Economics & Policy

Moneyed marriage

by Tony Hchaime
written by Tony Hchaime

Following the failed merger talks between Banque Audi and Banque Libano-Francaise in 2002, few anticipated the announcement of last month’s $159 million merger acquisition of Banque Audi and Banque Saradar. Moreover, such a merger differs significantly from the type of consolidation sought by the central bank, namely a consolidation of the smaller, less efficient, banks in the country. Nevertheless, the announcement of the Audi-Saradar merger took the market by surprise at first, only to make significant sense as details of the transaction began to trickle down to the market.

The deal ($100 million in cash and $59 million in shares), will lead to the creation of the largest banking group in the country and have significant implications on a number of levels related to the banks themselves, the banking sector locally and regionally, and Lebanon’s economy.

Banks in Lebanon have been facing a growingly competitive domestic environment over the past few years, not to mention the significant difficulties such banks are facing when attempting to venture into Arab markets. Lebanese banks lack the scale, efficiencies, and branding to establish a strong presence on the turf of banks like Saudi American Bank, National Bank of Kuwait and Arab Bank, among others. In that regard, the sheer scale of the combined Audi-Saradar entity provides the group with the cornerstone upon which to build a regional platform. With total combined assets in excess of $9 billion ($12 billion including fiduciary deposits, security accounts, and assets under management), the group begins to close the gap with the likes of Arab Bank, whose assets at year-end 2003 reached almost $24 billion.

There are also a number of financial, human, and commercial synergies that underline the drivers of the transaction. Both banks achieved significant growth rates over the past few years, with Banque Audi’s total asset and deposit growth reaching 38% and 42% respectively in 2003. In parallel, Banque Saradar’s total assets and deposits increased by 11% and 13% respectively over the same period. With such growth rates achieved individually, the now combined entity is likely to generate additional growth, and further widen the gap with other leading banks in the country.

Prior to the merger, Banque Audi benefited from a strong grip on the retail commercial banking market in Lebanon, gaining significant ground on retail-oriented competitors, including large banks, such as Byblos and Bank of Beirut, in addition to medium-sized retail banks, such as Al Mawarid. Saradar, on the other hand, benefited from a strong grip on the private banking and investment banking market in Lebanon, while lacking the retail aspect of commercial banking. With the consolidation of both banks into one entity, they have successfully created one banking corporation that can provide the full range of services, targeting both retail consumers and those seeking personalized private banking services. In that regard, the new entity might introduce a new competitive spirit to a sector in which few banks can efficiently provide a full range of financial services. However, customers of smaller banks in Lebanon typically favor such small-sized institutions because they offer a more personalized banking approach. As such, they would be less at risk than larger institutions – with the latter perhaps seeking to engage in M&A activities – seeking complimenting banks to merge with, in an effort to ward off any erosion of their market shares.

On the commercial front, both banks’ commercial strategies highly compliment each other. Banque Audi is highly aggressive on retail banking, dishing out new products for end consumers almost on a monthly basis, coupled with a range of insurance services through its Libano-Arabe subsidiary. Banque Saradar is more private banking oriented, with efforts to target the high-income high-net-worth individuals and groups in Lebanon and abroad. In that regard, the banks compliment each other in such a way as to target the totality of the market, from the low-income retail customer to the high-net-worth Lebanese and Arab individuals.

Moreover, both banks’ organization and personnel structures are highly synergistic, sharing many similarities in their overall culture and management approach. Such synergies were emphasized by Raymond Audi’s statement that “[the] two banks share the same values within an overall corporate culture based on integrity, transparency, innovation and quality.”

As per the terms of the merger, the Saradar shareholders will receive shares amounting to about 9% of the combined entity. As such, the new merged bank will benefit from a strong shareholder base, combining prominent Lebanese shareholders with well-connected high profile Gulf-based shareholders. In that regard, Banque Audi has historically sought to acquire certain institutions to benefit from their well-established regional shareholders, as was the case with the acquisition of Lebanon Invest.


It should be clearly outlined, however, that the Audi-Saradar merger is not limited to the banks themselves, as it has significant implications on the banking sector in Lebanon, the region, and the Lebanese economy.

The primary implications are certainly on Banks Audi and Saradar themselves. However, such implications are likely to coincide with the factors that drove the banks to merge in the first place. As such, the implications are likely to be mostly of a positive nature, capitalizing on the synergies between the banks. The combined efforts of Audi and Saradar are likely to further boost growth in deposits, loans, and overall assets, and are thus likely to further reinforce their position as the largest banking group in Lebanon.

Now we should see other big banks such as BLOM look at alternative routes to preserve its position in the Lebanese and regional market. Industry experts indicate that a drastic strategic change, although perhaps necessary, may not fit as well within BLOM’s culture. In fact, despite its scale, BLOM remains a “family-business,” much less institutionalized than Audi and Saradar. At Audi, the bank’s management consists of a team of professionals from various backgrounds, which have no major shareholdings in the bank. At BLOM, the bank’s management is tightly in the hands of Saad Azhari, vice chairman, and son of the bank’s founder and major shareholders. In this regard, BLOM may be less willing to open up its capital to other institutions or investors. Nevertheless, certain market developments that may endanger the bank’s position in the market may finally drive the Azharis to succumb to pressures and engage in the M&A route.

The word on the street is that the Audi-Saradar merger is the necessary trigger to the much-awaited wave of consolidation in the Lebanese banking sector. Essentially, this would be true if the proper drivers behind the transaction are clearly communicated to the market as incentives for others to follow suit. Moreover, the synergies between Audi and Saradar may not be so evident to other banking institutions in the country. Nevertheless, many banks in Lebanon realize the eventual necessity of consolidation, as they face the competitive risks brought forward by local and regional large-scale banks. In that regard, they are also heavily supported by the central bank, which is favoring consolidation in an effort to reduce the fragmentation in the sector and improve efficiencies. It is likely, however, that other banks will closely watch Audi’s ability to successfully consolidate its operations with Saradar as a precedent to taking any such actions themselves.

