Real Estate

Student housing: A booming market or a bad investment?

by Marianne Mirabeau
written by Marianne Mirabeau

With an increasing number of foreign and local students in Lebanon, real estate developers have tapped into a new market. Private student dorms, hostels, hotels and furnished apartments ranging from the five-star to the budget are opening on an almost monthly basis, ready to cater to the ever-widening range of needs and demands of the student population. Yet real estate developers are divided as to the commercial viability of such projects, saddled as they are with low returns and high wear and tear. There is also the specter of an increase in supply of on-campus accommodation. But for the time being at least, many students are opting for the off campus option.

Taking their business elsewhere

The need for privacy tops the list of requirements for many students, in addition to the desire for space and cleanliness. With some rent prices off campus comparable to those of the student dorms, several students are choosing to hit the private housing market. “I saw the dorms at LAU, and it wasn’t pretty,” Natasha Kaskas, a 20 year old graphic design student at LAU, commented. “Nor were the AUB dorms. They’re not clean, and there are too many girls for one bathroom. It’s just not sanitary.” Kaskas opted for a private student dorm – one of the many that have been flourishing around the AUB and LAU area. University Residence has been her home for the past three years. At $375 a month for a shared room – less than LAU’s student dorm rents of $400 a month – Kaskas gets a bathroom to share with her roommate, cable, internet access, hot water and electricity 24/7, free cleaning and laundry.

“I looked everywhere, and there were no good places to live, except for here,” said Kaskas. “It’s cleaner and more private. You only have to share your bathroom with one roommate, but you also have the choice of living alone. There are just so many facilities here. I’m all set.”

The all women’s private dorm has experienced a steady increase in applications since it opened over three years ago, most notably from foreign students. “Our main target is foreigners – Saudis, Kuwaitis, Jordanians, Syrians,” building manager Abir Alameddine explained. “The number of applicants have more than doubled over the course of the last two years. Right now, the most represented nationalities in the dorm are Kuwaitis and Saudis.”

In addition to the free services – which appeal to the students – the dorm has successfully been able to gain the confidence of parents through its strictly enforced no males and no alcohol rule, as well as its 24-hour security service and the option of an imposed curfew on the resident. As a result, some parents are willing to pay up to $630 a month for a suite for their daughters in the dorm.

This high-end of the market is one that developer Ramzi Tarcha, owner of Koura Residence in the north of Lebanon by Balamand University, has successfully exploited.

At rates ranging from $210 to $290 a month – high by local standards – Tarcha offers luxury accommodations replete with a restaurant, gymnasium, pool room, in addition to standard services such as internet, cable, laundry and cleaning. “We studied the market for some time and gathered that there was a demand for it,” he explained. “We decided to go for a luxurious place, so as to differentiate ourselves from other student accommodations, and basically give students a five-star hotel life-style. Also, by deciding to locate up north close to Balamand University, we got rid of most of the competition – Beirut being completely overcrowded – and were able to buy land at a much cheaper price.”

Despite the steep rent, Tarcha said many residents take the double rooms for themselves, willingly paying twice the price for their rooms. “The residence can accommodate 100 people, but a lot of students take a double room for themselves and pay double the price, so right now we have 76 people who provide us with full occupancy,” he said.

Tarcha puts his success on finding an underexploited niche in the market, in an area where demand for student housing is rapidly increasing. “We have targeted different people with a different mentality, who are willing to pay a great deal of money to provide their children with a certain comfort to entice them to study,” he said. “So far, our marketing strategy has proven to be a good one. Also, the Balamand University dorms only have room for 150 students, and the university keeps on growing, so we are benefiting a lot of this.”

Hard to break even

Yet despite Tarcha’s success, some real estate experts would say his experience remains an exception to the rule. Lara Kanj of the real estate department of the Ashada Group, which specializes in the construction industry, has conducted two studies on the profitability of developing land for student housing purposes. Both times, the conclusion was that the investment would not be worthwhile. “If you want to break even, you should sell, not rent out, especially if rent is low,” Kanj explained. “If you build a building for the purpose of renting out the units, the rent is usually set at 8% of the costs. But with student housing, the rent needs to be much lower than that – it would take too long a time to break even.” Kanj recommends investing in student housing if you are already a building owner. “If you already own a building and you are breaking even with the finishing costs that you invest in it, then you could get by,” she said. “But if you are starting from scratch and need to take a loan from a bank, than you are not likely to make it.”

Ahmad Jammal, the manager of a furnished apartment residency by Verdun, who wrote a thesis on the real estate market in Beirut, concurred with Kanj. Starting off with a strategy of targeting students for his residence, Jammal rapidly reevaluated his plan and switched to the expatriate market instead.

“It does bring in profit, but it is not justifiable compared to the profit you can make in renting to non-students,” Jammal said. “Students will always reach a maximum level of rent beyond which you can’t go. To be profitable in this business you have to target those people who are willing to pay more. Students require a lot of overhead: you need to do a lot of repair after them, as they tend to break things, they get things dirty … they are a little careless. So the combination of low to medium rent, in addition to a lot of overhead, makes this a non-profitable business.”

Supply at risk of exceeding demand

Compounding the challenge is the gradual crowding out of the market. In addition to the multiplying number of private housing facilities for students, the universities themselves are stepping up to the plate to meet their students’ needs. USJ is in the process of building a student dorm, predominantly meant for its foreign students, which will be ready in 2005. AUB is following suit, and is conducting a market study to assess the competition it is up against from the outside. Considering the fact that the university is presently able to meet its entire demand for housing, an increase in its offer could well ensure it’s recovery of a larger chunk of the market. Despite the lack of privacy and restricted freedom through curfews, the AUB dorms do offer the advantage of relatively low rent – set at $1,060 per semester for a shared room – and the convenience of living on campus, with fellow students.

“The social life is very important to the students, which plays a big factor in their decision to stay here,” said Nawal Semaan, co-coordinator of student housing at AUB.

The campus dorms also guarantee greater security, which, according to Tarek Naawas, dean of students at LAU, has been a problem for some students living in private accommodations. “We do fear that parents might have issues with the level of security in these places, which are definitely not comparable to the security we can provide our students,” he said. “So when we are asked, we do inform parents of this. There have been many complaints linked to security and to theft.”

Some also question the likelihood of the number of students continuing to expand. “There isn’t a crowding out yet, but in five years there probably will be,” a real estate expert, speaking on condition of anonymity, predicted. “Both AUB and LAU fees are increasing, and if you look at the income per capita in Lebanon, you understand that it is getting harder for people to afford university fees. There were more financial resources to assist students in the past. These have now stopped because the focus is to develop technical expertise over academic expertise.”

A potential goldmine upon certain conditions, the student housing market remains one to be carefully trodden into.

An ever expanding student population

Traditionally a destination for study in the Middle East, Lebanon has seen a significant rise in the size of its student population over the course of the past decade. Between 1993 and 2001, the student population in Lebanon increased by close to 60%, reaching 119,487 students by the academic year 2000 to 2001.

The events of September 11, 2001, further boosted numbers, with an increasing number of students from the region turning to Lebanon out of frustration with lengthy US visa procedures and the threat of discrimination.

For the academic year 2003 to 2004, Nadine Naffah, an associate director of admissions at the AUB was quoted as telling the DAILY STAR that the number of students applying from the Arab world had jumped by 41%, with the largest number of applicants coming from Saudi Arabia and Kuwait. “September 11 probably affected the numbers, but we can’t be sure of that,” she said, adding that the increase could also be linked to the university intensifying its recruiting efforts in the region.

At the AUB, the number of students has been steadily increasing by 7% to 8% over the last five years, reaching close to 7,200 today, a quarter of which are foreign students. USJ has seen its student population increase by over 10% since 2000, from 7,200 to over 8,000, with its number of foreign students rising by 34%. LAU has witnessed an increase of 40%, with approximately 7,200 students today.

Many Lebanese students, especially freshman students who live far away, like to live in the dorms, as their parents prefer for them to live on campus. Both LAU and AUB are rapidly reaching their maximum capacity intake for student accommodation. The former can accommodate up to 120 students at its Beirut campus – 2% of its student body. For AUB, the figure stands at 474 places for women and 374 for men – 12% of its student body. USJ presently has no student dorms available. With the number of applicants rising, both LAU and AUB are seeing themselves forced to make students double up in rooms.

“Many students ask for private rooms, but we can’t give it to them until we have met all the demands for accommodation that we’ve received,” said AUB’s Semaan. As a result, the university is presently meeting all its demands for accommodation, but the number of students granted their own rooms are few and far between.

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The Buzz

Emotional intelligence and the mood of your organization

by Tommy Weir
written by Tommy Weir

When Manfred FR Kets de Vries, the director of Insead’s Global Leadership Center, was asked how he identified successful leaders, without hesitation he replied: “The first thing I look for is emotional intelligence.” Emotional Intelligence (EI) is a term/skill that is receiving a lot of attention these days in management and leadership circles. Much of the 360 Feedback evaluation tool is devoted to measuring, to some extent, a person’s emotional intelligence. This month we will look at EI and how it can help you become a more successful leader.

