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.”

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?

“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.”