It was clearly articulated by the chairmen of both Audi and Saradar that combining the two entities significantly enhances their chances of successfully expanding regionally. This would certainly make sense given the necessities required to establish a presence in Arab markets. The GCC banking environment is highly competitive, requiring aggressive marketing, scale, advanced IT systems, a full range of banking and financial services, professionalism and efficiencies. While some Lebanese banks may achieve some of these characteristics, none actually benefit from the combination of such parameters, certainly not to the scale required by sophisticated Arab investors. Eventually, however, Lebanese banks will have to make some defensive move to defend even their local market shares, as the large-scale Arab banks have been somewhat successful in venturing in the Lebanese market, and many have been able to carve themselves a significant market share locally.

On a more general note, the Lebanese economy stands to be greatly affected by such a consolidation in the sector. In the short-term, the economy may be ill-affected by the higher degree of unemployment that typically results from consolidations. On a longer term basis, larger, stronger and more efficient financial institutions offering a full range of financial services, up to international standards, may allow the country to regain its role as a regional financial hub – a role taken away by Bahrain and Dubai.
Tony Hchaime is an investment banker at the Middle-East Capital group (MECG).

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Business

Sphere of influence

by Michael Young
written by Michael Young

In mid-February, the London-based daily Al-Hayat published an Arabic version of a US working paper that was to be presented to the G-8 summit at Sea Island, Georgia, from June 8 to 10. The paper, which was prepared “for G-8 Sherpas,” or senior advisors, outlined what the Americans have called the Greater Middle East Partnership (GME). The aim of the US is to see the GME project adopted by the wider G8, so that it can act as a basis to help “forge a long-term partnership with the Greater Middle East’s reform leaders and launch a coordinated response to promote political, economic, and social reform in the region.” In mid-March,New York Times reported that the document would not be presented the Sea Island summit after all. However, a senior US official privately noted this was incorrect, and that what may change is the way the document’s ideas are proposed: rather than be submitted unilaterally as G8 policy, it may be presented, more diplomatically, as a response to Arab requests. The three broad guidelines of future G8 action, according to the document, are the promotion of democracy and good governance, the building of a knowledge society, and the expansion of economic opportunities.

In early March, in the run-up to Arab League summit in Tunis at the end of the month, there was considerable criticism directed against GME in the Arab world. Arab states were divided into three groups on how to respond to the initiative, with one group supporting a dialogue on it, a second advocating caution, and a third calling for outright rejection for what was deemed meddling in Arab affairs. Egyptian President Hosni Mubarak, for example, declared: “We should not give others the opportunity to map out our future, define our course, or work on reforming us. We must take the initiative ourselves.” Sheikh Khalifa Bin Salman Al Khalifa of Bahrain noted that “imposition of any foreign view point separately is not in the interests of countries of the region.”

In a commentary in the English-language Al-Ahram Weekly, Egyptian commentator Mohamed Sid-Ahmad spoke for many Arabs when he noted that affirmation of a “greater Middle East,” by expanding the geographical boundaries of the region, “dilutes the importance of the Palestinian problem and demotes it from its central position on the political stage of the Middle East to a marginal position as just one of several ‘hot’ issues plaguing a much wider region.”

However, even a cursory reading of the US working paper shows it to be a remarkably satisfying wish list of reform for the region, with many of its principles already being applied through bilateral programs. Nor were the framers intimidated by the unilateralist preferences dominating in some quarters in Washington. Aside from relying heavily on the UNDP’s Arab Human Development Report of 2002, which was written exclusively by Arabs, the document emphasized that “genuine reform in the GME must be driven internally” through the civil societies of the region. In other words, the G-8, if the GME project is agreed, has the potential to be a hybrid Marshall Plan and Helsinki process for the Middle East. So, why is there such animosity toward it in the Arab world and Iran? The easy answer is that no leader wants the West to advance social, political and economic processes that will undeniably erode their own power. As the halting reform efforts in Saudi Arabia, Egypt and Syria have proven, change is only acceptable when it can ensure, or enhance, the authority of existing regimes. From the perspective of most Arab populations, however, bona fide reform must imply a possible change of leadership. Another fear in the region, as Sid-Ahmad suggested, is that GME would simply detract from the centrality of the Palestinian problem. While no one would quibble with the necessity to end the Palestinian-Israeli conflict, the insistence on using it as a benchmark to judge GME carries with it a high price tag. For one thing, Middle East reform must not be held hostage to a conflict most states in the region cannot control; for another, true regional reform would, one assumes, positively affect the behavior of Israelis and Palestinians as much as it would that of surrounding states.

However, there is a more fundamental reason for the regional animosity to GME, and it comes from the two very different philosophies defining state-to-state relations – one prevailing in the Middle East, the other in the West. In the past decade or so, the concept of state sovereignty has been recast in the West, so that states can no longer hide behind it to shield their more harmful policies. Whether due to humanitarian intervention, international efforts to curtail war crimes, regional cooperation projects, or the expanded role of the UN, state boundaries are eroding at breakneck speed. Even American neo-conservatives are, above all else, enemies of sovereignty as a barrier to the dissemination of Western, or indeed American, values.

This is alien to the Middle East, where brutish regimes have always received a free ride (including from the US) on the grounds that outsiders had no right to interfere in their affairs. What emerged was a conspiracy of silence, as all were complicit in the nasty order of things. However, GME – much like the Euro-Med partnership agreements or the US Middle East Partnership Initiative – is a reaffirmation that what is bad for the Middle East can also, ultimately, be bad for the rest of the world. That was the message of September 11, and the inability of the region to fully gauge the importance of that day is why so many have trouble understanding the importance of GME, as well as the West’s commitment to regional reform.

