Money MattersUncategorized

newsbrief issue 12

by Executive Contributor
written by Executive Contributor

The Messiah?

Chafic Muharram, former vice governor
of the central bank, has been asked to
take over the helm of the faltering Banque
Libanaise pour le Commerce (BLC) by the
bank’s general assembly. As chairman and
general manager, it is hoped that he will
steer the financial institution out of what has
been an almost unending series of troubles.

First came the nasty break-up of the
Byblos Bank–BLC merger. Then, what
seemed like a flawless marriage between
BLC and the United Bank of Lebanon
turned into a disaster when the central
bank demanded that Safi Harb, the bank’s
new chairman and the mastermind behind
the merger, get the boot after he was implicated
in illegal money lending.

Confidence has been waning on BLC, a
listed bank on both the GDR market and
the Beirut Stock Exchange (BSE). This comes not only
from the botched mergers. Analysts have
also become disgruntled over the BLC’s tardiness
in reporting its yearly results. They
claim that the bank lacks transparency,
with very little in the way of public access
to the consolidated financial statements for
the recent merger.

According to one analyst, “The appointment of Muharram is what
BLC needs today. He has experience in
the central bank, is conservative and the
bank needs stability. This may bring confidence
back to the bank.” He adds that the
major shareholders were put to the test:
The central bank requested a $40 million
raise in capital and a $50 million subordinated
loan to the central bank, and they complied.

But, throughout the Harb fiasco,
the performance of the bank’s shares has
been dismal, with stocks plummeting 27%
on the BSE and 28% on the GDR market so
far this year.

Holding on

The only closed-end investment fund listed
on the Beirut Stock Exchange suffered
a second disappointing year in 1999. The
value of Lebanon Holding’s portfolio
dropped 13%, from $45.8 million in 1998 to
$39.7 million last year. It started at $50 million
when it was launched in August 1997. Its net
asset value fell from $9.16 to $7.99.

The fund, which invests strictly in local
companies, got hurt the most by its stake in
two industries. Liban Beton, a leading
ready-mix cement company, has been hit
hard by the paralysis in the construction
sector and has suffered heavy losses.
Lebanon Holding also had to write off its
$4.4 million investment in the pipe maker
Eternit, which is filing bankruptcy after
several years of losses.

The bulk of the fund’s portfolio is in listed
banks – such as Banque Audi, Byblos Bank
and Banque du Liban et d’Outre-Mer. But,
despite their solid fundamentals, the banks’
shares, like the remainder of Lebanese
stocks, have been performing poorly.

Lebanon Holding is trying to buck the downturn. In the fourth
quarter, the company increased its stake in
Société des Grands Hotels du Liban
(SOHL), owner of Vendome and Phoenicia
Hotels, and First National Bank. Phoenicia
just opened last month, and, says Khalil
El-Khoury of Lebanon Holding, “It is the only
five-star hotel with five-star service in Lebanon. It
will have excellent cash
flow in the future, and its
stocks will probably
surge.”

But the future of the
fund and its shares, which
dropped 21% in 1999,
remain doubtful. According to one analyst,
“It can only see brighter
days when there is peace.”

A new Bou

Bou Khalil Markets (BKM) will be
adding a fifth supermarket to its chain,
this one in Ras Beirut. The new store –
smaller than the others at 2,800 m² –
is the second
to open in the last five months, following
the opening of a 4,000 m² Bou Khalil in
Tripoli last October. More are planned during
the next five years.

Sales, in the meantime, have been on the
rise for the supermarket chain, increasing to
$15.47 million by June 1999, 17.25%
above sales figures for the same time in
1998. But earnings have been declining,
dropping to $602,000 during the first half of
1999, 17.3% below earnings for the first
half of 1998.

“The chain is undergoing
heavy expansion, bigger than expected,”
says Walid El Khalil, head of the investment
firm Tulip Investments, who helped take
Bou Khalil public when he worked for
Banque Libanaise pour le Commerce’s
capital markets division. “Expenses shoot
up more than revenues during expansion.”

Bou Khalil’s shares have also suffered in
1999, down 17.6%.

A quick and

efficient IDAL,

hopefully

The Investment Development
Authority of Lebanon (IDAL) is trying
to make Lebanon a little more
investor-friendly. The organization has
opened a special office called “One-Stop
Shop,” which will assist investors in
getting through what is seen by many as a
maze of bureaucratic procedures.

IDAL is also planning to set up an
“Investors and Business Information
Center” to provide statistics, economic
data and relevant information for starting
a business in Lebanon.

“It’s a great idea because it will
reduce a lot of the bureaucratic difficulties
and red tape that investors have to go
through in order to invest in Lebanon,”
says Nassib Ghobriel, a Lebanon Invest
research analyst. “The real question,
however, is whether they will be able to
follow through with their intentions.”

IDAL recently announced that the long
delayed Linord project to rehabilitate
Metn’s northern coastal highway, from
Antelias to the Beirut port, will be relaunched
by summer. The project
requires the reclamation of 2.4 million
m² of land, the construction of a new
sewage plant, the development of an oil
storage facility, a marina and a small harbor
at an estimated cost of $550 million.

Last year, when the project was first proposed,
IDAL had trouble finding
investors. It remains to be seen if any of
them have changed their minds.

Top of Form

Gobbled up

Bank of Lebanon and Kuwait SAL
(BLK) may have a new owner.
Jordan’s Al-Ahli Bank, which has five
branches in Lebanon and has been operating
here for 39 years, signed an agreement
to acquire an 85% stake in the financial
institution for $22 million.

The deal, part of
the bank’s strategy to expand in Lebanon,
Jordan, and throughout the Arab world,
will create a medium-size bank with 11
branches, total assets of $250 million and
customer deposits of $200 million.

“When
a foreign bank wants to expand in
Lebanon, the best way is through acquisition;
they won’t be allowed to get a license for more than two branches a year,”
says an analyst at Lebanon Invest.

The
owners were looking to sell at a time Al-Ahli
was shopping around. “After studies
were done, we chose BLK because it’s a
clean bank, with a clean loan portfolio and
high capital,” says Rafic Aramouni, Al-Ahli’s
general manager. “Based on the
bank’s ratios we don’t expect any surprises,
unlike many other banks, and the size of
its staff and the number of branches were
appropriate.”

The bank’s aim, Aramouni
adds, is to become one of the larger financial
institutions in the country. The central
bank has given its preliminary approval to
the purchase and final approval is expected
within weeks.

Bottom of Form

Canning them

kindly

When your business starts suffering
losses, the first thing to do is cut
costs. That often means making the tough
decision to let go of workers. Société des
Ciment Libanais, Lebanon’s largest cement
producer, had plans to lay off 300 employees
after the company’s net income fell
from $14 million in 1995 to a net loss of 1.1
million in 1998.

The news, obviously, was
not greeted kindly by the company’s labor
union, which promptly intervened to try
and stop the move. After a six-hour meeting,
a compromise was reached between SCL’s
management and staff. Instead of layoffs, the
company would offer a cushy early retirement
package to hundreds of its employees,
giving them 36 months’ salaries in addition
to end-of-service indemnities they would
receive from social security.

“There are already nearly 100 people who accepted
the offer,” says Antoun Antoun, head of the
SCL employees’ union.

SCL invested in a
$165 million furnace before discovering
that demand for cement was below expectations.
With construction grinding to a
halt, demand for cement nose-dived, with
deliveries dropping 25%, from 4 million tons
in 1995 to 3 million in 1999. Insiders feel
that the company’s losses in 1999 will be
much higher.

Cyber trading

A new online trading website called
myTrack.com was recently introduced
in the Middle East by Dot-LB, the
agent of Net2Phone. The company is marketing
myTrack in 9 countries: Lebanon,
Syria, Jordan, Kuwait, Egypt, the United
Arab Emirates, Saudi Arabia, Cyprus and
Turkey.

The website requires users to download
special software (5 MB) and open a
minimum cash account of $500. Non-US
citizens are exempt from a tax on profits, but
they are required to open an account at
the Bank of New York for trading on
Nasdaq and over-the-counter (OTC).

Commissions will cost $15.95, and customers
will have to choose between three service
plans ranging in price between $20 and $80
a month. According to marketing manager
Ibrahim Choueiry, Dot-LB’s revenue
will depend on the number of clients it signs
up. So far, the company’s client base has
grown to 200 in 50 days, mostly Lebanese
and Lebanese expatriates in Arab countries.

“We expect to break even in about five to six
months,” says Choueiry.

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Money Matters

Proving to be a threat

by Peter willems
written by Peter willems

Not a bad start.

Only two

years after the

central bank let Credit

Libanais loose in the

market – followed by a

complete restructuring

program (see “Back to

life,” December 1999)it

outshone the leading

banks. Net income

jumped 52.5%, from

$15.l million in 1998

to $23.1 million last

year, while average

profits of the top-tier

banks dropped 3.7%

(Bankdata Financial

Services). Bank of

Beirut came in second,

up 27.6%. Credit

Libanais’ strategy is to

become a strong retail

bank, and results are

coming through. It led

its competitors in

deposit growth and non-interest income increased over 10%,

above the two leaders in retail banking,

Banque Audi and Byblos Bank.

But questions are beginning to surface. Is

Credit Lihanais a threat to the top retai I

banks? Leaping into the market with a

splash soon after Saudi entrepreneur

Khaled Ben Mahfouz bought the bank is

one thing; maintaining healthy returns in the

years to come is another. “The test is not

today,” says Ziad Maalouf, vice president at Middle East Capital Group. “The test is

this year and the next few years to come.”

According to Spiro Youakirn, senior

manager of corporate and project finance at

Schroders, Credit Libanais is well positioned

to compete in retail business. It has

a far-reaching branch network with 49

outlets and is highly liquid – 69% of liquid

assets to total assets. Youakim argue~ that

in the long term, “Retail banking revolves around retail lending, and once economic

conditions improve, Credit Libanais will be

able to he a major lender.”

Credit Libanais has already taken a step

forward in lending. Last year its loan portfolio

shot up 43%, “Most of our loan

growth has been in small consumer lending,”

says Andrew Stephens, head of retail

banking. “What we tried to do is speed up

the decision process so the customers enjoy coming to us,

rather than taking a

week or more to get a

loan. For small loans,

we can virtually agree

on the spot.” It also

cleaned up the faulty

loan portfolio inherited

from other banks it

acquired under the central

bank’s control. By

collecting $4.3 million

and writing off bad

loans, its non-performing

loans to gross loans

dropped from 26% in

1998 to 11.8% last

year, which is around

the average for the

leading banks.

Audi is still considered

the leader in producing

products and services:

“It always pays for

Audi to be the innovator

and to be the first in the

market,” says one analyst.

But Credit

Libanais is not far

behind, having already developed insurance,

leasing, phone banking, free Internet and ecommerce

facilities. Already the leader in

credit cards, its number of cards issued and

points of sale through businesses increased

20% last year.

Will it whip out more products this year?

“Enough is enough for now,” says

Stephens. “Customers can only take so

much. They mostly want fast, efficient and

value for money services. They don’t like you to mess around with their money too

much.” Instead, the bank will focus mostly

on cross selling existing products, which

fits in with its restructuring program to be

more sales oriented, turning its outlets into

points of sale.

Credit Libanais is also looking into

acquiring the American Express outlet in

Lebanon, which has over $80 million in

assets, within the next few months. “It’s a

good small bank that has a small portfolio

with prime, high net worth customers,”

says Credit Libanais’ chairman and general

manager Joseph Torbey. The bank knows

American Express well: It has an exclusive

partnership with the American bank as the

service provider for it~ cards, accepted only

through Credit Libanais’ network.