Emotional intelligence, as described by Daniel Goleman, the EI guru, “includes self-awareness, self-regulation, motivation, empathy and social skill.” • Self-awareness is the ability to recognize and understand your moods, emotions, and drives, as well as their effect on others. If you are self-confident, realistic about your personal assessment, and have a self-depreciating sense of humor, most likely you are self-aware.

• Self-regulation is the ability to control or redirect disruptive impulses and moods. It is also having the propensity to suspend judgment – to think before acting. If you have integrity and are trustworthy, feel comfortable with ambiguity, and are open to change, chances are you are able to regulate yourself.

• Motivation is a passion to work for reasons that go beyond money or status, and having a propensity to pursue goals with energy and persistence. If you have a strong drive to achieve, are optimistic (even in the face of failure), and are committed to your organization, then you are definitely motivated.

• Empathy is the ability to understand the emotional make-up of other people. It also requires a skill in treating people according to their emotional reactions. If you have an expertise in building and retaining talent, are cross-culturally sensitive, and are dedicated to servicing your clients and customers, most likely you are an empathetic person.

• Social skill is having proficiency in managing relationships and building networks. It requires an ability to find common ground and build rapport. If you are effective in leading change, are persuasive and have developed an expertise in building and leading teams, then you have social skills.

Sample EI test questions include:

1. Do you recognize how your feelings affect your performance, the quality of experience at work and your relationships?

2. Are you aware of your strengths and weaknesses to the degree that others familiar with you would agree with you?

3. Are you open to candid feedback?

4. Can you celebrate diversity in personal and professional life?

5. Are you able to remain collected, positive and unflustered even in stressful situations?

6. Are you able to build trust by displaying congruent behavior through your words and actions being in alignment? 7. Do you keep promises?

8. Do you take responsibility for your actions and inaction where appropriate?

Ask yourself these further questions:

Do people feel comfortable with you? Do they want to be around you? Are you able to give praise to the right people at the right time? Do you know how to build teams, and what kind of people make good team players? Are you an effective motivator?

The idea that leaders must be self-reflective in order to be successful has been met with the quick response. “In order to make it in business, you have to be a doer!” We don’t disagree with this. But long-term successful leaders must be able to act and reflect. All leaders (all people) have blind spots, and developing the ability to self-reflect and accept critical feedback is crucial for overcoming them. In short, successful leaders are highly motivated to work on themselves.

Is it too late to learn? No!!

In fact emotional intelligence increases with age, some like to call it wisdom or maturity. That being said, even mature leaders need training in EI. The problem, however, with most training programs designed to teach EI is that they don’t deliver real change. EI training cannot be taught in a workshop or training seminar, it requires an individualized approach where behavioral traits can be examined honestly and modified. This requires time, persistence and practice, which is where coaches come in really handy. Having a coach shadow you throughout the day is an excellent way to become aware of behavioral traits that might not be working for you. In this way you will be consistently reminded of where, when and with whom you get off track.

Most leaders who are truly dedicated to improving their emotional intelligence demand a candid assessment of their strengths and weaknesses from trusted people who know them well. This may seem straight forward enough, but the sad truth is that it rarely happens. Most leaders may say that they are interested in honest feedback, but the fact is many lack the courage and inner fortitude to accept receiving information that may crack their persona of “I’ve got it all under control.” This is unfortunate.

Rapidly changing realities (political, economic, social and technological) require flexibility and a new breed of leader. Emotionally intelligent leaders have the ability to manage themselves in the face of unpredictable change. They are able to remain focused and clear under pressure. They understand that anxiety destroys their ability to assimilate information quickly and respond, and that fear closes down their creative thinking and decision-making skills. Emotional Intelligence is a skill that aspiring successful leaders cannot ignore. It can be learned and it provides lasting personal and professional rewards. All it takes is a sincere desire to improve, persistence, the courage to receive candid feedback, and a good coach wouldn’t hurt.
 


Tommy Weir and Christine Crumrine are from the Beirut-based CrumrineWeir, the global leadership experts.

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Comment

Mutton dressed as lamb

by Yasser Akkaoui
written by Yasser Akkaoui

And so after much political tomfoolery and sleight of hand, Hariri is out and Karami is in. His first task was the creation of a cabinet that turned out to be comprised of vehement anti-government types, many of whom had given up on ever holding public office, and the usual pro-Syrian lackeys.

And now that President Lahoud has purged all internal opposition, he has no excuse for any political and economic shortcomings that may develop over the coming seven months. We do not know what to expect in terms of the economy, given that the criteria for selecting the new team appeared to be based more on political expediency than a genuine desire to address Lebanon’s economic woes. This is underlined by Karami’s warning not to expect miracles. If this was meant to offer hope, one dreads to think what he will say when things get rougher; and they will.

What is bewildering is that all this flies in the face of basic democratic principles. The people have been absent from the equation and thus feel more like helpless spectators than a genuine electorate.

Meanwhile, opposition has grown stronger with both Hariri and Jumblat swelling the ranks of those who do not support the new administration. While Jumblat is as vocal as ever (and the shadow of his late father seems to loom larger than it has done in years), Hariri’s record in opposition is of mounting a comeback and so it remains to be seen just how clean a break his exit deal was.

So where now? There has been a massive shift in how people see the future. While there is still every chance the frog will become a prince, some still believe in the white knight who will slay the dragon? If he is out there, he will want to claim his traditional virgin. The danger is that she may have turned into a snaggle-toothed, saggy hag and the knight may no longer be interested.

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Special Section

Convergence and synergies happy hour

by Thomas Schellen
written by Thomas Schellen

Take a hint from Solidere: Lebanon’s flagship share appreciated nicely over the first eight months of the year, settling on a much friendlier market valuation platform close to where analysts had already placed its fair share value. Besides Solidere’s smart restructuring initiative and buyback offer not to mention allegations of a few inelegant machinations – both reported on by Executive – the surge in the share price was also influenced by reliable market whispers that it would take a step beyond the Beirut Stock Exchange and co-list its shares on the bourse of Kuwait (KSE). 

This move and the effectiveness of its mere rumor in helping Solidere shares grow, say analysts in Beirut, would a) result in a much improved demand and trading potential for Solidere at the potent KSE and b) demonstrated that the BSE had failed in giving its largest stock the investor exposure it needed. As much as we had been aware of the BSE’s infirmity, the valuable pointer provided by Solidere’s likely KSE listing is that a look at regional stock markets could be well placed in discussing the development options for Lebanese companies and the nation’s financial markets. 

Latest estimates of privately held Arab wealth coming to $1.5 trillion and public coffers overflowing with petrol bounty, new all-time highs in share prices at neighboring stock markets are lately being reported more often than one has time to keep track of. Combined market capitalization by the top 150 listed companies in the GCC was $359 billion at the end of July, $121 billion higher than a year ago and more than three times of what it was in 1999, said for instance a report by Shuaa Capital, drooling with excited descriptors such as “engines of growth” and “robustness.”

While some experts recently warned of the potential for Gulf markets to overheat, analysts optimistic about the continuation of the boom point to the fact that the ratios of market capitalization to GDP in the GCC countries are, with exception of Kuwait, still substantially below the ratios in developed economies. Faithful collectors of Executive can easily verify that vigor of Gulf stock markets for themselves by comparing this month’s regional stock market indices (page xx) to those in an issue from January 2003 or June 2001. 

Outside of the indices, the evolutionary thrust of Arab stock markets was highlighted last month by a host of news, of which the linkage of the UAE national stock markets in Abu Dhabi and Dubai and the announcement of a new investment conference in Bahrain in October were about the smallest.

The undoubtedly hottest financial infrastructure news of the month was the opening of the Dubai International Financial Centre, DIFC. With its main Gate Building visually quoting the La Grand Arche in Paris in a sort of 21st century Arc d’Arabia way, the center professes that it wants to be the new link between Western and Eastern financial market places – and it has the scope to match these ambitions.

To understand this scope, one needs only look at the DIFC parking “lot.” Upon completion, this facility is designed to accommodate in excess of 34,000 cars. A while back, the DIFC project had temporarily looked a less certain development bet than usual for Dubai, because of fears analysts attributed to the US over what a money hub in the region could do for the likes of al-Qaeda. The DIFC had also experienced a few recent personnel ruckus over Western top executives who were said to have stepped down because of conflict-of-interest situations they witnessed.

But now, not only has the DIFC opened for business and granted its two first operating licenses (to banks Standard Chartered and Julius Baer), the center has also its very own regulatory authority – the DFSA or DIFC Financial Services Authority, touted as fully compliant with the toughest supervisory demands of our age – and its own “international exchange for wealth creation,” the DIFX.

The DIFC International Financial Exchange is billed by its creators as a high-tech stock market for the Arab countries, equipped for trading of all types of securities from equities and funds to derivatives and Islamic structured products. This will presumably take it out of the restrictions applying to national bourses in GCC countries. Gulf-based analysts already speculated early last month that the UAE government might privatize one of its attractive assets, to give the DIFX a birthday present and startup boost.

