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

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

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

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

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

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

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

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

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

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

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

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

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

Car drivers around the world usually agree on one opinion: gas prices at the pump rapidly shoot up when world crude prices increase but slip much less eagerly when crude rates head back south. In the period immediately after the world oil market relaxed from its $42/barrel (bbl) peak in late May, the reality in Western Europe and the US fit that view, as pump prices after one week relaxed only by about $0.04/ liter, or 2%, in Europe’s largest market, Germany, and rates in the US took until June 14 to drop back below $2/gallon. One can credit both stronger market confidence and improved balance of the supply-demand logic for allowing international crude oil prices to dip back below $40/bbl last month, following the June 3 Beirut OPEC meeting to increase production quotas by 2.5 million barrels per day (bpd) and legalize already existing overproduction, and subsequent physical increases in production from Saudi Arabia and the UAE (total around 1 million bpd) that brought a corrective factor onto record high prices. But although prices at the gas pump eased slightly in the second half of June also in Lebanon, vital concerns over the cost of fuel to both the Lebanese economy and the individual consumer remain.

In Lebanon, gasoline prices are government mandated, with weekly reviews of price ceilings that in all practical terms translate into the effective sales price that the consumer pays at the gas station. As the state thus exerts double influence on gasoline prices through taxation and price determination, the demand to lower retail prices for fuel became a central rallying point in the country’s May 27 general strike. However, while economic hardships make them more than understandable, demands for capping the maximum amount that Lebanese consumers have to pay at the fuel pump must in the end remain wishful thinking. The reasons behind high gasoline prices are too complex and the implications of reduced revenue from gasoline taxes are too vast to allow for such a “simple solution.” One may never forget that the first driver of the consumer gas bill is the supply situation. All mineral fuels are refined from crude oil and so the price of a gallon of gasoline derives directly from the price of crude oil. It has been well established that a number of reasons have influenced the high prices of crude oil, which soared as high as $42/bbl in trading on the New York Mercantile Exchange by late May 2004. Such a high price of oil will inevitably be passed along the refinery chain to gasoline prices and thus affect the end user. What then were the causes behind the recent oil price rally? It was spurred on by a combination of angst over potential supply shortages, strong demand, and aggressive speculative buying. Looking at the details, most analysts agree that the following main factors influenced the market in the first half of 2004:

· Instability in Iraq

· Terrorist threats to producer nations in the Middle East (including Saudi Arabia)

· Increased global demand, particularly from China

· Lower-than-expected non-OPEC production

· Shortages in spare refining capacity available to OPEC (and non-OPEC) producers

· Aggressive fund buying (more significant in the early stages of rally).

The large extent to which the war in Iraq added instability to the markets must not be underestimated. Attacks and acts of sabotage have hampered reconstruction efforts designed to rebuild the country’s archaic oil industry. At the time this article went to print, an attack on the Northern Kirkuk pipeline to the Turkish Mediterranean port of Ceyhan, and two separate attacks on the southern export terminal of Basra completely halted Iraq’s 1.8 million bpd of crude exports; repairs are expected to be completed around the second week of July. Kidnappings of foreign nationals hindered progress and prompted some foreign organizations to withdraw their employees, including construction companies who are in need of valuable experience for the reconstruction job at hand.

Iraqi exports had averaged 1.8 million bpd, around 1.6 million bpd of which is from the Basra oil terminal, while the remainder came from the northern Kirkuk pipeline that leads to the Turkish Mediterranean port of Ceyhan. Resistance to the US occupation and terrorist attacks against the country’s political and security infrastructure have been stiff, dimming the prospects for a successful performance of the Iraqi Interim Government in the second half of 2004. Numerous local leaders have openly opposed US plans for the handover of power in local elections, thus making additional violence and continued instability very likely. Terrorist threats to other Middle East producers have also pushed markets higher and are adding a premium to crude prices. An attack by gunmen against a Saudi Arabian refinery complex in Yanbu that killed six workers in May and further terror strikes against foreign oil workers in June underscored the threat against the security infrastructure in the world’s largest producer. If attempts to restore security at Saudi oil facilities and ward off terrorist groups are not successful, future supply fears could grow to levels that would make crude oil prices of $35 to $40/bbl seem cheap. In trade developments over the past year, crude markets have become increasingly affected by heavy speculative non-commercial buying, primarily by investment funds. Large speculative net long positions have pushed markets higher as well as raising the possibility of a massive sell-off when investors decide the market has topped off. NYMEX WTI net non-commercial longs hit a 15-year high of 87,000 lots in February, although this has now fallen back to 40,000 lots. Estimates of the impact of the funds on the market vary greatly but on average, traders see the impact as comprising around $4/bbl in the composition of current prices. However, it is important to note that the last $4 rise in the market (from $37 to $41 on WTI) has not been driven by fund buying. This reduces the likelihood of a large fund sell off as the funds are all heavily in the money. It also means that demand from buyers does not seem to have been significantly impacted by current high prices.

As for the demand outlook, figures are also not in favor of significantly lower oil prices. In its monthly OIL MARKET REPORT, the International Energy Agency (IEA) raised its forecast for global oil demand in 2004 by 360,000 bpd to 81.1 million bpd, reflecting the largest absolute increase in global oil demand in 24 years. The report cited stronger than expected energy consumption among industrialized nations, which was bolstered by explosive demand growth in China, as the main cause of the increase. The IEA forecasts world consumption will rise 3.8 million bpd from the second quarter’s 78.7 million bpd to 82.5 million bpd in the fourth quarter of this year. The upward revision adds to worries that increased demand will continue to prevent inventories from accumulating and cause disruptions in the supply of products such as gasoline. The IEA also said that non-OPEC producers are failing to pump as much as expected this year, increasing reliance on OPEC for extra crude. The IEA raised its forecast on the call of OPEC crude by 500,000 bpd to 26.4 million bpd for this year. However, numerous producing nations are currently producing at maximum levels leaving little room for any additional output to help ease prices. While predicting oil price developments is a fickle business, the combination of the above elements makes it seem unlikely that dropping crude oil prices could drive gasoline prices down to levels global consumers enjoyed in the late 90s. Here, it is also important to remember that as high as they are, nominal (inflation adjusted) crude oil prices today are far below their highest levels, reached in 1980 (see table).

But this fact cannot be a total comfort to Lebanese consumers. Apart from global market developments, end prices for gasoline are determined to a very significant portion on the domestic front. As stated unmistakably by a survey on global gasoline prices (undertaken in May by research firm AirInc for CNN Money), “the main driver of price disparities between countries is government policy.” In one word: taxes.

Different tax burdens contribute greatly to the fact that gasoline prices for a 20 liter tank filling in May 2004 could range up to $35 in the United Kingdom, Hong Kong, and Germany, while US drivers would have paid not much over $10 and motorists in some countries – try Azerbaijan –

could get away with filling up for as little as $6 to $8 per 20 liters. In Lebanon, the tax burden on motorists has increased substantially over the past four years, first through a hike in gasoline tax and then through addition of Value-Added Tax. The sum of tax levies on each 20-liter filling thus today easily exceeds 50%. The ratios fluctuate somewhat according to the rate decisions taken at the ministry of water and electricity (at the beginning of June, for instance, the ministry reportedly reduced the excise tax on gasoline by LL2,000 to curb pump prices at LL23,000 but in subsequent weeks it re-raised the rates by LL800 when supply costs dropped). But in essence, fuel tax rates in Lebanon are the highest they ever were and extremely unlikely to drop by any significant percentage.

