Business

Tourism’s dark side

by Peter Speetjens
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.
 

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Economics & Policy

Slippery Business

by Anthony Mills
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.

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Real Estate

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

by Anne Robinson
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.
 

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Economics & Policy

Reviving capital markets

by Nicolas Photiades
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.

 

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Business

Turning Japanese

by Anissa Rafeh
written by Anissa Rafeh

It is estimated that Lebanese consume about seven million pieces of sushi each year. Of those seven million, about 500,000 are ordered from Sushi Bento, the sushi delivery service established in July 2001. Revenues for the first year totaled $300,000. By 2003, that figure increased by over 33% to reach $400,000, and it is projected to hit the $500,000 mark by the end of 2004. Not bad for a company that started out with an initial investment of just $12,000.

“We realized that there was a gap in the market, for high quality, low budget sushi. So we thought, let’s eliminate everything that makes costs higher,” said Imad Abi Chaker, the general manager of Sushi Bento, who along with two other equal partners founded the business. The first part of the elimination process was to scrap the idea of a restaurant and the costs that come with it. The core business would lie in delivery.

“When I was studying in the US, I learned to eat sushi there. It’s not considered a luxury like it is here, so I got used to eating sushi – it was cheap,” explained Abi Chaker, who is also the general manager of his family owned food distribution company, ManyFood. “But when I came back here, I realized I was spending most my salary on sushi. It was my visa bill that gave me the idea to open Sushi Bento.”

Abi Chaker and his two partners began by picking a name: Abi Chaker wanted a Japanese word that was easy to pronounce and translated into ‘box,’ or ‘package,’ so ‘bento’ was chosen. Second came renting a small apartment in Ashrafieh. Using their initial capital of $4,000 each, they installed an industrial kitchen, and hired a chef (who is now Bento’s head chef). In the first three months, they made back their initial investment, and by the eighth month the partners plowed $38,000 back into the business, allowing them to shore up what until that point was a shaky delivery service.

To accommodate higher demand, the company relocated to larger premises, still in the Ashrafieh area, bought a bigger, 300m2 kitchen and hired more staff, taking the payroll to 25 employees. Despite a growing business, overheads were always kept at 20% of the monthly turnover.

Three years down the road, Sushi Bento has seen a rash of copycat operations popping up around the country. But, according to Abi Chaker, along with an increase in competition has come a surge in sushi’s popularity in Lebanon. “The competition is really helping more than hurting by creating a bigger market, so our numbers didn’t decrease,” explained Abi Chaker. “They helped us create an awareness of sushi and we are all benefiting from the [bigger] customer pie.”

Fighting off the competition is not a major concern because, said Abi Chaker, “Ashrafieh is expensive so it kept investors away.” Plus, it helps that Sushi Bento has a firmer grip on the market than most. Although no formal statistics on sushi exist in Lebanon, Abi Chaker estimates the market worth about $5 million, with Sushi Bento holding about 60% of the delivery market.

Not surprisingly, in a business that deals in raw fish, Abi Chaker claims that his major selling point is quality. Sushi Bento imports its fish directly from Japan and the Philippines, with the salmon obtained from local importers. Abi Chaker was quick to point out that Sushi Bento only buys Scottish salmon, as opposed to Norwegian salmon, as it is less fatty and of an altogether higher quality, even though it is about $3 to $4 more expensive per kilo. “We have the quality advantage and have managed to sustain a high quality product,” said Abi Chaker.

After the success of their initial venture – Sushi Bento saw its customer base increase by 500% – the next logical step was expansion. The company is now enjoying a growing franchise business, with the first branch already operating in Jal el Dib (another branch in the Palm Springs Village is owned by the Sushi Bento company).

“We try to get the first move advantage and reach underserved markets,” said Abi Chaker, adding that although he would rather not divulge the location, another franchise branch is expected to open in Lebanon very soon. He did, however, reveal that further franchises are in the works, not only in Lebanon but also in the region within the next 12 months.

“There is definitely more demand for our item, and the market is still underserved,” said Abi Chaker. “We’ve had many solicitations for franchises outside the country but have been reluctant to accept because of a lack of human resources to send out and train staff,” he continued, explaining that the current economic situation was also not the best climate in which to rush headlong into a hasty expansion program.

For now, however, Sushi Bento is concentrating on its budding catering business, which was introduced in 2003. Usually provided through another catering service, Sushi Bento sushi can now be found at all sorts of events, including dinner parties and weddings. Mostly operational during the summer months of June to September, the catering business makes up about 20% of the company’s yearly revenues.

And what of the challenges Sushi Bento has faced? Other than at first trying to convince Lebanese to eat raw fish, Abi Chaker said that the main obstacle they have come across is keeping up with the high demand. “Demand grew much faster than our production, that’s why we had to move to a bigger location.” Today, Sushi Bento delivers between 50 to 60 orders a day – that translates into about 1,000 pieces prepared daily.

Of the most in-demand raw fish treats, salmon ranks number one by far. In second place comes tuna, followed by the yellow tail. The most luxurious item on Sushi Bento’s menu is Unagi, or eel, which is also the most costly, ringing in at just under $4 per piece. “It’s the most rare type of fish [on the menu],” explained Abi Chaker, “and is less in-demand. It’s not a mass seller.” Another seafood delicacy is the fatty tuna, which is also very rare.

But above providing raw seafood right to your doorstep, Sushi Bento focuses on customer satisfaction. “One drawback [of a delivery service] is that we don’t see the reaction of the customers,” said Abi Chaker. So, to maintain good customer relations, 10 to 12 people are selected randomly each day and are asked for suggestions or comments on the Sushi Bento service. Luckily, none of the complaints have been too drastic so far. “We never, ever, had any complaint about quality – only about delays in delivering!” stressed Abi Chaker.

