Less popular cruises?

by Executive Contributor August 25, 2004

written by Executive Contributor

While 60 cruise ships dock at Beirut each summer only one, the Ausonia, takes on new passengers, and for three years now, Lebanese holidaymakers have signed up for the weeklong Greek island cruise, organized by the Cypriot company, Louis Cruise Lines. That was until this year, when prices went up by about 5%, noted Toufic Keyrouz, general manager of the travel agency Lebanese International Tours, who feels that the budget cruise may have had its day.

Paul Zahlan, a director of Lebanon’s Aeolos travel and cruise agency, which helps Louis organize the cruise, said roughly 1,000 places are sold to Lebanese each year. Aeolos spends $20,000 to market the trip on LBC, Light FM and Radio Free Lebanon and the company also relies on word of mouth from what it hopes are satisfied customers. According to Zahlan, the Ausonia, which accommodates a maximum of 690 people, is no luxury vessel, but its prices appeared to fit in with Lebanese budgets.

However, lure of cheap charter flights, luxury cruises, and more stringent visa application processes since Cyprus’ accession to the European Union may conspire to reduce the number of Lebanese interested in the cruise, he said. “I don’t think we will sell as many places this year,” Keyrouz warned.

His prediction comes at a time when local travel agents are selling week-long holidays to Turkey’s highly regarded resorts for under $400 per person. Prices on the Ausonia start at $500 per person going up to $1,030.

A taxing transfer

As they prepare to transfer management of the mobile network over to German firm Detecon and Kuwait’s Mobile Telephone Company (MTC), the two mobile telephone operators, Cellis and LibanCell, contend that their employees do not have to pay taxes on their indemnity packages following their voluntary decision to resign. The companies contend that they received confirmation of this in a letter from Sarkis Saker, the finance ministry’s tax department director.

However, the validity of the letter has since been thrown into doubt. An independent Audits Court is currently deciding whether the indemnity payments, ranging from $20,000 to $133,000, should, in fact, be subject to 20% taxation. A current Detecon employee, as well as a former Cellis one, told Executive that they had seen the letter. They both asked not to be named. The Detecon employee suggested there was a misunderstanding, or that a decision had been taken at a certain level but not at another. “If Sakr doesn’t represent the ministry, then who does?” asked the Cellis employee.

Saker confirmed that the letter had been sent, but said he was unable to comment further since the file was with Fouad Siniora, the minister of finance. He said he didn’t know when a decision would be taken. An official at the ministry said that Jean-Louis Qordahi, minister of telecommunications, wrote to Siniora on May 17 urging him to speed the decision process up.

A spokesperson for Detecon said less than 20 people had chosen to revoke their decision to voluntarily resign from Cellis by mid-afternoon on May 18 – the deadline given for doing so. MTC, for its part, said about 20 LibanCell employees had decided not to resign after all. More than 300 people at both Cellis and LibanCell have resigned.

How Smart a purchase?

With gasoline prices hurting the purse of most drivers, Mercedes importers Gargour & Sons were given an added fillip for the launch of the roughly $20,000, four-seat, four-door variation of their hip, compact Smart car, which can do about 350 km on a full tank per 20 liters. DaimlerChrysler chose Lebanon as the first Middle Eastern country in which to introduce the Smart series, and launched the 1.5l, four-cylinder 109 horsepower “smart forfour” at the new Smart showroom in Saifé.

A spokesman for DaimlerChrysler said the auto giant had picked Lebanon as their point of entry the region because it regards Beirut in particular as sharing the ‘hip lifestyle’ image it associates with the brand, which despite its obvious attractions has yet to catch on with the mainstream Lebanese car market.

At the newly-opened showroom 18-year-old Ibrahim El Zein agrees. “This is the best car for my age,” he said, before acknowledging that his parents would be footing the bill. Buyers said their attention had been drawn to the car by a successful billboard campaign, and noted that at a time of high petrol prices, the “smart forfour’s” fuel efficiency influenced their decision to buy.

By mid-June, Gargour had sold 17 of the cars. The distributors hope to sell 110 by the end of the year. But this may be overly optimistic. Mathieu El Hawa, a 33-year-old events organizer who has just bought a “smart forfour” at $22,500, said he thought the price was “at the upper end” of the range for that kind of vehicle. “I think the price will deter buyers,” he warned.

Overall, Gargour & Sons have sold about 80 smart cars – including the smart 4.2 and the roadster, exceeding expectations, said Aoun, who boasted that the “smart forfour” would help sales to continue “snowballing.”

Losing money, tranquilly

Restaurant owners on Maarad Street are angry that a walkway under construction behind buildings on one side of the street still has not been completed. The path will flank the rear façade of several restaurants as part of a “Garden of Forgiveness” – which will incorporate a portion of Beirut’s ancient ruins.

Before work began in September last year, the restaurants were using the space for outdoor seating. They have since been deprived of valuable income, and losses are growing as the summer season sets in. Revenue at Casper & Gambini’s Maarad Street outlet – which lost 120 outdoor seats when work on the path began- – has dropped by 50%, according to the restaurant chain’s director of research & development, Carol Maalouf. The neighboring TGI Friday’s has lost more than $100,000 since construction began.

Initially, restaurateurs had been promised that the walkway would be finished by March or April. “I am going to look into it to see if the delays are minor or major,” pledged Beirut Mayor Abed El-Menem Ariss. “The municipality does not delay things.” He said he was unable to say when the walkway would be finished.

Restaurateurs had also been told they would be allowed to set up outdoor seating again once construction had ended, Maalouf said. But it is now unclear whether the restaurants will, in fact, get their terraces back. “Halfway through they said no,” stated Maalouf. She said that the sudden volte-face had been prompted by Beirut Municipality concern that restaurant tables might spoil the tranquility of the garden. A Solidere urban development manager who asked not to be named said he was “extremely concerned about the abuse of space.” We don’t want the garden overwhelmed by commercial activity,” he said. The delay could, he acknowledged, have “something to do with that.”

Crashingly low payment

Half a year after a disaster of a Union Transports Africains flight cost the lives of over 130 passengers, most of them Lebanese, the carrier and its insurers issued an offer to compensate the families of victims. According to a press release by London law firm Barlow Lyde and Gilbert (BLG), UTA and its unnamed insurers established a “humanitarian fund” willing to disburse $10,000 per adult and $5,000 per minor killed or injured onboard the Boeing 727 that crashed on Christmas Day 2003 during takeoff from Cotonou (Benin) to Beirut.

The size and form of the proposed settlement raised questions in Beirut, as the amounts offered are unusually low for compensation commonly paid in airline accidents. Several families of crash victims immediately rejected the offer and some called the amounts “insulting,” said lawyers Youssef Mouawad and Diane Armaleit, who represent the interests of about 20 affected families.

According to Mouawad, the exact terms of the settlement proposal had not yet been conveyed to him and his clients by mid June. While some might be tempted by it, he said “the families of many victims are not going to accept this,” and would press for establishing the criminal culpability of the airline’s [Lebanese] owners in court.

Because of the circumstances of the crash, attributed by initial investigations to massive overloading of the plane, the families would aim to have the UTA owners charged with “gross negligence amounting to fraud,” Mouawad said, as soon as the final disaster investigation report is issued.

British law firm BLG, which administers the portentous fund and appointed lawyer Fady Mallat as their Beirut representative to submit claims to, would only state that the fund was established “outside of the terms and conditions of UTA’s insurance policy” and told Executive that it could not comment further.

Information sector disinformation?

A new study on the Lebanese information and communications technology (ICT) industry puts the sector’s size at 600 companies with a workforce of up to 6,750 employees and annual sales of up to $400 million. It affirmed that ICT is “a significant, vibrant and productive industry sector in Lebanon.”

The study, which canvassed sector companies based on commercial directories in March and achieved a response rate of just under 25%, was conducted by California-based research firm SRI (formerly Stanford Research Institute) and funded by the USAID mission in Lebanon.

Based entirely on industry responses, the survey found that 51.4% of sector companies are medium-sized firms ($100,000 to $1 million in sales). Almost 40% are active only in software development, where companies achieved almost triple the annual business growth of pure hardware firms. Regardless of their specialization, small firms (22.6%) reported higher growth rates than medium and large players. Companies said that insufficient information about export markets was their main challenge to growth and presented themselves as fairly confident of their technical and management skills.

Often hailed as key industry with international growth perspectives, the Lebanese ICT sector had suffered for years from an absence of reliable industry data. SRI cautioned that the survey results did not allow drawing implications for any strategic change.

Officials of Lebanon’s Professional Computer Association, which participated in the commissioning of the study, welcomed the results. But Fares Kobeissy, president of the Association of Lebanese Software Industry, questioned several figures, such as the reported annual industry growth rate of 12.5% over the past two years, based solely on information from companies in a sector known for presenting overly rosy figures. “We know that we have a lot of problems in our sector,” he said. “Unless we can be sure that they are 100% correct, such numbers are not going to help us.”

Have a Spin(neys)

Can you use new wheels? Try Spinneys. Ten spanking new cars are the main feature in a 100-day promotion and advertising drive from May to early August, which Lebanon’s expansive supermarket chain describes as “by far the largest ever” for such a campaign in retail here.

Putting out Toyota cars as prizes worth “just short of $300,000” and investing into advertising and below-the-line product promotions, the three-tiered campaign carries a value of $600,000, Spinneys’ Middle East retail director Michael Wright told Executive. At its mid-point, results were in line with expectations and brought the company month-on-month sales growth of 15% to 20%.

The campaign’s unprecedented size is based on both sales volumes and increased geographical presence of Spinneys markets in Lebanon. “Our advertising budget is directly related to our top-line sales,” Wright said. When the company operated at single branch level, even nationwide campaigns had been of limited effect, because customers would not find their way to the store, he added.

While some of the chain’s previous promotion efforts, such as introduction of coupons in 2003, seemed over-complicated for local habits and were not carried further, the current high visibility campaign apparently strikes a strong chord with Lebanese consumers. Under the rules of the campaign, a customer receives one ticket participating in the draw for the car prizes per each $34 in purchases.