In addition, under the regime of Saddam Hussein, Lebanon had import/ export agreements with Iraq that offered it crude oil at significantly below the market price. Although the legality of the Iraqi exports, and alleged related provisions to political leaders, has yet to be analyzed by a reliable source, the deliveries of Iraqi oil were relieving the Lebanese consumer of paying the true price of crude and helped in protecting him from abrupt price shocks as we see today. One can always question whether these levies were instituted with sufficient foresight on their macroeconomic and socioeconomic effects, which were exacerbated greatly by the rise in crude prices. Under a principle that applies equally to mature and developing economies, transportation-related taxes and fees are means to steer development, avoid wastage of fuel resources and limit pollution. Due to contradictory impulses, the Lebanese system of car registration fees and fuel taxes gives grounds for questions also in this context. But there can be no doubt that the fragile Lebanese fiscal situation today would be very negatively impacted by a massive contraction in revenue from fuel taxes.

The third force in determination of fuel prices are distributors. Local importers and distributors of gasoline are frequently accused of acting as cartel and bearing responsibility for the high gasoline prices. But although they are licensed to trade mineral products for profit, Lebanese importers and distributors of fuel oil play a much smaller role than the state in the setting of prices for end consumers.

Lebanon’s fuel importers and distributors say they are not benefiting from the high fuel prices and even claim that they put them at a disadvantage for several reasons. Regardless of the pump price, their government mandated dealer margins are fixed (at $0.20 per 20 liters) and remain unchanged. Costs in importing, such as obtaining letters of credit and pre-paying customs, and distribution-related costs, namely extension of credit lines to their buyers, are on the other hand being driven up by higher product prices. In addition, higher prices impact consumption and importers predominantly describe motorists as monitoring their consumption more than before. Some see mitigating effects in new cars and increasing tourism but overall, the sector speaks of stable to slightly negative developments in sales. Moreover, fuel distributors can only compete in very limited fashion, mostly through discounting in times of falling supplier prices. The limited leverage to set prices coincides with the limited buying power of Lebanese oil importers, restraining their ability to obtain good prices in international markets.

On the other hand, it appears undeniable that the Lebanese scenery of a few local and no multinational operators has reduced pressures that would normally give incentive to firms to develop, rationalize and become more competitive. Some traders admit that abolition of government fuel price mandates would most likely be immediately followed by a practice of price-fixing among distributors, since cartel structures already exist in several respects. Local refining capacities for oil remain theoretical and the small market – which lacks transparency in governmental pricing policies as well as in industry structures – seems not able to attract multinational firms to come in and develop local product chains to the end consumer. All these factors can be attributed with contributing to the very sluggish development of Lebanon’s domestic gas station culture, which is currently characterized by high service levels but a scarcity of modern efficient filling stations with associated retail marts. In conclusion, the issue of whether or not increases in global crude prices are affordable to the Lebanese consumers should not be a case for the treasury and its meager reserve but rather a case for alternative modes of transport, increased investment in public transport facilities, and perhaps a reduction in the number of cars the average household chooses to have. As inexpensive individual transportation (with emphasis on individual car ownership) does not qualify as either civil right or absolute economic necessity, the consequence is inescapable: if you want to drive it, you need to pay for it. Whether or not one can afford a private car is not a case for a depleted treasury to address, but rather a case of re-evaluating options. Said Ghusayni is the Energy Derivatives trader at Mitsui Bussan Commodities LTD in London.

The frightening rise in the number of terror attacks in Saudi Arabia appears to be aimed primarily at the expatriate community. This seems like a clear attempt to strike at the soft underbelly of the kingdom – its economy. Initially, it might seem the attacks are aimed at causing panic and claiming as many lives as possible. Or perhaps this is al-Qaeda’s promise to follow up on earlier threats to kill as many “crusaders” as they can. Closer analysis, however, reveals a more sinister motivation is driving the recent terror campaign. Its aim is to hit the kingdom where it would hurt the most.

Yes, it’s still very much about the economy. The terrorists, said Marc Sageman, a forensic psychiatrist and author of UNDERSTANDING TERROR NETWORKS, are applying the old communist logic, that “you wither away the state,” in order to have it fall. Sagemam is also a former CIA case officer for Afghanistan.

For the record, Saudi Arabia earns nearly $500 million a day, allowing the kingdom’s 7,000 princes and their assorted consorts – a total of some 24,000 royal household members – a healthy yearly stipend of $500,000 each. The grand total of that budget hovers around the $3 billion mark. Money that critics of the House of Saud say is wasted on luxury items, extravagant villas and apartments strewn across the Mediterranean.(A recent report circulating around Beirut these days has the crown prince reserving about 1,000 hotel rooms for him and his entourage in Lebanese hotels for the summer. If true, this would certainly give a boost to Lebanon’s economy.) But let’s return to the Saudi economy, which terrorists hope to disrupt. And this they can accomplish by targeting the petrochemical industry. There are basically three possible ways in which to obstruct the flow of oil. The first is to target the installations – the rigs that pump the oil from the ground, the refineries that process the crude, storage facilities and shipping terminals. But, all those locations are extremely well protected and hard to approach.

“The oil facilities are very well defended,” said Roger Diwan, managing director of the Petroleum Finance Co., a Washington, DC, firm specializing in analysis of oil industry trends. “There are armed troops, cameras, multiple levels of defenses, etc., that make it very difficult.”

The second option is targeting the oil pipelines, which carry the oil from the fields to the refineries and from there to shipping facilities. While also protected, these offer easier targets given the vast distances they cover. It is practically impossible to secure every mile of pipeline across the desert. In Iraq, for example, pipelines have become a favorite target of insurgents over the last year.

In Saudi Arabia the situation is far different, and security is far more stringent than in war-torn Iraq. Secondly, sensors, cameras and other devices closely monitor the pipeline network. Any interruption in the flow caused by an act of terror can be rapidly rectified. The oil flow can be quickly stopped from a remote monitoring station, the damage quickly assessed, minimized and repaired. And finally, the pipelines traverse remote desert regions where attacks carry little or no fear effect on the population. They have no propaganda effect.

That leaves the third option – the so–called “soft targets” – otherwise known as the civilian workers. Because civilians are less defended than the oil installations, they make far easier targets, and are therefore the “soft underbelly” of the kingdom’s economy.

Those behind the spate of attacks know only too well that if they manage to scare away the expatriate workforce, they disrupt the production of oil and in the process succeed in crippling the economy. That, in turn will paralyze the country, therefore weakening the government, allowing them to come all that much closer to achieving their ultimate goal: overthrowing the House of Saud. In the last month alone, armed gunmen killed six employees working for an American company in the Red Sea port of Yanbu, they murdered 22 civilians in a housing complex in the Eastern province city of Khobar, killed an American, an Irish BBC cameraman and wounded Frank Gardner, the BBC’s security correspondent and kidnapped an American in the capital Riyadh.