As for the future of sushi-eating in Lebanon, Abi Chaker has no qualms about sushi going belly-up. “Maybe it’s not as fashionable as it used to be,” said Abi Chaker, “but the sushi craze is here to stay.”

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Economics & Policy

Lebanese bonds: stable but vulnerable

by Faysal Badran
written by Faysal Badran

As the world markets, mature and emerging, went through the turbulent transition from low rates by the Federal Reserve to “a measured and consistent rise,” most bond markets suffered. In fact all bond markets suffered. The reverberations of each pronouncement by Federal Reserves chieftain, Alan Greenspan, are felt all over, in commodities, equities, but most importantly, in fixed income securities. This is a universal occurrence, except for Lebanon. Lebanon has been outstanding at being exceptional in almost every conceivable measure over its history. In this case, while the entire curve of interest rates gyrated all over the world, Lebanese bonds remained unmoved. In fact, expecting a big hike in Lebanese Republic rates (move down in price), I called some of my contacts a day after some inflation numbers in the US rattled every market from Kuala Lumpur to Sao Paolo. Guess what? Lebanon bonds were unchanged.

It is important to place in context the latest two years of bond action worldwide. The fall of the Lebanese bond yields came within an environment of intense global reflation and increased liquidity, and in most cases this environment benefited emerging markets and lower quality corporate issues. This drop in risk aversion, or increase in appetite for risk came on the heels of a huge increase in liquidity and as a rebound from the bubble meltdown in the US. Still, it was unprecedented in magnitude and timeframe. Lebanese Republic bonds were up more than 25% in a year, which represents equity type returns, and more importantly, without any improvement in fundamentals besides a last minute donor conference in Paris in November 2002. But in effect, the fiscal deterioration continued in Lebanon, political polarization increased and placed the entire system in a state of near paralysis, pushing out privatization, reform and just about anything else promised at any time. Still the bonds performed well.

Previous articles have addressed the tightness of the Lebanese bond market. The sovereign bonds are held almost entirely by local banks. This derived from a post-Russian crisis aversion to international bonds, and most importantly from the incestuous fiscal ménage between the banks and the Lebanese treasury, with banks continuing to prefer local risk. The market is illiquid, and held by a few institutions, and this has provided the market with a sort of immunity from international tremors. By definition, one should be wary of rigged markets, especially where the exit door is bar locked and volume is thin. This has been the case for Lebanon Republic bonds for more than two years now. There is no trading (for all practical purposes there is one holder: the banking sector) and a complete disregard for economic and budgetary time bombs as well as any international benchmarks. And herein lies the real problematic issue with the current pricing and interest rate structure of the bond market. It is unrealistic and expensive. It is unwise to go back and dwell on the decaying political system, the ballooning deficit, and the lack of credible economic policy. This would be tantamount to “shooting at the ambulance.” The regime and its failings are too easy a target. What we want to look at, in measured objectivity, is whether Lebanese bonds are safe for individual investors.

There are obviously many parameters in the decision to buy a bond, and they range from income needs, duration, potential capital appreciation in the case of depressed bonds, and of course alternatives. In a global market where individuals have a palette of choices and vast information on ratings, risks and opportunities, it is important to look at alternative bonds within similar risk factors.

To simplify the panorama, let us compare Lebanese Eurobonds with those of Turkey and Brazil. It is a broad enough geographical spread and in terms of economic maturity they lie at different points on the curve. Looking at the 2011 bonds this is the matrix of yields and spreads. What is key to bear in mind here is that while Lebanon is rated B-, both Brazil and Turkey are rated higher at B+. So the table should be even more mind-boggling:

Brazil 2011 10%

Turkey 2011 8.05%

Lebanon 2011 7.59%

According to those rates, one would think that Lebanon had a better rating, or better political climate, or better economic and fiscal fundamental. Wrong.

This represents an anomaly, especially in a global rising interest rate environment, and private investors wishing to remain in sovereign bonds are better served by looking at alternatives. There is no justification, besides the illiquidity and tightness of the market, for Lebanon to yield 240 basis points less than Brazil despite a lower rating. It is confounding that local institutions have so much risk concentration in Lebanese paper, lack of diversification would in other places be considered a point of vulnerability.

Lebanon bonds are trading in an “if” environment: if Paris II was respected; if the government had a clear plan for restoring balance and confidence; if the risk of external shock was minimal; and more staggering, if Lebanon had a clearer path than Brazil or Turkey. After the hits taken by many Lebanese in the devaluation (s), and the collapse of foreign markets, and the regional turbulence, caution over patriotism should prevail when it comes to Lebanon Republic bonds. With the real estate market in a state of Gulf driven irrationality, the economy stuttering, and the political environment infested, private investors ought to look at alternatives or wait for a significant event or back up in interest rates to reinvest.

In a globally unstable environment, and a rising rate trajectory, an investment in bonds has had a tendency to turn into financial bondage in many emerging and submerging economies.

 

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Business

Broadening horizons

by Anthony Mills
written by Anthony Mills

Banque Nationale de Paris Intercontinentale (BNPI), an offshoot of France’s BNP Paribas, is celebrating its 60th year in Lebanon, an indication that the bank remains confident of the Beirut market. Based on the niche market the bank has already carved for itself and its plans for regional growth, it is clear that the decision to maintain its presence here is also a well-planned, strategic move. “It is important for us, as an international bank, to be in Lebanon, not only because it is the link to Europe, but also because it is the key to developing our regional business in the Middle East,” said Claude Rufin, BNPI Beirut director-general.

