Business

Negative growth

by Dania Saadi
written by Dania Saadi

Lebanon’s agricultural sector has seen better days. Between 1979 and 1981, the labor force of the agricultural sector accounted for 14% of the total labor force, based on the figures of the United Nations’ Food and Agricultural Organization (FAO). This dwindled to 3% by 2001. In 1961, Lebanon’s Gross National Agricultural Production stood at LL300 million ($900 million, $1= three pounds), according to statistics compiled by the Lebanese Center for Agricultural Research and Studies. Four decades later, this figure has hardly budged, settling in 2002 at LL1.5 trillion ($1 billion).

“Up until, 1918, Lebanon used to provide the French city of Lyon, with half of its silk threads,” said Riad Saade, the center’s director. “In 1936, the French region of Roquefort used to import half of the raw cheese processed in the caves (bearing its name) from Lebanon.”

The decline in Lebanon’s agricultural output took place during the civil war, but it has been exacerbated in peacetime. The loss of agricultural land to the haphazard construction boom of the 1990’s, competition in the key export markets in the Arab World and the government’s focus on investments put the agricultural sector on the back burner. There have been half-hearted attempts, by successive governments to rehabilitate the sector but the only visible evidence of government backing are random subsides dished out at various times to farmers.

In 2001, the farmers raised an outcry and some replanted illicit crops to protest government inaction toward their plight, which left them trampling surplus produce on the streets. The government responded by allocating LL50 billion ($33 million) for an export subsidy program dubbed Export Plus, which gave farmers cash for exporting quality goods to markets around the world.

In 2004, the government and parliament is scrambling again to save the agricultural sector by extending new subsidies to apples and partially re-instating subsidies to sugar beet farmers to appease would-be voters in a decisive election year.

“Unfortunately, successive Lebanese governments have looked at the agriculture sector from a social rather than a socio-economic point of view,” said Raphael Debbane, head of the agricultural committee of the Union of Chambers of Commerce and Industry in Lebanon. “Tobacco subsidies are pure social help whereby the government buys the crops and throws it away because it cannot sell them on the world market on account of their poor quality. Now they have renewed sugar subsidies in a non-professional way and the main reason for that is socio-political.”

Against this government backing to the agriculture sector, the private sector is finding it harder to compete in the local and international markets, where subsidies are given to farmers on a different basis. “If the subsidies are stopped in developing countries, farmers will suffer but they will survive,” said Imad Bsat, owner of B-fresh agricultural company. “If Export Plus ends, nobody will enforce standards and the sector will collapse.”

IDAL helps farmers sell their quality goods, but it does not tell them what type of crops to plant or what kind of crops are wanted by consumers in world markets. “Technically, Export Plus is a success but economically it is a big failure,” said Saade. “The problem is not money. Export Plus is only one ring in a chain. Other rings are needed.”

The other rings of the chain start with orienting farmers on what to plant according to market demands and what types of products to export. The next chain consists of extending technology to farmers to improve their crops and introduce new varieties through government backed research and financial credit. The final chain is marketing, which is what IDAL handles now, said Saade.

“Under Export Plus, farmers exported some 350,000 tons in 2003, which is equivalent to the amount of citrus Lebanon used to export in the 1970’s and 1980’s,” said Bsat. His family used to own Safa Citrus, one of the country’s largest fruit exporters that shut down in the 1990’s. “The government is spending millions of dollars on subsidizing crops when it should be using this money to fund research and help farmers develop new varieties,” said Bsat.

Agricultural engineers say Lebanon’s farmers are unable to adapt to the new agricultural modes, which rely extensively on technology and marketing. “It is a vicious cycle,” said Debbane. “Lebanese farmers have to get know-how and expertise from outside, which means importing technology at a cost. But if you don’t have money, consequently you have no money to invest in new varieties.”
 

The odds are stacked against the farmers’ development. Their production costs are significantly higher than their neighboring countries. They once had a monopoly over the Arab markets, but their rising costs and competition from cheaper produce have forced them to lose their edge in their prime markets. Neighboring Arab countries are swamping the Lebanese market with cheap produce while closing their doors to Lebanese produce, which have been hurt by badly negotiated agricultural agreements. Farmers often cite the agreements with Syria, Jordan and Egypt as disastrous and some are even calling for the suspension of Lebanon’s membership to the Greater Arab Free Trade Agreement, which is due to enter into force in 2005.

“All hell is going to break loose once GAFTA is implemented,” said Bsat, who develops his own varieties of fruits and sells them to supermarkets. “We are already facing stiff competition from their produce now and it will only become harder to sell our produce once the markets open further under GAFTA and the World Trade Organization.”

Waddah Fakhri, head of the Southern Farmers’ Association, wants the government to suspend Lebanon’s membership in GAFTA until farmers are ready to compete with goods from the Arab World. “The government has negotiated trade agreements without consulting farmers, who bear higher production costs than neighboring countries and lack the standards needed to export,” said Waddah.

One sector that is set to suffer from the government’s negotiating blunders is the flower industry. Under Lebanon’s Association Agreement with the European Union, tariffs on flowers were fixed at 30% and are set to go down further once Lebanon’s five-year grace period for lowering tariffs on European imports is over. The whole problem started when the government in 2000 slashed tariffs on flowers from 105% to 30% while it was negotiating with the EU. Following lobbying by Lebanon’s flower growers, the government agreed to raise it again to 70%, but it was too late; the Europeans had agreed on 30% and were sticking to it.

“Our sector suffers from government apathy and inconsistent policies toward the agriculture sector,” said Rania Younes, the owner of several nurseries in Lebanon. “Lebanon has human resources and the know-how to compete. We do not need mass agricultural areas to export. We can plant specialized products from small pieces of land.”