But some analysts see a weakness Credit

Libanais bas to work on to be a real competitor

in retailing and maintaining steady

growth. “The new upper management that

was acquired recently is high caliber, but

human resources and services at the outlets

have to improve,” says one analyst. “If you

want to establish yourself as a retail bank, it’s

the service and the quality of staff behind it.

Credit Libanais is slower in tenns of training

and improving the quality of service,

especially compared to Banque Audi.”

Stephens replies: “We’ve recognized it and

we’re doing something about it. Training

began 12 months ago, and it will go on and

on.” Another issue is cost control. Its costto-

income ratio came out at 60.5% in 1999,

higher than Banque du Liban et d’Outre-Mer

(44.3%), Byblos (52.8%) and Audi

(56.2%). But with increasing efficiency

being a part of the restructuring program,

Credit Libanais’ cost-to-income dropped

7 .2 % from 1998, the largest decrease

among the top-tier banks.

After an initial burst of growth, it will be

interesting to watch how Credit Libanais

does from here on out. But the bank has an

idea of where it is heading. “What Credit

Libanais started two years ago was a statement

that we’re open for business,” says

Stephens. “We’ve put the building blocks in

place and we’ve done some good business.

We’re going to build on those building

blocks, and I see no reason why we can’t

sustain steady growth and be prepared to

take on opposition.”

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Money Matters

Streamline to the bottom line

by Peter willems
written by Peter willems

Expectations for most industries are
fairly routine. When sales sink in
the middle of an economic slowdown,
earnings should follow suit. Not so
at Uniceramic, Lebanon’s leading ceramic
tile manufacturer, whose sales dropped 9%
in 1999. Surprisingly, its sour sales performance
did not drag down profit growth;
instead, net income inched up 4.3%, from
$1.05 million in 1998 to $1.09 million.

Uniceramic’s formula was simple. With
revenue boxed in, the manufacturer has
been going through a major overhaul to
reduce costs across the board. A restructuring
program began in 1998 with the help of
Consulting & Development Services
(working with other big names, such as
Société Nationale d’Assurances and Obegi
Consumer Products) and Dr Christoph
Ackermann, a German expert who has 40
years of experience in tile manufacturing
and now sits on the board of directors. The
program pinpoints every aspect of the
company’s activities to raise efficiency and
enhance productivity (see “Back in the
black,” May 1999).

The results of the makeover have come
through. Cost of goods sold per m²
dropped from $3.65 in 1997 to $3.32 last
year, while general expenses declined from
$744,000 in 1998 to $689,000, down
7.4%. On the selling side, Uniceramic
changed its strategy from being mostly an
exporter in the early 90s to focusing on the
domestic market. In 1994, business abroad
took up 70% of sales. Last year local sales
accounted for 88%, which helped decrease
cost of sales by 24.6%. Its workforce was
also streamlined, down from 340 to 300.

“Sales going down and profits on the rise is
a rare occurrence,” says Fadlo Choueiri,
Arab Finance Corporation’s (AFC) project
officer. “Sales in tiles are directly correlated
with the performance of construction and
real estate. It’s cyclical. Had Uniceramic not
implemented a restructuring program, it
would have really suffered. But since they
did it, they have performed well, working
against the tide.”

What will Uniceramic do to continue
improving as Lebanon moves into another
year with little sign of economic recovery?
For one, the restructuring program isn’t
finished, according to Nabil Ghorra,
Uniceramic’s assistant general manager.
“Thirty percent of restructuring will be
implemented this year,” he says. This will
include additional cost reduction in
administration, financing and production.
“We haven’t seen all the benefits yet,”
adds Ghorra.

On the sales side, with costs down, some
prices will be lowered. But one objective has
been to take advantage of better quality and
more variety in tiles. With a broader range
of value-added products coming out,
Uniceramic will slap on a higher price tag,
increasing its margins. AFC predicts that the
firm’s average selling price will move up
from $5.78 per m² to
$6.1 per m² this year.

In the bigger scheme of things, trouble-shooting
to enhance efficiency and production
will be a never-ending process. (More proof
of Uniceramic’s drive to improve: To
interview Ghorra, EXECUTIVE had to call
him in Fontainebleau, France, where he is in
an international executive program at
INSEAD, a famous business school.)

To buffer itself against the difficulties of
the local market, Uniceramic is looking
abroad again. Its goal: move exports up
50% in 2000, from 12% to 18% of total
sales, aiming to reach 30% by the end of
2001. It plans to increase sales in markets it’s
familiar with, like Saudi Arabia and France,
and move into the US market for the first
time. Uniceramic is also working with the
United Nations to finalize a deal to export to
Iraq this year.

In the short term, exporting will not be a
tool to generate far greater earnings. With
higher cost of sales and stiff price
competition overseas, exporting goods will
put a squeeze on margins, and as Ghorra
says, exports will initially break even.
Uniceramic’s strategy is to increase its
presence in other markets and help offset the
chance of a further downturn in the local
market, keeping production at current levels
or increasing (cost savings by economies of
scale) and selling off excess inventory.

News announced last month could give a
boost to exports. Tiles were left out of the
Lebanese-Syrian free trade agreement when
it went into effect on Jan. 1, 1999. This left
Uniceramic and Lecico to face 130% tariffs
in moving their products next door. The two
countries agreed in mid-March to make up
lost ground on reducing tariffs 25% each
year applied to other products. Custom
duties were dropped 50% and will reach
zero in 2002.

Although Uniceramic has been waiting for
this, it will take time to see real results. The
tax on tiles this year is still a hefty 65%.
Even though Uniceramic’s quality should
stand out in the Syrian market, it will be
asking for a premium. It’s estimated that its
prices will be 15% higher than tiles produced
in Syria, and Syrians are notorious for being
price-sensitive consumers. Nonetheless,
Uniceramic does see Syria as a market full of
potential. In about four years, “The Syrian
market could absorb 25% to 30% of our
maximum production,” says Ghorra.

Uniceramic has weathered the storm, but
it has other challenges to face. It’s no
longer alone in making changes to deal
with harsh conditions. Lebanon’s only
other tile maker, Lecico, invested nearly
$900,000 in new modern equipment last
year (see “The right flush?” February
2000). Also a producer of sanitary ware,
Lecico holds about 15% of the tile market
compared to Uniceramic’s 33%. Georges
Ghorayeb, Lecico’s general manager,
predicts that the investment will reduce
costs in manufacturing tiles around 18% to
20% this year.

But Uniceramic appears to have the
upper hand. It has a wider range of tile
designs and sizes and it began focusing on
efficiency earlier than Lecico. Ghorayeb
says that tile sales showed losses last year.
(Lecico broke even on overall sales, of
which sanitary ware accounts for 70%.)

“Uniceramic was really smart in having
planned ahead of time to better reshape its
position in the economy,” says Choueiri.
“We can see what happened to Lecico –
losing money on tiles because it waited to
start making changes in 1999 with a
chance to see improvements in 2000.”

Ghorayeb is expecting tiles to break
even or see a glimpse of positive returns this
year. But he admits it will not come from
grabbing a larger market share. “With a
reduction in costs making the business
more efficient, we will be more profitable,”
says Ghorayeb. “We used to produce
1 million m² of tiles and we’ll still
make 1 million m² this year.”

More important than Uniceramic’s local
rival is foreign competition. The company
had set a goal of capturing some of the
market from foreign heavies to increase its
share from 30% in 1998 to 50% in 1999.
But products from European manufacturers,
especially in Spain and Italy, are still
Lebanon’s favorite, not to mention an
increase of tile imports from Jordan and
Saudi Arabia. The market share for imports
squeaked down slightly from 1998 to 1999,
while Uniceramic’s moved up to just 33%.

One of the reasons the local manufacturer
had problems capturing more of the market
was keeping its prices constant, according to
Ghorra. Its plan to move some prices lower
and beef up value-added products may make
a difference, aided by a more aggressive
marketing campaign. The goal to take 50%
of the market is still there, but has been
moved back to 2002.

AFC firmly believes that Uniceramic’s
restructuring will allow it to show steady
earnings growth this year. AFC’s projection
is a 16% increase, up to $1.3 million.
“Regardless of the economic conditions, we
anticipate a constant growth in profits,”
says Choueiri.

He also stresses that if there’s an economic
upswing in the near future, there will be a lot
of room to grow. Not only would construction
pick up, but also 50% of the estimated
200,000 unoccupied apartments still
require tiling. Increased sales coupled with
streamlined business would push profits
up considerably.

Investors have shown little interest in
Uniceramic’s stocks, even though it has
braced itself well for the construction market
hitting the dirt. With the Beirut Stock
Exchange dead and attention focused on
Solidere and the banks, Uniceramic’s
shares haven’t budged since July 1999.

Uniceramic cleared its debt with IFC last
year (a $6 million loan issued in 1993),
which will allow the manufacturer to pay
dividends in the future.

Its P/E ratio is on the high side at 19.2, but
is forecast to drop to 16 on AFC’s projected
earnings, based on the current share
price of $1.91. One positive note:
Uniceramic is one of the most transparent
non-bank companies on the BSE. (It
reported last year’s earnings at virtually
the same time as the banks, while the others
take their sweet time.)

It’s anyone’s guess when the economy
will recover to help boost Uniceramic’s
sales. But one thing is certain: Uniceramic
has shown that revamping operations and
cutting costs can lead to selling less and
making more.

Top of Form

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Money Matters

Games people play

by Peter willems
written by Peter willems

“It was a real mess,” describes Elie
Ghorayeb on what he saw when he
first came in as Casino du Liban’s
chairman and general manager in March
1999. His objective: do a clean-up job. He
concentrated heavily on cost cutting that
included reducing the casino’s bloated
workforce to 1,270, laying off 65 employees.

He also took a look at a number of contracts,
dealing with services such as cleaning
and maintenance, renegotiating seven and
canceling three. It is estimated that changing
the contract structure will help the casino save
about $3.5 million every year, with the overall
spending cuts adding up to savings
between $5 million and $6 million annually.

Ghorayeb acted quickly on the gambling
parlor’s debt as well. Two-and-a-half years
before the deadline, the casino paid back
$15 million, the remainder of a $50 million
syndicated loan used to rebuild the casino
after the war, which left the institution in the
clear. Ghorayeb was also wary of some of
the staff’s behavior. He implemented a
strict policy to make sure everybody
showed up for work, threatening to let go of
those not following through, and helped
the government uncover five employees
involved in embezzling funds.

The casino’s earnings last year were
impressive. Pre-tax profits jumped 50%,
from $13 million in 1998 to $19.5 million.
The casino estimates net income at $16.7
million, close to a 40% increase from $12
million the year before. Not a bad job,
right? Wrong, according to the board of
directors. Early last month, the board threw
a punch and knocked down the chairman’s
powers. He can no longer sign or tamper
with contracts or recruit new employees
without the board’s approval.

According to board members, it’s not
exactly what the chairman did, but more the
way he did it. They complain that
Ghorayeb was operating as a loner, keeping
a distance from the board and leaving them
out in the cold as to where he was heading.

“At the beginning we delegated some powers
to the chairman, but after one year we
discovered things that were not properly
administered in a diplomatic way,” says
Majid Joumblatt, a board member. “The
board does support reducing costs where
feasible. He reduced contracts but changed
them without consulting the members of the
board. He would only tell us something
very briefly during our meetings and didn’t
give any information whatsoever, only bits
and pieces. The information was not systematic,
informative or documented.”

Some at the casino see what prompted the
board to jump on Ghorayeb differently.
One source claims that at the start the
chairman was given the right to make decisions
and implement them on his own. “He
was supposed to present his plans broadly,
not specifically. Now they want to get into
every detail.”

