Employment and unemployment are two words that politicians love to use. They understand that an economy is equal to consumption, which entails income, which in turn entails a salary and yes, a salary requires a job. Politicians are thus duty-bound to maximize employment and develop human resources, to achieve optimum productivity.

The same cannot be said however, for politicians in Lebanon, where the issues of human development and job creation remain entirely marginal topics. This would seem a reckless policy, when unemployment stands at anywhere between 10% and 19%. That’s quite a range. In the US, a move of 0.5% sends the government running for cover. That’s how important jobs are to an economy.

“The Lebanese labor market is in a state of ‘dis-equilibrium,’ away from the effective allocation of labor,” said Zafiris Tzannatos, economist and internationally renowned human development specialist. Previously the manager for the Middle East and North Africa at the World Bank, and the author of several books – he joined the American University of Beirut (AUB) last year as chairman in the department of economics. The country’s civil war and other regional factors are heavily to blame for the labor market’s troubled state, Tzannatos said. “These factors cannot be ignored. No economic policy can be rational until it realizes the constraints of local factors and politics.” Under the present circumstances, any review of the national human development situation is more a report on glaring problems and inadequacies, rather than an inventory of achievements. For starters, human development specialists are a rare breed in the Lebanese economy, be it as human resources managers in the private sector or public sector policy makers. More importantly, policy making on human development seems to constitute a non-event in our national government. The files on human development and job creation appear to slumber in the bottom drawers of the public administration.

Even if such condemnation were exaggerated, it is the bigger picture that matters, and how it is perceived by Lebanese opinion makers and society as a whole. The general consensus is that the government is doing “absolutely nothing” for human resource development. “There is no government support whatsoever in human resource development,” said Nadia Shuayto, a professor at AUB. “I don’t see it anywhere.”

According to Shuayto, the lack of public support extends to both the realms of elementary and secondary education and to the absence of continued education opportunities for adults through community colleges.

The malaise is hardly less pronounced in the private sector. “Even within corporate organizations, I don’t think that they invest heavily in human resources development,” Shuayto said. “I worked on our human resources benchmarking study, comparing Lebanon to the US and Europe. Unfortunately, we are not up to par with international standards on the aspect of managing human resources in our companies.”

Due to the structure of the Lebanese economy with its vast number of small and very small enterprises of less than 15 employees, these corporate advisors see it as entirely unfeasible to expect the private sector to undertake research into factors such as labor productivity and short- and medium-term labor supply and demand. This responsibility belongs to the public sector, they say. This is the point where the National Employment Office (NEO) attached to the ministry of labor comes in, or where it should come in. The NEO has four departments, for labor statistics, studies and planning, guidance and vocational training and employment. The mandate of its activities includes the assessment of short-term labor market demand, long-term trends, and the training and matching of job seekers with local and international companies active in Lebanon. However, the agency has not published any recent labor market statistics as of late, and since its director general went into retirement last year (after 25 years in the same position), nobody at the NEO has the authority to release information on the number of registered job seekers, or how many positions the agency has helped fill. Private sector job market experts say that the NEO does not coordinate with companies involved in the research of corporate labor needs, and that a law regulating the activity of commercial job matching and head-hunting firms is missing. These critics also decry the absence of any governmental initiative to investigate the structure of the Lebanese labor force and say that it is probably all too convenient for Syria, if data on the Lebanese labor market remains opaque. The ministry of labor in Beirut is traditionally headed by an office holder with close affiliations to Damascus, which undisputedly benefits from the absorption of a good share of its labor force in Lebanon. Under the status quo, analysts believe that immediate measures need to be taken to secure the quality of education and the initiation of labor market research. Measures on the former must be government driven. With the latter, significant initiatives can originate from outside the public sector.