Curiously enough, just as the DIFC announced its presence, officials from Arab stock markets meeting in Cairo announced that a new pan-Arab bourse under the name of “United Arab Stock Exchange” would be created by early or mid 2005. Located in Egypt, the bourse would enjoy participation from six Arab stock exchanges (including Lebanon, but not mentioning the UAE), and it would be the largest in the region.

Given that full-mouthed announcements for great joint projects in this region come with an inbuilt disbelief factor and cooperation agreements such as the 1996 one between the CASE and KSE acceded to by the BSE have been unnoticeable in practical terms, what to make of these plans for a Unified Arab Stock Exchange?

“I am skeptical, simply because there has been much talk for many, many years about creating a pan-Arab bourse and it hasn’t been done,” said Ziad Maalouf, senior vice-president at newly formed Mena Capital, a Beirut-based private equity and merchant banking firm.

With investor confidence in the BSE thoroughly lacking and performance of the Amman Stock Exchange dismal over many years, Maalouf questioned the viability of a regional stock exchange involving Levant and North African bourses. International investors approached the Cairo and Alexandria Stock Exchange with great enthusiasm about a decade ago, he explained, but proved disappointed as most companies listed on the Egyptian exchange today are so solely because it brings them tax breaks.

Only the stock markets in Tunisia and Morocco are reasonably structured and operate satisfactorily, said Maalouf, who helped as a market analyst with the International Finance Corporation in the mid 1990s to put North African bourses on international investor maps by introducing them to the IFC’s Emerging Markets Group. As competent naysayers long to be proved wrong, individual bourses could yet defeat their ghosts and the pan-Arab bourse could still see the light next year. But a new, Nasdaq-like regional stock market at the DIFC looks far better programmed to become a success.

“It is a good idea. Dubai is at the center of capital in the Gulf. This is where the money is,” Maalouf said. “If companies in the region take this new proposition seriously and dual list at DIFX and the market becomes liquid, it has the potential of becoming a pan-Arab stock exchange and trading desk.” For BSE-listed Lebanese banks for instance, the possibility to dual list on an Arab market would mean exposure to a much wider investor base and the chance to substantially increase trading of their shares.

In summa, the developments of autumn 2004 confirm a triangle of locations vying for prominence in Arab finance. Next to Dubai and Cairo, this includes Bahrain. The emirate underscored its aspiration to the role of regional player by signing a free trade agreement with the United States in the third week of September, albeit ratification of the agreement in the US is not expected before the end of the year.

And Beirut? One point that all experts here seem to be in agreement on is that a convergence of Arab stock markets is in principle a good thing and that it will be beneficial to the country to be involved in such developments. But one cannot ignore a bitter flair to their statements. Regularly, many feel that Lebanon should have risen to the role of natural financial market place for the region. Instead, as the rest of the Arab world noted, the Lebanese were playing politics.

The morale of the story: The nation’s financial sector is being boosted with new blood and ingenuity of personalities willing to go to great length to appear smart (even in what cars they drive) and act congenial, rather than falling for the slowly vanishing styles of the brothers Pompous and Patronizing. Regulations still require improvements and with the insurmountably small domestic market, some obstacles we will never be able to remove. But the financial sector’s real problem is the political superstructure, which dominates the nation’s reality.  

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Money Matters

by Executive Contributor
written by Executive Contributor

Capital Intelligence Raises Shamil Bank’s Rating to BBB-

Capital Intelligence (CI) rating agency has raised SBB’s (Shamil Bank of Bahrain) long-term foreign currency rating and financial strength rating from BB+ to BBB-. The bank’s short-term foreign currency rating and support rating were kept at A3 and 2 respectively whereas a stable outlook was assigned to all the ratings. The agency noted that this upgrade is attributable to the strong growth in profitability and continuing reduction in non-performing financing. CI added that its ratings were based on SBB’s strong corporate-only balance sheet, full coverage from financing-loss reserve, its solid capital position in addition to the fact that investment account holders in Islamic banking share their own risk.

NBK Awarded “Bank of the Year” in the Middle East

In its annual Bank of the Year Awards given to banks in 133 different countries, The Banker magazine, an affiliate of the Financial Times Group, has named National Bank of Kuwait (NBK) as the best bank in Kuwait and the Middle East for the third time in a row. The Banker attributed this achievement to the bank’s excellent performance, innovation and regional expansion. The magazine added that NBK continued to post strong results in 2004 as its profits in the first half of the year reached record levels following a 27.7% return-on-equity registered at the end of 2003.

Country Profile: Jordan

An IMF report published in September 2004 demonstrates the recovery of Jordan’s economy from the disturbance caused by the war in Iraq. It shows that real GDP grew by 6.9% in the first quarter of 2004 amid a 29% yearly increase in exports. This upsurge in exports is attributable to the growing demand from the Iraqi market in addition to the continued rise in textile exports especially from the Qualified Industrial Zones (QIZ) to the United States. On the other hand, inflation was restrained at an average rate of 2.8% in the 12 months through March 2004 while the unemployment rate remained relatively high at 14.5% compared to a 5% growth in the Amman Stock Exchange index during the same period. On the fiscal side, the government’s better budgetary management, tighter government spending in addition to higher foreign grants led to the achievement of a 137 million Jordanian dinars ($194 million) budget surplus in the first quarter of 2004, equivalent to 1.8% of expected GDP. This fiscal surplus reduced net government debt by 8 percentage points to 93.5% of expected GDP.

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For your information

Welcome back

by Executive Contributor
written by Executive Contributor

Since September 1, the Lebanese authorities have again been allowing South Koreans to obtain visas upon arrival in Lebanon. The practice had been discontinued in November 2003, when the Lebanese government imposed visa restrictions on a number of countries.

South Korean embassy officials declined to offer an explanation for their country’s inclusion on the list, although one official suggested Lebanon felt that South Korea had not been doing all it could to facilitate visits to the country by Lebanese. They did suggest that the move would boost South Korean-Lebanese business ties. In fact, since the decision was implemented, a South Korean trade delegation has already paid a visit to Lebanon, which imports roughly $64 million in South Korean products a year, for only $8 million in exports.

“Business people have very busy schedules,” asserted the head of the delegation, Youn-Hwan Chung. “We were having to wait up to three weeks for a visa. And even then we weren’t sure of getting it.”

But although the visa hurdle has been dismantled, other obstacles to increased South Korean-Lebanese business remain.

“There are differences in business culture,” noted Chung. “And South Korea is geographically far removed from Lebanon. The Lebanese are more familiar with, and prefer, European brands. And Lebanon’s IT industry is not well developed. The Internet is very slow.”

“Most South Koreans still think Lebanon is very dangerous,” observed the South Korean embassy’s commercial attaché, Kihyoung Choe. “Members of the trade delegation were asking me if it was safe.”

The South Korean ambassador to Lebanon, Young-Sun Kim, however, remained upbeat: “I want to talk only about the positive aspects,” he said. “There is no doubt that the move will greatly contribute to the promotion of business between the two countries.”

Cool heads (if they stay on) prevail

The killing in Iraq of three Lebanese businesspeople, including a married couple, and the wounding of another, as well as further kidnappings of Lebanese since then, have dealt more serious blows to already faltering Lebanon-Iraq trade.

Initial business optimism generated by the quick fall of the former Iraqi regime has been replaced by uncertainty as the security situation in Iraq fails to improve. In recent months, a number of Lebanese businessmen and truck drivers have been kidnapped. According to the satellite television station Al-Jazeera, a statement on the Internet signed by a militant Iraqi group threatened to “slaughter any Lebanese working with the US Army and drag their bodies through the streets of Iraq.” Hundreds of Lebanese have flocked to Iraq over the last 15-16 months, in a quest to cash in on the massive postwar reconstruction effort.

“If there wasn’t so much money to be made in Iraq, we would already have stopped sending people there,” acknowledged Elie Shamsy, a manager of Beirut Cargo Center, which transports goods to Iraq. However, the company has stopped using Lebanese drivers. “We only use Syrians and Iraqis,” said Shamsy, “because they appear to be targeted less.”

But it is in Iraq, asserted Lebanese Industrialists’ Association head Fadi Abboud, that the time-honored determination of Lebanese industrialists has become again apparent. Despite the dangers, he noted, scores of Lebanese businesspeople remain in the country, and others continue heading there. “Iraqi importers who ask for half a million dollars of cement from Lebanese firms can’t provide security. People don’t want to send employees to Iraq. We’re finding it difficult to insure. But the Lebanese will not stop doing business with Iraq. Lebanese businesspeople have historically overcome hardship. They embody the SAS (British commandos) motto: ‘Who dares, wins.’”

A tough financial run

The organizers of the Beirut Marathon–in its second edition this year–say they have learned from last year’s mistakes. In their haste to stage an impressive debut event in 2003, they failed to pay enough attention to spending. The result was a whopping $1.5 million bill–of which only about $150,000 was covered by sponsors. (Close to a million was covered by the marathon’s patroness, May Khalil).