Civilian employees – particularly Westerners – easily stand out and make easier targets than the oil installations. Diwan pointed out that unlike the installations, terminals and refineries, “for the civilians, it’s far more difficult. In Dhahran, for example,” he said, “you have an entire city to defend. It’s very hard.” And what is hard for the authorities naturally becomes all that much easier for the terrorists. There are about six million foreign workers in Saudi Arabia. Tens of thousands of them are employed in the country’s huge petrochemical industry. Saudi Aramco, the state-owned oil company that holds the world’s largest oil reserves, employs 56,000 people, of whom about 2,300 are US and Canadian citizens and about 1,200 Europeans. Striking them in their place of work, as in the Yanbu attack on the Houston-based ABB Lummus Global company on May 1, or in their homes, as in Khobar, is simple enough from a tactical point of view. Despite stepped-up security at all work and housing locations, there is, after all, a limited amount of security that can be implemented without making those places resemble maximum-security prisons. Additionally, with the use of Saudi military uniforms, as the terrorists were reported to be wearing in several of the attacks, fooling the real security personnel is even easier.

Following the latest attacks, a number of Americans have already stared to leave the kingdom, encouraged by their embassy in Riyadh who advised all US citizens to leave as soon as possible. The British issued a similar warning and the Foreign Office is warning of more attacks to come. In an e-mail made available to this reporter, an oil executive at Saudi Aramco voiced his fears that the “exodus of ex-pats has begun.”

The terrorists hope that carrying out additional attacks on foreign workers will eventually scare more away, thus creating a vacuum in the oil industry, crippling the economy, and in turn weakening the authorities’ grip on power. This, the terrorists hope will facilitate the overthrow of the regime. Alternatively, following a sudden exodus of expatriates, al-Qaeda and its affiliates could replace the vacuum with sympathizers, positioning themselves for an eventual “take-over” of the oil infrastructures in the country. While these scenarios may seem far-fetched, neither possibility should be brushed aside without considerable thought. Either way, the terrorists could seriously undermine the kingdom’s oil-based economy. To take a page from Robert Baer’s book, SLEEPING WITH THE DEVIL, where Islamic terrorists sabotage the oil installations, this situation could now become all too real. Baer, a former CIA Middle East operative, describes a hypothetical situation in which Islamic fundamentalist terrorists sabotage Saudi Arabia’s oil facilities in the country’s eastern province, severely hindering the flow of oil to the West. Although imaginary, the scenario is nevertheless worrisome and the threat now very real.

The one positive outcome that may emerge from these frightening developments is that they should serve as a rude wake-up call for many Saudi officials who, until just recently, refused to believe that their country could be on the verge of serious civil strife.

For a long while the leaders of the kingdom refused to take the terror threat seriously. Lately, they have begun to say they would fight terrorism and crush it with “an iron fist.” But so far, the fist has failed to come down very hard, and the terrorists continue to operate and become bolder in their deadly endeavors. Prince Turki al-Faisal, who for decades ran Saudi intelligence and who is now ambassador to Great Britain, told the BBC that all but one of six al-Qaeda cells operating in the kingdom had been “dismantled.” But judging from the brashness – and the rise in number of attacks – one could easily assume the opposite to be true. After the Khobar attacks Abdulaziz al-Murqrin, a Saudi leader of a terrorist group known to be affiliated to al-Qaeda, published a statement on the internet calling for urban warfare and the toppling of the royal family. He promised that the remainder of the year would be bloody for the kingdom. Some analysts believe that the terrorists might have already infiltrated the security services. “The fact that most of the arrests have resulted in open gun battles suggests either that the Saudis are remarkably inept at security operations or that the terrorists know that security forces are coming,” reported MJ Gohel and Sajjan M. Gohel, terrorist analysts with the London-based Asia-Pacific Foundation. “Riyadh’s ability and the loyalty of its security services, to break up the terror network now operating in Saudi territory is questionable,”

“Bizarrely, the Saudi Arabian government announced that the current three terrorists still on the loose after the Khobar attack are part of the last terrorist cell in the country,” said the Gohel brothers. “I am very worried,” said Sageman, who added that he feared Saudi Arabia could be in the midst of a “full-blown insurgency.”

Claude Salhani is the foreign editor of United Press International in Washington, DC.

Lebanon’s $530 million retail jewelry sector has been putting in a strong performance over the last decade, with a reputation as one of the leading markets in jewelry manufacturing in the region. However, less optimistic observers will point to the fact that Lebanon has lost ground to other countries, notably in the Gulf, and, despite the potential for further growth, more could be done to promote the sector.

According to a report by the World Gold Council (WGC), before the outbreak of the civil war, Lebanon was the leading jewelry hub of the Middle East with a reputation equal to that of South Africa, London, Russia and Zurich. It had an emphasis on craftsmanship and creativity as well as an ability to combine the Middle East culture with modern methods. But the sector lost its luster during the war as most of Lebanon’s homegrown talent fled the country. Those who remained struggled to keep the industry afloat as Dubai, Kuwait and Saudi Arabia grew in stature. Ironically, the people who drove the development of the sector in these countries were mainly Lebanese.

“Although Lebanon continues to suffer from severe economic strains, we enjoy the fact that jewelry is still a major tourist attraction, especially to visitors from Arab countries, the US, Europe and Cyprus,” said Carole Hakim, marketing manager for Antoine Hakim Jewelers. “We have a worldwide reputation for our know-how in jewelry.” Leading jeweler George Mouzannar concurs: “There is no doubt that, as Lebanese, we are more into the creative side of jewelry making. Our designs can be found among the top international brands. This makes us proud, but of course there’s always room for improvement in any kind of business, and the jewelry industry is no exception.”

Exporting

According to ministry of trade and economy statistics, jewelry is Lebanon’s number one export industry, constituting 30% of the overall industrial sector in Lebanon. The latest data shows that jewelry export figures have increased by 9% since 2002 to around $465 million in 2003 – over 75% of which constitutes exports to Switzerland. First quarter of 2004 exports have reached $147.5 million.

But according to Vasken Hadidian, president of the Lebanese Jewelry Syndicate, the official figures hide the true story. “The government doesn’t differentiate between raw materials and finished products,” he explained. “Seventy percent of the figures constitute raw materials and not finished goods. The reason why Switzerland is seen as a major importer is because we sell them scrap gold, which is a form of money transfer rather than a commodity.” He added that Lebanon imports around 25 to 30 tons of jewelry yearly, only 30% of which remains in the country. The rest is designed, worked on, and then re-exported to Gulf areas, mainly Dubai and Kuwait. In fact, according to Hadidian, the majority of local jewelry is actually exported to the Gulf, with Switzerland mostly importing watches made specifically for the Swiss market. “We export to Switzerland under our international brand name, Romulus and Remus, with small quantities re-branded,” he added. There is room for improvement to make the sector more self-sufficient. Although Lebanon exports high-end jewelry (unlike the lower quality products exported by the Far East markets), it still lacks what it takes to make a genuine manufacturing sector. “We import finished products like chains, when most countries, like Italy, have all the equipment required to create everything they need,” said Mouzannar. “It is a pity that we still have not yet reached that level.”

