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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Economics & Policy

A proud Trading tradition

by Executive Staff
written by Executive Staff

I taught you value of information and how to get it,” yelled Gordon Gecco (Michael Douglas) to Bud Fox (Charlie Sheen) in the iconic 1980s movie Wall Street. Those few words constitute the whole vortex around which the movie is predicated. And while insider trading is a major felony in developed securities markets, it is an open practice in Lebanon.

In fact, insider trading is not illegal Lebanon. No law exists to prohibit people benefiting from privileged information – good or bad – before it hits the markets, only one which prohibits price manipulation (a practice not necessarily based on leaked information but on an artificial shake-up of any given market, usually by a sudden buy-up of stock).

The American financier Ivan Boesky, and our very own Samir Trabulsi (involved in the Pechiney Affair in which the French government was found guilty of insider trading and which led to the suicide of the then French finance minister Pierre Bérégovoy), have all fallen foul of the laws that control insider trading and spent time in jail for their crimes. Corporations have also been guilty. One only has to look at Enron, Parmalat and Martha Stewart’s empire to see the impact of greed and its consequences.

However, in Lebanon the absence of a law has made insider trading something of a gentleman’s sport, with those in the know seeking to outdo rivals with the quality of their ill-gotten intelligence (it was not unknown for highly-placed traders on the BSE to work with the CEO’s and chairmen of corporate Lebanon to create market movement by the dissemination of false information). Today many of these advisors (well-known personalities, still working in the financial markets and who have been exposed in the pages of Executive) serve as the country’s leading corporate chiefs, and continue working to corrupt the markets. Insider trading has become a de-facto profession.

In 2002, Freddy Baz, advisor to the chairman at Banque Audi, announced to the press that one of the major factors behind the failure of merger talks between Banque Audi and Banque Libano-Francaise at the time was that news of the merger was leaked to the market, and the resulting movement in the stock price complicated valuation issues for the merger, and ultimately contributed to its failure.
 

This year, mutterings about the performance of Solidere stock suggest that the insider trading genie might have been let out of its lamp once again. No illegal activity has so far been proven, but what was unusual was that the extraordinary price hike went uninvestigated by most local media and did not, publicly at least, raise any eyebrows from the various watchdogs at the central bank and BSE.

These two institutions, along with their counterparts at the Association of Banks in Lebanon, have been trying for years to monitor market activity and enforce securities regulations. A significant effort was made in 2001 and 2002, whereby certain guidelines to deter insider trading were established. One stipulated that any trading in listed stocks of Lebanese banks by all parties related to a bank (employees and their relatives), required getting prior approval of the bank itself. However, this a token gesture of regulation and there today exists no strong, real regulatory body that enjoys the necessary judicial or legal authority to investigate possible cases of insider trading. And while there was no evidence of financial hanky panky with the Solidere shares (although the almost 100% rise in the company’s stock price in a period of less than three months would have raised red flags on major exchanges in Europe or the US), the incident should act as a wake up call, especially if the BSE wants to present a cleaner image to investors and generate higher volumes.

So what did happen? Solidere stocks “A” and “B” are the most commonly traded securities on the Beirut Stock Exchange, and are most likely to fall prey to foul play. It is common knowledge that Solidere, although arguably the most active on the Beirut Stock Exchange, has seen minimal price movements and trivial volumes both by regional and international standards. Solidere “A,” the most active stock of the company, traded in the range of $4 to $5.25 from mid-April 2002 all the way to mid-April 2004. During that time, the average weekly volume on the Solidere “A” stock was nearly 135,000 shares. Excluding two block trades in early 2003, the average weekly volume did not exceed 87,000 shares.

The first sign of a breakout in the stock price occurred in the week of March 12, 2004, when the volume on the Solidere “A” stock leapt to more than 268,000 shares for the week. Volumes rose to more than 443,000 per week two weeks later, and managed to sustain high levels throughout April, May and June. During that time, average weekly volumes on the stock rose to 239,406 shares. In tandem, the price of the Solidere “A” stock jumped from under $5 in March 2004, to top the $8.25 mark during the first week of June, and to subsequently stabilize just under the $8 level.