The mechanics of the car giveaway follows the rules for lotteries under Lebanese law, by which prizes must amount to at least 3 percent of the accumulated value of participating tickets. Thus the campaign is geared towards achieving $10 million worth of tickets. For those who have a penchant for a gamble, this places the odds for winning an extra four wheels with your LL50,000 purchase at one in 30,000.

The politics of economic reform

Politically driven economics were high in the decision to initiate an early swap of $7.5 billion in Lebanese Eurobonds maturing in 2005 and 2006, for a new debt maturing in five years. The swap was approved on June 17 by the Cabinet, authorizing finance minister Fouad Siniora and central bank governor Riad Salameh to start negotiating a swap operation with commercial banks.

On contending sides of the issue were Prime Minister Rafik Hariri, who had opposed the measure, and President Emile Lahoud, who initiated it. Hariri stated that the national debt has reached $35 billion and could rise to $45 billion over the next three years, unless the country achieved its long-called-for economic reforms. Lahoud argued that the swap would ease pressure off the economy and that, done early, it could save the country money by achieving lower interest rates than those expected in international markets next year.

These latest economic policy arguments between Lahoud and Hariri grew from a seed planted a month earlier when the prime minister announced that he intended to orchestrate a third international donor conference for Lebanon, dubbed Paris III, in 2005. As pundits saw it, a new donor conference would underscore the importance of Hariri’s role for Lebanon’s economic recovery, weakening the president’s chances of an extended or renewed mandate; whereas avoiding such a conference would work to strengthen the position of Lahoud.

The question not commonly addressed in the dispute was why international institutions and donor countries would be interested in participating in yet another meet to rescue the Lebanese economy when the country has failed to deliver its promises made at the Paris II conference of November 2002. International economists observing the Lebanese scene immediately doubted that donor countries would have the stomach for yet another Paris round.

August 25, 2004 0 comments

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Getting empire right

by Michael Young August 3, 2004

written by Michael Young

President Bush: dogged by economic challenges

Not long ago, one of the more pervasive explanations for the American war in Iraq was that the Washington had somehow embarked on an imperialist binge. Many a learned scholar clamored that what was on display was, in fact, “neo-imperialism” fashioned by a small clique of right-wing hotheads who had infiltrated the highest echelons of the Bush administration.

How quaint the explanation now seems, as the US has spent the past several months proving that, if a new imperialism was indeed once a mantra (and nothing proves this), then very poor imperialists the Americans have proven to be. As the presidential election approaches, in Iraq the US is suffering from, to quote British historian Niall Ferguson, “attention deficit disorder.”

Ferguson has been making this case for over a year now, in the context primarily, but not exclusively, of the Iraqi conflict. However, his argument is also much more general, and underlines a belief that the world can indeed benefit from a liberal empire, similar to the British Empire during the 19th century. Ferguson’s argument is primarily an economic one, and he develops it in his most recent book, Colossus, on the price of America’s empire. He writes: “The evidence that, in an increasingly protectionist world, Britain’s continued policy of free trade was beneficial to its colonies seems unequivocal. Between the 1870s and the 1920s the colonies’ share of Britain’s imports rose from a quarter to a third.”

Ferguson goes on to write: “The British Empire was an engine for the integration of international capital markets. Between 1865 and 1914 more than ?4 billion flowed from Britain to the rest of the world, giving the country a historically unprecedented and since unequaled position as global net creditor, the ‘world’s banker’ indeed, or, to be exact, the world’s bond market.”

Based on this, and after cataloguing the myriad failures of third world countries having undergone decolonization, Ferguson argues that the US must embrace the liberal imperial mantle. The only problem, he notes, other than Washington’s propensity to abort its overseas ventures too early, is that an American empire faces both economic and manpower challenges: economically, the US must manage startling long-term domestic challenges, including a ballooning fiscal crisis nourished by the American propensity to consume much and save little. At the heart of this is an impending social security crisis. Americans are living longer and the present fiscal system remains entirely inadequate to pay for future generations of far more numerous retired people.

The ways of dealing with this, writes Ferguson, are to engage in massive increases in income and payroll taxes, or to slash social security benefits by equally dramatic amounts, or to cut discretionary spending to zero! This leads him to conclude: “[T]he decline and fall of America’s undeclared empire may be due not to terrorists at the gates or the rogue regimes that sponsor them, but to a fiscal crisis of the welfare state at home.”

A second challenge the US Empire faces is that it does not have enough people under arms to manage its vast global backyard. This stems, in part, from the fact that Americans are not instinctively “imperial” and hesitate to finance too martial a society. This, Ferguson suggests, is why “if Americans are reluctant peacekeepers, they must be the peacekeepers’ masters, and strike such bargains as the mercenaries of the ‘international community’ may demand.”

Has Iraq proven Ferguson’s point? Certainly in the past months the US has resorted to a more multilateral approach to the conflict there. The Bush administration virtually begged the UN to help it set up an interim Iraqi government, and would be delighted to see foreign forces, for example in the context of a NATO deployment, relieve American troops. That’s unlikely to happen, but long gone, apparently, are the exclusivist impulses that accompanied the American entry into Iraq over a year ago.

However, behaving multilaterally hardly prevents a powerful state from acting like, or indeed being, an empire. Take American behavior during the Cold War: the Western alliance was built on multilateral foundations, yet no one would deny that that was the time when the US took on its most forceful imperial identity.

What is critical, as Ferguson and others point out, is the deficit in American will in Iraq. As Middle East scholar Fouad Ajami wrote in the WALL STREET JOURNAL: “It is in Washington where the lines are breaking, and where the faith in the gains that coalition soldiers have secured in Iraq at such a terrible price appears to have cracked. We have been doing Iraq by improvisation, we are now ‘dumping stock,’ just as our fortunes in that hard land may be taking a turn for the better.”

How reminiscent that is of Ferguson’s own comment on US experiences in post-World War II Germany and Japan, which are often touted as examples of American nation-building success, but that were, in fact, very problematic ventures: “What was planned did not happen. What happened was not planned. This was not so much an empire by invitation as an empire by improvisation.”

So, will the US agree to be a liberal empire? For the moment the answer can be found in the Middle East, where the difficulties in Iraq may have prompted Washington to give up on its “liberal project” for the region. Instead, we risk seeing a return to the realist policies of the past that tolerated, indeed encouraged, autocratic regimes. That would be a shame. As the September 11 attacks made clear, only an international liberal order can buy America true security.

August 3, 2004 0 comments

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Prepared for tourists?

by Thomas Schellen August 1, 2004

written by Thomas Schellen

While, economists tend to measure tourism in visitor numbers, employment and/or contribution to GDP, an equally important gauge is the level of infrastructure development and the intensity of tourism “hotspots” (full of enthusiastic tour guides corralling tours through the nation’s must see sites). Theses abound at the pyramids, the Acropolis, St. Mark’s Square, the Louvre and the Eiffel Tower, but apart from a few weary public servants pointing to Roman columns at Baalbek, this level of tourist development has yet to be seen in Lebanon.

The BCD may be crowded night after night, but the continued total administrative indifference to emergency access needs and non-implementation of regulatory codes (which the ministry of tourism proclaimed only a few months ago would “absolutely be enforced before the summer”) in itself tells a story about the current art of managing tourism development.

But even the BCD still doesn’t radiate the air of a conventional tourism hotspot. Neither do Lebanon’s shores bear the mark of highly developed tourism displayed around the Mediterranean by sun-and-fun coastal villages, which rival their countries’ world-famous tourism landmarks as crowd magnets.

In this light, Lebanon’s tourism development is entering virgin territory. While the role of Beirut as Jet Set playground and entertainment attraction in the 60s has been touted ad nauseam, one local expert believes Lebanon never was a tourism destination, at least in the sense it would have us believe.

“Lebanon doesn’t belong to the classic scheme of tourism development of the type you find in catalogues, with hotels by the seaside, buffets, one tennis court per each 15 or 18 hotel rooms, and so forth,” said Guy Gay-Para, holder of a doctorate in tourism and owner of a café at Byblos Port. “This kind of tourism has been developed years ago in countries with dozens of kilometers of undeveloped seashores, such as Morocco, Tunisia, the Spain of Franco, the Portugal of Salazar. Recent history has shown that there never was Lebanese tourism in the classic sense. Lebanon was merely a convenient and convivial location that fused business and pleasure.”

However historical reflection is, it can be argued, irrelevant. The world of leisure travels today is very different from what it was 30 years ago and it is not enough to simply reproduce the past. Consumer behavior is diversifying and maturing. Providers and destinations have to increasingly deliver tourism products and services that are not only price competitive and high in quality but also satisfy social and environmental criteria.

This has not escaped the ministry of tourism (which, incidentally still has to demonstrate that it has a firm grasp of what is expected of it). “Our goal is really sustainable tourism,” said the ministry’s director general, Nada Sardouk. “We are working to develop the ‘Hidden Lebanon’, the many beautiful areas of the country that are not yet on the map. What we want for tourism is to achieve is social and economic development.”

What the ministry still has to demonstrate is a full grasp of what is expected of it. In a measure under its authority, it is currently completing the country-wide installation of sign posts and plans to issue comprehensive visitor maps. Although tourism conservation and development issues are spread over numerous institutions other than the ministry, and budget restraints hamper its operation, Sardouk said the shortage of funds did not present an insurmountable problem for the ministry’s role in tourism promotion, thanks (rather surprisingly) to inter-ministerial collaboration and (not surprisingly) barter deals with the private sector.

A good tourism infrastructure relies to a great portion on general infrastructure, road and transportation networks, water and electricity supply, waste collection and waste treatment. According to Sardouk, major highways and access roads to key tourist areas are in a good working order, but she agreed that general infrastructure needs more work. “The council of ministers has taken the decision to review roads and electricity supply to all mountain villages during the summer,” she said, and optimistically, “We still need a two to three year action plan for infrastructure development on water and electricity.”

While most of its aspects are public sector, a significant portion of tourism infrastructure is created by the private sector, from hotels and car rental companies to tour operators and visitor attractions. Here, the Lebanese state has instituted some support mechanism for the creation of this tourism infrastructure under the stipulations of the IDAL investment law 360, which since 2002 has benefited several large projects.

