As weak demand in the Lebanese car market has taken its toll on dealer profitability, new opportunities emerged through several automotive brands that had been under-represented in Lebanon, or are new to the country. To address niches, distributors played their strengths, and some opted to mobilize synergies that they might not otherwise have utilized. In reviewing distributor strategies for compact, mid-sized and luxurious automobiles, EXECUTIVE talked to distributors of cars that range from the very new to the legendary, asking them about their experiences, alliances and expectations.

Think small, think smart

In the small car segment, the latest marque to enter the Lebanese market is ambitious and daring, while building upon a huge name and innovative technology. Smart cars are a division of Daimler Chrysler and a tremendous success story in Europe. Lebanon’s Mercedes importers, Toufic Gargour & Fils (TGF), believe that the Smart concept will work here as well and they have committed to a substantial investment to position the car in the local market.

“After five weeks on the market, sales are already up to our expectations, and a bit more,” said Cesar Aoun, Smart brand manager at Gargour. “We are really optimistic about the trend that we will create with Smart cars.”

If Smart has a beginner’s handicap in the Lebanese market, its main challenge lies in the misperception that a small car is neither powerful nor safe, Aoun said. In his opinion, Lebanese customers had an incorrect first impression of the Smart car, because gray market importers had been bringing the vehicle into the country for about one year without communicating the brand identity. Some people mistook it for an electric car.

In reality, the current second generation base model of Smart – a 2.5 meter short two-seater with high seating profile and plenty of visibility – is powered by a Mercedes Benz manufactured engine that has been prepped up after the first generation achieved remarkable sales results and reviews. TGF’s first priority after launching sales in mid September was to present the brand value of Smart, as a car that is safe and performs.

Official entry of the brand to the Lebanese market was somewhat delayed due to factors the importer would not specify. However, the late start brings the benefit that the Smart range has in the meanwhile increased to the Smart roadster and roadster-coupe, very sportive versions of the Smart concept. And TGF is expecting Smart to really climb in local sales with the introduction of a four-seat version in April of next year and a four-wheel drive Smart in 2005. With these latter models, the distributor aims to also break into a market share held presently by some compact cars, and with the complete palette of Smart vehicles, TGF want to conquer a handsome share of new car sales in Lebanon – at least 5% by early 2006, Aoun said. For the moment, however, the manager is treading with a certain restraint on the marketing front. For instance, he is reluctant to widely discuss the price of the vehicles until consumers have become familiar with the value that the Smart offers for the purchase amount. TGF is constructing a new showroom in the Beirut Central District to sell Smart where its main market is: the city. The facility is not large but in a key location at the portside Saifi entrance of the BCD and represents a substantial investment, the exact height of which the manager did not want to disclose before the project’s completion. The showroom will be dedicated exclusively to Smart cars.

Until the new showroom opens at the end of the year, Smart cars reside in a temporary and slightly unusual cohabitation with Mercedes vehicles in the main Dora showroom of Gargour. The arrangement is extraordinary because worldwide and in Lebanon, Smart and Mercedes are careful to maintain separate brand identities. “The image of Smart is totally independent from Mercedes Benz,” Aoun said, and TGF therefore developed a distinct Smart team that will present the make to customers. The brand separation does not extend to the back office and maintenance, however. As the three-cylinder engine of the Smart is a Mercedes product, the two brands share much of the same diagnostic equipment, and the Smart team here also wants to emphasize that drivers of these cars benefit from the after sales service at TGF, which has become a benchmark for service quality in the region. Economical, practical and innovative fun, are the three markers, which Aoun is attempting to set for the identity of smart in the Lebanese market, first to individual clients. However, the company also harbors a number of ideas for bringing Smart cars and Lebanese companies together.

Middle of the road

The segment of middle-of-the-road sized vehicles with their sedan, hatchback and station wagon varieties is especially crowded with contenders. The new competitor here is Skoda. The brand is no stranger to the Lebanese market but the name has been up for rebirth after the Czech car manufacturer was taken over by Volkswagen. The chance of introducing the new flair of Skoda to the local market enticed two of Lebanon’s big car agents to launch a joint venture, VW/Audi/Porsche importers Kettaneh and Mercedes/Maybach dealers Gargour. Since beginning of this year, the partners operate a Skoda Showroom on the Damascus Highway in Hazmieh, under the joint venture name Kettaneh-Gargour Automotive.

The objective of the Skoda dealership is to replicate the success that the automaker has had elsewhere since VW took the reigns at the Eastern European company. “The Skoda today is a well-sold car in many markets,” the joint venture’s marketing manager, Gergi Murr, told EXECUTIVE. “In Lebanon, the brand is also promising. However, we should give it some time.”

The distributor started to approach the local market seven months ago. This first year, it imported the Skoda Fabia and Octavia models in well equipped configurations with wide sales appeal. The priciest Skoda model, Prestige, is yet to be introduced to Lebanon, but will probably be available next year. The manager declined to provide sales figures for the first half year of sales of the brand.

“When I think about Skoda, I think about a car that offers highly regarded VW technology and at the same time, benefits from the Skoda image of being a good deal,” said Murr, describing the marketing message of the brand. He was quick to ascertain that the distributor first imported a stock of spare parts even before bringing the cars into the country, to counter an image of difficulty in making spare parts available that Skoda had been stuck with in the past.

As equal partners in the Skoda distributorship, Kettaneh and Gargour could utilize their joint expertise to develop a strategy that would position Skoda cars in a cost-efficient, step-by-step development of the dealership and gradual marketing investments. Presently, the direct team at the sales outlet is relatively small, with six members in all. But because of its access to market studies and expertise at the parent companies, the Skoda dealership benefits from a much larger pool of resources without additional staff costs.

