Society

Convergence interrupted

by William Long
written by William Long

2004 is already shaping up to be the year that “converged networking” (CN) – the merging of voice, data and video communications into one seamless system – truly came of age. Although the concept is not particularly new, it can now be said, with confidence, that the technical problems surrounding CN have finally been solved for the serious enterprise user and casual consumer alike. Most significantly though, both the capital and operating costs of convergence have declined substantially while, in the process, even the corporate telecom behemoths, whose profits were largely dependent on a segregated voice and data market, have come around to accept, market and even welcome the inevitability of CN.

Former incumbent telephone monopolies like Verizon and AT&T in the US, among others internationally, have recently rolled out an array of new services that turn the trend into an even more viable alternative for small and medium sized enterprises (SMEs), individuals, and multinational goliaths. “There is a shifting in the market from corporate based [clients] to now also include individual based [clients],” said Samer Halawi, regional director of Inmarsat, a $500 million firm that provides mobile voice, data and video transmission services to major news networks around the globe. “We are not a telecom company anymore,” he added, “we are an IT telecom conversion company.”

Chief among the new CN products, and perhaps the most exciting from the perspective of markets traditionally overburdened by heavy regulation and high voice tariffs, is commercial internet telephony, or Voice over Internet Protocols (VoIP) – a technology that employs internet-based standards to send and receive voice traffic as if it was data traffic. At its most radical – and this is where government resistance, especially in the Middle East, comes into play – VoIP completely sidesteps the old Public Switch Telephone Network (PSTN) to make use of the new high-speed data networks that have been built up around the world (see diagram I).

In a clear indication of where CN is headed, last month the market research firm Insight Research predicted that VoIP phones in the enterprise will outnumber traditional phones by 2009. Meanwhile, in the Middle East and Africa regions, retail sales of VoIP technology are expected to grow by 50% over the next two years (from $260 million in sales in 2004 to $390 million in 2006), a development which, in part, has led the UN to reduce the weight given to fixed phone lines when it calculates a country’s “teledensity.”

“IP is the way the world will be connected in the next phase of communication history. The idea of switched networks like the one we have now is so old, and so archaic that it is going to end, exclaimed Said Ghazzi, Information and Communication Technology (ICT) associate technology expert at the UN’s Economic and Social Council for Western Asia (ESCWA).

When it comes to just the VoIP part of the CN revolution, according to a report from independent market research group Gartner Dataquest, traditional service providers “can benefit by positioning VoIP services among their retail offerings at the earliest opportunity; in this way they get a new source of revenue and reduce the amount of voice revenue they lose to alternative operators.” All of which is why the ministry of telecommunication’s (MoT) apparent fear of VoIP in Lebanon actually seems, at first glance, like a baffling position. Even if one were to take at face value the oft-assailed fact that Lebanon’s telecom sector is still a state-run asset, operating for the revenue benefit of the government and not the service benefit of consumers, fears of losing the old PSTN revenue should be balanced out by the increased revenue possibilities that exist with the provision of a whole new range of CN services, like VoIP.

After all, that’s what former monopolies have realized – replacing telephone revenue losses with data revenue gains – so one would think, logically, that an actual monopoly like the MoT, who controls regulation, data pricing and telephone pricing, would have even more of an incentive to push the trend. And since the government is also increasingly forced to compete against illegal VoIP calls from home PCs and internet cafes, leading the charge as soon as possible rather than fighting back would make more sense.

But, of course, the state-run telecom monopoly is not an independent company and it doesn’t adhere to conventional cost-benefit calculations. Indeed, the MoT is necessarily more risk-averse and change-averse than any corporate behemoth since it values the ultimate prizes in Lebanon, short-term stability and survival, above all else.

This is perhaps why, even though revenue from regular phone lines has dropped by 9% over the last five years in Lebanon – due mostly to illegal VoIP usage as well as the growth in the cellular sector – the government persists in projecting rosy assumptions about the growth in revenue from regular phone lines: last year the ministry of finance was off in its estimate of such revenue by 56%.

“The solutions are simple,” said Ghazzi. “Everywhere else in the world, the incumbents saw that the growth of voice revenue has slowed down or decreased, and their attempt to respond to that is to build converged networks that create completely new revenue streams for the incumbent.”

Unfortunately though, unlike Morocco’s Maroc Telecom, Bahrain’s Batelco, and others in the region like Jordan and Saudi Arabia that have begun to come to terms with CN and VoIP, Lebanon has not addressed what Gartner calls “the sensitive issue” of how far VoIP will “cannibalize” their PSTN revenue.

“The Middle East region is split,” the report said. “The lack of deployment… results largely from fear and a reluctance to change a market structure that works, even if it is not ideal.”

Even though the MoT itself now uses VoIP solutions internally to reduce the rate it pays for international calls (by as much as 70% over the last four years, according to an MoT source), Lebanon insists on holding court with the diminishing number of countries where most commercial VoIP services are illegal. The irony, and the beginning of a downward spiral really, stems from the fact that while the government uses VoIP for its international call routing, individuals are prohibited from using the technology. Thus, as more and more people use VoIP services under the table like Net2Phone – employed at many internet cafés in Lebanon to save callers almost 70 cents per minute on calls to the US – the MoT predictably digs in even more against the technology. Instead of seeing a market opportunity bolstered by its unique stance as both regulator and monopoly service provider, the MoT even goes so far as to prevent well-established corporations from using all but the most basic of VoIP applications.

A statement from one high-level source at the MoT captured the government’s predicament: VoIP technology “is supposed to achieve significant cost savings for businesses. When used by telecom operators, most probably new entrants, it will significantly reduce service costs and therefore charges on consumers. [However,] the incumbent [government] will normally be forced to practice lower prices consequently.”

Although the source explained that the MoT was considering the revenue effect of calling cards and some other limited VoIP services to offset declining call revenue, he made it clear that the government was primarily looking backwards at “recovering the investment cost of the traditional infrastructure.” This positioning has led to the awkward arrangement, whereby the government forces VoIP to stop at a company’s walls: the data is switched back to regular voice traffic and sent along to the PSTN, as any other normal call would be.

Despite the limitation, some companies in Lebanon are still doggedly pushing forward with VoIP deployment, and realizing cost savings and efficiencies in the process.

In fact, Cisco Systems, a major global supplier of internet technologies, recently sold a 2,500 VoIP phone system to a large company in Lebanon that now has a fully converged network: its four separate networks – surveillance cameras, administrative network, data internet, and the voice system – were all successfully collapsed into one unit.

The company had been paying $120,000 per year just for maintaining the voice system.

According to Hussam Kayyal, general manager Levant at Cisco Systems, the company was able to realize an 80% drop in annual operating telecom costs with the new system – even though the full power of VoIP is effectively cut off at the company’s door-step.

While the initial investment for such a solution is significant – IP phones are more expensive than regular phones – the generally accepted value proposition is that costs are more than recouped over time. Moreover, a whole new range of service enhancing applications moves into reach – voicemail and phones that can easily move across positions, call monitoring and profiling, the integration of email, voicemail and other messengering services. Indeed, the list keeps expanding with the march of technology. Added to this is the fact that, “they’re ready,” said Kayyal of his client. Ready for when Lebanon joins its peers in the region to recognize the potential that CN holds.

Although it is said that some major Lebanese banks have received waivers for VoIP, legality, not infrastructure or cost, is still the most immediate stumbling block for large enterprises, like the company which Cisco Systems outfitted. “Look, the infrastructure could be made almost immediately available, and all would love to join the converged network…it’s a no-brainer, but they do not want to be prosecuted,” said Imad Taraby, the CEO of FiberLink, a leading provider of corporate internet services in Lebanon.