Sources at the casino believe that some of
Ghorayeb’s moves irritated members on the
board. They suggest that some board members
may have had ties with those involved with
the contracts that were renegotiated or canceled
and that Ghorayeb stripped several members of
their second jobs working for the casino,
which is not allowed.

It is also believed that what brought the
struggle between the alienated parties to a
head was a particular contract that
Ghorayeb really wants to change. Abela
Tourism Development Company (ATDC),
a joint venture between Abela Group and
London Clubs International, was brought in
for technical management when the casino
was back in operation a little over three
years ago. Within the ten-year contract,
ATDC is responsible for looking over a full
range of activities, including gaming, theaters
and restaurants.

The payment structure for ATDC (percentages
of different revenues and earnings before interest expenses
and income tax) has been calculated as a
yearly average of $6 million (see table).
The casino also pays $1 million each year for
18 employees working for ATDC.

“It’s a big problem paying $6–7 million for
a counterpart doing I don’t know what,”
says Ghorayeb. A major beef, according to
one official, is that ATDC is not providing
enough services for the amount paid. He
cites only two employees working under
ATDC, outside the 18 on the casino’s payroll.
London Clubs is not being aggressive in
bringing in big foreign players and ATDC is
only giving advice that doesn’t offer
enough support.

Ghorayeb’s target is to bring ATDC’s income
down to reasonable terms. Including the $1
million payroll, it should be reduced to
between $1.5 million and $2 million,
allowing the casino to save around $5
million a year.

But some argue that, even though the
price looks high, it’s hard to estimate what
it should be. Abela Group is well known as
a multi-purpose contract company, especially
in working with restaurants and
catering. It has 33,000 employees in 40
different countries, covering territories
from North America to Southeast Asia. As
for London Clubs, it is famous internationally
for running gaming. According to a
financial analyst, whether it’s doing the best
job or not, it’s important just having the
name attached to the casino. “The casino
can’t lose London Clubs.”

Hacham Tabbara, another board member
and a regional manager for Abela Group,
goes further. He claims that Ghorayeb
doesn’t listen to suggestions given by ATDC.
“We submitted to him a written study that
ATDC is able to increase turnover by 20%
in 2000, with an additional cost of $1
million for renovations, such as tables,
increasing surface for slot machines, and
so forth,” he says.

It is estimated that revenue decreased
slightly from 1998 to 1999, which should
give credit to cost reductions increasing
earnings. Increasing turnover coupled with cost control
could push profits higher. “But he
refused,” says Tabbara. “He wouldn’t even
discuss it.”

From one source at the casino, Ghorayeb
will not let up; he plans to go on pressing the
issue to renegotiate the ATDC contract.
Talks between Ghorayeb and Abela are far
from inviting. And if there is no agreement,
Ghorayeb could take the case to an arbitrator,
which would take years and be costly.

Along with infighting, intrigue and uncertainties
(sex, lies and videotape extraordinaire),
there is also an ongoing question
about whether the casino can do better.
It’s obviously a money machine but has potential
to be a booming cash cow.

To help feed its revenue stream, the government gave the
casino a monopoly on gambling until 2026 in
return for 30% of gaming revenue (excluding
slot machines) in the first ten years, 40% in the
next ten years and up to 50% for the last ten.
It has little competition in the region — one in
Palestine and clubs in Egyptian hotels are the
best-known competitors.

But it has obstacles. Auditing firm
Deloitte & Touche estimates that the casino
can run on 1,150 employees, still 120 less
than what it has. Although Ghorayeb
claims that there has been no political pressure
preventing him from cutting the workforce,
the previous chairman, Habib
Letayf, once confessed that he was forced
to hire up to 300 employees.

In 1998 the ex-chairman was beaten up by armed marauders,
assumed to be operating for a political
power group, forcing the hiring of its own
people. This year Ghorayeb is considering a 5% reduction in staff.
But even then, the number of employees will be above
Deloitte & Touche’s benchmark.

Another weakness is its marketing campaign.
Thirty percent of the customers are
foreigners, but with little competition in the
region, the casino could push foreign
clients higher. This brings infighting back
into play.

The board claims that it established
a committee to study marketing
abroad four or five months ago. “I don’t
think Ghorayeb was able to listen at all. He
neglected everything,” says one board
member. “We could be involved in promotions
overseas much more and raise foreign customers much higher than 30%.
This is one of the most important tourist
institutions in Lebanon.”

But some argue that there’s a risk factor
attached to attracting tourists to a land still
at war. “It’s not easy to promote tourism
with no peace,” says Ghassan Matar, once
an independent consultant for the ministry
of tourism. “Israeli planes still provide fear
and you can lose tourists.”

On the service side, others argue that the
casino is hindering its progress by not following
the Las Vegas model. The key is that
non-gaming revenue is not where money is
made (about 95% of the casino’s revenue
comes from gaming); it’s only to attract customers
to gamble their money away.

“A hotel, a helicopter taking a gambler from the
airport to the hotel, cheap dinners, free
drinks — all this is crucial for the casino,”
says Nicolas Sawan, head of trading at
Lebanon Invest.

Some say that due to its monopoly and lack
of competition, the casino can get away
without pampering clients with food and
drink, but they are adamant that a hotel is
essential. In its contract with the government,
it’s supposed to build a hotel by 2001.
The casino hasn’t taken one step in that direction.

For the sake of survival (the casino would
have to pay hefty penalties and eventually
lose the contract), the ministry of finance
granted the institution a two-year extension,
according to Tabbara. Yet, putting together
any plans is still on the back burner.

Even though the casino is making
money, financial analysts don’t want to
come near its shares traded on the over-the-counter
market (and most don’t want to be
quoted directly, since it is considered a
political animal). One analyst estimates
that its earnings could have easily doubled
by now if it had put in the proper facilities,
moved heavily into marketing and reduced
costs even further.

The Financial Funds Advisers (FFA) report
published in July 1998 projected net income
to reach $29 million in 1999.

Another complaint is that the casino is not
transparent enough. “The way the balance
sheet is constructed raises a few questions,”
says one analyst. “The problem is
that the casino is not open to answering
questions. Detailed information on financials,
operations and management structure
are not readily available.”

More caution comes from the casino being
tied to political meddling. “A lot of politicians
have their fingers in it,” claims an analyst.
Better yet: “Everybody knows the casino is
corrupt,” says one broker.

Its shares reached a high point in July
1997 at $340 (from its starting point at
$148 in September 1996), but worked
their way down to $195 in mid-summer last
year and haven’t moved since. Now that its
debt is paid off, there’s a chance that the
gambling house will dish out dividend
payments in the future.

Could this create movement on the shares?
“It would please the shareholders but not much movement of the shares, because of lack of transparency
and not being as profitable as it
should be,” suggests an analyst.

The unanimous recommendation among analysts
questioned: gamble at the casino, but
don’t bet on it.

It’s also difficult to bet on
who is going to win in the
boxing arena. Many were
surprised that Ghorayeb
didn’t resign when the
board took away some of
his authority. But as one
analyst says, “He is clean
and he did a good job by
reducing costs, paying off
the debt and bringing up
profits.”

Ghorayeb faced a
mess when he first arrived, but
he has a bigger mess to
deal with now.

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Feature

Back in Iraq

by Robert Tuttle
written by Robert Tuttle

August 1990, Iraq invades Kuwait. Within days, Iraq is encircled in one of the most extensive economic blockades ever imposed on a country. Almost overnight, Lebanon loses what had traditionally been one of its most lucrative markets for manufactured goods. Iraq absorbed more than a quarter of Lebanese exports in the early 1970s and as much as 75% of transit exports. Even during the war, though statistics are not available, it continued to be an important destination for locally produced goods.

Four years after the Gulf War, relations between Beirut and Baghdad sank to a new low. When some Iraqi opposition members were assassinated in Beirut, the Lebanese government blamed Iraqi intelligence agents and promptly severed all diplomatic ties. With sanctions still intact, Lebanon sent a paltry $1,278 worth of textiles, probably donations of clothes, out of the more than $733 million in total exports, to Iraq in 1996.

Fast forward to February 2000. Nasser Saidi, minister of economy and trade, accompanies a delegation of more than 93 Lebanese businesses and 250 businessmen to Baghdad, where he and his Iraqi counterpart, Mohammed Mehdi Saleh, open an exhibition of Lebanese industrial products. It’s the sixth exhibition in Baghdad involving Lebanese business in two and a half years and Saidi is the fourth Lebanese minister to visit.

The port of Tripoli has been designated by the Iraqi government as a receiving station for an order of sugar exports to Iraq. Lebanese exports to Iraq are up to $22 million for 1999, making it the 12th most important export destination. But most businesspeople feel that these figures are underestimated and that much of the trade is not recorded on official statistics because it passes via a third country. The real number is probably double that figure and many expect it could double again by the end of this year.

Nearly two dozen Lebanese companies have opened offices in the Iraqi capital and warming relations have led to the restoration of diplomatic ties and the reopening of both countries’ embassies.

What happened? In the last few years, regional political developments have smiled kindly on Lebanese-Iraqi relations. Mounting sympathy in the Arab world toward Iraq’s plight and a sense that the time had come for the sanctions to be lifted has encouraged Arab states to reestablish trade links with Baghdad. For the first time in 15 years, Syria’s relations with Iraq have warmed and a common border for trade was opened, a move that no doubt gave Lebanon a green light to repair its own relations with Iraq. And, perhaps most significantly, growing international concern for the suffering of the Iraqi people prompted the United Nations (UN), in 1996, to start allowing Iraq to export a limited amount of oil in exchange for humanitarian goods.

By 1996, some of Lebanon’s business leaders were looking towards their eastern neighbor. Within one year, the first contracts were being signed and the first delegation of nearly 180 businessmen boarded buses and headed out across the Syrian desert to participate in the Baghdad International Trade Fair 1997. The rest is history.

Iraq is still under UN sanctions, and it must purchase the bulk of its imports using revenues generated from the yearly $11 billion in oil exports allowed under the oil for food program. Only $8 billion of that amount can be used to buy goods. But it is also a market of 22 million consumers with very few functioning industries of its own. Once again, Iraq is partly open for business and Lebanon’s struggling industries want a piece of the action.

Obegi Consumer Products, producers of such popular brands as Persil and Al-Wadi Al-Akhdar, is selling detergents there. Cosmaline Industries has been busy selling toiletries, while Uniceramic, Lebanon’s largest tile manufacturer, has struck its own deals.

Georges Ghorayeb, general manager of Lecico, manufacturers of sanitary ware and tiles, sees the Iraqi market as a salvation for his struggling business. He has seen profits shrink to zero in the last few years. Sales on the sluggish domestic market are down about 17% of what they were three years ago and a flood of cheap imports has resulted in a 40% drop in exports to his number one market – the Gulf. Just last month he signed his first contract with Iraq in over ten years to supply 10,000 pieces of sanitary ware – toilets, sinks and bidets – for about $250,000. Ghorayeb believes he could sell double that amount by the end of the year.

Before the invasion of Kuwait, Iraq accounted for about 30% of Lecico’s total revenues. If sanctions were lifted, he says, “I expect that the Iraqi market can absorb 1.2 million to 1.5 million sanitary pieces a year. We could get one fifth of that volume.”

Mohamed Ghaddar, managing director of Ghaddar Machinery, one of the country’s leading generator manufacturers, credits the Iraqi market for helping to turn around a rapid decline in sales. In 1994, while the local economy was booming, Ghaddar’s revenues were around $15 million. Facing a slump in local demand, revenues nosedived to $10 million in 1995 and down to $8 million the next year.

