Feature

Race Against Time

by Hadi khatib
written by Hadi khatib

Lebanon, start your engine. “The
rally of Lebanon is targeted to
become a world championship
course in 2001,” asserts Gaby Kreiker,
director of the Automobile and Touring
Club of Lebanon (ATCL). He expects 500
foreign journalists to swarm the country to
report on the 900-km, four-day race, an
event that is expected to attract big-name
sponsors and professional drivers from
around the world.

Even more ambitious
are the plans to hold a Formula One race in
the Beirut Central District in the next few
years. Over a billion people could watch
Michael Schumacher weave his Ferrari
through the streets of Solidere on TV. The
event could attract as many as 40,000 visitors
and pump hundreds of millions of
dollars into the local economy.

Sounds like the dreams of a motor-crazed
country craving international attention. The
Lebanese have a passion for car racing, as
anyone driving to Jounieh on a Friday night
quickly discovers. But the sad reality is that
motor racing events here are crashing.

“Motor sports are one of the most expensive
sports you can do,” says Kamil Maalouly,
one of three partners who own the Motor
Club, a company involved in organizing
amateur rallies. In 1997, its best year,
Motor Club organized five events, including
the Amateur Cup, which attracted 350 competitors.
The event was covered by LBC,
which contributed 200–300 advertising
spots. Motor oil company IGOL was the
main sponsor, contributing $10,000, with a
number of smaller co-sponsors throwing in
another $15,000.

But in 1998, the Motor
Club organized just two events. The company
had to shift to MTV for coverage of the
Amateur Cup because LBC was no longer
willing to contribute the same number of TV
spots, and the number of participants
dropped by more than a third.

Last year, the
Amateur Cup was the only event organized
by the Motor Club. This time, the company
had to go to Future TV for sponsorship and
only 60 competitors participated. The
Motor Club did well during those three
years, earning profits of around $50,000 on
revenues of $100,000. But for 2000, lack of
demand has meant that the company is not
organizing any events.

Kreiker understands these problems well.
ATCL, a non-profit organization with 9,000
members, organizes such big-name races as
Rally of Lebanon and Rally of the Cedars, as
well as a number of smaller karting, 4×4, and
closed-circuit events.

“Between 1992 and
1994, there were no other spectator sports, and
we made money. But since 1995 we started
to go downhill, losing coverage to basketball
and other events,” he says. Rally of Lebanon
and Rally of the Cedars used to get an average
of 20 TV spots per day, one month
before the event. Today, they get just 10
spots. “This affects our sponsors and drivers,”
says Kreiker.

ATCL has to pay around $200,000
of the $600,000 budget to organize
the Rally du Liban. Marlboro foots about
$250,000 of the bill, with TV stations — such
as LBC and MTV — contributing $100,000.
Co-sponsors pay the rest.

For the Rally of the Cedars,
these days ATCL must
pay the entire $70,000 to
$100,000 needed to organize
the event. The organization
receives no contributions from
TV stations.

ATCL’s difficult situation
could change if the Rally of
Lebanon is promoted from
the Middle Eastern rally car
circuit to the world circuit, as
Kreiker says will happen.

While the Middle Eastern
circuit stops in Dubai, Abu
Dhabi, Jordan, Qatar,
Bahrain, Cyprus, and
Lebanon, the international
circuit is held at 14 different
locations around the world.
With sponsors like Michelin
helping to finance the event,
an international rally car race
could bring an estimated $10
million of revenue into
Lebanon.

Profits generated
from the event could then be
reinvested in order to make
the Cedars Rally into a
Middle Eastern circuit event.

The payoffs of a Formula
One race would be even
greater. The idea first arose
in the mind of Khaled Altaki,
a local businessman, in 1994.
His Beirut Hariri Circuit
would have run along the
Ramlet El Baida promenade.
The idea has since been
scrapped, although Altaki
now claims to be designing a
second closed-circuit track
running in an as-yet-undisclosed
location.

But the main impetus these
days is on the idea of running
a Grand Prix through the
streets of Solidere. The Ministry
of Tourism has appointed a committee of five officials,
including Cheikh Fouad Al Khazen, the
chairman of ATCL, and Nabil Karam, a
five-time champion with ATCL, to prepare
a budget and market the event through a private
company.

Should Lebanon be awarded
the rights to organize a Formula One race,
ATCL would be given the job of managing
the race. The event would demand a year of
preparation and require an estimated budget
of $100 million. ATCL would be charged
with managing the event, gaining valuable
experience and worldwide recognition.

“Formula One will change the face of
Lebanon in the eyes of the world,” says
Karam. Hotels would be full for a week,
generating some $3 million for the government
in restaurant taxes alone. It has
been estimated that the event would generate
$100 million in profits for organizers,
which would be shared by the government,
ATCL, and the company in charge of marketing
the race.

“It will have a snowballing effect on
tourism and everyone will be positively
affected — taxis, hotels, restaurants, malls,
retailers — and it will put Lebanon on the
tourist map for the entire world,” says Fadi
Saab, board member of the national council
for tourism. Saab, also chairman of TMA,
would be involved in facilitating the transport
of racecars into and out of the country.

Sound too good to be true? It probably is.
Lebanon is competing against Egypt and
Dubai to host the event. Although Lebanon
has the best climate, Sundays off, and a casino
for gambling, Dubai has pledged to spend
close to $1 billion to organize the event and
is the leading candidate.

At the same time,
Dubai and Egypt do not have to deal with the
nasty political environment plaguing
Lebanon. “Bernie Ecclestone, the head of the
international association for Formula One organizers,
refuses to come to Lebanon under
these conditions,” says Karam, adding that
Formula One wouldn’t take place here
before regional peace is achieved.

Others feel that Lebanon is not ready to host
an event of this size. “It seems to me that it’s
too early to organize such an event. The
country doesn’t have the necessary organization
to attract the right amount of tourists and
make sure their stay is trouble-free,” says
Ghassan Matar, previously an independent
consultant for the ministry of tourism.

If Lebanon succeeds as a candidate, organizers
will have to wait until 2003 before
they can hold the event. Until then, perhaps
the slogan we should be promoting is
“Rally for peace.”

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Feature

Shame shame

by Kirsten Vance & Peter willems
written by Kirsten Vance & Peter willems

You’ve heard it before, we’re sure,
that old adage everyone so likes to
repeat: Lebanon — the region’s
entrepreneurial spirit and center of free
market capitalism. It seems, however, that
somebody forgot to tell the government.

The two cellular companies, LibanCell and
Cellis, have found that out recently, with
the government threatening to cancel their
contracts if they didn’t pay up. “It’s like a
soap opera with dark forces working
behind the scenes,” says Ziad Maalouf,
vice president at Middle East Capital
Group (MECG). “This could tarnish the
image of Lebanon in the eyes of investors.”

While it’s not clear who’s right or wrong
in the heated cellular row — or even if there
is fault on both sides — many in the business
community agree with Maalouf’s assessment
and feel the matter could have been
dealt with better.

Rather than being handled discreetly
with negotiations out of the spotlight, the
brawl has been all too public and loud. “If
what the government claims is legitimate,
they should have done it quietly,” says
Nassib Ghobril, an analyst at Lebanon
Invest. “We’re not exactly in the most stable
and peaceful environment for investors
— you don’t scare foreign investors.”

Instead, the government has brandished
swords, fencing LibanCell and Cellis into a
corner with a $300 million fine each.

With LibanCell’s five-year profits           
through 1999 at $141 million and Cellis’ at
$124 million, the move looks like the government’s
attempt to turn the two companies
into non-profit organizations — as if making
profits was some sort of a sin.