But how important is labor market research data in facilitating labor market development? Adequate and timely information as well as analysis are “prerequisite factors,” Tzannatos explained, for effective policies in increasing development. Three critical elements, are first and foremost employment opportunities by increases in production and more general economic growth; secondly, the ability of individuals in the labor market to capitalize on these opportunities; and thirdly, institutional factors such as the interaction between government entities and labor market participants, in addressing private sector development and social policies. He is at pains to emphasize that he is not out to play the role of the proverbial new broom, or level wholesale criticism on the deficiencies of existing researchers. He rather wants to contribute to remedying the problem. “It is important to introduce modern economic analysis on the labor market in Lebanon,” Tzannatos told Executive. While other aspects of the Lebanese labor market situation are also in urgent need of attention – data collection would go a long way towards mending the worst deficiencies in organizing the labor market here, which is fundamentally of a well-manageable size.

Attempting to instigate artificial or protectionist measures against the influx or outflow of labor, would not be good for a country that has a long history of labor mobility. “As an economist, I support the free movement of both capital and labor,” Tzannatos said. “I would see Lebanon with optimism, partly because historically it is a society that has made it, continuously, and largely successfully since Phoenician times, and partly because potentially the country has a tremendous social capital, at home and in the Diaspora. The important things for Lebanon are to articulate a (economic and social) development agenda and to apply sound macro-economic policies.” A healing of the fiscal coffers and subsequent allocation of fresh resources would certainly bear well for the NEO, which is currently woefully understaffed. According to an official at the institution, the NEO will soon undertake a full re-engineering process that will leave it with a functioning statistics collection, an interactive website and active employment mediation services. Lebanon’s immediate concern however, is how to integrate the country’s 905,445 school-age students (helped by its 84,409 teachers) into the global economy over the coming 15 years. Lebanon has the teachers, the curricula and the schools to produce top students, but the system needs to be geared to the demands of the labor market. Instead, the politicians see new schools as nothing more than convenient bribes at election time. Over half of today’s students are girls, and the country would loose out if it failed to open new avenues to women for achieving careers. The failure to achieve human development would seriously endanger the Lebanese economy by eliminating its main edge in the global market place – vibrant human capital.

Will those in the new Executive MBA program at AUB benefit from their investment? Who are we talking about?

We are talking about executives who hold managerial positions, have people who report to them and have budgets to run, often from tens of millions of dollar to over $100 million. Most executives in the Arab world do not necessarily have business degrees. They are technically qualified in their industries, but does the best engineer have skills in managing human resources? We are the first to know in this country that we have a huge deficiency in Lebanon in the area of human resources management. Most of the HR departments are run by people who are trained to deal with payroll issues, sick leaves, this kind of thing –rather than to manage the human capital resources in the company.

The corporate Middle East is a very peculiar business environment. How will you capture the region’s special characteristics and challenges in the program?

Most Arab companies whether in Lebanon or other countries, are family-based. This is factored into our courses through the cases that we are going to discuss. On one hand we are going to describe current practices, seeking to understand them. Then we aim to show the pros and cons of current business practices and current forms of organizations in the Arab world and try to identify the weaknesses and improve on them.

How fast do you foresee the results of the EMBA program percolating into the regional business culture?

I think of universities as kitchens for new ideas that will not necessarily be applied at the moment but hopefully in the future. Even in the West, where decisions on how to optimize your investment decisions were born, these were not practiced. It took 20 to 25 years of generating graduates at business schools and sending them to the job market so that they would convince their ‘boss with a hat’ of the methods they learned. We think that we will be able to convince the executives in our program to go to their boards of directors and present a case for the value of growth by extending beyond the traditional ways of Arab practices in business management. This is not going to be a push-button thing. Spreading this culture through our executive MBAs and our regular MBAs as well, we hope that in the next 10 or 20 years the culture of business in the area will evolve. Otherwise we will keep stagnant and not go anywhere.

How can you help the person applying for an EMBA convince their boss or board of directors to let him or her join the program and perhaps pay for it?

I stand yet to be corrected here but I doubt that any of the batch of executives already admitted to the program, got any sponsorship from any of their employers. This is really unfortunate. Trying to invest heavily into their people is still strange to the culture of many companies here. I would be happy to see companies pay their employees’ tuition on a loan basis, repayable after graduation, or share in the cost, or paying with the condition that they stay with the employer for a certain number of years after graduation. I haven’t seen that yet and I would like to help developing this.

