Society

Vital cover

by Executive Staff
written by Executive Staff

April 2003 saw ACAL succeed in reaching a viable framework for the implementation of the 1972 law governing compulsory third party car insurance covering bodily damage. Although some may argue that the early period of implementation may not have been as smooth as one may have hoped for, it did not take long to appreciate that the scenario whereby uninsured bodily injuries and/or deaths arising out of motor accidents have been eliminated. Most importantly, the “hit-and-run” culture has also been significantly reduced as those involved in accidents are less likely to flee the scene of an accident and more likely to help those injured.

The subject of extending this policy to include third party material damage is under review and may be implemented in the near future. No more will we hear stories from friends and acquaintances about how they have had accidents with cars that could not afford to offer indemnification. Statistics have proven that many accidents happen in the work place, especially construction sites. Another observation was that the low-income labor bracket has the highest exposure not only to minor injuries, but also to disabilities that can jeopardize their and their dependents welfare. Following fruitful discussions with the relevant authorities, providing proper insurance for workers has now become a prerequisite to obtaining a construction permit. Such insurance provides compensation for medical treatment (including hospitalization) and compensation following work related disabilities or deaths.

We all remember the tragic scenes of collapsed buildings and the consequences to the tenants. The government has now felt the need to promote safety standards for new buildings starting with early in the design phase. ACAL was actively involved in working with the official committee that took charge of studying this issue and the result included a recommendation to have various insurance policies for the different stages, including a 10 year insurance plan following the completion of the construction to compensate for inherent structural defects. A parliamentary committee is now reviewing these recommendations and we feel that it will not be long before building safety standards are significantly improved.

From our perspective, our work is not only contributing to the improvement of the quality of life in our society but also gradually creating new opportunities for our sector and increasing the size of the Lebanese workforce. ACAL has also been working to improve the difficult working conditions of insurance companies, including the slow recovery and development of the Lebanese economy following the years of war and the high increase in the cost of reinsurance following 9/11 with no possibility of increasing the price of insurance in our market. The latter has led to a drop in profit margins, the relatively small size of the Lebanese market and structural features not facilitating the expansion of Lebanese insurance operations in other countries Faced with these challenges, the insurance sector has worked individually and collectively through ACAL towards maximizing the potential of their development. We have seen remarkable progress in the quality of insurance contracts made available to the customers and I believe that this has been the natural result of our free market economy. In this sense, traditional single cover policies are being replaced by a variety of covers with competitive premiums.

Although debatable, there was surely extensive innovation in the distribution channels of insurance policies and here we have to acknowledge the introduction of Bancassurance and e-business. These reduce administrative costs of insurance sales transactions and the cost of premium collection, as well as the time dedicated to complete the sales operation

In conjunction with the above, the challenge will always be to provide the client with professional consultancy on his risk transfer requirements and the adequacy of the insurance contracts that he is buying, aspects that still seem to be better served through the traditional insurance intermediaries.

Regionally, Lebanese insurance companies have a proud tradition of regional expansion, especially in the Gulf. However, their role may be gradually diminishing due to the development of Arab insurance sectors with large financial capitalization and national interests. At present, there seem to be good prospects in Syria. There are high expectations that Damascus may be granting licenses to Lebanese insurance companies. ACAL is working closely with the Syrian insurance representatives and we have already established an excellent level of cross border co-operation.

Elsewhere, we have been witnessing serious efforts to optimize the potential of the Lebanese insurance companies to grow and compete. These efforts are the result of the joint commitments of the legislators, regulators and ACAL. Capital adequacy and regulatory control have formed the essential elements of our efforts. From the legal side, the law governing the insurance operations in Lebanon was subject to serious review, resulting in the promulgation of the amended 1999 law. The outcome was surely a step in the right direction but ACAL is aiming at further improvements and is currently working on further law amendments, which we shall reveal in due time.

ACAL has initiated the framework for the continuous evaluations of the sector, and we shall continue to issue the necessary recommendations within a context of active co-operation with all concerned. We do however hope to change our role to become binding with all licensed insurance companies.

To elaborate, we have created what we call CENTRALE DE RISQUES, where we will collect risk related data from all insurance companies to be made available to all member companies with the aim of improving the quality of insurance underwriting and minimizing the risk of fraud. We have also established a joint committee with the regulatory bodies that will be concerned in building up market statistics to promote transparency. Our agenda for the future will be to increase communication with the authorities on the taxation imposed on insurance clients and beneficiaries. The readers may well be aware that clients acquiring all non-life insurance contracts have to bear tax and stamp duties ranging between 9% and 11% of insurance premiums. Also, compensations received from life contracts are also subject to 5% tax deductions. Although these would appear to contribute in the public income, they do not promote growth in the insurance market, a growth that may well compensate for any loss of tax and stamp duty. Other economies have been long promoted the acquisition of insurance by making it tax deductible. Our system has instead contributed to lost local insurance opportunities, mainly in the marine and life sectors, where internationally rates are attractive and easily available and the loss of potential foreign direct investment.

Finally, it is an honor for me to announce that the 25th General Arab Insurance Conference will be held in Lebanon in May 2004 with the participation of a large number of participants from both the Arab and international insurance companies. The event will be presided by ACAL and the theme will be “Arab Insurance: An Outlook to the Future.” In brief, our work will concentrate on setting recommendations of a proactive nature that will allow Arab insurers to meet the challenges of the future with a high level of readiness.