By all accounts it was the GDR market in London that picked up first, and then came the orders out of the Gulf, 50,000 at a time, via US investment banks. Liquidity was low and so the orders had to be “worked.” This wasn’t difficult. As much as there were investors, flush from having made money in 2003, there were holders of Solidere stock willing to sell.

On international markets, or even the less liquid regional ones, price spikes accompanied with increased trading volumes is not that uncommon, and do not necessarily indicate any foul play. In many cases, such market developments are due to certain announcements or news hitting the market and becoming public knowledge, and it is this that draws a fine line between efficiency in the market and illegal market behavior.

Prior knowledge of Solidere’s new sales strategy, announced in June, undoubtedly triggered the sudden shopping spree. The offer invited share holders to use their stock as down payment for land for which they would receive a 15% discount. For its part, Solidere would cancel all bought back stock, reducing the number of shares on the market in an attempt to boost the market price.

No one at Solidere was available for comment, but chairman Nasser Chamaa told Executive in a July interview that, despite Beirut’s reputation for being a city where insider trading and conflicts of interest between ownership and management are common, Solidere ran a tight ship.

“I believe our internal procedures are working as far as confidentiality and transparency are concerned,” Chamaa said. “We have shareholders all over the world. We have to ensure that we are not only playing by the rules in this country but by global standards.”

In spite of these assurances, it is hard to imagine that key information was not leaked. BSE chairman, Fadi Khalaf was not available for comment. His secretary confirmed that he would not be talking to the press on any issue until further notice.

Was it an inside leak? Anyone wanting to ignite a buying spree could do so knowing that it could be easily explained, despite the fact that Solidere had made no dramatic announcements. The share price was low, arguably a good buy for speculators hoping for increased confidence in Lebanese real estate during the summer. Information could have been leaked to investors in the Gulf and it could have started from there.

According to Walid Hayeck, Investment Banking Manager at the Beirut-based Arab Finance Corporation (AFC): “some people had this information” prior to the official announcement. To Hayeck, while “insider trading” may not have been involved, some people were aware of the upcoming revelations, and managed to profit from that. Jean Riachi, from Financial Funds Advisors, concurs, stating that the developments were most likely due to inefficiencies in the market, where only some people held the information before it became public.

A senior executive at one major investment bank in Lebanon prefers to call a spade a spade, stating that however you dress it up, people acted on information that was not yet public and broke the rules. “The movement in the share price was quite strange, and there appears to have been insider trading, which is not surprising.”

Nassib Ghobril, head of research at Saradar Investment House put it bluntly: “We need a body like the SEC (Securities Exchange Commission) to raise confidence and transparency in the market,” he said, adding that such a strong regulatory body does not only help avoid, detect and investigate irregularities in stock trades, but it would be able to accomplish significant improvements in the market’s activities, just as it has in developed markets.

Another analyst at a major local financial institution reiterated Ghobril’s comments, but did not hold out much hope for such a body being created in the near future. Just as the developments in the Solidere share price and volumes went virtually unnoticed over the past few months, obvious reforms are being held up because “some people don’t want [the BSE] or others to succeed, because success would look good on the resume of a political opponent,” he said obviously referring to the upcoming elections that will dominate Lebanon during the next year.

Riachi agrees on the necessity of creating a strong regulatory body, but does not think that this would be enough. He pointed to the need to educate the market to better understand market dynamics, the dissemination of public information, and the circumstances under which one is allowed to trade on such information.

Hayeck, from AFC, also cast light on a whole new aspect to the problem, calling for the urgent division between different entities within or between corporations, so that information that is privileged is not shared or disseminated haphazardly and discriminately. “There needs to be a Chinese wall between corporate finance and capital markets, for example,” he said.