Who’s buying?

According to Hadidian, local consumption is worth around $50 to $70 million. Statistics provided by the ministry of economy and trade reveal that jewelry imports to Lebanon reached around $302 million in 2003. “Subtract from that amount what we consume locally and the rest is reproduced and exported,” explained Hadidian.

“Only 2% to 5% of the local population, namely the upper class, spends on high-end jewelry,” he added, “the rest prefer to invest in gold in its cheapest form.” Hadidian admitted that local sales had been hit by the frosty economic climate. “Our biggest customers were middle class consumers. We are loosing them. Even the upper class is not spending as much as they used to in the past. Instead of buying an item for $10,000 they now go for something that’s around a $1,000,” said Hakim.

Competition

Jewelry, as a luxury product, is much more sensitive to the economic cycle. Naturally, jewelers also have a tougher time keeping their heads above water when the downswing comes, as they need continuous capital to continue and grow. Although their profit margin is around 20% to 30%, unlike other industries, the largest share of revenue goes to labor.

The competition is growing in the world and in the region, and Lebanon is feeling the squeeze. Today, Dubai offers the Dubai Metals and Commodities Center, a hub for gold, diamonds and commodities trade, which aims at attracting key players throughout the industry sectors – including relevant support industries such as finance, logistics and insurance – by offering free zone services. This has not escaped the attention of Lebanese jewelry makers. “They are offering great incentives, so why wouldn’t Lebanese jewelers focus their expansion on these countries? It’s enough that they are offering 100% business ownership and no taxes for up to 50 years. How can we even dream of such a perfect deal in Lebanon?” asked Mouzannar.

For the record, the local industry employs around 20,000, including business retailers and manufacturers. “No one can really know how many people actually work in this sector, because some have factories others have smaller workshops, and others work on a freelance basis. Labor is expensive compared to other countries like India and the East Asia,” explained Hadidian. Mouzannar added, like most industries in Lebanon, social security remains a big problem. “The government is not motivating people to invest in expanding their businesses in order to employ more people and spread out. It’s better for us to outsource finished products, as it’s less expensive. Having three employees is like paying for four and there are no facilities or incentives encouraging enough for us to develop our business,” said Mouzannar. Hadidian hopes the government is aware of regional developments and reacts appropriately. “So far, no one is showing interest in this matter. We are supposed to be the hub for the Middle East, but while we’re doing nothing, others in the region are doing a great job,” he said.

“We are still far behind in terms of international movements that will hinder our advancement and development,” he said, adding that Lebanon has yet sign the Kimberly process agreement. The agreement, which involves 48 governments and the diamond industry, is in an attempt to create a certification system that would label legitimate stones, thereby blocking the sale of conflict diamonds and protecting the integrity of the $7.8 billion annual trade. Statistics show that about 4% of that trade is in conflict diamonds, the profits of which are said to finance terrorism.

Hadidian admitted that since Lebanon hasn’t signed the agreement yet, “we are jeopardizing our reputation and hindering exports to other countries, as well as local development – like licenses for setting up diamond refineries and so forth. All of these should be taken into consideration before making any further decisions.”

Solutions

“We definitely stand out in quality and availability; yet our position needs to be enforced by building stronger strategies with the help of the Lebanese government,” said Chafic Idriss, marketing manager at Nsouli Jewelry. “We need an institution that can teach jewel manufacturing as well as a gem and metallurgy lab.”

At the international level, steps have been taken to help revive the sector. A few years ago, as part of their move towards liberating the international jewelry market, the WGC approached the Lebanese government with a proposal to reduce customs duties to 4%, a rate similar to that of the UAE. They also recommended the establishment of an alternative jewelry hub in the Middle East, more specifically for the Levant and Egypt. Key jewelers from Egypt and the Gulf have urged Lebanese officials to encourage the jewelry sector. As a result, Lebanon has halved customs duties on imported finished gold jewelry to 5% in November 2000. At the same time, customs duties on all consumables and chemicals used in jewelry manufacturing were abolished. The government also stopped tariffs on precious stones. “Thanks to the government and the Jewelry Syndicate, VAT was decreased from 10% to just 1.2%,” said Mouzannar. This may have been the only positive step taken by the government thus far to keep jewelers from losing their businesses, said Hadidian, but he was quick to point out that many in the sector don’t feel that they have benefited from any changes in real terms. “The real problems that the industry faces lies in the hands of government officials. We are suffering while others are booming. One thing is for sure we cannot sit and wait for the government to do anything – one has to take matters in his own hands,” said Hadidian. “Industry professionals, who would like to go seek their future in Dubai, for example, should do so, as they will see no growth in Lebanon. They are providing so much for people in our business there, so why not?”

According to Hadidian, the only thing that could give Lebanon a genuine competitive edge is turning the country into a free zone market for jewelers, abolishing all taxes. “That is the only chance I see for us to compete.”

Fashion

While the Lebanese haute couture business has reached international catwalks and made it onto the backs of Hollywood’s most glamorous stars, Lebanon’s $150 million ready-to-wear garment sector, once a regional power, is decidedly threadbare. In 2003, Lebanon imported $247 million worth of garments but exported only $43 million worth. For the record, according to the Lebanese Industrialists Association, in 2003, Lebanon produced 25 million items of clothing; but the country actually has the capacity to triple this amount and, given the right initiative, create jobs for 30,000 workers, five times the current workforce. Still, Fouad Hodroj, president of the Lebanese garment manufacturers, is nonetheless upbeat and believes that Lebanon is going through a transitional phase, one that will see a brighter future. “International business trends change over time, the same way fashion changes seasonally,” he explained. “We must follow the trend now and Lebanese manufacturers should be working towards revamping their business strategies, investing in other creative aspects.” In the past, Lebanese designers have been known in the region for the quality and accuracy of their sewing, while a new generation of designers, including Elie Saab, Robert Abi Nader, Zuhair Mrad and Abed Mahfouz took a giant step into the world of glamorous clothing, selling to other Arab countries and achieving international recognition. “We are good at designing and creating beautiful clothes,” said Hodroj. “This is what we should invest in. Ten years from now, I see us designing and creating while sending sketches to the Far East or Egypt for manufacturing. This is what most Europeans do. It’s the way people are doing business abroad, and it’s time we follow that model,” Hodroj said. “Today, we are in no position to compete against ready-made garments imported from the Far East, as their prices are far less than ours. We can compete against European imports however, as our prices are almost the same. Therefore, we should be investing in quality rather than mass quantities, and more so, on the creative aspect. This is how international clothes industries are working – we should be doing the same.”

According to Daniel Tchakedjian, store manager of the ABC mall in Ashrafieh, it’s all in the quality. “The Lebanese fashion collections we have in our stores don’t sell as well as their Chinese and other counterparts,” he said. “I disagree when people say that it’s a matter of mentality and that people prefer to buy international products. They’d rather buy quality for the money they are paying and, unfortunately, the quality of local products is very low, especially when compared to its price tag.”

Maria Mansour, a local shopper, says that she prefers paying around LL100,000 on a shirt for her husband from Massimo Dutti, rather than from a local manufacturer. “I think [locally made clothing] is too expensive for what it is,” she explained.