The milking
machine had already been turned on once
before, when a six-cent tax was slapped on
each minute of talk time last June in an effort
to increase revenues to government coffers.

LibanCell, which is owned by Finland’s
Sonera and a consortium of local investors,
has a case pending in the Shura Council to
have that tax overturned. (Hussein Rifai, the
company’s chairman, declined repeated
requests for an interview, as did Issam
Naaman, the minister responsible.)

And where did that $300 million figure
come from anyway? “We don’t understand,”
says Sima Hafez, marketing director
of Cellis, which is two-thirds owned by
France Telecom and one-third owned by the
Mikati Group. “All they’ve said is ‘you’ve
done damage to the government. Pay.'”

The two companies weren’t the only ones
confused. While Naaman did list numerous
violations, there was a lack of documentation
or supporting evidence put forth.

Even
members of parliament, who approved the
cabinet’s decision to deliver the ultimatum,
were ill-equipped to give any kind of
verdict. “When we discussed the issue, we
didn’t have any documents,” says Boutros
Harb, a lawyer and MP. “We needed the
whole file in order to discuss it properly and
make a decision.”

The cellular operators appear to have done
much better in the media wars, returning the
government’s hardball with facts and figures.
The duo churned up the PR machine
with adverts splashed all over billboards and
in newspapers, spelling out which party
pockets the largest share of phone bills paid
by customers — the cellular companies at
4.63 cents and the government at 8.43 cents
per minute.

If LibanCell and Cellis already
had the sympathy of the business community
and investors, that move swayed general
public opinion in their favor.

And there’s
more to come. Cellis compiled 1,000 binders,
enclosing copies of the contract with other
supporting documents, destined for the
desks of prominent business leaders, as well
as 5,000 smaller pamphlets. LibanCell has prepared
its own thick file to present its case.

For the cellular companies, the government
demonstrated the worst of its bad
faith when Naaman pulled a flip-flop that
would be the envy of any Olympic gymnast.
In mid-April, the minister turned 180
degrees, bringing an abrupt end to negotiations
with LibanCell and Cellis without any
prior warning.

That was just one day after the
two cellular operators claimed they had
signed an agreement in principle to turn
their build-operate-transfer contracts into
licenses by the start of 2001. The operators
offered to pay $1.2 billion, according to
Georges Kassardji, a battler on the
front lines against the cellular companies.

While EXECUTIVE did receive an unsigned
copy of the agreement, Hafez claims the
signed version is at the offices of law firm
Booz, Allen & Hamilton (BAH). However,
the firm would not comment on the matter.

So what would be the next step to resolving
the stand-off professionally? “You can’t
sign contracts with two leading international
companies, abrogate the contract, and
expect to maintain goodwill,” says Marwan
Iskander, an economist. “The government
should agree to go to arbitration.”

Those sentiments
are echoed by many analysts, business
people, and MPs alike. It is also the
preferred choice of LibanCell and Cellis.

The government does, however, have the
right to terminate (see box) the contract for
any reason it sees fit.

But outside termination, there are other procedures
stipulated in the contract. “The
contract is clear about how to resolve a dispute,”
says Hafez, listing off the steps: the
coordination committee, the appointment of
outside experts, arbitration according to the
rules set out by the International Chamber of
Commerce. “This is what we should follow,”
she says. “We should abide by this contract.”

Further, the International Finance
Corporation, which provided Cellis with a
line of credit, received a letter of guarantee
from the previous government that the termination
clause would not be used. The
World Bank organ has since warned that
such a move could damage Lebanon’s ability
to attract future foreign investment.

The threat to give the cellular companies
an early exit visa stems from 17 alleged
violations. These include not providing sufficient
geographical coverage, not allowing
government audits of their accounts, failing
to pay taxes in full, and cheating the government
on its share of revenues. LibanCell
and Cellis have denied the accusations.

The most hotly disputed allegation concerns
the number of subscribers and
whether or not the contract stipulates a
ceiling of 250,000. Two independent
lawyers consulted by EXECUTIVE interpreted
the said figure as a ceiling, and that any
expansion of the subscriber base should
take place within that limit.

According to the
cellular operators, however, BAH said
there are two possible interpretations.

When the dispute first arose following the
change of government, the companies put
a hold on new subscriptions. That created a
black market. “We asked several times for
a meeting of the coordination committee,
but it hasn’t met in over two years,” says
Hafez. “They didn’t abide by the procedures
in the contract, so we put more lines on the
market and continued our expansion.”

The
government has said it wants 50% of revenues
from the lines in excess of 250,000,
rather than the usual 20% stipulated in the
contract for years one through eight.

According to Kassardji, the expansion was
a move to control the market before a third
player could enter the fray. “This is not
a good example of privatization; it’s an
example of a duopoly,” he says, presenting
a list of unfair practices and violations.

Regardless of the outcome, this doesn’t
bode well on the eve of privatization. Now that
parliament has passed the privatization law, the
government needs to sell off state assets to
reduce its huge debt. But in the aftermath of
such a disastrously mismanaged dispute, will
there be any buyers? And if so, will they pay
as much as the government hopes to get?

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Feature

It’s a jungle out here

by Gareth Smith
written by Gareth Smith

“Someone came and said he
wanted me to value a property
at $1,000 per m². I said I
wouldn’t, since it wasn’t worth that. He
went to a khabeer muhallaf ikary [sworn
expert on real estate], a big name, who
agreed to make the $1,000 valuation. There
are also examples where land is valued at,
say, $50 million for collateral, but when the
bank claims the land after default, it turns out
to be worth only $10 million.”

Raja Makarem — consultant and broker in
Lebanon and England for nearly 30 years —
smiles when he tells the stories, but he’s not
really laughing. In the post-war boom,
some saw mushrooming concrete as the
fruition of Lebanon’s love of free-market
entrepreneurship: anyone, it seemed, could
prosper in the unregulated real estate jungle.

In today’s landscape of unsold property,
silent building sites, and banks foreclosing,
the lack of regulation takes on a different
light. Suddenly, a new professionalism
seems to be needed, and yet professionalism
is next to impossible in a jungle.

Last year,
Georges Corm, the minister of finance, put
stagnation in real estate alongside public debt
and the balance-of-payments deficit as one
of Lebanon’s three most serious economic
problems. “If we don’t do anything about
them,” he said, “then the Lebanese should
not expect any growth in the future.”

Successful modern capitalism requires a
regulated market, and Makarem is not
alone in believing that the lack of regulation
is strangling Lebanese real estate. “The
sector is marked by several inefficiencies,
with a notable mismatch between supply
and demand,” noted an HSBC report last
summer. “Assessing the state of the market
is made difficult by a crucially lack of reliable
market information … Real estate transactions
in Lebanon are made more difficult by
heavy, time-consuming administrative formalities
and high costs. The aggregate of
local taxes, agent commissions, notary and
registration fees could be as high as 15% of
the property value.”

Living in a jungle, in other words, is
expensive. The lack of regulation — and
the consequent lack of transparency and professionalism —
pushes up prices.

“Anybody
here — a porter, a driver, a doctor — can
deal with real estate,” says Makarem.
“People buy the wrong property at the
wrong price, or they buy something without
knowing about the restrictions, like zoning.

Clients look for a quick buck and don’t
want to pay for market research. People
avoid serious brokers: they say things like
‘this guy won’t budge from his 2.5%,’ so
they go to someone who’ll take half a percent,
and there are plenty of them — of
course they might be taking a huge cut
from the vendor. In the end, all this uncertainty
can make prices 10% to 20% higher.”