Of course, the extremely high cost of broadband connectivity in Lebanon is still a significant problem hindering VoIP growth – especially for SMEs who can little afford the $12,000 – $24,000 that it costs to procure the minimal amount of bandwidth needed for CN. “Even if they did allow VoIP over the current infrastructure, it is not commercially justifiable to do it,” said Kayyal. Either way, time, it seems, is running out. According to an April 2004 report from the independent market research firm Datamonitor, “The Middle East, Eastern Europe and Africa are to become the main beneficiaries of Western Europe’s outsourcing of its call centers,” Already, Tunisia and other country’s in the region where international calling rates have been liberalized are seeing an explosion in call center employment.

Lebanon, with its high international calling rates and outright prohibition on international VoIP, has entirely shut itself out of this growth industry – despite the fact that the country suffers from an unemployment rate thought to be as high as 20%. This is perhaps one reason why, as Gartner put it: “Having no VoIP strategy is not an option. It is time that participants in the Middle Eastern market devised one.”

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Society

Smoking out the competition

by Anthony Mills
written by Anthony Mills

Lebanon’s days as a liberal haven for tobacco advertising may be numbered, in light of a petition signed by 10 MPs that urges the parliamentary health committee to outlaw all forms – above- and below-the-line – of tobacco advertising. However, established industry giants – such as Philip Morris, British American Tobacco and Japan Tobacco International, widely regarded as the ‘big three’ players in the global tobacco game – are fighting back as they seek to engineer a partial ban. They agree with outlawing tobacco advertising on television as part of their commitment to “responsible marketing” but stand accused of constructing a strategy that will harm emerging brands. If they get their way, the market leaders will be able to continue with almost all below-the-line activities and a handful of above-the-line ones (such as limited print and cinema advertising) to ensure a continued presence in the local market, while effectively curbing the challenge of those companies that rely on TV for successful brand building. “If you are losing market share to new competitors, the best way to counterattack is to say: let’s ban advertising so that you can use whatever awareness you already have in the market to try to increase your market share while preventing the others from becoming known to the consumers,” said an tobacco industry executive, who spoke on condition of anonymity. “It’s a sort of gentleman’s agreement, disguised as a responsible marketing campaign, which has been struck between key players in the industry to stop advertising on television.” He explained that the leading tobacco companies have lost a significant market share in recent years. “In the tobacco business, when you lose a 0.2% market share, heads roll. Imagine losing 1%, or 10%, or even 20%.” Five or six years ago, the ‘big three’ controlled about 90% of the market; now they make up less than 50%. They have lost about 20% to 22% market share to local cigarette brand Cedars, which used to have a share of only 2% to 3%. French cigarettes Gauloises and Gitanes have gained around 10% and Davidoff about 3% to 4%. In addition, a host of lesser-known, cheap brands, such as German-produced Three Stars – which sell at LL1,000 a pack – have made small but meaningful inroads. The solution? Cut off the supply of oxygen. “If you stop advertising, these people are going to reap the benefits,” concurred Joe Ayache, associate managing director of ad agency Impact BBDO.

However, even before there was talk of a tobacco advertising ban, industry leaders had begun to move into below-the-line activity to prop up their declining market shares. A few years ago, Philip Morris – which owns Marlboro – was spending less than 50% of its advertising budget below-the-line. That figure has since risen to more than 80%. Things are no different at British American Tobacco (BAT), another leading tobacco company with brands in the Lebanese market. “We are focusing our efforts on the point-of-purchase,” acknowledged Zeid Nadhim, BAT regional manager. He said BAT’s above-the-line ad expenditure had plummeted from about 75% a few years ago to less than 5% today.

“Tobacco advertisers have been affected by the economic situation and they don’t care about the reputation of the brand. This is why media advertising has dropped so drastically,” said Mounir Torbay, secretary-general of the World Federation of Advertisers’ Lebanon chapter. “They need the ‘push’ and not the ‘pull.’ They want people to buy more, to switch from one brand to another. This is very difficult to do through media advertising.”

Marketing executives of Lebanon’s the ‘big three’ insist they favor regulation for moral reasons. “The shift towards below-the-line advertising and our voluntary abstention from television advertising is definitely not driven by business reasons,” stated Elie Moukarzel, area manager for Kettaneh, which represents the marketing interests in Lebanon of leading cigarette manufacturers Philip Morris. “It is purely responsible marketing.” Continued below-the-line as well as various kinds of above-the-line advertising are not at odds with the ‘responsible marketing’ mantra. “We support restrictions on tobacco advertising but we don’t support a total ban. We believe below-the-line advertising should be preserved because this is where you can limit communication to adult smokers who have gone in to make their choice of brand,” said Bechara Baroudi of Marlboro Lebanon. Nadhim, however, believes that tobacco advertising should be permitted in various publications without a significant young readership.

But tobacco companies’ efforts to ruthlessly milk media advertising before any demise, and their determination to block the prohibition of almost all below-the-line, and some above-the-line advertising lend fuel to the suggestion that the ‘responsible marketing’ slogan, in Lebanon at least, is a façade.

“The people who are saying we should delay this, or never do it, are people who are trying to protect industries and their interests,” said Ghattas Khoury, a member of the parliamentary health committee seeking to implement a ban.

Industry efforts to delay and condition a ban are apparent in a May 9 Philip Morris document obtained by EXECUTIVE, entitled COMMENTS ON THE LAW PROPOSAL SEEKING TO BAN TOBACCO ADVERTISING IN ALL MEDIA IN LEBANON. The document says any law prohibiting tobacco advertising should contain a number of exceptions, including: · “Advertising in any publication that has at least 75% of its readership over 18 years of age.

· Outdoor advertising that is not closer than 100 meters from any point of the perimeter of a school attended by minors or in close proximity to playgrounds or other facilities frequented particularly by minors.

· Advertising in cinemas, when at least 75% of the audience is over 18 years of age.

· Communications to consumers at points-of-sale tobacco products.

· Tobacco product sponsorship until December 1, 2006.”

If implemented, these suggestions would conveniently ensure that companies like Philip Morris retain the means to market their products, while depriving emerging competition of their most important brand-building platform: television.

Khoury, who favors a total above- and below-the-line ban, is finding his position untenable. His foes include advertisers, advertising agencies, and MPs from South Lebanon’s tobacco farming heartland.

Some tobacco giants, ad agencies and advertisers argue that a complete, immediate ban is unsustainable for economic reasons. “If you deprive our ailing advertising industry of tobacco advertising expenditure, it will be a blow for an industry that is already struggling to survive,” said Torbay.

But Khoury said this was just a cynical business ploy. “They have played a very intelligent game here,” he said. “They are hammering us with the idea that we are kicking people out of jobs. But in fact they are motivated only by increasing sales,” he said. A current tobacco advertising ban draft law appears to accommodate the interests and views of Khoury’s foes. It does not call for an immediate or total ban, although above-the-line advertising would be completely banned as of January 1, 2006, as would the distribution of free promotional gifts. Below-the-line sponsorship of sports and cultural events would be prohibited starting from January 1, 2008 (allowing Marlboro to sponsor another three Lebanon rallies), while most other forms of below-the-line advertising would be tolerated.

Asked if it was likely that all below-the-line advertising would be banned in the near future, Torbay chuckled: “I don’t think that is a clear and present danger.” (BOX)

While alcohol does not face a ban on above-the-line advertising, distributors are under a different type of pressure. Hit by the current recession, they have been forced to cut costs and are shifting ad spend below-the-line, despite the potential harm this does to long-term brand image. “There has been a real shift towards promotional advertising,” acknowledged Carlo Vincenti, of Bacardi Breezer and Johnnie Walker distributors G. Vincenti & Sons. “This reflects the economic climate. The consumer no longer wants just his favorite brand. He wants it with a special offer. And for us, it is less expensive than any main media campaign.” Vincenti said his company’s below-the-line spend had risen from less than 15% a few years ago to 35%.