The advantages also register on the service side. For the start-up phase, cars sold at the Skoda dealership are being serviced at the facilities of Kettaneh automobiles with their specialization in maintenance of VW automobiles, to which the new Skodas are closely related. With time, plans are to establish an after-sales service facility at the dealership equipped for standard maintenance and small repairs. But for all major works on body or engine, the Kettaneh workshop will remain to be the brand’s service address. In realizing their joint venture as, in Murr’s words, “a heavy deal between two heavy dealers,” Kettaneh-Gargour Automotive took a road that could prove viable for establishing Skoda in the Lebanese market, even in times of tough competition and difficult market conditions. As for Murr, he sees no problems on the road ahead. “There is no obstacle,” he said, “just a lot of work to position this good product.”

Dream rides

At the top end of automobile dream lists comes Ferrari – the Italian marque with cult status – which is doing well in Lebanon only because manufacturer allocations are proportional to the market size. Beirut Ferrari dealer, GA Bazerji, is one of only 40 Ferrari distributors worldwide. “Considering that our country is a small market, our allocation is small,” said the company’s managing director, Nabil Bazerji. “We are succeeding in selling our allocation because it is really small.”

Out of Ferrari’s annual production of 3,500 road racers, the Italian company earmarks four to five vehicles for Lebanon, where there is an established clientele of 70 plus individuals with the necessary means to own them. For Maserati, the other premier sports car brand sold by Bazerji, the number of vehicles sold wavers around 10 cars per year. As to the reasons why a customer will buy a Ferrari or Maserati, there are few surprises. The owner of the Ferrari will relish in the excitement of hearing that throaty roar of the engine, and he also cherishes the “pleasure of driving the world’s best sports car,” Bazerji said, but leaves no doubt that the main reason is image. “It is first of all a status symbol.” The importer has held the Ferrari dealership for three years and the Maserati agency since 1968, in addition to long-standing agency contracts for Lancia and Suzuki. Marketing the super luxury sports cars is a different endeavor from marketing the latter makes, which generally follow the advertising and communications strategies for automotive sales. The market approach with Maserati is selective, through the media targeting of high net worth individuals, along with event sponsorship and measures to build brand awareness. With Ferrari, the image is pretty much preset as that of a Formula 1 racing stable that builds cars mainly to finance its existence on the circuit. The manufacturer handles much of their communications directly, and Bazerji participates through being present in motor shows and organizing the occasional event for Ferrari owners, such as a dinner or a cultural rally.

There is no denying that buyers of a luxury sports car must be wealthy, but it is a misconception that they would dismiss their sense of cost scrutiny when it comes to pursuing their penchant. And that means that the super luxury sports car segment is no less dampened by the current taxation regime than other new car sales. While the country professes adhering to free market principles, Lebanon’s taxation system leans toward socialist style indiscriminate penalization of people who can afford to buy luxury products, Bazerji said, calling this approach “not correct.”

According to the dealer, the massive taxation resulting in an 80% surcharge on the factory price of your average Ferrari has made Lebanese buyers reluctant or unable to pay these charges even if they can afford an expensive car. These customers consequently reach for a vehicle residing one or two price tiers below what they would choose without the high taxation.

But Bazerji claims that in the luxury car segment, a further huge loss of opportunities lies in the erosion of sales to wealthy part-time residents. Arabs who own summer homes in Lebanon are deterred from buying cars locally and keeping them here because of the high annual vehicle registration fees. It is cheaper for them to have their luxury cars shipped in from their home country and drive them with foreign license plates, said Bazerji. “Hundreds of units are imported and re-exported every year, and the Lebanese government gets no revenue from these cars.” Not to mention that local dealers lose out on the chance to sell sports cars to this summer clientele. They do not even gain income from servicing these cars because they are shipped back to their stables in the Gulf.
 

The story of Wael Hafez, the 21-year-old car dealer who fled Lebanon with reported debts of around $20 million, is a supreme HISTOIRE DE NOS TEMPS. Not only is it a story of personal greed, it also offers an insight into how the “used” luxury car market has become a magnet for those who seek glamour and a quick return on their money. Although nothing more than a insignificant footnote in history, it is a typical Lebanese story: bankers, cars dealers and private investors were all burned by a young man barely out of school, blinded by the shallow dividends that make up the modern Lebanese dream.

A scion of a respectable and wealthy family, Wael Hafez was elevated from small-time businessman to selling luxury cars bought mainly from disgraced banker Ibrahim Abou Ayache. In order to finance the purchase of these $50,000 to $250,000 dream machines, Hafez offered investors outrageous return on short-term loans.

“If you loaned him $100,000 he would immediately write you two post-dated checks for $60,000,” said one ex-associate. “He was offering the best interest rates on the planet.”

The system, essentially the final stages of an international money laundering operation, was straightforward. According to insiders, all of whom refused to be named (“These are powerful and dangerous people,” one said), Hafez would buy a car, worth say $100,000, for $75,000 from Abou Ayache, who had brought it from a dealer in Germany with money from Al Madina Bank. He would sell it at a shade under market value, take his cut and repay the loan. During its brief incarnation, Hafez’s Link Motors sold 500 between January and May 2003. “That is nearly as much as is sold by all the authorized dealers in Lebanon in a month,” said one insider. When Abou Ayache’s Al Madina bank went into receivership in Spring 2003, the boy who began his career by selling cars over the phone found himself facing millions of dollars worth of debts. In order to keep creditors at bay, Hafez resorted to check fraud. This desperate stopgap strategy, (Hafez thought his luck would turn), only delayed the inevitable. After he fled the country, his many creditors besieged the Hafez family home in Verdun demanding their dues, but his father, who is allegedly in regular contact with his fugitive son, has offered all the debtors approximately 20% of their claims. Despite the uproar from many who say they have lost their entire life savings or inheritances, many of those close to Hafez have little sympathy for those who claim they were ripped off.

“A lot of people made serious money out of Wael. If they lost on some of the final deals, so what,” shrugged one. “Anyway they were all grown up and they knew what they were doing and no one put a gun to their heads. No borrower gives those rates if there is no risk.”