The Solidere “incident” reflected the structural problems that are embedded in the Lebanese capital markets in general and the BSE in particular. The irregularities in trading can affect any stock on the exchange. “There is a general problem in the marketplace that is not specific just to Solidere,” said Hayeck.

If nothing is done the virus will spread. Insider trading is against the very philosophy of economic prosperity and the development of the BSE as a credible financial hub. But what is to be done? “Who will protect the market in the absence of a strong law,” asked one trader, adding, “I am sure that [President] Lahoud does not want this and I am certain that [Prime Minister] Hariri, who travels the world selling the financial strengths of Lebanon and who has a stake in Solidere, cannot be happy with these allegations.”

We may never know precisely what drove the Solidere stock between March and June. If there was a leak or leaks, we will never know who was behind them. What is known is that at least $20 million in cumulative profit was made and that questions are being asked. In the presence of any doubt, the buck stops with the boss, whether anything shady did or didn’t happen and whether he did or didn’t know about it. He could do the honorable thing, but then again, honor and conscience are in short supply these days.

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The Buzz

Tapping into office talent

by Tommy Weir
written by Tommy Weir

One comment that we routinely hear from HR managers in Lebanon is that “we can’t find good people and when we find them, we can’t keep them.” A fundamental question that begs to be answered is: Are good people born or developed? We believe that they are born and developed to reach their full potential. Is this the responsibility of the HR department or the CEO? To some degree, both.

Unfortunately, most CEOs spend little if any time developing talent in their company. A recent survey of top companies around the world revealed that successful CEOs spend close to 50% of their time developing themselves and others. How much time do you spend?

Organizations that do the best job of cranking out leaders tend to have CEO’s like Jeffery Immlet of GE, who are directly and actively involved in leadership development. Men and women like him realize that the future success of their company is dependent on this type of people investment.

Although it is important for the CEO to play an active role in talent development, ultimately the responsibility is up to you actively participate in motivating and developing yourself.

Listen to what General Mills CEO Steve Sanger recently told 90 of his colleagues: “As you all know, last year my team told me that I needed to do a better job of coaching my direct reports. I have just reviewed my 360-degree feedback. I have been working on becoming a better coach for the past year or so. I’m still not doing quite as well as I want, but I’m getting a lot better. My coworkers have been helping me to improve.”

Steve realized that it is his personal responsibility to develop himself and to acquire the skills that will enable him to be a more talented coach. No one was forcing him to do this. In order to become a better leader, he had to do something different. It makes no difference if you are a CEO, middle manager or front-line worker, you need to discover and develop your talent(s).

How is this accomplished?

Organizations need to put lots of focus on identifying high-potential people, better differentiate compensation, serve up the right kinds of opportunities (for promotion and training), and closely watch turnover. Of course, crucial to all these efforts is CEO support and involvement. There is no question that one of the best ways leaders can get others to improve is to work on improving themselves. Leading by example can mean a lot more than leading by public-relations hype.

Importantly, the principle of leadership development by personal example doesn’t apply just to general managers or CEOs. It applies to all levels of management. All good leaders want their people to grow and develop on the job and it starts at the top.

One of the benefits of talent development is talent retention. This is one of the greatest challenges facing the business world in Lebanon.

Every organization, large or small, that expects to grow and prosper must make talent retention a top priority. Failure to do so may be at the least a form of organizational denial and, at worst, a recipe for steady decline. The shortage of labor and widening skills gap fueled by the educational demands of knowledge work, has created a “battle for talent” that will make the “talent war” of the late 1990s look like a skirmish, all point to the need for updated retention competencies for leaders. Talent Keepers, an employee retention firm, list 10 talent keepers essential for leaders to understand and perform in order to retain and engage employees over the long-term:

1. Build trust.

2. Build esteem.

3. Communicate.

4. Build climate.

5. Be a flexibility expert.

6. Act as talent developer and coach.

7. Build high-performance.

8. Be a retention expert.

9. Monitor retention.

10. Find talent.

Using that success formula, leaders can retain and engage employees, but, importantly, they will earn their employees’ trust.

