Money Matters

A sure thing

by Avo Tavoukdjian
written by Avo Tavoukdjian

Middle East Assurance and Reinsurance Co (MEARCO) wants to be a big player in the Lebanese insurance industry. You won’t find it in the top ten Lebanese insurance companies though, at least not as far as total premiums are concerned. Local heavies such as SNA, Libano Suisse, Bankers and Medgulf all took in premiums of more than $12 million last year. MEARCO in comparison is small; written premiums in 1999 were just $1.18 million, not even 10% of the size of the bigger firms.

MEARCO, however, isn’t planning on staying small forever. It plans to grow, and may just do so very quickly. Its premiums already grew by 146%, from $480,000 in 1996 to $1.18 million in 1999. Earnings have also climbed, up 525% from $16,000 in 1997 to an estimated $100,000 in 1999.

Still, these numbers are small. Does MEARCO really have what it takes to become a major player? MEARCO’s plan for quick growth, believe it or not, is to be conservative. A contradiction in terms? In the Lebanese insurance market, not necessarily; conservatism is a sure way of avoiding the pitfalls that felled some major underwriters.

Insurance companies can grow in one of two ways. They can play it fast and dangerous, risking everything by taking any and all premiums that come their way, and even compounding the risk further by selling policies for ridiculously low prices. Unless a company has the necessary financial backbone to resort to such tactics, ALIG did it in 1998, taking in over $10 million in premiums in its first full year of business, ranking tenth in the market, the rewards of such aggressive tactics can be devastating. Some examples are Income Insurance, which folded in 1996, Phoenix, which went belly-up in 1998, and Mesir, which followed in 1999.

The other approach is to be conservative, like MEARCO. The company’s policy is to deal only in the profitable branches of insurance and avoid the high-risk business, offering coverage only where the tendency to leave a profit is greater. For example, MEARCO will not sell you health insurance. Why? They reckon there’s no money in it. “Health insurance has a tendency to leave you with losses,” says Rached Rached, MEARCO’s chairman. This has already been demonstrated by the late Phoenix and Mesir, both of which went heavily into health insurance and paid for it with their companies. MEARCO concentrates on the more profitable general accident portfolio, which includes motor insurance, workmen’s compensation, and construction-related accident insurance among others, constituting 78% of its business in 1999. Fire insurance (16%) and marine insurance (6%) take up the rest.

Further evidence of MEARCO’s approach is that it has no outstanding claims, owing no debts to claimholders. How did they pull that one off? They demand payment of insurance premiums up front; the market’s average collection period is four months, which basically translates into liquidity and funds on hand to pay off any incoming claims. It’s basically a more rigid version of the policy followed by Lebanese United Insurance (LUI), which also has strict terms of payment but with a two-month collection period, see “Getting tough,” January 2000. MEARCO doesn’t waste time paying claims either. Claimholders are usually reimbursed within days of submitting their claims.

But does conservatism lead to market domination? Al-Mashrek Insurance has made a go of it. A short collection period, 45 days for hospitalization insurance, and turning away high-risk business in favor of safer and more profitable portfolios has not only made it a solid player in the Lebanese market, but with its business abroad, perhaps the biggest in the country.

Such examples can also be found within the banking sector in institutions like Banque du Liban et d’Outre-Mer, see “The cool conservatives,” November 1999. Its conservative stance was the very thing that maintained its top position for the past 18 years as far as customer deposits and total assets are concerned, $3.9 billion and $4.6 billion in 1998 respectively. One important reason is because depositors feel safe with a financial institution that doesn’t embrace high-risk ventures, and insurance firms are no different. Insurance firms that shy away from high risks are more apt to remain on solid footing, thus assuring prospective clients that they will indeed be covered should the need arise.

MEARCO has other aces up its sleeve. Its chairman and general manager, Rached Rached, is an old hand at insurance. He was the general manager of Société Nationale d’Assurance (SNA), which is the leading insurance company in Lebanon after American Life, which specializes in life insurance. Most of the company’s 15 shareholders are either brokers or associated with the industry. They have not only brought their very substantial know-how to MEARCO, but also their clients. MEARCO had a ready client base from day one.

The company has plans to expand as well. The first step is to acquire a credit insurance license and provide that service to its clients. Basically a security that guarantees compensation to a debtor in the event that someone defaults on a payment, credit insurance has become a necessity in the Lebanese market. “People want to cover everything sold on credit, from mobile phones to furniture to cars,” says Rached, who expects this to be a very active branch of insurance. His expectations are supported by those of Hassan Harb, LUI’s chairman and general manager, who has just recently acquired the first and only credit license issued since the new law came out, and expects that to greatly improve LUI’s business. Even in this regard, MEARCO is adhering to its conservative stance by looking into the safer and more profitable branches of insurance for further growth.

Another direction in which MEARCO intends to head is toward life insurance. “One option is to acquire a company that already has the life license,” says Rached, since the Ministry of Economy and Trade is no longer issuing new life licenses. American Underwriters Group (AUG) also tried that strategy, acquiring ELKA Insurance for the purpose of getting its life license. “But most probably,” continues Rached, “we will form an alliance with a foreign company for the life insurance branch.” This might be a smart move. Not only would they benefit from that company’s expertise, but the alliance would relieve some of the financial burden and allow for greater liquidity.

Alliances between insurance companies and foreign underwriters have become quite the trend. AXA, the world’s leading insurer, already formed an alliance with Société Libano-Française (SLF), buying 51% of its shares, while Assurance Générale Française (AGF) did the same with Société Nationale d’Assurance (SNA), similarly acquiring 51% of the company’s shares. Most probably this is a strategy the Lebanese market will witness quite often in the coming years.

Is entering the life insurance market worth it? Aline Kamakian, general manager of International Insurance Consultants, seems to think so. “It’s probably the most profitable branch of insurance,” she says, “even more so than fire insurance.” The tendency for life insurance policyholders is to usually cancel after a while, which means the company retains the premiums as pure profit. Since beyond a certain age life insurance policies no longer apply, most life policies become a source of pure income for the insurer, and if invested in sound investment vehicles, the returns could be quite substantial.

MEARCO has the know-how, the tools and the right attitude. What we have to see is how it will use the assets at its disposal. Its conservatism is something to be admired. It helped it to negotiate through the turmoil within the sector while larger firms collapsed, and in the long run, perhaps MEARCO may become one of the country’s major underwriting firms, confirming the old adage about how slow and steady can win the race.

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Tech Knowledge

Are you real e-safe?

by Mira Baz
written by Mira Baz

Most Internet news highlights its great advantages, like generating revenue with low overheads, reducing costs, while increasing speed. Now here’s the bad news, and it’s not about pornography or violence. Security has become the wired world’s major risk factor and it is terrifying companies looking to go beyond a simple web presence.

In layman’s terms, anything connected to the Internet poses a threat, whether it’s a PC or a company’s server. That’s because, unlike television, the Internet is not only your window to the world, but also the world’s window to you. The closest analogy is tapping a phone line. The security issue has come to the forefront with the Internet’s evolution from mere information sharing and research, university and government networks originally, toward full-fledged worldwide e-commerce between a business and consumer or between businesses.

So what do the hackers want? “It’s either money or information,” says Tony Chebli, business manager for Computel. A hacker looks for passwords and credit card numbers, or wants access to a company’s database. In the second case, the hacker could be a professional or an employee hired to spy. Some will tamper with websites and replace them with anti-company or anti-government messages, like the US Department of Justice’s website, which was vandalized and turned into “The Department of Injustice” in 1997.

The major fear inhibiting consumers from getting into e-commerce is credit card use. It’s difficult to overcome the thought that one’s credit card number is out there somewhere and subject to unwanted access, or that it can be intercepted during transmission to the website. Yet some believe that the Internet is safer than the store clerk, the telephone, and especially the cellular phone. The reason is cryptography. In 1995, Netscape developed the Secure Sockets Layer (SSL) protocol, which includes encryption, data integrity, see box, and authentication.

Being a web of connections, data is never transmitted via just one route on the Internet. Instead, it can change routes and be redirected every time it meets a congested or blocked node. That creates speed, but is also how data can be accessed by anyone in the world. But when encrypted, data sent online, such as passwords or credit card numbers, is scrambled and turned into gibberish, then decoded by the receiving party.

Even if the information is stolen, it is enormously difficult to decipher. Until recently, 56-bit was the highest encryption level, but with the US finally allowing the export of 128-bit technology, encryption became 300-billion-trillion times safer, and requires sophisticated computer systems to be decoded.

SSL further ensures data integrity, meaning that information is not tampered with during transmission. Finally, with SSL, the receiver verifies the identity of the sender. Visa and MasterCard have devised a payment system based on the same concept of encryption, known as Secure Electronic Transaction.

These measures matter for a reason. If a hacker steals a credit card number and uses it, the e-tailer has no way of knowing whether the person punching on the keyboard is the card owner. Skygazer Technologies’ general manager Abbas Taher maintains that credit card fraud remains the biggest concern to online retailers. “You can never know if the credit card information was entered by the actual credit card owner,” says Taher, whose company recently launched eshop.com.lb. Fortunately, credit card transactions can be stopped and, if alerted, retailers can track down the individual with the delivery location. “We eliminated this problem by restricting delivery to Lebanon only,” says Taher.

There are two ways to identify secure websites. The first is the padlock icon on the browser. In a secure environment, the open padlock becomes locked. Usually, when the next page contains forms, either a warning or a server certificate pops up with the site’s security information. Since hackers can “kill” a website and redirect traffic to their own one masquerading as the original, server certificates provide company identification to reassure users that they have not been “spoofed” by a fake site. The other way is when an “s” is added to the location (URL), so http becomes https, meaning the site is secure.

For the paranoid, it’s always a good idea to limit transactions to reputable websites. Some alternatives are debit cards and web cards with a limit, which local banks have started to offer.

Once the transaction is done, though, the worry is not over. E-stores usually require clients to register, and thus save their confidential information in a database. The security concern at this level is the company’s server, where the databases are located. This is the first target for hackers, because servers are easier to break into if they’re not properly set up.

A web server requires a large, complex program. And the more complex it is, the greater the chance that it contains bugs. A knowledgeable intruder can take advantage of these vulnerabilities in the system. In e-commerce, servers have to be up and running around the clock with the same IP address, which is a magnet to hackers. This is where the importance of firewalls comes in. A firewall acts as a filter between the server and the Internet. It can be configured for outgoing as well as incoming traffic, to limit, monitor and control access either way. This could be done through disabling certain functions abused by hackers, like Telnet, a program that allows access to applications on a remote server, and File Transfer Protocol, which is used to upload and download files to and from a remote server.

Eshop, for example, has a dedicated server hosted by a local Internet service provider. “Ports are disabled,” Taher says, “and it can only be accessed through the website.”

Firewalls become complicated in an intranet environment, which connects networks together and, thus, many groups of users that require authentication. This is true for a local area network, i.e. within a company, or a wide area network (WAN), many networks connected via the Internet.

Business partners, suppliers, and clients can provide access to each other’s networks through a WAN for convenience and speed, especially when it comes to inventory clearing. Communication between networks is carried by virtual private networks. This system provides encrypted transactions, resulting in secure channels for electronic data interchange. It allows for a greater volume of data to be exchanged, and is a private network, restricted to the partners, rather than a public one that can be accessed by any browser. Through digital certificates, partners can verify each other’s identities. The high level of security for this type of network, though, makes it more attractive to hackers.

Hacking can easily be learned off the Internet. Anyone with an affinity for Internet lingo can pick it up, and there are amateurs locally. “It’s like a cookbook,” says Chebli, “all you have to do is follow the instructions.” Websites offering hacking tips, vulnerable sites, and tools abound, and can be pulled up in a search engine with the simple keyword “security.”

But as fast as businesses tighten their security, hackers seem to be fast upon their heels, because of the pace of change on the Internet. ICSA puts it nicely: “Systems need to evolve as hacking eats away at current technology.” Better be safe than sorry.

Question of privacy

A controversy has arisen in recent years over the use of “cookies.” Netscape explains a cookie as “a small piece of information that a web server can store temporarily with the web browser,” saved on the hard disk for a limited or an extended period of time. Cookies are used to identify registered users and pull up their “files” without having them re-register or repeatedly enter credit card and other information. They are used by websites like Hotmail and amazon.com, for example; if users access them with a private PC at home, they don’t have to log off, and will be recognized each time they return to the site. Cookies can further be used by webmasters to keep track of which pages are browsed, and to develop their websites or the information they provide accordingly.

The problem is that Internet advertising companies like DoubleClick and Matchlogic took it a step further. They use cookies to keep track of users’ interests and browsing habits to better target them with advertising. Two questions arose with this practice: why should anyone keep track of a person’s activities online, and how much more information can cookies be made to get? It also raised concern about hackers gaining access to the cookie files on a hard disk.