There are many examples of real estate
markets regulated both by law and voluntarily
by the industry. No one can deal in real
estate in the US without a broker’s certificate,
and they are legally liable for their actions.
The UK has no restrictions on who can deal
in real estate, but there is a code of practice
laid down by two professional associations
and a strict legal framework (see box).

Massad Fares, managing partner of
Prime Realty, argues that Lebanon needs a
real estate agents’ act to organize the profession:
“Other sectors here are regulated. A
financial broker, for example, needs a
license and the purchaser is bound by law to
pay a commission. This could be the case also
in real estate.”

Makarem suggests that the first
step is the establishment of a professional
body: “It should require basic minimum
knowledge of anyone wanting to become a
professional in the field. It might rule out people
with certain criminal records.” Those
approved would display a sign and adhere to
a publicly available code of practice and a
general fee structure.

The initiative, says
Makarem, must come from the industry: “It
has to start with us. The ministry of finance
should then become involved in drawing
up the regulations. Everyone should be
required to pay dues to the broker, as you can
only do the serious work if someone is paying
for it. But at the same time, the broker
should be held responsible for any breach of
the code of conduct.”

The only current qualified real estate
operatives in Lebanon are the so-called
sworn experts. There are over 700 such
appraisers, registered and approved by the
ministry of justice, who work for the courts
and offer services to the public. But their
only qualification is a high school or technical
school degree, or 15 years**’** practical
experience.

The appraisers’ methods, says
Massad Fares, are old-worldly and generally
based on comparisons — what “similar”
properties have sold for — rather than yields.
This means the appraisers do not examine
the potential of property, and consequently
portfolio holders are seeking better advice.

“The banks come to people like us, who are
more up to date,” says Fares. “We then
have the khabeer muhallaf sign our report.
A foreign bank will also tend to require an
auditor to sign the evaluation.”

The appraisers are involved in a wide
variety of transactions and are called on by
courts in cases of financial conflict. But they
are not held responsible for the accuracy of
their valuations. “In the UK, anyone who
makes a valuation is liable,” says Makarem.
“To do a valuation in Britain — or the United
States — you need professional indemnity
insurance. If you give the wrong advice and
someone suffers, they have to be compensated.”

In Lebanon, the legislation concerning
valuations is old, and ignorance of the law
is widespread. After more than 20 years in
business here, Makarem cannot recall a single
example of a valuer being sued.

Nothing is more basic in real estate than
square meters. Yet in Lebanon there is no
established way of measuring buildings.
Balconies and internal walls may or may not
be included: elevators, stairs, and technical
areas are sometimes counted in residential
properties.

“All over the world, each country
has one way of measuring,” says Fares. “In
Lebanon they have 60 different ways.”

Landlords and developers generally include as
much as possible, says Michael Dunn, Beirut
manager of Healey & Baker: “The current system
of measuring gross external areas allows
vendors or landlords to ask a higher price
and to divert attention from what interests the
client — the floor area that can be used.”

With land, the more progressive brokers are
taking up the concept of BUA (built-up area,
the amount of floor space permitted on a plot
of land by building regulations), which is the
only effective way of comparing prices. Most
brokers still price plots not in BUA but in
square meters of land, even though allowable
floor space can vary in Beirut from 1.2 times
plot size in zone ten (parts of the coast) to six
times in zone one (parts of downtown).

Floor space and land prices are not the only
questionable statistics bandied around.

“People invent figures,” says Fares. “They
say, for example, that $7 billion worth of
property is idle. But if you think about it, the
banks wouldn’t lend half that amount. So the
figures need to be questioned: is a building
empty because the owner is away in the
Gulf, or is it for sale?”

Other, more optimistic,
statistics cited on empty property come
from studies carried out by the government’s
short-staffed central administration of
statistics in 1995 or 1996 and are a poor guide
to today’s market. “There are no reliable
statistics here on empty buildings,” concludes
Dunn.

As with empty properties, so with “average
prices”. Experts take the prices for specific
neighborhoods quoted in some journals with
a large pinch of salt.

The stagnation of the
market since 1996 means that there are few
actual transactions in any neighborhood from
which to derive a meaningful market price.

In
Britain, large agents like the Halifax
use actual sales figures to compile regional
house-price surveys that are regularly published
in newspapers and, more thoroughly, in
specialized magazines.

In Lebanon, many
dealers claim that sellers and buyers regularly
report falsely low figures to the land registry
in order to minimize taxes — while at the
same time, the seller may circulate a falsely
high figure to enhance the development’s
standing amid potential buyers.

Figures for rents are distorted for a different
reason. Many owners still avoid
renting because of the history of state intervention
that fixed rents way below market
prices. Regulation can be harmful as well as
helpful.

The new law in 1992 (159/92) —
allowing landlords and tenants to agree
contracts freely — was a step in the right
direction, but it did nothing to change the
market distortion of older rents. Many of
these originate from days when the
exchange rate was LL3 to the dollar.

Proposals for reform have been bogged
down in parliament for many months and
action is overdue, says Naji Raad, president
of Beit-Mery-based firm Raad Group: “The
old rents can be raised only by parliamentary
approval and then by very small percentages.
The government should set a target — five or
ten years — for all rents to be converted to
market rents. The politicians are scared of
disadvantaged people becoming homeless.
But there has to be a limit. Today, someone
paying $100 or $200 a year in rent might
have to be offered $20,000 as khlou (indemnity)
to leave. This is ridiculous. Setting a
time limit would give tenants and owners an
incentive to negotiate.”

But the tenant and landlord law is “still in
its infancy,” says Dunn, who feels the 1992
law “needs to be tried, tested and proven
before it’s fully accepted in the market.”

The
absence of law on leasing has led Solidere
to pioneer the practice in downtown,
including the first residential properties (Saifi)
and commercial property (170
Marfaa) to be leased with an option to buy.

While not providing an adequate legal
framework for a successful market, the government
does tax real estate transactions
highly. Although comparable to Egypt, the
transaction tax of 5.4% is much higher than
in the West. In England, the rate is just 1% on
properties up to £250,000 ($390,000), rising
to 3% on properties above £500,000
($790,000). In Kuwait, the tax is just 0.5%.

“It’s also 16% here for foreigners,” says
Dunn. “While 5.4% and 16% may not
sound like very high figures, if you pay $20
million for a property the tax is a lot.”

Fares believes that tax rates should be part
of a wider overhaul of the antiquated legal
structure. Many point favorably to the legal
change in the 1970s that allowed landlords to
claim service charges from tenancies, but it falls
short of its aim because of the lack of professional
management of buildings.

Without clearer and more effective regulation,
the industry is likely to struggle, even
if and when the economy and the regional situation
improve.

Meanwhile, real estate professionals
envy the banking sector, which is
successful partly because it is strongly
supervised by the central bank and the banking
control commission.

“Real estate is
every bit as important as banking,” muses
Makarem. “Or at least it could be.”

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For your information

Great plan,poor implementation

by Executive Editors
written by Executive Editors

The Syrian-Lebanese free trade agreement was supposed to stimulate trade. Why has it failed to do that?

Lebanon’s total imports are down 25%, as are Syria’s. It’s not just a problem between Syria and Lebanon. It’s a problem relating to the economic possibilities in Lebanon and Syria. There is stagnation and recession. We also have to take into consideration the price of oil. Last year, the price was $8 or $9 a barrel. The biggest imports (50% to 60%) from Syria are oil, gas and fuel oil. The quantity is still the same, but the price has gone down. Another point, Lebanon imports about $25 million in truffles from Syria. Last year, there were no truffles, no production in Syria. At the same time, we’re still trying to resolve problems concerning the formalities of trade. We have to facilitate the formalities. We also have to find a solution to the problem with letters of credit (L/C).