You are substantially more expensive than other EMBA programs in Lebanon? Does your program quality justify this?

We did not at all look at current prices in other institutions when we priced our program. We didn’t look at this in the way of pricing. We looked at our MBA, how much it costs, and how much additional costs this program involves. We are talking a whole set of arrangements and different expenses, from data base costs to receiving scholars from outside. In fact, we think that this program may not break even in the beginning, and we don’t guarantee that the price will not be higher in the future.

And you want to transfer the good name recognition of AUB and the high image of your traditional MBA to your standing in executive education.

We are adding a new brand to this institution, but we are not branding ourselves against the local education market; we are branding ourselves on the international scene. If you look at EMBAs at the London School of Economics or Columbia Business School, all of the high-quality programs are above $100,000. So if you compare numbers on quality EMBAs, I think ours is at the moment among the cheapest. We priced our program as a good product at an affordable price, and we are trying to penetrate the market of quality EMBAs.

Does that mean that in the long run executives from major industrialized countries will see your EMBA as a viable option?

Given the image of Lebanon as the link between East and West, this program might fly internationally and we hope it does. Many executives in Europe, Japan and North America have business interests in the Arab world and perhaps want to know more about businesses in the Arab world. Perhaps it would appeal to them to acquire an EMBA here, mingle with people, establish contacts, business prospects for the future.

Would this also reflect positively on Lebanon’s role in the region?

Many people say today that Arab countries developed enough and know what to do, so they don’t need Lebanese anymore to link them to the West. On the surface, this is true. But when you go to the heart of things, you will find that in any business in the Gulf, there will be the Lebanese in the hierarchy, just below the Gulf person who is heading the division. There is value for this Lebanese brand.

Do you regard the wave of new universities in Lebanon as a problem?

People talk of turning Lebanon into the educational center of the Arab world. Turning Lebanon into the educational center of the region is one way to come up with a new market for Lebanon and this needs to be worked out. In this context, we don’t see the new universities as a challenge for AUB. We see them as an attraction to bring students to Lebanon. I will be more than happy to see 50 universities in this country, bringing tens of thousands of new students into the country. The School of Business at AUB is strong and wants to do its job well. We want the rest of the country to also do their jobs well and institutions to be qualified to build a reputation for Lebanon as a center for excellence in education.

MORE ABOUT THE NEW MBA PROGRAM

EXECUTIVE talked to Nadia Shuayto, the program’s coordinator, about its goals in building upon business culture in the Middle East

How did you structure the program?

The program uses a theme-based approach. For instance Fundamentals and Analytics is the theme for the first semester. Participants will earn credits but we decided to deliver the content in a modular format. Rather than giving separate courses on financial management or financial accounting, we decided to have two modules within the theme, and called them ‘soft skills’ and ‘hard skills.’

How long is the program?

The participant is expected to finish the entire Executive MBA program within 18 months. Courses will be given every three weeks for three days, and on very rare occasions, four days. Our target is not just the Lebanese executive; it is the executive from any country in the region. Thus we decided to organize our courses for Thursday, Friday and Saturday, because Thursday and Friday mark the weekend in many countries in the region.

What corporate experience is required for the Executive MBA?

A quality program begins with the participants. We are being very selective and strict on admission. You must have a minimum of seven to eight years of management experience to enter the program. Were equally scrupulous in your selection of faculty?

We are also very selective in our faculty about who will be teaching in the program and we will have many guest speakers from the industry who will talk about their experiences. Some of our keynote speakers are world-renowned authors, coming from Ivy League schools.

What do you expect graduates to take home from this program?

We want to train people to focus on the human aspect of management rather than just focusing on the financial bottom line. With our program we are going to create a well-rounded leader that will become a change agent. As change agents, the graduates of our program will go back to their companies and develop their employees as well. A lot of Middle Eastern executives fear delegating, they fear empowerment. We want to take that fear away from them. We don’t just want leadership at the top – we want an environment of leadership throughout the organization. Our focus is really on human development. Once the human develops, the corporation develops.