Updates of browsers began including options to get information, including expiry dates, to accept or reject cookies individually or disable cookies altogether. This last option would not allow some websites to work. Most websites do carry a privacy statement explaining their policy.

The debate persists, though, among proponents of the Internet as a free, information-for-all medium, those concerned with regulatory issues, and many ordinary people in the middle.

By Mira Baz

Keep that mouse clicking

Selim Semaan set up his first music shop, House of Music, in 1993. He set up another store in 1998 but has now decided to follow the worldwide trend of branchless expansion with an online store, Houseofmusiconline.com. And there’s no doubt, it makes sense. At a cost of $12,000 to $15,000, it’s 15 times cheaper than opening an all-out music store, according to Semaan. The website, which offers 10,000 items and an auction site, “reaches everybody at home,” says branch manager Bassel Dakkak. Prices are 20% lower, with delivery taken care of by Khadamat.

It’s not just music that can be accessed via the Internet. If gift shopping is your worst nightmare then take a look at Eshop.com.lb, a website hoping to grab the attention of grumpy last-minute buyers. “Eshop is more of a gift shop, that’s the image we want to create,” says Abbas Taher, general manager of Skygazer Technologies, which developed the eshop software for online shopping.

The e-store has eight main sections, including perfumes and watches, and offers 300-plus items from top suppliers mainly in the $30 to $100 range as well as some items for up to $500. The project takes into consideration the consumer’s psychology. People are reluctant to type in credit card numbers or to purchase anything on a screen if they don’t trust what they see. All items are brand names and displayed in “high resolution” pictures. With very low overheads, Taher adds that half of the discount from suppliers is passed on to consumers, making for just a 15% limit on the margin. The shop will not generate revenue from advertising placed on its site because banners can lure customers away from the site. “Advertising on an information site like Yahoo! works,” says Taher, “but on a shopping site, clicking on a banner might mean loss of a potential purchase to me.”

Shoppers are not the only customers catered for by the Internet. Snowboarding and ski buffs get a local online report when they visit Snowleb.com. The first of its kind in Lebanon, the website is the endeavor of Karim Daou. Targeting university kids, the website’s expenses will mainly be advertising through fliers and college publications. And during the summer, Snowleb.com will be turned into an “adventures in the mountains” site for people who go camping or trekking when they put away their snowboards.

Where angels fear to tread

When the subject of foreign investment crops up, Lebanon is not usually the first country to spring to mind; Sweden’s Ericsson, however, has decided to buck the trend. The company opened its Lebanon branch three years ago and is now the first mobile-phone company to base its Middle East office here. Located in the renovated Beirut Central District, the office’s new boss, Jordanian Nael Salah, shrugs off difficult local conditions that have prevented foreign investors from beating a path to Lebanon’s door. “Lebanon is showing signs of moving towards liberalization and privatization,” says Salah. He also argues that conditions in Lebanon for cellular companies are better than in other countries in the region, where one telecom sometimes provides fixed lines, cellular lines, and Internet services. “The prerequisites are there,” says Jan Embro, head of the Lebanon office. “It just depends on how quickly they will be implemented.”

The regional office, which will recruit and train 50 local employees, will manage financial and legal issues and conduct strategic planning for the region. How much Ericsson will invest in the operation is unclear. Salah says only that it will be about “a few million” in the first year.

Virtual radio

Radio One’s 17th anniversary has seen a new look for its website, www.radioone.com.lb. Developed by Egyptian engineer Wael el Zanaty, the website uses Shockwave 4 for a futuristic and metallic feel. With special effects and animation galore, download time is slow due to the local 36kb/s broadband, but not significant “compared to what you get,” says program director and webmaster Najy Cherabieh. “The reason we used Shockwave 4 is because something happens on the screen while the rest is downloading,” he explains.

Radio One’s website was launched in 1997 with live Real Audio transmission. With the infrastructure already in place, the upgrading cost general manager Raymond Gaspar $25,000. Gaspar says that the website also hopes to appeal to listeners abroad.

The website now offers various features to make sure visitors linger for a while, such as still shots of the studio, games, a chat room and even an online MP3 music mixer. Gaspar says the site generated some advertising revenue last year, and thinks it will grow slowly in the next five. A new feature that cyber surfers can look forward to in the near future is live requests via the website to listen to songs online.

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Money Matters

Shooting higher

by Peter willems
written by Peter willems

Salim Sfeir, sitting in his modest conference room at the Bank of Beirut’s headquarters, gives the impression of a mild-mannered chairman and general manager, content with where the bank stands. In an interview with EXECUTIVE, he chose his words carefully, and his voice certainly didn’t rock the Richter scale. But don’t be fooled. This is the man who has led one of the fastest growing banks in Lebanon since BoB came about in 1993.

It started small: only five branches with $101 million in assets and earning only $37,000 in its first year of operations. But by the end of 1999, its assets, deposits and profits grew on average by a whopping 62.89%, 78% and 139.5% annually. And there is another positive sign. Last year’s merger with Transorient Bank, which pushed BoB from a medium-sized bank into the top 10, was a successful marriage. The mixing of two corporate cultures and synergies is never easy: more than half of all mergers in the West fail. And BoB did not swallow up Transorient. They were of equal size, both had 14 branches, and must have had differences in business philosophies.

“It was a very good merger,” says Talal Ghali, senior associate at Middle East Capital Group (MECG). “It was successful, smooth; the mixing of the two corporate cultures was good, synergies were fine and it boosted BoB’s growth.” The numbers speak for themselves. Last year, BoB’s earnings jumped 27%, from $14.1 million to $18.1 million. From the 1999 consolidated income statement relative to the 1998 unconsolidated income statement, net interest income jumped 59.7%, and non-interest income soared 138.7%.

Now that the merger is complete, what will the bank be up to this year? The bank is concentrating on what shareholders want to hear: strengthening profitability. “It has been a fixture within the bank,” says Sfeir. “We focus more on profitability than on growth. This is our main strategy.”

Troubleshooting will be one of Sfeir’s tactics this year to continue strong profit growth. “We will be looking at whatever weaknesses we have,” says the chairman. “For profit centers that are not yielding returns, we expect to correct those weaknesses. For example, if there is a branch that is losing money, we’ll focus on it to make it profitable by the end of the year. If there are services that are not making money, we’ll see what the weaknesses are in the department and make it profitable.”

But BoB is doing more than just looking for weaknesses to maintain a steady growth pattern. It just created an asset management department that will run private banking. The private banking arm will be fund-oriented and will operate in a conservative fashion. “We are creating our own funds presently, but mutual funds outside will also be available,” says Sfeir. “It’s more of a capital preservation strategy, rather than a risky approach with a lot of profits on one day and losses on another day. This is why we are focusing on fund management.”

Private banking is not an easy chore; it takes time to develop and convince customers to come on board. But, according to Ghali, “This is an area of growth in Lebanon. There is a huge market for it. Lebanon has a substantial number of high-net-worth individuals.”

Last year, BoB did not emphasize new products and services while it was concentrating on the merger. It already has a strong product base to work from, including savings plans for all ages, an insurance program, Visa and MasterCard credit cards and bill-paying services. BoB also has a capital markets division, providing brokerage services on equities both locally and internationally, plus dealing with Lebanese T-bills on the secondary market. It is heavily involved in trade finance, ranking in the top ten for letters of credit in 1998 before the merger. Since then, its volume has increased considerably, which according to BoB, may have placed it as the leader in the sector.

Although the bank is hesitant to disclose plans for expanding products and services, financial controller and IT manager Sami Saliba offered a few hints. It will expand on its plastics business, especially targeting new clients that use cards more regularly. BoB also plans to launch e-banking this year, see “Virtual piggy bank,” p. 38. Its goal is to offer a full-service Internet package, such as transferring funds, applying for loans, paying bills, trading currencies and checking equity markets.

But one important development that may give a push to BoB’s profitability is its strategic alliance with the Dubai-based Emirates Bank International. One of the Gulf’s leading banks, EBI bought into BoB in 1997, 10%, and the two came up with a scheme that is generating another income stream for the local bank. What do the two banks offer? “All banking activities,” says the chairman. BoB recently changed its slogan to “Banking beyond borders.” This allows an expatriate in the United Arab Emirates to buy a house for his family in Lebanon, transfer money and do trade financing, for example.

A full range of products and services offered through a new channel could boost BoB’s net interest and non-interest income. But there is more. With the economic slowdown, spreads tightening as interest rates drift lower, and the market oversaturated with 65 banks, the heat is on the sector and is creating tough competition. One solution for local banks is to go international, see “Welcome to the real world,” Jan. 2000. Expanding regionally is a start and now is a good time. According to the Economist Intelligence Unit, the economic growth rate in the Middle East will be one of the fastest in the world in 2000, except for Lebanon, which is projected to come in dead last.

“Our relationship with EBI is opening up new markets for Bank of Beirut,” says Sfeir. “It’s helping us penetrate, which is a long-term strategy.” At present, BoB has representatives in several countries in the Middle East. But, says Saliba, “We are concentrating more on regional business; we’ll be more aggressive this year than last.” BoB is also thinking about setting up branches in the region. When is not clear; Sfeir will only say the bank is “assessing the markets.”

BoB’s strategies appear sound, but a question remains. In the midst of a recession that is affecting the entire sector, will the bank be able to report strong earnings in the near future? The first sign of the economic slowdown creeping up on the banks came in 1999. In the first three quarters, the average profit growth for 13 of the top leading banks dropped 3% year-on-year. From the full-year results that came out as EXECUTIVE went to print, Byblos Bank, ranked third by total assets in 1998, reported flat profit growth, and Banque Audi, fourth by total assets, experienced an 11% decrease in earnings. Watch out for Fransabank, Société Générale Libano-Européenne de Banque and Banque Libanaise pour le Commerce results, their third-quarter earnings fell 23.5%, 33.3% and 36.6% respectively.

Although some banks are faring well, BLOM has become the benchmark of how to make money in the face of recession, see “Cool conservatives,” Nov. 1999. Riding through the storm, BLOM’s profits last year jumped 20%, from $58.7 million to $70.4 million.

One of the keys to making it through a recession and strengthening earnings is cost control. BLOM is one of the best in the market. It was able to lower its cost-to-income ratio from 56.8% in 1995 to 38.2% in 1999. BoB is also sensitive to efficiency; its cost-to-income ratio dropped from 64% in 1995, ranked 23rd in the sector, to 42.5%, ranked 4th, in 1998. “This is another fixture of the bank,” says Sfeir. “We always focus on lowering our costs.” According to Saliba, the bank closely watches every penny, even the chairman’s business lunch expenses have to pass through the proper channels.

Yet in 1999, its cost-to-income ratio, excluding non-recurring merger charges, climbed to 46.6%. But, according to Sfeir, the increase can mostly be accounted for by some expenses that came from the merger but were not recorded in accounting for the merger costs. Some examples are upgrading hardware to handle the two systems, redecorating the new branches, and consulting fees. On track with its cost-control obsession, BoB cut the initial swelling of its staff during the merger from 498 to 417 and is aiming to reduce that to 400 by the end of 2000. According to Ghali, BoB’s cost-to-income ratio in 1999 was still far below the average for the sector, estimated at 55% by MECG, and its efficiency will remain a competitive advantage.

BLOM has also mastered pulling in large deposits, even though it has one of the lowest deposit rates. The so-called “BLOM premium” comes down to a customer perception of BLOM as the safest bank. But BoB is also able to have low deposit rates and keep the deposits flowing. In 1999, its average deposit rates fell from 8.7% to 7.5%, a full percentage point lower than the average deposit rate. Nonetheless, BoB’s deposits grew 16.7%, reaching $1.3 billion, last year, despite stiff competition to attract deposits. It was also substantially above MECG’s estimate for the average of the peer group, up 7% to 8%. On the income side, by lowering its deposit rates, BoB’s net interest spread increased from 1.9% in 1998 to 2.6% in 1999.

“Bank of Beirut has established itself with a brand name,” says Ghali. “BLOM has differentiated itself from other banks as the ‘BLOM premium.’ But Bank of Beirut is coming up with the ‘BoB premium.’ It’s visible now, it launched campaigns, it tells you how important it is. Customer service is an indicator of how the brand name is being established; it’s on the right track.”

On the lending side, BLOM is very conservative. Its loan-to-deposit ratio was below 25% in the first half of 1999 while BoB’s ratio stood at 38% at the end of 1999. However, its ratio is below MECG’s calculation for the sector’s average in 1999, up around 50%. BLOM mostly lends to high-net-worth corporate clients. Unlike the sector’s increase in non-performing loans, NPLs, BLOM’s ratio of NPLs to gross loans decreased from 7.3% in 1997 to 6.3% last year. BoB generally targets small- to medium-sized businesses and individuals. That’s a little more risky, but analysts believe that BoB’s risk management department is good at being selective in choosing customers. According to MECG, its ratio of NPLs to gross loans in 1999 came out at about 10%, a drop from around 15% in 1998.