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Economics & Policy

Road ahead

by Eleanor Blanch
written by Eleanor Blanch

“I’ll be glad if my watch could stop today,” said Jacque Sarraf, chairman of Malia Holding and former head of the Association of Lebanese Industrialists (ALI). “The year 2004 offers a vision of turmoil regionally and locally.”

Lebanon in 2004 will have to elect a new president or renew the mandate of President Emile Lahoud and hold municipal elections, two big political events that could shake the economy, said Sarraf.

“If you look in the region, there is no war but there is also no peace in Iraq. New problems are emerging in Saudi Arabia and the Gulf, with increased threats to Syria and Iran,” he added.

For the record, official government figures show that 418 new industrial units were created up to September 2003, while industrial exports in the first three quarters of the same year increased by 20% from the same period 2002. However, industrialists are not celebrating.

The US-led war on Iraq may have been shorter than previously expected, but it paralyzed a segment of industrialists who relied on an Iraqi market that catered to 24 million people. Many of the Iraqi officials Lebanese industrialists had dealt with were no longer around and some industrialists spent the latter part of the year trying to get money owed to them by the ousted Baathist regime. Major hostilities in Iraq were declared over in May, but oil prices continued to rise and industrialists had to endure higher fuel oil and electricity bills, which were will already steep in the run-up to the war.

The impact of the war on the economy as a whole was cushioned by last year’s Paris II donor conference, which gave Lebanon a breathing space and $4.4 billion in soft loans to reschedule its high public debt over a longer period and at a cheaper cost. The conference banished talks of a financial meltdown that would have hit industries hard. The Paris II loans worked on significantly lowering interest rates on government treasury-bills and deposits at banks, but most industrialists and merchants who were expecting a similar drop on loans were asked to wait.

Industrialists in 2003 also entered into a virtual free trade zone with Syria, which had signed with Lebanon an agreement that phases tariffs on industrial products traded between the two countries by the beginning of this year. The agreement has not rectified the trade imbalance with Syria, which has low labor costs, a vast range of raw materials and large swathes of industrial land.

Lebanese industrialists also entered into a semi free trade zone with the European Union when an interim free trade agreement with Lebanon’s number one import market came into force in March 2003. The interim Association Agreement, signed in the middle of 2002, gave many of Lebanon’s industrial, agro-industrial and agricultural exports nearly tariff-free access to the EU before the actual agreement was ratified. The Arab world remains the number one export market for Lebanese goods, but they are importing less and less products from Lebanon as production costs increase. The agro-industry sector is one victim of such high productions costs. “We were exporting $600 million of agro-industrial goods in 1996,” said Ateff Idriss, head of the Syndicate of Agro-Industries in Lebanon. “We lost in the last ten years more than 50% of agro exports, which stand today at $250 million a year.”

Industrialists are increasing exports because they cannot afford not to. Reducing production costs was top priority for industrialists in 2003 and will be their obsession in 2004. “In Lebanon the cost of land, financing and energy are more expensive than regional countries,” said Fadi Samaha, director general of the industry ministry. “Fuel costs alone represent 20% to 30% of general production costs,” he continued, adding that the ministry is working with the central bank to help cut the cost of financing for industrialists. Currently, the central bank subsidizes interest payments on loans extended to productive sectors.

“The Central bank subsidies are for a short period of seven years, but industrialists need loans for seven to 20 years,” said Samaha. “The loans subsidized by the central bank only cover investing costs, but not operating cost such as the financing of raw materials imported by industrialists.”

The central bank began this year to help the private sector lower the cost of its financing needs by urging banks in Lebanon to lower interest rates on loans, and one bank obliged. It also brokered an agreement between banks and the private sector to reschedule bad loans that banks wanted off their balance sheets and clients, such as industrialists, wanted to reschedule over a longer period of time.

Fadi Abboud, head of the ALI, estimates that 18% to 20% of the $4 billion in bad loans in question belong to the industrial sector. “Yes, the agreement will settle problems, but it does not address how a company is going to refinance itself,” said Abboud.

The industrial sector requires vast investments to help it modernize and compete with a influx of cheap and competitive goods that are finding their way into the Lebanese market. Meanwhile, many industrialists argue they will not be able to export much to European Union under the Association Agreement because they do not have the means to upgrade their industries to meet European standards.

“The EuroMed partnership allows us to have access to markets, but it has its own price because we have to have standards,” said Samaha. “It is not a given for everybody and we have to work on quality to reach European standards.”

Compliance with standards is another issue that is dogging the Lebanese industry, particularly the agro-industrial sector, which got a bad rap this year with rumors of contanimated dairy products finding their way onto the shelves.

“We need a food safety law, a sound legal framework, accreditation and research centers to modernize the agro-industry,” said Idriss. “Research is important for increasing exports because we cannot export unsafe packages to the European Union.”

For the meantime, many Lebanese industrialists are concentrating on a less demanding market, such as Iraq, Lebanon’s former number one export market. But insecurity and US control of government decisions in Iraq is not helping. Nonetheless, Lebanese industrialists returned to Iraq as soon as the war was over, trying to revive contacts and make new ones.

“The war on Iraq paralyzed industries for four to five months and we lost the work of seven years,” said Ahmad Kabbara, head of the export committee at the ALI. “But the Iraqi private sector has started to import from us goods such as cement and electronics.”

There are no accurate figures about the amount of goods Iraqi traders are currently importing from Lebanon, particularly as no proper Iraqi government is yet in charge.

“If the war did not take place, we were expecting to sign contracts worth $1 billion a year,” said Kabbara. “If the Iraqi private sector is revitalized, I think we can export $300 million a year to Iraq.”