With the local market saturated with generators, Ghaddar looked for ways to beef up exports. He found salvation in Iraq. In 1997, he signed a $1 million contract with the Iraqi government and delivered the goods one year later. Last year, he sold $4 million worth of generators. His revenues shot up to $9 million in 1997, $12 million in 1998 and last year were back at $15 million. Ghaddar’s exports have increased from 5% of revenues in 1994 up to 60% in 1999. Iraq represents his largest foreign market, absorbing about 35% of exports. Next year, he aims to sell $10 million to $15 million worth of goods to Iraq.

But as good as it may seem, there are problems. Ghorayeb complains that margins are often as low as operating at cost. Ghaddar isn’t happy because of the bureaucratic barriers. All his deals have been with the Iraqi public sector. Since Iraq is still under sanctions, the contracts must be approved by committee 661 of the UN Security Council, whose job it is to ensure that what enters Iraq is truly for humanitarian purposes.

“They [committee 661] are asking bizarre questions. For example, they ask us why this engine has a nozzle. There are no diesel engines in the world that do not have a nozzle,” says Ghaddar. Contracts that should take three weeks for approval are taking months. Ghaddar says that more than $4 million of his contracts have been put on hold, one for more than a year and a half. Others complain of similar problems.

Last year Lebanese businesses submitted more than $70 million worth of contracts to the UN, according to Ghazi Yehia, secretary general of the Lebanese Industrialists’ Association. “But only $35 million actually went through, the rest got held. They didn’t get approved by committee 661,” he says. A list of contracts, submitted during phase six of the UN oil for food program, which started in May of last year and ended in November, showed that only 44% of 36 contracts from Lebanon had been approved. Most of the rest – including a number of generators – were put on hold. By contrast, for Egypt, 69% were approved. Repeated attempts to contact both the Dutch and US representatives of committee 661 for a response to these complaints proved unsuccessful.

But faults within the UN system are not the only problem. Certain industries have benefited from the Iraqi market more than others. Lebanese generators are selling briskly in Baghdad – representing as much as one third of exports – because they are in high demand and competitive with generators from other countries, says Ghaddar. But his generators are sold there with margins as low as 5%.

But for less value-added products, where factors like transportation and labor costs make a difference, local manufacturers are finding Iraq to be as tough a market to compete in as any. “Exporting to Iraq is very difficult. Prices are becoming competitive. Everyone is going to Iraq,” says Ziad Bekdache, general manager of Oriental Paper Products, who only recently started to look seriously at the Iraqi market. Prices are so low that if he starts trading with Iraq it will be at cost.

Countries neighboring Iraq have other advantages. Under the oil for food program, all Iraq’s petroleum exports must go through Turkey via a pipeline. But Jordan, the number one exporter to Iraq, has a protocol which allows traders there to barter goods directly for discounted oil, bypassing committee 661. There is also rampant smuggling of oil via Turkey and Iran. Lebanese companies do not have the privilege of accepting oil. “We cannot sell for oil because Syria would not allow it to go through,” says Abdul Wadoud Nsouli, president of Nsouli Trading Company.

Jordan also benefits from having a committee 661 office on the ground, says Fares Saad, general manager of the Industrial Marketing Company. That makes processing contracts much easier and quicker. Some Lebanese have exported to Iraq via Jordan for that reason, but the cost of shipping is higher: $2,500 to send a truck with 25 tons of goods compared with $1,500 to send a truck through Syria. For Bekdache that is too much to export paper.

He has plans to participate in an upcoming tender with the Iraqi government for 5,000 tons of notebooks. But with prices so competitive, he has no illusions about making money even if he wins contracts. “I am willing to sell at cost just to have a presence there,” he says.

That is prompting many to enter the market now. This year Lebanese business will submit more than $100 million worth of contracts to committee 661 for approval, says Yehia. Assuming that just half that amount is exported, Iraq will fall into Lebanon’s top four export markets. Last year, Saudi Arabia bought $71 million worth of Lebanese goods; the UAE bought $54 million, France $52 million and Switzerland $45 million.

But traders say that if sanctions were lifted, Iraq could absorb up to $250 million per year in Lebanese goods – close to 40% of total exports. “If sanctions are lifted we’d have a bigger share of the market and quicker procedures in fulfilling the contracts,” says Ghaddar. But the issue of sanctions will have to wait for regional political developments to smile kindly on Lebanon.

Breaking new ground

Fares Saad, general manager of the Industrial Marketing Company, could be called a trading
pioneer. If one person can be credited with opening Iraq in the last few years, it is him.

In 1996, when Iraq might as well have been the moon as far as most local traders were concerned,
Saad struck up a conversation with a delegation
of Iraqi businessmen at a foodstuff trade fair in Tripoli. “We
sent a letter to the Iraqi minister of commerce, saying that
we would like to participate in a trade exhibition in
Baghdad and see the return of relations,” he says.

One year later, in October of 1997, he organized and led
the first local delegation of traders to Iraq to participate in
the Baghdad International Trade Fair. “Ninety-one companies
participated and about 25 sold products at the
exposition. The Iraqi market was thirsty for goods.”

He has since organized the participation of Lebanese delegations
in five more trade fairs in Baghdad, three of them special
Lebanese trade exhibitions. It wasn’t easy. “At the time,
those in authority did not encourage us in regard to this
idea because Lebanon had cut relations, because of the
sanctions and because exports were tough and no one
could do it,” says Saad.

But the trade fairs have been one of the keys to the Iraqi
market in the last few years. Saad now has three goals:
the return of commerce between the two countries, the
restoration of Lebanese industry to its previous position
in the Iraqi market and an end to sanctions. “It’s not possible
to allow the Iraqis to live in such conditions,” he says.

He feels that he has achieved his goals. “Relations between
Lebanon and Iraq have been restored, the embassy has reopened, Lebanese industry
has returned to the Iraqi market and many contracts have been completed. And thirdly,
many Lebanese have gone to Iraq to protest against the sanctions,” he says. “Now the sanctions
have started to collapse.”

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Uncategorized

A bloody mess

by Kirsten Vance
written by Kirsten Vance

Who would ever imagine that
sifting through someone else’s
garbage might create a ruckus.
But that’s exactly what happened <mark style=”background-color:#fff59d”>when</mark>
EXECUTIVE toured Saida’s medical facilities.
Syringes, used blood bags, tubes and IVs lay
loose and in untied bags in the bin behind
Dalaa Hospital. At Labib Medical Center,
syringes and medical gloves littered the
ground, while needles poked out of bags
inside the bin in the parking lot across the
road. There, after just one photo, hospital
security <mark style=”background-color:#fff59d”>showed</mark> up and a scuffle ensued
over the camera. After extracting the security
from the car door, the photographer and driver sped away, while this reporter ran
behind. A third, Hammoud Hospital, transported
its own waste to the city dump.

Strikingly, one of the scavengers who
inhabit Saida’s dump found the contents of
those bags too much to stomach.

Unfortunately, this is an all too common
example of how medical refuse is dealt with
in Lebanon. In the absence of any proper
national policy or waste management system,
hospitals are left to do what they will or can
within their own means. Of Lebanon’s
160 hospitals about 80% are private, with the
majority relatively small in size. That fact
alone could make enforcing a certain code of
conduct difficult. A full 75% of hospitals do
not even know how much waste they generate,
according to a nationwide survey carried
out by Dr Rita Karam, who has a PhD in
hospital waste management. Hospital risk
waste, which requires separate treatment,
includes such things as body parts, infected
materials, syringes, chemicals, radioactive
material and pharmaceuticals. Issa
Consulting and UK-based Environmental
Resource Management (ERM), <mark style=”background-color:#fff59d”>who</mark> are
working as consultants for the government,
estimate that out of a total 20,000 tons of hospital
refuse a year, about one-fifth can be considered
risk waste. That’s tiny compared to the overall daily volume of 3,000 to 3,500
tons of municipal waste. “It’s not the
amount, but the way that it’s handled and
treated that’s dangerous,” says Alissar
Chaker, environmental specialist with Issa.
“The problem is that when [the risk waste]
isn’t segregated it contaminates other waste
streams.” Some 73% of hospitals surveyed by
Karam responded that they do segregate risk
waste, while Dr Faouzi Adaimi, president of
the Syndicate of Hospitals of Lebanon,
claims that all practice segregation. “But still
you need to know if the segregation is done
properly,” says Karam. “Even if hospitals do
practice segregation, they don’t have an ideal method of disposal.” Segregation
should be practiced at each stage of storage,
transportation and treatment as well as
involve proper packaging and labeling.
Some hospitals don’t even have a budget or
waste officer responsible to follow the issue.

Currently <mark style=”background-color:#fff59d”>there</mark> is no regulation governing
how hospitals should manage their waste,
says Naji Kodeih, toxicology specialist
with the ministry of environment. “The
hospitals do what they want. In some
instances there is partial good practice,” he
says, naming the American University
Hospital and Hotel Dieu as examples.
“Partial good practice, but not complete.
This is not bad considering the prevailing
conditions in Lebanon.” But for some that is
simply not acceptable. Zeina Al-Hajj, who
heads the Lebanon chapter of Greenpeace,
refers to the situation as “complete chaos.”

When the old state-owned incinerators
were shut down in 1997, most medical
centers were no longer able to dispose of
their waste in this way. Meantime Sukleen,
which covers greater Beirut and Mount
Lebanon, refuses to collect medical waste
as it is only equipped to handle domestic
waste. “Instead of <mark style=”background-color:#fff59d”>hospitals</mark> investing in
clean technology since then, they have
continued with the same technology,” says
Al-Hajj. Some hospitals have their own
incinerators, but the conditions of those
are questionable due to the lack of control
and their location in residential areas. AUH
acknowledges that its current incinerator is
not suitable, but considers it the lesser of
several evils.

Karam’s survey found that just 14% of
hospitals incinerate their risk waste (see
chart). A large portion is disposed of
through the municipal waste system or by
burning in open fires. Illegal dumping has
been a problem, as has disposal through private
contractors. In many cases it is anybody’s
guess exactly where the waste ends
up. Some claim that medical waste also
finds its way into Sukleen bins regardless of
the company’s stance. “There’s no way we
should accept that medical waste is mixed
with domestic waste in the streets of Beirut
or Lebanon,” says Sarni Rizk, director general
of Rizk Hospital. But according to
Adaimi, most hospitals do sterilize <mark style=”background-color:#fff59d”>their</mark>
waste before disposal, as the equipment is already available for operating rooms. “It’s
not sufficient, I admit, but it’s not the monstrosity
that it’s made out to be,” he says.

In her study, Karam found that “with some
exceptions, the hospital waste management
situation in Lebanon is very far from being
satisfactory and needs to be reconsidered.”
That’s very similar to the findings of a wide-ranging
report on the state of the Lebanese
environment that was published by the ERM
in 1995. Despite its age, the report is still widely
referred to because of its comprehensiveness
and a general consensus that the situation
has not improved. At the time, ERM noted
that “most of the [hospital] waste generated
is collected and disposed of by municipal collection
systems, carrying serious risk of epidemic
and infection.” Indeed infection can be
spread through medical waste, but the source
of a disease is often difficult to determine.

While acknowledging that preventative
measures would be ideal, Dr Walid Amar,
director general of the ministry of health,
plays down the gravity of the situation. He believes there is unnecessary panic due to the
attention the issue has received, while
Adaimi talks of “psychological pollution”
because of the nature of hospital waste.
“Hospital waste accounts for barely 1% of
hazardous waste,” says Adaimi, pointing to
other sources of waste, such as industrial and
slaughterhouse waste. “It’s exaggerated.”