Although many operators say that they nonetheless do not see enough effective government support for development and usually rely on their own devices to plan and execute tourism ventures in absence of clear-cut communal or national strategy framework, the private sector does credit the ministry of tourism with making efforts in favor of their development.

Sardouk on her part described the partnership between private sector and ministry as “very good.” She added that the ministry is quietly “cleaning the house” of the tourism sector from defunct operators and that the quality of tour guide services is being upgraded under a new law, which, (rather bizarrely) mandates new guides to graduate from a specialized four-year university course. As far as being able to accommodate growing visitor numbers over the coming five years, she said she did not expect any bottlenecks in the supply of hotel rooms and facilities, tour buses, or any other aspect of the sector.

An essential operative aspect for securing functional tourism infrastructure, where private and public sector may find difficulties, is in understanding demand and matching it to what the country can supply or is willing to develop. Here Lebanon is facing an interesting challenge, because even at today’s relatively low inflows, the “typical” Lebanon tourist cannot be easily defined.

The guest from the Gulf region, whether he arrives by private jet, in economy class, or by car, is commonly viewed as a long-term guest, seeking a summer base, shopping and entertainment. Around Beirut and in the traditional mountain resort communities, ample evidence shows that many providers made a priority of developing facilities that appeal to this category of tourist.

Visitors from the Levant countries represent a different category, yet, with Syrian and Jordanian guests ranking third and fourth (after Saudi and Lebanese clients) for total hotel nights booked last year, this group represents a market potential that one hears little about. Tourists from outside the region comprise two distinct major groups: Lebanese expatriates and non-Arab (largely cultural and religious travelers with no discernable ancestral ties to the Eastern Mediterranean).

For the time being, data of arrivals and hotel stays (of over 160 nationalities by number of persons, total nights and average length of stay) by the ministry of tourism are quantitative. Because research hasn’t been more specific, the ministry for instance broadly assumes that holders of foreign passports are genuinely foreign as many expatriates enter the country using Lebanese identification. However, in case of second and third generation foreign-born Lebanese, this may not be the case (the number of Brazilian, Mexican and Argentinean hotel clients in 2003, all countries where persons of Lebanese descent make a good share of the population, were comparatively high).

The composition of anticipated future visitor streams, thought to include more and younger individual travelers from out of region, complicates the picture further. Behavior patterns in some of the main origin countries of international tourists digress seriously from public moral standards that apply in the Middle East and many western tourists today expect to be able to openly pursue activities that are not accepted under local behavior codes.

Under maturing trends in interests of European and other international travelers on the other hand, Lebanese tourism can expect to encounter strong and increasing demand for tourism products that they cannot readily supply. Beirut, for instance, lacks a museum that would guide visitors through the country’s cultural and communal diversity or explain the aspects of Lebanese history that people from around the world associate with the country – its exposure to the Middle East conflict. Health, eco- and agro-tourism are vacation growth areas that public and private sector have only recently awakened to and where soft and hard infrastructures need yet to be defined.

With tourism acting as the globalization force in culture, intensification of visitor arrivals would oblige operators and authorities here to embark on a steep learning and action curve in avoiding mistakes made elsewhere during the rise of mass tourism, evolve the tourism infrastructure in a multitude of features, and secure development that can enrich the national existence frame on environmental, cultural, social, and economic terms. In all that, the human element is the combining factor at the core of all tourism infrastructures. “The tourist will know if you lie to him,” said experienced tour guide Francoise Hobeika. “You have to make the tourists see the country through your eyes, let them feel the place and sense the beauty of the land so that they enjoy their visit.”

Besides nine main historic and natural attractions that could all be real tourism hotspots, Lebanon according to Sardouk holds about 190 sites of archeological and cultural interest, many of which are not yet incorporated into the tourism infrastructure. Add to that the country’s human capital and you maximize the power of the destination that might even open up even more untapped niche sectors.

“Among European cultural tourists, many are old and lonely,” said Hobeika. “I have seen seniors who left Lebanon with tears in their eyes and said they would never forget us. They didn’t feel lonely here.” Surely that is incentive enough.

August 1, 2004 0 comments

Business

Look who’s coming to town

by Thomas Schellen August 1, 2004

written by Thomas Schellen

This summer, Lebanon is riding on a wave of inbound tourism that is, by local standards, monumental. For the first time in recent memory, the month of June saw more than 100,000 arriving visitors. In relation to June 2003, the upward jump amounted to 37.43 % from 97,273 to 133,678 visitors, translating into a 26.4% share of the total 506,367 arrivals recorded for the first half of 2004. And while this increase was by far the largest year-on-year tourism growth for the month of June in a long time, the even better news is that growth rates in other months of this year were more flabbergasting still. In the first half-year of 2004, three out of six months recorded higher percentage wise increases than June: April (106.81%), March (77.16%), May (46.35%), plus January (35.34%) following not far behind.

For the industry, this means a double positive evolution of increasing and more balanced business as the summertime bulge in inbound tourism is becoming less extreme. “The figures for 2004 show a flattening of the curve between high and low seasons. The rise in tourism figures is consistent and very good for the country,” Nada Sardouk, general director at the ministry of tourism, told EXECUTIVE. In line with the good performance of the first six months, she confirmed that the ministry anticipates a total visitor count topping 1.3 million for this year.

The ministry’s optimism reverberates on the ground. From Bhamdoun to Broumana, the summer resort towns above Beirut saw business shift from zero to vibrant several weeks earlier than last year. The up market hotels that are the usual suspects for doing top business in Beirut confirm that occupancy has approached 100% since the beginning of July. And while Saudi Arabia’s new ambassador to Lebanon estimated in a welcomed message that more than 200,000 of the kingdom’s citizens (and coveted spenders) would vacation in Lebanon this year, arrivals of holidaymakers coming from outside the region also show new promise.

According to industry insiders, regional arrivals improved during the phase of changed travel patterns triggered by September 11 but many European tourists stayed away in 2002 and 2003. From this spring, however, the numbers of cultural tourists from Europe increased healthily and also started to include more people of younger age, where in previous years the “junior” in a tour group would often be 65.

Compared to previous years, while visitor numbers of one million per year marked a 2003 watershed and a 1974 visitor count of 1.48 million has again and again been quoted as the benchmark and the number to beat, the summer of 04 thus looks great. It seems a very fitting moment to pause and take stock of the larger potential, the up- and downsides of tourism for Lebanon, through an assessment of its macro-economic role and relevant public and private sector strategies.

On a worldwide scale, tourism is the fastest growing economic sector in two crucial respects: job creation and foreign exchange earnings, according to the World Tourism Organization (WTO), an agency of the United Nations. But although journeying has been called a human compulsion and universal drive since the first members of the human race embarked on migrations across deserts, oceans and mountain ranges, the career of tourism as a significant component in national economies has been more recent than the ascendancy of activities such as manufacturing, trade, finance, and transportation.

Tourism as a modern activity (in its definition as ‘travel for leisure,’ the term has been used officially for less than 80 years) has changed greatly from its beginnings as an elite pastime of wealthy young Britons who from the 18th century onward roamed Mediterranean destinations to escape their dreadful native climate and cuisine, and who greatly enlarged their cultural knowledge and art collections in the process. This elite phenomenon was the prototype of today’s cultural and leisure tourism and also soon came to include health tourism.

Tourism became less the preserve of the elite in the mid to late 19th century through organized mass travel but it really invigorated the economic equation of tourism in the second half of the 20th century. It brought the expansion of leisure journeys into a service used heavily by average income earners in industrial countries.

From a Lebanese perspective, it must appear sadly ironic that the year 1975 – when visitor numbers here came crashing down – is used as the international reference point for the sector’s rise to a new level and the unfolding of massive growth as worldwide tourist numbers broke the barrier of 200 million persons. From 1975 until 2000, this number of tourists tripled and for the coming 15 years, the WTO (which held its first general assembly as an UNDP agency in 1975) estimates another increase to 1.56 billion international tourist arrivals worldwide in 2020. Published in a report titled, Tourism2020 Vision, just before the turn of the millennium, the WTO prognoses calculated global tourism growth at 4.1% annually between 1995 and 2020 based on input from national tourism authorities and global industry leaders. The WTO’s regional forecast for the Middle East presents an even substantially higher outlook of 7.1% annual growth to reach 68.5 million tourist arrivals in 2020. Under this prediction, the Middle East’s share of international tourist arrivals would double over the study’s 25-year period from 2.2% in 1995 to 4.4% of the world total in 2020. However, a new WTO series of short-term assessments of sector developments, called the World Tourism Barometer, showed in its latest edition published in June that the Middle East achieved 30.4 million international tourist arrivals in 2003 (an increase of 10.3% from 2002), already representing a 4.4% share of the world’s 694 million tourist travels. According the findings of the report, Lebanon’s recent tourism boom is fully congruent with developments in the region and beyond. And assuming a 7.1% annual growth rate for the Middle East from this base figure, the region’s intake in tourism by 2020 could even be significantly higher than forecast in Tourism2020 Vision

The importance of tourism in global economic development in general, and the Middle East in particular, is clearly not in question. What requires examination in the macro-economic context, are the potential and strategies for Lebanese tourism relative to competing destinations and global trends on the one hand and the requirements to optimally manage tourism growth on the other hand.

Under the theme of managing tourism in global development, countries and international institutions are increasingly reviewing the link of tourism to economic, social and environmental development. A study undertaken for the World Bank concluded last year that the organization should cover the “operating environment of tourism” more strongly in its projects and country assistance strategies while carefully assessing the benefits of tourism for sustainable development. In all three respects of economic, social and environmental development, tourism growth has been shown to offer substantive benefits to national economies, but also brings with it risks and potential disadvantages.

In economic development, employment growth, increased foreign exchange earnings and heightened Foreign Direct Investment attractiveness are juxtaposed with increased infrastructure costs, inflationary pressures and the possibility of substantial outflows, or leakage, of tourism-related revenue from the economy. In its social and environmental impacts, badly managed tourism can also harm a nation’s living quality by factors such as limiting parts of the population in their access to water and energy, pushing real incomes lower, over-exploiting nature and degrading historic cultural assets.

For middle and low-income countries in the developing world, the contribution of tourism to GDP often assumes an over-proportional importance. Extreme dependency on tourism is a risk especially for small nations with marginal productivity, examples being exotic vacation islands such as the Maldives, Antigua or the Seychelles.