For investors, it may be difficult to speculate on BoB’s share price performance. In the last year-and-a-half, trading volume and stock prices on the Beirut Stock Exchange have tumbled. The BLOM index fell 20.9% in 1999. Following the good price performance of the bank’s shares after it was listed in April 1997, it has leveled off since spring 1998, but avoided the bad showing by most of the shares on the market, see graph.

BoB’s price/earnings, P/E, ratio is in the safe zone, at 13.1, based on 1999 earnings and the share price on January 28. The bank is expected to pay out 25% of its net income in 1999, the same as last year, a 0.12% dividend yield. Its return on average equity increased to 21%, one of the strongest in the sector. However, it is still not known when the BSE will emerge from its torpor. Furthermore, some analysts believe that although its shares are reasonably priced, other banks are cheaper, considering that its P/E ratio is the second highest among listed banks, see chart.

But BoB is generally considered to be a long-term buy. “If somebody wants to buy in Lebanese equities, BoB has to be included. It has been resilient to the downturn of the overall market. It will be paying the same dividends as last year and will continue to pay good dividends,” says Ghali. There is also faith in the management of the company. “They have the management to outperform other banks in terms of bottom line growth,” says Financial Funds Advisors chairman and general manager Jean Riachi. “They proved that hard work counts. Delivering is important to them, and they never miss any loophole anywhere. They never sleep.”

Sfeir’s style of management drives Riachi’s point home. He uses a hands-on approach, close to the dirty work with the rest of the management, and has an open communication policy, wiping out the layers that a manager has to go through to talk with him. And the management usually works from at least 8 a.m. until 8 p.m. As long as Sfeir is omnipresent, there is a good chance that BoB will defy the economic slowdown and show healthy growth in profits.

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Money Matters

Virtual piggy bank

by Peter willems & Mira Baz
written by Peter willems & Mira Baz

We recently went on a banking spree at a top foreign bank where we both have accounts. One of us queued behind six people waiting for a teller, which took 15 minutes. At the counter, after watching paper shuffling and stamping, plus signing four documents, the grand total was 25 minutes.

At the same time, the other went looking for her biannual statement, which never materialized. After two clerks thumbed through stacks of statements, a bank officer appeared and announced that the lost statement could be collected several days later. Time: 45 minutes. After the second visit, it will be 45-plus.

One day all this will be taken care of at the click of a mouse. Log on. Click. Check balance and do a transfer. Click, click. Log off.

E-banking has already begun in Lebanon, however modestly. A number of leading banks have taken the plunge with an informative presence online and possible further development in the future. Customers at several banks can sit at home and browse services, order checkbooks and enter the scary world of looking at their account balance. A foreign giant in Lebanon has already trumped local competitors. Banque Nationale de Paris Intercontinentale (BNPI) locally launched BNP Net last September, allowing clients to view exchange rates, stocks and mutual funds and move money from one account to another clickety-click.

But BNPI won’t be alone for long. Right around the corner, savvy Saradar will add transferring funds and ordering credit cards to its virtual menu. Credit Libanais, which is now on a tear in profit growth, up 65.6% year-on-year in the first three quarters of 1999, will soon launch e-banking as well, including moving money and loan applications.

Virtual banking is on its way, but will it be a booming business?

Not overnight. The first argument against it may be the way the Lebanese like to bank. They are used to the human touch inside the brick-and-mortar outlets, which could hinder luring customers to use the cold comfort of hardware. According to James Ross, assistant general manager at Bank of Beirut, the habit of customers walking in to see actual transactions and meet with an officer to discuss credit or products may be hard to break, especially with the older generation. “But Lebanon will gradually adapt. The depersonalized aspect will move upwards, from ATMs to phone banking to e-banking, which will probably crystallize in about three years.”

The number of Internet users is still insignificant compared to Western markets. Data Management’s managing director Maroun Chammas estimates a total of 50,000-80,000 subscribers. Since an account can be used by more than one person, the total number of users is higher. The Professional Computer Association (PCA) estimated a total of 100,000 users last fall, see “Going too low,” November 1999. While that number would be expected to increase at a much faster pace following the price drop for unlimited Internet access last fall, from around $29 to as low as $6.66, IntraCom’s managing director Bahjat el-Darwiche doesn’t think so. He estimates the market growth is 3,000 users per month, or close to 40,000 annually.

One major impediment to the growth of the Internet community is PC sales: The computer market has not caught fire yet. The growth of Internet subscribers is in sync with the PCA’s statistics on PC sales in Lebanon, roughly 40,000 annually.

According to Chammas and Darwiche, prices for PCs are too high in the stagnant Lebanese market. And telephone bills are too steep as well: The cost of a telephone connection is $1.40/hour.

Since it might be difficult to pull customers from branches and there aren’t enough Internet users yet, the younger generation is more likely to embrace e-banking. Darwiche maintains that the potential market for new subscribers is mainly fresh graduates. “They get free access in the universities, so once they graduate they buy a PC and log on. How many students are going to graduate each year? 30,000-40,000. That’s the potential.” And the bankers know it. “If I were a student about to graduate, next year I’d bank on the Internet,” says Andrew Stephens, head of retail banking at Credit Libanais. “They know how to use a PC, they’re not worried that their money is in the ether somewhere. It’s the new generation, and we will target them.”

That’s why some banks recently launched major marketing campaigns offering free Internet access with PC loans. Their target was mainly household clients or, more specifically, students. But these are future clients. The primary goal for e-banking now is to retain existing customers. The Lebanese market is small, around 3.5 million people with about 60% having a bank account, and the market is saturated with financial institutions, 65. “The problem is that you don’t get economies of scale. If I want to operate Internet banking, how many customers am I going to get? 10,000?” says Stephens. “There are 3.5 million people in Lebanon. Let’s say there’s 1 million of them that I can consider as potential clients. They’re not all going to bank with me. Everybody banks with several banks here. Your share of the wallet is small, so it’s a real fight for customers.”

If just a few leading banks do it, customers might migrate. None of the larger banks are going to be left out and risk losing major accounts; expect e-banking to flood the alpha group in no time at all. Carlos Heneine, Saradar’s head of strategic planning and marketing, says, “Lebanese banks are all concerned with serving their own existing customers. That’s what we should do, retain valuable customers. In other words, I have a customer who’s valuable to me, who has a PC, and somebody else offers him Internet service, and he finds it convenient. I can’t afford to lose him.”

If the top banks are the ones that will work with e-banking to keep their customers, what will happen to the smaller ones? If the smaller banks are unable to afford to keep up, we may see the Internet banking wave followed by another wave: mergers. Pressure is already mounting on the smaller banks as the sector is experiencing a decrease in earnings, due to the economic slowdown. Everyone knows that the last thing an owner would want to do is sell his bank. That has been and might continue to hinder a merging trend. But if customers uproot from small banks without e-banking and head for the larger banks, acquisitions will definitely pick up.

Even though many financial institutions will soon take a step from the basic to the intermediary phase in Internet banking, see chart, moving up to full cyber-service is out of reach for now. This is where regulation and security come into play, and the central bank will have a crucial role. The central bank’s attitude about banks offering products and transferring money within the same institution has been laissez-faire. But inter-bank operations online, like moving money from one bank to another, are perceived as living in the danger zone.

“Bigger operations in the future, which will entail higher risk, are in need of full security,” says the head of the information technology department at the central bank, Ali Nahle, who is in charge of setting up safer e-banking. He says it will take two to three months to regulate but two years for security to be implemented.

This will probably delay one of the best markets available. The Lebanese expats, who are in tune with the benefits of riding the tech waves and have accounts in local banks, would jump on the opportunity. “They’re probably more used to banking in those terms, they tend to be more wealthy than the Lebanese here, and if they want to maintain banking facilities in Lebanon, they could easily access us through the Internet,” says Stephens. But without advanced e-banking, they won’t be able to move money overseas.

One of the most blatant benefits of e-banking is efficiency. From Booz-Allen & Hamilton’s study on US banks, the drop in cost per transaction from in-house to Internet services is mind-boggling: $1.08 to $0.13, see graph. No study has taken place in Lebanon, but the US figures prove that e-banking can bring down costs. Yet there is a hitch in the Lebanese system. If there is less shuffling of paper, stamping and posting, downsizing staff is the key to cutting costs. But political and social pressure has made it difficult for businesses to lay off employees.

Still, e-banking could be the tool of the future for retail banking, which is on the upswing among the leading banks, pumping out more products and services at a steady pace.

Picture this: Each time you go to a bank to carry out a transaction, would you be pleasantly surprised if a teller tried to sell you a product over the counter? Intercepted on the way out by a staff member as you’re counting your money? Not likely. Instead, it would be more convenient for customers to see products on the screen after logging on to do some banking at home.

This would be the same for cross-selling products, an important catalyst to see banks increase volume that could help push up non-interest income. “Services and reminders, for example, are much easier to do with Internet banking,” says Stephens. “We can send an email to tell clients when the loan is due and ask if they want another one. If they have a mortgage, we can offer new furniture or a new car. We can talk to them more easily. Call you at home and you’re not there. Maybe a mobile phone, but you’re at a restaurant and you don’t want to talk now. With Internet, bam! You see it, you read it and I’ve got you.”

In the long term, e-banking can take on much more power for retail banks. A recent Booz Allen & Hamilton article explains how: “Using new, analytical, decision support capabilities, customer data can be mined to create predictive models of customer response and behavior.” With a customer profile and keeping track of client behavior, spending habits and activity on their websites, banks can determine who to target with which products.

The full development of e-banking in Lebanon will take time. But over the long haul, there is a good chance that the bank model you see today will change. Banks may get into e-commerce themselves. This is no different than Europe, where banks are creating shopping stores on their websites to get those credit cards rolling.

Joint ventures are an alternative, where the bank cashes in on transactions without having to worry about the web design or marketing side. Credit Libanais has teamed up with Data Management to create NetCommerce, an online shopping mall.

The Internet is also creating brickless banks. European start-ups, usually subsidiaries of brand names, include egg.com, Smile (smile.co.uk), and First-e. With low overhead and only a warehouse to operate from, these banks can offer higher interest rates on savings accounts and lower card rates. Customers can open accounts online, as well as apply for loans and receive a response within minutes, or even go shopping. In the longer term, as boundaries fade, these branchless banks could be a threat to the local industry.

But as banks start getting into this new virtual discovery, whether it pays off or not, customers should benefit the most. Convenience is the name of the game, and if the main focus of banks is to retain clients by offering a better service, luxury will fall into their laps.

Just imagine: At 2:30 a.m. you come home after paying for a big dinner using your debit card, and you know that you need to transfer funds into one account to cover your expenses for the rest of the week. You don’t want to leave your office, sit in Beirut traffic and spend time in the bank’s lobby the next day. Logging on before getting a few hours of shut-eye would do the trick. So the next time you’re stuck in line, ask your branch manager, “Ever heard of Internet banking?”

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Feature

Silicon dreams

by Kirsten Vance
written by Kirsten Vance

Computer geeks are all the rage these days. Just about everyone is looking to jump on the high-tech bandwagon towards economic growth, and is dreaming of spawning the world’s next Silicon Valley. This country’s administration has frequently voiced its support for turning Lebanon into a high-tech haven since last summer, while Vladimir Putin, Russia’s acting president, recently announced that encouraging investment in high-tech industries would be central to his economic policy.

And so the race is on to catch a ride on the digital wave. “IT is one of the industries Lebanon should rely on most,” says Michel Nseir, owner of Software Design. “It’s one of the sectors that might succeed here.” Software is often pinpointed as an industry where the Lebanese can excel. Pure exports are just a couple of million dollars, but Nseir estimates that Lebanese software development generates some $100 million abroad. Software Design and BML Istishirat are both based in Beirut but have foreign operations in several countries, while Lebanese companies like Infoplus, Murex, Integro and Computech are based abroad but have local development facilities. The local software industry is estimated at about $25 million, excluding in-house software and imports.

While the war did irreparable damage to Lebanon’s position as a tourist destination and financial center, natural resources are virtually non-existent and the high cost of labor and land make it difficult for industry to compete against countries like Egypt and Syria. “We’re on the cusp of the information century,” says Paul Salem, a development analyst. “This sector needs no raw materials; it is not location specific and we in Lebanon can situate ourselves as servers and engineers and constructors, and be players in the whole Arab information future. There’s going to be 20 to 30 years of rapid growth in the sector.” If the Arab common market is ever successful, Lebanon could potentially be to this region what Ireland is for the European Union in high-tech exports.