Besides the European Agreement, Lebanon’s flower sector is already suffering from a special agreement with Saudi Arabia, which is exporting flowers to Lebanon at minimal tariffs, she added. With only a few good trade agreements, Lebanese farmers require marketing cash to venture into new markets. Outside Export Plus, there is hardly any cash for marketing. “With a 0.4% budget out of the total government budget there is not much we can do,” said Louis Lahoud, director general at the agricultural ministry. “But we are working on a development plan for the agricultural sector to which the government has allocated LL5 billion ($3.3 million).”

Agriculturists agree that the government should start to control the sector by regulating standards and resolving the pricing anarchy in the domestic market that drove agriculturalists to seek price stability of supermarkets, despite stiff competition. “If we are able to regulate standards and prices in the domestic market, it would be much easier to do the same for our exports,” said Bsat.

Agriculturalists also want the ministry of agriculture to direct farmers to plant crops that could be used by the industrial sector. “A potentially successful road for developing the Lebanese agriculture sector is agro-industry,” said Debbane. “The government can develop Export Plus into a scheme inclusive of the agro-industry and a scheme for renewing orchards to introduce new varieties.”

According to Debbane, donors, who have pooled millions of dollars into agricultural projects that were doomed for failure due to political intervention or government inaction, need to divert the funds to the private sector. “Donors helping Lebanon develop its agriculture sector should pass this money to the private sector because the institutions of the Lebanese government have proved to be inefficient.”

THE ISRAELI EXAMPLE

Farmers and agricultural engineers point to the example of Israel, a country whose agricultural space and climate is similar but less diverse than Lebanon, but whose export potential has been propelled by staunch government backing. Similar to Lebanon, Israel’s agricultural land was being eaten away by a construction boom, declining number of farmers and a strain on its limited water resources, which had to be used to irrigate extensive desert land that Lebanon does not have. That did not stop the Israeli government from forging ahead in the 1990’s with an aggressive marketing campaign and research.


“When Israeli farmers wanted to introduce a new variety of grapes into England, the government spent $1 to $2 million on the marketing campaign,” said agricultural engineer Imad Bsat. Israel in the 1960’s was primarily known for the famous Jaffa oranges, but in the 1990’s its agricultural landscape changed. Instead of planting just citrus products, the Israeli government heavily invested into research, prodding its traditional farmers in the kibbutzes to adopt new agricultural products.

Currently, Israel’s exports around $200 million a year in flowers – a third of its fresh agricultural exports – an amount equivalent to Lebanon’s annual agro-industrial exports. “Each day an El Al plane leaves Tel Aviv and lands in Holland, the world’s flower market, carrying fresh flowers,” said economist Riad Saade. “Flowers are an example of a high-value added industry that can be easily developed in Lebanon.”

Lebanon’s flower exports in 2003 were around $300,000, based on customs figures. According to the Israeli government, it provides nearly 40% of Europe’s off-season fruit and vegetable market, and ranks second only to Holland in European flower sales. Israel’s fresh and processed agricultural exports stood at $1 billion in 2002. Nearly 60% of its exports were fresh produce, mainly headed to Europe, based on the figures of the Israeli ministry of agriculture. Israel does not only export agricultural produce, its also exports around $1 billion in agricultural technology each year.

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Business

Lending a hand to farmers

by Thomas Schellen
written by Thomas Schellen

Abi Habib: `Our loans are convenient, because they are cheap… and long term`

In making agriculture more sustainable in recent years, the availability of financing options has seen some important improvements. The number of loans to the agro sector has mushroomed in the last two years, especially through loans granted under the Kafalat loan guarantee program.

Lebanese farmers and small agricultural enterprises commonly encountered problems in accessing loans at commercial banks, whose focus of business would rarely include agriculture and whose branch networks were concentrated away from rural areas. Agriculturalists on their part were often reluctant to seek bank loans, which carried high interest charges and requirements to post land as collateral, a stipulation which the small land owners and family farmers viewed as running contrary to their traditions.

This placed agriculturalists in a situation where sponsored programs were most appropriate to their needs. One type of such finance vehicle is micro finance, which fundamentally aims at enabling poor people to realize their potential for economic productivity. The tool to achieve this is provision of micro credits with strict repayment discipline, modeled after a development concept popularized over the last two decades through the collateral-free lending activities of the Grameen Bank in Bangladesh. Over 20 foreign and domestic NGOs have involved themselves since the mid 1990s in managing the provision of such loans to Lebanese individuals and small enterprises, in many instances with an emphasis on serving specific communities or geographic regions.

An UNDP country survey from 1997 found that the concept encountered a notable amount of skepticism at that time, but a 2002 paper for a World Bank development debate drew a more promising picture on the potential of micro finance for Lebanon. Presently, accumulated NGO-driven micro lending activities with a ceiling of $5,000 per loan are estimated to stand at a level of around $30 million. As charities, micro finance NGOs are dependent on donor contributions. Except for micro lending initiatives within general lending by commercial banks, the activity is yet to be regulated, making it difficult to analyze the overall scope, distribution and performance. “Some of the NGOs have become more productive, others less,” said economist Joey Ghaleb, who co-authored the 2002 paper.

Experts said that new dynamics would enter this realm and boost the micro finance volume when the central bank implements a planned framework, under which banks will be allowed to utilize a portion of their statutory reserves for advancing funds to micro lending. For the time being, the Kafalat program remains the best non-commercial loan. Kafalat is the loan guarantee corporation whose shareholders are the National Institute for the Guarantee of Deposits and 50 commercial banks. The company was established in 1999 and its portfolio of loan guarantees has seen a tremendous increase from mid 2002, to reach a total amount of $199.2 million at the end of February 2004. With 1,355 loans, agriculture accounted for almost half of all guarantees awarded.