This year, the event organizers have been careful to shop around for the best deals, and have also been able to attract an additional 6,000 contestants. As a result, this year’s bill will run at roughly $800,000–a welcome diminution of last year’s cost, but significant nonetheless.

Despite this, cajoling potential sponsors into forking out cash is not proving much easier this year. The organizers expect only $50,000 more than last year’s $150,000. “It is very, very tough to get hard cash out of companies,” observed Event Coordinator Nadine Moawad. “There is a recession. Everyone says they don’t have the cash to spend on events.”

The race organizers hope that in a few years they will be self-sufficient, but acknowledge that a long road lies ahead. “We will have to show potential sponsors the added value,” noted Moawad. “But it is difficult to get that message through. For the moment, sponsors are not getting a feel of how important this event really is.”

“And even when we do break even, we will have to cover the losses of previous years,” remarked Beirut Marathon General Manager Ara Artine.

Growing mini cards

Lebanese banks Fransabank and Banque Audi recently introduced a new debit card format marketed as “mini cards” due to their 43 percent smaller size over standard plastic.

Issued in collaboration with Visa, the new cards offer advantages for participating banks through the prospect of increased point-of-sales (POS) purchases by consumers. In their functionality, mini cards are engineered to POS usage because they cannot be used in standard Automated Teller Machines (ATMs). A value added is that users carry a fashionable accessory characterized by “greater portability”, thanks to a hole in the plastic allowing it to be attached to a key chain or a mobile phone.

For banks, debit card POS purchases are more profitable than withdrawal of cash from ATMs, which still accounts for most instances of debit card usage. Debit or cash cards, such as the Visa Electron card popular in Lebanon, do not carry credit features.

“The purpose is to migrate people from using ATMs to more POS spending and change customer habits away from withdrawing cash,” a representative of Banque Audi’s payment cards department told Executive. He confirmed that the cards were targeted at “all Visa Electron holders in general but especially young, outdoorsy type of people.” Until the beginning of 2005, Banque Audi is offering their Visa mini card for free.

Fransabank is going after youths by stating in a flyer that its mini account and card are targeted at “cool and trendy people,” with offers of free benefits, including movie tickets.

Perhaps confounding consumers is a new prepaid card by BLOM Bank, introduced about two weeks after Banque Audi publicized its card. BLOM’s standard-size card was advertised as “mini”, but that referred to its ceiling of $500. Apparently targeting similar audiences as the Audi and Fransabank products, the bank crafted an extensive promotional program of discounts at places favored by young consumers (Virgin, Quicksilver, Chili’s, Waves, and on Cyberia).

Banking on Lebanese films

On September 19, Lebanese director Philippe Aractingi started the shooting of Autobus, a full-length musical that he hopes will receive international play. It is Lebanon’s first feature film fully financed by private investors.

“To make the film,” said Walid Hayek, investment manager at the Arab Finance Corporation (AFC), “we had to come up with a new financial structure called investment certificates. Unlike shares, they offer a right on future revenues, but no right to vote. We had to avoid the situation that the investor on paper was able to interfere with the director.”

Asked to help in putting together a finance structure by the film’s producer Fantascope, AFC set up a proper business plan based on estimated cost and revenues to attract investors, and issued 140 investment certificates of $10,000 each, producing a total budget of $1.4 million. “So far, we’ve managed to raise $840,000,” said Hayek, “which is enough to make the film. The remainder of the proposed budget, $560,000, is mainly meant for marketing and promotion. Now that shooting has started, however, I’m sure we will be able to attract further funding.”

The film’s projected revenues have been estimated at $2.1 million, which include theater admissions in Lebanon and the Middle East, as well as from television, video and DVD sales. What’s more, Fantascope and Hayek hope to cash in on the sales of CDs and cassettes with the film’s music.

So far, all the investors are Lebanese, among whom the LBCI chairman Pierre Daher. “Daher is a strategic investor,” said Hayek, “who is not just interested in making money, but who wants to test the market and see what the possibilities are. If this film works, he may be interested in making more.”

This seems to be the motto for all involved in the making of Autobus: including AFC, which has traditionally been focused on investment banking, brokering and portfolio management. “We are interested in targeting other sectors,” said Hayek, “among them audiovisuals, which have so been disregarded by bankers.”

Competing over Martyrs Square

To introduce a new face for Martyrs Square and the central axis of Beirut’s central district, Solidere has launched an international Urban Design and Ideas Competition open to both professional architects and students of architecture, urban design, urban planning and landscaping. In past plans, the axis along the square was meant to be Beirut’s main business and office area, but that seems to have changed.

“There are no limitations or requirements concerning the way participants can envision the new center of Beirut,” said Fadi Jamali, manager of Solidere’s Town Planning Department “It’s a mixed use area, so the square’s direct surroundings can be destined for shops, offices, or any other activities.”

However, Solidere does have a preference that the new heart of the city should reflect the reemergence of the center as a meeting point for people of all confessions and backgrounds. The notions of connection and communication play a major role and in that sense Solidere hopes the new center may become something of a media city.

“Martyrs Square symbolizes the link between past and future, East and West, old and new,” said Jamali. “In that sense not only the media, but also Internet companies and ad agencies could play a role.”

Solidere will award six cash prizes for student participants in the first stage with a ranking of the first three selected urban ideas and three honorary mentions. In addition, 5-7 professional architects will be asked to further develop their ideas and will be paid a fee for their work.

The second phase requires professional accreditation. Three cash prizes will be awarded after the second stage, while the winner will cooperate with Solidere in executing the design. Mid October the jury will decide upon student winners and the architects who will go through to the second round, the deadline of which is mid April. Winners will be announced on Martyrs Day, May 6, 2005.

A diplomatic advertiser

Bigger is not always better, at least that is what the newly founded advertisement and marketing company Adbox is out to prove. With a personalized market approach and a touch of feminine charm, the Gemazieh-based company has quickly found its niche in Lebanon’s highly competitive market.

“Adbox is aspires to be a boutique agency offering tailor-made marketing and advertisement services for small and medium sized companies,” said its owner Ghida al-Solh. “Not everyone can afford or wants to work with the big agencies, as they will never be treated as premium clients. Adbox offers a premium, personalized treatment and the same international standard.”

The company offers anything from public relations, media strategies and brochures to ads, packaging, corporate identity development and direct mailing. Having opened only this summer, Adbox’ clients include the jeweler Tufenkjian Freres, the Rest House in Tyre, Al-Baba Al-Mumtaza Sweets and Bear Real Estate. “For the next two years,” said Solh, a Lebanese American University graduate who worked for 7 years in a PR and marketing company, “I want to work with no more than six clients, after that we’ll see.”

To keep the costs down and remain flexible, Adbox is largely a one-person show. “Apart from my secretary,” Solh said, “I have no staff. I work only with freelancers on a project basis. I know most people in the business. While one may be excellent in layout, another’s specialty may be packaging. So, not only do I keep my operating cost down, I also work with only the best in the market.”

The young entrepreneur thinks she has one more asset allowing her to compete in Lebanon’s advertisement and marketing market, which she defines as “male dominated and rather aggressive.” She claims to “work with a much smoother, yet no less determined approach. I guess I’m just a bit more diplomatic. Perhaps that’s the family genes at work.”

We can use more education

Returns on university investments are highly beneficial to both individuals and national economies, reports the Organization for Economic Cooperation and Development (OECD) in its latest report on global education levels. According to the September 2004 report, individuals investing in their tertiary education on average achieved substantially higher returns than the potential rate of return from investing in financial markets. As for the benefits to a country’s overall prosperity, across OECD countries one additional year of education was estimated to boost economic output by between 3-6 percent

In light of such findings, Lebanon’s unabated fascination with higher education should simply spell good national economic prospects. Today, with an excess of 40 licensed institutions of higher education, the Lebanese university and college sector is continuing to see high demand from education seekers.

When it comes to matching supply and demand, the main surge in student numbers seems to be occurring at institutions with low- to medium-range tuition fees, which were licensed four to five years ago and, since, undertook massive expansion of their facilities. Admission officers at the American University College for Science and Technology (AUST) last month were working overtime to process student applications, anticipating a total enrolment of 4,500 or more, a 50 percent increase over 2002. At C&E American University, administrators told Executive they expected enrolment to reach 2,000 on their three campuses. The institution’s first two graduation classes of 2003 and 2004 numbered 300 in total. Another provider with massive ambitions is Global University, which wants to grow from a student body of 300 students today to “become one of the largest campuses in the area,” says an official,

All three of these education providers have tuition fees in the range of $115-130 for undergraduate courses. 

Top-ranked institutions have managed steady but controlled increases of student numbers. In the fall 2004 enrolment season, AUB’s Olayan school of business was keeping its student numbers stable while new facilities are under development. At AUB overall, where the tuition fee per credit hour costs up to $500, total enrolment of undergraduate and graduate students increased from 6,200 in 2001 to nearly 7,000 in spring 2004, with admittance rates for freshmen above 75 percent over the last three years. The shared vision of Lebanese education providers is to function as a regional center for excellence in training. But the rapid growth in institutions and students must, first, prove that it can provide quality across the board. 