The Executive MBA program at AUB is available to participants who qualify by their academic and managerial background. Class size is restricted to 24 persons and the courses for the first class started on February 26, 2004. Cost of the 44-credit program is $600 per credit, or approximately $30,000 for tuition, books and materials. English proficiency is a must.

Pain d’Or, the Lebanese bread, pastry, and confectionery manufacturers are investing $20 million into a new Saudi Arabian operation, which the company hopes will eventually lead to a multinational status. The new company, which will open in a year, will incorporate Pain d’Or’s full production, sales points and delivery network concept as Pain d’Or’s whole Lebanon range of products will be on offer in the Kingdom. “Saudi Arabia is the biggest economy in the Middle East. That is why we started our expansion there,” said manager Hachem el Koussa. “We will probably open in [the Saudi capital] Riyadh,” said Koussa. “It is central. The government is based there and the buying power is strongest there. But we plan to gradually cover the whole of the Kingdom.” In parallel to the international ventures, Pain d’Or is continuing to expand nationally, in particular into regions of the country in which it does not yet have a presence.

Pain D’Or’s story began almost 20 years ago, when in war-ravaged Beirut of 1986, bread deliverymen braved Beirut’s Green Line on a daily basis to ensure that customers got their bread.

“Today, Pain d’Or is a household name,” said Koussa, whose family company, the Malco Group (previously the Malco Trading Co) was founded by Hachem’s father and his three brothers four years earlier in 1982. Originally, the company specialized in restaurants, but the war-related instability prompted Malco Trading to branch out. Enter Pain d’Or with bread and pastries in 1986 (as well as Fantasia, the snack food company, in 1992).Today, the Malco Group manages three companies: the Malco Manufacturing and Distribution Company (MMD), HMDR – which is responsible for Pain d’Or production and sales – and the original Malco Trading Co. – which deals with the Malco Group’s restaurant interests, Horseshoe and Abu Nuwass. Pain d’Or was born, explained Koussa, out of his father’s empathy with the plight of a people suffering because of the war. In 1986, as inflation skyrocketed, vast swaths of the Lebanese population found themselves impoverished. The situation was particularly grim for children, Koussa recalled. “It was a new kind of war – economic war,” he said. “Our aim, in launching Pain d’Or, was to help ourselves, and the Lebanese people. We thought: if children can’t buy chocolate, let’s create something they can buy instead. And we invented the Pain au Lait.”

The war had also rendered movement around Beirut, and Lebanon in general, hazardous, so Pain d’Or created a unique distribution network. “Customers couldn’t come to us. We said: Ok, if they can’t come to us, why don’t we go to them? In this way, they were able to make hamburgers at home, with buns, without venturing out into the streets.”

The fledgling enterprise didn’t allow the East-West division of Beirut to stand in its way. “We refused to divide the country ourselves,” declared Koussa. “We went everywhere. It was dangerous for our workers, of course. But Pain d’Or was for everyone. We made this our slogan. It was our duty.”

Initially, Pain d’Or only produced and distributed. It had no outlets. The first shop opened on Corniche al-Mazraa in 1988, when its range was restricted to eight items, compared to the 300 it offers today.

Other companies were already producing many of the products offered by Pain d’Or, but Pain d’Or pegged its distinctiveness on the unification of a whole range of diverse, not necessarily unique, items under one brand name. “There has always been competition with respect to individual items,” Koussa acknowledged. “However, Pain d’Or combined many lines of production under one umbrella. Maybe there is a lot of competition with regard to bread, sweets, or donuts, but we unified everything in one establishment. Our strategy was: be different.”

Thanks to Pain d’Or, people no longer had to queue in bread lines, or purchase from what Koussa called, “unhygienic shops.” Most different of all, though, was the fact that Pain d’Or did not immediately produce Arabic bread. At the time, the Arabic bread flour available did not, Koussa claimed, meet Pain d’Or’s hygiene and overall quality specifications. In 1992, Pain d’Or developed a strategy, which it hoped would allow it to compete with emerging investor blocs. It began to open outlets across the country, to bring its products closer to the consumer. Today, there are 18 Pain d’Or shops throughout Lebanon, of which six are in Beirut. The company intensified its diversification efforts, while simultaneously attempting to raise consumer awareness. “Previously,” Koussa explained, “if a customer wanted any type of French bread, they would say: give me French bread. Now they specify what they want, but this has taken us more than 10 years.”

