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Business

Qatar’s many faces

by Michael Young May 1, 2004
written by Michael Young

As the Middle East continues to be buffeted by the winds of reform, both real and fictitious, one country seems have learned how to play the game of professed reform to better control its content: Qatar.

In the last decade, the emirate, the world’s third largest producer of natural gas (after having invested heavily in the sector in the mid-1990s), has been portrayed as an Arab proponent of free minds and markets. However, Qatar’s politics have, in fact, been far more complex, and interesting. Like a latter-day Venice, the emirate has blended pragmatic amorality in its foreign affairs with an ability to play all sides in order to ensure its own prosperity, security and regime survivability.

In April, the architect of Qatar’s political transformation, Emir Hamad bin Khalifa Al-Thani, hosted an international conference on democracy and free trade in Doha. Though the level of participation was less prominent than the initial list of invitees suggested, though there were fewer top American representatives than promised, the gathering did serve the emir’s purpose, namely to substantiate talk overseas of his assumed liberalism. In that sense, it allowed Qatar to represent itself, yet again, as an exception in a region grappling with reformist winds of change, the very same that virtually blew down the Arab summit that was scheduled to be held in Tunis in April.

While Emir Hamad is indeed more enlightened than many of his fellow Arab leaders, he does remain an absolute monarch. Qatar’s policies are very much the ones he defines, in collaboration with, among others, his influential foreign minister, Sheikh Hamad bin Jassem Al-Thani. And one of the emir’s most potent weapons has been his ability to develop a façade of free expression.

His crown jewel in that regard is Al-Jazeera, the satellite station that virtually no one in the Middle East can afford to be indifferent toward. Love it or hate it, Al-Jazeera is both Emir Hamad’s weapon and shield: he uses it to hit out at his enemies, most prominently Saudi Arabia (which has long regarded the freethinking emir as an unruly menace), but also to protect himself against the Arab nationalists and Islamists who delight in the station’s political line and what they consider its independence. “Independence” is a relative concept, however, in that Al-Jazeera is financed largely by Emir Hamad himself. At the Doha conference, one participant suggested that if the station was so popular, why didn’t it seek funding through commercials, like any private television station? The man was politely ignored. However, his query went to the very heart of the matter with regard to the station’s politics: to what extent is Al-Jazeera really separate from the emir’s interests?

In fact, Emir Hamad’s relationship with Al-Jazeera is a subtle one. By muzzling the station, his defenders suggest, he would merely undermine emerging Qatari pluralism and score another point for intolerance in the Middle East. Indeed, but it is equally true that by sponsoring the demagogical Arab nationalism or Islamism of Al-Jazeera, the emir also buys cover on his political left for hosting the huge American military base at Al-Udeid, from where American power in the Gulf is projected.

America offers Qatar what no one else will: security, permitting the emirate to export its natural gas without fear; but also a margin of maneuver vis-à-vis the emirate’s Gulf partners and the larger Arab states, so that Qatar has repeatedly taken on a prominence surpassing its diminutive size in both inter-Arab and inter-Islamic politics. It is to buttress its rapport with Washington that Qatar has also maintained ties – albeit ambiguous ones – with Israel. Yet, ever versatile, it was AGAINST Washington that Qatar stood before the Iraq war (even as it hosted U.S. Central Command), when it sought to avoid a conflict by intervening with the Iraqis after an Organization of the Islamic Conference summit in Doha in March 2003.

On other matters too, particularly Qatar’s relations with militant Islam (Qatari mosques follow Wahhabi teachings and the emir’s murky relations with Al-Qaeda have been the subject of considerable speculation), the cornerstone of Emir Hamad’s maneuverability has been his wearing the mask of openness. Democracy and a devotion to free markets, even when peddled by an un-elected ruler for life whose movement on democracy has been slow (if palpable), can go a long way to building up international goodwill. It has also allowed Emir Hamad to stand in the camp of the reformers, when some might question his authority to so brazenly do so. But Qatar remains blissfully indifferent to the contradictions on which its politics and stability rest. Security and profits are its mantra, and to preserve this, any and all fighting techniques are permitted – scratching and biting included.

May 1, 2004 0 comments
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Economics & Policy

Safe from harm?

by Faysal Badran May 1, 2004
written by Faysal Badran

Is Lebanon a genuine emerging economy? If so, how has the country been able to escape unscathed through the domino-like collapse of new entrants into the global financial architecture. After the implosion of several Asian “tiger” economies and the more recent Russian debt crisis, it seemed that the Lebanese bubble would burst. The common reflections on Lebanon as a potential ground were driven by fears over the fiscal imbalance and the stagnating macro economy. The emerging economies are in a sense the periphery in the global financial structure, and as the “hot” money (mainly composed of hedge funds and short term punters) flowed from the center to the periphery, many of the emerging countries witnessed a period of over investment. The excess inflows within a weak regulatory environment exposed certain vulnerabilities that highlighted a divide between both monetary and real factors. Once the short-term money flows reversed, the countries were left to pick up the pieces of fickle foreign hot money. The once revered Asian tiger countries eventually trumped their ability to siphon in short-term money.

Why has Lebanon been unaffected by all these global crises? After all, the fall in emerging markets is a stark reminder that economic reality, however masked by monetary factors, do come back to bite. It is important to note that during the period of euphoria, there is usually almost blind optimism and confidence in the countries’ ability to embark on reforms and policies that woo investments. The boom in Russia and South East Asia illustrates the wide held belief, strengthened by extensive research, that the economies’ fortunes will follow – a sort of “if you build it they will come” approach.

Lebanon stayed immune during these crises – from the Tequila Hangover that characterized the Mexican Peso collapse in the early to mid 90s, to the Asian, Russian, Brazilian blow-ups of the 1997 to 2002 period. The pessimists felt that the Lebanese miracle would unwind, and FOREX stability at the very least, would be in jeopardy. In fact, because Lebanon lacked the international sponsorship from an investment flow perspective, it would experience a more severe downfall. Marwan Barakat, head of research at Banque Audi, described in a recent presentation the crises factors that tend to precipitate problems as economic fundamentals, market factors, financial characteristics, and contagion variables. In Lebanon’s case, one would think that with the economy in the doldrums, the wake up call would be sharp. It is, however, on the other three fronts that Lebanon’s resilience was most prominent. Despite a costly monetary policy geared toward exchange rate stability and illiquid markets, it seems that the social benefit from maintaining the pound outweighed the risks. It also appears that the illiquidity of markets, seen in Barakat’s presentation as an element of vulnerability in other economies’ boom period, was a redeeming factor in Lebanon’s case, especially as most of the financial market transactions focused on local holders of debt and equity. The hot money never bothered with Lebanon, and this illiquidity, though a hallmark of a closed economy, contained the damage and banks rushed into lucrative but short-term Lebanese sovereign bonds. It also appears that the strength of the banking system was a pillar in this resilience. How much longer this can last with Basle II on the way is another issue. Contagion (the collapse of a nation with a large trade position that impacts directly on its trading partners) was never an issue in Lebanon as its role in trade and finance remains limited. The lack of statistics often distorts proper analyses of the situation. For instance, who knows what the real unemployment rate is? How often can one count on reliable monetary aggregate numbers, and what is the real level of consumption? As opposed to typical emerging markets, Lebanon has relied more on consumption than on investment, and while this provides temporary relief, for the economy to grow, real investment is crucial. This resilience is a rear view image of how Lebanon fared in comparison to other emerging markets. Simply put, Lebanon has not blown up perhaps because it has remained insular and closed, and relied on Lebanese and “patient” Arab money for its capital markets. But the resilience raises an important concern: the underreporting of non-performing loans. As this issue pertains to risks in China, Japan, and some of the South American economies, one cannot help but wonder how it may affect Lebanon. Non-performing loans to total loans in Lebanon are at a staggering 20%, according to Audi research figures. The policy lesson, according to Barakat, is that “banks and regulatory authorities should monitor sovereign exposure and find alternative sources of uses so as to avoid a strong correlation between sovereign and banking risks.”