Tchakedjian said that Lebanese are very sophisticated and are very smart shoppers. They will not buy anything that has no quality. Those looking for cheaper brands go for imported goods from the Far East. So what went wrong? Hodroj explained that the history behind the industry is important as it shows why the sector is in its current condition. The ready-to-wear garment sector began in Lebanon after the country’s independence in 1948. “This industry was booming in Lebanon. We found ourselves in this line of work more than others in the region, since Lebanese were naturally more open to other cultures, especially western ones.”

During that period, according to Hodroj, ready-to-wear garments accounted for 40% of the total industrial sector, and the garment industry enjoyed a long period of success that lasted until the outbreak of the civil war. “Before the war, there were no laws, no customs fees, no high electricity bills and no social securities to be paid, among other things,” said Hodroj. “But as production costs increased dramatically over the years, profit margins also had to increase, as producers had a great deal of expenses to pay. So, many in the industry suffered.”

To make matters worse, the industry lost nearly half its 25% market share after the government’s trade deals facilitated the import of Syrian and Egyptian products. “The government has not done enough to protect the local industry. What’s more, we cannot export our products to Egypt and Syria – does that make sense?” he asked.

Until the early 90’s, there were around 1,240 factories in Lebanon. That number has more than halved to 500 factories of varying size, employing 11,000 workers today. Those left are the ones who have invested in modernizing their factories with the latest equipment, and directed their business towards designing and producing quality products that have a chance to compete against European goods.

“Lebanese haute couture has been displayed along side Yves Saint Laurent, Armani and Christian Dior, among others. Hopefully, our ready-made clothes could do equally well in the future,” said Hodroj.

Lebanon’s new boom is tourism-related real estate. Significant developments – worth in excess of $4 billion – in this field have begun roughly four years ago and accelerated massively by this year. The Middle East’s largest resort project, Sannine Zenith, topped the list of headline-making projects by size. But other projects are also highly noteworthy, from the Metropolitan Park development in the Jamhour area above Beirut, which will be the Eastern Mediterranean’s first theme park, to a wave of new beach resorts with names such as Oceana, Bamboo Bay, La Voile Bleu, Edde Sands and, the latest addition, La Guava.

Ironically, as much as beach life has long been associated with the Lebanese scene, the development of good beach resorts is a recent phenomenon. As short ago as 2002, an economic guidebook on Lebanon could undisputedly label the nation’s publicly owned coast as having “little more to offer than uncontrolled industrial development and mountains of garbage.” Whereas beach facilities previously existed in some numbers, they did so either in form of elite islands for a most narrow clientele of Lebanon’s upper 10,000 or would meet only the lowest possible denominators of cheap fun, the new resorts are seeking to provide both class and relative affordability in an ecologically compatible setting.

The importance of resort development for the future of Lebanon can hardly be overestimated. These new trump cards in the Lebanese development game score on two crucial economic fronts – tourism and real estate. While sales of apartments and vacation homes on the high end of the market entered a boom phase over the past two years, economists, sector analysts and major real estate players cautioned that this flare of mostly foreign direct investments was restricted in its economic benefits. By contrast, resort properties are productive. As tourism destinations they attract visitors, offer jobs and operator profits. As real estate they boost values at the site and the surrounding area. Operators and developers of the new resorts reported sotto voce that their presence, whether on mountain or seashore, send land prices soaring in the immediate area by at least 50% and up to three times. In parallel, the developers uniformly agreed that the mere act of constructing a resort or setting up a building somewhere on unused land does not add any value. This value is created through sound commercial leisure activities that are up to 21st century standards on infrastructure, business concept, marketing, and environment.

Sannine Zenith

Beyond its image as behemoth and mother of all mountain resorts, much mystery still shrouds Sannine Zenith, the largest commercial real estate adventure ever attempted in Lebanon. The initial political hype over its ownership structure has settled and the land purchases have been registered to the As Salam company, which is now wholly Lebanese owned by Jean Abou Rached, according to public relations manager Firaz Amine. “This project is a golden egg. It is so beneficial to all of Lebanon that nobody can question it,” he enthused.

Burnt somewhat by controversies over an alleged sell-out of 1% of the nation’s surface, the developers prefer to liken Sannine Zenith’s current property tally of 75 million square meters to covering an area “four times the size of Beirut.” As the detailed final master plan and feasibility studies for the project are still being worked on, the use concept and ultimate scope of the mammoth site still has some vagueness to it. But the people of the company will gladly present feel-good videos that virtually glow with promise and reveal that in the end, after further intended land acquisitions, the project size will most probably amount to 95 million square meters of “virgin land.”

Of the land already bought for more than $200 million, about 30 % are earmarked for potential construction comprising of infrastructure and hotels (not less than 8), houses, and commercial buildings. Ski slopes (double the area of the Faraya ski slopes) and three, 18-hole golf courses will consume a substantial portion of the territory, for which the developers push the slogan “in the heart of Lebanon and above the clouds.”

A green spine with one million (yet to be planted) fast-growing Nordic pine trees, an artificial lake, a heliport and three residential villages – themed eco, sports and lakeside – are key characteristics of the design. Also important, areas above 1,600 meters elevation will not see any building of houses and other structures and the peaks zone above 2,200 meters will be turned into a nature preserve, Amine said.

As Salam, whose concept includes financing of the development by issuing $1.25 billion in Global Depository Receipts to willing investors, foresees a construction phase of 12 years, during which the project will provide thousands of jobs. A project of this magnitude cannot prey on only the rich as their clientele, and Sannine Zenith confesses to have a family-oriented approach that targets normal earners as well.

Asking prices for land in the area rose to $8 to $10 per square meter since the project was announced this spring, from $3/sqm, which As Salam paid in acquisitions last year, Amine said, marveling himself at the fact that the company could keep their intentions a secret during the purchase phase.

When work is underway full steam, the company “will be happy to sell a square meter at $100,” he gave as an approximation of anticipated future prices. If all goes according to plan, As Salam might even attempt to take their mountain identity to the sea and launch a new big seaside resort venture in North Lebanon, under the name Sannine-sur-Mer.

If successful, Sannine Zenith, with a population projection of 45,000, would provide a case study for what appreciation a large, desolate chunk of land, that no one knew what to do with, can achieve in a grand development scheme. “Once it is developed, it most definitely will be a project to lift the Lebanese GDP,” Amine said.

Oceana

Widely credited with having broken the ground for more stylish beach resort ambiences on the Lebanese coast, the Oceana resort is reopening this summer at a new site in the coastal plane of Damour, to where the resort relocated this year from their previous address in Rmeileh several kilometers further south. The all-new Oceana resort will be a double feature with a landside pool face for the day and a seaside promenade face at night.