You mentioned letters of credit. If a Syrian wants to import goods from Lebanon, he must pay 100% up front for an L/C. That’s not the case with other countries. What are you doing to solve this problem?

KHOURY There was a meeting between representatives of the Commercial Bank of Syria and about five or six private banks here. They decided that the first step towards a solution was to open a credit line between the Commercial Bank of Syria and the association of banks in Lebanon to facilitate the method of payment. About six banks here have this agreement and we hope that all other banks follow. But the issue is still under discussion. I hope that in four or six months, many of these problems will be solved.

This agreement makes exceptions for a number of items. Can you really call this free trade?

KHOURY This week an agreement was ratified for porcelain, reducing tariffs by 50%. With beverages, the problem is with customs duties. Other items, like marble, juice concentrate, mineral water and certain beverages such as Pepsi are kept out of the agreement. We are discussing these items. At the same time, there are about 20 industrial items that cannot be imported into Syria by the private sector. For example, Chiclets, who have a lot of factories in Syria, go through a public sector company. If the market needs it, they import it. If it doesn’t need it, they don’t import it. So we are discussing the possibilities of permitting the private sector to import these types of items from Lebanon. I think they are going to cancel this rule within a month. The private sector responds better to the market.

Agricultural products were also not included. The two sides negotiated a separate agreement in October. What was that agreement and why hasn’t it been implemented?

It calls for an immediate 50% reduction in tariffs on 22 items that are grown in both countries and a further I 0% reduction each year for the next five years. It was signed at the end of October, but not ratified. I expect it to be ratified at the end of this month.

Farmers here are worried that they will not be able to compete with Syrian produce. What do you think?

A commission from both countries was formed two months ago and is discussing how to coordinate agricultural policy, increase complementarity and specialization in regards to what both countries grow. When the plan is finished we will have an idea of what should be done in Lebanon and Syria.

Traders complain that the agreement is arbitrarily enforced at the border. One day something is allowed, the other it is not. Tariffs change on the whims of the customs agent.

KHOURY Both sides complain about this. Sometimes customs agents change the price. Sometimes you find an agent who changes the tariff code as he likes. You have a certificate of origin and you arrive at customs and they say that it’s not correct. We have a commission for Syria and Lebanon. You can sometimes complain to this commission and they will check up on the problem.

Fadi Abboud, president of the North Metn Industrialists’ Association, recently called the agreement “no more than an exercise in public relations.” Others have expressed similar feelings. What’s your response?

KHOURY I know Fadi Abboud very well. I think he believes deeply in the relationship between Syria and Lebanon. He is for a common market. He wants to promote it. That’s why he complains all the time. He is in a hurry all the time. But you cannot take everything as you see it. You have rules, you have an economic situation. You have a lot of things to take into consideration when you implement an agreement.

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Courting disaster

by Sami Atallah
written by Sami Atallah

The government of Hoss and the first and second governments of Hariri listed judicial reform as one of their top priorities. The rest is history. I want to add my voice to those who are calling for judicial reform. Not only is an independent and well-functioning judiciary one of the prerequisites of democracy and civil liberty, but also it is a vital component of the functioning of a market economy.

A well-functioning judicial system contributes to a country’s wealth and economic growth. First, it protects property rights, the basis of a market economy: It gives the owners of firms, capital and assets the right to use, sell and generate income as they wish and prohibits the government from expropriating their assets. Secondly, it enforces contracts and resolves disputes between two parties. With a fair and efficient judiciary, firms would be able to undergo complex interactions with the confidence that a second party will not renege on the agreement. Otherwise, firms will avoid such dealings and lose investment opportunities or face the difficulties of solving conflicts outside the court. And third, it can hold the executive and legislative branches accountable for their decisions and maintain the credibility of the business environment.

The last two hurt the Lebanese economy in a way that cannot be easily measured. The judiciary’s ability to enforce contracts and resolve disputes is slow and costly. This is expected since only 359 positions for judges are actually filled out of 515. Of course, this has resulted in the accumulation of unresolved cases. The average case takes three to four years to clear compared to 100 days in France. Although the government recently appointed judges, the situation is not likely to improve due to misuse of the procedural code. The system allows the defendant to postpone a case by abusing the process of hearing and notification. Along with the snail-pace of court cases, the cost of filing lawsuit fees, fiscal stamps, and lawyer fees make for a hefty bill. So it’s no surprise that resorting to the courts is the least favorite option of firms to revolve disputes.

The costs in terms of time and money are harmful to the economy. Small firms, which comprise the majority of enterprises in Lebanon, can’t afford to go to court and avoid it completely. They deal with people they trust, which limits their economic activities to their surroundings. Even if these deals aren’t the most economical, firms are willing to pay the extra price to guarantee the fulfillment of a contract. Bank lending to the private sector is also affected. Banks are inclined to lend to firms that are trustworthy, because the court procedures are complex. This, however, may deprive emerging firms of credit. Although there are other ways to solve disputes, such as arbitration and reputation, an efficient judicial system is irreplaceable.

The ability of the judiciary to hold the executive and legislative branches accountable is also questionable. Lebanon has decent laws and decrees, albeit in need of modernization, to govern the issue of competition and anti-dumping, but it has no resources to enforce them. In some instances, its rulings are ignored or subject to political pressure. The judiciary has often reported abuse by government officials of the public procurement process; however, nothing has been done about the problem. Its lack of power to check government action is problematic, especially if privatization is to be realized. Otherwise, the privatization process may become the pie that everyone tries to snatch. It is high time to bring the judicial reform file off the shelf. The call for an independent judiciary is needed more than ever.

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When will the tax man cometh?

by Executive Contributor
written by Executive Contributor

The government has increased taxes, but better collection is what’s needed.

As the government struggles to find new sources of income, many have called on the government for serious action. Georges Corm, the finance minister, chose to raise taxes as the primary way to meet the short-term goals of increasing revenues. But the Lebanese government’s track record on collection has been less than admirable. Instead it relies on customs duties, which are easy to collect and account for close to half of total revenues. The five-year plan calls for tax revenues at 16.8% of GDP in 1999, rising to 20.3% in 2003. But the problem lies in Corm’s approach: His main weapon to try to reach his 1999 figure has revolved largely around tax increases. Indeed, last year’s controversial budget increased the upper limit of income tax from 10% to 15%, doubled dividend taxes from 5% to I 0% and raised taxes on a number of products and services.

Corm’s reasons for the tax hikes? To achieve social justice and improve public revenues. Both goals are commendable and needed. But his definition of social justice is dated. Social justice would be better served by forcing tax evaders to pay their dues and penalizing them for delays. The theory of redistribution of wealth through taxation has been tried and tested throughout the world and has been unequivocally discredited by its utter failure to meet the three basic principles of taxation: productivity, equity and elasticity. Today, the worldwide trend is towards reducing taxes to stimulate the economy, increase disposable income and encourage investments.

The tax hikes have also hurt the competitiveness of the Lebanese economy. The evasion rate reaches 60% of income tax dues, according to Banque Audi estimates. Given the narrow tax base, it was not unexpected that the results backfired and the economy moved from economic slowdown in 1998 into a full-blown recession, depriving the government of much needed revenues.

What’s more, Corm seems bent on a touchy-feely approach of collection, repeating his desire to establish a “new relationship” with taxpayers. It’s still unclear what that means, but he shed light on his approach when he simply “reminded” tax delinquents recently that their 1999 taxes were overdue. This approach can hardly improve tax collection in Lebanon, or anywhere else in the world for that matter. That’s exactly what the US and other governments have long realized.