“Our loans are convenient, because they are cheap and more importantly, they are long-term,” said Kafalat chairman, Khater Abi Habib. Loans benefiting from the scheme, under which Kafalat guarantees 75% of principal and interest up to a ceiling of $200,000, can go a long way to help farmers restructure their activities, or enter new activities on land that had been under-exploited.

As it does not stipulate a minimum loan amount, the scheme could also be accessible to clients whose needs are in the range of micro finance. Kafalat as a rule processes loan guarantee requests within three weeks. A characteristic of the program suited to the needs of small businesses, and farmers in particular, is the low reliance on real estate collateral. “With the presence of our guarantees,” Abi Habib said, “it has not become totally easy but much easier.”

While not designed to finance major agro-industrial projects, the scheme allows the infusion of larger amounts into agro-industry through the nation’s industrial lending program. “I saw a number of agro-industrial concerns financed by central bank-subsidized loans creating sure markets for agriculturalists as suppliers of raw materials,” said Abi Habib, “and those agriculturalists are in turn being financed by banks on basis of the strength of the purchase contracts given to them by agro-industrialists, plus the strength of market developments and guarantees given by Kafalat.”

As medium-term facilities, the low-interest seven-year loans with a one-year grace period are suited to the needs of most agriculturalists. One sub sector of agriculture to which the parameters of Kafalat loan guarantees are less well suited, however, is tree farming. To start operation of an orchard, a farmer needs finance facilities that are repayable over 12 to 15 years, with a three-year grace period. For this, Kafalat guarantees are inadequate and a source of long-term funding would be needed, with possible sponsors including Lebanon’s usual partners in lending and aid programs, such as the World Bank, EU and their affiliated finance institutions.

The loan guarantee company is engaged in continuous efforts to inform its client base of existing or potential small and medium entrepreneurs. “The best marketing is for us to be in the midst of our potential users,” said Abi Habib, “the north is our weakest market, and that’s why the largest portion of our visits and activities is now to the north.”

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Business

Q&A Samih Barbir

by Executive Contributor
written by Executive Contributor

Lebanon’s Investment Development Authority, IDAL, figures twofold in the task of promoting the national agriculture and agro-industry sectors. Under the 2001 investment law 360, the agency offers incentives to investments into strategic sectors of the economy, including agriculture and agro-industry. For the past three years, the IDAL mandate also extended to supporting agricultural exports through the Export Plus program offering farmers transportation subsidies and quality certification for produce. In February 2004, IDAL and the nation’s agro-industrialists signed a collaboration for an Agro Market Access Program (Agromap). EXECUTIVE talked to IDAL chairman and managing director, Samih Barbir, about the agency’s achievements and plans in relation to the agro sector.

Where does IDAL set its priorities in supporting agriculture and agro-industry?

In Lebanon, we don’t have large volumes in agricultural production. Therefore, our main priority is quality. The successful experience of Export Plus of having two international firms implementing quality control has proven to be a very important factor in marketing Lebanese agricultural products abroad.

When you discuss Export Plus as a success story, where are the highlights, and what are the areas still in need for development?

The level of success is simply the fact that we witnessed an increase in our exports. In the first year, it was a big increase of 15%, in the second year, 5%, and last year, it was stabilizing. But one has to look at it in a different way. Before the launch of Export Plus, we were on a downward slope. Exports were dropping and the whole sector was suffering a lot, due to many problems. Maintaining a stable level of approximately 360,000 tons in exports per year is a success in itself. We experienced some additional difficulties, such as some bad weather hitting Lebanon over the last two years, the devaluation of the currency in Turkey and the war in Iraq, all of which affected our export markets.

In your statistics, 99% of agricultural exports went to GCC countries, plus Syria and Jordan. What can IDAL do to improve agro exports across other markets?

The GCC are the natural market. The Iraqi market is a new one that we are trying to enter right now. But our main objective is to enter European markets. We are doing a lot of contact work with all the embassies here, especially Eastern European ones. As a first target, we are trying to enter those countries that have the least obstacles.

Your 2003 report states that about 5% of agricultural products destined for exports to Arab countries were rejected in quality inspections. Would the same quality requirements apply to produce destined for Europe?

Exports to Europe would have to meet higher and different quality requirements. They have some very strict controls on pesticide residues and other issues that are not required by Arab countries. That is why we have to inform those farmers prior to starting to control their products.

On the other side of the coin, IDAL has the mission to draw in investments. How is this progressing as far as attracting agricultural investors?

We offer the same incentives to projects in all the sectors listed in the [Investment Development] law, as are tourism, ICT, agro-industry, industry in general and agriculture. The only difference is that agricultural projects have the lowest minimum investment requirements to qualify for incentives.

How have agricultural and agro-industry projects fared in terms of attracting investors?

We have two agro-industry projects that are being processed under the one-stop-shop service. The law is still relatively new and the incentives are new. It takes some time to let people know about it. We are planning to do a campaign by the middle of this year, to promote those incentives. But definitely, compared to tourism, it is still very shy.

Can you name an amount for the value of one of those two projects, to give an idea of the magnitude?

The project that has progressed further is for $4.3 million. Don’t expect to get big figures in this industry.

How much funding for agricultural export promotion do you have at your disposal?

The Export Plus program was approved for LL100 billion spread over the four years, 2001 to 2004.

How much have you dispersed to date?

A bit less than LL30 billion each year. We can handle the program until the end of this year. We might need some more [funding] but there is no problem in that. Theoretically, it should be covered.

Under the new Agromap project, you are sponsoring participation of Lebanese exhibitors in trade shows in Beirut, Paris, and New York. How does this interlace with the promotion of agricultural exports under Export Plus, where you described the strongest markets and prospects as being in the Gulf and Eastern Europe?