BNPI has regional expansion plans that evoke an echo of the bank’s past. After establishing itself in Lebanon in 1944, BNPI moved into Syria in 1945, Egypt in 1948, and Iraq in 1954. Because of regional turmoil, it was subsequently forced to pull out of all but Lebanon. And recent unrest has proved a core problem in enticing French corporate clients to set up shop in Lebanon. “We are trying to bring them here, to convince them that life is good here, and that you can do business here,” he said.

The bank has already reestablished itself in Egypt, and has opened branches in the Gulf – including Dubai, Bahrain, Qatar and Abu Dhabi – and has just received a license to operate in Saudi Arabia, where it plans to establish an outlet “within a few months.” BNPI has also asked for a license in Kuwait, which is expected by the end of the year.

Saudi Arabia’s attractive GDP was, Rufin acknowledged, a major element in the bank’s decision to move into the kingdom, despite a recent spurt of al-Qaeda insurgency. BNPI will be seeking to diversify its activities in Saudi Arabia, from corporate and investment banking, to dealing room and swap operations, and most significantly, private banking. “After all,” Rufin observed, “there are significant private fortunes in the country.” Rufin said BNPI plans to return to Syria and Iraq – at some stage – and to open a branch in Jordan as well. But a recent law in Syria allowing for 49% foreign ownership of a bank does not satisfy BNPI. It will only invest in Syria if it is allowed majority ownership, despite the allure of Syria’s retail banking potential.

As well as regional expansion, BNPI is also planning growth within Lebanon. The bank’s leading international status – BNP Paribas is the world’s fifth largest bank – and 100% French ownership have helped it lure in, and retain, both corporate and private customers – notably among the worldly Lebanese – who see BNPI as a confidence-inspiring international financial bastion tinged with a Lebanese hue. “They can do business with us in Beijing, Sydney, or New York,” noted Rufin. The bank has five branches in Lebanon and employs 215 staff.

Rufin conceded that BNPI had seen business wane in Lebanon over the years. Back in the 1950s and 60s it presided over one of the biggest market shares in the country.

“Our strategy is not to chase market share,” explained Rufin. “We focus on winning over top corporate clients and high net-worth individuals. We serve fewer clients, but they are top-notch, and interested in what an international bank has to offer.” Although not in pursuit of market share, the bank makes sure it maintains a solid balance sheet marked by a high profit ratio. It has a return on average equity of around 50% and a cost-to-income ration of below 50%. The main raison d’étre of BNPI, Rufin said, is the provision of economical loans to the private sector, which is reflected in the bank’s loans-to-deposits ratio of above 50%.

According to Rufin, the pillars of BNPI’s continued high profitability have evolved over time. The bank has always concentrated on corporate investment banking, with a focus on corporate clients turning over more than $10 million a year. In this context, a variety of offers, including business collateral and short- and medium-term facilities, are provided. The bank has also added a strong emphasis on the financing of international trade in the last few years. With a view to Lebanon’s strong import-export tradition, which has been bolstered by perceived business opportunities in Iraq, BNP Paribas established a new “trade center” in Beirut. Offering banking services with a trade focus, it is one of 80 such centers around the globe whose interconnectivity facilitates international trade. In addition to its corporate banking strength, BNPI has turned increased attention towards private banking, offering clients high-return products. Certain accounts offer returns of 3% to 5% on the dollar. Other products, all capital guaranteed, provide higher returns of between 6% and 10%, but over a longer time frame. “These are for clients who are a little more sophisticated,” observed Rufin. BNPI tailored products developed by its parent institution to the needs of the Lebanese market and opened a private banking center in Beirut one-and-a-half years ago in support of its activities. This center is electronically connected to all BNP Paribas private banking establishments in Europe. BNPI is also attempting to develop its retail banking business. To this end, the bank has overhauled all its branches in Lebanon, to homogenize them with modern branches in Paris, Honk Kong or New York. Emphasis is being placed on customer care. The bank is also developing services in conjunction with insurance providers. “With our international backup we should be able to offer the kinds of products that will attract clients, such as loans that were not offered before, especially as the Lebanese real estate market is thriving. We will try to be much closer not just to the companies or very wealthy clients but to more medium-range customers interested in banking with an international bank.” BNPI’s continuing expansion and growth plans in the country may seem surprising considering the recent decisions by foreign banks to reduce their exposure to Lebanon or pull out altogether. But Credit Agricole’s recent move to slash its ownership of Banque Libano-Francaise and ABN Amro’s withdrawal from Lebanon in 2002, did not cast a shadow over BNPI’s resolve to maintain its presence here. “We do not plan to leave Lebanon, because 1) we know the market, 2) we know the clients, 3) we remain profitable – which is crucial, 4) Lebanon is a country that can develop financially and economically, in a regional context, creating synergy with our other branches in the region,” said Rufin, adding that the bank had also created customer loyalty by providing uninterrupted service during the war.

According to Rufin, the country’s historic commitment to banking, dynamic economy and a resurgent real estate market was cause for optimism, as was the increase in international conferences being held here and tourists visiting Lebanon. “One gets the impression that, little by little, Lebanon is reacquiring a regional role. Its efficient service sector is a big help. There is word of a 3% to 4% increase in GDP this year. It’s a start.”

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Economics & Policy

Banks with buying power

by Tony Hchaime
written by Tony Hchaime

Last month’s issue of EXECUTIVE profiled the 10 mostly likely medium and small Lebanese banks to be acquired or merged. As we now seek to identify the potential acquirers, we shift our spotlight towards the banks financially capable and strategically oriented to undertake M&A activities on the buy-side of the table.