So what needs to be done? Create a tax collecting body similar to the US Internal Revenue Service (IRS). Indeed, conservative projections have shown that with adequate tax collection and fighting tax evasion, the government could easily treble its revenues from corporate and income tax.

The IRS collects income tax and enforces tax laws, administering a tax system based on voluntary cooperation. The taxpayer fills out a tax return, stating income and the amount of tax owed and then sends the money to the IRS. How can such a voluntary tax system work? Theoretically it shouldn’t since nobody likes to pay taxes, but it’s the powers of the IRS that makes this voluntary system function. The IRS has extraordinary powers to collect and to enforce the tax code. Unlike other US law-enforcement officers, IRS agents have a free hand to peer into and lay claim to bank accounts, pursue debt and to decide whether individuals must forsake their home, all without going through the courts. And, unlike other civil cases, when the IRS sues a citizen the burden of proof is on the taxpayer. As a result, the IRS receives more than 180 million voluntary tax returns annually and has a staff of 86,000 to audit them. In comparison, the FBI, the federal agency in charge of fighting crime, employs about I 0,000 persons.

These powers were mostly held in check by congressional oversight and the IRS’ own rigid code of ethics. But since the 1970s, a legal loophole has allowed the agency to shield itself from many inquiries into its activities and top IRS managers were rarely held accountable for how they achieved their goals. This has resulted in serious abuses. In sensational testimonies in front of the US Senate in 1997, a woman testified to a 17-year battle with the IRS during which the agency mistook her husband for another taxpayer. A Delaware man testified that he had paid the IRS $50,000 he did not owe, out of fear of financial ruin if he fought its false accusations. Other taxpayers told of IRS agents who wrongly seized bank accounts, fabricated evidence and refused to acknowledge payment. As a result, the US Congress approved unanimously an IRS reform package.

An empowered Lebanese Internal Revenue Service would collect taxes from all, indiscriminately lifting the cover from those avoiding payment. An embryonic structure exists for such an agency. Fouad Siniora, former minister of state and financial affairs, started the process of rebuilding the tax department by attracting well-qualified assessors and auditors, simplifying and automating operations, retraining staff and moving towards computerization. Corm is following in Siniora’s footsteps and plans to increase the number of tax collectors. But the idea of having direct ministry staff collect taxes has become increasingly obsolete as most advanced countries have an autonomous tax collecting body.

The long-term goal should be to form a Lebanese IRS as an independent governmental agency whose functioning is immune from political interference or change in leadership, and to grant it similar powers to those of the IRS. In the meantime the military should be employed to help collect taxes in the short-term until a system is in place. This practice has been prevalent in Russia, where tax evasion is notorious.

The solution to the tax problem is simple: Lebanon needs its own IRS that strikes terror in the hearts and minds of tax evaders but without the military tactics of the Russian government or the abuses of the American IRS and its lack of accountability. When the Lebanese reach the point of paraphrasing a popular American saying, “the only two things guaranteed in life are death and taxes,” everyone would know that a Lebanese IRS is born, and that social justice and public revenue growth are possible without tax hikes.

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Crash Landing

by Robert Tuttle
written by Robert Tuttle

It was one more of those grand schemes of Rafik Hariri’s era, designed to resurrect Lebanon’s glory days. Like Solidere and the construction of an Arab highway to Damascus, a new Beirut International Airport (BIA), was going to welcome visitors to the commercial and cultural capital of the Middle East. Today, Solidere is struggling, plans for an Arab highway are on hold, and the BIA has turned into a major headache. The new $400-million facility, touted to be one of the world’s most modern airports, is slated for completion this month. But that’s two years behind schedule, and already the facility has three strikes against it.

Strike one. Hoctief-Consolidated Contractors Company, the German-Lebanese joint-venture hired in 1994 to build the new airport, is locked in an arbitration dispute with the Council of Development and Reconstruction at the International Court of Arbitration in Paris. The conflict centers on $200 million in cost overruns that the company says arose from delays in construction and alterations made in the design of the facility. The arbitration case has been ongoing for two years in a relatively low-key manner. That is, until last month, when the government was accused of intervening in the process by preventing Joseph Takla, Lebanon’s representative, from attending a hearing. Takla eventually resigned and a replacement has yet to be appointed. Meanwhile, a number of local lawyers have suggested that the case be settled in Beirut, an option Hoctief rejects. “It was to take place in Paris during the initial arbitration. Both sides agreed,” said a spokesman for Hoctief.

Strike two. Mohammed Abdul Mohsen Al-Khorafi & Sons, the company building the $24 million airport car park, claims to have suffered a 50% reduction in revenues because the police have allowed illegal parking along the sidewalk in front of the airport. Khorafi won the 15-year build operate and transfer contract in 1997.

Phase one was completed in 1999 with 800 parking spaces. The second phase will increase the number of spaces to 2350 and is scheduled for completion by next year. Complaints to the Lebanese authorities haven’t yielded any results, says Khorafi. Fayssal Mikdashi, director general of civil aviation at the ministry of transport, claims that during peak times the police can do little to stop the infractions because there are too many cars. There have also been complaints that the rates are too high. “If rates were a bit lower, nobody would park outside,” he says. Users are charged LL4,500 for the first hour and LL6,000 for two hours.

Strike three. Just who will run a new 6000 m² duty-free zone when it opens this month, is still in question. Phoenicia Aer Rianta Company (PAC), a Lebanese-Irish joint venture, won a 15-year concession to operate the facility in 1996 on a $38 million bid, $20 million of which has already been paid. Last year, prime minister Salim Hoss, referring to a decision by the government’s committee for consultation and litigation, suddenly declared that the contract wasn’t legal. He said that a concession could be granted for four years only. The statement prompted protests from PAC, which still claims that it was not formally notified of the decision. Since then Najib Mikati, minister of transport, and Hoss have said that the government was reviewing the contract. But its status remains vague. Mikdashi says the contract is still valid, “unless we hear otherwise.”

But the government, if it wants to honor the deal, will have to make legal what was not. That will require approval from parliament. The ministry of transport prepared a draft law that would do just that, but it’s not clear whether it will be presented to parliament.

What do these problems have in common, other than the airport? Each involves a foreign company that has invested substantial amounts of money and is in conflict with the government. “It would do good to explain why all these projects have been going through this, and clarify the situation,” says Nassib Ghobril, an analyst at Lebanon Invest. “The reasons have not been clear. You can see why it would make foreign companies second-guess doing business with the government.” In other words, three strikes and the only one who might be out is foreign investors.

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On solid ground

by Avo Tavoukdjian
written by Avo Tavoukdjian

Al-Mashrek has its sights set on
becoming the top insurer in
Lebanon – and not just in terms of
premiums. Already ranked sixth in the country
last year with non-life premiums of
$14.5 million, Al-Mashrek’s global business
was about $29 million in 1999. That’s an
increase of more than 100% from $14 million
in 1996 (see graph). Al-Mashrek is now getting
ready to tackle the 21st century. The company
is aiming to expand both locally and
abroad, where already 50% of its business is
generated. But that won’t be so simple.

The insurance market is no longer the
carefree, anything-goes sector it once was
(see “Premium Pressure,” March 2000).
The players are faced with many new
obstacles, such as consolidation and new
government solvency requirements. Then
there are the foreign big hitters who have
moved in: Assurance Generale de France
(AGF) now owns 51% of Societe Nationale d’ Assurance (SNA), the third
largest insurer with non-life premiums of
about $20 million, while Axa bought 51%
of Societe Libano Française (SLF), the
fifth largest at $18.5 million. There are also
local subsidiaries of international firms,
such as Arab Lebanese Insurance Group
(ALIG), which is majority owned by its
parent company, Arab Insurance and
Reinsurance Group (ARIG). These firms
have the financial strength to compete
aggressively in the Lebanese market, solid
international experience in insurance and the
advantage of having names that carry a lot
of weight. Banks are also joining in the
insurance game, posing a new threat.

