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Small and nimble players are consistently finding innovative ways to strike big against the Goliaths. This is true whether in today
Less popular cruises?
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While 60 cruise ships dock at Beirut each summer only one, the Ausonia, takes on new passengers, and for three years now, Lebanese holidaymakers have signed up for the weeklong Greek island cruise, organized by the Cypriot company, Louis Cruise Lines. That was until this year, when prices went up by about 5%, noted Toufic Keyrouz, general manager of the travel agency Lebanese International Tours, who feels that the budget cruise may have had its day.
Paul Zahlan, a director of Lebanon
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According to Chateau Musar, the 2003 wine harvest promises wines that are
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Lebanese experts on urban planning and zoning contend that this communal discipline of real estate management exists as nothing more than a quasi-reality here. Sights from nearly every nook and cranny of the country corroborate the judgment. From north to south, communities overflow with building structures that defy common sense, communal planning and esthetics.
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The latest breast cancer awareness campaign has not only been extremely successful, it has also cost the government nothing. The campaign, estimated to cost around $200,000, was fully funded by the pharmaceutical company Roche, which also dipped into its pockets last year. But this time, with the backing of the government, Roche managed to get free airtime on TV channels and radio stations. This collective effort helped reduce the final bill.
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Paying the hospitals
After much back-and-forth in the media, in mid-July an agreement was finally hammered out between the Syndicate of Hospitals and the various government entities and public employee groups that collectively owe almost LL500 billion in unpaid hospital bills. The terms of the deal stipulate that the hospitals
E: When you say you are looking for the best, what defines ‘the best’?
RM: A quality that I especially like to see it is the passion to make an impact on the world that goes beyond making individual gains. It begins with developing the professional side and the personal side and then reaching out to the community, in terms of giving back to society.
E: How do you spot these special qualities in applicants?
RM: They have that drive, that energy, that special electricity. When you see it, you know it.
E: Was it in any way a political or economic decision for the school to intensify your presence here?
RM: Not necessarily. We started in the Middle East about five years ago. Then all the disruptions occurred and we just pulled back. I feel the disruptions in the region will continue for quite some time, but I decided that it is time to come back, regardless, and be part of an answer to some of the problems instead of leaving things stay as they are.
E: Wharton does not have a shortage of student applications. What is the average academic level for students who gain admission?
RM: We use the GMAT score, and the average score is 714. But I think the range is much more important. It is from 640 to 780. You don’t have to have the highest score. It is everything else that really makes the candidate stand out.
E: Can people easily recoup their investment if they attend Wharton, which is an expensive program?
RM: The MBA is a long-term investment. In light of that, Wharton has created a number of programs for financing your MBA that help student to gain access immediately, through loans given to students based on their needs. We hope that students come with a contribution of some small percentage, 10% or 20 %. But if a student can’t do that, it really is the responsibility of the school to provide grants. Students might face short-term pain in terms of servicing loans. But longer term, they will be fine. The gains to society, themselves, and their company will greatly outweigh the short-term pain of those first initial years of loan repayment.
E: But in order to be able to pay back those loans, they almost automatically will have to take a job with an American or multinational corporation?
RM: There is an advantage in working in a different nation for a year or two in order to broaden the experience of the MBA. If a Lebanese student would opt for working in London or Paris to gain diverse experience in the first years, and then come back, usually the salaries and bonuses from those first years do a lot towards paying back the loan.
E: Do you have the impression that anti-American bias has grown in the target group that you approach?
RM: There is no anti-American sentiment when it comes to education.
E: How about visa?
RM: This last year, I had no problems getting visa for my students from the Middle East. They went through an additional screening process but they had no problems because they did things correctly.
E: It is then safe to assume that people coming to Wharton from the Arab world will not experience an anti-Arab bias stateside?
RM: Not at Wharton. After 9-11 and the whole student body was very protective of our Arab students.
E: How many Arab students does Wharton have at present?
RM: Probably 1 to 1.5 %; that is something I’d like to increase.
E: How high is the percentage of non-acceptance of applications?
RM: If we have about 7,000 to 8,000 applications and a class of 800, there is a lot of it. We use a structure where we view the application first and then evaluate these twice, dividing them into two groups, one of about 40 % whom we want to interview and another group whom we don’t want to interview and will deny at that point. We then weed the first group down. It works out fairly well.
E: But you would advocate Wharton as offering a better opportunity than a local school?