Whilst the country is still in the process of formulating its sustainability agenda for tourism development, Lebanon’s ministry of tourism today assumes an outlook of rapid growth in tourism of 20% and more per annum for at least the next six years. As director general Sardouk confirmed, the ministry’s best-case expectation is for 4 million tourist arrivals in 2010. This is much higher than the paltry 1.71 million tourists, which the WTO projected Lebanon to attract in that year.

Such a performance would also propel the contribution of tourism to the GDP – estimated to range at present between 8% and 10% – to levels for which the ministry today has no projections. Considering that Lebanon is part not only of the Middle East but also located in the world’s number one tourism region, the Mediterranean – which represents an expected slice of 345 million tourists in the global 2020 leisure travel cake – such an aspiration seems entirely reasonable. This is if it also makes responsible tourism development a crucial item on every private and public sector to-do-list.

August 1, 2004 0 comments

Business

Cornering niche tourism markets

by Thomas Schellen August 1, 2004

written by Thomas Schellen

Tour operators report a 50% improvement in bookings over 2003; the streets of Bhamdoun are rocking; guides are having the best summer in three years and their busy season increased to six months…. But Lebanon wants more tourism. EXECUTIVE details how the country can get more by taking a look at tourism niches and sub-niches that have development potential or even untapped capacities.

Healing the body

Health-related travel is an international tourism market niche to which local experts attribute enormous inbound potential. A broad coalition from the public and private sectors has begun efforts to unleash this potential by cultivating a sub-specialization of health tourism, called medical tourism, and the first results are coming in.

In June, Lebanon’s National Council for Health Tourism (NCHT) counted 40 to 50 patient arrivals here from regional countries, marking the beginning of what is hoped to become a huge activity for Lebanese hospitals, doctors and hospitality providers. “Every year, Arabs spend over $3 billion on health treatment. We have a stock of excellent doctors who studied in 58 countries. That is why we can claim to be an alternative source to developed countries in provision of health services. We have accreditation of a standard that no other Arab country comes even close to,” boasted Khalil Malaeb, general manager of K&M International Health Tourism.

His company received a commission by the NCHT – an entity formed under participation of five government ministries and five private sector syndicates – to organize and market Lebanon’s health tourism project worldwide. Work on the project started one-and-a-half years ago with measures to set up the infrastructure of local networks and international agreements, Malaeb said, and once the system is rolling, local providers should expect clients to come “by the thousands.”

The elements that make Lebanon an attractive destination for medical tourism in the region and possibly beyond are a superb price-cost ratio offered by clinics and practitioners here and 140 years of excellence in the field, Malaeb claimed. In developing the potential NCHT does not rely on approaching individual patients but tries to establish a systemic supply through agreements with governments and insurance companies in partner countries and through alliances between hospitals.

According to Malaeb, first operational accords were established earlier this year with Kuwait and Dubai, and government-to-government agreements with three countries in the Gulf and North Africa are currently in the process of being completed.

By NCHT expectations, most patients coming to Lebanon, often accompanied by family members, would stay anywhere between several days and a few weeks to undergo operations for a range of internal ailments of heart, liver and other organs. However, first arrivals already also included patients seeking longer treatment for cancer and degenerative diseases.

A second very significant client group presenting strong revenue potential for local surgeons are persons signing up for plastic surgery. With costs starting around $1,500 and the duration of the procedure taking a maximum of one week, including all medical follow-up, plastic surgery has become a preoccupation for vastly growing numbers of women and men from around the region, and Lebanon has already gained a reputation as a center for such treatment.

If the formula for medical tourism becomes as successful as expected and hospitals fill up with patients whose treatment costs are paid (upfront) by their foreign healthcare providers, it would constitute a healthy inflow of revenue – for which no projections are available – and also lead to a follow-up creation of rehabilitation clinics, convalescence homes, and purpose-built accommodations for family members in the vicinity of major hospitals. For the moment, the network employs existing hotel facilities to serve clients, offering numerous options on cost and class of treatment and hotel stay.

The beach

In core qualities, the new prime-grade Lebanese beaches should have no trouble competing with many of the top destinations. Whether at an undeveloped beach in the south, or at any of the leading new resorts in Rmeileh, Jiyeh, Damour, and Byblos, one sees a different and distinct beauty confirming the country’s age-old spell as a land of splendor.

Cleanliness has been a problem on Lebanon’s coast, both due to absence of wastewater treatment facilities and because of prevalent picnickers and beach revelers who don’t remove their own trash. But with the emergence of carefully managed new seaside fun spots over the past four years, private sector operators have shaped stretches of noticeably clean resort environments. As the beach resort business is expanding, it hopefully will bring continued impetus in the creation of environmentally responsible recreation sites and push municipalities and national authorities towards more effective action in remedying the deplorable state of handling liquid and solid wastes.

Competition pressures among resorts seem to have thus far stood against the establishment of a dedicated association or syndicate and defining of joint standards by operators. But one only needs to compare the diverse features of, for instance, Oceana in Damour and the Edde Sands Resort in Byblos to be immediately convinced that the offerings of classy places complement one another, and the more originality and variety in style they provide, the better.

The establishment of sophisticated and affordable beach resorts that are able to comfortably accommodate capacity crowds is still a relatively young development. Thus, the new leisure attractions operate under challenges to achieve returns on their investments ranging from $1.5 to $10 million, satisfy their mainstay local customers and raise the image of a Lebanese beach vacation among European holidaymakers, who account for the vast majority of international tourists on Mediterranean beaches.

All is not eco

In the worldwide growth sector of eco tourism, Lebanon recently claimed to have many chances, reaching from participation in reforestation and environmental projects to adventure travel and agritourism. However, the sector is not really in gear. “I am afraid to have to say that the sector is very weak. We don’t have a profile of eco tourists coming to Lebanon from abroad,” said Pascal Abdallah, general manager of Cyclamen, one of seven local companies specialized in the sector.

What these companies currently can produce, accounts for far below 5% of the entire tourism turnover in Lebanon, he told EXECUTIVE, and companies cannot offer eco-tourism in the real sense, which relies on experiencing nature non-intrusively. “We do not yet have a national policy on eco-tourism. We are restrained to providing responsible nature tourism,” he said.

What are promoted mostly in the still very small sub-sector are sports and adventure tourism trips. Many of the recent providers of these programs are enterprises evolved from informal beginnings in hiking clubs and youth organizations. The issue of eco tourism is viewed as very important at the ministry of tourism. This notwithstanding, no formal department for eco tourism has been instituted and the issue of nurturing eco tourism is handled by members of the ministry “as a hobby.”

Agritourism projects have been proven viable by academic research but are still small or even merely conceptual, with wine tourism as the specialization seen as having the best potential to become a niche attraction for tourists. Lebanon did hope to claim a modest spot in this lucrative sector (Australia wine tourism brings in $500 million to rural Australia annually, with a near 100% increase in the number of tourists since 1991). However, this initiative has stuttered in recent years. In 2001 UVL put together a formal itinerary for wine tasting tours called Le Route du Vin, but the post 9/11 drought of Western tourists virtually stymied the plan at birth.

Globally, the typical wine tourist falls into three categories: aged 40 to 60, childless couples or those with a higher than average education and income. This is a growing demographic group and one that would appreciate Lebanon’s other cultural attractions. Apart from the vacationing expatriates, the wine growers had counted on these enlightened 40-somethings, mainly from the UK and Germany, to make the journey to the Bekaa wineries.

Currently, only Kefraya, Ksara (which receives 40,000 visitors a year) Massaya, Clos St. Thomas and Clos De Qana offer genuine hospitality services. Cave Koroum is putting the finishing touches to a not insignificant wine resort in the village of Kefraya. The winery is arguably the biggest in the Middle East and has a restaurant, tasting room and hotel to match.

Massaya, a younger but forward thinking winery, has introduced weekend buffet lunches and last year held blues and jazz concerts in the vineyards. This summer, the winery expects to receive nearly 10,000 visitors and has added more concert dates. Others have taken the lead: Clos St Thomas in Qab Elias holds regular lunches and star watching evenings.

Gaming, shopping, and festivals

Lebanon is always a good place to leave money, and there’s nowhere easier to do that than the Casino du Liban. From 1959 until deep into the civil war, it achieved a legendary career as place where the rich, famous and reckless gambled their fortunes. Show designers from Las Vegas are said to have come to Maamaltain in the casino’s heydays to pick up entertainment ideas.

Today, the casino again is a fixture of the region’s entertainment scene as the Middle East’s largest gaming establishment. Night after night, its silhouette outlined with brightly flashing stroboscopic lights dominates Jounieh Bay and the pulling power of its gaming rooms and the new risqué “Lipstick” show often turns the shoulder of the Byblos-Beirut freeway into a parking lot.

According to a Casino du Liban spokesperson, the establishment has been increasing its advertising and promotion activities in Arab countries in recent years, and regional visitor flows are growing steadily. How big is this niche exactly? Until comprehensive surveys of visitor behavior are conducted in Lebanon, it will remain unclear just how many of our 438,203 Arab visitors from 2003 found their way into the gaming areas and how many of the roughly 130,000 hotel guests from the Gulf region flew to Beirut specifically and solely for a casino vacation.

What is certain is that the casino patrons are esteemed spenders. The casino’s auditors have held back on releasing the establishment’s books over the last three years, due to unresolved tax disputes. But with pre-tax dividends of $50 on each $145 share (OTC) for 2003 and fiscal participation of 30% in the casino’s annual turnover of an estimated $88 million, investors and fiscal coffers, and to a smaller degree the national economy, clearly enjoy a profitable inbound tourism niche here. Retail shopping was historically embedded in Lebanon’s function as the Middle East’s trading post, back when people from the entire region came to Beirut to shop for goods ranging from abayas to household furnishings.

However, attempts in the mid 90s to run month-long Lebanon Shopping Festivals failed to re-establish Beirut as a retail tourism destination in direct competition to Saudi Arabia’s shopping mall culture and Dubai’s mega sales spectacles. Today, summer sales periods in Lebanon have become successful in attracting regional guests, and for visitors from Levant countries, the wide choices in retail commerce continue to make Beirut a real shopping destination.