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Economics & Policy

Q&A: Freddie Baz

by Executive Staff
written by Executive Staff

How long were the two banks involved in negotiations before signing the agreement to form a single group?

The two banks have had a long proactive relationship. Every now and then we sat together on the managerial level and assessed the situation of the banking industry in Lebanon and the consolidation process. In this favorable environment, more direct talks started two to three months ago but as one issue among several in our meetings. After negotiations started in serious, the whole process didn’t take more than one month.

Then it was a smooth procedure?

It was a very smooth procedure. The two parties are really open minded and not driven by any subjective considerations, which normally present an important obstacle for merger operations. There was never any ego dimension. Issues came up in a healthy way and never generated emotional attitudes or structural obstacles.

Will you form a group of banks or a single bank?

When Banque Audi becomes the sole shareholder of Saradar, Saradar shareholders will change part of their shares into Audi shares, and therefore will become shareholders of Banque Audi. We call the new entity that is emerging, the Audi-Saradar group, which, however, is not a legal concept. From an accounting standpoint, Banque Audi is the holding company where all the accounts of all the subsidiaries will be consolidated.

Under perspective of management culture and operational environment, would you describe the deal more as a merger or more as an acquisition?

In a merger, one institution absorbs another institution, which is not the case here. Both banks are keeping their legal status. As Banque Audi is paying partly in cash and partly in new Audi shares to be issued exclusively to Saradar shareholders, you can consider the cash configuration as an acquisition and the share configuration as a merger. But the spirit of the negotiations was the most important element, and the spirit was the spirit of a rapprochement of two banking groups into one mega group, which is Audi-Saradar. It is really a rapprochement between two banks, creating huge synergies at different levels: human, managerial, franchises, commercial, financial and so forth.

Is the absence of the merger law going to affect the process?

The scheme that I was describing by definition does not get any benefits from the merger law. Even if the law were in place, we would not have been granted any soft loan, because both entities are still operating and no license will be given back to the central bank.

Was size ever a consideration in the discussions?

Size has never been a target for us. Banque Audi’s target has always been to be among the best banks in Lebanon, not the biggest bank of Lebanon. However, when you reach the high quality level, which we believe we have reached over the last three years, your customer base obviously expands, and size follows.

Is your key strategic aim domestic or regional?

Both are related. You cannot expand beyond your national boundaries if you haven’t reached a mass in the domestic market. It is surprising that a country like Lebanon, which has developed its banking industry to 3.5 times the level of GDP, couldn’t build private entities with a size that would allow them to compete with regional banks. If two, three or four major banking groups in Lebanon materialize, and if each of those banks have a size similar to the top two or three in some countries in the region, we have a lot of chances to gain market shares in those markets.

Will financial firm Lebanon Invest be taken out of the market?

Who said that? By definition, if a merger or acquisition results in having three of four insurance companies or investment companies, the healthiest solution is to consolidate internally. But for the time being I cannot say that we have decided to liquidate this or merge that. Without going more into specifics, I can say we are in the process of reassessing all subsidiaries in order to generate the highest financial synergies.

But is it correct to say that Saradar Investment House will be absorbed into Audi Investment Bank?

If you believe in internal consolidation, by definition you have to consider it internally. For the time being there are no schemes at all for any of those entities. Starting with the signatures under the merger-acquisition agreement, we are becoming one entity. In each single entity, the best people have to manage the business, and in each subsidiary, the best people will get the responsibilities warranted by their expertise. I do not comment on these issues now because the steering committee has been assigned. It will assess the real values in each business. There are no preset positions.

How long do you estimate the steering committee to have to work on these assessments?

The committee’s role is to ensure the rapprochement’s best and optimal conditions to assure the interests of the new shareholders, which represent the old shareholders of both entities. It is a matter of not just assessing material things. In view of our size, it should take a minimum of two months or perhaps three.

In any merger, people in the involved companies have concerns over their jobs. Did you discuss any redundancies?

No. Since these entities will operate under their actual status, there is definitely room for all the people working for the group. The business synergies resulting from the rapprochement will probably create need for further jobs in the group.

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Business

Q&A V5 Project

by RabihIbrahim
written by RabihIbrahim

The latest mall to emerge on the Beirut scene is V5, to be constructed in Verdun and completed in early 2007. The joint venture between United Real Estate Company of Kuwait and Horizon Development Company of Lebanon will cost about $180 million and consist of a total built-up area (BUA) of approximately 148,000 m2 on an 18,000m2 plot of land. As well as an international department store, retail outlets, and a supermarket, other features will include various eateries, a cinema complex, a parking lot for 2,000 cars and furnished apartments with an estimated BUA of 7,600 m2. Future hopes for the center are already optimistic: total retail sales are expected to reach around $200 million by 2010. EXECUTIVE spoke to Afeef Makkawi, Horizon

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The Buzz

Objects of Desire

by Michael Karam
written by Michael Karam

Bentley makes its move


Saad and Trad have been blowing their trumpet about the new Bentley Continental GT. And why not? There are few names in motoring that match the romance, elegance and sheer brute force served up by Bentley. Today, Bentley is owned by those nice people at VW, who have been selling Bentley since January 2003. The Germans are at pains to point out that the car is still a wholesome bastion of all things British and admittedly the Bentley Continental GT is all car. Forget the walnut and leather (although it’s difficult), it’s the mechanics that will really blow your mind. The 6-liter, yes 6-liter, engine can do 0-60 mph in 4.7 seconds, with a top speed of 198 mph (that’s 318 km/h to you foreign chaps). Fast enough? If you want one, it will set you back £145,000 (plus VAT and registration) but there is a two-year waiting list. “We expect it to do well,” said Michel Trad. “Rather like what the S-Type did for Jaguar.”