Lebanon has weathered several global crises through a mix of luck and ephemeral variables. The key to maintaining the delicate balance is building confidence, which can be built only through public sector and political reform. As long as the current caretakers continue to place political bickering, personal careers, and confessional issues ahead of the economic and fiscal imperatives, the resilience of Lebanon will be an underutilized element. It is hopeful that unlike its emerging markets counterparts, Lebanon will not need an economic implosion to trigger change in the political and institutional modus vivendi. If, as Barakat put it, “credible policy response is crucial in the emerging economies’ ability to withstand shocks,” one wonders how the investing world feels about the future of a country where no clear economic plan is discernible and where any calls for “economic planning” is met with disdain.

May 1, 2004 0 comments
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Economics & Policy

Audi merger sets the stage

by Nicolas Photiades May 1, 2004
written by Nicolas Photiades

The merger of Banque Audi and Banque Saradar was the best thing to happen to the Lebanese banking sector for many years and the biggest merger/acquisition since the Byblos-Banque Beyrouth pour le Commerce and Bank of Beirut-Beirut Riyad Bank deals in 1995 and 2001, respectively. Although the banking sector has been consolidating for the last ten years, albeit at a slow pace, this consolidation has mainly been characterized by acquisitions of weak smaller banks by larger institutions.

The Audi-Saradar merger, on the other hand, has produced the first really institutionalized banking group in Lebanon with very little control by one single family and the widespread dilution of responsibilities and decisions among a complementary and relatively efficient management team. With such an institutionalization of ownership, the Audi-Saradar venture is likely to have positive developments on the overall competitive environment in Lebanon. It is also expected to influence other banking groups to improve corporate governance, as well as underwriting skills and risk management. Not only will the capitalization of the new venture be improved as a result of the combination of the two equity bases, but other banks are also likely to feel the peer pressure and step up their efforts to increase shareholders’ equity as well. There will also be improved banking products available to customers, reduced related party exposure as a result of family ownership dilution, increased financial flexibility and importance vis-à-vis the regulator and enhanced shareholder value. All of which will enable the new bank to meet Basel II requirements more easily and eventually offer greater support to the Lebanese domestic economy.

But it is what it may do for the cause of corporate governance that is most interesting. Lebanese banks desperately need to move away from family ownership towards a wider distribution of share ownership among passive and strategic investors or shareholders. Although some banks (such as Audi-Saradar and Bank of Beirut) have already followed the institutionalization path, a large number still remains in the hands of families and family ownership throughout the world has proved to have flaws. These include the lack of adequate resources to assist a bank in times of need and the unwillingness to dilute ownership to support growth. When families are present in management, there is the risk of credit and personnel decisions not being based on merit. Business decisions are often made purely for political or social reasons rather than economic ones, whilst the risk of connected lending is high and affects the image and creditworthiness of the bank (many Lebanese banks still claim though that they prefer to lend to companies they control, since they know them better).

To be fair to some family-owned banks, many family shareholders have already demonstrated their financial support to the business by taking minimal dividends (this was a Central Bank rule during the war years) or increasing the bank’s capital. Many families have also opted for a sale or a merger when they realized that they did not have the means to inject further capital and that they were better off joining hands with larger, better-equipped banks (such as the acquisition of Crédit Commercial du Moyen Orient by Banque Audi in 1996).

Family ownership in the Arab world has a different meaning than in other regions such as Europe or North America. Arab individual owners are often very wealthy in their own right and are more than able to support their business interests. Indeed, in Lebanon, the Central Bank considers family ownership to be a positive factor as it guarantees the conservatism of each individual bank and the heavy involvement of families in the daily management of the local banks has been a major factor behind the survival of most banks during the civil war period.

But this policy has its limitations. It can give rise to serious corporate governance and succession issues, and many banks, particularly smaller ones (below the top fifteen) are still run by forceful managers/shareholders (often carrying the two contradictory and conflicting titles of general manager AND chairman), who constrain or hinder the future development of their banks and add considerable stress on the already fragile and often weak financial structure.

It would be worth noting that many larger banks (as demonstrated by the recent Audi-Saradar venture) have been busy addressing corporate governance issues by taking significant steps towards institutionalization of management decision-making. The larger banks have been proactive in this area, as reflected by the setting up at various institutions of committees and executive management teams responsible for operational and financial (but rarely for strategic) decisions on a daily basis. The Central Bank, through its Banking Control Commission (BCC) has also been busy guiding the banks in their efforts to dilute the influence of particular senior managers or shareholders influence in managing the bank.

Today, the viability of many banks in Lebanon is in doubt. Those banks that still swim against the tide of consolidation typically have a very narrow franchise base, lack the necessary technological sophistication and operational capabilities that would lead to growth and long-term profitability. Most of these banks are vulnerable to the volatile external environment and would not be able to defend their franchises in the long-run. The forthcoming Basel II regulations, which are due to be forced upon banks all over the world, will put the final nail in the coffin, as they require a significant upgrade of risk management capabilities and a change of banking culture along Western European and North American ones, which are focused on credit and other risks.

While the Audi-Saradar merger will hopefully accelerate the pace of the consolidation process within Lebanon’s banking sector, the recent decreases in interest rates on government debt securities and the squeezing of margins should also change the thinking of many bankers, as they realize that organic growth is now increasingly difficult to achieve. The changing interest rate environment is likely to push all banks to become real lending banks, more focused on risk management, greater corporate governance, and on developing a strong credit culture within each institution. Greater consolidation of the banking sector in Lebanon would result in a more efficient banking system that is less vulnerable to shocks in the economy.

A sound and dynamic banking system is key to the future prosperity of the Lebanese economy. In order to achieve this higher level of creditworthiness, Lebanese bankers need to strike a balance between risk taking – financing economic growth – and prudent investment of national savings (deposits). Success in the key areas of risk and capital management, cost control and product diversification and distribution, will distinguish the healthy and profitable banks from the rest. However, given the current skepticism among some bankers, the sector may sadly still need a certain number of high profile collapses or failures to highlight to the rest of the sector the importance of robust risk management and rigorous corporate governance. Banque Audi and Banque Saradar have spectacularly shown the way to the banking sector. Emulation should now follow, while the wait for peer failures should not be an option for most banks.

Nicolas Photiades is an independent financial adviser on financing, capital optimization, and strategy.

May 1, 2004 0 comments
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Business

Bank of Beirut: Going steady

by Thomas Schellen April 3, 2004
written by Thomas Schellen

Following a very satisfactory 2003 for the country’s major banks, the outlook for the sector in 2004 is guarded but not downcast, said Salim Sfeir, chairman and general manager of Bank of Beirut.

Each and every bank in the sector’s leading stratum could outdo their expectations on the results they realized in 2003, Sfeir told EXECUTIVE. “Talking about 2004 and 2005 is a big question, because markets are slightly down and political uncertainties are still high,” he said. “But nevertheless, our financial forecast for the end of the year is not pessimistic. We look forward to having a smooth year, financially speaking.” Similar to other alpha group banks – the institutions at the top of the national banking hierarchy, with assets of more than $1 billion apiece – Bank of Beirut can point to exponential growth in the reconstruction years, both in size and range of activities. Today ranked sixth by assets and seventh in terms of tier-one capital among Lebanon’s banks, its evolution and performance appears archetypical for the fortunes of the sector’s better-achieving agents.

Entering the 90s as a very small player, Bank of Beirut ventured onto an ambitious path of expansion after installing a new management in 1993. Four years later, it was Lebanon’s third bank to go public, and in 1998, a merger with Transorient Bank completed the foundation that enabled Bank of Beirut to scale the $1 billion assets hurdle. In 2002, the bank made further headlines by acquiring Beirut Riyad Bank in a second large merger move, which contributed to a 2002 increase in assets by over 58% and boosted the branch network to over 40 domestic outlets and a subsidiary in London. The bank also established an international banking unit in Cyprus, adding to its representative office in Dubai at the seat of its strategic shareholder, Emirates Bank International. In parallel, Bank of Beirut in 2002 and 2003 undertook a number of measures to increase its tier-one and tier-two capital, including issuance of $55 million in preferred shares. It enlarged its product and services portfolio through creating new funds, retail and bancassurance products along with installation of a call center and an electronic banking operation. Perhaps more tiring than anticipated, the acquisition of Beirut Riyad Bank and integration of its labor force and customer base “was not an easy meal to digest”, Sfeir concedes, even as he maintains that the bank mastered the merger “in an excellent way. I don’t think it could have been done in a better way.” The bank’s underlying message seems to say that their growth expectations are far from exhausted but under national economic conditions, the next development cycle could be some time away.