Before the war started in March, Lebanese industrialists and businessmen signed over $1.1 billion in contracts with the Iraqi government under the United Nations brokered oil-for-food program. Some $450 million of these contracts were unpaid when the Iraqi government lost power in March. “The United Nations has rescheduled all contracts signed under the oil for food program,” said Kabarra. “We were paid $250 million and some $200 million have yet to be paid.”

For Kabarra and many other industrialists, Iraq still remains a market worth venturing in, despite security concerns and current competition from Americans, Europeans and other countries that were shunned by Saddam. “Lebanon, Iraq and Syria is the most important economic triangle that is capable of solving our problems and making us self-sufficient,” said Kabbara. “We will not need to rely on any other country as this triangle has sufficient raw material and human resources.”

Achieving this triangle requires a broader vision from Arab countries, which are usually more adept at erecting trade barriers, as is the case with the much-feared Greater Arab Free Trade Area that will come into force in the beginning of 2005. Most of the signatories to the agreement have not honored their commitments, leaving Lebanon’s open markets prey to their goods without reciprocal treatment.

“We are not prepared for the Arab invasion because Arabs are implementing the agreements in an Arabic way,” said Kabbara. “We face problems in transportation and transit taxes.”

Many industrialists lament the government is quick to sign trade agreements without studying their effects on the Lebanese industry, particularly as the broad cuts in import duties in 2000 reduced tariffs on industrial imports to an average of 5%.

Most industrialists expect exports to increase by 15% to 20% next year, but they do not think much of the increase. Lebanon will be preparing itself in 2004 for GAFTA and entering into serious talks with the World Trade Organization, which will leave Lebanon’s open markets without protection barricades. “We are seriously planning to address the WTO and EU that at this moment we can’t afford to have customs duties abolished due to high production costs,” said Abboud.

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Economics & Policy

Industry woes

by Executive Staff
written by Executive Staff

In 2003, the manufacturing sector witnessed some improvements, mainly related to healthier exports. By and large, though, 2003 has not been much different from previous years. The fact remains that Lebanese manufacturers are still operating in a moribund economy. Furthermore, mixing politics and economics is adding to our woes. Lebanon doesn’t know in which direction it is heading. The Lebanese Government has run out of ideas on how to promote growth, as was clear most grievously in the tariff-lowering decisions of the year 2000, when the death sentence was passed on the Lebanese manufacturing sector. However, the last wish of the condemned was not even granted, when, upon lowering tariffs, the government reneged on a promise to create a ministerial committee to assess and bring down the costs of production, to offset the damage resulting from lower tariffs. In fact, instead of bringing down costs of production, the government burdened the private sector with additional costs, namely transport and education allowances. Moreover, the government maintains relatively high tariffs on goods that are NOT made in Lebanon, rather than the other way round, such as cars, petrol, alcohol and tobacco, which represent more than 85% of custom duties. Even raw materials, which are not made in Lebanon such as iron roads, and spare parts for generators, still pay high duties. This is an anomaly that is probably unique to our country.

Some of the consequences of the government’s decisions in 2000 have begun to appear in 2003, with the tariffs coming down by 60% from already historic lows in 2003, as a result of the Arab Free Trade Area. The damage will continue in 2004 and 2005, when tariffs come down by 80% and 100%, respectively. This will bring down tariffs to zero among the Arab nations with whom we trade, except that, these Arab countries have a huge advantage over us, as their costs of production are much lower that ours.

The political fabric of Lebanon unfortunately encourages negative behavior (witness the government’s speedy reaction to farmers spilling apples in the streets). Now tariffs (recently imposed to protect local apple growers) are part of the government’s dictionary again. But for three years, the government refused to consider similar tariff increases for the industrial sector, even though such tariffs provide a safety net for manufacturers trying to compete with subsidy-laden Arab and Asian goods.

How can businesses and manufacturers grow in such a fluid environment? Lebanese businesses are required to defy logic by working in a burdensome and costly operating environment. If the government is concerned with, or even a little embarrassed by, closing businesses, emigration and unemployment, among others, it must change its priorities, policies and habits. It must become obsessed by promoting growth and job creation all over Lebanon. If the government cannot bring down production costs, which are the result of inefficient monopolies, then it should seriously consider imposing higher tariffs on imported goods, just as in the case of apple growers.

In addition to Lebanon’s unusually high production costs, including labor, energy and transport, Lebanese manufacturers have to remain nimble and competitive against an onslaught of non-traditional expenses, deriving mainly from bureaucratic red-tape, inefficiency, poor postal services, prohibitive communication costs and restrictive labor markets,

If these practices continue, Lebanese factories will vanish at an accelerated rate. Unfortunately, this would not be the result of “Creative Destruction,” where industries disappear today and new ones are born tomorrow. Far from it – if factories go bust under the prevailing conditions, it is difficult to foresee the birth of new enterprises and the new jobs that go with them.

It is, therefore, imperative today to tackle the causes that keep our factories shackled and unable to compete. Most of the detrimental costs that were mentioned above are relatively easy to deal with since they need no more than a bold government decision. But labor issues need a change of mentality.