When Bentley and Rolls Royce were made by the same people, there was a saying that Bentleys were meant to be driven, while Rolls Royces were meant to be driven in. They knew what they were talking about back then.

A Kind of Blue

Staying with objects of desire, those of you who ever wondered why Johnny Walker Blue Label was so ridiculously expensive, should have gone along to the Phoenicia Intercontinental last month to hear Ian Williams wax lyrical about the Cardow distillery’s finest. Created in the 1990s, on the back of demand for super luxury blends and malt whiskies with unpronounceable names – especially from wealthy Japanese executives who have a habit of getting excited about Western luxury goods – it has become synonymous with extravagance, luxury and mystique and, in some cases, international intrigue (it was allegedly Saddam Hussein’s whisky of choice). However, Williams, a distiller by profession, was in Lebanon to dispel some of the myths surrounding what is essentially nothing more than a magnificent whisky. “When we created Blue Label back in 1993 we wanted a blend that would hark back to the days when whiskies had that unique heavy Victorian style,” he said. He went on to explain that unlike Black Label, which is a blend of 40 whiskies, Blue Label is made of 15, but, according to Williams, they are chosen with care. “We have 7 million casks of maturing whiskies at the Johnny walker distillery and every now and then we get one that achieves something special. These, as well as our stock of rare whiskies, often from distilleries that no longer exist, are put aside for Blue Label.”

But does it taste any good? Williams suggests a mouth of iced water before every glug of “Blue” to clean the palate, but in all honesty this can become a bit of a performance after a while. Price aside there is no doubting Blue Label’s pedigree; it really is an outstanding whisky, but like the great malts, it is so potent and rich in flavor – nose, palate and length are all rampant with peat, oak, fruits and spices – that it has moved beyond the normal confines of whisky and into the realm of the great brandies. As such, it is probably best drunk after a meal – Williams even suggests drinking it from a brandy glass. To add ice is to miss the point and so the only real debate is whether or not to add water. There is no doubt, Blue Label is a fabulous whisky, but at $150/bottle, you had better start saving.

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Business

Falling on Deaf Ears?

by Michael Young
written by Michael Young

In mid-February, the United States government began its latest endeavor to change hearts and minds in the Arab world, as its new Arab-language satellite news station, Al-Hurra, began broadcasting to a mostly dubious Middle East audience.

Al-Hurra, or the “free one,” is a $62 million project funded by American taxpayers that will fall under the authority of the US Broadcasting Board of Governors, a public body. It currently employs some 200 staff and will be headed by Lebanese journalist Muaffaq Harb, formerly a correspondent in Washington. Almost immediately, critics in the Middle East dismissed the station as a propaganda tool of the United States. Some observers pointed out that the station merely repeated a pattern of American public diplomacy efforts that had already been shown to fail. Indeed, the State Department last year launched a radio station, Radio Sawa, and an Arabic-language lifestyle magazine titled Hi, to offer Arabs a friendlier image of America. The magazine in particular was met with crushing indifference. In an interview last year, the US ambassador to Lebanon, Vincent Battle, fended off a skeptical interviewer: “Hi and Sawa are part of a public diplomacy campaign that is growing. There is a perceived need to increase our communications with the Arab world, and for the Arab world to increase its communications with the United States as well. We’re making efforts to do that.” He did add, however, in an implicit admission of problems with such attempts, that: “Some of those efforts are more successful than others.”

In condemnation fairly typical of that in the region, Jordanian columnist Rami Khouri thumped the chairman of a US Advisory Commission on Public Diplomacy, who had said that “creating a credible communication channel from the United States to the Arab world is the greatest diplomacy challenge since the end of the Cold War.” Khouri responded: “Wrong again. People in Washington who think like this are offering counterproductive projects, reflecting inappropriate policies, based on inaccurate analyses, stemming from faulty diagnoses. Perhaps not since the Emperor Nero blamed the fledgling Christians for Rome’s domestic troubles … has a world power so flagrantly engaged in misguided policies that scapegoat others, instead of rationally analyzing the collective mistakes…of all concerned.”

Meanwhile, a serene Norma Pattiz of the Broadcasting Board of Governors waved all the criticism away. “People can sit there and say whatever they want before [Al-Hurra] launches … I think they may be interested in the fact that we may bring a different perspective,” she said.

The first thing that comes to mind is, why so much animosity in the Arab world against the station? After all, $62 million is fairly modest in the satellite news world, so Arab viewers won’t risk being unfairly enticed by sparkling production quality. And if viewers do find Al-Hurra objectionable, all they will have to do is switch to another channel. Surely the fact that the US government is keen to “reach out” to the Middle East, no matter how mawkish that may sound, hardly invites such annoyance.

What Al-Hurra’s critics miss is that Arabs suffer not at all from an additional station — whether it is a propaganda outlet or not. The only ones who do are US taxpayers. The real difficulty with Al-Hurra is that it is solely an American public policy liability.

There are two reasons for this, one general, the other specific. In general, there seems little reason for Americans to put money into a station over which they have no influence, which they will probably never see, or little understand if they do, and all in an enterprise that seems doomed from the start. However, making things even more absurd is that the station’s overseers, in the hope of attracting viewers, have promised to follow a balanced approach to regional politics. Al-Hurra is to be a propaganda station without propaganda. Somehow, that misses the point, doesn’t it? Not only does “being balanced” not explain why Americans should foot the bill — if the goal is to distance the station from official proselytism, why not just turn the whole thing over to the private sector? It also doesn’t explain what will make Al-Hurra different from countless other Arab satellite news stations, or those non-Arab stations freely available to viewers in the region. In other words, if the US government insists on going into the news business, it might as well use its outlet to disseminate official policy. However, to set up a station and then shy away from turning it into a mouthpiece seems a contradiction in terms.

