Lysandra Ohrstrom, Daily Star, 8/6/2007
BEIRUT: Since Solidere was incorporated on the Lebanese Stock Exchange in 1994 the public purpose company conceived to reconstruct battered downtown Beirut after the Civil War has managed to shrug off countless bribery and corruption charges, Lebanon's deteriorating investment climate, and profit from the abundant petrodollars flooding the region, all the while taking the shape of a commercial company and moving farther from its narrow, local mandate.
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| Stop SOLIDERE |
On May 29, a committee of 500-dogged, disenfranchised former downtown property owners filed a suit at the Majlis al-Shura against a two-month old ministerial decree approving Solidere's decision to create an international branch in Dubai. The case is the latest in a long line of lawsuits against Solidere over the past 12 years that raises questions about the company's dubious legal foundations and its checkered past.
SOLIDERE's operations range from the "immoral to the unconstitutional," according to its most vocal critics, and all were perpetrated under the cover of the Lebanese state in the name of "national interest."
Like its predecessors, the current case may never receive a ruling, but the Downtown Rights Holders Committee is optimistic that with the government led by staunch- SOLIDERE ally Premier Fouad Siniora in danger of collapse, and the possibility of a power sharing agreement increasingly imminent, they may be able to hem in SOLIDERE 's "unlawful expansion" - 37 percent of which was financed with local capital - so company profits are used to complete outstanding rehabilitation commitments in BCD, and not to finance speculative ventures in countries outside the state's control.
"We don't like this move because [SOLIDERE] is still supposed to be a public purpose company whose main mission is development, whose mission is to serve downtown property owners by finishing project quickly and distributing [dividends] to us so we can buy back our property in downtown. We don't want Solidere to go do other projects when they are barely 25 percent done in Lebanon." explained Constantine Karam, who filed the petition on behalf of the rights holders committee.
SOLIDERE was established by the government through CDR [the Council for Development and Reconstruction] and is regulated by two public statute laws but has taken the shape of a commercial company. It has been supported by the government and given about $1 billion in exemptions, and half of the area of SOLIDERE is municipal property. "The bottom line, without any argument, this move to go outside of Lebanon contradicts the law regulating the company, as simple as that," he concluded.
I. The Foundation Of SOLIDERE
Lawyer Mohammad Mugraby, who continues to represent about 50 original downtown rights holders in suits filed against SOLIDERE in the early 1990's that have yet to go to trial, said three elements convinced Parliament to pass Law 117 in 1991, which created a real-estate company radically different from the speculative holding and development company that SOLIDERE is today.
"When [Law 117] was passed by the Parliament it was marketed in a way that gave the [MPs] at that time the strong impression that this company to be formed under the law would be strictly an arm of the government, and that the government had no ability to fund the rehabilitation which at that time was estimated to cost roughly $400 million," Mugraby said from the office of his private practice in Hamra. "There was assurance given by Dr. Bahij Tabara, who was appointed council for CDR and appeared in front of Parliament in that capacity, that the company to be formed under the proposed law would not own property, but just reorganize it."
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| SOLIDERE's Official Logo, Beirut: An Ancient City For The "Future" |
Law 117 amended legislative decree number five, which created CDR in 1977, adding a sixth paragraph which is still in SOLIDERE's statutes, giving CDR the mandate of executing - either directly or through other entities including a real-estate company, formed or to be formed under article 21 of the civil organization law - any project that the council of ministers delegates to the CDR.
Though Mugraby argues that Law 117 is unconstitutional because it violates article 15 of the Lebanese Constitution that guarantees the protection of private property under the law, it nevertheless defines SOLIDERE as an agent of CDR whose purpose is confined to the reorganization and rehabilitation of the old town of Beirut.
The co-founder of the Downtown Rights Holders committee, Nayla Bustros, believes former Premier Rafik Hariri had been trying to take control of downtown Beirut's reconstruction since 1987, and had gone as far as approaching President Amin Gemayel and appointing contractors, but could not go forward without amending the existing legislation.