So let us concentrate on restrictive labor practices and ask why, for example, Petrol Station owners, according to an informal survey, prefer to hire non-Lebanese workers, even though the wages being paid to those foreign guest workers are $350 per month on average. This is almost double the minimum wage in Lebanon, and therefore a respectable enough salary for Lebanese workers to be seeking. It is no secret that some Lebanese employers shy away from hiring Lebanese workers because they are desperately trying to avoid getting mired in the maze of Lebanon’s restrictive labor laws, including expensive and time-consuming Social Security procedures. The outcome of this state of affairs is almost unique to Lebanon, whereby Labor Laws hinder employment creation, specially for Lebanese citizens. This is the only country in the world which punishes, from a tax point of view, he who employs a Lebanese citizen, and gives tax breaks if you employ foreign workers such as transport and education allowances, while affording the employed worker very few benefits and no safety net in the case of redundancy.

It is a true tragedy that our archaic labor laws have done so much damage to employment levels, not to mention to productivity, as the currently employed have little incentive to work hard while they feel secure in the job that the law protects, not the worker’s performance.

We agree with the government and all concerned parties that our workers are a major resource. Manufacturers should know because they spend years and make large investments in training their workers.

But it is futile to promote growth, employment generation and social development if the restrictive labor practices remain unchanged. We must possess the vision and the courage to change laws, practices and even mentalities. The priority now, as far as we are concerned, is for the country to move forward. Frankly, quibbling is a luxury that the economy cannot afford at this time. But this does not absolve the government of responsibility towards the industrial sector, as many promises have been made and few delivered, particularly concerning promoting exports.

Are manufacturers making unreasonable demands on a government with few resources to spare? Not at all, especially if one considers fast-paced developments in the world. Actually, Lebanon is far behind other countries in recognizing that sustainable industrial development is a prerequisite to fighting marginalization in a global economy. Our government does not even speak the same language as our international partners.

There is a vacuum in strategic thinking on industrial development that needs to be filled. Lebanon must show more commitment to the competitive capabilities of its industrial sector. We are not alone in having identified some of the major hindrances to growth. Independent European consultants have also found that Lebanon’s operating environment suffers from weak interactivity between state and industry, no public or international-standard industrial zones, costly public services and heavy and expensive administrative procedures. If the government does not solve these problems, how then are businesses supposed to survive, grow and thrive? How can we create enough jobs to keep people, especially the young, in Lebanon? Right now, Lebanon produces only one-third of the jobs it needs.

We know for a fact, and we have seen it all over the world, dynamic growth is a product of vision, policy, incentives and support Institutions. In 2004, as in years before and beyond, the manufacturing sector and the economy will continue to trudge along at best, if the Lebanese government does not become obsessed with promoting growth, before it is too late.

Fadi Abboud is the President of the Association of Lebanese Industrialists

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Society

Battling the ad wars

by Anthony Mills
written by Anthony Mills

An uphill battle awaits the advertising sector in 2004 as it struggles to reverse a plunge in revenues – which have dropped roughly 30% since January 2003 – played out against a backdrop of allegations of unfair competition and mafia-like cartels. As another desperate year draws to a close, many in the sector predict financial disaster in 2004.

“I hope that 2004 will not be worse than 2003 because if the annual drop in advertising revenues continues at this rate for another three years, there will be no advertising industry anymore,” warned Dani Richa, managing director of Impact/BBDO Lebanon.

“Next year will be no different from 2003,” predicted Wassim Rizk, regional director of media group CSS & Grey. “There will be a continuing decline in revenues because of the downturn in the economy – which we in advertising are a reflection of.”

However, Talal El Makdessi, chairman and CEO of the THG/Group media conglomerate believes that the economic travails should not be used to shroud the real problems plaguing the sector, “There is a lot of money in Lebanon in the advertising industry,” he said. Expenditures, by rate card, are increasing by 15% to 20% every year.”

Red Cell media group CEO Joe Ayoub concurred: “We’re suffering from marketing myopia now, where we think, ‘Ah, this is due to the economic crisis. This is wrong. Something is fundamentally sick in our industry.” In a sector dogged by domestic political instability and post-Iraq war fallout, local, independent Lebanese agencies are continuously falling victim to unfair competition and losing out to multinational affiliates that are causing many to pack up and leave the country. The situation is not helped, argued Richa, by regional and international advertisers’ misapprehension that they can reach Lebanese consumers through satellite television. “As a consequence, they are not investing in local media,” he complained. This misconception runs counter to efforts by terrestrial channels LBC and Future Television to increase viewer numbers with programs like STAR ACADEMY and SUPERSTAR.

In addition, belt-tightening across the board has led to a shift from above-the-line to below-the-line investment. The focus now is on the point of sale, rather than on brand building. As a result, the ‘special offer’ strategy has proliferated – with unwelcome effects. “There are so many ‘special offers’ now,” observed Richa, “that they, in general, are not attractive anymore. It’s a very short-term policy.” In the long term, profit margins and consumer loyalty wane.

Agencies, for their part, must discard a preference for discount strategies. “They might work for the day, but down the line profit margins shrink and your ability to attract talent is affected,” cautioned Rizk.

Industry experts are in agreement that if the sector is to recover, advertising agencies and media buying firms will have to work on regaining the trust of their clients. Something that is easier said than done considering that in Lebanon today, it is impossible to determine the correct price of services bought from media or advertising agencies – figures that are easily available in any healthy media sector. Agencies are continuously accused of over billing.