In the end, what the US government has not considered is the market. In starting up Radio Sawa, Hi and Al-Hurra, it failed to ask whether public funding was truly necessary. Had the projects been potentially successful (and Al-Hurra may yet work), the ideas could have been sold to private-sector investors from the start. When it became clear they were not likely to be a hit, the government got involved anyway. Is that smart? Not especially. It showed the US government failed to understand the market it was supposed to appeal to. Worse, it ignored it, and now Americans are paying.

Michael Young is a contributing editor at Reason Magazine in the US.

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Business

Looking to Lebanon

by Tony Hchaime
written by Tony Hchaime

The Sannine Zenith project was unveiled at a Jeddah conference on January 17th, when the audience was told that the project would cover almost 100 million square meters (the size of Beirut) and be home to a population of 30,000. It will also accomodate a 3 million square meter man-made lake, 18 million square meters of ski slopes, an 18-hole golf course and five-star hotels, all financed by $1.4 billion worth of GDR. Although the project is currently 99% owned by the Lebanese Jean Abi Rached’s Al Salam Group, 18% ($252 million) of options have been subscribed to by Saudi Arabian investors. The Kingdom of Saudi Arabia remains the largest Arab investor in Lebanon, (even though the UAE appears to contribute the most to overall Arab investments) with total documented investments for the year 2002 (the most recent figures) reaching $350 million, following a staggering 290% growth over 2001. Saudi investment in the Sannine Zenith project, is further evidence that the kingdom is pulling away from the rest of the field in terms of investing Lebanon.

For the record, UAE Investments come a distant second to those of Saudi Arabia, peaking at $191 million in 2002, compared to just under $70 million in 2001. Kuwait is the only other major Arab presence in Lebanon, contributing around $100 million in investments in the year 2002, a figure up from around $47 million in the previous year. Saudi Arabia’s investments in Lebanon accounted for 16.5% of the Kingdom’s total foreign investments in the year 2002, a significant rise from only 4% in the previous year. This indicates a growth in the allocation of Saudi funds to investments in Lebanon and compares favorably with Kuwait and the UAE, whose investments in Lebanon accounted for only 6% of their foreign investments over the same period.

Lebanon’s close relations with Saudi Arabia are not a recent development, nor are they limited to one aspect of cooperation or level of involvement. In fact, Saudi Arabia represents Lebanon’s second largest trading partner, accounting for 9% of exports in 2002, behind Switzerland at 13%. Saudi Arabia was the single largest contributor to the Paris II donor conference held in late 2002, although Lebanon has only drawn on part of $700 million pledged, because many of the conditions underpinning the loan have not been met. Helping to push through this investment are the close ties between Prime Minister Rafik Hairi and the royal family of Saudi Arabia, which play a significant role in promoting Lebanon in the Kingdom, while the majority shareholders on most of the Prime Minister’s large corporations operating in Lebanon (including Solidere) are Saudi Arabian.

Saudi Prince Al Walid bin Talal is another major player. Born of a Lebanese mother, Bin Talal is seemingly seeking more significant involvement in Lebanon, and has even been rumored to harbor political ambitions. This is clearly illustrated by the $98 million investment undertaken by Prince Walid bin Talal for a 49% stake in Lebanese TV satellite giant LBC SAT. Bin Talal also inaugurated his $140 million Movenpick hotel in Beirut in the year 2002, and has already begun the construction of the $100 million Four Seasons Hotel in the Beirut Central District.

Hariri and bin Talal are not the sole driving force behind Saudi investments in Lebanon, which is attracting other funds by offering an attractive risk/return environment for investments. A high consumption market, and a tourism infrastructure that has attracted more than 1 million tourists in the year 2003 alone, and is set to attract an even greater number in the year 2004 – should drive returns higher. With such a structure, investments in Lebanon offer concrete economic benefits to Saudi investors, who can capitalize on the dual benefits of higher returns on investments and a significantly low cost of capital enjoyed by such investors. With a consumption-driven market, a prosperous real-estate sector, and a strong tourism industry, projects yield annual returns of anywhere between 10% and 15%. Such results emerge as attractive to Saudi investors, whose cost of capital does not exceed 5%, and thus earning them net returns of between 5% and 10%.

The risks are relatively well quantifiable, and can be mitigated, capitalizing on the country’s well-established and sophisticated financial services industry. Regional political risks, while unavoidable, are also relatively limited in Lebanon, compared to countries with a close proximity to Iraq, Iran, Israel, and other high-tension areas. Furthermore, the Lebanese economy appears to have a sizeable potential for growth in various sectors, especially tourism, real estate and financial services. In such a sense, the growth in the Lebanese economy is not oil-dependent, unlike other regional attractive markets such as the UAE and Kuwait.

Statistics released by the Inter-Arab Investment Guarantee Corporation have indicated that the services sector in Lebanon attracts the vast majority of Arab investments at 85% in 2002, while industry and agriculture share the remaining 15%. Such a breakdown is not surprising, given that Lebanon’s tourism and hospitality industry presents the greatest investment opportunities in the country. A rapidly growing inflow of tourists, illustrated by the massive numbers seen in the summer of 2003, is quickly overwhelming the existing facilities in terms of hotels, resorts, and other leisure and tourism services. Considering that Beirut attracts the majority of wealthy Arab tourists seeking premium services and hotels, the capital’s accommodation capabilities for such services is limited. Until three years ago, the Phoenicia Intercontinental was the sole non-boutique 5-star international hotel operating in Beirut, and benefited from a virtual monopoly on the market.