Bank of Beirut has, so far, navigated 2004 with care – a mood primarily reflective of what management regards as ‘politically generated’ constraints on local and regional affairs encumbering the investment climate. The bank is party to a widespread sentiment that – positive impact of Paris II notwithstanding – the Lebanese political decision makers still need to fulfill their duty of facilitating macro-economic conditions more conducive for attracting investments. The lack of action on the government’s part has led the banking industry in general, and Bank of Beirut in particular, to declare itself apolitical. This does not mean that the bank would wait for political improvements before continuing their quest to innovate. Recent new products include a competitively priced account with revolving credit for salaried employees and a new lira-denominated housing loan. The bank’s current emphasis on housing loans took off with a product designed especially for Lebanese expatriates, who sought to establish a personal property bridgehead in their home country. As the interest rate environment on the lira has improved and lira products are more feasible than before, lira loans are a logical new product that many banks would follow Bank of Beirut in devising, Sfeir said. “The lira loan is another product. We are not highlighting the lira but promoting higher usage since interest rates have fallen to levels making it mandatory to start planning in this direction.” Like a dollar-denominated domestic housing loan introduced last year, the lira loan offers regressive interest rates.

In continued pursuit of its strategy to offer funds products attractive to small and large investors, the bank last year collaborated with First National Bank (FNB) in the creation of two new funds, the Beirut Global Income Fund in July and the Beirut Lira Fund in October. “Small investors took part in the funds and saw high returns,” Sfeir said. “Investors are well informed today, and expect returns that are higher than what they can gain elsewhere. As long as we are providing those returns, we are reaching our target.” According to Sfeir, the funds collaboration between Bank of Beirut and FNB was to the mutual benefit of both institutions. Could this development indicate a stronger partnership in the making, or perhaps another merger prospect? Not in the current situation, where the law and regulations supporting bank merger activities with central bank soft loans haven’t been renewed. “There is no merger law now; it would be a waste of time to get excited,” he said. “With a merger law, it would be a new opportunity.”

Profitability before size and profit optimization at lowest possible risk levels make for two fundamentals in the Bank of Beirut strategy, translating into an unhurried pace in the bank’s continued ambition for an increased role in regional markets. Together with its partner, Emirates Bank, the institution has applied for a license to establish a presence in Syria. It is also approaching the Nigerian market through a rep office project in Lagos, and – for the longer term – contemplates its entry into Iraq. In Sfeir’s view, international expansion is no easy fix and offshore markets poise high risks for Lebanese banks that venture there. They have to calculate a high costs of funds based on the interest rates paid to depositors, and offshore clients accepting those rates would not be likely to be a model for creditworthiness. “Whoever is going to borrow at our own rates will be a risky partner, on whom we have no control,” Sfeir said, “and this I don’t recommend at all to my people.” He accepts only the top five banks in the country as a peer group for Bank of Beirut and sees the optimal size of the Lebanese banking sector as containing no more than 12 or 13 banks. But domestic size ranking was never a concern of the bank, Sfeir said. “We never looked at other parties, the market and colleagues. Our policy is to compete against ourselves. To be much better than we have been.” The bank has a young labor force – the average age is below 40-years-old – and Sfeir prioritizes in-house training and continued education over hiring new staff. The priorities for the current period in the Bank of Beirut evolution are “to maintain the quality of our service and products,” he continued, “and improve the quality of our people through adequate education programs. This will reflect on our results.” The executive admonishes the existence of unprofessional banking practices that extend even into the ranks of the alpha group – but nonetheless appears less concerned about sector-specific problems than about the performance of the public sector leadership. “Lebanese bankers are good bankers,” he said, “I didn’t say that the Lebanese politicians are good politicians.”

The one internal snag factor that Sfeir identified for his institution – which adopts the motto ‘banking beyond borders’ – would be, “shyness.” “Every time when we are shy, we fail.” Extending an invitation to everyone to get closer to Bank of Beirut, the tough talking banker shows a softer side. “We are opening our doors to accommodate the public with a big smiling heart.”

April 3, 2004 0 comments
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Economics & Policy

Trouble with stocks

by Nicolas Photiades April 1, 2004
written by Nicolas Photiades

The re-opening of the Beirut Stock Exchange (BSE) in 1996 offered local businesses the means to raise equity funding to finance restructuring and development plans, as well as expansion strategies. It also coincided nicely with the rise in emerging market equities, and the initial listings of Lebanese companies and banks, such as Solidere, Banque Audi and Bank of Beirut, met with immediate and substantial rises in stock prices.

However, for the past six years, the BSE has been a thorough disappointment – a condition partly explained by global factors affecting emerging and other Arab markets. Last year, while many Arab stock markets experienced growth of between 20% and 70% in 2003, the Beirut Stock Exchange (BSE) experienced none. It has been plagued by illiquidity and tiny total market capitalization, which by mid-February 2004 amounted to around $1.7 billion (including over-the-counter stocks, such as Société des Grands Hotels du Liban [SGHL], the Casino du Liban and the ABC). Some stocks can now spend an entire week without any trading, while it is not unusual to see that one or two stocks can account for 100% of daily trading. In the “boom” years Solidere’s market capitalization alone used to reach $1.7 billion.

Lebanon’s depressed economic environment and the consequently low credit rating of the country (B- by Standard & Poor’s) are no doubt the overriding reasons behind the BSE’s stagnation. A stable economic and, more importantly, political environment is key and has been the key driver behind the relative success of the Amman Stock Exchange, which now boasts more than 100 listed companies.

There are, however, other factors. While an uncertain geopolitical situation has constantly driven away local and international investors, the absence of a domestic Capital Markets Authority, an equivalent of the US’ Securities and Exchange Commission (SEC), has had a greater effect on dampening the enthusiasm and appetite of local, regional and international investors. Were the government to have set up a local Capital Markets Authority simultaneously with the re-opening of the BSE, a significantly larger number of quality investors, with a greater focus on transparency and proper regulation, would have been attracted by Lebanese listed stocks.

The government’s “generous” fiscal policy of the mid-1990s, which meant that interest rates on Lebanese pound deposits and Treasury bills were significantly high – at one point, T-bills paid interest rates reaching the 45% mark – turned domestic investors’ funds and savings towards bank deposits and debt instruments, and away from domestic shares. The Solidere shares suffered particularly as a result. The high interest rate structure on deposits and debt securities contributed significantly in the premature end of an equity investing culture in Lebanon.

The lack of diverse BSE stocks also contributed significantly towards its demise. The listing of real estate, cement companies and banks was not enough in terms of diversification, with domestic and international investors requiring a wider choice of sector stocks in order to efficiently diversify their investment portfolio. A stock exchange must reflect the diversification of its local economy, and clearly this was not the case for the BSE. Foreign investors assumed that the Lebanese economy had very little scope for diversification and decided to reduce their exposure to Lebanon. In comparison, the Amman Stock Exchange is much more diversified and includes a large number of stocks emanating from different sectors. Banks there account for a significant portion of the exchange’s market capitalization, particularly the Arab Bank, which is regarded as one of the few international pan-Arab institutions. In contrast, Solidere, the BSE’s largest stock, is domestically focused and carries less importance in relation to the economy than a bank.

Company managers in Lebanon never really realized that the basis for efficient financial and operating management consists of diversifying funding and financing expansion mainly with equity. Today, companies are stuck in a situation where their cash flow is completely or significantly absorbed by debt servicing, and capital stock cannot be increased, as their creditworthiness and capitalization levels are negatively affected. Strong financial fundamentals and an apparently solid creditworthiness are essential for a successful public share offering as credit risk forms an essential part of the equity investment decision.

The limited number of investment banks and specialized finance companies in Lebanon, acting as intermediaries between the stock exchange and companies, was also a reason behind the current lack of development of the BSE. The lack of market makers has led to a secondary market illiquidity and the immediate loss of value of initial public offerings. The Gulf countries, on the other hand, have more developed brokerage and finance company sectors, which make markets on a much larger panoply of stocks and other securities.