But a few trump cards will be needed, as will a concerted effort from the government to create an environment where this sector can flourish.

To be fair, Lebanon does have a competitive edge in some respects. The big advantage is its human resources, a young, educated and multilingual population. But there is a gap between the skills of graduates and the market needs. “High-tech development occurred during the period when Lebanon was in the worst of times; the heavy toll is witnessed in the lack of proper candidates. Top-level people can be found, but at the second level, for example engineers and skilled labor, we have missing links,” says Yahya Hakim, director general of the Ministry of Finance and a member of the government committee working on concepts needed to turn Lebanon high-tech.

That could be redressed through better coordination between universities and the private sector, the establishment of technical institutes and a greater focus on engineering and technology as has happened in Ireland. Others suggest creating research centers and greater investment in training from the private sector. “But the education is there and the Lebanese are skilled in IT,” argues Charbel Fakhoury, the business development manager of Microsoft Lebanon. “It’s not a long process; in three to five years Lebanon could have a very highly skilled population.” Many believe that with the proper opportunities, Lebanon could also reverse its position as a net exporter of brainpower and lure some talent back to fill skilled positions.

And despite its technological backwardness, this country is advanced for the region. Take the Internet. While the number of users and providers has shown continual growth, the Internet has only recently been introduced in Syria. With some 100,000 users, among the few places in the region that Lebanon lags behind are the United Arab Emirates with 200,000 and Israel with over 250,000. The government has spent over $1 billion to upgrade the telecommunications system since the end of the war, while the private sector has spent another $1 billion. The result is one of the most advanced networks in the region and one of the highest penetration rates.

More investment will be required, however. While the government has talked of introducing integrated services digital network, ISDN, to provide high bandwidth services using the existing infrastructure, some are calling for digital subscriber lines, DSL, the newer and cheaper technology that provides up to 1.5 Mb/s and is helping to force rates down in the United States. “DSL technology allows you to deliver video, voice and data over copper wires,” says Chammas. “It wouldn’t require the expensive cabling and would give virtually the same result.”

The sector also needs to be deregulated, which could spur investment in fiber optics from the private sector and make prices more competitive. Services like Net2Phone, with tariffs of less than 10 cents/min, and the cut-rate offered by callback cards demonstrate how overpriced communications are in Lebanon.

“The government needs to address the cost infrastructure of the monopoly until telecommunications are privatized,” says George Chammas, president of Data Management. “It’s out of sync with today’s telecom economy.” He points to rates on T1 links, 1.5 Mb/s, that are now going for $285 a month in the United States with MCI WorldCom, while its 64 kb/s links go for a monthly flat rate of $150 regardless of distance. Flashcom, the largest DSL provider in the United States, offers dedicated links for as little as $49.95 per month for one to two users and $110 for 160 kb/s for multiple users. Installation and modem are free in most cases.

There is no Internet node in Lebanon. So on top of the local line, Internet service providers are forced to pay for international links, which cost up to $26,359 for an E1, 2 Mb/s, per month for a half-circuit, in order to hook up to the Internet. That’s a very costly prospect if a Silicon Valley is to emerge. With an Internet node, only a local leased line would be required to have an international connection. These are also used by businesses to connect to ISPs or to link different office sites. But leased lines are expensive, don’t include the prices of modems and can take several months to get due to the red tape. “If the cost of connectivity was lower, it would be much easier to decentralize from Beirut; in the West it doesn’t matter where you’re based,” says Roger Karam, assistant general manager of Sodecal, which is developing the Makse Industrial Park in the Bekaa Valley.

Since the Ministry of Post and Telecommunications is the second contributor to the treasury after customs, bringing in $593 million last year, a 37% increase over 1998, the government won’t be eager to reduce rates, despite arguments that it could spur demand. Hakim acknowledged that lower rates on communication links are unlikely to become a reality for another couple of years.

Other measures can be taken to create a lower-cost place to do business, including stamping out corruption. More than 62% of businesses acknowledge paying bribes to bureaucrats, according to a recent survey by the Lebanese Center for Policy Studies, much higher than the rest of the Middle East at 35%.

While income tax carries a maximum of 10% and the corporate tax rate is still low at 15%, this is an over-taxed society. Employers pay a social security tax of 27% on the first LL900,000, about $600, plus 8.5% on total salaries, meaning a total of 35.5% for most employees. That compares to a social security rate of 7.65% in the United States or the United Kingdom’s graded rate of 3 to 10% on national insurance contributions. Tariffs on utilities like electricity are high. So too are customs duties, which were raised on more than one occasion last year.

“What’s the government’s strategy to bring companies here?” says Karam. “If they don’t offer incentives, it’s useless to say they want a high-tech industry.” There are calls for the government to speed up the replacement of customs by a value-added tax, and to allow the creation of free zones to encourage exports in technology.

Legally there is also no shortage of work to be done. Last year’s passage of the new copyright law was a move in the right direction, albeit not enough to encourage real investment. The bottom line is that laws need to be enforced, says Fakhoury. So far there has been little, if any, evidence that the law is being implemented. If Lebanon can become a high-tech gateway to the Arab markets, its neighbors’ actions will be just as vital. New laws will also be required to regulate e-commerce.

Lebanon’s leaders can ill afford to waste any time if they are serious about spurring economic growth on the back of high-tech industries. Israel, Egypt and Dubai will make for tough competition.

Dubai Internet City is being dubbed as the world’s first free trade zone for e-business. It will also be home to an Internet university and R&D center. IBM, Microsoft, Sun, Cisco, and Yahoo have all been approached to set up software development centers. DIC is offering 100% foreign ownership and 50-year renewable leases, as well as no corporate tax, no personal tax and no import/export taxes.

Israel is already a high-tech success story. It has one of the highest research and development levels in the world at 3% of GDP and counts a higher percentage of engineers and technicians than the United States. Israel’s high-tech and electronics industry grew by more than 15% in 1998 to reach $8 billion. The highest growth was in software, up by 50% to reach a total of $1.5 billion. The Israeli high-tech sector counts some 3,000 companies with an estimated 150 new start-ups each quarter, while venture capital for technology had raised over $800 million by the end of 1998. Israel has over 100 listings on US stock exchanges and a higher presence on the NASDAQ than all of Europe combined. Foreign direct investment increased from less than $400 million in 1991 to more than $2 billion in 1998. Motorola, Digital Equipment, IBM, National Semiconductor and Microsoft have all set up shop. Israel’s telecommunications network, now fully digitized and deregulated, is more advanced than Lebanon’s. This has helped give Israeli electronics an important presence in foreign markets.

With such tough competition, Lebanon will have to get its act together and lobby companies hard; here a valuable lesson can be learned from Ireland’s Industrial Development Agency, IDA. Officials from the Lebanese agency have contacted their Irish counterparts and are studying their success, but it remains to be seen whether the Industrial Development Agency of Lebanon, IDAL, will play such an independent and aggressive role as the IDA.

IDAL has been given the government’s project for a high-tech park. Dubbed the Beirut Emerging Technology Zone, the project was awarded a $174,000 grant from the United States to carry out a feasibility study. But that money has yet to be used. Nonetheless, IDAL believes the study can be finished by mid-year and that the marketing of BETZ can then begin.

Two similar projects have been proposed by the private sector. Probably the most grandiose is businessman Roger Edde’s plan to create a complex for multimedia, e-business as well as online healthcare and education through agreements with universities abroad. Some 2 million m² of his own land near Jbeil has been earmarked for what would be called the Edde Global Village. Edde estimates that the project will require an initial investment of $27 million, including about $6-7 million to create a satellite dish farm and teleport hotel, or the network of other telecommunication links and equipment required for the village to become connected.

According to Edde, Sumitomo Bank will be the financial advisor on the project. Chase Capital and ING Barings are to be investors in the Internet incubator. They hope to attract international companies and be a feeding ground for local start-ups.

The other contender, the Makse Industrial Park, is slated to have a cluster zone for medium and high-tech companies, about 15 to 20% of the total area. Sodecal, the developer, is 75% owned by the Karam Group. It hopes to attract clients primarily by offering cheap prices, $20 to $32/m² or leasing at $2 to $3.50/m². Although Karam acknowledges that the distance from Beirut could be a drawback for small software companies that don’t require much space, he believes that assembly line operations will be interested.

Despite high-tech being singled out as the direction Lebanon should take, few are optimistic that the necessary changes will happen anytime soon. So far Silicon Valley has been little more than talk. The administration’s stupidities, like banning voice over IP and callback cards or blocking Intel chips because of the company’s Israeli operations, are not the best way to invite foreign investment or encourage high-tech.

“The problem with the governing elite is that they haven’t even heard of the new economy,” says Edde. “They just marvel at watching the US and European markets’ unbelievable financial growth, look at it as an artificial bubble without realizing that it’s the beginning of the harvest of the new economy.”

The Celtic roar

Silicon Valley hopefuls might look to the land of leprechauns for a lesson in how to achieve and pray for a wee bit of the luck o’ the Irish. No more a country of just whisky and Guinness, the technological revolution has seen the economy of Ireland, aka the Celtic Tiger, advance by leaps and bounds in the past decade. Ireland has had the fastest growing economy among OECD countries for the past five consecutive years and its standard of living surpassed that of Britain in 1997. Estimates for 1999 put Ireland’s real GDP growth at 7.9% compared to 3.7% for the United States and 1.1% for the UK. Despite worries that the Irish economy is overheating, GDP is generally forecast to increase by 5% to 6% for the next decade. Unemployment dropped about 10 percentage points in the past five years to reach its current level around 5%.

More than 1,200 foreign firms have set up shop in Ireland. There are over 500 companies from the United States alone, among them some of the world’s top high-tech companies. Apple, Microsoft, and Hewlett-Packard have all established operations in Ireland.

The influx of international companies and surge of local start-ups has made Ireland the world’s second largest exporter of software after the United States. It produces more than 40% of all packaged software sold on the European market. The electronics sector generates more than one-third of the country’s total exports and, since 1980, 40% of all new US investment in European electronics has gone to Ireland.

Some impressive statistics indeed for a country that just a couple of decades ago had been the backwater of Western Europe. How could this tiny nation of less than 4 million possibly have pulled off such an incredible turnaround? It certainly didn’t happen overnight.

Since the 1960s, Ireland has consistently worked on creating a pro-business environment and aggressively gone after foreign investment, abandoning its previous protectionist policies.

The government created the Industrial Development Agency, IDA, which specifically targeted international pharmaceuticals and technology firms and is now involved in the establishment of digital parks. Its first high-tech catch was Digital Equipment in the early 1970s. Ireland also snared Dell. All its PCs sold in Europe, the Middle East and Africa are assembled in Ireland.

But the big fish was Intel, and it didn’t get away. Ireland decided it wasn’t going to miss out when the US chip manufacturer announced plans to launch European operations. The IDA did its homework. A possible lack of qualified engineers was one of Intel’s main concerns. So Ireland hired a consulting agency to locate Irish people working in that field in the United States who might also be interested in returning to the old country. Intel’s $2.5 billion plant west of Dublin is its biggest outside the United States, and is the single largest foreign investment in Irish history. Returnees filled many of the senior engineer positions at the start-up in 1993. By the mid-90s Ireland managed to reverse its migration flow, becoming a net importer rather than a net exporter of human resources.

But Ireland did more than simply provide potential investors with a list of Irish expats. It also offered multinationals a low-cost place to do business. Corporate tax is just 10% until the end of 2002, after which the rate will be increased to 12.5%. Industrial electricity prices, office overhead and wages are also comparatively low versus other industrialized countries. Agreements between employers and employees have kept wage inflation relatively low, although in recent years there has been more upward pressure on pay.

In July 1998, Enterprise Ireland was created out of the former Irish Trade Board and other government agencies to offer financing, create links between educational institutions and industry and to assist companies in building export markets, research and development, and training.

Ireland has also created a generation of highly educated young people. Investment in education since the 1970s includes the establishment of nine regional technical colleges and a concerted effort to push kids towards higher education. Since 1992 the number of students entering post-secondary education has increased by about 22%, including a 35% increase in those studying engineering and technology.

The government also invested heavily in infrastructure, including $5 billion spent to overhaul the telecommunications network in the last decade. The deregulation of the Irish telecoms in 1998 is expected to bring significant additional investment in the coming years. Five telecoms companies, including MCI WorldCom, have plans to lay additional fiber.

But Ireland also has a few natural advantages, not the least of which is its young and English-speaking population. It also didn’t hurt when the country joined the European Union in 1973, opening up trade with Europe. As one of the poorer members, Ireland received funds for regional development and social programs. Receipts were about 2% to 4% of GDP over the past decade. Though not enough without the government’s efforts, these factors certainly helped make Ireland more attractive, especially to US companies looking for a base in Europe.