Such opportunities did not pass unnoticed. Apart from bin Talal’s spending, other developments include joint Saudi-Lebanese investments in the Summerland resort ($70 million), in addition to the on-going efforts to rebuild the Hilton Hotel ($128 million). Such a market condition prompted Arab investors to rapidly establish a presence in the country’s hotel industry, illustrated by the substantial investments undertaken by the likes of the Dubai-based Habtoor Group in the Metropolitan Palace Hotel.

Arguably Lebanon’s second biggest draw is the real estate sector, which is also attracting a large number of investors, seeking to establish in Lebanon a second home, one capable of providing them with the optimal mix of business and pleasure. Among such individuals is the personal aide to Saudi Arabia’s King Fahd, who recently acquired a multimillion-dollar penthouse apartment in the Beirut Central District. In addition, a recent report by real-estate consultants RAMCO indicates that 80 Arab investors have purchased up to 1.8 million square meters of real estate in Lebanon between 2001 and 2003.

Furthermore, Lebanon’s increasing role as the regional venue for conferences and conventions is creating a need for a more permanent residential presence for high profile Arabs. Such political events as the Arab Summit, and economic and financial conferences as the Arab Capital Markets, are attracting increasing numbers of Arab businessmen and investors. These developments are substantially increasing the need for accommodation facilities, including hotels and residential buildings. On the one hand, this creates substantial investment opportunities to Saudi investors, enabling them to capitalize on the sustained growth in the market. On the other, such developments are encouraging Lebanese investors and developers to regain faith in the country, making them more willing to undertake new projects.

The benefits of Saudi investments to Lebanon are not limited to such direct financial benefits, however, as the growth in Saudi investments has a large number of positive implications on the country’s economy and overall well-being. On the social and economic fronts, large-scale investments are providing substantial employment opportunities. Upon completion, the Four Seasons Hotel will require almost 300 employees, while the Summerland Resort currently employs more than 250 individuals. Moreover, the flow of Saudi funds to Lebanon has significant secondary effects as well, in the sense that it inspires confidence in the country’s abilities, a confidence that has been wilting away over the past five years, mainly due to the economic hardships and internal politics.

Shrewd by reputation, Saudi investors do not undertake large-scale investments unless based on certain risk and return assessments. Such investors can seemingly see sizeable potential in investments in Lebanon, as illustrated previously. This is having a significant impact on Lebanon as a whole, as it is inviting both Lebanese and other foreign investors to join the growing trend. Numerous ventures are already being undertaken by Lebanese companies and individual investors to capitalize on the trend. Three massive residential towers, worth more than $100 million each, are being developed on the sea front of the Beirut Central District. According to sources at Marina Towers – one such development – almost 80% of apartments have already been sold, with the majority to Gulf-based individuals. Moreover, the Park View high luxury residential building developed by Beirut-based investment bank, the Middle East Capital Group, has been almost entirely sold, with more than 70% of apartments purchased by Saudi individuals, at a price approaching $4,000 per square meter.

From such a viewpoint, Lebanon would appear to have regained to a great extent, its historical prosperity, and may be on the verge of regaining its role as the regional hub for investments. Nevertheless, a large shadow remains cast over the whole country, suffering from large budget deficits, an ever-growing public debt, and political squabble hindering any possible advances on the privatization front. That is to say that just attracting foreign investments is by no means enough to support a nation of 4 million people, and secure jobs and income to improve living conditions. It is certainly surprising to observe how Arab investors are pouring money into investments in Lebanon, while the Lebanese government’s credibility leaves something to be desired. Such an ironic set-up raises questions as to the long-term prospects of investment flows into Lebanon. While the country may, in the short term, capitalize on regional and international conditions to attract Arab investors, significant advances in economic reforms are indispensable if Lebanon is to be able to improve, or even retain, its appeal.

Nonetheless, Lebanon’s sovereign risk, although relatively significant, benefits from a more stable socio-political environment, when compared to Saudi Arabia or Kuwait. While the Saudi economy benefits from substantial levels of liquidity, the investment environment is often plagued by internal discontent, unease, and threats of terror and retaliation. The political environment in Lebanon, while also suffering from some internal political unease, is relatively calmer and more resilient, thus better suited for longer term investments. According to comments by some large Saudi investors, they view Lebanon as a safe haven, enjoying banking secrecy and an attractive investment environment, at a relative distance from regional political tensions.

Tony Hchaime is an investment banker at the Middle-East Capital group (MECG)
 

FINANCIAL IMPACT

The attacks of September 11, 2001, which caused a flight of Arab capital away from Western markets – have seen liquidity levels in the Gulf rise to unseen levels

Triggered by the events of September 11th, 2001, and the ensuing long-lasting and global response by the US government, wealthy Arab investors have radically changed their strategies regarding their global investments. The sudden policy changes by the US government regarding Arab financial resources in the US, and the crack-down on Islamic charity organizations, accelerated the exodus of Arab funds from investments in the US and Europe, which had already begun to shrink due to a number of other factors, including a low interest rate environment globally, and growing investment opportunities in some markets in the Middle East region. As a result, liquidity levels in the Gulf have risen to levels unseen in years, providing the whole region with a rare opportunity to accelerate developments on all fronts.

The wealthiest Arab countries, and those that are likely to contribute the most to inter-Arab investments, are the United Arab Emirates, Saudi Arabia, and Kuwait. Of the three, the UAE has the largest amount of funds invested outside the country, or dedicated for foreign investment. Saudi Arabia follows closely behind, ahead of Kuwait. The UAE’s investments abroad totaled $3.14 billion in 2002, compared to $2.13 billion for Saudi Arabia, and $1.64 billion for Kuwait. Moreover, the UAE’s new investments abroad reached almost $450 million in each of the years 2001 and 2002, compared to less than $50 million for Saudi Arabia.
 