Wael Hafez was born in 1982 into a respectable Beiruti family of Syrian origin. Educated initially at the International College, he later changed schools and was sent to the more conservative Al-Bayader High School. Those who know him say the move was for religious reasons, while others suggest he failed to make the grade at the hugely competitive IC and that Al-Bayader was the only school that would take him.

The family was very wealthy; reputed to be worth around $300 million, a fortune built up from the manufacturing of household appliances, refrigerators, ovens and washing machines. Life for young Wael was carefree. The family was initially liberal (Wael’s mother drove an open-top Mercedes) but in his teens the family became increasingly conservative. This new prohibition brought with it a new set of rules: no movies, no going out, and no girlfriends. However, at 17, Hafez fell in love with Zein Hrake, a 15-year-old, “open-minded” girl. Early marriage was nothing new to the Hafez family and when Wael turned 18, his mother agreed to the union.

Hafez briefly enrolled at LAU but never completed his first semester. Those who knew him then and know him now, remember him for his charm and charisma. “Wael is a genius,” said one fellow student. “Everything seems so easy for him. He is very positive and not afraid of anything.” The good news for Hafez was that his marriage meant freedom. He no longer lived with his parents and his monthly allowance had increased from $4,000 to $10,000. Leaving his by-now-veiled wife at home, he started going out at night with his friends.

According to many of those friends, Hafez found security and a sense of camaraderie in their presence, a welcome antidote to the conservatism of home life. At the height of his “reign,” he invited around a dozen friends on an all expenses paid trip to Dubai, where they stayed at the Burj El-Arab. “He paid for the lot,” said one ex-associate. “The food the booze and even the girls.” Those who were around him at this time, remember Hafez asked his friends to call him “the Prince” (IL BRINZ) and then surrounded himself with four bodyguards. He was styling himself and his lifestyle on that of Taha Qoleilat, the local businessman who seemingly came from nowhere to own five star hotels, restaurants, and luxury car dealerships. In fact, Hafez’s weakness was cars. “He was a car nerd,” said one friend. “He could dismantle and put back together any model you could name. He knew where every little nut and bolt went.”

Not surprisingly therefore, for a young man who would change his car up to four times a month, he began to get an understanding of how the car market worked, buying and selling cars. By September 2002, Hafez had established a cellular phone shop and two months later opened Savoy Café on Raouche, the motto of which was “Where friends become brothers.” Hafez would buy his cars from Highway Motors, owned by Fouad Kahwaji, who sourced luxury vehicles from Abou Ayache. In 2002, Hafez was introduced to Mohammed Doughan, Abou Ayache’s trusted fixer.

Abou Ayache needed a new outlet for his cars. Both Highway and Quatro Motors (owned by Taha Qoleilat) were beginning to raise eyebrows. He needed a front man who was young, ambitious, wealthy, and above reproach. Wael Hafez fitted the bill and in March 2003 Link Motors was established at the UNESCO intersection on an already established car lot rented from Abdel Salam Al Wazzan, whom Hafez would later rip off for $400,000. Hafez sought investors to finance the purchase of the cars. With the kind of returns he was offering, they were queuing up to give him their savings or inheritance.

One car dealer recounted how Wael once walked in his showroom carrying a paper bag filled with money. Emptying the bag on the floor, Hafez counted the bills, the total of which came to $500,000. He then called Tarek Issa, his Kurdish office boy, who came on a moped, threw the bag in his face and told him to go and deposit the money at the bank. Without a receipt, the boy put the bag between his legs and zigzagged his way through the traffic.

These vulgar displays of wealth convinced investors that Hafez was somehow connected with a money-laundering ring. “We assumed that he was well-protected, that’s why we trusted him with our savings and the savings of our relatives,” said one investor.

Hafez was a one-man money machine. Sitting in his office he would go through a checkbook in less than half an hour. This impressive movement of funds did not escape the attention of the Al Ahli International Bank, which by now had identified Hafez as a blue chip client.

In late April 2003, with the indictment of Abou Ayache, Hafez’s mini empire began to crumble. “The cars dried up and there were loans to be paid back,” said one associate. “He had been overspending, which didn’t help matters.” He certainly had. In the fine tradition of Lebanese excess, Hafez had displayed rare vulgarity. On one occasion, he ordered four Quads worth $12,000 each from Itani, and which were only used once and then given away. On another, after his morning jog, he went into Aïshti in Verdun, where none of the sales staff paid him much attention. Hafez, presumably irked at the lack of respect, proceeded to spend $17,000 and ordered the shop manager to carry the bags up to his apartment.

But by now the chickens had come home to roost. As a stopgap Hafez resorted to check kiting, a process whereby a person with accounts in two banks can create an illusion of money in his account. A check drawn on the first bank is deposited with the second bank and before the check reaches the first bank for payment, a check drawn on the second bank is deposited to the first bank. If that bank is willing to give immediate credit in the interim, the person can use the bank’s money without first providing collateral and without paying interest. This scheme can go on as long as the person keeps depositing checks in both banks and both banks believe there is money behind the checks. However, instead of using two banks Hafez is alleged to have used two accounts in the same branch, a claim that casts doubt on the bank’s later contention that it was unaware of his activities. Using this method, Hafez was able to hold off creditors. The bank, which until that point had been satisfied with the millions that he allegedly passed through his account, was presumably cutting its star client some slack. During this period he was able to generate enough money, thorough gullible investors, to pay the alleged $20 million dollars he is thought to have owed Abou Ayache. By this time, the checks to his investors were being broken down into smaller amounts and post-dated over longer periods. In the last weeks Hafez was working long hours and living on Red Bull, while staying at the presidential suite at the Mövenpick Hotel. Friends said that he was looking stressed and tired. Then, when the checks started to bounce and with only the clothes on his back, he and his wife fled the country on June 2. “His family told him to go,” said one close friend. “They need time to sort out his affairs and this is why they are handling his debtors”

The fallout has been considerable. The Al Ahli International Bank, with whom Hafez deposited up to $45 million over a period of less than six months, were quick to place any knowledge of Hafez’s check kiting scams on the shoulders of its branch manager Samir Tutunji. For his part Tutunji claims that the incriminating bounced checks found in his possession were given to him by the bank to follow up on and that the Hafez account was handled from the head office in Bab Idriss. Either way, the bank appears to have been negligent in its surveillance of Hafez’s banking activities.