The perils of cheaper gas

After a summer of high-flying energy costs, oil prices rose above $46 as autumn knocked, minimizing prospects in the foreseeable future that a barrel of crude would be available for $30 or less in international markets. Earlier this year, oil exporting countries and analysts had still claimed that a target range of $28-35 was attainable. Today, however, some analysts contend that the recently feared $50 threshold could soon turn out to be a price platform rather than a ceiling–the high price levels making Western consumers pay at the pump for the cost of the Iraq war.

In this context, Lebanese motorists ought to dismiss any hopes for a near-term reduction in gasoline costs to $10 per 20-liter tank filling. However, the political decision to not let gasoline prices rise above $15 per tank has thus far shielded local drivers from possible further increases. “We used to raise prices immediately after they increased on international markets, but this is no longer done,” confirmed an analyst at the ministry of finance.

So at least for the time being, Lebanon’s system of government-mandated gasoline prices, with fixed trade margins for gasoline importers and gas stations, works to the benefit of the consumer, while the Lebanese state is bearing the burden of international oil price increases. It is impossible today to predict the exact impact of international oil market developments on Lebanon’s fiscal situation, however upward price movements will inescapably cut deeper into the state’s revenue from excise taxes on imported oil derivatives. Over the past years, these taxes had increased dramatically in their importance, reaching almost $500 million in 2002. In the context of the dismal state finances, it appears only a matter of time until the government could see itself forced to look at re-adjusting those revenue flows and lift the price cap on gasoline, even if this risks another price shock to the economy.  

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Money Matters

by Executive Contributor
written by Executive Contributor

Capital Intelligence raises ARABIC’s rating to A-

Capital Intelligence rating agency has raised Saudi Al-Rajhi Banking & Investment Corporation’s (ARABIC) long-term credit rating from BBB+ to A-, thus placing it at the same level as the long-term sovereign rating of Saudi Arabia. The bank’s short-term foreign currency rating and financial strength was kept at A2 and A- respectively. The agency noted that this upgrade is attributable to the significant improvement in the bank’s liquidity profile due to its success in developing an acceptable means of investing in Saudi government securities. It is to note that ARABIC retained in 2003 its traditional ranking as Saudi Arabia’s most profitable bank with total assets standing at $17.3 billion (about 12% of the Kingdom’s banking assets).

Bank Muscat issues $64 million bond

Bank Muscat, Oman’s largest bank, launched a 25 million rial ($65 million) 10-year bond with a 6.25% fixed rate. The deadline for the issuance, which will be listed on Muscat Securities Market, is set at June 30th and was assigned a BBB rating by the international rating agency “Fitch.” This issuance came a month after the bank introduced a 96.25 million rial ($250 million) bond, which closed oversubscribed at 134.75 million rial ($350 million). It is to note that Bank Muscat recorded in its first-quarter a net profit of 7 million rial ($18 million), up form 6.4 million rial ($17 million) in the same quarter last year.

Country Profile: Palestine

The World Bank approved an emergency structural adjustment grant of $20 million as an immediate budgetary support for the Palestinian Authority (PA), which after three years of crisis, is facing severe economic and fiscal challenges with a financing gap estimated at $650 million for this year. Contributions to the bank-administered multi-donor instrument reform fund amounted to a current $25 million. In addition, the World Bank launched a Social Safety Reform Project with an initial financing of $10 million aimed at providing regular cash assistance, food donations and health insurance provisions to nearly 36,000 beneficiary families. The bank has been active in the West Bank & Gaza for the past 10 years, adopting to the prevailing political climate from reconstruction to institution building, and since September 2000 to emergency assistance. The fiscal situation in the West Bank & Gaza remained difficult in 2003 and 2004. PA’s budget deficit for 2003 amounted to $558 million and to $329 million after including external budgetary support of $230m (compared to $467 million in 2002 and $530 million in 2001). In addition, the stock of indebtness to the banking sector reached $176 million at year-end 2003, or 5.4% of GDP.   

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Business

Q&A: Omar Razzaz, World Bank country manager for Lebanon

by Executive Contributor
written by Executive Contributor

In September the World Bank issued its annual report Doing BUSINESS IN 2005: REMOVING OBSTACLES TO GROWTH, co-sponsored by the International Finance Corporation, the private sector lending arm of the World Bank Group. The report examines investment climates around the world, based on the regulatory performance and reforms undertaken in 145 nations. Comparing data and showcasing examples of best practice, the report demonstrates how governments can create a better business environment, which benefits all firms, as well as society as a whole. EXECUTIVE met with Omar Razzaz, the World Bank’s country manager for Lebanon, to discuss how the country’s business environment fares by international standards, the challenges facing reformers and the advantages offered to investors.
 


The World Bank’s annual DOING BUSINESS IN 2005 report just came out, with more countries and benchmarks than ever before. Governments are coming forth and requesting to be a part of it – what is the value of this report?

This is a yearly report with very critical information, not just on laws and regulations, but on the actual experience of businesses. That’s why it is meaningful. Businesses are not just interested in the legal framework, but how things work on the ground. The report tries to address the type of indicators that really matter to a business: how easy it is to start, how easy it is to operate and how easy it is to close a business. The other side of this report is that it looks at these indicators on a yearly basis, so you can see change all the time. A country that ranks very low but has gone on a pro-active program by the government to improve its business environment will be registered by the report very quickly. That is why the DOING BUSINESS report is increasingly noticed by investors around the world. Where a country ranks is as interesting to them as the pace at which it moves.

How would you assess Lebanon’s business environment based on the findings of the report?

Lebanon has its strengths and weaknesses. Among the strengths, you have the relative ease with which one can get credit and close a business – by regional standards that is. Where Lebanon does not do well is in terms of starting a business: the procedures as of now take 46 days, and the cost of starting a business is 130% of income per capita. This is much higher than in other countries in the region, as well as elsewhere in the world: just look at Latvia, another small country, where the cost is 17%. It has to do with the number of procedures, the time it takes and the uncertainty that’s involved in the process. The solutions are there: if you reduce the steps, if you automate them, if you set up a one-stop shop where investors can come and you give them clear procedures, it would dramatically change the situation. And it can be done fairly quickly: Jordan managed to reduce the time required to set up a business by nine weeks. The one other aspect in which Lebanon doesn’t do very well is the enforcement of contracts. In this area, Lebanon really stands out. It takes 721 days on average to enforce a contract and it involves 39 procedures. This is two or three times longer than even in developing countries. It is very difficult for a business to operate in an environment where you have a contract that you can’t have enforced. And there really is no reason why this has to continue. Lebanon, in terms of its jurisprudence, in terms of its human capital, has some of the best legal institutions in the Arab world. To improve that situation is a matter of will, of putting in the systems, and of training.

Have there been any significant attempts at implementing the necessary reforms to improve the investment climate here?

There have been very important islands of reform in Lebanon. If you look at the area of property registration or the application of VAT on transactions – these are areas that can take a very long time and in Lebanon it has been streamlined. But in the last two years, there hasn’t been a concerted effort by the government to systematically upgrade laws and regulations and undertake reform. This is a major drawback, because with a debt to GDP of almost 180%, the fiscal and monetary policies can only take you so far. They can reduce debt perhaps, and bring it down to 150-160%, but that is still a high level. The only way to reduce the debt is to grow out of it and increase your GDP. So it’s critical for Lebanon to focus on the investment environment to find ways to increase that pace of growth.

But this year, Lebanon witnessed a positive turn in many of its economic indicators: there’s been a sharp increase in export, tourism, construction permits, and bank deposits for instance. The country has experienced its highest GDP growth since 1997. Is this just cyclical growth or will it have a long-term impact, notably on the level of investment?

Our assessment is that this is not short-term. Lebanon has definitely benefited from this situation – it has allowed growth to reach 5% for instance. But the DOING BUSINESS report suggests that if a country moves drastically on reforms, it could add up to 2% on its growth rate. So what the Lebanese economy has done this year is fantastic, but if the country had improved its regulatory procedures for business, it might have added 2% more, thereby growing at 7%. And for Lebanon to deal with its debt problem in a sustainable way, it needs to grow at around 6% to7% every year, and this is achievable. When you look at the composition of the investments and the growth, tourism is fantastic and does create jobs, buying real estate is great. But what you want to see is more Lebanese expatriates and Arabs starting businesses that will create value added, jobs, on a sustainable basis. And for that to happen, you really need to make operating a business a much more straight forward undertaking.

How does this country fare by regional standards? Does it have any comparative advantages to other Arab countries in the eyes of investors?