Due to the concentration of assets and deposits towards the top of the table, however, the spotlight falls only on the Alpha group of banks, and of those, only some enjoy the combination of all the factors that would render them eager and willing to go down the acquisition path. Before attempting to identify banks that fit such a profile, it is essential to identify the main criteria required to become part of this exclusive “buyers” club.

As is the case with anything in life, members of the club should be “willing and able” to go down the acquisition road. Being “willing” means having an expansion oriented strategy, be it geographical expansion, services expansion, or other forms of expansion. Moreover, such a strategy should be keen on “non-organic growth,” through the acquisition of existing institutions that would help cross milestones faster. Surely enough, being “able” means having sufficient financial resources to undertake such monetarily demanding transactions. Recent years have witnessed a number of new share and debt offerings by major banks, with the primary purpose of funding acquisitions and expansion.

Looking at the “willing and able” candidates, the list shrinks down to the following 10 mostly likely players.

Banque Audi – Saradar

Beginning at the top of the list of banks in Lebanon, Audi-Saradar raced to the top following the closure of the merger between the two banks in mid-June 2004. Resulting in the largest bank in Lebanon, Audi’s acquisition of Banque Saradar accomplishes Banque Audi’s long-lasting favorable outlook on growth from acquisitions. Banque Audi has undertaken significant acquisitions in recent years, beginning with the acquisition of Orient Credit Bank in 1998, Lebanon Invest in 2001, and culminating with the largest acquisition in the history of the banking sector in Lebanon: Banque Saradar in 2004.

Banque Audi – Saradar has become a full-service financial institution, with strong retail and corporate banking operations complimented by a strong and geographically diversified private banking division inherited from Banque Saradar. Moreover, the bank is certainly seeking to expand overseas, operating branches in Jordan, France, Switzerland, and potentially the Gulf.

On another note, Banque Audi – Saradar enjoys one of the highest liquidity levels in the banking sector in Lebanon. The bank enjoys cash levels in excess of $4 billion, in addition to more than $1 billion deposited at other banks. Such liquidity levels far exceed the funding requirements for the acquisition of any local bank.

As such, Banque Audi-Saradar is surely “willing and able” to undertake new acquisitions. It remains to be seen if such activities have been put on hold recently. In fact, the acquisition of Banque Saradar earlier this year is Audi’s largest ever, and will certainly take time to fully digest. Consolidation in a typical merger of that size could take anywhere between 18 months and two years, and as such, the bank is likely to put any other options on hold until then.

BLOM Bank

Known for more than two decades as “the largest bank in Lebanon” BLOM Bank has been displaced to second position following the Audi-Saradar merger. Shear size has historically been BLOM’s strongest asset, priding itself as having the scale to sustain any shocks in the highly unstable local and regional socio-political and economic environments. While the bank remains significantly large by local standards, it is dwarfed by the major regional banks attempting to gain a foothold in Lebanon. It remains to be seen, however, if BLOM’s management, led by the bank’s founder’s son, Saad Azhari, is seriously considering a scale-oriented strategy to regain its lead over Audi.

Should that be the case, the most rapid way to gain size in the financial industry is through the acquisition of other institutions. Nevertheless, BLOM Bank has historically been absent from the M&A arena, not having undertaken any major acquisition in the sector for years. While this may have been the reason behind other banks catching up to it, BLOM’s management has expressed no intention to seek size through anything other than “organic growth.”

Byblos Bank

Byblos Bank was one of the first Lebanese banks to undertake acquisitions during the peak years of the country’s reconstruction era. The bank acquired the Credit Bancaire du Moyen Orient in 1996, and followed it by the acquisition of Wedge Bank in 2001, and the local operation of ABN Amro in 2002.

Such acquisitions shed some light on the bank’s strategy, as the acquired banks do not really provide Byblos with a significantly wider branch network, but do provide the bank with strength and development in areas where they seemingly lacked. Currently the third largest bank in the country, Byblos Bank is still busy digesting its latest acquisitions while consolidating its retail banking operations. The bank does enjoy a high liquidity level, with cash and deposits at other banks in excess of $3 billion, surely more than enough to undertake M&A activities in the local market. Nevertheless, such activities are likely to be delayed for another two to three years, as the bank is also currently focusing on establishing a presence in Africa, with the first Byblos branch in the Sudanese capital of Khartoum set to become operational in early 2004.

Banque de la Méditerranée

Despite priding itself as being one of the strongest diversified financial groups in the country, and its close affiliation to Prime Minister Rafik Hariri, the bank has also opted to stay away from growth through acquisitions over the past years (the purchase of Allied Bank was too small too represent a new strategic direction). The bank is currently focused on expanding the range of services it provides, maintaining and perhaps gaining market share, and consolidating its operations in the highly unstable domestic environment. The bank’s revenue base remains traditionally interest-driven, with more than 80% of income from interest revenues. Moreover, the bank has a history of investing the majority of excess funds in government T-Bills, which account for more than 30% of total assets. With such a structure leaving the bank with around $1 billion in available cash, it underlines the bank’s distance from the M&A route in the near term.

Banque Libano-Française (BLF)

BLF underwent a number of structural changes in the past years, topped by the decision by major shareholder French bank Crédit Agricole to sell down the majority of its stake in the bank. This comes as somewhat of a surprise as the French banking institution has not expressed any loss of interest in BLF or Lebanon in past years.

Nevertheless, such a development would probably put on hold any expansion plans drafted by BLF for the near term, as the bank’s remaining shareholders are busy seeking investors to acquire part or all of the equity share sold by Crédit Agricole.

On the other hand, and while BLF has been absent from the M&A arena in recent years, the bank remains mostly focused on traditional commercial banking services, and as such is likely to seek the development of new departments to offer additional services, such as private banking, investment banking, and others. In that regard, a preferred means to that end may be through the acquisition of a smaller, more specialized bank that would provide BLF with an existing and efficient operation.