The capital structure of the majority of Lebanese institutions, which is based on family ownership and control, has been a major factor behind the under-development of the BSE. Family owners find it very difficult to concede part of their controlling stake to new shareholders, which are generally regarded as an outside threat to their total management control. Moreover, the local mentality has always focused on long-term banking relations rather than stock exchange listings, as the latter means a more stringent reporting discipline that family owners are generally unwilling to comply with. This state of play compares unfavorably with both Cairo and Amman, where transparency is a must and companies are more institutionalized.

This lack of desire to obtain a listing could be solved partly with governmental fiscal incentives that might encourage companies to list. Even though the government has already reduced the dividend tax from 10% to 5% for listed companies, this measure is still insufficient and should be compounded with other fiscal incentives. What would the treasury gain from an active BSE? Well, more income from taxes on trading and capital gains, as well as the development of local capital markets, which is crucial in providing local institutions with greater financial flexibility or with an ability to tap diversified funding sources.

A lackluster privatization program, which under any circumstances should have boosted the BSE exponentially, is regarded as another major reason for the loss of interest for Lebanese listed stocks. Although there is a current will to put privatization back on track, it comes way too late for the BSE, which could have benefited significantly from a few privatizations back in 1996-1997, when emerging market shares were in very high demand by international investors (eg, the success of the Banque Audi and BLOM GDRs during that period). Were one or two public companies to have been privatized in 1996, the BSE would have reached a strong momentum, which would have been more difficult to break in times of crisis, such as during the 1998 Russian/Asian crises. The collapse of Asian and Russian stocks in 1998 sent all emerging markets into a tailspin plunge. All Arab stock markets, which were just re-emerging after years of deep sleep (mainly in Lebanon, Egypt, and other North African countries), were significantly affected by this shock. The more recent Nasdaq debacle and corporate scandals in the US have also virtually killed off any remaining interest for stock exchange activities among Lebanese investors, who are buying stocks but to a much lesser extent than pre-2001. A significant number got burned very seriously after being badly advised by Lebanese brokers and private bankers.

The recession experienced by the Lebanese economy since 1998, and the political volatility of the last few years, contributed significantly towards the disappearance of international investor interest in Lebanese equities and the lack of faith and disheartening of local investors.

What is currently needed is above all an efficient and transparent government policy towards the domestic stock market and the development of domestic capital markets (including debt capital markets). The recent implementation of a sophisticated quotation system is a step in the right direction, but remains insufficient. Lebanon still has an inadequate regulatory framework as compared to Amman or Cairo, and has no capital markets authority to regulate capital markets as a whole. The establishment of such an authority has never been more necessary.

The acceleration and greater transparency of the privatization program and process, as well as the decrease in interest rates on the Lebanese pound, are also regarded as key factors towards the development of the BSE. The latter is a vital channel towards equity funding, and will be needed at one stage in the future, particularly by local banks, as some of them will have to increase their capital following the implementation of Basel II guidelines.

The Lebanese government’s role is crucial in the sense that it should make clear to the international investor community, through a series of continuous road shows in major cities, of its commitment to reforms and economic recovery. Investors need constant reassurance about a country’s future economic plans and have to feel comfortable with the level of transparency. The slightest doubt about the disclosure of economic plans would generally drive down any market in the world.

Finally, Lebanese banks, which claim to have developed investment banking activities, could have a major role to play in the future development of the BSE. These banks could offer advisory services to their corporate borrowers, encouraging them to follow a better and healthier financial and operational strategy. Equity financing, particularly as regards to new projects and expansion, forms the basis of corporate creditworthiness for any institution, and the revival of the BSE can only facilitate a move towards better credit quality and more efficient management.

Nicolas Photiades is managing director of Orion Financial Solutions. He is advisor to the Lebanese banking sector on securitization and structured financing.

April 1, 2004 0 comments
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Business

Real success story?

by Thomas Schellen April 1, 2004
written by Thomas Schellen

Gada Sardouk is trotting out the government line. “Beirut’s downtown is the success story of the entire region. People are visiting in huge numbers,” said the director general of the tourism ministry. “Yes, it is sometimes crowded but the area has no problems. If there were anything to harm the tourist, it would be empty.”

Warped logic aside, if the growth of the area’s restaurants and cafés is a measure of its vitality (numbers rose from around 40 in late 2001 to over 70 in the summer 2002, 99 in autumn of 2003, and more than 110 this spring), the same activity offers equally negative indicators, such as the district’s high rate of restaurant closures and re-openings, affecting one in every five establishments over the last two years and with some properties on Maarad street housing more than three outlets during the same period. But the real problem is highlighted by the teams of municipal officers that swarmed through the area in February and March, instructing tenants to remove outdoor plant decorations, abide by sidewalk seating limits and meet hygiene standards. Those, though not all who were in breach were fined. A token gesture, say many; the problem has not gone away.

The two largest stakeholders in the area, the municipality of Beirut and Solidere, the company tasked with its redevelopment, say they are engaged in a major clean-up campaign to improve the area’s image by purging the downtown hospitality sector from various style aberrations and regulatory infractions. Both have been compelled to act. City hall does want to see the downtown become ‘sin city’ and Solidere does not want its shareholders repulsed by a deteriorating ambience. “Merchants and operators approached us to discuss how to organize the management of the area,” explained Georges Nour, property administration division manager at Solidere. “Nobody was respecting the rules.”

“Presently, the Beirut Central District (BCD) works in a very narrow and ill-directed way,” said one of Lebanon’s highest ranking public figures who refused to be identified. “It is an attraction for the bad side of tourism,“ he fumed. “Ours is a country that is 7,000 years old. We should have much more important poles of attraction for tourists. The downtown is over saturated with nightclubs and pubs that are so expensive that only a few rich people can enjoy it. This is not the vision of a downtown where people meet to exchange views on topics of culture, politics, or religion. When you sit in one of these cafes today, you hear anything but.”

Prime hospitality stakeholders in the area also raised grave concerns. “Investments are risky if regulations are not enforced. Can the authorities not see what is going on?” asked an angry Michel Fernein, owner of La Posta.

“For the time being, the situation is not as we expected,” said Dory Daccache, head of the Crepaway restaurant group and who holds stakes in four budget and mid-level eateries in the district. “That the area has been going down is not really a sufficient term to describe it.” According to Ferneine, both the luxury and mid-market restaurant niches have seen revenue shrink in the last year. “The average spend per ticket in 2003 was lower than in 2002, especially in the evenings,” he said. “Patrons who would order an upscale dinner and an important bottle of wine now stay away. They are no doubt put off by the congestion, noise, and harassment.”

The downtown appears to have a problem of clashing restaurant cultures. Restaurateurs are at odds over loud music and ‘un-neighborly’ practices and fight over precious outdoor seating areas. The situation has seen three distinct sub-groups emerge: those that actively disregard rules and live by fly-by-night mentality; those that want to see rules enforced and espouse a long-term strategy of doing business; and a buffer group, probably the largest of the three, comprising entrepreneurs that fundamentally accept the need for regulations and positive conduct, but do not actively seek to improve things and instead go with the flow. Plaintiffs from the second group insist that it is neither a matter of price competition nor a complaint against the riff raff. It is, they claim, all about Lebanon’s image. “Any downturn in revenue is our problem,” said Fernein, “but the reputation of the country is at stake here. The downtown is the most important project in Lebanon. How can something this important have so many things that obviously don’t work?”

Surprisingly, many of these complaints have been echoed by operators whose establishments in the past year have been less than scrupulous in maintaining their own standards in terms of rampant outdoor seating, lack of customer bathrooms and harassment of pedestrians.

“If it is not regulated, the city center is going to be a jungle,” said the owner of an eatery serving what he called “affordable food in big portions,” out of a kitchen installed in what was clearly designated to be a retail store. On condition of anonymity, the entrepreneur admitted that he had hired a hostess for the specific purpose of approaching potential customers. “We are a new place,” he said. “People wouldn’t notice us if we didn’t send the hostesses to explain our menu.” When asked about restroom facilities for the 40 or so seats in front of his establishment, he said a new portable toilet would be installed that night. He had a simple explanation for the area’s hospitality problems. “They didn’t expect the boom,” he said. “More restaurants than they ever expected opened in this area.” There is some truth to this. According to Nour, the success of Maarad began as an “urban management accident.” The Solidere master plan had earmarked the street for vehicular traffic and not as pedestrian zone. The plan had expected retail businesses to populate the street, and most buildings were not equipped for restaurant use, creating challenges in the adaptation of facilities, setting up generators, storing supplies (including cooking gas), and the collection of waste, that only a few investors rose to.