The natural Mediterranean beach in Damour is narrower than in Rmeileh and the old railroad tracks cut right through the property, so Oceana operators Cimes focused their creativity on turning these two limitations of the site into advantages, Cimes CEO Gilbert Khoury told EXECUTIVE. To do so, the developers aligned a boardwalk on the railroad right-of-way to create a 310-meter promenade along which they strung a lineup of restaurants designed to serve the resort patrons as well as a hoped-for dinner crowd. Since Lebanese beach goers mostly won’t seek direct exposure to the ocean waves and prefer to frolic between swimming pool and picnic tables, Khoury expects that the narrowness of the natural beach will not hurt the resort which is laid out to accommodate these customer desires during the day with the recreation facilities on its 30,000 square meter site and the restaurants facing it along the boardwalk.

Come evening, however, the promenade should rise to a second life as destination for people who fancy a walk and a meal or a party on the seafront. Then the restaurants will shift their attention to their west-looking terraces. Under this concept, “the short distance to the water is an attraction instead of a handicap,” Khoury said. The big pulling point that led Cimes to establish the new Oceana at Damour are the green surroundings. With the nearest building 500 meters away, the beach resort aims to entice Beirut dwellers to its Utopian setting only 15 kilometers from the capital. “It might be pretentious but we think we can create a wholesome destination for people to come there,” Khoury said.

This determination includes a commitment to preserve the integrity of the Damour plane, which represents a unique alveolus holding fresh air in the country’s coastal zone. Being to close to the sea for their purposes, farmers could not find much use for the land. For several years, the area had been under study for development as eco-tourism realm, and Oceana wants to be an anchor for environmentally sound recreation there. According to Khoury, all soil dug out during Oceana’s construction was reused in landscaping and above ground structures are built with wood.

With time, the resort intends to promote bicycle and horseback riding, and jogging as alternative to morning walks in the polluted city. With such features, the Damour plane fits the profile of new tourism-related real estate projects that can create new leisure values, property appreciation, and economic opportunities.

Apart from the location’s great overall potential, one reason for moving Oceana to the new site, so Khoury, was that Cimes didn’t want to operate the resort on conditions of a short-term lease. When first venturing into developing beach resorts four years ago, the company wanted to reduce its risks and rented the land for its first two beaches, Oceana and Bamboo Bay. The new Oceana, which involved a $2 million investment, is still set up on leased land but the terms are longer, seven years in Damour versus three years in Rmeileh. In Jiyeh, where the company is working on improving and expanding the Bamboo Bay resort by adding hotel facilities, the contract is for 10 years with extension option.

Ultimately however, the drawbacks of leasing arrangements can outweigh the advantages as the market for beach resorts is heating up, Khoury discovered with a laughing and a crying eye. “Now we are established in the market, but most of the added value is going to the landlord instead of us,” he said. In the case of the Damour property, the cost of the lease is still slightly better for Cimes than the cost of finance in purchasing the land, partly because owners in the area revised their prices for selling substantially upwards within the relatively short time from when Cimes signed their lease agreement until today.

In the longer term, however, Khoury wants to achieve gains from both operating beach resorts and from the real estate appreciation a resort creates. His aim for future projects is to have a two-pronged structure of a real estate investment firm and an operator company – but with separate shareholding bases, to avoid conflicts of interest between the resort operation side and the real estate aspect of the business.

Faqra and Mechref

The ancestral tree of the new Lebanese resorts family includes a number of projects that were important in evolving this particular real estate culture over the past thirty years. On the mountainside, the Faqra gated community was established in 1974 as a winter sports resort and pioneer of such developments. After the war years presented it with the challenge of serving different needs from the original design – customer demand for plots and construction was driven by Faqra’s security and insulation from the conflict zone – the project could re-emphasize its original focus over the last 12 years and today continues to grow, marketed now as an all-year, high-altitude resort community.

At a size of two million square meters, the Faqra Club group of companies, whose original investment has been estimated to translate into approximately $73 million in today’s dollars, saw a substantial recent increase in sales prices for their properties, from an average of $200 per square meter two years ago to at least $300 today, according to company managers. Plots are also tending to be larger. While the company designed its plots originally to measure from 700 to 1,000 square meters, a new 100,000 square meter segment under development today offers land ranging up to 4,000 square meters per plot.

While its presence pulled nearby land values up, the remoteness of Faqra granted the project an existence largely undisturbed by problems with individuals developing land outside of the community’s boundaries, although Faqra’s strict building codes were not implemented there. The value-added that the company provides to its residents comes from the infrastructure it established and from communal services – water, electricity and such – which the project owners in fact subsidize.

Industry observers regard Faqra as a successful development, which however remains by necessity restrained in scope to a comparatively narrow profile of a second or third-residence community for a small target group of affluent Lebanese, Lebanese expatriates and regional buyers. Within these limits, the project’s standing is strong and if the prospect of a belt of ski slopes interlinking the entire Faraya-Sannine area under the Sannine Zenith concept is realized, the good new neighbors could give Faqra yet another boost.

A further landmark in the history of private developments in Lebanon was established when the Mechref community saw the light in 1996. While earlier upscale suburban developments, such as the Rabieh subdivision to the north of the capital, had to face the handicaps caused by the conflict years and the social environment of the time, Mechref opened the gates for a wholly privately planned and structured community angling into the market as new one-site answer to the residential and recreational needs of the well-heeled.

The Mechref community covers a land surface of 3.3 million square meters at 30 to 350 meters above sea level overlooking the Damour coastal plane. Since the developers acquired the land in the mid nineties for an average $17 per square meter, value appreciation of both land and built-up real estate has been substantial. According to general manger Fouad Salha, cost per square meter to the company stands today at $85 and selling prices average $250 to $300, with upward outliers. Calculating that 300 villas have been completed, at average size of 600 square meters per dwelling and $750 cost for land and construction per square meter, the real estate worth of the Mechref community easily reached more than $130 million over eight years.

About 30% of the total area comprises developable land, 40% of which are still available in the market, Salha said. The company today tries to discourage the buying of plots by persons who speculate on increases in their value and do not intend to establish residences there. He described the increase of land prices in the developed as 35 to 40% since 1996, which he claimed was juxtaposed by a contraction of real estate values in much of the overall Lebanese real estate market by a similar percentage, thus further underscoring the Mechref value proposition.

In Salha’s expectation, the community will gain further from clustering of attractive tourism projects nearby, such as the Oceana beach resort in Damour. The awakening of tourism in the area would allow taking a new look at a hotel project in Mechref, which the developers had shelved after earlier feasibility studies had not projected satisfactory returns.

The visions do not end here. The developer of the Edde Sands resort in Byblos, Roger Edde, has a full plan up his sleeve to capitalize on the cultural and natural wealth of this ancient Phoenician city kingdom to amplify its tourism power into a leisure land embracing tennis camps, wellness hotels, green villages and its own port for yachts and even cruise liners – a $2 billion dream for the Byblos-Amcheet stretch alone, and that is without counting in Edde’s ambitions for a snow-side resort development in the Tannourine-Jaj cedars region. “I am fully bullish on the Byblos destination,” Edde told EXECUTIVE. “I feel the tourism industry and tourism related real estate in Lebanon are two years ahead of a moving curve, which will move up substantially in the 15 years that follow.”

Solidere has launched a new program thought to bring many changes to your business. What is the program’s core offering?

The program is based on settling part of the price of real estate transactions through shares at a time when we have noticed a major pickup in interest in developing downtown projects.

What motivated you to create this program?