As a product of the depressed advertising market, there has also been a move within above-the-line alcohol and tobacco ad spending from television to outdoor, such as billboards – which are fashionable, easier to create and, most importantly, cheaper. The emergence over the last few years of competition-enhancing ready-to-drink (RTD) beverages, such as Bacardi Breezer and Smirnoff Ice, has increased overall alcohol ad spend in Lebanon but has also contributed to the rush to below-the-line spending. Smirnoff Ice and Bacardi Breezer control over 85% of the RTD market share.

“The market is growing and consumption of whisky is down because of the economic crisis,” said Hadi Kahhale, business manager at Fattal, which distributes Dewar’s, Jack Daniel’s, Absolut Vodka, Bombay Sapphire, and Kefraya (in which it has a share). “There is pressure on us to increase volume of sales, and one safe way to increase volume is through promotions.” The lion’s share of alcohol ad spend is now being funneled into in-store, point-of-sale activity, promotion and sponsorship by zealous marketing directors. Supermarket shelves are stacked with alcohol-related ‘special offers.’ “There has been a lot of sales pressure on the marketers, who cannot compromise on price. So they had to undertake promotions,” said Ayache.

The transferal of alcohol advertising spend to below the line has been hastened by intense inter-brand wars, particularly over whisky, which accounts for over 85% of spirits imports into Lebanon and 45% to 50% of spirits sales in the country. Over the last few years, above-the-line ad spend on whisky has decreased by more than 60%, from more than $10 million in 2001 to $4 million today. The battle is most passionate between Dewar’s – distributed by Fattal – and Johnny Walker – distributed by Diageo. Dropping whisky consumption rates have raised the stakes in the fight for market share. Between them, Johnnie Walker, Dewar’s, and William Lawson (distributed by Fattal) control over 80% of the whisky market share. Fattal has just spent $500,000 re-launching Dewar’s.

The below-the-line alcohol brand war is being fought primarily at “off-trade” locations, such as supermarkets, groceries and mini-markets, which account for 95% of sales, and 70% of below-the-line spend at Vincenti & Sons. The rest goes to “on-trade” locations such as hotel bars, restaurants and nightclubs.

Alcohol distributors say that although they know the practice is bad for long-term brand image they are compelled to follow a trend no one admits to initiating, but all blame on the changing demands of consumers financially sensitized by the country’s economic woes and the need to protect their revenues and market shares. “You have to observe what’s being done and you have to be a part of it,” said Vincenti. “It’s a vicious circle. Everyone’s doing it, so you have to do it.” He acknowledged that below-the-line spend should not exceed 20% over a year, although his company’s currently stands at 35%. The trend towards below-the-line alcohol and tobacco ad spending is mirrored in the advertising industry as a whole. In four years, total above-the-line advertising spend in Lebanon has dropped by almost 50%, from around $130 million. Alcohol- and tobacco-related advertising used to account for between 20% and 30% of total spend. It is now less than 10% – of which two thirds can be attributed to alcohol, and one third to tobacco.

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Business

Broadening horizons

by Anthony Mills
written by Anthony Mills

Banque Nationale de Paris Intercontinentale (BNPI), an offshoot of France’s BNP Paribas, is celebrating its 60th year in Lebanon, an indication that the bank remains confident of the Beirut market. Based on the niche market the bank has already carved for itself and its plans for regional growth, it is clear that the decision to maintain its presence here is also a well-planned, strategic move. “It is important for us, as an international bank, to be in Lebanon, not only because it is the link to Europe, but also because it is the key to developing our regional business in the Middle East,” said Claude Rufin, BNPI Beirut director-general.

BNPI has regional expansion plans that evoke an echo of the bank’s past. After establishing itself in Lebanon in 1944, BNPI moved into Syria in 1945, Egypt in 1948, and Iraq in 1954. Because of regional turmoil, it was subsequently forced to pull out of all but Lebanon. And recent unrest has proved a core problem in enticing French corporate clients to set up shop in Lebanon. “We are trying to bring them here, to convince them that life is good here, and that you can do business here,” he said.

The bank has already reestablished itself in Egypt, and has opened branches in the Gulf – including Dubai, Bahrain, Qatar and Abu Dhabi – and has just received a license to operate in Saudi Arabia, where it plans to establish an outlet “within a few months.” BNPI has also asked for a license in Kuwait, which is expected by the end of the year.

Saudi Arabia’s attractive GDP was, Rufin acknowledged, a major element in the bank’s decision to move into the kingdom, despite a recent spurt of al-Qaeda insurgency. BNPI will be seeking to diversify its activities in Saudi Arabia, from corporate and investment banking, to dealing room and swap operations, and most significantly, private banking. “After all,” Rufin observed, “there are significant private fortunes in the country.” Rufin said BNPI plans to return to Syria and Iraq – at some stage – and to open a branch in Jordan as well. But a recent law in Syria allowing for 49% foreign ownership of a bank does not satisfy BNPI. It will only invest in Syria if it is allowed majority ownership, despite the allure of Syria’s retail banking potential.

As well as regional expansion, BNPI is also planning growth within Lebanon. The bank’s leading international status – BNP Paribas is the world’s fifth largest bank – and 100% French ownership have helped it lure in, and retain, both corporate and private customers – notably among the worldly Lebanese – who see BNPI as a confidence-inspiring international financial bastion tinged with a Lebanese hue. “They can do business with us in Beijing, Sydney, or New York,” noted Rufin. The bank has five branches in Lebanon and employs 215 staff.

Rufin conceded that BNPI had seen business wane in Lebanon over the years. Back in the 1950s and 60s it presided over one of the biggest market shares in the country.

“Our strategy is not to chase market share,” explained Rufin. “We focus on winning over top corporate clients and high net-worth individuals. We serve fewer clients, but they are top-notch, and interested in what an international bank has to offer.” Although not in pursuit of market share, the bank makes sure it maintains a solid balance sheet marked by a high profit ratio. It has a return on average equity of around 50% and a cost-to-income ration of below 50%. The main raison d’étre of BNPI, Rufin said, is the provision of economical loans to the private sector, which is reflected in the bank’s loans-to-deposits ratio of above 50%.

According to Rufin, the pillars of BNPI’s continued high profitability have evolved over time. The bank has always concentrated on corporate investment banking, with a focus on corporate clients turning over more than $10 million a year. In this context, a variety of offers, including business collateral and short- and medium-term facilities, are provided. The bank has also added a strong emphasis on the financing of international trade in the last few years. With a view to Lebanon’s strong import-export tradition, which has been bolstered by perceived business opportunities in Iraq, BNP Paribas established a new “trade center” in Beirut. Offering banking services with a trade focus, it is one of 80 such centers around the globe whose interconnectivity facilitates international trade. In addition to its corporate banking strength, BNPI has turned increased attention towards private banking, offering clients high-return products. Certain accounts offer returns of 3% to 5% on the dollar. Other products, all capital guaranteed, provide higher returns of between 6% and 10%, but over a longer time frame. “These are for clients who are a little more sophisticated,” observed Rufin. BNPI tailored products developed by its parent institution to the needs of the Lebanese market and opened a private banking center in Beirut one-and-a-half years ago in support of its activities. This center is electronically connected to all BNP Paribas private banking establishments in Europe. BNPI is also attempting to develop its retail banking business. To this end, the bank has overhauled all its branches in Lebanon, to homogenize them with modern branches in Paris, Honk Kong or New York. Emphasis is being placed on customer care. The bank is also developing services in conjunction with insurance providers. “With our international backup we should be able to offer the kinds of products that will attract clients, such as loans that were not offered before, especially as the Lebanese real estate market is thriving. We will try to be much closer not just to the companies or very wealthy clients but to more medium-range customers interested in banking with an international bank.” BNPI’s continuing expansion and growth plans in the country may seem surprising considering the recent decisions by foreign banks to reduce their exposure to Lebanon or pull out altogether. But Credit Agricole’s recent move to slash its ownership of Banque Libano-Francaise and ABN Amro’s withdrawal from Lebanon in 2002, did not cast a shadow over BNPI’s resolve to maintain its presence here. “We do not plan to leave Lebanon, because 1) we know the market, 2) we know the clients, 3) we remain profitable – which is crucial, 4) Lebanon is a country that can develop financially and economically, in a regional context, creating synergy with our other branches in the region,” said Rufin, adding that the bank had also created customer loyalty by providing uninterrupted service during the war.

