sweeping the advertising, telecom and consumer industries along in its wake. Despite misgivings about the suitability of applying Western concepts, such as Star Academy, to a region characterized by deep conservative and religious tendencies, the shows have succeeded in attracting record audience ratings from the word go. As it enters its third year on Arab TV screens, the industry is charging full steam ahead, developing new concepts, increasing production budgets and cashing in on multiple revenue streams. But will the new phenomenon of reality TV survive the pressure of constantly reinventing itself to maintain audience interest, whilst keeping conservative critics at bay?

A star is born

A long-standing feature on Western television screens, reality TV in the modern sense of the concept was first introduced in the United States in 1973 with the PBS series An American Family. Twenty years on, the genre gained mainstream popularity through MTV’s Real World, generating a slew of variations on the theme: reality game shows, reality dating shows, reality celebrity shows etc. Reality TV rapidly found a niche, catering to people’s attraction to voyeurism, the cult of celebrity, the desire for a new form of entertainment and the ever-growing opportunities for interactivity with audiences offered by modern communication technology.

By spring of 2004, 12 of the top 20 shows among 18 to 49 year olds that aired on American broadcast networks were unscripted, according to the LA Times. With viewing figures for shows such as The Apprentice, averaging close to 20 million, advertisers were no longer in two minds about associating themselves with the controversial programs. The shows are returning season after season and franchises are being created, giving reality TV both acceptance and predictability – two mouthwatering characteristics for advertisers. For CBS’ Survivor, 30 second advertising slots now go for over $400,000, putting it in the mega-league of top grossing programs.

From Real World to Miss Lebanon 2003

By spring of 2003, reality TV hit the Middle East. Future TV bought the license for Pop Idol from the British company Fremantle Media, turning it into Super Star, LBC launched its own concept: a reality TV beauty pageant, in the form of Miss Lebanon 2003. Both shows were instant hits, drawing viewers by the millions. For the finale of the first Super Star, 4.8 million viewers throughout the Arab world voted for their favorite contestant.

“In a rare moment in the history of the Arab media, a sense of influence and involvement has been given to the people, where their votes determine the outcome of the show,” Abed Al Rahman Pharaon, an analyst with Arab Advisors Media, commented in a report on the program. “Consequently the popularity of this show has been amplified, and viewer numbers has augmented tremendously.”

The success bred followers: franchises for Star Academy and Survivor were soon bought up by LBCI, the former going on to surpass the popularity of the network’s pioneering reality program.

“People in the Arab world love singing and dancing, which has made Star Academy the most popular show by far,” explained Ronny Jazzar, manager of AVM, which handles advertising for LBCI in Lebanon, and the producer of Miss Lebanon 2003.

The finale of Star Academy in February 2004 was watched by 48.8% of the Lebanese television audience.

“It’s been successful in part because of its social revolution aspect: boys and girls living under the same roof is very new by Arab standards – it gives it an image of coolness and tolerance,” said Naji Baz, manager of Star System, which handles the post-show careers of the Star Academy contestants and the sales of accessories related to the show. “Furthermore, for a show like Star Academy, every country has its own national champion, so you get the ‘international soccer effect,’ with everyone watching to cheer for their country’s representative.”

The revolutionary aspect of the shows has been significantly dampened so as to suit the social codes of 22 Arab countries. In Star Academy, men and women are lodged in separate areas, with segregated bedrooms and bathrooms. Alcohol, cigarettes and public displays of affection are out of bounds, and proper attire is de rigueur. It’s still a far cry from the steamy jacuzzi scenes and late-night bedroom escapades familiar to Western television audiences.

Arab producers are also coming up with their own concepts, which are being sold back to the West. The upcoming CEO on the Infinity channel, which pitches 10 budding entrepreneurs against each other in a bid to win $250,000 to fund their own business venture, has already sold its franchise to Indian producers, and is in negotiations with producers in Australia and the United States, according to executive producer Ziad Batal from Media Group.

As Batal sees it, reality shows have now become a fixed feature on the Arab scene. “Everybody is getting on the bandwagon, because these shows have proven themselves,” he said. “They are not a fad anymore, they have become the norm.”

High production costs

Part of the initial appeal of reality TV for Western television networks was the low production costs entailed. Recruiting a group of odinary people to live together under camera surveillance, as in Big Brother, was a low budget operation. Yet with growing competition and increasing airtime share, the production costs of the shows have rapidly risen.

“Production costs of reality shows might have been cheaper than scripted shows initially, since you don’t need to pay actors for example, but they are rapidly becoming expensive,” said Batal. “The CEO show is costing approximately $100,000 per episode – we’re incurring a lot of costs through all the activities we are getting the participants to partake in, but we are not skimping on costs – we’ll pay what we need to in order to produce quality TV.”

In the case of CEO, the producers of the show, Media Group, and the network, are splitting the costs. For LBC and Future TV, production is generally made in-house, and the costs are carried by the networks. Star Academy and Survivor cost between 10 to 15 times more than LBC’s other programs. Super Star is incurring a similar dent in Future TV’s budget.

“Between the franchise license, the royalties, the huge production costs involved in casting all over the Arab world, flying all the contestants in and hosting them for five months … we are looking at over $2 million in total production costs for the 19 episodes of Super Star,” said Claude Sabbagha, marketing manager for FMS, Future TV’s advertising agent.

Yet surpassing the increasing production costs are the growing revenues. Advertising alone covers production costs in their entirety. “We are really making a lot in advertising revenues – they exceed the production costs of $2 million by far, we are talking revenues in the multimillion dollar range here,” said Sabbagha, who was not alone in his reluctance to divulge total revenues.