“The client doesn’t trust his agency. The agency doesn’t believe the media is giving it the right price. The media doesn’t believe that the agency is giving the client the right thing, and the agency doesn’t trust the client because he says: ‘I will spend $1 million’ but ends up spending $50,000,” Ayoub said. The lack of objective, professional consultancy on the part of media buyers is another serious issue facing the sector. Clients complain that agencies only recommend certain newspapers and TV stations because they are the most financially beneficial to the agencies, not because they represent the best strategic choice for the client. Although many problems exist within the industry itself, the government, say experts, also bears responsibility and confidence in the government must be restored. “We have no leadership, no responsibility. The only thing that our government cares about is how to collect tax. It’s about time that new talent, new politicians, who are ‘clean,’ educated, unaffected by the Lebanese civil war and are not remotely related to any war leader, take over the government. We have enough corrupt politicians who have drained the country and amassed billions of dollars,” declared Makdessi. A reversal of the decline is only possible if players combat their woes in unison, possibly through mergers and acquisitions, Ayoub said. This is likely, though, to prove difficult since many of Lebanon’s small advertising agencies are family, one-man-shows. “They have to let go of their patriarchal mentality. To survive, they will have to open up, share decisions and not only give but also receive orders.” But the senior industry executives, who hold the strings of power, will be loath to change. The industry’s powerful egos are indeed a formidable hurdle, acknowledged Makdessi. “Everyone wants to be first,” he said. “If the industry’s four or five major players were to sit around a table, leave their egos aside, and talk logic and sense, the solution would be there immediately.”

Unfair competition, if left to flourish, will continue to compound the industry’s woes, say many. They contend that a handful of powerful players have the market in a chokehold and smaller players are being squeezed out. “In the absence of regulation, everything is possible,” noted Ayoub. “It becomes jungle law.” Rizk conceded that agencies are guilty of favoritism with respect to certain media outlets because of juicy incentives – which he said should be revisited and toned down. Makdessi, though, vigorously denied the existence of any form of advertising mafia. “The claims are not true. There is no monopoly of the industry. Those who claim there is a mafia are those who do not know what advertising is. They don’t know how advertising functions.” He said that only small advertising agencies might opt for a particular media outlet to serve private interests. “International agencies go by figures, statistics and research and are accountable for whatever they do.” His denials were echoed by Richa: “This mafia story has been circulated by weak media outlets, which, naturally, do not get a high share of advertising. The only excuse they can offer, to shroud their shortcomings, is: ‘so-and-so is in bed with so-and-so.’ But clients are not stupid, and advertisers can‎’t just do whatever they want.”

More regulation of the industry would help, say some insiders. Most regulation proponents, however, favor auto-regulation and there is widespread aversion to government interference. “They don’t really understand the ins and outs of this business,” said Ayoub. “They could impose really damaging decisions.” But unless the industry gets its act together, government intervention may be just around the corner, Ayoub warned, complete with unfair regulation and harsh decisions that would batter business even more and further damage investor confidence. “We don’t want this to be a government-led industry,” he said.

The term ‘regulation’ is, in any case, meaningless, Makdessi argued. “Why are we afraid of regulations if ministers do not respect them, politicians do not respect them, the government does not respect them. No one respects them,” he said, adding that the best form of regulation would be amending VAT charges so that they are exacted according to rate card, not invoice, value. A number of industry insiders have suggested that the source of the sector’s ills be pinpointed in a process overseen by global advertising bodies, such as the International Advertisers’ Association. An essential first step would be the mutual concession by principal actors that they all bear a portion of the blame. Makdessi, for his part, argued that a crucial ingredient of any remedy must be clean research that subsequently forms the basis for a new rate card sporting fair rates. The media must then respect those rates. “The day the media respects the rates, you will see an increase in the advertising spend in Lebanon by 15% to 20% gradually every year for the next five to six years,” said Makdessi, adding that a recent press conference, he offered to contribute $100,000 dollars as a first payment towards research. His gesture did not prompt others to open their checkbooks. Pessimism fuelled by the ongoing exodus of industry flair from Lebanon currently clouds the sector. The Gulf is packed with Lebanese talent and now, of the seven leading ad agencies in North Africa, five, Makdessi said, are owned and run by Lebanese who have fled the dearth of career opportunities in their own country. For those left behind it will take a long time to rebuild the trust necessary for smooth sailing. “I don’t see any light at the end of the tunnel 2004,” concluded Makdessi.

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Society

No season

by Anthony Mills
written by Anthony Mills

Ever-optimistic tourist industry insiders contend that 2003 has been a satisfactory year overall and that Lebanon will continue to replace Europe and America as the destination of choice for high-end Gulf Arab tourists in 2004. In reality, however, some major prodding is necessary in the coming year for an underdeveloped sector that needs to overcome serious obstacles imposed by the government, extend a paltry two-month summer peak season and bolster the number of arrivals to the country by attracting a fresh brood of tourists from non-Arab countries.

Working with a government that critics say is doing little, if anything, to help buttress the sector will continue to be a main hurdle for the tourism industry throughout 2004. The ministry currently operates with a hopelessly low budget, an aversion to new blood, no marketing plan to counter media that portray Lebanon as a violence-prone country, fractious domestic politics that unnerve prospective visitors – even in the Gulf – and simmering regional instability.

“The government must understand that tourism is not only selling hotel rooms and restaurant meals,” said Paul Ariss, president of the union of restaurant, café, nightclub and pastry shop owners.

Also hindering the development of the tourism sector is a flawed infrastructure, which the government has yet to seriously tackle. Not only do the poor roads restrict tourists from visiting major tourist destinations in various regions of the country, water and electricity shortages occur at the height of the summer season. Power cuts in Bhamdoun and Aley in August 2003 prompted 20% to 30% of the Arab tourists staying in the region’s mountain resorts to pack up and head for Syria, or home.