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Thinking Positive

by Thomas Schellen
written by Thomas Schellen

Talk to local manufacturers and you won’t hear a lot of talk about demand cycles and product innovation, successful brand building and the occupation of new niches in international markets. Instead you are more likely to get an ear full about issues such as excessive location costs and energy prices, the overbearing bureaucracy, unpredictable and unstudied alterations of customs tariffs, insufficient loan facilities and expensive credit. It’s not that these complaints aren’t well founded. The obstacles and troubles are real enough. But there seems to be a danger that the concerns and worries could turn into industrialist mantras of doom and self-destructive laments. This would not help a manufacturing entity that already has its share of existential questions. The Lebanese public and the representatives of the various communities and political interests in the country should have no reason to doubt, or as occasionally has happened, even refute that this is a country with room for industrial production.

Of course, Lebanon is a country where industry is possible. Of course, its industry has its success stories, existing or potential niches and areas where it has an edge. Otherwise, the country’s 7,000 or so “real” industrial entities and its 15,000 to 20,000 additional micro and cottage enterprises would not exist.

The history of modern industry in Lebanon – and one does not want to reminisce here about the production of purple dye in the Tyre of antiquity – spans a century and carries less weight than the country’s famed story in trade. But for a country of small spaces and restricted in natural resources, Lebanon has earned considerable industrial laurels in those 100 years.

In the establishment of industrial enterprises, it was in many instances a pioneer in the Middle East, from bringing in the region’s first machine for the conversion of plastics, to being ahead of many countries in the development of its cement industry. A special chapter in the annals of Lebanese industry is the way in which many manufacturing companies survived the grueling years of conflict. And although industrial activity in numerous other Middle Eastern countries has increased tremendously in the past quarter of a century that presented manufacturers – and all businesses – here with so many difficulties, Lebanon today still ranks very high in a comparative Middle Eastern context. “Regionally, Lebanon appears to be the most versatile economy,” stated a new research survey prepared this January by a German economist and AUB professor, Marcus Marktanner. It ranks first in the ESCWA region in seven out of 14 product categories, for which the UNCTAD/WTO International Trade Centre in Geneva provides indices on Revealed Comparative Advantage (RCA). The RCA index measures how the share of a sector in national exports – e.g. chemicals or processed food – compares with the share of this sector in world exports. A high ranking indicates that a country has a specialization in the sector. However, as Marktanner observed: “Unfortunately, this does not mean that Lebanon is a top performer globally.” Only in one category, miscellaneous manufacturing, is Lebanon ranked fourth in the world for RCA, he noted. “In addition, Lebanon as a small country can barely function as a locomotive for the region.”

From this economist’s perspective, one of several big-picture obstacles to trade development in ESCWA countries is “great income inequality, translating into a vicious cycle of a small base of manufacturing industries, little job creation, and little domestic investment.”

In the case of Lebanon, this income inequality is certainly an impediment to development, further exacerbated by an overvaluation of the Lebanese lira that has throttled the competitiveness of local manufacturers. According to Marktanner, income inequality is linked to the concentration of capital in the hands of a few, and currency overvaluation tends to make a few rich and keep many poor. Also, an inability to push for the depreciation of an overvalued currency is often linked to the lack of a strong manufacturing lobby.

Would that be where the cat bites its tail or the snake gets the rabbit? There is always a way forward, says the optimist. Lebanon’s debt-laden macro-economic situation is bound to undergo a drastic change, opening the window for a new start – either the soft way or the hard way. Even if the landing of the economy would result in a feared crash somewhere far from the money pots of Paris, industrial manufacturers in Lebanon, who have survived tremendous storms, have a future. To do their share in determining the course of that future, Lebanese industrialists may want to pay heed to the axiom that economies can only flourish if wealth is distributed widely and average incomes keep growing. They may also want to rethink communication strategies where the public and employees, and even many an industrialist are starved from learning about their very own companies’ performance, profitability and productivity.

For the past few years, public declarations of industrialist concerns have either lost themselves in repetitive complaints, or wallowed in unspecific promises of imminent grandeur. Boring. People want to hear new stories. The audience just loves a good and transparent success story. They can be stories of survival, learning by error, or demonstrable success. But they have to be specific, and for real.
 

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Backing industry

by Executive Contributor
written by Executive Contributor

Albert Nasr heads the center for economic research at the Federation of the Chambers of Commerce in Lebanon, a key institution charged with collecting data and conducting studies of benefit to Lebanese industry. He discussed the role of the center with Executive, and issues of importance in the development of industrial exports.

On the Center of Economic Research

The Center of Economic Research at the Federation of the Chambers of Commerce is designed to supply the federation with support for its duties with regard to business and economic policies and regulations that the government is or isn’t taking. Our main aim is to be advisors to the government insofar as business legislation in general is concerned, in order to be able to protect the interests of the private sector. The bulk of our work is the preparation of position papers.

On the numbers of Lebanese industry

When we speak about Lebanese industry, we are not talking about 22,000 industrial units. The Association of Lebanese Industrialists has a constituency of about 2,000 registered industrial companies. The Federation of the Chambers of Commerce has a constituency of about 7,000 industrial companies. As for the 15,000 remaining firms that make up the number of over 22,000 industrial units reported in the surveys of the ministry of industry, the question here is over the definition of manufacturing. By one definition, a bakery is an industrial unit because they use machinery and transform raw materials into a product. But we in Lebanon are not used to considering bakeries as manufacturing entities. It is a matter of definition. Once we adopt a new definition, we will stick by it.