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Feature

Washing water

by Hugh Jeffrey
written by Hugh Jeffrey

The office of Fadi Cumair, the director general of equipment at the Ministry of Water and Electricity, is a plush affair. While his secretaries were busy serving liqueur and chocolates, Cumair was explaining that if any person other than himself was to be quoted in this article, he would not provide any information. Cumair’s attitude, which is ironic considering he is a public servant, seems to typify the less than assiduous approach of local authorities towards the issue of proper water resource management in Lebanon.

In the Middle East, countries go to war over water, it is such an important issue. But, as far as government spending in this area in Lebanon is concerned, well, it isn’t. If the government’s allocation of financial resources in its annual budgets is any indication, attention to its water resources has increasingly taken up less of the government’s attention in the past decade.

Philippe Zgheib, an economist and professional hydrologist, made some calculations based on budget figures published in Lebanon’s monthly Official Gazette between 1984, 1994 and 1997 to prove the point. In constant dollars, annual budget expenditure for ministries such as defense, interior and labor has increased significantly. But budget expenditure for the Ministry of Water and Electricity has decreased from more than 7% in 1984 to just 0.2% of the total expenditure in 1997. Moreover, while aid from multilateral lending institutions such as the World Bank has been used to fund the rehabilitation of the electricity system, there has been no major funding for, or investment in, dams or other forms of water infrastructure. Similarly, the Ministry of Public Works, which is responsible for infrastructure projects required for water resources such as dams, saw its budget collapse from 22% of total expenditure in 1984 to 0.7% in 1997. And considering that wages and salaries absorb almost 40% of the state’s total budgeted expenditure, the money that has been provided has most likely been spent on just keeping the ministry’s employees paid.

Why has the government been so stingy in allocating resources to water? Governments are notoriously shortsighted and in Lebanon, the reality is that water has not been an issue weighing heavily on the government. Lebanon, at least for the time being, is not in dire need of water, unlike most other countries in the region. And considering the obvious repair needs after 15 years of civil war, perhaps it is understandable that water received less attention than urban reconstruction and telecommunications.

But scientists reckon spending policies have been shortsighted. Although Lebanon may have enough water for its domestic and commercial needs in a year of average rainfall, that will not always be so.

Population in the Middle East is growing at 2% to 2.5% annually, which means that water for domestic use will be in increasing demand while the productive sectors of the economy that rely on water, such as agriculture and industry, will come under pressure.

The equation is fairly simple. Lebanon is dependent entirely on precipitation, be that rain or snow, for its water supply. According to Musa Nimah, a professor of irrigation and soil physics at the American University of Beirut, Lebanon on average receives 860 to 900 mm of rain in a good year. If this figure is multiplied by the area of Lebanon, 10,452 km², Lebanon has a water supply of 9,200 million m³ per year. When rainfall drops below average, as in a time of drought, that figure drops to around 6,000 million m³ a year.

But there are problems with this figure. Lebanon lacks dams, reservoirs or other water-holding facilities to maximize the country’s use of its annual rainfall. Through evaporation loss, runoff loss, it runs into the sea, and other inefficiencies, approximately 50% of total annual rainfall is lost. That leaves Lebanon with around 4,600 million m³ per year. Out of that, 650 million m³ goes to Syria through the Orontes, Assi, River and the Northern Al-Kabir, 165 million m³ goes to Israel via the Hasbani and Wazzani tributaries of the Litani River, and 700 million m³ goes underground.

So in a year of average rainfall, Lebanon is left with approximately 3,200 million m³; in a year of drought, that falls to 800 million m³ to 700 million m³. And that, says Nimah, does not put Lebanon in a good position vis-a-vis its water needs.

Nimah calculates that domestic water consumption this year will be approximately 200 liters per day per person, about 20% of the average daily consumption in the United States. Total annual consumption, therefore, will work out to be around 400 million m³. Add that to the industrial and agricultural consumption, and Lebanon’s annual water needs come out at 2,445 million m³. So, if Lebanon’s rainfall falls below average, it will suffer a water shortage. And since domestic use always receives priority, the shortage will hit agriculture the most. Out of the 250,000 hectares of arable land in Lebanon, only 90,000 are irrigated, which is ruinous to agricultural productivity. “Irrigated land is two to three times more productive agriculturally than rain-fed land,” says Nimah.

By 2020, Nimah calculates Lebanon’s total annual water consumption will be 3,555 million m³. Without any attempt to increase water supply, Lebanon will face water deficits each year.

So what is the solution? Lebanon needs to dramatically increase its ability to store water if it hopes to maintain a water surplus in 2020. Obviously, this will require large-scale investment in dams and water reservoirs. Less apparent is Lebanon’s decrepit and leaking underground piping network, which needs to be replaced. Chafic Abisaid, the director of the Barouk water authority from 1980 to 1990, says that the system loses up to 40% or 50% of its water load.

With new piping, the way water is distributed and charged for should also be changed. In developed countries, businesses and households pay for the amount of water they consume. But in Lebanon this is not the case. Instead of a meter, pipes connecting consumers to water are fixed with an orifice that adjusts the pipe’s water capacity, but does not record the actual amount used. The result is that your neighbor might consume twice as much as you, but still pay the same price. In addition to making people pay for what they use, the installation of meters would allow the water authority to apply different tariff rates for certain sectors of the economy.

Besides the lack of funds, one of the major impediments to such obvious reforms has been the absence of any effective administration. In what must rate as one of the more ridiculous administrative follies the country has ever seen, Lebanon has 21 financially independent water authorities, a concept that goes against any idea of effective water management, especially in a country this small. For example, if there is a deficit in one authority and a surplus in another, there is currently no possibility of a transfer.

There was a decree in 1972 to reduce the authorities to five, but it was never implemented for political reasons, says Abisaid. “There have been too many beneficiaries,” he says ironically. “Every small water authority has its own board, its own director and staff. If you merge, a lot of people will suffer.”

In a January interview with EXECUTIVE, the minister of water and electricity, Suleiman Traboulsi, said the government is preparing for the looming water deficit. He is reviving the push for administrative changes, submitting a project to the council of ministers to eliminate the 21 different water authorities and reduce them to five, Beirut and Mount Lebanon, North Bekaa, South Bekaa, North Lebanon and South Lebanon. “These five authorities,” says Traboulsi, “will operate on commercial principles and will involve the private sector in administering their facilities.”

Reform of the administration is part of the larger project submitted to the council of ministers. Although short on details, the minister says the project, worth LL1.3 trillion ($867 million), will build dams and mountain reservoirs to ensure more than 2.2 million m³ after 2015 over a nine-year period. “This project,” says Traboulsi, “will be financed from the government treasury and not from foreign loans.” And he says this is not because of the difficulty of attracting funding. “It is our belief that within nine years we can secure the funds every year from the budget through a government decree called the ‘program law.'”

Governments are fond of large-scale development plans; they make good press. Completion and success of the plan is a different prospect, however. Besides the political difficulties of condensing 21 water authorities to five, Lebanon’s porous soil and mountainous terrain make large-scale dams and water reservoirs no easy task. It will take a committed ministry to secure the necessary funds and see it through.

The best-case scenario

Philippe Zgheib, an economist and professional hydrologist, is keen on water. With two doctorates in the field and a range of international experience, the Lebanese university professor has made water development issues the “passion” of his life. That’s beside, we assume, his expecting wife.

Given Zgheib’s approach to his work, he has chosen a suitably grandiose goal to pursue: nothing less than a multibillion-dollar integrated development of the region’s water resources. What is so exceptional about this? The area that we are talking about is the four points between Lebanon, Israel, Syria and Jordan.

Jordan, Israel and Syria all face severe water shortages, and in theory, an integrated development of the region’s water resources is the optimum solution to water shortages. The theory states that water, being a natural resource, does not adhere to national boundaries and therefore efficient management of the resource cannot be maximized at the country level. Instead, Zgheib says that to effectively develop the waters of one river, all the rivers in the region must be taken into consideration at the same time. Similarly, any water infrastructure, such as canals, dams, ducts, and pipe systems, has to accommodate all the water sources, not just one spring or river.

But pessimists, who always seem to outnumber optimists in the Middle East, believe the plan is wishful thinking. Even though most agree that an integrated development approach is best, they argue that the intractable grievances between the countries in question would make it impossible to join hands. Water resources, a lot of commentators say, have traditionally been a major source of conflict in the area, with no mechanism short of war being used to allocate the resource between countries.

But this year Israel and Syria are back at the negotiating table, with both sides interested in coming to a final settlement at last, a settlement in which questions over water resources will figure heavily. So perhaps it is time to give Zgheib’s plan more attention.

Although Zgheib can produce a lot of complicated figures to demonstrate the exact efficiency gains that would stem from an integrated development of the region’s water resources, understanding it is beyond this poor writer. But the basic plan makes sense. “My proposal,” says Zgheib, “goes beyond the country and looks at the resource regionally. Which means that I calculate all the water available in the region and compare that with all the demand, not by country, but by user sector: domestic, agricultural and industrial use.”

Second, instructs Zgheib, these needs would have to be factored in to population growth, which would change the level of demand for culinary and drinking water, agricultural and industrial water. Third, the development plan would need to prioritize these needs according to sequential use. This is water development speak for consumptive or non-consumptive use of water, the latter meaning using water in such a way that it does not change its chemical constitution. Industry, for example, uses water in cooling towers; the water used will rise in temperature, but its chemical makeup remains the same. Consumptive use, on the other hand, means that water undergoes a major chemical change, such as drinking water that comes out as sewage. By prioritizing non-consumptive use first, water supply can be magnified without tapping new sources since certain volumes can be used two or three times.

By looking at all the water demand and supply in this way, an integrated development plan could determine how to manage the water resources effectively. For example, it could determine what transfers would be necessary between countries and sectors to minimize shortages, calculate the infrastructure necessary to accommodate such transfers, the costs that would arise and hence what could be charged for the water in each sector.

Who would manage all this? Depending on a comprehensive peace settlement, Zgheib is envisaging some kind of supranational agency. Funded by member countries and international aid, the agency would have powers to attract financing, construct water infrastructure, impose operating and engineering rules, settle any disputes and establish and regulate a water market where users buy and sell water according to need. But given that water is a necessity for life, such a water market would have to operate under certain constraints. For example, Zgheib argues that this supranational agency would have to impose an “equity constraint,” meaning if there was a 10% water deficit in Syria’s agricultural sector, the same deficit should exist in the agricultural sectors of the other member countries.

And, says Zgheib, since Lebanon is the only country in the group with a current surplus in water supply, such a market could represent a business opportunity. One example that Zgheib uses is the Israeli predicament. The United Nations standard for the minimum amount of water each person must be secured for culinary and municipal needs is 90 liters a day; Palestinians currently have around 15 liters per person. “This is a time bomb for the Israelis,” says Zgheib. “They know that it will cost them less to buy water and give it to the Palestinians than to raise a policing army to deal with the potential instability, so they are ready to talk.”

Right now Israel could import water in floating medusa bags via ship or desalinate or build a sea pipeline from Turkey. The cheapest of these would cost at least $1 per m³. If Lebanon could supply water at a cheaper rate, Zgheib estimates that it could generate up to $2 billion in annual sales to the region, including Israel, a significant boon to the country’s huge budget deficit. But at its current level of development, Lebanon faces a water deficit by 2020. Perhaps Zgheib’s plan can be an added incentive to local authorities to get serious with improving water resource management in Lebanon.

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Feature

Beast burden

by Natacha Tohme
written by Natacha Tohme

Who would want to have a company that relies on fuel oil for its energy? In less than a year the price of fuel oil has almost doubled, from $90 to $140 per ton. Worse, what if that company sells energy at a flat rate and absorbs the price increase?

This situation, which no private company would tolerate, is the situation for Lebanon’s electricity provider, Électricité du Liban. The autonomous public authority, which the government hopes to one day put up for sale, is bankrupt. Shouldering huge losses due to electricity theft, uncollected bills, poor management and adverse operating conditions, such as Israeli air raids, EDL regularly reports an annual operating deficit of about $150 million, which is subsidized by the government. Its accumulated debt now stands at a staggering $1.6 billion, 11.4% of the total public debt. And according to Suleiman Traboulsi, the minister of water and electricity, EDL’s almost total reliance on fuel oil generated additional expenses of $80 to $90 million last year.