What started us thinking about this program was the realization that the share price cannot stay where it is, because it is significantly undervalued. We have to do something to try to make people and shareholders realize that there is much more value in the company stock.

In launching the program, you mentioned that the Solidere share price is undervalued. Where do you see the fair value?

We estimate that the land bank that we own is worth $ 4.5 billion. That is excluding the properties that have been developed, which we value at $300 million. This will increase immediately when the Souks are completed, bringing the value of the buildings that the company owns to about $800 million. So I think if you do the numbers, the shares are definitely undervalued.

Seven years ago, the most optimistic estimates by international finance houses saw Solidere shares going up to $18 or $20. Now we are happy to be at $7 per share. We are not happy to be at seven.

What number would make you happy?

I will not comment, but as the value of this land bank appreciates the share price appreciates. The other element is payment of dividends. This is a key component of our program, that we will request the cancellation of the shares, which we will acquire. Then whoever is left as shareholder in the company will own a bigger portion.

How long ago did you begin preparation for this program?

It has taken us some time but I think what is important is that this program is coming at a time when there is significant interest in development in the BCD.

Are you saying timing is everything?

Timing and the circumstances. The other beautiful part of this program is that it doesn’t have a drain on our cash situation. It is basically a buy-back program. We are buying back shares but without having to shell out cash and instead giving land.

Did you develop this all in-house or did you use outside consultants?

We consulted with different individuals but in the end these ideas really came from within.

Do you have grounds outside of the new program on which to base your optimism?

Beirut is a city that definitely is in fashion. I talked to international retailers who see that point very well and are able to gauge that through their global activities. They see that Arabs are now looking inwards and Beirut is a spot where they want to be. The Lebanese diaspora is also looking to invest in Lebanon.

Two years ago, you started on an upward curve. Is it correct that the company had a good year in 2003 but showed lower results because it did not want to record sales on its books before they were fully registered?

No, we had cancellations related to shareholders in Bank Al Madina. These were the transactions that had this negative impact on our income statement. Otherwise we would have had probably as good a year as the previous year.

Is the new program and special offer valid at this moment?

Yes, from the day that we declared it and it is already being practiced. But it has yet to result in sales. That is not the case. We have several contracts in different phases of execution. Some were prior to this offer. There are stages of signature, final stages of fine-tuning the contract, but as far as I am concerned, these are sales that are behind us. We are negotiating with a major investor on a huge lot, but this story is at a stage where we cannot yet make an announcement.

Are you in effect reducing the price of land that you sell in Solidere?

To make this program work, we offer a discount of 15% from the list price. We review our prices every six months, and have been moving them up all the time, and this will continue. Pricing the land is another mechanism that has to do with many other factors. We will not change that. What we have always done when we price land is that we stick to it to make sure that people who have invested are somehow protected.

How much did prices go up since Solidere started to market properties?

We started selling initially at $950 [per square meter of built-up area/BUA] and we had a transaction for a hotel that was at slightly less than $950. But since then we have gone up to $1,550. This was the price for a superb piece of land that sits right on the edge of the Marina. I will not be surprised when we are selling some similar properties with commanding views at $1700 or $1800 in two years’ time.

But is it a fact that with the current offer, prices for the buyer have gone down for the first time since the company was established?

No. We have made deals on a cash basis where we applied discounts. While this is not a cash deal, mind you, we are getting 40% payment in shares upfront. We were always getting 25%. This is already a plus. We are getting more money upfront. And we are getting the rest of our money more quickly, three years instead of five years. So this discount is not a giveaway. It has economic bases.

Thus, the 15 % discount would be compensated by a decrease in exposure of the debt over two years and at the same time by the price of shares?

Not by the price of shares. We are acquiring a larger down payment at 40%, which could be 40% in shares or 30% in shares and 10% in cash, instead of 25%. But I tell you something that nobody has noticed yet. This program will have a positive impact on our retained earnings, up to a certain point. As long as we acquire the shares at less than [the nominal issue value of] $10 and we are canceling them at $10, there is another positive impact for the shareholder but not for the real estate investor.

How much could an investor gain in a best-case scenario if he bought shares when they stood at $4 or $5 and used them now for the offer?

This depends on several factors, at what price you bought your shares, how long you have held them, what is your borrowing cost. But if you buy shares today and your borrowing cost is very low and you wait on these shares and then execute the program, these shares will probably be at a higher price a year from now and you will even get another benefit. You get a bonus of 10% on the price of your shares and you get a 15% discount on the land. The program is also telling you as a shareholder that your shares are dearer to you now. You should hold your shares and not accept to sell them at these lower levels.

Is the offer open ended?

We have no time limit on it today but it is an offer that we will have to keep assessing as time goes by.

Is the offer giving a certain edge to large investors and large shareholders over small ones?

No, not at all. It is probably giving more edge to the small shareholders. Large shareholders have held on to their shares. The small shareholders have been panicking when their share prices have been going down. I think today they have no reason to panic. They are in a position to feel that the company is backing their shares.

Can you ensure that no information on your new program was leaked, to people who had already been negotiating with the company over buying a property?

We have our internal procedures to make sure that this is the case and I hope they work.

How would you respond to concerns that this city is a place where insider trading and conflicts of interest between ownership and management are common?

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

What about allegations reported by some Beirut media about controversies in your general assembly on June 21?

We answered that. The auditors obviously never said anything [of the sort which was reported]. No shareholders, including those who stood up and screamed for other reasons, said such things in the assembly. Where did this reporter come up with those allegations? We have no idea. In fact the owner of the newspaper also doesn’t know where these allegations came from.

Can you comment on expressions of discontent at your general assembly?

You have to evaluate this discontent. If it is coming from a shareholder who is concerned about the interest of the company, I definitely take it seriously, but if it is criticism coming from troublemakers or people who have disputes with the company, this is negative for the other shareholders who have real concerns and [who risk] not having these concerns heard.

Could you give examples for real concerns?

There are many concerns that shareholders can voice and they do voice them. One of the concerns is why we aren’t paying dividends. This is a catch-22 situation; if we pay dividends we will not have enough cash to move ahead with the development process. If we pay dividends, some shareholders will be happy because it is an immediate benefit but in a way it will be taken away from future potential benefits.

In the long term, where do you see Solidere obtaining revenues?

From property management. Key to that are the Souks. Are local retailers getting twitchy over the delays and planting their flags elsewhere?

I am not concerned that this will happen. In fact, we have every indication that retailers understand the importance of this location very well. I would have liked to have completed this project by now, but we are about to start now, within the next couple of weeks. So within the next 18 months, we will have it up.

What do you say to developers who say the price of land makes it almost impossible for them to make money?

I tell them there are others who do and continue to come and buy land. This is what is happening. I am sure that also in Saifi and other non-waterfront residential areas, projects are making money.

And developers who are buying land at $1200 BUA and have to sell at roughly $3,000, can achieve that now?

Absolutely.

Relying entirely on organic growth of their business, BLOM Bank carried the baton of leading the Lebanese banking sector in terms of assets for more than two decades. As the creation of the Audi-Saradar Group is exerting consolidation pressure at the top of the sector, EXECUTIVE wanted to know how BLOM Bank views recent developments and if the bank is changing its strategies. EXECUTIVE asked and BLOM vice chairman and general manager, Saad Azhari, answered.