Government policies adopted in 2003 will also harm tourism in the coming year. The recent decision to stop granting British citizens visas upon their arrival at Beirut airport, for example, will undoubtedly cause a decrease in British visitor numbers and reflect negatively on Lebanon as a tourist destination. Although understandable as a diplomatic tit-for-tat measure – Britain now requires transit visas for Lebanese with layovers in the UK – the move, critics say, is a case of cutting off your nose to spite your face.

“Unfortunately, politics in Lebanon very rarely takes into consideration the benefits of tourism,” declared Ariss.

Another threat to the tourism sector is the levy of burdensome government imposed taxes that is driving 50% to 60% of the some 3,000 or so restaurants to consider shutting down and moving to Dubai, Abu Dhabi and other Gulf cities, despite the fact that each have already spent an average of $500,000 in start up costs to open in Lebanon. “There is no logic to the way the authorities deal with the general economy, and with tourism. The tourism sector should not be overburdened with taxes and charges,” Ariss complained. A realistic view of Lebanon’s tourist sector shows that the country no longer enjoys the unassailable position it held before the civil war. It must now work to compete with rival destinations, such as Egypt, Jordan, Syria and Dubai. According to Pierre Achkar, president of the Lebanese Hotels Association, Lebanon will have to fight to compete with the tourism industries of these countries. “We are not competitive because our prices are high, due mostly to the taxes and charges,” he said. For the moment, however, critics say the government is seemingly under the mistaken assumption that because Lebanon is blessed with natural tourist assets, it will somehow blossom unaided as a tourism destination. “We need a real political decision at a high level to make this country a real tourist destination,” said Achkar. “The government has to understand that you have to do a lot of things – even if you have a nice country, nice people, a nice nightlife – to be on the international map of tourism.” But detractors allege the ministry of tourism is either unwilling or unable to do its job. “We really have a problem in the ministry. They need human resources and they need a budget,” stated Ariss. “The current budget is at a minimum and it’s forbidden to have new employees in the ministry, even though they don’t have professional people.”

Criticism has also been leveled at the ministry over its handling of this year’s Arab World Trade and Tourism Exchange (AWTTE), held in September 2003 at BIEL. The ministry awarded the management contract for the fair to a certain Lebanese travel agency, invoking the anger of its competitors, which then boycotted the gathering. This contributed strongly to weak participation at the event and its failure to impress.

“The tourism ministry sometimes helps very big industry investors and ignoring the small investors,” protested Achkar. He added that the hundreds of smaller players, who actually put Lebanon on the international tourism map and constitute a social fabric upon which countless families depend for a living, are being swept aside to make way for powerful companies. According to Achkar, one reason why no tourism-bolstering governmental decisions have been taken is because the government has been resting on its laurels since the 9/11 attacks and the impression that Gulf Arabs wary of travel to the US and Europe will continue to turn to Lebanon. But accurate tourism-related data would help smash the false sense of security. Information is needed on where visitors are staying. For example, when Lebanon registers a million tourists, the implication is they all stay in hotels. But in fact, observers estimate that as many as 50% of Gulf Arabs own property and houses and do not pay for hotels, and spend much less on restaurants and other outings. To ensure a successful 2004 season, industry experts agree that Lebanon’s constricted two-month summer tourism season should be extended. In other countries, Achkar noted, the summer season runs from the beginning of May until the end of October. “Turkey, Cyprus, Egypt, are all fully booked from the first of May until the end of October. For us, the summer season is July and August and we are losing a lot of money [as a result].”

Furthermore, in a joint campaign with the tourism ministry, the Hotels Association is to start aggressively targeting potential tourists from Eastern Europe, in particular Russia and Ukraine (for Eastern Europeans, the cancellation rates in Egypt during the Iraq war were far lower than for Western Europeans and it appears the are less susceptible to the regionally-generated jitters). However, marketing studies will prove imperative to determine which prospective tourist types and what countries should be targeted, and how they should be lured in. “The figures that are published by the government should be analyzed more accurately in order to decide where to invest and who are the targets,” said Ariss, adding that Lebanon should start to steer away from relying heavily on the Gulf Arabs that constitute the lion’s share of the country’s tourists. “We cannot say that we have tourism in Lebanon just because we have some Arab tourists who come here during very defined periods.”

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Society

Q&A: Ali Abdallah

by Executive Staff
written by Executive Staff

E: What was the ministry’s strategy in 2003?

AA: This year should see a robust and energetic campaign to promote the Lebanese tourist industry, especially in light of the encouraging figures that were recorded in 2003. Not since 1974, 20 years ago, have we seen over one million visitors and the business that was generated was in the region of $1.6 billion or 10% of GDP. This growth, which realistically began in earnest in 2000, should translate into the end of 2003 seeing 1.1 million visitors, mainly from Arab countries, compared to 936,000 for 2002.

E: How do you explain the fact that 2003 was an unstable year for the region, while the local tourism industry saw a considerable improvement?

 

AA: Well, we still have regional instability and some foreign countries still associate us in their media with terrorism, but the reality is that tourists are amazed when they come to Lebanon and see the level of security and quality of services provided.

E: Who is coming?

AA: In 2002, 44% of visitors were Arabs. This August nearly 200,000 Arabs visited Lebanon. Currently, information is being collected at the airport to get a clearer picture of all the different types of tourists coming to Lebanon.

E: Are those that visit Lebanon big spenders?