Regardless, due to its potentially risky
nature, management of medical waste
shouldn’t be left to happenstance. In fact the
issue has been on the table since the early
1990s. About four years ago, the Council for
Development and Reconstruction (CDR)
estimated that implementing a solid waste
management system, including hospital,
would cost $135 million. The ERM-Issa
study on hospital waste was completed in
February 1999. And now the CDR is looking
at implementing separate projects for medical,
slaughterhouse and industrial waste.
The medical waste management project, the
more advanced of the three, will encompass
hospitals, dental offices, pharmacies
and other refuse of a similar nature, according
to Sarni Ferghali, the CDR’s program
coordinator for solid waste management.

The ERM-Issa study proposed a central
incinerator with a capital cost of $8.53 million
and annual operating costs at
$903,000, or $676 a ton. The other option
is thermal disinfection, which would
require a small incinerator for certain
waste. The capital cost is estimated at
$5.58 million, with annual operating costs
at $757,000, or $485 a ton. The creation of
a proper sorting, collection and transportation
system would bump those figures up
higher. The estimated cost to hospitals is $3
to $5 a day per occupied bed, which in all
likelihood would be passed on to the individual.
Adaimi argues that waste management
should be a service covered by the
municipal taxes that hospitals already pay
and that the patient should not be made to
bear the cost. Government officials, however,
counter that convention is for the user
to pay for waste management and that
those generating hazardous waste must be
responsible for its elimination.

But before worrying about the amount of
funding required and who should foot the
bill, the problem will be in building a consensus
between the various parties
involved in the decision-making process.
Though the study concentrated on incineration,
at the request of the CDR, it is still not
clear that it will be the chosen option. The
three parties involved in the decision are at
odds. The ministry of environment wants an
incinerator that burns at a higher degree than
the one proposed, while the ministry of health favors thermal disinfection.

Proponents of the latter say it makes dealing
with risk waste possible at the hospital
level with smaller equipment, eliminating
the need for a separate collection system and
the air pollution associated with incinerators.
On the other side of the fence, Kodeih
points to the fact that <mark style=”background-color:#fff59d”>thermal</mark> disinfection is not sufficient for about 6% to 8% of risk
waste, which must be incinerated.

Incineration is generally viewed as the
more tried and tested technology, which
has been made cleaner today. But Al-Hajj
criticizes the government’s entire waste
management policy for being based on
incinerators and landfills, whereas the current
world trend is to reduce and recycle
where possible.

Amidst the controversy, some hospitals
have decided to find their own solution. Last
year Rizk Hospital replaced its 40-year-old
incinerator and has begun implementing
waste management protocols in line with
ISO standards in hopes of being certified in
2001. “The idea for a centralized system is
great, but the major hospitals can’t wait
for the government,” says Sarni Rizk, the
hospital’s director general. He’s not alone.
AUH is having a new <mark style=”background-color:#fff59d”>incinerator</mark> assembled
that will meet the standards of the US-based
Environmental Protection Agency.

The hospital had tried to implement thermal
disinfection, but found such small-scale
equipment of the new technology unsatisfactory.
The major hospitals are considering a joint investment to use thermal <mark style=”background-color:#fff59d”>disinfection</mark>
on a larger scale as a temporary measure
until the government plan is implemented,
says Azmi Imad, the director of AUB’s
environmental health and safety.

Eventually the Lebanese authorities will
have to come up with a national solution, as
many hospitals won’t find the funds or the
will to make such investments. Ferghali
says that waste management is a priority
and the CDR is pushing for the three parties
to come to an agreement. “It’s not
always easy because of the NIMBY effect.
People say ‘that’s good, but not in my
back yard.’ But things have started evolving
in the right direction,” he says. Once an
option is agreed upon and financing
secured, Ferghali estimates that the system
will take about 18 months to two years to
implement. In other words, hospital risk
waste will continue to be mismanaged at
least until 2002, and then only if a decision
is made quickly and proper implementation
and control follow. The Lebanese authorities
don’t have a good track record in fixing
what ails this country. So, don’t expect
a miracle cure.

Such a waste

Perhaps the only thing that has saved Lebanon from
being turned into an environmental disaster is the fact
that it’s not a highly industrialized country. It certainly
couldn’t be put down to sound management strategies on
the part of the government or individual diligence and care
by all industries. Both of those are sadly lacking. The fact is
that unless polluting industries are forced to stringently abide
by specific regulations, more often than not they won’t.

Discussions on dealing with industrial waste are still ongoing
between the ministries of environment (MOE) and industry,
the municipalities and the Lebanese Industrialists’
Association (LIA), despite the number of reports produced
since the mid 1990s. The ministry of industry and petroleum
produced its own in 1994, ERM followed suit in 1995, while a
massive report was prepared by Dar Al-Handasah and
another by a Dutch consulting firm a couple of years ago.

Anwar Berberi, president of the LIA’s environmental division,
contends that the reports were a waste of time and money as
they were conducted by non-experts and based on some inaccurate
data. Berberi, who has patented his own liquid waste
management system, is angry that this government hasn’t
involved the industrialists or the local experts in the process.

Hazardous waste was estimated at about 18,500 tons a
year in 1994 and projected to increase to 64,500 by 2020, according to the Dar Al-Handasah report. The largest
quantity is forecast for Mount Lebanon (see chart). ” In
Lebanon the quantity is small and the degree of toxicity low,
but there are some compounds in enough quantity to
represent a potential risk for serious pollution,” says Naji
Kodeih, toxicology specialist at the MOE, who estimates
hazardous waste at 10,000 to 15,000 tons.

In general, industries discharge waste with little – if any –
treatment into rivers, lakes, the sea, ground or sewage system,
though Kodeih notes that some of the big industries
do have their own treatment facilities. Berberi agrees, saying
that both liquid waste and hazardous solid waste are
“extremely mismanaged.” Many point to the tanneries as
the worst offenders, because of the heavy metals produced.

Kodeih says the government is working with large
enterprises such as the Lebanese Chemical Company and
Eternit, which still uses asbestos. Cimenterie Nationale
alone has spent $12 million to become more environmentally
sound. There is also a unit within the ministry that is
working on eliminating CFC emissions.

But finding the right fix across the board will not be easy.
Berj Hajian, the MOE’s director general, declined to meet with
EXECUTIVE to discuss delays in finding and implementing a
solution. One problem is the disorganization and distribution
of industry in Lebanon, says Kodeih. “It’s a question of
zoning. You have small industries in residential areas, and a
low awareness among the general population, industrialists
and decision-makers about the hazards of some waste produced.”

Currently there are some 22,000 industrial units scattered
around the country. It is estimated that over 70% are
backyard industries employing less than five people, while
just 2% are considered to be large, employing over 250. The
highest concentration of industry is in Mount Lebanon (see chart). And many industrial units are located outside
designated industrial
zones. There is a proposal
to cluster each type of
industry together so that
they can share the same
infrastructure, including
waste treatment, and
benefit from economies
of scale. But that is still
controversial. According
to Berberi, it’s a question of so many different parties wanting to take control. To
date, nothing has been decided. There are also few recycling
facilities as many have been forced to shut down due to economic
difficulties.

Many raise concerns about the level of pollution in certain
areas. But so far there has been no serious study on the effects
of industrial pollution on the environment or public
health. There is a high level of bronchitis and respiratory
diseases in Chekka and the population is affected immediately
around the plants in Zouk and Sibline, according to
Mutasem El-Fadel, professor of environmental and water
resource engineering at American University of Beirut.

The Dar Al-Handasah report proposed three alternatives
for managing each industrial wastewater, solid waste and air pollution.
It estimated the
national cost at $0.24
per cubic meter of
wastewater and $16.5
per ton of solid waste,
while preferring pre-treatment
of liquid
waste and segregation
of hazardous waste at
the factory. “The problem
in reality is not whether we have standards or not but
the means of implementation, this is the real problem,” says
Kodeih. One problem is financing: The MOE has one of the
lowest budgets of all ministries – it has been allocated just
$2 million this year. But it must be strengthened to act. Until
then, any plans or legislation will just continue to collect dust.

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Cover story

Back on the radar screen

by Hadi khatib, Peter willems & Kirsten Vance
written by Hadi khatib, Peter willems & Kirsten Vance

T here was little hope for TMA’s survival

just a few years ago. Once one

of the world’s premier air freight

carriers, reaching the fourth position in

cargo capacity per mile hefore the war and

covering five continents, TMA was struggling.

It had lost most of its lucrative destinations

in the US and Far East and was left

with five aging B707s, down from 20

spanking new planes at its peak. The company

landed deep in the red. Headed by

Farid Raphael, chairman of Banque

Libano-Francaise, the Lebanese Air

Investment Holding (LAIH) bought 74% of

the airline from bankruptcy court in 1993.

In I 996, Raphael asked a little-known con-

L sultan!, Fadi Saab, to perform a complete

audit and create a plan to salvage the company.

Saab accepted and when he brought

in his results, Raphael said, “thanks, now

please implement it.” Hence the appointment

of Saab as chairman and president of

TMA in November of the same year.

Did Raphael pick the right man for the

job? Although TMA has not released 1999

figures, results indicate a clear improvement

since Saab took over. He claims to have

moved the company into the black in the last

two years. Revenues grew from $25 million

in 1996 to $30 million in 1998. Leased

hours decreased by 12% to 67% of total

hours, while scheduled hours increased by

11 % to 31 %, representing 52% of revenues,

or $15 million. And as the number of

points of origin increased from 15 to 21 and

destinations went up from 13 to 17, the

load factor (cargo to capacity) increased

from 72% to 82%. That put TMA in the

uumber five spot in cargo load factor

among airlines under International Air

Transport Association, the world governing

body for air transport.

So how did he do it? In parallel with

Saab’s appointment and in accordance

with his restructuring plan, there was a

decision in 1996 to increase the airline’s

capital by $40 million. The injection is to be

subscribed by LAIH, with the first half

paid at the start of 1997. ”The increase in

capital stopped the heavy financial burden

of accumulated debt, as this money went to

covc:r loans that were costing us interest,”

says Saab. Ogden, a US-based conglomerate

with specialization in aviation, will participate

with a minority interest on the

remaining $20 million. Ogden has agreed to

invest in upgrading airport-handling facilities

and to enter joint-venture deals with

TMA on projects like the Beirut airport

free zone and Klayaat airport.

Next came a reduction in the airline’s

operating costs to increase efficiency. First

the workforce was reduced from about 650

to 400, followed by a cut in administrative

and general fixed costs. The result was a cost

saving of $2.5 mi.Ilion between 1996 and

1997. “If you take care of your pennies, the

pounds will take care of you,” says Saab,

adopting the English proverh. Another

important cost-cutting measure came by

turning fixed costs tnto variable ones, with

the appointment of general sales agents,

or GS As. TMA had direct offices in places

like Germany, Japan, Hong Kong, Saudi

Arabia and Spain, which proved valuable

during TMA’s heyday. But when business

didn’t justify the expense, maintaining

those offices was an expensive proposition.

Jnstead GSAs are remunerated only

based on performance. With 14 offices

worldwide and 27 GS As operating another

35, TMA has managed to cut promotion and

sales expenses by 14% and general administrative

costs 17% from 1997 to 1998.

Finally, Saab took an overall look at

reducing fuel burn, maintenance, crew positioning

as well as landing and handling

charges. For example, double landing –

making a short stop on route to a destination

is now avoided. Instead of going from Paris

to Amsterdam and from Amsterdam to

London, TMA established hubs in Paris and

Amsterdam. Cargo from various European

markets is trucked to those locations.

Saab’s performance so far indicates that

he was the right choice for the job. And his

background explains part of the success.

This AUB graduate in economics and statistics,

received his MBA in finance from

France’s INSEAD, became vice president at

Bankers Trust in New York in charge of

international investment management

group for Middle East and Africa. He later

set up his own bnsiness, handling corporate

restructuring and venture capital for international

companies before returning to

work as a consultant in Lebanon.