With Agromap, we are targeting a different sector, agro-industry, and are promoting Lebanese agro-industry products. We are doing this as a pilot project in 2004 and I wanted to reach the Arab, European and North American markets, to see what the impact would be. We will evaluate each event right afterwards and depending on those three events, we could consider going into another round with a bigger budget in 2005.

Did you allocate equally to each fair, Horeca in Beirut, the Fancy Food Show in New York, and Sial in Paris?

Between the US and France, there will be equal space. Lebanon will be bigger. Here, much more people will come because they do not have the transportation issue. Horeca also accounts for biggest amount in the budget.

How was the response from the industry?

The first results are very good. For Horeca, we have about 35 industrialists and for the Fancy Food Show about 15. We are over-subscribed but I wouldn’t call that a problem. We will have the luxury to choose the best products to represent Lebanon abroad.

What will you provide to the companies that qualify for participation?

We will have a Lebanese pavilion, and we will cover 100% of the rent and the stand decorations. Exhibitors will have to cover their transportation and other costs.
 

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Economics & Policy

Moneyed marriage

by Tony Hchaime
written by Tony Hchaime

Following the failed merger talks between Banque Audi and Banque Libano-Francaise in 2002, few anticipated the announcement of last month’s $159 million merger acquisition of Banque Audi and Banque Saradar. Moreover, such a merger differs significantly from the type of consolidation sought by the central bank, namely a consolidation of the smaller, less efficient, banks in the country. Nevertheless, the announcement of the Audi-Saradar merger took the market by surprise at first, only to make significant sense as details of the transaction began to trickle down to the market.

The deal ($100 million in cash and $59 million in shares), will lead to the creation of the largest banking group in the country and have significant implications on a number of levels related to the banks themselves, the banking sector locally and regionally, and Lebanon’s economy.

Banks in Lebanon have been facing a growingly competitive domestic environment over the past few years, not to mention the significant difficulties such banks are facing when attempting to venture into Arab markets. Lebanese banks lack the scale, efficiencies, and branding to establish a strong presence on the turf of banks like Saudi American Bank, National Bank of Kuwait and Arab Bank, among others. In that regard, the sheer scale of the combined Audi-Saradar entity provides the group with the cornerstone upon which to build a regional platform. With total combined assets in excess of $9 billion ($12 billion including fiduciary deposits, security accounts, and assets under management), the group begins to close the gap with the likes of Arab Bank, whose assets at year-end 2003 reached almost $24 billion.

There are also a number of financial, human, and commercial synergies that underline the drivers of the transaction. Both banks achieved significant growth rates over the past few years, with Banque Audi’s total asset and deposit growth reaching 38% and 42% respectively in 2003. In parallel, Banque Saradar’s total assets and deposits increased by 11% and 13% respectively over the same period. With such growth rates achieved individually, the now combined entity is likely to generate additional growth, and further widen the gap with other leading banks in the country.

Prior to the merger, Banque Audi benefited from a strong grip on the retail commercial banking market in Lebanon, gaining significant ground on retail-oriented competitors, including large banks, such as Byblos and Bank of Beirut, in addition to medium-sized retail banks, such as Al Mawarid. Saradar, on the other hand, benefited from a strong grip on the private banking and investment banking market in Lebanon, while lacking the retail aspect of commercial banking. With the consolidation of both banks into one entity, they have successfully created one banking corporation that can provide the full range of services, targeting both retail consumers and those seeking personalized private banking services. In that regard, the new entity might introduce a new competitive spirit to a sector in which few banks can efficiently provide a full range of financial services. However, customers of smaller banks in Lebanon typically favor such small-sized institutions because they offer a more personalized banking approach. As such, they would be less at risk than larger institutions – with the latter perhaps seeking to engage in M&A activities – seeking complimenting banks to merge with, in an effort to ward off any erosion of their market shares.

On the commercial front, both banks’ commercial strategies highly compliment each other. Banque Audi is highly aggressive on retail banking, dishing out new products for end consumers almost on a monthly basis, coupled with a range of insurance services through its Libano-Arabe subsidiary. Banque Saradar is more private banking oriented, with efforts to target the high-income high-net-worth individuals and groups in Lebanon and abroad. In that regard, the banks compliment each other in such a way as to target the totality of the market, from the low-income retail customer to the high-net-worth Lebanese and Arab individuals.

Moreover, both banks’ organization and personnel structures are highly synergistic, sharing many similarities in their overall culture and management approach. Such synergies were emphasized by Raymond Audi’s statement that “[the] two banks share the same values within an overall corporate culture based on integrity, transparency, innovation and quality.”

As per the terms of the merger, the Saradar shareholders will receive shares amounting to about 9% of the combined entity. As such, the new merged bank will benefit from a strong shareholder base, combining prominent Lebanese shareholders with well-connected high profile Gulf-based shareholders. In that regard, Banque Audi has historically sought to acquire certain institutions to benefit from their well-established regional shareholders, as was the case with the acquisition of Lebanon Invest.


It should be clearly outlined, however, that the Audi-Saradar merger is not limited to the banks themselves, as it has significant implications on the banking sector in Lebanon, the region, and the Lebanese economy.

The primary implications are certainly on Banks Audi and Saradar themselves. However, such implications are likely to coincide with the factors that drove the banks to merge in the first place. As such, the implications are likely to be mostly of a positive nature, capitalizing on the synergies between the banks. The combined efforts of Audi and Saradar are likely to further boost growth in deposits, loans, and overall assets, and are thus likely to further reinforce their position as the largest banking group in Lebanon.

Now we should see other big banks such as BLOM look at alternative routes to preserve its position in the Lebanese and regional market. Industry experts indicate that a drastic strategic change, although perhaps necessary, may not fit as well within BLOM’s culture. In fact, despite its scale, BLOM remains a “family-business,” much less institutionalized than Audi and Saradar. At Audi, the bank’s management consists of a team of professionals from various backgrounds, which have no major shareholdings in the bank. At BLOM, the bank’s management is tightly in the hands of Saad Azhari, vice chairman, and son of the bank’s founder and major shareholders. In this regard, BLOM may be less willing to open up its capital to other institutions or investors. Nevertheless, certain market developments that may endanger the bank’s position in the market may finally drive the Azharis to succumb to pressures and engage in the M&A route.