On industrial production and its share of GDP

Industrial production has grown in Lebanon over the past few years but in relative terms, other sectors have grown by larger proportions. Therefore I would not consider it a problem that the industrial share in GDP has gone down slightly, to about 17%. For one thing, you have to set a question mark behind the reliability of the GDP estimates. If you do not know the size of your pie, you cannot exactly know the size of your slice, that purports to be 20%. Another problem in industry is parallel production. This does not get tallied in any survey. There is a large amount of parallel production from enterprises, producing not only for the local market, but also for exports. These are enterprises that are not officially recognized because they have not registered, mostly due to some outdated administrative requirement that prevents them from registering. It is as if they are non-existent.

On export development and statistics

The export data does show an overall increase, but we deplore the fact that data gathered at customs sometimes includes re-exports. There is a special category for re-exports in the data sheets. But a product that enters Lebanon with its customs duties paid, that is then re-exported would enter the statistics under exports. It is not sufficient to have a single criterion of whether customs duties have been paid, to distinguish between exports and re-exports. A product may have paid customs duties but still be re-exported. An example is, if I were to import a Mercedes from Germany and pay customs duties on it, this car would enter the statistics under Lebanese exports – if I sell it to someone in the region without seeking reimbursement for my earlier import duties. This is an aberration, because exports ought to reflect our capacity to produce and export – rather than our capacity to import and re-export. Importing and re-exporting is a major activity, and we excel in it. This does indicate that we still have a role to play in triangular trade and that our regional status allows us to do this. But it doesn’t say anything about our manufacturing capacity. We need exports to reflect our manufacturing capacity. The only way to solve this issue is in my opinion to have a certificate of origin accompany all exports, regardless of whether the country of destination requires the certificate or not. The way things are now, exports do not get accompanied by a certificate of origin where a destination country does not require that form.

On the Euro-Mediterranean Agreement

With regard to Europe, exporters have to complete the EUR-1 form, which can basically be described as a certificate of origin. Our export data to the EU is reliable. The EU agreement opens up new markets to industrial products, without customs duties. As you know, an earlier agreement from 1979 had nearly the same clauses. I fail to see how we would benefit just on that point. However, the Euro-Med agreement has been launched within a larger framework, and we are going to benefit from that larger framework. Previously we were on our own. Now, support programs from the EU are designed to make us benefit more from this openness of the EU markets.
 

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Q&A Nadine Labaki

by Executive Contributor
written by Executive Contributor

Up-and-coming film director and the winner of seven Phénix awards for work in advertising, talks to EXECUTIVE about creative freedom and her take on the industry

Has the phone stopped ringing since the awards?

No it hasn’t, but not in the way you think. It’s not as if they are all suddenly scrambling to hire me. All the agencies know me. I’ve been doing this for years. I’m not a new talent who has burst upon the scene, although I have had offers from abroad, France, Dubai, Italy and Egypt.

Surely your fees will go up?

Maybe they should but I am not a very good businesswoman. At the moment I’m having fun. Making ads is not my life and so maybe that is why I am not so focused on the monetary side of things.

But how much do you charge?

My fee is $3,000 per day. An advertisement can take two weeks with one or two days of shooting.

What was your first break?

It was an ad for Banque Audi in 2001, for H&C Leo Burnett. The one with the teacher in the classroom. I liked it very much, it was realistic (and) popular.

Are you targeting retail customers and what are your expectations for 2004?

We are aiming first at small and medium enterprises. We need to develop our network to at least 20 branches. I expect this year to be very hard. What you have seen here has been achieved in only six months. I spent 16 hours each day in the office. Sometimes I sleep there, to see my aims accomplished.

Do you look for realism?

We live in a society where there are so many taboos, so many things we can’t talk about. As a director, the things we cannot do – certain expressions and behavior that we can’t show on TV, limit me. In advertising you need to show a perfect world that does not exist and this is where I think advertising is fake. People are not stupid, they know when they can’t identify with an ad because it’s too good to be true, and they just don’t believe it.

What do you think of the quality of creative talent in the country?

I think being in an Arab country we’re not bold enough with our ideas, because we think that we’re going to be judged. There are too many boundaries and too many limits. The problem is not with the level of creativity that we have. I think we have a lot of talent and people who are really very creative. What we lack, I think, is courage. We think that if an idea is too bold it’s going to be rejected or it’s not going to sell. We’re afraid of how people will perceive things and consequently we’re still hiding behind easy things.

Do you find that you have to stifle your creative urges to please the client?

I’m very fortunate that this has never happened to me. I often change a lot of things on the shoot and storyboard, but I do this with the client and their message in mind. At the end of the day, you are doing a commercial, you are only the director, and this is someone else’s vision. I still introduce new things; I don’t just want to execute someone else’s idea. But I try to introduce my way of thinking in a way that the client will accept.

Do we spend enough on ads? I try to adapt whatever idea I have to the limitations without really knowing what the actual budget is. Of course, if we had more money we would be able to get equipment all the time, and could do bigger things. But, I’m more interested in concepts rather than huge productions. You are self-employed. How often then do you work?

I think two or three projects a month are enough for me because I can’t do more than that, even if the money isn’t great. Otherwise, you will not be able to give each project the time it needs and it will affect the quality of your work.

You also direct music videos. How did you get involved in this?

It was a coincidence. A friend of mine was a producer and she introduced me to singer Pascale Mashaalani. At first I didn’t think I’d be interested in shooting music videos, especially since I didn’t really like the formulaic stuff at the time. You know, the singer singing and dancing with a bunch of girls dancing behind him. But then I thought, why not? Maybe I can change things.

We also hear that you are working on a film. When will it be released?

By next year I think. I really can’t talk about it yet, but this is the next step in my career. I feel the urge to move on, to tell a story, to talk about my country, my people and I think a film is the only way I’m going to be able to say these things.

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