"He prepared the plan in 1987 but once he realized it wasn't working and he couldn't get a law to do so, he decided to become prime minister," Bustros explained in the living room of her sprawling Ottoman-era villa in Tabaris.
Law 117 was a radical departure from the existing legislation - based on the 1962 Urban Planning Law, and the twice-amended CDR law - which permitted the government to manage and finance an area's reconstruction through a real-estate company, jointly owned by the state and property rights holders, under the authority of CDR. Since the government was to be main financing party according to the earlier legislation, it was permitted to extract 25 percent of the rehabilitated area after the project's completion.
Mostly Hariri did not want the government to have anything to do with the company, and he didn't like that the activities of the company is under prior supervision of the government, so he decided to give it a new form," said Karam. "Parliament accepted the argument that the state doesn't have enough funds so let the private sector enter, and accepted Hariri's argument that it shouldn't be subjected to day-to-day supervision by CDR so it took the shape of a commercial company."
The company created by law 117 would finance the reconstruction independently, was not required to cede 25 percent of the surface area to the state or appoint public sector representatives to its board of directors, meaning the state effectively relinquished its property rights in BCD and its authority over the rebuilding.
But the government was still required to reimburse the company for infrastructure work - such as sewage systems - under the new law, so SOLIDERE received the lucrative rights to the 600,000 square meter Normandy Landfill in lieu of compensation.
The property is expected to yield SOLIDERE an estimated $3 billion to $5 billion in profits once the rehabilitation is complete, according to former property owner Costa Doumani.
While SOLIDERE is regulated by commercial law, it has assumed the all the prerogatives of a state agency in its operations. SOLIDERE took property rights from between 100,000 to 150,000 tenants and landowners in exchange for shares in the company, based on a clause in the urban planning law allowing the government to confiscate land for public benefit in an area damaged by military activities, and manage the reconstruction through a real-estate company. But after the completion of the rehabilitation the former occupants were guaranteed either the right to return to their property or the company's profits were to be distributed as just compensation.
Law 117 was passed under former Premier Rachid Karami, who fell from power in less than a year and was replaced by Hariri, SOLIDERE's largest single shareholder with stock valued at $150 million.
"SOLIDERE was registered, organized, and launched under Mr. Hariri as prime minister," said Mugraby. "In my opinion SOLIDERE is a Lebanese form of vigilantism under color of the law. It violates the Constitution, which prohibits the confiscation of property without prompt compensation and only for the public good. Most of the people who were hurt were not strictly the property owners but the occupants or lease holders, whose rights were taken away by law 117 and given to SOLIDERE," he said.
SOLIDERE created the mechanism of compensation through shares, and the Hariri-lead government appointed two separate special extra-judicial committees to make property appraisals and distribute an equivalent value of stock options to owners and tenants in downtown.
A former public official said the state became totally subservient to Hariri's business and political interests during his premiership, and his family maintains its tight grip today. "You have Hariri the prime minister doing business with Hariri the businessman, and he has Parliament in his pocket, which is not very difficult, so you have a huge ability to twist the arms of public officials," he said on condition of anonymity. "There have been thousands of pages written about him, but nobody hears, he's still a saint, a prophet, a benefactor of humanity. Whenever I talk about him my blood pressure rises."
II. Social Repercussions Of SOLIDERE's Reconstruction
The former head of the Order of Engineers and Architects, Issam Salam, drafted an alternative strategy to reconstruct downtown Beirut, restore its pre-war function as a bridge between the capital's Christian and Muslim communities, and reconcile a city that emerged from 15-years of civil war divided along sectarian lines.
By ignoring the two most important elements of an urban plan aimed at national reconciliation - namely the preserving the "common memory of the city" and "a tie to the past," and encouraging former occupants to return to the locations they abandoned - SOLIDERE concretized the division of the city, Salam argues.
SOLIDERE "demolished 85 percent of the city's memory considering buildings to be too badly damaged to be worth preserving, and denied property owners and tenants their right to return to where they were operating from before," he said. "The approach was a totally speculative one geared toward maximizing the return on investments and not oriented for the people of Beirut themselves. The heart of the city is vacant and the [capital] divided into a Christian and Muslim community. Disregarding the approach of integration leads to actions that are highly unconstitutional and a bit immoral."