According to Rufin, the country’s historic commitment to banking, dynamic economy and a resurgent real estate market was cause for optimism, as was the increase in international conferences being held here and tourists visiting Lebanon. “One gets the impression that, little by little, Lebanon is reacquiring a regional role. Its efficient service sector is a big help. There is word of a 3% to 4% increase in GDP this year. It’s a start.”

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Real Estate

Beirut’s sore thumb is 30

by Peter Speetjens
written by Peter Speetjens

Thirty years ago, the Murr Tower was a metaphor for promise-filled Lebanon. The brothers’ dream was to build, through their construction company La Liberal, Beirut’s first mixed use development, symbolizing the capital’s position as the region’s leading business and banking hub. The 40-storey giant was to host 34 floors of some 300m2 offices, 2,500 m2 of shopping space and a restaurant on top, which could be reached by an exterior panoramic elevator or helicopter. The building’s four underground floors were reserved for a 500-seat-cinema and 600 parking places. The total cost of Murr Tower, including the price of land, amounted to some $15 million.

“I was against the whole design from the start,” says Gabriel Murr, sitting in his offices in the old MTV building. “I favored a wider, 20-storey building,” he added. “I thought the [300m2] offices were too small for foreign companies, the vertical circulation was insufficient and there was not enough parking. My brother [ex-interior minister, Michel Murr] preferred a high-rise. He was La Liberal’s majority shareholder and so he had the final say.”

The tower’s foundations were laid in late 1974 and construction started just before the outbreak of the civil war in April 1975. “We worked according to the “slid and slide” method, which allowed us to build about one floor or three meters a day,” said Murr. “When the war started, 28 of the 40 floors planned had been completed.”

Despite the fighting during the initial years of the war, La Liberal managed to finish the building’s main structure and the Murr brothers remained optimistic that their vision would see the light.

Even in the spring of 1977, Michel Murr estimated in an interview with AN NAHAR that the damage to the building was as little as LL100,000 [then roughly $230,000], and said: “If the situation continues to improve, construction will be over in a year’s time.”

It was not to be. When heavy fighting erupted again, construction was indefinitely halted in February 1978 and the Murr Tower became a feared sniper’s nest with an arc of fire of some two kilometers.

In 1994, Solidere bought Murr Tower, and earmarked it as one of the pillars of its master plan to renovate and reconstruct the Beirut Central District (BCD). “Solidere offered $12 million worth of Solidere shares for the building,” said Gabriel Murr, “after which Hariri paid my brother another $3 million in cash.” Since then, Michel Murr has publicly claimed the building is still his. Gabriel Murr said this has more to do with the performance of Solidere shares (which dropped from a high of $14 in 1998 to a low of $4 in 2002. Today, they have rallied and current shares are valued at around $7) than anything else. Both brothers expected to make a killing, but, Gabriel Murr, sold before the bottom dropped out of them. His brother held on as the price plummeted. Having bought the Murr Tower, Solidere had two options: to finish the building or to demolish it and start from scratch. Civil engineer Fadi Madhoun, the former manager of Solidere’s Real Estate Development Division, was responsible for the building. “If finished in 1975,” said Madhoun, who left Solidere in 1999 for An Nasser Engineering Services, “Murr Tower would have had a ‘wow’ effect. But when we bought it in 1994, it absolutely did not.” Furthermore, Madhoun cited a 1975 study by French firm Socotec that showed that Murr Tower suffered from a stability problem and required strengthening with two seven-meter-long concrete beams. “In my opinion, the Murr family should be very happy with the price it received, because the design was outdated and construction had several structural problems,” he added. “In 1994,” Madhoun continued, “it would have cost Solidere some $16 million to complete the building. Yet it was not a viable option to put it on the market. At that point, I would say the wisest, most logical and most economic solution was to demolish the building. However, from a political point of view that was not an option.”

An alternative had to be found and the call went out for solutions. Renowned British architect Norman Foster suggested to keep Murr Tower as a core embodied in a shell-like structure, thereby enlarging floor space up to 1,000 m2. The spectacular glass building was to have a curved roof and a dozen high-speed exterior elevators. But Foster refused to work within Solidere’s budget, so in came Canadian firm WZMH, with a worldwide reputation for high rises. The concept remained the same: to keep the old Murr Tower as a backbone in a predominantly glass tower. The only design change was to include interior, as opposed to exterior, elevators. Dubbed the Beirut Trade Center (BTC), an officially registered trademark, the new $200 million tower was to be 40 floors high, increasing from 100 meters in height to 150 meters. The twenty-four floors of office space would be enlarged by a meter or so, there would be a double floored roof top restaurant and covered 70,000 m2 of BUA, of which 30,000 would be underground. According to a 1996 brochure announcing the project: “The existing Murr Tower has been a symbol of the Lebanese war…. The BTC will be a landmark development emphasizing a visual symbol for new Beirut and expressing the rebirth of the city as an international and commercial center.” And so, for years, a 30-meter-long poster hung on Murr Tower, visually announcing the project. According to Madhoun it was “the second largest poster in the world.” However, after years of stormy weather, the poster withered away and, it seems, so did the development plan for the concrete monstrosity.

“We had all the necessary permits,” Madhoun said. “We even obtained an adjustment on the permit to implode Murr Tower and construct a completely new inner frame. In 1998, we were on the verge of starting construction, but then the elections took place.”

The new Hoss government embarked on a campaign to curb public spending and nearly all Solidere projects were put on hold. Since 1998, nothing has changed and it’s not clear what the future will bring. According to Solidere spokesman Nabil Rached, there is no need to comment on Murr Tower “as there’s nothing new to say.” One of the main obstacles in completing Murr Tower is the myriad of problems facing Solidere. According to one source within the company, even if the funds were available, the original permits were valid for only a limited period and the bureaucratic procedures would have to start all over again if the project were pursued anew – and there just isn’t the demand for the size of offices offered. “The BTC design is still up-to-date,” said Madhoun, “while only a few office blocks in downtown are up to international standard, such as the Atrium, An Nahar and ESCWA building. The problem is demand. In 1998, we had a guarantee that the Banque Societe General would take 10 floors, while Solidere would move its headquarters there. Today, I don’t know if there are any clients. Maybe Solidere should consider residential use.”

Gabriel Murr, however, can’t wait till the day Murr Tower is demolished. “As an engineer I’d say destroy it. It’s easy, cheap and gives you the freedom to create something new.” Adding with a smile: “MTV bought the exclusive rights on the implosion.” Local real estate consultant Michael Dunn has a crystal clear opinion about the future of Murr Tower. “It’s old, outdated, ugly, and it has a negative impact on its direct surroundings,” he said. “It’s no longer a prime location either. It’s in fact located in the worst of four Solidere corners. I’d say demolish it.” According to Dunn, imploding the building and getting rid of the debris costs some $100,000 and will take up to six months. And what then? “In Lebanon, too many people dream of the past,” said Murr. “The past is over – Beirut is not Dubai. I say demolish it, turn it into a park and upgrade all surrounding properties.” A 1975 brochure praising the state-of-the-art design of the building emphasized the tower would, as well as having “an international telephone center and telex standard [sic],” be equipped with, “an electronically working lift to avoid any delays.” Thirty years is a long time to wait.

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The Buzz

Winning formula

by Alain Khouri
written by Alain Khouri

Four years ago, we wrote a document that addressed the future of the regional advertising industry. Our objective was to analyze the evolution of our business worldwide, to understand the international trends influencing marketing-communication and to project the relevance of those trends on our own markets. Once our strategy was established, we worked against the clock to ensure that we would be in the most favorable position moving forward.