But the situation at TMA isn’t exactly picture perfect. There is a.,problem with

IATA hooking agents, who are responsible

for booking cargo on outgoing flights.

About two-thirds of the 90 agents don’t

even work with the local cargo carrier.

Although Beirut is a transit stop for TMA on

its way from Europe to the Gulf and vice

versa, where the ratio of incomhig to outgoing

goods is nine to one, it is still an

important market to secure as TMA’s base

of operations. TMA claims to handle 30%

to 40% of the annual 50,000 tons of air

cargo moved in and out of Lebanon. That

would translate into about half the load it

handled during its boom years.

But some agents openly wonder who is

giving TMA cargo. “They need a fleet and

a schedule, which they don’t have,” says

Robert Douna, air freight manager at

Gezairi Transport and former shift manager

at TMA. Douna is one of the IATA

agents that books cargo on passenger airlines

like Air France (AF), MEA or KLM;

these have planes that can carry cargo in

their belly or larger ones that are used as

com bi es (half passenger-half cargo).

Bellies can take up to 4 tons of cargo on

average, while combies take up to 34 tO,!_lS

for Boeings and 16 tons for Airbus planes.

“The competition is offering exact deliveries,

frequent flights, more destinations and

money back guarantees if the cargo is not

delivered on time,” says Ousama Jureidini,

deputy general manager for Travel and

Cargo Divisions at Saad Transport, who is

a booking agent and a former TMA employee. Saab admits that exports from

Beirut to Europe are a problem for TMA:

“It’s a technical stop to unload some cargo

or to change crews.” TMA’s flights into

Beirut are scheduled from Europe on their

way to the UAE and Africa. Because

planes arriving from the UAE are usually

full and exports are minimal, there are no

scheduled flights to Europe. And with just

four operational planes, some of which are

chartered or leased, the frequency of

flights is inconsistent.

But the cargo TMA does pick up from the

30 agents it deals with in Beirut tends to

come from dedicated long-time clients.

Fouad Naja, CEO of Lebanese Trading and

Contracting, regularly gives TMA anywhere

from 5 to 20 tons of cargo containing

fish and textiles, and charters flights to

Europe. “TMA is so dynamic. They can do

miracles and Saab follows up on every kilo

of cargo we give him,” says Naja, who has

been a client ofTMA for at least nine years.

Meanwhile, Saab wants to offer alternative

solutions to increase local agent participation.

He’s looking at grouping them to

cooperate on TMA business so the cargo

carrier could appropriate scheduled flights

from Lebanon at good rates. Though this

won’t be easy, considering the competitive

nature of the business, some agents

already see the benefits of teaming up with

TMA. Mouhamad Jamil, owner of

Oumaya Transport and Trading Co., ships

about 3 to 6 tons of cargo of shoes and textiles

to UAE each week. ” It’s true that

TMA had more connections and more

flights, but they are intent on making this

company a true partner with its local

clients,” he says. In another move to

increase exports from Lebanon, Saab has

signed agreements with ministries, the

chamber of commerce and industrialists.

On top of the infrequent flights, agents

have other complaints about TMA’s services.

“There is a lack of information

between the sales representatives, and I

don’t trust the fragile labor situation they

have, where strikes can occur like in the

past, causing us many headaches,” says

Larene Haddad, manager at All Transport

Agency. Surveys done in 1997 and 1998 by

Information International indicated a list of

complaints, ranging from irregular service,

to lack of information, and more emphasis

on international flights to the detriment of

local clients. Recognizing this, Saab has

worked on intensifying the company’s

public image. He created a customer service

division in late 1998 and personally trained

his sales representatives to develop a team

spirit for better cooperation. He also developed

an IT system called ‘Super Cargo’

through an agreement with SETA. “It will

enable the clients to ge.t their own airway

bill, do transactions with us electronically,

trace and track shipments; it will solve a lot

of service problems,” says Saab, who has

invested more than $200,000 so far in setting

up the system. He also indicated that the

last strike was in 1996, and that labor relations

have since improved.

Saab will have to keep a close eye on other

airlines that arc competihg against TMA’s

route – mainly from Europe to the Gulf

and back with some reaching the Far East as

their ultimate destination, while TMA only

operates in the Far East on a charter basis.

Lufthansa, AF and Cargo Lux all have

scheduled flights in Beirut aJld price competition

is fierce. It is so fierce that

Lufthansa’s weekly freighter to Beirut will

most probably be discontinued, according

to Youssef Khatib, cargo sales

manager. He blames price dumping

from Cargo Lux, a

Luxembourg-based company.

(‘,in-,o I .m, initi,ill.v m,irlt>. ao-TP.Pments

to use TMA flight numbers,

later establishing its own

flight rights in 1995 and bringing

in two freighters a week.

Cargo Lux is a worldwide

cargo operator with over 14

hours of flight hours a day, one of

the highest rates in the world.

Operating out of an extensive

hub system, its unit cost is at least

30% to 40% less than any other

freighter operating in Lebanon.

“They are relatively new in

Lebanon and are usiug their

economies of scale to bring in

and take out cargo at low prices

and gain · market share,” says

Saab. TMA’s ability to stay competitive

in Lebanon is its

21,000m2 airport facilities.

Customs check points are located

within their facilities and there are areas for storage and han- dling, including cold storage for medicine

and perishables, a strong room for valuables

as well as equipment for hazardous materials

and for livestock. TMA is the only

cargo airline besides MEA, which handles

AF planes, with facilities to handle 707s and 747s. Those fees can run up to $1350 per

landing, according to Lufthansa, who uses

the facilities.

But can TMA deal with Cargo Lux price

slashing? According to Saab, the human factor

is the determining element in staying

competitive. “Cargo Lux is a mega-carrier

with no direct relationships with agents; we

on the other hand show flexibility and a

working relationship which caters to our

client’s changing needs,” says Saab.

Looking at the global picture, TMA

looks miniscule compared to other world

airlines. Commercial and freighter lines

such as Lufthansa, Cargo Lux, AF, KLM,

American Airlines compete on hub systems

that extend worldwide. Having refocused

operations on Paris

and Amsterdam as its main

hubs, TMA compensates

with 16 cooperation agreements

on certain destinations.

MEA, for example,

gives cargo to TMA for

flights to Amsterdam, while MEA takes TMA cargo from Europe to Kuwait.

TMA will soon beef up its fleet. There are

plans to lease medium-haul aircraft with a

capacity of 40 to 60 tons to replace the current

B707s and small feeder planes to take

care of the retail need of the market. These

new planes (one medium and one small in

2000, one medium and two small aircraft in

2001) will allow them to reach Far Eastern

destinations, while TMA waits for the US

ban to be lifted. Saab plans to strike more

alliances in order to extend TMA’s

reach in Africa and Asia. Following

last year’s transportation agreement

between Lebanon and Syria, TMA

signed a deal with Syrian Airways,

which doesn’t have a cargo department.

TMA will lease them planes,

operate joint flights and fly directly to

Damascus, starting next fall. “The

Syrian market is healthier than the

Lebanese market, with more balanced

trade and ex ports that justify

round trips,” says Saab. To better

serve the Syrian market, Saab hopes to

create a multi-model transportation

system via agreements with sea and

road transport companies.

However, freighter business is not

like it was during TMA’s boom years,

when passenger airplane capacities

were small, rendering cargo carriers an

important tool. “Today a freighter can

carry up to 50 tons, but a 727 passenger

plane can carry 18 tons, plus it

has several scheduled flights,” says

Sarni Abi Saab, cargo manager at

MEA. MEA net cargo income is around $17 million compared to TMA’s $24 million. Some $6 million –

20% ofTMA’s revenue -is generated from

pure lease contracts and don’t count as

actual cargo. “There’s not the advantage to

freighters like there was in the past,” says

Abi Saab.

Though growth is limited, the first steps

have been taken to get the company off

the ground again, but will it ever be tbe

TMA of old? “We’re a small fish in a big

pond, and our aim is to become a big fish in

a big pond,” says Saab.

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Best Sellers

Doing it right

by Gareth Smith
written by Gareth Smith

“I’m not really a developer,” says Massaad Fares.
Neither is he a broker and he has no background in
construction. His own, stylish office at the bottom of
Rue Foch is far from the image of a samsaar (real estate broker).
So what is he? “I am a technician,” he replies. Fares pinpoints
demand and finds the liquidity to produce the supply: he doesn’t
supply unless he has good reason to think that demand exists. Meet
a new breed in Lebanese real estate agents. For Fares, real estate
is not so much concrete as cash flow: location is not something to
stick a sign on, but just one part of a package.

Fares is the man behind the Atrium, “the only building in downtown
that currently meets international requirements,” says Michael
Dunn of the international consultants Healey & Baker. The reason
is simple. Besides its prime location on the corner of Weygand and
Maraad, the Atrium offers the only large, open-plan offices in
downtown. Hence, the Atrium’s 6,000 m² of offices and 3,000 m² of
retail are selling at some of the highest prices in Beirut. Fares studies
demand first. This, in itself, makes him different from many in
the market where it is estimated that there are more than $8 billion
worth of vacant apartments and prices are not adjusting to decreasing
demand. “The real estate sector in Lebanon is marked by several
inefficiencies, with a notable mismatch between supply and
demand, [and] sticky prices despite the current slump,” reads an
HSBC report released last summer. But the dark cloud has a silver
lining. “Despite the inefficiencies,” the report says, “the market hides
some profitable opportunities.”

Unlike some developers who threw up buildings willy-nilly during
the country’s post-war boom, Fares spent nearly a year doing his
homework. He looked at many locations in downtown before settling
on plot 448, housing a burned-out building at the junction of
Weygand and Maraad. The site had some important advantages. “It
was across the street from the souks and adjacent to the banking street.
I thought that if the banks came back, the area of their expansion
would be Maraad-Foch-Allenby,” he says. More importantly,
unlike elsewhere in the locality, Solidere had no plan to renovate the
building. Fares would not be constrained by the existing structure.

Fares realized that large open-plan offices, suiting the up-to-date
requirements of many international companies, would be rare in
Beirut Central District, at least until new purpose-built buildings
appeared much later elsewhere in downtown. Many of the available
plots in Maraad-Foch-Allenby were 200-400 m²; plot 448 was
fully 1,560 m². “There are customers for black shoes and customers
for white shoes,” says Fares. “Small offices might be suitable for
architects but not for brokers, it depends on the kind of business.
Many people don’t want to be going up and down floors every
time they need to speak to a colleague. Modern companies like purpose-
built offices where you can easily put in dividing walls or take
them away.” Another important component that is next to impossible
in restored buildings is the amount of underground parking,
150 spaces on four levels.

Fares carried out a tour de table to raise the capital from Saudi and
Lebanese investors for the Atrium, under the holding company
Prime Group, of which he was managing director with two partners.
The Atrium bought the land in September 1996 for $8 million, the first
plot that Solidere sold. The building’s design, by British architect Terry
Farrell and Lebanese Nabil Azar, was based around an atrium, an
empty, central vertical space that allows light to reach everywhere
inside. But if the product was good, the timing was far from ideal. Enter
recession. Real estate prices had already peaked by 1996, and demand
was falling by the time downtown came on stream. “The recession of
1999 was at the worst time for us, just as we were delivering,” says
Naaman Atallah, Solidere’s real estate sales and leasing manager.