Lebanon has to think dynamically in terms of its comparative advantage. It shouldn’t necessarily try to reclaim what it had in the 1960s, but rather think in terms of today – an era of information technology, globalization – to figure out its strengths and weaknesses. The most important element that Lebanon has that foreign investors would want is an innate cultural talent for creativity and service. If you look at the industries that are blooming, they are service industries, industries that relate to creativity, advertising, marketing, TV production… I’ve heard that six out of ten commercials in the Arab world are produced in Lebanon. This says something about the human capital in this country. This a multilingual country that is very exposed to information, trends from the West, and its juxtaposition between the Arab world and the West gives it a tremendous advantage in picking up important trends that might be relevant to the area, and modifying them to local tastes. Studies now show that for countries to compete, for countries to succeed, it’s not a matter of capital or resources, it’s a matter of the know-how that exists in a country and the systems that the country has that allow it to utilize that knowledge. The Lebanese have the know-how that is very hard to acquire by formal training. What they lack are the systems. And it’s incredible, because for most countries, the systems are the easy part to acquire. This is something you can buy with money, and a little bit of decision-making and coordination. Yet you find the systems that allow investors to invest money, to register, to get information, to have day-to-day operating procedures that are clear without dealing with a huge amount of red tape, to be the missing part here.

Yet at the same time the World Bank is pushing for educational programs in Lebanon to provide better technical and vocational training?

Here we come to the issue of equal opportunities. Lebanon has a long way to go before it can be proud of offering its population equal opportunities. There is a tremendous human capital in Lebanon, but that doesn’t mean everybody has access to the same quality of education. Those who have access to quality education, to private schools, to private universities, have tremendous talent. But those who are left behind are relegated to competing with unskilled workers, which is a very difficult thing to do in Lebanon given the relatively open borders and the inflow of foreign workers and high standards of living. For the average Lebanese, this is one of the hardest places to live. You can neither do what pays, because you haven’t been equipped, nor can you compete in the unskilled or semi-skilled professions because the standards of living are too high. And that is why vocational training and education are critical.

Speaking of unequal opportunities, is the lack of progress in improving the business environment excluding marginalized groups from participating in the formal economy in Lebanon?

This is very important. The more you deregulate entry for start-up businesses, especially small and medium enterprises, which are the ones that are most employment generating here, the more you create opportunities for employment, formal employment, which gives more protection to workers and has a snowball effect. In contrast, if you have high minimal capital requirements, then many of the businesses will stay in the informal sector. They will not be able to borrow, to expand, to pay taxes, which gets you into a vicious circle of the economy not growing and public finances not improving.

Another problem which Lebanon faces is the fact that it ranks internationally among the top violators of intellectual property rights. To what extent does this act as a deterrent to investors?

To the extent that Lebanon wants to move into the information age and the high-value added economy. In India, about 5000 to 6000 workers in Bangalore are producing about a third of all of India’s foreign exchange earnings, just because of the tremendous growth of the IT industry. Lebanon is so well positioned to enter that area. If it updates and reforms intellectual property rights and puts in the IT infrastructure, it can benefit a lot from it. Many countries make money out of piracy, but that’s not what Lebanon is about. Given Lebanon’s human capital, it needs to make the leap into becoming one of the producers of intellectual property, not one of the countries that live off piracy.

Closely related to this issue is the prospective of Lebanon joining the World Trade Organization (WTO), which the government hopes will happen in 2005. Is the country ready for it?

Lebanese business are ready for it, in the sense that there is a business acumen, an entrepreneurship that allows Lebanese businesses to excel anywhere in the world. My concern is whether Lebanon can bring the cost structure of doing business down. As long as these procedures, which we have been talking about, are prohibitive, as long as the cost of power is the way it is, as long as telecom is so expensive, as long shipment and agro-processing is costly and delayed and inefficient, Lebanese businesses will be greatly disadvantaged. Again, it’s about putting in the systems that will allow businesses to compete. It’s not about the innate ability of Lebanese businesses to compete with European businesses. If anything, I think lowering the barriers will allow for greater innovation.

Lebanon of course, also suffers from its external environment – the instability of the region, which affects investments into MENA as a whole. What impact do you think recent regional developments, most notably the passing of UN Resolution 1559, will have on the country?

These recent events have thrust Lebanon onto the international scene, which means that what the country does or doesn’t do is much more noticed today than it was yesterday. This poses both a challenge and an opportunity for the country. If the next government is a decisive government that takes strong actions on consolidating the freedoms in the country, protecting them, enhancing the transparency and accountability of the government, improving the business environment, taking concrete steps on the macro-economic level to put the country on a more sustainable path towards growth and debt reduction, this is going to be noticed, and noticed very favorably. If it turns out to be a government that is unable to take any serious action towards fundamental social and economic problems, and if it is perceived as even moving back on Lebanon’s uniqueness, which is its freedom, that will be registered as well. We are hopeful and the World Bank will be very active in continuing its support and will work with any government that comes in, to assist it in enhancing Lebanon’s performance and thereby it’s image in the world.

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Society

Down but not out

by Marianne Mirabeau
written by Marianne Mirabeau

There was a time, in the late 90s, when Lebanese basketball could do no wrong. Lebanese teams – brimming with home-grown talent and the odd high-profile import – beat everyone in sight, games were shown on prime-time TV and crowds of enthusiastic fans blocked streets for hours, celebrating victory after victory. Lebanon appeared to have found its national sport and the sponsors could not get their checkbooks out fast enough.

That was then. Today, the clubs, deserted by their sponsors, are propped up by wealthy patrons, marred by scandals, feuds and crises. The recession did not help, but when Antoine Choueiry, advertising mogul and the so-called “Godfather of Basketball,” recently announced his retirement from the presidency of Sagesse and indeed from the sport in general, basketball’s last hope appeared to have hung up his shirt. So what went wrong and what now for the sport that promised so much?

A sport supported by patrons

Essentially Lebanese basketball was always a loss-making concern, largely dependent on patrons willing to pick up the check. In the first division, all teams have one to two main patrons, covering virtually the entirety of their budgets, which averaged $1.5 million in 2004.

Relationships were formed out of a love for the sport, politics and business interests. Hence BLC Bank became one of Champville’s main sponsors, contributing $350,000 annually to the team, because tuition fees to Champville School were deposited with BLC. UFA insured the club and went on to sponsor the team to the tune of between $200,000 to $300,000 annually (although this jumped up to $800,000 in 2004 when UFA General Manager Henri Chalhoub was nominated team president).

“Each club has a certain person paying the deficit,” said Federation of Lebanese Basketball (FLB) Manager Roland Tabet. “For Blue Stars, it’s [Banque Saradar’s] Mario Saradar or [Loto Libanais’s] Rainier Jreissati. The club is not making a profit. None of them are.”

The Choueiry factor

It was Antoine Choueiry’s goal to make the game financially self-sufficient when he took over Sagesse in 1994. He may have failed in his bid, but his tenure as the sports most high-profile patron changed the face of the game. “Regardless of what anyone might say about Antoine Choueiry, what he did for basketball was memorable,” said Carlo Vincenti, who represents William Lawson, a former major sponsor of Sagesse. “His approach to basketball was very interesting, and it is what Lebanon needed – a more global approach, a more commercial approach.”

Choueiry injected significant amounts of capital both into his own team as well as into that of others. “He backed other teams up financially such as Antranik and Hannibal. He used to pay them $150,000 so they could play in the league,” explains a major Lebanese sports agent, who did not want to be named. With a solid group of teams competing at the highest level, Choueiry upped the ante by buying overseas professional players (mainly from the US) to shore up the quality of his own team. Such a move catapulted both Sagesse and the Lebanese national team on a winning streak, which culminated in Sagesse’s victory at the Asian Basketball Championship in 1999 and Lebanon’s qualification for the World Basketball Championship in Indianapolis, USA, in 2002. The media took the bait and the hype surrounding the sport reached a frenzy in 2000, when Choueiry, who controls 70% of Lebanon’s ad-spend, convinced LBCI to broadcast basketball games during prime time. “He got all the teams together and brought LBCI in to cover them, broadcasting the games live on satellite TV,” said the sports agent. “People started watching more and more basketball.”

Summing up the philosophy behind his strategy, Choueiry was quoted as saying that “to be competitive in sports, you need money, to get money, you need sponsoring, to get sponsoring you need exposure, for exposure you need TV, for TV to be interested you need true competition of a certain level. This needs important teams, to get important teams you need money.”

The sponsors liked what they saw. Despite representing a non-sport oriented product, William Lawson went from an obscure Scottish Whisky to a household name in three years by sponsoring Sagesse. “It was definitely effective in terms of brand building. When we started (sponsoring Sagesse in 1999), basketball wasn’t that big,” he said. “And basically while we were sponsoring Sagesse, it started winning tournaments, starting with the Lebanese championship, the Pan-Arab games and then all the way to the Asian Basketball Championship. So there was a major hype around basketball, and we got a lot of exposure from it. Before Choueiry you would never have seen a basketball game playing on prime time on LBCI. What sponsors need is the exposure – for them a basketball game playing at midnight or a game playing at 8:30 pm makes a big difference.”

The sport of choice

The increasing exposure made basketball the sport of choice in Lebanon, both in terms of audience and practice. According to Tabet, the number of licensed basketball players in Lebanon has been steadily increasing since 2000, when the Federation counted approximately 6,000 players. Today, this figure stands at 15,000. “Everybody loves basketball,” boasted Riaydi coach Fouad Abou Chacra. “In every family in Lebanon you have someone playing basketball. It’s the biggest sport.”