Talent is a crucial ingredient for any successful company. It must be cultivated and held on to. Don’t fall into the trap that so many do. They fail to develop talent in others for fear that they will lose it down the road. Start today, develop your talent and the talent of the people around you.

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

 

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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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Business

Mooring more boats in Lebanon

by Christian Henderson
written by Christian Henderson

Last month, two shark-like super yachts sat in Solidere marina, the sun’s reflection glinting menacingly off their blacked-out windows. Inside, built-in swimming pools, jacuzzis, radar masts and other space age gadgets come as standard. But that’s what you get for $60 million, a price range that shuts out all but the biggest spenders – and it is these that Lebanon’s marina owners want to woo as an increasing number of Arab owners are looking for suitable destinations to moor their boats. “It is a growth industry. We have more marinas and more people coming from the Gulf,” said Mohamad Chehab of Chehab Marine, a yacht accessory shop in the Starco building. The local yachting sector can be divided into two segments: sailors (mainly European), who include Lebanon in an Eastern Mediterranean cruise itinerary, and Arabs, mainly from the GCC nations, seeking to permanently moor a boat in a Lebanese marina. Not surprisingly, those in the industry are most excited about business coming from this latter group of high net-worth individuals.

“I have received had ten phone calls today from Kuwaitis and Saudis interested in yachts. It’s incredible. It’s the first time in 12 years that I have noticed this demand coming from Gulf residents,” Chehab said. This could be explained by the post-9/11 effect that has seen many Arabs eschew Europe for the delights of Lebanon. Many in the sector believe it will only be a matter of time before a yacht will become the ultimate accessory of the well-heeled Arab. “Wait one year and you will be amazed. Just think of all the luxury apartments you have in downtown, many of the people who will buy these will also be interested in boats,” Chehab said.

Investors in turn are keen to get a slice of this pie and are now showing more interest in the sector. It is rumored that several big marina projects are planned in Lebanon with property developers from Dubai showing interest. “We know of three or four (marinas) that are going to be launched in the coming years. One in the south and one in Beirut, and we expect to have some up north,” said Christine Asmar, project manager with International Fairs and Promotions (IFP), the company who with its German partner, Messe Duesseldorf, organized the recent Beirut Boat Show that attracted roughly 18,000 visitors.

“We all know that this is a country where everything lends itself to the marine industry: the weather is nice for nine months a year, it’s never too windy, it’s never to rainy and it’s conveniently located in the Mediterranean,” said Asmar. Interestingly enough, despite these relatively ideal sailing conditions, there seems to be little interest in sail boats, as most Arabs buyers are interested in engine-powered boats. “In the [global] super yacht segment, 20% are owned by Arabs,” said Asmar.

Prior to the Beirut Boat Show, now in its fourth year, IFP conducted a feasibility study that pointed toward major future growth in the industry. “The market projections for marinas and other water front facilities in the whole Middle East and Lebanon would be about $20 billion, with Lebanon’s potential estimated at $1 billion,” Asmar said. Although it could be argued that any report commissioned by the expo organizers may not be entirely objective, the potential was borne out by unprecedented sales at this year’s show.

“The highest number of visitors we had was in 2001. But the spending power was greater in 2004. It’s not the quantity that is important it’s the quality. A lot of sales took place at the show this year,” she said. “We also had a bigger participation on the international level.” Asmar said she felt that Lebanon and Dubai both catered to different markets and were not really in competition with each other. “Dubai is not a rival. We had exhibitors from Dubai this year and they are the people who confirmed to us that this is a complimentary market to Dubai, it doesn’t compete in any way,” said Asmar. “The region is big and the investments so huge that we can afford to have two shows, one in Beirut one in Dubai.” Asmar added that water sports centers on the Sinai Peninsula, such as Sharm el-Sheikh, attracted a different kind of market, one more interested in diving and other activities than yachting.