“You cannot believe how dirty it is behind the doors of some kitchens and service areas,” lamented one manager. “Some neighbors here have had an abominable lack of hygiene.” This situation is improving now, he added, since a system for collection of food waste and used cooking oil begun in February, as part of the initiative to better the area.

Many stakeholders agreed that implementation of hygiene standards should be more strongly enforced. “Lebanese regulations on restaurant hygiene are excellent,” said Daccache, “but some restaurants do not apply the regulations, and enforcement is weak.” The inspectors from the health department at the Beirut municipality, the supervisory authority for restaurant cleanliness, are reportedly meticulous in checking that employees working in restaurant kitchens wear hair covers and gloves and have clean fingernails. As a result of the unsanitary practices of some operators prior to the implementation of a new garbage collection scheme earlier this year, pest problems reportedly got so alarming that competitors in the same building had to hermetically seal off doors in order to ward off a despicable daily invasion of cockroaches from the garbage next door. Yet some restaurant owners wonder if all establishments are inspected with equal vigor. “The health inspectors are very tough on me,” said one manager who lambasted his neighbors for having no toilets and dirty kitchens. “If they are also being checked, how come they are still in business?”

Central to the whole issue is the legal status of restaurants, cafes, snack bars and nightclubs. Stakeholders and legal experts estimate that only a minuscule portion of downtown establishments operate with a full license, a legacy of Lebanon’s restaurant law, which was adopted by parliament in 1950 and has remained virtually unchanged since 1970. “In general, obtaining a restaurant permit from the ministry of tourism is extremely difficult,” said Paul Awad, a lawyer specialized in issues relating to the hospitality industry. “Not more than 5% to 7% of restaurants hold a permit.”

Getting a permit is a two-step process. Firstly, operators have to prove their basic compliance with regulations on kitchen facilities, bathrooms and exits, etc. If these are met, the restaurant, cafe or pub can launch its business but it still needs to complete the second step of the licensing in which the applicant must prove the existence of one parking space per 4m2 of restaurant floor space, on the same grounds as the restaurant location itself. Alternatively, the establishment can pay the municipality between $5,000 and $7,000 per non-realized parking space. “Nobody has these spaces, and nobody is willing to pay these amounts,” Awad said. “Therefore nobody gets a permit.”

Realistically, restaurants that have completed the first stage of licensing requirements face little trouble and can be reasonably certain that they will not be shut down. However, the second license is the basis for the classification of restaurants, the lawyer said, and one important consequence of the lack of full licenses is that eateries and pubs are not classified by the ministry, which in turn diminishes the ministry’s ability to monitor their compliance with price levels and service charges. On a day-to-day basis it works. The ministry does what it feels it has to, to maintain standards. “To be realistic, Lebanon is a tourism country. We deal with the private sector in form of a partnership,” said Sardouk. “We are very strict in responding to complaints but very flexible in communicating with the private sector. We are not a police state.” Sardouk added that in the whole of 2003, the ministry of tourism had received 10 serious complaints from tourists and acted upon them, only one of which involved a downtown restaurant. Hospitality establishments in the area display stickers with tourist police telephone numbers, should they have a complaint. When Executive tried to contact the tourist police, it was connected to an Ogero recording that said the number was “not yet in service.”

However, weaknesses in the legal framework clearly contribute to the current malaise. Operators who disregard rules tend to use what they see as absence of a clear legal environment as an all-purpose excuse for ignoring standards and regulations, but for those who wish to instigate improvements or challenge infringements, the legal ambiguity can be a major impediment because an “unlicensed” restaurateur with a complaint does not enjoy full legal status and is immediately at risk of becoming a target. In their plan for improving downtown, the municipality intends to enforce compliance with all standards before this summer. This will involve making operators abide by the areas of public space they rent from the municipality for outdoor seating and respect those regulations that insist that emergency pathways be kept clear and enforce all other municipal codes. For its part, Solidere has retained a consultant to style the area with a range of official materials, colors and designs for awnings, tables and chairs. “We are proposing to the municipality all ideas that we want to implement,” said Nour. “The organization of the public open space is the mandate of the public sector administration. We are offering only value-added. Urban management needs dialogue between the city and the people.” Reassuringly, in this context at least, both the municipality and Solidere claim that relations between them have never been better.

Restaurant owners who want to see standards improve say they are prepared to contribute to enticing back a better class of customer. In the long run, they also expect that the overall growth of the city center towards the seafront and the hotel district will alleviate some of the problems the area has experienced in the last two years. Finally, on the legal front, a revised restaurant licensing law with more practical regulations is under review in parliamentary committees, with hopes that it will be pushed through soon. But in a country where the law is frequently overlooked when it becomes a hindrance, it remains to be seen whether this will be enough.

Overcrowded mess

With seating boundaries constantly in violation, Maarad is becoming an accident waiting to happen

The restaurants and cafés on Maarad and Al Omari Streets are demarcated by round, metal studs embedded into the pavement, which represent the limit that a restaurant can place an umbrella, awning or gas heater. If they exceed the boundary, restaurant owners are, in theory, in violation of municipal seating regulations, designed to ensure there is enough space for pedestrians and emergency vehicles to pass. Most of the restaurants regularly violate these laws and Maarad Street, with its gas heaters and plastic awnings, is an accident waiting to happen.

An example of this blatant violation could be found at Al Sa’a, located across from the clock tower. On the last Sunday of March, the café increased its sales area from its usual 100 to some 168 chairs. The restaurant not only set up extra rows of tables in front of an empty storefront adjacent to their location, it also added two tables per row to an area that passersby should freely walk through according to the law.

The manager of Petit Café, one of the places on Maarad with the highest number of outdoor seats, admitted to Executive that in the high season (when the lion’s share comes from outdoor guests), he makes an average of “including cover charge, $25 per customer.” This is too much to resist for landlords who say they are struggling with the BCD’s exorbitant rents. For Layali al Balad, for instance, the owners pay a reported $260,000 a year to sublet the tiny premises. By bending the rules during one day in the busy summer season, 24 “extra” outdoor chairs can add another $1,440 to the day’s takings; that’s in excess of $44,000 each month. When some landlords are paying up to four times the market rate, this extra revenue can make all the difference.

On March 30, Executive, posing as a potential customer, spoke to restaurant owners and managers in the area to see how many outdoor diners they could accommodate at full capacity. Al Sa’a said it could accommodate a staggering 500 diners. La Cita offered to seat 120 diners, Kiub’z 150, while Petit Café and Layali Al Balad said they could seat 450 between them. Even with the most generous calculations these seating arrangements would easily put them in violation of municipal laws. Only Hani Osman, manager of TGI Friday’s, said that if he wished to exceed his legal quota, he would have to check with the municipality.

That the rules are being broken at will is obvious, but what is inexplicable is that the municipality is unable to exert its influence. In the property management offices of Solidere, a large map, dated December 2002, is pinned on the wall. It delineates in perfect detail areas where hospitality enterprises are allowed to set up tables and where they are not. The map is equally well known in the halls of the Beirut municipality, where officials admit that the regulations are not enforceable and that patience is required in the almost daily fights with some BCD tenants. According to the municipality, rent per square meter of its territory is 3% of the annual rent per square meter of a restaurant’s indoor area. The municipality would like to increase this to 15% or 20%, but for the time being income from the downtown business, either in rent (of public space) or fines is not a money-spinner. (Some outlets have been “fined” – in some cases as much as $30,000. This constituted rental dues and fines for operating outdoor seating for two years without a license.) It may simply be that many of the owners are politically backed and, therefore, immune to the rules and regulations that mere mortals have to abide by. The Bendakji brothers –who own Kiub’z, Petit Café and Layali al Balad as well as Al Sa’a, Grand Café, and VIP (the latter two are in the area of Abdel Malak Street) – are allegedly stoutly backed by top political individuals and appear to flout regulations with impunity. In the short term, a new walkway over the downtown ruins could offer visitors and restaurateurs on that side of Maarad a solution. The walkway will be inaugurated in the summer, but the municipal board has not yet reached a decision on allowing outdoor tables. Permanent barriers are also planned but fears remain that there will always be those whose connections will encourage them to ignore the law.