An advertising magnet

Success on a regional scale, continuing hype and a capacity to target the demographic category of choice for many brands has advertisers signing up in droves. “Star Academy has been a success because it is reaching the younger generation,” said Jazzar. “It’s the first time Arab TV successfully targets the 15 to 25 age bracket, which is not reached easily.”

“All the major brands are willing to pay for spot advertising on these shows,” said a media manager from an international advertising agency in Beirut. “They follow the shows’ ratings and see that they do well.” Rising alongside audience ratings are the prices of the advertising slots for the shows. Although not in the same league as US rates, 30 second ad slots for Arab reality TV run from $7,000 to up to $20,000.

“Advertisers are now willing to pay five to 10 times more than what they did initially,” said Batal.

Yet the real big spenders come in the form of sponsors, be they exclusive or co-sponsors. Exclusive sponsorships with the top international shows come in the form of regional package deals and remain the preserve of major international brands.

Lipton was the exclusive sponsor for Super Star during the first two seasons of the show, a contract Ford has now taken over. Star Academy was initially sponsored by Nescafe, and now has Pepsi as its sole sponsor.

“Sponsoring gets really expensive, and as it entails regional deals, they are only really worthwhile for major brands that are sold internationally,” said Karim Mansour, account manager for Grey Worlwide, which represents Pampa, one of Miss Lebanon 2003’s main sponsors. “For a product such as Pampa, entering a multi-million dollar deal to sponsor a show such as Star Academy is not worth doing, seeing how our product can’t be found in Saudi Arabia, Yemen and some other Arab countries. For a product like Pepsi, which has the biggest market share of carbonated drinks in the region, it definitely is.”

Both the television networks and the brands remain tightlipped about the size of the sponsorship deals, yet industry insiders evaluate the Lipton deal at $1 million for the first season and $5 million for the second season of Super Star. The Pepsi deal has been estimated at $4 million. Other products choose to become co-sponsors, at a lesser price, but still benefiting from significant exposure.

“You get a lot of mileage out of sponsoring these programs, a lot of exposure” Mansour explained. “The logo of your product is featured at the end of every promotional spot for the show, you get regular ad spots during the program, with certain deals you are also offered airtime on other shows and as a main sponsor, your product will be placed in the show, so on Miss Lebanon, the girls were seen drinking Pampa.”

Product placement – a long standing feature in Western advertising strategies – is gaining ground through the shows. Media Group is now opening a separate department to handle such deals for its shows.

Additional revenue streams

A large part of the appeal of reality TV shows is the interactivity with the audience. Encouraged to text in comments and vote for contestants by phone or over the internet, viewers become an inherent part of such shows and are given a sense of empowerment.

The Arab Advisors Group reported that during the first season of Super Star, “the two finalists were from Syria and Jordan and the GSM operators in both countries turned it into a sort of national duty to vote for the compatriot. According to the (Future) TV station, 80% of the votes came from Jordan, Syria, and Lebanon,” the countries from which the semi finalists came from. Companies such as Intercom Media and Cellcast are brought in as mediators for the networks to negotiate deals and shares with mobile phone providers throughout the region.

Although representing a smaller share of the total revenue – according to Sabbagh, 75% of the revenues for Super Star come from advertising, and 25% from phone calls – telecommunication could reveal itself to have significant future revenue potential

“Phone calls and text messages represent a huge revenue potential,” said Batal. “Both Star Academy and Super Star have generated millions in SMS revenues.”

Following the season finale of the first season of Super Star, the Arab Advisors Group wrote that “the true super star may indeed be the mobile operators that grossed, along with Future TV and the VAS service provider, over $4 million in voting revenues alone.”

Another revenue generating industry on the sidelines of the shows is the sale of accessories. The success enjoyed by the shows have turned them into internationally renowned brands, thereby making it worthwhile for the networks to produce accessories related to the program or team up with other consumer products. “We’ll be launching a huge merchandizing campaign, teaming up with renowned brands such as Mont Blanc to make CEO pens, CEO diaries, products targeting the niche we have found with this program, which is the corporate world,” said Batal.

The risks ahead

Although tremendously successful from both an audience and a revenue perspective, the reality TV industry in the Middle East is not without its risks. The shows are kept in check by the conservative forces in the region, which can go as far as ensuring that a show is cancelled. MBC’s Arab version of the popular Big Brother show, casting 12 participants sharing an apartment on Bahrain’s Amway Islands, caused such a public outcry that the show was pulled off the air less than two weeks after its premiere.

For some advertisers, such controversy has served as a disincentive to attach their product to the shows. In enumerating the reasons why Nescafe chose not to renew its sponsorship deal with Star Academy, Fida Yared, media planner at Media Insight, which handles the Nescafe account, said: “Regionally, the program did not go down so well in certain areas. People reacted to the idea of boys and girls living together in the same house, which is one reason why Nescafe chose not to continue sponsoring Star Academy.”

Boycotts of the show have also affected the telecommunication side of the industry, most recently in January 2005, when Saudi Arabia’s main mobile phone operator, state owned Saudi Telecommunications Company, announced it was blocking its 9.5 million customers from texting their votes during the second season of Star Academy, on the grounds that the show did not “match the values of the Saudi culture.”

Remaining innovative whilst respecting local culture and religious values will be the challenge ahead for the reality TV industry. Although off on a good start, the networks have no time to rest on their laurels. “By their third season, the novelty of these shows wears off – generally, you are not going to get the same viewers watching season after season,” warned Batal.

Yared concurred. “The main reason why we decided not to renew our sponsorship of Star Academy was because we didn’t expect it to be as big of a hit again,” she said.

In the US, the reality show graveyard is steadily filling up as viewer ratings fail to match expectations, prompting CNN to predict that the heydays of the genre are coming to an end. A multi-million dollar industry that has taken the Arab world by storm, reality TV still needs to prove it has what it takes to be a ‘survivor’.

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