RM: Students, who really have aspirations to create value and provide leadership, need to get abroad. The MBA is much more than a functional skill at learning. It is an experience of other cultures, worlds. It is the intensity of the experience. But some people just want to be functional experts that don’t want to leave. There are those who want to make money and therefore are interested in taking the credentials. To them I would say, stay, don’t take that risk; don’t spend the money. It really depends on the needs.
Khalil Daoud, the new chairman and managing director of LibanPost, has set aside a small patch of land outside the company’s headquarters, next to Beirut Airport. “It’s for the employees, so they can grow cucumbers and tomatoes.” he explained. “But they don’t care.” The failed horticultural experiment illustrates how difficult it is to spawn a sense of esprit de corps among LibanPost’s 600 employees, as well as the notion that they have a stake in its success or failure. Only a year and a half ago, after the original LibanPost had folded, many thought they were going to be laid off.
In a bid to bolster consumer confidence, Daoud has started giving the country’s post offices a “rejuvenated look,” by redecorating the offices. LibanPost is now allocating $300,000 to $350,000 a year – about 2% of its roughly $16 million annual budget – to this endeavor, and has spent $300,000 on a new post office off Riad al-Solh Square, in the Beirut Central District.
In addition, the company pays Canada Post $500,000 a year for consultancy services, which include training, and has spent over $1 million this year upgrading its technical capacities. Since he took over LibanPost in February 2002, Daoud has been implementing his vision of an overhauled Lebanese postal system. No easy task, since the country’s postal service was obliterated by the civil war and it was only thanks to local and international courier companies that any post flowed at all during that time.
Daoud said he has had to coax a people grown unaccustomed to using postal services back into the fold. “The core objective was to revamp the mail culture, which was non-existent over here. You had a whole generation without any idea about what a postal administration can offer.”
To this end, LibanPost is attempting to establish itself as a conduit for government services such as passport/residency permit renewals and military service exemptions/postponements. The effort, argued Daoud, bolsters President Emile Lahoud’s anti-corruption drive because it cuts out face-to-face transactions between citizens and government employees, thus reducing the potential for “under-the-table” deals. LibanPost exacts no fees for the renewal services, which it began offering about two years ago. So far, Daoud said, between 75,000 and 80,000 people have renewed their documents through LibanPost. The decision to offer assistance with military service formalities was born, Daoud noted, of his frustration with the time wasted sorting out an exemption for his university-bound son at one of the country’s five military service centers in the Bekaa region. “We had to wake up very early in the morning and when we arrived, there were some 2,000 to 3,000 students in line. We had to wait for several hours.” Initiated at the beginning of the year, the service costs LL6,000, or $4. Every week, the number of related transactions grows by 20% to 25%. LibanPost has processed a total of about 3,000 military service-related requests. In 2004, the company expects an increase to about 25,000 to 30,000 requests.
LibanPost is trying, as well, to foster a retail environment in its post offices by offering stationary products such as greeting cards, postcards, envelopes, packages, newspapers, magazines, Lebanon-themed screensavers, floppy diskettes, books about stamps, prepaid internet cards, credit cards and fuel coupons, bus tickets etc. Post offices also offer fax and photocopy services. “We’re gradually expanding the retail services so that it becomes a one-stop shop for people who are in any case visiting the post office,” said Daoud. On a less enthusiastic note, Daoud bemoaned the paucity of banking-related transactions registered by LibanPost. “So far, we haven’t been very successful with the financial institutions. The bulk of mail from banks consists basically of statements of accounts. Most banks today are not distributing statements of accounts, although [bank clients] pay a quarterly fee for them.”
Before the civil war in 1975, Lebanon’s postal services were under the direct control of the ministry of telecommunications. LibanPost, formed in 1998, is a private company under contract to the Lebanese government to operate the country’s postal services. The ministry of telecommunications and the general-directorate of the post regulate the service, but Daoud said the two institutions do not meddle in LibanPost’s affairs or impose strategy. Revenues are shared, but Daoud said that under the terms of the 15-year agreement he could not disclose the breakdown. Daoud refused to reveal the company’s revenues, but acknowledged that the company is still losing money, and probably will continue to do so until the end of 2003. “Next year, however, we hope to start generating profits. I am 100% convinced that there are ways of making a profit without simply waiting for the government to give us business. In all postal organizations around the world, the government is a major contributor to the well-being of the postal administration – this is not the case in Lebanon,” said Daoud.