There are three large-scale marinas in Lebanon, Joseph Khoury in Dbayeh, Automobile et Touring Club du Lebanon (ATCL) in Jounieh and Solidere marina, near the old St Georges hotel. ATCL, a non-profit private club and the oldest marina in Lebanon is almost always full, said director Nabil Gemayel. Most of the club members are Lebanese but Gemayel said the club often attracts Europeans coming from other Eastern Mediterranean destinations. “We receive every year around 40 or 50 yachts from Cyprus, Turkey and Greece,” he said.

The Joseph Khoury marina in Dbayeh opened five years ago and is arguably the biggest marina in the Middle East, with 700 berths and 200 staff. Manager Joe Bassoul said the occupancy rate was around 30%, but he believes business will improve as the marina – the newest in Lebanon – becomes more established. “It needs time before you can improve the situation,” said Bassoul, who added that the boats in his marina ranged from small size yachts to bigger boats, with usually around 15 luxury yachts moored in the facility.

Imad Dana, manager of the new Solidere marina, said that 95% of the members are Lebanese. The marina boasts around 150 boats in the 250 berth marina and Dana said he expected to see an increase in interest. The Solidere marina employs around 40 people, but Dana added that many of the bigger yachts have their own crews, some with as many as 20. Fueling the new interest in boating are two yachting events in the country: ATCL recently hosted the Emir Rally, a boat race across the Mediterranean, and Solidere marina will be the starting point for the La Route d’Elissa boat race that involves 10 sail boats with all female-crews racing from Lebanon to Tunisia. However, despite this new bubble of optimism, Lebanon still cannot compete with yachting hubs in Turkey, Cyprus and Greece where easy air access, cheaper mooring prices and stable politics attract European yacht owners. The key to Beirut’s attraction is that it is the genuine destination for Arabs to come and play on their boats. Although Dubai has some of the biggest sea-front developments in the world, such as the massive Palm Island project, many in the Middle East and Gulf are more interested in mooring their boats permanently in Lebanon, where the lifestyle is more in keeping with the yacht-owning culture.

“It’s very hot in the Gulf so they never use their boats and there are no destinations. In Lebanon, we have created summer resorts all over the coast,” said Chehab, who was at pains to mention that it wasn’t only the Gulf owners who were buying and mooring boats in Lebanon. “You have a lot of Lebanese emigrants coming from abroad and buying boats here,” said Chehab, while Alain Maaraoui, managing director of Sea Pros, said most of his sales were to locals. “Sales are going up, although last year was better than this year, but mostly they are Lebanese.”

Nonetheless, Lebanon could do more to attract visits from European yachters. Aside from the hazy images of war and uncertainty, Lebanon faces a major a hindrance with red tape in the customs and general security procedures, which deter foreign visitors. “It’s too much paperwork and people prefer not to go through that and just go somewhere else,” Asmar said. Moreover, bureaucracy makes it difficult for boat owners to leave their non-Lebanese registered boats here for longer than six months; this is in contrast to Turkey, where there is no time limit on mooring periods for foreign boats.

The conflict with Israel also restricts movement along the Lebanese coast. “To go through the Lebanese coast is not really permitted by the Lebanese authorities. They prefer the boat to come and stay in the marina and then people can visit the coast by car,” said Gemayel.

Cost is another factor that may put off the price-conscious European boat owner. Lebanon simply cannot compete in the Eastern Mediterranean. Average mooring prices in Lebanon are $350 per meter a year for smaller boats, with the price rising to around $600 a year for larger yachts. This is almost double the mooring charge in Turkey and Cyprus. But many in the industry say prices will drop as soon as there is more competition. “When there are more marinas the price will go down,” Asmar said.

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