Tourist preferences in retail purchases and the share of these expenditures in their overall spending can only be estimated, demonstrating the need for more detailed research into consumer groups and behavior. “They spend a lot on food, a lot on clothing and ladies leave much money at the beauty salons,” said the PR manager of a major Beirut resort hotel with many Gulf customers. However, her colleague at another top house with a large GCC clientele responded that the city is not seen as a major shopping destination by guests in the hotel.

Statistics on Value-Added-Tax refunds still provide the best indicators that are available on the role of retail in inbound tourism. After the program was instituted in 2002, VAT-refunds were reimbursed to visitors to the tune of over $1 million over 12 months. Respective purchases by tourists in the range of $10 million to $20 million in one year would hardly make for a national retail salvation. However, concentration of refunds in certain item categories – 62% of refunds were on clothes and 12% on jewelry/watches – and large shares of foreign-bound sales at some retail outlets suggest that Lebanon’s retail sector has destination potential in a few micro-niches.

While they may not qualify as a destination that people travel 2,000 kilometers to visit, specialized up market clothing retailers Aïshti are an example of an enterprise that attributes a massive share of its sales to non-residents. With the incentive of VAT tax refunds, the retail streets of Beirut’s Hamra and Verdun districts could in the past two years again count on tourism as income boosters during the summer and religious holiday seasons. Large retail projects under development around the capital also count on Arab visitors in their feasibility predictions, and the ABC shopping mall in Ashrafieh in its first summer season is visibly successful in drawing in Arab visitors who otherwise seldom found their way to the quarter’s retail scene.

Like gaming and shopping, music festivals have long been well-known fixtures of Lebanon’s tourism infrastructure. The Baalbeck Festival contributed to establishing the country’s international profile since its renewal in the late 90s, thanks to coverage of festival events by foreign media, festival committee member Leila Bissat told EXECUTIVE, but she agreed that “the Lebanese and expatriates” traditionally comprised the main clientele.

This could change. Numbers of cultural festivals are mushrooming, with locations from Aanjar to Zouk Mikhael adding their profiles to the list of summer entertainment. The majority of these festivals are seen as value-added to the community and perhaps domestic attractions, but some virginal events, such as the Beirut Jazz Festival held last month for the first time, are aiming to make it onto international event calendars.

With the impressive portfolio of cultural backgrounds and settings of Lebanon, festivals have the potential to reach more international fans. At Baalbeck, special performances by world famous artists such as Placido Domingo this summer proved suitable to attract tourists from Jordan, Syria and other Arab countries, Bissat said. And like other festivals, the Baalbeck planners are looking at cruise ships stopping over at Beirut Port for opportunities to organize excursions to festival events.

Some events even aspire to stardom. “This is our first year, in which we want to build the legend of the festival,” said Roland Barbar, the conceptual director of the Byblos Festival. After the festival changed its format into a composition of ticketed performances and a series of free concerts in the consecutive off-Byblos event, he is confident that the annual spectacle will make it to the world agenda within the next three years. The festival, with 24,000 sold tickets in 2003, is certainly on course to achieve financial feasibility.

It would be stretching things to assume that the Byblos Festival and its peers in the assembly of Lebanese summer events could aggregate into a cultural and fun profile that let the country acquire stature akin to the model of global leaders, like the Edinburgh Festival. But by the quality of settings and the enthusiasm of the growing fan base, good music and great moods, festival packages here seem disposed well enough to become the region’s hub and the bridge of cultures between Europe and the Arab world.

August 1, 2004 0 comments

Business

Q&A: Roger Edde

by Thomas Schellen August 1, 2004

written by Thomas Schellen

The city of Byblos is one of five UNESCO world heritage sites in Lebanon. Its tourism potential is tremendous but much of it has lain dormant. Roger Edde, business tycoon and developer with international experience in Europe and the United States, is a member of an old influential family here. After establishing a beach resort near Byblos in 2003, he has the ambition to turn city and area into a magnificent tourism destination with plenty of new features. To EXECUTIVE, Edde revealed details of his plans.

You are stepping forward with a new and highly ambitious plan for a real estate development in the Byblos area. Why are you proposing such a large project today?

I feel the tourism industry and tourism related real estate in Lebanon are two years ahead of a moving curve, which will move up substantially in the 15 years that follow. I also applied the principle of supply side economics in real estate. Dubai has proven that supply side economics in the construction of real estate in the worst of conditions can be successful. In Lebanon, we are not in the worst of conditions. We may be in one of the most interesting conditions.

What do you intend to develop in the Byblos area?

I was responding to a demand showing on the map of the growth of tourism. By aiming at creating a destination in Byblos I want to emphasize the cultural aspect because I believe in cultural tourism. I want to enrich that concept with what is already trendy worldwide: green villages, where people can feel that they have the quality of life that they dream to have during the years living in hard times in the big cities. I wanted to address also another growing business by developing an area with a large port that will be a port for leisure boats, plus a terminal for cruise liners.

How much land did you own prior to starting things and how much did you acquire additionally?

I had the vision already before, which meant I acquired a lot of land. We are talking about more than three million square meters and I have acquired a third of that recently.

Are the three million square meters continuous or distributed over the entire area?

We are talking about a stretch from the Byblos seaside to the Byblos snow side, the area of Laqlouq, the cedars of Tannourine, the cedars of Jaj and above. I already own 1.6 million square meters in Laqlouq, including a river. That will be the cornerstone for the Laqlouq, Tannourine, Aaqoura, and cedars of Jaj development where we could even promote religious tourism and pilgrimages. I won’t go and invest right now, before the road is done, because I know what not to do.

What do you want to establish on the seaside?

My tendency is to rely on private enterprise and I am not scared of dreaming of the impossible because I don‘t think there is anything impossible. Before starting anything, we had a top urban planner conceive a development for seven kilometers around Edde Sands. We centered the space on the port of Byblos and the volumes that go from the port.

Are you talking about expanding the old port?

No, the old port is small and medieval and cannot be touched. The city of Byblos and the Lebanese government and the UNESCO have already approved the idea of a port in a place called Ras Edde. I have already large amounts of land there. If we wait for the government, we can forget about it.

Building a port would cost how much?

It would be $270 to $350 million, minimum, for the pure port facilities not counting real estate. The cruise line terminal needs more than that because I would also like Byblos to become a place of support facilities and maintenance for the cruise liners.

How much will the entire development cost?

My calculation is now that we will rapidly reach a $2 billion investment, not only land buying but real investment, because we are talking a city development around a very large port facility. At a certain point I will start to accept investors. I have already demand from international pension funds, Arab and Lebanese investors to join in.

So your final vision is an investment volume of $2 billion in developing three million square meters of land?

No, I am talking about Byblos taking the $2 billion, in a triangle between Edde Sands, Amcheet and [the village of] Edde. That would be all connected with tennis camps, sports theme park centers, and a wellness area with clinics offering exams of the quality you can get in the Mayo Clinic.

Then you are focusing on health tourism?

Health tourism and sports tourism, but all in a leisure environment. In some places, you want to be quiet, discreet, in a wooded area out of sight, receive your spiritual treatment. We are already starting an experience of that in Edde Sands with spiritual treatment, for which we have been waiting a lot. At this stage, what we are doing is creating the brand and reputation and testing the ground. We will move when we have enough evaluation of demand.

So going to a next stage would depend on profitability?

It is not profitability. Next stages are planned and would go immediately. I don’t think we would have a problem to fill a large port. In fact, when I would do the port I would probably already have sold most of the space of the port.

How much did you invest in Edde Sands if we take this resort as the seed of the vision?

I am over the $10 million mark, not talking about the real estate but what has been invested into the real estate.

And you have calculated $100 million for a hotel in the next expansion phase?

This is correct for the first stage of the hotel. I think we may go up to $150 million, especially if we are doing a project consisting to a part of a hotel and to a part of a serviced hotel.

How much did land value of your properties increase since you started investing into this dream?

From a real estate point of view, not from a return point of view, every penny I have spent on that land has increased three to five times in value. Plus, I can price anything built on the land today at the same pricing in Solidere or any prime location in Beirut. That is also very important. You are 33km from Beirut but you did something of a real quality in a very unique spot, you can price absolutely at the same level as any prime location in Beirut.

Is it true that you have recently also undertaken other investments?

We have moved into the old city of Byblos. We are buying boutiques in the old souk and in fact collected more than 20 boutiques in the old souk. Prices have already multiplied three to five times; but when I have an offer, I take it. We are defining the market. Only two weeks ago, we hired two high-quality persons and asked them to establish their high quality fresh cuisine into the souks of Byblos. It is a sudden success.

How long until you fill the triangle with $2 billion worth of investment?

I think it will take at least seven years.

How do you respond to people who say that Mr. Edde only developed this project because he owns a lot of land and wanted to increase its value?

That is my right but it is not my reason. In fact, wherever I am starting a project I am buying land at a higher price. I am not a seller of land. Others say Roger Edde is doing politics the other way. That’s true. I cannot afford under the present political conditions to do politics. I don’t like to do politics under the Lebanese conditions as they are today. It is my way to do politics and have people understand that doing things for yourself and for others can be profitable for yourself and for others.

You are engaged in development of the Byblos area to a scale that seems to amount to private town planning. Isn’t there a contradiction?

No, it is not a contradiction. I am doing it privately and at the same time, this is putting a lot of pressure on the public authorities to respect what I am doing and emulate it.

Lebanon has a tradition of feudalism. Is this past of the ZAIM being carried over into the role of private public developer?

I have been born into a family, which has been the ZUAMA of the area historically. I made a real effort not to deal with the area as a fiefdom. I want my area and Lebanon to move out of this mentality. It is an ideological thing for me. I have written about this and I went from village to village to sell my ideas of democratic liberty, political liberty and economic liberty.

What if the public sector might someday say we don’t like this private man to be that powerful?

Then I will go back and run for president.

The less state there is the more responsibility rests on the shoulders of the developer. But could you as developer not take the view that your role is just to build and sell and afterwards pursue other projects?