SOLIDERE - whose general manager declined to be interviewed for this story - has never revealed the number of downtown "rights holders" who accepted SOLIDERE stock options after the government compelled them to contribute 50 percent of initial capital by ceding property rights to a company whose operations they had no control over. According to most estimates between 100,000 to 150,000 rights holders originally held 50 percent of SOLIDERE's shares, while private investors made 20,000 individual cash contributions and controlled the remaining stock, said Karam. About eight percent of owners and tenants, including Bustros, refused stock options, and still maintain the deeds to their property.
A few are hoping, against all odds, that a new government might come to power and amend law 117 so they can reclaim their rights to downtown. In 1997, following the committee's relentless campaign, SOLIDERE extracted five percent of property deemed salvageable from company capital, and the original owners were given the opportunity to recuperate independently.
But the extent of SOLIDERE's original corporate structure - financed 50 percent by in-kind property contributions and with cash from private investors, according to Karam - that remains intact is unknown, as is the volume of original rights holders who still hold stock.
Karam estimates that about half of the 92 percent of rights holders that received shares have sold them, and Bustros thinks the number may be even higher.
"Everyone I know has sold them," she said.
The identity of the private investors and board members controlling the company, and by extension downtown Beirut, is also unknown.
The Haddad family accepted SOLIDERE stock options in exchange for their land - which was valued at $800 per one square meter of built up area in 1992, and now fetches between $15,000 to $20,000 - and has yet to recoup even the nominal value of the property that was confiscated.
Not only was the initial value of the stock options received by owners and tenants in BCD not commensurate with the value of the property, but between 1994 and 2005 SOLIDERE stock plummeted on the market, prompting many original shareholders to sell.
"There were people who had heart attacks, got depression; they were rich and all of the sudden they lost everything in one day. They didn't have money to go to the doctor. So they had to sell what SOLIDERE gave them, to eat," said Mrs. Haddad, who did not want her first name to appear in print.
Meanwhile, SOLIDERE has distributed dividends only twice since it was listed on the BSE in 1994, most recently on August 15 last year. Shareholders were encouraged by their bankers to sign documents allowing company board members to vote on their behalf at the extraordinary meeting in November when SOLIDERE's by-laws were amended to allow it to forge ahead with its regional expansion.
"I went to the bank to collect cash and they handed us a [power of attorney] document to sign so they could invest profits in projects abroad last year, but we refused, collected dividends and left," Haddad recalled. "They threatened some people and told them if they don't sign they won't give them dividend payments."
III. The Founding Of The "Hariri Fan Club"
According to five of the SOLIDERE opponents interviewed by The Daily Star, the company has a long history of using the banks as intermediaries for its operations, beginning when bankers were recruited to market company shares to the general public during the initial subscription period.
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| Late PM Hariri Laying The Foundations Of SOLIDERE |
As incentives for the bankers to pitch SOLIDERE stock to their clients, the company offered commissions of seven percent, said Karam, winning the sector's support from the outset.
"During the capital subscription phase, Hariri urged his friends in politics, deputies and MPs to go and subscribe to the shares," he recounted.
"Politicians would say 'we don't have a lot of money now', so he said I will get my [two banks] to give you lines of credit at lowest interest rates, for say $1 million, to go and buy shares of SOLIDERE and I guarantee you will make money. After two months the subscription was closed and SOLIDERE was listed on the market. The shares rocketed from $150 to $170 per share [within the first month] and stayed there for two weeks ... [before they] dropped to $150 and $130. We discovered it was these politicians who sold ... it was a way to bribe the politicians in a legal way, so everyone made $500,000 in four or five months."
"During the capital subscription phase, Hariri urged his friends in politics, deputies and MPs to go and subscribe to the shares," he recounted.