Hafez’s brief incarnation as a small time tycoon had come to an end. Those of his debtors who have not accepted the 20% pay-off are seeking, through the Lebanese courts, an international arrest warrant to be issued. Khaled Dairaki, one of Hafez’s two trusted associates (the other was Tarek Issa the office boy), was approached by the family to retrieve the post-dated checks. The family promised that all monies owed to Dairaki – a reported $600,000 – would be honored. The well-connected Dairaki was able to get back a reported $11 million worth of checks but is reported to have been given the runaround by the Hafez family when it came to his own debts. Finally Dairaki’s patience ran out and, through his lawyers, issued seven writs against Hafez, one of which led to the sealing of his apartment and the selling off of assets. A nation’s moral compass can be gauged by the caliber of its heroes. In more developed nations, heroes set the benchmark for those to come. They may have suffered for a cause, encouraged the underprivileged, set new standards of sporting excellence, pushed back artistic boundaries or simply demonstrated such distinction in their individual fields as to have left us gasping and inspired at their accomplishments. In Lebanon, it seems that our heroes can be crooked, corrupt and downright nasty, just as long as they are rich.

The Automobile Importers Association teams up all local car agents who hold distributor contracts with international auto manufacturers. Avidly working to represent the interests of these primary agents, the AIA emphasizes a unified presentation of official importer concerns to the media and Lebanese public. EXECUTIVE talked to the president of the AIA, Samir Homzi.

E: What are the association’s main concerns?

SH: Our aim is to make new cars available to all people of all budgets. New car dealers are today making vehicles available in a price range that starts at around $5,000 to $6,000. These are economical, trouble-free new cars that consume very little unleaded gasoline. They are sold with manufacturer warranties and with payment arrangements over five years that make for monthly payments of $100 or $125 to families with a lower income.

E: How long does it take before new models are available in the local market?

SH: Sometimes new cars are launched in Lebanon prior to Geneva, Frankfurt, and Paris and in some instances, new cars have been launched in Lebanon for the Middle East and for the whole world. In many instances, new models are launched in Europe prior to being introduced to the Middle East. This is for technical reasons, whereby the manufacturer would like to optimize the vehicle for this area.

E: Turning to recent developments of automotive sales, is it correct that the association has observed a decrease of new car sales by 50% or more when comparing annual sales in 2002 with those in 1997 or 1998?

SH: The figures definitely went down. They went down first of all because of all the taxation. Vehicles are overtaxed in Lebanon. We are paying high customs duties in Lebanon, on top of which we are paying VAT, on top of which we are paying registration fees.A country like Lebanon deserves to have much lighter taxes.

E: Does the AIA have a figure for how many cars are operating in Lebanon today?

SH: To be really honest, the only way to get to this number would be to go to the traffic department and look at their data. They are getting better and better under the minister of the interior and have made great improvements. We prefer to keep track of only our own auto figures, which means each dealer provides his figures to the association and at the end of the day we calculate these figures as those of new car sales in Lebanon.

E: A study in the late 1990s placed the average age of cars circulating on Lebanese roads at about 14 years. Do you have any update or opinion on the current age of the country’s fleet of cars?

SH: I don’t think my figures would be far from that. But I won’t venture to give out figures because we don’t have the mechanism to determine what is the average age of the cars here. However, when you drive around, you can see that the age is quite high.

E: Can you comment on the mechanique fee schedule that does not advantage new or environmentally sound cars but is cheaper for the oldest cars?

SH: We worked on that issue but unfortunately we did not get what we wanted. We believe that the mechanique should stimulate people to renew the car stock in Lebanon. We are seeing every day cars on the road that nobody would accept in other countries. We would like to see these cars slowly replaced by new cars, and we are working seriously to have the government first of all cancel the registration fees and lower customs duties. Once the mechanique becomes a technical inspection in January 2004, we would like to see these cars pulled out of circulation because not only their appearance is less than exciting but also because they are a danger for people using the roads of Lebanon.

E: Without the high taxation levels, and under a favorable environment for financing of car purchases, how many new cars could the Lebanese market absorb annually?

SH: The total market today is about 12,000 units per year, distributed over 35 dealers. By contrast, in some neighboring countries, one dealer sells about 10,000 cars each year. We are not calling for elimination of customs but ask for their reduction and complete cancellation of registration fees, in order to encourage people to replace their old vehicles with new ones.

E: In a macro-economic context, how important is the contribution of automotive sector to fiscal income?

SH: Customs duties on vehicles and petrol tax and so forth make a very big contribution to the government income. But we believe that if registration fees are cancelled completely and customs duties are reduced, we will sell more vehicles. The government will benefit more from the taxes we just mentioned, and we would have cleaner air from cars that produce less pollution. We would have safer cars on the road, and more pleasant cars to look at for this country and its image as a tourism destination. On all fronts, we would be better off if we decrease the taxes.

E: How much does the automotive sector contribute to Lebanon’s GDP?

SH: Today we don’t have such a figure and I don’t want to jump and give a figure off the top of my head. We do contribute to the economy in various ways, to the banks and the insurance companies for example, where car loans and the motor insurance are important businesses.

E: How can the cost burden of car ownership be distributed more equally and fairly?

SH: If we dealers would take our profit margin up from 4% or 5% and put it at 25%, we would be selling a quarter of what we are selling today. That is not the case at all. As I said, competition is very high among the dealers and profit margins are very tight. But I am saying that with its tax burden, the government is trying to milk this cow to its limits. Asking too much from the cow and taking all eggs from the chicken is killing the chicken and killing the cow.

E: Would a change in taxation of cars not put the government under additional financial pressure?