The adverting industry has changed a lot and is still changing. Some aspects of the agency’s work are now carried out externally. When I started in advertising, the agency was known to be “the marketing arm” of the client. Gradually, a sizeable portion of the marketing role of the agency moved to the client. Equally, the agency had historically been responsible for the client’s media needs. With the advent of media independents (MBU’s), that role too moved out of the agency’s direct sphere of management. While from the outside, one could have the impression that we are going through a phase of disintegration of communication disciplines, the truth is quite the opposite. More than ever, clients expect their agencies to consolidate, or better – to integrate – all aspects of their brand’s communication, whether this is done within the same communication organization or through several specialists. The agency is increasingly becoming the consultant working with specialists. In other words, we are becoming a conductor working with freelance musicians. The orchestra may not necessarily be the same on each assignment, but the best musicians are hired to provide the best performance. Luckily, we regularly get “encores.” To achieve this end, we have to develop people with “procrealligence” as a built-in attitude in them – someone who can naturally project the three integral values: pro-activity, creativity and intelligence. We didn’t just pull the three words – pro-activity, creativity and intelligence – out of a hat. They were the result of extensive research and brainstorming. We asked ourselves what our clients truly want and realized how much these three words count in our daily professional lives. And on that basis, we developed “procrealligence” as our credo, our working method and the indispensable qualifier we – our people and our work – will reflect. You must remember that in the ad business, our aim is to deliver one message, a powerful single-minded idea – not two or three or four. For us, less is more. A single word capable of encapsulating all what we stand for did not exist. So, we created it: “procrealligence.” It may be difficult to pronounce, but it is ours and only ours. And we do not mind a bit of controversy as long as it is meant to improve our output and ourselves.

You may ask, is it the responsibility of the corporate world to instill this (procrealligence) culture in our people? Surely the family, school or civil society must play a role. Then you might ask, can people be shaped to adopt this philosophy? My answer is that there are people who can do this quite naturally, others who can be trained to adopt it and those who simply can’t endorse it. Ultimately, those in the last group will probably feel more comfortable elsewhere. As for those in the second category, we are committed to do everything to instill procrealligence in them. Obviously, those who are naturally procrealligent will find the most suitable environment in Impact/BBDO. If they are already with us, we’ll make sure they stay. If they’re elsewhere, we’d like to meet them.

I tell our people: you have to adopt procrealligence fast if you want to be part of us. I am very frank – our organization is now totally guided by this philosophy. The essence of our business is people – and at Impact/BBDO there can only be procrealligent people.

This vitality (or pro-activity) seems to be lacking in modern Middle East corporate culture; we hear it from clients all the time. People like to play it safe. They want all the advantages of the corporate world, but won’t take any risk when they need to. Pro-activity is the essence of the most successful companies and the lack of it is often the kiss of death for others. Examples of dinosaur-corporations abound. Ultimately, they run out of fuel.

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The Buzz

Building for future generations

by Tommy Weir
written by Tommy Weir

Globally, by the year 2010, family business owners ready to retire and pass the baton will transfer an estimated $8 trillion of wealth to the next generation. These businesses are the backbone of the world economies. Believe it or not, in the United States alone, family businesses constitute 90% of the more than 15 million businesses. Slightly over one-third of the Fortune 500 companies are family controlled. Family business is an even greater reality here in Lebanon and throughout the Middle East. Think about this for a moment, “In the Middle East not only do we have family run businesses, we have family run countries.” The family plays a critical role in running our lives and businesses.

Listen closely and we often hear business owners’ comment, “I started this firm to gain freedom and security not available elsewhere. The success I have had is something I would like to pass on to my children. I hope they come into the firm, but they must have the patience to learn the business before they take over.” Unfortunately this is not the key to the future of running a family-owned enterprise. Change is happening rapidly.

Changing Nature

Tom Peters in his seminal book, In Search of Excellence stated the following, “I know that the future does not belong to the companies I grew up with, the elephants that used to rule the world and that I used to serve.” It now belongs to the family business and even that sphere is changing. No longer are we speaking simply of our father’s shop. Family business is transforming into a worldwide enterprise.

What are the main forces of change? Globalization, generational business succession, and growth.

Conflict between family values and business needs is part and parcel of a growing company’s often painful maturation. As the first generation of entrepreneurs mature, their adult children are coming to work for them or moving into more responsible positions in the family business. So tensions are inevitable. In actuality, less than three out of ten family businesses succeed till the second generation. One in ten family businesses survives till the third generation. Lebanon has traditionally been successful in this domain, with many local businesses tracing their ancestry back more than two generations. Currently, 75% of the local businesses are run by the second generation.

In the very first stage of life, the family business started by the founder, must find competent employees and he or she must set the stage for a value and belief system which will prevail throughout the life of the company. The company at this stage fights to survive and eventually move to the second stage, growth. Beyond survival, the founder must think of competition and strategies. Once expanded, management functions tend to become paramount, delegating, organizing, staffing, sharing power, training family and non-family employees are some of the necessary functions that must be executed.

Succeeding through the Changes

Family businesses are viewed as enterprises that look backward with pride and forward with hope. For the hope to become a reality, the leaders of today’s family businesses must learn how to adapt to a competitive business environment, which is dominated by powerful multi-national corporations.

To find out what family businesses can do to ensure that they keep going – and growing – let’s look at what some of the top family business experts have to say. They all concede that addressing family business issues can be difficult, but insist it’s worth the effort if your company goal is strength and longevity. But, keep in mind that there are no easy answers; specific strategies and solutions will depend on your particular situation. The recommendations that follow are designed to help you get started.

Establish clear criteria for joining the family business

Experts say that sharing your last name with people isn’t the best reason for inviting them into your business. Qualifications, including education, skills and related work experience, should be weighed more heavily than family ties. That may mean throwing out old stereotypes about roles and relationships. You must recognize when a daughter might be more qualified than a son, a younger child more adept than an older child, or a son-in-law a better choice than a close blood relative. Also, make clear to those family members who own stock, but who do not work in the family business how much (or how little) that ownership entitles them to take part in the affairs of the company.

Define the roles and responsibilities of family members who work in the business

As soon as family members agree to come into the business, the next step is to clearly define their roles and responsibilities. Exactly what work is expected of them? To whom will they report? How will they be evaluated and promoted? Also, be sure to pay family members fairly. Some experts suggest that you base salaries and benefits on what a person would earn in a comparable position at a comparable company. Others suggest that you tie compensation to a person’s value to the company.

Adding family members, or involving them in different areas of the business, can create unexpected changes. For example, your son’s aggressive marketing plan might help increase sales, but it will also require a larger budget. Founders should be prepared for both the positive and negative impacts of new blood in the company. “The next generation should help move the business to the next level.”

Define the roles and responsibilities for non-family members who work in the business

Most family-owned firms also hire non-family workers. In fact, attracting and retaining qualified non-family employees is a key concern for many family companies. How do you ensure that non-family workers feel valued and reduce the perception of nepotism? The answer, say the experts, is to treat them fairly. They hasten to add, however, that fair is not always equal. For example, founders usually want to reserve certain executive-level positions in the company for family members.

No matter who they bring on board, families really don’t want to give up any power in the business. That’s why it is crucial to clearly define everyone’s responsibilities and range of authority.

Separate family and business issues

Many problems in family-owned businesses stem from the fact that families and businesses are separate systems that have different, often competing, needs and goals. Whereas the primary function of a family is to nurture relationships and raise children, the primary function of a business is to increase production and generate profits. The overlap of these systems creates confusion.