That aside, insurers have to find a way of
satisfying market demand, despite the relatively
low purchasing power of the population.
This has forced some to quote rates
lower than they would like, despite liquidity
considerations, and offer extended
credit facilities. If companies don’t walk a
fine line, they could easily follow Mesir,
Income and Phoenix.

All this and Al-Mashrek
doesn’t appear
overly concerned. Why
so smug? Al-Mashrek
thinks it has what it
takes. Part of its strength
comes from its reinsurers.
These help determine
to a large degree an
insurance firm’s credibility.
The reinsurers
behind Al-Mashrek are … and Swiss Re of Switzerland. All are rated
triple A. Al-Mashrek’s pricing strategies
are just as sound. The firm sets tariffs for
each branch of insurance based on statistics
gathered from the markets in which it operates.
Based on volume of expected claims
and rates offered by competitors, Al-Mashrek
works to maintain a balance
between safe underwriting and a competitive
spirit. Some, like American
Underwriters Group (AUG), sell just
below the market norm, while ALIG seriously
undercuts prices (see “New kid on the
block,” July/August 1999).

But with their financial strength (ALIG
has $7 million in capital and AUG has $4
million) and strong reinsurers (ARIG has
$1.7 billion in total assets and $460 million
in shareholders’ funds), both should be
able to cover losses in the event of unexpected
claims. Bankers, Societe Nationale
d’ Assurance and Libano Suisse are much more conservative when it comes to pricing,
with some of the more expensive rates in the
market. Al-Mashrek’s prices fall between
the two extremes.

On the collection front, Al-Mashrek also
tries to maintain a balance between liquidity
and convenient terms for its clients. For medical
insurance, the riskiest branch, it will not
deliver a policy before receiving a deposit
equal to 25% of the premium. The firm
allows no longer than 45 days for full payment. Sixty days is allowed for other types of insurance,
except in cases where large amounts are
owed. “We have to be realistic,” says Naji
Habiss, Al-Mashrek’s new deputy general
manager. “Someone who buys $4,000 to
$5,000 worth of coverage
may not be
able to pay all at
once.” In such
cases, the limit is
set at three months.
“But we have to
make sure that the first thing we collect
is what we have
to put as reserves
with the government,”
he continues.
Lebanese United Insurance,
for example, demands 35% up front and a
maximum of two months to close the
account, well within the market average
of four months (see “Getting tough,”
January 2000). Middle East Assurance and
Reinsurance Co (MEARCO) leaves no
room for maneuvering, requiring all payments
up front (see “A sure thing,”
February 2000). Some, like Libano Suisse,
play it too dangerously, allowing clients
as long as five months to complete their payments
(see “The $8 million millstone,”
November 1999).

Although initially Al-Mashrek’s activities
were geared towards marine insurance, it
gradually realigned its business by extending
operations to all branches. Now, 35% of its portfolio is in medical and 5% in life. The rest is in general insurance. Of that 40%, or about
25% of Al-Mashrek’s
portfolio, is in motor
insurance. Dealing in
all branches of insurance
assures that the
firm won’t have to turn
away potential clients.
“Often we lose clients
for the branches we do
have,” says Rached
Rached, chairman of
MEARCO, “because we
don’t deal in other branches that the
client needs.”

With 35% of its business in medical, Al-Mashrek
will start working with an international
third party administrator (TPA)
which is in the process of registering to
operate in Lebanon. Though Al-Mashrek
doesn’t work with one, TPAs like Medical
Express and Mednet already handle the
medical portfolios of many Lebanese
insurers. A TPA manages its clients’ healthcare
portfolios and is responsible for ensuring
that the branch is efficiently run, that the
guarantees are in place and a sound level of
liquidity is maintained (see “Doctoring
insurance,” December 1999). With physicians
working full-time on their payroll, the
TPA will screen clients for pre-existing
medical conditions and make sure that hospitals
don’t overcharge the insurer or prescribe
unnecessary expensive treatments.
This way Al-Mashrek can avoid worrying
about the high-risk branch and focus on
the others.

A major advantage for Al-Mashrek is
chairman Abraham Matossian’s wealth of
know-how. With decades of experience in
the insurance field, Matossian is the current
chairman of the Association of Lebanese
Insurance Companies (ACAL) and was
heavily involved in the implementation of
the new law. He was also instrumental in
getting diplomas from Centre d’Etude
d’ Assurance accredited. This qualification
is essential for those who wish to work in the
insurance industry according to the new
government requirements (see “Corporate
medicine,” September 1999).

Al-Mashrek is also in the process of
restructuring its management, reshuffling
personnel to positions where they’re most
qualified. The firm is bringing in new blood
from other insurance companies, including
SNA, !’Union
Nationale and
Libano Suisse. One
example is Habiss,
who ran Libano
Suisse for more than
22 years, which
ranked fourth in
1999 with non-life
premiums of about
$19 million.

As far as the bank
threat is concerned,
Al-Mashrek is loading
its guns. It is
ready to do business
with all financial
institutions, unlike
insurance firms that
are owned by banks.
One example is
ADIR, which does 90% of its business through Byblos Bank. Banks look for securities against loans. Clients are generally required to buy insurance, ranging from car and cargo insurance to house and life insurance, depending on the type of credit. “Banks won’t give credit to someone if he doesn’t get insured,” says Habiss. “We’re creating all kinds of products for the banks’ needs.” This way Al-Mashrek can sell motor policies to those buying cars on credit and cover the dealer if the client defaults on payments.

Another advantage Al-Mashrek has over
local rivals is its business abroad. Through
affiliates and subsidiaries in Cyprus, Saudi
Arabia, Egypt, and France, the firm generated
$14.5 million
or 50% of its business
in 1999. Not
only does Al-Mashrek
bring
home the experience
derived from
those markets, giving
itself the tools
to face the new foreign
threat, but it
takes the battle to
the foreign firms’
home turf. Others
that have offices
abroad include
SNA and Libano
Suisse.

Al-Mashrek is
also seriously looking
at consolidation.
It is currently in negotiations for an acquisition with two insurance companies, though Matossian declined to disclose which ones. The move would increase the firm’s client base and assets as well as provide greater coverage of the market with an increased branch network.
“But nothing has been finalized,” says Matossian. “We aren’t even ready to apply for ministerial approval.” If it is finalized, the firm will have taken a solid step towards achieving its ambitions for growth.

But growth will also come from within. In
this sense, Habiss plans to put a greater
emphasis on life insurance, which now
accounts for about 5% of Al-Mashrek’s total
premiums. “It’s the most profitable of all the
branches,” says Habiss, “unlike medical,
which is like a running faucet with funds
flowing out continuously.” Many others
agree. “It’s the safest and most profitable
branch of insurance,” says Aline Kamakian,
general manager of Insurance Investment
Consultant (IIC). For this reason, MEARCO
hopes to acquire a company for its life
license within a few years.

Is it worth it? AUG seems to think so. It
acquired ELKA insurance, solely for its
life license. Al-Mashrek is also in the midst
of creating services that are so far unavailable
in the market. For example, those who
buy all-risk car insurance will receive a
loaner car for a few days should they have an
accident. For those with house insurance
that get snowed in, Al-Mashrek will have
the snow cleared, saving you the trouble
and saving money for them by avoiding
water damage claims. The firm also plans on
introducing a 24-hour hotline service for
emergency assistance. “I want to reach the
point where the name Al-Mashrek is as
well known as Pepsi-Cola,” says Habiss.