The path to customer enlightenment was painstakingly slow but meticulously planned. “We didn’t introduce real French bread right away,” confessed Koussa. “European people like to chew. They like to eat hard bread. Americans don’t. They like to eat soft bread. Lebanese people like to eat soft bread. If we had given them hard bread straightaway, we would have had a problem. We slowly made some of the bread harder. Now, the Lebanese eat hard bread as well as soft bread,” he said. It was hard going at times, but Pain d’Or effectively pioneered the introduction of European-style bread to Lebanon, thus creating a whole new market, which eventually became saturated in the 1990s. “It was useless to compete,” said Koussa. “It was better to create a new market and that was why we expanded our range.” Today, though, neither Pain d’Or’s ‘broad variety under one umbrella’ trademark nor its array of European-style breads is unique, Pain d’Or remains the market leader, with an annual turnover of between $10 million and $15 million a year, and employs over 500 staff. The business has been dealt a tremendous blow by Lebanon’s economic and financial crisis, in particular by the introduction of Value Added Tax (VAT) in 2002. “Especially with our kind of products, which are not cheap, we could not introduce VAT without having a conflict with our customers,” Koussa recalled. “2002 was a disaster for us. Many of our customers refused to pay the VAT. They didn’t understand it.” In the interest of preserving its client base, Pain d’Or often paid VAT out of its own pocket. In so doing, it lost $2-3 million and saw its profit for 2002 wiped out.

In 2003, the company puts its shoulder to the yoke, armed with a strategy designed to help it recoup its losses. Essentially, it distributed its overheads across a broader, more diversified base by introducing a host of new products and establishing more outlets, and by increasing distribution. It also spent 6% to 10 % of its budget on advertising, especially with brochures and flyers, and on marketing its ‘healthy bread’ concept. These measures ensured that Pain d’Or revenues, helped by extra tourists, grew by 15% to 20% in 2003.

The Sannine Zenith project was unveiled at a Jeddah conference on January 17th, when the audience was told that the project would cover almost 100 million square meters (the size of Beirut) and be home to a population of 30,000. It will also accomodate a 3 million square meter man-made lake, 18 million square meters of ski slopes, an 18-hole golf course and five-star hotels, all financed by $1.4 billion worth of GDR. Although the project is currently 99% owned by the Lebanese Jean Abi Rached’s Al Salam Group, 18% ($252 million) of options have been subscribed to by Saudi Arabian investors. The Kingdom of Saudi Arabia remains the largest Arab investor in Lebanon, (even though the UAE appears to contribute the most to overall Arab investments) with total documented investments for the year 2002 (the most recent figures) reaching $350 million, following a staggering 290% growth over 2001. Saudi investment in the Sannine Zenith project, is further evidence that the kingdom is pulling away from the rest of the field in terms of investing Lebanon.

For the record, UAE Investments come a distant second to those of Saudi Arabia, peaking at $191 million in 2002, compared to just under $70 million in 2001. Kuwait is the only other major Arab presence in Lebanon, contributing around $100 million in investments in the year 2002, a figure up from around $47 million in the previous year. Saudi Arabia’s investments in Lebanon accounted for 16.5% of the Kingdom’s total foreign investments in the year 2002, a significant rise from only 4% in the previous year. This indicates a growth in the allocation of Saudi funds to investments in Lebanon and compares favorably with Kuwait and the UAE, whose investments in Lebanon accounted for only 6% of their foreign investments over the same period.