For Pepsi, the growing appeal of basketball in the country, especially among the youth, served as a big draw to get involved in the sport, and from 2000 on, the multinational signed up. “Pepsi wants to get close to what the youth likes, and in Lebanon, that sport is basketball more so than football,” explained Roula Safi, a regional account director at Impact/BBDO, Pepsi’s regional advertising agent.

Piggybacking on the significant exposure brought to basketball through prime time TV coverage, Pepsi went on to sign deals with LBCI, as well as buying ad space on courts. They launched a major ad campaign around Rony Seikaly, a fading, but high-profile Lebanese NBA player, and organized a promotional competition in 2003 to attract young, new talent to basketball.

“LBCI has done a good job of promoting the game, creating a hype – that’s why we have been sponsoring the game for the past three years,” Safi added. “As all the games are retransmitted, there is a lot of brand visibility, so branding on courts has been a good investment for us.”

Too much hype?

The sport reached it peak in 2000, after which the hype began to fizzle. Explaining William Lawson’s decision to terminate its sponsoring contract with Sagesse in 2000, Vincenti said: “Once you’ve reached the top it’s difficult to keep the interest going. They won the Asian Championship… then what? When you win the Lebanese championship ten years in a row, it becomes boring.”

For now, the brand is not considering returning to sport sponsorship any time soon. “Lebanon is not sports-oriented,” Vincenti said. “Actually, they are quite sports oriented, but not toward local sports, it’s much more international. Football is small and basketball was basically the most popular sport.”

It’s the economy stupid! Compounding the slump was the slight problem of a recession. Sponsors are pulling out, contracts are going for less, and advertising spots are being sold for a fraction of the price they used to. Getting one’s brand on the coveted center circle of the basketball court once went for $50,000 to $100,000, depending on the club. Today, it can go for as little as $6,000.

“The economic situation in Lebanon has been getting worse in the past five years, and thus the overall advertising budget is also down proportionally, by nearly 30% compared to what it was six years ago,” Choueiry complained last year.

Tabet agrees. “Instead of having a contract for $50,000, probably now they are negotiating for $15,000 to $20,000.”

Following the withdrawal of LibanCell, Sagesse is now saying goodbye to Adidas, its second biggest sponsor and one that had been with the team for years. “Adidas sponsored us for five to six years,” said Barakat. “This is in part because they are transferring their regional headquarters to Dubai, but it is also due to the fact that they are cutting down on their sponsoring budget and focusing on big international teams.” Adidas declined to comment on the matter.

The vote of no-confidence will undoubtedly affect the earning power of Lebanon’s top players, many of whom earn as much as $20,000 a month. “Even Lebanese players are earning between $5,000 and $7,000 per month,” said Barakat. The unraveling of the sport

However the sport’s struggle to obtain sponsoring cannot only be blamed on the economy. Crises, scandals, and mud-slinging have destroyed confidence among fans, players, team owners and sponsors alike. Topping the list of scandals is Café Najjar’s decision to dissolve its team following the brawl that erupted between its players and an Algerian team at the Arab Championships in Jeddahin May 2004. “Georges Najjar was unhappy with the fact that a team associated with his company, which is expanding into Algeria, was seen fighting on TV with the Algerian team,” the agent explained. “There are problems in Lebanese basketball,” admitted Joseph Abdel Massih, a member of Champville’s Sports Committee. “The championships never really finish. Every year you have a problem at the end of the championship. The clubs and the Federation need to solve these problems –sponsors don’t want to see players wearing their jersey having problems. Everything has to be calm.”

To others, the problems go beyond the perpetual feuds between the FLB and the teams. “The problem is that we’re in Lebanon – no law is applied, there is no legal recourse,” a Blue Stars affiliate complained. “It’s the law of the jungle, the law of the strongest that prevails. And who is the strongest here? Choueiry.” But while Choueiry’s sudden departure from Sagesse left a few rubbing their hands in glee, the most prevalent reaction was that of widespread regret. That the sport will suffer a set-back financially due to his retirement is beyond doubt and many patrons are abandoning what they see as a sinking ship. Henri Chalhoub is apparently to leave Champville and take UFA’s sponsorship with him. “I am almost certain that we won’t sponsor Champville anymore,” an associate of Chalhoub confided.

The challenges ahead

As patrons and big sponsors desert the court, the onus is on the sport to clean up its act, and on the teams to build up a strategy to re-attract enough sponsors to become self-sufficient. “Within five years, we plan to have sponsors covering our budget,” said Riyadi coach Abou Chacra. “We can achieve this target. This team will be able to attract all the big companies – it has the biggest number of supporters and it’s the oldest club.”

Others are more cautious in their predictions. Acknowledging that Choueiry’s departure will require an extended recovery period for the sport, they do however, point to the strengths Lebanese basketball has been able to build up over the recent years: the number of enlisted players, the enduring preference for basketball over other sports, the continued broadcasting on LBCI and the on-going plan to establish a Lebanese-Syrian-Jordanian Superleague.

“This [super league] will attract sponsors,” said Sagesse technical director Rizkallah Zaloum. “Next season the sponsorship will increase.” Pepsi is cautiously confident. “We do research assessments on the game’s appeal every year, notably to see if it is still attracting youth,” said Safi on behalf of Pepsi. “If it is still generating the interest that it is now, that will serve as a major factor in our decision as to whether or not we will continue sponsoring the sport.”

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Society

Battle of the Titans ends in merger

by Anthony Mills
written by Anthony Mills

This year, more than four million cinema tickets will be sold in Lebanon, despite the offer of a cheaper alternative by hundreds of cable TV and DVD pirates. The ABC mall cinema in Achrafieh has finally thrown open its doors – after months of delay. A 12-screen multiplex north of Beirut, reportedly the Middle East’s biggest, is slated for completion by year’s end. The big story however, is the merger between Lebanon’s two major cinema distributors, Planete and Empire. The move comes after an almost ten-year battle for market supremacy, one in which Empire ultimately prevailed.

Both companies confirmed to EXECUTIVE that Planete has committed to a November 4 management takeover by Empire, in a possible prelude to a buy-out. The announcement comes after Planete saw the 65% market share it acquired in just a few years after its 1995 launch drop to less than 25% in 2004. The official announcement of the deal will come in mid-October. The decline in Planete’s share of the roughly $20 million Lebanese cinema sector was precipitated by an aggressive Empire campaign to rebuild its market share, primarily by renting more space for cinemas. Unable to follow suit, because unlike Empire it had already spent a fortune buying cinema space, Planete looked on helplessly as Hollywood studio giants Warner and UIP re-defected to the Empire camp two years ago, and revenues plummeted. “We had different strategies. We invested much more than they did. Our strategy was to run theaters we owned. Theirs was to manage theaters. Now we understand that their strategy was the right one, and we were wrong,” declared Planete Manager Gilbert Chammas.

Planete’s brisk march to success after it broke into the sector almost 10 years ago took Empire by surprise. “We hadn’t taken Planete seriously,” admitted Empire Manager Gino Haddad. “But after the first year we saw that their figures were good. They began to eat away at our market share.”

When, after only a few years, Planete had a bigger market share than Empire, the alarm bells started ringing. The problem, explained Haddad, was that Empire simply didn’t have enough screens to satisfy distributors by playing all their movies, and keeping them on offer long enough. And so, a number of the distributors had decided that their interests would be better served by Planete. Empire’s response? “We opened more cinemas,” chuckled Haddad. “And we took the prime locations: Sodeco, Dunes, and recently the ABC mall cinema.”

In the absence of a counter move by Planete, the additional high-end Empire screens quickly tilted the market share balance back in Empire’s favor. Distributors began drifting back. But Chammas contended that they didn’t move back solely to maximize ticket sales. “When UIP was with us, they used to have 400,000 to 500,000 admissions a year. With Empire they now have only 150,000,” he asserted. He refused to reveal what he believed the distributors’ true motives were, saying only that Empire benefit from the alliances.

“Planete was starting from scratch,” echoed Haddad. Empire, on the other hand, has been around in one form or another for almost a century. The business distributed Lebanon’s three highest-grossing movies ever – TITANIC (about $2 million),” The PASSION OF CHRIST (about $1.4 million), and THE MASK OF ZORRO (roughly $600,000 – and sold about 2.6 million seats in 2003.

“Planete, I think, welcomes the management takeover move because all the major movies shown in Lebanon are now shown by Empire,” declared Haddad. “This year, our market share has grown to 78%. If things had continued like this, maybe next year we would have had 85%. And that’s how it would have ended. This is actually in the interest of Planete.” “It’s a win-win deal,” agreed Chammas.

Negotiations began over six months ago, according to Haddad. Both he and Chammas declined to disclose who initiated the merger discussions, but they stressed that the talks were amicable. Asked if Empire planned an eventual buyout of Planete, Haddad said: “There is the possibility of a buyout if the price is convenient for both parties.” Yes, he added, there had been discussions about whether or not Empire would be interested in buying. Planete was valuing itself in excess of $5 million, he said. Chammas confirmed the possibility of a buyout at a later stage. Haddad claimed, though, that Empire was adopting a cautious approach to the buyout option. He said the earliest a buyout would come in a year, after Empire had had time to assess the prospects of Planete cinemas under Empire management.