Land and construction costs for the high-tech Atrium were $22 million,
putting Fares under pressure. “The economic downturn made us
a little nervous,” he admits. But, having done his homework, he is in
better shape to survive the hard times than other developers. All the retail
at the Atrium has been sold at a top price of $9,500 per
m², around double Solidere’s
target figure for downtown.
Circle Hitti’s move to the
Atrium from Verdun was a
huge boost for the downtown
as a whole. Most of the
Atrium’s retail has gone to
jewelers keen on its location
opposite the gold souk.
Jewelers have also taken the
bulk of the first-floor offices,
usually in lots of 300 m².

Fares is negotiating with Merrill Lynch over one whole floor, and with
a “leading British company” on another. His list price for office space
is $3,000 per m², some 17% above Solidere’s target prices. Two months
ahead of the building’s June hand-over, sales have not been as fast as
Fares once expected, but good considering the vast amount of empty
real estate across the city. “There are too many amateurs around. We
are having fewer inquiries now, but they’re more serious, for example
from large advertising and insurance companies. I think we’re looking
at an internal rate of return over five years of 26%.”

Fares’ next project seems as startlingly obvious as the Atrium.
He has bought a plot of land next to the new HSBC building in
Minaa El Hosn, in the vicinity of the St Georges and the
Phoenicia hotels, where he will construct a block of furnished
apartments for short-term let. The target market will be foreign
business people on assignment, consultants, for example, and
expatriates returning home during the summer. The 20 units will
be both one-bedroom and two-bedroom. Its total floorspace will
be 2,300 m², including retail on the ground floor, and it will have
1,000 m² of underground parking. To buy the land, Fares had to
track down 14 different people who had inherited it from the two
deceased original owners. He won’t disclose exactly how much
he paid for the property, but he concedes it was “close” to the
Solidere asking price, which is $1,050 per m² of built-up area. This
would put the purchase in the region of $3 million plus at least
another $3 million for construction.

Fares is optimistic that he will
recoup his costs. “Furnished apartments fetch up to $150 a day. On
an optimistic scenario, I will recoup the money in five years. On
a pessimistic scenario, it will take seven.”

Fares’ next projects are likely to take him further away from what
is seen as “real estate” in Lebanon. Fares plans on moving more into
asset management for large property owners. He believes there is
potential too in working for banks, especially where they have taken
real estate as security for lending. “We can clean up portfolios,” he
says. “Banks often don’t have this expertise in house. I managed
portfolios in Europe and the United States. I want to enhance our
base of clients.” Another area he wants to expand is sales and marketing.
Prime Group marketed Mouawad Group’s 1,200,000 m² of
land at Tel al Ghazal, above Jal al Dib. Most was sold as plots of
land, but Prime also marketed Parc Jaden, Mouawad Group’s
residential project on part of the land, and successfully sold all the
units (apartments between 200 m² and 350 m² at $800-$900 per m²).

Successful businesses are not afraid of change. The Atrium will
be the last project under Prime Group. The shift away from construction
towards sales, marketing and portfolio management
means the three partners are parting company. Fares will continue
working with Samir Barraj in Prime Realty, the holding group for
the Minaa El Hosn furnished apartments project, while Joseph
Mouawad leaves to continue work more closely linked to construction.

Fares’ emphasis on movement and flexibility is new in a
country where real estate has been seen as family-asset management.
“No developer should proceed just with his own money,” he says.
“They should leverage their investment, sell their mortgages and
move on.” For Fares, the future of real estate is as an investment vehicle,
and not as bricks and mortar.

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Best SellersUncategorized

Power play

by Samia Jouzi
written by Samia Jouzi

Abdul Jessani is reveling in newfound
independence. “Any profit
or loss is now all ours,” says the
confident first chairman of Unilever
Levant. Jessani came to Lebanon two years
ago to set up a regional subsidiary of
Unilever, the world’s largest producer of
branded products, including Lipton tea,
Signal toothpaste and Lux soap. Global
revenues totaled $45.8 billion last year.
Jessani’s arrival followed a massive corporate
restructuring of the company.

Decisions concerning international markets
were moved from the European
boardroom to the regional headquarters.
The UK-based Export Division, previously
responsible for handling regional markets
through a myriad of local distributors, was
dismantled. Today, Unilever supplies the
capital, key human resources and global
brand strategy while the local outfits are
responsible for marketing strategies and
turning profits in their respective territories.

Jessani now sits at the helm of Unilever
for Jordan, Syria and Lebanon, where he is
responsible for the performance of 16 key
brands. The firm’s rise or fall in this part of the world is his responsibility and Jessani
relishes the challenge. His sales target for
the Levant is $150 million by 2003, up
from less than $20 million in 1998, a very
ambitious goal considering that the region
is in the midst of a recession. That figure is
based on expectations of grabbing at least
25% of the $600-million Levant market
for product categories where Unilever
competes here. So far he is on target, having
increased sales by 200% in the first
two years.

How did he do it? Jessani reduced
Unilever Levant’s portfolio of brands from
44 to 16, to focus on brands that have the
greatest potential for growth. Products like
Ragu spaghetti sauce, Timotei shampoo
and Gibbs Sport aftershave were dropped.
The move preceded a similar restructuring
by the mother company. Over the next five
years, Unilever will reduce its brand portfolio
from 1600 down to 400.

“Our experience has shown that, when we
focus on a more limited number of brands,
we excel. If you have big brands, then you
have an advantage of scale in terms of production
and marketing costs and an advantage
in distribution. If you look at our big
brands, you notice that they are more profitable,”
says Jessani.

Unilever has boosted local manufacturing
for specific ‘champion brands’ products,
thereby reducing import costs. Some new
products have also been added to the local
manufacturing line-up.

Two years ago, Unilever manufactured
from one factory in Lebanon producing
only Lifebuoy soap. But since Jessani’s
arrival, the company acquired a second
factory. Now the company produces Lux
soap, Comfort fabric softener, Jif, Sunsilk
and Organics shampoo. In Syria, where the
company manufactures Sunsilk shampoo,
Omo and Surf laundry detergent and
Signal toothpaste, it has increased its production
of Sunsilk from 200 to 1000 metric
tons in the last two years. Unilever has
a total of six factories in the Levant.

Jessani has also streamlined the manufacturing
operations by reducing the number
of work shifts, changing the plant layouts
and machinery, designing systems
that reduce wastage and reorganizing loading
and unloading procedures. “We have cut a lot of costs at the factory and from the supply
chain,” says Jessani. With manufacturing
costs reduced, the company has been
able to reduce prices on brands like Omo at
a time when sluggish economies have cut
into people’s purchasing power. In Syria, the
shop price of the 2.7kg pack of Omo laundry
detergent was cut to 235 Syrian
pounds, just 10% more than local brands
and 20% cheaper than the only other foreign
brand produced under license in Syria,
Obegi’s Persil. But Jessani stresses that
price cutting must be selective so as not to
harm brand image.

Unilever Levant has also begun offering
more affordable options. About a year ago,
it started importing Good Morning, an
olive oil based soap, which is manufactured
at its sister company’s plant in Egypt
and is 40% cheaper than Lux. According to
Jessani, the brand has proven to be a strong
performer in Syria because it is less expensive
and superior to local competitors.

The company is also reorganizing its
imports, which include Dove soap,
Impulse deodorant, Close Up toothpaste,
Lipton tea and Vaseline. The breadth of
Unilever’s network can make imports a
more viable and cheaper alternative than
manufacturing. “We went through our
inventory across the world and checked
which brands were the most relevant for us,
which would suit our requirements best,”
says Jessani. For example, he found that the
cheapest way to supply the Jordanian market
with Organics shampoo was to import it
from Saudi Arabia, where it is manufactured. A trade agreement between those
two countries means that tariffs are near
zero. Unilever has also changed the marketing
strategy of some key products, like
Lipton tea and Vaseline.

So far, Jessani’s measures to boost sales
have had mixed results. On the positive
side, the market share of Lux soap has
increased in Lebanon from 8.6% in the
spring of 1998 to 10.3% by the fall of last
year, according to a retail audit conducted
by AMER Research. (AMER’s bi-monthly
retail studies were taken from surveys of
medium-sized supermarkets and did not
include statistics from hypermarkets or
cooperatives prior to 2000). The company
made this gain by keeping the price of Lux
down and hiring former Miss Lebanon,
Joelle Bohlok, to promote the product.
“They pushed Lux into the top three in the
soap category in Lebanon. They used to be
well behind,” says Georges Obegi, president
and CEO of Obegi Consumer Products. As
producers of everything from Persil laundry
detergent to Fa soap, the Obegis are one of
Unilever Levant’s main competitors.

Today, says Jessani, Unilever is the
Levantine leader in the sale of personal
wash products. With Dove covering the
premium market, Lux covering the middle
ground, and Lifebuoy and Good Morning
at the bottom end of the market (see table),
Unilever had carved out a 19.7% share of
the Lebanese soap market by October of
last year, according to AMER. This compares
with a 15.7% market share in early
spring of 1998. By contrast, the share of
Procter & Gamble (P&G), with their
Camay and Zest brands of soap, declined
from 26.5% to 17.3%.

In Lebanon, the company has also managed
to push up the local market share of
Comfort fabric softener from 48.5% to 56.2%
in the same time period. By manufacturing
locally, Unilever has drastically
reduced shipping costs, which were high
because of the bulkiness of the products. In
Syria, says Jessani, sales of Sunsilk shampoo
have increased nearly ten times while in
Jordan it’s the leading brand with a 22.5%
market share.

But in fact, not all
Unilever bets have
paid off. While demand for Sunsilk
in Jordan and Syria
has been strong, the
brand’s performance
in Lebanon
has been disappointing.
According to
AMER, the brand
controls just 1.5% of
the market. Results
were so poor that
Jessani was recently
forced to relaunch
the product.

Organics shampoo,
another major Unilever brand, has
made some gains in Lebanon and Jordan, but
is still struggling with less than a 7% share in
both countries.

“Organics achieved some market share
gains in Lebanon, but not as much as they
had been expecting,” says Nazar Najarian,
the general manager of Cosmaline, a Sarraf
Group company. “The brand’s message,
‘health from the roots’, is not unique.
Procter & Gamble has already used it. It
made Unilever look like imitators, not
innovators.” Locally, Unilever has a long
way to go if it wants to challenge P&G’s
near dominant position in the shampoo
market. The three Unilever brands of
shampoo, Sunsilk, Organics and Timotei,
control just 7.4% of the market, compared
to P&G’s 36.7% with Head and
Shoulders, Pantene and Pert Plus.

By its own admission, Unilever needs to
pay more attention to the lucrative detergent
business in Syria. It already cut the price of
Omo but it’s still not clear whether the
move has helped the brand retain its estimated
15% share of the market against a
strong push by Obegi to increase Persil’s
5%. In Lebanon, where a tiny number of well-established brands dominate the market,
Unilever has decided against entering
the race for the time being. “Unilever is not
a competitor. Persil, Ariel and Bold have
90% of the market,” says Nadim Tabet,
managing director of Transmediterranean
that distributes P&G products. Only in
Jordan has the company been successful in
marketing detergents.

Unilever’s
more middle-range brand Surf, with a
12.4% share, is the
third most popular
detergent, behind
Sar with 20.2% and Persil at 13.2%, according to AMER’s figures.

Coupled with Omo’s
7.1%, Unilever has
the second best selling
portfolio of detergents there.

Jessani might
introduce new products
to the market, though he declined to say
which ones. The Levant market for all
product areas where Unilever international
competes is about $1 billion, compared to
the $600-million market Jessani is currently
fighting over. Bringing in a few more key
products could provide a boost.

Despite Unilever’s strength as a multinational,
the future won’t be an easy ride for
Jessani. Competition in the region is getting
more fierce. L’Oreal has opened its own
offices in Lebanon and there are strong
rumors that Colgate-Palmolive will follow
suit. P&G reached an exclusive local
distribution agreement with the Joud trading
company in Syria six months ago.
Joud has assembled and trained a 100 person
sales and distribution team and has a
sales target of $10 million for this year.