But in order to grow, Al-Mashrek believes
it has to go back a step first. It’s sacrificing
premiums by brushing off some bad and
high-risk clients in favor of a clean portfolio.
Though premiums generated locally have
increased from about $13.9 million in 1998
to $14.5 million in 1999, the non-renewal of
bad business contributed to a drop of $1.5
million in total revenues from $30.4 million
in 1998. With that, Al-Mashrek is seriously
screening all new business.

Talks are now ongoing with potential
new investors. “Al-Mashrek doesn’t need
big names to attract business,” says Habiss,
“but more liquidity can facilitate growth in
new ventures.”

Al-Mashrek is aggressive, but it does
not take the unwise risks that have brought
the downfall of others. It has also found a
balance to counter most of the sector’s pitfalls.
Al-Mashrek is confident that it is
taking the right steps. The question is
whether this will be enough to take the
business further.

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Give them credit

by Kirsten Vance & Peter willems
written by Kirsten Vance & Peter willems

Picture this. Mohammed and Mahmoud are good friends. The former is married to the latter’s maternal cousin, and most evenings after work are spent together around the dinner table followed by a session of backgammon and nargileh sipping. Jokes, exaggerated
tales and laughs are mixed with political
chit-chat and complaints about the state of
the Lebanese economy. Shop talk doesn’t
enter into the conversation much, but when
it does, Mahmoud’s $75,000 in outstanding
debts to his friend never does. Even in a
work environment, Mohammed finds it
difficult to press the matter for fear of
upsetting their close relationship.

Though these characters are fictitious and
any resemblance to real persons is purely
coincidental, it’s not a difficult scenario to
imagine in Lebanon, where it can be difficult
to separate personal from business relations.
While some may consider that to be a hindrance,
factoring firm Ipso Facto sees it as an
open invitation for its line of business. “A
client [of Ipso Facto] doesn’t have to jeopardize
his relationship with his buyers, pushing
them to pay, because it’s not his worry anymore,”
says Bassem Yammine, head of corporate
finance at Lebanon Invest.

But there are other advantages to using the services of Ipso Facto on top of safeguarding relationships. Factoring involves a
number of services that revolve around the
management of receivables, including collection,
credit insurance against bad debt
and financing. Ipso Facto receives a fee of
0.5% to 1.5% for its services as well as interest
on the financing it provides to clients
against their receivables. Ipso Facto has so
far concentrated largely on recourse factoring; if a client’s buyer doesn’t pay up,
Ipso Facto has recourse to the client.

Since its inception in 1997, Ipso Facto has
broken even, with losses last year canceling
out the previous year’s profits. But earnings
should be just around the corner as the
company expects profits of about
$250,000 this year. With about 35 clients last
year, Ipso Facto managed about $22 million
in receivables, about the same as it did in
1998. The company needed to increase its
capital and lay the groundwork before
being able to factor more, says Nagi
Schoucair, chairman and CEO, explaining
why business was flat in 1999.

As the first factoring firm in Lebanon,
Ipso Facto has doubled its human resources
since it began and invested about $500,000 in information technology last year. The
investment includes FactoLine, the firm’s
online service for clients to check up on their
accounts. The company has been given a
helping hand through its alliance with
Societe Française de Factoring (SFF),
France’s second largest factoring firm,
which has provided know-how and served
as a partner in international factoring for
trade between Lebanon and other countries.
“The last two-and-a-half years Ipso
Facto has basically been running like a lab:
testing, modifying, improving, testing,
modifying, improving,” says Yammine.
“Definitely, it has a two- to three-year lead
over any potential competitor; it would be
very difficult for someone to duplicate
what they have in a very short time.”

The next big push will come with the
planned capital increase from $2 million to
$8.75 million in May through Lebanon
Invest. This will bring a new shareholder
base into the company, which is 90%
owned by Schoucair and 10% by Rami
Nimr. At that level, Schoucair expects to be
able to handle about $70 million to $80
million in receivables in a full year of operations.
“This is a year of transition,” he
says. “For us, the first full year of going full
blast will be 2001.” The cash injection will
also give Ipso Facto the opportunity to dip
its toes into the regional pool of factoring,
where competition is scarce. Oman,
Tunisia and Morocco are the only countries
in the Middle East and North Africa that
have factoring firms.

SFF sees good potential in the region,
especially in Egypt. “The idea is for Ipso
Facto to be a partner that we’ll go with
into the region,” says Jean Gartner, international
director for SFF. “Now is the time
to go down to these regions, not when
everyone else is already set up there.” And
go they will, starting with Egypt and
Jordan. While SFF already holds a 5%
stake in Morocco Factoring and 10% in
Tunis Factoring, there are no plans to do the
same with Ipso Facto for the moment.

The plan is for Ipso Facto to form joint ventures
with local companies, which will bring
the knowledge of the market and put up the
capital. In its turn Ipso Facto will provide the
know-how and tools, using SFF again as its
partner in international factoring, which they plan to begin this year. Domestic factoring
will come at a later date in Egypt and
Jordan. With margins as slim as 2%, going
regional will help increase volume.
“Lebanon is a small market, so you can only
think of it as a lab to test concepts and see
how you can take it further,” says Yammine.

But what’s the benefit of paying money for
a third party to collect payments, when it can
be done in-house? Outsourcing the management of receivables allows a company to
eliminate related expenses and concentrate
on its core business. According to
Schoucair, factoring firms generally have
a collection rate that is 10% to 15% better
than when the clients do it themselves.
More importantly, financing allows a firm to
turn outstanding receivables into working
capital. Interest rates are 12% to 14%.
Clients include Sony, Megacom, Nike and
Playtime. “One of the major reasons we
decided to go to Ipso Facto is that it’s the only
company willing to offer this service on the
market,” says Mohit Parasher, branch manager
of Sony Lebanon.

Ipso Facto has been creating a sort of credit
bureau, called Ipso Credit Watch (ICW), in
the absence of such information on the market.
ICW has created a system of standardization
for industries similar to those codes
that operate in the US and EU. There are some
170,000 companies in the ICW database,
albeit with varying levels of financial information.
Based on balance sheets representing
about 15% of the companies in a given
industry, ICW can assess others with limited
information by using ratios such as turnover
per employee. “Based on this, we can
rebuild a balance sheet, figure out the assets
and so on,” says Schoucair. “But the condition
to do this is to have a proper sector study.”

Schoucair admits the method is not 100%
foolproof. In fact, the results are only accurate
to within a 20% to 25% variable by his
estimates. Come again. A 20% to 25% variable?
While that may be good for the prevailing
conditions in Lebanon, it still leaves
a huge margin for error. Schoucair has a few
other uphill battles to face, not the least of
which are the lack of transparency and culture
on the Lebanese market. “Take for
example securitization. It’s very simple, but
nobody understands it, nobody accepts it,”
says Nicholas Photiades, senior vice president
of Thomson Financial Bank Watch in
Beirut. “The legal structure is not there to
facilitate it. It’s still early, early days.”

Another analyst points to the inefficient
judicial system in Lebanon: “The banks
take the good debtors, so you’re left with bad
debtors and no courts.” While Schoucair
acknowledges the problem of the slow
legal system, he says the more important
legal issue is the invoice’s weak status in
comparison with the promissory note.