“Buying today is a risk, because in ten years’ time, I can’t tell you if Abraj and Zouk will still be doing the same figures,” he said. It is still unclear, he explained, what effect the ABC mall cinema will have on other cinemas. “ABC is exactly four-and-a-half minutes’ drive from Abraj, along the motorway. For every cinema that goes up, one goes down. ABC has gone up. Either Sodeco or Abraj will go down.”

Under the terms of the management takeover deal, Empire is to assume control of Planete’s Tripoli, Zouk and Abraj cinemas, which will retain their Planete brand identity. Planete will continue to manage its Concorde venue in Verdun. Overall, Planete theaters count a total of 28 screens and about 5,500 seats. The merger will give Empire control of 60 screens in Lebanon.

Empire is to pay Planete a percentage of revenue or “rental fee.” Haddad said he was unable to reveal figures, but said the fee would represent a “good chunk of revenue,” at least equal to current Planete earnings. A product of the merger, said Haddad, will be the homogenization of cinema movie selections across Empire and Planete screens. The curtains will be drawn on an almost-10-year Empire-Planete tussle for exclusive agreements with international distributors and on the mutually exclusive Empire and Planete movie listings these fluctuating alliances spawned. Soon, choice of movies will no longer figure among the criteria used by cinemagoers to decide which cinema to head for. Instead, they will be paying greater attention to décor, surroundings, location (including proximity to home), and atmosphere. “We want to get to the point where, like in the United States, people choose the site, and not the movie,” stated Haddad. “Having all the good movies in each cinema will increase revenue.”

And once the audiences are choosing sites, not movies, Empire intends to charge more for high-end venue tickets than for others. Just as moviegoers pay £11 to see a movie at a Leicester Square cinema in the heart of London, and less in the suburbs, so, Haddad explained, Lebanese audiences will be charged more to watch a movie at the ABC mall in Achrafieh, than at a cinema in Tripoli. “We might price tickets at new sites, with the best seats, sound and screen, at $10. But we would price the same movie at an old, dying site at $5.00,” he said. Even Sodeco tickets would cost less than ABC ones.

Another product of the deal will be the amalgamation of Empire Espace and Planete Zouk, both north of Beirut, to create a 12- or 13-screen 3,000-seat multiplex venue, complete with a media store and entertainment facilities. Espace Planete, as it will be known, will be the biggest multiplex venue in the Middle East, according to Chammas, and is scheduled to begin screening before the end of the year.

Empire believes there is money to be made from the massive influx of Gulf Arabs. The company’s newly-opened cinema at the ABC mall in Achrafieh attracted flocks of Gulf visitors in July and August, according to Haddad. In part to cater to Gulf Arab visitors, Empire is pioneering a staggered show-time approach – already standard practice in America and Britain – at its ABC mall cinema. Instead of showing movies at fixed times, a new screening begins in one of the nine theaters every 15 minutes. This routine allows viewers to dispense with the bustle of getting to the cinema ‘on time,’ and to integrate their cinema visit with a ramble around the mall, or a bite to eat at one of the shopping center’s cafés or restaurants. Gulf Arab families who have come to Lebanon to relax welcome the stress-free approach.

Although Gulf Arabs still represent a fraction of Lebanon’s annual box office receipts, they spend far more than Lebanese viewers at the concessions stands. “The average Lebanese spends a dollar or two. A Gulf Arab spends $7 to $10,” observed Haddad. And concession takings constitute between 20% and 30% of Empire’s overall annual revenue, he noted.

When it comes to taste, the younger Lebanese crowd isn’t too hot on Arabic movies, apart from the iconic ones like “West Beirut.” That explains why you might see only one Arabic movie a year in an Empire cinema, observed Haddad.

And there is no hope at all in Lebanon for art house movie theaters, which are popular in the West. “We tried,” said Haddad. “But no one wants to go to those kinds of cinemas anymore here. If there was a huge library in Lebanon, like in France or England, with old, interesting books, how many people would you see in it?” Home theaters are taking a steadily increasing, but bearable, toll on cinema owners. DVD and cable TV pirates, on the other hand, have, for several years been slashing huge chunks out of cinema revenues. According to lawyer Walid Nasser, who has been tasked by major American film studios with limiting the damages to their interests caused by piracy in Lebanon, cinemas here have lost more than 50% of their audiences because of the problem. “And the government is doing nothing about it.”

Nasser said there were as many as 700 pirate cable companies operating in Lebanon, with up to 750,000 subscribers, who pay an average of $10.50 each a month. This translates into a total monthly revenue of over $7.5 million for pirates.

“You can buy fake DVDs from Malaysia here for $2. We have pirated cable TV providers who play all the new movies. It’s a huge problem. In other countries they are finding solutions, but not in Lebanon. There are too many people involved. There’s too much money being made by people who control the market and have an interest in keeping things as they are,” lamented Haddad. “It’s like the electricity problem. In Jounieh, everyone pays. In Dahieh, no one does. It’s simple: politics. At the border, when they bring over pirated DVDs, someone gets $100 and a phone call. And even if pirates do get arrested, nothing happens to them. They have to pay $400 or $500, or another phone call is made.”

“There was one case in Sidon, where we went to raid a major pirate,” recalled Nasser. “He had a Kalashnikov on his desk. That put an end to the raid pretty fast.”

Asked if some pirates were protected by powerful public figures, Nasser said: “Frankly, I wouldn’t be surprised because of the amount of money that’s collected on a monthly basis – $7.5 million is a lot of money.”

If piracy was being combated properly in Lebanon, Haddad said, Empire would double its DVD sales. On a positive note, though, in contrast to other Arab countries, censorship in Lebanon is no longer proving too much of a headache for cinema industry professionals. “We have come a long way from the days when you couldn’t show a breast,” remarked Haddad.

TYRING TO REMAIN INDEPENDENT IN A CHANGING MARKET

Cinema runs in the blood of the Fathallah family. Since its inception in the age of silent movies, the Fathallah family cinema business has been passed down from generation to generation. Today, the Fathallah Films Co. rests in the hands of A.K. Fathallah, independent owner of the one-screen Aresco Palace and Montreal cinemas in Sanaya and Hamra respectively. Unable, though, to compete with Empire and Planete in the English-language film market, or to survive on Arabic film screenings alone, A.K. is battling the unthinkable: an inauspicious shutdown of the family’s cinema business interests.

Years ago, Fathallah Films used to distribute to cinemas across Lebanon, from Tripoli to Sidon, and throughout Beirut and its suburbs. Today, it finds itself confined to two locations in Beirut.

“There used to about 20 theaters in Hamra. We are the sole survivors. We’re trying to continue,” mused A.K.. “These days, we can show only Arabic movies, because Empire and Planete, who own all English-language film distribution rights for Lebanon, won’t give us any movies. Sometimes they say they don’t have enough prints, sometimes that they are waiting for confirmation from America. But the truth is they have their own cinemas and have no interest in letting anyone else show their films.”

A.K.’s audience numbers have been given a modest boost by the increase in Gulf Arab visitors. This year, A.K. opened a cinema for two months in Bhamdoun, to tap into the summer Gulf market up there. But there just aren’t enough popular Arabic movies, or Gulf tourists, around to pack A.K.’s cinemas consistently. During the lulls, he rents out his theaters for plays and shows. A mark of desperation? “It’s difficult,” A.K. concedes.

Increasing cable piracy since the end of the war in 1991 has only made matters worse. “The last five years have been terrible,” declared A.K.. “Everything is working against cinema. And no one is helping. They ask me for my certificates. Why does no one ask the pirates for theirs? People can watch 100 stations at home and pay nothing. Nowadays, to get someone out of their chair to go to the cinema, you need to offer a big choice or a big movie.”

Fathallah Films’ plight has been aggravated by changing audience preferences. Today’s younger generation in Lebanon is shying away from Arabic movies and one-screen cinemas, in favor of action-packed American blockbusters and multiplex venues. Back in 1980, Fathallah Films drew audiences to one of its cinemas for a year with the same Arabic movie. Today, that would be inconceivable. A.K.’s cinemas draw about 55,000 viewers (or roughly $260,000 revenue) a year, a far cry from Empire’s 2.6 million. No one has offered to buy out Fathallah Films’ cinema interests – an ominous indication, maybe, that, from a market perspective, they are simply not worth buying. This explains why the company has, in recent years, placed ever-greater emphasis on its non-cinematic interests. “We are shifting from cinema to television,” stated A.K. Fathallah Films distributes programs, including documentaries and cartoons, to television broadcasters like MBC and Dubai Television. Asked if Fathallah Films could survive today on cinema alone, A.K. responded: “Never. It’s impossible to survive on our two cinemas and low audiences.”

“I hope we don’t have to close down our cinema interests altogether,” he added. “I love cinema. My brother loves cinema. Our family started this company with cinema.”

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