Lebanon’s close relations with Saudi Arabia are not a recent development, nor are they limited to one aspect of cooperation or level of involvement. In fact, Saudi Arabia represents Lebanon’s second largest trading partner, accounting for 9% of exports in 2002, behind Switzerland at 13%. Saudi Arabia was the single largest contributor to the Paris II donor conference held in late 2002, although Lebanon has only drawn on part of $700 million pledged, because many of the conditions underpinning the loan have not been met. Helping to push through this investment are the close ties between Prime Minister Rafik Hairi and the royal family of Saudi Arabia, which play a significant role in promoting Lebanon in the Kingdom, while the majority shareholders on most of the Prime Minister’s large corporations operating in Lebanon (including Solidere) are Saudi Arabian.

Saudi Prince Al Walid bin Talal is another major player. Born of a Lebanese mother, Bin Talal is seemingly seeking more significant involvement in Lebanon, and has even been rumored to harbor political ambitions. This is clearly illustrated by the $98 million investment undertaken by Prince Walid bin Talal for a 49% stake in Lebanese TV satellite giant LBC SAT. Bin Talal also inaugurated his $140 million Movenpick hotel in Beirut in the year 2002, and has already begun the construction of the $100 million Four Seasons Hotel in the Beirut Central District.

Hariri and bin Talal are not the sole driving force behind Saudi investments in Lebanon, which is attracting other funds by offering an attractive risk/return environment for investments. A high consumption market, and a tourism infrastructure that has attracted more than 1 million tourists in the year 2003 alone, and is set to attract an even greater number in the year 2004 – should drive returns higher. With such a structure, investments in Lebanon offer concrete economic benefits to Saudi investors, who can capitalize on the dual benefits of higher returns on investments and a significantly low cost of capital enjoyed by such investors. With a consumption-driven market, a prosperous real-estate sector, and a strong tourism industry, projects yield annual returns of anywhere between 10% and 15%. Such results emerge as attractive to Saudi investors, whose cost of capital does not exceed 5%, and thus earning them net returns of between 5% and 10%.

The risks are relatively well quantifiable, and can be mitigated, capitalizing on the country’s well-established and sophisticated financial services industry. Regional political risks, while unavoidable, are also relatively limited in Lebanon, compared to countries with a close proximity to Iraq, Iran, Israel, and other high-tension areas. Furthermore, the Lebanese economy appears to have a sizeable potential for growth in various sectors, especially tourism, real estate and financial services. In such a sense, the growth in the Lebanese economy is not oil-dependent, unlike other regional attractive markets such as the UAE and Kuwait.

Statistics released by the Inter-Arab Investment Guarantee Corporation have indicated that the services sector in Lebanon attracts the vast majority of Arab investments at 85% in 2002, while industry and agriculture share the remaining 15%. Such a breakdown is not surprising, given that Lebanon’s tourism and hospitality industry presents the greatest investment opportunities in the country. A rapidly growing inflow of tourists, illustrated by the massive numbers seen in the summer of 2003, is quickly overwhelming the existing facilities in terms of hotels, resorts, and other leisure and tourism services. Considering that Beirut attracts the majority of wealthy Arab tourists seeking premium services and hotels, the capital’s accommodation capabilities for such services is limited. Until three years ago, the Phoenicia Intercontinental was the sole non-boutique 5-star international hotel operating in Beirut, and benefited from a virtual monopoly on the market.

Such opportunities did not pass unnoticed. Apart from bin Talal’s spending, other developments include joint Saudi-Lebanese investments in the Summerland resort ($70 million), in addition to the on-going efforts to rebuild the Hilton Hotel ($128 million). Such a market condition prompted Arab investors to rapidly establish a presence in the country’s hotel industry, illustrated by the substantial investments undertaken by the likes of the Dubai-based Habtoor Group in the Metropolitan Palace Hotel.

Arguably Lebanon’s second biggest draw is the real estate sector, which is also attracting a large number of investors, seeking to establish in Lebanon a second home, one capable of providing them with the optimal mix of business and pleasure. Among such individuals is the personal aide to Saudi Arabia’s King Fahd, who recently acquired a multimillion-dollar penthouse apartment in the Beirut Central District. In addition, a recent report by real-estate consultants RAMCO indicates that 80 Arab investors have purchased up to 1.8 million square meters of real estate in Lebanon between 2001 and 2003.