In terms of the bank’s financial ability to undertake such acquisitions, BLF benefits from a considerable level of liquidity, with excess funds around $1.3 billion. Moreover, the bank could potentially acquire another bank by swapping part of Crédit Agricole’s equity stake in the bank with another local bank.

Fransabank

Fransabank has been one of the banks in the spotlight recently, showing off rapid expansion into new services, namely in the areas of private banking and investment banking. While the bank developed the Fransa Invest Bank in-house, the bank has been historically spotted on the M&A route, with the acquisition of Bank Tohme, Universal Bank, and United Bank of Saudi and Lebanon in 1997, 2000, and 2001, respectively. The bank recently acquired, in 2003, Banque de la Bekaa, putting itself in close proximity to the high-potential Syrian market.

As such, the bank has a growth-oriented approach, focused on adding new services, and diversifying away from purely interest-generating activities, which have historically contributed the most to the bank’s bottom line. As the bank is currently focusing on consolidating its human resources and branch network following its recent acquisitions, it may put its expansion on hold in the short-term. Nevertheless, the bank’s strategy remains geared towards growth, and in favor of acquisitions. As such, we may see Fransabank once again on a buying spree in the medium term.

Bank of Beirut

While Bank of Beirut has only undertaken two acquisitions in the past few years, they were relatively significant in size, adding substantially to the bank’s balance sheet. Bank of Beirut acquired Transorient Bank in 1999, following by Beirut Riyadh Bank in 2002. The bank’s primary goal remains growth, with a focus on quality service. While the bank has experienced significant growth in-house, Bank of Beirut’s management seems to favor acquisitions as a means to accelerate such a growth. Based on the bank’s historical track record, and current expansion strategy, targeted acquisitions are likely to be in the pipeline for Bank of Beirut.

In terms of the bank’s ability to undertake such transactions, year-end 2003 numbers reveal sufficient liquidity, with cash and deposits at other banks reaching in excess of $1.3 billion, broadly sufficient to undertake a number of targeted acquisitions locally.

Société Générale de Banque au Liban (SGBL)

While having historically been present early on in the M&A arena, SGBL has been somewhat distant from the scene in the past few years. SGBL was one of the first to undertake M&A activities in the post-war era, acquiring Globe Bank in 1993, Bank Geagea in 1997, and Inaash Bank in 2000. In the past few years, however, and following the acquisition of Fidus, SGBL has been more focused on expanding overseas. SGBL is aggressively growing in Cyprus, expanding the network to four branches (two onshore and two offshore units). In addition, the bank operates 15 branches in Jordan, and is aggressively seeking a license in Syria, where it currently operates an offshore unit in the Damascus free zone area.

While the bank does consider Lebanon to remain its primary market, and has undertaken numerous steps to expand its presence in the local market, it is not likely to commit substantial financial resources to acquire other banks locally, but is likely to do so overseas.

Credit Libanais

Led by Joseph Torbei, the chairman and head of the Association of Lebanese Banks, Credit Libanais remains one of the leading banks in Lebanon, regaining a favorable position in the market following a period of turbulence in the 1990s. The bank has invested substantial amounts to improve the quality of its services, widen the range of such services and create an attractive market image.

Such goals went hand-in-hand with the bank’s acquisition strategy, which started in 1994 with First Phoenician Bank in 1994, and culminated with the acquisition of American Express’s local operation in 2000. The latter added significantly to the bank’s level of service and expertise, as it brought along a professional, modern and experienced management team.

As the bank continues to expand, it may undertake certain acquisitions, but such transactions are likely to be highly selective, and would target only such institutions that would add to the bank in terms of human resources, IT systems, and other value added areas.

BBAC

While BBAC remains one of the major players in the Lebanese banking sector, its growth strategy differs somewhat from that of other major banks in that it did not seek scale and growth as aggressively. BBAC has been absent from the M&A scene for years, and has not indicated any significant intention to undertake acquisitions.

Growth in the bank, while steady, has been relatively more modest, and focused particularly on retail banking and, to a lesser extent, corporate banking.

Conclusion

It seems then, that while a number of large Lebanese banks are eager to go down the M&A path seeking growth and scale, most are not likely to engage in any such activities in the very short term. Some are busy consolidating recent acquisitions, while others are busy with shareholding or management restructuring.

Considering the fact that a number of smaller banks are ripe for acquisition, such a delay by the larger banks to pursue these smaller banks may seem gloomy at first sight. Nevertheless, and as outlined in last month’s issue of EXECUTIVE, such attractive smaller banks may, while awaiting suitors, work on improving efficiencies, perking up image, and thereby significantly increasing their chances of getting a better value when the time comes to negotiate a sale.

Such a development would certainly, on one hand, please the central bank and its efforts to promote consolidation in the sector, while on the other, it would ensure a healthy consolidation, where the smaller, to-be-acquired banks would provide tangible added value to the buyers.

BOX

Putting all things into perspective, and after profiling both buyers and suitors, there may be a certain time-lag before the priorities of buyers and sellers coincide. EXECUTIVE’s June issue identified a number of small and medium-sized Lebanese banks with attractive features for potential consolidation into the larger players, and such banks are likely to be presently willing to undertake such transactions. On the other side of the table, however, and as outlined in the story, banks eager and able to undertake acquisitions are not likely to engage in such activities in the very short term, as most are busy consolidating previous mergers, undergoing internal restructurings, or other activities. Nevertheless, such banks do place considerable importance on growth through selective acquisitions, and are likely to go down the M&A route in late 2005 and 2006.