SH: Sales of new cars should increase for three reasons: economic, safety and fiscal. The whole set of taxes today is too high. If it is lower, the fiscal power of Lebanon will be the first to enjoy a better situation. One point is that our invoices come from the biggest car manufacturers and there is no chance of them being tampered with. Importation of used vehicles happens not through a manufacturer but through a dealer or a roadside trader, who can deliver an invoice that does not reflect the value of the vehicle. If we can stop the importation of used cars, or at least limit it to vehicles of two years of age, plus have a flexible taxation, the government will be the first to benefit and the country will definitely be winning.

E: Do you have any information on the number of used car dealers in Lebanon?

SH: We have no relationship with used car importers. We have relationship with used car dealers with whom we exchange the vehicles that we receive from our customers. They take these cars from us and recondition them. These were cars that have run in Lebanon and were used in Lebanon. But we have no relation with importers of used cars. I have personally no contact with importers of used cars.

E: It seems that you view the activity of used car imports not very favorably.

SH: I said from the beginning that I wish to see the importation of used cars stop, or if that is not feasible, to limit it to the acceptance of vehicles two years of age. I believe that trashy cars, which were refused in Europe and should have gone to the junkyard, ended up here.

E: Apart from lower taxes, do you see ways in which people could reduce their cost of car ownership?

SH: Wherever you look here, you see that most cars only have one driver. When I was in the United States, I experienced car-pooling. In a company, three or four people who share the same office hours agree to travel together to and from the office, and each car owner has to use his car only four one week a month. In this country, we have invented the service taxi. It is a Lebanese philosophy. Why don’t car owners do more ride-sharing in Lebanon?

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.
 

In the academic analysis of economics, corruption is a clear and present danger. “Efficient allocation of resources is the key to the capitalist system,” said Karim Salameh, managing director at Saradar Investment House and member of a new generation of Lebanese economists. “In the textbook answer, corruption cripples because it diverts resources away from their efficient use and directs them into the wrong pockets. Corruption is money badly spent.”

Here is a textbook evil that has become recognized to be a huge economic liability, or as The Economist once wrote in a scriptural allusion, “a worm that never dies.” The best available estimates put the cost of corruption at a magnitude of more than $80 billion worldwide, annually. Other studies by international agencies see the detrimental effect of corruption on Foreign Direct Investment in the hundreds of millions of dollars per each afflicted developing economy.

Unfortunately, what is obvious damage to the national economy and a detriment to foreign investment can look extremely enticing to an individual interested in his own pocket, personal business and bank account. When asked about the current reality of corruption in Lebanon, a politically connected importer of medical equipment guffawed. “How do you think I won a contract to set up a teaching laboratory at a big university?” he asked, describing how most deals are sealed in Lebanon today. “Let’s say I want to buy a satellite. I approach a Chinese, a German and an American manufacturer to get a price quote. I get offers at $5,000, $10,000, and $20,000. Then I call a Lebanese dealer, who quotes $25,000. He gets the deal.”

He continued: “How do I get the authorization? I buy the Chinese one at $5,000 and split the rest of the money with the department head who signed-off on the purchase.”

The high awareness of corruption in Lebanon manifests itself in plentiful individual occurrences of public sector irregularities. Talk to anyone and there is a rumor, a theory, or an anonymous account of how this official has been discovered siphoning money off from state payments to institutions housing orphans; how that ministry, although dissolved, still is paying rent for premises at an annual cost of $350,000; or how this or that civil servant maintains three luxury cars on an official salary of between $370 and $1,000. Whatever damage assessment is offered on the extent of public sector graft and greed, however, is usually at least partly speculative. Political or personal concerns and fears on part of the involved parties make it difficult to obtain statements that allow for detailed documentation of damages. Even the Lebanon mission director of US donor agency USAID, Raouf Youssef, did not want to talk to Executive about its agricultural program, one that former agriculture minister Ali Abdallah has been accused of defrauding. The costliest individual case of corruption damage to the Lebanese economy under discussion is that of Electricite du Liban, which has recently been labeled the cause behind a massive portion of the budget deficit. Finance minister Fuad Siniora was attributed with stating that loans to EDL over the years cut a $9 billion hole in the Lebanese treasury. Newspaper reports claimed in August that as much as $1 billion out of the $2.8 billion post-war rehabilitation investment into the national electricity generation and distribution network had been swallowed by thievery and embezzlement. The reports on the loss making of EDL and the reasons for the public enterprise’s disastrous financial state make for a composite horror story of grand corruption, political nepotism, and petty corruption. Energy consultant and middleman Ahed Baroudi has been named the architect behind the sector’s poor performance in his role as key dealmaker (see “The Italian job,” page XXXX). The sagas of black market sales of fuel oil by the tanker and deals over the construction and maintenance contracts of the country’s electricity generation plants are as close to big-deal corruption as anything reported or rumored in Lebanon over recent years.

However, analysts say the numbers and result figures that are available from the utility do not allow for a comprehensive assessment of the utility’s real performance. As civil servants, EDL management is supposedly accountable to public and media inquiries, but none of Executive’s calls were returned. Minister of energy and water Ayoub Humayed, however, did agree to meet with us at the 13th hour (see “From the eye of the storm,” page XXXX). But another big chunk of losses at the utility quite undisputedly stem from power theft by a large number of individual customers Ð between 25% and 40% of bills have been unpaid, according to various reports. This phenomenon in itself amounts to a sub-culture of corruption, with the non-paying customers to some extent being shielded against prosecution by political players with high levels of influence. The case of a massive share of non-collectable bills and systematic avoidance of paying for the electricity service in areas such as Palestinian refugee camps and the southern suburbs is generally undisputed. It makes for a case of multiple petty corruption through wide-ranging abuse of public services and defrauding of the law-abiding majority. This corruption of the poor does not, however, alter the fact that the part of the population that is most disadvantaged by the presence of corruption are the poor. They are denied the access to services that petty corruption buys in dealing with administration and private sector. What remains not known are the exact direct costs and indirect damages caused by corruption to either Lebanon’s national economy or the business community. The Beirut based consulting firm, Information International, issued a Corruption in Lebanon Country Assessment Report in early 2001, in which it estimated that “one billion US dollars in annual drain may be directly linked to corruption.”