Furthermore, Lebanon’s increasing role as the regional venue for conferences and conventions is creating a need for a more permanent residential presence for high profile Arabs. Such political events as the Arab Summit, and economic and financial conferences as the Arab Capital Markets, are attracting increasing numbers of Arab businessmen and investors. These developments are substantially increasing the need for accommodation facilities, including hotels and residential buildings. On the one hand, this creates substantial investment opportunities to Saudi investors, enabling them to capitalize on the sustained growth in the market. On the other, such developments are encouraging Lebanese investors and developers to regain faith in the country, making them more willing to undertake new projects.

The benefits of Saudi investments to Lebanon are not limited to such direct financial benefits, however, as the growth in Saudi investments has a large number of positive implications on the country’s economy and overall well-being. On the social and economic fronts, large-scale investments are providing substantial employment opportunities. Upon completion, the Four Seasons Hotel will require almost 300 employees, while the Summerland Resort currently employs more than 250 individuals. Moreover, the flow of Saudi funds to Lebanon has significant secondary effects as well, in the sense that it inspires confidence in the country’s abilities, a confidence that has been wilting away over the past five years, mainly due to the economic hardships and internal politics.

Shrewd by reputation, Saudi investors do not undertake large-scale investments unless based on certain risk and return assessments. Such investors can seemingly see sizeable potential in investments in Lebanon, as illustrated previously. This is having a significant impact on Lebanon as a whole, as it is inviting both Lebanese and other foreign investors to join the growing trend. Numerous ventures are already being undertaken by Lebanese companies and individual investors to capitalize on the trend. Three massive residential towers, worth more than $100 million each, are being developed on the sea front of the Beirut Central District. According to sources at Marina Towers – one such development – almost 80% of apartments have already been sold, with the majority to Gulf-based individuals. Moreover, the Park View high luxury residential building developed by Beirut-based investment bank, the Middle East Capital Group, has been almost entirely sold, with more than 70% of apartments purchased by Saudi individuals, at a price approaching $4,000 per square meter.

From such a viewpoint, Lebanon would appear to have regained to a great extent, its historical prosperity, and may be on the verge of regaining its role as the regional hub for investments. Nevertheless, a large shadow remains cast over the whole country, suffering from large budget deficits, an ever-growing public debt, and political squabble hindering any possible advances on the privatization front. That is to say that just attracting foreign investments is by no means enough to support a nation of 4 million people, and secure jobs and income to improve living conditions. It is certainly surprising to observe how Arab investors are pouring money into investments in Lebanon, while the Lebanese government’s credibility leaves something to be desired. Such an ironic set-up raises questions as to the long-term prospects of investment flows into Lebanon. While the country may, in the short term, capitalize on regional and international conditions to attract Arab investors, significant advances in economic reforms are indispensable if Lebanon is to be able to improve, or even retain, its appeal.

Nonetheless, Lebanon’s sovereign risk, although relatively significant, benefits from a more stable socio-political environment, when compared to Saudi Arabia or Kuwait. While the Saudi economy benefits from substantial levels of liquidity, the investment environment is often plagued by internal discontent, unease, and threats of terror and retaliation. The political environment in Lebanon, while also suffering from some internal political unease, is relatively calmer and more resilient, thus better suited for longer term investments. According to comments by some large Saudi investors, they view Lebanon as a safe haven, enjoying banking secrecy and an attractive investment environment, at a relative distance from regional political tensions.

Tony Hchaime is an investment banker at the Middle-East Capital group (MECG)
 

FINANCIAL IMPACT

The attacks of September 11, 2001, which caused a flight of Arab capital away from Western markets – have seen liquidity levels in the Gulf rise to unseen levels

The wealthiest Arab countries, and those that are likely to contribute the most to inter-Arab investments, are the United Arab Emirates, Saudi Arabia, and Kuwait. Of the three, the UAE has the largest amount of funds invested outside the country, or dedicated for foreign investment. Saudi Arabia follows closely behind, ahead of Kuwait. The UAE’s investments abroad totaled $3.14 billion in 2002, compared to $2.13 billion for Saudi Arabia, and $1.64 billion for Kuwait. Moreover, the UAE’s new investments abroad reached almost $450 million in each of the years 2001 and 2002, compared to less than $50 million for Saudi Arabia.
 