LibanPost’s shareholders changed in 2001, and an amendment to the original contract spawned the agreement under which LibanPost in its current form operates. Daoud claimed he was not sure why the previous LibanPost agreement disintegrated, but likened its failure to a “wedding that breaks up – the chemistry didn’t work.” In the belly of the company’s headquarters, video cameras and supervisors monitor employees as they handle the roughly 14 million annual transactions. Mistakes are not tolerated. “We are ruthless with errors,” acknowledged Daoud, from behind the broad desk of his white, spartanly furnished office. “Our clients are like people who go to the same restaurant every day. If one day they find a hair on their plate, that’s it, finished. If we hear of any moral irregularities proved to have been committed by one of our employees, then they are fired on the same day,” said Daoud, explaining that he LibanPost operates a “clean floor” policy. Shortcomings are exposed and discussed during daily, early-morning “debriefing” sessions. “Over the last 18 to 20 months, the quality of the service has been continuously improving,” asserted Daoud.
Nonetheless, in the mail sorting room, boxes full of undelivered letters abound, the envelopes marked in some instances with unintelligible scrawl, or an unidentifiable address – after all, Lebanon has no post code system. Thus, delivering letters in the oft labyrinthine streets of Beirut and its southern suburbs, can be a frustrating, sometimes impossible, task – especially if the envelopes sport addresses such as: “Current resident, 14, Blue Cliff Drive, Lebanon,” or “Ms. ‘X’, Lebanon.” Not surprisingly, the ‘Return to Sender’ stamp is in constant use. According to Daoud, Lebanon’s chaotic or non-existent address system is one of LibanPost’s biggest challenges. “Most of the addresses are either wrong or approximate, like ‘opposite that place,’ ‘next to the mosque,’ or ‘over the petrol station.,’” he lamented. In an effort to push for a postal code, LibanPost has already spent $2 million, but the investment has yet to bear fruit because municipalities will not allow plaques bearing postal codes to be affixed to buildings. “We have sent several reminders on the subject, and nothing has been done,” noted Daoud. An alternative, he said, would be to ensure that every street in Lebanon has a name and every building a number. But because the “ownership” of this initiative lies with the municipalities – of which there are 752 – the process is potentially lengthy. The stack of official approvals that must accompany each act of renaming merely serves to complicate the process. LibanPost’s obstacles, however, do not all arise from bureaucratic red tape. Daoud acknowledged that occasionally mail does go astray, but asserted that only in rare instances is it the fault of LibanPost. Inhospitable janitors or doormen sometimes refuse postmen access to a building, saying they will deliver the letters but do not. “The absence of letterboxes can also contribute to the loss of mail. When letters are left lying in front of doors, perched on walls, or propped up against electricity meters, they are easy prey for dishonest neighbors.”
At the press conference in which he outlined the 2004 budget, minister of finance, Fouad Siniora, began by justifying why the 2003 budget was missed by such a sizeable margin. According to figures for the first nine months of 2003, the deficit stood at around 38%, compared to almost 40% for the same period last year, thus registering a modest improvement. While revenues seem to be on target for the year, and may reach the budgeted LL6.475 billion by year-end, expenditures remain high. Current expenditures (excluding debt servicing) grew almost 8% between January and September 2003, compared to the same period last year, reaching LL3.4 billion against a full year budget of LL4.2 billion. On the other hand, debt servicing, which was expected to be capped at LL4 billion for the year, has already exceeded LL3.4 billion by September, and remains the main factor behind the government’s failure to trim the deficit further. In an effort to justify this performance, Siniora stressed that failure to implement structural reforms in the public sector was to blame for the government’s inability to trim current expenditures and meet its targets, while debt servicing targets set for 2003 were primarily dependent on the proceeds from privatization of state assets, a move yet to be implemented.
In doing so, Siniora absolved his ministry from failing to meet the budget for 2003, placing the blame primarily on the political bickering that has hampered the implementation of structural reforms and the progress of privatization. That done, Siniora moved on to sketch the main highlights of the government’s draft budget for the coming year, repeating the importance of structural reforms in the public sector, and their critical role in achieving any target set for 2004.
He said that the new budget would take into consideration the current and expected burdens on the ministry and the treasury. No new taxes would be levied, nor would there be any modifications to existing taxes, including the famed Value Added Tax, expected to remain at 10%.
On the revenue side, total proceeds were expected to remain stable at around LL6.4 billion, yielding an initial surplus in the budget of LL1.45 billion – until debt servicing comes into play.