I can’t do that, for the very simple reason that I chose to live here to give a chance to a place outside of Beirut, which is close to my heart where our name has been associated with historically. The choice of Byblos as a destination for me is a responsibility and also a sentimental choice. There is nothing wrong with that. To worry about the quality of architecture, worry about the quality of the green space, of the sand and the water, investing heavily into a place which honestly was a dump and turn it into a place that many people call heaven, this is a challenge that is part of a responsibility. The project is not a commercial one to me; I would never sell it.

August 1, 2004 0 comments

Business

Tourism’s dark side

by Peter Speetjens August 1, 2004

written by Peter Speetjens

A proud tradition

Lebanon’s adult entertainment industry/sex trade is worth an estimated $140 million (although this figure could be much higher), and employs over 4,000 people. Lebanon has always worn a patina of sin, one that represents a not insignificant portion (7%) of the tourist industry, around even though the ministry might prefer to focus on Lebanon’s more family-oriented attractions. Though hardly transparent, the market can be characterized as highly diversified, as it encompasses everything from the Super Nightclubs of Maameltein, with their bevies of Eastern European hostesses, the new wave of massage parlors (or anti-stress clinics), and the red light bars for the less well-heeled customers. There is also a thriving local and regional market for Lebanese “escorts,” and models. And then there are, of course the freelancers, the women (and men) who work the hotels, cafés and sidewalks, practicing the oldest profession in the world.

The law

Contrary to what most people think, prostitution is not illegal in Lebanon, in the sense that it is not included in the penal code. Only the act to facilitate or encourage prostitution is penalized. Prostitution is regulated under a 1931 law related to the “preservation of public health,” which stipulates that prostitution must take place in a “public house” or “meeting house,” both of which must be run by women over 25-years-old in accordance with the rules of the particular neighborhood. Other regulations stipulate that prostitutes should be at least 21 years of age, be subject to a medical exam twice a week (the fees of which are to be paid by the municipality) and that policemen can make spot checks whenever necessary. In other words, most prostitution in Lebanon is illegal, simply because it’s not done by the book.

Super nightclubs also fall under the law, as they need permits to serve alcohol and (according to a 1947 ruling) stage “non-cinematic” shows, i.e., cabarets. Finally, a 1929 government ruling controls the daily comings and goings of foreign “artists” employed to dance in bars and nightclubs.

These so called artists need a permit issued by the Surete Generale. The text stipulates that the person in question needs to submit “a certificate of previous work or be a member of a known artistic organization.” In case the artist does not fulfill these conditions, the Surete Generale can still authorize her to work “if investigations show the artist is good and qualified.” It is also worth noting that “exciting” dancing and dancing in indecent clothes are also prohibited. The text also regulates entry and stay in Lebanon. Policy today is that “artists” who enter the country as dancers can only stay for six months.

Super Nightclubs

The biggest money-spinners in the adult entertainment sector are the Super Nightclubs, which account for nearly $100 million annually. (For a popular operation, business can be lucrative. Overheads – rent, electricity, salaries, permits, “unofficial payments” etc. – account for 40% of revenues and, given the nature of the business, the finance ministry will find it hard to get a clear picture of monies earned.) There are an estimated 80 genuine super nightclubs in Lebanon, some 40 of which, including the most upscale ones, are historically located in the Jounieh neighborhood of Maameltein. The rest are dotted around Hamra, Ain Mreisseh, Tabarja, Mansourieh, Hazmieh and the mountain resort of Aley. The number of girls employed per club varies from five to 30, but the top clubs such as the famous Excalibur, which can employ up to 40 hostesses, have more. In theory, all so-called super nightclubs offer cabarets, but in reality only in the bigger ones are shows performed, mainly by girls from Eastern Europe and the former Soviet Union.

Show or no show, the main business is about spending time with the girls. The deal generally is that if you spend $60 to $100 on drinks, the girl of your choice will keep you company for around 90 minutes. The easiest option is to buy her a bottle of Champagne, but Whiskey will suffice. Your own drinks at $10 each come on top of that.

For men visiting a super nightclub with the idea it being a brothel, the experience can be rather disappointing. In principle, customers are not permitted to leave with a girl and girls are not allowed to offer sexual favors. The clubs are not bordellos and are subject to regular spot checks by undercover policemen or Surete Generale officers. However, if the customer spends the minimum $60 to $100, the customer is entitled to ask the girl “out” the next day between 1pm and 7pm. (The Surete Generale, which regulates the entry and stay of the girls in Lebanon, demands that the girls are to be in their hotel by 5am. They are not allowed to leave before 1pm and have to be back in the club by 8pm, hence the specific window of opportunity).

This does not mean that she will consent to sex. While some will (the rate is roughly $100), others will merely go for a walk or have a meal. In rare cases, clients can take a girl home the same night, but this is risky and restricted to long-term customers and both club owner and girl must agree. The fee is usually $300, $50 of which goes to the girl. The rest is divided between the owner (for loss of business), and the hotel owner, who must pay off the policeman who checks the hotel in the morning.

From Russia with love

For a foreign worker (they are mostly Russian) to find employment in the Lebanese super nightclub circuit, she must first sign up with an agency (most are in Moscow). A successful applicant’s contract will not stipulate the entire range of what is expected of her once she starts working in her new country of employment, but most arrive with their eyes open. (see Global Trade)

The Lebanese club owner pays a fee of about $150 per girl to the agency and must buy the girl a return ticket of some $800 and pay her an average salary of some $300 a month plus commission (based on her ability to sell bottles of champagne). Girls working in the top clubs however can earn salaries of $600 and even a $1,000. The employer pays some $400 for a permit and medical tests, as well as some $350 for medical insurance. Girls share a room in a hotel. Most club owners will pay for the cost of accommodations, which is roughly $300 a month per girl. Cases have been reported however, in which the hotel fee was deducted from the girl’s basic salary. Total cost to the employer per girl for her six-month stint in his employ is some $5,300.

Massage Parlors

Found throughout the Greater Beirut area, massage parlors, or anti-stress centers, as they are euphemistically known, are technically legal and generate as a “sector” over $20 million per year. Generally clean and well-run, these operations employ some six to 12 mainly Lebanese or Filipino girls, who will give a regular 40-minute massage before offering the extra service. The massage usually costs $20, which goes to the house, while any extras, usually another $20 to $30, is kept by the masseuse, who will often cater to around seven customers per day. A few years ago a string of parlors was raided by police and closed down. Today this “problem” has been resolved and many of the best businesses openly advertise in the local press.

Girlie bars

This cottage industry, the closest you will get to a traditional brothel in Lebanon, generates revenues of roughly $6 million per year. There are about two-dozen in Hamra and Ain Mnreiseh alone, recognizable by the universal red light outside their door. The price of a drink is about the same as in your average club on Monot Street, but there all similarity ends. The madam will waste no time in asking you right away if you want to take one of the three or four (often mature) ladies employed in the bar to a quiet place upstairs or behind the bar. The police are paid off at a local level and the cost of full sex is about $50.

Call girls

The top end of the “adult entertainment” market is dominated by the fearsomely popular Lebanese call girls, who ply their trade in the hotels of Beirut and the Gulf countries. Many of the less ambitious operators advertise in the local press as dancers seeking employment or women looking for a marriage partner, but for the high-net worth clients, the local model agencies and pages of the glamour magazines (showing contestants at bikini contests etc.) are their tele-shopping heaven. In these cases, the agency will arrange a contact and take a cut. In this sense, their activities are indistinguishable from regular pimping. The girls, often aspiring singers or models, can earn up to several thousand dollars a night, more if they are requested (and agree) to travel on one of the regular weekend party charter flights between Beirut, Saudi Arabia and other Gulf countries.

The Freelancers

At the budget end of the market are those women who ply their trade at the street level. Still, they are a solid component of the industry and contribute around $4 million to the sector. They are generally Lebanese, Syrian or African and offer their wares mainly on Raouche and the Jounieh Highway, but they can be found all over Lebanon. They charge between $25 and $50.

Many women (and men) work out of cafés, especially in the BCD, and in collaboration with a waiter who acts as a middleman between the professional and the potential client. She will charge anything between $100 and $500. Given the nature of their work, it’s difficult to estimate how many women are on the game, but it is assumed the number is in the high hundreds.

Lebanon and the Lebanese: part of a global game

Early last month, former British model David Barnett, was sentenced to four years in jail for running a jet set prostitution racket of 40 men and women for rich Lebanese and Saudi businessmen, including members of the Royal family. Barnett was sentenced to four years in prison. Among his four accomplices was 31-year-old Lebanese Wissam Nashef, who helped Barnett to find prostitutes. Nashef was sentenced to three months in jail and had to pay a 3000 euro fine. During the trial Nashef admitted to having pimped for wealthy clients from Lebanon and Saudi Arabia. The global trade in women to work in the sex industry is estimated to be worth between $7 and $12 billion. Since the fall of the Berlin wall, Russia and Eastern Europe have taken over the role dominated by the Asians in the 1980s. An estimated 500,000 Russian girls, or “Natashas,” are working in the global sex industry today, as well as some 100,000 Ukranians and up to 100,000 Moldavians. An estimated 1,500 of them reside in Lebanon.

Keeping up with the neighbors

In Israel the situation is somewhat different. It’s estimated that every year some 3,000 women are smuggled into the country by the Russian mafia and sold for $3,000 to $6,000 each. According to a local media investigation, these unfortunate women work up to 12 hours a day, serving 10 to 15 clients for an average of some $30 a customer, of which the pimp takes up to 90%. In July 2001, the US State Department placed Israel on the black list of countries that do not meet the criteria for dealing with sex crimes.