Another factor that the company will
have to prepare for is the inevitability of a
tougher market. Ipso Facto may soon find
that it doesn’t have the run of the place.
Commercial banks could become direct
competitors in the factoring business following
the recent central bank circular that
laid the ground rules. Schoucair, however,
has a plan to cut them off at the pass: Facto
Bank. “We’ll operate the factoring completely
from A to Z, and the bank just puts
its logo on it,” he says. “Or we can train
them, give them the tools and procedures to
enable them to do this.” Knowing the Alfa
banks will be tough to convince, Schoucair
plans to target the medium-sized banks.

Ipso Facto expects 2000 to be a very difficult
year. “1999 was a tough year, but most
companies had reserves,” says Schoucair.
“They’ve used them, so now a lot of companies
are on the edge.” He believes that this
year will bring a surge of bankruptcies. All
that and Ipso Facto is in the process of
switching its clients to non-recourse, meaning
if debts can’t be collected, Ipso Facto
swallows the loss. In the face of so many
obstacles, Schoucair has his work cut out
for him. The next couple of years will reveal
whether he can manage to pull it off. Either
way, at least he has the guts to try.

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Money Matters

Make room

by Peter willems
written by Peter willems

Coming home has paid off so far
for Societe de Grands Hotels du
Liban (SGHL). After opening
Vendome Hotel in 1996, its profits jumped
from $42,101 in 1997 to $3 million, unaudited,
last year. SGHL believes that this
was just a small step towards a real profit
surge. Last March it reopened what was
once one of the most prestigious hotels in
the Middle East before the war: Phoenicia
Hotel. Earnings are forecast at $15 million
for 2000, according to Mazen Salha, chairman.
That’s an increase of 400% – far above
what other companies on the
Lebanese stock market anticipate.

SGHL has a good chance to meet its target.
“Vendome is a yacht and Phoenicia is a
cruise liner,” says Francois Chopinet, InterContinental’s
general manager at Phoenicia
(InterContinental runs both SGHL’s hotels).
Unlike Vendome**,** which is a medium-sized
boutique hotel, Phoenicia will function on a
much grander scale. It has the largest conference
room and, once fully operational, will
have more rooms than any competitor in the
local hotel industry. Size matters. Existing
hotels, such as the Marriott, Savoy, Le
Bristol, Al-Bustan, Summerland and
Commodore, can house 300 to 1200 people in
a conference hall and have around 85 to 210
rooms. Phoenicia’s conference hall can hold
2000 guests and will have 450 rooms when
completed this month. According to Ghassan
Matar, previously an independent consultant
for the ministry of tourism, Phoenicia’s competitors
often can’t accommodate all their
guests when hosting events. “At Phoenicia,
with accommodation available in the same
hotel, convenience for the participants, organizers
and tourist agencies will attract many clients away from its competitors,” he says.

Big brand names in the hotel industry
have been scrambling to get in and set up
shop or manage local establishments. Many
believe that international chains, such as Le
Meridien, Starwood, Marriott, Holiday Inn
and InterContinental, will soon dominate the
Lebanese market. Others like Movenpick and
Four Seasons are on the way. “Lebanon is
opening up to the world, and local hotels need
international chains to market worldwide,”
says Tanios Kassis, development manager at
Choice Hotel International, which encompasses
Clarion, Quality, Comfort and Econo
Lodge. “To attract people from other countries,
a hotel needs a brand name,” says
Kassis. “And to market abroad, it takes
expertise and the ability to absorb costs.
Local owners are unable to do it.”

SGHL teaming up with InterContinental to
manage Phoenicia should pay off. InterContinental,
which belongs to Bass Hotels and Resorts, was the driving force that enabled
Vendome to become a moneymaker in a
short period of time. Bass Hotels and Resorts,
which includes Holiday Inn, Crowne Plaza,
Holiday Inn Express and Staybridge, is one of
the leaders in the global hotel business**,** generating
revenues of about $7.43 billion. In the
last three years, the average occupancy rate for
the hotel sector was 40.5% compared to 90%
for Vendome.

SGHL allocated InterContinental an initial
marketing budget of $500,000, to be followed
by 5% to 7% of revenues.
Marketing regionally and internationally,
InterContinental focuses exclusively on
corporate clients. “The hotel has been built
around targeting corporate clients. This is a
businessman’s hotel,” says Salha.

Phoenicia’s location in the Beirut Central
District will also be beneficial as businesses
are expected to migrate to the city center.
And according to Chopinet, corporate
clients are eager to find a new destination in
this region. “On our conference business, we
have 30,000 room nights booked between
March and the end of September,” he says.
“Two thirds of these clients had plans to go
to other destinations, but we stole them
from places like Dubai, Cairo and
Istanbul.” InterContinental, which has a $2-
million stake in Phoenicia, calculated a
conservative 50% occupancy rate for the
first six months. It has already been running
above expectations at 62%.

SGHL has one advantage that its competitors
do not: the name. “Phoenicia is one of the
oldest brand names in Lebanon,” says Pierre
Achkar, the president of the Lebanese Hotel
Association. “It was the first InterContinental
in the Middle East and was the
biggest. Everyone knows Phoenicia.”

SGHL doesn’t plan to stop there. “We
want to develop more hotels in Lebanon
and in neighboring countries,” says Salha.
Following a peace agreement, SGHL plans
to open a hotel in Damascus. Cairo will
probably come next year, while other spots
in North Africa and Iran are being considered.

But can SGHL attract investors? Its shares
have had a bumpy ride on the over-the-counter
market (OTC). Between early 1997
and late last year, its prices bounced
between $3.85 and $5.75. A positive sign: a
23% increase in the last few months, settling
in around $5.38. The recent jump came
from Vendome’s higher-than-expected
results last year and anticipation of
Phoenicia’s opening, according to Nicolas
Sawan, head of trading at Lebanon Invest,
which handled SGHL’s private placement in
1996. Sawan believes there could be more
movement to come, but it may take time.
“This year’s results should affect the share
price,” he says. “What drives share price
movement is psychological. If SGHL meets
its profit target, prices should move.”

But there are forces in Lebanon working
against the traditional rule of thumb of
stock prices moving upward as earnings
improve. “With all the bookings at the hotel
this year, it will be a successful beginning,”
says Nabil Aoun, general manager at Fidus.
“I’m very optimistic about SGHL, but its
shares won’t follow. The market is dead.”

Lebanon’s economic and political uncertainties
have killed investor interest. A good
example is BLOM’s GDRs, which are traded
on a more liquid market than the Beirut
Stock Exchange (BSE) or the OTC. The
largest bank in Lebanon, BLOM increased
earnings by 20%, from $58.7 million to $70.4
million, in 1999, and in the first quarter of
2000 profits jumped 14.5% over the same
period last year**,** despite recessionary pressure
taking its toll on the banking sector.
Even though international investment firms
recommend a buy and target its share price
as high as $44, its GDRs have dropped 9%,
down to $24.68, so far this year.

SGHL has received approval to move its
shares onto the BSE. “We are waiting for the
market to be more active,” says Salha. But
when that will happen is anyone’s guess.
Total trading volume dropped from $640
million in 1997 to $90 million in 1999. It has
sunk even further this year, down 19% in the
first quarter. There is a question of interest
being generated in SGHL itself. Several
analysts at local investment firms claim that
they tried to study the company and report on
its progress for investors, but were rejected.
“We tried to get information from SGHL, like
income statements, but no luck,” says one
analyst. “It’s not transparent at all.”

There is also concern about SGHL’s debt. To
rebuild Phoenicia, the company had to borrow
a total of $80 million. There is a chance that
SGHL will sell off Vendome to help reduce its

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