At over 5% of GDP, that figure substantially exceeded the rule-of-thumb assessments for corruption damage to a developing economy. Information International – which described its $1 billion estimate as “a conservative figure based solely on the research findings” – drew immediate and heavy fire for its statement at the time. The most ardent opposition arose from Lebanon’s political quarters but criticism came also from several civil society researchers, who questioned the methodology and motives behind the report, which had been based on large parts of focus group debates and opinion polls. After the reaction to the report, which had been commissioned by the UN, Information International has not executed any further research into the cost of corruption for Lebanon. The Lebanese private sector likewise shows no record of assessing the current cost of corruption either for the entire economy or for specific sectors. The cost of corruption basically finds no mention in the annual reports of Lebanese corporations. Although they agree with the national sentiment that corruption is rampant and often confess to it being a major problem for the country, individual business leaders see the problem as endemic with the political establishment more than with the business community.

Although corruption exists among the business realm, business-to-business relations are “by nature” less corrupt than politics, opinioned Claude Bahsali, an executive with the information technology group IDG Holding and member of the ethics and management committee at the Lebanese managerial association RDCL. “Without being able to put figures, I would say that IT due to its high competitiveness is not as affected as other sectors,” he told Executive (see box). ”I rank corruption as the number one issue in the country,” said Rizk Khoury, president of insurance company Cumberland. “If you want to do anything in Lebanon, you find that there is corruption.”

In the insurance industry, the most obvious cost is legal cost, he said. “When you are in the business of liabilities and there is corruption, the legal costs go up.”

To Salameh, corruption would rank definitely among the top five problems in Lebanon, although he also has no information on the costs of corruption to the nation at his disposal. In his corporate role as manager of the Saradar real estate investment company Eagle 1, he found it imperative to shape the company activities to be distanced from corruption, he said. “Real estate development is prone to corruption, because it is non-transparent. In real estate, corruption poses a problem directly proportional to the degree of interaction between private and public sector,” he said. “But in a real estate ownership situation where existing real estate is bought and managed by a fund, it is easy to minimize the impact of corruption by maximizing the decree of transparency.” Roger Dib, director of consulting firm Near East Consulting Group, took the view that the battle against corruption is a major political fight. The problem of encountering corruption mostly arises for companies that deal with the government in big projects, he said. “The cost to the economy is definite, through higher prices, delays in some projects, and the lack of transparency.”

His work did not involve the type of large projects where corruption becomes a major factor, Dib said, but noted that international consulting firms interested in joining up with NECG for a bid offer regularly ask as their first question “is this an open and transparent bid?” Corruption incurs a big cost because it deters foreign direct investment but might not be the top element of detraction, Dib added. “Frankly, I think the higher cost to the economy is the over-centralization of all decisions in an old-fashioned decision making process.”

Nonetheless, according to Salameh: “Investments want transparency. If it doesn’t encounter transparency, investment shies away. At the same time, the lack of transparency breeds corruption. Both things are related, the need to increase transparency and the need to reduce corruption.” He paused. “We in Lebanon cannot afford corruption.”

When World Bank President James Wolfensohn opened the annual meetings of the World Bank and International Monetary Fund last month in Dubai, he said the world was out of balance, with one sixth of the global population controlling 80% of global GDP and the divide between rich and poor nations ever increasing. The head of the cornerstone institution for global finance felt the need to remind the assembled central bank governors and officials that world leaders had agreed to the goals of the United Nations’ Millennium Declaration in 2000 in order to address the world’s most pressing inequalities. UN member nations committed themselves to targets on improving provisions for health, education, equal opportunities for women and to cutting global poverty in half by 2015. To do so, developed countries pledged to open markets and increase aid, Wolfensohn said, while “developing countries promised to strengthen governance; create a positive investment climate; build transparent legal and financial systems; and fight corruption.”

When asking why many developing countries are not on track towards fulfilling the goals of the UN’s Millennium Declaration, Wolfensohn gave the answer himself. “Part of the reason is that reform is not happening fast enough in the developing nations,” he said. “There is still too much cronyism and corruption. In nearly every country, it is a matter of common knowledge where the problems are and who is responsible. Frankly, there is not enough bold and consistent action against corruption, particularly at the higher levels of influence.”

The reminder could not have been timelier for Lebanon. Over the past two months there has been much talk over several highly publicized cases involving corruption. The Al Madina banking scandal, the judicial investigation of former agriculture minister Ali Abdallah, and the outcry over funds that have disappeared at Electricite du Liban. Each charge involved allegations of corruption at high levels of influence. On the sidelines, the arrest and temporary detention of lawyer Mohammed Mugraby in August was decried by his supporters as an attempt to stop Mugraby from fighting corruption in the Lebanese legal community.

The standard definition of corruption is the abuse of public trust for illicit private or personal gain. This implies that the problem tends to manifest itself where the interaction of a public official with an enterprise or citizen opens the opportunity for improper conduct and illegal financial gain. As a rule, corrupt deals between the private sector and public servants involve a bribe giver and bribe taker. The initiative to embark on such criminal activity can originate from either side. Demand driven Ð the official whose responsibility it is to issue a permit or evaluate a project bid presents himself as unresponsive or slow, until his abilities are boosted with a bit of monetary medicine. In the most obvious and blatant cases, the bribe demand is blunt and explicit. On the other hand, the corrupting process may originate from the business end of the relationship. The corporation bent on acquiring a lucrative public project uses bribery, as a means to get a contract it might not win in fair and square bidding. In this example of supply-driven corruption, the criminal enterprise may explore the possibility of soliciting a public official by shelling out innocent gifts, which over time evolve into more and more lavish and potentially compromising favors that establish ties of complicity.