Setting the debt-servicing burden aside, total expenditure by the government is expected to stretch by almost 8% to reach LL4.95 billion. Around 69%, or LL3.4 billion of such expenditures are allocated to salaries and wages for the workers of the public sector. With the national debt holding steady at current levels, total interest on the debt for the year 2004 is expected to reach at least LL4.3 billion, constituting 46% of total expenses, 67% of total revenues, and yielding a net deficit for the budget of LL2.85 billion, or 30.8% of spending.
As such, wages and salaries, in addition to debt servicing costs, amount to a staggering LL7.7 billion, or 84% of total expenditures. The remaining 16% of expenditures, or LL 1.9 billion, are allocated among various ministries as normal operating expenses for government entities. While such “discretionary” costs may be trimmed, it would conceivably be difficult to significantly improve efficiencies on that front with no radical structural reforms.
On the other hand, if privatization plans do materialize early in 2004, and if proceeds from such efforts are up to expectations, total debt servicing for the year may drop to LL3.9 billion. Such a drastic improvement would reduce the deficit to LL2.45 billion, or 27.7% of spending. The ability of the government to meet even the high end of the deficit for 2004 remains to be assessed, however, as it still marks a significant improvement over the numbers seen in the second half of 2003, where the deficit reached 38% of spending. In fact, as it has been clearly outlined by Siniora, prospects for additional cost-cutting outside debt servicing are bleak, while revenues are expected to remain flat. On the revenue side, options appear to be very limited, or so the government would want us to believe. Income taxes are already being levied on companies and individuals alike. Consumer taxes are being levied through a 10% Value Added Tax system being applied to almost every type of good or service. Custom duties are still applied to almost all import, including unfortunately raw materials and semi-finished goods for industrial use. From this perspective, it does seem that there is virtually no room for improvements. Any additional or higher taxes and the already high cost of living in Lebanon would squeeze consumption, investments, and subsequently economic growth.
Nevertheless, the case may not be as hopeless on that front as the government is painting it out to be. The government should be able to significantly improve its income not from increasing taxes and duties, but by simply improving tax collection. While no official records are kept on who pays what taxes, or at least no records are disclosed, the possibility of digging in that direction should be seriously considered because the current situation leaves no room for slacking off, especially with the World Bank and IMF breathing down the government’s neck. Improvements can be achieved through better tax collection on currently levied taxes, in addition to levying taxes on some job sectors to this day indemnified from paying taxes (medicine, law, etc…).
On the expenditure side, and apart from debt servicing, it was made clear by the government that the overwhelming majority of expenses (or 86%) is non-discretionary and cannot be significantly reduced. Furthermore, almost two thirds of all expenses are allocated to wages and salaries of public sector “servants”. The majority of members in the government and the parliament seem to believe that no cuts can be implemented on that front. Basic finance stipulates that reducing the debt servicing cost can be achieved by either trimming the amount of debt on the books, or negotiating lower interest rates on the existing loans. It appears that perhaps the easier solution is negotiating lower rates on existing loans, or replacing existing obligations with more suitable ones. However efforts in that direction are limited, with the benefits of Paris II beginning to dissipate as the country still fails to meet the requirement set during the summit last year. The government has failed to prove to potential lender/donor countries it ability to implement needed reforms and complete privatization.
As the current situation stands, on the other hand, reducing the overall debt level without privatization seems practically impossible. Severe drainage at the power company, a sizeable budget deficit, and increasing spending on social welfare are likely to force the government to continue borrowing over the near term. As such, the total public debt level is expected to breach the $33 billion level in the foreseeable future.
Therefore, we again realize that the fate of the country hinges on a matter debated so many times over the past five years: privatization of state assets. Three matters should be addressed with that regard:
– The importance of privatization and its impact on government finances
– The urgency of completing privatization plans
– The likelihood that privatization takes place in 2004.
The critical importance of privatization of state assets and its proceeds has been underlined so many times by various parties, including the World Bank, the IMF, international banks such as Citigroup, Merrill Lynch, and rating agencies such as Standards and Poor’s and Moody’s. The country’s economy is severely burdened by the level of debt, high debt servicing costs and the resulting deficits forcing the government to borrow more. Such factors have prompted a number of rating agencies to downgrade Lebanon’s sovereign rating yet again, stating the pace of reforms and privatization as the main factors behind such a move. Furthermore, the presidential elections to be held towards the end of 2004 are likely to stall any major moves on the part of the government.
Standard and Poor’s proceeded to revise Lebanon’s outlook from Positive to Stable due to fiscal consolidation delays. “The outlook revision reflects our view that the draft budget for 2004 implies a postponement in fiscal consolidation and hence delays the envisaged reduction in the government’s debt burden,” said S&P’s credit analyst Ala’a Al-Yousuf.