AA: Although we have a relatively small number of tourists, their daily spend is high. Tunisia needs five million visitors to reach our income. There, the average daily spend is around $60 per day, while in Lebanon the average expenditure per tourist per day is $250. Many Gulf Arabs spend as much as $500 per day. There are untapped countries like Japan and South Korea, whose tourists spend up to $400 per day. Lebanon has no tourism office in Japan. Today, there are talks to take exhibits from the national museum to Japan in an effort to help promote the country there.

E: What type of tourism is the ministry keen to focus on? Religious, shopping, archeological or conference tourism?

AA: We will have a clearer picture once the results of our research are finalized.

E: What about the more niche activities?

AA: We are trying to develop Lebanon as an upmarket destination, stressing on quality and luxury, but we are also promoting Lebanon as a destination for what I am going to call “medical tourism,” where we can offer packages to people looking for medical treatment and the ensuing recuperation period. Hospitals would be classified according to specialization and we would imagine a lot of Arabs would opt for this, as they respect our doctors and facilities. Cultural, eco and archaeological are other sectors we need to develop.

E: What do you anticipate will be the sectoral obstacles for 2004 and how do you intend to overcome them?

AA: Well, we need to improve the state of the roads. This is crucial if we wish to woo western tourists to Lebanon. We need to be seen as a safe country. We also need to work on our service skills, especially how we receive, talk to and help tourists, and this is especially needed in the public sector. We also need to develop modern laws for the sector and this will help hotels and restaurants overcome the problems that are limiting the inflow of foreign investment. The ministry has established a mechanism to reduce red tape. IDAL used to handle this but it was not doing a good job and that is why we decided to bring tourism-related investment development back to the ministry.

E: What is your strategy for 2004, assuming you are still in office?

AA: We are in the process of analyzing the tourism sector in every region in order to know what will be needed in terms of investment and then develop that region’s tourism potential. We will be promoting the country with an international marketing campaign, but domestically we are working on the TELEPHERIQUE project that aims to link all ski resorts. This will benefit a lot of derivative activities and companies such as MEA, car rental firms and tourism fairs. We will increase the number of tourism police; work closely with the private sector and others in the tourism community to improve the environment – an important factor for the modern tourist.
 

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Business

Q&A: Naji Boutros

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Among globally active real estate funds, investment firm Colony Capital has made their mark after over 13 years of investing in real estate to the tune of almost $1 billion annually and managing equity capital on behalf of leading institutional investors. By identifying and buying real estate, real estate-dependent companies, distressed assets and non-performing loans, the firm’s funds year after year realized internal rates of return in excess of 20%.

With leisure-related projects in hospitality, resorts and gaming strong in the list of participations, the company’s pedigree of past or present investments in high-profile properties includes names such as the Las Vegas Hilton, the Savoy Hotels chain in the United Kingdom, the Fukuoka Dome baseball arena in Japan, and the Costa Smeralda resort of Agha Khan fame on Sardinia. Last month, Colony made headlines by being in negotiations over acquiring several casinos in the United States.

Earlier this year, Colony Capital set up an office in Beirut, the 13th branch in their global network. Also notable from a local perspective is that Colony’s founder and chairman, American entrepreneur, Tom Barrack, has roots in Zahle, and that one of Colony’s 12 principals is Lebanese Naji Boutros, who joined the firm last year after acquiring a strong reputation as head of Middle East and European real estate at Merrill Lynch. EXECUTIVE talked to Boutros about the regional and local financial market in real estate investments, and about what it takes to be a Lebanese success story in global finance.

Why is real estate so very important for Middle Eastern financial markets?

Middle Eastern investors have always acquired real estate and globally are today among the most important investors in this field. I think that three factors make real estate a favorite asset class for Middle Eastern investors. For Islamic investors, if it is structured properly, real estate is SHARI’A-compliant. Secondly, real estate is not volatile; it is a hard asset. The third reason is what happened during the tech crisis, where a lot of money was wiped out.

How does the Middle East figure in Colony’s investment strategy? Are there projects that you would qualify as totally off market?

We are working with top decision makers in the Middle East who are offering us a lot of incentives to be with them, because we bring brand recognition to their local market. These economies range from monarchies to pluralist secular democracies. You can imagine which one that is, Turkey.

Is the participation of Middle Eastern investors in Colony Capital evolving positively then?

A year ago, we had zero participation of Middle Eastern investors in our worldwide operations. Today, it stands at 5%. That is fantastic. They like it and want more and more and more. I anticipate this participation to quadruple within 24 months to then be in the 20% of our global operations. We would like to become the vehicle of choice for Middle Eastern investors globally investing in real estate. By aligning our interests with theirs’ and by having such a sophisticated global experience platform at their service, we are doing well.

The current economic environment seems to correlate once again high revenues for the Middle East with somewhat subdued outlooks for many developed markets. Do you see another wave of Arab investments flowing out of the region?

I think what we are seeing is a recalibration of Arab investments. You have some repatriation of money back from the US. We don’t really know the number but it is a lot of money. That money went back to the Middle East, plus you have the generation of additional capital from oil prices and other factors. Smart Arab investors are channeling this money towards productive investments in their own countries. I cite what Dubai has done, which is incredible. Chapeau bas, there is one decision maker and so much attention and focus goes towards productive investments in his own country. I am today an amazed believer and supporter of what is happening in Dubai. We are talking about medical tourism in Lebanon but Dubai goes out there and proactively attracts the Mayo Clinic and the Harvard Medical Institute.

The presence of Colony in the region is relatively recent. When did you open your office here in Beirut?

We started our institution and moved in about five months ago.

How many staff do you have?

We have six highly qualified staff, and we are hiring the best out of Lebanon and bringing back the best Lebanese from outside to Beirut. We looked in Lebanon unsuccessfully for five months before bringing people back from the outside.