Jessani is also looking east.
Unilever’s sales are divided about equally
between the three countries. But with a
population that is nearly double that of
Lebanon and Jordan combined, Jessani
feels that Syria really represents the greatest
potential for the future. All that is needed
now is for the economy to liberalize.
Jessani is betting it will.

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Best Sellers

One step ahead

by Hadi khatib
written by Hadi khatib

Changes are afoot in the country to
the east. A serious debate is underway
in Syria – one of the last bastions of
Soviet-style central planning – about economic
liberalization, opening up borders and
making it easier for foreign companies to
invest. Two years ago, the country signed the
Arab free-trade zone agreement, which will
require it to reduce trade barriers on other
Arab states’ goods to zero within a decade.

Syria is also considering entry into the
European Association Agreement, which will
require tariffs on European goods to be
phased out over a ten-year period. Free trade
spells trouble for an array of inefficient public
and private sector companies, which have
been living off the luxury of high import barriers.

In the global economy, only the fittest survive,
and there is one Syrian company that is taking
heed. Joud, one of the largest trade and manufacturing
firms in Syria, with over
1,500 employees and annual revenues
in excess of $115 million, has
proven itself capable of adapting to
change. Whenever a new opportunity
crops up, Joud takes advantage
of it. And now it is getting
ready to compete in a market-driven economy.

Established in 1933 by Mohammed Joud,
an orphan who traveled between Syria and
Lebanon trading apples and flour, the company
rose from humble beginnings and now
commands a hefty portfolio of business
activities. It is one of the country’s biggest
traders in foodstuffs, animal feed, steel,
wood and heating equipment. The company
is the official importer and distributor of
Goodyear and Fulda tires and manufactures
Mandarin, Syria’s number one soft drink.

Joud also produces a range of home appliances,
including refrigerators, washing
machines, gas and electric ranges and
microwaves under the Penguin, Hi Life and
Riviera brand names.

How did the company get so big, especially
in an economy under heavy state control? By
anticipating the market and being the first to
take advantage of new opportunities. Today,
many of Joud’s most lucrative lines of business
are in areas that were in the strict
domain of the public sector. In 1975, when
the government opened up the manufacturing
of refrigerators to the private sector,
Joud wasted no time stepping into the business.
It formed a partnership with Penguin,
another private firm, built a factory and
within a year had rolled its first refrigerator
off the assembly line. In 1982, the line of
products was expanded to include freezers,
washing machines, gas and electric ranges, all
under the Penguin name. With demand rising,
a smaller second factory was opened in
Latakia in 1984.

In the early 1990s, two new opportunities
arose. The Syrian government passed
investment law number ten, which made it
cheaper and easier to import industrial
machinery, and began phasing out the use of
CFC (Freon)-producing appliances. Joud
spotted an untapped market. It wanted to use
the new investment law to build the country’s
first factory capable of producing appliances
compliant with the new regulations, but
its partner Penguin was not interested. “We
couldn’t reach an agreement with Penguin to
move to a bigger plant, and we felt we had to
satisfy the demands of the market, so we went
solo,” says Farouk Joud, general manager of
industrial operations. Joud formed another
company called Riviera and launched
Hi Life, Syria’s first brand of CFC-free
refrigerators and the first local manufacturer
to become ISO 9002 certified.

Today, Joud’s home appliance division
earns $25 million in revenues per year.
Thanks, in part, to a $450,000 per year
advertising budget, Joud claims that both its
Penguin and Hi Life brands control 30% to
35% of the 100,000-unit-per-year refrigerator
market. Its competitors, Al Hafez and the
state-owned Barada, each control a further
30% share, although Al Hafez says it produces
60,000 refrigerators a year (see “Chillin’
with the Big Boys,” February 2000). Joud also
maintains that its Riviera washing machines,
produced under the license of Italian manufacturer
Zerowatt, have carved a commanding
70% market share, and its microwaves,
despite having been in the market for only
three years, a 60% share.

Another opportunity that Joud wasted no
time in seizing was the government’s decision,
in the early 1990s, to reopen trade in
food items to the private sector – an area that
had been under the government’s tight control
since 1965. Today, Joud’s foodstuffs
division earns more than $20 million in revenue
annually. It is the importer of such popular
brands as St Louis sugar, Al Malak coffee,
and Chiquita bananas, while nearly 12%
of the division’s revenues come from exports
of locally produced olive oil, apples, lemons,
limes, oranges and seeds to Russia, Spain and
other Arab countries. With a 40% market
share, Joud’s only serious competitor in the
trade is Akhrass with 55%. “We are in every
Syrian kitchen, because my father taught me
how to weigh an honest 200 grams and
instilled the fear of God in me,” says Sobhi
Dib Joud, CEO of Joud and the eldest son of
the company’s founder.

The government also freed up the import
of animal feed to the private sector. Sure
enough, Joud was there. It now sells around
$30 million per year of animal feed, most of
which is imported in the form of yellow corn,
barley, meat meal, fishmeal and soya bean
meal from Belgium and France. Of this trade,
$4 million is by direct export to other countries.

Mohammed Joud, vice president, started
that division in 1992. Another example of
Joud taking advantage of new opportunities
was its entry into the tire business in 1994.
The company became the official importer
and distributor of Goodyear and Fulda
tires. Today, this division generates $3.7 million
a year in revenues, or a 33% share of the
domestic truck tire market and 15% for
farm vehicles.

One of Joud’s most dramatic success stories
has been Mandarin. With the international
cola heavyweights out of the Syrian
market due to import restrictions, Joud has
been able to make Mandarin the number
one brand, pushing sales from $6.6 million
in 1993 to $22 million last year. Mandarin,
the company claims, has a 39% local market
share, just ahead of the number two brand
Cadbury Schweppes, which has a 30% to
35% market share. Much of the soft drink’s
success, argues Haitham Joud, manager of
the soft drinks division, stems from the
nationwide direct distribution network. “In
Syria, once you improve your distribution
and marketing network, you exceed your
competitors,” says Haitham. Another reason
for Mandarin’s success is the diversity of
selection. “Joud has 12 flavors for all tastes
where we only produce three or four flavors,”
says Sidky Lyousfi, general manager of a factory
that produces Cadbury Schweppes.

Now, with economic liberalization on the
horizon, Joud is adding new feathers to its
hat. Two years ago, when Syria signed the
Arab Free Trade Agreement, Procter &
Gamble found the 16 million consumer
market a golden opportunity. For the first
time, the US-based multinational will be able
to import a multitude of brands into Syria –
including Pantene, Pert Plus, Always, Head
& Shoulders, Camay, Zest, Ariel, Tide and
YES – which it has already been producing
at its Saudi and Lebanese factories. The
international heavyweight chose Joud to be
its representative in this important new
market. “We had several criteria that we
presented to five distributors we picked
from hundreds who originally applied,”
says Ziad Chabaan, manager of manufacturing
at P&G Lebanon. “Out of five, we
picked Joud, because it was the company
best suited to our criteria.”

Joud is now P&G’s sole distributor in Syria
for the next 20 years or more. The company
has been busy building a 100-man sales
team, trained directly by P&G personnel, and
the multinational’s products have already hit
the shelves. “We will focus on diapers, detergents
and shampoo, with a sales goal of $10
million in 2000 and double that in 2001,”
says a confident Haitham. P&G will benefit by
being able to cross-advertise using Joud’s
portfolio of products.

Working with P&G will allow Joud to
improve its long-term planning, management
and distribution know-how. Joud will also be
able to attract contracts from other multinationals,
much in the way that Obegi in
Lebanon won the sole distribution
rights for McDonald’s through its
nearly 25-year connection with the
German-based Henkel corporation
(see “Can’t get enough,” March
2000). “P&G has very good products.
Joud, as a distributor, is very
good,” says Georges Obegi, chairman
of Obegi Consumer Products,
makers of everything from Persil
laundry detergent to Al Wadi Al
Akhdar canned foods. “They’re
professional. We’re not active in
diapers or shampoo in Syria. In
detergents, P&G Syria isn’t active
yet, but when they are, they’ll be a
challenge.”

Another new venture for Joud
was its 1995 partnership with the
Lebanese company BD&A, the
official representatives of Saatchi &
Saatchi (S&S) Middle East. That
deal placed the skills of a dynamic
international advertising firm at the company’s disposal. Today, the S&S
office in Damascus is mostly working for
Joud, helping it build strong brand images.
But in the future, there is significant potential
for the advertising firm to expand its
activities there. That will mean a new source
of profits for Joud.

Internationally, S&S focuses mainly on
big corporate entities like banks and insurance
companies. These sectors of the Syrian economy
are in the hands of the public sector. But what will happen
when the government finally allows the private
sector to enter these fields, like it did with
refrigerators, foodstuffs and animal feed?

“We will be partnered with a world-renowned
media company which will give us
a big advantage in serving those corporations
before any other media companies enter the
market,” says Haitham.

Another future plus for the company is its
position as an advisor for British American
Tobacco (BAT), manufacturers of such cigarette
brands as Viceroy, Lucky and Kent.
Currently, imports represent just 10% of the
tobacco market in Syria, and are controlled
by the state-run regie (Gotha). But, as with
many sectors of the economy, if the government
allows private companies into the cigarette
business, Joud’s association with
BAT will leave it in a position to dominate.

In Lebanon, BAT controls a 51% market
share, while Philip Morris, producers of
Marlboro, Merit, L&M and Chesterfield,
has just 38.5%, according to a retail audit
done by MEMRB in August 1999.

In anticipation of a housing boom – a
strong likelihood in the event of a Middle East
peace settlement – Joud is branching into
steel manufacturing. It has already become
one of the biggest importers of steel, wood and
heating equipment, a division that generates
revenues of $10 million per year. Now, the
company is building a $12 million plant
about 15 km from Latakia able to produce
profile sheets, reinforcing bars and other components
for construction. It will import its
raw materials from Ukraine and Russia and
sell to local dealers and wholesalers.

Even Joud’s soft drinks division is looking
to the future. So far, Coke and Pepsi,
with the exception of Pepsi’s 7-Up, have not
been able to penetrate the Syrian market
because the government forbids the importation
of the cola concentrate. But when
these restrictions are dropped, and
Mandarin is forced to compete, what will
happen to Joud? Well, the competition
might present an opportunity. In 1995, the
company received a letter of intent from the
Coca-Cola Company, giving Joud bottling
and distribution rights for Coke,
Sprite and Fanta. This means Joud
is poised to tap a potential gold
mine. Per capita cola consumption
is 12 liters a year in Syria,
whereas in Lebanon it is around 30
liters. “If Coke and Pepsi make
their way into the market in the
future, they will help bring the
soft drink consumption higher,”
says Haitham.

But a broadening of the economy
also poses new challenges. For the
first time, the home appliance
division is under attack from
imported Korean brands. While
the law prohibits the importation
into Syria of products that are
already produced domestically, a
trade agreement with Jordan
allows Korean brands produced in
that country, like LG and Daewoo
refrigerators, to enter the Syrian market.

“They have a fantastic finish and use digital
controls, but that kind of technology is not
needed in Syria and their prices are 30% to
40% higher than local brands, despite the
customs duties exemptions,” says Farouk.

Selim Antaki, CEO of LG Lebanon, disagrees:
“Although our appliances are digital,
they involve simple configurations that
any consumer can learn easily.”

More such challenges invariably lie
ahead. But Joud is a traditional family
business that has grown strong by adapting
to change. So long as it keeps on its toes,
it will likely do well.

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