April 1, 2004 0 comments
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Winning hearts?

by Claude Salhani April 1, 2004
written by Claude Salhani

A CIA job advertisement currently posted on the agency’s web site is offering up to $55,000 a year for “qualified and motivated Language Instructors of Arabic, Chinese, Dari/Pashto,” to work in the Washington, DC metropolitan area.

And for “qualified individuals who are able to read and translate Arabic, Dari and/or Pashto into English to serve the CIA as Middle Eastern Language Specialists in the Washington, DC metropolitan area, with limited opportunities in other areas,” the pay is even more interesting; up to $70,000 a year. For those Lebanese who fancy quadrupling their salary, there are basic qualification criteria: for a start you must be a US citizen. Furthermore, the vetting process is strict. Candidates must pass background security checks, a polygraph (lie detector) test, and so on. Even though in 2002, the FBI, reportedly had only 25 Arabic speakers, of the 73,000 resumes received by the NSA since 9/11, only a few have been selected.

Yes indeed. Despite the anti-Arab, anti-Muslim bias that may have surfaced in the United States after 9/11, demand for Arabic speakers in various levels of government – from the US military, to the FBI and the CIA – are at an all-time high (even the British MI5 have put out the call for Arabists). It would seem that the Bush administration is heeding the advice of Chairman Mao Zedung, who wrote in his little Red Book that “the first step towards defeating your enemy is to get to know him.”

But it wasn’t always thus. When George W Bush first came to the White House in January 2000, he tried, by and large, to ignore the Arabs, Islam, the Middle East and all its confusing troubles. In fact, his critics would accuse him of turning away from most anything that was related to international affairs. The new president wanted to diverge from his predecessor’s policies and disengage the United States from foreign interference. His aim was to focus on domestic policies, first and foremost. Ironically, today it’s the domestic economic situation in the United States that is Bush’s weakest link and the one that could lose him the 2004 election.

But as we know, the September 11 attacks forever altered the way Bush, America and Americans look at foreign policy, and particularly, at the Middle East. Since then, hardly a day has gone by without some Middle East-related news item hitting the pages of the American press or airing on national television. For the most part these reports are negative, portraying the majority of Muslims and Arabs as tainted by terrorism or hating America. But every so often, there will be one item that sheds a more positive light on the issue.

As the presidential electoral storm begins to gather momentum in Washington and the rest of the country, the Muslim/Arab vote – estimated to hover around the three million mark – is beginning to emerge as something both Democrats and Republicans would like to court. Particularly in light of how close these next election results are predicted to be. Understandably, the Muslim/Arab community is starting to realize its full potential as an electoral block and one that should be reckoned with.

Some US Muslims groups have undertaken a campaign to try and register up to 85% of the estimated three million potential Muslim voters in an effort to get them to vote in the upcoming November elections. And in the process, of course, let the political landscape in America become aware of the influence this group may hold. There are an estimated seven million Muslims in the US, of which some are expected to play an increasingly effective role in electoral politics.

Some Muslim organizations put the number of currently registered Muslim voters in the US at 1.8 million. There are predictions that those numbers will significantly increase as a new generation of young Muslim Americans comes of voting age.

But the Muslims in the US are far from voting as a unified block; they are divided between Democrats and Republicans. Traditionally, being more conservative in nature, Muslims tend to vote more Republican. “Many Muslims also voted for the Republican Party because they felt more comfortable with the party’s family-oriented, conservative values and with their stand on issues like gay marriages. Like the Republicans, many Muslims have a very conservative approach to these issues,” said Naushaba Ali, a Virginia resident and female activist who voted against Bush in the 2000 elections.

Afraid of losing its solid Jewish base, the Democratic Party has avoided flirting with the Muslim-Arab constituency. The Democrats’ historic alliance with Israel and the tendency of American Jews to vote Democrat has, in the past, made the Republican Party more appealing to Arab Americans. But that was until September 11 and the drastic changes that overtook the course of events and Arab-American relations.

The clampdown by John Ashcroft, the Attorney General, on Arab and Muslim groups that followed the September terrorist attacks; the arrests and detention of hundreds of Arabs and Muslims in the US, often without warrant or viable reason; additional harsh restrictions imposed at American points of entry, and the war in Iraq, has greatly stressed relations between Bush’s Republicans and the Arab-American community.

Many Arabs and Muslims in the US feel they have become unfairly targeted and unjustly discriminated against. They like to point out that the extremist fringe in Islam represents a very small percentage of the world’s more than 1.4 billion Muslims.

That feeling is not reserved exclusively to Arabs living in the US and is even echoed by a number of Americans. “US policy [in the Middle East] is viewed as anti-Muslim, a crusade against the ‘axis of evil’ and unfair, due to practices that favor Israel over the Arabs.” Those words come from a February 2003 study by the Institute for National Security Studies of the US Air Force Academy in Colorado titled, “View from the East: Arab Perception of United States Presence and Policy.”

The study states, in part, that Arab populations have become alienated from their governments and therefore tend to turn to Islam as their only solution. Usually, the study finds, that it is radical Islam that these populations usually turn to. This explains, in part, Bush’s incentive to impose rapid change on the Middle East. But the changes, needed as they may well be, can only come with the participation of the people involved. Many Arab leaders are beginning to realize, and admit, that the area is indeed in dire need of radical change. But as is often repeated by the Arab world’s leadership and outside observers familiar with the area, these changes must come in concordance with the people of the region. This change cannot be unilaterally imposed, as the Bush administration seems to believe it can.

In a March 12, Washington Post column, David Ignatius quoted Sheikh Mohammed Hussein Fadlallah, Hizbullah’s spiritual leader as admitting that Arab leaders were delaying their move towards democracy, largely using the “excuse” that Israel stands in their way. In other words, as long as the standing Palestinian-Israeli conflict would not be resolved, neither would the issue of Arab lack of democracy.

Every Arab official one talks to will reiterate that fact; solve the underlying problem troubling the Middle East first. Otherwise, addressing other Middle East issues ahead of the Palestinian question, such as introducing democracy in the area, becomes similar to trying to scratch your left ear with your right hand by placing it over your head. Why make life more difficult?

Al-Qaeda’s pet grievance – whether accurate or not – is the Palestinian issue. The same holds true in other non-Arab Islamic countries. Yet, the issue President Bush had promised to address head-on following the Iraq war (via the Middle East Road Map) remains on the back burners of US foreign policy makers.

Realistically however, while solving the Palestinian issue is by no means going to be equivalent to waving a magic wand over the Middle East and making all its problems disappear overnight, it will, nevertheless, accomplish two very important things. First, it will remove the primary reason of discontent and source of animosity currently existing between the Arab-Islamic street and the West, (primarily the US). Second, it will remove the “excuse” mentioned by Sheikh Fadlallah from the Arab/Islamic leaders to keep stepping on the brakes of the region’s natural march towards greater democracy.

In June, Bush will present his New Middle East Initiative, when he convenes with other world leaders in Europe. The details of the plan are still unknown, but already the proposal has become the target of harsh criticism from people and leaders in the concerned area, the reason being that they were not consulted. Maybe what the president needs to better understand the Middle East is more than a handful of linguistic experts?

Claude Salhani is a foreign editor and political analyst at United Press International in Washington, DC.

April 1, 2004 0 comments
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Wither agriculture

by Thomas Schellen April 1, 2004
written by Thomas Schellen

Food plays only a minor role on the national balance sheet, where agriculture is said to contribute about 8% to GDP, and it certainly doesn’t figure with any prominence in the budget. With subsidizing sugar beets and tobacco, the only somewhat significant government funding support for agriculture goes to crops that in the opinion of numerous experts have no future. The agriculture sector suffers most from insufficient public sector guidance and support, said Ragy Darwish, agricultural resource economist at AUB. “The unclear policies at the ministry of agriculture are the main problem,” he said. A second main reason for the sector’s shortfalls were the long years of civil war, he said, adding, “infrastructure and institutions have been degraded.”