Beyond small-scale bribes there is of course high-level corruption, which can seriously damage a nation’s reputation, development and fiscal balance. Take for example Ferdinand and Imelda Marcos who plundered the Philippines; Nigeria’s Abacha regime which stole billions of dollars from the people of Nigeria; and Peru’s former president Alberto Fujimori who is wanted by his country’s prosecutors who claim he enriched himself from weapons deals and aid contributions while in office until 2000.

In these cases the sums of money in question are often hard to quantify. A declaration by African anti-corruption activists in 2001, estimated that corruption damages in Africa amount to anywhere between $20 billion and $40 billion. The Nyanga Declaration stated that this figure had “over the decades been illegally and corruptly appropriated from some of the world’s poorest countries, most of them in Africa, by politicians, soldiers, businesspersons and other leaders.” The declaration has since been quoted by a UN global study on illegal transfers.

The UN study, prepared at the beginning of 2003 for the committee deliberating on the world body’s impending Convention Against Corruption, listed some of the heads of governments and their families who plundered national resources, investing the money abroad. Mobuto Sese Seko pilfered $5.5 billion as president of Zaire, outdoing the Abacha regime’s estimated siege of over $2 billion; HaitiÕs Jean-Claude Duvalier transferred more than $120 million in presidentially embezzled funds out of the country, which is one of the poorest in the world. $227 million went amiss under Peru’s Fujimori government; the brother of former Mexican president Carlos Salinas raked in a fortune of $120 million as result of corruption, while Argentina’s Carlos Menem, left his country owing $90 billion.
 

Other reports on corruption in Africa suggest that, as a rough rule of thumb, a 5% bribe of a $200 million contract would get the personal attention of a head of state, while a government minister would be in the game at about one tenth of that. Nigeria’s problem is so chronic that the international community has suspended loans to the West African state.

These amounts are sharply set apart from the pots of petty corruption in the lower half of the corruption sphere. Here, you may be talking as little as a $1 bribe for a village official in an impoverished nation, or as much as $1,000 in exchange for gaining a contract to haul a company’s garbage or landscape the city parks in a G7 country. This realm includes anything from slipping a traffic cop a $20 bill rather than paying the $150 speeding fine, buying the city inspector a cozy lunch while the building crew pours that slightly doubtful looking concrete, the police detective enjoying himself “on the house” with the escort service – to a price fixing deal between the supplier of medical syringes and the purchasing manager in a public or private hospital.

In addition to dissecting these universally present layers of what has been called the “culture of corruption,Ó international corruption fighters Ð most vociferous among them the non-governmental watchdog organization, Transparency International (TI) Ð have been attacking specific cases of corruption such as that found in the global diamond trade, party financing, and money laundering. There is no indication that this web of grand and petty corruption, bribery, graft, and criminal egotism will shrivel up anytime soon, or that some countries and institutions are immune to the plague. The European Union, where six of the world’s ten least corrupt countries are located, has just been embattled by a $6 million corruption scandal at the Eurostat statistics institution and allegations of corruption in other departments. A glance into the pages of any respectable newspaper proves that corruption is one of the most frequently exposed evils to surface in media reports between Beijing and Cape Town, from Munich to Miami. The Enron scandal, showed that investor confidence can be maintained if corruption is dealt with immediately and swiftly.

In Lebanon, the general awareness of the existence of corruption appears to be nothing short of pervasive. “Corruption definitely exists in this country,” said a member of parliament who won his seat as an independent. “Even more, it is a requirement. The system here will reject anyone who doesn’t agree to be involved in a network of corruption.” As many local politicians will point out, corruption is found anywhere, said Yehya Sadowski, a political science professor at AUB. “The difference is that in most countries, you can reap revenue from corruption but you still have to deliver something. In many Middle Eastern countries, it is often a transfer of income without the bribe taker having to deliver anything,” he said.

From business leaders, journalists and consultants to financiers Ð Executive encountered no one who would deny the existence of corruption in Lebanon. The question, “does corruption exist in Lebanon” typically led to one of two initial responses; laughter, or a resounding “No!” of the type that a grownup would answer a five-year-old who asked: “Didn’t Santa Claus look just like uncle Joseph in Santa’s suit this year?”

The harder question is how prevalent corruption is in this country. Pundits claimed that the former minister of agriculture, Ali Abdallah, is being investigated for embezzlement of agricultural aid funds because his greed became too excessive, eventually grating the political circles that had previously tolerated his activities.

In the course of the Al Madina banking scandal, allegations of money laundering piled up on accusations of embezzlement and check fraud, standard financial crimes which the country’s financial and judicial authorities are usually more than keen to prosecute. As the Al Madina case dragged on for the better part of the past year, observers have repeatedly crowed that Lebanon’s central bank should have stepped in much earlier, and hinted at political interference in the investigation.

In the often-murky reports of the daily press, the case against Al Madina was supposedly even about to be suspended at one point this summer because the financial damage had been contained, and the file sent back to the Special Investigation Commission at the central bank. Amid the outrage, the central bank quickly clarified that it was only updating the information for the prosecutor’s office, and the office confirmed that the investigation into the criminal offenses was continuing.

Undeniably, the current policies and practices on informing the Lebanese public about cases of alleged or proven corruption, leave much to be desired. Accountable and transparent procedures in addressing the issue of corruption, evaluating its extent and exposing individual cases are imperative for improving the public perception that corruption is being fought. But Lebanon is at least not the last country to be in the dark. On a global scale, the fight against corruption is a recent one. Measuring and comparing the infestation of corruption country by country as a tool to strengthen the fight against this scourge has been a project that TI initiated first in 1995. By introducing the Corruption Perception Index (CPI), TI has significantly increased awareness of the issue and countries with a low score for good practice, such as Nigeria, have become bywords for countries that are bad for business. In many nations, TI’s CPI has become a widely used instrument of alarm that helps responsible officials and civil society groups in their fight against the syndrome. However, Lebanon until now had not ranked in the CPI, leaving it up to every person to guess where the country might stand in the global ranking. Lebanon’s corruption is of “Nigerian proportions,” suggested Sadowski, and the country should set itself a goal to reach the standard of China for its level of corruption in global comparison.