August 1, 2004 0 comments

Economics & Policy

Slippery Business

by Anthony Mills August 1, 2004

written by Anthony Mills

Declining domestic consumption and an inability to compete on the international volume market are forcing Lebanon’s olive oil producers to go niche. It’s a nice idea (selling as it does, Lebanon’s ancient olive-oil-producing heritage and a quality attributable to the country’s soil, climate and general environment), but for the $250 million olive oil sector, which accounts for only 0.2% of worldwide production, it is a strategy that is fraught with challenges, not least the need for regulation and quality control. In a local market that is defined by brand fraud and sub standard products and flooded with cheaper oil (often smuggled from Syria), local producers have little incentive to make a high-end product, especially when exports represent only 10% of production. “I don’t see any hope for regulation,” said Ramzi Ghosn, producer of NAY olive oil as well as Massaya wines and arak. “Even if the laws existed, no one would comply with them. This is a bulk market and cheating is the name of the game.” Ghosn and other olive oil producers argue that the only way to reduce the volume of inferior quality oil is by building a brand image, but he said that the conditions do not exist for such an initiative. “So far, the market is not ripe enough for the development of brands. It is only ripe enough for bulk sales and cheats,” Ghosn said. This state of affairs in a sector once touted by the UN as a potentially lucrative agro-industry has forced many producers to reconsider their strategy. Ghosn admitted that the optimism with which he began producing his olive oil a few years ago had been misplaced. “We thought it would develop fairly fast. It hasn’t. We have put our olive oil operation into a dormant phase and are focusing on wine.”

Roughly 30% to 40% of olive oil sold in Lebanon enters the country illegally. In such an environment, the opportunity for brand fraud is considerable. “Some producers import low-quality olive oil and then market it as extra virgin Koura oil,” noted Mousa Nimah, an American University of Beirut professor of agriculture and food sciences who is a specialist on olives. “It’s not good quality, but it’s cheaper.” This focus on price means that less than 10% of olive oil produced in Lebanon is of “extra virgin” quality.

The doubt over quality extends to supermarket brands, which are assumed to have a quality threshold. Spinneys told EXECUTIVE that “its own label products are tested at the Industrial Research Institute and follow the strict regulations set by the ministry of economy and trade,” and that its “extra virgin” oil came from the “finest olive trees” in Koura. However, one international agricultural consultant who is working to bolster Lebanon’s olive oil sector, said that in the absence of stringent compulsory government controls, it was impossible to monitor – or guarantee – the quality of these products. “They sell it at a higher price because they say it is ‘extra virgin’ but where is the piece of paper proving that?” the consultant asked. Wafa’a Dikah, head of the ministry of agriculture’s agro-industry department, confirmed that an informal team of international olive oil experts spot tasted alleged “extra virgin” olive oil at a variety of Lebanese supermarkets. “Not one conformed to the organoleptic (involving use of sense organs) characteristics of ‘extra virgin’ oil,” she said.

Because of the worrying domestic situation, the quality of Lebanese olive oil cannot be guaranteed abroad. Often, oil marketed as high-end Lebanese is simply foreign oil bottled in Lebanon. “There should be rigorous pre-export testing,” said Nimah. “The absence of it is probably what has killed our markets abroad. Instead of applying the law, we help those who break it, and then break it again. You have to separate politics from production and marketing.” The government should be doing more to market high-quality Lebanese oil around the world than simply buying in bulk for the army, critics say, but in the absence of export quality controls this is a well-nigh impossible task. Exporting is made harder by the restrictions on imported olive oil imposed by the European Union to protect the olive oil produce of member states like Spain, Italy and Greece, which produces further hurdles for Lebanese exporters of quality oil hoping to establish markets in Europe. “It is a hidden way of creating trade barriers,” said a condemnatory Ghosn. “The government should have included these unreasonable restrictions on Lebanese olive oil in its trade discussions with the EU to make it easier for us to sell.” Meanwhile, the absence of major producers has affected the sector’s lobbying clout. “Big producers would have had enough power to get the government to put this on its agenda,” Ghosn said. So, for the moment, marketing initiatives, with the exception of those espoused by the non-governmental Rene Moawad foundation, are individualistic, place greater emphasis on price than quality, and do little to buttress the image of Lebanon’s olive oil at home and internationally. Olive oil farmers and the NGOs helping them say they also need research, training and equipment under government rural development projects if they are to assimilate to an evolving international market and to ensure that exports conform to its standards. “To have high quality, you need special training courses. We need new machines to compete at the international level,” said Mansour Azzi, an olive grower from the Chouf region. He said olive growers also needed government assistance to fight off an insect plague that was destroying up to 60% of crops. “In Europe, the governments are doing something. Here, no.”

The ministry of agriculture contends that with a limited (and shrinking) budget, it is doing all it can to bolster the sector. Dikah acknowledged that agriculture was not the government’s top priority but she said that the ministry was now trying to modernize the marketing of olive oil in Lebanon and was distributing machinery and hosting educational seminars. The ministry is also working on olive-oil-specific legislation that would allow for increased regulation of quality – both on the domestic market and with respect to oil bound for foreign countries. Those in the ministry believe a crackdown on illegal olive oil imports across the notoriously porous Syria-Lebanon border could in fact be implemented although the industry says this is unlikely. Dikah also pointed to increased olive oil funds from international donors such as the Italian government and the EU. A current agreement under negotiation with Italy would provide for $3 million in assistance. But it would be channeled through the Council for Development and Reconstruction – a body that has been criticized by observers in the past over alleged impartiality and corruption. “At the ministry, we treat all regions equally,” asserted Dikah. “There is a recognition of the importance of the sector, of producing quality olive oil. But things won’t change just like that,” Dikah continued. Overall, the future is bleak and any efforts to establish Lebanese olive oil as a luxury, top-quality product is a pipe dream – a pity since, according to Naame, “virgin Lebanese olive oil is among, if not the, best olive oil in the world.”

But not everyone is pessimistic. The Rene Moawad foundation, which together with USAID has created an olive farmer cooperative, constructed technical premises, provided technical support to farmers, organized olive oil conferences, and invited olive oil experts to Lebanon, exudes optimism about Lebanon’s olive oil sector potential. It says that the ministries of agriculture and economy have understood the need for development of the sector and that Europe is not the only potential market for Lebanese olive oil. It points, in particular, to Asia. Fady Yarak, the Rene Moawad Foundation executive director, declared: “Lebanese olive oil can compete in quality terms with any other international oil on the market.” The foundation boasts that thanks to its efforts, Lebanese olive oil is now sold by French firm Olivier & Co., but it acknowledges that certain kinds of Lebanese olive oil, although as good as their European counterparts, are excluded from the EU market because of the restrictive criteria, which cannot be fulfilled by certain varieties of Lebanese olive oil.

And the foundation concedes that even if some momentum has been generated, change on the ground may not be just around the corner. “I am sure that when the proposed legislation comes before the parliament, something [negative] will happen,” said one consultant who works with the foundation. However, time for genuine change may be limited. In Choueifaat, a region southeast of Beirut once renowned for its olives, concrete has replaced groves in an ominous trend that is gathering pace across the country, much to the chagrin of people like AUB professor Naame. “Choueifaat was full of olive trees. Now you can’t find a tree,” he lamented. “Lebanon is becoming interconnected with cement.” As a consequence, he said, olive oil production had decreased by 10% to 15% over the last decade, a development hastened by the declining social status of working in the olive groves. “Young gentlemen don’t want to work in the fields,” he noted. “They don’t want to dirty their hands.” Instead, Syrian, Egyptian and other foreign workers provide cheap labor. Often, though, they lack know-how passed down from generation to generation, let alone any modern training, and unwittingly help produce the inferior quality oil that is sullying the image of Lebanese olive oil in general.

August 1, 2004 0 comments

Real Estate

Old may be cheaper, but it’s harder to sell

by Anne Robinson August 1, 2004

written by Anne Robinson

To Rita Fakhoury it was the find of a lifetime. The three-bedroom apartment in Beirut proper was on the market for just $80,000. It was a little higher than the budget she and her husband Nadim had set but the prospect of a 160m2 home right in heart of the capital was a dream. In any case, they hoped to bargain the price down a little.

The 42-year-old building in Ras El Nabeh is solid but run down. Their new home on the third floor needs rewiring, replumbing and redecorating. But, having spent weeks trying to bring the price down – it finally went for $76,000 – they calculated on renovating the place at a speed they can afford and without piling up massive debts. To the young couple and their two small children, it was a passport to the Lebanese dream. To own their own home with no mortgage and no bank loan for restoration.

The flip side will come only if the Fakhourys ever want to sell the place. According to real estate experts, they are highly unlikely ever to get their money back. Indeed, they will face considerable difficulties in finding a buyer at any price. Rita Saade, a real estate consultant with The Landmark company in Riad Al Solh Street downtown, said even if the figure sought was very low, most buyers would not rush in. Price was a much lower factor among buyers than the amenities offered and the overall condition.

She said around 80% of the market was in new homes – “new” being defined as anything up to ten years old. Most of the rest is taken up with home-hunters seeking traditional Lebanese dwellings, with high ceilings and character, leaving minimal demand for everything in between.

“The attraction for young couples in a new building is that is likely to contain all the facilities that make life easier,” said Saade. These include parking space, a heating system and a standby generator. The properties in Sodeco, for example, don’t have underground parking because it wasn’t a requirement at the time the area was developed. For Rita and Nadim the lack of underground parking is the least of their concerns. They don’t even have a lift. Their bit of heaven is reached by a stairway.

The current trend, Saade added, is for people to move in from the suburbs and seek apartments in Beirut because of the increased potential for both work and entertainment in the capital, as well as the happy avoidance of the daily commuter battleground known as the feeder roads into the capital.

The benefits come at a price. Modern properties in Beirut rarely come at less than $1,000/m2 and can easily be double that figure. And even those numbers refer only to buildings outside the Beirut Central District (BCD) area, where $4,000/m2 is closer to the mark. It was a swift retreat from the high prices and an abiding fear of the never-ending process of repair and replacement involved in an old building that encouraged Christine Haddad to buy a home in Mansourieh. For $18,000 less than the Fakhourys paid for a wreck in the city, she bought a new three-bedroom apartment directly from the builder, who also helped to fix the financing. The 180m2 ground-floor home has a small private garden, an uninterrupted view down to the sea and the advantage of having a few minor defects fixed free-of-charge by the builder.

“My two girls go to school locally and happily I don’t need to travel regularly into Beirut,” said Haddad. “There is no way we could have afforded this level of comfort in Beirut itself and, in any case, I am confident that if in the next few years we need to sell the house and move we would be able to find a buyer.”