"Politicians would say 'we don't have a lot of money now', so he said I will get my [two banks] to give you lines of credit at lowest interest rates, for say $1 million, to go and buy shares of SOLIDERE and I guarantee you will make money. After two months the subscription was closed and SOLIDERE was listed on the market. The shares rocketed from $150 to $170 per share [within the first month] and stayed there for two weeks ... [before they] dropped to $150 and $130. We discovered it was these politicians who sold ... it was a way to bribe the politicians in a legal way, so everyone made $500,000 in four or five months."
"This was not a secret matter actually, because at the time it was talk of town to go and buy SOLIDERE shares, at one point president Elias Hrawi went and bought them," recalled Bustros.
Doumani concurred that at least two banks participated in the insider trading scheme by alerting the judges and politicians when to sell, so members of the "Hariri Fan Club" pocketed between $100,000 to millions of dollars, depending on their rank.
This was one of three main "premiums" SOLIDERE's founder and largest single shareholder used to consolidate the company's financial footing and the subservience of Lebanon's political class during his tenure as prime minister, charged Doumani.
CDR indirectly bribed judges to appraise confiscated property at one seventh its original value by paying them between $1,000 to $4,000 per property evaluation, said Doumani. CDR sued SOLIDERE in 1999 for failing to compensate the state agency for bribery payments made to the judiciary on its behalf.
SOLIDERE also engineered a "political premium" to ensure the Shiite community's support for reconstruction, Doumani said. The cost of repatriating the 4,000, predominately Shiite, refugees squatting in the abandoned, bullet-scarred building in the city center was estimated at between $50 to $60 million, but SOLIDERE paid Amal $250 million for the party to distribute as it saw fit, Doumani said.
Insider trading "is just one example of how [SOLIDERE] controlled the different levels in of the community ... and one of many corruption cycles in Lebanon," said Doumani.
Insider trading "is just one example of how [SOLIDERE] controlled the different levels in of the community ... and one of many corruption cycles in Lebanon," said Doumani.
IV. Will International Expansion Be The Move That Brings SOLIDERE Down?
Given Lebanon's gloomy commercial prospects, SOLIDERE's sound financial footing and ascendant international reputation, and the propensity of Gulf states to funnel oil revenues into high-profile real-estate development projects, SOLIDERE's international expansion is a commercially savvy move, one that will surely profit the downtown property owners who retain stock.
The various arguments leveled against SOLIDERE by the Downtown Rights Holders Committee range from rational to emotional.
"Our only aim is that by change of government sooner or later will accept an amendment to law and give property back to people who kept their property deeds, and downtown will start to work again," Bustros said hopefully.
"The company is owned by financial investors who don't care what happens to downtown so they accepted SOLIDERE's argument that the company will make more money in the emirates," she added.
Doumani estimates that between 60 to 70 percent of SOLIDERE stock is controlled by financial investors, meaning the 30 percent of shareholders whose properties were bought at one seventh of the price are bearing an additional risk of $90 million.
"Not only have you diluted their shares, not only has their investment never yielded any real value, but you are now forcing the remaining rights owners to assume an additional risk without controlling anything. Their rights have been diluted seven times compared to the financial investors who got premiums when buying shares at a discounted price. You have an international company doing operations I don't know where in the Cayman Islands, using its sister company's assets in Lebanon as a cushion and they are not transparent," Doumani said.
The $259 million SOLIDERE invested in its international company could have been reinvested in the company's outstanding commitments in BCD, said Doumani, such as two or three underground parking lots that have yet to be constructed.
"The problem with going international is that SOLIDERE was conceived and made to redevelop the center of Beirut, and is supposed to look after the people of Beirut and the 130,000 shareholders," Salam said. "SOLIDERE's last statement says we are private company, we have a right to operate as a private company, no one has any control over us. At the moment [SOLIDERE] is lured into the idea that this is a profitable business for them, but if they go operate in Dubai, Turkey, Qatar or someplace else this exposes SOLIDERE to risk from land speculation which may lead to profit and may lead to loss. After taking an action for Lebanese interest, the government has no right to expose these people to this."
This article is part of a project funded by USAID