As the leader in the Lebanese banking sector, you have seen a new group emerging besides you, a competitor of regional format. How does that affect your plans and ambitions?

Our policy will not change, in terms of looking that we have a strong bank, that our assets are good assets, and making sure that our shareholders always get the best return. BLOM Bank has an important size in the Lebanese market and we achieved this in continuous internal growth over 40 years, which allowed us to contain costs. Our level of cost to income is extremely low. That is why we have the highest return on our equity, and the lowest cost to income ratio. And that is why we have also the highest rating. We are the only BBB+ rated company by ratings agency, Capital Intelligence.

What do you regard as the key factor enabling you to reach market leadership?

We achieved this position of number one because of the confidence of our customers and we have been number for over 20 years, since 1981. Our customers believed that we provide security and a good service, and came to us because of that. We are still continuing to grow at a rapid pace and increasing our market share, as our figures for this year show.

Did merger and acquisition projects ever play a part in your development plans?

I cannot hide that there were a lot of merger discussions between us and other banks. Frankly, we found that elements that we require were missing: either the price was too high or the quality was not good. We would definitely not buy a bank just to grow. Some of the banks we discussed with, both foreign and local banks, have been bought by other banks.

How do you view mergers in Lebanon in terms of their benefits to the bottom line of the banks that went this road? 

Figures talk. Compare the actual present size of the banks that merged with what should have been their size, and look at BLOM. If you compare the risk profiles and look at profits of BLOM and the profits of banks that have merged, you will see that BLOM has the highest level of profits, even as it does not have the highest level of loans. Here you have high profit and low risk. What is better: high profit and low risk or high risk and lower profit? You judge for yourself.

If a new merger or acquisition prospect would enable you to ascertain the status of largest bank in Lebanon, would you pursue it more actively than in the past?

No. Our strategy will not change. For any merger to happen, it has to be sure that the quality of our assets will not deteriorate and that it does not negatively affect the return to our shareholders. Those are the essentials for us. We want to stay a strong bank with the highest rating in Lebanon. It is also very important to us to be able to give a good service to our customers.

Would you consider a merger as means to facilitate regional expansion?

BLOM Bank is the Lebanese bank with the strongest presence abroad. We have a subsidiary in Paris, which has branches in London, Dubai, Muscat and Sharjah. We have an offshore in Cyprus and we have constituted a bank in Syria where we have management control. We are also opening a branch in Jordan. We are expanding wherever we think it is possible and interesting for us.

It is often said that Lebanese banks need to be stronger and considerably larger in size to successfully compete in the region. What is your perspective on this?

I think that the size of the banks in Lebanon compares well to banks in the region. Compare the size of Kuwaiti banks and Lebanese banks, for example. The assets and deposits in Lebanese banks are almost twice of those in Kuwaiti banks. The banking sector in Lebanon is number three in size in the Arab countries, after Saudi Arabia and Egypt. Lebanese banks are growing larger and larger and today have large asset volumes. For example, we ourselves have passed $9 billion in assets. Our size is large compared to the economy and with our shareholders’ equity; we are over capitalized when compared to the risks on our balance sheets. We already have a good size compared to the region, we are able to have a presence outside and we have the possibility to expand.

So you do not consider large regional banks as having a size advantage over BLOM and other Lebanese banks?

Many Arab and foreign banks have a presence in Lebanon. Lebanon is an open market, while some regional markets are closed to us. I think we have a future advantage as these markets are opening up. Jordan is an example. Before, we could buy a bank in Jordan but not open a branch. As this has now been allowed, we are opening a branch there in September of this year. Lebanese banks have important opportunities in the region and I hope that we will be playing a much more important role in future.

Where does BLOM set priorities for domestic development?

We at BLOM have seen important growth in corporate banking and also in retail banking. This is for specific reasons. Retail is still a developing sector, where all banks increased their activities. In corporate lending, big corporate names here were historically mostly dealing with foreign banks. Some foreign banks have already moved out or are planning to move out of Lebanon. BLOM saw this opportunity. Last year, we created a corporate unit and effectively grabbed an important amount of clients that used to deal with foreign banks, which either left or are scaling down their portfolio, mostly because of Basel II and the strategy of international banks to reduce their exposure to emerging markets. That is why our loan portfolio had a good growth in lending last year, even though the lending in the Lebanese market was generally stable.

What is your ratio of non-performing loans?

The non-provisioned non-performing loans stand at less than one percent, 0.5 to 0.6%.

How important are private and investment banking in your activities?

In Lebanon, private banking is generally very limited, frankly speaking. You cannot strengthen private banking much, especially because of the taxes that the government collects on interests on international bonds. The big private banking activity is done by our subsidiary in Geneva. We have an investment bank that is mostly specialized in medium and long-term lending. Corporate and retail are expanding at a faster pace than other activities, but we are working in all activities.

Have Lebanese banks improved as much in non-balance sheet capabilities and quality as they grew in terms of balance sheets?

The services given by banks have improved a lot over the past years. Before, you had to deal with three or four people at a bank branch, to undertake an operation such as depositing a check or transferring money. Today some banks, including ourselves, have a teller system, in which one person can facilitate your operations. Secondly, delivery channels and their variety improved a lot. Before, the only option was to go to the bank. Today you can use ATM, phone banking, internet banking, and the call center. In standard of services, Lebanon has arrived at a very high level in worldwide comparison. You cannot see this from the balance sheet but you can see it through the operations, dealing with the bank.

Do you expect the banking sector to continue its first quarter good performance in the remainder of 2004?

It will definitely not be an easy year, because the treasury bills that Lebanese banks had bought before Paris II, especially in September, October, and November of 2002, will all mature by end of 2004. Those treasury bills carried a high interest rate and banks hold a large number of them. The renewals will be at a much lower rate. Secondly, we have to put a legal reserve of 15% of our US dollar deposits at the central bank. A central bank circular in 2002 asked banks to deposit a certain level of their dollar reserves for two years with the central bank, at interest rates that first stood at 9% and then were lowered to 8.75 % at the end of 2002. These two-year deposits are all maturing and will be replaced at a much lower rate. Banks thus are definitely going to be squeezed on those interest margins.

How about deposits by Arab investors?

We are continuing to see an important growth of deposits coming towards Lebanon from Lebanese and Gulf countries, and the pace may be a bit higher than last year. This is a good sign of confidence. We are also continuing to see interest in different projects. I have recently been in Kuwait and met a lot of people who are interested to buy homes in Lebanon. And some of the big groups there want to undertake important projects here. The same is true for groups from Saudi Arabia and the Emirates.

So overall, your expectation for 2004 is for a smooth year?

In general terms, 2004 will achieve a good growth of deposits and assets for the banking sector in Lebanon. There is going to be more pressure on banks in terms of profits towards the end of the year, and perhaps there will be a slight decrease in profits. We will not see a repeat performance of 2003. It would be good if banks can achieve stability of profits, which is a little difficult. Banks are expanding and all banks are trying to increase their market share and there is more competition. Overall, I don’t see any troubles in 2004.