Marked by an insider language and a particular way of life, modern shipping and transportation has long established its very own culture of connecting nations, cultures, and markets. It has a history of its own, which reaches farther back than that of most other economic activities. Today, the industry consists of a huge variety of services and business specializations, and plays a significant role in the global economy.

Compared to its past roles in facilitating international trade and exchange and also viewed against national economic ambitions, Lebanon’s place in transportation has been small – one can even go as far to say dismal. The contribution of the transportation and shipping sectors to GDP is, in typical fashion, not precisely determined. For a nation reputedly mired in mercantilism, Lebanon recently has been awfully short on transportation essentials, beginning with ships and rigs.

With less than 100 vessels (the number exceeded 300 before 1975), the merchant fleet is not only marginal in size but also overage and, critics say, to a large part technically obsolete. Trucking is an underdeveloped industry too, where no government incentives are extended to either individual owner/operators or fleet owners. Banks are said to be overly reluctant in engaging into financing of either merchant vessels or trucks.

Governmental budget allocations to transportation have shrunk in the past five years. In 2002, the expenditure was 2%, and, as throughout the reconstruction era, the vast majority of these funds were committed to boost the infrastructure.

On the side of road construction, acceptable improvements were achieved but progress has been slower than intended, and nothing at all has progressed with respect to rail. Of all infrastructure measures, the airport rehabilitation and expansion project is most complete, even though it was weighed down with expectations that could not be met in the projected time frame.

In both sea and air transportation, Lebanon’s long-term hope and aspiration is to function as a regional transportation hub. The country’s shipping and transport experts have placed their strongest bets on sea-to-sea transshipment, whereby large container “mother” vessels would call on Beirut Port to unload and load cargo to smaller vessels that provide feeder service to regional ports, to Cyprus, Turkey, Syria, Egypt and eventually the Palestinian territories.

Sea-to-land transshipment plays a lesser role in the scenarios because of the limitations on ground transportation, which protectionist practices of governments in the region have created. Local players have voiced higher hopes for succeeding in multi-modal transportation that would also integrate air shipping into a regional hub function. Beirut, with its port and airport, has momentous potential to fulfill the function. Public sector entities have made industry-wide lauded efforts to improve operations of the facilities, reduce red tape, and act upon suggestions by the shipping industry. However, other ports and airports in the region are competing for the coveted role. The port of Tartous – a strong candidate for growth in the opinion of local experts – last year was granted a 50 million euro expansion loan by the European Investment Bank. In a venture that analysts considered less promising, the Israeli government only last month commissioned a feasibility study for a proposed railroad to link its Mediterranean and Red Sea ports and, in this way, establish a niche role in transshipment. Although the discussion over creating a transshipment hub in Lebanon has been very involved, the country still needs to convince all around that it does not only talk-the-talk of transportation but is able to walk-the-walk.

The good news is that beyond verbal commotion over the Lebanese possibilities, chances prevail for real motion in the transport sector. In air travel, national carrier MEA has been resuscitated and outlooks for passenger travel in 2004 are among the economy’s most positive indicators. Aware of this potential, new companies are targeting Beirut for charter and corporate aviation business.

The hottest current optimism factor in the shipping industry is Iraq. Although freight forwarding to Lebanon’s former top Middle Eastern trade partner still presents great security concerns due to the activities of insurgents, the second half of 2003 has already shown that the ports of Tripoli and Beirut could increase cargo throughput to Iraq. Here, 2004 could become the first year of a new future for the Lebanese shipping industry and, within realistic regional possibilities, see the country enter a new phase in writing forth its contribution to the very hands-on culture of connecting nations by shipping.

The alternative wouldn’t be pretty. At least for sea transportation, failure to bring Beirut up to transshipment hub function might condemn the ancient trade center to ‘walk the plank’ and fully plunge into shipping marginality.