Is Lebanon a great location where you as real estate funds or financial firms in general can work on a Middle Eastern scale?

It is not a great location. The one attraction is that Lebanon is closer to Middle Eastern clients and the more these clients will come to Beirut, the more financial services will locate here. The second attraction is that Lebanese like to be back here. There are top financiers around the world working with investment banks and investment companies like ourselves, who are willing to come back to Beirut. They are ready to make huge sacrifices to be in Lebanon. But if you were to approach it objectively, why would Lebanon be better than a place like Dubai or Switzerland, where you have so many incentives for firms to operate in?

How do you evaluate the local market conditions for real estate investments?

To us as global real estate investors, the most important thing is who is behind a particular project and which asset management company is doing the work. We find it extremely disturbing that you have many briefcase salesmen in Lebanon, but very few long-term driven, institutional transparency-type of asset managers and real estate brokerage houses. That is what is missing. Recently we start to see global powerhouses like Coldwell Bankers coming here and we like that.

But is there not an overemphasis on real estate in Lebanon’s investment landscape?

I think the focus should be productive real estate versus real estate that you trade, which is totally unproductive for the economy. It should be operating real estate where you employ people. The focus of investors should be channeled towards hotels, not towards residential accommodations. We’d also like to see world-class urban planners to come and help in setting the right regulations that are essential for the long-term benefit of the country. What really annoys me in this country is that people think that a plot of land has the more value the more meters you can build on it. This is absolutely wrong, because values are driven by demand and not by supply. People should ask, ‘how can I attract the most value for my land, how can my land be competitive versus somebody else’s land’?

How can one increase the competitiveness of land?

In Sardinia, for example, we went to the urban planning authorities and told that them we want to build less than what is allowed. By doing so, we created a scarcity of buildable land. When you create that rarity factor you attract the crème de la crème. The billionaires will come to you. Lebanon is not doing that. What we have to address is the competitive edge of Lebanon. To me it is very simple: We have a beautiful mountain area, which is green and attracts our tourists. We have cultural heritage, and a few unspoiled beachfront spots. What we have to do is optimize the value of these places.

Is Lebanon then a good market under the perspectives espoused by Colony, namely to focus on undervalued properties and apply a “cautiously contrarian” approach?

Yes and no. Yes, because we can find value investments in Lebanon. There are distressed sellers in Lebanon, be they distressed individuals or banks, who would like at attractive prices to dispose of their non-performing loans and real estate owned. What is unfortunately detracting us from here, is number one that we are having difficulties in finding sizeable deals. Number two, we are having difficulties in finding unique deals; number three, we are having difficulties in keeping the noise away – you can interpret that in any way you like.

Does that indicate that you have not executed projects here?

We are not yet comfortable with stability and transparency, which goes back to noise. And we haven’t yet seen the incentives that could be offered to a global group such as ourselves. All of this to date is pointing us to analyze a lot of things in Lebanon but not yet make any investments here. We haven’t found the right deal yet. What we are doing instead is using our base in Lebanon to analyze and make investments in other parts of the world.

So beyond nice buildings and nice scenery, what values do you find in Beirut and Lebanon that contribute to your performance?

We love being here, we love the culture of this place we love the beauty of this place, the human being. This is a place that has generated intellectual capital and achievers found around the world – be they doctors, engineers, or financiers. That is why I say that we’ve got an amazing brain center at Colony in Beirut.

[Colony Capital CEO] Tom Barrak has got an amazing love for this place. When we acquired Costa Smeralda, Tom said in his opening speech, “the Phoenicians are back.” and he was so proud of it. We love this place and I cannot describe how much it hurts us because we are operating globally and we contribute and add value to all these places globally and we want to do that in Lebanon and we want to see this place get better.

How does one take his or her heritage and advantage of being Lebanese to become a true real success in finance?

What you need to do is forget everything you learned at school and remember what your grandmother told you, which is walin haram, watch out from the bad people. Your reputation and credibility and long-term relationships, this is what matters, but stay away from bad people. Give it your best shot, work hard. This is not stuff they taught you at school but I think this is the basis of success. To be appreciative, and hard working and remember what your grandmother told you.

From your experience, would you endorse the statement that a Lebanese should go abroad to succeed?

I left Lebanon with $2,000 in my pocket and worked hard. I busted my chops, cleaning dishes and doing whatever. I had a scholarship at a university in the US, got educated at Stanford and Notre Dame and I did well at work. Now I work with Colony, and I am giving back to Lebanon. I like to give back more to Lebanon. Would I have had this opportunity if I didn’t leave? I don’t think so. My mind, the way I think would be different if I would have remained here. I encourage the young people to go wherever their opportunity is. Don’t forget Lebanon; be like what the cedar is like. You have your roots here, and when you find your roots, then you can grow high into the sky. This is a great place to be from, and we have a lot to give back to it. In order to give back to it, one has to find his opportunity wherever it is. If it is in shoe shining, in planting grapes, be the best shoe shiner and the best viticulturist around. Be the best; give it your best.

With those principles on your internal billboard, you yourself rose from starting out with $2,000 in your pocket to what net worth today?

My net worth is measured in terms of the friends and relationships I have, the family I have. That’s my net worth. What we must focus on are the essentials, the priorities in life. Start from the foundation up, fix the human infrastructure and let’s stop all this plastic surgery business. Let people focus on what it is deep inside that governs their lives. Otherwise you end up building a society with false expectations, starting with the children.

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