Historically, larger banks in Lebanon tended to acquire smaller institutions, but have shifted recently to target larger groups (ABN Amro by Byblos, Saradar by Audi). Such a change in strategy, much to the displeasure of the central bank, has dented the buying power of the large institutions, at least for a while. As such, the newly formed, significantly larger institutions will need time to consolidate and go back shopping for more. As the trend returns, however, and as large banks pursue some of the attractive candidates identified in last month’s issue of EXECUTIVE, another problem arises. Top banks in the country are seeking scale through the merger with other large institutions, and added services and access to new markets by acquiring small specialized banks. The side effects of such developments may include a massive gap between newly formed ultra-large, full-service, regional Lebanese banks, and smaller, medium-sized banks from the Beta group, which are too costly to be acquired and too small to acquire on their own and grow sufficiently. The possibility of avoiding such a problem can be reached by encouraging equal mergers by such medium-sized banks, a move likely to be strongly encouraged by the central bank, which is making all attempts to improve efficiencies in the sector by cutting out excess fat and creating scale.

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Economics & Policy

Crisis management at the central bank

by Nicolas Photiades
written by Nicolas Photiades

For more than a decade, Banque du Liban (BDL), Lebanon’s central bank, and the Banking Control Commission (BCC), an independent administrative body established at the BDL in 1967 to supervise banks, have maintained a stable banking and financial system. Both have provided the banking sector with strong support, set up a good regulatory environment to enhance the reliability of the system, and have dealt swiftly and effectively with recent “crisis” situations, involving varying degrees of mismanagement at Credit Libanais in the late 80s, Inaash Bank in 1999 and Banque Libanaise pour le Commerce (BLC) in 2001. Most recently, it was forced to deal with the murky affair of the Al Madina Bank, the political implications of which, threatened to undermine the very fabric of the banking system. To its credit, the central bank emerged from the imbroglio with its integrity intact.

The BCC, with its staff of over one hundred, which include around seventy professional bank examiners, is responsible for supervising the financial sector, and monitoring the implementation by the financial institutions of the relevant articles of the Code of Money and Credit (CMC) and their adherence to the BDL’s monetary regulations. It is also supposed to verify and analyze financial statements provided by the institutions it supervises and is empowered to impose corrective measures and restrictions on individual financial institutions if necessary. So far, the track record of the BCC has been proven by the many successful interventions and bank failure preventions that occurred successively since the Intra Bank collapse of 1966. Indeed, the BDL set up the BCC in 1967 to replace the banking control department, which did not have sufficient independence and supervisory responsibilities as broad as today’s BCC. One of the most noticeable accomplishments of the BCC was the saving of Crédit Libanais in the late 1980s. This bank, which had suffered from its affiliation to the collapsed Bank Al Mashrek group, was taken over by the BDL, which re-capitalised it and imposed a senior management that remains to this day. For a number of years, Crédit Libanais remained a BDL-owned bank, whose sole purpose was to manage existing deposits and customers, and restructure operations with the view of ultimately selling the institution to a third party (which was ultimately the Bin Mahfouz group of Saudi Arabia, which owns parts of the National Commercial Bank, one of the largest banks in the Arab world). In the Inaash case, both the BCC and the BDL moved swiftly to find a white knight (Société Générale) to take over that institution, thanks partly with financial incentives, while in the case of BLC, a newly appointed management was brought in by the BDL to restructure the whole bank, and capital of around $150 million was injected, making the central bank a majority shareholder. The BLC case was similar to that of Crédit Libanais, but is currently being managed actively and is actually competing with other domestic banks instead of being constrained by the management of existing customers.

The reason behind the BCC’s swift intervention whenever a bank runs into trouble is explained by the BDL’s cast-in-gold policy, which aims at using all means available to maintain a stable financial and banking system. Indeed, the BDL believes that it would be very costly for the entire Lebanese banking system to allow any bank to fail at this critical stage of the country’s economic development and the image of financial stability must always be maintained in the eyes of international investors. For this reason, many crises of confidence, runs on deposits and bank failures have been dealt with efficiently by the BDL, which has always succeeded in reassuring investors and the public alike. Although, the more recent Bank Al Madina case appeared to have been handled too slowly, it was nevertheless sorted out without the public being too affected by the collapse of a bank that was experiencing abnormal growth.

In the months following the Paris II conference in November 2002, the BDL issued a new directive requesting the banks to increase their statutory reserve requirements. This was another effort to solidify the support and prevention policy as regards to the financial system, as it helps prevent liquidity crises, even though there are doubts as to the ability of banks to access these reserves on a timely basis. The work of the BDL and the BCC is constantly exposed to the fragile domestic economic environment and to radical external events (such as a major regional war or a disastrous domestic political decision) and the raising of the level of statutory reserves is still an insufficient measure when one realizes that there is no formal mechanism under which the BDL can make dollars available to the banks facing runs on deposits. There are however, numerous crises prevention measures. The BDL has laid down a series of regulations, which are meant to assist the banks in times of crises and to prevent a large number of banks from stepping out of normal and healthy banking practice. One measure was to allow banking institutions to hold equity in foreign currency for up to 60% of total equity, matching as a result the dollarization rate of the banks’ consolidated balance sheet. Another measure is to set up the minimum capital adequacy ratio at 12%, compared to 8% in most other countries. All these measures and rules reflect the BDL’s will to prevent major capitalization and liquidity crises, and are supposed to decrease the intensity of intervention in cases of bank failures, which can turn out to be costly and often inextricable.