The word on the street is that the Audi-Saradar merger is the necessary trigger to the much-awaited wave of consolidation in the Lebanese banking sector. Essentially, this would be true if the proper drivers behind the transaction are clearly communicated to the market as incentives for others to follow suit. Moreover, the synergies between Audi and Saradar may not be so evident to other banking institutions in the country. Nevertheless, many banks in Lebanon realize the eventual necessity of consolidation, as they face the competitive risks brought forward by local and regional large-scale banks. In that regard, they are also heavily supported by the central bank, which is favoring consolidation in an effort to reduce the fragmentation in the sector and improve efficiencies. It is likely, however, that other banks will closely watch Audi’s ability to successfully consolidate its operations with Saradar as a precedent to taking any such actions themselves.

It was clearly articulated by the chairmen of both Audi and Saradar that combining the two entities significantly enhances their chances of successfully expanding regionally. This would certainly make sense given the necessities required to establish a presence in Arab markets. The GCC banking environment is highly competitive, requiring aggressive marketing, scale, advanced IT systems, a full range of banking and financial services, professionalism and efficiencies. While some Lebanese banks may achieve some of these characteristics, none actually benefit from the combination of such parameters, certainly not to the scale required by sophisticated Arab investors. Eventually, however, Lebanese banks will have to make some defensive move to defend even their local market shares, as the large-scale Arab banks have been somewhat successful in venturing in the Lebanese market, and many have been able to carve themselves a significant market share locally.

On a more general note, the Lebanese economy stands to be greatly affected by such a consolidation in the sector. In the short-term, the economy may be ill-affected by the higher degree of unemployment that typically results from consolidations. On a longer term basis, larger, stronger and more efficient financial institutions offering a full range of financial services, up to international standards, may allow the country to regain its role as a regional financial hub – a role taken away by Bahrain and Dubai.
Tony Hchaime is an investment banker at the Middle-East Capital group (MECG).

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Business

Sphere of influence

by Michael Young
written by Michael Young

In mid-February, the London-based daily Al-Hayat published an Arabic version of a US working paper that was to be presented to the G-8 summit at Sea Island, Georgia, from June 8 to 10. The paper, which was prepared “for G-8 Sherpas,” or senior advisors, outlined what the Americans have called the Greater Middle East Partnership (GME). The aim of the US is to see the GME project adopted by the wider G8, so that it can act as a basis to help “forge a long-term partnership with the Greater Middle East’s reform leaders and launch a coordinated response to promote political, economic, and social reform in the region.” In mid-March,New York Times reported that the document would not be presented the Sea Island summit after all. However, a senior US official privately noted this was incorrect, and that what may change is the way the document’s ideas are proposed: rather than be submitted unilaterally as G8 policy, it may be presented, more diplomatically, as a response to Arab requests. The three broad guidelines of future G8 action, according to the document, are the promotion of democracy and good governance, the building of a knowledge society, and the expansion of economic opportunities.

In early March, in the run-up to Arab League summit in Tunis at the end of the month, there was considerable criticism directed against GME in the Arab world. Arab states were divided into three groups on how to respond to the initiative, with one group supporting a dialogue on it, a second advocating caution, and a third calling for outright rejection for what was deemed meddling in Arab affairs. Egyptian President Hosni Mubarak, for example, declared: “We should not give others the opportunity to map out our future, define our course, or work on reforming us. We must take the initiative ourselves.” Sheikh Khalifa Bin Salman Al Khalifa of Bahrain noted that “imposition of any foreign view point separately is not in the interests of countries of the region.”

In a commentary in the English-language Al-Ahram Weekly, Egyptian commentator Mohamed Sid-Ahmad spoke for many Arabs when he noted that affirmation of a “greater Middle East,” by expanding the geographical boundaries of the region, “dilutes the importance of the Palestinian problem and demotes it from its central position on the political stage of the Middle East to a marginal position as just one of several ‘hot’ issues plaguing a much wider region.”

However, even a cursory reading of the US working paper shows it to be a remarkably satisfying wish list of reform for the region, with many of its principles already being applied through bilateral programs. Nor were the framers intimidated by the unilateralist preferences dominating in some quarters in Washington. Aside from relying heavily on the UNDP’s Arab Human Development Report of 2002, which was written exclusively by Arabs, the document emphasized that “genuine reform in the GME must be driven internally” through the civil societies of the region. In other words, the G-8, if the GME project is agreed, has the potential to be a hybrid Marshall Plan and Helsinki process for the Middle East. So, why is there such animosity toward it in the Arab world and Iran? The easy answer is that no leader wants the West to advance social, political and economic processes that will undeniably erode their own power. As the halting reform efforts in Saudi Arabia, Egypt and Syria have proven, change is only acceptable when it can ensure, or enhance, the authority of existing regimes. From the perspective of most Arab populations, however, bona fide reform must imply a possible change of leadership. Another fear in the region, as Sid-Ahmad suggested, is that GME would simply detract from the centrality of the Palestinian problem. While no one would quibble with the necessity to end the Palestinian-Israeli conflict, the insistence on using it as a benchmark to judge GME carries with it a high price tag. For one thing, Middle East reform must not be held hostage to a conflict most states in the region cannot control; for another, true regional reform would, one assumes, positively affect the behavior of Israelis and Palestinians as much as it would that of surrounding states.