Here comes the good news. Starting this year, Lebanon will be included in the CPI, and there will be no more guessing about how the country is being perceived, based on the compounded findings from at least four studies sponsored by international agencies and independent consultants. TI set the release date for the 2003 CPI, rating 133 countries including Lebanon, for October 7. Although the exact ranking for Lebanon was not available at time of going to print, Executive learned that Lebanon will not score the lowest.

Whatever the score, some people will certainly be disappointed.

On September 30, Ayoub Humayed met with Executive for a political reality check on EDL, during which he answered questions on recent accusations leveled at EDL over corruption and criminal waste of public funds. In doing so, minister Humayed provided Executive with much anticipated answers on the issues of graft and transparency at EDL.

E: EDL has been specifically named in recent allegations of disappeared funds and inefficient management. Can you provide us with a precise figure on the cost of corruption at EDL?

AH: Lebanon is not an exception in the world. Corruption does not only affect developing economies. We should differentiate by looking at the causes of corruption. One cause of corruption is the lack of sustained and continuous supervision and accountability. Another factor is the lack of fair compensation that forces many EDL employees to supplement their salaries. Since I took office EDL and the water authorities have agreed to full transparency in any investigation. I am committed to facilitating the job of the investigative authorities in apprehending those who have abused the trust placed in them. The recent EDL crisis was purely financial. We needed money to buy fuel in the face of a global price hike. However, the debate became muddied by unhelpful side issues. [The minister then detailed how several measures were tried and abandoned until an agreement was reached under which $200 million could be borrowed from the central bank for the purchase of fuel.] In the course of these developments, the debate focused to the corruption and wastefulness that contaminated EDL in the past. Even though the director general of EDL and I have vowed to forward any information on irregularities we uncover, the ministry and EDL have no part in determining the direction of any investigation. Files on all previous activities at EDL have been made and are being investigated.

E: What about the stories that corruption was proven in these files?

AH: This issue does not concern us. A lot of noise has been made saying there is corruption, with people asking where the money went, and where wastefulness occurred. These questions have nothing to do with our present concern of finding money to buy fuel. These questions concern the past.

E: But the situation has become very heated and many people are stressing on the issue of corruption at EDL.

AH: Yes. Why we didn’t switch our power plants from oil to gas? Why are our networks and the tertiary links incomplete? Why can’t we erect power lines that would save millions? These are all legitimate questions, but some might have political reasons for raising these issues. Their motives may not be innocent. Today, these issues are in the hands of the judiciary whose responsibility it is to deal with any past irregularities. I am not in a position to pass judgment.

E: Could we talk about the underlying causes of the problems that are reflected in the situation of EDL. When did the problems start, and what was their effect on the plants, the networks, the grid, and power lines?

AH: We have a general problem in that there is too much ad hoc implementation of works with no proper planning. This is the main reason for irregularities in the public administration. This problem surfaces in every nook and cranny of our administration. You see a network of sewage pipes and no wastewater treatment plant and ask why do we need sewage pipes if we don’t have a treatment plant? I am not condemning nor am I excusing anyone. I am just not in the position to judge.

E: But we don’t want judgments.

AH: There are irregularities. I am not in a position to justify irregularities and mistakes. The issue of why there was an accumulation of factors that brought us to this explosive reality has aspects one cannot fathom with total objectivity and without bias or prejudice.

E: What is being done to remedy the problems at EDL?

AH: There are a lot of aspects to this topic. When EDL is suffering from the inner burnout of its administrative body and when one considers that there are 2,400 employees with an average age of 57 years, one can see that EDL cannot deliver what is required. For that reason, I said before that there are two sides to this issue. On the one side is the need to pump new blood into EDL through the activation of its human resources department. On the other side it is necessary to compensate employees fairly and give them incentives to work professionally.The reinforcement of human resources will mean that the administrative situation will improve, and so will the supervisory situation. It will also save money when compared to procedures currently used at EDL. It would bring great benefits if EDL can implement a system of bill collections, advanced meter readings and even prepaid cards. Completion of the 220 KV network and its connection to a six nation regional network should also provide energy at a lower cost.

E: Why weren’t these steps taken in 1994? What were the obstacles at the time?

AH: I cannot answer that. What I can say is that the funds that were received were destined for the reconstruction and rehabilitation of the power plants. These plants were destroyed more than once during the Israeli aggression, and the costs were prohibitive. If there had been no Israeli aggression, a lot of money would have been saved. Before the civil war and the Israeli aggression, EDL was profitable and productive. It is important to evaluate the entire set of circumstances in order to remedy the situation and not look back to the past and bring up corruption and waste. Our focus is the current operations at EDL, which are being handled in a scientific and practical manner to achieve a better future.

E: As many people feel no remorse over tapping into electricity lines or not paying their bills, how are you going to change the perception of EDL and produce an image of transparency?

AH: I already answered that in part. We always say that two matters go hand-in-hand. The first is the right of EDL to collect its dues, either from the citizen or from other administrative and public institutions. Secondly, EDL has to offer the citizen continuous electricity at reasonable rates. I gave directions and issued many statements to EDL staff that stressed an ethical interaction with customers. This very important at a time when the public sees EDL as corrupt and unable to provide a value for money.

E: If today there were no more theft at EDL, would the utility be working normally?

AH: When Italy’s power supply broke down the other day, the reason was traced to a power line between Italy and France that had become neglected. When electricity networks broke down in the US, it was also due to the age of the system. These are giant developed nations. It is easy to pass judgment in Lebanon but we have to be objective. We have to look at the circumstances that EDL is working under and consider the past.Due to severe space restraints in the magazine, Executive had to edit portions of minister Humayed’s sweeping answers. The Executive team made every effort to ascertain that no loss in content occurred as result of the editorial cuts and that the integrity of the answers was preserved to entirety.