Choose and train a successor

Deciding who will eventually take over management of your company is the first part of a two-part process called ‘succession planning.’ It’s one of the most difficult issues you will face. “The problem is you’re talking to me about being gone.” You may worry about relinquishing control of one “baby” (your business) to another “baby” (your child or children). Effective succession planning should anticipate these concerns and include opportunities for the founder to train and mentor the successor, and for the successor to assume significant responsibilities in the business. To succeed in transferring the business to their offspring, family business managers must be ready to adjust the organization to the skills, perspectives, and values of the next generation as part of the implementation of strategy. The successful integration of new family members is a goal that for many family enterprises is as important as profit targets, business niches, and other determinants of the firm’s business policy. Incorporating new family members into the firm, however, is often complicated by a blurring of boundaries between the family and the family business.

Seek help from qualified outsiders

Most family-owned firms keep family and family business matters private. Company founders rarely ask for help from outsiders, other than their lawyers and accountants. Consultants, who are trained to consider both family and business issues, are another good resource. Their job is to coordinate the efforts of a team of experts that may include your attorney, investment adviser, and even your banker.

Growth planning

No growth-oriented company should be without performance planning, coaching and counseling, annual evaluations, career development and reward and incentive programs in place.

Planning for the integration of the younger generation into the family firm is an issue of strategic importance, although offering challenges and finding a place for younger family members, or adjusting the organization to the new generation’s inputs and demands are issues not usually included as goals for sound business planning.

Many owner entrepreneurs produce and sell products or services with relative ease but lack the skills to pursue a long-term growth plan. An older generation that takes pride in “teaching the kids the business” in effect may be training them to do what no longer works. To help family-run companies overcome this myopia and figure out ways to move forward, they need strategic and operations planning.

Leadership/management

Entrepreneurs build companies without blueprints, and it shows. Solid plans and capable personnel accomplish little without the inspiration of effective leadership, or management, at all levels. Good leadership breeds understanding, confidence and motivation, and it assures equitable treatment for all, including employee managers or skilled technicians who may be key elements of a company’s success.

Global perspective

Survival in the 21st century means adopting new technology and adjusting to continual change. The evolution of a global marketplace has shortened product life cycles, revolutionized marketing and distribution, and eliminated traditional functions and organizations. Private businesses, especially family-owned ones, have to adjust to these and other worldwide developments. Businesses that stick to what worked for Dad or Granddad and maintain the status quo may be headed toward an early demise. Today’s family businesses can no longer rely only on “father knows best.” It is time to accept outside input and advice from your children if you are to succeed in the 21st Century.


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

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Economics & Policy

Pushing for consolidation

by Nicolas Photiades
written by Nicolas Photiades

The Banque du Liban (BDL), through its Banking Control Commission (BCC) has so far done a good job in ensuring that the Lebanese banking sector remains stable and sound, proving to be an able, proactive regulator that has come to the rescue and support of the banking sector whenever needed.

For the record, the BCC’s main responsibility is that of supervising domestic commercial banks, branches of foreign banks, foreign representative offices of banks, and financial institutions and brokerage firms in Lebanon. By making sure that the institutions implement the relevant articles of the Code of Money and Commerce (CMC), the BCC has the capacity to make a judgment and recommend whether particular institutions need rescuing, restructuring or even consolidation. The latter is a process that began in July 1997 when Banque Audi broke the deadlock and bought Crédit Commercial du Moyen Orient. In the same year Byblos Bank bought Banque Beyrouth pour le Commerce.

The BDL and the BCC have always been keen for the Lebanese banking sector to contract down to an optimum size (a total exceeding 83 banks in the mid 1990s for a small size country such as Lebanon was clearly too much). It is estimated that around 65% of the banks in Lebanon have total assets not exceeding $500 million individually, while the ten largest banks in the country control around 70% of the sector’s total assets, roughly $50 billion. Since the first merger/acquisitions, many other deals, some out of sound economic judgment, others out of necessity, followed. Inaash Bank, Universal Bank and Bank Al-Madina, had reached a point where a rescue was needed.

In such situations, the BDL stepped in, either as an administrator, hence taking over the management of the bank (e.g. the Banque Libanaise pour le Commerce case), or as an intermediate between a white knight (typically a larger and healthier bank, willing to expand its franchise further through external acquisitions) and the troubled bank in question. Such was the example of Inaash Bank, which was acquired by the Lebanese operation of Société Générale. The latter was provided with a “soft loan,” which assisted the acquisition funding, and was allowed a generous period for goodwill write-off.

It is worth noting however, that the BDL’s policy of granting soft loans to facilitate acquisitions of banks in difficulty has abated in recent years and, according to specialized bank analysts from international research institutes and securities firms, the generous policy of soft loans was said to encourage mediocrity and malpractice among the smaller banks, who felt they could sit back, safe in the knowledge that if things got sticky, the BDL come to the rescue with a plan that would not only preserve depositors and smoothly integrate the failed bank into a bigger and sounder group, but also save jobs that should not have existed in the first place.

The process of consolidation is being progressively more favored by BDL, as most of the country’s smaller banks are increasingly facing competition from their larger peers and are unable to invest in technology, human resources and product development. These banks are also barely capable of developing into niche players and will mostly not be ready for the forthcoming Basel II Capital Accord, which is due to be implemented world-wide in about three to five years’ time.

The Basel II Accord, which correlates capital with the underlying risk profile of the bank, is closely monitored by the BDL and the BCC, which have both shown concern as to the ability of certain banks to understand it, let alone implement it. Even the larger banks remain small by international standards and will inevitably look towards consolidation if their ambitions to become regional or international players, and to successfully implement Basel II.

BDL has so far facilitated the consolidation process with financial incentives (soft loans), and allowed larger banks to acquire and merge with smaller banks. BDL’s support in this policy has allowed the bigger banks to accelerate growth, extract more synergy savings, achieve higher economies of scale and leverage their non-financial resources. However, with the exception of the recent Audi-Saradar merger/acquisition, there has been no consolidation among the larger banks. This has so far not been particularly encouraged by the BDL, which still regards the elimination of smaller banks through systematic acquisition by larger ones, as a priority.

This policy has paid off. The total number of banks has been reduced from around 66 banks in 1999 to 54 banks at the end of 2002. However, the BDL should see the consolidation of the larger tier of domestic banks as a way to accelerate the consolidation process, as a larger and better equipped institution, such as the one resulting from the Audi-Saradar venture, should be in a better position to acquire the smaller banks, and hence reduce the total number of banking institutions in the country even further.

A rapid and strong consolidation momentum should produce a more efficient banking system, which would be more competitive on a regional basis, more aware of the latest international developments, and less vulnerable to external economic crises. Nevertheless, the BDL and the BCC should make it clear to the sector that a smaller number of large banks does not necessarily mean less credit risk, and that institutionalization should be the key for improved creditworthiness. The BDL is quite capable of handling a consolidation process, as it has the know-how, experience and tools to achieve and facilitate it, but it should step up its “education” campaigns in the themes of proper corporate governance, institutionalization and efficient banking management.

Meanwhile, any post-merger period is crucial for the BDL and the BCC, which have to make sure that the newly merged entity is capable of sustaining its market share, and there is compatibility of culture and management time allocated to the acquisition/merger. The “laissez-faire” attitude of the BDL should perhaps be tightened a little bit to include the continuous advisory of bank boards and executive management committees on how to conduct proper commercial and, in some cases, universal banking work.

The BCC has also encouraged the consolidation of foreign operations of some Lebanese banks (e.g. Audi, Byblos, Saradar, BLOM, etc.) with their domestic sister companies. Foreign branches or sister companies of local banks have been quite helpful in the past decade, as they have at one point been a safe haven in case of social unrest, and provided profits and assets in foreign currency. These foreign operations would also become an immediate destination for deposits fleeing Lebanon in the case a severe local economic crisis or geopolitical instability was to become too unbearable. In such an event, the outflow of funds from Lebanon would be minimized.