However, there is a more fundamental reason for the regional animosity to GME, and it comes from the two very different philosophies defining state-to-state relations – one prevailing in the Middle East, the other in the West. In the past decade or so, the concept of state sovereignty has been recast in the West, so that states can no longer hide behind it to shield their more harmful policies. Whether due to humanitarian intervention, international efforts to curtail war crimes, regional cooperation projects, or the expanded role of the UN, state boundaries are eroding at breakneck speed. Even American neo-conservatives are, above all else, enemies of sovereignty as a barrier to the dissemination of Western, or indeed American, values.

This is alien to the Middle East, where brutish regimes have always received a free ride (including from the US) on the grounds that outsiders had no right to interfere in their affairs. What emerged was a conspiracy of silence, as all were complicit in the nasty order of things. However, GME – much like the Euro-Med partnership agreements or the US Middle East Partnership Initiative – is a reaffirmation that what is bad for the Middle East can also, ultimately, be bad for the rest of the world. That was the message of September 11, and the inability of the region to fully gauge the importance of that day is why so many have trouble understanding the importance of GME, as well as the West’s commitment to regional reform.

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Business

Q&A V5 Project

by RabihIbrahim
written by RabihIbrahim

The latest mall to emerge on the Beirut scene is V5, to be constructed in Verdun and completed in early 2007. The joint venture between United Real Estate Company of Kuwait and Horizon Development Company of Lebanon will cost about $180 million and consist of a total built-up area (BUA) of approximately 148,000 m2 on an 18,000m2 plot of land. As well as an international department store, retail outlets, and a supermarket, other features will include various eateries, a cinema complex, a parking lot for 2,000 cars and furnished apartments with an estimated BUA of 7,600 m2. Future hopes for the center are already optimistic: total retail sales are expected to reach around $200 million by 2010. EXECUTIVE spoke to Afeef Makkawi, Horizon

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The Buzz

Objects of Desire

by Michael Karam
written by Michael Karam

Bentley makes its move


Saad and Trad have been blowing their trumpet about the new Bentley Continental GT. And why not? There are few names in motoring that match the romance, elegance and sheer brute force served up by Bentley. Today, Bentley is owned by those nice people at VW, who have been selling Bentley since January 2003. The Germans are at pains to point out that the car is still a wholesome bastion of all things British and admittedly the Bentley Continental GT is all car. Forget the walnut and leather (although it’s difficult), it’s the mechanics that will really blow your mind. The 6-liter, yes 6-liter, engine can do 0-60 mph in 4.7 seconds, with a top speed of 198 mph (that’s 318 km/h to you foreign chaps). Fast enough? If you want one, it will set you back £145,000 (plus VAT and registration) but there is a two-year waiting list. “We expect it to do well,” said Michel Trad. “Rather like what the S-Type did for Jaguar.”

When Bentley and Rolls Royce were made by the same people, there was a saying that Bentleys were meant to be driven, while Rolls Royces were meant to be driven in. They knew what they were talking about back then.

A Kind of Blue

Staying with objects of desire, those of you who ever wondered why Johnny Walker Blue Label was so ridiculously expensive, should have gone along to the Phoenicia Intercontinental last month to hear Ian Williams wax lyrical about the Cardow distillery’s finest. Created in the 1990s, on the back of demand for super luxury blends and malt whiskies with unpronounceable names – especially from wealthy Japanese executives who have a habit of getting excited about Western luxury goods – it has become synonymous with extravagance, luxury and mystique and, in some cases, international intrigue (it was allegedly Saddam Hussein’s whisky of choice). However, Williams, a distiller by profession, was in Lebanon to dispel some of the myths surrounding what is essentially nothing more than a magnificent whisky. “When we created Blue Label back in 1993 we wanted a blend that would hark back to the days when whiskies had that unique heavy Victorian style,” he said. He went on to explain that unlike Black Label, which is a blend of 40 whiskies, Blue Label is made of 15, but, according to Williams, they are chosen with care. “We have 7 million casks of maturing whiskies at the Johnny walker distillery and every now and then we get one that achieves something special. These, as well as our stock of rare whiskies, often from distilleries that no longer exist, are put aside for Blue Label.”

But does it taste any good? Williams suggests a mouth of iced water before every glug of “Blue” to clean the palate, but in all honesty this can become a bit of a performance after a while. Price aside there is no doubting Blue Label’s pedigree; it really is an outstanding whisky, but like the great malts, it is so potent and rich in flavor – nose, palate and length are all rampant with peat, oak, fruits and spices – that it has moved beyond the normal confines of whisky and into the realm of the great brandies. As such, it is probably best drunk after a meal – Williams even suggests drinking it from a brandy glass. To add ice is to miss the point and so the only real debate is whether or not to add water. There is no doubt, Blue Label is a fabulous whisky, but at $150/bottle, you had better start saving.

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Business

Falling on Deaf Ears?

by Michael Young
written by Michael Young

In mid-February, the United States government began its latest endeavor to change hearts and minds in the Arab world, as its new Arab-language satellite news station, Al-Hurra, began broadcasting to a mostly dubious Middle East audience.

Al-Hurra, or the “free one,” is a $62 million project funded by American taxpayers that will fall under the authority of the US Broadcasting Board of Governors, a public body. It currently employs some 200 staff and will be headed by Lebanese journalist Muaffaq Harb, formerly a correspondent in Washington. Almost immediately, critics in the Middle East dismissed the station as a propaganda tool of the United States. Some observers pointed out that the station merely repeated a pattern of American public diplomacy efforts that had already been shown to fail. Indeed, the State Department last year launched a radio station, Radio Sawa, and an Arabic-language lifestyle magazine titled Hi, to offer Arabs a friendlier image of America. The magazine in particular was met with crushing indifference. In an interview last year, the US ambassador to Lebanon, Vincent Battle, fended off a skeptical interviewer: “Hi and Sawa are part of a public diplomacy campaign that is growing. There is a perceived need to increase our communications with the Arab world, and for the Arab world to increase its communications with the United States as well. We’re making efforts to do that.” He did add, however, in an implicit admission of problems with such attempts, that: “Some of those efforts are more successful than others.”