Elsewhere, the BCC has consistently shown a capacity to intervene and support any banking institution in difficulty, despite the fact that its members (five in total, including the chairman) are appointed according to political affiliation and religious background. The BCC’s members are well supported by a more junior but nonetheless efficient and operational staff. The BCC stands out as arguably the most efficient government regulatory and supervisory authority in Lebanon.

Although the BDL and the BCC have proven to be able regulators and supervisors, particularly as compared to many regional counterparts, there is still significant room for improvement. Indeed, the BDL and the BCC have to start taking a significantly more proactive role when tackling banks in the country, by going beyond the due diligence stage and into enforcing financial and operational directions that would be commensurate with the situation of each individual bank. There must be stronger and more severe ways of making sure that the strategy laid down to each individual bank and every decision made by the BCC is more rapidly and efficiently implemented. There are still a large number of smaller banks, as was the case with BLC, who ignore and evade BDL and BCC rulings and who do not seem to realize that their ultimate collapse could have serious repercussions on both the banking sector and the nation.

The banking environment is now changing rapidly, with most banks in Lebanon having to abandon their traditional policy of gathering deposits and placing them in high yielding government debt securities. Most banks are now asked to behave as commercial banks rather than deposit banks, and establish the appropriate internal systems to step up their lending efforts and support economic growth. The BDL and the BCC, aware of the changing situation, should substantially intensify their pro-activeness, and guide the smaller and more inefficient banks (there is at least thirty of them) towards safe and healthy banking practices. For instance, the BDL and the BCC must guide smaller banks towards:

§ Better risk management à credit and market risks can be more effectively managed with recent techniques. Inexperience could prove fatal.

§ Capital management à Lebanese banks need to be more actively advised on how to allocate the right amount of capital to underpin risks by product.

§ Cost control à Tighter management of operating costs will be the only way to counter thinner margins and limited revenue diversification. The BCC must make this clear to the smaller banks, which have yet to realize this.

§ Product distribution à Product and service diversification and their distribution through efficient channels are key. Although this is not a prerogative of the BCC, the later must nevertheless make sure that banks look at this aspect seriously and make efforts towards achieving that objective.

More severe measures – such as suspending senior managers from their duties and publicly warning an institution (in the press) in a similar manner to regulatory authorities in Europe or North America – must be taken against banks that try to outsmart BDL and BCC directives, and consolidation must, in some cases, be forced. The laissez-faire attitude of the regulator, which worked well in the 1990s, must now give way to a stricter and more severe relationship with mediocre bankers. Leniency and apathy can be extremely damaging, and can lead to major problems such as the collapse of a medium size bank.

Setting up an independent body with the prerogative of going beyond the assessment and situation analysis stage and into actual execution of strategic plans for particular banks, could be the solution. The BCC and the BDL are bound to the tasks of realizing the situation in each individual bank and making recommendations. They cannot easily take pre-emptive measures against any bank, but would rather wait for a significant faux-pas or even an ultimate collapse. A newly set up independent body, with more aggressive prerogatives could be the ticket to greater system-wide efficiency

Such an aggressive body or behavior from the BCC would have come handy in the case of Bank Al Madina, the collapse of which could have been prevented had there been significant pre-emptive measures taken well in advance (e.g. warnings, guidance, etc.). However, it is worth noting that the Bank Al Madina case was known to have been plagued by outside political interference, which hampered the work of the BCC and the BDL. The latter must be allowed to work without such intervention, which normally affects the work of any regulator and supervisor. Political interference in the work of the supervisor affects the credibility of the national regulatory authority, particularly in the eyes of international investors, who remain crucially important for Lebanon.

It will be hard to have a perfectly regulated and supervised banking and financial system in a country where economic fragility is omnipresent and where political interference on behalf of rogue bankers is part of Lebanon’s daily life. The BDL and the BCC are an island of relative effectiveness in a sea of mediocrity. Support, partly in the form of providing the regulator with more seasoned and efficient human resources, or the provision of any necessary means that would help transform the national financial system into a global player, is crucial. This is needed sooner rather than later.

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Business

Lost in translation: the Elyssar plans

by Thomas Schellen
written by Thomas Schellen

The large majority of building stock in any modern society needs to consist of affordable, social, smart residential units, which means a massive presence of low cost apartments. This is an inescapable attribute of the highly populous and predominantly urban human existence that defines our world. Lebanon, with its very high degree of urbanization and population agglomeration, underprivileged masses and overall young citizenry, is at least as dependent as any developing country on improving and increasing its metropolitan living quality through provision of inexpensive but humane housing.

At the peak time of drafting great post-war reconstruction programs, this urgent necessity was recognized in one single key project for creation of urban living spaces – Elyssar. Under the patronage of the mythically enlarged figure of the Phoenician princess and founder of Carthage, Elyssar was initiated as a development project for the capital’s southwestern realm with a preliminary master plan in June 1995. In the area between Beirut International Airport and the new Sports City – both at the time two of the largest construction sites in a construction-happy city – Elyssar was to create a mixed environment with commercial and recreational qualities and at the very minimum, 2,500 units of quality housing for low and middle income families. Nine years later to the month, and well over half into the project’s “global estimated time frame of 14 years” for accomplishing this development, Elyssar in reality remains the forgotten twin-sister of Solidere that was lost in the slums. Not a single low-cost apartment, workshop and shop appropriate to the economic situation and needs of the poor has been built. The BHV-Monoprix shopping complex on the airport highway across from Sports City is the only element of the concept that stands accomplished. Today, outside of some references in highly academic but incompletely researched papers from international conferences on urban development, Elyssar doesn’t even exist. Or does it? Amazingly, the administrative offices of Elyssar are operating in 2004 and according to PR-responsible Fadi Moucharraf, do so with a staff of “around 40.” The entity has prepared a large amount of engineering studies and plans, said Moucharraf, but central management has put a moratorium blocking all media inquiries and interview requests due to the absence of new activities.