In the face of this financial disaster, EDL’s ability to supply the country with constant electricity, although improved enormously since the war, is far from reliable. Lebanon has spent around $1.3 billion on the rehabilitation of EDL, including interest on loans, which is responsible for the generation, transmission, and distribution of electric power throughout the country. According to a 1998 report, the restoration of existing facilities and the construction of new power stations has meant that Lebanon’s electricity capacity exceeds total demand. But the lack of transmission capacity and high losses of electricity through its network, reportedly more than 50%, means that Lebanon still suffers shortages and blackouts, even in Beirut.

So what is the government to do now? EDL is financially bankrupt at a time when it also faces a host of technical and administrative problems.

What has received a lot of media attention recently is the effort to reduce the burden EDL is placing on the budget by switching from fuel oil to natural gas. According to Pierre Chammas, a petroleum economist and president of APS Energy Group, natural gas is less prone to price fluctuations and “in terms of per barrel of oil equivalents, is half the cost.” Estimates vary, but converting all EDL’s power plants to natural gas could save the treasury more than $150 million a year. “This is very conservative, according to my estimates it’s over $250 million,” says Chammas.

Additionally, gas turbine equipment for electricity generation is two-thirds cheaper than that of a fuel oil plant and is much more efficient. EDL’s current method of producing energy, generating steam with fuel oil to run the turbines, involves huge losses. “Out of every 1,000 tons of fuel, only 30-35% generates power,” says Ronald Diab of National Energy Consultants. “With gas it’s between 40-60% efficiency, depending on the technology used.” Two technologies are available: one-cycle and combined-cycle gas turbines, with the latter the most efficient at up to 60% energy output.

Combined-cycle gas turbines produce electricity, and the gas exhaust then goes into a steam turbine which also produces energy. “One-third of the energy that you put into the gas turbine comes out free of charge, from the heat of the exhaust,” explains a private consultant.

There are other benefits. Operating and maintenance costs are less, because natural gas does not wear out equipment as quickly, giving it a longer life. It is estimated that these benefits alone could save EDL a further $100 million every year for 25 years.

Natural gas is also more environmentally friendly than fuel oil, which is sulfur-polluting and causes acid rain. There is a cost element here, because when oil is burned it must be desulfurized. The desulfurization process, says Chammas, is very costly. Natural gas also produces 60% less CO₂ than fuel oil, which has implications for the future. At the Kyoto convention, a commitment was made to reduce carbon dioxide emissions by major industrial polluters, namely the US, Japan, and Europe. The WTO will punish countries not complying, with a CO₂, or “green tax,” on emissions. In time, with the growth of energy systems in developing countries, they too will be required to reduce emissions. And Lebanon’s demand for electricity is growing at 4-5% every year.

So why doesn’t the government begin switching to gas immediately? Currently nine of the country’s 11 power plants run exclusively on fuel oil, building these plants was more convenient because fuel oil is more readily available. Only two new power plants, in Zahrani and Badawi, are ready to receive natural gas, built with the more efficient combined-cycle gas turbines at a cost of $600 million. But because natural gas is not yet available in Lebanon, these plants were built with dual systems, and can run on gas oil, which is even more expensive than fuel oil.

All depends on getting gas to Lebanon. Unlike fuel oil, natural gas cannot be bought off a ship. One way is to have it transported in its natural gas condition via pipeline, a heavy investment and often a politically difficult prospect. Israel, for example, is in negotiations with Qatar, owner of the world’s second largest natural gas reserves, to supply natural gas via a pipeline. But this cannot be realized until a peace settlement is reached.

Another alternative is to use special tankers to import the gas as liquefied natural gas, LNG. The compressed gas has to be received in special terminals then reconverted to gas, the facilities for which will need to be constructed. With these kinds of investments involved, importing LNG is more expensive than natural gas via a pipeline.

Syria, another producer of natural gas, has agreed to provide one billion cubic meters of natural gas every year for 25 years, three million cubic meters daily, with the quantity to be increased if more reserves are found in the future. The project involves building a 230-km pipeline from Homs to Badawi, then extending it to Zahrani. If work on the pipeline begins this year, gas could start running to these two plants by 2002. Suleiman Traboulsi, the minister of petroleum, told EXECUTIVE: “For this project to happen, we have to look for a source to finance it, or to find a way not to burden the treasury.”

Last year Elf Aquitaine Gaz International and its foreign partners presented a proposal to provide Lebanon with its natural gas needs under two different 25-year build-operate-own-transfer (BOOT) contracts. In the first, Elf is proposing to build the pipeline from Syria to the plants in Badawi and Zahrani. But if EDL converts all its power plants to natural gas turbines, by 2005 between nine to 11 cubic meters will be required daily. Its second contract proposes the rest be imported from Qatar, which has offered to supply 7-8 million cubic meters of LNG per day. Elf is offering to build two LNG tankers, a receiving and re-gassing terminal, outlined for Batroun, and additional pipelines to the other power stations. The tankers are each valued at $200 million, and the import area is estimated to cost $500 million to $600 million. The entire project is valued at almost $1 billion, which Elf will pay. If approved now, by 2004 the other power stations will be supplied with natural gas.

However, the government would have to cough up the money to refurbish the power plants running on fuel oil, estimated at $40 million to $50 million each. “This project will make Elf Aquitaine by far the biggest foreign investor in Lebanon,” says Chammas.

Considering EDL’s financial woes amidst the rising price of fuel oil, some experts are aghast, although not enough to go on record, at the government’s delay in giving the go-ahead on the project. But the current administration has gained a reputation for delay. Its 1999 budget was four months late, so too its five-year plan. Its tax collection program has yet to be implemented, and so far no concrete steps have been taken to restructure Tele-Liban and MEA.

Realistically, however, to convert the power plants to natural gas means scrapping or selling expensive equipment recently purchased, before recouping any return from it. And it requires large investments, which the government cannot afford.

The government’s oft-expressed goal of privatizing the utility could provide the funds, but that hardly seems realistic given EDL’s current financial and administrative status. To make it attractive to private investors, the government would have to invest heavily in restructuring or face selling it at fire-sale rates.

Instead, the government should focus just on improving billing and collection. Last year, 40% of the delivered electricity remained unpaid and Traboulsi has said that $466 million is owed to EDL by its customers. If EDL could demonstrate the ability to be profitable, private investors would be more willing to get involved.

Alternatively, the government could spin off some of EDL’s operations. One example might be to keep the generation and transmission public, but sell the distribution arm, which includes billing and collection, to the private sector under a profit-sharing agreement similar to the one which the government has with the cellular providers.

There is one other alternative, deregulation. Removing the monopoly and inviting the private sector to compete would result in less efficient power producers, in this case EDL, having to upgrade or fold. Minister Traboulsi has already indicated this is a possibility.

Whatever the government chooses, privatization and/or deregulation will have to figure. The UN’s ESCWA recently presented case studies of the Jordanian, Egyptian and Yemeni electric utilities, which have all been privatized. Egypt is presently the fastest growing country in terms of power generation in the Arab world. “They now have in excess of their needs,” says Diab.

As George Corm, the finance minister, likes to say, if other countries in the region can do it, then why not Lebanon?

The ‘other’ factor

The natural gas market for electric power generation is skyrocketing worldwide; it is predicted to rise by 2.5% every year for the next 20 years. In 1998 the value of gas turbine production worldwide was about $25 billion, 71% of it associated with aviation gas turbines. However, in the near future its application to electrical power generation is expected to exceed that of aviation gas turbines.

Besides being cheaper and environmentally friendlier, natural gas is readily available. The world’s gas reserves are estimated at 54 trillion cubic meters, over one-third being in the Middle East. With existing reserves estimated to last 60 years, utilizing it will help preserve oil resources, with current reserves estimated to last 40 years.

To preserve its oil reserves, Saudi Arabia has invested $25 billion to encourage its industries to run on gas. Presently a quarter of the country’s industries have shifted to natural gas.

In a related issue, an Israeli report commissioned by Jerusalem’s Hebrew University claimed that Syria’s petroleum reserves will run out in 10 years. Being Syria’s main export commodity, this typically led to rumors that Syria was pressuring Lebanon to convert to natural gas to preserve its oil reserves. Pierre Chammas, a petroleum economist, thinks that is beside the point. “Anybody who knows this business knows that the switch to natural gas is the option to do.”

Syria produces about 12.5 million cubic meters of natural gas daily, but the figure is expected to rise to over 18 million by next year. Chammas says that Syria is doing Lebanon “a favor” by promising to supply natural gas, as it presently cannot supply enough natural gas for its own needs. Between Syria’s proximity and the fact that gas is cheaper in its natural state via pipelines, the supply from Syria alone is expected to reduce costs by 30%. “It will be a good push for the Lebanese economy,” says Chammas.

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Cover story

Chilin’ with the big boys

by Hadi khatib, Peter willems & Hugh Jeffrey
written by Hadi khatib, Peter willems & Hugh Jeffrey

When visiting Concord last month, EXECUTIVE got that “it could only happen in Lebanon” feeling. Representing this $50 million-a-year conglomerate is not some hard-headed CEO with years of experience, but two relative youths, Ihsan Hafez, 32, and his cousin Khaled Hafez, 25, both sons of the company owners. A typical family business.

But you can’t argue with results. The combined revenues of the family’s business, which comprises a variety of companies in the region focusing on refrigeration, have exploded in the last five years, from $25 million in 1995 to $50 million in 1999. One example of this growth is in Lebanon, where production jumped from 2,500 refrigerators in 1992 to 30,000 in 1999. And these figures took place in the face of heavy competition from imports and a shrinking local economy. So what gives?

The first answer is that the Hafez family runs a diversified operation that is not tied to the sick Lebanese economy. The family group manufactures household appliances in Lebanon, Syria and Saudi Arabia. Unusually, the company sells its products under different brand names: Concord in Lebanon, Al Hafez in Syria and Lematic in Saudi Arabia.

Furthermore, unlike many Lebanese companies that believe that the rich will always be around in large enough numbers to support them, they’re not, the family has no delusions of grandeur; its products are downright inexpensive.

Lebanon is a good test case. In a market where established brand names like General Electric, Maytag, Samsung, LG, Hotpoint and others all have local distributors competing for market share, Concord has around a quarter of the refrigerator market. This adds up to $10 million in sales, the single largest chunk for any company.

The simple reason for this is that Concord refrigerators are the lowest priced coolers on the market. According to Raji El Mayla, the regional manager for Maytag, a US manufacturer of household appliances, Concord is on average 35% less expensive than Korean-made refrigerators and 45-50% less than the American competition.

For example, a 27-ft³ Concord fridge/freezer retails at anywhere from $750 to $840, while its Korean and US counterparts sell at slightly more than $2,000 and $2,500 to $2,700 respectively. In an economic recession, with people seeing their purchasing power decline, this pricing strategy is working like a charm.

“It’s a good time to sell low-end,” says Antoine Cherfane, president of AC Holdings, importers of the Korean Samsung brand. Historically, US brands have dominated the Lebanese market, one that once had an insatiable appetite for good quality and large-sized refrigerators. However, the recession has been particularly hard on US imports. “US imports overall have dropped 30% in the last three years,” says Majed Al Zein, deputy general manager at Abdulrahim Diab, a pioneer wholesaler of home appliances and sanitary ware in Lebanon and a supplier of Maytag refrigerators. US imports went down from 36,000 units three years ago to some 23,000 units in 1998 and “won’t exceed 15,000 units in 1999,” predicts Mayla.

Statistics from the Ministry of Economy and Trade show that imports of complete refrigerator units went from $21 million in 1998 down to $15.7 million in 1999. The beneficiaries of these conditions were the lower-priced Korean companies, which managed to increase their imports from $3.23 million in 1997 to $6.41 million in 1999, and Concord, which has boosted its production by 10,000 units since 1997.

But the key for the group in Lebanon is that no one can match or undercut its prices. Although there are some 500 suppliers of commercial refrigerators for mini-markets and supermarkets, such as Adam and Takal refrigerators, Concord is the only manufacturer of domestic refrigerators. It doesn’t have to fight any price battles with local competitors, something very few Lebanese businesses enjoy. Similarly, with shipping, customs and clearance adding 35-50% to the cost of US and Korean imports, Concord does not have to fear price competition from imports.

Concord backs up its low pricing with a strategy of taking good care of customers. Although it sells directly to retailers and distributors, its strategy is to provide service directly from the producer to the end-user, thereby relieving their buyers of the responsibility and gaining the trust of the consumers. The company has 10 roving trucks that go daily to all corners of Lebanon, carrying out maintenance and replacing parts.

But Concord does something unparalleled by any of the importers. It goes beyond its three-year warranty and replaces any damaged refrigerator parts for free. “Concord is very generous with their spare parts,” says Walid Tahan, sales manager at Abed Tahan and Sons, arguably the top retailer of household appliances. Tahan sells some 6,000 refrigerators a year, including some $400,000 worth of Concord refrigerators. “Our large volume of sales in refrigerator units allows us to replace a $10 plastic tray for free because it only costs us 10 cents to assemble it,” says Khaled Hafez, who handles factory operations. “So instead of burdening our distributors with that cost, the company prefers to absorb that cost to offer a better service.”