In condemnation fairly typical of that in the region, Jordanian columnist Rami Khouri thumped the chairman of a US Advisory Commission on Public Diplomacy, who had said that “creating a credible communication channel from the United States to the Arab world is the greatest diplomacy challenge since the end of the Cold War.” Khouri responded: “Wrong again. People in Washington who think like this are offering counterproductive projects, reflecting inappropriate policies, based on inaccurate analyses, stemming from faulty diagnoses. Perhaps not since the Emperor Nero blamed the fledgling Christians for Rome’s domestic troubles … has a world power so flagrantly engaged in misguided policies that scapegoat others, instead of rationally analyzing the collective mistakes…of all concerned.”

Meanwhile, a serene Norma Pattiz of the Broadcasting Board of Governors waved all the criticism away. “People can sit there and say whatever they want before [Al-Hurra] launches … I think they may be interested in the fact that we may bring a different perspective,” she said.

The first thing that comes to mind is, why so much animosity in the Arab world against the station? After all, $62 million is fairly modest in the satellite news world, so Arab viewers won’t risk being unfairly enticed by sparkling production quality. And if viewers do find Al-Hurra objectionable, all they will have to do is switch to another channel. Surely the fact that the US government is keen to “reach out” to the Middle East, no matter how mawkish that may sound, hardly invites such annoyance.

What Al-Hurra’s critics miss is that Arabs suffer not at all from an additional station — whether it is a propaganda outlet or not. The only ones who do are US taxpayers. The real difficulty with Al-Hurra is that it is solely an American public policy liability.

There are two reasons for this, one general, the other specific. In general, there seems little reason for Americans to put money into a station over which they have no influence, which they will probably never see, or little understand if they do, and all in an enterprise that seems doomed from the start. However, making things even more absurd is that the station’s overseers, in the hope of attracting viewers, have promised to follow a balanced approach to regional politics. Al-Hurra is to be a propaganda station without propaganda. Somehow, that misses the point, doesn’t it? Not only does “being balanced” not explain why Americans should foot the bill — if the goal is to distance the station from official proselytism, why not just turn the whole thing over to the private sector? It also doesn’t explain what will make Al-Hurra different from countless other Arab satellite news stations, or those non-Arab stations freely available to viewers in the region. In other words, if the US government insists on going into the news business, it might as well use its outlet to disseminate official policy. However, to set up a station and then shy away from turning it into a mouthpiece seems a contradiction in terms.

In the end, what the US government has not considered is the market. In starting up Radio Sawa, Hi and Al-Hurra, it failed to ask whether public funding was truly necessary. Had the projects been potentially successful (and Al-Hurra may yet work), the ideas could have been sold to private-sector investors from the start. When it became clear they were not likely to be a hit, the government got involved anyway. Is that smart? Not especially. It showed the US government failed to understand the market it was supposed to appeal to. Worse, it ignored it, and now Americans are paying.

Michael Young is a contributing editor at Reason Magazine in the US.

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The Buzz

Who’s Following the Leader?

by Tommy Weir
written by Tommy Weir

Sir Ernest Shakelton and crew spent the years 1914 to 1916 shipwrecked and stranded in pursuit of their dream – reaching Antarctica. The miracle of this story is that they survived. How can a crew of men stranded in one of the most desolate parts of the world, survive in inhumane temperatures and conditions?

Leadership!

Shakelton’s men wanted to follow him; he did not force them to do so. He was a people-centered leader and his example can be a guide for anyone in a position of leadership. What is “people-centered leadership” or, what we call “all-encompassing leadership?”

All-encompassing leadership is like a compass. A compass points out what direction you are headed. It identifies where north, south, east and west are. All-encompassing leadership is also concerned with direction – the direction of leadership. Leadership focuses on four directions: downward (employees), sideward (peers), upward (bosses), and inward (self).

Unfortunately, I (Tommy) remember having to use a compass one day when I was out exploring in the wilderness. As is typical for me, I was separated from everybody else, doing my own thing. Suddenly I became terrified as it dawned on me that I was lost. Not knowing where to turn or what direction to go in, I had to rely on my compass for direction. Surely, you have had similar moments of panic. Just as the compass is a helpful tool when you are lost in the wilderness, so can all-encompassing leadership be when you find yourself lost in the wilderness of organizational life.

Many times, leaders are lost in their jobs and have no idea where to turn or what to do. It is not surprising to discover that many leaders (or at least holders of leadership positions), do not always know what direction to head toward.

All-encompassing leadership is not too much concerned with the strategic direction of the organization or products, performance, results and rewards. Rather, it is concerned with the direction of the leader’s focus. His or her focus should point towards people.

Take a moment and think about this. What does leadership require? This is not a trick question. Leadership requires followers. Who are followers? People! So why is there so much focus on performance, products, etc.? It is a mistake that many organizations make. If the focus of leadership begins with people, real performance indicators and results will occur.

Before even deciding what products to concentrate on, the Sony Corporation set out from the beginning to become a great company. To do this, the leaders knew that they must focus on people. And this is what they did. They hired and developed the best. If you take away anything from this article, please remember this one word – people.

So, why is leadership about people? For one thing, there is no such thing as leadership without followers. People are an asset entrusted to you by your organization. More money is spent on payroll and other personnel related areas than any other item in organizational life. In mostly every organization, the people-related issue is the largest asset on the balance sheet. Nevertheless, it is surprising that in many cases employees are treated like a liability.

If you hired someone to manage your investment, what would be the expected outcome? Of course the desired outcome would be the growth of your portfolio. You would never be satisfied with the simple preservation of the assets. You would want growth.