Elsewhere, larger Lebanese banks have to start thinking about acquiring or merging with foreign banks in other countries, whether regionally or in other geographical locations. The strengthening of a foreign presence, which would ultimately lead to overseas assets and profits overtaking domestic ones, would allow Lebanese banks to have not only an international outlook and image, but also to pierce the Lebanese sovereign constraint. The BDL therefore, should start developing new regulations that would facilitate such internationalization, by allowing the able banks to start participating in some cherry picked foreign markets. The recent rule, whereby local banks are to be allowed to invest, up to a certain extent of capital, in bonds issued by foreign entities, provided that these bonds are rated BBB- and above, is a step in the right direction.

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Business

Salvaging credibility

by Michael Young
written by Michael Young

In the annals of transparency and accountability, the Arab world (which is already weak at the knees when it comes to either standard) will probably not want to remember the scandal over the mistreatment of Iraqi prisoners at Abu Ghraib. That’s a pity, because despite the sordidness of the episode, it was, even for some Arab commentators, a democratic eye opener.

For all intents and purposes the prisoner scandal was entirely an American affair. It was first publicized by the television show 60 Minute II, it was propelled by two searing articles by investigative journalist Seymour Hersh of The New Yorker, and it became front-page fare in all American newspapers, large and small, for weeks. It shook the Bush administration to its very foundations, threatening the future of high officials, at a crucial time in an election year. If Iraqis one day must retain anything from the post-war situation in their country, it would preferably be the images of US officials apologizing for the mistreatment at Abu Ghreib – particularly the once untouchable Defense Secretary Donald Rumsfeld. Saudi columnist Mashari al-Zaydi, writing in the London-based Al-Sharq Al-Awsat, marveled at the “summoning of the defense secretary of the world’s greatest power, before the cameras, so that he could sit in a hot seat in the American congress and be criticized, scolded and held accountable.” One recalls, by way of sinister contrast, the story of how Saddam Hussein, upon hearing a junior officer’s criticism about the management of military affairs during the Iran-Iraq war, drew a pistol and shot him. And yet the officer, like Saddam’s hundreds of thousands of other victims, could never dent the dictator’s standing in Arab eyes, precisely because he made it a point never to apologize.

Much about the situation in Iraq suggests that if anything compels the US to leave the country, it will be the American penchant to let free minds speak. Indeed, the turning mood of the public in the United States, while nowhere near a “Vietnam moment” characterized by collective despair, is emerging as the greatest threat to the success of the democratization project in Iraq. As Middle East scholar Fouad Ajami recently wrote in the opinion page of the WALL STREET JOURNAL: “It is in Washington where the lines are breaking, and where the faith in the gains that coalition soldiers have secured in Iraq at such a terrible price appears to have cracked. We…are now ‘dumping stock,’ just as our fortunes in that hard land may be taking a turn for the better.”

Ajami went on to conclude: “We haven’t stilled Iraq’s furies, and our gains there have been made with heartbreaking losses. But in the midst of our anguish over Abu Ghraib, and in our eagerness to placate an Arab world that has managed to convince us of its rage over the scandal, we should stay true to what took us into Iraq, and to the gains that may yet be salvaged.”

There is distinct pessimism in that phrase, and a sense that the US is preparing to abandon ship at the worst possible time for everyone involved in Iraq. That would suggest that democratic states, for all their strengths, can take far less punishment than autocracies. Perhaps, but accountability and the benefits of free minds are also the only truly new things the US can offer the Iraqis, and the only weapons it can use effectively. Indeed, had the Coalition Provision Authority (CPA) only provided more of it, its credibility in Iraq might have been enhanced. Take for example a leaked March memorandum written by an unidentified CPA official and whose contents were published by the VILLAGE VOICE. The author of the memo mercilessly deconstructed American errors in Iraq, highlighting the scourge of post-war corruption. He wrote: “We need to use our prerogative as occupying power to signal that corruption will not be tolerated. We have the authority to remove ministers. To take action…would win us applause on the street…We do share culpability in the eyes of ordinary Iraqis. After all, we appointed the Governing Council members. Their corruption is our corruption.”

In many ways that’s a philosophy the US must enforce in Iraq, where the rule of law must be made to prevail, whether for the occupier or the occupied. As Ajami put it best: “We ought to give the Iraqis the best thing we can do now, reeling as we are under the impact of Abu Ghraib – give them the example of our courts and the transparency of our public life. What we should not be doing is to seek absolution in other Arab lands.”

That’s a moral no amount of car bombs or videotaped decapitations will be able to undermine, and it’s one that the Iraqis, so used to seeing American military power in their streets, will appreciate as its encouraging antithesis.

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Business

Reeling in the ladies

by Anthony Mills
written by Anthony Mills

Beirut is saturated with restaurants, but how many are owned by 17 women and two men? That is the story behind Pinocchio, the five-month old $140,000 Italian ‘Pizzeria-Trattoria’ in Ashrafieh. The 140-chair restaurant threw open its doors for business in January, and has since been consistently packed for lunch and dinner. So much so that by mid-may, majority shareholder Saad Kazan, claimed that he and his “angels” had recouped their initial investment. Come autumn, predicted Kazan, he will have doubled his money. By then, if Pinocchio is swallowed by the Beirut whale, he and his co-investors will move on to new pastures.

“Doubling your investment in six to seven months is fine by me,” he laughs. “It’s fine by any standards.”

Another option is to close for the summer, when the majority of those people who would normally eat out, head to the beach instead. According to Kazan, in order to keep the brand fresh it is better to shut down and open in late autumn than compete with the beach clubs and have empty tables.

Kazan explained that he initially exploited a gap in the market for a real, traditional pizzeria in Achrafieh. “We’re selling more than 200 covers a day – more than double what anyone expected, including our suppliers. Now every supplier in Lebanon is banging down my door. They wouldn’t give me the time of day a few months ago. Sweet revenge, eh?”

But it is Beirut’s army of ladies who, like the emperor at the Circus Maximus, will have the final say. According to Kazan, Beirut’s restaurant sector is fickle at the best of times. His challenge is to survive beyond the summer season. “The customers are blasé,” he noted. “Whatever you give them is fine for a short period of time, and then they move on. This is why we needed an edge.”

The edge is, in fact, the female investors’ social connections, which have helped generate business. “We are doing well because of these women,” Saad concedes. “We did a good thing to let them in here. They’ve been the driving force behind this restaurant.” On any given day, he said, 90% of customers at lunchtime, and 50%to 60% for dinner, are women and friends of my partners.”

Nonetheless, Kazan has factored in Beirut’s short restaurant life expectancy into his business strategy. “I was fully aware of the situation when we set up. That’s why we have low overheads and are aiming for a fast return. I know that things could easily go wrong after a few months, even with the success we are having now. Success wanes quickly here and we had to factor that in.” He and his wife hold a 25% stake in the business. Two other investors have 15% and 10% shares respectively. The remaining 50% are spread in small, chopped-up parts (either 2.5% or 5%) across the other shareholders. Of the 17 female investors, all are of what the founder called a “certain social standing and they bring in the business.”


The minimal cost, low-risk, quick buck strategy explains, as well, why the initial investment was spread across more than a dozen people. It would be “sheer madness” for one person alone to shoulder the financial burden in the anticipation of drawn-out success, said the founder. “I would never do it. Unfortunately some of my colleagues have. They’ve lost a lot of money.”
Pinocchio’s simply decorated wooden-focused interior cost $25,000 to fashion. A $4,000 to $5,000 landscaping job set up an outside garden terrace for the summer months. And monthly costs run at around 50% of revenues – which are over $125,000 a month.

Nice work if you can find it.