But does that really matter, in context of the dwindling role of agriculture in the Lebanese economy? From a utilitarian perspective in the globalized age, food autarky is no longer the worthy policy it once was. But food security remains an issue of national economic and political importance also under conditions of globalization. “Few countries have succeeded in their economic takeoff without reinforcing their agricultural production and processing capacities,” stated the director of France‘s national agricultural research institute (INRA), Bertrand Hervieu, in a 2003 lecture. “No country can be developed or reconstructed without a minimum of agricultural economy and without being somewhat self-sufficient as regards food.” If this sector warrants strategic deliberation, it is for reasons of the unique attributes of food being at once essential livelihood, cultural identity and valuable commodity – which makes agriculture a multiple theme of food security, societal character and an economic factor. “I see agriculture as having a very important role because it is part of the basic foundation of a country, distinguishing it from its surroundings. Therefore, it is a potential source of comparative advantage and for building value-added,” said Khater Abi Habib, economist, anthropologist, and current chairman of Lebanon’s National Institution for Guarantee of Deposits and the Kafalat loan guarantee corporation. In his opinion, public and private sectors will under all economic scenarios need to invest heavily into agriculture. This doesn’t mean, however, that it would be realistic to aim for agriculture to regain an increased share of economic output. In a new positive development cycle, the basic production of commodity foodstuff would be outpaced by faster growing sectors of the economy. Whether the current contribution of agriculture to GDP reaches 8% or not, “the country remains on such a level because GDP has not risen as we had hoped,” Abi Habib said. “If our per capita income goes up significantly, we would have to invest heavily into agriculture to keep its share of GDP at 3% to 4%.”

Another consideration crucial in assessing the macroeconomic role of agriculture is the agro sector‘s massive technical development. While the high-tech revolution of the late 20th century is widely known for its immense rate of progress, the productivity increases of agriculture have been no less impressive in the larger picture of human sustainability. Over the past half century, agro productivity has grown faster than the world population, and agro industry rose to defining the sector’s viability.

The impact of the reversal of dominion by which food processing became economically more important than food growing has made farmers as dependent on agro industry demand as they are on weather and soil. Mismatches between production and demand thus count among the main problems of local agriculture. According to Darwish, some farmers who are situated just 200 meters away from agro industry companies dump their products, while the industrialists import food for processing from the region and even Eastern Europe. The remedy generally prescribed for alleviating the problem of underdeveloped collaboration in the sector is the formation of communication mechanisms. Based on the saying that it is better to light a candle than curse the darkness, Darwish and his colleagues proposed the creation of a Consortium du Agriculture National du Liban, or CANDL, as an instrument to bring all stakeholders in agriculture – farmers, agro industrialists, research institutions, statisticians and public policy makers – together, “to establish communication and work jointly for increased efficiency.” Private sector enterprises have invested considerable amounts into building agro processing capacities. However, many of these industrialists found that what is true for Lebanese industry in general, just as much applies to their situation: the domestic market is too small for justifying the capital outlays required for a modern agro industrial operation, and exports are the only viable proposition for sustainable agro processing. The Lebanese government has recently taken the first steps towards promoting agro industrial products abroad, through a pilot program for participation in food trade fairs, managed by the IDAL agency. Over the past three years, IDAL had also been entrusted with the promotion of Lebanese produce exports, which helped stabilizing production of farms but has yet to succeed in opening new markets. As things stand today, achieving marketability of Lebanese produce in Europe is a “long process” that will still require a considerable effort in educating agriculturalists, the chairman of IDAL, Samih Barbir, told EXECUTIVE (interview on page xx).

In popular local debates, excursions into the topic of Lebanese agricultural production almost invariably assume aspects of a historic comparison, measuring the national output of vegetables, fruits and cereals against the famed past when this fertile realm was the breadbasket of a much larger region than it is today. Lebanon still provides highly fertile ground. It needs to correlate its capacities for agricultural production and industrial agro processing to the role that this sector can play in a modern macroeconomic concert. According to Abi Habib, viewing agriculture under this perspective reveals development potentials not only for farming and agro industry but also for quality of life, attracting foreign companies, and tourism. Capitalizing on Lebanon‘s diversity in foodstuffs from production to culinary preparation could effect in a richer lifestyle on all levels and increase the country’s fundamental attractiveness. “It is an essential for giving us a tourism base that distinguishes us from countries around us. Sun bathing and shopping are limited and not thought nor culture enhancing,” he said. “When it is well sorted out, agriculture will provide jobs and opportunities, plus make the country richer and a more interesting place to go and look at.” A rich, successful and diverse agricultural setting thus would create a stage for highly developed tourism as well as establish the quality of life environment able to entice foreign companies to locate their regional offices here.

Agriculture could also fill a very direct function in providing parts of Lebanon with tourism revenue, added Darwish. Holidays on the farm are a fixture of tourism culture in many countries, and cultivating this segment in Lebanon could be lucrative. According to an AUB research study in two communities with agri-tourism potential, tourists would be willing to spend about $35 per day on an agricultural vacation with an arrangement of leisure options ranging from recreational fruit picking (for the guest’s own consumption or, in the case of grapes, for wine production) to hiking and eco excursions. Finally, protecting agriculture could translate into preserving the national social fabric and demographic balance between rural and urban populations, suggested Darwish. Whereas a lesser role of agriculture increases the migration pressure on cities and leads to marginalization of rural populations, the state could save considerable amounts by supporting agriculturalists, he said. “The government will be much better off in subsidizing farmers in any form rather than letting them migrate to the cities.”

April 1, 2004 0 comments
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Revolution in retail

by Michael Karam April 1, 2004
written by Michael Karam

Lebanon’s retail sector has finally shaken off the effects of the war as it moves towards a modern shopping culture. The good news is that a new generation of shopping malls is getting it right, offering a modern retail experience in an equally modern retail environment, catering to both local shoppers and tourists.

This modern culture has not had an easy birth, having emerged from the retail chaos of the immediate post war years. Then, the downtown, historically the capital’s retail core was still rubble and the ad hoc shopping districts that emerged during the conflict – Verdun, Zalka and Kaslik – still thrived in the absence of a genuine retail hub and modern malls. There were shopping centers of a sort, built with the money of returning exiles. This haphazard approach to retail was doomed to fail. The developments were badly run, ill-designed with small shops, fitted with low quality specifications and with little or no thought given to tenant mix. This and a once-thriving market of pirated goods (now happily on the wane) was not an auspicious start to a sector that has the potential to contribute to $3.6 billion or 20% of GDP.

However since 2000, the renaissance of the BCD, new malls –such as the ABC in Ashrafieh and Dunes – and the emergence of supermarket chains have all transformed the sector and the way we shop. This mini revolution has been helped by the fact that many Lebanese have lived and traveled abroad almost guaranteeing a target rich environment for the international brands. Today, as Lebanon continues to fall in line with international retailing trends it is witnessing larger developments, more car-borne shopping and longer opening hours. This is creating increased competition as retailers place greater emphasis on location, access, customer flow, tenant mix, climate control, service accessibility and parking. “The new malls will see a repositioning of the retail landscape, which is currently defined as the high-street,” explained Mark Morris-Jones of Cushman and Wakefield Healey and Baker’s associate office in Beirut. “Those malls that are properly conceived, managed and well-let will succeed.”

Beirut and its suburbs are dotted with promise. Six major retail developments in Dora, Dbayeh, Sin el Fil, the BCD and Verdun will add nearly 200,000m2 of net retail space. The five do not include the 100,000m2 Souks in the BCD, which has been delayed for four years and does not look like it will be built any time soon. However, local retailers believe that this increased supply will meet the demands of Lebanon’s retailers who insist on modern retail space. “The trouble is that today we just can’t find the right location for our premises,” said Admic chairman Michel Abchee. “The new projects are responding to this demand. If anyone is going to suffer it is the previous generation of retail developments.” It was a painful lesson to learn for those who poured their money into badly conceived projects. “We must remember that much of the retail space in the first phase was sold and, therefore, lack the management and direction of a modern mall where space is rented,” said Morris-Jones, who added that developers with the long-term view will be the eventual winner as they should see growth in sales, which will lead to rental growth and then capital growth.