Then, why is it that so many leaders treat their employees like a liability? It makes much more sense to treat them as an asset and help them grow. As a leader, the focus should be on developing your people as an asset. What percent of your time do you invest in developing people?

Great leaders intuitively know that leadership is about developing people. Jeffery Immlet, the CEO of General Electric, spends 50% of his time growing his people. Both the Harvard Business Review and Courageous Leadership recently wrote of the need for leaders to spend over half of their time developing people. Take a sneak peak into the board rooms of the major corporations and what do you find – you find the board of directors encouraging the CEOs to focus their efforts on the development of their people. Why is this so important? Because, a foundational principle of organizational life is: “A company cannot be any better than its employees.” Your success as a leader and a company, is ultimately dependent on your people.

Be an All-Encompassing Leader

To become an all-encompassing leader, you must know and lead in the four directions: downward, sideward, upward and inward. You may ask, “ok, how do I do this?”

Downward Leadership

Let’s start with the traditional starting place: your employees. How do you lead those who work for you? Take a moment and write out how you think you can best lead your employees.

We often think of approaches like command and control. Although these may be cultural approaches to leadership, deep down we realize that they are limited in their effectiveness.

Great leaders start by getting to know their employees. If you do not know your employees, (meaning more than just their name and birth date), how are you going to have an impact in their life? Start by getting to know who they are; why they are the way they are, what their interests are, dreams, ambitions, strengths and talents? Leadership requires a personal understanding of those around you.

Beyond getting to know your employees, there are three words that you need to remember – believe, inspire and empower. First, you must believe in people. If you do not believe in others, your leadership will be crippled. Forget about theories like McGregor’s Theory X, which says that the average person inherently dislikes work and needs high supervision. We need to move into modernity where leadership is considered a relational process. People are valuable and as a leader you need to believe in them. Believing in others is a simple change of perspective. Try this, walk into work tomorrow and begin to believe the best about your employees. Then do this day after day. Before long, you will see the impact. Once you know and believe in your employees, you can begin to inspire them. Rarely are people inspired by taking orders. Most people are inspired by seeing a picture of the future and understanding how they are a part of it. Take a moment and think through each of your employees and the role that they play. Then let them know why they are important and what you are relying on them to do. Then see if you can pass this test, and let someone else ask each of your employees what role they fulfill for you.

Once your employees know their role, how important that it is, and exactly what you want them to do, you should empower them. Part of this means you are going to have to give work away.

Sideward Leadership

How do you do lead your co-workers? You may be thinking, “I cannot lead them, because they do not report to me.” But, you can and you must. Remember, if you are not leading, you are being led. As you lead your peers, you will be surprised at the leadership you gain.

There are four points you need to remember in order to lead your co-workers. Firstly, you must add value to their life and work. Secondly, you should encourage their growth. Thirdly, you need to share what you have, and what you know. And fourthly, you ought to promote their work. Sometimes, this point seems absurd. But, it really does work. Give it a try and enjoy the results!

Upward Leadership

All-encompassing leadership is about all of the people around you, even your boss.

How do you lead your boss? First, you must remember that he or she is the boss. As we work with various leaders, we find so many people who try to act like they are the boss, when they are not. Your job is to support your boss. You need to anticipate his or her needs, and put their needs ahead of yours. This is one of the most sought after characteristics in employees. Bosses look for people who understand their needs and are willing to meet them.

Also, you should become an encourager. Bosses need encouragement. Leadership is a very lonely place. If you were to take a survey in your organization, the results would most likely reveal that the leadership rarely, if ever, receives encouragement. Instead, they spend most of their time dealing with problems.

And by all means, be trustworthy. It is time that workers stop pretending to support and like their leader, while talking behind his or her back. As you support, encourage and show yourself to be trustworthy you will gain a multitude of future leadership opportunities. By doing this, you are showing yourself to be a loyal employee.

With each of these directions of leadership, it is important to remember one point. You need to help others succeed. This is the key to leading others. It makes no difference if they are your peers, boss or employees. If you do this, your ability to lead will reach far beyond anything that you have ever imagined. And it will most likely spread throughout and perhaps beyond, your company.

To summarize all-encompassing leadership, let us take a look into the average promotion process of great organizations. Suppose Maha and Nour are up for a promotion. They have all of the same performance indicators, education, and they have been at the company for the same length of time. As a matter of fact, they are equally matched in every surface area. Therefore, the senior management team takes a deeper look. Firstly, they look to see who is in “each wallet,” (this is a phrase indicating who you have taken with you in your career). As they look in Maha’s wallet, they notice that she has done a great job of building a loyal team. When they investigate Nour’s wallet, they see that she, too, has developed a faithful following. But her wallet is more like a family album, many people who have worked around her are in other positions throughout the organization. Some are even in higher positions of leadership. Who gets the job? Maha has the experience, the numbers and the faithful following, but she gets to keep her current job. Why? Because, Nour helped others succeed. So in effect, she helped the company succeed. Success for a leader is in the people around you. Are you succeeding?

(To learn inward leadership, continue to read Executive Tools throughout 2004.)

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

 

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Business

Looking to Lebanon

by Tony Hchaime
written by Tony Hchaime

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

Triggered by the events of September 11th, 2001, and the ensuing long-lasting and global response by the US government, wealthy Arab investors have radically changed their strategies regarding their global investments. The sudden policy changes by the US government regarding Arab financial resources in the US, and the crack-down on Islamic charity organizations, accelerated the exodus of Arab funds from investments in the US and Europe, which had already begun to shrink due to a number of other factors, including a low interest rate environment globally, and growing investment opportunities in some markets in the Middle East region. As a result, liquidity levels in the Gulf have risen to levels unseen in years, providing the whole region with a rare opportunity to accelerate developments on all fronts.

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.
 

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