This leaves it anybody’s guess as to what the real status and future of the Elyssar project might be – a viable question of public concern not only because of the project’s theoretical importance but also because of its obligation to meet public scrutiny. Created explicitly for improving both the social and physical fabrics of Beirut’s suburban areas that had borne long-term damage from Lebanon’s internal conflict in form of illegal settlements and unacceptable living conditions, Elyssar is, by the decree that defined its legal status in 1996, “a public agency with administrative and financial autonomy.” As such, it ought to be directly accountable to the sovereign public and its political organs and representatives. Some reasons for the utter failure in implementing the Elyssar project to date are common knowledge. The realm under the agency’s responsibility has in critical aspects not been accessible to normal state authority. Sect-related influence spheres in the area and active resistance by people living in the concrete slums over years made it prohibitive for government representatives to instigate measures, such as the tearing down of illegal buildings that stood in the way of road and infrastructure construction. On occasion, government officials setting foot in the area, namely entering the Ouzai quarter, were confronted physically by outraged crowds. The financing formula for building the affordable housing units, which were to be offered to the displaced and underprivileged people living in the slums north of the airport, hinged on the plan to find commercial investors willing to pay large amounts for developing the neglected and run-down Elyssar seafront into chic resorts. But as Beirut reconstruction and commercial development activities began to slacken in 1997 and 1998, this concept fell victim to the less-favorable-than-expected circumstances. The worsening crisis stemming from the government’s overestimation of economic growth coupled with exploding reconstruction costs and rising public debt subsequently eliminated any rational possibility that sufficient government “allowances” would be available to increase the Elyssar project’s viability.

In addition to these immediate political and financial problems, the concept drew suspicions from an increasingly skeptical populace and became the target of opinion makers alleging that underneath the veneer of social development and promotion of economic opportunities for the masses, “dirty hands” were manipulating the project for corrupt self-enrichment. These allegations may not have been presented with full and verifiable evidence but they left large population groups with an image of Elyssar as a scam run by Prime Minister Rafik Hariri. Until today, and in the minds of some students at top Lebanese universities, Elyssar is nothing but another exploitation scheme by which the ruling clique wanted to amass more money, power and control over some of the most valuable real estate in metropolitan Beirut. All above factors played a role in turning a proposed grand Lebanese solution for an important socioeconomic challenge into a Lebanese problem exemplifying the national struggle with administrative inefficiency, distrust of politicians, internal disunity, and massive suspicions of corruption and squander of the people’s monies. Elyssar wanted “to set new precedents of the government will and dedication to promote balanced growth and to provide social equity to all Lebanese citizens,” stipulated the officious document that can be read on the agency’s website. “The success of Elyssar is also crucial for the future of Beirut. Its redevelopment should provide back to Capital [sic] its distinguished character along the waterfront while setting higher standards for quality of living,” it said.

In light of the unabated housing crisis in Beirut’s poorest suburbs and the danger of increasing social tensions among impoverished segments of society, such words constitute bitter and involuntary irony on part of a public agency that will not or cannot explain what options remain for rescuing its forgotten project, which it is managing PRO-FORMA at a cost to the public that must have accumulated to millions of dollars over many wasted years. As things stand today, it seems increasingly difficult to envision a new future for Elyssar under its original mission. Some real estate experts now expect the project to be reborn as an upscale commercial development venture, because they see the land between Beirut Airport and the city as prime real estate with potential per square meter values comparable to downtown. While the assuredly well-paid, seven-member board and general management of Elyssar and their superseding political decision makers are not available for comment, it is not possible to do anything but speculate about such possible fundamental changes in Elyssar’s orientation. The uncertainty is made worse by the fact that neither public nor commercial alternatives to the scheme are in sight, which would have the much needed capacity to serve as a model for low and middle income urban housing creation. Opinions among developers today differ whether such a project could be feasible. Some reasoned that all such projects require public subsidies and no investor would be able to venture into a socially responsible residential development of the required proportions, while others claimed that too much government involvement is the main obstacle to making social housing projects work.

There is also a growing argument for fundamental questions on orchestrated housing projects. Town planning specialists continue to discover from evidence in developed and developing societies that mega-projects in social housing run up an incessant bill of negative social and economic results, from growing crime rates to failure in motivating both job creation and job acceptance. The challenge resulting from the human limitation to centrally plan urban life and implement compatible schemes for mass-living places all deliberations on this important issue in a bind to come up with what modern marketing-speak likes to call “innovative solutions.” The progress of commercial developments of large real estate projects in Lebanon is slowly extending from top-end wealth communities down the income ladder. It may one day reach the point where social projects become satisfactory under both profit and humanitarian considerations. But the urgency in alleviating the plight of Lebanon’s slum inhabitants in the meantime gives a multitude of reasons to ask about the vision and weakness of Elyssar. On paper, the Elyssar mandate is concise and unchanged. The area under this public agency’s care is outlined in its official FINAL MASTER PLAN from May 9, 1997 as being bordered by the Mediterranean Sea to the west and the Beirut International Airport road to the east and stretching from Adnan Hakim Street (where BHV is located) in the north to the airport’s boundary. This rectangular area comprises 560 hectares of urban and waterfront properties, including three kilometers of sandy beaches.

The mandate stipulates that three sources of funding are to be used for developing the area: · Allowances from the fiscal budget

· Profits from real estate developments

· Loans or investments from public or private sources

The core development objectives of the mandate are, in order of presentation on the agency’s website:

· Creation of a vision

· Building affordable housing units

· Upgrading of infrastructure

· Creation of development opportunities

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