Since 1994, Concord has also maintained advertising of $600,000 a year, 80% of which is spent on ever-powerful TV commercials with the rest distributed among other media outlets. That budget exceeds the $470,000 budget put in by the Maytag Group for its number one brand Maytag, the group’s total budget averages $600,000 for its collective brands, namely Maytag, Hoover, Admiral, Magic Chef and Norge, and the budget for Samsung is just over $500,000. Thanks to this branding strategy, Concord has made itself a household name with many consumers.

Still, Concord is far behind the quality of its foreign counterparts, some point out. “Concord has more problems than US or Korean imports with leaks, noise and doors that don’t open or close well,” says Tahan.

But comparing the capital available to importers and their volume of sales to that of local manufacturing, it is easy to see why imports are better quality. Samsung has the newest factory in the world, costing hundreds of millions of dollars to build and which produces more than two million units a year but employs fewer than 30 workers. On one production line, robots assemble five different models and five different colors, achieving a ‘zero’ stock level, i.e. orders are manufactured simultaneously with other orders to remove the need for storage.

Samsung has used this efficiency and consistency in manufacturing to boost its sales volume by 25% a year in Lebanon. On the other hand, Maytag has invested some $220 million in a new technology called Advanced Product Design. Maytag has been the number one brand in the US for three years in a row, according to the US-published Consumer magazine. This new technology essentially eliminates noise, leaks and makes refrigerators totally rust-proof; Maytag has used this new technology to increase its local market share against other US importers from 32% in 1997, to 41% in 1998 and 61% in 1999.

Nonetheless, Concord is trying to improve quality within the means it has available. As production increases, quality will also improve as more money is invested into offering a better quality product. Concord invests about $1.5 million a year on upgrading machinery to improve the finish and on computerized equipment that performs internal temperature monitoring on the production line. “The manual test used to take us eight hours to perform, now the computer does it in two and a half,” says Ihsan Hafez, who handles the sales, exports and finance. Last year, the company increased its production by 5,000 units, but has maintained the same number of service calls, an indication that maintenance efficiency has improved.

The biggest chunk of the family’s business is generated in Syria. According to Ihsan, half of all revenues, some $20 million, originate from Syria, twice as much business as in Lebanon. The original company founders were Syrian, beginning with a small factory in 1952 which was later nationalized in the days of pan-Arab nationalism. Another larger factory was built in the early 1970s by the government, which ironically is now the factory that Al Hafez uses today. So now the company competes against a government-run factory it used to own and one other local manufacturer, a partnership between Joud and Syrian Batric Company, two large local manufacturers of a range of home-appliance brands such as Hi Life, Penguin, Zerowatt and Riviera. The family reckons Al Hafez has half of the market share in Syria, which consumes 120,000 refrigerators a year. That leaves 30% for the government, 15% for the Joud/Batric outfit and 5% for a slew of small workshops spread throughout the country.

But regardless of which company has what share, Al Hafez enjoys some marked advantages while operating in Syria. The company has seen sales increase by 20% a year. It produces about 30 refrigerator models at any one time; the competition, Khaled claims, manages to produce only three or four models.

Having a factory in Syria guarantees another advantage. For one, the country is a closed market to all but a few imports and thus competition is limited to local manufacturers. “In Syria you can import according to a quota, in a very limited fashion,” says Raymond Daou, sales manager at Samsung’s main showroom. Al Hafez is already an established brand name with more than 50 years in the market, and newcomers will have a very hard time taking away market share from it. “Al Hafez has their tradition and history in the market,” says a Joud representative in Syria. And, even though a free-trade deal exists with Syria, don’t look to Lebanon for increased competition.

Despite a 25% cut in import tariffs between the two countries since January 1999, Lebanese exports have declined from $47 million in 1998 down to $27 million in 1999. The deal has run into serious snags, mainly generated by the complex bureaucratic procedures that are still in place in Syria, leaving many Lebanese exporters wondering about the usefulness of the agreement. Although the accord stipulates the immediate removal of all paper formalities for the exchange of goods, customs officials on both sides of the border have ended up as the real enforcers of the agreement. Traders cite red tape and corruption as the major obstacles to trade. A further 25% cut in tariffs, bringing it to a 50% total cut, took effect last month, but it is too early to predict the effect.

Another advantage to having a factory in Syria, says Khaled, is that the current market will not provide sufficient returns on the investment necessary to break in. “If you’re already in Syria, you can invest little by little and grow gradually. But if you have to put in $30 million to start a new factory, it’s nearly impossible to make it.”

The Al Hafez factory only supplies the Syrian market and spends around $700,000 in yearly advertising to market its products. But what if peace with Israel takes effect and borders open up, will the company be affected? “It’s better for us,” says Ihsan. “Labor cost will still be down, the cost of parts will be reduced and since we’re the only ones selling in large volumes in Syria, we will have the best chance of surviving in the market.”

The final manufacturing operation of the family business is the 10,000 m² factory in Saudi Arabia, which produces 50 commercial freezers per day used for ice cream displays; Lematic complements the local market with imports of refrigerators from the Lebanon factory. The company does not manufacture refrigerator units in Saudi Arabia since local competitors produce 50,000 units a year, not to mention around 30,000 US imports. Saudi operations represent 20% of the group’s total annual turnover, $8 million, and spend $500,000 in advertising.

But since profit margins on refrigerator sales do not exceed 3% to 5%, the company has looked to diversify its operations. To that end, the family has started an industrial engineering company to take on turnkey projects in the region. This involves building home-appliance factories from scratch, starting with the design, moving into the manufacturing line, supplying the machines, operating them and transferring the entire operation to its clients. In almost all cases, these are government-run factories or government-funded projects, designed as an incentive to produce locally.

The family has built half of all the refrigerator factories in the Gulf. In order to support these activities during the civil war, the Lematic group built factories in Turkey and Italy and design offices in Germany, Britain and Canada.

An average project starts at $5 million and can go as high as $20 million. Now that these projects have been reduced to one or two a year at most, these factories have been reduced to representative offices. However, although factory building is slow-going due to the saturation of factories, agreements with the factories they built stipulate that the family supplies them components, and this currently represents a nice and steady income stream, 20% of sales in 1998 and 1999, for the company. In the early 1990s, when building projects were peaking, the company was supplying components that used to represent 55% of its turnover.

The company also branched into the commercial end of the market, supplying freezers and drink cooler cabinets for such clients as Pepsi, Cortina, Iceberg, Dolsi, and Maccaw. These companies use the refrigerators to push sales of their products and distribute these machines free of charge to supermarkets and grocers. Having the capability of high-volume manufacturing, the company has essentially pushed all competition out in Lebanon.

Hryar Atamian, the general manager of Adam Industries, was one of those supplying the market with soft drink coolers. “This market became dead for us because we couldn’t compete with Concord’s lower prices and volume of production,” he says. “Concord has almost a 100% market share supplying freezers, soft drink coolers, but we do have 15% of the supply of juice coolers for companies like X-tra, Libby’s, Snapple and Gatorade,” says Houssam Moghraby, sales and marketing manager at Joud Lebanon. Joud took that share by applying some special marketing techniques that included allowing clients to lease instead of buy, offering free parts and service, even if the user broke it, and free delivery. Joud Lebanon is also trying to get in on the cooler refrigerators and water cooler market under its brand Riviera.

Diversifying even more, the family also manufactures twin-tub semi-automatic washers and supplies the Gulf, Algeria and Libya, where most of its sales occur due to water and electricity shortages. They are competing against Chinese manufacturers, which got involved in the business about 10 years ago and have flooded the market due to overproduction. Lematic produces about 10,000 units annually, supplying anything from 2,000 to 20,000 components depending on the year, but its local sales are declining because as electricity is restored, people are shifting to fully automatic units.

Besides that, the family decided it wanted to tackle global competition. In 1998, the group embarked on an expansion program trying to export more finished products than components. It has entered North and West Africa, the Gulf and parts of Europe. As soon as customs barriers between Egypt and Lebanon were lifted, the company jumped into that market, where there are close to 60 million consumers.

The family is leaving it up to the wholesalers in these markets to advertise and market the products and also to provide service and maintenance. It will use these cost savings to introduce very inexpensive products and will not make any profits on them. The main goal of the company at the beginning will be to increase market share and establish a foothold in these markets. The exports will originate from Lebanon; the family won’t open a factory there, even though it would mean significant savings on shipping and customs. “I cannot enter the market with a factory and supply only a limited amount, it’s too risky,” says Hafez. Instead, the company will concentrate on increasing its sales until it reaches a respectable amount of units sold, around 20,000, that warrants investing in a $20-30 million factory.

And the group has made progress in the new markets, selling a total of 1,000 units in 1998, and 4,000 units in 1999. Although making no profits on those sales, economies of scale indicate that selling more volume reduces the cost per unit of manufacturing, thus generating indirect profits not coming from the sale of individual units.

However, this expansion program faces some obstacles. For one, Lebanon is the most expensive country to export from. To get a container from the factory to the ship will cost $400 per container, so the prices have to be discounted even further. Secondly, even if the company decided to open a factory overseas, it doesn’t have the resources. “Our weakness is that we are not a shareholding company and we are not listed, so we don’t have easy access to capital,” says Khaled.

Like the family outfit that it is, the company is reluctant to open itself up to outside influence. And this could be a deciding factor in its continued sales success. Lebanon’s economic future, and that of the region, lies with the global market; the family will need significant resources to keep going forward or it will face rivals jumping ahead, not just in these new markets, but on home turf.

Even though they are facing obstacles, the bottom line is that the family wants these new markets to be the driving force of the group. They’re hot now; we’ll have to wait and see if they will cool off.

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Best Sellers

Stuck in the mud

by Avo Tavoukdjian
written by Avo Tavoukdjian

What’s big and yellow, rips up the ground, flattens the earth and breathes fire? Caterpillar, the world’s leading brand in construction equipment. Okay, it might not breathe fire, but it is one tough piece of machinery. The quality and endurance of the Caterpillar product line, which includes everything from excavators and loaders to trucks, tractors, forklifts and a diverse range of engines, are the reasons behind the success of the company and the record sales it has had for six consecutive years. Sales and revenues for 1998 totaled almost $21 billion worldwide, a record for the company, although the first nine months of 1999 showed a drop of almost 5.6% over the same period of 1998.

Business for M. Ezzat Jallad & Fils, the agents for Caterpillar in Lebanon, Syria and Jordan, has taken a much sharper turn for the worse. The company’s revenues from the Lebanese market had been rising steadily from $10.9 million in 1994 to $18 million in 1998, but 1999 was a disappointment. Business dropped 43% from the previous year, plummeting to $10.2 million. Even business in Syria and Jordan, both potentially far larger markets than Lebanon, has seen better days. So what has so dramatically affected Jallad’s sales?

In Lebanon, the weak economy and government deficit are the main factors that have hurt the company’s construction equipment side of business. While gross domestic product shrunk by 1% in 1999, according to the Economist Intelligence Unit, the government’s efforts to reduce the deficit included putting a freeze on most public construction projects. This forced contractors to focus more on private projects, such as building and renovation works, where heavy construction equipment is used less.

“The drop in demand is tremendous,” says Walid Tamari, general manager of Michel Sehnaoui and Sons Plant Division, which also deals in construction equipment. “As long as the government has funding problems, the slowdown will continue.”

Jallad’s revenues from sales of construction equipment, about $7 million and 39% of total revenues in 1998, nosedived by more than 90% to some $600,000, a mere 6% of 1999 revenues. And despite taking up a greater proportion of total revenues, from 28% in 1998 to 42% in 1999, total sales of generator sets dropped by almost 10%, down from $4.68 million in 1998 to $4.28 million in 1999.

Sales of generators have been adversely affected by the same factor that has hit the construction equipment side of business: projects in Lebanon are dead. On top of the smaller demand for generators, especially since the days of erratic supply of electricity seem to be behind us, there are more players taking a chunk of the $35 million-a-year business. One such firm is Saccal Power Engineering, a local assembler of generator sets that launched in 1987. By 1998 it had grabbed around 10% of the market with a turnover of $3.7 million. Jallad claims to have a 22% to 25% share of the market for generator sets.

The only side of Jallad’s business that is doing better is its product support. Here revenues climbed nearly 50% from $6.3 million in 1998 to $9.36 million in 1999. But this doesn’t come as a surprise. If contractors aren’t purchasing new equipment, they’re maintaining the ones they already have, and since maintenance requires the replacement or repair of parts, this boosts Jallad’s revenues from its product support department. “Without sales of new equipment,” says Omar Jallad, the company’s chairman and part owner, “even this will decrease eventually.”