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Business

Feeling the pressure

by Michael Karam
written by Michael Karam

It all seemed to be going so well for Lebanese wine. Once the sole preserve of Musar, Ksara and Kefraya, the sector has, since the late 90s, seen the emergence of new wineries, producing exciting wines in eye-catching bottles. The UVL (Union Vinicole du Liban), established in 1997, showed it could function as a genuine association. It was serious about establishing a regulatory national wine institute and there was even a spirited initiative to sell Lebanon as a wine tourism destination. Its members even demonstrated rare ESPRIT DE CORPS by exhibiting on the same stand at the two major international wine fairs in London and Bordeaux in 2003. Lebanese wine was moving.

This momentum had been inspired by the knowledge that Lebanon was hosting the annual OIV (OFFICE INTERNATIONAL DE LA VIGNE ET DU VIN) congress in Beirut in June 2005. The event would enhance the country’s brand equity, strengthening its export potential and boosting its quality to price ratio. It would create a new image of Lebanon, one driven by wine and culture, rather than war and mayhem. Finally, UVL president, Serge Hochar, co-owner of Chateau Musar and for so long the darling of the wine world, the man who risked life and limb to make wine during the dark days of the war, would welcome the OIV to his country. It was to be a truly vintage year for Lebanese wine. And then, last month came the awkward admission from UVL members that the OIV had changed its mind. So far no official explanation has been given by the OIV for the seemingly sudden VOLTE-FACE and at the time of going to print, Frederico Castelluci, director general of the OIV has not replied to EXECUTIVE’s requests for clarification. “It is a huge loss to Lebanon,” said Charles Ghostine, managing director of Ksara, Lebanon’s biggest producer. “We have not yet received official notification; this will be sent to the Lebanese government. However, I do not hold much hope of the congress being held in Beirut next year.” Ghostine has more reason to be disappointed than most. In June of last year, he gave a speech at the OIV congress in Paris, in which he outlined Lebanon’s plans for 2005. “All 45 countries, including Israel, gave me a standing ovation,” he said. “We were meant to go to Vienna this summer to present our final itinerary. Then I get the call from Frederico Castelluci, telling me that there was a change of plan.”

Ghostine said Castelluci had told him that the reason for the change of venue stemmed from the organization’s doubt that Lebanon had the “technical ability” to manage some of the more scientific and linguistic aspects of the congress. “They need translators in five languages. This is not a problem. We can translate in six,” said Ghostine. Privately, wine producers believe pressure from the Israeli delegation was the main driving force behind the decision. “The OIV is a non-political body and therefore they cannot cite a non-political reason,” said one. “What can we do? We need them more than they need us.”

Ghostine’s frustration is evident when he talks of missed opportunities, especially in the export markets. “The recognition the congress would have bestowed upon us would have been priceless. To be honest we are still not fully established as a wine making force even though we have be doing it for 6,000 years,” he said. “The congress would have given up priceless exposure. Export markets are very important to us. Lebanon is exporting 40% of its wine.” UVL president, Serge Hochar was equally uncomfortable with the turn of events. “Until we have an official notification from the OIV, I prefer not to comment.” The demise of Beirut 2005 came as a surprise to many of those who had worked hard within the government to ensure it happened. “It’s the first I have heard of it,” said Basil Fuleihan, ex-economy minister and now the chairman of the Parliamentary Committee on Economic Affairs, Trade, Industry and Planning. “Quite frankly if it turns out to be true, it is very disappointing news for Lebanon and Lebanese wine.” While in office, Fuleihan lobbied hard for the congress and is a firm believer in the potential of the sector. “Lebanese wine needs to be supported. It is good for general prosperity; it’s good for exports and it’s good for the image of Lebanon.”

Teething problems

The news came at a time when the UVL has been experiencing delayed teething problems. In January, Massaya, one of the most energetic of the new generation of wine producers, resigned after it claimed the association was dragging its heels on an initiative to establish a wine marketing board and launch a national advertising campaign. A statement issued by Massaya, which had vigorously lobbied for the move, said that it was obvious that the interests of Massaya and the UVL were irreconcilable and that the winery had no option but to go it alone.

Elsewhere plans to establish a national wine institute (to be responsible for implementing the 2000 wine law and oversee and regulate all areas of grape growing and wine production) seem to be caught in a bureaucratic bottleneck. “We have prepared our draft constitution,” said Ghostine. “Now we are just waiting for government approval. We are confident our file is in order.” According to Hochar, its establishment is crucial to the evolutionary progress of the sector. Speaking in November of last year he announced: “We have joined the OIV and we have passed a wine law. Now we just need an institute to implement it,” he said. “We cannot move forward without it.” UVL members are energetic exhibition-goers, although last month only three producers – Musar, Ksara and Kefraya – made it to the London Wine Fair. The energy of 2003 appears to have waned. “The reason we all went to London last year was that we got money from the EU,” explained Massaya’s Ramzi Ghosn. “All this needs intensive lobbying on behalf of the UVL and this in turn requires time and effort. Nothing will come of nothing.”

Still, Lebanon’s $26 million wine industry is essentially filled with promise. The good news is that exports have doubled in six years and producers continue to consolidate proven international markets, while seeking out new ones. Ksara alone has doubled its exports and is consolidating its position in the UK, a market pioneered by Chateau Musar in the 70s and one that also proved successful for Kefraya, Massaya and Clos St Thomas. The future

The good news is there is room for further growth. “There is huge potential. Any collaboration with the wine growers has been done with the best interests of the sector at heart. I have not sensed any official reluctance,” said Fuleihan, stressing the government’s faith in the industry. “All the grievances have been addressed such as tariffs and taxation. Yes, the government has not yet developed a viable agro or industrial strategy but we cannot satisfy the entire spectrum of demands because of the existing financial constraint.”

What is certain is that the land is there for further planting, although many within the industry prefer to exercise caution. “We just cannot plant without a strategy,” said Paulette Chlela, Ksara’s Chef de Culture. “We have already seen grape prices drop by 10% in the last year because of a dip in demand.”

But the overriding belief is one of an opportunity that needs to be seized. “Wine is the only hope for the Bekaa,” believes Ghosn. “In some areas this reality is taking shape while in others it will take a bit more time. New grape plantations have changed the lives of many of the Bekaa’s struggling farmers, who have been forced to grow illegal hashish and opium, or produce that was severely undercut by those from neighboring countries. The landscape of many towns is changing as the demand for good TERROIR increases.”

Ghosn also believes that to best demonstrate the value-added Lebanon has to offer the wine world, more producers should improve viticulture methods, moving away from high to lower, more concentrated yields and use better quality grapes. “To do this, there will have to be significant replanting or restructuring of existing vineyards, the adoption of more up-to-date working methods, and new vineyards. This will mean further exploration of Lebanon’s different regions and TERROIR, including a formal study of the various soil types and viticultural potential.” However, as the sector grows, the incidence of malpractice will undoubtedly increase. The UVL must snuff out those producers tempted to push the ethical envelope and clamp down on the importation of foreign wine in bulk quantities, over-harvesting, medal sticker abuse, diluting and misrepresentation. “It has already started,” shrugged Dargham Touma, owner of the Heritage winery, alluding the increasing number of Syrian-made “Lebanese” wines that are reportedly finding their way into Lebanese and North African restaurants in France. The national institute cannot come soon enough.

Nor can a national marketing campaign, one that would emphasize the quality of Lebanese wine as well as educating the drinker on the health benefits of drinking and stress the economic importance of buying Lebanese. Already, the wines are facing an epic struggle in an evolved and viciously competitive drinks sector. “Whisky and Vodka are king,” exclaimed Touma. “External budgets are dictating consumer budgets. They are telling people what to drink and what not to drink.” Given many of the mediocre brands that are being pushed in the local market, it is sad that many of Lebanon’s best wines are unknown to local drinkers, who in a misguided exercise in snobbery often perceive foreign wines as better. Oz Clarke, the English wine guru has rated Clos St Thomas’ “Chateau” as “stunning”, while only last month Jancis Robinson, arguably an even bigger hitter than Clarke, raved about Massaya at a tasting in London.

Tell that to the OIV.
 

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