Saade confirms that view. “There is definitely a market for modern apartments and there is even a possibility that the seller may make a 5% 10% profit on the deal, depending on overall confidence in the economy at the time,” she said. The prospect of making a killing out of soaring property prices – as in, say, Britain, where values have increased by more than 500% in the past eight years – doesn’t exist. BCD is seen by people in the real estate business as the only area in the country where values may double over a period.

“In any case,” said Saade, “buying property in Lebanon is most often done on the basis of buying for a lifetime. Chopping and changing every few years is a phenomenon that doesn’t exist.”

Selling up and moving on was never in Farida Khazem’s mind anyway when she opted earlier this year to buy an old home in Sanayeh. “I know that almost no one else would want it, but that’s irrelevant to me,” she said. “I bought what I could afford in Beirut to be free of negligent landlords and to be close to all the amenities.” What is of “no value” to anyone else is, after redecoration and some repairs, a priceless palace for Khazem.

What consistent small demand there is for old homes that don’t quite fall into the category of “charming period Lebanese home” depends on the location and the fact that the apartment does have at least, as Saade put it, “some cachet.” It’s not enough to say Ashrafieh in this regard; it depends on which bit of Ashrafieh. Sassine down to Abdel Wahab, Tabaris, Monot and Gemmayzeh is a much easier sell than Jeitawi. Sioufi falls somewhere in the middle. Most difficult of all is to try to sell a soulless home in a place like Sin El Fil or Jal El Dib. What emphasizes that difficulty is the fact that some buildings were very poorly constructed and may even be illegal in respect of both planning applications and building standards.

“At the time, these cheap apartments in the suburbs were attractive for people with very limited budgets who wanted to move down from the mountains and be nearer to Beirut,” said Saade. Nowadays there are very few takers for these homes. Even some of the newer apartments suffer from questionable construction practices but since the amateurs have been squeezed out of the building market in the past three to four years, average standards have risen.

An added difficulty to modernizing older blocks was highlighted by Mark Morris Jones, a real estate consultant at Michael Dunn and Company. “The chances of getting a collection of existing owners in a building to share equitably the installation of a generator or the provision of parking facilities is often so small as to be negligible,” he said. Even where agreement was reached, the improvements would be solely for the benefit of the owners since it would have little effect on the resale value of the property.

One section of people on the move that form an increasingly significant factor in the residential real estate market is the Lebanese diaspora and other Arabs. While an image exists of the mega-wealthy moving in, exemplified by the reported $12 million paid for the downtown Park View penthouse by Mohammed Sleiman, chief adviser to Saudi Arabia’s King Fahd, the bulk of the market is much more mundane. The demands of Lebanese expatriates – and most other Arab buyers – are predominantly similar to those of the domestic market. They want modern apartments with modern facilities.

“The budgets of expatriates tend to be a little higher than those of people already living here,” said Saade. Their choices of what to go for are unaffected by the reason for buying – either as a personal home or as an investment to rent out. Just as it’s more convenient to move into a home where everything is both clean and functional, so it’s easier to find a tenant for a modern apartment than for an old building. The percentage return is also better and, with reasonable tenants, the income from a new lease can make it a sound investment.

Cheap old houses bring in much smaller rents and much larger headaches as far as maintenance is concerned. But the Fakhourys didn’t enter the market to make money. They see the mountainous list of tasks to be done to convert their decaying acquisition into a home fit for the family more as a labor of love than a headache.

August 1, 2004 0 comments

Economics & Policy

Reviving capital markets

by Nicolas Photiades August 1, 2004

written by Nicolas Photiades

Back in the mid 1990s, Lebanon showed a promising entry into the world of capital markets, which coincided with the significant boom of emerging markets during that period. The first Eurobond in US dollars issued by an Arab state was the 1994 $400 million Eurobond issue by the Lebanese Republic, which also became “Eurobond deal of the year.” The Lebanese government went on to issue debt securities, both domestically and internationally to this day, and at one stage became the only “frequent issuer” of debt securities in the Arab world. The Lebanese corporate world also followed suit in 1994 and subsequent years with a series of Eurobond issues by the larger banks, around five GDR (Global Depositary Receipts, or a form of stock issue) issues by Banque Audi (two issues), Banque du Liban et d’Outre Mer, Banque Libanaise pour le Commerce, and Solidere, and a few initial public offerings (Bank of Beirut, Rymco, Bou Khalil, etc.). The first Banque Audi GDR was also the first GDR issue in the Arab world and in the Middle East North Africa region ever, and was considered by finance specialists and investment bankers in places like London to have been a very gutsy decision by Banque Audi’s management.

But what happened since? With the exception of the odd Lebanese government issue (generally to repay the older issue, which had come to maturity) and the recent bond issue of First National Bank, the Lebanese capital markets are now considered to have lost their momentum. One of the main reasons for the relative dying out of the Lebanese capital markets was that domestic investment banks never established themselves properly. The few investment banks that had set up shop in Beirut in the mid-1990s either had extremely limited human, operational, and capital resources to build the foundations of large and liquid capital markets in Lebanon, or were staffed with inexperienced individuals, who lacked the necessary rigor and diligence, so crucial in this industry. Most of these investment banks have now been reduced to very small sizes, while others have been absorbed by the larger local commercial banks. The rare competent investment bankers have now left the country for greener pastures, and are now exercising their craft in a booming investment banking industry in Dubai, or are trying to make it as golden boys in London, New York, and even as far as Hong Kong.

The burst in the emerging market bubble in the late 1990s did not help the Lebanese capital markets’ cause either. With demand for bonds and stocks issued by Russian, Asian, Egyptian and South American companies and governments collapsing overnight, the Lebanese dream of developing the capital markets turned into a nightmare. Indeed, the Lebanese government, which had issued a series of Eurobonds and Lebanese pound Treasury bills before the emerging market crisis, found it much more difficult to issue bonds (mainly to repay old issues) and became constrained to selling their new issues to the local commercial banks, who became stuffed with highly risky and lowly rated debt securities. The Beirut Stock Exchange on the other hand, witnessed a drop by half in its market capitalization, and it became virtually impossible for any Lebanese institution to carry out an initial public offering or issue GDRs internationally. Moreover, the privatization window of opportunity of the mid 1990s period had clearly been missed, as politicians decided to kick-start the privatization program too late, towards 1999. This program is yet to really take off, and one of the privatization methods, which consists of selling shares of the privatized entity to the public via the domestic capital markets, is clearly out of the question for the time being, partly due to a lack of demand by local and international investors and partly because of a weak domestic infrastructure.

Another reason for the short life of the Lebanese capital markets has been the lack of interest by international investment banks for the Lebanese market. Lebanon is judged to be too small and too risky by international investment bankers and investors alike, and there is little hope that any global investment banking group would take interest and invest in the necessary resources for the development of the Lebanese capital markets. When companies such as Merrill Lynch, Citigroup, or Deutsche Bank act as bond book-runners for more than 300 to 500 issues each for total amounts exceeding $150 billion, in an international bond market exceeding $2 trillion (as at the end of 2003), the Lebanese market is obviously insignificant and simply not worth the hassle or investment banker’s time.

A developed and well-regulated domestic capital market environment is crucial if Lebanon is to come out of its economic inertia. The rate of national savings would also increase significantly and the development of debt capital markets would definitely provide a savings alternative to the population. For the capital markets to take off in Lebanon, domestic commercial banks need to take their self-assumed “universal banking” role much more seriously, as they are the only financial institutions in Lebanon to have the necessary financial resources to develop strong investment banking and capital markets capabilities. These banks must start showing greater flexibility in their dealing with their corporate clientele and suggest bond or equity issues when appropriate. Advisory services within the banks should be developed, not only for the development of primary and secondary securities issues, but also for the establishment of a wide institutional and retail investor base on a domestic basis.

It will not be sufficient for banks to convince a company to issue bonds or stocks. A solid and efficient secondary trading market must be established by at least the ten largest banks in the country, which would also have to develop a professional and transparent research capability. A domestic rating agency may even need to be set up, as ratings play a catalytic role in the development of capital markets and are vital for the initial pricing of primary bond or other debt securities issues. The local banks and insurance companies will have to work hand in hand to accomplish the important task of setting up a series of mutual, pension, venture capital, and other types of funds, which, under any circumstances, constitute the core of any investor base.

Simultaneously, the privatization program must resume in a transparent and highly proclaimed way, with the government making it clear to the public that every significant privatization will include a regional and domestic initial public offering. It will be indeed crucial for the development of local equity capital markets to list the newly privatized institutions on the Beirut Stock Exchange (BSE). The latter would, in this way, see its market capitalization increase substantially, and, thanks to active market making, secondary trading and research by the local banks, would become an interesting investment alternative once again.

The government would also have a role to play. For a start, it can announce a major securitization program for its government institutions. Securitization is the most efficient restructuring tool, which has been widely used by other governments prior to launching their own privatization programs (Greece carried out more than €10 billion worth of securitization transactions in the last few years). It is a way of getting financed more cheaply, by issuing debt securities, which would be secured by the cash flow ability or collateral value of a specified asset or pool of assets. For example, the Lebanese government tried recently to securitize tobacco customs’ duties. The aim was to issue debt securities, which principal and interest rate would be assured by the cash flow emanating from the payment of customs’ duties over a ten year period. Such a transaction never got off the ground for political reasons, and also because few people understood its meaning and realized its long-term benefits.

It is vital that Lebanon does not follow the trend of many Asian economies in the late 1990s, when the reasons for the market collapses of 1998 were attributed to the absence of a developed domestic debt capital market. Indeed, when Asian shares (mainly of banks) collapsed, and simultaneously, bank deposits became unsafe, retail investors and savings could not fall back on any other alternative source of liquid investment. Hong Kong was the rare Asian country to have survived the crisis, thanks to its developed local debt capital markets.

Lebanon needs to embark on capital markets reforms, which should be carried out with a high degree of conviction and vigor. The development of the debt capital markets means the creation of an entire financial sector, including the establishment of a long-overdue capital markets authority, which would boost national growth through the more fluid financing of both the private and public sectors.

The development of investment banking activities by local banks, a privatization take-off, and the launch by the government of a securitization program, are essential components of a capital markets development trend. Well-regulated and developed capital markets would inject life in a moribund economy and avoid ultimate catastrophe. Their development must be considered as a priority.

August 1, 2004 0 comments