The only conceivable solution to reduce the level of debt is through the privatization of some state assets. The two profitable cellular operations should CONCEPTUALLY be easily sold. The power company, on the other hand, is a losing business, with accumulating debts and losses. Nevertheless, serious efforts should be undertaken to sell-off EDL, which by itself is burdening the treasury and forcing on more debts. Proceeds from privatization can range from $2 to $4 billion, and can substantially reduce the overall debt servicing cost by more than 10% in 2004 alone.
Moreover, the benefits of privatization are not limited to the use of proceeds to reduce debts, but such a move would considerably boost the government’s image on the international scene, prompting cheaper lending, more donations, and improve the overall foreign investment climate in the country.
However, as the political bickering has delayed privatization for almost 4 years, the value of the assets, to the contrary of the level of national debt, are certainly not rising. The longer the privatization is delayed, the less the proceeds of such a move will be, and the more damage the government’s already frail credibility will suffer.
The year 2004 is the presidential election year. President Emile Lahoud is eager to improve his public image, while Prime Minister Rafik Hariri is equally keen on meeting his economic targets. It remains to be seen, however, if their plans to improve their public image include a certain compromise on such critical issues as privatization, and how soon, if ever, such precarious steps are to be taken.
The stock market’s upward move this year has humbled many analysts and perplexed even the most optimistic financial experts. Take the all-tech/all-emotions Nasdaq as an example: it’s up a mind-boggling 73% from its October 2002 lows, a tempting sign to many that it’s safe to invest again. But are Wall Street’s happy days here to stay, or is the stock market’s upswing operating on borrowed time?
It is crucial when looking at the market to keep an eye on the big picture, which in this case is that stocks cracked in 2000 and have embarked on a massive bear market. Any moves up within this bear market have to be analyzed in the context of the larger force in action: the bear. In fact, for the SP500 index, the bear market is in the earlier stages of its decline. The Nasdaq, although on the rise – some Nasdaq dream makers are up two, three, even five-fold – it is still down 60% from its March 2002 numbers. This latest rally has brought little real solace for the buy and hold crowd, as they are still down. The short-term punters that have played the move up, however, have cleaned up nicely. But in the meantime, the individual investor must ask the following question: “Is it for real and do I keep my money in?” The answer to both is a resounding “no”.
The move up, from a technical perspective is not so irrational – there have been three other moves up since the crash started, and all had been mistaken for a real revival. This latest surge came with a whole media blitz on how “the US economy is recovering” and in three months, the word “recovery” replaced the word “recession”. The current mainstream view is that the recovery in the US will lead to ever-higher asset prices, but there are two important cautionary factors that should be considered. The first is that the sentiment is extremely positive. This may seem counter-intuitive, but with market participants feeling so buoyant, there is ample room for disappointment. Ever forgetful of the past, the public and the media are being lured into a false sense of security. The market never bottomed at multiples beyond seven or eight and we are currently at 28 times earnings on the SP500. The second factor is that with consumption being the catalyst of any recovery, it is hard to imagine it staying robust without improvements in job creation. Job growth, especially weak in Europe, has faded significantly in the US, with the unemployment rate increasing from 4% at the height of the mania, to near 6%. Chances are, unemployment will continue to rise given the massive overcapacity in most sectors.
The technical factors abound, but the most relevant for the individual investor, is that the bear market is not over. People should be looking at their portfolios and cutting stock exposure to a bare minimum, and while the media and large financial institutions will have you believe that “cash is trash”, this advice will likely turn out ruinous. The notion that people must invest in the stock market is outdated. From 1982 to 2001, the markets were hugging a near perfect up trend (see chart). Since then, it has gone back and forth, sometimes with inebriating speeds, but the market remains below the trend line broken three years ago. What does that entail? It simply reinforces, visually, that despite the recent large move up in stocks, and the hope driven discourse about elections, recoveries, and the “new world”, the markets are still in dangerous territory. Even the sexiest alternative investment will not dodge the coming deflation in prices across the global markets, especially in US stocks and corporate bonds. It is much simpler to adopt the optimistic scenario, as it flows strongly in the ambient media. But one must be more cautious than ever before of the dream of long-term prosperity in stocks. Having been devastated by hope on multiple occasions in the past, it is an elixir that should be passed up. Stay in cash, invest where you live, and preserve hard-earned money. Cash, far from being trash, is the ammunition for investing when no one, including CNBC, will be positive on stocks. For now, stay liquid for the stormy winter.