One of the most adventurous new projects is the Metropolitan mall in Sin el Fil. While many analysts believe that the Habtoor Group is throwing good money after bad, but Morris-Jones believes its might just work. “It is a lot smaller than the other malls coming on stream. It has less than 14,000m2 with a lot of restaurants and coffee shops,” he said. Analysts believe that the new ADMIC mall at Dora will help Sin El Fil’s customer draw, as it will be the first genuine hypermarket in Lebanon and will change shopping patterns in Beirut’s northern suburbs.

Area’s that are expected to make a significant comeback include Hamra, a traditional retail area with a proper commercial street and a residential base woven into its fabric. Verdun should also survive as long as it responds to the new challenges presented by the malls. “We need to see retailers’ associations providing street furniture, parking and safety features that will enhance streets and allow them to compete,” said Morris-Jones.

The downtown’s retail dynamic, once so full of promise, has stuttered due to the delay of the Souks project. In 2001, the development was touted as the single most important development in the BCD and a catalyst for foreign direct investment. With roughly 52,000m2 of retail space – including a 15,000m2 dept store and a 7,000m2 supermarket – it was estimated at the time that the Souks could achieve revenues of $270 million in its first year. International retailers – including Les Galleries Lafayette, Harvey Nichols and Printemps – showed genuine interest in leasing the department store while Spinneys also showed an interest in the supermarket plot. Today, political squabbling has thrown Solidere’s original retail blueprint out the window. Allenby and Foch were designed for upmarket brands but have had to absorb those “high-street” labels originally earmarked for the Souks. When the Souks open for business, retail analysts believe that the high-end shops will head to the BCD. “The expectation is that the price point of products offered in the Souks will be some way above those elsewhere and will serve the higher end market segment,” said Morris-Jones. “This will be an extension of the current trend where we have already seen some of those high end retailers drifting in from a number of outside destinations. There will however be an impact on those retailers operating outside the BCD in that they will take with them a chunk of total sales and this will see a reduction in rental levels elsewhere.” But what is selling? Currently women’s wear and restaurants are the most popular retail outlets with home accessories, footwear, jewelry and men’s wear in close pursuit. “There are some outstanding homegrown retailers in Lebanon, such as GS, Patchi, Kababji, Crepaway, Red Shoe, Pointure, Aziz, Ghia Holdings, Maison du Café and any number of the jewelry retailers and some of the boutiques,” said Morris-Jones. “This includes branded franchises from overseas, as well as some home grown operators. Quality will always show through and as long as a full range of stock is carried, which the good retailers do.”

Of the branded concepts – most under franchises – there are the big regional operators such as Retail Group and Al Shaya. Virgin is also a good example of an operator going into and dominating a sector in a professional manner. Special mention must be made of the MaxiMa Group as they have taken brands to the region as a Lebanese company based in Lebanon.

The future is bright. Rental levels should come down and tighter contracts between tenants and mall owners should lead to a more professional performance by malls – including uniform opening hours etc. The Souks will eventually be the jewel in Lebanon’s retail crown and the final jigsaw in the BCD retail evolution, attracting tourists who will add shopping to their Lebanon agenda. Prices will drop, standards will rise and services will improve. Demand for leisure goods and fashion items will mean more international brands and bigger stores. Increased car borne shopping should lead to better facilities in malls in order to make the shopping experience more of a family day out and daycare and crèche facilities will become a must. There should be more specialist shops forcing out those who are unable to respond to the changes in the market and there will be a gradual move away from developing residential buildings with shops on the ground floor as retail hubs come into sharper focus. Finally, customer care service and better stock control will come about as a part of the sector’s natural evolutionary process. No longer will the Lebanese shopper be grateful for what is on offer. The shopper will have more of a choice and better redress.

April 1, 2004 0 comments
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Business

Q&A: Khalil Daoud, director LibanPost

by Executive Contributor April 1, 2004
written by Executive Contributor

Why did the original LibanPost fold at the end of 2001?

The investors were upset at the slowness with which the agreement signed with the ministry of telecommunications was being implemented.

What was the state of the company when you took over?

There wasn’t a clear sense of direction. There wasn’t a clear vision.

What have you done since then?

We have improved quality, separated customer service and sales from distribution, renovated post offices and introduced a wide array of retail products – prepaid phone and internet cards, fuel coupons, newspapers magazines and maps, screensavers, stamps. We have also introduced a number of services, to make people’s lives easier. These include fax and photocopy facilities, as well as passport and residency renewal, military service postponement, and university degree certification services. We are trying to make LibanPost a serious intermediary between citizens and the various government departments, while making money along the way – because we are not a charity. We are a ‘front office’ for the government. Finally, we have invested in our 600 employees and in technology. We have invested about $1 million in computerizing the post offices. And recently, I received a telephone call from Fadi Abboud, head of the Lebanese Industrialists’ Association, asking me what we can do for Lebanon’s industrialists.

How serious are you about quality?

We are very serious about it. We have quality controllers who do nothing else all day long but ensure that the mail is delivered on time and that we don’t have issues with customers. We have a 24-hour National Control Center and a daily 9:30am meeting, during which we deal with any ‘incidents’ over the previous 24 hours. Any necessary amendments are made. We don’t hesitate to take drastic measures against our employees, if necessary.

What are your future plans?

In the near future we will be offering over-the-counter insurance products at our post offices – for cars, personal accident, things that are not complicated to sell and do not require medical exams. We just signed an agreement with the ministry of interior relating to the annual roadworthiness check, the renewal of drivers’ licenses, car registration etc. In addition, we plan to introduce two or three other services which should be announced soon. A few days ago, we established a new department within the company. It is responsible for printing, folding, and inserting into envelopes any publications. These are then immediately distributed. It is part of our plan to offer ‘complete solutions.’ We have reached an agreement with the ministry of telecommunications and the telephone company Ogero, under which we will print and distribute telephone bills. We hope this will prompt other utility companies and financial institutions, including insurance companies, to follow suit.

How much has LibanPost invested in these initiatives?

The printing and distribution initiative alone is worth $1 million. Along with the $1 million for the computerization initiative, that already makes $2 million in a year. That is significant. And it doesn’t include other things like digital map systems, which we are going to invest in. That is another couple of hundred thousand dollars.

What problems do you face?

Firstly, is very difficult to operate in a country that doesn’t have a proper addressing system. Secondly, many buildings do not have separate mailboxes for separate tenants. For LibanPost, this is catastrophic. The time wasted because of this is phenomenal. Mailmen have to knock on doors to deliver letters. Sometimes, it takes them 45 minutes to complete delivery to one building alone. Thirdly, not everyone knows of our services, and even if they do, they have to be induced to try them. We have an issue with the way we are communicating with the public and are in the process of addressing it.We can do better. We are finalizing a marketing and media program worth 2.5% of our projected turnover this year. I would like our media costs to one day reach 3%.

What is your projected turnover?

That’s not public information – several million dollars.

What were revenues for 2003?

They were 15% higher than for 2002, and revenues for 2002 were 12% higher than for 2001. And 2004 is planned to be 16% higher than 2003.

How about profits?

Our plan was to break even in 2004. We almost did that in 2003, so we’re slightly ahead of schedule. We now envisage a profit for 2004 – about 2.5% of revenues.

What influence does the government have?

All pricing is controlled by the government. We have some concerns about this. I understand that given the current economic environment the government wants to keep mail prices as low as possible. But from a private business perspective we don’t share those concerns. Also, LibanPost was supposed to be working in a monopolistic environment. Unfortunately, there are local Lebanese courier companies operating without licenses. They are competing with LibanPost in the profitable areas. It’s unfair.

Is there any theft of the contents of parcels opened by the authorities?

None at all.

April 1, 2004 1 comment
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Since its first edition emerged on the newsstands in 1999, Executive Magazine has been dedicated to providing its readers with the most up-to-date local and regional business news. Executive is a monthly business magazine that offers readers in-depth analyses on the Lebanese world of commerce, covering all the major sectors – from banking, finance, and insurance to technology, tourism, hospitality, media, and retail.

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