In 1997, revenues from Jallad’s business in Jordan surpassed revenues from the local market, but 1999 was disappointing even abroad. The combined revenues from both Jordan and Syria barely equaled that of Lebanon, and an upturn isn’t expected soon. “As long as the Syrian government doesn’t receive funding for public construction projects,” says Jallad’s chairman, “we can’t expect business to pick up.” It’s a shame. The volume of business that Syria is capable of putting Jallad’s way could make that from the Lebanese market seem trivial.

The same goes for Jordan. Phosphate mining has not only become a major contributor to Jordan’s economy, but that same mining created the demand for Jallad’s products. Now, with Jordan’s economic slowdown, Jallad’s business there has also dropped significantly, especially after 1997.

But what can Jallad do to face this slowdown? It can’t really diversify. The most it can do in this regard is to push sales of related products such as forklifts, a strategy Sehnaoui is trying in order to offset the drop in demand for construction equipment. “We are turning our attention to warehouses that use products related to our existing line,” says Tamari. Although that might generate some income, it can hardly compensate for the lack of sales of heavier equipment.

Furthermore, competitors in generator sets such as Saccal, Jubaili, and Ghaddar have an option not open to Jallad. They can export. In fact, these companies have been able to increase their business dramatically through exports. Since April 1999, Saccal landed two contracts with the Iraqi government totaling $8.75 million, or about 240% of 1998’s turnover. Ahmad Rajah Jubaili, a local assembler for FG Wilson generators, has exported to Nigeria since 1997 and to Iraq since 1998.

Ghaddar, assembler of Perkins and Leroy Somer generators, has been present in the international market for ten years and has an annual turnover of over $5 million with contracts in Africa, Dubai, Iraq and Kuwait. But with around 200 agents worldwide with the exclusive representation for Caterpillar products, Jallad can’t market its goods anywhere besides Lebanon, Syria, and Jordan.

But Jallad does have some advantages going for it. Brand power has been instrumental, especially since Jallad is no longer the only supplier of heavy construction machinery. “What makes Jallad number one in generator project sales is branding,” says Maher Saccal, CEO of Saccal Power Engineering. “This makes a difference with clients.” Hasan Ghaddar, owner and CEO of Ghaddar, agrees. “We cannot compete against Jallad who has had the Caterpillar name for over 70 years.”

Some projects executed by Jallad include supplying the American University of Beirut, the Indevco power station, the Beirut International Airport, Ghandour Mills, Liban Cables, Pepsi Cola, Coca Cola, and Casino du Liban, with $11 million worth of business just from the first three.

Brand power helps give Caterpillar products an edge despite higher prices than competitors. “Caterpillar products are 20% to 100% more expensive than others in the market,” admits Emile Copty, Jallad’s general manager. Due to low operating and maintenance costs of the machines as well as a relatively high resale value, Caterpillar products are a good investment in spite of the hefty premiums. One example was a 25-year-old machine that was recently resold for $30,000; its original price tag was $50,000. A new one now costs about $250,000, so considering the machine’s age and the need for repairs, the resale value is good.

Nonetheless, Jallad has already taken steps to become more competitive on pricing for generators. For example, a 1,000 kVA generator, previously priced at $150,000, can now be purchased for $120,000, not much more than $110,000 for the same output product offered by Ghaddar. “Selling at the same price, and backed by discounts from the supplier, he will get the deal because he is Caterpillar,” says Ghaddar.

Today’s market requires different marketing tools. “Before we used to just negotiate the price with the client,” says Copty, “but the consumer is no longer satisfied with a standard product that he can just walk in and buy.” Jallad increasingly uses tools such as operating cost per hour, life cycle costing, and productivity to persuade a client to buy. Since many clients don’t know how to assess the requirements involved in obtaining the right tool for a project, they solicit the dealer’s recommendations.

And Jallad has been quick to integrate that service into its operations. “We now perform five studies for every ten projects as compared to before, when it was one for every ten,” continues Copty. The Indevco plant in Halat, which Jallad supplied with two Cat 3616 generators, each rated 4,200 kW at 1,000 rpm, required six months for study and installation. Caterpillar engines were chosen after studies by 18 different suppliers were considered.

Jallad ensures that stock of the most popular goods never falls below a minimum, 97% of most spare parts are now on hand. Even the stock of heavy construction equipment, though now reduced substantially, still includes the most popular machines ready for delivery. While Jallad also manufactures soundproof chambers and control boards for the power generators, not to mention all supporting equipment and installation, it’s not alone. Local manufacturers like Saccal do the same.

Basically Jallad is in still waters without a paddle. “We will have to suffer,” says Copty, “for the next few years.” All they can do is maintain a solid reputation, whilst taking as big a chunk of the generator market as possible. Having survived as Caterpillar’s Levant dealer for more than 70 years, Jallad should be able to hang on until things get better.

Global operations

Caterpillar Inc., the world’s largest manufacturer of construction and mining equipment, as well as diesel and gas engines, is a Fortune 500 company with $26.5 billion in assets at the end of the third quarter of 1999. Following record revenues of $20.98 billion in 1998 and profits of $1.51 billion, last year brought some slippage. At the end of the third quarter, revenues totaled $14.68 billion versus $15.57 billion for the same period of 1998, while profits were just $707 million, down from $1.2 billion. With a reputation for manufacturing rugged machines that set industry standards for performance, durability, quality and value, the Illinois-based firm, one of a handful of US companies that leads the industry, had clocked in record highs for six consecutive years.

In the past five years, Caterpillar added 88 facilities to its assets, such as warehouses and manufacturing plants, acquired 20 companies, and entered 17 joint ventures. In addition, it introduced 244 new or improved products, with 44 of them introduced in 1998, when revenues climbed by 46% and profits by 58%. Engine sales increased by 37%, a result of recent acquisitions, while the ensuing $6.5 billion in engine business accounted for a third of total sales.

Caterpillar records more than half its sales to overseas customers, with export sales of $6 billion in 1998. Its products are sold in nearly 200 countries through a network of 195 dealers, 131 of which are located outside the United States. Much of its success and reputation has resulted in customers that have remained loyal throughout the years, with 80% of the company’s sales coming from repeat customers.

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Best Sellers

Dealing with adversity

by Hadi khatib
written by Hadi khatib

So Lebanese industry has a checkered past; that doesn’t mean there are not some truly decent operations out there. Bassile Freres is one of them. From a tiny outlet in Hazmieh half a century ago, this modest binding company has become one of the major players in the local stationery manufacturing industry.

Bassile’s market is school and office supplies. It is so dominant in the latter that competitors such as Stationers, a school supplies importer, and Oriental Paper Products, a local school stationery manufacturer, call it a “monopoly.”

Milad Bassil, the company’s financial manager and one of the eight current owners, is more modest. “Though statistical data is lacking in our line of business, I can safely say that we have a fair market share in office supplies and we are a leader in some 50 to 60 items. But I wouldn’t call that a monopoly.”

Picture perfect? Unfortunately not. Since the early 1990s, Bassile’s local sales have been growing at around 15% annually, from about $2 million in 1993 to $4.4 million in 1998, with exports adding a respectable $3 million. That, however, is the catch. The export market used to represent 75% of Bassile’s sales during the war years, but has been in a steady annual decline of 5-8% for the last five years.

Cheap stationery imports from Indonesia and increasing industrialization in the region have exposed the uncompetitive operating conditions for Lebanese industry. Fadi Bekdash, for example, was once a part-owner of stationery manufacturer OPP but left five years ago to concentrate on importing from Indonesia. Now the general manager and part-owner of Stationers, Bekdash doesn’t miss the manufacturing side of the business. “The local manufacturing industry is not much appreciated by the government or the consumer,” he says. “Although equal in quality, people would rather buy imports.”

And now with the recession biting, Bassile’s total sales have dropped by 5% last year, $4 million, with a corresponding 3% drop in its net profits.

The timing wasn’t good. In 1997 it embarked on a $6.5 million investment strategy to solidify its position locally and compete regionally by adding 3,500 m² of warehousing space, renovating and increasing manufacturing capacity and expanding printing operations.

So while GDP growth slipped from around 4% in 1996 to an estimated -1% in 1999, Bassile’s new machinery came online in the first six months of last year. The result was stacks of inventory it could not sell. In 1998, Bassile’s stocks increased by a typical $400,000 between January and the end of September. But during the same period last year, inventory jumped $1 million in preparation for the school term and business.

To make matters worse, in the second half of the year last-minute buyers, who represent 10-20% of Bassile’s business, did not come through. That brought the company’s extra inventory to $400,000 near the end of 1999. Bassile froze its investment program with only two-thirds complete and cleared $130,000 worth of products at 20% of their market value, around $22,000.

Adapting to these conditions has meant big changes. Most importantly, Bassile introduced a whole new brand last year called Quest. “The best way to compete in these conditions,” says Bassil, “is to compete against yourself.” Although the new brand covers the company’s traditional product range such as files, indexes, account and office books, school notebooks and diaries, its target is different.

Instead of focusing on good quality items with standard specifications and constant prices for all his clients, Bassile will target the low-end buyer. Quest uses 60-gram paper instead of a good quality 80-gram paper, uses smaller-sized paper instead of A4 and lower quality binding and covers. “If people today cannot afford good quality stationery, I’m giving them a choice. We cut corners here and there and offer cheaper prices, even giving discounts for large orders,” says Bassil. “And since the product doesn’t carry our name we protect our image.” The brand now represents 8% of Bassile’s total sales.

And although Bassile’s investments did not come at the best time, they have helped it cut costs by improving on efficiency. In order to satisfy its yearly production of some 2,674 metric tons of products, an employee earning $300 and producing 4,000 items daily can now earn $500 and produce 10,000 items using the new machinery. Speed of production also goes towards better servicing of clients. For example, it used to take the company one month to produce 10,000 notebooks, but now an order of 10,000 privately labeled notebooks can be delivered within one week. Bassile’s competitors have not had that luxury for lack of serious investments in that type of machinery.

Bassile could go a step further by dropping unnecessary employees to compensate for overproduction or to cut costs even further, but it won’t. “We don’t have the heart to do what it takes, which is send a few employees home and stuff like that,” says Bassil.

Additionally, the company needs to compensate for the high hidden costs of storing raw materials and finished products, which run at 25-30% of the total cost. Bassile uses around 800 different types of raw materials, such as paper, plastics, glue, steel plates, just to name a few. Company suppliers have not been able to commit to just-in-time delivery, where the material gets used at the same time it is needed. So when looking at the aggregate between raw materials, storage and finished product stock, they end up with a 1.1 turnover ratio, ratio of goods sold over raw materials and finished goods in dollar value. “For us that ratio is too low, because the quality of some paper adhesive deteriorates, and paper products get damaged from moving equipment for lack of maneuvering space,” says Bassil.

OPP, on the other hand, is fully aware of cost cutting and has set out a plan to streamline operations and management to cut costs by 5% a year, even if it means reducing the labor force while trying to maintain the same efficiency.

OPP approached the economic slowdown differently. Instead of investing heavily in its core stationery manufacturing business, it put money into diversifying. It decided not to build more on producing seasonal goods that create a lag time, but rather move into year-round products. OPP invested $500,000 in 1997-98 to produce computer paper, using available space within its factory. It quickly grabbed about a 20% share of the market, competing with four other producers. It also invested in a sheeting and cutting business, which cuts reels of paper into standard-sized paper used, for example, for photocopying.

Bassile is still standing strong with a wide customer base of about 450 clients, mostly bookstore owners, but also small businesses, banks, insurance companies and other stationery wholesalers, both locally and abroad. It now distributes directly to its customers, doing away with the distributors it used to rely on. This came about partly because it could not reach some areas during the war. In order to maintain a constant price, the company used to take 2% out of its profits to compensate for the distribution costs, but not anymore.

Bassile has also done well in financing half of its investments. While 50% was self-financed, Bassile utilized the Arab Trade Finance Program (ATFP) to secure investment at an interest rate of Libor + 1.5%, now around 6.5%. By comparison, OPP resorted to local bank financing for its expansion program at rates of 8% or more. And for once, some outside forces were there to help Bassile’s business. After a five-year fight lobbying the government, customs on stationery imports went up by 50% last year.

If the economy improves, Bassile will benefit. The company is highly liquid, having the benefit of using the ATFP fund. This is a revolving credit line that finances the company in an amount equal to 80% of its export invoices any year it wants it. Still, OPP has a solid 40% market share in a business that grew with the generations of students using notebooks, note pads and school copybooks with OPP printed in bold.

It might be a good idea for Bassile to concentrate on its strengths in supplying office stationery. Will its ‘monopoly’ be broken up?

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